TMI Blog2019 (2) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... s. We set aside the orders of the lower authorities and allow the claim of the assessee for 100% depreciation on such temporary sheds built by using steel pipes and iron meshes. Ground No.2 of the assessee for all the years stands allowed. Restriction of depreciation claimed on electrical fittings - eligible for 15% depreciation or 10% - Held that:- It is not disputed that electrical fittings if considered as part of building is eligible for only 10% depreciation. Claim of the assessee is that these fittings were to be considered as part of plant and machinery. However nothing has been brought on record to show that electrical wiring, switches, sockets, other fittings were part of any plant and machinery. Accordingly, we are of the opinion that lower authorities were justified in restricting the depreciation to 10%. Restriction of the claim of depreciation on software - @25% or 60% - Held that:- What we find from the above description is that all these were nothing but items in the nature software or software applications. Entry No.5 coming in III of Part A in New Appendix I clearly says that computer included computer software. Note 7 of the Appendix, defines computer softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound 2 - Depreciation at 10% on temporary shed as against 100% claim of depreciation is unwarranted 2.1 On the facts and circumstances of the case, the learned CIT(A) erred in confirming the restriction of depreciation at 10% on the temporary shed as against 100% depreciation claimed by the Appellant. 2.2 The Appellant prays that depreciation be allowed at 100% on temporary shed as against 10% under the Act. Ground 3 - Depreciation at 10% on electrical fitting as against 15% claim of depreciation is unwarranted 3.1 On the facts and circumstances of the case, the CIT(A) erred in reclassifying electrical fitting under the block of Furniture and fittings, thereby resulting in restriction of depreciation at 10% as against 15% depreciation claimed by the Appellant. 3.2 The Appellant prays that depreciation be allowed at 15% since electrical fitting is classifiable under the block of Plant and Machinery under the Act as against 10%. Ground 4 - Depreciation at 25% on software license as against 60% claim of depreciation is unwarranted 4.1 On the facts and circumstances of the case, the CIT(A) erred in reclassifying software license under the block of Intangib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for meeting the expenditure of two staff who were engaged in the investment transactions. 7. However, ld. Assessing Officer was not impressed by the above reply. According to him, assessee did not maintain any separate account for the expenditure relating to the investments giving rise to exempt income. As per the ld. Assessing Officer, assessee also did not give details of the ratio applied for computing the suo-motu disallowances made by it. In other words, as per ld. Assessing Officer, assessee had not given any basis how it arrived at the suo-motu disallowance for the respective years. As per the ld. Assessing Officer, investments whether it yielded exempt income or not, had to be considered for computing the disallowance. Nevertheless, he restricted the disallowance only to the indirect expenditure specified in clause (iii) of Rule 8D(2), applying 0.5% on average of the investments, after giving allowance for the suo-motu disallowances made by the assessee for the respective assessment years. This resulted in a further disallowance of C71,02,401/-, C11,92,971/- and C30,03,694/-. Assessee s appeal before ld. Commissioner of Income Tax (Appeals) did not meet with any success. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gument of counsel for the parties on both sides, in the light of various judgments which have been cited before us, some of which have already been taken note of above. 32. In the first instance, it needs to be recognised that as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee in relation to income which does not form part of the total income under this Act . Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income. 33. There is no quarrel in assigning this meaning to section 14A of the Act. In fact, all the High Courts, whether it is the Delhi High Court on the one hand or the Punjab and Haryana Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to income which does not form part of total income under the Act'. It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A . . . The theory of apportionment of expenditure between taxable and non- taxable has, in principle, been now widened under section 14A. 35. The Delhi High Court, therefore, correctly observed that prior to introduction of section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of the said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not only inserted section 14A by the Finance (Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the Income-tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on between stock-in-trade and investment and provides that if the motive behind purchase and sale of shares is to earn profit, then the same would be treated as trading profit and if the object is to derive income by way of dividend then the profit would be said to have accrued from investment. To this extent, the High Court may be correct. At the same time, we do not agree with the test of dominant intention applied by the Punjab and Haryana High Court, which we have already discarded. In that event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased by the assessees as stock-in-trade and not as investment . We proceed to discuss this aspect hereinafter. 39. In those cases, where shares are held as stock-in- trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as income under the head Profits and gains from business and profession . What happens is that, in the process, when the shares are held as stock-in-trade , certain dividend is also earned, though incidentally, which is also an income. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove. 41. Having regard to the language of section 14A(2) of the Act, read with rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, suo motu disallowance under section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the Assessing Officer was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, the nature of the loan taken by the assessee for purchasing the shares/ making the investment in shares is to be examined by the Assessing Officer . Except for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, ld. Counsel for the assessee submitted that the electrical fittings were eligible for 15% depreciation, whereas lower authorities had given the rates available for buildings. As per the ld. Authorised Representative such electrical fittings were to be considered as part of plant and machinery and was eligible for 15% depreciation. 16. Per contra, ld. Departmental Representative strongly supported the orders of the lower authorities. 17. We have considered the rival contentions and perused the orders of the authorities below. It is not disputed that electrical fittings if considered as part of building is eligible for only 10% depreciation. Claim of the assessee is that these fittings were to be considered as part of plant and machinery. However nothing has been brought on record to show that electrical wiring, switches, sockets, other fittings were part of any plant and machinery. Accordingly, we are of the opinion that lower authorities were justified in restricting the depreciation to 10%. Ground No.3 of the assessee stands dismissed. 18. Arguing on fourth common ground, which is on restriction of the claim of depreciation on software, ld. Authorised Representative su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were nothing but items in the nature software or software applications. Entry No.5 coming in III of Part A in New Appendix I clearly says that computer included computer software. Note 7 of the Appendix, defines computer software as any computer programme recorded in any information storage device. We are therefore of the opinion that assessee was eligible to claim depreciation at the rate of 60% on the above items. Orders of the lower authorities on this issue are set aside and the claim is allowed. Ground No.4 of the assessee stands allowed. 21. This leaves us with one another ground which is appear in the appeal of the assessee for the assessment year 2014-15. This ground is reproduced hereunder:- Ground 5 - Disallowance of payment of non-compete fees of Rs, 12,35,58,502 is unwarranted . 5.1 On the facts and circumstances of the case, the CIT(A) erred in confirming disallowance of ₹ 12,35,58,502 towards non-compete fees claimed by the Appellant as revenue expenditure. 5.2 On the facts and circumstances of the case, the CIT(A) erred in confirming the rejection of the Appellant's alternative claim for allowing expenditure over the period of the noncom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue expenditure. In any case as per ld. Authorised Representative, if it was considered to have been incurred in a capital field, then it resulted in an intangible asset eligible for depreciation u/s.32 of the Act. Reliance were placed on the following judgments:- (i) CIT vs. Coal Shipments (P) Ltd (1971) 82 ITR 902 (SC) (ii) Empire Jute Co. Ltd vs. CIT, (1980) 3 Taxman 69 (SC) (iii) Carborandum Universal Ltd vs. JCIT(2012) 26 Taxmann.com 268 (Madras HC) (iv) CIT vs. (Late) GD Naidu and others (1986) 24 Taxmann 255 268 (Madras HC) (v) Asianet Communications Ltd vs. CIT(2018 ) 96 26 Taxmann.com 399 (Madras HC) (vi) Hatsun Agro Products Ltd. vs. JCIT (2018) 99 26 Taxmann.com 220 (Madras HC) (vii) Hidelberg Cement India Ltd vs. ACIT( 2015) 55 26 Taxmann.com 336 (Mumbai ITAT) 24. Per contra, ld. Departmental Representative submitted that even though the tenure of the agreement was only for eighteen months, it had a linkering effect. According to him, non compete agreement placed at paper book pages 273 to 285, clearly indicated that Shri. V. Shankar could not even recruit any person from the assessee company during the tenure of such agreement. This, according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with any other Person; 2.2.2 cause his Affiliates; or 2.2.3 assist any Person to; call upon any Retained Employees or any individual who is, at the time the individual is called upon, an employee of the Company, (a) for the purpose or with the intent of soliciting such employee away from, or out of the employment of the Company, or employ or offer employment to any individual who was an employee of the Company during the period of 12 (twelve) months prior thereto or is employed by the Company; or (b) with a view to use the specific knowledge or skills of such person for the benefit of any Person carrying on Company's Activities; or Cc) to terminate or breach a contractual or any other relationship with the Company' Nothing in this Clause 2.2 shall apply to an individual who has ceased to be employed by the Company for a period of at least 12 (twelve) months prior thereto or an individual who has applied for employment with the founder or his affiliates or with any Person who is being assisted by the Founder, in response to a general solicitation for such employment made by the Founder or his Affiliates or by any Person who is being assisted by the Founder, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations Ltd vs. CIT [T.C (Appeal) No.174 of 2005 dated 26.06.2018] with regard to non compete compensation, had held as under at paras 46 to 49 of its judgment. 46.The governance for non-compete i s traceable t o S e ction 2 7 of the Indian Contract Ac t, 1872 wh i ch reads as below 27. Agreements in restraint of trade , void .- Every agreement, - by which anyone is restrained from e x e rcisin g a lawful profession , trade or business or a n y ki nd , is to t h at extent void. Exception 1 . - Saving of agreement not to carry on business of which goodwill is sold - O n e who sells the goodwill of a business may agree with the buye r to refrain from carry i ng on a similar business , w i th i n s pe ci f ied local l i mits , so long as the buyer , o r an y pe r son der i v ing title to the goo d will from h i m, carries on a like business therein, provided that such limits appear to the Court reasonable, regard being had to the nature of the business. Any contractual term that imposes restraint on a contracting party from engaging in any business ..... X X X X Extracts X X X X X X X X Extracts X X X X
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