Ita/6/2011 Of Ingersoll-Rand (India) Limited v. The Commissioner Of Income Tax 1

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 11 DAY OF MARCH 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE M. NAGAPRASANNA| I.T.A. NO.6/2011 C/W I.T.A. NO.7/2011 & I.T.A. NO.8/2011 I.T.A. NO.6/2011 BETWEEN: INGERSOLL-RAND (INDIA) LIMITEDPLOT NO.35, KIADB INDUSTRIAL AREABIDADI, BANGALORE-562109(REP. BY ITS COMPANY SECRETARYMR. P.R. SHUBHAKAR) PREVIOUSLY AT.SOLITAIRE CORPORATE PARKIV UNIT NOS.411 & 412I FLOOR, ANDHERI-KURLA ROAD.ANDHERI (E), MUMBAI. — ADPELLANT. (By Sri. T. SURYANARAYANA, ADV., FOR|M/S. KING & PARTRIDGE, ADVS.,) AND: 1.THE COMMISSIONER OF INCOME-TAX-I| C.R. BUILDINGS, QUEEN'S ROAD| BANGALORE. 2 |THE DEPUTY COMMISSIONER OF INCOME-TAX|CIRCLE-6(3), MUMBAI.CIRCLE-6(3), MUMBAI. .., RESPONDENTS (By Sri. K.V. ARAVIND, ADV.) THIS ITA IS FILED UNDER SECTION JZ600A OF I.T. ACT 1L9ARISING OUT OF ORDER DATED 30/8/2010 PASSED IN ITA|NO.7254/MUM/2003, FOR THE ASSESSMENT YEAR 2000-01,|PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW|STATED THEREIN. ALLOW THE APPEAL AND SETI ASIDE THE|ORDER PASSED BY THE ITAT IN ITA NO.7254/MUM/2003 DATED|30/8/2010 AND CROSS OBJECTIONS NO.495/MUM/2004 TO THE|EXTENT QUESTIONED THEREIN, IN THE INTEREST OF JUSTICE|AND EQUITY. I.T.A. NO.7/2011 BETWEEN: INGERSOLL-RAND (INDIA) LIMITEDPLOT NO.35, KIADB INDUSTRIAL AREABIDADI, BANGALORE-562109(REP. BY ITS COMPANY SECRETARYMR. P.R. SHUBHAKAR) PREVIOUSLY AT.SOLITAIRE CORPORATE PARKIV UNIT NOS.411 & 412I FLOOR, ANDHERI-KURLA ROAD.ANDHERI (E), MUMBAI. — ADPELLANT. (By Sri. T. SURYANARAYANA, ADV., FOR|M/S. KING & PARTRIDGE, ADVS.,) AND: 1.THE COMMISSIONER OF INCOME-TAX-I| C.R. BUILDINGS, QUEEN'S ROAD| BANGALORE. 2 |THE ADDITIONAL COMMISSIONER OF INCOME-TAX RANGE-6(1), MUMBAT. .., RESPONDENTS (By Sri. K.V. ARAVIND, ADV.) THIS ITA IS FILED UNDER SECTION JZ600A OF I.T. ACT 1L9ARISING OUT OF ORDER DATED 30/8/2010 PASSED IN PREVIOUS|YEAR NO.3952/MUM/2005, FOR THE ASSESSMENT YEAR 2001-02,PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW|STATED THEREIN. ALLOW THE APPEAL AND SETI ASIDE THE|ORDER PASSED BY THE ITAT IN ITA NO.3952/MUM/2005 DATED|30/8/2010 TO THE EXTENT QUESTIONED THEREIN, IN THE}INTEREST OF JUSTICE AND EQUITY.| I.T.A. NO.8/2011 BETWEEN: INGERSOLL-RAND (INDIA) LIMITEDPLOT NO.35, KIADB INDUSTRIAL AREABIDADI, BANGALORE-562109(REP. BY ITS COMPANY SECRETARYMR. P.R. SHUBHAKAR) PREVIOUSLY AT.SOLITAIRE CORPORATE PARKIV UNIT NOS.411 & 412I FLOOR, ANDHERI-KURLA ROAD.ANDHERI (E), MUMBAI. ... APPELLAN[. (By Sri. T. SURYANARAYANA, ADV., FOR|M/S. KING & PARTRIDGE, ADVS.,) AND: 1.THE COMMISSIONER OF INCOME-TAX-I| C.R. BUILDINGS, QUEEN'S ROAD| BANGALORE. 2.|THE ASSISTANT COMMISSIONER OF INCOME-TAX.CIRCLE-6(1), MUMBAT..., RESPONDENTSCIRCLE-6(1), MUMBAT..., RESPONDENTS THIS ITA IS FILED UNDER SECTION J60A OF I.T. ACT 1961ARISING OUT OF ORDER DATED 30/8/2010 PASSED IN ITA| NO.7158/MUM/2005, FOR THE ASSESSMENT YEAR 2002-03,|PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW|STATED THEREIN. ALLOW THE APPEAL AND SET ASIDE THE|ORDER PASSED BY THE ITAT IN ITA NO.7158/MUM/2005 DATED|30/8/2010 TO THE EXTENT QUESTIONED THEREIN, IN THE|INTEREST OF JUSTICE AND EQUITY.| THESE ITAS COMING ON FOR’ HEARING, THIS’ DAY, |ALOK ARADHE J.,DELIVERED THE FOLLOWING: COMMON JUDGMENT These appeals under Section 260A of the Income Tax.Act, 1961 (hereinafter referred to as tne Act for snort) are|preferred by the assessee. I.T.A.No.6/2011 was admitted by|a bench of this Court by an order dated 09.02.2011 on the|following substantial question of law: THIS ITA IS FILED UNDER SECTION J60A OF I.T. ACT 1961ARISING OUT OF ORDER DATED 30/8/2010 PASSED IN ITA| NO.7158/MUM/2005, FOR THE ASSESSMENT YEAR 2002-03,|PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW|STATED THEREIN. ALLOW THE APPEAL AND SET ASIDE THE|ORDER PASSED BY THE ITAT IN ITA NO.7158/MUM/2005 DATED|30/8/2010 TO THE EXTENT QUESTIONED THEREIN, IN THE|INTEREST OF JUSTICE AND EQUITY.| THESE ITAS COMING ON FOR’ HEARING, THIS’ DAY, |ALOK ARADHE J.,DELIVERED THE FOLLOWING: COMMON JUDGMENT These appeals under Section 260A of the Income Tax.Act, 1961 (hereinafter referred to as tne Act for snort) are|preferred by the assessee. I.T.A.No.6/2011 was admitted by|a bench of this Court by an order dated 09.02.2011 on the|following substantial question of law: 1.Whether in the facts and circumstances ofthe case and the grounds urged, the)Tribunal was right or justified in holding|thatclubmembership|feeof.Rs.11,29,520/- paid by appellant was in)the nature of capital expenditure and|therefore notdeductabledS|revenue expenaiture ?the case and the grounds urged, the)Tribunal was right or justified in holding|thatclubmembership|feeof.Rs.11,29,520/- paid by appellant was in)the nature of capital expenditure and|therefore notdeductabledS|revenue expenaiture ? >.Whether in the facts and circumstances ofthe case and tne grounas urged, the)Tribunal was right or Justified in setting|aside the Commissioner’s order deleting|the case and tne grounas urged, the)Tribunal was right or Justified in setting|aside the Commissioner’s order deleting| thedisallowance Of|Rs.23,490/-dS|expenditure incurred for earning exempt|Income? 3. Whether Income Tax Appellate Tribunalerred in law in setting aside the order of.the Commissioner in deleting tne adnocdisallowanceOf|Rs. 10LakhsOutOf|expenditure incurred for entertainment,|business, meals, gifts fees for association|etc. and disallowing Rs.5,00,000/- on aestimation basis without any evidence of)the fact that sucn expenses were in tne)nature of non-business expenditure?| 4 Whetherthe[ncome TaxAppellateTribunal erred in confirming the orders of the appellate autnority as well as tne)assessing officer in reducing 90%_ ofRs.3,05,11,720/-beingIncome fromSeErvliCcrenderedandRs.21,77,493/-being sundry income from profits of the|business while computing deduction under|Section 8SQHHC? 5.Whether the Tribunal Committed an error:in law in not considering the aiternate|ground raised by the appellant that 90%| of the service income and sundry income|was reguired to be reduced from “profitsof business” for tne purposes of Section|SOHHC,theSad [shouldbenetexpenaiture incurreaq for earning suchIncome? 2).In I.T.A.No.7/2011 & I.T.A.No.8/2011, since the|Same questions of law viz., question of law Nos.4 and 5 only|arise for consideration, and as all the appeals pertains to the.Same assessee for different assessment years, they were)neard together and are being decided by this common'G79C>38; ‘3.I.T.A.No.6/2011 pertains to assessment year)2000-01, whereas I.T.A.No.7/2011 pertains to assessment|YEdr|2001-02anc|I.T.A.No.8/2011pertainsCOtneassessment year 2002-03. For tne facility of reference, facts|from I.T.A.No.6/2011 are being referred to. 4Appellant is a company engaged in the business|of manufacture and sale of air and gas compressors, rock.and water well drilling equipment, pit pressures etc. Tne} appellant filed its return of income for assessment year.2O0OOQ0-ONn30.11.2000|declaringtotalincome.OT|Rs.58,06,47,260/-. The return was initially processed underSection 143(2) and 142(1) by the Deputy Commissioner of Income Tax but thereafter, the notices were issued under|Section 143(2) and 142(1) of the Act. On receipt of tne|aforesaid notice, the appellant filed a response by way ofwritten submissions and sougnt personal hearing. The}assessing officer passed an order on 19.03.2003 under|Section 143(3) of the Act re-determining the total income by|resorting to certain adjustments and re-computing the|deductions under Section 80HHC, 80HHE, 80I and 8OIA of tne Act. | appellant filed its return of income for assessment year.2O0OOQ0-ONn30.11.2000|declaringtotalincome.OT|Rs.58,06,47,260/-. The return was initially processed underSection 143(2) and 142(1) by the Deputy Commissioner of Income Tax but thereafter, the notices were issued under|Section 143(2) and 142(1) of the Act. On receipt of tne|aforesaid notice, the appellant filed a response by way ofwritten submissions and sougnt personal hearing. The}assessing officer passed an order on 19.03.2003 under|Section 143(3) of the Act re-determining the total income by|resorting to certain adjustments and re-computing the|deductions under Section 80HHC, 80HHE, 80I and 8OIA of tne Act. | 5.Tne Assessing Officer disallowed the deduction|claimed by the appellant in respect of club membership ofRs.11,29,520/- on the ground that the aforesaid expenditure|was not incurred for business purposes. While considering|the claim for exemption in respect of dividend income under|Section 10(33) of the Act, assessing officer assumed ansestimated expenditure of Rs.23,490/- at 5% of the dividend| income of Rs.4,69,800/- and disallowed the sum _ oRs.23,490/-. The Assessing officer also disallowed EDPexpenses to the tune of Rs.60,/79,380/- by treating the sameas capital expenditure. Tne Assessing Officer also disallowed|a sum of Rs.10 Lakhs out of the expenditure incurred for)entertainment, business, meals, gifts fees for association etc.On an adnoc basis by considering the same as non Dusiness|expenditure. Tne.ASS@SSINQOfficerreduced90%OT|Rs.3,05,11,720/- being income from services rendered andRs.21,/77,493/- being sundry income from. “profits obusiness’ for the purposes of computation of deduction under|Section 8OHHC., 6.Being aggrieved by the aforesaid order, the|assessee filed an appeal before Commissioner of Income Tax|(Appeals). Tne appellate authority by an order dated|29.08.2003 allowed the appeal partly insofar as it pertains to)club membersnip fee, expenses allegedly incurred to earn|exempt income and adhoc disallowance of Rs.10 Lakhs)relatable to expenditure for entertainment, business, meals,|gifts fees for association etc. However, the Commissioner| rejected the appeal to the extent of disallowance of EDP)expenses and reduction of 90% of the income rendered and|sundry income from profits of business for the purpose of)computation of deduction under Section 8O0HHC. Accordingly,the appeal was partly allowed. Being aggrieved, the revenue|filed an appeal before the Income Tax Appellate Tribunal. TheTribunal by an order dated 30.08.2010; set aside the order|passed by the appellate autnority and allowed the appeal|preferredDYtnerevenue.In.theaforesaidfactualbackground, this appeal has been filed. J.Learned counsel for the appellant submitted that|the Tribunal grossly erred in treating the club membersnip|fee of Rs.11,29,520/- in the nature of capital expenditure. It)is furtner submitted that the Tribunal ought to Nhaveappreciated that the order passed by the Tribunal dated|21.10.7011In,MCIT&|ANOTHERYS, INFOSYS| TECHNOLOGIES LTD.,was upheld by division bench of this|court vide order dated 21.10.2011 in ITA No.2975, 2976 and|2011/2005 and therefore, the same ought not to Nave been|treated as capital expenditure. It is also submitted that in| earlier years and in subsequent years, the Commissioner of|Income Tax (Appeals) had allowed the claim of the appellant|in this regard whicn was not challenged by the revenue. It is|further submitted that in the absence of any mechanism to compute the disallowance, tne Tribunal grossly erred in|deleting disallowance of Rs.23,490/- as expenditure incurred|for earning exempt income. It is further submitted that sub-Section (2) and (3) of Section 14-A of the Act, wnicn were|inserted in the year 2008, have been neld to be prospective|in nature py the Supreme Court in|"CIT VS. ESSAR TELEHOLDINGS LTD.,', (2018) 90 TAXMANN.COM 2 (SC)tO.be prospective in nature and in the absence of any.mecnanism, adnoc assessment witn regard to deletion otfdisallowance for earning exempt income could not have been)macade earlier years and in subsequent years, the Commissioner of|Income Tax (Appeals) had allowed the claim of the appellant|in this regard whicn was not challenged by the revenue. It is|further submitted that in the absence of any mechanism to compute the disallowance, tne Tribunal grossly erred in|deleting disallowance of Rs.23,490/- as expenditure incurred|for earning exempt income. It is further submitted that sub-Section (2) and (3) of Section 14-A of the Act, wnicn were|inserted in the year 2008, have been neld to be prospective|in nature py the Supreme Court in|"CIT VS. ESSAR TELEHOLDINGS LTD.,', (2018) 90 TAXMANN.COM 2 (SC)tO.be prospective in nature and in the absence of any.mecnanism, adnoc assessment witn regard to deletion otfdisallowance for earning exempt income could not have been)macade 8.It is further submitted that deletion of adhoc|cGisallowance of Rs.10 Lakns and disallowance of Rs.5 LakNnon estimate basis is not based on any evidence. It is further|SuDmitted that such disallowance cannot De made on adnoc|basis. In support of aforesaid submission, reliance has been) placedOn|decisionOf|SupremeCourtIn,"CITYS, WALCHAND & CO. (P) LTD.," (1967) 65 ITR 381 (SC)Lastly, it is urged that sub-Section (3) of Section 80HHC|provides tne manner, in which deduction nas to becomputed. Learned counsel for the appellant has also invitedour attention to explanation contained to Section 8QHHC (4C)and has submitted that profit of business means the profit of|business as computed under the head “profits of business” or “profession” as reduced by 90% of any sum referred to in|clauses (ilia), (ilib), (ilic), (iid) and (tile) of Section 28 or of)any receipts by way of brokerage, commission, interest, rent,charges or any other receipt of a similar nature included in)such profits. It is also submitted that the Tribunal grossly|erred in holding that the decision rendered in)"CIT VS.|BANGALORECLOTHINGCOMPANY ,,(2003)1277TAXMANN637nas|peen|OVET|ruled+8"CITVS.K.RAVINDRANATH NAIR’, (2007) 165 TAXMANN 282|(SC),which is factually incorrect. It is further submitted that.the decision inK. RAVINDRANATH NAIsupra does not!deal with the issue of business profits. It is further submittedthat the Tribunal ought to have appreciated that in earlier| years as well aS subsequent years, the appellate authority|nad neld in favour of the assessee and the revenue had not!preferred any appeal. Q.On the other hand, learned counsel for the}revenue submitted tnat the order passed by the Tribunal isjust and legal and does not call for any interference. It is|further submitted that issue of estimation of expenses is a)finding of fact and since, the appellant had not followed the|criteria under Section 3/7(1) of the Act, therefore, theTribunal nad quantified the amount. It is further submitted|that the decision rendered in the case of.WALCHANDSUP.daSupports the case of the revenue and the assessee nad not)produced any material to snow that business income Nas a|direct nexus witn the exports. 10.We have considered the SUDMISSIONS made on!both the sides and have perused the record. The Assessing|Officer disallowed club membership expenditure on the.ground tnat it is a capital expenditure. However, the|Commissioner of Income Tax (Appeals) by an order held that)in earlier years, it has been neld by the Commissioner of| 10.We have considered the SUDMISSIONS made on!both the sides and have perused the record. The Assessing|Officer disallowed club membership expenditure on the.ground tnat it is a capital expenditure. However, the|Commissioner of Income Tax (Appeals) by an order held that)in earlier years, it has been neld by the Commissioner of| Income Tax (Appeals) that club membersnip are to beallowed in deduction and accordingly, tne aforesaid deductionwas permitted. However, the Tribunal followed the decision|in case of —FRAMATONE CONNECTOR OEFEN LTD. VSDCIT’, (2007) 294 ITR 599and held the same to be ascapital expenditure. However, the Tribunal failed to take into|account the fact that its order passed inCIT AND ANOTHERVS. INFOSYS TECHNOLOGIES LTD.,by wnich it had neldtnat the club membership expenditure was in the nature of|revenue expenditure was upheld by division bench of this)court vide dated 21.10.2011, whicn was binding on the|Tribunal. The Tribunal also failed to appreciate that the order|of the Commissioner of Income Tax (Appeals), by which itnas held the expenditure to be revenue expenditure in|previous years was not cnallenged by the revenue.Therefore, the first substantial question of law is held in the)negative and in favour of the Revenue. 11.It is pertinent to mention here that Sub-Section|(2) and (3) to Section 14-A were incorporated by Finance|Act, 2006 with effect from 01.04.2007 and prior to it, there) was no mechanism to compute the disallowance on the|expenditure for earning exempt income. In the absence of|any mechanism, adhoc allowance could not nave peen made|in the absence of any material with regard to actual|expenditure. It is pertinent to mention nere that in|"CIT VS.ESSARJSELEHOLDINGS LTD.,’,(2018)90|TAXMANN.COM 2(SC)the Supreme Court has held tnatsub-Section (2) and (3) are prospective nature and have to be utilized for computing expenditure for the assessment|year 2007-08 and onwards. In the absence of any.mecnanism to compute the disallowance as expenditure|incurred for earning exempt income, the Tribunal grossly|erred in setting aside the order of the Commissioner of|Income Tax (Appeals). Therefore, the second substantial|question of law is answered in the negative and in favour otfthe assessee. It is pertinent to mention here that the)Commissioner of Income Tax (Appeals) without any evidenceon record, treated the adhoc disallowance of Rs.10,000/- out|of the expenditure incurred for entertainment, business,|meals, gifts fees for association etc. and in disallowing|Rs.5,000/- on estimation basis. Tne Supreme Court in the case ofWALCHANDsupra Nas held tnat the Tribunal has torecord the satisfaction that the expenditure was laid out orexpendid wholly and exclusively for the purpose of business.of the assessee and there is no reason wny the full amount|snould not have been allowed. In the instant case, no sucn|satisfaction has been recorded by the autnorities. Tnerefore,|the third substantial question of law is also answered infavour of tne assessee. 17)|The Commissioner of Income Tax (Appeals) as)well as the Tribunal have reduced 90% of Rs.3,05,11,/720/-being income from services rendered and Rs.21,/7,493/-being sundry income from. profits of business whilecomputing deduction under Section 8QHHC. It is pertinent to|note that tne service charges could not be deducted asprofits of business means profits of business reduced by 90%of any sum referred to in clauses (ilia), (iiib), (illic), (ilid) and(ilie) of Section 28 or of any receipts by way of brokerage,commission, interest, rent, charges or any other receipt of a.similar nature included in such profits. In)"COMMISSIONER OF INCOME TAX VS. PFIZER LTD.’,it nas peen held tnat| 17)|The Commissioner of Income Tax (Appeals) as)well as the Tribunal have reduced 90% of Rs.3,05,11,/720/-being income from services rendered and Rs.21,/7,493/-being sundry income from. profits of business whilecomputing deduction under Section 8QHHC. It is pertinent to|note that tne service charges could not be deducted asprofits of business means profits of business reduced by 90%of any sum referred to in clauses (ilia), (iiib), (illic), (ilid) and(ilie) of Section 28 or of any receipts by way of brokerage,commission, interest, rent, charges or any other receipt of a.similar nature included in such profits. In)"COMMISSIONER OF INCOME TAX VS. PFIZER LTD.’,it nas peen held tnat| Explanation (baa) in terms does not refer to export turnover.Tnerefore, before a receipt is liable to be excluded to the|extent of 90% it must be a receipt of a nature similar to)brokerage, commission, interest, rent or charges. It is also|pertinent to note that decision of the Supreme Court in)K,RAVINDRANATH NAIRdoes not deal with the issue ofbusiness profits and has not over ruled the decision in)BANGALORE CLOTHING CQOsupra. Tne finding in this|regard recorded by the Tribunal is factually incorrect.|Therefore, the service charges are liable to be excluded fromprofits of business for the purposes of computing deduction|under Section 80HHC. Accordingly, the fourth and fifth)substantial questions of law is also answered in favor of the|assessee and against the revenue.| 13.The substantial question of law framed in ITA)No.7 & 8/2011 are alSo answered in favour of the assessee|and against the revenue. In view of the preceding analysis,|the order passed by the Income Tax Appellate Tribunal as|well as the order passed by the Commissioner of Income Tax|(Appeals) insofar as it pertains to rejection of the claim of the 45536648;�4*3�23*3A)�D741239���8�;23�*3176;#�;23�4553461�4*3� 466<B39�� 11� ����������� �������������