TaxTMI 
TaxTMI 
2021 (7) TMI 346
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....penses incurred in [the] assessment year 2004-05 on [the] demerger of certain units of NIIT and vesting of the same in the Appellant, on the incorrect premise that such deduction is allowable only in the hands of the demerged company (NIIT) and not the resulting company (Appellant)? (ii) Whether on the facts and in the circumstances of the case, the Tribunal erred in law in sustaining and not deleting the disallowance under Section 14A of the Act, to the extent of 0.5% of [the] average value of investments which yielded exempt income during the year?" Questions of law framed in ITA 215/2020 "(i) Whether on the facts and in the circumstances of the case, the Tribunal erred in law in not deleting in-toto the disallowance of one-time commuted/discounted lease rent amounting to Rs. 77,98,042/- (equivalent to 11 times annual rent) made by the assessing officer? (ii) Whether the Tribunal erred in law in travelling beyond the scope of the appeal and the case set-up by the assessing officer/CIT(A) and argued by the Revenue, contrary to the mandate of Section 254 of the Act, and that too, without confronting the said reasoning/basis to the Appellant (through it....
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....D of the Rules was scaled down from the figure of Rs. 1,79,17,211/- to Rs. 82,05,031/-. Also, the CIT(A) rejected the aforementioned suo motu disallowance, as being ad-hoc in nature and without any basis. The break-up of the disallowance under Section 14A of the Act, as ordered by the CIT(A) is as follows. S. No. Particulars Amount (Rs.) 1. Direct expenditure concerning exempt income Nil 2. Interest expenditure not directly attributable to any particular income 44,71,541 3. ½% of average investments 37,33,490 TOTAL 82,05,031 3.3. This propelled the appellant/assessee to carry the matter further, and accordingly, an appeal was preferred with the Tribunal. The Tribunal, via its order dated 28.01.2020, also allowed the appeal, albeit, partially. Resultantly, while the Tribunal sustained the findings of the AO and CIT(A) concerning disallowance under Section 35DD of the Act, it deleted the entire disallowance of Rs. 44,71,541/- ordered by the authorities below, in respect of interest expenditure [inadvertently the figure has been noted in the order as Rs. 37,33,490/-] under Section 14A of the Act read with Rule 8D of the Rul....
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....allowance ordered by the AO under Section 35DD of the Act, the disallowance directed by the AO under Section 14A of the Act read with Rule 8D of the Rules was scaled down from the figure of Rs. 1,56,08,262/- to Rs. 91,18,132/-. The break-up of the disallowance under Section 14A of the Act, as ordered by the CIT(A) is as follows. S. No. Particulars Amount (Rs.) 1. Direct expenditure concerning exempt income Nil 2. Interest expenditure not directly attributable to any particular income 36,85,740 3. ½% of average investments 62,11,454 Total 98,97,195 Less: Suo motu disallowance by appellant/assessee 7,79,063 DISALLOWANCE 91,18,132 4.3. This propelled the appellant/assessee to carry the matter further, and accordingly, an appeal was preferred with the Tribunal. The Tribunal, via its order dated 28.01.2020, also allowed the appeal partially. Resultantly, the Tribunal sustained the findings of the CIT(A) concerning disallowance of deduction claimed under Section 35DD of the Act, in line with its decision for AY 2007-08. Likewise, it ordered that the disallowance under Section 14A of the Act be r....
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....ppeal preferred by the appellant/assessee, the CIT(A), vide order dated 30.07.2013, deleted the disallowance ordered by the AO in respect of the aforesaid one-time lease rent charges, and held that the expenditure was incurred wholly and exclusively for the purpose of business. 5.6. The revenue, being dissatisfied with the order of the CIT(A), instituted an appeal with the Tribunal. The Tribunal, vide order dated 28.01.2020 while accepting the principle contention on behalf of the appellant/assessee that commuted and discounted lease rent amounting to Rs. 77,98,042/- had to be classified as revenue expenditure, directed that the said amount should be spread through the entire tenure of the lease i.e. 90 years by applying the matching principle of accounting. Submissions on behalf of the appellant/assessee: - 6. Mr. Rohit Jain advanced submissions on behalf of the appellant/assessee. He, broadly, made the following submissions concerning the issues that arose before us. i. Insofar as the disallowance of expenditure for the AYs in issue, i.e., AY 2007-08 and 2008-09 is concerned, it was contended that the Tribunal had erred in upholding the disallowance even while t....
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.... of deferred revenue expenditure. b) The Tribunal erred in travelling beyond the scope of the appeal before it and the case set up by the revenue, and thus, acted contrary to the mandate of Section 254 of the Act. The reasoning adopted by the Tribunal was not put to the appellant/assessee at the time of the hearing. Submissions advanced on behalf of the revenue: - 7. On the other hand, Mr. Shailendra Singh relied upon the orders passed by the Tribunal. It was argued that the Tribunal had taken the correct view about the deduction claimed by the appellant/assessee under Section 35DD of the Act, the extent to which the disallowance was sustained, under Section 14A, as also the direction issued that the one-time lease rent paid by the appellant/assessee should be spread over the tenure of the lease, in equal proportion. Analysis and reasons: - 8. Having heard counsel for the parties, although four substantial questions of law have been admitted, the issues which arise for consideration concern three aspects. Therefore, we would be adjudicating the same, having in mind, the three issues that have arisen in the matter. Deduction claimed under Section 35DD: - 9....
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....been incurred by the assessee in assessment year 2004-05 and 1/5th of said expenses has been claimed deduction under section 35DD of the Act since assessment year 200405 for consecutive five assessment years. According to the Revenue, the said deduction under section 35DD of the Act is allowable only to the parent demerged company and not to the resultant company i.e. the assessee company. For ready reference, the said provisions of section 35DD of the Act are reproduced as under: "Amortisation of expenditure in case of amalgamation or demerger. 35DD. (1) Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place. (2) No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act." 4.6 In the above section the deduction has been a....
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....judicial decisions and law should be certain and definite. It is almost as important that the law should be settled permanently as that it should be settled correctly. But there may be circumstances where public interest demands that the previous decision be reviewed and reconsidered. The doctrine of stare decisis should not deter the Court from overruling an earlier decision, if it is satisfied that such decision is manifestly wrong or proceeds upon a mistaken assumption in regard to the existence or continuance of a statutory provision or is contrary to another decision of the Court. It was Jackson, J., who said in his dissenting opinion in Massachusetts vs. United States (333 US 611) : "I see no reason why I should be consciously wrong today because I was unconsciously wrong yesterday". Lord Denning also said to the same effect when he observed in Ostime vs. Australian Mutual Provident Society (1960) AC 459, 480 : "The doctrine of precedent does not compel your Lordships to follow the wrong path until you fall over the edge of the cliff." Here we find that there are overriding considerations which compel us to reconsider and review the decision in Cloth Traders' cas....
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.... factor, namely, that the deduction required to be made under sub-s. (1) of s. 80M is not from the gross total income but from "such income by way of dividends". There is also another circumstance which makes it necessary for us to reconsider and review the decision in Cloth Traders' case and that is the decision in Cambay Electric Supply Co.'s case (supra). The decision in Cloth Traders' case is inconsistent with that in Cambay Electric Supply Co.'s case. Both cannot stand together. If one is correct, the other must logically be wrong and vice versa. It is, therefore, necessary to resolve the conflict between these two decisions and harmonise the law and that necessitates an inquiry into the correctness of the decision in Cloth Traders' case. It is for this reason that we have reconsidered and reviewed the decision in Cloth Traders' case and on such reconsideration and review, we have come to the conclusion that the decision in Cloth Traders' case is erroneous must be overturned." 11. In our opinion, the view of the Tribunal is flawed for the following reasons. 11.1. Firstly, the Tribunal has failed to appreciate the various ways in which demerger....
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....ense [expenses covered under Rule 8D(2)(iii) of the Rules] and, that too, to 0.5% of the value of the assets, which yielded income exempt from tax during the period under consideration. This issue concerns both, AY 2007-2008 and AY 2008-2009. 12.1. It is not in dispute that Rule 8D of Rules was made part of the Rules only on 24.03.2008, and therefore, could have impacted the concerned assessees, if at all, only in AY 2008-2009 and onwards. Furthermore, it is required to be noticed (something which is not disputed) that the appellant/assessee on its own, had triggered disallowance to the extent of 20% of the total expenses of the treasury division in AY 2007-2008; which was pegged at Rs. 5,62,842/-. The appellant/assessee, however, had earned in the same period, income by way of dividend amounting to Rs. 1,66,74,318/-, which was exempt from tax, via investment in various mutual funds. 12.2. In AY 2008-2009, the appellant/assessee, excluded, by way of disallowance, Rs. 7,79,063/-, being proportionate time-cost of designated employees making investments. This amount, according to the appellant/assessee, was duly verified and certified by its auditors. As against this, the appell....
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....n an approach where it assumes that no income can be earned without incurring expenditure; the assessee (in this case, the appellant/assessee) is not required to segregate expenditure, in its account (we would assume administrative expenditure); the onus is on the appellant/assessee to show that no expenditure has been incurred; and lastly, since disallowance has been made by the AO, it is obvious that he was not satisfied with the correctness of the claim made by the appellant/assessee in respect of such expenditure incurred to earn income exempt from tax. 12.6. To understand this line of reasoning, it would be apposite to extract the relevant part of Section 14A of the Act. "[Expenditure incurred in relation to income not includible in total income. 14A. [(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to86 income which does not form part of the total income under this Act.] [(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Ac....
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....ncurred by him concerning income which does not form part of the total income under the Act. 13.2. The approach of the Tribunal has been that, since a disallowance was made, it follows logically, that the AO was not satisfied. This, according to us, is not what is envisaged under the provisions of Section 14A of the Act. The satisfaction has to be arrived at by the AO having regard to the assessee's accounts and not otherwise. Concededly, there is nothing in the record to suggest that the AO examined the accounts from this perspective. 13.3. Furthermore, in our view, because the appellant/assessee had itself offered an amount which could be disallowed under Section 14A of the Act, the onus shifted onto the revenue to ascertain, after examination of the accounts, as to whether or not the appellant's/assessee's claim was correct. It is only after the aforesaid exercise was conducted, could the AO have taken recourse to the prescribed method i.e. Rule 8D of the Rules, for determining the expenditure, which, according to him, needed to be disallowed under Section 14A of the Act. 13.4. We would assume, for the moment, that the revenue could take recourse to Rule 8D of t....
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....g the accounts, that he was not satisfied with the correctness of the Assessee's claim of Rs. 3 lakhs being the administrative expenses. This was mandatorily necessitated by Section 14 A (2) of the Act read with Rule 8D (1) (a) of the Rules. 36. In para 3.2 of the assessment order, the AO records that, in answer to the query posed by the AO requiring it to produce calculation for disallowances, the Assessee "submitted that they have not incurred any expenditure for earning the dividend income." Thereafter, in para 3.3, the AO records "I have considered the submissions of the Assessee and found not to be acceptable." Thereafter, the AO proceeded to deal with the said provisions of Section 14A and Rule 8D and observed, in para 3.3.1, that making of investment, maintaining or continuing investment and time of exit from investment are well informed and well coordinated management decisions that, in relation to earning of income, are embedded in indirect expenses. It is then stated in para 3.4 that, in view of the above, the provisions of sub-section (2) of Section 14A and Rule 8D of the Rules are in operation and therefore, will strictly be adhered to by the Assessee. In p....
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.... a reasonable manner to ascertain the true and correct picture of its income and expenses." 40. Consequently on the aspect of administrative expenses being disallowed, since there was a failure by the AO to comply with the mandatory requirement of Section 14 A (2) of the Act read with Rule 8D (1) (a) of the Rules and record his satisfaction as required thereunder, the question of applying Rule 8D (2) (iii) of the Rules did not arise. The question framed in ITA 549 of 2015 is answered accordingly." 13.6. Thus, having regard to the aforesaid, the question of law no. (ii), as framed in ITA 213/2020 and 214/2020, is also decided in favour of the appellant/assessee and against the revenue. Commuted/discounted one-time lease rent: - 14. It is relevant to note that, vis-à-vis this aspect of the matter, while the Tribunal has agreed with the appellant/assessee, the one-time lease rent was incurred by it to run its business both, effectively and efficiently, the Tribunal has gone on to hold that the amount involved should be spread over the tenure of the lease, albeit, in equal proportion. The reasoning of the Tribunal is given in paragraph 9.6 to 9.9 of the impugne....
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....usiness of the appellant. That apart from the aforesaid benefit, which is in the revenue field, there is no advantage in the capital field as there is no acquisition of any capital asset inasmuch the plot of land is not under the ownership of the appellant and remains the property of Greater Noida Industrial Development Authority. It is submitted that payment of commuted lease rentals did not result in creation of a capital asset having enduring benefit in the capital field. The amount in question was essentially revenue expenditure allowable deduction. 8.5.3 Hon'ble Supreme Court in the case of Empire Jute Co. v CIT: 124 ITR 1, held that the test of enduring benefit is not certain or conclusive test in determining whether the expenditure is capital or revenue in nature and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. The Supreme Court further laid down that what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists mer....
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....efore, could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, the expenditure appears to be revenue expenditure." 8.5.6 The above decisions of Apex Court are squarely applicable in the case of the appellant. In the case of the appellant, also it did not acquire title / ownership of any capital asset. The plot of land on which construction would be carried on by the appellant under the lease deed of 99 years, would remain the property of Greater Noida Industrial Development Authority at all times. In lieu of incurring the expenditure, the appellant would be entitled to enjoy the property as a tenant under long term lease. Such an advantage even though, enduring in nature, could not be regarded as in the capital field as the expenditure only facilitates the carrying out of business more efficiently and profitably by making available suitable premises for the business of the appellant. The expenditure on account of commuted lease rentals paid by the appellant company has been incurred in respect of premises used wholly and exclusively for the purposes of the business of the company; and the same repre....
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.... under consideration cannot be allowed as revenue expenditure in the instant year. For the year under consideration, only 1/90th of the amount of Rs. 77,98,042/- has been incurred wholly and exclusively for the purposes of the business for the year under consideration. Accordingly, we allow 1/90th of Rs. 77,98,042/- as revenue expenditure in the year and balance be characterized as advance rent in the financial statement as on 31.03.2007. Accordingly, the Ground Nos. 3 & 4 of the appeal of the Revenue are partly allowed." [Emphasis is ours] 14.1. As is evident from the reasoning adopted by the Tribunal, the Tribunal while finding no difficulty with the stand of the appellant/assessee that, although, paying commuted and discounted one-time lease rent gave the appellant/assessee an enduring benefit, it allowed the appellant/assessee to run its business effectively. 14.2. Having said that the Tribunal, in our opinion, needlessly went on to direct that the amount incurred i.e. Rs. 77,98,042/- should be spread equally over the tenure of the lease. As correctly argued on behalf of the appellant/assessee, this was not the stand of the revenue before the Tribunal. The stand of the....
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....en on a stronger footing inasmuch as not only the liability had arisen in the assessment year in question, it was even quantified and discharged as well in that very accounting year. 16. Judgment in Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC) was cited by the learned counsel for the Revenue to justify the decision taken by the courts below. We find that the Court categorically held even in that case that the general principle is that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years,....
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.... conscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period. 18. What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which upto now has been restricted to the cases of debentures. 19. In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action w....
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....mmuted and discounted value of the one-time lease rent was eleven (11) times the annual rent; which in absolute terms was much lower than the amount that would have accrued as rent over the entire tenure of the lease i.e. 99 years. This was the option exercised by the appellant/assessee. As is evident, taking the present value or time value of the money into account, a lumpsum figure was proposed to the appellant/assessee for securing leasehold rights for 90 years. The lumpsum amount paid by the appellant/assessee, as adverted to above, was far less than the amount that it would have to pay if it were to choose the other option i.e. pay the lease rent on an annual basis for 90 years at the rate of Rs. 7,08,913/-. 14.4. The matching principle, which is an accounting concept, requires entities to report expenses, at the same time, as the revenue. In other words, the revenue is matched with the expense, in the income and expenditure statement, for a particular period. Given the facts obtaining in this case, the matching principle would have no applicability. The appellant/assessee chose to incur the liability of a crystallised amount in the period relevant to the AY in issue i.e. A....
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....al provision, as far as possible, will not be so construed as to affect finality of tax assessment or to open up liability which had become barred. Assessment creates a vested right and an assessee cannot be subjected to reassessment unless a provision to that effect inserted by amendment is either expressly or by necessary implication retrospective. A provision which in terms is retrospective and has the effect of opening up liability which had become barred by lapse of time, will be subject to the rule of strict construction. In the absence of a clear implication, such a legislation will not be given a greater retrospectivity than is expressly mentioned; nor will it be construed to authorise the Income Tax Authorities to commence proceedings which, before the new Act came into force, had by the expiry of the period then provided, become barred. But unambiguous language must be given effect to, even if it results in reopening of assessments which had become final after expiry of the period earlier provided for reopening them. There is no fixed formula for the expression of legislative intent to give retrospectivity to a taxation enactment. ..." 24. A three-Judge Bench of this C....
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....t. We cannot, therefore, consistently with the rule of interpretation which denies retrospective operation to a statute which has the effect of creating or imposing a new obligation or liability, construe sub-section (6) of Section 171 as embracing a case where assessment of a Hindu Undivided Family is made under the provisions of the old Act. Here in the present case, the assessments of the Hindu Undivided Family for Assessment Years 1950-1951 to 1956-1957 were completed in accordance with the provisions of the old Act which included Section 25-A and the Income Tax Officer was, therefore, not entitled to avail of the provision enacted in sub-section (6) read with sub-section (7) of Section 171 of the new Act for the purpose of recovering the tax or any part thereof personally from any members of the joint family including the petitioners." xxx xxx xxx 45. The Constitution Bench in CIT v. Vatika Township (P) Ltd. [CIT v. Vatika Township (P) Ltd., (2015) 1 SCC 1] , after noticing the principle of statutory interpretation, as noted above, has laid down the following in paras 36, 37 and 39: (SCC p. 25) "36. In ....
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....above, that Rule 8-D has again been amended by the Income Tax (Fourteenth Amendment) Rules, 2016 w.e.f. 2-6-2016, by which Rule 8-D sub-rule (2) has been substituted by a new provision which is to the following effect: "8-D. (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely- (i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income: Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee." 47. The method for determining the amount of expenditure brought in force w.e.f. 24-3-2008 has been given a go-by and a new method has been brought into force w.e.f. 2-6-2016, by interpreting Rule 8-D retrospective, there will be a conflict in applicability of 5th & 14th Amendment Rules which clearly indicates that the Rule has a prospecti....