The DCIT, Circle-1(1), Baroda V. Gujarat Urja Vikas Nigam Ltd., Baroda

ITA 1820/AHD/2010

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 67702 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 04-09-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 28-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: T P KRISHNA KUMAR
• Assessee Lawyers: J P SHAH
• Keywords: Business income; Earning of tax free income; Deemed to accrue or arise in india; Proportionate interest; Retrospective amendment; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, AHMEDABAD BEFORE SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER AND SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER ITA NO.1820/AHD/2010 A.Y. 2006-07 THE DCIT CIRCLE-1(1), BARODA VS GUJARAT URJA VIKAS LIMITED, SARDAR PATEL VIDYUT BHAVAN, RACE COURSE ROAD, BARODA. PAN: AAACG 2861L (APPELLANT) (RESPONDENT) REVENUE BY : SHRI T.P. KRISHNA KUMAR, SR.D.R., ASSESSEE(S) BY : SHRI J.P. SHAH, A.R. / DATE OF HEARING : 04/09/2013 / DATE OF PRONOUNCEMENT: 30/09/2013 / O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THIS IS AN APPEAL FILED BY THE REVENUE ARISING FROM THE ORDER OF LEARNED CIT(A)-I, BARODA, DATED 24.02.2010. 2. AT THE OUTSET, OUR ATTENTION HAS BEEN DRAWN ON A N ADDITIONAL GROUND OF APPEAL RAISED BY THE REVENUE DEPARTMENT READS AS UNDER: 1(A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.187.97 CRORES U/S 14A OF THE ACT ON ACCOUNT OF INTEREST ATTRIBUTABLE TO INVESTMENT I N SHARES WITHOUT APPRECIATING THE FACT THAT IN VIEW OF SECTION 106 O F THE INDIAN EVIDENCE ACT, IT WAS UP TO THE ASSESSEE COMPANY TO ADDUCE EVIDENCE T HAT ALL THE BORROWINGS WERE USED FOR THE PURPOSES OF BUSINESS AND ITS IS A SSESSEES OWN SURPLUS FUND THAT WERE INVESTED IN THE SHARES AND DEPOSITS EARNI NG EXEMPTED INCOME, AND, EVEN IN CASE OF MIXED FUNDS, THE DISALLOWANCE OF IN TEREST COULD BE MADE. 1(B). AS AN ALTERNATE PLEA, THE LD. CIT(A) ERRED IN NOT UPHOLDING THE ADDITION U/S. 14A ON ACCOUNT OF INTEREST ATTRIBUTABLE TO INV ESTMENT IN SHARES TO THE EXTENT IN VIEW OF PROVISIONS OF SECTION 14A READ WI TH RULE 8D. ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 2 - 3. LEARNED DR HAS PLEADED THAT AN ADDITION OF RS.18 7.97 CRORES WHICH WAS MADE U/S 14A WAS DELETED BY LEARNED CIT(A ), HOWEVER, IT WAS NOT ADJUDICATED AS PER THE GROUNDS OF APPEAL. LEARN ED DR HAS ALSO ARGUED THAT THE ASSESSEE WAS REQUIRED TO ADDUCE EVIDENCE T HAT ALL THE BORROWINGS WERE USED FOR THE PURPOSE OF THE BUSINESS AND THE A SSESSEES OWN SURPLUS FUNDS WERE INVESTED IN THE SHARES. LEARNED DR HAS A LSO INFORMED THAT IN A.Y. 2007-08, THE ADDITION OF SIMILAR NATURE WAS UP HELD BY LEARNED CIT(A). HE HAS THUS PLEADED THAT THE ISSUE BEING LE GAL IN NATURE WHICH HAS EMERGED FROM THE FACTS ALREADY ON RECORD, THERE FORE, THE ADDITIONAL GROUND DESERVES TO BE ADMITTED FOR ADJUDICATION. 4. AFTER HEARING BOTH THE SIDES, THE ADDITIONAL GRO UND OF THE REVENUE DEPARTMENT IS HEREBY ADMITTED FOR ADJUDICATION. AT THE OUTSET, IT IS WORTH TO MENTION THAT THE IMPUGNED ADDITION OF RS.18796.8 2 LACS WAS MADE BY THE AO WITHOUT HAVING ANY DISCUSSION IN RESPECT OF THE APPLICABILITY OF SECTION 14A OF THE IT ACT. LIKEWISE, LEARNED CIT(A) HAS ALSO NOT DISCUSSED THE APPLICABILITY OF THE PROVISIONS OF SE CTION 14A OF IT ACT, HOWEVER, AFTER CONSIDERING THE MERITS OF THE CASE, DELETED THE ADDITION. WITH THIS CLARIFICATION, WE HAVE EXAMINED THE FACTS AND THE ISSUE AS EMERGED FROM THE CORRESPONDING ASSESSMENT ORDER PAS SED U/S. 143(3), DATED 26.12.2008. IT WAS NOTED BY THE AO THAT THE A SSESSEE HAD CLAIMED A HUGE AMOUNT OF INTEREST EXPENDITURE OF RS.19360.59 LACS, AS PER THE FOLLOWING BIFURCATION. (RS. IN LACS) PARTICULARS AMOUNT INTEREST ON TERM LOANS 8981.35 WORKING CAPITAL 8184.50 OTHERS 677.63 BANK CHARGES & GUARNATEE FEES 591.65 19435.13 LESS : INTEREST CAPITALISED 74.54 ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 3 - 19360.59 4.1 AT THE SAME TIME, IT WAS ALSO FOUND BY THE AO T HAT THE ASSESSEE HAD MADE THE INVESTMENT OF RS.5,47,709.74 LACS ON W HICH DIVIDEND EARNED WAS AT RS.508.18 LACS. THE AOS OBJECTION WA S THAT ON ONE HAND THE ASSESSEE HAS DIVERTED THE HUGE FUNDS TOWARDS SU CH INVESTMENT HAVING EXEMPTED INCOME AND ON THE OTHER HAND BORROWED HUGE FUNDS OF RS.3,46,272.51 LACS ON WHICH CLAIMED INTEREST OF RS .19360.59 LACS. THEREFORE, THE AO WAS OF THE VIEW THAT THE ASSESSEE HAD DIVERTED THE BORROWED FUNDS FOR EARNING EXEMPTED INCOME. THE ASS ESSEES CONTENTION WAS THAT THE INVESTMENT DURING THE YEAR WAS ONLY RS .102.32 LACS AND REST OF THE INVESTMENT WAS MADE IN THE EARLIER YEARS. AC CORDING TO THE AO, IF THE ASSESSEE HAD NOT MADE SUCH INVESTMENT EITHER IN THE YEAR UNDER CONSIDERATION OR IN EARLIER YEARS THEN THE ASSESSEE WOULD NOT HAVE BEEN REQUIRED TO BORROW INTEREST BEARING LOANS. THE AO H AS PLACED RELIANCE UPON THE CASE OF H.R SUGAR FACTORY, 187 ITR 366 (ALD) FOR THE LEGAL PROPOSITION THAT THE ASSESSEE COULD HAVE OTHERWISE AVOIDED ITS LIABILITY OF INTEREST BY NOT GIVING INTEREST FREE FUNDS TO ITS G ROUP CONCERNS. THE ADDITION IN THE QUESTION WAS THUS MADE BY THE AO IN THE FOLLOWING CONCLUSION. IN VIEW OF THE ABOVE DISCUSSION AND PROVISION OF LA W, THE INTEREST ATTRIBUTABLE TO THE INVESTMENT IS NOT ALLOWABLE EXPENDITURE. THE ASSESSEE WAS REQUIRED TO GIVE THE RATES OF INTEREST PAID TO VARIOUS SOURCES. THE ASSESSEE VIDE ITS REPLY DID NOT FURNISH THE RATES OF INTEREST PAID. IT SIMP LY SUBMITTED THAT LOANS FROM VARIOUS BANKS WITH VARYING INTEREST RATES WERE OBTA INED. DURING THE YEAR UNDER CONSIDERATION, THE MARKET RATE OF INTEREST WA S 12%. THEREFORE, INTEREST AT THE RATE OF 12% WORKS OUT TO RS.65725.17 LACS ON INVESTMENTS OF RS.547709.74 LACS. HOWEVER, THE ASSESSEE HAS CLAIME D INTEREST EXPENDITURE OF RS.19360.59 LACS AND HAS SHOWN INTEREST INCOME OF R S.55.59 LACS AND DIVIDEND INCOME OF RS.508.18 LACS. HENCE, AGAINST T HE INTEREST EXPENDITURE OF RS.19360.59 LACS ASSESSEE HAS GROWN INTEREST AND DI VIDEND INCOME OF RS.563.77 LACS. THUS, NET DISALLOWANCE IS MADE OF R S.18796.82 LACS. ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 4 - 5. BEING AGGRIEVED THE MATTER WAS CARRIED BEFORE TH E FIRST APPELLATE AUTHORITY WHO HAS DECIDED THE ISSUE IN ASSESSEES F AVOUR IN THE FOLLOWING MANNER: THUS, THE ONLY TEST TO BE APPLIED IS THAT OF COMM ERCIAL EXPEDIENCY. IN THE INSTANT CASE, IT IS SEEN THAT NO INVESTMENT WAS MAD E BY THE ASSESSEE COMPANY BY USING BORROWED FUNDS. THE ENTIRE INVESTMENT, EXC EPT MINOR INVESTMENT OF RS.11.25 LACS WAS INHERITED IN THE DEMERGER EXERCIS E. THE INVESTMENT IN SHARES WAS DUE TO THE RESTRUCTURING CARRIED OUT AT THE BEHEST OF GOG. THE INVESTMENTS WERE IN THE FORM OF SHARES OF SUBSIDIAR Y COMPANIES AS PART OF THE FINANCIAL RESTRUCTURING PLAN APPROVED BY THE GOVERN MENT OF GUJARAT WHICH WAS INTEGRAL TO THE DEMERGER. THIS WAS CLEARLY COMM ERCIALLY EXPEDIENT FOR THE APPELLANT COMPANY. THE BUSINESS ITSELF WAS VIABLE O NLY UNDER THE PLAN OF RESTRUCTURING, WHICH REQUIRED THE COMPANY TO HAVE C ROSS-HOLDINGS IN THE UNBUNDLED COMPANIES OF GEB. IN FACT, THE APPELLANT BECAME THE HOLDING COMPANY OF THE GENERATING AND TRANSMISSION COMPANIE S. LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE, I AM OF THE OPINION THAT THERE WAS NO DIVERSION OF BORROWED FUNDS FOR NON-BUSINESS PURPOSES. ACCORD INGLY, THE ADDITION OF RS.18796.82 LACS IS DIRECTED TO BE DELETED. 6. WITH THIS FACTUAL BACKGROUND, WE HAVE HEARD BOTH THE SIDES. LEARNED DR HAS PRIMARILY PLACED RELIANCE ON A DECIS ION OF RESPECTED SPECIAL BENCH OF ITAT MUMBAI IN THE CASE OF ITO V/S. DAGA CAPITAL MANAGEMENT PVT. LTD., 117 ITD 169 (MUM) (SB) . LEARNED DR HAS ALSO PLEADED THAT IN ONE OF THE ASSESSMENT YEAR, I. E., IN A.Y. 2007-08 LEARNED CIT(A) HAD SUSTAINED THE SAME NATURE OF ADD ITION. FROM THE FACTS OF THE CASE, WE HAVE NOTED THAT THERE WAS RE-STRUCT URING ACCORDING TO WHICH ERSTWHILE GEB WAS DEMERGED INTO SEVEN DIFFERE NT COMPANIES. POST RE-STRUCTURING; THE ASSESSMENT YEAR UNDER CONSIDERA TION IS THE FIRST YEAR OF OPERATION OF THE ASSESSEE COMPANY. ON ONE HAND, THO SE WERE THE FACTS WHICH WERE RELIED UPON BY THE LEARNED CIT(A). HOWEV ER, ON THE OTHER HAND, THE AO HAS REPRODUCED SOME OF THE REPLIES OF THE ASSESSEE THROUGH WHICH IT WAS CLAIMED THAT THE SAID INVESTMENT WAS N OT MADE BY THE ASSESSEE COMPANY OUT OF THE BORROWED FUNDS BUT FROM THE CONSUMERS CONTRIBUTION AND SUBSIDIARIES. THERE WAS A REFERENC E OF THE ANNUAL ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 5 - ACCOUNTS OF THE YEAR 2005-06. THE ASSESSEE HAS ALSO INFORMED THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY H AD INVESTED ONLY A SUM OF RS.11.25 LACS. REST OF THE INVESTMENTS WERE THE SHARE CAPITAL OF THE SUBSIDIARY COMPANIES AS PER THE TERMS OF THE FI NANCIAL RESTRUCTURING PLAN APPROVED BY THE GOVERNMENT OF GUJARAT. WE HAVE NOTED THAT THE LEARNED CIT(A) HAS GRANTED RELIEF ONLY ON THE GROUN D THAT THE ASSESSEE COMPANY HAD BECOME THE HOLDING COMPANY AND THE INVE STMENTS WERE IN THE FORM OF SHARES OF SUBSIDIARY COMPANIES WHICH WA S AN INTEGRAL PART OF THE DEMERGER ARRANGEMENT. THEREFORE, IT WAS NOTHING BUT COMMERCIAL DECISION. 6.2 ACCORDING TO US, THE ISSUE HAS BEEN MIXED UP BY THE REVENUE DEPARTMENT. THE FIRST STEP SHOULD BE TO EXAMINE THE SCHEME OF DEMERGER AND THEREAFTER THE ISSUE COULD HAVE BEEN STREAMLINE D. AS PER THE DEFINITION OF DEMERGER PRESCRIBED U/S.2(19AA) MEA NS; THE TRANSFER PURSUANT TO A SCHEME OF ARRANGEMENT BY A DEMERGED C OMPANY OF ITS ONE OR MORE UNDERTAKINGS TO ANY RESULTING COMPANY IN SU CH A MANNER THAT ALL THE PROPERTY OF THE UNDERTAKING/UNIT BEING TRANSFER RED BY THE DEMERGED COMPANY IMMEDIATELY BEFORE THE DEMERGER, WHICH BECO MES THE PROPERTY OF THE RESULTING COMPANY BY VIRTUE OF THE DEMERGER. THEREFORE, IT WAS NECESSARY FOR THE AO TO EXAMINE THE BALANCE SHEET O F THE DEMERGED COMPANY AND THE POSITION OF THE ACCOUNTS OF THE UND ERTAKING WHICH IS DEMERGED WITH THE RESULTING COMPANY. THE AO HAS TO EXAMINE THE LIABILITIES RELATED TO THE SAID UNDERTAKING WHETHER BEING TRANSFERRED UNDER THE SCHEME OF ARRANGEMENT WHICH WERE IN EXISTENCE I MMEDIATELY BEFORE THE DEMERGER. THE AO HAS TO EXAMINE THE VALUE OF TH E PROPERTY IN THE BOOKS OF ACCOUNTS IMMEDIATELY BEFORE THE DEMERGER W HICH WAS ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 6 - TRANSFERRED. THE AO HAS ALSO TO EXAMINE THE FINANCI AL POSITION OF THE RESULTING COMPANY, AS DEFINED U/S.2(41A) OF IT AC T. IN GENERAL, AN UNDERTAKING OF THE DEMERGED COMPANY IS TRANSFERRED IN A DEMERGER SCHEME AND AS A RESULT A RESULTING COMPANY COMES IN TO EXISTENCE. THE RESULTING COMPANY IN CONSIDERATION OF SUCH TRANSFER OF AN UNDERTAKING OF THE DEMERGERD COMPANY ISSUES SHARES TO THE SHARE HO LDERS OF THE DEMERGED COMPANY. THEREFORE, THE RESPONSIBILITY OF THE RESULTING COMPANY WAS ALSO REQUIRED TO BE ASCERTAINED BY THE AO. THIS IS THE FIRST ASPECT, WHICH WAS NOT EXAMINED BY THE AO AND THE OR DER OF THE REVENUE AUTHORITIES ARE SILENT ON THIS SUBJECT. 6.3 NEXT QUESTION IS ABOUT THE HUGE AMOUNT OF INTER EST EXPENDITURE CLAIMED BY THE ASSESSEE. THE AO IS REQUIRED TO EXAM INE FIRST THE CORRECTNESS OF THE CLAIM. WHETHER THE INTEREST ON T ERM LOANS, BANK CHARGES AND GUARANTEE FEES WERE IN RESPECT OF THE B USINESS OF THE ASSESSEE. THEREAFTER, THE AO IS ALSO REQUIRED TO GI VE A CLEAR FINDING ABOUT THE BORROWINGS MADE BY THE ASSESSEE ON WHICH THE SA ID INTEREST WAS PAID. THE NEXT STEP IS THAT THE AO HAS TO EXAMINE THE SOU RCES OF THE FUNDS WHICH WERE INVESTED FOR EARNING THE DIVIDEND INCOME . IF THE SOURCE OF SUCH INVESTMENT IS OUT OF THE INTEREST BEARING BORR OWINGS, THEN ONLY THE QUESTION OF DISALLOWANCE OF INTEREST WOULD ARISE, O THERWISE NOT. ON THE OTHER HAND, THE CLAIM OF THE ASSESSEE IS THAT THERE WERE SUFFICIENT NON INTEREST BEARING RESERVES OR SURPLUS AVAILABLE. THE AO IS REQUIRED TO INVESTIGATE THE CORRECTNESS OF THE CLAIM THAT WHETH ER THE ASSESSEE HAD SUFFICIENT NON INTEREST BEARING FUND AVAILABLE AND IN WHAT FORM THOSE WERE UTILIZED BY THE ASSESSEE. IF THE ASSESSEE IS I N A POSITION TO DEMONSTRATE THAT THE NON-INTEREST BEARING FUNDS HAV E ACTUALLY BEEN ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 7 - INVESTED TO EARN EXEMPTED INCOME THEN THE ASSESSEE S CLAIM IS LEGALLY CORRECT. THEREAFTER, THE QUESTION OF THE INVOCATION OF SECTION 14A COMES INTO PLAY. AS FAR AS THE APPLICABILITY OF THE DECIS ION OF SPECIAL BENCH IS CONCERNED THE SAME NOW STOOD COVERED BY THE DECISIO N OF HONBLE BOMBAY HIGH COURT PRONOUNCED IN THE CASE OF GODREJ AND BOYCE, 328 ITR 81 (BOM). FOR THE SAKE OF COMPLETENESS HEREINBELOW REPRODUCED A PORTION OF AN ITAT ORDER VIZ., ADITYA MIDCALS AS FO LLOWS: 5. WITH THIS BRIEF BACKGROUND, WE HAVE EXAMINED TH E FACTS OF THE CASE AS ALSO THE LAW PRONOUNCED IN THIS REGARD. 6. AS FAR AS THE ASSESSING OFFICERS ACTION IS CON CERNED, THE DISALLOWANCE HAS BEEN MADE ON THE BASIS OF A CALCULATION OF THE PROPORTIONATE INTEREST ALLEGED TO BE ATTRIBUTABLE TO THE INVESTMENT EARNIN G EXEMPTED DIVIDEND INCOME. IT IS ALSO TO BE NOTED THAT WHILE DOING SO FOR THE YEARS UNDER CONSIDERATION THE A.O. HAS NOT FOLLOWED THE PAST ME THOD OF CALCULATION OF THE DISALLOWANCE. AS PER AO IT WAS SEEN THAT THE WORKIN G OF DISALLOWANCE WAS WRONG BECAUSE WHILE CALCULATING THE PROPORTIONATE I NTEREST ATTRIBUTABLE TO DIVIDEND INCOME THE RATIO OF DIVIDEND INCOME AND TO TAL SALES HAVE BEEN TAKEN THOUGH THERE WAS NO DIRECT RELATION BETWEEN THE TWO . THE ASSESSING OFFICER HAD THUS MADE THE CALCULATION AFTER TAKING INTO ACC OUNT THE PROPORTION OF THE INTEREST ON THE RATIO BETWEEN THE INVESTMENT IN SHA RES AND TOTAL ASSETS INCLUDING INVESTMENT IN SHARES. APART FROM THIS, TH ERE IS NOTHING IN THE ASSESSMENT ORDER WHICH CAN ESTABLISH THE NEXUS OF U TILIZATION OF BORROWED INTEREST-BEARING FUNDS DIVERTED TOWARDS INVESTMENT IN DEBENTURES. BUT THERE ARE OTHER DISCUSSIONS IN THIS VERY ASSESSMENT ORDER WHEREIN THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT HAVE ALSO BEEN TOUCHE D UPON. THE ASSESSING OFFICER WAS EXPECTED TO CORRELATE THE SAID DISCUSSI ON WITH THE EXEMPTED DIVIDEND INCOME U/S.10(33) OF THE ACT. AS FAR AS TH E LAW PRONOUNCED IN THIS REGARD IS CONCERNED, FIRST OF ALL, WE HAVE TO FOLLO W A LATEST DECISION OF HON'BLE BOMBAY HIGH COURT PRONOUNCED IN THE CASE OF GODREJ & BOYCE MFG. CO.LTD. MUIMBAI VS. DY.CIT IN INCOME TAX APPEAL NO.626 OF 2010 AND WRIT PETITION NO.758 OF 2010 ORDER DATED 12/08/2010, { NOW REPORTED AS 328 ITR 81(BOM) } WHEREIN THE HON'BLE HIGH COURT HAS UPHELD THE CONS TITUTIONAL VALIDITY OF SECTION 14A OF THE I.T. ACT, 1961 AND H ELD THAT THE ASSESSING OFFICER SHOULD DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO DIVIDEND INCOME AND/OR INCOME FROM MUTUAL FUND WHICH DO NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED U/S.14A OF THE I.T. ACT, 1961. IT HAS ALSO BEEN DIRECTED THAT THE ASSESSING OFFIC ER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIO NMENT. IT HAS ALSO BEEN OBSERVED BY THE HON'BLE COURT THAT WHILE MAKING THA T DETERMINATION, THE ASSESSING OFFICER SHOULD PROVIDE A REASONABLE OPPOR TUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND MATERIAL HAVING A BEAR ING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 8 - 6.1. IN THIS JUDGEMENT AT THE END, THE HON'BLE COUR T HAS ALSO RECAPITULATED THE CONCLUSION AND PRONOUNCED THAT A FINDING IS REQ UIRED WHETHER THE INVESTMENT IN SHARES IS MADE OUT OF OWN FUNDS OR OU T OF BORROWED FUNDS. A NEXUS IS REQUIRED TO BE ESTABLISHED BETWEEN THE INV ESTMENTS AND THE BORROWINGS. IN SECTION 14A OF THE ACT EXPENDITURE INCURRED IN RELATION TO EXEMPTED INCOME IS TO BE DISALLOWED ONLY IF THE ASS ESSING OFFICER IS SATISFIED WITH THE EXPENDITURE CLAIMED BY THE ASSESSEE PERTAI NING TO THE SAID EXEMPT INCOME. RATHER, THE COURT WAS VERY SPECIFIC THAT IN CASE, NO SUCH EXERCISE WAS CARRIED OUT BY THE ASSESSING OFFICER THEN THE M ATTER IS TO BE REMANDED BACK FOR AFRESH INVESTIGATION. IT HAS ALSO BEEN MA DE CLEAR THAT THE PROVISO TO SECTION 14A OF THE ACT WAS EFFECTIVE FROM 2001-02. THE HON'BLE COURT HAS ALSO POINTED OUT THE IMPORTANCE OF RULE 8D OF THE I .T.RULES, 1962. IT WAS MADE CLEAR THAT SUB-SECTION (1) TO SECTION 14A WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 01/04/1962, HOWEVER, SUB-SECTIONS (2) & (3) WERE MADE APPLICABLE WITH EFFECT FROM 01/04/2007. THE PROVISO WAS INSE RTED WITH RETROSPECTIVE EFFECT FROM 11/05/2001 , HOWEVER RULE 8D WAS INSERT ED BY THE INCOME TAX (FIFTH AMENDMENT), RULES, 2008 BY PUBLICATION IN TH E GAZETTE DATED 24/03/2008; REPRODUCED BELOW:- A) THE ITAT HAD RECORDED A FINDING IN THE EARLIE R ASSESSMENTS THAT THE INVESTMENTS IN SHARES AND MUTUAL FUNDS HAV E BEEN MADE OUT OF OWN FUNDS AND NOT OUT OF BORROWED FUNDS AND THAT TH ERE IS NO NEXUS BETWEEN THE INVESTMENTS AND THE BORROWINGS. HOWEVE R, IN NONE OF THOSE DECISIONS WAS THE DISALLOWABILITY OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME EARNED OUT OF INVESTMENTS MADE OUT OF OWN FUNDS CONSIDERED. MOREOVER, UNDER SECTION 14A, EXP ENDITURE INCURRED IN RELATION TO EXEMPT INCOME CAN BE DISALLOWED ONLY IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF TH E EXPENDITURE CLAIMED BY THE ASSESSEE. IN THE PRESENT CASE, NO SUCH EXER CISE HAS BEEN CARRIED OUT AND, THEREFORE, THE TRIBUNAL WAS JUSTIFIED IN R EMANDING THE MATTER. B) SECTION 14A WAS INTRODUCED BY THE FINANCE ACT 20 01 WITH RETROSPECTIVE EFFECT FROM 1 APRIL 1962. HOWEVER, I N VIEW OF THE PROVISO TO THAT SECTION, THE DISALLOWANCE THEREUNDE R COULD BE EFFECTIVELY MADE FROM ASSESSMENT YEAR 2001-2002 ONW ARDS. THE FACT THAT THE TRIBUNAL FAILED TO CONSIDER THE APPLICABIL ITY OF SECTION 14A IN ITS PROPER PERSPECTIVE, FOR ASSESSMENT YEAR 2001-20 02 WOULD NOT BAR THE TRIBUNAL FROM CONSIDERING DISALLOWANCE UNDER SE CTION 14A IN ASSESSMENT YEAR 2002-2003. C) THE DECISIONS REPORTED IN SRIDEV ENTERPRISES (SUPRA), MUNJAL SALES CORPORATION (SUPRA) AND RADHASOAMI SATSANG (SUPRA) HOLDING THAT THERE MUST BE CONSISTENCY AND DEFINITENESS IN THE APPROACH OF THE REVENUE WOULD NOT APPLY TO THE FACTS OF THE PRESENT CASE, BECAUSE OF THE MATERIAL CHANGE INTRODUCED BY SECTION 14A BY WA Y OF STATUTORY DISALLOWANCE IN CERTAIN CASES. THERE, THE DECISION S OF THE TRIBUNAL IN THE EARLIER YEARS WOULD HAVE NO RELEVANCE IN CONSID ERING DISALLOWANCE IN ASSESSMENT YEAR 2002-2003 IN THE LI GHT OF SECTION 14A OF THE ACT. 73. FOR THE REASONS WHICH WE HAVE INDICATED, WE HA VE COME TO THE CONCLUSION THAT UNDER SECTION 14A(1) IT IS FOR THE ASSESSING OFFICER TO ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 9 - DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED A NY EXPENDITURE IN RELATION TO THE EARNING OF INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THE ACT AND IF SO TO QUANTIFY THE EXTE NT OF THE DISALLOWANCE. THE ASSESSING OFFICER WOULD HAVE TO ARRIVE AT HIS DETERMINATION AFTER FURNISHING AN OPPORTUNITY TO TH E ASSESSEE TO PRODUCE ITS ACCOUNTS AND TO PLACE ON THE RECORD ALL RELEVANT MATERIAL IN SUPPORT OF THE CIRCUMSTANCES WHICH ARE CONSIDERE D TO BE RELEVANT AND GERMANE. FOR THIS PURPOSE AND IN LIGHT OF OUR OBSERVATIONS MADE EARLIER IN THIS SECTION OF THE JUDGMENT, WE DEEM IT APPROPRIATE AND PROPER TO REMAND THE PROCEEDINGS BACK TO THE ASSESS ING OFFICER FOR A FRESH DETERMINATION. CONCLUSION : 74. OUR CONCLUSIONS IN THIS JUDGMENT ARE AS FOLLOWS ; I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FALLIN G WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME TAX ACT 1 961, AS WAS APPLICABLE FOR ASSESSMENT YEAR 2002-03 IS NOT INCLU DIBLE IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE. CONSEQ UENTLY, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITUR E INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIRTUE O F THE PROVISIONS OF SECTION 14A(1); II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTION 115 O(1) OF ADDITIONAL INCOME TAX ON PROFITS DECLARED, DISTRIBU TED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS OF THE CO MPANY. THE COMPANY IS CHARGEABLE TO TAX ON ITS PROFITS AS A DI STINCT TAXABLE ENTITY AND IT PAYS TAX IN DISCHARGE OF ITS OWN LIAB ILITY AND NOT ON BEHALF OF OR AS AN AGENT FOR ITS SHAREHOLDERS. IN THE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DIVIDEND, IN COME BY WAY OF DIVIDEND DOES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROVISIONS OF SECTION 10(33). INCOME FROM MUTU AL FUNDS STANDS ON THE SAME BASIS; III) THE PROVISIONS OF SUB SECTIONS (2) AND (3) OF SECTI ON 14A OF THE INCOME TAX ACT 1961 ARE CONSTITUTIONALLY VALID; IV) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES A S INSERTED BY THE INCOME TAX (FIFTH AMENDMENT) RULES 2008 ARE NOT ULTRA VIRES THE PROVISIONS OF SECTION 14A, MORE PARTICULA RLY SUB SECTION (2) AND DO NOT OFFEND ARTICLE 14 OF THE CON STITUTION; V) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES W HICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24 MARCH 2008 SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09; VI) EVEN PRIOR TO ASSESSMENT YEAR 2008-09, WHEN RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORCE TH E PROVISIONS OF SUB SECTION (1) OF SECTION 14A. FOR THT PURPOSE , THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE THE EX PENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE A SSESSING ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 10 - OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CON SISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD; VII) THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 SHALL S TAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESS ING OFFICER SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCU RRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO DIV IDEND INCOME / INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART O F THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSE SSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION, TH E ASSESSING OFFICER SHALL PROVIDE A REASONABLE OPPORT UNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMST ANCES OF THE CASE. 6.4 DUE TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT, IT IS LEGALLY CORRECT TO REFER THIS ISSUE BACK TO THE STA GE OF THE AO TO BE DECIDED DE NOVO AS PER THE GUIDELINES OF THE HONBL E COURT. THE OUTCOME OF THE ABOVE DISCUSSION IS THAT THE ADDITIONAL GRO UND RAISED BY THE REVENUE MAY BE TREATED AS ALLOWED BUT ONLY FOR STAT ISTICAL PURPOSE. 7. GROUND NO.1 IS REPRODUCED BELOW: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.1,43,83,41,912 /- MADE U/S.43B OF THE ACT. THE LD. CIT(A) ERRED IN NOT APPRECIATING THE FACT T HAT THE ASSESSEE HAD NOT FURNISHED THE DETAILS OF PAYMENTS AND THE DATE OF P AYMENT DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 8. FACTS OF THE CASE HAVE REVEALED THAT THE AO HAD ASKED THE ASSESSEE TO FURNISH THE DETAILS OF EMPLOYEES CONTRIBUTION T O PF. ACCORDING TO AO, IF AN EMPLOYER HAS RECEIVED THE CONTRIBUTION FROM I TS EMPLOYEES THEN IT IS MANDATORY ON THE PART OF THE EMPLOYER TO PAY THE AM OUNT WITHIN THE PRESCRIBED TIME. THE AO THEN REFERRED THE PROVISION S OF SECTION 36(1)(VA) AND SECTION 2(24)(X) OF IT ACT. THE ASSES SEE HAS FURNISHED THE ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 11 - MONTH-WISE EMPLOYEES CONTRIBUTION, DUE DATE OF PAY MENT AND ACTUAL DATE OF PAYMENT. AS PER THE CHART AVAILABLE AT PAGE 9 OF THE ASSESSMENT ORDER, THE ACTUAL DATE OF PAYMENT IS MENTIONED ONLY AT ONE PLACE, I.E., 16.06.2005. THE AO WAS NOT CONVINCED AND FINALLY HE LD THAT AN AMOUNT OF RS.143,82,99,469/- WAS THE DEEMED INCOME AS PER THE SAID PROVISIONS OF THE ACT. IT HAS ALSO BEEN NOTED BY THE AO THAT T HE EMPLOYEES CONTRIBUTION TO EPS WAS LATE. THE LATE SUM OF RS.42 ,443/- WAS DISALLOWED BY THE AO. BEING AGGRIEVED, THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. 8. AT THE OUTSET, LEARNED CIT(A) HAS GIVEN A CATEGO RICAL FINDING THAT CHART AS PRODUCED AT PAGE 9 OF THE ASSESSMENT ORDER WAS NOT A COMPLETE CHART. THEREAFTER, LEARNED CIT(A) HAS REPRODUCED TH E TOTAL CHART THROUGH WHICH THE MONTH-WISE DETAILS OF EMPLOYEES CONTRIBU TION, EMPLOYERS CONTRIBUTION, ADVANCES PAID, DUE DATE OF PAYMENT AN D ACTUAL DATE OF PAYMENT HAVE BEEN MENTIONED. UNDER THE COLUMN ACTU AL DATE OF PAYMENT THE ASSESSEE HAD INFORMED THAT THE PAYMENT WAS MADE BEFORE DUE DATE IN RESPECT OF THE CONTRIBUTION FOR THE MO NTH OF JUNE, 2005. THE ACTUAL DATE OF PAYMENT WAS 15 TH JUNE, 2005. LEARNED CIT(A) HAS ALSO NOTED A GROSS MISTAKE OF THE AO THAT FIGURE NOTED W AS THE CHEQUE NUMBER AND NOT THE AMOUNT IN QUESTION. ON DUE ANALYSIS OF THE DATES OF PAYMENTS; LEARNED CIT(A) HAS GIVEN A CATEGORICAL FI NDING THAT THE PAYMENTS HAVE BEEN MADE BEFORE THE DUE DATE OF EVER Y MONTH, HENCE, THERE WAS NO BELATED PAYMENT OF EMPLOYEES CONTRIBU TION TO PF. 9. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES, WE ARE OF THE CONSIDERED OPINION THAT THE AO HAS NOT PROPERLY EXA MINED THE FACTS OF ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 12 - THE CASE, ESPECIALLY THE DATE OF PAYMENTS AS DECLAR ED BY THE ASSESSEE. ON THE OTHER HAND, THE ASSESSEE HAS PRODUCED ALL THOSE VERY DETAILS BEFORE LEARNED CIT(A), WHO HAS, ON EXAMINATION, HELD IN CL EAR TERMS THAT THERE WAS NO PAYMENT BEYOND THE DUE DATE BUT IT WAS DEPOS ITED IN ADVANCE. FROM THE SIDE OF THE REVENUE, NOW BEFORE US, THERE IS NO EVIDENCE TO CONTRADICT THE SAID FACTUAL FINDING OF LEARNED CIT( A). WE, THEREFORE, HOLD THAT THERE IS NO FALLACY IN THE VIEW TAKEN BY LEARN ED CIT(A); HENCE, THE SAME IS HEREBY CONFIRMED AND THE GROUND OF THE REVE NUE IS THUS DISMISSED. 10. GROUND NO.2 IS REPRODUCED BELOW: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.15,15,54,000/- BEING NET INCOME OVER EXPENDITURE, WHICH WAS MATERIALIZED DURING THE YEAR UNDER CONSIDERATION, BUT NOT OFFERED FOR TAXATION. 11. DURING THE ASSESSMENT PROCEEDINGS, IT WAS NOTED BY THE AO THAT A SUM OF RS.1515.54 LACS WERE SHOWN IN THE P & L A/C BELOW THE LINE AFTER THE PROVISIONS MADE FOR TAXATION. THE AO HAS ISSUED A SHOW CAUSE AS FOLLOWS: JUSTIFICATION NOTE AS TO WHY THE INCOME (NET OF EXP ENSES) OF RS.1515.54 LACS OF ERSTWHILE GEB WHICH HAS BEEN CONSIDERED IN PROFI T AND LOSS ACCOUNT OF THE COMPANY SHOULD NOT BE BROUGHT TO THE TAX UNDERNORMA L PROVISIONS AND U/S. 115JB. (SCHEDULE 15 OF BALANCE SHEET) AND NOTES TO ACCOUNTS (PART B- 1(2)(E)(VI)). 11.1 IN COMPLIANCE, THE ASSESSEES REPLY WAS AS UND ER: IT IS SUBMITTED THAT AFTER THE DE-MERGER OF ERSTHW HILE GEB THE YEAR UNDER CONSIDERATION WAS THE FIRST YEAR OF OPERATIONS OF T HE ASSESSEE COMPANY. ACCORDINGLY, ALL EXPENDITURE AND INCOMES OF ERSTWHI LE GEB WAS BIFURCATED AND SHOWN SEPARATELY. THE NATURE OF BUSINESS AND OB JECTS OF BUSINESS REMAIN SAME AFTER DE-MERGER. HENCE THE ENTIRE INCOME OF RS .1515.54 LACS (NET EXPENSES) IS INCURRED IN THE ORDINARY COURSE OF BUS INESS AND IS FULLY ALLOWABLE AS BUSINESS INCOME. ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 13 - FINANCE YEAR 2005-069 WAS THE FIRST YEAR AFTER GUVN L CAME INTO EXISTENCE. SINCE THERE IS A NET INCOME ON ACCOUNT OF TRANSACTI ONS PERTAINING TO ERSTWHILE GEB BUT MATERIALIZED DURING THE F.Y.2005-06, THE SA ME HAS BEEN ACCOUNTED AS INCOME OF ERSTWHILE GEB AND NOT AS PRIOR PERIOD INCOME. 11.2 THE AO WAS NOT CONVINCED BECAUSE OF THE REASON THAT THE INCOME HAD IN FACT MATERIALIZED DURING THE YEAR ALTHOUGH I T WAS PERTAINED TO ERSTWHILE GEB. IT WAS THE INCOME OF ERSTWHILE GEB A ND IT WAS NOT PRIOR PERIOD INCOME. AS PER AO THE GEB WAS NOT IN EXISTEN CE, HENCE IF AN INCOME HAS MATERIALIZED DURING THE YEAR THEN THE SA ME IS TAXABLE IN THE HANDS OF THE ASSESSEE. IN THE RESULT, THE SAID AMOU NT WAS ADDED BACK IN THE TOTAL INCOME OF THE ASSESSEE. BEFORE LEARNED CI T(A), IT WAS EXPLAINED THAT AFTER THE DEMERGER OF ERSTWHILE GEB THE ASSESS EE COMPANY HAS STARTED OPERATION AND THE YEAR UNDER CONSIDERATION WAS THE FIRST YEAR OF ITS OPERATION AS A RESULTING COMPANY. THE EXCESS OF I NCOME OVER EXPENDITURE AMOUNT TO RS. 15.15 CRORES COMPRISED OF VARIOUS EXPENSES AS WELL AS RECEIPTS. AFTER NETTING OFF, THE NET INCO ME WAS THE SAID AMOUNT. THE DETAILS OF THE INCOME AND THE EXPENDITURE IN RE SPECT OF EACH HEAD HAS ALSO BEEN REPRODUCED BY LEARNED CIT(A). THE VERDICT OF LEARNED CIT(A) WAS IN FAVOUR OF THE REVENUE IN THE FOLLOWING MANNE R: I HAVE CONSIDERED THE SUBMISSIONS OF LD. AR AND TH E FACTS OF THE CASE. THERE ARE TWO ASPECTS TO THE MATTER. THE FIRST RELATES TO WHETHER THE EXPENSES AS WELL AS THE INCOME RELATING TO THE ERSTWHILE GEB COULD B E CONSIDERED AS INCOME AND EXPENSES OF THE SUCCESSOR, I.E., APPELLANT COMP ANY. THE APPELLANT FAIRLY ADMITS THAT ON THIS THERE IS NO DISPUTE AND THAT TH E ITEMS OF INCOME AGGREGATING TO RS.69,80,04,000/- AND THE ITEMS OF E XPENDITURE AGGREGATING TO RS.54,64,51,000/- (NET RS.15,15,54,000/-) WOULD BE INCLUDIBLE IN THE TAXABLE INCOME OF THE APPELLANT. HENCE THE ADDITION OF THE AO IN TREATING THIS AS INCOME OF THE ASSESSEE FOR THE YEAR IS UPHELD. 11.3 AFTER PRONOUNCING THIS VIEW LD. CIT(A) HAS TAK EN A DIFFERENT VIEW IN ASSESSEES FAVOUR AS FOLLOWS:- IT IS SEEN FROM THE TABLE THAT THE ASSESSEE, IN HI S COMPUTATION OF INCOME, CONSISTENTLY DISALLOWED THE PROVISIONS FOR BAD AND DOUBTFUL AND CLAIMED AS AN ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 14 - EXPENDITURE ONLY THE AMOUNT ACTUALLY WRITTEN OFF DU RING THE YEAR. THE DIFFERENCE BETWEEN THE TWO WAS OFFERED FOR TAXATION IN THE PAST. THE FIGURE OF RS.39,71,79,000/- IS THE CUMULATIVE PROVISION FOR D OUBTFUL DEBTS OF THE ERSTWHILE GEB, WHICH HAD ALREADY SUFFERED TAXATION. SINCE THE SAME HAS ALREADY BEEN TAXED IN THE EARLIER YEARS, THIS FIGUR E MUST BE EXCLUDED FROM THE INCOME OF THE CURRENT YEAR. IF THE SAME IS DONE, TH EN THERE WOULD BE EXCESS OF EXPENDITURE OVER INCOME TO THE TUNE OF RS.24.57 CRO RES AND THERE COULD BE NO ADDITION TO THE INCOME. IN VIEW OF THE ABOVE, IT IS HELD THAT THE ADDITION OF RS.15,15,54,000/- WAS NOT JUSTIFIED AND IS ACCORDIN GLY DELETED. 12. IN THE LIGHT OF THE PARAGRAPHS, REPRODUCED ABOV E, IT IS EVIDENT THAT THE GROUND RAISED BY THE REVENUE IS NOT CORRECTLY W ORDED. FACTUALLY, THE LEARNED CIT(A) HAS UPHELD THAT ADDITION, THEREFORE, IT IS WRONG ON THE PART OF THE REVENUE DEPARTMENT TO AGITATE IN GROUND NO.2 THAT LEARNED CIT(A) HAD ERRED IN DELETING THE IMPUGNED ADDITION. AT THI S JUNCTURE, WE HAVE ASKED THE RESPONDENT ASSESSEE THAT WHETHER AN APPEA L HAS BEEN FILED AGAINST THE AFOREMENTIONED VERDICT BY LEARNED CIT(A ). NO SPECIFIC REPLY WAS GIVEN BUT IT WAS PLEADED THAT IN RESPECT OF THE INCOME SHOWN UNDER THE HEAD EXCESS PROVISION FOR DOUBTFUL DEBTS RETUR N BACK IS TO BE TAKEN OUT WHILE COMPUTING THE NET INCOME OF THE ASSESSEE. IF THIS INCOME IS TO BE REDUCED THEN THERE IS NO EXCESS OF INCOME BUT IT OUGHT TO BE EXCESS OF EXPENDITURE OVER INCOME. LEARNED AR HAS INFORMED TH AT THE ASSESSEE HAD ITSELF DISALLOWED THE SAME IN EARLIER YEARS; HENCE, THAT VERY AMOUNT CANNOT BE CONSIDERED AS INCOME OF THE CURRENT YEAR, WHICH WOULD AMOUNT TO DOUBLE TAXATION. LEARNED AR HAS TRIED TO ARGUED THAT IN A.Y. 2002-03, VIDE AN ORDER PASSED U/S. 143(3), DATED 22.02.2005 THE PROVISION FOR DOUBTFUL DEBT WAS ADDED BACK IN THE INCOME OF THE A SSESSEE, HOWEVER THAT CAN BE VERIFIED BY THE AO. IN SHORT, HE HAS REQUEST ED TO REFER THIS ISSUE BACK TO THE FILE OF THE AO FOR FRESH INVESTIGATION. LEARNED DR HAS ARGUED THAT ALTHOUGH THE ADDITION WAS CONFIRMED BY LEARNED CIT(A) BUT THE ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 15 - CLAIM OF BAD DEBT WAS RIGHTLY CONSIDERED BY LEARNED CIT(A) WHILE CONFIRMING THE ADDITION. 13. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES, AT THE OUTSET, WE ARE OF THE CONSIDERED OPINION THAT BY RAISING CONFL ICTING ARGUMENTS THE REVENUE DEPARTMENT HAS RAISED CERTAIN DOUBTS ABOUT THE CONTROVERSY. 13.1 AS FAR AS THE PROCEDURE OF TAXATION OF THE RES ULTING COMPANY IS CONCERNED, THE SAME IS UNAMBIGUOUS; THAT THE INCOME ARISING AFTER THE DEMERGER IS THE RESPONSIBILITY OF THE RESULTING CO MPANY TO BE TAXED AS PER LAW. RELEVANT SECTIONS IN THIS REGARD HAVE ALRE ADY BEEN MENTIONED (SUPRA). THE RESULTING INCOME, IF ANY, HAS TO BE TA XED IN THE HANDS OF THE ASSESSEE COMPANY BEING A RESULTING COMPANY. THE ONL Y QUESTION IS THAT THERE SHOULD NOT BE DOUBLE TAXATION IN RESPECT OF T HE SAME INCOME IN THE HANDS OF THE ASSESSEE. THIS FACT CAN EASILY BE ASCE RTAINED BY REVENUE DEPARTMENT BY CHECKING THE OLD RECORDS OF THE ASSES SEE. ON THE OTHER HAND, WE ALSO HEREBY DIRECT THIS ASSESSEE TO PLACE THE RELEVANT EVIDENCE BEFORE THE AO THROUGH WHICH IT CAN BE DEMONSTRATED THAT THE VERY AMOUNT HAD ALREADY BEEN OFFERED TO TAX IN THE HANDS OF THE ASSESSEE. THIS FACT IS ALSO REQUIRED TO BE PLACED ON RECORD THAT H OW MUCH RECOVERIES HAVE BEEN MADE OUT OF THE ALLEGED BAD DEBT AMOUNT. WITH THESE DIRECTIONS, THIS GROUND MAY BE TREATED AS ALLOWED B UT FOR STATISTICAL PURPOSE ONLY. 14. GROUND NO.3 IS REPRODUCED BELOW: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.6,60,52,000/- BEING TOTAL LEGAL AND FOR PREPARATION FEES TREATED AS CAPITAL EXPENDITURE AS THESE EXPENDITURE WAS INCURRED FOR PREPARATION, FINALIZATION AND FILING O F ANNUAL REVENUE ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 16 - REQUIREMENTS (ARR), FOR PREPARATION OF POWER PURCHA SE AGREEMENTS, FORMULATING STRATEGIES FOR DEMAND SIDE MANAGEMENT, SUPPORTING LAN NETWORK, COORDINATION WITH BSNL FOR INTERNET CONNEC TIVITY, FOR PROVIDING AND UPGRADING INTERNET BANDWIDTH, MATTERS RELATING TO L ETTER PATENT, PROFESSIONAL FEE FOR RESTRUCTURING HIGH COST DEBTS, TOWARDS ANNU AL MAINTENANCE CONTRACT FOR EPABX SYSTEM AND WAN NETWORK SYSTEM ETC. THEREF ORE, THE EXPENDITURE WAS RIGHTLY TREATED AS CAPITAL IN NATURE. 15. UNDER THE HEAD LEGAL AND PROFESSIONAL FEES AN EXPENDITURE OF RS.606.52 LACS WAS CLAIMED. THE NATURE OF SERVICES OBTAINED WAS AS UNDER: SL NO. NAME AND ADDRESS OF PARTY AMOUNT PAID NATURE OF SERVICE OBTAINED 1 M/S. CRISIL LTD. 9061969 CONSULTANCY 2 M/S. FEEDBACK VENTURE LTD. 8625925 CONSULTANCY 3 M/S. GUJARAT INF. PETRO LTD. 11054247 IT SYSTEM MAINTENANCE 4 GERC 5010000 FILING FEES 5 M.G. RAMACHANDRAN 1000000 LEGAL CONSULTATION 6 M/S. ALLIANZ SECURITIES LTD. 10953097 FINANCE CONSULTANCY 7 S. N. SHELAT 867000 ADVOCATE FEES 8 S.B. VAKIL 517000 ADVOCATE FEES 9 M/S. SIEMENS LTD. 754472 IT CONSULTANCY 16. THE ASSESSEE HAS FURNISHED THE DETAILS OF THE S ERVICES RENDERED BY THE RESPECTIVE PROFESSIONALS; HOWEVER, THE AO WAS N OT CONVINCED AND HELD THAT IT WAS CONNECTED WITH ERSTWHILE GEB; HENC E, NOT RELATED TO THE BUSINESS OF THE ASSESSEE. THE ENTIRE EXPENDITURE WA S DISALLOWED. 17. LEARNED CIT(A) HAS EXAMINED THE FACTS OF THE CA SE AND CAME TO THE CONCLUSION THAT THE PAYMENTS COULD NOT BE CATEGORIZ ED AS CAPITAL IN NATURE THE FINDINGS OF LEARNED CIT(A) WAS AS UNDER: I HAVE CONSIDERED THE SUBMISSION OF LD. AR AND THE FACTS OF THE CASE. THE AO HAS HIMSELF REPRODUCED THE DETAILS IN RESPECT OF TH E EXPENDITURE INCURRED, AT ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 17 - PAGE 12-13 OF THE ASSESSMENT ORDER. IT IS SEEN THAT M/S CRISIL LTD AND FEEDBACK VENTURES LTD WERE PAID CERTAIN AMOUNTS FOR PREPARATION, FINALIZATION AND FILING OF ANNUAL REVENUE REQUIREME NT (ARR), PETITIONS BEFORE GERC, FOR PREPARATION OF SHORT TERM POWER PURCHASE AGREEMENTS AND FOR FORMULATING STRATEGIES FOR DEMAND SIDE MANAGEMENT. M/S. GUJARAT INFO PETRO WAS PAID FEES FOR SUPPORTING LAN NETWORK, PROVIDING IT PROFESSIONALS FOR FACILITY MANAGEMENT SERVICES, COORDINATION WITH BSN L FOR INTERNET CONNECTIVITY AND FOR PROVIDING AND UPGRADING INTERN ET BANDWIDTH. SIMILARLY, GERC WAS PAID FEES FOR APPROVAL OF POWER PURCHASE A GREEMENTS AND LICENSE FEES FOR INTRA-STATE TRADING. THE SAID LICENSE FEES ARE PAYABLE ANNUALLY. ADVOCATE M.G. RAMACHANDRAN WAS PAID PROFESSIONAL AN D CONSULTANCY FEES FOR ADVICE ON STATUTORY AND REGULATORY ISSUES AND F OR REPRESENTING THE ASSESSEE BEFORE VARIOUS COURTS. SIMILARLY ADVOCATES SHRI S.N. SHELAT AND SHRI S.B. VAKIL WERE PAID PROFESSIONAL FEES FOR REPRESEN TING GUVNL BEFORE THE GUJARAT HIGH COURT IN MATTERS RELATING TO LETTERS P ATENT, APPEALS AND SPECIAL CIVIL SUITS. M/S ALLIANZ SECURITIES LTD WERE PAID P ROFESSIONALS FEE FOR RESTRUCTURING HIGH COST DEBTS. M/S SIEMENS LTD WERE PAID ANNUAL MAINTENANCE CONTRACT (AMC) FOR EPABX SYSTEM AND WAN NETWORK SYS TEMS. NONE OF THE ABOVE PAYMENTS CAN BE CATEGORIZED AS CAPITAL IN NAT URE SINCE NO ENDURING BENEFIT WAS DERIVED AND NOR ANY ASSET WAS BROUGHT I NTO EXISTENCE. ACCORDINGLY, THE AGGREGATE DISALLOWANCE OF RS.6,60, 52,000/- IS DIRECTED TO BE DELETED. 18. FROM THE SIDE OF THE REVENUE, LEARNED CIT-DR, M R. T.P. KRISHNA KUMAR, HAS ARGUED THAT BY INCURRING THOSE EXPENDITU RES THE ASSESSEE HAS OBTAINED ENDURING BENEFIT, THEREFORE, RIGHTLY DISAL LOWED BY THE AO AS CAPITAL EXPENDITURE. FROM THE OTHER SIDE, LEARNED A R HAS PLACED RELIANCE ON GUJARAT NARMADA VALLEY FERTILIZER CO. LTD., 33 TAXM AN, COM 117 (GUJ.), CIT V/S. JCT ELECTRONICS LTD., 188 TAXMAN, 191 (P&H) . ON HEARING THE SUBMISSIONS OF BOTH THE SIDES AND AFTER EXAMINING THE NATURE OF SERVICES RENDERED BY THOSE PROFESSIONALS AS MENT IONED IN THE ASSESSMENT ORDER, WE ARE OF THE OPINION THAT THE EX PENDITURE WAS CONNECTED WITH THE BUSINESS ACTIVITY OF THE ASSESSE E. AS FAR AS THE APPLICABILITY OF THE PROVISIONS OF SECTION 37(1) IS CONCERNED, THE NATURE OF EXPENDITURE DID NOT DEMONSTRATE THAT IT WAS A C APITAL EXPENDITURE. RATHER, THE CONSULTANCY WORK AND THE PREPARATION OF RECORDS WAS NOTHING BUT CONNECTED WITH THE BUSINESS OF THE ASSESSEE. WE HAVE ALSO EXAMINED ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 18 - THE CASE LAWS CITED BY LEARNED AR AND THEREUPON WE CAME TO THE CONCLUSION THAT EVEN THE CONSULTATION CHARGES OF RE -STRUCTURING WAS HELD AS REVENUE EXPENDITURE. RESULTANTLY, THE VIEW TAKEN BY LEARNED CIT(A) IS HEREBY CONFIRMED AND THE GROUND IS DISMISSED. 19. GROUND NO.4 IS REPRODUCED BELOW: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN THE DIRECT THE ASSESSING OFFICER TO EXCLUD E THE PROVISIONS FOR GRATUITY OF RS.3,02,17,000/-, WHICH IS AN UNASCERTAINED LIAB ILITY, FOR THE COMPUTATION OF BOOK PROFIT U/S.115JB. 20. AFTER EXAMINING THE FACTS OF THE CASE, LEARNED CIT(A) HAS REFERRED THE CASE OF BHARAT EARTH MOVERS, 245 ITR 428 AND CERTAIN DECISIONS OF THE TRIBUNAL AND THEN CAME TO THE CONCLUSION THAT T HE PROVISION FOR GRATUITY WAS MADE ON ACTURIAL VALUATION; HENCE, IT WAS NOT AN UNASCERTAINED LIABILITY. IN OUR OPINION, THERE WAS NO FALLACY IN THE SAID VERDICT OF LEARNED CIT(A) BECAUSE THE ASSESSEE HAS DEMONSTRATED THAT THE PROVISION FOR GRATUITY WAS MADE ON THE BASIS OF SPE CIFIC CALCULATION AND IT WAS NOT AN UNASCERTAINED LIABILITY. IN THE CASE OF ESAR MOTORS LIMITED, 82 TTJ , IT WAS HELD BY THE RESPECTED CO-ORDINATE BENCH TH AT THE PROVISION FOR GRATUITY BASED UPON ACTURIAL VALUATION WAS NOT AN UNASCERTAINED LIABILITY WHICH COULD BE ADDED BACK WHILE COMPUTING THE BOOK PROFIT FOR THE PURPOSE OF SECTION 115JB. RESPECTFULLY FOLLOWIN G THIS DECISION, NO INTERFERENCE IS REQUIRED IN THE VIEW TAKEN BY LEARN ED CIT(A). THIS GROUND OF THE REVENUE IS, THEREFORE, DISMISSED. 21. GROUND NO.5 IS REPRODUCED BELOW: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN THE ADJUSTMENT OF BOOK PROFIT U/S. 115J BY THE NET INCOME OVER EXPENDITURE AMOUNTING TO RS.15,15,54,000/-. ITA NO.1820/AHD/2010 DCIT, BARODA VS. GUJARAT URJA VIKAS NIGAM LTD. FOR A.Y. 2006-07 - 19 - 22. THIS GROUND IS CONSEQUENTIAL IN NATURE. WE HAVE ALREADY RESTORED GROUND NO.2 FOR DE NOVO ADJUDICATION. THE OUTCOME O F THE INVESTIGATION SHALL BE APPLIED WHILE COMPUTING THE BOOK-PROFIT U/ S. 115J OF IT ACT. THEREFORE, WE ARE NOT APPROVING THE VIEW OF LD. CIT (A) AND RESTORING THIS GROUND, AS WELL, TO AO FOR AFRESH ADJUDICATION . THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSE ONLY. 23. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLOWED AS PER THE DIRECTION PROTANTO. SD/- SD/- (ANIL CHATURVEDI) ( MUKUL KR. SHRAWAT ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 30/09/2013 PRABHAT KR. KESARWANI, SR. P.S. TRUE COPY / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A)-III, AHMEDABAD 5. , , / DR, ITAT, AHMEDABAD 6. / GUARD FILE. / BY ORDER, / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD