Videotex International (P) Ltd., Ludhiana V. Addl. CIT, Ludhiana

ITA 820/CHANDI/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9171 (ITAT-CHANDIGARH)
• Duration Of Justice: 9 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-08-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Next Hearing Date: 13-06-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 06-11-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANJEET SINGH
• Assessee Lawyers: NAVNEET SEHGAL
• Keywords: Capital asset; Earning of tax free income; Proportionate interest; Question of law; Tangible material; Revenue expenditure; Capital expenditure
• Section: 14A

Judgement Text

INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 820 /CHD/ 2015 ASSESSMENT YEAR: 2008 - 09 VIDEOTEX INTERNATIONAL (P) LTD, LUDHIANA PAN:AAACV5472C VS. ADDL. COMMISSIONER OF INCOME TAX, RANGE - III, LUDHIANA (APPELLANT) (RESPONDENT) ASSESSEE BY : SH. NAVNEET SEHGAL REVENUE BY: SH. MANJEET SINGH DATE OF HEARING 08 /0 8 /2016 DATE OF PRONOUNCEMENT 11 /0 8 /2016 O R D E R PER PRASHANT MAHARISHI , A . M . 1 . THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD CIT(A) - I, LUDHIANA DATED 21.08.2015 FOR THE ASSESSMENT YEAR 2008 - 09 RAISING FOLLOWING EFFECTIVE GROUNDS OF APPEAL: - 1. THAT THE PREJUDICIAL OBSERVATIONS MADE IN THE APPELLATE AS WELL AS IN THE ASSESSMENT ORDER ARE EITHER UNFOUNDED OR NOT SUSCEPTIBLE OF GIVING RISE TO ANY ADVERSE CONCLUSION. 2. THAT THE HON'BLE COMMISSIONER OF INCOME TAX (APPEALS) HAS GROSSLY ERRED IN CONFIRMING THE ADDITION OF RS.9,243 / - BY APPLICATIO N OF SEC. 14A READ WITH RULE 8D OF THE INCOME TAX RULES ON THE BASIS OF CONJECTURES, SURMISES AND WITHOUT ANY BASIS. THERE IS NET RECEIPT OF INTEREST AND NO INTEREST OUTGO. THE ADDITION BY APPLICATION OF SEC. 14 A MERITS DELETED. 3. THAT THE HON'BLE COMMISSIO NER OF INCOME TAX (APPEALS) HAS GROSSLY ERRED IN DISALLOWING RS. 1,29,000 / - ON ACCOUNT OF IN TEREST UNDER PROVISO TO SEC.36(1 )(III) OF THE INCOME TAX ACT, 1961 ON THE BASIS OF CONJECTURES, PAGE 2 OF 10 VIDEOTEX INTERNATIONAL ( P) LTD V ACIT 820/CHD/2015 A Y 2008 - 09 SURMISES AND WITHOUT ANY BASIS. THERE IS NET RECEIPT OF INTEREST AND NO TERM LOANS BORROWED FOR INVESTMENT. THE DISALLOWANCE MERITS ALLOWANCE. 4. THAT THE HON'BLE COMMISSIONER OF INCOME TAX (APPEALS) HAS GROSSLY ERRED IN CONFIRMING EXPENDITURE OF RS.3,86,388 / - (216888 + 195 00 + 150000) AS CAPITAL EXPENDITURE ON THE BASIS OF CONJECTURES, SURMISES W ITHOUT APPRECIATING THE FACTS OF THE CASE. THE DISALLOWANCE OF RS.3,86,388 / - AS CAPITAL EXPENDITURE MERITS ALLOWANCE. 2 . THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PRIVATE LTD COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING OF TELEPHONE, VCD AND OTHER ELECTRICAL ITEMS. THE ASSESSEE FILED ITS RETURN OF INCOME ON 30.09.2008 SHOWING INCOME OF RS. 64509870/ - . AGAINST THIS THE ASSESSMENT U/S 143(3 ) OF THE INCOME TAX ACT WAS FRAMED WHEREIN AMONGST OTHER DISALLOWANCE U/S 14A OF RS. 9243/ - , DISALLOWANCE OF INTEREST OF RS. 1290 0 0/ - TREATING AS IT CAPITAL EXPENDITURE AND DISALLOWANCE OF RS. 386388/ - OUT OF RESEARCH AND DEVELOPMENT, SOFTWARE EXPENDITURE AND ARCHITECT FEES TREATED AS CAPITAL EXPENDITURE. AGAINST THIS DISALLOWANCE, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD CIT(A), WHO IN TURN CONFIRMED THE SAME. THEREFORE, THE ASSESSEE IS IN APPEAL BEFORE US. 3 . THE FIRST GROUND OF APPEAL IS GENERAL IN N ATURE THEREFORE THE SAME IS DISMISSED. 4 . GROUND NO. 2 IS AGAINST CONFIRMATION OF DISALLOWANCE OF RS. 9243/ - BY APPLYING RULE 8D U/S 14 A OF THE ACT. AS AT THE END OF THE ACCOUNTING YEAR INVESTMENT IN EQUITY SHARES OF RS. 11007253/ - IS MADE AND IT IS CLAIME D THAT IT IS OUT OF OWN SOURCE, WHICH ARE FROM NON - INTEREST BEARING FUNDS AND THEREFORE NO INTEREST, HAS BEEN PAID DURING THE YEAR. NO DISALLOWANCE HAS BEEN MADE BY THE ASSESSEE ON ITS OWN. THE LD AO REJECTED THE CONTENTIONS OF THE ASSESSEE AND APPLIED RUL E 8D AND DISALLOWED RS. 9243/ - ACCORDINGLY. THE LD CIT(A) DISMISSED THE ARGUMENTS OF THE ASSESSEE AS NO NEXUS HAS BEEN PROVED WITH RESPECT TO INTEREST EXPENDITURE AS WELL AS NETTING OF INTEREST EXPENDITURE WITH INTEREST INCOME IS ALSO REJECTED AS THERE IS NO SUCH PROVISION IN RULE 8D. PAGE 3 OF 10 VIDEOTEX INTERNATIONAL ( P) LTD V ACIT 820/CHD/2015 A Y 2008 - 09 5 . BEFORE US, THE LD AR REITERATED THE SAME ARGUMENTS THAT WERE RAISED BEFORE THE LD CIT(A) AND THE LD DR SUBMITTED THA T THE ASSESSEE HAS NOT DISALLOWED ANY EXPENDITURE DESPITE EARNING EXEMPT INCOME AND HAVING EXEMPT INCOME E ARNING INVESTMENT. HE FURTHER STATED THAT NETTING OF INTEREST AND ASSESSEES CLAIM WAS NOT INCURRING ANY INTEREST EXPENDITURE ARE NOT SUSTAINABLE IN VIEW OF THE APPLICABILITY OF RULE 8D. 6 . WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. THE LD CIT(A) HA S DECIDED THIS ISSUE VIDE PARA 4.2 OF HIS ORDER AS UNDER: - 4.2 I HAVE CONSIDERED THAT FACTS OF THE CASE, THE BASIS OF DISALLOWANCE MADE BY THE ASSESSING OFFICER AND THE ARGUMENTS OF THE AR DURING THE COURSE OF THE ASSESSMENT AS WELL AS THE APPELLATE PROCEEDINGS. THE APPELLANT HAS SUBMITTED THAT IT HAS NOT PAID ANY INTEREST DURING THE YEAR. ACTUALLY THE APPELLANT HAS INDULGED IN NETTING OF INTEREST HOWEVER, NO SUCH PROVISIONS HAVE BEEN MADE IN RULE 8D. IT MERELY MENTIONS ABOUT THE INCURRING OF EXPENDITURE BY THE APPELLANT BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. HENCE, NO NETTING OF INTEREST IS ALLOWABLE, WHILE CALCULATING DISALLOWANCE OF EXPENSES U/ 14A READ WITH RULE 8D. THIS HAS FURTHER BEEN SUPPORTED BY THE JUDGMENT OF HONBLE ITAT IN CAS E OF M/S. AVON CYCLES LTD VS. CIT LUDHIANA, FOR ASSESSMENT YEAR 2008 - 09, ON THE ISSUE OF NETTING OF INTEREST AND THE RELEVANT PART OF THE JUDGMENT IS REPRODUCED HERE BELOW: - 21 . ON THE PERUSAL OF THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES, WE FI ND THAT THE EXPENDITURE RELATABLE TO THE EARNING OF EXEMPT INCOME IS EQUAL TO AGGREGATE OF THE AMOUNT OF EXPENDITURE DIRECTLY RELATABLE TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME I.E. RULE 8D(2)(I) AND THE DISALLOWANCE OF INTEREST AS PROVID E UNDER RULE 8D(2)(II) AND FURTHER DISALLOWANCE COMPUTED UNDER RULE 8D(2)(III) OF THE INCOME TAX RULES. THE DISALLOWANCE MADE BY THE APPELLANT ON ACCOUNT OF DIRECT EXPENDITURE RELATABLE TO THE EARNING OF EXEMPT INCOME I.E. FEE PAID FOR PORTFOLIO MANAGEMENT TOTALING RS.13,95,065/ - IS DISALLOWABLE UNDER RULE 8D(2)(I) OF THE INCOME TAX RULES. UNDER THE PROVISIONS OF RULE 8D(2)(II) THE INTEREST RELATABLE TO THE INVESTMENT IN TAX FREE FUNDS IS TO BE COMPUTED AND AS PER THE WORKING OF THE ASSESSEE ITSELF THE SAME COMES TO RS.10,49,851/ - . CONSEQUENTLY, WE DIRECT THE ASSESSING OFFICER TO DISALLOW RS.10,49,851/ - BEING THE INTEREST SO RELATABLE TO THE EARNING OF EXEMPT INCOME. WE FIND NO MERIT IN THE ALTERNATE PLEA RAISED BY THE ASSESSEE THAT NO DISALLOWANCE OF INTERES T IS CALLED FOR AFTER SETTING OFF THE INTEREST PAID AND INTEREST RECEIVED, W HERE THERE IS NO INTEREST PAYMENT. ADMITTEDLY THE APPELLANT HAD PAID TOTAL INTE REST OF RS.2.92 CRORES OUT OF WHICH INTEREST PAID ON TERM LOAN RAISED FOR SPECI FIC PURPOSE TOTALS TO RS.1.70 CRORES A ND BALANCE INTEREST PAID BY THE APPELL ANT IS RS.1.21 CRORES. THE FUNDS UTILIZED PAGE 4 OF 10 VIDEOTEX INTERNATIONAL ( P) LTD V ACIT 820/CHD/2015 A Y 2008 - 09 BY THE APPELLANT BEING MIXED FUN DS AND IN VIEW OF THE PROVISIONS OF RULES 8D(2)(II) OF THE INCOME TAX R ULES THE DISALLOWANCE IS CONFIRMED AT RS.10,49,851/ - . WE FIND NO MERIT IN THE ADHOC DISALLOWANCE MADE BY THE CIT (APPEALS) AT RS.5,00,000/ - . CONSEQUENTLY, GROUND OF APPEAL RAISED BY THE REVENUE IS PARTLY ALLOWED AND GROUND RAISED BY THE APPELLANT IN CROSS - OBJECTION IS ALLOWED.' THE ABOVE FINDING OF HON'BLE ITAT HAS FURTHER BEEN CONFIR MED BV THE HON'BLE PUNJAB & HARY ANA HIGH COURT IN ITS JUDGMENT IN CASE OF M/S AVON CYCLES LTD, VS. CIT. LUDHIANA & OTHER IN ITA NO. 277 OF 2013, DATED 20.08.201 4. WHEREIN HON'BLE PUNJAB & HARY ANA HIGH COURT HAS SAID THAT NO SUBSTANTI AL QUESTION OF LAW ARISES ON THE ISSUE.' FURTHER, THE APPELLANT HAS SUBMITTED THAT THE SAID INVESTMENT IS OUT OF ITS OWN FUNDS. THE APPELLANT HAS TAKEN LOANS AND IS INVESTING OUT OF THE COMMON HOTCH - POTCH OF FUNDS. THE PRIMARY ONUS OF PROOF LAY ON THE APPELLANT TO PROVE ITS CLAIM REGARDING SUFFICIENCY OF ITS OWN FUNDS AS HELD BY THE JURISDICTIONAL ITAT IN THE CASE OF CIT VS. SHRI AVTAR SINGH IN ITA NO. 948/CHD/2011. THE ONUS WAS ON THE APPELLANT TO PROVE THAT IT HAS NOT INCURRED ANY EXPENDITURE TO EARN THE EXEMPT INCOME. HOWEVER, THE APPELLANT HAS NOT BEEN ABLE TO DISCHARGE ITS ONUS. IN VIEW OF THE SAME THE DISALLOWANCE OF RS. 9243/ - MADE BY THE AO U/S 14A READ WITH RULE 8D OF THE ACT, IS JUSTIFIED. THIS GROUND OF APPEAL IS ACCORDINGLY, DISMISSED. 7 . THE LD CIT(A) HAS CONFIRMED THIS DISALLOWANCE BY CONSIDERING THE DECISION OF THE JURISDICTIONAL HIGH COURT IN CASE OF AVON CYCLES LTD V CIT 228 TAXMANN 368 WHEREIN THE ORDER OF THE COORDINATE BENCH HAS BEEN UPHELD AND HON HIGH COURT HAS HELD THAT WHERE FUND S UTILIZED BY ASSESSEE WAS MIXED FUNDS AND, HENCE, INTEREST PAID ON BORROWED FUND WAS ALSO RELATABLE TO INTEREST ON INVESTMENT MADE IN TAX FREE FUNDS, INTEREST EXPENDITURE RELATABLE TO INVESTMENT IN TAX FREE FUNDS WAS TO BE COMPUTED UNDER PROVISIONS OF RUL E 8D(2)(II) . FURTHER HON PUNJAB AND HARYANA HIGH COURT HAS HELD IN CASE OF CIT V ABHISHEK INDUSTRIES LIMITED [380 ITR 852 ] THAT WHERE ASSESSING OFFICER DISALLOWED AN AMOUNT BY HOLDING THAT INTEREST BEARING FUNDS HAD BEEN USED TO EARN TAX FREE DIVIDE ND, ETC., BUT THERE WAS NO TANGIBLE MATERIAL TO RECORD HIS SATISFACTION, DISALLOWANCE MADE WAS UNJUSTIFIED AS UNDER : - 10. SECTION 14A OF THE ACT REQUIRES THE ASSESSING OFFICER TO RECORD SATISFACTION THAT INTEREST BEARING FUNDS HAVE BEEN USED TO EARN TAX FREE INCOME. THE SATISFACTION TO BE RECORDED MUST BE BASED UPON CREDIBLE AND RELEVANT EVIDENCE. THE ONUS, THEREFORE, TO PRO VE THAT INTEREST BEARING FUNDS WERE USED, LIES SQUARELY ON THE SHOULDERS OF THE REVENUE. THUS, IF THE ASSESSING OFFICER IS ABLE TO REFER TO RELEVANT MATERIAL WHILE RECORDING SATISFACTION THAT BORROWED FUNDS WERE USED TO EARN INTEREST FREE INCOME AS PAGE 5 OF 10 VIDEOTEX INTERNATIONAL ( P) LTD V ACIT 820/CHD/2015 A Y 2008 - 09 OPPOSED TO THE ASSESSEE'S OWN FUNDS, THE ASSESSING OFFICER MAY LEGITIMATELY DISALLOW SUCH A CLAIM. THE ASSESSING OFFICER, HOWEVER, CANNOT, BY RECORDING GENERAL OBSERVATIONS, PARTICULARLY WHERE THE ASSESSEE HAS DENIED USING INTEREST BEARING FUNDS, PROCEED TO INFER THAT INTEREST BEARING INCOME MUST HAS BEEN USED TO EARN EXEMPTED INCOME. SECTION 14A OF THE ACT, BEING IN THE NATURE OF AN EXCEPTION, HAS TO BE CONSTRUED STRICTLY AND ONLY WHERE THE ASSESSING OFFICER RECORDS SATISFACTION, ON THE BASIS OF CLEAR AND COGENT MATERIAL, SHALL AN ORDER BE PASSED UNDER SECTION 14A OF THE ACT, DISALLOWING SUCH A CLAIM. AS THERE IS NO TANGIBLE MATERIAL ON RECORD THAT COULD HAVE ENABLED THE ASSESSING OFFICER TO RECORD SATISFACTION IN TERMS OF SECTION 14A OF THE ACT, FINDINGS RECORDED BY THE CIT(A) AND THE ITAT THAT THE ASSESSING OFFICER HAS FAILED TO DISCHARGE THIS ONUS ARE NEITHER PERVERSE NOR ARBITRARY AND, THEREFORE, DO NOT CALL FOR INTERFERENCE. 11. EVEN OTHERWISE, THE CONTROVERSY, IN OUR CONSIDERED OPINION, IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT IN WINSOME TEXTILE INDUSTRIES LTD . ( SUPRA ). WE, THEREFORE, FIND NO REASON TO INTERFERE WITH FINDINGS RECORDED BY THE INCOME TAX APPELLATE TRIBUNAL, ANSWER THE QUESTIONS OF LAW AGAINST THE REVENUE AND DISMISS THE APPE AL ACCORDINGLY . 8 . THEREFORE IN VIEW OF THE ABOVE TWO DECISIONS OF HONOURABLE PUNJAB AND HARYANA HIGH COURT, DRAWING SUPPORT FROM THE DECISION OF HONOURABLE SUPREME COURT IN CASE OF CIT V VEGETABLE PRODUCTS [88 ITR 192] , WE ARE INCLINED TO TAKE THE VIEW WH ICH IS PROPOUNDED IN CASE OF CIT V ABHISHEK INDUSTRIES [SUPRA] WHICH IN FAVOUR OF THE ASSESSEE. AS IN THE PRESENT CASE THERE IS NO SATISFACTION OF THE ASSESSING OFFICER BASED ON TANGIBLE MATERIAL THAT INTEREST BEARING FUNDS HAVE BEEN USED FOR INVESTMENT IN TAX FREE INCOME EARNING SECURITIES THEREFORE WE REVERSE THE FINDING OF THE LD CIT (A) IN CONFIRMING THE DISALLOWANCE U/S 14 A OF THE ACT OF RS. 9243/ - U/S 14A OF THE ACT INVOKING RULE 8D. THEREFORE GROUND NO 2 OF THE APPEAL OF THE ASSESSEE IS ALLOWED. 9 . THE GROUND NO. 3 OF APPEAL IS AGAINST CONFIRMATION OF ACTION OF THE LD AO IN DISALLOWING RS. 129000/ - OUT OF INTEREST EXPENDITURE TREATING IT AS CAPITAL EXPENDITURE. DURING THE YEAR, ASSESSEE HAS SHOWN CAPITAL WORK IN PROGRESS AND THEREFORE IT WAS ASKED ABOUT THE PROPORTIONATE INTEREST TO BE CAPITALIZED ON THAT EXPENDITURE. IN RESPONSE TO THAT ASSESSEE SUBMITTED THAT THE ASSESSEE HAS PAID INTEREST ON BORROWINGS FOR WORKING CAPITAL OF RS. 1434113/ - AND HAS PAID INTEREST ON TERM LOAN OF RS. PAGE 6 OF 10 VIDEOTEX INTERNATIONAL ( P) LTD V ACIT 820/CHD/2015 A Y 2008 - 09 197981/ - , THEREFORE THE ASSESSEE HAS NOT BORROWED ANY SUM FOR THE PURPOSE O F W ORK IN PROGRESS. IT WAS FURTHER SUBMITTED THAT ASSESSEE HA S SUFFICIENT CAPITAL AND FREE RESERVE AND THEREFORE NO DISALLOW ANCE CAN BE MADE. ALTERNATIVELY, IT WAS FURTHER SUBMITTED THAT EVEN IN CASE OF ANY INTEREST IS TO BE CAPITALIZED WHICH SHOULD BE RESTRICTED TO 1.21 LAKS. BUT AGAINST THIS THE AO FOLLOWING THE DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN CASE OF ABHIS HEK INDUSTRIES LTD VS. CIT 286 ITR 1 DISALLOWING THE INTEREST BY APPLYING SECTION 43 (1) READ WITH SECTION 36(1)( III ) OF THE ACT AND AND DISALLOWED THE SUM OF RS. 129000/ - . THE ASSESSEE CARRIED THE MATTER BEFORE THE LD CIT(A), WHO IN TURN CONFIRMED THE ACTI ON OF THE LD AO RELYING ON THE DECISION OF THE MADRAS HIGH COURT IN CASE OF CIT VS. VEN KATSWARN 22 2 ITR 163 (MAD) . AGAINST THIS ASSESSEE HAS PREFERRED AN APPEAL BEFORE US. 10 . THE LD AR SUBMITTED THAT THE ASSESSEE HAS NOT BORROWED ANY SUM TAKEN FOR CAPITAL WORK IN PROGRESS AND THEREFORE PROVISION OF SECTION 43(1) CANNOT APPLY. AS THE MAIN ARGUMENT WAS THAT BORROWING IS NOT TAKEN FOR THE PURPOSE OF FINANCING CAPITAL WORK IN PROGRESS AND THEREFORE NO INTEREST IS PAID FOR THAT . S ECOND ARGUMENT W AS THAT EVEN OTHERWISE IT HAS ENOUGH NON INTEREST BEARING FUNDS TO FUND THE CAPITALIZATION. TO DEMONSTRATE THIS HE SUBMITTED A CHART TABULATING THE ABOVE DETAILS . HE FURTHER STATED THAT NETTING OF THE INTEREST SHOULD ALSO BE CONSIDERED IN THE PRESENT CA SE , IF THE ISSUE IS DECIDED AGAINST ASSESSEE . 11 . THE LD DR RELIED UPON THE ORDERS OF THE LOWER AUTHORITIES AND SUBMITTED THAT AN AMOUNT OF DISALLOWANCE REQUIRED TO BE CAPITALIZED . 12 . WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. ACCORDING TO THE PROVISIO N OF SECTION 3 6(1)(3) THE ASSESSEE IS ALLOWED DEDUCTION OF AMOUNT OF INTEREST PAID ON CAPITAL BORROWED FOR THE PURPOSE OF THE BUSINESS OR PROFESSION. UNDISPUTEDLY THE ASSESSEE HAS BORROWED FUNDS AND UTILIZED THE SAME FOR THE PURPOSE OF THE BUSINESS AND TH EREFORE ANY INTEREST PAID THEREON IS ALLOWABLE TO THE ASSESSEE UNDER THAT SECTION. HOWEVER, W.E.F. 01.04.2004 A PROVISO HAS BEEN ADDED ACCORDING TO WHICH IT PROVIDES PAGE 7 OF 10 VIDEOTEX INTERNATIONAL ( P) LTD V ACIT 820/CHD/2015 A Y 2008 - 09 THAT ANY AMOUNT OF THE INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSINESS SHALL NOT BE ALLOWED AS DEDUCTION FROM THE DATE OF THE BORROWING OF THE CAPITAL UPTO THE DATE ON WHICH SUCH ASSET HAS BEEN FIRST PUT TO USE. THEREFORE, APPARENTLY THERE HAS TO BE A BORROWING FOR ACQUISITION OF AN ASSET. IN THE PRESENT CASE THE ARGUMENT OF THE ASSESSEE IS THAT IT HAS NOT BORROWED ANY SUM FOR ACQUISITION OF CAPITAL WORK IN PROGRESS, WHICH IS OPENING BALANCE IN THE BALANCE SHEET. THE AO BEFORE DISALLOWING UNDER THIS SECTION HAS A LSO NOT SHOWN THAT THE ASSESSEE HAS BORROWED SUCH SUM FOR ACQUISITION OF CAPITAL WORK IN PROGRESS. FURTHER, THE ASSESSEE HAS SUBMITTED A CHART WHEREIN IT HAS SHOWN AS SECURE D LOAN FROM ASSESSMENT YEAR 2005 - 06 TO ASSESSMENT YEAR 2007 - 08 WHICH IS DECREASI NG YEAR AFTER YEAR AND THEREFORE THERE CAN BE A PRESUMPTION IN FAVOR OF THE ASSESSEE THAT IT HAS NOT BORROWED THE SUM FOR THE PURPOSE OF ABOVE CAPITAL WORK IN PROGRESS. ACCORDING TO THE DETAILS FURNISHED CAPITAL WORK IN PROGRESS IN CLUDES AMOUNT FOR PURCHA SE OF LAND AS WELL AS BUILDING UNDER CONSTRUCTION AND ADVANCES TO CONTRACT AND THE TOTAL CAPITAL WORK IN PROGRESS IS OF RS. 2.88 CRORES. A SSESSEE HAS SHOWN THAT TOTAL INTEREST HAS BEEN PAID FOR WORKING CAPITAL FINANCE EXCEPT A SMALL SUM FOR TERMS LOAN. A SSESSEE HAS SUBMITTED THAT IT HAS NOT BORROWED ANY SUM FOR ACQUISITION OF LAND AS WELL AS FOR CONSTRUCTION AND THIS ARGUMENT IS NOT CONTROVERTED BY REVENUE, NO INTEREST ACCORDING TO US IS IN RELATION TO ACQUISITION OF THIS ASSETS IS CLAIMED AS EXPENDITUR E BY THE ASSESSEE. IN VIEW OF FACT THAT ASSESSEE HAS NOT BORROWED ANY CAPITAL FOR ACQUISITION OF AN ASSET WHICH THE PLOT AT NOIDA OR CONSTRUCTION THEREON, WE ARE OF THE VIEW THAT THE CLAIM OF THE ASSESSEE IS NOT H IT BY THE FIRST PROVISO 36(1)(III ) OF THE INCOME TAX ACT AND THEREFORE NO DISALLOWANCE ON ACCOUNT OF INTEREST TO BE CAPITALIZED FOR THAT ASSET CAN BE MADE . HENCE, WE REVERSE THE FINDING OF THE LD CIT(A) AND ALLOW GROUND NO. 3 OF THE APPEAL OF THE ASSESSEE. PAGE 8 OF 10 VIDEOTEX INTERNATIONAL ( P) LTD V ACIT 820/CHD/2015 A Y 2008 - 09 13 . GROUND NO. 4 OF THE APPEAL OF THE A SSESSEE IS AGAINST THE DISALLOWANCE OF EXPENDITURE OF RS. 386388/ - AS CAPITAL EXPENDITURE. DURING THE YEAR THE ASSESSEE HAS INCURRED EXPENDITURE ON RESEARCH AND DEVELOPMENT EXPENDITURE, SOFTWARE PURCHASE AND BUILDING REPAIRS AND MAINTENANCE EXPENDITURE. THESE EXPENDITURES WERE DISALLOWED BY LD AO FOR THE REASON THAT THE RESEARCH AND DEVELOPMENT EXPENDITURE INCURRED BY THE ASSESSEE IS FOR ACQUISITION OF NEW CAPITAL ASSET. REGARDING SOFTWARE DEVELOPMENT EX PENDITURE HE HELD THAT IT IS A ONETIME INVESTMENT AND REGARDING BUILDING REPAIR AND MAINTENANCE WORK A SUM OF RS. 1,50,000/ - IS PAID FOR WOODWORK AND GLASS WORK IN OFFICE ALONG WITH PAYMENT TO ARCHITECT , HENCE, HELD TO BE A CAPITAL EXPENDITURE. THUS AN E XPENDITURE OF RS. 386388/ - WAS DISALLOWED A S CAPITAL EXPENDITURE. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD CIT(A) WHO UPHELD THAT DISALLOWANCE MADE BY THE LD AO. 14 . THE LD AR SUBMITTED THAT R&D EXPENDITURE IS NOT FOR THE PURPOSE OF ACQUISITION OF NEW AS SET BUT IS FOR THE PURPOSE OF MANUFACTURING ACTIVITIES. HE SUBMITTED THAT THIS EXPENDITURE IS WITH RESPECT TO IMPORT OF VARIOUS RAW MATERIALS AND NOT FOR ACQUISITION OF ANY CAPITAL ASSET. REGARDING THE SOFTWARE EXPENDITURE, HE SUBMITTED THAT IT IS FOR FINA NCIAL ACCOUNTING SOFTWARE AS AN ANNUAL EXPENDITURE. REGARDING THE EXPENDITURE ON FURNITURE AND FIXTURES HE SUBMITTED THAT THE AREA WAS INFECTED WITH TERMITE AND THEREFORE INCURRED REPAIR EXPENDITURE AND NO ENDURING BENEFIT IS DERIVED. HE REFERRED TO P AGES 15 TO 28 OF THE PAPER BOOK WHEREIN A DETAILS OF EXPENDITURE INCURRED IS SHOWN. IN VIEW OF THIS, HE SUBMITTED THAT NO BENEFIT OF ENDURING NATURE WAS OBTAINED AND THE EXPENDITURE IS REVENUE IN NATURE. 15 . THE LD DR RELIED ON THE ORDERS OF THE LOWER AUTHORI TIES. 16 . WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. WITH RESPECT TO R&D EXPENDITURE, THE ASSESSEE HAS NOT PURCHASED ANY CAPITAL ASSET BUT HAS INCURRED PETTY EXPENDITURE ON ACCOUNT OF PURCHASE OF VARIOUS ELECTRICAL ITEMS, WHICH ARE USED N THE MANUFACTURING PROCESS OF THE ASSESSEE . PAGE 9 OF 10 VIDEOTEX INTERNATIONAL ( P) LTD V ACIT 820/CHD/2015 A Y 2008 - 09 FURTHER, THE ASSESSEE HAS IMPORTED LCD TV AND OTHER ELECTRICAL ITEMS FOR THE PURPOSE OF ITS RESEARCH AND DEVELOPMENT ACTIVITIES. IT IS ALSO NOT THE CASE OF THE REVENUE THAT THESE ARE THE EQUIPMENTS THA T ARE NOT USED FOR THE MANUFACTURING ACTIVITIES. DETAILS OF R ESEARCH AND DEVELOPMENT EXPENDITURE INCURRED BY THE ASSESSEE ARE AVAILABLE FROM PAGE 9 TO 13 OF THE PAPER BOOK. WE DO NOT FIND THAT THE ASSESSEE HAS PURCHASED ANY NEW CAPITAL ASSET OR HAS ACQUI RED ENDURING BENEFIT. IT IS ONLY AN OPERATIONAL BENEFIT THAT HAS ARISEN TO THE ASSESSEE, WHICH DOES NOT RESULT, INTO ANY CAPITAL ASSET AND THEREFORE THE EXPENDITURE IS ALLOWABLE AS REVENUE EXPENDITURE. EVEN OTHERWISE, THE PROVISION OF SECTION 35(1) ALLOWS DEDUCTION WITH RESPECT TO CAPITAL EXPENDITURE AS WELL AS REVENUE EXPENDITURE BOTH ON ACCOUNT OF RESEARCH AND DEVELOPMENT EXPENDITURE. THEREFORE, WE REVERSE THE FINDING OF THE LD CIT(A) WITH RESPECT OF DISALLOWANCE OF RESEARCH AND DEVELOPMENT EXPENDITURE OF RS. 216888/ - . WITH RESPECT TO THE PURCHASE OF ACCOUNTING SOFTWARE, IT IS STATED THAT IT IS AN ANNUAL EXPENDITURE FOR THE LICENSE OF THE SOFTWARE. SUCH SOFTWARE LICENSE PURCHASE CANNOT BE HELD TO BE CAPITAL EXPENDITURE AS IT IS MERELY A LICENSE TO USE TH AT SOFTWARE FOR A PARTICULAR PERIOD NOT CULMINATING IN TO ANY ENDURING BENEFIT TO THE ASSESSEE . THEREFORE WE REVERSE THE FINDING OF THE LD CIT ( A) WITH RESPECT TO SOFTWARE EXPENDITURE AND DIRECT THE SAME TO BE ALLOWED AS REVENUE EXPENDITURE. REGARDING THE REPAIRS AND MAINTENANCE EXPENDITURE ASSESSEE HAS SUBMITTED THAT ITS FACTORY IS SURROUNDED BY AGRICULTURE AREA WHICH WAS INFECTED BY TERMITE AND THEREFORE CERTAIN WOODEN PARTITIONS ARE CHANGED AND GLASS WERE FITTED INTO THAT. WE HAVE PERUSED THE DETAILS OF SUCH EXPENDITURE SUBMITTED AT PAGE 15 TO 28 OF THE PAPER BOOK. THE BILL OF THE ARCHITECT ALSO SHOWS THAT IT WAS RENOVATION EXPENDITURE OF THE PREMISES. THE ASSESSEE ALSO INCURRED REPAIRS EXPENDITURE FOR PREMISES ETC. LOOKING TO THE DETAILS OF SUCH EXPENSE S, WHICH ARE PETTY IN NATURE AND ROUTINE, LOOKING TO THE TOTAL ASSETS OF THE COMPANY AS ON 31.03.2008 HAVING GROSS BLOCK OF RS. 4.36 CRORES. THE ABOVE EXPENDITURE HAS ALSO NO T RESULTED IN TO NEW ASSET PAGE 10 OF 10 VIDEOTEX INTERNATIONAL ( P) LTD V ACIT 820/CHD/2015 A Y 2008 - 09 AND FURTHER NO NEW CONSTRUCTION HAS BEEN ALLEGEDLY UNDERTAKEN BY THE ASSESSEE. ASSESSEE HAS ALSO EXPLAIN ED REASONS ABOUT WHY THESE EXPENDITURE ARE NECESSARY. IN VIEW OF THIS FACT WE REVERSE THE FINDING OF THE LD CIT(A) IN CONFIRMING THE DISALLOWANCE OF RS. 150,000/ - AS CAPITAL EXPENDITURE AND NOT REPAIRS AND RENOVATION. IN THE RESULT, WE ALLOW GROUND NO. 4 OF THE APPEAL OF THE ASSESSEE. 17 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11 / 08 /2016. - SD/ - - SD / - ( BHAVNESH SAINI ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 11 / 08 / 2016 A K KEOT COPY FORWARDED TO 1 . APPLICANT 2 . RESPONDENT 3 . CIT 4 . CIT (A) 5 . DR:ITAT ASSISTANT REGISTRAR ITAT, CHANDIGARH