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TMI Blog2020 (11) TMI 809X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.Ys. 2007-08 to 2009-10 and A.Y. 2011-12 to 2013-14 and appeal by the assessee for the A.Y. 2010-11. 2. First we take up the appeal for the A.Y. 2007-08 in ITA.No. 5775/Mum/2011 (assessee's appeal) and ITA.No. 6860/Mum/2011 (revenue's appeal). ITA.No. 5775/Mum/2011 (A.Y. 2007-08) (Assessee's Appeal) 3. Assessee in its appeal has raised following grounds in its appeal: - "1) The Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the disallowance made by Assessing Officer (AO) for depreciation claim of Rs..375,000/- on intangible assets - non-compete fees of Rs..20,00,000 under the non-compete agreements. 2) The CIT(A) erred in restricting disallowance u/s 14A of the Act to 5% of exempt income (i.e. 5% of Rs..11,05,15,050/-) which works out to Rs..55,25,752/- lakhs and not accepting the disallowance offered by the appellant u/s 14A of Rs..37,66,085/- (being Rs..19,87,289/- towards administrative expenses and Rs..17,78,796/- towards interest expenditure). 3) The CIT(A) erred in confirming the disallowance of Rs..147,635/- (i.e. 1/5th of Rs..738,189/-) incurred towards preferential issue of shares and Rs..185,640/- (i.e. 1/5th of Rs..928,198/-) towards war ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compete fees. 7. Ld. DR fairly submitted that the issue has been decided in favour of the assessee by this Tribunal for the A.Y. 2006-07. 8. We have heard the rival submissions, perused the orders of the authorities below and the order of the Coordinate Bench. The Tribunal while disposing off the appeal of the assessee for the A.Y. 2006-07 in ITA.No.1163/Mum/2011 dated 27.08.2018 allowed the claim for depreciation on intangible assets i.e. non-compete fees observing as under: - "7. We have heard the rival submissions of both the parties and perused the material on record including the decisions cited by the Ld. A.R. We find that in the present case the assessee acquired 78% of the interest in a firm known as M/s. Landmark which was engaged in the business of retailing and publishing the books and magazines. The assessee paid Rs. 10 lakh each to two partners vide two separate agreements dated 30.08.2005 as non compete fee for not carrying on or competing with the firm for 5 years from the date of agreement. The assessee claims that the said payment was made as non compete fee in order to protect 78% of the business interest in the firm M/s. Landmark and therefore the reasoning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome as per Rule 8D r.w.s. 14A of the Act. 12. Assessee vide letter dated 06.10.2009 submitted its reply as under: "1. As per Annexure X to the tax audit report and statement no. 16 to the return it had itself worked out the disallowance by a scientific method based on facts as follows: a. The Investment Committee of Directors: The Committee meets from time to time to review the investments, decides the asset allocation and investments to be purchased and sold. The sitting fees paid to the Committee are included in expenses pertaining to investment activity. b. The company has employed one investment manager to take day-to-day decisions regarding purchase and sale of investment as per the guidelines issued by the investment committee. The salary of investment manager is included in expenses pertaining to investment activity. c. 10% of salary of head of accounts was allocated to investment activity. d. All other administrative expenses consisting of office rent, electricity, telephone, travel, audit fees, etc. is apportioned to investment activity on proportionate basis. e. The total expenses pertaining to investment activity are apportioned between taxable income and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration (these investments were acquired on or after 1 July 2005, and continued to be held during the year under consideration) - 55.56% of such mutual fund investments i.e. INR 34,50,86,345 have been considered as invested out of debenture issue proceeds - Interest @ 2% (i.e. interest cost for the year as a percentage of the total debentures outstanding as at end of the year) has been computed on the amount of INR 34,50,86,345 for the proportionate number of days for which the amount remained invested in the mutual funds. 16. Referring to Page No. 114 of the Paper Book Learned Counsel for the assessee submitted that Administrative expenses of Rs.19,87,796/-considered for disallowance u/s. 14A have been computed based on a percentage of operating expenses. The detailed working showing the computation of administrative expense is submitted in the paper book. Referring to Page Nos. 121 and 122 of the Paper Book Learned Counsel for the assessee submitted that suomoto disallowance made in A.Y.2007-08 is on exactly similar basis as the suomoto disallowance made in A.Y.2006-07. Referring to Page Nos. 155 and 156 of the Paper Book, Ld. Counsel for the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have heard the rival submissions, perused the orders of the authorities below. We observe that the assessee made suomoto disallowance of Rs..37,66,085/- being the expenses attributable for earning exempt income and a detailed working was also furnished along with the computation of income which the Ld. Assessing Officer also accepted this position. However, rejecting the working of the assessee Ld. Assessing Officer invoking Rule 8D of I.T. Rules and computed the disallowance accordingly. Ld.CIT(A) however estimated the disallowance at 5% as a reasonable expense attributable for earning exempt income referring to the decision of the Mumbai Bench of the Tribunal and also noticed that provisions of Rule 8D have no application for the A.Y. 2007-08. On a perusal of the order of the Ld.CIT(A) for the A.Y. 2006-07 dated 19.04.2012 we find that the assessee made suomoto disallowance of Rs..37,29,108/- wherein a detailed working was also furnished showing the basis for making such disallowance and this was accepted by the Ld.CIT(A). Further, Ld. Assessing Officer estimated the expenditure attributable for earning exempt income at 5% as reasonable expenditure. However, the Ld.CIT(A) aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount as adopted by the assessee. However, since the assessee had already made suomoto disallowance we direct the Assessing Officer to delete the disallowance made u/s. 14A r.w. Rule 8D of I.T. Rules. This ground is allowed. 23. As the main plea of the assessee is accepted we are not going into the alternative pleas made by the assessee, as such the alternate pleas in grounds are dismissed. 24. Ground Nos. 3 and 4 of grounds of appeal relates to disallowance made U/s. 35D of the Act. 25. Briefly stated the facts are that, the Assessing Officer while completing the assessment noticed that the assessee in its computation of income claimed deduction of Rs..33,31,710/- u/s. 35D of the Act. The Assessing Officer required the assessee to explain as to why claim made u/s. 35D of the Act shall not be disallowed as was made in earlier years. 26. The assessee submitted that during the A.Y. 2007-08 it had incurred expenses towards issue of shares to promoters and also for conversion of warrants and the expenses incurred for issue of shares/warrants are eligible for deduction u/s. 35D of the Act. However, the Assessing Officer denied the claim for deduction u/s. 35D observing as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer. 28. Ld. Counsel for the assessee submits that the assessee is engaged in the business of retailing of readymade garments, other accessories and household items through a chain of retail stores with a popular name as "'Westside", departmental stores in the name of "Star Bazaar". Further, it is submitted that part of the garments sold are manufactured on job-work basis. Learned Counsel for the assessee submitted that the assessee issued equity shares and warrants to its promoters on preferential basis during AY 2007-08. The proceeds of the share issue were to be utilized for setting up of new stores for its retailing business and other purposes of its business. The assessee claimed 1/5th of expenses incurred on such issue under section 35D of the Act. Learned Counsel for the assessee submitted that the Assessing Officer rejected the claim of the assessee on the grounds that the Assessee's business does not fall under the definition of "industrial undertaking" and therefore, deduction under section 35D of the Act cannot be claimed. Ld. Counsel for the assessee inviting our attention to the amendment to section 35D made w.e.f. 1 April 2009, wherein the word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tribunal considered the issue as to whether the assessee which is engaged in the shipping business is eligible for deduction u/s. 35D of the Act and observed as under: - "6. Briefly stated, the relevant facts are that the assessee company is engaged in the Business of operating ships. The assessee company filed return of income on 29.11.95 wherein there is a sum of Rs..12,93,626/- equivalent to 20% of the total expenditure of Rs..64,68,381/- incurred by the assessee-company in connection with the issue of shares to meet the requirement of funds for the acquisition of new ships was amortized. The return was processed u/s. 143(1). However, the Assessing Officer issued notice u/s. 148 for re-opening the assessment u/s 147 on the ground that amortization of shares issue expenses claimed & allowed to the assesse was not allowable because these expenses were of capital nature in view of the decision of Hon'ble Supreme Court in the case of M/s Brooke Bond India Ltd. as reported in 225 1TR 79 and hence income escaped assessment. The Assessing Officer, after obtaining necessary details of the expenses and considering the submissions made by the assessee, disallowed the claim o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ispute that the assessee incurred expenses for raising additional resources through public issue to acquire new ships-. It is also not in dispute that these expenses are in the nature of capital expenses in view of the decision of the Hon'ble Supreme Court in the case of Brooke Bond India Ltd. (supra). However, but section 35-B of the Act permits the amortization of such expenses if the conditions specified therein are fulfilled. It is also not in doubt the expenses incurred by the assessee fall with the category of expenses which are eligible for amortization. The only question which is required to be considered is whether the assessee-company is a Industrial undertaking or not within the meaning of provisions of Section 35 D of the Act. No doubt the definition of the term has not been given in the Section itself. The assessee has contended that in the absence of any specific definition, the definition of the term "Industrial Undertaking" can be imported from the definition of the term given in other sections or other Acts to arrive at the correct conclusion while the Revenue has contended that this term has been used with a specific meaning in respective provisions and, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sections by the assessee. In view of above discussion, we are of the considered opinion that the learned CIT(A) was not justified in confirming the disallowance made by the Assessing Officer in this regard and accordingly we reverse the order of the learned CIT(A) and direct the Assessing Officer to re-compute the income of the assesse after allowing amortization of share issue expenses @ 10% of the total expenses incurred by the assessee, Thus, this ground of the assessee Is accepted." 35. This decision of the Tribunal was appealed before the Hon'ble Bombay High Court by the Revenue in Income Tax Appeal No. 1079 of 2008 and the Hon'ble Bombay High Court by order dated 05.09.2008 dismissed the appeal of the Revenue observing as under: - "1. Heard the learned Counsel for the parties. In this Appeal the Appellant has sought to raise the following substantial question of law: - Whether on the facts and in the circumstances of the case, the Hon'ble Tribunal was right in law in holding that the shipping business is an Industrial Undertaking and in allowing deduction u/s.35D of the IT Act, 1961? 2. Perused the order passed by the Division Bench of this Court on 14th Aug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;Act is directed to dealings with matters affecting everybody generally, the words used have the meaning attached to them in the common and ordinary use of language' [Vide Unwin v. Hanson (189) 2 Q.B. 115 (CA), per Lord Esher M.R., at page 119]. That the Income-tax Act is of general application, is beyond dispute. It, therefore, follows that the meaning that should be given to these words 'industrial undertaking' must be the natural meaning. It is all the more so because the Income-tax Act is one consolidating and amending the law relating to income-tax and supertax. (See Rao Bahadur Ravula Subha Rao v. CIT [1956] 30 ITR 163 (SC) at p. 169). ...Undertaking' in common parlance means an 'enterprise', 'venture', 'engagement'. It can as well mean 'the act of one who undertakes or engages in a project or business' (Webster). An undertaking mentioned in Section 54D must be one maintained by a person for the purpose of carrying on his business. 'Undertaking', for the purpose of this Section, however, must be an 'industrial undertaking'. The demonstrative adjective 'industrial undertaking' qualifying the word 'u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Eleventh Schedule and so, the assessee is entitled to relief under Section 32A. (c) The Supreme Court decision referred to above was concerned with the term "Industry" and the "Undertaking" as appearing in Industrial Disputes Act and in that context it held as under: 34. So, the long and short of it is, what is an industry? Section 2(;) defines it: industry" means any business, trade undertaking, manufacture or calling of employers and includes any calling, service, employment, handicraft, or industrial occupation or avocation of workmen. Let us put it plain. The canons of construction are trite that we must read the statute as a whole to get a hang of it and a holistic perspective of it. We must have regard to the historical background, objects and reasons, international thoughtways, popular understanding, contextual connotation and suggestive subject-matter. Equally important dictionaries, while not absolutely binding are aids to ascertain meaning. Nor are we writing on a tabula rasa. Since Banerjee, 1953 SCR 302: (AIR 1953 SC 58), decided a silver span of years ago, we have a heavy harvest of rulings on what is an 'industry' and we have to be guided by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 'industry' cannot exist without co-operative endeavour between employer and employee. No employer, no industry; - no as a dogmatic proposition in economics but as an articulate major premises of the definition and the scheme of the Act, and as a necessary postulate of industrial disputes and statutory resolution thereof. 39. An industry is not a utility but geared to utilities in which the community has concern. And in this mundane world where law lives now, economic utilities - material goods and services, not transcendental flights nor intangible achievements - are the functional focus of industry. Therefore, no temporal utilities, no statutory industry, is axiomatic. If society, in its advance, experiences subtler realities and assigns values to them, jurisprudence may reach out to such collective good. Today, not tomorrow, is the first charge of pragmatic law of western heritage. So we are confined to material, not ethereal end products." (d) The Karnataka High Court in the case of Shankar Construction Co. v. CIT [1991] 189 ITR 463 : 56 Taxman 98, held that the activities of a firm carrying on business in manufacturing and sale of tiles and specialising in const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee being not an 'industrial undertaking'?" 8. In this context, we have to first notice that by Finance Act, 2008 with effect from 01.04.2009 there was an amendment of Section 35D by Section 8 of the Finance Act, which reads as under: "8. Amendment of Section 35-D.- In Section 35-D of the Income Tax Act, with effect from the 1st day of April, 2009,- (a) for the words "industrial undertaking", wherever they occur, the word "undertaking" shall be substituted; (b) for the words "industrial unit", wherever they occur, the word "unit" shall be substituted." The learned Counsel appearing for the appellant would contend that there being a substitution, the amendment would have to be deemed to be retrospective. The judgment of a Division Bench of this Court in Commercial Tax Officer v. Najeem [2018 (3) KLT 877] is also put forth. It is argued that this Court had found that when there is a substitution, if it is not specifically expressed to be prospective, then "the Courts could always interpret it to be retrospective, looking at the scheme of the enactment, the purpose and object of the amendment, especially when the amendment by substitution, was intended a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s v. C.I.T. [(1987) 166 ITR 804 (Ker)], Shankar Construction Co. v. C.I.T. [(1991) 189 ITR 463 (Kar.)], C.I.T. v. Emirates Commercial Bank Ltd. [(2003) 262 ITR 55 (Bom.)], C.I.T. v. Computerised Accounting and Management Service Pvt. Ltd. [(1999) 235 ITR 502 (Ker)] and C.I.T. v. Peerless Consultancy and Service (P.) Ltd. [(2001) 248 ITR 178]. The learned Standing Counsel for Government of India (Taxes) has relied on the decision in Ansal Housing and Construction Ltd. v. CIT [(2010) 320 ITR 420 (Delhi)]. 11. In Alikunju, M.A.Nazeer Cashew Industries, this Court was concerned with the issue whether the construction of a lodging house would be considered as an "industrial undertaking". Therein the provision was one which granted exemption to gains arising on transfer of land and building forming part of industrial undertaking; when invested in setting up another industrial undertaking. The assessee had an ice factory; the land and buildings of which were acquired by the Government. The consideration was treated as long term capital gains as against which, the assessee claimed exemption under Section 54D on the ground that he had invested the capital gains in the construction of a lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construction and sale of multi-storeyed residential buildings and complexes, promotion and development of residential colonies, etc. The said decision is in direct conflict with the decision of the Karnataka High Court in Shankar Construction Co. We also notice that the decision in Alikunju, M.A.Nazeer Cashew Industries was distinguished, finding that the Division Bench of this Court had only dealt with the expression "undertaking" and not with the expression "industrial undertaking". We are unable to agree with the High Court of Delhi on that issue since the specific finding was that "the running of a lodge could be said to be an industrial undertaking within the meaning of Section 54D". 17. The Division Bench decisions of this Court in Alikunju, M.A.Nazeer Cashew Industries and Computerised Accounting and Management Service Pvt. Ltd., have a binding effect on us while the decision of the High Court of Delhi in Ansal Housing and Construction Ltd. can only be persuasive. We, hence, respectfully follow the Division Bench decisions of this Court and in doing so, we reiterate the principle as stated by the Karnataka High Court insofar as the assessee being favoured when two views ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal No.305 of 2008 dated 14.08.2008 held as under: "1. Heard learned Counsel appearing for both the sides. The interpretation placed on the term "industrial undertaking" occurring in the provision of Section 35D of the Income Tax Act, in our opinion, is proper. The grievance of the learned Counsel appearing for appellant-department that the decision of this Court in the Case of "Insight Diagnostic and Oncological Research Institute Pvt.Ltd. Vs. Deputy Commissioner of Income Tax, reported in (2003)262 ITR 0041W" was not considered by the Tribunal, in our opinion, is not proper because that judgment though interprets the term "industrial undertaking" it interprets the term "industrial undertaking" found in sub-section (1) of Section 32A of the Income Tax Act. For the purpose of section 35D of the Act that judgment is not relevant. In our opinion, in so far as interpretation of the term "industrial undertaking" found in section 35D of the Act is concerned, the tribunal has rightly considered the meaning of the term "industrial undertaking" common parlance. We see no question of law arising. The appeal is, therefore, rejected." 39. In the facts and circumstances of the assessee's ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/08 (Mumbai Tribunal). 43. Ld. DR fairly submitted that the issue has been decided in favour of the assessee in assessee's own case for the A.Y. 2006-07. 44. We have heard the rival submissions, perused the orders of the authorities below and the decision of the Coordinate Bench. On a perusal of the order of the Coordinate Bench in ITA.No. 1163/Mum/2011 dated 27.08.2018 an identical issue has been decided in favour of the assessee by the Tribunal wherein it was held as under: - "10. The issue raised in third ground of appeal is against the confirmation of disallowance of Rs. 64,75,000/- by Ld. CIT(A) as made by the AO towards amortization in respect of Company's Employee Stock Options Scheme (ECOS) under section 37(1) of the Act. 11. The facts in brief are that the AO during the course of scrutiny proceedings observed that assessee has amortized Rs. 0.64 crore in the P & L Account out of the stock options of 45,850 granted under the Employee Stock Options Scheme (ECOS) to senior manager and selected officers of the company the total cost of which was Rs. 3.96 crores. The assessee has appended note in the annual report to this extent that company has granted stock options und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e which according to the AO was not correct and he disallowed the same by holding that same is of capital in nature which was also affirmed by the CIT(A). We are not in agreement with the conclusion drawn by the Ld. CIT(A) on this issue that the amortization of expenditure claimed by the assessee is not admissible as revenue in nature and the issue is settled by the various judicial forums. The case of the assessee is supported by a series of decisions referred to above by the Ld. A.R. We have perused all these decisions and found that the case of the assessee is squarely covered by ratio laid down in these decisions. In view of these facts and ratio laid down by the various judicial forums, we set aside the order of Ld. CIT(A) and direct the AO to delete the disallowance." 45. Facts being identical respectfully following the said decision of the Tribunal for the immediately preceding Assessment Year i.e. A.Y.2006-07 we allow the claim of the assessee for the year under appeal. This ground is allowed. 46. Ground No. 6(a) of grounds of appeal of the assessee is relating to determination of Annual Letting Value (ALV) of the premises at Taj Building u/s. 23(1)(a) of the Act. 47. Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y High Court) ii) Smt. Smitaben N. Ambani v. Commissioner of Wealth [2009] 323 ITR 104 (Bombay High Court) iii) Tip Top Typography vs CIT [2014] 48 taxmann.com 191 (Bombay High Court) 50. Ld. DR vehemently supported the order of the Assessing Officer. 51. We have heard the rival submissions, perused the orders of the authorities below and the decision of the Coordinate Bench in assessee's own case for the A.Y. 2006-07. On a perusal of the order of the Tribunal we observed that identical issue has come up before the Tribunal for the A.Y. 2006-07 in ITA.No. 1163/Mum/2011 dated 27.08.2018 and the Tribunal held as under: - "16. The issue raised in 4th ground of appeal is against the order of Ld. CIT(A) in deciding the annual letting value of the premises known as Taj Building as per section 23(1)(a) of the Act and also erred in rejecting the assessee's contention that fair market rent of the building should be compared with the total sum received from letting of premises along with furniture hire charges. 17. The facts in brief are that the assessee has entered into a Leave and License Agreement with M/s. Freight Systems (I) Pvt. Ltd. for a license fees amounting to Rs. 94,39 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate. In fact, the AO has been very fair to have put a premium of only 20% on the residential property, with which the impugned property was compared, to evaluate the potential rental of the commercial property in question. The impugned commercial property, as rightly observed by the AO is in a posh area and the AO has been very reasonable in estimating the sum for which the property might reasonably be expected to let from year to year. Hence, the action of the AO in estimating the ALV of this property at Rs. 35,50,000/- is upheld. This limb of the ground is dismissed." 18. The Ld. A.R. submitted before the bench that the AO has wrongly treated Taj Building as Taj Hotel by referring to the observations of AO in para 5.6 A4 at page No.4 of the assessment order. The Ld. A.R. further referred to para 5.6 A6 wherein the AO compared the Taj Building which is located at Fort, Mumbai with another building owned by the central government used for officer's residences known as Belvedere which is Breach Candy and thus pointed out that the whole exercise of the AO to find out the fair market rent was fallacious and full of anomalies as two buildings are at two different locations and theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owjani v. DCIT (2017) 166 ITD 488 (Mumbai Tribunal)" 19. The Ld. D.R., on the other hand, relied on the order of authorities below and submitted before the Bench that the AO is free to determine the ALV of the premises let out by the assessee where the fair rent is enormously low as compared with the market rate. The Ld. D.R. relied on the decision of Hon'ble Bombay High Court in the case of CIT vs. Tip Top Typography v. CIT [2014] 48 taxmann.com 191 (Bombay High Court) and ACIT vs. Virendra Jain in ITA No.2116/M/2012 A.Y. 2009-10. The Ld. D.R. finally prayed before the Bench that the order passed by the AO is well reasoned based on the comparable instances of the fair rent in the vicinity and was rightly upheld by the Ld. CIT(A) and therefore deserves to be sustained. 20. We have heard the rival submissions of both the parties and perused the material on record including the decisions cited by both the parties. We find that in the present case the assessee has let out Taj Building which is located in D.N. Road, Fort, Mumbai to M/s. Freight Systems (I) Pvt. Ltd. The assessee entered into two agreements (i) for lease of premises dated 14.08.2003 at a monthly rent of Rs. 94,392/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid premises is Rs. 1,31,300/-. The case of the assessee is supported by the various decisions referred to and relied by the Ld. A.R. of the assessee during the course of hearing. In the case of M.V. Sonavala vs. CIT (supra) the Hon'ble Bombay High Court has upheld the order of the Tribunal wherein it has been held that annual value of the property is to be taken at an amount which is higher of the two i.e. rent received by the assessee in respect of different properties and not at their municipal rateable rate. In the present case, the municipal rate of valuation is below the actual rent received and therefore the actual rent has to be taken as ALV. In the case of CIT vs. Tip Top Typography (supra) the Hon'ble Bombay High Court has held that the market rate in the locality is an approved method of determining the fair rental value but it is only when the AO is convinced and satisfied that the case before him is suspicious and determination by the parties is doubtful that he can resort to enquire about the prevailing rate in the locality. So the Hon'ble High Court has held that only in the event of suspicion and some manipulation, the AO can resort to make enquiries or comprehensiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that an adhoc disallowance computed under section 14A of the Act does not represent actual expenditure incurred for earning exempt income, the same should not be added back while computing 'book profit' under section 115JB of the Act." 58. Ld. Counsel for the assessee submits that the assessee has disallowed an amount of Rs..35,07,020/- as expenditure incurred towards earning exempt income while computing its book profit taxable under section 115JB of the Act. The expenses disallowed pertain to those incomes which are exempted/ excluded while computing book profit under section 115JB of the Act. The Assessing Officer has applied Rule 8D of I.T. Rules to compute the disallowance u/s. 14A of the Act at Rs..3,71,34,919/- and added back the same to the assessee's income taxable under normal provisions of the Act, as well as to the book profit under section 115JB of the Act. Ld. Counsel for the assessee further submits that disallowance computed u/s. 14A of the Act r.w. Rule 8D of I.T. Rules is not the actual expenditure incurred by the assessee for earning exempt income, but is a notional amount, which has not actually been debited to the assessee's profit and loss account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able as the tax effect is below Rs..50 Lacs. ITA.No. 1036/Mum/2012 (A.Y: 2008-09) (Assessee's Appeal) 61. Assessee has raised following grounds in its appeal: - "1) The Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the disallowance made by Assessing Officer (AO) for depreciation claim of Rs..281,250/-on intangible assets - non-compete fees. 2) The CIT(A) erred in confirming the disallowance of Rs..147,635/- (i.e. 1/5th of Rs..738,189/-) incurred towards preferential issue of shares and Rs..185,640/- (i.e. 1/5th of Rs..928,198/-) towards warrant issue claimed u/s 35D of the Act. 3) The CIT(A) erred in confirming the disallowance of Rs..20,95,679/- (i.e. 1/5th of Rs..10,478,393/-) incurred in AY 2008-09 towards issue of equity shares on right basis claimed u/s 35D of the Act. 4) The CIT(A) erred in not dealing with alternate plea of the appellant to allow Rs..39,02,000/- claimed u/s 37(1) of the Act being expenses of revenue nature out of Rs..10,478,393/- incurred towards issue of equity shares on right basis in AY 2008-09. 5) The CIT(A) erred in confirming the disallowance of Rs..163,225/- (i.e. 1/5th of Rs..816,129/-) incurred in AY 2008-09 towards i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) u/s. 37(1) of the Act. This ground is similar to Ground No. 5 of grounds of appeal raised for the A.Y. 2007-08 and the decision taken therein shall apply mutatis-mutandis to the appeal for the A.Y. 2008-09 also. We order accordingly. 65. Ground No. 10 of grounds of appeal relating to the disallowance made u/s. 36(1)(ii) of the Act by the Assessing Officer in respect of commission paid to the Directors on the ground that they hold equity shares of the company. 66. Briefly stated the facts are, the Assessing Officer while completing the assessment noticed that assessee has paid commission to its Directors. The Assessing Officer required the assessee to furnish the commission paid to its Directors and their shareholding in the company. On going through the details furnished by the assessee the Assessing Officer noticed that Executive Director Shri K.M. Santuk was holding 360 shares in the company and was paid commission of Rs..5 lacs. Similarly, the Managing Director Shri Neol Tata was holding 43322 shares and was paid commission of Rs..53,25,000/-. Therefore, the Assessing Officer was of the view that since the Directors are holding shares and also paid commission, the commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court) vi) Colour Publications (P.) Ltd. vs Pr. CIT [2018] 97 taxmann.com 116 (Mumbai Tribunal) vii) Coil Company (P.) Ltd. vs Asst. CIT [2012] 22 taxmann.com 75 (Delhi Tribunal) viii) Mandovi Motors (P.) Ltd. [2010] 8 taxmann.com 225 (Bangalore Tribunal) ix) Arihantam Infraprojects (P.) Ltd. vs Joint CIT [2015] 64 taxmann.com 404 (Pune Tribunal) 69. Ld. DR vehemently supported the orders of the authorities below. 70. We have heard the rival submissions, perused the orders of the authorities below and the decision relied on. In the case of New Silk Route Advisors Pvt. Ltd., (supra) the Hon'ble Bombay High Court held as under: "2. The Revenue urges the following questions of law for our consideration: "(i) Whether on the facts and in the circumstances of the case and in law, the Tribunal is justified in holding that the payment of bonus to shareholder employees is allowable under Section 36(1)(ii) of the Act? (ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal is correct by holding the M/s. ICSL is not a comparable to the assessee company under Section 10B(2)(i) and (ii)? (iii) Whether comparables can be rejected on the gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mar that the entire payment made of the employee directors of bonus was in lieu of dividend which would have been otherwise paid to the shareholders. Thus, on the above ground it is submitted that this question requires admission. (d) As is evident from the chart hereinabove of the payment of bonus made to the employee directors, it is clear that all the four employee directors own identical number of shares i.e. 12.20% aggregating to 49% shares in respect of company. Nevertheless the bonus which has been paid to each of them is different. This is evidence of the fact that the payment of bonus was a performance based payment and entirely dependent on the performance of the employee. This also explains the fact that employee directors were paid at a much higher rate than the other employees of the company as the payment of the bonus is performance based and not designation based. In the above view, it is clear that the payment made to the four employee directors of the company is not a payment made in lieu of dividend as in fact found on facts by the Tribunal. (e) In the above view, we find that the question as proposed does not give rise to any substantial question of law, thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive Director but to the other Directors and there is no much variation in commission paid except in the case of Zubin Dubash. Similarly, other than the Executive Director none of the Directors were holding any shares. The Managing Director was paid Rs..53,25,000/- though he was holding 43322 shares. Dividend was also declared which was payable equally to all its shareholders including the Executive Director and Managing Director. It is the submission of the Ld. Counsel for the assessee that the commission was paid is in accordance with the terms of the agreement entered into with the Directors and the commission is within the ceiling limit for which payment is allowed under the provisions under the company's Act and is decided by the Board of Directors on the recommendations of the remuneration committee. We noticed that Assessing Officer completely ignoring and without going into the submissions of the assessee made disallowance simply relying on the decision in the case of Loyal Motor Service Co. Ltd. v. CIT (supra). The decision in the case of New Silk Route Advisors Pvt. Ltd., (supra) the Hon'ble Bombay High Court had also considered the decision in the case of CIT v. Shah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007-08. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in treating interest on margin money, interest on loans to employees, interest on day to day balance with bank in current account, interest on blocked amount and as business income without appreciating the fact that the same were not immediately linked to the business of the assessee." 77. Briefly stated the facts are the Assessing Officer while completing the assessment applying Rule 8D computed the disallowance u/s. 14A at Rs..4,70,84,812/-. However, since the assessee has made suomoto disallowance of Rs..26,65,237/- the Assessing Officer restricted the disallowance to Rs..4,44,19,575/-. On appeal the Ld.CIT(A) held that assessee's computation of disallowance u/s. 14A is satisfactory and the disallowance made u/s. 14A is to be restricted to the suomoto disallowance of Rs..35,90,326/-. 78. Ld. DR vehemently supported the orders of the Assessing Officer. 79. Learned Counsel for the assessee submitted that the arguments as advanced for the A.Y. 2007-08 will apply with all force for the A.Y. 2008-09 and also for the subsequent assessment years. 80. We have heard the rival submissions, peruse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce) is on a scientific basis. While dealing with the appeal for the A.Y. 2007-08 we have accepted the computation of the assessee since it is more scientific than the adhoc disallowance made by the Assessing Officer. Even though the provisions of Rule 8D are applicable for the year under consideration i.e. A.Y.2008-09 in the absence of any satisfaction recorded by the Assessing Officer as to why the suomoto disallowance made by the assessee is not acceptable having regard to the Books of Accounts of the assessee and the correctness of the claim of expenditure made by the assessee, we accept the suomoto disallowance made by the assessee as the computation of disallowance made by the assessee is on a scientific basis and is in consistent with the same method as adopted consistently from the A.Y. 2006-07 onwards. In the circumstances, we sustain the order of the Ld.CIT(A) and direct the Assessing Officer to adopt the suomoto disallowance made by the assessee for computing the disallowance u/s. 14A of the Act. Grounds raised by the revenue are dismissed. ITA.No. 3423/MUM/2012 (A.Y: 2009-10) (Assessee's Appeal) 82. Assessee has raised following grounds in its appeal: - "1) The Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey hold equity shares of the company. This ground is similar to Ground No. 10 of grounds of appeal raised for the A.Y. 2008-09 and the decision taken therein shall apply mutatis-mutandis to the appeal for the A.Y. 2009-10 also. We order accordingly. 86. Ground No. 8 of grounds of appeal is relating to confirming the interest disallowance on the loans given to subsidiaries, interest on Income-tax refund and interest on warrants conversion, application money, taxed under the income from other sources instead of business income. Ld. Counsel for the assessee submitted that this ground is not pressed as there is no impact on the assessed income and hence academic. In view of the submissions of the Ld. Counsel for the assessee this ground is treated as not pressed. Further, we keep the issue open and the decision taken for this assessment year shall not be treated as precedent for later years. This ground is dismissed as indicated above. ITA.No. 4490/MUM/2012 (A.Y: 2009-10) (Revenue's Appeal) 87. Revenue has raised following grounds in its appeal: - "1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in simply following the appellate order for A.Y. 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed under the head 'Income from other sources' and not as 'business income' as offered by the Appellant. 90. Ground No. 1 of grounds of appeal is relating to depreciation on intangible assets i.e. non-compete fees. This ground is similar to Ground No. 1 of grounds of appeal raised for the A.Y. 2007-08 and the decision taken therein shall apply mutatis-mutandis to the appeal for the A.Y.2010-11 also. We order accordingly. 91. Ground No. 2 is relating to disallowance u/s. 14A r.w. Rule 8D of I.T.Rules and this issue has been dealt with elaborately by us in the appeals for the A.Y. 2008-09 and A.Y: 2009-10 in revenue's appeal and for the same elaborate reasons given therein we direct the Assessing Officer to accept the claim of the assessee for disallowance as computed by the assessee in a scientific way and this is more so as there should be a consistent method of approach in making disallowance. We find that Ld.CIT(A) having accepted the claim of the assessee for the A.Y.2006-07 to A.Y. 2009-10 the scientific method of computing the disallowance u/s.14A of the Act, there is no reason as to why the same method cannot be applied for the Assessment Year under consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be treated as precedent for later years. This ground is dismissed as indicated above. ITA NO.433/MUM/2016 (A.Y: 2011-12) (Assessee's Appeal) 96. Assessee has raised following grounds in its appeal: - "1) The Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the disallowance made by Assessing Officer (AO) for depreciation claim of Rs. 1,21,390/- on intangible assets - non-compete fees. 2) a) The CIT (A) erred in applying Rule 8D(2)(iii) for purposes of disallowance u/s 14A of the Act b) The CIT(A) erred in disallowing administrative expenses of Rs..55,30,848/- u/s 14A of the Act by applying Rule 8D (2)(iii). 3) The CIT (A) erred in confirming the disallowance of Rs. 20,95,679/- (i.e.1/5th of Rs. 10,478,3937-) incurred in AY2008-09 towards issue of equity shares on right basis claimed u/s 35D of the Act. 4) The CIT (A) erred in confirming the disallowance of Rs. 37,65,5767- (i.e. 1/5th of Rs. 18,827,878/-) incurred in A.Y. 2011 -12 towards issue of CCPS on right basis claimed u/s 35D of the Act. 5) The CIT (A) erred in confirming the disallowance made by AO in respect of commission paid u/s 36(1)(ii) to Mr. K.N.Suntook, Director of the company. 6) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011-12. We order accordingly. 103. Ground No. 6 of grounds of appeal is relating to confirming the interest disallowance on the loans given to subsidiaries, interest on Income-tax refund and interest on warrants conversion, application money, taxed under the "Income from other sources" instead of "business income". Ld. Counsel for the assessee submitted that this ground is not pressed as there is no impact on the assessed income and hence academic. In view of the submissions of the Ld. Counsel for the assessee this ground is treated as not pressed. Further, we keep the issue open and the decision taken for this assessment year shall not be treated as precedent for later years. This ground is dismissed as indicated above. ITA.No. 758/MUM/2016 (A.Y. 2011-12) (Revenue Appeal) 104. Revenue has raised following grounds in its appeal: - "1. The order of the CIT(A) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance made as per Rule 8D(2)(ii), thereby overlooking the crucial fact that this method of calculation has been prescribed by the statute and held as a reasonable method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d No. 2 of grounds of appeal is relating to depreciation on intangible assets i.e. non-compete fees. This ground is similar to Ground No. 1 of grounds of appeal raised for the A.Y. 2007-08 and the decision taken therein shall apply mutatis-mutandis to the appeal for the A.Y.2012-13 also. We order accordingly. 109. Ground No. 3 grounds of appeal is relating to disallowance u/s. 14A r.w. Rule 8D(2)(ii) of the I.T. Rules. This ground is similar to Ground No. 2 of grounds of appeal raised for the A.Y. 2010-11 and the decision taken therein shall apply mutatis-mutandis to the appeal for the A.Y.2012-13 also. We order accordingly. 110. Ground No. 4 grounds of appeal is relating to disallowance u/s. 14A r.w. Rule 8D(2)(iii) of the I.T. Rules. This ground is similar to Ground No. 3 of grounds of appeal raised for the A.Y. 2010-11 and the decision taken therein shall apply mutatis-mutandis to the appeal for the A.Y.2012-13 also. We order accordingly. 111. Ground Nos. 5 to 8 of grounds of appeal are relating to disallowance towards warrant issue expenses claimed u/s 35D of the Act. This ground is similar to Ground No. 3 and 4 of grounds of appeal raised for the A.Y.2007-08 and the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in this case of M/s. HDFC Ltd. is relying on the decision in the case of M/s. Reliance Utilities & Power Ltd. wherein the assessee had established the nexus of investment with own funds. 115. As we have already held that the computation of disallowance as made by the assessee is to be accepted applying the principle of consistency grounds raised by the revenue are dismissed. ITA NO.1500/MUM/2018 (A.Y: 2013-14) (Assessee Appeal) 116. Assessee has raised following grounds in its appeal: - "1) The Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the disallowance made by Assessing Officer (AO) for depreciation claim of Rs. 66,742/- on intangible assets - non-compete fees. 2) The CIT(A) erred in applying Rule 8D (2)(iii) towards disallowance of administrative expenses u/s 14A of the Act without giving any reasons for not accepting disallowance offered by Appellant towards 14A. 3) The CIT (A) erred in confirming disallowance of Rs. 37,65,576/- (i.e. 1/5th of Rs. 18,827,878/-) incurred in AY 2011-12 towards issue of CCPS on right basis claimed u/s 35D of the Act. 4) The CIT (A) erred in confirming disallowance of Rs. 99,39,752/- (i.e. 1/5th of Rs. 4,96 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case since the same relate to A.Y. 2001-02 to 2005-06 which is prior to the insertion of Rule 8D of the I.T. Rules w.e.f. A.Y. 2008-09 which is mandatory if A.O is satisfied that the disallowance u/s. 14A is required to be made." 2. "Whether on the facts and circumstance of the case and in law, the Ld. CIT(A) erred in holding that disallowance made u/s 14A of the I T Act, as per Rule 8D(2)(ii) is not correct since the reserve 86 Surplus of the assessee company is more than investment relying on the decision in the case of HDFC Ltd.( 366 ITR 505) without appreciating the fact that the decision of the Hon'ble High Court in this case of M/s. HDFC Ltd. is relying on the decision in the case of M/s. Reliance Utilities & Power Ltd. wherein the assessee had established the nexus of investment with own funds. 3. "Whether On the facts and the circumstances of the case and in law ,the Id.CIT(A) has erred in not appreciating the fact that as per clause (f) of explanation 1 of section 115JB(2) "the book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2),as increased by the amount or amounts of expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X
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