ACIT, New Delhi V. M/s. VRV Foods Ltd., New Delhi

ITA 1171/DEL/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5114 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: SMC
• Next Hearing Date: 20-07-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 28-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T VASANTHAN
• Assessee Lawyers: SUBODH GUPTA
• Keywords: Earning of tax free income; Proportionate interest
• Section: 143(3); 142(1); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH SMC : NEW DELHI) BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER ITA NO. 1171/DEL/2017 ASSESSMENT YEAR: 2012-13 ACIT, CIRCLE 26(2), VS. M/S VRV FOODS LTD., NEW DELHI F-32/3, SECOND FLOOR, OKHLA INDUSTRIAL AREA, PHASE-II, NEW DELHI - 20 (APPELLANT) (RESPONDENT) REVENUE BY : SH. T. VASANTHAN, SR. DR. ASSESSEE BY : SH. SUBODH GUPTA, FCA ORDER THE REVENUE HAS FILED THE APPEAL AGAINST THE ORDER DATED 25.11.2016 OF THE LD. CIT(A)-39, NEW DELHI PERTAINI NG TO ASSESSMENT YEAR 2012-13 ON THE FOLLOWING GROUNDS:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE U/S 36(1)(III) OF RS. 44,22,720/- ON ACCOUNT OF INTEREST EXPENSES ON BUSINESS ADVANCE FOR PURCHASE OF EQUITY SHARES OUT OF BORROWED FUNDS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 3,63,454/- U/S. 14A. 2 3. THE APPELLANT CRAVES, LEAVE OR RESERVING THE RIGHT TO AMEND MODIFY, ALTER, ADD OR FOREGO ANY GROUND(S) OF APPEAL AT ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEAL. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE FILED RETURN DECLARING LOSS OF RS. 1,67,14,148/- ON 30.9.2012. THE CASE OF THE ASSESSEE WAS PROCESSED U/S. 143(1) OF THE INCOME TA X ACT, 1961 (HEREINAFTER REFERRED THE ACT). SUBSEQUENTLY, THE C ASE WAS TAKEN UP IN SCRUTINY AND NOTICE U/S. 143(2) OF THE ACT WAS I SSUED ON 12.8.2013 AND SERVED UPON THE ASSESSEE. THEREAFTER, NOTICES U /S. 142(1) OF THE ACT ALONGWITH QUESTIONNAIRE WAS ISSUED AND DULY S ERVED UPON THE ASSESSEE WHEREIN CERTAIN SPECIFIC DETAILS WERE CALL ED FOR. THE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING , MARKETING OF IMFK, COUNTRY LIQUOR AND TRADING IN VANASPATI AND E DIBLE OIL. THE EDIBLE OIL SEGMENT COMPRISES OF TRADING IN VANSAPAT I, REFINED OILS AND CRUDE EDIBLE OILS. THE LIQUOR SEGMENT COMPRISES OF BOTTLING, MANUFACTURING AND TRADING OF IMFL AND COUNTRY LIQUO R AT ITS UNIT AT SANSARPUR TERRACE, DISTT. KANGRA (HIMACHAL PRADESH) AND WHOLE SALE VENDS IN THE STATE OF HIMACHAL PRADESH. THE AO COMP LETED THE ASSESSMENT AT RS. 41,69,034/- U/S. 143(3) OF THE AC T VIDE ORDER DATED 2.3.2015 AND MADE THE VARIOUS ADDITIONS. AGAI NST THE ASSESSMENT ORDER, THE ASSESSEE APPEALED BEFORE THE LD. CIT(A), WHO VIDE HIS IMPUGNED ORDER DATED 25.11.2016 HAS PARTL Y ALLOWED THE APPEAL BY GIVING PART RELIEF TO THE ASSESSEE. 3 3. AGGRIEVED WITH IMPUGNED ORDER DATED 25.11.2016, REVENUE FILED AN APPEAL BEFORE THE TRIBUNAL. 4. LD. DR RELIED UPON THE ORDER OF THE AO AND REITE RATED THE GROUNDS OF APPEAL. 5. ON THE CONTRARY, LD. COUNSEL OF THE ASSESSEE RE LIED UPON THE ORDER OF THE LD. CIT(A) AND STATED THAT LD. CIT(A) HAS PASSED A WELL REASONED ORDER WHICH DOES NOT NEED ANY INTERFERENCE . 6. I HAVE HEARD BOTH THE PARTIES AND PERUSED THE RE CORDS AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW, E SPECIALLY THE CONTENTION RAISED IN THE ORIGINAL GROUNDS OF APPEAL FILED BY THE REVENUE. I FIND THAT THE LD. CIT(A) HAS ELABORATELY DISCUSSED THE ISSUE IN PARA NO. 5 TO 5.3 AT PAGE NO. 13 & 14 AN D PARA NO. 5.5 AT PAGE NO. 15 OF THE IMPUGNED ORDER. FOR THE SAKE OF CONVENIENCE, THE RELEVANT PARAGRAPHS ARE REPRODUCED AS UNDER:- 5. I HAVE CONSIDERED THE ORDER U/S 143(3) OF THE A CT, THE SUBMISSION OF THE AR ALONG WITH THE CASE LAWS RELIE D UPON BY HIM AND THE EXTANT LAW ON THE SUBJECT. WHIL E THE GROUNDS AT (H) AND (I) ARE GENERAL AND NOT PRESSED DURING THE APPELLATE PROCEEDINGS, THE GROUND AT (D) COVERS THE GROUNDS AT (B) AND (C) AND THAT AT (F) COVERS THE G ROUND AT (E), WHILE THE GROUND AT (G) IS ON THE DEMAND RA ISED ON THE ASSESSED INCOME COVERING ALL THE GROUNDS OF APPEAL. FROM THE GROUND AT (A) OF THE GROUNDS OF AP PEAL MENTIONED AT PARA 3 ABOVE, IT IS OBSERVED FROM THE 4 IMPUGNED ORDER THAT THE AO HAS REJECTED THE CONTENT ION OF THE APPELLANT TOWARDS THE PROPOSED DISALLOWANCE OF EXPENSES U/S 14A ON THE STRENGTH OF THE MEANING OF SECTION 14A ITSELF AND ITS DETERMINATION VIDE APPLI CATION OF RULE 8D OF THE INCOME TAX RULES 1962. 5.1 FROM A PLAIN READING OF SECTION 14A (1), IT IS CLEAR THAT THE OBJECTIVE BEHIND THE PROVISION IS TO DISAL LOW ONLY SUCH EXPENSE WHICH IS RELATABLE TO TAX-EXEMPT INCOM E AND NOT EXPENDITURE IN RELATION TO ANY TAXABLE INCO ME. WHILE THERE IS NO DOUBT THAT THE METHOD FOR DETERMI NING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME IS AVAILABLE IN RULE 80 OF THE INCOME TAX RULES 1962 [INSERTED BY IT (FIFTH ARNDT. ) RULES 2008 W.E.F. 24/3/2008], YET THE INTENTION OF THE LEGISLATURE ON THIS ASPECT IS CLEAR. THE AO IS REQU IRED TO FIRST SATISFY HIMSELF / HERSELF BEFORE EMBARKING ON THE DETERMINATION OF DISALLOWANCE U/S 14A R W RULE 8D. THUS, WHILE SECTION 14A OF THE IT ACT STIPULATES THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITUR E INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT, I T ALSO PLACES A DUTY ON THE AO TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE INCURRED, IN ACCORDANCE WITH THE PRESCR IBED METHOD (RULE 8D), SATISFACTION OF THE AO REGARDING THE 5 ASSESSEE'S CLAIM OF EXPENDITURE OR NIL EXPENDITURE. FURTHER, THE ISSUE STANDS FAIRLY SETTLED (ALBEIT TH E REVENUE'S SLP HAS BEEN ADMITTED BY THE APEX COURT) IN VIEW OF THE PLETHORA OF JUDICIAL PRONOUNCEMENTS AS UNDER:- - DISALLOWANCE OF EXPENSES RELATED TO TAX EXEMPT INCOME - SATISFACTION OF AO, REGARDING CLAIM OF EXPENDITUR E / NIL EXPENDITURE DISALLOWED BY ASSESSEE FROM ITS BOOKS OF ACCOUNTS, COMPULSORY - DISALLOWANCE U/S 14A NOT AUTOMATIC, AO TO SHOW NEXUS BETWEEN TAX EXEMPT INCOME AND RELATED EXPENDITURE - EARNING OF TAX EXEMPT INCOME NECESSARY FOR DETERMINING DISALLOWANCE U/S 14A - DISALLOWANCE RESTRICTED TO THE QUANTUM OF TAX EXEMPT INCOME RECEIVED - ONLY NET INTEREST EXPENSES ON BONCWEA FUNDS TO BE CONSIDERED FOR DISALLOWANCE U/S 14A 5.2 IN THE IMPUGNED ORDER IT IS MENTIONED, INTER AL IA,., THE COMPANY HAS INVESTED IN SHARES OF PNB AND OTHE R COMPANIES AND IN MUTUAL FUNDS. IN THE ASSTT. YEAR 2 011- 12, DISALLOWANCE OF RS.66,578/- WAS MADE BY THE A.O . THE COMPANY IS HOLDING 400 SHARES OF PUNJAB NATIONA L 6 BANK AS ON 31/0312012. IN ITS SUBMISSION DATED 22/01/2015, THE COMPANY DID NOT DISCLOSE FULL DETAI LS OF OTHER INCOME OF RS.3,04,433 UNDER THE HEAD MISC. INCOME OF RS.9,96,317/-. THE ASSESSEE VIDE LETTER D ATED 26/1212014 STATED THAT NO DIVIDEND WAS EARNED. AS P ER THE INFORMATION AVAILABLE, PUNJAB NATIONAL BANK HAS DECLARED DIVIDEND OF 22% I.E. RS.22/- PER SHARE ON 16/0612011 AND DIVIDEND OF RS.8800/- SHOULD HAVE BE EN RECEIVED BY THE COMPANY IN THE F. Y. 2011-12. THE COMPANY INTENTIONALLY CONCEALED THIS FACT TO AVOID ADDITION U/S 14A AND THE PROVISIONS OF SECTION 14A OF THE ACT ARE SQUARELY APPLICABLE ON THE ASSESSEE. THE COMPUTATION OF DISALLOWANCE U/S 14A OF THE ACT READ WITH RULE 8D IS DONE ... ' HOWEVER, FROM THE IMPUGNED OR DER, IT IS OBSERVED THAT THE DETERMINATION OF DISALLOWAN CE U/S 14A R W RULE 80 IS NOT CORRECT AS THERE IS NO NEXUS SHOWN BETWEEN EXPENSES RELATED TO INCOME ROT INCLUDED IN THE TOTAL INCOME (TAX EXEMPT INCOME) AND THE TAX-EXEMPT INCOME ITSELF. EVEN THE INVESTMENT IS NOT FRESH BUT OF EARLIER YEARS. 5.3 IT CAN THEREFORE BE SAFELY BE INFERRED FROM TH E IMPUGNED ORDER THAT THE SATISFACTION OF THE AO FOR DISALLOWANCE OF EXPENSES, IN VIEW OF THE PRESUMED T AX- EXEMPT DIVIDEND INCOME, U/S. 14A OF THE ACT IS DRAW N 7 FROM THE FACT THAT THE APPELLANT SUO MOTO DID NOT M AKE ANY SUCH DISALLOWANCE. ALSO, THERE APPEARS TO HAVE BEEN NO OBJECTIVE ANALYSIS OF THE APPELLANTS EXPENSE IN THIS REGARD VIS--VIS ITS ACCOUNT. AGAIN, THE LEGISLATIV E INTENT OF SECTION 14A WHICH IS TO DISALLOW THE EXPENDITURE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF TOT AL INCOME REQUIRES PROPER IDENTIFICATION RATHER THAN DISALLOWING ALL OR PROPORTIONATE INTEREST AND ADMINISTRATIVE EXPENSES ON AN AD HOC BASIS. IN FACT , THE AR'S VERSION OF THE FACTS IS BORNE OUT FROM RECORDS . IT IS ALSO GATHERED THAT THE CIT(A) HAS DELETED THE DISALLOWANCE OF RS.66,578/- U/S 14A IN T ASSESSMENT ORDER FOR AY 2011-12 STATING, INTER ALIA, ' ... IN THIS CASE THE APPELLANT HAS SUBMITTED THAT IT HAS NOT CLAIMED THE DIVIDEND INCOME IN THE COMPUTATION OF INCOME. THE APPELLANT HAS RELIED THE DECISION OF CIT VS. CORRTE CH ENERGY (P.) LTD. (2014) 45 TAXMAN.COM 116 (GUJARAT) THAT THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPT ION IN SUCH A SITUATION UNDER SECTION 14A COULD HAVE NO APPLICATION. THE APPELLANT HAS ALSO RELIED THE DECI SION OF CIT VS SHIVAM MOTORS JUDGEMENT DATED 05/05/2014 OF HON'BLE ALLAHABAD HIGH COURT WHERE IT WAS HELD THE 'IN THE ABSENCE OF ANY INTEREST FREE INCOME, THERE CANN OT BE ANY DISALLOWANCE AS NO CORRESPONDING EXPENDITURES W ERE 8 INCURRED TO EARN A PARTICULAR TAX FREE INCOME' IN A BOVE CIRCUMSTANCES AND IN VIEW OF THE ABOVE DECISIONS TH AT ASSESSEE HAS NOT CLAIMED EXEMPT INCOME. SO, NO DISALLOWANCE CAN BE MADE. THEREFORE, THE ADDITION M ADE BY THE AO IS HEREBY DELETED.' ACCORDINGLY, IN VIEW OF THE EXTANT LAW ON THE SUBJECT, PRESENTLY SETTLED BY JUD ICIAL PRECEDENTS FROM THE COURTS INCLUDING THE JURISDICTI ONAL HIGH COURT (DELHI HC) - MAXOPP INVESTMENT LTD V CIT (A Y 2002-03) ITA NO. 68712009 (DEL HC) CHEMINVEST LTD. CIT (AY 2004-05) (2015) 61 TAXMANN.COM 118 (DEL HC) COMMISSIONER OF INCOME TAX-IV VS HOLCIM INDIA PVT. LTD., ITA NO. 48612014 AND 29912014 CITV TAIKISHA ENGINEERING INDIA LIMITED ITA 115/2014 & 119/2014 DATED 25/11/2014 (DEL) DCM LTD. V DCIT, CIRCLE 10 (1) NEW DELHI AND VICE - VERSA 2015 (9) TM11.110 ITAT DELHI JOINT INVESTMENTS PVT. LTD. VERSUS COMMISSIONER O F INCOME TAX 372 ITR 694 CIT VS. HERO CYCLES LTD. [2010]189 TAXMANN 50 (PUNJ. & HAR.) ACB SERVICES PVT. LTD. (HC) (DEL) 9 AND IN DUE DEFERENCE TO THE AFOREMENTIONED COURT DECISIONS, I AM INCLINED TO AGREE WITH THE CONTENTI ON OF THE APPELLANT IN THIS REGARD AND DELETE THE DISALLO WANCE MADE U/S. 14A OF THE ACT IN THE IMPUGNED ORDER. .5.5 WITH REGARD TO THE GROUND AT (C) ABOVE RELA TING TO THE DISALLOWANCE OF IN OBSERVED FROM THE IMPUGNED O RDER THAT THE APPELLANT HAS INVESTMENT IN 653100 EQUITY SHARES OF M/S. GLOBUS INDUSTRIES AND SERVICES LTD. AS WELL AS GIVEN ADVANCES OF RS.312.56 CRORES TO PUNJAB STA TE INDUSTRIES DEVELOPMENT CORPORATION (PSI DC) AND RS.56,00,000/- TO MR. SURAJ GUPTA TO ACQUIRE SHARES OF M/S. GLOBUS INDUSTRIES AND SERVICES LTD. THE COMPAN Y HAS TAKEN SECURED LOAN FROM BANKS AND UNSECURED LOA NS FROM OTHERS AND INTEREST OF RS.2,68,50,884/- IS DEB ITED UNDER THE HEAD 'FINANCE COST', WHEREAS THE COMPANY IS ADVANCING INTEREST FREE ADVANCES TO GLOBUS INDUSTRI ES & SERVICES LTD / PSIDC / SURAJ GUPTA. IN RESPONSE TO THE SHOW CAUSE ISSUED REGARDING CHARGING OF INTEREST @ 12% INTEREST ON THE ADVANCES OF RS.368.56 LACS, THE APP ELLANT RESPONDED THAT THE MIS. GLOBUS INDUSTRIES AND SERVI CES LTD. WAS ENGAGED IN MANUFACTURE OF VANASPATI AND REFINED OIL AT FAZILKA (PUNJAB) AND BOTH PSIDC AND SURAJ GUPTA WERE HOLDING THE SHARES OF THE COMPANY WHICH THE 10 APPELLANT WAS IN THE PROCESS OF ACQUISITION. AS THE SE WERE ADVANCES OF PURCHASE OF ASSETS AND NOT A LOAN, THER E WAS NO STIPULATION REGARDING PAYMENT OF INTEREST. HOWEV ER, DUE TO CERTAIN STRATEGIC DECISION AT THE LEVEL OF P SIDC, THE TRANSFER OF SHARES. IS YET TO TAKE PLACE AND HE NCE THE OUTSTANDING. THE APPELLANT FURTHER SUBMITTED THAT T HERE WAS NO FRESH INVESTMENT IN THIS REGARD DURING THE Y EAR AND THE IMPUGNED ADVANCES FOR PURCHASE OF SHARES OF M/S. GLOBUS INDUSTRIES AND SERVICES LTD. WAS MADE I N YEARS. IN THE IMPUGNED ORDER, THE APPELLANT'S SUBMISSION W AS REJECTED THOUGH STATING THAT IT HAD BORROWED FUNDS AND CLAIMED INTEREST OF RS.2,47,03,610/- (FINANCE COST ). HOWEVER, FROM THE ORDER IT IS NOT CLEAR AS TO HOW T HE AO CAME TO CONCLUDE THAT BORROWED FUNDS WERE UTILIZED WHEN THE ADVANCE WAS MADE DURING THE PERIOD BETWEEN 2005 AND 2007 AND CERTAINLY NOT IN THE RELEVANT PREVIOUS YEAR, AS GATHERED FROM THE COPIES OF THE AUDITED ACCOUNTS AVAILABLE. OBVIOUSLY NO EXERCISE TO PROVE THE NEXUS BETWEEN DIVERSION OF FUNDS GIVING INTEREST FREE AD VANCES (TO SISTER CONCERNS) APPEARS TO HAVE BEEN DONE BEFO RE ARRIVING AT SUCH A CONCLUSION. IT IS IMPORTANT AT T HIS JUNCTURE TO MENTION THAT THE APPELLANT'S OBJECTION MENTIONS, INTER ALIA, 'WITH RESPECT TO BOTH OF THE ABOVE 11 DECISIONS RELIED UPON BY THE LEARNED AO, THE ADMITT ED FACTS WERE THAT THE BORROWED FUNDS WERE USED FOR ACQUIRING THE CONTROLLING INTEREST OF MAKING INVEST MENT. HOWEVER, IN THE PRESENT CASE, NO SUCH FINDING HAS B EEN RECORDED BY THE LEARNED AO THAT BORROWED FUNDS WERE USED BY THE ASSESSEE IN ACQUIRING THE CONTROLLING I NTEREST OR MAKING INVESTMENT. IT IS SUBMITTED THAT SUCH DIV ERSION OF FUNDS COULD ONLY BE ASCERTAINED IN THE YEAR WHEN THE INVESTMENT WAS ORIGINALLY MADE. AS PER RECORDS, THE INVESTMENTS WERE MADE OVER A PERIOD FROM JANUARY 20 05 TO DECEMBER 2007. THE ASSESSEE WAS ASSESSED ULS 143(3) DURING 2007-08 & 2009-10. IN NONE OF THESE ASSESSMENTS, SUCH FINDING OR ALLEGATION OF DIVERSIO N OF FUNDS WAS MADE. THUS LEARNED AO WAS ARBITRARY IN TH E PRESENT CASE WITHOUT RECORDING FACTS AND FINDING OF DIVERSION OF FUNDS'. SECONDLY, IT IS OBSERVED FROM THE AUDITED P&L A/C OF THE APPELLANT THAT NO RELATED EXPENDITURE WAS CLAIMED AS A DEDUCTION. ONLY IF INT EREST ON BORROWED FUND IS CLAIMED U/S 36(1 )(III) CAN A DISALLOWANCE BE MADE THEREIN. THIRDLY, FROM THE IMPUGNED ORDER, IT IS OBSERVED THAT THE COURT DECIS IONS RELIED ON BY THE AO I.E. CIT VS. AMRITABEN R SHAH 2 38 ITR 777 (BOM HE) AND SARABHAI SONS PVT. LTD. VS. ER R 201FTR 464 (GUJ HE) ARE ON A DIFFERENT ISSUE. BOTH CASES 12 RELATE TO THE DEDUCTION U/S 57(III) WHICH IS NOT SO IN THE PRESENT CASE. FOURTHLY, IT IS OBSERVED FROM THE APP ELLANT'S SUBMISSION THAT THE INVESTMENT IN M/S. GLOBUS INDUS TRIES & SERVICES LTD WAS TO INCREASE ITS STAKE IN THAT CO MPANY WHICH IS IN THE LINE OF MANUFACTURE AND SALE OF EDI BLE OILS, VANASPATI ETC. THERE APPEARS TO BE NO FINDING OF TH E FACT THAT M/S. GLOBUS INDUSTRIES & SERVICES LTD. AND THE APPELLANT ARE SISTER CONCERNS. FINALLY, EVEN IN THE IMPUGNED ORDER THE BUSINESS OF THE APPELLANT INCLUD ES TRADING IN VANASPATI AND EDIBLE OILS. ACCORDINGLY, CONSIDERING ALL THESE OBSERVATIONS AND ARGUMENTS, T HE DISALLOWANCE OF INTEREST U/S 36(1)(III) MADE IN THE IMPUGNED ORDER BY WORKING OUT THE AVERAGE RATE OF INTEREST AT 12% ON THE INTEREST-FREE ADVANCE OF RS.368.56 LACS (= RS.44,22,720/-) IS DELETED. 6.1 AFTER GOING THROUGH THE AFORESAID FINDING OF TH E LD. CIT(A), WITH REGARDING TO GROUND NO. 2 RELATING TO DELET ION OF ADDITION U/S. 14A OF THE ACT OF RS. 3,63,454/- IS CONCERNED, IT IS OBSERVED THAT THE AO HAS REJECTED THE CONTENTION OF THE ASSESSEE TOWARDS THE PROPOSED DISALLOWANCE OF EXPENSES U/S 14A ON THE ST RENGTH OF THE MEANING OF SECTION 14A ITSELF AND ITS DETERMINATION VIDE APPLICATION OF RULE 8D OF THE INCOME TAX RULES 1962. FROM A PLA IN READING OF SECTION 14A(1), IT IS CLEAR THAT THE OBJECTIVE BEHI ND THE PROVISION IS TO DISALLOW ONLY SUCH EXPENSE WHICH IS RELATABLE TO TAX-EXEMPT 13 INCOME AND NOT EXPENDITURE IN RELATION TO ANY TAXAB LE INCOME. WHILE THERE IS NO DOUBT THAT THE METHOD FOR DETERMINING A MOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME IS AVAILABLE IN RULE 80 OF THE INCOME TAX RULES 1962 [ INSERTED BY IT (FIFTH ARNDT.) RULES 2008 W.E.F. 24/3/2008], YET TH E INTENTION OF THE LEGISLATURE ON THIS ASPECT IS CLEAR. THE AO IS REQU IRED TO FIRST SATISFY HIMSELF / HERSELF BEFORE EMBARKING ON THE DETERMINA TION OF DISALLOWANCE U/S 14A R W RULE 8D. THUS, WHILE SECTI ON 14A OF THE IT ACT STIPULATES THAT NO DEDUCTION SHALL BE ALLOWED I N RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT, IT ALSO PLACES A DUTY ON THE AO TO DETERMINE THE AMOUNT OF SUCH EXPE NDITURE INCURRED, IN ACCORDANCE WITH THE PRESCRIBED METHOD (RULE 8D), SATISFACTION OF THE AO REGARDING THE ASSESSEE'S CLA IM OF EXPENDITURE OR NIL EXPENDITURE. FURTHER, THE ISSUE STANDS FAIRL Y SETTLED (ALBEIT THE REVENUE'S SLP HAS BEEN ADMITTED BY THE APEX COURT) IN VIEW OF THE PLETHORA OF JUDICIAL PRONOUNCEMENTS AS UNDER:- - DISALLOWANCE OF EXPENSES RELATED TO TAX EXEMPT INCOME - SATISFACTION OF AD, REGARDING CLAIM OF EXPENDITUR E / NIL EXPENDITURE DISALLOWED BY ASSESSEE FROM ITS BOOKS OF ACCOUNTS, COMPULSORY 14 - DISALLOWANCE U/S 14A NOT AUTOMATIC, AO TO SHOW NEXUS BETWEEN TAX EXEMPT INCOME AND RELATED EXPENDITURE - EARNING OF TAX EXEMPT INCOME NECESSARY FOR DETERMINING DISALLOWANCE U/S 14A - DISALLOWANCE RESTRICTED TO THE QUANTUM OF TAX EXEMPT INCOME RECEIVED - ONLY NET INTEREST EXPENSES ON BONCWEA FUNDS TO BE CONSIDERED FOR DISALLOWANCE U/S 14A 6.1.1 I FURTHER FIND THAT IN THE ASSESSMENT ORDER I T IS MENTIONED, INTER ALIA,.. THE COMPANY HAS INVESTED IN SHARES OF PNB AND OTHER COMPANIES AND IN MUTUAL FUNDS. IN THE ASSTT. YEAR 2 011-12, DISALLOWANCE OF RS.66,578/- WAS MADE BY THE A.O. TH E COMPANY IS HOLDING 400 SHARES OF PUNJAB NATIONAL BANK AS ON 31 /0312012. IN ITS SUBMISSION DATED 22/01/2015, THE COMPANY DID NOT DI SCLOSE FULL DETAILS OF OTHER INCOME OF RS.3,04,433 UNDER THE HE AD MISC. INCOME OF RS.9,96,317/-. THE ASSESSEE VIDE LETTER DATED 26 /1212014 STATED THAT NO DIVIDEND WAS EARNED. AS PER THE INFORMATION AVAILABLE, PUNJAB NATIONAL BANK HAS DECLARED DIVIDEND OF 22% I .E. RS.22/- PER SHARE ON 16/0612011 AND DIVIDEND OF RS.8800/- SHOUL D HAVE BEEN RECEIVED BY THE COMPANY IN THE F. Y. 2011-12. THE C OMPANY INTENTIONALLY CONCEALED THIS FACT TO AVOID ADDITION U/S 14A AND THE PROVISIONS OF SECTION 14A OF THE ACT ARE SQUARELY A PPLICABLE ON THE ASSESSEE. THE COMPUTATION OF DISALLOWANCE U/S 14A O F THE ACT READ 15 WITH RULE 8D IS DONE ... ' HOWEVER, FROM THE IMPUGN ED ORDER, IT IS OBSERVED THAT THE DETERMINATION OF DISALLOWANCE U/S 14A R W RULE 80 IS NOT CORRECT AS THERE IS NO NEXUS SHOWN BETWEEN E XPENSES RELATED TO INCOME ROT INCLUDED IN THE TOTAL INCOME (TAX EXE MPT INCOME) AND THE TAX-EXEMPT INCOME ITSELF. EVEN THE INVESTMENT I S NOT FRESH BUT OF EARLIER YEARS. IT CAN THEREFORE BE SAFELY BE INFERR ED FROM THE AOS ORDER THAT THE SATISFACTION OF THE AO FOR DISALLOWA NCE OF EXPENSES, IN VIEW OF THE PRESUMED TAX-EXEMPT DIVIDEND INCOME, U/ S. 14A OF THE ACT IS DRAWN FROM THE FACT THAT THE ASSESSEE SUO MO TO DID NOT MAKE ANY SUCH DISALLOWANCE. ALSO, THERE APPEARS TO HAVE BEEN NO OBJECTIVE ANALYSIS OF THE APPELLANTS EXPENSE IN THIS REGARD VIS--VIS ITS ACCOUNT. AGAIN, THE LEGISLATIVE INTENT OF SECTION 1 4A WHICH IS TO DISALLOW THE EXPENDITURE IN RELATION TO INCOME, WHI CH DOES NOT FORM PART OF TOTAL INCOME REQUIRES PROPER IDENTIFICATI ON RATHER THAN DISALLOWING ALL OR PROPORTIONATE INTEREST AND ADMIN ISTRATIVE EXPENSES ON AN AD HOC BASIS. IT IS ALSO GATHERED THAT THE LD . CIT(A) HAS DELETED THE DISALLOWANCE OF RS.66,578/- U/S 14A IN T ASSESSMENT ORDER FOR AY 2011-12 STATING, INTER ALIA, ' ... IN THIS CASE THE ASSESSEE HAS SUBMITTED THAT IT HAS NOT CLAIMED THE DIVIDEND INCOME IN THE COMPUTATION OF INCOME. THE APPELLANT HAS RELIED THE DECISION OF CIT VS. CORRTECH ENERGY (P.) LTD. (2014) 45 TAXMAN.COM 116 (GUJARAT) THAT THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPT ION IN SUCH A SITUATION UNDER SECTION 14A COULD HAVE NO APPLICATI ON. THE APPELLANT HAS ALSO RELIED THE DECISION OF CIT VS SHIVAM MOTOR S JUDGEMENT 16 DATED 05/05/2014 OF HON'BLE ALLAHABAD HIGH COURT WH ERE IT WAS HELD THE 'IN THE ABSENCE OF ANY INTEREST FREE INCOME, TH ERE CANNOT BE ANY DISALLOWANCE AS NO CORRESPONDING EXPENDITURES WERE INCURRED TO EARN A PARTICULAR TAX FREE INCOME' IN ABOVE CIRCUMSTANCE S AND IN VIEW OF THE ABOVE DECISIONS THAT ASSESSEE HAS NOT CLAIMED E XEMPT INCOME. SO, NO DISALLOWANCE CAN BE MADE. THEREFORE, THE ADD ITION MADE BY THE AO WAS RIGHTLY DELETED BY THE LD. CIT(A) IN VIE W OF THE EXTANT LAW ON THE SUBJECT, PRESENTLY SETTLED BY JUDICIAL P RECEDENTS FROM THE COURTS INCLUDING THE JURISDICTIONAL HIGH COURT (DEL HI HC) AS UNDER- MAXOPP INVESTMENT LTD V CIT (A Y 2002-03) ITA NO. 68712009 (DEL HC) CHEMINVEST LTD. CIT (AY 2004-05) (2015) 61 TAXMANN.COM 118 (DEL HC) COMMISSIONER OF INCOME TAX-IV VS HOLCIM INDIA PVT. LTD., ITA NO. 48612014 AND 29912014 CIT V TAIKISHA ENGINEERING INDIA LIMITED ITA 115/2014 & 119/2014 DATED 25/11/2014 (DEL) DCM LTD. V DCIT, CIRCLE 10 (1) NEW DELHI AND VICE - VERSA 2015 (9) TM11.110 ITAT DELHI JOINT INVESTMENTS PVT. LTD. VERSUS COMMISSIONER O F INCOME TAX 372 ITR 694 CIT VS. HERO CYCLES LTD. [2010]189 TAXMANN 50 (PUNJ. & HAR.) ACB SERVICES PVT. LTD. (HC) (DEL) 17 6.1.2 IN VIEW OF THE ABOVE, IN MY CONSIDERED OPINIO N, THE LD. CIT(A) HAS PASSED A WELL REASONED ORDER WHICH DOES NOT NEE D ANY INTERFERENCE ON MY PART, HENCE, I UPHOLD THE SAME AND REJECT THE GROUND NO. 2 RAISED BY THE REVENUE. 7. WITH REGARDING TO GROUND NO. 1 RELATING TO DE LETION OF ADDITION U/S. 36(1)(III) OF RS. 44,22,720/- ON ACCO UNT OF INTEREST EXPENSES ON BUSINESS ADVANCE FOR PURCHASE OF EQUITY SHARES OUT OF BORROWED FUNDS IS CONCERNED, I FIND THAT AS PER TH E ASSESSMENT ORDER, THE ASSESSEE HAS INVESTMENT IN 653100 EQUITY SHARES OF M/S. GLOBUS INDUSTRIES AND SERVICES LTD. AS WELL AS GIVE N ADVANCES OF RS.312.56 CRORES TO PUNJAB STATE INDUSTRIES DEVELOP MENT CORPORATION (PSI DC) AND RS.56,00,000/- TO MR. SURA J GUPTA TO ACQUIRE SHARES OF M/S. GLOBUS INDUSTRIES AND SERVIC ES LTD. THE COMPANY HAS TAKEN SECURED LOAN FROM BANKS AND UNSEC URED LOANS FROM OTHERS AND INTEREST OF RS.2,68,50,884/- IS DEB ITED UNDER THE HEAD 'FINANCE COST', WHEREAS THE COMPANY IS ADVANCI NG INTEREST FREE ADVANCES TO GLOBUS INDUSTRIES & SERVICES LTD / PSID C / SURAJ GUPTA. IN RESPONSE TO THE SHOW CAUSE ISSUED REGARDING CHAR GING OF INTEREST @ 12% INTEREST ON THE ADVANCES OF RS.368.56 LACS, T HE APPELLANT RESPONDED THAT THE MIS. GLOBUS INDUSTRIES AND SERVI CES LTD. WAS ENGAGED IN MANUFACTURE OF VANASPATI AND REFINED OIL AT FAZILKA (PUNJAB) AND BOTH PSIDC AND SURAJ GUPTA WERE HOLDIN G THE SHARES OF THE COMPANY WHICH THE ASSESSEE WAS IN THE PROCESS O F ACQUISITION. AS THESE WERE ADVANCES OF PURCHASE OF ASSETS AND NOT A LOAN, THERE WAS 18 NO STIPULATION REGARDING PAYMENT OF INTEREST. HOWEV ER, DUE TO CERTAIN STRATEGIC DECISION AT THE LEVEL OF PSIDC, THE TRANS FER OF SHARES. IS YET TO TAKE PLACE AND HENCE THE OUTSTANDING. THE ASSESS EE FURTHER SUBMITTED THAT THERE WAS NO FRESH INVESTMENT IN THI S REGARD DURING THE YEAR AND THE IMPUGNED ADVANCES FOR PURCHASE OF SHARES OF M/S. GLOBUS INDUSTRIES AND SERVICES LTD. WAS MADE IN YEA RS. IN THE ASSESSMENT ORDER, THE ASSESSEE'S SUBMISSION WAS RE JECTED THOUGH STATING THAT IT HAD BORROWED FUNDS AND CLAIMED INTE REST OF RS.2,47,03,610/- (FINANCE COST). HOWEVER, FROM THE ORDER IT IS NOT CLEAR AS TO HOW THE AO CAME TO CONCLUDE THAT BORROW ED FUNDS WERE UTILIZED WHEN THE ADVANCE WAS MADE DURING THE PERIO D BETWEEN 2005 AND 2007 AND CERTAINLY NOT IN THE RELEVANT PREVIOUS YEAR, AS GATHERED FROM THE COPIES OF THE AUDITED ACCOUNTS AVAILABLE. OBVIOUSLY NO EXERCISE TO PROVE THE NEXUS BETWEEN DIVERSION OF FU NDS GIVING INTEREST FREE ADVANCES (TO SISTER CONCERNS) APPEARS TO HAVE BEEN DONE BEFORE ARRIVING AT SUCH A CONCLUSION. IT IS IM PORTANT AT THIS JUNCTURE TO MENTION THAT THE APPELLANT'S OBJECTION MENTIONS, INTER ALIA, 'WITH RESPECT TO BOTH OF THE ABOVE DECISIONS RELIED UPON BY THE LEARNED AO, THE ADMITTED FACTS WERE THAT THE BORROW ED FUNDS WERE USED FOR ACQUIRING THE CONTROLLING INTEREST OF MAKI NG INVESTMENT. HOWEVER, IN THE PRESENT CASE, NO SUCH FINDING HAS B EEN RECORDED BY THE LEARNED AO THAT BORROWED FUNDS WERE USED BY THE ASSESSEE IN ACQUIRING THE CONTROLLING INTEREST OR MAKING INVEST MENT. IT IS SUBMITTED THAT SUCH DIVERSION OF FUNDS COULD ONLY B E ASCERTAINED IN 19 THE YEAR WHEN THE INVESTMENT WAS ORIGINALLY MADE. A S PER RECORDS, THE INVESTMENTS WERE MADE OVER A PERIOD FROM JANUAR Y 2005 TO DECEMBER 2007. THE ASSESSEE WAS ASSESSED ULS 143(3) DURING 2007- 08 & 2009-10. IN NONE OF THESE ASSESSMENTS, SUCH FI NDING OR ALLEGATION OF DIVERSION OF FUNDS WAS MADE. THUS AO WAS ARBITRARY IN THE PRESENT CASE WITHOUT RECORDING FACTS AND FINDIN G OF DIVERSION OF FUNDS'. SECONDLY, IT WAS OBSERVED FROM THE AUDITED P&L A/C OF THE APPELLANT THAT NO RELATED EXPENDITURE WAS CLAIMED A S A DEDUCTION. ONLY IF INTEREST ON BORROWED FUND IS CLAIMED U/S 36 (1)(III) CAN A DISALLOWANCE BE MADE THEREIN. THIRDLY, FROM THE IMP UGNED ORDER, IT IS OBSERVED THAT THE COURT DECISIONS RELIED ON BY THE AO I.E. CIT VS. AMRITABEN R SHAH 238 ITR 777 (BOM HC) AND SARABHAI SONS PVT. LTD. VS. CIT 201 ITR 464 (GUJ HC) ARE ON A DIFFERE NT ISSUE. BOTH CASES RELATE TO THE DEDUCTION U/S 57(III) WHICH IS NOT SO IN THE PRESENT CASE. FOURTHLY, IT IS OBSERVED FROM THE APPELLANT'S SUBMISSION THAT THE INVESTMENT IN M/S. GLOBUS INDUSTRIES & SERVICES LTD WAS TO INCREASE ITS STAKE IN THAT COMPANY WHICH IS IN THE LINE OF MANUFACTURE AND SALE OF EDIBLE OILS, VANASPATI ETC. THERE APPEA RS TO BE NO FINDING OF THE FACT THAT M/S. GLOBUS INDUSTRIES & SERVICES LTD. AND THE APPELLANT ARE SISTER CONCERNS. FINALLY, EVEN IN THE IMPUGNED ORDER THE BUSINESS OF THE APPELLANT INCLUDES TRADING IN VANAS PATI AND EDIBLE OILS. ACCORDINGLY, CONSIDERING ALL THESE OBSERVATIO NS AND ARGUMENTS, THE DISALLOWANCE OF INTEREST U/S 36(1)(III) MADE IN THE IMPUGNED ORDER BY WORKING OUT THE AVERAGE RATE OF INTEREST A T 12% ON THE 20 INTEREST-FREE ADVANCE OF RS.368.56 LACS (= RS.44,22 ,7201-) WAS RIGHTLY DELETED BY THE LD. CIT(A), WHICH DOES NOT N EED ANY INTERFERENCE ON MY PART, HENCE, I UPHOLD THE SAME A ND REJECT THE GROUND NO.1 RAISED BY THE REVENUE. 8. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 08-08-2017. SD/- (H.S. SIDHU) JUDICIAL MEMBER DATED :08-08-2017 SR BHATANGAR COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A), NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.