R E I Agro Ltd., Kolkata V. DCIT, Central Circle - XXVII, Kolkata, Kolkata

ITA 1331/KOL/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3156 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 8 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-06-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 11-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: L K S DEHIYA
• Assessee Lawyers: RAVI TULSIYAN FCA PER SH
• Keywords: Depreciation; Earning of tax free income; Additional evidence
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: KOL KATA [BEFORE SHRI K.K.GUPTA, A.M. & SHRI GEORGE MATHAN, J.M. ] I.T.A. NO. 1331/KOL/2011 : ASSESSMENT YEAR : 2008-09 REI AGRO LTD., KOLKATA -VS- DCIT, CENTRAL CI RCLE-XXVII, KOL. (PAN : AABCR 4929H) (APPELLANT) (RESPONDENT) I.T.A. NO. 1423/KOL/2011 : ASSESSMENT YEAR : 2008-09 DCIT, CENTRAL CIRCLE-XXVII, KOL. VS- REI AGRO LTD., KOLKATA (APPELLANT) (RESPONDENT) DATE OF CONCLUDING THE HEARING : 22.05.2013 DATE OF PRONOUNCING THE ORDER : 19.06.2013 APPEARANCES : FOR THE DEPARTMENT : SHRI L.K.S. DEHIYA, CIT(DR) FOR THE ASSESSEES : SHRI RAVI TULSIYAN, FCA O R D E R PER SHRI GEORGE MATHAN,J.M. THE ITA NO.1331/KOL/2011 IS AN APPEAL FILED BY THE ASSESSEE AND THE ITA NO.1423/KOL/2011 IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT(A), CENTRAL-I, KOLKATA IN APPEAL NO.03/CC-XXVII/CIT(A), C-II/10-11 DATED 2 ND AUGUST, 2011 FOR THE ASSESSMENT YEAR 2008-09. 2. SHRI L.K.S.DEHIYA, CIT,D.R APPEARED ON BEHALF O F THE REVENUE AND SHRI RAVI TULSIYAN. FCA APPEARED ON BEHALF OF THE ASSESSEE. 3. IN THE ASSESSEES APPEAL, THE ASSESSEE HAS RAIS ED THE FOLLOWING GROUNDS: 1. THE ORDERS PASSED BY THE LOWER AUTHORITIES ARE U NWARRANTED, ARBITRARY, WITHOUT PROPER REASONS, INVALID AND BAD IN LAW, IN SO FAR AS THEY ARE AGAINST THE INTEREST OF THE APPELLANT COMPANY. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LEARNED CIT(A) ERRED IN HOLDING THAT PROPORTIONATE MANAGEMENT AND ADMINISTRATIVE ITA NO.1331 & 1423/KOL/ 2011 ASSESSMENT Y EAR: 2008-09 2 EXPENSES ARE REQUIRED TO BE DEDUCTED WHILE COMPUTI NG EXEMPT INCOME OR DEALING WITH INVESTMENT MATTER AND IN THAT VIEW, I N SUSTAINING THE DISALLOWANCE OF RS.26,09,386/- UNDER RULE 8D(2)(II I) OF THE INCOME TAX RULES. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LEARNED CIT(A) ERRED IN SUSTAINING DISALLOWANCE OF RS.26,09,386/- U/S 14A OF THE INCOME- TAX ACT, 1961, BY APPLYING THE PROVISIONS OF RULE 8D(2)(III) OF THE INCOME TAX RULES AGAINST MEAGER DIVIDEND INCOME OF RS.1,3 2,638/- ONLY. 4. THE APPELLANT CRAVES LEAVE TO AMEND, ALTER, MO DIFY, ADD TO, ABRIDGE AND/OR RESCIND ANY OR ALL THE ABOVE GROUNDS IN FUT URE. 3.1 IN THE REVENUES APPEAL, THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: 01. THAT IN THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN LAW IN DELETING THE DISALLOWAN CE OF RS.37727610/- IN RESPECT OF INTEREST MADE U/S.14A OF THE ACT READ W ITH RULE 8D OF IT RULES BY HOLDING THAT THE INVESTMENT OF SHARES WAS MADE OUT OF OWN FUNDS OF THE ASSESSEE WITHOUT CONSIDERING THAT THE LINKAGE BETW EEN THE FUNDS BORROWED AND THE INVESTMENTS, THE INCOME OF WHICH IS EXEMPT , WAS NOT ESTABLISHED BY THE ASSESSEE. 02. THAT IN THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE LD. CIT(A) HAS ERRED IN LAW IN DELETING THE DISALLOWANCE OF RS.3, 77,27,610/- IN RESPECT OF INTEREST MADE U/S.14A R/W RULE 8D OF THE ACT, IN V IEW OF THE DECISION OF THE HONBLE KOLKATA HIGH COURT IN THE CASE OF DANUKHA & SONS VS- CIT (CENTRAL)-I, KOLKATA REPORTED IN 201 TAXMAN 105 (K OL) (MAG), WHEREIN IT HAS BEEN HELD THAT IN THE ABSENCE OF ANY MATERIAL DISCLOSING THE SOURCE OF ACQUISITION OF SHARES WHICH IS WITHIN THE SPECIAL KNOWLEDGE OF THE ASSESSEE, THE ASSESSING AUTHORITY CAN MAKE PROPORTIONATE DIS ALLOWANCE. 03. THAT THE DEPARTMENT CRAVES LEAVE TO ADD, MODI FY OR ALTER ANY OF THE ABOVE GROUND(S) OF APPEAL AND/OR ADDUCE ADDITIONAL EVIDENCE AT THE TIME OF HEARING OF THE CASE. 4. AT THE TIME OF HEARING, IT WAS SUBMITTED BY THE LD. D.R. THAT THE ASSESSEE IS A COMPANY WHICH IS DOING THE BUSINESS OF RICE PROCESS ING, POWER GENERATION AND RETAIL SALE. IT WAS A SUBMISSION THAT DURING THE YE AR, THE ASSESSEE HAD RECEIVED DIVIDEND INCOME OF RS.1,32,638/-, WHICH WAS CLAIMED AS EXEMPT. THE ASSESSEE HAD ITA NO.1331 & 1423/KOL/ 2011 ASSESSMENT Y EAR: 2008-09 3 NOT DEBITED ANY EXPENSES IN RESPECT OF EXPENDITURE INCURRED FOR EARNING SUCH EXEMPT INCOME. THE AO HAS INVOKED THE PROVISIONS OF SECTION 14A READ WITH RULE 8D OF THE ACT AND HAS MADE A DISALLOWANCE OF AN AMO UNT OF RS.4,03,36,996/-. IT WAS A SUBMISSION THAT ON APPEAL, THE LD. CIT(A) HAD REDUCED THE DISALLOWANCE UNDER SECTION 14A TO RS.26,09,386/-. IT WAS A SUBMI SSION THAT AGAINST THE RELIEF GRANTED OF RS.4,03,36,996/-, THE REVENUE HAS FILED THE APPEAL IN ITA NO.1423/KOL/2011 AND IN RESPECT OF DISALLOWANCE CON FIRMED BY THE CIT(A) TO THE EXTENT OF RS.26,09,386/-, THE ASSESSEE HAS FILED TH E APPEAL IN ITA NO.1331/KOL/2011. IT WAS A SUBMISSION THAT THE LD. CIT(A) HAD CONSIDERED THE VARIOUS CASE LAWS TO COME TO THE CONCLUSION THAT NO DISALLOWANCE UNDER SECTION 14A WOULD BE MADE. IT WAS A SUBMISSION THAT THE CAS E LAWS RELIED ON BY THE LD. CIT(A) RELATED TO THE PERIOD PRIOR TO THE ASSESSMEN T YEAR 2008-09, BEING THE ASSESSMENT YEAR FROM WHICH THE PROVISIONS OF RULE 8 D CAME INTO APPLICATION. IT WAS A SUBMISSION THAT THE ASSESSEE HAD INVESTED RS. 103 CRORES IN SHARES DURING THE RELEVANT ASSESSMENT YEAR. IT WAS A FURTHER SUBMISSI ON THAT THERE WAS NO INCREASE IN THE SHARE CAPITAL DURING THE RELEVANT ASSESSMENT YE AR. IT WAS A SUBMISSION THAT HOWEVER, THE ASSESSEES LOAN ACCOUNT HAD INCREASED BY RS.122 CRORES. IT WAS, THUS, THE SUBMISSION BY THE LD. D.R. THAT THE INVESTMENT IN THE SHARES WAS OUT OF INTEREST- BEARING FUNDS. IT WAS A SUBMISSION THAT THE LD. CIT (A) HAD IN HIS ORDER IN PARA 4.1 HELD THAT THE ASSESSEE WAS HAVING A COMMON POOL IN RESPECT OF ITS OWN FUND AS ALSO ITS LOAN FUND. IT WAS A SUBMISSION THAT AS THE ASSE SSEE HAD USED INTEREST-BEARING FUND FOR PURCHASING SHARES AND THE ASSESSEE HAD PAI D INTEREST ON THE SAME, THE DISALLOWANCE AS MADE BY THE AO BY INVOKING THE PROV ISIONS OF SECTION 14A READ WITH RULE 8D WAS LIABLE TO BE UPHELD. IT WAS A FURT HER SUBMISSION THAT THOUGH THE AO HAS IN HIS ASSESSMENT ORDER SPECIFICALLY HELD TH AT THERE IS NO DISALLOWANCE LIABLE TO BE MADE UNDER RULE 8D(I), DISALLOWANCE UN DER RULE 8D(II) HAD BEEN MADE ON THE BASIS OF THE COMPUTATION PROVIDED THEREUNDER , AS ALSO UNDER RULE 8D(III). IT WAS A SUBMISSION THAT IN VIEW OF THE DECISION OF TH E HONBLE JURISDICTIONAL HIGH ITA NO.1331 & 1423/KOL/ 2011 ASSESSMENT Y EAR: 2008-09 4 COURT IN THE CASE OF DANUKHA & SONS VS- CIT (CENTR AL)-I, KOLKATA REPORTED IN 201 TAXMAN 105 (KOL), IT WAS FOR THE ASSESSEE TO SH OW THE SOURCE OF ACQUISITION OF THE SHARES BY PRODUCTION OF THE MATERIALS THAT THOS E WERE ACQUIRED FROM FUNDS AVAILABLE IN THE HANDS OF THE ASSESSEE AT THE RELEV ANT POINT OF TIME WITHOUT TAKING BENEFIT OF ANY LOAN. THE ASSESSEE HAVING NOT SHOWN SUCH AVAILABILITY OF FUNDS, THE DISALLOWANCE WAS LIABLE TO BE UPHELD. 4.1 HE ALSO RELIED UPON THE DECISION OF THE HONBLE KERALA HIGH COURT IN THE CASE OF LEENA RAMCHANDRAN REPORTED IN 339 ITR 296. IT WAS A SUBMISSION THAT THE ORDER OF THE LD. CIT(A) WAS LIABLE TO BE REVERSED T O THE EXTENT THAT HE HAS REDUCED THE DISALLOWANCE. 5. IN REPLY, THE LD. A.R. SUBMITTED THAT AS PER THE PROVISIONS OF SECTION 14A(2), THE AO WAS TO DETERMINE THE AMOUNT OF EXPENDITURE I NCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME , IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. IT WAS A FURTHER SUBMI SSION THAT THERE WAS ALSO SUPPOSED TO BE SATISFACTION TO THE CORRECTNESS OF T HE CLAIM OF THE ASSESSEE. IT WAS A SUBMISSION THAT AT THE OUTSET, THE AO HAS NOT SHOWN THAT THE CLAIM OF THE ASSESSEE THAT THERE IS NO AMOUNT DISALLOWABLE WAS WRONG NOR IS THERE ANY SATISFACTION RECORDED TO SUCH EFFECT. ON THIS POINT, THE LD. D.R . SUBMITTED THAT THE COORDINATE BENCH OF THIS TRIBUNAL HAS, IN THE CASE OF CHAMPION COMMERCIAL REPORTED IN 26 TAXMAN.COM 342, HELD THAT IT IS ONLY WHERE THE ASSE SSEE OFFERS A DISALLOWANCE UNDER SECTION 14A, THE AO IS REQUIRED TO RECORD SAT ISFACTION. WHEN NO EXPENDITURE IS OFFERED BY THE ASSESSEE, THE AO NEED NOT RECORD SUCH SATISFACTION. 5.1 IT WAS SUBMITTED BY THE LD. A.R. THAT AS PER TH E PROVISIONS OF SECTION 14A(3), THE PROVISIONS OF SUB-SECTION (2) ALSO APPLY IN REL ATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN THE RETURN FILED BY ITA NO.1331 & 1423/KOL/ 2011 ASSESSMENT Y EAR: 2008-09 5 THE ASSESSEE, THERE IS NO PROVISION FOR MAKING A CL AIM THAT THERE IS NO EXPENDITURE. THE FACT THAT THE ASSESSEE DID NOT MAKE ANY DISALLO WANCE UNDER SECTION 14A, IN THE RETURN FILED ITSELF WAS THE CLAIM THAT NO EXPENDITU RE HAS BEEN INCURRED. THE LD. A.R. FURTHER DREW OUR ATTENTION TO P&L A/C. OF THE ASSES SEE FOR THE YEAR ENDED ON 31.03.2008 AS ALSO THE BALANCE-SHEET, WHICH WERE AT PAGES 78 TO 95 OF THE PAPER BOOK. IT WAS A SUBMISSION THAT THE SHAREHOLDERS FU NDS IN THE BALANCE-SHEET SHOWED THAT THE SHARE CAPITAL HAD INCREASED BY RS.4 CRORES DURING THE RELEVANT ASSESSMENT YEAR AND THE RESERVES AND SURPLUS HAD GONE UP BY RS .112 CRORES. THE LOAN FUND HAD INCREASED BY RS.122 CRORES. IT WAS A SUBMISSION THAT THE LOAN FUNDS WERE USED FOR THE ACQUISITION OF ASSETS AS ALSO TOWARDS WORKI NG CAPITAL AND IN FACT THE FIXED ASSETS NET BLOCK INCREASED BY RS.116 CRORES, AFTER CONSIDERING A DEPRECIATION OF 57 CRORES. IT WAS, THUS, A SUBMISSION THAT THE ACTUAL INCREASE IN THE FIXED ASSETS WHEN COMPARED TO THE NET BLOCK FOR THE YEAR ENDED ON 31. 03.2007 WAS 174 CRORES. IT WAS A SUBMISSION THAT THE PROFITS AVAILABLE TO THE ASSE SSEE BEFORE TAXATION FOR THE ASSESSMENT YEAR 2008-09 WAS RS.130 CRORES AND THE P ROFIT, AFTER TAXATION, WAS RS.109 CRORES. THE AMOUNT AVAILABLE FOR APPROPRIATI ON FOR THE ASSESSMENT YEAR 2008-09 WAS RS.128 CRORES. HE FURTHER DREW OUR ATTE NTION TO THE INVESTMENTS DURING THE YEAR, WHICH IS SHOWN AT PAGE 84, BEING T HE INVESTMENT IN VARRSANA ISPAT LIMITED AT RS.103 CRORES. IT WAS A SUBMISSION THAT THE OTHER INVESTMENTS, WHICH WERE THERE AS ON THE BEGINNING OF THE ASSESSMENT YE AR WAS TO AN EXTENT OF RS.58,27,282/-. IT WAS A SUBMISSION THAT IT IS OUT OF THE SHARES OF THIS INVESTMENT OF RS.58,27,282/-, THE ASSESSEE HAD RECEIVED THE DIVID END INCOME AND NOT ON THE INVESTMENT OF RS.103 CRORES. THE LD. A.R. FURTHER D REW OUR ATTENTION TO PAGE 362 OF THE PAPER BOOK, WHICH WAS THE COPY OF THE LOAN SANC TION DOCUMENT FROM THE STATE BANK OF BIKANER AND JAIPUR DATED 22.12.2007 FOR LET TER OF CREDIT OF RS.175 CRORES. IT WAS A SUBMISSION THAT THIS WAS ON THE SECURITY O F THE STOCK AVAILABLE WITH THE ASSESSEE. HE FURTHER DREW OUR ATTENTION TO PAGE 370 OF THE PAPER BOOK, WHICH WAS THE LETTER FROM ALLAHABAD BANK FOR REVIEWING AND EN HANCING THE LIMITS FOR WORKING ITA NO.1331 & 1423/KOL/ 2011 ASSESSMENT Y EAR: 2008-09 6 CAPITAL FROM THE EXISTING RS.250 CRORES TO RS.500 C RORES. IT WAS A SUBMISSION THAT THIS WAS ALSO ENHANCED WORKING CAPITAL LIMIT, WHICH WAS TO BE RELEASED ONLY AFTER THE TIE-UP OF THE ENTIRE LIMIT OF RS.1800 CRORES FR OM THE CONSORTIUM. THIS WAS ALSO FOR THE LETTER OF CREDIT PURPOSE. HE FURTHER DREW O UR ATTENTION TO PAGES 372, 374 AND 381, WHICH WERE ALL CREDIT SANCTION ADVICES GIV EN BY THE VARIOUS BANKS, BEING UNITED BANK OF INDIA, INDIAN OVERSEAS BANK. IT WAS A SUBMISSION THAT ALL THESE WERE FOR L.C. ONLY. IT WAS A SUBMISSION THAT ALL TH E LOANS WERE DIRECTLY RELATED TO THE BUSINESS OF THE ASSESSEE. THE LD. A.R. FURTHER DREW OUR ATTENTION TO THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CAS E OF BALARAMPUR CHINI MILLS LTD. 140 TTJ (KOL) 73, WHEREIN THE TRIBUNAL HAS HEL D THAT SECTION 14A AND RULE 8D CAN BE INVOKED ONLY WHEN THE AO IS NOT SATISFIED WITH REGARD TO THE ACCOUNT OF THE ASSESSEE THAT THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE IS NOT CORRECT AND THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN MADE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOME UN DER THE ACT. WHERE THE ASSESSEE HAS EXPLAINED THAT THE SHARE CAPITAL AND R ESERVES, THAT IS ITS OWN FUNDS, WERE UTILIZED FOR THE PURPOSE OF INVESTMENT IN SHAR ES FOR EARNING DIVIDEND INCOME WHICH HAS NOT BEEN NEGATED BY LOWER AUTHORITIES AN D THERE IS NO LINKAGE OR NEXUS BETWEEN THE FUNDS BORROWED BY THE ASSESSEE AND THE IMPUGNED INVESTMENTS, NO INTEREST EXPENDITURE CAN BE DISALLOWED BY MECHANICA LLY APPLYING THE PROVISIONS OF RULE 8D. IT WAS A SUBMISSION THAT THE DECISION OF T HE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF DANUKHA & SONS ( SUPRA ) WOULD NOT APPLY IN SO FAR AS IN THAT CASE THE ASSESSEE WAS NOT ABLE TO SHOW THAT THE INV ESTMENT WAS MADE OUT OF ITS OWN INDEPENDENT NON-INTEREST BEARING FUNDS. IT WAS A SU BMISSION THAT NO DISALLOWANCE UNDER SECTION 14A COULD BE MADE. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. A PERU SAL OF THE PROVISIONS OF SECTION 14A, MORE SPECIFICALLY SUB-SECTION (2), SHO WS THAT IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, THEN THE AO SHALL DETERMINE THE ITA NO.1331 & 1423/KOL/ 2011 ASSESSMENT Y EAR: 2008-09 7 AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT. FOR THIS THE ME THOD IS PRESCRIBED IN RULE 8D. THE PROVISION OF SECTION 14A, SUB-SECTION (3) SPECI FIES THE PROVISION OF 14A(2) WOULD ALSO APPLY WHERE THE ASSESSEE MAKES A CLAIM T HAT THERE IS NO EXPENDITURE INCURRED. THIS IS BECAUSE IF THE ASSESSEE DOES NOT MAKE A DISALLOWANCE UNDER SECTION 14A IN ITS COMPUTATION OF TOTAL INCOME, WHE N FILING THE RETURN, THEN IF SUB- SECTION (3) WAS NOT AVAILABLE, THE AO MIGHT NOT BE ABLE TO MAKE A DISALLOWANCE UNDER SECTION 14A. THUS, WHERE THE ASSESSEE MAKES A CLAIM THAT ONLY A PARTICULAR AMOUNT IS TO BE DISALLOWED UNDER SECTION 14A OR WHE RE THE ASSESSEE DOES NOT MAKE A DISALLOWANCE UNDER SECTION 14A, IF THE AO PROPOSE S TO INVOKE THE SECTION 14A, HE IS TO RECORD A SATISFACTION ON THAT ISSUE. THIS SATISFACTION CANNOT BE A PLAIN SATISFACTION OR A SIMPLE NOTE. IT IS TO BE DONE WIT H REGARD TO ACCOUNTS OF THE ASSESSEE. IN THE PRESENT CASE, THERE IS NO SATISFAC TION BY THE AO AND CONSEQUENTLY, IN VIEW OF THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF BALARAMPUR CHINI MILLS LTD. REFERRED TO SUPRA , NO DISALLOWANCE UNDER SECTION 14A CAN BE MADE. 7. NOW COMING TO THE MERITS OF THE ISSUE. A PERUSAL OF THE PROVISION OF SECTION 14A(1) CLEARLY SHOWS THE WORDINGS, IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. IN THE PR ESENT CASE, THIS INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T, IS THE DIVIDEND INCOME OF RS.1,32,638/-. THEREFORE, IF ANY DISALLOWANCE IS TO BE MADE IN RESPECT OF EXPENDITURE INCURRED, IT SHOULD BE IN RELATION TO T HIS DIVIDEND INCOME OF RS.1,32,638/-. IF AN ASSESSEE HAS INVESTED IN SHARE S, WHICH COULD GET DIVIDEND OR THERE IS INVESTMENT WHICH GENERATES DIVIDEND INCOME OR EXEMPT INCOME AS ALSO INVESTMENT WHICH DOES NOT GENERATE EXEMPT INCOME, I T IS ONLY SUCH INVESTMENTS IN RESPECT OF WHICH THE DIVIDEND INCOME OR EXEMPTED IN COME HAS BEEN EARNED WHICH CAN BE CONSIDERED WHEN COMPUTING THE DISALLOWANCE U NDER SECTION 14A READ WITH ITA NO.1331 & 1423/KOL/ 2011 ASSESSMENT Y EAR: 2008-09 8 RULE 8D. A PERUSAL OF THE PROVISIONS OF RULE 8D ALS O TALKS OF SATISFACTION IN SUB-RULE (1). RULE 8D(2) HAS THREE SUB-PARTS. THE FIRST SUB- PART I.E. (I) DEALS WITH THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO THE INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME. THAT ISSUE IS NOT IN DISPUTE HERE AND THERE FORE, WE DO NOT GO INTO IT IN THIS CASE. IN SECOND SUB-PART I.E.(II), IT IS A COMPUTAT ION PROVIDED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE BY WAY OF INTE REST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULA R INCOME OR RECEIPT. THIS CLEARLY MEANS THAT IF THERE IS ANY INTEREST EXPENDITURE, WH ICH IS DIRECTLY RELATABLE TO ANY PARTICULAR INCOME OR RECEIPT, SUCH INTEREST EXPENDI TURE IS NOT TO BE CONSIDERED UNDER RULE 8D(2)(II). IN THE ASSESSEES CASE HERE T HE INTEREST HAS BEEN PAID BY THE ASSESSEE ON THE LOANS TAKEN FROM THE BANKS FOR ITS BUSINESS PURPOSE. THERE IS NO ALLEGATION FROM THE BANKS NOR THE AO THAT THE LOAN FUNDS HAVE BEEN DIVERTED FOR MAKING THE INVESTMENT IN SHARES OR FOR NON-BUSINESS PURPOSES. FURTHER RULE 8D(2)(II) CLEARLY IS WORDED IN THE NEGATIVE WITH TH E WORDS NOT DIRECTLY ATTRIBUTABLE. THUS FOR BRINGING ANY INTEREST EXPEN DITURE, CLAIMED BY THE ASSESSEE, UNDER THE AMBIT OF RULE 8D(2)(II) IT WILL HAVE TO B E SHOWN BY THE AO THAT THE SAID INTEREST IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTIC ULAR INCOME OR RECEIPT. WHY WE SAY HERE THAT IT IS TO BE SHOWN BY THE AO IS ON ACCOUNT OF THE WORDS IN RULE 8D(1) BEING WHERE THE ASSESSING OFFICER, IS NOT SATISFIED WITH. (A) .. (B) .. IN RELATION TO INCOME., HE SHALL DETERMINE THE A MOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PRO VISIONS OF SUB-RULE (2). IN THE ASSESSEES CASE, ADMITTEDLY, THE ASSESSEE HA S SUBSTANTIAL CAPITAL. THE INCREASE IN THE CAPITAL ITSELF IS TO AN EXTENT OF RS.4 CRORE S AND IN RESPECT OF RESERVES AND SURPLUS, THE INCREASE IS RS.112 CRORES. THE LOANS T AKEN DURING THE YEAR ADMITTEDLY ARE FOR THE LETTERS OF CREDIT AND THE ASSESSEE IS B OUND TO PROVIDE THE BANK STOCK ITA NO.1331 & 1423/KOL/ 2011 ASSESSMENT Y EAR: 2008-09 9 STATEMENT AND OTHER DETAILS TO SHOW THE UTILIZATION OF THE LOANS. NO BANK WOULD PERMIT THE LOAN GIVEN FOR ONE PURPOSE TO BE USED FO R MAKING ANY INVESTMENT IN SHARES. THE LD. CIT(A), IT IS NOTICED THAT AFTER CO NSIDERING THESE FACTS THAT THE ASSESSEE HAD NOT USED ANY OF ITS BORROWINGS FOR PUR CHASING THE SHARES, HAS DELETED THE DISALLOWANCE. ON THIS GROUND ITSELF, THE DELETI ON AS MADE BY THE LD. CIT(A) IS LIABLE TO BE CONFIRMED AND WE DO SO. 7.1 IN ANY CASE, THE WORKING OF THE DISALLOWANCE UN DER SUB-PART (II) OF SUB- CLAUSE (2) OF RULE 8D AS MADE BY THE AO ALSO SUFFER S FROM A SUBSTANTIAL ERROR IN SO FAR AS IN THE SAID RULE IN REGARD TO THE NUMERATOR B, THE WORDS USED ARE THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT FORM OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE-SHE ET AS ON THE FIRST DAY AND IN THE LAST DAY OF THE PREVIOUS YEAR. HERE THE AO HAS TAKE N INTO CONSIDERATION THE INVESTMENT OF RS.103 CRORES MADE THIS YEAR, WHICH H AS NOT EARNED ANY DIVIDEND OR EXEMPT INCOME. IT IS ONLY THE AVERAGE OF THE VALUE OF THE INVESTMENT FROM WHICH THE INCOME HAS BEEN EARNED WHICH IS NOT FALLING W ITHIN THE PART OF THE TOTAL INCOME THAT IS TO BE CONSIDERED. THIS IS WHY THE QU ESTION OF SATISFACTION IS PROVIDED IN SECTION 14A AND RULE 8D(1), THAT RELATE S TO THE ACCOUNTS OF THE ASSESSEE. THUS, IT IS NOT THE TOTAL INVESTMENT AT THE BEGINNI NG OF THE YEAR AND AT THE END OF THE YEAR, WHICH IS TO BE CONSIDERED BUT IT IS THE AVERA GE OF THE VALUE OF INVESTMENTS WHICH HAS GIVEN RISE TO THE INCOME WHICH DOES NOT F ORM PART OF THE TOTAL INCOME WHICH IS TO BE CONSIDERED. A QUESTION MAY ARISE AS TO WHY THE TERM AVERAGE OF THE VALUE OF INVESTMENT IS THEN USED. THE TERM AVERAGE OF THE VALUE OF INVESTMENT WOULD BE TO TAKE CARE OF CASES WHERE THERE IS THE I SSUE OF DIVIDEND STRIPING. IN ANY CASE, AS WE HAVE ALREADY HELD THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME, THE FINDINGS OF THE LD. CIT(A) O N THE ISSUE STAND CONFIRMED AND CONSEQUENTLY THE APPEAL FILED BY THE REVENUE STANDS DISMISSED. ITA NO.1331 & 1423/KOL/ 2011 ASSESSMENT Y EAR: 2008-09 10 8. IN RESPECT OF PROVISIONS OF RULE 8D(2)(III), WHI CH IS THE SUBJECT-MATTER OF THE APPEAL IN THE ASSESSEES HAND, A PERUSAL OF THE SAI D PROVISION SHOWS THAT WHAT IS DISALLOWABLE UNDER RULE 8D(2)(III) IS THE AMOUNT EQ UAL TO PERCENTAGE OF THE AVERAGE VALUE OF INVESTMENT THE INCOME FROM WHICH D OES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME. THUS, UNDER SUB-CLAUSE (III), WHAT IS DISALLOWED IS PERCENTAGE OF THE NUMERATOR B IN RULE 8D(2)(II). AG AIN THIS IS TO BE CALCULATED IN THE SAME LINE AS MENTIONED EARLIER IN RESPECT OF NU MERATOR B IN RULE 8D(2)(II) OF THE ACT. 8.1 THUS, NOT ALL INVESTMENTS BECOME THE SUBJECT-MA TTER OF CONSIDERATION WHEN COMPUTING DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D. THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D IS TO BE IN REL ATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND THIS CAN BE D ONE ONLY BY TAKING INTO CONSIDERATION THE INVESTMENT WHICH HAS GIVEN RISE T O THIS INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. UNDER THE CIRCUMSTAN CES, THE COMPUTATION OF THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D(2) (III), WHICH IS ISSUE IN THE ASSESSEES APPEAL, IS RESTORED TO THE FILE OF THE A O FOR RECOMPUTATION IN LINE WITH THE DIRECTION GIVEN ABOVE. NO DISALLOWANCE UNDER SE CTION 14A READ WITH RULE 8D(2)(I) AND (II) CAN BE MADE IN THIS CASE. 9. IN THE RESULT, THE APPEAL FILED BY THE REVENUE S TANDS DISMISSED AND THE APPEAL FILED BY THE ASSESSEE STANDS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THIS ORDER IS PRONOUNCED IN THE COURT ON 19 TH JUNE, 2013. SD/- SD/- (K. K. GUPTA) (GEORGE MATHAN) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 19 TH JUNE, 2013 ORDER PRONOUNCED BY: SD/- SD/- A.M. J.M. (NSS) (GM) ITA NO.1331 & 1423/KOL/ 2011 ASSESSMENT Y EAR: 2008-09 11 COPY OF THE ORDER FORWARDED TO: 1. REI AGRO LTD., 46C, CHOWRINGHEE ROAD, KOLKATA - 700 071 2 DCIT, CENTRAL CIRCLE-XXVII, KOLKATA 3. THE CIT(A), 4. CIT, 5. DR, KOLKATA BENCHES, KOLKATA TRUE COPY, BY ORDER, ASSTT. REGISTRAR , ITAT, KOLKATA TALUKDAR(SR.P.S.)