Chettinad Builders Private Limited, CHENNAI V. ACIT, CHENNAI

ITA 1544/CHNY/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7675 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2016
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 20-01-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 03-07-2015
• Court: TRIBUNAL
• Department Lawyers: A B KOLI
• Assessee Lawyers: K B MURALIDHARAN
• Keywords: Depreciation; Additional depreciation; Earning of tax free income; Commercial expediency
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL B BENCH, CHENNAI , . , BEFORE SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO. 1645 /MDS/2015 / ASSESSMENT YEAR : 20 1 0 - 1 1 THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1(2), CHENNAI 600 034. VS. M/S. CHETTINAD BUILDERS PVT. LTD., 5 TH FLOOR, RANI SEETHAI HALL, 603, ANNA SALAI, CHENNAI 600 006. [PAN: AACCC4133B] ( / APPELLANT ) ( / RESPONDENT ) ./ I.T.A.NO. 1544/MDS/2015 / ASSESSMENT YEAR :2010 - 11 M/S. CHETTINAD BUILDERS PVT. LTD., 5 TH FLOOR, RANI SEETHAI HALL, 603, ANNA SALAI, CHE NNAI 600 006. VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1(2), [FORMERLY COMPANY CIRCLE 1(3)] CHENNAI 600 034. ( / APPELLANT ) ( / RESPONDENT ) DEPARTMENT BY : SHRI A. B. KOLI, JCIT ASSESSEE BY : SHRI K.B. MUR ALIDHARAN, C.A. / DATE OF HEARING : 20 . 01 .201 6 / DATE OF P RONOUNCEMENT : 31 .03 .201 6 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : THE CROSS APPEAL S FILED BY BOTH THE REVENUE AS WELL AS ASSESSEE IS D IRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) I.T.A. NO S . 1645 & 1544 /M/ 15 2 1 , CHENNAI , DATED 25 . 0 3 .20 1 5 RELEVANT TO THE ASSESSMENT YEAR 20 1 0 - 1 1 . THE REVENUE HAS RAISED THE FOLLOWING GROUNDS : 1. THE ORDER OF THE LEARNED CIT(A) IS CONTRARY TO LAW AND FACTS OF THE CASE. 2.1 THE LEARNED CIT(A) ERRED IN DIRECTING THE AO TO WITHDRAW THE DISALLOWANCE MADE UNDER RULE 80(2)(II). 2.2 THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THE HON'BLE DELHI TRIBUNAL'S DECISION IN THE CASE OF CHEMINVEST LTD VS ITO REPORTED IN 121 ITD 318 (2009) WHEREIN IT HAS BEEN HELD SINCE DIVIDEND INCOME IS EXEMPTED FROM TAX BY VIRTUE OF SEC. 10(34), INTEREST PAID ON BORROWED CAPITAL UTILIZED IN PURCHASE OF SHARES, .BEING EXPENDITURE INCURRED' IN RELATION TO DIVIDEND INCOME NOT FORMING P ART OF ASSESSEE'S TOTAL INCOME, CANNOT BE ALLOWED AS A DEDUCTION. FURTHER THE COURT HELD THAT, SUCH DISALLOWANCE U/S.14A CAN BE MADE EVEN IN A YEAR IN WHICH NO EXEMPT INCOME HAS BEEN EARNED OR RECEIVED BY THE ASSESSEE. 3.1 THE LEARNED CIT(A) ERRED IN AL LOWING ADDITIONAL DEPRECIATION ON READY MIX CONCRETE TO THE TUNE OF RS.15,234/ - . 3.2. THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OFF CIT VS. N. BOODHARAJA & CO AND OTHERS REPORTED IN 2045 ITR 412 (SC) . SINCE THE PREPARATION OF READY MIX CONCRETE IS NOTHING BUT A ACTIVITY ALLIED TO CONSTRUCTION ACTIVITY IN LIEU OF THE DECISION OF THE HON'BLE SUPREME COURT, IT IS NOT A MANUFACTURING ACTIVITY. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE T IME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 2. BRIEF FACTS OF THE CASE ARE THAT THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CONSTRUCTION AND PRODUCTION OF READY MIX C ONCRETE (RMC). THE I.T.A. NO S . 1645 & 1544 /M/ 15 3 ASSESSEE HAS FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2010 - 11 ON 15.10.2010 ADMITTING AN INCOME OF .16,96,82,450/ - . THE RETURN FILED BY THE ASSESSEE WAS PROCESSED UNDER SECTION 143(1) OF THE INCOME TAX ACT, 1961 [ ACT IN SHORT] ON 31.3.2012. SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143 (2) OF THE ACT DATED 26.8.2011 WAS ISSUED. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE ASSESSING OFFICER HAS COMPLETED THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT ON 20.3.2013 BY MAKING VARIOUS DISALLOWANCES. 3. ON APPEAL, AFTER CONSIDERING THE DETAILED SUBMISSIONS OF THE A SSESSEE AND BY RELYING VARIOUS CASE LAW, THE LD. CIT(A) HAS DIRECTED THE ASSESSING OFFICER TO WITHDRAW THE DISALLOWANCE MADE UNDER RULE 8D(2)(II) AND SUSTAIN ONLY THE DISALLOWANCE WORKED OUT UNDER LIMB (III) OF RULE 8D SINCE LIMB(III) IS INVOKABLE AS INCUR RING OF CERTAIN EXPENDITURE IS NOT RULED OUT. 4. ON BEING AGGRIEVED, THE REVENUE IS IN APPEAL WITH REGARD TO THE DIRECTIONS OF THE LD. CIT(A) TO THE ASSESSING OFFICER TO WITHDRAW THE DISALLOWANCE MADE UNDER RULE 8D(2)(II) AND THE ASSESSEE HAS ALSO PREFE RRED AN APPEAL AGAINST SUSTENANCE OF DISALLOWANCE WORKED OUT UNDER LIMB (III) TO RULE 8D(2). 5. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE ASSESSING OFFICER HAS OBSERVED I.T.A. NO S . 1645 & 1544 /M/ 15 4 THAT THE ASSESS EE HAS INVESTED .70,00,00,000/ - IN EQUITY SHARES OF M/S. ALLIED METALS AND MINERALS P LTD (AMM) DURING THE YEAR AND THAT AS ON 31.3.2010 RESERVES & SURPLUS OF THE ASSESSEE WAS .35,88,20,576/ - ONLY AND OBTAINED UNSECURED LOANS OF .71,79,72,152/ - . HE FURT HER OBSERVED THAT THE UNSECURED LOAN WAS INCREASED FROM .31,42,86,058/ - (AS ON 31.3.2009) AND THE ASSESSEE HAS CLAIMED INTEREST EXPENDITURE OF .2,85,70,074/ - ON LOANS. THE ASSESSING OFFICER HAS STATED THAT THE INVESTMENT IN SHARES IS MADE OUT OF BORROWED CAPITAL SINCE THE RESERVES & SURPLUS AVAILABLE WITH THE ASSESSEE WILL NOT BE SUFFICIENT FOR MAKING SUCH HUGE INVESTMENTS OF .70.00 CRORES. THE ENTIRE INVESTMENT IS MADE DURING THE SUBJECT ASSESSMENT YEAR AND CORRESPONDINGLY THERE WAS AN INCREASE IN UNSEC URED LOANS AS WELL. THEREFORE, THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE WITH RESPECT TO BORROWED AMOUNT APPEARS TO BE AN EXPENSE INCURRED IN RESPECT OF EARNING INCOME FROM THE INVESTMENT OF SHARES. IT WAS FURTHER STATED THAT THE ASSESSEE HAS INCUR RED CERTAIN ADMINISTRATIVE EXPENSE WHICH IS ALSO RELATABLE TO EARNING OF EXEMPTED INCOME OUT OF INVESTMENT IN SHARES. THE ASSESSING OFFICER HAS OBSERVED THAT THOUGH THE ASSESSEE HAS NOT RECEIVED DIVIDEND INCOME, THERE IS A POSSIBILITY THAT EXEMPTED INCOME MAY ARISE OUT OF INVESTMENT IN EQUITY SHARES. WHEN THE ASSESSING OFFICER ASKED THE ASSESSEE AS TO WHY THE DISALLOWANCE UNDER SECTION 14A OF THE ACT SHOULD NOT BE MADE WITH RESPECT TO EXPENSES CLAIMED IN RELATION TO EXEMPT INCOME, THE ASSESSEE HAS REPLIED T HAT THE INVESTMENT WAS MADE BY THE ASSESSEE OUT I.T.A. NO S . 1645 & 1544 /M/ 15 5 OF INTERNALLY GENERATED FUND AND NOT OUT OF ANY LOAN TAKEN FROM ANY BANKS AND THAT THE ASSESSEE DID NOT INCUR ANY INTEREST EXPENDITURE IN THIS REGARD. THE ASSESSEE HAS FURTHER REFERRED TO THE PROVISIONS OF SE CTION 14A AND RULE 8D(2). THE ASSESSING OFFICER HAS OBSERVED THAT THAT THE RESERVES AND SURPLUS AVAILABLE WITH THE ASSESSEE DO NOT SUPPORT HUGE INVESTMENT OF .70 CRORES AND THERE IS AN INCREASE IN UNSECURED LOANS TO THE EXTENT OF .40,36,86,094/ - COMPARED TO PREVIOUS YEAR AND THE ASSESSEE HAS CLAIMED INTEREST EXPENDITURE OF .2,85,70,074/ - AGAINST IT. THE ASSESSING OFFICER FURTHER STATED THAT IF THE ASSESSEE HAS 'INTERNALLY GENERATED FUNDS' THEN WHY SHOULD IT BORROW CAPITAL FOR THE PURPOSE OF BUSINESS AND T HAT THE ASSESSEE HAS MADE A CHOICE TO INVEST IN EQUITY SHARES, THE INCOME FROM WHICH IS NOT TAXABLE AND ALSO CLAIM INTEREST EXPENDITURE SO THAT TAXABLE INCOME IS REDUCED TO THAT EXTENT. BY RELYING ON THE DECISION OF THE DELHI BENCHES OF THE TRIBUNAL IN THE CASE OF CHEMINVEST LTD. V. ITO [121 ITD 318 (2009)], THE ASSESSING OFFICER HAS CONCLUDED THAT EVEN IF THE INVESTMENT IN SHARES DID NOT YIELD ANY DIVIDEND IN THE YEAR UNDER CONSIDERATION, THE DISALLOWANCE UNDER SECTION 14A OF THE ACT ON THE EXPENDITURE INC URRED FOR EARNING INCOME IS WARRANTED, NOTWITHSTANDING THE FACT THAT NO SUCH INCOME WAS EARNED. ACCORDINGLY, THE ASSESSING OFFICER HAS DISALLOWED A SUM OF .79,34,631/ - UNDER LIMBS (II) & (III) OF RULE 8D(2). I.T.A. NO S . 1645 & 1544 /M/ 15 6 6. BEFORE US, THE LD. DR STRONGLY CONTENDED THAT THE DELHI BENCHES OF THE TRIBUNAL IN THE CASE OF CHEMINVEST LTD V. ITO IN 121 ITD 318 (2009) HAS HELD THAT SINCE DIVIDEND INCOME IS EXEMPTED FROM TAX BY VIRTUE OF S EC TION 10(34) OF THE ACT , THE INTEREST PAID ON BORROWED CAPITAL UTILIZED IN PURCHASE OF SHARES, BEING EXPENDITURE INCURRED IN RELATION TO DIVIDEND INCOME NOT FORMING PART OF ASSESSEE'S TOTAL INCOME, CANNOT BE ALLOWED AS A DEDUCTION. FURTHER THE COURT HELD THAT, SUCH DISALLOWANCE U/S.14A CAN BE MADE EVEN IN A YEAR IN WHICH NO EXEMPT INCOME HA S BEEN EARNED OR RECEIVED BY THE ASSESSEE. 7. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSESSEE HAS STRONGLY CONTENDED THAT WHEN NO INTEREST WAS PAID OR PAYABLE ON THE AMOUNT OF .70.00 CRORES RECEIVED FROM CHETTINAD CORPORATION LTD. AND INVESTED IN A LLIED MINERALS AND METALS P. LTD. FOR PURCHASE OF SHARES, THE QUESTION OF DISALLOWANCE DOES NOT ARISE. HE ALSO STRONGLY SUPPORTED THE ORDER PASSED BY THE LD. CIT(A) ON THIS ISSUE. 8. IT IS NOT DISPUTED THAT THE ASSESSEE RECEIVED . 70.00 CRORES FROM CHET TINAD CORPORATION LTD., A GROUP COMPANY AND INVESTED DIRECTLY ON THE SAME DAY IN ALLIED MINERALS AND METALS P. LTD. FOR PURCHASE OF SHARES. IT IS ALSO NOT DISPUTED THAT THE ASSESSEE HAS PAID ANY INTEREST FOR THE ABOVE AMOUNT OF RS.70.00 CRORES. SO, WE ARE UNABLE TO UNDERSTAND AS TO WHERE THE QUESTION OF DISALLOWANCE OF INTEREST EXPENDITURE ARISES. THE DECISION IN THE I.T.A. NO S . 1645 & 1544 /M/ 15 7 CASE OF CHEMINVEST LTD V. ITO (SUPRA), AS RELIED ON BY THE LD. DR, DOES NOT SPEAK ANYTHING ABOUT THE DISALLOWANCE WHEN NO INTEREST EXPENDITURE WAS INCURRED ON THE AMOUNT RECEIVED FROM ASSESSEE S GROUP CONCERN. FURTHER, A GAINST THE UNSECURED LOANS, WHICH WERE PUT AS WORKING CAPITAL OF THE BUSINESS, THE ASSESSEE HAS CLAIMED INTEREST EXPENDITURE OF .2,85,70,074/ - . IN THE ASSESSMENT ORDER, THE DEPA RTMENT HAS NOT PROVED THAT THE UNSECURED LOANS WERE PUT IN USE FOR THE PURPOSE OF INVESTMENT. WHEREAS, THE LD. CIT(A) HAS OBSERVED FROM THE ACCOUNT COPIES OF THE ASSESSEE COMPANY AND THE BANK ACCOUNT COPY MAINTAINED WITH ICICI BANK THAT .70.00 CRORES RECE IVED FROM CHETTINAD CORPORATION LTD., A GROUP COMPANY WAS INVESTED DIRECTLY WITHIN SAME DAY IN ALLIED MINERALS AND METALS P. LTD. FOR PURCHASE OF SHARES. IN VIEW OF THE ABOVE, THE ONUS CAST UPON THE ASSESSEE HAS BEEN PROVED. 9. T HE COMMERCIAL EXPEDIENCY IS A MATTER ENTIRELY LEFT TO THE JUDGMENT OF THE ASSESSEE AS HELD BY THE HON BLE MADRAS HIGH COURT IN THE CASE OF AMARJOTHI P ICTURES V. CIT 69 ITR 755 AND IN THE CASE OF ALUMINIUM CORPORATION OF INDIA LTD V. CIT 86 ITR 11(SC). IN OUR OPINION, THE BUSINESSM AN IS ONLY THE BEST JUDGE TO DETERMINE THE BUSINESS EXPEDIENCY . THE ASSESSING OFFICER CAN MAKE DISALLOWANCE TOWARDS INTEREST EXPENDITURE, IF ANY, INCURRED BY THE ASSESSEE ON THE BORROWED FUNDS UTILIZED FOR INVESTMENTS PURPOSE , BUT , THE ASSESSING OFFICER CA NNOT QUESTION THE I.T.A. NO S . 1645 & 1544 /M/ 15 8 ASSESSEE AS TO WHY THE ASSESSEE CAN UTILIZE THE INTEREST BEARING BORROWED FUNDS AS WORKING CAPITAL FOR ITS BUSINESS WHEN THE INTEREST FREE INTERNALLY GENERATED FUNDS WERE UTILIZED FOR INVESTMENT IN SHARES. 10. UNDER THE ABOVE FACTS AND CIRCUMSTANCES, WHEN THE AUTHORITIES BELOW HAVE OBSERVED THAT THE ASSESSEE HAS RECEIVED .70.00 LAKHS FROM THE GROUP CONCERN WAS INTEREST FREE AND NO INTEREST WAS DEBITED ON THIS AMOUNT, THE LD. CIT(A) HAS RIGHTLY HELD THAT THE DISALLOWANCE UNDER RULE 8D(2 )(II) CANNOT BE MADE WHEN THERE WAS NO INTEREST BURDEN ON THE AMOUNT BORROWED FROM THE GROUP CONCERN. THUS, THE GROUND RAISED BY THE REVENUE STANDS DISMISSED. 11. THE NEXT GROUND RAISED IN THE APPEAL OF THE REVENUE IS WITH REGARD TO DELETION OF DISALLOW ANCE OF ADDITIONAL DEPRECIATION ON READY MIX CONCRETE [RMC]. THE ASSESSING OFFICER HAS DENIED THE CLAIM OF ADDITIONAL DEPRECIATION ON THE GROUND THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CIVIL CONSTRUCTION AND NOT MANUFACTURING. THE ASSESSEE HAS SUBM ITTED BEFORE THE ASSESSING OFFICER THAT THE ASSESSEE IS ENGAGED IN MANUFACTURING OF READY MIX CONCRETE AND GYPSUM AND STATED THAT ONCE THE RAW MATERIALS MIXED CANNOT BE RECONVERTED INTO THEIR ORIGINAL SHAPE AND CHARACTER AND THE RESULTANT PRODUCT KNOWN AS RMC IS TOTALLY VARIED CHARACTER. THEREFORE, THE PROCESS INVOLVED A MANUFACTURING ACTIVITY AND HENCE THE ASSESSEE HAS CLAIMED ADDITIONAL DEPRECIATION FOR RMC. HOWEVER, THE ASSESSING OFFICER HAS NOT ACCEPTED THE SUBMISSIONS OF THE ASSESSEE AND BY RELYING VAR IOUS I.T.A. NO S . 1645 & 1544 /M/ 15 9 DECISION, HE HELD THAT THE PRODUCTION OF RMC CANNOT BE STATED TO BE THAT OF MANUFACTURING. ON APPEAL, THE LD. CIT(A) ALLOWED THE GROUND RAISED BY THE ASSESSEE BY FOLLOWING THE DECISION FOR EARLIER ASSESSMENT YEAR 2009 - 10 WHERE THE FACTS ARE SIMILAR. 12. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 13. WE HAVE HEARD BOTH SIDES AND PERUSED THE MATERIALS ON RECORD. WITH REGARD TO THE ADDITIONAL DEPRECIATION ON READY MIX CONCRETE [RMC], BY FOLLOWING THE ORDER FOR THE ASSESSMENT YEAR 2009 - 10 IN ASSESSEE S OWN CASE, WHEREIN, THE DECISION OF ITAT DELHI IN THE CASE OF YCF PROJECTS P. LTD. V. DCIT (2010) 134 TTJ 167 HAS BEEN FOLLOWED, THE LD. CIT(A) ALLOWED THE GROUND RAISED BY THE ASSESSEE. HOWEVER, ON AN IDENTICAL ISSUE IN SIMILAR FACTS AND C IRCUMSTANCES, IN THE CASE OF CHERIAN VARKEY CONSTRUCTION CO. (P) LTD. V. ACIT IN I.T.A. NO. 25/COCH/2014 (TM) FOR THE ASSESSMENT YEAR 2006 - 07, THE COCHIN BENCHES OF ITAT HAS HELD AS UNDER: 22. I, THEREFORE, ANSWER THE QUESTION IN THE NEGATIVE AND IN FAVO UR OF THE REVENUE BY HOLDING THAT THE ASSESSEE IS NOT ENTITLED FOR ADDITIONAL DEPRECIATION IN RESPECT OF MACHINERY USED SINCE PRODUCTION OF READY MIX CONCRETE WOULD NOT AMOUNT TO MANUFACTURE OF ARTICLE OR THING. RESPECTFULLY FOLLOWING THE THIRD MEMBER DE CISION OF COCHIN BENCHES OF ITAT (SUPRA), WE REVERSE THE FINDINGS OF THE LD. CIT(A) ON THIS ISSUE AND RESTORE THAT OF THE ASSESSING OFFICER. ACCORDINGLY, THE GROUND RAISED BY THE REVENUE STANDS ALLOWED. I.T.A. NO S . 1645 & 1544 /M/ 15 10 I.T.A. NO. 1544/MDS/2015 14. THE ONLY EFFECTIVE GRO UND RAISED IN THE APPEAL FILED BY THE ASSESSEE IS WITH REGARD TO SUSTENANCE OF DISALLOWANCE MADE UNDER RULE 8D(2)(III). AGAINST THE DISALLOWANCE MADE BY THE ASSESSING OFFICER, THE LD. CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE AS WELL AS VARIOUS DECISIONS, SUSTAINED THE DISALLOWANCE MADE UNDER RULE 8D(2)(III). 15. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS STRONGLY CONTENDED THAT RULE 8D(2) IS NOT APPLICABLE IN ASSESSEE S CASE WHEN NO EXPENDITURE, EITHER DIRECTLY OR INDIRECTLY INCURRED BY THE ASSESSEE DURING THE ASSESSMENT YEAR UNDER CONSIDERATION AND MOREOVER, THE ASSESSEE HAS ALSO NOT EARNED ANY EXEMPT INCOME. 16. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THAT WHETHER THE ASSESSEE HAS EARNED ANY EXEMPT INCOME OR NOT, ONCE THE ASSES SEE HAS INVESTED IN SHARES, THE DIRECT/INDIRECT MANAGEMENT AND ADMINISTRATIVE EXPENSES QUALIFY FOR DISALLOWANCE UNDER SECTION 14A. 17. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF AUTHORITIES BELOW. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HAS NOT RECEIVED DIVIDEND INCOME BUT THERE IS A POSSIBILITY THAT EXEMPTED INCOME MAY ARISE OUT OF INVESTMENT IN EQUITY SHARES. THEREFORE, DURING THE SCRUTINY PROCEEDINGS, THE ASSESSEE WAS I.T.A. NO S . 1645 & 1544 /M/ 15 11 REQUIRED TO EX PLAIN VIDE LETTER DATED 24.01.2013 AS TO WHY DISALLOWANCE UNDER SECTION 14A SHOULD NOT BE MADE WITH RESPECT TO EXPENSES CLAIMED IN RELATION TO EXEMPT INCOME. IN RESPONSE THERETO, THE ASSESSEE HAS FILED ITS DETAIL REPLY AND WITH REGARD TO THIS ISSUE, THE AS SESSEE HAS SUBMITTED THAT SINCE THERE IS NO INCOME REALIZED DURING THE CURRENT YEAR, SECTION 14A IS NOT APPLICABLE IN ITS CASE. THE ABOVE EXPLANATION WAS NOT ACCEPTED BY THE ASSESSING OFFICER, SINCE; THERE IS NO REQUIREMENT FOR EARNING AN INCOME TO CLAIM E XPENDITURE BECAUSE AS PER THE PROVISIONS OF THE ACT, IT IS CLEAR THAT THE RELATION HAS TO BE SEEN BETWEEN THE EXEMPT INCOME AND THE EXPENDITURE INCURRED IN RELATION TO IT AND NOT VICE VERSA. THE ASSESSING OFFICER HAS FURTHER OBSERVED THAT WHAT IS RELEVANT IS TO WORK OUT THE EXPENDITURE IN RELATION TO EARNING EXEMPT INCOME AND NOT TO EXAMINE WHETHER THE EXPENDITURE INCURRED BY THE ASSESSEE HAS RESULTED INTO EXEMPT INCOME OR TAXABLE INCOME. BY RELYING ON THE DECISION IN THE CASE OF CHEMINVEST LTD. V. ITO 121 ITD 318 (DEL), THE ASSESSING OFFICER HAS SATISFIED AND HELD THAT EVEN IF THE INVESTMENT IN SHARES DID NOT YIELD ANY DIVIDEND IN THE YEAR UNDER CONSIDERATION, THE DISALLOWANCE UNDER SECTION 14A OF THE ACT ON THE EXPENDITURE INCURRED FOR EARNING INCOME IS WA RRANTED, NOTWITHSTANDING THE FACT THAT NO SUCH INCOME WAS EARNED. ON APPEAL, THE LD. CIT(A) HAS OBSERVED AS UNDER: (IV) WITH REGARD TO APPLICABILITY OF LIMB ( III) OF RULE 80(2) THE DECISION IN THE CASE OF ESCORTS LTD, 102 TTJ 522, THE ITAT DELHI HAS I.T.A. NO S . 1645 & 1544 /M/ 15 12 CLEAR LY HELD THAT INDIRECT MANAGEMENT AND ADMINISTRATION EXPENSES QUALIFY FOR DISALLOWANCE U/S 14A AND THERE IS NO DECISION SO FAR BY ANY SIMILAR FORUM CONTRADICTING THE ABOVE FINDINGS. SIMILAR VIEW WAS ALSO TAKEN BY ITAT CHENNAI IN THE CASE OF SOUTHERN PETROCH EMICAL INDUSTRIES (93 TTJ 161) AS UNDER: ' ... WHETHER TO INVEST OR NOT TO INVEST AND WHETHER TO RETAIN THE INVESTMENTS OR TO LIQUIDATE THE SAME ARE VERY STRATEGIC DECISIONS WHICH THE MANAGEMENT IS CALLED UPON TO TAKE. THESE ARE MIND - BOGGLING DECISIONS A ND TOP MANAGEMENT IS INVOLVED IN TAKING THESE DECISIONS. THIS DECISION - MAKING PROCESS IS VERY COMPLICATED AND REQUIRES VERY CAREFUL ANALYSIS. MOREOVER, THE ASSESSEE HAD TO KEEP TRACK OF VARIOUS DIVIDEND INCOMES DECLARED BY THE INVESTEE COMPANIES AND ALSO T O KEEP TRACK OF THE DIVIDEND INCOME HAVING BEEN REGULARLY RECEIVED BY THE ASSESSEE. THAT ACTIVITY ITSELF CALLED FOR CONSIDERABLE MANAGEMENT ATTENTION AND COULD NOT BE LEFT TO A JUNIOR CLERK. ', THIS VIEW HAS BEEN FURTHER SUPPORTED BY THE DECISION OF HON' BLE KERALA HIGH COURT IN THE CASE OF SMT. LEENA RAMACHANDRAN (2011) (339 ITR 293) (KERALA HC). 18. IN VIEW OF THE ABOVE FINDINGS AND DECISIONS, THE LD. CIT(A) HAS HELD THAT THE ASSESSING OFFICER HAS RIGHTLY INVOKED THE PROVISIONS OF THE SECTION 14A OF THE ACT AND RULE 8D(2) AND SUSTAINED THE DISALLOWANCE WORKED OUT UNDER LIMB (III) OF RULE 8D(2) SINCE LIMB (III) IS INVOKABLE AS INCURRING OF CERTAIN EXPENDITURE IS NOT RULED OU T. I.T.A. NO S . 1645 & 1544 /M/ 15 13 19. UNDER THE ABOVE FACTS, WE FIND THAT BEFORE INVOKING PROVISIONS OF SECTION 14A R.W. RULE 8D, THE ASSESSING OFFICER ISSUED A LETTER 24.01.2013 TO THE ASSESSEE CALLING EXPLANATION AS TO WHY DISALLOWANCE UNDER SECTION 14A R.W. RULE 8D(2) AND (III) SH OULD NOT BE MADE. THE ASSESSEE HAS ALSO FILED ITS REPLY WITH REGARD TO ALL QUERIES RAISED BY THE ASSESSING OFFICER BUT NOT ACCEPTED AND SATISFIED IN VIEW OF THE DECISION IN THE CASE OF CHEMINVEST LTD. V. ITO AND WORKED OUT THE DISALLOWANCE UNDER RULE 8D(2) (III). THUS, WE FIND THAT THE ASSESSING OFFICER HAS SATISFIED THAT THERE WAS AN ELEMENT OF EXPENSES INVOLVED IN MAKING INVESTMENTS AND THE ASSESSING OFFICER IS DUTY BOUND TO INVOKE THE PROVISIONS OF RULE - 8D. ONCE THE PROVISIONS OF RULE 8D ARE INVOKED, THE ASSESSING OFFICER HAS NO OPTION BUT TO ARRIVE AT THE EXPENSES @ 0.5% AS PER STEP - 3 OF THE FORMULA WHICH IS MANDATORY. IN FACT, THE ASSESSING OFFICER IN HIS ORDER HAS CLEARLY STATED THESE FACTS BEFORE INVOKING THE PROVISIONS OF SECTION 14A R.W.R.8D. HENCE THE ASSESSING OFFICER RIGHTLY INVOKED THE RULE - 8D AND ARRIVED AT THE DISALLOWANCE OF EXPENSES U/S.14A R.W.RULE - 8D. THE LD. CIT(A) CONFIRMED THE DISALLOWANCE BY RELYING VARIOUS DECISIONS AS REPRODUCED HEREINABOVE. WE FIND THAT WHILE MAKING INVESTMENT, THE E LEMENT OF EXPENDITURE INVOLVED IN THE PROCESS CANNOT BE RULED OUT. HOWEVER, T HIS EXPENDITURE MAY NOT BE DIRECT. THUS, THERE IS AN EXPENDITURE INVOLVED IN MAKING THESE INVESTMENTS. THEREFORE, THERE IS A NEED TO IDENTIFY AND APPORTION A REASONABLE AMOUNT OF EXPENSES AS I.T.A. NO S . 1645 & 1544 /M/ 15 14 ATTRIBUTABLE FOR EARNING THE EXEMPTED INCOME. IN THE CASE OF DCIT V. SREI INTERNATIONAL FINANCE LTD. (2006/10 SOT 722 (DELHI) - TRIB.) , THE DELHI BENCHES OF ITAT HAS HELD AS UNDER: IN LIGHT OF CLEAR PROVISIONS OF SECTION 14A, EVEN IN CASE IT I S NOT POSSIBLE TO IDENTIFY EXPENSES INCURRED IN EARNING INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, DISALLOWANCE HAS TO BE MADE ON SOME BASIS. FURTHER, IN THE CASE OF MAREZBAN BHARUCHA V. ASSTT. CI T [2007/12 SOT 133 (MUM. - TRIB.), THE MUMBAI BENCHES OF ITAT HAS HELD AS UNDER: WHERE AN EXPENDITURE IS COMPOSITE ONE, I.E., RELATING TO TAXABLE RECEIPTS AS WELL AS NON - TAXABLE RECEIPTS, ASSESSING OFFICER IS DUTY - BOUND TO DISALLOW PROPORTIONATE AMOUNT OF EXPENDITURE RELATABLE TO NON - TAXABLE OR EXEMPTED INC OME BY INVOKING PROVISIONS OF SECTION 14A. 20. IN ORDER TO ARRIVE AT A REASONABLE AMOUNT OF EXPENDITURE, WHICH MAY VARY FROM CASE TO CASE AND SITUATION TO SITUATION, THE LEGISLATURE, AFTER TAKING VARIOUS FACTORS INTO CONSIDERATION, CAME TO A CONCLUSION THAT SUCH EXPENSES CAN BE REASONABLY CALCULATED @ 0.5% OF THE AVERAGE INVESTMENTS MADE BY THE ASSESSEE. FOR THIS PURPOSE, THE LEGISLATURE HAS ARRIVED AT A COMMON FORMULA TO CALCULATE THE EXPENSES @ 0.5% OF THE AVERAGE INVESTMENTS MADE AS PER STEP - 3 OF THE FORMULA GIVEN IN RULE - 8D. ACCORDINGLY THE LEGISLATURE INCORPORATED AND INTRODUCED THE RULE - 8D. FURTHER, AS COULD BE SEEN FROM THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS RIGHTLY QUANTIFIED THE EXPENDITURE UNDER RULE 8D(2)(III) AND DISALLOWED UNDER SEC TION 14A OF THE ACT. I.T.A. NO S . 1645 & 1544 /M/ 15 15 21. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES, WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A) AND THUS, THE GROUND RAISED BY THE ASSESSEE IS DISMISSED. 22. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY A LLOWED AND THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON THE 31 ST MARCH , 201 6 AT CHENNAI. SD/ - SD/ - ( CHANDRA POOJARI ) ACCOUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 31 . 0 3 .201 6 VM/ - / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6. / GF.