All acesesories of computer cannot work in isolation allowed depreciation @60% and expenditure on exempt income cannot be allowed

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI ‘C’ BENCH

BEFORE SHRI I.C. SUDHIR, JM & SHRI A.N. PAHUJA, AM

ITA nos..322& 2583/Del/2012

AYs: 2007-08 & 2008-09

A.C. I .T. ,Circle 12(1),

New Delhi

(Appellant)

V/s.

M/s HCL Comnet Ltd. ,

806, Siddhartha, 96,

Nehru Place, New Delhi

 (Respondent)

[PAN :AAACH 9667 H]

ITA no.2239/Del/2012

Assessment year: 2008-09

M/s HCL Comnet Ltd. ,

806, Siddhartha, 96,

Nehru Place, New Delhi

(Appellant)

V/s.

 A.C. I .T.Circle 12(1) ,

New Delhi

 (Respondent)

Assessee by Shri Ajay Vohra,AR

Revenue by Shri R.S. Negi,DR

Date of hearing 30-07-2012

Date of pronouncement 24-08-2012

O R D E R

A.N. PAHUJA:-

These three appeals – appeal filed on 20.01.2012 by the Revenue against an order dated 31-10-2011 of the ld. CIT(A)-XXVII, New Delhi for the assessment year 2007-08 and the cross appeals filed by the assessee on 10-05-2012 and the Revenue on 29-05-2012 against an order dated 14.03.2012 of the learned CIT(A)-XV, New Delhi, raise the following grounds:-

I.T.A. no.322/Del./2012[Revenue-AY2007-08]

1. “Whether ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the disallowance of ``26,49,206/- made by the Assessing Officer u/s 14A.

2. Whether ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the disallowance of ``3,23,127/- made by the AO on account of excess depreciation on UPS, printers, scanners etc.

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

I.T.A. No.2239/Del./2012[Assessee-AY2008-09]

1. “That the CIT(A) erred on facts and in law in sustaining the disallowance of expenditure amounting to ``44,24,562/- u/s 14A of the Income-tax Act, 1961 (“the Act”).

1.1 That the CIT(A) erred on facts and in law in confirming the disallowance u/s 14A of the Act without appreciating that the investment was made out of own surplus funds and no expense was attributed for earning of tax free dividend income.

1.2 That the CIT(A) erred on facts and in law in not appreciating that in terms of section 14A(2) and 14A(3) of the Act read with rule 8D of the Income-tax Rules, 1962 for making disallowance under the said section, the Assessing Officer has to record satisfaction that claim of the appellant regarding amount disallowable under the said section, was incorrect.

1.3 Without prejudice that the CIT(A) erred on facts and in law in not appreciating that only an insignificant amount of expenditure out of the administrative expense could at best be attributed to earning of tax free dividend income.

1.4 Without prejudice, the CIT(A) erred on facts and in law in not appreciating that the disallowance u/s 14A of the Act cannot exceed ``56,485/-, on the basis used for disallowing expenditure u/s 14A in the earlier years.

1.5 Without prejudice, the CIT(A) erred in facts and in law in wrongly computing the disallowance u/s 14A of the Act to be ``44,24,562/- instead of ``40,24,562/- computed by the Assessing Officer.

2. That the CIT(A) erred on facts and in law in confirming the disallowance of depreciation on elevator to the extent of ``131,400/- holding the same to be a part of building instead of plant and machinery.

The appellant craves leave to add to, alter, amend or vary from the above grounds of appeal before or at the time of hearing.”

I.T.A. no.2583/Del./2012[Revenue-AY2008-09]

1. Whether learned CIT(A) was correct on facts and circumstances of the case and in law in deleting the disallowance of ``99,58,780/- made by the Assessing Officer on account of interest u/s 14A.

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

2. Adverting first to ground no.1 in the appeal of the Revenue for AY 2007-08, facts, in brief, as per relevant orders are that return declaring income of ``19,08,29,777/- filed on 30.10.2007, engaged in business of commissioning of networking solutions and providing professional services for management and maintenance of networking solutions, was taken up for scrutiny with the service of a notice u/s 143(2) of the Income-tax Act, 1961 (hereinafter referred to as the Act), issued on 21.08.2008. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee earned dividend income of ``1,39,11,977/- exempt u/s 10(34) of the Act. To a query by the AO, seeking details of expenditure incurred for earning the dividend income, the assessee replied that they did not incur any expenses for earning dividend income nor any efforts and time was involved as all the investments were made in pursuance of the guidelines issued by its ultimate holding company while the entire dividend income was automatically credited through ECS and reinvested in the same mutual fund scheme. The assessee also pointed out that no interest cost was attributable to the investment, the entire investments having been funded out of interest free loans received from its holding company and thus, no expenditure could be attributed to earning of dividend income. The assessee further objected to the invocation of provisions of section 14A of the Act and applicability of rule 8D of the Income-tax Rules, 1962. However, the AO did not accept the submissions of the assessee on the ground that earning of exempt income was not in the nature of passive activity having no input. Accordingly, while referring to provisions of sec. 14A of the Act read with Rule 8D of the I.T. Rules, 1962 and relying upon decisions in CIT vs. Sharwan Kumar Swarup,210 ITR 886(SC); H.H. Sir Rama Varma Vs. CIT, 205 ITR 433 (SC); CIT Vs. Podar Cement (P) Ltd,. 226 ITR 625 (SC); S. Subhash Vs. CIT,248 ITR 512(Madras); CIT Vs. Shelly Products Ltd., 261 ITR 367(SC); ITO Vs. M/s Daga Capital Management Pvt. Ltd. in I.T.A. No.8057/Mum/2003 and M/s Max Opp Investment Ltd. Vs. ACIT in I.T.A. no.1372/D/05, the AO disallowed an amount of ``27,19,110/- .

3. On appeal, the ld. CIT(A),following the decision of Hon’ble Bombay High Court in Godrej Boyce Mfg. Co. Ltd. Vs. DCIT and Another, 234 CTR 1 (Bombay and decision of the ld. CIT(A) in the AY 2005-06,reduced the disallowance to ``69,894/- in the following terms:

“11 The facts of the case for the year under consideration are similar to the facts of the case decided by the CIT(A)-X as above. After having gone through his observations as reproduced above, I am in agreement with him with regard to the reasonable basis adopted by him for making disallowance u/s 14A of the Act. The appellant was accordingly asked to furnish the relevant details for the year under consideration which were provided as under:-

Expenses relating to Finance Department:

Particulars Amount[In `]

Personnel Cost 83,67,000/-

Rent 8,45,704/-

Depreciation 5,00,000/-

Communication 1,21,000/-

expenses and other miscellaneous expenses

Total 0.47

Calculation of proportion between gross receipts and tax free income.

Particulars Amount

Gross Receipts 2,95,25,52,078/-

Dividend 1,39,11,977/-

% of proportion 0.47

12 Thus, the expenses incurred for earning the exempt income comes to ``69,894/- i.e. (.47 x 14833704). Disallowance u/s 14A is, therefore, upheld to the extent to `69,894/-. The appellant gets a relief of ``26,49,206/- (2719100-69894).”

4. The Revenue is now in appeal before us against the aforesaid findings of e ld. CIT(A).The ld. DR supported the order of the AO while the ld. AR on behalf of the assessee relied upon the findings in the impugned order. Since the findings of learned CIT(A) were based on his findings in the AY 2005- 06,to a query by the Bench, both the parties agreed that the matter having been restored to the file of AO by the ITAT in their decision dated 20th January, 2012 of in the assessee’s own case in I.T.A. no.5051/Del./2011, accordingly, the matter in the year under consideration may be restored to the file of AO for readjudication in the light of decision of Hon’ble jurisdictional High Court in M/s Max Opp. Investment Ltd. Vs. ACIT, 203 Taxman 364(Del.).

5. We have heard both the parties and gone through the facts of the case. Indisputably, the findings of the learned CIT(A) in the year under consideration are based on his own findings in the assessee’s own case in the AY 2005-06. In that year, the ITAT vide their aforesaid order dated 20.01.2012 in identical circumstances, restored the issue to the file of the AO in the following terms:-

 “5. We have heard both the parties and their contentions have carefully been considered. Though learned CIT(A) has discussed all the related figures in his order, but, apparently, he has

not confronted all these figures to the Assessing Officer. The Assessing Officer had made estimated disallowance of 25% of the dividend income. Keeping in view the entirety of facts, we are of the opinion that it would meet the interest of justice if the matter is restored back to the file of Assessing Officer to reconsider the disallowance keeping in mind the aforementioned decision of the Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. Vs. CIT (supra). We direct accordingly. The Assessing Officer will give reasonable opportunity of hearing to the assessee and after giving such opportunity, the Assessing Officer will re-compute the disallowance by taking into consideration the aforementioned decision of Hon’ble High Court as per the provisions of law.”

6. We may point out that ,Hon’ble jurisdictional High Court in their decision dated 18.11.2011 in Maxopp Investment Ltd. vs. CIT,[2011] 15 taxmann.com 390 (Delhi) held as under:

"41. Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income "in accordance with such method as may be prescribed". Of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) & (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing officer was free to adopt any reasonable and acceptable method.

42. Thus, the fact that we have held that sub-sections (2) & (3) of section 14A and Rule 8D would operate prospectively (and, not retrospectively) does not mean that the assessing officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort (supra) to the following effect:-

"The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A."

So, even for the pre-Rule 8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the assessing officer will have to verify the correctness of such claim. In case, the assessing officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality, the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment."

.

7. As already observed, in the instant case, the assessee denied incurring any expenditure for earning income, which does not form total income during the course of assessment proceedings even when huge investments of `512,670,533/- were made by the assessee in units and mutual funds. In terms of the aforesaid decision of the Hon’ble jurisdictional High Court, even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the AO is required to verify the correctness of such claim. In case, the AO is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the AO has to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act, Hon’ble High Court concluded. Following the view taken in this decision, Hon’ble jurisdictional High Court in CIT vs. Machino Plastic Ltd in their decision dated 28.2.2012 in ITA no. 92 of 2011, restored the matter to the file of the AO, being handicapped because of failure of the assessee to furnish relevant details and particulars .In the instant case also, the AO was handicapped, because of failure of the assessee to furnish relevant details and particulars while making the disallowance There is nothing in the assessment order or impugned order as to whether the assessee expressed his willingness to furnish the details desired by the AO nor the AO or the ld. CIT(A) seems to have undertook any exercise to ascertain the details of expenditure objectively in managing and supervising the aforesaid huge investments of `512,670,533/- in mutual funds and securities. In view of the foregoing, specially when the ld. CIT(A) or the AO did not have the benefit of aforesaid decisions including that of the Hon’ble jurisdictional High Court, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to the file of the AO for deciding the issue, afresh in accordance with law in the light of aforesaid judicial pronouncements, after allowing sufficient opportunity to the assessee. The assessee is also directed to furnish al l the relevant details of expenditure actually incur red in managing and supervising the aforesaid huge investments in mutual funds & securities. With these observations, ground nos. 1 in the appeal is disposed of.

8. Ground no.2 in the appeal of the Revenue for the AY 2007-08 relates to disallowance of ``3,23,127/-on account of excess depreciation on UPS & printers. The AO restricted the depreciation on computers peripherals, UPS and Printers @15% as against claim made by the assessee @60%, resulting in disallowance of ``3,23,127.

9. On appeal, the ld. CIT(A) allowed the claim in the following terms:-

 “16. With regard to this disallowance, the appellant has submitted that the Assessing Officer has failed to appreciate that UPS, Printers and scanners are part and parcel of the computers, which cannot work in isolation, and are computer peripherals which are entitled to the depreciation at the rate applicable to the computers, i.e. 60%. Further, while rejecting the claim of the appellant on this issue, the Assessing Officer did not ask for any explanation from the appellant during the course of the assessment proceedings and hence the addition was in clear violation of natural justice and on this count also the impugned addition deserves to be deleted. The appellant also relied on the following decisions in this regard:-

- DCIT Vs. Datacraft India Ltd. (I.T.A. Nos.7462 & 754/Mum/2007),

- CIT Vs. BSES Rajdhani Powers Ltd. (I.T.A. No.1266 of 2010)(Delhi).

- Expeditors International (India)(P) Ltd. Vs. ACIT (118 TTJ 652), (Delhi ITAT).

- Income-tax Officer Vs. Samiran Majumdar (98 ITD 119) (Kolkatta ITAT).

- CIT Vs. Karnataka Power Corporation (2011) 247 ITR 268 (Supreme Court).

- M/s Accenture Services Pvt. Ltd. (I.T.A. No.3697/Mum/2008).

- ACIT Vs. Continental Carriers (P) Ltd. (I.T.A. No.2137/D/2008).

- ACIT Vs. M/s Cincom System India Pvt. Ltd. (I.T.A. No.1534/d/2008).

- Container Corporation of India Ltd. Vs. ACIT (I.T.A. No.2753,2851,3680,3775 and 4477).

17. This issue has been discussed and decided in a number of cases by the jurisdictional ITAT as well as Delhi High Court, wherein it has been held that the computer accessories and peripherals, printer and scanner, UPS etc are entitled to higher rate depreciation @60% on the ground that such accessories and peripherals form an essential part of the computer systems and the same cannot be used without the computer. The Assessing Officer is, therefore, directed to allow depreciation on UPS, printers and scanner etc. @60% as claimed by the appellant.”

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

11. We have heard both the parties and gone through the facts of the case. We find that the Hon’ble Delhi High Court in the case of CIT v. BSES Rajdhani Powers Ltd. in I.T. Appeal no. 1266 (Delhi) of 2010, in their decision dated 31-8-2010 while adjudicating a similar issue, held as under:

"We are in agreement with the view of the Tribunal that computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60 per cent."

11.1 Following the said decision, ITAT in ITO vs. Omni Globe Information Technologies India (P.) Ltd., 131 ITD 280(Delhi) held that if peripherals such as printers, scanners and servers etc. form integral part of the computer system, UPS will also be an integral part of the computer system, entitled for deduction of depreciation at the rate of 60 per cent. In another decision dated 9.11.2010, Hon’ble Delhi High Court in CIT vs. Citycorp Maruti Finance Ltd. in ITA nos. 1712& 1714/2010 followed their own decision in BSES Yamuna Powers Ltd.(supra) and upheld the view of the ITAT, allowing depreciation @60% on computer accessories and peripherals like printers etc. .A similar view was taken in CIT Vs. M/s Bonanza Portfolio Ltd.: I.T.A. no.833 of 2011 by the Hon’ble jurisdictional High Court in their decision dated 10.8.2011. In the light of view taken in the aforesaid decisions, especially when the Revenue have not placed before us any contrary decision nor any other material so as to enable us to take a different view in the matter, we have no hesitation in upholding the findings of the ld. CIT(A),allowing depreciation @60% on UPS & printers. Therefore, ground no.2 in the appeal of the Revenue is dismissed.

.

12. Adverting now to ground nos. 1 to 1.5 in the appeal of the assessee and ground no.1 in the appeal of the Revenue for the assessment year 2008-09 relating to disallowance u/s 14A of the Act. During the course of assessment proceedings, the AO noticed that the assessee made certain investments in mutual funds and securities ,yielding dividend income, long term capital gain, interest free interest etc., which did not form part of total income. The AO, after considering the submissions of the assessee, concluded that earning of exempt income is not in the nature of passive activity, having no input. In fact, making of investment, maintaining or continuing investment and time of exit from investment are well informed and well coordinated management decisions involving not only inputs from various sources but also acumen of senior management functionaries. Therefore, cost was inbuilt into even so called “passive” investment while there were incidental expenditure of collection, telephone, follow up, research etc. Accordingly, while referring to provisions of section 14A of the Act read with Rule 8D of the of the Income-tax Rules, 1962 and in the light of decision of Hon’ble High Court of Bombay in the case of Godrej  & Boyce Mfg. Co. Ltd. Vs. DCIT in I.T.A. No.626 & WP 2010 and Chem Invest

Ltd. Vs. Income-tax Officer, 317 ITR(AT) 86(SB), the AO disallowed an amount of ``1,39,83,342/-.

13. On appeal, the ld. CIT(A) restricted the disallowance to ``44,24,562/- in the following terms:-

“6. I have carefully considered the facts of the case, submissions of the appellant and material placed on record. I have also considered the case laws which are being relied upon both by the appellant as well as by the AO. In the instant case, AO has made a disallowance u/s 14A read with Rule 8D of the rules of ``1,39,83,342/- (``99,58,780 on account of interest and ``40,24,562/- on account of administrative expenses). In this regard the foremost contention of the appellant is that AO has not recorded his satisfaction before making a disallowance u/s 14A read with rule 8D. The appellant has relied upon the decisions of ITAT in the case of Wimco Seedlings Ltd. (supra) and, Jindal Photo Ltd. (supra) among other decisions.

6.1 The scope of the above section was recently examined by the Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. Vs. CIT reported in 64 DTR 122 wherein it was held that, if an expenditure has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise, qualifies under the other provisions of the said Act. It

was further held that, it is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of expenditure claimed to have been incurred that Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method is the method stipulated in Rule 8D of the Rules which is applicable from assessment year 2008-09. Thus, the necessary precondition for invoking section 14A(2) read with Rule 8D is satisfaction of the Assessing Officer.

6.2 In the instant case, since Assessing Officer has invoked Rule 8D, it is thus implied that, he was not satisfied with the correctness of the claim of the appellant. In any case, since it is well settled that, powers of the CIT(A) are co-terminus with that of the Assessing Officer, as has been held by Hon’ble Supreme Court in the case of Kanpur Goal Syndicate Vs. CIT reported in 53 ITR 225, the appellant was given another opportunity at the appellate stage, to explain as to why disallowance u/s 14A read with Rule 8D be not made, as from assessment year 2008-09, this rule is mandatory in nature.

With regard to above, the appellant simply stated during the appellate proceeding that apart from ``28,830/- which they have already disallowed in their computation sheet no other disallowance is warranted. Further all investments are in debt oriented mutual funds, where no continuous monitoring is required and dividend is automatically credited to their account. Further, entire investment is from the interest free funds.

The appellant further stated that facts in the year under consideration and in the assessment year 2005-06 are same and CIT(A)-X while adjudicating the appeal for assessment year 2005- 06 calculated the disallowance by applying the %age of proportion of taxable income and exempt income to the expenses related to the finance department and without prejudice, if at all disallowance u/s 14A is warranted, even then that cannot be more than `56,845/ . 6.3 From the submissions of the appellant as well as from the perusal of Assessing Officer’s order, it is seen that the addition u/s 14A read with Rule 8D has two components viz interest disallowance of ``99,58,780/- and disallowance on account of administrative cost ``40,24,562/-.

6.3.1. With regard to the disallowance of interest component, after verifying the facts and evidences, I agree with the appellant’s submissions that the interest relating to vehicle lease, TDS, sales tax and bank charges have no relation with the investments, the income from which yield the exempt income. Further with regard to the interest on short terms currency loan (buyer’s credit) it is seen that these are given as payments to the suppliers from whom the imports are made by the appellant, obviously, therefore, these loans are not related to the “investment” which gives rise to exempt income, hence, therefore, the interest on foreign currency loan for the purpose of disallowance u/s 14A should not be considered. Same logic goes for the interest on loan taken from CISCO, from whom the appellant has purchased assets on the basis of “sales and lease bank agreement”.

In view of the above, I therefore, hold that, the Assessing Officer’s action in taking the proportionate interest by applying Rule 8D for the purpose of disallowance u/s 14A is not correct.

 6.3.2. However, with regard to the disallowance u/s 14A on account of administrative charges as per Rule 8D amounting to ``44,24,562/-, I am not in agreement with the appellant’s argument that they have not incurred any expenditure as the investment is guided by their holding company and the investment is in mutual funds, other dividend goes automatically though ECS.

In the nature of any passive activity involving no input. In fact, in my view.

a) making of investment,

b) maintaining or continuing with any investment in a particular share/mutual funds etc. and

c) even the time when to exit from one investment to another.

All these activities are well coordinated and well informed management decisions, involving not only inputs from various sources but also it involves acumen of senior management decisions whether they sit in subsidiary company or holding company. These are incidental administration expenses on collecting information, research etc. which helps in arriving at a particular investment decisions and these expenses, relating to earning of income are embedded in the indirect expenses. The investments made being conscious decisions and having deployment of the funds brings into picture expenditure by way of cost of funds “invested”.

6.3.3 Accordingly, in the absence of any information from the appellant, from assessment year 2008-09, the Assessing Officer (and CIT(A) in view of his co-terminus power with that of Assessing Officer) is bound to compute disallowance u/s 14A read with Rule 8D. Accordingly, by applying the same, I compute the disallowance under Section 14A Rule 8D at ``44,24,562/- (0.5% of average investments) and thereby disallowance is warranted under Rule 8D (2)(iii).

14. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A), upholding the disallowance of ``44,24,562/- while the Revenue is in appeal against the findings of ld. CIT(A) holding that proportionate disallowance on account of interest by applying Rule 8D was not correct. The ld. DR while carrying us through the impugned order contended that out of total finance charges of ``2,59,07,519/-, bank charges of ``96,61,717/- might include interest on overdraft and the ld. CIT(A) has not recorded any findings on this aspect in the impugned order. The ld. DR elaborated that the assessee had taken short term loans on account of certain purchases and since payments were deposited in the same bank account, these might have been utilized towards investments and not merely for repayment of loans.

14.1. On the other hand, the ld. AR on behalf of the assessee while relying upon decision in Maxopp Investment Ltd.(supra) argued that bank charges did not include any interest on overdraft especially when the assessee had turn over more than ``387/- crores. Moreover, short term foreign currency loans could not be utilized for investments in India. While referring to decisions in CIT vs. Bombay Samachar Ltd,74 ITR 723(Bom.), followed by Hon’ble Delhi High Court in Regal Theatre vs. CIT,225 ITR 205(Del.), the ld.AR vehemently argued that borrowed funds were used for the purpose of the business and not for the purpose of investment,yielding exempt income .The ld. AR, relying upon decision in Maxopp Investment Ltd.(supra),argued that the ld. CIT(A) rightly concluded that the interest relating to vehicle lease, TDS, sales tax and bank charges have no relation with the investments while short terms currency loan were in the nature of buyer’s credit and were payments to the suppliers from whom the imports were made and thus, were not related to the “investment”,yielding exempt income. Similarly, interest on loan taken from CISCO, from whom the assessee purchased assets on the basis of “sales and lease back agreement”, had no relation with any of the investments, yielding exempt income and,

therefore, proportionate disallowance on account of interest was not justified. 1

4.2 In his rejoinder, the ld. DR argued that decisions relied upon by the ld. AR in Bombay Samachar Ltd(supra) &Regal Theatre(supra) were rendered prior to insertion of section 14A of the Act and had no relevance in the instant case. In fact, the impugned order was non-speaking, the learned CIT(A) having not recorded any findings in relation to bank charges nor the assessee had filed relevant details before the AO.

15. As regards disallowance upheld by the ld. CIT(A), the ld. AR argued that their gross receipts were ``3,876,245,118/- while expenses relating to finance department were ``14,707,272/-,yielding proportion between expenditure incurred in earning exempt income at 0.39. Thus, at the most, disallowance could be made to the extent of ``56,845/-. The ld. AR further pointed out that not much efforts and time was required for investments in mutual funds. Since the ld. CIT(A) did not dispute their submissions, the disallowance upheld by the ld. CIT(A) was not correct, the ld. AR added.

15.1 On the other hand, the ld. DR pointed out that correct proportion could be between the taxable income and exempt income and not between gross receipts and exempt income.

15.2 In his rejoinder, the ld. AR pointed out that efforts in earning income crystallized into receipts and, therefore, expenses have to be allocated to the gross earning and not to the net income.

16. We have heard both the parties and gone through the facts of the case. Indisputably, the AO disallowed the aforesaid amount of `1,39,83,342/-,invoking provisions of section 14A(2) of the Act read with Rule 8D of I.T. Rules, 1962,without even analyzing the nature of the expenditure incurred for earning income, which did not form part of total income.. The assessee submitted before the AO in its letter dated 27.8.2010 that only expenditure of 28,380/- i.e salary of shri Niraj Murarka, had been incurred by it ,which had any proximate connection to earning of tax free dividend income and all the investments made as per directives of HCL Technologies Ltd. were out of their own funds and the assessee had no discretion in any investment avenue . A perusal of details of investments in the balance sheet reveals that the assessee had investments of `512,670,533/-/- in mutual funds as on 31.3.2007 which increased to `1,097,154,427/-as on 31.3.2008. The assessee claimed that investments were made out of its own funds and it had not debited any interest towards investments in the year under consideration. The ld. CIT(A), after analyzing the details of interest, found that interest relating to vehicle lease, TDS, sales tax and bank charges had no relation with the aforesaid investments while short terms currency loan were in the nature of buyer’s credit and in fact, were payments to the suppliers from whom the imports were made . Similarly, interest on loan taken from CISCO, from whom the assessee purchased assets on the basis of “sales and lease back agreement” had no relation with any of the

investments, yielding exempt income.. Accordingly, the ld. CIT(A) deleted the disallowance in relation to interest. Hon’ble Punjab & Haryana High Court in their decision in CIT vs. Hero Cycles Ltd. ,323 ITR 518 observed that disallowance under sect ion 14A requi res f inding of incur r ing of expenditure and where it is found that for earning exempted income no expenditure has been incurred, disallowance under sect ion 14A cannot stand. Hon’ble jurisdictional High Court held in Maxopp Investment Ltd.(supra) that the ‘actual’ expenditure that is in contemplation under section 14A(1) of the said Act is the ‘actual’ expenditure in relation to or in connection with or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made under section 14A of the said Act. Since the Revenue have not placed before us any material, evidencing that bor rowed funds had indeed been ut i lized in making aforesaid investments nor placed before us any material, cont rover t ing the aforesaid f indings of the ld. CIT(A), delet ing disallowance u/s 14A of the Act in relat ion to interest , we are not incl ined to interfere. Therefore, ground no.1 raised by the Revenue in their appeal for the AY 2008-09 is dismissed.

17. As regards ground raised in the appeal of the assessee ,we find that assessee claimed that total expenditure incurred in the Finance Department was `14,707,272/- and at the most disallowance could be `56,845/-. The ld. CIT(A) while observing that the activities involved in making and maintaining huge investments were well coordinated and well informed management decisions, involving not only inputs from various sources but also it involved acumen of senior management decisions, whether they sit in subsidiary company or holding company, in the absence of any information from the assessee, upheld disallowance at ``44,24,562/- being 0.5% of average investments. Apparently, the assessee did not furnish complete details of expenditure incurred for management and supervision of aforesaid huge investments in the year under consideration even while admitting that decisions in regard to investments were taken by the holding company. No such details of expenditure incurred by the holding company have been placed before the lower authorities and even before us nor it is informed as to how such expenditure has been dealt with in the books of the holding company or the assessee. In any case, no material was placed before the AO in order to enable him to record his satisfaction while the ld.CIT(A) specifically concluded that he was not satisfied with the correctness of claim of the assessee that no expenditure was incurred in relation to income which did not form part of total income. Hon’ble Apex Court in Kantamani Venkata Narayana and Sons v. First Addl. ITO [1967] 63 ITR 638 and again in Malegaon Electricity Co. P. Ltd. v. CIT [1970] 78 ITR 466 (SC) observed that it is the duty of the assessee to bring to the notice of the Income tax Officer particular items in the books of account or portions of documents which are relevant. The law casts a duty on the assessee to disclose fully and truly all material facts necessary for his assessment for that year. Not even a whisper has been made before us as to whether or not relevant accounts were placed before the AO or the ld. CIT(A) in order to enable them to examine the claim of the assessee. The object or purpose of the investment affects operation of section 14A of the Act inasmuch as any expenditure incurred for earning tax free income is not an allowable deduction by virtue of operation of the said section, as held in CIT vs.

State Bank of Travancore,16 Taxmann.com 289(Ker).

17.1. Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Ltd. (supra) while adjudicat ing a similar issue in the context of provisions of sec. 14A of the Act and Rule 8D of the IT Rules,1962 concluded that Rule 8D, inserted w.e. f 24.3.2008 applies only w.e. f AY 2008-09. Hon’ble Supreme Court in thei r decision dated 6.7.2010 in CIT v. Walfort Share & Stock Brokers (P.) Ltd. ,326 ITR 1, inter alia, observed that for at t ract ing sect ion 14A of the Act there has to be a proximate cause for disallowance which is its relat ionship with the tax exempt income. The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A, Hon’ble Apex Court concluded. In Cheminvest Ltd. v. Income-tax Officer,317ITR(AT)86,Special Bench held that when the expenditure is incurred in relation to income which does not form part of total income, it has to suffer the disallowance irrespective of the fact whether any income is earned by the assessee or not and the provisions of sec. 14A of the Act do not envisage any such exception. Hon’ble jurisdictional High Court in a recent decision dated 18.11.2011 in Maxopp Investment Ltd. (supra) held that sub-section (2) of section 14A stipulates that the AO shall determine the amount

of expenditure incurred in relation to income which does not form part of the total income "in accordance with such method as may be prescribed" and of course, this determination can only be undertaken if the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure.

17.2 As already observed, in the instant case, the assessee denied incurring any expenditure for earning income, which does not form total income during the course of assessment proceedings even when huge investments were made by the assessee in mutual funds & securities. In terms of the aforesaid decision of the Hon’ble jurisdictional High Court in Maxopp Investment Ltd.(supra), even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the AO is required to verify the correctness of such claim. In case, the AO is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the AO has to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act, Hon’ble High Court concluded. Following the view taken in this decision, Hon’ble jurisdictional High Court in CIT vs. Machino Plastic Ltd in their decision dated 28.2.2012 in ITA no. 92 of 2011, restored the matter to the file of the AO, being handicapped because of failure of the assessee to furnish relevant details and particulars .In the instant case also, the AO was handicapped, because of failure of the assessee to furnish relevant details/particulars and accounts while making the disallowance in terms of provisions of sec. 14A of the Act. There is nothing in the assessment order or impugned order as to whether the assessee placed the relevant details & accounts before the AO nor these authorities seems to have undertook any exercise to ascertain the details of expenditure incurred in managing and supervising the aforesaid huge investments in various funds & securities, objectively. In these circumstances, it is but natural that management would have spent some time in taking investment or disinvestment decisions in various mutual funds. However, this issue has not been examined at length by any of the lower authorities. The assessee claimed before the ld. CIT(A) that sufficient opportunity was not given by the AO. The ld. CIT(A) concluded that his powers were co-terminus with that of the AO and accordingly , he afforded the opportunity, as mentioned in para 6.2 of the impugned order. Hon’ble Apex Court held in Tin Box Company vs. CIT,249 ITR 216 that opportunity by the AO is not the same as granted by the ld. CIT(A) and that the assessee could have placed evidence before the first appellate authority or before the Tribunal is really of no consequence for it is the assessment order that counts. In view of the foregoing, we consider it fai r and appropr iate to set aside the order of the ld. CIT(A) and restore the mat ter to the f ile of the AO for deciding the issue, af resh in accordance with law in the light of our aforesaid observat ions and var ious judicial pronouncements, including those referred to above, af ter al lowing suf f icient opportunity to the assessee Needless to say that while redeciding the issue, the AO. shall pass a speaking order, giving reasons for his sat isfact ion or otherwise, as pointed out by the Hon’ble jur isdict ional High Court in thei r decision in Maxopp Investment Ltd (supra). The assessee is also di rected to furnish al l the relevant details of expenditure actual ly incur red in managing and supervising the aforesaid huge investments in mutual funds & secur it ies along with relevant accounts and cash f low statement.With these observat ions, ground nos 1 to 1.5 in the appeal of the assessee for the AY 2008-09 are disposed of.

18. As regards ground no.2 in the appeal of the assessee for the AY 2008-09, relating to depreciation on elevator, the AO restricted the depreciation on cost of elevator at the rates prescribed for building as against claim of the assessee for depreciation at the rates prescribed for plant and machinery. Accordingly, the AO disallowed excess depreciation of ``1,31,400/-.

19. On appeal, the ld. CIT(A) upheld the findings of the AO in the following terms:-

“8 I have gone through the above submission of the appellant and have considered the facts and evidences placed on record and have also perused the Assessing Officer’s order. It is seen that the only ground on which the appellant has claimed depreciation on elevators under the head “plant and machinery” is that elevators can be dismantled and removed to another location. In this regard, I am in agreement with the observations of the Assessing Officer that it is the functional and location usage which wills determine whether a particular item is “plant and machinery” or not. In the present case, the elevators are being used as a part and parcel of the building and therefore, depreciation on the same can only be allowed at the rate applicable to building. The addition of ``1,31,400/- made by Assessing Officer on this account is, therefore, confirmed.”

20. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld.AR on behalf of the assessee relied on the decisions in CIT vs. Jyoti Ltd.,163 ITR 274(Guj) & VD Talwar(Deceased) vs. CIT,225 ITR 439(Mad.) while contending that elevators were part of plant and machinery and thus, entitled for depreciation at the rates prescribed for plant and machinery and not building. On the other hand, the ld. DR supported the findings of the ld. CIT(A).

21. We have heard both the parties and gone through the facts of the case. Indisputably, similar disallowance was made in the preceding assessment year and upheld by the ld. CIT(A).As pointed out by the AO, the assessee in the FY 2005-06 capitalised the office building; but elevators were capitalized with plant and machinery and not the office building. To a query by the AO, the assessee replied that elevators were part of plant and machinery. There is nothing to suggest nor the ld. AR informed as to what was the status of their claim in the AY 2006-07.Even in the preceding assessment year i.e AY 2007-08, disallowance has been upheld by the ld. CIT(A) and there is nothing to suggest as to whether or not the assessee disputed the findings of the ld. CIT(A) in further appeal. Before us, the ld. AR relied upon decisions in Jyoyi Ltd.(supra), wherein while considering the issue of grant of development rebate under section 33(1)(a) of the Act, Hon’ble High Court held that the lift was a machinery or a mechanical device for transporting men and materials from one place to another. Following this decision, Hon’ble Madras High Court in VD Talwar(Deceased) held that since the lift was moving up and down with the help of twisted steel rope within a structure, it can also be considered as a ropeway structures-carrier entitled to the higher rate of 15 per cent depreciation as per entry III(ii)B(15) of

the depreciation Schedule. Apparently, the assessee is claiming depreciation since the installation of lift in the preceding years while there is nothing to suggest as to whether or not the assessee disputed the findings of the ld. CIT(A),holding elevators as a part and parcel of the building, in further appeal in those years and the issue as to whether or not lift could be treated as part of building was never examined in the decisions relied upon before us by the ld.AR nor the lower authorities had any occasion to consider the facts and circumstances in these decisions. In these circumstances ,especially when complete facts have not been placed before us we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to the file of the AO for deciding the issue, afresh in accordance with law in the light of aforesaid judicial pronouncements and after analyzing the view taken in the assessee’s own case in the preceding years and of course , after allowing sufficient opportunity to the assessee. With these observations, ground no. 2 in the appeal of the assessee for the AY 2008-09 is disposed of.

22. No additional ground having been raised before us in terms of residuary ground no.3 in the appeal of the Revenue for the AY 2007-08, and ground No.2 in their appeal for the AY 2008-09 as also residuary ground in the appeal of the assessee, accordingly, all these grounds are dismissed.

23.. No other plea or argument was made before us.

24 In the result, appeal of the Revenue for the AY 2008-09 is dismissed while their appeal for the AY 2007-08 is partly allowed and appeal of the assessee for the AY 2008-09 is allowed, but both for statistical purposes.

Order pronounced in open Court

                                                          Sd/-                  Sd/-

                                             (I.C. SUDHIR)   (A.N. PAHUJA)

                                          (Judicial Member) (Accountant Member)

NS

Copy of the Order forwarded to:

1 Assessee

2. A.C. I .T. ,Ci rcle 12(1), New Delhi

3. CIT. concerned

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

5. DR, ITAT,’C’ Bench, New Delhi

6. Guard File.

BY ORDER,

Deputy/Asstt.Registrar

ITAT, Delhi