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Smart Summary

Factual and Procedural Background

This opinion concerns three related appeals for the assessment year 2006-07: ITA No. 518/Mds/2010 (appeal filed by the assessee), ITA No. 519/Mds/2010 (appeal filed by the assessee relating to FBT matters) and ITA No. 710/Mds/2010 (appeal filed by the Revenue). All three appeals challenged orders of the learned Commissioner of Income-Tax (Appeals), LTU, Chennai (dates of the CIT(A) orders: 24-02-2010 for ITA No. 52/08-09/LTU(A) and 12-02-2010 for FBT No. 02/08-09/LTU(A)).

Shri R. Vijayaraghavan, Advocate, represented the assessee; Shri P.B. Sekaran, learned CIT-DR, represented the Revenue. The Tribunal (Judicial Member George Mathan and Accountant Member Abraham P. George) heard submissions on multiple grounds including: (a) characterization of certain interior/renovation expenses as capital or revenue, (b) application of section 14A and Rule 8D in relation to dividend income disallowance, (c) inclusion of prior period expenses in book profits under section 115JB, and (d) whether leave travel allowance (LTA) benefits are subject to Fringe Benefit Tax (FBT).

Legal Issues Presented

  1. Whether the expenditure of Rs. 19,61,421 incurred on interior decoration, extension and renovation of leased premises is capital in nature (liable for capitalization and depreciation) or is revenue in nature (allowable as business expenditure).
  2. Whether the disallowance under section 14A of the Income Tax Act, 1961 (and related application of Rule 8D) as enhanced by the CIT(A) was proper, including whether Rule 8D should be applied and whether the enhancement without notice was challengeable.
  3. Whether prior period expenses of Rs. 1,52,00,000 should be included in computing book profits under section 115JB of the Income Tax Act, 1961.
  4. Whether LTA (leave travel allowance) benefits granted to employees are subject to Fringe Benefit Tax (FBT) in the hands of the employer, or treated as perquisites/salary (and thus not chargeable to FBT per CBDT Circular No. 8/2005).

Arguments of the Parties

Appellant's Arguments (Assessee)

  • On the characterization of the Rs. 19,61,421 expenditure: the assessee contended these were interior works (electrical fittings, electrification, cabinets, work-stations/partitions/cupboards/stands, manager chamber, front desk, conference room, pantry) and did not amount to modification/renovation of the building structure so as to be treated as capital expenditure under Explanation 1 to section 32(1). The works were temporary/fixtures and were revenue in nature (furniture and fittings).
  • The assessee relied on the jurisdictional High Court decision in Commissioner of Income-Tax v. TVS Lean Logistics Ltd., 293 ITR 432 to support the proposition that renovation or improvement must be to the building itself to be capital in nature.
  • On the section 14A / Rule 8D issue: the assessee submitted that the Assessing Officer had disallowed 2% of dividend income under section 14A, while the CIT(A) enhanced the disallowance by applying Rule 8D without giving an enhancement notice. The assessee also agreed that no ground was raised challenging enhancement without notice and concurred that the question under section 14A could be restored to the file of the AO for re-adjudication, considering the Bombay High Court decision in Godrej & Boyce Mfg. Co. Ltd. v. DCIT.
  • On FBT (LTA): the assessee pointed to appointment letters, cost-to-company statements, Form 12BA entries and TDS deduction showing LTA treated as a perquisite/salary, and relied on CBDT Circular No. 8/2005 (Q.44) which indicates that such LTA treated as salary is not liable to FBT.

Revenue's Arguments

  • On the characterization of the Rs. 19,61,421 expenditure: the Revenue (through learned DR) supported the CIT(A)'s order that the expenditure was capital in nature, relying on the provisions of section 32(1) and Explanation 1 thereto; the Assessing Officer had allowed depreciation on the expenditure.
  • On section 14A / Rule 8D: the learned DR supported the order of the learned CIT(A) (which had applied Rule 8D following the Special Bench ITAT decision in Daga Capital Management (P) Ltd.).
  • On prior period expenses under section 115JB: the Revenue relied on the ITAT, Madras Bench decision in Sree Rajendra Mills Ltd. v. DCIT (63 TTJ 697) to contend prior period expenses should be included in computing book profits under section 115JB.
  • On FBT (LTA): the Revenue supported the orders of the CIT(A) and Assessing Officer treating LTA benefits as liable to Fringe Benefit Tax.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner Of Income-Tax v. TVS Lean Logistics Ltd., 293 ITR 432 Authority for the proposition that renovation or improvement must be to the building itself (i.e., alteration of structure) to constitute capital expenditure under Explanation 1 to section 32(1). The assessee relied on this decision to argue the disputed interior works were not capital in nature; the Tribunal considered the nature of the works and found they did not alter the building structure, aligning with the principle that the expenditure was revenue in nature.
Daga Capital Management (P) Ltd., ITA No. 8057/Mumbai/3 (Special Bench ITAT) dated 20.10.2008 Application of Rule 8D in determining disallowance under section 14A. The CIT(A) had applied this Special Bench decision to direct the application of Rule 8D. The Tribunal noted the CIT(A)'s application of that decision but, since enhancement was not challenged, restored the section 14A issue to the Assessing Officer to re-adjudicate in light of later authoritative decisions.
Godrej & Boyce Mfg. Co. Ltd. v. DCIT, IT Appeal No. 626 of 2010 & Writ Petn. No. 758 of 2010 dated 12-08-2010 (Bombay High Court) Relevant authority to be considered while adjudicating disallowance under section 14A and application of Rule 8D. The Tribunal directed that the Assessing Officer should take this Bombay High Court decision into consideration when re-adjudicating the section 14A issue on remand.
Sree Rajendra Mills Ltd. v. Deputy Commissioner of Income-tax, 63 TTJ 697 (ITAT, Madras Bench) Held that prior period expenses were liable to be included for computing book profit under section 115JB. The Revenue relied on this decision, but the Tribunal observed this decision preceded the Supreme Court's decision in Apollo Tyres and no longer remained good law in light of later authority.
Apollo Tyres Ltd. v. CIT, 255 ITR 273 (Supreme Court) Authoritative decision affecting the law on inclusion of certain items for the purpose of computing book profits under section 115JB. The Tribunal held that after the Supreme Court's decision in Apollo Tyres, the Sree Rajendra Mills decision no longer remained good law; this supported dismissal of the Revenue's appeal on the section 115JB point.
CIT v. Khaitan Chemicals And Fertilizers Ltd., 307 ITR 150 (Delhi High Court) Held that expenses disclosed as prior period/extra-ordinary items form part of the profit & loss account and are properly deductible in computing book profits under section 115JB. The Tribunal noted that the learned CIT(A) had followed this Delhi High Court decision and agreed with that approach; accordingly the Tribunal declined to interfere with the CIT(A)'s deletion of the addition for prior period expenses.

Court's Reasoning and Analysis

The Tribunal addressed each principal issue by applying statutory provisions, precedent decisions and the factual matrix disclosed in the assessee's paper book. The Tribunal's step-by-step reasoning was as follows:

  1. Characterization of Rs. 19,61,421 (interior/renovation expenditure):
    • The Tribunal examined the detailed breakup of the expenditures and observed they related to interior decoration and creation of office atmosphere (electrical fittings, electrification, cabinets, work stations, partitions, cupboards, stands, manager chamber, front desk, conference room, pantry).
    • The Tribunal found that the expenditure did not result in any new building nor did it modify or alter the existing building structure; there was no structural change as a consequence of the works.
    • Applying the principle from Explanation 1 to section 32(1) (which treats modification, renovation, extension or improvement to a building as capital), the Tribunal concluded that because the structure was not altered, the expenditure could not be treated as capital.
    • Therefore, the Tribunal held the expenditures were in the revenue field (repairs and maintenance / furniture and fittings) and directed reversal of the CIT(A)'s and AO's disallowance; the AO was directed to allow the claim as revenue expenditure. Consequentially, depreciation previously allowed by the AO on amounts capitalized was to be reversed.
  2. Section 14A and Rule 8D (disallowance in respect of dividend income):
    • The Tribunal noted the factual posture: the AO disallowed 2% of dividend income under section 14A; the CIT(A) enhanced the disallowance by applying Rule 8D (following Daga Capital Special Bench) without an enhancement notice being challenged by the assessee.
    • Because the assessee had not raised a ground challenging the enhancement by the CIT(A) without a show-cause notice, the Tribunal observed it could not adjudicate that enhancement issue.
    • Both parties agreed that the question of disallowance under section 14A (and the application of Rule 8D) should be restored to the file of the AO for re-adjudication in light of the Bombay High Court decision in Godrej & Boyce Mfg. Co. Ltd.
    • The Tribunal therefore restored the matter to the AO for fresh adjudication in accordance with law, after giving the assessee adequate opportunity to substantiate its case, and directed the AO to consider the Godrej Boyce decision while adjudicating.
  3. Inclusion of prior period expenses in book profit under section 115JB:
    • The Revenue relied on Sree Rajendra Mills (ITAT, Madras) to include prior period expenses in book profit; the assessee and the CIT(A) relied on later decisions including the Supreme Court in Apollo Tyres and the Delhi High Court in Khaitan Chemicals.
    • The Tribunal observed that Sree Rajendra Mills was rendered in 1998, prior to the Supreme Court's ruling in Apollo Tyres. After Apollo Tyres, Sree Rajendra no longer remained good law.
    • The Tribunal also noted that the Delhi High Court in Khaitan Chemicals had held prior period or extraordinary items disclosed in the profit & loss account are properly deductible in computing book profits under section 115JB.
    • Because the learned CIT(A) had followed the Delhi High Court decision in Khaitan, the Tribunal found the CIT(A)'s conclusion to be on a correct footing and declined to interfere; the Revenue's appeal on this issue was dismissed.
  4. Fringe Benefit Tax (LTA treated as perquisite/salary):
    • The Tribunal observed that the LTA in question was shown in appointment letters, cost-to-company statements, and Form 12BA; TDS had been deducted on the LTA, indicating treatment as a perquisite and part of salary.
    • Relying on CBDT Circular No. 8/2005 (specifically Question No. 44 as extracted by the CIT(A)), the Tribunal concluded that where LTA is treated as salary/perquisite and TDS has been deducted, FBT is not applicable.
    • Consequently the Tribunal reversed the orders of the CIT(A) and the AO on the FBT point and allowed the assessee's appeal on this issue.

Holding and Implications

Holding:

  • ITA No. 518/Mds/2010 (assessee) — Partly allowed for statistical purposes. The Tribunal reversed the disallowance of Rs. 19,61,421 (holding it to be revenue expenditure) and directed the AO to allow it as revenue expenditure; consequential reversal of depreciation previously allowed on amounts capitalized was ordered.
  • ITA No. 710/Mds/2010 (Revenue) — Dismissed. The Tribunal upheld the CIT(A)'s deletion of the addition of Rs. 1,52,00,000 (prior period expenses) for the purpose of computing book profit under section 115JB, following the reasoning that Sree Rajendra Mills was no longer good law after Apollo Tyres and that Khaitan Chemicals supported the assessee's position.
  • ITA No. 519/Mds/2010 (assessee — FBT) — Allowed. The Tribunal held that LTA treated as a perquisite/salary with TDS deducted is not liable to Fringe Benefit Tax in view of CBDT Circular No. 8/2005.

Implications:

  • Direct effects on the parties: the assessee obtains relief on the characterization of the interior/renovation expenditures (treated as revenue expenditure) and on the FBT liability for LTA (not liable to FBT). The Revenue's challenge to the deletion of prior period expenses under section 115JB failed.
  • On the section 14A / Rule 8D point, no final decision was rendered on the merits by this Tribunal; the matter was restored to the Assessing Officer for re-adjudication in accordance with law and in light of the Bombay High Court decision in Godrej & Boyce, ensuring the assessee an opportunity to be heard.
  • The Tribunal did not purport to lay down any new precedent; its rulings applied the cited authorities to the facts before it and implemented consequential directions (e.g., reversal of capitalisation/ depreciation). No new principle of law beyond application of existing authorities was announced in this opinion.

Order pronounced on 7th January, 2011. Copy directed to: Assessee / AO / CIT(A) / CIT / D.R. / Guard file.

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    M/s. Sundaram BNP Paribas Asset Management Company Limited, CHENNAI v. ACIT, CHENNAI

    PER GEORGE MATHAN, JUDICIAL MEMBER : ITA No. 518/Mds/2010 is an appeal filed by the assessee and ITA No. 710/Mds/2010 is an appeal filed by the Revenue against the order of the learned

    I.T.A. Nos. 518, 519 & 710/Mds/2010 CIT(Appeals), LTU, Chennai in ITA No./ 52/08-09/LTU(A) dated 24-02-2010 for the assessment year 2006-07. ITA No. 519/Mds/2010 is an appeal filed by the assessee against the order of the learned CIT(A), LTU in FBT No. 02/08- 09/LTU(A) dated 12-02-2010 for the assessment year 2006-07.

    2. Shri R. Vijayaraghavan, Advocate represented on behalf of the assessee and Shri P.B. Sekaran, learned CIT-DR represented on behalf of the Revenue.

    3. ITA 518/Mds/2010: In the assessees appeal in regard to grounds No. 2 to 5 it was submitted by the learned authorised representative that the issue was against the action of the learned CIT(A) in confirming the disallowance of the expenses of ` 19,61,421/- incurred on the interior decoration, extension and renovation of various buildings taken by the assessee on lease. The learned authorised representative drew our attention to page 2 of the paper book which showed that all the various expenses incurred are in the nature of electrical fittings, electrification, cabinet, work station/partition/cupboard/stand, Manager Chamber, Front Desk, Conference Room and Pantry. It was the submission that the renovation was more in the nature of interior works for making the leased premises suitable for the office running. It was the submission that none of the expenses was in the capital field. It was the submission that even as per the Explanation 1 to section 32(1) what was liable to be treated as capital expenditure on which depreciation was allowable, was any modification, renovation, extension or improvement to the building. He drew our attention to

    I.T.A. Nos. 518, 519 & 710/Mds/2010 the word structure or work as mentioned in the said Explanation to submit that it was any modification or renovation to the buildings as such which was liable to be considered as a capital expenditure. He further placed reliance on the decision of the jurisdictional High Court in the case of Commissioner Of Income-Tax v. Tvs Lean Logistics Ltd. reported in 293 ITR 432 to submit that even the Hon'ble High Court had categorically given a finding that the renovation or the improvement must be to the building. It was the submission that as the expenditures as had been incurred by the assessee were in the nature of temporary partition and temporary fixtures, the same were in the nature of furniture and fittings which are liable to be treated as revenue expenditure.

    4. In reply, the learned DR vehemently supported the order of the learned CIT(A). It was the submission that in view of the provisions of section 32(1) and the Explanation 1 thereto, the expenditure as incurred by the assessee was liable to be held as a capital expenditure on which depreciation had also been allowed by the Assessing Officer.

    5. We have considered the rival submissions. A perusal of the break up of the expenses which have been disallowed clearly shows that the expenditures are on the interior decorations and creation of the office atmosphere. The expenditure has not resulted in any building coming into existence nor has the existing building been modified or the structure altered. As the existing building has not been altered and there is no change to its structure as a result of the

    I.T.A. Nos. 518, 519 & 710/Mds/2010 expenditure incurred by the assessee, it cannot be said that the expenditure incurred by the assessee is in the capital field. Further a perusal of the expenditure clearly shows that it is in the revenue field. In the circumstances we are of the view that the expenditure on the repairs and maintenance in the form of electrical fittings, electrification, cabinet, work station, partition, cupboard, stand etc. are liable to be treated as a revenue expenditure. In the circumstances, the orders of the learned CIT(A) and the Assessing Officer are reversed on this issue and the Assessing Officer is directed to grant the assessee the claim of revenue expenditure in regard to the said expenditure. Consequently, the depreciation as allowed by the Assessing Officer on the said expenditure which has been capitalized would stand reversed.

    6. In regard to grounds No.6 to 8 it was submitted by the learned authorised representative that the issue was against the action of the learned CIT(A) in enhancing the disallowance made by the Assessing Officer u/s. 14A of the Income Tax Act, 1961 by applying the provisions of Rule 8D. It was submitted by the learned authorised representative that the Assessing Officer had disallowed 2% of the dividend earned as disallowable u/s. 14A. It was the submission that the learned CIT(A) had enhanced the same without giving any enhancement notice and had applied the decision of the Special Bench of the

    I.T.A.T. in the case of Daga Capital Management (P) Ltd. in ITA No. 8057/Mumbai/3 dated 20.10.2008 and had directed that Rule 8D was to be

    I.T.A. Nos. 518, 519 & 710/Mds/2010 applied. However, he fairly agreed that no ground has been raised in regard to the enhancement by the learned CIT(A) without giving a show cause notice. It was further fairly agreed by both sides that the issue in regard to the disallowance by applying the provisions of sec. 14A could be restored to the file of the Assessing Officer for re-adjudication after considering the decision of the Hon'ble Bombay High Court in the case of Godrej & BVoyce Mfg. Co. Ltd. v. DCIT in IT Appeal No. 626 of 2010 & Writ Petn. No. 758 of 2010 dated 12-08-2010.

    7. We have considered the rival submissions. As it is noticed that the issue of enhancement has not been challenged by the assessee, we are of the view that this issue cannot be adjudicated by us. However, as it has been agreed by both sides, the issue of disallowance by application of sec. 14A is restored to the file of the Assessing Officer for re-adjudication in accordance with law after granting the assessee adequate opportunity to substantiate its case. The Assessing Officer should also take into consideration the decision of the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd., referred to supra, while adjudicating on this issue.

    8. Grounds No.1 and 9 are general in nature and do not call for any adjudication. Consequently, the appeal of the assessee is partly allowed for statistical purposes.

    9. ITA No. 710/Mds/2010: In this appeal the Revenue has challenged the action of the learned CIT(A) in deleting an addition of `

    I.T.A. Nos. 518, 519 & 710/Mds/2010 1,52,00,000/- representing the prior period expenses when computing the book profit u/s. 115JB of the Income Tax Act, 1961. It was submitted by the learned DR that in view of the decision of the Hon'ble Madras Bench of the ITAT in the case of Sree Rajendra Mills Ltd. v. Deputy Commissioner of Income-tax, reported in 63 TTJ 697, the prior period expenses were liable to be included for the purpose of computing the book profit under section 115JB.

    10. In reply the learned DR submitted that the decision of the ITAT, Madras Bench in the case of Sree Rajendra Mills Ltd. was no more good law in view of the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT reported in 255 ITR 273 as also the decision of the Delhi High Court in the case of CIT v. Khaitan Chemicals And Fertilizers Ltd. reported in 307 ITR 150. It was the submission that the learned CIT(A) had considered these two decisions while granting the relief to the assessee.

    11. We have considered the rival submissions. A perusal of the decision in the case of Sree Rajendra Mills Ltd. shows that the said decision was rendered in 1998 much before the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd., referred to supra. After the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. the decision in the case of Sree Rajendra Mills Ltd. no more remains a good law. Further a perusal of the decision of the Hon'ble Delhi High Court in the case of Khaitan Chemicals And Fertilizers Ltd. shows that the Hon'ble High Court has categorically held that the expenses

    I.T.A. Nos. 518, 519 & 710/Mds/2010 which have been disclosed as for prior period items/extra-ordinary items are part of the profit & loss account and properly deductible in computing the book profits. It is also noticed that the learned CIT(A) has followed the decision of the Hon'ble Delhi High Court in the case of Khaitan Chemicals And Fertilizers Ltd. In the circumstances, we are of the view that the finding of the learned CIT(A) on this issue is on a right footing and does not call for any interference. In the circumstances, the appeal of the Revenue is dismissed.

    12. ITA No. 519/Mds/2010: In this appeal it was submitted by the learned authorised representative that the issue was against the action of the learned CIT(A) in treating the LTA benefit granted to the employees as being liable to be Fringe Benefit Tax in the hands of the assessee company. The learned authorised representative drew our attention to the letter of appointment of the concerned employees as also to the cost to company statement as also to the Form 12BA statement as prescribed in Rule 26A(2) which show the particulars of the perquisites, fringe benefits or amenities and profits in view of salary with the value thereof which showed that the LTA was treated as a perquisite and TDS had been deducted thereon. He further drew our attention to Circular No. 8/2005 issued by the CBDT which gave clarification on various matters of Fringe Benefit Tax more specifically question No. 44 which was extracted by the learned CIT(A) in page 2 para 4 of his order. It was the

    I.T.A. Nos. 518, 519 & 710/Mds/2010 submission that as per the said circular as the LTA had been treated as salary, Fringe Benefit Tax was not applicable to the same.

    13. In reply, the learned DR vehemently supported the orders of the learned CIT(A) and the Assessing Officer.

    14. We have considered the rival submissions. As it is noticed that the LTA is treated as a perquisite and part of the salary and TDS has also been deducted therefrom, in view of the circular issued by the CBDT the same is not liable for the Fringe Benefit Tax. In the circumstances, the orders of the learned CIT(A) and the Assessing Officer on this issue stand reversed and the appeal of the assessee is allowed.

    15. In the result, appeal of the assessee in ITA No. 518/Mds/2010 is partly allowed for statistical purposes, appeal of the Revenue in ITA No. 710/Mds/2010 is dismissed and the appeal of the assessee in ITA No. 519/Mds/2010 is allowed.

    16. The order was pronounced in the court on 07/1/2011. Sd/- Sd/- (Abraham P. George) (George Mathan) Accountant Member Judicial Member Chennai, Dated the 7th January, 2011. Copy to: Assessee/AO/CIT (A)/CIT/D.R./Guard file

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    M/s. Sundaram BNP Paribas Asset Management Company Limited, CHENNAI v. ACIT, CHENNAI
    (Jan 7, 2011)