M/s. United Spirits Ltd., Bangalore V. ACIT, Bangalore

ITA 1276/BANG/2010

• Counselvise Citation: 127621114 RSA 2010
• Duration Of Justice: 4 year(s) 2 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-01-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 28-10-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 19-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Opportunity of being heard; Principle of natural justice; Earning of tax free income; Bad and doubtful debts; Onus to prove
• Section: 234B; 14A; 115JB; 37; 12; 144; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T . A. NO. 1276 /BANG/201 0 (ASSESSMENT YEAR : 200 6 - 07 ) M/S. UNITED SPIRITS LTD. 6 TH FLOOR, UB TOWERS, UB CITY, NO.24, VITTAL MALLYA ROAD, BANGALORE - 560 001 . APPELLANT. PAN AACCM 8043J VS. ASST . COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2 (3) , BANGALORE. .. RESPONDENT. I.T. A. NO.1448/BANG/2010 (ASSESSMENT YEAR : 2006 - 07) (BY REVENUE) ASSESSEE BY : SHRI K.R. PRADEEP, C.A. R E VENUE BY : SHRI C.H. SUNDAR RAO, CIT (D.R) DATE OF H EARING : 28.10.2014. D ATE OF P RONOUNCEMENT : 23.1.20 1 5 . O R D E R PER SHRI JASON P. BOAZ , A.M . : THESE ARE CROSS APPEALS, ONE BY THE ASSESSEE AND THE OTHER BY REVENUE, DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) VI, BANGALORE DT.6.10.2010 FOR ASSESSMENT YEAR 2006 - 07. 2. THE FACTS OF THE CASE, BRIEFLY, ARE AS UNDER : - 2 IT A NO S . 1276 & 144 8 /BANG/201 0 2.1 THE ASSESSEE, A PUBLIC LIMITED COMPANY, FILED ITS R ETURN OF INCOME FOR ASSESSMENT YEAR 2006 - 07 ON 30.11.2006 DECLARING TOTAL INCOME OF RS.51,21,86,191 UNDER SECTION 115JB OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT'). THE CASE WAS TAKEN UP FOR SCRUTINY AND THE ASSESSMENT WAS COMPLETED UNDER SECTION 143 (3) OF THE ACT VIDE ORDER DT.31.12.2008 WHEREBY THE INCOME OF THE ASSESSEE WAS DETERMINED AT RS.66,49,17,332 AND LONG TERM CAPITAL GAINS (LTCG) OF RS.1,76,41,248 IN VIEW OF THE FOLLOWING ADDITIONS / DISALLOWANCES : - I) BAD DEBTS AND ADVANCES NOT RECOVERABL E : A) BIFR COMPANIES : RS.13,81,18,000. B) UNITED DISTILLERIES : RS.10,69,52,000. II) DISALLOWANCE U/S. 14A : RS.57,00,44,771. III) FOREIGN EXCHANGE FLUCTUATION : RS.2,70,00,000. IV) CENTRAL SUBSIDY : RS.;15,00,000. 2.2 AGGR IEVED BY THE ORDER OF ASSESSMENT FOR ASSESSMENT YEAR 2006 - 07 DT.31.12.2008, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (APPEALS) VI, BANGALORE RAISING VARIOUS GROUNDS. THE LEARNED CIT (APPEALS) DISPOSED OFF THE ASSESSEE'S APPEAL VIDE ORDER DT.6.10. 2010 GRANTING THE ASSESSEE PARTIAL RELIEF. 3. AGGRIEVED BY THE ORDER OF THE CIT (APPEALS) VI, BANGALORE DT.6.10.2010 FOR ASSESSMENT YEAR 2006 - 07, BOTH THE ASSESSEE AND REVENUE ARE IN APPEAL BEFORE THE TRIBUNAL RAISING VARIOUS GROUNDS. THE APPEALS ARE DISPOSED OFF AS UNDER : - 3 IT A NO S . 1276 & 144 8 /BANG/201 0 ITA NO.1876/BANG/2010 ASSESSEE'S APPEAL FOR A.Y. 2006 - 07. 4. THE ASSESSEE HAD RAISED SEVERAL GROUNDS WHICH WERE NARRATIVE AND ARGUMENTATIVE AND WAS DIRECTED TO FILE CONCISE GROUNDS OF APPEAL. THE ABRIDGED GROUNDS OF APPEA L RAISED BY THE ASSESSEE ARE AS UNDER : 1. THAT THE ORDER OF THE AUTHORITIES BELOW IN SO FAR AS IT IS AGAINST THE APPELLANT IS AGAINST THE LAW, FACTS, CIRCUMSTANCES, NATURAL JUSTICE, EQUITY, WITHOUT JURISDICTION, BAD IN LAW AND ALL OTHER KNOWN PRINCIPL ES OF LAW. 2. THAT THE TOTAL INCOME AND TOTAL TAX LIABILITY COMPUTED IS HEREBY DISPUTED. 3. THE AUTHORITIES BELOW ERRED IN DISALLOWING BAD DEBTS AND ADVANCES WRITTEN OFF TO THE EXTENT OF RS.18,26,06,489 IN THE FOLLOWING CASES : I) CSD DEBTORS IN THE BOOKS OF SWD RS.1,40,83,000. II) KARNATAKA BREWERIES & DISTILLERIES LTD. RS.2,76,91,000 III) SKOKIE TRADERS PVT. LTD. RS.8,80,00,000 IV) MIDAS GOLDEN DISTILLERIES. RS.3,20,55,000 V) SALSON DISTILLERIES. RS.4,78,000 VI) UNITED DISTILLERIES RS.20,57 ,489. VII) CHITWAN DISTILLERIES IN THE BOOKS OF TDV. RS.25,00,000. VIII) U B DISTILLERIES LTD. RS.1,57,42,000. TOTAL : RS.18,26,06,489. 4. THE ENHANCEMENT NOTICE ISSUED BY THE CIT (APPEALS) IS WITHOUT JURISDICTION AND CONTRARY TO THE POSITION OF LAW. 5. THE LEARNED CIT (APPEALS) ERRED IN ISSUING A NOTICE FOR ENHANCEMENT IN A CASE WHICH HAS BEEN DECIDED BASED ON SATISFACTION OF THE ASSESSING OFFICER AND THEREBY VIOLATED PRINCIPLES OF NATURAL JUSTICE. 6. THE LEARNED CIT (APPEALS) ERRED I N ISSUING A NOTICE FOR ENHANCEMENT OF DISALLOWANCE OF BAD DEBTS TO THE EXTENT OF RS.10,69,52,000. 7. THE CIT (APPEALS) / A.O ERRED IN MAKING DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D OF INCOME TAX ACT WITHOUT RECORDING ANY REASONS. 8. THE CI T (APPEALS) / A.O ERRED IN DISALLOWING UNDER SECTION 14A OF THE ACT AN AMOUNT OF RS.42,14,20,436 OUT OF INTEREST EXPENDITURE. 9. THE CIT (APPEALS) / A.O. ERRED IN DISALLOWING U/S.14A A SUM OF RS.2,52,80,397 OUT OF OTHER EXPENDITURE.. 10. THE CIT (APPEALS) / A.O ERRED IN BRINGING TO TAX CENTRAL SUBSIDY OF RS.15,00,000 BY TREATING IT AS REVENUE IN NATURE. 4 IT A NO S . 1276 & 144 8 /BANG/201 0 11. THE APPELLANT DENIES LIABILITY FOR INTEREST UNDER SECTION 234B OF THE ACT. FURTHER THE INTEREST IF ANY HAS TO BE LEVIED ONLY ON RETURNED IN COME. 12. THE AUTHORITIES BELOW ERRED IN NOT GIVING AN OPPORTUNITY BEFORE LEVYING INTEREST UNDER SECTION 234B OF THE IT ACT. 13. WITHOUT PREJUDICE TO THE APPELLANT S RIGHT OF SEEKING WAIVER BEFORE APPROPRIATE AUTHORITY THE APPELLANT BEGS FOR CONSEQUENTI AL RELIEF IN THE LEVY OF INTEREST UNDER SECTION 234B OF THE ACT. 14. FOR THE ABOVE AND OTHER GROUNDS AND REASONS WHICH MAY BE SUBMITTED DURING THE COURSE OF HEARING OF THIS APPEAL, THE ASSESSEE REQUESTS THAT THE APPEAL BE ALLOWED AS PRAYED AND JUSTICE BE RENDERED. 5. THE GROUNDS RAISED AT S.NOS.1, 2 AND 14 BEING GENERAL IN NATURE AND NOT URGED BEFORE US, NO ADJUDICATION IS CALLED FOR THEREON. 6. GROUND NO.3 : DISALLOWANCE OF BAD DEBTS AND ADVANCES WRITTEN OFF. 6.1 THIS GROUND RELATES TO THE D ISALLOWANCE OF BAD DEBTS WRITTEN OFF TO THE EXTENT OF RS.18,26,06,489 IN THE FOLLOWING CASES : - I) CSD DEBTORS IN THE BOOKS OF SWD RS.1,40,83,000. II) KARNATAKA BREWERIES & DISTILLERIES LTD. RS.2,76,91,000 III) SKOKIE TRADERS PVT. LTD. RS.8,80,00,00 0 IV) MIDAS GOLDEN DISTILLERIES. RS.3,20,55,000 V) SALSON DISTILLERIES. RS.4,78,000 VI) UNITED DISTILLERIES RS.20,57,489. VII) CHITWAN DISTILLERIES IN THE BOOKS OF TDV. RS.25,00,000. VIII) U B DISTILLERIES LTD. RS.1,57,42,000. TOTAL : RS.18,26,06 ,489. 6.2 THE FACTS OF THE MATTER AS EMERGE FROM THE RECORD ARE THAT IN THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER OBSERVED FROM THE DETAILS FILED AND THE COMPUTATION OF INCOME THAT THE ASSESSEE HAD CLAIMED AND WRITTEN OFF RS.46,86, 8 7, 958 TO ITS GENERAL RESERVE ACCOUNT ON ACCOUNT OF BAD DEBTS AND IRREVOCABLE ADVANCES. WRITTEN SUBMISSIONS IN THIS REGARD WERE MADE BEFORE THE ASSESSING OFFICER. ON EXAMINATION THEREOF, THE ASSESSING OFFICER ALLOWED THE ASSESSEE'S CLAIM PARTIALLY AND DIS ALLOWED THE CLAIM TO THE EXTENT OF RS.18,26,06,489 5 IT A NO S . 1276 & 144 8 /BANG/201 0 IN RESPECT OF THE PARTIES LISTED AT PARA 6.1 OF THIS ORDER (SUPRA). THE RELEVANT FINDING OF THE ASSESSING OFFICER WHILE MAKING THE SAID DISALLOWANCE AT PAGE 17 OF THE ORDER OF ASSESSMENT IS AS UNDER : (III) FOR THE CLAIMS MADE IN THE FOLLOWING, NO SATISFACTORY EVIDENCE FOR SUCH AMOUNTS APPEARING WAS FURNISHED DURING THE COURSE OF THE HEARING. IN THE ABSENCE OF EVIDENCE BEING FILED, THE SAME IS NOT BEING ALLOWED. DEBTORS ADVANCES NOT RECOVERABLE. UB DISTILLERIES LTD. RS.1,57,42,000 CSD DEBTORS SHAW WALLACE DISTILLERY BOOKS. RS.1,40,83,000. KARNATAKA BREWERIES & DISTILLERIES RS.2,76,91,000. SKOKIE TRADERS PVT. LTD. RS.8,80,80,000. MIDAS GOLDEN DISTILLERIES LTD. RS.3,20,55,000. SALSON DIST TMU (DEBTORS) RS.4,78,000. UD DISTRIBUTORS (TDV) RS.20,57,489. CHITWAN DISTILLERIES RS.25,00,000. 6.3 BEFORE THE LEARNED CIT (APPEALS), THE ASSESSEE PUT FORTH ITS EXPLANATIONS AND SUBMISSIONS IN SUPPORT OF ITS CLAIM AND ALSO PROD UCED THE LEDGER EXTRACTS AND OTHER EVIDENCES. THE LEARNED CIT (APPEALS) WHILE DEALING WITH THIS ISSUE DECLINED TO EXAMINE / LOOK INTO THE LEDGER EXTRACTS AND OTHER EVIDENCES WHILE CONFIRMING THE ADDITIONS / DISALLOWANCES; HOLDING AS UNDER AT PAGE 11 OF TH E IMPUGNED ORDER : - . EVEN OTHERWISE, THE LEDGER EXTRACT AND OTHER EVIDENCES PRODUCED DURING THE APPELLATE PROCEEDINGS ARE NOT ADMISSIBLE AS NONE OF THE CIRCUMSTANCES MENTIONED IN CLAUSE (A) TO CLAUSE (D) OF SUB - RULE (1) OF RULE 46A OF THE INCOME TAX RULES, 1962 EXISTED IN THE CASE OF THE APPELLANT. 6.4.1 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE CONTENDED THAT THE ASSESSEE'S CLAIM CONSISTED OF BOTH BAD DEBTS COVERED UNDER SECTION 36(1)(VII) OF THE ACT AND ALSO ADVANCES GI VEN IN THE COURSE OF CARRYING ON BUSINESS FOR PROCUREMENT OF GOODS AND SERVICES. IT WAS STATED THAT AND CIRCUMSTANCES FOR MAKING THE CLAIM ALONG WITH ACCOUNT EXTRACTS WERE 6 IT A NO S . 1276 & 144 8 /BANG/201 0 SUBMITTED BEFORE THE ASSESSING OFFICER EVEN AT THE TIME OF ASSESSMENT VIDE LETTER DT .19.11.2008 AND OTHER SUCH CORRESPONDENCES PLACED IN THE ASSESSEE'S PAPER BOOK AT PAGES 61 TO 86. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE ASSESSING OFFICER NEITHER ADDRESSED THESE SUBMISSIONS AND EVIDENCES FURNISHED BY THE ASSESSEE NOR SP ECIFIED WHAT FURTHER EVIDENCES WERE REQUIRED TO ESTABLISH THE CLAIMS. IT WAS SUBMITTED THAT IN THE CASE OF WRITE OFF OF BAD DEBTS, WRITE OFF IN THE ACCOUNTS OF THE ASSESSEE'S BOOKS IS SUFFICIENT TO ALLOW THE CLAIM AS WAS HELD BY THE HON'BLE APEX COURT IN THE CASE OF TRF LTD. V CIT (230 CTR 14) AND THEREFORE APPLYING THIS DECISION OF THE HON'BLE APEX COURT, THE ASSESSEE'S CLAIM FOR BAD DEBTS OUGHT TO HAVE BEEN ALLOWED. 6.4.2 AS REGARDS THE ADVANCES WRITTEN OFF, THE LEARNED AUTHORISED REPRESENTATIVE CONT ENDS THAT SIMILAR TYPE OF ADVANCES WRITTEN OFF IN THE EARLIER YEARS WERE CONSIDERED AND ALLOWED BY A CO - ORDINATE BENCH OF THE TRIBUNAL IN THE ASSESSEE'S OWN CASE IN ITA NO.217(BNG)/09 DT.21.8.2009 FOR ASSESSMENT YEAR 2005 - 06 AT PARA 5 THEREOF WHICH IS AS U NDER : - 5 .. WE ARE THEREFORE OF THE CONSIDERED VIEW THAT ITEMS OF ADVANCES FOR INTERNAL CONTROL PURPOSES HAVING NOT BEEN RENDERED FOR CLAIMING EXPENSES IN THE YEAR OF ADVANCE BUT BECOMES IRRECOVERABLE AS NOTED BY THE BOARD OF DIRECTORS IN THE IMPUGNED YEAR IS A TRADE / REVENUE LOSS AS CLAIMED BY THE ASSESSEE BEING REVENUE IN NATURE IS FOR THE BUSINESS ONLY. THE DISALLOWANCE UNDER THIS HEAD THEREFORE IS DIRECTED TO BE DELETED. 6.4.3 IT WAS SUBMITTED THAT THE ASSESSING OFFICER HAD NOT CONSIDERED THE AFORESAID DECISION OF THE TRIBUNAL. IT WAS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THE LEARNED CIT (APPEALS) ERRED IN REFUSING TO ENTERTAIN EVIDENCES PLACED BEFORE HIM, IN A MUCH AS IT WAS THE SAME EVIDENCES WHICH WERE PLACED BEF ORE THE ASSESSING OFFICER A ND THEREFORE THERE WAS NO CASE WITH THE LEARNED CIT (APPEALS) FOR APPLYING RULE 46A IN THE 7 IT A NO S . 1276 & 144 8 /BANG/201 0 MANNER HE DID. THE LEARNED AUTHORISED REPRESENTATIVE ARGUED THAT A DETAILED LETTER DT.27.9.2010 FILED BEFORE THE LEARNED CIT (APPEALS), P LACED AT PAGES 198 TO 205 OF THE ASSESSEE'S PAPER BOOK WAS ONLY AN ELABORATION OF THE EVIDENCES AND EXPLANATIONS WHICH WERE AVAILABLE BEFORE THE ASSESSING OFFICER AND NOT ANY FRESH EVIDENCES. THE LEARNED AUTHORISED REPRESENTATIVE PRAYED THAT IN THE FACTUA L CIRCUMSTANCES AS LAID OUT ABOVE, THE ISSUE IN QUESTION MAY BE RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION OF THE DETAILS AND EVIDENCES IN ACCORDANCE WITH THE PRINCIPLES LAID DOWN BY THE HON'BLE APEX COURT IN THE CASE OF TRF LTD. (SUPRA) AND THE DECISION OF THE CO - ORDINATE BENCH IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2005 - 06 (SUPRA). 6.5 THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR REVENUE SUBMITTED THAT SINCE THE ASSESSEE'S CLAIM OF WRITE OFF OF BAD DEBTS WAS MADE IN T HE STATEMENT OF TOTAL INCOME AND NOT IN THE PROFIT AND LOSS ACCOUNT, IT IS NOT ALLOWABLE UNDER SECTION 36(1)(VII) OF THE ACT AND IN VIEW OF THIS, NO USEFUL PURPOSE WOULD BE SERVED IF THIS ISSUE IS RESTORED TO THE FILE OF THE ASSESSING OFFICER AS THE CONDIT IONS FOR ALLOWING THE CLAIM OF BAD DEBTS WERE NOT MET BY THE ASSESSEE. IN SO FAR AS THE ADVANCES ARE CONCERNED, THE LEARNED DEPARTMENTAL REPRESENTATIVE CONTENDED THAT SINCE THE ASSESSEE IS NOT IN THE MONEY LENDING BUSINESS, THE WRITE OFF OF ADVANCES WAS N OT ALLOWABLE. THE LEARNED DEPARTMENTAL REPRESENTATIVE PRAYED THAT IN VIEW OF THE CIRCUMSTANCES NARRATED ABOVE DISALLOWANCES OF THE CLAIMS OF BAD DEBTS AND ADVANCES WRITTEN OFF MADE AND CONFIRMED BY THE AUTHORITIES BELOW BE SUSTAINED. 6.6 IN REJOINDER, THE LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTENTION TO THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF RALLIS INDIA LTD. V ACIT & ANOTHER REPORTED 8 IT A NO S . 1276 & 144 8 /BANG/201 0 IN 323 ITR 54, WHEREIN IT STATED TO BE HELD THAT DEBIT TO THE PROFIT AND LOSS ACCOUNT WAS NOT CONDITION PRECEDENT FOR ALLOWING THE CLAIM OF BAD DEBTS. IT WAS FURTHER STATED THAT WRITE OFF OF ADVANCES IS ALLOWED UNDER SECTION 37 OF THE ACT, EVEN IN CASES WHERE THE MAIN BUSINESS IS NOT MONEY LENDING AND SUBMITTED THAT THE ASSESSEE HAD DERIVED IN TEREST INCOME OF RS.6.82 CRORES FROM ADVANCING OF MONEY IN THE IMPUGNED ASSESSMENT PERIOD AND RS.4.8 CRORES IN THE EARLIER ASSESSMENT YEAR. THE LEARNED AUTHORISED REPRESENTATIVE PRAYED THAT IN VIEW OF THE ABOVE, THE ASSESSEE'S CLAIM FOR WRITE OFF OF ADVAN CES REQUIRES TO BE ALLOWED. 6.7 WE HAVE HEARD BOTH PARTIES AT LENGTH, CONSIDERED THE WRITTEN SUBMISSIONS PUT FORTH AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JUDICIAL DECISIONS CITED. ON AN APPRECIATION OF THE MATERIAL O N RECORD, WE FIND THE SUBMISSIONS AND EVIDENCES PLACED BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW, VIZ., BOTH THE ASSESSING OFFICER AND LEARNED CIT (APPEALS) HAVE NOT BEEN CONSIDERED PROPERLY IN THE LIGHT OF THE PRINCIPLES LAID DOWN IN THE DECISIONS OF T HE HON'BLE APEX COURT IN THE CASE OF TRF LTD. (SUPRA) AND THE DECISION OF THE HON'BLE MUMBAI HIGH COURT IN THE CASE OF RALLIS INDIA LTD. (SUPRA). WE ARE OF THE VIEW THAT IT WAS ESSENTIAL FOR THE ASSESSING OFFICER TO CONSIDER THE SUBMISSIONS AND EVIDENC E S PLACED ON RECORD BY THE ASSESSEE BOTH IN RESPECT OF WRITE OFF OF BAD DEBTS AND WRITE OFF OF ADVANCES AND FIND THAT HE HAS NOT DONE SO. IN THIS FACTUAL MATRIX, WE ARE OF THE OPINION THAT IT WOULD BE IN THE INTEREST OF EQUITY AND JUSTICE THAT IT IS ABSOLUTE LY NECESSARY FOR THE ASSESSING OFFICER TO RE - EXAMINE ALL THE FACTS OF THE MATTER REGARDING THE ASSESSEE S CLAIMS FOR WRITE OFF OF BAD DEBTS AND WRITE OFF OF ADVANCES SO THAT THERE IS CLARITY WHILE DECIDING THE ISSUE. WE, THEREFORE, RESTORE THESE ISSUES OF THE ASSESSEE'S CLAIMS FOR WRITE OFF OF BAD DEBTS AND 9 IT A NO S . 1276 & 144 8 /BANG/201 0 WRITE OFF OF ADVANCES TO THE FILE OF THE ASSESSING OFFICER TO BE DEALT WITH IN THE LIGHT OF OUR OBSERVATIONS AFTER AFFORDING THE ASSESSEE ADEQUATE OPPORTUNITY OF BEING HEARD AND TO FILE DETAILS REQUI RED AND AFTER CONSIDERING THE SUBMISSIONS ALREADY MADE BY THE ASSESSEE IN THE LIGHT OF THE JUDICIAL PRONOUNCEMENTS CITED AND RELIED ON BY THE ASSESSEE (SUPRA). IT IS ORDERED ACCORDINGLY. CONSEQUENTIALLY, GROUND NO.3 OF THE ASSESSEE'S APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 7. GROUND NOS. 4 TO 6 ENHANCEMENT BY THE CIT (APPEALS). 7.1.1 IN THE GROUNDS RAISED AT S.NOS.4 TO 6 , THE ASSESSEE IS AGGRIEVED BY THE ENHANCEMENT OF RS.10,69,52,000 MADE BY THE LEARNED CIT (APPEALS) IN THE IMPUGNED ORDER. THE FACTS OF THE MATTER ARE THAT IN THE PERIOD UNDER CONSIDERATION, THE ASSESSEE MADE A CLAIM OF WRITE OFF OF RS.12,26,93,224 IN RESPECT OF OUTSTANDING FROM UB DISTILLERIES LTD., CONSISTING OF RS.845 LAKHS ADVANCES AGAINST SUPPLIES AND RS. 318 LAKHS BEING WRITE OFF OF DEBTORS. THE ASSESSING OFFICER DEALT WITH THE ASSESSEE'S CLAIM AT PARA (II) ON PAGE 16 OF THE ORDER OF ASSESSMENT AS UNDER : - (II) THE ASSESSEE ;COMPANY HAS ALSO SUBMITTED THAT IT WAS ADVISED THAT THERE WAS NO CHANCE OF RE COVERY OF THE DEBTS AND ADVANCES FORM UB DISTILLERIES LTD., THE SAME HAVING BEEN ACQUIRED BY THE STATE OF BIHAR BY WAY OF AN ORDINANCE. HOWEVER, AS PER THE ANNUAL REPORT, IT IS STATED THAT THE SUNDRY DEBTORS AND LOANS AND ADVANCES INCLUDED 224.52 LACS AN D 845.0 LACS AGAINST WHICH THE MANAGEMENT WAS HOPEFUL OF RECOVERY IN FULL OUT OF COMPENSATION TO BE RECEIVED BY IT FROM THE SELLERS. AS A MEASURE OF PRUDENCE, A SUM OF RS.530 LACS WAS TRANSFERRED TO CONTINGENCY RESERVE TO MEET ANY EVENTUAL SHORTFALL IN T HE REALIZATION OF ABOVE DEBTS AND ADVANCES. THIS BEING SO, AMOUNTS AT RS.224.52 LACS AND RS.845.00 LACS BEING BAD DEBTS IS BEING ALLOWED. NO DETAILS FOR THE BALANCE RS.157.42 LACS WAS FILED, AND HENCE CANNOT BE ALLOWED. 10 IT A NO S . 1276 & 144 8 /BANG/201 0 AS CAN BE SEEN, THE ASSESS ING OFFICER ALLOWED THE ASSESSEE'S CLAIM TO THE EXTENT OF RS.10,69,52,000 AND DISALLOWED RS.1,57,42,000 ON ACCOUNT OF NO DETAILS BEING FILED IN RESPECT OF THIS PORTION OF THE ASSESSEE'S CLAIM. 7.1.2 ON APPEAL, THE LEARNED CIT (APPEALS) WHILE CONSIDERING THE ASSESSEE'S APPEAL, ISSUED NOTICE ON ENHANCEMENT UNDER SECTION 251(2) OF THE ACT ON 16.2.2010 WHICH IS EXTRACTED HEREUNDER FROM PAGE 3 OF THE IMPUGNED ORDER. 2. ON PERUSAL OF PARA 7.1(II) OF THE ASSESSMENT ORDER, IT IS NOTICED THAT IN RESPECT OF UB DISTILLERIES LTD., WHERE DEDUCTION UNDER SECTION 36(1)(VII) HAS BEEN CLAIMED. IN THE ANNUAL REPORT, IT IS MENTIONED THAT THE SUNDRY DEBTORS AND LOANS AND ADVANCES INCLUDED 224.52 LACS AND 845.0 LACS AGAINST WHICH THE MANAGEMENT WAS HOPEFUL OF RECOVERY I N FULL OUT OF COMPENSATION TO BE RECEIVED BY IT FORM THE SELLERS. AS A MEASURE OF PRUDENCE, A SUM OF RS.530 LACS WAS TRANSFERRED TO CONTINGENCY RESERVE TO MEET ANY EVENTUAL SHORTFALL IN THE REALIZATION OF ABOVE DEBTS AND ADVANCES. THE ABOVE NOTE IN THE ANNUAL REPORT MAKES IT CLEAR THAT THE ABOVE SUNDRY DEBTORS HAS NOT BEEN WRITTEN OFF FORM THE BOOKS OF ACCOUNTS AND ALSO NO EVIDENCE HAVE BEEN PRODUCED TO SUPPORT THAT THE CONDITIONS OF SECTION 36(2)(I) OF THE INCOME TAX ACT HAS BEEN FULFILLED FOR CLAIMING THE ABOVE AMOUNT AS DEDUCTION UNDER SECTION 36(1)(VII) OF THE I.T. ACT. HOWEVER, IT IS NOTICED THAT FORM THE ASSESSMENT ORDER THAT THE ASSESSING OFFICER HAS NOT DISALLOWED THE DEDUCTION CLAIMED ON THE ABOVE DEBTORS. 3. YOU ARE REQUESTED TO SHOW CAUSE AS TO WHY THE ASSESSMENT SHOULD NOT BE ENHANCED TO THE EXTENT OF RS.224.52 _ 845 = 1069.52 LAKH IN VIEW OF THE POWER CONFERRED TO THE UNDERSIGNED UNDER SUB - SECTION (2) OF SECTION 251 OF THE INCOME TAX ACT, 1961. THE ASSESSEE FILED ITS REPLY / OBJECTIO NS THERETO AND THE SAME WAS DEALT WITH BY THE LEARNED CIT (APPEALS) AT PARA 2.2.3 AT PAGES 6 TO 14 OF THE IMPUGNED ORDER. BASED ON THE FINDINGS RENDERED THEREIN, THE LEARNED CIT (APPEALS) DISALLOWED THE ASSESSEE'S CLAIM AND THEREBY ENHANCED THE ASSESSEE'S INCOME BY RS.10,69,52,000, WHICH HAD BEEN ALLOWED BY THE ASSESSING OFFICER. 7.2 THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE ASSESSEE'S CLAIMS ON THIS ISSUE WERE EXAMINED AND CONSIDERED BY THE ASSESSING OFFICER AND IT IS ONLY AFTER SUCH 11 IT A NO S . 1276 & 144 8 /BANG/201 0 OBJECTIVE VERIFICATION THAT HE PARTIALLY ALLOWED THE ASSESSEE'S CLAIM TO THE EXTENT OF RS.10,69,52,000 AND DISALLOWED THE BALANCE OF RS.1,57,42,000. THE LEARNED AUTHORISED REPRESENTATIVE STRONGLY CONTENDED THAT SINCE THE REASONS GIVEN BY THE ASSESSING OF FICER WERE OBJECTIVE AND SUSTAINABLE IN LAW, THE INTERFERENCE BY THE LEARNED CIT (APPEALS) IN MAKING THE SAID ENHANCEMENT IS LIABLE TO BE SET ASIDE. 7.3 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT IF THE OTHER ISSUES OF DISALLOWANCES OF THE CLAIMS OF THE ASSESSEE WITH RESPECT TO WRITE OFF BAD DEBTS AND ADVANCES ARE TO BE SET ASIDE FOR FRESH CONSIDERATION BY THE ASSESSING OFFICER, THEN THIS ISSUE MAY ALSO BE SET ASIDE TO THE FILE OF THE ASSESSING OFFICER FOR DE NOVO ADJUDICATION AFTER EXAMINAT ION AND VERIFICATION THEREOF. 7.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD INCLUDING THE VIEWS OF THE AUTHORITIES BELOW IN THE MATTER AND FIND THAT THE REASONS GIVEN BY THE ASSESSING OFFICER WHI LE ALLOWING THE ASSESSEE'S CLAIM LACK CLARITY. THE LEARNED CIT (APPEALS) IS RIGHT IN OBSERVING THAT THE REASONS GIVEN BY THE ASSESSING OFFICER CREATES AN AMBIGUITY. HOWEVER, AS SUBMITTED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, SINCE THE ISSUE OF THE ASSESSEE'S OTHER CLAIMS FOR WRITE OFF OF BAD DEBTS AND ADVANCES HAVE BEEN RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR DE NOVO ADJUDICATION AFTER A COMPREHENSIVE EXAMINATION, WE ARE OF THE VIEW, THAT IT WOULD BE IN THE INTEREST OF EQUITY AND JUSTICE TO SET ASIDE THE ORDER OF THE LEARNED CIT (APPEALS) ON THE ISSUE OF ENHANCEMENT TO THE FILE OF THE ASSESSING OFFICER FOR DE NOVO ADJUDICATION IN THE LIGHT OF OUR OBSERVATIONS ON THE ISSUE OF W RI TE OFF OF BAD DEBTS AND ADVANCES IN PARA 6.7 OF THIS ORDER. I T IS ORDERED ACCORDINGLY. 12 IT A NO S . 1276 & 144 8 /BANG/201 0 CONSEQUENTLY, GROUND NOS.4 TO6 OF THE ASSESSEE'S APPEAL ARE TREATED A S ALLOWED FOR STATISTICAL PURPOSES. 8. GROUND NOS. 7 TO 9 : DISALLOWANCE U/S.14A OF THE ACT. 8.1.1 IN THE ORDER OF ASSESSMENT, THE ASSESSING OFF ICER INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT MADE A DISALLOWANCE OF RS.57,00,44,771, WHICH WAS SUSTAINED BY THE LEARNED CIT (APPEALS) TO THE EXTENT OF RS.44,67,00,833. AS PER THE DETAILS FILED BEFORE THE ASSESSING OFFICER, THE ASSESSEE SUBMITTED THAT IT HAD AN INVESTMENT PORTFOLIO OF RS.702,26,48,000, THE BREAK UP OF WHICH IS GIVEN AS UNDER : - INVESTMENT IN SWCL RS.488.88 CRORES INVESTMENT IN PRIMO DISTRIBUTORS PVT. LTD. RS.103.00 CRORES I NTEREST AS SOLE BENEFICIARY IN U SL BENEFIT TRUST RS.68.7 0 CRORES. OTHERS (INVESTMENTS IN BANKS ACQUIRED ON AMALGAMATION) RS.41.68 CRORES. TOTAL : RS.702.02 CRORES. 8.1.2 IN RESPECT OF THE ABOVE INVESTMENTS, THE ASSESSEE SUBMITTED THAT IT HAD EARNED DIVIDEND INCOME OF RS.4,28,93,000. THE ASSESSEE, IN TH E PERIOD UNDER CONSIDERATION HAD CLAIMED INTEREST ON ITS BORROWINGS AT RS.173,30,55,000 AND SUBMITTED THAT ITS RESERVES AND SURPLUS FOR THE YEAR AMOUNTED TO RS.896,09,73,000. THE ASSESSING OFFICER ISSUED A NOTICE SEEKING THE ASSESSEE'S OBJECTIONS TO A PROPOSED DISALLOWANCE UNDER SECTION 14A OF THE ACT. THE ASSESSEE FILED ITS OBJECTIONS VIDE LETTER DT.17.12.2008 WHICH IS EXTRACTED BY THE ASSESSING OFFICER AT PAGES 7 & 8 OF THE ORDER OF ASSESSMENT. THE ASSESSING OFFICER REJECTED THE OBJECTIONS PUT FORTH BY THE ASSESSEE HOLDING AS UNDER AT PARAS 6.9 TO 6.11 IN THE ORDER OF ASSESSMENT WHICH ARE EXTRACTED HEREUNDER : - 13 IT A NO S . 1276 & 144 8 /BANG/201 0 6.9 THE ASSESSEE ARGUES THAT IT IS ONLY THROUGH THE ACQUISITION OF INVESTMENT HELD BY PRIMO DISTRIBUTORS (15%), SHAW WALLACE & COMPANY LTD. (40%) AND SWDL BENEFIT TRUST (40%) THAT THE ENTIRE CONTROL OVER SHAW WALLACE DISTILLERIES LTD. HAS BEEN ACQUIRED. IT IS ALSO STATED THAT THROUGH THE AMALGAMATION OF SHAW WALLACE DISTILLERIES LTD. (WITH EFFECT FROM 1.4.2005) IT HAS ACQUIRED 10 MANUFAC TURING UNITS ALONG WITH TIE - UP ARRANGEMENTS IN MANY STATES, WHICH GAVE RISE TO SIGNIFICANT ADDITION TO TURNOVER AND PROFITS. 6.10 IT IS ALSO A RGUED BY THE ASSESSEE THAT THE SHARES OF SHAW WALLACE & COMPANY LIMITED AND PRIMO DISTRIBUTORS LTD. ARE FORMING PART OF THE OVERALL STRATEGY TO ACQUIRE THE BUSINESS CARRIED ON BY THE SHAW WALLACE & COMPANY LTD. REGARDING THE FUND INVESTED IN THE SHARES OF THESE COMPANIES, IT IS STATED THAT NO BORROWAL COULD BE ATTRIBUTED TO THESE INVESTMENTS, AS THESE INVESTMENTS ARE NOT FOR EARNING ANY TAX FREE INCOME. THE ASSESSEE CLAIMS THAT THE PROVISIONS OF SECTION 14A CANNOT BE APPLIED TO ANY OF THE INVESTMENTS MADE BY IT IN SHARES. 6.11 THE ASSESSEE HAS NOT FURNISHED ANY DETAILS TO PROVE THAT THE INVESTMENTS WERE MADE AS AN OVERALL STRATEGY TO ACQUIRE THE BUSINESS CARRIED ON BY THE SHAW WALLACE & COMPANY LTD AND NOT FOR EARNING INTEREST FROM IT. SINCE THE ASSES SEE IS CLAIMING THAT THESE INVESTMENTS WERE MADE AS BUSINESS STRATEGY AND NOT FOR EARNING DIVIDEND, THE ONUS TO PROVE THE CLAIM IS ON THE ASSESSEE. THE ASSESSEE HAS TO BRING ALL MATERIAL FACTS ON RECORDS. THE DEPARTMENT CAN NOT STEP INTO THE SHOW OF THE A SSESSEE TO GET THE DETAILS / DOCUMENTARY EVIDENCE TO ALLOW THE CLAIM OF THE ASSESSEE. ONE OF THE PRINCIPLES OF EQUITY IS THAT ONE WHO ASSERTS A POINT MUST PROVE IT BY COGENT EVIDENCE. IN THE INSTANT CASE, HOWEVER, THE ASSESSEE HAS NOT PRODUCED ANY SUCH EVIDENCE TO PROVE ITS CASE. WITHOUT PREJUDICE TO THE FINDING ABOVE, IT CANNOT BE REITERATED THAT PROVISIONS OF SECTION 14A ASSESSEE APPLICABLE IN RESPECT OF EXPENDITURE INCURRED BY ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCO ME UNDER THE ACT. THERE IS NO SEPARATE RULE TO EXAMINE THIS SECTION IN THE LIGHT / MERITS OF THE ISSUE. THE SECTION HAS BEEN INTRODUCED WITH THE INTENTION TO ASCERTAIN THE INCOME OF THE ASSESSEE CORRECTLY WHICH WAS GETTING REDUCED BY WAY OF EXPENDITURE O N INTEREST PAYMENT, THE RETURNS FROM WHICH WAS NOT TAXABLE. SECTION 14A(2) HAS BEEN INTRODUCED W.E.F. 1.4.2007, WHICH ALLOWS THE ASSESSING OFFICER TO DETERMINE SUCH AMOUNT OF EXPENDITURE, THE SAME PRESCRIBED AS PER RULE 8D. THE ASSESSEE HAS ONLY REITERAT ED THE ARGUMENT OF NON - APPLICABILITY OF SECTION 14A, NO CALCULATIONS HAVING BEEN FURNISHED. THE SAME IS BEING ADDRESSED ON MERITS. FURTHER, IT MAY BE STATED HERE THAT THE BANK ACCOUNTS MAINTAINED BY THE ASSESSEE ARE CURRENT ACCOUNTS WITH OVERDRAWAL FACIL ITY. THE AMOUNTS INVESTED BY THE ASSESSEE IN SHARES CONTRIBUTE TO INCREASE IN THE OVERDRAWAL FACILITY WHICH RESULTS IN PAYMENT OF INTEREST. THE ASSESSEE MAY ALSO ARGUE THAT THE SOURCES WERE OUT OF LOANS IN THE EARLIER YEARS AND AS ON DATE SUCH LOANS ARE N OT IN EXISTENCE. THIS COULD HARDLY BE AN ARGUMENT SINCE THE NET WORTH BEING NEGATIVE THE NEW LOANS HAVE REPLACED THE OLD LOANS WHICH WERE UTILIZED FOR SUCH ADVANCES. IN VIEW OF THE ABOVE THE INTEREST ON BORROWED CAPITAL RELEVANT TO THE INVESTMENT INEQUIT Y IS TO BE DISALLOWED UNDER SECTION 14A. AS ALREADY DISCUSSED ABOVE, THE ASSESSEE HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNTS IN RESPECT OF THE ACTIVITIES INVOLVING INCOME UNDER THE HEAD 14 IT A NO S . 1276 & 144 8 /BANG/201 0 DIVIDENDS AND ALSO THE INCOME FROM OTHER ACTIVITIES. THEREFORE, THE INTEREST RELATABLE TO THE FUNDS INVESTED IN EQUITY SHAR E S IS DETERMINED IN ACCORDANCE WITH THE FORMULA S PROVIDED UNDER RULE 8D(1) OF THE INCOME TAX RULES,1962 AS UNDER : AGGREGATE OF THE FOLLOWING : (I) NIL (THE AMOUNT OF EXPENDITURE DIRECTLY RELATI NG TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. (II) A X B HERE, A = 173,30,55,000 (I.E. THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST C OTHER THAN THE AMOUNT OF INTEREST DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. B = RS.505,60,79,500* AVERAGE OF 34550153 & 66671.06 AFTER REDUCING 3663.67 LAKHS (I.E., THE AVERAGE OF VALUE OF INVESTMENT, INCOME FORM WHICH DOESNOT OR SHALLNOT FORM PART OF THE TOTAL INCOME AS APPEA RING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. C = RS.160848.695 LAKHS ** (I.E. THE AVERAGE OF TOTAL ASSETS AS APPEARING ON THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE P REVIOUS YEAR. ( AVERAGE OF BEGINNING AND END + 86278.53 & 235418.86**) THEREFORE, * EXCLUDING THE VALUE OF INVESTMENT OF RS.3663.67 LACS MADE IN ASIAN OPPORTUNITIES AND INVESTMENTS LTD. AND MC DOWELL NEPAL LIMITED AS THIS INVESTMENT IS OFFERED TO TAX AND NOT EXEMPT FROM TAX (AS INFORMED BY THE AUTHORISED REPRESENTATIVE.) ** AS PER RULE 8D(3), THE TOTAL ASSETS MEAN, TOTAL ASSET AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON RE VALUATION OF ASSETS. AS PER NOTE - 1 OF SCHEDULE 5 THERE IS AN INCREASE OF RS.8870.62 LACS IN THE VALUE OF LAND AND BUILDING, MACHINERY ETC. ON ACCOUNT OF REVALUATION AND AN INCREASE OF 754.00 LACS DECREASE ON REVALUATION. HENCE THE INCREASE IS REDUCED AND DECREASE IS INCREASED TO ARRIVE AT CLOSING ASSET VALUE OFRS.235418.86 LAKHS (AS AGAINST RS.243535.48 LAKHS) (THE ADJUSTED VALUE OF FIXED ASSET IS TAKEN AT 48254.98 AS AGAINST RS.56371.60 LAKCS). (III) RS.2,52,80,397.5 (BEING ONE HALF PER CENT OF THE AV ERAGE OF THE VALUE OF INVESTMENT OF RS.505,60,79,500, INCOME FROM WHICH DOES NOT RO SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. THEREFORE, THE INTEREST RELATABLE TO THE FUNDS INVESTED IN SHARES ETC. WORKS OUT TO RS.57,00,44,771 (I.E. THE AGGREGATE AMOUNT OF (I) + (II) + (III) DETERMINED ABOVE). THE SAME IS DISALLOWED AS NOT ALLOWABLE UNDER SECTION 14A OF THE INCOME TAX ACT. 15 IT A NO S . 1276 & 144 8 /BANG/201 0 8.2 ON APPEAL, OUT OF RS.57,00,44,771 THE LEARNED CIT(A) SUSTAINED THE DISALLOWANCE UNDER SECTION 14A OF THE ACT TO THE EXTENT OF RS.44,67,00,833 AFTER CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE. THE FINDINGS OF THE LEARNED CIT(A) IN THIS REGARD ARE AT PAGES 26 OF THIS IMPUGNED ORDER WHICH ARE EXTRACTED HEREUNDER : - IN VIEW OF THE ABOVE, THE PROPORTIONATE DISALLOWANCE OF THE INTEREST & FINANCE CHARGES AND OTHER EXPENSES DEBITED TO THE PROFIT AND LOSS ACCOUNT HAS TO BE MADE ON A REASONABLE BASIS, EVEN IF THE METHOD OLOGY PRESCRIBED IN RULE 8D IS NOT APPLIED. IN MY VIEW, THE DISALLOWANCE OF THE INTEREST AND FINANCIAL CHARGES ON REASONABLE BASIS CAN BE MADE BASED ON THE PERCENTAGE OF BORROWING COST OF TOTAL FUNDS. FOR THIS PURPOSE, THE GROSS INTEREST OF RS.173,30,55, 000 HAS TO BE CONSIDERED FOR ARRIVING AT PERCENTAGE BORROWING COST CONSIDERING THE FACT THAT THE APPOINTMENT OF THE INTEREST AND FINANCE CHARGES HAS TO BE MADE TO WORK OUT SUCH EXPENSES ATTRIBUTABLE TO THE INCOME WHICH IS NOT INCLUDIBLE IN TOTAL INCOME AND THE REMAINING AMOUNT REPRESENTS THE EXPENSES INCURRED FOR PURPOSE OF EARNING THE INCOME (WHICH INCLUDE THE INTEREST INCOME CREDITED TO PROFIT AND LOSS ACCOUNT) WHICH FORM PART OF THE TOTAL INCOME. DURING THE ASSESSMENT YEAR UNDER CONSIDERATION, THE TOTAL EXPENSES ON INTEREST & FINANCE CHARGES ARE INCURRED TO THE EXTENT OF RS.173,30,55,000 AGAINST THE TOTAL OF BORROWED AND INTEREST FREE FUND AVAILABLE TO THE EXTENT OF RS.2435,35,48,000, THUS THE AVERAGE COST OF THE BORROWING WORKS OUT TO 7.11%, ON APP LICATION OF THIS RATE TO THE INVESTMENT OF RS.592,71,51,000, THE DISALLOWABLE AMOUNT OUT OF INTEREST AND FINANCE CHARGES UNDER SECTION 14A OF THE INCOME TAX ACT WORKS OUT TO RS.42,14,20,436. IN ADDITION TO THE INTEREST AND FINANCE CHARGES, FOR MAKING THE HUGE INVESTMENTS, THE APPELLANT HAS ALSO TO INCUR THE EXPENSES OUT OF OTHER EXPENSES AND THEREFORE REASONABLE DISALLOWANCE OUT OF THE OTHER EXPENSES IS ALSO TO BE MADE, ON THIS REGARD, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AT RS.2,52,80,397 IS RE ASONABLE LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE. THUS THE TOTAL DISALLOWANCE UNDER SECTION 14A WORKS OUT TO RS.44,67,00,833 (RS.42,14,20,436 + RS.2,52,80,397), ACCORDINGLY, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 14A O F THE INCOME TAX ACT IS UPHELD TO THE EXTENT OF RS.44,67,00,833. 8.3.1 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE CONTENDED THAT THE LEARNED AUTHORISED REPRESENTATIVE ERRED IN INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT AND DISALLOWING AN AMOUNT OF RS.57,00,44,771 THEREUNDER, WITHOUT FIRST SATISFYING THE NECESSARY CONDITIONS OF SECTION 14A OF THE ACT. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT SUCH 16 IT A NO S . 1276 & 144 8 /BANG/201 0 DISALLOWANCE CAN BE MADE ONLY WHEN THERE IS A CASE OF EXPENDITURE INCURRED IN RE LATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME AND THE ASSESSING OFFICER HAS NOT RENDERED ANY SUSTAINABLE FINDINGS IN THIS REGARD, IN WHICH CASE ALONE SECTION 14A OF THE ACT CAN BE INVOKED. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT OUT OF THE TOTAL INVESTMENT OF APPROX. RS.702.02 CRORES, RS.698.15 CRORES WAS FOR ACQUIRING CONTROLLING INTEREST, EXPANSION OF MARKET SHARE AND STRATEGIC BUSINESS PURPOSES AS WAS THE CASE IN MAKING THE INVESTMENT IN SHAW WALLACE CO. LTD., PRIM O DISTRIBUTORS LTD. AND U SL BENEFICIAL TRUST; WHICH WAS ALL FOR BUSINESS PURPOSES. THE LEARNED AUTHORISED REPRESENTATIVE FURTHER SUBMITTED THAT THE TOTAL BUSINESS INCOME EARNED AND OFFERED TO TAX IN THE FORM OF AUGMENTED SALES, ROYALTY, ETC., TOTALED RS.789.64 CRORES AS SUBMITTE D TO THE LEARNED CIT(A) VIDE LETTER DT.24.10.2009, PLACED AT PAGES 141 TO 145 OF THE ASSESSEE'S PAPER BOOK. THUS, THE LEARNED AUTHORISED REPRESENTATIVE CONTENDS THAT IN SO FAR AS THESE INVESTMENTS ARE CONCERNED, IT CANNOT BE SAID THAT IT WAS FOR EARNING EXEMPT INCOME. MOREOVER, WHEN INVESTMENTS ARE MADE FOR THE PURPOSE OF ACQUIRING CONTROLLING INTEREST AND STRATEGIC INTEREST, THE PROVISIONS OF SECTION 14A CANNOT BE INVOKED A S HAS BEEN HELD BY THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. (25 0 ITR 291). THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT IN THIS REGARD, THE ASSESSEE PLACES RELIANCE ON THE FOLLOWING DECISIONS OF THE VARIOUS TRIBUNALS. (I) KINGFISHER FINVEST INDIA LTD. IN ITA NO.1368/BANG/2012 DT.17.10.2014; (II ) GARWARE W ALL ROPES LTD. IN ITA NO.5408 & 4957/MUM/2012 OF THE ITAT, MUMBAI. (III) J.M. FINANCIAL LTD. V ADDL. CIT IN ITA NO.4521/MUM/2012 OF ITAT, MUMBAI. 17 IT A NO S . 1276 & 144 8 /BANG/201 0 8.3.2 THE LEARNED AUTHORISED REPRESENTATIVE FURTHER CONTENDED THAT THE ASSESSEE HAD ITS OWN FUNDS OF RS.8 96 CRORES CONSISTING OF CAPITAL AND RESERVES AND SURPLUS FAR IN EXCESS OF THE TOTAL INVESTMENTS OF RS.702.02 CRORES, INDICATING THAT THE ASSESSEE HAD SUFFICIENT NON - INTEREST BEARING FUNDS. IT WAS CONCEDED THAT THE BANK ACCOUNTS OF THE ASSESSEE CONSISTED O F BOTH INTEREST FREE AND INTEREST BEARING FUNDS, AND THUS THE ASSESSEE'S FUNDS WERE MIXED IN NATURE. IT IS CONTENDED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT EVEN IN SUCH CASES, NO PROPORTIONATE DISALLOWANCE, AS MADE BY THE AUTHORITIES BELOW, COULD BE SUSTAINED AS HELD IN THE CASES OF CIT V SUZLON ENERGY LTD. (354 ITR 630) (GUJ); DCIT V MAHARASHTRA SEAMLESS LTD. 138 TTJ 244 (ITAT, DELHI) AND VOLTAS LTD. V ACIT 125 TTJ 601 (ITAT, MUMBAI). 8.3.3 THE LEARNED AUTHORISED REPRESENTATIVE FURTHER SUBMITT ED THAT THE ASSESSING OFFICER HAD MADE A FACTUAL ERROR AT PAGE 10 OF THE ORDER OF ASSESSMENT BY HOLDING THAT THE ASSESSEE'S NET OWN FUNDS WERE NEGATIVE EVEN THOUGH THE NET WORTH WAS OVER RS.896 CRORES. EVEN OUT OF THE TOTAL DIVIDEND EARNED AMOUNTING TO RS .4,28,93,165, AN AMOUNT OF RS.1,69,29,000 WAS EARNED FROM ITS OVERSEAS SUBSIDIARY WHICH IS TAXABLE, AND THE EXEMPT DIVIDEND WAS ONLY RS.2,59,66,165. THE LEARNED AUTHORISED REPRESENTATIVE CONTENDS THAT FROM THIS IT IS AMPLY CLEAR THAT THE ASSESSING OFFICE R HAD ERRED BOTH L EGA LLY AND FACTUALLY IN MAKING THE DISALLOWANCE ON THE ENTIRE DIVIDEND INCOME; BOTH TAXABLE AND EXEMPT. THE LEARNED AUTHORISED REPRESENTATIVE FURTHER CONTENDED THAT THE ASSESSING OFFICER HAD NOT RECORDED REASONS FOR INVOKING THE PROVISIO NS OF SECTION 14A OF THE ACT, WHICH IS A CONDITION PRECEDENT AND THEREFORE HIS ACTION IN MAKING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT IN THE MANNER HE DID IS NOT SUSTAINABLE. IN SUPPORT OF THIS ARGUMENT, THE LEARNED A .R. PLACED RELIANCE IN THE FOL LOWING DECISIONS : - 18 IT A NO S . 1276 & 144 8 /BANG/201 0 (I) BALARAMPUR CHINI MILLS LTD. V DCIT 140 TTJ 73 (ITAT, KOLKATA) (II) EIMCO ELECON (INDIA) LTD. V ADDL. CIT 33 C CH 619 (ITAT, AHMEDABAD). THE LEARNED AUTHORISED REPRESENTATIVE FURTHER SUBMITTED THAT THE LEARNED CIT(A) HAS AL SO NOT APPLIED THE LAW AS LAID DOWN IN THE ABOVE JUDICIAL PRONOUNCEMENTS (SUPRA) AND THEREFORE THE DISALLOWANCE UNDER SECTION 14A OF THE ACT OUGHT TO BE DELETED. 8.4 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF THE AUTHO RITIES BELOW AND PRAYED FOR CONFIRMATION OF THE DISALLOWANCE OF RS.44,67,00,833 SUBMITTED BY THE LEARNED CIT(A). 8.5 WE HAVE HEARD BOTH PARTIES AT LENGTH AND PERUSED AND CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JUDICIAL PRONOUNCEMENTS CITED AND PLACED RELIANCE ON. THE LEARNED A.R. SUBMITS THAT IN CASES WHERE THERE HAS BEEN SUBSTANTIAL INVESTMENT FOR STRATEGIC PURPOSES WHEREIN THE INTENTION HAS BEEN THE EXPANSION AND SUPPORT OF THE ASSESSEE'S BUSINESS, AND NOT FOR THE PURPOSE OF EARNING DIVID END, THE PROVISIONS OF SECTION 14A OF THE ACT OUGHT NOT TO HAVE BEEN INVOKED EVEN IF SUCH EXPANSION HAS OCCURRED OUT OF INTEREST BEARING BORROWED FUNDS. RULING TO THIS EFFECT HAS BEEN RENDERED BY THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. (S UPRA) RELIED ON BY THE ASSESSEE. THIS IS THE PROPOSITION PUT FORTH IN TH IS CASE BY THE ASSESSEE, APART FROM ITS AVERMENTS THAT ITS OWN FUNDS ARE MORE THAN THE INVESTMENT IN EQUITIES. WE ALSO FIND THAT THE ASSESSING OFFICER HAS NOT CONSIDERED THE ABOVE AR GUMENTS OF THE ASSESSEE AND HIS FINDING THAT THE ASSESSEE'S NET WORTH IS NEGATIVE SUFFERS FROM LACK OF FACTUAL CLARITY, AS THE ASSESSEE'S AVERMENTS TO THE CONTRARY ARE THAT ITS NET WORTH IS POSITIVE AT RS.896 CRORES. IN VIEW OF THE FACT THAT THE ORDERS OF THE AUTHORITIES BELOW SUFFER FROM NON - CONSIDERATION OF 19 IT A NO S . 1276 & 144 8 /BANG/201 0 ARGUMENTS, DETAILS AND EVIDENCES PUT FORTH BY THE ASSESSEE, WE, IN THE INTEREST OF EQUITY AND JUSTICE, SET ASIDE THE DISALLOWANCE UNDER SECTION 14A OF THE ACT AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO CONSIDER THE MATTER AFRESH IN DETAIL AND DECIDE THE ISSUE AFTER AFFORDING THE ASSESSEE ADEQUATE OPPORTUNITY OF BEING HEARD AND TO FILE DETAILS / EVIDENCE REQUIRED AND ADDRESSING THE SUBMISSIONS MADE BY THE ASSESSEE IN THIS REGARD. IT IS ORDERED ACCORDINGLY. CONSEQUENTLY, GROUNDS NO.7 TO 9 OF THE ASSESSEE'S APPEAL ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 9. IN THE GROUND AT S.NO.10 , THE ASSESSEE CONTENDS THAT THE AUTHORITIES BELOW HAVE ERRED IN MAKING AN D CONFIRMING THAT THE CENTRAL SUBSIDY OF RS.15,00,000 IS REVENUE IN NATURE. WE HAVE HEARD BOTH THE LEARNED AUTHORISED REPRESENTATIVE AND LEARNED DEPARTMENTAL REPRESENTATIVE ON THE ISSUE AND FIND THAT OTHER THAN RAISING THIS GROUND BOTH BEFORE THE LEARNED CIT(A) AND IN THIS APPEAL, THE ASSESSEE HAS NOT BROUGHT ON RECORD BEFORE US ANY MATERIAL EVIDENCE TO CONTROVERT THE FINDINGS OF THE AUTHORITIES BELOW. IN THIS VIEW OF THE MATTER, WE UPHOLD THE FINDING OF THE AUTHORITIES BELOW IN TREATING THE CENTRAL SUBSI DY OF RS.15,00,000 AS REVENUE IN NATURE AND CONSEQUENTLY DISMISS THE GROUND NO.10 RAISED BY THE ASSESSEE. 10. IN THE GROUNDS AT S.NOS.11 TO 13 , THE ASSESSEE DENIES ITSELF LIABLE TO BE CHARGED INTEREST UNDER SECTION 234B OF THE ACT. THE CHARGING OF INT EREST IS CONSEQUENTIAL AND MANDATORY AND THE ASSESSING OFFICER HAS NO DISCRETION IN THE MATTER AND WE, THEREFORE, UPHOLD HIS ACTION IN CHARGING THE SAID INTEREST. THE ASSESSING OFFICER IS, HOWEVER, DIRECTED TO RECOMPUTE THE INTEREST CHARGEABLE UNDER SECTI ON 234B OF THE ACT, IF ANY, WHILE GIVING EFFECT TO THIS ORDER. 20 IT A NO S . 1276 & 144 8 /BANG/201 0 11. IN THE RESULT, THE ASSESSEE'S APPEAL FOR ASSESSMENT YEAR 2006 - 07 IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.1448/BANG/2010 REVENUE S APPEAL FOR A.Y. 2006 - 07. 12. REVENUE IN ITS APPEAL HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : - 1. THE ORDER OF THE LEARNED CIT (APPEALS) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. THE LEARNED CIT (APPEALS) HAS ERRED IN DELETING THE ADDITION OFRS.2,70,00,000 BEING DISALLOWANC E OF FOREIGN EXCHANGE LOSS. 3. THE LEARNED CIT (APPEALS) HAS NOT APPRECIATED THE FACT THAT THE ASSESSEE HAS FAILED TO PRODUCE EVIDENCE TO SHOW ANY NEXUS BETWEEN THE LOANS AVAILED BY IT AND THE UTILIZATION OF THE SAME FOR WORKING CAPITAL REQUIREMENTS. 4. THE LEARNED CIT (APPEALS) HAS ALSO FAILED TO APPRECIATE THE FACT THAT THE ASSESSEE COMPANY HAS GONE FOR HUGE INVESTMENTS OF SHARE CAPITALS OF VARIOUS COMPANIES WHICH SHOWS THAT THE LOANS WERE NOT UTILIZED BY THE ASSESSEE FOR ITS BUSINESS PURPOSES. 5. FOR THESE REASONS AND SUCH OTHER REASONS THAT MAY BEURGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT (APPEALS) DT.6.10.2010 BE CANCELLED AND THE ORDER OF THE A.O. UPHELD. 13. THE GROUNDS RAISED AT S.NO.1 AND 5 ARE GENERAL IN NATU RE AND NOT BEING URGED BEFORE US ARE DISMISSED AS INFRUCTUOUS. 14.1 THE GROUND RAISED AT S.NO.2 RELATES TO FOREIGN EXCHANGE LOSS OF RS.2,70,00,000 AND REVENUE IS AGGRIEVED BY THE RELIEF GRANTED BY THE LEARNED CIT(A) IN THE IMPUGNED ORDER ON THIS ISSUE. THE LEARNED DEPARTMENTAL REPRESENTATIVE WAS HEARD IN SUPPORT OF THE GROUNDS RAISED AND PRAYED THAT THE ORDER OF THE LEARNED CIT(A) BE REVERSED AND THAT OF THE ASSESSING OFFICER RESTORED ON THE ISSUE OF FOREIGN EXCHANGE LOSS. 14.2 PER CONTRA, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT REVENUE S GROUND OF APPEAL IS LIABLE TO BE DISMISSED AS ON SIMILAR SET OF FACTS, THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2005 - 06 IN ITA NO.217(BNG)/09 DT.21.8.2009 HAS DECIDED THE SIMILAR ISSUE IN FAVOUR OF THE ASSESSEE. 21 IT A NO S . 1276 & 144 8 /BANG/201 0 14.3 WE HAVE HEARD BOTH THE LEARNED DEPARTMENTAL REPRESENTATIVE OF REVENUE AND THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD, INCLU DING THE JUDICIAL DECISION CITED AND PLACED RELIANCE ON BY THE ASSESSEE. WE FIND THAT THE ISSUE OF FOREIGN EXCHANGE LOSS ON SIMILAR FACTS WAS BEFORE THE CO - ORDINATE BENCH OF THE TRIBUNAL FOR CONSIDERATION, IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 20 05 - 06 (SUPRA), AND THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE , WHEREIN AT PARA 6 OF THE ORDER IT WAS HELD AS UNDER : - 6. ON THE ISSUE OF FOREIGN EXCHANGE LOSS ON CONVERSION CLAIM, AS NOTED BY THE AUTHORITIES BELOW, DETAILS AS IN THE PAPER BOOK HAVE BEEN FURNISHED TO ESTABLISH NEXUS OF INCURRING THIS LOSS AS A BUSINESS LOSS IN THE HANDS OF THE ASSESSEE. THE ANNEXURE FURNISHED INDICATES THE FORWARD RATE AND THE SPOT RATE DURING THE ACCOUNTING YEAR THEREFORE RESULTED IN LOSS AMOUNTING TO RS.1.8 CR ORES IS BROUGHT OUT CLEARLY TO BE ALLOWED AS A BUSINESS LOSS WHEN PRIMARILY THE ASSESSEE INDICATES THAT THE LOANS WERE OBTAINED IN FOREIGN EXCHANGE FOR WORKING CAPITAL FROM ITS BANKS THEREFORE INDICATED THAT A FOREIGN EXCHANGE LOSS AS NOTED BY THE BANK WAS NOT TO BE BORNE BY THE BANKS BUT BY THE ASSESSEE. THEREFORE IT IS CLEAR THAT THE ASSESSEE HAS BEEN ABLE TO ESTABLISH ITS WORKING CAPITAL REQUIREMENTS AS WAS NOT RELATED AS OTHERWISE NOTED BY THE ASSESSING OFFICER CLAIMED AS INTEREST ON FORWARD CONTRACTS FOR INVESTMENT IN SHARES OF COMPANIES WHICH INVESTMENT INCREASED FROM RS.102 CRORES TO RS.380 CRORES. JUSTIFIABLY THE LEARNED COUNSEL POINTED OUT THE ISSUE IN ACCORDANCE WITH THE PROVISIONS OF SECTION 43A DISTINGUISHING THE CAPITAL / REVENUE NATURE IMBIB ED THEREIN TO RESULT IN CONSIDERATION THEREOF AS WERE CLAIMED BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW. THE ASSESSEE HIMSELF RENDERED INCOME ON GAIN FROM EXCHANGE FLUCTUATION ON IDENTICAL NATURE OF REVENUE FROM LOANS REMAINING UNPAID. THE SAME IS TO BE ALLOWED ON THE FACTS AND CIRCUMSTANCES OF THE CASE. FOLLOWING THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2006 - 07 IN ITA NO.217/BANG/2009 DT.21.8.2009, WE UPHOLD THE ACTION OF THE LEARNE D CIT(A) IN DELETING THE DISALLOWANCE OF FOREIGN EXCHANGE LOSS OF RS.2,70,00,000 MADE BY THE ASSESSING OFFICER. CONSEQUENTLY, REVENUE S GROUND AT S.NO.2 IS DISMISSED. 22 IT A NO S . 1276 & 144 8 /BANG/201 0 15. THE GROUNDS RAISED AT S.NO.3 & 4 OF REVENUE S APPEAL ARE ALSO PART OF THE SUBJEC T MATTER OF THE GROUND NOS.7 TO 9 OF THE ASSESSEE'S APPEAL AND HAVE ALREADY BEEN ADDRESSED BY US AT PARAS 8 TO 8.5 OF THIS ORDER (SUPRA), WHEREIN THIS ISSUE HAS BEEN RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION AND ADJUDICATIO N AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE JUDICIAL DECISIONS CITED AND AFFORDING THE ASSESSEE ADEQUATE OPPORTUNITY OF BEING HEARD IN THE MATTER. THEREFORE, NO SEPARATE ADJUDICATION IS CALLED FOR ON THIS ISSUE. CONSEQUENTLY, REVENUE S GROUN DS AT S. NOS.3 & 4 ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 16. IN THE RESULT, REVENUE S APPEAL FOR ASSESSMENT YEAR 2006 - 07 IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. TO SUM UP, BOTH THE ASSESSEE'S AND REVENUE S APPEALS FOR A .Y. 2006 - 07 ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD JAN., 2015. SD/ - SD/ - ( P. MADHAVI DEVI ) ( JASON P BOAZ ) JUDICIAL MEMBER ACCOUNTANT MEMBER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE. (TRUE COPY) BY ORDER ASST. REGISTRAR , ITAT , BANGALORE