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

ITA 1821/AHD/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 76861 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-06-2014
• Appeal Filed By: Department
• Bench Allotted: C
• Next Hearing Date: 12-06-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 28-05-2010
• Court: TRIBUNAL
• Department Lawyers: T P KISHANKUMAR
• Assessee Lawyers: J P SHAH
• Keywords: Business income; Depreciation; Earning of tax free income; Proportionate interest; Retrospective amendment; Additional evidence; Revenue expenditure
• Section: 14A; 115JB

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, AHMEDABAD 0 00 0 0 00 0 , , , , ! ' ! ' ! ' ! '0 00 0 0 00 0 #' #' #' #', , , , $ $ $ $ % % % % BEFORE SHRI D.K. TYAGI, JUDICIAL MEMBER AND SHRI N.S. SAINI, ACCOUNTANT MEMBER ITA NO. 1874/AHD/2010 ASSESSMENT YEAR 2007-08 GUJARAT URJA VIKAS NIGAM LTD. SARDAR PATEL VIDYUT BHAVAN RACE COURSE CIRCLE, BARODA. PAN: AACCG2861L VS ACIT, CIRCLE-1(1), BARODA. &'/ APPELLANT )&' / RESPONDENT ITA NO. 1821/AHD/2010 ASSESSMENT YEAR 2007-08 DCIT, CIRCLE-1(1), BARODA. VS GUJARAT URJA VIKAS NIGAM LTD. SARDAR PATEL VIDYUT BHAVAN RACE COURSE CIRCLE, BARODA. PAN: AACCG2861L &'/ APPELLANT )&' / RESPONDENT REVENUE BY : SHRI T.P. KISHANKUMAR, SR. DR ASSESSEE(S) BY : SHRI J.P. SHAH, AR *' + , -$/ // / DATE OF HEARING : 29/05/2014 ./0 , -$ / DATE OF PRONOUNCEMENT : 20/06/2014 1 1 1 1/ // / O R D E R PER SHRI N.S. SAINI, ACCOUNTANT MEMBER: THESE ARE THE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), BARODA DATED 25.02.2010. ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 2 - 2. GROUND NO. 1 OF THE ASSESSEES APPEAL IS DIRECT ED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) C ONFIRMING THE ADDITION OF RS 1,97,80,00,000/- MADE OUT OF THE INTEREST EXP ENDITURE CONSIDERING THE SAME AS ATTRIBUTABLE TO EXEMPT DIVIDEND INCOME BY I NVOKING THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT, 1961. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS ING OFFICER OBSERVED THAT THE ASSESSEE HAS CLAIMED INTEREST EXP ENSES OF RS 18325.41 LAKHS. HE FURTHER OBSERVED THAT THE ASSESSEE HAS INVESTED RS 5,47,709.74 LAKHS, OF WHICH DIVIDEND INCOME OF RS 1283.95 LAKHS WAS EARNED. HE ALSO OBSERVED THAT NO EXPENDITURE HAS BEEN ATTRIBUTED TO THE OPENING OF EXEMPT DIVIDEND INCOME. BY INVOKING THE PROVISIONS OF SEC TION 14A READ WITH RULE 8D, THE ASSESSING OFFICER DISALLOWED RS 197.80 CROR ES. 4. ON APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS), ASSESSEE SUBMITTED THAT THERE WAS NO NEW ADDITION T O THE INVESTMENTS DURING THE YEAR. THE ENTIRE INVESTMENT WAS MADE IN THE EARLIER YEARS BY ERSTWHILE GUJARAT ELECTRICITY BOARD (GEB) WHICH GOT DE-MERGED IN THE IMMEDIATELY PRECEDING YEAR. THE ASSESSEE WAS ONE O F THE SEVEN DE-MERGED COMPANIES THEREOF. IT WAS FURTHER ARGUED THAT EARN ING OF DIVIDEND INCOME WAS A PASSIVE EXERCISE REQUIRING NIL EXPENDITURE ON FINANCIAL OR ADMINISTRATIVE RESOURCES. HENCE, DISALLOWANCE U/S. 14A WAS NOT JUSTIFIED. 5. THE COMMISSIONER OF INCOME TAX (APPEALS) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT IT WAS EX PENDITURE AT THE TIME OF ASSESSMENT PROCEEDINGS WITH INVESTMENT APPEARING IN THE BALANCE SHEET AS ON 31.03.2007 AMOUNTING TO RS 5,47,709.74 LAKHS REP RESENTED THE INVESTMENT RESULTING ON ACCOUNT OF DIVESTING OF ASS ETS AND LIABILITIES OF ERSTWHILE GEB WHICH WERE TAKEN OVER BY THE STATE GO VERNMENT ON 31.03.2005 IN SEVEN CORPORATE ENTITIES WHICH CAME I NTO EXISTENCE ON RESTRUCTURING OF GEB. IT WAS FURTHER SUBMITTED THA T THE ERSTWHILE GEB HAD ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 3 - ALSO MADE INVESTMENT IN THE COMPANIES ENGAGED IN GE NERATION OF POWER. POST RESTRUCTURING AS A RESIDUAL ENTITY, THE COMPAN Y RECEIVED THESE INVESTMENTS PURSUANT TO THE NOTIFICATION ISSUED BY THE STATE GOVERNMENT. THEREFORE, IT CANNOT BE CONCLUDED THAT THE COMPANY BORROWED FUNDS AND DIVERTED THE SAME FOR INVESTMENT IN SUBSTANTIAL OR OTHER COMPANIES. THE COMMISSIONER OF INCOME TAX (APPEALS) AFTER CONSIDER ING THE SUBMISSIONS OF THE ASSESSED HELD AS UNDER: 4.7 I HAVE CONSIDERED THE SUBMISSIONS OF THE L D. AR AND THE FACTS OF THE CASE. THE ISSUE RELATING TO DISALLOWA NCE U/S 14A HAD BECOME A CONTENTIOUS ISSUE AND CONFLICTING JUDGMENT S WERE AVAILABLE. IN ORDER TO HAVE A CONSIDERED OPINION IN THIS MATTER, THE ITAT CONSTITUTED A SPECIAL BENCH FOR THIS PURPO SE. THIS ISSUE HAS BEEN EXAMINED IN DETAIL IN ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD., 119 TTJ 289. THE HON'BLE ITAT HAS HELD THEREIN THAT SO FAR AS ONUS IS CONCERNED, THE BURDE N LIES ON THE ASSESSEE TO PROVE THAT THE EXPENDITURE WAS INCURRED IN THE TAXABLE BUSINESS OPERATIONS AND NOT IN THE EXEMPT I NCOME OPERATIONS. SECONDLY, IT HAS BEEN HELD THAT PARLIAM ENT IN ITS WISDOM HAD ENACTED SECTION 14A WITH RETROSPECTIVE E FFECT FROM 1.4.1962 IN ORDER TO CLARIFY THE ALREADY EXISTING P OSITION THAT ONLY THOSE EXPENSES COULD BE CLAIMED WHICH WERE REL ATABLE TO TAXABLE INCOME. SUB-SECTIONS (2) & (3) OF SECTION 1 4A WERE INSERTED BY THE FINANCE ACT, 2006 W.E.F. 1.4.2007. HOWEVER, THESE ARE ONLY MACHINERY PROVISIONS INTENDED TO PRO VIDED A BASIS FOR COMPUTATION OF THE DISALLOWANCE TO BE MADE U/S 14A. SINCE THE MAIN SECTION ITSELF WAS RETROSPECTIVELY INSERTE D IN THE STATUTE BOOK W.E.F. 1.4.1962, THE MACHINERY PROVISIONS PROV IDING THAT THE DISALLOWANCE SHOULD BE COMPUTED AS PER RULE 8D WOULD ALSO BE DEEMED TO HAVE BEEN IN FORCE W.E.F. 1.4.1962. FOLLOWING THE DECISION OF THE SPECIAL BENCH AS ABOVE, IT IS HELD THAT THE PROVISIONS OF RULE 8D WOULD BE APPLICABLE ON THE FA CTS OF THE INSTANT CASE. THE AO IS DIRECTED TO WORK OUT THE DI SALLOWANCE AS PER THE PROVISIONS OF RULE 8D. IN VIEW OF THE ABOV E, IT IS HELD THAT THE ASSESSING OFFICER WAS JUSTIFIED IN MAKING THE ADDITION U/S. 14A. THIS GROUND THUS FAILS. 6. THE DEPARTMENTAL REPRESENTATIVE RELIED ON THE O RDER OF THE ASSESSING OFFICER WHEREAS THE AUTHORIZED REPRESENTA TIVE OF THE ASSESSEE SUBMITTED THAT THE ISSUE WAS COVERED BY THE ORDER O F THIS TRIBUNAL IN ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 4 - ASSESSEES OWN CASE BY THE ORDER OF THIS TRIBUNAL I N ASSESSEES OWN CASE PASSED IN ITA NO. 1820/AHD/2010 IN THE IMMEDIATELY PRECEDING YEAR 2006- 07 WHEREIN VIDE ORDER DATED 30.09.2013 THE TRIBUNAL RESTORED THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATI ON AFRESH. HE THEREFORE SUBMITTED THAT THIS ISSUE SHOULD BE RESTORED BACK T O THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATION AFRESH WITH THE SAME DIREC TIONS AS GIVEN BY THE TRIBUNAL IN THE ASSESSMENT YEAR 2006-07. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RECORD . THE UNDISPUTED FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS EARNED TAX FREE DIVIDEND INCOME OF RS 1283.95 LAKHS AND TH AT THE ASSESSEE HAS CLAIMED INTEREST EXPENDITURE OF RS 18,325.41 LAKHS. THE ASSESSEE HAS NOT ATTRIBUTED ANY EXPENDITURE TOWARDS EARNING OF EXEMP T DIVIDEND INCOME. THEREFORE, BY INVOKING THE SECTION 14A READ WITH RU LE 8D HE MADE DISALLOWANCE OF RS 197.80 CRORES. WE FIND THAT A S IMILAR ISSUE HAD COME UP BEFORE THIS TRIBUNAL IN ASSESSEES OWN CASE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR 2006-07 WHEREIN THE TRIBUNAL RESTOR ED THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATION AFRESH BY OBSERVING AS UNDER: 2. AT THE OUTSET, OUR ATTENTION HAS BEEN DRAWN ON AN ADDITIONAL GROUND OF APPEAL RAISED BY THE REVENUE D EPARTMENT READS AS UNDER: '1(A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) ERRED IN DELETING THE ADDITION OFRS.187.97 CRORES U/S 14A OF THE ACT ON ACCOUNT OF INTEREST AT TRIBUTABLE TO INVESTMENT IN SHARES WITHOUT APPRECIATING THE FACT THAT IN VIEW OF SECTION 106 OF THE INDIAN EVIDENCE ACT, IT WAS U P TO THE ASSESSEE COMPANY TO ADDUCE EVIDENCE THAT ALL THE BO RROWINGS WERE USED FOR THE PURPOSES OF BUSINESS AND ITS IS A SSESSEE' S OWN SURPLUS FUND THAT WERE INVESTED IN THE SHARES A ND DEPOSITS EARNING EXEMPTED INCOME, AND, EVEN IN CASE OF MIXED FUNDS, THE DISALLOWANCE OF INTEREST COULD BE MADE.' 1(B) AS AN ALTERNATE PLEA, THE ID. CIT(A) ERRED IN NOT UPHOLDING THE ADDITION U/S. 14A ON ACCOUNT OF INTER EST ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 5 - ATTRIBUTABLE TO INVESTMENT IN SHARES TO THE EXTENT IN VIEW OF PROVISIONS OF SECTION 14A READ WITH RULE 8D. ' 3. LEARNED DR HAS PLEADED THAT AN ADDITION OF RS. 1 87.97 CRORES WHICH WAS MADE U/S 14A WAS DELETED BY LEARNE D CIT(A), HOWEVER, IT WAS NOT ADJUDICATED AS PER THE GROUNDS OF APPEAL. LEARNED DR HAS ALSO ARGUED THAT THE ASSESSEE WAS RE QUIRED TO ADDUCE EVIDENCE THAT ALL THE BORROWINGS WERE USED F OR THE PURPOSE OF THE BUSINESS AND THE ASSESSEE'S OWN SURP LUS FUNDS WERE INVESTED IN THE SHARES. LEARNED DR HAS ALSO IN FORMED THAT IN A.Y. 2007-08, THE ADDITION OF SIMILAR NATURE WAS UPHELD BY LEARNED CIT(A). HE HAS THUS PLEADED THAT THE ISSUE BEING LEGAL IN NATURE WHICH HAS EMERGED FROM THE FACTS ALREADY ON RECORD, THEREFORE, THE ADDITIONAL GROUND DESERVES TO BE ADM ITTED FOR ADJUDICATION. 4. AFTER HEARING BOTH THE SIDES, THE ADDITIONAL GRO UND OF THE REVENUE DEPARTMENT IS HEREBY ADMITTED FOR ADJUDICAT ION. AT THE OUTSET, IT IS WORTH TO MENTION THAT THE IMPUGNED AD DITION OF RS.18796.82 LACS WAS MADE BY THE AO WITHOUT HAVING ANY DISCUSSION IN RESPECT OF THE APPLICABILITY OF SECTI ON 14A OF THE IT ACT. LIKEWISE, LEARNED CIT(A) HAS ALSO NOT DISCUSSE D THE APPLICABILITY OF THE PROVISIONS OF SECTION 14A OF I T ACT, HOWEVER, AFTER CONSIDERING THE MERITS OF THE CASE, DELETED T HE ADDITION. WITH THIS CLARIFICATION, WE HAVE EXAMINED THE FACTS AND THE ISSUE AS EMERGED FROM THE CORRESPONDING ASSESSMENT ORDER PASSED U/S. 143(3), DATED 26.12.2008. IT WAS NOTED BY THE AO THAT THE ASSESSEE HAD CLAIMED A HUGE AMOUNT OF INTEREST EXPE NDITURE 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 & GUARANTEE FEES 591.65 19435.13 LESS: INTEREST CAPITALIZED 74.54 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 WHICH DIVIDEND EARNED WAS AT RS.508.18 LACS. THE AO 'S OBJECTION WAS THAT ON ONE HAND THE ASSESSEE HAS DIVERTED THE HUGE FUNDS TOWARDS SUCH INVESTMENT HAVING EXEMPTED INCOME AND ON THE ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 6 - OTHER HAND BORROWED HUGE FUNDS OF RS.3,46,272.51 LA CS ON WHICH CLAIMED INTEREST OF RS. 19360.59 LACS. THEREF ORE, THE AO WAS OF THE VIEW THAT THE ASSESSEE HAD DIVERTED THE BORROWED FUNDS FOR EARNING EXEMPTED INCOME. THE ASSESSEE'S C ONTENTION WAS THAT THE INVESTMENT DURING THE YEAR WAS ONLY RS .102.32 LACS AND REST OF THE INVESTMENT WAS MADE IN THE EARLIER YEARS. ACCORDING TO THE AO, IF THE ASSESSEE HAD NOT MADE S UCH INVESTMENT EITHER IN THE YEAR UNDER CONSIDERATION O R IN EARLIER YEARS THEN THE ASSESSEE WOULD NOT HAVE BEEN REQUIRE D TO BORROW INTEREST BEARING LOANS. THE AO HAS PLACED RELIANCE UPON THE CASE OF H.R SUGAR FACTORY, 187 ITR 366 (AID) FOR THE LEGAL PROPOSITION THAT THE ASSESSEE COULD HAVE OTHERWISE AVOIDED ITS LIABILITY OF INTEREST BY NOT GIVING INTEREST FREE F UNDS TO ITS GROUP CONCERNS. THE ADDITION IN THE QUESTION WAS THUS MAD E BY THE AO IN THE FOLLOWING CONCLUSION. 'IN VIEW OF THE ABOVE DISCUSSION AND PROVISION OF L AW, THE INTEREST ATTRIBUTABLE TO THE INVESTMENT IS NOT ALLO WABLE 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 SIMPLY S UBMITTED THAT LOANS FROM VARIOUS BANKS WITH VARYING INTEREST RATE S WERE OBTAINED. DURING THE YEAR UNDER CONSIDERATION, THE MARKET RATE OF INTEREST WAS 12%. THEREFORE, INTEREST AT THE RAT E OF 12% WORKS OUT TO RS.65725.17 LACS ON INVESTMENTS OF RS. 547709.74 LACS. HOWEVER, THE ASSESSEE HAS CLAIMED INTEREST EX PENDITURE 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 THE INTEREST EXPENDITURE OF RS.19360.59 LACS ASSESSEE H AS GROWN INTEREST AND DIVIDEND INCOME OF RS.563.77 LACS. THU S, NET DISALLOWANCE IS MADE OF RS.18796.82 LACS.' 5. BEING AGGRIEVED THE MATTER WAS CARRIED BEFORE TH E FIRST APPELLATE AUTHORITY WHO HAS DECIDED THE ISSUE IN AS SESSEE'S FAVOUR 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 N O INVESTMENT WAS MADE BY THE ASSESSEE COMPANY BY USING BORROWED FUNDS. THE ENTIRE INVESTMENT, EXCEPT MINOR INVESTMENT OF R S.11.25 LACS WAS INHERITED IN THE DEMERGER EXERCISE. THE IN VESTMENT IN SHARES WAS DUE TO THE RESTRUCTURING CARRIED OUT AT THE BEHEST OF GOG. THE INVESTMENTS WERE IN THE FORM OF SHARES OF SUBSIDIARY COMPANIES AS PAN OF THE FINANCIAL RESTRUCTURING PLA N APPROVED BY THE GOVERNMENT OF GUJARAT WHICH WAS INTEGRAL TO THE DEMERGER. THIS WAS CLEARLY COMMERCIALLY EXPEDIENT F OR THE APPELLANT COMPANY. THE BUSINESS ITSELF WAS VIABLE O NLY UNDER THE PLAN OF RESTRUCTURING, WHICH REQUIRED THE COMPA NY TO HAVE CROSS-HOLDINGS IN THE UNBUNDLED COMPANIES OF GEB. I N FACT, THE ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 7 - APPELLANT BECAME THE HOLDING COMPANY OF THE GENERAT ING AND TRANSMISSION COMPANIES. LOOKING TO THE FACTS AND CI RCUMSTANCES OF THE CASE, I AM OF THE OPINION THAT THERE WAS NO DIVERSION OF BORROWED FUNDS FOR NON-BUSINESS PURPOSES. ACCORDING LY, THE ADDITION OF RS. 18796.82 LACS IS DIRECTED TO BE DEL ETED.' 6. WITH THIS FACTUAL BACKGROUND, WE HAVE HEARD BOTH THE SIDES. LEARNED DR HAS PRIMARILY PLACED RELIANCE ON A DECISION 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 TH E ASSESSMENT YEAR, I.E., IN A.Y. 2007-08 LEARNED CIT(A) HAD SUST AINED THE SAME NATURE OF ADDITION. FROM THE FACTS OF THE CASE , WE HAVE NOTED THAT THERE WAS RE-STRUCTURING ACCORDING TO WH ICH ERSTWHILE GEB WAS DEMERGED INTO SEVEN DIFFERENT COMPANIES. PO ST RE- STRUCTURING; THE ASSESSMENT YEAR UNDER CONSIDERATIO N IS THE FIRST YEAR OF OPERATION OF THE ASSESSEE COMPANY. ON ONE H AND, THOSE WERE THE FACTS WHICH WERE RELIED UPON BY THE LEARNE D CIT(A). HOWEVER, ON THE OTHER HAND, THE AO HAS REPRODUCED S OME OF THE REPLIES OF THE ASSESSEE THROUGH WHICH IT WAS CLAIME D THAT THE SAID INVESTMENT WAS NOT MADE BY THE ASSESSEE COMPAN Y OUT OF THE BORROWED FUNDS BUT FROM THE CONSUMERS, CONTRIBU TION AND SUBSIDIARIES. THERE WAS A REFERENCE OF THE ANNUAL A CCOUNTS OF THE YEAR 2005-06. THE ASSESSEE HAS ALSO INFORMED THAT D URING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY HAD I NVESTED ONLY A SUM OF RS.11.25 LACS. REST OF THE INVESTMENT S WERE THE SHARE CAPITAL OF THE SUBSIDIARY COMPANIES AS PER TH E TERMS OF THE FINANCIAL RESTRUCTURING PLAN APPROVED BY THE GOVERN MENT OF GUJARAT. WE HAVE NOTED THAT THE LEARNED CIT(A) HAS GRANTED RELIEF ONLY ON THE GROUND THAT THE ASSESSEE COMPANY HAD BECOME THE HOLDING COMPANY AND THE INVESTMENTS WERE IN THE FORM OF SHARES OF SUBSIDIARY COMPANIES WHICH WAS 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 EXA MINE THE SCHEME OF DEMERGER AND THEREAFTER THE ISSUE COULD H AVE BEEN STREAMLINED. AS PER THE DEFINITION OF 'DEMERGER' PR ESCRIBED U/S.2(19AA) MEANS; THE TRANSFER PURSUANT TO A SCHEM E OF ARRANGEMENT BY A DEMERGED COMPANY OF ITS ONE OR MOR E UNDERTAKINGS TO ANY RESULTING COMPANY IN SUCH A MAN NER THAT ALL THE PROPERTY OF THE UNDERTAKING/UNIT BEING TRANSFER RED BY THE DEMERGED COMPANY IMMEDIATELY BEFORE THE DEMERGER, W HICH BECOMES THE PROPERTY OF THE RESULTING COMPANY BY VI RTUE OF THE DEMERGER. THEREFORE, IT WAS NECESSARY FOR THE AO TO EXAMINE THE BALANCE SHEET OF THE DEMERGED COMPANY AND THE POSIT ION OF THE ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 8 - ACCOUNTS OF THE UNDERTAKING WHICH IS DEMERGED WITH THE RESULTING COMPANY. THE AO HAS TO EXAMINE THE LIABIL ITIES RELATED TO THE SAID UNDERTAKING WHETHER BEING TRANSFERRED U NDER THE SCHEME OF ARRANGEMENT WHICH WERE IN EXISTENCE IMMED IATELY BEFORE THE DEMERGER. THE AO HAS TO EXAMINE THE VALU E OF THE PROPERTY IN THE BOOKS OF ACCOUNTS IMMEDIATELY BEFOR E THE DEMERGER WHICH WAS TRANSFERRED. THE AO HAS ALSO TO EXAMINE THE FINANCIAL POSITION OF THE 'RESULTING COMPANY', AS DEFINED U/S.2(41A) OF IT ACT. IN GENERAL, AN UNDERTAKING OF THE DEMERGED COMPANY IS TRANSFERRED IN A DEMERGER SCHEM E AND AS A RESULT A RESULTING COMPANY COMES INTO EXISTENCE. THE RESULTING COMPANY IN CONSIDERATION OF SUCH TRANSFER OF AN UND ERTAKING 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 ASCERTA INED BY THE AO. THIS IS THE FIRST ASPECT, WHICH WAS NOT EXAMINE D BY THE AO AND THE ORDER 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 REQU IRED TO EXAMINE FIRST THE CORRECTNESS OF THE CLAIM. WHETHER THE INTEREST ON TERM LOANS, BANK CHARGES AND GUARANTEE FEES WERE IN RESPECT OF THE BUSINESS OF THE ASSESSEE. THEREAFTER, THE AO IS ALSO REQUIRED TO GIVE A CLEAR FINDING ABOUT THE BORROWIN GS MADE BY THE ASSESSEE ON WHICH THE SAID INTEREST WAS PAID. T HE NEXT STEP IS THAT THE AO HAS TO EXAMINE THE SOURCES OF THE FU NDS WHICH WERE INVESTED FOR EARNING THE DIVIDEND INCOME. IF T HE SOURCE OF SUCH INVESTMENT IS OUT OF THE INTEREST BEARING BORR OWINGS, THEN ONLY THE QUESTION OF DISALLOWANCE OF INTEREST WOULD ARISE, OTHERWISE NOT. ON THE OTHER HAND, THE CLAIM OF THE ASSESSEE IS THAT THERE WERE SUFFICIENT NON INTEREST BEARING RES ERVES OR SURPLUS AVAILABLE. THE AO IS REQUIRED TO INVESTIGAT E THE CORRECTNESS OF THE CLAIM THAT WHETHER THE ASSESSEE HAD SUFFICIENT NON INTEREST BEARING FUND AVAILABLE AND IN WHAT FOR M THOSE WERE UTILIZED BY THE ASSESSEE. IF THE ASSESSEE IS IN A P OSITION TO DEMONSTRATE THAT THE NON-INTEREST BEARING FUNDS HAV E ACTUALLY BEEN INVESTED TO EARN EXEMPTED INCOME THEN THE ASSE SSEE'S CLAIM IS LEGALLY CORRECT. THEREAFTER, THE QUESTION OF THE INVOCATION OF SECTION 14A COMES INTO PLAY. AS FAR AS THE APPLI CABILITY OF THE DECISION OF SPECIAL BENCH IS CONCERNED THE SAME NOW STOOD COVERED BY THE DECISION OF HON'BLE BOMBAY HIGH COUR T PRONOUNCED IN THE CASE OF GODREJ AND BOYCE, 328 ITR 81 (BOM). FOR THE SAKE OF COMPLETENESS HEREIN BELOW REPRODUCE D A PORTION OF AN ITAT ORDER VIZ., ADITYA MIDCALS AS FO LLOWS: ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 9 - '5. WITH THIS BRIEF BACKGROUND, WE HAVE EXAMINED TH E FACTS OF THE CASE AS ALSO THE LAW PRONOUNCED IN THIS REGA RD. 6. AS FAR AS THE ASSESSING OFFICER'S ACTION IS CONC ERNED, THE DISALLOWANCE HAS BEEN MADE ON THE BASIS OF A CALCUL ATION OF THE PROPORTIONATE INTEREST ALLEGED TO BE ATTRIBUTABLE T O THE INVESTMENT EARNING 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 S EEN THAT THE WORKING OF DISALLOWANCE WAS WRONG BECAUSE WHILE CAL CULATING THE PROPORTIONATE INTEREST ATTRIBUTABLE TO DIVIDEND INCOME THE RATIO OF DIVIDEND INCOME AND TOTAL SALES HAVE BEEN TAKEN THOUGH THERE WAS NO DIRECT RELATION BETWEEN THE TWO. THE A SSESSING OFFICER HAD THUS MADE THE CALCULATION AFTER TAKING INTO ACCOUNT THE PROPORTION OF THE INTEREST ON THE RATIO BETWEEN THE INVESTMENT IN SHARES AND TOTAL ASSETS INCLUDING INV ESTMENT IN SHARES. APART FROM THIS, THERE IS NOTHING IN THE AS SESSMENT ORDER WHICH CAN ESTABLISH THE NEXUS OF UTILIZATION 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(L)(III) OF THE ACT HAVE ALSO BEEN TOUCHED UPON. THE ASSESSING OFFICER WAS EXPECTED TO CORRELATE THE SAID DISCUSSION WITH THE EXEMPTED DIVIDEND INCOME U/S. 10(33) OF THE ACT. AS FAR AS T HE LAW PRONOUNCED IN THIS REGARD IS CONCERNED, FIRST OF AL L, WE HAVE TO FOLLOW A LATEST DECISION OF HON'BLE BOMBAY HIGH COURT PRONOUNCED IN THE CASE OF GODREJ & BOYCE MFG. CO.LT D. MUMBAI 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 CONSTITUTIONAL VALIDITY O F SECTION 14A OF THE I.T. ACT, 1961 AND HELD THAT THE ASSESSING O FFICER SHOULD DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO DIV IDEND 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 ASSES SING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPO RTIONMENT. IT HAS ALSO BEEN OBSERVED BY THE HON'BLE COURT THAT WH ILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHOULD PR OVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 6.1. IN THIS JUDGEMENT AT THE END, THE HON'BLE COUR T HAS ALSO RECAPITULATED THE CONCLUSION AND PRONOUNCED THAT A FINDING IS REQUIRED WHETHER THE INVESTMENT IN SHARES IS MADE O UT OF OWN FUNDS OR OUT OF BORROWED FUNDS. A NEXUS IS REQUIRED TO BE ESTABLISHED BETWEEN THE INVESTMENTS AND THE BORROWI NGS. IN SECTION 14A OF THE ACT EXPENDITURE INCURRED IN RELA TION TO ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 10 - EXEMPTED INCOME IS TO BE DISALLOWED ONLY IF THE ASS ESSING OFFICER IS SATISFIED WITH THE EXPENDITURE CLAIMED B Y THE ASSESSEE PERTAINING TO THE SAID EXEMPT INCOME. RATHER, THE C OURT WAS VERY SPECIFIC THAT IN CASE, NO SUCH EXERCISE WAS CA RRIED OUT BY THE ASSESSING OFFICER THEN THE MATTER IS TO BE REMA NDED BACK FOR AFRESH INVESTIGATION. IT HAS ALSO BEEN MADE CLE AR THAT THE PROVISO TO SECTION 14A OF THE ACT WAS EFFECTIVE FRO M 2001-02. THE HON'BLE COURT HAS ALSO POINTED OUT THE IMPORTAN CE OF RULE 8D OF THE I.T.RULES, 1962. IT WAS MADE CLEAR THAT S UB-SECTION (1) TO SECTION 14A WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 01/04/1962, HOWEVER, SUB-SECTIONS (2) & (3) WERE MA DE APPLICABLE WITH EFFECT FROM 01/04/2007. THE PROVISO WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 11/05/2001 , HOWEVER RULE 8D WAS INSERTED BY THE INCOME TAX (FIFTH AMEND MENT), RULES, 2008 BY PUBLICATION IN THE GAZETTE DATED 24/ 03/2008; REPRODUCED BELOW:- 'A) THE ITAT HAD RECORDED A FINDING IN THE EARLIER ASSESSMENTS THAT THE INVESTMENTS IN SHARES AND MUTU AL FUNDS HAVE BEEN MADE OUT OF OWN FUNDS AND NOT OUT OF BORR OWED FUNDS AND THAT THERE IS NO NEXUS BETWEEN THE INVEST MENTS AND THE BORROWINGS. HOWEVER, IN NONE OF THOSE DECISIONS WAS THE DISALLOW ABILITY OF EXPENSES INCURRED IN RELATION T O EXEMPT INCOME EARNED OUT OF INVESTMENTS MADE OUT OF OWN FU NDS CONSIDERED. MOREOVER, UNDER SECTION 14A, EXPENDITUR E INCURRED IN RELATION TO EXEMPT INCOME CAN BE DISALLOWED ONLY IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECT NESS OF THE EXPENDITURE CLAIMED BY THE ASSESSEE. IN THE PRESENT CASE, NO SUCH EXERCISE HAS BEEN CARRIED OUT AND, THEREFORE, THE TRIBUNAL WAS JUSTIFIED IN REMANDING THE MATTER. B) SECTION 14A WAS INTRODUCED BY THE FINANCE ACT 20 01 WITH RETROSPECTIVE EFFECT FROM 1 APRIL 1962. HOWEVER, IN 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 A PPLICABILITY OF SECTION 14A IN ITS PROPER PERSPECTIVE, FOR ASSESSME NT YEAR 2001 -2002 WOULD NOT BAR THE TRIBUNAL FROM CONSIDERING D ISALLOWANCE UNDER SECTION 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 T HE FACTS OF THE PRESENT CASE, BECAUSE OF THE MATERIAL CHANGE IN TRODUCED BY SECTION 14A BY WAY OF STATUTORY DISALLOWANCE IN CER TAIN CASES. THERE, THE DECISIONS OF THE TRIBUNAL IN THE EARLIER YEARS WOULD HAVE NO RELEVANCE IN CONSIDERING DISALLOWANCE IN AS SESSMENT YEAR 2002-2003 IN THE LIGHT OF SECTION 14A OF THE A CT. ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 11 - 73. FOR THE REASONS WHICH WE HAVE INDICATED, WE HAV E COME TO THE CONCLUSION THAT UNDER SECTION 14A(1) IT IS FOR THE ASSESSING OFFICER TO DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED ANY EXPENDITURE IN RELATION TO THE EARNING OF INCOM E WHICH DOES NOT FORM PAN OF THE TOTAL INCOME UNDER THE ACT AND IF SO TO QUANTIFY THE EXTENT OF THE DISALLOWANCE. THE ASSESS ING OFFICER WOULD HAVE TO ARRIVE AT HIS DETERMINATION AFTER FUR NISHING AN OPPORTUNITY TO THE ASSESSEE TO PRODUCE ITS ACCOUNTS AND TO PLACE ON THE RECORD ALL RELEVANT MATERIAL IN SUPPORT OF T HE CIRCUMSTANCES WHICH ARE CONSIDERED TO BE RELEVANT A ND GERMANE. FOR THIS PURPOSE AND IN LIGHT OF OUR OBSER VATIONS MADE EARLIER IN THIS SECTION OF THE JUDGMENT, WE DEEM IT APPROPRIATE AND PROPER TO REMAND THE PROCEEDINGS BACK TO THE AS SESSING OFFICER FOR A FRESH DETERMINATION. CONCLUSION: 74. OUR CONCLUSIONS IN THIS JUDGMENT ARE AS FOLLOWS ; I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FAL LING WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME TA X ACT 1961, AS WAS APPLICABLE FOR ASSESSMENT YEAR 2002-03 IS NOT INCLUDIBLE IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE. CONSEQUENTLY, NO DEDUCTION SHALL BE ALLOW ED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIRTUE OF THE PROVIS IONS OF SECTION 14A(1); II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTION 115O(1) OF ADDITIONAL INCOME TAX ON PROFITS DECLARE D, DISTRIBUTED OR PAID IS A CHARGE ON A COMPONENT OF T HE PROFITS OF THE COMPANY. THE COMPANY IS CHARGEABLE T O TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAYS TAX IN DISCHARGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT FOR ITS SHAREHOLDERS. IN THE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DIVIDEND, INCOME BY WAY OF DIVIDEND DOES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROVISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS; III) THE PROVISIONS OF SUB SECTIONS (2) AND (3) OF SECTION 14A OF THE INCOME TAX ACT 1961 ARE CONSTITUTIONALLY VAL ID; IV) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RUL ES AS INSERTED BY THE INCOME TAX (FIFTH AMENDMENT) RULES 2008 ARE NOT ULTRA VIRES THE PROVISIONS OF SECTION 14A, MORE PARTICULARLY SUB SECTION (2) AND DO NOT OFFEND ARTICLE 14 OF THE CONSTITUTION;; V) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24 TH MARCH, 2008 SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09; (VI) EVEN PRIOR TO ASSESSMENT YEAR 2008-09, WHEN RU LE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO EN FORCE ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 12 - THE PROVISIONS OF SUB SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFFICER IS DUTY BOUND TO DET ERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UND ER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASON ABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FA CTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON TH E RECORD; VII) THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 SH ALL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSI NG OFFICER SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RE LATION TO DIVIDEND INCOME / INCOME FROM MUTUAL FUNDS WHICH DO ES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED U NDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. W HILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SH ALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATE RIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE.' 6.4 DUE TO THE DECISION OF THE HON'BLE 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 HON 'BLE COURT. THE OUTCOME OF THE ABOVE DISCUSSION IS THAT THE 'AD DITIONAL GROUND' RAISED BY THE REVENUE MAY BE TREATED AS ALL OWED BUT ONLY FOR STATISTICAL PURPOSE. 8. IN THE ABSENCE OF ANY DISTINGUISHING FEATURES P OINTED OUT BY THE DEPARTMENTAL REPRESENTATIVE, FACTS BEING IDENTICAL, RESPECTFULLY FOLLOWING THE PRECEDENT WE RESTORE THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATION AFRESH WITH THE SAME DIRECTIONS AS GIV EN BY THE TRIBUNAL IN THE ASSESSMENT YEAR 2006-07 IN THE ABOVE QUOTED ORDER. NEEDLESS TO MENTION THAT HE SHALL ALLOW REASONABLE AND PROPER OPPORTUNI TY OF HEARING TO THE ASSESSEE BEFORE ADJUDICATING THE ISSUE. THUS, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSE. 9. GROUND NO. 2 OF THE APPEAL OF ASSESSEE IS DIREC TED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) C ONFIRMING DISALLOWANCE ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 13 - OF RS 1,04,52,500/- UNDER THE HEAD ASSETS WRITTEN O FF ON THE GROUND THAT THE SAME IS NOT A REVENUE EXPENDITURE. 10. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SING OFFICER NOTED THAT THE ASSESSEE HAS WRITTEN OFF ASSETS BY DEBITIN G PROFIT AND LOSS ACCOUNT A SUM OF RS 1,13,00,000/- BEING THE VALUE OF ASSETS C OSTING LESS THAN RS 5,000/-. THE ASSESSING OFFICER HELD THE SAME TO BE PART OF PLANT AND MACHINERY AND AFTER ALLOWING DEPRECIATION THEREON, DISALLOWED THE NET AMOUNT OF RS 1,04,52,500/-. 11. BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS ), THE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY HAS WRITTEN OFF ASSETS ONLY IF ITS VALUE WAS LESS THAN RS 5,000/-. REGARDING THE NATURE OF ASSETS, IT WAS SUBMITTED THAT THESE WERE IN THE NATURE OF OFFICE EQUIPMENTS. THE COMMISSIONER OF INCOME TAX (APPEALS) AFTER CONSIDERING THE SUBMISSI ONS OF THE ASSESSEE HELD AS UNDER : I HAVE CONSIDERED THE SUBMISSION OF THE LD. AUTHORI ZED REPRESENTATIVE OF THE ASSESSEE AND THE FACTS OF THE CASE. IT IS PERTINENT TO NOTE IN THIS REGARD THAT THE EARLIER P ROVISION ALLOWING WRITE-OFF OF TOOLS AND EQUIPMENT COSTING LESS THAN RS 5000/- AT THE RATE OF 100% IS NO LONGER ON THE STATUTE BOOK. NOW, AFTER 01.04.1996, ALL SUCH ITEMS OF OFFICE EQUIPMENT WOUL D FORM PART OF PLANT AND THE EXPENSES IN THIS REGARD WOULD BE C APITALIZED. ACCORDINGLY, IT IS HELD THAT THE ASSESSING OFFICER WAS JUSTIFIED IN MAKING THE DISALLOWANCE OF RS 104 LAKHS. THIS GROU ND THUS FAILS. 12. THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE RELIED ON THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. ADI ARTECH TRANSDUCERS (P) LIMITED 219 TAXMANN 310 (GUJ.) AND SUBMITTED THAT IT WAS HELD BY THE HONBLE JURISDICTIONAL HIGH COURT THAT EXPENDITURE TOWARDS PURCHASE OF DRILLS, TOOLS AND MILLS WHICH WERE CONS UMED DURING THE OPERATION ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 14 - AND DID NOT HAVE LIFE OF MORE THAN A FEW DAYS WAS R EVENUE EXPENDITURE. HE, THEREFORE, SUBMITTED THAT THE DISALLOWANCE MADE SHO ULD BE DELETED. 13. THE DEPARTMENTAL REPRESENTATIVE ON THE OTHER H AND SUPPORTED THE ORDER OF THE LOWER AUTHORITIES. 14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS OF LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RECORD . IN THE INSTANT CASE, THE ASSESSEE CLAIMED DEDUCTION OF RS 1,13,00,000/- AS A SSETS WRITTEN OFF COSTING LESS THAN RS 5,000/-. THE ASSESSING OFFICER HELD T HE SAME TO BE PLANT AND MACHINERY AND AFTER ALLOWING DEPRECIATION THEREOF, DISALLOWED NET AMOUNT OF RS 1,04,52,500/-. 15. ON APPEAL, THE COMMISSIONER OF INCOME TAX (APP EALS) CONFIRMED THE ACTION OF THE ASSESSING OFFICER BY OB SERVING THAT THE EARLIER PROVISION ALLOWING WRITE-OFFS OF TOOLS AND EQUIPMEN TS COSTING LESS THAN RS 5,000/- AT THE RATE OF 100% WAS NO LONGER ON THE ST ATUTE BOOK AFTER 01.04.1996 AND SUCH ITEMS OF OFFICE EQUIPMENTS FORM PART OF PLANT AND ARE REQUIRED TO BE CAPITALIZED. 16. THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE DURING THE COURSE OF HEARING HAS FILED BEFORE US AN ORDER OF THE HON BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. ADI ARTECH TRANSDUCERS (P) LIMI TED (SUPRA) AND SUBMITTED THAT THE HONBLE HIGH COURT HAS HELD THAT EXPENDITURE TOWARDS PURCHASE OF DRILLS, TOOLS AND MILLS WHICH ARE CONSU MED DURING THE OPERATIONS AND DO NOT HAVE LIFE OF MORE THAN FEW DAYS, WAS REV ENUE EXPENDITURE AND SUBMITTED THAT IN THE PRESENT CASE OF THE ASSESSEE, AS THE ASSETS IN QUESTION HAVE LIFE OF A FEW DAYS SHOULD BE ALLOWED DEDUCTION TO THE ASSESSEE AS REVENUE EXPENDITURE. THE DEPARTMENTAL REPRESENTATI VE HAS SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. WE FIND THAT BEFO RE THE ASSESSING OFFICER AS WELL AS COMMISSIONER OF INCOME TAX (APPEALS), THIS DECISION WAS NOT ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 15 - AVAILABLE WHILE ADJUDICATING THIS ISSUE. FURTHER, THE FACT THAT THE ITEMS IN QUESTION ARE DRILLS, TOOLS AND EQUIPMENTS WHICH DO NOT HAVE LIFE OF MORE THAN A YEAR HAS TO BE VERIFIED FROM THE ACCOUNT BOOKS AN D DOCUMENTS OF THE ASSESSEE AS THEY ARE NOT AVAILABLE ON RECORD. THER EFORE, WE SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) A ND RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER FOR ADJUD ICATION OF THE ISSUE AFRESH IN THE LINE OF THE DECISION OF THE HONBLE GUJARAT HIG H COURT IN THE CASE OF ADI ARTECH TRANSDUCERS (P) LIMITED (SUPRA) AFTER ALLOWI NG REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. THUS, THIS GROUND OF A PPEAL IS ALLOWED FOR STATISTICAL PURPOSE. 17. GROUND NO. 3 OF THE APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEAL S) IN CONFIRMING ENHANCEMENT OF BOOK PROFITS COMPUTED U/S. 115JB OF THE INCOME TAX ACT BY RS 1,97,80,00,000/- ON ACCOUNT OF DISALLOWANCE MADE U/S. 14A OF THE INCOME TAX ACT. 18. AT THE TIME OF THE HEARING, THE AUTHORIZED REP RESENTATIVE OF THE ASSESSEE SUBMITTED THAT THIS GROUND OF APPEAL OF TH E ASSESSEE IS CONSEQUENTIAL TO GROUND NO. 1 OF THE PRESENT APPEAL . 19. AS WE HAVE SET ASIDE GROUND NO. 1 OF THE APPEA L OF THE ASSESSEE RELATING TO DISALLOWANCE OF EXPENDITURE U/S. 14A OF THE INCOME TAX ACT FOR EARNING EXEMPT DIVIDEND INCOME BACK TO THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATION AFRESH, THEREFORE THIS GROUND OF APPEA L OF THE ASSESSEE IS ALSO SET ASIDE TO THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATION AFRESH AS PER LAW. THUS, THIS GROUND OF APPEAL IS ALLOWED FOR ST ATISTICAL PURPOSE. 20. GROUND NO. 4 OF ASSESSEES APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) CONFIRM ING ENHANCEMENT OF ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 16 - BOOK PROFITS U/S. 115JB OF THE INCOME TAX ACT BY RS 90,69,255/- ON ACCOUNT OF ADDITION OF INTEREST MADE TO THE TOTAL INCOME. 21. AT THE TIME OF THE HEARING, THE AUTHORIZED REP RESENTATIVE OF THE ASSESSEE SUBMITTED THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS DISMISSED THIS GROUND OF APPEAL AS THE ASSESSEE AT THE TIME OF HEARING BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS) HAD NOT PRESSED THIS GROUND OF APPEAL. THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THEREFORE THIS GROUND OF APPEAL OF THE ASSESSE E NEEDS TO BE DISMISSED. ACCORDINGLY, THIS GROUND OF APPEAL OF ASSESSEE IS D ISMISSED. 22. IN REVENUES APPEAL, GROUND NO. 1 IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DELETIN G THE ADDITION OF RS 6,84,06,000/- ON ACCOUNT OF DISALLOWANCE OF PRIOR P AID EXPENSES. 23. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SING OFFICER OBSERVED THAT THE ASSESSEE HAS DEBITED RS 6,84,06,0 00/- AS EXPENDITURE UNDER THE HEAD PRIOR PAID EXPENSES. NO EXPLANATION WAS OFFERED AS TO WHY THE SAME SHOULD BE ALLOWED. THE ASSESSING OFFICER OBSERVING THAT THE ASSESSEE FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING SI NCE THE EXPENDITURE OF ABOVE AMOUNT RELATED TO EARLIER PERIOD, THE SAME WA S DISALLOWED. 24. BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS ) THE ASSESSEE SUBMITTED THAT AFTER RESTRUCTURING OF THE ERSTWHILE GEB, THE YEAR UNDER CONSIDERATION WAS SECOND YEAR OF OPERATION OF THE A SSESSEE COMPANY. THUS, ALL THE EXPENDITURE ACCOUNTED UNDER THE HEAD PRIOR PAID EXPENSES WERE ALLOCATED TO COMPANY AS A RESULT OF SUPPLY/TRANSFER OF THE RUNNING BUSINESS UNDERTAKING. HENCE ALL THE ABOVE EXPENDITURE CRYST ALLIZED IN THE HANDS OF THE ASSESSEE COMPANY DURING THE YEAR UNDER CONSIDER ATION. THE SAID EXPENDITURE HAVE NEVER BEEN CLAIMED IN THE EARLIER YEARS AND HENCE THE SAME IS CLAIMED DURING THE YEAR ON CRYSTALLIZATION OF THE SAME. ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 17 - 26. THUS, THE COMMISSIONER OF INCOME TAX (APPEALS) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HELD AS UNDER: 6.3 I HAVE CONSIDERED THE SUBMISSION OF LEARNED AR AND THE FACTS OF THE CASE. FROM THE DETAILED BREAK-UP FOR T HE EXPENSES, IT IS SEEN THAT THE BULK OF THE EXPENSE I.E. INTEREST AND OTHER FINANCIAL CHARGES, RELATED TO BANK CHARGES DEBITED BY THE VARIOUS BANKS IN THE EARLIER YEARS. THESE CHARGES WERE DISP UTED AND ON RESOLUTION OF THE DISPUTES THROUGH NEGOTIATIONS, TH E ASSESSEE HAS AGREED TO PAY SUCH CHARGES AGGREGATING TO RS.227.04 LAKHS. THESE EXPENSES HAD NOT BEEN CLAIMED IN THE EARLIER YEARS. SIMILARLY, THE ADMINISTRATIVE EXPENSES, EMPLOYEE CO ST ETC. ALSO WERE CRYSTALLIZED DURING THE YEAR. FOR EXAMPLE, THE PAYMENT MADE TO LEGAL HEIRS OF DECEASED EMPLOYEE CRYSTALLIZ ED DURING THIS YEAR AFTER THE DECREE OF THE LABOUR COURT. SIMILARL Y ADVERTISEMENT EXPENDITURE, CONSULTANCY & LEGAL FEES AND EXPENSES INCURRED ON REPAIRS, ALTHOUGH PERTAINING T O EARLIER EARS, GOT CRYSTALLIZED ONLY DURING THIS YEAR. FURTHER, VA RIOUS CLAIMS IN RESPECT OF TRANSMISSION CHARGES, TARIFF, ADDITIONAL CAPACITY CHARGE, BUILDING CHARGES ETC. RAISED BY VARIOUS PAR TIES LIKE NATIONAL THERMAL POWER CORPORATION LTD., POWER GRID CORPORATION OF INDIA LTD., GANDHAR POWER STATION, M AHARASHTRA STATE ELECTRICITY BOARD ETC. WERE SETTLED DURING TH IS YEAR, AND THE LIABILITY TO PAY GOT CRYSTALLIZED ONLY DURING THIS ACCOUNTING YEAR. 6.4 THE JUDICIAL OPINION IS CLEAR ON THIS ISSUE. IT HAS BEEN HELD THAT ALTHOUGH THE EXPENDITURE MAY ARISE OR ACCRUE D URING THE ACCOUNTING PERIOD, THE; SAME MAY BE CRYSTALLIZED OR PAYABLE ONLY AT A SUBSEQUENT DATE. THE EXPENSES WHICH DO NOT GET CRYSTALLIZED COULD NOT BE CLAIMED IN THE YEAR OF ACCRUAL BUT COU LD ONLY BE CLAIMED IN THE YEAR IN WHICH IT GETS CRYSTALLIZED, AND ONLY TO THE EXTENT TO WHICH IT GETS CRYSTALLIZED. IN THE INSTAN T CASE, THE CORRECT QUANTUM OF LIABILITY TOWARDS CERTAIN EXPENS ES ONLY BECAME KNOWN DURING THE YEAR. THE ASSESSEE HAS EARL IER CLAIMED ONLY UNDISPUTED PORTION. NOW ONLY THAT PORTION HAS BEEN CLAIMED AS A DEBIT TO THE PROFIT & LOSS ACCOUNT WHICH HAS F INALLY BECOME SETTLED AS DUE FOR PAYMENT. THE BALANCE PORTION, WH ICH THE ASSESSEE HAS NOT TO PAY, HAS NEVER BEEN CLAIMED. 6.5 IN VIEW OF THE ABOVE, IT IS HELD THAT THE TREAT MENT ACCORDED BY ASSESSEE WAS IN LINE WITH THE ACCEPTED ACCOUNTIN G PRACTICES AND PRONOUNCEMENTS. ACCORDINGLY, DISALLOWANCE OF RS . 6,84,06,000/- IS DIRECTED TO BE DELETED. ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 18 - 27. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS OF LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RECORD . THE UNDISPUTED FACTS OF THE CASE ARE THAT THE ASSESSEE CLAIMED DEDUCTION OF RS 6,84,06,000/- AS EXPENDITURE UNDER THE HEAD PRIOR PAID EXPENSES. TH E ASSESSING OFFICER, OBSERVING THAT THE ASSESSEE WAS FOLLOWING MERCANTIL E SYSTEM OF ACCOUNTING AND THEREFORE SUCH EXPENSES DID NOT RELATE TO THE Y EAR UNDER CONSIDERATION, DISALLOWED DEDUCTION FOR THE SAME TO THE ASSESSEE. 28. ON APPEAL, THE COMMISSIONER OF INCOME TAX (APP EALS) OBSERVED THAT THE INTEREST AND OTHER FINANCIAL CHARGES PAYAB LE TO THE BANK WAS THE BULK OF THE EXPENSES RELATING TO EARLIER YEARS. TH ESE CHARGES AND INTEREST PAYABLE TO THE BANK WERE DISPUTED BY THE ASSESSEE A ND AFTER NEGOTIATION THE SAME AGGREGATING TO RS 227.04 LAKHS WAS CRYSTALLIZE D DURING THE YEAR AND THEREFORE, THE SAME WAS PAYABLE DURING THE YEAR UND ER CONSIDERATION. SIMILARLY, THE COMMISSIONER OF INCOME TAX (APPEALS) FOUND THAT ADMINISTRATIVE EXPENSES, EMPLOYEE COST ETC. WERE AL SO CRYSTALLIZED DURING THE YEAR AFTER THE DECREE OF THE LABOUR COURT AND H ENCE WAS RIGHTLY CLAIMED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION . FURTHER, THE COMMISSIONER OF INCOME TAX (APPEALS) ALSO OBSERVED THAT ADVERTISEMENT EXPENDITURE, CONSULTANCY AND LEGAL FEES AND EXPENSE S ON REPAIRS GOT CRYSTALLIZED DURING THE YEAR. FURTHER, VARIOUS CLA IMS IN RESPECT OF TRANSMISSION CHARGES, TARIFF, ADDITIONAL CAPACITY C HARGES, BUILDING CHARGES ETC RAISED BY NATIONAL THERMAL POWER CORPORATION LIMITE D, POWER GRID CORPORATION OF INDIA LIMITED, GANDHAR POWER STATION , MAHARASHTRA STATE ELECTRICITY BOARD ETC. WERE SETTLED DURING THE YEAR AND THE LIABILITY TO PAY GOT CRYSTALLIZED ONLY DURING THE ACCOUNTING YEAR. THE DEPARTMENTAL REPRESENTATIVE HAS RELIED ON THE ORDER OF THE ASSES SING OFFICER. HE COULD NOT BRING ANY MATERIAL ON RECORD TO SHOW THAT THE F INDING OF THE COMMISSIONER OF INCOME TAX (APPEALS) THAT VARIOUS E XPENSES CLAIMED BY THE ASSESSEE UNDER THE HEAD PRIOR PAID EXPENSES GOT CRYSTALLIZED DURING THE YEAR AND THEREFORE WERE CLAIMED AS DEDUCTION DURING THE YEAR UNDER ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 19 - CONSIDERATION WAS INCORRECT. NEITHER HAS IT BEEN S HOWN BY THE REVENUE THAT THE EXPENSES CLAIMED BY THE ASSESSEE ARE NOT GENUIN E. IT IS THE CLAIM OF THE REVENUE THAT SINCE THE ASSESSEE IS FOLLOWING MERCAN TILE SYSTEM OF ACCOUNTING, THEREFORE EXPENSES RELATING TO THE YEAR UNDER CONSIDERATION ARE ONLY ALLOWABLE TO THE ASSESSEE. 29. IN OUR CONSIDERED OPINION, EVEN IN THE CASE WH ERE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, EXPENSES WHICH ARE DISPUTED AND ARE FINALLY SETTLED AND CRYSTALLIZED IN A LATER YEA R, THEY ARE ALLOWABLE AS DEDUCTION TO THE ASSESSEE IN THE YEAR OF CRYSTALLIZ ATION OF SUCH EXPENSES. THEREFORE, WE DO NOT FIND ANY GOOD AND JUSTIFIABLE REASON TO INTERFERE WITH THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEAL S) WHICH IS CONFIRMED AND THIS GROUND OF APPEAL OF THE REVENUE IS DISMISS ED. 30. GROUND NO. 2 IN REVENUES APPEAL IS DIRECTED A GAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DELETING T HE ADDITION OF RS 1,53,32,30,000/- MADE ON ACCOUNT OF DISALLOWANCE OF MISCELLANEOUS EXPENSES AND WRITE-OFF. 31. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SING OFFICER OBSERVED THAT AS PER PROFIT AND LOSS ACCOUNT, THE A SSESSEE HAS CLAIMED RS 1,53,32,30,000/- ON ACCOUNT OF MISCELLANEOUS LOSSES AND WRITE-OFF. A SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE TO EXPLAIN WHY THE SAID AMOUNT SHOULD NOT BE DISALLOWED. THE ASSESSEE REPLIED THA T THE ERSTWHILE GEB WAS UNBUNDLED INTO SEVEN COMPANIES BASED ON THEIR FUNCT IONAL LINES. DURING THE YEAR, THE COMPANY HAS CARRIED OUT REVIEW OF ITS VAR IOUS ACCOUNTS AND FOUND THAT CERTAIN ADVANCES (NET OF CREDITORS) WERE NOT R ECOVERABLE. IN ABSENCE OF RELEVANT DETAILS AND RECORD, AN AMOUNT OF RS 1,53,3 2,30,000/- WAS WRITTEN OFF. THE ASSESSING OFFICER OBSERVED THAT SINCE THE ASSESSEE ITSELF ADMITTED THAT IT DOES NOT HAVE RELEVANT DETAILS AND RECORD E XCEPT NAMES OF PARTIES FOR WHICH SUCH SUMS ARE WRITTEN OFF DURING THE YEAR UND ER CONSIDERATION. THE ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 20 - ASSESSEE IS NOT ABLE TO PROVE THAT THE SAID ADVANCE S WERE GIVEN ONLY FOR BUSINESS PURPOSE. IN ADDITION, THE ASSESSEE ALSO F AILED TO SUBMIT THAT THE SAID AMOUNT REPRESENTS AMOUNT NOT RECOVERABLE FOR S ALE OF ELECTRICITY SUPPLIED TO VARIOUS CUSTOMERS. IN ABSENCE OF THE A BOVE DETAILS, THE ASSESSING OFFICER DISALLOWED THE SUM OF RS 1,53,32, 30,000/- IN RESPECT OF SUNDRY BALANCES WRITTEN OFF DEBITED TO THE PROFIT A ND LOSS ACCOUNT. 32. BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS ), THE ASSESSEE SUBMITTED THAT IN THE YEAR 2002-03, GUJARAT STATE S UFFERED FROM SEVERE DROUGHT. THE AVAILABILITY OF POWER TO THE FARMERS FOR RUNNING WATER PUMPS TO SAVE THE STANDING CROPS WAS NOT SUFFICIENT. HEN CE, THE GOVERNMENT DIRECTED THE ELECTRICITY BOARD TO PURCHASE NAPHTHA BASED POWER WHICH WAS A COSTLY POWER AS COMPARED TO THERMAL POWER. THE POW ER SO PURCHASED WAS THEN DISTRIBUTED TO THE FARMERS. IN ORDER TO COMPE NSATE THE GEB FOR HIGH COST OF PURCHASE OF NAPHTHA BASED POWER, THE GOVERN MENT OF GUJARAT ANNOUNCED SUBSIDY OF RS 354 CRORES WHICH WAS PAYABL E TO GEB. THIS WAS DULY ACCOUNTED FOR BY THE GEB AS ITS INCOME IN ASSE SSMENT YEAR 2003-04 ON ACCRUAL BASIS, ALTHOUGH NOT ACTUALLY RECEIVED. THE SAME WAS REFLECTED IN POWER PURCHASE SCHEDULE 6 TO THE PROFIT AND LOSS AC COUNT. THUS, ENTIRE AMOUNT OF RS 354 CRORES HAD ALREADY BEEN OFFERED FO R TAX IN THAT YEAR. SUBSEQUENTLY, AFTER THE UNBUNDLING OF GEB INTO SEVE N COMPANIES INCLUDING THE ASSESSEE, IT WAS INFORMED BY GOG THAT INSTEAD O F SUBSIDY AMOUNT OF RS 354 CRORES, SUBSIDY WOULD BE RESTRICTED TO RS 150 C RORES ONLY. HENCE, THE ASSESSEE COMPANY WROTE OFF OUT OF THE ALREADY TAXED AMOUNT THE BALANCE AMOUNT OF RS 153.32 CRORES. IF THE SAME WAS DISALL OWED IN THIS YEAR, IT WOULD AMOUNT TO DOUBLE TAXATION OF THE SAME AMOUNT. THE COMMISSIONER OF INCOME TAX (APPEALS) AFTER CONSIDERING THE SUBMISSI ONS HELD AS UNDER: I HAVE CONSIDERED THE SUBMISSIONS OF LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE AND FACTS OF THE CAS E. SCHEDULE 6 TO THE PROFIT & LOSS ACCOUNT FOR AY 2003-04 SHOWS THAT THE COST OF PURCHASE OF POWER WAS REDUCED BY THE NAPHTH A SUBSIDY ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 21 - TO THE EXTENT OF RS 354.00 CRORE. THE TAXABLE INCO ME OF THE APPELLANT THUS WAS OVER-STATED BY THIS AMOUNT. FUR THER, VIDE LETTER DATED 27.07.2007, THE UNDER SECRETARY, ENERG Y & PETROCHEMICALS DEPTT., INFORMED THE APPELLANT THAT THE AMOUNT OF SUBSIDY WAS RESTRICTED TO RS 150.00 CRORE ONLY. SINCE THE BALANCE AMOUNT WAS NO LONGER RECEIVABLE, BUT HAD AL READY BEEN OFFERED FOR TAXATION, THE ACTION OF THE ASSESSEE IN REDUCING ITS INCOME BY THE BALANCE OF RS 1,53,32,30,000/- CANNOT BE FAULTED. ACCORDINGLY, IT IS HELD THAT DISALLOWANCE OF THIS A MOUNT WAS NOT JUSTIFIED AND IS, ACCORDINGLY, DIRECTED TO BE DELET ED. 33. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS OF LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RECORD . IN THE INSTANT CASE, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS CLAIM ED DEDUCTION ON ACCOUNT OF MISCELLANEOUS LOSSES AND WRITE-OFF OF RS 1,53,32 ,30,000/-. ACCORDING TO ASSESSING OFFICER, THE ASSESSEE COULD NOT FILE THE RELEVANT DETAILS AND NAMES OF PARTIES FOR WHICH SUCH SUMS WERE WRITTEN OFF DUR ING THE YEAR UNDER CONSIDERATION. THEREFORE, HE DISALLOWED THE DEDUCT ION FOR THE SAME. ON APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEA LS), THE ASSESSEE SUBMITTED THAT DURING THE ASSESSMENT YEAR 2002-03, GUJARAT STATE SUFFERED VERY SEVERE DROUGHT. THE AVAILABILITY OF POWER TO FARMERS FOR RUNNING WATER PUMPS TO SAVE THE STANDING CROPS WAS NOT SUFFICIENT . HENCE, GOVERNMENT DIRECTED THE ELECTRICITY BOARD TO PURCHASE NAPHTHA BASED POWER WHICH WAS COSTLIER COMPARED TO THERMAL POWER. THE POWER THUS PURCHASED WAS DISTRIBUTED TO THE FARMERS. THE GOVERNMENT IN ORDE R TO COMPENSATE FOR THE HIGH COST OF NAPHTHA BASED POWER ANNOUNCED SUBSIDY OF RS 354 CRORES PAYABLE TO THE ASSESSEE. THE ASSESSEE ACCORDINGLY IN ASSESSMENT YEAR 2003-04 SHOWED RS 354 CRORES RECEIVABLE FROM THE GO VERNMENT AS ITS INCOME AND PAID TAX THEREOF. IT WAS EXPLAINED THAT DURING THE YEAR UNDER CONSIDERATION, THE GOVERNMENT INFORMED THAT IT WOUL D BE PAYING SUBSIDY ONLY TO THE TUNE OF RS 150 CRORES. THEREFORE, THE ASSESSEE CLAIMED THE BALANCE AMOUNT OF RS 153.32 CRORES AS DEDUCTION DUR ING THE YEAR UNDER CONSIDERATION AS IT HAS OFFERED THE ENTIRE AMOUNT O F RS 354 CRORES AS INCOME IN ASSESSMENT YEAR 2003-04. THEREFORE, THE COMMISS IONER OF INCOME TAX ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 22 - (APPEALS) ALLOWED THE CLAIM FOR DEDUCTION TO THE AS SESSEE. THE DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE ADDITIONAL EVIDENCES IN THE FORM OF A LETTER DATED 27.07.2007 OF THE UNDER SECRETARY, ENERGY & PETROCHEMICALS DEPARTMENT THROUGH WHICH THE ASSESSE E WAS INFORMED THAT THE AMOUNT OF SUBSIDY WAS RESTRICTED TO RS 150 CROR ES IN PLACE OF RS 354 CRORES WAS NOT FILED BEFORE THE ASSESSING OFFICER A ND WAS FILED BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS) FOR THE FIRST TIME WHO RELYING ON THE SAME DELETED THE ADDITION WITHOUT CALLING FOR A REM AND REPORT FROM THE ASSESSING OFFICER. IT WAS THUS HIS SUBMISSION THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS VIOLATED RULE 46A OF THE I NCOME TAX RULES, 1962. THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE COULD NOT CONTROVERT THE ABOVE SUBMISSION OF THE DEPARTMENTAL REPRESENTATIVE . 34. IN OUR CONSIDERED OPINION, THE ASSESSING OFFIC ER SHOULD ALSO GET AN OPPORTUNITY TO VERIFY THE DOCUMENTS WHICH WERE F ILED BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS) FOR THE FIRST TIME BY THE ASSESSEE. IN VIEW OF THE ABOVE SUBMISSIONS OF THE DEPARTMENTA L REPRESENTATIVE, WE SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME T AX (APPEALS) AND RESTORE THIS MATTER BACK TO THE FILE OF THE ASSESSI NG OFFICER FOR ADJUDICATION OF THE ISSUE AFRESH AS PER LAW AFTER ALLOWING REASO NABLE AND PROPER OPPORTUNITY OF HEARING TO THE ASSESSEE. THE ASSESS EE IS ALSO DIRECTED TO FILE ALL THE DETAILS AND DOCUMENTS BEFORE THE ASSESSING OFFICER AS AND WHEN CALLED UPON TO DO SO. THUS, THIS GROUND OF APPEAL OF REVENUE IS ALLOWED FOR STATISTICAL PURPOSE. 35. GROUND NO. 3 OF THE APPEAL OF THE REVENUE IS D IRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEAL S) DELETING THE ADDITION OF RS 3,53,84,000/- MADE U/S. 40(A)(IA) FOR FAILURE TO FURNISH THE DETAILS WITH REGARD TO PAYMENT AND TAX DEDUCTED THEREON AND CRED ITED THE SAME TO THE GOVERNMENT. ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 23 - 36. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SING OFFICER FOUND THAT LEGAL AND PROFESSIONAL CHARGES AMOUNTING TO RS 3,53,84,000/- WAS DEBITED IN THE PROFIT AND LOSS ACCOUNT. THE ASSESS EE WAS REQUIRED TO FURNISH THE DETAILS IN RESPECT OF THE SAME AND TO SHOW HOW TAX BEEN DEDUCTED AT SOURCE IN RESPECT OF SUCH PAYMENT. HOWEVER, THE AS SESSEE FAILED TO FURNISH THE REQUIRED DETAILS. THEREFORE, BY INVOKING THE P ROVISIONS OF SECTION 40(A)(IA) OF THE ACT, THE ASSESSING OFFICER DISALL OWED THE ENTIRE EXPENSES OF RS 3,53,84,000/-. 37. BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS ), THE ASSESSEE SUBMITTED THAT IT WAS REQUIRED TO FURNISH THE DETAI LS BY 18.12.2009. HOWEVER, ON 17.12.2009 ITSELF, THE ASSESSING OFFICE R PASSED ORDER DISALLOWING THE SAID EXPENSES. COPIES OF THE DETAI LS IN THIS REGARD WERE FILED BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). I T WAS SUBMITTED THAT SINCE THE TAX HAD BEEN DEDUCTED, THERE WAS NO INFRI NGEMENT OF SECTION 40(A)(IA) AND THEREFORE, THE DISALLOWANCE MAY BE DE LETED. 38. THE COMMISSIONER OF INCOME TAX (APPEALS) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HAS HELD AS UNDER: I HAVE CONSIDERED THE SUBMISSION OF LEARNED AR OF T HE ASSESSEE AND THE FACT OF THE CASE. FROM THE DETAILS FILED I N THIS REGARD IS SEEN THAT THE PAYMENT PERTAINED TO LEGAL AND CONSUL TANCY CHARGES, TECHNICAL FEES, PROFESSIONAL FEES, HONORAR IUM AND EXPENSES FOR PAPER SETTING/CHECKING, AS UNDER: SR. NO. LEGAL & PROFESSIONAL FEES ACCOUNT HEAD RS (IN LAKHS) 1 LEGAL CHARGES 76.121 32.02 2 CONSULTANCY CHARGES 76.123 305.76 3 TECHNICAL FEES 76.124 3.67 4 OTHER PROFESSIONAL FEES AND EXPENSES 76.125 12.26 5 HONORARIUM 76.127 0.12 6 EXP. FOR PAPER SETTING/ CHECKING 76.128 0.01 TOTAL 353.84 ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 24 - SO FAR AS THE FIRST FOUR ITEMS ARE CONCERNED, TAX H AS BEEN DEDUCTED AT APPROPRIATE RATES AND ALSO PAID INTO GO VERNMENT ACCOUNT WITHIN DUE DATES. SO FAR AS ITEM AT 5 AND 6 ARE CONCERNED, THE PAYMENTS HAVE BEEN MADE IN EACH INST ANCE OF SUM LESS THAN RS 5,000/- AND THEREFORE THERE WAS NO LEGAL REQUIREMENT FOR DEDUCTING TAX AT SOURCE. IN VIEW O F THE ABOVE, IT IS HELD THAT DISALLOWANCE OF RS 3.5384 CRORE WAS NO T JUSTIFIED AND IS ACCORDINGLY DIRECTED TO BE DELETED. 39. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE ORDERS OF LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RECORD . IN THE INSTANT CASE, THE ASSESSING OFFICER BY INVOKING THE PROVISIONS OF SEC TION 40(A)(IA) OF THE ACT DISALLOWED DEDUCTION OF RS 3,53,84,000/- DEBITED IN THE PROFIT AND LOSS ACCOUNT ON THE GROUND THAT THE ASSESSEE FAILED TO F URNISH THE DETAILS OF DEDUCTING TAX AT SOURCE FROM THE SAID PAYMENTS. 40. ON APPEAL, THE COMMISSIONER OF INCOME TAX (APP EALS) OBSERVED THAT THE ASSESSEE FILED DETAILS BEFORE HIM SHOWING THAT THE PAYMENTS PERTAINED TO LEGAL AND CONSULTANCY CHARGES, TECHNIC AL FEES, PROFESSIONAL FEES, HONORARIUM AND EXPENSES FOR PAPER SETTING/CHECKING. THE COMMISSIONER OF INCOME TAX (APPEALS) ALSO OBSERVED THAT THE ASSESSE E HAS DEDUCTED TAX FROM LEGAL CHARGES CONSULTANCY CHARGES, TECHNICAL F EES AND PROFESSIONAL FEES AND PAID TO THE ACCOUNT OF CENTRAL GOVERNMENT WITHI N THE DUE DATES. THE COMMISSIONER OF INCOME TAX (APPEALS) FURTHER OBSERV ED THAT REGARDING THE HONORARIUM AND EXPENSES FOR PAPER SETTING/CHECKING, EACH INSTANCE OF PAYMENT WAS LESS THAN RS 5,000/- AND HENCE NOT LIA BLE FOR DEDUCTION OF TAX AT SOURCE. THUS, COMMISSIONER OF INCOME TAX (APPEA LS) DELETED THE ENTIRE ADDITION OF RS 3,53,84,000/-. THE DEPARTMENTAL REP RESENTATIVE SUBMITTED THAT BEFORE THE ASSESSING OFFICER, THE ASSESSEE DID NOT FILE ANY EVIDENCE AND DETAILS SHOWING THAT THE ASSESSEE HAS DEDUCTED TAX AT SOURCE FROM THE PAYMENT OF RS 3,53,84,000/- OR THE SAID AMOUNT INCL UDED PAYMENTS OF LESS THAN RS 5000/- IN EACH CASE AND THEREFORE, NOT REQU IRING DEDUCTION OF TDS. ITA NOS. 1874 & 1821/AHD/2010 GUJARAT URJA VIKAS NIGAM LTD., BARODA. FOR A.Y. 2007-08 - 25 - IN THESE CIRCUMSTANCES, THE ASSESSING OFFICER DISAL LOWED THE DEDUCTION TO THE ASSESSEE. THE ASSESSEE FILED THE DETAILS BEFOR E THE COMMISSIONER OF INCOME TAX (APPEALS) WHO AFTER EXAMINING AND RELYIN G ON THE SAME DELETED THE ENTIRE ADDITION. THE COMMISSIONER OF INCOME TA X (APPEALS) BEFORE ADMITTING THESE ADDITIONAL EVIDENCES DID NOT CALL F OR REMAND REPORT FROM THE ASSESSING OFFICER AND THEREBY VIOLATED RULE 46A OF THE INCOME TAX RULES, 1962. HENCE, HE PRAYED THAT THE MATTER SHOULD BE R ESTORED BACK TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION OF THE ISSUE. 41. THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE COULD NOT CONTROVERT THE ABOVE SUBMISSION OF THE DEPARTMENTAL REPRESENTATIVE. 42. IN OUR CONSIDERED VIEW, THE ASSESSING OFFICER SHOULD ALSO GET AN OPPORTUNITY TO VERIFY THE EVIDENCES WHICH WERE FILE D FOR THE FIRST TIME BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS) BY THE ASS ESSEE. THEREFORE, IN VIEW OF THE ABOVE SUBMISSIONS OF THE DEPARTMENTAL R EPRESENTATIVE, WE SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME TAX ( APPEALS) AND RESTORE THE MATTER BACK TO THE FILE OF ASSESSING OFFICER FO R ADJUDICATION OF THE ISSUE AFRESH AFTER ALLOWING REASONABLE AND PROPER OPPORTU NITY OF HEARING TO THE ASSESSEE. THUS, THIS GROUND OF APPEAL IS ALLOWED F OR STATISTICAL PURPOSE. 43. IN THE RESULT, THE APPEALS OF THE ASSESSEE AND REVENUE BOTH ARE PARTLY ALLOWED AS ABOVE. ORDER PRONOUNCED IN THE COURT ON FRIDAY THE 20TH OF JUNE, 2014 AT AHMEDABAD. SD/- SD/- (D.K. TYAGI) JUDICIAL MEMBER (N.S. SAINI) ACCOUNTANT MEMBER AHMEDABAD; DATED 20/06/2014 GHANSHYAM MAURYA, SR. P.S.