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Deputy Commissioner of Deputy Commissioner of Income Tax, Circle New Delhi. Vs.. M/s Engineers India Limited, M/s Engineers India Limited, Engineers India Bhawan, 1, Bhikaji Cama Place, 1New Delhi 110 066.
July, 03rd 2014
                                 `B' : NEW DELHI
                    DELHI BENCH `B


                         ITA No.
                       Assessment Year : 2004-

Deputy Commissioner of         Vs.    M/s Engineers India Limited,
Income Tax,                           Engineers India Bhawan,
Circle-11(1),                         1, Bhikaji Cama Place,
New Delhi.                            New Delhi ­ 110 066.
                                      PAN : AAACE5318C.
     (Appellant)                          (Respondent)

                   CROSS OBJECTION No.158/Del/2011
                      Assessment Year : 2004-

M/s Engineers India Limited,   Vs.    Deputy Commissioner of
Engineers India Bhawan,               Income Tax,
1, Bhikaji Cama Place,                Circle-11(1),
New Delhi ­ 110 066.                  New Delhi.
     (Appellant)                          (Respondent)

             Appellant by       :    Smt. Parwinder Kaur, Sr.DR.
             Respondent by      :    Shri Deepak Chopra and
                                     Shri Piyush Singh, Advocates.


      This appeal by the Revenue emanates from the order of learned
CIT(A)-V, New Delhi dated 17th September, 2010.

2.    The assessee is a Government of India undertaking under the
Ministry of Petroleum & Natural Gas and primarily engaged in providing
engineering and technical consultancy services and execution of
contracts on a turnkey basis predominantly in oil, gas and hydrocarbon
sectors.    The assessee has submitted the return of income on
28.10.2004 declaring income of `140,04,57,990/-.         The return was
                                       2                             ITA-5391/D/2010 &

revised and income was reduced to `133,76,87,880/- and assessment
was completed under Section 143(3) on 15.12.2006. The notice under
Section 148 of the Act was issued on 6.3.2004 and the assessment
under Section 143(3) read with Section 147 was completed on
25.8.2009 wherein three disallowances were made ­ prior period
expenses `3,25,46,000/-, provision for leave salary `2,29,82,152/- and
disallowance under Section 14A `1,22,68,000/-.                In appeal, learned
CIT(A) has deleted the addition for prior period expenses and provision
for leave salary.     The addition under Section 14A was reduced to
`25,000/-.   Now, the Revenue is in appeal before us by taking the
following grounds:-

     "1.     The order of ld.CIT(A) is wrong, perverse, illegal and
     against the provisions of law, liable to be set aside.

     2.      The ld.CIT(A) erred in deleting the addition of prior
     period expenses of Rs.3,25,46,000/-.

     3.      The ld.CIT(A) erred in deleting the addition of
     Rs.2,29,82,152/- leave encashment.

     4.      The ld.CIT(A) erred in deleting the addition of
     Rs.12,268,000/-     as    expenditure         incurred   for   earning
     interest income exempt u/s 14A.

     5.      The appellant craves leave to add, alter or amend
     any ground of appeal raised above at the time of hearing."

3.   The     assessee    has    also       filed   cross-objection     in     which
reassessment proceedings initiated under Section 147 of the Act by
the DCIT (AO) are challenged. The grounds taken by the assessee in
the cross-objection read as under:-
                                    3                         ITA-5391/D/2010 &

      "1.   That on the facts and in the circumstances of the
      case and in law, the learned Commissioner of Income Tax
      (Appeals) [`CIT(A)'] erred in holding that the reassessment
      proceedings initiated under section 147 of the Act by the
      Deputy Commissioner of Income-tax (`AO') were not bad in
      law and accordingly, the reassessment order passed under
      section 147 of the Act is valid and is thus not liable to be

      2.    That the Respondent craves leave to add, alter,
      amend and/or modify any of the cross objections either
      before or during the course of the appellate proceedings."

4.    Ground Nos.1 & 5 of the Revenue's appeal are general in nature
and require no adjudication.

5.    In ground No.2, the issue relates to the deleting of addition of
`3,25,46,000/- on account of prior period expenses.        The CIT(A) has
granted relief to the assessee by holding as under:-

      "4.2 I have carefully gone through the order of the AO and
      the submissions filed by the appellant.            The AO has
      observed, in the reassessment order, as under:-

      "The authorized representative of the assessee has
      explained   that,   in   accordance   with   the    method    of
      accounting/tax assessment adopted since its inception, the
      entire amount of `expenditure pertaining to the previous
      year' has been fully allowed in the year in which it is
      accounted just as income pertaining to the previous year is
      taxed in the year the same is accounted for compilation of
                                    4                         ITA-5391/D/2010 &

      the financial statements at the end of each accounting

      4.3     However, the appellant contended the aforesaid
      explanation as recorded in the reassessment order was
      never been given in the assessment proceedings.            The
      appellant contended that the prior period expenses has
      already been added in the income.         In this regard, the
      appellant produced the return of income along with the
      computation of income and showed that the impugned
      prior period expenses has already been added back in the
      original return of income. On perusal of the computation of
      income, it is evident that the prior period expenses had
      already been disallowed in the computation of income and
      accordingly, the disallowance of such expenses again is not
      justified. In view of the discussion, I direct the AO to delete
      the addition of Rs.325.46 lacs made on account of prior
      period expenses. The assessee's appeal on this ground is

6.    We have heard both the sides on the issue.           We have also
perused the paper book submitted by the assessee. Learned AR drew
our attention to page 12 of the paper book which is the computation of
assessable income of the assessee for AY 2004-05 wherein item No.6 &
7 has been disallowed by the assessee itself in the computation of
income. Keeping these facts in view, we find no merit in ground No.2
of the Revenue's appeal and we uphold the order of learned CIT(A) on
this issue.

7.    In ground No.3, the issue is with regard to deleting the addition
of `2,29,82,152/- on account of leave encashment. On this issue also,
learned AR drew our attention to page 12 which is computation of
                                  5                         ITA-5391/D/2010 &

income of the assessee in the year under consideration wherein the
assessee itself has added back the provision for leave salary under
Section 43B of the Act.     The CIT(A) has granted the relief to the
assessee by holding as under:-

     "5.2 In this regard, the appellant produced the tax audit
     reports and computations of income (along with the return
     of income) for the AY 2004-05 and 2005-06. On perusal of
     tax audit report for the AY 2005-06, it is evident that sum
     of    Rs.131,342,282    represents   provision   for    leave
     encashment created during the AY 2005-06 and remained
     unpaid. Therefore, the same is to be added back in the
     computation of income for the AY 2005-06.                 The
     computation of income for the AY 2005-06 produced before
     me clearly indicated that such sum was correctly been
     added back in the computation of income for the AY 2005-

     5.3    Further, tax audit report for the AY 2004-05 shows
     provision for leave encashment created during the year
     and remained unpaid is Rs.108,360,130/- and, only such
     sum is disallowable for the AY 2004-05.      The return of
     income for AY 2004-05 (i.e. the AY under consideration)
     shows that Rs.108,360,130/- had already been added back.
     Therefore, no further disallowance is required on account
     of provision for leave encashment for the AY under
     consideration. Accordingly, I direct the AO to delete the
     addition of Rs.22,982,152/- made on account of provision
     for leave encashment in the reassessment order. Actually
     the assessee is adding back the provisions for leave
     encashment suo moto at the end of F.Y. every year. This
     ground of appeal of appellant is allowed."
                                     6                            ITA-5391/D/2010 &

8.    After hearing both the sides, we find no fault in the order of
learned CIT(A) and sustain the same.

9.    Ground No.4 relates to the deleting of part addition made on
account of invoking the provisions of Section 14A of the Act.

10.   We have heard both the sides on this issue.           The CIT(A) has
granted part relief to the assessee by holding as under:-

      "6.2 I have carefully gone through the order of the AO and
      the submissions filed by the appellant. As evident from the
      reassessment order, the appellant has earned an exempt
      income of Rs.709.84 lakh from tax free bonds of UTI.                I
      have also noted that no redemption or further investment
      was made during the year by the appellant in the bonds.
      The assessee has the following investment in the bonds of
      UTI as per the balance sheet as on March 31, 2004:

                                                          Rs in lacs
      Investment                         March 31, 2004
      Investment in UTI Bond             12619.42

      6.3     The AO held that the provisions of Rule 8D of the
      Income-tax Rules, 1962 are applicable in the instant case
      and,     disallowed/added     back     Rs.122.68     lakhs       as
      proportionate       management        expenditure      in       the
      computation of income, without disclosing the basis of
      arriving at the figure disallowed. I note that the AO had
      mentioned the same amount of disallowance of Rs.122.68
      lakhs    in   the   reasons   recorded   for   re-opening       the
      assessment proceedings and no basis was given.
                                 7                             ITA-5391/D/2010 &

6.4      In relation to the applicability of Rule 8D of the Rules,
the Hon'ble Bombay High Court (in case of Godrej & Boyce
v DCIT) has recently held that Rule 8D would apply with
effect from Assessment Year 2008-09. Accordingly, I am of
the opinion that the AO was incorrect in holding that the
provisions of section 8D are applicable. However, even in
the absence of applicability of Rule 8D, as held in case of
Godrej      &    Boyce    v   DCIT   (supra),     the    expenditure
incurred/apportioned to earn the exempt income is
required to be disallowed.

6.5      In the instant case, the appellant has submitted that
no expense has been incurred for earning the exempt
income and has contended that the disallowance of
Rs.122.68 lakhs as proportionate management expenses is
an ad-hoc disallowance without disclosing the basis to
compute the said figure of Rs.122.68 lakhs.

6.6      On perusal of the profit and loss account, it is evident
that the appellant has total income of Rs.111,741.71 lakhs
during the subject assessment year which includes exempt
interest income of Rs.709.84 lakhs.             The expenditure in
profit     and     loss   accounts     consists     of      Technical
assistance/sub-contracts, consumables/stores R&D Centre,
construction      material    and    equipment,         salaries   and
benefits, facilities, corporate costs,           depreciation and
others. A perusal of the items of expenditure shows that if
at all, only the salaries and benefits could be, said to have
been incurred in part towards earning of the exempt
income.         As submitted by the appellant, only effort
required to realize the exempt income is merely to send
                                     8                         ITA-5391/D/2010 &

      some employee to the bank to deposit the cheques
      received from UTI.     During the subject assessment year,
      the appellant has received interest from UTI at two
      occasions i.e. 11 cheques at a time. Further, the appellant
      did   not   receive    any   dividend   from   its   subsidiary
      Certification Engineer International Limited.        In such a
      case, the effort made by him has to be evaluated in
      monetary terms and may constitute expenditure incurred
      in relation to the earning of the dividend income. There is
      also no need to maintain any investment portfolio division
      since the investment is in the UTI bonds only.          Thus, it
      appears to me that a very small and negligible amount of
      time, effort and expenditure is required to earn the exempt
      interest income.      Considering this position, even if the
      disallowance is to be upheld in principle, the cost may not
      have been incurred in excess of Rs.5,000. In this regard,
      reliance is placed on the Hon'ble Delhi Tribunal's ruling in
      the case of Jubiliant Enpro Ltd. Vs. DCIT (12 SOT 194)
      where-in    the    Hon'ble   Tribunal   had    restricted    the
      disallowance to Rs.25,000/- even though the AO in the said
      case had disallowed Rs.50,000/- on an adhoc basis.
      Accordingly, I hold to disallow Rs.25,000/- u/s 14A."

11.   In view of the various decisions of Hon'ble High Courts including
Hon'ble Jurisdictional High Court, we find that the CIT(A) was justified in
granting relief to the assessee. We, therefore, dismiss this ground of
Revenue's appeal.

12.   In the result, the appeal of the Revenue stands dismissed.
                                   9                        ITA-5391/D/2010 &

13.   Since we have decided the issue on merits in the Revenue's
appeal, therefore, the cross-objection filed by the assessee remains
academic and we are not deciding this on merits.

14.   In the result, the appeal of the Revenue as well as the cross-
objection of the assessee is dismissed.
      Decision pronounced in the open Court on 2nd July, 2014.

                  Sd/-                               Sd/-
          (H.L. KARWA)                               MEENA)
                                               (B.C. MEENA)
           PRESIDENT                       ACCOUNTANT MEMBER

Dated : 02.07.2014

Copy forwarded to: -

1.    Revenue    : Deputy Commissioner of Income Tax,
                 Circle-11(1), New Delhi.
2.    Assessee   : M/s Engineers India Limited,
                             India Bhawan,
                 Engineers India
                 1, Bhikaji Cama Place, New Delhi.

3.    CIT
4.    CIT(A)
5.    DR, ITAT

                              Assistant Registrar
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