DCIT, CHENNAI V. Spero Foundations Pvt Ltd., CHENNAI

ITA 1572/CHNY/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6193 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 07-06-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 30-05-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: G BASKAR
• Assessee Lawyers: ASHISH TRIPATHI JT
• Keywords: Business income; Earning of tax free income; Onus to prove
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL BENCH C, CHENNAI , . ! #$, & #' BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER ./ITA NO.1189/MDS/2016 & ! (! / ASSESSMENT YEAR : 2011-12 SPERO FOUNDATIONS PVT. LTD., NO.12/1, BASHYAM BASHEER AHMED STREET, ALWARPET, CHENNAI 600 018. [PAN: AAACU 1229L] VS. DY. COMMISSIONER OF INCOME TAX, CORPORATE WARD-6(2), CHENNAI. ( /APPELLANT ) ( / RESPONDENT ) ./ITA NO.1572/MDS/2016 & ! (! / ASSESSMENT YEAR : 2011-12 DY. COMMISSIONER OF INCOME TAX, CORPORATE WARD-6(2), CHENNAI. SPERO FOUNDATIONS PVT. LTD., NO.12/1, BASHYAM BASHEER AHMED STREET, ALWARPET, CHENNAI 600 018. [PAN: AAACU 1229L] ( /APPELLANT ) ( / RESPONDENT ) $) * + / APPELLANT BY : SHRI G.BASKAR, ADVOCATE ,-$) * + / RESPONDENT BY : SHRI ASHISH TRIPATHI, JT. CIT . * / / DATE OF HEARING : 07.06.2017 0( * / / DATE OF PRONOUNCEMENT : 04.09.2017 /O R D E R PER SANJAY ARORA, AM : THESE ARE CROSS APPEALS BY THE ASSESSEE AND THE RE VENUE ARISING OUT OF THE COMMON ORDER DATED 08.03.2016 BY THE COMMISSIONER O F INCOME TAX 2 ITA NOS.1189 & 1572/MDS/2016 (AY 2011 -12) SPERO FOUNDATIONS PVT. LT D. (APPEALS)-15, CHENNAI (CIT(A) FOR SHORT), PARTLY ALLOWING THE ASSESSEES APPEALS CONTESTING ITS ASSESSMENT U/S. 143(3) OF T HE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR ASSESSMENT YEAR (AY) 2011-12 DATED 28.03.2014. 2. THE FIRST ISSUE ARISING IN THE ASSESSEES APPEAL IS THE MAINTAINABILITY OF THE CLAIM QUA ADVANCES WRITTEN OFF, AT . 67.87 LACS. THE SAME WERE GIVEN DURING THE RELEVANT YEAR ITSELF TO TWO CONCERNS, NAMELY, V K INVESTMENTS AND HOLDINGS PVT. LTD. (AT . 30.11 LACS) AND NAUGHTY TRADING PVT. LTD (AT . 37.76 LACS), AGAINST FABRIC PURCHASE ORDERS, PLACED ON THEM FOR . 31.69 LACS AND . 39.78 LACS RESPECTIVELY (REFER PARAS 2.1 AND 5.5 OF ASSES SMENT AND THE IMPUGNED ORDER RESPECTIVELY). HOWEVER, NO GOODS WERE SUPPLIED NOR WERE THE AMOUNTS FORTHCOMING AND, RATHER, THE COMPANIES WERE SUBSEQU ENTLY DISSOLVED. ACCORDINGLY, THE ASSESSEE WAS CONSTRAINED TO WRITE OFF THE DEBTS AS IRRECOVERABLE, CLAIMING THE SAME AS BUSINESS LOSS. THE ADVANCES, AS FOUND BY THE ASSESSING OFFICER (A O), ARE TO RELATED PARTIES. THE COMPANIES WERE DISSOLVED ON 11.04.2011 AND 28.01.2011, I.E., SOON AFTER BEING ADVANCED ON 19.07.2010. HOW COULD IT BE THAT THE ASSESSEE COMPANY, A GROUP CONCERN, WAS NOT AWARE OF THEIR FINANCIAL S TATUS ? THE TRANSACTION WAS ONLY A CAMOUFLAGE TO DERIVE A TAX ADVANTAGE. THE CL AIM WAS ACCORDINGLY DISMISSED. IN APPEAL, THE SAME WAS CONFIRMED IN THE ABSENCE OF ANY IMPROVEMENT BEING EFFECTED IN ITS CASE BY THE ASSE SSEE. AGGRIEVED, THE ASSESSEE IS IN SECOND APPEAL. 3. BEFORE US, THE LD. AUTHORIZED REPRESENTATIVE (AR ) WOULD, PLACING RELIANCE ON CIT V. CRESCENT FILMS (P.) LTD. [2001] 248 ITR 670 (MAD), SUBMIT THAT THE ASSESSEE HAD PURCHASED FROM THE LENDEE CONCERNS IN THE PAST AS WELL. THE COMPANIES HAD BEEN DECLARED DEFUNCT, AND NOT GONE I NTO DISSOLUTION. THE GENUINENESS OF THE CLAIM OF LOSS COULD NOT BE DOUBT ED MERELY BECAUSE THE SAID DATE WAS CLOSE TO THE DATE OF THE ADVANCE/S. THE LD . DEPARTMENTAL REPRESENTATIVE 3 ITA NOS.1189 & 1572/MDS/2016 (AY 2011 -12) SPERO FOUNDATIONS PVT. LT D. (DR) WOULD, ON THE OTHER HAND, URGE FOR THE CONFIRM ATION OF THE DISALLOWANCE, STATING THAT NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE ASSESSEE AT ANY STAGE TO ESTABLISH ITS CASE. THE TRANSACTION/S IS ONLY A MAKE BELIEVE. 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE REVENUE HAS NOT RAISED ANY OBJECTION, I.E., IN PRINCIPLE, TO THE ASSESSEES CLAIM. WITHOUT DOUBT, A TRADE ADVANCE WH ICH BECOMES BAD, BEING SUSTAINED IN THE REGULAR COURSE OF BUSINESS, THE CO NCOMITANT LOSS IS A BUSINESS LOSS, LIABLE FOR BEING ALLOWED IN THE COMPUTATION O F BUSINESS INCOME U/S. 28. THE ASSESSEES RELIANCE ON THE DECISION IN CRESCENT FILMS (P.) LTD. (SUPRA), CLARIFYING THE LEGAL POSITION, WOULD THEREFORE BE O F NO MOMENT. IT IS THE GENUINENESS OF THE IMPUGNED LOSS A MATTER OF FACT , THAT HAS BEEN DOUBTED BY THE REVENUE. THIS IS AS THE TWO ADVANCEE-PAYEE CONC ERNS ARE RELATED PARTIES, SO THAT IT COULD NOT BE THAT THE ASSESSEE WAS NOT AWAR E OF THEIR FINANCIAL HEALTH WHEN THE ADVANCES WERE GIVEN. THIS IS PARTICULARLY SO AS THE DATE OF THEIR BEING DECLARED DEFUNCT IS ONLY A FEW MONTHS AFTER THE DAT E OF THE ADVANCE/S. RATHER, THE SAID (DEFUNCT) STATUS WOULD ONLY FOLLOW AN ACUT E FINANCIAL STRESS. AND, PERHAPS, FOR A CONSIDERABLE TIME PRIOR TO THEIR BEI NG SO DECLARED (AS DEFUNCT) INASMUCH AS THE SAME SIGNIFIES A DECLARATION TO THE EFFECT THAT THE CONCERN IS NO LONGER A GOING CONCERN, I.E., A COMPLETE INABILITY TO FUNCTION AS AN ECONOMIC ENTITY/AGENT. WITHOUT DOUBT, THESE FACTS AND INCIDE NTS, WHICH ARE NOT IN DISPUTE, ARE SUFFICIENT TO RAISE A STRONG, BONA FIDE DOUBT AS TO THE ADVANCES BEING GENUINE TRADE ADVANCES. IN OUR VIEW, THE MATTER, RATHER THA N RESTING ON A DOUBT, HOWSOEVER STRONG, IS TO BE DETERMINED ON A CLEAR AN D DEFINITE FINDING OF FACT AS TO THE TRANSACTIONS BEING MOTIVATED BY AN IMPROPER OR OBLIQUE PURPOSE AND DID NOT REPRESENT A GENUINE LOSS, I.E., WHICH STANDS INCURRED BONA FIDE BY THE ASSESSEE IN THE NORMAL COURSE OF ITS BUSINESS . THIS IS ALL THE MORE SO AS THE SAME HAS PENAL AND OTHER CONSEQUENCES UNDER THE ACT AS W ELL. FURTHER, IN VIEW OF THE PAYEE-COMPANIES HAVING BEEN DECLARED DEFUNCT, THERE IS LITTLE DOUBT THAT THE 4 ITA NOS.1189 & 1572/MDS/2016 (AY 2011 -12) SPERO FOUNDATIONS PVT. LT D. AMOUNTS STAND LOST IRRECOVERABLY AND, THUS, OF THE ASSESSEE INCURRING LOSS OF CAPITAL TO THAT EXTENT. HOWEVER, IN VIEW OF THE PURCHASE ORDERS , THE SAME ASSUMES THE NATURE OF A BUSINESS LOSS. THE COMPANIE S ARE NOT IN THE RELEVANT BUSINESS/TRADE. WHY DID, THEN, THE ASSESSEE PLACE T HE ORDERS? WE HAVE ALREADY OPINED THAT THERE EXIST REASONS TO DOUBT THE GENUIN ENESS OF THE TRANSACTION/S. THIS BECOMES ALL THE MORE RELEVANT AS BUT FOR THE O RDERS, THE AMOUNT ADVANCED WOULD BE A CAPITAL TRANSACTION AND, ITS LOSS, CONS EQUENTLY, A CAPITAL LOSS, INADMISSIBLE AS A BUSINESS DEDUCTION. FURTHER, AS A FORESAID, THE FINANCIAL CONDITION WOULD ONLY BE DELETERIOUS FOR THE SAID CO MPANIES TO HAVE BEEN DECLARED DEFUNCT JUST A FEW MONTHS LATER. THE GROUP CONCERNS WOULD, IN ANY CASE, BE IN THE INTIMATE KNOW OF THEIR OWN AFFAIRS. WHY, AND UNDER WHAT CIRCUMSTANCES, THEN, DID THEY ACCEPT THE ORDER/S, I MPLYING THEM TO BE IN BUSINESS, I.E., AS GOING CONCERNS, WHICH THEY ARE A PPARENTLY NOT. AGAIN, EVEN IF FACING FINANCIAL STRESS, THE SUPPLIES COULD YET BEE N AFFECTED. THAT IS, BY SECURING GOODS FROM THE MARKET USING THE ASSESSEES MONEY, E ARNING A NEAT MARGIN IN THE BARGAIN AND, RATHER, MITIGATING THEIR FINANCIAL PRO BLEMS TO SOME EXTENT. NO SUPPLIES WERE ADMITTEDLY MADE, AND THERE IS ALSO NO CLUE AS TO WHERE THE MONEY ADVANCED BY THE ASSESSEE HAS DISAPPEARED. THAT IS, THE PLACEMENT OF THE PURCHASE ORDERS AND THEIR ACCEPTANCE IS, UNDER THE CIRCUMSTANCES, HIGHLY SUSPECT. IT THEREFORE CANNOT BE SAID THAT THE APPAR ENT IS TO BE PRESUMED, AS IS GENERALLY THE CASE, AS REAL. ALSO, THE ONUS TO PROV E ITS RETURN, AND CLAIMS PREFERRED THEREBY, IS ONLY ON THE ASSESSEE ( CIT V. CALCUTTA AGENCY LTD . [1951] 19 ITR 191 (SC); CIT V. R. VENAKATASWAMY NAIDU [1956] 29 ITR 529 (SC)). THE ASSESSING OFFICER (AO), ON HIS PART, MAY MAKE ANY VERIFICATION HE DEEMS PROPER, INCLUDING COLLECTION OF MATERIAL IN R EBUTTAL OF THE ASSESSEES CLAIMS, DULY CONFRONTING THE SAME TO THE ASSESSEE. A NUMBER OF SURROUNDING CIRCUMSTANCES NEED TO BE EXPLAINED. TO BEGIN WITH, WHO PLACED THE ORDER/S ON THE ASSESSEE COMPANY, WHICH IS IN THE BUSINESS OF P ROPERTY RENTALS AND RUNNING SERVICE APARTMENTS? THAT IS, IS A COMPANY NOT IN TH E BUSINESS OF MANUFACTURING 5 ITA NOS.1189 & 1572/MDS/2016 (AY 2011 -12) SPERO FOUNDATIONS PVT. LT D. OF GARMENTS, OR EVEN IN THE GARMENT TRADE, I.E., FO R SUPPLYING WHICH (GARMENTS) FABRIC IS STATED TO BEING PURCHASED, OR EVEN A SIGN IFICANT PART OR A REGULAR SEGMENT OF ITS BUSINESS. THE BUSINESS ENVIRONMENT I S EXTREMELY COMPETITIVE, SO THAT IT IS ONLY THE FIRMS WITH LONG STANDING AND EX PERIENCE IN THE RELEVANT TRADE WHICH WOULD STAND TO BE AWARDED THE BUSINESS OR, IN ANY CASE, WOULD HAVE TO BE COMPETED WITH. DOES, THEN, THE ASSESSEE HAS THE WHE REWITHAL TO PROSECUTE THE ORDERS INASMUCH AS THE GARMENTS HAVE TO BE MANUFACT URED? THAT IS, ON WHAT BASIS DID THE ASSESSEE CONSIDER ITSELF COMPETENT TO SUPPLY, GIVEN THE TECHNICAL DETAILS OF EACH PRODUCT; THE FACILITIES REQUIRED TO DELIVER; THE BUSINESS INTRICACIES OF EACH TRADE, ETC.? THEN, ON WHAT BASIS DOES THE C OMPANY CONSIDER IT PRUDENT TO SOURCE THE SUPPLY FROM RATHER THAN THOSE IN THE TRA DE, THE PAYEE-CONCERNS, WHICH, LIKE ITSELF, HAVE, CLEARLY, NO NAME OR PROVEN COMPE TENCE THEREIN. THAT IS, WHAT IS THE SOURCE OF ITS BUSINESS CONFIDENCE OR COMMERCIAL DECISION FOR THE SAID PURCHASES AND, TWO, FOR THE TRADE ADVANCE, WHICH AP PEARS TO BE INCONSISTENT WITH THE TRADE PRACTICE. THERE ARE NO DETAILS OF FABRIC IN THE PURCHASE ORDERS (PB PGS. 23-26, 27-30). HOW WOULD THE PURCHASE PRICE, WHICH VARIES OVER A RANGE, TO BE ASSESSED. THE FABRICS COULD VARY OVER A VAST RANGE, ON THE PARAMETERS OF YARN QUALITY/SIZE, COMPOSITION, SPUN, COLOUR, WEAVE, DES IGN, ETC. UNLESS COMMUNICATED, IT IS NEITHER POSSIBLE FOR THE ASSESS EE TO SOURCE THE MATERIAL, NOR FOR ITS SUPPLIER/S TO DO SO. AGAIN, HOW WOULD THEY QUOTE OF PRICE, OR AGREE TO A PRICE, WHICH IMPLIES A COMMUNICATION AND UNDERSTAND ING IN THE MATTER, WHICH IS CONSPICUOUS BY ITS ABSENCE. THIS IS ALL THE MORE SI GNIFICANT AS, AS IT APPEARS, THE ASSESSEE ITSELF DID NOT RECEIVE ANY ADVANCE FOR THE PURPOSE, SO THAT PAYMENT IN ADVANCE DOES NOT CHARACTERIZE THE TRADE. CONTINUING FURTHER, THE PURCHASE ORDERS REFLECT TH E TERMS OF PAYMENTS AS 50% ADVANCE. HOW, THEN, HAS THE ASSESSEE GIVEN NEAR LY THE ENTIRE AMOUNT, WHICH, RATHER, IN ONE CASE (VK INVESTMENT, AT .32.90 LACS) EXCEEDS 100% (OF THE ORDER), AS ADVANCE? THIS IS ALL THE MORE SIGNIF ICANT AS, AS IT APPEARS, THE ASSESSEE ITSELF DID NOT RECEIVE ANY ADVANCE FOR THE PURPOSE, SO THAT PAYMENT IN 6 ITA NOS.1189 & 1572/MDS/2016 (AY 2011 -12) SPERO FOUNDATIONS PVT. LT D. ADVANCE DOES NOT CHARACTERIZE THE TRADE. THE LEDGER ACCOUNTS OF THE ADVANCEES (PB PGS. 33, 34) REVEAL THE ASSESSEE TO HAVE MONEY TRANSACTIONS WITH THEM; IN FACT SETTLING THEIR ACCOUNT (BY MAKING PAYMENT ( . 6.53 LACS) IN ONE CASE, AND RECEIVING ( . 13.52 LACS) IN ANOTHER) MONTHS BEFORE THE PLACEME NT OF PURCHASE ORDER/EXTENDING ADVANCE. HOW HAS THE MONEY BEEN UTI LIZED BY THE PAYEE COMPANIES, BEING RELATED CONCERNS, IS ALSO VERY REL EVANT. THAT IS, IT COULD BE A CASE WHERE THEY HAD ACCEPTED THE ORDERS BONA FIDE AND PROCEEDED TO THE SOURCE THE MATERIALS, OF WHICH, TO ANY EXTENT, THEY MAY EV EN HAVE INVENTORY, GIVING FURTHER ADVANCES, FOR PURCHASING THE BALANCE, ETC. ON THE OTHER HAND, IT WOULD ALSO BE THAT THE MONEY HAS BEEN DIVERTED TO MAKE SO ME URGENT PAYMENTS, LEAVING NO MONEY TO SUPPLY. IN CASE OF THE LATTER, THE SAME WOULD GIVE CREDENCE TO THE REVENUES CLAIM OF THE TRANSACTION/S BEING C AMOUFLAGED AS AN ADVANCE AGAINST PURCHASE, I.E., TO SECURE A TAX ADVANTAGE A ND, BESIDES, TO SIPHON OFF ITS FUNDS TO RELATED CONCERNS, ADMITTEDLY IN FINANCIAL DISTRESS. TOWARD THIS, THEIR BALANCE-SHEET/S OR THE WORK UNDERTAKEN IN THE RECEN T PAST WOULD BE RELEVANT. FURTHER, THE ORDERS CLEARLY MENTION THAT THE SUPPLI ES ARE TO BE MADE WITHIN 15 DAYS. IS IT THAT THE ENTIRE MONEY HAS BEEN UTILIZED (LOST) WITHIN THE SAID SPAN OF TIME IN-AS-MUCH AS NO SUPPLY WHATSOEVER STANDS MADE WITHIN THAT TIME. THAT IS, INSTEAD OF THE COMPLETE SUPPLY, EVEN A PART SUPPLY HAS NOT BEEN MADE IN THE 15 DAY PERIOD, AFTER WHICH THE ASSESSEE WOULD DEFINITE LY INQUIRE, IF NOT EARLIER, ABOUT THE EXECUTION OF ITS ORDER. AFTER ALL, ITS O WN SUPPLIES WOULD GET IMPACTED BY THE NON-RECEIPT OF THE GOODS. NORMALLY, THE SUPP LIES WOULD START SOON AFTER, I.E., IN PART SHIPMENTS, ENABLING THE ASSESSEE TO P ROCESS THE GOODS FURTHER. RATHER, IT WOULD BE IN CONSTANT CONTACT WITH THE SU PPLIER/S ABOUT THE PROGRESS/ STATUS OF ITS ORDER. THERE APPEARS TO BE NO SUCH CO MMUNICATION EVEN AFTER LAPSE OF THE 15 DAYS. THESE AND SUCH LIKE DETAILS, WOULD THROW LIGHT ON THE GENUINENESS OF THE TRANSACTION, WHICH WOULD STAND T O BE DETERMINED ONLY AFTER PROPER ANSWERS TO THESE FACTS, INCIDENT TO THE BUSI NESS TRANSACTION, ARE MADE AVAILABLE. IN FACT, A DEFUNCT COMPANY IS REQUIRED T O FILE A NIL BALANCE SHEET WITH 7 ITA NOS.1189 & 1572/MDS/2016 (AY 2011 -12) SPERO FOUNDATIONS PVT. LT D. THE REGISTRAR OF COMPANIES, I.E., ALONG WITH ITS A PPLICATION U/S. 560 OF THE COMPANIES ACT, 1956. WHEN WAS THIS APPLICATION MADE IN THE CASE OF THE PAYEE CONCERNS? FURTHER, HOW HAS THE LIABILITY TO THE ASS ESSEE BEEN ACCOUNTED FOR OR TREATED IN THEIR BOOKS OF ACCOUNT? THIS IS AS IN T HE ABSENCE OF ANY SUPPLIES BEING MADE, THE ENTIRE SUM WOULD OSTENSIBLY CONTINU E TO OUTSTAND AS A LIABILITY, AND COULD NOT POSSIBLY BE NEUTRALIZED IN THEIR BOOK S, AS REQUIRED TO YIELD A NIL BALANCE SHEET. THIS ASPECT WOULD ALSO BE REQUIRED T O BE EXAMINED. ALL THESE EXPLANATIONS/DETAILS, AMONG OTHERS, WOUL D BE READILY AVAILABLE WITH THE ASSESSEE IF THE TRANSACTIONS HAVE ACTUALLY ARISEN IN THE NORMAL COURSE OF ITS BUSINESS, TO WHICH SURPRISINGLY NO REFERENCE HA S AT ALL BEEN MADE, EVEN IN PASSING, BY THE ASSESSEE WHILE PLEADING ITS CASE. THE FACTS/INCIDENTS REFERRED TO ARE ONLY TO ENABLE DEFINITE FINDINGS OF FACT IN THE CONSPECTUS OF THE CASE. WE, ACCORDINGLY, ONLY CONSIDER IT PROPER TO RESTORE THE MATTER BACK TO THE FILE OF THE AO TO ALLOW THE ASSESSEE, IN THE INTEREST OF JUSTIC E, ANOTHER OPPORTUNITY TO PROVE ITS CLAIMS, WHICH COULD BE SO ON VARIOUS COUNTS AND PER A NUMBER OF SUPPORTING DOCUMENTS AND CORROBORATIVE CIRCUMSTANCES. NEEDLESS TO ADD, HE SHALL DECIDE PER A SPEAKING ORDER. THE BURDEN TO PROVE ITS CLAIM S BEING ON THE ASSESSEE, AN INABILITY ON ITS PART TO DO SO SHALL ENTITLE THE AO TO DRAW INFERENCE(S) AS MAY BE PROPER UNDER THE CIRCUMSTANCES. REFERENCE HERE MAY BE MADE TO THE DECISION IN KAPURCHAND SHRIMAL V. CIT [1981] 131 ITR 451 (SC). WE DECIDE ACCORDINGLY. 5. THE NEXT GROUND RELATES TO THE DISALLOWANCE OF P ERSONNEL AND ADMINISTRATION EXPENSES IN THE SUM OF . 48,15,744/-, WORKED OUT AT 96% OF THE TOTAL SUCH EXPENDITURE. THE ASSESSEE DISCLOSED A RE NTAL INCOME OF . 1,74,27,736/-, CLAIMING PERSONNEL AND ADMINISTRATIV E EXPENDITURE AT . 25.02 LACS AND . 25.15 LACS RESPECTIVELY THERE-AGAINST. THE SAME S URELY COULD NOT BE ALLOWED AGAINST INCOME FROM HOUSE PROPERTY, UNDER W HICH HEAD OF INCOME THE RENTAL INCOME WAS RETURNED AND ASSESSED. THE RENTAL RECEIPT WORKING TO 96% OF 8 ITA NOS.1189 & 1572/MDS/2016 (AY 2011 -12) SPERO FOUNDATIONS PVT. LT D. THE TOTAL RECEIPT ( .182.75 LACS), THE AO DISALLOWED THE EXPENDITURE TO THE PROPORTIONATE EXTENT. 6. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. WITHOUT DOUBT, THERE IS NO QUESTION OF PERSONNEL A ND ADMINISTRATIVE EXPENDITURE BEING ALLOWED IN COMPUTING THE INCOME A SSESSABLE AS INCOME FROM HOUSE PROPERTY (S. 22), WHICH IS TO BE PER SS. 23 & 24 OF THE ACT. THE LD. AR WAS QUESTIONED IN RESPECT OF RECEIPT FROM SERVICE APART MENTS, WHO EXPLAINED IT TO BE BOOKED UNDER THE HEAD SILVER SPRING INCOME (AT . 5.34 LACS), I.E., SEPARATE FROM THE RENTAL INCOME ( . 174.28 LACS), AND RETURNED AND ASSESSED AS BUSINE SS INCOME. THIS IS AS THE SERVICE APARTMENT INCOME IS ONLY IN THE NATURE OF A BUSINESS, AND INCOME THERE-FROM, ACCORDINGLY, BUSIN ESS INCOME. THE QUESTION THEREFORE THAT NEEDS TO BE ANSWERED IS THE EXTENT O F EXPENDITURE INCURRED FOR OR ATTRIBUTABLE TO THE PROPERTY INCOME, WHICH CONSTITU TES THE PRINCIPAL RECEIPT AND, CORRESPONDINGLY, THE PRINCIPAL ACTIVITY DURING THE YEAR. IT WAS UPON THE ASSESSEE TO SHOW THAT THE EXPENDITURE INCURRED IN RELATION T HERETO IS LOWER IN PROPORTION TO THAT OBTAINING ON THE BASIS OF THE PROPORTIONATE RE CEIPT IN THE TOTAL TURNOVER. HOWEVER, BOTH BEFORE THE AO AS WELL AS THE LD. CIT( A) NO EXPLANATION, MUCH- LESS MATERIALS, STAND FURNISHED BY THE ASSESSEE TOW ARD THE SAME. THE POSITION CONTINUES TO BE THE SAME BEFORE US. HOW, THEREFORE, WE WONDER, CAN THE AOS ESTIMATE, WHO IS ENTITLED TO MAKE THE SAME ON THE B ASIS OF THE MATERIAL AND THE INFORMATION ON RECORD, BE FAULTED WITH (REFER CONSOLIDATE COFFEE LTD. V. STATE OF KARNATAKA [2001] 248 ITR 432 (SC)). THAT THE AO IS ENTITLED TO MAKE A REASONABLE ESTIMATE IS WELL SETTLED. THE REASONABIL ITY OF THE ESTIMATE APART, PERSONNEL AND ADMINISTRATIVE EXPENDITURE IS INADMIS SIBLE U/SS. 23 & 24, SO THAT THE AO HAS IN FACT, IN ALLOWING PROPORTIONATE EXPEN DITURE THEREON, BEEN LIBERAL. UNDER THE CIRCUMSTANCES, WE FIND NO INFIRMITY IN TH E IMPUGNED ORDER AND, ACCORDINGLY, CONFIRM THE DISALLOWANCE. WE DECIDE A CCORDINGLY. 9 ITA NOS.1189 & 1572/MDS/2016 (AY 2011 -12) SPERO FOUNDATIONS PVT. LT D. REVENUES APPEAL 7. THE ONLY ISSUE IN THE REVENUES APPEAL IS THE DI SALLOWANCE U/S. 14A IN RESPECT OF DIVIDEND INCOME OF . 1,12,122/-, WHICH STANDS WORKED OUT U/R. 8D AT A TOTAL OF . 58,29,423/-, COMPRISING DIRECT EXPENDITURE (ON IN TEREST) (AT . 56.16 LACS), INDIRECT INTEREST EXPENDITURE ( . 49,555/-) AND INDIRECT ADMINISTRATIVE EXPENDITURE ( . 1.64 LACS). THE BASIS OF THE RELIEF BY THE LD. CI T(A), APPROVING THE DISALLOWANCE IN PRINCIPLE, IS THAT THE DISALLOW ANCE U/S. 14A CANNOT EXCEED THE EXEMPT INCOME, AS HELD IN JOINT INVESTMENTS PVT. LTD. V. CIT [2015] 372 ITR 694 (DEL). 8. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. SECTION 14A SEEKS TO DISALLOW, IN COMPUTING THE AS SESSEES TOTAL INCOME, EXPENDITURE INCURRED IN RELATION TO INCOME NOT FORM ING PART OF THE TOTAL INCOME UNDER THE ACT. THIS IS AS, AS EXPLAINED IN GODREJ & BOYCE MFG. CO. LTD. V. DY. CIT [2010] 328 ITR 81 (BOM), INCOME IMPLIES ONLY NET INCOME, I.E., NET OF EXPENDITURE INCURRED FOR OR TOWARD EARNING THE SAME , WHETHER TAXABLE OR TAX- EXEMPT. WHERE, THEREFORE, EXPENDITURE IS INCURRED W HICH IS PARTLY IN RELATION TO INCOME FORMING PART OF THE TOTAL INCOME AND THE PAR TLY NOT SO, THE EXPENDITURE IN RELATION TO THE LATTER IS TO BE ISOLATED AND NETTED AGAINST THE SAID, I.E., INCOME NOT FORMING PART OF THE TOTAL INCOME. THIS IS THE RATIO NALE OF S. 14A, AS EXPLAINED IN CIT V. WALFORT SHARE & STOCK BROKERS (P.) LTD. [2010] 326 ITR 1 (SC), REFERRED TO IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA). FURTHER, THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME IS TO BE COMPUTED WITH RE FERENCE TO AND HAVING REGARD TO THE ASSESSEES ACCOUNTS. HOWEVER, WHERE T HE SAME IS NOT ASCERTAINABLE WITH REFERENCE TO THE ASSESSEES ACCOUNTS OR THE AO IS NOT SATISFIED WITH THE ASSESSEES APPROPRIATION, I.E., THE CORRECTNESS OF THE METHOD EMPLOYED BY THE ASSESSEE, HE SHALL COMPUTE THE SAME WITH REFERENCE TO THE METHOD AS MAY BE PRESCRIBED, AND WHICH BRINGS US TO R. 8D (S. 14A(2) ). THE ASSESSEES APPROPRIATION WOULD INCLUDE A CASE WHERE NO EXPENDI TURE IS, IN ITS VIEW, 10 ITA NOS.1189 & 1572/MDS/2016 (AY 2011 -12) SPERO FOUNDATIONS PVT. LT D. ATTRIBUTABLE TO THE EXEMPT INCOME (S. 14A(3)). OF COURSE, THE ASSESSEES METHOD HAS TO BE, AGAIN, WITH REFERENCE TO ITS ACCOUNTS AN D NOT DE HORS THE SAME, IN WHICH CASE IT IS NOT MORE THAN A BALD CLAIM (REFER: AFL (P.) LTD. V. ASST. CIT [2013] 28 ITR (TRIB.) 263 (BOM)). THE CONSTITUTIONA LITY OF R. 8D STANDS UPHELD IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA), AND IS NOT UNDER CHALLENGE, SO THAT IT IS, BY NECESSARY IMPLICATION, REASONABLE AND NOT AR BITRARY. IN FACT, THE ONLY COMPONENT OF R. 8D WHICH SEEKS TO ESTIMATE WITHOUT REFERENCE TO THE ACCOUNTS EXCEPT BROADLY, IS QUA INDIRECT, ADMINISTRATIVE EXPENDITURE, PEGGING THE SAME AT AN EXTREMELY LOW RATIO OF THE INVESTMENT THAT YIELD S EXEMPT INCOME. THIS IS AS THE NATURE OF SUCH EXPENDITURE MAY ASSUME DIVERSE F ORMS AND, FURTHER, HAS NO CORRESPONDENCE WITH THE INCOME THAT MAY ARISE FROM THE ACTIVITY ENTAILING THE EXPENDITURE. THE COMPANY MAY, FOR EXAMPLE, HOLD AN INVESTMENT FOR AN ENTIRE YEAR, TO NO AVAIL, WHILE IN ANOTHER CASE AN INVESTM ENT AT THE FAG-END OF THE YEAR MAY BE PRODUCTIVE, YIELDING INCOME, THE QUANTUM OF WHICH IS AGAIN UNCERTAIN/ VARIABLE. THAT IS, THERE COULD BE NO UNIFORMITY IN THE EXPENDITURE INCURRED ON HOLDING/MANAGING THE INVESTMENTS. WHILE IN ONE CASE IT MAY BE A CASE CONSTANT REVIEW AS TO BUY, HOLD OR SELL, I.E., ON A REGULAR BASIS, IN ANOTHER THERE MAY BE PRACTICALLY NO EXPENDITURE, I.E., INDIRECT, ADMINIS TRATIVE EXPENDITURE, IN RELATION THERETO. THE SAME, THEREFORE, WHERE NOT DETERMINABL E WITH REFERENCE TO THE ASSESSEES ACCOUNTS, HAS BEEN PROVIDED FOR BY LAW T O BE AT A FRACTION (0.5%) OF THE AVERAGE VALUE OF INVESTMENT HELD DURING THE REL EVANT YEAR. AS REGARDS INTEREST, THE SAME WOULD WITHOUT DOUBT DEPEND UPON THE FINANCING, DIRECT OR INDIRECT, OF THE RELEVANT INVESTMENT, SO THAT THE S AME WOULD AGAIN DEPEND ON THE FACTS OF THE CASE. THE FINANCE ACT, 2017 FURTHER FI NE TUNES THE ATTRIBUTION METHOD PRESCRIBED U/R. 8D BY AVERAGING THE INVESTME NT ON A MONTHLY BASIS, RATHER THAN THE SIMPLE MEAN OF THE OPENING AND CLOS ING BALANCE FOR THE YEAR. FURTHER, BY WAY OF ABUNDANT CAUTION, IT ALSO PROVID ES THAT THE DISALLOWANCE (OF EXPENDITURE) SHALL NOT EXCEED THE TOTAL EXPENDITURE CLAIMED BY THE ASSESSEE. THIS IS IN FACT AXIOMATIC AS THE SAME CANNOT POSSIBLY EX CEED THE EXPENDITURE ACTUALLY 11 ITA NOS.1189 & 1572/MDS/2016 (AY 2011 -12) SPERO FOUNDATIONS PVT. LT D. INCURRED, WHICH IS/IS TO BE ATTRIBUTED, I.E., IN WH OLE OR IN PART, TO THE INCOME NOT FORMING PART OF THE TOTAL INCOME. IN OTHER WORDS, T HE DISALLOWANCE OF EXPENDITURE IS ESSENTIALLY A MATTER OF FACT, AND CA NNOT BE EITHER PREJUDGED OR PREDETERMINED BY LAW. WHY, THE AMOUNT OF INCOME, WI TH REFERENCE TO AND AT WHICH THE EXPENDITURE IS SAID TO BE ARTIFICIALLY PE GGED/LIMITED TO, IS ITSELF UNCERTAIN. REFERENCE IN THIS REGARD MAY ALSO BE MAD E TO THE DECISION IN CIT V. RAJENDRA PRASAD MOODY [1978] 115 ITR 519 (SC), AS WELL AS THE DECISIONS IN DY. CIT V. DAMANI ESTATES & FINANCE (P.) LTD . [2013] 25 ITR (TRIB) 683 (MUM) AND VOLTECH ENGINEERS (P.) LTD. V. DY. CIT [2017] 163 ITD 469 (CH), TO CITE SOME, BY THE TRIBUNAL. THERE IS, IN FACT, NO M ANDATE IN LAW FOR THE PROPOSITION BEING ADVANCED, ATTRIBUTED TO THE DECIS ION IN JOINT INVESTMENTS PVT. LTD. (SUPRA). ALL THAT THIS DECISION SAYS IS THAT THE E XPENDITURE DISALLOWED UNDER SECTION 14A COULD NOT EXCEED THAT ACTUALLY INCURRED , THE CACHE NOTES OF THE SAID DECISION READING AS UNDER: INCOME COMPUTATION DISALLOWANCE OF EXPENDITURE ON EARNING NON- TAXABLE INCOME DISALLOWANCE ONLY TO EXTENT OF EXP ENDITURE INCURRED BY ASSESSEE IN RELATION TO TAX EXEMPT INCOME NO REAS ON FOR DISALLOWANCE OF SUM VOLUNTEERED NO SCRUTINY OF ACCOUNTS ENTIRE TAX EXEMPT INCOME LOWER THAN DISALLOWANCE MATTER REMANDED INCOME- TAX RULES, 1962, R. 8D INCOME-TAX ACT, 1961, S. 14A. WE HAVE IN FACT REGARDED THIS THE RATIO OF THE DE CISION, AS A TRUISM INASMUCH AS NO MORE THAN THE EXPENDITURE INCURRED COULD, AT BES T, BE ATTRIBUTED TO THE RELEVANT INCOME, FURTHER POINTING THAT SUCH A CAVEA T HAS SINCE BEEN INCORPORATED IN THE STATUTE ITSELF. THERE BEING NO SCRUTINY OF A CCOUNTS, A PRE-REQUISITE, THE HONBLE COURT WONDERED AS TO HOW COULD THE DISALLOW ANCE SWALLOW THE ENTIRE (EXEMPT) INCOME. IN THE PRESENT CASE, ON THE CONTRA RY, THE ASSESSEE HAS FURNISHED NO BASIS FOR ITS NIL DISALLOWANCE. ALMOST, THE ENTI RE DISALLOWANCE U/S. 14A IS QUA DIRECT INTEREST EXPENDITURE, IMPLYING AN EXAMINATIO N OF ACCOUNTS, AS WELL AS OF THE EXTENT TO WHICH THE INVESTMENT HAS BEEN FINANCE D BY INTEREST BEARING FUNDS. 12 ITA NOS.1189 & 1572/MDS/2016 (AY 2011 -12) SPERO FOUNDATIONS PVT. LT D. THERE IS, IN FACT, ANOTHER, EQUALLY RELEVANT ASPEC T OF THE MATTER. THE INVESTMENT IN SHARES AND UNITS DOES NOT FORM PART O F THE ASSESSEES BUSINESS. THE BULK ( .56.66 LACS) OF THE EXPENDITURE DISALLOWED U/S. 14A IS INTEREST EXPENDITURE, OF WHICH .56.16 LACS IS BY WAY OF DIRECT INTEREST COST. NOW, INASMUCH AS HOLDING INVESTMENTS OR OTHERWISE DEALIN G IN SHARES/UNITS IS NOT THE ASSESSEES BUSINESS, THE INTEREST EXPENDITURE, TO T HE EXTENT THE SAME STANDS APPORTIONED TO INVESTMENTS, CANNOT BE REGARDED AS F OR THE PURPOSES OF ITS BUSINESS, OR EVEN IN RESPECT OF PROPERTY INCOME. TH E SAME WOULD THEREFORE STAND TO BE DISALLOWED, EITHER U/S. 36(1)(III) OR U/S. 24 (B), AS WELL. A SIMILAR ARGUMENT WOULD APPLY TO THE ADMINISTRATIVE EXPENDITURE ADMIS SIBLE U/S. 37(1); THE EXPENDITURE DISALLOWED U/R. 8D(2)(III) BEING ONLY T HAT RELATABLE TO THE TAX-EXEMPT INCOME, I.E., THAT CAN BE SAID TO BE EXPENDED TOWAR D EARNING THE SAME. CONSIDERED EITHER WAY, THEREFORE, A DISALLOWANCE I N THE IMPUGNED SUM ARISES IN THE COMPUTATION OF THE ASSESSEES TOTAL I NCOME. WE DECIDE ACCORDINGLY. 9. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED FOR STATISTICAL PURPOSES, WHILE THE REVENUES APPEAL IS ALLOWED. ORDER PRONOUNCED ON SEPTEMBER 04, 2017 AT CHENNAI . SD/- SD/- ( ! #$ ) (GEORGE MATHAN) & / JUDICIAL MEMBER ( ) (SANJAY ARORA) /ACCOUNTANT MEMBER /CHENNAI, 1 /DATED, SEPTEMBER 04, 2017. EDN 2 * ,&/34 54(/ /COPY TO: 1. $) /APPELLANT 2. ,-$) /RESPONDENT 3. . 6/ ( )/CIT(A) 4. . 6/ /CIT 5. 478 ,&/& /DR 6. 89! : /GF