TMI Blog2012 (9) TMI 543X X X X Extracts X X X X X X X X Extracts X X X X ..... h know-how. However, the assessee never became the owner of such know-how but was merely granted a licence to use the same in manufacturing process. The know-how at all the time remains the property of the licensor. At the end of the licence period the assessee was to forthwith return all the plates and drawings, data material and other documents supplied by the licensor to it. Therefore, in view of the ratio laid down by the Hon’ble Supreme Court in the case of CIT Vs. 69 ITR 692 of India Ltd. [1967 (12) TMI 3 - SUPREME COURT] the payment is to be considered as revenue expenditure and no part thereof can be considered as capital expenditure - in favour of assessee. - ITA Nos.1934 & 1935 /Del/2012 - - - Dated:- 6-7-2012 - R P Yadav, A N Pahuja, JJ. For Appellant: Shri V K Aggarwal, AR For Respondent: Shri Satpal Singh, DR ORDER Per: A N Pahuja: These two appeals filed on 26.04.2012 by the Revenue against two separate orders dated 16.02.2012 of the ld. CIT(A)(Central)-Gurgaon, raise the following grounds:- I.T.A. no. 1934/D/2012 [AY 2007-08] 1. Whether on the facts and in the circumstances of the case, the learned CIT(A) was right in law in deleting the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2007 and, therefore, cannot have retrospective operation. 2.1 After considering the reply of the assessee, the AO while referring to decisions in CIT Vs. Sharwan Kumar Swarup, 210 ITR 886 (SC); H.H. Sir Rama Varma Vs. CIT, 205 ITR 433 (SC); CIT Vs. Podar Cement (P) Ltd., 226 ITR 625 (SC); CIT Vs. Shelly Products Ltd. 261 ITR 367(SC); CIT Vs. Shahzada Nand Sons, 60 ITR 392 (SC) ; and M/s Daga Capital Management Pvt. Ltd. in I.T.A. no.8057/Mum/2003 and M/s Maxopp Investment Ltd. Vs. ACIT in I.T.A. no.1372/Del./2005 , observed that in the instant case, the assessee continued and maintained investments in terms of well informed and co0ordinated management decisions which involved indirect expenditure including in collection of income, follow up and telephone etc Accordingly, the AO disallowed an amount of Rs.11,44,183/- being the 0.5% of the average value of investment in terms of provisions of section 14A of the Act read with Rule 8D of the IT Rules,1962. 2.2 Likewise, in the AY 2008-09, the AO disallowed an amount of Rs.11,85,916/- in terms of aforesaid provisions of section 14A read with Rule 8D of I.T. Rules,1962. 3 On appeal, the ld. CIT(A) deleted the disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the section 14A cannot be extended to disallow even expenditure which is assumed to have been incurred for the purpose of earning the tax free income. 15. On query as to the position of appeal against the assessment order u/s 143(3) on similar issue for A Y 2006-07, the AR of the assessee informed that no second appeal was filed since there was no judgment of any High Court on the subject at the time of CIT(A)'s order, the judgment of the Special Bench of the ITAT prevailed at that point of time. However, that the basis of confirmation of the disallowance u/s 14A by CIT(A) did not survive now with the binding decision of the Delhi High Court. Copy of the appellate order was furnished. It is seen that the disallowance u/s 14A r/w Rule 8D by the Ld. AO relying on the decisions of the Special Benches of ITAT (supra) Delhi and Mumbai was confirmed by the Ld CIT(A) stating that in view of the latest decision of the Special Bench Mumbai ITAT (in the case of M/s Daga Capital Investment Pvt. Ltd) on this issue, categorically holding that being procedural in nature, Rule 8D is applicable with retrospective effect. (para 3.1 of the Appellate order dt.18.3.2010). - However, as stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d his dissatisfaction on the claim of the assessee u/s 14A(2), whether details were filed or not, before taking recourse to Rule 8D. Even the Special Bench relied upon by the Ld. AO mentions about "satisfaction" of the AO before proceeding with the disallowance. This has not been done. This is also not a case of one indivisible business giving rise to taxable income as well as exempt income. Neither is this a case of the assessee company dealing in several shares, mutual funds or securities. As such, I find merit in the contention raised by the appellant. Needless to say, for making any disallowance which is not arbitrary or artificial, it must be based on some real and substantial material. The Courts including the jurisdictional High Court in the case of Hero Cycles Ltd. (2010) 323 ITR 518 (P H) have held that no disallowance can be made on estimate basis, that, there has to be a categorical finding with regard to expenditure incurred on earning the exempted income. In Wimco Seedlings Ltd. Vs DCIT (109 TTJ 9(Del) TM 462, the Hon'ble Tribunal inter-alia held that the section 14A cannot be extended to disallow even expenditure which is assumed to have been incurred for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these investments were explained before the AO in the relevant years and instead submitted that the assessee made oral submissions before the AO besides reply in terms of a note ,a copy of which is placed on page 28 of the paper book. However, after discussion, both the parties agreed that the issue requires reconsideration by the AO in the light of various judgments including those of the Hon ble jurisdictional High Court. 5. We have heard for both the parties and gone through the facts of the case. Indisputably, the AO disallowed the aforesaid amount invoking provisions of section 14A(2) of the Act read with Rule 8D of I.T. Rules, 1962,without even analyzing the nature of the expenditure nor it appears that relevant details of expenditure and accounts were placed before the AO or the ld. CIT(A). The ld.AR merely invited our attention to page 28 of the paper book in the AY 2007-08 wherein it is mentioned that no interest cost was involved because only surplus funds were invested and neither any direct or indirect cost were incurred for earning the exempt income to the tune of Rs.1,61,44,244/- from ICICI Prudential mutual fund, liquid plan etc. There is nothing to suggest as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 6.7.2010 in CIT v. Walfort Share Stock Brokers (P.) Ltd., 326 ITR 1 , inter alia, observed that for attracting section 14A of the Act there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A, Hon ble Apex Court concluded. 5.3 Hon ble Punjab Haryana High Court in their decision in CIT vs. Hero Cycles Ltd., 323 ITR 518 have observed that disallowance under section 14A requires finding of incurring of expenditure and where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand. 5.4 In Cheminvest Ltd. v. Income-tax Officer, 317 ITR (AT) 86 , Special Bench held that when the expenditure is incurred in relation to income which does not form part of total income, it has to suffer the disallowance irrespective of the fact whether any income is earned by the assessee or not and the provisions of sec. 14A of the Act do not envisage any such exception. 5.5 Hon ble jurisdictional High Court in a recent decision dated 18.11.2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 insofar 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 clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restore the matter to the file of the AO for deciding the issue, afresh in accordance with law in the light of our aforesaid observations and various judicial pronouncements, including those referred to above, after allowing sufficient opportunity to the assessee Needless to say that while redeciding the issue, the AO. shall pass a speaking order, giving reasons for his satisfaction or otherwise, as pointed out by the Hon ble jurisdictional High Court in their decision in Maxopp Investment Ltd (supra). The assessee is also directed to furnish all the relevant details of expenditure actually incurred in managing and supervising the aforesaid huge investments in funds securities along with relevant accounts and cash flow statement. With these observations, ground no 1 in these two appeals is disposed of. 6. Ground no.2 in these appeals relate to disallowance on account of royalty. On perusal of details, the AO noticed that the assessee paid royalty of Rs.16,17,267/- in assessment year 2007-08 and Rs.84,81,307/- in assessment year 2008-09. The assessee is stated to have entered into technical collaboration agreement with Star Syringe Ltd., UK, First Line Medical Supplies Income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce was deleted by the Tribunal in respect of A. Y 2005-06 vide aforementioned order dated 8th May, 2009 the relevant portion of which is reproduced below:- "Ground NO.3 is against disallowance of Rs. 1,62,770/- being 25% of the royalty payable considering it as a capital expenditure. The facts are that the assessee company entered into technical collaboration of agreement with Star Syringes Ltd (Licensor). Under the agreement, the licensor gave technical assistance in relation to assembly manufacture, distribution and sale of products. The assessee was required to pay royalty @ 5% of sale product. The AO held that the agreement is for 10 years which can be renewed further. The assessee has acquired know-how which gives an advantage of enduring nature. Applying the decisions of Hon ble Supreme Court in the case of Southern Switchgears Ltd., 148 ITR 272, 25% of the total royalty expenses were considered as capital expenditure. The same was confirmed by the learned CIT(A). The ld. counsel for the assessee submitted that the assessee is an old established company. On 12.3.2001 it entered into agreement with Star Syringes Ltd. owns and possesses know-how technology for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod the assessee was to forthwith return all the plates and drawings, data material and other documents supplied by the licensor to it. Therefore, in view of the ratio laid down by the Hon ble Supreme Court in the case of CIT Vs. Ciba of India Ltd., 69 ITR 692 and that by the Hon ble Delhi High Court in the case of Sriram Pistons Rings Ltd. (supra), the payment is to be considered as revenue expenditure and no part thereof can be considered as capital expenditure. As rightly contended by the learned counsel for the assessee, the decision of Hon ble Supreme Court in the case Southern Switchgears Ltd. (supra) is distinguishable on facts. In the said case under the collaboration agreement, the assessee obtained technical knowledge which was available for its manufacturing and industrial processes even after the termination of the agreement. The technical assistance covers the establishment of the factory and the operation thereof for the manufacture of transformers of all kinds. The foreign company also makes available to the assessee its procedures, designs, experience and technical know-how for the same. Even after the expiry of the agreement, the assessee could use the method of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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