TaxTMI 
TaxTMI 
2021 (7) TMI 346
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....he] 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 its counsel) at the time of hearing?" Background facts: - 2. Before we procee....
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....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 Rules and ordered that the disallowance under Section 14A of the Act be restricted only to administrative expenditure, which, according to it, ought to be quantifie....
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.... 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 restricted only to administrative expenditure. According to the Tribunal, as held by it qua AY 2007-2008, administrative expenditure ought to be quantified at 0.5% of the value of investments, that yielded income exempt from tax in the period under ....
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....e 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 the same had been allowed for 3 AYs i.e. AY 2004-2005, 2005-2006 and 2006-2007. In other words, the submission was that the principle of consistency should have been kept in mind by the revenue. [See: CIT vs. Rajasthan Breweries Limited [ITA 889/2009] (Del); the SLP filed vis-&....
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....ssions 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. The facts which have emerged vis-à-vis this issue and qua which there is no dispute are as follows. i. An undertaking of NIIT Ltd. was spun off under the scheme of demerger approved by this Court. The demerger came into effect from 01.04.2003. The demerged entity vested in an existing company i.e. the appellant/assessee herein, form....
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....any. 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 allowed to the "assessee" for expenditure incurred wholly and exclusively for demerger of an undertaking. Since demerger of the undertaking(s) in the instant case has taken place from the parent company M/s NIIT Ltd, the word "assessee" here refers to M/s NIIT Ltd. and not the target company M/s NIIT Technologies Ltd. i.e. the Assessee, with whom the undertakings of M/s NIIT Ltd. got merged. In our opinion the lan....
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....y 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' case (supra). In the first place, the decision in Cloth Traders' case (supra) was rendered by this Court on 4th May, 1979, and immediately thereafter, within a few months, Parliament introduced s. 80AA with retrospective effect from 1st April, 1968, with a view to overriding the interpretation placed on s. 80M in Cloth Traders' case (supra). The decision in Cloth Traders' case (supra) did not, therefore, hold the field for a....
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.... 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 takes place. A demerger is a legal device used, very often by assessees, to restructure their business operations. It is a process that is, in a sense, a merger in the reverse. Demerger can, ordinarily, take place in two ways i.e. by way of "spin-off" or by way of "split-off". A spin-off can take place in various ways, including by transferring, an undertaking/unit to a new or a subsidiary company, in which, shares are offered to the sh....
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....rmore, 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 appellant/assessee had earned income by way of dividend which was exempt from tax, via investments in fully paid equity shares of NIIT GIS Ltd. and mutual funds units, aggregating to Rs. 38,63,71,350/-. 12.3. The authorities below triggered the provisions of Rule 8D of the Rules even for AY 2007-2008 when the same came into force only in AY 2008-2009. [See Godrej & Boyce Mfg. Co. Ltd. vs. DCIT, Mumbai & Anr. (2017) 394 ITR 449 (SC) and CIT vs. Essar Teleho....
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....ellant/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 Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form....
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....rom 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 the Rules in both AYs, i.e. 2007-2008 and 2008-2009, although, as indicated above, it could have been triggered perhaps only in AY 2008-2009. 13.5. Given the aforesaid position, we are of the view that the Tribunal in calculating the disallowance as per the provisions of Rule 8D(2)(iii) of the Rules was not in order. In this context, the observations made by a division bench of this Court in H.T. Media Ltd. vs. Pr. CIT (2017) 399 ITR 576 (Del), being apposite, are extracted hereafter. "Failure of the AO to record satisf....
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.... 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 para 3.6 of the assessment order, after discussing Section 14A(1) read with Rule 8D and referring to the decision of the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd v. DCIT [2017] 394 ITR 449 (SC), the AO simply stated that "in view of the facts and circumstances and legal position on the issue as discussed above, I am satisfied that the Assessee had incurred expenses to manage its investments which may yield exempt income, and Assessee grossly failed to calculate such expenses in a reasonable manner to ascertain to ascertain the true and correct picture of i....
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.... 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 impugned orders; the same is extracted hereafter. "9.6 We have heard the rival submission and perused the relevant material on record. The assessee has filed a copy of the lease deed under reference. In terms of the lease deed, the assessee has made following payments to GNIDA: (a) one-time lease premium of Rs. 2,83,56,515/- (b) commuted one time lease rent of Rs. 77,98,042/- 9.7 As far as payment of one-time lease premium is concerned, the assessee has capitalized the said amount in its books of accounts. The Ground No. 4 of the appeal of the Revenue is factually incorrect because the premium has....
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....t 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 merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. 8.5.4 In the case of Lakshmiji Sugar Mills Co. P. Ltd. v. CIT : 82 ITR 376, Hon'ble Supreme Court held that the contribution made by the assessee under a statutory obligation for the development of roads which were originally the property of the Government and remained so even after the improvement had been done, being expendi....
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....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 represents commuted payment in lieu of regular lease rental and hence is in the nature of revenue expenditure. In view of the above, the AO has erred in making the disallowance of the commuted lease rentals. The appeal is allowed in this ground no. 7 of appeal. Since appeal is allowed in ground no. 7 of appeal, therefore, the plea of the appellant in ground no. 8 of appeal is infructuous and not necessary to be adjudicated." 9.9 We find that the Ld. CIT(A) has distinguished the expenditure in the capital field and expenditure incurred only to facilitate the carrying of the business more efficiently and profitably, which is revenue in nature. The onetime premium paid b....
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....hat, 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 revenue was that the one-time lease rent amount paid to GNIDA was capital expenditure and not that it needed to be deferred over the tenure of the lease. As has been correctly argued on behalf of the appellant/assessee, there is no concept of deferred revenue expenditure under the Act. An expenditure can be spread over a time span, only if it so provided, in the Act. Section 35DD of the Act, which we have discussed above, is one such example. The observations of the Supreme Court in Taparia Tools Ltd. vs. JCIT, (2015) 372 ITR 605 (SC), being relevant in this regard, are extracted for the sake of convenience. "14. The High Court has also observed that it was a case of deferred interest optio....
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....ing 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, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilise the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself: "15.. The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. ....
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.... 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 was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act [See - Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC); Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC); Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) and ....
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....es 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. AY 20072008, and therefore, it was entitled to seek deduction of the amount which fulfilled the following attributes. i. The expenditure was not in the nature of capital expenditure or a personal expense. ii. It was expended fully and exclusively for the purposes of the business and; iii. It did not fall within the realm of any provision of the Act which prohibited the appellant/assessee from claiming this deduction. 14.5. Thus, we are of the view that question nos. (i) and (ii), as framed in ITA 215/2020, should also be decided in favour of the appellant/assessee and against the revenue. It is ordered accordingly. Conclusion: - 15. For the foregoing reasons, the above-captioned appeals are allowed. As indicated hereinabove, all four questions of law, as framed, are decided ....
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....ecome 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 Court in Govind Das v. CIT [Govind Das v. CIT, (1976) 1 SCC 906 : 1976 SCC (Tax) 133] , noticing the settled rules of interpretation laid down following in para 11: (SCC pp. 914-15) "11. Now it is a well-settled rule of interpretation hallowed by time and sanctified by judicial decisions that, unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute so as to take away or impair an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure. The general rule as stated by Halsbury in Vol. 36 of Laws of England (3rd Edn.) and reiterated in several decisions of this Court as well as English courts is that "all statutes other than those which are merely declaratory or which relate only to matters of procedu....
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....p; 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 CIT v. Scindia Steam Navigation Co. Ltd. [CIT v. Scindia Steam Navigation Co. Ltd., AIR 1961 SC 1633] , this Court held that as the liability to pay tax is computed according to the law in force at the beginning of the assessment year i.e. the first day of April, any change in law affecting tax liability after that date though made during the currency of the assessment year, unless specifically made retrospective, does not apply to the assessment for that year. Answer to the reference 37. When we examine the insertion of the proviso in Section 113 of the Act, keeping in view the aforesaid principles, our irresistible conclusion is that the intention of the legislature was to make it prospective in nature. This proviso cannot be treated as declaratory/statutory or curative in nature. *** Reasons in support 39. The first and foremost poser is as to whether it was possibl....
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....od 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 prospective operation, which has been prospectively changed by adopting another methodology. 48. One of the submissions raised by the learned counsel for the assessee also needs to be noticed. The learned counsel for the assessee submits that it is well settled that subordinate legislation ordinarily is not retrospective unless there are clear indication to the same. Reliance has been placed on the judgment of this Court in State of Jharkhand v. Shiv Karampal Sahu [State of Jharkhand v. Shiv Karampal Sahu, (2009) 11 SCC 453 : (2009) 2 SCC (L&S) 640]. In para 17, following has been stated: (SCC pp. 459-60) "17. Ordinarily, a subordinate legislation should not be construed to be retrospective in operation. The Circular Letter dated 7-5-2003 was given a prospective effect. The father of the respondent died on 19-5-2000. There is nothing to show that even the Circular dated 9-8-2000 had been given retrospective effect. In any view of the matter, as the State of Jharkhand in the Cir....