INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "D": NEW DELHI
BEFORE SHRI S. V. MEHROTRA, ACCOUNTANT MEMBER
AND
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
PAN:AAACL1995J
(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
PAN:AAACL1995J
(Appellant) (Respondent)
Appellant by : Sumant Chadha, CA
Respondent by : Prathui Raj Meena, Sr. DR.
ORDER
PER A. T. VARKEY, JUDICIAL MEMBER
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
premises.
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
30(a)(ii).
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
dismissed.
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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