The order of the Bench was delivered by
Chandra Mohan Garg, Judicial Member - Assessee's appeal in I. T. A. No. 3215/D/2013 for the assessment year 2007-08
2. At the outset, learned counsel for the assessee submitted that the assessee does not want to press ground Nos. 1, 2 and 2.1, therefore, these grounds are dismissed as not pressed.
3. Ground No. 3 of the assessee reads as under :
"3. That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding annual web hosting charges to be prior period expenses."
4. Apropos ground No. 3, we have heard arguments of both sides and carefully perused the relevant material placed on record. Learned counsel for the assessee placed a copy of the bill dated April 17, 2006, issued by Sampatti.com Ltd. wherein annual charges for website hosting, database connectivity, email accounts and e-mail facility has been billed at Rs. 3 lakhs plus service tax of Rs. 30,000 and cess of Rs. 600. Learned counsel further submitted that as per decision of the hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. v. CIT [1995] 213 ITR 523/80 Taxman 61 when the assessee is maintaining books of account as per mercantile system of accounting, then if liability arising in relevant previous year relating to the expenditure of earlier years, then expenditure is allowable and deductible as business expenditure under section 37 of the Income-tax Act, 1961. It was also submitted on behalf of the assessee that the authorities below ignored the ratio of the above judgment of the hon'ble Gujarat High Court wherein it has been held thus (page 531) :
"In each case where the accounts are maintained on the mercantile basis it has to be found in respect of any claim, whether such liability was crystallised and quantified during the previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years it cannot be disallowed as deduction merely on the basis the accounts are maintained on mercantile basis and that it related to a transaction of the previous year. The true profits and gains of a previous year are required to be computed for the purpose of determining tax liability. The basis of taxing income is accrual of income as well as actual receipt. If for want of necessary material crystallising the expenditure is not in existence in respect of which such income or expenses relate, the mercantile system does not call for adjustment in the books of account on estimate basis. It is actually known income or expenses, the right to receive or the liability to pay which has come to be crystallised, which is to be taken into account under the mercantile system of maintaining books of account. An estimated income or liability, which is yet to be crystallised, can only be adjusted as a contingency item but not as an accrued income or liability of that year."
5. Replying to the above, the learned Departmental representative submitted that it was noticed by the Revenue authorities that an amount of Rs. 3 lakhs was claimed in respect of annual charges paid for website hosting for the assessment year 2005-06. Since the amount paid towards annual charges for web hosting for the assessment year 2005-06 was in the nature of prior period expenses, then the same was rightly disallowed by the Assessing Officer and impugned order is justified in this regard.
6. On a careful consideration of the above submissions, we observe that the main contention of learned counsel for the assessee is that the bill was raised on April 17, 2006, therefore, the liability of the prior period crystallised during the financial year relevant to the assessment year under consideration, therefore, as per mercantile system of accounting, the claim of expenditure was allowable and the authorities below grossly erred in making disallowance and addition on this issue.
7. As per ratio of the decision of the hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. (supra), we note that their Lordships held that if any liability, though relating to an earlier year depends upon the making if a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous year, it cannot be disallowed as deduction merely on the basis that the accounts are maintained on mercantile basis and that it is related to a transaction of previous years. In view of the above, we come to a conclusion that the Revenue authorities grossly erred in disallowing the claim of expenditure incurred by the assessee during relevant previous year pertaining to the liability relating to earlier year. We further hold that the issue of prior period expenditure deserves to be adjudicated in the light of the above decision of the hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. (supra), and the Assessing Officer is directed to verify and examine the claim of the assessee in the light of discussion made hereinabove. Accordingly, ground No. 3 of the assessee is deemed to be allowed for statistical purposes.
Assessee's appeal in I. T. A. No. 3214/Del/2013
8. Learned counsel for the assessee submitted an application and requested that the captioned appeal was mistakenly filed, therefore, the assessee may be allowed to withdraw this appeal. The Departmental representative has no objection in allowing the assessee to withdraw its appeal. Accordingly, the appeal of the assessee for the assessment year 2008-09 bearing I. T. A. No. 3214/D/2013 is dismissed as not pressed. Departmental's appeal in I. T. A. No. 3684/D/2013 for the assessment year 2007-08
9. This appeal has been preferred by the Revenue against the order of the Commissioner of Income-tax (Appeals)-XV for the assessment year 2007-08.
10. The Revenue has raised mainly two grounds which read as under :
| "1. |
Whether, the learned Commissioner of Income-tax (Appeals) was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 14,59,612 made by the Assessing Officer under section 14A read with rule 8D ? |
2. |
Whether, the learned Commissioner of Income-tax (Appeals) was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 1,52,25,588 made by the Assessing Officer on account of capitalisation of the advertisement expenses ?" |
11. Apropos ground No. 1, the learned Departmental representative submitted that the Assessing Officer rightly invoked the provisions of section 14A of the Act read with rule 8D of the Income-tax Rules, 1962 and the Commissioner of Income-tax (Appeals) deleted the disallowance of Rs.14,59,612 without any basis and cogent reasons. The Departmental representative further contended that even prior to the introduction of rule 8D, the Assessing Officer has to satisfy himself with the correctness of claim of the assessee and if the Assessing Officer is not satisfied about the correctness of the claim of the assessee, then he shall have to reject the claim and state the reasons for doing so and in this situation, the Assessing Officer is required to determine the amount of expenditure incurred not related to income which does not form part of the total income under the Act on the basis of reasonable and acceptable method of apportionment.
12. Replying to the above, learned counsel for the assessee submitted that rule 8D is not applicable to the assessment year 2007-08 retrospectively. Learned counsel further contended that in the case of Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272/[2011] 203 Taxman 364/15 taxmann.com 390, the hon'ble jurisdictional High Court of Delhi, after considering the decision of the hon'ble Supreme Court in the case ofCIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1/192 Taxman 211 the hon'ble High Court has analysed the scope of the provisions of section 14A and powers vested with the Assessing Officer before invoking the same. Learned counsel for the assessee further submitted that when the Assessing Officer has not recorded his dissatisfaction about the correctness of the claim of the assessee or in other words, the Assessing Officer has to satisfy himself about the incorrectness of the claim of the assessee, then only the Assessing Officer may proceed to determine the amount of expenditure incurred in relation to income which does not form part of the total income on the basis of a proper method of apportionment. Learned counsel supported the impugned order and submitted that the disallowance and addition made by the Assessing Officer was not sustainable and it was rightly deleted by the Commissioner of Income-tax (Appeals).
13. On a careful consideration of the above contentions, submissions and careful perusal of the relevant material on record as well as ratio of the decisions relied on by both parties, at the outset, we note that as per the decision of the hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT[2010] 328 ITR 81/194 Taxman 203, rule 8D is applicable from the assessment year 2008-09 onwards prospectively. The case in hand is related to the assessment year 2007-08. Hence, rule 8D is not applicable to the present case.
14. Turning to the decision of the hon'ble jurisdictional High Court of Delhi in the case of Maxopp Investment Ltd. (supra), we observe that their Lordships have also enlightened the situation when the provisions of section 14A of the Act is to be invoked and disallowance to be worked out for the period prior to the introduction of rule 8D. The relevant operative part of the decision reads as under (page 295) :
"How is section 14A to be worked for the period prior to the introduction of rule 8D ?
Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income 'in accordance with such method as may be prescribed'. Of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfilment of a condition precedent is also implicit in section 14A(1) (as it now stands) as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) and (3) would require the Assessing Officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the Assessing Officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method.
Thus, the fact that we have held that sub-sections (2) and (3) of section 14A and rule 8D would operate prospectively (and, not retrospectively) does not mean that the Assessing Officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort Share and Stock Brokers P. Ltd.[2010] 326 ITR 1 (SC) to the following effect (page 17) :
'The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A.'
So, even for the pre-rule 8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the Assessing Officer will have to verify the correctness of such claim. In case, the Assessing Officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the Assessing Officer is to accept the claim of the assessee in so far as the quantum of disallowance under section 14A is concerned. In such eventuality, the Assessing Officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the Assessing Officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the Assessing Officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment.
At this juncture, we must make it clear that Dr. Rakesh Gupta's arguments that rule 8D of the said Rules exceeds the mandate of section 14A, have not been considered by us because the appeals before us are in respect of the assessment years prior to the introduction of rule 8D. We, therefore, refrain from expressing any opinion on the issue as to whether rule 8D (and, to what extent, if at all) is ultra vires section 14A of the said Act.
Answers to the questions
In view of the foregoing, question No. 1 is answered in the affirmative and questions Nos. 2 and 3, in the negative."
15. In the case in hand, the Assessing Officer made disallowance and addition by invoking section 14A of the Act read with rule 8D of the Income-tax Rules, 1962 which is not sustainable as rule 8D is not applicable to the present case which is related to the assessment year 2007-08. From bare reading of the impugned order, we observe that the Commissioner of Income-tax (Appeals) deleted the addition with the following observations and conclusion :
"6.3 Regarding ground Nos. 2.2 to 2.9 of the appeal relating to disallowance under section 14A by invoking the provisions of rule 8D, I hold that for assessment year 2007-08, the provision of rule 8D cannot be applied as these provisions came into effect from March 24, 2008, only and cannot be applied to income earned during the financial year 2006-07. Since the provisions of rule 8D determine the taxable income of the appellant and hence cannot be treated as procedural rules which could be applied to pending proceedings as on the date of their commencement of operation. Accordingly, the same are considered as substantive provisions, which cannot be applied, in the absence of clear legislative mandate, with a retrospective effect.
Without prejudice to the other, even for the assessment year for which such provisions are applicable, the provisions of rule 8D are not applicable for each and every case and are to be applied only where the Assessing Officer is not satisfied with the claim of the appellant, having regard to the account of the appellant in respect of such expenses which were actually incurred for earning tax exempt income. The hon'ble Delhi High Court in the case of Maxopp Investment Ltd. [2012] 347 ITR 272 (Delhi) has held that the lack of satisfaction of the Assessing Officer should be on cogent reasons. In the case of the appellant, the appellant had already disallowed an amount of Rs. 1 lakh in the return of income. Therefore, before invoking rule 8D, if it were applicable, the Assessing Officer ought to have pointed out any discrepancy in the claim made by the appellant, having regard to its accounts. In the absence of any cogent finding, the law does not allow the Assessing Officer to use the provisions of rule 8D in an automatic manner. Moreover, during the course of appellate proceedings, I was informed that the dividend income earned by the appellant was with respect to certain investment of its surplus funds in mutual funds in respect of which the concerned mutual funds charge fund management charges as permitted by the SEBI. It was informed that in the case of the appellant, an amount of Rs. 55 lakhs was charged by the mutual funds which were effectively in the nature of directly related administrative expenses in respect of such investment. The appellant has shown net dividend income hence such expenses which were directly related were already disallowed. The appellant informed that other than this, it had only to fill up mutual funds standard printed requisition form and issue cheques. It was informed that the appellant-company does not have particular persons exclusively engaged in the investment activity and personnel from the accounts department do the same as integral part of the day-to-day accounting work. The learned Assessing Officer also informed that the mutual funds are required to pay dividend distribution tax and only net income after payments of dividend distribution tax paid by the fund is paid to the investor.
On a careful consideration of the above facts and on observing that provision of rule 8D were not applicable during the year, the addition made under section 14A is deleted."
16. Learned counsel for the assessee submitted that the Assessing Officer has not raised any doubt about the correctness of the claim of the assessee pertaining to the interest expenses. Learned counsel further submitted that assessee-company made investment out of its own funds and the assessee has not used borrowed funds for the purpose of investment, therefore, there is no nexus with the borrowed funds and interest paid thereon. Learned counsel further pointed out that disallowance under section 14A of the Act can only be made in respect of actual expenditure incurred, which is found to have some nexus with the exempt income and the onus to prove that the expenditure incurred was in relation to exempt income earned is on the revenue and not on the assessee. Learned counsel vehemently contended that the Assessing Officer is not empowered to make disallowance on ad hoc basis without bringing out on record evidence of incorrectness of claim of expenditure towards earning exempt dividend income and since the assessee had surplus funds to make investment, the disallowance under section 14A of the Act is not permitted in absence of any finding of the assessee in regard to incorrectness of the claim of the assessee as well as without bringing out any direct nexus of borrowed funds with investment.
17. From paragraph 6.3 of the Commissioner of Income-tax (Appeals)'s order as reproduced hereinabove, we note that the Commissioner of Income-tax (Appeals) has simply deleted the addition with a bottom line conclusion that the provisions of rule 8D of the Income-tax Rules, 1962, were not applicable for the year under consideration and the Commissioner of Income-tax (Appeals) deleted the impugned addition. This is not a correct approach because the period prior to introduction of rule 8D of the Rules, for making disallowance under section 14A of the Act, the Assessing Officer shall have to reject the claim of the assessee pertaining to the expenditure of interest and other managerial and administrative expenses and also have to state the reasons for doing so. Further, the Assessing Officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the provisions of the Act and the Assessing Officer is required to do so on the basis of an acceptable and reasonable levy of apportionment of expenditure claimed by the assessee. Hence, the Assessing Officer wrongly took aid of rule 8D and the Commissioner of Income-tax (Appeals) deleted the impugned addition only on this basis without analysing the situation and factual matrix of the case and totally ignoring the decision of the hon'ble jurisdictional High Court of Delhi in the case of Maxopp Investment Ltd. (supra).
18. In view of the above, we come to a conclusion that the authorities below have not dealt with the issue of disallowance under section 14A of the Act as per letter and spirit of the relevant statutory provisions and as per the decision of the hon'ble jurisdictional High Court of Delhi in the case of Maxopp Investment Ltd.(supra) and other relevant decisions. Therefore, we are of the considered view that the issue of disallowance under section 14A of the Act requires thorough verification and examination at the end of the Assessing Officer and hence the assessment order as well as impugned order, only up to this extent, is set aside and the issue is restored to the file of the Assessing Officer with a direction that the Assessing Officer shall adjudicate the issue afresh by affording due opportunity of hearing for the assessee without being prejudiced with the observations and findings of the assessment order as well as impugned order. Accordingly, ground No. 1 of the Revenue is deemed to be allowed for statistical purposes.
Ground No. 2
19. Apropos ground No. 2, the learned Departmental representative submitted that the Assessing Officer noticed that the assessee has incurred substantial amount on glow sign boards and on hoardings which was capital in nature as this expenditure brings enduring benefit for the assessee and the assessee could not substantiate that the expenditure was revenue in nature which was a part of day-to-day business expenditure incurred in the normal course of business. The Departmental representative further contended that the Commissioner of Income-tax (Appeals) deleted the addition without any cogent and reasonable basis, therefore, the impugned order may be set aside by restoring that of the Assessing Officer.
20. Replying to the above, learned counsel for the assessee pointed out paragraph No. 6.5 of the impugned order and submitted that as per decision of the hon'ble Supreme Court in the cases of Empire Jute Co. Ltd.v. CIT [1980] 124 ITR 1/3 Taxman 69, CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257/38 Taxman 110A (SC) and in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377/43 Taxman 312 (SC), it has been held that if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably, while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may be for an indefinite future. Learned counsel supporting the impugned order submitted that the Assessing Officer made disallowance without any basis which was rightly deleted by the Commissioner of Income-tax (Appeals) as the expenditure was incurred for day-to-day business of the assessee and the expenditure did not bring any benefit of enduring nature to the assessee-company.
21. The operative relevant part of the impugned order which deleted the impugned addition reads as under :
"6.5 Regarding ground No. 4 of the appeal keeping in view the decision in the cases of CIT v. Liberty Group Marketing Division [2009] 315 ITR 125 (P&H), Mohan Meakin Breweries Ltd. v. CIT[1979] 118 ITR 101 (HP) and of the hon'ble Delhi Income-tax Appellate Tribunal in the case of Sony India Ltd. v. Deputy CIT, the expenses for laying hoardings and glow signboards are held as revenue expenditure since neither any enduring benefit has been acquired by the appellant nor any capital asset has been put in place. Accordingly, the addition made on this ground is deleted."
22. In view of the above, we note that the Assessing Officer has not doubted the genuineness and truthfulness of the claim of the assessee pertaining to the expenses for glow sign board and hoardings in view of decision of the Punjab and Haryana High Court in the case of CIT (Central) v. Liberty Group Marketing Division[2009] 315 ITR 125/[2008] 173 Taxman 439 the decision of the hon'ble Himachal Pradesh High Court in the case of Mohan Meakin Breweries Ltd. v. CIT [1979] 118 ITR 101/2 Taxman 150, we are of the considered opinion that the Assessing Officer was not justified in making the disallowance and addition and on the other hand, the Commissioner of Income-tax (Appeals) rightly deleted the addition by holding that the expenses for hoardings and glow sings are expenditure of revenue in nature because the same neither bring any enduring benefit for the assessee and the advantage consists merely in facilitating the assessee's trading operations, supporting the management and conduct of the assessee's business to be carried out on more efficiently or more profitably leaving fixed capital of the assessee untouched. We are unable to see any ambiguity or perversity or any other valid reason to interfere with the impugned order on this issue and we uphold the same. Accordingly, ground No. 2 of the Revenue in I. T. A. No. 3684 is also dismissed.
I. T. A. Nos. 3686/Del/2013 and 3694/Del/2013
23. The Revenue has raised following grounds in I. T. A. No. 3686/Del/2013 :
| "1. |
Whether, the learned Commissioner of Income-tax (Appeals) was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 15,71,149 made by the Assessing Officer under section 14A read with rule 8D ? |
2. |
Whether, the learned Commissioner of Income-tax (Appeals) was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 1,92,80,942 made by the Assessing Officer on account of capitalisation of the advertisement expenses ? |
3. |
Whether, the learned Commissioner of Income-tax (Appeals) was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 68,40,900 made by the Assessing Officer under the head of miscellaneous expenses ?" |
24. The Revenue has raised following sole ground in I. T. A. No. 3694/Del/ 2013 in pursuance to the order of the Commissioner of Income-tax (Appeals) passed under section 154/143(3) of the Act dated March 18, 2013 :
| "1. |
|
Whether, the learned Commissioner of Income-tax (Appeals) was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 1,15,32,425 made by the Assessing Officer under section 14A read with rule 8D ?" |
Ground No. 1 in I. T. A. No. 3683 and ground No. 1 in 3694/Del/2013
25. The learned Departmental representative submitted that the Assessing Officer rightly invoked the provisions of section 14A read with rule 8D of the Rules which was applicable for the assessment year 2008A-09. The learned Departmental representative further pointed out that the Assessing Officer made disallowance and addition of Rs. 15,71,149 in original assessment order dated December 24, 2002, passed under section 143(2) of the Act and subsequently, the Assessing Officer passed another order dated August 25, 2011, under section 154/143(3) of the Act. The Assessing Officer rightly disallowed additional amount of Rs. 1,15,32,425 under section 14A of the Act. The learned Departmental representative vehemently contended that the Commissioner of Income-tax (Appeals) deleted the addition without any justified and cogent reason and the Commissioner of Income-tax (Appeals) also quashed the order of the Assessing Officer dated August 25, 2011, passed under section 154/143(3) of the Act without any justified basis and cogent findings.
26. Learned counsel for the assessee submitted that the provisions of section 14A of the Act are applicable only when an expenditure is actually incurred in relation to the income which does not form part of the total income and no expenses were actually incurred by the assessee in relation to the dividend income. Learned counsel for the assessee further pointed out that the Assessing Officer had applied the provisions of rule 8D of the Income-tax Rules which is not applicable automatically without recording any adverse satisfaction against the assessee in this regard. Learned counsel further pointed out that the Assessing Officer passed order dated August 25, 2011, under section 154/143(3) of the Act without affording due opportunity of hearing for the assessee and there was no mistake apparent from the record in the original assessment order dated December 24, 2010, therefore, the Commissioner of Income-tax (Appeals) was right in deleting the baseless and unsustainable huge addition of Rs. 1.15 crores.
27. It was also prayed by both parties that since the issue of disallowance and addition under section 14A of the Act pertaining to the assessment year 2007-08 has been restored to the file of the Assessing Officer for fresh adjudication as per provisions of the Act and as per ratio of the decision of the jurisdictional High Court of Delhi in the case of Maxopp Investment Ltd. (supra), therefore, similar issue for the assessment year 2008-09 may also be restored to the file of the Assessing Officer for fresh adjudication.
28. On a careful consideration of above, at the outset, we hold that rule 8D of the Income-tax Rules, 1962, is applicable to the present case assessment year, i.e., 2008-09 as per decision of the hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. (supra). However, the Commissioner of Income-tax (Appeals) has held that the Assessing Officer was not empowered to automatically invoke the provisions of rule 8D of the Rules and the addition is not sustainable which is not based on appropriate and legal approach as per the provisions of section 14A of the Act read with rule 8D of the Income-tax Rules, 1962 and the Commissioner of Income-tax (Appeals) has also ignored the ratio of the decision of the hon'ble jurisdictional High Court of Delhi in the case of Maxopp Investment Ltd. (supra).
29. Since the issue of disallowance under section 14A of the Act has been restored to the file of the Assessing Officer for the assessment year 2007-08 in the light of the decision of jurisdictional High Court of Delhi in the case of Maxopp Investment Ltd. (supra). Therefore, we also find it appropriate that the issue of disallowance under section 14A of the Act read with rule 8D of the Income-tax Rules, 1962 (which is applicable from the assessment year 2008-09 prospectively) is also restored to the file of the Assessing Officer with a direction that the Assessing Officer shall examine and verify the issue afresh by affording due opportunity of hearing for the assessee and without being prejudiced with the earlier assessment, rectification and impugned orders. The Assessing Officer shall keep in mind this very fact and legal position that rule 8D of the Income-tax Rules is applicable to the assessment year under consideration, i.e., 2008-09 and the Assessing Officer shall decide the controversy as directed above and to adjudicate the issue as per ratio of the decision of the hon'ble High Court of Delhi in the case of Maxopp Investment Ltd. (supra). Accordingly, ground No. 1 in both appeals of the Revenue is also restored to the file of the Assessing Officer with aforementioned directions and deemed to be allowed for statistical purposes.
Ground No. 2 in I. T. A. No. 3686/Del/2013
30. Since similar deletion of addition on account of capitalisation of advertisement expenses made by the Assessing Officer and deleted by the Commissioner of Income-tax (Appeals) has been upheld by us by the earlier part of this order for the assessment year 2007-08 by disallowing ground No. 2 of the Revenue in I. T. A. No. 3684/Del/2013, therefore, respectfully following the same, ground No. 2 of the Revenue in I. T. A. No. 3686/Del/ 2013 is held to be squarely covered in favour of the assessee and therefore, following our decision in the earlier part of this order on this issue, ground No. 2 of the Revenue for the assessment year 2008-09 is also disallowed and the order of the Commissioner of Income-tax (Appeals) is upheld.
Ground No. 3 in I. T. A. No. 3686/Del/2013
31. Apropos ground No. 3, we have heard rival arguments of both sides and carefully perused the relevant material placed on record.
32. Briefly stated, the facts pertaining to ground No. 3 of the Revenue for the assessment year 2008-09 are that the Assessing Officer made disallowance in regard to horticulture expenses (for plant and staff colony), security services expenses (for staff colony), computer supply (peripherals) and software purchase expenses total amounting to Rs. 68,40,814 which were deleted by the Commissioner of Income-tax (Appeals) by allowing ground Nos. 4, 5, 5.1, 6, 6.1, 7 and 8 of the assessee raised before him, i.e., Commissioner of Income-tax (Appeals) in the impugned order. Now, the Revenue reagitated the above issue in ground No. 3 as reproduced hereinabove.
33. Apropos these five issues from the impugned order we observe that the Commissioner of Income-tax (Appeals) granted relief for the assessee with the following observations and conclusion :
"6.4 |
Regarding ground No. 3 of the appeal, keeping in view the decision in the case of CIT v. Liberty Group Marketing Division [2009] 315 ITR 125 (P&H), Mohan Meakin Breweries Ltd. v. CIT[1979] 118 ITR 101 (HP) and of the hon'ble Delhi Income-tax Appellate Tribunal in the case ofSony India Ltd. v. Deputy CIT, the expenses for laying hoardings and glow signboards are held as revenue expenditure since neither any enduring benefit has been acquired by the appellant nor any capital asset has been put in place. Accordingly, the addition made on this ground is deleted. |
6.5 |
Regarding ground No. 4 relating to horticulture expenses for the plant, the disallowance was made by the Assessing Officer by holding the same as not for business purpose. The appellant has set up the plant in a remote area in Gujarat which is a semi-desert state. It is, therefore, required to have dust free environment for the proper manufacturing of the product of the appellant, i.e., glass. In any case, such expenses were incurred within the factory premises in order to provide necessary landscape and making the environment green. There are several other expenses, which are incurred for decorating the building and plant and for providing general security. However, all such expenses do not necessarily result in augmenting the production, however, since no other purpose is achieved other than the main purpose, i.e., manufacturing and such expenses certainly facilitate the operations by providing better environment, such expenses are clearly held as revenue in nature. There are a number of incentive provisions within the Income-tax Act for environment protection, therefore, the Assessing Officer could have been little more environment friendly in this regard. In view of the same, addition made on account of the disallowance is deleted. |
6.6 |
On the same ground, the disallowance made by the Assessing Officer in respect of horticulture expenses for the staff colony which is in the immediate vicinity of plant and the security thereof are also held to be of same nature. The appellant's plant is away in a remote area in Gujarat and it is in the business interest of the appellant to have a staff colony in the vicinity of the plant that saves the time and cost incurred for transportation of the employees to the plant. The appellant had set up a staff colony in the neighbourhood of the plant for this purpose and all other expenses in respect of such staff colony, whether capital or revenue, have been allowed by the Assessing Officer, by providing depreciation allowance or by holding them as revenue expenses. Since the staff colony is a business asset of the appellant, security of such assets which are business in nature may be held as business expenditure. Repairs, maintenance security and laying proper lights and horticulture for the staff colony may be justified as business purpose or the same could alternatively be allowed as staff welfare. The appellant has claimed to have paid fringe benefits tax on the same. It is undisputed that no other non-business benefit was derived from the appellant-company by claiming such expenses. In view thereof, such expenses are allowed and the addition made in this regard is deleted. |
6.7 |
Regarding ground No. 6 disallowance out of computer supplies, on perusal of the details furnished before me, I find that these expenses are routine expenses in the nature of printer cartridges, computer peripherals like CD disks, pen drive, etc., which are routine consumable items for the use of computer. Each item is a small value item. On a careful consideration of the details, on holding the same revenue in nature, addition made on this ground is deleted. |
6.8 |
Regarding ground No. 7 of the appeal relating to software licence fee, on careful examination, I find that the same are in the nature of e-mail to fax services, SMS charges, etc. In view of this, I do not agree with the contention of the Assessing Officer that such expenses were capital in nature and hold them are routine revenue expenditure. Therefore, the addition made in this regard is deleted." |
34. On the issue of horticulture expenses at plant and staff colony, learned counsel for the assessee submitted that the manufacturing plant of the assessee-company is situated at a remote desert area and in order to have dust free environment, it is required to have green environment, landscaping and trees, hence, the assessee incurred expenditure on horticulture and the same was incurred for business purposes to enhance efficiency in the day-to-day working of the company which did not result in creation of capital assets or enduring benefit for the assessee and learned counsel further contended that the Commissioner of Income-tax (Appeals) rightly deleted the addition.
35. Learned counsel strenuously contended that the horticulture expenses for plant area and staff colony were incurred towards maintenance of green landscape in the factory premises and residential accommodation provided to the employees and they were essential for business purpose and therefore the disallowance has rightly been deleted by the Commissioner of Income-tax (Appeals).
36. The learned Departmental representative replied that the impugned expenditure on horticulture of plant and employees colony cannot be said to be incurred for business purpose and neither it was expenditure of capital nature, hence, the same was rightly disallowed by the Assessing Officer but the Commissioner of Income-tax (Appeals) erred in deleting the additional on a wrong principle.
37. On a careful consideration of above, we are of the considered opinion that we are in agreement with the reasoning and conclusion of the Commissioner of Income-tax (Appeals) in paragraph 6.5 of the impugned order as the main purpose of expenditure on horticulture was to facilitate the operations by providing better environment which is of revenue in nature, hence, the same is allowable under section 37 of the Act. We also observe that there are other several expenses which are incurred for decorating the building and for providing general security, beautification and required environment for day-to-day activities of manufacturing unit of the assessee, therefore, these kind of expenses are incurred for the purpose of business and the same cannot be disallowed.
38. In regard to issue of security services at the staff colony is concerned the learned Departmental representative submitted that the expenses cannot be said for business purpose as the same was incurred for non-business purpose, hence, the Assessing Officer rightly made an addition in this regard which was deleted by the Commissioner of Income-tax (Appeals) without any justified reasoning.
39. The authorised representative replied that in the appeal for preceding assessment year 2007A-08 of the Department has accepted the stand of the assessee and not filed any appeal before the Tribunal on the aforesaid issue of security expenses on staff colony, which was similarly decided in favour of the assessee by the Commissioner of Income-tax (Appeals) by following earlier order. Therefore, considering the rule of consistency too, there ought to be uniformity in the treatment and consistency in the approach adopted by the Department.
40. On a careful consideration of the above submissions and perusal of the order of the Commissioner of Income-tax (Appeals) for preceding the assessment year 2007-08 and respectfully following the decision of the hon'ble apex court in the case of Empire Jute Co. Ltd. (supra), wherein it was held that the expenditure incurred for welfare of employees and even general public interest is allowable as revenue deduction, we reach to a conclusion that the expenditure of security for staff colony is squarely covered in favour of the assessee by the earlier/preceding the assessment year 2007-08 order of the Commissioner of Income-tax (Appeals) and in the present case, the Commissioner of Income-tax (Appeals) was right in deleting the addition. Hence, we are unable to see any ambiguity or perversity in the impugned order or any other valid reason to interfere with the same.
41. On the issue of computer peripherals supply expenses, the learned Departmental representative submitted that as per claim of the assessee, the assessee incurred expenditure of Rs. 18,24,903 towards purchase of printer cartridges, computer peripherals like CD disks, etc. and other consumables for maintenance of computers and printers but the assessee has not furnished any details/evidence to support this claim. Therefore, the Assessing Officer rightly treated the same as capital nature expenditure and allowed depreciation at the rate of 15 per cent. and disallowed the remaining balance of Rs. 15,51,168. The Departmental representative further contended that the Commissioner of Income-tax (Appeals) granted relief for the assessee on wrong basis, hence the impugned order may be set aside by restoring that of the Assessing Officer.
42. Learned counsel for the assessee replied that (i) the nature of aforesaid expenses incurred on consumables are routine in nature, and (ii) such expenditure was incurred wholly and exclusively for the purpose of business and did not bring any benefit of enduring nature for the assessee, therefore, such expenditure should not be treated as capital expenditure as has been done in the preceding assessment year. Learned counsel further submitted that the expenditure incurred on consumables of computer supplies should be allowed as deductible revenue expenditure, learned counsel alternatively submitted that depreciation on such computer supplies should be allowed at the rate of 60 per cent.
43. On a careful perusal of the assessment order, we observe that the Assessing Officer treated the expenditure as capital in nature and made an addition, after allowing depreciation at the rate of 15 per cent., by holding that the assessee has not furnished details/evidence to support the claim. From paragraph 6.7 of impugned order, as reproduced above, we observe that the Commissioner of Income-tax (Appeals) granted relief for the assessee on perusal of the details furnished before him but the Commissioner of Income-tax (Appeals) has not given any finding about the nature of expenditure and facts emerging from details/evidence submitted before him, neither the remand report has been called from the Assessing Officer. Hence, we find it appropriate to restore this issue to the file of the Assessing Officer with a direction that the Assessing Officer shall examine the details/ evidence of the assessee about this claim of the assessee and adjudicate the issue afresh without being prejudiced from earlier assessment and impugned order.
44. Apropos software purchase and development expenditure the learned Departmental representative submitted that the nature of expenditure clearly shows that it is of capital nature subject to admissible depreciation at the rate of 60 per cent. and the Assessing Officer rightly disallowed balance amount of Rs. 5,86,967. Learned counsel for the assessee replied that expenses on computer software are to be regarded to be incurred as revenue expenditure as per test laid down by the Special Bench of the Tribunal in the case of Amway India Enterprises v. Dy. CIT [2008] 21 SOT 1/111 ITD 112 (Delhi) inasmuch as (i) such computer software does not have utility for long duration and hence does not result in enduring benefit, and (ii) such software does not constitute profit earning apparatus and merely enable the assessee to efficiently conduct its business. Learned counsel also placed reliance on the decisions of the hon'ble jurisdictional High Court of Delhi in the cases of CIT v. Asahi India Safety Glass Ltd. [2012] 346 ITR 329/[2011] 203 Taxman 277/15 taxmann.com 382 and Amway India Enterprises (supra) wherein it has been held that software expenses not to create new assets or a new source of income but upgrade system, hence, software expenditure is revenue expenditure which is allowable under section 37 of the Act.
45. On a careful consideration of the above submissions of both sides, we are of the considered view that the Assessing Officer has not doubted about the genuineness of the claim of the assessee but the Assessing Officer treated the same as capital expenditure. Per contra, the Commissioner of Income-tax (Appeals) rightly held that the expenditure incurred on software licence fee, purchase/development of miscellaneous software and hosting and maintenance of website and charges for internet band-width connectivity are expenditure of revenue nature and we are unable to see any valid reason to interfere with the same, hence, the order of the Commissioner of Income-tax (Appeals) is upheld and contentions of the Departmental representative are rejected. To sum up, on ground No. 3 of the Revenue in the assessment year 2008-09 the issue of horticulture expenses in plant and staff colony, security, charge for staff colony and software development expenses is decided in favour of the assessee and the same is partly dismissed on above four issues and on the issue of computer supplies a part of ground of the Revenue is deemed to be allowed by restoring the issue to the file of the Assessing Officer with the directions as indicated above.
46. Finally, in the result, the above captioned appeals are disposed of with the summarised result as under :
| (i) |
I. T. A. No. 3214/D/2013 of the assessee is dismissed as withdrawn. |
(ii) |
I. T. A. No. 3215/Del/2013 of the assessee is partly allowed on ground No. 3 and the same is deemed to be allowed for statistical purposes. |
(iii) |
I. T. A. No. 3684/Del/2013 of the Revenue is dismissed on ground No. 2 and deemed to be allowed for statistical purposes on ground No. 1. |
(iv) |
I. T. A. No. 3686/Del/2013 is partly dismissed on ground No. 2 and on four issues as indicated above of ground No. 3 and partly deemed to be allowed on ground No. 1 and on the issue of computer supplies a part of ground No. 3. |
(v) |
In I. T. A. No. 3694/Del/2013 of the Revenue the sole ground is deemed to be allowed for statistical purposes. |
The order pronounced in the open court on August 22, 2014.