The DCIT, Circle-1, Ahmedabad V. The Arvind Mills Ltd., Ahmedabad

ITA 1904/AHD/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 89676 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 21-09-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 01-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V K SINGH
• Keywords: Business income; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD BEFORE SHRI ANIL CHATURVEDI ACCOUNTANT MEMBER AND SHRI S.S. GODARA JUDICIAL MEMBER ITA S NO . 1816 AND 1904 /AHD/ 2011 A. Y .20 0 6 - 07 1. ARVIND LTD. (FORMERLY KNOWN AS THE ARVIND MILLS LTD.), NARODA ROAD, AHMEDABAD. PAN:AABCA 2398D 2. DCIT, CIR - 1, AHMEDABAD VS 1. DCIT, CIR - 1, AHMEDABAD. 2.ARVIND LTD. (FORMERLY KNOWN AS THE ARVIND MILLS LTD.), NARODA ROAD, AHMEDABAD. (APPELLANT) (RESPONDENT) REVENUE BY : S HRI V.K. SINGH , SR. D.R. , ASSESSEE(S) BY : SHRI P.M. MEHTA WITH SHRI V.R. CHOCKSI , A.R. / DATE OF HEARING : 22 / 06 /201 5 / DATE OF PRONOUNCEMENT: 25 / 0 6 /201 5 / O R D E R PER S.S. GOD ARA , JUDICIAL MEMBER TH ESE CROSS APPEALS FILED BY ASSESSEE AND THE REVENUE FOR A.Y. 200 6 - 0 7 , ARISE FROM ORDER OF THE CIT(A) - VI, AHMEDABAD, DATED 18.05.2011 PASSED I N CASE NO .CIT(A) - ITA S NO. 1816 & 1904 /AHD/ 2011 M/S. ARVIND MILLS LTD. FOR A.Y. 2006 - 07 - 2 - VI/DCIT.CIR.1/371/09 - 10, IN PROCEEDINGS UNDER SECTION 143(3 ) OF THE INCOME TAX ACT , IN SHORT THE ACT . 2. THE ASSESSEE S SUBSTANTIVE GROUNDS RAISED IN ITS APPEAL ITA 1816/AHD/2011 READ AS FOLLOWS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOWANCE TO THE EXTENT OF RS.1,12, 55,780 FROM OUT OF THE TOTAL DISALLOWANCE OF RS.1,15,28,410 MADE BY THE ASSESSING OFFICER U/S.14A OF THE I.T. ACT. 2. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ADDITION TO THE EXTENT OF RS.1,12,55,780 OUT OF THE TOTAL ADDITION OF RS.1,15,28,410 MADE BY THE ASSESSING OFFICER TO THE BOOK PROFIT OF THE APPELLANT COMPANY U/S.115JB OF THE I.T. ACT. THE REVENUE S SOLE SUBSTANTIVE GROUND IS REPRODUCED AS UNDER: 1. THE LD. CIT (A) ERRED IN LAW AND ON FACTS IN REDUCING THE DISALLOWANCE U/S 14A IN RESPECT OF INVESTMENT IN FOREIGN SUBSIDIARY HOLDING THAT IT WILL NOT RESULT IN EXEMPT INCOME, SINCE THE ASSESSEE HAD NOT FURNISHED SPECIFIC EVIDENCE TO SHOW THAT THE INVESTMENT WAS ACTUA LLY IN FOREIGN COMPANY. THE ABOVESAID PLEADING S RAISE THE SOLITARY ISSUE OF SECTION 14A DISALLOWANCE. BOTH PARTIES REITERATE THEIR RESPECTIVE SUBMISSIONS. WE PROCEED TO DEAL WITH SECTION 14A DISALLOWANCE IN SUCCEEDING PARAGRAPHS 3. THE CASE FILE REVEAL S THAT THE CIT(A) S ORDER UNDER CHALLENGE COMPRISES OF RELEVANT EXTRACT OF THE ASSESSMENT ORDER DATED 31.12.2009 AS UNDER: ITA S NO. 1816 & 1904 /AHD/ 2011 M/S. ARVIND MILLS LTD. FOR A.Y. 2006 - 07 - 3 - 4. THE GROUND NO.3 IS AGAINST DISALLOWANCE OF RS.1,15,28,410/ - U/S. 14A OF THE ACT. 4.1 THE A.O. HAS STATED IN THE ASSESSMENT ORDER DATED 31/12/2009 WHICH IS AS UNDER. 'IT IS SEEN THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME TO THE TUNE OF RS. 24.42 LACS WHICH IS EXEMPT FROM TAX. VIDE QUESTIONNAIRE DTD.29/09/20 09, THE ASSESSEE WAS ASKED TO FURNISH DETAILS OF INVESTMENT AGAINST WHICH THE SAID DIVIDEND INCOME HAS BEEN RECEIVED AS WELL AS TO SPECIFY THE SOURCE OF SUCH INVESTMENTS. VIDE SUBMISSION DTD.13/10/2009 (RECEIVED ON 17/11/2009), THE ASSESSEE FURNISHED THE D ETAILS. PERUSAL OF THE SAID DETAILS REVEALS THAT THE DIVIDEND HAS BEEN RECEIVED AGAINST THE INVESTMENT IN SHARES OF M/S. ATUI LTD. AS WELL AS INVESTMENT IN MUTUAL FUNDS. VIDE THE ORDER SHEET ENTRY DTD. 1 7/ 11/2009, THE ASSESSEE WAS ASKED TO SUBMIT CONTENTIO N IN RESPECT OF APPLICABILITY OF PROVISION OF SEC.14A OF THE I.T. ACT. VIDE SUBMISSION DTD. 10/12/2009, THE ASSESSEE SUBMITTED AS UNDER : - '2. JUSTIFICATION FOR NO DISALLOWANCE U/S 14 A: YOUR GOOD SELVES HAVE ASKED TO SUBMIT A JUSTIFICATION AS TO WHY DIS ALLOWANCE U/S. 14A SHOULD NOT BE MADE. IN THIS REGARDS, THE ASSESSEE COMPANY STATES AS UNDER: 2.1 THE ASSESSEE COMPANY STATES THAT IT HAS, MADE INVESTMENTS BY UTILIZING ITS OWN FUNDS. THE OWNED FUNDS I. E. THE INTEREST FREE FUNDS OF THE ASSESSEE COMPANY A RE RS.1531.95 CRORES. THE ASSESSEE COMPANY HAS TOTAL INVESTMENTS OF RS.348.1 CRORES. FURTHER, MOST OF THE SAID INVESTMENTS ARE MADE IN THE FOREIGN SUBSIDIARIES OF THE ASSESSEE COMPANY OR STRATEGIC INVESTMENTS IN GROUP COMPANIES. THE INCOME RECEIVED, IF ANY , FROM FOREIGN SUBSIDIARIES IS TAXABLE AND THEREFORE, THE PROVISIONS OF SEC.14A SHALL NOT APPLY WITH REFERENCE TO THE SAME. 2.2 AS REGARDS THE ALL THE OTHER INVESTMENTS, IT IS SUBMITTED THAT THEY REPRESENT THE LONG TERM STRATEGIC INVESTMENTS IN GROUP COMP ANIES. THE INVESTMENTS IN SU CH SUBSIDIARY COMPANY ARE NOT FOR EARNING ANY EXEMPT INCOME. 2.3 THE SAID INVESTMENTS DO NOT REQUIRE CONSTANT MONITORING AND THEREFORE, NO MAJOR EFFORTS ARE REQUIRED FOR THE SAME. THEREFORE THE ADMINISTRATIVE EXPENSES ARE NOT R ELATED WITH THE DIVIDEND INCOME. NO SPECIFIC ATTEMPT WAS REQUIRED FOR EARNING OF DIVIDEND INCOME. ACCORDINGLY NO PART OF THE ADMINISTRATIVE EXPENSES WAS ATTRIBUTABLE TO DIVIDEND INCOME.' ITA S NO. 1816 & 1904 /AHD/ 2011 M/S. ARVIND MILLS LTD. FOR A.Y. 2006 - 07 - 4 - THE SUBMISSION MADE BY THE ASSESSEE WAS PERUSED AND NOT FOUND ACCEPT ABLE. THE ASSESSEE HAS SIGNIFICANT INVESTMENT IN SUCH ASSETS WHICH DO NOT YIELD TAXABLE INCOME. THEREFORE, IT IS EVIDENT THAT SOME QUANTUM OF EXPENDITURE IS INCURRED BY THE ASSESSEE IN RESPECT OF EARNING OF SUCH INCOME WHICH DO NOT FORM ART OF THE TOTAL IN COME. THE SUBMISSION OF THE ASSESSEE FOUND TO BE VERY GENERAL AND NO SPECIFIC EVIDENCES HAVE BEEN FURNISHED TO SHOW THAT NO DISALLOWANCE U/S.14A IS CALLED FOR. ACCORDINGLY, VIDE THE ORDER SHEET ENTRY DTD.10/12/2009, THE ASSESSEE WAS ASKED TO SHOW CAUSE WHY DISALLOWANCE U/S. I4A BE NOT MADE IN RESPONSE, THE ASSESSEE VIDE SUBMISSION DTD. 24/12/2009 SUBMITTED AS UNDER: THE ASSESSEE MUST HAVE INCURRED ADMINISTRATIVE EXPENSES SUCH AS DOCUMENTATION, SALARIES OF EMPLOYEES, HANDLING THE INVESTMENT PORT FOLIO, ADMI NISTRATIVE OVER HEADS LIKE STATIONERY, TELEPHONE, COMPUTER, OFFICE EQUIPMENTS, VEHICLES ETC. EVERY YEAR, A PART OF WHICH CAN BE ATTRIBUTED TO THE INVESTMENT PORTFOLIO. MOREOVER, RELIANCE IS PLACED ON THE FOLLOWING CASE LAWS. (1) RAJASTHAN STATE WAREHOUSING CORP. LTD. VS. CIT(242 ITR 450) (RAJ) (2) MARUTI UDYOG LTD. VS. DEP. COMM. (DELHI) 92 TTJ 987 (3) WIPRO INFORMATION TECHNOLOGY VS. DEP. CIT (BANG) 88 TTJ 378 (4) DEP. COMM. OF I.TAX VS. SHREE SYNTHETICS LTD. (INDOREJ 88 TTJ 717. 15) HARISH K. SHAFT VS. IT O 85 TT J 872. FURTHER, FROM THE SUBMISSION OF THE ASSESSEE ITSELF, IF IS SEEN THAT EXPENDITURE TO THE EXTENT OF RS.20.98 LACS HAS BEEN INCURRED WHICH CAN NOT BE DIRECTLY RELATED TO A CERTAIN INCOME. THEREFORE, SOME DISALLOWANCE OUT OF INTEREST EXPENSES I S ALSO CALLED FOR IN VIEW OF PROVISION OF RULE 8D(2)(II). IT IS ALSO TO BE NOTED THAT THE VARIOUS ISSUES RAISED BY THE ASSESSEE HAVE BEEN EXTENSIVELY COVERED AND DECIDED IN FAVOUR OF THE REVENUE IN THE CASE OF ITO VS. M/S. DAGA CAPITAL MANAGEMENT PVT. LTD. VIDE ITA NO.8057/MUM/03 FOR A. Y. 2001 - 02, BY HON'BLE MUMBAI ITAT (SB). IT IS ALSO TO BE NOTED THAT S.14A DISALLOWS EXPENDITURE 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL COME' AND IN ORDER FOR THE EXPENDITURE TO BE DISALLOWED, ACTUAL INCOME NEED NOT BE EARNED. THIS VIEW HAS BEEN CONFIRMED IN THE CASE OF CHEMINVEST LTD. VS. I TO. (ITAT, DELHI (SB) IN ITA NO. 87/DEL/2008. ITA S NO. 1816 & 1904 /AHD/ 2011 M/S. ARVIND MILLS LTD. FOR A.Y. 2006 - 07 - 5 - IN VIEW OF THE ABOVE DISCUSSION, IT IS SEEN THAT THE PROVISIONS OF SECTION 14A ARE CLEARLY APPLICABLE TO THE ASSESSEE. IN V IEW OF THE SAME, THE DISALLOWANCE IS COMPUTED AS BELOW: CALCULATION OF AVERAGE VALUE OF INVESTMENTS: DETAILS OPENING CLOSING INVESTMENTS 1302595622 3253453680 AVERAGE VALUE OF INVESTMENTS 2278024651 D IRECT EXPENSES INCURRED DISALLOWANCE OF INTEREST: INTEREST PAID X AVERAGE VALUE OF INVESTMENT AVERAGE VALUE OF TOTAL ASSETS 2098553 X 2278024651 =138287 34569750000 INVESTMENT AS ON 31/03/2007 RS. 1302595622 INVESTMENT AS ON 31/03/2006 RS.32 53453680 AVERAGE VALUE OF INVESTMENT RS.2278024651 VALUE OF ASSETS VALUE OF ASSETS AS ON 31/03/2007 RS.32394100000 VALUE OF ASSETS AS ON 31/03/2006 RS.36745400000 AVERAGE VALUE OF ASSETS RS. 34569750000 DISALLOWANCE OF OTHER EXPENSES: 2278024651 @ 0.50% 11390123 TOTAL 11528410 4.2 THE APPELLANT HAS SUBMITTED IN ITS WRITTEN SUBMISSION, WHICH IS AS UNDER: '3.7.7 THE ASSESSING OFFICER HAS MADE DISALLOWANCE U/S. 14A BY APPLYING THE CALCULATION MECHANISM GIVEN IN RULE 3D. IN THIS REGARDS, IT MAY BE POINTED OUT THAT THE SAID RULE HAS BEEN INSERTED BY THE I.T. ITA S NO. 1816 & 1904 /AHD/ 2011 M/S. ARVIND MILLS LTD. FOR A.Y. 2006 - 07 - 6 - (FIFTH AMENDMENT) RULES, 2008, W.E.F. 28 - 03 - 2008. THUS, THE SAID RULE HAS BEEN INSERTED ALMOST AFTER TWO YEARS FROM THE END OF YEAR UNDER CONSIDERATION. FURTHER, THE SAID RULE HAS BEEN INSERTED IN ORDER TO PRESCRIBE THE METHOD TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EARNING EXEMPT INCOME, AS PER PROVISIONS OF SUB - SECTION (2) OF SECTION 14A. IN THIS CONNECTION, IT MAY BE POINTED OUT THAT THE SAID SUB - SECTION (2} OF SECTION 14A WAS INSERTED BY THE FINANCE ACT, 2006, W.E.F. 1 - 4 - 2007. THEREFORE, IT IS APPLICABLE ONLY IN RESPECT OF ASSESSMENT YEARS BEGINNING ON OR AFTER 1 - 4 - 2007. HENCE, THE SAID PROVISIONS ARE NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION, I.E. A.Y. 20 06 - 07. 3.1.2 CONSIDERING THE ABOVE, IT IS CLEAR THAT THE PROVISIONS OF RULE 8D ARE WRONGLY APPLIED BY THE ASSESSING OFFICER IN MAKING DISALLOWANCE U/S. 14A. THEREFORE, THE DISALLOWANCE NEEDS TO BE DELETED. 3.2 WITHOUT PREJUDICE TO THE ABOVE, IT MAY B E POINTED OUT THAT A PERUSAL OF THE RELEVANT PORTION OF THE IMPUGNED ASSESSMENT ORDER SHOWS THAT THE LEARNED ASSESSING OFFICER HAS MADE THE IMPUGNED DISALLOWANCE WITHOUT APPRECIATING: (A) THAT SECTION 14A CANNOT BE SO READ AS TO ENTAIL A DISALLOWANCE OF EXPENDITURE IN EVERY SINGLE CASE WHERE THE ASSESSES HAD TAX EXEMPT INCOME; (B) THAT IT WAS ONLY IF THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, EITHER THAT NO DISALLOWANCE WHATSOEVER WAS WARRANTED U/S. 14A OR THAT DISALL OWANCE ONLY OF A PARTICULAR AMOUNT WAS WARRANTED UNDER THAT PROVISION, THAT THE QUESTION FOR HIM TO INVOKE THE PROVISIONS OF SECTION 14A FOR MAKING A DISALLOWANCE WHERE NO DISALLOWANCE HAD BEEN MADE BY THE APPELLANT SUO MOTU OR FOR MAKING A DISALLOWANCE OF AN AMOUNT HIGHER THAN THAT THE SUO MOTU DISALLOWANCE OF THE ASSESSEE, CAN ARISE; (C) THAT, IN ANY CASE, THERE COULD BE ABSOLUTELY NO QUESTION FOR MAKING A DISALLOWANCE U/S. 14A OF AN AMOUNT WHICH WAS HIGHER THAN EVEN THE TAX EXEMPT INCOME OF THE AS SESSEE, WHICH IS RS. 24.42 LACS. 3.3 THE DISALLOWANCE MADE BY THE ASSESSING OFFICER COMPRISES OF INTEREST OF RS. 138287/ - AND OTHER EXPENSES OF RS.113,90,123/ - . WITH REFERENCE TO THE SAME, IT IS SUBMITTED THAT THE IMPUGNED DISALLOWANCE HAS BEEN MADE WITHOUT THE ASSESSING OFFICER HAVING ANY REAL REASON FOR BEING SATISFIED IN THE MANNER REQUIRED BY SECTION 14A. 3.3.1 AS REGARDS THE DISALLOWANCE OF INTEREST OF RS.1,38,287/ - , THE ASSESSING OFFICER HAS OBSERVED THAT THE EXPENDITURE TO THE EXTENT OF RS. 20.98 HAS BEEN INCURRED WHICH CANNOT BE DIRECTLY RELATED TO A CERTAIN INCOME AND THEREFORE, HE PROCEEDED TO MAKE DISALLOWANCE OUT OF THE ITA S NO. 1816 & 1904 /AHD/ 2011 M/S. ARVIND MILLS LTD. FOR A.Y. 2006 - 07 - 7 - SAID AMOUNT. IN CONNECTION WITH THE SAID OBSERVATION OF THE ASSESSING OFFICER, IT MAY BE POINTED OUT THAT THE ASSESSEE HAS GIVEN DETAILS OF INTEREST EXPENSES GIVING BREAK - UP OF SPECIFIC BUSINESS PURPOSE BORROWING AND GENERAL BUSINESS PURPOSE BORROWING. HOWEVER, THE SAME CANNOT BE INTERPRETED TO MEAN THAT THE INTEREST ON GENERAL PURPOSE BORROWINGS WAS NOT RELATED TO EARNIN G BUSINESS INCOME. FURTHER, IN CONNECTION WITH THE UTILIZATION OF BORROWED FUNDS ONLY: FOR THE PURPOSE OF BUSINESS, IT MAY BE IMPORTANT TO NOTE THAT THOUGH DISALLOWANCE HAS BEEN MADE U/S. 14A IN EARLIER YEAR(S), NO DISALLOWANCE HAS BEEN MADE U/S. 14A IN A NY YEAR PRIOR TO THE YEAR UNDER CONSIDERATION. THIS PROVES THAT THE FACTS THAT THE BORROWED FUNDS HAVE BEEN UTILIZED ONLY FOR THE BUSINESS PURPOSES OF THE ASSESSEE, HAS BEEN ACCEPTED IN ALL THE YEARS PRIOR TO THE YEAR UNDER CONSIDERATION. MOREOVER, AS REGA RDS THE NEW INVESTMENTS OF RS. 195.08 CRORES MADE DURING THE YEAR, IT MAY BE POINTED OUT THAT THE COMPANY HAS RAISED FRESH EQUITY CAPITAL OF RS.14 CRORES ALONGWITH SHARE PREMIUM OF RS.154 CRORES, AGGREGATING TO RS. 168 CRORES AND IT HAS ALSO EARNED PROFIT (AFTER TAX) OF RS. 127.16 CRORES. THE SAID FUNDS ARE FAR IN EXCESS OF WHAT HAS BEEN INVESTED IN SHARES OF SUBSIDIARY COMPANY OF THE ASSESSEE COMPANY, AMOUNTING TO RS. 195.08 CRORES. THEREFORE, THERE IS NO UTILIZATION OF BORROWED FUNDS FOR THE PURPOSE OF MA KING ANY INVESTMENTS. IN VIEW OF THE ABOVE, NO DISALLOWANCE CAN BE MADE U/S. 14A, OUT OF INTEREST EXPENSES. 2.3.2 AS REGARDS THE DISALLOWANCE OF RS.1,13,90,1231 - OUT OF OTHER EXPENSES, THE ASSESSING OFFICER HAS OBSERVED AS UNDER: THE ASSESSEE MUST HAVE INCURRED ADMINISTRATIVE EXPENSES SUCH AS DOCUMENTATION, SALARIES OF EMPLOYEES, HANDLING THE INVESTMENT PORTFOLIO, ADMINISTRATIVE OVERHEADS LIKE STATIONERY, TELEPHONE, COMPUTER, OFFICE EQUIPMENTS, VEHICLES ETC. EVERY YEAR, A PART OF WHICH CAN BE ATTRIB UTED TO THE INVESTMENT PORT FOLIO. MOREOVER, RELIANCE IS PLACED ON THE FOLLOWING CASE LAWS: (1) RAJASTHAN STATE WAREHOUSING CORP. LTD. V/S. CIT (242 ITR 450) (RAJ) (2) MARUTI UDYOG LTD. VS. DEP. COMM. (DELHI) 92 TTJ 987 (3) WIPRO INFORMATION TECHNOL OGY VS. DEP. CIT (BANG.) 88 TTJ 378 (4) DEP. COMM. OF I. TAX VS. SHREE SYNTHETICS LTD. (INDORE) 88 TTJ 717. (5) HARISH K. SHAFT VS. ITO 85 TTJ 872.' ITA S NO. 1816 & 1904 /AHD/ 2011 M/S. ARVIND MILLS LTD. FOR A.Y. 2006 - 07 - 8 - AS REGARDS THE ABOVE OBSERVATION, IT MAY BE NOTED THAT THE ASSESSEE COMPANY HAS NEITHER PUT IN ANY EXTRA EFFORTS NOR EMPLOYED ANY STAFF IN CONNECTION WITH THE INVESTMENTS MADE. THE ASSESSING OFFICER HAS FAILED TO APPRECIATE THE FACT THAT THE INVESTMENTS MADE BY THE ASSESSEE COMPANY ARE IN SHARES OF SUBSIDIARY COMPANIES OR OTHER GROUP COMPANIES. THERE ARE NO INVESTMENTS IN OTHER COMPANIES OR MUTUAL FUNDS. APART FROM ABOVE, IT IS ALSO IMPORTANT TO NOTE THAT IT IS NOT AN INVESTMENT FOR THE PURPOSE OF EARNING DIVIDEND INCOME. IT IS, IN FACT, AN EXTENSION OF THE BUSINESS OF THE ASSESSEE COMPANY THROUGH SEPARATE S UBSIDIARY COMPANIES, SO THAT CONCENTRATED EFFORTS CAN BE MADE FOR BUSINESS DEVELOPMENT IN SPECIFIC AREA. 3.4 APART FROM ABOVE, THE DECISIONS OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF HERO CYCLES LTD. IN ITA NO.331 OF 2009 SHOULD BE CONSIDERED, WHERE I N IT HAS CATEGORICALLY HELD THAT EVEN UNDER RULE 8D OF S. 14A, DISALLOWANCE CAN BE MADE ONLY IF THERE IS ACTUAL NEXUS BETWEEN TAX - FREE INCOME AND EXPENDITURE DISALLOWANCE UNDER SECTION 14A OF THE ACT AND IN THE CASE OF APPELLANT COMPANY NO SUCH NEXUS HAVE BEEN ESTABLISHED OR PROVED BY THE INCOME TAX DEPARTMENT. 3.5 WITHOUT PREJUDICE TO ABOVE, THE ASSESSING OFFICER FAILED TO APPRECIATE THAT THE COMPANY HAS EARNED EXEMPT INCOME OF RS. 24.42 LACS. THEREFORE, DISALLOWANCE, IF ANY, MADE BY HIM SHOULD NOT EXCEED THE SAID AMOUNT. 3.6 WITHOUT PREJUDICE TO THE FORGOING, IT MAY ALSO BE POINTED OUT THAT THE APPELLANT HAS INVESTED RS. 5,38,75,0231 - IN ARVIND SPINNING LTD. THE SAID COMPANY IS ALSO FOREIGN SUBSIDIARY OF THE APPELLANT COMPANY AND INCOME FROM THE SAID COM PANY IS TAXABLE IN THE HANDS OF THE SHAREHOLDERS. THEREFORE, THE PROVISIONS OF SECTION 14A WOULD NOT APPLY IN RESPECT OF THE INVESTMENTS IN THE SAID COMPANY. HOWEVER, THE SAME HAS BEEN INCLUDED IN THE COMPUTATION OF DISALLOWANCE U/S. 14A. T HEREFORE, WITHOUT PREJUDICE TO THE OTHER CONTENTION OF THE APPELLANT, EVEN ON THE BASIS ASSESSING OFFICER'S VIEW, THE DISALLOWANCE U/S. 14A WOULD BE WORKED OUT TO RS.1 72,55,780/ - AND NOT RS.1,15,28,410/ - .' 4.3 I HAVE CONSIDERED THE FACTS OF THE CASE, ASSE SSMENT ORDER AND APPELLANT'S SUBMISSION. ASSESSING OFFICER MADE DISALLOWANCE OF EXPENSE RELATING TO EXEMPT INCOME. SUCH DISALLOWANCE WAS CONSIDERED NECESSARY SINCE APPELLANT DID NOT DISALLOW ANY PART OF INTEREST AND ITA S NO. 1816 & 1904 /AHD/ 2011 M/S. ARVIND MILLS LTD. FOR A.Y. 2006 - 07 - 9 - OTHER EXPENSES TREATING THE SAME AS RELA TING TO INVESTMENT RESULTING IN EXEMPT INCOME. NOW RULE 8D IS HELD TO BE APPLICABLE WITH EFFECT FROM ASSESSMENT YEAR 2008 - 09 BY BOMBAY HIGH COURT HOWEVER THE DISALLOWANCE OF EXPENSES RELATING TO EXEMPT INCOME ARE TO BE MADE BY APPROPRIATE METHOD. IT IS NOT IN DISPUTE THAT APPELLANT EARNED EXEMPT INCOME IN THE FORM OF DIVIDEND ON INVESTMENT OF MORE THAN RS.325 CRORES. APPELLANT INCURRED EMPLOYEES' REMUNERATION AND OTHER ADMINISTRATIVE EXPENSES TOTALING TO RS.670 CRORES, PART OF WHICH MAY RELATE TO INVESTMENT RESULTING IN EXEMPT INCOME. SIMILARLY PAYMENT OF INTEREST WILL ALSO PARTLY RELATE TO INVESTMENT RESULTING IN EXEMPT INCOME THEREFORE DISALLOWANCE UNDER SECTION 14 A ON ACCOUNT OF INTEREST AND OTHER EXPENSES ARE NECESSARY. COMING TO THE METHOD OF COMPUTAT ION OF DISALLOWANCE UNDER SECTION 14 A, ASSESSING OFFICER DISALLOWED EXPENSES RELATABLE TO EXEMPT INCOME AS PER RULE 8D. FOR INTEREST, PROPORTIONATE EXPENSE IS DISALLOWABLE WHEREAS FOR OTHER EXPENSES .5% OF INVESTMENT VALUE IS DISALLOWABLE. CONSIDERING THE FACT THAT APPELLANT CLAIMED HUGE ADMINISTRATIVE AND OTHER EXPENSES, THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES MADE BY THE ASSESSING OFFICER @.5% OF INVESTMENT RESULTING IN EXEMPT INCOME IS REASONABLE. I DO NOT AGREE WITH THE APPELLANT THAT EXPENSES CANN OT BE MORE THAN EXEMPT INCOME. FROM THE SIZE OF THE BALANCE SHEET AND APPLICATION OF FUNDS, IT IS CLEAR THAT PART OF EXPENSES ARE RELATABLE TO INVESTMENT RESULTING IN EXEMPT INCOME. IN ABSENCE OF SPECIFIC DETAILS OF EXPENSES INCURRED IN EARNING EXEMPT INCO ME, THE FORMULA GIVEN IN RULE 8D IS ADOPTED FOR MAKING DISALLOWANCE. IN VIEW OF THIS THE ADDITION @ .5% OF INVESTMENT RESULTING IN EXEMPT INCOME MADE BY THE ASSESSING OFFICER IS CONFIRMED SUBJECT TO FOLLOWING PARA - . APPELLANT SUBMITTED THAT INVESTMENT IN FOREIGN SUBSIDIARY WILL NOT RESULT IN EXEMPT INCOME HENCE DISALLOWANCE FOR THE SAME CANNOT BE MADE. I AGREE WITH THE APPELLANT SINCE DIVIDEND FROM FOREIGN COMPANY IS TAXABLE IN INDIA; AN EXPENSE RELATING TO THIS INVESTMENT IS NOT DISALLOWABLE. ASSESSING OF FICER WILL ACCORDINGLY REDUCE THE DISALLOWANCE. AS REGARDS INTEREST, APPELLANT HAD BORROWED FUNDS ON WHICH INTEREST WAS PAID. WHILE MAKING INVESTMENTS, BOTH BORROWED FUNDS AS WELL AS OWN FUNDS WERE USED HENCE ONE CANNOT SAY THAT BORROWED FUNDS WERE USED O NLY FOR BUSINESS PURPOSE AND FRESH CAPITAL RAISED WAS ONLY USED FOR INVESTMENT. EVEN OTHERWISE, ASSESSING OFFICER HAS TAKEN ONLY THAT PART OF INTEREST PAID FOR GENERAL BORROWINGS NOT MADE FOR ANY SPECIFIC PURPOSE. THEREFORE IN THE ABSENCE OF CLEAR CUT DETA ILS OF UTILIZATION OF FUNDS, THE FORMULA GIVEN IN RULE 8D IS MOST APPROPRIATE METHOD. SINCE ITA S NO. 1816 & 1904 /AHD/ 2011 M/S. ARVIND MILLS LTD. FOR A.Y. 2006 - 07 - 10 - ASSESSING OFFICER WORKED OUT INTEREST DISALLOWANCE ON THE SAME BASIS, THE INTEREST DISALLOWANCE IS CONFIRMED. THIS LEAVES BOTH THE PARTIES AGGRIEVED AND IN CROSS APPEALS. 4. WE HAVE HEARD BOTH SIDES AND GONE THROUGH THE CASE FILE. THERE IS NO DISPUTE IN ASSESSEE S APPEAL THAT THE AUTHORITIES BELOW HAVE INVOKED RULE 8D(2)(II) AND (III) OF THE INCOME TAX RULES IN COMPUTING THE IMPUGNED SECTION 14A DISALLOWANCE. T H E ASSESSMENT YEAR IN QUESTION IS 2006 - 07. IT DOES NOT REQUIRE MUCH DISCUSSION THAT RULE 8D IS APPLICABLE FROM ASSESSMENT YEAR 2008 - 09 ONWARDS . THE CASE LAW OF HON BLE BOMBAY HIGH COURT IN GODREJ BOYCE AND CO. 328 ITR 1 IS QUOTED IN SUPPORT. THE REVENUE IS NOT ABLE TO POINT OUT ANY EXCEPTION TO THE SAME. THEREFORE, THE VERY BASIS ADOPTED BY THE ASSESSING OFFICER AS WELL AS CIT(A) IN COMPUTING THE IMPUGNED DISALLOWANCE UNDER RULE 8D (2)(II) AND (III) IS HELD TO BE NOT AS PER THE SETTLED LAW. AT THE SAME TIME, WE ARE OF THE VIEW THAT REASONABLE COMPUTATION METHOD I S ARRIVING AT SUCH A DISALLOWANCE HAS TO BE ADOPTED IN ASSESSMENT YEARS PRIOR TO 2008 - 09. IT HAS COME ON RECORD THAT THE ASSESSEE S EXEMPT INCOME IN QUESTION FROM DIVIDENDS READS A SUM OF RS.24.42 LAC S. THERE IS NO OTHER DISPUTE INVOLVED IN ITS APPEAL ON FACTS AND FIGURES NARRATED IN THE CIT(A) ORDER COMPRISING OF ASSESSING OFFICER S FINDINGS ITA S NO. 1816 & 1904 /AHD/ 2011 M/S. ARVIND MILLS LTD. FOR A.Y. 2006 - 07 - 11 - HEREINABOVE. WE OBSERVE IN THESE CIRCUMSTANCES THAT LARGER INTEREST OF JUSTICE WOULD BE MET IN CASE A LUMPSUM A DHOC DISALLOWANCE OF RS.2.5 LACS IS MADE IN THESE PECU LIAR FACTS WITH A RIDER THAT THE SAME SHALL NOT BE TREATED AS A PRECEDENT. ORDERED ACCORDINGLY. THE ASSESSEE GETS PART RELIEF . THE ASSESSING OFFICER IS DIRECTED TO PASS A CONSEQUENTIAL ORDER. THE ASS ESSEE S APPEAL ITA 1816/AHD/2011 IS PARTLY ALLOWED. 5. THIS LEAVES US WITH THE REVENUE S APPEAL ITA 1904/AHD/2011. THE CIT(A) HOLDS THAT ONCE THE ASSESSEE S INVESTMENTS MADE IN ITS FOREIGN SUBSIDIARIES DO NOT RESULT IN ANY INCOME AND ALSO THAT ITS DI VIDENDS FROM FOREIGN COMPANIES ARE NOT EXEMPT; BUT TAXABLE IN INDIA , SECTION 14A READ WITH RULE 8D WOULD NOT APPLY . WE HAVE GIVEN SUFFICIENT OPPORTUNITY TO THE REVENUE TO REBUT THE ABOVESTATED FINDINGS. IT FAILS TO PROVE THAT THE ASSESSEE S INVESTMENT S / D IVIDEND RELATED TO ITS FOREIGN SUBSIDIARIES COME UNDER THE PURVIEW OF EXEMPT INCOME CATEGORY U/S.10 OF THE ACT. WE AFFIRM THE CIT(A) FINDINGS IN THESE CIRCUMSTANCES. THE REVENUE S SOLE SUBSTANTIVE GROUND FAILS. THE REVENUE S APPEAL ITA 1904/AHD/2011 IS D ISMISSED. ITA S NO. 1816 & 1904 /AHD/ 2011 M/S. ARVIND MILLS LTD. FOR A.Y. 2006 - 07 - 12 - 6. TO SUM UP, THE ASSESSEE S APPEAL ITA 1816/AHD/2011 IS PARTLY ALLOWED AND THE REVENUE S APPEAL ITA 1904/AHD/2011 IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON THIS DAY, THE 25 TH JUNE , 201 5 AT AHMEDABAD . SD/ - SD/ - ( ANIL CHATURVEDI ) ( S.S. GODARA ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 25 / 06 / 20 1 5 PRABHAT KR. KESARWANI , SR. P . S . / 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