Aditya Medisales Ltd., Baroda V. The CIT-I, Baroda

ITA 1616/AHD/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 9147 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 10-03-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 22-05-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: S N SOPARKAR
• Keywords: Earning of tax free income
• Section: 143(3); 142(1); 14A; 263; 63

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD BEFORE SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER ./ ITA NO. 1616/AHD/2014 / ASSESSMENT YEAR: 2009-10 ADITYA MEDISALES LTD, 402, 4 TH FLOOR, R K CENTER, FATEH GUNJ, BARODA-390002 PAN : AABCA 9314 J VS THE CIT-I, BARODA / (APPELLANT) / (RESPONDENT) ASSESSEE(S) BY : SHRI S.N. SOPARKAR, AR REVENUE BY : SHRI SANJAY AGRAWAL, CIT-DR / DATE OF HEARING : 10/03/2016 / DATE OF PRONOUNCEMENT: 22/03/2016 / O R D E R PER SHRI KUL BHARAT, JUDICIAL MEMBER:- THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX-I, BARODA, DATED 13.03.2014 FOR ASSESSMENT YEAR 2009-10. 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APP EAL:- 1. RE: ORDER PASSED U/S. 263 IS BAD IN LAW. 1.1 THE LEARNED COMMISSIONER OF INCOME TAX-I, BARODA ('THE CIT') ERRED IN FACT AND IN LAW IN SETTING ASIDE THE ASSES SMENT MADE U/S. 143(3) BY INVOKING POWERS U/S. 263 OF THE INCOME TAX ACT, 1961 ('THE ACT') DESPITE THE FACT THAT THE CONDITIONS STIPULATE D FOR INVOKING SUCH EXTRA-ORDINARY JURISDICTION WERE NOT SATISFIED. 1.2 THE ORDER PASSED BY THE CIT U/S. 263 IS BA D IN LAW ON THE GROUND THERE IS NO FINDING GIVEN BY THE CIT ABOUT INCURRIN G ANY EXPENDITURE FOR EARNING EXEMPT INCOME. SECTION 263 CANNOT BE RE SORTED TO APPLY ARITHMETICAL WORKING SPECIFIED UNDER RULE 8D. ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 2 2. RE: DISALLOWANCE U/S. 14A: 2.1 THE LEARNED CIT ERRED IN FACT AND IN LAW I N OBSERVING THAT THE DISALLOWANCE U/S. 14A WAS NOT PROPERLY WORKED OUT B Y THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1(1), BARODA ('T HE AO') WHILE ASSESSING THE INCOME OF THE APPELLANT U/S. 143(3) OF THE ACT. 2.2 THE LEARNED CIT ERRED IN FACT AND IN LAW I N DIRECTING THE AO TO RE-COMPUTE THE DISALLOWANCE U/S. 14A APPLYING RULE 8D DESPITE THE FACT THAT THE ASSESSING OFFICER HAD APPLIED HIS MIND TO THE DISALLOWANCE MADE BY THE APPELLANT AND WAS SATISFIED ABOUT THE D ISALLOWANCE SO MADE. 2.3 THE LEARNED CIT FAILED TO APPRECIATE THE FACT T HAT WHILE ASSESSING THE TOTAL INCOME IN SCRUTINY ASSESSMENT U/S. 143(3) , THE AO HAD DISALLOWED NET INTEREST EXPENDITURE OF RS. 26,19,62 ,722/- WHICH OTHERWISE WOULD HAVE PROPORTIONATELY INCREASED THE DISALLOWANCE U/S. 14A AND THEREFORE ON THIS COUNT ALSO THERE IS NO ER ROR IN THE ORDER U/S. 143(3) PASSED BY THE AO NOR THE ORDER PASSED BY THE AO IS PREJUDICIAL TO THE INTEREST OF THE REVENUE. 2.4 WITHOUT PREJUDICE TO ABOVE, THE LEARNED CIT ERR ED IN FACT AND IN LAW IN COMPUTING THE DISALLOWANCE U/S. 14A READ WIT H RULE 8D AT RS. 215,16,31,588 AS AGAINST RS. 6,06,477 DISREGARDING THE SUBMISSIONS MADE BY THE APPELLANT. 2.5 WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT GROSSLY ERRED IN CALCULATING THE DISALLOWANCE U/S. 14A READ WITH RUL E 8D IN FOLLOWING RESPECTS A. IN WORKING OUT THE DISALLOWANCE U/S. 14A ON THE BASIS OF GROSS INTEREST WITHOUT REDUCING THE INTEREST EARNED BY TH E APPELLANT B. WHILE COMPUTING THE AVERAGE TOTAL ASSETS U/R 8D CURRENT LIABILITIES HAVE BEEN INCLUDED IN THE TOTAL ASSETS C. WHILE CALCULATING AVERAGE INVESTMENTS, THE INVES TMENTS EARNING TAXABLE INCOME HAVE BEEN INCLUDED. 3. YOUR APPELLANT CRAVES THE RIGHT TO ADD TO OR AL TER, AMEND, SUBSTITUTE, DELETE OR MODIFY ALL OR ANY OF THE ABOV E GROUNDS OF APPEAL. 3. BRIEFLY STATED FACTS ARE THAT THE CASE OF ASSESS EE WAS PICKED UP FOR SCRUTINY ASSESSMENT AND THE ASSESSMENT U/S 143(3) O F THE INCOME-TAX ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 3 ACT, 1961 (HEREINAFTER REFERRED TO AS 'THE ACT') WA S FRAMED VIDE ORDER DATED 30.12.2011. WHILE FRAMING THE ASSESSMENT, TH E ASSESSING OFFICER MADE DISALLOWANCE OF INTEREST PAID TO THE SUN PHARM A GROUP OF RS.66,19,55,722/-, DISALLOWANCE OF DISCOUNT CLAIM O F RS.7,34,80,655/- AND DISALLOWANCE OF DONATION OF RS.11,00,000/-; THU S, HE MADE THE ADDITION OF RS.33,65,43,377/- AS AGAINST THE RETURN ED INCOME OF RS.1,82,77,859/-. SUBSEQUENTLY, THE LEARNED CIT PR OPOSED TO REVISE THE ASSESSMENT SO FRAMED ON THE BASIS THAT IN COMPUTATI ON OF INCOME FILED BY THE ASSESSEE ALONGWITH THE RETURN FOR THE YEAR U NDER CONSIDERATION, I.E., AY 2009-10, SHOWS THAT IT HAD EARNED EXEMPTED INCOME OF RS.4,22,54,212/- WHICH DID NOT FORM PART OF TOTAL I NCOME. AGAINST THIS AN AMOUNT OF RS.50,000/- ONLY OFFERED FOR DISALLOWA NCE U/S 14A OF THE INCOME-TAX ACT. CONSIDERING THE FINANCIAL EXPENSES , ADMINISTRATIVE EXPENSES, MANAGEMENT EXPENSES AND OTHER OPERATING E XPENSES ATTRIBUTABLE TO EARN THE EXEMPTED INCOME THE DISALL OWANCE U/S 14A R.W. RULE-8 SHOULD HAVE BEEN RS.2,15,16,31,588/-. THEREFORE, THE LEARNED CIT PROCEEDED TO PASS AN ORDER U/S 263 OF T HE ACT, THEREBY HE DIRECTED THE ASSESSING OFFICER TO PASS A FRESH DE NOVO ASSESSMENT ORDER. THE ASSESSEE, AGGRIEVED BY THIS DECISION OF THE LEA RNED CIT, HAS PREFERRED THE PRESENT APPEAL. 4. GROUND NOS.1 TO 1.2 ARE WITH REGARD TO VALIDITY OF THE ORDER PASSED U/S 263 OF THE ACT. LEARNED SR. COUNSEL FOR THE ASSESSEE, SHRI S.N. SOPARKAR, SUBMITTED THAT LEARNED CIT HAS GROSS LY ERRED IN INVOKING THE PROVISIONS U/S 263 OF THE ACT. HE SUB MITTED THAT THE CONDITIONS STIPULATED FOR INVOKING SUCH EXTRA-ORDIN ARY JURISDICTION ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 4 WERE NOT SATISFIED AS THERE IS NO PREJUDICE CAUSED TO THE REVENUE BY THE ASSESSMENT ORDER. HE SUBMITTED THAT THE LAW IS WELL SETTLED THAT FOR INVOKING THE PROVISIONS OF SECTION 263 OF THE ACT, TWIN CONDITIONS ARE TO BE SATISFIED; FIRSTLY, THE ASSESSMENT ORDER SO F RAMED IS TO BE ERRONEOUS AND ALSO PREJUDICIAL TO THE INTEREST OF R EVENUE. HE SUBMITTED THAT THE PROVISIONS OF SECTION 263 CANNOT BE RESORTED TO APPLY ARITHMETICAL WORKING SPECIFIED UNDER RULE 8D. THE LEARNED CIT HAS TO DEMONSTRATE THAT, BY THE ASSESSMENT SO FRAME D BY THE ASSESSING OFFICER, SOME PREJUDICE IS CAUSED TO THE REVENUE. THE LEARNED COUNSEL FOR THE ASSESSEE, IN SUPPORT OF HIS CONTENTION, HAS RELIED UPON THE JUDGMENT OF HONBLE SUPREME COURT RENDERED IN THE C ASE OF MALABAR INDUSTRIAL CO. LTD VS. CIT (SC), REPORTED IN 243 IT R 83. HE ALSO REITERATED THE SUBMISSIONS AS WERE MADE BEFORE THE LEARNED CIT IN RESPONSE TO NOTICE U/S 263 OF THE ACT. 5. ON THE CONTRARY, LEARNED CIT-DR HAS SUPPORTED TH E ORDER OF THE LEARNED CIT AND SUBMITTED THAT IT IS THE CASE WHERE NO ENQUIRY WAS MADE BY THE ASSESSING OFFICER. IF THERE IS FAILURE TO MAKE SUCH ENQUIRY, ORDER IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. THE CIT NEED NOT PROVE THAT IT IS ERRONEOUS AND HE CAN REVI SE IT U/S 263 OF THE ACT. IN SUPPORT OF HIS CONTENTION, LEARNED CIT-DR HAS PLACED RELIANCE ON THE JUDGMENTS OF THE VARIOUS COURTS, RENDERED IN THE CASES OF RAMPYARI DEVI SARAOGI VS. CIT, REPORTED IN 67 ITR 8 4 (SC); MALABAR INDUSTRIAL CO. LTD. VS. CIT, 234 ITR 83 (SC); SWARU P VEGETABLE PRODUCTS INDUSTRIES LTD VS. CIT, 187 ITR 412 (ALL) AND GEE VEE ENTERPRISES VS. ADDL. CIT & ORS (DEL), 99 ITR 375 ( DEL). HE FURTHER SUBMITTED THAT IT WOULD NOT BE PROPER FOR THE HONB LE MEMBERS OF THE ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 5 TRIBUNAL TO LOOK INTO THE MERITS OF THE ISSUE AS TH E COURT OF FIRST INSTANCE. IN SUPPORT OF THIS CONTENTION LEARNED CI T-DR HAS PLACED RELIANCE ON THE DECISION OF DELHI HIGH COURT RENDER ED IN THE CASE OF CIT VS. EASTERN MEDIKIT LTD, REPORTED IN 337 ITR 56 (DEL). HE ALSO PLACED RELIANCE ON THE JUDGMENT OF HONBLE GUJARAT HIGH COURT IN THE CASE OF ADDL. CIT VS. MUKUR CORPORATION, REPORTED I N (1978) 111 ITR 312 (GUJ.). 6. IN REJOINDER, THE LEARNED SR. COUNSEL, APPEARING ON BEHALF OF THE ASSESSEE, SUBMITTED THAT SIMILAR ISSUE WAS DECIDED BY THE CO-ORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.1334/AHD/2015 FOR ASSESSMENT YEAR 2010-11, WHERE IN THE TRIBUNAL, AFTER EXAMINING THE ISSUE, CAME TO THE CO NCLUSION THAT CIT WAS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF SEC TION 263 OF THE ACT. 7. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITI ES BELOW. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT THE ASSESSI NG OFFICER HAS NOT MADE ANY ENQUIRY WITH REGARD TO THE EXEMPT INCOME D URING THE ASSESSMENT PROCEEDINGS AND NON-CONDUCTING OF THE EN QUIRY BY THE ASSESSING OFFICER IS AN ERRONEOUS APPROACH. THE LEA RNED CIT IS EMPOWERED U/S 263 OF THE ACT TO INITIATE THE PROCEE DINGS IN CASE THE ASSESSING OFFICER HAS NOT CONDUCTED ANY ENQUIRY AND APPLIED HIS MIND ON THE ISSUE. THEREFORE, THE INITIATION OF PROCEED INGS U/S 263 OF THE ACT IS CONCERNED, WE DO NOT SEE ANY ILLEGALITY IN T O THE ACT OF THE LEARNED CIT. THEREFORE, THE GROUND NO.1 OF THE ASS ESSEES APPEAL IS REJECTED. ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 6 8. GROUND NO.2 IS WITH REGARD TO WORKING OF DISALLO WANCE U/S 14A OF THE ACT. THE LEARNED COUNSEL FOR THE ASSESSEE S UBMITTED THAT THE LEARNED CIT WAS ERRED IN FACT AND LAW IN COMPUTING THE DISALLOWANCE U/S 14A READ WITH RULE 8D AT RS.2,15,16,31,588/- AS AGAINST RS.6,06,477/- DISREGARDING THE SUBMISSIONS MADE BY THE ASSESSEE. IT IS CONTENDED THAT THE CIT HAS ERRED IN WORKING OUT THE DISALLOWANCE U/S 14A ON THE BASIS OF GROSS INTEREST WITHOUT REDUCING THE INTEREST EARNED BY THE ASSESSEE. WHILE COMPUTING THE AVERAGE TOTAL ASSETS UNDER RULE 8D, CURRENT LIABILITIES HAVE BEEN INCLUDED IN THE T OTAL ASSETS. WHILE CALCULATING AVERAGE INVESTMENTS, THE INVESTMENTS EA RNING TAXABLE INCOME HAVE BEEN INCLUDED. THE LEARNED COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE ON THE JUDGMENT OF HONBLE GUJARAT HIGH COURT RENDERED IN THE CASE OF PR. CIT VS. INDIA GELTINE A ND CHEMICALS LTD, IN TAX APPEAL NOS.276 AND 277 OF 2015. THE LEARNED CO UNSEL ALSO RELIED UPON THE JUDGMENT OF HONBLE DELHI HIGH COURT IN TH E CASE OF PR. CIT VS. BHARTI OVERSEAS (P.) LTD. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. BEFORE THE LEARNED CIT, THE ASSESSEE HAD SU BMITTED AS UNDER:- SUB: REPLY TO YOUR SHOW CAUSE NOTICE FOR ACTION U/S.263 DATED 05.12.2013; YOUR LETTER DATED 06.01.2014 REF: M/S. ADITYA MEDISALES PVT. LTD A.Y.: 2009-10 PAN: AABCA9317J THIS HAS REFERENCE TO SHOW CAUSE NOTICE ISSUED BY Y OUR KIND OFFICE REGARDING PROCEEDING INITIATED U/S 263 OF THE INCOM E-TAX ACT, 1961 (THE 'ACT'). WITH RESPECT TO THE SAME WE SUBMIT AS UNDER: REPLY ON INVOCATION OF PROVISION OF SECTION 263 OF THE ACT: ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 7 1. YOUR OFFICE HAS ISSUED NOTICE U/S. 263 OF TH E ACT STATING THE ORDER PASSED BY THE ASSESSING OFFICER U/S. 143(3) OF THE A CT DATED 30.12.2011 WAS ERRONEOUS IN SO FAR AS IT WAS PREJUDICIAL TO TH E INTEREST OF THE REVENUE. YOUR OFFICE HAS STATED THAT CONSIDERING TH E FINANCIAL EXPENSES, ADMINISTRATIVE EXPENSES, MANAGEMENT EXPENSES AND OT HER OPERATING EXPENSES ATTRIBUTABLE TO EARN THE EXEMPTED INCOME T HE DISALLOWANCE U/S.14A READ WITH RULE 8 SHOULD HAVE BEEN RS.215,16 ,31,588 (RS.215.16 CR.) WHEREAS THE ASSESSEE HAS DISALLOWED THE SUM OF RS.50,000 U/S. 14A OF THE ACT. YOUR OFFICE HAS ASKE D US TO SUBMIT AS TO WHY THE ORDER PASSED BY THE ASSESSING OFFICER U/S. 143(3) OF THE ACT SHOULD NOT BE ENHANCED OR CANCELLED WITH A DIRECTIO N TO MAKE FRESH ASSESSMENT IN ACCORDANCE WITH PROVISION OF SECTION 263 OF THE ACT. FURTHER AS PER OUR REQUEST LETTER DATED 17.12.2013, YOUR OFFICE HAS ALSO PROVIDED WORKING OF DISALLOWANCE OF RS.215.63 CR. 2. IN THE ABOVE RESPECT WE SUBMIT THAT THE ORDE R PASSED BY THE AO IS NOT ERRONEOUS AND ALSO NOT PREJUDICIAL TO THE INTER EST OF THE REVENUE. THE ISSUE UNDER CONSIDERATION HAS ALREADY BEEN EXAM INED BY THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS. FOR RE ADY REFERENCE THE CHRONOLOGY OF EVENTS IN THE CASE OF THE ASSESSEE IS AS UNDER: EVENT DATE REGULAR ASSESSMENT U/S. 143(3): RETURN OF INCOME FILED U/S. 139(1) ON 29TH SEPTEMBER , 2009 NOTICE U/S. 143(2) ISSUED ON 19.08.2010 REGULAR ASSESSMENT COMPLETED ON 30.12.2011 3. WE MOST RESPECTFULLY SUBMIT THAT THE CASE OF THE ASSESSEE WAS SELECTED FOR REGULAR SCRUTINY U/S. 143(2) OF THE ACT . DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER HAD CALLED FOR VARIOUS INFORMATION AND EXPLANATION BY ISSUING NOTICES U/S. 142(1) OF THE ACT. YOUR OFFICE MAY KINDLY NOTE THAT THE ASSESSEE HAS D ISALLOWED SUM OF RS.50,000 IN THE RETURN OF INCOME U/S.14A OF THE AC T. WE ALSO WISH TO HIGHLIGHT THAT ALONG WITH THE RETURN OF INCOME, THE ASSESSEE IS REQUIRED TO FILE A TAX AUDIT REPORT DULY CERTIFIED BY A CHAR TED ACCOUNTANT IN FORM 3CA TOGETHER WITH FORM 3CD. THE SAID FORM 3CD HAS A SPECIFIC REQUIREMENT OF REPORTING ANY DISALLOWANCE UNDER SEC TION 14A VIDE ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 8 CLAUSE NO. 17(1). THE ASSESSEE HAS DULY REPORTED THE DISALLOWANCE OF RS.50,000/- IN THE SAID CLAUSE AND THE SAME HAS BEE N CERTIFIED BY THE TAX AUDITOR. 4. IT IS ONLY AFTER VERIFYING THE ABOVE RETURN OF INCOME AND TAX AUDIT REPORT, THE AO HAS DECIDED TO ACCEPT THE CONTENTION OF THE ASSESSEE. ALSO THE AO HAS IN THE EARLIER YEARS MADE AN ADDITI ON / DISALLOWANCE WITH RESPECT TO SEC. 14A AND THAT SINCE DURING THE YEAR UNDER CONSIDERATION ALREADY INTEREST EXPENSES HAVE BEEN D ISALLOWED BY THE AO IN THE ASSESSMENT ORDER THEREFORE THE ASSESSING OFF ICER AFTER DUE APPLICATION OF MIND HAS MADE NO DISALLOWANCE UNDER SEC. 14A. HENCE, IT CAN BE SAID THAT THE ASSESSING OFFICER HAD APPLIED HIS MIND IN RESPECT OF THE SAID ISSUE. 5. IN THIS REGARD WE WOULD ALSO LIKE TO SUBMIT THAT IN TERMS OF SECTION 14A(2), ONLY WHERE AN ASSESSING OFFICER IS NOT SATI SFIED WITH REGARD TO THE DISALLOWANCE CARRIED OUT BY THE ASSESSEE, CAN H E INVOKE THE PROVISIONS OF RULE 8D. THERE ARE VARIOUS JUDICIAL D ECISIONS WHICH HAVE HELD THAT INVOKING RULE 8D IS NOT AUTOMATIC AS IT I S DEPENDENT UPON THE SATISFACTION OR OTHERWISE OF THE ASSESSING OFFICER. A FEW DECISIONS ARE CITED IN THIS REGARD: AUCHTEL PRODUCTS LIMITED - ITAT MUMBAI ITA 3185/ MUM/2011 IT IS ONLY WHEN THE ASSESSING OFFICER IS NOT SATISF IED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR NO EXPENDITURE HAVING BEEN INCURRED IN RELATION TO EXEMPT INCOME, THAT THE MANDATE OF RULE 8D WILL OPERATE. JINDAL PHOTO LTD. (ITAT DELHI) ITA NO. 814(DEL)2011 THE ASSESSING OFFICER APPLIED RULE 8D WITHOUT POINT ING OUT ANY INACCURACY IN THE METHOD OF APPORTIONMENT OR ALLOCA TION OF EXPENSES AS ADOPTED BY THE ASSESSEE. RULE 8D CAN BE INVOKED ONLY IF THE ASSESSING OFFICE R HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATIS FIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO TAX FREE INCOME . GODREJ & BOYCE MANUFACTURING CO. LTD.328 ITR 81 ( BOM HC) MAXOPP INVESTMENT LIMITED 247CTR162(DELHI HC) SAW PIPES LIMITED 3 SOT 237 (DELHI ITAT) ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 9 6. IN OUR CASE THERE IS NO FINDING ON RECORD TH AT THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. IN THE PRESENT CASE HAVING REGARD TO THE TOTALITY OF THE FACTS AND THE DISCLOSURES MADE BY THE ASSESSEE IN THE ANNUAL ACCOUNTS IS ALSO IN T HE TAX AUDIT REPORT, THE ASSESSING OFFICER HAD COME TO A REASONABLE SATI SFACTION THAT NO DISALLOWANCE UNDER SECTION 14 A IS CALLED FOR. ACCO RDINGLY NO DISALLOWANCE WAS CARRIED OUT. WE THEREFORE SUBMIT T HAT THE AO HAS TAKEN ONE OF THE POSSIBLE VIEWS ON SATISFACTION OF DISALLOWANCE U/S.14A AND HENCE PROCEEDINGS U/S.263 CANNOT BE INITIATED F OR SUCH ISSUE. THE DISALLOWANCE OF RS.50,000/- MADE BY THE ASSESSEE HA S BEEN ACCEPTED BY THE ASSESSING OFFICER DURING THE COURSE OF ASSESSME NT. ALL RELEVANT DETAILS PERTAINING TO INVESTMENTS, EXEMPT INCOME, E TC. WERE ON RECORDS. THE ASSESSING OFFICER HAS FRAMED THE ASSESSMENT AFT ER DUE APPLICATION OF MIND. THUS, IT WOULD BE INCORRECT TO HOLD THAT T HE ASSESSMENT ORDER WAS ERRONEOUS MERELY BECAUSE OF A DIFFERENT OPINION WHICH VARIES WITH THE OPINION OF THE ASSESSING OFFICER. SINCE THE REL EVANT MATERIAL WAS ALREADY ON RECORD AND BEING DULY CONSIDERED BY THE ASSESSING OFFICER BASED ON WHICH THE ASSESSING OFFICER HAS TAKEN A PA RTICULAR VIEW, THE MERE FACT THAT A DIFFERENT VIEW IS POSSIBLE CANNOT BE THE BASIS FOR INVOKING S. 263. HENCE, WE RESPECTFULLY SUBMIT THAT THE ISSUE OUGHT NOT TO BE CONSIDERED AGAIN U/S. 263. 7. WE THEREFORE SUBMIT THAT THE AO HAS PASSED THE ORDER AFTER CONSIDERING THE FACTS ON RECORD AND AFTER DUE APPLI CATION OF MIND AS MENTIONED IN THE ABOVE PARAS. WE THEREFORE SUBMIT T HAT THE ORDER PASSED BY THE AO IS A REASONED ORDER. WE ARE THEREF ORE OF THE VIEW THAT THE ASSUMPTION OF EXTRAORDINARY JURISDICTION U/S. 2 63 BY YOUR OFFICE IS NOT AS PER LAW. THE ORDER OF THE AO IS NEITHER ERRO NEOUS NOR PREJUDICIAL TO THE INTEREST OF THE REVENUE. WE INVITE YOUR KIND ATTENTION TO THE DECISION OF JURISDICTIONAL GUJARAT HIGH COURT IN TH E CASE OF AMIT CORPN. 21 TAXMANN.COM 64 (2012) WHEREIN IT WAS HELD THAT WHERE ASSESSING OFFICER AFTER VERIFICATION OF RECORDS AND MAKING INQUIRY, HAD FRAMED ASSESSMENT, COMMISSIONER COULD NOT REVISE IT . SIMILAR VIEW IS ALSO EXPRESSED BY IN THE CASE OF CIT-III V. RECONST RUCTION CO. 175 TAXMANN 165 (2008) (GUJ.). IN THIS CASE IT WAS HELD T HAT WHEN THE ASSESSING OFFICER HAS TAKEN A PARTICULARS VIEW BASE D 8. UPON EVIDENCED PRODUCED BEFORE HIM, THE COMM ISSIONER CANNOT TAKE A DIFFERENT VIEW BY INVOKING THE PROVISION OF SECTION 263 OF THE ACT. ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 10 9. THE ASSESSING OFFICER CONSIDERED ONE OF THE TWO POSSIBLE AND PLAUSIBLE ALTERNATIVES. IT IS A FINDING OF FACT AND THE FINDING OF FACT IS NOT PERVERSE AND THEREFORE IT WOULD NOT BE CORRECT TO S TATE THAT THE VIEW OF THE AO IS ERRONEOUS. IT IS A MATTER OF JUDGMENT, WH ICH AO HAS EXERCISED AFTER DUE APPLICATION OF MIND. IN THE CAS E OF CIT V MAX INDIA LTD 295 ITR 282 (SC), IT WAS HELD THAT WHEN THE AO INTERPRETED THE PROVISION OF THE ACT IN ONE OF THE TWO POSSIBLE WAY S, THE ORDER OF THE AO WAS NOT ERRONEOUS. THESE ARE THE MATTERS WHICH DO N OT COME WITHIN THE PURVIEW OF SECTION 263 REVISION. WE ALSO RELY UPON THE DECISION OF MUMBAI HIGH COURT IN THE CASE OF CIT V GABRIEL INDI A LTD.203 ITR 108. IN THE SAID CASE IT WAS HELD THAT CIT CANNOT R EVISE ORDER BECAUSE HE DISAGREES WITH THE DECISION OF AO, FURTHER THE COUR T OBSERVED THAT WITHOUT FINDING THE ORDER OF ITO AS ERRONEOUS, COMM ISSIONER CANNOT SET ASIDE THE SAME AND DIRECT ITO TO RE-EXAMINE THE FACTS. RELIANCE IS ALSO PLACED ON THE DECISION OF DELHI HIGH COURT IN THE CASE OF DLF POWER LTD 329 ITR 289. 10. IF THE ASSESSING OFFICER HAS FOLLOWED ONE OF S EVERAL PERMISSIBLE VIEWS, IT CANNOT BE SAID THAT THE ORDER IS ERRONEOU S AND PREJUDICIAL SHOULD BE CAUSED AS A RESULT OF PASSING AN ERRONEOU S ORDER. 11. WE FURTHER SUBMIT THAT AN ORDER CANNOT BE TERME D AS ERRONEOUS UNLESS IT IS NOT IN ACCORDANCE WITH LAW. IF THE AO MAKES AN ASSESSMENT IN ACCORDANCE WITH LAW, THE SAME CANNOT BE BRANDED AS ERRONEOUS BY THE COMMISSIONER SIMPLY BECAUSE, ACCORDING TO HIM, THE ORDER SHOULD HAVE WRITTEN MORE ELABORATELY. THIS SECTION DOES NOT VIS UALIZE A CASE OF SUBSTITUTION OF THE JUDGMENT OF THE COMMISSIONER FO R THAT OF THE ASSESSING OFFICER. ALSO IN THE CASE OF CIT V GABRIE L INDIA LTD 203 ITR 108 (MUM.) 12. WE WOULD LIKE TO SUBMIT THAT THE AS PER THE PRO VISIONS OF SEC. 263 THE PREREQUISITE TO EXERCISE REVISION BY THE CIT U/ S.263 IS THAT THE ORDER OF THE AO IS ERRONEOUS TO THE EXTENT IT IS PREJUDIC IAL TO THE INTERESTS OF THE REVENUE. THE CIT HAS TO BE SATISFIED OF TWIN CO NDITIONS, NAMELY, (I) THE ORDER OF THE AO SOUGHT TO BE REVISED IS ERRO NEOUS; AND (II) IT IS PREJUDICIAL TO THE INTERESTS OF THE REVEN UE. 13. IF ONE OF THEM IS ABSENT I.E., IF THE ORDER OF THE ASSESSING OFFICER IS ERRONEOUS BUT IS NOT PREJUDICIAL TO THE REVENUE OR IF IT IS NOT ERRONEOUS BUT IS PREJUDICIAL TO THE REVENUE THEN THE RECOURSE CANNOT BE HAD TO S. 263(1). IN THE PRESENT CASE, THE ASSESSING OFFICER H AS ALREADY MADE A ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 11 DISALLOWANCE OF INTEREST EXPENDITURE INCURRED BY TH E ASSESSEE COMPANY DURING THE YEAR. THUS BY MAKING DISALLOWANCE THERE HAS BEEN ADDITION MADE TO THE INCOME OF THE ASSESSEE. SINCE THE INTER EST HAS BEEN DISALLOWED WHILE MAKING THE ASSESSMENT, THE ALLEGED FAILURE TO MAKE DISALLOWANCE UNDER SECTION 14A DOES NOT CAUSE ANY P REJUDICE TO THE INTERESTS OF THE REVENUE AS THE ALLEGED INTEREST HA S ALREADY BEEN DISALLOWED. SINCE THE ORDER OF THE ASSESSING OFFICE R IS NOT BEEN PREJUDICIAL TO THE INTEREST OF THE REVENUE THEREFOR E RECOURSE TO SEC. 263 CANNOT BE TAKEN. TO JUSTIFY THE SAME WE ALSO RELIED UPON THE DECISION OF SAW PIPES LIMITED (2005) 3 SOT 237 (DEL. ITAT). IN TH IS CASE IT WAS HELD THAT THE ISSUE OF ALLOW-ABILITY OF INTEREST HA VING BEEN EXAMINED BY THE CIT(A), THE CIT'S JURISDICTION TO EXAMINE THAT ISSUE OR ANY OTHER ASPECT RELATED TO THAT ISSUE UNDER S. 263 STANDS OU STED. 14. WE FURTHER SUBMIT THAT THE ENTIRE ISSUE OF DISA LLOWANCE UNDER SECTION 14A IS HIGHLY LEGALLY DEBATABLE AND CONTENT IOUS ISSUE. SINCE THE ASSESSING OFFICER AFTER DUE APPRECIATION OF THE FAC TS OF THE PRESENT CASE ACCEPTED THE DISALLOWANCE U/S. 14A CARRIED OUT BY T HE ASSESSEE AND NOT MADE ANY DISALLOWANCE UNDER SECTION 14A, THERE WAS NO ERROR PREJUDICIAL TO THE INTERESTS OF THE REVENUE. THIS I S MORE SO BECAUSE THE DISALLOWANCE UNDER SECTION 14 A IS FAIRLY INTRICATE BASED ON REVIEW OF THE FACTS AND THE LAW ON THE SUBJECT. HENCE THE DIS ALLOWANCE UNDER SECTION 14A IS NOT AUTOMATIC ESPECIALLY WHERE MORE THAN ONE VIEW IS POSSIBLE AND THE ASSESSING OFFICER HAS ACCEPTED A P ARTICULAR POSITION TAKEN BY THE ASSESSEE. IN THE CIRCUMSTANCES THE POW ER TO INVOKE SECTION 263 IS ABSENT. WE FURTHER SUBMIT THAT THE ISSUE OF DISALLOWANCE U/S. 14A IS HIGHLY DEBATABLE AND HENCE PROVISION OF SECT ION 263 IS NOT APPLICABLE IN THE FOLLOWING CASES TOO IT HAS BEEN H ELD THAT WHERE AN ISSUE IS DEBATABLE, THE PROVISIONS OF S. 263 CANNOT BE IN VOKED: CIT VS. DLF LTD (2013) 31 TAXMANN.COM 158, DELHI HC METHOD TRADING & INVESTMENT LTD. (2000) 246 IT R 588 CAL HC AN SAL PROPERTIES & IND. (P) LTD. (2009) 315 ITR 225 DE LHI HC 15. WE THEREFORE SUBMIT THAT PROVISION OF SECTION 2 63 IS NOT APPLICABLE UNDER THESE CIRCUMSTANCES BASED UPON THE ABOVE SUBM ISSIONS. HENCE WE REQUEST YOUR OFFICE TO DROP THE FURTHER PROCEEDI NGS. 16. WITHOUT PREJUDICE TO THE ABOVE WE ALSO SUBMIT T HAT AS PER EXPLANATION (C) TO SECTION 263 (1), POWER UNDER THE SAID SECTION CAN BE ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 12 EXERCISED IN RESPECT OF MATTERS WHICH ARE NOT SUBJE CT MATTER OF ANY APPEAL. IN THE PRESENT CASE, THE ASSESSING OFFICER HAS DISALLOWED THE INTEREST CLAIMED (NET) BY THE ASSESSEE. THE ASSESSE E HAS CARRIED THE SAID MATTER IN APPEAL BEFORE THE CIT(A). SINCE THE DISALL OWANCE OF INTEREST IS SUBJECT MATTER OF AN APPEAL, IT IS PRAYED THAT THE PROPOSED ACTION UNDER SECTION 263 IS NOT WITHIN THE SCOPE OF THE POWERS G RANTED UNDER THE LAW IN THIS REGARD AS A MAJOR PORTION OF THE PROPOSED D ISALLOWANCE PERTAINS TO DISALLOWANCE OF INTEREST. 17. WE FURTHER SUBMIT THAT YOUR OFFICE HAS ALSO NO T GIVEN ANY FINDING THAT THE ASSESEE HAS INCURRED ANY DIRECT EXPENDITUR E TO EARN THE TAX FREE INCOME. YOUR OFFICE HAS PROPOSED TO APPLY RULE 8D(2 ) BY STATING THAT VARIOUS EXPENDITURE IS DEBITED TO PROFIT AND LOSS A CCOUNT. HOWEVER THERE IS NO FINDING THAT THIS EXPENDITURE SHOULD HAVE BEE N INCURRED FOR EARNING THE EXEMPT INCOME. WE THEREFORE SUBMIT THAT THE PROVISION OF SECTION 263 CANNOT BE APPLY FOR MERELY APPLYING THE ARITHMETICAL WORKING SPECIFIED UNDER RULE 8D(2). IN THE CASE OF A CCEL LTD 25 TAXMANN.COM 377 CHENNAI ITAT HAS HELD THAT NO REVIS ION CAN BE MADE U/S.263 OF THE ACT, UNLESS ANY EXPENDITURE IS SHOWN FOR EARNING EXEMPT INCOME. IN ABSENCE OF FINDING ABOUT INCURRIN G OF ANY EXPENDITURE IN EARNING EXEMPT INCOME, REVISION CANN OT BE DONE ON GROUND THAT ASSESSEE HAD NOT OFFERED ANY SUCH EXPEN DITURE. ON THIS GROUND ALSO WE REQUEST YOUR OFFICE TO DROP THE PROC EEDINGS. SUBMISSIONS ON MERITS OF THE CASE: 18. WITHOUT PREJUDICE TO OUR RIGHT TO CHALLENGE THE VALIDITY OF PROCEEDINGS U/S.263 OF THE ACT ON THE BASIS OF THE ABOVE CONTENTIONS, WE SUBMIT ON MERITS OF THE CASE AS UNDER. 19. YOUR OFFICE HAS PROPOSED TO APPLY THE PROVISION OF RULE 8D(2) AND TO DISALLOW THE EXPENDITURE U/S.14A OF RS.215.16 CR . WITHOUT PREJUDICE TO VARIOUS MISTAKES AS APPEARED IN THE WO RKING OF DISALLOWANCE U/S.14A, WE SUBMIT THAT THE ASSESSEE H AS ALREADY DISALLOWED SUM OF RS.50,000/- AND HENCE NO FURTHER DISALLOWANCE CAN BE MADE U/S. 14A OF THE ACT. 20. YOUR OFFICE MAY KINDLY NOTE THAT RULE 8D IS APP LICABLE WHEN THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECT NESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED FOR THE EARNING TAX FREE INCOME OR IN CASE WHERE THE ASSESSEE CLAIMS THAT NO SUCH EXPENDITURE HAS BEEN INCURRED FOR EARNING TAX FREE INCOME. IN O UR CASE THE ASSESSEE HAS DISALLOWED EXPENDITURE OF RS.50,000 SINCE NO OT HER EXPENDITURE IS ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 13 DIRECTLY OR INDIRECTLY ATTRIBUTABLE FOR EARNING THE EXEMPT INCOME. SINCE ALL THE INVESTMENT WERE MADE FROM NON-INTEREST BEAR ING FUNDS, THERE IS NO QUESTION OF DISALLOWANCE OF INTEREST U/S.14A OF THE ACT. WE THEREFORE SUBMIT THAT RULE 8D(2) IS NOT APPLICABLE I N OUR CASE. 21. DURING THE YEAR, THE ASSESSEE HAS EARNED DIVIDE ND INCOME OF RS. 4,22,54,212 WHICH HAS BEEN CLAIMED AS EXEMPT U/S 10 (34). THE APPELLANT HAD SUFFICIENT INTEREST FREE FUNDS TO CAR RY OUT THE INVESTMENTS AND HENCE NO BORROWED FUNDS WERE UTILIZ ED FOR MAKING INVESTMENTS AND HENCE NO DISALLOWANCE OUGHT TO BE M ADE UNDER RULE 8D(2) OF THE ACT. 22. THE ASSESSEE'S INTEREST FREE FUNDS COMPRISING O F SHARE CAPITAL AND RESERVES AND SURPLUS WERE SUFFICIENT TO COVER THE C OST PRICE OF THE INVESTMENTS WHICH YIELD TAX FREE INCOME. THUS THERE COULD NOT BE ANY DISALLOWANCE OF INTEREST BECAUSE NONE OF THE INTERE ST BEARING FUNDS WERE USED FOR THE PURPOSE OF MAKING TAX FREE INVESTMENT, THE FOLLOWING TABLE PROVIDES DETAILS OF OWN FUNDS AVAILABLE AND INVESTM ENTS MADE: FIGURES AS AT 31.03.2009 AMOUNT IN RS. SHARE CAPITAL RESERVES AND SURPLUS 82,76,000 29,53,22,342 TOTAL 30,35,98,342 AMOUNT OF TAX FREE INVESTMENTS 12,54,57,104 WE ALSO SUBMIT HEREWITH IN ANNEXURE 1 A CHART CONTA INING DETAILS OF THE OWN FUNDS OF THE COMPANY AND THE AMOUNT OF TAX FREE INVESTMENTS EVIDENCING THAT THE ASSESSEE COMPANY HAS SUBSTANTIA L OWN FUNDS TO COVER THE COST OF TAX FREE INVESTMENTS. 23. IT IS EVIDENT FROM THE ABOVE THAT THERE ARE SUF FICIENT INTEREST FREE FUNDS TO COVER THE COSTS OF THE INVESTMENT. IN THE ABSENCE OF A DIRECT NEXUS BETWEEN FUNDS DEPLOYED AND UNITS PURCHASED, T HE INTEREST FREE FUNDS SHOULD BE CONSIDERED FIRST FOR THE PURPOSE OF THE UNITS ACQUIRED. IF THE COST OF UNITS IS HIGHER THAN THE INTEREST FREE FUNDS THEN ONLY FOR THE BALANCE AMOUNT, INTEREST BEARING FUNDS SHOULD BE CO NSIDERED. WE RELY ON THE FOLLOWING DECISIONS IN WHICH IT WAS HELD THA T NO DISALLOWANCE SHOULD BE MADE IF SUFFICIENT INTEREST FREE FUNDS AR E AVAILABLE. 24. WE INVITE REFERENCE TO THE RECENT JUDGMENT OF T HE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER L IMITED - 18 DTR 1 (BOM) (2009). THIS IS VERY RECENT DECISION OF THE BOM BAY HIGH COURT ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 14 WHICH HAS LAID DOWN THAT IF THE INTEREST FREE FUNDS OF THE APPELLANT ARE SUFFICIENT TO COVER THE INTEREST FREE ADVANCES, THE N THE PRESUMPTION OUGHT TO BE THAT THE INTEREST FREE ADVANCES SHOULD BE CONSIDERED FROM THE ASSESSEE'S OWN FUNDS. THE DISCRETION OF THE ASSESSE E TO INVEST HIS OWN FUNDS IN THE MANNER CONSIDERED APPROPRIATE BY HIM I S NOT TO BE QUESTIONED. EVEN OTHERWISE IN THE FOLLOWING DECISIO NS IT HAS BEEN HELD THAT IF OWN FUNDS ARE SUFFICIENT, THEN A PRESUMPTIO N TO BE MADE THAT ANY INVESTMENT OF INTEREST FREE FUNDS SHOULD BE ATT RIBUTED TO OWN FUNDS RATHER THAN BORROWED FUNDS: HARRISONS MALAYALAM 19 SOT 363 (COCHIN) BECK INDIA LTD. 26 SOT 141 (MUMBAI) HOTEL SAVERA 239 ITR 795 (MADRAS) UNITED AGENCIES 37 TTJ 374 (AHMEDABAD) ASSANDAS & SONS 18 TTJ 199 (BOMBAY) TORRENT FINANCIERS VS. ACIT 73 TTJ 624 (AHMEDABAD) SAHNI SILK MILLS PVT. LTD. 253 ITR 294 (DELHI) 25. FURTHER, THE INVESTMENTS IN SHARES OF LISTED AN D UNLISTED COMPANIES HELD AS INVESTMENT ARE LONG TERM IN NATURE AND THER E IS NO MAJOR TRANSACTION-WISE ACTIVITY OF BUYING OR SELLING OF T HESE INVESTMENTS. ACCORDINGLY, THE ASSESSEE IS NOT REQUIRED TO INCUR ANY MAJOR ADMINISTRATIVE EXPENSES FOR EARNING THE EXEMPT INCO ME. CONSIDERING THESE FACTS, THE ASSESSEE HAD SUO MOTU DISALLOWED A SUM OF RS. 50,000/- FOR THE PURPOSE OF EARNING THE EXEMPT INCOME._THE A MOUNT OF RS. 50,000/- WAS DISALLOWED REPRESENTING 0.5% OF TIME O F THE PERSON HANDLING INVESTMENT MR. HIREN DESAI (DIRECTOR) DEVOT ED TOWARDS MAINTENANCE, UPDATING OF INVESTMENTS AND OTHER RELA TED ANCILLARY ACTIVITIES UNDERTAKEN AND ALSO 0.5% OF ABOVE SALARY AS EXPENSES TOWARDS ADMINISTRATIVE EXPENSES. THE WORKING OF THE EXPENSE IS DISALLOWED IS GIVEN AS UNDER: PARTICULARS AMOUNT IN RS. 0.5% OF SALARY OF MR. HIREN DESAI 25,000 OTHER ADMINISTRATIVE EXPENSES 25,00 TOTAL 50,000 26. WE ALSO RELY ON RULE 8D(2)(II), WHICH SPECIFICAL LY PROVIDES THAT THE PRO RATA DISALLOWANCE OF INTEREST IS REQUIRED TO BE MADE ONLY IN A SITUATION WHERE THE INTEREST PAID BY THE ASSESSEE I S NOT SPECIFICALLY ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 15 ATTRIBUTABLE TO EARNING ANY INCOME. WE ENCLOSE HERE WITH IN THE ANNEXURE-2, THE DETAILS OF INTEREST EXPENDITURE INC URRED BY THE ASSESSEE. A PERUSAL OF THE SAID DETAILS WILL INDICA TE THAT THE ENTIRE INTEREST HAS BEEN INCURRED IN RESPECT OF THE PHARMA CEUTICAL TRADING BUSINESS ACTIVITY OF THE ASSESSEE. IN VIEW OF THE S PECIFIC PROVISION OF RULE 8D, NO PRO RATA ALLOCATION OF INTEREST IS REQUIRED TO BE MADE. 27. BASED UPON THE ABOVE ANALYSIS WE SUBMIT THAT TH E ASSESSEE HAS ALREADY DISALLOWED RELEVANT EXPENDITURE FOR EARNING TAX FREE INCOME FROM ITS INVESTMENT. HENCE RULE 8D IS NOT APPLICABL E. WE THEREFORE SUBMIT THAT NO DISALLOWANCE CAN BE MADE UNDER RULE 8D (2). 28. BASED ON THE ABOVE WE HUMBLY REQUEST YOUR OFFIC E TO PLEASE DROP THE PROCEEDINGS INITIATED BY YOU U/S.263 OF THE ACT. MISTAKES IN COMPUTATION OF DISALLOWANCE UNDER RULE 8D(2): 30. WITHOUT PREJUDICE TO THE ABOVE WE SUBMIT THAT T HERE ARE MISTAKES IN THE WORKING OF DISALLOWANCE U/S.14A SUBMITTED BY YO UR OFFICE VIDE LETTER DATED 06.01.2014. WHILE COMPUTING THE SAID D EDUCTION YOUR OFFICE HAS CONSIDERED ALL THE INVESTMENT OUTSTANDING AS ON 31.03.2009 & 31.03.2008. THIS ALSO INCLUDES INVESTMENT EARNING T AXABLE INCOME. FURTHER THE VALUE OF TOTAL ASSETS AND THE VALUE OF INTEREST ARE ALSO TAKEN INCORRECTLY. IN VIEW OF THE SAID MISTAKES THE AMOUN T OF DISALLOWANCE IS WORKED OUT AT RS.215.16 CR. WHICH IS NOT MORE THAN THE VALUE OF INVESTMENT BUT HIGHER THAN THE TOTAL AMOUNT OF EXPE NDITURE DEBITED TO PROFIT AND LOSS ACCOUNT OF RS.165.34 CR. THE SAME I S ELABORATED AS UNDER: A. CONSIDERATION OF GROSS INTEREST FOR THE PURPOSE OF RULE 8D WITHOUT REDUCING THE INTEREST INCURRED SPECIFICALLY AND DIR ECTLY IN THE COURSE OF PHARMA BUSINESS: I. YOUR HONOUR WHILE COMPUTING THE DISALLOWANCE U/S 14A HAS CONSIDERED GROSS INTEREST EXPENDITURE FOR THE PURPO SE OF RULE 8D WITHOUT DEDUCTING THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE COMPANY ON OVERDUE BILLS AGGREGATING TO RS.66,08,23 ,037/-. II. WE WOULD LIKE TO STATE THAT THE INTEREST EXPEN DITURE INCURRED BY THE ASSESSEE IS ON ACCOUNT OF THE OVERDUE SALES BILLS I .E., IN OTHER WORDS THE INTEREST ON OVERDUE BILLS INCURRED IS SPECIFIC TO P HARRNA ACTIVITY OF THE ASSESSEE. AS THE SAME IS SPECIFICALLY ATTRIBUTABLE TO THE PHARMA ACTIVITY, THEREFORE IT WOULD BE INAPPROPRIATE TO CONSIDER THE SAME AS ATTRIBUTABLE ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 16 TOWARDS EARNING OF EXEMPT INCOME. ANY EXPENDITURE A TTRIBUTABLE TO A SPECIFIC BUSINESS ACTIVITY OF THE ASSESSEE SHOULD B E OUTSIDE THE SCOPE OF WORKING OUT THE DISALLOWANCE U/S. 14A. HENCE THE SA ID INTEREST SHOULD BE EXCLUDED FROM THE TOTAL INTEREST EXPENSES INCURR ED BY THE ASSESSEE COMPANY. III. WITHOUT PREJUDICE TO THE ABOVE, WE SUBMIT THAT DURING THE COURSE OF ASSESSMENT THE ASSESSING OFFICER HAS DISALLOWED THE ABOVE EXPENDITURE BY CONSIDERING THE SAME AS NON-BUSINESS PURPOSE AND MADE NET DISALLOWANCE OF RS.26,19,62,722/-. THEREFORE IF THE ENTIRE INTEREST EXPENSES INCURRED BY THE ASSESSEE ARE CONSIDERED FO R WORKING OUT DISALLOWANCE U/S. 14A READ WITH RULE 8D IT WOULD TA NTAMOUNT TO DOUBLE DISALLOWANCE IN THE HANDS OF THE ASSESSEE IN RESPECT OF THE SAME EXPENDITURE. THUS WHILE COMPUTING THE DISALLOWANCE U/S.14A R.W. RULE 8D THE TOTAL INTEREST EXPENDITURE SHOULD BE RE DUCED BY THE AMOUNT OF INTEREST EXPENSE ALREADY DISALLOWED BY THE ASSES SING OFFICER. B. NON DEDUCTION OF INTEREST INCOME FROM THE INTER EST EXPENSES: I. WHILE WORKING OUT THE DISALLOWANCE U/S. 14A READ WITH RULE 8D THE INTEREST EXPENSES ARE CONSIDERED WITHOUT DEDUCT ING THERE FROM THE INTEREST INCOME EARNED BY THE ASSESSEE. DURING THE YEAR ENDED 31.03.2009, THE ASSESSEE HAD EARNED AN INTEREST INC OME OF RS. 39,99,93,354/- AND INCURRED INTEREST EXPENDITURE OF RS. 66,21,35,396/-. IT IS THE BASIC PRINCIPLE OF LAW TO CHARGE NET INCO ME TO TAX. ON THE SAME ANALOGY INTEREST EXPENDITURE TO BE CONSIDERED FOR C OMPUTING DISALLOWANCE AS PER RULE 8D HAS TO BE THE NET EXPEN DITURE I.E. AFTER REDUCING INTEREST INCOME FROM THE AGGREGATE INTERES T EXPENDITURE. II. WE ALSO RELY ON THE DECISION IN CASE OF MORGAN STANLEY INDIA SECURITIES (P) LIMITED (55 DTR 177) ITAT MUMBAI. WHER EIN IT HAS BEEN HELD THAT INTEREST EXPENDITURE HAS TO BE CONSI DERED ON NET BASIS. FURTHER, HONBLE ITAT - KOLKATA IN THE CASE OF M. S . TRADE APARTMENT LIMITED (ITA NO; 1277/KOLKATA/2011 FOR A. Y. 2008-0 91 HAS ALSO HELD THAT INTEREST EXPENDITURE HAS TO BE SET OFF AGAINST INTEREST INCOME AND IF THERE IS NO INTEREST EXPENDITURE LEFT AFTER ADJUSTI NG THE INTEREST INCOME, THE DISALLOWANCE US/ 14A IS NOT WARRANTED. IT WAS A LSO HELD IN CASE OF KARNAVATI PETROCHMEM PVT. LTD. (AHD.) (TRIB.) THAT I N CASE THE INTEREST INCOME WAS MORE THAN INTEREST EXPENSE AND THE ASSES SEE HAD NET POSITIVE INTEREST INCOME, THE INTEREST EXPENDITURE CANNOT BE CONSIDERED FOR DISALLOWANCE U/S 14A AND RULE 8D. ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 17 III. THUS THE NET INTEREST EXPENDITURE INCURRE D DURING THE YEAR SHOULD BE CONSIDERED FOR COMPUTING THE DISALLOWANCE AS PER RULE 8D. IV. HENCE BASED ON ABOVE IT IS RESPECTFULLY SU BMITTED THAT THE AMOUNT OF INTEREST EXPENDITURE CONSIDERED FOR THE P URPOSE OF THE CLAUSE (II) OF RULE 8D(2) IS INCORRECT. C. CURRENT LIABILITIES SHOULD BE EXCLUDED FROM THE TOTAL ASSETS FOR COMPUTING THE AVERAGE TOTAL ASSETS U/R, 8D: I. THE TERM TOTAL ASSETS' WOULD COMPRISE OF O NLY FIXED ASSETS, INVESTMENTS AND CURRENT ASSETS. IN THE BALANCE SHEE T, CURRENT LIABILITIES ARE NETTED OFF AGAINST CURRENT ASSETS ON ACCOUNT OF THE FORMAT SPECIFIED UNDER SCHEDULE VI - PART A OF THE COMPANIES ACT, 19 56. SUCH FORMAT IS SPECIFIED SO THAT IT WOULD REPRESENT THE COMPANY'S NET WORKING CAPITAL ON THE FACE OF THE BALANCE SHEET. THIS FORMAT HAS N O RELATION WITH THE METHOD SPECIFIED U/R. 8D. IF THE BALANCE SHEET WERE TO BE PREPARED IN THE T FORMAT THEN THE CURRENT LIABILITIES AND PROVISION S WOULD HAVE BEEN REFLECTED AS LIABILITIES. FROM THE LANGUAGE USED IN THE RULE, IT IS CLEAR THAT TO ASCERTAIN THE 'TOTAL ASSETS' CURRENT LIABIL ITIES ARE NOT TO BE NETTED OFF. THE ONLY ADJUSTMENT THAT IS PRESCRIBED TO DETE RMINE THE 'TOTAL ASSETS' IS AN ADJUSTMENT FOR REVALUATION OF ASSETS. FURTHER, THE TERMINOLOGY USED IN THE BALANCE SHEET TOTAL AS PER THE SCHEDULE VI FORMAT IS 'APPLICATION OF FUNDS' AS OPPOSED TO 'TOT AL ASSETS'. HAD THE TERM 'TOTAL ASSETS' BEEN USED IN ARRIVING AT THE BA LANCE SHEET TOTAL AS PER SCHEDULE VI, THEN IT WOULD BE OUT OF DOUBT THAT CURRENT LIABILITIES NEED TO BE REDUCED FOR ARRIVING AT THE AVERAGE TOTA L ASSETS AS PER RULE 8D. II. IN ORDER TO SUBSTANTIATE OUR CLAIM WE WOUL D LIKE TO STATE THAT EVEN THE REVISED SCHEDULE VI WHICH HAS BECOME APPLICABLE FOR THE PREPARATION OF FINANCIAL STATEMENTS CLASSIFIES CURR ENT LIABILITIES AS A DISTINCT ITEM FROM CURRENT ASSETS. AS PER REVISED S CHEDULE VI THE CURRENT LIABILITIES ARE PRESENTED BELOW NON -CURREN T LIABILITIES UNDER THE HEAD 'EQUITY AND LIABILITIES'. HENCE ON THE ABO VE OBSERVATIONS WE HEREBY SUBMIT THAT FOR THE PURPOSE OF RULE 8D THE ' TOTAL ASSETS' SHALL BE COMPUTED WITHOUT ADJUSTING THE CURRENT LIABILITIES THERE FROM. D. INVESTMENT EARNING TAXABLE INCOME SHOULD BE EX CLUDED FOR THE PURPOSE OF CALCULATION OF THE AVERAGE INVESTMENTS: I. WE WOULD LIKE TO STATE THAT IN ARRIVING AT THE INVESTMENT RELATED FIGURES IN THE COMPUTATION MECHANISM OF RULE 8D, TO TAL INVESTMENTS ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 18 HAVE BEEN CONSIDERED FOR THE PURPOSE OF CALCULATING THE AVERAGE INVESTMENTS WITHOUT REDUCING INVESTMENTS WHICH YIEL DS TAXABLE INCOME. AS PER RULE 8D(2) INVESTMENT EARNING TAX FRE E INCOME IS REQUIRED TO BE CONSIDERED. HENCE THE COMPUTATION OF AVERAGE INVESTMENTS REQUIRED FOR THE PURPOSE OF THE CLAUSE (II) AND CLAUSE (III) OF RULE 8D(2) IS INCORRECT. OUT OF THE TOTAL INVESTMENT S AS ON 31.03.2009, THE FOLLOWING INVESTMENTS BEING TAXABLE SHOULD NOT BE CONSIDERED FOR WORKING OUT THE DISALLOWANCE U/S. 14A READ WITH RUL E 8D: SR. NO. NATURE OF INVESTMENT AMOUNT RS. AMOUNT RS. REASON 31.03.2009 31.03.2008 1 NATIONAL HOUSING BONDS AND RURAL ELECTRIFICATION 50,00,000 1,45,10,000 INTEREST INCOME BONDS TAXABLE 2 NATIONAL SAVINGS CERTIFICATE 7,000 7,000 INTEREST INCOME TAXABLE 3 INVESTMENT IN FIXED MATURITY PLANS (FMP) 15,00,00,000 182,20,61,380 ON REDEMPTION OF FMP OFFERED AS TAXABLE INCOME. 4 OPTIONALLY FULLY CONVERTIBLE DEBENTURES 15,30,000 15,30,000 INTEREST INCOME TAXABLE TOTAL 15,65,37,000 183,81,08,380 31. SINCE INCOME FROM ALL THE ABOVE INVESTMENT IS T AXABLE, THE SAME IS NOT REQUIRED TO BE CONSIDERED WHILE COMPUTING THE A VERAGE VALUE OF INVESTMENT FOR THE PURPOSE OF RULE 8D(2). FURTHER, IN THE PRESENT CASE THE PROPOSED DISALLOWANCE ON ACCOUNT OF INTEREST IT SELF HAS BEEN COMPUTED AT RS. 2,14,60,88,499/-. THIS IS HIGHER TH AN THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE AMOUNTING TO R S.662135396/-. THIS IS DUE TO THE FACT THAT THE AVERAGE INVESTMENT S AS PER THE SAID COMPUTATION CONSIDERED AS RS.1,11,86,17,994/- IS HI GHER THAN THE AVERAGE TOTAL ASSETS OF RS.34,51,28,62S/-. THIS CLE ARLY INDICATES THAT THERE IS A BASIC FLAW IN WORKING OUT THE PROPOSED D ISALLOWANCE. 32. IF YOUR OFFICE CONSIDERS THE ABOVE SUBMISSIONS AND RECTIFY THE ABOVE MISTAKES, THE TOTAL AMOUNT OF DISALLOWANCE IS TO BE WORKED OUT AT ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 19 RS.6,06,477/-. THE COMPUTATION OF THE SAME IS ENCLO SED AS ANNEXURE-3. HENCE EVEN IF YOUR OFFICE APPLY THE PROVISION OF RU LE 8D(2), THE DISALLOWANCE CAN BE MADE UP TO RS.6,06,477 AND NOT RS.215.60 CR. THIS IS WITHOUT PREJUDICE TO OUR RIGHT THAT PROVISI ON OF RULE 8D(2) IS NOT APPLICABLE IN OUR CASE AND THE ASSESSEE HAS COR RECTLY DISALLOWED SUM OF RS.50,000 U/S.14A OF THE ACT. 10. HOWEVER, THE LEARNED CIT WITHOUT CONSIDERING TH E SUBMISSIONS DECIDED THE ISSUE BY OBSERVING AS UNDER:- 2.2 THE SUBMISSION OF THE ASSESSEE HAS BEEN CONSIDE RED. THE CASE RECORDS WERE ALSO EXAMINED. ON PERUSAL OF THE BALANCE SHEET IT IS NOTICED THAT DURING THE YEAR UNDER CONSIDERATION HEAVY INVESTMEN TS WERE MADE BY THE ASSESSEE IN SHARES AND SECURITIES WHICH GENERAT ED EXEMPTED INCOME. IN THE STATEMENT OF COMPUTATION OF INCOME FILED WIT H THE RETURN OF INCOME IT IS SEEN THAT THE ASSESSEE HAS SHOWN AN AM OUNT OF RS. 4,22,54,212 AS EXEMPTED INCOME U/S. 10(34) OF THE I. T. ACT WHICH DID NOT FORM PART OF TOTAL INCOME. TO EARN THIS INCOME THE ASSESSEE HAS SHOWN A MEAGRE AMOUNT OF RS. 50,000/- AS DISALLOWAN CE U/S. 14A OF THE I.T. ACT. LOOKING TO THE QUANTUM OF EXEMPTED INCOME SHOWN BY THE ASSESSEE, THE AMOUNT OF DISALLOWANCE SHOWN IS ILLOG ICAL. NO INVESTIGATION HAVE BEEN CARRIED OUT BY THE A.O. DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS IN THIS REGARD. THE BASIS OF DISALLOWANCE OF RS.50,000/- HAS NEITHER BEEN DISCLOSED NOR INVESTIG ATED BY THE ASSESSING OFFICER. PERSONAL WHIM CANNOT BE A SUBS TITUTE FOR PROVISION OF RULE 8D READ WITH S-14A. THEREFORE, THE ASSES SMENT ORDER BY THE A.O IS HELD TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE AS THE DISALLOWANCE OF RS.50,000/- WAS SHOWN TO EARN A N AMOUNT OF EXEMPTED INCOME OF RS.4,22,54,212 HAS ABSOLUTELY NO BASIS. IT HAS FURTHER BEEN SUBMITTED BY THE ASSESSEE THAT IF PROVISION OF R-8D(2) IS APPLIED THEN DISALLOWANCE WOULD COME TO R S.6,06,477/- AND NOT 215.60 CRORES. FROM THIS ALSO, IT IS SEEN THAT THERE WAS NO BASIS FOR MAKING OF DISALLOWANCE OF RS.50,000/- ONLY. IT IS ALSO NOTICED THAT WORKING OF DISALLOWANCE OF RS.6,06,477/- OF ASSESSE E IS NOT IN ACCORDANCE WITH THE PROVISION OF R-6D. 2.3 IN VIEW OF ABOVE FACTUAL POSITION, THE ASSESS MENT ORDER PASSED IS SET-ASIDE AND THE A.O IS DIRECTED TO PASS A FRESH O RDER DENOVO AFTER INVESTIGATING THIS ISSUE THOROUGHLY AND MAKE DISALL OWANCE FOLLOWING THE METHOD PRESCRIBED U/S. 14A R.W. RULE 8D R.W.S 1 4A OF THE I.T.ACT ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 20 AFTER AFFORDING OPPORTUNITIES TO THE ASSESSEE. IN T HE ASSESSMENT ORDER IT IS SEEN THAT THE A.O HAS DISALLOWED INTEREST NET OF RS. 26,91,62,722/- [INTEREST PAID TO THE SUN PHARMA GROUP RS. 66,19,55 ,722 (-) INTEREST EARNED OF RS. 39,99,93,000 = RS. 26,91,62,722). IN T HIS CONNECTION THE ASSESSEE IN THE ABOVE SUBMISSION HAS STATED AS UNDE R: I. WITHOUT PREJUDICE TO THE ABOVE, WE SUBMIT THAT D URING THE COURSE OF ASSESSMENT THE ASSESSING OFFICER HAS DISA LLOWED THE ABOVE EXPENDITURE BY CONSIDERING THE SAME AS NON-BU SINESS PURPOSE AND MADE NET DISALLOWANCE OF RS.26,19,62,72 2/-. THEREFORE IF THE ENTIRE INTEREST EXPENSES INCURRED BY THE ASSESSEE ARE CONSIDERED FOR WORKING OUT DISALLOWANCE U/S. 14 A READ WITH RULE 8D IT WOULD TANTAMOUNT TO DOUBLE DISALLOWANCE IN THE HANDS OF THE ASSESSEE IN RESPECT OF THE SAME EXPEND ITURE. THUS WHILE COMPUTING THE DISALLOWANCE U/S.14A R.W. RULE 8D THE TOTAL INTEREST EXPENDITURE SHOULD BE REDUCED BY THE AMOUNT OF INTEREST EXPENSE ALREADY DISALLOWED BY THE ASSESSIN G OFFICER. 2.4. THIS PLEA OF THE ASSESSEE MERITS CONSIDERATION . THE A.O IS DIRECTED TO EXAMINE THIS ISSUE AND REDUCE THE AMOUNT OF INTE REST EXPENSES WHICH WERE ALREADY DISALLOWED BY THE A.O, IF ANY, WHILE C OMPUTING THE DISALLOWANCE U/S. 14A READ WITH RULE 8D OF THE I.T. ACT. 11. AS PER SECTION 14A(1), NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT. THEREFORE, THE FIRST REQUIREMENT FOR MAKING DISALLOWANCE IS THAT S UCH EXPENDITURE SHOULD BE RELATED TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, I.E., EXEMPT INCOME. AS PER SECTION 14A(2) , THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE I NCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTA L INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE P RESCRIBED (RULE 8D), IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 21 DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT. THEREFORE, THE SECOND REQUIREMENT IS THAT THE ASSESSING OFFICER HA S TO SATISFY ABOUT THE CORRECTNESS OF THE EXPENDITURE CLAIMED IN RESPE CT OF THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. THE METHOD IS PRESCRIBED UNDER RULE 8D OF THE INCOME TA X RULES. RULE 8D(2) READS AS UNDER:- (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWING AMOUNTS, NAMELY : ( I ) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCO ME W HICH DOES NOT FORM PART OF TOTAL INCOME; ( II ) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITU RE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTR IBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY : A B C WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE ( I ) INCURRED DURING THE PREVIOUS YEAR ; B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FR OM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPE ARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR ; C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN T HE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR ; 12. IN THE LIGHT OF AFORESAID PROVISION, NOW WE EXA MINE THE CORRECTNESS OF THE ORDER OF THE LEARNED CIT. THE L EARNED CIT OBSERVED THAT THERE IS UNDER ASSESSMENT OF RS.2,15,16,31,588 /-. THIS FIGURE IS ARRIVED BY THE LEARNED CIT BY INVOKING THE PROVISIO NS OF RULE 8D; HOWEVER, THE CONTENTION OF THE ASSESSEE IS THAT THE LEARNED CIT HAS TAKEN GROSS INTEREST WITHOUT REDUCING THE INTEREST INCURRED SPECIFICALLY AND DIRECTLY IN THE COURSE OF PHARMA BUSINESS. THE CONTENTION OF THE ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 22 ASSESSEE IS THAT TOTAL INTEREST EXPENDITURE SHOULD BE REDUCED BY THE AMOUNT OF INTEREST EXPENSES ALREADY DISALLOWED BY T HE ASSESSING OFFICER. IT IS ALSO SUBMITTED THAT NO DEDUCTION IS GIVEN IN RESPECT OF INTEREST INCOME EARNED FROM THE INTEREST EXPENDITUR E. THE LEARNED COUNSEL FOR THE ASSESSEE HAS DEMONSTRATED THAT DURI NG THE YEAR ENDED ON 31.03.2009, THE ASSESSEE HAS EARNED INTEREST INC OME OF RS.39,99,93,354/- AND INCURRED INTEREST EXPENDITURE OF RS.66,21,35,396/-. THEREFORE, ONLY THE NET OF THE SAME WAS REQUIRED TO BE TAKEN FOR COMPUTING THE DISALLOWANCE AS PER RULE 8D. IN SUPPORT OF THIS, RELIANCE HAS BEEN PLACED ON THE DECISION OF C O-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF MORGAN STANLEY INDIA SE CURITIES (P) LIMITED V/S. ACIT, REPORTED IN (2011) 55 DTR 177 (MUMBAI) A ND ALSO THE DECISION OF THE CO-ORDINATE BENCH OF TRIBUNAL IN TH E CASE OF M. S. TRADE APARTMENT LIMITED IN ITA NO. 1277/KOLKATA/201 1 FOR A. Y. 2008-09. THE GRIEVANCE OF THE ASSESSEE IS ALSO THA T THE CURRENT LIABILITY SHOULD BE EXCLUDED FROM THE TOTAL ASSETS FOR COMPUT ING THE AVERAGE TOTAL ASSET UNDER RULE 8D. THE LD. CIT(A) HAS NOT CONSIDERED THIS; HE HAS SIMPLY REMANDED THE ISSUE TO THE FILE OF THE AS SESSING OFFICER. THE CO-ORDINATE BENCH OF TRIBUNAL (ITAT, AHMEDABAD D BENCH) IN ASSESSEES OWN CASE IN ITA NO.1334/AHD/2015 HAS OBS ERVED AS UNDER:- 9. WHETHER THE NET INTEREST AMOUNT IS TO BE CONSIDERED FOR DISALLOWANCE UNDER SECTION 14A IS NOW JUDICIALLY SETTLED BY A NU MBER OF DECISIONS OF THIS TRIBUNAL IN FAVOUR OF THE ASSESSEE. WHEN THESE DECISIONS ARE POINTED OUT TO THE LEARNED COMMISSIONER, HE DOES NO T EVEN DEAL WITH THESE JUDICIAL PRECEDENTS. VARIOUS BENCHES OF THIS TRIBUNAL, SUCH AS IN ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 23 THE CASES OF MORGAN STANLEY (SUPRA) AND TRADE APARTM ENT (SUPRA) HAVE CONSISTENTLY TAKEN THE VIEW THAT THE AMOUNT OF INTE REST, FOR THE PURPOSE OF COMPUTING THE DISALLOWANCE, IS TO BE TAKEN AT TH E NET FIGURE. SUCH BEING THE CIRCUMSTANCES, BY NO STRETCH OF LOGIC, TH E ASSESSING OFFICER CONSIDERING THE NET INTEREST AMOUNT FOR DISALLOWANC E UNDER SECTION 14A CANNOT SAID TO BE ERRONEOUS. AS REGARDS THE QUESTIO N OF INCLUDING THE MUTUAL FUNDS IN THE FIGURE OF INVESTMENTS IN ASSETS YIELDING TAX EXEMPT INCOME, FOR THE PURPOSE OF COMPUTING DISALLOWANCE U NDER SECTION 14A, WE HAVE NOTED THAT THERE WAS NO INCOME FROM THESE M UTUAL FUNDS WHICH WAS CLAIMED AS EXEMPT, AND THAT INCOME ON REDEMPTIO N OF THESE MUTUAL FUND UNITS WAS EXIGIBLE TO TAX AS CAPITAL GAIN. WE HAVE ALSO NOTED THAT VARIABLE B IN THE FORMULAE SET OUT IN RULE 8D(2)(II) REFERS TO 'THE AVERAGE VALUE OF INVESTMENTS, INCOME FROM WHICH DOE S NOT, OR SHALL NOT, FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE....'. THE INVESTMENT IN MUTUAL FUND SATISF IES THIS CONDITION INASMUCH AS THE INVESTMENT IS STATED TO BE IN FIXED MATURITY PLAN- A FACT STATED BY THE ASSESSEE ALL ALONG, INCLUDING IN HIS SUBMISSION BEFORE THE COMMISSION IN RESPONSE TO THE SHOW CAUSE NOTICE- AT PAGE 54 OF THE PAPERBOOK BEFORE US, AND THE SAME HAS NOT BEEN CONT ROVERTED AT ANY STAGE. THE INCOME IN THE CASE OF A FIXED MATURITY P LAN ARISES ONLY ON REDEMPTION WHICH IS TAXABLE AS CAPITAL GAIN. ON THE SE FACTS, EXCLUSION OF THESE UNITS IN THE COMPUTATION OF DISALLOWANCE WAS WHOLLY JUSTIFIED AND THERE WAS NO ERROR IN THE STAND OF THE ASSESSEE. AS REGARDS THE QUESTION WHETHER CURRENT ASSETS ARE TO BE TAKEN ON THE BASIS OF THE ACTUAL FIGURES OR NET OF THE CURRENT LIABILITIES, WE FIND THAT THE WORDINGS OF THE FORMULA ARE CLEAR AND UNAMBIGUOUS AND IT REFERS TO 'THE AVE RAGE OF TOTAL ASSETS, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR'. CLEARLY, THEREFORE, THE ASSETS ARE TO BE TAKEN AT THE BALANCE SHEET VALUE AND THERE IS NO SC OPE OF NETTING THESE FIGURES BY SUBTRACTING CURRENT LIABILITIES FROM THE SAME. A REFERENCE TO THE AVERAGE VALUE OF 'TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET' IMPLIES THE TOTAL OF ASSETS APPEARING IN THE BALANC E SHEET; NOTHING MORE, NOTHING LESS. THERE IS NO REASON FOR REDUCING THE T OTAL OF ASSETS BY THE CURRENT LIABILITIES. THE WORDING IS CLEAR AND UNAMB IGUOUS. WHAT IS TO BE TAKEN INTO ACCOUNT IS THE TOTAL OF ASSETS APPEAR ING IN THE BALANCE SHEET AND THERE IS NO CONTROVERSY ABOUT THE GROSS A SSETS AND NET ASSETS IN THE FORMULAE. AS FOR THE COORDINATE BENCH DECISI ON IN THE CASE OF GEOJIT INVESTMENTS (SUPRA), ALL IT SAYS IS THAT 'SI NCE THERE IS MISTAKE IN COMPUTING THE DISALLOWANCE, AS RIGHTLY POINTED OUT BY THE LD. AR, WE ARE INCLINED TO HOLD THAT NET CURRENT ASSETS IS TO BE CONSIDERED WHILE APPLYING THE FORMULA UNDER RULE 8D OF THE I.T. RULE S INSTEAD OF GROSS ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 24 CURRENT ASSETS', BUT THEN THE LIMITED FACTS SET OUT IN THIS ORDER DO NOT MAKE IT CLEAR AS TO WHAT IS THE MISTAKE IN COMPUTAT ION WHICH HAS LED TO THE CONCLUSION THAT NET CURRENT ASSETS ARE TO BE AD OPTED RATHER THAN GROSS CURRENT ASSETS AND WHETHER THE NET CURRENT AS SETS ARE NET OF LIABILITIES OR NET OF SOMETHING ELSE. THERE IS NOTH ING MORE ON FACTS OR THE REASONING PROCESS, EXCEPT FOR A REFERENCE TO 'MISTA KE IN COMPUTING THE DISALLOWANCE' BUT THEN THERE IS NO CLUE ABOUT THIS MISTAKE EITHER. WE FIND NO GUIDANCE IN THIS DECISION ON THE ISSUE WHET HER THE ASSETS ARE TO BE TAKEN AS AGGREGATE OF THE BALANCE SHEET VALUE OR THE ASSETS ARE TO BE TAKEN, AFTER NETTING OFF THE LIABILITIES, FROM THE AGGREGATE VALUE SO ARRIVED AT. IT WAS NOT, IN ANY EVENT, A POINT OF DI SPUTE ON WHICH ADJUDICATION WAS DONE. THE FIGURE OF NET ASSETS WIL L ALWAYS BE LOWER VIS--VIS THE GROSS ASSETS AND THE FORMULAE SET OUT IN RULE 8D(2) WILL, THEREFORE, HAVE A LARGER DENOMINATOR IN THE EVENT O F GROSS ASSETS BEING ADOPTED. ESSENTIALLY, THE FIGURE OF GROSS ASSETS BE ING ADOPTED AS A DENOMINATOR WILL LEAD TO LOWER AMOUNT. YET, IT APPE ARS THAT, IN THIS CASE, THE ASSESSEE HIMSELF POINTED OUT THAT THE FIG URE OF NET ASSETS SHOULD BE ADOPTED WHICH WOULD HAVE LED TO A HIGHER DISALLO WANCE UNDER RULE 8D. SUCH A CONCESSION CANNOT, IN ANY EVENT, CONSTIT UTE AN ADJUDICATION BY THE COORDINATE BENCH. BE THAT AS IT MAY, AT THE MINIMUM, IT IS A HIGHLY CONTENTIOUS ISSUE THAT ADOPTING THE GROSS AS SETS FIGURE, WITHOUT REDUCING LIABILITIES FROM THE SAME, IS AN ERROR. WE ARE OF THE CONSIDERED VIEW THAT SUCH A NETTING OR ADJUSTMENT IS UNCALLED FOR, NOR IS IT AN ERROR TO TAKE THE ASSETS AT THE BALANCE SHEET VALUE. IT I S AT BEST ONE OF THE POSSIBLE VIEWS OF THE MATTER THAT THE ASSETS, NET O F LIABILITIES, SHOULD BE TAKEN INTO ACCOUNT, AND THE OTHER VIEW, WHICH IS EQ UALLY IF NOT, MORE CONVINCING A VIEW IS THAT THE TOTAL VALUE OF ASSETS SHOULD BE TAKEN INTO ACCOUNT WITHOUT MAKING ANY ADJUSTMENT FOR THE LIABI LITIES. IT IS ELEMENTARY, AS WAS HELD BY HON'BLE SUPREME COURT IN THE CASE OF MALABAR INDUSTRIAL CO LTD VS CIT [(2000) 243 ITR 83 (SC)], 'EVERY LOSS OF REVENUE AS A CONSEQUENCE OF AN ORDER OF AO CANNOT BE TREATED AS PREJUDICIAL TO THE INTERESTS OF THE REVENUE, FOR EX AMPLE, WHEN AN ITO ADOPTED ONE OF THE COURSES PERMISSIBLE IN LAW AND I T HAS RESULTED IN LOSS OF REVENUE; OR WHERE TWO VIEWS ARE POSSIBLE AND THE ITO HAS TAKEN ONE VIEW WITH WHICH THE CIT DOES NOT AGREE, IT CANNOT B E TREATED AS AN ERRONEOUS ORDER PREJUDICIAL TO THE INTERESTS OF THE REVENUE UNLESS THE VIEW TAKEN BY THE ITO IS UNSUSTAINABLE IN LAW'. LEA RNED COMMISSIONER WAS THUS IN ERROR IN HOLDING THAT TAKING THE TOTAL OF ASSETS ON THE BASIS OF ITS VALUE IN THE BALANCE SHEET HAS RENDERED THE ASSESSMENT ORDER ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE RE VENUE. THE VIEW THAT THE ASSETS ARE REQUIRED TO BE TAKEN ON THE BASIS OF VALUE SHOWN IN THE ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 25 BALANCE SHEET, AND NOT AFTER REDUCING THE LIABILITI ES, IS AN EQUALLY, IF NOT MORE, CONVINCING APPROACH TO THE ISSUE. VIEWED IN T HE LIGHT OF HON'BLE SUPREME COURT'S JUDGMENT IN THE CASE OF MALABAR IND USTRIAL (SUPRA), THUS THE ASSETS BEING TAKEN ON THE VALUE IN THE BAL ANCE SHEET, WITHOUT ADJUSTING THE LIABILITIES, IS NOT SUCH AN ERROR, ER ROR EVEN IF IT IS, WHICH CAN LEAD TO THE ASSESSMENT ORDER BEING SUBJECTED TO THE REVISION PROCEEDINGS UNDER SECTION 263. 14. THE LD. COUNSEL APPEARING ON BEHALF OF THE ASSE SSEE HAS ADMITTED THE FACT THAT THE ASSESSING OFFICER HAS NOT EXAMINE D THE ISSUE OF DISALLOWANCE OF EXPENDITURE U/S 14A OF THE ACT. TH ERE IS ALSO NO DISPUTE WITH REGARD TO THE FACT THAT THE ASSESSEE H AS EARNED EXEMPT INCOME AND FOR THE PURPOSE OF COMPUTATION OF DISALL OWANCE, METHOD PRESCRIBED UNDER RULE 8D OF THE INCOME TAX RULES, 1 962 IS TO BE ADOPTED, SUBJECT TO SATISFACTION OF CONDITIONS AS P RESCRIBED UNDER THE ACT. IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE H AS SUO MOTTO DISALLOWED THE EXPENDITURE OF RS.50,000/-. THE ASS ESSING OFFICER HAS NOT GIVEN ANY FINDING AS TO WHETHER HE IS SATISFIED ABOUT SUCH DISALLOWANCE OR NOT. DURING THE COURSE OF APPELLAT E PROCEEDINGS, THE ASSESSEE ITSELF HAS COMPUTED DISALLOWANCE U/S 14A A T RS. 6,06,477/- WHICH IS MUCH HIGHER THAN THE AMOUNT DISALLOWED BY THE ASSESSEE IN ITS RETURN OF INCOME. UNDER THESE FACTS, WE ARE UN ABLE TO ACCEPT THE CONTENTION OF LD. SR. COUNSEL THAT THE ASSESSMENT O RDER IS NOT PREJUDICIAL TO THE INTEREST OF THE REVENUE. HOWEVE R, WE DIRECT THE ASSESSING OFFICER WHILE WORKING OUT DISALLOWANCE U/ S 14A OF THE ACT, HE WOULD KEEP IN MIND THE OBSERVATIONS AS MADE BY T HE CO-ORDINATE BENCH IN ITA NO.1334/AHD/2015. THIS GROUND OF THE ASSESSEES ITA NO. 1616/AHD/2014 ADITYA MEDISALES LTD VS. CIT AY : 2009-10 26 APPEAL IS DISPOSED OF IN THE TERM OF DISCUSSIONS MA DE HEREINABOVE. ACCORDINGLY, THE APPEAL OF THE ASSESSEE IS DISMISSE D. 15. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 22 ND MARCH, 2016 AT AHMEDABAD. SD/- SD/- (ANIL CHATURVEDI) ACCOUNTANT MEMBER (KUL BHARAT) JUDICIAL MEMBER AHMEDABAD; DATED 22/03/2016 *BIJU T. '#$%&'&($ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ! ' ' # / CONCERNED CIT 4. ' ' # ( ) / THE CIT(A) 5. &'( ! , ' ! , / DR, ITAT, AHMEDABAD 6. (- . / GUARD FILE . / BY ORDER, TRUE COPY / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD