I.T. A. No. 2228/AHD/2012 (Assessment Year: ) PAN: AABCK5078Q

Transcription

1 1 ITA No 2228/A/2012. A.Y IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD (BEFORE SHRI MUKUL KR. SHRAWAT J.M. & SHRI ANIL CHATURVEDI, A.M.) I.T. A. No. 2228/AHD/2012 (Assessment Year: ) The Income-tax Officer, Ward- 4(2), Ahmedabad (Appellant) Vs. Karnavati Petrochmem Pvt. Ltd., Sambhav House, Opp.. Judges Banglow, Premchandnagar, Bodakdev, Ahmedabad (Respondent) PAN: AABCK5078Q Appellant by Respondent by : Shri T. Sankar Sr. D.R. : Shri S.N. Divetia A.R. (आद श आद श)/ORDER Date of hearing : Date of Pronouncement : PER SHRI ANIL CHATURVEDI,A.M. 1. This appeal is filed by the Revenue against the order of CIT(A)- VIII, Ahmedabad dated for A.Y The facts as culled out from the order of lower authorities are as under.

2 2 ITA No 2228/A/2012. A.Y Assessee is a company engaged in the business of Finance. It electronically filed its return of income on declaring total income at Rs. NIL after set off of carry forward losses. The case was selected for scrutiny and thereafter assessment was framed under 143(3) vide order dated and the total income was assessed at Rs. 15,45,700/-. Aggrieved by the order of Assessing Officer, Assessee carried the matter before CIT(A). CIT(A) vide order dated granted partial relief to the Assessee. Aggrieved by the aforesaid order of CIT(A) the Revenue is now in appeal before us and has raised the following effective ground:- 1. The Ld. CIT(A) has erred in law and on facts in deleting disallowance of Rs. 15,63,883/- made u/s. 14A of the Act, without appreciating the fact that there was no nexus that could be established with the amounts incurred by the assessee for earning the tax free income. 4. During the course of assessment proceedings, Assessing Officer noticed that Assessee has made investment in shares amounting to Rs. 95,45,400/-. Assessing Officer was of the view that the investment would generate exempt income and therefore provisions of section 14A becomes applicable. He accordingly applying the formula prescribed in Rule 8D of Income Tax Rules 1962 worked out disallowance under Section 14A of Rs. 15,63,883/-. Aggrieved by the order of Assessing Officer, Assessee carried the matter before CIT(A). CIT(A) after

3 3 ITA No 2228/A/2012. A.Y considering the submissions made by the Assessee granted partial relief by holding as under:- 4.3 I have gone through the assessment order and the submission of the appellant. During the course of Assessment proceeding, the Assessing officer noticed that the appellant had made investment in shares amounting to Rs.95,45,400/- so that disallowance of expenses was required to be made in view of section 14A of the Act in respect of interest expenses and administrative expenses the AO has worked out the disallowance of Rs. 15,63,883/- as per Rule 8D. The appellant has submitted that he has claimed only Rs. 300 as exempt income i.e. Dividend Income and it is submitted that no direct/indirect expenditure has been incurred to earn the exempt income. The appellant has submitted that the dividend generally received through ECS and no specific expenditure incurred for collecting and depositing the said dividend in bank, therefore, no disallowance u/s 14A can be made for administrative expenses. The appellant has further submitted that he has incurred interest expenses of Rs.1,83,02,724/- as against interest income of Rs. 1,86,81,762/- and thus it has surplus interest income of Rs. 3,79,038/- and on that ground no part of interest can be disallowed u/ 14A read with rule 8D on the basis of the decisions of Kolkatta Bench of IT AT in case of Trade Apartment Ltd and the decision of Mumbai Tribunal in case of Morgan Stanley India Securities Private Limited. The appellant has further submitted that AO has not pointed out any particular expenditure that incurred for earning exempt income and while proposing disallowance u/s 14A, AO has failed to establish a pre-requisite nexus between the expenditure disallowed and the investments made from which income earned is exempt from tax. The appellant submits that there cannot be any presumption that the borrowings were made for the purpose of making any investment, consequently, the proposed addition by the Id. Assessing Officer is uncalled for On the identical facts in assessee's own case the Ld. ClT(A)Vlll in Appeal no. ClT(A)-VHl/lTO Wd-4(2)/657/09-10 dated

4 4 ITA No 2228/A/2012. A.Y for the A.Y has held in para on page no. 17 as under:- "In view of the details submissions of the appellant, it is categorically established that the interest expenditure has no direct nexus with the tax free investment. Secondly, the net interest expenditure is only Rs. 3,26,722/-.ln such a situation where appellant has net interest expenditure only of Rs. 3,26,722/-, the disallowance of gross interest is not justified. The case of Hero Cycles Ltd. (P & H) 323 ITR 22 supports this contention. In view of all the facts mentioned above the disallowance us/ 14A has calculated and submitted by the appellant above of Rs /- is confirmed. The remaining addition Rs /-is deleted." Therefore, in light of the above discussion, I am of the opinion that there was no nexus that could be established with the amounts incurred by the assessee for earning the tax free income. The appellant is also having net positive interest income which cannot be part for the disallowance in view of the basis of the decisions of Kolkatta Bench of IT AT in case of Trade Apartment Ltd and the decision of Mumbai Tribunal in case of Morgan Stanley India Securities Private Limited. At the same time, the appellant is incurring administrative expenses to maintain the above investments. In view of the above, the amount of Rs. Rs /- which is 0.5% of average Investment of Rs. 94,45,400/- is taken as the disallowance u/s14a. In view of the facts of the case and the decision in the cases (supra) and following the decision of my predecessors, the disallowance made by the A.O. u/s 14A of the I.T. Act, 1961 cannot be fully sustained. In these circumstances, the A.O. is directed to delete the disallowance made by him of Rs. 15,08,803/-and Rs.7140/- on amount of interest under section 14A of the Act. The disallowance of Rs /- on administrative expenses is confirmed. The ground of appellant is partly allowed. 5. Aggrieved by the order of CIT(A) the Revenue is now in appeal before us.

5 5 ITA No 2228/A/2012. A.Y Before us, the learned D.R. relied on the order of Assessing Officer. On the other hand the learned A.R. submitted that provisions of Section 14A are applicable only when Assessee earns an income which is exempt from tax and incurs some expenditure for earning the aforesaid income. He further submitted that the Assessing Officer has to establish nexus between the expenditure incurred and the source of exempt income. In the present case, no nexus has been established by the Assessing Officer and therefore no disallowance under 14A can be made. The learned A.R. further submitted that the Assessee has received dividend of Rs. 300 which has been received through ECS and no specific expense has been incurred for collecting and depositing the dividend. He thus supported the order of CIT(A). 7. We have heard the rival submissions and perused the material on record. We find that CIT(A) while granting relief to the Assessee has given a finding that no nexus has been established by the A.O. with the amount incurred by the Assessee for earning the tax free income. He has further noted that in the Assessee s case the interest income was more than interest expense and thus the Assessee was having net positive interest income and therefore the same cannot be considered for disallowance and for which he placed reliance on the decision of Kolkata Tribunal in the case of Trading Apartment Limited and the decision of Tribunal in the case Morgan Stanley India Securities Private Limited. He however

6 6 ITA No 2228/A/2012. A.Y considered the administrative expenses to be 0.5% of the average investments and disallowed the same. 8. Before us the Revenue could not bring any material on record to controvert the findings of CIT(A). We therefore find no reason to interfere the order of CIT(A). Thus this ground of the Revenue is dismissed. 9. In the result the appeal of the Revenue is dismissed. Order pronounced in Open Court on Sd/- (MUKUL KR. SHRAWAT) JUDICIAL MEMBER Ahmedabad. Rajesh Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. TRUE COPY Sd/- (ANIL CHATURVEDI) ACCOUNTANT MEMBER By ORDER Deputy/Asstt.Registrar ITAT,Ahmedabad

7 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, G, MUMBAI BEFORE SHRI R V EASWAR, PRESIDENT AND SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER I T A Nos : 5072/Mum/2005 and 6774/Mum/2008 (Assessment Years : and ) Morgan Stanley India Securities Appellant Private Limited, Mumbai (PAN: AAACM4048B) Vs Assistant Commissioner of Income Tax Respondent Circle 1(2), Mumbai Appellant by: Mr Arvind Sonde & Mr Laxmikant Kothari Respondent by: Mr Panan Ved & Mr A K Mayak O R D E R R V EASWAR, PRESIDENT: These are two appeals, both filed by the assessee, for the assessment years and Since they were heard together, they are disposed of by a common order. 2. The assessee is a company engaged in the business of providing back office support services to various overseas companies. The appeals arise out of the assessments made under section 143(3) of the Income Tax Act, 1961, by orders dated and respectively. 3. The learned counsel for the assessee has filed charts explaining the disputes in the appeals and both sides have argued on the basis of the charts. The paper books filed by the assessee have also been taken into consideration.

8 2 4. Assessment Year : - The first ground relates to the disallowance of interest under section 14A of the Act. This issue is dealt with in paragraph 1 of the assessment order and paragraphs 1 to 5 of the order of the CIT(A). The assessee itself disallowed interest of `3,40,56,528/- under section 14A of the Act. In calculating the disallowance, the assessee reduced the interest received from the interest paid and the disallowance was also worked out on net basis. The Assessing Officer took objection to this. He also found that while calculating the disallowance the assessee has worked out the average funds available as on and and computed the disallowance accordingly. The Assessing Officer also took objection to this method of calculating the disallowable interest. He took the view that the averaging of the available funds on these two dates was not proper and proceeded to calculate the average cost of capital with reference to the total assets as on , which was the last date for the assessment year under consideration. Accordingly the disallowable interest came to `3,90,21,257/-. On appeal, the CIT(A) upheld the method adopted by the Assessing Officer. 5. The contention of the assessee in the further appeal before us is that since the actual interest debited to the Profit and Loss Account is on net basis, the disallowance under section 14A was also computed by it on net basis and the objection taken by the Assessing Officer was not sound. As regards the averaging of the funds available on and , it was submitted that interest was paid on funds utilized during the entire previous

9 3 year and not only on the funds available on the last day of the year, i.e. on and that the Assessing Officer was not right in rejecting the averaging method adopted by the assessee. It is further submitted that though Rule 8D of the Income Tax Rules is not applicable to the year under consideration, the said Rule also recognized the averaging method adopted by the assessee and, therefore, in fairness the amount of interest disallowed by the assessee itself in the computation of the income should be considered adequate and appropriate. 6. On behalf of the revenue, strong reliance was placed on the decision of the CIT(A) in paragraph 4 of his order and the reasoning given therein. 7. On a proper consideration of the facts and the rival contentions, we are of the view that no strong grounds have been advanced by the departmental authorities to discard the method adopted by the assessee in disallowing the interest under section 14A of the Act. There can be no dispute that since the amount of interest debited to the Profit and Loss Account is on net basis, the disallowance of interest should also be made only with reference to the net interest, as was done by the assessee. There is also merit in the argument put forth on behalf of the assessee that it is not proper to take into consideration only the value of investments and assets as on since interest is paid on funds utilized during the entire period between and and the more appropriate method is to average the funds position as on these two dates and apply section 14A with reference to the

10 4 average value. The learned counsel for the assessee is also right in his submission that Rule 8D of the Income Tax Rules does recognize the averaging method. Reference may be made to Sub- Rule (2) of the said Rule, which speaks of average value of the investment. We therefore hold that the disallowance of the interest as made by the assessee is adequate and appropriate and no further disallowance is called for. The ground is thus allowed. 8. The second ground relates to the adhoc disallowance of administrative and other expenses amounting to `2,00,000/- under section 14A of the Act. This ground is dismissed as not pressed. 9. The third ground relates to the disallowance of professional fees. This issue is discussed in paragraph 2 of the assessment order and in paragraphs 9 to 14 of the impugned order of the CIT(A). The assessee paid `34,00,000/- to Ms Naina Lal Kidwai and claimed the same as deduction as professional fees paid for the purpose of the business. The Assessing Officer called for the details of the professional services offered by Ms Naina Lal Kidwai but the assessee was unable to furnish the details. Accordingly the amount was added back to the assessee s income. Before the CIT(A) it was submitted that the fees was paid to provide the assessee with support, advice and consultation in connection with its business activities in India and to keep the assessee appraised of any events, developments and other matters relevant to the business in India. A copy of the agreement for payment of the professional fees was also filed before the CIT(A). It was again submitted that the relevant details regarding the services rendered

11 5 were given to the Assessing Officer vide letters dated and and copies of these letters were filed before the CIT(A). It was also pointed out that the professional advice was highly confidential and sensitive in nature and was mostly rendered personally or over the phone and, therefore, it was not possible to maintain details / evidence of the services. 10. The CIT(A) referred to some of the clauses of the agreement in which there was reference to the nature of the services to be rendered by Ms Naina Lal Kidwai but found that there was no evidence to show that such services were actually rendered. He referred to certain authorities to hold that in the absence of any evidence to show the actual rendering of the services, the mere fact that there was an agreement between the parties did not advance the assessee s case. In this view of the matter he confirmed the disallowance. 11. We have carefully considered the facts and the rival contentions. A copy of the agreement between the assessee and Ms Naina Lal Kidwai is placed at pages 14 and 15 of the paper book filed by the assessee. The agreement is dated Clause 1(a) states that Ms Naina Lal Kidwai shall provide the assessee with support, advice and consultation in connection with the assessee s business activities in India and clause (b) says that she shall update and keep the assessee apprised of any events, developments and other matters relevant to the assessee s business in India. Clause 2 provides for payment of fees of `34,00,000/-. Clause 3 makes it clear that the agreement shall not

12 6 be construed as giving rise to a partnership or agency between the parties. Clause 4 prohibits any modification or alteration of the terms of the agreement unless mutually agreed to in writing. A perusal of the agreement shows there is precious little therein to show exactly what kind of services were to be specifically rendered by Ms Naina Lal Kidwai which would be in the interest of the assessee s business in India. Clauses 1(a) and (b) are delightfully vague. Further there is also no evidence adduced by the assessee to show what exactly were the services rendered by Ms Naina Lal Kidwai so as to justify the professional fees, as found by the CIT(A). The assessee s plea that the services were highly confidential and sensitive in nature and were mostly rendered personally over the phone is not acceptable since the burden is on the assessee to reveal what information was given to it by Ms Naina Lal Kidwai, which would facilitate its business operations in India. The reliance placed by the CIT(A) on the judgment of the Supreme Court in the case of Lachminarayan Madan Lal vs. CIT (1972) 86 ITR 439 (SC) is apposite and in this case it has been held that the mere existence of an agreement between the parties is not conclusive or decisive of the question whether the payment of commission or professional fees is allowable or not and it is for the assessee to prove that the commission or fees was paid for services which were connected to the assessee s business and which were actually rendered. In the absence of any such evidence in the present case we are in agreement with the view taken by the departmental authorities that

13 7 the assessee failed to discharge its burden. We accordingly uphold the disallowance and dismiss the ground. 12. Ground No: 4 relates to the deduction allowable under section 80HHE of the Act. It is contended by the assessee that the CIT(A) erred in confirming the action of the Assessing Officer of considering the profits of all the business activities of the assessee instead of considering only the profits of the back office support services for the purposes of computing the deduction under the section. The argument of the learned counsel for the assessee runs like this. The section provides for deduction in respect of profits from export of computer software etc. It is not in dispute that the assessee is engaged, inter alia, in such business. If the assessee carries on the business of export of computer software, then it shall be allowed, in computing the total income, a deduction to the extent of profits, referred to in sub-section (1B), derived by the assessee from such business. Under sub-section (3), for the purpose of sub-section (1), profits derived from the computer software export business shall be the amount which bears to the profits of the business, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. Accordingly only the profits of the back office support services should be considered under sub-section (3) and it is only those profits which are to be divided in the proportion which the export turnover bears to the total turnover. From the profits arrived at by applying this formula, 80% thereof under clause (i) of subsection (1B) is to be given the exemption. In the present case the

14 8 profits of the back office support services came to `80,46,765/-. So far as the back office support services are concerned, the export turnover as well as the total turnover are the same because the entire computer software is exported. This figure comes to `5,65,44,376/-. Since the export turnover (numerator) and the total turnover (denominator) are the same, 80% of `80,46,765/- will enjoy exemption. This figure comes to `64,37,412/ According to the learned CIT DR as well as the departmental authorities, the method suggested by the assessee cannot be accepted. In their view, the assessee was not entitled to any deduction under section 80HHE because of the following working: As per the Learned Assessing Officer Amount Amount Rs. Rs. Business income as per the Assessment Order 15,42,52,035 Less: Interest on Fixed Deposits 46,87, ,95,64,204 Less: 90% of i. Commission, brokerage 41,41,726 and profits ii. Management and other 15,10,93,708 support fees iii. Recovery for use of long 2,37,46,487 term and office premises iv.gain on exchange 1,05,041 fluctuation % of 17,90,86,962 16,11,78, (1,16,14,062) ========== Since figure of Business Profits is negative, deduction under section 80HHE not computed.

15 9 According to the CIT DR, for the purpose of section 80HHE computation, the profits of all the businesses carried on by the assessee have to be considered because of Explanation (d) below the section which defines profits of the business as meaning the profits of the business as computed under the head Profits and gains of business or profession as reduced by 90% of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. He accordingly submitted that the Assessing Officer had rightly taken the figure of profits at `15,42,52,035/- and he was also right in deducting the interest on fixed deposits, commission, brokerage, etc., to the extent of 90%, which left a negative figure of business profits of `1,16,14,062/-, which did not permit any deduction to be computed under section 80HHE of the Act. 14. The learned CIT DR also referred to sub-section (5) of section 80-IA, which provided that the profits and gains of an eligible business shall be computed as if the eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year upto and including the assessment year for which the determination is to be made and submitted that there was no similar provision in section 80HHE in order to justify the assessee s claim that under sub-section (3) of section 80HHE only the profits of the export of computer software business should be taken into consideration. He accordingly contended that the assessee s plea was without substance.

16 We have carefully considered the provisions of section 80HHE and the rival arguments. In sub-section (1), it is provided that the assessee shall be allowed a deduction of the profits from the eligible business. Such deduction is to be allowed in computing the total income of the assessee. Sub-section (3) has been enacted only for the purposes of sub-section (1). Sub-section (1) requires that the profits which are eligible for the deduction should be derived by the assessee from the eligible business. What are the profits derived from the eligible business is explained in subsection (3). It says that the profits derived from the eligible business shall be the amount which bears to the profits of the business, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. Explanation (d) below the section defines the expression profits of the business as meaning the profits of the business as computed under the head Profits and gains of business as reduced by, inter alia, 90% of the receipts by way of brokerage, commission, etc. which are included in such profits. The working of the Assessing Officer, which we have extracted earlier, is premised on the assumption that the expression profits of the business appearing in sub-section (3) read with Explanation (d) means profits of all the businesses carried on by the assessee. The Assessing Officer has taken the business income at `15,42,52,035/-. This figure of profit represents profits of the various businesses carried on by the assessee including the profits on export of computer software (eligible business). From this figure of profit the Assessing Officer

17 11 has reduced 90% of the commission, brokerage, etc. as also interest on fixed deposits which he has considered to be income from other sources and has arrived at a negative figure of `1,16,14,062/-. Since there is a negative figure, he has stated that the assessee is not eligible to any deduction under section 80HHE of the Act. In page 4 of the assessment order under the heading Deduction under section 80HHE of the Income Tax Act, 1961, the Assessing Officer has commented upon the working of the assessee. He has noted two features in the assessee s working. The first is that the assessee has taken the total turnover of the business as representing the turnover of only the back office support services. The second feature noticed by the Assessing Officer is that the assessee s figure of profit of `80,46,765/- is the profit of only the business of back office support services. After noticing these two features the Assessing Officer has commented that the assessee believes that since it is engaged in different lines of business, which are not eligible to a deduction under section 80HHE of the Income Tax Act, 1961, the total profit and the total turnover for the purpose of deduction should be restricted to the eligible business i.e. the back office support services in view of the following judicial pronouncements: (i) CIT vs. K K Doshi, 245 ITR 849 (Bom) (ii) ACIT vs. Smt Subhadra Ravi Karunakaran, 66 ITD 53 (Coch). Thereafter the Assessing Officer has proceeded to observe that the profits of the business have to be worked out on the basis of Explanation (d) below section 80HHE and in this view of the matter

18 12 has proceeded to take the figure of profits of all the businesses carried on by the assessee, which has been explained earlier. Since after applying Explanation (d) and deducting the sum of `16,11,78,266/- from the profits of all the businesses carried on by the assessee the Assessing Officer arrived at a negative figure of `1,16,14,062/-, he rejected the assessee s claim for the deduction at that point itself. He did not therefore consider it necessary to examine the assessee s other contention that the total turnover of only the eligible business should be taken note of for the purpose of applying the formula laid down in sub-section (3). 16. The controversy before us therefore is limited to the question as to whether, while applying sub-section (3) and the formula prescribed therein, the expression profits of the business should mean only the profits of the eligible business or the profits of all the businesses carried on by the assessee. Whereas the figure of `15,42,52,035/- adopted by the Assessing Officer represents the aggregate profits of all the businesses carried on by the assessee, the figure of `80,46,765/- which forms the basis of the assessee s computation represents only the profits of the eligible business (back office support services). The task before us is to examine which of the two views is correct. 17. According to us, the view canvassed on behalf of the assessee is to be preferred over the view put forth on behalf of the income tax department. As already noted, sub-section (3) exists only for the purposes of sub-section (1) and it says that profits derived from the business referred to in sub-section (1), which is the

19 13 eligible business, shall be the amount which bears to the profits of the business, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. If regard is had to be use of the definite article the, it seems to us that the expression profits of the business appearing in subsection (3) refers only to the profits of the eligible business which is referred to in sub-section (1). In other words, it is only the profits of the business of back office support services which have to be split in the same proportion as the export turnover in the said business bears to the total turnover in the said business. Explanation (d), which defines the expression profits of the business refers to the profits of the business as computed under the head Profits and gains of business. Under the Income Tax Act, having regard to the provisions of Chapter IV read with section 70 and section 71, it seems to us that in the case of an assessee carrying on more than one business, each business is considered as a separate source falling under the head Profits and gains of business. The net result of the computation in respect of any source of business, if it is a loss, can be adjusted against the income from any other business as provided in section 70(1). Therefore, when Explanation (d) provides that the expression profits of the business means the profits of the business as computed under the head Profits and gains of business, it means the profits of the eligible business as computed under the aforesaid head. In other words, Explanation (d) does not expand the meaning of the expression profits of the business to include profits of all the businesses carried on by the

20 14 assessee. Having said in sub-section (3) that the profits of the business means the profits of the eligible business referred to in sub-section (1), it is inconceivable that by Explanation (d) the expression profits of the business would have been defined to include the profits of all the businesses carried on by the assessee. The Explanation can only explain the expression profits of the business appearing in sub-section (3), but it cannot expand the meaning of the expression. Explanation (d) is controlled by subsection (3) and what it says is only descriptive of what the profits of the business are. It only says that the profits of the business, which means the eligible business, are the profits as computed in the assessment order under the head Profits and gains of business. It has possibly been enacted to clarify or explain that the profits of the eligible business is not what the books of account of the assessee show and it can only be what the assessment order shows. It is also significant that sub-section (3) as well as Explanation (d) refer only to profits of the business and not the profits of all the businesses carried on by the assessee. This reasoning also takes care of the argument of the learned CIT DR based on section 80- IA(5). In this view of the matter we are unable to accept the contention advanced on behalf of the department. 18. Our view is in conformity with the view taken by a Coordinate Bench in Mumbai in the case of Datamatics Ltd. vs. ACIT (2007) 111 TTJ (Mum) 55. Paragraphs 35 and 36 of this order deal with the question. These paragraphs are as under: It is the case of the assessee that assessee company is exporting the computer software manufactured in SEEPZ unit. Assessee is

21 15 keeping separate account. The entire activity of the assessee in this zone is independent from assessee s other business. There is no overlapping and mingling of the services or any link between the manufacturing activities of both. Both are exclusive of each other. 36. As rightly contended by the learned counsel, section 80HHC speaks of deduction in respect of profits derived by the assessee from export of such goods or merchandise; whereas section 80HHE speaks of such business. Such business only could mean the business of export of computer software. The scope of consideration has been narrowed down. In other words, whether the assessee derives income from any other business or not, is not a criteria and it is wholly extraneous while granting deduction under section 80HHE, which is exclusively for computing deduction in respect of profit from export of computer software etc. For the reasons stated hereinabove, we allow the claim of the assessee on this ground. In coming to the above conclusion the Tribunal has referred to two judgments of the Madras High Court, in the case of CIT vs. Rathore Brothers (2002) 254 ITR 656 (Mad) and in the case of CIT vs. Madras Motors / M M Forgings Ltd. (2002) 257 ITR 60 (Mad). These two judgments were concerned with section 80HHC of the Act. However, there was similarity between section 80HHC and section 80HHE in the sense that while working out the eligible profits on the basis of the ratio between the export turnover and the total turnover, it was held by the Madras High Court that it is only the profits of the export business that have to be so apportioned and the profits of businesses which did not qualify for the deduction, which were also carried on by the assessee, cannot be held eligible

22 16 for the deduction. The ratio laid down in these judgments was considered applicable to the provisions of section 80HHE also. 19. The result of the above discussion is that the departmental authorities were not correct in taking the profits of the eligible business at `15,42,52,035/-. They ought to have taken the figure at `80,46,765/- as contended for by the assessee, which figure represents the profits of the back office support services, which in other words are the profits of the eligible business. 20. We are not at present concerned with the controversy as to what would be the export turnover and the total turnover for purposes of sub-section (3) of section 80HHE of the Act. That is a matter which the Assessing Officer, while giving effect to our order, has to adjudicate upon in accordance with law and after giving adequate opportunity to the assessee. The Assessing Officer has not expressed any opinion on this point because according to his calculation the figure of business profits was negative and, therefore, even at the threshold the assessee s claim could not be entertained. The ground taken by the assessee before us is also (Ground No: 4) that the Assessing Officer ought to have taken only the profits of the back office support services for computing the deduction under section 80HHE of the Act. What would be the export turnover and the total turnover is not the subject matter of the present appeal. The ground as taken by the assessee is allowed. 21. Ground Nos: 5.1 and 5.2 are directed against the decision of the Assessing Officer to reduce the 90% of various receipts such as

23 17 commission, brokerage, etc. from the figure of profits. The contention of the assessee is that the Assessing Officer ought to have reduced 90% of the net receipts by way of commission, brokerage, etc. aggregating to 17,90,86,962/- and not from the gross figure of such receipts. Since we have upheld the assessee s claim that the profits of the back office support services should be taken at `80,46,765/-, these grounds are academic and need not be decided. 22. The sixth ground relates to the disallowance of expenses relating to stock broking activities. The issue is discussed at page 3 of the assessment order. The assessee wrote off bad debts of `8,40,920/- and also claimed deduction in respect of payment of `8,14,330/- as Provident Fund payment. The assessee claimed that the bad debts are in respect of disputed / lost shares in respect of business carried on by the assessee on behalf of the clients, acting as a broker on the BSE / NSE. It was also claimed that the employees who were looking after the stock broking activity were assured certain rate of return by the Provident Fund, but the investments made by the Provident Fund did not generate the expected rate of return and in order to make good the deficit the assessee was obliged to pay `8,14,330/- to the Provident Fund. 23. The Assessing Officer called upon the assessee to explain as to why the aforesaid two items of expenses should not be disallowed because they related to the stock broking activities carried on by the assessee till only and not during the relevant accounting year. The assessee admitted that the stock

24 18 broking activity was discontinued after the above date but pointed out that the activities of rendering back office support services, rendering support services to group entities and providing business premises along with facilities to group entities were carried on during the relevant year and the expenses / write off claimed by the assessee should be allowed against the profits from the aforesaid businesses. The Assessing Officer was however of the view that since the business of stock broking, with reference to which the bad debts and payment to Provident Fund were incurred, had been stopped, those expenses cannot be allowed against the profits of the other businesses carried on in the relevant accounting year. The view of the Assessing Officer was upheld by the CIT(A) and hence the present ground. 24. The learned counsel for the assessee submitted before us that the conclusion of the departmental authorities suffered from a serious infirmity in law and that since all the businesses carried on by the assessee were intertwined and interrelated, they must be considered to be a single business against which the claim of bad debts and payment to the Provident Fund were allowable. Strong reliance was placed on the following decisions: - (1) B R Ltd. vs. V P Gupta, CIT (1978) 113 ITR 647 (SC) (2) CIT vs. Singla Tea & Agriculture Industries Ltd. (2001) 250 ITR 274 (Cal) (3) CIT vs. P I Simon (1991) 187 ITR 302 (Ker) (4) West Bengal Power Supply Co. Ltd. vs. ITO (1983) 16 TTJ (Cal) 342

25 19 In the alternative it was claimed that only the net expenses after considering the income of `41,41,726/- in respect of the stock broking activities should be disallowed. On the other hand, the learned CIT DR contended that the profits assessed under section 41(1) of the Act were assessable under the head Business, but the section does not say that the business is deemed to have been continued in the relevant assessment year. He pointed out that once the business is closed, no expenditure relating to the said business can be allowed as a deduction. 25. We have carefully considered the facts and the rival contentions. There is no dispute that the claim of bad debts and the payment to the Provident Fund were related to the stock broking business which was discontinued on That business was not carried on in the relevant previous year. It is well settled, as pointed out by the learned CIT DR that expenditure relating to a business which was not carried on during the relevant previous year cannot be allowed as a deduction against the profits of the other businesses. This principle is however conditioned by the rider that if all the businesses constituted a single business because of their interconnection, interlacing, intertwining, etc., then such expenses will be allowable as a deduction. During the relevant year the assessee has received commission, brokerage and profits of `41,41,726/-. The CIT(A) has observed that this amount may represent recoveries of the brokerage relating to the closed business which however does not mean that the assessee was carrying on the stock broking business in the relevant year. He has

26 20 also observed in paragraph 25 of his order that the assessee was not responsible for the loss of the shares while dealing with the clients and that the cost of replacing the shares to the clients would represent capital expenditure. We are unable to agree with this part of his decision because either the assessee could compensate the client for the loss or could procure the shares. Whichever way it is done, it cannot be said to be capital expenditure because the loss arises in the course of the carrying on of the business. The CIT(A) has also held that there was no agreement between the assessee and the clients that the assessee was responsible for such losses. It may be true that there may not have been a written agreement but so long as the assessee has undertaken to compensate the client for the loss of the shares, the bona fide and the genuineness of the claim cannot be doubted. In fact it was not doubted by the Assessing Officer. We are unable to accept as correct the conclusion of the CIT(A) in this regard. The assessee has recovered some brokerage in the relevant accounting year as part of the amount of `41,41,726/- credited in the Profit and Loss account under the head Commission, brokerage and profits. Apparently such brokerage represents recovery of brokerage earlier allowed as irrecoverable, and brought to assessment under section 41(1) of the Act. Section 41(1)(a) says that any benefit accruing to the assessee in respect of any deduction allowed in an earlier year for any loss, expenditure or trading liability shall be deemed to be profits and gains of business and accordingly charged to tax as the income of the previous year in which the benefit is obtained,

27 21 whether the business in respect of which the allowance or deduction was made is in existence in that year or not. The assessment of such recoveries under the head Business is under a deeming provision. In CIT vs. Rampur Timber & Turnery Co. Ltd. (1973) 89 ITR 150 (All), the Allahabad High Court held that section 41(1) creates a legal fiction and the inevitable corollary of the fiction would be that the business would be deemed to have been carried on in that year. This decision was cited by the learned counsel for the assessee. However, in Akola Electric Supply Co. Pvt. Ltd. vs. CIT (1978) 113 ITR 265 (Bom), the Hon ble Bombay High Court has taken a different view. It was held that the legal fiction enacted in section 41(2) to the effect that a business is deemed to be in existence is only for the limited purpose of bringing the balancing charge to tax and for no other purpose and it cannot be extended so as to permit deduction of expenses incurred in the business. Respectfully following the judgment of the Hon ble Bombay High Court, we hold that despite the fact that some recovery of brokerage relating to the discontinued stock broking business is brought to tax under section 41(1)(a) of the Act, the assessee is not entitled to claim any expenditure against the said receipt. 26. The other contention based on the judgment of the Supreme Court in the case of B R Ltd. vs. V P Gupta, CIT (supra) cannot apply to the present case because the assessee has not adduced any evidence to show that there was interlacing, interdependence, dovetailing, etc. between the different businesses of the assessee so that they can constitute a single business. Apart from that in

28 22 relation to the payment to the Provident Fund it is not understood why the assessee should make the payment because if the Provident Fund is not able to give guaranteed returns to the employees, in the absence of any agreement, it is not the obligation of the assessee to make good the difference. There is no evidence of any business considerations involved in the act of the assessee. We are in agreement with the conclusion of the CIT(A) on this point in paragraph 25.1 of the impugned order. This is apart from the reasoning that no expenditure can be claimed against receipts assessed as profits of the business under section 41(1)(a) of the Act. We therefore uphold the disallowance of the claim of bad debts of `8,40,920/- and payment of `8,14,330/- to the Provident Fund. The ground is dismissed. 27. The seventh and last ground for this year relates to the disallowance of depreciation of `31,350/- on purchase of Figutsu scanner. The evidence for purchase of the scanner was not furnished before the Assessing Officer but was furnished before the CIT(A). The CIT(A) in paragraph 33 of his order has not admitted the evidence on the ground that the Assessing Officer had given ample opportunity to the assessee to prove his claim. Having regard to this finding, we uphold the disallowance and dismiss the ground. 28. In the result, the appeal is partly allowed. 29. Assessment Year : - The first ground, which is against the adhoc disallowance of administrative and other

29 23 expenses amounting to `2,98,930/- made under section 14A is dismissed as not pressed. 30. Ground No: 2 relates to the deduction under section 80HHE of the Act and is identical to Ground No: 4 for the assessment year In line with our decision for that year we allow the ground subject to the same remarks made therein. 31. Ground Nos: 3.1 and 3.2 are identical to Ground Nos: 5.1 and 5.2 for the assessment year In that year these grounds have been held to be academic. Accordingly for this year also the grounds are rejected as academic. 32. In the result, the appeal is partly allowed. 33. To sum up, both the appeals filed by the assessee are partly allowed with no order as to costs. Order pronounced in the Open Court on 13 th April Sd/- (Pramod Kumar) Accountant Member Sd/- (R V Easwar) President Mumbai, Dated 13 th April 2011 saldanha copy to: 1. Morgan Stanley India Securities Private Limited 18 th / 19 th Floor, B Wing, Tower 2 One India Bulls Centre, Jupiter Mills Compound 841, Senapati Bapat Marg Elphinstone Road, Mumbai ACIT, Circle 1(2), Mumbai 3. CIT-City I, Mumbai 4. CIT(A)-I, Mumbai 5. DR G Bench TRUE COPY BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI

30 IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA A BENCH, KOLKATA I.T.A. No.: 1277/ Kol. / 2011 Assessment year : Before Shri Pramod Kumar (Accountant Member), and Shri N Vijaykumaran (Judicial Member) Page 1 of 4 I.T.A. No.: 1277/ Kol. / 2011 Assessment year : Deputy Commissioner of Income Tax, Circle-4, Kolkata, P-7, Chowringhee Square, Kolkata Appellant -Vs.- M.s. Trade Apartment Ltd., 31, N.S. Road, Kolkata ,... Respondent [PAN : AABCT 2117 P] Appearances by: S.K. Roy, for the appellant D.S. Damle, for the respondent Date of concluding the hearing : February 07, 2012 Date of pronouncing the order : March 30 th, 2012 Per Pramod Kumar: O R D E R 1. By way of this appeal, the Assessing Officer has challenged correctness of learned Commissioner of Income Tax(Appeals) s order dated 28 th April, 2011, in the matter of assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year , on the following grounds :- (1) That on the facts and circumstances of the case, ld. CIT(A) erred in law in deleting the disallowance of Rs.9,86,306/- under rule 8D(2)(ii) being a part of total

31 I.T.A. No.: 1277/ Kol. / 2011 Assessment year : disallowance u/s. 14A since he opined in the instant case that there cannot be any interest expenditure left where interest income is more than interest expenditure. (2) That on the facts and circumstances of the case, ld. CIT(A) erred in law in deleting the disallowance of Rs.19,14,503/- under rule 8D(2)(iii) being a part of total disallowance u/s. 14A without appreciating the fact that AO had followed Rule 8D(2)(iii) in toto while making such disallowance and ld. CIT(A) could not mention the reason while deleting the disallowance in question. Page 2 of 4 2. Briefly stated, the relevant material facts are like this. During the course of assessment proceedings, the Assessing Officer noted that the assesee has earned tax exempt dividend income of Rs.12,44,386/- but offered only Rs.1,11,521/- for disallowance u/s. 14A on estimate basis. The Assessing Officer, however, observed that when assesese earns all its income from same establishment and composite fund of the company is utilized, expenses will have to allocate as per Rule 8D. Accordingly, out of total interest expenses debited to profit and loss account Rs.10,64,547/-, he disallowed Rs.9,86,306/- by taking into account of average investments. The proportionate expenses as per Rule 8D(2)(iii) were also computed at Rs.19,14,503/-. Aggrieved, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) noted that there was no interest expenditure, after setting off interest income earned, and, as such, the Assessing Officer was in error in disallowing interest of Rs.9,86,306/-. The CIT(A) further noted that as entire expenditure incurred by the assessee, which was Rs.1,11,521/-, nothing further remained to be disallowed. Once entire expenses are disallowed, nothing further can be disallowed under rule 8D. The

32 I.T.A. No.: 1277/ Kol. / 2011 Assessment year : Page 3 of 4 action of the Assessing Officer was thus reversed on both the counts. The Assessing Officer is aggrieved and is in appeal before us. 3. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 4. As learned CIT(A) has rightly observed, once there is no net interest expenditure, as is the case before us upon setting off interest credited to profit and loss account, no part of interest debited can be disallowed as attributable to earning tax free dividend. The CIT(A) was thus quite justified in deleting the interest disallowance. We have also noted that entire expenses incurred by the assessee have been offered for disallowance, and once that happen, nothing remains for further disallowance u/s. 14A. The disallowance under section 14A can come into play only out of expenses claimed for deduction and expenses have been claimed for deduction, there cannot be any disallowance either. The conclusions arrived at by the CIT(A) are, therefore, correct and admit no interference by us. We, approve and confirm the order of the CIT(A). 5. In the result, the appeal is dismissed. Pronounced in the open Court today on 30 th day of March, Sd/- N Vijaykumaran (Judicial Member) Sd/- Pramod Kumar (Accountant Member) Kolkata, the 30 th day of March, 2012

33 I.T.A. No.: 1277/ Kol. / 2011 Assessment year : Page 4 of 4 Copies to : (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) The Departmental Representative (6) Guard File By order etc Assistant Registrar Income Tax Appellate Tribunal Kolkata benches, Kolkata Laha/Sr. P.S.