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Judgment
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER :
These cross appeals have been filed by the assessee as well as by the Revenue against the order of the learned Commissioner of Income Tax (Appeals)–9, New Delhi [‘CIT(A)’ in short] dated 25.01.2019 arising from the assessment order dated 03.11.2017, passed under Section 143(3) of the Income Tax Act, 1961 (‘the Act’) by the Addl. CIT, Circle-25(1), New Delhi concerning Assessment Year (A.Y.) 2015-16.
Since the above captioned cross appeals were heard together and the facts in issues are identical, both the appeals are being disposed of by this common order for the sake of convenience and brevity.
The brief facts of the case are that the assessee is engaged in the business of prime multi disciplinary organization providing full range of consultancy, design and engineering services in various fields of telecommunication, IT and civil construction in India as well as abroad. Assessee filed its original return of income on 23.09.2015 and revised return on 07.03.2017 declaring income under normal provision of Rs.17,11,55,370/- in both the returns. In the assessment order, Assessing Officer made the following additions:
Disallowance u/s 14A Rs.2,23,15,688/-
Disallowance on Prior Period expenses Rs.91,19,097/-
Disallowance on Depreciation on Toll Road Rs.38,43,160/-
Disallowance on Provision for warranty period expenses Rs.52,85,543/-
Disallowance on Intt. on IT Refund Rs.97,812/-
Aggrieved by the order of learned AO, assessee went before the CIT(A) who gave partial relief to the assessee. Now assessee is before us with the following grounds :
The grounds raised by the assessee in ITA No. 3371/Del/2019 are as under :
“1.That the CIT(A) erred on facts and in law in upholding the disallowance made by the Ld. Assessing Officer ("AO") under Section 14A of the Income-tax Act, 1961 ("the Act") and in remanding the issue to the AO with a direction to re-compute the disallowance under Section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962, after considering the interest expenditure of Rs. 7,01,91,881, without appreciating that the said interest expenditure pertained to overdrafts used for meeting working capital requirements of various project and not for making investments.
2.Grounds of Appeal That the CIT(A) erred on facts and in law in upholding the action of the AO, to disallow/restrict the depreciation allowance of the Appellant under section 32(1)(ii) of the Act, in respect of an intangible asset, being 'right for collection for Toll Road', which was claimed by the Appellant at the rate of 25%, and holding that the cost of construction/development of Toll Road, was to be amortized over the concessionaire period, as per the CBDT Circular dated 23.04.2014, followed by a remand of the issue to the AO for re-computation of the depreciation allowance in accordance with the said Circular. While remanding the issue to the AO, the CIT(A) failed to appreciate the submissions of the Appellant and follow the judicial precedents in this regard.
The above grounds are independent and without prejudice to one another. The Appellant prays leave to add, amend, alter, delete or forego any of the grounds either before or during the course of hearing.”
The 1st issue is with regard to the disallowance of Rs.2,23,15,688/- u/s 14A of the Act. At the outset, learned Counsel of the assessee submitted that assessee received dividend income from investments made in subsidiaries, namely M/s Bharti Hexacom & M/s ICSIL during the subject year amounting to Rs.15,07,20,000. Investments in these subsidiaries were made in F.Ys. 1998-99, 1999-2000, 2000-02, 2006-07 & 2008-09. Admittedly, no fresh investment was made during this year. The assessee did not offer any disallowance under section 14A of the Act, on the ground that no expenditure was incurred for earning exempt dividend income. Further, the Assessee also argued that investment in aforesaid subsidiaries was made from own/surplus funds in the past and no interest bearing funds were used so as to attract disallowance of interest in terms of Rule 8D. The AO rejected the argument of the assessee on the ground that Assessee was not maintaining separate books of accounts to establish that investments were made out of own/surplus funds and not from interest bearing funds. As, such interest expenditure (not directly attributable) was disallowed in terms of Rule 8D amounting to Rs.2,23,15,688. Aggrieved assessee before the CIT(A). Partial relief was granted by CIT(A) by holding:
•Interest expenditure of Rs.7,36,43,389 being for borrowings/term loans admittedly and undisputedly linked to identified projects to be excluded by AO while computing the disallowance.
•Disallowance of interest in terms of Rule 8D to be computed in respect of interest of Rs.7,01,91,881 that was paid in re: bank overdraft.
•Only dividend yielding investments to be considered for computing disallowance in terms of Rule 8D and not total average investment.
The ld AR relied on the Hon'ble Supreme Court in South Indian Bank Ltd. v. CIT [2021] 130 taxmann.com 178 (SC) for the proposition that where the assessee has mixed pool of funds (with surplus own funds and interest-bearing funds) from which investments are made and the surplus funds exceed the value of investments, then the presumption will be that own funds were used to make such investments, and hence, no disallowance under section 14A of the Act on account of interest is warranted. The ld AR further relied on the following:
CIT vs. UTI Bank Ltd. (2022) 142 taxmann.com 136 (SC)
Viney Corporation Ltd. v. ACIT [2022) 138 taxmann.com 71 (Delhi - Trib.)
PCIT v. Shapoorji Pallonji & Co. Ltd., ITA 1298/2017, decided on: 04.03.2020 (Born HC)
PCIT v. Nirma Chemical Works (P) Ltd. [2024] 164 taxmann.com 380 (Gujarat)
Reliance Power Ltd. v. DCIT [2024] 159 taxmann.com 1626 (Mumbai Trib.)
Paharpur Cooling Towers Ltd. v. CIT [2024] 163 taxmann.com 81 (Calcutta)
The ld DR relied on the orders of the AO.
We have heard the rival submissions and perused the material available on record. We find that the fact that the investments were made by the assessee out of its own surplus funds and not out of interest-bearing funds in those years, has not been controverted by the Revenue. The assessee had large amount of deposits in FDRs in all these years and term loans for comparatively negligible amounts. We further find that it is an admitted fact that the assessee’s own funds far exceeded the amount of investments. Cumulatively therefore, it can be concluded that no interest-bearing funds were used. Following the decision of Hon'ble Supreme Court in South Indian Bank Ltd. v. CIT (supra) no disallowance on account of interest under section 14A of the Act, in terms of Rule 8D of the Rules, is therefore warranted. Ground 1 is allowed.
2nd issue is with regard to the depreciation on right to build and operate toll Road under BOT scheme amounting to Rs.38,43,160/-. At the outset, learned Counsel of the assessee submitted that in lieu of assessee constructing, operating and maintaining the Nabha toll road (same road project under contention for A.Y. 2013-14) under the Build, Operate and under the Concessionaire Agreement ("CA") with the Government of Punjab, the assessee has been granted an exclusive right (in the form of a license) to collect toll during the concessionaire period. Per section 32(1)(ii) of the Income-tax Act, 1961 ("Act") (as it stood at the relevant time), depreciation is allowed in respect of intangible assets (at the rate of 25%), being inter alia, license or 'any other business or commercial rights of similar nature’. Explanation 3(b) to Section 32(1) of the Act defines intangible asset as know-how, patents, copyrights, trade-marks. licenses, franchises or ‘any other business or commercial rights of similar nature’. The assessee has claimed depreciation on the aforesaid 'right to collect toll' at the rate of 25%, treating the same as intangible asset.
The ld AR stated that the claim of the assessee have been consistently allowed by the AO upto A.Ys 2012-13. 'Right to collect toll has been granted to the assessee during the concessionaire period granted by the Government of Punjab. But for such right, the assessee could not have collected toll from users. As such, it is submitted that such right tantamount to License. It is also submitted that the above right also qualifies as 'any other business or commercial rights of similar nature', applying the principle of ejusdem generis. Reliance is placed on following judgment which squarely covers the issue in favour of the Assessee in assessee’s own case for A.Y. 2013 for the same toll road project : Gwalior Bypass Project Lid. v. ACIT ITA No.1297/Del/2019, decided on: 26.07.2022/AY 2015-16. ACIT v. Progressive Constructions Ltd. [2018] 92 taxmann.com 104 (Hyderabad-Trib.) (SB) DCIT vs. Ashoka Dhankuni Kharagour Tollway Ltd. [2022] 145 taxmann.com 97 (Pune - Trib)
The Ld DR argued that the issue of right to collect toll is not a License and is not eligible for claim of depreciation. The Ld DR relied on the decision of Madras High Court in the case of Narmada Infrastructure Construction Enterprises Ltd in TCA no 868 of 2009 dated 29.12.2022 as also on the decision of the coordinate bench of Delhi ITAT in the case of Vijayawada Gundugolanu Road Project ITA No. 1839/DEL/2020 for A.Y 2015-16 dated 06-08-2024.
We have heard the rival submissions and have carefully perused the materials on record. The question before us is whether the ‘right’ to collect Toll is ‘intangible asset’. We find that the Hon'ble Madras High Court in the case of M/s. L & T Infrastructure Development V ACIT in TCA no 868 of 2009 dated 29.12.2022 wherein while dealing with the identical issue, has answered the substantial question of law against the assessee and in favour of the Revenue, holding that rights emanating from Concessionaire agreements cannot be equated with "intangible asset", such as licenses, franchises, or other business or commercial rights of similar nature, so as to qualify for depreciation under Section 32 the Act as follows:
120.We are of the view that the second part of the substantial question of law as to whether the respective assessees have any "Intangible Assets" under the respective Concessionaire Agreements as per the definition in Explanation 3(b) to Section 32 of the Income Tax Act, 1961 also requires to be answered against the assessee. The definition of the above expression has already been extracted above.
121.The expression used in the last part of the definition of "Intangible Asset" is licenses, franchises or any other business or commercial rights of similar nature".
122.The meaning of the above expression "licenses" and the phrase" any other business or commercial rights of similar nature" has to be inferred from the meaning of the words along with which they have been used. Their meaning has to be inferred from the meaning of the expression "know-how", "patents", "copy rights", "trademark", "franchises" by applying the principle of nocitur a sociis.
123.In Maxwell's Interpretation of Statutes (12th Edition) at page 289, it has been stated as follows:-
"Where two or more words which are susceptible of analogous meaning are coupled together, nocitur a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general.
124.As per the above principle the words must take colour from words with which they are associated.
125.In Skinner & Co.v.Shew and Co. (1893) 1 Ch 413 (D), it was observed:
"The rule of ejusdem generis is intended to be applied where general words have been used following particular and specific words of the on the established rule of construction that the Legislature presumed to use the general words in a restricted sense, that is to say, asbelonging to the same genus as the particular and specific words. Such a restricted meaning has to be given to words of general import only where the context of the whole scheme of legislation requires it. But where the context and the object and mischief of the enactment do not require such restricted meaning to be attached to words of general import, it becomes the duty of the Courts to give these words their plain and ordinary meaning. In our opinion, in the context of the object and the-mischief of the enactment there is no room for the application of the rule of ejusdem generis. Hence it follows that the vacancy as declared by the order impugned in this case, even though it may not be covered by the specific words used, is certainly covered by the legal import of the words "or otherwise"."
126.Therefore, it cannot be construed that the respective assessees had acquired "intangible assets" within the meaning of the definition in Explanation 3(b) to section 32 of the Income Tax Act, 1961 under the respective concessionaire agreement for the purpose of claiming depreciation.
127.By no stretch of imagination can it be construed that the respective assessees have been conferred upon any "intangible assets" under the concessionaire agreements for the purpose of the aforesaid provision.
128.In the light of the above discussion we are constrained to answer the second part of the first substantial question of law also against the assessee and in favour of the revenue.
The decision of above hon’ble Madras High Court was followed by the Mumbai Tribunal in the case of Hazaribagh Ranchi Expressway Ltd. vs. ACIT [2024] 167 taxmann.com 571 and by Delhi ITAT in Vijayawada Gundugolanu Road Project in ITA No. 1839/DEL/2020 for A.Y 2015-16, dated 06-08-2024. We have not been apprised of any decision of High Court which is contrary to the judgment of the Hon'ble Madras High Court in L & T Infrastructure Development Projects Ltd. [supra].
In so far as reliance of the assessee on the decision of Delhi ITAT in the case of M/s Gwalior Bypass Project Ltd (supra) is concerned, we find that the decision of hon’ble Madras High Court in the case of L & T Infrastructure Development Projects Ltd (supra) was not brought to the notice of the hon’ble ITAT Bench. Further the Judgement of Hon’ble Madras High Court (supra) would supersede the decision of Special Bench in ACIT v. Progressive Constructions Ltd (Supra). We therefore, respectfully distinguish the decision of ITAT in the case of M/s Gwalior Bypass Project Ltd (supra) and ACIT v. Progressive Constructions Ltd. Accordingly the Grounds 2 of the assessee is dismissed.
The grounds raised by the Revenue in ITA No. 3199/Del/2019 are as under :
“1.Whether on the facts and circumstances of the case, the Id. CIT(A) erred in deleting the disallowance on account of Prior Period expenses Rs. 91,19,097/-, made by the Assessing Officer. The loss on scrapping of assets and Extra-ordinary items are related to assets which are capital in nature and were crystallized during the different previous years and would not determine the year of crystallization of liability.
2.Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of Provision for warranty period expenses of Rs. 52,85,543/- ignoring the fact that during the assessment proceedings the assessee did not demonstrated as to how it has quantified the amount of provision for warranty and that the liability cannot be ascertained which can only be treated as ascertained when it can be quantified with reasonable estimate and the same has also irrevocable and accrued during the year.
3.Whether on the facts and circumstances of the case, the Ld.CIT(A) erred in allowing the appeal of the assessee ignoring the fact that provision for warranty period expenses of Rs.52,85,543/- is contingent liability. Since, it is not in nature of ascertained liability, which cannot be excluded from book profit w/s 115JB.
4.Whether on the facts and circumstances of the case the ld CIT(A) erred in allowing the appeal of the assessee ignoring the fact that the provisions of section 14A and clause (f) to explanation (1) to section 115JB(2) are similar, then the mode of computation with same purpose cannot be differently made merely because section 115JB creates a deeming section.
5.The appellant craves, leave or reserving the right to amend modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.
First issue is with regard to the disallowance of Prior Period Expenses amounting to Rs.91,19,097/-. At the outset, learned Counsel of the assessee submitted that the breakup of prior period expenditure of Rs.91,19,097 is; sub-contractors (DGLL project) Rs.81,17,272/-, Loss on scrapping of assets Rs.1,08,884/- and extra-ordinary item (Loss on sale of assets) Rs.8,92,941/-. The prior period expense of Rs.81,17,272/- pertains to the DGLL project being the payment under sub-contractor head. The four bills of M/s HITT were received on 06.08.2014, being the AMC bills pertaining to F.Y 2013-14. Since the liabilities were crystallized in August 2014, the same were booked under prior period expenses in A.Y 2015-16. During the year, some of the assets were scrapped and the loss on scrapping was shown as Rs.1,08,884/- being the difference between gross block and written down value of assets on 31.03.2015. This expense was an extraordinary item and not the prior period expenses as the scraping of assets were done on 31.03.2015 i.e. at the end of A.Y. 2015-16 and hence is to be allowed as business expense. A sum of INR 8,92,941/- was booked as loss on sale of assets. The loss on sale of assets was booked on gross block and written down value of assets on 31.03.2015 as compared with the realization value of these assets and hence the same was not a prior period expense rather an extra-ordinary item. Hence this expense is to be allowed as business expense. The issue is squarely covered in favour of the decisions of the ITAT in assessee's own case in A.Ys 2005-06 and 2011-12 (A.Y. 2011-12 affirmed by Hon'ble Jurisdictional High Court in ITA 293/2022).
We find that the issue has been decided in favour of the assessee by the ITAT and the hon’ble Delhi High Court, in assessee’s own case. Respectfully following the same, the ground 1 of Revenue appeal is dismissed.
Ground Nos.2 & 3 are with regard to the disallowance of provision for warranty period expenses (both under normal provisions & under MAT) amounting to Rs.52,85,543/-. At the outset, learned Counsel of the assessee submitted that the assessee undertakes turnkey projects (in the field of telecom, IT and Civil) both in India and overseas. Per the terms of such turnkey contracts, the assessee is required to ensure satisfactory performance of the projects during warranty period, which ranges from 1 to 3 years. During warranty period, the cost associated with (a)deploying manpower and machinery, (b)maintaining office/establishment at project sites and its administration related overheads, (c)Vehicles running (d)Consumables and spares and (e)bank guarantee charges etc. are estimated (based on past experiences, company's accounting practice and budget estimates) for each of the projects and provided for. Excess provision is reversed and is written back at the end of the warranty period. As such, given the nature of the expenditure and the business of the assessee; (a) it is a liability that represents a present obligation which arises from past events where the assessee has incurred actual expenditure in discharging its warranty obligation. (b) it is a liability which entails outflow of resources every year (during the warranty period), and (c) a reliable estimate of the same can be made by the Appellant. As such, deduction of the same should be allowed following the principles laid down in Rotork Controls India (P) Ltd. v. CIT [2009] 180 Тахтаnn 422 (SC). Further, the warranty obligation/cost is inbuilt into the turnkey contracts. Additionally, since the total income of the project is recognized by the assessee, the corresponding expenditure of the project, including warranty expenses, has to be booked in order to provide a true and fair view of the accounts and in accordance with the matching principle. Therefore, it is an ascertained liability which is capable of being construed in definite terms which has arisen in the relevant assessment year though the actual quantification and discharge is deferred to a future date. The ld AR further submitted that the claim of the assessee has been consistently allowed in the past upto A.Y. 2011-12. In A.Ys 2012-13, the claim was disallowed by AO but the disallowance was deleted by CIT(A). The Income Tax Department has accepted the said orders of CIT(A) in A.Y. 2012-13 and A.Y. 2014-15 and no appeal was filed before ITAT. Therefore, following the principles of consistency, the claim should be allowed. Reliance is also placed on:
Assessee own case before ITAT for A.Y. 2013-14
Rotork Controls India (P) Ltd. v. CIT [2009] 180 Taxman 422 (SC)
Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC)
CIT v. Vinitec Corp. Pvt. Ltd. [2005] 278 ITR 33 7 (Delhi)
CIT v. Sony India Pvt. Ltd. [2007] 160 ΤΑΧΜΑΝ 397 (DELHI)
Calcutta Co. Ltd. v. CIT [1959] 37 ITRI (SC)
In view of the arguments on merits (under normal provisions of the Act), since provision of warranty is an ascertained liability, it cannot be added to the book profits u/s 115JB of the Act.
Per contra, the ld DR relied on the orders of the AO.
We have heard the rival submissions and perused the materials on record. We find that the issue has been decided in favour of the assessee by the ITAT for AY 2013-14. Following the same, the deletion of disallowance of provisions for warranty period expenses, both under the normal provisions as well as MAT, is upheld. Ground 2 and 3 are dismissed.
Ground No.4 is with regard to disallowance under section 14A of the Act (under MAT). At the outset, learned Counsel of the assessee submitted that no addition u/s 14A of the Act under MAT. Reliance is placed on the following judgments:
ACIT vs. Vireet Investments (P.) Ltd. [2017] 82 tamann.com 415 (Delhi -Trib.) (SB)
PCIT vs. Atria Power Corporation Ltd. (2022) 142 taxmann.com 412 (Kar.) [SLP by Department against High Court's judgment dismissed by Supreme Court in (2022) 142 taxmal111.com 413 (SC)]
Atul Ltd. v. DCIT [2024] 162 taxmann.com 862 (Ahmedabad Trib.)
PCIT v. Moon Star Securities Trading & Finance Co, (P) Ltd [2024] 161 taxmann.com 158 (Delhi)
CIT Bangalore v. Gokaldas Images (P) Ltd [2020] 122 taxmann.com 160 (Karnataka)
Karnataka State Industrial and Infrastructure Development Corpn. Ltd. v. DCIT [2021] 128 taxman.com 412 (Karnataka)
Prime Property Development Corporation Ltd v. ACIT /JCIT/DCIT/ITO-NFAC [2024] 159 taxman.com 1581 (Mumbai Trib.)
In the above factual matrix, we are of the considered view that the disallowance under Section 14A, which restricts deductions for expenses related to exempt income, cannot be added back to compute book profits under Minimum Alternate Tax as provided in section 115JB. The Special Bench of the ITAT in ACIT v. Vireet Investment (P.) Ltd. established that clause (f) of Explanation 1 to Section 115JB only applies to expenditure directly relatable to exempt income, not to notional disallowances under Rule 8D. We therefore direct the AO to delete the addition made u/s 14A under MAT. Ground 4 is dismissed.
In the result, the appeal of the assessee in ITA No. 3371/DEL/2019 is partly allowed and the appeal of the Revenue in ITA No. 3199/DEL/2019 is dismissed.