Rane Holdings Limited, CHENNAI V. ACIT, CHENNAI

ITA 115/CHNY/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8249 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Assessment Year: 2010-2011
• Appeal Filed On: 14-01-2015
• Court: TRIBUNAL
• Assessee Lawyers: VIJAYARAGHAVAN
• Keywords: Earning of tax free income; Wholly owned subsidiary
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI ... , . , , BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.115 /MDS./2015 ( !' #' / ASSESSMENT YEAR :2010-11) M/S.RANE HOLDINGS LIMITED , MAITHRI NO.132,CATHEDRAL ROAD, CHENNAI 600 086. VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 5(1), CHENNAI 600 034. PAN AABCR 5136 J ( / APPELLANT ) ( / RESPONDENT ) $% & ' / APPELLANT BY : MR.VIJAYARAGHAVAN,ADVOCATE ()$% & ' / RESPONDENT BY : DR.B.NISCHAL,JCIT, D.R * + & ,- / DATE OF HEARING : 04.11.2015 .# & ,- /DATE OF PRONOUNCEMENT : 06.01.2016 / O R D E R PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE ASSESSEE, AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-V, CHENNA I DATED 21.10.2014 IN ITA NO.849/13-14(A)-V PASSED UNDER S EC.143(3) READ WITH SEC. 250 OF THE ACT. ITA NO.115 /MDS/2013 2 2. THE ASSESSEE HAS RAISED THREE ELABORATE GROUNDS IN ITS APPEAL, HOWEVER THE CRUX OF THE ISSUE IS THAT THE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE LD. CIT (A), CHENNAI WHO HAS SUSTAINED THE ADDITION MADE BY THE LD. ASSESSING OFFICER FOR ` 2,46,85,257/- BEING EXPENSES INCURRED FOR EARNING EXEMPT DIVIDEND INCOME BY INVO KING SECTION14A OF THE ACT R.W RULES 8D. 3.1 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE COMPANY IS THE HOLDING COMPANY OF RANE GROUP COMPANIES, ENGA GED IN THE BUSINESS OF SUPPORTING SERVICE IN THE AREAS OF MANA GEMENT, INFORMATION TECHNOLOGY, BUSINESS DEVELOPMENT AND IN FRASTRUCTURE, FILED ITS RETURN OF INCOME ON 01.10.2010 FOR THE AS SESSMENT YEAR 2010-11. SUBSEQUENTLY, THE CASE WAS SELECTED FOR S CRUTINY AND THE ASSESSMENT U/S.143(3) WAS COMPLETED ON 28.03.2013 WHEREIN THE LD. ASSESSING OFFICER MADE CERTAIN DISALLOWANCES AMONGS T WHICH ONE OF THE DISALLOWANCES WAS MADE BY INVOKING SECTION.14A R.W. RULE 8D FOR ` 2,46,85,257/- BEING THE EXPENDITURE INCURRED FOR EA RNING EXEMPT DIVIDEND INCOME OF ` 21,51,35,562/-. THE ASSESSEE HAD EXPLAINED ITA NO.115 /MDS/2013 3 BEFORE THE LD. ASSESSING OFFICER AS TO HOW SECTION. 14A OF THE ACT WOULD NOT BE APPLICABLE IN THE RELEVANT CASE AS FOL LOWS:- DURING THE PREVIOUS YEAR RELEVANT TO THE A. Y. 201 0-11, THE COMPANY EARNED A DIVIDEND INCOME OF RS. 2, 151 LAKHS. IT IS SUBMIT TED THAT, TO ELIMINATE CROSS HOLDING AMONGST THE GROUP COMPANIES AND TO CONSOLID ATE THE PROMOTER SHAREHOLDINGS, RESTRUCTURING OF THE SHAREHOLDING WA S UNDERTAKEN IN THE PRECEEDING YEARS. THE INVESTMENTS PURSUANT TO RESTR UCTURING OF THE SHAREHOLDING IN THE PREVIOUS YEAR 2007-08, HAVE YIELDED THE DIVI DEND INCOME TO THE COMPANY. THE INCREASE IN INVESTMENTS DURING THE PREVIOUS YEA R RELEVANT TO THE ASSESSMENT YEAR 2010-11 DUE TO AMALGAMATION OF ITS WHOLLY OWNE D SUBSIDIARY RANE INVESTMENTS LTD. PURSUANT TO THIS MERGER, THE COMPA NY BECAME THE BENEFICIAL OWNER OF SHARES HELD BY RANE INVESTMENTS IN THE GRO UP COMPANIES. THE MAJOR INVESTMENTS MADE BY THE COMPANY ARE IN TH E GROUP COMPANIES AND THE DIVIDENDS ARE DIRECTLY CREDITED IN THE ACCOUNT OF THE ASSESSEE COMPANY BY THOSE COMPANIES. THESE INVESTMENTS ARE LONG TERM IN NATURE AND NORMALLY STAY INVESTED FOR MANY YEARS. IT IS ALSO SUBMITTED THAT NO EXPENDITURE WAS INCURRED FOR EARNING OF DIVIDEND INCOME. THE COMPANY FURTHER SUB MITS THAT NO INVESTMENTS HAVE BEEN MADE OUT OF BORROWED FUNDS. THE ASSESSEE HAD NOT TAKEN ANY LOAN FOR MAKING SUCH INVESTMENT AND IT IS EVIDENT FROM T HE SCHEDULE OF SECURED LOANS WHICH CONSISTS OF ONLY TERM LOANS WHICH CANNOT BE U TILIZED FOR INVESTMENTS. DURING THE COURSE OF THE HEARING YOU HAD SAID THAT YOU RE PROPOSING TO MAKE THE DISALLOWANCE U/S. 14 A BY INVOKING THE PROVISION OF RULE 8D OF THE INCOME TAX RULES. WITHOUT PREJUDICE TO OUR CLAIM THAT NO EXPEN DITURE HAS BEEN INCURRED TOWARDS EARNING DIVIDEND INCOME AND NO DISALLOWANCE U/S. 14 A IS WARRANTED, WE WISH TO SUBMIT THAT THE COMPANY ALLOCATES THE INTER EST EXPENSES (OTHER THAN INTEREST ON LOAN FROM HDFC) TO ITS GROUP COMPANIES AND RECOVERS THE SAME IN THE SERVICE CHARGES BILLED TO THE GROUP COMPANIES. HENCE CLAUSE (II) OF RULE 8D WOULD NOT APPLY TO THE COMPANY. ITA NO.115 /MDS/2013 4 IN THE PRESENT CASE, THE COMPANY HAS ONLY TERM LOAN S WHICH ARE SANCTIONED BY THE BANKS ONLY FOR SPECIFIC PURPOSES AND CANNOT BE UTILIZED FOR INVESTMENTS. FURTHER, THE COMPANY HAS CHARGED OFF THE INTEREST T O THE GROUP COMPANIES AND HENCE THE FORMULA UNDER RU(E 8D(2)(II) WOULD NOT AP PLY TO THE COMPANY AS NO BORROWED FUNDS HAVE BEEN USED FOR MAKING THE INVEST MENTS. WITHOUT PREJUDICE TO THE FACT THE RULE 8D IS NOT AP PLICABLE, WE SUBMIT THAT DISALLOWANCE OF INTEREST UNDER CLAUSE (II) OF THE R ULE IS NOT WARRANTED. 3.2.1 FURTHER, THE ASSESSEE RELIED UPON THE DECISIO NS IN THE CASES OF CIT VS. HERO CYCLES IN 323 ITR 518(P & H), GREAVES LEASING FINANCE LTD VS. ITO (ITA NO.5634(MUM.) OF 2009) AND ACIT VS. CHAMPION COMMER CIAL COMPANY LTD IN ITA NO.6441KOL/2012 IN SUPPORT OF ITS CONTENTIONS. HOWEVER, THE EXPLANATION OFFERED BY THE ASSESSEE WA S REJECTED BY THE LD. ASSESSING OFFICER BY OBSERVING AS UNDER:- 3.3 THE REPLY OF THE ASSESSEE HAS BEEN CONSIDERED. A PLAIN READING OF SECTION 14A READ WITH RULE 8D CLARIFIES THE LEGISLA TIVE INTENT THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. NO EXPENDITURE, WHETHER DIRECT OR I NDIRECT, WHICH IS NOT ATTRIBUTABLE OR RELATABLE TO EARNING TO TAXABLE INC OME CAN BE ALLOWED. IN A PARTICULAR YEAR THERE MAY NOT BE AN INCOME WHICH DO ES NOT FORM PART OF TOTAL INCOME BUT STILL DISALLOWANCE UNDER THE PROVISIONS OF SECTION 14A READ WITH RULE 8D AS THE SOURCE FOR GENERATING INCOME IS ALREADY C REATED WHICH REQUIRES TO BE DEVELOPED AND NURTURED. THEREFORE THOUGH SAID SOURC E MAY NOT YIELD INCOME IN A PARTICULAR YEAR BUT THE SOURCE REMAINS, MAINTAINED AND NURTURED. IT IS PERTINENT HERE TO MENTION THE DECISION OF HONB(E ITAT DELHI (SPECIAL BENCH) IN THE CASE OF CHEMINVEST LTD VS. INCOME TAX OFFICER 124 TTJ 57 7 (DEL) (SB) IN THE CONTEXT ITA NO.115 /MDS/2013 5 THAT EVEN IF THERE IS NO EXEMPT INCOME EARNED DURIN G A PARTICULAR YEAR STILL DISALLOWANCE CAN BE MADE U/S 14A READ WITH RULE 8D. THE CONTROVERSY BEFORE THE SPECIAL BENCH, IN THIS CASE, WAS WHETHER DISALL OWANCE U/S 14A COULD BE MADE WHETHER NO DIVIDEND IS RECEIVED IN THE YEAR UN DER CONSIDERATION. IN THIS CASE THE ASSESSEE HAD BORROWED MONIES FOR ACQUIRING SHARES AS A TRADER AS WELL AS AN INVESTOR BUT NO DIVIDEND WAS THAT SINCE NO IN COME FORMING PART OF TOTAL INCOME WAS RECEIVED, THE QUESTION OF MAKING ANY DIS ALLOWANCE DID NOT ARISE. AFTER HEARING THE PARTIES, IT WAS HELD THAT IF THE EXPENDITURE IS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, IT HAS TO SUFFER DISALLOWANCE IRRESPECTIVE OF THE FACT WHETHER ANY INCOME IS EARN ED BY THE ASSESSEE OR NOT. SECTION 14A DOES NOT ENVISAGE ANY SUCH EXCEPTION. W HEN PRIOR TO INTRODUCTION OF SECTION 14A, AN EXPENDITURE BOTH UNDER SECTION 36 A ND 57 WAS ALLOWABLE TO AN ASSESSEE WITHOUT SUCH REQUIREMENT OF EARNING OR REC EIPT OF INCOME, SUCH CONDITION CANNOT BE IMPORTED WHEN IT COMES FOR DISA LLOWANCE OF THE SAME EXPENDITURE U/S. 14A. IN COMING TO THIS CONCLUSION, THE BENCH RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F CIT VS. RAJENDRA PRASAD MOODY 115 ITR 519 SC. RELIANCE WAS ALSO PLACED IN THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF CIT VS. WALFORT SHARE & STOCK BROKERS (P.) LTD. REPORTED IN 326 ITR 01 (SUPRA) BY LD. ASSESSING OFF ICER ITA NO.115 /MDS/2013 6 3.2 ON APPEAL, THE LD. CIT (A) HAD CONFIRMED THE O RDER OF THE LD. ASSESSING OFFICER BY HOLDING AS FOLLOWS:- 5. I HAVE VERIFIED THE ASSESSMENT ORDER, GROUNDS OF APPEAL AND SUBMISSION OF THE AR OF THE APPELLANT CAREFULLY. TH E ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAD DIVIDEND INCOME OF RS.21,51,3 5,562/- AND CLAIMED EXEMPTION U/S 10(34) OF THE IT ACT. THE ASSESSING O FFICER APPLIED THE PROVISIONS OF SEC.14A AND ARRIVED AT EXPENDITURE INCURRED IN R ELATION TO EARNING OF INCOME NOT FORMING PART OF TOTAL INCOME HENCE THE SAME WAS NOT ALLOWED. THE ASSESSING OFFICER HAS DEALT ELABORATELY ON THIS ISSUE AND AFT ER CONSIDERING THE SUBMISSIONS OF THE AR OF THE APPELLANT, THE AO APPLIED THE PROV ISIONS OF SECTION 14A READ WITH RULE 8D. IT IS A FACT THAT THERE MAY NOT BE AN INCOME IN A PARTICULAR YEAR WHICH DOES NOT FORM PART OF TOTAL INCOME BUT STILL DISALLOWANCE UNDER THE PROVISIONS OF SECTION 14A READ WITH RULE 8D AS THE SOURCE FROM GENERATING INCOME HAS ALREADY CREATED. EVEN THOUGH THE SAID SO URCE MAY NOT YIELD INCOME IN A PARTICULAR YEAR, BUT THE SOURCE REMAINS MAINTA INED AND NURTURED. EVEN IF THERE IS NO EXEMPT INCOME EARNED DURING A PARTICULA R YEAR STILL DISALLOWANCE U/S 14A READ WITH RULE 8D CAN BE MADE. IF THE EXPENDITU RE IS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME , IT HAS TO SUFFER DISALLOWANCE IRRESPECTIVE OF THE FACT WHETHER ANY INCOME IS EARN ED BY THE ASSESSEE OR NOT. HOWEVER, THE RELIANCE PLACED BY THE ASSESSING OFFIC ER ON THE RATIO HELD IN WALFORT SHARE & STOCK BROKERS P LTD., THE HONBLE SUPREME C OURT HAS HELD THAT THE BASIC REASON FOR INSERTION OF SEC.14A IS THAT CERTAIN INC OMES ARE NOT INCLUDIBLE WHILE ITA NO.115 /MDS/2013 7 COMPUTING TOTAL INCOME AS THESE ARE EXEMPTED UNDER CERTAIN PROVISIONS OF THE ACT. 5.1 THE ASSESSING OFFICER MADE A VALID OBSERVATION THAT THE COPIES OF INVOICES PERTAINING TO THE YEAR UNDER CONSIDERATION FILED BY THE ASSESSEE DO NOT INDICATE ANY ALLOCATION OR PASSING ON OF THE INTEREST SUFFER ED BY IT TO ITS GROUP COMPANIES. THE ASSESSEE CONTINUE TO EARN SUBSTANTIAL DIVIDEND INCOME ON ITS HUGE INVESTMENTS AS IN THE PAST AND EXPENDITURE INCURRED IN RELATION TO EARNING OF SUCH INCOME WHICH IS LIABLE FOR DISALLOWANCE UNDER SECTI ON 14A. THE WORKING GIVEN BY THE ASSESSEE IN WHICH IT HAS STATED THAT INTEREST H AS BEEN ALLOCATED TO ITS GROUP COMPANIES IS ONLY SELF SERVING AND PREPARED ACCORDI NGLY SO AS TO AVOID THE INTEREST PAID BEING HIT BY RULE 8D. I AM IN AGREEME NT WITH THE DECISION TAKEN BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS FAILED TO SUBSTANTIATE THAT IT HAS BEGAN TO ALLOCATE THE INTEREST BY FAILING TO SUBMIT EVIDENCES IN THIS REGARD AND ACCORDINGLY, DISALLOWANCE U/S 14A READ WITH RULE 8D AND WORKED OUT CORRECTLY AN AMOUNT OF RS.2,46,85,2571- FOR DISALLOWANCE AND ACC ORDINGLY THE SAME IS CONFIRMED, DISMISSING ALL THE GROUNDS OF APPEAL ON THIS ISSUE. 4. BEFORE US LD. A.R. SUBMITTED THAT THE ASSESSEE HAS MADE INVESTMENTS ONLY IN ITS SISTER CONCERNS AND THEREFO RE, PROVISIONS OF SECTION 14A WOULD NOT BE ATTRACTED. RELIANCE WAS PL ACED IN THE DECISION OF CHENNAI BENCH OF THE TRIBUNAL IN ITA NO .156/MDS/2013 VIDE ORDER DATED 20.08.2013 & M/S AGILE ELECTRIC SU B ASSEMBLY PVT. LTD., IN I.T.A.NO.1272/MDS./2015 DATED 27.11.2015. ON THE OTHER HAND, LD. D.R ARGUED IN SUPPORT OF THE ORDERS OF TH E REVENUE. ITA NO.115 /MDS/2013 8 5. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY P ERUSED THE MATERIALS AVAILABLE ON RECORD. ON THE IDENTICAL IS SUE AS POINTED OUT BY THE LD. A.R. THE CHENNAI BENCH OF THE TRIBUNAL I N ITA NO.156/MDS/2013 VIDE ORDER DATED 20/08/13 FOR THE A SSESSMENT YEAR 2009-10 HAS REMITTED BACK THE MATTER TO THE LD. ASS ESSING OFFICER TO DECIDE THE MATTER ONCE AGAIN AFRESH BASED ON THE FI NDINGS WHETHER THE ASSESSEE HAD ACTUALLY INCURRED ANY EXPENDITURE IN EARNING THE DIVIDEND INCOME. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED HEREIN BELOW FOR REFERENCE:- 6. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED TH E CASE FILE AS WELL AS THE JUDGMENT QUOTED BY THE ASSESSEE. FACTS OF T HE CASE STANDS NARRATED HEREINABOVE. THE DISPUTE BETWEEN THE PARTIES IS ON LY QUA AN AMOUNT OF ` 2,58,66,515/- DISALLOWED/ADDED BY THE ASSESSING O FFICER AND CIT(A) AFTER INVOKING SEC.14A READ WITH RULE 8D(II) AND (III) OF THE RULES. IN THIS BACKDROP, IT IS TO BE SEEN FROM THE ASSESSMENT ORDER THAT BEFORE INVOKING EXIGIBILITY OF THE CHARGING SECTION ITSELF I.E. SECTION 14A, THE ASSES SING OFFICER HAS NOWHERE RECORDED SATISFACTION SPECIFICALLY REBUTTING THE A SSESSEES CONTENTION THAT IT HAD NOT INCURRED ANY EXPENDITURE WHILST EARNING THE EXE MPT INCOME IN QUESTION. IN SUCH A CASE, WE FIND THAT THE KOLKATA TRIBUNAL (SUP RA) HAS CATEGORICALLY HELD THAT BEFORE INVOKING THE SEC.14A OF THE ACT, IT IS THE D UTY OF THE ASSESSING OFFICER TO RECORD SUCH A SATISFACTION THAT THE PLEA OF THE ASS ESSEE AVERRING NO EXPENDITURE TO HAVE BEEN INCURRED IS NOT CORRECT. THE RELEVANT OBSERVATION OF THE CO-ORDINATE BENCH READ AS UNDER:- ITA NO.115 /MDS/2013 9 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. A PER USAL OF THE PROVISIONS OF SECTION 14A, MORE SPECIFICALLY SUB-SECTION (2), SHO WS THAT IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, THEN THE AO SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN REL ATION TO SUCH INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT. FOR THIS THE METHOD IS PRESCRIBED IN RULE 8D. THE PROVISION OF SECTION 14 A, SUB-SECTION (3) SPECIFIES THE PROVISION OF 14A(2) WOULD ALSO APPLY WHERE THE ASS ESSEE MAKES A CLAIM THAT THERE IS NO EXPENDITURE INCURRED. THIS IS BECAUSE IF THE ASSESSEE DOES NOT MAKE A DISALLOWANCE UNDER SECTION 14A IN ITS COMPUTATIO N OF TOTAL INCOME, WHEN FILING THE RETURN, THEN IF SUBSECTION (3) WAS NOT AVAILABL E, THE AO MIGHT NOT BE ABLE TO MAKE A DISALLOWANCE UNDER SECTION 14A. THUS, WHERE THE ASSESSEE MAKES A CLAIM THAT ONLY A PARTICULAR AMOUNT IS TO BE DISAL LOWED UNDER SECTION 14A OR WHERE THE ASSESSEE DOES NOT MAKE A DISALLOWANCE UNDER SECTION 14A, IF THE AO PROPOSES TO INVOKE THE SECTION 14A, HE IS T O RECORD A SATISFACTION ON THAT ISSUE. THIS SATISFACTION CANNOT BE A PLAIN OR A SIMPLE NOTE. IT IS TO BE DONE WITH REGARD TO ACCOUNTS OF THE ASSESSEE. IN THE PRESENT CASE, THERE IS NO SATISFACTION BY THE AO AND CONSEQUENTLY, IN VIEW OF THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF B ALARAMPUR CHINI MILLS LTD. REFERRED TO SUPRA, NO DISALLOWANCE UNDER SECTION 14 A CAN BE MADE. 7. NOW COMING TO THE MERITS OF THE ISSUE. A PERUSAL OF THE PROVISION OF SECTION 14A(1) CLEARLY SHOWS THE WORDINGS, IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. IN THE PR ESENT CASE, THIS INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T, IS THE DIVIDEND INCOME OF RS.1,32,638/-. THEREFORE, IF ANY DISALLOWANCE IS TO BE MADE IN RESPECT OF EXPENDITURE INCURRED, IT SHOULD BE IN RELATION TO T HIS DIVIDEND INCOME OF RS.1,32,638/-. IF AN ASSESSEE HAS INVESTED IN SHARE S, WHICH COULD GET DIVIDEND OR THERE IS INVESTMENT WHICH GENERATES DIVIDEND INCOME OR EXEMPT INCOME AS ALSO INVESTMENT WHICH DOES NOT GENERATE EXEMPT INCOME, I T IS ONLY SUCH INVESTMENTS IN RESPECT OF WHICH THE DIVIDEND INCOME OR EXEMPTED INCOME HAS BEEN EARNED WHICH CAN BE CONSIDERED WHEN COMPUTING THE DISALLOW ANCE UNDER SECTION 14A READ WITH RULE 8D. A PERUSAL OF THE PROVISIONS OF R ULE 8D ALSO TALKS OF SATISFACTION IN SUB-RULE (1). RULE 8D(2) HAS THREE SUB-PARTS. TH E FIRST SUB-PART I.E. (I) DEALS WITH THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THAT ISSUE IS NOT IN DISPUTE HERE AND THEREFORE, WE DO NOT GO INTO IT IN THIS CASE. IN SECOND SUB-PART I.E.(II), IT IS A COMPUTATION PROVIDED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTR IBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THIS CLEARLY MEANS THAT IF THERE IS ANY INTEREST EXPENDITURE, WHICH IS DIRECTLY RELATABLE TO ANY PARTICULAR INCOME OR RECE IPT, SUCH INTEREST EXPENDITURE IS NOT TO BE CONSIDERED UNDER RULE 8D(2)(II). IN THE A SSESSEES CASE HERE THE INTEREST HAS BEEN PAID BY THE ASSESSEE ON THE LOANS TAKEN FR OM THE BANKS FOR ITS BUSINESS PURPOSE. THERE IS NO ALLEGATION FROM THE B ANKS NOR THE AO THAT THE LOAN FUNDS HAVE BEEN DIVERTED FOR MAKING THE INVESTMENT IN SHARES OR FOR NON- ITA NO.115 /MDS/2013 10 BUSINESS PURPOSES. FURTHER RULE 8D(2)(II) CLEARLY I S WORDED IN THE NEGATIVE WITH THE WORDS NOT DIRECTLY ATTRIBUTABLE. THUS FOR BRI NGING ANY INTEREST EXPENDITURE, CLAIMED BY THE ASSESSEE, UNDER THE AMBIT OF RULE 8D (2)(II) IT WILL HAVE TO BE SHOWN BY THE AO THAT THE SAID INTEREST IS NOT DIRECTLY AT TRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. WHY WE SAY HERE THAT IT IS TO BE SHOWN BY THE AO IS ON ACCOUNT OF THE WORDS IN RULE 8D(1) BEING WHERE THE ASSESSING OFFICER, IS NOT SATIS FIED WITH. (A) .. (B) .. IN RELATION TO INCOME., HE SHALL DET ERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE (2). IN THE ASSESSEES CASE, ADMITTEDLY, THE ASSESSEE HA S SUBSTANTIAL CAPITAL. THE INCREASE IN THE CAPITAL ITSELF IS TO AN EXTENT OF RS.4 CRORE S AND IN RESPECT OF RESERVES AND SURPLUS, THE INCREASE IS RS.112 CRORES. THE LOANS T AKEN DURING THE YEAR ADMITTEDLY ARE FOR THE LETTERS OF CREDIT AND THE ASSESSEE IS B OUND TO PROVIDE THE BANK STOCK ITA NO.1331 & 1423/KOL/2011 ASSESSMENT YEAR: 2008-0 9 STATEMENT AND OTHER DETAILS TO SHOW THE UTILIZATION OF THE LOANS. NO BA NK WOULD PERMIT THE LOAN GIVEN FOR ONE PURPOSE TO BE USED FOR MAKING ANY INVESTMEN T IN SHARES. THE LD. CIT(A), IT IS NOTICED THAT AFTER CONSIDERING THESE FACTS TH AT THE ASSESSEE HAD NOT USED ANY OF ITS BORROWINGS FOR PURCHASING THE SHARES, HAS DE LETED THE DISALLOWANCE. ON THIS GROUND ITSELF, THE DELETION AS MADE BY THE LD. CIT( A) IS LIABLE TO BE CONFIRMED AND WE DO SO. 7.1 IN ANY CASE, THE WORKING OF THE DISALLOWANCE UN DER SUB-PART (II) OF SUBCLAUSE (2) OF RULE 8D AS MADE BY THE AO ALSO SUFFERS FROM A SUBSTANTIAL ERROR IN SO FAR AS IN THE SAID RULE IN REGARD TO THE NUMERATOR B, THE WORDS USED ARE THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT FORM OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE-SHE ET AS ON THE FIRST DAY AND IN THE LAST DAY OF THE PREVIOUS YEAR. HERE THE AO HAS TAKEN INTO CONSIDERATION THE INVESTMENT OF RS.103 CRORES MADE THIS YEAR, WHICH H AS NOT EARNED ANY DIVIDEND OR EXEMPT INCOME. IT IS ONLY THE AVERAGE OF THE VAL UE OF THE INVESTMENT FROM WHICH THE INCOME HAS BEEN EARNED WHICH IS NOT FALLI NG WITHIN THE PART OF THE TOTAL INCOME THAT IS TO BE CONSIDERED. THIS IS WHY THE QU ESTION OF SATISFACTION IS PROVIDED IN SECTION 14A AND RULE 8D(1), THAT RELATE S TO THE ACCOUNTS OF THE ASSESSEE. THUS, IT IS NOT THE TOTAL INVESTMENT AT T HE BEGINNING OF THE YEAR AND AT THE END OF THE YEAR, WHICH IS TO BE CONSIDERED BUT IT IS THE AVERAGE OF THE VALUE OF INVESTMENTS ITA NO.115 /MDS/2013 11 WHICH HAS GIVEN RISE TO THE INCOME WHICH DOES NOT F ORM PART OF THE TOTAL INCOME WHICH IS TO BE CONSIDERED. A QUESTION MAY ARISE AS TO WHY THE TERM AVERAGE OF THE VALUE OF INVESTMENT IS THEN USED. THE TERM AVE RAGE OF THE VALUE OF INVESTMENT WOULD BE TO TAKE CARE OF CASES WHERE THE RE IS THE ISSUE OF DIVIDEND STRIPING. IN ANY CASE, AS WE HAVE ALREADY HELD THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE BY WAY OF INTEREST DURING THE PREVI OUS YEAR, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME, THE FINDINGS OF THE LD. CIT(A) ON THE ISSUE STAND CONFIRMED AND CONSEQUENTLY THE APPEAL FILED B Y THE REVENUE STANDS DISMISSED. 8. IN RESPECT OF PROVISIONS OF RULE 8D(2)(III), WHI CH IS THE SUBJECT-MATTER OF THE APPEAL IN THE ASSESSEES HAND, A PERUSAL OF THE SAI D PROVISION SHOWS THAT WHAT IS DISALLOWABLE UNDER RULE 8D(2)(III) IS THE AMOUNT EQ UAL TO PERCENTAGE OF THE AVERAGE VALUE OF INVESTMENT THE INCOME FROM WHICH D OES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME. THUS, UNDER SUB-CLAUSE (I II), WHAT IS DISALLOWED IS PERCENTAGE OF THE NUMERATOR B IN RULE 8D(2)(II). AG AIN THIS IS TO BE CALCULATED IN THE SAME LINE AS MENTIONED EARLIER IN RESPECT OF NU MERATOR B IN RULE 8D(2)(II) OF THE ACT. 8.1 THUS, NOT ALL INVESTMENTS BECOME THE SUBJECT-MA TTER OF CONSIDERATION WHEN COMPUTING DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D. THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D IS TO BE IN REL ATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND THIS CAN BE D ONE ONLY BY TAKING INTO CONSIDERATION THE INVESTMENT WHICH HAS GIVEN RISE T O THIS INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. UNDER THE CIRCUMSTAN CES, THE COMPUTATION OF THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D(2) (III), WHICH IS ISSUE IN THE ASSESSEES APPEAL, IS RESTORED TO THE FILE OF THE A O FOR RECOMPUTATION IN LINE WITH THE DIRECTION GIVEN ABOVE. NO DISALLOWANCE UNDER SE CTION 14A READ WITH RULE 8D(2)(I) AND (II) CAN BE MADE IN THIS CASE. ACCORDINGLY, AFTER FINDING THAT IN THE INSTANT CASE AS WELL, THE ASSESSING OFFICER AND THE CIT(A) HAVE NOWHERE APPLIED MIND A RRIVING AT SATISFACTION QUA ASSESSEES PLEA THAT IT HAD NOT INCURRED ANY EXPEND ITURE IN EARNING THE IMPUGNED DIVIDEND INCOME, WE DEEM IT FIT TO DIRECTING ASSESS ING OFFICER TO RE-DECIDE THE MATTER AFTER AFFORDING ADEQUATE OPPORTUNITY OF HEAR ING TO THE ASSESSEE. WHILST DIRECTING SO, WE ARE ALSO CONSCIOUS TO THE FACT TH AT THE CO-ORDINATE BENCH HAD DECIDED THE ISSUE ON MERITS AS WELL IN FAVOUR OF TH E ASSESSEE I.E. COMPUTATION UNDER RULE 8D OF THE RULES. HOWEVER, SINCE WE ARE REMITTING THE MATTER BACK ON LEGALITY ASPECT ITSELF, WE DO NOT CONSIDER IT APPRO PRIATE TO ADVERT TO THE COMPUTATION ASPECT OF THE CASE. ITA NO.115 /MDS/2013 12 FURTHER, ON THE IDENTICAL ISSUE VARIOUS BENCHES OF THE TRIBUNAL AND THE HONBLE BOMBAY HIGH COURT HAVE HELD AS FOLLOWS: - I) GARWARE WALL ROPES LTD., VS. ACIT REPORTED IN (2014) 65 SOT 086 (MUM.) HELD AS FOLLOWS:- WHEN ASSESSEE HAS PRIMA FACIE BROUGHT OU T CASE THAT NO EXPENDITURE HAS BEEN INCURRED FOR EARNING INCOME, W HICH DOES NOT FORM PART OF TOTAL INCOME, THEN IN ABSENCE OF ANY FINDIN G THAT EXPENDITURE HAS BEEN INCURRED FOR EARNING EXEMPT INCOME PROVISIONS 14A CANNOT BE APPLIED.. II) INTEGLOBE ENTERPRIESES LTD., VS. DCIT REPOTED IN (2014) 40 CCH 0022(DEL. TRIB.) HELD AS FOLLOWS:- NO DISALLOWANCE OF INTEREST IS REQUIRED TO BE MADE UNDER RULE 8D(I) & 8D(II) WHERE NO DIRECT OR INDIRECT INTEREST EXPEN DITURE WAS INCURRED FOR MAKING INVESTMENTS. WHERE THE ASSESSEE HAD UTILIZED INTEREST FREE FUNDS FOR MAKING FRESH INVESTMENTS AND THAT TOO INTO ITS SUBSIDIARIES, WHI CH WAS NOT FOR THE PURPOSE OF EARNING EXEMPT INCOME AND WHICH WAS FOR STRATEGIC PURPOSES ONLY, NO DISALLOWANCE OF INTEREST WAS REQU IRED TO BE MADE UNDER RULE 8D(I) & 8D(II) AND STRATEGIC INVESTMENT HAS TO BE EXCLUDED FOR PURPOSE OF ARRIVING AT DISALLOWANCE UNDER RULE 8D(III). ITA NO.115 /MDS/2013 13 III) M/S.JM FINANCIAL LTD., VS. ACIT REPORTED IN 2 014-TIOL-202- ITAT-MUM HELD AS FOLLOWS: THE DEPARTMENT HAS NOT DISPUTED THIS FACT OUT OF THE TOTAL INVESTMENT ABOUT 98% OF THE INVESTMENT ARE IN SUBSIDIARY COMPA NIES OF THE ASSESSEE AND, THEREFORE, THE PURPOSE OF INVESTMENT IS NOT FOR EARNING THE DIVIDEND INCOME BUT HAVING CONTROL AND BUSINESS PURPOSE AND CONSIDERATION. THE ASSESSEE HAS BROUGHT OUT A CASE TO SHOW THAT NO EXPENDITURE HAS BEEN INCURRED FOR MAINTAINING THE 9 8% OF THE INVESTMENT MADE IN THE SUBSIDIARY COMPANIES, THEREF ORE, IN THE ABSENCE OF ANY FINDING THAT ANY EXPENDITURE HAS BEEN INCURR ED FOR EARNING THE EXEMPT INCOME, THE DISALLOWANCE MADE BY THE ASSESSI NG OFFICER IS NOT JUSTIFIED, ACCORDINGLY THE SAME IS DELETED. (IV) CIT VS. BHARTI TELEVENTURE LTD. REPORTED IN (2 011) 331 ITR 0502. WHERE THE ASSESSEE WAS FOUND TO BE HAVING ADEQUATE NON- INTEREST BEARING FUND BY WAY OF SHARE CAPITAL AND R ESERVES AND THERE WAS NO NEXUS BETWEEN THE BORROWALS OF ASSESSEE AND THE ADVANCES GIVEN, NO DISALLOWANCE FOR INTEREST WAS CALLED FOR . (V) CIT VS. RELIANCE UTILITIES & POWER LTD., REPOR TED IN (2009) 313 ITR 0340(BOM.) HAS HELD AS FOLLOWS:- TRIBUNAL HAVING RECORDED A CLEAR FINDING THAT THE ASSESSEE POSSESSED SUFFICIENT INTEREST-FREE FUNDS OF ITS OWN WHICH WER E GENERATED IN THE COURSE OF THE RELEVANT FINANCIAL YEAR, APART FROM S UBSTANTIAL ITA NO.115 /MDS/2013 14 SHAREHOLDERS FUND, PRESUMPTION STANDS ESTABLISHED T HAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE BY THE ASSESSEE OUT OF INTEREST FREE FUNDS AND THEREFORE NO PART OF INTEREST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTMENTS WERE MADE OUT OF INTERES T BEARING FUNDS. (VI) EIH ASSOCIATED HOTELS LTD VS. DCIT REPORTED I N 2013-TIOL- 796-ITAT-MAD . THE INVESTMENTS MADE BY THE ASSESSEE IN THE SU BSIDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNING CAPITA L GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAVE BEEN MADE BY THE ASSE SSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOTEL INDUSTRY. THE ASSESSEE IS NOT INTO THE BUSINESS OF INVESTMENT AND THE INVESTM ENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXPEDIENCY. ANY DIVIDEND EARNED BY THE ASSESSEE FROM INVESTMENT IN SUBSIDIARY COMPA NY IS PURELY INCIDENTAL. THEREFORE THE INVESTMENT MADE BY THE AS SESSEE IN ITS SUBSIDIARY IS NOT TO BE RECKONED FOR DISALLOWANCE U /S.14A R.W.R.8D. THE ASSESSING OFFICER IS DIRECTED TO RE-COMPUTE THE AVE RAGE VALUE OF INVESTMENT UNDER THE PROVISIONS OF RULE 8D AFTER DE LETING INVESTMENTS MADE BY THE ASSESSEE IN SUBSIDIARY COMPANY. TAKING NOTE OF THE ABOVE DECISIONS AND THE DECISI ON OF THE CHENNAI BENCH OF THE TRIBUNAL IN ITA NO.156/MDS/13 CITED SUPRA, WE HEREBY REMIT THE MATTER BACK TO THE FILE OF LD. ASS ESSING OFFICER TO EXAMINE THE ISSUE INVOLVED IN THIS CASE AFRESH AND PASS APPROPRIATE ORDER AS PER LAW AND MERITS AND IN THE LIGHT OF THE DECISIONS CITED ITA NO.115 /MDS/2013 15 HEREIN ABOVE. WHILE DOING SO, WE ALSO DIRECT THE LD . ASSESSING OFFICER TO CONSIDER THE DECISION OF THE TRIBUNAL IN THE CASE M/S AGILE ELECTRIC SUB ASSEMBLY PVT. LTD. CITED SUPRA WHEREIN IT WAS HELD AS FOLLOWS:- 7.2 IN REGARD TO APPLICABILITY OF SECTION 14A OF THE ACT READ WITH RULE 8D ALSO; THE ABOVE VIEW WILL BE APPLICABLE. M OREOVER IN THE CASE EIH ASSOCIATED HOTELS LTD V. DCIT REPORTED IN 2013 (9) TMI 604 IN ITA NO.1503, 1624/MDS/2012 DATED 17 TH JULY, 2013, IT HAS BEEN HELD BY THE CHENNAI BENCH OF THE TRIBUNAL AS FOLLOWS:- DISALLOWANCE U/S. 14A RW RULE 8D CIT UPHELD DISAL LOWANCE HELD THAT INVESTMENTS MADE BY THE ASSESSEE IN THE SUBS IDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNING CAPITA L GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAVE BEEN MADE BY THE ASS ESSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOTEL INDUSTRY. A PERUSAL OF THE ORDER OF THE CIT(APPEALS) SHOWS THAT OUT OF TOTAL I NVESTMENT OF RS.64,18,19,775/-, RS.63,31,25,715/- IS INVESTED IN WHOLLY OWNED SUBSIDIARY. THIS FACT SUPPORTS THE CASE OF THE ASS ESSEE THAT THE ASSESSEE IS NOT INTO THE BUSINESS OF INVESTMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXP EDIENCY. ANY DIVIDEND EARNED BY THE ASSESSEE FROM INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENTAL. THEREFORE, THE INVES TMENTS MADE BY THE ASSESSEE IN ITS SUBSIDIARY ARE NOT TO BE RECKONED F OR DISALLOWANCE U/S. 14A R.W.R. 8D. THE ASSESSING OFFICER IS DIRECTED T O RE-COMPUTE THE AVERAGE VALUE OF INVESTMENT UNDER THE PROVISIONS OF RULE 8D AFTER DELETING INVESTMENTS MADE BY THE ASSESSEE IN SUBSID IARY COMPANY DECIDED IN FAVOUR OF ASSESSEE. ITA NO.115 /MDS/2013 16 FOR THE ABOVE SAID REASONS, WE HEREBY HOLD THAT IN THE CASE OF THE ASSESSEE THE PROVISIONS OF SECTION 14A READ WITH RULE 8D WILL NO T BE APPLICABLE IN REGARD TO INVESTMENTS MADE FOR ACQUIRING THE SHARES OF THE AS SESSEES SISTER CONCERNS. ACCORDINGLY WE RESTRAIN OURSELVES FROM INTERFERING WITH THE ORDER OF THE LD.CIT(A) ON THIS REGARD. IT IS ORDERED ACCORDINGLY. 6. IN THE RESULT, THE APPEAL OF ASSESSEE IS ALLOW ED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THE 06 TH JANUARY, 2016 AT CHENNAI. SD/- SD/- ( . . . ) ( N.R.S.GANESAN ) ( . '#$ %' ) (A.MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 6 TH JANUARY, 2016. K S SUNDARAM. & (,/0 1 0#, /COPY TO: 1. $% /APPELLANT 2. ()$% /RESPONDENT 3. * 2, ( ) /CIT(A) 4. * 2, /CIT 5. 05 (,6! /DR 6. ' 7+ /GF