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2021 (7) TMI 346 - HC - Income TaxDeduction u/s 35DD - being l/5th of expenses incurred on demerger of certain units of NIIT - HELD THAT:- One of the undertakings of the demerged company i.e. NIIT Ltd. was transferred to another existing company i.e. NIIT Technologies Ltd./appellant/assessee. Thus, the resulting company, i.e. NIIT Technologies Ltd. was already in existence, and therefore, the argument that the deduction can be claimed only by the demerged company, which was in existence, and that the word “assessee” has been carefully used by the legislature, only to include the demerged company, is, misconceived. The legislature has used the word “assessee” having regard to the various ways in which the schemes are structured. Illustratively, two very broad mechanisms often used have been adverted to hereinabove. Secondly, having regard to the fact that the deduction claimed by the appellant/assessee under the provisions of Section 35DD of the Act was allowed in the earlier AYs i.e. AY 2004-2005 to 2006-2007, the same should not have been disallowed in the AYs in issue i.e. 2007-2008 and 2008-2009 based on reasoning which does not comport with a plain reading of the provisions of Section 35DD of the Act, and the understanding of how a demerger scheme operates. The interpretation of such provisions should align, wherever possible, with how ordinary men of commerce construe such business structuring operations. - Decided against revenue. Disallowance u/s 14A r.w.r. 8D - HELD THAT:- We are of the view that the Tribunal in calculating the disallowance as per the provisions of Rule 8D(2)(iii) of the Rules was not in order - Failure of the AO to record satisfaction - no reasons have been provided but only a conclusion has been reached that the AO was “satisfied that the Assessee had incurred expenses to manage its investments which may yield exempt income, and Assessee grossly failed to calculate such expenses in a reasonable manner to ascertain the true and correct picture of its income and expenses. Consequently on the aspect of administrative expenses being disallowed, since there was a failure by the AO to comply with the mandatory requirement of Section 14 A (2) of the Act read with Rule 8D (1) (a) of the Rules and record his satisfaction as required thereunder, the question of applying Rule 8D (2) (iii) of the Rules did not arise. Deduction of lease rent - lumpsum amount paid by the appellant/assessee for the entire tenure of the lease i.e. 99 years - HELD THAT:- Tribunal was wrong in applying the matching principle and directing that one-time lease rent should be spread equally over the tenure of the lease - The annual lease rent that the appellant/assessee was required to pay if it had chosen the said route, was ₹ 7,08,913/-. The commuted and discounted value of the one-time lease rent was eleven (11) times the annual rent; which in absolute terms was much lower than the amount that would have accrued as rent over the entire tenure of the lease i.e. 99 years. This was the option exercised by the appellant/assessee. As is evident, taking the present value or time value of the money into account, a lumpsum figure was proposed to the appellant/assessee for securing leasehold rights for 90 years. The lumpsum amount paid by the appellant/assessee, as adverted to above, was far less than the amount that it would have to pay if it were to choose the other option i.e. pay the lease rent on an annual basis for 90 years at the rate of ₹ 7,08,913/-. The matching principle, which is an accounting concept, requires entities to report expenses, at the same time, as the revenue. In other words, the revenue is matched with the expense, in the income and expenditure statement, for a particular period. Given the facts obtaining in this case, the matching principle would have no applicability. The appellant/assessee chose to incur the liability of a crystallised amount in the period relevant to the AY in issue i.e. AY 20072008, and therefore, it was entitled to seek deduction of the amount which fulfilled the following attributes - The expenditure was not in the nature of capital expenditure or a personal expense, It was expended fully and exclusively for the purposes of the business and; It did not fall within the realm of any provision of the Act which prohibited the appellant/assessee from claiming this deduction. - Decided against revenue.
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