M/s Sterling Developers Pvt. Ltd., Bangalore V. JCIT, Bangalore

ITA 1417/BANG/2012

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9762 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-06-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 02-06-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 31-10-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Business expenditure; Earning of tax free income
• Section: 234B; 14A; 80IB; 12

Judgement Text

ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'B', BANGALORE BEFORE SHRI. N. V. VASUDEVAN, JUDICIAL MEMBER AND SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER I.T.A NO.1417/BANG/2012 (ASSESSMENT YEAR : 2009-10) M/S. STERLING DEVELOPERS P. LTD, NO.8, PRESTIGE NUBULA, LEVEL-5, CUBBON ROAD, OPP. INCOME-TAX OFFICE, BANGALORE 560 001 ..APPELLANT PAN : AACCS0304G V. JOINT COMMISSIONER OF INCOME-TAX (OSD), CIRCLE -12 (3), BANGALORE ..RESPONDENT I.T.A NO.168/BANG/2013 (ASSESSMENT YEAR : 2009-10) (BY THE REVENUE) ASSESSEE BY : SHRI. V. SRINIVASAN, CA REVENUE BY : DR. P. K. SRIHARI, ADDL. CIT HEARD ON : 02.06.2015 PRONOUNCED ON : 23.06.2015 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THESE ARE APPEALS FILED BY ASSESSEE AND REVENUE RE SPECTIVELY, DIRECTED AGAINST THE ORDER OF CIT (A)-III, BANGALORE, DT.27. 09.2012, FOR THE ASSESSMENT YEAR 2009-10. ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 2 02. ASSESSEE HAS RAISED FIVE GROUNDS IN ITS APPEAL OF WHICH, GROUNDS 1 AND 5 ARE COMMON NEEDING NO ADJUDICATION. GROUND 4 IS ON LEVY OF INTEREST U/SS.234A, 234B AND 234C OF THE INCOME-TAX ACT, 196 1 (THE ACTIN SHORT), WHICH IS CONSEQUENTIAL IN NATURE AND ALSO DO NOT NE ED NEED SPECIFIC ADJUDICATION. EFFECTIVE GROUNDS 2 AND 3 ARE REPROD UCED HEREUNDER : 2. THE LEARNED CIT (A) IS NOT JUSTIFIED IN SUSTAIN ING THE DISALLOWANCE PF RS.3,81,18,472/- OUT OF THE TOTAL D ISALLOWANCE OF RS.5,20,69,680/- U/S.14A OF THE ACT UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE. 3. THE LEARNED CIT(A) IS NOT JUSTIFIED IN UPHOLDING THE DISALLOWANCE OF RS.1,64,97,300/- CLAIMED U/S.57 OF THE ACT IN RESPECT OF THE INTEREST PAID ON BORROWED FUNDS UNDER THE FA CTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE. 03. AS AGAINST THIS, REVENUE HAS TAKEN FOUR GROUNDS OF WHICH, GROUNDS 1, 3 AND 4 ARE GENERAL, NEEDING NO SPECIFIC ADJUDICATION . EFFECTIVE GROUND OF THE REVENUE, NUMBERED AS GROUND 2 IS REPRODUCED HEREUND ER : 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED CIT (A) HAS ERRED IN LAW IN DIRECTING THE AO TO ALL OW SET OFF OF LOSSES SUFFERED IN THE ELIGIBLE 80IB UNIT AGAINST THE INCO ME FROM NON ELIGIBLE UNIT WITHOUT APPRECIATING THE STATUTORY POSITION AS ENVISAGED UNDER SUB SECTION 5 OF SECTION 80IA WHICH IS APPLICABLE T O SECTION 80IB ALSO, THAT THE INCOME FROM ELIGIBLE UNIT SHALL BE COMPUTE D AS IF SUCH ELIGIBLE BUSINESS WERE THE ONLY SOURCE OF INCOME OF THE ASSE SSEE DURING THE PREVIOUS YEAR RELEVANT TO THE AYS FOR WHICH THE PRO VISIONS OF SECTION 80IB ARE APPLICABLE. 04. FACTS APROPOS ARE THAT ASSESSEE ENGAGED IN DEVE LOPING AND CONSTRUCTION OF HOUSES, BUILDINGS AND OTHER RELATED ACTIVITIES. IT FILED A RETURN OF INCOME DECLARING INCOME OF RS.4,10,17,850/-. DURING THE C OURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTED BY THE AO THAT ASSESSEE H AD CLAIMED DEDUCTION U/S.80IB OF THE ACT, IN RESPECT OF ONE OF ITS TWO P ROJECTS. IT HAD LOSS IN THE ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 3 PROJECT ON WHICH IT WAS ELIGIBLE FOR CLAIMING DEDUC TION U/S.80IB OF THE ACT, BUT IT EFFECTED A SET OFF OF THE SAID LOSS AGAINST ITS INCOME FROM PROJECTS ON WHICH 80IB DEDUCTION WAS NOT AVAILABLE. AO WAS OF THE OP INION THAT LOSS IN THE 80IB UNIT COULD NOT BE ALLOWED FOR SET OFF AGAINST BUSIN ESS INCOME FROM NON-ELIGIBLE UNITS IN VIEW OF SUB-SECTION (13) OF SECTION 80IB O F THE ACT, WHICH INTER ALIA STIPULATED APPLICATION OF SUB-SECTION 5 AND 7 TO 12 OF SEC.80IA OF THE ACT. THOUGH THE ASSESSEE ARGUED BEFORE THE AO THAT SET O FF OF LOSSES UNDER ANY SOURCE WITHIN A GIVEN HEAD WAS TO BE ALLOWED IN ACC ORDANCE WITH SECTION 70 (1) OF THE ACT, PLACING RELIANCE ON THE JUDGMENT OF HON BLE APEX COURT IN THE CASE OF SYNCO INDUSTRIES LTD V. AO [(2008) 299 ITR 444)] , LD. AO WAS NOT IMPRESSED. ACCORDING TO HIM, BY VIRTUE OF THE DECI SION OF THE HONBLE APEX COURT IN THE CASE OF LIBERTY INDIA V. CIT [(2009) 3 17 ITR 218] AND DUE TO THE OVERRIDING PROVISION CONTAINED IN SEC.80IA OF THE A CT, LOSS OF ELIGIBLE BUSINESS COULD NOT BE ALLOWED FOR SET OFF FROM PROFIT FROM N ON-ELIGIBLE BUSINESS. TAKING THIS VIEW OF THE MATTER, HE DISALLOWED THE LOSS OF RS.1,13,69,446/- CLAIMED FOR SET OFF AGAINST THE BUSINESS PROFITS OF THE NON-80I B PROJECTS. 05. AO ALSO FOUND THAT ASSESSEE HAD CLOSING VALUE O F INVESTMENTS OF RS.54,77,66,006/- AND OPENING VALUE OF INVESTMENTS OF RS.57,27,60,174/-, INCOME FROM WHICH WAS EXEMPT U/S.14A OF THE ACT. HE NOTED THAT IN THE PROFIT AND LOSS ACCOUNT ASSESSEE HAD CHARGED RS.12,13,19,5 85/- AS FINANCE CHARGES WHICH INTER ALIA INCLUDED INTEREST ON FIXED LOANS RS.8,58,54,952/- AND INTEREST ON OTHER LOANS OF RS.3,28,42,343/-. ASSESSEE WAS P UT ON NOTICE AS TO WHY ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 4 SECTION 14A OF THE ACT READ ALONG WITH RULE 8D OF T HE IT RULES SHOULD NOT BE APPLIED. REPLY OF THE ASSESSEE WAS THAT THE INVEST MENTS MADE WERE IN SHARES AND DEBENTURES OF ONE M/S. STERLING URBAN DEVELOPME NTS P. LTD (SUDPL IN SHORT) DURING THE FINANCIAL YEAR 2005-06. AS PER T HE ASSESSEE, IT HAD BORROWED RS.50 CRORES FROM HDFC FOR MAKING THESE INVESTMENTS . ASSESSEE POINTED OUT THAT THERE WAS A SURVEY U/S.133A OF THE ACT IN THE PREMISES OF THE ASSESSEE, WHEN THE DEPARTMENT HAD TAKEN A STAND THAT PROPORTI ONATE INTEREST ON THE LOANS UTILISED FOR INVESTMENTS IN SHARES AND DEBENTURES C OULD NOT BE ALLOWED AS BUSINESS EXPENDITURE. ACCORDINGLY AS PER THE ASSES SEE, INTEREST PERTAINING TO SHARES AND DEBENTURES WERE SEPARATED OUT OF THE BUS INESS INCOME AND PLACED UNDER THE HEAD INCOME FROM OTHER SOURCES AND THE RELATED INTEREST OUT GO WAS CLAIMED U/S.57 OF THE ACT. AS PER THE ASSESSEE, WH AT COULD BE DISALLOWED U/S.14A OF THE ACT, COULD AT BEST BE RS.36,80,500/- , BEING THE INVESTMENT MADE IN M/S. PADMAVATHI ASSOCIATES, A PARTNERSHIP FIRM, WHEREIN THE ASSESSEE WAS A PARTNER. 06. HOWEVER, AO WAS NOT IMPRESSED WITH THE ABOVE RE PLY. ACCORDING TO HIM, INVESTMENTS IN SHARES OF SUDPL MADE BY THE ASS ESSEE WERE TO EARN INCOME FROM DIVIDENDS WHICH WAS NOT INCLUDIBLE IN THE TOTA L INCOME. ACCORDING TO THE AO, THERE WAS NO BUSINESS INCOME DIRECTLY RELATABLE TO THE INTEREST EXPENDITURE DURING THE RELEVANT PREVIOUS YEAR. ACCORDING TO HI M, A PART OF THE INTEREST OUT GO OF RS.12,13,19,585/- HAD TO BE DISALLOWED APPLYI NG THE FORMULA PRESCRIBED IN RULE 8D OF THE IT RULES. HE WORKED OUT THE RATI O OF THE AVERAGE INVESTMENT ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 5 TO THE AVERAGE VALUE OF THE TOTAL ASSETS AND APPLIE D IT ON THE TOTAL INTEREST AND ARRIVED AT A INTEREST DISALLOWANCE OF RS.4,92,78,16 0/- UNDER RULE 8D(2)(II). A FURTHER DISALLOWANCE OF RS.27,91,520/- WAS ALSO MAD E AT 0.5% OF THE AVERAGE VALUE OF THE INVESTMENT APPLYING RULE 8D(2)(III). 07. AO ALSO FOUND THAT ASSESSEE HAD SEGGREGATED OUT THE INTEREST INCOME EARNED FROM ITS INVESTMENT IN DEBENTURES WITH M/S. SUDPL UNDER THE HEAD NCOME FROM OTHER SOURCES. SUCH INTEREST INCOME, C AME TO RS.19,05,000/-. AGAINST THE INTEREST INCOME, ASSESSEE HAD CLAIMED I NTEREST ON THE LOANS RAISED FROM HDFC FOR SUBSCRIBING TO SUCH DEBENTURES COMING TO RS.1,64,97,300/-, WHICH HAD RESULTED IN A LOSS UNDER THE SAID HEAD. AO WAS OF THE OPINION THAT WHAT COULD NOT BE CONSIDERED AS AN ALLOWANCE U/S.37 OF THE ACT, IF THE INCOME FROM INTEREST WAS RECKONED UNDER THE HEAD PROFITS AND GAINS FROM BUSINESS OR PROFESSION COULD NOT BE CONSIDERED UNDER THE HEAD INCOME FROM OTHER SOURCES AS WELL. FURTHER AS PER THE AO, SUDPL WAS A CONCER N HAVING SAME DIRECTORS AS THAT OF THE ASSESSEE AND THE SAID CONCERN HAD SCALE D DOWN THE INTEREST PAID BY IT ON THE DEBENTURES FROM 10% TO 1% WHICH RESULTED IN THE MINISCULE INTEREST INCOME OF RS.19,05,000/- AGAINST AN INTEREST OUTGO OF RS.1,64,97,300/-. HE DISALLOWED THE CLAIM OF INTEREST OUTGO OF RS.1,64,9 7,300/-. 08. AGGRIEVED WITH THE ABOVE ADDITIONS, ASSESSEE MO VED IN APPEAL BEFORE THE CIT (A). 09. VIS--VIS SET OFF OF LOSS OF 80IB, AGAINST PROF ITS OF NON-80IB PROJECTS, CIT (A) WAS OF THE OPINION THAT THE PROCEDURE FOLLOWED BY THE ASSESSEE WAS ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 6 ACCEPTABLE AND FOR TAKING THIS VIEW HE RELIED ON HI S OWN ORDER IN ASSESSEES OWN CASEFOR A. Y. 2008-09. LD. CIT (A) HELD THAT ASSES SEE WAS ELIGIBLE FOR CLAIMING LOSS UNDER 80IB PROJECT AGAINST ITS INCOME FROM NON -80IB PROJECT. 10. VIS--VIS THE SECOND ISSUE VIZ., DISALLOWANCE U /S.14A OF THE ACT, ARGUMENT OF THE ASSESSEE WAS THAT IT HAD IN ITS LET TER DT 15.11.2011 TO THE AO SPECIFICALLY MENTIONED THAT THERE WAS NO EXEMPT INC OME EARNED BY IT DURING THE RELEVANT PREVIOUS YEAR AND THEREFORE NO DISALLOWANC E COULD BE MADE U/S.14A OF THE ACT. ASSESSEE ALSO PLACED RELIANCE ON THE DECI SION OF CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF SIVA INDUSTRIES V. ACIT (IT A.2148/MDS/2010, DT.20.05.2011). FURTHER, AS PER THE ASSESSEE, ENTI RE INTEREST EXPENDITURE COULD NOT HAVE BEEN CONSIDERED FOR APPLICATION OF RULE 8D (2)(II) SINCE PART OF THE LOANS WERE UTILISED FOR ITS BUSINESS. ASSESSEE ALS O POINTED OUT THAT AVERAGE INVESTMENTS CONSIDERED BY THE AO AT RS.55,83,03,916 /- WAS INCORRECT AND THE ACTUAL FIGURE SHOULD HAVE BEEN RS.37,42,52,916/-. CIT (A) PARTLY AGREED WITH THE CONTENTIONS OF THE ASSESSEE AND HELD THAT AVERA GE VALUE OF THE INVESTMENTS WAS WRONGLY CONSIDERED BY THE AO WHILE WORKING OUT THE DISALLOWANCE UNDER RULE 8D. HE ALSO HELD THAT A SUM OF RS.44,16,600/- HAD TO BE EXCLUDED FROM THE TOTAL INTEREST EXPENDITURE OF RS.12,13,19,585/- WHILE WORKING OUT THE INTEREST DISALLOWANCE. EFFECTIVELY, HE SCALED DOWN THE DISA LLOWANCE U/S.14A OF THE ACT, FROM RS.5,20,69,680/- TO RS.3,8118,472/-. 11. VIS--VIS THE THIRD ISSUE VIZ., CLAIM OF LOSS U NDER THE HEAD INCOME FROM OTHER SOURCES ARGUMENT OF THE ASSESSEE BEFORE THE CIT (A) WAS THAT THE INCOME ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 7 FROM THE DEBENTURES HAVING BEEN DECLARED U/S.56 OF THE ACT, LEGITIMATE EXPENDITURE CLAIMED U/S.57 COULD NOT BE DISALLOWED. AS PER THE ASSESSEE, THE REASONING GIVEN BY THE AO THAT WHAT COULD BE DISALL OWED U/S.37 COULD NOT BE CLAIMED U/S.57 WAS INCORRECT. CIT (A), THOUGH IN P RINCIPLE AGREED WITH THIS CONTENTION OF THE ASSESSEE WAS OF THE OPINION THAT INCOME FROM DEBENTURES WAS REDUCED BY M/S. SUDPL FROM 10% TO 1% DURING THE REL EVANT PREVIOUS YEAR, RESULTING IN SUBSTANTIAL REDUCTION OF INTEREST INCO ME. AS PER THE CIT (A), THE DIRECTORS OF THE ASSESSEE COMPANY WERE COMMON AS TH AT OF SUDPL AND ASSESSEE HAD CRITICAL CONTROL OVER THE SUDPL. CIT (A) WAS OF THE OPINION THAT THE ASSESSEE COULD NOT GIVE PROPER REASONS FOR REDUCTIO N OF INTEREST FROM 10% TO 1%. AS PER THE CIT (A), ASSESSEE HAD ACCEPTED THE REDUCTION OF INTEREST ON DEBENTURES WHILE PAYING HIGH INTEREST TO THE LOANS TAKEN FROM HDFC WHICH WAS UTILISED FOR MAKING SUCH INVESTMENTS. RELYING ON T HE DECISION OF HONBLE APEX COURT IN MCDOWELL & CO. LTD V. CTO (154 ITR 148), CIT (A) HELD THAT REDUCTION OF INTEREST BY SUDPL WAS ONLY TO CLAIM A HUGE LOSS ON ACCOUNT OF PAYMENT OF INTEREST AND IT WAS A COLOURABLE DEVICE WHICH HAD NO PROPER ECONOMIC JUSTIFICATION AND RATIONALE. HE CONFIRMED THE ADDITION OF RS.1,64,97,300/- MADE BY THE AO, THOUGH FOR A DIFF ERENT REASON. 12. NOW BEFORE US, REVENUE IN ITS APPEAL IS AGGRIEV ED ON THE DIRECTION OF THE CIT (A) TO ALLOW SET OFF OF LOSS OF 80IB PROJECT AG AINST PROFITS OF NON-80IB PROJECTS WHEREAS ASSESSEE IS AGGRIEVED ON THE ADDIT IONS MADE U/S.14A AND DISALLOWANCE OF THE CLAIM U/S.57 OF THE ACT. ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 8 13. LD. COUNSEL FOR THE ASSESSEE AT THE OUT SET SUB MITTED THAT THE ISSUE REGARDING SET OFF OF LOSS OF 80IB PROJECTS FROM PRO FITS OF NON-80IB PROJECTS HAD COME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR A. Y. 2008-09 IN ITA.487/BANG/2012, DT.31.01.2013 AND THE DECISION W AS IN FAVOUR OF THE ASSESSEE. 14. LD. DR FAIRLY AGREED THAT THE ISSUE STOOD COVER ED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN C ASE IN ITA.487/BANG/2012 (SUPRA). 15. WE HAVE HEARD THE CONTENTIONS AND PERUSED THE O RDERS. CIT (A) RELIED ON HIS OWN ORDER FOR A. Y. 2008-09 IN DIRECTING THE AO TO SET OFF THE LOSS FROM 80IB UNIT WITH THE PROFITS OF NON-80IB PROJECTS. THIS TRIBUNAL ON APPEAL FILED BY THE REVENUE, IN ITS ORDER DT 31.01.2013, HELD AS UNDER : 5.3.1 WE HAVE HEARD BOTH PARTIES AND HAVE CAREFU LLY PERUSED AND CONSIDERED THE MATERIAL ON RECORD. AT THE OUTSET I T MUST BE MENTIONED HERE THAT THE HON'BLE APEX COURT IN THE CASE OF SYNCO IN DUSTRIES LTD (SUPRA) WAS CONCERNED WITH TOT WITHSTANDING ANYTHING CONTAI NED IN ANY OTHER PROVISIONS OF SECTION 80 I(6) OF THE ACT, AS IT EXI STED AT THAT RELEVANT POINT OF TIME AND THE SAME IS EXTRACTED HEREUNDER FOR CL ARITY : SECTION 80 I (6) NOTWITHSTANDING ANYTHING CONTA INED IN ANY OTHER PROVISIONS OF THIS ACT, THE PROFITS AND GAINS OF AN INDUSTRIAL UNDERTAKING ON A SHIP OR THE BUSINESS OF A HOTEL (OR THE BUSINESS OF REPAIRS TO OCEAN GOING VESSELS OR OTHER POWERED CRAFT) TO WHICH THE PROVIS IONS OF SUB-SECTION (1) APPLY SHALL, FOR THE PURPOSES OF DETERMINING THE QU ANTUM OF DEDUCTION UNDER SUB-SECTION (1) FOR THE ASSESSMENT YEAR IMMED IATELY SUCCEEDING THE INITIAL ASSESSMENT YEAR OR ANY SUBSEQUENT ASSESSMEN T YEAR, BE COMPUTED AS IF SUCH INDUSTRIAL UNDERTAKING OR SHIP OR BUSINESS OF THE HOTEL (OR THE BUSINESS OF REPAIRS TO OCEAN GOING VESSELS OR OTHER POWERED CRAFT) WERE THE ONLY SOURCE OF INCOME OF THE ASSESSEE DURING THE PR EVIOUS YEARS RELEVANT TO THE INITIAL ASSESSMENT YEAR AND TO EVERY SUBSEQUENT ASSESSMENT YEAR UPTO AND INCLUDING THE ASSESSMENT YEAR FOR WHICH THE DET ERMINATION IS TO BE MADE. ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 9 LET US ALSO PERUSE AND CONSIDER THE PROVISIONS OF S ECTION 80 IA(5) OF THE ACT WHICH IS RELIED ON BY THE ASSESSING OFFICER WHI CH IS ALSO EXTRACTED HEREUNDER : SECTION 80-IA(5) - NOTWITHSTANDING ANYTHING CONTAI NED IN ANY OTHER PROVISION OF THIS ACT, THE PROFITS AND GAINS OF AN ELIGIBLE BUSINESS TO WHICH THE PROVISIONS OF SUB-SECTION (1) APPLY SHALL, FOR THE PURPOSES OF DETERMINING THE QUANTUM OF DEDUCTION UNDER THAT SUB -SECTION FOR THE ASSESSMENT YEAR IMMEDIATELY SUCCEEDING THE INITIAL ASSESSMENT YEAR OR ANY SUBSEQUENT ASSESSMENT YEAR, BE COMPUTED AS IF SUCH ELIGIBLE BUSINESS WERE THE ONLY SOURCE OF INCOME OF THE ASSESSEE DURING TH E PREVIOUS YEAR RELEVANT TO THE INITIAL ASSESSMENT YEAR AND TO EVERY SUBSEQU ENT ASSESSMENT YEAR UP TO AND INCLUDING THE ASSESSMENT YEAR FOR WHICH THE DETERMINATION IS TO BE MADE. 5.3.2 FROM A PERUSAL AND COMPARISON OF BOTH THESE P ROVISIONS, NAMELY SECTIONS 80 I(6) AND 80 IA(5) OF THE ACT, IT IS SEE N THAT THE PROVISIONS OF SECTION 80 IA(5) OF THE ACT, IT IS SEEN THAT THE PR OVISIONS OF SECTION 80 IA(5) OF THE ACT ARE COUCHED IN SIMILAR LANGUAGE TO THE E RSTWHILE PROVISIONS OF SECTION 80 I(6) OF THE ACT. IN OTHER WORDS, THE RE STRICTION CONTEMPLATED UNDER SECTION 80 I (6) OF THE ACT, IS THE SAME AS T HE RESTRICTION CONTEMPLATED UNDER SECTION 80 IA(5) OF THE ACT. IT IS IN THIS CONTEXT THAT THE HON'BLE APEX COURT IN THE CASE OF SYNCO INDUSTRIES LTD (SUPRA) HELD AFTER AN ELABORATE ANALYSIS OF THE PROVISIONS AT PARAS 12 AND 13 OF ITS ORDER WHICH ARE EXTRACTED AND REPRODUCED HEREUNDER : 12. THE CONTENTION THAT UNDER SECTION 80-I(6) TH E PROFITS DERIVED FROM ONE INDUSTRIAL UNDERTAKING CANNOT BE SET OFF AGAINS T LOSS SUFFERED FROM ANOTHER AND THE PROFIT IS REQUIRED TO BE COMPUTED A S IF PROFIT MAKING INDUSTRIAL UNDERTAKING WAS THE ONLY SOURCE OF INCOM E, HAS NO MERITS. SECTION 80-I(1) LAYS DOWN THAT WHERE THE GROSS TOTA L INCOME OF THE ASSESSEE INCLUDES ANY PROFITS DERIVED FROM THE PRIORITY UNDE RTAKING / UNIT / DIVISION, THEN IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE, A DEDUCTION FROM SUCH PROFITS OF AN AMOUNT EQUAL TO 20 PER CENT HAS TO BE MADE. SECTION 80-I(1) LAYS DOWN THE BROAD PARAMETERS INDICATING CIRCUMSTA NCES UNDER WHICH AN ASSESSEE WOULD BE ENTITLED TO CLAIM DEDUCTION. ON THE OTHER HAND SECTION 80-I(6) DEALS WITH DETERMINATION OF THE QUANTUM OF DEDUCTION SECTION 80- I(6) LAYS DOWN THE MANNER IN WHICH THE QUANTUM OF D EDUCTION HAS TO BE WORKED OUT. AFTER SUCH COMPUTATION OF THE QUANTUM OF DEDUCTION, ONE HAS TO GO BACK TO SECTION 80-I(1) WHICH CATEGORICALLY S TATES THAT WHERE THE GROSS TOTAL INCOME INCLUDES ANY PROFITS AND GAINS D ERIVED FROM AN INDUSTRIAL UNDERTAKING TO WHICH SECTION 80-I APPLIE S THEN THERE SHALL BE A DEDUCTION FROM SUCH PROFITS AND GAINS OF AN AMOUNT EQUAL TO 20 PER CENT. THE WORDS INCLUDES ANY PROFITS USED BY THE LEGIS LATURE IN SECTION 80-I(1) ARE VERY IMPORTANT WHICH INDICATE THAT THE GROSS TO TAL INCOME OF AN ASSESSEE SHALL INCLUDE PROFITS FROM A PRIORITY UNDE RTAKING. WHILE ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 1 0 COMPUTING THE QUANTUM OF DEDUCTION UNDER SECTION 80 -I(6) THE ASSESSING OFFICER, NO DOUBT, HAS TO TREAT THE PROFITS DERIVED FROM AN INDUSTRIAL UNDERTAKING AS THE ONLY SOURCE OF INCOME IN ORDER T O ARRIVE AT THE DEDUCTION UNDER CHAPTER VI-A. HOWEVER, THIS COURT FINDS THAT THE NON OBSTANTE CLAUSE APPEARING IN SECTION 80-I(6) OF THE ACT, IS APPLICABLE ONLY TO THE QUANTUM OF DEDUCTION, WHEREAS, THE GROSS TOT AL INCOME UNDER SECTION 80B(5) WHICH IS ALSO REFERRED TO IN SECTION 80-I(1) IS REQUIRED TO BE COMPUTED IN THE MANNER PROVIDED UNDER THE ACT WHICH PRESUPPOSES THAT THE GROSS TOTAL INCOME SHALL BE ARRIVED AT AFTER AD JUSTING THE LOSSES OF THE OTHER DIVISION AGAINST THE PROFITS DERIVED FROM AN INDUSTRIAL UNDERTAKING. IF THE INTERPRETATION AS SUGGESTED BY THE APPELLANT IS ACCEPTED IT WOULD ALMOST RENDER THE PROVISIONS OF SECTION 80A(2) OF T HE ACT NUGATORY AND THEREFORE THE INTERPRETATION CANVASSED ON BEHALF OF THE APPELLANT CANNOT BE ACCEPTED. IT IS TRUE THAT UNDER SECTION 80-I(6) FO R THE PURPOSE OF CALCULATING THE DEDUCTION, THE LOSS SUSTAINED IN ON E OF THE UNITS, CANNOT BE TAKEN INTO ACCOUNT BECAUSE SUB-SECTION (6) CONTEMPL ATES THAT ONLY THE PROFITS SHALL BE TAKEN INTO ACCOUNT AS IF IT WAS TH E ONLY SOURCE OF INCOME. HOWEVER, SECTION 80A(2) AND SECTION 80B(5) ARE DECL ARATORY IN NATURE. THEY APPLY TO ALL THE SECTIONS FALLING IN CHAPTER V I-A. THEY IMPOSE A CEILING ON THE TOTAL AMOUNT OF DEDUCTION AND THEREF ORE THE NON OBSTANTE CLAUSE IN SECTION 80-I(6) CANNOT RESTRICT THE OPERA TION OF SECTIONS 80A(2) AND 80B(5) WHICH OPERATE IN DIFFERENT SPHERES. AS OBSERVED EARLIER SECTION 80-I(6) DEALS WITH ACTUAL COMPUTATION OF DEDUCTION WHEREAS SECTION 80-I(1) DEALS WITH THE TREATMENT TO BE GIVEN TO SUCH DEDUCT IONS IN ORDER TO ARRIVE AT THE TOTAL INCOME OF THE ASSESSEE AND THEREFORE W HILE INTERPRETING SECTION 80-I(1), WHICH ALSO REFERS TO GROSS TOTAL INCOME ON E HAS TO READ THE EXPRESSION GROSS TOTAL INCOME AS DEFINED IN SECTI ON 80B(5). THEREFORE, THIS COURT IS OF THE OPINION THAT THE HIGH COURT WA S JUSTIFIED IN HOLDING THAT THE LOSS FROM THE OIL DIVISION WAS REQUIRED TO BE A DJUSTED BEFORE DETERMINING THE GROSS TOTAL INCOME AND AS THE GROSS TOTAL INCOME WAS NIL THE ASSESSEE WAS NOT ENTITLED TO CLAIM DEDUCTION UN DER CHAPTER VI-A WHICH INCLUDES SECTION 80-I ALSO. 13. THE PROPOSITION OF LAW, EMERGING FROM THE ABOV E DISCUSSION IS THAT THE GROSS TOTAL INCOME OF THE ASSESSEE HAS FIRST GOT TO BE DETERMINED AFTER ADJUSTING LOSSES, ETC., AND IF THE GROSS TOTAL INCO ME OF THE ASSESSEE IS NIL THE ASSESSEE WOULD NOT BE ENTITLED TO DEDUCTIONS UN DER CHAPTER VI-A OF THE ACT. 5.3.3 THE ABOVE DECISION OF THE HON'BLE APEX COURT SQUARELY SUPPORTS THE CASE OF THE ASSESSEE THAT THE PROVISIONS OF SEC TION 80 IA(5) OF THE ACT WOULD NOT RESTRICT THE OPERATION OF THE PROVISIONS OF SECTION 70(1) OF THE ACT WITH RESPECT TO THE SET OFF OF THE LOSS. THE O PERATION OF THE PROVISION OF SECTION 80 IA(5) OF THE ACT IS RESTRICTED TO THE CO MPUTATION OF THE QUANTUM OF DEDUCTION FOR WHICH IT HAS TO BE CONSIDERED THAT THE ELIGIBLE BUSINESS IS THE ONLY SOURCE OF INCOME. THAT RESTRICTION, HOWEV ER, CANNOT BE APPLIED TO ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 1 1 RENDER THE CONCEPT OF GROSS TOTAL INCOME IN TERMS O F SECTION 80 B(5) TO BE DETERMINED BEFORE THE SET OFF OF THE LOSSES UNDER S ECTION 70(1) OF THE ACT. WE ARE, THEREFORE, OF THE VIEW THAT THE LEARNED CIT (APPEALS) HAS RIGHTLY APPLIED THE DECISION OF THE HON'BLE APEX COURT IN T HE CASE OF SYNCO INDUSTRIES LTD (SUPRA) AND THAT THERE IS NO MERIT I N THE PLEA OF REVENUE THAT THE SAID JUDGMENT IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE OF THE ASSESSEE. 5.3.4 THAT APART, THE LEARNED COUNSEL FOR THE ASSES SEE HAS RIGHTLY CONTENDED THAT THE PROVISIONS OF SECTION 80 IA (5) OF THE ACT APPLIES IN COMPUTING THE PROFITS OF AN ELIGIBLE BUSINESS FOR T HE PURPOSES OF WORKING OUT THE QUANTUM OF DEDUCTION FOR THE INITIAL ASSESS MENT YEAR AND FOR EVERY SUBSEQUENT YEAR THEREAFTER. THE INCENTIVE DEDUCTIO NS BOTH UNDER SECTION 80 IA AND 80 IB OF THE ACT HAVE THE CONCEPT OF INIT IAL ASSESSMENT YEAR IN RESPECT OF ALMOST ALL ELIGIBLE BUSINESS. HOWEVER, WITH RESPECT TO THE ELIGIBLE BUSINESS TO WHICH THE PROVISIONS OF SECTIO N 80 IB(10) OF THE ACT APPLY, THERE IS NO CONCEPT OF INITIAL ASSESSMENT Y EAR. THE DEDUCTION IS GRANTED TO UNDERTAKINGS ENGAGED IN THE BUSINESS OF DEVELOPING AND BUILDING HOUSING PROJECTS ON CERTAIN CONDITIONS BEI NG FULFILLED. THE PROVISIONS OF SECTION 80 IB (13) OF THE ACT, THAT M AKES THE PROVISIONS OF SECTION 80 IA(5) APPLICABLE TO SECTION 80 IB ALSO, APPLIES ONLY SO FAR AS MAY BE. THUS, BY VIRTUE OF THE FACT THAT THERE IS NO CONCEPT OF INITIAL ASSESSMENT YEAR UNDER SECTION 80IB(10) OF THE ACT, WE ARE ALSO OF THE VIEW THAT THE PROVISIONS OF SECTION 80 IA(5) OF THE ACT WOULD NOT BE APPLICABLE TO THE DEDUCTION CLAIMED UNDER SECTION 80 IB(10) OF TH E ACT. FROM THIS ANGLE OF THE MATTER ALSO, WE FIND NO MERIT IN THE VIEW TA KEN BY REVENUE. FOLLOWING THE ABOVE VIEW, WE DISMISS THE APPEAL FIL ED BY REVENUE. 16. COMING TO THE ISSUES RAISED BY THE ASSESSEE IN ITS APPEAL, LD. AR IN RELATION TO THE DISALLOWANCE MADE U/S.14A OF THE AC T, SUBMITTED THAT THERE COULD BE NO SUCH DISALLOWANCE WHEN THERE WAS NO CLAIM OF EXEMPT INCOME. RELIANCE WAS PLACED ON THE DECISION OF THE COORDINATE BENCH IN THE CASE OF M/S. ASK BROTHERS LTD V. DCIT [ITA.1074 & 1075/BANG/2006, DT .22.08.2014] 17. PER CONTRA, LD. DR SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 1 2 18. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. IN THE DECISION OF THE COORDINATE BENCH IN THE CASE OF M/S . ASK BROTHERS LTD, (SUPRA), IT WAS HELD AS UNDER : 9. WE HAVE DULY CONSIDERED THE RIVAL CONTENTION AN D GONE THROUGH THE RECORD CAREFULLY. THE ASSESSING OFFICER HAS DIS ALLOWED THE INTEREST EXPENDITURE ON THE GROUND THAT THE ASSESSEE HAS BOR ROWED THE MONEY WHICH HAS BEEN INVESTED. THE INVESTMENT WOULD ULTIM ATELY RESULT DIVIDEND INCOME WHICH WILL BE EXEMPT FROM TAX. THER EFORE, THE EXPENDITURE ATTRIBUTABLE TO EARNING OF SUCH DIVIDEN D INCOME CANNOT BE ALLOWED TO THE ASSESSEE. ACCORDINGLY THE ASSESSI NG OFFICER HAS DISALLOWED THE INTEREST EXPENDITURE INCURRED ON BOR ROWED FUNDS USED FOR INVESTMENT. ASSESSING OFFICER TOOK THE HELP OF SECTION 14A WHICH PROHIBIT AN ASSESSEE TO CLAIM ANY EXPENDITURE WHICH IS ATTRIBUTABLE TO EARNING OF EXEMPT INCOME. ON THE OTHER HAND THE STA ND OF THE ASSESSEE IS THAT IT HAS NOT RECEIVED ANY EXEMPT INC OME DURING THE YEAR, THEREFORE, SECTION 14A IS NOT APPLICABLE. THI S STAND OF THE ASSESSEE HAS BEEN ACCEPTED BY THE COORDINATE BENCH IN THE CASE OF DCIT VS. M/S. BHUWALKA STEEL INDUSTRIES LTD IN ITA NO.349/BANG/2013. THE FINDING OF THE TRIBUNAL IN TH IS CASE READ AS UNDER: 14. THE ONLY ISSUE THAT ARISE FOR CONSIDERATION IN THIS APPEAL BY THE ASSESSEE IS WITH REGARD TO THE DISALLOWANCE MADE BY THE ASSESSING OFFICER BY INVOKING THE PROVISIONS OF SECTION 14A O F THE ACT. THE ASSESSING OFFICER HAS OBSERVED IN THE ORDER OF THE ASSESSMENT THAT FROM THE FINANCIALS OF THE ASSESSEE, IT HAD EARNED EXEMPT INCOME DURING THE YEAR. THE OPENING INVESTMENT AS ON 01.4. 2007 WAS RS.3,80,00,000/- AND THE CLOSING INVESTMENT STOOD A T RS.13,82,00,000/-. THE AVERAGE INVESTMENT WAS RS. 8 ,81,00,000/-. THE ASSESSING OFFICER CALLED UPON THE ASSESSEE TO EXPLA IN AS TO WHY THE EXPENDITURE INCURRED IN EARNING EXEMPTED INCOME SHO ULD NOT BE DISALLOWED BY APPLYING THE PROVISIONS OF SECTION 1 4A R/W RULE 8D IN RESPONSE, THE ASSESSEE SUBMITTED THAT THE INVESTMENTS WERE MA DE IN ITS SUBSIDIARY COMPANY OUT OF THE PROFIT EARNED BY THE ASSESSEE. THE ASSESSING OFFICER DID NOT ACCEPT THE EXPLANATION GI VEN BY THE ASSESSEE AND WAS OF THE VIEW THAT WHETHER THE INVESTMENT WAS MADE WITH A SUBSIDIARY COMPANY OR WITH AN OUTSIDE COMPANY, THE INTENTION OF MAKING INVESTMENT WAS TO EARN DIVIDEND INCOME WHICH IS EXEMPTED UNDER THE I. T. ACT. BY APPLYING THE PROVISIONS OF SECTION 14A R/W RULE ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 1 3 8D, THE ASSESSING OFFICER DISALLOWED A SUM OF RS.4, 40,500/- AND BROUGHT TO THE SAME TO TAX. 15. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER , THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT (A). THE CIT (A) CO NFIRMED THE ORDER OF THE ASSESSING OFFICER FOR THE REASONS GIVEN IN P ARA 4.8 OF HIS ORDER, WHICH READS AS FOLLOWS: 4.8 THE ASSESSING OFFICER MADE A DISALLOWANCE UNDE R RULE 8D(2)(III) AMOUNTING TO RS.4,40,500/-. THIS DISALLOWANCE IS TO WARDS EXPENSES IN THE NATURE OF INDIRECT EXPENDITURE. THE WORD EXPEN DITURE USED IN SECTION 1 4A OF THE ACT HAS A WIDER MEANING. THE TE RM EXPENDITURE WOULD TAKE IN ITS SWEEP NOT ONLY EXPENDITURE BUT AL SO ALL FORMS OF EXPENDITURE REGARDLESS OF WHETHER IT IS FIXED, DIRE CT, INDIRECT, ADMINISTRATIVE, MANAGERIAL OR FINANCIAL. THEREFORE, THE SAID RULE PROVIDES FOR THE INDIRECT EXPENDITURE AS A FIXED PE RCENTAGE OF THE AVERAGE INVESTMENTS AS PER THE FORMULA LAID DOWN. A S ALREADY STATE, THE ASSESSING OFFICER HAS POWER TO INVOKE RULE 8D E VEN IN A CASE WHERE THE APPELLANT CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS PER SUB-SECTION (3) OF SECTION 14A OF THE ACT. I N THE INSTANT CASE, IT IS THE CONTENTION OF THE APPELLANT THAT NO EXPENDIT URE HAS BEEN INCURRED FOR EARNING THE EXEMPT INCOME.: THE SAME C ANNOT BE ACCEPTED BECAUSE THERE RF1Y BE SOME INDIRECT EXPEND ITURE, WHICH IS NOT DIRECTLY VISIBLE. SINCE IT IS ALREADY DECIDED T HAT THE TERM EXPENDITURE IN SECTION 14A INCLUDES INDIRECT EXPE NDITURE, THE ASSESSING OFFICERS ACTION IN MAKING A DISALLOWANCE OF RS.4,40,500/- IS JUSTIFIED AND THE SAME IS CONFIRMED. 16. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT THERE WAS NO EXEMPT INCOME EARNED BY THE ASSESSEE D URING THE PREVIOUS YEAR. IN THIS REGARD OUR ATTENTION WAS DRA WN TO PAGE 84 OF THE ASSESSEES PAPER BOOK WHICH CONTAINS THE COMPUT ATION OF TOTAL INCOME OF THE ASSESSEE. OUR ATTENTION WAS DRAWN TO THE FACT THAT NO INCOME IS CLAIMED AS EXEMPT IN. THE COMPUTATION OF TOTAL INCOME. OUR ATTENTION WAS ALSO DRAWN TO THE PROFIT AND LOSS ACC OUNT AT PAGE 51 OF THE PAPER BOOK AND THE ITEM OF MISCELLANEOUS INCOME WHICH IS AT SCHEDULE NO.13 TO THE P&L A/C. THOUGH THERE IS NO B REAK-UP OF MISCELLANEOUS RECEIPTS IN SCHEDULE NO.13 OF THE PRO FIT AND LOSS ACCOUNT, THE LEARNED COUNSEL SUBMITTED THAT COMPUTA TION OF TOTAL INCOME WOULD CLEARLY EVIDENCE THE FACT THAT THE ASS ESSEE HAD NO EXEMPT INCOME DURING THE PREVIOUS YEAR. 17. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS OF THE HONBLE HIGH COURTS TO THE ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 1 4 PROPOSITION THAT IF THERE IS NO EXEMPT INCOME DURIN G THE PREVIOUS YEAR, THEN THE PROVISIONS OF SECTION 1 4A OF THE AC T, CANNOT BE INVOKED: * CIT V. WINSOME TEXTILE INDUSTRIES LTD (2009) 319 IT R 204 (P&H) * CIT V. CORRTECH ENERGY P. LTD (TAX APPEAL NO.23 9 O F 2014, DT24.03.2014)(GUJ.); * JCIT V. SHIVAM MOTORS (F) LTD (ITA 17/LKW/2012, DAT ED 12.11.2013) (ITATLUCKNOW); AND * CIT V. M/S SHIVAM MOTORS (F) LTD (ITA 88 OF 2014, D ATED 5.5.14)ALLAHABAD HIGH COURT. 18. THE LEARNED DR RELIED ON THE ORDER OF THE ASSES SING OFFICER AND DREW OUR ATTENTION TO THE CIRCULAR NO.5 OF 2014 DT. 11.02.2014 WHEREIN THE CBDT HAS OPINED THAT EVEN IN THE ABSENC E OF EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE PREVIOUS Y EAR, PROVISIONS OF SECTION 14A HAVE TO BE INVOKED. 19. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RI VAL SUBMISSIONS. ON THE BASIS OF THE DOCUMENTS TO WHICH OUR ATTENTIO N WAS DRAWN IT IS CLEAR THAT THE ASSESSEE DID NOT EARN ANY EXEMPT INC OME DURING THE PREVIOUS YEAR. IN SUCH CIRCUMSTANCES AS LAID DOWN I N THE DECISIONS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE , PROVISIONS OF SECTION 14A COULD NOT BE INVOKED. THE BOARD CIRCULA R WHICH IS CONTRARY TO THE HONBLE HIGH COURTS DECISIONS CANN OT THEREFORE BE THE BASIS TO SUSTAIN THE DISALLOWANCE MADE BY THE R EVENUE AUTHORITIES. WE THEREFORE, HOLD THAT THE DISALLOWAN CE MADE U/S 14A OF THE ACT SHOULD BE DELETED. ACCORDINGLY, THE APPEAL OF THE ASSESSEE IS ALLOWED. 20. IN THE RESULT, APPEAL BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE AND THE APPEAL BY THE ASSESSEE IS ALLOWED. 10. THE HONBIE ALLAHABAD HIGH COURT HAS ALSO CONSID ERED THIS ISSUE IN THE CASE OF CIT VS. M/S. SHIVAM MOTORS (P) LTD. THE QUESTION FORMED BY THE HONBLE ALLAHABAD HIGH COURT ON THIS ISSUE READ AS UNDER: 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE INCOME TAX APPELLATE TRIBUNAL WAS JUSTIFIE D IN UPHOLDING THE DECISION OF CIT (A) IN DELETING THE DISALLOWANCE OF RS.2, 03,752/- U/S 14A IGNORING THE FACT THAT THERE IS DFFERENCE OF OP INION OF VARIOUS COURTS ON THE VIEW TAKEN BY THE ITAT THAT IN THE AB SENCE OF TAX FREE INCOME, NO DISALLOWANCE U/S 1 4A IS PERMISSIBLE. ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 1 5 11. THIS QUESTION HAS BEEN ANSWERED BY THE HONBLE ALLAHABAD HIGH COURT AS UNDER : AS REGARDS THE SECOND QUESTION, SECTION 14A OF THE ACT. PROVIDES THAT FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THE CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT O F EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HENCE, WHAT SECTION 1 4A PROVIDES IS THAT IF THERE IS ANY INCOME WHICH DOES NOT FORM PART OF THE INCOME UNDER THE ACT, THE EXPENDITURE WHICH IS INCU RRED FOR EARNING THE INCOME IS NOT AN ALLOWABLE DEDUCTION. FOR THE Y EAR IN QUESTION, THE FINDING OF FACT IS THAT THE ASSESSEE HAD NOT EA RNED ANY TAX FREE INCOME. HENCE, IN THE ABSENCE OF ANY TAX FREE INCOM E, THE CORRESPONDING EXPENDITURE COULD NOT BE WORKED OUT F OR DISALLOWANCE. THE VIEW OF THE CIT(A), WHICH HAS BEEN AFFIRMED BY THE TRIBUNAL, HENCE DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTIO N OF LAW. HENCE, THE DELETION OF THE DISALLOWANCE OF RS.2,03,752/- MADE BY THE ASSESSING OFFICER WAS IN ORDER. 12. IN THE LIGHT OF THE ABOVE PROPOSITION, FACTS AR E REQUIRED TO BE EXAMINED WITH THE ANGLE, WHETHER THE ASSESSEE HAS R ECEIVED ANY DIVIDEND INCOME OR ANY OTHER INCOME WHICH IS EXEMPT . THE ASSESSEE HAS BEEN RAISING THIS PLEA RIGHT FROM THE ASSESSMEN T PROCEEDINGS STAGE, BUT CONCLUSIVELY NEITHER THE ASSESSING OFFIC ER NOR THE CIT (A) HAS EXAMINED THIS ASPECT. THEREFORE, WE SET ASIDE T HIS ISSUE TO THE FILE OF THE LEARNED ASSESSING OFFICER FOR EXAMINATION. I F ON EXAMINATION IT COMES OUT THAT THE ASSESSEE HAS NOT CLAIMED ANY EXE MPT INCOME, THEN SECTION 14A WOULD NOT BE APPLICABLE. IN CASE EXEMPT INCOME WOULD FOUND TO BE CLAIMED, THEN DISALLOWANCE WOULD BE THE RE. THE LEARNED ASSESSING OFFICER SHALL RE-EXAMINE THIS ISSUE WITH THE ABOVE ANGLE AND ADJUDICATE IT IN ACCORDANCE WITH THE LAW. OUR OBSER VATION WOULD NOT IMPAIR THE CASE OF THE ASSESSING OFFICER AND WOULD NOT CAUSE TO THE DEFENSE/EXPLANATION OF THE ASSESSEE. 13. IN ASSESSMENT YEAR 2003-04, THE DIVIDEND INCOME WAS NOT EXEMPT FROM TAXATION. PRIOR AND SUBSEQUENT TO THIS ASSESSM ENT YEAR, DIVIDEND INCOME WAS EXEMPT. THEREFORE, IN THIS YEAR SECTION 14A WOULD NOT BE APPLICABLE. RESPECTFULLY FOLLOWING THE JUDGMENT OF THE HONBLE ALLAHABAD HIGH COURT, GUJARAT HIGH COURT AND AS CO NSIDERED BY THE COORDINATE BENCH, WE ALLOW THIS GROUND OF APPEAL IN A.Y 2003-04 AND DELETE THE DISALLOWANCE OF INTEREST EXPENDITURE . ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 1 6 19. IT IS NOT DISPUTED THAT THERE WAS NO DIVIDEND O R EXEMPT INCOME CLAIMED BY ASSESSEE DURING THE RELEVANT PREVIOUS YEAR. OTHER INCOME SHOWN BY THE ASSESSEE IN ITS SCHEDULE 15, PLACED AT PAPER BOOK PAGE 10 SH OWS DIVIDEND INCOME AS NIL. NO DOUBT THERE IS A SUM OF RS.160,701,177/- APPEAR ING AS MISCELLANEOUS INCOME IN THE P & L ACCOUNT. HOWEVER, THIS WAS THE SUBJECT OF AN ANALYSIS BY THE AO AT PARA 9 OF THE ASSESSMENT ORDER. IN SUCH ANALYSIS, THE AO HIMSELF HAS GIVEN A FINDING THAT RS.16 CRORES WAS REMUNERATION RECEIVED BY THE ASSESSEE FOR DEVELOPMENT OF PROPERTIES AND NOT ANY INCOME CONSID ERED AS EXEMPT. IN ANY CASE, COMPUTATION OF INCOME OF THE ASSESSEE WHICH A PPEAR AT PAGE 12 OF THE ASSESSMENT ORDER START WITH THE FIGURE OF RS.2,44,6 2,794/- IN THE NEGATIVE, WHICH IS THE SAME FIGURE APPEARING IN THE AUDITED PROFIT AND LOSS ACCOUNT PLACED AT PAPER BOOK PAGE 5, AS PROFIT (LOSS) BEFORE TAXATI ON. THUS, THE WHOLE OF THE OTHER INCOME WAS A PART OF THE NET WORKING RESULTS AND CONTENTION OF THE ASSESSEE THAT IT HAD NOT MADE ANY CLAIM OF EXEMPT I NCOME IS FOUND TO BE CORRECT. WE ARE OF THE VIEW THAT A DISALLOWANCE U/S.14A COUL D NOT HAVE BEEN MADE WHEN THERE WAS NO CLAIM FOR EXEMPT INCOME DURING THE REL EVANT PREVIOUS YEAR BY VIRTUE OF THE DECISION OF THE COORDINATE BENCH IN T HE CASE OF ASK BROTHERS LTD (SUPRA). SUCH DISALLOWANCE STANDS DELETED. 20. COMING TO THE DISALLOWANCE OF RS.1,67,97,300/- MADE U/S.57 OF THE ACT, LD. AR SUBMITTED THAT ASSESSEE ITSELF HAD CARVED OU T THE INTEREST INCOME FROM DEBENTURES FROM ITS INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESSAND PLACED IT UNDER THE HEAD INCOME FROM OTHER SOURCES . AS PER THE LD. AR, THERE ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 1 7 WAS NO DISPUTE THAT THE LOAN TAKEN FROM HDFC WAS UT ILISED FOR INVESTING IN THE DEBENTURES. THUS ACCORDING TO HIM, BORROWED FUNDS WERE UTILISED FOR PLACING THE DEBENTURES AND INTEREST PAID FOR THE BORROWED FUNDS HAD TO BE ALLOWED. ACCORDING TO HIM, SUB-SECTION (III) OF SECTION 57 O F THE ACT, ENTITLED THE ASSESSEE TO CLAIM SUCH EXPENDITURE. JUST BECAUSE T HE INTEREST RATES ON THE DEBENTURES WERE LOWER IN THE RELEVANT PREVIOUS YEAR WOULD NOT MEAN THAT THE EXPENDITURE INCURRED FOR RAISING THE FUNDS, FOR PLA CING THE DEBENTURES WERE TO BE DISALLOWED. LD. AR FURTHER SUBMITTED THAT FOR A. Y . 2008-09, INTEREST INCOME FROM DEBENTURES SHOWN BY THE ASSESSEE UNDER THE HEA D INCOME FROM OTHER SOURCES WERE ACCEPTED BY THE AO IN AN ASSESSMENT D ONE U/S.143(3) AND INTEREST EXPENDITURE ON THE FUNDS UTILISED FOR PLACING SUCH DEBENTURES, CLAIMED U/S.57(III) OF THE ACT, WERE ALLOWED. AS PER THE LD. AR, REVEN UES CLAIM THAT REDUCTION IN INTEREST RATE ON DEBENTURES EFFECTED BY SUDPL WAS A COLOURABLE DEVICE WAS NOT SUBSTANTIATED. LD. AR SUBMITTED THAT M/S. SUDPL WA S ALSO ENGAGED IN THE VERY SAME LINE OF BUSINESS AND SUBSCRIPTION TO ITS DEBEN TURES BY THE ASSESSEE WERE DONE AS A PART OF ASSESSEES BUSINESS. THE INCOME THEREFROM HAD TO BE CLASSIFIED UNDER THE HEAD INCOME FROM OTHER SOURCES SINCE IT WAS IN THE NATURE OF INTEREST. RELIANCE WAS PLACED BY LD. AR ON THE DECISION OF HO NBLE APEX COURT IN THE CASE OF UNION OF INDIA V. AZADI BACHAO ANDOLAN [(20 03) 263 ITR 706]. 21. PER CONTRA, LD. DR SUBMITTED THAT INTEREST RATE ON DEBENTURES HAD COME DOWN FROM 10% TO 1% AND ASSESSEE WAS NOT ABLE TO SH OW WHY ITS ASSOCIATE CONCERN SUDPL REDUCED THE INTEREST RATE BY 9%. AS PER THE LD. DR, THIS WAS ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 1 8 NOTHING BUT A COLOURABLE DEVICE FOR CLAIMING THE LO SS ON ACCOUNT OF INTEREST. LD. DR SUBMITTED THAT SUDPL BEING AN ASSOCIATE ENTERPRI SE OF THE ASSESSEE, A DEVICE WAS ADOPTED SO AS TO FACILITATE A CLAIM OF L OSS BY THE ASSESSEE UNDER THE HEAD INCOME FROM OTHER SOURCES, WHEN IT WAS OBVIO US THAT SUCH CLAIM COULD NOT BE ALLOWED U/S.37 OF THE ACT, IF THE INCOME FRO M DEBENTURES WERE SHOWN AS A PART OF ITS BUSINESS INCOME. 22. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. IT IS NOT DISPUTED THAT THE DEBENTURES HAD EARNED AN INTEREST INCOME OF RS.19,05,000/- TO THE ASSESSEE. IT IS ALSO NOT DISPUTED THAT SUCH IN TEREST INCOME WAS SHOWN BY THE ASSESSEE UNDER THE HEAD INCOME FROM OTHER SOURCES . AO HIMSELF HAS STATED IN PARA 7 OF THE ASSESSMENT ORDER THAT THE INVESTMENT BY WAY OF DEBENTURES IN SUDPL WERE SOURCED OUT OF THE LOAN FROM HDFC ON WHI CH AN INTEREST OF RS.1,64,97,300/- WAS PAID TO HDFC. AS PER THE AO, HAD SUCH INCOME BEEN SHOWN UNDER THE HEAD INCOME FROM BUSINESS THEN T HE INTEREST OUT GO WOULD HAVE BEEN DISALLOWED U/S.37 OF THE ACT. OR IN OTHE R WORDS ACCORDING TO HIM, WHAT WAS TO BE DISALLOWED U/S.37 OF THE ACT, COULD NOT BE CLAIMED BY AN ASSESSEE U/S.57(III) OF THE ACT. ASSESSEE HAS IN ITS RETURN OF INCOME FOR A.Y. 2008-09 ALSO SHOWED INTEREST INCOME FROM DEBENTURES UNDER THE HEAD INCOME FROM OTHER SOURCES IN ITS COMPUTATION OF INCOME PL ACED AT PAPER BOOK PAGES 27 AND 28. AGAINST SUCH INTEREST INCOME, ASSESSEE HAD CLAIMED INTEREST OUT GO OF RS.2,52,41,251/- AND CLAIMED A LOSS OF RS.61,91,251 /- AS WELL FOR THAT ASSESSMENT YEAR. IN THE ASSESSMENT DONE U/S.143(3) OF THE ACT, FOR THE SAID YEAR, ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 1 9 AO HAD ACCEPTED THIS STAND. THOUGH PLACING OF DEBE NTURES IN M/S. SUDPL MIGHT HAVE BEEN IN FURTHERANCE OF ITS BUSINESS OBJE CTS, THE IMMEDIATE SOURCE OF THE INTEREST INCOME WAS THE DEBENTURES. THEREFORE, INTEREST EARNED BY IT FROM SUCH DEBENTURES WERE RIGHTLY CLASSIFIED UNDER THE H EAD INCOME FROM OTHER SOURCES. THE SOLE REASON WHY THE INTEREST OUT GO OF RS.1,64,97,300/- HAS BEEN DISALLOWED BY THE AO IS THAT IF IT WAS CONSIDERED A S INCOME FROM BUSINESS, THE INTEREST EXPENDITURE WOULD FALL UNDER THE PERSONAL EXPENDITURE. ON THE OTHER HAND, CIT (A) JUSTIFIED THE DISALLOWANCE ON A GROUN D THAT SUDPL HAD UNJUSTIFIABLY REDUCED THE RATE OF INTEREST FROM 10% TO 1%, AND THIS HAD RESULTED IN DRASTIC REDUCTION IN THE DEBENTURE INTEREST IN T URN LEADING TO AN EXAGGERATED CLAIM OF LOSS WHICH WAS A COLOURABLE DEVICE. TO ES TABLISH A COLOURABLE DEVICE, IT IS NECESSARY TO SHOW THAT THERE WAS A SERIES OF LEGAL STEPS TAKEN BY THE ASSESSEE FOR BRINGING DOWN ITS TAXABLE INCOME AND THE INTERMEDIATE STEPS SHOULD SHOW THAT THE REAL MOTIVE OF THE ASSESSEE WAS TO EV ADE TAX. CIT (A) RELIED ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF M CDOWELLS & CO LTD (SUPRA), FOR CONSIDERING THE REDUCTION OF INTEREST BY SUDPL TO BE A COLOURABLE DEVICE. HOWEVER, AS EXPLAINED BY HONBLE APEX COUR T IN THE CASE OF AZADI BACHAO ANDOLAN (SUPRA), IT IS NOT PART OF THE JUDIC IAL FUNCTION TO TREAT AS NUGATORY ANY STEP WHATEVER WHICH A TAX PAYER MIGHT TAKE WITH A VIEW TO AVOIDANCE OR MITIGATION OF TAX. THEIR LORDSHIPS AL SO OBSERVED THAT A TAX PAYER WHERE HE IS IN A POSITION TO CARRY THROUGH A TRANSA CTION IN TWO ALTERNATIVE WAYS, ONE OF WHICH WILL RESULT IN LIABILITY TO TAX, AND T HE OTHER OF WHICH WILL NOT, BE AT LIBERTY TO DO THE LATTER, AND TO DO SO EFFECTIVELY IN THE ABSENCE OF ANY SPECIFIC TAX ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 2 0 AVOIDANCE PROVISION. NOTHING HAS BEEN PLACED BY TH E REVENUE TO SHOW THAT THE REDUCTION IN DEBENTURE INTEREST RATE BY SUDPL WAS N OT IN ACCORDANCE WITH LAW AND VIOLATED ANY SPECIFIC TAX AVOIDANCE PROVISION I N THE ACT. IT IS NOT POSSIBLE TO SAY THAT AN ACT WHICH WAS OTHERWISE VALID IN LAW SHOULD BE TREATED AS NON EST MERELY ON THE BASIS OF SOME UNDERLYING MOTIVE WHEN NO CREDIBLE EVIDENCE HAS BEEN BROUGHT ON RECORD TO SHOW SUCH UNDERLYING MOTI VE. 23. IN OUR OPINION, WHAT IS TO BE SEEN IS WHETHER T HE CLAIM OF INTEREST EXPENDITURE COULD BE ALLOWED U/S.57(III) OF THE ACT AS EXPENDITURE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING THE INTEREST INCOME. AS ALREADY MENTIONED BY US, THE AO IN THE ASSESSMEN T ORDER HAS CLEARLY MENTIONED THAT THE LOANS RAISED FROM HDFC WERE UTIL ISED FOR INVESTING IN THE DEBENTURES. THE QUESTION THEREFORE BOILS DOWN TO T HE PURPOSE FOR WHICH LOANS WERE RAISED FROM HDFC. OR IN OTHER WORDS, IF THE P URPOSE OF THE LOANS WAS FOR THE BUSINESS OF THE ASSESSEE, CAN THE INTEREST THER EON BE CLAIMED U/S.57(III) OF THE ACT. NONE OF THE AUTHORITIES BELOW HAVE EXAMINED T HE PURPOSE FOR WHICH LOAN WAS BORROWED FROM HDFC. U/S.57(III) OF THE ACT, EX PENDITURE SHOULD BE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING THE INCOME. THE CLAIM OF THE ASSESSEE IS THAT INTEREST EARNED ON DEBENTURES IS INCOME FROM OTHER SOURCES. THEREFORE THE TEST FO R ALLOWING DEDUCTION OF EXPENSES AGAINST INTEREST INCOME LAID DOWN IN SEC .57(III) OF THE ACT HAS TO BE SATISFIED. WE ARE THEREFORE OF THE VIEW THAT IT WO ULD BE JUST AND APPROPRIATE TO SET ASIDE THE ORDER OF CIT (A) ON THIS ISSUE AND RE MAND THE ISSUE TO THE AO FOR ITA.1417/BANG/2012 & ITA.168/BANG/2013 PAGE - 2 1 THE LIMITED PURPOSE OF VERIFYING THE PURPOSE FOR WH ICH LOANS WERE BORROWED BY THE ASSESSEE FROM HDFC LTD, AND WHICH WERE UTILISED IN MAKING INVESTMENT IN DEBENTURES. IF THE BORROWING IS FOR WORKING INVEST MENTS THEN THE DEDUCTION U/S.57(III) OF THE ACT HAS TO BE ALLOWED. THUS THI S GROUND IS DECIDED ACCORDINGLY. 24. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED, WHEREAS THE APPEAL OF REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD JUNE 2015. SD/- SD/- (N. V. VASUDEVAN) (ABRAHAM P GEORG E) JUDICIAL MEMBER ACCOUNTANT MEMBER