M/s. Vepar Pvt.Ltd., Ahmedabad V. The ACIT.,Circle-8, Ahmedabad

CO 6/AHD/2011

• Counselvise Citation: [2013] 122 COUNSELVISE.COM (IT) 9020 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 10 month(s) 22 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 29-11-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 20-11-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 07-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P L KUREEL
• Assessee Lawyers: P M MEHTA; S N SOPARKAR
• Keywords: Business income; Depreciation; Business expenditure; Earning of tax free income; Commercial expediency
• Section: 14A; 115JB; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER AND SHRI T.R. MEENA, ACCOUNTANT MEMBER ITA NO.3346/AHD/2010 A.Y. 2007-08 ACIT, CIRCLE-8, AHMEDABAD. VS VEPAR PRIVATE LIMITED, KAIVANNA, 9 TH FLOOR, PANCHAVATI, ELLISBRIDGE, AHMEDABAD. (APPELLANT) (RESPONDENT) CO NO.06/AHD/2011 A.Y. 2007-08 VEPAR PRIVATE LIMITED, KAIVANNA, 9 TH FLOOR, PANCHAVATI, ELLISBRIDGE, AHMEDABAD. VS ACIT, CIRCLE-8, AHMEDABAD. (APPELLANT) (RESPONDENT) REVENUE BY : SHRI P.L. KUREEL, SR.D.R. ASSESSEE(S) BY : S/SHRI S.N. SOPARKAR AND P.M. MEHTA, A.R. / DATE OF HEARING : 21/11/2013 / DATE OF PRONOUNCEMENT: 29/11/2013 / O R D E R PER SHRI MUKUL KUMAR SHRAWAT, JUDICIAL MEMBER THE REVENUE IS IN APPEAL AND THE ASSESSEE HAS FILED CROSS OBJECTION EMANATING FROM THE ORDER OF LEARNED CIT(A )-XIV, AHMEDABAD DATED 09.08.2010. THE GROUNDS RAISED BY THE REVENUE ARE HEREBY DECIDED AS FOLLOWS: ITA NO.3346/ AHD/2010 AND CO NO.06/AHD/2011 ACIT CIR-8, AHMEDABAD VS. VEPAR PVT. LTD., AHMEDABA D . FOR A.YS. 2007-08 - 2 - THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DE LETING THE DISALLOWANCE OF DEPRECIATION ON FACTORY BUILDING AMOUNTING TO RS.11 ,42,541/-. 2. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDING ASSESSMENT ORDER PASSED U/S. 143(3), DATED 20 TH OF NOVEMBER, 2009 WERE THAT THE ASSESSEE COMPANY IS IN THE BUSINESS OF MANUFACTURING OF GARM ENTS. IN RESPECT OF DEPRECIATION CLAIMED ON THE FACTORY BUILDING, WE HA VE BEEN INFORMED THAT THE ASSESSEE HAS FILED A COPY OF THE MA ORDER OF TH E ITAT BEFORE LEARNED CIT(A) AND ALSO PLACED ON RECORD THE REQUISITE INFO RMATION THEREUPON IT WAS DISCUSSED AS UNDER:- 3.1 IT IS SUBMITTED THAT FOR THE ASSESSMENT YEAR 2 002-03 TO 2005-06 THIS CLAIM WAS ACCEPTED BY THE HONBLE CIT(APPEALS). THE AO HAS REFERRED TO THE ORDER OF ITAT FOR A.Y. 2002-03 AND 2003-04 DATED 27 .2.2009. HOWEVER, THE ITAT HAS ON A MISCELLANEOUS APPLICATION MADE BY THE APPELLANT BEING MA NO.139-141/AHD/2009 VIDE ORDER DATED 30.11.2009 ACC EPTED THE CLAIM OF THE ASSESSEE AND DIRECTED THE AO TO ALLOW THE DEPRECIAT ION ON THE FACTORY PREMISES AS CLAIMED. CONSIDERING THIS FACT THE AO M AY PLEASE BE DIRECTED TO ALLOW THE DEPRECIATION ENTIRELY AS CLAIMED BY THE A PPELLANT. FOR READY REFERENCE COPY OF THE ORDER DATED 30.11.2009 PASSED BY THE ITAT IN MISCELLANEOUS APPLICATION FILED BY THE APPELLANT. 2.1 CONSIDERING THE ORDER OF THE TRIBUNAL, LEARNED CIT(A) HAS DIRECTED THE AO TO ALLOW THE DEPRECIATION. FOR READY REFEREN CE, THE ORDER OF THE TRIBUNAL PRONOUNCED IN THE CASE OF THE ASSESSEE IN M.A. NO.139- 141/AHD/2009 (ARISING OUT OF ITA NOS.957, 1239 & 16 41/AHD/2006 FOR A.YS. 2002-03 AND 2003-04, DATED 30.11.2009 RELEVAN T PARA REPRODUCED AS UNDER: WE FIND THAT IN THE PRESENT CASE ALSO THE FACTUAL P OSITION AVAILABLE ON RECORDS CLEARLY SHOWS THAT PART OF THE BUSINESS COM PULSION AND ON ACCOUNT OF COMMERCIAL EXPEDIENCY FOR THE SIMPLE REASON THAT PA RT OF THE STITCHING PROCESS HAD TO BE CARRIED OUT UNDER THE DIRECT TECHNICAL SU PERVISION OF THE ASSESSEE COMPANY WHICH WAS NOT POSSIBLE IF THIS WORK WOULD H AVE BEEN CARRIED OUT BY THE SUBSIDIARY COMPANY ELSEWHERE. ACCORDINGLY, THE BUSINESS PREMISES WERE FULLY USED FOR THE BUSINESS PURPOSES OF THE ASSESSE E COMPANY AND FOR NO OTHER PURPOSE AND THEREFORE THE ASSESSEE COMPANY IS CLEAR LY ELIGIBLE FOR GRANT OF DEPRECIATION IN RESPECT OF THE WHOLE BUSINESS PREMI SES. ACCORDINGLY, WE AMEND THE FINDINGS OF THE TRIBUNAL TO THAT EXTENT A ND ALLOW THESE MAS OF THE ITA NO.3346/ AHD/2010 AND CO NO.06/AHD/2011 ACIT CIR-8, AHMEDABAD VS. VEPAR PVT. LTD., AHMEDABA D . FOR A.YS. 2007-08 - 3 - ASSESSEE. ACCORDINGLY, THE RESULT IN THE TRIBUNALS DECISION IS THAT THE REVENUES APPEAL IN ITA NO.1239/AHD/2006 ON THIS IS SUE IS DISMISSED. 2.2 IN THE LIGHT OF THE ABOVE, ONCE A RESPECTED CO- ORDINATE BENCH HAS TAKEN A VIEW ABOUT THE CLAIM OF DEPRECIATION; HENCE , WE FIND NO FALLACY IN THE DIRECTIONS OF LEARNED CIT(A); HENCE, THIS GROUN D OF THE REVENUE IS HEREBY DISMISS. 3. GROUND NOS.2 & 3 ARE REPRODUCED BELOW: 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF FOREIGN TRAVEL EXPENSES AMOUNTING TO RS.17,10,18 4/-. 3. THE LD. COMMISSIONER OF INCOME-TAX(A)-XIV, AHMED ABAD HAS ERRED IN LAW AND ON FACTS IN ADMITTING FRESH EVIDENCE IN VIO LATION OF RULE 46A AND NOT ALLOWING THE ASSESSING OFFICER AN OPPORTUNITY TO VE RIFY & COMMENT UPON THE FRESH EVIDENCES FURNISHED BY THE ASSESSEE. 3.1 AN EXPENDITURE OF RS.17,10,184/- WAS INCURRED O N FOREIGN TRAVEL BY THE ASSESSEE. THE AO HAS REPRODUCED THE DETAILS OF THE EXPENDITURE ALONG WITH NAMES OF THE PERSONS WHO HAVE VISITED UK AND JAPAN. THIS DETAIL CONTAINS THE PERIOD OF THE TRAVEL, AIR TICKE T AND THE EXPENDITURE INCURRED BY THOSE PERSONS. THE ASSESSEES MAIN CONT ENTION WAS THAT BEING A 100% EXPORT COMPANY, THEREFORE, TRAVELING WAS FOR THE PURPOSE OF THE EXPORT BUSINESS. THE AO WAS OF THE VIEW THAT THE PU RPOSE OF THE FOREIGN TRAVEL WAS NOT COMMUNICATED BY THE ASSESSEE. THE AS SESSEE HAS NOT PRODUCED EVIDENCE OF ATTENDING EXHIBITION OR THE DE TAILS OF THE NEW CUSTOMERS SO AS TO ESTABLISH THAT THE AMOUNT WAS SP ENT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. IN THE ABSENCE OF ALL THOSE DETAILS, THE ENTIRE EXPENDITURE WAS DISALLOWED. 4. WHEN THE MATTER WAS CARRIED BEFORE LEARNED CIT(A ), AFTER EXAMINING THE FACTS OF THE CASE, IT WAS HAS HELD AS UNDER: ITA NO.3346/ AHD/2010 AND CO NO.06/AHD/2011 ACIT CIR-8, AHMEDABAD VS. VEPAR PVT. LTD., AHMEDABA D . FOR A.YS. 2007-08 - 4 - I HAVE CONSIDERED THE ASSESSMENT ORDER AND THE ABOV E SUBMISSIONS. IT IS NOT THE CASE OF THE AO THAT THE EXPENDITURE IS PERSONAL . HIS MAIN CONTENTION IS THAT THE APPELLANT COULD NOT SHOW AS TO HOW EXPENDI TURE IS FOR BUSINESS. IT IS NOT IN DISPUTE THAT THE APPELLANT IS MAINLY EXPORT ORIENTED CONCERN. TO MAINTAIN THE TURNOVER IN THE FORM OF EXPORT, THE AS SESSEE HAS TO BE IN TOUCH WITH THE DIFFERENT CUSTOMERS AND HAVE THE KNOWLEDGE OF THE DEVELOPMENT IN THE FASHION, CHANGES IN DEMAND OF THE FOREIGN BUYERS. T HEY HAVE ALSO TO MAINTAIN RELATION WITH THE DIFFERENT SHOPS OUTLETS WHERE THE IR PRODUCTS ARE BEING SOLD. THE APPELLANT IS IN THIS BUSINESS SINCE FOR THE LAS T MORE THAN 20 YEARS. IT IS NOT JUSTIFIED TO PRESUME THAT THE ESTABLISHMENT OF FORE IGN MARKET IS PERMANENT AND DOES NOT REQUIRE CONTACTS FROM TIME TO TIME. IN ORD ER TO HAVE THE INFORMATION ABOUT DEVELOPMENT OF MARKET, AND THE REQUIREMENT OF THE BUYERS, ONE HAS TO VISIT DIFFERENT PLACES. THEREFORE, THE ASSESSEE WAS REQUIRED TO INCUR SUCH EXPENDITURE. IT IS NOTICED THAT DIRECTOR SMT. ASHA SARABHAI IS IN THIS BUSINESS AND IS QUALIFIED. SHE HAS ALSO SUCCESSFULLY MANAGED EXHIBITION. HER DESIGNS IN TEXTILE ARE APPRECIATED IN DIFFERENT MAGAZINES AND STUDIOS IN OTHER COUNTRIES. THE PHOTOGRAPHS OF SUCH EXHIBITIONS AND DESIGNS ARE FURNISHED SO AS TO HIGHLIGHT THE NATURE OF ACTIVITY. EVEN COPIES OF EM AILS CORRESPONDENCE ARE ALSO FILED. THE OTHER DIRECTOR SUHRID SARABHAI IS A LSO WELL QUALIFIED PERSON AND WORKED AS TEXTILE COMPANY DIRECTOR. SIMILARLY, THE OTHER DIRECTOR SONALI DALAL IS ALSO HAVING GOT EXPERIENCE IN THE BUSINESS . THE APPELLANT HAS ALSO SHOWN THAT SIMILAR EXPENDITURE WAS BEING INCURRED I N THE PAST AND WAS ALLOWED FULLY IN THESE ASSESSMENT YEARS. CONSIDERIN G ALL THESE FACTS I DO NOT FIND ANY JUSTIFICATION FOR DISALLOWANCE OF THE EXPE NDITURE UNDER CONSIDERATION. THE ENTIRE DISALLOWANCE IS, THEREFORE, DELETED. 5. WE HAVE HEARD BOTH THE SIDES. WE HAVE PERUSED TH E MATERIAL BEFORE US. WE HAVE BEEN INFORMED THAT THE PERSONS VISITED THE FOREIGN COUNTRIES WERE NONE OTHER THAN DIRECTORS OR THE EXECUTIVE DIR ECTORS OF THE COMPANY. WE HAVE NOTED THAT UNDISPUTEDLY THE ASSESS EE IS A 100% EXPORT UNIT. FACTS OF THE CASE HAVE REVEALED THAT S MT. ASHA SARABHAI IS THE CO-CHAIRMAN OF THE COMPANY. LIKEWISE, SHRI SUHR ID SARABHAI IS CHAIR PERSON OF THE COMPANY. THEY ARE HIGHLY QUALIF IED AND IN BUSINESS SINCE 1983. THEY HAD COLLABORATION WITH MIYAKE DES IGN STUDIO AND MAUREEN DOHEROTY. THOSE DESIGNERS HAVE HELD EXHIB ITION IN LONDON, TOKYO AND GERMANY, ETC. DURING THE HEARING, IT HAS ALSO BEEN INFORMED THAT THE IMPUGNED AMOUNT WAS ALSO SUBJECTED TO FBT (FRINGE BENEFIT TAX). THE ASSESSEE HAS ALSO EXPLAINED THAT IN THE P AST AS WELL THE FOREIGN ITA NO.3346/ AHD/2010 AND CO NO.06/AHD/2011 ACIT CIR-8, AHMEDABAD VS. VEPAR PVT. LTD., AHMEDABA D . FOR A.YS. 2007-08 - 5 - TRAVEL WAS UNDERTAKEN TO PROMOTE THE EXPORT BUSINES S. YEAR-WISE DETAILS OF EXPENDITURE AND THE EXPORT TURNOVER WAS AS UNDER :- SR. NO. ASST. YEAR EXPORT TURNOVER FOREIGN TRAVELLI NG EXPS. 1. 2004-05 6,80,50,667 29,67,958 2. 20005-06 6,54,45,192 28,31,950 3. 2006-07 6,64,53,241 22,49,679 4. 2007-08 6,67,77,845 17,10,184 5.1 CONSIDERING ALL THESE DETAILS AND THE EVIDENCE ON RECORD AS WELL AS THE CBDT CIRCULAR NO.4 [C.NO.27(3)-T/50] DATED 19.6 .1950, AS CITED BEFORE US; WE ARE OF THE VIEW THAT THERE WAS NO ABR UPT INCREASE IN THE FOREIGN TRAVEL AND THE SAME APPEARS TO BE INCURRED FOR THE PURPOSE OF THE EXPORT BUSINESS OF THE ASSESSEE, ESPECIALLY BEING A 100% EXPORTER, THEREFORE, WE HEREBY APPROVE THE VERDICT OF LEARNED CIT(A). 6. IN THE RESULT, WE FIND NO FORCE IN THE GROUND OF THE REVENUE. HENCE HEREBY DISMISSED. 7. GROUND NO.4 IS REPRODUCED BELOW: 4. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF SUNDRY CREDITORS U/S.41(1) AMOUNTING TO RS.60,40 9/-. 8. IT WAS NOTED BY THE AO THAT AN AMOUNT OF RS.60,4 09/- WAS OUTSTANDING IN THE NAME SHRI BHAGWANDAS GURUDAS SIN CE PAST THREE YEARS. A SHOW CAUSE WAS ISSUED THAT WHY THE IMPUGNED AMOUN T BE NOT TAXED IN THE HANDS OF THE ASSESSEE AS PER THE PROVISIONS OF SECTION 41(1) OF IT ACT. THE ASSESSEES REPLY WAS THAT THE AMOUNT WAS OUTSTA NDING IN THE NORMAL ITA NO.3346/ AHD/2010 AND CO NO.06/AHD/2011 ACIT CIR-8, AHMEDABAD VS. VEPAR PVT. LTD., AHMEDABA D . FOR A.YS. 2007-08 - 6 - COURSE OF THE BUSINESS AND IF NOT DEMANDED BY THE S AID PARTY THEN THE SAME SHALL BE WRITE-OFF IN THE BOOKS AND THEN IT SH ALL BE OFFERED AS BUSINESS INCOME. THE AO HAS FURTHER NOTED THAT THE SAID AMOUNT WAS FOUND OUTSTANDING ON 11.11.2009. ACCORDING TO HIM, EVEN AS PER LIMITATION ACT, THE SAID CREDITOR WAS NOT LEGALLY E NTITLED TO ENFORCE THE PAYMENT OF THE SAID AMOUNT. BY PLACING RELIANCE ON KESORAM INDUSTRIES & COTTON MILLS LTD. VS. CIT (1992) 196 ITR 845 (CAL ) , THE AO HAS MADE AN ADDITION OF THE IMPUGNED AMOUNT. 9. WHEN THE MATTER WAS CARRIED BEFORE THE FIRST APP ELLATE AUTHORITY, LEARNED CIT(A) HAS DELETED THE ADDITION IN THE FOLL OWING MANNER: THE APPELLANT SUBMITS THAT MERELY BECAUSE THE DEBT HAS BECOME TIME BARRED IT DOES NOT CEASE TO BE A LIABILITY. IT BECOMES DEE MED INCOME AS PER SECTION 41(1) ONLY IF IT IS WRITTEN BACK BY THE DEBTOR BEIN G ASSESSEE IN ITS BOOKS OF ACCOUNT. THIS MAY BE APPRECIATED IN VIEW OF THE PRO VISIONS OF SECTION 41(1). AS PER CLAUSE (1) THE ASSESSEE HAS TO OBTAIN WHETHE R IN CASH OR OTHERWISE SOME BENEFIT IN RESPECT OF WHICH TRADING LIABILITY BY WAY OF CESSION OR REMISSION HAS ARISEN. IT WILL BE TAXABLE AS THE INC OME OF THAT YEAR IN WHICH IS REMITTED OR IT CEASED. HOWEVER, FOR THAT SUCH LIABI LITY HAS TO BE WRITTEN BACK IN THE BOOKS OF THE ASSESSEE. IT IS NOT THE CASE OF TH E A.O. THAT THE APPELLANT HAS WRITTEN BACK THIS LIABILITY IN THE BOOKS OF ACCOUNT . THIS MAY BE APPRECIATED IN VIEW OF THE EXPLANATION 1 TO SECTION 41(1) INTRODUC ED IN THE ACT W.E.F. 1-4- 1997 WHICH CLEARLY SAYS THAT EVEN UNILATERAL WRITE BACK IN THE ACCOUNT WOULD BE TAXABLE. THUS IT CLEARLY SHOWS THAT IT HAS TO BE WRITTEN OFF IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. THIS POSITION IS APPRECIAT ED BY ITAT, PUNE IN THE CASE OF DCIT VS. THAKKAR DEVELOPERS 115 TTJ 841 WHE RE IS HELD THAT THERE BEING NO MATERIAL ON RECORD TO SHOW THAT ASSESSEE W AS IN RECEIPT OF ANY AMOUNT OF BENEFIT, NO ADDITION UNDER S. 41(1) COULD BE MADE ON THE GROUND THAT AMOUNT SHOWN AS OUTSTANDING LIABILITIES HAD BE COME BARRED BY LIMITATION. THIS IS ALSO SUPPORTED BY GUJARAT HIGH COURT DECISI ON IN THE CASE OF CIT VS. SILVER COTTON MILLS CO. LTD. 254 ITR 728. CONSIDERI NG THE ABOVE POSITION THE ADDITION MADE DESERVES TO BE DELETED. ON CONSIDERATION OF THE ABOVE SUBMISSIONS, IT IS NO TICED THAT THE APPELLANT HAS NOT WRITTEN BACK THE IMPUGNED AMOUNT IN THE BOOKS. THE AMOUNT IS STILL SHOWN AS CREDITORS. UNDER THE CIRCUMSTANCES, IN MY VIEW I T DOES NOT AMOUNT TO CESSION OF LIABILITY AS PER THE REQUIREMENT OF SECT ION 41(1). THE DECISION OF ITAT, PUNE SQUARELY APPLIES TO THE APPELLANT'S CASE . ACCORDINGLY THIS ADDITION IS DELETED. ITA NO.3346/ AHD/2010 AND CO NO.06/AHD/2011 ACIT CIR-8, AHMEDABAD VS. VEPAR PVT. LTD., AHMEDABA D . FOR A.YS. 2007-08 - 7 - 10. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES AS WELL AS ON CAREFUL PERUSAL OF THE CASE LAWS CITED BEFORE US, W E ARE OF THE VIEW THAT LEARNED CIT(A) HAS NOT ENDEAVOURED TO EXAMINE THE F ACTS OF THE CASE IN THE RIGHT PERSPECTIVE. IN FACT, IT WAS NECESSARY FI RST TO ASCERTAIN THAT WHETHER THE IMPUGNED LIABILITY WAS ALLOWED AS AN EX PENDITURE IN THE PAST IN ANY OF THE ASSESSMENT ORDER. THEN THE NEXT STEP IS THAT AN INQUIRY OUGHT TO HAVE BEEN MADE TO ASCERTAIN WHETHER THE AFORESAI D SUNDRY CREDITOR WAS STILL INTERESTED TO PURSUE RECOVERY OF THE AMOUNT O R NOT. THIS IS NOT THE CASE THAT THE ASSESSEE UNILATERALLY WRITTEN OFF THE AMOUNT RATHER THE AO HAD INVOKED THE PROVISIONS OF SECTION 41(1) OF THE IT ACT. ON ONE HAND, THE AO IS STATING THAT THE SAID CREDITOR WAS NOT LE GALLY ENTITLED TO ENFORCE THE RECOVERY OF THE AMOUNT, ON THE OTHER HAND, LEAR NED CIT(A) HAS HELD THAT THE IMPUGNED LIABILITY WAS RECOVERABLE FROM TH E ASSESSEE. ACCORDING TO US, BOTH THE AUTHORITIES SHOULD HAVE EXAMINED TH E SAID FACT AND THEREAFTER DECIDE THE ISSUE ON THE BASIS OF COGENT EVIDENCES. WE, THEREFORE, DEEM IT PROPER THAT THE MATTER IS REQUIR ED TO BE RESTORED BACK TO THE FILE OF LEARNED CIT(A) FOR RE-ADJUDICATION, NEE DLESS TO SAY AFTER PROVIDING AN OPPORTUNITY TO THE REVENUE DEPARTMENT AS WELL AS THE ASSESSEE. RESULTANTLY, THIS GROUND OF THE REVENUE M AY BE TREATED AS ALLOWED FOR STATISTICAL PURPOSE. B. CO NO.6/AHD/2011 11. THE ASSESSEE HAS FILED THE CROSS OBJECTION AND THE GROUNDS ARE AS FOLLOWS: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) SHOULD HAVE REALIZED THAT IT WAS NOT AT ALL A FIT CASE FOR INVO KING THE PROVISIONS OF SECTION 14A HE FURTHER ERRED IN UPHOLDING THE DISALLOWANCES OF R. 4,36,471/-. ITA NO.3346/ AHD/2010 AND CO NO.06/AHD/2011 ACIT CIR-8, AHMEDABAD VS. VEPAR PVT. LTD., AHMEDABA D . FOR A.YS. 2007-08 - 8 - 12. IT WAS NOTED BY THE AO THAT THE ASSESSEE HAS EA RNED EXEMPT INCOME OF RS.47,00,945/-. THE AO HAS INVOKED THE PR OVISIONS OF SECTION 14A AND FOR THE PURPOSE OF COMPUTATION OF DISALLOWA NCE APPLIED RULE 8D IN THE FOLLOWING MANNER:- DIRECT EXPENDITURE RS. NIL INTEREST EXPENDITURE RS.NIL ADMINISTRATIVE EXP. % OF (87,12,4133+87,46,4377 )2 RS.4,36,471/- TOTAL RS.4,36,471/- ACCORDINGLY A DISALLOWANCE OF RS.4,36,471/- IS MAD E AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. RELIANCE IN THIS REGA RD IS PLACED UPON THE FOLLOWING DECISIONS: 13. WHEN THE MATTER WAS CARRIED BEFORE THE LEARNED CIT(A), IT HELD AS UNDER: ON PERUSAL OF THE ASSESSMENT ORDER AND THE ABOVE SU BMISSIONS, IT IS NOTICED THAT IN THE ASSESSMENT YEAR 2005-06, VIDE ORDER DAT ED 12.2.2009 THE CIT(APPEALS)-XIV HAD RESTRICTED THE DISALLOWANCE TO THE EXTENT OF 3% OF THE EXPENDITURE BUT IN MY VIEW HAVING REGARD TO THE DEC ISION OF THE ITAT, SPECIAL BENCH IN THE CASE OF DAGA CAPITAL SERVICES 117 ITD 169, RULE 8D IS APPLICABLE AND THE AO HAVING APPLIED RULE 8D, THIS GROUND OF APPEAL CANNOT BE ALLOWED. SO FAR AS THE PORTFOLIO MANAGEMENT FEE ARE CONCERNED, IT EARNS ONLY CAPITAL GAIN AND HENCE NOT AN EXPENDITURE ADMI SSIBLE U/S.37(1). ACCORDINGLY, THESE TWO GROUNDS OF APPEAL ARE REJECT ED. 14. WE HAVE HEARD BOTH THE SIDES. WE HAVE PERUSED T HE ORDER OF THE AUTHORITIES BELOW. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES, WE ARE OF THE VIEW THAT THE AO HAS INVOKED THE PROVISIONS OF SECTION 14A FOR DISALLOWING ADMINISTRATIVE EXPENSES @ 0.5% BY APPLY ING THE CALCULATION AS PROVIDED IN RULE 8D OF IT RULES. OTHERWISE, THER E IS NO SUCH EVIDENCE PLACED BY THE AO ON RECORD TO ESTABLISH THAT THERE WAS A NEXUS OF ADMINISTRATIVE EXPENSES INCURRED TO EARN THE IMPUGN ED EXEMPTED INCOME. BEFORE WE PROCEED FURTHER, WE WANT TO HIGHLIGHT THE ASSESSMENT YEAR UNDER CONSIDERATION IS A.Y.2007-08. IN THE LIGHT OF THE AFOREMENTIONED ITA NO.3346/ AHD/2010 AND CO NO.06/AHD/2011 ACIT CIR-8, AHMEDABAD VS. VEPAR PVT. LTD., AHMEDABA D . FOR A.YS. 2007-08 - 9 - FACTUAL BACKGROUND, THE ASSESSEE HAS PLACED RELIANC E ON CATHOLIC SERIAN BANK LIMITED, 207 TAXMANN. COM PAGE 2 (KERALA), (23 7 CTR 164) AND ACIT VS. TORRENT PHARMACEUTICALS LTD., 137 ITD 301 (AHD). 14.1 FROM THE SIDE OF THE REVENUE, LEARNED SR.D.R., MR. P.L. KUREEL APPEARED. HE HAS PLACED RELIANCE UPON THE DECISIONS OF HONBLE ITAT BENCH, ARE CITED BELOW: (A) DEPUTY COMMISSION OF INCOME TAX, MUMBAI VS. SEK SARIA BISWAN SUGAR FACTORY LTD., IN ITA NO.7692/MUM/2003, DATED 22 ND JANUARY, 2007, REPORTED IN (2007) 14 SOT 66 (MUM.) (B) CONWOOD AGENCIES (P.) LTD. VS. ITO, MUMBAI, IN ITA NO.5195/MUM/2003, DATED 6 TH FEBRUARY, 2007, REPORTED IN (2007) 15 SOT 308 (MUM) (C) PRAKASH HEAT TREATMENT & INDUSTRIES (P.) LTD. V S. ITO, MUMBAI, IN ITA NO.8272/MUM/2003, DATED 6 TH FEBRUARY, 2007, REPORTED IN (2007) 14 SOT 348 (MUM.) (D) KALPATARU CONSTRUCTION OVERSEAS (P.) LTD. VS. D CIT, MUMBAI, IN ITA NO.7160/MUM/2002, DATED 31 ST OCTOBER,, 2006, REPORTED IN (2007) 13 SOT 194 (MUM.) 14.2 WE HAVE HEARD BOTH THE SIDES. WE ARE OF THE VI EW THAT IN THE LIGHT OF THE DECISION OF MAXOPP INVESTMENT LTD. AND OTHER S VS. CIT, 347 ITR 272 (DEL), THE ACTION OF THE AO IS REQUIRED TO BE R E-EXAMINED BY LD. CIT(A) AFRESH. FOR THE SAKE OF COMPLETENESS THE REL EVANT PORTION IS REPRODUCED BELOW: SUB-S. (2) OF S. 14A PROVIDES THE MANNER IN WHICH THE AO IS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HOWEVER, IF ONE EXAMINES THE PROVISION CAREFULLY, ONE WOULD FIND THAT THE AO IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ONLY IF THE AO, HAVING REGARD TO THE AC COUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES N OT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN OTHER WORDS, THE REQUIREME NT OF THE AO EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE I NCURRED IN RELATION TO EXEMPT INCOME WOULD BE TRIGGERED ONLY IF AO RETURNS A FINDING THAT HE IS NOT ITA NO.3346/ AHD/2010 AND CO NO.06/AHD/2011 ACIT CIR-8, AHMEDABAD VS. VEPAR PVT. LTD., AHMEDABA D . FOR A.YS. 2007-08 - 10 - SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. SUB-S. (3) IS NOTHING BUT AN OFFSHOOT OF SUB-S. (2) OF S. 14A. SUB-S. (3) APPLIES TO CASES WHERE THE ASSESSEE CLAIMS THAT NO EXPENDIT URE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN OTHER WORDS, SUB-S. (2) DEALS WITH CASES WHERE T HE ASSESSEE SPECIFIES A POSITIVE AMOUNT OF EXPENDITURE IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AND SUB-S. (3) AP PLIES TO CASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDITURE HAD BEEN INCUR RED IN RELATION TO EXEMPT INCOME. IN BOTH CASES, THE AO, IF SATISFIED WITH TH E CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR NO E XPENDITURE, AS THE CASE MAY BE, CANNOT EMBARK UPON A DETERMINATION OF THE AMOUN T OF EXPENDITURE IN ACCORDANCE WITH ANY PRESCRIBED METHOD, AS MENTIONED IN SUB-S. (2) OF S. 14A. IT IS ONLY IF THE AO IS NOT SATISFIED WITH THE CORR ECTNESS OF THE CLAIM OF THE ASSESSEE, IN BOTH CASES, THAT THE AO GETS JURISDICT ION TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WIT H THE PRESCRIBED METHOD, THE PRESCRIBED METHOD BEING THE METHOD STIPULATED I N R. 8D. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPEND ITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE AO WOULD HAVE TO INDICATE COGENT REASONS FOR THE SAME. IT IS, THEREFORE, CLE AR THAT DETERMINATION OF THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME UNDER RULE 8D WOULD ONLY COME INTO PLAY WHEN THE ASSESSING OFFICER REJECTS T HE CLAIM OF THE ASSESSEE IN THIS REGARD. IF ONE EXAMINES SUB-RULE (2) OF RULE 8D, THE METHOD FOR DETERMINING THE EXPENDITURE IN RELATION TO EXEMPT INCOME HAS THREE COMPONENTS. THE FIRST COMPONENT IS THE AMOUNT OF EXPENDITURE DIRECTLY REL ATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE SECOND IS BEING COMPUTED ON THE BASIS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSESSEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTL Y ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE FORMULA ESSENTIA LLY APPORTIONS THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST (OTHER THAN THE A MOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR IN THE RATIO OF THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, TO THE AVERAGE OF THE TOTAL ASSETS OF THE ASSESSEE. THE THIRD COMPONENT IS AN ARTIFICIAL FIGURE-ONE HALF PERCENT OF THE AVERAGE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, APPEARING IN THE BALANCE-SHEETS OF THE ASSE SSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. IT IS THE AGGRE GATE OF THESE THREE COMPONENTS WHICH WOULD CONSTITUTE THE EXPENDITURE I N RELATION TO EXEMPT INCOME AND IT IS THIS AMOUNT OF EXPENDITURE WHICH W OULD BE DISALLOWED UNDER SECTION 14A OF THE ACT. IT IS, THEREFORE, CLEAR TH AT IN TERMS OF THE RULE, THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME HAS TWO ASPECTS- (A) DIRECT, AND (B) INDIRECT. THE DIRECT EXPENDITURE I S STRAIGHTAWAY TAKEN INTO ACCOUNT BY VIRTUE OF CLAUSE (I) OF SUB-RULE(2) OF R ULE 8D. THE INDIRECT ITA NO.3346/ AHD/2010 AND CO NO.06/AHD/2011 ACIT CIR-8, AHMEDABAD VS. VEPAR PVT. LTD., AHMEDABA D . FOR A.YS. 2007-08 - 11 - EXPENDITURE, WHERE IT IS BY WAY OF INTEREST, IS COM PUTED THROUGH THE PRINCIPLE OF APPORTIONMENT. SECTION 14A EVEN PRIOR TO THE INTRODUCTION OF SUB-S ECTIONS (2) AND (3) WOULD REQUIRE THE ASSESSING OFFICE TO FIRST REJECT THE CL AIM OF THE ASSESSEE WITH REGARD TO THE EXTENT OF SUCH EXPENDITURE AND SUCH R EJECTION MUST BE FOR DISCLOSED COGENT REASONS. IT IS THEN THAT THE QUES TION OF DETERMINATION OF SUCH EXPENDITURE BY THE ASSESSING OFFICER WOULD ARISE. THE REQUIREMENT OF ADOPTING A SPECIFIC METHOD OF DETERMINING SUCH EXPE NDITURE HAS BEEN INTRODUCED BY VIRTUE OF SUB-SECTION (2) OF SECTION 14A. PRIOR TO THAT, THE ASSESSEE WAS FREE TO ADOPT ANY REASONABLE AND ACCEP TABLE METHOD. SO, EVEN FOR THE PRE-RULE 8D PERIOD, WHENEVER THE ISSUE OF S ECTION 14A ARISES BEFORE AN ASSESSING OFFICER, HE HAS, FIRST OF ALL, TO ASCERTA IN THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCUR RED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURR ED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THE A SSESSING OFFICER WILL HAVE TO VERIFY THE CORRECTNESS OF SUCH CLAIM. IN CASE, THE ASSESSING OFFICER IS SATISFIED WITH THE CLAIM OF THE ASSESSEE WITH REGAR D TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, THE ASSESSING OFFI CER IS TO ACCEPT THE CLAIM OF THE ASSESSEE IN SO FAR AS THE QUANTUM OF DISALLOWAN CE UNDER SECTION 14A IS CONCERNED. IN SUCH EVENTUALITY, THE ASSESSING OFFI CER CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE FOR THE PURPOSES OF SECTION 14A (1). IN CASE, THE ASSESSING OFFICER IS NOT, ON THE BASIS OF THE OBJECTIVE CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUN ITY, SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HE SHALL HAVE TO REJECT THE CLAIM AND STATE THE REASONS FOR DOING SO. HAVING DONE SO, TH E ASSESSING OFFICER WILL HAVE TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRE D IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HE IS REQUIRED TO DO SO ON THE BASIS OF A REASONABLE AND ACCEPTABLE M ETHOD OF APPORTIONMENT. 14.3 IN THE RESULT, THIS GROUND OF THE CROSS OBJECT ION MAY BE TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 15. GROUND NO.2 IS REPRODUCED BELOW: 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) SHOULD HAVE REALIZED THAT IT WAS NOT AT ALL A FIT CASE FOR DISA LLOWING PROFESSIONAL FEES AND HE FURTHER ERRED IN UPHOLDING THAT DISALLOWANCE IN A SUM OF RS.6,39,678/-. 16. IT WAS NOTED BY THE AO THAT THE ASSESSEE HAD MA DE A PAYMENT OF RS.6,39,768/- TO M/S. JEETAY INVESTMENT PRIVATE LIM ITED FOR ADVISING THE ASSESSEE ON PORTFOLIO MANAGEMENT. ACCORDING TO AO, THE SAID ITA NO.3346/ AHD/2010 AND CO NO.06/AHD/2011 ACIT CIR-8, AHMEDABAD VS. VEPAR PVT. LTD., AHMEDABA D . FOR A.YS. 2007-08 - 12 - EXPENDITURE WAS RELATED TO THE INVESTMENT ON WHICH THE ASSESSEE HAD OFFERED CAPITAL GAIN. ACCORDING TO AO, IT WAS A CAP ITAL EXPENDITURE AND EVEN IF ALLOWED AS BUSINESS EXPENDITURE THEN OUGHT TO HAVE BEEN DISALLOWED U/S.14A OF IT ACT. 17. WHEN THE MATTER WAS CARRIED BEFORE LEARNED CIT( A), IT WAS HELD THAT THE EXPENDITURE BEING RELATED TO THE CAPITAL G AIN; HENCE NO ADMISSIBLE AS BUSINESS EXPENDITURE. 18. HAVING HEARD THE SUBMISSION OF BOTH THE SIDES. WE HAVE NOTICED THAT AMOUNT BEING CAPITALIZED BY THE ASSESSEE WHILE COMPUTING THE CAPITAL GAIN, THE SAME IS NOT ADMISSIBLE AS AN EXPENDITURE U/S. 37(1) OF IT ACT. REVENUE AUTHORITIES HAVE CORRECTLY TAKEN THE ACTION . RESULTANTLY, WE FIND NO FORCE IN THIS GROUND OF THE ASSESSEE; HENCE HERE BY DISMISSED. 19. GROUND NO. 3 IS REPRODUCED BELOW: 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN NOT ACCEPTING THE ASSESSEES CLAIM THAT IT WAS NOT AT A LL A FOR CASE FOR DISTURBING THE FIGURE OF BOOK PROFIT U/S. 115JB AND HE FURTHER ERRED IN UPHOLDING THE ASSESSEEE OFFICERS ACTION OF INCREASING IT BY THE DISALLOWANCE MADE U/S. 14A IN A SUM OF RS.4,36,471/-. 20. IN THIS REGARD, LEARNED CIT(A) HAS HELD THAT TH E EXPENDITURE WHICH WERE DISALLOWED UNDER THE REGULAR PROVISIONS OF IT ACT SHOULD ALSO BE ACCOUNTED WHILE COMPUTING THE BOOK PROFIT UNDER THE PROVISIONS OF SECTION 115JB OF IT ACT. THEREFORE, LEARNED CIT(A) HAS UPHELD THE ACTION OF THE AO. 21. WE HAVE NOTED THAT THE ASSESSEE HAS CONTESTED T HAT THIS ISSUE IS COVERED BY CADILA HEALTHCARE, 56 SOT 89 (AHD) AND G OETZ (INDIA) LTD, ITA NO.3346/ AHD/2010 AND CO NO.06/AHD/2011 ACIT CIR-8, AHMEDABAD VS. VEPAR PVT. LTD., AHMEDABA D . FOR A.YS. 2007-08 - 13 - 32 SOT 101 (DEL). ON THE OTHER HAND, FROM THE SIDE OF THE REVENUE AN ORDER OF HONBLE ITAT (MUM) IN THE CASE OF DABUR IN DIA LIMITED, 37 TAXMANN. COM 289 HAS BEEN CITED. WE ARE OF THE VIEW THAT THIS ISSUE IS TO BE DECIDED IN THE LIGHT OF THE OUTCOME OF THE GROUN D NO.1 OF THE CROSS OBJECTION (SUPRA) AS PER LAW; HENCE, RESTORED BACK TO CIT(A). THIS GROUND OF THE CROSS OBJECTION MAY BE TREATED AS ALL OWED FOR STATISTICAL PURPOSE ONLY. 22. IN THE RESULT, THE APPEAL OF THE REVENUE AS WEL L AS THE CROSS OBJECTION OF THE ASSESSEE ARE PARTLY ALLOWED FOR ST ATISTICAL PURPOSE. . SD/- SD/- (T.R. MEENA) (MUKUL KR. SHRAWAT) ACCOUNTANT MEMBER JUD ICIAL MEMBER AHMEDABAD; DATED 29/11/2013 PRABHAT KR. KESARWANI, SR. P.S. TRUE COPY / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A)-III, AHMEDABAD 5. , , / DR, ITAT, AHMEDABAD 6. / GUARD FILE. / BY ORDER, / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD `