Thiru Arooran Sugars Ltd., CHENNAI V. ACIT, CHENNAI

ITA 1231/CHNY/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8806 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 1 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2016
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 23-05-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 06-06-2013
• Court: TRIBUNAL
• Department Lawyers: ARUN C BHARAT
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Earning of tax free income; Deemed dividend; Commercial expediency
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI , ! ' ! # . $% & '( BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO.1231/MDS./2013 / ASSESSMENT YEAR : 2009-10 M/S.THIRU AROORAN SUGARS LTD ., ELDORADO,VTH FLOOR, 112,UTTAMAR GANDHI ROAD, CHENNAI 600 034. VS. THE ASSISTA NT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE III(2), CHENNAI. [PAN AAACT 2382 B ] ( )* / APPELLANT) ( +,)* /RESPONDENT) ./ I.T.A.NO.1457/MDS./2013 / ASSESSMENT YEAR : 2009-10 THE ASSIST ANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE III(2), CHENNAI. VS. M/S.THIRU AROORAN SUGARS LTD ., ELDORADO,VTH FLOOR, 112,UTTAMAR GANDHI ROAD, CHENNAI 600 034. [PAN AAACT 2382 B ] ( )* / APPELLANT) ( +,)* /RESPONDENT) / APPELLANT BY : MR.R.VIJAYARAGHAVAN,ADVOCATE /RESPONDENT BY : MR.ARUN C. BHARAT, CIT DR / DATE OF HEARING : 23 - 05 - 201 6 / DATE OF PRONOUNCEMENT : 29 - 07 - 2016 ITA NO.1231,1457/MDS./15 :- 2 -: - / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE ARE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-III, CHENNAI D ATED 14.03.2013 PERTAINING TO ASSESSMENT YEAR 2009-10. FIRST WE TAKE UP REVENUES APPEAL (ITA NO.1457/MDS. /13) 2. THE FIRST GROUND IN THE APPEAL OF REVENUE IS WI TH REGARD TO DELETION OF ADDITION OF ` 11,03,84,378/- MADE TOWARDS DIFFERENCE OF PROFIT BETWEEN THE VALUE OF BAGASSE TRANSFERRED TO AND POWER TRANSFERRED FROM M/S.TERRA ENERGY LTD. 2.1. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE IS ENGAGED IN THE MANUFACTURE OF SUGAR. THE SUBSIDIARY COMPANY, M/S.T ERRA ENERGY LTD. IS ENGAGED IN THE BUSINESS OF CO-GENERATION OF POWE R WITH BAGASSEE AS FUEL PREDOMINANTLY. THE ASSESSEE SUPPLIES THE BAGAS SE FROM ITS SUGAR FACTORY TO TEL, WHICH IS BURNT IN THE BOILER OF M/S .TERRA ENERGY LTD.(TEL) TO PRODUCE STEAM AND THE STEAM IS IN TURN USED TO PRODUCE ELECTRICITY. THE ASSESSEE COMPANY HAS ENTERED INTO A BARTER AGREEMENT WITH TERRA ENERGY LTD., WHEREBY THE ASSESSEE COMPAN Y SHALL SUPPLY BAGASSE FROM ITS SUGAR FACTORY TO TEL AND TEL IN RE TURN FOR THE BAGASSE SUPPLIED SHALL SUPPLY TO THE ASSESSEE COMPA NY NECESSARY STEAM WHICH SHALL NOT BE LESS THAN 45% OF THE CANE CRUSES AND ELECTRICITY WHICH SHALL NOT BE LESS THAN 30 UNITS P ER TONNE OF CANE ITA NO.1231,1457/MDS./15 :- 3 -: CURSHED. THE QUANTITY OF POWER AND STEAM ACTUALLY S UPPLIED IS QUANTIFIED BY TEL AND ANY POWER OR STEAM SUPPLIED I N EXCESS OF THE AFORESAID AGREEMENT IS CHARGED BY TEL. 2.2 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO MADE THE ADDITION OF A SUM OF ` 11,03,84,378/-AS THE DIFFERENCE IN THE VALUE OF THE BAGASSE, A BY-PRODUCT ARISING IN THE MANUFAC TURE OF SUGAR, SUPPLIED BY THE ASSESSEE TO ITS SUBSIDIARY COMPANY TEL IN EXCHANGE FOR THE POWER AND STEAM RECEIVED BY THE ASSESSEE FR OM THE SUBSIDIARY COMPANY. THE AO CONSIDERED THE MARKET VALUE OF THE BAGASSEE SUPPLIED BY THE ASSESSEE TO ITS SUBSIDIARY COMPANY AND AGAINST THE SAID VALUE OF BAGASSEE, CONSIDERED THE VALUE OF POW ER RECEIVED BY THE ASSESSEE FROM THE SUBSIDIARY COMPANY AND ARRIVED AT THE DIFFERENCE OF ` 11,03,84,378/-, WHICH HAS BEEN ADDED BACK TO THE IN COME OF ASSESSEE. AGGRIEVED, THE ASSESSEE CARRIED THE APPEA L BEFORE THE LD.CIT(A). ON APPEAL, THE LD.CIT(A) CONFIRMED THE ORDER OF LD.CIT(A). 2.3. AFTER HEARING THE BOTH THE PARTIES, THIS ISSU E WAS DECIDED BY THE TRIBUNAL IN ASSESSEE'S OWN CASE IN ITA NO.635/MDS./ 2010 & 791/MDS./2012 FOR ASSESSMENT YEAR 2000-01 VIDE ORDE R DATED 17.01.2013. THE TRIBUNAL HELD AS FOLLOWS:- 24. WE HAVE HEARD BOTH SIDES AT LENGTH AND ALSO GO NE THROUGH THE RELEVANT FINDINGS OF THE ASSESSING OFFI CER AS WELL AS CIT(A) AND CASE LAW CITED BY THE ASSESSEE I.E. C IT VS. ITA NO.1231,1457/MDS./15 :- 4 -: TANFAC INDUSTRIES LD.: S.L.P. (C) NO. 18537 OF 2009 DECIDED BY THE HONBLE SUPREME COURT VIDE ORDER DAT ED 27.07.2009. BOTH PARTIES ARE NOT DISPUTING THE FACT S RELEVANT TO THE GROUND. THE ONLY QUESTION IS THAT IN THE ASS ESSMENT ORDER, THE ASSESSING OFFICER HAD NOT TAKEN INTO CON SIDERATION THE COST OF STEAM PURCHASED BY THE ASSESSEE FOR THE PURPOSE OF PRODUCING POWER. IN APPEAL, THE CIT(A) HAS QUANT IFIED THE COST AT RS.156/- PER TONNE. BEFORE US, THE REVENUE HAS NOT PRODUCED ANY MATERIAL SO AS TO CONTROVERT THE FINDI NGS OF THE CIT(A) ABOUT THE STEAM RECEIVED AND ITS COST. WE AL SO NOTICE THAT IN THE ABOVE SAID CASE LAW AS WELL, THE HONBL E SUPREME COURT HAS HELD THAT IN AN ISSUE PERTAINING TO SPECI AL DEDUCTION UNDER SECTION 801A OF THE ACT THAT THE C ONCERNED ASSESSEE IS ENTITLED TO CLAIM DEDUCTION QUA THE VAL UE OF THE STEAM USED FOR CAPTIVE CONSUMPTION. NEVERTHELESS, I N MODEM DAY TECHNOLOGY, STEAM IS ALSO AN ASSET CARR YING VALUE FOR THE PURPOSE OF COMPUTING PROFITS. IN THIS VIEW OF MATTER AND MORE SO, WHEN THERE IS NO RECORD REBUTTI NG THE FINDINGS OF THE CIT(A) QUA VALUATION OF STEAM, WE O BSERVE THAT ASSESSEES CLAIM HAS BEEN BY THE CIT(A). HENCE , WE SEE NO REASON TO INTERFERE. IN VIEW OF THIS ABOVE DECISION OF THE TRIBUNAL IN A SSESSEE'S OWN CASE, WE ARE INCLINED TO DECIDE THE ISSUE IN FAVOUR OF TH E ASSESSEE. THIS GROUND RAISED BY THE REVENUE IS DISMISSED. 3. THE SECOND GROUND IN THE APPEAL OF REVENUE IS W ITH REGARD TO DELETION OF ADDITION MADE BY AO IN RESPECT OF SALE OF MOLASSES. 3.1 THE FACTS OF THE CASE ARE THAT THE AO HAS MADE AN ADDITION OF ` 30,09,770/- IN RESPECT OF THE SALE OF MOLASSES BY T HE ASSESSEE BY ITA NO.1231,1457/MDS./15 :- 5 -: COMPARING THE PRICE AT WHICH ANOTHER COMPANY, TRICH Y DISTILLERIES AND CHEMICALS LIMITED HAS PURCHASED THE MOLASSES. THE AO FOUND THAT THE AVERAGE RATE AT WHICH THE MOLASSES WAS SOLD BY THE ASSESSEE DURING THE PERIOD FROM 1.4.2008 TO 31.3.2009 WAS ` 1,618.62 PER MT WHEREAS THE PREVAILING RATE AS PER THE PURCHASES MA DE BY M/S.TRICHY DISTILLERIES AND CHEMICALS LTD., WAS ` 2,259/- PER MT. THEREFORE, THE AO ADDED THE DIFFERENCE TO THE TOTAL INCOME OF ASSESSE E WHICH HAS RESULTED IN THE IMPUGNED ADDITION ` 30,09,770/-. AGGRIEVED WITH THE ORDER OF AO, THE ASSESSEE CARRIED THE APPEAL BEFORE THE LD.CIT(A). 3.2 ON APPEAL, THE LD.CIT(A) DELETED THE ADDITION O N THE REASON THAT THE PRICE DEPENDS UPON QUALITY OR GRADE AS WELL AS ON THE DEMAND AND SUPPLY POSITION. THE AO HAS TAKEN AVERAGE RATE OF ` 1,680/- PER MT, IN RESPECT OF ONE CUSTOMER NAMELY M/S.INTEGRATED SERVI CES P. LTD. AND COMPARED THE SALE RATE WITH THAT OF M/S.TRICHY DIST ILLERIES AND CHEMICALS LTD., AT ` 2,259/- PER MT. THE ASSESSEE HAS FILED DETAILS BEFORE THE LD.CIT(A) AS PER WHICH MOLASSES HAS BEEN PURCHASED AND SOLD AT RATES VARYING FROM ` 2,00/- MT TO ` 4,700/- MT. IT IS ALSO NOTED THAT THE AO HAS FAILED TO NOTE THAT PURCHASE PRICE OF MOLASSES INCLUDES EXCISE DUTY @ ` 750/- PER MT IN ADDITION TO SALES TAX @ ` 30/-, IF THESE TWO LEVIES ARE FACTORED IN AND THE VALUE AT WHICH P URCHASES HAVE BEEN SAID TO BE MADE BY M/S.TRICHY DISTILLERIES AND CHEM ICALS LTD., ARE ADJUSTED, IT CAN BE SEEN THAT THE PRICE AT WHICH TH E ASSESSEE HAS SOLD ITA NO.1231,1457/MDS./15 :- 6 -: MOLASSES IS HIGHER THAN THE PRICE AT WHICH IT WAS P URCHASED BY M/S.TRICHY DISTILLERIES AND CHEMICALS LTD. THUS, L D.CIT(A) DELETED THE ADDITION STATING THAT THE AO HAS NOT ESTABLISHED TH AT THE ASSESSEE HAS SOLD MOLASSES BELOW THE MARKET PRICE. NOW, THE REVE NUE IS IN APPEAL BEFORE US. 4. ACCORDING TO LD.A.R, MATERIAL BROUGHT ON RECORD SUGGESTS THAT THE PRICE CHARGED FOR SALE OF MOLASSES BY THE ASSES SEE COMPANY IS AT MARKET PRICE OF MOLASSES SOLD WAS COMPARED WITH THE PRICE AT WHICH IT HAS BEEN PURCHASED DURING THE RELEVANT MONTH AND IT S PRICE ALSO DEPENDS UPON QUALITY AND GRADE OF MOLASSES AND ALSO DEMANDS AND SUPPLY. THE PURCHASE OF MOLASSES INCLUDES EXCISE D UTY @ ` 750/- PER MT IN ADDITION TO SALES TAX @ ` 30/-, IF THESE TWO LEVIES ARE FACTORED IN AND THE VALUE AT WHICH PURCHASES HAVE BEEN SAID TO BE MADE BY M/S.TRICHY DISTILLERIES AND CHEMICALS LTD., ARE ADJ USTED, IT CAN BE SAFELY SAID THAT THE PRICE AT WHICH THE ASSESSEE HAS SOLD MOLASSES IS HIGHER THAN THE PRICE AT WHICH IT WAS PURCHASED BY M/S.TRI CHY DISTILLERIES AND CHEMICALS LTD. THE LD.D.R RELIED ON THE ORDER OF L D. ASSESSING OFFICER AND SUBMITTED THAT THE FINDINGS OF LD.CIT(A) TO BE REVERSED AS IT IS NOT BASED ON TRUE FACT. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION, THE ADDITION MADE BY THE AO CANNOT BE SUSTAINED AND WE FIND NO REASON TO INTERFERE WITH T HE ORDER OF ITA NO.1231,1457/MDS./15 :- 7 -: LD.CIT(A). THE PRICE OF THE MOLASSES IS DEPENDING ON THE QUALITY OF THE SAME. THE PRICES ARE TO BE COMPARED WITH SAME Q UALITY OF MOLASSES.THE AOS COMPARISON OF PRICE IS NOT PROPER . THE LD.CIT(A) CONSIDERED THE QUALITY OF MOLASSES AND VARIOUS COMP ONENTS INCLUDED IN IT TO ARRIVE AT A PROPER COMPARISON. THE DEPARTMENT AL REPRESENTATIVE WAS NOT ABLE TO CONTROVERT THE FINDINGS OF CIT(A). HENCE, THE SAME IS CONFIRMED AND THIS GROUND OF REVENUE IS REJECTED. 6. THE NEXT GROUND IN THE APPEAL OF REVENUE IS WIT H REGARD TO DELETION OF ADDITION OF ` 8.60 CRORES MADE AS DEEMED DIVIDEND U/S.2(22)(E) OF THE ACT BY AO. 6.1 THE FACTS OF THE ISSUE ARE THAT DURING THE COU RSE OF ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE HAS RECE IVED A SUM OF ` 28,60,00,000/- FROM SHREE AMBIKA SUGARS LTD, AN ASS OCIATE COMPANY OF THE ASSESSEE IN WHICH THE ASSESSEE IS HOLDING MO RE THAN 10% OF THE EQUITY SHARE CAPITAL. DURING THE YEAR, THE ASSESSEE PURCHASED ` 76,56,610/- EQUITY SHARES OF SHREE AMBIKA SUGARS LT D. (SASL) FOR TOTAL CONSIDERATION OF ` 30,70,30,061/-. THE AO NOTED THAT THE SHARES WERE BOUGHT BY ASSESSEE OUT OF BORROWING FROM OTHER CORPORTES VIZ. M/S.WARDHA POWER COMPANY LTD. AND AARSHREE INVESTME TNS LTD. THE AO FURTHER NOTED THAT ASSESSEE PAID INTEREST ON THE SAID BORROWINGS AND THE LOANS WERE REPAID DURING THE YEAR ITSELF. THE AO CALCULATED THE TRANSACTIONS WITH M/S.WARDHA POWER COMPANY LTD AND AARSHREE ITA NO.1231,1457/MDS./15 :- 8 -: INVESTMENTS LTD AND INTEREST OF 97,98,082/- WAS PAI D TO ABOVE COMPANIES WHICH WAS DISALLOWED. THE AO FURTHER REFE RRED TO THE BANK ACCOUNT DETAILS OF THE COMPANY AND NOTED THAT EXCEP T FOR AN AMOUNT OF ` 1,40,00,000/-, THE ENTIRE REPAYMENT OF ICDS OBTAINE D BY THE ASSESSEE FROM M/S.WARDHA POWER COMPANY LTD AND AARS HREE INVESTMENTS LTD HAD BEEN MADE BY THE ASSESSEE OUT O F AMOUNTS RECEIVED FROM M/S.SASL. THE AO FOUND THAT M/S.SASL IS A CLOSELY HELD COMPANY AND THEREFORE THE LOANS/ADVANCES AMOUNTING TO ` 28,60,00,000/- MADE TO THE ASSESSEE AMOUNTS TO DEEM ED DIVIDEND U/S.2(22)(E) OF THE ACT IN THE HANDS ASSESSEE AND A LSO INTEREST OF 97,98,082/- PAID ON THE ABOVE BORROWINGS DISALLOWED . ON THE RECEIPT OF ASSESSMENT ORDER, THE ASSESSEE FILED A PETITION U/S.154 OF THE ACT, WHEREIN CLEARLY MENTIONED THAT OUT OF ` 28,60,00,000/-, A SUM OF ` 20 CRORES WAS RECEIVED IN THE MONTH OF APRIL 2009, WHI CH FELL AFTER THE ASSESSMENT YEAR 2009-10 AND HENCE CLAIMED THAT THIS SHOULD NOT BE CONSIDERED IN THE ASSESSMENT YEAR. BASED ON THIS PE TITION, THE AO HAS DELETED THE ADDITION OF ` 20 CRORES WITH THE RESULT THAT THE AMOUNTS OF ` 8,60,00,000/- STANDS ASSESSED AS DEEMED DIVIDEND U/ S.2(22)(E) OF THE ACT.. AGGRIEVED WITH THE ORDER OF LD. ASSESSING OFFICER, THE ASSESSEE CARRIED THE APPEAL BEFORE THE LD.CIT(A). O N APPEAL, THE LD.CIT(A) AFTER RELYING ON VARIOUS CASE LAWS OBSER VED THAT IT IS AN UNDISPUTED FACT THAT DURING THE YEAR THE ASSESSEE H AS PURCHASED SUGAR ITA NO.1231,1457/MDS./15 :- 9 -: FROM SASL TO THE EXTENT OF 16.90 CRORES WHICH CLEAR LY ESTABLISHES THAT THERE IS A TRADING RELATIONSHIP BETWEEN THE ASSESSE E AND SASL. FURTHER, HE OBSERVED THAT THE DETAILS OF THE TRANSA CTIONS BETWEEN THE ASSESSEE AND SASL AS MENTIONED IN PARAGRAPH 7.3.1 O F HIS ORDER CLEARLY ESTABLISH THE EXISTENCE OF TRADING RELATION SHIP BETWEEN THE ASSESSEE AND THE SASL AND THAT THE TRANSACTIONS BET WEEN THE TWO COMPANIES INCLUDING FUNDS TRANSFER REPRESENT TRANSF ER IN THE COURSE OF ORDINARY TRADING TRANSACTIONS BETWEEN THE TWO COMPA NIES. THEREFORE LD.CIT(A) DIRECTED THE AO TO DELETE THE ADDITION MA DE BY AO ON ACCOUNT OF DEEMED DIVIDEND U/S.2(22)(E) OF THE ACT. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE AFTER RECTIFICATION U/S.154 OF THE ACT VIDE ORDER DATED 23.02.2012, AO CONSIDERED THE AMOUNT OF ` 8.6 CRORES AS DEEMED DIVIDEND IN THE HANDS OF ASSESSEE AS RECEIVE D FROM SASL ON ACCOUNT OF PAYMENT TO M/S.AARSEE INVESTMENTS P LTD. ON BEHALF OF THE ASSESSEE. THE LD.CIT(A) WAS OF THE OPINION THAT SAS L HAS BEEN A SISTER CONCERN OF THE ASSESSEE COMPANY WHICH IS ENG AGED IN THE MANUFACTURE OF SUGAR AND ALCOHOL APART FROM CO-GENE RATION OF POWER AND MANAGED BY A COMMON MANAGING DIRECTOR MR.R.V.TY AGARAJAN. FURTHER, LD.CIT(A) OBSERVED THAT FUNDS AND PERSONNE L AND RESOURCES WHICH ARE COMMON IN NATURE AND THUS, THERE IS UNITY OF MANAGEMENT ITA NO.1231,1457/MDS./15 :- 10 -: AND CONTROL BETWEEN THESE TWO COMPANIES. HENCE, PRO VISIONS OF THE SECTION 2(22)(E) OF THE ACT CANNOT BE APPLIED TO RU NNING ACCOUNT BETWEEN THE ASSESSEE AND SASL, WHICH IS IN THE ORDI NARY COURSE OF BUSINESS TRANSACTION AND DELETED THE ADDITION MADE U/S.2(22)(E) OF THE ACT. 7.1 CONTRARY TO THIS, THE LD.D.R SUBMITTED BEFORE U S THAT EVEN RUNNING ACCOUNT CANNOT GO OUT OF THE PROVISIONS OF THE SECTION 2(22)(E) OF THE ACT. IN OUR OPINION, ONCE THE ASSE SSEE HAS ESTABLISHED THAT THIS IS A RUNNING ACCOUNT BETWEEN THE PARTIES ON ACCOUNT OF BUSINESS TRANSACTIONS BETWEEN THE TWO PARTIES, PROV ISIONS OF THE SECTION 2(22)(E) OF THE ACT CANNOT BE APPLIED AS HE LD BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. RA J KUMAR REPORTED IN 318 ITR 462(MAD.) WHEREIN LORDSHIPS AFTER CONSIDERI NG THE JUDGEMENT OF APEX COURT IN THE CASE OF TARULATA SHYAM (SMT.) VS. CIT [1977] 108 ITR 345(SC) HELD AS UNDER:- IT IS CLEAR THAT SUB-CL. (E) OF S. 2(22), PLAINLY SEEKS TO BRING WITHIN THE TAX NET ACCUMULATED PROFITS WHICH ARE DI STRIBUTED BY CLOSELY-HELD COMPANIES TO ITS SHAREHOLDERS IN THE F ORM OF LOANS. THE PURPOSE BEING THAT PERSONS WHO MANAGE SU CH CLOSELY-HELD COMPANIES SHOULD NOT ARRANGE THEIR AFF AIRS IN A MANNER THAT THEY ASSIST THE SHAREHOLDERS IN AVOIDIN G THE PAYMENT OF TAXES BY HAVING THESE COMPANIES PAY OR DISTRIBUTE, WHAT WOULD LEGITIMATELY BE DIVIDEND IN THE HANDS OF THE SHAREHOLDERS, MONEY IN THE FORM OF AN ADVANCE O R LOAN. IF THIS PURPOSE IS KEPT IN MIND THEN, THE WORD ADVANC E HAS TO ITA NO.1231,1457/MDS./15 :- 11 -: BE READ IN CONJUNCTION WITH THE WORD LOAN USUALLY ATTRIBUTES OF A LOAN ARE THAT IT INVOLVES POSITIVE ACT OF LEND ING COUPLED WITH ACCEPTANCE BY THE OTHER SIDE OF THE MONEY AS L OAN : IT GENERALLY CARRIES AN INTEREST AND THERE IS AN OBLIG ATION OF REPAYMENT. ON THE OTHER HAND, IN ITS WIDEST MEANING THE TERM ADVANCE MAY OR MAY NOT INCLUDE LENDING. THE WORD ADVANCE IF NOT FOUND IN THE COMPANY OF OR IN CONJUNCTION WI TH A WORD LOAN MAY OR MAY NOT INCLUDE THE OBLIGATION OF REP AYMENT. IF IT DOES THEN IT WOULD BE A LOAN. THUS ARISES THE CONUN DRUM AS TO WHAT MEANING ONE WOULD ATTRIBUTE TO THE TERM ADVAN CE THE RULE OF CONSTRUCTION WHICH ANSWERS THIS CONUNDRUM I S NOSCITUR A SOCILS. KEEPING THE AFORESAID RULE IN MIND THE WO RD ADVANCE WHICH APPEARS IN THE COMPANY OF THE WORD LOAN COU LD ONLY MEAN SUCH ADVANCE WHICH CARRIES WITH IT AN OBLIGATI ON OF REPAYMENT. TRADE ADVANCE WHICH IS IN THE NATURE OF MONEY TRANSACTED TO GIVE EFFECT TO A COMMERCIAL TRANSACTI ON WOULD NOT FALL WITHIN THE AMBIT OF THE PROVISIONS OF S. 2 (22)(E). THIS INTERPRETATION WOULD ALLOY THE RULE OF PURPOSIVE CO NSTRUCTION WITH NOSCITUR A SODS. THUS, TRADE ADVANCE DOES NOT FALL WITHIN THE AMBIT OF THE PROVISIONS OF S. 2(22)(E). MISS P . SARADA VS. CIT (1998) 144 CTR (SC) 209 : (1998) 229 ITR 444 (S C) AND SMT. TARULATA S/WARN & ORS. VS. CIT 1977 CTR (SC) 2 75: (1977) 108 ITR 345 (SC) DISTINGUISHED; LIC OF INDIA VS. RETD. LIC OFFICERS ASSOCIATION (2008) 3 SCC 321 AND ROHIT PULP & PAPER MILLS LTD. VS. CCE AIR 1991 SC 754 APPLIED. BEING SO, IN OUR OPINION WHEN THERE IS A RUNNING AC COUNT BETWEEN THE PARTIES ON ACCOUNT OF BUSINESS TRANSACTIONS AND THE RE IS NO OBLIGATION OF REPAYMENT BY THE PARTIES, WHICH IS IN NATURE OF TRADE ITA NO.1231,1457/MDS./15 :- 12 -: ADVANCE, TO GIVE EFFECT TO COMMERCIAL TRANSACTION D OES FALL WITHIN THE MEANING OF SEC.2(22)(E) OF THE ACT. HENCE, IN OUR O PINION DELETION OF ADDITION BY THE CIT(A) IS JUSTIFIED AND THE ORDER O F LD.CIT(A) IS CONFIRMED ON THIS ISSUE. THIS GROUND IS REJECTED. 8. THE NEXT GROUND IN THE APPEAL OF REVENUE IS WITH REGARD TO DELETION OF ADDITION MADE ON ACCOUNT OF EXPORT SALES TO AGRO CORP. 8.1 THE FACTS OF THE ISSUE ARE THAT THE ADDITION O F ` 7,59,38,975/- WAS MADE BY AO ON ACCOUNT OF EXPORT SALES TO M/S.AG ROCORP. THE AO FOUND THAT ASSESSEE HAD MADE EXPORT SALES IN ADDITI ON TO LEVY SUGAR AND FREE SALE. AFTER ANALYZING THE DETAILS FURNISHE D BY THE ASSESSEE,THE AO NOTED THAT FROM THE SAID SHIPPING DOCUMENTS ON S UGAR SHIPPED TO M/S.AGROCORP FROM TUTICORIN PORT, THE FOLLOWING DIS CREPANCIES EMERGED. INVOICE NO./DATE DATE OF EXPORT QUANTITY IN MT VALUE IN USD CONVERSION RATE VALUE IN INR TASL-SUG/284 DT 3.5.08 22.5.08 10,000 495000 39.9 1 9,75,05,000 TASL-SUG/332 DT 6.6.08 30.7.08 1,700 561000 42.7 2, 39,54,700 TASL-SUG/331 DT 6.6.08 30.7.08 3,150 1109500 42.7 4 ,73,75,650 TASL-SUG/330 DT 6.6.08 30.7.08 7,150 2339500 42.7 9 ,98,96,650 36,87,32,000 THEN, AO ADDED ` 7,59,38,975/- TO THE INCOME OF ASSESSEE ON THEREASON THAT THE DIFFERENCE BETWEEN THE SALES MAD E TO AGROCORP AS PER DTAILS OF EXPORT SALES SUPPLIED BY THE ASSESSEE AND THE EXPORT DAY BOOK AND THE BILL OF LADING. AGGRIEVED WITH THE ORD ER OF AO, THE ASSESSEE CARRIED THE APPEAL BEFORE THE LD.CIT(A). ITA NO.1231,1457/MDS./15 :- 13 -: 8.2 ON APPEAL, THE LD.CIT(A) OBSERVED THAT FROM TH E ASSESSMENT ORDER IT IS NOT CLEAR AS TO HOW THE AMOUNT DISALLOW ED AT ` 7,59,38,975/- WAS ARRIVED AT BY THE AO. DURING THE APPELLATE PROC EEDINGS, THE ASSESSEE VIDE STATEMENT OF FACTS HAS GIVEN THE WORK ING FOR THE SAID ADDITION AMOUNT AS UNDER:- RS. EXPORT SALES 36,87,32,000 LESS: A CHITTUR UNIT DAY BOOK (-)12,59,34, 143 TRADE EXPORTS (-)16, 68,58,882 BALANCE 7,59,38,975 CIT(A) OBSERVED THAT A GROSS SUGAR TURNOVER OF 2,32 ,93,73,118/- OF WHICH THE EXPORT TURNOVER IS MENTIONED AT ` 73,63,27,028/- AND THE DETAILS OF EXPORT TURNOVER GIVEN PARTYWISE AND MONT HWISE BY ASSESSEE REFLECTED THE EXPORT SALE OF SUGAR TO M/S.AGROCORP TOTALING TO 40.94 CRORES IS INCLUDED IN THE EXPORT TURNOVER FORMING P ART OF THE TOTAL SUGAR TURNOVER REPORTED BY THE ASSESSEE AND THIS SUGAR TU RNOVER IS FOUND INCLUDED IN THE TOTAL SALES, REPORTED IN THE P & L A/C. THEREFORE, LD.CIT(A) CAME TO A CONCLUSION THAT THERE IS NO OMI SSION ON THE PART OF THE ASSESSEE TO REPORT THE EXPORT TURNOVER OF M/S.A GROCORP. HENCE, LD.CIT(A) DELETED THE ADDITION MADE BY THE LD. ASSE SSING OFFICER. AGAINST THE REVENUE IS IN APPEAL BEFORE US. 8.3 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE DETAILS OF DOCUMENT PRODUCED BY THE ASS ESSEE BEFORE THE ITA NO.1231,1457/MDS./15 :- 14 -: AUTHORITIES SHOW THAT THE ASSESSEE HAS PROPERLY ACC OUNTED THE EXPORT SALES AT ` 40.94 CRORES, WHICH WAS DULY REFLECTED IN THE SALES REPORTED IN THE P & L A/C FOR THE YEAR ENDED ON 31.03.2009. FURTHER, THE ASSESSEE HAS PRODUCED BEFORE THE LD.CIT(A), THE PAR TY-WISE AND GROUP-WISE EXPORT OF SALE OF SUGAR TO M/S.AGROCORP , WHICH IS AT ` 40.94 CRORES. LD.D.R IS NOT ABLE TO CONTROVERT THE FINDINGS OF THE LD.CIT(A)S RECORDING IN PARA 11.3 OF CIT(A)S ORDE R. HENCE, WHEN THE BOOKS OF ACCOUNTS ARE DULY AUDITED AND THERE IS NO ADVERSE FINDINGS REGARDING THE RECORDING OF THE EXPORT SALES AND DOC UMENTS RELATING TO THE EXPORT SHOW THE SAME EXPORT FIGURE, THERE IS NO QUESTION OF DOUBTING THE SAME. HENCE, WE DO NOT FIND ANY INFIRM ITY IN THE ORDER OF LD.CIT(A) AND THE SAME IS CONFIRMED. THIS GROUND RA ISED BY THE REVENUE IS REJECTED. NOW WE TAKE UP ASSESSEE S APPEAL (ITA NO.1231/MDS. /13) 9. THE MAIN GRIEVANCE IN THIS APPEAL IS WITH REGAR D TO SUSTAINING THE ADDITION OF ` 4,39,92,362/- U/S.14A R.W.RULES 8D OF THE ACT. 9.1 THE FACTS OF THE ISSUE ARE RELATED TO DISALLOW ANCE OF A SUM OF ` 5,48,15,816/- U/S.14A R.W.R.8D. IN THE COURSE OF AS SESSMENT PROCEEDINGS, THE LD. ASSESSING OFFICER FOUND THAT T HE INVESTMENT PORTFOLIO OF THE ASSESSEE AS ON 31.03.2009 STANDS A T AN AGGREGATE VALUE OF 106,38,01,607/- OUT OF WHICH THE ASSESSEE EARNED INCOME WHICH IS NOT INCLUDED IN THE TOTAL INCOME AND SEC.1 4A(3) PROVIDES FOR ITA NO.1231,1457/MDS./15 :- 15 -: THE PRINCIPLES TO BE APPLIED IN SUCH A SITUATION. T HE AO THEN REPRODUCED THE PROVISIONS OF THE SECTION 14A(2) AND 14A(3) AND HELD THAT THE PROVISIONS OF RULE 8D WILL APPLY IN THIS C ASE. THEREAFTER, THE AO COMPUTED THE DISALLOWANCE OF ` 5,48,15,816/- APPLYING THE SECOND AND THIRD LIMBS OF RULE 8D. AGGRIEVED WITH THE ORDE R OF LD. ASSESSING OFFICER, THE ASSESSEE CARRIED THE APPEAL BEFORE THE LD.CIT(A). 9.2. ON APPEAL, LD.CIT(A) OBSERVED THAT ASSESSEE E ARNED DIVIDEND INCOME OF ` 3,30,200/-DURING THE ASSESSMENT YEAR UNDER CONSIDER ATION FROM THE INVESTMENT PORTFOLIO OF WHICH AGGREGATE VA LUE OF ` 1,06,38,01,607/- AND THE INVESTMENT IN THE ASSESSME NT YEAR IN THE SHARES OF SASL AT ` 30 LAKHS. THE AO APPLIED THE THIRD LIMB OF RULE 8D(2)(II) AND COMPUTED THE DISALLOWANCE OF ` 5,48,15,816/-. ACCORDING TO THE LD.CIT(A), FOR THE ASSESSMENT YEAR 2009-10, RULE 8D IS APPLICABLE, THE AMOUNT OF ` 97,98,082/- PAID THE INTEREST ON INTER- CORPORATE DEPOSIT ARE DISALLOWABLE UNDER RULE 8D(2) (I) OF THE RULES. REGARDING 8D(2)(II), HE COMPUTED THE DISALLOWANCE A T ` 2,96,38,895/- AND REGARDING RULE 8D2(III), HE COMPUTED THE DISALL OWANCE AT ` 45,55,385/-. THUS, HE SUSTAINED THE DISALLOWANCE A T ` 4,39,92,362/- U/S.14A READ WITH RULES 8D. AS AGAINST LD. ASSESSIN G OFFICER DISALLOWED AT ` 5,48,15,816/-, HE HAS GIVEN A RELIEF TO THE ASSESSE E ONLY TO THE EXTENT OF 1,08,23,454/-. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. ITA NO.1231,1457/MDS./15 :- 16 -: 9.3. THE MAIN PLEA OF THE LD.A.R IS THAT INVES TMENT IS A SISTER CONCERN AND ASSOCIATED COMPANIES AND INTEREST PERTA INED TO BORROWINGS USED FOR EARNING EXEMPT INCOME FROM THE INVESTMENTS TO BE CONSIDERED AND HE DREW OUR ATTENTION TO THE PAPE R BOOK AT PAGE 21 TO 22 TO SHOW THAT MOST OF THE INVESTMENTS ARE IN E QUITY SHARES OF SISTER CONCERNS AND THESE INVESTMENTS ARE MADE ON A CCOUNT OF COMMERCIAL EXPEDIENCY. HE PLACED RELIANCE ON THE J UDGMENT OF DELHI HIGH COURT IN THE CASE OF CIT VS. BHARTI OVERSAS PV T. LTD., REPORTED IN 17 TH DECEMBER, 2015 WHEREIN HELD THAT EXPENDITURE IN RE LATION TO INCOME WHICH IS EXEMPT SHALL BE AGGREGATE OF EXPEN DITURE ATTRIBUTABLE TO TAX EXEMPTED INCOME, AND WHERE THERE IS COMMON E XPENDITURE, THAT CANNOT BE ATTRIBUTABLE TO EITHER TAX EXEMPT IN COME OR TAXABLE INCOME. HE ALSO SUBMITTED THAT INTEREST ON BORROWIN GS WHICH IS AVAILABLE FOR SPECIFIC PURPOSE CANNOT BE CONSIDERED FOR DISALLOWANCE U/S.14A R.W.RULE 8D. IN OUR OPINION, THE TRIBUNAL C ONSIDERED THIS ISSUE IN THE CASE OF FARIDA SHOES PVT. LTD. IN ITA NOS.21 02 & 2103/MDS./15 FOR ASSESSMENT YEARS 2011-12 & 2012-12 VIDE ORDER D ATED 08.01.16 WHEREIN HELD THAT:- 5.1 COMING TO THE MERITS OF THE ISSUE REGARDING DISALLOWANCE U/S.14A R.W. RULE 8D OF THE I.T.RULES, IN OUR OPINION, SIMILAR ISSUE WAS CONSIDERED BY THIS TRIBU NAL IN THE CASE OF ACIT V. M/S. BEST & CROMPTON ENGINEERING LT D. IN ITA NO.1603/MDS/2012 DATED 16.7.2013, WHEREIN IT WA S OBSERVED THAT INTEREST ON BORROWINGS USED FOR THE B USINESS PURPOSE CANNOT BE CONSIDERED FOR THE PURPOSE OF COM PUTING ITA NO.1231,1457/MDS./15 :- 17 -: DISALLOWANCE U/S.14A R.W. RULE 8D(2)(II) OF THE IT RULES AND THE RELEVANT PORTION IS REPRODUCED AS BELOW: 10. HEARD BOTH SIDES. PERUSED THE ORDERS OF LOWER AUTHORITIES AND THE DECISION OF CALCUTTA BENCH OF T HIS TRIBUNAL RELIED ON BY THE ASSESSEES COUNSEL. THIS ISSUE HAS BEEN CONSIDERED ELABORATELY BY THE COMMISSIONER OF INCOME TAX(APPEALS) AND DELETED THE INTEREST ON BAN K LOAN AND TERM LOANS WHICH WERE NOT UTILIZED FOR MAK ING ANY INVESTMENTS HAVING TAX FREE INCOME. WHILE HOLDI NG SO, THE COMMISSIONER OF INCOME TAX (APPEALS) HELD A S UNDER:- 5.2.1 HAVING HELD THAT PROVISIONS OF RULE 0D ARE A PPLICABLE, LET US NOW EXAMINE WHETHER THE AMOUNT HAS BEEN CORR ECTLY QUANTIFIED. THE AO HAD CALCULATED THE DISALLOWANCE AT ` NIL, ` 1,04,38,000/- AND ` 26,87,000/- UNDER (I), (II) & ( III) OF RULE 80 (2)RESPECTIVELY. THERE IS NO DISPUTE REGARDING THE FIRST COMPONENT, BECAUSE IT IS NIL. WITH REGARD TO THE SE COND COMPONENT BEING THE EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, THE AO HAS DETERMINED THE AMOUNT AT ` 1,04,38,000/. THE AO HAS TAKEN INTO ACCOUNT THE ENTIRE INTEREST EXPENDIT URE OF `.5,79,46,000/- FOR COMPUTING THE ABOVE DISALLOWANC E. THE ID.AR, IN HIS SUBMISSION, HAS GIVEN THE BREAK-UP OF INTEREST WHICH INCLUDES (1) INTEREST ON BANK LOANS: ` 67,92 ,000/- (2) INTEREST ON TERM LOANS ` 3,82,11,000/- AND (3) INT EREST ON OTHER ACCOUNTS: ` 1,29,43,000/-. IF LOANS HAVE BEEN SANCTIONED FOR SPECIFIC PROJECTS/EXPANSION AND HAVE BEEN UTILIZED TOWARDS THE SAME, THEN OBVIOUSLY THEY COUL D NOT HAVE BEEN UTILIZED FOR MAKING ANY INVESTMENTS HAVING TAX -FREE INCOMES. FROM THE COPY OF THE SANCTION LETTERS FROM STATE BANK OF BIKANER & JAIPUR IT CAN BE SEEN THAT THE LO AN WAS GRANTED WITH A SPECIFIC REQUIREMENT THAT THE LOAN S HALL BE UTILIZED FOR PURCHASE OF IMPORTED MACHINERY WHILE I N THE CASE OF LOAN FROM FEDERAL BANK, IT IS SEEN THAT THE LOAN WAS TO BE UTILIZED FOR EXPANSION OF PROJECTS. SANCTION OF BOT H THESE LOANS PROHIBIT UTILIZATION OF FUNDS FOR PURPOSES OTHER TH AN FOR THE UTILIZATION FOR WHICH THEY ARE SANCTIONED. FROM THE LEDGER EXTRACT FOR THE YEAR ENDED 31.03.2008 FOR BOTH LOAN ACCOUNTS, IT IS SEEN THAT NO AMOUNT HAS BEEN UTILIZED FOR INV ESTMENT IN SUBSIDIARIES WHICH EARNS TAX-FREE INCOME. THE LOAN AMOUNTS WERE FULLY DISBURSED AND UTILIZED IN THE YEAR ENDED 31.03.2008 ITA NO.1231,1457/MDS./15 :- 18 -: (A.Y. 2008-09) ITSELF. TAKING INTO ALL THE FACTS AS STATED ABOVE, I AM OF THE CONSIDERED OPINION THAT IF LOANS/BORROW ED AMOUNTS ARE GRANTED FOR SPECIFIC PROJECTS/EXPANSION AND NO AMOUNT FROM THE SAME HAS BEEN DIRECTLY UTILIZED FOR INVESTMENTS, THEN THE FIRST AND SECOND LIMB OF RULE 80 ATTRIBUTING THE INTEREST PAYMENTS TO THE INVESTMENT S WILL NOT BE APPLICABLE. ACCORDINGLY, INTEREST ON BANK LOAN A ND TERM LOAN AMOUNTING TO ` 67,92,000/- AND `3,82,11,000/- RESPECTIVELY ARE TO BE EXCLUDED FROM THE CALCULATIO N TO DETERMINE THE DISALLOWANCE UNDER RULE 8D(2)(II). TH E AO IS, THEREFORE, DIRECTED TO TAKE INTO ACCOUNT ONLY THE R EMAINING INTEREST ON OTHER ACCOUNTS AMOUNTING TO ` 1,29,43,0 00/- FOR COMPUTING THE PROPORTIONATE DISALLOWANCE UNDER RULE 80(2)(II). 11. ON GOING THROUGH THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), WE FIND THAT THE COMMISSIONER OF INCOME TAX (APPEALS) EXCLUDED THE INTEREST ON BANK LOAN AND TERM LOANS FROM THE CALCULATION OF DISALLOWANCE UND ER RULE 8D(2)(II) AS THE ASSESSEE HAS UTILIZED THE BANK LOA N AND TERM LOAN FOR THE PURPOSE OF PURCHASE OF MACHINERIES AND FOR EXPANSION OF PROJECTS AND THESE LOANS WERE SPECIFIC ALLY SANCTIONED FOR SPECIFIC PROJECT AND SUCH LOANS WERE ALSO USED FOR THE PURPOSE FOR WHICH THEY WERE SANCTIONED. IN THE CIRCUMSTANCES, WE FIND THAT THE COMMISSIONER OF INC OME TAX (APPEALS) HAS RIGHTLY EXCLUDED SUCH INTEREST FROM T HE PURVIEW OF COMPUTATION OF DISALLOWANCE UNDER RULE 8D(2)(II) . 12. THE DECISION OF CALCUTTA BENCH OF THIS TRIBUNAL IN THE CASE OF CHAMPION COMMERCIAL CO.LTD. (SUPRA) ALSO SU PPORTS THE VIEW OF THE COMMISSIONER OF INCOME TAX (APPEALS ). THE TRIBUNAL HAD CONSIDERED A SITUATION WHEN THE LOANS WERE UTILIZED FOR THE PURCHASE OF MACHINERIES, INTEREST ARISING OUT OF SUCH LOANS, WHETHER SUCH INTEREST IS TO BE EXCLUDED FOR THE PURPOSE OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)( II), THE TRIBUNAL HELD THAT SUCH INTEREST HAS TO BE EXCLUDED . WHILE HOLDING SO, IT HAS HELD AS UNDER:- 11. THERE IS NO DISPUTE ABOUT WORKING OF THIS METHOD SO FAR AS RULE 8D(2)(I) AND (III) IS CONCERN ED. IT IS ONLY WITH REGARD TO THE COMPUTATION UNDER RUL E 8D(2)(II) THAT THE ASSESSING OFFICER AND THE CIT(A) HAVE DIFFERENT APPROACHES. THIS PROVISION ADMITTEDL Y DEALS WITH A SITUATION IN WHICH THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT . CLEARLY, ITA NO.1231,1457/MDS./15 :- 19 -: THEREFORE, THIS SUB CLAUSE SEEKS TO ALLOCATE COMMO N INTEREST EXPENSES TO TAXABLE INCOME AND TAX EXEMPT INCOME. IN OTHER WORDS, GOING BY THE PLAIN WORDINGS OF RULE 8D(2)(II) WHAT IS SOUGHT TO BE ALLOCATED IS EXPENDITURE BY WAY OF INTEREST..WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT AND THE ONLY CATEGORIES OF INCOME AND RECEIPT, SO FAR AS SCHEME OF RULE 8 D IS CONCERNED, ARE MUTUALLY EXCLUSIVE CATEGORIES OF TAX EXEMPT INCOME AND RECEIPT AND TAXABLE INCOME AND RECEIPT. NO OTHER CLASSIFICATI ON IS GERMANE TO THE CONTEXT IN WHICH RULE 8 D IS SET OUT, NOR DOES THE SCHEME OF SECTION 14 A LEAVE ANY AMBIGUITY ABOUT IT. 12. IRONICALLY, HOWEVER, THE DEFINITION OF VARIABLE A EMBEDDED IN FORMULA UNDER RULE 8D(2)(II) IS CLEARLY INCONGRUOUS INASMUCH WHILE IT SPECIFICALLY EXCLUDES INTEREST EXPENDITURE DIRECTLY RELATED TO TAX EXEMPT INCOME, IT DOES NOT EXCLUDE INTEREST EXPENDITURE DIRECTLY RELATED TO TAXABLE INCOME. RESULTANTLY, WH ILE RULE 8D(2)(II) ADMITTEDLY SEEKS TO ALLOCATE EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT IT ENDS UP ALLOCATING EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, PLUS INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME (EMPHASIS BY UNDERLINING SUPPLIED BY US). THIS INCONGRUITY WILL BE MORE GLARING WITH THE HELP OF FOLLOWING SIMPLE EXAMPLE: IN THE CASE OF A & CO LTD, TOTAL INTEREST EXPENDITURE IS ` 1,00,000, OUT OF WHICH INTEREST EXPENDITURE IN RESPECT OF ACQUIRING SHARES FROM WHICH TAX FREE DIVIDEND EARNED IS ` 10,000. OUT OF THE BALANCE ` 90,000, THE ASSESSEE HAS PAID INTEREST OF ` 80,000 FOR FACTORY BUILDING CONSTRUCTION WHICH CLEARLY RELATES TO THE TAXABLE INCOME. THE INTEREST EXPENDITURE WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR RECEIPT OR INCOME IS THUS ONLY ` 10,000. HOWEVER, IN TERMS OF THE FORMULA IN RULE 8D (2)(II), ALLOCATION OF INTER EST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULA R INCOME OR RECEIPT WILL BE FOR ` 90,000 BECAUSE, AS PER FORMULA THE VALUE OF A (I.E. SUCH INTEREST EXPENSES TO BE ALLOCATED BETWEEN TAX EXEMPT AND ITA NO.1231,1457/MDS./15 :- 20 -: TAXABLE INCOME) WILL BE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) [ I.E. DI RECT INTEREST EXPENSES FOR TAX EXEMPT INCOME] INCURRED DURING THE PREVIOUS YEAR. LET US SAY THE ASSETS RELATING TO TAXABLE INCOME AND TAX EXEMPT INCOME ARE IN THE RATIO OF 4:1. IN SUCH A CASE, THE INTERE ST DISALLOWABLE UNDER RULE 8 D(2)(II) WILL BE ` 18,000 WHEREAS ENTIRE COMMON INTEREST EXPENDITURE WILL ONLY BE ` 10,000/-. 13. THE INCONGRUITY ARISES BECAUSE, AS THE WORDINGS OF RULE 8D(2)(II) EXIST, OUT OF TOTAL INTEREST EXPE NSES, INTEREST EXPENSES DIRECTLY RELATABLE TO TAX EXEMPT INCOME ARE EXCLUDED, INTEREST EXPENSES DIRECTLY RELATABLE TO TAXABLE INCOME, EVEN IF ANY, ARE NOT EXCLUDED. 14. THE QUESTION THEN ARISES WHETHER WE CAN TINKER WITH THE FORMULA PRESCRIBED UNDER RULE 8D(2)(II) OF THE INCOME TAX RULES, OR CONSTRUE IT ANY OTHER MANNER OTHER THAN WHAT IS SUPPORTED BY PLAIN WORDS OF THE RULE 8 D (2)(II). 15. WE FIND THAT NOTWITHSTANDING THE RIGID WORDS OF RULE 8D(2)(II), THE STAND TAKEN BY THE REVENUE AUTHORITIES ABOUT ITS APPLICATION, AS WAS BEFORE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD VS DCIT (328 ITR 81) WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WAS IN CHALLENG E, IS THAT IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.). THEREFORE, IT IS NOT ONLY THE INTEREST DIRECTLY ATTRIBUTABLE TO TAX EXEMPT INCOME, I.E. UNDER RULE 6D(2)(I), BUT ALSO INTEREST DIRECTLY RELATABLE TO TAXABLE INCOME, WHICH IS TO B E EXCLUDED FROM THE DEFINITION OF VARIABLE A IN FORMULA AS PER RULE 6D(2)(II), AND RIGHTLY SO, BECAUSE IT IS ONLY THEN THAT COMMON INTEREST ITA NO.1231,1457/MDS./15 :- 21 -: EXPENSES, WHICH ARE TO BE ALLOCATED AS INDIRECTLY RELATABLE TO TAXABLE INCOME AND TAX EXEMPT INCOME, CAN BE COMPUTED. THIS IS CLEAR FROM THE FOLLOWING OBSERVATIONS MADE BY THEIR LORDSHIPS OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SUPRA): 60. IN THE AFFIDAVIT-IN-REPLY THAT HAS BEEN FILED O N BEHALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RATIONALE UNDERLYING R. 8D. IN THE WRITTEN SUBMISSIONS WHICH HAVE BEEN FILED BY THE ADDL. SOLICITOR GENERAL IT HAS BEEN STATED, WITH REFERENCE TO R. 8D(2)(II) THAT SINCE FUNDS ARE FUNGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACT UAL QUANTUM OF BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX-FREE INVESTMENTS. IT IS ONLY THE INTERES T ON BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (F OR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) THE JUSTIFICATION THAT HAS BEEN OFFERED IN SUPPORT OF T HE RATIONALE FOR R. 8D CANNOT BE REGARDED AS BEING CAPRICIOUS, PERVERSE OR ARBITRARY. APPLYING THE TESTS FORMULATED BY THE SUPREME COURT IT IS NOT POSSIBLE FOR THIS COURT TO HOLD THAT THER E IS WRIT ON THE STATUTE OR ON THE SUBORDINATE LEGISLATI ON PERVERSITY, CAPRICE OR IRRATIONALITY. THERE IS CERT AINLY NO 'MADNESS IN THE METHOD'. 16. ONCE THE REVENUE AUTHORITIES HAVE TAKEN A PARTICULAR STAND ABOUT THE APPLICABILITY OF FORMULA SET OUT IN RULE 8 D(2)(II), AND BASED ON SUCH A STA ND CONSTITUTIONAL VALIDITY IS UPHELD BY HONBLE HIGH COURT, IT CANNOT BE OPEN TO REVENUE AUTHORITIES TO TAKE ANY OTHER STAND ON THE ISSUE WITH REGARD TO TH E ACTUAL IMPLEMENTATION OF THE FORMULA IN THE CASE OF ANY ASSESSEE. VIEWED THUS, THE CORRECT APPLICATION OF THE FORMULA SET OUT IN RULE 8D(2)(II) IS THAT, A S HAS BEEN NOTED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE (SUPRA), AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE ITA NO.1231,1457/MDS./15 :- 22 -: TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) . ACCORDINGLY, EVEN BY REVENUES OWN ADMISSION, INTEREST EXPENSES DIRECTLY ATTRIBUTABLE TO TAX EXEMPT INCOME AS ALSO DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME, ARE REQUIRED TO BE EXCLUDED FROM COMPUTATION OF COMMON INTEREST EXPENSES TO BE ALLOCATED UNDER RULE 8D(2)(II). 17. TO THE ABOVE EXTENT, THEREFORE, WE HAVE TO PROCEED ON THE BASIS THAT RIGOUR OF RULE 8 D (2)(II ) IS RELAXED IN ACTUAL IMPLEMENTATION, AND REVENUE AUTHORITIES, HAVING TAKEN THAT STAND WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WAS IN CHALLENG E BEFORE HONBLE HIGH COURT, CANNOT NOW DECLINE THE SAME. IDEALLY, IT IS FOR THE CENTRAL BOARD OF DIREC T TAXES TO MAKE THE POSITION CLEAR ONE WAY OR THE OTHER EITHER BY INITIATING SUITABLE AMENDMENT TO RU LE 8D(2)(II) OR BY ADOPTING AN INTERPRETATION AS PER PLAIN WORDS OF THE SAID RULE, BUT EVEN ON THE FACE OF THINGS AS THEY ARE AT PRESENT , IN OUR HUMBLE UNDERSTANDING, REVENUE AUTHORITIES CANNOT TAKE ONE STAND WHEN DEMONSTRATING LACK OF PERVERSITY, CAPRICE OR IRRATIONALITY IN RULE 8D BEFORE HONBLE HIGH COURT, AND TAKE ANOTHER STAND WHEN IT COMES TO ACTUAL IMPLEMENTATION OF THE RULE IN REAL LIFE SITUATIONS. THEREFORE, EVEN AS WE ARE ALIVE TO THE FACT THAT THE STAND OF THE LEARNED DEPARTMENTAL REPRESENTATIVE IS IN ACCORDANCE WITH THE STRICT WORDING OF RULE 8D(2)(II), WE HAVE TO HOLD THAT, FO R THE REASONS SET OUT ABOVE, THIS RIGID STAND CANNOT BE APPLIED IN PRACTICE. 13. IN VIEW OF THE DECISION OF THE CALCUTTA BENCH O F THIS TRIBUNAL CITED ABOVE, WE UPHOLD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN EXCLUDING T HE INTEREST ON BANK LOAN AND TERM LOANS FOR THE PURPOS E OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)(II). THE GR OUNDS RAISED BY THE REVENUE ARE REJECTED ON THIS ISSUE. ITA NO.1231,1457/MDS./15 :- 23 -: 10. IN VIEW OF THE ABOVE DECISION, WE ARE OF THE O PINION THAT THE INTEREST ON BORROWING WHICH ARE MADE FOR SPECIFIC P URPOSE OF BUSINESS CANNOT BE CONSIDERED FOR THE PURPOSE OF RULE 8D OF THE INCOME TAX RULES. FURTHER, INVESTMENTS IN SISTER CONCERNS OR S UBSIDIARIES WITH WHICH THE ASSESSEE IS HAVING BUSINESS TRANSACTIONS, THAT INVESTMENTS CANNOT BE CONSIDERED FOR THE PURPOSE OF APPLICABILI TY OF RULE-8D. FOR THIS PROPOSITION WE RELY ON THE JUDGMENTS OF TRIBU NAL IN THE CASE OF SUN TV NETWORKS IN ITA NO.1340 & 1341/MDS./15 & 157 8 TO 1579/MDS,/15 WHEREIN HELD THAT:- 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EI THER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECO RD. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE AVAILAB LE SHARE CAPITAL INCLUDING RESERVES AND SURPLUS WAS `2385.7 CRORES AS ON 31.03.2010. THE AVAILABLE SHARE CAPITAL IS `1970 .4 CRORES AND RESERVES AND SURPLUS IS ` 21,886.7 CRORES. THE INVESTMENTS MADE IN MUTUAL FUNDS INCLUDING SUBSIDIA RY COMPANIES ARE ONLY `541.11 CRORES. THEREFORE, IT CA NNOT BE SAID THAT THE ASSESSEE HAS DIVERTED THE BORROWED FU NDS FOR MAKING ANY INVESTMENT EITHER IN THE SISTER CONCERNS OR IN THE MUTUAL FUNDS. WHEN THE ASSESSEE HAS SUFFICIENT SHAR E CAPITAL, RESERVES AND SURPLUS, THIS TRIBUNAL IS OF THE CONSI DERED OPINION THAT THERE CANNOT BE ANY DISALLOWANCE TOWARDS THE I NTEREST PAID ON THE BORROWED FUNDS UNDER SECTION 14A OF THE ACT. FOR THE PURPOSE OF DISALLOWING INTEREST INCOME UNDER SE CTION 14A READ WITH RULE 8D, THERE SHOULD BE NEXUS BETWEEN TH E BORROWED FUNDS AND INVESTMENT MADE BY THE ASSESSEE IN THE SHARE CAPITAL AND MUTUAL FUNDS. IN THE ABSENCE OF A NY NEXUS, THE PRESUMPTION IS THAT THE ASSESSEE HAS INVESTED T HE AVAILABLE ITA NO.1231,1457/MDS./15 :- 24 -: INTEREST-FREE FUNDS IN SHARE CAPITAL AND MUTUAL FUN DS. FURTHERMORE, MAKING INVESTMENT IN SISTER CONCERNS I S FOR COMMERCIAL EXPEDIENCY IN VIEW OF THE JUDGMENT OF AP EX COURT IN S.A. BUILDERS LTD. V. CIT (2007) 288 ITR 1. IT I S NOT THE CASE OF THE REVENUE THAT THE SISTER CONCERN OR ANY OF TH E DIRECTORS HAS MISUSED THE FUNDS INVESTED BY THE ASSESSEE. WHE N THE SISTER CONCERN USES THE FUNDS ONLY FOR BUSINESS PUR POSE, THERE WAS COMMERCIAL EXPEDIENCY FOR MAKING INVESTMENT. TH EREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE RE CANNOT BE ANY DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962. 13. IN VIEW OF THE ABOVE, THIS TRIBUNAL IS UNABLE T O UPHOLD THE ORDERS OF THE LOWER AUTHORITIES. ACCORDINGLY, THE O RDERS OF THE LOWER AUTHORITIES ARE SET ASIDE. THE ENTIRE ADDITIO N MADE BY THE ASSESSING OFFICER IS DELETED. 10.1 WE ALSO RELY IN THE CASE OF BEACH MINERS CO. PVT LTD. VS. ACIT IN ITA NO.2110/MDS./14 DATED 06.08.15 WHEREIN HELD THA T: 6.1. GROUND NO.3 DISALLOWANCE OF EXPENDITURE BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT FOR `3,11,34,6 30/- SINCE THE ASSESSEE HAD MADE INVESTMENTS OF `71,55,33,570/- FO R EARNING EXEMPT INCOME. AT THE OUTSET, WE FIND THAT THERE IS NO MERIT FOR THE REVENUE TO MAKE ADDITION OF `3,11,34,630/- INVOKING THE PROVIS IONS OF SECTION 14A OF THE ACT BECAUSE THE INVESTMENT MADE OF `71, 55,33,570/-, BEARS NO COST IN THE FORM OF INTEREST OR WHATSOEVER , SINCE THE FUNDS BY WHICH THE INVESTMENT IS MADE IS ASSESSEES OWN F UNDS. FURTHER, THESE INVESTMENTS ARE MADE ONLY WITH SISTER COMPANI ES OF THE ASSESSEE AND NO COST CAN BE ATTRIBUTED FOR THE MANA GEMENT OF SUCH FUNDS. THEREFORE, WE HEREBY DELETE THE ADDITION OF RS. ITA NO.1231,1457/MDS./15 :- 25 -: `3,11,34,630/- MADE BY THE LD. ASSESSING OFFICER IN VOKING THE PROVISIONS OF SECTION 14A OF THE ACT. THIS GROUND RAISED BY THE ASSESSEE IS ALLOWED IN ITS FAVOUR . 11. IN VIEW OF THE ABOVE JUDGMENTS, THE AO HAS TO CONSIDER THE ASSESSEES OWN FUND I.E. CAPITAL AND RESERVES AS AV AILABLE FOR INVESTMENT WHICH YIELDS EXEMPTED INCOME AND THEREAF TER HE SHALL APPLY THE FORMULA IN RULE 8D AND ALSO EXCLUDE INVES TMENTS IN SUBSIDIARIES AS HELD BY THE ABOVE ORDER OF CO-ORDIN ATE BENCH. WITH THIS OBSERVATION, WE REMIT THE ISSUE TO THE FILE OF AO FOR FRESH CONSIDERATION. HENCE, THIS GROUND IS ALLOWED FOR ST ATISTICAL PURPOSES. 12. IN THE RESULT, THE APPEAL OF REVENUE IS DISMIS SED AND THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STAT ISTICAL PURPOSES. ORDER PRONOUNCED ON 29 TH JULY, 2016, AT CHENNAI. SD/- SD/- ! ' # . $ %& ' ( DUVVURU RL REDDY ) ) & / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER () / CHENNAI *+ / DATED: 29 TH JULY, 2016 K S SUNDARAM +,-- ./-0/ / COPY TO: - 1 . / APPELLANT 3. - 1-!' / CIT(A) 5. /23- 4 / DR 2. / RESPONDENT 4. - 1 / CIT 6. 3&-5 / GF