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Attorney(S)
  • Assessee by: Shri Tarandeep Singh & Shri Maneesh Upreja
  • Revenue by: Mrs. Anusha Khurana, Sr. DR
Judges
  • I.P Bansal, J.M
  • A.N Pahuja, A.M
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citation codes
Case Number
Attorney(S)
  • Assessee by: Shri Tarandeep Singh & Shri Maneesh Upreja
  • Revenue by: Mrs. Anusha Khurana, Sr. DR
Judges
  • I.P Bansal, J.M
  • A.N Pahuja, A.M
Acts
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Smart Summary

Structured Summary of the Opinion (ITA No.3843/Del/2011 & C.O. No.330/Del/2011)

Factual and Procedural Background

This is an appeal before the Income Tax Appellate Tribunal (Delhi Bench) directed by Judicial Member I.P. Bansal. The revenue filed the appeal and the assessee filed cross objections against the order of the Commissioner of Income-tax (Appeals) dated 1st June, 2011, concerning Assessment Year 2006-07 (ITA No.3843/Del/2011; C.O. No.330/Del/2011).

There are two principal grounds presented: (1) treatment of expenses amounting to Rs.77,21,466 on leasehold improvements — whether these should be treated as capital (new assets) or revenue in nature; and (2) the correctness and quantum of disallowance under section 14A read with Rule 8D in relation to exempt dividend income of Rs.3,11,48,835 (the Assessing Officer computed a disallowance of Rs.38,26,774 under Rule 8D, whereas the CIT(A) limited the disallowance to Rs.15,57,441.75).

The AO had disallowed the leasehold improvement expenditures (following disallowance in an earlier year) and had computed the section 14A/Rule 8D disallowance by reference to Rule 8D(2)(iii). The CIT(A) deleted the addition relating to leasehold improvements (following a Tribunal decision in the assessee's own case) but limited the Rule 8D disallowance to 5% of exempted income. The revenue appealed the deletion/limitation; the assessee cross-objected against the sustained disallowance under section 14A.

Legal Issues Presented

  1. Whether the expenses aggregating Rs.77,21,466 incurred on leasehold improvements (detailed in the CIT(A) order) are revenue in nature and therefore disallowable, or whether they should be treated as non-disallowable having regard to prior Tribunal decisions in the assessee's own case.
  2. Whether the disallowance under section 14A read with Rule 8D should be computed as Rs.38,26,774 by reference to Rule 8D(2)(iii), or whether it was correctly restricted by the CIT(A) to Rs.15,57,441.75 (5% of exempt income), and whether the matter should be restored to the Assessing Officer for fresh adjudication in the light of higher court authority (Godrej & Boyce).

Arguments of the Parties

Appellant (Revenue) — Principal contentions

  • The Assessing Officer correctly disallowed the leasehold improvement expenditures and the CIT(A) erred in deleting that disallowance.
  • The Assessing Officer was right in computing the disallowance under section 14A read with Rule 8D; the partial deletion/limitation by the CIT(A) is incorrect and ought to be set aside.

Respondent (Assessee) — Principal contentions

  • The deletion of the leasehold improvement addition by the CIT(A) was proper as it followed the Tribunal's earlier decision in the assessee's own case (reported in the Tribunal's reports quoted in the order).
  • As to the leasehold improvements, the assessee's representative conceded that expenditure on furniture (Rs.6,97,027) could not be regarded as allowable; therefore, if the Tribunal decision is followed, only the furniture amount should be excluded from deletion (i.e., remain disallowed).
  • With respect to section 14A disallowance, the onus is on the revenue to establish the disallowance; reliance was placed on a number of authorities (CIT vs. Hero Cycles 323 ITR 518 (P&H); ACIT vs. Eicher Ltd. 101 TTJ (Del) 369; Maruti Udyog vs. DCIT 92 ITD 119 (Del)).
  • The assessee argued that the Assessing Officer had computed the disallowance under Rule 8D(2)(iii) which concerns administrative expenses and that case law (Catholic Bank and Others 237 CTR (Ker) 164) holds that, prior to insertion of Rule 8D, no disallowance for direct expenses was called for.
  • The assessee further contended that, since the necessary facts were on record, the Tribunal should decide the section 14A issue on merits rather than remitting the matter to the Assessing Officer; remand would permit the AO to fill alleged loopholes.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
27 SOT 304 (Tribunal decision in assessee's own case — as reproduced in CIT(A) order) Used by CIT(A) to delete addition relating to leasehold improvements in the assessee's case. The Tribunal observed in the assessee's earlier case that most of the expenditure (except air-conditioning duct and furniture) did not result in new assets and was for commercial expediency; following that, the CIT(A) deleted the addition and the present Tribunal restricted the disallowance to the furniture amount (Rs.6,97,027) following that Tribunal decision.
27 SOT 344 (Tribunal decision reported in the order in respect of AY 2001-02 and 2002-03) Tribunal decision used as authority to restrict disallowance on leasehold improvement expenditures. The Tribunal's reasoning (that expenditures except certain items did not create new assets) was followed to restrict disallowance to furniture only; the present Tribunal limited the disallowance to Rs.6,97,027 accordingly.
CIT vs. Hero Cycles 323 ITR 518 (P&H) Cited by the assessee to support the proposition that the onus for establishing a section 14A disallowance is on the revenue. The assessee relied on this authority in arguing that the AO must bear the onus; the Tribunal noted the reliance but, in view of other considerations (Rule 8D and Godrej & Boyce), restored the matter to the AO for fresh consideration.
ACIT vs. Eicher Ltd. 101 TTJ (Del) 369 Cited by the assessee alongside other authorities to contend onus rests on revenue for disallowance under section 14A. The assessee invoked this decision in support of its position; the Tribunal noted the citation but did not decide the section 14A quantification finally and instead remitted the issue to the AO for re-adjudication.
Maruti Udyog vs. DCIT 92 ITD 119 (Del) Cited by the assessee in support of the contention that the revenue bears the onus for establishing disallowance under section 14A. The Tribunal recorded the reliance but ordered remand to the AO for fresh adjudication in light of other controlling authority (Godrej & Boyce).
Catholic Bank and Others 237 CTR (Ker) 164 Held (as cited) that prior to insertion of Rule 8D, there was no disallowance on account of direct expenses; cited to argue Rule 8D's scope is limited. The assessee relied on this finding to contend Rule 8D relates to administrative expenses only; the Tribunal considered these submissions in deciding remand but ultimately restored the matter to the AO to consider section 14A after giving the assessee opportunity.
Godrej & Boyce Mfg. Co. Ltd. vs. DCIT (2010) 328 ITR 81 (Bom) Bombay High Court decision (cited in the order) that overruled the Special Bench decision on Rule 8D's retrospective operation; held that Rule 8D was not applicable retrospectively and AO must make disallowance under section 14A considering facts and circumstances. The Tribunal relied on this decision as a controlling precedent on the applicability of Rule 8D and as the basis for restoring the section 14A/Rule 8D issue to the Assessing Officer for fresh adjudication after affording the assessee a reasonable opportunity of hearing.

Court's Reasoning and Analysis

The Tribunal considered both factual material and the parties' submissions and proceeded separately on the two main issues.

(A) Leasehold improvement expenditures (Ground No.1)

  • The Tribunal noted that the CIT(A) had deleted the addition relating to leasehold improvements by following a Tribunal decision in the assessee's own case (reported variously in the order as 27 SOT 304 and 27 SOT 344).
  • The CIT(A)'s order reproduced the Tribunal's earlier reasoning that, except for items such as air-conditioning ducting and furniture, the expenditures did not result in the creation of new assets but were for commercial expediency and to give the office a proper outlook.
  • The revenue contested the deletion; the assessee's representative conceded that the furniture component (Rs.6,97,027) could not be considered allowable under the Tribunal's precedent.
  • The Tribunal, applying the earlier Tribunal decision cited by the CIT(A), restricted the disallowance to Rs.6,97,027 (the furniture amount) and allowed Ground No.1 of the revenue appeal only partially.

(B) Disallowance under section 14A read with Rule 8D (Ground No.2 and Cross Objections)

  • The Assessing Officer computed disallowance by applying Rule 8D(2)(iii) and arrived at Rs.38,26,774. The CIT(A) limited the disallowance to 5% of exempt income (Rs.15,57,441.75).
  • The Tribunal examined the procedural posture in the immediate preceding assessment year (AY 2005-06), where the Tribunal had restored the issue to the AO because the basis for the disallowance (Rule 8D) was called into question by the Bombay High Court's decision in Godrej & Boyce.
  • The Tribunal observed that, although the assessee contended that necessary facts were on record to decide the matter on merits, it had not demonstrated how all necessary facts were presently available for a final adjudication by the Tribunal.
  • Given that the AO had made the disallowance under Rule 8D without detailed discussion, and in view of the Bombay High Court's decision in Godrej & Boyce (which the Tribunal treated as undermining the basis for direct application of Rule 8D), the Tribunal concluded it was appropriate to remit the matter to the Assessing Officer.
  • The Tribunal directed that the AO should re-adjudicate the issue de novo under section 14A after giving the assessee a reasonable opportunity of hearing, applying the legal principles laid down by the Bombay High Court and considering all facts and circumstances.
  • For the present appeal, the Tribunal restored the section 14A/Rule 8D issue to the Assessing Officer with similar directions as given in the Tribunal's earlier restoration for AY 2005-06.

Holding and Implications

Holding:

- The appeal filed by the revenue is partly allowed in respect of Ground No.1: the Tribunal restricted the disallowance relating to leasehold improvements to Rs.6,97,027 (the furniture component) following the Tribunal's earlier decision referred to in the record.
- In respect of Ground No.2 (section 14A read with Rule 8D) and the assessee's cross objections, the Tribunal restored the matter to the file of the Assessing Officer for fresh consideration and re-adjudication in accordance with the law (noting the Bombay High Court decision in Godrej & Boyce). For statistical purposes, Ground No.2 of the revenue and the assessee's cross objections are allowed (i.e., restored/remanded) as described in the order.

Implications:

  • Direct effect: The disallowance relating to leasehold improvements has been reduced to Rs.6,97,027 (furniture). The section 14A/Rule 8D quantification dispute is not finally decided by the Tribunal but is remitted to the Assessing Officer to be decided afresh after giving the assessee a reasonable opportunity to be heard.
  • The Tribunal's order follows and applies existing authorities (including the assessee's own prior Tribunal decision and the Bombay High Court decision in Godrej & Boyce). The Tribunal did not purport to lay down a new precedent on the law governing section 14A/Rule 8D; instead it directed re-adjudication at the AO level in light of those authorities.

Order pronounced in open court on 21.10.2011. Members: A.N. Pahuja (Accountant Member) and I.P. Bansal (Judicial Member).

Show full summary ...

    Amway India Enterprises Pvt. Ltd. v. Cit

    PER I.P. BANSAL, JUDICIAL MEMBER The appeal is filed by the revenue and CO by the assessee. They are directed against the order passed by the CIT (A) dated 1st June, ITA No.3843/Del/2011 C.O. No.330/Del/2011 2011 for Assessment Year 2006-07. The grounds of appeal read as under:-

    1. The learned CIT (A) has erred on facts and in law in treating the expenses of Rs.77,21,466/- on leasehold improvement as revenue in nature disregarding the fact that new assets were purchased and installed for the renovation/improvement of leasehold premises.

    2. The learned CIT (A) has erred on fats and in law in restricting the disallowance u/s 14a read with rule 8d to Rs.15,57,441.75 as against disallowance of Rs.38,26,774/-. Learned CIT (A) has failed to take cognizance of sub-section (3) of section 14a which specifies that even if the assessee makes a claim that no expenditure has been incurred in earning the exempted income, sub-section (2) of section 14a shall apply, meaning thereby, disallowance u/s 14A(1) is called for.

    3. The appellant raves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal. 1.1 The grounds of Cross Objections read as under:-

    1. That on facts and in law the Commissioner of Income-tax (Appeals) erred in upholding a disallowance of Rs.15,57,441.75 (i.e., 0.5% of dividend income of Rs.3,11,48,835/-) under section 14A of the Income Tax Act, 1961. That the respondent prays for leave to add, alter or amend any grounds of the cross objections raised above, at or before the time of hearing.

    2. Apropos to Ground No.1 filed by the revenue, the facts are that the assessee has incurred a total expenditure of ` 77,21,486 towards the improvements in its offices located at Kolkota, Chennai and at its head office. The assessee was required to submit as to why such expenditure should not be disallowed following the same line in earlier years. In response, it was submitted that this issue has been decided by ITAT in favour of the assessee. Considering the submission of the assessee, the AO observed that since the matter is being litigated at the level of High Court, the contention of the assessee is not acceptable and for the reason of disallowance being made in earlier year i.e. assessment year 2005-06, these expenditures have been ITA No.3843/Del/2011 C.O. No.330/Del/2011 disallowed in its entirety. The details of these expenditures are not given in the assessment order, however, in para 6 of the order of CIT (A), such details have been given which are as under:- Particulars Amount (Rs.) Plumbing, sanitary, tiling 264,410 False ceiling, wooden partitions, storage cabinets, doors 2,197,120 Furniture 697,027 Electrical i.e., tube light, halogen fittings, sockets, et. 751,840 Other Misc. repair work 290,787 LAN cabling 813,519 Temporary wooden partitions for division of cabins, fixed wooden cupboards, wooden worktops 10,70,201 Barricade pole 58,500 Ducting 410,240 Day to day repair/renovation at Chennai office 114,233 Renovation of Data Centre 283,770 Cable, Racks Mounting work at head office 352,920 Cabins at head office 16,900 Total 77,21,466

    3. Ld. CIT (A) observed that ITAT in assessees own case which is reported at 27 SOT 304 has decided this issue according to which such disallowance was to be deleted. After reproducing the order of the Tribunal in assessees own case, ld. CIT (A) has deleted the addition. The department is aggrieved, hence, in appeal.

    4. After narrating the facts, relying upon the assessment order, ld. DR submitted that the disallowance was rightly made by the AO and it has wrongly been deleted by the CIT (A).

    5. On the other hand, it was submitted by ld. AR that the disallowance has rightly been deleted by Ld. CIT (A) following the order of the Tribunal in assessees own case. However, ld. AR fairly conceded that according to the aforementioned decision of the Tribunal, furniture cannot be considered to be an allowable ITA No.3843/Del/2011 C.O. No.330/Del/2011 expenditure and he, in this regard, referred to the observations of the Tribunal in para 7, the relevant portion whereof read as under:- After going through the nature of expenditure so incurred, we found that by incurring these expenditure except expenditure Air conditioning duct and furniture, no new asset has come into existence and the expenditure so incurred was on account of commercial expediency and for the commercial use of the lease hold premises and to give proper outlook to the office and to create international standard of good working environment on multinational work culture.

    6. He, therefore, submitted that furniture amounting to ` 6,97,027/- should be excluded and, therefore, if the Tribunal decision is followed, the disallowance has to be restricted only to the extent of ` 6,97,027/-.

    7. After hearing both the parties, we restrict the disallowance to a sum of ` 6,97,027/- following the aforementioned decision of the Tribunal which is reported as 27 SOT 344 in respect of assessment years 2001-02 and 2002-03. Ground No.1 of the revenue is partly allowed.

    8. Ground No.2 of the departmental appeal and ground of Cross Objections raised by the assessee are common. The facts relating to this ground is that the Assessing Officer found that the assessee had claimed exempted income in the shape of dividend of a sum of ` 3,11,48,835/-. Referring to the provisions of section 14a read with rule 8d, the Assessing Officer has computed the disallowance by referring to rule 8d(2)(iii) at a sum of ` 38,26,774/-. Learned CIT (A) has concluded this issue in para 12-18 of the impugned order. He has arrived at a conclusion that it will be reasonable to add 5% of the total exempted income and he, in this manner, has restricted the disallowance to ` 15,57,441.75. The revenue is aggrieved by the part deletion of disallowance of the addition and the assessee in its cross objections has agitated the sustained addition. ITA No.3843/Del/2011 C.O. No.330/Del/2011

    9. Relying upon the assessment order, it was pleaded by the learned DR that the Assessing Officer was right in making the disallowance and it has wrongly been partly deleted by the learned CIT (A).

    10. On the other hand, the learned AR of the assessee submitted written synopsis in which it has been mentioned that for making disallowance u/s 14A the onus is on the revenue and reference in this regard is made to the following decisions:-

    i) CIT vs. Hero Cycles 323 ITR 518 (P&H); ii) ACIT vs. Eicher Ltd. 101 TTJ (Del) 369; and iii) Maruti Udyog vs. DCIT 92 ITD 119 (Del)

    11. It was further submitted that in assessees case the disallowance is made by the Assessing Officer under rule 8d (2)(iii) which is only as regards administrative expenses and he referred to the decision of Kerala High Court in the case of Catholic Bank and Others reported in

    237 CTR (Ker) 164 in which it has been held that prior to insertion of Rule 8D, no disallowance on account of direct expenses was called for.

    12. Further, it was submitted by him that no direct precedent of jurisdictional High Court is available, therefore, the view expressed by Punjab & Haryana High Court and Kerala High court should be followed. It was further submitted that in the instant case since the necessary facts are available on record, the issue should be decided on merits and it should not be remitted back to the Assessing Officer and if the matter is remanded back, it will only facilitate the Assessing Officer to fill the loopholes in his order and, thus, it has been pleaded by the learned AR that the issue should be decided at the level of the Tribunal. ITA No.3843/Del/2011 C.O. No.330/Del/2011

    13. We have carefully considered the rival submissions in the light of the material placed before us. It may be seen that for immediate preceding assessment year 2005-06, this issue was restored back to the file of Assessing Officer by the Delhi ITAT only on the ground that the disallowance was made by the Assessing Officer under Rule 8D and it was sustained by learned CIT (A) under Rule 8D. Though it has been the contention of the learned AR that necessary facts are available on record, but, it has not been shown that how the necessary facts are available on record. In this case the Assessing Officer has made disallowance with reference to Rule 8D only and has not discussed this issue in detail. If it is held that Rule 8D is not applicable, then, the Assessing Officer has to be provided with opportunity to consider the case afresh in the light of the observations of Honble Bombay High court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT (2010) 328 ITR 81 (Bom). Here, it will be relevant to reproduce the observations fo the Tribunal on this issue in assessees own case for Assessment Year 2005-06:-

    6. We have carefully considered the rival submissions in the light of the material placed before us. The disallowance has been computed by the Assessing Officer under Rule 8D of Income-tax Rules, 1962. The learned CIT (A) has also upheld the disallowance on the ground that the aforementioned Special Bench decision of the Tribunal has held that Rule 8D has retrospective operation. The aforementioned decision of the Special Bench has been over-ruled by the Honble Bombay High Court in the case of Godrej & Boyce Mfg. Pvt. Ltd. (supra). Therefore, the very basis on which the disallowance has been made does not exist. However, it is seen that though Rule 8D is not applicable, but the Assessing Officer is duty bound to make the disallowance under Section 14A after considering all the facts and circumstances of the case as observed by Honble Bombay High Court in the aforementioned case of Godrej & Boyce Mfg. Pvt. Ltd. (supra). Therefore, keeping in view the facts and circumstances of the case, we consider it just and proper to restore this issue to the file of Assessing Officer to consider this issue raised in the present appeal denovo as per the provisions of law after giving the assessee a reasonable opportunity of hearing. Therefore, we restore this issue to the file of Assessing Officer to reconsider and re-adjudicate the same after giving the assessee a reasonable opportunity of ITA No.3843/Del/2011 C.O. No.330/Del/2011 hearing. We direct accordingly. In the result, the ground No.2 raised by the assessee is allowed for statistical purposes in the manner aforesaid.

    14. Therefore, in our humble opinion, it will be most appropriate if the matter is restored back to the file of Assessing Officer. By restoring the matter back to the file of Assessing Officer, no prejudice will be caused to the assessee as what is directed by the Tribunal is just to re-adjudicate the issue denovo after giving the assessee a reasonable opportunity of hearing. The assessee will get opportunity of hearing before the Assessing Officer particularly in view that substantial addition has been upheld by the learned CIT (A) on this issue and the CIT (A) has also not given the reasons for making disallowance only to the extent of 5%of the total exempted income. In view of the above discussion, we are of the opinion that the matter should be restored back to the file of Assessing Officer with the similar directions as have been given for Assessment Year 2005-06 and the relevant observations of the Tribunal for that year have already been reproduced. With similar directions, we restore this issue to the file of Assessing Officer.

    15. For statistical purposes the ground No.2 of the revenue and the Cross Objections raised by the assessee both are allowed.

    16. In the result, the appeal filed by the revenue is partly allowed in the manner aforesaid and the Cross Objection filed by the assessee is allowed for statistical purposes in the manner aforesaid. The order pronounced in the open court on 21.10.2011. Sd/- Sd/- [A.N. PAHUJA] [I.P. BANSAL] ACCOUNTANT MEMBER JUDICIAL MEMBER Dated, 21.10.2011. ITA No.3843/Del/2011 C.O. No.330/Del/2011 Copy forwarded to: -

    1. Appellant

    2. Respondent

    3. CIT

    4. CIT(A)

    5. DR, ITAT By Order, Deputy Registrar, ITAT, Delhi Benches

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    Comments

    Amway India Enterprises Pvt. Ltd. v. Cit
    (Oct 21, 2011)