DCIT 6(2)(1), MUMBAI V. CEAT LTD, MUMBAI

ITA 679/MUM/2017

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 0306 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 30-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AWUNGSHI GIMSON
• Assessee Lawyers: VIJAY MEHTA A R SHRI P D VIRA
• Keywords: Depreciation; Earning of tax free income; Capital receipt; Rule 8D; Set aside
• Section: 143(3); 14A; 115JB; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C, MUMBAI BEFORE SHRI RAJESH KUMAR, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER ITA NO.679/M/2017 ASSESSMENT YEAR: 2011-12 DCIT 6(2)(1), ROOM NO.563, AAYAKAR BHAVAN, M.K. ROAD, CHURCHGATE, MUMBAI - 400020 VS. M/S. CEAT LTD., RPG HOUSE, 463, DR. ANNIE BESANT RD., WORLI, MUMBAI 400 030 PAN: AAACC 1645G (APPELLANT) (R ESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI VIJAY MEHTA, A.R. SHRI P.D. VIRA, A.R. REVENUE BY : SHRI AWUNGSHI GIMSON, D.R. DATE OF HEARING : 26.02.2019 DATE OF PRONOUNCEMENT : 13.03.2019 O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN PREFERRED BY THE REVEN UE AGAINST THE ORDER DATED 01.11.2016 OF THE COMMISSIO NER OF INCOME TAX (APPEALS) [HEREINAFTER REFERRED TO AS TH E CIT(A)] RELEVANT TO ASSESSMENT YEAR 2011-12. 2. THE VARIOUS GROUNDS RAISED BY THE REVENUE ARE AS UNDER:- 'ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING ADDITION OF RS. 21,31,93,834/- MADE ON ACC OUNT OF RECEIPT OF SALE PROCEEDS OF THE PRODUCTION FROM THE TRIAL RUN OF THE PLANT A T HALOL, GUJRAT AND IGNORING THE FACT THE SAID RECEIPT WAS REVENUE IN NATURE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS. 4,16,40,140/- U/S 1 4A R.W. RULE 8D OF THE ACT, ON ACCOUNT OF EXEMPT INCOME BEING DIVIDEND INCOME UNDE R NORMAL PROVISIONS AS WELL AS U/S 115JB OF THE ACT. ITA NO.679/M/2017 M/S. CEAT LTD. 2 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF RS. 7,80,54,973/- O N ACCOUNT OF DEPRECIATION CLAIMED ON TRADE MARK IGNORING THE FACT THAT AS ON 31.03.2011, THE ASSESSEE DID NOT OWN GLOBAL RIGHTS FOR TRADE MARK AS THE SAME WAS SH ARED BY C. SPA ITALY AND THE SAID TRADE MARK WAS BEING SIMULTANEOUSLY USED BY TH E ITALIAN COMPANY TILL 31.12.2012. 4. THE APPELLANT PRAYS THAT THE ORDER OF THE CI T (APPEALS) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE AO BE RESTORED. 5. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTE R ANY GROUND OR TO SUBMIT ADDITIONAL NEW GROUND, WHICH MAY BE NECESSARY. 3. THE ISSUE IN THE FIRST GROUND OF APPEAL IS AGAIN ST THE DELETION OF RS. 21,31,93,834/- BY LD. CIT(A) AS MA DE BY THE AO TOWARDS SALES PROCEEDS OF PRODUCTS MANUFACTURED DUR ING TRIAL RUN. 4. THE FACTS IN BRIEF ARE THAT THE ASSESSEE, WHO IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF AUTOMOTIVE TYRES, FILED THE RETURN OF INCOME DURING THE YEAR ON 28.11.2011 AT A LOSS OF RS.38,63,23,659/-. THE CASE WAS SELECTED UNDER CASS AND STATUTORY NOTICES WERE ISSUED AND DULY SERVED UPON THE ASSESSEE. THE AO OBSERVED THAT THE ASSESSEE HAS RE DUCED THE AMOUNT OF SALES PROCEEDS OF PRODUCTS DURING TRIAL RUN AT HALOL PLANT, GUJARAT OF RS.21,31,93,834/- FROM FIXED ASS ETS INSTEAD OF CREDITING TO THE PROFIT AND LOSS ACCOUNT. ACCORDIN G TO THE AO, THE SAID RECEIPT WAS REVENUE RECEIPT AND SHOULD HAV E BEEN CREDITED TO THE PROFIT AND LOSS ACCOUNT. FINALLY, T HE AO ADDED THE SAME TO THE INCOME OF THE ASSESSEE IN THE ASSESSMEN T FRAMED U/S 143(3) DATED 30.3.2015. 5. IN THE APPELLATE PROCEEDINGS, THE LD. CIT(A) ALL OWED THE APPEAL OF THE ASSESSEE AFTER CONSIDERING THE REPLIE S AND CONTENTIONS OF THE ASSESSEE BY OBSERVING AND HOLDIN G AS UNDER: ITA NO.679/M/2017 M/S. CEAT LTD. 3 7.15 I HAVE CAREFULLY PERUSED THE ASSESSMENT ORDER ON THE TWO ISSUES CAREFULLY AND I HAVE ALSO PERUSED THE DETAILED SUBMISSIONS AN D THE RELIANCE PLACED ON THE CASE LAWS BY THE APPELLANT. THE APPELLANT IS A PUBL IC LIMITED COMPANY/ ENGAGED IN THE BUSINESS OF MANUFACTURING / TRADING OF AUTOMOTI VE TIRES AND TUBES AND FLAPS. 7.16 IT IS SEEN THAT DURING THE ASSESSMENT YEAR UND ER CONSIDERATION, THE APPELLANT ESTABLISHED A NEW PLANT AT HALOL, GUJARAT, AND COND UCTED THE TRIAL RUN OF THE NEW SET-UP PLANT. DURING THE TRIAL RUN, PRODUCTION HAD TAKEN PLACE WHICH WAS DISPOSED OF AND SALE PROCEEDS TO THE TUNE OF RS.21,31,93,834 /- WAS REALIZED. THE APPELLANT GOT THE SALE PROCEEDS REDUCED FROM PRE-OPERATIVE EX PENSES AND THE BALANCE PRE- OPERATIVE EXPENSES WERE CAPITALIZED TO THE FIXED AS SETS AND ACCORDINGLY, DEPRECIATION WAS CLAIMED. IT IS SEEN THAT THE A.O H AS NOT APPROVED THIS SYSTEM OF ACCOUNTING OF SALE OF TRIAL RUN PRODUCTION WHICH WA S SOLD AND ADJUSTED AGAINST PRE- OPERATIVE EXPENSES BY THE APPELLANT COMPANY. THE A. O. CREDITED THE TRIAL RUN SALE PROCEEDS OF RS.21,31,93,834/- TO THE PROFIT & LOSS ACCOUNT TAXED IT. IT IS FURTHER SEEN THAT THE APPELLANT'S CLAIM OF PRE-OPERATIVE EX PENDITURE OF RS.66,60,37,000/- WHICH WAS ALSO REQUIRED TO BE GIVEN THE SAME TREATM ENT AS HAS BEEN GIVEN TO THE SALES PROCEEDS HAS BEEN IGNORED BY THE A.O. 7.17 DURING APPELLATE PROCEEDINGS THE ARS OF THE AP PELLANT HAVE VEHEMENTLY ARGUED THAT THE APPELLANT HAS RIGHTLY REDUCED THE S ALE PROCEEDS OF TRIAL RUN PRODUCTION FROM PRE-OPERATIVE EXPENSES AND THE REMA INING PRE-OPERATIVE EXPENSES HAVE BEEN CAPITALIZED WITH THE FIXED ASSETS. THE CO MPLETE FACTS AND FIGURES OF TRAIL RUN PRODUCTION, ITS SALES AND OTHER RELEVANT MATERI AL HAS BEEN BROUGHT ON RECORD AND ALSO BROUGHT TO THE NOTICE OF THE A.O. DURING A SSESSMENT PROCEEDINGS. THE ARS THEREFORE ARGUED THAT THE ACTION OF THE APPELLANT I N TREATING THE TRIAL RUN SALES IS PROPER, CORRECT EVEN FROM ACCOUNTING SYSTEM. THE AR S ALSO EXPLAINED THAT TRIAL RUN IS MERELY A TEST OF THE PLANT IN WHICH THE PRODUCT OR PROCEDURE TO RUN THE PLANT BEING FOLLOWED FOR THE PRODUCT IS TRIED AND CHECKED WITH A VIEW TO FIND OUT WHETHER THE SAME IS CORRECTLY WORKING AND PRODUCTION IS UPT O THE MARK OR NOT. THUS, TRIAL RUN OF A PLANT AND PRODUCTION OF GOODS IF ANY, DURING T RIAL RUN CANNOT BE EQUATED WITH COMMERCIAL PRODUCTION. THE ARS ALSO STATED THAT IT MAY HAPPEN THAT PRODUCTION DURING TRIAL RUN MAY NOT BE OF THAT STANDARD SO AS TO BE DISPOSED OF IN THE OPEN MARKET. SOMETIMES IT MAY FETCH SOME PRICE OR SOMETI MES GOODS MAY EVEN BE DISCARDED AS DEFECTIVE. THERE COULD BE SEVERAL SITU ATIONS WITH REGARD TO THE PRODUCTION OF GOODS AT THE TIME OF TRIAL RUN. THUS, THE PRODUCTION OF GOODS AT THE TIME OF TRIAL RUN MAY BE DEALT WITH ACCORDING TO TH E QUALITY OF GOODS PRODUCED AND WHETHER THE SAME IS MARKETABLE OR NOT. THE ARS THER EFORE PLEADED THAT IN THE APPELLANT'S CASE, FORTUNATELY, THE GOODS PRODUCED A T TRIAL RUN WERE FOUND TO BE MARKETABLE AND BECAUSE OF THAT THEY COULD BE DISPOS ED OF. SINCE THE GOODS WERE PRODUCED AND SOLD AT TRIAL RUN THEY HAVE RIGHTLY BE EN ACCOUNTED BY WAY OF REDUCING FROM THE PRE-OPERATIVE EXPENSES. 7.18 I HAVE CONSIDERED THE CONTENTIONS OF THE APPEL LANT CAREFULLY. THERE IS NO DOUBT THAT A TRIAL RUN OF A NEWLY ESTABLISHED PLANT IS ME RELY A TRIAL RUN AND CANNOT BE EQUATED WITH COMMERCIAL PRODUCTION. A TRIAL RUN IS CONDUCTED TO TEST THE PLANT FROM ALL ANGLE. THE PRODUCTION OF THE GOODS DURING TRIAL RUN CANNOT BE CATEGORIZED AS COMMERCIAL PRODUCTION. I NOTICE THAT THE APPELLANT HAS TAKEN ALL THE SALES MADE AFTER DATE OF COMMERCIAL PRODUCTION TO THE PROFIT & LOSS ACCOUNT AND ALSO OFFERED ITA NO.679/M/2017 M/S. CEAT LTD. 4 TO TAX. I THEREFORE FIND THAT THE TREATMENT GIVEN T O THE SALE OF PRODUCTION OF GOODS DURING TRIAL RUN PERIOD BY THE APPELLANT IS JUSTIFI ED AS THE SAID SALES PROCEEDS HAS BEEN EARNED DURING THE PRE-OPERATIVE PERIOD AND HEN CE, NEEDS TO BE CAPITALIZED. THE APPELLANT HAS, THEREFORE /RIGHTLY CAPITALIZED T HE SALES PROCEEDS OF THE GOODS PRODUCED DURING THE TRIAL RUN BY ADJUSTING THE SAME FROM THE PRE-OPERATIVE EXPENSES OF THE PLANT. 7.19 IN REACHING THE ABOVE DECISION ON THE ISSUE, R ELIANCE IS PLACED ON FOLLOWING DECISIONS OF HON'BLE JUDICIAL AUTHORITIES:- 1. THE HON'BLE DELHI HIGH COURT IN THE CASE OF ADD L. CIT V/S INDIA DRUGS & PHARMACEUTICALS LTD., CITED SUPRA, HELD THAT WHERE THE BUSINESS WAS IN THE PROCESS OF BEING SET-UP AND RECEIPTS AND PAYMENTS I N RESPECT OF THAT SOURCE, WHILE THE BUSINESS WAS BEING SET UP, MUST NECESSARI LY BE RELATED TO THAT SOURCE. SINCE THE BUSINESS WAS NOT STILL FULLY SET UP, THE RECEIPTS AND PAYMENTS WOULD BE CLEARLY ON CAPITAL ACCOUNT. THE R ATIO OF THIS DECISION, IS SQUARELY APPLICABLE TO THE FACTS OF THE APPELLANT C ASE. THE APPELLANT'S BUSINESS WAS IN THE PROCESS OF BEING SET UP, THE SA LE OF TRIAL RUN PRODUCTION AND PREOPERATIVE EXPENSES ARE THEREFORE CLEARLY ON CAPITAL ACCOUNT. ACCORDINGLY, THE APPELLANT HAS RIGHTLY REDUCED THE SALE PROCEEDS OF GOODS PRODUCED AT TRIAL RUN FROM THE PREOPERATIVE EXPENSE S AND THE REMAINING EXPENDITURE HAS BEEN CAPITALIZED. THUS, RECEIPTS AN D EXPENDITURE BOTH HAVE RIGHTLY BEEN TREATED BY THE APPELLANT ON CAPITAL AC COUNT. 2. IN THE CASE OF CIT V/S. BOKARO STEEL LTD. CITED SUPRA, THE HON'BLE SUPREME COURT 7 HELD THAT INTEREST EARNED BY INVESTING BORROWED CA PITAL IN SHORT TERM DEPOSIT IS ' AN INDEPENDENT SOURCE OF INCOME AND NO T CONNECTED WITH THE CONSTRUCTION ACTIVITY OR BUSINESS ACTIVITY OF THE A SSESSEE, THE SAME CANNOT BE SAID IN THE PRESENT CASE WHERE THE UTILIZATION O F VARIOUS ASSETS OF THE COMPANY AND THE PAYMENTS RECEIVED FOR SUCH UTILIZAT ION ARE DIRECTLY LINKED WITH THE ACTIVITY OF - SETTING UP OF THE STEEL PLAN T OF THE ASSESSEE. THESE RECEIPTS ARE IN EXTRICABLE LINKED WITH THE SETTING UP OF THE CAPITAL STRUCTURE OF THE ASSESSEE COMPANY. THEY MUST THEREFORE BE VIE WED AS CAPITAL RECEIPT GOING TO REDUCE THE COST OF CONSTRUCTION. THE RATIO OF THIS DECISION OF SUPREME COURT IS ALSO SQUARELY APPLICABLE TO THE FA CTS OF THE APPELLANT'S CASE. IN THIS CASE ALSO THE STEEL PLANT WAS IN THE PROCESS OF SETTING UP. RECEIPT OF INTEREST ON FD WAS HELD TO BE CAPITAL RE CEIPT GOING TO REDUCE THE COST OF CONSTRUCTION. IN THE APPELLANT COMPANY'S CA SE THE SALE PROCEEDS OF TRIAL GOODS PRODUCED HAVE DONE THE SAME THING I.E. THEY HAVE REDUCED THE COST OF THE PROJECT AS THE APPELLANT COMPANY HAS RE DUCED THE SAME FROM THE PREOPERATIVE EXPENSES AND REMAINING EXPENDITURE HAS ONLY BEEN CAPITALIZED. 3 . INTERNATIONAL SEAPORTS (HALDIA) PVT. ITD. V/S I TO. (CALCUTTA TRIBUNAL), CITED SUPRA. IN THIS CASE, THE ASSESSEE WAS AWARDED A CONTRACT TO BUILD A BERTH AT HALDIAR DOCK COMPLEX. THE ASSESSEE CONDUCT ED TRIAL RUN OF THE PORT BEFORE THE START OF COMMERCIAL OPERATION. DURING TH E TRIAL RUN ASSESSEE HAD EARNED INCOME FOR CARGO HANDLING CHARGES AND BERTH HIRE CHARGES WHICH IT HAD NOT OFFERED FOR TAX, BUT ADJUSTED THE SAME TO T HE PREOPERATIVE ITA NO.679/M/2017 M/S. CEAT LTD. 5 EXPENSES. THE HON'BLE TRIBUNAL UPHELD THE STAND TAK EN BY THE ASSESSEE AND STATED THAT INCOME FROM TRIAL RUN WERE INCIDENTAL T O THE CONSTRUCTION OF BERTH AND HENCE SHOULD GO TO REDUCE THE COST OF ASS ETS. IT IS SEEN THAT EVEN THE RATIO OF THIS DECISION IS ALSO APPLICABLE TO TH E FACTS OF THE APPELLANT'S CASE. AS THE APPELLANT HAS ADJUSTED THE SALE PROCEE DS OF GOODS PRODUCED AT THE TIME OF TRIAL RUN FROM THE PREOPERATIVE EXPENSE S. THE FACTS OF THE APPELLANT'S ISSUE AND THE FACTS OF THE ABOVE DECISI ON ARE SIMILAR AND THEREFORE, THE RATIO OF THIS DECISION IS FULLY APPL ICABLE TO THE APPELLANT'S CASE ALSO. 6. THE LD. D.R. WHILE RELYING ON THE ORDER OF AO SU BMITTED THAT THE ASSESSEE HAS MADE HUGE SALES OF PRODUCTS MANUFACTURED DURING TRIAL RUN OF HE PLANT WHICH WE RE WRONGLY REDUCED FROM THE FIXED ASSETS INSTEAD SHOWING AS SA LES IN THE PROFIT AND LOSS ACCOUNT. THE VOLUME IS HUGE AND TH US SUSPICIOUS. THE ASSESSEE WAS FOLLOWING THE MERCANTI LE SYSTEM OF ACCOUNTING AND THUS THE ACCRUAL OF INCOME HAS TO GO THE PROFIT AND LOSS ACCOUNT AND NOT TO BE REDUCED FROM THE FIX ED ASSETS. IT WAS ALSO ARGUED BY THE DR THAT THE NECESSARY DETAIL S WERE NOT FURNISHED BEFORE THE AO IN THE ASSESSMENT PROCEEDIN GS. THE TRIAL RUN WAS NORMALLY UNDERTAKEN TO TEST THE QUALITY OF THE GOODS IN ORDER TO ENSURE THE QUALITY PRODUCTS IN THE MARKET. BUT IN THE PRESENT CASE THE VOLUME OF SALES WAS SO HUGE AND THEREFORE THE AO RIGHTKY TREATED IT AS REVENUE SALES .FINALLY THE LD DR PRAYED THAT THE ORDER OF AO MAY BE RESTORED BY SETTING ASI DE THE ORDER OF CIT(A). 7. THE LD. A.R., ON THE OTHER HAND, STRONGLY OBJECT ED TO THE NEW ARGUMENTS TAKEN BY THE LD AR THAT THE HUGE QUAN TUM OF SALES RENDERED THE SALES DURING THE TRIAL RUN AS DO UBTFUL. THE LD AR SUBMITTED THAT THE TRIAL RUN WAS NOT IN DOUBT AT ALL IN THE ASSESSMENT STAGE AND THE AO NOTED THE FINDINGS IN T HE ASSESSMENT ORDER ITSELF. SIMILARLY THERE WAS NO SUC H ISSUE BEFORE THE APPELLATE AUTHORITY. THE LD AR DREW OUT ATTENTI ON TO ITA NO.679/M/2017 M/S. CEAT LTD. 6 SCHEDULE NO. 5 WHICH IS IN RESPECT OF PRE-OPERATIVE EXPENSES CAPITALIZED TO FIXED ASSETS. IN THE SAID SCHEDULE T HERE IS COMPLETE BREAK UP OF EXPENSES INCURRED SUCH AS BORROWING COS T, RAW MATERIALS, STAFF COST, POWER AND FUEL ETC TOTALING TO RS.99,18,86,000/- FROM WHICH THE TRIAL RUN SALES OF RS.21,31,94,000 WERE REDUCED. THE LD AR CONTENDED T HAT IF THE SALES WERE TO BE TREATED AS REVENUE INCOME AND TO B E CREDITED TO THE PROFIT AND LOSS ACCOUNT, THEN SAME ANALOGY HAS TO BE APPLIED TO THE EXPENSES INCURRED WHICH WERE CAPITAL ISED. IN OTHER WORDS THE AR CONTENDED THESE EXPENSES WOULD H AVE TO BE DEBITED TO THE PROFIT AND LOSS ACCOUNT IN THAT CASE . THE LD AR RELIED ON THE DECISION OF DELHI HIGH COURT IN THE C ASE OF ADDL. CIT VS INDIAN DRUGS AND PHARMACEUTICALS LTD 141 ITR 134 (DEL) IN WHICH IT HAS BEEN HELD THAT WHERE RECEIPTS WERE FROM SOURCES NOT INDEPENDENT BUT INEXTRICABLY LINKED TO THE PRO CESS OF SETTING UP THE BUSINESS IS CAPITAL RECEIPTS. THUS THE LD AR SUPPORTED THE ORDER OF LD CIT(A) AND PRAYED THAT SAME MAY BE UPHELD. 8. FROM THE RIVAL ARGUMENTS AND PERUSAL OF THE RECO RDS BEFORE US, IT IS CLEAR THAT THE ASSESSEE HAS CARRIED OUT T RIAL RUN OF ITS PLANT AT HALOL, GUJRAT WHICH WAS NOT AT ALL IN DISP UTE IN THE ASSESSMENT. THE PRODUCTS MANUFACTURED DURING TRIAL RUN YIELDED SALES OF RS.21.31,94,000/- WHICH WERE REDUCED FROM THE PRE- OPERATIVE EXPENSES INCURRED AMOUNTING TO RS. 99,18, 86,000/- COMPRISING VARIOUS ELEMENTS OF COST SUCH AS BORRO WING COST, RAW MATERIALS, STAFF COST, POWER AND FUEL , TRAVELL ING, PROFESSIONAL CHARGES ETC. THE NET PREOPERATIVE EXPENSES WERE CA PITALIZED IN THE FIXED ASSETS. THE LD CIT(A) HAS TAKEN A VERY RE ASONED AND CORRECT VIEW OF THE MATTER BY PASSING A SPEAKING OR DER AFTER FOLLOWING DECISIONS OF THE APEX COURT AND DELHI HI GH COURT. AFTER ITA NO.679/M/2017 M/S. CEAT LTD. 7 EXAMINING THE FACTS AND THE RATIO IN THE VARIOUS DE CISIONS AS REFERRED TO ABOVE, WE ARE OF THE VIEW THAT THE REC EIPTS BY WAY SALES OF PRODUCTS MANUFACTURED DURING TRIAL RUN FRO M A PLANT WHICH IS BEING TESTED FOR THE QUALITY PRODUCT IS A CAPITAL RECEIPT AND CORRECTLY BEEN REDUCED FROM THE FIXED ASSETS. A CCORDINGLY THE GROUND OF REVENUE IS DISMISSED. 9. THE ISSUE IN THE SECOND GROUND OF APPEAL IS AGAI NST THE DELETION OF ADDITION OF RS.4,16,40,140/- IN RESPEC T OF EXPENSES ON EARNING OF EXEMPT INCOME WHICH WAS ADDED U/S 14 A R.W.R. 8D. 10. THE FACTS IN BRIEF ARE THAT DURING THE YEAR THE ASSESSEE EARNED TOTAL DIVIDEND OF RS.7,56,52,878/- OUT OF WH ICH RS.6,72,09,808/- WAS RECEIVED AS FOREIGN DIVIDEND W HICH WAS OFFERED TO TAX. THUS EXEMPT DIVIDEND RECEIVED WAS TO THE TUNE OF RS. 1,22,98,602/- WHICH WAS CLAIMED AS EXEMPT. T HE ASSESSEE SUO MOTTO DISALLOWED RS. 2,00,000/- UNDER SECTION 1 4A R.W.R. 8D(2)(III) FOLLOWING THE DECISION IN ASSESSEE OWN C ASE IN AY 2010- 11 BY LD CIT(A). THE AO, BY WRONGLY TAKING THE EXEM PT INCOME AT RS. 7,56,52,878/- , REJECTED THE CONTENTIONS OF THE ASSESSEE AND CALCULATED THE DISALLOWANCE AT RS. 4,16,40,140/- BY APPLYING PROVISIONS OF SECTION 14A R.W.R. 8D COMPRISING RS. 3,80,14,202/- UNDER RULE 8D(2)(II) AND RS. 36,25,938/- UNDER RUL E 8D(2)(III) DESPITE ASSESSEES CONTENTIONS THAT OWN FUNDS WERE MORE THAN THE INVESTMENTS IN SHARES AND SECURITIES. 11. IN THE APPELLATE PROCEEDINGS, LD CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE BY HOLDING THAT NO DISALLOWANCE IS REQ UIRED TO BE MADE UNDER RULE 8D(2)(II) OF THE RULES AS THE ASSES SEES OWN ITA NO.679/M/2017 M/S. CEAT LTD. 8 FUNDS WERE MORE THAN THE INVESTMENTS IN SHARES AND SECURITIES YIELDING EXEMPT INCOME BY FOLLOWING DECISIONS OF TH E BOMAY HIGH COURT IN THE CASE OF CIT VS RELIANCE UTILITIES AND POWER LTD [2009] 313 ITR 340 (BOM), AND CIT VS HDFC BANK LTD (2014)366 ITR 505(BOM) AS AFFIRMED BY THE APEX COURT IN CIT VS HDFC BANK LTD (2016)383 ITR 529(SC). ON THE DISALLOWANCE UNDER RULES 8D(2)(III), WE NOTE THAT THE LD CIT(A) HAS FO LLOWING HIS OWN DECISION IN AY 2010-11 IN ASSESSEES OWN CASE WHER EIN IT WAS HELD THAT NO DISALLOWANCE IS REQUIRED TO BE MADE A S THE ASSESSEE HAS SUO MOTTO DISALLOWED RS.2,00,000/-.THE APPELLATE AUTHORITY WHILE ADJUDICATING THE GROUND OF THE ASSE SSEE ALSO NOTED THAT THE AO HAS NOT CORRECTLY UNDERSTOOD THE FACTS OF THE ASSESSEE ON THIS ISSUE AND STRAIGHTAWAY APPLIED THE PROVISIONS OF SECTION 14A OF THE ACT R.W.R. 8D OF THE I.T. RUL ES. 12. THE DR ARGUED THAT ORDER OF LD CIT(A) IS NOT AS PER THE PROVISIONS OF THE ACT AS THE PROVISIONS OF SECTION 14A RULE 8D ARE TO BE MANDATORILY TO BE APPLIED POST AY 2007-08.THE LD AR ARGUED THAT MERE FACT THAT THE ASSESSEES OWN FUNDS WERE SUFFICIENT TO COVER THE INVESTMENTS IN QUESTION ARE NOT SUFFICIENT BUT THE INVESTMENTS OF FUNDS HAVE TO BE PROVED OUT OF OWN FUNDS. SIMILARLY THE DR SUBMITTED THAT MERE DISALL OWANCE OF RS. 2,00,000/- TOWARDS ADMINISTRATIVE AND OTHER EXPENSE S WOULD NOT SERVE THE PURPOSE WHEN RULE 8D(2)(III) PROVIDES FOR 0.5% OF THE TOTAL INVESTMENTS ON SHARES AND SECURITIES. TH E LD DR THEREFORE PRAYED THAT THE ORDER OF THE AO MAY BE RE STORED. 13. PER CONTRA, LD AR RELIED ON THE ORDER OF LD CIT (A) BY SUBMITTING THAT THE APPELLATE AUTHORITY HAS PASSED A VERY REASONED ORDER BY FOLLOWING THE JURISDICTIONAL HIGH COURT IN THE ITA NO.679/M/2017 M/S. CEAT LTD. 9 CASE OF RELIANCE UTILITIES AND POWER LTD AND CIT VS HDFC SO FAR AS THE DISALLOWANCE UNDER 8D(2)(II) IS CONCERNED AN D ASSESSEES OWN CASE IN THE ASSESSMENT YEAR 2010-11 BY CIT(A) FOR DISALLOWANCE UNDER RULE 8D(2)(III). THE LD AR WHILE TAKING US THROUGH THE ASSESSMENT ORDER , SUBMITTED THAT THE A O HAS NOT RECORDED ANY SATISFACTION BEFORE INVOKING THE PROV ISIONS OF SECTION 14A OF THE ACT R.W.R. 8D OF THE RULES WHICH IS MANDATORY REQUIREMENT AS HAS BEEN HELD BY THE APEX COURT IN T HE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. 328 ITR 81, THE HON'BLE BOMBAY HIGH COURT HAS HELD THAT RULE 8D R.W.S. 14A( 2) IS NOT ARBITRARY OR UNREASONABLE BUT CAN BE APPLIED ONLY I F THE ASSESSEE'S METHOD IS NOT SATISFACTORY AND JUSTIFIED THE ORDER OF CIT(A) AND PRAYED FOR UPHOLDING THE SAME. 14. AFTER HEARING THE RIVAL PARTIES AND PERUSING TH E MATERIALS ON RECORDS AS PLACED BEFORE US WE OBSERVE THAT LD CIT() HAS PASSED A REASONED AND SPEAKING ORDER AFTER FOLLOWIN G JURISDICTIONAL HIGH COURTS AND THE ASSESSEES OWN CASE WHILE DELETING THE DISALLOWANCE UNDER RULE 8D(2)(II) & (I II) RESPECTIVELY AND THERE IS NO REASON TO TAKE ANY CONTRARY VIEW. A CCORDINGLY THE GROUND RAISED BY THE REVENUE IS DISMISSED BY UP HOLDING THE ORDER OF CIT(A). 15. THE ISSUE RAISED IN GROUND NO.3 OF THE APPEAL I S AGAINST THE DISALLOWANCE OF RS.7,80,54,973/- BY LD. CIT(A) AS M ADE BY THE AO ON ACCOUNT OF DEPRECIATION ON TRADE MARK BY IGNO RING THE FACT THAT AS ON 31.03.2011 THE ASSESSEE WAS NOT OWN ER OF THE GLOBAL RIGHTS FOR TRADE MARK CEAT. ITA NO.679/M/2017 M/S. CEAT LTD. 10 16. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E AO OBSERVED THAT ASSESSEE HAS CLAIMED DEPRECIATION ON INTANGIBLE ASSETS ACQUIRED FROM PIRELLI AND C-SPA, ITALY @ 12. 5%. AO FURTHER OBSERVED FROM THE DIRECTORS REPORT THAT TH E ASSESSEE HAS ACQUIRED GLOBAL RIGHTS OF BRAND CEAT BY PAYING EURO OF 9 MILLION AND ACCORDING TO THE AGREEMENT BETWEEN PIRELLI AND C-SPA, ITALY THE USAGE OF TRADE MARK WAS VESTED WITH THE SAID FO REIGN COMPANY TILL 31.12.2012. ACCORDINGLY, THE AO ISSUE D SHOW CAUSE NOTICE TO THE ASSESSEE AS TO WHY THE DEPRECIA TION OF RS.7,80,54,973/- SHOULD NOT BE DISALLOWED AS THE PROVISIONS OF SECTION 32(1) OF THE ACT WERE NOT SATISFIED. THE A SSESSEE SUBMITTED BEFORE THE AO THAT PAYMENT WAS MADE AND A SSESSEE BECAME PART OWNER OF THE GLOBAL RIGHTS BY PAYING EU RO 9 MILLION THOUGH UNDER THE AGREEMENT THE TRADE MARK WAS TO RE MAIN WITH C-SPA, ITALY TILL 31.12.2012 FOR LIMITED PURPOSE. THE SAID REPLY OF THE ASSESSEE WAS NOT ACCEPTED BY THE AO AND CONS EQUENTLY REJECTED THE CLAIM OF DEPRECIATION OF RS.7,80,54,97 3/-. 17. IN THE APPELLATE PROCEEDINGS, THE LD. CIT(A) AL LOWED THE APPEAL OF THE ASSESSEE AFTER CONSIDERING THE SUBMIS SIONS AND CONTENTIONS OF THE ASSESSEE BY OBSERVING AND HOLDIN G AS UNDER: 11.24 IT IS SEEN FROM THE FACTS OF THE ISSUE THAT THE APPELLANT COMPANY CLAIMED DEPRECIATION ON BRAND CEAT DURING THE YEAR BEING AN INTANGIBLE ASSET ACQUIRED DURING PREVIOUS YEAR RELEVANT TO THE A.Y. 2011-12. HOWEVER, THE CLAIM OF DEPRECIATION WAS DISALLOWED BY THE A.O. ON THE GROU ND THAT THE APPELLANT HAS NOT SATISFIED THE OWNERSHIP CONDITION AS STIPULATED U/ S,32(L) OF THE ACT FOR CLAIMING DEPRECIATION. 11.25 IT IS FURTHER SEEN THAT THE APPELLANT COMPANY WAS THE OWNER OF BRAND 'CEAT' IN THE COUNTRIES NAMELY INDIA, SRILANKA, VIETNAM, P AKISTAN, NEPAL, MYANMAR, BHUTAN, AFGHANISTAN AND BANGLADESH, WHEREAS PIRELLI &C.S.P.A WAS THE OWNER OF ALL THE TERRITORIES EXCEPT THE ABOVE MENTIONED COUNTRIE S. THE APPELLANT COMPANY ENTERED INTO AGREEMENT DATED 06.10.2010 WITH PIRELL I & C.S.P.A TO ACQUIRE THE BRAND 'CEAT' FOR THE ENTIRE WORLD FOR WHICH THE APP ELLANT COMPANY PAID 9 MILLION EURO. AS THE BRAND WAS ACQUIRED IN THE 2 ND HALF OF THE YEAR THE APPELLANT CLAIMED DEPRECIATION @ 12.5% ONLY. THE ASSET SO ACQUIRED WA S CLAIMED AS INTANGIBLE ASSET. ITA NO.679/M/2017 M/S. CEAT LTD. 11 IT IS SEEN THAT THE APPELLANT COMPANY GOT TRANSFERR ED TRADEMARK IN THE NAME OF THE APPELLANT FROM VARIOUS COUNTRIES FOR WHICH CERTIFIC ATES HAVE BEEN ISSUED TO THE APPELLANT COMPANY. HOWEVER, PIRELLI & C.S.P.A WHO H AD STOCK WITH BRAND NAME 'CEAT' WAS ALLOWED LIMITED RETAILED RIGHTS AS PER P ARA 5 OF THE AGREEMENT IN ORDER TO FACILITATE TO DISPOSE OF ITS STOCK. THE EFFECTIVE D ATE OF THIS LIMITED RIGHT WOULD COME TO AN END ON 31,12.2011 AS PER PARA 5 OF THE AGREEM ENT. MOREOVER, THE PROVISIONS OF SECTION 32(1) OF THE IT. ACT WHICH CLEARLY LAY D OWN THAT FOR CLAIMING DEPRECIATION THE OWNERSHIP OF AN ASSET WOULD BE WHOLLY OR PARTLY . EVEN IF AN ASSET WHICH IS BEING USED AND ON WHICH DEPRECIATION IS BEING CLAIMED BUT NOT OWNED FULLY BUT PARTIALLY DEPRECIATION CANNOT BE DENIED. IN THE APPELLANT'S C ASE, PROBABLY DEPRECIATION HAS BEEN DENIED BY THE A.O. ON THE GROUND THAT PIRELLI &C.S.P.A HAS BEEN ALLOWED LIMITED RETAILED RIGHTS. IT DOES NOT MEAN THAT ALLO WING LIMITED RETAILED RIGHTS IN ANY MANNER AND CIRCUMSTANCES HAS PUT AN EMBARGO ON THE OWNERSHIP OF BRAND 'CEAT' OF THE APPELLANT COMPANY. THE LIMITED RETAILED RI GHT HAS BEEN ALLOWED TO FACILITATE THE BUSINESS OF PIRELLI &CS.P.A AND TO SMOOTHEN THE INTERNATIONAL BUSINESS. 11.26 IT IS SEEN THAT THE WORD 'OWNERSHIP' HAS BEEN EXPLAINED BY THE COURTS IN SEVERAL DECISIONS. THE HON'BLE SUPREME COURT IN THE CASE OF STATE OF UP VS. RENUSAGAR POWER CO., CITED SUPRA, HELD THAT THE WOR D 'OWN' IS A GENERIC TERM. IT MEANS TO POSSESS, TO HAVE OR HOLD AS PROPERTY. IN T HE APPELLANT'S CASE, THE APPELLANT COMPANY OWNS THE BRAND 'CEAT'. ALLOWING PIRELLI &C. S.P.A FOR LIMITED PERIOD TO USE THE BRAND NAME IS TO FACILITATE BUSINESS AND TO MEE T THE BUSINESS OBLIGATION IN INTERNATIONAL MARKET. THE PROVISIONS OF SECTION 32 ALLOWS DEPRECIATION ONCE THE ASSESSEE USE THE ASSET AND OWNS THE ASSETS EITHER F ULLY OR PARTIALLY. IT IS SEEN THAT THE APPELLANT COMPANY HAS IN ITS ANNUAL REPORT FOR FY 2010-11, HAS ALSO EVIDENCED THE ACQUISITION OF BRAND NAME 'CEAT'. THUS, IT IS C ONSIDERED VIEW THAT THE APPELLANT IS THE OWNER OF THE BRAND 'CEAT' WHICH THE APPELLAN T COMPANY HAD ACQUIRED DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR U NDER CONSIDERATION, ON WHICH THE APPELLANT HAS RIGHTLY CLAIMED DEPRECIATION @12. 5% AS THE ASSET WAS ACQUIRED IN THE 2 ND HALF OF THE YEAR. ACCORDINGLY, THE CLAIM OF DEPREC IATION OF RS.7,80,54,973/- IS ALLOWED, THE ADDITION OF RS.7,80,54,973/- IS DELETE D. GROUND OF APPEAL NO.7 IS ALLOWED. 18. AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD, WE OBSERVE THAT THE AO DISALLOWED THE CLAIM OF DEPRECIATION OF THE ASSESSEE ON THE GROUND THAT CON DITIONS AS ENVISAGED UNDER SECTION 32(1) WERE NOT SATISFIED. 19. THE LD. D.R. ARGUED THAT THE ASSESSEE IS NOT EN TITLED TO CLAIM THE DEPRECIATION ON THE INTANGIBLE ASSETS AS HE WAS NOT THE OWNER OF THE BRAND TILL 31.12.2012 AND THUS RELIED ON THE ORDER OF AO HEAVILY. ITA NO.679/M/2017 M/S. CEAT LTD. 12 20. ON THE OTHER HAND, THE LD. A.R. SUBMITTED BEFOR E US THAT THE ASSESSEE HAS BECOME OWNER OF THE TRADE MARK VID E ASSIGNMENT AGREEMENT DATED 06.10.2010 VIDE WHICH T HE ASSESSEE HAS MADE THE PAYMENT FOR THE SAID TRADE MA RK. THE LD. A.R. DREW OUR ATTENTION TO THE VARIOUS CLAUSES OF THE TRADE MARK AGREEMENT WHEREIN IT HAS BEEN MENTIONED THAT A SSIGNER PIRELLI & C-SPA SHALL BE ENTITLED TO RETAIN THE RIG HTS FOR A LIMITED PURPOSE AND THE ASSIGNOR BECOMES THE OWNER OF THE T RADE MARK. BESIDES THE LD. COUNSEL BROUGHT TO OUR NOTICE THE C ONSIDERATION OF EURO 9 MILLION PAID UNDER THE ASSIGNMENT AGREEME NT. THE LD. A.R. ALSO TOOK US THROUGH THE PARA NO.5.1(A) WHICH PROVIDES THAT THE ASSIGNOR HAS THE RIGHT TO USE AS A LICENSEE OF THE ASSIGNEE TO USE SUCH TRADE MARK UP TO 31.12.2011 AND ALSO TO GR ANT EXCLUSIVE SUB LICENSES TO ITS AFFILIATES TO USE THE TRADE MARK UP TO 31.12.2011 ETC. THUS IT IS CLEAR THAT PIRELLI & C- SPA IS A LICENSEE OF THE ASSESSEE TO USE TRADE MARK. THE LD. A.R. FU RTHER TOOK US THROUGH THE PROVISIONS OF SECTION 32(1)(II) OF THE ACT AND SUBMITTED THAT FOR THE PURPOSE OF CLAIMING DEPRECIA TION EVEN IF THE ASSESSEE IS PART OWNER OF THE ASSET, THE DEPREC IATION HAS TO BE ALLOWED. THUS THE LD. A.R. SUBMITTED THAT EVEN PART OWNERSHIP IS SUFFICIENT FOR THE PURPOSE OF CLAIM OF DEPRECIATION. THE LD. A.R. FURTHER TOOK US THROUGH THE INVOICE DA TED 6.10.2010 ISSUED BY PIRELLI & C-SPA COPY OF WHICH I S ATTACHED AT PAGE NO.66 OF THE PAPER BOOK WHEREIN IT STATED AS SALE OF CEAT TRADE MARK RIGHTS, TRADE MARK ASSIGNING DATED 06.10 .2010 AND ALSO GIVES A DETAIL AND PAYMENT OF EURO OF 9 MILLIO N. 21. AFTER TAKING ALL THE FACTS AND CIRCUMSTANCES IN TO ACCOUNT, WE FIND THAT IN THIS CASE THE ASSESSEE BECAME OWNE R OF THE TRADE MARK CEAT IMMEDIATELY UPON THE SIGNING OF TRADE MAR K ITA NO.679/M/2017 M/S. CEAT LTD. 13 AGREEMENT WHEN THE ASSESSEE HAS ALSO MADE THE PAYME NT OF 9 MILLION EURO. WE ARE THEREFORE IN COMPLETE AGREEME NT WITH THE CONCLUSION DRAWN BY THE LD. CIT(A) WHO HAS PASSED A VERY COMPREHENSIVE AND DETAILED ORDER TAKING INTO ACCOUN T VARIOUS LEGAL AND FACTUAL ASPECTS OF THE MATTER. IN OUR CO NSIDERED VIEW, THE ASSESSEE HAS RIGHTLY CLAIMED THE DEPRECIATION O N THE TRADE MARK AND THEREFORE WE ARE INCLINED TO UPHOLD THE OR DER OF THE LD. CIT(A). 22. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 13.03.2019. SD/- SD/- ( AMARJIT SINGH) (RAJESH KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: .03.2019. * KISHORE, SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORDER DY/ASS TT. REGISTRAR, ITAT, MUMBAI.