IT: Tenancy rights cannot be construed as 'intangible' assets falling within meaning of Explanation 3 to section 32(1) and, therefore, there is no question of allowing depreciation on said rights
IT: Amount disallowable under section 14A is covered under clause (f) of Explanation 1 to section 115JB(2) and, thus, said amount has to be added back while computing amount of book profits
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[2013] 37 taxmann.com 289 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'F'
Dabur India Ltd.
v.
Assistant Commissioner of Income-tax, Circle-5(1), Mumbai*
R.S. SYAL, ACCOUNTANT MEMBER
AND SANJAY GARG, JUDICIAL MEMBER
AND SANJAY GARG, JUDICIAL MEMBER
IT APPEAL NO. 4679 (MUM.) OF 2012
[ASSESSMENT YEAR 2009-10]
[ASSESSMENT YEAR 2009-10]
AUGUST 23, 2013
I. Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/rate of [Tenancy rights] - Assessment year 2009-10 - Whether tenancy rights cannot be construed as 'intangible' assets falling within meaning of Explanation 3 to section 32(1) and, therefore, there is no question of allowing depreciation on said rights - Held, yes [Para 5] [In favour of revenue]
II. Section 115JB, read with section 14A, of the Income-tax Act, 1961 and rule 8D of the Income-Tax Rules, 1962 - Minimum alternate tax [Computation of book profit] - Assessment year 2009-10 - Whether amount disallowable under section 14A is covered under clause (f) of Explanation 1 to section 115JB(2) and, thus, said amount has to be added back while computing amount of book profits - Held, yes [Para 7] [In favour of revenue]
FACTS-I
| ■ | During the relevant assessment year, the assessee filed its return claiming depreciation on tenancy rights. | |
| ■ | The revenue authorities rejected the assessee's claim. | |
| ■ | On second appeal: |
HELD-I
| ■ | A bare perusal of the definition of intangible assets on which depreciation is available under section 32, makes it vivid that the intangible assets so classified are know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. | |
| ■ | One is reminded of the rule of nosticur a sociis which simply means that the general words associated with the specific words draw their meaning from the company they keep. Going by this rule, the expression 'any other business or commercial rights' as employed in the definition of 'intangible' assets as per the above Explanation, must mean only the intangible assets similar to those which precede it, that is, 'know-how, patents, copyrights, trade marks, licences, franchises'. | |
| ■ | The former category of intangible assets includes such assets with which the business is directly carried on. In other words, these are intangible assets by which either the permission to carry on the business or manufacture is received or are used for the manufacture or the sale of the products manufactured. Such intangible assets directly facilitate the profit earning activity. | |
| ■ | On the other hand, the tenancy rights have no significance whatsoever either with a right to manufacture or actual manufacture of the products or their sale carrying brand name or logo etc. Tenancy rights simply provide a place at which manufacturing or administrative activity is persued. | |
| ■ | A businessman can carry on manufacturing at any place but the business cannot be carried on without licence, or without specific know-how, copy right, or trade mark etc. Reverting to the extant case, only an intangible asset of the nature of know-how, patents, copyrights, trademarks, licences, franchises etc. can be brought within the ambit of 'any other business or commercial right'. | |
| ■ | The Legislature has made its intention crystal clear by the use of words 'of similar nature' immediately after the words 'any other business or commercial rights'. This makes the position beyond any pale of doubt that 'any other business or commercial rights' would only be such which are of the nature of know-how, patents, copyrights, trade marks, licences, franchises etc. | |
| ■ | There is a vast difference between know-how, patents, copyrights, trade marks, licences, franchises etc. on one hand and tenancy rights on the other, thus, it is opined that tenancy rights cannot be construed as 'intangible' assets falling within the meaning of Explanation 3 to section 32(1). | |
| ■ | Since the tenancy right cannot be treated as an intangible asset, there is no question of allowing depreciation on it. Therefore, the view taken by the authorities below on this issue is approved. [Para 5] |
FACTS-II
| ■ | The assessee earned certain exempt income but did not offer any disallowance under section 14A. | |
| ■ | The Assessing Officer computed disallowance under section 14A by applying rule 8D of 1962 Rules. While computing book profit under section 115JB, the Assessing Officer added said disallowance as per clause (f) of Explanation 1 to section 115JB. | |
| ■ | The Commissioner (Appeals) upheld the assessment order. | |
| ■ | On second appeal: |
HELD-II
| ■ | A bare perusal of clause (f) of Explanation 1 to section 115JB makes it abundantly clear that the amount of expenditure 'relatable to' any exempt income, other than section 10(38), is liable to be added back to the amount of net profit as shown in the profit and loss account. | |
| ■ | When one turns to the language of section 14A, it transpires that it talks of disallowing any expenditure incurred 'in relation to' income not includible in the total income. Sub-section (1) of this provision provides that : "For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee 'in relation to' income which does not form part of the total income under this Act." | |
| ■ | The expression 'in relation to' used for making disallowance under section 14A has been employed in Explanation 1 to section 115JB(2) as expenditure 'relatable to', in more or less the same form. | |
| ■ | It is manifest that the amount of dividend is exempt under section 10(33) [not section 10(38)] of the Act. Thus any expenditure 'relatable to' the exempt dividend income would fall under clause (f). | |
| ■ | The assessee argued that unless an amount is specifically debited to the profit and loss account in respect of an exempt income, the same cannot be brought within the purview of clause (f) of the Explanation 1 to section 115JB(2). | |
| ■ | It was further stated that since the disallowance under section 14A is computed as per rule 8D, the origin of the expenses disallowed cannot be traced to the profit and loss account and hence it cannot be covered within the mischief of clause (f) of the Explanation. | |
| ■ | One fails to find any logic in this submission because of the clear language of the Explanation 1, which provides in unequivocal terms that the amount of expenditure 'relatable to' the exempt income shall be added back. Neither the language of clause (f) expressly refers to the amount specifically debited to the profit and loss account nor there can be an implication in this regard. What has been contemplated by the provision is the amount of the expenditure 'relatable to' the exempt income. | |
| ■ | Further, the amount disallowable under section 14A is always part of the expenses specifically debited to the profit and loss account. It is axiomatic that unless any expenditure is incurred and claimed as deduction, there can be no question of any hypothetical disallowance under section 14A. It, therefore, follows that the amount disallowable under section 14A is covered under clause (f) of Explanation 1 to section 115JB(2). | |
| ■ | As the assessment year under consideration is 2008-2009 in which disallowance under section 14A is required to be computed as per rule 8D and further it is in this fashion that the amount has been disallowed and also added to the amount of net profit for computing 'book-profit' under section 115JB, there is no reason to disturb the impugned order on this issue. This ground is not allowed. [para 7] |
CASE REVIEW
Techno Shares & Stocks Ltd. v. CIT [2010] 327 ITR 323/193 Taxman 248 (SC) (para 5) distinguished.
CASES REFERRED TO
CIT v. Techno Shares & Stocks Ltd. [2010] 323 ITR 69/[2009] 184 Taxman 103 (Bom.) (para 3), Techno Shares & Stocks Ltd. v. CIT [2010] 327 ITR 323/193 Taxman 248 (SC) (para 3), CIT v. Venkateswara Hatcheries (P.) Ltd. [1999] 237 ITR 174/103 Taxman 503 (SC) (para 5),Stonecraft Enterprises v. CIT [1999] 237 ITR 131 (SC) (para 5), Aravinda Paramila Works v. CIT [1999] 237 ITR 284/104 Taxman 109 (SC)(para 5), RBK Share Broking (P.) Ltd. v. ITO [IT Appeal No. 6678 (Mum.) of 2011, dated 29-8-2012] (para 7) and Esquire (P.) Ltd. [IT Appeal No. 5688 (Mum.) of 2011, dated 24-7-2003] (para 7).
Subhash Shetty for the Appellant. R.R. Prasad for the Respondent.
ORDER
R.S. Syal, Accountant Member - This appeal by the assessee is directed against the order passed by the Commissioner of Income-tax (Appeals) on 18.05.2012 in relation to the assessment year 2009-2010.
2. The first ground is against the denial of depreciation on tenancy rights amounting to Rs. 2,90,948. Briefly stated the facts of this ground are that the assessee claimed depreciation on tenancy rights. The Assessing Officer rejected such claim following the view taken by him for the assessment years 2003-2004 to 2007-2008. The learned CIT(A) upheld the assessment order on this issue.
3. After considering the rival submissions and perusing the relevant material on record, we find that the earlier years came up for consideration before the Tribunal in ITA No.6050/Mum/2007 etc. Vide order dated 09.04.2010, the Tribunal has upheld the view of the authorities below by relying on the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Techno Shares & Stocks Ltd. [2010] 323 ITR 69/[2009] 184 Taxman 103 (Bom.). The learned Counsel for the assessee contended that the Hon'ble Supreme Court has overruled this judgment in Techno Shares & Stocks Ltd. v. CIT [2010] 327 ITR 323/193 Taxman 248 and the effect of such reversal is that the depreciation should now be allowed. In canvassing such a view for the grant of depreciation, he referred to the provisions of section 32(1)(ii) for bringing home the point that the tenancy rights fall within the ambit of the expression "any other business or commercial rights of similar nature" as employed in defining "intangible" assets. Au contraire, the ld. DR relied on the impugned order.
4. We are not convinced with the contention advanced on behalf of the assessee. The manifest reason is the following definition of the term "intangible" asset given in Explanation (3) to section 32(1) :-
"(b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature".
5. A bare perusal of the definition of intangible assets on which depreciation is available u/s 32 makes it vivid that the intangible assets so classified are know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. We are reminded of the rule of nosticur a sociis which simply means that the general words associated with the specific words draw their meaning from the company they keep. This rule has been quoted with approval by the Hon'ble Supreme Court in several judgments including CIT v. Venkateswara Hatcheries (P.) Ltd.[1999] 237 ITR 174/103 Taxman 503, Stonecraft Enterprises v. CIT [1999] 237 ITR 131 (SC) and Aravinda Paramila Works v. CIT [1999] 237 ITR 284/104 Taxman 109 (SC). Going by this rule, the expression "any other business or commercial rights" as employed in the definition of "intangible" assets as per the above Explanation, must mean only the intangible assets similar to those which precede it, that is, "know-how, patents, copyrights, trade marks, licences, franchises". The former category of intangible assets includes such assets with which the business is directly carried on. In other words, these are intangible assets by which either the permission to carry on the business or manufacture is received or are used for the manufacture or the sale of the products manufactured. Such intangible assets directly facilitate the profit earning activity. On the other hand, the tenancy rights have no significance whatsoever either with a right to manufacture or actual manufacture of the products or their sale carrying brand name or logo etc. Tenancy rights simply provide a place at which manufacturing or administrative activity is persued. A businessman can carry on manufacturing at any place but the business cannot be carried on without licence, or without specific know-how, copy right, or trade mark etc. Reverting to the extant case, only an intangible asset of the nature of know-how, patents, copyrights, trademarks, licences, franchises etc. can be brought within the ambit of "any other business or commercial right". The legislature has made its intention crystal clear by the use of words "of similar nature" immediately after the words "any other business or commercial rights". This makes the position beyond any pale of doubt that "any other business or commercial rights" would only be such which are of the nature of know-how, patents, copyrights, trade marks, licences, franchises etc. As noticed supra, there is a vast difference between know-how, patents, copyrights, trade marks, licences, franchises etc. on one hand and tenancy rights on the other, we are of the considered opinion that tenancy rights cannot be construed as "intangible" assets falling within the meaning of Explanation 3 to section 32(1). The reliance of the ld. DR on the judgment of the Hon'ble Supreme Court in Techno Shares & Stocks Ltd. (supra) is of no consequence. In that case the question was whether depreciation can be granted on the Bombay Stock Exchange Membership card. As the ownership of such Membership Card is sine qua non to conduct the business on the floor of stock exchange, the Hon'ble Supreme Court held it to be an intangible asset eligible for depreciation. Such Membership card is a permission to do the business as share broker akin to 'licence' and not a place for carrying on such business akin to 'tenancy right'. In our considered opinion, this judgment does not advance the case of the assessee any further. To sum up, we hold that since the tenancy right cannot be treated as an intangible asset, there is no question of allowing depreciation on it. We, therefore, approve the view taken by the authorities below on this issue. This ground fails.
6. Second ground of the appeal is against the confirmation of addition to the book profit u/s 115JB by disallowance u/s 14A amounting to Rs. 4,15,062. The assessee earned exempt income of Rs. 8.78 lakh but did not offer any disallowance u/s 14A. The Assessing Officer computed disallowance u/s 14A by applying rule 8D at Rs. 4.15 lakh. While computing book-profit u/s 115JB, the A.O. added this disallowance of Rs. 4.15 lakh as per clause (f) of Explanation 1 to section 115JB. The learned CIT(A) upheld the assessment order on this point.
7. We have heard the rival submissions and perused the relevant material on record. 'Book-profit' u/s 115JB is computed as per Explanation (1) to sub-section (2) of section 115JB. This Explanation provides that "book profit" means net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2) as increased by certain amounts specified under clauses (a) to (i) if debited to the profit and loss account and clause (j) if not credited to the profit and loss account. The amount so determined is further adjusted by reducing the amounts specified in clauses (i) to (vii). The amount which eventually results is the amount of 'book profit' on which tax liability is determined u/s 115JB. Clause (f) to the Explanation (1) provides that the net profit shown in the profit and loss account shall be increased by : "(f) the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause 38 thereof) or section 11 or section 12 apply;". A bare perusal of clause (f) of Explanation (1) makes it abundantly clear that the amount of expenditure "relatable to" any exempt income, other than section 10(38), is liable to be added back to the amount of net profit as shown in the profit and loss account. When we turn to the language of section 14A, it transpires that it talks of disallowing any expenditure incurred 'in relation to' income not includible in the total income. Sub-section (1) of this provision provides that : "For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act." The expression "in relation to" used for making disallowance u/s 14A has been employed in Explanation (1) to section 115JB(2) as expenditure "relatable to", in more or less the same form. It is manifest that the amount of dividend is exempt u/s 10(33) [not section 10(38)] of the Act. Thus any expenditure 'relatable to' the exempt dividend income would fall under clause (f). The ld. AR argued that unless an amount is specifically debited to the Profit and loss account in respect of an exempt income, the same cannot be brought within the purview of clause (f) of the Explanation 1 to section 115JB(2). He stated that since the disallowance u/s 14A is computed as per rule 8D, the origin of the expenses disallowed cannot be traced to the profit and loss account and hence it cannot be covered within the mischief of clause (f) of the Explanation. We fail to find any logic in this submission because of the clear language of the Explanation 1, which provides in unequivocal terms that the amount of expenditure 'relatable to' the exempt income shall be added back. Neither the language of clause (f) expressly refers to the amount specifically debited to the profit and loss account nor there can be an implication in this regard. What has been contemplated by the provision is the amount of the expenditure 'relatable to' the exempt income. Further, the amount disallowable u/s 14A is always part of the expenses specifically debited to the profit and loss account. It is axiomatic that unless any expenditure is incurred and claimed as deduction, there can be no question of any hypothetical disallowance u/s 14A. It, therefore, follows that the amount disallowable u/s 14A is covered under clause (f) of Explanation (1) to section 115JB(2). Our view is fortified by the decision of the Mumbai bench of the tribunal in RBK Share Broking (P.) Ltd. v. ITO in ITA No.6678/Mum/2011 and another earlier order dated 29 August, 2012 passed by the Mumbai Bench of the tribunal in the case of Esquire (P.) Ltd., Mumbai (ITA No. 5688/Mum/2011) deciding the issue against the assessee vide its order dated 24.07.2013. As the assessment year under consideration is 2008-2009 in which disallowance u/s 14A is required to be computed as per Rule 8D and further it is in this fashion that the amount has been disallowed and also added to the amount of net profit for computing 'book-profit' u/s 115JB, we see no reason to disturb the impugned order on this issue. This ground is not allowed.
8. In the result, the appeal is dismissed.
Regards
Prarthana Jalan
__._,_.___
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