DCIT Vs M/s Aban Offshore Ltd (ITAT Chennai)

DCIT Vs M/s Aban Offshore Ltd. (ITAT Chennai)- Whether when the assessee earns dividend income, dis allowance of administrative expenditure incurred, directly or indirectly, can be made even without rule 8 provided AO is able to link the same to earning of the income?

Whether dis allowance u/s 40(a)(ia) is warranted for deduction of tax @ 1% on subcontract where the sub-contract is entered into to fulfill the conditions of the main contract and the same is not independent to the main contract ?

Whether the assessee is right in deducting tax @ 4% being 10% of 40% of tax rate u/s 44BB on the payments made to the non-residents engaged in providing services and facilities in connection with supplying plant and machinery on hire or to be used in prospecting for or extraction of or production of mineral oils – Whether where there is no record date for relevant schemes for which it had received dividend, no disallowance can be made u/s 94(7)?

Whether the assessee is not entitled to claim expenses u/s 35D as amortization of preference shares issued for purchase of rig as it was under refurbishment and was yet to be put to use and was shown under the head `Capital Work in Progress’?

 Assessee’s appeal partly allowed : CHENNAI ITAT

The Deputy Commissioner of Income Tax Vs Aban Offshore Ltd.

ITAT Chennai

I.T.A. Nos. 1542 & 1543/Mds/10

Assessment Years: 2005- 06 & 2006- 07

Aban Offshore Ltd. V. The Addl. / Deputy Commissioner of Income Tax,

I.T.A. Nos. 1381 & 1382/Mds/10

Assessment Year: 2005- 06 & 2006- 07

O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER 

The first two appeals are filed by the Department, whereas, other two appeals are filed by the assessee. Appeals filed by the Department are taken first for disposal.

I.T.A. No. 1 542/Mds/1 0 (assessment year 2005-06)

Revenue has taken six grounds out of which, grounds No.1 and 6 are general needing no adjudication. Vide its ground No. 2, grievance of the Revenue is that ld. CIT(Appeals) deleted depreciation allowance of ~ 4,67,74,780/- made by the A.O.

4. Now before us, the only contention raised by the learned D.R. is that the above referred decision of the Tribunal in assessee’s own case for assessment year 2003-04 has not been accepted.

5.Per contra, learned A.R. pointed out that the matter stood decided in favour of assessee by the Tribunal.

6. We have perused the orders and heard the rival contentions. The disallowance was deleted by ld. CIT(Appeals) relying on Tribunal order in assessee’s own case for assessment year 2003-04 mentioned supra. Nothing has been brought on record to take a contrary view for impugned assessment year. Therefore, ground No.2 appeal of the Revenue stands dismissed.

7. Vide its ground No.3, Revenue’s grievance is that ld. CIT(Appeals) deleted dis allowance of ~ 30,12,454/- made by the A.O. under Section 14A of Income-tax Act, 1961 (in short “the Act”).

8. Assessee had claimed entire amount of dividend income received by it as exempt under Section 10(34) of the Act. Assessing Officer was of the opinion that at least a part of the expenditure incurred for maintaining its establishment and administration, would be attributable to the activity of earning dividend. As per the A.O., the management and staff would have also been involved in the decision making process with regard to the investments resulting in dividends. Assessee replied to the A.O. that it had deployed only surplus funds generated from its business and further, Rule 8D of Income-tax Rules, 1962 could not be applied retrospectively. A.O., however, relying on the decision of Special Bench in the case of ITO v. Daga Capital Management Pvt. Ltd. (117 ITD 169) held that Rule 8D had to be retrospectively applied and Section 14A(2) and 14A(3) were procedural. Dis allowance made came to ~ 30,12,454/-.

9. In its appeal before ld. CIT(Appeals), argument of the assessee was that the investments giving raise to the dividend were not out of borrowed funds, but made out of interest free funds available to it. Assessee also relied on cash flow statement for the relevant previous year for substantiating its contention that fresh borrowings were utilised only for purchasing assets and no part thereof was used for making any investments. Reliance was also placed on the decision of Honourable Punjab and Haryana High Court in the case of Hero Cycles Ltd. v. CIT (323 ITR 518) for arguing that unless there was a finding regarding incurring of expenditure for earning exempt income, dis allowance under Section 14A could not be made. Ld. CIT(Appeals) was of the opinion that the audited accounts and cash flow statement filed by the assessee did show that out of ~ 18,99,26,740/- incurred as interest expenditure, a sum of ~ 18,25,99,371/- was used for acquisition of rigs and windmills. In so far as balance amount of ~ 73,27,369/- was concerned,   ld. CIT(Appeals) was of the opinion that assessee’s contention regarding use of such amount towards working capital requirements was not disproved by the A.O. Further, as per ld. CIT(Appeals), it could not always be considered that direct or indirect expenditure was incurred and dis allowance under Section 14A was required to be made in every case. He, therefore, deleted the and made by the A.O.

10. Now before us, learned D.R. submitted that Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT (328 ITR 81) though had held that Rule 8D of Income-tax Rules, 1962 could not be applied retrospectively, there was a clear ruling that Section 14A of the Act had to be applied even in earlier years and A.O. was not precluded from making apportionment of expenditure between exempt and non-exempt income for dis allowance, even without invoking Rule 8D or sub-section (2) and (3) of Section 14A of the Act.

11. Per contra, the learned A.R. submitted that assessee could not be fastened with a disallowance where no borrowed funds were used for the purpose of investments giving raise to dividend.

12. We have perused the orders and heard the rival contentions. The Assessing Officer made the dis allowance relying on the decision in Daga Capital Management Pvt. Ltd. (supra) and applied Rule 8D. Honourable Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd.’s case (supra) had overturned the decision of Special Bench of this Tribunal on this aspect and held that Rule 8D could be applied only prospectively from 24^th March, 2008 when it came to be notified. Nevertheless, Bombay High Court also held that the A.O. was not precluded from making an apportionment of expenses even in the absence of Rule 8D in the earlier years. If the assessee could show that no expenditure whatsoever was incurred, directly or indirectly in relation to earning of dividend income for periods prior to applicability of Rule 8D, there could not have been any dis allowance under Section 14A of the Act. We are of the opinion that these aspects have not been verified by the A.O. or ld. CIT(Appeals). Hence, we set aside the orders of lower authorities in this regard and remit the issue back to the file of the A.O. for consideration afresh de novo in accordance with law. Ground No. 3 is allowed for statistical purposes.

13. Vide its ground No. 4, grievance of the Revenue is that ld. CIT(Appeals) deleted the dis allowance of ~ 62,21 ,744/- made by the A.O. relying on Section 40(a)(ia) of the Act for non deduction of tax on payments made to catering contractors.

14. Short facts apropos are that during the relevant previous year, assessee paid a sum of ~ 1,99,53,399/- to its catering contractors. Out of such total catering charges of ~ 1,99,53,399/-, a sum of ~ 75,09,911/- was reimbursed by ONGC with which assessee had a drilling contract. Explanation of the assessee for deducting tax only at 1% and not 2% on the payments, was that it had given the catering contract only as a sub-contract of its main contract with ONGC. As per the assessee, it had undertaken a contract for drilling with ONGC and it was pursuant to such contract it had entered into sub-contract for giving catering facilities to the members and staff. As per the assessee, under the contract with ONGC, it was obliged to do the drilling work using its equipment, persons and staff. Therefore, the pursuant contracts entered by it, for satisfying the requirement of the main contract, were all in the nature of sub-contracts and hence, as per the assessee, it had rightly deducted 1% TDS. However, the A.O. was of the opinion that assessee’s explanation regarding sub ­contracts could be only accepted to the extent of the amount reimbursed by ONGC for catering services done to its employees. Therefore, as per the A.O., the balance amount which came to ~ 1,24,43,488/- represented catering charges directly spent by the assessee and TDS ought have been deducted at 2% on such amount and not 1%. He, therefore, made pro rata dis allowance of ~ 62,21 ,744/-, relying on Section 40(a)(ia) of the Act.

15. In its appeal before ld. CIT(Appeals), argument of the assessee was that it had provided catering facilities for pursuant to the main drilling contract with ONGC. As per the assessee, it was its responsibility to provide catering facilities for ensuring due performance of the main contract and the sub-contract entered into with the catering services company was only for this purpose. With regard to the observation of the Assessing Officer that there was nothing mentioned in the agreement with ONGC regarding boarding and lodging or to whom the catering work should be entrusted, argument of the assessee was that primary operation of the assessee was providing drilling service under contracts with oil companies and but for such contracts, there was no question of giving any catering facilities to anybody. Reliance was also placed on certain paras of its agreement with ONGC and also the schedule of responsibilities in support of these contentions. Ld. CIT(Appeals) was appreciative of these contentions. He held that it was necessary for assessee to enter into separate contracts for each area of work undertaken by it as per its agreement with ONGC and it could enter into sub-contracts for various areas of work on which it was obliged to render services under the main contract with ONGC. According to ld. CIT(Appeals), even if a part of the work undertaken by the main contractor was entrusted to a third party, even then such contract with the third party could be considered as a sub-contract. He, therefore, held that assessee had rightly deducted TDS at 1%, and deleted the dis allowance made by the A.O.

16. Now before us, learned D.R. submitted that the catering contract was an independent contract, and not related to the contract assessee had with ONGC. According to learned D.R., assessee was catering not only to ONGC employees but also its own employees through such facilities. Learned D.R. submitted that A.O. had correctly excluded from the disallowance the amount reimbursed by ONGC for catering service done by the assessee to the employees of ONGC. The assessee was obliged to deduct tax at 2% on the balance amount and having not done so, the A.O. was right in making a pro rata disallowance.

17. Per contra, learned A.R. strongly supported the order of ld. CIT(Appeals).

18. We have perused the orders and heard the rival contentions. Assessee was rendering drilling service and such drilling service was rendered to major oil companies under contracts with such oil companies. Assessee would never by its own do a drilling for finding and extracting oil, since its business was offshore drilling only. Unless assessee was given contracts for exploration by ONGC or similar companies who had licence from the Government, it could not operate a rig on its own nor extract any oil from the wells drilled by it. Thus, the rigs employed by the assessee in offshore drilling were all based on its contract with ONGC and similar companies licenced by the Government to do so. Hence, it could not be considered that the assessee had entered into a catering contract as an independent contract having no relation whatsoever with main contract it had with oil companies. If we look at Section 195C(2) of the Act, it reads as under:-

“Any person (being a contractor and not being an individual or a Hindu undivided family) responsible for paying any sum to any resident (hereafter in this section referred to as the sub ­contractor) in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labour for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of the sub-contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income-tax on income comprised therein”

What is required is that the person who is making payments to any resident should be doing so in pursuance of a contract with a sub­contractor and such contract shall be for supply of labour or for carrying out all or any part of work undertaken by the assessee. We cannot say that the catering services given by the assessee whether to its employees engaged in rig operation or to ONGC employees did not form part of the work undertaken by the assessee through this main contract with ONGC. Assessee agreement with ONGC at Exhibit A(II)(5) which gives the schedule of responsibilities, run as under:-

	Description	Provided by		At cost of
		Company	Contractor	Company	Contractor
15.	(i) Catering including meals, accommodation    for Company/ Company’s third party personnel at U5$ 15 per day per    person  for boarding and lodging or in the case the person does not stay overnight on rig and takes     only  meal(s),		X	X
	U5$ 6 for individual meal.dbry fruit packets (40 gram Almonds, 40 gram Cashew nuts &		X		X
	20 gram raisins per person per day for stay on board rig to company personnel.

Assessee was thus obliged to provide catering services not only to ONGC personnel but also third party personnel. For this purpose, assessee had entered into a contract with another person and such person, in our opinion, can only be considered as a sub-contractor engaged for carrying out a part of the work undertaken by the assessee. We are, therefore, of the opinion that assessee had correctly deducted 1% from its payment made on catering contract considering such catering contract to be a sub-contract. Ld. CIT(Appeals) was, therefore, justified in deleting the proportionate dis allowance made by the A.O. We, therefore, dismiss ground No.4 of the Revenue.

19. Vide its ground No.5 , grievance of the Revenue is that ld. CIT(Appeals) had deleted dis allowance of ~ 2,11,02,509/- made by the A.O. relying on Section 40(a)(i) of the Act for payments made to non-residents without deduction of TDS.

20. Short facts apropos are that assessee had, during the relevant previous year, paid for offshore drilling services and machinery repairs/rentals, varying amounts to M/s International Tubular F2E and International Offshore Management both of which were non-resident entities. On such payments, assessee deducted tax at 4%. Assessee arrived at 4% by considering the services rendered by the non-resident entities to fall under Section 44BB of the Act. Therefore, as per the assessee, only 10% of their receipts could be deemed as income and 40% of such 10% worked out to 4%. However, the A.O. was of the opinion that assessee was required to deduct tax at 40% on the gross sum paid to such entities under Section 195 of the Act. Therefore, as per the A.O., assessee had failed to deduct tax as prescribed under the Act and made a dis allowance of ~ 2,11,02,509/- under Section 40(a)(i) of the Act.

21. Before ld. CIT(Appeals), argument of the assessee was that it had correctly deducted the tax as prescribed under the Act. According to the assessee, the services rendered by the non-resident entities were in connection with prospecting and extracting or production of mineral oils in India. Hence, under sub-section (2) of Section 44BB, profit of such entities could be considered at 10% of their receipts. Assessee also brought to the notice of the ld. CIT(Appeals) that Section 44BB of the Act started with a non­obstante clause and, therefore, prevailed over other provisions of the Act. As for the contention of the A.O. that assessee had not followed the procedure prescribed under sub-section (2) of Section 195 of the Act, argument of the assessee was that the word used in sub-section (2) of Section 195 was “may” and hence, it was not mandatory in nature. Reliance was also placed on CBDT Circular No.759 dated 18^th November, 1997 and also Circular No.10 dated 9^th October, 2002. As per the assessee, its Chartered Accountant had certified that the deduction was required to be made at 4% only. Therefore, as per the assessee, it was under bonafide belief that the deduction was correctly done. As for the reliance placed by the A.O. on the decision of Chennai Bench of this Tribunal in the case of Frontier Offshore Exploration (India) Ltd. v. DCIT (118 ITD 494), contention of the assessee was that the said decision was considered by Special Bench of this Tribunal in the case of ITO v. Prasad Productions Ltd. (125 ITD 263) and the decision of Special Bench mentioned supra was in its favour. Ld. CIT (Appeals) was appreciative of these contentions. According to him, Section 44BB was a special provision dealing with computation of profits and gains of business of the nonresidents engaged in providing services and facilities in connection with supplying plant and machinery on hire or to be used in prospecting for or extraction of or production of mineral oils. According to him, the said Section started with non-obstante clause and in the earlier years, certificates were issued by the A.O. under Section 195(2) for effecting remittances with deduction of tax at lower rate on identical payments. Therefore, as per the ld. CIT(Appeals), assessee had taken a bonafide decision to make a deduction only at the rate of 4% based on its past experience. Ld. CIT(Appeals) also noted that Special Bench in the case of Prasad Productions Ltd. (supra) had taken into consideration various other decisions on the same issue including that of Frontier Offshore Exploration (India) Ltd. (supra), Transmission Corporation of A.P. Ltd. v. CIT (239 ITR 587)(SC), CIT v. Samsung Electronics Co. Ltd. (320 ITR 209) (Kar.) and Van Oord ACZ India (P) Ltd. v. CIT 323 ITR 130. He, therefore, deleted the dis allowance made by the A.O.

22. Now before us, learned D.R. submitted that assessee could not by itself decide whether Section 44AB was to be applied to the concerned non-residents. According to learned D.R., when the assessee was of the belief that a lower deduction only was warranted, it had to follow the procedure laid down in sub-section (2) of Section 195 of the Act. Learned D.R. stressed that Special Bench in the case of Prasad Productions Ltd. (supra) had clearly observed that an assessee had to take recourse to Section 195(2) where it was of the opinion that part of amount to be paid would be income of the non-residents and if it wanted a deduction at a rate lower than what was prescribed. Reliance was once again placed on the decision of Hon’ble Delhi High Court in the case of Van Oord ACZ India (P.) Ltd. (supra).

23. Per contra, the learned A.R. placing reliance on an order of coordinate Bench of this Tribunal in the case of Frontier Offshore Exploration (India) Ltd. v. DCIT in I.T.A. No. 200/Mds/2009 dated ₄th February, 2011, submitted that the decisions relied on by the A.O. as well as ld. CIT(Appeals) and also learned D.R. were all considered by the co-ordinate Bench of this Tribunal and on similar set of facts it was held that there was no violation of provisions of Section 195 of the Act warranting disallowance under Section 40(a)(ia) of the Act. Further, reliance was also placed on the decision of Hon’ble Apex Court in the case of GE India Technology Centre Pvt. Ltd. v. CIT (327 ITR 456).

24. We have perused the orders and heard the rival contentions. The payments were made by the assessee to non-residents. The payment made to International Tubular F2E was for rental and repairs to machinery and payment made to International Offshore Management was for drilling services. This has been mentioned by the Assessing Officer at para 6 of his assessment order. However, as per the Assessing Officer, it was not for the assessee to decide whether Section 44BB could be applied to such non-resident entities. Assessing Officer relied on the decision of Frontier Offshore Exploration (India) Ltd. v. DCIT (118 ITD 495) which was for assessment year 2003-04 for making the dis allowance for short deduction of tax at source. Assessee admittedly was engaged in exploration of oil on offshore basins and drilling was undertaken on contracts received from entities like ONGC. Such offshore drilling was for crude oil and crude oil is definitely a mineral oil. Therefore, services rendered by a non-resident entity for rental and repairs to machinery used in offshore drilling and also for drilling services can only be considered as services or facilities in connection with prospecting for, or extraction or production of mineral oil. Hence assessee had sufficient reason to have a bonafide belief that Section 44BB of the Act would apply to M/s International Tubular F2E and M/s International Offshore Management. Subsequent to the decision in the case of Frontier Offshore Exploration (India) Ltd. v. DCIT ( 118 ITD 495) for assessment year 2003-04, which has been heavily relied on by the A.O. for making the dis allowance, there was a decision by another co-ordinate Bench in I.T.A. No. 200/Mds/2009 for assessment year 2004-05 where also one of the party was same Frontier Offshore Exploration (India) Ltd. A very similar issue was involved in that case. Tribunal examined the aspect of deduction of tax at source on payments made to a non-resident, falling under Section 44BB of the Act and whether an assessee could make deduction at lower rate taking 10% as the income of such nonresident entity. After considering its earlier decision for assessment year 2003-04, it was held at paras 6 and 7 of the order dated ₄th February, 2011, as under:-

“6. We have considered the rival submissions. At the outset we are primarily to decide as to whether to follow the decision of the co-ordinate Bench of this Tribunal in the assessee’s own case for the assessment year 2003-04, supra, or to differ from the same. After a perusal of the decision of the Honourable Supreme Court in the case of GE India Technology Centre (P) Ltd. as also taking into consideration the views expressed by the Honourable jurisdictional High Court in the case of Hi Tech Arai reported in 321 ITR 477 (Mad) we are of the view that the decision of the co-ordinate Bench of this Tribunal in the assessee’s own case for the assessment year 2003-043 would no more constitute good law. To err is human. To continue the error is not bravery. If we are to accept the contention of the Revenue that the provisions of sec. 44BB is relating only to the non-resident for the purpose of his assessment, then one should also keep in mind that the non-resident’s assessment comes into play when he files his return. The non-resident would file his return only when the assessee has made the payment and if the assessee has made the payment to the non-resident, where is the question that the assessee is to deduct TbS at a lower rate after the assessment has been done on the non-resident? Section 44BB is a special provision as it is mentioned in the cause title to the said provision itself. As per the provisions of sec. 44BB(1) a sum equal to 10% of the aggregate of the amount specified in sub-section (2) is deemed to be the profits and gains of such business chargeable to tax under the  head profits and gains of business or profession”. It is because the provision of sec. 44BB has quantified the deemed income of the non-resident assessee at 10%, it has opened with the clause Notwithstanding anything to the contrary” contained in sections 28 to 41 and sections 43 and 43A. The aggregate amounts are quantified in sub-section (2) of sec. 44BB to be the amount paid or payable, received or deemed to be received etc. As per the sub-section (3) of sec. 44BB the non-resident can claim a lower profit. It is for the purpose of claiming lower profits that the non-resident must file a return and prove the same with support of his regular books of accounts and other documents and by complying with other conditions specified therein. If no return is filed, section 44BB(1) deems that the profits and gains of the business of the non-resident at 10% of the gross receipts. A perusal of the decision of the Honourable Supreme Court in the case of GE India Technology Centre (P) Ltd., referred to supra, clearly shows that the Honourable Supreme Court has categorically held that the obligation to deduct TbS is limited to the appropriate portion of income chargeable under the Act forming part of the gross sums of money payable to the non-resident. The Honourable Supreme Court while deciding the issue had categorically recognised that as per the provisions of sec. 195 the words used were any other sums chargeable under the provisions of this Act” as against the term any sum” used in the other provisions falling in Chapter XVII of the Income Tax Act, 1961. Obviously, what the Assessing Officer is demanding is that TbS is liable to be made under the provisions of section 195 of the Act. If the provisions of sec. 195 are to be invoked, it is only such sum which is chargeable to tax under the Income-tax Act, 1961 on which TbS can be made. A question now arises as to how much of the amounts paid by the assessee to the non-resident is the income chargeable to tax under the Income Tax Act, 1961 for the purpose of section 195. It is true that the assessee cannot quantify the income of the non-resident.  This is where the special provision of sec. 44BB comes into play. Where the statute has provided a special provision for  dealing with a special type  of income such a provision would exclude a general provision dealing with the income accruing or arising out of any business connection. This view of ours finds support from the decision of the Honourable jurisdictional High Court in the case of Copes Vulcan Inc., referred to supra. Section 44BB is a special provision to the exclusion of all the contrary provisions provided in sections 28 to 41 and 43 and 43A of the Act. Once the provisions of sections 28 to 41 and sections 43 & 43A stand excluded, the method of computing the business income of the non-resident on the basis of the books of accounts goes out of the picture. Then it is only the provisions of section 44Ab, 44AE & 44AF which could be applied and the same obviously do not apply to the income of the non-resident companies. The Honourable Supreme Court while dealing with its own decision in the case of Transmission Corporation of A.P. Ltd., referred to supra, has categorically explained that the tax was liable to be deducted by the payer of the gross amount if such payment included in it an amount which was exigible to tax in India. This is not so in the present case. Here on account of the special provisions of sec. 44BB, 10% of the gross amount payable to the non-residents deemed as the income chargeable to tax in India. In the present case it is noticed that the assessee has deducted tax at the specified rate on the 10% of the Bare Boat charges paid to the Norway company who is the non-resident, computed as per the provisions of sec. 44BB. In the circumstances, we are of the view that there is no violation of the provisions of section 195 in the assessee’s case which calls for a disallowance by invoking the provisions of section 40(a)(i) of the Act. In the circumstances, the finding of the learned CIT(A) and that of the Assessing Officer stands reversed.

7. We may also mention here that we are not in agreement with the submission of the learned authorised representative that the provisions of sec. 40(a)(i) postulates an absolute failure and not short deduction. This is because a reading of section 201 clearly shows that the portion the whole or any part of the tax” is in connection with the words after so deducting fails to pay”. It is not in connection with the words does not deduct”.”

25. We are, therefore, of the view that assessee was right in effecting deduction of tax at source considering Section 44BB of the Act. The dis allowance was rightly deleted by ld. CIT(Appeals). No interference is called for. Ground No.5 of the Revenue stands dismissed.

26. In the result, appeal of the Revenue for assessment year 2005-06 is partly allowed for statistical purposes.

I.T.A. No. 1 543/Mds/1 0 (assessment year 2006-07)

I.T.A. No. 1381/Mds/10 (assessment year 2005-06)

29. In this appeal, assessee has taken two effective grounds. In its first ground, grievance of the assessee is that A.O. considered letting out of building as “income from house property” against income from business shown by it, and this treatment was confirmed by ld. CIT(Appeals).

30. Assessee had, during the relevant previous year, let out a portion of its building, but the rental income therefrom was shown under the head “profits and gains from business”. This treatment was not allowed by the A.O. according to whom, such rental income could be considered only under the head “income from house property”.

31. In its appeal before ld. CIT(Appeals), submission of the assessee was that the building was purchased in ordinary course of business and was rented out to generate additional revenue. Hence, as per the assessee, the rental income should be assessed as its business income. However, the CIT(Appeals) was not impressed. According to him, decision of Honourable Apex Court in the case of Shambu Investments Pvt. Ltd. v. CIT (263 ITR 143) and that of Honourable jurisdictional High Court in the case of CIT v. Chennai Properties Ltd. (266 ITR 685) (Mad) did not allow any other treatment for rental income received from letting out of building.

32. Now before us, learned A.R., strongly assailing the order of ld. CIT(Appeals), submitted that letting out was in the course of assessee’s business.

33.Per contra, learned D.R. supported the order of ld. CIT(Appeals).

34. We have perused the orders and heard the rival contentions. What was let out was building and not plant, machinery or any other asset. It is settled law that when a building is let out, the income has to be computed as income from house property. It was not letting out of a complex nature involving machinery and services. In our opinion, ld. CIT(Appeals) rightly applied the decision of Honourable Apex Court in the case of Shambu Investments Pvt. Ltd. (supra) and that of Honourable jurisdictional High Court in the case of Chennai Properties Ltd. (supra). Even if letting out of property on rent, was the object of the assessee-company, decision of Honourable Apex Court in the case of East India Housing & Land Development Trust Ltd. v. CIT (42 ITR 49) would still go against it. We are, therefore, of the opinion that the view taken by the lower authorities do not require any interference. Assessee’s ground in this regard is dismissed.

35. Second ground taken by the assessee is that ld. CIT(Appeals) confirmed disallowance of ~ 91,423/- made under Section 94(7) of the Act.

36. The A.O., during the course of assessment proceedings, noted that assessee had claimed short term capital loss arising out of sale of units of mutual funds which were held for a period of less than three months. The details of such transactions for which dis allowance under Section 94(7) of the Act was made by the A.O., are reproduced as under:-

Particulars	bate of Sale	Cost Rs.	Sale Value Rs.	Profit/ Loss Rs.	dividend Rs.	Dis allowance u/s 94(7) Rs.
DSP ML Floating Fund	02.04.04	22806018.32	22798962.46	(-)7055.86	15318.07	7055.86
Grindlay Floating          Rate Fund	26.10.04	5010658.00	5010133.83	(-)524.17	10658	524.17
Grindlay Floating          Rate Fund	07.04.04	95202348.91	95202348.29	(0.62)	75433.18	0.62
Kotak Floating Rate Fund	05.05.04	12912708.13	12903753.62	(-)8954.51	42957.41	8954.51
Kotak Floating Rate Fund	29.9.04	15141314.07	15137071.24	(-)4242.83	141314.07	4242.83
Prudential Floating      Rate Fund	16.9.04	2523047.90	2516229.35	(-)68 18.55	19798.90	6818.55
Prudential Floating      Rate Fund	29.9.04	35569181.12	35511480.83	(-)57700.29	524610	57700.29
Temple ton Floating      Rate Income Fund	29.9.04	52981129	52975003.25	(-)6125.75	481129	6125.75
						91422.58

The A.O. disallowed claim of short term capital loss to the extent of dividend receipt.

40. We have perused the orders and heard the rival contentions. It is for the assessee to show that the short term capital loss claimed by it were all on mutual investments, for which there was no record date. Assessee could not produce any details. In fact, nothing was brought on record to show how the computation made by the Assessing Officer reproduced at para 36 above was not acceptable. We are, therefore, of the opinion that the dis allowance was rightly done. No interference is required. Ground No. 2 is dismissed.

41. In the result, appeal of the assessee for assessment year 2005- 06 is dismissed.

I.T.A. No. 1 382/Mds/1 0 (assessment year 2006-07)

44. We have already decided in paras 34 and 40 above that income from letting out of building was rightly assessed as income from house property and dis allowance under Section 94(7) of the Act was rightly done by the lower authorities. For the same reasons mentioned therein, ground Nos.1 and 2 for the impugned assessment year are also dismissed.

45. Vide its ground No. 3, grievance of the assessee is that ld. CIT(Appeals) confirmed Assessing Officer’s stand of not allowing amortisation of preference share issue expenses of ~ 4,13,25,000/-, under Section 35D of the Act.

46. Short facts apropos are that assessee had, during the relevant previous year, issued non-convertible cumulative preference shares for ~ 150 Crores. The issue expenses came to ~ 4,13,25,000/-. The said expenses were classified under the head “Other Expenses” claimed in full as revenue outgo by the assessee in its return of income. The A.O., during the course of assessment proceedings, put the assessee on notice that decision of Honourable Apex Court in the case of Brooke Bond India Limited v. CIT (225 ITR 798) and in the case of Punjab State Industrial Development Corporation Limited v. CIT (225 ITR 792) went against it and such share issue related expenses could only be considered as capital expenditure. Assessee submitted that the expenditure if not allowed as revenue, should be considered for amortisation under Section 35D of the Act. Assessing Officer after going through provisions of Section 35D of the Act, held that assessee could not claim such amortisation on account of two reasons. First was that assessee was not an industrial undertaking as defined under Section 72A of the Act. Second reason was that even if it was considered as an industrial undertaking, the oil rig for the purchase of which such preference share capital proceeds were used, having not been put to use during relevant previous year, and assessee having itself classified it as capital work in progress, deduction under Section 35D could not be allowed.

47. In its appeal before CIT(Appeals), contention of the assessee was that assessee was engaged in the business of oil drilling and rigs hired and purchased were used by the assessee for drilling and other oil field services. Therefore, according to assessee, such exploration of oil came within the meaning of “mining” and therefore, clause (aa) of sub-section (7) of Section 72A clearly applied and it was an industrial undertaking. Further, as per the assessee, the oil rig purchased, though not put to use during the year, such purchase was only an extension of industrial undertaking and the moment the purchase was complete, the extension of industrial undertaking was also complete. Though ld. CIT(Appeals) accepted the contention of the assessee that it was an industrial undertaking, he was of the opinion that assessee though it had purchased the oil rig, had never put it to use in relevant previous year. According to ld. CIT(Appeals), extension of industrial undertaking could not be treated as complete just by effecting a purchase. He was, therefore, of the opinion that Section 35D had no application in the relevant previous year.

48. Now before us, learned A.R. submitted that ld. CIT(Appeals) had given a clear finding on the dispute as to whether assessee was an industrial undertaking and this has not been challenged by the Revenue. Therefore, according to him, the only area of contention was whether assessee had completed the extension of the industrial undertaking on purchase of the new oil rig. As per the learned A.R., when the oil rig was purchased, the extension was complete. Treatment given by the assessee in the books of accounts was not decisive in this regard. Assessee was already in the field of offshore drilling owning a number of rigs and therefore, purchase of another oil rig was definitely an extension of industrial undertaking. Hence, according to him, Section 35D of the Act clearly applied and if not for the relevant previous year, amortization of preference share issue expenses should be allowed, in the year in which oil rig was actually put to use.

49. Per contra, learned D.R. submitted that assessee had never made any claim for amortisation of issue expenses in the original return of income. It had chosen to file a letter for claiming amortisation under Section 35D of the Act when the Assessing Officer put it on notice that its claim for share issue related expenses as a Revenue outgo could be allowed. According to learned D.R., in view of the decision of Honourable Apex Court in the case of Goetze (India) Ltd. v. CIT (284 ITR 323) (SC), such a claim could never have been considered. In any case, according to him, extension of the industrial undertaking could not be considered as complete, just by the purchase of a rig.

50. We have perused the orders and heard the rival contentions. There is no dispute that a sum of ~ 4,13,25,000/- was expenses related to issue of preference share capital of ~ 150 Crores. There is no dispute that the said amount was utilised for purchase of an oil rig. There is no dispute that the said rig was not put to use during the relevant previous year, but was shown by the assessee as “capital work in progress”. Assessee had never made a claim for amortisation of preference share issue expenses in its return of income, but had chosen to make such a claim when put on notice that the said amount could not be allowed as revenue expenditure. In so far as contention of learned D.R. that assessee could not prefer such a claim, but through a revised return, no doubt, in the case of Goetze (India) Ltd. (supra), Honourable Apex Court held that an A.O. could not entertain a claim made otherwise than by way of revised return. However, here the assessee had claimed the whole of the amount as revenue expenditure. The letter filed by the assessee was only an alternative claim that amount if not allowed in one go, it should be considered amortisation under Section 35D of the Act. Assessee might have made a claim under a particular Section, but if the claim though not allowable under that section, but was allowable under another section, then it cannot be considered as a fresh claim, though the allowance under the latter Section could be given only in a gradated manner. The claim, nevertheless, was always there and we cannot consider it as claim of allowance made for the first time. In any case, Assessing Officer himself had considered the claim of the assessee under Section 35D of the Act. He did not allow the claim for two reasons. Primary reason was that assessee, according to him, was not an industrial undertaking and second reason was that assessee had not completed extension of its industrial undertaking by purchase of rig. Assessing Officer never declined to consider the claim for a reason it was made otherwise than through a revised return. Assessing Officer had refused to consider the claim under Section 35D for different reasons.

51. Now coming to merits, Revenue has not assailed the finding of ld. CIT(Appeals) that assessee was an industrial undertaking. This leaves only with question whether the purchase of a rig could be considered as sufficient to satisfy the condition prescribed under Section 35D of the Act. Sub-section (1) thereof which allows amortisation of expenses related to issue of share capital, as it stood at the relevant point of time is reproduced here under:-

35b.(1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31^st day of March, 1970, any expenditure specified in sub-section (2), –

(i) before the commencement of his business, or

(ii) after the commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up a new unit,

the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new unit commences production or operation:

[Provided that where an assessee incurs after the 31^st day of March, 1998, any expenditure specified in sub-section (2), the provisions of this sub-section shall have effects as if for the words an amount equal to one-tenth of such expenditure for each of the ten successive previous years”, the words an amount equal to one-fifth of such expenditure for each of the five successive previous years” had been substituted.]

The purchase of a rig might result in extension of its industrial undertaking. But, the deduction under Section 35D of the Act would be allowable for ten successive years beginning with the year in which extension of industrial undertaking is complete. Can we say that by purchase a rig, the extension of industrial undertaking is complete? It is an admitted position that the rig was under refurbishment and was not put to use. It is also an admitted position that assessee itself had shown it as a part of capital work in progress. No article classified as work-in-progress can be considered as a completed item. Be it a rig or be it any other thing. Hence, extension of the industrial undertaking cannot be considered as complete in the relevant previous year. Ld. CIT(Appeals) was justified in denying assessee claim under Section 35D of the Act for the impugned assessment year. We do not find any reason to interfere. Ground No. 3 of the assessee stands dismissed.