ACIT, Gurgaon V. Beekman Helix India Consulting India (P) Ltd., Gurgaon

ITA 1456/DEL/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6830 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 6 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 11-08-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 28-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K JAIN
• Assessee Lawyers: C S AGRAWAL ADV R P MALL
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; Earning of tax free income; Additional evidence; Assessment record; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A; 32; 10

Judgement Text

1 ITA NOS. 2307 & 1456/DEL/2011 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: A NEW DELHI BEFORE SHRI G. D. AGRAWAL, VICE PRESIDENT AND SMT SUCHITRA KAMBLE, JU DICIAL MEMBER ITA NO.- 2307/DEL/2011 (ASSESSMENT YE AR 2007-08) DCIT CIRCLE-2 (1) ROOM NO. 398B, C. R. BUILDING NEW DELHI (APPELLANT) VS. BEEKMAN HELIX INDIA CONSULTING INDIA (P) LTD. 3 RD FLOOR, AUGUSTA POINT, SESCTOR-53 GURGAON AACCB8655R (RESPONDENT) I.T.A .NO.-1456/DEL/2012 (ASSESS MENT YEAR 2007-08) ACIT CIRCLE-1 GURGAON (APPELLANT) VS. BEEKMAN HELIX INDIA CONSULTING INDIA (P) LTD. 3 RD FLOOR, AUGUSTA POINT, SESCTOR-53 GURGAON AACCB8655R (RESPONDENT) APPELLANT BY SH. S. K. JAIN, SR. DR RESPONDENT BY SH. C. S. AGRAWAL, ADV, R. P. MALL, ADV ORDER PER SUCHITRA KAMBLE, JM THESE APPEALS ARE FILED BY THE REVENUE AGAINST THE ORDER DATED 22/02/2011 & 7/12/2011 RESPECTIVELY, PASSED B Y THE CIT(A)-V, NEW DELHI. DATE OF HEARING 11.08.2016 DATE OF PRONOUNCEMENT 19.10.2016 2 ITA NOS. 2307 & 1456/DEL/2011 2. THE GROUNDS OF APPEAL ARE AS UNDER: (ITA NO. 2307/DEL/2011) 1. THE LD.CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION OF RS.53,12,500/- MADE ON ACCOUNT OF CALL OPTION FEE B Y HOLDING THE EXPENSES AS REVENUE IN NATURE, AS: A). LD.CIT(A) ERRED IN LAW BY ADMITTING THE ADDITIO NAL EVIDENCES REGARDING CALL OPTION FEES BECAUSE THIS CASE IS NOT COVERED UNDER RULE 46A OF THE I.T. RULES 1962. B) THE CASES RELIED ON BY LD.CIT(A) ARE NOT SQUAREL Y APPLICABLE IN THIS CASE. C) ALL THE EXPENDITURE IS INTEGRAL PART OF PROFIT E ARNING PROCESS AND CANNOT BE HELD AS REVENUE EXPENDITURE BECAUSE ONLY NECESSITY OF EXPENDITURE OR EXPENDITURE INCURRED FOR PROTECTING THE INTEREST OF INVESTORS IS NOT THE TEST OF REVENUE OR CAPITAL EXP ENDITURE. D) EXPENDITURE FOR PURCHASE OF SHARES OR ANY RIGHT TO PURCHASE OF SHARES CAN BE HELD AS REVENUE EXPENDITURE IN THE CA SE OF SHARE DEALER/TRADER ONLY AND ASSESSE DOES NOT DEALS IN SH ARES. 2. THE LD.CIT(A) HAS ERRED ON FACTS AND IN LAW IN R ESTRICTING THE DISALLOWANCE U/S 14A READ WITH RULE 8D TO RS.1,06,5 63/- AS AGAINST DISALLOWANCE OF RS.2,13,126/-. LD.CIT(A) HA S FAILED TO TAKE COGNIZANCE OF SUB-SECTION (3) OF SECTION 14A W HICH SPECIFIES THAT EVEN IF THE ASSESSEE MAKES A CLAIM THAT NO EXP ENDITURE HAS BEEN INCURRED IN EARNING THE EXEMPTED INCOME, SUB-S ECTION (2) OF SECTION 14A SHALL APPLY, MEANING THEREBY, DISALLOWA NCE U/S 14(A) IS CALLED FOR. (ITA NO. 1456/DEL/2011) 1. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) WAS RIGHT IN LAW IN DELETING THE ADDITION OF RS.28,515/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF EXCESS DEPRE CIATION CLAIMED ON UPS. THE DEFINITION OF COMPUTER HAS NOT BEEN GIVE N IN THE INCOME TAX ACT AND AS SUCH ITS MEANING IS TO BE DERIVED FR OM THE ALLIED ACTS. AS PER THE INFORMATION TECHNOLOGIES ACT, UPS IS NOT COVERED IN THE DEFINITION OF COMPUTER OR COMPUTER SYSTEM. HENC E, IT CAN ONLY FALL UNDER THE HEAD OF PLANT AND MACHINERY? 2. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. 3 ITA NOS. 2307 & 1456/DEL/2011 CIT(A) WAS RIGHT IN LAW IN DELETING THE ADDITION OF RS.1,21,75,000/- MADE BY THE ASSESSING OFFICER TREATING THE CALL OPT ION FEES AS CAPITAL EXPENDITURE. THE CALL OPTION FEES IS A FEE PAID B Y THE ASSESSEE COMPANY TO THE PROMOTERS OF THE INVESTEE COMPANIES FOR SECURING AN OPTION TO PURCHASE THE SHARE CAPITAL IN CASE OF CER TAIN DEFAULT EVENTS WHICH MAY OR MAY NOT OCCUR. THUS, THE SAME IS RELAT ED TO INVESTMENTS WHICH ARE CLEARLY AN EXPENDITURE OF CAP ITAL NATURE? 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE CASE LAWS RELIED UPON BY THE LD. CIT(A) ARE SQUARELY APP LICABLE IN THIS CASE IN VIEW OF THE FACT THAT ALL THE EXPENDITURE I S INTEGRAL PART OF PROFIT EARNING PROCESS AND CANNOT BE HELD AS REVENU E EXPENDITURE ON THE BASIS OF NECESSITY OF EXPENDITURE. THE EXPENDIT URE INCURRED FOR PROTECTING THE INTEREST OF INVESTORS IS NOT THE TES T OF REVENUE OR CAPITAL EXPENDITURE? 4. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD. CIT(A) WAS RIGHT IN LAW IN ADMITTING THE ADDITIONAL EVIDENCE REGARDING CALL OPTION FEES? 3. INSTANT TWO APPEALS HAVE BEEN FILED BY THE REVEN UE, WHICH PERTAIN TO THE ASSESSMENT YEARS 2007-2008 AND 2008- 2009. ONE OF THE COMMON GROUND INVOLVED IN BOTH THESE APP EALS PERTAIN TO THE DELETION OF A DISALLOWANCE OF AN EXP ENDITURE INCURRED BY THE ASSESSEE DEBITED UNDER THE HEAD CA LL OPTION FEE. THE CALL OPTION FEE WAS THE NOMENCLATURE USED FOR WHICH SUM HAD BEEN INCURRED TO SECURE AND THEREBY TO INDU CE INVESTORS OF THE RISKS UNDERTAKEN BY THEM ON MAKING INVESTMENT ON ADVICE OF THE ASSESSEE AND ANNUALLED EXPENDITURE TO EARN THE ORIGINATION FEE, THE SOURCE OF ITS INCOME AND THUS THE EXPENDITURE INCURRED HAD DIRECT NEXUS WITH THE INCURRING OF EXPENDITURE. ANOTHER COMMON G ROUND INVOLVED IN BOTH THESE APPEALS PERTAIN TO THE REVEN UES GRIEVANCE OF THE ADMISSION MADE OF ADDITIONAL EVIDE NCE, 4 ITA NOS. 2307 & 1456/DEL/2011 SUBMITTED BY THE ASSESSEE BEFORE THE CIT(A), WHO AC CEPTED THE APPLICATION MADE UNDER RULE 46A OF THE INCOME T AX RULES, 1962. THE OTHER GROUND FOR THE AY 2007-2008, RAISED BY THE REVENUE IS WITH REGARD TO, RESTRICTIN G OF THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE I.T. RULES, 1962. IN SO FAR AS THE A SSESSMENT YEAR 2008-09, THERE IS ONE MORE GROUND OTHER THAN T HE COMMON GROUND WHICH PERTAINS TO THE DELETION OF THE DISALLOWANCES OF CLAIM OF DEPRECIATION. 4. FACTUAL BACKGROUND OF THE CASE: THE ASSESSEE IS A PRIVATE LIMITED COMPANY AND WAS INCORPORATED ON 17/5/2006 UNDER THE COMPANIES ACT, 1956. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING IN VESTMENT ADVISORY & DERIVES INCOME BY WAY OF ORIGINATION FEE (WHICH ASSISTS DEVELOPERS IN REAL ESTATE IN ARRANGING FINANCIAL AS SISTANCE FOR THEIR REAL ESTATE PROJECTS) AND, ALSO PROVIDES ADVISORY S ERVICES RELATING TO INVESTMENT OPPORTUNITIES IN THE INDIAN REAL ESTA TE SECTOR TO ITS OVERSEAS ASSOCIATED ENTERPRISES/FUNDS. 5. DISALLOWANCE OF EXPENDITURE OF CALL OPTION FEE :- FOR THE ASSESSMENT YEAR 2007-08, THE ASSESSEE COMPA NY FILED A RETURN OF INCOME ON 30.10.2007 DECLARING A TOTAL IN COME OF RS. 98,52,467/- AND FOR THE AY 2008-2009 THE ASSESSEE F ILED ITS RETURN OF TOTAL INCOME ON 30.09.2008 AT A LOSS OF R S. 1,11,41,459/-. THESE RETURNS OF INCOME WERE DULY 5 ITA NOS. 2307 & 1456/DEL/2011 ACCOMPANIED BY THE AUDITED FINANCIAL STATEMENTS AND , TAX AUDIT REPORT U/S 44AB OF THE ACT. A COPY OF THE AUDITED FINANCIAL STATEMENTS AND, OTHER ENCLOSURES FILED AL ONG WITH RETURN OF INCOME IS PLACED AT PAGES 3-48 OF THE PB FOR THE AY 2007-2008 AND AT 3-50 OF THE PB FOR THE AY 2008-2009. 5.1. HOWEVER, THE ASSESSING OFFICER IN ORDERS U/S 143(3) OF THE ACT DATED 19.11.2009 AND 29.10.2010 COMPUTED THE INCOME OF THE ASSESSEE COMPANY FOR THE AY 2007-2008 AT AN INC OME OF RS. 1,65,71,920/- AND FOR AY 2008-2009 AT AN INCOME OF RS. 13,52,750/-, RESPECTIVELY. 5.2. THE ASSESSEE COMPANY BEING AGGRIEVED AGAINST T HE AFORESAID ORDERS OF THE ASSESSMENTS, PREFERRED APPEALS BEFORE THE CIT(A) AND FILED ITS WRITTEN SUBMISSIONS (SEE PAGE 81-110 OF T HE PB FOR THE AY 2007-2008 AND (PAGE 105-135 OF THE PB FOR THE AY 20 08- 2009). DURING THE APPELLATE PROCEEDINGS, THE ASSESSEE MADE AN APPLICATION DT. 17.12.2010 (PAGES 111-115) UNDER RU LE 46A OF THE INCOME TAX RULES, 1962 SEEKING A PERMISSION TO FURN ISH ADDITIONAL EVIDENCES, SINCE IN THE COURSE OF THE AS SESSMENT PROCEEDING THE ASSESSEE HAD NOT BEEN GRANTED A VALI D AND ADEQUATE OPPORTUNITY OF BEING HEARD AND FURTHER BEF ORE DRAWING AN ADVERSE INFERENCE, WHEN HE DISALLOWED THE CLAIM OF EXPENDITURE THE AO NEVER GAVE ANY SPECIFIC NOTICE OF TREATING T HE EXPENDITURE AS DISALLOWABLE, BUT WAS OF THE OPINION THAT IT REP RESENTS CAPITAL EXPENDITURE THOUGH CLAIMED AS REVENUE EXPENDITURE. THE EVIDENCE 6 ITA NOS. 2307 & 1456/DEL/2011 PLACED BY THE ASSESSEE AS AN ADDITIONAL EVIDENCE TH OUGH WERE ADVERTED BY THE ASSESSEE BEFORE THE AO HOWEVER SINC E THE AO DID NOT DISPUTE THE CONTENTS OF SUCH DOCUMENTARY EVIDEN CE, SUCH EVIDENCES WERE NOT PHYSICALLY PLACED ON RECORD AND IT IS THUS SUBMITTED OTHERWISE TOO IN LAW THE EVIDENCE WERE TO REFERRED AS ADDITIONAL EVIDENCE COULD NOT BE REGARDED, TECHNICA LLY AS AN ADDITIONAL EVIDENCE. THE ADDITIONAL EVIDENCE SUBMIT TED BY THE ASSESSEE FOR AY 2007-08 WAS AS UNDER: 1 MANDATE LETTER DATED DECEMBER 18, 2006 EXECUTED BETWEEN BEEKMAN HELIX INDIA CONSULTING PVT. LTD. AN D THE INVESTOR RITESH SPINNING MILLS LIMITED (PAGES 1 16- 122 OF THE PAPER BOOK FOR AY 2007-2008) 2 TERM SHEET DATED JANUARY 10, 2007 EXECUTED BETWEEN BEEKMAN HELIX INDIA CONSULTING PVT. LTD. AND RITESH SPINNING MILLS LTD. (PAGES 123- 131 OF THE PAPER BO OK FOR AY 2007-2008) 3 ALL THE CALL OPTION AGREEMENTS EXECUTED BY BEEKMAN HELIX INDIA CONSULTING PVT. LTD. WITH THE PROMOTERS OF THE INVESTEE COMPANIES (SAMPLE COPY OF A CALL OPTIO N AGREEMENT IS ENCLOSED AT PAGES 132-146 OF THE PAPER BOOK FOR AY 2007-2008) 5.3. THE AFORESAID ADDITIONAL EVIDENCES ALONG WITH THE WRITTEN SUBMISSION OF THE ASSESSEE WERE SENT TO THE AO FOR HIS COMMENTS. THE CIT (A) AFTER PERUSING THE ASSESSMENT RECORD & AFTER BEING SATISFIED WITH THE SUBMISSION OF THE ASSESSEE MADE IN ITS 7 ITA NOS. 2307 & 1456/DEL/2011 APPLICATION DT. 17.12.2010 FOUND THEM TO BE FACTUALLY CORRECT AND WAS BORNE OUT FROM RECORD AND THUS DIRECTED THE AO TO RE- EXAMINE THE CLAIM OF THE EXPENDITURE IN THE LIGHT O F FACTS OF THE CASE AND IN THE LIGHT OF EVIDENCE PRODUCED BEFORE H IM WITH COURSE OF ASSESSMENT PROCEEDING WITH REFERENCE TO THE SAID EVIDENCE WHICH THE APPLICANTS HAD SOUGHT TO PHYSICALLY PLACE ON RECORD. IN COMPLIANCE THERETO THE AO FURNISHED HIS REMAND REPO RT FOR BOTH THE ASSESSMENT YEARS (PLACED AT PAGE 147-149 OF THE PB FOR AY 2007-2008 AND AT PAGE 102-104 OF THE PB FOR AY 2008 -2009). THE AO IN HIS REMAND REPORT REITERATED THAT THE EXPENDI TURE INCURRED ON ACCOUNT OF CALL OPTION FEES PAID IS FOR PURCHASI NG SHARE CAPITAL OF CERTAIN COMPANIES IN CERTAIN CIRCUMSTANCES AND T HUS THE SAME IS RELATED TO INVESTMENTS, WHICH IS CLEARLY AN EXPE NDITURE OF CAPITAL NATURE. THE CIT(A) OBSERVED THAT THE A.O B EING FULLY AWARE OF THE PROCEEDINGS WHICH HAD TAKEN BEFORE HIM DID NOT SERIOUSLY OBJECT TO THE ASSESSEES PRAYER THAT SUCH DOCUMENTS BE ALLOWED TO BE TAKEN PHYSICALLY ON RECORD AND WERE D ULY ADVERTED BEFORE HIM. IN FACT ON THE PERUSAL OF THE COMMENTS OF AO IN HIS REMAND REPORT, HE MAINLY OBJECTED TO THE ADMISSION OF THE ADDITIONAL EVIDENCE WITH REFERENCE TO CLAUSE (A) AN D CLAUSE (B) OF SUB RULE (1) OF RULE 46A OF THE I.T. RULES AND DID NOT AT ALL OBJECT TO THE SUBMISSION OF THE ASSESSEE THAT SUCH AN EVID ENCE AS WAS BEING PHYSICALLY PRODUCED BEFORE THE CIT (A) WERE A LSO REFERRED BEFORE THE AO. IN OTHER WORD, HE DID NOT MAKE ANY C OMMENT ON THE ASSESSEES SUBMISSION IN RESPECT OF CLAUSE (C) & (D) OF SUB- RULE (L) OF RULE 46A OF THE I.T RULES, 1962. IN RE SPONSE TO THE 8 ITA NOS. 2307 & 1456/DEL/2011 REMAND REPORT, ASSESSEE ALSO FURNISHED ITS REJOINDE R (PAGE 150- 153 OF THE PB FOR THE AY 2007-2008 AND PAGES 136-14 0 OF THE PB FOR THE AY 2008-2009). 5.4. THE CIT(A) AFTER CONSIDERING THE REMAND REPORT AND SUBMISSIONS OF THE ASSESSEE ADMITTED THE ADDITIONA L EVIDENCE (PARA 4.3 AND PARA 6.3 OF THE ORDER OF THE CIT(A) F OR THE AY 2007- 2008 AND 2008-2009, RESPECTIVELY) AND DELETED THE A LLOWANCES MADE BY THE AO BY HOLDING THAT THE EXPENDITURE INCU RRED BY WAY OF CALL OPTION FEE IS REVENUE EXPENDITURE AND HAD DIRE CT NEXUS WITH THE EARNING OF INCOME AND CANNOT BE REGARDED A S CAPITAL IN NATURE. 5.5. INSTANT APPEALS HAVE BEEN PREFERRED BY THE REV ENUE, WHEREIN ONE OF THE ISSUE INVOLVED IS WITH REGARD TO THE DEL ETION OF THE DISALLOWANCE OF THE EXPENDITURE INCURRED REPRESENTI NG CALL OPTION FEE PAID BY THE ASSESSEE COMPANY WHICH EXPENDITURE HAS BEEN DISALLOWED BY THE AO BY HOLDING THE SAME TO BE CAPI TAL EXPENDITURE. 5.6. THE LD. DR RELIED UPON THE ORDER OF THE ASSESS ING OFFICER. THE LD. DR FURTHER SUBMITTED THAT THE AO RIGHTLY CO MPUTED THE INCOME OF THE ASSESSEE COMPANY FOR THE AY 2007-2008 AT AN INCOME OF RS. 1,65,71,920/- AND FOR AY 2008-2009 AT AN INCOME OF RS. 13,52,750/-, RESPECTIVELY. 5.7 THE LD. AR SUBMITTED THAT TO ATTRACT THE INVEST OR TO INVEST 9 ITA NOS. 2307 & 1456/DEL/2011 IN THE COMPANIES TO WHOM LESSEE HAS GIVEN INVESTMEN T ADVISORY AND TO SECURE THE INVESTMENT OF THE INVESTOR, THE A SSESSEE COMPANY ALSO INCURS EXPENDITURE DENOMINATED AS CALL OPTION FEE SO THAT INVESTORS ARE SECURED OF THEIR RISK TH EY UNDERTAKE ON MAKING INVESTMENTS ON ADVICE OF THE AS SESSEE COMPANY. T HE SAID EXPENDITURE IS INCURRED UNDER AN AGREEMENT TITLED AS CALL OPTION AGREEMENTS ENTERED BY THE A SSESSEE COMPANY WITH THE PROMOTERS OF THE INVESTEE COMPANIE S, WHICH ENABLES THE ASSESSEE COMPANY TO PURCHASE SHARES OF GROUP CONCERNS OF PROMOTERS PROVIDED THEY FAIL TO HONOUR THEIR OBLIGATIONS TOWARDS THE INVESTORS. THE DETAILS OF THE ORIGINATION FEE RECEIVED AND CALL OPTION FEE PAID F OR ASSESSMENT YEAR 2007-08 ARE AS UNDER:- S. NO. NAME OF THE PARTY INVESTMENT ORIGINATION FEE CALL O PTION FEE 1 D. D. HOUSING LTD. RS.112.50 CRORE RS. 28,12,500/- 2 SUPREME BUILD CAP RS. 75 CRORE RS. 18,75,000/- 3 RITESH SPINNING MILLS RS. 25 CRORES. RS. 6,25,000/- TOTAL RS. 4,42,71,818/- RS.53,12,500/- THE DETAILS OF THE ORIGINATION FEE RECEIVED AND CA LL OPTION FEE PAID FOR AY 2008-09 ARE AS UNDER: S. NO. NAME OF THE PARTY INVESTMENT (RS. IN CORRES) ORIGINATION FEE (IN PRS.) CALL OPTION FEE (IN RS.) 1 PACIFIC 32.00 48,00,000/- 8,00,000/- 10 ITA NOS. 2307 & 1456/DEL/2011 INFRASTRUCTURE PRIVATE LIMITED (IT PARK PROJECT) 2 PACIFIC INFRASTRUCTURE PRIVATE LIMITED (RESIDENTIAL PROJECT) 75.00 1,12,50,000/- 18,75,000/- 3 PARKWOOD DEVELOPERS PRIVATE LIMITED (GROUP HOUSING PROJECT AT MOHALI) 25.00 50,00,000/- 6,25,000/- 4 GLOBAL HIRITAGE VENTURE LIMITED (HOTEL PROJECT AT GURGAON) 100.00 2,00,00,000/- 25,00,000/- 5 NETZONE DEVELOPERS PRIVATE LIMITED (COMMERCIAL PROJECT MUMBAI) 255.00 4,46,25,000/- 63,75,000/- TOTAL 487.00 8,56,75,000/- 1,21,75,000/- THE LD. AR FURTHER SUBMITTED THAT THE ASSESSEE HAS INCURRED THE EXPENDITURE OF CALL OPTION FEE, WHICH EXPENDITURE W AS INCURRED FOR THE PURPOSE OF EARNING THE ORIGINATION FEE. IT IS SUBMITTED THAT FOR THE PURPOSE OF EARNING THE ORIGINATION FEE , ASSESSEE HAD PAID AN AMOUNT TO THE PROMOTERS OF THE INVESTEE COM PANIES TO ACQUIRE THE TOTAL SHARES OF THE PROMOTERS OF THE IN VESTEE COMPANIES ON THE HAPPENING OF THE CERTAIN EVENTS (W HICH EVENTS ARE MAINLY IN THE NATURE OF PROTECTING THE INTEREST OF INVESTOR 11 ITA NOS. 2307 & 1456/DEL/2011 COMPANIES), AND BY INCURRING THIS CALL OPTION FEE, ASSESSEE RESPONDENT HAS ENSURED THAT THE INVESTEE COMPANIES DONT MAKE ANY DEFAULT IN ANY RESPECT. 5.8. THE LD. AR SUBMITTED THAT INCURRING OF THE EXP ENDITURE OF CALL OPTION FEE AND EARNING OF THE ORIGINATION FE E HAS COMPLETE NEXUS, AS BUT FOR THE CALL OPTION FEE, ASSESSEE WOU LD NOT HAVE BEEN ABLE TO PERSUADE THE INVESTORS TO INVEST IN TH E INVESTEE COMPANIES FROM WHOM THE ASSESSEE HAS EARNED THE OR IGINATION FEE. IT IS SUBMITTED THAT THE NATURE OF THE BUSINE SS CARRIED ON BY THE ASSESSEE MAKES IT PRUDENT FOR IT TO ENTER INTO SUCH ARRANGEMENT, SO AS TO ATTRACT THE INVESTORS TO INVE ST IN THE COMPANIES AT THE ADVISE OF THE ASSESSEE. IT IS FURT HER SUBMITTED THAT HAD SUCH AN ARRANGEMENT WAS NOT ENTERED BY THE ASSESSEE WITH THE INVESTOR COMPANIES, IT WOULD NOT HAVE BEEN POSSIBLE FOR THE ASSESSEE TO GET THE INVESTMENT FOR THEIR CLIENT S AND THEREFORE IT WOULD NOT HAVE BEEN ABLE TO EARN THE ORIGINATION F EE. THE LD. AR SUBMITTED THAT SINCE, THE ASSESSEE COMPANY IS IN THE BUSINESS OF ARRANGING FUNDS AND PROVIDING RESEARCH SERVICES, ANY FAILURE OF THE PROJECT RECOMMENDED BY IT WOULD HAVE NEGATIVE I MPACT ON THE PROSPECTIVE CUSTOMERS, AND AS SUCH, TO INSURE THE R EGULAR FLOW OF THE BUSINESS SUCH AS EXPENDITURE HAS BEEN INCURRED. THE LD. AR SUBMITTED THAT WITHOUT SUCH AN ARRANGEMENT, ASSESSE E WOULD NOT HAVE ARRANGED ANY INVESTMENT FOR ANY OF ITS CLIENTS . ENTERING INTO THE CALL OPTION AGREEMENT WAS MUTUALLY AGREED BY THE ASSESSEE AND THE INVESTEE COMPANY, AS CAN BE SEEN FROM THE MANDATE 12 ITA NOS. 2307 & 1456/DEL/2011 LETTER (PAGE 116-122 OF THE PB FOR THE AY 2007-2008) AND ONLY THEN THE ASSESSEE PROVIDE THE INVESTMENT ADVISORY S ERVICES. THE LD. AR SUBMITTED THAT AS PER THE UNDERSTANDING I.E. MANDATE LETTER, THE NATURE OF THE SERVICES TO BE PROVIDED BY THE ASSESSEE ARE AS UNDER: I. APPRAISAL OF SPV AND THE PROJECTS TO BE UNDERTAKEN BY SUCH SPV. II. IDENTIFYING POTENTIAL INVESTORS. III. ARRANGING FOR INVESTOR DUE DILIGENCE. IV. STRUCTURING THE TRANSACTION. V. PREPARING PRESENTATION MATERIAL FOR APPROVAL BY THE INVESTORS. 5.9 THE LD. AR PLACED ON RECORD A MANDATE LETTER DA TED 18.12.2006 ISSUED BY M/S RITESH SPINNING MILLS LTD. (PROMOTER), A COPY OF WHICH WAS PLACED AT PAGES 116 TO 122 OF P B FOR THE AY 2007-08. A PERUSAL THEREOF WOULD SHOW THAT, ASSESSEE COMPANY WAS GIVEN THE MANDATE TO IDENTIFY POTENTIAL INVESTORS IN LIEU OF ORIGINATION FEE BEING 2.5% OF THE INVESTMEN TS MADE BY INVESTOR. HOWEVER, TO EARN THE SAID INCOME, THE ASS ESSEE AGREED TO INCUR EXPENDITURE OF 0.25% OF THE INVESTMENTS MADE AS CALL OPTION FEE. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED RELEV ANT DOCUMENTS. THE EXPENDITURE INCURRED AS CALL OPTION FEE PAID BY ASSESSEE COMPANY WAS PART AND PARCEL OF THE BUSINES S OF THE ASSESSEE COMPANY. THE SAME WAS FOR THE INVESTORS TO SECURE THEIR 13 ITA NOS. 2307 & 1456/DEL/2011 RISK THEY HAVE UNDERTAKEN ON MAKING INVESTMENTS ON ADVISE OF THE ASSESSEE COMPANY. T HE SAID EXPENDITURE IS INCURRED UNDER AN AGREEMENT TITLED AS CALL OPTION AGREEMENTS ENTERE D BY THE ASSESSEE COMPANY WITH THE PROMOTERS OF THE INVESTEE COMPANIES, WHICH ENABLES THE ASSESSEE COMPANY TO PURCHASE SHAR ES OF GROUP CONCERNS OF PROMOTERS PROVIDED THEY FAIL TO H ONOUR THEIR OBLIGATIONS TOWARDS THE INVESTORS. THIS EXPEN DITURE WAS INCURRED FOR THE PURPOSE OF EARNING ORIGINATION FEE . THUS CIT(A) HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSE E. THERE IS NO REQUIREMENT OF INTERFERING THE FINDINGS OF THE C IT(A). THIS GROUND IS DISMISSED. 7. DISALLOWANCE UNDER SECTION 14A OF THE ACT: IN THE ASSESSMENT YEAR 2007-08, THE ASSESSEE COMPAN Y HAS RECEIVED DIVIDEND INCOME FROM MUTUAL FUNDS AMOUNTIN G TO RS. 26,30,028 WHICH HAS BEEN CLAIMED AS EXEMPT UNDER SE CTION 10 (35) OF I.T. ACT, 1961. DURING THE ASSESSMENT PROCE EDINGS THE A.O. HELD THAT NO EXPENDITURE DIRECTLY OR INDIRECTLY WAS INCURRED FOR EARNING THE EXEMPT INCOME AND COMPUTED THE EXPENSE S UNDER RULE 8D OF THE INCOME TAX RULES, 1962 AT 0.5 % OF T HE CLOSING VALUE OF INVESTMENT AND DISALLOWED THE SAME AS EXPE NSES INCURRED IN RELATION TO EXEMPT INCOME. 7.1. THE ASSESSEE COMPANY BEING AGGRIEVED PREFERRED AN APPEAL BEFORE THE CIT (A) AND CONTENDED THAT SECTION 14A O F THE ACT WOULD TRIGGER ONLY WHEN EXPENDITURE HAS BEEN INCURR ED IN ORDER TO 14 ITA NOS. 2307 & 1456/DEL/2011 EARN THE INCOME THAT, IS OTHERWISE EXEMPT. WITHOUT PREJUDICE TO THE ABOVE CONTENTIONS, THE ASSESSEE COMPANY ALSO SU BMITTED BEFORE THE CIT(A) THAT THE DISALLOWANCE HAS BEEN WR ONGLY BEEN COMPUTED AT 0.5% ON THE CLOSING BALANCE OF THE INVE STMENTS OF RS. 4,26,25,260/-, RATHER THAN THE AVERAGE VALUE OF INV ESTMENTS, AS PRESCRIBED UNDER RULE 8D OF THE RULES. SINCE, THE O PENING VALUE OF INVESTMENT IS NIL, THE AVERAGE VALUE OF THE INVESTM ENT SHOULD BE COMPUTED AT RS.2,13,12,630/-. ACCORDINGLY, THE CORR ECT AMOUNT OF DISALLOWANCE WOULD BE RS.1,06,563/-. AFTER CONSIDER ING THE ASSESSEE COMPANYS CONTENTIONS, THE CIT(A) HELD THA T THE AO HAS CORRECTLY DISALLOWED 0.5% OF THE VALUE OF INVESTMEN T, HOWEVER THE CALCULATION OF 0.5% SHOULD BE MADE ON AVERAGE VALUE OF INVESTMENT, AS CONTENDED BY THE ASSESSEE COMPANY. HENCE, THE CIT(A) LIMITED THE ADDITION TO RS.1,06,563/-. 7.2. IN THE INSTANT APPEAL FILED BY THE REVENUE, RE VENUE HAS CHALLENGED THE DELETION OF THE ADDITION BY THE CIT( A) ON THE GROUND THAT SUB-SECTION (3) OF SECTION 14A OF THE A CT WHICH SPECIFIES THAT EVEN IF THE ASSESSEE MAKES A CLAIM T HAT NO EXPENDITURE HAS BEEN INCURRED IN EARNING THE EXEMPT ED INCOME, SUB-SECTION (2) OF SECTION 14A OF THE ACT SHALL APP LY, MEANING THEREBY, DISALLOWANCE U/S 14A(1) OF THE ACT IS CALL ED FOR. THE LD. DR SUBMITTED THAT THE ASSESSING OFFICER HAS RIGHTLY HELD THAT NO EXPENDITURE DIRECTLY OR INDIRECTLY WAS INCURRED FOR EARNING THE EXEMPT INCOME AND COMPUTED THE EXPENSES UNDER RULE 8D OF THE INCOME TAX RULES, 1962 AT 0.5 % OF THE CLOSING VALU E OF 15 ITA NOS. 2307 & 1456/DEL/2011 INVESTMENT AND DISALLOWED THE SAME AS EXPENSES INCU RRED IN RELATION TO EXEMPT INCOME. 7.3. IN LIGHT OF THE AFORESAID BACKGROUND, THE LD. AR SUBMITTED THAT CIT(A) HAS MERELY RECTIFIED THE COMP UTATION OF THE DISALLOWANCE MADE BY THE AO UNDER SECTION 14A O F THE ACT READ WITH RULE 8D OF THE RULES. THE LD. AR SUBM ITTED THAT FOR MAKING THE DISALLOWANCE, AO HAS INVOKED R ULE 8D(2)(III) OF THE INCOME TAX RULES WHICH PROVIDES T HAT THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME SHALL BE AN AMOUNT EQUAL TO ONE- HALF PER CENT OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME F ROM 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. HERE, AVERAGE VALUE OF THE INVES TMENT MEANS THE AVERAGE OF THE OPENING VALUE OF THE INVESTMENT AT THE BEGINNING OF THE ASSESSMENT YEAR AND CLOSING VALUE OF THE INVESTMENT AT THE END OF THE ASSESSMENT YEAR. THE L D. AR SUBMITTED THAT AO WHILE COMPUTING THE DISALLOWANCE HAS ERRONEOUSLY TAKEN THE VALUE OF THE INVESTMENT I.E. THE VALUE OF THE INVESTMENT AT THE CLOSE OF THE YEAR, NOT THE AVERAG E VALUE OF THE INVESTMENT AS PER THE AFORESAID RULE. 7.4. THE LD. AR SUBMITTED THAT THE CIT(A) HAS ONLY CORRECTED THE COMPUTATION OF DISALLOWANCE IN ACCORDANCE WITH THE PROVISIONS OF RULE 8D OF THE I. T. RULES TO 0.5% THE AVERAGE VALU E OF 16 ITA NOS. 2307 & 1456/DEL/2011 INVESTMENTS. SINCE, THE OPENING VALUE OF INVESTMENT IS NIL, THE AVERAGE VALUE OF THE INVESTMENT SHOULD BE COMPUTED AT RS.2,13,12,630/- [(0+4,26,25,260)/2]. ACCORDINGLY, THE CORRECT AMOUNT OF DISALLOWANCE IS RS. 1,06,563/- [0.5% X 2, 13,12,630]. THE CONTENTION OF THE LD. DR THAT THE CIT(A) HAS ER RED IN RESTRICTING THE DISALLOWANCE UNDER SECTION 14A OF T HE ACT READ WITH RULE 8D OF THE RULES TO RS. 1,06,563/- AS AGAI NST THE DISALLOWANCE OF RS.2,13,126/-, DOES NOT HAVE ANY SU PPORT. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED RELEV ANT DOCUMENTS. THE AO WHILE COMPUTING THE DISALLOWANCE HAS ERRONEOUSLY TAKEN THE VALUE OF THE INVESTMENT I.E. THE VALUE OF THE INVESTMENT AT THE CLOSE OF THE YEAR, NOT THE AVERAG E VALUE OF THE INVESTMENT AS PER THE AFORESAID RULE. THE CIT(A) HA S ONLY CORRECTED THE COMPUTATION OF DISALLOWANCE IN ACCORD ANCE WITH THE PROVISIONS OF RULE 8D OF THE I. T. RULES TO 0.5% TH E AVERAGE VALUE OF INVESTMENTS. SINCE, THE OPENING VALUE OF INVESTM ENT IS NIL, THE AVERAGE VALUE OF THE INVESTMENT SHOULD BE COMPUTED AT RS.2,13,12,630/- [(0+4,26,25,260)/2]. ACCORDINGLY, THE CORRECT AMOUNT OF DISALLOWANCE IS RS. 1,06,563/- [0.5% X 2, 13,12,630]. THUS, NO INTERFERENCE IS REQUIRED IN THE ORDER OF T HE CIT(A). THIS GROUND IS DISMISSED. 9 . DELETION OF DISALLOWANCE OF DEPRECIATION ON UPS: DURING THE ASSESSMENT YEAR 2008-09, THE ASSESSEE CO MPANY HAS 17 ITA NOS. 2307 & 1456/DEL/2011 PURCHASED UPS EQUIPMENT AMOUNTING TO RS. 1,26,734 T HAT HAS BEEN INCLUDED IN THE BLOCK OF MACHINERY AND PLANT UNDER THE HEAD COMPUTER INCLUDING COMPUTER SOFTWARE, IN ACC ORDANCE WITH THE PROVISIONS OF SECTION 32 OF THE ACT READ WITH R ULE 5 OF THE RULES. ACCORDINGLY, THE ASSESSEE HAS CLAIMED DEPREC IATION @ 60% ON THE UPS. 9.1. HOWEVER, THE AO HELD THAT UPS IS SEPARATE EQU IPMENT WHICH CAN WORK IN CONJUNCTION WITH A COMPUTER BUT CAN ALS O WORK INDEPENDENTLY WITH OTHER ELECTRICAL/ ELECTRONIC EQU IPMENTS. THE AO HELD THAT THE UPS IS NOT PART OF COMPUTER SYSTEM ELIGIBLE FOR DEPRECIATION @ 60%, RATHER IS A PART OF MACHINERY AND PLANT WHICH IS ELIGIBLE FOR DEPRECIATION @ 15% AND ACCORD INGLY DISALLOWED RS. 28,515/- AS EXCESS DEPRECIATION CLAI MED ON UPS. 9.2. THE CIT(A) ALLOWED THIS GROUND IN FAVOUR OF TH E ASSESSEE. 9.3 THE LD. DR RELIED UPON THE ORDER OF THE ASSESSI NG OFFICER AND SUBMITTED THAT THE DISALLOWANCE IS RIGHTLY MADE BY THE AO. 9.4 THE LD. AR SUBMITTED THAT THE TERM COMPUTER HAS NOT BEEN SPECIFICALLY DEFINED FOR THE PURPOSE COMPUTING DEPR ECIATION UNDER THE PROVISIONS OF THE ACT. THEREFORE, RELIANCE MAY BE PLACED ON JUDICIAL PRECEDENTS IN ORDER TO UNDERSTAND THE TERM COMPUTER. IN THIS REGARD, THE LD. AR PLACED RELIANCE ON THE CASE OF CIT VS BSES YAMUNA POWERS LIMITED (ITA NO 1267/2010), WHEREIN THE HONBLE HIGH COURT OF DELHI HAS HELD AS UNDER: 18 ITA NOS. 2307 & 1456/DEL/2011 WE ARE IN AGREEMENT WITH THE VIEW OF THE TRIBUNAL THAT COMPUTER ACCESSORIES AND PERIPHERALS SUCH AS, PRINT ERS, SCANNERS AND SERVER ETC. FORM AN INTEGRAL PART OF T HE 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 HI GHER RATE OF 60% . 9.5. FURTHERMORE, IN THE CASE OF CIT VS ORIENT CERAMICS & INDUSTRIES LTD (56 DTR 397), THE HONBLE HIGH COURT OF DELHI, RELYING ON ITS OWN JUDGMENT IN THE CASE OF CIT VS B SES YAMUNA POWERS LIMITED (SUPRA), HAS HELD AS UNDER: THE ASSESSEE COMPANY HAD CLAIMED DEPRECIATION ON U PS @ 60 PER CENT WHEREAS THE AO HAD ALLOWED IT @ 25 PERC ENT AND ON THIS BASIS, DISALLOWANCE OF RS. 1,4 70 WAS MADE. THE ISSUE NOW STANDS COVERED BY THE JUDGMENT OF THIS CO URT IN THE CASE OF CIT VS. BSES YAMUNA POWERS LTD. (IN IT APPE AL NO. 1267 DECIDED ON 31ST AUG.,2010) WHEREIN IT WAS HELD THAT THE DEPRECIATION @ 60 PER CENT ON SUCH ITEMS SHALL BE A LLOWED. THE LD. AR PLACED RELIANCE ON THE FOLLOWING JUDICIA L PRECEDENTS, IN SUPPORT OF ITS CONTENTIONS: I. CIT VS CITICORP MARUTI FINANCE LIMITED (1TA NO. 171 2/2010 AND ITA NO. 1714/2010) (DEL HC) II. DCIT VS DATACRAFT INDIA LTD. (133 TTJ 377) (SPECIA L BENCH OF THE MUMBAI TRIBUNAL) III. ITO VS OMNI GLOBEINFORMATION TECHNOLOGIES INDIA (P ) LTD (ITA NO 3465/DEL/2009) IV. ACIT VS FIDELITY INFORMATION SYSTEMS CO. INDIA (P) LTD (ITA NO 2951 OF 2009)(DELHI TRIBUNAL) V. EXPEDITORS INTERNATIONAL INDIA PRIVATE LIMITED VS. ADDL. CIT [2008] 118 TTJ 652 (DELHI TRIBUNAL) VI. ITO VS. SAMIRAN MJUMDAR (98 ITD 119) (KOLKATA TRIB UNAL) 19 ITA NOS. 2307 & 1456/DEL/2011 IN LIGHT OF THE ABOVE, THE LD. AR SUBMITTED THAT TH E UPS PURCHASED BY THE ASSESSEE COMPANY FORM AN INTEGRAL PART OF THE COMPUTER BLOCK AND ARE ELIGIBLE FOR DEPRECIATIO N @60%. ACCORDINGLY, THE DEPRECIATION CLAIMED ON UPS AT THE RATE OF 60% IS IN ACCORDANCE WITH THE LAW AND THE SAME SHOULD BE S USTAINED. 10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE MATERIALS AVAILABLE ON RECORD. IT IS PERTINENT TO NOTE THAT THE CIT(A) HAS GIVEN AN EXTENSIVE FINDING ON THE ISSUE MENTIONED H EREINABOVE. THE UPS PURCHASED BY THE ASSESSEE COMPANY FORM AN I NTEGRAL PART OF THE COMPUTER BLOCK AND ARE ELIGIBLE FOR DEP RECIATION @60%. ACCORDINGLY, THE DEPRECIATION CLAIMED ON UPS AT THE RATE OF 60% IS IN ACCORDANCE WITH THE LAW AND THE SAME SHOULD BE S USTAINED. THUS THE ORDER OF THE CIT(A) IS JUST AND PROPER. 11. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 19TH OF OCTOBER, 2016 SD/- SD/- (G. D. AGRAWAL) (SUCHITRA KAMBLE) VICE PRESIDENT JUDICIAL MEMBER DATED: 19/10/2016 R. NAHEED * COPY FORWARDED TO: 1. APPELLANT 20 ITA NOS. 2307 & 1456/DEL/2011 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRA R ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 11.08.2016 PS 2. DRAFT PLACED BEFORE AUTHOR 11.08.2016 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .2016 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 19.10.2016 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 19.10.2016 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER. 21 ITA NOS. 2307 & 1456/DEL/2011