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Nexus between exempted income and expenses on that income must be established to disallow

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Court :
INCOME TAX APPELLATE TRIBUNAL

Brief :
On facts and in the circumstances of the case and in law, the learned CIT (A) has erred in upholding the disallowance of `.2,073,610/-, being 25% of the dividend income, made by the AO under section 14A of the Act, without establishing any real nexus between the dividend income earned and the expenses allegedly incurred by the appellant for earning such dividend income; 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; 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;

Citation :
H.C.L. Comnet Ltd. ,806, Sidhartha, 96, Nehru Place, New Delhi (Appellant) V/s. DCIT,Ci rcle 12(1), New Delhi [PAN: AAACH 9667 H](Respondent)

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI ‘C’ BENCH

BEFORE SHRI RAJPAL YADAV, JM & SHRI A.N. PAHUJA, AM

ITA no.1074 /Del/2008

Assessment year: 2004-05

H.C.L. Comnet Ltd. ,

806, Sidhartha, 96, Nehru

Place, New Delhi

(Appellant)

V/s.

DCIT,Ci rcle 12(1),

New Delhi

[PAN: AAACH 9667 H]

(Respondent)

ITA no.220 /Del/2012

Assessment year: 2004-05

ACIT,Circle 12(1),

New Delhi

(Appellant)

V/s.

H.C.L. Comnet Systems &

Services Ltd.806, Sidhar tha,

96, Nehru Place, New Delhi

[PAN: AAACH 3130M]

 (Respondent)

Assessee by: Shri Piyush Gupta,& Shri S.K.Agarwal, ARs

Revenue by:  Smt.Veena Joshi, DR

Date of hearing: 05-07-2012

Date of pronouncement: 24-08-2012

O R D E R

A.N.Pahuja:-

These two appeals-one filed by the assessee M/s HCL Comnet Ltd. on 24.03.2008 against an order dated 08.01.2008 of the ld. CIT(A)-XV, New Delhi for the AY 2004-05 and the other by the Revenue in the case of M/s HCL Comnet Systems & Services Ltd. on 13th January, 2012 against an order dated 28.10.2011 of the ld. CIT(A)-X, New Delhi, raise the following grounds:-

I.T.A. No.1074/Del./2008

1 “Disallowance under section 14A of the Income-tax Act, 1961 of `.2,073,610 on account of expenditure relatable to earning of the dividend income of `.8,294,433.

1.1 On facts and in the circumstances of the case and in law, the learned CIT (A) has erred in upholding the disallowance of `.2,073,610/-, being 25% of the dividend income, made by the AO under section 14A of the Act, without establishing any real nexus 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 debtoriented 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 erred in observing that the increase in expenditure during the relevant previous year vis-a-vis sales made

by the appellant is on account of expenditure incurred for earning dividend income.

1.6 On facts and in the circumstances of the case and in law, the learned CIT (A) has erred in not appreciating that all the investments made by the appellant have been funded out of the interest-free funds available with the appellant company and therefore, no interest cost can be attributed towards earning of dividend income from the investments as per the provisions of section 14A of the Act;

1.7 On facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not appreciating that no disallowance can be made under section 14A(1) of the Act as no method for computing the amount of expenditure allegedly incurred in relation to earning of the dividend income, has been prescribed under sub section (2) of section 14A of the Act and accordingly, in the absence of any prescribed computation machinery, no disallowance under section 14A can be made;

2 Disallowance of expenditure incurred on leasehold premises amounting to `.43,95,598/-.

2.1 On facts and in the circumstances of the case and in law, the learned CIT (A) has erred in upholding the disallowance made by the AO on account of expenses incurred on leasehold premises by holding them to be capital in nature;

2.2 On facts and in the circumstances of the case and in law, the learned CIT A) has erred in not appreciating that the said expenditure has been incurred wholly and exclusively for the purposes of business on account of commercial expediency to have the best commercial use of the leased premises and thus, the same is allowable as a deduction under section 37(1) of the Act;

2.3 Without prejudice to the above, where the expenditure on leasehold premises is held to be capital in nature, depreciation at the rate of 100% may kindly be allowed as prescribed under Old Appendix 1 to Income Tax Rules, 1962 since the expense incurred on leasehold premises is in the nature of temporary erections.

3 That the appellant craves leave to add, alter, amend and/or modify, by deletion, substitution or otherwise, the above ground of appeal at any time before or during the hearing of the appeal.”

I.T.A. No.220/Del./2012

1. “Whether learned CIT(A) was correct on facts and circumstances of 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.

2. Whether learned CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition pf ``20,46,474/- made by the AO on account of provision for doubtful advances written off.

3. 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/-.

4. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.”

2. 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 Income-tax Act, 1961 (hereinafter referred to as the Act) issued on 06.10.2005. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee claimed exemption of dividend income of ``82,94,433/-. To a query by the AO, seeking details of the expenditure incurred in earning the exempt dividend income, the assessee merely replied that no expenses were incurred nor any estimate could be made to determine expenses in relation to earning the exempt income on proportionate basis. However, the AO did not accept the submissions of the assessee and while referring to the decision of Kolkata Bench in the case of K.V. Trading Co. Ltd. Vs. DCIT in I.T.A. no.924 of 2003 observed that onus was on the assessee to substantiate the expenses incurred for earning the dividend income. Since the assessee claimed entire expenditure against nonexempt income, it was for the assessee to establish the genuineness of their claim. For earning the exempt income, various administrative expenses involved in taking the decision of investment, expenses related to purchase/sale of the investment like the DMAT fee, collection expenses, telephone expenses, etc. and other administrative expenses had been incurred and the assessee did not furnish details of these expenses. Since the assessee did not furnish the relevant accounts and details, accordingly, the AO attributed 25% of the exempt income of ``82,94,433/- by way of expenditure incurred in earning dividend income and added an amount of `20,73,610/-to the total income in terms of provisions of sec. 14A of the Act, relying, inter alia, on the decision in the case of United General Trust Pvt. Ltd. (1993), 200 ITR 488 (SC).

2.1 For similar reasons, in the case of H.C.L. Comnet Systems & Services Ltd. also , the AO attributed 25% of the exempt income of ``4,85,474/- by way of expenditure incurred in earning dividend income and added an amount of `1,21,370/- to the total income in terms of provisions of sec. 14A of the Act, relying, inter alia, on the decision in the case of United General Trust Pvt. Ltd. (1993), 200 ITR 488 (SC).

3. On appeal in the case of H.C.L. Comnet Ltd., the ld. CIT(A) upheld the disallowance in the following terms:-

“1.3 I have considered the submissions of the appellant, the findings of the Assessing Officer and the facts on 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, whether debt oriented or equity oriented mutual funds scheme, both investments are subject to market forces, and their NAV on a day to day basis accordingly fluctuates. These investments require the same type of monitoring as in the case of investment in equity. I agree with the Assessing Officer that there is no merit in the contention of the appellant to equate investment in mutual funds to that of a bank deposit.

(b) The appellant states that it incurred nothing in decision making for making investments, as all investments have been made as per directives of the ultimate holding company. Now, the only evidence on record justifying the appellant's contention as above is an inter office memo dated 20.02.03 of G.M. Treasury of HCL Technologies Ltd. to the Finance Controller of the appellant company. The inter office memo is said to be containing guidelines for treasury investment of its temporary surplus funds. According to the memo, investment can be made in short term funds (short term debt/floating rate short term liquid schemes) of Deutsche Mutual Funds, D.S.P. Meril Lynch, Franklin Templeton, Kotak, HSBC, IDBI Principal, Prudential ICICI, Standard Chartered Graindlays. As can be seen, the so called investment guidelines have given names of nearly 50% of the funds in the Indian market at the given time for making the investments. No specific scheme of any mutual fund has ever been suggested for making investment therein by the ultimate holding company. Even otherwise, no operative periods in respect of the investment guideline dated 20.02.03 of HCL Technologies Ltd. is given in the said memo, meaning thereby as to whether the investments of the appellant company for A.Y, 04-05 was in terms of investment guideline issued in the preceding year or otherwise is not ascertainable. It is also noticeable that the investment guideline provided for investment of temporary surplus fund. The appellant had a net profit as per accounts of `.0.68 crores and an accumulated undistributed profit of `.1.43 crores. Its investments in mutual fund. during the year under appeal were `.26.24 crores. Investments therefore are not out of internal accrual, nor are they temporary surplus funds. If at all those are temporary surplus funds, those at best be considered as temporary surplus funds of the ultimate holding company, if evidences support such view. I hold on fact 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 `.1.01 crores and simultaneously made fresh investments of `.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 `.1.01 crores was invested for A.Y. 03-04, for the year under appeal, the investment in mutual funds rose to `.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 that the company has a lot at stake, in so far as investments are much in excess of its accumulated profits.

(d) A company can not earn dividend without its existence and management. Investment decisions are generally complicated requiring daily analysis of market trends, research and analysis. Decisions relate to acquisition holding period and redemption of investment at the opportune time. These decisions are generally taken in the meetings of Board of Directors, for which administrative expenses are incurred. As held in Southern Petrochemicals Inds. Vs DCIT (2005) 3 SOT 157 (Chennai), it is not correct to, say that dividend income can be earned by incurring no or nominal expenditure. After comprehensive consideration of all the relevant aspects of the case including the provisions of law, it was held in the decisions supra that investment decision are very strategic decisions in which top management is involved and therefore proportionate management expenses are required to be deducted while computing exempt income from dividend. In Harish Krishankant Bhatt Vs ITO (2004) 91 ITD 311 (Ahd.) the Tribunal held that dividend being exempt u/s 10 (33), interest on capital borrowed for acquisition of relevant share yielding such dividend can not be allowed deduction by operation of section 14A of the Act. In DCIT Vs S.G. Investment and Inds. Ltd. (2004) 89 ITD 44 (Cal.), the Tribunal said that in view of section 14A of the Act, prorate expenses on account of interest relatable to investment in share for earning exempt income from dividend are to be disallowed against taxable income and only the net dividend income is to be allowed exemption after deducting the expenses. Secondly it was held that the expression "expenditure incurred by the assessee in relation to income which does not form part of total income", in section 14A has to be given a wider meaning and would include both direct and indirect relationship between expenditure and exempt income. Following the decision in CIT Vs United General Trust Ltd. 200 ITR 488 (SC), it was held in the case of S.G. Investment and Inds. Ltd.( supra) that interest paid by the assessee being attributable to the money borrowed for the purpose of making investment which yielded the dividend and other expenses incurred in connection with or for making or earning the dividend income can be regarded as expenditure in relation 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 `.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 per schedule 18 of the accounts was more by 55% over the figures of assessment year 2003-04, whereas sales grow by 36%. As to whether the increase in operating, administration and other expenses proportionate to the corresponding sales did or did not factor in incidental administrative and other expenses pertaining to investments is to be decided on the basis of facts on record. In the appellant’s case, the accumulated profit is `.4.68 crores and the current years profit as per accounts is ``68.67 lakhs. Investment in mutual funds is ``26.00 crores. Evidently there is a substantial amount at stake, in so far as investments much in excess of the accumulated profit have been made. The appellant is apparently exploring areas of new income generation apart from the traditional sources of its operational income, In so doing, i.e. making investment 5 times of its accumulated profits, it has incurred expenditure within rent, staff welfare, electricity and water, communication and postage, printing and stationery etc., which apparently contained expenditure relatable to earning of dividend income. The appellant denies any nexus between expenditure and earning of dividend income. The accounts prove otherwise. I hold, therefore, that the Assessing Officer was justified in invoking the provisions of section 14A for disallowing a part of the expenditure for earning exempt income. That without prejudice, argument of the appellant that in the absence of machinery section, the substantive provisions of section 14A could not have been invoked is without merits. Section 14A(2) comes into effect w.e.f. 01.04.01. Prior to that, I hold that it was within the jurisdiction and technical competence of the AO to refer to the provisions of section 14A as it stood at the relevant time and disallow such expenditure incurred by the appellant in relation to income which did not form part of its total income under the Act. The ground is dismissed.”

3.1 Likewise, in the case of HCL Comnet Systems & Services Ltd., the ld. CIT(A) restricted the disallowance to ``13,530/- as against ``1,21,370/- made by the AO in the following terms:-

“2.8. The aforesaid submissions have been duly considered. The issue for adjudication is whether disallowance of 25% of the dividend income u/s 14A of the IT Act was reasonable or not. The AO disallowed 25% of the dividend income 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/- (`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 regularly reinvested, without involving any collection expenses, as alleged by the AO. Therefore, taking an overall view of the facts mentioned above, the ad hoc formula adopted by the AO in computing the disallowable portion u/s 14A at 25% of the tax-free income is hereby discarded as being skewdly disproportionate.

2.9. Having set aside the formula of disallowance adopted by the Assessing Officer, I wish to adopt a "reasonable formula" as mandated by the Hon'ble High Court in the case of Godrej &. Boyce Mfg. Co. Ltd vs. DCIT (2010) 328 ITR 81 (Born). The conclusion arrived at by the Bombay High Court in so far as the same is relevant to the issue in question is reproduced hereunder:

"Even prior to A Y 2008-09, when Rule 8-D was not applicable, the AD has to enforce the provision of Section 14A(1). For that purpose, the AD is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. He must adopt a reasonable basis consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on record. (page 138)"

(Emphasis mine)

2.10. In the similar vein runs the decision of Hon'ble Supreme Court reported in the case of CIT vs. Walfort Stock Brokers Pvt. Ltd (2010) 326 ITR 1 (SC), wherein it has been held as under:

"The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income........... The basic principle of taxation is to tax the net income i.e. gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purpose of section 14A". (page 15-16)

"The theory of apportionment of expenditure between taxable and non- taxable income has, in principle, been now widened u/s 14A. Reading section 14A in juxtaposition with section 15 to 59, it is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest etc in respect of which allowances are provided for (see sections 30 to 37)". (Page 17)

(Emphasis mine)

2.11. After considering the ratios of the above decisions of the Supreme Court and the Bombay High Court and considering 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 schemes, is not correct. Therefore, the AO was correct in principle to invoke provisions of Sec.14A of the I.T. Act. Obviously some senior personnel in the Finance Department of the appellant company under the overall supervision, directions and control of the Board of Directors must have taken the decisions of investment/redemption. Accordingly, the Ld. ARs had been asked to furnish the details of personnel engaged in such decision making within the broad guidelines framed by the ultimate holding company and the details of salaries paid to such personnel. They had also been asked to furnish the details of remuneration paid to the Board of Directors: Details of other administrative costs including depreciation incurred on assets used in the Finance Department located in the corporate office had also been called for. The idea behind calling for such details was to partially disallow such expenses as allocable to the earning of dividend by applying provisions of section 14A of the LT. Act.

2.13. In reply the Ld. ARs have submitted that Shri Praveen Seth, Manager (Finance) of the appellant company was responsible for the function of finance, accounts and compliance of the appellant company. The annual salary paid to the employee during the relevant year was approximately to the tune of Rs.4.50 lakhs. But when they were asked to furnish copies of his salary certificate and details of remuneration paid to other employees in the Finance Department, the Ld. ARs expressed their inability. It is common knowledge that employees in the

Finance Department work as a team, and everyone has some role in every function. Therefore, the appellant's claim that only one employee in the Finance Wing was responsible for investment in mutual funds, cannot be accepted. Hence, remuneration paid to the employees of the entire Finance Department is being considered for proportionate disallowance towards earning of tax-free income. In the absence of relevant details forthcoming from the appellant, on whom generally the onus lies, I reasonably estimate the personnel cost of people engaged in the Finance Department, who were also responsible for managing the mutual fund portfolio in addition to their normal finance and accounts job at ``70 lakhs. Out of the rent of ``27.12 lakhs paid for the corporate office of the appellant company, the rent attributable to the Finance 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 (``3,44,17,354/-) on computers, furniture & fixtures and office equipment, depreciation attributable to Finance Department is reasonably estimated at `.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:

[In` ]

(a) Personnel cost of Finance Department 70,00,000

(b) Rent relating to the Finance Department 3,80,000

(c) Depreciation relating to the Finance Deptt. 34,42,000

(d) Communication expenses and other misc. expo approximately taken at 10%

(23.82 lacs + 12.57 lacs + 5.73 lacs) 42,12,000

TOTAL 1,50,34,000

2.14. Thus, in my opinion, the disallowance u/s 14A has to be worked out on the basis of above expenses incurred by the company because only these expenses could be reasonably attributed to have been incurred on the earning of such taxexempt income of `4.85 lacs. It is worthwhile to mention here that the gross receipts of the appellant company were to the extent of Rs.54.87 crores during the year. Needless to say, the Finance Department at the corporate level, the C.F.O. and the Board of Directors had as much a role in the total taxable receipts of the appellant company as they had in the earning of the tax-free income. Therefore, the expenditure to be allocated towards earning of the exempt income should be worked out in the same proportion as it has with the taxable income. Applying the above ratio, the percentage of tax-free income to taxable gross receipts works out to 0.09% (``4.85 lakhs : ``54.87 crores). Thus, the disallowable portion of  the expense works out approx. ``13,530/- (0.09% of ``1,50,34,000/-). While doing so, I have also kept in view the decision of the Hon'ble Supreme Court in the CIT vs. Walfort Stock Brokers Pvt. Ltd (2010) 326 ITR 1 (SC), wherein it has been held that even depreciation and rent could be subject-matter of disallowance u/s 14A. Thus, the total disallowance u/s 14-A is worked out at `13,530/- as against disallowance of ``1,21,370/- worked out by the A.O. Accordingly, the AO's action is upheld to the extent of ``13,530/- only.

Hence, the appellant gets a partial relief of ``1,07,840/- (``1,21,370 - ``13,530/- ).”

4. The assessee is now in appeal before us in the case of HCL Comnet Ltd.while the Revenue is in appeal in other case against the findings of the ld.CIT(A). The ld. AR on behalf of the assessee 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.

5. 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 income by way of expenditure incurred towards earning the dividend income in terms of provisions of sec. 14A of the Act, following the decision of Hon’ble Supreme Court in the case of United General Trust (P) Ltd., 200 ITR 488 (supra). On appeal in the case of HCL Comnet Ltd., the ld. CIT(A) observed that both investments ,whether debt oriented or equity oriented mutual funds scheme, were subject to market forces, and their NAV fluctuated on a day to day basis . It was also noticed that the investment guideline issued by HCL Technologies Ltd., provided for investment of temporary surplus funds. The assessee had a net profit of Rs.0.68 crores in the year under consideration besides accumulated undistributed profit of Rs.1.43 crores while investments in mutual funds during the year were Rs.26.24 crores. Accordingly, the ld. CIT(A) concluded that investments were not out of internal accruals nor there was any evidence that the holding company took decisions about investments made by the assessee. While declining to accept the submissions of the assessee that there was no nexus between expenditure and earning of dividend income, the ld. CIT(A) concluded that the accounts proved otherwise and therefore, AO was justified in invoking the provisions of section 14A for disallowing a part of the expenditure for earning exempt income.

5.1 However in case of HCL Comnet Systems & Services Ltd, the ld. CIT(A) reduced the disallowance by allocating the cost incurred by the Finance Department of the company for earning the exempt income.

5.2 We find that in the AY 2005-06 in the case of M/s HCL Comnet Ltd., the ITAT vide their order dated 20.01.2012 in identical circumstances, restored the issue to the file of the AO for readjudication in the light of decision of the Hon’ble Delhi High Court in the case of Maxopp Investment Ltd.(supra). Likewise, in the AYs 2007-08 & 2008-09 matter has been restored to the file of the AO for readjudication. As already observed, in the instant case, the assessee denied incurring any expenditure for earning income, which does not form total income during the course of assessment proceedings even when fresh investments of `26.24 crores were made by the assessee in units and mutual funds. There is nothing to suggest as to whether any cash flow statement or sources of the investments in the various funds by the 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’ble Supreme Court in thei r decision dated 6.7.2010 in CIT v. Walfort Share & Stock Brokers (P. ) Ltd. ,326 ITR 1, inter al ia, observed that for at tract ing sect ion 14A of the Act there has to be a proximate cause for disallowance, which is its relat ionship with the tax exempt income. The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A, Hon’ble Apex Court concluded. In Cheminvest Ltd. v. Income-tax Officer,317ITR(AT)86,Special Bench held that when the expenditure is incurred in relation to income which does not form part of total income, it has to suffer the disallowance irrespective of the fact whether any income is earned by the assessee or not and the provisions of sec. 14A of the Act do not envisage any such exception. In terms of the aforesaid decision of the Hon’ble jurisdictional High Court in Maxopp Investment Ltd.(supra), even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the AO is required to verify the correctness of such claim. In case, the AO is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the AO has to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act, Hon’ble High Court concluded. Following the view taken in this decision, Hon’ble jurisdictional High Court in CIT vs. Machino Plastic Ltd in their decision dated 28.2.2012 in ITA no. 92 of 2011, restored the matter to the file of the AO, being handicapped because of failure of the assessee to furnish relevant details and particulars .In the instant cases also, the AO was handicapped, because of failure of the assessee to furnish relevant details and particulars while making the disallowance. There is nothing in the assessment order or impugned order as to whether the assessee expressed his willingness to furnish the details desired by the AO nor the AO or the ld. CIT(A) seems to have undertook any exercise to ascertain the details of expenditure objectively in managing and supervising the aforesaid huge investments of ``26.24 crores in mutual 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 suf f icient opportuni ty to these assessees. The assessees are also directed to furnish all the relevant details and accounts of expenditure actual ly incur red in managing and supervising the aforesaid huge investments in mutual funds & securit ies. With these observat ions, ground nos.1 to 1.7 in the appeal in HCL Comnet Ltd. & ground no.1 in HCL Comnet Systems & Services Ltd., are disposed of.

6. Ground no.2 in the appeal in the case of HCL Comnet Ltd. relates to disallowance of expenditure incurred on leasehold improvements amounting to ``43,95,598/-,claiming the same to be temporary erections even when the assessee capitalized the amount in the books. Since the assessee failed to establish that the additions made by it were temporary in nature, the AO disallowed the same, allowing depreciation at the prescribed rates, resulting in disallowance of ``39,41,593/- (`4395598 – 454005).

7. On appeal, the ld. CIT(A) upheld the disallowance, holding as under:-

“2.4 I have considered the submissions of the appellant, the findings of the Assessing Officer and the facts on record. The details of lease hold improvements as per record include

 a) cost of false ceiling, civil works and additional works of- ``3,40,000/-,

b) purchase and fabrication of power distribution board, UPS board AC wiring, cabling and laying of cable for server room to studio- ``45,480/-

c) partition panel etc-.``38,000/-,

d) wooden doors- ``39,315/-,

e) door look handle arm set- ``10,010/-,

 f) supply and fixing of storage rack -``1,22,188/- and `.36,390/-

g) supply, installation of furniture and fixtures like work stations and wooden partition- `.7 ,04,218/- ,

h) supply and installation of racks- `.18,480/-,

i) L-4, works station- `.53,294/-

,j) labour charge :for staff chairs- `54,120/-,

 k)partition with 2 side laminate and pin board -`.1,I01,536/-

l) partition with one side laminate and pin board- `.1,101,536/-,

 m) supply of laminated working top- `.22,388/-,

n) cabling works for TAC project- `.5,84,038/- and `.4,17,69I/-,

o) wooden office table- `.11,000/-and labour charges.- `.13,950/-,

p) supply and installation of racks- `.65,772!-,

q) supply of partition, TRC table, key board- `.l,63,500/-,

r) furniture and fixture- `.33,400/-,

s) office table, sofa set and centre table- `.15, 176/-,

t) supply and installation of wooden file racks- `.28, 700/ -;

u} supply of mobile draw unit and filing rack- `.37,400/-,

v) supply of partition and table- `.34,505/-,

w) supply of mobile drawer unit, wooden top and laminated shells- `.92,600/-,

x) computer table,and wooden chairs- `.15,500/-,

y) side unit and almirah- `.I0,000/-,z) steel revolving chairs- `.12,OOO/-,

z) electrical work completed by Swan Electricals- `.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 and interpretation thereof under the Act are furniture and fixture, forming a block of capital asset and on which depreciation at the appropriate rate is allowable. The Assessing Officer is justified in denying claims of revenue expenditure on those.

In so far as other components of expenditure within lease hold. improvements related to the leased building in respect of which the appellant holds a lease or other right of occupancy, the claims of expenditure, whether capital or revenue, is first to be examined, and depending on the nature of expense so determined, the provisions of Explanation 1 to Sec. 32 is required to be invoked. The other components of expenditure included false ceiling, civil works, provision of cabling, provision of partition paneling, cabling work for TAC project, extensive electrical works. One can dearly observe elaborate electrical, civil, interior finishing work included in those invoices. The expenditure under this category in the ratio of law as arrived at in Balimal Naval Kishore Vs. CIT 224 ITR 440 (Supreme Court), New Shorrock Spn. & Wvg. Co. Ltd. Vs. CIT 30 ITR 338 (Bom) and Modi Spn. And Wvg. Mills Co. Ltd. Vs. CIT 200 ITR 544 (Delhi) would not be anything other than a capital expenditure. The extensive civil, electrical and residual work have brought in an advantage of enduring nature and therefore it cannot be said within the factual parameters of the case under appeal that the lease hold improvements to the leased building do not come within the preview of Explanation 1 to Sec. 32. I hold, therefore, that the extensive works on the lease hold properties are not in the nature of current repairs; nor within the meaning of temporary erections/structures; and that in view of Khimji Vishram & Sons (Guj) Pvt. Ltd. Vs. CIT 209 ITR 993 (Guj), the provisions of section 37 do not lie for adjudicating the claims of the appellant other than under the provisions of Explanation 1 to Section 32. The Assessing Officer’s action in disallowing the claims of revenue expenditure on the lease hold improvements is, therefore, in order.

I agree, however, that the disallowances of the appellant's claim of revenue expenditure in respect of lease hold improvements, as per assessment orders of earlier years, need to be given effect to, while determining allowable depreciation for the year under appeal. The AO is directed to examine and 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.”

8. 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 premises, ld. AR vehmently argued that the expenditure was revenue in nature.

9. On the other hand, the ld. DR while supporting the findings of the ld. CIT(A) submitted that expenditure incurred by the assessee on purchase/installation of various items of furniture and fittings like tables ,chairs, work stations, electric fittings ,partitions etc. could not be treated as revenue in nature.

10. We have heard both the parties and gone through the facts of the case. Indisputably and as pointed out by the ld. CIT(A),the details of the expenditure revealed two categories of expenditure-first that incurred on renovation or improvement to the leased building, and the other independent of the leased building . In the latter category, expenditure incurred on supply and fixing of storage racks, work stations, 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. is apparently on purchase/fabrication of furniture and fixture, having no relation with lease or otherwise of the premises. Furniture and fittings including electrical fittings are specifically provided in Appendix -1 to IT Rules 1962 and entitled for depreciation @15%. Whether these furniture and fixtures including electrical fittings are installed in own building or leased premises is immaterial nor the ld. AR on behalf of the assessee placed any material before us so as to how this expenditure on purchase/installation of furniture and fixtures has any relation with lease of the premises. In any case, there is nothing to suggest that this expenditure has been incurred by way of repairs or renovation of any asset. In the absence of any material enabling us to take a different view in the matter, we are not inclined to interfere. Therefore, ground raised by the assessee so far as it relates to expenditure incurred towards supply/fixing or purchase of furniture and fixtures including electrical fittings, is dismissed.

10.1 As regards expenditure incurred on false ceiling, partition and civil works etc., the question which arises for determination in this case is whether the assessee was entitled to claim the afore stated amounts(other than on furniture & fittings including electrical fittings) as "repairs" under sections 30(a)(i) of the Act or u/s 37 (1) of the Act as revenue expenditure. 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."

10.11 Hon’ble Apex Court in Balimal Naval Kishore (supra) in the context of ‘current repairs’ within the meaning of section 10(2)(v), approved the aforesaid test evolved by Chagla C. J., as the most appropriate one having regard to the context in which the said expression occurs. It has also been followed by a majority of the High Courts in India.

10.12 Under section 37, a particular item of expenditure may be deductible if the expenditure does not fall within sections 30 to 36 ; that it should have been incurred in the accounting year; that it should be in respect of a business carried an by the assessee; that it should not be on personal account of the assessee; that it should not be in the nature of capital expenditure and that it should be spent wholly and exclusively for business. Whether expenditure is "revenue" or "capital in nature" would depend upon several factors, namely, nature of the expenditure, nature of business activity etc..In the instant case, the assessee claimed that the building upon which the expenditure in question had been incurred by the assessee were not ownership building premises of the assessee but taken on lease from various parties. Here we may refer to following explanation 1 to sec.32(1) of the Act, inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, w.e.f. 1st April, 1988:

Explanation 1. : Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause

shall apply as if the said structure or work is a building owned by the assessee.

10.13 Prior to insertion of aforesaid expln. 1 w.e.f. 1st April, 1988 the Act contained provisions of Section 32(1A) to the same effect that were inserted by the Taxation Laws (Amendment) Act, 1970 w.e.f. 1st April, 1971 and omitted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 1st April, 1988. Thus, the fact that premises are leasehold premises is not of much significance. The judgment of Hon'ble Delhi High Court in the case of Instalment Supply (P) Ltd. (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 consider the provisions of Explanation 1 to section 32(1) and impact of the amendment on the applicability of the judgment in the case of Madras Auto Services (P.) Ltd. At any rate, the ratio of the judgment of Hon'ble Delhi High Court in the case of Rajdev Singh & Co. is quite clear. Fact of the matter is that for the purpose of determination of the nature of expenditure under consideration before us, the fact that the premises are lease-hold must be ignored and it should be assumed that the premises belonged to the assessee. In Modi Spinning & Weaving Mills Co. Ltd. (supra) their Lordships were considering a case where the assessee had carried out repairs that were long overdue. There is no such aspect involved in the case of the assessee before us. Thus, this decision is also not of any help to the assessee.

10.14 However, in a subsequent decision in Hi Line Pens Pvt Ltd.(supra) while adjudicating an identical issue in the context of expenditure incurred to make leasehold premises more conducive to its business activity , Hon’ble jurisdictional High Court, held as under:

“After having considered the arguments advanced by the learned counsel for the parties and examined the decisions cited by them, we are of the view that the assessee’s claim for deduction under section 30(a)(i) has been rightly allowed by the Tribunal. The decisions cited by the learned counsel for the revenue relate to ‘current repairs’. There is a clear distinction between the expression ‘repairs’ and the expression ‘current repairs’. It is obvious that the word ‘repairs’ is much wider than the expression ‘current repairs’. This fact has also been taken note of by the Supreme Court in the case of Saravana Spg. Mills (P.) Ltd. (supra). The expression ‘current repairs’ is much more restricted than the word ‘repairs’ because the latter is qualified by the word ‘current’. What the assessee has done in the present case has been construed to be repairs by the Tribunal as a finding of fact. It has not brought about any new asset and more importantly it was not the intention of the assessee to bring about any new capital asset. The expenses that were incurred by the assessee were towards repairing the premises taken on lease so as to make it more conducive to its business activity. Such expenses would clearly fall within 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 the assessee’s claim falls within that provision there is no question of considering the question of applicability of section 32.”

10.15 Hon’ble Bomaby High Court in a recent decision in CIT vs. Talathi and Panthaky Associated (P.) Ltd,18taxmann.com367(Bom.) held the cost of repair/reconstruction of tenanted premises as revenue in nature and allowable as deduction under section 30(a)(i) of the Act . The Hon’ble High Court in their decision, concluded as under:

“The issue as to whether expenditure incurred by an assessee is of a revenue or capital nature has fallen for determination in various contexts, but in all decisions particularly of the Supreme Court what has been emphasised is that the matter has to be looked at from a commercial point of view. In Madras Auto Service (P.) Ltd. (supra) the assessee obtained certain premises under an agreement of lease for a period of thirty nine years. Under the terms of the agreement, the assessee had a right to demolish the existing premises and to construct a new building thereon for the purposes of its business. The lease deed stipulated that the new construction shall continue to be the property of the lessor and the assessee as the lessee would only have a right to be a tenant for a period of thirty nine years subject to the payment of rent and the observance of other conditions. The Supreme Court noted that the advantage which the assessee obtained by constructing a building which belonged to someone else was the benefit of a long lease on a concessional rate at a lower rent. The saving in expenditure was the saving in revenue expenditure in the form of rent. In defining as to whether the character of the expenditure is of a revenue or capital nature the Supreme Court emphasised (following its earlier decision in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) that expenditure may be treated as properly attributable to capital when it is made not only once for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. If a lump sum payment gets rid of an annual business expense chargeable against revenue, the lump sum payment should be regarded as a business expense. Contrariwise if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. The Supreme Court noted that by expending money for 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 modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure."

8. In Madras Auto Service (P.) Ltd. (supra) the assessee had in fact incurred the entire cost of construction of a new building but obtained no title to the new construction. The benefit which the assessee obtained was a long lease of thirty nine years on low rent. The Supreme Court held that the asset which was created belonged to someone else. The assessee was held to have obtained an enduring business advantage for the purpose of conducting the business profitably and more successfully, thus saving a considerable amount of revenue expenditure over the term of the lease. In the present case, there is a concurrent finding of fact both by the CIT (Appeals) and affirmed by the Tribunal that the assessee was and continues to be a tenant. The character of the occupation of the assessee has not been altered. The assessee by contributing an amount of Rs. 1.50 Crores to the reconstruction of the building has obtained an enduring advantage but nonetheless of a commercial nature of securing an equivalent area on the same rent of Rs. 11,300/- in the new structure. The ownership of the new structure has not been transferred to the assessee nor has the assessee acquired any capital asset. The case, therefore, cannot be distinguished from the situation which arose before the Supreme Court for its decision in Madras Auto Service (P.) Ltd. (supra) on any principled basis.

9. The judgment of the Supreme Court in Madras Auto Service (P.) Ltd. (supra) has been followed by a Division Bench of this Court in CIT v. Hede Consultancy (P.) Ltd. [2002] 258 ITR 380/[2003] 127 Taxman 597.

10. At this stage, it would be necessary to note that the decision of the Supreme Court in Madras Auto Service (P.) Ltd. (supra) arose in relation to Assessment Year 1968-69 which was prior to the insertion of Explanation I to Section 32 of the Income Tax Act 1961. Explanation I has been inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act 1986 with effect from 1 April 1988. Explanation I stipulates that where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of the clause shall apply as if the said structure or work is a building owned by the assessee. In order that Explanation I is attracted, it is necessary that any capital expenditure is incurred by the assessee. In other words, it is necessary to emphasise that what Explanation I brings about is a deeming fiction by which expenditure of a capital nature incurred by the assessee for the purposes stipulated therein including inter alia for the construction of any structure or the work of renovation, extension or improvement can form the basis of a claim for depreciation as if the structure or work is a building owned by the assessee. But for the Explanation, an assessee would not be entitled to the benefit of depreciation even if the expenditure which was incurred was of a capital nature and the effect of the Explanation is to entitle the assessee to the benefit of the provisions of Section 32, if the stipulations and conditions set out in the Explanation are fulfilled. The deeming fiction is for the purposes of the statutory provision in question. But the point to be emphasised is that the explanation operates in a situation where capital expenditure is incurred by the assessee. Unless the expenditure is of a capital nature, there would be no occasion to apply the deeming fiction that is carved out by Explanation I. In the present case, for the reasons that we have already indicated and following the judgment of the Supreme Court in Madras Auto Service (P.) Ltd. (supra), we have arrived at the conclusion that the assessee had not incurred any expenditure of a capital nature. The expenditure did not result in the acquisition of a capital asset by the assessee. The assessee continued as before to be a tenant in respect of the premises. By contributing an amount of Rs. 1.50 Crores towards the reconstruction or as the case may be renovation of the existing structure, the assessee obtained a commercial advantage of securing tenancy of an equivalent area of premises on the same rent as before. Since there was no acquisition of a capital asset and the occupation of the assessee continued in the character of a tenancy, the expenditure could not be regarded as being of a capital nature.

11. Counsel appearing on behalf of the assessee submitted that in the event that this Court were to hold that the expenditure is of a capital nature, in that event the assessee would have submitted in the alternative that the assessee would be entitled to the benefit of Section 30(a)(i) since the period to which the appeal relates is prior to the insertion of the Explanation to Section 30 by the Finance Act of 2003 with effect from 1 April 2004. In the view which we have taken we have arrived at the conclusion that the expenditure was of a revenue nature. The decision of the Tribunal, which confirms the view taken by the CIT (Appeals) that the expenditure was of a revenue nature does not fall for any interference in this appeal. For the aforesaid reasons, we answer the question of law by holding that the cost of repair/reconstruction of the tenanted premises was of a revenue nature and was legitimately allowable as and by way of deduction. We do not find any error in the judgment of the Tribunal. The question of law is accordingly answered in the aforesaid terms.”

10.16 Hon’ble Delhi High Court in the case of CIT v. Escorts Finance Ltd. [2006] 155 taxman 559 has held at 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".

10.2 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 ceiling, partition and civil works, etc. has to be treated as revenue expenditure. Therefore, ground nos. 2 to 2.3 in the appeal of the assessee in HCL Comnet Ltd., so far as it relates to expenditure incurred on false ceiling, partition and civil works, etc. , is allowed..

11.. Adverting now to ground no.2 in the appeal of the Revenue in the case of M/s HCL Comnet Systems & Services Ltd., which relates to disallowance of provision for doubtful advances written off, the AO noticed that the assessee claimed doubtful advances written off amounting to ``20,46,474/-. To a query by the AO, the assessee replied that these advances were made to the employees who left the organization. The provision against the same made in the books of accounts of earlier years, was offered to tax in the earlier years, the assessee explained. However, the AO did not accept the submissions on the ground that the assessee did not submit any evidence that these advances could  not be recovered nor furnished any evidence that provision made in preceding years was shown as income in those years. Accordingly, while treating these advances as capital loss, the AO disallowed the entire amount.

12. On appeal, the ld. CIT(A) deleted the disallowance, holding as under:-

“3.4 The above submissions have been duly considered. From the facts narrated above, it is evident that certain advances were made to the employees in the regular course of business.  However, the advances could not be recovered since the employees left the service of the company without intimation and without taking a formal relieving order. Under the circumstances, the amounts were transferred to “provision for doubtful advances” and were offered to tax in the respective years since such provisions are not allowable as a deduction under the I.T. Act. During the appellate proceedings, I specifically asked the learned AR to submit the ledger account copies of two employees namely Mr. Neeraj D. Brahmbhatt and Yogesh A. Parulkar against whom the amounts written off were to the extent of `3,04,531/- and `3,86,271/- respectively. They had also been asked to submit evidence in support of the efforts made to recover these advances. In response to the same, vide written submission dated 13.4.2011, it has been submitted that these two employees remained absent w.e.f. 29.1.2001 and 22.10.2000 respectively. Both these 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 and subsequently becoming irrecoverable had to be allowed as a deduction as “business loss” in computing the business income. Further, in the case of Datamatics Ltd. Vs. ACIT 111 TTJ 55, the Hon’ble Mumbai Tribunal considered a similar issue of employees’ advance being written off and held that since the employee advances were given in the course of business and were incidental to the business, the amount written off out of the same on becoming irrecoverable, is allowable as deduction. Further, it is also to be kept in mind that the appellant is in the information and technology business, where the employee turnover in general was very high. In this background, the disallowance of such irrecoverable employee advances actually written off in the books of the appellant cannot be sustained. Accordingly, ground No.2 is allowed.”

13. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. DR supported the order of the AO while the ld. AR on behalf of the assessee relied upon the findings in the impugned order.

14. We have heard both the parties and have gone through the facts of the case. Indisputably, advances to the employees could not be recovered, since the employees left the company without any intimation. Subsequently, the amount was transferred to doubtful advances and offered to tax in the respective years. In these circumstances, while relying upon decisions in Court in Ramchander Shivnarayan Vs. CIT 111 ITR 263 (SC); CIT Vs. Mysore Sugar Co. Ltd. (1962) 46 ITR 649 (SC), and Datamatics Ltd. Vs. ACIT 111 TTJ 55(Mumbai), the ld. CIT(A) concluded that loss incurred by the assessee had direct and proximate connection and nexus with the business operations and is, therefore, allowable. Since the Revenue have not placed before us any material, controverting the aforesaid findings of facts recorded by the ld. CIT(A) so as to enable us to take a different view in the matter nor brought to our notice any contrary decision, we are not inclined to interfere . Therefore, ground no.2 in the appeal of the Revenue in the case of M/s HCL Comnet Systems & Services Ltd., is dismissed.

15. Ground no.3 in the appeal of the Revenue in the case of M/s HCL Comnet Systems & Services Ltd. relates to disallowance of ``1,76,996/- on account of investment written off. The AO noticed that the assessee debited an amount 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..

16. 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 “capital loss”, the Assessing Officer should have applied the provisions of section 45 and section 48 of the Act to work out the “long term capital loss” and allowed it to be set off carried forward in terms of the provisions of the Act. Before me, the limited prayer of the appellant against the action of the Assessing Officer is that the benefit of carry forward of long term capital loss computed at ``2,08,085/- as worked out in para 4.3 of this order, should be allowed. I agree with such request of the appellant because once the said sale is treated to be falling under the head “capital gains”, then full effect to all the provisions under the said head of income has to be given together with the set off and carried forward of provisions contained in Section 74 of the I.T. Act. To that extent, there is an infirmity in the order of the Assessing Officer.”

17. The revenue is now in appeal against the aforesaid findings of ld. CIT(A).The ld. DR supported the order of the AO while the ld. AR on behalf of the assessee contended that their only claim before the ld. CIT(A) was for carry forward of long term loss of ``2,08,085/- worked out in para 4.3 of the impugned order as extracted hereunder:-

Sale consideration as per agreement 44,444

Less:

Cost of acquisition (A) 2,21,440

Date of acquisition -10 Feb 2001

Notified cost inflation index for relevant financial year (B) 406

Date of disposal-6 January 2004

Notified cost inflation index for relevant financial year © 463

Indexed cost of acquisition (A)*(C)/(B) 2,52,529

Long term capital loss 2,08,085

18. We have heard both the parties and have gone through the facts of the case. Indisputably, the ld. CIT(A) upheld the findings of the AO, holding the aforesaid loss due to investments in Net India Private Ltd. written off, in the nature of “capital loss”. The ld. CIT(A) further held that once the said sale is treated to be falling under the head “capital gains”, then full effect to all the provisions under the said head of income has to be given together 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 norexamined the said claim in the light of relevant provisions in law. In view of  the foregoing, especial ly 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 appropr iate to set aside the order of the ld. CIT(A) and restore the mat ter to the f ile of the AO for deciding the aforesaid claim in accordance with law, af ter allowing suf f icient opportunity to the assessee. With these observat ions, ground no. 3 in the appeal of the Revenue in the case of M/s HCL Comnet Systems & Services Ltd., is disposed of .

19. No additional ground having been raised before us in terms of residuary ground no.3 in the appeal of the assessee in HCL Comnet Ltd. & ground no.4 in the appeal of the Revenue in HCL Comnet Systems & Services Ltd., accordingly, both these grounds are dismissed.

20. No other submission or argument was made before us in these two appeals..

21.. In the result, both the appeal of the assessee in HCL Comnet Ltd. & appeal of the Revenue HCL Comnet Systems & Services Ltd. are partly allowed but for statistical purposes.

Order pronounced in open Court

                                                                Sd/-                    Sd/-

                                                 (RAJPAL YADAV) (A.N. PAHUJA)

                                                 (Judicial Member) (Accountant Member)

NS

Copy of the Order forwarded to:-

1. Assessees as aforesaid

2. DCIT,Ci rcle-12(1), New Delhi.

3. CIT concerned.

4. CIT(A)-XV, & CIT(A)-X,New Delhi

5. DR, ITAT,’C’ Bench, New Delhi

6. Guard File.

By Order,

Deputy/Asstt.Registrar

ITAT, Delhi

 

CS Bijoy
on 26 September 2012
Published in Income Tax
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