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TMI Blog2011 (8) TMI 763X X X X Extracts X X X X X X X X Extracts X X X X ..... as not applicable on the facts and law involved in this year. Under the provision of the Act and relevant case law, the addition as confirmed by the CIT(A) is unmerited. 3. The learned CIT (A) has erred inter alia; (i) in rejecting the appellant's claim with regard to expenditure incurred in relation to dividend income without giving valid reasons why he was not satisfied with the correctness of the appellant's claim. (ii) determining the expenditure in relation to dividend income by recourse to sub-section (2) of the Section 14A read with Rule 8D without giving any reason why such expenditure could not be determined by having regard to the accounts of the appellant. (iii) in applying Rule 8D to the appellant's case for the assessment year 2006-07 even though the enabling sub-section (2) of Section 14A was introduced with effect from 01.04.2007 and Rule 8D was notified on 24.03.2008 (iv) determining the expenditure in relation to dividend income under clause (iii) of sub-rule (2) of Rule 8D and apportioning Rs. 28,09,104/- out of total expenditure to dividend income even though there was no nexus between the expenses claimed aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Rs. 28,09,104/-. 5. Being aggrieved, the assessee carried the matter to the learned CIT(A) and submitted that sub-section (2) of section 14A of the IT. Act and Rule 8D of the IT. Rules framed thereunder are not applicable to assessments prior to assessment year 2007-08. It was further submitted that without prejudice to the above contention, even if it is assumed that sub section (2) of section 14A of the IT. Act read with Rule 8D of the IT. Rules embodies a procedural or machinery provision and is therefore applicable even to assessments of assessment years prior to the insertion of subsection (2) of section 14A and the notification of the Rule, the appellant contends that the Rule is not applicable to its case, for the reasons stated herein below. (i) While inserting the procedural sub-section (2) in section 14A the legislature has taken care to ensure that the sub section and any rule framed thereunder shall not be applied mechanically without application of mind in all cases. The sub section has been made applicable only 'if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly or indirectly" relatable to dividend income, the question of maintaining any separate accounts for expenditure in-relation-to dividend income did not arise. It was also stated that without prejudice to the assessee's above argument that there were no valid reasons to record non satisfaction with the assessee's claim of expenditure in-relation-to dividend income and therefore to apply Rule 8D to its case. It was also submitted that the aforesaid Rule as it stands is contrary to, and overrides, the intent and purpose of sections 10(34) and 14A because the intent of section 10(34) is to exempt dividend income and the purpose of section 14A is to limit the exemption to net exempt-income after deducting expenditure incurred in relation to the exempt income. It was submitted that any rule which computes expenditure in relation to exempt income cannot be framed in a manner so as to compute a total income higher than what would be computed if the exempt income were not exempt at all and were taxable, for example, if the assessee had received a dividend of only Rs. 10 lacs during the financial year under consideration, Rule 8D would still yield expenditure in-relation-to dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for earning the dividend and that no separate accounts of this (investment) activity have been maintained. 4.3.1 Income by definition means net income after expenses. It was for this reason that the Legislature in 2001 introduced section 14A as a clarificatory provision with retrospective effect from 1962. The section clarified that 'for the purpose of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act'. Sub section (2) of section 14A was later inserted with effect from 1.4.2007 in order to empower the Government to prescribe a method to determine expenditure incurred in relation to exempt income. Pursuant to the enabling provision, the Government on 24.3.2008 notified the new Rule 8D, prescribing the method to determine expenditure in-relation-to the exempt income. 4.3.2 I see no merit in the claim that no expenses at all have been incurred for earning the exempt dividend income. As stated above, it is rather over-simplification to say that no expenses at all have been incurred for earning the dividend. The AO has not been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income which does not from part of total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001." 9.1 From the above provisions it would be clear that the mandate of Section 14A is to prevent claims for deduction of expenditure in relation to income which does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Warehousing Corporation v. CIT [2000] 159 CTR (SC) 132 : [2000] 242 ITR 450 (SC) that in the case of a composite and indivisible business which resulted in taxable and non-taxable income, it was impermissible for the AO to apportion the expenditure incurred in relation to such business as between the earning of taxable and non-taxable income. Sub-sec (1) of s. 14A was inserted with retrospective effect from 1st April, 1962 to overcome the decisions of the Supreme Court. At the same time, as has been noticed by the Supreme Court in its decision in CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 233 CTR (SC) 42 : [2010] 41 DTR (SC) 233, the theory of apportionment of expenditure between taxable and non-taxable income has, in principle, been now widened under s. 14A. Reading s. 14 in juxtaposition with ss. 15 to 59, it has been observed that the words "expenditure incurred" in s. 14A refer to expenditure on rent, tax, salary, interest etc. in respect of which allowances are provided for. Thirdly, sub-ss. (2) and (3) were introduced by a legislative amendment brought about by the Finance Act of 2006. The Memorandum Explaining the Provisions of the Finance Bill of 2006 recogni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect to subordinate legislation. However, unless expressly or by necessary implication, a contrary provision is made, no retrospective effect is to be given to any rule so as to prejudicially affect the interests of the assessee. Even in the absence of sub-ss. (2) and (3) of S. 14A and of r. 8D, the AO was not precluded from making apportionment. Such an apportionment would have to be made in order to give effect to the substantive provisions of sub-s. (1) of S. 14A which provide that no deduction would be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. The change which is brought about by the insertion of sub-ss (2) and (3) into S. 14A by the Finance Act of 2006 w.e.f 1st April, 2007 is that in a situation where the AO is not satisfied with the correctness of the claim of the assessee in regard to the expenditure incurred by it in relation to the non-taxable income, the AO would have to follow the method which is prescribed by the rules. The amendment rules were notified to come into force on 24th March, 2008. It is a trite principle of law that the law which would apply to an assessment year is the law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance of Rs. 10,42,895/- for prior year expenses claimed as deduction during the A.Y. 2006-07. 3. Appellant craves leave to add or amend any one or more of the above grounds of appeal as and when need for doing so may arise with the prior permission of the Hon'ble Bench." 11. Vide ground No. 1 of the appeal, the grievance of the Department relates to the deletion of disallowance of Rs. 13,32,39,725/- made by the Assessing Officer u/s 40(a)(ia) read with section 194C of the IT. Act, 1961 (in short, the "Act"). 12. The facts related to this issue, in brief, are that the assessee is a limited company engaged in the business of Civil Engineering construction, limestone mines and real estate etc. During the year under consideration, the assessee filed return of income on 30/11/2006 declaring net income of Rs. 9,45,72,139/-. The Assessing Officer, during the course of assessment proceedings, noticed that the assessee was doing most of the activities as a sub contractor of M/s Jai Prakash Associates Ltd. and for carrying out the activities like construction of dam, supply of labour, construction of buildings etc., the assessee executed an agreement for hiring of machiner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd equipment including salary & wages, allowances and other benefits of driver/operator/helper, fuel and lubricants, repair and maintenance, spares including tyres, tubes, batteries etc., road tax, insurance and other expenses incidental to the running/operating the said machinery and equipment and the Hirer will only be liable to pay the hire charges. In case, where the Lender does not have necessary infrastructure for providing the services of required manpower, fuel & lubricants, repairs & maintenance and other spare(s) etc, the Hirer would be entitled to arrange for the same at the cost and expense of the Lender. 5. The machines & equipment shall be given on hire at various working sites in India of the Hirer. However if the Hirer requires the machinery & equipments which are not available at the site and plant & machinery needs to be transferred from other site, then it would be the sole responsibility of the Hirer to get the machineries & equipment transferred at its own cost and expense. The Hirer would be fully responsible for any damages incurred to the machinery and equipment during transfer from one site to another. 6. The machinery and equipm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,000/- per hour 3,000/- per hour 4. Loader (BEML-BE-30) Daily basis 06 hours (as & when required) 1,500/- per hour 5. Loader (HM-2021) Daily basis 06 hours (as & when required) 1,000/- per hour 6. Dumpers (Volvo 600) Daily basis 06 hours (as & when required) 1,250/- per hour 7. Dumpers (Tatra Hemang) Daily basis 06 hours (as & when required) 1,250/-per hour 8. Eumpers (BEML-BH-35) Daily basis 06 hours (as & when required) 3,000/- per hour 9. Tipper (TATA) Daily basis 06 hours (as & when required) 400/- per hour 10. Vibratory Compactor (Bombay BW-216) Daily basis 06 hours (as & when required) 1,500/- per hour 11. Escorts JCB-3D Daily basis 06 hours (as & when required) 1,000/- per hour 12. Tata Scoop Tipper TC 2516 Daily basis 06 hours (as & when required) 2,000/- per hour 13. Water Tanker (Tata) Daily basis 06 hours (as & when required) 400/- per hour 14. Truck Monthly basis 40,000/- per month or 20/-per Km whichever is higher 15. Bus Monthly basis 30,000/- per month or 15/-per KM, whichever is higher 16. Jeep Monthly basis 20,000/- per month upto 3000 kms and thereafter 10/-per km. 17. Pick- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to bear all running cost of machinery and equipment including salary and wages, allowances and other benefits of the driver/operator/helper, fuel and lubricants, repair and maintenance, spares including tyres, tubes, batteries etc., road tax, insurance and other expenses incidental to the running/operating the said machinery and equipment and the Hirer will only be liable to pay the hire charges. He further observed that as per clause-7 of the agreement, the lender was required to take adequate and comprehensive insurance of the machinery and equipment, given on hire, at its own cost and any loss or damage to the machinery and equipment by accident or otherwise will be made good by the Lender at his own cost, therefore, the case of the assessee did not remain a simple case of renting. According to him, the insertion of word Machinery & Equipment" u/s 194-I is to ensure that tax is deducted at the higher rate of 10% prescribed in section 194-I because it was found that rent/lease agreement were being split up to reduce/avoid liability of TDS. As regards to the contention of the assessee that hiring or renting of equipments was not covered by section 194-C, the Assessing Officer ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not with reference to the work done. In other words, the lender neither had any work obligation nor any command, control and possession of the machines after they were temporarily handed over to the hirer. It was stated that the provisions in the contract for drivers, operators and helpers along with specific machines and for meeting their operating & maintenance costs by the lender, were subservient to the hiring of machinery and to facilitate its proper use and maintenance. It was further stated that the machines being heavy and specialized construction machinery requiring skilled operating personnel and specific maintenance schedules, therefore, the provision of operating personnel and maintenance was incidental and subservient to the substantial and predominant purpose of hiring the machines. The assessee submitted to the learned CIT(A) that a contract u/s 194C may be for (a) carrying out any work; (b) for supply of labour for carrying out any work. Therefore, to come within the meaning of limb (a) of section 194C, a contract must involve the carrying out of any work, whether tangible or intangible and that in the case of a contract for carrying out intangible work (service c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expense on account of default in tax deduction at source. As such, it is actually a penal provision for enforcing compliance with the TDS provisions. It was stated that a tax payer should not be fastened with a liability in the nature of a penalty unless he is shown to have acted deliberately and wilfully in defiance of the law and that the penalty should not be levied where default has not been proved beyond reasonable doubt. Accordingly, it was submitted that the disallowance under sub clause (ia) of clause (a) of section 40 of the Act should be invoked only where the liability to deduct tax is clear and unambiguous, and the non deduction is clearly indefensible but it is not the case of the assessee since the assessee acted reasonably and in good faith in not deducting tax from payments in question. 13.1 The learned CIT(A), after considering the submissions of the assessee, observed that the assessee was engaged in the business of Civil Engineering construction, limestone mines and real estate, executing civil works as a sub contractor for M/s Jaiprakash Associates Ltd. and for executing the aforesaid works, the assessee hired from M/s Jaiprakash Associates Ltd., certain const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so pointed out that the provision in the contract for drivers, operators and helpers along with specific machines and for meeting their operating & maintenance costs by the lender, were subservient to the hiring of machinery and to facilitate its proper use and maintenance and that the machines being heavy and specialized construction machinery requiring skilled operating personnel and specific maintenance schedules, therefore, the provision of operating personnel and maintenance was incidental and subservient to the substantial and predominant purpose of hiring the machines. The learned CIT(A) was of the view that the provisions of section 194C of the Act is having two limbs; (a) carrying out any work or (b) for supply of labour for carrying out any work and in order to fall within the meaning of limb (a) of section 194C of the Act, a contract must involve the carrying out of any work, whether tangible or intangible and in the case of a contract for carrying out intangible work (service contract) with the help of any machinery, the test is that there is, firstly, an obligation to carry out a specified work, and secondly, the command, control and possession of the machinery remain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of the assessee's case and the assessee itself deducted TDS in respect of Tehri unit but for similar work no TDS was deducted for Teesta, Greater Noida and Guna sites, therefore, the assessee violated the provisions of section 194C of the Act in not deducting the TDS and the Assessing Officer rightly made the disallowance which has wrongly been deleted by the learned CIT(A). It was further stated that since the assessee had not deducted tax at source u/s 194C of the Act, the Assessing Officer was justified in making the disallowance u/s 40(a)(ia) of the Act. He prayed to restore the disallowance made by the Assessing Officer. 15. In his rival submissions, the learned Counsel for the assessee reiterated the submissions made before the authorities below and strongly supported the impugned order of the learned CIT(A) on this issue. It was contended that the assessee hired certain construction machinery and equipments along with operating personnel and fuel, therefore, it was a case of hiring of the instruments/equipments and not the case of work contract. It was further stated that since the assessee did not enter into a contact involving the carrying out of any work whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enance, spares including tyres, tubes, batteries etc., road tax, insurance and other expenses incidental to the running/operating the said machinery & equipment and in lieu of those facilities, the assessee was liable only to pay the hire charges. In the instant case, it is not in dispute that the machines and equipments taken on hire by the assessee were utilized in the business at the discretion of the assessee and payments under the contract accrued with reference to the time length of the usage of the machines and not with reference to the quantum of any work done. Therefore in the present case, the lender neither had any work obligation nor any command, control and possession of the machines after they were temporarily handed over to the assessee on hire basis. In the instant case, the provisions in the contract for drivers, operators and helpers along with the specific machines and meeting all the operating and maintenance costs by the lender were incidental and subservient to the hiring of the machinery and equipment. Therefore, as per the provisions contained in the agreement dated 01/08/2005, the contract entered into was purely a contract for the hiring of the machinery a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 194C is that there must be carrying out of any work whether tangible or intangible. In the instant case, the assessee was not under an obligation to carry out the work as it was not under the control of the lender and the possession of the machinery temporarily was passed to the assessee after entering into agreement with the lender. Therefore, in the present case, taking of the machinery and equipment on hire would not amount to a contract for carrying out any work as contemplated in section 194C of the Act. The said contract i.e. taking of machinery and equipment on hire also cannot be treated with a contract for supply of labour. Therefore, the provisions of section 194C of the Act were not applicable to the facts of the assessee's case, as such no disallowance was called for u/s 40(a)(ia) of the I. T. Act. 16.2 On a similar issue the Hon'ble Madras High Court in the case of Poompuhar Shipping Corpn. Ltd. (supra) has held as under, (Head Note): "Under section 194C of the Income-tax Act, 1961, the tax is to be deducted when a contract is entered into for carrying out any work in pursuance of a contract between the contractor and the entities mentioned in sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or equipment" has been added with effect from 13/07/2006 by the Taxation Laws (Amendment) Act, 2006. Earlier these were not included in the definition of the "rent" for the purposes of section 194-I of the Act. Therefore, the provisions of this section i.e. 194-I of the Act are not applicable to the facts of the present case because the previous year relevant to the assessment year under consideration ends on 31st March 2006 while insertion of the word "machinery or plant or equipment" has been made effective from 13th July 2006 i.e. much after the end of the previous year relevant to the assessment year under consideration. Therefore, the provisions of section 194-I of the Act are also not applicable to the facts of the present case. 17. The next issue vide ground No. 2 agitated by the Department relates to the deletion of disallowance of Rs. 10,42,895/-. 18. The facts related to this issue, in brief, are that the Assessing Officer, during the assessment proceedings, noticed that the assessee had claimed a sum of Rs. 10,51,714/- as prior period expenses. He asked the assessee to show cause why the same should be allowed when the assessee was following mercantile system of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, observed that bill of one of the vendors, namely M/s Punjab Distributor, New Delhi for a sum of Rs. 10,42,895/- pertaining to financial year 2002-03 was lost in transit and was not received. As a result, it was accounted for and paid during the financial year relevant to the assessment year under consideration on being submitted afresh and claimed by the vendor. He further observed that in mercantile system of accounting the liability for an expense is booked when it accrues and the liability for an expense accrues when it crystallizes or becomes known or ascertained. The learned CIT(A) was of the view that the mercantile system of accounting does not bar booking prior period expenses in a later year provided those expenses had become known, ascertained or crystallized in the later year. The learned CIT(A) categorically stated that the expense of Rs. 10,42,895/- had become ascertained or crystallized only when the bill in respect of the same was received and accepted and since the relevant bill was received and accepted by the assessee in the financial year under consideration, the liability in respect of the same was rightly booked in that year as per the mercantile sys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 237 (All.). (iv) Ashok Iron & Steel Rolling Mill (supra). (v) CIT v. Khaitan Chemicals & Fertilizers Ltd. [2008] 307 ITR 150/175 Taxman 195 (Delhi). 22. We have considered the rival submissions and carefully gone through the materials available on the record. In the present case it is not in dispute that a bill amounting to Rs. 10,42,895/- was raised by M/s Punjab Distributor, New Delhi during the year under consideration. The said bill although pertained to the financial year 2002-2003 but could not be traced since the same was lost in transit. In the instant case, the vendor asked for the payment against the said bill during the year under consideration. Therefore, the liability was ascertained and crystallised during the year under consideration. 22.1 On a similar issue, the Hon'ble Jurisdictional High Court in the case of Ashok Iron & Steel Rolling Mill (supra) has held as under: "In the mercantile system, deduction can be made only in the year in which the liability to pay accrues. And it accrues only when the liability crystallises or becomes ascertained. That it was only when the Assistant Labour Commissioner passed the order on December 31, 1973, determ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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