ACIT, CHENNAI V. M/s. SDB CISCO (India) Ltd., CHENNAI

ITA 133/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64112 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 6 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-08-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 07-08-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 27-01-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JUNIOR
• Assessee Lawyers: S SRIDHAR
• Keywords: Depreciation; Earning of tax free income; Commercial expediency
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NOS. 129, 130, 131, 132 & 133/MDS/2011 ASSESSMENT YEARS : 2003-04, 2004-05, 2005-06, 200 6-07 & 2007-08 THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI(1), CHENNAI - 600 034 . (APPELLANT) V. M/S SDB CISCO (INDIA) LTD., 14, AVENUE ROAD, NUNGAMBAKKAM ROAD, CHENNAI - 600 034 . PAN : AAACT3628C (RESPONDENT) I.T.A. NO. 2069/MDS/2011 ASSESSMENT YEAR : 2008-09 THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II(3), CHENNAI - 600 034 . (APPELLANT) V. M/S ISS SDB SECURITY SERVICES PVT. LTD., (PREVIOUSLY KNOWN AS SDB CISCO INDIA LTD.) NO.4, DECCAN HOUSE, 7 TH AVENUE, HARRINGTON ROAD, CHETPET, CHENNAI - 600 031. PAN : AAACT3628C (RESPONDENT) APPELLANT BY : SHRI K.E.B. RENGARAJAN, JUNIOR STANDING COUNSEL RESPONDENT BY : SHRI S. SRIDHAR, ADVOCA TE DATE OF HEARING : 07.08.2012 DATE OF PRONOUNCEMENT : 07.08.2012 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THESE ARE APPEALS FILED BY THE REVENUE FOR THE IM PUGNED ASSESSMENT YEARS, DIRECTED AGAINST ORDERS OF COMMIS SIONER OF INCOME 2 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 TAX (APPEALS)-V, CHENNAI. SINCE COMMON GROUNDS HAV E BEEN RAISED BY THE REVENUE IN ITS APPEALS FOR ASSESSMENT YEARS 200 3-04, 2004-05 AND 2005-06, THESE APPEALS ARE DISPOSED OF FIRST. 2. THREE EFFECTIVE GROUNDS HAVE BEEN TAKEN BY THE R EVENUE IN THESE THREE APPEALS. ALL THE GROUNDS RELATE TO DISALLOWA NCE OF INTEREST AND FINANCE CHARGES WHICH WERE DELETED BY CIT(APPEALS). AS PER THE REVENUE, ASSESSEE HAD MADE INVESTMENTS IN UTI MONEY MARKET FUND OUT OF BORROWED FUNDS AND SUCH INVESTMENTS WERE NOT FOR THE PURPOSE OF ITS BUSINESS. ASSESSEE HAD ALSO MADE INVESTMENTS I N ONE M/S MODERN PROTECTION AND INVESTIGATIONS PVT. LTD. (MPIPL) WHI CH, AS PER THE REVENUE, WAS FOR EARNING DIVIDEND AND NOT RELATED T O THE BUSINESS OF THE ASSESSEE. ACCORDING TO THE REVENUE, THE CIT(APPEAL S) HAD COME TO A WRONG CONCLUSION THAT ASSESSEE MADE THESE INVESTMEN TS OUT OF ITS OWN SURPLUS FUNDS, AND HAD ALSO IGNORED A DECISION OF T HIS TRIBUNAL IN I.T.A. NO. 1621/MDS/2008 WHICH INTER-ALIA REQUIRED THE CIT (APPEALS) TO EXAMINE THE ISSUE IN THE LIGHT OF THE JUDGMENT OF H ONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF K. SOMASUNDARAM & BROS. V. CIT (1999) 238 ITR 939 (MAD). REVENUE IS ALSO AGGRIEVED THAT CIT( APPEALS) HELD THE DISALLOWANCE TO HAVE BEEN MADE UNDER SECTION 14A OF INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT'), WHEREAS, ASSESSING OFFIC ER HAD MADE THE DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT. 3 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 3. FACTS APROPOS THE ABOVE ISSUE ARE THAT ASSESSEE- COMPANY ENGAGED IN PROVIDING SECURITY SERVICES AND ALSO SEL LING ELECTRONIC EQUIPMENTS FOR SUCH SECURITY SERVICES, HAD MADE INV ESTMENT OF ` 25 LAKHS ON 27.3.2003 IN UTI MONEY MARKET FUND. ASSE SSEE HAD ALSO ACQUIRED 1870 EQUITY SHARES OF M/S MODERN PROTECTIO N AND INVESTIGATIONS PVT. LTD. (IN SHORT MPIPL) FROM ITS PROMOTERS FOR A PRICE OF ` 22.73 LAKHS. INVESTMENT IN UTI MONEY MARKET FUND WAS WITHDRAWN BY THE ASSESSEE BY 4.4.2003. ASSESSING OFFICER SOUGHT EXPLANATION FROM THE ASSESSEE AS TO WHY A DISALLOWANCE OF INTEREST S HOULD NOT BE MADE FOR LOANS TAKEN BY THE ASSESSEE SINCE SUCH LOANS WE RE USED FOR THE ABOVE MENTIONED INVESTMENTS. REPLY OF THE ASSESSEE WAS THAT THE INVESTMENT MADE IN UTI MONEY MARKET FUND WAS OUT OF IDLE FUNDS AVAILABLE WITH IT AND NOT FROM ANY BORROWED FUNDS. AS FOR THE ACQUISITION OF SHARES IN MPIPL, REPLY OF THE ASSESSEE WAS THAT THE SAID COMPANY WAS ALSO ENGAGED IN A BUSINESS OF SECURITY SERVICES IN MUMBAI AND THE ACQUISITION WAS DONE AS A PART OF THE EXPANSION PRO GRAMME OF BUSINESS OF THE ASSESSEE. AS PER THE ASSESSEE, IT WAS IN TH E SAME LINE OF BUSINESS. HOWEVER, THE A.O. WAS NOT IMPRESSED. AC CORDING TO HIM, THE INVESTMENT IN UTI MONEY MARKET FUND WAS DONE FROM F UNDS LYING IN A BANK ACCOUNT OF THE ASSESSEE WITH M/S UTI BANK AND SUCH BANK ACCOUNT HAD IN IT BOTH BORROWED FUNDS AS WELL AS BUSINESS S URPLUS. AS PER THE 4 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 A.O., ASSESSEE COULD NOT DISCHARGE THE ONUS LYING O N IT TO PROVE THAT INVESTMENTS WERE OUT OF OWN FUNDS. RELIANCE WAS PL ACED BY THE ASSESSING OFFICER ON THE DECISION OF HONBLE JURISD ICTIONAL HIGH COURT IN THE CASE OF CIT V. COIMBATORE SALEM TRANSPORT PVT. LTD. (61 ITR 480), MR. MOHD. ALI V. CIT (38 ITR 413), INDIAN METALS & FERRO ALLOYS LTD. (193 ITR 344), PHALTAN SUGAR WORKS LTD. V. CIT (208 ITR 989), R. DALMIA V. CIT (133 ITR 169). HE THUS DISALLOWED THE FINANCE CHARGES DEBITED IN THE PROFIT & LOSS ACCOUNT FOR THE RESPECTIVE ASSESS MENT YEARS. 4. ASSESSEE MOVED IN APPEAL BEFORE CIT(APPEALS) FOR ALL THESE THREE YEARS. FOR ASSESSMENT YEAR 2003-04, VIDE HIS ORDER DATED 17.1.2008, LD. CIT(APPEALS) HELD THAT THE INVESTMENTS WERE NOT IN ANY DIVERSION OF FUNDS. BUT, AGAINST THAT, DEPARTMENT MOVED IN APPE AL BEFORE THIS TRIBUNAL AND THIS TRIBUNAL VIDE ITS ORDER DATED 24. 3.2009 IN I.T.A. NO. 162/MDS/2008 REMITTED THE MATTER BACK TO THE CIT(AP PEALS) FOR CONSIDERATION AFRESH. WHILE THE APPEALS FOR ASSESS MENT YEARS 2004-05 AND 2005-06 WERE BEING CONSIDERED, THE CIT(APPEALS) ALSO TOOK UP THE APPEAL FOR ASSESSMENT YEAR 2003-04, REMITTED BACK B Y THE TRIBUNAL. AT THIS JUNCTURE, IT IS TO BE NOTED THAT THE TRIBUNAL HAD REMITTED THE APPEAL FOR ASSESSMENT YEAR 2003-04 BACK TO THE CIT(APPEALS ), FOR EXAMINING THE ISSUE IN THE LIGHT OF THE DECISION OF HONBLE J URISDICTIONAL HIGH COURT IN THE CASE OF K. SOMASUNDARAM & BROS. V. CIT (238 ITR 939). DURI NG 5 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 THE COURSE OF PROCEEDINGS BEFORE THE CIT(APPEALS), ARGUMENT OF THE ASSESSEE WAS THAT INVESTMENT MADE IN THE SHARES OF MPIPL WAS TO ENLARGE ITS OPERATIONS AND TO INCREASE ITS TURNOVER IN MUMBAI. AS PER THE ASSESSEE, THE SAID COMPANY WAS ALREADY ESTABLISHED AND THEREFORE, BY ACQUIRING ITS SHARES, IT COULD ESTABLISH ITS BUSINE SS IN MUMBAI WITHOUT INCURRING ANY ADDITIONAL EXPENDITURE. IN OTHER WOR DS, AS PER THE ASSESSEE, THE INVESTMENT WAS IN ITS REGULAR COURSE OF BUSINESS AND NOT FOR ANY NON-BUSINESS PURPOSES. FURTHER, AS PER THE ASSESSEE, IT WAS HAVING INTEREST FREE FUND AS AT THE END OF FINANCIA L YEAR 2002-03 TOTALLING TO ` 8,13,45,801/- AND THEREFORE, IT WAS ONLY A PRESUMP TION TAKEN BY THE ASSESSING OFFICER THAT THE INVESTMENTS WERE MADE OU T OF BORROWED FUNDS. AS FOR THE INVESTMENT IN M/S UTI MONEY MARK ET FUND, SUBMISSION OF THE ASSESSEE WAS THAT IT WAS ONLY FOR A PERIOD O F TEN DAYS AND THERE WAS NO BORROWING WHATSOEVER MADE BY IT FOR THE SAID PURPOSE. 5. CIT(APPEALS) WAS APPRECIATIVE OF THESE CONTENTIO NS OF THE ASSESSEE. ACCORDING TO HIM, THERE WAS NO DIVERSION OF BORROWED FUNDS BY THE ASSESSEE. INVESTMENTS WERE MADE OUT OF ASSE SSEE'S OWN FUNDS SINCE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS A VAILABLE WITH IT. AS FOR THE CASE OF HONBLE JURISDICTIONAL HIGH COURT IN TH E CASE OF K. SOMASUNDARAM & BROS. (SUPRA), CIT(APPEALS) WAS OF T HE OPINION THAT IN THE SAID CASE, BORROWED FUNDS WERE ADVANCED TO PART NERS AND THEREFORE, 6 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 FACTS WERE ENTIRELY DIFFERENT. FURTHER, AS PER THE CIT(APPEALS), A DISALLOWANCE UNDER SECTION 14A WAS NOT SUSTAINABLE SINCE FUNDS FOR THE INVESTMENTS HAD GONE OUT OF A COMMON KITTY AND THER EFORE, COULD NOT BE STATED THAT ANY BORROWED FUNDS WERE USED FOR THE PU RPOSE OF SUCH INVESTMENTS. HE, THEREFORE, DELETED THE DISALLOWAN CE MADE BY THE ASSESSING OFFICER FOR ALL THESE YEARS. 6. NOW BEFORE US, LEARNED D.R. STRONGLY ASSAILING T HE ORDERS OF CIT(APPEALS), SUBMITTED THAT THE RESOURCE AND SURPL US AVAILABLE WITH ASSESSEE WERE ALL USED FOR FUNDING THE SUNDRY DEBTO RS. ASSESSEE COULD NOT ESTABLISH A ONE-TO-ONE MATCH BETWEEN OWN FUNDS AND INVESTMENTS IN SHARES AS WELL AS UTI MONEY MARKET FUND. ACCORDING TO LEARNED D.R., THE DISALLOWANCES WERE MADE BY THE ASSESSING OFFICE R UNDER SECTION 36(1)(III) OF THE ACT SINCE IT WAS NOT FOR THE PURP OSE OF BUSINESS OF THE ASSESSEE AND THE A.O. HAD NOT RELIED ON SECTION 14A FOR MAKING THE DISALLOWANCE. INVESTMENT MADE IN MPIPL WAS IN THE FORM OF SHARES OF THE COMPANY AND ASSESSEE WAS IN RECEIPT OF SUBSTANT IAL DIVIDENDS FROM THE SAID COMPANY. IT HAD RECEIVED ` 10,28,780/- IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2004-05, ` 19,97,200/- IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2006-07 AND ` 24,96,500/- IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2007-08. THUS, EV IDENTLY, THE INVESTMENTS WERE MADE FOR THE PURPOSE OF EARNING DI VIDENDS. JUST 7 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 BECAUSE SAID COMPANY WAS ENGAGED IN A BUSINESS OF S ECURITY SERVICES, IT COULD NOT BE PRESUMED THAT INVESTMENTS WERE ALSO MADE FOR BUSINESS PURPOSES. IN ANY CASE, ACCORDING TO HIM, THE DISAL LOWANCES WERE MADE UNDER SECTION 36(1)(III) OF THE ACT AND NOT UNDER S ECTION 14A OF THE ACT. HE STRONGLY RELIED ON THE DECISION OF HONBLE JURIS DICTIONAL HIGH COURT IN THE CASE OF K. SOMASUNDARAM & BROS. (SUPRA). 7. PER CONTRA, LEARNED A.R. SUBMITTED THAT INVESTME NT MADE IN THE COMPANY MPIPL WAS FOR THE PURPOSE OF EXPANSION OF T HE BUSINESS OF THE ASSESSEE AND ADMITTEDLY, IT WAS IN THE SAME LINE OF BUSINESS. THE QUESTION OF ONE-TO-ONE MATCHING WAS NOT AT ALL RELE VANT, ACCORDING TO HIM. FOR THIS, HE RELIED ON THE DECISION OF HONBL E JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. HOTEL SAVERA (239 ITR 7 95). ACCORDING TO HIM, DEPARTMENT HAD FAILED TO PROVE THAT ANY BORROW ED FUNDS WERE UTILIZED FOR SUCH INVESTMENTS. RELIANCE WAS ALSO P LACED ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF S.A. BUILDERS LTD. V. CIT (288 ITR 1). 8. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THERE WERE TWO INVESTMENTS MADE BY THE ASSESSEE FOR WHICH INTEREST DISALLOWANCES WERE MADE. ONE WAS INVESTMENT IN UTI MONEY MARKET FUND TO THE TUNE OF ` 25 LAKHS AND OTHER WAS INVESTMENT IN SHARES OF M/S MPIPL TO THE TUNE OF ` 22.73 LAKHS. 8 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 9. INSOFAR AS INVESTMENT MADE IN UTI MONEY MARKET F UND IS CONCERNED, THE SAID INVESTMENT WAS MADE ON 27.3.200 3 AND THE AMOUNT WAS FULLY WITHDRAWN BY 4.4.2003. HENCE, THE MONEY WAS WITH UTI MONEY MARKET FUND ONLY FOR A PERIOD OF TEN DAYS. A S PER THE ASSESSEE, IT HAD ITS OWN FUNDS AT THE POINT OF TIME FOR MAKIN G SUCH INVESTMENTS AND SUCH INVESTMENTS WERE ALL OF A SHORT-TERM NATURE. FUNDS AVAILABLE WITH ASSESSEE AS ON 31.3.2003 WERE AS FOLLOWS:- SHARE CAPITAL : ` 12,50,000/ - RESERVES & SURPLUS : ` 6,39,95,610/ - DEPRECIATION RESERVES : ` 1,61,00,191/ - TOTAL INTEREST FREE FUND : ` 8,13,45,801/ - TOTAL INVESTMENTS MADE BY THE ASSESSEE IF WE CONSID ER BOTH UTI MONEY MARKET FUND AND MPIPL, CAME TO ONLY ` 48 LAKHS. WHEN VIEWED AGAINST THE SUBSTANTIAL RESERVES AND SURPLUS AVAILABLE WITH ASSESSEE, WE CANNOT SAY FOR DEFINITE THAT ANY LOAN FUNDS WERE UTILIZED FOR THE PURPOSE OF INVESTMENTS. THERE IS A CLEAR FINDING BY THE A.O. HIMSELF THAT BORROWED FUNDS AS WELL AS BUSINESS SURPLUS FORMED A COMPOSIT E FUND AND INVESTMENTS WERE MADE OUT OF SUCH FUNDS. NO DOUBT, ASSESSEE WAS UNABLE TO SHOW A ONE-TO-ONE MATCHING BETWEEN THE IN VESTMENTS AND SURPLUS FUNDS. HOWEVER, THE ASSESSING OFFICER HAS ALSO NOT BEEN ABLE TO BRING OUT ANY LINK BETWEEN BORROWED FUNDS AND INVES TMENTS. SHARE PURCHASED BY THE ASSESSEE IN M/S MPIPL WAS FOR HAVI NG CONTROLLING 9 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 INTEREST THEREIN. ASSESSING OFFICER HIMSELF HAS NO TED THAT ASSESSEE HAD PURCHASED 1216 OUT 2200 SHARES FROM THE PROMOTERS O F THE SAID COMPANY. IT IS ALSO NOT DISPUTED THAT THE SAID COM PANY WAS ENGAGED IN THE SAME LINE OF BUSINESS. CONTENTION OF THE ASSES SEE THAT THE INVESTMENTS WERE MADE FOR COMMERCIAL EXPEDIENCY FOR EXPANSION OF ITS BUSINESS IN MUMBAI, OUGHT NOT HAVE BEEN BRUSHED ASI DE. NO DOUBT, HONBLE JURISDICTIONAL HIGH COURT IN THE CASES OF C OIMBATORE SALEM TRANSPORT PVT. LTD., MR. MOHD. ALI, INDIAN METALS & FERRO ALLOYS LTD., PHALTON SUGAR WORKS LTD. AND R.DALMIA (SUPRA), HAD HELD THAT INTEREST ON BORROWED FUNDS, WHICH WERE USED FOR INVESTMENTS, WOULD NOT BE ELIGIBLE FOR DEDUCTION. BUT, NEVERTHELESS, IN OUR OPINION, NONE OF THESE DECISIONS HAVE ANY RELEVANCE ON FACTS HERE, SINCE A SSESSEE WAS HAVING SUBSTANTIAL RESERVE FUNDS WITH IT AND THE ASSESSING OFFICER HAD MERELY GONE BY A PRESUMPTION THAT INVESTMENTS WERE MADE OU T OF BORROWED FUNDS. DISALLOWANCE WAS MADE BY THE ASSESSING OFFI CER UNDER SECTION 36(1)(III) AND NOT UNDER SECTION 14A OF THE ACT. I N FACT, ONE OF THE GROUNDS TAKEN BY THE REVENUE IS THAT CIT(APPEALS) F ELL IN ERROR IN CONSIDERING THE DISALLOWANCE TO HAVE BEEN MADE UNDER SECTION 14A OF THE ACT. IN THE CIRCUMSTANCES, WE ARE OF THE OPINI ON THAT DISALLOWANCE UNDER SECTION 36(1)(III) WAS NOT WARRANTED. AS FOR THE RELIANCE PLACED BY THE REVENUE IN THE CASE OF K. SOMASUNDARAM & BROS. (SUPRA), THERE THE BORROWED FUNDS WERE UTILIZED FOR GIVING ADVANCE TO THE PARTNERS OF 10 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 THE FIRM AND THOUGH SUCH PAYMENTS TO THE PARTNERS W ERE MADE OUT OF CONTRACT RECEIPTS, IT WAS FOUND ONLY TO BE A POSTPO NEMENT OF DIVERSION. IT WAS CLEARLY ESTABLISHED THAT THERE WAS DIVERSION BY POSTPONEMENT AND IT WAS FOR THIS REASON THE HONBLE JURISDICTIONAL HIGH COURT HELD THE INTEREST DISALLOWANCE TO BE JUSTIFIED. ON THE OTHER HAND, H ERE, NEITHER WAS THE MONEY GIVEN TO ANY PARTNERS NOR HAS THE REVENUE EST ABLISHED ANY DIVERSION OF BORROWED FUNDS. WE ARE, THEREFORE, OF THE OPINION THAT THE CIT(APPEALS) WAS JUSTIFIED IN DELETING THE DISALLOW ANCE OF INTEREST. WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDERS OF CIT(APPEALS). 10. APPEALS OF THE REVENUE FOR ASSESSMENT YEARS 200 3-04, 2004-05 AND 2005-06 STAND DISMISSED. 11. NOW WE TAKE UP APPEALS FOR ASSESSMENT YEARS 200 6-07 AND 2007- 08. 12. GROUNDS TAKEN BY THE REVENUE FOR THESE TWO YEAR S ARE SIMILAR. REVENUE IS AGGRIEVED THAT THE CIT(APPEALS) DELETED DISALLOWANCE OF ` 11,85,000/- FOR ASSESSMENT YEAR 2006-07 AND ` 13,94,192/- FOR ASSESSMENT YEAR 2007-08 MADE BY THE A.O., RELYING O N SECTION 14A OF THE ACT. AS PER THE REVENUE, INVESTMENTS MADE BY T HE ASSESSEE, WHICH EARNED IT DIVIDENDS, WERE NOT OUT OF ANY SURPLUS FU NDS OR ANY INTEREST 11 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 FREE FUNDS AND CIT(APPEALS) GAVE RELIEF TO THE ASSE SSEE WITHOUT STUDYING THE LIQUIDITY POSITION AT THE TIME OF MAKING SUCH I NVESTMENTS. 13. FACTS APROPOS ARE THAT FOR THE ABOVE TWO ASSESS MENT YEARS, ASSESSEE HAD CLAIMED FINANCE CHARGES OF ` 3,57,000/- AND ` 2,52,869/- AND INTEREST PAYMENT OF ` 8,28,000/- AND ` 11,41,323/- RESPECTIVELY IN ITS PROFIT & LOSS ACCOUNT. BASED ON HIS FINDING FOR PR ECEDING ASSESSMENT YEARS 2004-05 AND 2005-06, ASSESSING OFFICER CAME T O A CONCLUSION THAT ASSESSEE HAD MADE SUCH INVESTMENTS OUT OF BORR OWED FUNDS. AS PER THE A.O., DIVIDENDS RECEIVED FROM M/S MPIPL WER E EXEMPT AND THEREFORE, A DISALLOWANCE UNDER SECTION 14A OF THE ACT WAS CALLED FOR. HE DISALLOWED THE FINANCE CHARGES AND INTEREST PAYM ENTS FOR THESE YEARS, RELYING ON SECTION 14A OF THE ACT. IN OTHER WORDS, FOR THESE YEARS, HE CHOSE TO MAKE THE DISALLOWANCE UNDER SECTION 14A , RATHER THAN SECTION 36(1)(III) HE APPLIED FOR THE EARLIER YEARS . 14. ASSESSEE MOVED IN APPEAL FOR BOTH THE YEARS. A RGUMENT OF THE ASSESSEE WAS THAT IT HAD INTEREST FREE FUNDS OF ` 8,13,45,801/- IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2003-04 A ND ` 10,90,94,431/- IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 20 04-05 AND THE INVESTMENTS CONSIDERED BY THE ASSESSING OFFICER ALL PERTAINED TO EARLIER YEARS. AS PER THE ASSESSEE, SINCE INVESTMENTS WERE MADE OUT OF OWN FUNDS AND NO BORROWED FUNDS WERE INVOLVED, DISALLOW ANCE UNDER SECTION 14A WAS NOT JUSTIFIED. ACCORDING TO THE ASSESSEE, IT WAS ENGAGED IN THE 12 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 SAME BUSINESS AS THAT OF THE COMPANY IN WHICH IT HA D ACQUIRED SHARES AND THEREFORE, IT WAS ONLY AN EXPANSION OF ITS EXIS TING BUSINESS. 15. CIT(APPEALS) WAS IMPRESSED BY THE CONTENTIONS O F THE ASSESSEE. ACCORDING TO HIM, HONBLE PUNJAB & HARYANA HIGH COU RT IN THE CASE OF CIT V. HERO CYCLES (323 ITR 518) HAD HELD THAT ONCE ASSESSEE HAD MADE INVESTMENTS OUT OF OWN FUND WHICH WAS MERGED W ITH BORROWED FUNDS, I.E. FROM A COMMON KITTY, DISALLOWANCE UNDER SECTION 14A COULD NOT BE MADE. CIT(APPEALS) ALSO PLACED RELIANCE ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & B OYCE MFG. CO. LTD. V. DCIT (328 ITR 81). 16. NOW BEFORE US, LEARNED D.R. STRONGLY ASSAILING THE ORDERS OF CIT(APPEALS), SUBMITTED THAT HONBLE BOMBAY HIGH CO URT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA) HAD CLEARLY HE LD THAT EVEN FOR ASSESSMENT YEARS PRIOR TO ASSESSMENT YEAR 2008-09, SECTION 14A WAS APPLICABLE AND IT WAS REQUIRED TO MAKE A DISALLOWAN CE AGAINST INVESTMENT MADE FOR EARNING TAX FREE INCOME. 17. PER CONTRA, LEARNED A.R. SUBMITTED THAT ASSESSE E HAD NOT INCURRED ANY EXPENDITURE FOR EARNING TAX FREE DIVIDEND AND T HEREFORE, ANY DISALLOWANCE OF INTEREST WAS NOT CALLED FOR. 13 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 18. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THERE IS NO DISPUTE THAT DURING THESE TWO YEARS, RU LE 8D OF INCOME-TAX RULES, 1962, WAS NOT APPLICABLE IN VIEW OF THE DECI SION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG . CO. LTD. (SUPRA). NEVERTHELESS, IT WAS CLEARLY HELD BY HONBLE BOMBAY HIGH COURT THAT DISALLOWANCE MIGHT BE REQUIRED FOR EXPENSES INCURRE D FOR EARNING TAX FREE INCOME BASED ON CIRCUMSTANCES OF EACH CASE FOR EARLIER YEARS AS WELL. HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. &ORS. V. CIT (2011) 64 DTR 122 HAS HELD AT PARAS 30 AND 31 OF ITS ORDER AS FOLLOWS:- 30. AS WE HAVE ALREADY NOTICED, SUB-S. (2) OF S. 14A O F THE SAID ACT REFERS TO THE METHOD OF DETERMINATION OF THE AM OUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. T HE EXPRESSION USED IS SUCH METHOD AS MAY BE PRESCRIBED. WE H AVE ALREADY MENTIONED ABOVE THAT BY VIRTUE OF NOTIFICATION NO.45 OF 2008 DT. 24 TH MARCH, 2008, THE CBDT INTRODUCED R. 8D IN THE SAID RULES . THE SAID R. 8D ALSO MAKES IT CLEAR THAT WHERE THE A.O., HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE TH AT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT FOR SUCH PREVIO US YEAR, THE A.O. SHALL DETERMINE THE AMOUNT OF THE EXPENDITURE IN REL ATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-R. (2) OF R. 8D. WE MAY OBSERVE THAT R. 8D(1) PLACES THE PROVISIONS OF S . 14A(2) AND (3) IN THE CORRECT PERSPECTIVE. AS WE HAVE ALREADY SEE N, WHILE DISCUSSING THE PROVISIONS OF SUB-SS. (2) AND (3) OF S . 14A, THE CONDITION PRECEDENT FOR THE A.O. TO HIMSELF DETERMI NE THE AMOUNT OF EXPENDITURE IS THAT HE MUST RECORD HIS DISSATISFA CTION WITH THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE OR WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSES SEE THAT NO 14 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 EXPENDITURE HAS BEEN INCURRED. IT IS ONLY WHEN THIS CONDITION PRECEDENT IS SATISFIED THAT THE A.O. IS REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCL UDIBLE IN TOTAL INCOME IN THE MANNER INDICATED IN SUB-R. (2) OF R. 8D OF THE SAID RULES. 31. IT IS, THEREFORE, CLEAR THAT DETERMINATION OF TH E AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME UNDER R. 8D W OULD ONLY COME INTO PLAY WHEN THE A.O. REJECTS THE CLAIM OF T HE ASSESSEE IN THIS REGARD. IF ONE EXAMINES SUB-R. (2) OF R. 8D, WE FIND THAT THE METHOD OF DETERMINING THE EXPENDITURE IN RELATION TO EXEMPT INCOME HAS THREE COMPONENTS. THE FIRST COMPONENT BEING TH E AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES N OT FORM PART OF THE TOTAL INCOME.THE SECOND COMPONENT BEING COMPUTE D ON THE BASIS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE AS SESSEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE FORMULA ESSE NTIAL APPORTIONS THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST [OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CL. (I)] INCURRED DU RING THE PREVIOUS YEAR IN THE RATIO OF THE AVERAGE VALUE OF INVESTMEN T, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, TO THE AVERAGE OF THE TOTAL ASSETS OF THE ASSESSEE. THE T HIRD COMPONENT IS AN ARTIFICIAL FIGURE-ONE-HALF PER CENT OF THE AVERA GE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEETS OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR . IT IS THE AGGREGATE OF THESE THREE COMPONENTS WHICH WOULD CON STITUTE THE EXPENDITURE IN RELATION TO EXEMPT INCOME AND IT IS TH IS AMOUNT OF EXPENDITURE WHICH WOULD BE DISALLOWED UNDER S. 14A O F THE SAID ACT. IT IS, THEREFORE, CLEAR THAT IN TERMS OF THE SAID R ULE, THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME HAS TWO ASPE CTS (A) DIRECT AND (B) INDIRECT. THE DIRECT EXPENDITURE IS STRAIGH TAWAY TAKEN INTO ACCOUNT BY VIRTUE OF CL. (I) OF SUB-R. (2) OF R. 8D. THE INDIRECT EXPENDITURE, WHERE IT IS BY WAY OF INTEREST, IS COMP UTED THROUGH THE PRINCIPLE OF APPORTIONMENT, AS INDICATED ABOVE. AN D, IN CASES WHERE THE INDIRECT EXPENDITURE IS NOT BY WAY OF INTEREST, A RULE OF THUMB FIGURE OF ONE-HALF PER CENT OF THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART O F THE TOTAL INCOME, IS TAKEN. 15 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 WE ARE OF THE OPINION THAT IN VIEW OF VARIOUS JUDIC IAL PRONOUNCEMENTS WITH REGARD TO DISALLOWANCE UNDER SECTION 14A OF TH E ACT, THE MATTER REQUIRES A RE-VISIT BY THE A.O. WE, THEREFORE, SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND REMIT THE ISSUE BACK TO THE F ILE OF THE A.O. FOR CONSIDERATION AFRESH IN ACCORDANCE WITH LAW. 19. APPEALS OF THE REVENUE FOR ASSESSMENT YEARS 200 6-07 AND 2007- 08 ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 20. THIS LEAVES WITH LAST APPEAL OF THE REVENUE, WH ICH IS FOR ASSESSMENT YEAR 2008-09. 21. IN THIS APPEAL, REVENUE IS AGGRIEVED THAT CIT(A PPEALS) PARTIALLY DELETED THE DISALLOWANCE MADE BY THE A.O. UNDER SEC TION 14A OF THE ACT. AS PER THE REVENUE, CIT(APPEALS) OUGHT NOT HA VE RESTRICTED THE DISALLOWANCE TO THIRD LIMB OF RULE 8D, I.E. 5% ON T HE AVERAGE VALUE OF INVESTMENTS. 22. FACTS GIVING RISE TO THE DISALLOWANCE FOR IMPUG NED ASSESSMENT YEAR ARE ALSO SIMILAR TO THAT OF PRECEDING ASSESSME NT YEARS, NAMELY, ASSESSMENT YEARS 2006-07 AND 2007-08. A.O. HAD FOR THE IMPUGNED ASSESSMENT YEAR ALSO MADE A DISALLOWANCE UNDER SECT ION 14A OF THE ACT FOR THE INTEREST CHARGES CLAIMED BY THE ASSESSE E. NEVERTHELESS, 16 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 A.O. DID NOT APPLY RULE 8D, DESPITE SUCH RULE BEING APPLICABLE FOR IMPUGNED ASSESSMENT YEAR. 23. ON ASSESSEES APPEAL, CIT(APPEALS) HELD THAT NO DISALLOWANCE OF INTEREST WAS CALLED FOR, SINCE ASSESSEE HAD SUBSTAN TIAL SURPLUS FUNDS AVAILABLE WITH IT FOR MAKING THE INVESTMENT IN SHAR ES OF MPIPL. NEVERTHELESS, THE CIT(APPEALS) GAVE A DIRECTION TO THE A.O. TO RE- COMPUTE THE DEDUCTION IN ACCORDANCE WITH RULE 8D. 24. NOW BEFORE US, LEARNED D.R. FAIRLY ADMITTED THA T RULE 8D WAS APPLICABLE FROM IMPUGNED ASSESSMENT YEAR AND THEREF ORE, THE A.O. WAS OBLIGED TO COMPUTE THE DEDUCTION IN ACCORDANCE WITH THE SAID RULE. 25. PER CONTRA, LEARNED A.R. SUPPORTED THE ORDER OF CIT(APPEALS). 26. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. WE FIND THAT THE A.O. HAD NOT APPLIED RULE 8D FOR MAKI NG DISALLOWANCE UNDER SECTION 14A OF THE ACT. RULE 8D OF INCOME-TA X RULES, 1962, HAS VARIOUS LIMBS IN IT AND LAYS DOWN THE METHOD BY WHI CH A DISALLOWANCE UNDER SECTION 14A IS TO BE CALCULATED. BOTH SECTIO N 14A AND RULE 8D REQUIRE THE EXISTENCE OF CERTAIN CONDITIONS, WHEN I T CAN BE INVOKED, FOR MAKING A DISALLOWANCE. WE ARE, THEREFORE, OF THE OPINION THAT THE MATTER HAS TO GO BACK TO THE A.O. FOR CONSIDERATION AFRESH, IN ACCORDANCE 17 I.T.A. NOS. 129 TO 133/MDS/11 I.T.A. NO. 2069/MDS/11 WITH LAW. WE SET ASIDE THE ORDERS OF AUTHORITIES B ELOW AND REMIT THE ISSUE BACK TO THE FILE OF A.O. FOR CONSIDERATION AF RESH DE NOVO. 27. APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2008- 09 IS ALLOWED FOR STATISTICAL PURPOSES. 28. TO SUMMARIZE THE RESULT, REVENUES APPEALS FOR ASSESSMENT YEARS 2003-04, 2004-05 AND 2005-06 STAND DISMISSED, WHERE AS, THOSE FOR ASSESSMENT YEARS 2006-07, 2007-08 AND 2008-09 ARE A LLOWED FOR STATISTICAL PURPOSES. THE ORDER WAS PRONOUNCED IN THE COURT ON TUESDAY, T HE 7 TH OF AUGUST, 2012, AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 7 TH AUGUST, 2012. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-V, CHENNAI-34 (4) CIT, CHENNAI-III, CHENNAI (5) D.R. (6) GUARD FILE