TMI Blog2012 (8) TMI 1155X X X X Extracts X X X X X X X X Extracts X X X X ..... xus between the dividend income earned and the expenses allegedly incurred by the appellant for earning such dividend income; 1.2 On facts and in the circumstances of the case and in law, the learned CIT (A) has erred in not appreciating that the entire dividend income has been derived by the appellant from the investments made by it in the debt-oriented schemes of the mutual funds, as stipulated in the guidelines issued to it by its holding company and therefore, no management cost is allocable towards the earning of the dividend income as per the provisions of section 14A of the Act; 1.3 On facts and in the circumstances of the case and in law, the learned CIT (A) has erred in observing that the entire investment of the appellant in mutual funds was made pursuant to appellants' own research, analysis and opinion; 1.4 On facts and in the circumstances of the case and in law, the learned CIT (A) has erred in observing that investment in debt oriented mutual fund schemes requires constant monitoring, as in the case of equity funds and that it is not akin to bank fixed deposits; 1.5 On facts and in the circumstances of the case and in law, the learned CIT (A) has erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case and in law in deleting the disallowance of ₹ 1, 07, 840/-made by the AO u/s 14A as expenditure incurred in relation to earning of dividend income. Whether learned CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition P.F. ₹ 20, 46, 474/-made by the AO on account of provision for doubtful advances written off. Whether learned CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition of ₹ 1, 76, 996/-made by the AO on account of investments written off and allowing /the carried forward capital loss of ₹ 2, 08, 085/-. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing. Adverting first to ground nos.1 to 1.7 in the appeal in HCL Comnet Ltd. ground no. 1 in HCL Comnet Systems Services Ltd., facts, in brief, as per relevant orders in the case of M/s HCL Comnet Ltd. are that return declaring income of ₹ 15, 28, 572/-filed on 31.10.2004 by the assessee, engaged in the business of providing and maintaining networking solutions, was taken up for scrutiny with the service of a notice u/s 143(2) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record. As per audited accounts for the year under appeal, the appellant has disclosed an amount of ₹ 82, 94, 433/-being dividend on non trade current investment. This is as per schedule 15 of the accounts. The entire amount has been claimed as exempt. (a) The appellant states that all investments are in debt oriented mutual funds which are similar to bank deposits, and those do not require constant monitoring and analysis. The view is subjective and general. In the same manner as equity oriented mutual fund schemes are prone to market forces, in the same manner, debt oriented mutual funds scheme are subject to market fluctuation and their NAV also changes according to the given market sentiment. The appellant acknowledges the said fact at clause 20(1)(vi) (significant accounting policies) and states inter alia that as per its policy, current investments are carried at the lower of cost and fair value and that provision is made to recognize any decline in the carrying value. Had investments in the debt oriented equity fund been akin to bank deposits as claimed by the appellant, there should have been no contingency to recognize any fall in their carrying value. In essence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts that the investments of the appellant in specific schemes of mutual funds were pursuant to its own research, analysis, considered opinion that ultimate holding company did not in any way make investment decisions on behalf of the appellant. (c) The accounts of the appellant show that for the year under appeal, it redeemed the entire block of units of Grindlays Cash Funds amounting to Rs..1.01 crores and simultaneously made fresh investments of Rs..26.24 crores under various mutual fund scheme namely GSSIF, Prudential ICICI, HSBC, DSP, Templeton, Deutsche etc. On a year to year basis, investments in mutual funds for A.Y. 04-05 are 2598% more than the investments of the immediately preceding year. Thus whereas an amount of Rs..1.01 crores was invested for A.Y. 03-04, for the year under appeal, the investment in mutual funds rose to Rs..26.24 crores. The fact that diversified investment in mutual funds have been made 20 times of the investment of the preceding year and 5 times of the accumulated profit of the company as a whole would suggest that considerable time, effort, application of skills, technical knowledge, expertise etc, have gone in towards such investments and tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to dividend income. In Ever Plus Securities and Finance Ltd. Vs DCIT (2006) 101 ITD I51 (Delhi), it was held that merely because the assessee did not earn dividend out of investment in certain shares does not imply that the provisions of section 14A would not apply to that extent. In ACIT Vs. Premier Capital Trust (India) Ltd. (2004) 83 TTJ 843 (Mum.), it was held that the AO was justified in attributing a part of the financial and administration expenditure, and expenditure incurred in relation to exempt income and disallowing the same in view of provisions of section 14A of the Act. In the appellant's case, its operational turn over rose from ₹ 131 crores in the immediately preceding year to Rs..174 crores In the year under appeal, or in other words increase of 36%. On comparison on account to account basis, in respect of such accounts, which have a bearing on the appellant's income from dividend, it is seen that staff welfare expenses rose by 96%; rent increased by 15%; electricity and water by 165%; communication and postage increased by 84% over the corresponding figure of the immediately preceding year. Overall, operating, administration and other expenses as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome u/s 14A of the IT Act on the ground that the appellant had incurred interest, administrative personnel cost. But the Ld. ARs have been able to provide sufficient evidence that no interest cost was involved in earning of such tax-free dividend income because the entire interest expenditure of about ₹ 45, 29, 326/*(Rs.21, 80, 126 + ₹ 23, 49, 200) had been incurred on interest on finance lease obligations, discount on sale of receivables of subsidiary company, interest on delayed payment of transponder fees, interest on delayed payment of service tax etc and bank charges. This leaves us only with administrative and personnel expenses such as salary of personnel involved with investment decisions and any other administrative expense found to have been incurred directly or indirectly on earning of such dividend income. The Ld. ARs have submitted copies of the mutual fund statements, which show that the dividend amount has been re-invested in the same schemes or redeemed. Therefore, there is no question of payment of de-mat fee, as alleged by the AO. Since the appellant had opted for dividend reinvestment option while making investments, such dividends were getting regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering the facts of the case, I hold that necessary disallowance out of tax-free income in respect of relatable expenses have to be made by adopting a reasonable basis consistent with all the relevant facts and circumstances of the case. Now, I proceed to do the same. 2.12. It is no doubt true that the dividend income earned during the year relates only to investment in short-term debt-oriented mutual funds including floating rate short-term/liquid schemes of various mutual funds. Investment in these mutual funds have been made according to the broad guidelines issued in the form of Inter-Office Memo by HCL Technologies Ltd, the ultimate holding company. However, even within those broad guidelines, the individual companies including the appellant are supposed to make independent investment decisions, keeping in view the risk parameter noted therein. The Inter-Office Memo had also barred investment in equity, any mutual fund having equity component or any other related products. Thirdly, a maximum limit of ₹ 5 crores in any particular scheme of a prescribed fund house had been set. Hence, the Ld. AR's claim that no time and effort were involved investing in these sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inance Department is reasonably estimated at ₹ 3.80 lakhs (14%). This estimation is being done on the basis of information furnished by the appellant company that the total number of employees in the corporate office was 35 out of which the strength of the Finance Department was 5 in number. Out of the total claim of depreciation (Rs.3, 44, 17, 354/-) on computers, furniture fixtures and office equipment, depreciation attributable to Finance Department is reasonably estimated at Rs..34.42 lakhs (10%). This estimation is made on the basis of the information made available by the appellant that it has got 51 employees on roll during the relevant period (both head office other locations), with 5 persons working in the finance team , which roughly works out to 10%. On the basis of the above estimation, total expenditure of ₹ 1, 50, 34, 000/-has been found to have been incurred on the Finance Department by the appellant company in its corporate office which was rendering all finance, account and compliance functions of the appellant company including the function relating to investment/redemption in mutual funds. The break-up is given hereunder: (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee while referring to decisions in Chemical and Mettallurgical Design Co. Ltd. in I.T.A. no. 803/2008, M/s ING Investment Management(India) Pvt. Ltd. Vs. ACIT in I.T.A. no. 1435 and 5346/Mum/2005);and Wimco Seedlings Ltd. Vs. DCIT, (2007) 107 ITD 267 (Delhi) (TM) contended that the ld. CIT(A) was not justified in upholding the disallowance in the case of HCL Comnet Ltd. nor there was any basis for attributing 25% of the dividend income by way of expenditure incurred in earning the dividend. As regards HCL Comnet Systems Services Ltd., the ld. AR supported the findings of the ld. CIT(A). On the other hand, the ld. DR supported the findings of the ld. CIT(A) in the case of HCL Comnet Ltd and argued in the case of HCL Comnet Systems Services Ltd. that the ld. CIT(A) was not justified in reducing the disallowance. 4. We have heard both the parties and gone through the facts of the case. Indisputably, the assessee did not furnish the relevant accounts and details relating to expenditure incurred in earning exempt dividend income before the AO and instead submitted that no such expenditure had been incurred. As a result, the AO made estimated disallowance @ 25% of the dividend i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in the year under consideration or in the preceding years was placed before the AO or the ld. CIT(A) in these two cases. In any case, no material was placed before the AO in order to enable him to record his satisfaction.. Hon'ble Apex Court in Kantamani Venkata Narayana and Sons v. First Addl. ITO [1967] 63 ITR 638 and again in Malegaon Electricity Co. P. Ltd. v. CIT [1970] 78 ITR 466 (SC) observed that it is the duty of the assessee to bring to the notice of the Income tax Officer particular items in the books of account or portions of documents which are relevant. The law casts a duty on the assessee to disclose fully and truly all material facts necessary for his assessment for that year. Not even a whisper has been made before us as to whether or not relevant accounts were placed before the AO or the ld. CIT(A) in order to enable them to examine the claim of the assessee. The object or purpose of the investment affects operation of section 14A of the Act inasmuch as any expenditure incurred for earning tax free income is not an allowable deduction by virtue of operation of the said section, as held in CIT vs. State Bank of Travancore, 16 Taxmann.com 289(Ker). Hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al funds and securities in the case of HCL Comnet Ltd. while no such details are evident from the impugned order in HCL Comnet Systems Services Ltd.. In the latter case, the ld. CIT(A) merely allocated proportionate cost incurred by the Finance Department for earning exempt income, without giving any opportunity to the AO. There is nothing in the impugned order that the ld. CIT(A) confronted the details and submissions obtained by him to the AO.In view of the foregoing, especially when the ld. CIT(A) or the AO did not have the benefit of aforesaid decision of the Hon'ble jurisdictional High Court, we consider it fair and appropriate to set aside the orders of the ld. CIT(A) and restore the matter to the file of the AO for deciding the issue, afresh in accordance with law in the light of aforesaid judicial pronouncement in Maxopp Investment Ltd.(supra), after allowing sufficient opportunity to these assessees. The assessees are also directed to furnish all the relevant details and accounts of expenditure actually incurred in managing and supervising the aforesaid huge investments in mutual funds securities. With these observations, ground nos.1 to 1.7 in the appeal in HCL Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el revolving chairs*Rs..12, OOO/-, z) electrical work completed by Swan Electricals-Rs..11, 62, 450/-, The details of the expenditure above, include two categories namely those which have been incurred by way of renovation or improvement to the leased building, and those expenses which are independent of the leased building. In the latter category are those expenses, which are stand alone, independent and whether or not the premises where those are incurred or assets are created, are leased or not is immaterial in order to evaluate the nature of those expenditure. For example supply and fixing of storage rack, supply and installation of work station, supply and installation of furniture and fixture, sofa set, centre table, wooden file racks, mobile drawer unit, filing rack, wooden laminated shelf, computer table, side unit, almirah, revolving chair etc. are purely cases of purchase/fabrication of furniture and fixture, and no matter that these furnitures and fixtures have been put up at a. leased building, does not by itself contradict the nature of those expenses, which are by the terms of narration given in the invoices, nomenclature given in the books of accounts, definition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd allow upon such examination, if deemed appropriate, claim of depreciation on lease hold improvements which have been disallowed the earlier assessment orders holding those as capital expenditure. 7. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. AR on behalf of the assessee reiterated their submissions before the ld. CIT(A)while referring to details placed on page 180-181 of the paper book. It was further contended that expenditure was incurred, inter alia, on partitions, wooden doors, storage racks, work stations in their various premises. To a query by the Bench, the ld. AR submitted a copy of lease agreement entered on 31st October, 2000 with M/s Logitronics Pvt. Ltd. for its premises at F-8/9, Sector-III, Noida, another lease agreement entered into on 1st December, 2001 with M/s A.S. Transport Pvt. Ltd., for their premises at Madonna Mansion, 86, Nungambakkam High Road, Chennai and a third agreement entered into 28.02.2003 with M/s Chanson Shipping and Packing Company (P) Limited for their premises at A-90, Sector-2, Noida District Gautam Budh Nagar (U.P.). While referring to details of expenditure incurred in the various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure. Whether or not expenditure is on repairs, the following test was formulated by Shri Chagla C J. in the case of New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT [1956] 30 ITR 338 (Bom), observed as follows: The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of 'repairs' because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the Legislature has permitted under section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure. 9.11 Hon'ble Apex Court in Bali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. (supra) was held to be no longer applicable as observed by Hon'ble jurisdictional High Court in the case of Rajdev Singh Co. v. CIT, 181 ITR 38(Del.). In Rajdev Singh Co. (supra) the Hon'ble Delhi High Court have clearly declared that the earlier judgment in the case of Instalment Supply (P) Ltd. (supra) is not applicable after insertion of the provisions of Section 32(1A) which provisions are now in the Act by way of Expln. 1 to Section 32(1). Hon'ble High Court, applying the provisions of section 32(1A) held that any expenditure in the nature of a capital expenditure even if incurred by a tenant on the leased premises will amount to capital expenditure. Further construction of any structure or doing of any work in or in relation to or in any way renovating or extending or improving the building would be regarded as capital expenditure. There is, thus, no doubt that for the purpose of determination of the nature of expenditure incurred by the assessee, the fact that the premises are leasehold must be ignored and it should be assumed that the premises belonged to the assessee. In Hari Vignesh Motors (P.) Ltd.(supra), the Hon'ble Madras High Court did not con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the expression of repairs to the premises as appearing in section 30(a)(i). The Legislature has made a distinction between expenses incurred by a tenant for 'repairs' of the premises and expenses incurred by a person who is not a tenant towards 'current repairs' to the premises. This distinction has to be given meaning. Perhaps the logic behind the distinction was that a tenant would, by the very nature of his status as a tenant, not undertake expenditures as would endure beyond his likely period of tenancy or create a new asset. Whereas, an owner may undertake expenditures so as to even bring about new assets of capital nature. It was, therefore, necessary to qualify the expenditure on repairs. The deduction was, therefore, limited to expenditure on 'current repairs' only. It follows, therefore, that the cost of repairs that have been incurred by a tenant in respect of such premises would have to be allowed under section 30(a)(i). The question of disallowing such an expenditure and relegating the assessee to claim depreciation under section 32 does not arise. The assessee has not claimed depreciation. It has claimed deduction under section 30(a)(i). Once ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purposes of construction, the assessee did not acquire any capital asset and the only advantage which it had obtained was the lease of a new building at low rent. After adverting to the earlier judgments of the Court in Lakshmiji Sugar Mills Co. (P.) Ltd. v. CIT [1971] 82 ITR 376 (SC), L.H. Sugar Factory Oil Mills (P.) Ltd. v. CIT [1980] 125 ITR 293/4 Taxman 5 (SC) and CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257/38 Taxman 110A (SC) the Supreme Court observed as follows : All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using mode ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Para-4 as under: - We consider that the amount spent on providing wooden partition, painting of leased premises, carrying out repairs so as to make the premises workable, to replace glasses etc. has to be considered as revenue expenditure. It is for the businessman to see as to in what manner the leased premises is to be maintained and what are the necessary repairs which are required to be done. We consider that all such expenditures which were incurred on painting, polishing of the floor providing wooden panelling etc. is revenue expenditure and the nature of repairs is not of an enduring character so as to characterise as capital expenditure. 9.2 In the light of view taken in the aforesaid decisions by the Hon'ble Delhi High Court in decision in Hi Line Pens Pvt Ltd.(supra); Escorts Finance Ltd) and Hon'ble Bombay High Court in a recent decision in CIT vs. Talathi and Panthaky Associated (P.) Ltd.(supra), especially when the Legislature itself have made a distinction between expenses incurred by a tenant for repairs of the premises and expenses incurred by a person who is not a tenant towards current repairs to the premises, the expenditure incurred on false ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese employees have been removed from the rolls of the company on account of their continuous and unexplained absence. Since they were not even responding to repeated correspondence sent to their available address, the HR Department suggested writing off of the amount as future prospects of recovery appeared unlikely. This advice of the HR Department has been accepted by the finance department of the appellant. Thus, after making necessary efforts, when it was found that the advances are irrecoverable, the appellant actually wrote off such advances in its books and then claimed deduction of such sums in financial year 2003-04, after about 3 years. 3.5. Now, the issue for consideration is whether this claim of deduction is just and proper and allowable under the I.T. Act. The Hon'ble Supreme Court in the case of Ramchander Shivnarayan Vs. CIT 111 ITR 263 (SC) has held that the loss incurred by the assessee is allowable as a deduction if the same has direct and proximate nexus with the business operation and is incidental to the business. Similarly, in the case of CIT Vs. Mysore Sugar Co. Ltd. (1962) 46 ITR 649 (SC), it was held that the advance given in the course of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of ₹ 1, 76, 996/-on account of investment written off. To a query by the AO, the assessee relied that the assessee was holding 16, 000 equity shares of M/s Net India Pvt. Ltd. Since the business of the acquired company could not sustain in the market and the company became non-functional, value of shares eroded and accordingly, written off. However, the AO did not accept the submissions of the assessee on the ground that the assessee did not furnish any details or evidence that the company in which investment was made, became non functional and the value of its shares eroded. Accordingly, amount of ₹ 1, 76, 996/-was added back. 15. On appeal, the learned CIT(A) dealt with the issue as under: 4.4 I have considered the submissions filed by the appellant and other documents on record. In my view, the Assessing Officer is correct in holding that such loss incurred by the appellant on sale of shares held in Net India Private Ltd. is in the nature of capital loss . Even the Assessing Officer has mentioned in the order passed by him that the loss incurred by the appellant may at best be treated as capital loss and not business loss . However, while holding it as c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r with the set off and carried forward of provisions contained in Section 74 of the Act. However, there is nothing to suggest that the shares held by the assessee in Net India Private Ltd., were sold nor the AO or the ld. CIT(A) seems to have examined as to whether or not the loss as a result of write off of investments falls under the head 'Capital gains' or fulfills the conditions stipulated u/s 74 of the Act. The assessee has written off the investments as loss to it for good. That being the case, there is no material or finding of any of the lower authority that that there is any transfer involved. There is nothing to suggest that the assessee transferred its right to the assets in favour of a third party whereby the right has extinguished. The ld. CIT(A) did not even allow any opportunity to the AO before adjudicating an altogether new claim made by the assessee before him nor examined the said claim in the light of relevant provisions in law. In view of the foregoing, especially when the ld. CIT(A) have not passed a speaking order on the claim for carry forward of aforesaid capital loss due to erosion in the value of shares, we consider it fair and appropriate to set ..... X X X X Extracts X X X X X X X X Extracts X X X X
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