Kumar Urban Development Ltd., Pune V. ACIT, Circle 11(1), Pune

ITA 1628/PUN/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 7171 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 5 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-02-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 03-03-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 27-08-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: HITENDRA NINAWE
• Keywords: Business income; Depreciation; Business expenditure; Earning of tax free income; Proportionate interest; Question of law; Wholly owned subsidiary; Commercial expediency
• Section: 143(3); 14A; 37

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . . , ! , # $ BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.1628/PUN/2013 #& & / ASSESSMENT YEAR : 2009-10 KUMAR URBAN DEVELOPMENT LTD., 10 TH FLOOR, KUMAR BUSINESS CENTRE, OPP. PUNE CENTRAL, BUND GARDEN ROAD, PUNE 411 001 PAN : AAACK7659N . / APPELLANT V/S ACIT, CIRCLE-11(1), PUNE . / RESPONDENT . / ITA NO.1636/PUN/2013 #& & / ASSESSMENT YEAR : 2009-10 ACIT, CIRCLE-11(1), PUNE . / APPELLANT V/S M/S. KUMAR URBAN DEVELOPMENT LTD., KUMAR CAPITAL, 2 ND FLOOR, 2413, EAST STREET, CAMP, PUNE 411 001 PAN : AAACK7659N . / RESPONDENT ASSESSEE BY : NIKHIL PATHAK REVENUE BY : SHRI HITENDRA NINAWE / ORDER PER R.K.PANDA, AM : THESE ARE CROSS APPEALS. THE FIRST ONE IS FILED B Y THE ASSESSEE AND THE SECOND ONE FILED BY THE REVENUE AND ARE DIRECTE D AGAINST THE ORDER DATED 21-06-2013 OF THE CIT(A)-I, PUNE RELATING TO ASSESSMENT YEAR 2009- 10. / DATE OF HEARING :08.11.2016 / DATE OF PRONOUNCEMENT:02.02.2017 2 ITA NOS.1628 & 1636/PUN/2013 ITA NO.1628/PUN/2013 (BY ASSESSEE): 2. GROUNDS OF APPEAL NO.1 TO 3 AND ADDITIONAL GROUN DS OF APPEAL RELATE TO DISALLOWANCE U/S.14A OF THE I.T. ACT. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A COMPANY ENGAGED IN THE BUSINESS OF PROMOTERS AND BUILDERS. IT FILED ITS RETURN OF INCOME ON 31-10-2009 DECLARING LOSS OF RS.4,27,74,8 83/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER OBS ERVED FROM THE COMPUTATION OF INCOME THAT THE ASSESSEE HAS CLAIMED EXEMPTED INCOME OF RS.1,73,076/- UNDER THE HEAD DIVIDEND U/S.10(34) OF THE I.T. ACT. IT HAS ALSO CLAIMED EXEMPT PROFIT U/S.10(2A) FROM THE PARTNERSH IP FIRMS IN WHICH THE ASSESSEE COMPANY IS ONE OF THE PARTNERS. IN THE CO MPUTATION OF INCOME THE ASSESSEE HAS CLAIMED EXPENSES OF RS.4,61,16,561/- F OR EARNING THE SAID EXEMPT INCOME AND ACCORDINGLY DISALLOWED AND ADDED TO THE TOTAL INCOME U/S.14A OF THE I.T. ACT. THE ASSESSING OFFICER, TH EREFORE, ASKED THE ASSESSEE TO FURNISH THE WORKING OF THE SAID DISALLO WANCE OF RS.4,61,16,561/- AND JUSTIFICATION THEREOF. 4. FROM THE DETAILS FURNISHED BY THE ASSESSEE, THE ASSESSING OFFICER OBSERVED THAT ASSESSEE HAS ALSO RECEIVED TAXABLE IN COME OF RS.2,31,38,427/- FROM M/S. KUMAR SONS, RS.1,46,66,0 07/- FROM M/S. K.K. ERECTORS AND RS.76,04,519/- FROM KUMAR BUILDERS. A CCORDINGLY, HE NOTED THAT THE CLAIM OF THE ASSESSEE THAT THE TAXABLE INC OME BY WAY OF INTEREST ON PARTNERS CAPITAL HAS BEEN RECEIVED FROM THOSE FIRMS AND OFFERED FOR TAXATION AS INCOME OF COMPANY IS CORRECT. 5. HOWEVER, AT THE SAME TIME, THE ASSESSEE HAS RECE IVED EXEMPT INCOME BY WAY OF SHARE OF PROFIT FROM THE SAID FIRM S. THEREFORE, IN RESPECT OF SUCH A COMPOSITE INCOME WHICH IS PARTLY TAXABLE AND PARTLY EXEMPT, DISALLOWANCE U/S.14A HAS TO BE MADE ON PRO-RATA BAS IS. RELYING ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF MAREZBAN 3 ITA NOS.1628 & 1636/PUN/2013 BHARUCHA VS. ACIT VIDE ITA NOS. 4221 & 4250/MUM/200 3 THE ASSESSING OFFICER HELD THAT IT IS APPROPRIATE TO DISALLOW THE PROPORTIONATE AMOUNT OF EXPENDITURE RELATABLE TO NON TAXABLE OR EXEMPT INCO ME BY INVOKING THE PROVISIONS OF SECTION 14A. 6. THE ASSESSING OFFICER FURTHER OBSERVED THAT ASSE SSEE DID NOT CONSIDER THE INVESTMENT ON ACCOUNT OF SHARE APPLICA TION MONEY PENDING ALLOTMENT IN ITS WORKING OF DISALLOWANCE U/S.14A OF THE I.T. ACT. ACCORDING TO HIM, INVESTMENT IN SHARE APPLICATION MONEY PENDING ALLOTMENT OF RS.112.441 CRORES IS QUASI-EQUITY INVESTMENT IN VIEW OF THE DE CISION OF HONBLE MADHYA PRADESH HIGH COURT IN THE CASE OF CIT VS. PREMIUM I NDUSTRIES (INDIA) LTD. REPORTED IN 257 ITR 672. HE ACCORDINGLY HELD THAT ANY EXPENDITURE RELATING TO SUCH INVESTMENT ALSO CALLS FOR DISALLOWANCE OF E XPENSES U/S.14A OF THE I.T. ACT. THE ASSESSING OFFICER ON VERIFICATION OF THE DETAILS NOTED THAT ASSESSEE HAS NOT CONSIDERED THE FOLLOWING EXEMPT ASSETS WHIL E CALCULATING THE DISALLOWANCE U/S.14A : (A) DISALLOWANCES ON ACCOUNT OF EXEMPTED SHARE OF PROF IT RECEIVED FROM THE PARTNERSHIP FIRMS VIZ., M/S. KUMAR SONS & M/S. K.K. ERECTORS, (B) DISALLOWANCES ON ACCOUNT OF INVESTMENT FOR SHARE AP PLICATION MONEY PENDING ALLOTMENT. IN VIEW OF THE ABOVE, THE ASSESSING OFFICER DISALLO WED AN AMOUNT OF RS.2,94,01,003/- U/S.14A OF THE I.T. ACT. 7. BEFORE CIT(A) IT WAS ARGUED THAT INVESTMENT MADE IN RESPECT OF SHARE APPLICATION MONEY PENDING ALLOTMENT SHOULD NOT BE I NCLUDED FOR PURPOSE OF RULE 8D SINCE SUCH SHARE APPLICATION MONEY PER SE DOES NOT GENERATE ANY INCOME OF THE NATURE WHICH IS NOT TO BE INCLUDED IN THE COMPUTATION OF TOTAL INCOME. ONLY AFTER ALLOTMENT OF SHARES, THE SHARES ALLOTTED MAY RESULT IN EARNING OF INCOME IN THE FORM OF DIVIDEND WHICH IS NOT TO BE INCLUDED IN THE TOTAL INCOME OF THE RECIPIENT. FURTHER, TILL THE T IME THE SHARES ARE ALLOTTED THE PAYER OF THE SHARE APPLICATION MONEY IS NOT ENTITLE D TO RECEIVE ANY DIVIDEND 4 ITA NOS.1628 & 1636/PUN/2013 OR ANY OF SUCH TAX FREE INCOME OF THE NATURE WHICH IS NOT TO BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. IT WAS ARGUED THAT T HE DECISION RELIED ON BY THE ASSESSING OFFICER IN THE CASE OF PREMIUM INDUST RIES (INDIA) LTD. REPORTED IN 257 ITR 672 IS MISPLACED. 8. IT WAS FURTHER ARGUED THAT THE ASSESSING OFFICER WHILE CONSIDERING THE SHARE APPLICATION MONEY PAID BY THE ASSESSEE FOR TH E PURPOSE OF COMPUTATION OF DISALLOWANCE U/S.14A R.W. RULE 8D HA S ALSO CONSIDERED SHARE APPLICATION MONEY OF RS.83,47,553/- RECEIVED BY THE ASSESSEE FOR COMPUTATION OF DISALLOWANCE U/S.14A R.W. RULE 8D. THE ASSESSING OFFICER HAS NOT CONSIDERED THE ASSESSEES DEBIT/OVERDRAWN B ALANCES IN THE CAPITAL/CURRENT ACCOUNTS IN PARTNERSHIP FIRMS. THE ASSESSING OFFICER HAS TAKEN PRO-RATA BALANCES OF CAPITAL/CURRENT ACCOUNTS IN THE FIRMS FROM WHOM THE ASSESSEE RECEIVED TAXABLE AS WELL AS TAX FREE I NCOME. IT WAS ACCORDINGLY ARGUED THAT THE ASSESSING OFFICER SHOULD BE DIRECTE D NOT TO CONSIDER THE SHARE APPLICATION MONEY PAID BY THE ASSESSEE AS WEL L AS THE SHARE APPLICATION MONEY RECEIVED BY THE ASSESSEE FOR WORK ING OF THE DISALLOWANCE U/S.14A. FURTHER, THE ASSESSING OFFICER SHOULD ALS O BE DIRECTED TO CONSIDER THE DEBIT BALANCES IN THE PARTNERSHIP FIRMS FOR WOR KING OUT THE DISALLOWANCE U/S.14A R.W. RULE 8D. 9. DURING THE APPEAL PROCEEDINGS THE LD.CIT(A) CALL ED FOR CERTAIN DETAILS FROM THE ASSESSEE TO WHICH THE ASSESSEE FILED THE S OURCE OF SHARE APPLICATION MONEY PENDING ALLOTMENT AS ON 31-03-200 9. THE ASSESSEE ALSO FILED THE DETAILS OF THE INTEREST AND NON-INTEREST BEARING FUNDS UTILIZED FOR MAKING THE SHARE APPLICATION MONEY AND THE SUBSEQUE NT DATES OF SHARE ALLOTMENT AND OR REFUND OF MONEY, THE DETAILS OF WH ICH ARE AS UNDER : SR. NO. NAME OF COMPANY AMOUNT AS ON 31-3-2009 INTEREST BEARING FUNDS NON - INTEREST BEARING FUNDS REMARKS 1 RIVER VIEW PROPERTIES PVT. LTD. 8,89,80,000 2,54,00,000 6,35,80,000 ALLOTTED AS ON 17-6-2009 5 ITA NOS.1628 & 1636/PUN/2013 2 PUNE MUMBAI REALTY PVT. LTD. 6,21,87,313 4,93,87,312 1,28,00,000 REFUNDED AS ON 1-4-2011 3 PBAP REALTY INVESTMENT FUND PVT. LTD. 5,00,000 5,00,000 0 REFUNDED AS ON 1-4-2009 4 PBAD REALTY PVT. LTD. 1,00,000 1,00,000 0 ALLOTTED AS ON 6-6-2009 5 KUMAR BUILDERS TOWNSHIP DEVELOPERS PVT. LTD. 14,48,49,360 4,08,19,499 10,40,29,913 REFUNDED AS ON 23-3-2010 6 KUMAR IKA PORT DEVELOPERS PVT. LTD. 15,00,000 15,00,000 0 REFUNDED AS ON 14-9-2010 29,81,16,674 11,77,06,761 18,04,09,913 20,90,36,675 10. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) HELD THAT THE ASSESSING OFFICER HAS CORRECTLY INCLU DED SHARE APPLICATION MONEY PAID BY THE ASSESSEE AMOUNTING TO RS.29,81,16 ,674/- IN WORKING OUT THE DISALLOWANCE UNDER RULE 8D(2). HE, HOWEVER, HE LD THAT THE SHARE APPLICATION MONEY RECEIVED BY THE ASSESSEE STANDS A T DIFFERENT FOOTING ALTOGETHER WHICH IS NOT AN ASSET BUT A LIABILITY IN THE HANDS OF THE ASSESSEE AND CANNOT BE CONSIDERED FOR PURPOSES OF WORKING OU T THE AVERAGE VALUE OF INVESTMENTS OR ASSETS IN TERMS OF RULE 8D. HE ACCO RDINGLY DIRECTED THE ASSESSING OFFICER TO EXCLUDE THE AMOUNT OF RS.83,47 ,553/- AND COMPUTE THE DISALLOWANCE UNDER RULE 8D BY INCLUDING ALL OTHER I NVESTMENTS. 11. HE OBSERVED THAT THE ASSESSEE HAS RAISED THE FO LLOWING ADDITIONAL GROUND BEFORE HIM : THE LD. ASSESSING OFFICER ERRED IN NOT CONSIDERING THE DEBIT BALANCES IN THE CAPITAL/CURRENT ACCOUNTS OF FIRMS AS ARE APPEARING IN THE BALANCE SHEET OF THE APPELLANT FOR WORKING OUT THE DISALLOWA NCE U/S.14A R.W.R. 8D OF THE INCOME TAX RULES, 1961. THE APPELLANT THEREF ORE REQUESTS YOUR HONOUR TO KINDLY DIRECT THE LD. ASSESSING OFFICER TO CONSIDER THESE DEBIT BALANCES IN THE CAPITAL/CURRENT ACCOUNTS OF THE APPEL LANT IN THE PARTNERSHIP FIRMS FOR WORKING OUT THE DISALLOWANCE U/S. 14A R.W.R. 8D OF THE INCOME TAX RULES, 1962. 12. HOWEVER, THE LD.CIT(A) DISMISSED THE ADDITIONAL GROUND RAISED BEFORE HIM BY OBSERVING AS UNDER : 6 ITA NOS.1628 & 1636/PUN/2013 5.2 I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT BUT FIND MYSELF UNABLE TO AGREE WITH THE PROPOSITION THAT THE NEGATI VE BALANCE IN THE PARTNERSHIP FIRMS SHOULD ALSO BE CONSIDERED FOR WORKING OF THE AVERAGE VALUE OF INVESTMENTS. IN THE FIRST INSTANCE, IT IS SEEN THAT THE APPELLANT HAD ITSELF NOT INCLUDED ANY OF THE INVESTMENTS IN THE PARTNERSHIP FIRMS FOR THE PURPOSES OF WORKING OUT THE DISALLOWANCE U/S.1 4A IN ITS RETURN OF INCOME AND AS FURNISHED BEFORE THE ASSESSING OFFICER DURI NG THE ASSESSMENT PROCEEDINGS VIDE LETTER DATED 13.6.2011. SINC E THE SHARE OF PROFIT RECEIVED FROM THE OTHER PARTNERSHIP FIRMS WAS E XEMPT IN THE HANDS OF THE APPELLANT U/S 10(2A), THE ASSESSING OFFICER MADE A DISALLOWANCE U/R 8D(2) BY REWORKING AVERAGE VALUE OF INVESTMENTS. IN THE ABOVE CASES, THE APPELLANT HAS NOT EARNED ANY TAX- FREE INCOMES FROM THESE FIRMS DURING THE YEAR. FURTHER, IT IS SEEN FROM T HE RECORD THAT THE NEGATIVE/ DEBIT BALANCES IN THE CAPITAL AND CURRENT ACCOUNT OF THE COMPANY IN THE PARTNERSHIP FIRMS M/S KUMAR BUILDERS HAS ARISEN MOSTLY IN VIEW OF THE WITHDRAWAL, FROM THE, CAPITAL IN THA T FIRM FOR MAKING INVESTMENTS IN THE SHARE APPLICATION MONEY INVESTED IN VARIOUS SISTER CONCERNS. THE TOTAL WITHDRAWALS OF THE APPELLANT FRO M ITS CAPITAL ACCOUNT IN KUMAR BUILDERS DURING THE F.Y. 2008-09 RELEVANT F OR THE A.Y. 2009-10 IS SEEN TO BE RS.6,05,34,662 FOR MAKING INVESTMENTS IN RIVER VIEW PROPERTIES PVT. LTD. (RS.95 LAKHS), PBAP REALTY INVESTM ENT FUND PVT. LTD. (RS.5 LAKHS), PUNE MUMBAI .REALTY PVT. LTD, (RS.2,23,7 5,213), PBAP REALTY PVT., LTD. (RS.1 LAKH) AND KUMAR BUILDERS TOWN SHIP DEVELOPERS PVT. LTD. (RS.2,80,59,449). THEREFORE, ON THE FACTS OF THE CASE, SINCE THE APPELLANT HIMSELF DID NOT CONSIDER THE AVERAGE VALUE OF ANY OF ITS INVESTMENTS REPRESENTING CAPITAL ACCOUNTS IN THE PARTNE RSHIP FIRMS FOR PURPOSES OF WORKING OUT DISALLOWANCE UNDER SEC. 14A IN ITS RETURN OF INCOME AND ALSO SINCE IT IS SEEN THAT THE DEBIT BALANCE S HAVE OCCURRED DUE TO THE OVER-DRAWAL OF ITS CAPITAL BALANCES WITH THE PARTNERSHIP FIRM, THE ADDITIONAL GROUND OF APPEAL FILED BEFORE ME FAI LS. 13. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : THE FOLLOWING GROUNDS ARE TAKEN WITHOUT PREJUDICE T O EACH OTHER - ON FACTS AND IN LAW, 1] THE LEARNED CIT(A) ERRED IN HOLDING THAT THE SHARE A PPLICATION MONEY AMOUNTING TO RS. 29,81,16,674/- PAID BY THE AP PELLANT COMPANY WAS TO BE CONSIDERED AS PART OF TAX FREE INVESTMENTS FO R DETERMINING THE DISALLOWANCE U/S. 14A R.W.R. 8D. 1.1] THE LEARNED CIT(A) FAILED TO APPRECIATE THA T THE. SHARE APPLICATION MONEY PAID BY THE APPELLANT COMPANY WAS NOT IN THE N ATURE OF TAX FREE INVESTMENTS SINCE NO SHARES WERE ALLOTTED TO THE APPELL ANT COMPANY IN THIS YEAR AND IN SOME OF THE CASES, THE SHARE APPLICATIO N MONEY WAS ALSO REFUNDED BACK TO THE APPELLANT AND ACCORDINGLY, THE SHARE APPLICATION MONEY COULD NOT BE CONSIDERED AS TAX FREE INVESTMENT F OR THE PURPOSES OF DETERMINING THE DISALLOWANCE U/S. 14A R.W.R. 8D. 1.2] WITHOUT PREJUDICE, THE APPELLANT COMPANY SUB MITS THAT IF AT ALL, THE SHARE APPLICATION MONEY PAID BY THE APPELLANT CO MPANY IS TO BE CONSIDERED AS PART OF THE TAX FREE INVESTMENTS, IN THAT CASE, ONLY THE AMOUNT IN RESPECT OF WHICH SHARES ARE FINALLY ALLOTTED TO THE APPELLANT 7 ITA NOS.1628 & 1636/PUN/2013 COMPANY SHOULD BE CONSIDERED AND THOSE AMOUNTS WHICH AR E ULTIMATELY REFUNDED BACK TO THE APPELLANT COMPANY SHOULD NOT BE CONSIDERED AS PART OF TAX FREE INVESTMENTS. 1.3] WITHOUT PREJUDICE, THE APPELLANT COMPANY FUR THER SUBMITS THAT THE SHARE APPLICATION MONEY WHICH IS PAID OUT OF INTE REST BEARING FUNDS SHOULD ONLY BE CONSIDERED FOR THE PURPOSES OF MAKING TH E DISALLOWANCE U/S. 14A AND NOT THE ENTIRE SHARE APPLICATION MONEY P AID BY THE APPELLANT COMPANY. 2] THE LEARNED CIT(A) FURTHER ERRED IN HOLDING THA T THE LEARNED A.O. WAS JUSTIFIED IN MAKING DISALLOWANCE U/S. 14A IN RESPECT OF THE SHARE OF PROFIT EARNED BY THE APPELLANT COMPANY FROM PARTNER SHIP FIRMS WITHOUT APPRECIATING THAT THE PROVISIONS OF SECTION 14A WERE NOT APPLICABLE TO THE SHARE OF PROFIT EARNED FROM PARTNERSHIP FIRMS. 3] THE LEARNED CIT(A) ERRED IN HOLDING THAT THE LE ARNED A.O. WAS JUSTIFIED IN NOT CONSIDERING THE DEBIT BALANCES OF AP PELLANT COMPANY IN THE FIRMS IN WHICH THE APPELLANT IS A PARTNER WHILE D ETERMINING THE AVERAGE INVESTMENTS FOR THE PURPOSES OF DETERMINING THE DISALLOWANCE U/S. 14A R.W.R 8D. 14. THE ASSESSEE HAS ALSO FILED THE FOLLOWING ADDIT IONAL GROUNDS : THE APPELLANT IN THE ABOVE REFERRED APPEAL REQUESTS FOR ADMISSION OF THE FOLLOWING ADDITIONAL GROUNDS OF APPEAL WHICH ARE RAISED WITHOUT PREJUDICE TO THE ORIGINAL GROUNDS OF APPEAL 1. THE ASSESSEE SUBMITS THAT THE DISALLOWANCE OFFERED BY I T OF INTEREST EXPENDITURE OF RS.4,24,30,542/- U/S 14A R.W. R. 8D IN THE RETURN OF INCOME IS NOT WARRANTED AND THE SAME SHOULD BE DELE TED WHILE COMPUTING THE TOTAL INCOME OF THE ASSESSEE. 2. THE ASSESSEE SUBMITS THAT THE DISALLOWANCE OFFERED BY IT ON ACCOUNT OF INDIRECT EXPENDITURE OF RS.36,86,019/- U/ S 14A R.W.R. 8D IN THE RETURN OF INCOME IS NOT WARRANTED AND THE SAME SHO ULD BE- DELETED WHILE COMPUTING THE TOTAL INCOME OF THE ASSESSED. 3. THE ASSESSEE SUBMITS THAT THE INVESTMENTS ON WHICH NO TA X FREE INCOME HAS BEEN EARNED DURING THE YEAR SHOULD BE EXCL UDED FOR THE PURPOSES OF COMPUTING THE DISALLOWANCE U/S 14A R.W.R 8 D. 4. THE ASSESSEE FURTHER SUBMITS THAT THE INVESTMENTS MADE B Y IT IN SISTER CONCERNS ARE STRATEGIC INVESTMENTS AND HENCE, SHOUL D BE EXCLUDED FOR THE PURPOSES OF COMPUTING THE DISALLOWANCE U/S. 14A R.W.R.8D. 15. THE LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET SUBMITTED THAT THE ADDITIONAL GROUNDS RAISED BEFORE THE TRIBUNAL ARE P URELY LEGAL IN NATURE AND NO FRESH FACTS ARE REQUIRED TO BE INVESTIGATED. RE FERRING TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE NTPC LTD. REPORTE D IN 229 ITR 383 AND IN THE CASE OF JUTE CORPORATION OF INDIA LTD. REPOR TED IN 187 ITR 688 AND THE 8 ITA NOS.1628 & 1636/PUN/2013 DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F AHMEDABAD ELECTRICITY COMPANY REPORTED IN 199 ITR 351 HE SUBMITTED THAT T HE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE SHOULD BE ADMITTED. 16. AFTER HEARING BOTH THE SIDES AND CONSIDERING TH E ADDITIONAL GROUNDS RAISED BY THE ASSESSEE BEING PURELY LEGAL IN NATURE AND NO FRESH FACTS ARE REQUIRED TO BE INVESTIGATED, THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE ARE ADMITTED FOR ADJUDICATION. 17. THE LD. COUNSEL FOR THE ASSESSEE WHILE ARGUING ALL THE GROUNDS SUBMITTED THAT THE ASSESSEE COMPANY HAS EARNED DIV IDEND INCOME OF RS.1,73,076/- WHICH WAS CLAIMED AS EXEMPT. FURTHER , THE ASSESSEE COMPANY HAS ALSO EARNED SHARE OF PROFIT FROM PARTNE RSHIP FIRMS AMOUNTING TO RS.18,83,39,507/-. THE ASSESSEE ON ITS OWN MADE DI SALLOWANCE OF RS.4,61,16,561/- U/S.14A IN THE COMPUTATION OF INCO ME WHICH CONSISTS OF DISALLOWANCE OF INTEREST OF RS.4,24,30,542/- AND IN DIRECT EXPENDITURE OF RS.36,86,019/-. THUS, THE TOTAL DISALLOWANCE WAS W ORKED OUT AT RS.4,61,16,561/- U/S.14A R.W. RULE 8D. THE ASSESSI NG OFFICER, HOWEVER, MADE FURTHER DISALLOWANCE OF RS.2,91,01,003/- OVER AND ABOVE THE DISALLOWANCE OFFERED BY THE ASSESSEE. WHILE DOING SO, HE INCLUDED THE SHARE APPLICATION MONEY AS TAX FREE INVESTMENT. FU RTHER, THE ASSESSING OFFICER ALSO CONSIDERED THE INVESTMENTS IN PARTNERS HIP FIRMS FROM WHICH ASSESSEE HAS EARNED SHARE OF PROFIT AND ALSO INTERE ST INCOME FOR THE PURPOSE OF DISALLOWANCE U/S.14A. THE ASSESSING OFFICER AFT ER CONSIDERING THE INVESTMENTS IN THE PARTNERSHIP FIRMS ON PRO-RATA BA SIS ENHANCED THE DISALLOWANCE BY RS.2,94,01,003/- U/S.14A OF THE I.T . ACT. HE SUBMITTED THAT THE LD.CIT(A) HELD THAT ULTIMATELY THE SHARES ARE A LLOTTED IN THE SUBSEQUENT YEARS IN 2 COMPANIES AND THE INTENTION OF THE ASSES SEE IS TO HOLD THE SHARES AS AN INVESTMENT. FURTHER, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S.14A ON ACCOUNT OF INVESTMENT IN PARTNERSHIP FIR MS IS ALSO JUSTIFIED. HE, HOWEVER, DIRECTED THE ASSESSING OFFICER TO EXCLUDE THE SHARE APPLICATION 9 ITA NOS.1628 & 1636/PUN/2013 MONEY RECEIVED BY THE ASSESSEE FROM DIFFERENT PERSO NS WHILE COMPUTING THE DISALLOWANCE U/S.14A. 18. HE SUBMITTED THAT NOT ONLY THE DISALLOWANCE MAD E BY THE ASSESSING OFFICER AND UPHELD BY THE CIT(A) IS INCORRECT BUT A LSO THE DISALLOWANCE OFFERED IN THE RETURN OF INCOME IS ALSO NOT CORRECT AND THERE IS NO REASON FOR ANY DISALLOWANCE U/S.14A. REFERRING TO THE COPY OF THE BALANCE SHEET, COPY OF WHICH IS PLACED FROM PAGES 7 TO 42 OF THE PAPER BOOK THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ASSESSEE HAS RECEIVED C OMMISSION INCOME IN THE FORM OF DIVIDEND OF RS.1,73,076/- AND SHARE OF PROFIT OF RS. 18,83,39,507/-. REFERRING TO PAGE 46 OF THE PA PER BOOK HE SUBMITTED THAT THE ENTIRE DIVIDEND INCOME IS EARNED FROM MUTU AL FUNDS. REFERRING TO PAGE 20 OF THE PAPER BOOK THE LD. COUNSEL FOR THE A SSESSEE DREW THE ATTENTION OF THE BENCH TO THE DETAILS OF INVESTMENT ACCORDING TO WHICH THE INVESTMENT IN VARIOUS GROUP CONCERNS IS RS.90,75,82 ,590/- AS ON 31-03- 2009. HE SUBMITTED THAT THIS INVESTMENT HAS BEEN C ONSIDERED BY THE ASSESSING OFFICER FOR THE PURPOSE OF DISALLOWANCE U /S.14A. HOWEVER, THE ASSESSEE COMPANY HAS NOT RECEIVED ANY DIVIDEND ON T HESE INVESTMENTS DURING THE YEAR. THEREFORE, THE INVESTMENTS MADE I N THE GROUP COMPANIES SHOULD BE EXCLUDED FOR THE PURPOSE OF COMPUTING DIS ALLOWANCES U/S.14A R.W. RULE 8D. FOR THE ABOVE PROPOSITION, HE RELIED ON T HE DECISION OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF KOLTE PATIL DEVELOPE RS LTD. VS. DCIT VIDE ITA NOS. 1656 TO 1659/PN/2014 ORDER DATED 29-04-2016 FO R A.YRS. 2008-09 AND 2009-10 WHEREIN THE TRIBUNAL, FOLLOWING THE DECISIO N OF HONBLE BOMBAY HIGH COURT IN THE CASE OF HOLCIM INDIA LTD., HAS HE LD THAT NO DISALLOWANCE U/S.14A IS WARRANTED ON ACCOUNT OF INVESTMENT IN SH ARES OF SUBSIDIARY/ASSOCIATE COMPANIES WHERE NO DIVIDEND IN COME HAS BEEN RECEIVED. HE ACCORDINGLY SUBMITTED THAT THE INVEST MENTS MADE BY IT IN THE GROUP COMPANIES SHOULD BE EXCLUDED FOR THE PURPOSE OF COMPUTING DISALLOWANCE U/S.14A R.W. RULE 8D. 10 ITA NOS.1628 & 1636/PUN/2013 19. HE SUBMITTED THAT APART FROM THE INVESTMENT IN THE GROUP COMPANIES THE ASSESSEE HAS ALSO MADE CERTAIN INVESTMENTS IN T HE PARTNERSHIP FIRMS. WHILE COMPUTING THE DISALLOWANCE U/S.14A THE ASSESS EE HAS EXCLUDED THE INVESTMENTS MADE IN THE PARTNERSHIP FIRMS. HOWEVER , THE ASSESSING OFFICER DID NOT ACCEPT THE STAND OF THE ASSESSEE AND HAS IN CLUDED THE INVESTMENTS MADE IN M/S. K.K. ERECTOR, KUMAR SONS AND KUMAR BUI LDER, MUMBAI ON PRO- RATA BASIS. HE SUBMITTED THAT THE AMOUNT INVESTED IN THE PARTNERSHIP FIRMS IS MUCH LESS THAN THE OWN CAPITAL AND FREE RESERVES OF THE ASSESSEE COMPANY AND THEREFORE NO DISALLOWANCE OF INTEREST CAN BE MA DE IN RESPECT OF THE ABOVE INVESTMENTS. FOR THE ABOVE PROPOSITION, HE R ELIED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. HD FC BANK LTD. REPORTED IN 366 ITR 505 WHICH HAS BEEN FOLLOWED BY THE COORD INATE BENCH OF THE TRIBUNAL IN THE CASE OF KOLTE PATIL DEVELOPERS LTD. (SUPRA). 20. SO FAR AS THE INCLUSION OF SHARE APPLICATION MO NEY FOR THE PURPOSE OF DISALLOWANCE U/S.14A IS CONCERNED HE SUBMITTED THAT NO SHARES ARE ALLOTTED AS ON 31-03-2009 AND THEREFORE THE QUESTION OF EARN ING ANY EXEMPT INCOME SIMPLY DOES NOT ARISE. REFERRING TO THE DECISION O F MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF RAINY INVESTMENT PVT. LTD. VS. ACIT REPORTED IN 56 SOT 61 HE SUBMITTED THAT THE TRIBUNAL IN THE SAID D ECISION HAS HELD THAT SHARE APPLICATION MONEY CANNOT BE REGARDED AS AN IN VESTMENT IN SHARES OR AN ASSET YIELDING TAX FREE INCOME AND NEITHER IS IT CAPABLE OF YIELDING ANY TAX FREE INCOME AND THEREFORE NO DISALLOWANCE CAN BE MA DE U/S.14A OF THE I.T. ACT. REFERRING TO THE DECISION OF KOLKATA BENCH OF THE TRIBUNAL IN THE CASE OF LGW LTD. VS. ITO AND VICE VERSA VIDE ITA NO.267/KOL /13 AND CO NO.29/KOL/13 ORDER DATED 07-10-2015 HE SUBMITTED TH AT THE TRIBUNAL IN THE SAID DECISION HAS HELD THAT WHILE WORKING OUT THE A VERAGE VALUE OF THE INVESTMENTS UNDER RULE 8D(2)(III) OF THE RULES, THE SHARE APPLICATION MONEY SHOULD NOT BE INCLUDED. 11 ITA NOS.1628 & 1636/PUN/2013 21. SO FAR AS THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF CHEMINVEST LTD. RELIED ON BY THE ASSESSING OFFICER AND THE CIT(A) ARE CONCERNED HE SUBMITTED THAT THE SAME HAS BEEN REVER SED BY THE HONBLE DELHI HIGH COURT IN ITA NO.749/2014 ORDER DATED 02- 09-2015. THE HONBLE HIGH COURT AFTER THOROUGHLY DISCUSSING THE ISSUE HA S HELD THAT NO DISALLOWANCE U/S.14A OF THE ACT CAN BE MADE IN A YE AR IN WHICH NO EXEMPT INCOME HAS BEEN EARNED OR RECEIVED BY THE ASSESSEE. HE ACCORDINGLY SUBMITTED THAT THE DISALLOWANCE MADE BY THE ASSESSI NG OFFICER AND OFFERED BY THE ASSESSEE IN THE RETURN OF INCOME ALSO SHOUL D BE DELETED. 22. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHE R HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A). HE SUBMITTED THAT ASSE SSEE HAS MADE INVESTMENT IN VARIOUS GROUP COMPANIES AND IN DIFFER ENT PARTNERSHIP FIRMS THE DIVIDEND INCOME OR THE SHARE OF PROFIT FROM THE FIR M AS THE CASE MAY BE WOULD HAVE BEEN EXEMPT FROM TAX. UNDER THESE CIRCU MSTANCES, THE DETAILED ORDER OF THE CIT(A) JUSTIFYING THE DISALLOWANCE U/S .14A SHOULD BE UPHELD AND THE GROUNDS RAISED BY THE ASSESSEE SHOULD BE DISMIS SED. 23. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE PAP ER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIO US DECISIONS CITED BEFORE US. WE FIND THE ASSESSEE IN THE INSTANT CAS E HAS EARNED DIVIDEND OF RS.1,73,076/- WHICH IT CLAIMED AS EXEMPT U/S.14A. THE ASSESSEE COMPANY HAD ALSO EARNED SHARE OF PROFIT FROM PARTNERSHIP FI RMS AMOUNTING TO RS.18,83,39,507/-. THE ASSESSEE ON ITS OWN HAD MAD E DISALLOWANCE OF RS.4,61,16,561/- U/S.14A IN COMPUTATION OF INCOME. THE BREAKUP OF ABOVE DISALLOWANCE CONSISTS OF INTEREST OF RS.4,24,30,542 /- AND INDIRECT EXPENDITURE OF RS.36,86,019/-. WE FIND THE ASSESSI NG OFFICER IN THE ORDER PASSED U/S.143(3) MADE FURTHER DISALLOWANCE OF RS.2 ,94,01,003/- OVER AND ABOVE THE DISALLOWANCE MADE BY THE ASSESSEE. WHILE COMPUTING SUCH ADDITIONAL DISALLOWANCE THE ASSESSING OFFICER INCLU DED THE SHARE APPLICATION 12 ITA NOS.1628 & 1636/PUN/2013 MONEY RECEIVED BY THE ASSESSEE AS WELL AS GIVEN BY THE ASSESSEE AS TAX FREE INVESTMENT. APART FROM THE ABOVE ADDITION, THE ASSESSING OFFICER HAS ALSO CONSIDERED THE INVESTMENTS ON PRO-RATA BASIS I N THE PARTNERSHIP FIRMS FROM WHICH IT HAD EARNED SHARE OF PROFIT WHICH IS E XEMPT AND INTEREST INCOME. ACCORDINGLY, THE ASSESSING OFFICER ENHANCED THE DISALLOWANCE BY RS.2,94,01,003/-. 24. WE FIND IN APPEAL THE LD.CIT(A) REJECTED THE CO NTENTION OF THE ASSESSEE THAT THE SHARE APPLICATION MONEY CANNOT BE CONSIDERED AS PART OF TAX FREE INVESTMENTS SINCE NO SHARES ARE ALLOTTED T O IT. WHILE DOING SO, HE HELD THAT ULTIMATELY THE SHARES ARE ALLOTTED IN THE SUBSEQUENT YEARS IN TWO COMPANIES AND THE INTENTION OF THE ASSESSEE IS TO H OLD THE SHARES AS AN INVESTMENT. HE ALSO REJECTED THE SUBMISSION OF THE ASSESSEE THAT PRO-RATA INCLUSION OF THE CAPITAL IN THE FIRMS IS NOT CORREC T. THUS, THE CIT(A) UPHELD THE ACTION OF THE ASSESSING OFFICER IN MAKING DISAL LOWANCE U/S.14A ON ACCOUNT OF SHARE APPLICATION MONEY AND INVESTMENT I N PARTNERSHIP FIRMS. 25. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT NOT ONLY THE DISALLOWANCE U/S.14A MADE BY THE ASSESSING OFFI CER OVER AND ABOVE THE DISALLOWANCE OFFERED IN THE RETURN OF INCOME SHOULD BE DELETED BUT THE DISALLOWANCE OFFERED IN THE RETURN OF INCOME BY THE ASSESSEE BEING NOT CORRECT SHOULD ALSO BE DELETED. ACCORDING TO THE L D. COUNSEL FOR THE ASSESSEE SINCE THE ASSESSEE COMPANY HAS NOT RECEIVE D ANY DIVIDEND INCOME DURING THE YEAR FROM THE COMPANIES IN WHICH IT HAS INVESTED IN SHARES, THEREFORE, NO DISALLOWANCE U/S.14A IS CALLE D FOR. SO FAR AS THE INVESTMENT IN SHARE APPLICATION MONEY IS CONCERNED IT IS HIS SUBMISSION THAT IN VIEW OF THE DECISION OF MUMBAI BENCH OF THE TRIB UNAL IN THE CASE OF RAINY INVESTMENTS PVT. LTD. (SUPRA) AND THE DECISION OF H ONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. (SUPRA), THE DECISIO N OF KOLKATA BENCH OF THE TRIBUNAL IN THE CASE OF LGW LTD. (SUPRA) SHARE APPL ICATION MONEY SHOULD BE 13 ITA NOS.1628 & 1636/PUN/2013 EXCLUDED FROM THE TOTAL INVESTMENTS FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE U/S.14A. SO FAR AS THE INVESTMENT IN PARTNERSHIP FIRMS IS CONCERNED IT IS THE SUBMISSION OF THE LD. COUNSEL F OR THE ASSESSEE THAT SINCE THE OWN CAPITAL AND FREE RESERVES OF THE ASSE SSEE COMPANY ARE MUCH MORE THAN THE INVESTMENT IN PARTNERSHIP FIRMS, THER EFORE, IN VIEW OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F RELIANCE UTILITIES AND POWER LTD. REPORTED IN 313 ITR 340 NO DISALLOWANCE U/S.14A IS CALLED FOR. 26. WE FIND MERIT IN THE ABOVE ARGUMENTS OF THE LD. COUNSEL FOR THE ASSESSEE. IT IS AN ADMITTED FACT THAT NO DIVIDEND HAS BEEN RECEIVED BY THE ASSESSEE FROM THE SHARES INVESTED IN THE GROUP COMP ANIES WHICH HAS BEEN CONSIDERED BY THE ASSESSING OFFICER FOR THE PURPOSE OF COMPUTING DISALLOWANCE U/S.14A. FROM PAGE 46 OF THE PAPER BO OK WE FIND WHATEVER DIVIDEND THE ASSESSEE HAS RECEIVED IS ON ACCOUNT OF DIVIDEND FROM MUTUAL FUNDS. WE FIND THE PUNE BENCH OF THE TRIBUNAL IN T HE CASE OF M/S. KOLTE PATIL DEVELOPERS LTD. (SUPRA) WHILE ADJUDICATING TH E ISSUE OF DISALLOWANCE U/S.14A ON ACCOUNT OF INVESTMENT IN SHARES ON WHICH NO DIVIDEND HAS BEEN RECEIVED HAS HELD THAT NO DISALLOWANCE U/S.14A CAN BE MADE IN A CASE WHERE THE ASSESSEE HAS NOT RECEIVED ANY DIVIDEND OU T OF THE SHARES HELD AS INVESTMENT. THE RELEVANT OBSERVATION OF THE TRIBUN AL AT PARA 25 OF THE ORDER READS AS UNDER : 25. WE FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT WHEN NO DIVIDEND IS RECEIVED ON INVESTMENT IN SHARES WORTH RS.117,85,71,206/- IN SUBSIDIARY/ASSOCIATE COMPANI ES NO DISALLOWANCE U/S.14A IS CALLED FOR. WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF GOYAL ISHWARCHAND KISHORILAL ( SUPRA) HAS HELD THAT WHEN ASSESSEE HAS NOT RECEIVED ANY DIVIDEND OUT OF THE SHARES HELD AS INVESTMENT, THEN NO DISALLOWANCE U/S.14A CAN BE MADE . SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE DELHI HIGH COURT IN TH E CASE OF CIT VS.HOLSIM INDIA PVT. LTD. VIDE ITA NO. 486 AND 299/20 14 AND VARIOUS OTHER DECISIONS THEREFORE, WE FIND MERIT IN THE ARGUM ENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT DISALLOWANCE U/S.14A IS NOT WARRANTED ON ACCOUNT OF INVESTMENT OF RS.117,85,71,206/- IN SHARES IN SUBSIDIARY/ASSOCIATE COMPANIES. 14 ITA NOS.1628 & 1636/PUN/2013 27. WE FIND BEFORE THE HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. THE FOLLOWING SUBSTANTIAL QUESTION OF LAW WAS RAISED : WHETHER DISALLOWANCE U/S.14A OF THE ACT CAN BE MADE IN A YEAR IN WHICH NO EXEMPT INCOME HAS BEEN EARNED OR RECEIVED B Y THE ASSESSEE. 28. THE HONBLE HIGH COURT IN ITA NO.749/2014 ORDER DATED 02-09-2015 REVERSED THE DECISION OF SPECIAL BENCH OF THE TRIBU NAL IN THE CASE OF ACIT VS. CHEMINVEST LIMITED VS. CIT REPORTED IN (2009) 3 17 ITR (AT) 86 (DELHI) (SB) AND OBSERVED AS UNDER : 19. IN LIGHT OF THE CLEAR EXPOSITION OF THE LAW IN HOLCIM INDIA (P) LTD. (SUPRA) AND IN VIEW OF THE ADMITTED FACTUAL POSITION IN THIS CASE THAT THE ASSESSEE HAS MADE STRATEGIC INVESTMENT IN SHARES OF MAX IND IA LTD., THAT NO EXEMPTED INCOME WAS EARNED BY THE ASSESSEE IN THE RE LEVANT AY AND SINCE THE GENUINENESS OF THE EXPENDITURE INCURRED BY T HE ASSESSEE IS NOT IN DOUBT, THE QUESTION FRAMED IS REQUIRED TO BE ANSWER ED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. . . . . . . . . . . . . . . . . . . . . . . 23. IN THE CONTEXT OF THE FACTS ENUMERATED HEREINBEF ORE THE COURT ANSWERS THE QUESTION FRAMED BY HOLDING THAT THE EXPRESSI ON DOES NOT FORM PART OF THE TOTAL INCOME IN SECTION 14 A OF THE ENVISAGES THAT THERE SHOULD BE AN ACTUAL RECE IPT OF INCOME, WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME, DURING THE RELEVANT PREVIOUS YEAR FOR THE PURPOSE OF DISALLOWING ANY EXPENDITURE I NCURRED IN RELATION TO THE SAID INCOME. IN OTHER WORDS, SECTION 14A WILL NOT APPLY IF NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING THE R ELEVANT PREVIOUS YEAR. 29. SINCE IN THE INSTANT CASE THE ASSESSEE HAS NOT RECEIVED ANY DIVIDEND ON THE INVESTMENT MADE IN SHARES OF GROUP COMPANIES , THEREFORE, THE INVESTMENT MADE IN THE GROUP COMPANIES SHOULD BE EX CLUDED FROM THE INVESTMENTS FOR THE PURPOSE OF COMPUTING DISALLOWAN CE U/S.14A R.W. RULE 8D. 30. SO FAR AS INCLUSION OF SHARE APPLICATION MONEY IS CONCERNED, IT IS AN ADMITTED FACT THAT NO SHARES ARE ALLOTTED AS ON 31- 03-2009. WE FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE QUESTION OF EARNING ANY EXEMPT INCOME SIMPLY DOES NOT ARISE ON SUCH SHARE APPLICATION 15 ITA NOS.1628 & 1636/PUN/2013 MONEY PENDING ALLOTMENT. WE FIND THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF RAINY INVESTMENTS PVT. LTD. (SUPRA) HAS HEL D THAT SHARE APPLICATION MONEY CANNOT BE REGARDED AS AN INVESTMENT IN SHARES OR AN ASSET YIELDING TAX FREE INCOME AND NEITHER IS IT CAPABLE OF YIELDI NG ANY TAX FREE INCOME. THE RELEVANT OBSERVATION OF THE TRIBUNAL FROM PARA 4 READS AS UNDER : 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. SECTION 14A R/W R. 8D IS MANDATORY IN ITS APP LICATION WHERE THE ASSESSEE EARNS INCOME WHICH IS CLAIMED TAX- EXEMPT, AS DIV IDEND INCOME IN THE INSTANT CASE. IN FACT, THERE IS NO DOUBT WITH REGARD TO THIS; THE ASSESSE ITSELF CONCEDING TO THE SAME BEFORE US AND, BESIDE S, BEING ENGAGED IN THE BUSINESS OF MAKING INVESTMENTS AND EARNIN G DIVIDEND INCOME AS AN INTEGRAL PART THEREOF. THE ONLY OPTION, THEREFORE, IF IT CONSIDERS THE APPLICATION OF THE PROVISION AS OPERATING TO ITS DETRIMENT, IS TO FORFEIT ITS RIGHT TO EXEMPTION FROM TAX IN ITS R ESPECT. QUA MERITS, WE FIND MUCH FORCE IN THE ASSESSEE'S ARGUME NT THAT 'SHARE APPLICATION MONEY', TO THE EXTENT IT IS ACTUALLY SO, SO THAT IT ONLY REPRESENTS AMOUNT/S PAID BY WAY OF APPLICATION FOR ALL OTMENT OF SHARES, THE SAME CANNOT BE REGARDED AS AN INVESTMENT IN SHARES, OR AN ASSET (OR ASSET CLASS) YIELDING TAX-FREE INCOME, AND NEITHER IS IT CAPABLE OF YIELDING ANY TAX-FREE INCOME. THE SAME WOULD, THEREFORE, IN O UR CLEAR VIEW, HAVE TO BE EXCLUDED IN WORKING OUT THE DISALLOWANCE U/R. 8D. FURTHER, THOUGH THE REVENUE HAS NOT DISPUTED THE SUMS REFLECTED AS 'SHARE APPLICATION MONEY' IN THE ASSESSEE'S BALANCE-SHEET, THE AO, TO WHOM T HE MATTER IS TO BE IN ANY CASE RESTORED FOR WORKING OUT THE DISALLOWA NCE BY EXCLUDING THE SAME, SHALL, IN THE SET ASIDE PROCEEDINGS, ALSO EXAM INE THE VERACITY OF THE ASSESSEE'S CLAIM WITH REGARD TO THE SAME BEING 'SHARE APPLICATION MONEY'. THIS IS IN VIEW OF THE PERTINENT QUESTIONS RAI SED BY THE BENCH IN ITS RESPECT, TO WHICH NO SATISFACTORY ANSWER WAS FORTHCOM ING DURING HEARING, NOR - TO BE FAIR TO THE LD. AR, COULD POSSI BLY BE IN THE ABSENCE OF ANY DETAILS ON RECORD. WE STATE SO AS THE 'SHARE APPLICA TION MONEY' WOULD ORDINARILY ONLY BE 'PUBLIC MONEY' AND, THUS, E XCEPT PERHAPS WHERE TOWARD SHARES OF PRIVATE LIMITED COMPANIES, SUBJECT TO STRINGENT PROCEDURE, AS IS GENERALLY IN PLACE FOR SUCH FUNDS. WE MAY FURTHER CLARIFY THAT THE EXCLUSION OF 'SHARE APPLICATION MONEY', AS OP INED BY US, IS NOT IN THE LEAST FOR THE REASON THAT IT DID NOT YIELD ANY TA X-FREE INCOME FOR THE RELEVANT YEAR, BUT FOR THE REASON THAT IT IS INCAPABL E OF ANY SUCH INCOME. THE SAME IS ONLY IN THE NATURE OF APPLICATION (OFFER) MONEY, WHICH WOULD THOUGH, ON ALLOTMENT, GET ADJUSTED AGAINST THE COST OF THE SAID SHARES, AND ONLY WHEREUPON ANY RIGHTS IN THE INVESTEE COMPANY INU RE TO THE ALLOTTEE. NO RIGHTS, NOT EVEN INCHOATE, IN THE SHARE CAPITAL OF THE ISSUING COMPANY ARISE ON THE PAYMENT OF THE SHARE APPLICATION MONEY, IRRESPECTIVE OF THE TIME PERIOD FOR WHICH IT MAY OUTSTAND. THE SAME MAY A T BEST YIELD INTEREST INCOME (FOR WHICH A SPECIAL PROCEDURE THOUGH HAS TO BE FOLLOWED BY THE COMPANY CONCERNED), WHICH IS IN ANY CASE TAXAB LE, SO THAT THERE IS NO SCOPE FOR APPLICATION OF SEC. 14A THEREON. 31. WE FIND THE KOLKATA BENCH OF THE TRIBUNAL IN TH E CASE OF LGW LTD. (SUPRA) HAS OBSERVED AS UNDER : 16 ITA NOS.1628 & 1636/PUN/2013 6. WE HAVE HEARD THE SUBMISSIONS OF THE LD. DR, WHO R ELIED ON THE ORDER OF AO. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THE DECISION OF ITAT, CHENNAI BENCH IN THE CASE OF MSA SE CURITIES SERVICES PVT. LTD. VS ACIT IN ITA NOS.1523- 1524/MDS/2012 DATED 17.10.2012 AND IN THE CASE OF RAINY INVESTMENTS P.LTD VS ACIT IN I TA NO.5491/MUM/2011 DATED 16.01.2013. THE HONOURABLE B ENCHES HAVE TAKEN THE VIEW THAT THE SHARE APPLICATION MONEY GETS CONVERTED INTO SHARES ONLY ON ALLOTMENT BY THE COMPANY. TILL SUCH TIM E THE SHARE APPLICATION MONEY IS CONVERTED INTO SHARES, THE APPLIC ANT DOES NOT HAVE ANY RIGHTS OF A SHAREHOLDER/MEMBER. THE SHARE APPLICAN T SEE WAS NOT ENTITLED TO ANY DIVIDEND. THEREFORE SHARE APPLICATIO N MONEY CANNOT BE CONSIDERED AS INVESTMENT WHICH IS LIKELY TO EARN TAX FR EE DIVIDEND INCOME. HENCE, THERE CAN BE NO DISALLOWANCE U/S 14A O F THE ACT. 7. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RIV AL SUBMISSIONS. WE ARE OF THE VIEW THAT ORDER OF CIT(A) ON THIS ISSUE HAS TO BE UPHELD. AS RIGHTLY CONTENDED BY THE LD. COUNSEL FOR THE ASSESSEE, SH ARE APPLICATION MONEY IS ONLY IN THE NATURE OF AN OFFER TO BUY SHARES MADE BY THE ASSESSEE. IT IS ONLY AFTER THE OFFER IS ACCEPTED BY THE COMPANY RESULTING IN A CONCLUDED CONTRACT, THE ASSESSEE BECOMES THE SHAREHOLDE R IN A COMPANY. TILL THIS TIME THE ASSESSEE BECOMES A SHAREHOLDER , THE ASSESSEE CANNOT HAVE ANY RIGHTS TO CLAIM ANY DIVIDEND TH AT MAY BE DECLARED BY THE COMPANY. IN SUCH CIRCUMSTANCES WE ARE OF THE VIEW THAT WHILE WORKING OUT THE AVERAGE VALUE OF THE INVESTMEN TS U/R 8D(2)(III) OF THE RULES THE SHARE APPLICATION MONEY SHOULD NOT BE IN CLUDED. WE HOLD ACCORDINGLY AND DISMISS GROUND NO.(I) RAISED BY THE RE VENUE. 32. RESPECTFULLY FOLLOWING THE DECISIONS OF COORDIN ATE BENCHES OF THE TRIBUNAL CITED (SUPRA) WE HOLD THAT SHARE APPLICATI ON MONEY PENDING ALLOTMENT SHOULD BE EXCLUDED FROM THE INVESTMENTS F OR THE PURPOSE OF COMPUTING DISALLOWANCE U/S.14A. 33. NOW COMING TO THE COMPUTATION OF DISALLOWANCE U /S.14A ON ACCOUNT OF INVESTMENT IN PARTNERSHIP FIRMS WE FIND THE ASSE SSEE HAS EXCLUDED THE SAME FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE U/S.14A. WE FIND THE ASSESSING OFFICER INCLUDED THE INVESTMENTS MADE IN K.K. ERECTOR, KUMAR SONS AND KUMAR BUILDERS ON A PRO-RATA BASIS WHICH H AS BEEN UPHELD BY THE CIT(A). WE FIND THE AMOUNTS INVESTED IN THE ABOVE FIRMS IS MUCH LESS THAN THE OWN CAPITAL AND FREE RESERVES OF THE ASSESSEE C OMPANY. THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF KOLTE PATIL DE VELOPERS LTD. (SUPRA) WHILE ADJUDICATING THE ISSUE OF DISALLOWANCE U/S.14A,HAS HELD THAT NO DISALLOWANCE CAN BE MADE U/S.14A WHERE THE OWN CAPITAL AND FREE RESERVES ARE MUCH 17 ITA NOS.1628 & 1636/PUN/2013 MORE THAN THE INVESTMENTS, THE INCOME OF WHICH IS T AX FREE. THE RELEVANT OBSERVATION OF THE TRIBUNAL READ AS UNDER : 28. AS REGARDS THE SUBMISSION OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT IF THE ASSESSEE HAD SUFFICIENT INTERE ST FREE FUNDS, THEN THERE WAS NO NEED TO BORROW IS CONCERNED WE DO NOT FIND ANY MERIT IN THE SAME. IT IS FOR THE ASSESSEE TO ARRANGE ITS AFFAIR S AND THE REVENUE CANNOT DIRECT THE ASSESSEE TO DO ITS BUSINESS IN A PARTIC ULAR MANNER. THE REVENUE HAS TO SEE WHETHER MONEY BORROWED HAS BEEN UTI LIZED FOR THE PURPOSE OF BUSINESS OR NOT. WE FIND A SOMEWHAT SIMILAR I SSUE HAD COME UP BEFORE THE HONBLE BOMBAY HIGH COURT IN THE CASE OF BOMBAY SAMACHAR LTD. (SUPRA). IN THAT CASE, THE ASSESSEE HAD BORROWED MONEY PRIOR TO THE RELEVANT PREVIOUS YEAR ON WHICH INTEREST HAD BEEN PAID AND CLAIMED THE SAME INTEREST EXPENDITURE IN THE PROFIT A ND LOSS ACCOUNT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTED THAT ASSESSEE HAD GIVEN INTEREST FREE FUNDS TO SISTER CONCERNS. HE, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY ASSESSEE SHOULD ADVAN CE MONEY TO THE SISTER CONCERNS WHICH INTURN WOULD EARN INCOME FROM INTEREST THERE ON WHILE NO INTEREST ACCRUED TO THE ASSESSEE ON THE LARGE BALANCES WITH IT. HE THEREFORE DISALLOWED A PART OF THE INTE REST EXPENDITURE. ACCORDING TO THE AO SINCE THE AMOUNT OF INTEREST WHIC H THE ASSESSEE WOULD HAVE GOT IF HE HAD CHARGED INTEREST ON THESE AM OUNTS, FAR EXCEEDED THE AMOUNT OF INTEREST PAID BY IT TO OUTSID ERS IN THIS YEAR, THEREFORE HE DISALLOWED THE ENTIRE AMOUNT OF INTEREST CLAIMED BY THE ASSESSEE AS A DEDUCTION. THE AAC CONFIRMED THE ACTION O F THE AO. ON FURTHER APPEAL, THE TRIBUNAL HELD THAT THE ASSESSEE WA S ENTITLED TO THE ENTIRE AMOUNT OF INTEREST AS AN ALLOWABLE DEDUCTION U /S.10(2)(III) OF THE I.T. ACT. ON FURTHER APPEAL BY THE REVENUE, THE HO NBLE HIGH COURT OBSERVED AS UNDER : AS WE HAVE ALREADY POINTED OUT, IT IS UNDISPUTED THAT THE AMOUNTS BORROWED FROM OUTSIDERS ON WHICH INTEREST HAS B EEN PAID HAVE BEEN USED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. IT APPEARS TO HAVE BEEN THE VIEW OF THE INCOME TAX OFFICER THAT IF THE ASSESSEE HAD COLLECTED THE OUTSTAND INGS WHICH WERE DUE TO IT FROM OTHERS, IT WOULD HAVE BEEN ABLE TO REDUCE ITS INDEBTEDNESS AND THUS SAVE A PART OF THE INTEREST WHICH IT HAD TO PAY ON ITS OWN BORROWINGS. THE ASSESSEE, THEREFORE, WAS NOT JUSTIFIED IN ALLOWING ITS OUTSTANDINGS TO REMAIN WITHOU T CHARGING ANY INTEREST THEREON WHILE IT WAS PAYING INTEREST ON T HE AMOUNTS BORROWED BY IT. TO THE EXTENT, THEREFORE, TO WHICH IT WOULD HAVE BEEN IN A POSITION TO COLLECT INTEREST ON THE OUTSTAND INGS DUE TO IT FROM OTHERS, IT COULD NOT BE PERMITTED TO CLAIM INTE REST PAID BY IT TO OUTSIDERS. IN OUR OPINION THE VIEW TAKEN BY THE IN COME TAX OFFICER IS CLEARLY UNSUSTAINABLE. AS HAS BEEN POINTED O UT BY THE MADHYA PRADESH HIGH COURT IN RAM KISHAN OIL MILLS V. COMMISSIONER OF INCOME TAX THE ONLY CONDITIONS REQUIRE D TO BE SATISFIED IN ORDER TO ENABLE THE ASSEESEE TO CLAIM A DE DUCTION IN RESPECT OF THE INTEREST UNDER SECTION 10(2)(III) ARE, FIRSTLY, THAT MONEY MUST HAVE BEEN BORROWED BY THE ASSESSEE ; SECONDLY , IT MUST HAVE BEEN BORROWED FOR THE PURPOSE OF BUSINESS AN D, THIRDLY, THE ASSESSEE MUST HAVE PAID INTEREST ON THE SAID AMOUNT AND CLAIMED IT AS A DEDUCTION. IT IS NOT THE REQUIR EMENT OF THE PROVISION THAT THE ASSESSEE MUST FURTHER SHOW THAT THE BO RROWING 18 ITA NOS.1628 & 1636/PUN/2013 OF THE CAPITAL WAS NECESSARY FOR THE BUSINESS SO THAT IF AT THE TIME OF BORROWING THE ASSESSEE HAD SUFFICIENT AMOUNT OF ITS OW N, THE DEDUCTION COULD NOT BE ALLOWED. SIMILARLY, THE MADR AS HIGH COURT IN AMNA BAI HAJEE ISSA V. COMMISSIONER OF INCOME TAX HA S HELD THAT IN DECIDING WHETHER A CLAIM FOR INTEREST ON BOR ROWING CAN BE ALLOWED THE FACT THAT THE ASSESSEE HAD AMPLE RESOURCES A T ITS DISPOSAL AND NEED NOT HAVE BORROWED, IS NOT A RELEVANT MATTER FOR CONSIDERATION. THE MATTER TO BE DECIDED IS WHETHER TH E AMOUNT OF INTEREST WAS PAID IN FACT IN RESPECT OF THE CAPITAL BO RROWED FOR BUSINESS. WE THEREFORE DO NOT FIND ANY MERIT IN THE ARGUMENTS OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT IF THE ASSESSEE HAD SUF FICIENT INTEREST FREE FUNDS, THERE WAS NO NEED TO BORROW FROM FINANCIA L INSTITUTIONS. 29. AS REGARDS THE ARGUMENT OF THE LD. DEPARTMENTAL R EPRESENTATIVE THAT ASSESSEE WAS NOT ABLE TO DEMONSTRATE THAT NO BORROWE D FUNDS HAVE BEEN UTILIZED BY THE ASSESSEE TOWARDS THE INVESTMENT IN SHARES/MUTUAL FUNDS/PARTNERSHIP FIRMS, THE INCOME OF WHICH IS TAX FRE E IS CONCERNED, WE FIND THE ASSESSEE BEFORE THE AO HAD DEMONSTRATED THAT NO BORROWED FUNDS HAVE BEEN UTILIZED FOR INVESTMENT IN TAX FREE I NVESTMENTS. ONCE THE ASSESSEE SUBMITS THAT THERE IS NO DIVERSION OF INTEREST BEARING FUNDS FOR TAX FREE INVESTMENTS, THE ONUS SHIFTS TO THE AO. WE FIND IN THE INSTANT CASE THE AO HAS NOT CONCLUSIVELY PROVED THAT BORROWED FUNDS HAVE BEEN DIVERTED FOR INVESTMENT IN TAX FREE FUNDS. WE FURTHE R FIND INVESTMENTS, THE INCOME OF WHICH IS TAXABLE LIKE DEBENTURES, NSC E TC. HAVE BEEN CONSIDERED BY THE AO AS TAX FREE INVESTMENTS. FURTHER, FOR THE PURPOSE OF COMPUTING THE SURPLUS AMOUNT AVAILABLE WITH THE ASSE SSEE THE AO HAS REDUCED THE NET FIXED ASSETS AND NET CURRENT ASSETS FRO M SUCH FREE RESERVES AND OWN CAPITAL WHICH IN OUR OPINION IS NOT J USTIFIED IN THE LIGHT OF VARIOUS DECISIONS INCLUDING THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD . (SUPRA) AND HDFC BANK LTD. (SUPRA). 30. WE FIND THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF HDFC BANK LTD. (SUPRA) AT PARA 15 AND 16 OF THE ORDER H AS HELD AS UNDER : 15. IT IS CLEAR THAT FOR THE FIRST TIME IN THE CASE O F HDFC BANK LTD. (SUPRA) THAT THIS COURT TOOK A VIEW THAT THE PR ESUMPTION WHICH HAS BEEN LAID DOWN IN RELIANCE UTILITIES AND PO WER LTD. (SUPRA) WITH REGARD TO INVESTMENT IN TAX FREE SECURIT IES COMING OUT OF ASSESSEES OWN FUNDS IN CASE THE SAME ARE IN EXCESS OF THE INVESTMENTS MADE IN THE SECURITIES (NOTWITHSTANDING THE FACT THAT THE ASSESSEE CONCERNED MAY ALSO HAVE TAKEN SOME FUNDS ON INTEREST) APPLIES, WHEN APPLYING SECTION 14A OF THE ACT. THUS, THE DECISION OF THIS COURT IN HDFC BANK LTD.(SUPRA) FOR T HE FIRST TIME ON 23 RD JULY, 2014 HAS SETTLED THE ISSUE BY HOLDING THAT THE TEST OF PRESUMPTION AS HELD BY THIS COURT IN RELIANCE UTILITIE S AND POWER LTD. (SUPRA) WHILE CONSIDERING SECTION 36(1)(III) OF THE ACT WOULD APPLY WHILE CONSIDERING THE APPLICATION OF SECTION 1 4A OF THE ACT. THE AFORESAID DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA) ON THE ABOVE ISSUE HAS ALSO BEEN ACCEPTED BY THE REVENUE INASMUCH AS EVEN THOUGH THEY HAVE FILED AN APPEAL TO THE SUPR EME COURT AGAINST THAT ORDER ON THE OTHER ISSUE THEREIN, VIZ., B ROKEN PERIOD INTEREST, NO APPEAL HAS BEEN PREFERRED BY THE REVENUE ON THE ISSUE OF INVOKING THE PRINCIPLES LAID DOWN IN RELIANCE UTILITIES AND 19 ITA NOS.1628 & 1636/PUN/2013 POWER LTD. (SUPRA) IN ITS APPLICATION TO SECTION 14A OF THE ACT. THEREFORE, THE ISSUE WHICH AROSE FOR CONSIDERATION BEFO RE THE TRIBUNAL HAD NOT BEEN DECIDED BY THIS COURT IN GODRE J AND BOYCE MANUFACTURING CO. LTD. (SUPRA). IT AROSE AND WAS SO D ECIDED FOR THE FIRST TIME BY THIS COURT IN HDFC BANK LTD. (SUPRA ). THUS, THERE IS NO CONFLICT AS SOUGHT TO BE MADE OUT BY THE I MPUGNED ORDER. THUS, IMPUGNED ORDER HAS PROCEEDED ON A FUND AMENTALLY ERRONEOUS BASIS AS THE RATIO DECINDI OF THE ORDER IN G ODREJ AND BOYCE MANUFACTURING CO. LTD. (SUPRA) HAD NOTHING TO DO WITH THE REST OF PRESUMPTION CANVASSED BY THE PETITIONER BEFORE THE TRIBUNAL ON THE BASIS OF THE RATIO OF THE DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA). 16. AT THE HEARING MR. SURESH KUMAR, LEARNED COUNSEL FOR THE REVENUE URGED THAT ON THE FACTS OF THIS CASE NO FAULT CAN BE FOUND WITH THE ORDER OF THE TRIBUNAL. IT IS SUBMITTED THAT , THE PETITIONER WAS NOT ABLE TO ESTABLISH BEFORE THE ASSESSING OFFICER AN D THE CIT(A) THAT THE AMOUNTS INVESTED IN THE INTEREST FREE SECURITIES CAME OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE PE TITIONER. IN THAT VIEW OF THE MATTER, IT IS SUBMITTED BY HIM THAT THE ORDER OF THIS COURT IN HDFC BANK LTD.(SUPRA) WOULD NOT APPLY TO THE FACTS OF THE PRESENT CASE. WE ARE UNABLE TO UNDERSTAND THE ABOVE SUBMISSION. THE ASSESSING OFFICER PASSED THE ASSESSMENT ORDER ON 22 ND DECEMBER, 2010 UNDER SECTION 143(3) OF THE ACT. TH E CIT(A) PASSED AN ORDER ON 21 ST NOVEMBER, 2011 DISMISSING THE PETITIONERS APPEAL. ON BOTH THE DATES, WHEN THE ORD ERS WERE PASSED BY THE ASSESSING OFFICER AND CIT(A), THE AUTHORITI ES DID NOT HAVE THE BENEFIT OF THE ORDER OF THIS COURT IN H DFC BANK LTD. (SUPRA) RENDERED ON 23 RD JULY, 2014. ONCE THE ISSUE IS SETTLED BY THE DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA) , THERE IS NOW NO NEED FOR THE ASSESSEE TO ESTABLISH WITH EVIDENCE THAT THE AMOUNTS WHICH HAS BEEN INVESTED IN THE TAX FREE SECURI TIES HAVE COME OUT OF INTEREST FREE FUNDS AVAILABLE WITH IT. T HIS IS BECAUSE ONCE THE ASSESSEE IS POSSESSED OF INTEREST FREE FUNDS SUFFICIEN T TO MAKE THE INVESTMENT IN TAX FREE SECURITIES, IT IS PRESUM ED THAT IT HAS BEEN PAID FOR OUT OF THE INTEREST FREE FUNDS. CO NSEQUENTLY, WE DO NOT FIND ANY MERIT IN THE ABOVE SUBMISSION MADE AT THE HEARING ON BEHALF OF THE REVENUE. 31. SINCE THE ASSESSEE IN THE INSTANT CASE HAS CONCLUSIVELY PROVED THAT IT S OWN CAPITAL AND FREE RESERVES IS FAR MORE THA N THE INVESTMENT IN SHARES/MUTUAL FUNDS/PARTNERSHIP FIRMS, THE INCOME OF WHI CH IS TAX FREE, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HDFC BANK LTD.(SUPRA) WE HOLD THAT NO DISALLOWANCE U/S.14A R.W. RULE 8D(2) IS CALLED FOR ON ACCOUNT OF DISALLOWANCE OF INTEREST. 34. SINCE THE ASSESSEE IN THE INSTANT CASE HAS CONC LUSIVELY PROVED THAT ITS OWN CAPITAL AND FREE RESERVES ARE MUCH MORE THA N THE INVESTMENT IN THE PARTNERSHIP FIRMS AND SINCE WE HAVE ALREADY HELD IN THE PRECEDING PARAGRAPHS THAT THE SHARE APPLICATION MONEY AS WELL AS INVESTMENT IN THE GROUP COMPANIES ON WHICH NO DIVIDEND HAS BEEN RECEI VED HAS TO BE 20 ITA NOS.1628 & 1636/PUN/2013 EXCLUDED FROM THE INVESTMENTS FOR THE PURPOSE OF CO MPUTATION OF DISALLOWANCE U/S.14A, THEREFORE, IN VIEW OF THE DIS CUSSIONS ABOVE NO DISALLOWANCE U/S.14A IS CALLED FOR IN THE INSTANT C ASE. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESSEE INCLUDING THE ADDITI ONAL GROUNDS ARE ALLOWED. 35. GROUNDS OF APPEAL NO.4 TO 4.2 BY THE ASSESSEE R EADS AS UNDER : 4] THE LEARNED CIT(A) ERRED IN CONFIRMING THE AD DITION OF RS . 12,24,391/- BEING INTEREST RECEIVED ON DEPOSITS BELONG ING TO THE SOCIETY WITHOUT APPRECIATING THAT THE SAID INTEREST WAS NOT IN COME OF THE APPELLANT COMPANY. 4.1] THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE ABOVE INTEREST WAS RECEIVED ON DEPOSITS MADE WHICH WERE TO BE ULTIMAT ELY TRANSFERRED TO THE FLAT OWNERS' SOCIETY AND HENCE, THE INTEREST RE CEIVED ON SUCH DEPOSITS COULD NOT BE TAXED AS AN INCOME OF THE APPELL ANT COMPANY. 4.2] THE LEARNED CIT(A) ERRED IN HOLDING THAT THE APPELLANT COMPANY HAS CLAIMED CREDIT OF THE TDS DEDUCTED ON SUCH INTERE ST AND HENCE, THE INTEREST INCOME SHOULD BE TAXED IN THE HANDS OF THE AP PELLANT COMPANY WITHOUT APPRECIATING THAT NO SUCH CREDIT WAS CLAIMED BY THE APPELLANT IN ITS RETURN AND THEREFORE, THE QUESTION OF TAXING SUCH INTEREST INCOME SIMPLY DID NOT ARISE . 36. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT ASSESSE E HAS RECEIVED INTEREST AMOUNTING TO RS.12,24,391 (I.E., FROM IDBI BANK LTD. - RS.13,534/- FROM STATE BANK OF TRAVANCORE RS.12,10,857/-) WHI CH THE ASSESSEE HAS NOT OFFERED TO TAX. HE, THEREFORE, CONFRONTED THE SAME TO THE ASSESSEE. REJECTING THE VARIOUS EXPLANATIONS GIVEN BY THE ASS ESSEE, THE ASSESSING OFFICER MADE ADDITION OF RS.12,24,391/- TO THE TOTA L INCOME OF THE ASSESSEE. IN APPEAL THE LD.CIT(A) UPHELD THE ACTION OF THE AS SESSING OFFICER ON THE GROUND THAT ASSESSEE HAS CLAIMED CREDIT OF THE TDS AND THEREFORE THERE WAS NO REASON FOR NOT OFFERING THE INTEREST INCOME TO T AX. 37. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 21 ITA NOS.1628 & 1636/PUN/2013 38. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD COLLECTED ONE TIME MAINTENANCE DEPOSIT FROM THE CUS TOMERS WHICH WAS RETAINED BY IT TILL THE SOCIETY OF THE FLAT OWNERS IS FORMED AND THEN THE SAID AMOUNT IS HANDED OVER TO THE SOCIETY. INSTEAD OF K EEPING THE FUNDS IDLE THE AMOUNT HAS BEEN KEPT IN FIXED DEPOSIT WITH BANKS AN D THE INTEREST ALONG WITH PRINCIPAL AMOUNT IS HANDED OVER TO THE SOCIETY. HE ACCORDINGLY SUBMITTED THAT SINCE THERE IS NO INCOME ACCRUED TO THE ASSESS EE, THEREFORE, IT HAS NOT ACCOUNTED FOR THE ABOVE INTEREST. THE LD. DEPARTMEN TAL REPRESENTATIVE ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE C IT(A). 39. AFTER HEARING BOTH SIDES, WE FIND THE LD.CIT(A) WHILE DISMISSING THE GROUND RAISED BY THE ASSESSEE ON THIS ISSUE AT PARA 9.6 OF THE ORDER HAS OBSERVED AS UNDER : 9.6 I HAVE CONSIDERED THE CONTENTIONS OF THE APPELL ANT AS WELL AS THE PECULIAR CIRCUMSTANCES ARISING OUT OF THESE GROUNDS OF A PPEAL. THE APPELLANT HAS CLAIMED TDS OF RS.2,789/- ON INTEREST IN COME OF RS.13,534/- RECEIVED FROM IDBT BANK LTD. AND RS.2,69, 179/- ON INTEREST INCOME OF RS.12,10,857/- RECEIVED FROM STATE BANK OF TRAVANCORE. THEREFORE, HAVING CLAIMED TDS ON THE INTEREST INCOME S, THERE IS NO REASON FOR THE APPELLANT TO NOT OFFER THE CORRESPONDI NG INTEREST INCOME FOR TAX. I THEREFORE SEE NO INFIRMITY IN THE ACTION ON THE PART OF THE ASSESSING OFFICER IN BRINGING THE AMOUNTS OF INTEREST INC OME RECEIVED FROM IDBI BANK LTD. AND STATE BANK OF TRAVANCORE, T O TAX. GROUND NO.5 THUS, FAILS. 40. THE LD. COUNSEL FOR THE ASSESSEE COULD NOT BRIN G ANY MATERIAL BEFORE US TO SHOW THAT ASSESSEE HAS INFACT HANDED OVER THE MONEY TO THE SOCIETY. SINCE THERE IS NO EVIDENCE ON RECORD THAT ANY SOCIE TY HAS BEEN FORMED AND THE ASSESSEE HAS TRANSFERRED THE MONEY TO THE SOCIE TY OR HAS SHOWN ANY LIABILITY IN ITS BOOKS AND CONSIDERING THE FACT THA T THE ASSESSEE HAS CLAIMED TAX CREDIT ON SUCH INTEREST INCOME, THEREFORE, WE F IND NO INFIRMITY IN THE ORDER OF THE CIT(A) ON THIS ISSUE. ACCORDINGLY, THE GROU NDS RAISED BY THE ASSESSEE ON THIS ISSUE ARE DISMISSED. 22 ITA NOS.1628 & 1636/PUN/2013 41. GROUNDS OF APPEAL NO.5 TO 5.4 BY THE ASSESSEE A ND 4 TO 9 BY THE REVENUE RELATES TO DELETION OF PROPORTIONATE DISALL OWANCE OF RS.58,75,491/- WHICH WAS MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DIVERSION OF BORROWED FUNDS AND AMOUNT OF RS.12,95,32,777/- ON A CCOUNT OF ENHANCEMENT OF INCOME. 42. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT THE ASSESSEE IN THE PROFIT AND LOSS ACCOUNT HAS DEBITED/CREDITED ON ACCOUNT OF INTEREST PAID/RECEIVED UNDER VARIOUS HEADS. FROM THE VARIOUS DETAILS FURN ISHED BY THE ASSESSEE THE ASSESSING OFFICER OBSERVED THAT ASSESSEE DID NO T CHARGE ANY INTEREST ON THE LOANS GIVEN TO ITS SUBSIDIARY COMPANIES NAMELY KUMAR CITY CLUB LTD. AND L.K DEVELOPERS PVT. LTD., THE DETAILS OF WHICH ARE AS UNDER : KUMAR CITY CLUB LTD. 13 LK DEVELOPERS PVT. LTD. 261,243 PUNE TECHNO POLIS DEV. PVT. LTD. 5,614,234 TOTAL 5,875,491 HE, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN THE RE ASONS FOR THE SAME AS TO WHY PROPORTIONATE INTEREST AMOUNTING TO RS.58,75,49 1/- SHOULD NOT BE DISALLOWED. IT WAS EXPLAINED BY THE ASSESSEE THAT SUBSTANTIAL INTEREST FREE FUNDS ARE AVAILABLE WITH THE COMPANY ON ACCOUNT OF OWN CAPITAL AND FREE RESERVES ETC. OUT OF WHICH IT HAS ADVANCED INTEREST FREE FUNDS AND THEREFORE NO DISALLOWANCE IS CALLED FOR. 43. HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIE D WITH THE EXPLANATION GIVEN BY THE ASSESSEE. RELYING ON THE DECISION OF HONBLE KERALA HIGH COURT IN THE CASE OF CIT VS. V.I. BABY AND COMPANY REPORT ED IN 254 ITR 248 WHERE THE HONBLE HIGH COURT HAS UPHELD THE DISALLO WANCE OF INTEREST MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DIVERSION OF BORROWED FUNDS FOR NON- BUSINESS CONSIDERATION, DISALLOWED AN AMOUNT OF RS. 58,75,491/- BEING INTEREST @12% ON THE AMOUNT ADVANCED. 23 ITA NOS.1628 & 1636/PUN/2013 44. IN APPEAL THE LD.CIT(A) WHILE DELETING THE PROP ORTIONATE DISALLOWANCE OF RS.58,75,491/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DIVERSION OF BORROWED FUNDS IN ITS TWO SUBSIDIARY COMPANIES NAME LY L.K. DEVELOPERS PVT. LTD. AND PUNE TECHNOPOLIS DEVELOPMENT PVT. LTD. DIR ECTED THE ASSESSING OFFICER TO MAKE PRO-RATA INTEREST DISALLOWANCE IN R ESPECT OF INTEREST FREE ADVANCES GIVEN TO M/S. SINEW DEVELOPERS LTD. AND RI VERVIEW PROPERTIES PVT. LTD. AMOUNTING TO RS.12,95,32,777/- BY ENHANCI NG THE INCOME. THE RELEVANT OBSERVATION OF THE CIT(A) FROM PARA 10.6 O NWARDS READS AS UNDER : 10.6. I HAVE GIVEN THE APPELLANT'S SUBMISSIONS THE MOST CAREFUL CONSIDERATION. AS PER PROVISIONS OF SECTION 36(1)(III) O F THE ACT, THE INTEREST ON LOANS RAISED BY THE ASSESSEE FOR BUSINESS PURPOS ES IS AVAILABLE AS A BUSINESS DEDUCTION. IF THE ASSESSEE MAKES A CLAIM TO DEDUCTION IN TERMS OF SECTION 36 FOR THE PURPOSE OF CO MPUTATION OF INCOME REFERRED TO IN SECTION 28, HE HAS TO PLACE MA TERIALS IN SUPPORT OF HIS CLAIM OF ENTITLEMENT TO THE DEDUCTION. SECTION 3 6(1)(III) RELATES TO THE AMOUNT OF INTEREST PAID ON CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS, PROFESSION OR VOCATION. THE ASSESSEE HAS TO SATISFY THE ASSESSING AUTHORITY THAT HE IS ENTITLED TO OBTAIN DEDUCT ION IN ACCORDANCE WITH THE TAXING STATUTE. THE BURDEN IS ON THE ASSESSEE TO PROVE THAT A PARTICULAR CLASS OF INCOME IS EXEMPT FROM TAXATION. TH E BURDEN IS ON THE REVENUE AUTHORITIES TO SHOW THAT THE INCOME IS LIABLE TO TAX UNDER THE STATUTE; BUT THE ONUS OF SHOWING THAT A PARTICULAR CLA SS OF INCOME IS EXEMPT FROM TAXATION LIES ON THE ASSESSEE. TO EARN THE E XEMPTION,' THE ASSESSEE HAS TO ESTABLISH THAT HIS CASE CLEARLY AND SQUARELY FALLS WITHIN THE AMBIT OF THE EXEMPTING PROVISIONS OF THE ACT. THE PRINCIPLES EQUALLY APPLY IN CASES OF DEDUCTIONS CLAIMED. ONCE THE ASSESSEE CL AIMS ANY SUCH INTEREST AS DEDUCTION IN THEIR BOOKS OF ACCOUNT THE ON US IS ALWAYS ON THE ASSESSEE TO SATISFY THE ASSESSING OFFICER THAT WHATEVER LOANS WERE RAISED BY THE ASSESSEE WERE FOR THE PURPOSE OF BUSINESS. IF IN THE PROCESS OF EXAMINATION OF GENUINENESS OF SUCH DEDUCTION, IT TRANSP IRES THAT THE ASSESSEE HAS. ADVANCED CERTAIN FUNDS TO SISTER CONCERNS CHA RGING NO INTEREST, THERE WOULD BE A VERY HEAVY ONUS ON THE ASSESSE E TO DISCHARGE BEFORE THE ASSESSING OFFICER TO THE EFFECT THAT IN SPITE OF OUTSTANDING LOANS ON WHICH THE ASSESSEE IS INCURRING LIABILITY TO P AY INTEREST, THERE WOULD BE SUFFICIENT JUSTIFICATION TO ADVANCE THE LOAN S TO SISTER CONCERNS FOR NON-BUSINESS PURPOSES WITHOUT CHARGING ANY INTEREST. THIS WAS THE FINDING OF THE HONOURABLE ALLAHABAD HIGH COURT IN 3 52 ITR 8 [CIT VS SAHU ENTERPRISE (P) LTD]. 10.7. THE HONOURABLE PUNJAB AND HARYANA HIGH COURT IN ABHISHEK INDUSTRIES LTD. REPORTED IN 286 ITR 1 CAME TO A FINDI NG THAT ONCE IT IS BORNE OUT FROM THE RECORD THAT THE ASSESSEE HAD BORROW ED CERTAIN FUNDS ON WHICH LIABILITY TO PAY INTEREST IS BEING INCURRED AND ON THE OTHER HAND, CERTAIN AMOUNTS HAD BEEN ADVANCED TO SISTER CONC ERNS OR OTHERS WITHOUT CARRYING ANY INTEREST AND WITHOUT ANY BUSINESS PURPOSE, THE INTEREST TO THE EXTENT THE ADVANCE HAD BEEN MADE WIT HOUT CARRYING ANY INTEREST IS TO BE DISALLOWED UNDER SECTION 36(1)(III). SUCH BORROWINGS TO THAT EXTENT CANNOT POSSIBLY BE HELD FOR THE PURPOSE O F BUSINESS BUT FOR 24 ITA NOS.1628 & 1636/PUN/2013 SUPPLEMENTING THE CASH DIVERTED WITHOUT DERIVING ANY BENEFIT OUT OF IT. IT WAS HELD: 'THE ENTIRE MONEY IN A BUSINESS ENTITY COMES IN A COMMO N KITTY AND THE APPELLANT'S BUSINESS IS NO DIFFERENT. THE MONIES RECEIVE D AS SHARE CAPITAL, AS TERM LOAN, AS WORKING CAPITAL LOAN, AS SAL E PROCEEDS ETC. DO NOT HAVE ANY DIFFERENT COLOUR. THE ONLY THING SUFFICIENT TO DISALLOW THE INTEREST PAID ON THE BORROWING TO THE EXTENT THE AMO UNT IS LENT TO SISTER CONCERN WITHOUT CARRYING ANY INTEREST FOR NON-BUSINESS PURPOSES WOULD BE THAT THE ASSESSEE HAS SOME LOANS OR OTHER INTEREST BEAR ING DEBTS TO BE REPAID. IN CASE THE ASSESSEE HAD SOME SURPLUS AMOUNT WH ICH, ACCORDING TO IT, COULD NOT BE REPAID PREMATURELY TO ANY FINANCIAL INSTITUTION, STILL THE SAME IS EITHER REQUIRED TO BE CI RCULATED AND UTILISED FOR THE PURPOSE OF BUSINESS OR TO BE INVESTED IN A MANNE R IN WHICH IT GENERATES INCOME AND NOT THAT IT IS DIVERTED TOWARDS SI STER CONCERN FREE OF INTEREST. THIS WOULD RESULT IN NOT PRESENTING TRUE AND CORRECT PICTURE OF THE ACCOUNTS OF THE ASSESSEE AS AT THE COST BEING INCUR RED BY THE ASSESSEE, THE SISTER CONCERN WOULD BE ENJOYING THE BENEF ITS THEREOF. IT CANNOT POSSIBLY BE HELD THAT THE FUNDS TO THE EXTENT D IVERTED TO SISTER CONCERNS OR OTHER PERSONS FREE OF INTEREST WERE REQUIRE D BY THE ASSESSEE FOR THE PURPOSE OF ITS BUSINESS AND LOANS TO THAT EXTEN T WERE REQUIRED TO BE RAISED. THEREFORE, DIRECT NEXUS OF THE FUNDS BETWE EN BORROWINGS OF THE FUNDS AND DIVERSION THEREOF FOR NON-BUSINESS PURPOSES IS NOT AT ALL A FACTOR IN CONSIDERING THE ISSUE OF ALLOWABILITY OF SEC TION 36(1)(III). RATHER, THERE SHOULD BE NEXUS OF USE OF BORROWED FUNDS FOR THE PURPOSE OF BUSINESS TO CLAIM DEDUCTION .UNDER SECTION 36(1)(II I) OF THE ACT'. 10.8 IT IS THE MATTER OF RECORD THAT THE APPELLANT H AS TAKEN TERM LOANS AND SHORT TERM LOANS FROM THE BANKS AMOUNTING TO RS.119 ,75,71,641 WHICH ARE OUTSTANDING AS ON 01-04-2009 AND THE APPELL ANT HAS CLAIMED INTEREST EXPENDITURE OF RS.21,02,92,673 WHICH HAS BEEN DEBITED TO THE P&L ACCOUNT. INTEREST AMOUNTING TO RS.7,22,93,707 H AS ALSO BEEN PAID TO OTHERS. THUS, THE TOTAL INTEREST OUTGOINGS ARE TO T HE TUNE OF RS.28,25,86,380. INTEREST BEARING FUNDS OF RS.11,77,06 ,761 HAVE ALSO ADMITTEDLY BEEN BORROWED FOR MAKING SHARE APPLICATI ON ADVANCES (SEE CHART AT PARA 4.5 SUPRA). THE APPELLANT HAS ADVANCED HUGE SUMS OF MONEY OF RS.29,81,16,675 AS SHARE APPLICATION MONEY WH ICH IS STANDING IN THE BOOKS OF ITS SUBSIDIARY COMPANIES AS ON 31.3.200 9. IT HAS MADE THESE SHARE APPLICATION ADVANCES, ADMITTEDLY, FROM INT EREST BEARING LOANS TAKEN FROM PARTNERSHIP FIRMS OR OTHER SUBSIDIARY COMPANIES/RELATED PARTIES AMOUNTING TO RS. 11,77,06,76 1. IN FACT, IT HAS SUBSEQUENTLY NOT BEEN ALLOTTED SHARES IN MOST OF THE CASE S AND HAS BEEN REFUNDED RS. 20,90,36,675 IN THE SUBSEQUENT YEARS, AFTE R THE SUBSIDIARY COMPANIES HAVE MADE GOOD USE OF THESE INTEREST FREE FUN DS. DURING THE YEAR, IT HAS MADE FRESH INVESTMENTS AMOUNTING TO RS.34 C RORES IN SUBSIDIARY COMPANIES (CLOSING BALANCE RS. 90.75 CRORES ), MADE INVESTMENTS IN THE FORM OF SHARE APPLICATION MONEY TO SISTER CONCERNS/ SUBSIDIARY COMPANIES TO THE TUNE OF RS.29.81 CRORES (AS ST ATED ABOVE) AND MADE INTEREST FREE ADVANCES OF RS.122 CRORES TO SUBS IDIARY COMPANIES ON WHICH NO INTEREST IS SHOWN AS RECEIVABLE. T HE TOTAL OF THE LOANS AND ADVANCES MADE BY THE APPELLANT IN THE BOOKS AT YEAR END ARE RS. 307 CRORES AND INVENTORIES STAND AT RS. 71.11 CRORES. THE POSITION OF THE INTEREST FREE ADVANCES AS ON 31.3.2009 AND AMOUNTS ADVANCED DURING THE YEAR IS AS UNDER : 25 ITA NOS.1628 & 1636/PUN/2013 SR. NO. ADVANCES TO SUBSIDIARY COMPANIES BALANCE AS ON 31-03-2009 ADVANCED DURING THE YEAR 1 KUMAR PERFUMERIES PVT. LTD. RS.36,66,96,497 RS.31,01 ,00,000 2 RIVER VIEW PROPERTIES PVT. LTD. RS.26,75,90,063 RS.7,75,87,539 3 KHIRANAGAR DEVELOPMENT PVT. LTD. RS.19,37,99,436 RS.19,37,99,436 4 SINEW DEVELOPERS LTD. RS.72,74,39,982 RS.5,40,95,482 5 PUNE TECHNOPOLIS DEVELOPMENT PVT. LTD. RS.5,75,14,834 R S.5,75,14,000 6 L.K. DEVELOPERS PVT. LTD. RS.53,06,51,207 RS.53,05,52,089 TOTAL RS.214,36,92,019 RS.122,36,48,546 10.9 AS AGAINST THE SAME, THE AVERAGE BALANCE OF SHARE CAPITAL AND RESERVES STANDS AT RS.180.89 CRORES. THE ADVANCES OF RS.75 .34 CRORES RECEIVED FROM SUBSIDIARIES (ADJUSTED TOWARDS PROPERTY AC QUISITION; REFER SCHEDULE 10 OF THE AUDITED ACCOUNTS), SHARE APP LICATION MONEY OF RS.83.47 LAKHS RECEIVED BY THE APPELLANT (CANNOT BE D IVERTED FOR OTHER PURPOSES AS PER COMPANY ACT) AND ONE-TIME MAINTENANCE DEPOSITS OF RS. 1.28 CRORES (REFER SCHEDULE 8; COLLECTED ON BEHAL F OF PROPOSED SOCIETY OF FLAT OWNERS AND THEREFORE, A 'CURRENT LIAB ILITY') ARE NOT INTEREST FREE FUNDS AVAILABLE FOR PURPOSES OF MAKING THE IMPUG NED INTEREST FREE ADVANCES, DESPITE' THE APPELLANT'S CLAIMS TO THE CONTRA RY. THE FIGURES THEREFORE, CLEARLY SHOW THAT THE APPELLANT DID NOT H AVE SUFFICIENT INTEREST FREE FUNDS AT, ITS DISPOSAL AND THE BANK LOANS OF RS. 11 9 CRORES AND OTHER INTEREST-BEARING LOANS OF RS. 11.77 CRORES (AS STATED IN PARA 10.8 SUPRA) NAVE BEEN UTILIZED TOWARDS MAKING THE IMPUGNED INTE REST FREE ADVANCES. THAT BEING THE POSITION, THERE WOULD BE NO ESCAPE FROM THE FINDING THAT INTEREST BEING PAID BY THE APPELLANT TO THE EXTENT THE AMOUNTS ARE DIVERTED TO SISTER CONCERN ON INTEREST FREE BASIS ARE TO BE DISALLOWED. THE VIEW THAT WHERE THE AMOUNT IS ADVANCE D FROM A MIXED ACCOUNT OR SHARE CAPITAL OR SALE PROCEEDS OR PROFITS, I T WOULD NOT BE DEEMED AS DIVERSION OF BORROWED CAPITAL OR THAT THE R EVENUE HAD NOT BEEN ABLE TO ESTABLISH NEXUS OF THE FUNDS ADVANCED TO THE SISTER CONCERNS WITH THE BORROWED FUNDS, IS NOT CORRECT. ONCE IT IS BORNE OUT FROM THE RECORD THAT THE ASSESSEE HAD BORROWED CERTAIN FUNDS ON WHICH LIABILITY TO PAY INTEREST IS BEING INCURRED AND ON TH E OTHER HAND CERTAIN AMOUNTS HAD BEEN ADVANCED TO SISTER CONCERNS OR OTHERS W ITHOUT CARRYING ANY INTEREST AND WITHOUT ANY BUSINESS PURPOSE, THE INTEREST TO THE EXTENT THE ADVANCE HAD BEEN MADE WITHOUT CARRYI NG ANY INTEREST IS TO BE DISALLOWED UNDER SECTION 36(1)(III) OF THE ACT . IN FACT, THE DELHI HIGH COURT IN PUNJAB STAINLESS STEEL INDUSTRIES VS CIT R EPORTED IN 324 ITR 396 HELD THAT IT MAY NOT BE RELEVANT AS TO WHETH ER THE ADVANCES HAVE BEEN EXTENDED OUT OF THE BORROWED FUNDS OR OUT OF MIXED FUNDS WHICH INCLUDE BORROWED FUNDS. THE TEST TO BE APPLIED IN SUCH CASES IS NOT THE SOURCE OF THE FUNDS BUT THE PURPOSE FOR WHICH THE ADVANCES ARE EXTENDED. IT WAS ALSO HELD THAT THE QUESTION TO BE APP LIED IN. EACH CASE WAS TO SEE WHETHER THE INTEREST FREE ADVANCE WAS COMMER CIALLY EXPEDIENT FOR THE ASSESSEE OR NOT. IT WAS HELD THAT THE COMMERCIAL EXPEDIENCY WOULD INCLUDE SUCH PURPOSE AS IS EXPECTED B Y THE ASSESSEE TO ADVANCE ITS BUSINESS INTEREST AND MAY INCLUDE MEASUR ES TAKEN FOR PRESERVATION, PROTECTION OR ADVANCEMENT OF ITS BUSINE SS INTERESTS, WHICH HAS TO BE DISTINGUISHED FROM THE PERSONAL INTEREST OF IT S DIRECTORS OR PARTNERS, AS THE CASE MAY BE. IN OTHER WORDS, THERE HA S TO BE A NEXUS BETWEEN THE ADVANCING OF FUNDS AND BUSINESS INTEREST OF THE ASSESSEE- FIRM. THE APPROPRIATE TEST IN SUCH A CASE WOULD BE AS T O WHETHER A REASONABLE PERSON STEPPING INTO THE SHOES OF THE DIRECTO RS/PARTNERS OF 26 ITA NOS.1628 & 1636/PUN/2013 THE ASSESSEE-FIRM AND WORKING SOLELY IN THE INTEREST OF T HE ASSESSEE- FIRM/COMPANY, WOULD HAVE EXTENDED SUCH INTEREST FREE ADVANCES. IN THAT VIEW OF THE MATTER, THE APPELLANTS CLAIM THAT IT HAD SUFFICIENT INTEREST FREE FUNDS AT ITS DISPOSAL AMOUNTING TO RS.258.3 8 CRORES (AVERAGE) IN THE FORM OF SHARE CAPITAL AND RESERVES, ADVANCES RECEIVED FROM SUBSIDIARIES, SHARE APPLICATION MONEY AND ONE-TIME MAINTENANCE DEPOSITS DURING A.Y. 2009-10 IS NOT ACCEPTABLE NOR MAT ERIAL TO THE FACTS OF THE CASE. 10.10 COMING TO THE LEGAL PRECEDENTS ON THE ISSUE, IT IS SEEN THAT THE HIGHEST COURT OF THE LAND, NAMELY THE HONBLE SUPREM E COURT IN S.A. BUILDERS LTD. VS. CIT (288 ITR 1) HAS HELD THAT THE CO RRECT APPROACH TO THE ISSUE OF GRANT OF DEDUCTION U/S.36(1)(III) WOULD B E TO EXAMINE WHETHER THE AMOUNT ADVANCED TO THE SUBSIDIARY OR ASSOC IATED COMPANY OR ANY OTHER PARTY WAS ADVANCED AS A MEASURE OF COMMER CIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER T HE AMOUNT WAS ADVANCED FOR EARNING PROFITS. IT WAS HELD THAT IF TH E HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES (WHICH NEED NOT NECES SARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE ASSESSEE COULD, OR DINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOA NS. HAVING LAID DOWN THE TEST FOR DETERMINATION OF THE ALLOWABILITY OF DEDUCTION U/S.36(1)(VII) THE APEX COURT SET ASIDE THE MATTER TO BE DECIDED AFRESH. THIS DECISION OF THE SUPREME COURT OVERRULED A HOST OF HIGH COURT DECISIONS TO THE CONTRARY WHICH GAVE A LIMITED INTERP RETATION TO THE SCOPE OF THE PHRASE FOR THE PURPOSES OF BUSINESS OR PROFE SSION USED IN SECTION 36(1)(III). THIS DECISION OVERRULED THE BOMB AY HIGH COURT DECISIONS IN THE CASE OF PHALTAN SUGAR WORKS LTD. REPO RTED IN 208 ITR 989 AND 215 ITR 582, AND APPROVED THE DELHI HIGH CO URT DECISION IN CIT V. DALMIA CEMENT (BHARAT) LTD. [2002] 254 ITR 377. 10.11 SUBSEQUENT TO THIS DECISION OF THE APEX COURT, T HE DEPT. FILED AN SLP AGAINST THE DELHI HIGH COURTS DECISION IN ADDL.CI T VS. TULIPS STAR HOTELS LTD. REPORTED IN 338 ITR 482 WHEREIN THE HIGH COURT HAD HELD THAT THE INTEREST LIABILITY ON LOANS BORROWED TO ACQU IRE THE EQUITY CAPITAL OF A SUBSIDIARY COMPANY WHICH WAS IN THE SAME LINE OF BUSINESS WAS ALLOWABLE DEDUCTION U/S.36(1)(III). WHILE ADMITTING THE SLP OF THE DEPARTMENT, THE SUPREME COURT VIDE ORDER DATED 30.4 .2012 DIRECTED THAT THE EARLIER VIEW OF THE COURT IN S.A. BUILDERS LTD. VS. CIT SHOULD BE REFERRED FOR RECONSIDERATION TO ANOTHER BENCH OF THE COURT. 10.12 BASED ON THESE DECISIONS OF THE APEX COURT, IT NE EDS TO BE EXAMINED WHETHER THE AMOUNTS IN QUESTION THAT WERE AD VANCED TO SISTER CONCERNS WITHOUT ANY INTEREST WERE JUSTIFIED BY REASONS OF COMMERCIAL EXPEDIENCY OR NOT. THE JUSTIFICATION AS PROVIDED BY THE APPELLANT (AT PARA 10.4 SUPRA), FOR THE AMOUNTS ADVANCED AND THE EX AMINATION AND FINDINGS RELATING TO THE COMMERCIAL EXPEDIENCY FOR SU CH ADVANCES ARE ENUMERATED AND TABULATED HEREIN UNDER : SL. NO NAME OF SUBSIDIARY REASONS (AS FURNISHED BY THE APPELLANT) EXAMINATION AND FINDING 1 KUMAR PERFUMERIES PVT. LTD. FUNDS FOR DEVELOPING A COMMERCIAL PROJECT HINDMATA AT DADAR, MUMBAI BY THE SUBSIDIARY SISTER CONCERN IS IN SAME LINE OF BUSINESS AND IS WHOLLY OWNED SUBSIDIARY; DEVELOPED COMMERCIAL BUILDING KUMAR FUN & SHOP AND TRANSFERRED THE ENTIRE PROJECT TO APPELLANT BY MOU DATED 27 ITA NOS.1628 & 1636/PUN/2013 16/11/2007. THE SUBSIDIARY HA REAL ESTATE REVENUES OF RS. 7 CRORES AND RS.1.30 CRORE FOR YEAR ENDING 30-30-07 AND 31-03-08 RESPECTIVELY. IT EARNED RS.1,52,13,837 AND RS.(-) 55,71,795 AS PROFITS/LOSSES AFTER TAX FOR THOSE YEARS. IT IS A WHOLLY OWNED SUBSIDIARY IN THE SAME LINE OF BUSINESS; HENCE THE CONTENTION THAT IT WAS A COMMERCIALLY EXPEDIENT TRANSACTION STANDS ACCEPTED. 2 RIVER VIEW PROPERTIES PVT. LTD. SUBSCRIBING TO THE EQUITY OF THE SUBSIDIARY, WHICH IS ENGAGED IN DEVELOPING A TOWNSHIP AT MHALUNGE, PUNE SINCE TIMELY EXECUTION OF THE PROJECT IS IN THE INTEREST OF THE APPELLANT THE APPELLANT IS HOLDING 74% STAKE IN THE SUBSIDIARY. THERE IS NO MOU BETWEEN THE TWO PARTIES BUT THE INVESTMENT REPRESENTS PURCHASE OF SHARES IN THE SUBSIDIARY WHICH WERE ALLOTTED AS ON 17/06/2009, I.E. SUBSEQUENT YEAR. HERE IT IS SEEN THAT THE APPELLANT BORROWED INTEREST BEARING FUNDS FOR MAKING SHARE APPLICATION IN THIS SUBSIDIARY TO THE EXTENT OF RS. 8,89,80,000 BY WITHDRAWING RS.95,00,000 FROM ITS CAPITAL IN THE PARTNERSHIP FIRM KUMAR BUILDERS AND RS.1,59,00,000 AS LOAN FROM ANOTHER SUBSIDIARY CO, KUMAR HOUSING CORPORATION LTD (APPELLANTS SUBMISSIONS DATED 26.2.2013, REPRODUCED AT PARA 4.5 SUPRA) FURTHER, THE APPELLANT HAS PURCHASED THE 32,500 SHARES AT THE PREMIUM OF RS 9230.77 PER SHARE, THEREBY INCURRING ADDITIONAL COST OF RS. 30 CRORES. THE BALANCE AMOUNT OF RS.26,75,90,063 REPRESENTS INTEREST FREE ADVANCE, ADJUSTED AGAINST ALLOTMENT OF EQUITY. THE SUBSIDIARY INCURRED LOSSES OF RS.(-)60.51 LAKHS IN THE PREVIOUS YEAR AND RS.(-) 77.83 LAKHS IN THE CURRENT YEAR. THE PRO RATA INTEREST ON SUCH ADVANCE @12% OF RS.2,99,15,174 IS CLEARLY DISALLOWABLE IN VIEW OF SC DECISION IN TULIP STAR HOTELS LTD. AND ALSO FOR THE REASONS DISCUSSED IN THE SUBSEQUENT PARAGRAPHS. 3 KHIRANAGAR DEVELOPMENT PVT. LTD. PAID ON BEHALF OF WHOLLY OWNED SUBSIDIARY ENGAGED IN REDEVELOPMENT OF KHIRANAGAR CHS, SANTA CRUZ, MUMBAI FOR PURCHASING THE FLATS FROM THE FLAT HOLDERS THE APPELLANT COMPANY SUCCESSFULLY BID FOR REDEVELOPMENT TENDER FOR KHIRANAGAR CO-OPERATIVE HOUSING SOC. IN THE YEAR 2007. DURING THE YEAR ALL THE EXPENSES/INVESTMENTS TOWARDS THIS PROJECT TRANSFERRED TO NEWLY FORMED SUBSIDIARY COMPANY & SHOWN AS ADVANCE IN SCHEDULE 9 OF THE BALANCE SHEET. THE CONTENTION THAT IT IS NOT AN INTEREST FREE ADVANCE BUT TRANSFER OF PROPERTY AND IS ULTIMATELY AIMED AT IMPROVING THE BUSINESS PROSPECT IS ACCEPTED. 4 SINEW DEVELOPERS LTD.(SDL) PAID TO SUVARNA SAH BANK FOR RELEASE OF PLEDGED ASSETS AND SHARES OF SUBSIDIARY (CLEARING DEFECTS & REMOVAL OF TITLE ENCUMBRANCES) IN EXCHANGE OF REFUND OF BORROWING. THE LOAN HAD BEEN TAKEN FROM THE BANK FOR DEVELOPMENT OF PAUD ROAD PROPERTY AGAIN, THERE IS NO MOU OR WRITTEN AGREEMENT BETWEEN THE PARTIES. SHARES IN THE SUBSIDIARY CO. ALLOTTED AGAINST ADVANCES PAID TOWARDS PURCHASE OF LAND SO THAT THE SUBSIDIARY BECOMES A WHOLLY OWNED SUBSIDIARY. IT IS CLAIMED THAT HAD THE BANK NOT BEEN PAID, THE SHARES OF SDL MIGHT HAVE BEEN AUCTIONED TO SOMEONE ELSE, IN WHICH CASE, THE APPELLANT MIGHT 28 ITA NOS.1628 & 1636/PUN/2013 HAVE PERMANENTLY LOST ITS STAKE AND THEREBY, ITS INCOME EARNING SOURCE. IT REPRESENTS PAYMENT TO PROTECT INCOME EARNING SOURCE. THIS ARGUMENT OF THE APPELLANT IS NOT ACCEPTABLE FOR THE FOLLOWING REASONS :- (A) THE SUBSIDIARY SHOWED BOOK LOSSES OF RS.(-) 20,77,35,988 FOR Y.E. 31.3.2008 & RS.(-) 1,20,67,829 FOR Y.E. 31.3.2009 AND THERE ARE NO CLEAR INDICATIONS THAT IT COULD BE A PROFIT-EARNING VENTURE AS IT INVOLVES SLUM CLEARING & RESETTLEMENT. IT DOES NOT APPEAR TO BE A PRUDENT BUSINESS DECISION; (B) HEAVY INTEREST BURDEN WAS ALREADY BEING INCURRED TOWARDS BORROWINGS FROM SUVARNA SAH BANK BY SDL; (C) CLEARLY INTEREST BEARING FUNDS WERE UTILIZED FOR MAKING THE PAYMENT TO THE BANK IN THE LIGHT OF THE DISCUSSION AT PARA 10.8 & 10.9 SUPRA; (D) 445,000 SHARES HAVE BEEN ACQUIRED AT FACE VALUE OF RS.10 BUT PREMIUM OF RS.565 PER SHARE HAS ALSO BEEN PAID. THE PREMIUM ALONE AMOUNTS TO RS.25,14,25,000 OUT OF THE TOTAL SHARE INVESTMENT OF RS.25,58,75,000. AGAIN THIS DOES NOT APPEAR TO BE A PRUDENT AND SOUND BUSINESS DECISION; (E) THE EQUITY IS A LONG TERM INVESTMENT AND CAN BE DIVESTED AT ANY TIME, LEADING TO CAPITAL GAINS (REFER SUBSEQUENT PARA 10.15) THE PRO RATA INTEREST ON SUCH ADVANCE @12% OF RS.9,96,17,603 IS CLEARLY DISALLOWABLE IN VIEW OF SC DECISION IN TULIP STAR HOTELS LTD. AND ALSO FOR THE REASONS DISCUSSED IN THE SUBSEQUENT PARAGRAPHS. 5 PUNE TECHOPOLIS DEVELOPMENT PVT. LTD. DEVELOPMENT RIGHTS OF PROPERTY OWNED BY SUBSIDIARY AT MANJARI BUDRUK, PUNE TO BE TRANSFERRED TO APPELLANT THE APPELLANT HAS ADVANCED UNSECURED LOAN FOR UTILIZATION IN INVESTMENT IN LAND, AND THE MOU DATED 28/05/2008 SHOWS THAT THE SUBSIDIARY HAD CLEAR TITLE OVER THE SAID PROPERTY. THE BALANCE SHEET OF THE WHOLLY OWNED SUBSIDIARY COMPANY SHOWS THE UNSECURED LOANS FROM THE APPELLANT AND THE LAND AND DEVELOPMENT RIGHTS UNDER THE HEAD INVENTORY. THE APPELLANTS CONTENTION THAT IT IS PURELY A BUSINESS TRANSACTION WITH THE SUBSIDIARY IS ACCEPTABLE. 6 L.K.DEVELOPERS PVT. LTD. THE APPELLANT SOLD ITS PROPERTY AT MANJARI TO THE OUTSTANDING REPRESENTS AMOUNT RECEIVABLE ON SALE OF PROPERTY THUS IT IS IN THE NATURE OF SUNDRY DEBTORS AND NOT ADVANCE. THE AMOUNT ACTUALLY REPRESENTS PURCHASE OF LAND THROUGH THE SUBSIDIARY. VIDE MOU DATED 3/10/2008, THE DEVELOPMENT RIGHTS OVER LAND FOR SPECIAL TOWNSHIP IN THE LAND BELONGING TO THE APPELLANT ADMEASURING 1 HECTARE 25.5 ARES AT MANJRI TRANSFERRED TO THE SUBSIDIARY RS.53 CRORES ADVANCED AS AGAINST REQUIREMENT OF TOKEN AMOUNT OF RS.12 CRORES UNTIL MARCH 2009 AS PER MOU. THE APPELLANTS CONTENTION THAT THE AMOUNT OUTSTANDING REPRESENTS AMOUNT RECEIVABLE ON SALE OF PROPERTY HAS BEEN 29 ITA NOS.1628 & 1636/PUN/2013 EXAMINED SINCE BOTH THE COMPANIES WERE IN SAME LINE OF BUSINESS, THE COMMERCIAL EXPEDIENCY IN PURCHASING LAND THROUGH SUBSIDIARY AND PARTAKING OF THE PROFITS SUBSEQUENTLY IS ESTABLISHED. 10.13 IN REACHING THESE CONCLUSIONS, I AM GUIDED BY TH E FACT THAT WHILE A BUSINESSMAN IS NORMALLY EXPECTED TO TAKE SOUND AND PRU DENT BUSINESS DECISIONS (IN CIT V. WALCHAND & CO. (P) LTD. [1967] 6 5 ITR 381 (SC) IT WAS OBSERVED THAT YARDSTICK WILL HAVE TO BE TAKEN FROM THE BUSINESSMAN POINT OF VIEW BUT THE BUSINESSMAN MUST BE A PRUDENT BUSI NESSMAN), THE TAX AUTHORITIES ARE STILL ENTITLED TO EXAMINE THE BUSI NESS EXPEDIENCY. THIS WAS THE RATIO OF THE PUNJAB AND HARYANA HIGH COU RT DECISION IN CIT VS. ROCKMAN CYCLE INDUSTRIES PVT. LTD. REPORTED IN 326 ITR 291. THE FACTS OF THE CASE BEFORE THE HIGH COURT WERE THAT THE ASSESSEE BORROWED MONEY FROM ITS SISTER CONCERN ON INTEREST AT RATE OF 18 PER CENT PER ANNUM AND PURCHASED SHARES FROM OTHER SISTER CONCERN WHI CH CARRIED DIVIDEND AT RATE OF 4 PER CENT. THE ASSESSING OFFICER H ELD THAT THERE WAS NO JUSTIFICATION TO BORROW FUNDS AT RATE OF 18 PER CE NT INTEREST FOR MAKING INVESTMENT IN SHARES, WHICH WOULD GIVE A DIVID END OF 4 PER CENT ONLY AND HAVING REGARD TO FACT THAT BORROWING WAS MA DE FROM SISTER CONCERN AND INVESTMENT WAS ALSO IN ANOTHER SISTER CONCER N, CLAIM FOR INTEREST WAS TO BE DISALLOWED. THE COMMISSIONER (APPEALS) UPHELD THE ORDER OF ASSESSING OFFICER. HOWEVER, ON SECOND APPEAL, T RIBUNAL ALLOWED ASSESSEE'S CLAIM HOLDING THAT IT COULD NOT BE PREVENTED FROM MAKING INVESTMENT ONLY BECAUSE RETURN FROM SHARES WAS LOW; AND THAT THE WISDOM OF ASSESSEE IN CHOICE OF INVESTMENT WAS NOT OPEN TO QUESTION, EVEN IF SUCH TRANSACTIONS WERE NOT PRUDENT. THE HIGH C OURT HELD THAT SINCE TRIBUNAL, WHILE TAKING ITS DECISION, HAD NOT APP LIED TEST OF BUSINESS EXPEDIENCY, THAT' ORDER WAS TO BE SET ASIDE. WHILE DOI NG SO, THE QUESTION AS TO WHETHER HAVING REGARD TO RELATIONSHIP BETWEEN DIFFERENT CONCERNS, WHERE A TRANSACTION, WHICH IS PATENTLY IMPRUDENT, TAKES PLA CE, THE TAXING AUTHORITY SHOULD EXAMINE THE QUESTION OF BUSINESS EXPEDIENCY AND NOT GO MERELY BY FACT THAT ASSESSEE HAD TAKEN A DECISION IN ITS WISDOM WHICH MAY BE WRONG OR RIGHT, WAS REFERRED TO A LARGER BENCH OF HIGH COURT. 10.14. THE HON'BLE SUPREME COURT IN S A BUILDERS LTD . CITED SUPRA HELD THAT IT IS NOT IN EVERY CASE THAT INTEREST ON BORROWE D LOAN HAS TO BE ALLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN. I T ALL DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. THE TAX AUTHORITIES ARE THEREFORE, ENTITLED TO PROBE THE FACTS AND CIRC UMSTANCES UNDER WHICH THE ASSESSEE HAS MADE CERTAIN INTEREST FREE ADVANCES AVAIL ABLE TO ITS SUBSIDIARIES. THE OBSERVATIONS OF THE APEX COURT MADE IN PARA 35 IN THE CASE OF S.A. BUILDERS LTD. SUPRA TO THE EFFECT THAT ' WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND, HENCE, IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSI DIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSESSEE WOULD, (IN THE OPINION OF SUPREME COURT) ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS' REQUIRED RE- CONSIDERATION/REVIEW BY ANOTHER BENCH OF THE SUPREME COURT BECAUSE THE COMMERCIAL EXPEDIENCY ASPECT CANNOT BE SAID TO H AVE BEEN SATISFIED MERELY ON THE BASIS OF HOLDING/SUBSIDIARY RELATIONSHIP, MORE SO WHEN THE TWO COMPANIES ARE INDEPENDENT ENTITIES IN THE E YES OF LAW. THE OBSERVATIONS OF THE COURT IN THE CONTEXT OF HOLDING/SU BSIDIARY COMPANY CONTAINED IN PARAGRAPH 35 OF THE JUDGMENT MAY NOT B E THE RATIO DECIDENDI OF THE DECISION SINCE THE LOWER COURTS' DECI SIONS HAVE BEEN SET ASIDE/REMANDED BY THE APEX COURT. IF THE THEORY REGA RDING 30 ITA NOS.1628 & 1636/PUN/2013 BUSINESSMAN'S VIEW POINT IS TO PREVAIL AND IS TO BE TAKEN TO ITS LOGICAL CONCLUSION, THEN A VIEW COULD EMERGE TO THE EFFECT T HAT THERE IS NO NEED TO HAVE ELABORATE PROVISIONS IN THE ACT IN REGARD TO ALLOWANCES OF EXPENDITURE IN A LONG DRAWN WAY BY HAVING SECTIONS 30 TO 43D. 10.15. AS DISCUSSED AT PARA 10.12 ABOVE, IT IS SEEN THAT THE INTEREST FREE ADVANCES GIVEN TO TWO OF THE SUBSIDIARY COMPANIES VIZ. RIVERVIEW PROPERTIES PVT. LTD. AND SINEW DEVELOPERS PVT. LTD. H AVE NOT ONLY BEEN ADVANCED FROM INTEREST BEARING FUNDS BUT ALSO THE JUSTI FICATION FOR ADVANCING SUCH FUNDS, AT A PREMIUM I.E. OVER AND ABOV E THE MARKET RATE HAS NOT BEEN ESTABLISHED. THE APPELLANT HAS INCURRED BU SINESS LOSSES OF RS. (-) 20,88,43,838 FOR A.Y. 2008-09 AND RS. (-) 23, 73,34,263 FOR THE IMPUGNED A.Y. WHEN THE APPELLANT HAS INCURRED CONSISTE NT LOSSES OVER THE YEARS, IT CERTAINLY HAS NO REASON TO INVEST INTEREST -BEARING FUNDS AT A PREMIUM IN THE EQUITY OF SUBSIDIARY COMPANIES. NO INC OME FROM. ANY. SUBSIDIARY CO HAS BEEN REFLECTED OVER THE LAST SEVERAL YEARS. THE SHARE OF PROFITS IN REGISTERED FIRMS ALSO EXEMPT U/S 10(2A). THER E IS ALSO ANOTHER ASPECT TO THE ISSUE. THE SHARES PURCHASED IN THESE TWO SUBS IDIARY COMPANIES AND OTHER SUBSIDIARY COMPANIES ARE HELD AS 'IN VESTMENTS' IN THE BOOKS OF THE APPELLANT. WHILE, EXAMINING THE BAL ANCE SHEET OF THE APPELLANT, IT WAS NOTICED THAT THE APPELLANT HAD SOLD PART OF ITS 'INVESTMENTS' I.E. SHARES IN ANOTHER SUBSIDIARY CO. KUMAR BUILDERS TOWNSHIP VENTURE PVT. LTD. DURING THE YEAR AND EARNE D LONG TERM CAPITAL GAINS ON THE TRANSACTION. THE APPELLANT SOLD 5 ,43,479 SHARES FOR RS. 20 CRORES TO THE LANDMARK GROUP OF MAURITIUS AND E ARNED LONG TERM CAPITAL GAINS OF RS. 19.45 CRORES THEREON. IN THE SUBSEQ UENT A.Y. 2010-11 THE APPELLANT HAS SOLD 800 SHARES IN ANOTHER SUBSIDIARY C OMPANY PUNE MUMBAI REALTY PVT. LTD. FOR THE SALE CONSIDERATION O F RS.30 CRORES AND SHOWN LONG TERM CAPITAL GAINS AMOUNTING TO RS.29.99 CR ORES. IN OTHER WORDS, THE INVESTMENTS MADE BY THE APPELLANT COMPANY I N SEVERAL SUBSIDIARY COMPANIES ARE NOT FOR BUSINESS PURPOSES BUT PURE LY WITH THE INTENTION OF LONG TERM INVESTMENTS FOR EARNING DIVIDE NDS, INTEREST INCOME AND INCOME FROM CAPITAL GAINS, AS DISCUSSED ABOVE . THIS ASPECT IS ALSO CONSIDERED EXTREMELY RELEVANT AND CRITICAL TO TH E ISSUE AT HAND. FOR CLAIMING ANY DEDUCTION UNDER SECTIONS 30 TO 43D IN CO MPUTING THE INCOME OF THE ASSESSEE, THE CONDITION PRECEDENT IS THAT THE INCOME FROM THE CONNECTED RECEIPTS IS COMPUTED UNDER THE HEAD 'P ROFITS AND GAINS FROM BUSINESS OR PROFESSION'. ACCORDING TO THE SCHEME OF THE INCOME TAX ACT, ALL INCOMES OF THE ASSESSEE ARE TO BE CLASSIFIED UNDER VARIOUS HEADS DESCRIBED UNDER SECTION 14 AND THEN INCOME IS TO BE COMPUTED UNDER THOSE VERY HEADS IN ACCORDANCE WITH THE PROVISIO NS CONTAINED UNDER THOSE VERY HEADS, LF THE RECEIPT FALLS UNDER A PARTICULAR HEAD, THEN, THE INCOME FROM SUCH RECEIPT MUST BE COMPUTED IN ACCO RDANCE WITH THE PROVISIONS UNDER THE VERY HEAD, IRRESPECTIVE OF THE NA TURE OF RECEIPTS. THE RECEIPTS AND THE EXPENDITURE HAVING NEXUS WITH EA CH OTHER MUST BE CONSIDERED UNDER ONE HEAD ONLY. IF THE EXPENDITURE I NCURRED BY THE ASSESSEE IS NOT ALLOWABLE UNDER THAT HEAD, THEN IT CANN OT BE ALLOWED EVEN IF IT HAS BEEN INCURRED BY THE ASSESSEE. ON THIS ACC OUNT ALSO, INTEREST PAID ON BORROWED CAPITAL CANNOT BE ALLOWED AS THERE IS NO FORESEEABLE 'INCOME FROM BUSINESS' IN THE SHARES HELD IN THE SUBSIDIARY COMPANIES FOR 'INVESTMENT' PURPOSES. THE HON'BLE DELHI HIGH COURT IN CIT VS J.K. SYNTHETICS LTD. REPORTED IN 200 TAXMAN 10 1 TOOK A VIEW THAT SECTION 36(1)(III) USES THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS', WHILE SECTION' 37 CONTAINS THE EXPRESSION 'LAID OR EXPE NDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE-OF BUSINESS' AND SINCE THE SU PREME COURT IN S.A. BUILDERS V. CIT HAS EQUATED THE TWO EXPRESSIONS AN D AS A MATTER OF FACT APPLIED THE TEST LAID DOWN BY COURTS UNDER SECTI ON 37 TO INTERPRET 31 ITA NOS.1628 & 1636/PUN/2013 THE EXPRESSION USED UNDER SECTION' 36(I)( III), TAKING A CUE FROM THE PRINCIPLE ENUNCIATED IN S.A. BUILDERS CASE, WENT ON T O HOLD THAT SINCE SHARE INVESTMENT WAS NOT BUSINESS OF THE ASSESSEE AND WOULD N OT RESULT IN BUSINESS INCOME, THE INTEREST EXPENDITURE WAS NOT BUS INESS EXPENDITURE IN TERMS OF SEC. 36(1)(III). IT HELD: 'IN ORDER TO DETERMINE AS TO WHETHER THE EXPENDITUR E INCURRED IS FOR THE PURPOSES OF BUSINESS, IT HAS TO BE ASCERTAINED WHET HER THE ACT OF INVESTMENT IN SHARES WAS COMMERCIALLY EXPEDIENT. IN OTHER WORDS WHETHER THERE WAS A NEXUS BETWEEN THE EXPENDITURE MADE AND THE BUSINESS OF THE ASSESSEE. IT IS NOT IN DISPUTE THAT THE BUSINESS OF THE ASSESSEE IS TO MANUFACTURE AND DEAL IN YARN. IN MAKING INVESTMENT IN SHARES BY TAKING RECOURSE TO BORROWED FUNDS, THE ASSESSEE COMPANY MA Y HAVE ACQUIRED AN ASSET AND BECAME ITS OWNER, IT HAD NOT NECESSARILY INCURRED EXPENDITURE FOR THE PURPOSES OF THE BUSINESS. IT HAS TO BE BORN E IN MIND THAT A DEDUCTION UNDER SECTION 37 OF THE I.T. ACT IS AVAILABLE TO AN ASSESSEE WHILE CALCULATING 'PROFITS AND GAINS FROM BUSINESS AND PR OFESSION' UNDER SECTION 28 OF THE I.T. ACT. IT CANNOT BE DISPUTED THAT ON A CQUIRING SHARES IN A COMPANY THE ASSESSEE WOULD STAND TO GAIN BY WAY OF DIVIDEND WHICH WOULD ADD TO THE INCOME OF THE ASSESSEE. BUT THIS INCOME WOULD NOT BE A BUSINESS INCOME AS UNDERSTOOD UNDER SECTION 28 OF THE I.T. A CT. THEREFORE, GIVEN THE FACT THAT THERE WAS A CLEAR FINDING AS REGARDS THE UTILIZATION OF BORROWED FUNDS IN THE INVESTMENT MADE IN SHARES, THE DISALLO WANCE MADE BY THE ASSESSING OFFICER WILL HAVE TO BE SUSTAINED' 10.16. THE APPELLANT IS NOT AN INVESTMENT COMPANY, B UT A BUILDER AND DEVELOPER. HOWEVER, THE SHARES HELD IN THE SUBSIDIARY C OMPANIES; NAMELY PUNE MUMBAI REALTY', PVT. LTD., KUMAR BUILDE RS TOWNSHIP VENTURE PVT. LTD., RIVERVIEW PROPERTIES PVT. LTD. AN D SINEW DEVELOPERS PVT. LTD. ARE CLASSIFIED IN THE BALANCE SHEET AS 'LONG TERM INVESTMENTS'. PROFITS ON THE SAME, ARE TAXABLE UNDER THE HEAD CAPIT AL GAINS, AS CLAIMED BY THE APPELLANT IN THE CURRENT YEAR AND ALSO IN THE A.Y. 2010-11. DIVIDEND INCOME, IF ANY, RECEIVED IS TAXABLE UNDER T HE HEAD 'INCOME FROM OTHER SOURCES'. FURTHER, DIVESTING SHARES AT A LATER DA TE THROUGH CIRCULAR TRADING IS ALSO AN ISSUE THAT CANNOT BE RULED OUT, AS H ELD BY THE SUPREME COURT IN CIT VS ASHINI LEASE FINANCE (P) LTD. (309 ITR 320] WHERE THE COURT SET ASIDE TO THE GUJARAT HIGH COURT TO EXAMINE THE ISSUE RELATED TO CIRCULAR TRADING ENTERED INTO SOLELY WITH THE IDEA O F' EVADING TAX SINCE THE' RECORD INDICATED, PRIMA FACIE, THAT THE ASSESSEE C OMPANY HAD ACQUIRED THE SHARES OF AEC, THROUGH FINANCES ARRANGED MAINLY FROM TORRENT GROUP (SISTER COMPANIES) ALONG WITH TWO OTHER COMPANIES ONLY TO ENABLE TORRENT GROUP TO ACQUIRE AND TAKEOVER THE BUSINESS OF AEC. 10.17 IT CAN BE THUS SEEN FROM THE JUDICIAL PRECEDENT S AND FACTS THAT ARE ELABORATELY DISCUSSED AT PARAS 10.6 TO 10.16 THAT THE I NVESTMENTS MADE IN THE SUBSIDIARY COMPANIES NAMELY RIVERVIEW PROPERTIE S PVT. LTD. AND SINEW DEVELOPERS LTD. ARE IN THE NATURE OF LONG TERM INVESTMENTS. THE FACT BORNE OUT FROM THE RECORDS SHOW THAT THE APPELLA NT'S INTENTION WAS TO EARN CAPITAL GAINS FROM THEIR SALE AND DIVIDENDS F ROM SUCH HOLDING, ACCORDINGLY, THE INTEREST EXPENDITURE INCURRED BY TH E APPELLANT FOR PURPOSES OF ACQUIRING THESE SHARES CANNOT BE ALLOWED IN ENTIRETY U/S 36(1)(III). FOR THE REASONS DISCUSSED IN PARA 10.12 ABOV E IT IS HELD THAT THE ADDITION MADE BY THE ASSESSING OFFICER FOR DISALLOWI NG PRO-RATA INTEREST IN RESPECT OF INTEREST FREE ADVANCES GIVEN TO L.K. DEVELOPERS PVT. LTD. AND PUNE TECHNOPOLIS DEVELOPMENT PVT. LTD. AMOU NTING TO RS.58,75,491 IS NOT JUSTIFIED. HOWEVER, THE ASSESSING OFF ICER IS DIRECTED 32 ITA NOS.1628 & 1636/PUN/2013 TO MAKE PRO RATA INTEREST DISALLOWANCE IN RESPECT OF I NTEREST FREE ADVANCES GIVEN TO M/S. SINEW DEVELOPERS LTD. AND RIVER VIEW PROPERTIES PVT. LTD. AMOUNTING TO RS.12,95,32,777 (RS.2,99,15,17 4 + HS.9,96,17,603). THE NET ENHANCEMENT TO THE APPELLAN T'S INCOME WOULD THEREFORE, BE RS.12,36,57,286. GROUND OF APPEAL NO.6 IS TREATED AS ALLOWED SUBJECT TO THE ENHANCEMENT OF RS.12,95,32,777 AS DISCUSSED ABOVE. 45. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) BOTH TH E ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE US. 46. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY HAD ADVANCED FUNDS TO ITS GROUP CONCERNS. THE ASSESSING OFFICER DISALLOWED AN AMOUNT OF RS.58,75,491/- BEING INTERE ST @12% ON THE AMOUNTS ADVANCED TO M/S. L.K. DEVELOPERS PVT. LTD. AND PUNE TECHNOPOLIS DEVELOPMENT PVT. LTD. ON WHICH THE ASSESSEE HAS NOT CHARGED ANY INTEREST. HE SUBMITTED THAT WHILE THE CIT(A) DELETED THE INTE REST DISALLOWANCE WORKED OUT BY THE ASSESSING OFFICER IN RESPECT OF ADVANCES MADE TO THE ABOVE TWO CONCERNS HOWEVER SHE DIRECTED THE ASSESSING OFFICER TO MAKE PRO-RATA DISALLOWANCE OF INTEREST IN RESPECT OF INTEREST FRE E ADVANCES GIVEN TO M/S. SINEW DEVELOPERS PVT. LTD. AND RIVERVIEW PROPERTIES PVT. LTD. AMOUNTING TO RS.12,95,32,777/-. WHILE JUSTIFYING THE REASONS GI VEN BY THE CIT(A) FOR DELETION OF THE DISALLOWANCE OF INTEREST MADE BY TH E ASSESSING OFFICER, THE LD. COUNSEL FOR THE ASSESSEE STRONGLY OBJECTED TO E NHANCEMENT OF INCOME BY RS.12,95,32,777/-. REFERRING TO PAGE 39 OF THE O RDER OF THE CIT(A) THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO THE INTEREST FREE ADVANCES GIVEN BY THE ASSESSEE DURING THE YEAR THE DETAILS OF WHICH ARE GIVEN AS UNDER : SR. NO. ADVANCES TO SUBSIDIARY COMPANIES BALANCE AS ON 31-03-2009 ADVANCED DURING THE YEAR 1 KUMAR PERFUMERIES PVT. LTD. RS.36,66,96,497 RS.31,01,00,000 2 RIVER VIEW PROPERTIES PVT. LTD. RS.26,75,90,063 RS.7,75,87,539 3 KHIRANAGAR DEVELOPMENT PVT. LTD. RS.19,37,99,436 RS.19,37,99,436 4 SINEW DEVELOPERS LTD. RS.72 ,74,39,982 RS.5,40,95,482 5 PUNE TECHNOPOLIS DEVELOPMENT PVT. LTD. RS.5,75,14,834 RS.5,75,14,000 6 L.K. DEVELOPERS PVT. LTD. RS.53,06,51,207 RS.53,05,52,089 TOTAL RS.214,36,92,019 RS.122,36,48,546 33 ITA NOS.1628 & 1636/PUN/2013 47. HE SUBMITTED THAT THE AMOUNTS ADVANCED AS ON 31 -03-2009 TO RIVERVIEW PROPERTIES PVT. LTD. WAS RS.26,75,90,063/ - AND M/S. SINEW DEVELOPERS PVT. LTD. WAS RS.72,74,39,982/-. THUS T OTAL AMOUNTS ADVANCED TO THESE TWO CONCERNS IS RS.99.49 CRORES. REFERRIN G TO THE BALANCE SHEET OF THE ASSESSEE COMPANY AS ON 31-03-2009, HE SUBMITTED THAT THE SHARE CAPITAL AND FREE RESERVES OF THE ASSESSEE COMPANY A S ON 31-03-2009 IS RS.180,90,35,430/-. ( RS.172,88,51,035/- AS ON 31-0 3-2008). HE SUBMITTED THAT SINCE THE OWN CAPITAL AND FREE RESERVES OF TH E ASSESSEE COMPANY ARE MUCH HIGHER THAN THE AMOUNTS ADVANCED TO THE ABOVE TWO CONCERNS FREE OF INTEREST, THEREFORE, IN VIEW OF THE DECISION OF HON BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. REPOR TED IN 313 ITR 340 AND THE DECISION OF PUNE BENCH OF THE TRIBUNAL IN THE C ASE OF TRINITY INDIA LTD. VS. DCIT VIDE ITA NO.666/PN/2012 ORDER DATED 28-08- 2013 NO DISALLOWANCE IS CALLED FOR. 48. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHE R HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A) TO THE EXTENT OF ENHANCEMENT OF INCOME BY RS.12,95,32,777/-. SO FAR AS DELETION OF RS.58,95, 491/- IS CONCERNED THE LD. DEPARTMENTAL REPRESENTATIVE HEAVILY RELIED ON THE O RDER OF THE CIT(A). 49. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE PAP ER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIO US DECISIONS CITED BEFORE US. WE FIND THE ASSESSING OFFICER IN THE IN STANT CASE MADE DISALLOWANCE OF INTEREST AMOUNTING TO RS.58,75,491/ - BEING INTEREST @12% ON THE AMOUNT ADVANCED TO L.K. DEVELOPERS PVT. LTD. (RS.53,05,52,089/-) AND M/S.PUNE TECHNOPOLIS DEVELOPMENT PVT. LTD. (RS. 5,75,14,000/-) ON THE GROUND THAT THE SAME HAS BEEN ADVANCED FOR NON BUSI NESS CONSIDERATION. WE FIND IN APPEAL THE LD.CIT(A) DELETED THE DISALLO WANCE IN RESPECT OF INTEREST FREE ADVANCES TO BOTH THE COMPANIES ON THE GROUND THAT THERE IS 34 ITA NOS.1628 & 1636/PUN/2013 COMMERCIAL EXPEDIENCY. SHE, HOWEVER, HELD THAT THE AMOUNTS ADVANCED TO SINEW DEVELOPERS PVT. LTD. AND RIVERVIEW PROPERTIES PVT. LTD. ARE FOR NON BUSINESS PURPOSES AND THEREFORE SHE ENHANCED THE IN COME OF THE ASSESSEE BY DIRECTING THE ASSESSING OFFICER TO DISALLOW INTE REST EXPENDITURE OF RS.12,95,32,777/-. IT IS THE SUBMISSION OF THE LD. COUNSEL THAT THE OWN CAPITAL AND FREE RESERVES OF THE ASSESSEE ARE MUCH MORE THAN THE INTEREST FREE ADVANCES GIVEN TO THE ABOVE TWO COMPANIES AND THEREFORE NO DISALLOWANCE OF INTEREST IS CALLED FOR. 50. WE FIND MERIT IN THE ABOVE SUBMISSION OF THE LD . COUNSEL FOR THE ASSESSEE. WE FIND IDENTICAL ISSUE HAD COME UP BEFO RE THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF TRINITY INDIA LTD. (SUP RA) WHERE THE ASSESSING OFFICER HAD MADE DISALLOWANCE OF INTEREST EXPENDITU RE OF RS.29,36,965/- BY INVOKING THE PROVISIONS OF SECTION 36(1)(III) ON TH E GROUND THAT ASSESSEE HAD DIVERTED INTEREST BEARING FUNDS TOWARDS INTEREST FR EE LOANS TO ITS SISTER CONCERNS. ACCORDINGLY THE ASSESSING OFFICER HAD DI SALLOWED PROPORTIONATE INTEREST @12% ON THE ADVANCES SO MADE. BEFORE CIT( A) THE ASSESSEE MADE TWO FOLD ARGUMENTS, I.E. (A) THE ADVANCES WERE MADE FOR BUSINESS PURPOSES AND THEREFORE NO DISALLOWANCE IS CALLED FO R AND (B) THE ASSESSEE HAD SUFFICIENT INTEREST FREE ADVANCES AVAILABLE WIT H IT AND THEREFORE IN VIEW OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CA SE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. REPORTED IN 313 ITR 340 NO DISALLOWANCE OF INTEREST IS CALLED FOR. WE FIND THE LD.CIT(A) REJECTED THE ABOVE CONTENTION OF THE ASSESSEE. ON FURTHER APPEAL THE TRIBUNAL DELETED T HE DISALLOWANCE OF INTEREST BY OBSERVING AS UNDER : 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSION S. OSTENSIBLY, IN THIS CASE, IT WAS FOUND THAT ASSESSEE HAD ADVANCED INTEREST -FREE FUNDS OF RS.2,44,74,710/- TO TWO SISTER-CONCERNS AS ON 31.03.2008 . THE OPENING BALANCE OF SUCH ADVANCES AS ON 01.04.2007 WAS RS.23,09,4 60/- AND THE BALANCE OF RS.2,21,65,250/- WAS ADVANCED DURING THE Y EAR UNDER A.Y. 2008-09 CONSIDERATION. ON THE OTHER HAND, ASSESSEE INCUR RED INTEREST EXPENDITURE OF RS.2,85,38,397/- ON BORROWINGS. THE RE VENUE HAS DISALLOWED THE INTEREST PROPORTIONATE TO THE IMPUGNED INTEREST-FREE 35 ITA NOS.1628 & 1636/PUN/2013 ADVANCES BY INVOKING SECTION 36(1)(III) OF THE ACT P ROFESSING THAT THE SAME IS FOR NON-BUSINESS PURPOSES. THAT SUCH ADVANCES ARE FO R NON- BUSINESS PURPOSES IS NOT AN ISSUE FOR CONSIDERATION BEFORE U S INASMUCH AS THE ASSESSEE HAS NOT DISPUTED THE POSITION ARRIVED AT BY THE CIT(A) THAT SUCH ADVANCES ARE FOR NON-BUSINESS PURPOSES. HOWEVER, BEFORE US, THE DISALLOWANCE HAS BEEN SOUGHT TO BE RESISTED ON THE B ASIS OF THE PROPOSITION EMERGING FROM THE JUDGEMENT OF THE HON'B LE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LTD. (SUPRA) WHEREBY IT CAN BE SAID THAT WHERE AN ASSESSEE HAS ADVANCED INTEREST- FREE FUNDS TO THE SISTER CONCERNS AND THE ASSESSEE HAS BOTH INTEREST BEARI NG AND INTEREST FREE FUNDS, AND IF THE INTEREST FREE FUNDS ARE SUFFICIENT TO COVER THE ADVANCES TO SISTER CONCERNS, A PRESUMPTION CAN BE D RAWN THAT FUNDS ADVANCED TO THE SISTER CONCERNS ARE OUT OF INTEREST-FRE E FUNDS AVAILABLE WITH THE ASSESSEE. IN THIS CONNECTION, THE APPELLANT HAS SOUGHT TO POINT OUT THAT THE TOTAL INTEREST-FREE FUNDS AVAILABLE WITH IT, NAMELY, SHARE CAPITAL PLUS FREE RESERVES ARE SUFFICIENT TO COVER THE IMPUGNED INTEREST- FREE ADVANCES MADE TO THE SISTER CONCERNS. IN THIS CONNE CTION, BALANCE- SHEET AS ON 31.03.2008 HAS BEEN REFERRED TO, WHICH IS P LACED IN THE PAPER BOOK. FACTUALLY SPEAKING, IT IS SEEN THAT AS ON 01.04.2 007 I.E. AT THE BEGINNING OF THE YEAR THE FUNDS AVAILABLE WITH THE A SSESSEE BY WAY OF SHARE CAPITAL AND RESERVES & SURPLUS WAS ENOUGH TO COVE R THE SAID IMPUGNED INTEREST-FREE ADVANCES TO THE SISTER CONCERNS. IN-FACT, AS PER THE PROFIT AND LOSS ACCOUNT FOR YEAR ENDING 31.03.200 8 THE PROFIT FOR THE YEAR AFTER DEPRECIATION AND TAX IS TO THE EXTENT OF RS.5,14,84002/-, WHICH ALONE IS ENOUGH TO COVER THE IMPUGNED INTEREST-FREE A DVANCES. IN OUR CONSIDERED OPINION, THE PARITY OF REASONING LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LTD. (SUPRA) IS CLEARLY APPLICABLE IN THE PRESENT CASE INASMUCH AS T HERE ARE FUNDS AVAILABLE WITH THE ASSESSEE BOTH INTEREST-FREE AND INTER EST BEARING, AND THE A.Y. 2008-09 INTEREST-FREE FUNDS AVAILABLE WITH T HE ASSESSEE ARE SUFFICIENT TO COVER THE IMPUGNED INTEREST-FREE ADVANC ES MADE TO THE SISTER CONCERNS, THEN THE PRESUMPTION IS THAT THE IMPUG NED INTEREST-FREE ADVANCES MADE TO THE SISTER CONCERNS ARE OUT OF INTEREST -FREE FUNDS. IN SUCH A SITUATION, FOLLOWING THE JUDGEMENT OF THE HON' BLE BOMBAY HIGH COURT THE DISALLOWANCE OF INTEREST EXPENDITURE MADE B Y THE ASSESSING OFFICER BECOMES UNTENABLE. 7. IN-FACT, THE FACTUAL ASPECTS OF THE SAID PROPOSITIO N HAVE NOT BEEN FAULTED BY THE CIT(A), THOUGH HE HAS NOT FOUND IT FI T TO APPLY THE SAID PROPOSITION TO THE ASSESSEE'S CASE. AS PER THE DISCUSSION MADE BY THE CIT(A) IN PARA 5.3.2 IT EMERGES THAT ACCORDING TO TH E CIT(A) THE AFORESAID PROPOSITION LAID DOWN BY THE HON'BLE BOMBAY HIGH COU RT IS APPLICABLE ONLY IN A SITUATION WHERE THE ADVANCES/INVESTMENTS ARE MADE FOR BUSINESS PURPOSES ALONE. AS PER THE CIT(A) WHERE ADVANCES TO SISTER CONCERNS ARE FOR NON-BUSINESS PURPOSES, THE AFORESAID PROP OSITION LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IS NOT APPLICA BLE. IN OUR CONSIDERED OPINION, THE INTERPRETATION PLACED BY THE CIT(A) ON THE JUDGEMENT OF THE HON'BLE BOMBAY HIGH COURT IS QUITE MISPLACED. IN- FACT, TO SAY THAT THE PROPOSITION THAT WHERE THERE ARE FUN DS AVAILABLE BOTH INTEREST-FREE AND INTEREST BEARING, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS ARE OUT OF INTEREST-FREE ONLY IF INTEREST-F REE ARE SUFFICIENT TO COVER THE INVESTMENT IS A PROPOSITION WHICH IS AVAILABL E ONLY IN A SITUATION WHERE THE INVESTMENTS ARE FOR BUSINESS PURPOSES, IS WRONG. WE SAY SO FOR THE REASON THAT IF THE INVESTMENTS/ADVANCES TO THE SISTER CONCERNS WERE FOR BUSINESS PURPOSES THEN THE QUESTION OF D ISALLOWANCE UNDER SECTION 36(1)(III) WOULD NOT ARISE AT ALL, AS SECTION 36(1)(III) EXPLICITLY PERMITS DEDUCTION FOR THE AMOU NT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF BUSINESS OR PROFESSION. 36 ITA NOS.1628 & 1636/PUN/2013 ONCE INTEREST IS PAID IN RESPECT OF FUNDS USED FOR PURPO SES OF BUSINESS THERE IS NO QUESTION OF ITS DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT AND THERE WOULD NOT BE A NECESSITY TO SEE AS TO WHE THER THE FUNDS ADVANCED TO SISTER CONCERN ARE OUT OF INTEREST-BEARING BORROWINGS OR NOT. IN OUR A.Y. 2008-09 VIEW, THE CIT(A) ERRED IN NOT A PPRECIATING THE JUDGEMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE C ASE OF RELIANCE UTILITIES & POWER LTD. (SUPRA) IN ITS PROPER RESPECTIVE . ACCORDINGLY, ON THIS GROUND THE ORDER OF THE CIT(A) IS SET- ASIDE AND T HE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITION OF RS.29,36,965/- MADE UNDER SECTION 36(1)(III) OF THE ACT. ON THIS GROUND ASSESSEE SUCCEEDS. 51. SINCE IN THE INSTANT CASE THE LD. COUNSEL FOR T HE ASSESSEE HAS CONCLUSIVELY PROVED THAT THE OWN CAPITAL AND FREE R ESERVES OF THE ASSESSEE COMPANY IS MUCH MORE THAN THE INTEREST FREE ADVANCE S GIVEN TO SINEW DEVELOPERS PVT. LTD. AND RIVERVIEW PROPERTIES PVT. LTD. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF COORDINATE B ENCH OF THE TRIBUNAL IN THE CASE OF TRINITY INDIA LTD. (SUPRA) WE HOLD THAT THE CIT(A) IS NOT JUSTIFIED IN ENHANCING THE INCOME OF THE ASSESSEE BY DIRECTING T HE ASSESSING OFFICER TO DISALLOW PROPORTIONATE DISALLOWANCE OF INTEREST OF RS.12,95,32,777/-. GROUND RAISED BY THE ASSESSEE ON THIS IS ACCORDINGL Y ALLOWED. 52. SO FAR AS THE GROUND RAISED BY THE REVENUE IS C ONCERNED WE FIND THE LD.CIT(A) HAS GIVEN A CATEGORICAL FINDING THAT THE INTEREST FREE ADVANCES TO PUNE TECHNOPOLIS DEVELOPMENT PVT. LTD. AND L.K. DEV ELOPERS PVT. LTD. ARE FOR BUSINESS EXPEDIENCY AND THEREFORE IN VIEW OF DE CISION OF HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. (SU PRA) NO DISALLOWANCE OF INTEREST U/S.36(1)(III) IS CALLED FOR UNDER THE FAC TS AND CIRCUMSTANCES OF THE CASE. THE LD. DEPARTMENTAL REPRESENTATIVE COULD NO T CONTROVERT THE FACTUAL FINDING GIVEN BY THE CIT(A) THAT THE ADVANCES GIVEN TO THE ABOVE TWO CONCERNS ARE FOR COMMERCIAL EXPEDIENCY. SO FAR AS THE DECISION OF HONBLE KERALA HIGH COURT RELIED ON BY THE LD. DEPARTMENTAL REPRESENTATIVE IN THE CASE OF CIT VS. BABY & CO. REPORTED IN 254 ITR 248 IS CONCERNED WE FIND THE SAME IS NOT APPLICABLE TO THE FACTS OF THE PRES ENT CASE IN VIEW OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F RELIANCE UTILITIES AND POWER LTD. (SUPRA) AND THE FACTUAL FINDING GIVEN BY LD.CIT(A). WE, 37 ITA NOS.1628 & 1636/PUN/2013 THEREFORE, DO NOT FIND ANY INFIRMITY IN THE ORDER O F THE CIT(A) IN DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AMOUNTIN G TO RS.58,75,491/-. GROUND RAISED BY THE REVENUE IS ACCORDINGLY DISMISS ED. ITA NO.1636/PUN/2013 (BY REVENUE) : 53. IN GROUND OF APPEAL NO.1, 10 AND 11 BY THE REVE NUE BEING GENERAL IN NATURE ARE DISMISSED. 54. IN GROUND OF APPEAL NO.2 & 3 THE REVENUE HAS CH ALLENGED THE ORDER OF THE CIT(A) IN DELETING THE ADDITION OF RS.2,80,2 24/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF SOCIETY MAINTENANCE CHARGES. 55. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS.2,83,224/- ON ACCOUNT OF SOCIETY MA INTENANCE CHARGES. ON BEING QUESTIONED BY THE ASSESSING OFFICER TO JUSTIF Y THE SAME BY FILING NECESSARY DETAILS, THE ASSESSEE FURNISHED THE DETAI LS ON ACCOUNT OF SOCIETY MAINTENANCE CHARGES PAID FOR THE PROJECT KUMAR SURA KASHA - RS.2,83,224/- PROJECT ORION RESIDENCY, PARK VALENCIA, KUMAR DHRUV A, KUMAR CRYSTAL- RS.3,000. IT WAS SUBMITTED THAT THE BUILDER HAS TO LOOKAFTER THE SOCIETY MAINTENANCE ACTIVITIES TILL THE COMPLETION OF THE P ROJECT AND TILL THE SOCIETY IS FORMED AND HANDEDOVER. 56. HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIE D WITH THE EXPLANATION GIVEN BY THE ASSESSEE. HE OBSERVED THAT THE ASSESS EE HAS NOT CLAIMED ANY INCOME UNDER THE HEAD INCOME FROM BUSINESS/PROFESSI ON FROM THE PROJECT KUMAR SURAKASHA, ORION RESIDENCY, PARK VALENCIA, K UMAR DHRUVA, KUMAR CRYSTAL. HE OBSERVED THAT THE ASSESSEE HAS CLAIME D BUSINESS RECEIPT OF JUST RS.43.28 LAKHS FROM COMPLETED PROJECT AND SUM OF RS.2.25 CRORES AS PROJECT MANAGEMENT FEE. THE REST OF THE INCOME IS ON ACCOUNT OF INCOME FROM OTHER SOURCES ONLY. THE EXPENSES UNDER THE H EAD REPAIRS AND 38 ITA NOS.1628 & 1636/PUN/2013 MAINTENANCE IS IN RESPECT OF THOSE BUILDINGS WHICH HAS ALREADY BEEN SOLD OUT BY THE ASSESSEE IN THE EARLIER YEARS AND AS SUC H NO SUCH ASSET HAS BEEN REFLECTED EITHER AS WORK-IN-PROGRESS OR FIXED ASSET S. FURTHER, NO RECEIPTS FROM THE FLAT HOLDER AS MAINTENANCE CHARGES OR OTHE RWISE HAS BEEN CLAIMED. HE, THEREFORE, HELD THAT THE EXPENSES INCURRED ARE NOT RELATED AND THEREFORE CANNOT BE ALLOWED. HE ACCORDINGLY DISALLOWED THE E XPENSES OF RS. 2,80,224/-. 57. BEFORE CIT(A) THE ASSESSEE MADE ELABORATE SUBMI SSION JUSTIFYING THE CLAIM OF SUCH EXPENSES. IT WAS SUBMITTED THAT THE SOCIETY MAINTENANCE EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE IN THE COURSE OF ITS BUSINESS AND FOR THE PURPOSE OF BUSINESS. AS A BUILDER AND D EVELOPER IT IS THE RESPONSIBILITY OF THE ASSESSEE TO MAINTAIN THE BUIL DING TILL SUCH TIME THE SOCIETY IS FORMED AND HANDED OVER TO THE COMMITTEE THEREOF. TILL THAT PERIOD IRRESPECTIVE OF ANY BUSINESS RECEIPT THE ASSESSEE H AS TO TAKE CARE OF SUCH MATTERS. IT ALSO REFLECTS THE REPUTATION OF THE AS SESSEE IN THE MARKET. SINCE THE BUSINESS OF THE ASSESSEE IS A CONTINUOUS ONE AN D IT IS NOT A ONE-TIME ACTIVITY, THEREFORE, THE ASSESSING OFFICER IS NOT J USTIFIED IN DISALLOWING THE EXPENSES. 58. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFI CER BY OBSERVING AS UNDER : 8.1 HAVING CONSIDERED THE SUBMISSIONS MADE BY THE APPE LLANT IT IS SEEN THAT THE ASSESSING OFFICER HAS DISALLOWED THE EXPENDI TURE IN RESPECT OF PROJECT KUMAR SURAKSHA ON THE GROUND THAT THE SAME RELATED TO A COMPLETED PROJECT IN RESPECT OF WHICH THE SALES HAVE BEEN SHOWN BY THE APPELLANT IN EARLIER YEARS. HOWEVER, THE APPELLANT IS A BUILDER AND DEVELOPER AND IT IS A NORMAL BUSINESS PRACTICE THAT THE BUILDER IS RESPONSIBLE FOR THE MAINTENANCE OF THE BUILDINGS OF A SOCIETY, EVEN THOUGH THE FLATS MAY HAVE BEEN SOLD TO THE FLAT OWNER S, TILL SUCH TIME AS THE FLAT OWNERS SOCIETY OR COMMITTEE IS FORMED AND TH E MAINTENANCE OF THE SOCIETY IS THEREAFTER HANDED OVER TO THE SOCIETY OR COMMITTEE. THE ASSESSING OFFICER HAS NOT DOUBTED THE GENUINENESS OF THE E XPENDITURE NOR IS IT HIS CONTENTION THAT THE EXPENDITURE DOES NO T RELATE TO THE IMPUGNED ASSESSMENT YEAR OR THAT IT RELATES TO THE PRIOR PERIOD. IN THE CONTEXT OF THE BUSINESS OF THE APPELLANT AND CONSIDERI NG THE REPUTATION 39 ITA NOS.1628 & 1636/PUN/2013 IN THE MARKET, THE SOCIETY MAINTENANCE EXPENSES INCUR RED BY THE APPELLANT ARE HELD TO BE BUSINESS EXPENDITURE QUALIFYI NG FOR DEDUCTION U/S.37(1). GROUND NO.4 THEREFORE, SUCCEEDS. 59. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REV ENUE IS IN APPEAL BEFORE US. 60. AFTER HEARING BOTH THE SIDES, WE DO NOT FIND AN Y INFIRMITY IN THE ORDER OF THE CIT(A) ON THIS ISSUE. ADMITTEDLY, THE ASSESSEE IS A BUILDER AND DEVELOPER. IT IS A NORMAL BUSINESS PRACTICE IN CON STRUCTION BUSINESS THAT THE BUILDER IS RESPONSIBLE FOR THE MAINTENANCE OF THE B UILDINGS OF A SOCIETY TILL SUCH TIME THE FLAT OWNERS SOCIETY OR COMMITTEE IS FORMED AND THE MAINTENANCE OF THE SOCIETY IS THEREAFTER HANDED OVE R TO THE SOCIETY OR COMMITTEE EVEN THOUGH THE FLATS ARE SOLD. IN THE I NSTANT CASE, THERE IS NO FINDING BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS INCURRED SOCIETY MAINTENANCE CHARGES EVEN AFTER THE FORMATION OF THE COMMITTEE AND THE MAINTENANCE OF THE BUILDINGS WAS HANDED OVER TO SUC H COMMITTEE. IN ABSENCE OF THE SAME, WE FIND MERIT IN THE FINDINGS GIVEN BY THE CIT(A) THAT THE SOCIETY MAINTENANCE EXPENDITURE INCURRED BY THE ASSESSEE IS A BUSINESS EXPENDITURE INCURRED IN THE NORMAL COURSE OF BUSINE SS ACTIVITY SINCE THE SOCIETY HAS NOT BEEN FORMED AND THE MAINTENANCE OF THE SOCIETY IS NOT HANDED OVER TO THE SOCIETY OR COMMITTEE. IN THIS V IEW OF THE MATTER AND IN VIEW OF THE DETAILED REASONING GIVEN BY THE CIT(A) WE FIND NO INFIRMITY IN HER ORDER. ACCORDINGLY, THE SAME IS UPHELD AND THE GRO UNDS RAISED BY THE REVENUE ON THIS ISSUE ARE DISMISSED. 61. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AND THE APPEAL FILED BY THE REVENUE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 02-02-2017. SD/- SD/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACC OUNTANT MEMBER PUNE; DATED : 02 ND FEBRUARY, 2017. 40 ITA NOS.1628 & 1636/PUN/2013 ) *#,! -! / COPY OF THE ORDER FORWARDED TO : / BY ORDER , // TRUE COPY // //TRUE COPY// &' /ASSISTANT REGISTRAR ) , / ITAT, PUNE 1. / THE APPELLANT 2. / THE RESPONDENT 3. THE CIT(A) - I , PUNE 4. CIT-I, PUNE 5. , //) , ) , B BENCH / DR, ITAT, B BENCH PUNE; 6. 1 / GUARD FILE.