M/s. Kolte Patil Developers Ltd., Pune V. Deputy Commissioner of Income-tax,

ITA 1657/PUN/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1913 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 26-04-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 04-09-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ASEEM SHARMA
• Keywords: Business income; Business expenditure; Earning of tax free income; Proportionate interest
• Section: 143(3); 142(1); 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . . , ! , # $ BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NOS.1656 & 1657/PN/2014 #& & / ASSESSMENT YEARS : 2008-09 & 2009-10 M/S. KOLTE PATIL DEVELOPERS LTD., 2 ND FLOOR, CITY POINT, DHOLE PATIL ROAD, PUNE 411001 PAN NO.AAACK7310G . / APPELLANT V/S DCIT, CENTRAL CIRCLE-1(1), PUNE . / RESPONDENT / ASSESSEE BY : SHRI NIKHIL PATHAK / REVENUE BY : SHRI ASEEM SHARMA / ORDER PER R.K.PANDA, AM : THE ABOVE 2 APPEALS FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE COMMON ORDER DATED 31-03-2014 OF THE CIT(A)-II, PU NE RELATING TO ASSESSMENT YEARS 2008-09 AND 2009-10 RESPECTIVELY. F OR THE SAKE OF CONVENIENCE THESE WERE HEARD TOGETHER AND ARE BEING D ISPOSED OF BY THIS COMMON ORDER. ITA NO.1656/PN/2014 (A.Y.2008-09) : 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF DEVELOPMENT OF REAL ES TATE, / DATE OF HEARING :26.04.2016 / DATE OF PRONOUNCEMENT:29.04.2016 2 ITA NO.1656 & 1657/PN/2014 PURCHASE AND SALE OF LAND ETC. IN THIS CASE, SUBSEQUEN T TO SEARCH ACTION U/S.132 OF THE I.T. ACT CONDUCTED IN THE GROUP OF CASES ON 22-08-2008 ASSESSMENT WAS COMPLETED U/S.153A R.W.S.143(3 ) FOR THE IMPUGNED ASSESSMENT YEAR VIDE ORDER DATED 31-12-2010 DETERMINING THE TOTAL INCOME AT RS.131,23,95,397/-. SUBSEQUENTLY, TH E CIT VIDE ORDER DATED 24-07-2012 PASSED U/S.263 SET ASIDE THE A SSESSMENT AS THE SAME WAS FOUND TO BE ERRONEOUS IN SOFARAS IT WAS PR EJUDICIAL TO THE INTEREST OF THE REVENUE WITH THE FOLLOWING DIRECTIONS : (1) THE ASSESSING OFFICER SHOULD CAUSE NECESSARY ENQUIRIES AS PER PROVISIONS OF SECTION 14A R/W RULE 8D. (2) THE ASSESSING OFFICER SHOULD VERIFY THE CONTENTIONS OF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. (3) THE ASSESSING OFFICER SHOULD VERIFY BOTH DIRECT AS WE LL AS INDIRECT EXPENDITURE FOR EARNING EXEMPT INCOME. (4) WHERE THE EXPENDITURE INCURRED CANNOT BE RELATE D TO EITHER TAXABLE INCOME OR EXEMPTED INCOME, THE PROVISIONS OF SECTION 14A WOULD BE ATTRACTED AND THEREFORE, ASSESSING OFFICER WOULD BE JUSTIFIED IN MAKING DISALLOWANCE IN ACCORDANCE WITH PROVISIONS OF SUB-SECTIO NS (2) & (3) R/W RULE 8D IF THE ASSESSMENT YEAR IS 2008-09 OR ANY SUBSEQUEN T YEAR. (5) IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE COR RECTNESS OF THE CLAIM(S) OF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, HE MUST RECORD HIS SATISFACTION. (6) AFTER RECORDING SATISFACTION, THE ASSESSING OFFICER SHOULD DETERMINE THE EXPENDITURE INCURRED IN RELATION TO SU CH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, IN ACCORDANC E WITH RULE 8D OF INCOME TAX RULES, 1962. 3. THE AO, THEREAFTER, ISSUED NOTICE U/S.143(2) AND 142(1) A ND ASKED THE ASSESSEE TO JUSTIFY THE CORRECTNESS OF ITS C LAIM IN RESPECT OF DISALLOWANCE U/S.14A R.W. RULE 8D. IT WAS SUBMITTED BY TH E ASSESSEE THAT AS PER THE AUDITED BALANCE SHEET OF THE COMPANY T HE SHARE CAPITAL IS RS.75,31,00,480/- AND THE FREE RESERVES ARE TO THE TUNE OF RS.493,28,64,916/-. THUS, TOTAL SHARE CAPITAL AND FREE RESE RVES IS AROUND RS.568.57 CRORES WHEREAS THE INVESTMENTS ARE T O THE TUNE OF RS.507.46 CRORES. IT WAS FURTHER SUBMITTED THAT OUT OF T HE INVESTMENT 3 ITA NO.1656 & 1657/PN/2014 OF RS.507.46 CRORES THERE ARE DEBENTURES TO THE TUNE O F RS.104.33 CRORES AND SHARES/DEBENTURE APPLICATION MONEY OF RS.128.3 5 CRORES. THE ABOVE AMOUNTS ARE TO BE EXCLUDED FROM THE TOTAL INV ESTMENT SINCE INCOME ARISING THERE FROM IS NOT EXEMPT FROM TAX. THUS, TH E NET INVESTMENT WHICH MAY YIELD EXEMPT INCOME IS ONLY RS.278.07 CRORES WHICH IS MUCH LESS THAN THE TOTAL FIGURE OF SHARE CAPITAL AN D FREE RESERVES AVAILABLE WITH THE COMPANY. IT WAS ACCORDINGLY SUBMITTED THAT THE ASSESSEE HAS SURPLUS FUNDS AVAILABLE WHICH IS MUC H MORE THAN THE INVESTMENT MADE FOR EARNING THE EXEMPT INCOME AND THEREFORE THERE IS NO QUESTION OF MAKING ANY DISALLOWANCE OF EXPENDITURE U/S.14A. 4. THE ASSESSEE FURTHER SUBMITTED A CHART GIVING THE DETAILS OF TOTA L INVESTMENTS MADE IN VARIOUS SHARES/SECURITIES/MUTUAL FUND S ETC. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE COMPANY HAS M ADE A PUBLIC ISSUE OF SHARES IN F.Y. 2007-08 AND HAD RECEIVED RS.275.54 CRORES AS IPO FUND WHICH WAS KEPT IN A SEPARATE BANK ACCOUNT MAIN TAINED WITH HSBC WITH BANK VIDE A/C.NO.105475297916 AND THE INVESTME NTS IN MUTUAL FUNDS WERE MADE FROM THE SAID ACCOUNT. IT WAS AC CORDINGLY SUBMITTED THAT SINCE THE ENTIRE INVESTMENT IN THE MUTUAL FUNDS WERE OUT OF THE IPO FUND AND SINCE ALL THE EXPENDITURE INCURRED PERTAINING TO IPO WERE DISALLOWED BY THE ASSESSEE COMPANY SUO-MOT O AND NOT A SINGLE PENNY WAS CLAIMED AS ALLOWABLE BUSINESS EXPENDITURE, THEREFORE, NO DISALLOWANCE U/S.14A R.W. RULE 8D IS REQUIRED T O BE MADE ON ACCOUNT OF SUCH INVESTMENTS. 5. THE ASSESSEE SUBMITTED THAT THERE ARE CERTAIN INVE STMENTS IN THE PARTNERSHIP FIRMS WHERE THE ASSESSEE IS A PARTNER. PROFIT ARISING FROM THE PARTNERSHIP FIRM IS EXEMPT IN THE HANDS OF THE P ARTNER. HOWEVER, THE PARTNERSHIP FIRM HAS PAID THE TAXES ON THE PROFIT 4 ITA NO.1656 & 1657/PN/2014 GENERATED AND SO THERE IS NO QUESTION OF TREATING THE IN VESTMENT IN PARTNERSHIP FIRM LIABLE FOR DISALLOWANCE U/S.14A. IT WAS ACCO RDINGLY SUBMITTED THAT THE INVESTMENTS IN THE PARTNERSHIP FIRM A RE NOT TO BE CONSIDERED AS EXEMPT INVESTMENTS FOR THE PURPOSE OF DET ERMINING THE DISALLOWANCE U/S.14A. FINALLY IT WAS SUBMITTED THAT THERE IS NO CLEAR NEXUS THAT THE ASSESSEE COMPANY HAS UTILIZED THE BORRO WED INTEREST BEARING FUNDS FOR MAKING IN TAX FREE INVESTMENTS. THE TOTA L BORROWED INTEREST BEARING FUNDS AS ON 31-03-2008 IS RS.84.05 CRORE S WHICH IS FAR LESS THAN THE INVESTMENTS MADE BY THE ASSESSEE COM PANY. IT WAS REITERATED THAT THE ASSESSEE HAS ITS OWN SURPLUS FREE FU NDS FAR MORE THAN THE TAX FREE INVESTMENTS MADE AND THEREFORE IN ABS ENCE OF ANY NEXUS TO PROVE THAT THE BORROWED FUNDS ARE UTILIZED FOR EARNING TAX FREE INCOME, THERE IS NO QUESTION OF MAKING ANY DISALLOWANCE U/S.14A. IT WAS ACCORDINGLY ARGUED THAT UNDER NO CIRCUMSTANCES ANY DISALLOWANCE U/S.14A R.W. RULE 8D IS CALLED FOR. VARIOUS DECISIO NS INCLUDING THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE C ASE OF RELIANCE UTILITIES AND POWER LTD. REPORTED IN 313 ITR 340 W ERE RELIED UPON. 6. HOWEVER, THE AO WAS NOT SATISFIED WITH THE ARGUMENTS ADVANCE D BY THE ASSESSEE. ACCORDING TO HIM, THE CONTENTION OF THE ASSESSEE THAT ONLY SURPLUS INTEREST FREE FUNDS WAS USED FOR MAKI NG TAX FREE INVESTMENT IS INCORRECT BECAUSE OF THE FOLLOWING : TABLE-1 A.Y.2008-09 INTEREST FREE FUNDS 568.51 CR LESS (I) NET CURRENT ASSETS 134.6 CR II) NET FIXED ASSETS 9.86 CR TOTAL 424.05 CR. 7. FROM THE ABOVE, IT IS CLEAR THAT AS AGAINST AVAILABILITY O F RS.424.05 CRORES FOR MAKING INVESTMENTS THE ASSESSEE HAS MADE 5 ITA NO.1656 & 1657/PN/2014 INVESTMENT OF RS.507.46 CRORES WHICH IS HIGHER THAN THE INT EREST FREE FUNDS AVAILABLE FOR SUCH INVESTMENT. THUS, IT IS APPARENT TH AT THE DIFFERENCE OF RS.83.35 CRORES HAS BEEN INVESTED THROUGH LO AN BEARING FUNDS. DURING THE YEAR THE TOTAL LOAN BEARING FUNDS IS RS.8 4.05 CRORES WHICH IS UTILISED FOR MAKING INVESTMENT. THEREFORE, T HE CONTENTION OF THE ASSESSEE THAT IT HAS SURPLUS FUNDS TO MAKE INVESTMENT OF RS.507.4 CRORES IS NOT ONLY WRONG BUT ALSO BASED ON MIS-REPRESENTATION OF FACTS. 8. AS REGARDS THE RELIANCE ON THE DECISION OF HONBLE BOM BAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. (SUPRA ) IS CONCERNED, THE AO OBSERVED THAT THE SAID JUDGMENT WAS GIVEN IN RESPECT OF SECTION 36(1)(III) OF THE ACT WHEREAS THE ISSUE IN T HE INSTANT CASE IS APPLICABILITY OF SECTION 14A. THEREFORE, THE SAID DECIS ION IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 9. HE ALSO REJECTED THE CONTENTION OF THE ASSESSEE THA T AMOUNT OF RS.424.05 CRORES WAS AVAILABLE FOR MAKING INVESTMENT WHICH INCLUDES RS.275.54 CRORES RECEIVED FROM THE IPO. RELYING ON VARIO US DECISIONS THE AO HELD THAT TAX FREE INCOME EARNED FROM PARTNERSHIP FIRM IS SUBJECT TO DISALLOWANCE U/S.14A. SINCE THE ASSESSEE HAS MADE INVESTMENT AS CAPITAL CONTRIBUTION FROM LOAN BEARING FUNDS, THEREFORE, PROVISIONS OF SECTION 14A ARE APPLICABLE. HE ALSO REJECTED THE CONTENTION OF THE ASSESSEE THAT THERE IS NO DIRECT NEXU S BETWEEN LOAN BEARING FUNDS AND ITS UTILISATION. THE AO ACCORDINGLY HELD THAT THERE IS NEXUS BETWEEN LOAN FUNDS AND ITS UTILISATION IN TAX FREE INVESTMENTS. DURING THE YEAR THE ASSESSEE HAS INCURRED RS.6.46 CRORES AS INTEREST EXPENSES DEBITED TO THE PROFIT AND LO SS ACCOUNT AND HAS EARNED TAX FREE INCOME TO THE TUNE OF RS.7.094 CRO RES. SINCE BOTH TYPES OF FUNDS HAVE BEEN UTILISED FOR MAKING TAX FREE AND T AXABLE 6 ITA NO.1656 & 1657/PN/2014 INVESTMENT IN CURRENT YEAR AND IN PRECEDING YEARS ALSO, T HEREFORE, THE AO APPLYING THE PROVISIONS OF SECTION 14A R.W. RULE 8D (2) A ND 8D(3) MADE A DISALLOWANCE OF RS.2,70,46,829/-. 10. IN APPEAL, THE LD.CIT(A) UPHELD THE ACTION OF THE AO FO R WHICH THE ASSESSEE 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 CONFIRMING THE DISAL LOWANCE U/S 14A R.W.R. 8D OF RS. 2,70,46,829/- ON THE GROUND THAT THE ASSESSEE HAD INCURRED THE ABOVE EXPENDITURE FOR EARNING EXEMPT I NCOME AND HENCE, THE SAME WAS NOT ALLOWABLE AS A DEDUCTION WHILE COMPUT ING THE BUSINESS INCOME FOR THIS YEAR. 2] THE LEARNED CIT(A) ERRED IN HOLDING THAT THE LE ARNED A.O. HAD MADE THE DISALLOWANCE U/S 14A R.W.R. 8D AFTER RECORDING HIS SATISFACTION THAT THE CLAIM OF THE ASSESSEE WAS NOT CORRECT AND THERE FORE, THE DISALLOWANCE WAS JUSTIFIED. 2.1] THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE SATISFACTION RECORDED BY THE LEARNED A.O. WAS BASED ON WRONG PRESUM PTIONS AND SINCE THE A.O. HAD NOT GIVEN ANY COGENT REASONS AS TO H OW THE CLAIM OF THE ASSESSEE WAS INCORRECT, THE DISALLOWANCE MADE U/S 14A WAS NOT JUSTIFIED AT ALL. 3] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSESSE E SUBMITS THAT THE INVESTMENTS IN SHARES OF VARIOUS GROUP COMPANIES O R CAPITAL CONTRIBUTION IN PARTNERSHIP FIRMS WERE MADE ON ACCOUN T OF BUSINESS EXPEDIENCY AND NOT WITH AN INTENTION TO EARN EXEMPT INCOME AND HENCE, THERE WAS NO REASON TO MAKE ANY DISALLOWANCE U/S 14A R.W.R. 8D IN RELATION TO SUCH INVESTMENTS. 4] THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ASSE SSEE HAD UTILIZED INTEREST BEARING BORROWED FUNDS FOR MAKING TAX FREE I NVESTMENTS AND THEREBY CONFIRMING THE DISALLOWANCE OF RS.1,75,15,183 /- MADE ON ACCOUNT OF PROPORTIONATE INTEREST EXPENDITURE COMPUTED AS PER THE PROVISIONS OF RULE 8D(2)(II) OF THE INCOME TAX RULES, 1962. 4.1] THE LEARNED CIT(A) ERRED IN HOLDING THAT - A. THERE WAS A NEXUS BETWEEN THE INTEREST BEARING FUND S RAISED AND MAKING OF TAX FREE INVESTMENTS AND HENCE, THE PROPORT IONATE INTEREST ATTRIBUTABLE TO TAX FREE INVESTMENTS WAS RIGHTLY DISALL OWED BY THE LEARNED A.O. BY APPLYING THE PROVISIONS OF SECTION 14A R.W.R. 8D(2)(II). B. THE ASSESSEE HAD NOT FURNISHED ANY MATERIAL TO ESTABLI SH THAT THE INTEREST BEARING FUNDS WERE NOT UTILISED FOR MAKING TA X FREE INVESTMENTS AND THEREFORE, THE DISALLOWANCE OF INTEREST U/S 14A R. W.R. 8D(2)(II) WAS JUSTIFIED. 7 ITA NO.1656 & 1657/PN/2014 4.2] THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE OWNED FUNDS AVAILABLE WITH THE ASSESSEE WERE FAR MORE THAN THE AMOU NT OF TAX FREE INVESTMENTS AND SINCE THERE WAS NO NEXUS BETWEEN THE IN TEREST BEARING LOANS AND MAKING OF TAX FREE INVESTMENTS, THERE WAS NO REASON TO HOLD THAT THE ASSESSEE HAD UTILIZED BORROWED FUNDS FOR MAKING TAX FREE INVESTMENTS AND THUS, THE DISALLOWANCE OF INTEREST TO T HE EXTENT OFRS.L,75 , 15,183/- WAS NOT JUSTIFIED. 4.3] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE AS SESSEE SUBMITS THAT WHOLE OF THE INVESTMENTS IN MUTUAL FUNDS WERE SOURCED OUT OF OWNED FUNDS RAISED THROUGH IPO OF SHARES OF THE ASSESSEE COMPANY AND THIS FACT WAS ALSO DEMONSTRATED BY THE ASSESSEE WITH PROPER EVIDENCE S AND HENCE , THE INVESTMENTS MADE IN MUTUAL FUNDS SHOULD HAVE BEEN E XCLUDED FROM THE AMOUNT OF TAX FREE INVESTMENTS WHILE COMPUTING TH E DISALLOWANCE U/S 14A R.W.R. 8D(2)(II). 4 . 4] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSESSE E SUBMITS THAT SUBSTANTIAL INVESTMENTS IN GROUP COMPANIES WERE MADE OUT OF OWNED FUNDS OF THE ASSESSEE AND THIS FACT WAS DULY DEMONSTRATED B Y THE ASSESSEE AND THEREFORE, SUCH INVESTMENTS MADE OUT OF OWNED FUND S SHOULD HAVE BEEN EXCLUDED FROM THE AMOUNT OF TAX FREE INVESTMENT S WHILE COMPUTING THE DISALLOWANCE U/S 14A R.W.R. 8D(2)(II). 5] THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISAL LOWANCE OF RS. 95,31 , 646/- MADE BY THE LEARNED A.O. U/S 14A R.W.R. 8D(2)( III) ON THE GROUND THAT THE ASSESSEE HAD INCURRED INDIRECT EXPENDIT URE IN RELATION TO EARNING EXEMPT INCOME WITHOUT APPRECIATING THAT THE LEARNED A.O. H AS NOT RECORDED ANY OBJECTIVE SATISFACTION AS TO HOW THE CLAI M OF THE ASSESSEE IS NOT CORRECT AND HENCE , THE DISALLOWANCE MADE U/S 14A R.W.R. 8D(2)(III) IS NOT JUSTIFIED AT ALL . 5.1] THE LEARNED CIT(A) FAILED TO APPRECIATE THAT T HE ASSESSEE HAD NOT CLAIMED INDIRECT EXPENDITURE INCURRED IN RELATION T O EARNING THE EXEMPT INCOME IN THE FORM OF DIVIDEND FROM MUTUAL FUNDS AND SHARE OF PROFIT IN PARTNERSHIP FIRMS AND HENCE, THE DISALLOWANCE OF RS.95, 31,646/- WAS NOT JUSTIFIED ON THE FACTS OF THE CASE. 5.2] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSE SSEE SUBMITS THAT THE WHOLE OF THE INVESTMENTS IN MUTUAL FUNDS WERE SOURC ED OUT OF FUNDS RAISED THROUGH IPO OF SHARES OF THE ASSESSEE COMPANY AND NO EXPENSES IN RESPECT OF THE IPO ISSUE HAVE BEEN CLAIMED BY THE ASSESSEE AND THEREFORE, THE INVESTMENTS IN MUTUAL FUNDS SHOULD HAVE BEEN EXCLUD ED FROM THE AMOUNT OF TAX FREE INVESTMENTS WHILE COMPUTING THE DI SALLOWANCE U/S 14A R.W.R. 8D(2)(III). 6] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSESSEE SUBMITS THAT THE DISALLOWANCE U/S 14A IS ATTRACTED ONLY IN CASES WHE RE THE ASSESSEE HAS EARNED EXEMPT INCOME AND HENCE, IF AT ALL, ANY D ISALLOWANCE U/S 14A R.W.R . 8D IS TO BE MADE IN THE CASE OF THE ASSESSEE, THE INVESTM ENTS ON WHICH NO EXEMPT INCOME HAS BEEN EARNED SHOULD HAVE BE EN EXCLUDED WHILE COMPUTING THE DISALLOWANCE U/S 14A R.W.R . 8D. 7] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSESSEE SUBMITS THAT THE INVESTMENT MADE IN PARTNERSHIP FIRMS IS NOT A TAX FREE INVESTMENT SINCE THE INCOME EARNED BY THE FIRM IS SUBJECTED TO IN COME TAX AND HENCE, THE INVESTMENT IN PARTNERSHIP FIRM MAY BE EXCLUDED FR OM THE AMOUNT OF 8 ITA NO.1656 & 1657/PN/2014 'TAX FREE INVESTMENTS' WHILE COMPUTING THE DISALLOWANC E U/S. 14A AS PER RULE 8D(2)(II) AND RULE 8D(2)(III) OF THE INCOME TA X RULES, 1962. 8] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSESSEE SUBMITS THAT THE DISALLOWANCE MADE IS VERY HIGH AND MAY BE REDUCED SUBSTANTIALLY. 9] THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND O R DELETE ANY OF THE ABOVE GROUNDS OF APPEAL. 11. THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO PAGE 46 OF THE PAPER BOOK DREW THE ATTENTION OF THE BENCH TO THE CH ART SHOWING TAX FREE INVESTMENTS HELD AS ON 31-03-2008 AND SUBMITTED TH AT THE TOTAL INVESTMENTS CAN BE CATEGORISED INTO 3 PARTS : A. INVESTMENT IN SUBSIDIARY/ASSOCIATE COMPANIES RS.117,85,71,206/- B. INVESTMENT IN MUTUAL FUNDS - RS.160,28,12,406/- C. INVESTMENT IN PARTNERSHIP FIRMS - RS.56,66,04,935/- ------------------------ - RS.334,79,88,547/- ----------------------------- 12. HE SUBMITTED THAT NO DIVIDEND HAS BEEN RECEIVED FROM INVESTMENT IN SHARES OF SUBSIDIARY/ASSOCIATE COMPANIES. HO WEVER, THE ASSESSEE HAS RECEIVED DIVIDEND INCOME OF RS.4,22,46,215/ - FROM INVESTMENT IN MUTUAL FUNDS AND RS.8,06,67,348/- EXEMPT INCOM E FROM INVESTMENT IN PARTNERSHIP FIRMS. 13. HE SUBMITTED THAT ALTHOUGH BEFORE THE AO AS WELL AS THE CIT(A) IT WAS SUBMITTED THAT THE OWN FUNDS ARE MORE THAN THE TAX FREE INVESTMENT AND THERE IS NO DIRECT NEXUS BETWEEN THE BO RROWED FUNDS AND THE INVESTMENT IN SHARES/DEBENTURES/MUTUAL FUNDS/INV ESTMENT IN PARTNERSHIP FIRMS, THE INCOME OF WHICH IS TAX FREE, THE AO AND THE CIT(A) HAVE NOT CONSIDERED THE SAME PROPERLY. HE SUBMIT TED THAT IT WAS CONCLUSIVELY PROVED BEFORE THE AO AND CIT(A) THAT TH E ASSESSEE HAS RAISED FUNDS FROM PUBLIC ISSUE WHICH WAS KEPT IN SEPARA TE BANK 9 ITA NO.1656 & 1657/PN/2014 ACCOUNT MAINTAINED WITH HSBC AND THE SAID FUNDS WERE TEM PORARILY UTILISED FOR INVESTMENT IN MUTUAL FUNDS WHICH WAS REDEEMED A S AND WHEN FUNDS WERE REQUIRED. HOWEVER, THE LOWER AUTHORITIES HAVE REJECTED THE CONTENTION OF THE ASSESSEE WITHOUT GIVING A NY JUSTIFIABLE REASONS. HE SUBMITTED THAT IT WAS CONCLUSIVELY PROVED BEFORE THE LOWER AUTHORITIES THAT THE MUTUAL FUNDS ARE NOT AT ALL OUT OF BORROWED FUNDS. REFERRING TO THE COMPUTATION STATEMENT FOR A.Y. 200 8-09, A COPY OF WHICH IS PLACED AT PAGE 12 OF THE PAPER BOOK HE SUBMITTED THAT ENTIRE IPO EXPENSES OF RS.1,55,31,359/- HAS BEEN SUO MOTO DISALLOWED BY THE ASSESSEE IN ITS COMPUTATION STATEMENT. REFERRING TO PAGE 24 OF THE PAPER BOOK THE LD. COUNSEL FOR THE ASSES SEE DREW THE ATTENTION OF THE BENCH TO THE BALANCE SHEET OF THE ASS ESSEE COMPANY AND SUBMITTED THAT THE SHARE CAPITAL HAS BEEN SHOWN AT RS.75,31,00,480/- AND RESERVES AND SURPLUS AT RS.493,26,64 ,916/-. HOWEVER, THE AO IN THE BODY OF THE ASSESSMENT ORDER HA S REDUCED THE NET CURRENT ASSETS SHOWN AT RS.134.6 CRORES AND NET FI XED ASSETS AT RS.9.86 CRORES AND HAS DETERMINED THE OWN CAPITAL AND FRE E RESERVES OF THE ASSESSEE COMPANY AT RS.424.05 CRORES. REFERRING T O THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANC E UTILITIES AND POWER LTD.(SUPRA) HE SUBMITTED THAT THIS IS NOT THE WAY TO LOOK INTO THE AVAILABILITY OF OWN CAPITAL AND FREE RESERV ES AS DONE BY THE AO. 14. IN HIS ALTERNATE ARGUMENT, HE SUBMITTED THAT EVEN IF THE CALCULATION OF THE AO IS ASSUMED AS CORRECT, HOWEVER, HE H AS TO EXCLUDE THE INVESTMENTS WHOSE INCOME IS OTHERWISE TAXAB LE. REFERRING TO PAGE 46 OF THE PAPER BOOK THE LD. COUNSEL FOR THE AS SESSEE SUBMITTED THAT THE TOTAL INVESTMENT IN SHARES OF SUBSIDIAR Y/ASSOCIATE COMPANIES, INVESTMENT IN MUTUAL FUNDS AND INVESTMENT IN 10 ITA NO.1656 & 1657/PN/2014 PARTNERSHIP FORMS ARE ONLY TO THE TUNE OF RS.334,79,88,547 /-. HOWEVER, THE AO WHILE COMPUTING THE INVESTMENT OF RS.507.4 CRORES HAS INCLUDED THE INVESTMENT IN DEBENTURES ETC. WHOSE INCO ME IS TAXABLE. SINCE THE OWN CAPITAL AND FREE RESERVES OF THE A SSESSEE COMPANY AT RS.568.58 CRORES IS MUCH MORE THAN THE TAX FREE INVESTMENTS OF RS.334.80 CRORES, THEREFORE, IN VIEW OF THE DE CISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF HDFC LTD. VIDE W RIT PETITION NO.1753/2016 ORDER DATED 25-02-2016 NO DISALLOWA NCE U/S.14A R.W. RULE 8D IS PERMISSIBLE. HE SUBMITTED THAT THE ENTIRE CONTENTION OF THE AO IS ONLY REGARDING DISALLOWANCE OF INTER EST AND THERE IS NO DISCUSSION ABOUT INDIRECT EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING THE TAX FREE INCOME. 15. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE INVESTMENT IN MUTUAL FUNDS ARE OUT OF THE PROCEEDS OF THE IPO AND T HERE IS NO QUESTION OF ANY DIVERSION OF INTEREST BEARING FUNDS. THEREFOR E, NO DISALLOWANCE ON THIS AMOUNT IS CALLED FOR. SO FAR AS THE INVE STMENT IN SUBSIDIARY/ASSOCIATE COMPANIES AMOUNTING TO RS.117.86 CROR ES IS CONCERNED HE SUBMITTED THAT NO DIVIDEND HAS BEEN RECEIV ED FROM THESE COMPANIES. REFERRING TO THE DECISION OF THE PUNE BE NCH OF THE TRIBUNAL IN THE CASE OF GOYAL ISHWARCHAND KISHORILAL VIDE IT A NO.422/PN/2013 ORDER DATED 26-06-2014 HE SUBMITTED TH AT THE TRIBUNAL IN THE SAID DECISION HAS HELD THAT WHEN ASSESSEE HAS NOT RECEIVED ANY DIVIDEND INCOME OUT OF THE SHARES HELD AS INV ESTMENT, NO DISALLOWANCE U/S.14A CAN BE MADE. THEREFORE, DISALLOWANCE A T BEST CAN ONLY BE MADE ON THE INVESTMENT IN THE PARTNERSHIP FIRMS THE INCOME OF WHICH IS EXEMPT. HOWEVER, AS ALREADY MENTIONED, THE SAME IS ALSO NOT PERMISSIBLE SINCE THE ASSESSEE HAS HUGE OWN FU NDS AND 11 ITA NO.1656 & 1657/PN/2014 FREE RESERVES WHICH IS MORE THAN THE INVESTMENT IN TAX FR EE INVESTMENTS. 16. SO FAR AS THE INDIRECT EXPENSES ARE CONCERNED THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO THE COMPUTATION STATEMEN T SUBMITTED THAT THE ASSESSEE HAS ALREADY DISALLOWED THE PUBLIC ISSUE EXPENDITURE ON ACCOUNT OF THE IPO IN THE COMPUTATION STATEMENT. TH EREFORE, NO DISALLOWANCE IS CALLED FOR. FURTHER, NO SATISFACTION HAS BEEN RECORDED BY THE AO ON ACCOUNT OF INCURRING OF INDIRECT EXPENSES FOR EARNING TAX FREE DIVIDEND INCOME. REFERRING TO THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. MAGARPATTA TOWNSHIP DEVELOPMENT AND CONSTRUCTION LTD. REPORTED IN 152 ITD 4 69 HE SUBMITTED THAT THE TRIBUNAL IN THE SAID DECISION HAS HELD T HAT WHERE AO HAS NOT RECORDED ANY SATISFACTION AS REQUIRED BY SEC TION 14A(2) AND WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE WAS INCURRED FOR EARNING EARNED EXEMPT INCOME, THE AO WAS NOT JUSTIFIED IN INVOKING RULE 8D IN COMPUTING DISALLOWANCE U/S.14A OF THE I.T. ACT. HE ACCORDINGLY SUBMITTED THAT THE GROUNDS RAISED BY THE A SSESSEE SHOULD BE ALLOWED. 17. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER H AND HEAVILY RELIED ON THE ORDER OF THE AO AND THE CIT(A). HE SUBMITTE D THAT THE ASSESSEE HAS EARNED HUGE EXEMPT INCOME AND NO DISALLOWA NCE HAS BEEN MADE U/S.14A R.W. RULE 8D. HE SUBMITTED THAT IF THE CONTENTION OF THE ASSESSEE THAT IT HAS SURPLUS FUNDS FOR INVESTMENT IN SHARES/MUTUAL FUNDS/PARTNERSHIP FIRMS IS ACCEPTED, THEN TH ERE WAS NO NEED TO BORROW FUNDS. REFERRING TO PARA 4.3 OF THE OR DER OF THE CIT(A) AT PAGE 34 HE SUBMITTED THAT THE LD.CIT(A) HAS GIVE N A FINDING THAT NO SEPARATE ACCOUNTS ARE MAINTAINED. THE ASSESSE E COULD NOT 12 ITA NO.1656 & 1657/PN/2014 SHOW THAT BORROWED FUNDS ARE NOT UTILISED IN MAKING INVES TMENT IN SHARES/MUTUAL FUNDS, THE INCOME OF WHICH IS EXEMPT. 18. AS REGARDS THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THERE IS NO RECORDING OF SATISFACTION, THE LD. DEPARTM ENTAL REPRESENTATIVE REFERRED TO PAGE 8 OF THE ASSESSMENT O RDER AND DREW THE ATTENTION OF THE BENCH TO THE LAST PARAGRAPH WHERE THE AO HAS CLEARLY MENTIONED THAT IT IS A FIT CASE WHERE PROVISIONS OF SECTION 14A ARE APPLICABLE AND APPLYING RULE 8D(2) HE HAS CALCULATED THE DISALLOWANCE U/S.14A. HE ACCORDINGLY SUBMITTED THAT THE O RDER OF THE CIT(A) BE UPHELD. 19. THE LD. COUNSEL FOR THE ASSESSEE IN HIS REJOINDER REFE RRING TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF C IT VS. BOMBAY SAMACHAR LTD. REPORTED IN 74 ITD 723 SUBMITTED THAT THE HONBLE HIGH COURT IN THE SAID DECISION HAS HELD THAT THE FACT THAT THE ASSESSEE HAD AMPLE RESERVES AT HIS DISPOSAL AND NEED N OT HAVE BORROWED IS NOT A RELEVANT MATTER FOR CONSIDERATION. IT HAS ALSO BEEN HELD IN VARIOUS DECISIONS THAT THE AO CANNOT DIRECT THE A SSESSEE TO DO ITS BUSINESS IN A PARTICULAR MANNER. THE ONLY THING THAT THE ASSESSEE HAS TO DEMONSTRATE IS THAT THE CAPITAL WHICH WAS BORROWED IS USED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE IN THE RELEVANT YEAR. 20. AS REGARDS THE CONTENTION OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT ASSESSEE WAS NOT ABLE TO DEMONSTR ATE THAT NO BORROWED FUNDS HAVE BEEN UTILISED FOR INVESTMENT IN TAX FRE E INVESTMENTS, HE SUBMITTED THAT THE ASSESSEE HAS CLEARLY DEMONSTRATED BEFORE THE LOWER AUTHORITIES THAT IT HAS NOT UTILISED THE B ORROWED FUNDS FOR TAX FREE INVESTMENTS. THEREFORE, THE ONUS HAS S HIFTED TO THE 13 ITA NO.1656 & 1657/PN/2014 REVENUE AUTHORITIES. SINCE THEY HAVE NOT DISCHARGED TH E ONUS THE ASSESSEE CANNOT BE BLAMED FOR THIS. 21. AS REGARDS THE RECORDING OF SATISFACTION IS CONCERNED HE SUBMITTED THAT THE AO IN PAGE 8 OF THE ASSESSMENT ORDE R HAS RECORDED SATISFACTION WHICH IS IN RELATION TO THE INTEREST DISALLOWANCE. HOWEVER, NO SPECIFIC SATISFACTION HAS BEEN RECORDED FOR DISALLOWANCE OF INDIRECT EXPENSES. REFERRING TO THE DECISION OF THE PUNE BENCH O F THE TRIBUNAL IN THE CASE OF KALYANI STEELS LTD. VS. JCIT VIDE ITA NO.2012 /PN/2013 ORDER DATED 21-07-2014 HE SUBMITTED THAT THE TRIBUNAL IN THE SAID DECISION HAS HELD THAT IN ABSENCE OF ANY SPECIFIC OBJECTIVE SATISFACTION RECORDED BY THE AO WHICH IS ONE OF THE MANDATES OF SECT ION14A(2) NO DISALLOWANCE IS CALLED FOR. IT HAS BEEN HELD IN THE SAID DEC ISION THAT THE AO MUST FURNISH TO THE ASSESSEE A REASONABLE OPPORTUNITY TO S HOW CAUSE ON THE CORRECTNESS OF THE CLAIM MADE BY HIM. IN T HE EVENT THAT THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE HE MUST RECORD REASONS FOR HIS CONCLUSION. THE RE HAS TO BE SPECIFIC OBJECTIVE SATISFACTION RECORDED BY THE AO WHICH IS ONE OF THE MANDATES OF SECTION 14(2). IN ABSENCE OF THE SAME RECOUR SE TO RULE 8D OF THE RULES IS NOT PERMISSIBLE. THEREFORE, WHERE THE AO IN THE INSTANT CASE HAS NOT RECORDED ANY OBJECTIVE SATISFACTION TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, WHICH IS MANDATO RILY REQUIRED IN TERMS OF SECTION 14A(2) OF THE ACT, THEN HIS ACT ION OF INVOKING RULE 8D OF THE RULES TO COMPUTE THE DISALLOWANCE IS UNTENABLE. HE ACCORDINGLY SUBMITTED THAT THE GROUNDS R AISED BY THE ASSESSEE SHOULD BE ALLOWED AND THE DISALLOWANCE MADE BY T HE AO AND UPHELD BY THE CIT(A) SHOULD BE DELETED. 14 ITA NO.1656 & 1657/PN/2014 22. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE P APER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E VARIOUS DECISIONS CITED BEFORE US. WE FIND THE LD.CIT IN THE INSTANT CASE HAS DIRECTED THE AO TO CAUSE NECESSARY ENQUIRIES AS PER TH E PROVISIONS OF SECTION 14A R.W. RULE 8D AND DETERMINE THE DISALLOWANCE IN ACCORDANCE WITH PROVISION TO SUB-SECTION (2) AND (3) OF RULE 8D. WE FIND THE AO IN THE ASSESSMENT ORDER MADE DISALLOWANCE OF RS.2,20,46,829/- U/S.14A ON ACCOUNT OF INVESTMENT IN SHARES/DEBENTURES/MUTUAL FUNDS/PARTNERSHIP FIRMS, THE INCO ME OF WHICH IS EXEMPT. WE FIND THE CIT(A) HAS UPHELD THE ACTION OF THE AO. 23. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE HAS SUFFICIENT OWN CAPITAL AND FREE RESERVES WHI CH IS FAR MORE THAN THE AMOUNT OF INVESTMENT IN SHARES/MUTUAL FUNDS/PARTNERSHIP FIRMS, THE INCOME OF WHICH IS EXEMPT. FUR THER, THE INVESTMENT IN MUTUAL FUNDS ARE OUT OF THE PROCEEDS O F IPO WHICH WERE KEPT IN A SEPARATE BANK ACCOUNT MAINTAINED WITH HS BC AND WERE UTILIZED FOR MAKING INVESTMENT IN MUTUAL FUNDS. IT IS ALS O THE SUBMISSION OF THE LD. COUNSEL OF THE ASSESSEE THAT NO DIVID END INCOME HAS BEEN RECEIVED BY THE ASSESSEE FROM INVESTMEN T IN SHARES OF VARIOUS GROUP COMPANIES FOR WHICH NO DISALLOWANCE CAN BE MADE ON ACCOUNT OF INVESTMENT IN SHARES. IT IS ALSO THE ARGUMEN T OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE INCOME OF THE PARTNER SHIP FIRM HAS ALREADY SUFFERED TAX IN THE HANDS OF THE PARTNERSHIP FIRM AND THEREFORE NO DISALLOWANCE IS CALLED FOR. IT IS THE SUBMISSION OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT IF THE ASSESSEE HAS SU FFICIENT OWN FUNDS AND FREE RESERVES THERE WAS NO OCCASION TO BORRO W INTEREST BEARING FUNDS AND THAT THE ASSESSEE HAS CONCLUSIVELY NO T PROVED THAT 15 ITA NO.1656 & 1657/PN/2014 THE INTEREST BEARING FUNDS ARE NOT DIVERTED FOR INVESTMEN T IN SHARES/MUTUAL FUNDS/PARTNERSHIP FIRMS, THE INCOME OF WHICH IS EXEMPT. 24. FROM THE COPY OF SCHEDULE-6 TO THE BALANCE SHEET, WH ICH GIVES THE DETAILS OF INVESTMENT AND A COPY OF WHICH IS PLACED AT PAGE 28 OF THE PAPER BOOK, WE FIND THE TOTAL INVESTMENT OF RS.507.46 C RORES INCLUDES INVESTMENT IN DEBENTURES AND NSC THE INCOME OF W HICH IS NOT TAX FREE. THEREFORE, THE AO IS NOT JUSTIFIED IN INCLUDING T HE SAME IN THE CATEGORY OF INVESTMENT, THE INCOME OF WHICH IS TAX FREE. FROM PAGE 46 OF THE PAPER BOOK WE FIND THE TOTAL INVESTMENT IN SUBSIDIARY/ASSOCIATE COMPANIES, INVESTMENT IN MUTUAL FUNDS A ND THE INVESTMENT IN PARTNERSHIP FIRMS, THE INCOME OF WHICH IS TAX F REE IS RS.334,79,88,547/-. THE BALANCE SHEET OF THE ASSESSEE, A COPY OF WHICH IS PLACED AT PAGE 24 OF THE PAPER BOOK SHOWS THE SHARE CAPITAL AT RS.75,31,00,480/- AND FREE RESERVES AND SURPLUS AT RS.433,26,64,916/-. THUS, THE TOTAL AMOUNT OF SHARE CAPITAL AND FREE RESERVES OF RS.568.57 CRORES IS MUCH MORE THAN THE AMOU NT OF RS.334.80 CRORES INVESTED IN SHARES/MUTUAL FUNDS/PARTNER SHIP FIRMS, THE INCOME OF WHICH IS TAX FREE. UNDER THESE CIRCUMS TANCES WE HAVE TO SEE THE APPLICABILITY OF PROVISIONS OF SECTION 14A R.W.R.8D. 25. WE FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT WHEN NO DIVIDEND IS RECEIVED ON INVESTMEN T IN SHARES WORTH RS.117,85,71,206/- IN SUBSIDIARY/ASSOCIATE COMPANIES N O DISALLOWANCE U/S.14A IS CALLED FOR. WE FIND THE PUNE BENCH O F THE TRIBUNAL IN THE CASE OF GOYAL ISHWARCHAND KISHORILAL (SUPRA) HAS HELD THAT WHEN ASSESSEE HAS NOT RECEIVED ANY DIVIDEND OUT O F THE SHARES HELD AS INVESTMENT, THEN NO DISALLOWANCE U/S.14A CAN BE M ADE. 16 ITA NO.1656 & 1657/PN/2014 SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS.HOLSIM INDIA PVT. LTD. VIDE ITA NO. 486 AND 299/2014 AND VARIOUS OTHER DECISIONS THEREFORE, WE FIND MERIT IN THE A RGUMENT 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. 26. SO FAR AS INVESTMENT OF RS.160,28,12,406/ IN MUTUAL FUNDS IS CONCERNED WE FIND THE ASSESSEE BEFORE THE AO HAS MADE THE FOLLOWING SUBMISSION WHICH HAS BEEN REPRODUCED BY THE AO AT PAGE 4 AND 5 OF THE ASSESSMENT ORDER AND WHICH READS AS UNDER : 6. SECONDLY, THE ASSESSEE IS ENCLOSING HEREWITH THE CHAR T GIVING THE DETAILS OF THE TOTAL INVESTMENTS MADE IN VARIOUS SHARES/SECURITIES/MUTUAL FUNDS. NOW, IT MAY KINDLY BE N OTED THAT THE ASSESSEE COMPANY HAD MADE A PUBLIC ISSUE OF ITS SHARES IN F. Y.2007-08 AND HAD RECEIVE D RS.275.54 CRORES AS IPO FUNDS. THESE IPO FUNDS WERE TEMPORARILY INVESTED IN THE MUTUAL FUNDS. THE ASSESSEE IS ENCLOSING HEREWITH THE BANK ACCOUNT STATEMENT OF OUR ACCOUNT N O.105475297916 IN THE HSBC BANK WHEREIN ALL THE IPO FUNDS WERE DEPO SITED AND YOUR HONOUR WOULD NOTICE THAT OUT OF THESE FUNDS, THE ASSESSEE HAS INVESTED IN MUTUAL FUNDS. IN THIS RESPECT, THE ASSESSEE HAS ALSO ENCLOSE D HEREWITH THE RELEVANT LEDGER EXTRACT IN ORDER TO INDICATE TH AT THE IPO FUNDS WERE UTILIZED FOR INVESTING IN MUTUAL FUNDS. HENCE, THE A SSESSEE SUBMITS THAT THE ENTIRE INVESTMENTS IN THE MUTUAL FUNDS WERE OUT O F THE IPO FUNDS. IT IS ALSO TO BE NOTED THAT ALL THE EXPENSES INCURRED PERT AINING TO THE IPO WERE DISALLOWED BY THE ASSESSEE COMPANY AND NOT A SINGLE PENNY WAS CLAIMED AS ALLOWABLE BUSINESS EXPENDITURE. THE COMPUTA TION OF INCOME FOR A.Y.2008-09 IS ENCLOSED HEREWITH AND FROM WHICH I T IS CLEAR THAT THE EXPENDITURE INCURRED FOR THE IPO HAS BEEN DISALLOWED WHILE COMPUTING THE INCOME. 27. NOTHING HAS BEEN BROUGHT ON RECORD BY THE REVENUE THAT THE ABOVE SUBMISSION OF THE ASSESSEE IS FALSE OR UNTRUE. THE REFORE, WHEN THE ASSESSEE HAS MADE A CATEGORICAL STATEMENT BEFORE THE AO AS WELL AS THE CIT(A) THAT THE INVESTMENT IN THE MUTUAL FUNDS ARE OUT OF THE PROCEEDS OF THE IPO WHICH WERE KEPT IN A SEPARATE BANK ACCOUNT AND WERE UTILIZED FOR INVESTMENT IN MUTUAL FUNDS, THEREFORE WITHO UT CONTRADICTING THE ABOVE SUBMISSION OF THE ASSESSEE, THE REVENUE 17 ITA NO.1656 & 1657/PN/2014 AUTHORITIES ARE NOT JUSTIFIED IN INVOKING THE PROVISIONS OF SE CTION 14A ON ACCOUNT OF INVESTMENT OF RS.116.28 CRORES IN MUTUAL FUNDS. 28. AS REGARDS THE SUBMISSION OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT IF THE ASSESSEE HAD SUFFICIENT INTEREST 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 AFFAIRS AND THE REVENUE CANNOT DIRECT THE ASSESSEE TO DO ITS BUSINESS IN A PARTICULAR MANNER. THE REVENUE HAS TO SEE WHETHER MONEY BORROW ED HAS BEEN UTILIZED FOR THE PURPOSE OF BUSINESS OR NOT. WE FIND A SOME WHAT SIMILAR ISSUE HAD COME UP BEFORE THE HONBLE BOMBAY HIGH C OURT IN THE CASE OF BOMBAY SAMACHAR LTD. (SUPRA). IN THAT CASE , THE ASSESSEE HAD BORROWED MONEY PRIOR TO THE RELEVANT PRE VIOUS YEAR ON WHICH INTEREST HAD BEEN PAID AND CLAIMED THE SAME INTERES T EXPENDITURE IN THE PROFIT AND LOSS ACCOUNT. DURING THE CO URSE OF ASSESSMENT PROCEEDINGS THE AO NOTED THAT ASSESSEE HA D GIVEN INTEREST FREE FUNDS TO SISTER CONCERNS. HE, THEREFORE, AS KED THE ASSESSEE TO EXPLAIN AS TO WHY ASSESSEE SHOULD ADVANCE MONEY TO THE SISTER CONCERNS WHICH INTURN WOULD EARN INCOME FROM INTERE ST THERE ON WHILE NO INTEREST ACCRUED TO THE ASSESSEE ON THE LA RGE BALANCES WITH IT. HE THEREFORE DISALLOWED A PART OF THE INTEREST EXP ENDITURE. ACCORDING TO THE AO SINCE THE AMOUNT OF INTEREST WHICH T HE ASSESSEE WOULD HAVE GOT IF HE HAD CHARGED INTEREST ON THESE AMOU NTS, FAR EXCEEDED THE AMOUNT OF INTEREST PAID BY IT TO OUTSIDERS IN THIS YEAR, THEREFORE HE DISALLOWED THE ENTIRE AMOUNT OF INTEREST CLAIM ED BY THE ASSESSEE AS A DEDUCTION. THE AAC CONFIRMED THE ACTION O F THE AO. ON FURTHER APPEAL, THE TRIBUNAL HELD THAT THE ASSESSEE W AS 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 H ONBLE HIGH 18 ITA NO.1656 & 1657/PN/2014 COURT OBSERVED AS UNDER : AS WE HAVE ALREADY POINTED OUT, IT IS UNDISPUTED THAT THE AMOUNTS BORROWED FROM OUTSIDERS ON WHICH INTEREST HAS BEEN PAID HAVE BEEN USED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. IT APPEAR S TO HAVE BEEN THE VIEW OF THE INCOME TAX OFFICER THAT IF THE ASSESSEE HAD COLLECTED THE OUTSTANDINGS WHICH WERE DUE TO IT FROM OTHERS, IT WOUL D HAVE BEEN ABLE TO REDUCE ITS INDEBTEDNESS AND THUS SAVE A PART OF THE INTE REST WHICH IT HAD TO PAY ON ITS OWN BORROWINGS. THE ASSESSEE, THEREFORE, W AS NOT JUSTIFIED IN ALLOWING ITS OUTSTANDINGS TO REMAIN WITHOUT CHARGING A NY INTEREST THEREON WHILE IT WAS PAYING INTEREST ON THE AMOUNTS BO RROWED BY IT. TO THE EXTENT, THEREFORE, TO WHICH IT WOULD HAVE BEEN IN A POSITION TO COLLECT INTEREST ON THE OUTSTANDINGS DUE TO IT FROM OTHERS, IT COULD NOT BE PERMITTED TO CLAIM INTEREST PAID BY IT TO OUTSIDERS. IN OUR OPINION THE VIEW TAKEN BY THE INCOME TAX OFFICER IS CLEARLY UNSUSTAINAB LE. AS HAS BEEN POINTED OUT 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 DEDUCTION I N RESPECT OF THE INTEREST UNDER SECTION 10(2)(III) ARE, FIRSTLY, THAT M ONEY MUST HAVE BEEN BORROWED BY THE ASSESSEE ; SECONDLY, IT MUST HAVE BEEN BO RROWED FOR THE PURPOSE OF BUSINESS AND, THIRDLY, THE ASSESSEE MUST HAVE PAI D INTEREST ON THE SAID AMOUNT AND CLAIMED IT AS A DEDUCTION. IT IS N OT THE REQUIREMENT OF THE PROVISION THAT THE ASSESSEE MUST FURTHER SHOW THAT TH E BORROWING OF THE CAPITAL WAS NECESSARY FOR THE BUSINESS SO THAT IF AT THE TIME OF BORROWING THE ASSESSEE HAD SUFFICIENT AMOUNT OF ITS OWN, THE DEDUCTION COULD NOT BE ALLOWED. SIMILARLY, THE MADRAS HIGH COU RT IN AMNA BAI HAJEE ISSA V. COMMISSIONER OF INCOME TAX HAS HELD THAT IN DECI DING WHETHER A CLAIM FOR INTEREST ON BORROWING CAN BE ALLOWED THE F ACT THAT THE ASSESSEE HAD AMPLE RESOURCES AT ITS DISPOSAL AND NEED NOT HAVE BO RROWED, IS NOT A RELEVANT MATTER FOR CONSIDERATION. THE MATTER TO BE DECIDED IS WHETHER THE AMOUNT OF INTEREST WAS PAID IN FACT IN RESPECT OF THE CAPITAL BORROWED FOR BUSINESS. WE THEREFORE DO NOT FIND ANY MERIT IN THE ARGUMENTS OF T HE LD. DEPARTMENTAL REPRESENTATIVE THAT IF THE ASSESSEE HAD SU FFICIENT INTEREST FREE FUNDS, THERE WAS NO NEED TO BORROW FROM FIN ANCIAL INSTITUTIONS. 29. AS REGARDS THE ARGUMENT OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT ASSESSEE WAS NOT ABLE TO DEMONSTR ATE THAT NO BORROWED FUNDS HAVE BEEN UTILIZED BY THE ASSESSEE TOWAR DS THE INVESTMENT IN SHARES/MUTUAL FUNDS/PARTNERSHIP FIRMS, THE I NCOME OF WHICH IS TAX FREE IS CONCERNED, WE FIND THE ASSESSEE BEFORE THE AO HAD DEMONSTRATED THAT NO BORROWED FUNDS HAVE BEEN UTILIZED FOR INVESTMENT IN TAX FREE INVESTMENTS. ONCE THE ASSESSEE S UBMITS THAT 19 ITA NO.1656 & 1657/PN/2014 THERE IS NO DIVERSION OF INTEREST BEARING FUNDS FOR TAX FREE INVESTMENTS, THE ONUS SHIFTS TO THE AO. WE FIND IN THE INS TANT CASE THE AO HAS NOT CONCLUSIVELY PROVED THAT BORROWED FUNDS HAVE BEEN DIVERTED FOR INVESTMENT IN TAX FREE FUNDS. WE FURTHER FIND INVESTMENTS, THE INCOME OF WHICH IS TAXABLE LIKE DEBENTURES, NSC ETC. HAVE BEEN CONSIDERED BY THE AO AS TAX FREE INVESTMENT S. FURTHER, FOR THE PURPOSE OF COMPUTING THE SURPLUS AMOUNT AVAILABLE WITH THE ASSESSEE THE AO HAS REDUCED THE NET FIXED ASSETS AN D NET CURRENT ASSETS FROM SUCH FREE RESERVES AND OWN CAPITAL WHICH IN O UR OPINION IS NOT JUSTIFIED IN THE LIGHT OF VARIOUS DECISIONS INCLUDING THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIE S AND POWER LTD. (SUPRA) AND HDFC BANK LTD. (SUPRA). 30. WE FIND THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HDFC BANK LTD. (SUPRA) AT PARA 15 AND 16 OF THE ORDER HAS 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 PRESUMPT ION WHICH HAS BEEN LAID DOWN IN RELIANCE UTILITIES AND POWER LTD. (SUPR A) WITH REGARD TO INVESTMENT IN TAX FREE SECURITIES COMING OUT OF ASSESSEES OWN FUNDS IN CASE THE SAME ARE IN EXCESS OF THE INVESTMENTS MADE IN TH E SECURITIES (NOTWITHSTANDING THE FACT THAT THE ASSESSEE CONCERNED M AY ALSO HAVE TAKEN SOME FUNDS ON INTEREST) APPLIES, WHEN APPLYING S ECTION 14A OF THE ACT. THUS, THE DECISION OF THIS COURT IN HDFC BANK LT D.(SUPRA) FOR THE 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 UTILI TIES AND POWER LTD. (SUPRA) WHILE CONSIDERING SECTION 36(1)(III) OF THE ACT WOULD APPLY WHILE CONSIDERING THE APPLICATION OF SECTION 14A OF THE AC T. THE AFORESAID DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA) ON T HE ABOVE ISSUE HAS ALSO BEEN ACCEPTED BY THE REVENUE INASMUCH AS EVEN THO UGH THEY HAVE FILED AN APPEAL TO THE SUPREME COURT AGAINST THAT OR DER ON THE OTHER ISSUE THEREIN, VIZ., BROKEN PERIOD INTEREST, NO APPEAL HAS BEEN PREFERRED BY THE REVENUE ON THE ISSUE OF INVOKING THE PRINCIPLES LAID D OWN IN RELIANCE UTILITIES AND POWER LTD. (SUPRA) IN ITS APPLICATION TO SECTION 14A OF THE ACT. THEREFORE, THE ISSUE WHICH AROSE FOR CONSIDERATIO N BEFORE 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 IMPUGNED ORDER. THUS, I MPUGNED ORDER HAS PROCEEDED ON A FUNDAMENTALLY ERRONEOUS BASIS AS THE RA TIO DECINDI OF THE ORDER IN GODREJ AND BOYCE MANUFACTURING CO. LTD. (S UPRA) HAD NOTHING TO DO WITH THE REST OF PRESUMPTION CANVASSED BY THE PETITI ONER BEFORE THE 20 ITA NO.1656 & 1657/PN/2014 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 PET ITIONER WAS NOT ABLE TO ESTABLISH BEFORE THE ASSESSING OFFICER AND THE CIT(A) TH AT THE AMOUNTS INVESTED IN THE INTEREST FREE SECURITIES CAME OUT OF IN TEREST FREE FUNDS AVAILABLE WITH THE PETITIONER. IN THAT VIEW OF THE MATTER, IT IS SUBMITTED BY HIM THAT THE ORDER OF THIS COURT IN HDFC BANK LTD.(S UPRA) WOULD NOT APPLY TO THE FACTS OF THE PRESENT CASE. WE ARE UNABLE TO UNDERSTAND THE ABOVE SUBMISSION. THE ASSESSING OFFICER PASSED THE ASSESSMENT O RDER 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. O N BOTH THE DATES, WHEN THE ORDERS WERE PASSED BY THE ASSESSIN G OFFICER AND CIT(A), THE AUTHORITIES DID NOT HAVE THE BENEFIT OF THE ORDER OF THIS COURT IN HDFC 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 SECURITIES HAV E COME OUT OF INTEREST FREE FUNDS AVAILABLE WITH IT. THIS IS BECAUSE ONCE THE ASSESSEE IS POSSESSED OF INTEREST FREE FUNDS SUFFICIENT TO MAKE THE IN VESTMENT IN TAX FREE SECURITIES, IT IS PRESUMED THAT IT HAS BEEN PAID F OR OUT OF THE INTEREST FREE FUNDS. CONSEQUENTLY, WE DO NOT FIND ANY MERIT IN THE ABOVE SUBMISSION MADE AT THE HEARING ON BEHALF OF THE REVENU E. 31. SINCE THE ASSESSEE IN THE INSTANT CASE HAS CONCLUSIVE LY PROVED THAT IT S OWN CAPITAL AND FREE RESERVES IS FAR MORE THAN THE INVESTMENT IN SHARES/MUTUAL FUNDS/PARTNERSHIP FIRMS, THE INCOME OF WHICH 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 A CCOUNT OF DISALLOWANCE OF INTEREST. 32. SO FAR AS THE DISALLOWANCE OF INDIRECT EXPENDITURE FOR EA RNING TAX FREE DIVIDEND INCOME IS CONCERNED WE FIND THERE IS NO O BJECTIVE SATISFACTION RECORDED BY THE AO WHICH IS ONE OF THE MANDA TES OF SECTION 14A(2) OF THE I.T. ACT. NEITHER THERE IS ANY DISCU SSION BY THE AO NOR ANY SPECIFIC QUERY RAISED BY THE AO TO THE ASSES SEE ON THIS ISSUE. AT THE SAME TIME, THERE IS NO SUO MOTO DISALLOWANCE MADE BY THE ASSESSEE ON ACCOUNT OF THE EXPENDITURE ATTRIBUTABLE TO EARNING OF 21 ITA NO.1656 & 1657/PN/2014 THE EXEMPT INCOME OTHER THAN THE EXPENDITURE ON ACCOU NT OF IPO. ALTHOUGH THE ASSESSEE HAS NEITHER DISALLOWED ANY EXPEND ITURE ON THIS ACCOUNT IN THE COMPUTATION STATEMENT PRESUMABLY ON TH E GROUND THAT NO EXPENDITURE HAS BEEN INCURRED AND ALTHOUGH THE AO HAS ALSO NOT SPECIFICALLY DISCUSSED THIS ISSUE IN THE BODY OF THE ASS ESSMENT ORDER, HOWEVER, IT CANNOT BE SAID THAT NO EXPENDITURE HA S BEEN INCURRED BY THE ASSESSEE FOR EARNING THE TAX FREE INCOME. CONSIDERIN G THE TOTALITY OF THE FACTS OF THE CASE, WE ARE OF THE CONS IDERED OPINION THAT DISALLOWANCE OF RS.10 LAKHS ON ADHOC BASIS ON ACCOUNT OF EXPENDITURE ATTRIBUTABLE FOR EARNING TAX FREE INCOME WILL MEE T THE ENDS OF JUSTICE. WE HOLD AND DIRECT ACCORDINGLY. THE GRO UNDS RAISED BY THE ASSESSEE ARE ACCORDINGLY PARTLY ALLOWED. ITA NO.1657/PN/2014 (A.Y.2009-10) : 33. GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER : THE FOLLOWING GROUNDS ARE TAKEN WITHOUT PREJUDICE T O EACH OTHER - ON FACTS AND IN LAW, 1] THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISAL LOWANCE U/S 14A R.W.R. 8D OF RS. 2,62,33,383/- ON THE GROUND THAT THE ASSESSEE HAD INCURRED THE ABOVE EXPENDITURE FOR EARNING EXEMPT I NCOME AND HENCE, THE SAME WAS NOT ALLOWABLE AS A DEDUCTION WHILE COMPUT ING THE BUSINESS INCOME FOR THIS YEAR. 2] THE LEARNED CIT(A) ERRED IN HOLDING THAT THE LE ARNED A.O. HAD MADE THE DISALLOWANCE U/S 14A R.W.R. 8D AFTER RECORDING HIS SATISFACTION THAT THE CLAIM OF THE ASSESSEE WAS NOT CORRECT AND THERE FORE, THE DISALLOWANCE WAS JUSTIFIED. 2.1] THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE SATISFACTION RECORDED BY THE LEARNED A.O. WAS BASED ON WRONG PRESUM PTIONS AND SINCE THE A.O. HAD NOT GIVEN ANY COGENT REASONS AS TO H OW THE CLAIM OF THE ASSESSEE WAS INCORRECT, THE DISALLOWANCE MADE U/S 14A WAS NOT JUSTIFIED AT ALL. 3] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSESSE E SUBMITS THAT THE INVESTMENTS IN SHARES OF VARIOUS GROUP COMPANIES O R CAPITAL CONTRIBUTION IN PARTNERSHIP FIRMS WERE MADE ON ACCOUN T OF BUSINESS EXPEDIENCY AND NOT WITH AN INTENTION TO EARN EXEMPT INCOME AND HENCE, THERE WAS NO REASON TO MAKE ANY DISALLOWANCE U/S 14A R.W.R. 8D IN RELATION TO SUCH INVESTMENTS. 22 ITA NO.1656 & 1657/PN/2014 4] THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ASSE SSEE HAD UTILIZED INTEREST BEARING BORROWED FUNDS FOR MAKING TAX FREE I NVESTMENTS AND THEREBY CONFIRMING THE DISALLOWANCE OF RS.1,62,11,508 /- MADE ON ACCOUNT OF PROPORTIONATE INTEREST EXPENDITURE COMPUTED AS PER THE PROVISIONS OF RULE 8D(2)(II) OF THE INCOME TAX RULES, 1962. 4.1] THE LEARNED CIT(A) ERRED IN HOLDING THAT - A. THERE WAS A NEXUS BETWEEN THE INTEREST BEARING FUND S RAISED AND MAKING OF TAX FREE INVESTMENTS AND HENCE, THE PROPORT IONATE INTEREST ATTRIBUTABLE TO TAX FREE INVESTMENTS WAS RIGHTLY DISALL OWED BY THE LEARNED A.O. BY APPLYING THE PROVISIONS OF SECTION 14A R.W.R. 8D(2)(II). B. THE ASSESSEE HAD NOT FURNISHED ANY MATERIAL TO ESTABLI SH THAT THE INTEREST BEARING FUNDS WERE NOT UTILISED FOR MAKING TA X FREE INVESTMENTS AND THEREFORE, THE DISALLOWANCE OF INTEREST U/S 14A R. W.R. 8D(2)(II) WAS JUSTIFIED. 4.2] THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE OWNED FUNDS AVAILABLE WITH THE ASSESSEE WERE FAR MORE THAN THE AMOU NT OF TAX FREE INVESTMENTS AND SINCE THERE WAS NO NEXUS BETWEEN THE IN TEREST BEARING LOANS AND MAKING OF TAX FREE INVESTMENTS, THERE WAS NO REASON TO HOLD THAT THE ASSESSEE HAD UTILIZED BORROWED FUNDS FOR MAKING TAX FREE INVESTMENTS AND THUS, THE DISALLOWANCE OF INTEREST TO TH E EXTENT OF RS.1,62,11,508/- WAS NOT JUSTIFIED. 4.3] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE AS SESSEE SUBMITS THAT WHOLE OF THE INVESTMENTS IN MUTUAL FUNDS WERE SOURCED OUT OF OWNED FUNDS RAISED THROUGH IPO OF SHARES OF THE ASSESSEE COMPANY AND THIS FACT WAS ALSO DEMONSTRATED BY THE ASSESSEE WITH PROPER EVIDENCE S AND HENCE, THE INVESTMENTS MADE IN MUTUAL FUNDS SHOULD HAVE BEEN E XCLUDED FROM THE AMOUNT OF TAX FREE INVESTMENTS WHILE COMPUTING TH E DISALLOWANCE U/S 14A R.W.R. 8D(2)(II). 4.4] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE AS SESSEE SUBMITS THAT SUBSTANTIAL INVESTMENTS IN GROUP COMPANIES WERE MADE OUT OF OWNED FUNDS OF THE ASSESSEE AND THIS FACT WAS DULY DEMONSTRATED B Y THE ASSESSEE AND THEREFORE, SUCH INVESTMENTS MADE OUT OF OWNED FUND S SHOULD HAVE BEEN EXCLUDED FROM THE AMOUNT OF TAX FREE INVESTMENT S WHILE COMPUTING THE DISALLOWANCE U/S 14A R.W.R. 8D(2)(II). 5] THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISAL LOWANCE OF RS. 1,01,21,875/- MADE BY THE LEARNED A.O. U/S 14A R.W.R . 8D(2)(III) ON THE GROUND THAT THE ASSESSEE HAD INCURRED INDIRECT EXPENDIT URE IN RELATION TO EARNING EXEMPT INCOME WITHOUT APPRECIATING THAT THE LEARNED A.O. HAS NOT RECORDED ANY OBJECTIVE SATISFACTION AS TO HOW THE CLAI M OF THE ASSESSEE IS NOT CORRECT AND HENCE, THE DISALLOWANCE MADE U/S 14A R.W.R. 8D(2)(III) IS NOT JUSTIFIED AT ALL. 5.1] THE LEARNED CIT(A) FAILED TO APPRECIATE THAT T HE ASSESSEE HAD NOT CLAIMED INDIRECT EXPENDITURE INCURRED IN RELATION T O EARNING THE EXEMPT INCOME IN THE FORM OF DIVIDEND FROM MUTUAL FUNDS AND SHARE OF PROFIT IN PARTNERSHIP FIRMS AND HENCE, THE DISALLOWANCE OF RS.1,0 1,21,875/- WAS NOT JUSTIFIED ON THE FACTS OF THE CASE. 23 ITA NO.1656 & 1657/PN/2014 5.2] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSE SSEE SUBMITS THAT THE WHOLE OF THE INVESTMENTS IN MUTUAL FUNDS WERE SOURC ED OUT OF FUNDS RAISED THROUGH IPO OF SHARES OF THE ASSESSEE COMPANY AND NO EXPENSES IN RESPECT OF THE IPO ISSUE HAVE BEEN CLAIMED BY THE ASSESSEE AND THEREFORE, THE INVESTMENTS IN MUTUAL FUNDS SHOULD HAVE BEEN EXCLUD ED FROM THE AMOUNT OF TAX FREE INVESTMENTS WHILE COMPUTING THE DI SALLOWANCE U/S 14A R.W.R. 8D(2)(III). 6] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSESSEE SUBMITS THAT THE DISALLOWANCE U/S 14A IS ATTRACTED ONLY IN CASES WHE RE THE ASSESSEE HAS EARNED EXEMPT INCOME AND HENCE, IF AT ALL, ANY D ISALLOWANCE U/S 14A R.W.R . 8D IS TO BE MADE IN THE CASE OF THE ASSESSEE, THE INVESTM ENTS ON WHICH NO EXEMPT INCOME HAS BEEN EARNED SHOULD HAVE BE EN EXCLUDED WHILE COMPUTING THE DISALLOWANCE U/S 14A R.W.R . 8D. 7] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSESSEE SUBMITS THAT THE INVESTMENT MADE IN PARTNERSHIP FIRMS IS NOT A TAX FREE INVESTMENT SINCE THE INCOME EARNED BY THE FIRM IS SUBJECTED TO IN COME TAX AND HENCE, THE INVESTMENT IN PARTNERSHIP FIRM MAY BE EXCLUDED FR OM THE AMOUNT OF 'TAX FREE INVESTMENTS' WHILE COMPUTING THE DISALLOWANC E U/S. 14A AS PER RULE 8D(2)(II) AND RULE 8D(2)(III) OF THE INCOME TA X RULES, 1962. 8] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSESSEE SUBMITS THAT THE DISALLOWANCE MADE IS VERY HIGH AND MAY BE REDUCED SUBSTANTIALLY. 9] THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND O R DELETE ANY OF THE ABOVE GROUNDS OF APPEAL. 34. AFTER HEARING BOTH THE SIDES WE FIND THE GROUNDS RAISE D BY THE ASSESSEE ARE IDENTICAL TO THE GROUNDS IN ITA NO.1656/PN/ 2014. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUNDS RAISED B Y THE ASSESSEE HAVE BEEN PARTLY ALLOWED. FOLLOWING THE SAME REASONINGS WE DIRECT THE AO TO DISALLOW EXPENDITURE OF RS.10,00,000/- ON A DHOC BASIS BEING ATTRIBUTABLE FOR EARNING THE EXEMPT INCOME. TH E GROUNDS RAISED BY THE ASSESSEE ARE PARTLY ALLOWED. 35. IN THE RESULT, BOTH THE APPEALS FILED BY THE ASSESSEE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29-04-2016. SD/- SD/- ( VIKAS AWASTHY ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE ; DATED : 29 TH APRIL, 2016. 24 ITA NO.1656 & 1657/PN/2014 ) *#,! -! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. THE CIT(A) - I I , PUNE 4. 5. 6. THE CIT-II, PUNE $ ''(, (, / DR, ITAT, B PUNE; - / GUARD FILE. / BY ORDER , // $ ' //TRUE COPY // // TRUE COPY // /0 ' ( / SR. PRIVATE SECRETARY (, / ITAT, PUNE