DCIT, Chengalput V. Best & Crompton Engg. Projects Ltd., CHENNAI

ITA 647/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7690 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 18-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS
• Keywords: Depreciation; Earning of tax free income
• Section: 43B; 14A; 260A; 139

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI . . . , . . , BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER ./ ITA NO. 646/MDS/2016 / ASSESSMENT YEAR : 2011-12 THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1 (2), CHENNAI 34. V. M/S. BEST & CROMPTON ENGG. PROJECTS LTD., PGP HOUSE, 2 ND FLOOR, NO.57, STERLING ROAD, NUNGAMBAKKAM, CHENNAI 34. PAN : AABCB5248H ( /APPELLANT) ( !' /RESPONDENT) & ./ ITA NO. 647/MDS/2016 / ASSESSMENT YEAR : 2011-12 THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1 (2), CHENNAI 34. V. M/S. BEST & CROMPTON ENGG. LTD., NO.28, SIDCO INDUSTRIAL ESTATE, AMBATTUR, CHENNAI - 58. PAN : AAACB2753N ( /APPELLANT) ( !' /RESPONDENT) # /APPELLANT BY : SHRI SHIVA SRINIVAS, JCIT !' # /RESPONDENT BY : NONE # /DATE OF HEARING : 11.01.2017 # /DATE OF PRONOUNCEMENT : 28.02.2017 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER : BOTH THE APPEALS OF THE REVENUE ARE DIRECTED AGA INST THE RESPECTIVE ORDERS OF THE COMMISSIONER OF INCOME TAX (APPEALS) 2 I.T.A. NO.646/MDS/2016 & I.T.A. NO.647/MDS/2016 AND RELATES TO TWO INDEPENDENT ASSESSEES. WE HEARD BOTH THE APPEALS TOGETHER AND DISPOSING OF THE SAME BY THIS COMMON ORDER. 2. THERE WAS A DELAY OF 35 DAYS IN FILING THIS APPE AL BY THE REVENUE. THE REVENUE HAS FILED A PETITION FOR COND ONATION OF DELAY. WE HAVE HEARD LD. D.R. WE FIND THAT THERE WAS SUFFICIENT CAUSE FOR NOT FILING THE APPEAL BEFORE THE STIPULAT ED TIME. THEREFORE, WE CONDONE THE DELAY AND ADMIT THE APPEAL. 3. LET US FIRST TAKE ITA NO.646/MDS/2016 FOR CONSID ERATION: THE ONLY ISSUE ARISES FOR CONSIDERATION IS DEPRECIATION ON PRE- QUALIFICATION RIGHTS AND TECHNICAL KNOW-HOW. 4. NO-ONE APPEARED FOR THE ASSESSEE INSPITE OF SERV ICE OF NOTICE THROUGH THE ASSESSING OFFICER. THE LD. DEPA RTMENTAL REPRESENTATIVE HAS PLACED ON RECORD THE COPY OF THE ACKNOWLEDGEMENT AS PROOF OF SERVICE OF NOTICE ON TH E ASSESSEE. THEREFORE, WE HEARD THE LD. D.R., AND PROCEEDED TO DISPOSE THE APPEAL ON MERIT. 5. SHRI SHIVA SRINIVAS, THE LD. D.R., SUBMITTED THA T THE ASSESSEE RECEIVED TECHNICAL PROPRIETARY INFORMATIO N AND 3 I.T.A. NO.646/MDS/2016 & I.T.A. NO.647/MDS/2016 PREQUALIFICATION RIGHTS ON TRANSFER FROM ITS WHOL LY OWNED SUBSIDIARY COMPANY. THE ASSESSEE CLAIMED DEPRECIATION ON THE TECHNICAL PROPRIETARY INFORMATION AND PREQUALIFICATION RIGHTS UNDER SECTION 32(1)(II) OF THE INCOME TAX ACT, 1961 (IN SHORT TH E ACT). THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSES SEE ON THE GROUND THAT THE ASSETS TRANSFERRED ARE NOT ACQUIRED BY THE PARENT COMPANY AND IT WAS SELF-GENERATED INTANGIBLE ASSET. REFERRING TO THE ORDER OF THIS TRIBUNAL IN THE ASSESSEES OWN CA SE FOR THE ASSESSMENT YEAR 2002-03 TO 2005-06, THE ASSESSING O FFICER FOUND THAT THE DEPARTMENT HAS ALREADY FILED AN APPEAL BEF ORE THE HIGH COURT UNDER SECTION 260A OF THE ACT. THEREFORE, IN ORDER TO KEEP THE MATTER ALIVE, THE REVENUE HAS FILED THE APPEAL BEFORE THIS TRIBUNAL. 6. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. D. R., AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASS ESSEE CLAIMED DEPRECIATION ON THE TECHNICAL PROPRIETARY INFORMATI ON AND PREQUALIFICATION RIGHTS WHICH WAS SAID TO BE TRANSF ERRED BY THE PARENT COMPANY. THIS ISSUE WAS EXAMINED BY THE TRIBUNAL I N THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2002-0 3 TO 2005-06 IN ITA NOS. 1675 TO 1678/MDS/2008 DATED 20.04.2011. THIS TRIBUNAL APPARENTLY PLACED ITS RELIANCE ON THE JUDG MENT OF THE 4 I.T.A. NO.646/MDS/2016 & I.T.A. NO.647/MDS/2016 SUPREME COURT IN TECHNO STOCKS AND SHARES V CIT 327 ITR 323 AND FOUND THAT THE ASSESSEE IS ELIGIBLE FOR DEPRECI ATION. THE CIT (APPEALS) BY PLACING RELIANCE ON THE ORDER OF THIS TRIBUNAL ALLOWED THE CLAIM OF THE ASSESSEE. NOW, THE REVENUE CLAIMS THAT AN APPEAL WAS ALREADY FILED BEFORE THE HIGH COURT AGAINST THE ORDER OF THIS TRIBUNAL AND IT IS PENDING. THIS TRIBUNAL IS OF TH E CONSIDERED OPINION MERE PENDENCY OF AN APPEAL BEFORE THE HIGH COURT CANNOT BE A REASON FOR TAKING A DIFFERENT VIEW. IT IS NOT THE CASE OF THE REVENUE THAT THE ORDER OF THIS TRIBUNAL WAS STAYED BY THE HIGH COURT. IN THOSE CIRCUMSTANCES, THIS TRIBUNAL IS O F THE CONSIDERED OPINION THE CIT (APPEALS) HAS RIGHTLY PLACED HIS RE LIANCE ON THE ORDER OF THIS TRIBUNAL AND ALLOWED THE CLAIM OF DEP RECIATION. ACCORDINGLY, THIS TRIBUNAL DO NOT FIND ANY REASON T O INTERFERE WITH THE ORDER OF THE LOWER AUTHORITY AND THE SAME IS CONFIR MED. 7. IN THE RESULT THE APPEAL OF THE REVENUE STANDS D ISMISSED. 8. NOW COMING TO ITA NO.647/MDS/2017, THE FIRST GRO UND OF APPEAL IS DISALLOWANCE OF EMPLOYEES CONTRIBUTION. 9. SHRI SHIVA SRINIVAS, THE LD. D.R., SUBMITTED THA T THE ASSESSEE PAID THE EMPLOYEES CONTRIBUTION TO PROVID ENT FUND BEFORE 5 I.T.A. NO.646/MDS/2016 & I.T.A. NO.647/MDS/2016 THE DUE DATE FOR FILING THE RETURN OF INCOME UNDER SECTION 139(1) OF THE ACT, HOWEVER THE PAYMENT WAS BEYOND THE DUE DAT E PRESCRIBED BY THE PF ACT. THEREFORE, THE ASSESSING OFFICER D ISALLOWED THE CLAIM OF THE ASSESSEE. THE CIT (APPEALS) BY PLACIN G HIS RELIANCE ON THE JUDGMENT OF MADRAS HIGH COURT IN CIT V NEXUS CO MPUTER (P) LTD (2009) 313 ITR 144 (MAD) FOUND THAT THE PF CONT RIBUTION OF THE EMPLOYEES WAS PAID BEFORE THE DUE DATE FOR FILING T HE RETURN OF INCOME UNDER SECTION 139 (1) OF THE ACT. THEREFORE , HE ALLOWED THE CLAIM OF THE ASSESSEE. IN FACT, THE CIT (APPEALS) DIRECTED THE ASSESSING OFFICER TO VERIFY THE EXACT DATE OF PAYME NT OF EMPLOYEES CONTRIBUTION AND IF IT IS PAID BEFORE THE DUE DATE FOR FILING THE RETURN OF INCOME, HE DIRECTED THE ASSESSING OFFICER TO ALL OW THE SAME. 10. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. D .R., AND PERUSED THE MATERIAL AVAILABLE ON RECORD. BOTH TH E EMPLOYEES AND EMPLOYER CONTRIBUTION HAS TO BE ALLOWED ON PAYMENT BEFORE THE DUE DATE FOR FILING THE RETURN OF INCOME IN VIEW OF SEC TION 43B OF THE ACT. IN THIS CASE, THE ASSESSEE CLAIMS THAT THE EMPLOYEE S CONTRIBUTION WAS PAID TO THE ACCOUNT OF THE GOVERNMENT BEFORE TH E DUE DATE FOR FILING THE RETURN OF INCOME UNDER SECTION 139(1) OF THE ACT. HOWEVER, THE ASSESSING OFFICER HAS NO OCCASION TO E XEMPT THE ACTUAL PAYMENT SAID TO BE MADE BY THE ASSESSEE. TH EREFORE, THE 6 I.T.A. NO.646/MDS/2016 & I.T.A. NO.647/MDS/2016 CIT (APPEALS) HAS DIRECTED THE ASSESSING OFFICER TO VERIFY THE EXACT DATE OF PAYMENT AND ALLOW THE CLAIM OF THE ASSESSEE PROVIDED THE SAME WAS PAID WITHIN THE DUE DATE PROVIDED UNDER SE CTION 139(1) OF THE ACT. THIS TRIBUNAL IS OF THE CONSIDERED OPINIO N, IN VIEW OF THE JUDGMENT OF MADRAS HIGH COURT IN NEXUS COMPUTER (P) LTD SUPRA , THE PAYMENT MADE BEFORE THE DUE DATE OF FILING OF R ETURN OF INCOME UNDER SECTION 139(1) OF THE ACT HAS TO BE ALLOWED. ACCORDINGLY THE ASSESSING OFFICER NEEDS TO VERIFY THE EXACT DATE OF PAYMENT OF EMPLOYEES CONTRIBUTION TO THE PF ACCOUNT AND IF IT IS PAID BEFORE THE DUE DATE FOR FILING OF RETURN OF INCOME, THE SAME H AS TO BE ALLOWED AS FOUND BY THE CIT(APPEALS). THEREFORE THIS TRIBU NAL DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUTHORITY. ACCORDINGLY THE SAME IS CONFIRMED. 11. THE NEXT GROUND OF APPEAL IS WITH REGARD TO DIS ALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 14A REA D WITH RULE 8D OF THE ACT. 12. THE LD. D.R., SUBMITTED THAT THE ASSESSING OFF ICER DISALLOWED 1,03,44,540/- UNDER SECTION 14A READ WITH RULE 8D O F THE ACT. THE LD. D.R. FURTHER SUBMITTED THAT THE A SSESSEE BORROWED FUNDS FOR THE BUSINESS AND ALSO MADE INVESTMENT TO THE EXTENT OF 7 I.T.A. NO.646/MDS/2016 & I.T.A. NO.647/MDS/2016 119,38,10,000/- DURING THE YEAR UNDER CONSIDERATION . THE INCOME FROM THE ABOVE INVESTMENT TO THE EXTENT 18,19,381/- IS EXEMPTED FROM TAXATION. THEREFORE, THE ASSESSING OFFICER BY PLACING RELIANCE ON THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S, COMPUTED THE DISALLOWANCE. HOWEVER, THE CIT (APPEALS) ALLOW ED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT NO EXEMPT INCOME WA S RECEIVED DURING THE RELEVANT ASSESSMENT YEAR. 13. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. D .R., AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE PARLI AMENT IN THEIR WISDOM THOUGHT IT FIT TO DISALLOW THE EXPENDITURE R ELATING TO INCOME WHICH IS OTHERWISE NOT TAXABLE UNDER THE INCOME TAX ACT. BEFORE INTRODUCTION OF RULE 8D AND 14A OF THE ACT, THE APE X COURT FOUND THAT WHEN THERE WAS A COMPOSITE BUSINESS AN AGRICUL TURAL ACTIVITY, EVEN THOUGH PART OF THE EXPENDITURE WAS RELATABLE T O EARNING OF INCOME WHICH IS NOT TAXABLE UNDER THE PROVISIONS OF INCOME TAX ACT, THE ENTIRE EXPENDITURE HAS TO BE ALLOWED AS DEDUCTI ON. TO OVERCOME THIS JUDGMENT OF THE APEX COURT PROBABLY THE PARLIA MENT THOUGHT IT FIT TO INTRODUCE THE PROVISIONS OF SECTION 14A OF T HE ACT. SECTION 14A OF THE ACT, PROVIDES FOR DISALLOWANCE OF EXPEND ITURE RELATABLE TO EARNING OF EXEMPTED INCOME. RULE 8D (2) OF THE ACT , PROVIDES FOR METHODOLOGY FOR COMPUTATION OF DISALLOWANCE FOR EAR NING THE 8 I.T.A. NO.646/MDS/2016 & I.T.A. NO.647/MDS/2016 EXEMPTED INCOME. IN FACT, THE CONSTITUTIONAL VALID ITY OF RULE 8D AND SECTION 14A OF THE ACT WAS CHALLENGED BEFORE THE DE LHI HIGH COURT AND THE DELHI HIGH COURT UPHOLD THE CONSTITUTIONAL VALIDITY OF RULE 8D AND SECTION 14A OF THE ACT. THEREFORE, IT IS MA NDATORY FOR THE ASSESSING OFFICER TO COMPUTE THE DISALLOWANCE AS PE R THE METHOD PRESCRIBED UNDER RULE 8D OF THE INCOME TAX RULES. 14. LET US NOW EXAMINE RULE 8D (2) OF THE ACT. RUL E 8D (2) (I) OF THE ACT PROVIDES FOR DISALLOWANCE OF DIRECT EXPENDI TURE RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . ADMITTEDLY, THE ASSESSEE DID NOT INCUR ANY DIRECT EXPENDITURE. THEREFORE, THE ASSESSING OFFICER HAS NOT TAKEN ANY AMOUNT FOR DISA LLOWANCE UNDER RULE 8D(2)(I) OF THE ACT. 15. NOW COMING TO RULE 8D(2)(II) OF THE ACT, THE AS SESSEE ADMITTEDLY BORROWED LOAN AND PAID INTEREST. THE PA YMENT OF INTEREST DOES NOT DIRECTLY ATTRIBUTABLE TO ANY INCOME OR REC EIPT. IN SUCH A SITUATION RULE 8D(2)(II) OF THE ACT PROVIDES FOR A COMPUTATION OF DISALLOWANCE. THE ASSESSING OFFICER COMPUTED THE E XPENDITURE UNDER RULE 8D(2)(II) OF THE ACT AT 81,55,000/-. 9 I.T.A. NO.646/MDS/2016 & I.T.A. NO.647/MDS/2016 16. NOW, COMING TO RULE 8D(2)(III) OF THE ACT, THE ASSESSING OFFICER HAS TAKEN AN AMOUNT EQUAL TO 0.5% OF THE AV ERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT AND SHAL L NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHE ET OF THE ASSESSEE AT 66,80,022/-. AGGREGATE OF ALL THE THREE LIMB OF RU LE 8D(2) WAS COMPUTED AT 1,03,44,540/-. FROM A BARE READING OF RULE 8D (2) OF THE RULES, IT IS OBVIOUS THAT GENERA TION OF INCOME IS AN ESSENTIAL REQUIREMENT UNDER 8D(2)(III) OF THE RU LES, EVEN THOUGH UNDER OTHER TWO LIMBS NAMELY 8D(2)(I) AND 8D(2)(II) OF THE ACT GENERATION OF INCOME IS IRRELEVANT. WHAT IS TO BE TAKEN IN TO CONSIDERATION IS THE EXPENDITURE DIRECTLY INCURRED BY THE ASSESSEE AND ALSO THE EXPENDITURE BY WAY OF INTEREST WHICH D OES NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. 17. IN VIEW OF THE ABOVE, THE CIT (APPEALS) IS NOT JUSTIFIED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER , MERELY ON THE GROUND THAT THERE WAS NO EXEMPT INCOME. ACCORDINGL Y, THE ORDER OF THE CIT (APPEALS) IS SET ASIDE AND THAT OF THE ASSE SSING OFFICER IS RESTORED. 10 I.T.A. NO.646/MDS/2016 & I.T.A. NO.647/MDS/2016 18. WITH THE ABOVE OBSERVATION, THE APPEAL OF THE R EVENUE IS PARTLY ALLOWED. 19. TO SUM-UP, ITA NO.646/MDS/2016 OF THE REVENUE I S DISMISSED, HOWEVER ITA NO.647/MDS/2016 IS PARTLY ALLOWED. ORDER PRONOUNCED ON 28 TH FEBRUARY, 2017 AT CHENNAI. SD/- SD/- ( . . ) ( . . . ) (D.S. SUNDER SINGH) (N.R.S. GANESAN) /ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, /DATED, THE 28 TH FEBRUARY, 2017. JR. # ! $ % $ /COPY TO: 1. /APPELLANT 2. !' /RESPONDENT 3. &' ( )/CIT(A)-1, CHENNAI 4. &' /CIT 5. ! $ /DR 6. () /GF.