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A.C.I.T.,Circle 12(1),New Delhi V/s . M/s HCL Comnet Ltd.,806, Siddhartha, 96,Nehru Place, New Delhi
August, 28th 2012
        IN THE INCOME TAX APPELLATE TRIBUNAL DELHI `C' BENCH
          BEFORE SHRI I.C. SUDHIR , JM & SHRI A.N. PAHUJA, AM

                              ITA nos..322& 2583/Del/2012
                                AYs: 2007-08 & 2008-09

A.C.I.T.,Circle 12(1),                 V/s . M/s HCL Comnet Ltd.,
New Delhi                                    806, Siddhartha, 96,
                                             Nehru Place, New Delhi
(Appellant)                   [PAN :AAACH 9667 H]      (Respondent)

                                 ITA no.2239/Del/2012
                               Assessment year : 2008-09

M/s HCL Comnet Ltd.,                   V/s .       A.C.I.T.Circle 12(1),
806, Siddhartha, 96,                               New Delhi
Nehru Place, New Delhi



         (Appellant)                                          (Respondent)

                     Assessee by       Shri Ajay Vohra,AR
                    Revenue by         Shri R.S. Negi,DR


                   Date of hearing                 30-07-2012
                   Date of pronouncement           24-08-2012





                                    ORDER


 A.N. PAHUJA:- These three appeals ­ appeal filed on 20.01.2012 by the
 Revenue against an order dated 31-10-2011 of the ld. CIT(A)-XXVII, New Delhi
 for the assessment year 2007-08 and the cross appeals filed by the assessee on
 10-05-2012 and the Revenue on 29-05-2012 against an order dated 14.03.2012
 of the learned CIT(A)-XV, New Delhi, raise the following grounds:-


 I.T.A. no.322/Del./2012[Revenue-AY2007-08]
              1.      "Whether ld. CIT(A) was correct on facts and
                      circumstances of the case and in law in deleting the
                                     2          ITAnNos.322,2239&2583/D/2012


                  disallowance of ``26,49,206/- made by the Assessing
                  Officer u/s 14A.

            2. Whether ld. CIT(A) was correct on facts and
               circumstances of the case and in law in deleting the
               disallowance of ``3,23,127/- made by the AO on account
               of excess depreciation on UPS, printers, scanners etc.

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


I.T.A. No.2239/Del./2012[Assessee-AY2008-09]
             1.   "That the CIT(A) erred on facts and in law in
                  sustaining the disallowance of expenditure amounting
                  to ``44,24,562/- u/s 14A of the Income-tax Act, 1961
                  ("the Act").

             1.1 That the CIT(A) erred on facts and in law in
                 confirming the disallowance u/s 14A of the Act without
                 appreciating that the investment was made out of own
                 surplus funds and no expense was attributed for
                 earning of tax free dividend income.

             1.2 That the CIT(A) erred on facts and in law in not
                 appreciating that in terms of section 14A(2) and
                 14A(3) of the Act read with rule 8D of the Income-tax
                 Rules, 1962 for making disallowance under the said
                 section, the Assessing Officer has to record
                 satisfaction that claim of the appellant regarding
                 amount disallowable under the said section, was
                 incorrect.

             1.3 Without prejudice that the CIT(A) erred on facts and in
                 law in not appreciating that only an insignificant
                 amount of expenditure out of the administrative
                 expense could at best be attributed to earning of tax
                 free dividend income.

             1.4 Without prejudice, the CIT(A) erred on facts and in
                 law in not appreciating that the disallowance u/s 14A
                 of the Act cannot exceed ``56,485/-, on the basis
                 used for disallowing expenditure u/s 14A in the earlier
                 years.
                                         3          ITAnNos.322,2239&2583/D/2012


               1.5 Without prejudice, the CIT(A) erred in facts and in law
                   in wrongly computing the disallowance u/s 14A of the
                   Act to be ``44,24,562/- instead of ``40,24,562/-
                   computed by the Assessing Officer.

               2.    That the CIT(A) erred on facts and in law in
                     confirming the disallowance of depreciation on
                     elevator to the extent of ``131,400/- holding the same
                     to be a part of building instead of plant and
                     machinery.

                      The appellant craves leave to add to, alter, amend or
                     vary from the above grounds of appeal before or at
                     the time of hearing."

I.T.A. no.2583/Del./2012[Revenue-AY2008-09]
               1.    Whether learned CIT(A) was correct on facts and
                     circumstances of the case and in law in deleting the
                     disallowance of ``99,58,780/- made by the Assessing
                     Officer on account of interest u/s 14A.

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

2.            Adverting first to ground no.1 in the appeal of the Revenue for AY
2007-08, facts, in brief, as per relevant orders are that return declaring income of
``19,08,29,777/- filed on 30.10.2007, engaged in business of commissioning of
networking solutions and providing professional services for management and
maintenance of networking solutions, was taken up for scrutiny with the service
of a notice u/s 143(2) of the Income-tax Act, 1961 (hereinafter referred to as the
Act), issued on 21.08.2008.    During the course of assessment proceedings, the
Assessing Officer (A.O. in short) noticed that the assessee earned dividend
income of ``1,39,11,977/- exempt u/s 10(34) of the Act. To a query by the AO,
seeking details of expenditure incurred for earning the dividend income, the
assessee replied that they did not incur any expenses for earning dividend
income nor any efforts and time was involved as all the investments were made
in pursuance of the guidelines issued by its ultimate holding company while the
entire dividend income was automatically credited through ECS and reinvested
                                         4           ITAnNos.322,2239&2583/D/2012


in the same mutual fund scheme. The assessee also pointed out that no interest
cost was attributable to the investment, the entire investments having been
funded out of interest free loans received from its holding company and thus, no
expenditure could be attributed to earning of dividend income. The assessee
further objected to the invocation of provisions of section 14A of the Act and
applicability of rule 8D of the Income-tax Rules, 1962. However, the AO did not
accept the submissions of the assessee on the ground that earning of exempt
income was not in the nature of passive activity having no input. Accordingly,
while referring to provisions of sec. 14A of the Act read with Rule 8D of the I.T.
Rules, 1962 and relying upon decisions in CIT vs. Sharwan Kumar Swarup,210
ITR 886(SC); H.H. Sir Rama Varma Vs. CIT, 205 ITR 433 (SC); CIT Vs. Podar
Cement (P) Ltd,. 226 ITR 625 (SC); S. Subhash Vs. CIT,248 ITR 512(Madras);
CIT Vs. Shelly Products Ltd., 261 ITR 367(SC); ITO Vs. M/s Daga Capital
Management Pvt. Ltd. in I.T.A. No.8057/Mum/2003 and M/s Max Opp Investment
Ltd. Vs. ACIT in I.T.A. no.1372/D/05, the AO disallowed an amount of
``27,19,110/- .


3.           On appeal, the ld. CIT(A),following the decision of Hon'ble Bombay
High Court in Godrej Boyce Mfg. Co. Ltd. Vs. DCIT and Another, 234 CTR 1
(Bombay and decision of the ld. CIT(A) in the AY 2005-06,reduced the
disallowance to ``69,894/- in the following terms:
      "11           The facts of the case for the year under consideration
      are similar to the facts of the case decided by the CIT(A)-X as
      above. After having gone through his observations as reproduced
      above, I am in agreement with him with regard to the reasonable
      basis adopted by him for making disallowance u/s 14A of the Act.
      The appellant was accordingly asked to furnish the relevant details
      for the year under consideration which were provided as under:-

             Expenses relating to Finance Department:
            Particulars                      Amount[In `]
            Personnel Cost                   83,67,000/-
            Rent                             8,45,704/-
            Depreciation                     5,00,000/-
            Communication                    1,21,000/-
                                         5          ITAnNos.322,2239&2583/D/2012


            expenses and other
            miscellaneous
            expenses
            Total                            0.47

        Calculation of proportion between gross receipts and tax free
        income.


            Particulars               Amount
            Gross Receipts            2,95,25,52,078/-
            Dividend                  1,39,11,977/-
            % of proportion           0.47

        12            Thus, the expenses incurred for earning the exempt
        income comes to ``69,894/- i.e. (.47 x 14833704). Disallowance
        u/s 14A is, therefore, upheld to the extent to `69,894/-. The
        appellant gets a relief of ``26,49,206/- (2719100-69894)."

4.            The Revenue is now in appeal before us against the aforesaid
findings of e ld. CIT(A).The ld. DR supported the order of the AO while the ld.
AR on behalf of the assessee relied upon the findings in the impugned order.
Since the findings of learned CIT(A) were based on his findings in the AY 2005-
06,to a query by the Bench, both the parties agreed that the matter having been
restored to the file of AO by the ITAT in their decision dated 20th January, 2012 of
in the assessee's own case in I.T.A. no.5051/Del./2011, accordingly, the matter
in the year under consideration may be restored to the file of AO for re-
adjudication in the light of decision of Hon'ble jurisdictional High Court in M/s Max
Opp. Investment Ltd. Vs. ACIT, 203 Taxman 364(Del.).


5.            We have heard both the parties and gone through the facts of the
case.     Indisputably, the findings of the learned CIT(A) in the year under
consideration are based on his own findings in the assessee's own case in the
AY 2005-06. In that year, the ITAT vide their aforesaid order dated 20.01.2012 in
identical circumstances, restored the issue to the file of the AO in the following
terms:-
                                           6          ITAnNos.322,2239&2583/D/2012


       "5.           We have heard both the parties and their contentions
       have carefully been considered. Though learned CIT(A) has
       discussed all the related figures in his order, but, apparently, he has
       not confronted all these figures to the Assessing Officer. The
       Assessing Officer had made estimated disallowance of 25% of the
       dividend income. Keeping in view the entirety of facts, we are of
       the opinion that it would meet the interest of justice if the matter is
       restored back to the file of Assessing Officer to reconsider the
       disallowance keeping in mind the aforementioned decision of the
       Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. Vs.
       CIT (supra). We direct accordingly. The Assessing Officer will give
       reasonable opportunity of hearing to the assessee and after giving
       such opportunity, the Assessing Officer will re-compute the
       disallowance by taking into consideration the aforementioned
       decision of Hon'ble High Court as per the provisions of law."

6.    We may point out that ,Hon'ble jurisdictional High Court in their decision
dated 18.11.2011 in Maxopp Investment Ltd. vs. CIT,[2011] 15 taxmann.com
390 (Delhi) held as under:

       "41. Sub-section (2) of section 14A, as we have seen, stipulates that the
     Assessing Officer shall determine the amount of expenditure incurred in
     relation to income which does not form part of the total income "in
     accordance with such method as may be prescribed". Of course, this
     determination can only be undertaken if the Assessing Officer is not satisfied
     with the correctness of the claim of the assessee in respect of such
     expenditure. This part of section 14A(2) which explicitly requires the
     fulfillment of a condition precedent is also implicit in section 14A(1) [as it now
     stands] as also in its initial avatar as section 14A. It is only the prescription
     with regard to the method of determining such expenditure which is new and
     which will operate prospectively. In other words, section 14A, even prior to
     the introduction of sub-sections (2) & (3) would require the assessing officer
     to first reject the claim of the assessee with regard to the extent of such
     expenditure and such rejection must be for disclosed cogent reasons. It is
     then that the question of determination of such expenditure by the assessing
     officer would arise. The requirement of adopting a specific method of
     determining such expenditure has been introduced by virtue of sub-section
     (2) of section 14A. Prior to that, the assessing officer was free to adopt any
     reasonable and acceptable method.
     42. Thus, the fact that we have held that sub-sections (2) & (3) of section
     14A and Rule 8D would operate prospectively (and, not retrospectively) does
     not mean that the assessing officer is not to satisfy himself with the
     correctness of the claim of the assessee with regard to such expenditure. If
     he is satisfied that the assessee has correctly reflected the amount of such
     expenditure, he has to do nothing further. On the other hand, if he is satisfied
                                          7          ITAnNos.322,2239&2583/D/2012


     on an objective analysis and for cogent reasons that the amount of such
     expenditure as claimed by the assessee is not correct, he is required to
     determine the amount of such expenditure on the basis of a reasonable and
     acceptable method of apportionment. It would be appropriate to recall the
     words of the Supreme Court in Walfort (supra) to the following effect:-
     "The theory of apportionment of expenditure between taxable and non-taxable has,
     in principle, been now widened under section 14A."
     So, even for the pre-Rule 8D period, whenever the issue of section 14A
     arises before an Assessing Officer, he has, first of all, to ascertain the
     correctness of the claim of the assessee in respect of the expenditure
     incurred in relation to income which does not form part of the total income
     under the said Act. Even where the assessee claims that no expenditure has
     been incurred in relation to income which does not form part of total income,
     the assessing officer will have to verify the correctness of such claim. In
     case, the assessing officer is satisfied with the claim of the assessee with
     regard to the expenditure or no expenditure, as the case may be, the
     assessing officer is to accept the claim of the assessee insofar as the
     quantum of disallowance under section 14A is concerned. In such
     eventuality, the assessing officer cannot embark upon a determination of the
     amount of expenditure for the purposes of section 14A(1). In case, the
     assessing officer is not, on the basis of objective criteria and after giving the
     assessee a reasonable opportunity, satisfied with the correctness of the
     claim of the assessee, he shall have to reject the claim and state the reasons
     for doing so. Having done so, the assessing officer will have to determine the
     amount of expenditure incurred in relation to income which does not form
     part of the total income under the said Act. He is required to do so on the
     basis of a reasonable and acceptable method of apportionment."
.
7.    As already observed, in the instant case, the assessee denied incurring
any expenditure for earning income, which does not form total income during the
course    of   assessment    proceedings      even   when    huge   investments     of
`512,670,533/- were made by the assessee in units and mutual funds. In terms
of the aforesaid decision of the Hon'ble jurisdictional High Court, even where the
assessee claims that no expenditure has been incurred in relation to income
which does not form part of total income, the AO is required to verify the
correctness of such claim. In case, the AO is not, on the basis of objective criteria
and after giving the assessee a reasonable opportunity, satisfied with the
correctness of the claim of the assessee, he shall have to reject the claim and
state the reasons for doing so. Having done so, the AO has to determine the
amount of expenditure incurred in relation to income which does not form part of
                                           8          ITAnNos.322,2239&2583/D/2012


the total income under the said Act, Hon'ble High Court concluded. Following the
view taken in this decision, Hon'ble jurisdictional High Court in CIT vs. Machino
Plastic Ltd in their decision dated 28.2.2012 in ITA no. 92 of 2011, restored the
matter to the file of the AO, being handicapped because of failure of the
assessee to furnish relevant details and particulars .In the instant case also, the
AO was handicapped, because of failure of the assessee to furnish relevant
details and particulars while making the disallowance There is nothing in the
assessment order or impugned order as to whether the assessee expressed his
willingness to furnish the details desired by the AO nor the AO or the ld. CIT(A)
seems to have undertook any exercise to ascertain the details of expenditure
objectively in managing and supervising the aforesaid huge investments of
`512,670,533/- in mutual funds and securities. In view of the foregoing,
especially when the ld. CIT(A) or the AO               did not have the benefit of
aforesaid decisions including that of the Hon'ble jurisdictional High Court, we
consider it fair and appropriate to set aside the order of the ld.
CIT(A) and restore the matter to the file of the AO for deciding the
issue, afresh in accordance with law in the light of aforesaid judicial
pronouncements,         after   allowing       sufficient   opportunity   to    the
assessee. The assessee is also directed to furnish all the relevant
details   of    expenditure      actually       incurred    in    managing      and
supervising the aforesaid huge investments in mutual funds &
securities. W ith these observations, ground nos. 1 in the appeal is
disposed of.


8.             Ground no.2 in the appeal of the Revenue for the AY 2007-08
relates to disallowance of ``3,23,127/-on account of excess depreciation on UPS
& printers. The AO restricted the depreciation on computers peripherals, UPS
and Printers @15% as against claim made by the assessee @60%, resulting in
disallowance of ``3,23,127.


9.             On appeal, the ld. CIT(A) allowed the claim in the following terms:-
                                 9           ITAnNos.322,2239&2583/D/2012



"16.          With regard to this disallowance, the appellant has
submitted that the Assessing Officer has failed to appreciate that
UPS, Printers and scanners are part and parcel of the computers,
which cannot work in isolation, and are computer peripherals which
are entitled to the depreciation at the rate applicable to the
computers, i.e. 60%. Further, while rejecting the claim of the
appellant on this issue, the Assessing Officer did not ask for any
explanation from the appellant during the course of            the
assessment proceedings and hence the addition was in clear
violation of natural justice and on this count also the impugned
addition deserves to be deleted. The appellant also relied on the
following decisions in this regard:-


-   DCIT Vs. Datacraft        India   Ltd.   (I.T.A.   Nos.7462    &
    754/Mum/2007),
-   CIT Vs. BSES Rajdhani Powers Ltd. (I.T.A. No.1266 of
    2010)(Delhi).
-   Expeditors International (India)(P) Ltd. Vs. ACIT (118 TTJ 652),
    (Delhi ITAT).
-   Income-tax Officer Vs. Samiran Majumdar (98 ITD 119),
    (Kolkatta ITAT).
-   CIT Vs. Karnataka Power Corporation (2011) 247 ITR 268
    (Supreme Court).
-   M/s Accenture Services Pvt. Ltd. (I.T.A. No.3697/Mum/2008).
-   ACIT Vs. Continental Carriers (P) Ltd. (I.T.A. No.2137/D/2008).
-   ACIT Vs. M/s Cincom System India Pvt. Ltd. (I.T.A.
    No.1534/d/2008).
-   Container Corporation of India Ltd.          Vs.   ACIT   (I.T.A.
    No.2753,2851,3680,3775 and 4477).

17.            This issue has been discussed and decided in a
number of cases by the jurisdictional ITAT as well as Delhi High
Court, wherein it has been held that the computer accessories and
peripherals, printer and scanner, UPS etc are entitled to higher
rate depreciation @60% on the ground that such accessories and
peripherals form an essential part of the computer systems and the
same cannot be used without the computer. The Assessing Officer
is, therefore, directed to allow depreciation on UPS, printers and
scanner etc. @60% as claimed by the appellant."
                                           10         ITAnNos.322,2239&2583/D/2012


10.             The Revenue is now in appeal before us against the aforesaid
findings of the ld. CIT(A).The ld. DR supported the order of the AO while the ld.
AR on behalf of the assessee relied upon the findings in the impugned order.


11.             We have heard both the parties and gone through the facts of the
case. We find that the Hon'ble Delhi High Court in the case of CIT v. BSES
Rajdhani Powers Ltd. in I.T. Appeal no. 1266 (Delhi) of 2010, in their decision
dated 31-8-2010 while adjudicating a similar issue, held as under:

      "We are in agreement with the view of the Tribunal that computer accessories
      and peripherals such as, printers, scanners and server etc. form an integral
      part of the computer system. In fact, the computer accessories and
      peripherals cannot be used without the computer. Consequently, as they are
      the part of the computer system, they are entitled to depreciation at the higher
      rate of 60 per cent."

11.1           Following the said decision, ITAT in ITO vs. Omni Globe Information
Technologies India (P.) Ltd., 131 ITD 280(Delhi) held that if peripherals such as
printers, scanners and servers etc. form integral part of the computer system,
UPS will also be an integral part of the computer system, entitled for deduction of
depreciation at the rate of 60 per cent.        In another decision dated 9.11.2010,
Hon'ble Delhi High Court in CIT vs. Citycorp Maruti Finance Ltd. in ITA nos.
1712& 1714/2010 followed their own decision in BSES Yamuna Powers
Ltd.(supra) and upheld the view of the ITAT, allowing depreciation @60% on
computer accessories and peripherals like printers etc. .A similar view was taken
in CIT Vs. M/s Bonanza Portfolio Ltd.: I.T.A. no.833 of 2011 by the Hon'ble
jurisdictional High Court in their decision dated 10.8.2011. In the light of view
taken in the aforesaid decisions, especially when the Revenue have not placed
before us any contrary decision nor any other material so as to enable us to take
a different view in the matter, we have no hesitation in upholding the findings of
the ld. CIT(A),allowing depreciation @60% on UPS & printers. Therefore, ground
no.2 in the appeal of the Revenue is dismissed.
.
                                         11         ITAnNos.322,2239&2583/D/2012


12.           Adverting now to ground nos. 1 to 1.5 in the appeal of the assessee
and ground no.1 in the appeal of the Revenue for the assessment year 2008-09
relating to disallowance u/s 14A of the Act. During the course of assessment
proceedings, the AO noticed that the assessee made certain investments in
mutual funds and securities ,yielding dividend income, long term capital gain,
interest free interest etc., which did not form part of total income. The AO, after
considering the submissions of the assessee, concluded that earning of exempt
income is not in the nature of passive activity, having no input. In fact, making of
investment, maintaining or continuing investment and time of exit from
investment are well informed and well coordinated management decisions
involving not only inputs from various sources but also acumen of senior
management functionaries.      Therefore, cost was inbuilt into even so called
"passive" investment while there were incidental expenditure of collection,
telephone, follow up, research etc. Accordingly, while referring to provisions of
section 14A of the Act read with Rule 8D of the of the Income-tax Rules, 1962
and in the light of decision of Hon'ble High Court of Bombay in the case of Godrej
& Boyce Mfg. Co. Ltd. Vs. DCIT in I.T.A. No.626 & WP 2010 and Chem Invest
Ltd. Vs. Income-tax Officer, 317 ITR(AT) 86(SB), the AO disallowed an amount
of ``1,39,83,342/-.


13.           On appeal, the ld. CIT(A) restricted the disallowance to
``44,24,562/- in the following terms:-
       "6.           I have carefully considered the facts of the case,
       submissions of the appellant and material placed on record. I have
       also considered the case laws which are being relied upon both by
       the appellant as well as by the AO. In the instant case, AO has
       made a disallowance u/s 14A read with Rule 8D of the rules of
       ``1,39,83,342/- (``99,58,780 on account of interest and
       ``40,24,562/- on account of administrative expenses). In this
       regard the foremost contention of the appellant is that AO has not
       recorded his satisfaction before making a disallowance u/s 14A
       read with rule 8D. The appellant has relied upon the decisions of
       ITAT in the case of Wimco Seedlings Ltd. (supra) and, Jindal Photo
       Ltd. (supra) among other decisions.
                                  12         ITAnNos.322,2239&2583/D/2012


6.1            The scope of the above section was recently
examined by the Hon'ble Delhi High Court in the case of Maxopp
Investment Ltd. Vs. CIT reported in 64 DTR 122 wherein it was held
that, if an expenditure has a relation or connection with or pertains
to exempt income, it cannot be allowed as a deduction even if it
otherwise, qualifies under the other provisions of the said Act. It
was further held that, it is only if the Assessing Officer is not
satisfied with the correctness of the claim of the assessee in
respect of expenditure claimed to have been incurred that
Assessing Officer gets jurisdiction to determine the amount of
expenditure incurred in relation to such income which does not form
part of the total income under the said Act in accordance with the
prescribed method.       The prescribed method is the method
stipulated in Rule 8D of the Rules which is applicable from
assessment year 2008-09. Thus, the necessary precondition for
invoking section 14A(2) read with Rule 8D is satisfaction of the
Assessing Officer.

6.2            In the instant case, since Assessing Officer has
invoked Rule 8D, it is thus implied that, he was not satisfied with
the correctness of the claim of the appellant. In any case, since it is
well settled that, powers of the CIT(A) are co-terminus with that of
the Assessing Officer, as has been held by Hon'ble Supreme Court
in the case of Kanpur Goal Syndicate Vs. CIT reported in 53 ITR
225, the appellant was given another opportunity at the appellate
stage, to explain as to why disallowance u/s 14A read with Rule 8D
be not made, as from assessment year 2008-09, this rule is
mandatory in nature.

With regard to above, the appellant simply stated during the
appellate proceeding that apart from ``28,830/- which they have
already disallowed in their computation sheet no other disallowance
is warranted. Further all investments are in debt oriented mutual
funds, where no continuous monitoring is required and dividend is
automatically credited to their account. Further, entire investment
is from the interest free funds.

The appellant further stated that facts in the year under
consideration and in the assessment year 2005-06 are same and
CIT(A)-X while adjudicating the appeal for assessment year 2005-
06 calculated the disallowance by applying the %age of proportion
of taxable income and exempt income to the expenses related to
the finance department and without prejudice, if at all disallowance
u/s 14A is warranted, even then that cannot be more than `56,845/-
.
                                 13         ITAnNos.322,2239&2583/D/2012



6.3           From the submissions of the appellant as well as
from the perusal of Assessing Officer's order, it is seen that the
addition u/s 14A read with Rule 8D has two components viz interest
disallowance of ``99,58,780/- and disallowance on account of
administrative cost ``40,24,562/-.

6.3.1.        With regard to the disallowance of interest
component, after verifying the facts and evidences, I agree with the
appellant's submissions that the interest relating to vehicle lease,
TDS, sales tax and bank charges have no relation with the
investments, the income from which yield the exempt income.

Further with regard to the interest on short terms currency loan
(buyer's credit) it is seen that these are given as payments to the
suppliers from whom the imports are made by the appellant,
obviously, therefore, these loans are not related to the "investment"
which gives rise to exempt income, hence, therefore, the interest on
foreign currency loan for the purpose of disallowance u/s 14A
should not be considered. Same logic goes for the interest on loan
taken from CISCO, from whom the appellant has purchased assets
on the basis of "sales and lease bank agreement".

In view of the above, I therefore, hold that, the Assessing Officer's
action in taking the proportionate interest by applying Rule 8D for
the purpose of disallowance u/s 14A is not correct.

6.3.2.        However, with regard to the disallowance u/s 14A on
account of administrative charges as per Rule 8D amounting to
``44,24,562/-, I am not in agreement with the appellant's argument
that they have not incurred any expenditure as the investment is
guided by their holding company and the investment is in mutual
funds, other dividend goes automatically though ECS.

In the nature of any passive activity involving no input. In fact, in
my view.

a)    making of investment,
b)    maintaining or continuing with any investment in a particular
      share/mutual funds etc. and
c)    even the time when to exit from one investment to another.
                                       14         ITAnNos.322,2239&2583/D/2012


        All these activities are well coordinated and well informed
        management decisions, involving not only inputs from various
        sources but also it involves acumen of senior management
        decisions whether they sit in subsidiary company or holding
        company.      These are incidental administration expenses on
        collecting information, research etc. which helps in arriving at a
        particular investment decisions and these expenses, relating to
        earning of income are embedded in the indirect expenses. The
        investments made being conscious decisions and having
        deployment of the funds brings into picture expenditure by way of
        cost of funds "invested".

        6.3.3         Accordingly, in the absence of any information from
        the appellant, from assessment year 2008-09, the Assessing
        Officer (and CIT(A) in view of his co-terminus power with that of
        Assessing Officer) is bound to compute disallowance u/s 14A read
        with Rule 8D. Accordingly, by applying the same, I compute the
        disallowance under Section 14A Rule 8D at ``44,24,562/- (0.5% of
        average investments) and thereby disallowance is warranted under
        Rule 8D (2)(iii).

14.           The assessee is now in appeal before us against the aforesaid
findings of the ld. CIT(A), upholding the disallowance of ``44,24,562/- while the
Revenue is in appeal against the findings of ld. CIT(A) holding that proportionate
disallowance on account of interest by applying Rule 8D was not correct. The ld.
DR while carrying us through the impugned order contended that out of total
finance charges of ``2,59,07,519/-, bank charges of ``96,61,717/- might include
interest on overdraft and the ld. CIT(A) has not recorded any findings on this
aspect in the impugned order. The ld. DR elaborated that the assessee had
taken short term loans on account of certain purchases and since payments were
deposited in the same bank account, these might have been utilized towards
investments and not merely for repayment of loans.


14.1.         On the other hand, the ld. AR on behalf of the assessee while
relying upon decision in Maxopp Investment Ltd.(supra) argued that bank
charges did not include any interest on overdraft especially when the assessee
had turn over more than ``387/- crores. Moreover, short term foreign currency
                                         15         ITAnNos.322,2239&2583/D/2012


loans could not be utilized for investments in India. While referring to decisions in
CIT vs. Bombay Samachar Ltd,74 ITR 723(Bom.), followed by Hon'ble Delhi High
Court in Regal Theatre vs. CIT,225 ITR 205(Del.), the ld.AR vehemently argued
that borrowed funds were used for the purpose of the business and not for the
purpose of investment,yielding exempt income .The ld. AR, relying upon decision
in Maxopp Investment Ltd.(supra),argued that the ld. CIT(A) rightly concluded
that the interest relating to vehicle lease, TDS, sales tax and bank charges have
no relation with the investments while short terms currency loan were in the
nature of buyer's credit and were payments to the suppliers from whom the
imports were made and thus, were not related to the "investment",yielding
exempt income. Similarly, interest on loan taken from CISCO, from whom the
assessee purchased assets on the basis of "sales and lease back agreement",
had no relation with any of the investments, yielding exempt income and,
therefore, proportionate disallowance on account of interest was not justified.


14.2 In his rejoinder, the ld. DR argued that decisions relied upon by the ld. AR
in Bombay Samachar Ltd(supra) &Regal Theatre(supra) were rendered prior to
insertion of section 14A of the Act and had no relevance in the instant case. In
fact, the impugned order was non-speaking, the learned CIT(A) having not
recorded any findings in relation to bank charges nor the assessee had filed
relevant details before the AO.


15.             As regards disallowance upheld by the ld. CIT(A), the ld. AR
argued that their gross receipts were ``3,876,245,118/- while expenses relating
to    finance   department   were   ``14,707,272/-,yielding   proportion    between
expenditure incurred in earning exempt income at 0.39.          Thus, at the most,
disallowance could be made to the extent of ``56,845/-.         The ld. AR further
pointed out that    not much efforts and time was required for investments in
mutual funds. Since the ld. CIT(A) did not dispute their submissions, the
disallowance upheld by the ld. CIT(A) was not correct, the ld. AR added.
                                        16          ITAnNos.322,2239&2583/D/2012


15.1          On the other hand, the ld. DR pointed out that correct proportion
could be between the taxable income and exempt income and not between
gross receipts and exempt income.


15.2   In his rejoinder, the ld. AR pointed out that efforts in earning income
crystallized into receipts and, therefore, expenses have to be allocated to the
gross earning and not to the net income.


16.     We have heard both the parties and gone through the facts of the case.
Indisputably, the AO disallowed the aforesaid amount of `1,39,83,342/-,invoking
provisions of section 14A(2) of the Act read with Rule 8D of I.T. Rules,
1962,without even analyzing the nature of the expenditure incurred for earning
income, which did not form part of total income.. The assessee submitted before
the AO in its letter dated 27.8.2010 that only expenditure of 28,380/- i.e salary of
shri Niraj Murarka, had been incurred by it ,which had any proximate connection
to earning of tax free dividend income and all the investments made as per
directives of HCL Technologies Ltd.        were out of their own funds and the
assessee had no discretion in any investment avenue . A perusal of details of
investments in the balancesheet reveals that the assessee had investments of
`512,670,533/-/- in mutual funds as on           31.3.2007 which increased to
`1,097,154,427/-as on 31.3.2008. The assessee claimed that investments were
made out of its own funds and          it had not debited any interest towards
investments in the year under consideration. The ld. CIT(A), after analyzing the
details of interest, found that interest relating to vehicle lease, TDS, sales tax
and bank charges had no relation with the aforesaid investments while short
terms currency loan were in the nature of buyer's credit and in fact, were
payments to the suppliers from whom the imports were made . Similarly, interest
on loan taken from CISCO, from whom the assessee purchased assets on the
basis of "sales and lease back agreement" had no relation with any of the
investments, yielding exempt income.. Accordingly, the ld. CIT(A) deleted the
disallowance in relation to interest. Hon'ble Punjab & Haryana High Court
                                         17          ITAnNos.322,2239&2583/D/2012


in their decision in CIT vs. Hero Cycles Ltd.,323 ITR 518 observed
that disallowance under section 14A requires finding of incurring of
expenditure and where it is found that for earning exempted income
no expenditure has been incurred, disallowance under section 14A
cannot stand. Hon'ble jurisdictional High Court held in Maxopp
Investment Ltd.(supra) that     the `actual' expenditure that is in contemplation
under section 14A(1) of the said Act is the `actual' expenditure in relation to or in
connection with or pertaining to exempt income. The corollary to this is that if no
expenditure is incurred in relation to the exempt income, no disallowance can be
made under section 14A of the said Act. Since the Revenue have not
placed before us any material, evidencing that borrowed funds had
indeed been utilized in making aforesaid investments nor                    placed
before us any material, controverting the aforesaid findings                 of the
ld. CIT(A), deleting disallowance             u/s 14A of the Act in relation to
interest, we are not inclined to interfere. Therefore, ground no.1
raised by the Revenue in their appeal for the AY 2008-09 is
dismissed.


17.     As regards ground raised in the appeal of the assessee ,we find that
assessee claimed that total expenditure incurred in the Finance Department was
`14,707,272/- and at the most disallowance could be `56,845/-. The ld. CIT(A)
while observing that the activities involved in making and maintaining huge
investments were well coordinated and well informed management decisions,
involving not only inputs from various sources but also it involved acumen of
senior management decisions, whether they sit in subsidiary company or holding
company, in the absence of any information from the assessee,                upheld
disallowance at ``44,24,562/- being 0.5% of average investments. Apparently,
the assessee did not furnish complete details         of expenditure incurred for
management and supervision of aforesaid huge investments in the year under
consideration even while admitting that decisions in regard to investments were
taken by the holding company. No such details of expenditure incurred by the
                                        18          ITAnNos.322,2239&2583/D/2012


holding company have been placed before the lower authorities and even before
us nor it is informed as to how such expenditure has been dealt with in the
books of the holding company or the assessee. In any case, no material was
placed before the AO in order to enable him to record his satisfaction while the
ld.CIT(A) specifically concluded that he was not satisfied with the correctness of
claim of the assessee that no expenditure was incurred in relation to income
which did not    form part of total income. Hon'ble Apex Court in Kantamani
Venkata Narayana and Sons v. First Addl. ITO [1967] 63 ITR 638 and again in
Malegaon Electricity Co. P. Ltd. v. CIT [1970] 78 ITR 466 (SC) observed that it is
the duty of the assessee to bring to the notice of the Income tax Officer particular
items in the books of account or portions of documents which are relevant. The
law casts a duty on the assessee to disclose fully and truly all material facts
necessary for his assessment for that year. Not even a whisper has been made
before us as to whether or not relevant accounts were placed before the AO or
the ld. CIT(A) in order to enable them to examine the claim of the assessee. The
object or purpose of the investment affects operation of section 14A of the Act
inasmuch as any expenditure incurred for earning tax free income is not an
allowable deduction by virtue of operation of the said section, as held in CIT vs.
State Bank of Travancore,16 Taxmann.com 289(Ker).


17.1. Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing
Company Ltd. (supra) while adjudicating a similar issue in the context
of provisions of sec. 14A of the Act and Rule 8D of the IT
Rules,1962 concluded that             Rule 8D, inserted w.e.f 24.3.2008
applies only w.e.f AY 2008-09. Hon'ble              Supreme Court        in   their
decision dated 6.7.2010 in          CIT v. W alfort Share & Stock Brokers
(P.) Ltd.,326 ITR 1, inter alia, observed that for attracting section
14A of the Act there has to be a proximate cause for disallowance,
which is its relationship with the tax exempt income. The theory of
apportionment of expenditure between taxable and non-taxable has, in principle,
been now widened under section 14A, Hon'ble Apex Court concluded. In
                                         19          ITAnNos.322,2239&2583/D/2012


Cheminvest Ltd. v. Income-tax Officer,317ITR(AT)86,Special Bench held that
when the expenditure is incurred in relation to income which does not form part
of total income, it has to suffer the disallowance irrespective of the fact whether
any income is earned by the assessee or not and the provisions of sec. 14A of
the Act do not envisage any such exception. Hon'ble jurisdictional High Court in
a recent decision dated 18.11.2011 in Maxopp Investment Ltd. (supra) held that
sub-section (2) of section 14A stipulates that the AO shall determine the amount
of expenditure incurred in relation to income which does not form part of the total
income "in accordance with such method as may be prescribed" and of course,
this determination can only be undertaken if the AO is not satisfied with the
correctness of the claim of the assessee in respect of such expenditure.
.
17.2       As already observed, in the instant case, the assessee denied
incurring any expenditure for earning income, which does not form total income
during the course of assessment proceedings even when huge investments
were made by the assessee in mutual funds & securities. In terms of the
aforesaid decision of the Hon'ble jurisdictional High Court in Maxopp Investment
Ltd.(supra), even where the assessee claims that no expenditure has been
incurred in relation to income which does not form part of total income, the AO is
required to verify the correctness of such claim. In case, the AO is not, on the
basis of objective criteria and after giving the assessee a reasonable opportunity,
satisfied with the correctness of the claim of the assessee, he shall have to reject
the claim and state the reasons for doing so. Having done so, the AO has to
determine the amount of expenditure incurred in relation to income which does
not form part of the total income under the said Act, Hon'ble High Court
concluded. Following the view taken in this decision, Hon'ble jurisdictional High
Court in CIT vs. Machino Plastic Ltd in their decision dated 28.2.2012 in ITA no.
92 of 2011, restored the matter to the file of the AO, being handicapped because
of failure of the assessee to furnish relevant details and particulars .In the instant
case also, the AO was handicapped, because of failure of the assessee to
furnish relevant details/particulars and accounts while making the disallowance in
                                         20         ITAnNos.322,2239&2583/D/2012


terms of provisions of sec. 14A of the Act. There is nothing in the assessment
order or impugned order as to whether the assessee placed the relevant details
& accounts before the AO nor these authorities seems to have undertook any
exercise to ascertain the details of expenditure incurred in managing and
supervising the aforesaid huge investments in         various funds & securities,
objectively. In these circumstances, it is but natural that management would have
spent some time in taking investment or disinvestment decisions in various
mutual funds. However, this issue has not been examined at length by any of the
lower authorities. The assessee claimed before the ld. CIT(A) that sufficient
opportunity was not given by the AO. The ld. CIT(A) concluded that his powers
were co-terminus with that of the AO and accordingly , he afforded the
opportunity, as mentioned in para 6.2 of the impugned order. Hon'ble Apex Court
held in Tin Box Company vs. CIT,249 ITR 216 that opportunity by the AO is not
the same as granted by the ld. CIT(A) and that the assessee could have placed
evidence before the first appellate authority or before the Tribunal is really of no
consequence for it is the assessment order that counts. In view of the
foregoing, we consider it fair and appropriate to set aside the order
of the ld. CIT(A) and restore the matter to the file of the AO for
deciding the issue, afresh in accordance with law in the light of our
aforesaid      observations     and      various   judicial       pronouncements,
including      those   referred     to   above,    after        allowing   sufficient
opportunity to     the assessee Needless to say that while redeciding
the issue, the AO. shall pass a speaking order,                  giving reasons for
his satisfaction       or otherwise, as pointed out by the Hon'ble
jurisdictional High Court in their decision in Maxopp Investment Ltd
(supra). The assessee is also directed to furnish all the relevant
details   of    expenditure       actually    incurred     in       managing     and
supervising the aforesaid huge investments in mutual funds &
securities along with relevant accounts and cash flow statement.
W ith these observations, ground nos 1 to 1.5 in the appeal                    of the
assessee for the AY 2008-09 are disposed of.
                                       21         ITAnNos.322,2239&2583/D/2012



18.          As regards ground no.2 in the appeal of the assessee for the AY
2008-09, relating to depreciation on elevator, the AO restricted the depreciation
on cost of elevator at the rates prescribed for building as against claim of the
assessee for depreciation at the rates prescribed for plant and machinery.
Accordingly, the AO disallowed excess depreciation of ``1,31,400/-.


19.   On appeal, the ld. CIT(A) upheld the findings of the AO in the following
terms:-
      "8            I have gone through the above submission of the
      appellant and have considered the facts and evidences placed on
      record and have also perused the Assessing Officer's order. It is
      seen that the only ground on which the appellant has claimed
      depreciation on elevators under the head "plant and machinery" is
      that elevators can be dismantled and removed to another location.

      In this regard, I am in agreement with the observations of the
      Assessing Officer that it is the functional and location usage which
      wills determine whether a particular item is "plant and machinery" or
      not. In the present case, the elevators are being used as a part
      and parcel of the building and therefore, depreciation on the same
      can only be allowed at the rate applicable to building. The addition
      of ``1,31,400/- made by Assessing Officer on this account is,
      therefore, confirmed."

20.   The assessee is now in appeal before us against the aforesaid findings of
the ld. CIT(A).The ld.AR on behalf of the assessee relied on the decisions in CIT
vs. Jyoti Ltd.,163 ITR 274(Guj) & VD Talwar(Deceased) vs. CIT,225 ITR
439(Mad.) while contending that elevators were part of plant and machinery and
thus, entitled for depreciation at the rates prescribed for plant and machinery
and not building. On the other hand, the ld. DR supported the findings of the ld.
CIT(A).


21.          We have heard both the parties and gone through the facts of the
case. Indisputably, similar disallowance was made in the preceding assessment
year and upheld by the ld. CIT(A).As pointed out by the AO, the assessee in the
                                        22            ITAnNos.322,2239&2583/D/2012


FY 2005-06 capitalised the office building; but elevators were capitalized with
plant and machinery and not the office building. To a query by the AO, the
assessee replied that elevators were part of plant and machinery. There is
nothing to suggest nor the ld. AR informed as to what was the status of their
claim in the AY 2006-07.Even in the preceding assessment year i.e AY 2007-08,
disallowance has been upheld by the ld. CIT(A) and there is nothing to suggest
as to whether or not the assessee disputed the findings of the ld. CIT(A) in
further appeal. Before us, the ld. AR relied upon decisions in Jyoyi Ltd.(supra),
wherein while considering the issue of grant of development rebate under section
33(1)(a) of the Act, Hon'ble High Court held that the lift was a machinery or a
mechanical device for transporting men and materials from one place to another.
Following this decision, Hon'ble Madras High Court in VD Talwar(Deceased)
held that since the lift was moving up and down with the help of twisted steel
rope within a structure, it can also be considered as a ropeway structures-carrier
entitled to the higher rate of 15 per cent depreciation as per entry III(ii)B(15) of
the depreciation Schedule. Apparently, the assessee is claiming depreciation
since the installation of lift in the preceding years while there is nothing to
suggest as to whether or not the assessee disputed the findings of the ld.
CIT(A),holding elevators as a part and parcel of the building, in further appeal in
those years and the issue as to whether or not lift could be treated as part of
building was never examined in the decisions relied upon before us by the ld.AR
nor the lower authorities had any occasion to consider the facts and
circumstances in these decisions. In these circumstances ,especially when
complete facts have not been placed before us           we consider it fair and
appropriate to set aside the order of the ld. CIT(A) and restore the
matter to the       file of the AO for deciding the                 issue, afresh in
accordance       with     law    in   the     light     of    aforesaid         judicial
pronouncements          and   after   analyzing       the    view    taken      in   the
assessee's own case in the preceding years and of course , after
allowing    sufficient    opportunity    to     the     assessee.       W ith    these
                                       23         ITAnNos.322,2239&2583/D/2012


observations, ground no. 2 in the appeal of the assessee for the AY
2008-09 is disposed of.


22.          No additional ground having been raised before us in terms of
residuary ground no.3 in the appeal of the Revenue for the AY 2007-08, and
ground No.2 in their appeal for the AY 2008-09 as also residuary ground in the
appeal of the assessee, accordingly, all these grounds are dismissed.


23..           No other plea or argument was made before us.


24     In the result, appeal of the Revenue for the AY 2008-09 is dismissed while
their appeal for the AY 2007-08 is partly allowed and appeal of the assessee for
the AY 2008-09 is allowed, but both for statistical purposes.
                 Order pronounced in open Court

        Sd/-                                                        Sd/-
( I.C. SUDHIR )                                               (A.N. PAHUJA)
(Judicial Member)                                          (Accountant Member)

NS

Copy of the Order forwarded to:
   1 Assessee
   2. A.C.I.T.,Circle 12(1), New Delhi
   3. CIT. concerned
  4. CIT(A)-XXVII & CIT(A)-XV, New Delhi
  5. DR, ITAT,'C' Bench, New Delhi
  6. Guard File.
                                                                    BY ORDER,


                                                          Deputy/Asstt.Registrar
                                                                    ITAT, Delhi
 
 
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