M/s. SIL Investment Ltd., Jhalawar V. ACIT, New Delhi

CO 349/DEL/2010

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 7179 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 6 month(s) 14 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 04-05-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 19-09-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 21-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Additional depreciation; Earning of tax free income; Scheme of amalgamation; Onus to prove; Revised return
• Section: 14A; 28; 10

Judgement Text

(FIT FOR PUBLICATION SD/-) IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH G DELHI) BEFORE SHRI G.E. VEERABHADRAPPA, HONBLE PRESIDENT AND SHRI A.D. JAIN, JUDICIAL MEMBER ITA NO. 2431(DEL)2010 ASSESSMENT YEAR: 2006-07 ASSTT.COMMISSIONER OF INCOME TAX, SIL INVEST MENT LTD., CIR.8(1), NEW DELHI. V. (FORMERLY SUTLEJ INDUSTRIES LTD.), PANCHPAHAR RD.BHAWANI MANDI, JHALAWAR. C.O. NO.349(DEL)2010 (IN ITA 2431(DEL)2010) ASSESSMENT YEAR: 2006-07 SIL INVESTMENT LTD. V. ASSTT.COMMISSIONER OF L. TAX, (FORMERLY SUTLEJ INDUSTRIES LTD.), CIR. 8(1), NEW DELHI. PANCHPAHAR RD.BHAWANI MANDI, JHALAWAR (APPELLANT) (RESPONDENT) DEPARTMENT BY: SHRI S, MOHANTY, DR ASSESSEE BY: S/SHRI AJAY VOHRA, ADVOCATE,- ROHIT JAIN, CA & MS. JANPRIYA ROOPRAI, ADV. ORDER PER A.D. JAIN, J.M . THESE ARE DEPARTMENTS APPEAL AND THE ASSESSEES CR OSS OBJECTIONS AGAINST THE ORDER DATED 4.2.2010 PASSED BY THE CIT( A), XI, NEW DELHI. THE FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE DEPARTMENT :- ITA 2431 & CO 349 2 1. LD. COMMISSIONER OF INCOME TAX (APPEALS) ERRED, I N LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE, IN REST RICTING THE DISALLOWANCE OF ` 2,08,83,181/- MADE BY THE AO U/S 14A OF THE I.T. ACT TO ` 16,54,531/- 2. LD. COMMISSIONER OF INCOME TAX (APPEALS) ERRED, IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE, IN DELETIN G THE DISALLOWANCE OF ` 5,000/- MADE BY THE AO ON ACCOUNT OF FINES & PENALTIES. 3. LD. COMMISSIONER OF INCOME TAX (APPEALS) ERRED, IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE, IN DIRECTI NG THE AO AS UNDER :- I) TO VERIFY THE CLAIM OF THE ASSESSEE AND EXCLUDE INT EREST INCOME FROM UTI FROM INCOME AFTER DUE VERIFICATION. II) TO ALLOW THE BALANCE 50% OF ADDITIONAL DEPRECIATION AFTER VERIFYING THE CONTENTION OF THE ASSESSEE THAT 50% O F ADDITIONAL DEPRECIATION WAS CLAIMED AND ALLOWED IN IMMEDIATELY PRECEDING YEAR I.E. A.Y. 2005-06. III) VERIFY THE CLAIM OF THE ASSESSEE AND ALLOW CREDIT O F THE TDS. SINCE THE CIT(A), AS PER THE PROVISIONS OF SECTION 251 (1)(A) OF THE I.T. ACT, MAY CONFIRM, REDUCE, EN HANCE OR ANNUL THE ASSESSMENT AND THE ABOVE DIRECTIONS OF THE CIT(A) AMOUNT TO SETTING ASIDE THE GROUNDS OF APPE AL. 2. THE ASSESSEE HAS RAISED THE FOLLOWING CROSS OB JECTIONS:- 1. THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN CONFI RMING THE DISALLOWANCE OF EXPENDITURE AMOUNTING TO ` 16,54,52 5/- UNDER SECTION 14A INCOME-TAX ACT, 1961 (THE ACT), ALLEGED TO HAVE BEEN INCURRED FOR EARNING TAX FREE DIVIDEND INCOME. ITA 2431 & CO 349 3 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN NOT HO LDING THAT DISALLOWANCE UNDER SECTION 14A OF THE ACT, COULD NO T HAVE BEEN WORKED OUT AS PER THE METHOD PROVIDED IN RULE 8D OF THE INCOME -TAX RULES, 1962 (THE RULES) SINCE THE SAME WAS PROSPECTIVE IN OPERATION AND WAS NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION. 2. THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN NOT DI RECTING THE ASSESSING OFFICER TO ALLOW DEDUCTION UNDER SECTION 801A/80IB OF THE ACT IN RESPECT OF THE THREE UNITS OF THE APPELL ANT. 2.1 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN NO T APPRECIATING THAT DEDUCTION UNDER SECTION 80IA/80IB OF THE ACT WAS NO T ALLOWED IN RESPECT OF THE PROFITS OF THE THREE UNITS FOR THE P ERIOD 01.04.2005 TO 30.06.2005 TO THE APPELLANT AS WELL AS THE RESULTIN G COMPANY. 3. APROPOS GROUND NO.1 OF THE DEPARTMENTS APPEAL & CROSS OBJECTION NO.1 OF THE ASSESSEE, AS PER THE ASSESSMENT ORDER, THE AO NOTICED THAT THE ASSESSEE HAD EARNED DIVIDEND INCOME OF ` 17,32,701/- AND LONG TERM CAPITAL GAIN OF ` 12,15,93,111/-, AGAINST WHICH, NO EXPENSES HAD BEEN CLAIMED TO HAVE BEEN INCURRED. THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY DISALLOWANCE U/S 14A OF THE I.T. ACT BE NOT MADE IN RESPECT OF EXPENSES ATTRIBUTABLE TO INCOME EXEMPT U/S 10 OF THE ACT. THE ASSESSEE SUBMITTED THAT NO EXPENSES HAD BEEN INCURRED TO EARN THE EXEM PT INCOME. THE AO, HOWEVER, DISAGREED WITH THE STAND TAKEN BY THE ASSE SSEE. IT WAS OBSERVED THAT THE ASSESSEE HAD AN OPENING BALANCE OF INVESTM ENT OF ` 88,85,47,596/- AND A CLOSING BALANCE OF ` 1,00,47,31,991/-, FROM WHICH, THE ASSESSEE HAD EARNED THE EXEMPT INCOME; THAT AS AVAILABLE FROM TH E ASSESSEES PROFIT AND LOSS ACCOUNT, THE ASSESSEE HAD INCURRED AN INTEREST COST OF ` 3,22,99,963/- ITA 2431 & CO 349 4 DURING THE YEAR; THAT THE ASSESSEE COMPANY HAD BEEN CARRYING ON THE BUSINESS OF MANUFACTURE OF YARN, WHICH HAD BEEN TRANSFERRED TO SUTLEJ TEXTILES AND INDUSTRIES LTD. (STIL, FOR SHORT), WITH EFFECT FR OM 1.7.2007, AS PER THE SCHEME OF ARRANGEMENT SANCTIONED BY THE HONBLE RAJ ASTHAN HIGH COURT; THAT THE ASSESSEE COMPANY HAD RETAINED THE INVESTME NT BUSINESS; THAT AS SUCH, 50% OF THE EXPENSES ON ACCOUNT OF INTEREST WERE BEI NG TREATED AS INCURRED FOR INVESTMENT BUSINESS, FROM WHICH, THE ASSESSEE HAD E ARNED INCOME IN THE FORM OF DIVIDEND AND CAPITAL GAINS; AND THAT IT WAS CLEAR THAT THE ASSESSEE HAD EARNED EXEMPT INCOME AT THE COSTS DEBITED TO THE PR OFIT AND LOSS ACCOUNT. THE AO FURTHER HELD THAT FOLLOWING THE SPECIAL BENC H DECISION OF THE TRIBUNAL IN ITO, MUMBAI V. DAGA CAPITAL MANAGEMENT PVT. LTD., 2008 TIOL 509-MUMBAI-(SB), RULE 8 D OF THE I.T. RULES READ WITH SECTIONS 14A(2) & (3) OF THE ACT ARE APPLICABLE WITH RETROSP ECTIVE EFFECT. HOLDING SO, THE AO WORKED OUT THE DISALLOWANCE U/S 14 A OF THE ACT AS FOLLOWS:- A) DIRECT COST (50% OF INTEREST) 1,61,49,981/- B) INDIRECT COST OPENING BALANCE OF INVESTMENT 88,85,47,596/- CLOSING BALANCE OF INVESTMENT 100,47,31, 991/- _______________ 189,32,79,587/- 94,66,39,793/- 47,33,200/- TOTAL DISALLOWANCE U/S 14A (A+B) 2,08,83,181/- ITA 2431 & CO 349 5 4. BEFORE THE LD. CIT(A), THE ASSESSEE CONTENDED TH AT AS PER THE SCHEME OF DEMERGER, THE ENTIRE INTEREST BEARING LIABILITIE S, NAMELY, SECURED AND UNSECURED LOANS, BELONGING TO THE ASSESSEE COMPANY AS ON 30.6.05, THE DATE PRECEDING THE DATE OF DEMERGER, WERE RELATABLE TO T HE DEMERGED TEXTILE DIVISION AND WERE TRANSFERRED TO THE RESULTING COMP ANY, I.E., STIL, AS PART OF THE DEMERGER. THE ASSESSEE SUPPORTED SUCH CONTENT ION WITH DOCUMENTARY EVIDENCE, I.E., SCHEDULE OF ASSETS AND LIABILITIES IN RESPECT OF THE RESIDUAL UNDERTAKING FORMING PART OF THE SCHEME OF DEMERGER, THE PROFIT AND LOSS ACCOUNT OF THE COMPANY FOR THE PERIOD FROM 1.7.2005 TO 31.3.2006, WHEREIN NIL INTEREST EXPENSES HAD BEEN DEBITED AND COMPARAT IVE PROFIT AND LOSS ACCOUNT FOR THE DEMERGER PERIOD AND FOR THE COMPLET E YEAR, SHOWING THAT THE ENTIRE INTEREST EXPENDITURE RELATED TO THE PRE-DEME RGER PERIOD FROM 1.4.2005 TO 30.6.2005. THE ASSESSEE THUS CONTENDED THAT TH ERE WAS NO INTEREST EXPENDITURE ACTUALLY RELATED TO THE INVESTMENT ACTI VITY AND SO, NO PART OF INTEREST EXPENDITURE WAS DISALLOWABLE U/S 14A OF TH E ACT. IT WAS SUBMITTED THAT DURING THE POST DEMERGER PERIOD, THE ASSESSEE ONLY HAD INVESTMENT ACTIVITY; THAT EXPENSES OF ONLY ` 9,26,788/- HAD BEEN CLAIMED AS DEDUCTION TOWARDS REMUNERATION TO DIRECTOR, AUDIT FEE, ETC., WHICH ALSO COULD NOT BE SAID TO BE RELATED TO THE EARNING OF EXEMPT INCOME; THAT DURING THE PRE- ITA 2431 & CO 349 6 DEMERGER PERIOD, DISALLOWANCE, IF ANY CALLED FOR, C OULD BE OF ONLY ` 7,27,743/-, SINCE THE REST OF THE EXPENDITURE RELAT ED TO HARIDWAR HOLIDAY HOME AND DEHRADUN HOLIDAY HOME, WHICH HAD ALSO DEME RGED WITH THE TEXTILE BUSINESS; AND THAT RULE 8D OF THE I.T. RULE S WAS APPLICABLE ONLY PROSPECTIVELY AND NOT RETROSPECTIVELY. 5. THE LD. CIT(A) ASKED FOR A REMAND REPORT FROM TH E AO. IN THE REMAND REPORT, THE AO STATED THAT INTEREST EXPENDITURE ALS O RELATED TO THE INVESTMENT ACTIVITY AND THAT THE ASSESSEE WAS WRONG IN CONTEND ING THAT NO EXPENSES RELATED TO THE DIVIDEND INCOME. 6. SO FAR AS REGARDS THE APPLICABILITY OF RULE 8D O F THE INCOME TAX RULES, THE LD. CIT(A) CONFIRMED THE AOS VIEW OF TH E SAID RULE BEING RETROSPECTIVELY APPLICABLE. IN DOING SO, THE LD. C IT(A) ALSO WENT BY DAGA CAPITAL MANAGEMENT(SUPRA). 7. SO FAR AS REGARDS THE MERITS OF THE DISALLOWANCE , THE LD. CIT(A) OBSERVED THAT THE DISALLOWANCE HAD BEEN MADE ON ACC OUNT OF INTEREST EXPENDITURE AND OTHER ADMINISTRATIVE AND OPERATIVE EXPENSES. CONCERNING THE INTEREST EXPENDITURE, THE LD. CIT(A) HAD ASKED THE ASSESSEE TO FILE THE AUDITED FINANCIAL STATEMENTS OF STIL, I.E., THE RES ULTING COMPANY, AS ON 31.3.2006. THERE-FROM, THE LD. CIT(A) OBSERVED TH AT THE ENTIRE LOAN, ON WHICH THE INTEREST EXPENDITURE HAD BEEN INCURRED, A CTUALLY STOOD TRANSFERRED ITA 2431 & CO 349 7 FROM THE ASSESSEE COMPANY TO STIL, PURSUANT TO THE SCHEME OF DEMERGER SANCTIONED BY THE HONBLE RAJASTHAN HIGH COURT. T HE LD. CIT(A) OBSERVED THAT IT STOOD ESTABLISHED THAT THE ENTIRE INTEREST EXPENDITURE ACTUALLY RELATED TO THE EARNING OF TAXABLE INCOME FROM THE TEXTILE DIVI SION AND NOT TO THE EARNING OF ANY EXEMPT INCOME. IT WAS HELD THAT THER EFORE, NO PART OF THE INTEREST EXPENDITURE WAS DISALLOWABLE U/S 14A OF TH E ACT READ WITH RULE 8D OF THE RULES. 8. REGARDING THE DISALLOWANCE OF ` 47,33,200/- OUT OF ADMINISTRATIVE AND OPERATIVE EXPENSES, THE LD. CIT(A) OBSERVED THAT TH E ENTIRE EXPENDITURE DURING THE PRE-DEMERGER PERIOD, EXCEPTING ` 12,99,537/- RELATED TO THE DEMERGED TEXTILE DIVISION; THAT FOR THE POST-DEMERG ER PERIOD, THE TOTAL EXPENDITURE WAS OF ` 21,06,266/-, OUT OF WHICH, THE ASSESSEE HAD ITSELF DISALLOWED ` 11,79,478/- AND HAD CLAIMED ONLY THE BALANCE OF ` 9,26,788/-; AND THAT THUS, THE TOTAL PRE-DEMERGER AND POST-DEM ERGER EXPENSES, FROM WHICH, DISALLOWANCE COULD BE MADE, AGGREGATED TO ` 22,26,325/-. THE LD. CIT(A) OBSERVED THAT THE DISALLOWANCE OF ` 47,33,000/-, AS MADE BY THE AO U/S 14A OF THE ACT READ WITH RULE 8D OF THE RULES C OULD NOT BE SUSTAINED, SINCE SUCH DISALLOWANCE HAD TO BE RESTRICTED TO THE ACTUAL EXPENDITURE INCURRED. THE LD. CIT(A) FURTHER OBSERVED THAT, O N THE OTHER HAND, THE CONTENTION OF THE ASSESSEE THAT NO PART OF THE EXPE NDITURE OF ` 22,26,000/- ITA 2431 & CO 349 8 WAS DISALLOWABLE, WAS ALSO NOT ACCEPTABLE; AND THAT THE ASSESSEE HAD ACTUALLY EARNED EXEMPT DIVIDEND INCOME, DUE TO WHICH, THE EXPENDI TURE INCURRED IN RELATION TO SUCH INCOME NEEDED TO BE DISALLOWED IN TERMS OF SECTION 14A OF THE ACT. OBSERVING THAT THE EXPENDITURE OF ` 5,71,794/- RELATED TO HARIDWAR HOLIDAY HOME AND DEHRADUN HOLIDAY HOME, WHICH ALSO STOOD DEMERGED AS PART OF THE TEXTILE DIVISION, THE LD. CIT(A) REDUCE D THIS AMOUNT FROM THE AMOUNT OF ` 22,26,000/- AND HELD THE ENTIRE BALANCE EXPENDITURE OF ` 16,54,531/- TO BE RELATING TO THE INVESTMENT ACTIVI TY OF THE ASSESSEE COMPANY. IT IS THIS AMOUNT OF ` 16,54,531/-, TO WHICH THE DISALLOWANCE OF ` 2,08,83,181/-, AS DETERMINED BY THE AO, WAS RESTRIC TED BY THE LD. CIT(A). 9. THE DEPARTMENT HAS RAISED GROUND NO.1 OF ITS APP EAL AGAINST THIS ACTION OF THE LD. CIT(A), SEEKING CONFIRMATION OF T HE ENTIRE DISALLOWANCE OF ` 2,08,83,181/-, AS MADE BY THE AO. THE ASSESSEE, O N THE OTHER HAND, HAS TAKEN CROSS OBJECTION NO.1, REQUESTING FOR THE DELE TION OF THE ENTIRE DISALLOWANCE AS AGAINST THAT RESTRICTED BY THE LD. CIT(A) TO ` 16,54,531/-. 10. THE LEARNED COUNSEL FOR THE ASSESSEE HAS MADE O RAL ARGUMENTS AND A CHART OF ISSUES HAD BEEN FILED AS WELL. IT HAS BE EN CONTENDED THAT THE PROVISIONS OF SECTION 14A OF THE ACT ARE APPLICABLE ONLY TO EXPENDITURE INCURRED IN RELATION TO INCOME NOT FORMING PART OF THE TOTAL INCOME. RELIANCE IN THIS REGARD HAS BEEN PLACED ON CIT V. WALFORT SHARE AND STOCK ITA 2431 & CO 349 9 BROKERS, 326 ITR 1(SC) AND GODREJ & BOYCE MANUFAC TURING CO. LTD., BOMBAY V. DCIT, 328 ITR 81(BOM). IT HAS BEEN CONT ENDED THAT IN THE PRESENT CASE, DURING THE YEAR, NO EXPENSE, HAVING E ITHER ANY DIRECT OR ANY INDIRECT RELATION WITH THE EARNING OF EXEMPT INCOME , WAS INCURRED BY THE ASSESSEE; THAT NO PART OF THE INTEREST EXPENDITURE ACTUALLY RELATED TO THE INVESTMENT DIVISION, AS ALSO NOTED BY THE LD. CIT(A ), SINCE THE ENTIRE LOAN ON WHICH THE INTEREST HAD BEEN PAID, HAD BEEN TRANSFER RED TO STIL, THE RESULTING COMPANY, PURSUANT TO THE SCHEME OF DEMERGER, WITH E FFECT FROM 1.7.05. THE LEARNED COUNSEL FOR THE ASSESSEE HAS DRAWN ATTENTIO N TO A COPY OF THE SCHEME OF DEMERGER [PAGES 1 TO 20 OF THE ASSESSEES PAPER BOOK (APB FOR SHORT)] . REFERENCE HAS, THEN, BEEN MADE TO THE SCHEDULE OF A SSETS AND LIABILITIES IN RESPECT OF THE RESIDUAL UNDERTAKING OF THE ASSESSEE COMPANY (APB 21 TO 76). FURTHER, THE PROFIT AND LOSS ACCOUNT OF THE RESIDUA L COMPANY FOR THE PERIOD FROM 1.7.05 TO 31.3.06 (APB 78), THE COMPARATIVE PR OFIT AND LOSS ACCOUNT FOR THE SEGREGATED PERIOD FROM 1.4.05 TO 30.6.05, O F THE CONSOLIDATED COMPANY AND THAT FOR THE YEAR ENDING 31.3.06 (APB 7 9 TO 80) HAVE ALSO BEEN REFERRED TO. IT HAS BEEN CONTENDED THAT IF NO NEXU S IS SHOWN BETWEEN THE BORROWED FUNDS AND THE TAX FREE INVESTMENT, NO DISA LLOWANCE OF INTEREST ON THE BORROWED FUNDS CAN BE MADE. FOR THIS PROPOSITI ON, RELIANCE HAS BEEN PLACED ON THE FOLLOWING CASE LAWS:- ITA 2431 & CO 349 10 1. CIT V. HERO CYCLES, 323 ITR 518(P&H); 2. CIT V. K. RAHEJA CORPORATION PVT. LTD., DECISION DATED 8.8.11 IN ITA NO. 1260/2009, RENDERED BY THE HONBLE BOMBAY H IGH COURT (COPY AT PAGES 31 TO 33 OF THE CASE LAWS PAPER BOOK FILED BY THE ASSESSEE, CLPB FOR SHORT); 3. DCIT V. JINDAL PHOTO LTD., AUTHORED BY ONE OF US, THE J.M., ON 22.12.10, IN ITA NO. 4539(DEL)2010 (COPY AT CLPB 39 TO 45); 4. MARUTI UDYOG LTD. V. DCIT, 92 ITD 119(DEL); 5. ACIT V. EICHER LTD., 101 TTJ 369(DEL); AND 6. DCIT V. MAHARASHTRA SEAMLESS LTD., 138 TTJ 244(DE L). 11. APROPOS THE ADMINISTRATIVE EXPENDITURE, IT HAS BEEN CONTENDED ON BEHALF OF THE ASSESSEE THAT FIRSTLY, NO PART OF THE ADMINISTRATIVE EXPENDITURE RELATED TO THE INVESTMENT DIVISION; THAT THE AO DID NOT BRING ANYTHING ON RECORD TO SHOW THAT EXPENDITURE TO HAVE BEEN INCURR ED FOR EARNING EXEMPT INCOME; THAT THE DISALLOWANCE U/S 14A OF THE ACT WA S MADE ON AN ENTIRELY ADHOC BASIS, WITHOUT DISCHARGING THE ONUS OF JUSTIF YING THE DISALLOWANCE OF SUCH EXPENDITURE; AND THAT THIS IS IMPERMISSIBLE IN LAW, AS LAID DOWN IN - 1. CHEMICAL AND METALLURGICAL DESIGN CO. LTD., ITA N O. 803/2008 ..? 2. PTC INDIA LTD. V. DCIT, ITA NOS. 580 & 581(DEL)09(DEL) ? 3. WIMCO SEEDLINGS LTD. V. DCIT, 107 ITD 267(DEL)(TM ); AND 4. CIT V. MS. SUSHMA KAPUR, 319 ITR 299(DEL). 12. IT HAS BEEN FURTHER CONTENDED THAT EVEN OTHERWI SE, THE PROVISIONS OF SECTIONS 14A(2) AND (3) OF THE ACT AND RULE 8D OF T HE RULES ARE PROSPECTIVE ITA 2431 & CO 349 11 AND CANNOT BE APPLIED FOR ANY ASSESSMENT YEAR PRIOR TO ASSESSMENT YEAR 2008-09. FOR THIS, RELIANCE HAS BEEN PLACED ON 1. GODREJ & BOYCE MANUFACTURING CO. LTD. V. DCIT, 32 8 ITR 81(BOM); 2. GODREJ AGROVET LTD. V. ACIT, 326 ITR 81(BOM); AND 3. CONTINENTAL CARRIERS (P)LTD. V. ACIT, 138 TTJ 249 (DEL). 13. EXPLAINING THE ADMINISTRATIVE EXPENDITURE ACTUA LLY INCURRED BY THE ASSESSEE, IT HAS BEEN CONTENDED THAT SO FAR AS REGA RDS THE PRE-DEMERGER EXPENDITURE, THE TOTAL EXPENDITURE WAS OF ` 12,99,537/-. REFERENCE IN THIS REGARD HAD BEEN MADE TO APB 82 TO 87. IT HAS BEEN SUBMITTED THAT THIS ENTIRE EXPENDITURE RELATED TO ACTIVITIES OTHER THAN THE AC TIVITIES OF THE TEXTILE DIVISION; THAT AN AMOUNT OF ` 11,76,500/- OUT OF THE SAID EXPENDITURE OF ` 12,99,537/- WAS DEBITED AS MISCELLANEOUS EXPENDITU RE; THAT OUT OF THIS EXPENDITURE, EXPENDITURE OF ` 5,71,794/- RELATED TO HARIDWAR HOLIDAY HOME AND DEHRADUN HOLIDAY HOME, WHICH WERE ALSO DEMERGED UNDER THE SCHEME, (WITH REGARD TO WHICH, APB 199 HAS BEEN REFERRED TO ); AND THAT THEREFORE, ONLY THE BALANCE EXPENDITURE OF ` 7,27,743/- WAS INCURRED DURING THE THREE MONTHS PERIOD FROM 1.4.05 TO 30.6.05, UNDER THE HE AD OF MISCELLANEOUS EXPENDITURE. REFERRING TO THE POST-DEMERGER EXPE NDITURE FROM 1.7.05 TO 31.3.06, THE LEARNED COUNSEL FOR THE ASSESSEE HAS A RGUED THAT THE TOTAL EXPENDITURE DURING THIS PERIOD AMOUNTED TO ` 21,06,266/- (APB 81 REFERRED ITA 2431 & CO 349 12 TO); THAT THIS EXPENDITURE PRIMARILY COMPRISED OF A RESTRUCTURING/DEMERGER EXPENDITURE OF ` 14,74,347/- AND BALANCE OTHER EXPENSES, WITH REGARD TO WHICH, OUR ATTENTION HAS BEEN DRAWN TO APB 78 TO 80 ; THAT IN THE REVISED RETURN OF INCOME, OUT OF THE DEMERGER EXPENSES OF ` 14,74,347/-, AN AMOUNT OF ` 2,94,869/- HAD BEEN CLAIMED U/S 35 DD OF THE ACT, W HEREAS THE BALANCE EXPENDITURE OF ` 11,79,478/- WAS DISALLOWED IN THE RETURN (REFERENCE MADE TO APB 283); THAT THEREFORE, A TOTAL EXPENDITURE OF ON LY ` 16,54,531/- HAD BEEN CLAIMED AND DISALLOWANCE, IF AT ALL, COULD HAVE BEE N MADE ONLY OUT OF THE SAID EXPENDITURE OF ` 16,54,531/-; THAT SO, THE LD. CIT(A) WENT WRONG IN DISALLOWING THE ENTIRE EXPENDITURE, PARTICULARLY WH EN THERE IS NO EVIDENCE AVAILABLE TO SUGGEST THAT EVEN ANY PART OF SUCH EXPENDITURE WAS INCURRED TO EARN EXEMPT INCOME; AND THAT FURTHER MORE, THIS EXP ENDITURE INCLUDES EXPENDITURE TOWARDS REMUNERATION OF DIRECTOR AND AU DIT FEES, WHICH EXPENDITURE HAD TO BE INCURRED , IRRESPECTIVE OF EXEMPT INCOME BEING RECEIVED OR NOT AND THESE EXPENSES ALSO COULD NOT B E HELD TO BE RELATED TO THE EARNING OF EXEMPT INCOME. 14. THE LEARNED DR, ON THE OTHER HAND, HAS CONTENDE D THAT THE LD. CIT(A) HAS ERRED IN RESTRICTING THE DISALLOWANCE OF ` 2,08,83,181/- MADE BY THE AO U/S 14A OF THE ACT TO ` 16,54,531/-; THAT WHILE DOING SO, THE LD. CIT(A) HA S FAILED TO TAKE INTO CONSIDERATION THAT THE ASSESSEE HAD AN OPENING BALANCE OF ITA 2431 & CO 349 13 INVESTMENT OF ` 88,85,47,596/- AND A CLOSING BALANCE OF ` 1,00,47,31,991/-; THAT IT WAS THEREFROM THAT THE ASSESSEE HAD EARNED EXEMPT INCOME; THAT DURING THE YEAR, THE ASSESSEE HAD INCURRED INTEREST COST OF ` 3,22,99,963/-, AS AVAILABLE FROM THE PROFIT AND LOSS ACCOUNT; THAT TH E ASSESSEE HAD EARNED EXEMPT INCOME AT THE COSTS DEBITED TO THE PROFIT AN D LOSS ACCOUNT; THAT UNDISPUTEDLY, A LOAN HAD BEEN TAKEN, ON WHICH, INTE REST WAS BEING PAID; THAT AS SUCH, THE AO WAS RIGHT IN HOLDING 50% OF THE IN TEREST EXPENDITURE TO BE DIRECTLY RELATABLE TO THE EARNING OF EXEMPT INCOME; THAT AS SUCH, THE AO WAS CORRECT IN MAKING THE DISALLOWANCE ACCORDINGLY; THA T EVEN THOUGH AGREEING WITH THE AO TO THE APPLICABILITY OF FORMULA AS PER RULE 8D OF THE RULES, THE LD. CIT(A) ERRED IN RESTRICTING THE DISALLOWANCE MA DE BY THE AO AT ` 47,33,000/- BEING 0.5% OF THE AVERAGE INVESTMENT, T O ` 22,26,000/-; THAT THE LD. CIT(A) FURTHER ERRED IN REDUCING A SUM OF ` 5,71,794/- AND THEREBY RESTRICTING THE DISALLOWANCE TO ONLY ` 16,54,531/-; THAT EVEN OTHERWISE, THE MATTER NEEDS TO BE REMITTED TO THE AO TO EXAMINE TH E EXPENSES REGARDING THE EXEMPT INCOME IN THE LIGHT OF GODREJ & BOYCE(SUPR A), AS PER WHICH, EVEN IF THE ASSESSEE HAS UTILIZED ITS OWN FUNDS FOR MAKI NG INVESTMENTS WHICH HAVE RESULTED IN INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, THE EXPENDITURE WHICH IS INCURRED IN THE EARNI NG OF THAT INCOME WOULD HAVE TO BE DISALLOWED, WHICH EXPENDITURE IS WHAT TH E AO HAS TO DETERMINE. ITA 2431 & CO 349 14 15. WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE MATERIAL ON RECORD WITH REGARD TO THIS ISSUE. THE ASSESSEE IS A LIMI TED COMPANY AND IS IN THE BUSINESS OF MAKING INVESTMENTS, BESIDES OTHER BUSIN ESS. EARLIER, IT WAS CARRYING ON THE ACTIVITY OF MANUFACTURING AND DEALI NG IN TEXTILES. THE TEXTILE DIVISION OF THE ASSESSEE, HOWEVER, GOT DEME RGED INTO THE RESULTING COMPANY, STIL, WITH EFFECT FROM 1.7.05. THE AO MA DE DISALLOWANCE OF INTEREST EXPENDITURE OF ` 1,61,49,987/- AND OF OTHER ADMINISTRATIVE AND OPERATIVE EXPENSES OF ` 47,33,200/-, TOTAL AMOUNTING TO ` 2,08,83,181/-. THE LD. CIT(A), APROPOS THE INTEREST EXPENDITURE, HELD THAT THE ENTIRE LOAN ON WHICH THE INTEREST EXPENDITURE HAD BEEN PAID ACTUAL LY STOOD TRANSFERRED FROM THE ASSESSEE COMPANY TO STIL, THE RESULTING COMPANY , PURSUANT TO THE SCHEME OF DEMERGER. THIS FACT, AS FOUND BY THE LD . CIT(A), HAS REMAINED ESTABLISHED. NOTHING TO THE CONTRARY HAS BEEN BR OUGHT OUT . IT REMAINS UNDISPUTED THAT IN THE AUDITED FINANCIAL STATEMENT OF STIL, AS ON 31.3.2006, THIS LOAN STOOD TRANSFERRED PURSUANT TO THE SCHEME OF DEMERGER, FROM THE ASSESSEE COMPANY TO STIL. THIS WAS IN ACCORDANCE WITH THE SCHEME OF DEMERGER AS APPROVED BY THE HONBLE RAJASTHAN HIGH COURT. A COPY OF THE SAID SCHEME OF DEMERGER IS AT APB 1 TO 20. AS PER THIS SCHEME, THE LIABILITIES, DUTIES AND OBLIGATIONS OF THE ASSESSEE COMPANY RELATING TO THE DEMERGED TEXTILE DIVISION WERE TO BE TRANSFERRED TO THE RESULTING COMPANY, ITA 2431 & CO 349 15 STIL. THEN, AS PER THE SCHEDULE OF ASSETS AND LIA BILITIES IN RESPECT OF THE RESIDUAL UNDERTAKING FORMING PART OF THE SCHEME OF DEMERGER, THE RELEVANT PORTION WHEREOF IS AT APB 62 TO 64, AFTER THE DEMER GER, THE BOOKS OF THE ASSESSEE DO NOT SHOW ANY OUTSTANDING LOANS, SIGNIFY ING THAT ALL THE LOANS PERTAINING TO THE DEMERGED TEXTILE DIVISION STOOD T RANSFERRED. APB 64, STATES, INTER ALIA, :- SECURED LOANS - NIL UNSECURED LOANS - NIL APB 62 TO 64 CONSTITUTE THE STATEMENT OF ASSETS AND LIABILITIES IN RESPECT OF THE RESIDUAL UNDERTAKING OF SIL (THE ASSESSEE) AS O N THE DATE IMMEDIATELY PRECEDING THE APPOINTED DATE. FURTHER, THE DETAIL S OF PROFIT AND LOSS ACCOUNT OF SIL (THE ASSESSEE), FROM JULY, 2005 TO M ARCH, 2006 (APB 78) GIVES THE DETAILS OF THE EXPENDITURE, AS PER WHICH, THE TOTAL EXPENDITURE WAS OF ` 21,06,266/-. THE COMPARATIVE PROFIT AND LOSS ACCO UNT FOR THE SEGREGATED PERIOD, I.E., FROM 1.4.05 TO 30.6.05, OF THE CONSOLIDATED COMPANY, AND FOR THE YEAR ENDING 31.3.06, ARE AT APB 79 TO 8 0. THEREIN, NO INTEREST EXPENDITURE STANDS SHOWN AS RELATING TO THE PERIOD FROM 1.7.05 TO 31.3.06, I.E., THE PERIOD DURING WHICH THE ASSESSEE COMPANY WAS ONLY AN INVESTMENT COMPANY. IT WAS ONLY TO THE THREE MONTHS PERIOD P RIOR TO THE SAID PERIOD, I.E., FROM 1.4.05 TO 30.6.05, THAT THE TOTAL INTERE ST EXPENDITURE PERTAINED. ITA 2431 & CO 349 16 THIS CLEARLY SHOWS THAT THE EXPENDITURE ON INTEREST CONCERNED THE DEMERGED TEXTILE DIVISION OF THE ASSESSEE COMPANY AND NOT I TS INVESTMENT ACTIVITY. 16. AS SUCH, NO NEXUS WAS BROUGHT BY THE AO BETWEEN THE BORROWED FUNDS AND THE TAX FREE INVESTMENT. THAT BEING SO, DISALLOWANCE OF INTEREST ON BORROWED FUNDS WAS ENTIRELY UNCALLED FOR. 17. IN K. RAHEJA CORPORATION PVT. LTD. (SUPRA ), IT WAS HELD BY THE HONBLE BOMBAY HIGH COURT THAT IN THE ABSENCE OF AN Y MATERIAL OR BASIS TO HOLD THAT THE INTEREST EXPENDITURE DIRECTLY OR INDI RECTLY WAS ATTRIBUTABLE FOR EARNING THE DIVIDEND INCOME, THE DECISION OF THE TR IBUNAL IN DELETING THE DISALLOWANCE OF INTEREST MADE U/S 14A OF THE ACT CO ULD NOT BE FAULTED. IN THE FACTS OF THE PRESENT CASE, AS DISCUSSED, K. RAHEJ A CORPORATION PVT. LTD. (SUPRA), IS SQUARELY APPLICABLE. 18. IN CIT V. HERO CYCLES (SUPRA), IT WAS HELD BY THE HONBLE PUNJAB & HARYANA HIGH COURT, INTER ALIA, THAT THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE WAS ALWAYS INCURRED, WHICH MUST BE DISALLOWED U/S 14A OF THE ACT AND THE IMPACT OF THE EXPENDITURE SO INCURRED COULD NOT BE ALLOWED TO BE SET OFF AGAINST THE BUSI NESS INCOME WHICH MAY NULLIFY THE MANDATE OF SECTION 14A, COULD NOT BE AC CEPTED; AND THAT THE DISALLOWANCE U/S 14A REQUIRED A FINDING OF INCURRIN G OF EXPENDITURE AND WHERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME , NO EXPENDITURE HAD ITA 2431 & CO 349 17 BEEN INCURRED, DISALLOWANCE U/S 14A COULD NOT STAND . IN THE PRESENT CASE, AS SEEN, THE AO HAS NOT ESTABLISHED ANY NEXUS WHATSOEV ER BETWEEN THE BORROWED FUNDS AND THE INVESTMENT MADE. THEREFORE , HERO CYCLES (SUPRA), IS APPLICABLE. 19. IN ACIT V. EICHER LTD. (SUPRA), IT HAS BEEN H ELD THAT THE BURDEN IS ON THE AO TO ESTABLISH THE NEXUS OF THE EXPENDITURE INCURRED WITH THE EARNING OF EXEMPT INCOME, BEFORE MAKING ANY DISALLOWANCE U/ S 14A OF THE ACT. 20. IN MARUTI UDYOG(SUPRA), IT HAS BEEN HELD THAT BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT, THE ONUS TO ESTABL ISH THE NEXUS OF THE SAME WITH THE EXEMPT INCOME, IS ON THE REVENUE. 21. IN JINDAL PHOTO(SUPRA), FOLLOWING HERO CYCLE S(SUPRA), EICHER LTD.(SUPRA), MARUTI UDYOG(SUPRA) AND OTHER DECIS IONS, WE HAVE HELD AS FOLLOWS:- 18. NOW, AS PER SECTION 14A(2) OF THE ACT, IF THE AO, HAVING REGARD THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE ASSESSEES TOTAL INCOME UNDER THE ACT, THE AO SHALL DETERMINE THE AMOUNT INCURRED IN RELATION TO SUCH INCOME, IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, I.E. UNDER RULE 8D OF THE I.T. RULES. H OWEVER, IN THE PRESENT CASE THE ASSESSMENT ORDER DOES NOT EVIN CE ANY SUCH SATISFACTION OF THE AO REGARDING THE CORRECTNE SS OF THE CLAIM OF THE ASSESSEE. AS SUCH, RULE 8D OF THE RULE S WAS NOT APPROPRIATELY APPLIED BY THE AO AS CORRECTLY HELD B Y THE CIT (A). IT HAS NOT BEEN DONE BY THE AO THAT ANY EX PENDITURE ITA 2431 & CO 349 18 HAD BEEN INCURRED BY THE ASSESSEE FOR EARNING ITS D IVIDEND INCOME. MERELY, AN AD HOC DISALLOWANCE WAS MADE. TH E ONUS WAS ON THE AO TO ESTABLISH ANY SUCH EXPENDITUR E. THIS ONUS HAS NOT BEEN DISCHARGED. IN CIT VS. HERO CYCL ES: (P & H) 323 ITR 518, UNDER SIMILAR CIRCUMSTANCES, IT W AS HELD THAT THE DISALLOWANCE U/S 14A OF THE ACT REQUIRES A CLEAR FINDING OF INCURRING OF EXPENDITURE AND THAT NO DISALLOWANCE CAN BE MADE ON THE BASIS OF PRESUMPTIO NS. IN ACIT VS. EICHER LTD., 101 TTJ (DEL.) 369, THAT IT WAS HELD THAT THE BURDEN IS ON THE AO TO ESTABLISH NEXUS OF EXPENSES INCURRED WITH THE EARNING OF EXEMPT INCOME, BEFORE MAKING ANY DISALLOWANCE U./S 14A OF THE ACT. IN MARUTI U DYOG VS. DCIT, 92 ITD 119 (DEL.), IT HAS BEEN HELD THAT BEFO RE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT, THE ONU S TO ESTABLISH THE NEXUS OF THE SAME WITH THE EXEMPT INC OME, IS ON THE REVENUE. IN WIMCO SEEDLINGS LIMITED VS. DCI T, 107 ITD 267 (DEL.) , IT HAS BEEN HELD THAT THERE C AN BE NO PRESUMPTION THAT THE ASSESSEE MUST HAVE INCURRED EXPENDITURE TO EARN TAX FREE INCOME. SIMILAR ARE TH E DECISIONS IN : 1. PUNJAB NATIONAL BANK VS. DCIT, 103 TTJ 908 (DEL.) ; 2. VIDYUT INVESTMENT LTD. 10 SOT 284 ( DEL.) ; AND 3. D.J. MEHTA VS. ITO, 290 ITR 238 (MUM.) (AT). 19. IN VIEW OF THE ABOVE, FINDING NO ERROR WITH THE ORDER OF THE CIT(A) ON THE POINT AT ISSUE , THE SAME IS HEREBY CONFIRMED. GROUND NO. 3 IS THUS REJECTED. 22. MOREOVER, AS RIGHTLY CONTENDED, THE FINDING OF FACT RECORDED BY THE LD. CIT(A), TO THE EFFECT THAT NO PART OF THE INTEREST EXPENDITURE ACTUALLY RELATED TO THE INVESTMENT ACTIVITY, HAS NOT BEEN CHALLENGED BY THE DEPARTMENT. 23. THEREFORE, WE HOLD THAT THE LD. CIT(A) HAS CORR ECTLY DELETED THE DISALLOWANCE OF THE INTEREST EXPENDITURE OF ` 1,61,49,987/-. ITA 2431 & CO 349 19 24. FURTHER, THE AO MADE DISALLOWANCE OF ` 4,77,33,200/- OUT OF ADMINISTRATIVE AND OPERATIVE EXPENSES AT 0.5% OF TH E AVERAGE INVESTMENT OF THE ASSESSEE COMPANY, UNDER THE FORMULA GIVEN IN RU LE 8D(2)(III) OF THE RULES. THE LD. CIT(A) OBSERVED THAT THE ENTIRE EX PENDITURE INCURRED DURING THE PRE-DEMERGER PERIOD RELATED TO THE DEMERGED TEX TILE DIVISION, BUT FOR ` 12,99,537/-. IT WAS ALSO NOTICED THAT THE TOTAL E XPENDITURE FOR THE POST DEMERGER PERIOD WAS OF ` 21,06,266/-. OUT OF THIS AMOUNT, THE ASSESSEE HAD ITSELF DISALLOWED ` 11,79,478/- AND HAD CLAIMED ONLY THE BALANCE EXPENS ES OF ` 9,26,788/-. THE TOTAL EXPENSES PRE-DEMERGER AND P OST-DEMERGER THUS AMOUNTED TO ` 22,26,325/-. THE LD. CIT(A) OBSERVEAD THAT IT WAS OUT OF THIS AMOUNT THAT THE DISALLOWANCE COULD BE MADE. THE C IT(A) AGREED IN PRINCIPLE WITH THE ARGUMENT OF THE ASSESSEE THAT JU ST SINCE THE AO HAD WORKED OUT THE DISALLOWANCE OF ` 47,33,000/- U/S 14A OF THE ACT, BEING 0.5% OF THE AVERAGE INVESTMENT UNDER RULE 8D OF THE RULES, AND THIS AMOUNT EXCEEDED THE TOTAL EXPENDITURE INCURRED IN CONNECTI ON WITH THE EARNING OF THE EXEMPT INCOME, THE EXPENDITURE AS WORKED OUT AS PE R THE RULES, COULD NOT BE DISALLOWED. THE LD. CIT(A) WAS OF THE VIEW THA T THE DISALLOWANCE WAS TO BE RESTRICTED TO THE TOTAL EXPENDITURE OF ` 22,26,325/- (ROUNDED OFF TO THE FIGURE OF ` 22,26,000/-), LEST THE DISALLOWANCE EXCEEDED EVEN T HE ACTUAL EXPENDITURE INCURRED. HOWEVER, THE ASSESSEES STAN D THAT NO PART OF THE ITA 2431 & CO 349 20 EXPENDITURE DETERMINED AT ` 22,26,000/- WAS DISALLOWABLE, WAS NOT ACCEPTED BY THE LD. CIT(A), OBSERVING THAT THE ASSE SSEE HAD ACTUALLY EARNED EXEMPT INCOME BY WAY OF DIVIDEND AND IN TERMS OF SE CTION 14A OF THE ACT, THE EXPENDITURE INCURRED IN RELATION TO THAT INCOME WAS REQUIRED TO BE DISALLOWED. AS SUCH, OUT OF THE EXPENDITURE DETER MINED AT ` 22,26,000/-, THE LD. CIT(A) SUBTRACTED THE AMOUNT OF ` 5,71,794/- REPRESENTING EXPENDITURE RELATING TO HARIDWAR HOLIDAY HOME AND D EHRADUN HOLIDAY HOME, WHICH WERE FOUND TO BE DEMERGED UNDER THE DEM ERGER SCHEME, AND ARRIVED AT THE FIGURE OF ` 16,54,531/-. THE LD. CIT(A) HELD THIS AMOUNT TO RELATE TO THE INVESTMENT ACTIVITY OF THE ASSESSEE C OMPANY AND DISALLOWED IT AS AGAINST THE DISALLOWANCE OF ` 47,33,200/- MADE BY THE AO. 25. THE ASSESSEE MAINTAINS THAT THE LD. CIT(A) HAS ERRED IN DISALLOWING THE SUM OF ` 16,54,531/- ALSO, AS ACCORDING TO THE ASSESSEE, NO PART OF THE ADMINISTRATIVE EXPENDITURE RELATED TO THE INVESTMEN T DIVISION OF THE ASSESSEE. THIS CONTENTION OF THE ASSESSEE, IT IS SEEN, CARRIE S FORCE. TO START WITH, IT CANNOT BE GAINSAID THAT THE DISALLOWANCE U/S 14A OF THE ACT CANNOT BE MADE ON AN AD-HOC BASIS AND IT IS THE DEPARTMENTS RESPO NSIBILITY TO JUSTIFY ANY SUCH DISALLOWANCE BY BRINGING MATERIAL ON RECORD TO SHOW THAT ANY EXPENDITURE WAS INCURRED FOR EARNING THE EXEMPT INC OME. REFERENCE IN THIS REGARD HAS CORRECTLY BEEN MADE TO WIMCO SEEDLINGS LTD. V. DCIT(SUPRA), ITA 2431 & CO 349 21 WHEREIN IT HAS BEEN HELD THAT THERE CAN BE NO PRESU MPTION THAT THE ASSESSEE MUST HAVE INCURRED EXPENDITURE TO EARN TAX FREE INC OME. WIMCO SEEDLINGS LTD. (SUPRA) WAS FOLLOWED BY US IN JINDAL PHOTO (SUPRA). 26. IN MS. SUSHMA KAPUR (SUPRA), IT HAS BEEN HELD BY THE TRIBUNAL THAT TO THE EXTENT IT COULD BE PROVED THAT THE INVESTMEN T WAS MADE FROM BORROWED FUNDS, THE EXPENSES HAD BEEN DISALLOWED U/S 14A. THIS FINDING OF FACT RECORDED BY THE TRIBUNAL WAS UPHELD BY THE HONBLE JURISDICTIONAL HIGH COURT. 27. IN THE PRESENT CASE, THE AO DID NOT BRING ANY E VIDENCE ON RECORD TO ESTABLISH THAT ANY EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE COMPANY FOR EARNING THE EXEMPT INCOME. IN THE ABSENCE OF SUCH EVIDENCE, IT WAS WRONG ON THE PART OF THE AO TO PROCEED TO COMPUTE D ISALLOWANCE OF THE EXPENSES U/S 14A OF THE ACT BY MERELY APPLYING RULE 8D(2)(III) OF THE RULES. 28. APROPOS THE ASSESSEES CONTENTION REGARDING THE APPLICABILITY OF THE PROVISIONS OF SECTIONS 14A(2) AND (3) OF THE ACT AN D RULE 8D OF THE RULES BEING PROSPECTIVE WITH EFFECT FROM ASSESSMENT YEAR 2008-09, SUCH CONTENTION IS SUPPORTED BY GODREJ & BOYCE(SUPRA) AND GODREJ AGROVET LTD.(SUPRA). IT IS, HOWEVER, WELL ESTABLISHED, A S HELD IN CONTINENTAL CARRIERS P.LTD. V. ACIT, 138 TTJ 249(DEL), THAT E VEN PRIOR TO ASSESSMENT ITA 2431 & CO 349 22 YEAR 2008-09, WHEN RULE 8D OF THE RULES WAS NOT APP LICABLE, THE AO WAS DUTY BOUND TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO INCOME NOT FORMING PART OF THE TOTAL INCOME, BY ADOPTING A REA SONABLE BASIS. THEREFORE, NOTHING STOPPED THE AO FROM DETERMINING THE EXPEND ITURE INCURRED IN RELATION TO THE EXEMPT INCOME EARNED BY THE ASSESSE E. BUT FOR DOING SO, A REASONABLE BASIS HAD TO BE ADOPTED. AND THE MOS T REASONABLE BASIS, RATHER, THE FIRST REASONABLE BASIS FOR SUCH DETERMI NATION CAN BE NONE ELSE THAN THE NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE EXEMPT INCOME EARNED. NOW, EVIDENTLY, THE AO DID NOT ESTABLISH ANY SUCH N EXUS BETWEEN THE EXPENDITURE INCURRED AND THE EXEMPT INCOME EARNED B Y THE ASSESSEE COMPANY. 29. EVEN THE LD. CIT(A), THOUGH HE RESTRICTED THE D ISALLOWANCE FROM ` 47,33,200/- TO ` 16,54,531/-, DID NOT ESTABLISH ANY SUCH NEXUS AND IT WAS MERELY OBSERVED THAT THIS AMOUNT RELATED TO THE INV ESTMENT ACTIVITY OF THE ASSESSEE COMPANY, WITHOUT CLARIFYING AS TO HOW IT W AS FOUND TO BE SO. 30. WE FIND THAT APROPOS THE PRE-DEMERGER EXPENDITU RE INCURRED DURING THE PERIOD FROM 1.4.05 TO 30.6.06, THE TOTAL EXPEND ITURE RELATING TO THE ACTIVITIES OTHER THAN THOSE OF THE TEXTILE DIVISION OF THE ASSESSEE COMPANY, AS AVAILABLE FROM THE CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ITA 2431 & CO 349 23 ENDED 31.3.06 OF STIL (COPY AT APB 83 TO 87), WAS ` 12,99,537/-, AS FOLLOWS:- ` 1. SALARY, WAGES, BONUS ETC. 61 ,353/- 2. EMPLOYEES CONTRIBUTION TO PF .. 2,792 /- 3. RATES AND TAXES .. 3,440/- 4. INSURANCE PREMIUM(NET) .. 50 ,000/- 5. MISC. EXPENSES 11,76,500/- _____________ TOTAL: 12,99,537/- OUT OF THE ABOVE EXPENDITURE OF ` 12,99,537/-, IT IS SEEN, AN AMOUNT OF ` 11,76,500/- STANDS DEBITED AS MISC.EXPENDITURE. T HE BREAK UP OF THESE MISC.EXPENSES, AS APPENDED AT APB 82, IS AS FOLLOWS :- PARTICULARS 200506 3 MONTHS 9 MONTHS *DETAIL OF M/S. EXPENSES -FILING FEE 4000 0 4000 -GENERAL EXPENSES 12361 12361 0 -POSTAGE & TELEGRAM 118478 4929 113549 -PRINTING AND STATIONERY 231675 469 231206 -BANK COMMISSION 13 5 135 0 -BOOKS AND PERIODICALS 2497 2497 0 -TRAVELING EXPENSES 38696 38696 0 -TRUNK & TELEPHONE EXP. 1888 1888 0 -HARIDWAR HOLIDAY HOME 171231 171231 0 -LEGAL & PROFESSIONAL 80407 8 0407 0 -ELECTRICITY CHARGES 2769 2769 0 -WATER CHARGES 425 42 5 0 -ADVERTISEMENT 7 7570 77570 0 -LISTING FEE 84250 58000 26250 -MAINTENANCE CHARGES 3940 3940 0 -DIRECTORS TRAVELING 6680 18 178511 489507 -CONVEYANCE CHARGES 620 620 0 ITA 2431 & CO 349 24 -DEPOSITORY FEES 44080 44080 0 -DEMAT EXPENSES 4 6653 0 4 6653 -DEHRADUN HOLIDAY HOME EXP. 400563 400563 0 -MOTOR CAR EXP. 80910 80910 0 -PRESS CONFERENCE EXP. 165 00 16500 0 _________________________________________ 2087666 1176501 911165 __________________________________________ 31. AS NOTED ABOVE, AN AMOUNT OF ` 5,71,794/- WAS EXPENDITURE RELATED TO HARIDWAR HOLIDAY HOME ( ` 1,71,231/-) AND DEHRADUN HOLIDAY HOME ( ` 4,00,563/-). THESE PROPERTIES, PERTINENTLY, WERE SHOWN IN THE SCHEDULE FORMING PART OF THE BALANCE SHEET AS ON 31.3.06 (CO PY AT APB 199), AS FIXED ASSETS OF THE COMPANY. BOTH THESE HOLIDAY HOMES, U NDENIABLY, WERE DEMERGED UNDER THE DEMERGER SCHEME AND SO, THE LD. CIT(A) RIGHTLY DID NOT DISALLOW THE EXPENDITURE ON THESE HOLIDAY HOMES. 32. SO, WHAT REMAINED AS BALANCE UNDER THE HEAD OF MISC.EXPENDITURE INCURRED DURING THE THREE MONTHS PERIOD FROM 1.4.20 05 TO 30.6.2005, WAS THE AMOUNT OF ` 7,27,743/-. EVEN THIS PART OF THE EXPENDITURE HAS NOT BEEN CO- RELATED BY THE AUTHORITIES BELOW TO THE EXEMPT INCO ME EARNED BY THE ASSESSEE COMPANY. 33. SO FAR AS REGARDS THE POST-DEMERGER EXPENDITURE INCURRED BY THE ASSESSEE FROM 1.7.05 TO 31.3.06, AS AVAILABLE FROM THE DETAILS OF EXPENSES IN THE PROFIT AND LOSS ACCOUNT IN MARCH, 2006 AND JUNE , 2005, I.E., FOR THE YEAR ITA 2431 & CO 349 25 ENDED 31.3.06 AND FOR THE PERIOD ENDED 30.6.05 (COP Y AT APB 81), THAT IS, THE DIFFERENCE OF EXPENSES IN THE PROFIT AND LOSS ACCOU NT FOR THE PERIOD FROM 1.4.05 TO 30.6.05 AND 1.7.05 TO 31.3.06, I.E., TO S AY, THE PRE-DEMERGER AND THE POST-DEMERGER PERIODS, DURING THE POST-DEMERGER PER IOD, THE ASSESSEE HAD ONLY INVESTMENT ACTIVITY AND THERE WAS NO ACTIVITY OF MANUFACTURE OF TEXTILES, THE TEXTILE DIVISION HAVING BEEN DEMERGED . THE TOTAL EXPENDITURE INCURRED DURING THIS PERIOD WAS OF ` 21,06,266/-. THIS COMPRISED OF (AS AVAILABLE FROM THE COPY OF THE DETAILS OF THE PROFI T AND LOSS ACCOUNT OF THE ASSESSEE COMPANY FROM JULY 2005 TO MARCH, 2006, AT APB 78), OF OPERATIVE AND OTHER EXPENSES OF ` 14,78,766/- AND DIRECTORS FEES AND COMMISSION OF ` 6,27,500/-. THE OPERATIVE AND OTHER EXPENSES OF ` 14,78,766/- CONSTITUTED, MAINLY, RESTRUCTURING/DEMERGER EXPENSES OF ` 14,74,347/- (APB 79). THE BALANCE OPERATING AND OTHER EXPENSES WERE OF ` 4,419/-. A REVISED COMPUTATION OF INCOME FOR THE ASSESSMENT YEAR 2006- 07 (COPY AT APB 283 TO 286) WAS FILED BY THE ASSESSEE BEFORE THE AO ALO NG WITH LETTER DATED 27.11.06 (COPY AT APB 287 TO 292). IN THE REVISED RETURN OF INCOME, OUT OF THE DEMERGER EXPENSES OF ` 14,74,347/-, THE ASSESSEE CLAIMED AN AMOUNT OF ` 2,94,869/- AS BEING ALLOWABLE U/S 35 DD OF THE I.T. ACT, BEING 1/5 TH OF THE SAID AMOUNT OF ` 14,74,347/-. THE BALANCE EXPENDITURE OF ` 11,79,478/- ITA 2431 & CO 349 26 WAS DISALLOWED. THE REVISED COMPUTATION (APB 283) , IN THIS REGARD, READS AS FOLLOWS:- A. INCOME FROM BUSINESS ADJUSTMENTS IN ACCORDANCE WITH SECTIONS 28 TO 44 . 7. EXPENDITURE ON ACCOUNT OF DEMERGER ` 14,74,347/- LESS: ALLOWABLE U/S 35DD (1/5 TH OF ` 14,74,347/-) ` 2,94,869/- ________________ ` 11,79, 478/- AS SUCH, IT IS EVIDENT THAT THE ASSESSEE HAD CLAIME D EXPENDITURE ONLY OF ` 16,54,531/-. THE LD. CIT(A) HAS DULY TAKEN THIS I NTO CONSIDERATION. NO DOUBT, THE DISALLOWANCE, IF ANY, COULD HAVE BEEN MA DE OUT OF THIS AMOUNT ONLY. HOWEVER, IN ORDER TO VALIDATE SUCH A DISALLO WANCE, AS DISCUSSED HEREINABOVE, WHAT WAS REQUIRED TO BE ESTABLISHED WA S THE NEXUS OF THE EXPENDITURE WITH THE EARNING OF THE EXEMPT INCOME. THE LD. CIT(A), IN THIS REGARD, HAS MERELY OBSERVED THAT THE ENTIRE BALANCE EXPENDITURE OF ` 16,54,531/- RELATES TO THE INVESTMENT ACTIVITY OF T HE ASSESSEE COMPANY. THERE IS, HOWEVER, NOTHING IN THE IMPUGNED ORDER AS TO HOW THIS FINDING HAS BEEN ARRIVED AT BY THE LD. CIT(A). IT CANNOT BE GA IN-SAID THAT THE ONUS TO PROVE THE NEXUS BETWEEN THE EXPENDITURE INCURRED AN D THE EARNING OF INCOME NOT FORMING PART OF THE TOTAL INCOME IS SQUARELY ON THE DEPARTMENT. IN THE ITA 2431 & CO 349 27 ABSENCE OF DISCHARGING THIS ONUS, NO DISALLOWANCE I N THIS REGARD CAN BE MADE, MUCH LESS SUSTAINED, AS HAS BEEN DONE BY THE LD. CIT(A). THERE IS ABSOLUTELY NOTHING ON RECORD TO SHOW THAT ANY PART OF THE EXPENDITURE WAS INCURRED TO EARN THE EXEMPT INCOME. AND NOT ONLY THIS, AS RIGHTLY CANVASSED, THIS EXPENDITURE OF ` 16,54,531/- EVEN INCLUDED EXPENDITURE TOWARDS REMUNERATION TO DIRECTOR AND AUDIT FEES. NOW THIS KIND OF EXPENDITURE, IRRESPECTIVE OF THE FACT WHETHER OR NO T INCOME NOT FORMING PART OF THE TOTAL INCOME IS EARNED, HAS TO BE INCURRED. THEREFORE ALSO, THESE EXPENSES CANNOT, IN ANY MANNER, BE SAID TO BE RELAT ABLE TO EARNING OF EXEMPT INCOME BY THE ASSESSEE COMPANY. 34. THUS, LOOKED AT FROM ANY ANGLE, THE LD. CIT(A), IN OUR CONSIDERED OPINION, WAS NOT AT ALL JUSTIFIED IN HOLDING THE EN TIRE BALANCE EXPENDITURE OF ` 16,54,531/- INCURRED BY THE ASSESSEE COMPANY AS LIA BLE TO DISALLOWANCE U/S 14A OF THE ACT. THE GRIEVANCE OF THE ASSESSEE IN T HIS REGARD IS, THEREFORE, FOUND TO BE JUSTIFIED AND IS ACCEPTED AS SUCH. TH E GROUSE OF THE DEPARTMENT, ON THE OTHER HAND, IS FOUND TO BE BASELESS AND GROU ND NO. 1 RAISED BY THE DEPARTMENT IS, HENCE, REJECTED, WHEREAS CROSS OBJEC TION NO. 1 TAKEN BY THE ASSESSEE IS ACCEPTED. 35. TURNING TO GROUND NO.2 RAISED BY THE DEPARTMENT , IT HAS BEEN CONTENDED THAT THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF ` ITA 2431 & CO 349 28 5,000/- MADE BY THE AO ON ACCOUNT OF FINES AND PENA LTIES. THE AO, IT IS SEEN, MADE DISALLOWANCE OF THE EXPENDITURE OF ` 5,000/- INCURRED BY THE ASSESSEE COMPANY ON ACCOUNT OF FINES TOWARDS TRAFFI C VIOLATION. BEFORE THE LD. CIT(A), THE ASSESSEE CONTENDED THAT A SIMILAR A MOUNT HAD BEEN ALLOWED AS A DEDUCTION IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 1990-91 BY THE TRIBUNAL IN ITA NO. 2856(DEL)93. THE LD. CIT( A) DELETED THE DISALLOWANCE FOLLOWING THE SAID ORDER OF THE TRIBU NAL. BEFORE US, THE ASSESSEE HAS AGAIN PRESSED INTO SERVICE THE TRIBUNA LS ORDER (SUPRA) FOR THE ASSESSMENT YEAR 1990-91 (COPY AT APB 225 TO 228)IN RESPONSE TO THE LD. DRS ARGUMENT THAT THE PAYMENT FOR FINES TOWARDS TR AFFIC VIOLATION AND THE AO HAD CORRECTLY MADE THE DISALLOWANCE. 36. THE FACTS REMAINING THE SAME FOR THE YEAR UNDER CONSIDERATION, AS THOSE FOR THE ASSESSMENT YEAR 1990-91 AND FOLLOWING THE TRIBUNAL ORDER, THE ACTION OF THE LD. CIT(A) IN DELETING THE DISALLOWAN CE IS CONFIRMED, REJECTING GROUND NO.2 TAKEN BY THE DEPARTMENT. 37. TURNING TO GROUND NO.3, THE DEPARTMENT CONTENDS THAT THE LD. CIT(A) HAS ERRED IN DIRECTING THE AO TO VERIFY THE CLAIM O F THE ASSESSEE AND EXCLUDE INTEREST INCOME FROM UTI FROM INCOME AFTER DUE VERI FICATION AND TO ALLOW THE BALANCE 50% OF THE ADDITIONAL DEPRECIATION AFTE R VERIFYING THE CONTENTION OF THE ASSESSEE THAT 50% ADDITIONAL DEPRECIATION W AS CLAIMED AND ALLOWED IN ITA 2431 & CO 349 29 THE IMMEDIATELY PRECEDING YEAR, I.E., IN THE ASSESS MENT YEAR 2005-06 AND TO VERIFY THE CLAIM OF THE ASSESSEE AND TO ALLOW CREDI T OF TDS. 38. IN THIS REGARD, IT IS SEEN THAT THE AO REFUSED TO ALLOW ADDITIONAL DEPRECIATION @ 7.5% IN RESPECT OF ADDITION OF PLANT AND MACHINERY DURING THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, I.E., AS SESSMENT YEAR 2005-06. BEFORE THE LD. CIT(A), THE ASSESSEE CONTENDED THAT IN THE ASSESSMENT YEAR 2005-06, THE ASSESSEE HAD CLAIMED ADDITIONAL DEPREC IATION @ 7.5%, BEING 50% OF ADDITIONAL DEPRECIATION OF 15%, AMOUNTING TO ` 5,32,65,467/-, IN RESPECT OF NEW PLANT AND MACHINERY, INSTALLED AT TH E NEW ELIGIBLE INDUSTRIAL UNDERTAKING OF THE COMPANY, I.E., UNIT NO.8, KATHUA , U/S 32 (IIA) OF THE ACT, SINCE THE MACHINERY HAD BEEN PUT TO USE FOR A PERIO D OF LESS THAN 180 DAYS IN THAT PREVIOUS YEAR; THAT THE DEPRECIATION CLAIMED I N THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2005-06 WAS ALLOWED; THAT IN TH E RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD CLAI MED THE BALANCE 50% OF ADDITIONAL DEPRECIATION OF 15% OF THE VALUE OF THE PLANT AND MACHINERY INSTALLED IN THE IMMEDIATELY PRECEDING ASSESSMENT Y EAR; THAT THIS WAS DONE THROUGH NOTES TO ACCOUNTS APPENDED TO THE RETURN OF INCOME; THAT THIS CLAIM WAS COMPUTED AT ` 1,32,79,884/-, BY APPORTIONING 50% OF THE GROSS AMO UNT OF ADDITIONAL DEPRECIATION OF ` 5,32,65,467/- IN THE RATIO OF 91 DAYS TO THE ITA 2431 & CO 349 30 TOTAL PERIOD; AND THAT HOWEVER, THE AO HAD NOT CONS IDERED THIS CLAIM MADE BY THE ASSESSEE. 39. THE LD. CIT(A), IN THE IMPUGNED ORDER, OBSERVED AS FOLLOWS:- 8.2 SINCE THE APPELLANT IS STATED TO BE ADMITTED LY ELIGIBLE FOR DEDUCTION OF ADDITIONAL DEPRECIATION AS 50% OF THE SAME HAS ALREADY BEEN DULY ALLOWED BY THE AO IN THE IMME DIATELY PRECEDING ASSESSMENT YEAR 2005-06, THERE IS NOTHING ON RECORD TO INDICATE THAT THE APPELLANT SHOULD NOT BE ALLOWED DEDUCTION OF THE BALANCE 50% OF DEDUCTION IN THE CU RRENT ASSESSMENT YEAR 2006-07. ACCORDINGLY, THE LD. AO I S DIRECTED TO VERIFY THE CONTENTION OF THE APPELLANT THAT 50% OF ADDITIONAL DEPRECIATION WAS CLAIMED AND ALLOWED IN THE IMMEDIA TELY PRECEDING ASSESSMENT YEAR 2005-06 AND IF THIS FACT IS FOUND TO BE FACTUALLY CORRECT, THE AO IS DIRECTED TO ALLOW T HE BALANCE 50% OF ADDITIONAL DEPRECIATION DURING THE YEAR UNDE R CONSIDERATION. THIS GROUND OF APPEAL IS ACCORDING LY TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 40. THERE IS NOTHING ON RECORD TO SHOW THAT THE DIR ECTIONS GIVEN BY THE LD. CIT(A) ARE NOT PROPER. THE ELIGIBILITY FOR DEDUCTIO N OF ADDITIONAL DEPRECIATION STANDS ADMITTED, SINCE 50% THEREOF HAD ALREADY BEEN ALLOWED BY THE AO IN THE ASSESSMENT YEAR 2005-06, I.E., THE IM MEDIATELY PRECEDING ASSESSMENT YEAR. THEREFORE, OBVIOUSLY, THE BALANC E 50% OF THE DEDUCTION IS TO BE ALLOWED IN THE CURRENT YEAR, I.E., ASSESSMENT YEAR 2006-07. THE LD. CIT(A) HAS MERELY DIRECTED THE VERIFICATION OF THE CONTENTIONS OF THE ASSESSEE AND TO ALLOW THE BALANCE ADDITIONAL DEPREC IATION AFTER SUCH FACTUAL ITA 2431 & CO 349 31 VERIFICATION. ACCORDINGLY, FINDING NO MERIT THERE IN, GROUND NO. 3 RAISED BY THE DEPARTMENT IS REJECTED. 41. NOW THE ONLY ISSUE REMAINING IS THAT COMPRISING CROSS OBJECTION NO. 2 RAISED BY THE ASSESSEE, WHICH IS TO THE EFFECT TH AT THE LD. CIT(A) HAS ERRED IN NOT DIRECTING THE AO IN ALLOWING DEDUCTION TO TH E ASSESSEE UNDER SECTIONS 80 IA/80 IB OF THE ACT IN RESPECT OF THE THREE UNIT S OF THE ASSESSEE. 42. THE AO REFUSED TO ALLOW DEDUCTION UNDER SECTION S 80 IA/80 IB REGARDING THE ASSESSEES THREE UNITS WHICH STOOD DE MERGED PURSUANT TO THE DEMERGER SCHEME APPROVED BY THE HONBLE RAJASTHAN H IGH COURT. THIS DEMERGER CAME ABOUT 1.7.05, AS NOTED HEREINABOVE. THE DISALLOWANCE WAS ORDERED BY THE AO AS PER THE PROVISIONS OF SECTION 80 IA(12) READ WITH SECTION 80 IB OF THE ACT. 43. BEFORE THE LD. CIT(A), THE MAIN CONTENTION ON B EHALF OF THE ASSESSEE COMPANY WAS THAT DEDUCTION U/S 80 IB OF THE ACT HAD NOT BEEN ALLOWED FOR THE PRE-DEMERGER PERIOD FROM 1.4.05 TO 30.6.05, EIT HER TO THE ASSESSEE COMPANY OR TO THE RESULTING COMPANY AFTER THE DEMER GER. 44. THE LD. CIT(A) HELD THE ACTION OF THE AO TO BE CORRECT IN VIEW OF THE PROVISIONS OF SECTION 80 IA(12), AS PER WHICH, WHER E THE ELIGIBLE UNDERTAKING STANDS TRANSFERRED IN A SCHEME OF AMALGAMATION OR D EMERGER, THE DEDUCTION IS ALLOWABLE ONLY TO THE RESULTING COMPANY. ITA 2431 & CO 349 32 45. BEFORE US, IT HAS BEEN CONTENDED ON BEHALF OF T HE ASSESSEE THAT UNDISPUTEDLY, THE DEDUCTION UNDER SECTIONS 80 IA/80 IB OF THE ACT HAD BEEN CLAIMED WITH RESPECT TO THE PROFIT OF CERTAIN ELIGI BLE UNITS OF THE ASSESSEE COMPANY; THAT THESE UNITS HAD BEEN PART OF THE ASSE SSEE COMPANY DURING THE PRE-DEMERGER PERIOD FROM 1.4.05 TO 30.5.05; THAT TH ESE UNITS HAD BEEN TRANSFERRED UNDER THE DEMERGER SCHEME WITH EFFECT F ROM 1.7.05; THAT THE DEDUCTION CLAIMED WAS ONLY WITH RESPECT TO THE PROF ITS EARNED BY THESE UNDERTAKINGS FOR THE SAID PRE-DEMERGER PERIOD ONLY AND SUCH DEDUCTION HAD NOT BEEN CLAIMED IN THE COMPUTATION OF INCOME BUT B Y WAY OF NOTES APPENDED TO THE RETURN OF INCOME FILED, THE SAID NO TES FORMING AN INTEGRAL PART OF THE RETURN OF INCOME; AND THAT PRIOR TO THE INTRODUCTION OF SECTION 80 IA(12), CBDT CIRCULAR NO. 15/5/63 IT(A-I) DATED 1 3.12.63 CLARIFIED THAT DEDUCTIONS UNDER SECTIONS 80 IA AND 80 IB OF THE AC T WERE RELATED TO THE ELIGIBLE UNDERTAKING AND ACCORDINGLY, THEY GOT TRAN SFERRED WITH THE UNDERTAKING, NOTWITHSTANDING THE OWNERSHIP THEREOF. THE LEARNED COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE ON THE FOLLOWI NG CASE LAWS IN THIS REGARD:- 1. CIT V. P.K. ENGG.& FORGING PVT. LTD., 87 TAXMANN 101(CAL); 2. A.G.S. TIMBER & CHEMICAL INDUSTRIES PVT. LTD. V. C IT, 233 ITR 207(MAD); ITA 2431 & CO 349 33 3. ITO V. HINDUSTAN PETROLEUM CORPN. LTD., 25 TTJ (B OM)28; 4. SHAH GRANITES PVT. LTD. V. ITO, 28 TTJ 83(BOM); 5. ITO V. SLM MANEKLAL INDUSTRIES LTD., 17 ITD 515(A HD.); 6. ACIT V. IIS INFOTECH LTD., 82 TTJ 174(DEL); 7. TECH BOOKS ELECTRONICS SERVICES (P)LTD. V. ACIT, 100 ITD 125(DEL); 8. ACIT V. PRISMA ELECTRONICS ITA NOS. 3378(DEL)20 09 & 500(DEL)2010(DEL); AND 9. ITO V. ADVANCE VALVES GLOBAL ITA NO. 2096(DEL)2 008(DEL). 45. IT HAS THUS BEEN CONTENDED THAT AS SUCH, THE PR OFITS OF THE UNDERTAKING EARNED BY THE RESPECTIVE COMPANIES, I.E., THE RESPE CTIVE UNITS, FOR THE PERIOD THE UNDERTAKING WAS OWNED BY THE RESPECTIVE COMPAN IES, ARE ELIGIBLE FOR DEDUCTION UNDER SECTIONS 80 IA/80 IB OF THE ACT; TH AT THE PROVISIONS OF SECTION 80 IA(12) MERELY FACILITATES THE GRANT OF D EDUCTION UNDER SECTIONS 80 IA/80 IB OF THE ACT TO THE RESULTING COMPANIES ALSO , IN THE YEAR OF TRANSFER/MERGER; THAT WHILE BRINGING INTO THE STATU TE BOOK, THE SAID SECTION 80 IA(12); THAT THE EXPLANATORY NOTE PROVIDES THAT THESE PROVISIONS HAVE BEEN INTRODUCED TO MAKE THE CORPORATE REORGANIZATIO NS TAX NEUTRAL; THAT BY VIRTUE OF THE PROVISIONS OF SECTIONS 80 IA/80 IB(12 ) OF THE ACT, BENEFIT OF DEDUCTION UNDER THE PROFITS EARNED BY THE DEMERGER COMPANIES, FOR PART OF THE PERIOD CANNOT, AND SO, OUGHT NOT, BE DENIED. I T HAS FURTHER BEEN ITA 2431 & CO 349 34 CONTENDED THAT THE PROVISIONS OF THE ACT WHICH ARE BENEFICIAL TO THE ASSESSEE MUST BE LIBERALLY CONSTRUED, AS HAS BEEN WELL SETTL ED IN BAJAJ TEMPO V. CIT, 194 ITR 188(SC), CIT V. STRAWBOARD MANUFACTU RING CO. LTD., 177 ITR 431(SC) AND P.R. PRABHAKAR V. CIT, 284 ITR 54 8(SC). THE LEARNED COUNSEL HAS THEN CONTENDED THAT AS SUCH, THE PROVIS IONS OF SECTIONS 80 IA(12) AND 80 IB(12) OF THE ACT, BEING PROVISIONS BENEFICI AL TO THE ASSESSEE, REQUIRE TO BE CONSTRUED LIBERALLY; THAT DEDUCTION UNDER THE SAID SECTIONS IS ALLOWABLE TO THE DEMERGED AND RESULTING COMPANY IN RESPECT OF THE PROFITS EARNED BY BOTH THE COMPANIES FOR THE RESPECTIVE PERIOD OF OWN ERSHIP OF THE ELIGIBLE UNDERTAKING IN THE YEAR OF DEMERGER; THAT THE AO HA S FACTUALLY ERRED IN OBSERVING THAT NO AUDIT REPORT IN FORM NO. 10 CCB, AS PROVIDED UNDER SECTIONS 80 IA(12) AND 80 IB(12) OF THE ACT WAS FIL ED; THAT ACTUALLY, THE AUDIT REPORTS FOR THE RESPECTIVE UNITS WERE DULY FILED IN THE ASSESSMENT PROCEEDINGS VIDE LETTER DATED 7.11.08 BY THE ASSESSEE; THAT THE DETAILS OF DEDUCTION UNDER SECTIONS 80 IA(12) AND 80 IB(12) OF THE ACT WERE AL SO GIVEN IN THE TAX AUDIT REPORTS, CERTIFYING SUCH DEDUCTION; THAT THE AO HAS ALSO WRONGLY OBSERVED THAT SINCE THE DEDUCTION WAS NOT CLAIMED IN THE COM PUTATION OF INCOME, IT COULD NOT BE ALLOWED, IN VIEW OF GOETZE INDIA V. C IT, 284 ITR 323(SC); THAT IN FACT, IT REMAINS UNDISPUTED THAT THE DEDUCT ION IN QUESTION WAS CLAIMED BY WAY OF A NOTE APPENDED TO THE ORIGINAL RETURN OF INCOME; THAT IN CIT V. ITA 2431 & CO 349 35 SAIN PROCESSING AND WEAVING MILL PVT. LTD., 325 IT R 565(DEL), IT HAS BEEN HELD THAT THE NET PROFIT CANNOT BE DETERMINED, WITH OUT TAKING INTO ACCOUNT THE INFORMATION DISCLOSED IN THE NOTES APPENDED TO THE ACCOUNTS, WHICH NOTES FORM PART OF THE ACCOUNTS OF THE ASSESSEE COMPANY. 46. THE LD. DR, ON THE OTHER HAND, HAS STRONGLY SUP PORTED THE IMPUGNED ORDER IN THIS REGARD, SUBMITTING THAT IT REMAINS UN DISPUTED THAT UNDER THE PROVISIONS OF SECTION 80 IA(12) OF THE ACT, IN A CA SE WHERE THE ELIGIBLE UNDERTAKING STANDS TRANSFERRED IN A SCHEME OF AMALG AMATION AND DEMERGER, DEDUCTION IS ALLOWABLE ONLY TO THE RESULTING COMPA NY AND SO, THE ASSESSEE/DEMERGED COMPANY IS NOT AT ALL ELIGIBLE FO R DEDUCTION UNDER SECTIONS 80 IA/80 IB OF THE ACT, AS HAS RIGHTLY BEE N HELD BY BOTH THE AUTHORITIES BELOW CONCURRENTLY. IT HAS FURTHER BEE N CONTENDED THAT IT WOULD BE WRONG TO CANVASS, AS HAS BEEN DONE IN THE CASE O F THE ASSESSEE, THAT THE PROVISIONS OF SECTION 80 IA OF THE ACT REQUIRE TO B E READ BENEFICIALLY TO THE ASSESSEE; THAT THE FACTUAL FINDINGS OF THE LD. CIT( A) IN THIS REGARD ARE ABUNDANTLY CLEAR AND NOTHING HAS BEEN BROUGHT ON RE CORD TO DISLODGE THEM; THAT MOREOVER, THE AO HAS CATEGORICALLY OBSERVED IN THE ASSESSMENT ORDER THAT NO REPORT IN FORM NO. 10 CCB WAS FILED BY THE ASSESSEE AND IT IS ONLY BY WAY OF AN ALIBI THAT THE ASSESSEE NOW CONTENDS TO H AVE DONE THE NEEDFUL IN THIS REGARD BEFORE THE AO DURING THE ASSESSMENT PRO CEEDINGS. ITA 2431 & CO 349 36 47. ON THIS ISSUE, WE FIND THAT INDEED, AS PER CIR CULAR NO. 15/5/63 IT(A-I) DATED 13.12.63 (SUPRA) IT HAS BEEN CLARIFI ED THAT DEDUCTION UNDER SECTIONS 80 IA/80 IB OF THE ACT RELATES TO THE ELIG IBLE UNDERTAKING AND, ACCORDINGLY, IT TRANSFERS WITH THAT UNDERTAKING, NO TWITHSTANDING THE OWNERSHIP OF SUCH UNDERTAKING. THE CIRCULAR RELAT ES THAT THE BOARD AGREED THAT THE BENEFIT OF SECTION 84 ATTACHED TO THE UNDE RTAKING AND NOT TO THE OWNER THEREOF AND THAT THE SUCCESSOR WOULD BE ENTIT LED TO THE BENEFIT OF THE UNEXPIRED PERIOD OF 5 YEARS, PROVIDED THE UNDERTAKI NG WAS TAKEN OVER AS A RUNNING CONCERN. THE CASE LAWS RELIED ON BY THE A SSESSEE ARE TO A SIMILAR EFFECT. 48. IN ADVANCE VALVES (SUPRA), FOLLOWING, INTER A LIA, P.K. ENGG. & FORGING (SUPRA) AND A.G.S TIMBER (SUPRA), PRISM A ELECTRONICS (SUPRA) AND THE CBDT CIRCULAR (SUPRA) IT HAS BEEN HELD THAT IT IS THE SUCCESSOR ON DEMERGER, WHICH WOULD BE ENTITLED TO THE BENEFIT FO R THE UNEXPIRED PERIOD OF 5 YEARS, PROVIDED THE UNDERTAKING WAS TAKEN OVER AS A RUNNING CONCERN. 49. SO FAR AS REGARDS THE CLAIM MADE BY THE ASSESSE E, IT IS ON RECORD THAT THE ASSESSEE HAD DULY FILED THE AUDIT REPORT IN FOR M NO. 10 CCB VIDE LETTER DATED 7.11.08 BEFORE THE AO, IN WHICH AUDIT REPORT, DEDUCTIONS UNDER SECTIONS 80 IA(12)/80 IB(12) OF THE ACT WERE DULY CERTIFIED TO HAVE BEEN CLAIMED BY THE ASSESSEE. IT IS UNDISPUTED THAT THE CLAIM WAS MADE BY WAY OF ITA 2431 & CO 349 37 A NOTE APPENDED TO THE ORIGINAL RETURN OF INCOME. IT CANNOT BE GAIN-SAID THAT THE NOTE TO THE RETURN OF INCOME FORMED AN INTEGRAL PART OF THE RETURN. THAT BEING THE POSITION, OBVIOUSLY, IT CANNOT BE HELD TH AT THE DEDUCTION WAS NOT CLAIMED IN THE RETURN OF INCOME. IN THIS REGARD, IN SAIN PROCESSING (SUPRA), IT HAS BEEN HELD THAT NET PROFIT CANNOT BE DETERMIN ED WITHOUT TAKING INTO ACCOUNT THE INFORMATION DISCLOSED IN THE NOTES APPE NDED TO THE ACCOUNTS WHICH FORMED PART OF THE ACCOUNTS OF THE ASSESSEE C OMPANY. 50. IN VIEW OF THE ABOVE, WE HOLD THAT THE AO ERRED IN DENYING THE DEDUCTION UNDER SECTIONS 80 IA(12)/80 IB(12) OF TH E ACT TO THE ASSESSEE AND THE LD. CIT(A) ERRED IN CONFIRMING SUCH DISALLOWANC E. THE GRIEVANCE OF THE ASSESSEE IN THIS REGARD IS WELL JUSTIFIED, AND CROS S OBJECTION NO. 2 RAISED BY THE ASSESSEE IS THUS ACCEPTED. 51. IN THE RESULT, WHEREAS THE APPEAL FILED BY THE DEPARTMENT IS DISMISSED, THE CROSS OBJECTION FILED BY THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 04.05.2012. SD/- SD/- (G.E. VEERABHADRAPPA) (A.D. JAIN) PRESIDENT JUDICIAL MEMBER DATED: 04.05.2012. *RM ITA 2431 & CO 349 38 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR TRUE COPY BY ORDER DEPUTY REGISTRAR