JCIT, Bangalore V. M/s Bharat Fritz Werner Limited, Bangalore

ITA 1185/BANG/2011

• Counselvise Citation: 118521114 RSA 2011
• Duration Of Justice: 1 year(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-12-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 01-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K P KUMAR SHRI FARHAT HUS
• Keywords: Capital asset; Depreciation; Business expenditure; Earning of tax free income; Wholly owned subsidiary; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 43B; 143(3); 14A; 147; 6; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SMT. P MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER ITA NO.1185/BA NG/2011 (ASST. YEAR - 2008-09) THE JT. COMMISSIONER OF INCOME-TAX, (OSD) CIRCLE - 11(2), BANGALORE. . APPELLANT VS. M/S BHARAT FRITZ WERNER LTD., OFF : TUMUKUR ROAD, YESHWANTHPUR P.O, BANGALORE-560 022. . RESPONDENT PAN NO.AAACB 5723A. ITA NO.1123/BANG/2011 (BY ASSESSEE) APPELLANT BY : SHRI K.P KUMAR, ADVOCATE RESPONDENT BY : SHRI FARHAT HUSSAIN QURESHI, CIT DATE OF HEARING : 03-12-2012 DATE OF PRONOUNCEMENT : 21-12-2012 O R D E R PER SMT. P MADHAVI DEVI, JUDICIAL MEMBER THESE CROSS APPEALS ARE FILED BY THE ASSESSEE AS WELL AS THE REVENUE. THE RELEVANT ASSESSMENT YEAR IS 2008-09. THE CROSS APPEALS ITA NO.1185 & 11 23/B/11 2 ARE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) I AT BANGALORE DATED 22.09.2011. THE APPEAL ARISES OUT OF THE ASSESSMENT COMPLETED U/S 143(3) OF THE INCOM E-TAX ACT, 1961. 2. THE ASSESSEE IS AGGRIEVED BY THE 1) DISALLOWANCE OF RS.16,99,179/- U/S 14A. 2) DISALLOWANCE OF RS.4,41,08,588/- ON VALUE OF TOO LS 3) DISALLOWANCE OF RS.6,76,67,00/- OF LOANS GIVEN T O THE SISTER CONCERN 4) DISALLOWANCE OF RS.1,72,32,337/- OF DESIGN CHARG ES. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF MACHINE TOOLS AND FOR THE RELEVANT ASSESSMENT YEAR 2008-09, THE ASSESSEE HAS FILED ITS RETURN OF INCOME DECLARING RS.27,56,74,12 0/-. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT, THE A O CALLED FOR VARIOUS DETAILS AND AFTER EXAMINATION OF THE SAME, CAME TO THE CONCLUSIONS THAT CERTAIN DISALLOWANCES ARE CALLED F OR.. 3. FROM THE FINANCIALS OF THE ASSESSEE, THE AO OBSE RVED THAT THE ASSESSEE COMPANY HAS EARNED EXEMPTED INCOME OF RS.2 ,44,33,380/- ITA NO.1185 & 11 23/B/11 3 THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE EXP ENDITURE INCURRED FOR EARNING EXEMPTED INCOME BY APPLYING THE PROVISI ONS OF SEC. 14A READ WITH RULE 8D OF IT RULES SHOULD NOT BE DISALLO WED. IN RESPONSE TO THE SAME, THE ASSESSEE COMPANY STATED THAT THE I NVESTMENTS ARE MADE OUT OF ADDITIONAL CAPITAL RAISED AND NO SPECIF IC EXPENDITURE HAS BEEN INCURRED FOR EARNING THE EXEMPTED INCOME. THE AO WAS HOWEVER NOT CONVINCED WITH THE SAID SUBMISSIONS OF THE ASSESSEE AND HELD THAT WHETHER THE INVESTMENTS IS MADE OUT OF AD DITIONAL CAPITAL RAISED OR OTHERWISE, THE COST OF EXPENDITURE INCURR ED FOR EARNING SUCH EXEMPTED INCOME HAS TO BE WORKED OUT AS PER THE PRO VISIONS OF SEC. 14A READ WITH RULE 8D AND HAS TO BE DISALLOWED. HE FURTHER OBSERVED THAT THE REASONS AS TO WHY THE ASSESSEE COMPANY HAS NOT UTILIZED THE ADDITIONAL CAPITAL RAISED FOR ITS DAY TO DAY WORKIN G AS ITS MAIN ACTIVITY IS MANUFACTURING BUSINESS IS NOT KNOWN, BUT IT HAS MADE INVESTMENT IN EARNING EXEMPTED INCOME AND, THEREFORE, ITS INTENTI ON IS TO EARN DIVIDED INCOME AND THE PROVISION OF SEC. 14A READ W ITH RULE 8D ARE TO BE APPLIED AND, THEREFORE, DISALLOWED THE SUM OF RS.16,99,179/- BEING ONE HALF PERCENT OF THE AVERAGE INVESTMENT. 4. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFO RE THE CIT(A) REITERATING THE SUBMISSION MADE BY THE ASSESSEE BEF ORE THE AO AND ITA NO.1185 & 11 23/B/11 4 ALSO PLEADED THAT THE AO HAS NOT SHOWN THAT EXPEND ITURE WAS INCURRED FOR SUCH PURPOSE. IN SUPPORT OF ITS CONTENTION, TH E ASSESSEE PLACED RELIANCE UPON THE FOLLOWING DECISIONS : 1) MAHARASHTRA APEX CORPORATION LTD. VS. CIT (2006) 60 (KAR) LJ 451 2) CIT VS. HERO CYCLES LTD. (2010), 323 ITR 518 (P & H ) 3) CIT VS. METALMAN AUTO PVT. LTD., 336 ITR 434 (P & H ) THE CIT(A) HELD THAT THE RATION DECIDENDI OF ALL TH E DECISIONS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE , IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. HE HE LD THAT IN THE CASE OF MAHARASHTRA APEX CORPORATION LTD. VS. CIT (CITED SUPRA), THE HONBLE KARNATAKA HIGH COURT WAS DEALING WITH SEC . 80M(I), WHILE IN THE PRESENT CASE, THE ISSUE IS WITH REGARD TO THE DISALLOWANCE U/S 14A OF THE INCOME-TAX ACT. AS REG ARDS THE OTHER TWO DECISIONS, HE HELD THAT INTERPRETATION OF LAW I NVOLVED WAS FOR ASSESSMENT YEAR 2004-05 ONLY WHERE ONLY PROVISIONS OF SUB SEC. 1 OF SEC. 14A WAS IN THE STATUE BOOK AND IN THOSE CIR CUMSTANCES, IT WAS HELD THAT THE DISALLOWANCE U/S 14A IS NOT JUSTI FIED. HE OBSERVED THAT BY AMENDMENT AND INTRODUCTION OF SUB SECS. (2) AND (3) TO SEC. 14A OF THE INCOME-TAX ACT W.E.F 2007-08 , METHOD OF ITA NO.1185 & 11 23/B/11 5 COMPUTATION TO DETERMINE THE DISALLOWANCE AMOUNT WA S LAID DOWN AND THE PROCEDURE WAS PRESCRIBED UNDER RULE 8D W.E. F 24.3.2008. HE HELD THAT THE RULE 8D ALSO PRESCRIBED THAT THE A O IS NOT REQUIRED TO EXAMINE EACH AND EVERY EXPENDITURE TO PINPOINT W HICH RELATE TO EARNING OF TAX FREE INCOME BUT HE HAS ONLY TO SHO W THAT THE CLAIM OF SUCH EXPENDITURE BY THE ASSESSEE IS INCORRECT. THUS HOLDING THAT FOR THE ASSESSMENT YEAR 2007-08 ONWARDS, THE POSITI ON OF LAW IS VERY CLEAR AND, THEREFORE, EVEN IF THE ASSESSEE DOE S NOT SHOW ANY EXPENDITURE TO EARN THE EXEMPTED INCOME, A PORTION OF IT HAS TO BE DISALLOWED FROM THE ASSESSMENT YEAR 2008-09 ONWARDS . IN SUPPORT OF THIS FINDING, HE PLACED RELIANCE UPON THE DECISI ON OF ITAT DELHI BENCH IN THE CASE OF 1) WIMCO SEEDINGS LTD., VS. DC IT (2007) REPORTED IN 293 ITR (DEL TRIB) AND 2) M/S CIVIL ENGINEERS ENTERPRISES PVT. LTD., VS. D CIT REPORTED IN 859/KOL/2010 DATED 19.8.2010 3) ITO VS. M/S B.P SECURITIES PVT. LTD. IN ITA NO.123/KOL/`2010 DATED 19.8.2010, WHEREIN IT WAS HE LD THAT EVEN IF THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAD BEEN IN CURRED TO EARN EXEMPTED DIVIDEND, STILL 1% OF EXEMPTED INCOME HAS TO BE ITA NO.1185 & 11 23/B/11 6 DISALLOWED U/S 14A OF THE INCOME-TAX ACT AS INDIREC T AND INVISIBLE EXPENDITURE RELATABLE TO THE EXEMPTED INCOME. THUS , HE CONFIRMED THE DISALLOWANCE MADE BY THE AO AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US. 5. THE LEARNED AR WHILE REITERATING THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW SUBMITTED THA T THE ASSESSEES PAID UP CAPITAL AND RESOURCES DURING THE RELEVANT A SSESSMENT YEAR EXCEEDED RS.124 CRORES WHILE THE INVESTMENTS AGGREG ATING TO RS.35 CRORES WERE MADE OUT OF THE ADDITIONAL SHARE CAPIT AL RAISED DURING THE ASSESSMENT YEAR 2006-07. HE SUBMITTED THAT PRI OR TO RAISING OF SUCH ADDITIONAL CAPITAL, THE ASSESSEES INVESTMENT WAS NOT SIGNIFICANT. HE SUBMITTED THAT THE AOS OBJECTIONS THAT THE ADDITIONAL SHARE CAPITAL OUGHT TO HAVE BEEN INVESTE D/USED FOR DAY TO DAY ACTIVITIES OF THE ASSESSEE IS NOT JUSTIFIED BE CAUSE IT IS ONLY THE ASSESEE WHO CAN DECIDE AS TO HOW ITS RESOURCES ARE TO BE UTILIZED AND IT IS NOT FOR THE AO TO SIT AND JUDGE THE BUSIN ESS ACTIVITIES OF THE ASSESSEE. HE SUBMITTED THAT AS PER SEC. 14A OF THE INCOME-TAX ACT, THE ASSESSING OFFICER HAS TO BE SATISFIED THAT THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS ITA NO.1185 & 11 23/B/11 7 NOT CORRECT. THUS, ACCORDING TO HIM, THE ASSESSING OFFICER HAS TO RECORD SATISFACTION THAT THERE IS SOME PART OF THE EXPENDITURE WHICH HAS BEEN INCURRED FOR THE PURPOSE OF EARNING THE EX EMPTED INCOME. HE SUBMITTED THAT IN THE ABSENCE OF SUCH A FINDING, THE ASSESSING OFFICER CANNOT PROCEED TO THE COMPUTE THE EXPENDIT URE TO BE DISALLOWED U/S 14A OF THE INCOME-TAX ACT READ WITH RULE 8D OF THE INCOME-TAX ACT. HE SUBMITTED THAT THE APPLICATION OF RULE 8D IS NOT AUTOMATIC BUT IT GETS ITS AUTHORITY FROM SEC. 1 4A OF THE INCOME- TAX ACT AND WHEN SEC. 14A DOES NOT ALLOW/AUTHORIZE THE AO TO COMPUTE THE DISALLOWANCE UNDER 14A WITHOUT RECORDIN G A SATISFACTION, THE DISALLOWANCE IS NOT JUSTIFIED. IN SUPPORT OF HIS CONTENTIONS, HE PLACED RELIANCE UPON THE FOLLOWING DECISIONS : 1) MAHARASHTRA APEX CORPORATION LTD. VS. CIT (2006) 60 (KAR) LJ 451 2) CIT VS. HERO CYCLES LTD. (2010), 323 ITR 518 (P & H ) 3) CIT VS. METALMAN AUTO PVT. LTD., 336 ITR 434 (P & H ) 6. IN ADDITION TO THE ABOVE ARGUMENT, HE ALSO SUBMI TTED THAT NO PRESUMPTION CAN BE DRAWN THAT ADMINISTRATIVE EXPENS ES HAVE ALSO BEEN INCURRED FOR MAKING SAID INVESTMENTS AND EARN ING OF SUCH EXEMPTED INCOME AND HE SUBMITTED THAT THE ASSESSEE HAS INVESTED ITA NO.1185 & 11 23/B/11 8 ITS OWN CAPITAL AND, THEREFORE, THERE IS NO EXPENDI TURE INCURRED FOR EARNING OF SUCH EXEMPTED INCOME. HENCE, IT IS CLEAR THAT NO COST WAS INVOLVED IN INVESTMENTS IN MUTUAL FUNDS AND HEN CE NO DISALLOWANCE BE MADE. 7. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE O RDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE CHANGES HA VE BEEN BROUGHT IN SEC. 14A AND THE DISALLOWANCE U/S 14A IS TO BE C OMPUTED AS PER THE PRESCRIBED RULE 8D. THUS, ACCORDING TO HIM, TH E AO NEED NOT IDENTIFY THE SPECIFIC EXPENDITURE TO APPLY RULE 8D . IN SUPPORT OF ITS CONTENTION, HE PLACED RELIANCE UPON THE DECISIO N OF THE ITAT BANGALORE BENCHES IN THE CASE OF KHODAY DISTILLERIE S AND.. THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F WALFORT SHARES AND STOCK BROKERS REPORTED IN 326 ITR 1 (SC). HE SUBMITTED THAT THE JUDGMENTS ON WHICH ASSESSEES HAS PLACED RELIANCE UPON RELATE TO THE PERIOD PRIOR TO INSERTI ON OF RULE 8D OF IT RULES AND, THEREFORE, ARE NOT APPLICABLE TO THE FAC TS OF THE CASE BEFORE US. 8. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDE RED THEIR RIVAL CONTENTIONS, WE FIND THAT THE UNDISPUTED FACTS ARE THAT THE ASSESSEE ITA NO.1185 & 11 23/B/11 9 HAS INVESTED THE ADDITIONAL CAPITAL RAISED BY IT IN MUTUAL FUNDS AND HAS EARNED DIVIDEND INCOME WHICH IS EXEMPT FROM TAX . IN SUCH A CIRCUMSTANCES, THE PROVISION OF SEC. 14A COME INTO PLAY. WHEREVER AN ASSESEE EARNS EXEMPTED INCOME, THE EXPENDITURE I NCURRED FOR EARNING SUCH INCOME IS TO BE DISALLOWED. FOR THE P URPOSES OF CONVENIENCE AND CLARITY, THE PROVISION OF SEC. 14A ARE REPRODUCED HEREUNDER : (1) FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS 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 THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, IF THE AO, HAVING REGARD TO THE ACCOUNTS OF THE ASSESEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO ITA NO.1185 & 11 23/B/11 10 INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SEC (2) SHALL ALSO APPLY IN RELATION TO A CASE WHERE AN ASSESSEE, CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT; PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOWER THE AO EITHER TO REASSESS U/S 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE U/S 154 FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1 ST DAY OF APRIL, 2001. 9. SUB SEC. (2) OF SEC. 14A INSERTED BY FINANCE ACT 2006 W.E.F 1.4.2007 CLEARLY PROVIDE THAT WHEREVER THE AO, HAVI NG REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT, HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN ACC ORDANCE WITH ITA NO.1185 & 11 23/B/11 11 SUCH METHOD AS MAY BE PRESCRIBED. SUB SEC. (3) PRO VIDES THAT WHEREVER AN ASSESSSE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO EARNING OF EXEMPT INCOME, THE N THE PROVISION OF SUB SEC. (2) SHALL APPLY IN THE CASE BEFORE US, THE RELEVANT ASSESSMENT YEAR 2008-09. THE ASSESSEES CLAIM IS TH AT IT HAS NOT INCURRED ANY EXPENDITURE FOR EARNING THE EXEMPTED I NCOME. IN SUCH CIRCUMSTANCES, IN OUR OPINION, THE PROVISIONS OF SU B SEC. (3) OF SEC. 14A WOULD COME INTO PLAY AND PROVISIONS OF SUB. SEC (2) WOULD APPLY. AS PER SUB SEC. (2), THE AO CAN DETERMINE T HE EXPENDITURE INCURRED FOR EARNING OF EXEMPT INCOME AS PER THE ME THOD PRESCRIBED. THE METHOD PRESCRIBED IS UNDER RULE 8D OF THE ITAT RULES. FOR THE SAKE OF CONVENIENCE, RULE 8D IS REP RODUCED HEREUNDER : (1) WHERE THE AO, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL ITA NO.1185 & 11 23/B/11 12 INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWING AMOUNTS, NAMELY (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY :- B A X ___ C WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR; ITA NO.1185 & 11 23/B/11 13 B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE T OTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE AS SESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS Y EAR; (III) AN AMOUNT EQUAL TO ONE-HALF PERCENT O THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. (3) FOR THE PURPOSE OF THIS RULE, THE TOTAL ASSETS SH ALL MEAN, TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS.] C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN T HE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; 10. FROM A LITERAL READING OF THE ABOVE RULE, IT IS CLEAR THAT THE RULE IS APPLICABLE W.E.F THE ASSESSMENT YEAR 2008-09 AND THE AO IS BOUND TO FOLLOW THE SAME WHEREVER THE ASSESSEE CLAI MS THAT NO EXPENDITURE HAS BEEN INCURRED FOR EARNING OF SUCH I NCOME. BY ITA NO.1185 & 11 23/B/11 14 FOLLOWING THE FINDINGS OF THE SPECIAL BENCH OF THE TRIBUNAL IN IT O VS. DAGA CAPITAL MANAGEMENT PVT. LTD REPORTED IN 11 7 ITD 169 (MUM TRIB) (SB), WE FIND THAT THE AO HAS COMPUTED T HE DISALLOWANCE U/S 14A IN ACCORDANCE WITH CLAUSE (III ) OF SUB RULE (1) OF RULE 8D. THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF GODREJ & BOYCE (CITED SUPRA) AT PARA 73 OF ITS ORD ER HAS HELD AS UNDER : IN THE AFFIDAVIT IN REPLY THAT HAS BEEN FILED ON BEHALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RATIONALE UNDERLYING RULE 8D. IN T HE WRITTEN SUBMISSIONS WHICH HAVE BEEN FILED BY THE ADDITIONAL SOLICITOR GENERAL IT HAS BEEN STATED, WI TH REFERENCE TO RULE 8D(2)(II) THAT SINCE FUNDS ARE FU NGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACTUAL QUANTU M OF BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX F REE INVESTMENTS. IT IS ONLY THE INTEREST ON BORROWED F UNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN ( AS A IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PART ICULAR INCOME OR RECEIPT (FOR EXAMPLE ANY ASPECT OF THE ASSESSEES BUSINESS SUCH AS PLANT/MACHINERY, ETC.). AS REGARDS RULE 8D(2)(III) IT HAS BEEN SUBMITTED THAT SOME MECHANISM OR FORMULA HAD TO BE ADOPTED FOR ATTRIBUT ING PART OF THE ADMINISTRATIVE/MANAGERIAL EXPENSES TO T AX ITA NO.1185 & 11 23/B/11 15 EXEMPT INVESTMENT INCOME. THE ADMINISTRATIVE EXPEN SES ATTRIBUTABLE TO TAX FREE INVESTMENT INCOME HAVE A F IXED COMPONENT AND A VARIABLE COMPONENT. A VIEW WAS TAKEN THAT THE DISALLOWANCE SHOULD ALSO BE LINKED T O THE VALUE OF THE INVESTMENT RATHER THAN THE AMOUNT OF EXEMPT INCOME. UNDER PORTFOLIO MANAGEMENT SCHEMES (PMS) THE FREE CHARGES RANGES BETWEEN 2 AND 2.5 PERCSENT, OF THE PORTFOLIO VALUE WHICH WOULD BE INC LUSIVE OF A PROFIT ELEMENT FOR THE PORTFOLIO MANAGER. WHI LE THE FIXED ADMINISTRATIVE EXPENSES WERE EXCLUDED, ON THE GROUND THAT IN THE CASE OF A LARGE CORPORATE TAXPAY ER THEY WOULD BE SPREAD OVER A LARGE NUMBER OF VOLUMINOUS ACTIVITIES, THE VARIABLE EXPENSES WERE COMPUTED AT ONE-HALF PER CENT OF THE VALUE OF THE INVESTMENT. THE JUSTIFICATION THAT HAS BEEN OFFERE D IN SUPPORT OF THE RATIONALE FOR RULE 8D CANNOT BE REGA RDED AS BEING CAPRICIOUS, PERVERSE OR ARBITRARY. APPLYI NG THE TESTS FORMULATED BY THE SUPREME COURT IT IS NOT POS SIBLE FOR THIS COURT TO HOLD THAT THERE IS WRIT ON THE ST ATUE OR ON THE SUBORDINATE LEGISLATION PERVERSITY, CAPRICE OR IRRATIONALITY. THERE IS CERTAINLY NO MADNESS IN T HE METHOD. THEREFORE, EVEN WHERE THERE IS NO DIRECT EXPENDITU RE RELATABLE TO THE EXEMPT INCOME, A PART OF ADMINISTRATIVE/MANAGER IAL EXPENSES HAVE TO BE ATTRIBUTED TOWARDS SUCH INCOME AND FOR T HIS PURPOSE ONLY ITA NO.1185 & 11 23/B/11 16 CLAUSE (III) OF RULE 8D(2) IS PROVIDED. THE AO HAS APPLIED CLAUSE (III) OF 8D(2) AND HENCE IS JUSTIFIED. 11. IN VIEW OF THE SAME, WE SEE NO REASON TO INTE RFERE WITH THE ORDER OF THE AO AND THE CIT(A) AND THIS GROUND OF A PPEAL IS REJECTED. 11. AS REGARDS GROUND NO.2 RELATING TO DISALLOWANCE OF VALUE OF TOOLS, IT IS SEEN THAT THE ASSESSEE BEING IN THE MA NUFACTURING BUSINESS, PURCHASED VARIOUS TOOLS DURING THE RELEVA NT FINANCIAL YEAR AND WRITTEN OFF 50% OF THE SAME DURING THE YEAR OF PURCHASE AND THE BALANCE 50% IN THE SECOND YEAR. THE AO DISALLO WED THE CLAIM OF THE ASSESSEE OF EXPENDITURE ON THE GROUND THAT THE AO CALLED FOR CERTAIN DETAILS FROM THE ASSESSEE SUCH AS 1) INVENT ORY OF OPENING AND CLOSING STOCK 2) REQUISITION SLIP FROM THE PRO DUCTION DIVISION FOR ISSUING TOOLS 3) REGISTER FOR HAVING USED THE T OOLS FROM PRODUCTION DIVISION ACCORDING TO THE REQUIREMENT AN D 4) IDENTIFICATION OF THE EMPLOYEES/ CONCERN TO WHOM T HE TOOLS HAVE BEEN ISSUED ALONG WITH THE SIGNATURE AND DATE AND T HE SAME HAVE NOT BEEN FILED. THE CONTENTION OF THE ASSESSEE IS THAT CD CONTAINING THE DETAILS REQUESTED FOR BY THE AO WAS GIVEN AT TH E TIME OF ITA NO.1185 & 11 23/B/11 17 HEARING. HOWEVER, THE AO HELD THAT THE ASSESSEE HAS FAILED TO GIVE THE REQUISITE DETAILS. HE HELD THAT THE ASSESSEE H AS FAILED TO ESTABLISH THE SYSTEMATIC METHOD OF INVENTORY MANAGE MENT FOR CONSUMPTION OF LOOSE TOOLS THEREBY THERE IS NO EVID ENCE THAT THE LOOSE TOOLS HAVE BEEN ACTUALLY CONSUMED IN MANUFACT URING ACTIVITIES WHICH HAVE BEARING ON THE INCOME AND THA T IT HAS FAILED TO PRODUCE THE BASIC EVIDENCE FOR SHOWING THE CONSUMPT ION OF TOOLS AND, THEREFORE, THE ASSESSEE WAS NOT JUSTIFIED TO W RITE OFF THE LOOSE TOOLS ON A ESTIMATION BASIS. HE ALSO HAS CALLED OU T A LIST OF SOME OF THE ITEMS WHICH WERE WRITTEN OFF AND HELD THAT THOU GH THEY ARE SHOWN AS CONSUMABLES, THEY HAVE LONG LASTING LIFE A ND ONCE PUT TO USE, THEY GIVE ENDURING BENEFIT AND HE FURTHER HEL D THAT THE WRITE OFF OF THE CONSUMABLES IS NOT PROPORTIONAL TO THE T URNOVER OF THE ASSESSEE AND, THEREFORE, THE SAME IS NOT ALLOWABLE. 12. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BE FORE THE CIT(A) WHO CONFIRMED THE ORDER OF THE AO AND THE A SSESSEE IS IN SECOND APPEAL BEFORE US. THE LEARNED COUNSEL FOR T HE ASSESSEE WHILE REITERATING THE ASSESSEES SUBMISSIONS BEFORE THE AUTHORITIES BELOW SUBMITTED THAT THE TOOLS ARE USED FOR MANUFAC TURING OPERATIONS AND, THEREFORE, WEAR OUT VERY FAST AND I N AN AVERAGE EACH ITA NO.1185 & 11 23/B/11 18 TOOL DOES NOT LAST FOR MORE THAN 2 YEARS AND, THERE FORE, THE ASSESSEE HAS BEEN CHARGING OFF THE COST OF THE TOOL IN TWO YEARS AND HAS BEEN FOLLOWING THIS PRACTICE FOR THE LAST 14 YEARS AND T HE REVENUE HAS ACCEPTED THIS METHOD. HE SUBMITTED THAT THIS IS TH E ONLY YEAR IN WHICH THE REVENUE HAS MADE THE DISALLOWANCE. HE SU BMITTED THAT SOME OF THE DETAILS CALLED FOR BY THE AO COULD NOT BE FURNISHED AS THE VOLUME OF TOOLS PURCHASED AND USED WAS VERY HIG H AND THE DETAILS WERE CALLED FOR BY THE AO WAS NOT POSSIBLE TO FURNISH. THE DETAILS AVAILABLE WITH THE ASSESSEE WAS FURNISHED B UT THE AO FAILED TO APPRECIATE THE SAME IN PROPER PROSPECTIVE. HE S UBMITTED THAT THE AO HAVING HELD THE EXPENDITURE TO BE CAPITAL IN NAT URE HAS FAILED TO ALLOW DEPRECIATION ON THE SAME WHICH SHOWS THE UNRE ASONABLENESS OF THE ORDER. IN SUPPORT OF HIS CONTENTION THAT UN IFORM STAND HAS TO BE TAKEN BY THE AO WITH REGARD TO THE SAME ASSESSEE IN ALLOWING OR DISALLOWING A PARTICULAR ITEM OF EXPENDITURE, HE PL ACED RELIANCE UPON THE DECISION OF THE SUPREME COURT IN THE CASE OF RADHASOAMI SATSANG VS. CIT REPORTED IN 193 ITR 321. ON ALLOWAB ILITY OF EXPENSES ON TOOLS WHICH WEAR-OUT EASILY, THE LEARN ED COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE UPON THE DECISION IN THE CASE OF CIT VS. METALMAN AUTO PVT. LTD., 336 ITR 434, WHEREIN THE WRITE OFF OF 80% OF THE COST OF TOOLS AND DESIGNS WERE HE LD TO BE JUSTIFIED. ITA NO.1185 & 11 23/B/11 19 HE SUBMITTED THAT EVEN IF THE SAID EXPENDITURE IS T REATED AS CAPITAL EXPENDITURE AND DEPRECIATION IS ALLOWED, THEN 15% DEPRECIATION IS TO BE ALLOWED IN FIRST YEAR OF ACQUISITION AND THE BALANCE OF 85% OF THE COST IS TO BE ALLOWED IN THE SECOND YEAR WHEN T HE TOOLS ARE WRITTEN OFF. THEREFORE ACCORDING TO HIM, THE REVEN UE EFFECT IN CLAIMING THE SAME AS REVENUE EXPENDITURE AND TREATI NG THE SAME AS CAPITAL EXPENDITURE AND ALLOWING THE DEPRECIATION T HERETO IS NIL. 13. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESS EE HAS FAILED TO PROVE THAT SUCH TOOLS HAVE BEEN PUT TO USE BY THE A SSESSEE IN ITS MANUFACTURING ACTIVITY AND THAT THEY ARE NOT CAPITA L IN NATURE, THEREFORE, THE AO WAS JUSTIFIED IN DISALLOWING THE SAME. 14. HAVING HEARD BOTH THE PARTIES AND HAVING CONSI DERED THEIR RIVAL CONTENTIONS, WE FIND THAT THE REVENUE HAS NOT DISPUTED THE INCURRING OF EXPENDITURE BY THE ASSESSEE IN PUR CHASE OF THE TOOLS. THE ONLY REASON FOR THE DISALLOWANCE IS THA T IT IS NOT REVENUE IN NATURE BUT IS OF CAPITAL IN NATURE. IT IS ALSO NOT DISPUTED THAT THE ASSESSEE IS FOLLOWING THE SAID METHOD OF ACCOUNTING FOR THE PAST 14 YEARS AND NO DISALLOWANCE HAS BEEN MADE IN THE PREV IOUS YEARS. AS ITA NO.1185 & 11 23/B/11 20 RIGHTLY POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE REVENUE EFFECT WOULD BE VERY MINIMAL WHETHER THE EX PENDITURE IS TREATED AS REVENUE IN NATURE OR TREATED AS CAPITAL IN NATURE AND DEPRECIATION ALLOWED THEREON THEREFORE, TAKING THE TOTALITY OF THE FACTS INTO CONSIDERATION, WE HOLD THAT REVENUE OUGH T TO HAVE ALLOWED THE REVENUE EXPENDITURE CLAIMED BY THE ASSE SSEE. THIS GROUND OF APPEAL IS ACCORDINGLY ALLOWED. 15. AS REGARDS GROUND NO.3, THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAD ADVANCED LOANS TO ITS SISTER CONCERNS WITHOUT INTEREST. THE AO OBSERVED THAT THE ASSESSEE IS PAY ING THE INTEREST, WHILE IT IS NOT CHARGING ANY INTEREST ON THE ADVANC ES OR LOANS GIVEN TO ITS SISTER CONCERNS. HE, THEREFORE, DISALLOWED T HE INTEREST TO THE EXTENT OF LOANS ADVANCED TO THE SISTER CONCERNS. ON APPEAL, THE CIT(A) CONFIRMED THE SAME AND THE ASSESSEE IS IN AP PEAL BEFORE US. 16. THE LEARNED COUNSEL FOR THE ASSESEEE SUBMITTED THAT ASSESSEE WAS HAVING MORE THAN 124 CORES OF CAPITAL AND RESOURCES OUT OF WHICH, IT HAS ADVANCED AN AMOUNT OF 64,38,73 0/-, WHICH IS VERY SMALL PORTION OF ITS OWN FUNDS. IN SUPPORT OF ITS CONTENTION ITA NO.1185 & 11 23/B/11 21 THAT ANY ADVANCES GIVEN TO SISTER CONCERN IN COMMER CIAL EXPEDIENCY ARE TO BE TREATED AS BUSINESS EXPENDITURE AND NO DI SALLOWANCE OF INTEREST IS CALLED FOR, THE LEARNED COUNSEL FOR THE ASSESEE HAS RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF S.A BUILDERS LTD., REPORTED IN 288 ITR 1. IN SUPPORT OF ITS CONTENTIONS THAT WHERE THE ASSESSEE HAS ITS OWN INTEREST FREE F UNDS AND INTEREST BEARING FUNDS OR MIXING FUNDS THEN NO DISALLOWANCE ON INTEREST IS CALLED FOR ON INTEREST FREE ADVANCES, THE LEARNED COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE UPON THE DECISION OF S UPREME COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD., REPO RTED IN 313 ITR 340. THE LEARNED COUNSEL FOR THE ASSESSEE PRAYED TH AT IN THE ABOVE CIRCUMSTANCES NO DISALLOWANCE IS CALLED FOR. 17. THE LEARNED DR, HOWEVER SUPPORTED THE ORDERS O F THE AUTHORITIES BELOW. 18. HAVING HEARD BOTH THE PARTIES AND HAVING CONSI DERED THEIR RIVAL CONTENTIONS, WE FIND THAT THERE IS NO F INDING BY THE AO THAT THERE IS NEXUS BETWEEN THE INTEREST BEARING FU NDS OF THE ASSESSEE AND THE INTEREST FREE ADVANCES OF THE SIS TER CONCERN. THE ONLY REASON FOR THE DISALLOWANCE IS THAT THE ASSESE E IS PAYING ITA NO.1185 & 11 23/B/11 22 INTEREST ON THE LOANS TAKEN BY IT, WHILE IT HAS GIV EN INTEREST FREE ADVANCES TO SISTER CONCERNS. WHEN THERE IS NO NEXU S BETWEEN THE INTEREST BEARING FUNDS AND THE INTEREST FREE ADVANC ES, THE PRESUMPTION TO BE DRAWN IS THAT THE ADVANCES ARE OU T OF THE NON INTEREST BEARING FUNDS OF THE ASSESWSEE AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD., (CITED SUPRA) THEREFORE, IT HAS TO BE PRESUMED THA T THE INTEREST FREE ADVANCES ARE OUT OF THE OWN FUNDS OF THE ASSESSEE A ND, THEREFORE, NO DISALLOWANCE OF INTEREST IS CALLED FOR. THE ASSESS EES CONTENTION OF THE COMMERCIAL EXPEDIENCY OF ADVANCING THE LOANS IS NOT ACCEPTED FOR THE REASON THAT THE SISTER CONCERNS HAVE NOT CA RRIED OUT ANY ACTIVITIES DURING THE RELEVANT PREVIOUS YEAR AND TH E ASSESSEE ALSO HAS NOT ESTABLISHED THE COMMERCIAL EXPEDIENCY FOR T HE SAID ADVANCES. THIS GROUND OF APPEAL IS ACCORDINGLY ALL OWED FOR THE ABOVE REASONS. 19. AS REGARDS THE GROUND NO.4, THE ASSESSEE H AD CLAIMED RS.1,72,32,337/- AS DESIGN CHARGES OUT OF WHICH AN AMOUNT RS.1,31,05,337/- REPRESENTED ACTUAL SALARIES PAID T O EMPLOYEES FUNCTIONING IN THE R & D DIVISION OF THE ASSESSEE ( WHICH WAS SHOWN BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT AS RE SEARCH AND ITA NO.1185 & 11 23/B/11 23 DEVELOPMENT) AND RS.40,67,000/- REPRESENTED THE AM OUNT EXPANDED BY THE ASSESSEE TOWARDS PROCURING VARIOUS DESIGNS FROM M/S MICROSYS DESIGN LAB PVT. LTD., SINGAPORE WHICH IS A SUBSIDIARY OF M/S EXCEL PRECISION MANUFACTURING LTD ., WHICH IN TURN IS WHOLLY OWNED SUBSIDIARY OF ASSESSEE COMPANY AND THE ASSESSEE RECEIVED BASIC DESIGNS OF FEW MODELS OF M ACHINES FROM MICROSYS. THE AO HELD THE ENTIRE EXPENDITURE TO BE CAPITAL IN NATURE AND ALLOWED DEPRECIATION THEREON. AN APPEAL , THE CIT(A) CONFIRMED THE DISALLOWANCE HOLDING THAT THE ASSESSE E HAS ITSELF SHOWN THE EXPENDITURE UNDER THE HEAD RESEARCH AND DEVELOPMENT. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. 19A. THE LEARNED COUNSEL FOR THE ASSESSEE, WHILE REITERATING THE SUBMISSIONS MADE BY THE ASSESSESSEE BEFORE THE AUT HORITIES BELOW SUBMITTED THAT THE ASSESSEE HAD PRODUCED LEDGER EXT RACT TO EVIDENCE THAT THE RESEARCH AND DEVELOPMENT EXPENSES WERE ACT UALLY SALARY PAID TO THE EMPLOYEES ENGAGED IN THE R & D DIVISION BUT AT THE END OF THE YEAR WAS SHOWN AS R& D EXPENDITURE, THEREFO RE, IT IS CLEARLY REVENUE EXPENDITURE AND OUGHT TO HAVE BEEN ALLOWED AS SUCH. HE SUBMITTED THAT BOTH THE AO AS WELL AS THE CIT(A) HA VE NOT CONSIDERED THE ISSUE IN THE PROPER PERSPECTIVE AND HAVE ERRONEOUSLY HELD IT TO BE CAPITAL IN NATURE. HE SUBMITTED THAT THE REVENUE ITA NO.1185 & 11 23/B/11 24 AUTHORITIES HAVE TO EXAMINE THE EXACT NATURE OF EXP ENDITURE AND NOT GO BY THE PRESENTATION OF THE ACCOUNTS BY THE ASSES SEE. HE SUBMITTED THAT THE ISSUE OF WHETHER THE SAID AMOUNT REPRESENTS SALARIES PAID TO R & D EMPLOYEES CAN BE VERIFIED B Y THE AO AND THE SAME HAS TO BE ALLOWED AS REVENUE EXPENDITURE. 20. AS REGARDS THE EXPENDITURE INCURRED FOR ACQ UISITION OF DESIGNS, HE SUBMITTED THAT THE DESIGNS ARE NOT OF E NDURING NATURE AND KEEP CHANGING AS PER THE REQUIREMENTS OF THE AS SESSEE AND, THEREFORE, IT CANNOT BE SAID TO BE CAPITAL IN NATUR E. IN SUPPORT OF THIS CONTENTION, HE PLACED RELIANCE UPON THE DECISION OF APEX COURT IN THE CASE OF CIBA OF INDIA LTD, 69 ITR 692, WHEREIN IT WAS HELD THAT WHEN THE ASSESSEE DID NOT ACQUIRE ANY ASSET OR ADVANTAGE OF ENDURING NATURE FOR THE PURPOSE OF ITS BUSINESS, IT CANNOT BE HELD TO BE CAPITAL IN NATURE. 21. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 22. HAVING HEARD BOTH THE PARTIES AND HAVING CONSI DERED THEIR RIVAL CONTENTIONS, WE FIND THAT THE SALARIES PAID TO THE ITA NO.1185 & 11 23/B/11 25 EMPLOYEES OF THE ASSESSEE ENGAGED IN THE RESEARCH & DEVELOPMENT ARE REVENUE IN NATURE AND HAVE TO BE ALLOWED AS REV ENUE EXPENDITURE. MERELY BECAUSE THE ASSESSEE HAS SHOWN THE EXPENDITURE AS RESEARCH AND DEVELOPMENT, IT WILL N OT CHANGE THE NATURE AND CHARACTER OF THE EXPENDITURE. THEREFORE , THE AO IS DIRECTED TO VERIFY THE CLAIM OF THE ASSESSEE THAT T HE AMOUNT OF RS.1,31,05,337/- IS SALARIES PAID TO THE EMPLOYEES AND IF IT IS FOUND TO BE CORRECT, THEN THE SAME IS TO BE ALLOWED. 23. AS REGARDS OTHER EXPENSES AS DESIGNING CHARGES , WE FIND THAT THE ASSESEES CONTENTION BEFORE THE AO HAS BE EN THAT THE M/S MICROSYS DESIGN LAB PVT. LTD., CATERS TO THE DESIG N REQUIREMENTS OF THE ASSESSEE BY GIVING THE BASIC DESIGN OF FUTUR E MODELS OF MACHINES AND THE DESIGN ACTIVITY IN MACHINE TOOL MA NUFACTURING INDUSTRY IS A CONTINUOUS PROCESS AND THE DESIGN IS BASED ON THE CUSTOMERS REQUIREMENTS. THE AO HAS HELD THAT THE DESIGNS HAVE BECOME THE ASSET OF THE ASSESSEE COMPANY AND, THERE FORE, ARE CAPITAL IN NATURE. WE FIND THAT THE ASSESSEES CON TENTION THAT THESE DESIGNS ARE USED FOR MANUFACTURING OF THE MACHINE T OOLS AS PER THE CUSTOMERS REQUIREMENTS HAS NOT BEEN CONSIDERED BY THE AUTHORITIES BELOW. IF A DESIGN IS USED IN ALL THE TOOLS MANUFA CTURED BY THE ITA NO.1185 & 11 23/B/11 26 ASSESSEE IRRESPECTIVE OF THE CUSTOMERS REQUIREMENT , THEN IT CAN BE SAID THAT THE DESIGN IS CAPITAL ASSET BUT IF THE DE SIGN IS CHANGING FOR EACH TOOL MANUFACTURED BY THE ASSESSEE AS PER THE C USTOMERS REQUIREMENTS, THEN IT CAN NOT BE SAID THAT IT IS GI VING AN ENDURING BENEFIT AND IS CAPITAL IN NATURE. THEREFORE, THIS ISSUE IS SENT BACK TO THE FILE OF THE AO FOR RECONSIDERATION AFTER GIV ING THE ASSESSEE AN OPPORTUNITY OF HEARING AS TO EXACT NATURE OF THE DE SIGNS PROCURED BY THE ASSESSEE AND TO DECIDE THE ISSUE IN ACCORDANCE WITH LAW. 24. IN THE RESULT, THIS GROUND IS ALLOWED FOR STAT ISTICAL PURPOSES. ITA NO.1185/BANG/2011 25. IN THE REVENUES APPEAL, THE ONLY ISSUE IS AS TO WHETHER THE PROPERTY TAX DEPOSITED BY THE ASSESSEE AS PER T HE DIRECTIONS OF THE HONBLE KARNATAKA HIGH COURT IS ALLOWABLE U/S 4 3B OF THE INCOME-TAX ACT. 26. THE BRIEF FACTS OF THE CASE ARE THAT THE BBMP HAD CLAIMED THE PROPERTY TAX PAYABLE TO IT AND DETERMIN ED THE TAX AT ITA NO.1185 & 11 23/B/11 27 RS.15,500 P.M FROM 1995-96 AND DEMANDED RS,1,49,371 /- FROM 1995-96 TO 2004-05 BY ISSUING A NOTICE DATED 28.3.2 005. THE ASSESSEE OBJECTED TO THE SAID DEMAND AND APPROACHED THE COURTS. BY THE DIRECTION OF THE COURTS INCLUDING THE HONBL E HIGH COURT OF KARNATAKA, THE ASSESEE HAD TO DEPOSIT CERTAIN AMOUN TS TOWARDS THE DEMAND TILL THE ISSUE IS ADJUDICATED BY THE COURTS . THE ASSESSEE CLAIMED AMOUNT DEPOSITED INTO THE COURTS AS EXPENDI TURE U/S SEC. 43B OF THE INCOME-TAX ACT. THE AO HELD THAT THE LI ABILITY HAS NOT CRYSTALLIZED AS IT IS SUBJECT TO OUTCOME OF THE LI TIGATION AND, THEREFORE, IT IS NOT AN EXPENDITURE INCURRED DURING THE RELEVANT FINANCIAL YEAR AND HE DISALLOWED THE SAME U/S 43B. 27. ON APPEAL, THE CIT(A) HELD THAT THE LIABILITY IS CERTAIN AND IF THE ASSESSEE SUCCEEDS THAT IT IS IN THE LITI GATION, WILL SHOW THE AMOUNT AS REVENUE IN THE YEAR OF RECEIPT. 28. AGAINST THE RELIEF GIVEN BY THE LEARNED CIT( A), THE REVENUE IS IN APPEAL BEFORE US. THE LEARNED COUNSEL FOR THE A SSESSEE HAS PLACED RELIANCE UPON THE ORDERS OF THE CIT(A) WHILE THE LEARNED DR SUPPORTED THE ORDER OF THE AO. ITA NO.1185 & 11 23/B/11 28 29. HAVING HEARD BOTH THE PARTIES AND HAVING CONSI DERED THEIR RIVAL CONTENTIONS, WE FIND THAT THE ASSESEE I S LIABLE TO PAY PROPERTY TAX TO BBMP AND THE ONLY DISPUTE IS WITH R EGARD TO THE QUANTUM OF THE PROPERTY TAX TO BE PAID. THEREFORE, IT IS CLEAR THAT THERE IS A LIABILITY FASTENED ON THE ASSESSEE TO PAY THE PROPERTY TAX. THE ASSESEE HAS DEPOSITED PART OF THE DEMAND RAISE D BY THE BBMP AS PER THE DIRECTIONS OF THE COURT. THEREFORE, IT CANNOT BE SAID THAT THE LIABILITY HAS NOT CRYSTALLIZED AS THAT IT IS NO T TAX PAID BY THE ASSESSEE. AS RIGHTLY OBSERVED BY THE CIT(A), THE A SSESSEE WILL SHOW THE REFUND AS INCOME IN THE YEAR OF RECEIPT BU T THE TAX IS ALLOWABLE ONLY IN THE YEAR OF PAYMENT. 30. IN VIEW OF THE SAME, THE REVENUES APPEAL IS D ISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST DEC, 2012. SD/- SD/- (JASON P BOAZ) (MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER VMS. BANGALORE DATED : 21/12/2012 ITA NO.1185 & 11 23/B/11 29 COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER SR. PRIVATE SECRETA RY, ITAT, BANGALORE.