TMI Blog2019 (12) TMI 958X X X X Extracts X X X X X X X X Extracts X X X X ..... said computation is reproduced in the assessment order, page 3, point 5. We direct the Assessing Officer to restrict the disallowance to the tune of ₹ 91,07,352 under section 14A of the Act read with rule 8D(2)(iii), being 0.5 per cent. of the average investments yielding exempt income. In a nut shell we confirm the disallowance under rule 8D(2)(i) at ₹ 56,181 and under rule 8D(2)(iii) at ₹ 91,07,352. The same principles for computation of disallowance under section 14A read with rule 8D will be applicable to the assessee's appeal in I. T. A. No. 937/Kolkata/2018, therefore, the Assessing Officer is directed to compute the disallowance as per the precedents cited above and discussion made Disallowance of prior period expenses - CIT(Appeals) rejected the claim of the assessee holding that since the assessee followed the mercantile system of accounting and as such the impugned expenditure can only be allowed in the year to which it pertains - HELD THAT:- Since the bills were not received, it was not possible to make provisions for such expenses in the accounts of the preceding year ending on March 31, 2009. On receipt of these bills relating to earlier yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Sundaram Finance Limited [ 2017 (7) TMI 661 - ITAT CHENNAI] we note that it is abundantly clear that the Government securities are entitled to indexation benefits. Therefore, we note that the Government securities are different from bond and debenture for the purpose of the third proviso to section 48 of the Act (4th proviso after amendment) and therefore the benefit of indexation should be granted to the assessee on the redemption of these Government securities. Deduction u/s 37(1) on account of education cesses paid by the assessee - HELD THAT:- Education cess being not Income-tax is allowable as deduction under section 37(1) of the Act. For this, we rely on the judgment of ITC Ltd. [ 2018 (11) TMI 1611 - ITAT KOLKATA] wherein it was held that education cess is an allowable expenditure under section 37(1) of the Act. Therefore, we direct the Assessing Officer to verify all the relevant facts and allow education cess as deduction under section 37(1) of the Act. - I. T. A. Nos. 937, 938 and 1439 /Kol/ 2018 (assessment year 2010-11) - - - Dated:- 24-4-2019 - A. T. Varkey Judicial Member And Dr. A. L. Saini Accountant Member For the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee, therefore, it does not require adjudication. (3) Ground No. 3 raised by the Revenue in I. T. A. No. 1439/Kolkata/ 2018, for the assessment year 2010-11, relates to the deletion of the addi tion of notional interest of ₹ 82,78,301. (4) Ground No. 4 raised by the Revenue in I. T. A. No. 1439/Kolkata/ 2018, relates to the disallowance of compensation of ₹ 11,00,000 paid to M/s. Conforms Pvt. Ltd, a related company under section 40A(2)(b) of the Act without calling for remand report. (5) Grounds raised by the assessee in I. T. A. No. 938/Kolkata/2018, for the assessment year 2010-11, relates to the action of the Assessing Officer in treating the Government securities within the meaning of bonds for the purpose of the third proviso to section 48 of the Act and erred in dismissing the assessee's claim for indexed loss of ₹ 31,49,09,561. (6) Additional ground raised by the assessee in I. T. A. No. 937/ Kolkata/2018 for the assessment year 2010-11 reads as under : That on the facts and in the circumstances of the case, the author ities below erred in not allowing the deduction under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,38,000 182,14,70,419 0.50% of average investment 91,07,352 The Assessing Officer noticed that the assessee-company has not worked out the disallowance under section 14A read with rule 8D strictly according to the method laid down in the said provisions of the Act/Rules. Therefore, during the course of hearing, the assessee was asked to furnish full calculation of disallowance in terms of rule 8D of the Income-tax Rules. In response, the assessee-company submitted the revised computa tion of disallowance under rule 8D. However, the Assessing Officer rejected the computation of the assessee and held that disallowance is liable to be worked out strictly in accordance with the method laid down as per section 14A read with rule 8D of the Income-tax Rules. So the amount of disallowance was calculated by the Assessing Officer, on the basis of rule 8D of the Income-tax Rules as under : (i) Direct expenses : The amount of expenditure directly relating to income which does not form part of total income in the profit and loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned Departmental representative for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, the learned counsel for the assessee has defended the order passed by the learned Commissioner of Income-tax (Appeals). 10. After giving our thoughtful consideration to the submission of the parties and perusing the judicial decisions relied upon by the learned authorised representative, we find that the issue involved in the present issue is no longer res integra. We note that the co-ordinate Bench of the Income-tax Appellate Tribunal, Kolkata in the case of REI Agro Ltd. v. Dy. CIT [2013] 144 ITD 141 (Kol-Trib) has held that it is only the investments which yields dividend during the previous year that has to be considered while adopting the average value of investments for the purpose of rule 8D(2)(ii) and (iii) of the Rules. The aforesaid view of the Tribunal has since been affirmed as correct by the hon'ble Calcutta High Court in G. A. No. 3581 of 2013 in the appeal against the order of the Tribunal in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nths from January, 2000 to March, 2000. The Commissioner (Appeals) found that the assessee had enough interest-free funds at its disposal for investment and accordingly deleted the addition of ₹ 4.40 crores made by the Assessing Officer and directed him to allow the deduction under section 36(1)(iii). The order of the Commissioner (Appeals) was upheld by the Tribunal. On appeal to the High Court : Held, dismissing the appeal, that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption was established considering the finding of fact both by the Commis sioner (Appeals) and the Tribunal. The interest was deductible. Therefore, considering the factual position and position in law explained above, we delete the disallowance under rule 8D(2)(ii) of the Income-tax Rules. 12. We note that in computation of disallowance under rule 8D(2)(iii), the jurisdictional High Court in the case of REI Agro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade addition to the tune of ₹ 4,06,487. 15. On appeal, the learned Commissioner of Income-tax (Appeals) confirmed the addition made by Assessing Officer. Aggrieved, the assessee is in appeal before us. 16. Before us, the learned Departmental representative for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and the same is not being repeated for the sake of brevity. On the other hand, the learned counsel for the assessee has relied on the submissions made before the authorities below. 17. We have heard both the parties and perused the material available on record, we note that the aforesaid expenditure pertains to telephone and electricity bill which the assessee has claimed to have received in the financial year 2009-10 and as such booked in this year. We note that learned Commissioner of Income-tax (Appeals) rejected the claim of the assessee holding that since the assessee followed the mercantile system of accounting and as such the impugned expenditure can only be allowed in the year to which it pertains. The learned Commissioner of Income-tax (Appeals) al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mercantile basis. In each case where the accounts are maintained on mercantile basis it has to be found in respect of any claim, whether such liability was crystallised and quantified during the previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years cannot be disallowed as deduction merely on the basis the accounts are maintained on mercantile basis and that it related to a transaction of the previous year. Since the bills were not received, it was not possible to make provi sions for such expenses in the accounts of the preceding year ending on March 31, 2009. On receipt of these bills relating to earlier year, these payments were made in the current year. These prior period expenses, which were claimed in the current year, were not debited in the books of the preceding year and accordingly were not claimed by the assessee in the assessment year 2009-10. The said expenses of ₹ 4,06,487 was claimed by the assessee in the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contention of the asses see and the proportionate disallowance of interest on the said loan calcu lated at the rate of 5 per cent. (which is given by the assessee to its certificate holders) worked out to be ₹ 82,78,301 was disallowed by the Assessing Officer. 20. On appeal, the learned Commissioner of Income-tax (Appeals) deleted the addition made by the Assessing Officer. Aggrieved, the Revenue is in appeal before us. 21. Before us, the learned Departmental representative for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and the same is not being repeated for the sake of brevity. On the other hand, the learned counsel for the assessee has relied on the submissions made before the authorities below. 22. We have heard both the parties and perused the material available on record, we note that in respect of the disallowance of notional interest of ₹ 82,78,301 in respect of interest-free loan of ₹ 16.55 crores advanced by it for business purpose of M/s. Peerless Developers Ltd., which is its subsidiary company and since the said money was given t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of Income-tax (Appeals) deleting the disallowance made by the Assessing Officer on account of interest allegedly attributable to the interest-free loans given by the assessee-company to its subsidiary companies and dismiss ground No. 3 of the Revenue's appeal. Since this ground of the Revenue has already been adjudicated by the co-ordinate Bench in the assessee's own case for the assessment year 2009-10, and there being no change in the facts of the case and law in the present assessment year, therefore, we dismiss the appeal of the Revenue. 23. We take summarised and concise ground No. 4, which reads as follows : (4). Ground No. 4 raised by the Revenue in I. T. A. No. 1439/ Kolkata/2018, relates to the disallowance of compensation of ₹ 11,00,000 paid to M/s. Conforms Pvt. Ltd, a related company under section 40A(2)(b) of the Act without calling for remand report. 24. The brief facts qua the issue are that during the assessment proceedings, the Assessing Officer noted that the assessee, in its profit and loss account had debited an amount of ₹ 2,56,87,475 under the sub-head other expenditure . The party- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of section 40A(2)(a) and (b), to prove the excess so paid by the assessee to such company. The payment was made in respect of vacation of the property so occupied by such company. We find substance in the learned counsel's argument that the payment was made by the assessee after much negotiation and it was a separate entity and correspondences had occurred between the assessee and the said company to settle the amount. Even if the agreement was not there but the relevant correspondences duly prove that the payment was for the vacation of the impugned premises which was vacated by the said company. Hence, it is in accordance with the business of the assessee and the same is allowable. That being so, we decline to interfere with the order of the learned Commissioner of Income-tax (Appeals) in deleting the aforesaid addition. His order on this issue is, therefore, upheld and the grounds of appeal of the Revenue is dismissed. 28. Now, we shall take summarised and concise ground No. 5, which reads as under : (5) Grounds raised by the assessee in I. T. A. No. 938/Kolkata/ 2018, for the assessment year 2010-11, relates to the action of the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed an order under section 263 dated March 19, 2015 restoring back to the file of the Assessing Officer set asiding the issue. A show cause letter dated July 22, 2015 was issued to the assessee requesting to explain the issue, in response the assessee submitted a letter on July 29, 2015 stating that the assessee preferred an appeal before Income-tax Appellate Tribunal against the order of the learned Principal Commissioner of Income-tax. Since the explanation of the assessee was not adequate therefore the assessee was asked to submit the proper explanation. In response, the assessee submitted explanation on November 30, 2015 stating that even if the effect of the order under section 263 was given there is no impact on the total income and till date that capital loss not utilised in subsequent years. It appeared to the Assessing Officer that the assessee did not have proper explanation to submit in response of the wrong claim of long-term capital gains as mentioned above. Under this circumstances, the long-term capital gains was being reduced by ₹ 28,43,33,411 and only long-term capital gains (loss) of ₹ 3,05,76,150 was allowed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of this Act by the Central Government or a State Government for the purpose of raising a public loan and having one of the forms specified in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944). Further, section 2(2) of the Public Debt Act, 1944 defines Govern ment security as follows : Government security means- (a) a security, created and issued, by the Government for the purpose of raising a public loan, and having one of the following forms, namely :- (i) stock transferable by registration in the books of the bank ; or (ii) a promissory note payable to order ; or (iii) a bearer bond payable to bearer ; or (iv) a form prescribed in this behalf ; (b) any other security created and issued by the Government in such form and for such of the purposes of this Act as may be prescribed. The Government securities which were sold during the year were stocks being of the nature described in clause (i) to section 2(a) of the Public Debt Act, 1944. The third proviso to section 48 of the Act restricts the indexation in the case of long-term ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove definitions. Had bonds and Government securities the same, there would have been no need to define both these terms differently. The learned Assessing Officer and the learned Commissioner of Income-tax (Appeals) had not disputed the fact that the assessee has transacted in Government securities but have only alleged that these Government securities are in the nature of bonds and debentures on which indexation benefit under section 48 of the Act is not applicable. During the course of appellate proceedings, the above definitions were explained before the learned Commissioner of Income-tax (Appeals). 34. We note that it was also submitted during the appellate proceedings that the learned Principal Commissioner of Income-tax in his order under section 263 dated March 19, 2015 had not discussed any of the contentions of the assessee claiming that Government securities are not bonds and debentures. In the said order, he has not given any finding either accepting or denying the contentions of the assessee. On the other hand, in the said order passed under section 263, he had concentrated only on the technical aspect that the assessment order for the assessment year 2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arket. From perusal of the RBI clarification also, the assessee is found to have purchased and sold the said Govern ment securities through the secondary market, i. e., LKP Securities Ltd. and bankers, i. e., United Bank of India as per copy of confir mations placed on record by the assessee. Hence, in my considered opinion, the Government securities in question, viz., GS-2010 GS-2012 are also bonds, as per this definition of bond as enunciated by various authorities, including the guidelines of the RBI. The learned Commissioner of Income-tax (Appeals), has finally relied on a decision of the hon'ble Tribunal Ahmedabad Bench in the case of Areez P. Khambatta in I. T. A. No. 795/Ahd/2009 for the assessment year 2005-06 dated December 9, 2011, wherein the Tribunal examined the question whether UTI MIP-59 carrying fixed amount of interest was a bond and debenture. It was held that aforesaid financial instrument was bond and therefore no benefit of indexation would be available to the assessee because the case was hit by the third proviso of section 48 of the Act. But the said order of the Tribunal did not throw any light on the dispute in the present case, i. e., w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UTI MIP-99 was transferred by the assessee. UTI MIP-99 is a bond floated by the Unit Trust of India which is not a Government entity. UTI Mutual Fund is promoted by the four of the largest public sector financial institutions as sponsors, viz., State Bank of India, Life Insurance Corporation of India, Bank of Baroda and Punjab National Bank with each of them holding an 18.24 per cent. stake in the paid up capital of Unit Trust of India AMC. However, in the present case, the assessee has transferred Government securities floated by the Central Government. In this case cited by the Commissioner of Income-tax (Appeals), there is no reference of Government securities, as such the facts of this are clearly distinguishable from the present case. Most importantly, to buttress the contention that indexation benefits are available on sale of the Government securities we rely on the judgment of the co-ordinate Bench of the Chennai Tribunal in the case of Sundaram Finance Limited v. Asst. CIT (LTU) [2017] 165 ITD 563 (Chennai) wherein on identical facts it was held that Government Securities are entitled to indexation. The detailed facts and findings are given below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as per section 48 of Income-tax Act. From the plain reading of third proviso section 48 of the Income-tax Act, Government securities are not excluded for indexation benefit only bond or debenture included in the third proviso to section 48. Therefore, we do not find any infirmity in the order of the learned Commissioner of Income-tax (Appeals) and the same is upheld. Based on the factual position discussed above, we note that as per section 2(42A) expression security shall have meaning assigned to clause II of the Securities Contracts Regulation Act, 1956 which includes Government securities. The facts of this case are squarely applicable to the present case of the assessee. Therefore, respectfully following the judgment of the co-ordinate Bench in the case of Sundaram Finance Limited (supra) we note that it is abundantly clear that the Government securities are entitled to indexation benefits. Therefore, we note that the Government securities are different from bond and debenture for the purpose of the third proviso to section 48 of the Act (4th proviso after amendment) and therefore the benefit of indexation should be granted to the assessee on the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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