Sundaram Clayton Ltd., CHENNAI V. DCIT, CHENNAI

ITA 1163/CHNY/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9649 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 10 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2016
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 02-02-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 27-05-2013
• Court: TRIBUNAL
• Department Lawyers: R MOHAN
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Earning of tax free income; Speculation loss
• Section: 14A; 43(5); 28; 15

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI , ! ' ! # . $% , & '( BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ ITA NO. 1163/MDS/2013 / ASSESSMENT YEAR : 2009-2010 SUNDARAM CLAYTON LTD., NO.29, HADDOWS ROAD, CHENNAI 600 006. PAN AAACS4920J APPELLANT) V. THE ADDL. COMMISSIONER OF INCOME-TAX, COMPANY RANGE-VI, CHENNAI 600 034. RESPONDENT) ./ ITA NO. 1431/MDS/2013 / ASSESSMENT YEAR : 2009-2010 THE ASST.. COMMISSIONER OF INCOME-TAX, COMPANY RANGE-VI(4), CHENNAI 600 034. APPELLANT) V. SUNDARAM CLAYTON LTD., NO.29, HADDOWS ROAD, CHENNAI 600 006. RESPONDENT) / APPELLANT BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE / RESPONDENT BY : SHRI R. MOHAN, CIT ! / DATE OF HEARING : 02.02.2016 '# ! / DATE OF PRONOUNCEMENT: 13.04.2016 - - ITA 1163 & 1431/13 2 ) / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE CROSS APPEALS BY THE ASSESSEE AND BY THE REVENUE ARE DIRECTED AGAINST THE ORDER OF THE COMMI SSIONER OF INCOME-TAX(APPEALS) DATED 28.3.2013 FOR THE ASSESS MENT YEAR 2009-10. 2. THE FIRST GROUND RAISED BY THE ASSESSEE IN ITS A PPEAL IS AS FOLLOWS : 1. THE COMMISSIONER OF INCOME-TAX(APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF THE CLAIM MADE U/S.35(2AB) OF THE INCOME-TAX ACT ON THE EXPENDITUR E INCURRED ON ITS APPROVED RESEARCH AND DEVELOPMENT FACILITIES. THE COMMISSIONER OF INCOME-TAX(APPEALS) OUGHT TO HAVE APPRECIATED THAT THE APPELLANT HAD COMPLIED WI TH ALL THE REQUIREMENTS AS PER THE LAW AND THE NON- ISSUANCE OF THE CERTIFICATE BY DSIR IS BEYOND THE CONTROL OF THE APPELLANT AND HENCE OUGHT TO HAVE CONFIRMED THE DISALLOWANCE. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSING OFF ICER DENIED THE WEIGHTED DEDUCTION ON THE GROUND THAT TH E EXPENDITURE ELIGIBLE FOR WEIGHTED DEDUCTION HAS NOT BEEN QUANTIFIED BY THE DSIR AND THE RELEVANT REQUISITE C ERTIFICATE FOR GRANT OF WEIGHTED DEDUCTION BY DSIR HAS NOT BEEN PR ODUCED. - - ITA 1163 & 1431/13 3 4. THE LD. AR SUBMITTED THAT THE ASSESSEE IS IN A P OSITION TO PRODUCE THE CERTIFICATE ISSUED BY THE COMPETENT AUT HORITY AND THE ISSUE MAY BE REMITTED BACK TO THE ASSESSING OFFICER FOR FRESH CONSIDERATION. CONSIDERING THE ASSESSEES PLEA AND THE ASSESSEE HAS ALREADY BROUGHT ON RECORD THE CERTIFIC ATE ISSUED U/S.35(2AB) OF THE ACT BY DSIR ON 13.1.2014, WHICH IS AFTER PASSING THE ORDER BY THE FIRST APPELLATE AUTHORITY, IT IS APPROPRIATE TO REMIT THE ISSUE BACK TO THE A.O. FOR FRESH CONSI DERATION. ACCORDINGLY, WE REMIT THIS ISSUE TO THE FILE OF THE A.O. FOR FRESH CONSIDERATION AND THIS GROUND OF APPEAL OF THE ASSE SSEE IS ALLOWED FOR STATISTICAL PURPOSES. 5. THE NEXT GROUND IN BOTH THE ASSESSEES AS WELL A S REVENUES APPEAL IS WITH REGARD TO DISALLOWANCE U/S .14A OF THE ACT. 6. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE HAD RECEIVED DIVIDEND INCOME OF ` 7,72,50,346/- AND THE INTEREST FROM UTI OF ` 1,78,073/- (AGGREGATING TO ` 7,74,28,419/-), WHICH ARE EXEMPTED FROM TAXATION. THE ASSESSEE IN ITS RETURN OF INCOME HAD DISALLOWED A SUM OF ` 15,48,568/- REPRESENTING 2% ON THE EXEMPTED INCOME AS EXPENDITURE INCURRED IN EARNING THE SAME. - - ITA 1163 & 1431/13 4 HOWEVER, THE AO REJECTED THE CLAIM OF THE ASSESSEE AND COMPUTED DISALLOWANCE APPLYING RULE 8 D OF THE I.T. RULES. THEREFORE, ARRIVED AT INDIRECT INTEREST EXPENDITURE TO BE ALLOCATED ON THE INVESTMENT ON THE BASIS OF RULE 8D TO DETERM INE A SUM OF ` 3,18,89,340/-. THE AO DETERMINED THE ADMINISTRATIV E EXPENDITURE AT 0.5% ON THE INVESTMENT AT ` 34,17,470/- AND THUS, THE TOTAL DISALLOWANCE U/S.14A WAS ARRIVED AT ` 3,53,06,810/-. AGGRIEVED BY THIS, THE ASSESSEE WENT IN APPEAL BEFO RE THE COMMISSIONER OF INCOME-TAX(APPEALS). 7. ON APPEAL, THE COMMISSIONER OF INCOME-TAX(APPEAL S) OBSERVED THAT THE ASSESSEE CLEARLY DEMONSTRATED THA T : (A) INVESTMENTS WERE MADE IN THE EARLIER YEARS; (B) IN THE RESPECTIVE YEARS WHEN THE INVESTMENTS WE RE MADE THE ASSESSEE HAD SUFFICIENT PROFITS TO MAKE THE INVESTM ENTS; AND (C) IN ALL THOSE YEARS THE BORROWED FUNDS WERE UTIL ISED FOR THE PURPOSE OF THE BUSINESS AND HENCE NO PART OF THE BO RROWINGS WERE USED FOR MAKING INVESTMENTS. THE COMMISSIONER OF INCOME-TAX(APPEALS), FURTHER ST ATED THAT NO PART OF THE BORROWINGS CAN BE SAID TO HAVE BEEN UTILIZED DIRECTLY OR INDIRECTLY FOR MAKING INVESTMENTS WHOSE INCOME IS EXEMPT FROM TAX. HENCE, THE COMMISSIONER OF INCOM E- - - ITA 1163 & 1431/13 5 TAX(APPEALS) OBSERVED THAT THERE CAN BE NO DISALLOW ANCE INSOFAR AS INTEREST OF BORROWALS IS CONCERNED U/S.14A FOR T HE PURPOSE OF MAKING TAX FREE INVESTMENT AND DIRECTED THE AO TO D ELETE THE INTEREST AMOUNT OF ` 3,18,89,340/- OUT OF THE TOTAL DISALLOWANCE AFTER VERIFICATION OF THE FACTS. 7.1 REGARDING ADMINISTRATIVE EXPENDITURE, THE COMM ISSIONER OF INCOME-TAX(APPEALS) OBSERVED THAT THE ASSESSEE H AD RECEIVED EXEMPT INCOME OF ` 7,72,50,346/- AS EXEMPT U/S.10(34) ON CONSIDERABLE INVESTMENTS OF ` 69,39,94,000/-. AS AGAINST THE SAME, THE ASSESSEE HAS DISALLOWED EXPENDITURE ATTRI BUTABLE TO THE EARNING OF EXEMPT INCOME @ 2% OF THE EXEMPT INC OME. FURTHER, THE COMMISSIONER OF INCOME-TAX(APPEALS) OB SERVED THAT THE ASSESSEE HAS NOT GIVEN ANY COGENT BASIS OR REASONS FOR NOT CONSIDERING THE AMOUNT TO BE DISALLOWED AS PER THE PROVISIONS OF RULE 8D R.W.S.14A OF THE ACT, WHEREAS , THE AO HAS WORKED OUT THE DISALLOWANCE BASED ON AN FORMULA MAN DATED BY THE ACT THAT THE LEGISLATION, IN ITS WISDOM, HAS EV OLVED TO AVOID HAIR SPLITTING AND TO PUT REST TO THIS ISSUE HAS PROVIDE FOR DISALLOWANCE @ 0.5% OF THE AVERAGE OF THE VALUE OF THE INVESTMENT, WHICH ACCORDING TO THE COMMISSIONER OF INCOME- - - ITA 1163 & 1431/13 6 TAX(APPEALS) SQUARELY APPLIES TO THE FACTS OF THE C ASE OF THE ASSESSEE. 7.2 IN VIEW OF THE FACTS OF THE CASE, THE COMMISSIO NER OF INCOME-TAX(APPEALS) OBSERVED THAT THERE ARE CONSIDE RABLE INVESTMENTS OF ` 69,39,94,000/- AT THE CLOSE OF THE YEAR AND THE DIVIDEND EARNED OF ` 7,72,50,346/- AND THE AO HAS CORRECTLY APPLIED THE PROVISIONS OF SEC.14A R.W. RULE 8D AND WORKED OUT THE DISALLOWANCE @ 0.5% OF THE AVERAGE VALUE OF INV ESTMENTS AS MANDATED BY THE ACT, AS AGAINST DISALLOWANCE @ 2% O F THE EXEMPT INCOME AS EXPENSE CONSIDERED BY THE ASSESSEE AND BEING NO REASONS FOR THAT. HENCE, THE DISALLOWANCE OF ` 34,17,470/- WAS UPHELD BY THE COMMISSIONER OF INCOM E- TAX(APPEALS). AGAINST THIS, THE ASSESSEE AND THE REVENUE, BOTH ARE IN APPEAL BEFORE US. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. SIMILAR ISSUE CAME FOR CONSIDERATION B EFORE THIS TRIBUNAL IN ITA NO.2112/MDS/2015 DATED 10.3.2016 IN THE CASE OF M/S. SHRIRAM INVESTMENTS, WHEREIN IT WAS OBSERVE D AS UNDER : 6. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIAL S ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. T HE ASSESSEE BORROWED MONEY FROM ITS GROUP COMPANIES AND FIRMS A ND GIVEN LOANS TO ITS OWN GROUP COMPANIES AND FIRMS AND THE INVEST MENTS ALSO IN ITS - - ITA 1163 & 1431/13 7 GROUP COMPANIES ONLY. IN THE BALANCE SHEET, THE FIR M SHOWN .69,39,16,000/- AS SHARE APPLICATION MONEY. TILL 31 .03.2010 NO SHARES WERE ALLOTTED TO THE FIRM. IN THE PROFIT AND LOSS ACCOUNT, THE FIRM HAS SHOWN .95,41,875/- AS INTEREST PAID TO OTHERS. SIMILAR PA TTERN OF INVESTMENT IN SHARE APPLICATION MONEY AND INCURRED HUGE EXPENDITURE ON INTEREST, BUT NO SHARES WERE ALLOTTED AND THE FI RM HAD NOT TAKEN ANY EFFORT TO GET THE SHARES OR TO TAKE BACK THE MONEY GIVEN AS SHARE APPLICATION MONEY. THEREFORE, THE ASSESSING OFFICER WAS OF THE OPINION THAT IT IS A CLEAR DIVERSION OF INTEREST BE ARING FUNDS TO OTHER GROUP COMPANIES. THE ASSESSEE WOULD BE ENTITLED TO CLAIM DEDUCTION OF INTEREST UNDER SECTION 36(1)(III) OF THE ACT ON THE BORROWED FUNDS UTILIZED FOR THE ACQUISITION OF SHARES ONLY IF SHAR ES WERE HELD AS STOCK- IN-TRADE AND THAT WOULD ARISE ONLY IF THE ASSESSEE WAS ENGAGED IN TRADING IN SHARES. SO FAR AS THE ACQUISITION OF SHA RES WAS IN THE FORM OF INVESTMENT AND THE ONLY BENEFIT THE ASSESSEE DERIVE D WAS THE DIVIDEND INCOME WHICH WAS NOT ASSESSABLE UNDER THE ACT, WE ARE OF THE OPINION THAT THE DISALLOWANCE UNDER SECTION 14A OF THE ACT WAS SQUARELY ATTRACTED AND THE ASSESSING OFFICER HAS RI GHTLY DISALLOWED THE CLAIM. OUR VIEWS ARE FORTIFIED BY THE DECISION IN T HE CASE OF PRADEEP KAR V. ACIT 319 ITR 416 [KAR], WHEREIN THE HONBLE KARNATAKA HIGH COURT HAS OBSERVED AND HELD AS UNDER: THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF INTERES T ON THE AMOUNTS BORROWED BY HIM FOR PURCHASE OF SHARES IS D ISALLOWED BY THE ASSESSING OFFICER. IN THE APPEAL FILED BY HI M AGAINST THE ASSESSMENT ORDER, THE FIRST APPELLATE AUTHORITY REV ERSED THE ORDER OF THE ASSESSING AUTHORITY BY APPLYING THE DECISION OF THE SUPREME COURT REPORTED IN CIT VS. RAJENDRA PRASAD M OODY [1978] 115 ITR 519. THE REVENUE TOOK UP THE MATTER IN SECOND APPEAL BEFORE THE INCOME-TAX APPELLATE TRIBUNAL, HE REINAFTER CALLED AS 'THE TRIBUNAL' IN SHORT. THE TRIBUNAL REV ERSED THE DECISION OF THE FIRST APPELLATE AUTHORITY AND RESTO RED THE ORDER OF THE ASSESSING AUTHORITY. BEING AGGRIEVED BY THE SAM E, THE ASSESSEE IS BEFORE US BY FILING THIS APPEAL FRAMING SUBSTANTIAL QUESTIONS OF LAW AND URGED THE GROUNDS IN SUPPORT O F THE SAME. SMT. ANURADHA, LEARNED COUNSEL FOR THE APPELLANT RE LIED UPON THE DECISION REPORTED IN CIT VS. RAJENDRA PRASAD MOODY [1978] 115 ITR 519 WHEREIN, IT IS HELD THAT INTEREST PAID ON M ONEY BORROWED FOR INVESTMENT IN SHARES IS DEDUCTIBLE UNDER SECTIO N 57(III) OF THE INCOME-TAX ACT, WHICH REQUIRES THAT THE EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR MAKING O R EARNING INCOME. SHE ALSO RELIED UPON ANOTHER DECISION IN TH E CASE OF CIT VS. SMT. SUSHILA DEVI KHADARIA [2009] 319 ITR 413 ( BOM); [2009] TIOL 171 HC (MUM-IT) AND SUBMITS THAT THE OR DERS PASSED BY THE ASSESSING AUTHORITY AND THE TRIBUNAL ARE - - ITA 1163 & 1431/13 8 ERRONEOUS AND CONTRARY TO THE AFOREMENTIONED DECISI ONS. THEREFORE, SHE SUBMITS THAT SUBSTANTIAL QUESTIONS ( I) AND (II) FRAMED IN THE APPEAL MEMORANDUM ARISE FOR CONSIDERA TION OF THIS COURT AND REQUESTED TO SET ASIDE THE ORDER PASSED B Y THE TRIBUNAL. THE SUBSTANTIAL QUESTIONS OF LAW FRAMED I N THE APPEAL ARE EXTRACTED AS HEREUNDER. '(I) WHETHER OR NOT THE TRIBUNAL WAS RIGHT IN NOT ALLOWING THE INTEREST INCURRED BY THE ASSESSEE AS EXPENDITUR E IN COMPUTING INCOME OF THE ASSESSEE? (II) WHETHER OR NOT THE TRIBUNAL WAS RIGHT IN REVE RSING THE FINDINGS OF THE COMMISSIONER OF INCOME-TAX (APPEALS ), WHICH WAS BASED ON A SUPREME COURT'S DECISION BY RELYING ON THE DECISION OF OTHER TRIBUNALS? (III) WHETHER OR NOT THE TRIBUNAL WAS JUSTIFIED IN NOT AFFORDING AN OPPORTUNITY OF HEARING TO THE ASSESSEE BEFORE DECIDING THE ISSUE ON HAND BY PLACING RELIANCE ON J UDGMENTS, WHICH WERE NOT CITED BY EITHER SIDE? (IV) WHETHER OR NOT THE TRIBUNAL WAS RIGHT IN RELY ING ON THE DECISIONS INAPPLICABLE TO THE FACTS ON HAND BY DIST INGUISHING THE DECISION OF THE HON'BLE SUPREME COURT, WHICH IS SQU ARELY APPLICABLE?' WITH REFERENCE TO THE CONTENTIONS URGED, WE HAVE PE RUSED THE ORDERS PASSED BY THE ASSESSING AUTHORITY, THE FIRST APPELLATE AUTHORITY AND THE TRIBUNAL WITH A VIEW TO FIND OUT AS TO WHETHER THE SUBSTANTIAL QUESTIONS OF LAW FRAMED IN THIS APP EAL WOULD ARISE FOR CONSIDERATION OF THIS COURT. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD BORROWED LOANS AND INVESTED THE SAME I N SHARES. DEDUCTION IS CLAIMED BY HIM OF THE INTEREST AMOUNT PAID ON THE BORROWED LOANS. THE AMOUNTS BORROWED BY THE APPELLA NT WERE INVESTED IN SHARES AND DIVIDEND IS EARNED. WHEN DED UCTION FOR THE INTEREST PAID IS CLAIMED, THE DIVIDEND EARNED C ANNOT BE EXCLUDED FROM INCOME. COMPUTATION OF INCOME HAS TO BE MADE TAKING THE AMOUNT OF DIVIDEND INCOME EARNED BY THE APPELLANT. THE ASSESSING AUTHORITY CONSIDERED THE DECISION IN RAJENDRA PRASAD MOODY'S CASE [1978] 115 ITR 519 (SC) RELIED UPON BY THE LEARNED COUNSEL AND HELD THAT IT IS NOT APPLICA BLE TO THE FACT SITUATION. THE REASONS ASSIGNED FOR SUCH A CONCLUSI ON IN THE ASSESSMENT ORDER ARE EXTRACTED HEREUNDER: - - ITA 1163 & 1431/13 9 'THE DECISION IS WITH REFERENCE TO DEDUCTION ALLOWA BLE UNDER SECTION 57(III) OF THE INCOME-TAX ACT. THE DE CISION RELATES TO AN ASSESSMENT YEAR WHERE DIVIDEND INCOME WAS TAXABLE IN THE HANDS OF THE ASSESSEE. WITH THE INTR ODUCTION OF SECTION 10(33) OF THE INCOME-TAX ACT FROM THE ASSESSMENT YEAR 1998-99 THE POSITION OF LAW IN REGA RD TO TAXABILITY OF DIVIDENDS HAS BEEN CHANGED SINCE SUCH INCOME BECOMES A PART OF INCOME WHICH DO NOT FORM A PART OF TOTAL INCOME OF THE ASSESSEE. THE PROVISIONS OF SECTION 14A INTRODUCED BY THE FINANCE ACT, 2001, WITH EFFEC T FROM APRIL 1, 1962, RETROSPECTIVELY BARS ALLOWING ANY EX PENDITURE IN RESPECT OF INCOME WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME. CONSIDERING THIS CHANGE IN THE POSITION OF LAW THE DECISION OF THE SUPREME COURT RELIED UPON BY THE AS SESSEE DOES NOT APPLY TO THE ASSESSEE'S CASE.' THEREFORE, THE DIVIDEND INCOME IS EXEMPTED FROM THE TAX LIABILITY UNDER SECTION 10(33) OF THE ACT. UNDER SECTION 14A OF THE ACT, EXPENDITURE RELATING TO EXEMPTED INCOME IS NOT ALLO WABLE. THE ASSESSING AUTHORITY HAS CONSIDERED THE ABOVE RELEVA NT FACTOR AND DISALLOWED THE CLAIM OF THE ASSESSEE. THE FIRST APPELLATE AUTHORITY REVERSED THE ORDER OF THE ASSESSING AUTHORITY BY APPLYING THE DECISION IN RAJENDRA PRAS AD MOODY'S CASE [1978] 115 ITR 519 (SC), REFERRED TO SUPRA, WH ICH WAS RENDERED PRIOR TO INTRODUCTION OF SECTION 14A OF TH E ACT AND WHICH HAS NO APPLICATION TO THE FACT SITUATION. THE TRIBUNAL HAS RIGHTLY SET ASIDE THE ORDER OF THE FIRST APPELLATE AUTHORITY. IT CANNOT BE DISPUTED THAT DIVIDEND INCOME IS EXEMPTED UNDER SECTION 10(33) OF THE ACT FROM THE TAX LIABILITY AN D THE SAME CANNOT BE COMPUTED FOR INCOME UNDER THE HEAD 'OTHER SOURCES'. EXEMPTED INCOME IS NOT ALLOWABLE FOR DEDUCTION IN V IEW OF SECTION 14A OF THE ACT. IN VIEW OF THESE TWO PROVIS IONS, THE CLAIM OF THE ASSESSEE IS WHOLLY UNTENABLE AND THE DECISIO NS RELIED UPON BY THE LEARNED COUNSEL ON BEHALF OF THE APPELL ANT ARE NOT APPLICABLE TO THE FACT SITUATION. WE ARE IN AGREEMENT WITH THE ORDERS PASSED BY THE A SSESSING AUTHORITY AND THE TRIBUNAL AND DIFFER FROM THE VIEW TAKEN BY THE FIRST APPELLATE AUTHORITY. FOR THE REASONS STATED S UPRA, INTERFERENCE WITH THE IMPUGNED ORDER OF THE TRIBUNA L IS NOT WARRANTED IN THIS CASE. NO SUBSTANTIAL QUESTIONS OF LAW MUCH LESS THE QUESTIONS OF LAW FRAMED BY THE APPELLANT W ILL ARISE FOR CONSIDERATION OF THIS COURT. THE APPEAL IS DEVOID O F MERIT AND LIABLE TO BE DISMISSED. - - ITA 1163 & 1431/13 10 ACCORDINGLY, THE APPEAL IS DISMISSED. 7. SIMILARLY, IN THE CASE OF CIT V. SMT. LEENA RAM ACHANDRAN 339 ITR 296, THE HONBLE KERALA HIGH COURT HAS HELD AS UNDE R: DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMEN T YEAR 2001-02, THE ASSESSEE PAID INTEREST AT 24 PER CENT. PER ANNUM ON FUNDS BORROWED FOR PURCHASE OF SHARES IN A COMPA NY. HER CLAIM WAS THAT THE ACQUISITION OF SHARES WITH THE B ORROWED FUNDS WAS FOR THE PURPOSE OF CONTROLLING THE COMPANY AND SINCE THE BORROWED FUNDS WERE UTILISED FOR THE ACQUISITION OF SHARES OF THE COMPANY UNDER THE CONTROL OF THE ASSESSEE, THE UTIL ISATION OF THE BORROWED FUNDS WAS FOR BUSINESS PURPOSE ENTITLING T HE ASSESSEE TO DEDUCTION OF INTEREST UNDER SECTION 36(1)(III) O F THE INCOME-TAX ACT, 1961. THE ASSESSING OFFICER HELD THAT THE ASSE SSEE MADE INVESTMENTS BY UTILISING THE BORROWED FUNDS ILL THE FORM OF ACQUISITION OF SHARES IN THE COMPANY AND THE ONLY B ENEFIT THE ASSESSEE GOT WAS DIVIDEND INCOME OF RS. 3 LAKHS. SI NCE SECTION 14A OF THE ACT BARS ANY DEDUCTION PERTAINING TO ANY EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING ANY INCOME WHI CH DID NOT FORM PART OF THE TOTAL INCOME, THE ASSESSING OFFICE R DISALLOWED THE CLAIM TO DEDUCTION OF INTEREST. THE COMMISSIONE R (APPEALS) CONFIRMED THE ASSESSMENT. THE TRIBUNAL ALLOWED THE CLAIM BUT MADE A DISALLOWANCE OF RS. 2 LAKHS BEING THE INTERE ST STATED TO BE ATTRIBUTABLE TO THE DIVIDEND INCOME OF RS. 3 LAK HS EARNED BY THE ASSESSEE FROM THE LEASING COMPANY DURING THE PR EVIOUS YEAR. ON APPEAL: HELD, ALLOWING THE APPEAL, THAT ANY EXPENDITURE INC URRED FOR EARNING ANY INCOME WHICH WAS NOT TAXABLE UNDER THE ACT WAS NOT AN ALLOWABLE EXPENDITURE. DIVIDEND INCOME WAS E XEMPT UNDER SECTION 10(33) OF THE ACT AND THE DIVIDEND EA RNED BY THE ASSESSEE ON THE SHARES ACQUIRED BY HER WITH THE BOR ROWED FUNDS DID NOT CONSTITUTE PART OF THE TOTAL INCOME IN THE HANDS OF THE ASSESSEE. THE REASONING GIVEN BY THE TRIBUNAL FOR D ISALLOWANCE OF RS. 2 LAKHS, I.E., BY APPLYING SECTION 14A, SQUA RELY APPLIED TO THE INTEREST PAID ON THE BORROWED FUNDS BECAUSE IT WAS ON RECORD THAT THE ENTIRE FUNDS BORROWED WERE UTILISED FOR THE ACQUISITION OF SHARES BY THE ASSESSEE IN THE COMPAN Y. THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION OF INTEREST UNDER SECTION 36(1)(III) OF THE ACT ON THE BORROWED FUNDS UTILISE D FOR THE ACQUISITION OF SHARES ONLY IF SHARES WERE HELD AS S TOCK-IN-TRADE AND THAT WOULD ARISE ONLY IF THE ASSESSEE WAS ENGAG ED IN TRADING IN SHARES. SO FAR AS THE ACQUISITION OF SHARES WAS IN THE FORM OF INVESTMENT AND THE ONLY BENEFIT THE ASSESSEE DERIVE D WAS THE DIVIDEND INCOME WHICH WAS NOT ASSESSABLE UNDER THE ACT, THE - - ITA 1163 & 1431/13 11 DISALLOWANCE UNDER SECTION 14A WAS SQUARELY ATTRACT ED AND THE ASSESSING OFFICER RIGHTLY DISALLOWED THE CLAIM. 8. FURTHER, IN THE CASE OF LAKSHMI RING TRAVELLERS V. ACIT IN I.T.A. NO. 2083/MDS/2011 VIDE ORDER DATED 02.03.2012 FOR THE A SSESSMENT YEAR 2008-09, THE COORDINATE BENCH OF THE TRIBUNAL HAS H ELD AS UNDER: 6. WE CONSIDERED THE ARGUMENTS OF BOTH THE SIDES IN DETAIL. SEC.14A(1) DECLARES THE LAW THAT THE EXPEND ITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT SHALL NOT BE ALLOWED AS A DEDUCTION IN COMPUTING THE TAXABLE INCOME OF THE AS SESSEE. SEC.14A(2) PROVIDES FOR DETERMINING THE QUANTUM OF SUCH EXPENDITURE WHICH SHALL NOT BE ALLOWED AS A DEDUCTI ON. THAT IS THE MACHINERY PROVISION AS FAR AS SEC.14A IS CONCER NED. IN THAT PROVISION, IT HAS BEEN PROVIDED THAT IF THE ASSESSI NG OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE COMPUTATIONS MADE BY AN ASSESSEE, HE SHALL COMPUTE THE QUANTUM IN ACCORDANC E WITH THE METHOD THAT MAY BE PRESCRIBED. FOR THIS MATTER, RUL E 8D HAS ALREADY BEEN PRESCRIBED. SUB-SEC.(3) FURTHER PROVID ES THAT EVEN IN A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDIT URE WAS INCURRED, THE ASSESSING AUTHORITY HAS TO PRESUME TH E INCURRING OF SUCH EXPENDITURE AS PROVIDED UNDER SUB-SEC.(2) READ WITH RULE PRESCRIBED. THEREFORE, IT BECOMES CLEAR THAT EVEN I N A CASE WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE WAS S O INCURRED, THE STATUTE HAS PROVIDED FOR A PRESUMPTIVE EXPENDIT URE WHICH HAS TO BE DISALLOWED BY FORCE OF THE STATUTE. IN A DISTANT MANNER, LITERALLY SPEAKING, IT MAY EVEN BE CONSIDERED FOR T HE PURPOSE OF CONVENIENCE AS A DEEMING PROVISION. WHEN SUCH DEEMI NG PROVISION IS MADE ON THE BASIS OF STATUTORY PRESUMP TION, THE REQUIREMENT OF FACTUAL EVIDENCE IS REPLACED BY STAT UTORY PRESUMPTION AND THE ASSESSING OFFICER HAS TO FOLLOW THE CONSEQUENCES STATED IN THE STATUTE. IT MEANS THAT E VEN IN A CASE WHERE NO EXPENDITURE IS STATED TO HAVE BEEN INCURRE D, THE ASSESSING AUTHORITY HAS TO APPLY RULE 8D. AS THE ST ATUTORY PRESUMPTION SUBSTITUTES THE REQUIREMENT OF FACTUAL EVIDENCE, THE QUESTION OF ENQUIRY DOES NOT ARISE. THEREFORE, WE A RE UNABLE TO AGREE WITH THE ARGUMENT OF THE LEARNED CA. 7. IN RESULT, THIS APPEAL FILED BY THE ASSESSEE IS DISMISSED. 9. IN THE CASE OF COAL INDIA LTD. V. ADDL. CIT IN I.T.A. NO. 1032/KOL/2012 & 1238/KOL/2012 FOR THE ASSESSMENT YE AR 2008-09 VIDE ORDER DATED 13.05.2015, THE KOLKATA BENCH OF THE TR IBUNAL HAS HELD AS UNDER: - - ITA 1163 & 1431/13 12 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE FACTS OF THE CASE. THE LD. AR HAS STRONGLY ARGUED T HAT NO SATISFACTION AS TO THE CORRECTNESS OF THE CLAIM MAD E U/S 14A READ WITH 8D(III) HAS BEEN RECORDED BY THE AO AS WELL AS THE LD. CIT(A). THE AFORESAID CONTENTION OF THE ASSESSEE IS NOT ACCEPTABLE FOR THE REASONS HEREINAFTER. THE ORDER P ASSED BY THE AO GOES TO SHOW THAT AO HAS COMPLIED WITH THE REQUI REMENT OF SECTION 14A OF THE ACT BY OBSERVING THAT AS TO WHY HE IS NOT SATISFIED WITH THE CORRECTNESS OF CLAIM OF THE ASSE SSEE THAT NO EXPENDITURE WAS INCURRED. THE AO HAS RECORDED THE F INDINGS THAT EARNING OF DIVIDEND WAS NOT AN AUTOMATIC PROCESS AN D THE ASSESSEE WAS REQUIRED TO KEEP REGULAR CONTROL OVER THE INVESTMENTS MADE. 5.1. THE CONTENTION PUT FORTH BY THE LD. AR THAT I T HAD EARNED DIVIDEND INCOME OF RS.262907.86 LAKHS WITHOU T INCURRING ANY EXPENSES DOES NOT CONVINCE US AT ALL. THE TERM EXPENDITURE AS PER SECTION 14A WOULD INCLUDE THE EXPENDITURES THAT ARE RELATED TO INVESTMENTS MADE I.E. EXPENDITU RES ON ADMINISTRATION, CAPITAL EXPENSES, TRAVELLING EXPENS ES, OPERATING EXPENSES ETC. IT IS DIFFICULT TO ACCEPT THAT THE AS SESSEE COMPANY WAS MAKING INVESTMENTS DECISIONS TO THE TUNE OF RS. 6,31,637 LAKHS OF PUBLIC MONEY WITHOUT INCURRING A SINGLE PE NNY OUT OF ITS POCKET. SUCH DECISIONS ARE HIGHLY STRATEGIC IN NATU RE AND ARE REQUIRED TO BE MADE BY HIGHLY QUALIFIED AND EXPERIE NCED PROFESSIONALS. THE SAME WOULD ALSO REQUIRE MARKET R ESEARCH AND ANALYSIS. THE ASSESSEE COMPANY BY ACQUIRING CON TROLLING INTEREST IN THE SUBSIDIARY COMPANIES WOULD ALSO BE REQUIRED TO ATTEND BOARD MEETINGS AND MAKE POLICY DECISIONS WIT H REGARD TO THE AFORESAID HUGE AMOUNT OF INVESTMENTS MADE. BY N O STRETCH OF IMAGINATION, IT CAN BE ASSUMED THAT SUCH ACTIVIT IES WERE DONE WITHOUT INCURRING ANY EXPENDITURE. IT IS PERTINENT TO MENTION HERE THAT EVEN THE ASSESSEE DID NOT REBUT THE FINDINGS O F AO THAT THE ASSESSEE WAS REQUIRED TO SUPERVISE AND ADMINISTER A LL THE INVESTMENTS MADE. 5.2. IT IS PERTINENT TO REFER TO THE OBSERVATIONS MADE BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS WALFORT SHARE & STOCK BROKERS (P) LTD. (2010) 326 ITR 1 (SC) DEFINI NG THE SCOPE OF SECTION 14A OF THE ACT INCORPORATED RETROSPECTIV ELY FROM 1ST APRIL, 1962. RELEVANT PORTION IS REPRODUCED HEREIN BELOW : 17. THE INSERTION OF S. 14A WITH RETROSPECTIVE EFF ECT IS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT T O ALLOW DEDUCTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE - - ITA 1163 & 1431/13 13 TOTAL INCOME UNDER THE ACT AGAINST THE TAXABLE INCO ME (SEE CIRCULAR NO. 14 OF 2001 DT. 22ND NOV., 2001). IN OT HER WORDS, S. 14A CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSES INCURRED BY THE A SSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCOME AND PA RTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF S. 14A, THE EXPEN DITURE INCURRED IN RESPECT OF EXEMPT INCOME WAS BEING CLAI MED AGAINST TAXABLE INCOME. THE MANDATE OF S. 14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES IN CURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AN D AT THE SAME TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTI ON OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. THE BASIC REASON FOR INSERTION OF S. 14A IS THAT CERTAIN INCOMES ARE NOT INCLUDIBLE WHIL E COMPUTING TOTAL INCOME AS THESE ARE EXEMPT UNDER CERTAIN PROV ISIONS OF THE ACT. IN THE PAST, THERE HAVE BEEN CASES IN WHICH DE DUCTION HAS BEEN SOUGHT IN RESPECT OF SUCH INCOMES WHICH IN EFF ECT WOULD MEAN THAT TAX INCENTIVES TO CERTAIN INCOMES WAS BEI NG USED TO REDUCE THE TAX PAYABLE ON THE NON-EXEMPT INCOME BY DEBITING THE EXPENSES, INCURRED TO EARN THE EXEMPT INCOME, A GAINST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE. O N THE SAME ANALOGY THE EXEMPTION IS ALSO IN RESPECT OF NET INC OME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE INCOME. THIS IS THE PURPORT OF S. 14A. IN S. 14A, T HE FIRST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UND ER THIS CHAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS OF INCOME AS PRESCRIBED UNDER CHAPTER IV WOULD FALL WITHIN S. 14 A. THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF TOTAL INCOME UNDER THE ACT'. IT MEANS THAT IF AN INCOME D OES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT OF THE APPLICABILITY OF S. 14A. FURTHER, S. 1 4 SPECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORD ER TO BE CHARGEABLE, AN INCOME HAS TO BE BROUGHT UNDER ONE O F THE FIVE HEADS. SECS. 15 TO 59 LAY DOWN THE RULES FOR COMPUT ING INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX UNDER THOSE HEADS. SECS. 15 TO 59 QUANTIFY THE TOTAL INCOME CHARGEABLE TO TA X. THE PERMISSIBLE DEDUCTIONS ENUMERATED IN SS. 15 TO 59 A RE NOW TO BE ALLOWED ONLY WITH REFERENCE TO INCOME WHICH IS BROU GHT UNDER ONE OF THE ABOVE HEADS AND IS CHARGEABLE TO TAX. IF AN INCOME LIKE DIVIDEND INCOME IS NOT A PART OF THE TOTAL INC OME, THE EXPENDITURE/DEDUCTION THOUGH OF THE NATURE SPECIFIE D IN SS. 15 TO 59 BUT RELATED TO THE INCOME NOT FORMING PART OF TO TAL INCOME COULD NOT BE ALLOWED AGAINST OTHER INCOME INCLUDIBL E IN THE TOTAL INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX. THE THEORY OF - - ITA 1163 & 1431/13 14 APPORTIONMENT OF EXPENDITURES BETWEEN TAXABLE AND N ON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER S. 14A. R EADING S. 14 IN JUXTAPOSITION WITH SS. 15 TO 59, IT IS CLEAR THA T THE WORDS 'EXPENDITURE INCURRED' IN S. 14A REFERS TO EXPENDIT URE ON RENT TAXES, SALARIES, INTEREST, ETC. IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR(SEE SS.30TO37). 5.3. IT IS FURTHER APPOSITE TO REFER TO THE DECISI ON OF THE ITAT MUMBAI BENCH IN THE CASE OF ACIT VS CITICORP FINANC E (INDIA) LTD. (2007) 108 ITD 457 DATED 21ST NOVEMBER, 2006 W HEREIN ON SIMILAR FACTS, THE CONTENTION OF THE ASSESSEE THAT IT HAD INCURRED NO EXPENDITURE FOR EARNING HIGH DIVIDENDS WAS NEGAT ED. THE RELEVANT PORTION OF THE DECISION IS REPRODUCED HERE IN BELOW:- BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT TH E ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF PROVIDING FI NANCIAL SERVICES LIKE COMMERCIAL VEHICLE FINANCING, EQUIPME NT FINANCE, ADVANCES AGAINST FINANCIAL ASSETS AND INTER-CORPORA TE LOANS AND DEPOSITS. DURING THE COURSE OF THE ASSESSMENT PROCE EDINGS, THE AO NOTICED THAT THE ASSESSEE HAD EARNED DIVIDEND OF RS. 4,85,24,362 WHICH WAS EXEMPT FROM TAX. TAKING NOTE OF S. 14A OF THE IT ACT, HE CALLED UPON THE ASSESSEE TO FURNI SH THE DETAILS OF EXPENDITURE INCURRED IN EARNING THE AFORESAID DI VIDEND AND ALSO TO EXPLAIN AS TO WHY EXPENDITURE ON PRO RATA B ASIS SHOULD NOT BE APPORTIONED TO THE EARNING OF THE AFORESAID DIVIDEND. IN REPLY, THE ASSESSEE SUBMITTED BEFORE THE AO THAT IT HAD NOT INCURRED ANY EXPENDITURE IN EARNING THE AFORESAID D IVIDEND AND HENCE THE PRORATE BASIS COULD NOT BE APPLIED TO ALL OCATE THE EXPENDITURE FOR EARNING THE SAID DIVIDEND. IN THE A BSENCE OF DETAILS, THE AO APPLIED PRO RATA BASIS FOR ALLOCATI NG THE TOTAL EXPENDITURE OF RS.90,64,63,336 BETWEEN EXEMPT INCOM E (I E., DIVIDEND) AND NON-EXEMPT INCOME IN THE RATIO OF THE RECEIPTS (TOTAL RECEIPTS BEING RS. 119,48,19,592 INCLUDING D IVIDEND RECEIPTS OF RS. 4,85,24,362). IN THIS MANNER, HE QU ANTIFIED THE EXPENDITURE AT RS. 3,68,02,411 BEING 4.06 PER CENT OF TOTAL EXPENDITURE AS HAVING BEEN INCURRED IN RELATION TO EARNING THE DIVIDEND AND THEREFORE DISALLOWED THE SAME WHILE CO MPUTING NON-EXEMPT INCOME. ON APPEAL, THE LEARNED CIT(A),BY HIS ORDER DT. 16TH JUNE, 2003, DIRECTED THE AO TO ALLOW DEDUC TION ON THE GROSS AMOUNT OF DIVIDEND WITHOUT ALLOCATING ANY EXP ENDITURE. DEPARTMENT IS AGGRIEVED BY THE AFORESAID ORDER AND IS NOW IN APPEAL BEFORE THIS TRIBUNAL. 13. IT IS DIFFICULT TO ACCEPT THE HYPOTHESIS THAT ONE CAN EARN SUBSTANTIAL DIVIDEND INCOME WITHOUT INCURRING ANY E XPENSES WHATSOEVER INCLUDING MANAGEMENT OR ADMINISTRATIVE E XPENSES. BY SAME LOGIC, IT IS EQUALLY DIFFICULT TO ACCEPT TH AT THE ONLY - - ITA 1163 & 1431/13 15 EXPENSES INVOLVED IN EARNING THE DIVIDEND INCOME AR E THOSE INCURRED ON COLLECTION OF DIVIDEND OR ON ENCASHING A FEW DIVIDEND WARRANTS. A COMPANY CANNOT EARN DIVIDEND WITHOUT IT S EXISTENCE AND MANAGEMENT. INVESTMENT DECISIONS ARE VERY COMPL EX IN NATURE. THEY REQUIRE SUBSTANTIAL MARKET RESEARCH, D AY-TO-DAY ANALYSIS OF MARKET TRENDS AND DECISIONS WITH REGARD TO ACQUISITION, RETENTION AND SALE OF SHARES AT THE MO ST APPROPRIATE TIME. THEY REQUIRE HUGE INVESTMENT IN SHARES AND CO NSEQUENTIAL BLOCKING OF FUNDS. IT IS WELL KNOWN THAT CAPITAL HA S COST AND THAT ELEMENT OF COST IS REPRESENTED BY INTEREST. BESIDES , INVESTMENT DECISIONS ARE GENERALLY TAKEN IN THE MEETINGS OF TH E BOARD OF DIRECTORS FOR WHICH ADMINISTRATIVE EXPENSES ARE INC URRED. IT IS THEREFORE NOT CORRECT TO SAY THAT DIVIDEND INCOME C AN BE EARNED BY INCURRING NO OR NOMINAL EXPENDITURE. THIS ASPECT OF THE MATTER HAS ALSO RECEIVED CAREFUL ATTENTION OF CHENNAI BENC H OF THIS TRIBUNAL IN SOUTHERN PETRO CHEMICAL INDUSTRIES VS. DY. CIT (2005) 93 TT] (CHENNAI) 161. AFTER COMPREHENSIVE CO NSIDERATION OF ALL THE RELEVANT ASPECTS OF THE CASE INCLUDING T HE PROVISIONS OF LAW, THE CHENNAI BENCH HAS HELD THAT 8 ITA NOS.1032&1238/KOL/2012 M/S.COAL INDIA LTD. A.YR.200 8-09 INVESTMENT DECISIONS ARE VERY STRATEGIC DECISIONS I N WHICH TOP MANAGEMENT IS INVOLVED AND THEREFORE PROPORTIONATE MANAGEMENT EXPENSES ARE REQUIRED TO BE DEDUCTED WHI LE COMPUTING THE EXEMPT INCOME FROM DIVIDEND. IN HARIS H KRISHNAKANT BHATT VS. ITO (2004)85TT](AHD) 872 : (2 004) 91 ITD 311 (AHD), THE AHMEDABAD BENCH OF THIS TRIBUNAL HAS HELD THAT, THE DIVIDEND INCOME BEING EXEMPT UNDER S. 10(33), T HE INTEREST ON CAPITAL BORROWED FOR ACQUISITION OF RELEVANT SHA RES YIELDING SUCH DIVIDEND CANNOT BE ALLOWED DEDUCTION BY OPERAT ION OF S.14A.IN DY. CIT VS. S.G. INVESTMENTS & INDUSTRIES LTD. (2004) 84 TT] (KOL) 143 : (2004) 89 ITD 44 (KOL), THE CALC UTTA BENCH OF THIS TRIBUNAL HAS LAID DOWN TWO PROPOSITIONS: ONE, IN VIEW OF S. 14A INSERTED IN THE IT ACT WITH RETROSPECTIVE EFFEC T FROM 1ST APRIL, 1962, PRO RATA EXPENSES ON ACCOUNT OF INTEREST RELA TABLE TO INVESTMENT IN SHARES FOR EARNING EXEMPT INCOME FROM DIVIDEND ARE TO BE DISALLOWED AGAINST TAXABLE INCOME AND ONL Y THE NET DIVIDEND INCOME IS TO BE ALLOWED EXEMPTION AFTER DE DUCTING THE EXPENSES; AND TWO, THE EXPRESSION 'EXPENDITURE INCU RRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME' IN S. 14A HAS TO BE GIVEN A WIDER MEA NING AND WOULD INCLUDE BOTH DIRECT AND INDIRECT RELATIONSHIP BETWEEN EXPENDITURE AND EXEMPT INCOME. FOLLOWING THE DECISI ON OF THE HON'BLE SUPREME COURT IN CI TVS. UNITED GENERAL TRU ST LTD. (1994) 116 CTR (SC) 194 : (1993) 200 ITR 488 (SC), THE CALCUTTA BENCH OF THE TRIBUNAL HAS ALSO HELD THAT T HE INTEREST PAID BY THE ASSESSEE BEING ATTRIBUTABLE TO THE MONE Y BORROWED - - ITA 1163 & 1431/13 16 FOR THE PURPOSE OF MAKING THE INVESTMENT WHICH YIEL DED THE DIVIDEND AND OTHER EXPENSES INCURRED IN CONNECTION WITH OR FOR MAKING OR EARNING THE DIVIDEND INCOME CAN BE REGARD ED AS EXPENDITURE INCURRED IN RELATION TO DIVIDEND INCOME . IN EVERPLUS SECURITIES& FINANCE LTD. VS. DY. CIT (2006) 102 TTJ (DEL) 120, THE DELHI BENCH OF THIS TRIBUNAL HAS HELD THAT MERE LY BECAUSE THE ASSESSEE DID NOT EARN THE DIVIDEND OUT OF INVES TMENT IN CERTAIN SHARES DOES NOT IMPLY THAT THE PROVISIONS O F S. 14A WOULD NOT APPLY TO THAT EXTENT. IN ASSTT.CIT VS. PREMIER CONSOLIDATED CAPITAL TRUST (I) LTD. (2004) 83 TTJ (MUMBAI)843,TH E MUMBAI BENCH OF THIS TRIBUNAL HAS HELD THAT THE AO IS JUST IFIED IN ATTRIBUTING A PART OF THE FINANCIAL AND ADMINISTRAT IVE EXPENSES AS EXPENDITURE IN RELATION TO EXEMPT INCOME AND DISALL OWING THE SAME IN VIEW OF THE PROVISIONS OF S.14A. WE FIND THAT THE AFORESAID JUDGEMENT IS SQUARELY AP PLICABLE TO THE PRESENT CASE OF THE ASSESSEE. 5.4. THE FINDINGS RECORDED BY US AS REGARDS THE EXPENDITURE REQUIRED TO BE INCURRED BY THE ASSESSEE COMPANY FOR CARRYING OUT THE INVESTMENTS AND EARNING DIVIDE NDS INCOME ALSO FINDS FORCE FROM THE DECISION RENDERED BY ITAT , CHENNAI BENCH IN THE CASE OF SOUTHERN PETRO CHEMICAL INDUST RIES VS DCIT (2005) 3 SOT 157 DATED 20TH OCTOBER, 2004 RELE VANT PART OF WHICH IS REPRODUCED AS UNDER :- 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORDS OF THE CASE. ADMITTEDLY, THESE INVESTMENTS IN SHARES WERE MADE DURING THE COURSE OF THE CARRYI NG ON OF BUSINESS AND AS IS EVIDENT FROM THE 9 ITA NOS.1032&1238/KOL/2012 M/S.COAL INDIA LTD. A.YR.200 8-09 RECORDS, SUBSTANTIAL INVESTMENTS HAD BEEN MADE BY T HE ASSESSEE IN EARLIER YEARS, AND DURING THE CURRENT Y EAR AS WELL THE ASSESSEE MADE AN INVESTMENT OF RS. 19 CRORES. WHETH ER TO INVEST OR NOT TO INVEST AND WHETHER TO RETAIN THE I NVESTMENTS OR TO LIQUIDATE THE SAME ARE VERY STRATEGIC DECISIONS WHI CH THE MANAGEMENT IS CALLED UPON TO TAKE. THESE ARE MIND-B OGGLING DECISIONS AND TOP MANAGEMENT IS INVOLVED IN TAKING THESE DECISIONS. THIS DECISION MAKING PROCESS IS VERY COM PLICATED AND REQUIRES VERY CAREFUL ANALYSIS. MOREOVER, THE ASSES SEE HAS TO KEEP TRACK OF VARIOUS DIVIDEND INCOMES DECLARED BY THE INVESTEE COMPANIES AND ALSO TO KEEP TRACK OF THE DIVIDEND IN COME HAVING BEEN REGULARLY RECEIVED BY THE ASSESSEE. THIS ACTIV ITY ITSELF CALLS FOR CONSIDERABLE MANAGEMENT ATTENTION AND CANNOT BE LEFT TO A JUNIOR CLERK. THE HON'BLE SUPREME COURT IN THE CASE OF UNITED GENERAL TRUST LTD. (SUPRA), APPLYING THE DECISION O F HON'BLE - - ITA 1163 & 1431/13 17 SUPREME COURT IN THE CASE OF DISTRIBUTORS (BARODA) (P) LTD. VS. UNION OF INDIA (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC), REVERSED THE DECISION OF THE HON'BLE BOMBAY H IGH COURT IN CIT VS. UNITED GENERAL TRUST (P) LTD. (SUPRA), WHER EIN THE QUESTION WAS AS UNDER: 'WHETHER, ON THE FACTS AND I N THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL WAS JUSTIFIED IN APPLYING THE DECISION OF THE BOMBAY HIGH COURT I N THE CASE OF CIT VS. NEW GREAT INSURANCE CO. LTD. (1973) 90 ITR 348 (BORN) TO THE ASSESSMENT YEAR IN QUESTION WITHOUT CONSIDER ING THE EFFECT OF THE AMENDMENT OPERATIVE FROM 1STAPRIL, 1968, AND IN THUS HOLDING THAT THE ASSESSEE WOULD BE ENTITLED TO THE DEDUCTION UNDER S. 80M ON THE GROSS DIVIDEND BEFORE DEDUCTION OF THE PROPORTIONATE MANAGEMENT EXPENSES ?' THUS, WHEN THE DECISION OF THE HON'BLE BOMBAY HIGH COURT HAS BEEN REVERSED, THE PROPORTIONATE MANAGEMENT EXPENSES ARE REQUIRED TO BE DEDUCTED WHILE COMPUTING THE DIVIDEND INCOME. IN TH E DECISION OF THE HON'BLE CALCUTTA HIGH COURT, RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE, MR. DASTUR, IN THE CASE O F CIT VS. UNITED COLLIERIES LTD. (SUPRA), IT HAS BEEN HELD TH AT IF THE FACTS OF A PARTICULAR CASE SO WARRANT, THE ALLOCATION CAN BE MADE TOWARDS EXPENSES. IN VIEW OF THE AFOREMENTIONED DISCUSSION AND KEEPING IN VIEW THE SUBMISSIONS OF THE LEARNED DEPARTMENTAL REPRESENTATIVE, WE RESTORE THIS MATTER TO THE AO TO VERIFY THE QUANTUM OF DEDUCTION CLAIMED BY THE ASSESSEE IN EAR LIER YEARS UNDER S. 57(I) FROM THE DIVIDEND INCOME (WHEN IT WA S TAXABLE) AND MAKE A PRO RATA ADJUSTMENT ON THE BASIS OF SUBS EQUENT INVESTMENTS MADE, INFLATION, ETC. THIS GROUND IS, A CCORDINGLY, ALLOWED FOR STATISTICAL PURPOSES. 5.5. SINCE THE ASSESSEE HAD CLAIMED THAT NO EXPEND ITURE WAS INCURRED, THE ASSESSING AUTHORITIES WERE CORREC T TO ESTIMATE THE INCURRING OF SUCH EXPENDITURE U/S 14A READ WITH RULE 8D. IT IS PERTINENT TO REFER TO THE OBSERVATIONS MADE BY ITAT CHENNAI BENCH IN THE CASE OF LAKSHMI RING TRAVELLERS VS ACI T IN ITA NO.2083/MADS/2011 DATED 2ND MARCH,2012 WHEREIN IT W AS HELD AS UNDER (RELEVANT PORTION REPRODUCED) :- THEREFORE, IT BECOMES CLEAR THAT EVEN IN A CASE WH ERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE WAS SO INCURRED , THE STATUTE HAS PROVIDED FOR A PRESUMPTIVE EXPENDITURE WHICH HA S TO BE DISALLOWED BY FORCE OF THE STATUTE. IN A DISTANT MA NNER, LITERALLY SPEAKING, IT MAY EVEN BE CONSIDERED FOR THE PURPOSE OF CONVENIENCE AS A DEEMING PROVISION. WHEN SUCH DEEMI NG PROVISION IS MADE ON THE BASIS OF STATUTORY PRESUMP TION, THE REQUIREMENT OF FACTUAL EVIDENCE IS REPLACED BY STAT UTORY - - ITA 1163 & 1431/13 18 PRESUMPTION AND THE ASSESSING OFFICER HAS TO FOLLOW THE CONSEQUENCES STATED IN THE STATUTE. 5.6. THE DECISIONS RELIED UPON BY THE ASSESSEE TO SUPPORT THE AFORESAID GROUNDS OF APPEAL ARE DISTINGUISHABLE ON FACTS AND LAW AND DOES NOT HELP THE CAUSE OF ASSESSEE. THE AS SESSEE RELIED UPON THE DECISION OF VARIOUS COURTS OF LAW L ISTED AS UNDER : (I) MAXOPP INVESTMENTS LTD. VS CIT 347 ITR 272 (DEL ) (II) GODREJ & BOYCE MFG.CO.LTD. VS DCIT 328 ITR 81 (BOM) (III) RELAXO FOOTWEARS LTD. VS ADDL.CIT (2012) 50 S OT 102 (IV) REI AGRO LTD. KOLKATA VS D CIT ITA NO.1331/KOL /2011 (V) DCIT VS ASHISH JHUNJHUNWALA IN ALL OF THE AFORESAID JUDGEMENTS, THE RATIO WAS T HAT THE AO FAILED TO RECORD ANY SATISFACTION U/S 14A READ WITH RULE 8D WHEREAS IN THE PRESENT CASE PROPER SATISFACTION WAS RECORDED BY THE AO U/S 14A OF THE ACT. RELIANCE WAS PLACED ON T HE JUDGMENTS RENDERED IN THE CASE OF REI LTD., KOLKATA (SUPRA) IN THE AFORESAID DECISION, THE ISSUE WITH RESPECT TO T HE DISALLOWANCE MADE UNDER SECTION 14A READ WITH RULE 8D(2)(III) WA S RESTORED TO THE FILE OF AO AND NO JUDGMENT WAS RENDERED ON M ERITS OF THE CONTENTIONS OF ASSESSEE. THE ASSESSEE HAS SUBMITTED THAT FOR DISALLOWING THE EXPENDITURE INCURRED FOR EARNING TH E EXEMPT INCOME THERE MUST BE A NEXUS BETWEEN THE TWO. TO SU BSTANTIATE THE SAME, THE ASSESSEE HAS RELIED UPON THE DECISION S OF VARIOUS COURTS LISTED AS UNDER: (I) BALRAM CHINNI MILLS LTD. VS DCIT IN ITA NO.504/ KOL/2011 (II) CIT VS HERO CYCCLES LTD. 323 ITR 518 (PUN&HAR) (III) SAURABH AGROTECH (P) LTD VS DCIT IN ITA NO.78 6/JP/2011 (IV) HINDUSTHAN PAPER CORPORATION LTD. IN ITA NO.47 /KOL/2012. THE AFORESAID JUDGEMENTS WILL NOT SUPPORT THE CASE OF THE ASSESSEE AS THE SAME ARE RENDERED IN THE DIFFERENT FACTS ALTOGETHER. IN THE AFORESAID DECISIONS, THE RATIO W AS THAT ONLY THOSE EXPENDITURES WHICH HAS NEXUS TO THE EXEMPT IN COME ARE TO BE DISALLOWED. HOWEVER IN THE PRESENT CASE THE N EXUS BETWEEN THE EXPENDITURE INCURRED AND THE DIVIDEND I NCOME WAS ESTABLISHED BY THE REVENUE AUTHORITIES. 5.7. THE LD. AR SUBMITTED THAT IN SUBSEQUENT YEARS I.E. A.YRS. 2009- 10 AND 2010-11, THE AFORESAID ISSUE HA S BEEN DECIDED IN FAVOUR OF THE ASSESSEE. THE AFORESAID OR DERS OF THE LD. CIT(A) WILL NOT HELP THE ASSESSEE AS THE SAME H AS NO BEARING ON THE PRESENT CASE. - - ITA 1163 & 1431/13 19 5.8. THE LD. AR SUBMITTED WITHOUT PREJUDICE TO THE AFORESAID GROUNDS THAT THERE IS A COMPUTATIONAL ERROR IN CALC ULATION UNDER RULE 8D(III) AND THE AO HAS INCLUDED THE INVESTMENT S OF THE SUBSIDIARIES, WHICH HAVE NOT PAID DIVIDENDS TO THE ASSESSEE. IN VIEW OF SUBMISSION MADE, THE SAID ISSUE IS REMANDED TO THE FILE OF AO TO MAKE A CORRECT COMPUTATION WITHOUT INCLUDI NG THE INVESTMENTS OF COMPANIES WHICH HAVE NOT PAID ANY DI VIDEND TO THE ASSESSEE COMPANY. THE AFORESAID GROUNDS ARE, TH EREFORE, HELD TO BE AGAINST THE ASSESSEE ON MERITS AND ON TH E ISSUE OF COMPUTATION UNDER RULE 8D(III), THE MATTER IS REMAN DED BACK TO THE FILE OF AO. ACCORDINGLY GROUNDS 1(A), 1(B), 1(C ), 2(B) AND 2(C) OF THE ASSESSEE ARE DISMISSED. 10. THE CASE LAW RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009-10 IN I.T.A. NO. 1690/MDS/2013 IS NOT REFLECTI NG CORRECT POSITION OF LAW AND THEREFORE, THIS BENCH CANNOT BL INDLY FOLLOW THE EARLIER DECISION OF THE TRIBUNAL IN VIEW OF THE RULINGS OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T V. HI TECH ARAI LTD. [2010] 321 ITR 477, WHEREIN THE HONBLE H IGH COURT HAS HELD AS UNDER: WE ARE NOT IN A POSITION TO APPRECIATE EITHER OF T HE CONTENTIONS OF THE LEARNED COUNSEL FOR THE PETITION ER. AS FAR AS THE FIRST CONTENTION IS CONCERNED, WHEN THE TRIBUNA L BY THE IMPUGNED ORDER HAS APPLIED SECTION 32(1)(IIA) OF THE ACT, TO THE FACTS INVOLVED IN THE CASE OF THE ASSESSEE AND HAS FOUND THAT THE ASSESSEE IS ENTITLED FOR THE ADDITIONAL DEPRECIATIO N CLAIMED UNDER THE SAID PROVISION, IT CANNOT BE HELD THAT SIMPLY B ECAUSE A CO- ORDINATE BENCH OF THE TRIBUNAL HAD EARLIER TAKEN A DIFFERENT VIEW, THE TRIBUNAL ON THIS OCCASION ALSO OUGHT TO HAVE FO LLOWED THE SAME. WHEN WE FIND THAT THE TRIBUNAL HAS APPLIED TH E LAW CORRECTLY IN THE IMPUGNED ORDER, THERE IS NO GAIN S AYING THAT THERE WAS AN EARLIER ORDER BY THE CO-ORDINATE BENCH AND THEREFORE, FOR THAT REASON, THIS TIME ALSO THE TRIB UNAL SHOULD HAVE BLINDLY FOLLOWED ITS OWN EARLIER DECISION EVEN IF S UCH EARLIER DECISION DID NOT REFLECT THE CORRECT POSITION OF TH E LAW. 11. IN VIEW OF THE ABOVE JUDICIAL PRONOUNCEMENTS O F THE TRIBUNAL AS WELL AS THE DECISION OF THE HONBLE JUR ISDICTIONAL HIGH COURT IN THE CASE OF CIT V. HI TECH ARAI LTD. (SUPR A), WE REVERSE THE FINDINGS OF THE LD. CIT(A) ON THIS ISSUE AND RE STORE THE ORDER PASSED BY THE ASSESSING OFFICER. ACCORDINGLY, THE A PPEAL FILED BY THE REVENUE IS ALLOWED. - - ITA 1163 & 1431/13 20 ACCORDINGLY, THIS ISSUE IS DECIDED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE . 9. THE NEXT GROUND IN REVENUES APPEAL IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) ERRED IN DIRECT ING THE ASSESSING OFFICER TO ALLOW THE LOSS INCURRED ON CAN CELLATION OF FORWARD CONTRACT TO THE EXTENT OF ` 7,94,89,013/-. 10. THE FACTS OF THE ISSUE ARE THAT IN THE COURSE O F ASSESSMENT, THE AO FOUND THAT THE ASSESSEE HAD CLAI MED A SUM OF ` 7,9489,013/- BEING LOSS ON CANCELLATION OF FORWARD CONTRACT AND DISALLOWED THE SAME TREATING IT TO BE SPECULATIVE LOSS IN VIEW OF THE PROVISIONS OF SEC.. 43(5) OF THE ACT AND THE TRANSACTION BEING NOT COVERED UNDER CLAUSE (D) UNDER SEC.43(5). AGAINST THIS, THE ASSESSEE WE NT IN APPEAL BEFORE THE CIT(APPEALS), WHO ALLOWED THE APP EAL OF THE ASSESSEE. AGAINST THIS, THE REVENUE IS IN APPE AL BEFORE US. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. SIMILAR ISSUE CAME FOR CONSIDER ATION - - ITA 1163 & 1431/13 21 BEFORE THIS TRIBUNAL IN THE CASE OF M/S. MAJESTIC E XPORTS V. JCIT IN ITA NOS. 1336 & 3072/MDS/2014 DATED 24.7.20 15, WHEREIN IT WAS HELD AS FOLLOWS : 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF HOSIERY GARMENTS. DURING THE COURSE OF EXPORT, T HE ASSESSEE ENTERED INTO DERIVATIVE CONTRACT. THE ASSESSEE INCURRED LOSS IN THIS TRANSACTION. THE ASSESSEE CLAIMED IT AS BUSINESS LOSS. ACCORDING TO THE ASSESSING OFFICER THIS LOSS WAS NOT BUSINESS LOSS A ND IT IS A SPECULATIVE LOSS AND THIS TRANSACTION IS SPECULATIVE IN NATURE AS SUCH THE LOSS INCURRED ON THIS TRANSACTION CANNOT BE SET OFF AGAINST BUSINESS INCO ME OF THE ASSESSEE. ACCORDING TO THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSEE, THE DERIVATIVE TRANSACTION CANNOT FALL UNDER SEC.73. EXPLANATION T O SEC.73 CREATES A DEEMING FICTION BY WHICH AMONG THE ASSESSEE, WHO IS A COMPANY, AS INDICATED IN THE SAI D EXPLANATION DEALING WITH THE TRANSACTION OF SHARE A ND SUFFER LOSS, SUCH LOSS SHOULD BE TREATED TO BE SPECULATIVE TRANSACTION WITHIN THE MEANING OF SEC.7 3 OF THE ACT, NOTWITHSTANDING THE FACT THAT THE DEFINITI ON OF SPECULATIVE TRANSACTION MENTIONED IN SEC.43(5) OF T HE ACT, THE TRANSACTION IS NOT OF THAT NATURE AS THERE HAS BEEN ACTUAL DELIVERY OF THE SCRIPS OF SHARE. AS PER THE DEFINITION OF SEC.43(5), TRADING OF SHARES WHICH IS DONE BY TAKING DELIVERY DOES NOT COME UNDER THE PURVIEW OF THE SAID SECTION. SIMILARLY, AS PER CLAUSE (D) OF SEC.43(5), DERIVATIVE TRANSACTION IN SHARES IS ALSO NOT SPECULATION TRANSACTION AS DEFINED IN THE SAID SECT ION. THEREFORE, BOTH PROFIT/LOSS FROM ALL THE SHARE DELI VERY TRANSACTIONS AND DERIVATIVE TRANSACTIONS ARE HAVING THE SAME MEANING, SO FAR AS SEC.43(5) OF THE ACT IS CONCERNED. AGAIN, IN VIEW OF THE FACT THAT BOTH DEL IVERY TRANSACTIONS AND DERIVATIVE TRANSACTIONS ARE NON- SPECULATIVE AS FAR AS SEC.43(5) IS CONCERNED, IT FO LLOWS - - ITA 1163 & 1431/13 22 THAT BOTH WILL HAVE THE SAME TREATMENT AS FAR AS APPLICATION OF EXPLANATION TO SEC.73 IS CONCERNED. THEREFORE, AGGREGATION OF THE SHARE TRADING PROFIT AND LOSS FROM DERIVATIVE TRANSACTIONS SHOULD BE DONE BEFORE THE EXPLANATION TO SEC.73 IS APPLIED. THE AB OVE VIEW HAS BEEN TAKEN BY SPECIAL BENCH OF THIS TRIBUN AL, MUMBAI BENCH, IN THE CASE OF CIT V. CONCORD COMMERCIAL PVT. LTD. (2005) 95 ITD 117 (MUM)(SB). I N THIS CASE, THE SPECIAL BENCH HELD THAT : BEFORE CONSIDERING WHETHER THE ASSESSEES CASE IS HIT BY THE DEEMING PROVISION OF EXPLANATION TO SEC. 73 OF THE ACT, THE AGGREGATE OF THE BUSINESS PROFIT / LOS S HAS TO BE WORKED OUT BASED ON THE NON-SPECULATIVE PROFI TS; EITHER IT IS FROM SHARE DELIVERY OR FROM SHARE DERIVATIVE. 8. FROM THE ABOVE, IT IS CONCLUDED THAT BOTH TRADIN G OF SHARES AND DERIVATIVE TRANSACTIONS ARE NOT COMING UNDER THE PURVIEW OF SECTION 43(5) OF THE ACT WHICH PROVIDES DEFINITION OF SPECULATIVE TRANSACTION EXCLUSIVELY FOR PURPOSES OF SECTION 28 TO 41 OF THE ACT. AGAIN, THE FACT THAT BOTH DELIVERY BASED TRANSACTIO N IN SHARES AND DERIVATIVE TRANSACTIONS ARE NON-SPECULAT IVE AS FAR AS SECTION 43(5) IS CONCERNED GOES TO CONFIR M THAT BOTH WILL HAVE SAME TREATMENT AS REGARDS APPLICATION OF THE EXPLANATION TO SECTION 73 IS CONCERNED, WHICH CREATES A DEEMING FICTION. NOW, BEFORE APPLICATION OF THE SAID EXPLANATION, AGGREGA TION OF THE BUSINESS PROFIT/LOSS IS TO BE WORKED OUT IRRESPECTIVE OF THE FACT, WHETHER IT IS FROM SHARE DELIVERY TRANSACTION OR DERIVATIVE TRANSACTION. 8.1 NOW, THIS VIEW HAS BEEN TAKEN BY CO-ORDINATE, CHENNAI IN THE CASE M/S. AISHWARYA & CO P. LTD IN I TA NO.860/MDS/2014, DATED 29.05.2015, WHEREIN THEY FOLLOWED THE JUDGMENT OF THE CALCUTTA HIGH COURT IN THE CASE OF M/S. BALJIT SECURITIES PVT. LTD. (88 CCH 31 3) WHEREIN HELD AS UNDER:- - - ITA 1163 & 1431/13 23 CLAUSE (D) OF SECTION 43(5) BECAME EFFECTIVE WITH EFFECT FROM 1ST APRIL, 2006. THEREFORE, PRIOR TO 1S T APRIL, 2006 ANY TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY INCLUDING STOCKS AND SHARES WAS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER O F THE COMMODITY OR SCRIP WAS A SPECULATIVE TRANSACTION. SUB-SECTION 1 OF SECTION 73 PROVIDES AS FOLLOWS: (1) ANY LOSS, COMPUTED IN RESPECT OF A SPECULATION BUSINESS CARRIED ON BY THE ASSESSEE, SHALL NOT BE S ET OFF EXCEPT AGAINST PROFITS AND GAINS, IF ANY, OF AN OTHER SPECULATION BUSINESS. THE RESULTANT EFFECT WAS THAT ANY LOSS ARISING OUT OF SPECULATIVE TRANSACTION COULD ONLY HAVE BEEN SET OF F AGAINST PROFITS ARISING OUT OF SPECULATIVE TRANSACT ION. IN THE PRESENT CASE, THE ASSESSEE, AS ALREADY INDICATE D, HAS BEEN DEALING IN SHARES WHERE DELIVERY WAS IN FA CT TAKEN AND ALSO IN SHARES WHERE DELIVERY WAS NOT ULTIMATELY TAKEN. IN OTHER WORDS, THE ASSESSEE HAS BEEN DEALING IN ACTUAL SELLING AND BUYING OF SHARES AS ALSO DEALING IN SHARES ONLY FOR THE PURPOSE OF SETT LING THE TRANSACTION OTHERWISE THAN BY ACTUAL DELIVERY. THE QUESTION ARISE WHETHER THE LOSSES ARISING OUT OF TH E DEALINGS AND TRANSACTION IN WHICH THE ASSESSEE DID NOT ULTIMATELY TAKE DELIVERY OF THE SHARES OR GIVE DELI VERY OF THE SHARES COULD BE SET OFF AGAINST THE INCOME ARIS ING OUT OF THE DEALINGS AND TRANSACTIONS IN ACTUAL BUYI NG AND SELLING OF SHARES. AN ANSWER TO THIS QUESTION I S TO BE FOUND IN THE EXPLANATION APPENDED TO SECTION 73 WHICH READS AS FOLLOWS: EXPLANATION: WHERE ANY PART OF THE BUSINESS OF A COMPANY OTHER THAN A COMPANY WHOSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME WHICH IS CHARGEABL E UNDER THE HEADS INTEREST ON SECURITIES, OR A COMP ANY THE PRINCIPAL BUSINESS OF WHICH IS THE BU9SINESS OF BANKING OR THE GRANTING OF LOANS AND ADVANCES) CONSISTS IN THE PURCHASE AND SALE OF SHARES OF OTHE R - - ITA 1163 & 1431/13 24 COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOSES OF THIS SECTION, BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHASE. IN ORDER TO RESO LVE THE ISSUE BEFORE US, THE SECTION HAS TO BE READ IN THE MANNER AS FOLLOWS: EXPLANATION : WHERE ANY PART OF THE BUSINESS OF A COMPANY ( . . . .. .. .. .. .. .. .. . .. .. . ) CONSIST IN THE PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOSES OF THIS SECTION, BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHASE AND SAL E OF SUCH SHARES. IT WOULD, THUS, APPEAR THAT WHERE AN ASSESSEE, BEING THE COMPANY, BESIDES DEALING IN OTHER THINGS ALSO DEALS IN PURCHASE AND SALE OF SHA RES OF OTHER COMPANIES, THE ASSESSEE SHALL BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS. THE ASSESSEE , IN THE PRESENT CASE, PRINCIPALLY IS A SHARE BROKER, AS ALREADY INDICATED. THE ASSESSEE IS ALSO IN THE BUSINESS OF BUYING AND SELLING OF SHARES FOR SELF W HERE ACTUAL DELIVERY IS TAKEN AND GIVEN AND ALSO IN BUYI NG AND SELLING OF SHARES WHERE ACTUAL DELIVERY WAS NOT INTENDED TO BE TAKEN OR GIVEN. THEREFORE, THE ENTIR E TRANSACTION CARRIED OUT BY THE ASSESSEE, INDICATED ABOVE, WAS WITHIN THE UMBRELLA OF SPECULATIVE TRANSACTION. THERE WAS, AS SUCH, NO BAR IN SETTING OFF THE LOSS ARISING OUT OF DERIVATIVES FROM THE INCOME ARISING OUT OF BUYING AND SELLING OF SHARES. THIS I S WHAT THE LEARNED TRIBUNAL HAS DONE. 9. FROM THE ABOVE DECISION OF THE CALCUTTA HIGH COU RT IN THE CASE OF BALJIT SECURITIES PVT. LTD. CITED SU PRA, THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE. HOWEVER, WE MAKE IT CLEAR THAT TOTAL TRANSACTION CONSIDERED FOR DETERMINING THIS BUSINESS LOSS FROM DERIVATIVE TRANSACTIONS CANNOT BE MORE THAN THE TOT AL - - ITA 1163 & 1431/13 25 EXPORT TURNOVER OF THE ASSESSEE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION AND IF THE DERIVATIVE TRANSACTION IS IN EXCESS OF EXPORT TURNOVER, THEN T HAT LOSS SUFFERED IN RESPECT OF THAT PORTION OF EXCESS TRANSACTIONS TO BE CONSIDERED AS SPECULATIVE LOSS O NLY AS THAT EXCESS DERIVATIVE TRANSACTION HAS NO PROXIM ITY WITH EXPORT TURNOVER AND THE ASSESSING OFFICER IS DIRECTED TO COMPUTE ACCORDINGLY. THIS GROUND IS ALLOWED AS INDICATED ABOVE. 11.1 FURTHER, IN THE CASE OF M/S. TCS TEXTILES P. L TD. V. DCIT IN ITA NO.1192/MDS/2015 DATED 24.3.2016, AFTER CONSIDERING THE DECISION OF THIS TRIBUNAL IN THE CA SE OF M/S.AMBATTUR CLOTHING LTD., IN ITA NOS.1436, 1643/M DS/14 AND 910/MDS/15 DATED 28.12.2015, IT WAS HELD AS UNDER: 6. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE O PINION THAT THIS SIMILAR ISSUE CAME FOR CONSIDERATION BEFO RE THIS TRIBUNAL RECENTLY IN THE CASE OF M/S.AMBATTUR CLOTHING LTD., IN ITA NO.1436 & 1643/MDS./2014 & 910/MDS./2015 VIDE ORDER DATED 28.12.2015 WHEREIN THE TRIBUNAL HELD AS FOLLOWS:- WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, THE COMMISSIONER OF INCOME TAX (APPEALS) GIVEN AN DIRECTION TO THE ASSESSING OFFICER TO VERIFY ANY FORWARD CONTRACTS HAVE BEEN CANCELLED PREMATURELY AND VERIFY THE REASONS FOR PREMATURE CANCELLATION IN THE LIGHT OF THE ORDER OF THE TRIBUNAL IN THE CASE OF LONDON STAR DIAMOND COMPANY (I) P. LTD VS. DCIT IN ITA NO.6169/M/2012, DATED 11.10.2013 WHEREIN IT WAS OBSERVED THAT LOSS ARISING FROM CANCELLATION OF PREMATURE IS ALLOWED AS - - ITA 1163 & 1431/13 26 BUSINESS LOSS. BEING SO, THE ASSESSEE CANNOT HAVE ANY GRIEVANCE ON THIS ISSUE AS COMMISSIONER OF INCOME TAX (APPEALS) HAS GIVEN DIRECTION TO FOLLOW THE TRIBUNAL ORDER. FURTHER, WE MAKE IT CLEAR THAT LOSS ARISING OUT OF DERIVATIVE TRANSACTION IN EXCESS OF EXPORT TURNOVER HAS TO BE CONSIDERED AS SPECULATIVE LOSS BECAUSE EXCESS DERIVATIVE TRANSACTION HAS NO PROXIMITY WITH EXPORT TURNOVER. WITH THESE OBSERVATIONS, WE REJECT THE GROUND OF THE ASSESSEE. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE ARE INCLINED TO REMIT THE ISSUE TO THE FILE OF THE TRIB UNAL TO EXAMINE THE DERIVATIVE TRANSACTION EQUIVALENT TO TH E TOTAL EXPORT TURNOVER FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, AND PREMATURE CANCELLATION OF THE TRANSACTION UNDERTAKEN BY THE ASSESSEE TO BE EXCLUDED AND DECIDE ACCORDINGLY IN THE LIGHT OF ABO VE ORDERS OF TRIBUNAL. THIS GROUND IS REMITTED BACK TO THE FILE OF THE AO FOR FRESH CONSIDERATION. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE ARE INCLINED TO REMIT THE ISSUE TO THE FILE OF THE TRIBUNAL TO CONS IDER THE DERIVATIVE TRANSACTION EQUIVALENT TO THE TOTAL EXPO RT TURNOVER FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, AND ALSO T O IGNORE THE LOSS ON ACCOUNT OF PREMATURE CANCELLATION/TERMINATI ON BEFORE THE DUE DATE OF MATURITY OF THE TRANSACTION UNDERTAKEN BY THE ASSESSEE AND DECIDE IN ACCORDANCE WITH LAW. ACCORD INGLY, THIS GROUND IS REMITTED BACK TO THE FILE OF THE AO FOR F RESH CONSIDERATION. - - ITA 1163 & 1431/13 27 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DI SMISSED AND THE APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON WEDNESDAY, THE 13 TH OF APRIL, 2016 AT CHENNAI. SD/- SD/- ( $ % . & '( ) ( ) * + , ) DUVVURU RL REDDY - ./012304556037- 8 9: /JUDICIAL MEMBER ! 9:;<<5=1>01>?@AB@3 )8 /CHENNAI, C9 /DATED, THE 13 TH APRIL, 2016. MPO* 9D EFGF /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. H- /CIT(A) 4. H /CIT 5. FIJ K /DR 6. J(L /GF.