ACIT, CHENNAI V. M/s. TVS Motor Company Limited, CHENNAI

ITA 1782/CHNY/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9513 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 6 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2016
• Appeal Filed By: Department
• Bench Allotted: D
• Assessment Year: 2008-2009
• Appeal Filed On: 28-09-2012
• Court: TRIBUNAL
• Department Lawyers: ARUN C BHARAT
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Depreciation; Business expenditure; Earning of tax free income; Retrospective amendment; Revised return; Revenue expenditure; Capital expenditure
• Section: 143(3); 142(1); 14A; 37(1); 10B

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . , BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY , JUDICIAL MEMBER I.T.A.NO. 1 7 0 7/MDS/2012 ASSESSMENT YEAR :20 08 - 09 M/S. TVS MOTOR COMPANY LTD., NO.29, HADDOWS ROAD, CHENNAI 600 006. [PAN: A AAC S7032B ] VS. THE JOINT COMMISSIONER OF INCOME TAX , CO MPANY RANGE I II , CHENNAI 600 034 . ( / APPELLA NT ) ( / RESPONDENT ) I.T.A.NO. 1 78 2 /MDS/2012 ASSESSMENT YEAR :20 08 - 09 THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II I( 2 ), CHENNAI 600 034. VS. M/S. TVS MOTOR COMPANY LTD., NO.29, HADDOWS ROAD, CHENNAI 600 006. ( / AP PELLANT ) ( / RESPONDENT ) ASSESSEE BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE DEPARTMENT BY : SHRI A RUN C. BHARAT , CIT / DATE OF HEARING : 1 0 . 0 2 .201 6 / DATE OF P RONOUNCEMENT : 27 . 0 4 .201 6 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : THESE CROSS APPEALS BY THE ASSESSEE AND REVENUE; RESPECTIVELY, ARE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) II I, C HENNAI DATED 29 .06.201 2 RELEVANT TO THE ASSESSMENT YEAR 20 08 - 09 . THE I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 2 I SSUE S RAISED IN THE GROUNDS OF APPEAL OF THE ASSESSEE ARE WITH REGARD TO CONFIRMATION OF DISALLOWANCE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 [ ACT IN SHORT] R.W. RULE 8D AND NO T ACCEPTING THE EXPENDITURE OF .26,45,886/ - INCURRED AS A PORTION OF SALARY OF THE EXECUTIVE WHO HAVE ACTUALLY HANDLED THE INVESTMENTS PORTFOLIO TO BE THE AMOUNT TO BE DISALLOWED UNDER SECTION 14A FOR EARNING THE EXEMPT INCOME. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENG AGED IN THE BUSINESS OF MANUFACTURE AND SALE OF AUTOMOTIVE, TWO, THREE WHEELERS AND PARTS THEREOF. THE ASSESSEE HAS FILED ITS RETURN FOR THE ASSESSMENT YEAR 2008 - 09 ON 30.09.2008 ADMITTING LOSS OF .59,67,82,166/ - . SUBSEQUENTLY, THE ASSESSEE HAS FILED ITS REVISED RETURN ON 31.03.2010 REVISING THE TOTAL LOSS OF .59,82,66,374/ - . THE RETURN FILED BY THE ASSESSEE WAS PROCESSED UNDER SECTION 143(1) OF THE ACT. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) OF THE ACT WAS ISSU ED ON 12.08.2009 . THEREAFTER, FRESH NOTICE UNDER SECTION 142(1) OF THE ACT ALONG WITH QUESTIONNAIRE WAS ISSUED TO THE ASSESSEE ON 20.10.2011. IN RESPONSE THERETO, THE AR OF THE ASSESSEE HAS APPEARED AND FURNISHED DETAILS AND WRITTEN SUBMISSIONS. AFTER CONS IDERING THE WRITTEN SUBMISSIONS AND DETAILS FILED BY THE ASSESSEE, THE ASSESSING OFFICER HAS COMPLETED THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT ON 28.12.2011 AND DETERMINED TOTAL INCOME AT .91,46,18,434/ - BY MAKING VARIOUS ADDITIONS. I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 3 3. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) AND RAISED VARIOUS GROUNDS. AFTER CONSIDERING THE SUBMISSIONS AND ALSO BY CONSIDERING THE FACTS OF THE CASE, THE APPEAL FILED BY THE ASSESSEE WAS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 4. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 5. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE ASSESSEE HAS CHALLENGED CONFI RMATION OF DISALLOWANCE UNDER SECTION 14A OF THE ACT. IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HAS DERIVED FOLLOWING EXEMPT INCOME UNDER SECTION 10 OF THE ACT : (I) DIVIDEND INCOME . 3,51,88,070/ - (II) AGRICULTURAL INCOME . 2,37,808/ - (III) UTI TAX - FREE BONDS . 90,51,559/ - (IV) LONG TERM CAPITAL GAINS . 7,26,05,371/ - AS THE ASSESSEE HAS NOT ALLOCATED ANY EXPENDITURE RELATABLE TO THESE INCOMES, THE ASSESSING OFFICER APPLIED R ULE 8D AND WORKED OUT THE QUANTUM OF EXPENDITURE RELATABLE TO THE ABOVE EXEMPT INCOMES AND QUANTIFIED THE DISALLOWANCE AT .3,66,11,461/ - AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. WITH REGARD TO THE ABOVE DISALLOWANCE, THE AR OF THE ASSESSEE HAS STRONGLY CONTESTED BEFORE THE LD. CIT(A). AFTER EXAMINING THE PROFIT AND LOSS ACCOUNT, BALANCE - SHEET AND OTHER DETAILS SUBMITTED BY THE AR OF THE ASSESSEE, THE LD. CIT(A) HAS OBSERVED AS UNDER: I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 4 4.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AN D THE SUBMISSION OF THE LD. AR. I HAVE ALSO GONE THROUGH THE DECISIONS RELIED ON BY THE AO AND LD. AR. I HAVE ALSO PERUSED THE PROFIT AND LOSS ACCOUNT, BALANCE - SHEET AND OTHER DETAILS SUBMITTED BY THE LD.AR IN SUPPORT OF HIS CONTENTION THAT NO BORROWED FUN D WAS UTILIZED FOR MAKING INVESTMENT WHICH YIELDED EXEMPT INCOME. THERE IS NO DISPUTE REGARDING THE QUANTUM OF INVESTMENT MADE BY THE APPELLANT TO THE EXTENT OF RS.338.96 CRORES AND RECEIPT OF EXEMPT AMOUNTING TO RS.11.70 CRORES. THE VALUE OF INVESTMENT WA S RS.344.74 CRORES AND RS.338.96 CRORES AS ON 31.3.2007 AND 31.3.2008 RESPECTIVELY. OBVIOUSLY, THE RETURNS FROM SUCH INVESTMENT WOULD NOT ATTRACT ANY TAX. THE APPELLANT HAS ALSO DEBITED INTEREST OF RS.11,47,62,163/ - TO THE PROFIT AND LOSS ACCOUNT. IT IS, T HEREFORE, DIFFICULT TO ACCEPT THE CONTENTION OF THE LD.AR THAT CONDITIONS OF RULE 8D(1) ARE NOT SATISFIED. INVESTMENT OF SUCH HUGE MAGNITUDE OF RS.338.96 CRORES WOULD DEFINITELY INVOLVE THE SERVICES OF COMPETENT MANPOWER AS WELL AS INFORMED DECISION MAKING BY THE TOP MANAGEMENT AND THE DIRECTORS. THEREFORE, THE CONTENTION THAT NO EXPENDITURE WHATSOEVER WAS INCURRED FOR EARNING THE DIVIDEND INCOME IS BEYOND THE REALM OF POSSIBILITY. HENCE, THIS IS A FIT CASE FOR APPLICATION OF RULE 8D. FURTHER, THE HON'BLE B OMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING (SUPRA) HAS ALSO CLEARLY HELD THAT PROVISIONS OF RULE 8D ARE APPLICABLE FROM A.Y.2008 - 09 ONWARDS. IN VIEW OF THE ABOVE FACTS AND THE PRECEDENT, I AM OF THE CONSIDERED OPINION THAT THE AO HAD RIGH TLY APPLIED THE PROVISIONS OF RULE 8D TO THE PRESENT CASE. 4.3 REGARDING THE QUANTIFICATION, THE AO HAD CALCULATED THE DISALLOWANCE AT RS. NIL, RS.1,95,18,961/ - AND RS.1,70,92,500/ - UNDER CLAUSES (I), (II) & (III) OF RULE 8D (2) RESPECTIVELY. THERE IS N O DISPUTE REGARDING THE FIRST COMPONENT BECAUSE IT IS NIL. WITH REGARD TO THE SECOND COMPONENT, BEING THE EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, THE AO HAS DETERMINED THE AMOUNT AT RS.1,95,18, 961/ - . THE AO HAS TAKEN INTO ACCOUNT INTEREST EXPENDITURE OF RS.9,26,30,134/ - FOR COMPUTING THE ABOVE DISALLOWANCE. THE LD.AR, ON THE OTHER HAND, HAS EXPLAINED WITH DETAILS OF PROFIT AND LOSS ACCOUNTS, NET PROFITS OF THE LAST SIX YEARS INCLUDING THE CURREN T YEAR, INCREASE IN INVESTMENTS IN THOSE YEARS, SALE OF INVESTMENTS, BALANCE - SHEET ETC THAT INTEREST - BEARING LOANS WERE NOT UTILIZED FOR MAKING INVESTMENTS WHICH HAS GIVEN TAX - FREE INCOME. THE INVESTMENT AS ON 31.3.2008 WAS R S .338.96 CRORES. THE SALE PROCE EDS OF INVESTMENTS DURING THE YEAR WAS RS.964.52 CRORES, WHICH WAS HIGHER BY RS.5.78 CRORES THAN PURCHASE OF INVESTMENTS OF RS.958.74 CRORES. THE FREE RESERVE AND SURPLUS WERE RS.791.40 CRORES. THE HON'BLE ITAT, MUMBAI, IN THE CASE OF HDFC LTD., V. DCIT (I TA NO,4529,3650,3651, I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 5 4059,991/MUM DATED 29.6.2011) HAS HELD THAT IF ASSESSEE'S OWN FUND AND NON - INTEREST BEARING FUNDS ARE MORE THAN THE INVESTMENT IN TAX - FREE SECURITIES, THEN THERE IS NO BASIS FOR DEEMING THAT THE ASSESSEE HAS USED THE BORROWED FUNDS FO R INVESTMENT IN TAX - FREE SECURITIES. FURTHER, HON'BLE BOMBAY HIGH COURT IN CIT V. RELIANCE UTILITIES AND POWER LTD (213 ITR 340) HAS HELD THAT IF THERE BE INTEREST - FREE FUNDS AVAILABLE TO ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN, IT CAN BE PRESUMED THAT INVESTMENTS WERE MADE FROM INTEREST FREE FUNDS AVAILABLE. HENCE, TAKING INTO ACCOUNT THE TOTALITY OF FACTS AND THE PRECEDENTS, I AM OF THE CONSIDERED OPINION THAT THE APPELLANT HAD SUFFICIENT INTEREST - FR EE FUNDS OF ITS OWN TO MAKE INVESTMENT IN TAX - FREE TERRITORY AND HENCE NO INTEREST CAN BE DISALLOWED UNDER RULE 8D(2)(II). HENCE, DISALLOWANCE OF INTEREST OF RS.1,95,18,961/ - UNDER RULE 8D(2)(II) IS DELETED. 4.4 AS REGARDS THE CONTENTION OF THE APPELLAN T THAT THE THIRD LIMB BEING RULE 8D(2)(III) IS ALSO NOT APPLICABLE, I DO NOT FIND SUBSTANCE IN SUCH ARGUMENT. THERE IS ALSO NO SUBSTANCE IN THE ARGUMENT THAT ONLY RS.26.46 LAKHS CAN AT BEST BE DISALLOWED U/S 14A. AS STATED EARLIER, THE INVESTMENT OF THE AP PELLANT IS QUITE SUBSTANTIAL. THE INVESTMENTS WILL DEFINITELY INVOLVE CERTAIN ADMINISTRATIVE AND ESTABLISHMENT COST SINCE THE DECISION TO MAKE INVESTMENTS, TRACK INVESTMENTS, SALE OF SUCH INVESTMENTS AND FOLLOW - UP OF THE RECEIPT OF INCOME, SALE PROCEEDS ET C HAVE TO BE UNDERTAKEN WHICH ENTAILS DEFINITE COSTS. IT IS FOR THIS PURPOSES THAT RULE 8D(2)(I I I) PROVIDES THAT ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENTS WILL BE DEEMED TO BE EXPENDITURE INCURRED FOR THE SAME. WHEN THE ACT HAS SPECIFIED A D EFINITE FORMULA FOR WORKING OUT THE AMOUNT, RESTRICTING THE SAME TO AN AMOUNT OF RS.26,45,886/ - AS SUGGESTED BY LD.AR WILL NOT BE IN ACCORDANCE WITH LAW. IF LAW FAILS, THERE IS NO QUESTION OF ANY UNJUSTNESS. HENCE, THE DISALLOWANCE MADE BY THE AO OF RS.1,7 0,92.500/ - , BEING HALF PER CENT OF THE AVERAGE INVESTMENT YIELDING EXEMPT INCOME, IS CONFIRMED. IN THE RESULT, DISALLOWANCE OF RS.1.70,92,500/ - IS CONFIRMED AND THE GROUND IS PARTLY ALLOWED. 6. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS CONT ENDED THAT THE CONFIRMATION OF DISALLOWANCE AT 0.5% OF AVERAGE INVESTMENT AS EXPENDITURE FOR EARNING EXEMPT INCOME TO BE DISALLOWED UNDER SECTION 14A OF THE ACT IS LEGALLY NOT CORRECT AND BY RELYING ON THE DECISION IN THE CASE OF INAUTIX I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 6 TECHNOLOGIES INDIA P. L TD. V. ACIT IN I.T.A. NOS. 2277 & 2625/MDS/2014 DATED 19.06.2015, HE HAS SUBMITTED THAT THE DISALLOWANCE MAY BE RESTRICTED TO 2% OF THE DIVIDEND INCOME ONLY ON THE GROUND THAT THE NOTIFICATION OF RULE 8D W.E.F. 24.03.2008 IS PROSPECTIVE IN OPERATION. IN TH IS CASE, THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2008 - 09 AND WITH REGARD TO APPLICATION OF RULE 8D, THE HON BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. DCIT [(2010) 328 ITR 81 ] HAS HELD AS UNDER: . HOWEVER, UNLESS EXPRESSLY OR BY NECESSARY IMPLICATION, A CONTRARY PROVISION IS MADE, NO RETROSPECTIVE EFFECT IS TO BE GIVEN TO ANY RULE SO AS TO PREJUDICIALLY AFFECT THE INTERESTS OF THE ASSESSEE. THE RULES WERE NOTIFIED TO COME INTO FORCE ON MARCH 24, 2008. IT IS A TRITE PRINCIPLE OF LAW THAT THE LAW WHICH WOULD APPLY TO AN ASSESSMENT YEAR IS THE LAW PREVAILING ON THE FIRST DAY OF APRIL. CONSEQUENTLY, RULE 8D WHICH HAS BEEN NOTIFIED ON MARCH 24, 2008, WOULD APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008 - 09 . 7 . IN VIEW OF THE ABOVE LAW LAID DOWN BY OF THE HON BLE MUMBAI HIGH COURT THAT THE APPLICATION OF PROVISIONS OF R ULE 8D NOTIFIED WITH EFFECT FROM 24.03.2008 WOULD APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008 - 09 , WHICH WAS NOT FOUND TO HAVE BEEN REVERSED BY THE HIGHER COURT, THE QU ESTION OF RESTRICTION OF DISALLOWANCE @ 2% AS WELL AS APPLICATION OF THE ABOVE SAID NOTIFICATION WHETHER FROM RETROSPECTIVELY OR PROSPECTIVELY DOES NOT ARISE. SINCE T HE ASSESSEE HAS NOT EXCLUDED ANY EXPENDITURE RELATABLE TO EARNING EXEMPT INCOME OF .11,70,82,808/ - , BY INVOKING SECTION 14A OF THE ACT APPLIED RULE 8D AND WORKED OUT THE EXPENDITURE AT .1,95,18,961/ - UNDER I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 7 RULE 8D(2)(II) AND .1,70,92,500/ - UNDER RULE 8D(2)(III). BY CONSIDERING VARIOUS DECISIONS OF THE MUMBAI BENCHES OF THE TRIBUNAL, A S REPRODUCED HEREINABOVE, WHILE DELETING THE DISALLOWANCE MADE UNDER RULE 8D(2)(II) OF .1,95,18,961/ - , THE LD. CIT(A) CONFIRMED THE DISALLOWANCE OF .1,70,92,500/ - MADE UNDER RULE 8D(2)(III) ON THE GROUND THAT THE INVESTMENTS WOULD HAVE DEFINITELY INVOLVE D CERTAIN ADMINISTRATIVE AND ESTABLISHMENT COST SINCE THE DECISION TO MAKE INVESTMENTS, TRACK INVESTMENTS, SALE OF SUCH INVESTMENTS AND FOLLOW - UP OF THE RECEIPT OF INCOME, SALE PROCEEDS, ETC. HAVE TO BE UNDERTAKEN WHICH ENTAILS DEFINITE COSTS. DURING THE C OURSE OF APPELLATE PROCEEDINGS, THE AR OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS AGREED FOR DISALLOWANCE OF 25% OF THE SALARY OF SR. VICE - PRESIDENT, FINANCE & VP FINANCE & SECRETARY AT .26,45,886/ - [ .15,37,990 + .11,07,896], WHICH WAS NOT ACCEPTED BY THE LD. CIT(A) SINCE THERE WAS NO SUBSTANCE. WITH REGARD TO THE CONFIRMATION OF DISALLOWANCE OF .1,70,92,500/ - MADE UNDER RULE 8D(2)(III), THE ONLY PLEA RAISED BY THE LD. COUNSEL FOR TH E ASSESSEE BEFORE THE BENCH IS THAT THE DISALLOWANCE MAY BE RESTRICTED TO 2% OF THE DIVIDEND INCOME 8 . SINCE T HE ASSESSEE HAS NOT EXCLUDED ANY EXPENDITURE RELATABLE TO EARNING EXEMPT INCOME DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2008 - 0 9, BY INVOKING SECTION 14A OF THE ACT, THE ASSESSING OFFICER HAS RIGHTLY APPLIED RULE 8D AND WORKED OUT THE EXPENDITURE RELATABLE TO EARNING I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 8 OF EXEMPT INCOME, WHICH WAS CONFIRMED BY THE LD. CIT(A). THEREFORE, THE REQUEST FOR RESTRICTING THE DISALLOWANCE @ 2% OF THE DIVIDEND INCOME AS EXPENDITURE IS NOT PERMISSIBLE UNDER THE LAW. BY FOLLOWING THE ABOVE DECISION OF THE HON BLE BOMBAY HIGH COURT, IN THE CASE OF INDIAN BANK V. ACIT FOR THE ASSESSMENT YEAR 2008 - 09 IN I.T.A. NO. 1923/MD/2011 VIDE ORDER DATED 30.1 1.2015 [CONSOLIDATED ORDER IN I.T.A. NOS. I.T.A.NOS.880/MDS/2010, 1923/MDS/2011, 1871/MDS/2012, 1395, 1396 & 1397/MDS/2014 ] AT PARA 82 - 83, THE COORDINATE BENCH OF THE TRIBUNAL HAS HELD AS UNDER: 82. THE FIFTH GROUND RAISED BY THE ASSESSEE RELATES TO DISA LLOWANCE UNDER SECTION 14A. THE ASSESSING OFFICER MADE DISALLOWANCE OF .22,58,62,431/ - UNDER SECTION 14A OF THE ACT AND COMPUTED IN ACCORDANCE WITH RULE 8D IN RESPECT OF THE TAX FREE INCOME. ON APPEAL, AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, T HE LD. CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER BY OBSERVING THAT THE CLAIM OF THE ASSESSEE THAT 2 PER CENT OF EXEMPT INCOME CAN BE TAKEN AS EXPENDITURE INCURRED TO EARN TAX FREE INCOME CANNOT BE ACCEPTED. WHEN THE ACT HAS PRESCRIBED A METHOD FOR QUANTIFYING THE DISALLOWANCE WHERE THE ASSESSING OFFICER HAS NOT SATISFIED WITH THE DISALLOWANCE MADE BY THE ASSESSEE, THE SAME CANNOT BE OVERLOOKED. IN THE ASSESSEE S CASE, THE SECURITIES ARE HELD AS STOCK - IN - TRADE. 83. AFTER HEARING BOTH SIDES, WE HAVE CAREFULLY PERUSED THE ORDERS OF AUTHORITIES BELOW. IN VIEW OF THE DECISION OF THE HON BLE MUMBAI HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. DCIT (SUPRA) THAT RULE 8D IS APPLICABLE FROM THE ASSESSMENT YEAR 2008 - 09, WHEN THE AC T HAS PRESCRIBED A METHOD FOR QUANTIFYING THE DISALLOWANCE, THE SAME CANNOT BE OVERLOOKED. SINCE RULE 8D IS NOT APPLICABLE PRIOR TO THE ASSESSMENT YEAR 2007 - 08, THE TRIBUNAL HAS SET ASIDE THE ORDER PASSED BY THE LD. CIT(A) AND DIRECTED THE ASSESSING OFFICE R TO WORK OUT THE DISALLOWANCE @ 2%. HOWEVER, SINCE RULE 8D IS APPLICABLE FROM THE ASSESSMENT YEAR 2008 - 09 ONWARDS, THE DISALLOWANCE SHOULD BE MADE BASED ON THE PRESCRIBED METHOD QUANTIFIED BY THE ACT. SINCE THE ASSESSING OFFICER HAS MADE THE DISALLOWANCE UNDER SECTION 14A AND I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 9 COMPUTED UNDER RULE 8D, WE CONFIRM THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. ACCORDINGLY, THE GROUND RAISED BY THE ASSESSEE IS DISMISSED. 9 . SIMILARLY, IN THE CASE OF INDIAN NIPPON ELECTRICALS LTD. V. DCIT IN I.T.A. NO. 459 /MDS/2014 FOR THE ASSESSMENT YEAR 2008 - 09 VIDE ORDER DATED 17.02.2016, THE SAME BENCH OF THE TRIBUNAL HAS OBSERVED AND HELD AS UNDER: 7. THE SECOND ISSUE RAISED IN THE APPEAL OF THE ASSESSEE RELATES TO CONFIRMATION OF DISALLOWANCE MADE UNDER SECTION 14A READ WITH RULE 8D. IT IS NOT DISPUTED THAT THE TOTAL INVESTMENTS MADE BY THE ASSESSEE IN THE FORM OF SHARES/FUNDS IS .99,61,87,000/ - AS ON 31.03.2008 AND EARNED DIVIDEND INCOME OF .5,17,68,002/ - DURING THE FINANCIAL YEAR 2007 - 08. IT IS ALSO NOT DISPUTED THAT THE ASSESSEE HAS BORROWED SUBSTANTIAL AMOUNTS OF FUNDS DURING THE FINANCIAL YEAR 2007 - 08 AND INTEREST AMOUNT PAI D ON THESE BORROWINGS STOOD AT .1,01,000/ - . FURTHER, IT WAS ALSO NOT DISPUTED THAT THE MAIN ACTIVITY OF THE ASSESSEE IS MANUFACTURING ELECTRONIC IGNITION SYSTEMS AND IN ADDITION THE ASSESSEE IS ALSO INVESTING AND TRADING IN SHARES/MUTUAL FUNDS, BUT THE AS SESSEE HAS NOT MAINTAINED ANY SEPARATE SETS OF BOOKS FOR THE INVESTMENT ACTIVITY AND THE MANUFACTURING ACTIVITIES. ALL THE FUNDS ARE POOLED UP AND UTILIZED FOR VARIOUS ACTIVITIES FROM A COMMON KITTY. THEREFORE, THE ASSESSING OFFICER HAS SEGREGATED THE PROB ABLE EXPENSES BY WAY OF FINANCIAL CHARGES AND OTHER OVERHEAD EXPENSES BETWEEN THE INVESTMENT ACTIVITY AND MANUFACTURING AND EXPORT ACTIVITIES. ACCORDINGLY, BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT AND APPLYING RULE 8D, THE ASSESSING OFFICER APP ORTIONED THE EXPENSES AGAINST THE INCOME GENERATED FROM THE INVESTMENT ACTIVITY. THE LD. CIT(A), BY CONSIDERING VARIOUS DECISIONS AND SUBMISSIONS OF THE ASSESSEE, CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. FROM THE DECISION OF T HE HON'BLE BO MBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD V. DCIT (320 ITR 81), IT IS VERY CLEAR THAT THE APPLICATION OF PROVISIONS OF RULE 8D, WHICH HAS BEEN NOTIFIED WITH EFFECT FROM 24.03.2008, SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008 - 09 ONWAR DS. 8. THE ASSESSEE HAS RELIED ON THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF ACIT V. SUN INVESTMENTS P. LTD. 8 ITR (TRI) 33, WHEREIN IT WAS HELD THAT UNLESS THE ASSESSING OFFICER ESTABLISHES I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 10 THAT SPECIFIC EXPENDITURE HAS BEEN INCURRED B Y THE ASSESSEE FOR EARNING EXEMPT INCOME THERE CAN BE NO DISALLOWANCE UNDER SECTION 14A OF THE ACT, HAS NO APPLICATION TO THE FACTS OF THE PRESENT CASE BECAUSE IN THAT CASE THE ASSESSMENT YEAR RELATES TO 2005 - 06 AND THE ASSESSING OFFICER DISALLOWED 2% OF T HE DIVIDEND INCOME AS EXPENSES ATTRIBUTABLE FOR EARNING IT. 9. IN THE PRESENT CASE, THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2008 - 09 AND IN VIEW OF THE DECISION IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD V. DCIT(SUPRA), THE APPLICATION OF PROVISIONS O F RULE 8D, WHICH HAS BEEN NOTIFIED WITH EFFECT FROM 24.03.2008, SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008 - 09 ONWARDS. SINCE THE ASSESSEE HAS NOT MAINTAINED ANY SEPARATE SETS OF BOOKS FOR THE INVESTMENT ACTIVITY AND THE MANUFACTURING ACTIVITIES AND MOREOVER, ALL THE FUNDS ARE POOLED UP AND UTILIZED FOR VARIOUS ACTIVITIES FROM A COMMON KITTY. THEREFORE, THE ASSESSING OFFICER HAS SEGREGATED THE PROBABLE EXPENSES BY WAY OF FINANCIAL CHARGES AND OTHER OVERHEAD EXPENSES BETWEEN THE INVESTMENT ACTIVITIES A ND MANUFACTURING AND EXPORT ACTIVITIES. IN VIEW OF THE ABOVE, THE ASSESSING OFFICER HAS RIGHTLY APPLIED THE PROVISIONS OF RULE 8D BY INVOKING SECTION 14 OF THE ACT, WHICH WAS CONFIRMED BY THE LD. CIT(A). THEREFORE, WE FIND NO INFIRMITY IN THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND THUS, THE GROUND RAISED BY THE ASSESSEE IS DISMISSED. 10 . I N THE RETURN OF INCOME FILED BY THE ASSESSEE, THE ASSESSEE HAS NOT SHOWN ANY EXPENDITURE INCURRED FOR EARNING THE EXEMPT INCOME. THEREFORE, IN ACCORDANCE WITH THE P ROVISIONS OF SECTION 14A R.W. RULE 8D THE ASSESSING OFFICER MADE THE DISALLOWANCE OF EXPENDITURE FOR EARNING THE EXEMPT INCOME. EVEN DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE HAS NOT ACCEPTED ANY EXPENDITURE FOR EARNING THE EXEMPT INCOME. O NLY BEFORE THE LD. CIT(A), THE AR OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS AGREED FOR DISALLOWANCE OF 25% OF THE SALARY OF SR. VICE - PRESIDENT, FINANCE & VP FINANCE & SECRETARY AT .26,45,886/ - [ .15,37,990 + .11,07,896], WHICH WAS NOT ACCEPTED BY THE LD. CIT(A) SINCE THERE WAS NO I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 11 SUBSTANCE AS THE INVESTMENT OF THE ASSESSEE IS QUITE SUBSTANTIAL. THE LD. CIT(A) HAS PASSED A DETAILED ORDER, WHICH IS REPRODUCED HEREINABOVE. 11 . IN VIEW OF THE ABOVE, WE ARE UNABLE TO ACCEPT THAT ONLY THE EXPENDITU RE OF .26,45,886/ - WOULD HAVE INCURRED TO HANDLE THE INVESTMENT OF HUGE MAGNITUDE OF . 338.98 CRORES. UNDER THE ABOVE FACTS AND CIRCUMSTANCES, THE ASSESSING OFFICER HAS RIGHTLY APPLIED RULE 8D AND WORKED OUT THE EXPENDITURE RELATABLE TO EARNING OF EXEMPT INCOM E, WHICH WAS CONFIRMED BY THE LD. CIT(A) AND WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A). THUS, THE GROUND RAISED BY THE ASSESSEE STANDS DISMISSED. IN TOTALITY, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. I.T.A. NO. 1782/MDS/2012 1 2 . THE FIRST ISSUE RAISED IN THE APPEAL OF THE REVENUE IS WITH REGARD TO DELETION OF DISALLOWANCE OF .1,95,18,961/ - BY THE LD. CIT(A) BY HOLDING THAT NO INTEREST COULD BE DISALLOWED UNDER RULE 8D(2)(II). T HE ASSESSING OFFICER HA S CALCULATED THE DISALLOWANCE AT .1,95,18,961/ - UNDER CLAUSE (II) OF RULE 8D(2). WITH REGARD TO THE ABOVE COMPONENT, BEING THE EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, THE ASSESSING OFFICER HAS DETERMINED THE AMOUNT AT .1,95,18,961/ - . THE ASSESSING OFFICER HAS TAKEN INTO ACCOUNT THE INTEREST EXPENDITURE OF .9,26,30,13 4/ - FOR COMPUTING THE ABOVE DISALLOWANCE. I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 12 1 3 . BEFORE THE LD. CIT(A), THE AR OF THE ASSESSEE CONTENDED THAT NO BORROWED FUND WAS UTILIZED FOR MAKING INVESTMENT WHICH YIELDED EXEMPT INCOME. AFTER PERUS ING THE PROFIT AND LOSS ACCOUNT, BALANCE - SHEET AND OTH ER DETAILS SUBMITTED BY THE ASSESSEE, THE LD. CIT(A) HAS OBSERVED THAT T HERE IS NO DISPUTE REGARDING THE QUANTUM OF INVESTMENT MADE BY THE ASSESSEE TO THE EXTENT OF .338.96 CRORES AND RECEIPT OF EXEMPT AMOUNTING TO .11.70 CRORES. THE VALUE OF INVESTMENT WAS .344.74 CRORES AND .338.96 CRORES AS ON 31.3.2007 AND 31.3.2008 RESPECTIVELY. THE INVESTMENT AS ON 31.3.2008 WAS .338.96 CRORES. THE SALE PROCEEDS OF INVESTME NTS DURING THE YEAR WAS .964.52 CRORES, WHICH WAS HIGHER BY .5.78 CRORES THAN PURCHASE OF INVESTMENTS OF .958.74 CRORES. THE FREE RESERVE AND SURPLUS WERE .791.40 CRORES. SINCE THE MUMBAI BENCHES OF ITAT IN THE CASE OF HDFC LTD., V. DCIT (ITA NO . 4529, 3650, 3651, 4059, 991/MUM DATED 29.6.2011) HAS HELD THAT IF ASSESSEE'S OWN FUND AND NON - INTEREST BEARING FUNDS ARE MORE THAN THE INVESTMENT IN TAX - FREE SECURITIES, THEN THERE IS NO BASIS FOR DEEMING THAT THE ASSESSEE HAS USED THE BORROWED FUNDS FOR INVESTM ENT IN TAX - FREE SECURITIES. FURTHER, THE HON'BLE BOMBAY HIGH COURT IN CIT V. RELIANCE UTILITIES AND POWER LTD (213 ITR 340) HAS HELD THAT IF THERE BE INTEREST - FREE FUNDS AVAILABLE TO ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSE SSEE HAD RAISED A LOAN, IT CAN BE PRESUMED THAT INVESTMENTS WERE MADE FROM INTEREST FREE FUNDS AVAILABLE. HENCE, TAKING INTO ACCOUNT THE I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 13 TOTALITY OF FACTS AND THE PRECEDENTS, THE LD. CIT(A) HAS HELD THAT THE ASSESSEE HAD SUFFICIENT INTEREST - FREE FUNDS OF I TS OWN TO MAKE INVESTMENT IN TAX - FREE TERRITORY AND HENCE NO INTEREST CAN BE DISALLOWED UNDER RULE 8D(2)(II). HENCE, HE DELETED THE DISALLOWANCE OF INTEREST OF .1,95,18,961/ - MADE UNDER RULE 8D(2)(II). 1 3 . BEFORE US, T HE LD. DR HAS SUBMITTED THAT RULE 8D UNDERTAKES DISALLOWANCE ON A PROPORTIONATE BASIS IN THE RATIO OF THE AVERAGE VALUE OF INVESTMENTS AGAINST THE AVERAGE VALUE OF TOTAL ASSETS. IT WAS FURTHER SU BMITTED THAT SECTION 14A SUPERSEDES THE PRINCIPLE OF LAW THAT IN THE CASE OF A COMPOSITE BUSINESS EXPENDITURE INCURRED TOWARDS TAX FREE INCOME, THE SAME COULD NOT BE DISALLOWED AND INCORPORATES AN IMPLICIT THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAX ABLE AND NON - TAXABLE INCOME. THEREFORE, THE ORDER PASSED BY THE LD. CIT(A) SHOULD BE REVERSED. 1 5 . PER CONTRA, THE LD. COUNSEL FOR THE ASSESSEE STRONGLY SUPPORTED THE ORDER PASSED BY THE LD. CIT(A). 1 6 . WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE DEPARTMENT HAS NOT DISPUTE D OVER THE QUANTUM OF INVESTMENT MADE BY THE ASSESSEE TO THE EXTENT OF .338.96 CRORES AND RECEIPT OF EXEMPT INCOME AMOUNTING TO .11.70 CRORES. THE VALUE OF INVESTM ENT WAS .344.74 CRORES AND .338.96 CRORES AS ON I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 14 31.3.2007 AND 31.3.2008 RESPECTIVELY. THE INVESTMENT AS ON 31.3.2008 WAS RS.338.96 CRORES. THE SALE PROCEEDS OF INVESTMENTS DURING THE YEAR WAS .964.52 CRORES, WHICH WAS HIGHER BY .5.78 CRORES THAN PURCHA SE OF INVESTMENTS OF .958.74 CRORES. THE RE IS NO DISPUTE ON THE FREE RESERVE AND SURPLUS FUNDS AVAILABLE WITH THE ASSESSEE OF .791.40 CRORES. WHEN THE ASSESSEE GOT ITS OWN FUND AND NON - INTEREST BEARING FUNDS MORE THAN THE INVESTMENT IN TAX - FREE SECURITIE S, THEN THERE IS NO QUESTION OF DEEMING THAT THE ASSESSEE HAS USED THE BORROWED FUNDS FOR INVESTMENT IN TAX - FREE SECURITIES. BY FOLLOWING THE DECISION OF THE ITAT, MUMBAI IN THE CASE OF HDFC BANK LTD. V. DCIT (SUPRA), WHEREIN IT WAS HELD THAT IF ASSESSEE S OWN FUND AND NON - INTEREST BEARING FUNDS ARE MORE THAN THE INVESTMENT IN TAX - FREE SECURITIES, THEN THERE IS NO BASIS FOR DEEMING THAT THE ASSESSEE HAS USED THE BORROWED FUNDS FOR INVESTMENT IN TAX - FREE SECURITIES, THE LD. CIT(A) HAS HELD THAT THE ASSESSEE HAD SUFFICIENT INTEREST - FREE FUNDS OF ITS OWN TO MAKE INVESTMENT IN TAX - FREE TERRITORY AND HENCE NO INTEREST CAN BE DISALLOWED UNDER RULE 8D(2)(II). THE FINDING OF THE MUMBAI BENCHES OF THE TRIBUNAL IN THE CASE OF HDFC BANK LTD. V. DCIT (SUPRA) WAS DULY CO NFIRMED BY THE HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT V. HDFC BANK LTD. [2014] 366 ITR 505. THE LD. DR COULD NOT CONTROVERT THE ABOVE FINDINGS OF THE TRIBUNAL AS WELL AS THE DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT V. HDFC BANK L TD. UNDER THE ABOVE FACTS AND CIRCUMSTANCES, I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 15 WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A) AND THUS, THE GROUND RAISED BY THE REVENUE STANDS DISMISSED. 1 7 . THE NEXT GROUND RAISED IN THE APPEAL OF THE REVENUE IS WITH REGARD TO DELETION OF D ISALLOWANCE OF EXPENSES ON DIES AND MOULDS MADE TO THE TUNE OF .23,29,55,420/ - ONLY ON THE GROUND THAT THE DEPARTMENT HAS PREFERRED AN APPEAL AGAINST THE ORDER OF THE TRIBUNAL IN ASSESSEE S OWN CASE IN I.T.A. NO. 893/MDS/2007 DATED 22.05.2008 FOR THE ASSESSMENT YEAR 2003 - 04, WHICH WAS NOT ACCEPTED BY THE DEPARTMENT . 18 . THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAS CLAIMED .27,40,65,201/ - TOWARDS REVENUE EXPENDITURE INCURRED IN CONSUMPTION OF DIES, JIGS AND MOULDS. DIES AND MOULDS ARE ACTUALLY PART OF THE HEAVY PLANT AND MACHINERY WHICH ARE USED FOR MANUFA CTURING OF VARIOUS PARTS OF AUTOMOBILES COMPONENTS. HOWEVER, THE ASSESSING OFFICER HAS TREATED THIS EXPENDITURE AS CAPITAL IN NATURE AND ALLOWED DEPRECIATION @ 15% AND THE BALANCE AMOUNT OF .23,29,55,420/ - WAS DISALLOWED AND ADDED TO THE TOTAL INCOME OF T HE ASSESSEE. THE REASON FOR NOT ALLOWING THE CLAIM OF THE ASSESSEE WAS THAT SIMILAR CLAIM WAS NOT ACCEPTED BY THE DEPARTMENT IN ASSESSMENT YEAR 2003 - 04. THOUGH THE ITAT HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE, THE SAME HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND THE MATTER HAS NOT REACHED ITS FINALITY. I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 16 1 9 . BEFORE THE LD. CIT(A), THE AR OF THE ASSESSEE HAS SUBMITTED THAT THE ITAT 'C' BENCH IN ITA NO. 792/MDS/2007 FOR THE AY 2003 - 04 AND THE 'D' BENCH IN ITA NO. 491/MDS/2008 FOR THE AY 2004 - 05 IN AS SESSEE S OWN CASE HAS HELD THAT REPLACEMENT OF DIES AND MOULD WAS ONLY 'REVENUE EXPENDITURE' AFTER DISTINGUISHING THE FACTS OF THE ASSESSEE'S CASE FROM THAT OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. SARAVANA SPINNING MILLS PVT. LTD (293 ITR 201). THE APEX COURT HAS REVERSED THE DECISION OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT V. JANAKIRAM MILLS LTD WHICH HELD IT AS CAPITAL EXPENDITURE . THE AR OF THE ASSESSEE ALSO FURNISHED COPIES OF THE ITAT ORDER IN ASSESSEE'S OWN CASE FOR A.Y. 2000 - 01 WHEREIN SIMILAR DISALLOWANCE HAS BEEN DELETED. THE AR OF THE ASSESSEE HAS ALSO RELIED ON ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2007 - 08 IN ITA NO. 469/09 - 10/A - LLL DATED 21.02.2011 WHEREIN THE GROUND HAS BEEN ALLOWED. UNDER THE ABOVE FACTS AND CIRCU MSTANCES, THE LD. CIT(A) HAS HELD AS UNDER: 6.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSION OF THE ID. AR. I HAVE ALSO GONE THROUGH THE ORDERS OF THE HON'BLE TRIBUNAL IN APPELLANT'S OWN CASE FOR AYS. 2003 - 04 AND 2001 - 02 & 2005 - 0 6 WHEREIN THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT. IN THE RU L IN G FOR AY. 2000 - 01 AND 2005 - 06 IN ITA NO.697 & 657/MDS/2009 AND ITA NOS. 976 & 1017/MDS/2009 DATED 22.12.2010, THE HON'BLE TRIBUNAL HELD THAT EXPENDITURE ON REPLACEMENT OF DYES AND MOULDS WAS OF REVENUE NATURE AND ACCORDINGLY, IT REJECTED THE GROUND OF THE REVENUE. FOLLOWING THE DECISIONS OF THE HON'BLE ITAT, THE CIT(A) HAS ALSO ALLOWED THE APPEAL OF THE APPELLANT FOR AY. 2007 - 08 IN ITA NO.469/09 - 10/AIII DATED 21.02.2011. FOLLOWING THE REASONS GIVEN IN THE ABOVE ORDERS, THE GROUND IS ALLOWED. I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 17 20 . SINCE THE LD. DR COULD NOT FILE AND DECISION OF THE HIGHER COURTS HAVING MODIFIED OR REVERSED THE FINDINGS OF THE TRIBUNAL, WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A) AND ACCORDINGLY, THE GROUND RAISED BY THE REVENUE IS DISMISSED. 2 1. THE NEXT GROUND RELATES TO DISALLOWANCE OF PRODUCT LAUNCH EXPENDITURE OF .41,28,15,721/ - . THE ASSESSEE HAS LAUNCHED FOUR NEW VEHICLES I.E., STAR SPORT, APACHE RTR, FLAME AND STAR 110 AND HAS INCURRED AN EXPENDITURE OF .51,07,67,162/ - AS PRODUCT LAUNCHING EXPENSES. THE ABOVE EXPENSES ARE CHARGED TO REVENUE IN THE ACCOUNTS OVER A PERIOD OF 36 MONTHS. IF THE LAUNCH IS CARRIED OUT IN THE MONTH OF APRIL, THE EXPENDITURE WILL BE CHARGED TO REVENUE FOR THE ENTIRE 12 MONTHS OF THE YEAR AND FURTHER FOR SUBSEQUENT TWO YEARS. IF THE PRODUCT IS LAUNCHED IN SOME OTHER MONTH, THE EXPENDITURE IS CHARGED TO REVENUE EQUIVALENT TO THE REMAINING MONTHS AND BALANCE WILL BE CHARGED IN THE SUBSEQUENT THREE FINANCIAL YEARS. BUT FOR THE PURPOSE OF INCOME - TAX THE ENTIRE EXPENDITUR E IS CLAIMED IN T HE YEAR IN WHICH IT IS INCURRED. THE ASSESSING OFFICER HAS STATED THAT THE ABOVE EXPENSES ARE MAINLY INCURRED FOR ADVERTISEMENT AND BRAND BUILDING OF NEW PRODUCTS AND TO PROMOTE SALES IN TH E INDIAN MARKET. THE ASSESSING OFFICER HAS OBSERVE D THAT THE DIFFERENTIAL TREATMENT GI V EN BY THE ASSESSEE FOR BOOK PURPOSES AND FOR INCOME - TAX PURPOSES IS NOT ACCEPTABLE. THE PRODUCT LAUNCH EXPENSES ARE INCURRED MAINLY TOWARDS BRAND BUILDING AND PROMOTING THE SALE. THESE I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 18 EXPENSES ARE MAINLY TOWARDS ADVERT ISEMENT EXPENSES IN VARIOUS FORMS AND LAUNCHING RELATED EXPENSES. IN THE INITIAL YEAR, THE PRODUCT LAUNCH EXPENSE MAY BE HUGE BUT THERE MAY NOT BE CORRESPONDING REVENUE. HENCE, THE TREATMENT IS NOT IN LINE WITH THE PRINCIPLE OF MATCHING CONCEPT (REVENUE VS . CORRESPONDING EXPENSES). THEREFORE, THESE BRAND BUILDING EXPENSES ARE TO BE AMORTISED OVER THE ESTIMATED LIFE OF THE PRODUCT FURTHER, THESE EXPENSES ARE MAINLY IN THE FORM OF PRELIMINARY EXPENSES INCURRED TO PROMOTE SALE OF THE PRODUCT. HENCE, THEY FALL IN THE CATEGORY OF EXPENSES CONTEMPLATED U NDER SECTION 35D OF THE ACT . SINCE THE ASSESSEE HAS CHOSEN TO AMORTISE THE EXPENDITURE OVER A PERIOD OF THREE YEARS FOR THE BOOK PURPOSES, IT SHOULD HAVE CLAIMED THE EXPENSES ON THE SAME BASIS FOR INCOME - TAX PURPOS ES ALSO. THE REFORE THE ASSESSING OFFICER HAS ADOPTED THE BASIS AS CONSIDERED BY THE ASSESSEE FOR THE BOOK PURPOSES AND ALLOWED . 9,79,41,441/ - ONLY AND DISALLOWED THE REMAINING EXPENDITURE OF .41,28,15,721/ - AND ADDED IT TO THE TOTAL INCOME. 22 . THE ASSESSEE CARRIED THE MATTER IN APPEAL. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND FA CTS OF THE CASE, THE LD. CIT(A), BY PASSING A DETAILED ORDER, DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 23 . THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 19 2 4 . WITH REGARD TO CLAIM OF PRODUCT LAUNCH EXPENDITURE, AFTER CONSIDERING THE SUBM ISSIONS OF THE ASSESSEE AND ALSO CONSIDERING VARIOUS DECISIONS, THE LD. CIT(A) HAS OBSERVED THAT THERE IS NO DISPUTE REGARDING THE FACT THAT THE ASSESSEE HAD INCURRED EXPENDITURE OF .51,07,57,162/ - . HOWEVER, THE ASSESSING OFFICER RESTRICTED THE CLAIM TO .9,79,41,411/ - ONLY AS THAT AMOUNT WAS CHARGED TO THE PROFIT AND LOSS ACCOUNT AND DISALLOWED THE REMAINING EXPENSES OF .41,28,15,721/ - BY HOLDING THAT THE DIFFERENTIAL TREATMENT FOR BOOKS AND INCOME TAX PURPOSE IS NOT ACCEPTABLE. BY RELYING VARIOUS DECISIONS, THE LD. CIT(A) HAS HELD THAT THE EXPENDITURE ON PRODUCT LAUNCH, ADVERTISEMENT AND SALES PROMOTION IS ALLOWABLE AS REVENUE EXPENDITURE UNDER SECTION 37(1) OF THE ACT AND MOREOVER , AMORTIZATION OF THE IMPUGNED EXPENDITURE UNDER SECTION 35D IS ALSO NOT WARRANTED. THE ONLY CONTENTION RAISED BY THE LD. DR BEFORE THE TRIBUNAL IS THAT THE DEPARTMENT HAS NOT ACCEPTED THE DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T V. BRILLIANT TUTORIALS LTD. 292 ITR 399 RELIED ON BY THE LD. CIT(A) AND AGAINST THIS DECISION, THE DEPARTMENT HAS PREFERRED SLP BEFORE THE HON BLE SUPREME COURT. HOWEVER, THE LD. DR COULD NOT FILE ANY DECISION AGAINST THE DECISION OF THE HON BLE JURISDIC TIONAL HIGH COURT IN THE CASE OF CIT V. BRILLIANT TUTORIALS LTD. (SUPRA). UNTIL AND UNLESS THE DECISION IS REVERSED, THE DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT IS HAVING BINDING NATURE , THEREFORE, WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A) ON THIS ISSUE AND ACCORDINGLY, THE GROUND RAISED BY THE REVENUE IS DISMISSED. I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 20 2 5 . THE NEXT GROUND RAISED IN THE APPEAL OF THE REVENUE IS WITH REGARD TO DELETION OF DISALLOWANCE UNDER SECTION 40(A)(I) MADE TO THE TUNE OF .12.61 CRORES FOR NON - DEDUCTION OF TAX AT SOURCE ON THE FOREIGN REMITTANCES MADE FOR AGENCY COMMISSION . IN THE ASSESSMENT ORDER, T HE A SSESSING O FFICER HAS STATED THAT THE ASSESSEE HAS DEBITED THE ABOVE SUM TOWARDS SELLING AGENCY COMMISSION. AFTER FURNISHING ALL DETAILS, THE AS SESSEE HAS EXPLAINED BEFORE THE ASSESSING OFFICER THAT THE SERVICES WERE RENDERED BY THE AGENTS OUTSIDE INDIA AND THEREFORE T D S UNDER SECTION 195 OF THE ACT IS NOT APPLICABLE AS PER CB D T CI RCULAR NO .786/2000. HOWEVER, T HE ASSESSING OFFICER DID NOT ACCEPT T HE CONTENTION OF THE ASSESSEE BECAUSE THE CB D T VIDE ITS CIRCULAR NO. 7 DATED 22.10.2009 HAS WITHDRAWN BOTH CIRCULAR N O .23 OF 1969 AND 786 OF 2000. IN ABSENCE OF THE IMMUNITY FOR COMMISSION PAYMENTS ABROAD TO NON - RESIDENTS, EACH INDIVIDUAL PAYMENT IS TO BE DEALT WITH AS PER THE PROVISIONS OF SECTION 9(1) R.W.S.195 OF THE ACT. HE HELD THAT THE COMMISSION PAYMENT FITS INTO THE SCOPE OF PAYMENT ENUMERATED IN SEC 9( 1) OF THE ACT AND AS PER SEC TION 9( 1)(I) , THE COMMISSION PAYMENT SHALL BE DEE M E D TO ACCRUE OR ARIS E IN INDIA IF SUCH INCOME IS ACCRUING OR ARISING FROM ANY BUSINESS CONNECTION IN INDIA. IN THE CASE OF THE ASSESSEE , THE PAYMENTS WERE MADE FOR ASSESSEE'S BUSINESS PURPOSES , WHICH ARE CARRIED ON IN INDIA. HENCE, THE PAYMENT, THOUGH MADE TO NON - RESIDENTS AB ROAD, IS DEEMED TO HAVE BEEN ARISEN IN INDIA. HE FURTHER STATED THAT TAX IS REQUIRED TO BE DEDUCTED UNDER SECTION I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 21 195(1) OF THE ACT IF THE SUM PAID IS CHARGEABLE TO TAX. THE ASSESSEE SHOULD HAVE OBTAINED CERTIFICATE UNDER SECTION 195(2) OF THE ACT FROM THE D EPARTMENT IF IT FELT THAT THE SAID SUM IS NOT TAXABLE IN INDIA. THE ASSESSING OFFICER HAS ALSO RELIED ON THE DECISION IN THE CASE OF M/S . TRANSMISSION CORPORATION OF ANDHRA PRADESH REPORTED IN 239 ITR 589 (SC). THEREAFTER, HE APPLIED PROVISIONS OF SEC 40 (A)(I) OF THE ACT FOR NON - COMPLIANCE THE PROVISIONS OF SEC 195(1) OF THE ACT IN RESPECT OF COMMISSION PAID TO NON - RESIDENTS AND DISALLOWED THE ENTIRE SUM OF RS.12,60,58,838/ - . 2 6 . BEFORE THE LD. CIT(A), THE AR OF THE ASSESSEE HAS SUBMITTED THAT CB D T CIR CULAR NO. 786 DATED 07.02.2000 CLARIFIED THAT EXPORT AGENCY COMMISSION IS NOT TAXABLE IN INDIA AND HENCE NO TAX NEEDS TO BE DEDUCTED AT SOURCE AND MOREOVER, T HE CB D T CIRCULAR NO .7/2009 DATED 22.10.2009 W ITHDRAWING THE ABOVE CIRCULAR IS ONLY PROSPECTIVE AND NOT RETROSPECTIVE . HE ALSO RELIED ON THE DECISION IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR S 2005 - 06 AND 2007 - 08 AND PLEADED THAT NO TAX NEED TO BE DEDUCTED AT SOU RCE AND THE DISALLOWANCE MADE U/ S 40(A)(I) WAS DELETED. AFTER CONSIDERING THE SUBMISSIO NS OF THE ASSESSEE AND ALSO ORDERS OF THE LD. CIT(A) IN THE ASSESSMENT YEARS 2005 - 06 AND 2007 - 08, THE LD. CIT(A) ALLOWED THE GROUND RAISED BY THE ASSESSEE BY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEE S OWN CASE IN ITA NO.697, 757, 976 AND 1017/200 9 DATED 22.12.2010 DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 22 2 7 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. WITH REGARD TO THE ISSUE AS TO WHETHER THE TDS HAS TO BE DEDUCTED OR NOT WHEN THE COMMISSION PAYMENT MADE TO T HE OVERSEAS AGENTS, THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. FAIZAN SHOES PVT. LTD. [2014] 367 ITR 155, WHEREIN BY DISMISSING THE APPEAL OF THE REVENUE, THE HON B LE HIGH COURT HAS HELD AS UNDER: HELD, DISMISSING THE APPEAL, THAT ON A READING OF SECTION 9(1)(VII), COM MISSION PAID BY THE ASSESSEE TO THE NON - RESIDENT AGENTS WOULD NOT COME UNDER THE TERM 'FEES FOR TECHNICAL SERVICES'. FOR PROCURING ORDERS FOR LEATHE R BUSI NESS FROM OVERSEAS BUYERS, WHOLESALERS OR RETAILERS, AS THE CASE MAY BE, THE NON - RESIDENT AGENT WAS PAID 2.5 PER CENT COMMISSION ON FREE ON BOARD BASIS. THIS WAS A COMMISSION SIMPLICITER. WHAT WAS THE NATURE OF TECHNICAL SERVICE THAT THE NON - RESIDEN T AGENTS HAD PROVIDED ABROAD TO THE ASSESSEE WAS NOT CLEAR FROM THE ORDER OF THE ASSESSING OFFICER. THE OPENING OF LETTERS OF CREDIT FOR THE PURPOSE OF COMPLETING THE EXPORT OBLIGATION WAS AN INCIDENT OF EXPORT AND, THEREFORE, THE NON - RESIDENT AGENT WAS UN DER AN OBLIGATION TO RENDER SUCH SERVICES TO THE ASSESSEE, FOR WHICH COMMISSION WAS PAID. THE NON - RESIDENT AGENT DID NOT PROVIDE TECHNICAL SERVICES FOR THE PURPOSES OF RUNNING OF THE BUSINESS OF THE ASSESSEE IN INDIA. THEREFORE, THE COMMISSION PAID TO THE NON - RESIDENT AGENTS WOULD NOT FALL WITHIN THE DEFINITION OF 'TEES FOR TECHNICAL SERVICES' AND THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT SOURCE ON PAYMENT OF COMMISSION. 2 8 . RESPECTFULLY FOLLOWING THE ABOVE JUDGEMENT OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. FAIZAN SHOES PVT. LTD. (SUPRA), THE GROUND RAISED BY THE REVENUE IS DISMISSED. I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 23 2 9 . THE NEXT ISSUE RAISED IN THE APPEAL OF THE REVENUE PERTAINS TO S ET OFF OF THE LOSS OF 80IC UNITS AGAINST THE INCOME OF OTHER UNITS. THE ASSES SING OFFICER HAS OBSERVED THAT THE ASSESSEE HA S ARRIVED AT A LOSS OF .32,78,84,171/ - FROM HIMACHAL UNIT WHICH WAS SET OFF AGAINST THE INCOME OF OTHER NON 80 - IC UNITS LOCATED AT MYSORE AND HOSUR. PROFITS OF MYSORE AND HOSUR UNITS ARE TAXABLE , WHEREAS , PROFIT OF H.P. UNIT IS NOT TAXABLE. HE STATED THAT PROVISIONS OF SEC TION 80 - IA(5) OF THE ACT WILL APPLY TO THE UNITS E L IGIBLE FOR DEDUCTION UNDER SECTION 80 - IC OF THE ACT IN VIEW OF THE PROVISIONS CONTAINED IN SUB - SECTION (7) OF SEC 80 - IC OF THE ACT . HE HELD THAT THE ELIGIBLE INCOME OR LOSS DERIVED BY THE HIMACHAL UNIT IS NOT E LIGIBLE FOR SET OFF WITH ANY OTHER UNIT. THE INCOME OR LOSS OF THE UNIT IS TO BE TREATED AS IF IT IS THE ONLY SOURCE OF INCOME TO THE ASSESSEE WHICH MEANS THAT THE INCOME OR LOSS OF THIS UNIT CANNOT BE CLUBBED WITH THE INCOME OR LOSS FROM ANY OTHER SOURCE FROM THE SAME HEAD. THEREFORE, SET OFF OF LOSS IS NOT ALLOWABLE AS PER SEC TION 70(1) OF THE ACT. HE, ACCORDINGLY, DISALLOWED THE SET OFF OF LOSS OF THE HIMACHAL UNIT AND ALLOWED THE ABOVE LOSS OF .32,78,84,171/ - TO BE CARRIED FORWARD FOR SET OFF AGAINST T HE INCOME OF THE SAME UNIT IN THE SUBSEQUENT YEARS. 30 . BEFORE THE LD. CIT(A), THE AR OF THE ASSESSEE VEHEMENTLY CONTENDED AGAINST THE DENIAL OF SET OFF OF LOSS OF THE HIMACHAL UNIT AGAINST THE PROFITS OF OTHER UNITS , BY RELYING ON THE DECISION OF THE J URISDICTIONAL TRIBUNAL IN THE I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 24 CASE OF MOHAN BREWERIES AND DISTILLERIES LTD (311 ITR 346) AND ALSO VARIOUS OTHER DECISIONS, THE LD. COUNSEL FOR THE ASSESSEE HAS PLEADED THAT THE SET OFF OF LOSS OF THE 80IC UNITS SHOULD BE ALLOWED AGAINST THE INCOME OF OTHER UNITS. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND ALSO BY CONSIDERING VARIOUS DECISIONS, THE LD. CIT(A) DIRECTED THE ASSESSING OFFICER TO ALLOW CARRY FORWARD AND SET OFF THE LOSSES OF THE UNIT FROM THE PROFIT OF THE UNIT IN SUBSEQUENT YEAR(S). 31. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. THE LD. DR , BY RELYING ON THE DECISION CIT V. KEI INDUSTRIES LTD. 373 ITR 574 (DELHI), HAS SUBMITTED THAT THE FINDINGS OF THE LD. CIT(A) SHOULD BE REVERSED. 32. ON THE OTHER HAND, THE LD. C OUNSEL FOR THE ASSESSEE STRONGLY SUPPORTED THE ORDER PASSED BY THE LD. CIT(A). 3 3 . WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. WITH REGARD TO SET OFF OF LOSSES OF 80IC UNIT AGAINST THE PROF IT OF OTHER UNITS, WE FIND THAT THE HON BLE DELHI HIGH COURT IN THE CASE OF CIT V. KEI INDUSTRIES LTD. (SUPRA) HAS HELD AS UNDER: LOSS SUFFERED BY THE ASSESSEE IN A UNIT ENTITLED TO EXEMPTION UNDER SECTION 10B OF THE INCOME - TAX ACT, 1961 CANNOT BE SET OFF AGAINST INCOME FROM ANY OTHER UNIT NOT ELIGIBLE FOR SUCH EXEMPTION. I.T.A. NO S . 1 707 & 1 78 2 /M/ 12 25 34. RESPECTFULLY FOLLOWING THE RATIO LAID DOWN IN THE ABOV E DECISION OF THE HON BLE DELHI HIGH COURT, WE SET ASIDE THE ORDER PASSED BY THE LD. CIT(A) ON THIS ISSUE AND RESTORE THAT OF THE ASSESSING OFFICER. A CCORDINGLY, THE GROUND RAISED BY THE REVENUE IS ALLOWED . 3 5 . I N THE RESULT, THE APPEAL FILED BY THE ASS ESSEE IS DISMISSED AND THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED . ORDER PRONOUNCED ON THE 27 TH APRIL , 201 6 AT CHENNAI. SD/ - SD/ - ( CHANDRA POOJARI ) ACCOUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 27 . 0 4 .201 6 VM/ - / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6. / GF.