Appeal details
Counselvise Citation
[2016] 133 COUNSELVISE.COM (IT) 1291 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 year(s) 10 month(s) 23 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
23-06-2016
Appeal Filed By
Department
Order Result
Partly Allowed
Bench Allotted
C
Next Hearing Date
10-06-2016
Assessment Year
2010-2011
Appeal Filed On
30-07-2013
Judgement Text
PIN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH AHMEDABAD BEFORE SHRI RAJPAL YADAV, JM, & SHRI MANISH BORAD , AM. ITA NO.2031/AHD/2013 ALONG WITH CO NO.8/AHD/2014 ASST. YEAR: 2010-11 DCIT, CIR-4, AHMEDABAD. VS. GALAXY REAL ESTATE DEVELOPERS (GUJ) P. LTD., 4 TH & 10 TH FLOOR COMMERCE HOUSE, JUDGES BUNGLOW BODAKDEV, AHMEDABAD. APPELLANT RESPONDENT PAN AABCG 4180H APPELLANT BY SHRI PRASOON KABRA, SR.DR RESPONDENT BY SHRI P. M. MEHTA & VARTIK CHOWKSHI, ARS DATE OF HEARING: 10/6/2016 DATE OF PRONOUNCEMENT: 23/6/2016 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER . THE APPEAL IS FILED BY THE REVENUE AND THE CROSS O BJECTION IS FILED BY THE ASSESSEE AGAINST THE ORDER OF LD. CIT( A) VIII, AHMEDABAD DATED 22.5.2013 IN APPEAL NO.CIT(A)-VIII/ ACIT/CIR.4/30 /12-13 PASSED AGAINST ORDER U/S 143(3) OF THE IT AC T, 1961 FOR ASST. YEAR 2010-11 ON 28.5.2012 BY ACIT, CIRCLE-4, AHMEDA BAD. 2. BRIEFLY STATED FACTS AS CULLED OUT FROM THE RECO RDS ARE THAT ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN TH E BUSINESS OF ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 2 BUILDERS AND DEVELOPERS. RETURN OF INCOME WAS FILED ON 12.10.2010 DECLARING TOTAL INCOME AT RS.1,43,59,520/-. CASE WA S SELECTED FOR SCRUTINY ASSESSMENT AND NOTICE U/S 143(2) OF THE AC T WAS ISSUED ON 26.09.2011. NECESSARY REPLY WAS SUBMITTED BY THE AS SESSEE IN REPLY TO THE QUESTIONNAIRE AND QUERIES MADE BY THE LD. AS SESSING OFFICER. AFTER MAKING ADDITION OF RS.27,78,024/- BY WAY OF D ISALLOWANCE U/S 14A OF THE ACT INCOME WAS ASSESSED AT RS.1,71,35,54 4/- AND BOOK PROFIT WAS ASSESSED AT RS.2,35,75,954/-. THIS DISAL LOWANCE WAS CALLED FOR ON THE BASIS OF OBSERVATION OF LD. ASSESSING OF FICER THAT ASSESSEE WAS UNABLE TO JUSTIFY THAT THE INVESTMENT IN SHARES WAS FROM HIS OWN FUNDS OR FROM THE FUNDS ON WHICH NO INTEREST PAYMEN T IS MADE BY THE ASSESSEE. BY APPLYING RULE 8D R.W.S. SECTION 14A OF THE ACT THE DISALLOWANCE OF EXPENDITURE COMES TO RS.28,43,777/- OUT OF WHICH ASSESSEE COMPANY HAD ITSELF DISALLOWED RS.65,753/- IN ITS COMPUTATION OF INCOME AND THEREFORE, REMAINING AMOU NT OF RS.27,78,024/- WAS DISALLOWED U/S 14A BY LD. ASSESS ING OFFICER. 3. AGGRIEVED, ASSESSEE WENT IN APPEAL BEFORE LD. CI T(A). LD. CIT(A) PARTLY ALLOWED ASSESSEES APPEAL BY RESTRICT ING THE DISALLOWANCE TO RS.6,18,396/- OUT OF THE TOTAL DISA LLOWANCE OF RS.27,78,024/- BY OBSERVING AS UNDER :- 3.3. I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORD ER AND SUBMISSION FILED BY APPELLANT. IT IS NOTICED THAT ASSESSING OFFICER HAS MADE DISALLOWANCE BY INVOKING PROVISIONS OF SECTION 14A R.W. RULE 8D AND SAME IS WORKED OUT AS UNDER- PARTICULARS AMOUNT RS. TOTAL INTEREST EXPENDITURE 1,19,91,671 AVERAGE INVESTMENTS 8,73,41,794 AVERAGE TOTAL ASSETS 43,51,24,428 PROPORTIONATE DISALLOWANCE OF INTEREST EXPENDITURE 24,07,068 ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 3 DISALLOWANCE OF OTHER EXPENDITURE BEING 0.5% OF AVE RAGE INVESTMENTS 5,01,661 TOTAL DISALLOWANCE 28,43,777 LESS: AMOUNT ALREADY DISALLOWED IN RETURN OF INCOME 65,753 TOTAL DISALLOWANCE 27,28,024 IT IS UNDISPUTED FACT THAT APPELLANT HAS MADE INVES TMENTS IN SHARES AND PARTNERSHIP FIRM THEREFORE, THE ASSESSING OFFICER H AS MADE DISALLOWANCE U/S 14A ON THE GROUND THAT APPELLANT HAS UTILIZED INTEREST BEARING FUNDS FOR MAKING INVESTMENTS ON WHICH TAX FREE INCOME IS EARNED. ON THE OTHER HAND, THE APPELLANT HAS ARGUED THAT ASSESSING OFFICER HAS MADE DISALLOW ANCE ON ASSUMPTION THAT SOME EXPENDITURE HAS BEEN INCURRED FOR EARNING EXEM PT INCOME BUT HE HAS NOT ESTABLISHED ANY NEXUS BETWEEN THE EXPENDITURE AND I NVESTMENTS FROM WHICH EXEMPT INCOME IS EARNED HENCE, NO DISALLOWANCE IS C ALLED FOR. FURTHER, THE APPELLANT HAS ARGUED THAT IT HAS SUFFICIENT INTERES T FREE FUNDS IN THE FORM OF SHARE CAPITAL, RESERVES AND SURPLUS, ETC AND THEREFORE, B ORROWED FUNDS HAVE NOT BEEN UTILIZED FOR MAKING INVESTMENT ON WHICH TAX FREE IN COME HAS BEEN EARNED AND THEREFORE DISALLOWANCE U/S 14A IS NOT REQUIRED TO B E MADE. FURTHER, THE APPELLANT HAS ARGUED THAT PROFITS OF PARTNERSHIP FIRM ARE FIR ST TAXED IN THE HANDS OF FIRM AND THEREAFTER DIVIDED AMONG THE PARTNERS; THEREFORE SU CH INCOME CANNOT BE TREATED AS EXEMPT INCOME FOR THE PURPOSE OF MAKING DISALLOW ANCE U/S14A OF THE ACT. IN HIS SUBMISSION, THE LEARNED AR OF THE APPELLANT MAI NLY ARGUED AS UNDER:- (I) INVESTMENTS MADE IN KALUPUR COMMERCIAL CO- OPERATIVE BANK LIMITED HAS RESULTED INTO DIVIDEND INCOME OF RS 6,49,500 WH ICH HAS BEEN OFFERED TO TAX AND HENCE SUCH INVESTMENT CANNOT BE SUBJECT TO DISALLOWANCE U/S 14A. (II) INVESTMENT MADE IN PARTNERSHIP FIRMS BEI NG DEEP GALAXY DEVELOPERS, SNEHAL DEVELOPERS AND DEVANSHI CORPORATION, APPELLA NT HAS EARNED TAXABLE INTEREST INCOME HENCE INVESTMENT MADE IN SU CH PARTNERSHIP FIRMS CANNOT BE SUBJECT TO DISALLOWANCE U/S 14A. (III) INTEREST INCOME EARNED DURING THE YEAR HAS N OT BEEN DEDUCTED FROM TOTAL INTEREST EXPENDITURE CONSIDERED FOR THE PURPO SE OF WORKING OUT DISALLOWANCE U/S 14A. THE DISALLOWANCE IF ANY IS RE QUIRED TO BE RESTRICTED AFTER CONSIDERING NET INTEREST EXPENDITU RE AND IN PRESENT CASE, THERE IS NET INTEREST INCOME. (IV) FOR THE PURPOSE OF WORKING OUT DISALLOWANCE, THE BALANCE IN ORCHID DEVELOPERS IS INCLUSIVE OF PROFIT ELEMENT WHICH WAS TRANSFERRED ON THE LAST DAY OF THE CONCERNED FINANCIAL YEAR HENCE SAME IS REQUIRED TO BE REDUCED. ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 4 (V) THE APPELLANT HAS SUFFICIENT INTEREST FREE FUND S IN FORM OF SHARE CAPITAL AND 'RESERVES AND SURPLUS TO COVER AFORESAID INVEST MENTS CONSIDERED BY ASSESSING OFFICER FOR MAKING DISALLOWANCE U/S 14A H ENCE NO PROPORTIONATE INTEREST EXPENDITURE CAN BE DISALLOW ED. 3.4. ON CAREFUL CONSIDERATION OF OBSERVATION OF ASSESSIN G OFFICER AND CONTENTION OF APPELLANT, IT IS OBSERVED THAT IDENTICAL ISSUE H AS ARISEN IN CASE OF APPELLANT FOR AY 09-10 AND VIDE ORDER DATED 30TH AUGUST 2012 IN A PPEAL NO CIT(A)- VHI/ACIT/CIRC 4/297/11-12, THE ISSUE OF DISALLOWANC E U/S 14A MADE BY ASSESSING OFFICER WAS PARTLY CONFIRMED IN SAID ORDER. FOLLOWI NG THE OBSERVATIONS MADE IN SAID ORDER AND CONSIDERING THE FACTS OF APPELLANT'S CASE FOR PRESENT ASSESSMENT YEAR, GROUNDS OF APPEAL FILED BY APPELLANT IS ADJUD ICATED AS UNDER (A) THE ARGUMENT OF APPELLANT THAT PROFIT EARNED FR OM PARTNERSHIP FIRM IS NOT TAX FREE IN HANDS OF APPELLANT COMPANY AS SUCH FIRM S HAVE ALREADY PAID TAXES ON SUCH INCOME HENCE BALANCES IN PARTNERSHIP FIRM CANNOT BE ACCEPTED AS BOTH FIRM AND PARTNERS ARE SEPARATE IDE NTITY IN EYES OF LAW AND PROFIT EARNED FROM PARTNERSHIP FIRM IS SPECIFICALLY EXEMPT U/S 10(2A) OF THE ACT. FURTHER, ARGUMENT OF APPELLANT THAT DURING THE YEAR UNDER CONSIDERATION ON CERTAIN INVESTMENTS IT HAS NOT EARNED ANY TAX FREE DIVIDEND INCOME AND ALL SUCH INVESTMENTS CANNOT BE SUBJECT TO DISALLOWANCE U/S 14A OF THE ACT. THIS ARGUMENT OF APPELLANT CANNOT BE ACCEPTED THAT AS DISALLOWANCE U/S 14A AS PER RULE 8D IS REQUIRED TO BE COMPUTED ON IN VESTMENTS RESULTING INTO THE AVERAGE OF VALUE OF INVESTMENT, INCOME FRO M WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARI NG IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE RELEVANT ACCOUNTING YEAR WHICH MEANS THAT EVEN IF THERE IS NO EXEMPT IN COME FROM INVESTMENT IN CURRENT YEAR, DISALLOWANCE IS REQUIRED TO BE MAD E. (B) APPELLANT HAS MADE INVESTMENTS IN PARTNERSHIP F IRMS AND MUTUAL FUNDS BUT HAS NOT ESTABLISHED ANY NEXUS BETWEEN UTILIZATI ON OF INTEREST FREE FUNDS AND SUCH INVESTMENTS. THE APPELLANT HAS NOT EVEN SU BSTANTIATED ITS CLAIM THAT NO OTHER EXPENDITURE WAS INCURRED FOR MAKING S UCH INVESTMENTS. CONSIDERING THE SAME, ASSESSING OFFICER WAS JUSTIFI ED IN INVOKING RULE 8D FOR THE PURPOSE OF MAKING DISALLOWANCE U/S 14A OF T HE ACT. FURTHER, HON'BLE BOMBAY HIGH COURT IN CASE OF GODREJ & BOYCE MANUFACTURING COMPANY LIMITED 328 ITR 81 HAS HELD THAT PROVISIONS OF RULE 8D ARE APPLICABLE FROM A.Y. 2008-2009. EVEN APPELLANT HAS NOT ESTABLISHED THAT DISALLOWANCE U/S 14A MADE IN RETURN OF INCOME IS AS PER RULE 8D HENCE ARGUMENT THAT NO FURTHER DISALLOWANCE IS CALLED FOR CANNOT BE ACCEPTED. (C) HOWEVER, THE ARGUMENT OF APPELLANT THAT DISALLO WANCE U/S 14A CANNOT BE MADE ON INVESTMENTS IN PARTNERSHIP FIRM FROM WHI CH TAXABLE INTEREST ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 5 INCOME HAS BEEN EARNED IS ACCEPTABLE AS APPELLANT H AS EARNED TAXABLE INTEREST INCOME ON DAY TO DAY BALANCE OF INVESTMENT MADE IN SUCH FIRMS. CONSIDERING THE SAME, ASSESSING OFFICER IS DIRECTED TO REDUCE INVESTMENT MADE IN PARTNERSHIP FIRMS BEING M/S DEEP GALAXY DEV ELOPERS, SNEHAL DEVELOPERS AND DEVANSHI CORPORATION, (D) THE SECOND CONTENTION OF APPELLANT THAT ASSESSI NG OFFICER HAS CONSIDERED THE INVESTMENT IN SHARES OF KALUPUR COMM ERICAL CO OPERATIVE BANK WHEREIN DIVIDEND INCOME HAS ALREADY BEEN SUBJE CT TO TAX AND NO TAX FREE INCOME HAS BEEN EARNED HENCE NO DISALLOWANCE I S CALLED ON SUCH INVESTMENT IS FOUND CORRECT. EVEN ASSESSING OFFICER HIMSELF HAS NOT CONSIDERED CLOSING BALANCE OF SUCH INVESTMENT FOR ' THE PURPOSE OF COMPUTING DISALLOWANCE U/S 14A HENCE ASSESSING OFFI CER IS DIRECTED TO EXCLUDE OPENING BALANCE OF INVESTMENTS IN SHARES OF KCCB FOR THE PURPOSE OF DISALLOWANCE U/S 14A OF THE ACT. (E) THE APPELLANT HAS ALSO ARGUED THAT FOR THE PURP OSE OF COMPUTING DISALLOWANCE U/S 14A OF THE ACT CLOSING BALANCE OF INVESTMENT OF PARTNERSHIP FIRM IS REQUIRED TO BE REDUCED BY SHARE OF PROFIT RECEIVED FROM FIRM ON LAST DAY OF FINANCIAL YEAR IS ALSO ACCEPTED AS SUCH AMOUNT HAS BEEN RECEIVED ON LAST DATE AND THERE IS NO ACTUAL U TILIZATION OF FUNDS BY APPELLANT FIRM. THE CLOSING INVESTMENTS CONSIDERED BY ASSESSING OFFICER ARE REQUIRED TO BE REDUCED BY SUCH PROFIT ELEMENT. ASSESSING OFFICER HAS CONSIDERED CLOSING BALANCE OF INVESTMENTS IN FIRM B EING ORCHID DEVELOPERS AT RS 10,55,381 WHICH IS AFTER CONSIDERING SHARE OF PROFIT OF RS 3,86,07,902 HENCE ASSESSING OFFICER IS DIRECTED TO REDUCED INVE STMENTS OF RS 10,55,381 FROM TOTAL INVESTMENTS CONSIDERED BY HIM. (F) THE APPELLANT HAS ALSO ARGUED THAT OPENING INVE STMENT IN MUTUAL FUNDS FOR RS. 6.01 CRORE WAS SOLD ON 8 TH APRIL, 2009 WHICH MEANS THAT INVESTMENTS WERE HELD FOR ONLY EIGHT DAYS AND CONSI DERING THE SAME, IT HAS ALREADY MADE PROPORTIONATE DISALLOWANCE OF RS. 65,7 53 WHILE FILING RETURN OF INCOME. THIS ARGUMENT OF APPELLANT IS FOUND CORR ECT AND AS APPELLANT HAS ALREADY MADE DISALLOWANCE IN RETURN OF INCOME O N INVESTMENT IN MUTUAL FUNDS, NO SEPARATE DISALLOWANCE IS CALLED FO R. (G) FURTHER, THE APPELLANT HAS ARGUED THAT IT HAS N OT INCURRED ANY OTHER EXPENDITURE FOR MAKING INVESTMENTS HENCE DISALLOWAN CE OF EXPENDITURE BEING 0.5% OF AVERAGE INVESTMENTS INCURRED CANNOT B E ACCEPTED AS APPELLANT HAS FAILED TO ESTABLISH ANY AMOUNT FOR NO N-INCURRENCE OF SUCH EXPENDITURE MORE PARTICULARLY WHEN IT HAS MADE SUBS TANTIAL INVESTMENTS. FURTHER APPELLANT HAS ARGUED THAT WHILE FILING RETU RN OF INCOME IT HAS MADE DISALLOWANCE OF RS 2,15,753 WHEREAS ASSESSING OFFIC ER HAS GIVEN CREDIT OF RS. 65,753. ON CAREFUL CONSIDERATION OF RETURN OF INCOM E IS FILED BY APPELLANT, IT IS SEEN .THAT APPELLANT HAS MADE SPECIFIC DISALLOWANCE U/S 14A FOR RS 65,753 ONLY ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 6 AND REMAINING DISALLOWANCE OF RS 1,50,000 IS NOT WI TH SPECIFIC REFERENCE OF 14A HENCE ASSESSING OFFICER WAS JUSTIFIED IN GIVING CRE DIT OF DISALLOWANCE MADE IN RETURN OF INCOME AT RS 65,753 ONLY. (H) IN VIEW OF DISCUSSION MADE HEREIN ABOVE, D ISALLOWANCE UNDER SECTION 14A MADE BY ASSESSING OFFICER IS RESTRICTED AS UNDER:- PARTICULARS OF INVESTMENTS AMOUNT AS ON 31/03/2010 AMOUNT AS ON 31/03/2009 REMARKS IN PARTNERSHIP FIRMS DEEP GALAXY DEVELOPERS - - TAXABLE INTEREST INCOME IS EARNED ORCHID DEVELOPERS 2,65,97,479 PROFIT ENTRY REDUCED PRATIK ASSOCIATES (3,88,46,791 1,13,88,476 DEVANSHI CORPORATION TAXABLE INTEREST INCOME IS EARNED GALAXY DEVELOPERS 45,45,000 SURYA KIRAN DEVELOPERS (2,506) IN SHARES OF KALUPUR COMM. CO-OP. BANK LTD. TAXABLE DIVIDEND INCOME IS EARNED IN MUTUAL FUND ASSESSEE HAS ALREADY MADE PROPORTIONATE DISALLOWANCE IN RETURN OF INCOME FOR INVESTMENT OF RS.6.01 CRORES HENCE NO DISALLOWANCE IS REQUIRED. TOTAL 3,79,85,955 AVERAGE INVESTMENT 1,89,92,978 AMOUNT IN RS. CALCULATION AS PER RULE 8D PARTICULARS AMOUNT AS ON 1.4.2009 AMOUNT AS ON 31.3.2010 AVERAGE AVERAGE ASSETS (A) 31,91,21,902 55,11,26,953 43,51, 24,427 INVESTMENT IN PARTNERSHIP FIRMS (B) 3,79,85,955 1,89,92,978 INTEREST EXPENDITURE (C) 1,19,91,671 (A) DIRECT EXPENSES (B)DISALLOWANCE OUT OF INTEREST (C+B)/A 5,23,431 (C)HALF PARCENTAGE OF AVERAGE INVESTMENT ().5% *B 94,955 TOTAL 6,18,396 IN VIEW OF AFORESAID FINDING, DISALLOWANCE UNDER SE CTION 14A MADE BY ASSESSING OFFICER IS RESTRICTED TO RS. 6,18,396/- OUT OF TOTA L ADDITION MADE IN ASSESSMENT ORDER FOR RS. 27,78,024/-. THE RELATED GROUND OF AP PEAL IS PARTLY ALLOWED. ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 7 4. AGGRIEVED REVENUE HAS FILED THE APPEAL VIDE TA NO.2031/AHD/2013 AND THE ASSESSEE HAS FILED THE CR OSS OBJECTION NO.8/AHD/2014. 5. FIRST WE TAKE UP REVENUES APPEAL WHEREIN FOLLOW ING GROUNDS HAVE BEEN RAISED :- 1. THE LD.CIT(A) ERRED IN LAW AND ON FACTS IN RESTR ICTING THE DISALLOWANCE TO RS.6,18,396/- AND THEREBY DELETING THE ADDITION OF RS.21,59,628/- OUT OF TOTAL ADDITION OF RS.27,78,02 4/-, WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS MADE IN VESTMENT IN SHARES AND OTHERS OF RS. 43,93,062/- FOR WHICH IT C OULD NOT JUSTIFY THE INVESTMENT MADE IN SHARES IS FROM ITS OWN FUND OR F ROM THE FUNDS ON WHICH NO INTEREST PAYMENT IS MADE BY THE ASSESSEE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD, C1T(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFF ICER. 3. IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE L D. CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED TO THE ABOVE EXTENT. 6. THE ONLY SOLITARY GRIEVANCE OF THE REVENUE RELAT ES TO ACTION OF LD. CIT(A) PARTLY DELETING THE ADDITION ON ACCOUNT OF DISALLOWANCE U/S 14A OF RS.21,59,628/-. 7. LD. DR SUPPORTED THE ORDER OF LD. ASSESSING OFFI CER. 8. ON THE OTHER HAND, LD. AR SUBMITTED THAT IN THE RETURN OF INCOME FILED BY THE ASSESSEE VOLUNTARY DISALLOWANCE OF RS. 2,15,753/- WAS MADE ON ACCOUNT OF DISALLOWANCE U/S 14A OF THE ACT WHEREAS LD. ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 8 ASSESSING OFFICER CALCULATED THE DISALLOWANCE U/S 1 4A AT RS. 28,43,777/- WITHOUT SATISFYING WITH THE CORRECTNESS OF THE CLAIM OF ASSESSEE WITH REGARD TO THE ACCOUNT OF BOOKS OF ACC OUNT AND NOR RECORDED ANY SUCH SATISFACTION TO PROVE THE INCORRE CTNESS OF THE DISALLOWANCE SUO MOTTO MADE BY THE ASSESSEE. LD. AR FURTHER REFERRING TO THE AUDITED PROFIT AND LOSS ACCOUNT SU BMITTED THAT TOTAL INTEREST INCOME EARNED BY THE COMPANY FOR FINANCIAL YEAR 2009-10 WAS AT RS.1,60,47,758/- WHEREAS EXPENDITURE TOWARDS INTEREST AND FINANCIAL CHARGES PAID IS AT RS.1,19,95,664/- AND T HE TOTAL NET INCOME EARNED BY THE ASSESSEE DURING FINANCIAL YEAR 2009-1 0 IS AT RS.40,52,094/-. REFERRING TO THIS POSITION OF NET I NTEREST INCOME EARNED BY THE ASSESSEE DURING THE YEAR LD. AR SUBMI TTED THAT WHEN DISALLOWANCE U/S 14A IS CALCULATED THE PROPORTIONAT E PORTION OF INTEREST EXPENDITURE IS DISALLOWED WITH REGARD TO THE TOTAL INVESTMENT HELD BY THE COMPANY AGAINST THE TOTAL ASSETS OF THE COMPANY AND AS THERE IS NO INTEREST EXPENDITURE INCURRED BY THE COMPANY LD. ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING ANY SUCH DISALLOWANCE O N ACCOUNT OF INTEREST EXPENDITURE U/S 14A OF THE ACT. LD. AR FUR THER REFERRED AND RELIED ON THE DECISION OF THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO.2313 & 2429/AHD/2012 FOR ASST. YEAR 2009-10 PRONOUNCED ON 4.5.2016 AND IN THE CASE OF SAFAL REA LTY P. LTD. VS. ACIT (OSD), CIRCLE-8, AHMEDABAD IN ITA NO.2334/AHD/ 2012 & 1842/AHD/2013 ASST. YEARS 2009-10 & 2010-11 PRONOUN CED ON 29.11.2013. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD AND ALSO GONE THROUGH THE DECISIONS RELIE D ON BY THE LD. AR. ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 9 THROUGH THIS GROUND REVENUE IS AGGRIEVED WITH THE A CTION OF LD. CIT(A) IN RESTRICTING THE DISALLOWANCE TO RS.6,18,3 96/- AT THE PLACE OF 27,78,024/- THEREBY DELETING THE ADDITION OF RS.21, 59,628/-. 10. WE OBSERVE THAT THE ISSUE RELATING TO DISALLOWA NCE U/S 14A OF THE ACT IN ASSESSEES OWN CASE IN ASST. YEAR 2009-1 0 CAME UP BEFORE THE CO-ORDINATE BENCH WHEREIN FOLLOWING DECISION WA S TAKEN:- 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND HAVE CA REFULLY PERUSED THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH TH E RELEVANT DOCUMENTARY EVIDENCES BROUGHT TO THE NOTICE BY THE LD. COUNSEL. THE UNDISPUTED FACT IS THAT THE INVESTMENTS OF THE ASSESSEE HAVE BEEN TAKEN AT RS. 17.02 CRORE, ASSESSEE'S OWN FUNDS ARE AT RS. 17.60 CRORES. THUS, IT CAN BE SAFE LY CONCLUDED THAT THE ASSESSEE WAS HAVING SUFFICIENT OWN FUNDS TO MAKE THE INVESTM ENTS AND, THEREFORE, THE RATIO LAID DOWN BY THE HON'BLE HIGH COURT OF BOMBAY IN TH E CASE OF A.Y. 2009-10 RELIANCE UTILITIES & POWER LTD. 313 ITR 340 SQUAREL Y APPLY. WHEREIN THE HON'BLE HIGH COURT HAS HELD THAT IF THE ASSESSEE IS HAVING MIXED FUNDS I.E. OWN FUNDS PLUS BORROWED FUNDS THAN THE PRESUMPTION IS THAT THE INV ESTMENTS HAVE COME OUT OF OWN FUNDS. THIS RATIO HAS BEEN FOLLOWED BY THE HON' BLE HIGH COURT OF BOMBAY IN THE CASE OF HDFC BANK 366 ITR 505. RESPECTFULLY FOL LOWING THE RATIO LAID DOWN BY THE HON'BLE HIGH COURT OF BOMBAY, NO DISALLOWANCE I S TO BE MADE IN SO FAR AS INTEREST IS CONCERNED. 11. IN SO FAR AS DISALLOWANCE RELATING TO ADMINISTR ATIVE EXPENSE IS CONCERNED, WE FIND THAT THE ASSESSEE HAS SUO MOTU DISALLOWED RS. 3.50 LACS WHILE COMPUTING THE INCOME FOR THE YEAR UNDER CONSIDERATION. IN OUR CON SIDERED OPINION, THIS DISALLOWANCE OF RS. 3.50 LACS SHOULD MEET THE ENDS OF JUSTICE AND NO FURTHER DISALLOWANCE IS REQUIRED. WE ACCORDINGLY DIRECT THE A.O TO DELETE THE IMPUGNED DISALLOWANCE MADE U/S. 14 A OF THE ACT . 11. BEFORE GOING AHEAD LET US GO THROUGH THE PROVIS IONS OF SECTION 14A OF THE ACT AND RULE-8D OF THE IT RULES WHICH RE AD AS UNDER :- ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 10 SEC. 14A. EXPENDITURE INCURRED IN RELATION TO INCO ME NOT INCLUDIBLE IN TOTAL INCOME.(1)FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS C HAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUN T OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, IF THE ASSESSING OFFIC ER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT: PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOW ER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCI NG THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. 2. NEW RULE 8D : 2.1 IN EXERCISE OF THE POWERS GIVEN IN S. 14A(2) C. B.D.T. HAS ISSUED A NOTIFICATION NO. S.O. 547(E) ON 24-3-2008 (299 ITR (ST) 88). THIS NOTIFIC ATION AMENDS THE INCOME-TAX RULES BY INSERTION OF A NEW RULE 8D PROVIDING FOR A 'METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME'. READING THIS RULE IT IS EVIDENT THAT THE RULE PROVIDES FOR DISALLOWANCE OF NOT ONLY DIRECT EXPEND ITURE INCURRED FOR EARNING THE EXEMPT INCOME BUT ALSO FOR DISALLOWANCE OF PROPORTIONATE INDIRECT EXPENDITURE. THIS IS CLEARLY CONTRARY TO THE MAIN OBJECTIVE WITH WHICH S. 14A WAS ENACTED. 2.2 BROADLY STATED, THE NEW RULE 8D PROVIDES AS UND ER : (I) THE METHOD PRESCRIBED IN THE RULE IS TO BE APPL IED ONLY IF THE AO IS NOT SATISFIED WITH : (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE INC URRED FOR EARNING THE EXEMPT INCOME MADE BY THE ASSESSEE OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED FOR EARNING EXEMPT INCOME. (II) THE METHOD PRESCRIBED IN THE RULE STATES THAT THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF THE FOLLOWING AMOUNTS : (A) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. (B) IN THE CASE OF INTEREST ON BORROWED FUNDS WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, THE AMOUNT COMPUTED IN ACCORDANC E WITH THIS FOLLOWING FORMULA : A X B C A = AMOUNT OF INTEREST, OTHER THAN THE AMOUNT OF IN TEREST WHICH IS DIRECTLY ATTRIBUTABLE TO THE EXEMPT INCOME STATED IN (A) ABOVE. ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 11 B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE RELEVANT ACCOUNTING YEAR. C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE RELEVANT ACCOUNTING YEA R. THE TERM TOTAL ASSETS MEANS TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INC REASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. (C) AN AMOUNT EQUAL TO % OF THE AVERAGE OF THE VA LUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SH EET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE RELEVANT ACCOUNTING YEAR. 12. THERE IS NO DISPUTE TO THE FACT THAT ASSESSEE C OMPANY IS HAVING EXEMPTED INCOME AS WELL AS INVESTMENTS HAVING TAX F REE INCOME IN THE IMMEDIATELY PREVIOUS YEAR AND THE YEAR UNDER AP PEAL AND, THEREFORE, PROVISIONS OF SECTION 14A OF THE ACT REA D WITH RULE 8D ARE SQUARELY APPLICABLE ON THE ASSESSEE. DISALLOWANCE U /S 14A OF THE ACT HAS TO BE CALCULATED ON THE BASIS OF METHOD PROVIDE D UNDER RULE 8D(2) AS REFERRED ABOVE WHICH HAS GOT THREE PARTS. WE WILL ANALYZE EACH PART SEPARATELY. 13. (I) PART RELATES TO AMOUNT OF EXPENDITURE DIRECTLY RELATIN G TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. WE OBSERVE THAT ASSESSEE HAS VOLUNTARILY MADE DISALLOWANCE OF RS.65 ,753/- U/S 14A OF THE ACT AND TO EXAMINE THIS FACT WE REFER TO THE CO MPUTATION OF INCOME AVAILABLE AT PAGES 21 TO 24 OF THE PAPER BOOK AND F IND THAT ASSESSEE HAS MADE SPECIFIC DISALLOWANCE U/S 14A AT RS.65,753 /-. WE FURTHER OBSERVE THAT BEFORE LOWER AUTHORITIES ASSESSEE HAS SUBMITTED THAT DISALLOWANCE U/S 14A OF THE ACT HAS BEEN MADE AT RS .2,10,753/- WHICH INCLUDES RS.65,753/- SPECIFICALLY MADE U/S 14 A OF THE ACT AND REMAINING AMOUNT OF RS.1,45,000/- WAS TERMED AS AN AD HOC DISALLOWANCE. HOWEVER, WE ARE OF THE VIEW THAT ONLY RS.65,753/- CAN ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 12 BE TREATED AS SPECIFIC DISALLOWANCE U/S 14A OF THE ACT AND WE ACCEPT THE SAME AS THE AMOUNT OF EXPENDITURE DIRECTLY RELA TING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND TH ERE IS NO DISPUTE TO THE SAME BY BOTH THE LOWER AUTHORITIES. 14. NOW WE TAKE (II) PART RULE 8D (2) WHICH DEALS WITH DISALLOWANCE OF INTEREST WHICH IS NOT DIRECTLY ATTR IBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT AND SOME PORTION OF IT IS DEEMED TO HAVE BEEN USED ON THE FUNDS USED FOR THE PURPOSES OF INV ESTMENTS. TO EXAMINE THIS ASPECT, WE OBSERVE THAT AS PER AUDITED PROFIT AND LOSS ACCOUNT FOR THE YEAR UNDER APPEAL, THE GROSS INTERE ST INCOME EARNED BY THE ASSESSEE IS SHOWN AT RS.1,60,47,758/- AND EX PENDITURE UNDER THE HEAD INTEREST AND FINANCIAL CHARGES HAVE BEEN C LAIMED AT RS.1,19,95,664/- THEREFORE, THE NET INTEREST INCOME EARNED BY THE RESPONDENT DURING THE FINANCIAL YEAR 2009-10 IS AT RS.40,52,094/-. THERE IS NO DISPUTE FROM THE SIDE OF REVENUE TO THI S FACT THAT THERE IS NET INTEREST INCOME EARNED BY THE ASSESSEE DURING T HE YEAR. WE FURTHER OBSERVE THAT CO-ORDINATE BENCH IN THE CASE OF SAFAL REALTY P. LTD. VS. ACIT (OSD), CIRCLE-8, AHMEDABAD (SUPRA) HA S DEALT WITH SIMILAR ISSUE IN WHICH DISALLOWANCE U/S 14A R.W.RUL E 8-D WAS HELD TO BE NOT JUSTIFIED WHEN THE INTEREST EXPENDITURE WAS MORE THAN THE INTEREST INCOME AND WHILE DECIDING SO THE CO-ORDINA TE BENCH OBSERVED AS UNDER :- 5. WE HAVE HEARD BOTH THE SIDES AT SOME LENGTH. WE HAVE ALSO CAREFULLY PERUSED THE ORDERS OF THE AUTHORITIES BELOW IN THE LIGHT OF THE ABOVE COMPILATION FILED. ONCE, THE FACTUAL POSITION IS THAT THE ASSESSEE WAS HAVING SUFFICIENT OWN FUNDS, AS DEMONSTRATED BEFORE US WHICH WERE STATED TO BE UTILIZED FOR THE INVESTMENT IN CAPITAL OF THE PARTNERSHIP FIRM THEN IT IS UNFAIR ON THE PART OF THE REVENUE DEPARTMENT TO PRESUME THAT THE BORROWED CAPITAL ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 13 WAS UTILIZED FOR THE PURPOSE OF INVESTMENT IN THE F IRM TO EARN THE EXEMPTED INCOME FOR A.Y. 2008-09. THE MAIN PROVISIONS OF SECTION 14A AR E TO BE APPLIED. FURTHER RULE 8D (1) READS AS FOLLOWS: WHERE THE ASSESSING OFFICER, HAV ING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH- (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; OR WWW.TAXGURU.IN ITA NOS.2334/ AHD/2012 AND 1842/AHD/2013 SAFAL REALITY P. LTD. AHMEDABAD VS. A CIT (OSD) CIR-8, AHMEDABAD . FOR A.YS. 2009-10 & 2010-11 - 7 - (B) THE CLAIM MAD E BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETE RMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROV ISIONS OF SUB-RULE (2). 5.1 AS PER THIS RULE, AS REPRODUCED ABOVE, THE AO HAS TO DETERMINE THE DISALLOWANCE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE TO SATISFY HIMSELF IN RESP ECT OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE AS WELL AS IN RESPECT OF THE CLAIM WHE THER ANY EXPENDITURE WAS INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME; HENCE, EXEMPT UNDER THE ACT. THE AO IS FIRST REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH EXEMPTED INCOME. WE HAVE ALSO NOTED THAT EVEN FOR A.Y. 2008-09 THE RESPECTED CO- ORDINATE BENCH D ITAT AHMEDABAD IN THE CASE OF KA RNAVATI PETROCHEM PVT. LTD. (SUPRA) HAS HELD AS UNDER: WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT CIT(A) WHILE GRANTING RELIE F TO THE ASSESSEE HAS GIVEN A FINDING THAT NO NEXUS HAS BEEN ESTABLISHED BY THE AO WHICH THE AMOUNT INCURRED BY THE ASSESSEE FOR EARNING THE TAX FREE INCOME. HE HAS FURTHER NOT ED THAT IN THE ASSESSEES CASE THE INTEREST INCOME WAS MORE THAN INTEREST EXPENSE AND THUS THE ASSESSEE WAS HAVING NET POSITIVE INTEREST INCOME AND THEREFORE THE SAME CAN NOT BE CONSIDERED FOR DISALLOWANCE AND FOR WHICH HE PLACE RELIANCE ON THE DECISION OF KOLK ATA TRIBUNAL IN THE CASE OF TRADING APARTMENT LIMITED AND THE DECISION OF TRIBUNAL IN T HE CASE MORGAN STANLEY INDIA SECURITIES PRIVATE LIMITED. HE HOWEVER CONSIDERED T HE ADMINISTRATIVE EXPENSES TO BE 0.5% OF THE AVERAGE INVESTMENTS AND DISALLOWED THE SAME. 5.2 TO COMPLETE THIS ORDER, WE DEEM IT PROPER TO REPRODUCE A PORTION OF THE ORD ER OF HONBLE DELHI HIGH COURT PRONOUNCED IN THE CASE OF MAXOPP INVESTMENT LTD. AN D OTHERS VS. CIT AS FOLLOWS: SUB- S. (2) OF S. 14A PROVIDES THE MANNER IN WHICH THE A O IS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME. HOWEVER, IF ONE EXAMINES THE PROVISION CAREFULLY, O NE WOULD FIND THAT THE AO IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ONLY IF THE AO, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL WWW.TAXGURU.IN ITA NOS.2334/ AHD/2012 AND 1842/AHD/ 2013 SAFAL REALITY P. LTD. AHMEDABAD VS. ACIT (OSD) CIR-8, AHMEDABAD . FOR A.Y S. 2009-10 & 2010-11 - 8 - INCOME UNDER THE ACT. IN OTHER WORDS, THE REQUIREME NT OF THE AO EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME WOULD BE TRIGGERED ONLY IF AO RETURNS A FINDING THAT HE I S NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E. SUB-S. (3) IS NOTHING BUT AN OFFSHOOT OF SUB-S. (2) OF S. 14A. SUB-S. (3) APPLIES TO CASE S WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN OTHER WORDS, SUB-S. (2) DE ALS WITH CASES WHERE THE ASSESSEE SPECIFIES A POSITIVE AMOUNT OF EXPENDITURE IN RELAT ION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AND SUB-S. (3) AP PLIES TO CASES WHERE THE ASSESSEE ASSERTS ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 14 THAT NO EXPENDITURE HAD BEEN INCURRED IN RELATION T O EXEMPT INCOME. IN BOTH CASES, THE AO, IF SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE IN ACCORDANCE WITH ANY PRESCRIBED METHOD, AS MENTIONED IN SUB-S. (2) OF S. 14A. IT IS ONLY IF THE AO IS NOT S ATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, IN BOTH CASES, THAT THE AO GETS JURIS DICTION TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WITH THE PRESCRI BED METHOD, THE PRESCRIBED METHOD BEING THE METHOD STIPULATED IN R. 8D. WHILE REJECTI NG THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE M AY BE, IN RELATION TO EXEMPT INCOME, THE AO WOULD HAVE TO INDICATE COGENT REASONS FOR THE SA ME. IT IS, THEREFORE, CLEAR THAT DETERMINATION OF THE AMOUNT OF EXPENDITURE IN RELAT ION TO EXEMPT INCOME UNDER RULE 8D WOULD ONLY COME INTO PLAY WHEN THE ASSESSING OFFICE R REJECTS THE CLAIM OF THE ASSESSEE IN THIS REGARD. IF ONE EXAMINES SUB-RULE (2) OF RULE 8 D, THE METHOD FOR DETERMINING THE EXPENDITURE IN RELATION TO EXEMPT INCOME HAS THREE COMPONENTS. THE FIRST COMPONENT IS THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCO ME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE SECOND IS BEING COMPUTED ON THE B ASIS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSESSEE INCURS EXPENDITURE BY WAY O F INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. T HE FORMULA ESSENTIALLY APPORTIONS THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST (OTHER THA N THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR IN THE RATIO OF THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART O F THE TOTAL INCOME, TO THE AVERAGE OF THE TOTAL ASSETS OF THE ASSESSEE. THE THIRD COMPONE NT IS AN ARTIFICIAL FIGURE-ONE HALF PERCENT OF THE AVERAGE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, APPEARING IN THE BALANCE-SHEETS OF TH E ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. IT IS THE AGGREGATE OF TH ESE THREE COMPONENTS WHICH WOULD CONSTITUTE THE EXPENDITURE IN RELATION TO EXEMPT IN COME AND IT IS THIS AMOUNT OF EXPENDITURE WHICH WOULD BE DISALLOWED UNDER SECTION 14A OF THE ACT. IT IS, THEREFORE, CLEAR THAT IN TERMS OF THE RULE, THE AMOUNT OF EXPE NDITURE IN RELATION TO EXEMPT INCOME HAS TWO ASPECTS- (A) WWW.TAXGURU.IN ITA NOS.2334/ AHD/2 012 AND 1842/AHD/2013 SAFAL REALITY P. LTD. AHMEDABAD VS. ACIT (OSD) CIR-8, AHM EDABAD . FOR A.YS. 2009-10 & 2010-11 - 9 - DIRECT, AND (B) INDIRECT. THE DIRECT EXPENDITURE IS STRAIGHTAWAY TAKEN INTO ACCOUNT BY VIRTUE OF CLAUSE (I) OF SUB-RULE(2) OF R ULE 8D. THE INDIRECT EXPENDITURE, WHERE IT IS BY WAY OF INTEREST, IS COMPUTED THROUGH THE PRIN CIPLE OF APPORTIONMENT. SECTION 14A EVEN PRIOR TO THE INTRODUCTION OF SUB-SECTIONS (2) AND (3) WOULD REQUIRE THE ASSESSING OFFICE TO FIRST REJECT THE CLAIM OF THE ASSESSEE WI TH REGARD TO THE EXTENT OF SUCH EXPENDITURE AND SUCH REJECTION MUST BE FOR DISCLOSED COGENT REA SONS. IT IS THEN THAT THE QUESTION OF DETERMINATION OF SUCH EXPENDITURE BY THE ASSESSING OFFICER WOULD ARISE. THE REQUIREMENT OF ADOPTING A SPECIFIC METHOD OF DETERMINING SUCH E XPENDITURE HAS BEEN INTRODUCED BY VIRTUE OF SUB-SECTION (2) OF SECTION 14A. PRIOR TO THAT, THE ASSESSEE WAS FREE TO ADOPT ANY REASONABLE AND ACCEPTABLE METHOD. SO, EVEN FOR THE PRE-RULE 8D PERIOD, WHENEVER THE ISSUE OF SECTION 14A ARISES BEFORE AN ASSESSING OFF ICER, HE HAS, FIRST OF ALL, TO ASCERTAIN THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME UNDER THE ACT. EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURR ED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THE ASSESSING OF FICER WILL HAVE TO VERIFY THE CORRECTNESS ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 15 OF SUCH CLAIM. IN CASE, THE ASSESSING OFFICER IS SA TISFIED WITH THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, A S THE CASE MAY BE, THE ASSESSING OFFICER IS TO ACCEPT THE CLAIM OF THE ASSESSEE IN S O FAR AS THE QUANTUM OF DISALLOWANCE UNDER SECTION 14A IS CONCERNED. IN SUCH EVENTUALITY , THE ASSESSING OFFICER CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE F OR THE PURPOSES OF SECTION 14A (1). IN CASE, THE ASSESSING OFFICER IS NOT, ON THE BASIS OF THE OBJECTIVE CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY, SATISFIED WITH T HE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HE SHALL HAVE TO REJECT THE CLAIM AND STA TE THE REASONS FOR DOING SO. HAVING DONE SO, THE ASSESSING OFFICER WILL HAVE TO DETERMINE TH E AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HE IS REQUIRED TO DO SO ON THE BASIS OF A REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. 5.3 UNDER THE TOTALITY OF THE FACTS AND CIRCUMSTANC ES OF THE CASE, WE ARE OF THE CONSIDERED OPINION THAT WHEN THE INTEREST INCOME WAS MORE THAN THE INTEREST EXPENDITURE THEN THE AO WAS NOT JUSTIFIED TO INVOKE THE PROVISIONS OF SECTI ON 14A READ WITH RULE 8D OF IT ACT. WE HEREBY REVERSE THE FINDINGS OF THE AUTHORITIES B ELOW AND DIRECT TO DELETE THE DISALLOWANCE. 15. RESPECTFULLY FOLLOWING THE DECISION OF CO-ORDIN ATE BENCH IN THE CASE OF SAFAL REALTY P. LTD. VS. ACIT (OSD), CIRCLE -8, AHMEDABAD (SUPRA) AND IN VIEW OF OUR ABOVE DISCUSSION, WITH R EFERENCE TO PART (II) OF RULE 8D(2) WE ARE OF THE VIEW THAT NO DISALLOWAN CE IS CALLED FOR TOWARDS INTEREST EXPENDITURE AS THE ASSESSEE HAS A NET INTEREST INCOME DURING THE YEAR I.E. INTEREST RECEIVED IS MO RE THAN INTEREST EXPENDITURE. 16. NOW WE TAKE PART (III) OF RULE 8D(2) WHEREIN AN AMOUNT EQUAL TO 0.5% OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IN THIS REG ARD, WE OBSERVE THAT AT THE TIME OF FRAMING ASSESSMENT LD. ASSESSING OFF ICER TOOK THE VALUE OF AVERAGE INVESTMENT AT RS.8,73,41,794/- AND CALCU LATED 0.5% OF THIS AMOUNT TO ARRIVE AT RS.4,36,709/-. THEREAFTER WHEN THE MATTER CAME UP BEFORE LD. CIT(A) THE AMOUNT OF RS.4,36,709/- WA S REDUCED TO RS.94,965/- BY LD. CIT(A) ON THE BASIS OF HIS OBSER VATION THAT ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 16 INVESTMENTS HELD BY THE ASSESSEE COMPANY INCLUDES I NVESTMENT IN PARTNERSHIP FIRM WHICH FETCHES TAXABLE INCOME TO TH E ASSESSEE, INVESTMENTS IN SHARES ON WHICH TAXABLE DIVIDEND INC OME IS EARNED AND A FEW OTHER INVESTMENTS WHICH HAVE BEEN MADE AT THE END OF THE YEAR AND WERE MADE IN THE COURSE OF BUSINESS WHICH DO NOT GIVE ANY TAX FREE RETURN TO THE ASSESSEE. LD. CIT(A) ACCORDI NGLY CALCULATED AVERAGE INVESTMENT AT RS.1,89,92,978/- AND BY APPLY ING 0.5% CALCULATED RS.94,965/- AS A DISALLOWANCE UNDER POIN T (III) OF RULE 8D(2). 17. NOW AS THE MATTER IS BEFORE THE TRIBUNAL, WE WE NT THROUGH THE AUDITED BALANCE SHEET AS WELL AS SCHEDULE-E RELATIN G TO INVESTMENT AVAILABLE AT PAGE 11 OF THE PAPER BOOK AND WE OBSER VE THAT INVESTMENTS HAVE BEEN BIFURCATED INTO VARIOUS CATEG ORIES WHICH ARE AS UNDER :- I) IN EQUITY SHARES II) IN MUTUAL FUND III) IMMOVABLE PROPERTY IV) MOVABLE PROPERTY V) PARTNERSHIP FIRM. 18. OUT OF THE CATEGORIES INVESTMENTS IN IMMOVABLE PROPERTY, MOVABLE PROPERTY AND PARTNERSHIP FIRM ARE CERTAINLY NOT ELIGIBLE TO FORM PART OF AVERAGE INVESTMENT FOR THE PURPOSE OF RULE 8-D. AS FAR AS INVESTMENT IN SHARE IS CONCERNED, ASSESSEE HAS SUBM ITTED THAT THESE INVESTMENTS WERE MADE IN EQUITY SHARES OF KALUPUR C OMMERCIAL CO- OP. BANK LTD. IS HELD SINCE LAST YEAR AT RS.54,37,5 00/- AND ASSESSEE EARNS TAXABLE DIVIDEND INCOME AND, THEREFORE, THE S AME SHOULD NOT BE CONSIDERED FOR CALCULATION OF AVERAGE INVESTMENT. N OW THE ONLY ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 17 AMOUNT LEFT IS INVESTMENT IN MUTUAL FUND WHICH STOO D AT RS.6,00,48,057/- AS ON 31.3.2009 & AT RS.NIL AS ON 31.3.2010. THEREFORE, THE AVERAGE INVESTMENT FOR THE PURPOSE O F CALCULATION OF DISALLOWANCE IN PART (III) OF THE METHOD PROVIDED U NDER RULE 8D(2) OF IT RULES SHALL BE 0.5% OF RS.3,00,24,029 (6,00,48,0 57 + 0 2). THIS AMOUNT WORKS OUT AT RS.1,50,120/-. NOW SUMMARIZING ALL THE THREE PARTS OF RULE 8D(2), WE FIND THAT IN PART (I) RS.65 ,753/- IS THE AMOUNT OF ADMISSIBLE EXPENDITURE VOLUNTARILY DISCLOSED BY ASSESSEE AND ACCEPTED BY US. SO NO DISALLOWANCE IS CALLED FOR. I N PART (II) WE HAVE OBSERVED ABOVE THAT NO DISALLOWANCE IS CALLED FOR O N THE INTEREST EXPENDITURE AND IN PART (III) WE OBSERVE THAT 0.5% OF AVERAGE INVESTMENT WILL BE CALCULATED AT RS.1,50,120/-. THE REFORE, WE ARE OF THE VIEW THAT A DISALLOWANCE OF RS.1,50,120/- IN TH E CASE OF ASSESSEE IS SUSTAINABLE ON ACCOUNT OF DISALLOWANCE U/S 14A O F THE ACT. WE HOLD SO. ACCORDINGLY REVENUES APPEAL IS PARTLY ALLOWED. 19. OTHER GROUNDS OF REVENUES APPEAL ARE OF GENERA L NATURE, WHICH NEED NO ADJUDICATION. 20. NOW WE TAKE UP THE CROSS OBJECTION FILED BY THE ASSESSEE. THROUGH THIS CROSS OBJECTION ASSESSEE IS AGGRIEVED WITH THE ORDER OF LD. CIT(A) FOR SUSTAINING DISALLOWANCE OF RS.6,18,3 66/-. FROM GOING THROUGH THE ORDER OF LD. CIT(A) WE FIND THAT DISALL OWANCE OF RS.6,18,366/- WAS SUSTAINED ON THE FOLLOWING I) DISALLOWANCE OUT OF INTEREST EXPENDITURE - RS.5, 23,431/- II) 0.5% OF AVERAGE INVESTMENT - RS. 94,965/- ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 18 WE HAVE DEALT WITH DISALLOWANCE U/S 14A OF THE ACT WHILE DECIDING REVENUES APPEAL IN ITA NO. 2031/AHD/2013, WHEREIN WE HAVE CALCULATED THE DISALLOWANCE UNDER ALL THE THREE LIM BS OF THE METHOD PROVIDED UNDER RULE 8D(2) OF THE IT RULES AND HAVE ACCEPTED ADMINISTRATIVE EXPENDITURE OF RS.65,753/- VOLUNTARI LY SHOWN BY THE ASSESSEE IN THE RETURN OF INCOME, DELETED THE DISAL LOWANCE ON ACCOUNT OF INTEREST EXPENDITURE AS THE ASSESSEE WAS HAVING A NET INTEREST INCOME DURING THE YEAR AND HAVE CALCULATED 0.5% ON AVERAGE INVESTMENT AT RS.1,50,120/-. OUR DECISION TAKEN IN REVENUES APPEAL WILL TAKE CARE OF THE CROSS OBJECTION FILED BY THE ASSESSEE AND THE ONLY DISALLOWANCE U/S 14A REMAINS AT RS.1,50,120/-. CROSS OBJECTION IS PARTLY ALLOWED. 21. OTHER GROUND OF C.O. IS OF GENERAL NATURE, WHIC H NEEDS NO ADJUDICATION. 22. IN THE RESULT, REVENUES APPEAL AND THE CROSS O BJECTION OF THE ASSESSEE BOTH ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 JUNE, 201 6 SD/- SD/- (RAJPAL YADAV) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 23/6/2016 MAHATA/- ITA NO.2031/AHD/2013 & CO 8/AHD/2014 ASST. YEAR 2010-11 19 COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, AHMEDABAD 1. DATE OF DICTATION: 21-22/06/2016 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 23/06/2016 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 24/6/16 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER:
