Eicher Goodearth Ltd., New Delhi V. DCIT, New Delhi

ITA 5089/DEL/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 82035 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 10-11-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 15-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Earning of tax free income; Notional interest; Revenue expenditure; Capital expenditure
• Section: 14A; 37(1); 10

Judgement Text

IN TH E INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: B : NEW DELHI BEFORE SHRI J.S. REDDY, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K. , JUDICIAL MEMBER ITA NO . 5453 / DEL / 201 1 ASSESSMENT YEAR: 200 6 - 200 7 DCIT, CIRCLE 11(1), VS. M/S E ICHER MOTORS LIMITED NEW DELHI. (ERSTWHILE EICHER GOODEARTH INVESTMENT LTD.) 3 RD FLOOR, SELECT CITY WALK, A - 3 DIST. CENTRE SAKET NEW DELHI ITA NO. 5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 M/S EICHER MOTORS LTD. (ERSTWHILE VS. ACIT, RANGE II EICHER GOODEARTH INVESTMENT LTD. ) NEW DELHI 3 RD FLOOR, SELECT CITY WALK A - 3, DIST. CENTRE, SAKET , NEW DELHI - 1100 17. (APPELLANT ) (RESPONDENT) APPELLANT BY : SMT. PARMINDER KAUR, SR. D.R. SHRI AJAY VOHARA, SR. ADVOCATE RESPONDENT BY: MS. GAURAV JAIN, ADVOCATE . ORDER PER SHRI GEORGE GEORGE K , J M : 1. THESE ARE CROSS APPEAL S DIRECTED AGAINST THE CIT ( A) S ORDER DATED 14.09.2011 . T HE RELEVANT ASSESSMEN T YEAR IS 2006 - 07. ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 2 2. WE SHALL FIRST TAKE UP REVENUE S APPEAL FOR ADJUDICATION . IN REVENUE S APPEAL , THE FOLLOWING EFFECTIVE GROUNDS ARE RAISED: - I) . ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS .4,48,01,000/ - MADE ON ACCOUNT OF DISALLOWANCE OF EXPENSES UNDER THE HEADS MANUFACTURING, TRADING AND OTHER EXPENSES. II) O N THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN RESTRICTING THE ADDITION OF RS.33,23,000/ - TO RS.1,26, 710/ - MADE U/S 14A READ WITH RULE 8D OF THE I.T. RULES, 1962. 3. THE FACTS IN RELATION TO THE FIRST GROUND ARE AS FOLLOWS: - THE ASSESSEE, A LIMITED COMPANY, WAS ENGAGED IN THE BUSINESS OF TRADING VARIOUS FURNISHING I TEMS THROUGH ITS RETAIL OU TLETS . IN THE TRADING DIVISION, THE ASSESSEE S TOTAL SALE WAS RS.1285.85 LA KH S , AGAINST WHICH , NET PROFIT DECLARED WAS RS.456.15 LA KH S. THE ASSESSING OFFICER , IN THE COURSE OF SCRUTINY ASSESSMENT , COMPARED THE PROFIT OF THE AFORESAID TRADING DIVISION WITH NET PROFIT ACHIEVED BY OTHER BUSINESS CARRIED ON BY THE ASSESSEE, NAMELY , MANUFACTURING AND TRADING OF MAPS AND GUIDES AND EXPORT BUSINESS. SINCE THERE WAS A LOW PROFIT IN TRADING BUSINESS , THE ASSESSING OFFICER RAISED VARIOUS QUERIES TO THE ASSESSEE TO JU STIFY ITS LOW PROFIT IN THE TRADING DIVISION. THE ASSESSEE FILED DETAILS COMPRISING OF PURCHASES MADE DURING THE YEAR, JUSTIFICATION OF LOW NET PROFIT ON ACCOUNT OF HEAVY INDIRECT EXPENSES AND DIVISION - WISE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT YEAR END ING. THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE REPLY OF THE ASSESSEE AND SOUGHT TO VERIFY THE PROFIT ABILITY OF TRADING DIVISION THROUGH FURNISHING OF PURCHASE AND SALE VOUCHERS OF EACH SINGLE ITEM TRADED IN THE ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 3 TRADING DIVISION . SINCE THE ASSESSEE COULD NOT FURNISH THE DETAILS AS REQUIRED BY THE ASSESSING OFF ICER, THE AO MADE AN AD - HOC DISALLOWANCE @ 10% OF THE TOTAL EXPENSES INCURRED BY THE ASSESSEE DURING THE YEAR INCLUDING EXPENSES INCURRED IN THE OTHER DIVISIONS, NAMELY, MANUFACTURING AND SALE OF MAP AND GUIDES AND THE EXPORT DIVISION. ACCORDINGLY, OUT OF THE TOTAL EXPENSES OF RS.4480.11 LA KH S THE AO DISALLOWED RS. 4.48 CRORES. 4. ON APPEAL, THE CIT ( A) DELETED THE DISALLOWANCE OF THE ASSESSING OFFICER. THE RELEVANT FINDINGS OF THE CIT ( A) READS AS UNDER: - 3.6 I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORDER , CONTENT I ONS RA I SED BY THE APPELLANT IN THE SUBMISSIONS AND THE DOCUMENTS AVAILABLE ON RECORD . IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS DRAWN ADVE R SE INFERENCES MAINLY ON THE GROUND OF NET LOSS (AFTER EXCLUDING OTHER I NCOME) SUFFERED BY THE TRADING DIVISION DURING THE YEAR AND ALSO DUE TO FAILURE ON , THE PART OF ASSESSEE IN NOT FURNISHING ITEM - WISE DETA I LS OF SALE - PURCHASE DURING THE COURSE OF ASSESSMENT PROCEEDINGS. IN ADDIT I ON TO A BOVE, THE ASSESSING OFFICER ALSO OBSERVED THAT THE ASSESSEE D I D NOT FILE DETA I LS OF EXPENSES. I FIND THE OBSERVATIONS OF THE ASSESSING OFFICER THAT NO DETA I LS OF EXPENSES WERE FILED TO BE INCORRECT INASMUCH AS THE ASSESSEE HAD F I LED DETAILS OF ' MAJOR EXPE NSES DURING THE COURSE OF ASSESSMENT PROCEED IN G S AND NO DEFECT I N SAME HAS BEEN POINTED OUT BY THE ASSESS I NG OF FI CE R IN THE ASSESSMENT ORDE R. THE MAIN REASO N FOR DISALLOWING EXPENSES W A S , TH U S, LOW PROFITABIL I TY AND NON - FURNISHING OF ITEM - W I SE SALE - PURCHAS E VOUC H ERS . IT IS SEEN THAT THE ASSESSEE DEALS IN, APPROXIMATELY 25,000 ITEMS AND FOR THAT REASON COULD NOT FURNISH THE DETAILS AS DESIRED BY THE ASSESS I NG OFF I CER DURING THE COURSE OF ASSESSMENT PROCEEDINGS WITHIN THE SHORT AVAI L ABLE TIME . HOWEVER, THE AS SESSEE HAS FILED THE AFORESAID DETA I LS ON SAMP L E BASIS DUR I NG THE APPEAL PROCEEDINGS, WHICH WERE EVEN SENT TO T H E ASSESSING OFFICER FOR COMME N TS / VER I F I CATION . SINCE THE MA I N REASON O F THE ASSESSING OFFICER FOR DISALLOW I NG THE EXPENSES I S ON THE AFORESAID G R OUND ONLY, IN THE I NTEREST OF JUSTICE I T IS NECESSARY TO ADMIT THE AFORESAID DETA IL S FILED BY THE ASSESSEE I N THE APPEAL PROCEED I NGS . IN VIEW THEREOF , THE AFORESAID EVIDENCES A R E ADMITTED AND ARE CONSIDERED HEREUNDER FOR ADJUDICATION OF THE GROUND OF APPE AL AS ABOVE . ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 4 3.7 I HAVE FOUND THAT THE ASSESSE E H AS EARNED GROSS P R OF I T O F 31 . 5 7% FROM SALE - PURCHASE OF GOODS IN TH E TR AD I NG D I V I S I ON DUR I NG THE R EL E VANT P REV I OUS YEAR . THIS SU BSTANT I A TES TH E A S SE R T I ON OF THE A P P ELL A N T THAT THE GOODS W ERE SO L D B Y THE ASS ESSE E A T PROFIT ONLY . THE L OSS HAS BEEN SU FFERE D BY THE ASSESSEE DUE TO I NCURRING O F VAR I OUS IND I RECT EXPENSES I N THE NATURE OF HEAVY RENT OF RETAIL OUTLETS OPENED AT POSH LOCALITIES AND A T PROMINENT LOCATIONS COMMANDING H I GHER RENT, OTHER INDIRECT EXPENSE S IN THE NATURE OF SALARIES, ADVERTISEMENTS, ROUTINE MANAGEMENT AND ADMINISTRATION EXPENSES AGGREGAT I NG TO 407.22 LACS. THE DETAILS OF THESE EXPENSES INCURRED DURING THE YEAR WERE ALSO SUBMITTED BY THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THE ASSESSING OFFICER HAS NOT RAISED ANY DOUBT ON SAME OR HAS NOT EVEN POINTED OUT A S IN G L E I NSTANCE OF UNVOUCHED/ INFLATED EXPENDITURE. THE RESULTS OF THE TRAD I NG DIVISION HAVE BEEN ARR I VED AT ON THE BASIS OF BOOKS OF ACCOUNT WH I CH ARE DULY AUDITED AND NO ADVERSE I NFERENCE IN MAINTENANCE THEREOF HAS BEEN POINTED OUT BY THE AUDITORS. THE ASSESSING OFFICER HAS ALSO NOT PO I NTED OUT ANY DEFECT IN MAINTENANCE OF BOOKS OF ACCOUNT NOR REJECTED THE SAME AND HAS FINALLY _ COMPLETED THE ASSESSMENT ON THE BASIS OF SUC H ACCOUNTS ITSE LF. UNDER THESE CIRCUMSTANCES, IN MY VIEW, THERE WAS NO BASIS FOR T H E A SSESSI NG OFFICER TO DOUBT THE PROF I T DECLARED BY THE TRADING D I V I S I ON A N D DI S ALLOW T H E EXPENSES I NCURRED DURING THE YEAR ON AD - HOC BAS IS . IN V IE W OF THE D I SCUSS I ON AS A BOVE , I AM I NC L INED TO ACCEPT TH E PR O F I T D ECLARED BY THE ASSESSEE IN THE TRAD I NG DIVISION AND THEREFORE THE AD - HOC DI S ALLOWANCE OF E X P E NSE S MAD E B Y TH E AS S ESSING OFF I CER I S D IR EC TE D T O B E DE L E T E D. T H E APPEL L ANT SUCC E ED S I N TH I S G R OUND . 5. THE REVENUE , BEING AGGRIEVED , IS IN APPEAL BEFORE US. THE LD. D.R. RELIED ON THE ORDER OF THE ASSESSING OFFICER. ON THE OTHER HAND, THE LD. A.R. REITERATED THE SUBMISSION MADE BEFORE THE INCOME TAX AUTHORITIES . 6. WE HAVE HEARD RIVAL SUBMISSION AND PERUSED THE MATERI AL ON RECORD. THE A.O. DISALLOWED ON AD - HOC BASIS 10% OF THE TOTAL EXPENDITURE FOR THE REASON THAT THE ASSESSEE COULD NOT FURNISH ITEM - WISE DETAILS OF PURCHASE AND SALE OF GOODS. THE CONTENTION OF THE ASSESSEE IS THAT IT IS DEALING IN VARIOUS ITEMS OF GOOD S ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 5 (MORE THAN 25000 ITEMS) AND DETAILS SOUGHT FOR BY THE ASSESSING OFFICER COULD NOT BE FURNISHED FULLY DUE TO PAUCITY OF TIME (DETAILS CALLED ON 26.12.2007 AND THE ASSESSMENT WAS COMPLETED ON 31.12.2007). HOWEVER, IN APPELLATE PROCEEDING S, ON QUERIES RAIS ED BY THE CIT(A), THE ASSESSEE HAD FURNISHED ITEM WISE DETAILS OF THE TRADING DIVISION ALONG WITH VOUCHERS FOR PURCHASE AND SALE THEREOF ON SAMPLE BASIS, VIDE LETTER DATED 30.03.2010. THE DETAILS FURNISHED BY THE ASSESSEE AS PER THE CIT ( A) DIRECTION WAS F ORWARDED TO THE AO FOR HIS COMMENTS. THE AO FURNISHED A REPORT VIDE HIS LETTER DATED 30.04.2010. IN THE REPORT, THE ASSESSING OFFICER DID NOT RAISE ANY OBJECTION TO THE ASSESSEE S CASE ON MERITS BUT TECHNICAL OBJECTIONS WERE RAISED BY PLACING RELIANCE ON R ULE 46A OF THE I.T. RULES, 1962. ADMITTEDLY, IN THIS CASE, THE BOOKS OF ACCOUNT WERE ACCEPTED BY THE ASSESSING OFFICER AND NO ADVERSE INFERENCE IN MAINTENANCE THEREOF WAS POINTED OUT. THE ENTIRE EXPENSES INCURRED DURING THE YEAR WAS DULY VOUCHED AND SUPPOR TED BY NECESSARY DOCUMENTS . THE ASSESSING OFFICER COULD NOT HAVE MADE ANY AD - HOC DISALLOWANCES WITHOUT POINTING OUT EVEN A SINGLE INSTANCE OF INFLATION OF EXPENDITURE. ANOTHER REASON , FOR MAKING THE ABOVE SAID DISALLOWANCE WAS ON ACCOUNT OF LOW PROFIT IN TRADING DIVISION. AS MENTIONED EARLIER, THE GROSS MARGIN WAS WORKED OUT ON THE BASIS OF BOOKS OF ACCOUNT WHICH WERE DULY AUDITED AN D ACCEPTED A S CORRECT AND COMPLETE. THE GROSS PROFIT WITH REGARD TO SALE AND PURCHASE OF GOODS IN THE TRADING DIVISION WAS AT RATE OF 31.57% AND THERE WERE VARIOUS IN DIRECT EXPENSES IN THE NATURE OF HIGH RENTAL FOR RETAIL OUTLETS IN PROMINENT LOCATION. THIS HA D PUSHED DOWN THE NET PROFIT RATE. ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 6 THE CIT ( A) HAS CATEGORICALLY FOUND GROSS PROFIT EARNED FROM THE TRADING DIVISION O F THE ASSESSEE IS REASONABLE AND HAS ALSO EXAMINED THE VOUCHERS OF PURCHASE AND SALE OF GOODS MADE BY THE ASSESSEE ON A SAMPLE BASIS AND H AS FOUND SAME IS TO BE CORRECT . THESE FINDINGS OF THE CIT (A) HAS NOT BEEN DISPELLED BY THE REVENUE PLACING A N Y MATERIA L / DOCUMENTS. T HEREFORE, WE SEE NO REASON TO INTERFERE WITH THE ORDER OF THE CIT (A). ACCORDINGLY, WE DISMISS THIS GROUND OF THE REVENUE. 7. AS REGARDS THE SECOND GROUND , NAMELY REDUCING THE ADDITION U/S 14A TO RS.1,26,710/ - FROM RS.33,23,000/ - . THE FACTS IN BRIEF ARE AS FOLLOWS. IN THE COMPUTATION STATEMENT FILED ALONG WITH THE RETURN OF INCOME , IT WAS NOTICED BY AO THAT ASSESSEE HAS EARNED DIVIDEND INCOME OF RS . 4,47,30,053/ - , WHICH HAS BEEN CLAIMED AS EXEMP T U/S 10 ( 3 3 ) OF TH E IT ACT . THE ASSESSEE WA S AS KED TO EXPLAIN WHY DISALLOWANCE U/S 14 A S H O ULD NOT BE MADE ON E XEMP T ED DI V IDEND INCOME . THE ASSESSE E H AS S UB M IT TE D TH A T N O PART OF THE INTEREST E X PENDITURE AND ADMINISTRATIVE E X P ENSES H AS B E EN INCURRED IN RELATION TO EARNING OF DI V IDEND INCOME. IT W AS SUB MITTE D TH A T IN V ESTM E NT IN S HARES ON W HICH DI V IDEND HAS BEEN RECEIVED , W ER E MADE IN EA RLIER Y EARS , OUT OF INTEREST FREE OWNED FUNDS AND NO PART OF THE BORRO W E D FUNDS WE RE USED IN EARLIER Y EARS FOR THE SAME. IT W AS ALSO S UBMITTED TH A T N O F R ESH INVESTME N T IN S H A RES HA VE BEEN MADE DURING THE PR EVI OUS Y EAR RELEVANT TO A Y 2006 - 07 AND INCREASE IN THE AMOUNT OF IN V ESTMENT IS PURSUANT TO SCHEME OF AMAL GAMATION OF SUBSIDIARY COMPAN Y OF THE ASSESSEE. IT WAS FURTHER SUBMITTED TH AT AMOUNT BORROWED DURING THE Y E A RS WERE U S ED FOR THE ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 7 PURPOSE OF BUSINES S OF THE A SSESSEE AS IS EVIDENT FROM THE CASH F LO W STATEMENT ATTACHED ALONG WITH TH E RE TURN . THE ASSESSEE HAS FURTHER SUBMITTED THAT DISALLOWANCE OF NOTIONAL INTEREST AND ADMINISTRATIVE EXPENSES U/S 14A MADE IN AY 2004 - 05 HA S ALREADY BEEN DELETED BY THE CIT(A) - XIII, NEW DELHI. THE ASSESSEE HAS RELIED ON VARIOUS CASE LAWS IN SUPPORT OF ITS CONTENTION AND STATED THAT NO DISALLOWANCE U/S 14A IS APPLICABLE IN THE CASE OF THE ASSESSEE. THE AO, HOWEVER, REJECTED THE CONTENTIONS OF THE ASSESSEE. THE ASSESSING OFFICER APPLIED THE PROVISION OF SECTION 14A OF THE ACT AND COMPUTED THE DISALLOWANCE OF RS.33.23 LA KHS OUT OF THE TOTAL INTEREST AND ADMINISTRATIVE EXPENSES INCURRED IN THE CURRENT ASSESSMENT YEAR. THE AMOUNT DISALLOWED WAS ARR IVED AT BY APPLYING THE FOLLOWING METHOD: I) INTEREST EXPENSE WAS APPORTIONED IN THE RATIO OF INVESTMENT ON WHICH EXEMPT DIVIDEND INCOME WAS RECEIVED DURING THE YEAR TO TOTAL FUNDS AVAILABLE FOR INVESTMENT; II) ADMINISTRATIVE EXPENSES WERE APPORTIONED IN T HE RATIO OF 0.5% PERCENT OF THE AVERAGE VALUE OF INVESTMENT WHICH HAD RESULTED IN EXEMPT DIVIDEND INCOME. 8. THE CALCULATION OF DISALLOWANCE MADE BY THE AO IS AS UNDER: - (A) INTEREST PAID (RS.75.17 LACS) RUPEES IN LA KHS DIVIDEND 447.30 AMOU NT INVESTED IN SHARES TO EARN SUCH DIVIDEND (A) 2,942.47 SHARE CAPITAL + RESERVE SURPLUS 7,925.48 LOANS (SECURED + UNSECURED) 2,833.54 TOTAL FUNDS AVAILABLE (B) 10,759.02 INTEREST PAID 75.17 INTEREST RELATED TO DIV IDEND INCOME (75.17X2,942.47/10,759.02) 20.56 ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 8 (B) ADMINISTRATIVE EXPENSES @ 0.5% OF AVERAGE VALUE OF INVESTMENT IN SHARES (2,534.21X0.5%) 12.67 ________ TOTAL DISALLOWANCE 33.23 LAKHS 9. AGGRIEVED BY THE DISALLOWANCE OF INTEREST AND ADMINISTRATIVE EXPENSES , THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A). THE CIT (A) REDUCE D THE DISALLOWANCE MADE U/S 14A TO RS.1,26,710/ - BEING 0.05% OF THE AVERAGE VALUE OF THE INVESTMENT IN SHARES. THE RELEVANT FINDING OF THE CIT (A) READS AS FOLLOWS: - 5.3. I HAVE CAREFULLY CONS I DERED THE ASSESSME N T ORDER AS WELL AS THE C ONTENTIONS RA I SED BY THE APPELLANT IN T HE WR I TTEN SUBMISSION . THE APPELLANT HAS CONTENDED THAT NO BORRO W ED FUNDS WAS USED FOR THE INVESTMENTS AND MOREOVER THE I NVESTMENTS WERE MADE IN EARLIER YEARS AND THE INCREASE IN INVESTMENT IN SHARES WAS BY VIRTUE OF SHARES OF CERTAIN COMPANIES WHICH VESTED W I TH THE APPELLANT CO ON AMALGAMATION. THE A .O HAS ALSO RIOT ESTABLISHED ANY NEXUS BETWEEN THE INVESTMENT AND BORROWED FUNDS . ON THE BASIS OF CASH FLOW STATEMENT, I T IS OBSERVED THAT THE APPELLANT HAS ENOUGH INTERES T FREE FUNDS IN THE FORM OF RESERVES AND SURPLUS. THE ADDITIONAL INVESTMENT DURING THE YEAR IS ONLY RS. 7.02 LACS. TH EREFORE AFTER CONSIDERATION OF THE ENTIRE FACTS OF THE CASE, AM UNABLE TO C ONFIRM THE ADDITION OF INTEREST APPORTIONED TO DIVIDEND INCOME BY THE A.O OF RS. 20,56,000/ - . AS REG ARDS THE APPORTIONMENT OF ADMINISTRATIVE EXPENSES, I T I S NOBODY' S CASE THAT NO EXPENSES HAVE BEEN INCURRED AND THE I NVESTMENTS WERE AUTOMATICALLY MADE WITHOUT ANYBODY TAKING A DECISION TO MAKE THE INVESTMENT. THE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE IN 234 CTR 1 WHILE RULING THAT RULE 8D WAS APPLICABLE FROM AY 08 - 09, HOWEVER, HELD THAT EVEN IN EARLIER YEARS THE EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME WOULD HAVE TO BE APPORTIONED AND DISALLOWED. THE APP ELLANT HAS ALSO SUBMITTED THAT THE ONLY EXPENDITURE WHICH MAY HAVE SOME RELATION WITH THE EXEMPT INCOME WOULD BE THE SALARY PAID TO DEPUTY GM FINANCE. HOWEVER, I AM UNABLE TO AGREE WITH THIS VIEW. THE DECISION FOR INVESTMENT EVEN FOR CONTROLLING STAKES WOU LD BE TAKEN BY THE MANAGEMENT. AFTER CONSIDERATION OF THE CASE IN ITS TOTALITY, IT WOULD BE FAIR AND REASONABLE TO RESTRICT THE DISALLOWANCE TO .05% OF THE AVERAGE VALUE OF ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 9 INVESTMENTS IN SHARES (2,534.21X0.05%) WHICH WORKS OUT TO RS.1,26,710/. THEREFORE, THE ADDITION TO THIS E XTENT IS CONFIRMED. 10 THE REVENUE , BEING AGGRIEVED , IS IN APPEAL BEFORE US. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ADMITTEDLY, THE DIVIDEND WHICH IS EXEMPT FROM TAXATION IS EARNED ON ACCOUNT OF IN VESTMENT MADE IN SHARE IN THE EARLIER YEARS . THE ADDITIONAL SHARES ALLOTTED TO THE ASSESSEE S COMPANY IN THE CURRENT ASSESSMENT YEAR WERE ON ACCOUNT OF AMALGAMATION OF SUBSIDIARY COMPANIES. THEREFORE , NO PORTION OF THE INTEREST EXPENSES INCURRED WAS IN REL ATION TO INVESTMENTS IN SHARES. AS RIGHTLY POINTED OUT BY THE CIT (A) , THE AO HAS NOT ESTABLISHED ANY NEXUS BETWEEN THE INVESTMENT AND THE BORROWED FUNDS . ON THE FACTS AND CIRCUMSTANCES OF TH E CASE AND PERUSAL OF THE CASH FLOW STATEMENT , THE CIT(A) HAS CAT EGORICALLY FOUND THAT THE ASSESSEE HA D ENOUGH INTEREST FREE FUNDS IN THE FORM OF RESERVES AND SURPLUS AND THERE WA S NO RELATION BETWEEN THE INTEREST EXPENDITURE AND THE DIVIDEND INCOME . THEREFORE, DISALLOWANCE OF INTEREST EXPENDITURE , BY INVOKING THE PROV ISION OF SECTION 14A , WA S UNCALLED FOR AND, HENCE , WE CONFIRM THE CIT(A) S ORDER ON THIS ASPECT. 11.2 AS REGARDS THE DISALLOWANCE OF ADMINISTRATIVE EXPENDITURE , THE CIT(A) , FOLLOWING THE JUDGMENT OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE REPORTED IN 234 CTR 1 , HELD THAT THE RULE 8D IS NOT RETRO SPECTIVE AND APPLICABLE FOR AND FROM A.Y. 2008 - 09. THE CIT (A) HAD, HOWEVER, HELD THAT SOME ADMINISTRATIVE EXPENDITURE IS RELATABLE FOR EARNING OF ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 10 DIVIDEND INCOME . THE CIT (A) CALCULATED THE DISALLOWANCE A T 0 .05% OF THE AVERAGE VALUE OF INVESTMENTS IN SHARES (2,534.21X.05%) WHICH WORKS OUT TO RS.1,26,710/ - . THIS ESTIMATION OF ADMINISTRATIVE EXPENSES RELATABLE TO THE EARNING OF DIVIDEND INCOME IS REASONABLE AND JUSTIF IABLE ON THE FACTS AND CIRC UMSTANCES OF THIS CASE . T HEREFORE, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT ( A) , WARRANTING OUR INTERFERENCE . IT IS ORDERED ACCORDINGLY. ASSESSEE S APPEAL - ITA NO. 5089/12 THE EFFECTIVE REVISED GROUNDS RAISED BY THE ASSESSEE RE AD AS FOLLOWS: I) THAT THE COMMISSIONER OF INCOME TAX (APPEALS) - V, NEW DELHI HAS GROSSLY ERRED ON FACTS AND IN LAW IN CONFIRMING THE DISALLOWANCE OF REPAIR AND MAINTENANCE EXPENSES RELATED TO BUILDING AND OFFICE EQUIPMENT TO THE TUNE OF RS. 19,94,640/ - ALLEG ING THE SAME (AS) CAPITAL EXPENDITURE. II) THAT THE COMMISSIONER OF INCOME TAX (APPEALS) - V, NEW DELHI HAS GROSSLY ERRED ON FACTS AND IN LAW IN CONFIRMING THE DISALLOWANCE U/S 14A TO THE TUNE OF RS. 1,26,710/ - BEING 0.05% OF THE AVERAGE VALUE OF INVESTMENTS IN SHARES. 12. WITH REFERENCE TO THE FIRST REVISED GROUND RAISED BY THE ASSESSEE, THE BRIEF FACTS ARE AS FOLLOWS: DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAD INCURRED AN EXPENDITURE OF RS. 85,65,757 / - UNDER THE HEAD REPAIRS AND MAI NTENANCE WHICH WAS CLAIMED AS REVENUE EXPENDITURE. HOWEVER, THE A O TREATED THE SAME AS CAPITAL IN NATURE ON THE GROUND THAT THE DETAILS OF SUCH EXPENSES COULD NOT BE VERIFIED. ON FURTHER APPEAL , THE CIT (A) CONFIRMED THE DISALLOWANCE OF FOLLOWING EXPENSES , AGGREGATING TO RS. 19,94,640 / - : ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 11 REPAIR & MAINTENANCE EXPENSES BUILDING PARTICULARS AMOUNT IN RS. AMOUNT OF PAINTING AND REPAIR WORK AT BALLABGARH 76,419 REPAIR OF METER ROOM 92,995 RENOVATION AT BALLABGARH 1,01,985 RENOVATION AT BALLABGARH 1,16 ,197 RENOVATION AT BALLABGARH 1,46,908 PAINTING WORK AT BALLABGARH 1,50,000 SUB - TOTAL 6,84,504 REPAIR & MAINTENANCE EXPENSES OFFICE EQUIPMENT PARTICULARS AMOUNT IN RS. ANNUAL MAINTENANCE CHARGES 1,10,200 UP - GRADATION CHARGES 1,14,535 FEE PAID FOR INSTALLATION OF LICENSES FOR ADDITIONAL USERS IN EXISTING SOFTWARE 89,482 FEE PAID FOR INSTALLATION OF LICENSES FOR ADDITIONAL USERS IN EXISTING SOFTWARE 96,777 FEE PAID FOR INSTALLATION OF LICENSES FOR ADDITIONAL USERS IN EXISTING SOFTWARE 1,45,600 BANDWIDTH USAGE CHARGES 2,43,542 LICENSE FEE FOR CITRIX PRESENTATION SOFTWARE 1,02,000 FEE PAID FOR INSTALLATION OF LICENSES FOR ADDITIONAL USERS IN EXISTING SOFTWARE 4,08,000 SUB - TOTAL 13,10,136 GROSS TOTAL 19,94,640 13. AS REGARDS THE EXPENSES OF RS. 6,84,504 / - INCURRED TOWARDS REPAIRS OF EXISTING FACTORY BUILDING AT BALLABGARH, THE CIT(A) SUSTAINED THE DISALLOWANCE ON THE GROUND THAT THE EXPENDITURE WAS INCURRED ON COMPLETE OVERHAULING OF THE EXISTING FACTORY INVOLVING OVERHAUL OF THE MAIN - HALL, M ETER ROOM, MAIN GATE, DEMOLITION OF FRONT WALL, ETC., WHICH CANNOT BE SAID TO BE A ROUTINE REPAIR AND MAINTENANCE EXPENDITURE, FOR BEING ALLOWED AS REVENUE ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 12 EXPENDITURE. IN RESPECT OF RS. 19,94,640 INCURRED TOWARDS UP - GRADATION OF EXISTING SOFT - WARES, ANN UAL MAINTENANCE CHARGES FOR SUCH SOFT - WARES OR PURCHASING ADDITIONAL LICENSES FOR ADDITIONAL USERS OF EXISTING SOFTWARE, AS PER DETAILS ABOVE, THE SA ME WAS DISALLOWED BY RELYING ON THE DECISION OF THE SPECIAL BENCH OF TRIBUNAL IN THE CASE OF AMWAY INDIA E NTERPRISES: 111 ITD 112 (SB) ON THE GROUND THAT THE EXPENDITURE INCURRED ON ACQUISITION OF LICENSES FOR SOFTWARE HAS BEEN HELD TO BE CAPITAL EXPENDITURE IN THE SAID DECISION. 14. THE CONTENTIONS/SUBMISSIONS OF THE ASSESSE BEFORE US, BRIEFLY, ARE AS UNDE R: THAT THE FACTORY BUILDING WAS CONSTRUCTED WAY BACK IN 1981 AND SINCE THE BUILDING WAS IN CONTINUOUS USE DURING THE COURSE OF BUSINESS ACTIVITY FOR OVER TWO DECADES, CERTAIN REPAIRS AND ALTERATIONS REQUIRED TO BE EFFECTED FOR SMOOTH FUNCTIONING OF THE EX ISTENCE BUSINESS OPERATION. ACCORDINGLY, A SUM OF 6.84 LAKHS WAS INCURRED ON THE BUILDING WHICH WAS QUITE NOMINAL AND THE SAME REQUIRED TO BE ALLOWED AS REVENUE EXPENSES; WITH REGARD TO THE EXPENSES ON SOFT - WARE LICENSES, IT WAS CONTENDED THAT IT WAS F OR UP - GRADATION OF EXISTING SOFT - WARE OR PURCHASING OF NEW LICENSES FOR ADDITIONAL USERS OF EXISTING SOFT - WARES 15. IN VIEW OF THE ABOVE, IT WAS SUBMITTED THAT THE EXPENSES CLAIMED BEING LEGITIMATE REVENUE EXPENSES, THE SAME IS REQUIRED TO BE ALLOWED AS D EDUCTION . ON THE OTHER HAND, THE LEARNED DR SUPPORTED THE STAND OF THE AUTHORITIES BELOW IN REJECTING THE ASSESSEE S CLAIM. 16. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. IT IS A FACT THAT T HE ASSESSEE HAD ACQUIRED THE LAND AT BALLABGARH IN THE YEAR 1979 ON WHICH FACTORY BUILDING WAS CONSTRUCTED AND , ACCORDINGLY, CAPITALIZED IN THE BOOKS ON THE YEAR ENDING 31.3.1981 FOR AN AGGREGATE AMOUNT OF RS. 85,99,124 / - . IT WAS ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 13 ALSO A FACT THAT S INCE THEN THE BUILDING WAS PUT TO USE IN THE COURSE OF BUS IN ESS CARRIED ON BY THE ASSESSEE AN D FOR THE CONTINUOUS USE O F THE BUILDING FOR A LONG PERIOD OF OVER 20 YEARS, THE FACTORY BUILDING HAD NATURALLY REQUIRED CERTAIN REPAIRS AND ALTERATIONS FOR UNINTERRUPTED AND SMOOTH OPERATIONS OF THE BUSINESS I N THE SAID BU ILDING. CONSIDERING THE LIFE OF THE BUILDING AND THE TOTAL AMOUNT OF EXPENDITURE OF RS. 6,84,504/ - INCURRED ON REPAIR OF THE AFORESAID FACTORY DURING THE YEAR WAS NOMINAL COMPARED TO THE TOTAL CONSTRUCTION COST OF BUILDING OF RS. 85,99,124 / - IN THE YEA R 1981. AS ARGUED BY THE LEARNED AR DURING THE COURSE OF HEARING , T HE AFORESAID EXPENSES WERE INCURRED TOWARDS REPAIR AND RENOVATION OF THE EXISTING FACTORY BUILDING WHICH DID NOT RESULT IN ACQUISITION OF ANY NEW CAPITAL ASSET NOR INCREASE IN PRODUCTION C APACITY OF THE FACTORY. THE AFORESAID REPAIR EXPENSES AT THE FACTORY BUILDING ONLY FACILITATED SMOOTH FUNCTIONING OF THE EXISTING OPERATIONS CARRIED OUT AT THE FACTORY. THEREFORE , WE ARE OF THE VIEW THAT THE SAID EXPENDITURE CANNOT BE SAID TO BE CAPITAL IN NATURE. UNDER THE PROVISIONS OF THE ACT, AN EXPENDITURE INCURR ED ON REPAIR OF BUILDING FOR THE PURPOSES OF BUSINESS, WHICH IS NOT CAPITAL IN NATURE IS ALLOWABLE DEDUCTION UNDER SECTION 30 OR 37(1) OF THE ACT. EXPENDITURE IN THE NATURE OF CURRENT REPAIRS OF BUILDING IS ALLOWABLE DEDUCTION UNDER SECTION 30 OF THE ACT. IF THE REPAIR EXPENDITURE, WHICH IS INCURRED FOR THE PURPOSES OF BUSINESS, DOES NOT FALL WITHIN THE NATURE OF EXPENSES SPECIFIED IN, INTER ALIA, SECTION 30, AND NOT BEING IN THE NATURE OF CAPI TAL EXPENDITURE, IS ALLOWABLE DEDUCTION UNDER SECTION 37(1) OF THE ACT. T HE HON BLE SUPREME COURT IN THE CASES OF (I) CIT V. SARVANA SPINNING MILLS P. LTD.: 293 ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 14 ITR 201 (SC) & (II) RAMARAJU SURGICAL COTTON MILLS: 294 ITR 328 (SC) HAS HELD THAT IF A REPAI R EXPENDITURE DOES NOT FALL WITHIN THE MEANING OF CURRENT REPAIR UNDER SECTION 30, BUT DOES NOT RESULT IN ACQUISITION OF ANY NEW CAPITAL ASSET, CAN BE ALLOWED AS REVENUE EXPENDITURE UNDER THE RESIDUARY PROVISION OF SECTION 37(1) OF THE ACT . EXPENDITURE IS REGARDED AS CAPITAL EXPENDITURE, IF THE SAME RESULTS IN (I) ACQUISITION OF CAPITAL ASSETS; OR (II) BENEFIT OF ENDURING NATURE IN THE CAPITAL FIELD OR ADDS TO THE PROFIT EARNING APPARATUS OF AN ASSESSEE. SINCE THE EXPENDITURE INCURRED BY THE PRESENT ASS ESSEE ON THE EXISTING FACTORY BUILDING DID NOT - (I) RESULT IN ACQUISITION OF ANY NEW CAPITAL ASSET, IN AS MUCH AS, THE BUILDING WAS OLD AND HAD ALREADY STOOD CAPITALIZED IN THE BOOKS FOR THE YEAR ENDING 31.3.1981 AND (II) EVEN ADD TO THE PROFIT EARNING CA PACITY OF THE FACTORY SINCE THE RENOVATION IN THE FACTORY HAD NO BEARING ON INCREASE IN THE PROFIT EARNING CAPACITY; SUCH RENOVATION ONLY FACILITATED SMOOTH FUNCTIONING OF THE EXISTING OPERATIONS OR PROFIT EARNING CAPACITY OF THE FACTORY BUILDING , WE ARE O F THE VIEW THAT THE EXPENDITURE BEING NOT CAPITAL IN NATURE AND HAVING BEEN INCURRED FOR THE PURPOSE OF BUSINESS, IS ALLOWABLE AS REVENUE EXPENDITURE UNDER SECTION 30 OR 37(1) OF THE ACT. FOR THE ABOVE PROPOSITION, WE RELY ON THE JUDGMENTS OF THE HON BLE SUPREME COURT IN THE CASES OF (I) ASSAM BENGAL CEMENT CO. LTD. V. CIT: 27 ITR 34 (SC); (II) EMPIRE JURE CO. LTD. V. CIT: 124 ITR 1 (SC); (III) CIT V. ASSOCIATED CEMENT COMPANIES LTD.: 172 ITR 257 (SC); AND (IV) ALEMBIC CHEMCIAL WORKS CO. LTD. V. CIT: 177 I TR 377 (SC ). ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 15 17. IN RESPECT OF E XPENDITURE ON SOFTWARE LICENSES , WE FIND THAT THE CIT (A) HA D HELD THAT SUCH EXPENDITURE TO BE CAPITAL EXPENDITURE ON THE GROUND THAT THE ASSESSEE HAD ACQUIRED CAPITAL ASSET, VIZ., SOFT - WARE BY RELYING ON THE DECISION OF T HE SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF AMWAY INDIA ENTERPRISES V. DCIT REPORTED IN 111 ITD 112 . IN THIS CONNECTION, WE WOULD LIKE TO POINT OUT THAT THE SAID FINDING OF THE SPECIAL BENCH HAS SINCE BEEN MODIFIED BY THE HON BLE JURISDICTIONAL HIG H COURT IN THE CASE OF CIT VS. ASAHI INDIA SAFETY GLASS LTD.: 346 ITR 329 (DEL) . IN THAT CASE , THE HON BLE COURT HAD HELD THAT THE EXPENDITURE INCURRED TOWARDS PURCHASE OF APPLICATION SOFTWARE, WHICH DOES NOT ADD TO THE PROFIT - EARNING APPARATUS OF AN ASSE SSEE, NOR VESTS OWNERSHIP RIGHTS TO AN ASSESSEE AND FURTHER CONSIDERING THAT THE SAME HAS TO BE UP - DATED FROM TIME TO TIME, CANNOT BE SAID TO BE AN EXPENDITURE INCURRED ON CAPITAL ACCOUNT. THUS, THE COURT HELD THAT EXPENDITURE ON PURCHASE OF SOFTWARE IS AL LOWABLE REVENUE EXPENDITURE. VARIOUS HIGH COURTS HAVE ALSO TAKEN A SIMILAR VIEW ON THE ISSUE . TO ILLUSTRATE FURTHER, IN THE FOLLOWING CASES, THE HON BLE COURTS HAVE HELD SIMILAR VIEW: (I) CIT V. AMWAY INDIA ENTERPRISES: 346 ITR 341 (DEL.) (II) CIT VS VARINDER AG RO CHEMICALS LTD.: 309 ITR 272 (P&H) (III) CIT VS G.E. CAPITAL SERVICES LTD.: 300 ITR 420 (DEL.) (IV) CIT VS KOTAK SECURITIES LTD. (NO. 1): 346 ITR 349 (BOM.) ( V) CIT VS RAYCHEM RPG LTD.: 346 ITR 138 (BOM.) 18. DERIVING STRENGTH FROM THE AFORESAID DECISION S , WE ARE OF THE VIEW THAT THE RATIO LAID DOWN BY THE SAID COURTS IS SQUARELY APPLICABLE TO THE FACTS OF ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 16 THE CASE UNDER CONSIDERATION. IN THE PRESENT CASE, THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING/ PUBLISHING AND SALE OF CITY MAPS, MANUFAC TURING AND TRADING OF FURNISHING ITEMS, ETC. THUS, THE ASSESSEE IS NOT ENGAGED IN THE BUSINESS OF MANUFACTURING SOFTWARE OR RENDERING SERVICES, THROUGH USE OF SOFT - WARES. THE SOFT - WARES, IF ANY, ACQUIRED BY THE ASSESSEE DURING THE RELEVANT YEAR OR UP - GRAD ATION OF EXISTING SOFTWARE ACQUIRED IN THE EARLIER YEAR, WERE MERELY APPLICATION OF SOFT - WARES WHICH ENABLED THE ASSESSEE TO EXECUTE TASKS IN THE FIELD OF ACCOUNTING, PURCHASES, INVENTORY MAINTENANCE, ETC. AND, THUS, FACILITATING SMOOTH CARRYING ON OF THE BUSINESS OPERATIONS. IN OTHER WORDS, SUCH APPLICATION OF SOFTWARE , IN OUR VIEW, DID NOT RESULT IN CREATION OF ANY NEW PROFIT - EARNING APPARATUS OR SOURCE OF INCOME FOR THE ASSESSEE. FURTHER, CONSIDERING THAT THE ASSESSEE ONLY ACQUIRED LICENSE TO USE THE SOF T - WARES, IT DID NOT AMOUNT TO HAVE ANY OWNERSHIP RIGHT IN SUCH SOFTWARE, AND THAT THE ASSESSEE CANNOT EVEN BE SAID TO HAVE ACQUIRED ANY CAPITAL ASSET TO CONSIDER SUCH LICENCE FEE PAID AS CAPITAL EXPENDITURE. 19. IN OVERALL CONSIDERATION OF THE FACTS OF T HE ISSUE, WE ARE OF THE VIEW THAT THE EXPENDITURE INCURRED ON UP - GRADATION OF EXISTING SOFT - WARES OR PAYMENT OF LICEN S E FEE FOR NEW SOFT - WARES FOR ADDITIONAL USERS CANNOT BE SAID TO BE CAPITAL IN NATURE . IN SUBSTANCE, THE CLAIM OF THE ASSESSE IS AN ALLOWA BLE REVENUE EXPENDITURE. IT IS ORDERED ACCORDINGLY. ITA NO. 5453&5089 /DEL /201 1 ASSESSMENT YEAR : 200 6 - 200 7 17 20. WITH REFERENCE TO GROUND NO. 2 NAMELY DISALLOWANCE BY CONFIRMING PROVISIONS U/S 14A WE FIND NO MERITS IN THE CONTENTIONS RAISED BY THE ASSESEE IN VIEW OF REASONING IN PARAGRAPH 11 AND 11.1 OF THIS ORDER. HENCE , REVISED GROUND NO. 2 RAISED IS DISMISSED. 2 1. IN THE RESULT , (I) THE REVENUE S APPEAL IS DISMISSED ; & (II) THE ASSESSEE S APPEAL IS PARTLY ALLOWED. TH E DECISION WAS PRONOUNCED IN THE OPEN COURT ON 21 ST NOVEMBER , 201 4 . SD/ - SD/ - ( J.S. REDDY ) (GEORGE GEORGE K.) A CCOUNTANT MEMBER J UDICIAL MEMBER DATED: NOVEMBER , 21 ST , 201 4 . AKS/ - COPY FORWARDED TO 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST . REGISTRAR, ITAT, NEW DELHI