1 ITA Nos. 2307 & 1456/Del/2011 IN INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: NEW DELHI BEFORE SHRI G. D. AGRAWAL, VICE PRESIDENT AND SMT SUCHITRA KAMBLE, JUDICIAL MEMBER ITA No.-2307/DEL/2011 (ASSESSMENT YEAR 2007-08) DCIT vs. Beekman Helix India Circle-2 (1) Consulting India (P) Ltd. Room No. 398B, C. R. Building 3rd Floor, Augusta Point, New Delhi Sesctor-53 Gurgaon AACCB8655R (APPELLANT) (RESPONDENT) I.T.A .No.-1456/DEL/2011 (ASSESSMENT YEAR 2007-08) ACIT vs. Beekman Helix India Circle-1 Consulting India (P) Ltd. Gurgaon 3rd Floor, Augusta Point, Sesctor-53 Gurgaon AACCB8655R (APPELLANT) (RESPONDENT) Appellant by Sh. S. K. Jain, SR. DR Respondent by Sh. C. S. Agrawal, Adv, R. P. Mall, Adv Date of Hearing 11.08.2016 Date of Pronouncement 19.10.2016 ORDER PER SUCHITRA KAMBLE, JM These appeals are filed by Revenue against order dated 22/02/2011 & 7/12/2011 respectively, passed by CIT(A)-V, New Delhi. 2 ITA Nos. 2307 & 1456/Del/2011 2. grounds of appeal are as under: (ITA No. 2307/Del/2011) 1. Ld.CIT(A) has erred on facts and in law in deleting addition of Rs.53,12,500/- made on account of call option fee by holding expenses as revenue in nature, as: a). Ld.CIT(A) erred in law by admitting additional evidences regarding call option fees because this case is not covered under Rule 46A of I.T. Rules 1962. b) cases relied on by Ld.CIT(A) are not squarely applicable in this case. c) All expenditure is integral part of profit earning process and cannot be held as revenue expenditure because only necessity of expenditure or expenditure incurred for protecting interest of investors is not test of revenue or capital expenditure. d) Expenditure for purchase of shares or any right to purchase of shares can be held as revenue expenditure in case of share dealer/trader only and assesse does not deals in shares. 2. Ld.CIT(A) has erred on facts and in law in restricting disallowance u/s 14A read with Rule 8D to Rs.1,06,563/- as against disallowance of Rs.2,13,126/-. Ld.CIT(A) has failed to take cognizance of sub-section (3) of Section 14A which specifies that even if assessee makes claim that no expenditure has been incurred in earning exempted income, sub-section (2) of section 14A shall apply, meaning thereby, disallowance u/s 14(A) is called for. (ITA No. 1456/Del/2011) 1. Whether, on facts and in circumstances of case, Ld. CIT(A) was right in law in deleting addition of Rs.28,515/- made by Assessing Officer on account of excess depreciation claimed on UPS . definition of computer has not been given in Income Tax Act and as such its meaning is to be derived from allied Acts. As per Information Technologies Act, UPS is not covered in definition of Computer or Computer System . Hence, it can only fall under head of Plant and Machinery ? 2. Whether, on facts and in circumstances of case, Ld. 3 ITA Nos. 2307 & 1456/Del/2011 CIT(A) was right in law in deleting addition of Rs.1,21,75,000/- made by Assessing Officer treating call option fees as capital expenditure. call option fees is fee paid by assessee company to promoters of investee companies for securing option to purchase share capital in case of certain default events which may or may not occur. Thus, same is related to investments which are clearly expenditure of capital nature? 3. Whether on facts and in circumstances of case, case laws relied upon by Ld. CIT(A) are squarely applicable in this case in view of fact that all expenditure is integral part of profit earning process and cannot be held as revenue expenditure on basis of necessity of expenditure. expenditure incurred for protecting interest of investors is not test of revenue or capital expenditure? 4. Whether on facts and in circumstances of case, Ld. CIT(A) was right in law in admitting additional evidence regarding call option fees? 3. Instant two appeals have been filed by revenue, which pertain to assessment years 2007-2008 and 2008-2009. One of common ground involved in both these appeals pertain to deletion of disallowance of expenditure incurred by assessee debited under head call option fee . call option fee was nomenclature used for which sum had been incurred to secure and thereby to induce investors of risks undertaken by them on making investment on advice of assessee and annualled expenditure to earn origination fee, source of its income and thus expenditure incurred had direct nexus with incurring of expenditure. Another common ground involved in both these appeals pertain to Revenue s grievance of admission made of additional evidence, 4 ITA Nos. 2307 & 1456/Del/2011 submitted by assessee before CIT(A), who accepted application made under Rule 46A of Income tax Rules, 1962. other ground for AY 2007-2008, raised by Revenue is with regard to, restricting of disallowance made under section 14A of Act read with Rule 8D of I.T. Rules, 1962. In so far as Assessment Year 2008-09, there is one more ground other than common ground which pertains to deletion of disallowances of claim of depreciation. 4. FACTUAL BACKGROUND OF CASE: assessee is private limited company and was incorporated on 17/5/2006 under Companies Act, 1956. assessee is engaged in business of providing investment advisory & derives income by way of origination fee (which assists developers in real estate in arranging financial assistance for their real estate projects) and, also provides advisory services relating to investment opportunities in Indian real estate sector to its overseas associated enterprises/funds. 5. Disallowance of expenditure of call option fee :- For assessment year 2007-08, assessee company filed return of income on 30.10.2007 declaring total income of Rs. 98,52,467/- and for AY 2008-2009 assessee filed its return of total income on 30.09.2008 at loss of Rs. 1,11,41,459/-. These returns of income were duly 5 ITA Nos. 2307 & 1456/Del/2011 accompanied by audited financial statements and, tax audit report u/s 44AB of Act. copy of audited financial statements and, other enclosures filed along with return of income is placed at pages 3-48 of PB for AY 2007-2008 and at 3-50 of PB for AY 2008-2009. 5.1. However, Assessing Officer in orders u/s 143(3) of Act dated 19.11.2009 and 29.10.2010 computed income of assessee company for AY 2007-2008 at income of Rs. 1,65,71,920/- and for AY 2008-2009 at income of Rs. 13,52,750/-, respectively. 5.2. assessee company being aggrieved against aforesaid orders of assessments, preferred appeals before CIT(A) and filed its written submissions (see page 81-110 of PB for AY 2007-2008 and (page 105-135 of PB for AY 2008- 2009). During appellate proceedings, assessee made application dt. 17.12.2010 (pages 111-115) under Rule 46A of Income Tax Rules, 1962 seeking permission to furnish additional evidences, since in course of assessment proceeding assessee had not been granted valid and adequate opportunity of being heard and further before drawing adverse inference, when he disallowed claim of expenditure AO never gave any specific notice of treating expenditure as disallowable, but was of opinion that it represents capital expenditure though claimed as revenue expenditure. evidence 6 ITA Nos. 2307 & 1456/Del/2011 placed by assessee as additional evidence though were adverted by assessee before AO however since AO did not dispute contents of such documentary evidence, such evidences were not physically placed on record and it is thus submitted otherwise too in law evidence were to referred as additional evidence could not be regarded, technically as additional evidence. additional evidence submitted by assessee for AY 2007-08 was as under: 1 Mandate Letter dated December 18, 2006 executed between Beekman Helix India Consulting Pvt. Ltd. and investor Ritesh Spinning Mills Limited (Pages 116- 122 of paper book for AY 2007-2008) 2 Term sheet dated January 10, 2007 executed between Beekman Helix India Consulting Pvt. Ltd. and Ritesh Spinning Mills Ltd. (Pages 123- 131 of paper book for AY 2007-2008) 3 All call option agreements executed by Beekman Helix India Consulting Pvt. Ltd. with promoters of investee companies (Sample copy of call option agreement is enclosed at pages 132-146 of paper book for AY 2007-2008) 5.3. aforesaid additional evidences along with written submission of assessee were sent to AO for his comments. CIT (A) after perusing assessment record & after being satisfied with submission of assessee made in its 7 ITA Nos. 2307 & 1456/Del/2011 application dt. 17.12.2010 found them to be factually correct and was borne out from record and thus directed AO to re- examine claim of expenditure in light of facts of case and in light of evidence produced before him with course of assessment proceeding with reference to said evidence which applicants had sought to physically place on record. In compliance thereto AO furnished his remand report for both assessment years (placed at page 147-149 of PB for AY 2007-2008 and at page 102-104 of PB for AY 2008-2009). AO in his remand report reiterated that expenditure incurred on account of call option fees paid is for purchasing share capital of certain companies in certain circumstances and thus same is related to investments, which is clearly expenditure of capital nature. CIT(A) observed that A.O being fully aware of proceedings which had taken before him did not seriously object to assessee s prayer that such documents be allowed to be taken physically on record and were duly adverted before him. In fact on perusal of comments of AO in his remand report, he mainly objected to admission of additional evidence with reference to clause (a) and Clause (b) of Sub Rule (1) of Rule 46A of I.T. Rules and did not at all object to submission of assessee that such evidence as was being physically produced before CIT (A) were also referred before AO. In other word, he did not make any comment on assessee s submission in respect of clause (c) & (d) of sub- Rule (l) of Rule 46A of I.T Rules, 1962. In response to 8 ITA Nos. 2307 & 1456/Del/2011 remand report, assessee also furnished its rejoinder (page 150- 153 of PB for AY 2007-2008 and pages 136-140 of PB for AY 2008-2009). 5.4. CIT(A) after considering remand report and submissions of assessee admitted additional evidence (para 4.3 and para 6.3 of order of CIT(A) for AY 2007- 2008 and 2008-2009, respectively) and deleted allowances made by AO by holding that expenditure incurred by way of call option fee is revenue expenditure and had direct nexus with earning of income and cannot be regarded as capital in nature. 5.5. Instant appeals have been preferred by revenue, wherein one of issue involved is with regard to deletion of disallowance of expenditure incurred representing call option fee paid by assessee company which expenditure has been disallowed by AO by holding same to be capital expenditure. 5.6. Ld. DR relied upon order of Assessing Officer. Ld. DR further submitted that AO rightly computed income of assessee company for AY 2007-2008 at income of Rs. 1,65,71,920/- and for AY 2008-2009 at income of Rs. 13,52,750/-, respectively. 5.7 Ld. AR submitted that to attract investor to invest 9 ITA Nos. 2307 & 1456/Del/2011 in companies to whom lessee has given investment advisory and to secure investment of investor, assessee company also incurs expenditure denominated as call option fee so that investors are secured of their risk they undertake on making investments on advice of assessee company. said expenditure is incurred under agreement titled as call option agreements entered by assessee company with promoters of investee companies, which enables assessee company to purchase shares of group concerns of promoters provided they fail to honour their obligations towards investors. details of origination fee received and call option fee paid for Assessment Year 2007-08 are as under:- S. Name of Party Investment Origination fee Call option fee No. 1 D. D. Housing Ltd. Rs.112.50 Rs. 28,12,500/- Crore 2 Supreme Build Cap Rs. 75 Rs. 18,75,000/- Crore 3 Ritesh Spinning Rs. 25 Rs. 6,25,000/- Mills Crores. Total Rs. 4,42,71,818/- Rs.53,12,500/- details of origination fee received and call option fee paid for AY 2008-09 are as under: S. Name of Investment (Rs. Origination Call option fee No. party In corres) fee (in Prs.) (in Rs.) 1 Pacific 32.00 48,00,000/- 8,00,000/- 10 ITA Nos. 2307 & 1456/Del/2011 Infrastructure Private Limited (IT Park Project) 2 Pacific 75.00 1,12,50,000/- 18,75,000/- Infrastructure Private Limited (Residential Project) 3 Parkwood 25.00 50,00,000/- 6,25,000/- Developers Private Limited (Group Housing Project at MOhali) 4 Global Hiritage 100.00 2,00,00,000/- 25,00,000/- Venture Limited (Hotel Project at Gurgaon) 5 Netzone 255.00 4,46,25,000/- 63,75,000/- Developers Private Limited (Commercial Project Mumbai) Total 487.00 8,56,75,000/- 1,21,75,000/- Ld. AR further submitted that assessee has incurred expenditure of call option fee, which expenditure was incurred for purpose of earning origination fee. It is submitted that for purpose of earning origination fee, assessee had paid amount to promoters of investee companies to acquire total shares of promoters of investee companies on happening of certain events (which events are mainly in nature of protecting interest of investor 11 ITA Nos. 2307 & 1456/Del/2011 companies), and by incurring this call option fee, assessee respondent has ensured that investee companies don t make any default in any respect. 5.8. Ld. AR submitted that incurring of expenditure of call option fee and earning of origination fee has complete nexus, as but for call option fee, assessee would not have been able to persuade investors to invest in investee companies from whom assessee has earned origination fee . It is submitted that nature of business carried on by assessee makes it prudent for it to enter into such arrangement, so as to attract investors to invest in companies at advise of assessee. It is further submitted that had such arrangement was not entered by assessee with investor companies, it would not have been possible for assessee to get investment for their clients and therefore it would not have been able to earn origination fee . Ld. AR submitted that since, assessee company is in business of arranging funds and providing research services, any failure of project recommended by it would have negative impact on prospective customers, and as such, to insure regular flow of business such as expenditure has been incurred. Ld. AR submitted that without such arrangement, assessee would not have arranged any investment for any of its clients. Entering into call option agreement was mutually agreed by assessee and investee company, as can be seen from Mandate 12 ITA Nos. 2307 & 1456/Del/2011 Letter (page 116-122 of PB for AY 2007-2008) and only then assessee provide investment advisory services. Ld. AR submitted that as per understanding i.e. Mandate Letter , nature of services to be provided by assessee are as under: i. Appraisal of SPV and projects to be undertaken by such SPV. ii. Identifying potential investors. iii. Arranging for investor due diligence. iv. Structuring transaction. v. Preparing presentation material for approval by investors. 5.9 Ld. AR placed on record mandate letter dated 18.12.2006 issued by M/s Ritesh Spinning Mills Ltd. (promoter), copy of which was placed at pages 116 to 122 of PB for AY 2007-08. perusal thereof would show that, assessee company was given mandate to identify potential investors in lieu of origination fee being 2.5% of investments made by investor. However, to earn said income, assessee agreed to incur expenditure of 0.25% of investments made as call option fee. 6. We have heard both parties and perused relevant documents. expenditure incurred as Call Option Fee paid by assessee company was part and parcel of business of assessee company. same was for investors to secure their 13 ITA Nos. 2307 & 1456/Del/2011 risk they have undertaken on making investments on advise of assessee company. said expenditure is incurred under agreement titled as call option agreements entered by assessee company with promoters of investee companies, which enables assessee company to purchase shares of group concerns of promoters provided they fail to honour their obligations towards investors. This expenditure was incurred for purpose of earning Origination fee. Thus CIT(A) has rightly allowed claim of assessee. There is no requirement of interfering findings of CIT(A). This ground is dismissed. 7. Disallowance under section 14A of Act: In assessment year 2007-08, assessee company has received dividend income from mutual funds amounting to Rs. 26,30,028 which has been claimed as exempt under section 10 (35) of I.T. Act, 1961. During assessment proceedings A.O. held that no expenditure directly or indirectly was incurred for earning exempt income and computed expenses under Rule 8D of Income Tax Rules, 1962 at 0.5 % of closing value of investment and disallowed same as expenses incurred in relation to exempt income. 7.1. assessee company being aggrieved preferred appeal before CIT (A) and contended that section 14A of Act would trigger only when expenditure has been incurred in order to 14 ITA Nos. 2307 & 1456/Del/2011 earn income that, is otherwise exempt. Without prejudice to above contentions, assessee company also submitted before CIT(A) that disallowance has been wrongly been computed at 0.5% on closing balance of investments of Rs. 4,26,25,260/-, rather than average value of investments, as prescribed under Rule 8D of Rules. Since, opening value of investment is Nil, average value of investment should be computed at Rs.2,13,12,630/-. Accordingly, correct amount of disallowance would be Rs.1,06,563/-. After considering assessee company s contentions, CIT(A) held that AO has correctly disallowed 0.5% of value of investment, however calculation of 0.5% should be made on average value of investment, as contended by assessee company. Hence, CIT(A) limited addition to Rs.1,06,563/-. 7.2. In instant appeal filed by revenue, revenue has challenged deletion of addition by CIT(A) on ground that sub-section (3) of section 14A of Act which specifies that even if assessee makes claim that no expenditure has been incurred in earning exempted income, sub-section (2) of section 14A of Act shall apply, meaning thereby, disallowance u/s 14A(1) of Act is called for. Ld. DR submitted that Assessing Officer has rightly held that no expenditure directly or indirectly was incurred for earning exempt income and computed expenses under Rule 8D of Income Tax Rules, 1962 at 0.5 % of closing value of 15 ITA Nos. 2307 & 1456/Del/2011 investment and disallowed same as expenses incurred in relation to exempt income. 7.3. In light of aforesaid background, Ld. AR submitted that CIT(A) has merely rectified computation of disallowance made by AO under section 14A of Act read with Rule 8D of Rules. Ld. AR submitted that for making disallowance, AO has invoked Rule 8D(2)(iii) of Income Tax Rules which provides that expenditure in relation to income which does not form part of total income shall be amount equal to one- half per cent of average of value of investment, income from which does not or shall not form part of total income, as appearing in balance sheet of assessee, on first day and last day of previous year. Here, average value of investment means average of opening value of investment at beginning of assessment year and closing value of investment at end of assessment year. Ld. AR submitted that AO while computing disallowance has erroneously taken value of investment i.e. value of investment at close of year, not average value of investment as per aforesaid rule. 7.4. Ld. AR submitted that CIT(A) has only corrected computation of disallowance in accordance with provisions of Rule 8D of I. T. Rules to 0.5% average value of 16 ITA Nos. 2307 & 1456/Del/2011 investments. Since, opening value of investment is Nil, average value of investment should be computed at Rs.2,13,12,630/- [(0+4,26,25,260)/2]. Accordingly, correct amount of disallowance is Rs. 1,06,563/- [0.5% x 2,13,12,630]. contention of Ld. DR that CIT(A) has erred in restricting disallowance under section 14A of Act read with Rule 8D of Rules to Rs. 1,06,563/- as against disallowance of Rs.2,13,126/-, does not have any support. 8. We have heard both parties and perused relevant documents. AO while computing disallowance has erroneously taken value of investment i.e. value of investment at close of year, not average value of investment as per aforesaid rule. CIT(A) has only corrected computation of disallowance in accordance with provisions of Rule 8D of I. T. Rules to 0.5% average value of investments. Since, opening value of investment is Nil, average value of investment should be computed at Rs.2,13,12,630/- [(0+4,26,25,260)/2]. Accordingly, correct amount of disallowance is Rs. 1,06,563/- [0.5% x 2,13,12,630]. Thus, no interference is required in order of CIT(A). This ground is dismissed. 9. Deletion of disallowance of depreciation on UPS: During assessment year 2008-09, assessee company has 17 ITA Nos. 2307 & 1456/Del/2011 purchased UPS equipment amounting to Rs. 1,26,734 that has been included in block of Machinery and Plant under head Computer including computer software , in accordance with provisions of section 32 of Act read with Rule 5 of Rules. Accordingly, assessee has claimed depreciation @ 60% on UPS. 9.1. However, AO held that UPS is separate equipment which can work in conjunction with computer but can also work independently with other electrical/ electronic equipments. AO held that UPS is not part of computer system eligible for depreciation @ 60%, rather is part of Machinery and Plant which is eligible for depreciation @ 15% and accordingly disallowed Rs. 28,515/- as excess depreciation claimed on UPS. 9.2. CIT(A) allowed this ground in favour of assessee. 9.3 Ld. DR relied upon order of Assessing Officer and submitted that disallowance is rightly made by AO. 9.4 Ld. AR submitted that term computer has not been specifically defined for purpose computing depreciation under provisions of Act. Therefore, reliance may be placed on judicial precedents in order to understand term computer . In this regard, Ld. AR placed reliance on case of CIT vs BSES Yamuna Powers Limited (ITA No 1267/2010), wherein Hon ble High Court of Delhi has held as under: 18 ITA Nos. 2307 & 1456/Del/2011 We are in agreement with view of Tribunal that Computer accessories and peripherals such as, printers, scanners and server etc. form integral part of computer system. In fact, computer accessories and peripherals cannot be used without computer. Consequently, as they are part of computer system, they are entitled to depreciation at higher rate of 60% . 9.5. Furthermore, in case of CIT vs Orient Ceramics & Industries Ltd (56 DTR 397), Hon ble High Court of Delhi, relying on its own judgment in case of CIT vs BSES Yamuna Powers Limited (supra), has held as under: assessee company had claimed depreciation on UPS @ 60 per cent whereas AO had allowed it @ 25 percent and on this basis, disallowance of Rs. 1,4 70 was made. issue now stands covered by judgment of this Court in case of CIT vs. BSES Yamuna Powers Ltd. (in IT Appeal No. 1267 decided on 31st Aug.,2010) wherein it was held that depreciation @ 60 per cent on such items shall be allowed. Ld. AR placed reliance on following judicial precedents, in support of its contentions: i. CIT vs Citicorp Maruti Finance Limited (1TA No. 1712/2010 and ITA No. 1714/2010) (Del HC) ii. DCIT vs Datacraft India Ltd. (133 TTJ 377) (Special Bench of Mumbai Tribunal) iii. ITO vs Omni Globeinformation Technologies India (P) Ltd (ITA No 3465/Del/2009) iv. ACIT vs Fidelity Information Systems Co. India (P) Ltd (ITA No 2951 of 2009)(Delhi Tribunal) v. Expeditors International India Private Limited Vs. Addl. CIT [2008] 118 TTJ 652 (Delhi Tribunal) vi. ITO vs. Samiran Mjumdar (98 ITD 119) (Kolkata Tribunal) 19 ITA Nos. 2307 & 1456/Del/2011 In light of above, Ld. AR submitted that UPS purchased by Assessee company form integral part of Computer block and are eligible for depreciation @60%. Accordingly, depreciation claimed on UPS at rate of 60% is in accordance with law and same should be sustained. 10. We have heard both parties and perused all materials available on record. It is pertinent to note that CIT(A) has given extensive finding on issue mentioned hereinabove. UPS purchased by Assessee company form integral part of Computer block and are eligible for depreciation @60%. Accordingly, depreciation claimed on UPS at rate of 60% is in accordance with law and same should be sustained. Thus order of CIT(A) is just and proper. 11. In result, both appeals of Revenue are dismissed. order is pronounced in open court on 19th of October, 2016 Sd/- Sd/- (G. D. AGRAWAL) (SUCHITRA KAMBLE) VICE PRESIDENT JUDICIAL MEMBER Dated: 19/10/2016 R. Naheed * Copy forwarded to: 1. Appellant 20 ITA Nos. 2307 & 1456/Del/2011 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI Date 1. Draft dictated on 11.08.2016 PS 2. Draft placed before author 11.08.2016 PS 3. Draft proposed & placed before .2016 JM/AM second member 4. Draft discussed/approved by JM/AM Second Member. 5. Approved Draft comes to 19.10.2016 PS/PS Sr.PS/PS 6. Kept for pronouncement on PS 7. File sent to Bench Clerk 19.10.2016 PS 8. Date on which file goes to AR 9. Date on which file goes to Head Clerk. 10. Date of dispatch of Order. 21 ITA Nos. 2307 & 1456/Del/2011 DCIT Circle-2 (1), New Delhi v. Beekman Helix India Consulting India (P) Ltd