Abhi Ambi Financial Services Limited, CHENNAI V. DCIT, CHENNAI

CO 96/CHNY/2014

• Counselvise Citation: [2016] 123 COUNSELVISE.COM (IT) 2342 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 8 month(s) 15 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 22-04-2016
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 08-02-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 07-08-2014
• Court: TRIBUNAL
• Department Lawyers: SHRIRAM SHESHADRI
• Assessee Lawyers: A V SREEKANTH JCITD R
• Keywords: Earning of tax free income; Cost of acquisition; Notional interest; Commercial expediency
• Section: 14A; 115JB; 145

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , ! . ' #$ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NO.1855 /MDS./2014 ( / ASSESSMENT YEAR :2010-11) & C.O. NO.96/MDS/2014 DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-1(1), CHENNAI 600 034. VS. M/S.ABHI AMBI FINANCIAL SERVICES LTD ., 327,STERLING TOWER,ANNA SALAI,TEYNAMPET,CHENNAI 6. PAN AAACA 9181 H ( %& / APPELLANT ) ( '(%& / RESPONDENT/ CROSS OBJECTOR ) / APPELLANT BY : MR.A.V.SREEKANTH,JCIT,D.R / RESPONDENT BY : MR.SHRIRAM SHESHADRI C.A & MR.ASHIK SHAH C.A / DATE OF HEARING : 08.02.2016 !' /DATE OF PRONOUNCEMENT : 22.04.2016 ) / O R D E R PER G.PAVAN KUMAR, JUDICIAL MEMBER: THIS APPEAL FILED BY THE REVENUE AND CROSS OBJECT IONS BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER OF THE LEAR NED ITA NO1855./MDS/2014 CO NO.96/MDS./14 2 COMMISSIONER OF INCOME TAX(A)-I, CHENNAI IN ITA NO .266/12-13/A-1 DATED 24.03.2014 PERTAINING TO THE ASSESSMENT YEAR 2010-11 PASSED U/S.143(3) OF THE ACT. 2.1 THE REVENUE HAS RAISED THE FOLLOWING GROUNDS:- 1. THE ORDER OF THE LD.CIT(A) IS CONTRARY TO LAW A ND FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE CIT(A) ERRED IN RESTRICTING THE DISALLOWANCE MADE U/S 14A TO THE EXTENT OF LIMB (II) OF RULE 8D(2). 2.1 THE CIT(A) FAILED TO TREAT THE IMPACT OF THE IN TEREST ACCRUED ON INTEREST FREE LOAN GIVEN TO M/S.HITECH HOUSING PROJ ECTS PVT.LTD. AS IN PARA5.9 OF THE ASSESSMENT ORDER. 2.2 THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THOUG H THE ASSESSEE HAS GRANTED INTEREST FREE ADVANCE OF RS.21.50 CRORE S TO M/S.HI-TECH HOUSING PROJECTS P LTD., ITS SISTER CONCERN, THE IN TEREST ACCRUED ON THE SAME IS TAXABLE AS THE ASSESSEE IS 2.3 THE CIT(A) OUGHT TO HAVE FOLLOWED THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF M/S.UNITED NILGIRI S TEA ESTATE COMPANY (210 TAXMAN 62) DATED 17/07/2012 WHEREIN IT IS HELD THAT WHEN THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, INTEREST ACCRUED THEREIN HAD TO BE ASSESSED IN THE HANDS OF THE ASSESSEE EVEN THOUGH THE ASSESSEE HAD NOT RECEIVED ANY AMOUNT AS THE PRINCIPAL AMOUNT ITSELF WAS NOT A BAD DEBT. ITA NO1855./MDS/2014 CO NO.96/MDS./14 3 3. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF NOTIONAL INTEREST ON INTEREST FREE LOAN GIVEN TO M/S.HITECH HOUSING PVT. LTD AMOUNTING TO RS.1.55 CRORES. 3.1 THE CIT(A) FAILED TO APPRECIATE THAT IN THE BUS INESS OF NON BANKING FINANCE COMPANIES, DETERMINING THE ACTIVITY OF BUSI NESS AND NON- BUSINESS ACTIVITY CANNOT BE DISTINGUISHED AND IN TH E ASSESSEES CASE, THE ADVANCES MADE ARE NOT DISTINGUISHABLE. 3.2 THE CIT(A) OUGHT TO HAVE APPRECIATED THAT EVEN IF THE LOANS HAVE BEEN GRANTED OUT OF THE PROFITS OF THE COMPANY EARN ED ON AND TREATING IN SHARES, DISALLOWANCE IS ENFORCEABLE U/S 36(1)(III) FOLLOWING THE RATIONAL VERDICT OF JURISDICTION HC I N THE CASE OF K.SOMASUNDARAM & BROS 3.3 THE CIT(A) OUGHT TO HAVE PLACED RELIANCE ON THE DECISION OF THE HONBLE HIGH COURT OF MADRAS IN THE CASE OF M/S.UNI TED NILGIRIS TEA ESTATE COMPANY (210 TAXMAN 62) DATED 17/07/2012 WHE REIN IT IS HELD THAT WHEN THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, INTEREST ACCRUED THEREIN HAD TO BE ASSE SSED IN THE HANDS OF THE ASSESSEE EVEN THOUGH THE ASSESSEE HAD NOT RECEIVED ANY AMOUNT AS THE PRINCIPAL AMOUNT ITSELF WAS NOT A BAD DEBT. 3.4 THE CIT(A) OUGHT TO HAVE UPHELD THE DISALLOWANC E IN THE ABSENCE OF THE EVIDENCES OF THE BUSINESS AND NON-BUSINESS A CTIVITY OF THE NBFC AND AS PER THE PROVISIONS OF SEC. 36(1)(IIL). ITA NO1855./MDS/2014 CO NO.96/MDS./14 4 2.2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS IN ITS CROSS OBJECTIONS:- 1. DISALLOWANCE U/S.14A OF THE ACT . 1.1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) [CIT(A)] ERRED IN UPHOLDING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT BY APPLYING RULE 8D OF THE INCOME-TAX RULES, 1962 (RU LES), WITHOUT NOTING THE FACT THAT THE ASSESSING OFFICER (AO) H AS FAILED TO RECORD ANY SATISFACTION TO THE EFFECT THAT THE VOLUNTARY D ISALLOWANCE MADE BY THE RESPONDENT IS INCORRECT. 1.2. THE LEARNED CIT(A) HAS FAILED TO APPRECIATE TH E FACT THAT THE DIVIDEND EARNED BY THE RESPONDENT WERE INCIDENTAL T O TRADE INVESTMENTS AND OUT OF INVESTMENTS IN MUTUAL FUNDS WHICH WERE BOUGHT AND SOLD DURING THE YEAR AMOUNTING TO RS 20, 20,846/- AND RS 30,21,718/- RESPECTIVELY. 1.3. THE LEARNED CIT (A) HAS ERRED IN UPHOLDING THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT BY APPLYING RULE 8D(II I) OF THE RULES TO THE EXTENT OF RS.20,50,543, WHICH IS EXCESSIVE, UNR EASONABLE AND ARBITRARY, CONSIDERING THE FACT THAT THE DIVIDEND I NCOME EARNED FROM INVESTMENTS IS ONLY RS.30,21,718/-. 1.4. THE LEARNED CIT(A) HAS FAILED APPRECIATE THE A MOUNT OF DISALLOWANCE OF RS.2,52,167 MADE UNDER SECTION 1 4A OF THE ACT BY ITA NO1855./MDS/2014 CO NO.96/MDS./14 5 THE RESPONDENT VOLUNTARILY TOWARDS MANAGERIAL AND A DMINISTRATIVE CHARGES IN THE RETURN OF INCOME FILED FOR THE SUBJE CT ASSESSMENT YEAR IS REASONABLE, CONSIDERING THE FACT THAT THE DIVIDE ND EARNED FROM INVESTMENTS IS ONLY RS.30,21,718/-. 1.5. WITHOUT PREJUDICE TO THE ABOVE, IN THE ENTIRE DISALLOWANCE MADE UNDER RULE 8D OF THE RULES, SHOULD BE ALLOWED AS AD DITIONAL COST OF ACQUISITION OF THOSE SECURITIES HELD AS INVESTMENT. 2. ADJUSTMENT TO BOOK PROFITS UNDER SECTION 115JB OF T HE ACT. 2.1. THE LEARNED CIT (A) HAVE ERRED IN UPHOLDING TH E ADJUSTMENT TO BOOK PROFITS COMPUTED IN ACCORDANCE WITH SECTION 115JB O F THE ACT, TOWARDS DISALLOWANCE RS.32,05,094 MADE UNDER SECTION 14A OF THE ACT BY APPLYING THE PROVISIONS OF RULE 8D OF THE RULES. 2.2. THE LD.CIT(A) HAVE FAILED TO APPRECIATE THAT T HE ADJUSTMENT TO BOOK PROFITS CANNOT BE MADE ON NOTIONAL BASIS COMPUTING IN ACCORDANCE WITH RULE 8D OF THE RULES. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS A LIMITED COMPANY, A NON BANKING FINANCIAL INSTITUTION ENGAGE D IN THE BUSINESS OF TRADING IN SHARES THROUGH JMF TRADING A CCOUNT AND FILED ITS E-RETURN OF INCOME ON 13.10.2010 FOR ASSESSMENT YEAR 2010-11 WITH TOTAL INCOME OF ` 48,47,74,400/-. SUBSEQUENTLY, THE RETURN WAS ITA NO1855./MDS/2014 CO NO.96/MDS./14 6 SELECTED FOR SCRUTINY AND NOTICE U/S.143(2) OF THE ACT WAS ISSUED TO THE ASSESSEE DUE TO CHANGE IN JURISDICTION. IN RESP ONSE TO THE NOTICE, THE AUTHORISED REPRESENTATIVE OF ASSESSEE APPEARED FROM TIME TO TIME AND FURNISHED THE DETAILS CALLED FOR DURING AS SESSMENT PROCEEDINGS. 3.1. THE AO MADE DISALLOWANCE U/S.14A OF THE ACT O F ` 29,52,927/-. ON PERUSAL OF THE BALANCE SHEET, THE INVESTMENTS AR E ` 31.99 CRORES AS ON 31.03.2010 AND ALSO ` 2.72 CRORES WERE DEBITED FOR FINANCIAL CHARGES. THE ASSESSEE HAS RECEIVED DIVIDEND INCOME OF ` 50,42,564/- AND CLAIMED EXEMPTION U/S.10(34) OF THE ACT. FURTHER THE ASSESSEE HAS NOT DISALLOWED ANY EXPENDITURE UND ER THE PROVISIONS OF THE SECTION 14A OF THE ACT AS NO EXPE NDITURE WAS INCURRED FOR THE PURPOSE OF EARNING THE EXEMPT INCO ME. BUT THE ASSESSEE INCURRED ROUTINE ESTABLISHMENT, ADMINISTRA TIVE EXPENSES AND PORTION IS ATTRIBUTABLE TO EARNING OF DIVIDEND INCOME. IN REPLY TO THE SHOW-CAUSE NOTICE, LD.A.R SUBMITTED THAT ASSESS EE HAS DISALLOWED ` 2,52,167/- TOWARDS EXPENDITURE FOR EARNING DIVIDEN D INCOME, BUT THE LD. ASSESSING OFFICER, BASED ON THE DECISION OF ITA NO1855./MDS/2014 CO NO.96/MDS./14 7 M/S.GODREJ & BOYCE VS. DCIT [ 234 DTR 01 (BOM.) ] CALCULATED THE DISALLOWANCE UNDER RULE-8D(II) OF THE I.T. RULES,19 61 AND MADE DISALLOWANCE OF ` 29,52,927/-. THE LD.A.R HAS FURNISHED DETAILED EXPLANATIONS ABOUT THE DIVIDEND INCOME AND THE INVE STMENTS, AND ALSO CITED CASE LAWS IN SUPPORT OF HIS SUBMISSIONS AT PAGES 3 & 4 OF ASSESSMENT ORDER WHERE IN LD. ASSESSING OFFICER CAL CULATED THE DISALLOWANCE UNDER RULE-8D IN TABULATION AT PARA 4. 3 OF HIS ORDER ARE APPLICABLE EFFECTIVELY FROM THE ASSESSMENT YEAR 200 8-09 BASED ON FINANCIAL STATEMENTS, CALCULATED THE DISALLOWANCES UNDER RULE-8D (I), (II) & (III) OF 32.05.094/- WHEREAS THE ASSESSEE HA S ALREADY DISALLOWED ` 2,52,167/-. HENCE, THE NET AMOUNT OF ` 29,52,924/- WAS DISALLOWED. 3.2. DURING THE ASSESSMENT PROCEEDINGS, THE LD.A.O FOUND THAT THE ASSESSEE HAS LENT INTEREST FREE ADVANCES OF 21.50 C RORES TO M/S.HI- TECH HOUSING PROJECTS LTD., AND CALLED FOR EXPLANA TIONS WHY THE INTEREST WAS NOT ACCRUED ON ADVANCES TO M/S.HI-TECH HOUSING PROJECTS LTD., AS THE COMPANY IS FOLLOWING MERCANTI LE SYSTEM OF ACCOUNTING. ON PERUSAL OF P&L A/C, 2,72,69,000/- WAS CLAIMED AND CAN BE DISALLOWED U/S.36(1)(III) OF THE ACT AS THE COMPANY HAS GIVEN ITA NO1855./MDS/2014 CO NO.96/MDS./14 8 INTEREST FREE ADVANCE TO HIS SISTER CONCERNS. LD. A.R FILED DETAILED SUBMISSIONS AT PARA 5.2 OF ASSESSMENT ORDER AND LD. ASSESSING OFFICER REFERRED THE PROVISIONS OF THE SECTION 5 & SECTION 145 OF THE ACT AND RELIED ON THE VARIOUS DECISIONS OF HIGH COU RT AND TRIBUNALS, FOLLOWED BY THE DECISION OF M/S.S.A BUILDERS LTD. V S. CIT (288 ITR 01 (SC) ) WHEREIN IT WAS DEALT ON CERTAIN CORDINAL PRI NCIPLE TO DETERMINE WHETHER THE ADVANCING OF BORROWED LOAN IS ON COMME RCIAL EXPEDIENCY OR NOT. THE AO WAS OF THE OPINION THA T THE INTEREST ACCRUED ON ADVANCES TO M/S.HI-TECH HOUSING PROJECTS LTD., IS TO BE TAXED AND WAS WORKED OUT TO ` 1,54,82,876/-. THE LD. ASSESSING OFFICER WITH THE ABOVE DISALLOWANCES PASSED ASSESSM ENT ORDER U/S.143(3) OF THE ACT ON 19.12.2013. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE HAS FILED AN APPEAL BEFORE THE LD. CIT(A). 4.1. IN THE APPELLATE PROCEEDINGS, ON THE ISSUE OF DISALLOWANCE U/S.14A, LD.A.R VEHEMENTLY ARGUED THE GROUNDS RAISE D IN ITS APPEAL AND SUPPORTED HIS ARGUMENTS WITH THE DECISIONS AS R EFERRED AT PAGES 3 & 4 OF THE CIT(A)S ORDER. THE BASIC ISSUE BEING THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE IN RESPECT OF EARN ING SUCH EXEMPT ITA NO1855./MDS/2014 CO NO.96/MDS./14 9 INCOME AND INVESTMENTS ARE OUT OF INTEREST FREE FUN DS /OWN FUNDS AND NO LOAN WAS OBTAINED TO MAKE SUCH INVESTMENTS. LD.C IT(A) HAD CONSIDERED THE SUBMISSIONS/GROUNDS AND ALSO THE MET HODOLOGY OF DISALLOWANCES MADE BY THE AO AND DEALT IN EXHAUSTIV ELY IN HIS ORDER ON THE APPLICABILITY OF RULE-8D ON WHAT CONSTITUTE THE INVESTMENTS FOR THE CALCULATION OF THIRD LIMB UNDER RULE 8D. THE LD .CIT(A) RELIED ON THE DECISION OF THE CIT VS. M/S.HERO CYCLES LTD. [ (2010)(323 ITR 518 (P&H) ] WHEREIN IT HAS BEEN C LEARLY EXPLAINED THAT THE DISALLOWANCE U/S.14A REQUIRES FINDING OF I NCURRING OF EXPENDITURE, WHERE IT IS FOUND THAT FOR EARNING EXE MPTED INCOME, NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE U/S.14A CANNOT BE WARRANTED. FURTHER, LD.CIT(A) RELIED ON THE DECIS ION OF SPECIAL BENCH OF MUMBAI TRIBUNAL IN THE CASE OF DAGA CAPITA L MANAGMENET P. LTD. (2008) (117 ITD 169) AND ALSO VARIOUS DECIS IONS OF HIGH COURTS AND TRIBUNALS. AFTER CONSIDERING THE FACTS AND ALSO FINANCIAL STATEMENTS, THE LD.CIT(A) OBSERVED THAT THE ASSESSE E COMPANY HAS OBTAINED LOAN FROM M/S.J.M.FINANCIAL PRODUCTS P. LT D. (JMF) EXCLUSIVELY FOR THE PURPOSE OF SALE AND PURCHASE OF SHARES AND INTEREST WAS CHARGED FOR DAILY OUTSTANDING BALANCE. LD.CIT(A) BASED ITA NO1855./MDS/2014 CO NO.96/MDS./14 10 ON THE BALANCE SHEET AND INTEREST DEBITED TO THE P & L A/C SUPPORTED BY THE RETURN SUBMISSIONS FILED BY THE ASSESSEE, FO UND THAT ` 96,01,132/- WAS DIRECTLY RELATED TO THE INVESTMENT S AND BALANCE ` 1,76,68,025/- WAS INCURRED TOWARDS THE INTEREST FOR TRADING PURPOSE. CONSIDERING THE LOAN ASPECT OF JMF, BALANCE SHEET OF THE ASSESSEE WHEREIN THE ASSESSEE HAS SUFFICIENT OWN FUNDS OF ` 59.13 CRORES AGAINST THE INVESTMENT OF ` 31.99 CRORES. THE LD.CIT(A) ALLOWED THE GROUND BY OBSERVING AS UNDER:- 4.2.8 HOWEVER, THE DISALLOWANCE MADE BY THE AO B Y INVOKING LIMB(III) OF RULE 8D(2) IS IN ORDER IN VIEW OF THE FACT THAT THIS SCIENTIFIC FORMULA NEEDS T BE APPLIED FROM A.Y 2008-09 ONWARDS FOR DISALLOWANCE U/S.14A R.W.RULE 8D AS PER THE DECISION IN THE CASE OF GODREJ & BOYCE. FURHTER, IN THE CASE OF ESCORTS LTD. 102 TTJ 522, T HE ITAT DELHI HAS CLEARLY HELD THAT INDIRECT MANAGEMENT AND ADMINISTR ATION EXPENSES QUALIFY FOR DISALLOWANCE U/S.14A AND THERE IS NO DE CISION SO FAR BY ANY SIMILAR FORUM CONTRADICTING THE ABOVE FINDING. IN VIEW OF THE ABOVE, I DIRECT THE AO TO RESTRICT THE DISALLOWANCE ONLY TO THE EXTENT OF LIMB(III) OF RULE 8D(2). THIS GROUND IS PARTLY ALLOWED. ITA NO1855./MDS/2014 CO NO.96/MDS./14 11 4.2 ON THE ISSUE OF NOTIONAL INTEREST OF ` 1,54,82,876/-, LD.CIT(A) PERUSED THE FINDINGS& OBSERVATIONS OF AO AND SUBMIS SIONS BY LD.A.R IN HIS ORDER AND FOUND THAT THE ASSESSEE HAS ADVANC ED ` 21.5 CRORES TO ITS SISTER CONCERNS OUT OF THE FUND GENERATED FR OM INTEREST ACCRUALS. ON PERUSAL OF THE BALANCE SHEET AND FINANCIAL STATE MENTS, ASSESSEE HAS ONLY ONE LOAN FACILITY IN FORM OF DEMAND LOAN FROM JMF AND THE SAME WAS UTILIZED FOR THE PURPOSE OF PURCHASE AND S ALE OF SHARES ONLY. CONSIDERING THE FACTUAL ASPECTS, THE ADVANC E IS TREATED AS INTEREST FREE ADVANCE OUT OF SURPLUS FUND, BUT THE AO HAS MADE AN ADDITION OF NOTIONAL INTEREST ON THE BALANCE OUTSTA NDING AS ON 31.03.2010. LD.CIT(A) HAS ALLOWED THE GROUND OF ASS ESSEE BY DIRECTING THE AO TO DELETE THE DISALLOWANCE BY OBSE RVING AS UNDER:- AS DISCUSSED IN EARLIER PARAGRAPHS, THE ONLY LOA N FACILITY I.E. THE CREDIT LIMIT WAS TAKEN FROM JMF FOR PURCHASE AND SA LE OF SHARES. SINCE IT IS FOR SPECIFIC PURPOSE THAT TOO A CREDIT LIMIT AND NOT IN THE FORM OF CASH, IT CANNOT BE CONSTRUED THAT THESE FUN DS WERE DIVERTED TO ANY OTHER CONCERNS. ON THE OTHER HAND, THE APPELLA NT IS ALSO HAVING SUFFICIENT OWN FUNDS OUT OF INTERNAL ACCRUALS AS SE EN FROM THE BALANCE SHEET (RESERVE & SURPLUS AS ON 1.4.2009 OF RS.21.29 CRORES WERE INCREASED TO RS.59.13 CRORES AS ON 31.03.2010) WHIC H COULD BE USED FOR ADVANCING TO OTHER CONCERNS. IN VIEW OF THE ABO VE FACTS, THE NOTIONAL INTEREST DISALLOWED BY THE AO IS NOT CALLE D FOR. THE AI IS DIRECTED TO WITHDRAW THE DISALLOWANCE. THE GROUND I S ALLOWED. ITA NO1855./MDS/2014 CO NO.96/MDS./14 12 AGGRIEVED BY THE ORDER OF LD.CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 5.1. BEFORE US, LD.D.R ARGUED THE GROUNDS AND MAD E SUBMISSIONS THAT THE LD.CIT(A) HAS ERRED IN RESTRICTING THE DIS ALLOWANCE MADE U/S.14A TO THE EXTENT OF LIMB(II) OF RULE 8D(2), LI MB(III) TO THE EXTENT OF INTEREST COMPONENT WITHOUT CONSIDERING THE INVESTME NTS MADE BY THE ASSESSEE IN TAX FREE SECURITIES AND SHARES. THE ASS ESSEE BEING NBFC AND IN THE BUSINESS OF TRADING SHARES, DISALLO WANCE HAS TO BE CONSIDERED, FOR THE AVERAGE OF VALUE OF THE INVES TMENTS AS THEY TAKE THE CHARACTERISTICS OF TRADING ASSET AND APPEAR IN THE BALANCE SHEET. THE TRANSACTION OF PURCHASE AND SALE IS MEANT FOR B USINESS OF THE ASSESSEE AND SUCH INVESTMENTS ARE ONLY FOR THE PURP OSE OF COMMERCIAL EXPEDIENCY AND PRAYED FOR SETTING ASIDE THE CIT(A)S ORDER. 5.2. CONTRA, LD.A.R SUBSTANTIATE HIS ARGUMENTS THA T IN CASE OF TRADING IN SHARES ONLY RULE 8D(2) SHALL APPLY AND A LSO REFERRED TO PAGE-32 OF THE PAPER BOOK EXPLAINING THAT M/S.J.M.F INANCIAL PRODUCTS ITA NO1855./MDS/2014 CO NO.96/MDS./14 13 P. LTD. (JMF) CONFIRMING THE LOAN SANCTIONED ONLY F OR THE PURPOSE OF PURCHASE AND SALE OF SHARES , RULE 8D(2) SHALL APPL Y IN RESPECT OF INTEREST COMPONENT, WHICH IS DIRECTLY ATTRIBUTABLE TO THE INVESTMENTS. BY REFERRING TO THE FINANCIAL STATEMENTS, THE INTER EST COMPONENT PERTAINS TO THE SHARES AND SECURITIES AND NOT WITH RESPECT TO INVESTMENTS, LD.CIT(A) HAS RESTRICTED THE DISALLOWA NCE TO THAT EXTENT, WITHOUT CONSIDERING THE OTHER TWO LIMBS. 6.1. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD AND JUDICIAL DECISION CITED. THE MAIN CONTE NTION OF LD.D.R BEING THE RESTRICTION OF INTEREST COMPONENT AS PER RULE 8D(2) IS NOT VIABLE AND SUPPORTED WITH THE ARGUMENTS RELYING ON THE VARIOUS DECISIONS. THE LD.A.R SUBMITTED THAT ASSESSEE BEIN G THE NBFC AND IT IS REGULAR PRACTICE TO MAKE INVESTMENTS IN THE S HARES AND SECURITIES AND ASSESSEE ALSO DISALLOWED AMOUNT SUO MOTO UNDER RULE 8D, BUT THE AO APPLIED RULES 1 , 2 & 3 AND MADE DISALLOWANC E OF ` 29,52,927/-. THE LD.A.R SUPPORTED HIS ARGUMENTS THA T THE ASSESSEE HAS OBTAINED ONLY ONE LOAN FROM M/S.J.M.FINANCIAL P RODUCTS P. LTD., FOR THE PURPOSE OF PURCHASE AND SALE OF SHARES. TH EREFORE, THIS ITA NO1855./MDS/2014 CO NO.96/MDS./14 14 INTEREST COMPONENT DOES NO FORM PART OF ANY INCOME TAXABLE AND ALSO RELIED ON THE DECISION OF TRIBUNAL IN THE CASE OF M /S.GEOJIT INVESTMENT SERVICES LTD. VS. ACIT IN ITA NO.261/COCH./2014 VID E ORDER DATED 28.08.2014 AND ALSO SUPPORTED WITH ACIT VS.FARIDA S HOES PVT LTD. IN ITA NO.359/MDS./2013 FOR ASSESSMENT YEAR 2008-09 VI DE ORDER DATED 11.04.2013. SO CONSIDERING THE PROVISIONS AND SUBM ISSIONS OF COUNSELS WE ARE OF THE OPINION THAT THE LD.CIT(A) H AD DEALT WITH THE ISSUE IN DETAIL AND ALSO CONSIDERED THE SUBMISSIONS AND EXPLANATIONS OF THE ASSESSEE, THEREFORE, WE ARE NOT INCLINED TO INTERFERE WITH THE ORDER OF THE LD.CIT(A) AND CONFIRM THE SAME. 6.2 ON THE ISSUE OF NOTIONAL INTEREST, THE LD.D.R SUBMITTED THAT ASSESSEE COMPANY HAS PROVIDED INTEREST FREE ADVANCE S TO M/S.HI- TECH HOUSING PROJECTS LTD., ITS SISTER CONCERNS AND THE INTEREST ACCRUED ON THE SAME IS TAXABLE AS THE ASSESSEE IS F OLLOWING MERCANTILE SYSTEM OF ACCOUNTING. AS A PRUDENT BUSI NESS PRACTICE, INTEREST HAS TO BE CONSIDERED IN THE BOOKS OF ACCOU NTS, EVEN THOUGH THE ACTUAL RECEIPT DOES NOT FALL IN THE CURRENT FIN ANCIAL YEAR. FURTHER, IF THE LOANS HAVE BEEN GRANTED OUT OF INCOME EARNED ON SALE OF ITA NO1855./MDS/2014 CO NO.96/MDS./14 15 INVESTMENTS, DISALLOWANCE HAS TO BE MADE U/S.36(1)( III) OF THE ACT AND ALSO THE ACTIVITY COULD NOT BE DISTINGUISHED BY THE ASSESSEE. THE LD.D.R HAS DEALT WITH ONLY LD.CIT(A)S OBSERVATION S IN PARA 5.9 OF HIS ORDER WHERE ADJUSTMENTS WAS MADE CONSIDERING THE D ISALLOWANCE. THE FACT THAT THE ASSESSEE HAS OBTAINED LOANS ONLY FOR THE PURPOSE OF PURCHASE AND SALE OF SHARES FROM M/S.J.M.FINANCIAL PRODUCTS P. LTD. THE LD.CIT(A) ASSUMED THE PRINCIPLE OF COMMERCIAL EXPEDIENCY AND DIRECTED THE AO TO DELETE THE ADDITION, WHICH IS NO T IN ACCORDANCE WITH LAW. THEREFORE, PRAYED FOR SETTING ASIDE THE ORDER . CONTRA LD.A.R OF THE ASSESSEE RELIED ON THE FINDINGS OF THE CIT(A) AND DREW OUR ATTENTION TO THE PAPER BOOK EXPLAINING THE FINANCIA L STATEMENTS AND ALSO BREAK UP OF FUNDS AVAILABLE FOR INVESTMENTS IN SHARES AND SUPPORTED HIS ARGUMENTS WITH THE DECISION OF SIVA P ROJECTS ENGG. AND ENTERPRISES LTD. VS. ACIT IN ITA NO.1896/MDS./2011 VIDE ORDER DATED17.02.2012. 6.3. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD AND JUDICIAL DECISION CITED. THE FACT OF TH E CASE IS THAT ASSESSEE HAS PROVIDED INTEREST FREE ADVANCES TO ITS SISTER CONCERN, ITA NO1855./MDS/2014 CO NO.96/MDS./14 16 WHICH IS NOT DISPUTED BY THE LOWER AUTHORITIES AND DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE PROVIDED THE P ARTICULARS OF INCOME OF THE ASSESSEE FOR GIVING INTEREST FREE LOA N AND ON PERUSAL OF THE STATEMENT REVEALED THAT THE ASSESSEE HAS SURPLU S FUNDS AND LOANS ARE ADVANCED OUT OF INTERNAL ACCRUALS AND PRO FITS MADE FROM SALE OF SHARES AND WERE REFLECTED IN THE BALANCE SH EET. THE LD.D.R THOUGH ACCEPTED THE CONTENTION, DID NOT ACCEPT THE NOTIONAL INTEREST, WHICH HAS NOT ARISED TO THE ASSESSEES CASE. THEREF ORE,, THE FINDINGS OF LD.CIT(A) IN DELETING THE ADDITION IS PROPER AND ACCORDINGLY,WE UPHELD THE ORDER OF LD.CIT(A) ON THIS GROUND. CROSS OBJECTIONS BY ASSESSEE 7.1 DISALLOWANCE U/S.14A OF THE ACT TO TREAT THE E NTIRE DISALLOWANCE BY APPLYING RULE 8D OF THE I.T.RULES AS COST OF ACQ UISITION OF SECURITIES IS TO BE HELD AS INVESTMENTS. THE LD. ASSESSING OFFICER MADE DISALLOWANCE, SUB SEQUENTLY THE LD.CIT(A) UPHELD THE DISALLOWANCE WITH A DIRECT ION THAT IT SHOULD BE RESTRICTED DISALLOWANCE ONLY TO THE EXTENT OF LI MB(III) OF RULE 8D(2). SO WE ARE OF THE VIEW THAT THE LD.CIT(A) HAS CONSID ERED THE FACTS AND ITA NO1855./MDS/2014 CO NO.96/MDS./14 17 ALSO THE CALCULATIONS PROVIDED UNDER RULE8D, THE DI RECTION OF LD.CIT(A) IS IN ORDER AND WE DISMISS THIS GROUND. 7.2 ADJUSTMENT TO BOOKS PROFITS U/S.115JB OF THE A CT. THE LD.CIT(A) HAS GIVEN A DIRECTION BASED ON THE CLAUSE (F) OF EXPLANATION-1 TO S.115JB OF THE ACT MAKE IT ABUNDAN TLY CLEAR THAT THE AMOUNT OF EXPENDITURE RELATABLE TO EXEMPT INCOME OT HER THAN SEC.10(38) IS ADDED BACK. PROVISIONS OF THE SECTI ON 115JB TO EXPLANATION-1 OF CALUSE (F) IS AS UNDER:- S.115JB EXPLANATION 1. FOR THE PURPOSES OF THIS SECTION, ' BOOK PROFIT ' MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCO UNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB-SECTION (2), AS IN CREASED BY- (A) -- (B -- (C) ---- (E) --- (F) THE AMOUNT OR AMOUNTS OF EXPENDITURE RELATABLE TO ANY INCOME TO SECTION 10 OTHER THAN THE PROVISIONS CONTAINED IN C LAUSE (38) THEREOF OR SECTION 11 OR SECTION 12 APPLY ; OR ITA NO1855./MDS/2014 CO NO.96/MDS./14 18 CONSIDERING THE PROVISIONS AND FINDINGS OF THE LD.C IT(A), LD.CIT(A) HAS RIGHTLY UPHELD THE ADDITIONS OF THE AO AND DIS ALLOWANCE U/S.14A HAS BEEN BROUGHT TO BOOK PROFIT CALCULATIONS. THER EFORE, THE CROSS OBJECTIONS BY THE ASSESSEE IS DISMISSED. 8. IN THE RESULT, THE APPEAL OF REVENUE IS DISMISSE D AND THE CROSS OBJECTIONS FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON FRIDAY, THE 22 ND OF APRIL,2016 AT CHENNAI. SD/- SD/- ( #$ % ) & CHANDRA POOJARI ' ( . ) (G.PAVAN KUMAR) ( ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 22 ND APRIL,2016. K S SUNDARAM. )*((+,(-, /COPY TO: ( 1. /APPELLANT 2. /RESPONDENT 3. ( .(&' /CIT(A) 4. ( . /CIT 5. ,/0 (1 /DR 6. 02(3 /GF