M/s Ludhiana Stock Exchange Ltd., Ludhiana V. ACIT, Ludhiana

ITA 15/CHANDI/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6747 (ITAT-CHANDIGARH)
• Duration Of Justice: 9 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 03-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANDEEP DAHIYA
• Keywords: Earning of tax free income; Commercial expediency
• Section: 143(3); 14A; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH A, CHANDIGARH BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO.15/CHD/2017 (ASSESSMENT YEAR : 2012-13) M/S LUDHIANA STOCK EXCHANGE LTD., VS. THE A.C.I.T., LUDHIANA. CIRCLE-7, LUDHIANA. PAN: AAACT5495M (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUDHIR SEHGAL RESPONDENT BY : SHRI SANDEEP DAHIYA, CIT DR DATE OF HEARING :25.07.2017 DATE OF PRONOUNCEMENT : .10.2017 ORDER PER ANNAPURNA GUPTA, A.M. : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX(APP EALS)- 4, LUDHIANA DATED 7.4.2015 RELATING TO ASSESSMENT Y EAR 2012-13. 2. THE ONLY ISSUE IN THE PRESENT APPEAL PERTAINS TO THE DISALLOWANCE MADE U/S 14A AMOUNTING TO RS.3,13,578/ -. 3. BRIEFLY STATED, THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF PROMOTION OF REGULATION OF TRADE OF STO CKS AND SHARES. ASSESSMENT U/S 143(3) WAS FRAMED FOR THE IMPUGNED ASSESSMENT YEAR MAKING DISALLOWANCE U/S 14 A OF THE ACT R.W.R. 8D ON ACCOUNT OF EXPENSES AMOUNTING TO RS. 3,13,578/-INCURRED FOR EARNING EXEMPT INCOME IN REL ATION TO INVESTMENTS MADE IN EQUITY INSTRUMENTS OF THE SU BSIDIARY 2 COMPANY OF THE ASSESSEE I.E. LSE SECURITIES LIMITED TO THE EXTENT OF RS.3,45,17,625/-. THE SAME WAS UPHELD BY THE LD.CIT(APPEALS). 4. AGGRIEVED AGAINST WHICH THE ASSESSEE HAS FILED P RESENT APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS: 1. THAT THE LD. CIT (A) HAS ERRED IN CONFIRMING THE OR DER OF THE ASSESSING OFFICER IN SUSTAINING THE ADDITION OF RS. 3,13,578/- BY INVOKING THE PROVISIONS OF SECTION 14A BE CAUSE OF THE FOLLOWING FACTS:- I). THAT NO SPECIFIC SATISFACTION HAS BEEN RECORDED BY THE ASSESSING OFFICER WITH REGARD TO DISALLOWANCE MADE U/S 14A SINCE THE ASSESSING OFFICER HAS NOT RECORDED ANY REASON FOR REJECTING THE CLAIM OF ASSESSEE AND, AS SUCH, N O DISALLOWANCE COULD HAVE MADE AS PER THE BINDING JUDGM ENT OF JURISDICTIONAL HONBLE PUNJAB & HIGH COURT IN THE CAS E OF CIT VS KAPSON ASSOCIATES AS REPORTED IN 381 ITR 204. II). THAT THE INVESTMENT MADE BY THE ASSESSEE WAS STATUTORY REQUIREMENT OF THE GOVT. AND BEING STRATE GIC INVESTMENT, NO DISALLOWANCE COULD BE MADE U/S 14A SI NCE SUCH INVESTMENTS ARE ATTRIBUTABLE TO COMMERCIAL EXPEDIE NCY. III). THAT THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS IN THE SHAPE OF 'RESERVES AND SURPLUS' AND SHARE CAPIT AL AND, THUS, NO BORROWED FUNDS HAVING BEEN UTILIZED FOR THE PURPOSE OF MAKING THE INVESTMENT AND, AS SUCH, NO DISALLOWANCE U/S 14A WAS REQUIRED TO BE MADE. 2. WITHOUT PREJUDICE TO ABOVE, THE LD. CIT(A) HAS ERR ED IN STATING THAT INTEREST PAID ON MEMBER'S SECURITY AMOUNT ING TO RS.11,80,000/- SHOULD BE CONSIDERED FOR THE PURPOSE OF THE DISALLOWANCE UNDER SECTION 14A READ WITH SUB RULE(2)OFRULE8DONTHECONTENTION THAT THE APPELLANT H AD MIXED FUNDS AND IT COULD NOT BE ASCERTAINED THAT WHICH FUNDS HAVE BEEN USED FOR WHICH PURPOSE. THE FI NDING OF THE CIT (A) IN THIS REGARD IS NOT SUSTAINABLE. 5. DURING THE COURSE OF HEARING BEFORE US, LEARNED COUNSEL FOR THE ASSESSEE CHALLENGED THE DISALLOWANC E MADE ON SEVERAL COUNTS AS UNDER: 1) ABSENCE OF SATISFACTION RECORDED BY THE ASSESSIN G OFFICER OF THE INCORRECTNESS OF THE CLAIM OF THE 3 ASSESSEE THAT NO EXPENDITURE WAS INCURRED VIS--VIS THESE INVESTMENTS. 2) THAT IN ANY CASE THE ENTIRE INVESTMENTS WERE MADE OUT OF OWN INTEREST FREE FUNDS OF THE ASSESSEE AND NO INTEREST BEARING FUNDS HAS BEEN USED. THEREFORE NO DISALLOWANCE ON INTEREST EXPENDITURE COULD BE MADE. 3) WITH PREJUDICE TO THE ABOVE, THE INTEREST PAID O N SECURITIES RECEIVED FROM MEMBERS COULD NOT HAVE BEE N CONSIDERED FOR THE PURPOSE OF DISALLOWANCE SINCE TH E SECURITIES WERE REQUIRED TO BE AND WERE ALSO KEPT I N FDRS AND THUS NO QUESTION AROSE OF HAVING USED THEM FOR THE PURPOSE OF THE IMPUGNED INVESTMENT. 4) THAT THE SAID INVESTMENTS WERE STRATEGIC INVESTMENTS AND, THEREFORE NO DISALLOWANCE U/S 14A WAS WARRANTED. 6. WE SHALL BE TAKING UP EACH CONTENTION OF THE ASS ESSEE ONE BY ONE. COMING TO THE FIRST CONTENTION THAT TH E DISALLOWANCE U/S 14A COULD NOT HAVE BEEN MADE IN TH E ABSENCE OF ANY SATISFACTION RECORDED BY THE ASSESSI NG OFFICER VIS--VIS THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAD BEEN INCURRED VIS- -VIS THE IMPUGNED INVESTMENT, LD. COUNSEL FOR THE ASSES SEE DREW OUR ATTENTION FIRST TO THE CLAIM MADE BY THE A SSESSEE BEFORE THE ASSESSING OFFICER THAT NO EXPENDITURE HAD BEEN 4 INCURRED BY THE ASSESSEE VIS--VIS THESE INVESTMENT S, REPRODUCED AT PAGE 6 OF THE ORDER AS UNDER: IN VIEW OF THE ABOVE, IT IS SUBMITTED THAT, NO DIRECT EXPENDITURE WAS INCURRED BY THE ASSESSEE AND NO BORROWED FUNDS WAS UTILIZED FOR THE PURPOSE OF INVESTING IN EQUITY SHARES. AS A RESULT , NO EXPENDITURE ON ACCOUNT OF INTEREST PAYMENT CAN BE SAID TO HAVE BEEN INCURRED FOR THE PURPOSE OF EARNING TAX FREE INCOME. THE ENTIRE INVESTMENTS, THE INCOME FROM WHICH WOULD NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, HAVE BEEN MADE OUT OF INTERNAL ACCRUAL WITHOUT HAVING INCURRED ANY INTEREST EXPENDITURE DURING THE YEAR. HOWEVER, THE AMOUNT OF DIVIDEND RECEIVED IS DIRECTLY CREDITED TO THE ACCOUNT OF COMPANY THROUGH E-BANKING. THEREFORE, NO DIRECT OR INDIRECT EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE AND THEREFORE NO DISALLOWANCE UNDER SECTION 14A APPLICABLE TO THE COMPANY. IN VIEW THEREOF, THE APPLICABILITY OF RULE 8D DOES NOT ARISE IN THE CASE OF THE ASSESSEE. FURTHER, HON'BLE SUPREME COURT IN CASE OF CIT VS. WALFORT SHARE & STOCK BROKERS P. LTD. (2010) 192 TAXMANN 211 HELD THAT FOR THE PURPOSE OF INVOKING THE PROVISION OF SECTION 14A OF THE ACT, THERE HAS TO BE A PROXIMATE CAUSE OF THE EXPENDITURE WITH THE EXEMPT INCOME. IN THE ABSENCE OF THE PROXIMATE CAUSE FOR DISALLOWANCE, THE PROVISION OF SECTION 14A CANNOT BE INVOKED. IN THE CASE OF HIGH COURT OF PUNJAB & HARYANA (COMMISSIONER OF INCOME TAX, JALANDHAR) VS DEEPAK MITTAL, (SECTION 14A OF THE INCOME TAX ACT, 1961, READ WITH RULE 8D OF THE INCOME TAX RULES, 1962-EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME [DIVIDEND INCOME]- ASSESSMENT YEAR 2007-08) ASSESSEE HAD EARNED DIVIDEND INCOME AND CONSISTENT CASE OF ASSESSEE WAS THAT HE HAD NOT MADE ANY EXPENDITURE ON EARNING SUCH INCOME. HOWEVER. ASSESSMENT PROCEEDINGS DISAGREEING WITH THE PLEA PF ASSESSEE HELD THAT INTEREST BEARING FUNDS HAD BEEN INVESTED FOR GENERATING DIVIDEND INCOME AND HAD MADE AN ADDITION BY MAKING DISALLOWANCE UNDER SECTION 14A, READ WITH RULE 8D. WHETHER SINCE ASSESSING OFFICER INSTEAD OF PROCEEDING TO COLLECT MATERIAL O R EVIDENCE TO DETERMINE EXPENDITURE INCURRED B Y 5 ASSESSEE, RELIED UPON RULE 8D AND APPLIED IT AS A FORMULA, DISALLOWANCE WAS TO BE DELETED. HELD, YES [PARA 9] (IN FAVOUR OF ASSESSEE).S 7. THEREAFTER OUR ATTENTION WAS DRAWN TO THE ORDER OF THE ASSESSING OFFICER WHERE PURPORTEDLY SATISFACTION OF THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE WAS RECO RDED BY THE ASSESSING OFFICER AT PARA 2.4 AS UNDER: 2.4 IN VIEW OF THE OBSERVATIONS ABOVE AND HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE I AM NOT SATISFIED WITH TH E CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL IN COME UNDER THE ACT FOR THE PREVIOUS YEAR. THE METHOD ADOPTED B Y ASSESSEE CANNOT BE ACCEPTED BECAUSE IT HAS BEEN WORKED UPON ADMINISTRATIVE EXPENSES ONLY ON PROPORTIONATE BASIS AND A PART OF INTEREST PAID ONLY. HOWEVER, THE EXPRESSION OF 'EX PENDITURE INCURRED' IN SECTION 14A OF THE I.T. ACT REFERS TO OTHER EXPENDITURES ALSO INCLUDING RENT, TAXES, SALARIES INTER EST ETC. WHICH CANNOT BE APPORTIONED UNLESS RULE 8D IS APPLIE D. HENCE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOM E IS REQUIRED TO BE DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE 2 OF RULE 8D OF THE I.T. RULES. 8. LD. COUNSEL FOR THE ASSESSEE POINTED OUT THAT TH E ASSESSING OFFICER HAD SUMMARILY DISMISSED THE CLAIM OF THE ASSESSEE AND NO OBJECTIVE SATISFACTION WAS RECORDED HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE THAT EXPENSE S IN RELATION TO THE IMPUGNED INVESTMENTS HAD BEEN INCUR RED BY THE ASSESSEE. LD COUNSEL FOR THE ASSESSEE POINTED THAT THE ASSESSING OFFICER HAD MERELY HARPED ON THE METHOD A DOPTED BY THE ASSESSEE BEING NOT ACCEPTABLE SINCE IT WORKE D ONLY ON THE ADMINISTRATIVE EXPENSES AND PART OF INTEREST ONLY AND FURTHER REFERRED THAT OTHER EXPENSES ALSO HAD T O BE INCLUDED. LD COUNSEL FOR THE ASSESSEE POINTED TH AT FIRSTLY 6 NO WORKING OR CALCULATION WAS SUBMITTED TO THE AO A T ALL AND THEREFORE THE OBSERVATIONS OF THE AO IN THIS RE GARD WERE WITHOUT ANY BASIS. FURTHER LD.COUNSEL STATED THAT C LEARLY NOWHERE IN THE SATISFACTION RECORDED, THE ASSESSING OFFICER HAS MENTIONED AS TO WHY THE CLAIM OF THE ASSESSEE T HAT SINCE NO BORROWED FUNDS WERE USED FOR MAKING THE INVESTMENTS NO INTEREST EXPENDITURE WAS TO BE DISAL LOWED OR SINCE THE DIVIDEND RECEIVED IS DIRECTLY CREDITED TO THE ACCOUNT OF THE ASSESSEE NO EXPENSES ARE INCURRED FO R THE PURPOSE OF EARNING DIVIDEND INCOME, WAS INCORRECT. LD COUNSEL FOR THE ASSESSEE POINTED OUT THAT NO REFERE NCE TO THE EXPENDITURE DEBITED IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE HAS BEEN MADE BY THE AO POINTING OUT THAT SUCH EXPENDITURE COULD BE SAID TO HAVE BEEN INCURRED FOR THE PURPOSE OF EARNING EXEMPT INCOME FROM THE IMPUGNED INVESTMENT FOR OBJECTIVE REASONS. LD. COUNSEL FOR THE ASSESSEE THEREFORE STATED THAT THE SATISFACTION REC ORDED BY THE ASSESSING OFFICER COULD NOT SAID TO BE AN OBJEC TIVE SATISFACTION. LD COUNSEL FOR THE ASSESSEE RELIED O N NUMBER OF JUDICIAL DECISIONS IN THIS REGARD AS UNDER: 1) CIT VS. KAPSONS ASSOCIATES,(2016) 381 ITR 204(P&H) 2) GANESHAY OVERSEAS INDUSTRIES LTD. VS. DCIT, ITA NO.186/CHD/2015 DATED 19.10.2015 3) DCIT VS. LOIL HEALTHFOOD, ITA NO.235/CHD/2015 DATED 09.09.2015 7 9. THE LD DR, ON THE OTHER HAND, STATED THAT DUE SATISFACTION HAD BEEN RECORDED BY THE AO AS POINTED OUT BY THE LD.COUNSEL FOR THE ASSESSEE AT PARA 2.4 OF THE ASSESSMENT ORDER AND THE CASE LAWS RELIED UPON BY T HE ASSESSEE WERE NOT APPLICABLE IN THE FACTS OF THE PR ESENT CASE. 10. WE HAVE HEARD BOTH THE PARTIES VIS--VIS THE CONTENTION RELATING TO SATISFACTION OF THE AO WITH REGARD TO THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE THAT NO EXPENSES WERE INCURRED FOR THE PURPOSE OF MAKING TH E IMPUGNED INVESTMENTS. THERE IS NO DISPUTE VIS-A-VI S THE PROPOSITION OF LAW THAT BEFORE MAKING DISALLOWANCE U/S 14A THE ASSESSING OFFICER HAS TO FIRST OF ALL RECORD TH AT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE HE IS NOT SA TISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT. THE HO NBLE PUNJAB & HARYANA HIGH COURT IN A LATEST DECISION IN PUNJAB TRACTORS LTD. VS. COMMISSIONER OF INCOME TAX REPORT ED IN 78 TAXMANN.COM 65 WHILE ANSWERING THE QUESTION FRAM ED BEFORE IT WHETHER IT IS NECESSARY FOR THE ASSESSING OFFICER TO RECORD HIS REASONS FOR NOT BEING SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, ANSWERED IN THE AFFIRMATIVE STATING THAT THE MATTER STOOD CONCLUDE D IN VIEW OF THE JUDGEMENT OF THE JURISDICTIONAL HIGH COURT IN THE 8 CASE OF ABHISHEK INDUSTRIES. THE HONBLE HIGH COURT HELD AS UNDER: THE NEXT QUESTION IS AS TO WHETHER IT IS NECESSARY FO R THE ASSESSING OFFICER TO RECORD HIS REASONS FOR NOT BEI NG SATISFIED WITH THE CORRECTNESS OF THE ASSESSEE'S CLAIM. 19. IT IS MANDATORY FOR THE ASSESSING OFFICER TO REC ORD THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE AS SESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME W HICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT OR T HAT HE IS NOT SATISFIED WITH THE ASSESSEE'S CLAIM THAT NO EXPENDITU RE HAD BEEN INCURRED BY HIM IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. 20. THE MATTER STANDS CONCLUDED BY A JUDGMENT OF THIS COURT DATED 27.01.2015 INCOMMISSIONER OF INCOME TAX-1, LUDHIA NA V. M/S ABHISHEK INDUSTRIES LTD. LUDHIANA, ITA NO . 320 OF 2013, WHERE THE DIVISION BENCH HELD:- 'SECTION 14A OF THE ACT REQUIRES THE ASSESSING OFFICER TO RECORD SATISFACTION THAT INTEREST BEARING FUNDS HAVE BEEN USED TO EARN TAX FREE INCOME. THE SATISFACTION TO BE RECORDE D MUST BE BASED UPON CREDIBLE AND RELEVANT EVIDENCE......................................' 21. THE JUDGMENT IN MAXOPP INVESTMENT LTD. (SUPRA) ALSO SUPPORTS THIS VIEW NAMELY THAT THE ASSESSING OFFICE R MUST RECORD REASONS FOR NOT BEING SATISFIED WITH THE COR RECTNESS OF THE ASSESSEE'S CONTENTIONS WITH REGARD TO THE ASPECT S MENTIONED IN SUB SECTIONS (2) AND (3) OF SECTION 14A . IT IS TRUE THAT THE DELHI HIGH COURT MERELY STATES THAT SUCH RE JECTION MUST BE FOR DISCLOSED COGENT REASONS. THE DISCLOSURE, HOWEVER, CAN ONLY BE IN WRITING. IT CAN 15 OF 32HARDLY BE SUGGESTED THAT THE DISCLOSURE REMAINS IN THE ASSESSI NG OFFICER'S MIND. THE ASSESSEE IS ENTITLED TO TEST THE B ASIS OF THE REJECTION OF HIS CONTENTIONS. THIS CAN BE DONE ONLY I F THE ASSESSING OFFICER RECORDS HIS REASONS FOR HIS NOT B EING SATISFIED IN WRITING. 11. HAVING SAID SO, WHILE APPLYING THE ABOVE PROPOS ITION TO THE FACTS OF THE PRESENT CASE AS POINTED OUT BEFORE US AND AS IS EVIDENT FROM A PERUSAL OF THE ORDER OF THE AS SESSING OFFICER PLACED BEFORE US WE FIND THAT THE ASSESSEE HAD CONTENDED BEFORE THE ASSESSING OFFICER THAT NO EXPE NSES EITHER IN THE NATURE OF INTEREST OR OTHER HAD BEEN INCURRED 9 BY THE ASSESSEE IN RELATION TO THE SAID INVESTMENT. REASONS FOR CLAIMING SO HAD ALSO BEEN GIVEN BY THE ASSESSEE STATING THAT OWN FUNDS HAD BEEN USED FOR MAKING THE INVESTM ENTS AND SINCE DIVIDEND IS DIRECTLY CREDITED THROUGH E-B ANKING NO OTHER EXPENDITURE IS ALSO INCURRED. THE ASSESSING OFFICER, WE FIND, REJECTED THE CLAIM OF THE ASSESSEE THOUGH PURPORTEDLY ON THE BASIS OF THE BOOKS OF ACCOUNT OF THE ASESSEE BUT NO OBJECTIVE REASONS FOR REJECTING THE SAID CLAIM IS FOUND. THE ASSESSING OFFICER, AS RIGHTLY POINTE D OUT BY THE LD.COUNSEL FOR THE ASSESSEE HAS SIMPLY SUMMARIL Y DISMISSED THE CLAIM OF THE ASSESSEE WITHOUT SPECIFI CALLY DEALING WITH THE CONTENTION OF THE ASESSEE IN THE C ONTEXT OF THE BOOKS OF ACCOUNT OF THE ASSESSEE. THE AO WE FIN D WHILE DISMISSING THE CLAIM OF THE ASSESSEE HAS STATED THA T THE METHOD ADOPTED BY THE ASSESSEE CANNOT BE ACCEPTED, WHICH THE LD.COUNSEL POINTED OUT WAS INCORRECT SINCE NO CALCULATION WAS DONE BY THE ASSESSEE AT ALL. THIS CONTENTION HAS NOT BEEN CONTROVERTED BY THE REVENUE BY POINTING OUT ANY SUCH CALCULATION SUBMITTED BY THE ASSESSEE. THEREFORE, WE HOLD THAT THE ASSESSING OF FICER HAS PROCEEDED TO MAKE THE DISALLOWANCE WITHOUT RECORDIN G ANY SATISFACTION ABOUT THE INCORRECTNESS OF THE CLAIM O F THE ASSESSEE AND THUS THE DISALLOWANCE SO MADE IS LIABL E TO BE QUASHED FOR THIS REASONS ALONE IN VIEW OF THE JUDIC IAL PRECEDENT IN THIS REGARD CITED ABOVE. 12. THE NEXT CONTENTION RAISED BY THE LD. COUNSEL F OR THE ASSESSEE WAS THAT NO INTEREST BEARING FUNDS WERE UT ILIZED BY 10 THE ASSESSED FOR MAKING INVESTMENTS IN THE EQUITY S HARES OF M/S LSE SECURITIES LIMITED AND, THEREFORE, NO DISAL LOWANCE ON ACCOUNT OF INTEREST WAS CALLED FOR. IN THIS REG ARD, LD COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE DETAIL FILED BEFORE THE CIT (APPEALS) REFLECTING THE FACT THAT NO BORROWED FUNDS WERE UTILIZED WHENEVER INVESTMENTS I N SHARES OF MN/S LSE SECURITIES LTD. WAS MADE IN DIFF ERENT YEARS, REPRODUCED AT PAGE 10 OF THE CIT (APPEALS) O RDER. LD COUNSEL FOR THE ASSESSEE POINTED OUT THAT THE AFORE SAID FACT WAS SUBSTANTIATED FROM THE BALANCE SHEET AND PROFIT AND LOSS ACCOUNT FOR THE ABOVE MENTIONED YEARS WHICH WA S ALSO FILED BEFORE THE CIT (APPEALS). LD COUNSEL FURTHER STATED THAT IT WAS ALSO DEMONSTRATED BEFORE THE CIT (APPEA LS) THAT IN ALL THE RELEVANT YEARS WHEN THE INVESTMENT WAS M ADE THE ASSESSEE HAD SUFFICIENT OWN FUNDS FOR MAKING THE INVESTMENTS. ATTENTION WAS DRAWN TO THE DETAIL TAB ULATING THE SAID FACTS REPRODUCED AT PARA 11 OF THE CIT (AP PEALS) ORDER AS UNDER: FINANCIAL YEAR NO. OF SHARES PURCHASED/ (SOLD) BORROWED FUNDS AS ON 1 ST OF APRIL BORROWED FUNDS AS ON 31 ST OF MARCH REMARKS 1999-00 27,01,000 2004359 NIL THIS WAS A WORKING CAPITAL LOAN THAT WAS FULLY REPAID ON 13.04.1999 2000-01 13,00,000 NIL NIL NO LOAN WAS OUTSTANDING DURING THE 11 YEAR 2001-02 (1421,300) NIL 92,30,450 THIS WAS SECURED LOAN FROM CENTURION BANK 2004-05 5,10,000 NIL NIL NO LOAN WAS OUTSTANDING DURING THE YEAR 2009-10 2,41,375 NIL NIL NO LOAN WAS OUTSTANDING DURING THE YEAR YEAR AMOUNT OF INVESTMENT CASH FROM OPERATIONS OWN FUNDS IN THE BEGINNING OF THE YEAR 1999- 00 2.70,10,000/- 3,64,78,027 12,70,60,836 2000- 01 . 2,16,25,000/- 41608113 13,87,44,036 2004- 05 5I,00,000/- 91,71,215 15,38,35,753 2009- 10 36,20,625/- 1,08,53,140 17,58,76,643 13. LD COUNSEL STATED THAT IT WAS CLEARLY EVIDENT F ROM THE ABOVE THAT NO BORROWED FUNDS HAD BEEN USED FOR MAKI NG THE INVESTMENTS AND THAT THE SAME HAD BEEN MADE ENTIREL Y OUT OF OWN FUNDS OF THE ASSESSEE AND, THEREFORE, NO DISALLOWANCE OF INTEREST EXPENDITURE COULD BE MADE U/S 14A. RELIANCE WAS PLACED ON A NUMBER OF DECISIONS OF HIGH COURTS IN THIS REGARD: 1) CIT VS. HDFC BANK LTD.(2014) 366 ITR 505(BOM) 2) CIT VS. RELIANCE UTILITIES & POWER LTD.(2009) 31 3 ITR 340(BOM) 12 3) CIT VS. MAX INDIA LTD., ITA NO.210/CHD/2013 DT.08-03-2017 14. LD. DR ON THE OTHER HAND RELIED UPON THE ORDER THE CIT (APPEALS) STATING THAT IN VIEW OF AVAILABILITY OF M IXED FUNDS THE DISALLOWANCE WAS WARRANTED. 15. HAVING HEARD THE CONTENTIONS OF BOTH THE PARTIE S, WE FIND MERIT IN THE CONTENTIONS OF THE LD COUNSEL FOR THE ASSESSEE. WE FIND THAT THE ASSESSEE HAD DULY DEMON STRATED THE FACT THAT THE INVESTMENTS MADE IN VARIOUS YEARS WAS NOT OUT OF BORROWED FUNDS AND HAVING DEMONSTRATED THE AVAILABILITY OF ENOUGH OWN FUNDS THE ASSESSEE HAD A LSO DULY DEMONSTRATED THAT THERE WERE SUFFICIENT OWN INTERES T FREE FUNDS FOR MAKING THE IMPUGNED INVESTMENTS. THEREFO RE, THERE WAS NO REASON FOR MAKING ANY DISALLOWANCE OF INTEREST. THE RELIANCE PLACED BY THE LD COUNSEL FO R THE ASSESSEE ON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF MAX INDIA LTD. (SUPRA) IS APT WHEREIN I T HAS BEEN HELD THAT IF AN ASSESSEE ESTABLISHES THAT ITS INTER EST FREE FUNDS WERE EQUAL TO OR MORE THAN THE INTEREST BEARI NG FUNDS IT WOULD BE OPEN TO IT TO CONTEND THAT PRESUMPTION ARISES THAT THE EXPENDITURE FOR EARNING INTEREST INCOME WA S INCURRED FROM OUT OF ITS INTEREST FREE FUNDS. THE R ELEVANT FINDINGS OF THE HONBLE HIGH COURT ARE AS UNDER: 9. THIS PRESUMPTION IS UNFOUNDED. MERELY BECAUSE TH E INTEREST FREE FUNDS WITH THE ASSESSEE HAVE DECREASED DURING ANY PERIOD, IT DOES NOT FOLLOW THAT THE FUNDS BORROWED ON I NTEREST WERE UTILIZED FOR THE PURPOSE OF INVESTING IN ASSET S YIELDING EXEMPT INCOME. IF EVEN AFTER THE DECREASE THE ASSESS EE HAS INTEREST FREE FUNDS SUFFICIENT TO MAKE THE INVESTME NT IN ASSETS YIELDING THE EXEMPT INCOME, THE PRESUMPTION THAT IT WA S SUCH FUNDS THAT WERE UTILIZED FOR THE SAID INVESTMENT RE MAINS. THERE IS NO REASON FOR IT NOT TO. THE BASIS OF THE PR ESUMPTION AS WE WILL ELABORATE LATER IS THAT AN ASSESSEE WOULD IN VEST ITS 13 FUNDS TO ITS ADVANTAGE. IT GAINS NOTHING BY INVESTING INTEREST FREE FUNDS TOWARDS OTHER ASSETS MERELY ON ACCOUNT OF THE INTEREST FREE FUNDS HAVING DECREASED. IN THAT EVENT SO LONG AS EVEN AFTER THE DECREASE THEREOF THERE ARE SUFFICIEN T INTEREST FREE FUNDS THE PRESUMPTION THAT THEY WOULD BE FIRST USED TO INVEST IN ASSETS YIELDING EXEMPT INCOME APPLIES WITH E QUAL FORCE.' 16. IN VIEW OF THE ABOVE WE HOLD THAT IN ANY CASE NO DISALLOWANCE OF INTEREST EXPENDITURE U/S 14A WAS LI ABLE IN THE PRESENT CASE AND THE SAME NEEDS TO BE DELETED. 17. THE NEXT CONTENTION RAISED BY THE LD COUNSEL FO R THE ASSESSEE WAS THAT THE ENTIRE INVESTMENTS WERE STRAT EGIC INVESTMENTS AND THE SOLE OBJECTIVE OF THE INVESTMEN T WAS NOT TO EARN DIVIDEND OR CAPITAL GAIN ON SALE OF SUC H SHARE BUT TO PROVIDE TRADING PLATFORM TO THE GENERAL PUBL IC. LD COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE DETAILED SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES REPRO DUCED AT PAGE NOS.17 AND 18 OF THE CIT(APPEALS) AS UNDER: AFTER THE SCAM IN STOCK MARKET IN YEAR 1994 AND FOR MATION OF REGULATORY I.E. SECURITIES AND EXCHANGE BOARD OF IN DIA, THE REGULATORY DECIDED TO DISCOURAGE THE FUNCTIONING OF REGIONAL S TOCK EXCHANGES IN INDIA AND PROMOTED A NATIONAL LEVEL OF STOCK EXCHAN GE I.E. NATIONAL STOCK EXCHANGE. LATER ON, IT WAS FELT BY THE REGULATORY THAT IT WAS DIFFICULT TO CONTROL AND REGULATE THE FUNCTIONS. THEN THE QUESTION AROSE AS TO WHAT THE MEMBERS OF REGIONAL STOCK EXCHANGES WOULD DO IN CAS E OF CLOSURE OF STOCK EXCHANGES AND HOW TO PROVIDE A TRADING PLATFO RM TO THE INVESTING PUBLIC IN THE REMOTE AREAS. TO SOLVE THIS ISSUE, A MEETING OF A GROUP ON REVIVA L OF SMALL STOCK EXCHANGES WAS HELD ON 8T K SEPTEMBER 1999, TO DISCUSS THE SUGGESTIONS/ REVIVAL PLANS FORWARDED BY SMALL EXCHANGES FOR THEI R REVIVAL. THE GROUP CONSIDERED THE SUGGESTION/ REVIVAL PLANS SUBMITTED BY SMALL EXCHANGES AND RECOMMENDED THAT SMALL EXCHANGES MAY BE PERMITT ED TO PROMOTE A SUBSIDIARY WHICH CAN ACQUIRE MEMBERSHIP RIGHTS OF L ARGER STOCK EXCHANGES VIZ. NSE/BSE/CSEADSE' OR ANY OTHER EXCHAN GE SUBJECT TO USUAL CONDITIONS APPLICABLE TO THE OTHER MEMBERS. T HEREAFTER, A CIRCULAR NO. SMD-IL/POLICY/CIR-37/99 DATED 26.11.1999 WAS PA SSED, WHEREIN IT WAS HELD THAT THE SMALL STOCK EXCHANGES MAY PROMOTE / FLOAT A SUBSIDIARY COMPANY TO ACQUIRE MEMBERSHIP RIGHTS OF OTHER STOCK EXCHANGES SUBJECT TO 14 CERTAIN CONDITIONS. COPY OF THE SAID CIRCULAR IS EN CLOSED ON PAGES 76 OF THE PAPER BOOK. OUT OF THE SAID CONDITIONS, ONE CONDITION WAS THAT THE SUBSIDIARY COMPANY SHALL BE 100% OWNED BY THE STOCK EXCHANGE P ROMOTING/ FLOATING SUCH A SUBSIDIARY/COMPANY. FURTHER, A CONSEQUENTIAL AMENDMENT WAS MADE UNDER R ULE 17C OF THE INCOME TAX RULES TO INCLUDE THE SAID KIND OF IN VESTMENTS IN THE FORMS OR MODE OF INVESTMENT OR DEPOSIT BY A CHARITABLE OR RE LIGIOUS TRUST OR INSTITUTION, AS SPECIFIED IN THE SAID RULE, TO CLAI M EXEMPTION UNDER SECTION 11 OF THE ACT. THE RELEVANT CLAUSE OF RULE 17C IS M ENTIONED BELOW: RULE 17C: THE FORMS AND MODES OF INVESTMENT OR DEPO SITS UNDER CLAUSE (XII) OF SUB-SECTION (5) OF SECTION 11 SHALL BE THE FOLLOWING, NAMELY: A. WHICH IS ENGAGED IN DEALING WITH SECURITIES O R MAINLY ASSOCIATED WITH THE SECURITIES MARKET; B, WHOSE MAIN OBJECT IS TO ACQUIRE THE MEMBERSHIP O F ANOTHER RECOGNISED STOCK EXCHANGE FOR THE SOLE PURPOSE OF F ACILITATING THE MEMBERS OF THE INVESTOR TO TRADE ON THE SAID STOCK EXCHANGE THROUGH THE INVESTEE IN ACCORDANCE WITH THE DIRECTIONS OR GUIDE LINES ISSUED UNDER THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 199 2 (15 OF 1992) BY THE SECURITIES AND EXCHANGE BOARD OF INDIA ESTABLISHED UNDER SECTION 3 OF THAT ACT; AND C. IN WHICH AT LEAST FIFTY-ONE PER CENT OF EQUITY S HARES ARE HELD BY THE INVESTOR AND THE BALANCE EQUITY SHARES ARE HELD BY MEMBERS OF SUCH INVESTOR; ON THE BASIS OF THE ABOVE LEGAL AND FACTUAL SUBMISS IONS, IT IS SUBMITTED BEFORE YOUR GOODSELF THAT THE INVESTMENT MADE BY THE APPELLANT IN THE EQUITY SHARES OF ITS SUBSIDIARY CO MPANY I.E. LSE SECURITIES LTD WAS NOT MADE FOR THE PURPOSE OF EARN ING DIVIDEND OR PROFIT ON SALE OF SUCH SHARES BUT FOR THE PURPOSE OF CREAT ING A SUBSIDIARY COMPANY TO PROVIDE A TRADING PLATFORM TO THE INVEST ING PUBLIC IN THE REMOTE AREAS I.E. THE SAID INVESTMENT WAS MADE TO P ROMOTE THE OBJECTIVE OF PROMOTION OF STOCK AND SHARES.. THEREFORE, THE P ROVISIONS OF SECTION 14A ARE NOT APPLICABLE IN CASE OF THE APPELLANT. IN THIS REGARD, THE APPELLANT PLACES RELIANCE ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS: 18. IT WAS THEREFORE CONTENDED THAT THE SAID INVEST MENT BEING STRATEGIC IN NATURE NO DISALLOWANCE U/S 14A W AS WARRANTED. RELIANCE WAS PLACED ON THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF CIT VS. ORIENTAL STRUCTUR AL PVT. LTD. IN ITA NO.605/2012 DATED 15.1.2013. 19. LD.DR, ON THE OTHER HAND, RELIED UPON THE ORDER S OF THE LOWER AUTHORITIES AND STATED THAT NO DIFFERENTI ATION ON 15 ACCOUNT OF STRATEGIC INVESTMENTS OR OTHERWISE WAS PERMISSIBLE FOR THE PURPOSE OF APPLICABILITY OF SEC TION 14A. 20. HAVING HEARD BOTH THE PARTIES, WE AGREE WITH TH E LD COUNSEL FOR THE ASSESSEE. UNDOUBTEDLY AND UNDISPUT EDLY, THE INVESTMENT MADE IN SHARE OF LSE SECURITIES LTD. WAS FOR THE PURPOSE OF FACILITATING AND PROVIDING A TRADIN G PLATFORM TO THE GENERAL PUBLIC BY CREATING A SUBSIDIARY COMP ANY. HAVING SAID SO, THE COMMERCIAL EXPEDIENCY OF MAKING THE IMPUGNED INVESTMENT STANDS ESTABLISHED AND THE INTE REST EXPENDITURE INCURRED THEREON CANNOT THEREFORE BE HE LD TO BE FOR ANY NON BUSINESS PURPOSE SO AS TO WARRANT DISAL LOWANCE OF THE SAME U/S 14A OF THE ACT. RELIANCE PLACED BY LD. COUNSEL FOR THE ASSESSEE ON THE DECISION OF THE DEL HI HIGH COURT IN THE CASE OF ORIENTAL STRUCTURAL ENGINEERS PVT. IS APT WHEREIN IT HAS BEEN CATEGORICALLY HELD THAT THE INVESTMENT BEING ATTRIBUTABLE TO COMMERCIAL EXPEDIE NCE, EXPENSES INCURRED IN RELATION TO THE SAME CANNOT BE TERMED TO HAVE BEEN INCURRED FOR EARNING EXEMPT INCOME. W E, THEREFORE, HOLD THAT SINCE THE INVESTMENTS WERE STR ATEGIC INVESTMENTS NO DISALLOWANCE COULD BE MADE U/S 14A O F THE ACT. 21. IN VIEW OF THE ABOVE, WE, THEREFORE, SET ASIDE THE ORDER OF THE LD. CIT(APPEALS) AND DIRECT THAT THE DISALLO WANCE MADE U/S 14A BE DELETED. GROUND OF APPEAL NO.1 RAI SED BY THE ASSESSEE, THEREFORE, STANDS ALLOWED. 22. IN GROUND NO.2 THE ASSESSEE HAS CONTESTED THE INCLUSION OF FUNDS PERTAINING TO MEMBERS SECURITY AMOUNTING TO RS.11,80,000/- RECEIVED BY THE ASSESSE E FOR 16 THE PURPOSE OF CALCULATING THE INTEREST EXPENSES DISALLOWABLE U/S 14A. SINCE IN GROUND NO.1 WE HAVE DELETED THE ENTIRE DISALLOWANCE MADE U/S 14A INCLUD ING THE INTEREST COMPONENT, THE SAID GROUND BECOMES INFRUCT UOUS AND NEED NOT BE ADJUDICATED UPON. 23. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS, T HEREFORE, ALLOWED IN ABOVE TERMS. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (SANJAY GARG) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 17 TH OCTOBER, 2017 *RATI* COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A)S 4. THE CIT 5. THE DR ASSISTANT REGISTRAR, ITAT, CHANDIGARH