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TMI Blog2019 (12) TMI 958X X X X Extracts X X X X X X X X Extracts X X X X ..... volved, therefore, these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. 3. Although, these appeals filed by the Revenue and the assessee contain multiple grounds of appeal. However, at the time of hearing, we have carefully perused all the grounds raised by the assessee as well as the Revenue. We find that most of the grounds raised by the assessee as well as the Revenue are either academic in nature or contentious in nature. However, to meet the ends of justice, we confine ourselves to the core of the controversy and the main grievance of the assessee and the Revenue as well. With this back ground, we summarise and concise the grounds raised by the Revenue as well as the assessee as follows : (1) Ground No. 1 raised by the assessee in I. T. A. No. 937/Kol/2018, for the assessment year 2010-11 and ground Nos. 1 and 2 raised by the Revenue in I. T. A. No. 1439/Kolkata/2018 for the assessment year 2010-11 are common and identical and relate to the disallowance under section 14A read with rule 8D(2)(ii) and 8D(2)(iii) of the Income-tax Rules, 1962. (2) Ground No. 3 raised by the assessee in I. T. A. No. 937/K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance under section 14A read with rule 8D(2)(ii) and 8D(2)(iii) of the Income-tax Rules, 1962. Note : To adjudicate this summarised and concise ground No. 1, we take the lead case of the Revenue's appeal in I. T. A. No. 1439/Kolkata/ 2018, for the assessment year 2010-11. 7. The brief facts qua the issue are that on verification of the accounts of the assessee, it was noted by the Assessing Officer that the assessee-company earned interest from tax-free bonds (exempt income) of Rs.N1,32,09,652, and dividend income of Rs. 5,13,16,782. In its computation of income, the assessee-company has suo motu offered an amount of Rs. 91,07,352, as disallowance under the said section. The computation of disallowance under section 14A read with rule 8D, as offered by the assessee-company is reproduced hereunder for the sake of clarity and convenience. 1. Average investment in shares on which dividend was received 46,43,51,330 2. Average investment in mutual funds on which dividend was received 1,22,79,81,089 3. Average investment in bonds on which tax-free interest was received 12,91,38,000 182,14,70,419 0.50% of average investment 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance under rule 8D of the Income-tax Rules read with section 14A of the Income-tax Act, was worked out to Rs. 7,40,76,948 [(i) + (ii)+ (iii) = Rs. 56,181 + Rs. 6,14,29,152 + Rs. l,25,91,615 = Rs. 7,40,76,948] The assessee-company, as discussed above, has offered suo motu an amount of disallowance to the tune of Rs. 91,07,352 in its computation of income. Therefore, the disallowance here is restricted to the tune of Rs. 6,49,69,596 (Rs. 7,40,76,948 -Rs. 91,07,352 = Rs. 6,49,69,596. 8. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the learned Commissioner of Income-tax (Appeals), who has partly allowed the appeal of the assessee. Aggrieved, the Revenue is in appeal before us. 9. 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 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer recorded a finding that the sum of Rs. 213 crores was invested out of its own funds and Rs. 147 crores was invested out of borrowed funds. Accordingly, he disallowed interest amounting to Rs. 4.40 crores calculated at 12 per cent. per annum for three months 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r under consideration and there fore, the same should be allowed. However, the Assessing Officer rejected the contention of the assessee and made addition to the tune of Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n question on the basis of maintaining accounts on the 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 Rs. 4,06,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance 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 Rs. 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 Rs. 82,78,301 in respect of interest-free loan of Rs. 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 to the subsidiary in course of business of the assessee. We are of the view that the principles decided by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies 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 Rs. 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 Rs. 2,56,87,475 under the sub-head "other expenditure". The party-wise details were sought. On perusals of which it was noted by the Assessing Officer that the assessee had paid Rs. 11,00,000 on account of compensation paid to tenant. The assessee was further asked to produce the details of the tenants. The same was filed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 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 Rs. 31,49,09,561." 29. The brief facts qua the issue are that the assessee-company filed its return of income for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 Rs. 28,43,33,411 and only long-term capital gains (loss) of Rs. 3,05,76,150 was allowed to be carried forward. 30. On appeal by the assessee, the learned Commissioner of Income-tax (Appeals) confirmed the addition made by Assessing Officer. The learned Commissioner of Income-tax (Appeals) noted that the Government securities held by the assessee are bonds and therefore the assessee is not eligible for indexation in view of the third proviso to section 48 of the Income-tax Act, 1961. Therefore, the assessee's claim for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 capital assets, being bonds or debentures other than capital indexed bonds issued by the Government. The term debenture has been defined in section 2(30) of the Companies Act, 2013 which reads as "debenture" includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not." From the above definitions, it is clear that debenture includes bond but it does not include Government securities. One of the fundamental differences between "debenture" on one hand and "Government securities" on the other hand is that "debentures" are issued by a company whereas "Government secur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der 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 2010-11 was erroneous and prejudicial to the interests of the Revenue since the learned Assessing Officer had not examined this question of indexation on transfer of Government securities at the assessment stage and hence section 263 of the Act was applicable in the present case. He therefore set aside the assessment order for the limited purpose of examining whether on the divestment of the Government securities the assessee was entitled to the benefit of indexation. The assessee thereafter filed an appeal against the learned Principal Commissioner of Income-tax's order under section 263 before the hon'ble Tribunal. The assessee raised several grounds pointing out the difference between bonds and debentures on one hand and Government securities on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned 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., whether the Government securities are bonds and debentures. The facts of the said case and conclusion is given below : "Facts of this case : Capital gains-Indexation benefit on debt instruments-Assessee reported loss on conversion of units of UTI MIP 99 which were converted by UTI into tax-free bonds prior to the actual date of redemption, after claiming benefit of indexation-Terms "bonds" and 'debentures" are not defined in Income-tax Act-In case of prema ture withdrawal, interest already paid is deducted from capital-In that sense, UTI, MIP-99 is also a bond as per definition of bond- Third proviso to section 48 excludes bonds and debentures other than capital indexed bonds issued by the Government from the list of capital assets eligible for the benefit of indexation-Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities" 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 : "Facts of the case Capital gains-Short term and long-term capital assets and short-term and long-term capital gains-Deletion of addition-Assessing Officer disallowed indexation benefit claimed by assessee as per third proviso of section 48 held that on sale of Government securities, indexation benefit was not allowed-Commissioner of Income-tax (Appeals) deleted addition placing reliance on Explanation 2 to section 2(42A) read with Securities Contracts Regulation Act, 1956 and allowed appeal of assessee-Revenue in appeal was related to indexation benefit on capital gains under section 48-Held, from definition of capital asset, Government securities were not excluded from definition of capital asset-As per section 2(42A) expression 'security' should had meaning assigned to clause 11 of Securities Contracts Regulation Act, 1956 which includes Government securi ties- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 36. In the result, appeal of the assessee in I. T. A. No. 938/Kolkata/2018, is allowed. 37. 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 deduction under section 37(1) of the Income-tax Act, 1961, on account of education cesses paid by the assessee while arriving at the assessed income for the year under appeal." 38. 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 ground of appeal is no longer res integra. The 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 the co-ordinate Bench of In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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