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LG Chemical India (P) Ltd., 3rd Floor, Tower 10-B, DLF Cyber City, Phase-II Gurgaon Vs. ACIT Circle-4(1), Room No.407, C.R. Building, IP Estate, New Delhi
December, 08th 2014
                        DELHI BENCH "D": NEW DELHI
                    SHRI A. T. VARKEY, JUDICIAL MEMBER

                                    ITA No. 331/Del/2013
                                  (Assessment Year: 2009-10)

              LG Chemical India (P) Ltd.,           ACIT
              3rd Floor, Tower 10-B,                Circle-4(1), Room
              DLF Cyber City, Phase-II       Vs.    No.407, C.R. Building,
              Gurgaon                               IP Estate, New Delhi
              (Appellant)                           (Respondent)

                                     ITA No. 181/Del/2013
                                  (Assessment Year: 2009-10)

              DCIT                                       LG Chemical India (P) Ltd.,
              Circle-4(1), Room No.407,                  3rd Floor, Tower 10-B,
              C.R. Building, IP Estate,            Vs.   DLF Cyber City, Phase-II
              New Delhi                                  Gurgaon
              (Appellant)                                (Respondent)

                                 Appellant by       :    Sumant Chadha, CA
                               Respondent by        :    Prathui Raj Meena, Sr. DR.


       These are cross appeals preferred by the assessee company and the revenue

against the order of the ld CIT(A), VIII, New Delhi dated 30.10.2012.

2.     The grounds raised by the assessee are as follows:-

       "1.    The CIT(A) has erred in sustaining the addition of Rs.63,16,000/- being the
              disallowance u/s 14A r.w. Rule 8D.

       2.     The CIT(A) has erred in disallowing the expenditure incurred on A.C. ducting
              amounting to Rs.5,50,000/- treating it to be capital expenditure."

3.     The grounds raised by the revenue are as follows:-

       " 1.   Whether on the facts and in the circumstances of the case and in law, the ld
              CIT(A) had erred in deleting the additions of Rs.28,82,600/- towards
              renovation of leased hold premises on account of capital expenditure.
                                                                                   Page 2 of 8

       2.     Whether on the facts and in the circumstances of the case and in law, the
              learned CIT(A) has erred in not considering the Explanation 1 to Section 32 of
              the Income-tax Act which clearly proves that the purpose of section 32 even
              if the assessee is not the owner of the building then also for the purpose of
              any expenditure in the nature of capital expenditure in the building, he will
              be related as the owner of the building."

4.     Apropos ground No.1 relates to disallowance of Rs.63,16,000/- u/s 14A of the

Income Tax Act, 1961 (herein after `the Act') read with Rule 8D of the Income Tax Rules,

1962 (herein after `the Rules).

5.     The AO noted that assessee was holding investments of Rs.126.33 crores and

therefore held that intention of inserting Rule 8D is to allow the AO to estimate expenses in

situations where no expense can be directly attributed to investments which may lead to

tax free income. Before the ld CIT(A), the assessee contended that the investments were

made in its wholly owned subsidiary company M/s. L.G. Polymers India Pvt. Ltd, which did

not earn any exempt income. It was submitted that no expenditure has been incurred for

earning exempt income. The ld CIT(A), however, rejected the contention of the assessee

and confirmed the disallowance made by the AO, observing as under:-

       "I have considered the submissions of the appellant, the findings of the AD and the
       facts on record. A company cannot earn dividend without its existence and
       management. Investment decisions are generally complicated requiring daily
       analysis of market trends, research and analysis. Decisions relate to acquisition
       holding period and redemption of investment at the opportune time. These
       decisions are generally taken in the meetings of Board of Directors, for which
       administrative expenses are incurred.

               The Hon'ble Bombay High Court in the case of Godrej & Boyce
       Manufacturing Co. Ltd. vs. DCIT 328 ITR 81 has held that rule 8D is applicable
       from AY 2008-09. Rule 8D considers three circumstances under which
       disallowance is required to be made which are as under:-
          (I) The amount of expenditure directly relating to income which does not
         form part of total income;
          (II) Secondly, proportionate disallowance of interest which is not directly
       attributable to any particular income or receipt, and;
       (III)   Thirdly, an amount equal to one-half percent of the average of the
       value of the investment, income from which does not form part of the total
       income, as appearing in the balance sheet of the assessee, on the first day
       and the last day of the previous year.
                                                                                    Page 3 of 8

              Disallowance has been made by the AO in terms of clause (iii) on
       account of indirect expenses. The contention of the appellant that no
       disallowance can be made since no exempt income has been earned
       does not hold good in view of the decision of the Hon'ble Special bench of
       the ITAT Delhi in the case of M/s Cheminvest Ltd in ITA NO. 87/DEL/2008
       which has clearly held that disallowance u/s 14A has to be made even if no
       exempt income has been earned by the appellant. In the instant case,
       since expenditure had been incurred by the appellant for earning of
       exempt income therefore, the disallowance made by the AO under the
       provisions of section 14A read with rule 8D is as per law. This ground of
       appeal is dismissed."

6.     Aggrieved by the aforesaid order of the ld CIT(A), the assessee is before us.

7.     The ld AR relied upon the decision of the Delhi High Court in the case of CIT Vs.

Holcim India Ltd and submitted that since there is no exempt income, disallowance by

applying Rule 8D does not arise. He also referred to the ITAT Mumbai Bench in the case of

J.M. Financial Ltd, (2014-TIOL-202-ITAT-Mum) which has followed the judgement of Delhi

High Court in Oriental Structure dated 15.01.2013 (2013-TIOL-97-H.C. Delhi-IT) wherein it was

held that in respect of investment made in subsidiary companies, on account of

commercial expediency no expenses can be attributable for disallowance u/s 14A read

with Rule 8D. He also referred to the decision of the Delhi Bench of this Tribunal in the case

of International Travel House (2014-TIOL-402-ITAT Del). Ld DR supported the order of the

authorities below.

8.     We have heard both the parties and have perused the records of the case. In the

case of CIT Vs. Holcim India Ltd the Hon'ble Delhi High Court ITA No.486/2014 & ITA

No.299/2014 has held as follows:-

       "14. On the issue whether the respondent-assessee could have earned
       dividend income and even if no dividend income was earned, yet Section
       14A can be invoked and disallowance of expenditure can be made, there
       are three decisions of the different High Courts directly on the issue and
       against the appellant-Revenue. No contrary decision of a High Court has
       been shown to us. The Punjab and Haryana High Court in Commissioner of
       Income Tax, Faridabad Vs. M/s. Lakhani Marketing Incl., ITA No. 970/2008,
       decided on 02.04.2014, made reference to two earlier decisions of the same
       Court in CIT Vs. Hero Cycles Limited, [2010] 323 ITR 518 and CIT Vs. Winsome
                                                                                   Page 4 of 8

      Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot
      be invoked when no exempt income was 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 Appella 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 14Aprovides 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 substantial question of law. Hence, the deletion of the
             disallowance of Rs.2,03,752/- made by the Assessing Officer was in
             order" .

      15.    Income exempt under Section 10 in a particular assessment year,
      may not have been exempt earlier and can become taxable in future
      years. Further, whether income earned in a subsequent year would or would
      not be taxable, may depend upon the nature of transaction entered into in
      the subsequent Assessment Year. For example, long term capital gain on
      sale of shares is presently not taxable where security transaction tax has
      been paid, but a private sale of shares in an off market transaction attracts
      capital gains tax. It is an undisputed position that respondent assessee is an
      investment company and had invested by purchasing a substantial number
      of shares and thereby securing right to management. Possibility of sale of
      shares by private placement etc. cannot be ruled out and is not an
      improbability. Dividend may or may not be declared. Dividend is declared
      by the company and strictly in legal sense, a shareholder has no control and
      cannot insist on payment of dividend. When declared, it is subjected to
      dividend distribution tax."
9.    The facts of the instant case are in Pari-materia with the facts of the aforesaid case,

in as much as, no exempt income has been earned by the assessee from the investment

made in the subsidiary. Therefore respectfully following the binding precedent we hold

that the ld CIT(A) erred in confirming the order of the AO. So we direct the deletion of

Rs.63,16,000/- added u/s 14A read Rule 8D.
                                                                                       Page 5 of 8

10.    Ground No.2 of the assessee's appeal is regarding disallowance of expenditure

incurred on Air Condition ducting and ground No.1 and 2 of the revenue's appeal is

regarding deletion of addition of Rs.28,82,000/- on account of renovation of lease hold


11.    During the year the assessee incurred expenditure of Rs.44,18,785/- on account of

interior work, civil work, partition, ceilings, flooring, light fitting, telephone line setting,

painting, ducting etc. The AO further observed that the details submitted by the appellant

revealed that the expenditure was incurred as acquiring or bringing into existence an

asset or advantage for enduring benefit. In view of the above findings, he therefore

disallowed an expenditure of Rs.34,32,600/- out of expenses claimed by the appellant as

being capital in nature.

12.    On appeal, the ld CIT(A) held that the perusal of the details of expenses filed by the

appellant show that the expenses have been incurred on renovation and repairs on

leased premises. He held that these expenses are expenses which have been incurred

during the regular course of business. No expenditure of capital nature is observed in the

expenses. He concluded that the AO has not brought any facts on record to show that

the appellant was deriving any benefits of enduring nature by incurring these expenses.

13.    In the light of the above, he concluded as under

       "In the instant case, it is observed that the appellant had incurred expenditure on
       walled partitions, ceilings, flooring works, light fittings, telephone line setting, fire
       fighting works, glass, AHU ducting and civil works. The hon'ble High Court in the
       case of M/s. Export Finance Ltd. (206 (IT4) GJX-0341-Del) has held that expenditure
       incurred on providing wooden partition, painting, glass work another repairs to the
       lease hold premises was revenue expenditure. In the case of M/s. Modi Spinning
       and Weaving Mills Ltd. 200 ITR 544 it has been held by the Hon'ble Delhi High Court
       that revenue expenditure incurred on lease hold improvement for the purpose of
       facilitating the business was revenue in nature. In the case of CIT Vs. M/s. Citi
       Financial Consumer Finance Ltd. 2011-TIOL-309-HC-Del-IT it has been held that the
       expenditure incurred on lease hold improvements was revenue expenditure. In the
       above case the assessee had incurred expenditure on laying of cables, electric
       connections, sanitary fittings, partitions, civil work, brick work, flooring, fall ceiling
       etc. which was held to be in the nature of revenue expenditure. In the case of M/s.
                                                                                        Page 6 of 8

          Amway India Enterprises Vs. DCIT 2009-TIOL-17-ITAT-Del it has been held that the
          expenditure incurred by the assessee towards repairing and upgradation of the
          premises taken on lease so as to make it more conducive to a business activities
          was allowable expenditure. However, in the above case it has been held that the
          expenditure incurred on AC unit was capital in nature. In view of the decisions
          discussed above and also in view of the fact that the various expenses relating to
          civil work, partitions, ceiling, flooring etc. do not result in any enduring benefits to
          the appellant therefore the disallowance made by the AO is deleted except the
          expenditure incurred on AHU ducting of Rs.5,50,000/- which is in the nature of
          capital expenditure."

14.       The ld AR, relied upon the judgement of the Hon'ble Delhi High Court in the case of

CIT Vs. Amway India Enterprises 346 ITR 341 and CIT Vs. Hi Pens 306 ITR 182. He contended

that all the expenditure by the assessee was revenue in nature and there was no creation

of new asset. It was submitted that expenses was incurred to use the office premises for

better functioning. The ld DR submitted that the expenditure incurred in the instant case is

capital expenditure and therefore correctly disallowed by the AO, because the

expenditure incurred by the assessee, resulted in enduring benefits to the assessee so it is a

capital expenditure.

15.       Having considered factual matrix, we find that the break-up of the expenditure

incurred is as under:-

      S. L. No.   Description                              Qty.    Rate      Amount
      1           Reimbursement for office interior work   1
                  Civil work                               1       350,000   350,000
                  Wall Partition                           1       445,000   445,000
                  Ceilings                                 1       519,000   519,000
                  Flooring work                            1       650,000   650,000
                  ELEC'C/ Lighting Fitting                 1       850,000   850,000
                  Networking/ Tel Line setting             1       210,000   210,000
                  Painting work (plastic/ Duco             1       480,000   480,000
                  AHU Ducting                              1       550,000   550,000
                  Fire Fighting work's                     1       240,000   240,000
                  Sinage Board/ Sheet/ETG/Glass            1       124,785   124,785
                  Total                                                      44,18,785/-

16.       Out of above an amount of Rs.4,80,000/- in respect of painting and Rs.1,24,785/- in

respect of sign board has been allowed by AO as Revenue expenditure. The balance

Rs.38,14,000/- was held to be capital expenditure, which has been allowed by the ld
                                                                                     Page 7 of 8

CIT(A), except a sum of Rs.5,50,000/- on ducting of air condition. The nature of

expenditure reveals that they were in respect of interior work of an office premises. The

said office premise of the assessee is a leased premise. The lessor has provided the air-

conditioning. Only the ducting was carried out by the assessee. So in the said factual

aspect, we are of the view that no asset was created so as to hold the expenditure to be

capital expenditure. The Hon'ble Delhi High Court in the case of Amway 346 ITR 341 after

considering Explanation 1 to section 32 concluded as under:-

      "6.     The first issue, in our opinion, has been considered and decided against
      the revenue in a judgment delivered by us passed in ITA Nos.1110/2006 and
      111/2006 titled CIT Vs. M/s. Asahi India Safety Glass Ltd. 6.1 As regards the second
      issue, we find that in CIT Vs. Hi Line Pens Pvt Ltd. (2008) 306 ITR 0182, the court was
      called upon to interpret the expression "repairs of the premises". The court had
      thus to determine as to whether the expenses incurred on repairs were in the
      nature of revenue expenditure ITAs 1344/2009 and 1363/2009 Page 3 of 5 or, had
      brought into existence, an asset, of enduring nature. The court concluded that
      the expenditure was in the nature of revenue expenditure. A distinction was also
      made between the terms "repairs""and "current repairs". The court held that the
      term "repairs" was wider than the expression "current repairs" as used in Section

      6.2 In CIT Vs. Escorts Finance Ltd (2006) 205 CTR (Delhi) 574, which is an earlier
      judgement of this court, the court was called upon to decide as to whether the
      expenses incurred on improvement of leasehold premises, were in the nature of
      revenue expenditure, as contended by the assessee. The court sustained the
      contention of the assessee and allowed the deduction claimed under Section
      37(1) of the IT Act. The court noticed the dicta of the judgements o the Bomaby
      High Court in the case of CIT Vs.David Mills Ltd. (Income Tax Reference
      No.17/1950 decided by Chagla C.J. and Tendolkar, J on 10.10.1950) and Menor
      Mills Ltd. Vs/ CIT (Income Tax Reference No.36/1950 decided by the same Bench,
      on 30.03.1951) wherein, it has been observed that in ascertaining whether an
      expenditure incurred is made on revenue account or otherwise one would have
      to bear in mind the nature of the expenditure, that is, was it incurred for
      maintenance or preservation of an asset or was it expended otherwise. It thus
      concluded tha6 if the expenditure incurred is made on revenue account or
      otherwise one would have to bear in mind the nature of the expenditure, that is,
      was it incurred for maintenance or preservation of an asset or was it expended
      otherwise. It thus concluded that if the expenditure was of the former kind it
      would be in the nature of a revenue expenditure. In the very same judgement,
      the observations made in Gulamhussein Ebrahim Matcheswalla Vs. CIT ITAs
      1344/2009 and 1363/2009 Page 4 of 5 (1974) 97 ITR 24 (Bom) were also noticed
      whereby, the court rejected the submission that it is the amount spent on repairs
      which would determine the nature of the expenditure.
                                                                                   Page 8 of 8

         6.3   Therefore, having regard to the principles laid down in the aforementioned
         judgment and the nature of the expenses in issue, we are of the view that the
         revenue's appeal, on this issue, as well would have to be rejected."

17.      In the light of the ratio laid by the jurisdictional High Court, we conclude that

expenditure incurred and claimed was for carrying out interior of a leased premise on the

facts of the case is revenue expenditure. As such the ground raised by the assessee is

allowed and the ground raised by the revenue is rejected.

18.      In the result the appeal of the assessee is allowed and the appeal of the revenue is


         Order pronounced in the open court on 05.12.2014.

               -Sd/-                                                  -Sd/-
         (S. V. MEHROTRA)                                       (A. T. VARKEY)
       ACCOUNTANT MEMBER                                       JUDICIAL MEMBER
 Dated:05 /12/2014
A K Keot

Copy forwarded to
      1. Applicant
      2. Respondent
      3. CIT
      4. CIT (A)
      5. DR:ITAT
                                                                   ASSISTANT REGISTRAR
                                                                   ITAT, New Delhi
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