TMI Blog2015 (7) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... pital asset, so has to be recorded as expenditure in capital field. It should be noted that the assessee had to incur this kind of expenditure year after year so as to be in business subsequently even the advantage secured from earlier expenditure would get dissipated. Further, we place reliance on the judgment of Supreme Court in the case of Alembic Chemical Works vs. CIT (1989 (3) TMI 5 - SUPREME Court ) wherein held that just because an expenditure is debited in books towards the business being competitive and prudence and conservatism being fundamental accounting assumptions, capitalization of such expenses or ascribing lasting abiding value to such expenses, could only be done on sound footing and cogent basis. Thus, in our opinion the expenditure cannot be attributed to capital expenditure.Being so, taking consistent view, we are of the opinion that expenditure is to be allowed as revenue expenditure only. - Decided in favour of assessee. Addition relating to expenditure incurred for exempt income while computing the book profit u/s.115JB - Held that:- Disallowance made u/s.14A r.w. Rule 8D cannot be added while computing book profit u/s.115JB of the Act that the disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 8D 0.5% of 670,98,30,500 Rs.3,35,49,152/- Total Rs.9,53,58,713/- Average assets = (827,38,22,646 + 1047,04,13,303)/2 = 937,21,17,974/- Average investments = (789,89,19,000 + 552,07,42,000)/2 = 670,98,30,500/-. 3.1 According to AO the disallowance of the expenditure to be made according to the provisions of the Rule 8D read with section 14A works out at ₹ 9,53,58,713. This amount constitutes 20.56% of the total expenditure claim of ₹ 46,37,20,957 (as per return of income). On the other hand, the income claimed as exempt of C 23,82,25,782 constituted 27.75% (23,82,25,000x100 /85,81,74,000) of the total receipts of the assessee. Hence, disallowance according to the provisions of section 14A, is at 20.56% of the total expenditure as against proportionate expenditure of 27.75% in relation to total receipts to be considered in the normal course. 3.2 According to Assessing Officer, there is an excess claim for deduction of expenditure of ₹ 9,53,58,713 and the same needs to be disallowed. It was noted by the AO that the determination of the expenditure in rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,34,000/-, personal expenses C1,80,60,000/- other expenses C35,30,95,000/- and depreciation was C62,33,000/-. No books of accounts were separately maintained for earning dividend income and other incomes which are chargeable to tax. Large part of the expenses incurred were common. The entire top management of the company was fully involved in making strategic decisions and improving the profitability of the company. According to Commissioner of Income Tax (Appeals), therefore, it cannot be said that only few employees were involved in earning the exempt income. Had it been so, the assessee could have separately formed a new entity and earned exempt income to claim benefit from the taxation. Therefore, he agreed with the view of the AO that large portion of the expenditure incurred could be attributable towards earning of dividend income. It is also not disputed that the assessee incurred huge expenditure of C8,63,34,000/- as finance charges on its borrowed capital which was also claimed as deduction in the P L Account. The P L Account consists of dividend income as well as other incomes which are chargeable to tax. The quantum of the expenditure on the basis of the proportionate ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be made. The Tribunal while delivering the order has followed the order, of the Delhi Special Bench reported in 121 ITD 318 in the case of Chem Invest Ltd. vs. ITO wherein it was held that disallowance u/s.14A can be made even in the year where no exempt income has been earned or received by the assessee. The High Court of Bombay in the case of M/s. Godrej Boyce. Mfg. Co. Ltd. vs CIT reported in 328 ITR 81 held that the AO is duty bound to determine the expenditure which had been incurred in relation to income which did not form part of the total income. It is further held by the High Court of Bombay that the AO had to enforce the provisions of sub section(1) of Sec.14A even prior to A.Y. 2008-09. This same issue also came up before the Tribunal, Chennai Bench in the case of M/s. Lakshmi Ring Travellers Vs. ACIT, Company Circle I (1), Coimbatore [ITA No.2083(Mds)/ dt. 02.11.2012] for the A.Y. 2008-09 and Hon'ble ITAT at page 4 of the said order has held that - Rule 8D has already been prescribed. Sub-section 3 further provides that even in a case where the assessee claims that no expenditure was incurred, the assessing authority has to presume the incurring of such ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No.14 of 2001 dated 22.11.2001). In other words, Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of Section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of Section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of Section 14A is that certain incomes are not includible while computing total income as these are exempt under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, contention of the assessee that provisions of sec.14A are not attracted in the case of the assessees carrying on the business of investment promotion was not accepted by Commissioner of Income Tax (Appeals). It was the stand of the assessee that the Tribunal in the assessee's own case has held that provisions of the section 14A are not attracted. According to Commissioner of Income Tax (Appeals) the stand taken by the assessee on this issue is not factually correct. In fact, the Assessing Officer during the assessment year 2005-06 has computed 2% as the expenditure incurred for earning exempt income and disallowed the same u/s.14A of the I.T. Act. On appeal, the Tribunal in Appeal in ITA No.638/Mds/2012 dated 04.02.2013 in the assessee's own case has confirmed the stand of the revenue and modified the quantum of the disallowance to C10,00,000/-. The relevant paras are mentioned below: 2.8 We considered this issue. We, are not on the question whether the income was earned without incurring any, mechanical expenditure like clearance charges, collection charges etc. or not. We are concerned about the expenditure by way of remuneration paid to top management and executi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of investment is not relevant for determination of the quantum of disallowance u/s.14A of the I.T. Act. According to the CIT(A), the provisions of Section 14A are applicable to all the classes of the assessees who hold investments, giving rise to exempt income. The provisions of Section 14A are very clear and unambiguous to that effect. Therefore, the stand of the AR of the assessee that provisions of section 14A are not applicable to-the assessee for the year under consideration is rejected by CIT(A). 4.7 Regarding exclusion of interest paid on TDS, FBT,ST and IT of C1,40,95,404/- for the purpose of disallowance under Rule 8D (ii) of the I.T. Rules, the assessee stated before CIT(A) that if this is taken into account the amount of disallowance works out to C.517,80,237/- as against the amount computed by the AO at C.618,09,561/-. The claim of the assessee is not accepted by Commissioner of Income Tax (Appeals) as the Rule 8D(ii) does not prescribe for exclusion of such expenditure. The Rule 8D(ii) prescribes the quantum of the interest expenditure to be disallowed i.e. amount of expenditure by way of interest other than the amount of interest included in Clause (i) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of carrying on of the said business that the assessee has invested in shares of Shriram Investments Limited and Shriram Transport Finance Company Limited. Whether the dividends arising out of those shares will be exempted from taxation or not, is entirely a different question. The first thing to be examined is the purpose of investments made by the assessee in shares on the testing ground of commercial expediency . In the present case, the assessee engaged in the business of investing in shares, has made investments in shares of group companies viz., Shriram Investments Limited and Shriram Transport Finance Company Limited. In that way, the assessee company is strengthening the capital and liquidity base of those two companies viz., Shriram Investments Limited and Shriram Transport Finance Company Limited. The strengthening of the capital base and liquidity of those associate concerns will definitely enhance the turnover and the profit of the group concerns. It is a fact that in group concerns some companies are carrying on operational activities and other companies are acting as catalysts to boost the performance of those operating companies. 2.5. Viewed in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax-free dividend income. 2.9. But in the present case, the investments were so old and those investments have been held by the assessee company in a consistent manner and as such, the scope of indirect expenditure also would be little lessor. Taking into consideration all the aspects of the case, we modify the disallowance to a lumpsum amount of 10 lakhs. This ground is partly allowed. 6. According to ld. Authorised Representative for assessee, investment made by assessee is strategic investment and there is no question of disallowance u/s. 14A of the Act. In the present case, the assessee made investment in Shriram Retail Holdings Pvt. Ltd alongwith another group company Shriram Enterprise Holdings Pvt. Ltd having controlling interest in Shriram City Union Finance Ltd., a public limited company, whose equity shares are listed in stock exchanges. Similarly Shriram Credit Company Ltd., has controlling interest in M/s. Shriram Insight Share Brokers Ltd. The investments are made to acquire controlling interest. The facts of the investment made by the assessee in acquiring controlling interest was not disputed by the Revenue. In such circumstances, we are not in a positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purposes of calculation of disallowance at ₹ 16.50 lakhs by the assessee on its own. In this view of the matter and in absence of any distinguishable feature brought to our notice by the learned Counsel for the assessee against the order of the CIT(A), we do not find any infirmity in the same. Accordingly the same is upheld and the ground raised by the assessee is dismissed. 8. As it is clear from the finding of Tribunal that the assessee failed to furnish the details of disallowance under section 14A and, therefore, the disallowance made by the AO was found by the Tribunal without any infirmity. For the year under consideration the assessee has specifically raised a point before the AO that 97.82% of the investment is in the subsidiary companies and joint venture companies and, therefore, no expenditure was incurred for maintaining the portfolio on these investments or for holding the same. The assessee has also pointed out that these investments are long term investment and no decision is required in making the investment or disinvestment on regular basis because these investments are strategic in nature in the subsidiary companies on long term basis and, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted by an amendment brought about by the Finance Act of 2006 with effect from April 1, 2007. Sub-Sections(2) and (3) provide as follows:- 14A.(2) The Assessing Officer shall determine the amount of expenditure 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 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of section 14A provides for the application of sub-section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an assessment year beginning on or before April 1,2001, either to reassess under section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under section 154. 10. It has been made clear by the Hon ble High Court that sub -section (2) does not ifso facto empower the AO to apply the method prescribed by Rules straightaway without considering whether the claim made by the assessee is correct. 11. The assessee has relied upon various decisions of this Tribunal wherein an identical issue has been considered. In the case of Garware Wall Ropes Limited Vs. Addl. CIT (supra), the Tribunal while deciding an identical issue has held in para 2.4 as under:- We have considered the rival submission and carefully perused the relevant records. So far as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Hon ble Supreme Court in case of CIT Vs. Walfort Share and Stock Brokers P. Ltd. ( 326 ITR 1). Therefore, there should be a proximate relationship between the expenditure and the income which does not form part of the total income. In the case in hand the assessee has claimed that no expenditure has been incurred for earning the exempt income, therefore, it was incumbent on the AO to find out as to whether the assessee has incurred any expenditure in relation to income which does not form part of the total income and if so to quantify the expenditure of disallowance. The AO has not brought on record any fact or material to show that any expenditure has been incurred on the activity which has resulted into both taxable and non taxable income. Therefore, in our view when the assessee has prima facie brought out a case that no expenditure has been incurred for earning the income which does not form part of the total income then in the absence of any finding that expenditure has been incurred for earning the exempt income the provisions of section 14A cannot be applied. Accordingly we delete the addition/disallowance made by AO u/s 14A r.w. Rule 8D. 12. A similar view wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. We have heard the rival submissions of both the parties and have gone through the material available on record. First, we take up the appeal for assessment year 2008-09. In this year, the assessee had three type of investments one relating to investment in subsidiary companies the amount of which is 101.74 crores. The second category relates to long term unquoted shares the amount of which is 31.53 crores. The third category is of equity shares the value of which is 14.88 lakhs and the last category is investment in units of mutual funds amounting to 10.15 crores. These facts and figures are verifiable from paper book page 204A. As regards the first category of shares in the form of investment into subsidiary companies we find that investment into this category of shares had increased from 78.17 lakhs to 101.74 crores which is due to increase in investment in preference shares and other equity shares. During this period, the interest bearing funds had decreased from 1.49 crores to 87,30 lakhs as is apparent from paper book page 203 and further most of the interest bearing loans are for vehicle loans as mentioned in paper book page 203. During this year under consideration, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts prior to the assessment year beginning on 01/04/2001. Furthermore, as observed by the Supreme Court in Walfort (supra), the basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure and on the same analogy the exemption is also in respect of net income. In other words, where the gross income would not form part of total income, it's associated or related expenditure would also not be permitted to be debited against other taxable income. 25. We are of the view that the expression in relation to appearing in Section 14 A of the said act cannot be ascribed a narrow or constricted meaning. If we were to accept the submission made on behalf of the assessees then sub-section (1) would have to be read as follows:- For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee with the main object of earning income which does not form part of the total income under this Act. That is certainly not the purport of the said provision. The expression in relation to does not have any embedded object. It simply means in connection with or per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . v. DCIT in I.T.A. No./ 1331/Del/2011 dated 29.7.2011. The relevant portion of Tribunal findings as contained in the Kolkatta Tribunal are reproduced below:- (iii) Further in Rule 8D(2)(ii), the words used in numerator B are the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance sheet as on the first day and in the last day of the previous year . The Assessing Officer was wrong in taking into consideration the investment of `103 crores made during the year which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. Thus,. It is not the total investment at all beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. The term average of the value of investment is used to take care of cases where there is the issue of dividend striping. iv) Under R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e incurred is basically under four heads of expenses only. The preliminary expense written off was already added back by the appellant in the computation statement and the other head was depreciation. The major expenses incurred are under two heads namely personal expenses and administrative expenses. As per the appellant's AR, the entire personal expense of ₹ 51,12,123/- was incurred for the salary of two employees who are not directors of the company. The details of administrative expenses were also furnished and the same is as follows: Head of expenses Amount (Rs.) Bank charges 3070 Communication expenses 88223 Services Tax 2387 Auditors remuneration 25000 Legal professional charges 184400 Consultancy charges 3912217 Maintenance expenses 4368 Entertainment/business promotion 226304 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s connection, reliance is placed on Gujarat High Court judgment in the case of CIT vs. Suzion Energy Ltd. 354 ITR 630, in which the Court confirmed the deleting of disallowance u/s 14A in respect of interest expenses incurred for investments in subsidiaries and administrative expense such as staff salary of corporate office, audit fees, building rent and communication expenses. In view of the above, the cross objection filed by the assessee deserve to be allowed. 9.2 We also find that the case law cited by the Ld. Counsel of the assessee i.e. Hon ble Jurisdictional Delhi High Court judgment dated 5.9.2014 in the case of Commissioner of Income Tax-IV vs. Holcim India P. Ltd. in ITA No. 486/2014 ITA No. 299/2014 has dealt the similar issue and decide the issue against the Revenue by adjudicating as under 3. The respondent-assessee, a subsidiary of Holderind Investments Ltd., Mauritius, was formed as a holding company for making downstream investments in cement manufacturing ventures in India. In he return of income filed for the Assessment Year 2007-08, therespondentassessee declared loss of ₹ 8.56 Crores approximately. The respondent-assessee had declared revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be established when the assessee was ready to commence. Revenue expenditure incurred after setting up business should be allowed under Section 37 of the Act but expenditure incurred prior to setting up of business cannot be allowed. The CIT (A) accordingly held:- 5.6 In view of the above discussions, I hold that the appellant is engaged in the business of holding of investment is entitled to claim expenditure provided there is a direct connection between expenditure incurred and business of the assessee company. In the instant case. the expenditure incurred is on salaries of employees of the assessee company and other operating expenses of the company. The appellant has also admitted that the said expenditure have been incurred in order to protect their investment as well as exploration of new investments . 6. For the Assessment Year 2008-09, the same reasoning was adopted and followed. 7. However, the CIT(A) issued notice and called upon assessee, why Section 14A should not be invoked? The Section postulates that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of the expenditure incurred in relation to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT, [2012] 347 ITR 272 to observe that Rule 8D of the Income Tax Rules, 1962 was not applicable in the assessment year 2007-08. Judgment of the Bombay High Court in Godrej and Boyce Manufacturing Co. Ltd.Vs. DCIT, [2010] 328 ITR 81 was also quoted. As per Maxopp Investment Ltd. (supra), the correctness of the claim of the assessee in respect of expenditure incurred in relation to the income which did not form part of total income had to be first ascertained and in case, the assessee claimed that no expenditure was incurred, the Assessing Officer should verify the correctness of the claim. Where the Assessing Officer was satisfied that no expenditure was incurred, no disallowance should be made under Section 14A. In other cases, the Assessing officer would have to determine the amount of expenditure incurred in relation to the income which did not form part of the total income and the said basis had to be reasonable and based on the acceptable method of apportionment. Expounding the expression in relation to appearing in Section 14A as interpreted in Maxopp Investment Ltd. (supra), the CIT(A) held that the said expression could not be given a narrow meaning. The expression in rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure is not allowable in view of Section 14A of the Act. Thus, disallowance made by the Assessing Officer is confirmed though on a different ground and as such, the appeal preferred by the appellant is dismissed . 11. The CIT(A) did not refer to the factual matrix in his order for the assessment year 2008-09 but applied his earlier order dated 02.08.2012 for the Assessment Year 2007-08. We may note that for the Assessment Year 2008-09, Rule 8D as per the decision in the case of Maxopp Investment Ltd. (supra) is applicable. The said Rule was not invoked. The reasoning given by the CIT(A) reads thus: 4....While deciding the appeal for A.Y. 2007-08, vide my order dated 01.08.2012, I have given the finding that AO was not correct in disallowing the expenses on the ground of noncommencement business. In the said order however I have upheld the disallowance u/s 14A by giving a detailed finding therein. Since in the year underconsideration the same facts exists as were existing in assessment year 2007- 08 and the appellant has also made the same submissions as were given during the appellate proceedings for assessment year 2007- 08, therefore relying on my order da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reasons or the grounds given by the CIT(A) to make the said addition. Possibly, the CIT(A), though it is not argued before us, had taken the stand that the respondentassessee had made investment and expenditure was incurred to protect those investments and this expenditure cannot be allowed under Section 14A. 14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue ITA and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad Vs. M/s. Lakhani Marketing Incl., ITA No. 970/2008, decided on 02.04.2014, made reference to two earlier decisions of the same Court in CIT Vs. Hero Cycles Limited, [2010] 323 ITR 518 and CIT Vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I Vs. Corrtech Energ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure incurred by the respondent-assessee for conducting business. The CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A). 17. In these circumstances, we do not find any merit in the present appeals. The same are dismissed in limine. 10. In the background of the aforesaid discussions and precedents, we find that the present issue is squarely covered by the aforesaid judgment dated 5.9.2014 of the Jurisdictional Delhi High Court in the case of Commissioner of Income Tax-IV vs. Holcim India P. Ltd. in ITA No. 486/2014 ITA No. 299/2014 in favor of the assessee and against the Revenue. Respectfully following the above precedent, we dismiss the Appeal of the Revenue and allow the Cross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to maximise its profit but he had missed one important aspect that the assessee was holding the shares of group concerns for strategic purposes and for selling and buying and selling them frequently. In absence of the finding as to how much was the sum incurred by the assessee under the head administrative expenses ,it is not possible for us to uphold the order of the FAA for the year under consideration. We further find that the FAA had not brought on record as to how the facts of earlier two AY.s. were different from the facts of the year consideration. In the case of Aroni Commerci - als Ltd.(362ITR403)the Hon ble Bombay High Court has held as under: Though the principle of res judicata is not applicable to tax matters as each year is separate and distinct ,nevertheless where facts are identical from year to year, there has to be uniformity and in treatment. Hon ble jurisdictional High Court in the case of Gopal Purohit (336ITR287)has held that that there should be uniformity in treatment and when facts and circumstances for different years were identical particularly in the case of the same assessee Analysis of the above two judgments lay down that the principle of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these companies. Thus in the group companies, the assessee company have controlling interest in Shriram City Union Finance Ltd, a public limited company whose equity shares are listed in stock exchange. Shriram Credit Company Ltd has controlling interest in M/s.Shriram Insight Share Brokers Ltd. These facts were not contradicted by the Department and finally these facts will definitely enhance the profitability of the assessee company as well as market share of the assessee s business by this investment. Being so, in our opinion disallowance made by the Assessing Officer at C9,53,58,713/- for the assessment year 2010-2011 and 11,56,55,300/- for the assessment year 2011-12 is at very high side. Thus considering the earlier order of the Tribunal on this issue for the assessment year 2008-09 in assessee own case, we are of the opinion that the above entire expenditure cannot be disallowed. However, we cannot rule out the incurring of management expenses by the assessee to earn exempt income and considering this aspect, we are inclined to direct the Assessing Officer to disallow `15 lakhs for each assessment year. In the result, this ground of the assessee is partly allowed in both app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy force and information, which are beneficial for SLIC and SGIC, and on account of these payments, the three chit fund companies are under obligation to keep the branch network intact and ready to use whenever requested for by the assessee or its nominees. It is also stated that the datas would enable the insurance companies to do insurance business. 12.2 The assessee also submitted before AO that it had hold 74% of shares in Shriram General Insurance Company Limited Shriram Life Insurance Company Limited and also stated that Shriram Chits Tamilnadu Private Limited, Shriram Chits (Karnataka) Private Limited, Bangalore and Shriram Chits Private Limited, Hyderabad are engaged in the business of Chit funds and has a vast net work of branches and agency force. 12.3 It was submission of the assessee before the AO that the above amount was paid to the 3 Chit Companies viz Shriram Chits Tamilnadu Private Limited, Shriram Chits (Karnataka) Private Limited, Bangalore and Shriram Chits Private Limited, Hyderabad to keep the branch network of the three chit companies intact and ready to use whenever requested for by assessee or its nominee. It is not paid to create new network. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms of agreements that the consideration was paid for the right of access to entire branch network of the chit fund, companies for a period of 10 years. The chit fund companies have a wide network in the state of Tamilnadu, Karnataka and Andhra Pradesh as stated by the assessee, The nature of assets such as obtaining of right to access the branch network of chit fund companies is an intangible asset. The right of access to the entire network branch and agency force both present and future owned by chit fund companies was made available to the assessee company i.e. SCL for a period of 10 years and consideration was paid towards acquiring right to access to the network. This particular right was acquired by the assessee company vide agreements dated 01.12.2008. The nature of the rights acquired by the assessee company was akin to business or commercial rights of similar nature being intangible assets as defined under Explanation 3 to sec.32(1) of the IT Act. The benefit for the use of the right extends over a period of 10 years. The network was already owned by chit fund companies. The assessee company acquired the right to access the network of the subsidiary companies for a period o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is treated as incurred towards acquiring intangible asset and nature of expenditure is treated as capital expenditure, he observed that the question of disallowing the same u/s 40(a)(ia) does not arise in this case. Against this, the assessee is in appeal before us. 14. We have heard both the parties. In this case, the assessee entered into an agreements with three companies viz. Shriram Chits Private Limited, Hyderabad, Shriram Chits (Karnataka) Private Limited, Bangalore and Shriram Chits Tamil Nadu Private Limited Chennai on 01.12.2008 for doing the life insurance business in India on the representation of the assessee company. The terms of the agreements entered by the assessee with three companies were identical. By virtue of entering of three agreements the assessee company was required to pay a total consideration of C58 crores and payment was made in two instalments i.e C33 crores during the A.Y. 2009-2010 and C25 crores during the assessment year 2010-2011. It was seen from the terms of agreements that the consideration was paid for the right of access to entire branch network of the chit fund companies for a period of ten years. The chit fund companies have a wide netw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f acquiring of right of access to entire branch network of the chit fund companies for the period of ten years. In our opinion, the payment in a lump sum which is for a period of ten years does not necessarily make the payment a capital one. It may still possess Revenue character in the same way as a series of payments. If there is a lump sum payment but there is no possibility of a recurrence, it is probably of a capital nature, though this is by no means a decisive test. If the payment of a lump sum closes the liability to make repeated and periodic payments in the future, it may generally be regarded as a payment of a revenue character and also if the ownership of the money whether in point of fact or by a resulting trust be still in the taxpayer, then there is acquisition of a capital asset and not an expenditure of a revenue character. Further, income tax law does not allow all the deduction as expenses, which a prudent trader would make in computing its profits. The money may expend on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd, 366 ITR 293, the Karnataka High Court held as under:- As per the agreement entered into between the parties, the assessee had paid consideration to the transferor company. While filing the returns, the said transaction has been disclosed by the assessee and claimed it as revenue expenditure. In the instant case, insofar as payment for getting domestic customer database is concerned, it was clear that, assessee had only got right to use that database; the company which has provided such database was not precluded from using such database. Hence, the expenditure incurred was for the use of database and not for acquisitions of such database. 17.2 In the case of Wipro GE Medical Systems Ltd. vs. Deputy Commissioner of Income Tax 81 TTJ (Bang) 455, the Tribunal held as under:- The payments in question are made under a tripartite agreement and such agreement was entered into the normal course of business. The entire payment was for the benefit of the assessee s business both in the short run and in the long run. As regards the compensation paid to retrenched employees, the payment is for business consideration and it is a part of recruitment expenses. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit of the business it would, unless the circumstances show otherwise, be in the nature of a capital expenditure. The quantum of the expenditure cannot be reason to decide nature of expenditure. The amount spent no matter, the nature of the expenditure depend upon the acquisition of assets in permanent nature and if the aim and object of expenditure is to bring new asset into existence or on the other hand if it is incurred for running a business or working it with a view to produce profit it would be revenue expenditure. Usually, while deciding the nature of expenditure one has to see the following points:- i) If the expenditure is with the intention or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business i.e. being carried on, or for existence of the business i.e. going on, or for a substantial replacement of an existing business asset it would be capital expenditure. ii) If on the other hand, the expenditure, although for the purpose of acquiring an asset or advantage is for running of the business or for working out that asset with a view to produce profit, it would be revenue expenditure. iii) If the outgoing i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple reason that it does not bring into existence any new asset in the field of capital or in other words no new asset was developed by incurring that expenditure and even the accounting treatment given by the assessee cannot be conclusive to treat expenditure as capital. In this case, expenditure for the purposes of access to data relating to business of the assessee so as to increase the Business of the assessee. This expenditure stands incurred for the purpose of running the business. It is not per se capital in nature. By incurring this expenditure, it cannot be said that any capital asset stands acquired by the assessee and it was incurred for the purpose of running the business and such nature of expenditure cannot be said that resulted in enduring benefit. The ld. DR argued that the assessee having admittedly incurred the expenditure in capital field, it cannot be retracted from the same; its books of accounts reflecting its understanding represents its current state of affairs. However, it is to be noted that the assessee has not considered the expenditure in the field of capital account. The assessee has treated it as Revenue expenditure only. As such, there is no force i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a period of ten years. (iii) The assessee company had entered into agreement with the above said three companies giving arise to contractual obligations however tax was not deducted at source for the payments made in accordance with Section 194C of the Act, thereby attracting the provisions of section 40(a)(ia) of the Act. 3.3 Based on the above findings, the ld. CIT held as follows:- I have gone through carefully the facts available on the record and the arguments put forth by the Executive Director. From the nature of transaction, it is clear that the transaction is nothing but contractual in nature. The assessee company has not deducted the tax deductible at source as per the provisions of Section 194C of the Act. As per the provisions of 40(a)(ia), if the TDS liable to be deductible is not deducted by the assessee, then the expenditure has to be disallowed and the same can be allowed as expenditure only in the year in which, the assessee deducts tax at source as per the provisions of Income Tax Act. Accordingly, the expenditure of 33 crores claimed by the assessee cannot be allowed for the assessment year 2009-2010. It can be allowed in the year in which, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, it cannot be construed that the Ld. Assessing Officer had passed the order without application of mind. He has considered all these facts and had consciously decided the matter. From the above facts, it appears that the Ld.CIT has passed the order U/s.263 based on difference of opinion and by reviewing the issue which was already decided by the Ld. Assessing Officer. Moreover, it is pertinent to mention at this juncture that the decision rendered in the case of Merilyn Shipping and Transports Vs. Additional CIT in 16 ITR (Trib) 1 is also in favour of the case of the assessee. In the aforesaid case the order of the learned Judicial Member was upheld by the Hon ble Vice President sitting as the Third Member wherein it was held that:- the provisions of Section 40(a)(ia) are applicable only to the amounts of expenditure which are payable as on the dated 31st March of every year and it cannot be invoked to disallow which had been actually paid during the previous year, without deduction of TDS . Considering all these facts and the discussions mentioned herein above, we are of the considered view that the Ld.CIT has erred in setting aside the order of the Ld. Assessing Officer by in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the Assessing Officer are not based on the evidence found during the search, the same cannot enlarge the scope of appeal for giving the direction to the Assessing Officer for reopening of the assessment for the assessment year 1999-2000. The Commissioner of Income Tax (Appeals) has failed to record a categorical finding justifying the direction given to the Assessing Officer when the Assessing Officer himself had not chosen for reopening the assessment. Asst. CIT vs. Rajaram Brothers (2005) 193 CTR (MP) 248; (2005) 274 ITR 122 (MP) followed; CIT Anr. Vs. Foramer France (2003) 185 CTR (SC) 512; (2003) 264 ITR 566 (SC), CIT vs, Banwarilal Sons (P) Ltd, ( 2002) 175 CTR (Del) 124; (2002) 257 ITR 518 (Del), ITO vs. Murlidhar Bhagwan Das (1964) 52 ITR 335 (SC), Pt. Hazari Lal vs. ITO (1960) 39 ITR 265 ( All),Raj Kishore Prasad vs. ITO (1990) 88 CTR (All) 152; (1992) 195 ITR 438 (All) and Abdul Wahid Gehlot vs. ITO (2005) 93 TTH (Jd) 232 relied on. 19.4 Being so, taking consistent view, we are of the opinion that expenditure is to be allowed as revenue expenditure only. Thus, this ground is allowed 20. The second common ground in both appeals is with regard to confirmi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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