DCIT, V. M/s Kemwell Pvt. Ltd.,

ITA 210/BANG/2014

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 8389 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-04-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 10-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B R RENUKA PRASAD
• Keywords: Capital asset; Depreciation; Double taxation relief; Charitable institution; Rule of consistency; Earning of tax free income; Additional evidence; Advance ruling; Wholly owned subsidiary; Commercial expediency; Revenue expenditure
• Section: 143(3); 14A; 36 (1) (iii); 37; 6; 12; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO. A.Y. APPELLANT RESPONDENT 209/BANG/14 2009-10 M/S. KEMWELL PVT. LTD., KEMWELL HOUSE, 11, TUMKUR ROAD, BANGALORE [PAN: AAACK5854F] ASST. COMMISSIONER OF INCOME TAX, CIRCLE-11(5), BANGALORE 210/BANG/14 2009-10 DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(5), BANGALORE M/S. KEMWELL PVT. LTD., KEMWELL HOUSE, 11, TUMKUR ROAD, BANGALORE [PAN: AAACK5854F] APPELLANT BY : SHRI B.R. RENUKA PRASAD, ADVOCATE RESPONDENT BY : SHRI R.N. SIDDAPPAJI, ADDL.CIT DATE OF HEARING : 09-04-2019 DATE OF PRONOUNCEMENT : 12-04-2019 O R D E R PER N V VASUDEVAN, VICE PRESIDENT : ITA NO. 209/BANG/2014 IS AN APPEAL FILED BY THE ASS ESSEE WHILE ITA NO. 210/BANG/2014 IS AN APPEAL FILED BY THE REV ENUE. BOTH THESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 24-10- 2013, OF THE : 2 : ITA NOS. 209 & 210/BANG/2014 COMMISSIONER OF INCOME TAX (APPEALS)-1, BANGALORE, RELATING TO ASSESSMENT YEAR 2009-10. FIRST WE TAKE UP FOR CONSIDERATION THE APPEAL OF AS SESSEE IN ITA NO.209/BANG/2014 2. THE FIRST ISSUE THAT ARISES FOR CONSIDERATION I N THE APPEAL BY THE ASSESSEE IS WITH REGARD TO ADDITION MADE TO THE TOTAL INCOME BY REJECTING THE CLAIM OF ASSESSEE FOR DEDUCTION OF A SUM OF RS. 5,23,38,266/-. 3. BRIEF FACTS REGARDING THE ABOVE ISSUE ARE THAT THE ASSESSEE IS A COMPANY, ENGAGED IN THE BUSINESS OF MANUFACTUR ING OF DRUGS AND PHARMACEUTICALS PREPARATION. IN THE COURSE OF ASSE SSMENT PROCEEDINGS FOR THE AY. 2009-10 U/S. 143(3) OF THE INCOME TAX A CT [ACT], THE ASSESSING OFFICER (AO) NOTICED THAT IN THE COMPUTAT ION OF INCOME, THE ASSESSEE HAD CLAIMED DEDUCTION OF A SUM OF RS. 5,23 ,38,266/- UNDER THE HEAD FOREIGN CURRENCY MONETARY ITEM TRANSLATION DI FFERENCE ACCOUNT. THE AO CALLED UPON THE ASSESSEE TO FURNI SH THE DETAILS IN RESPECT OF THE AFORESAID CLAIM OF ASSESSEE AND ALSO TO SUBSTANTIATE AS TO HOW THE AFORESAID CLAIM IS ADMISSIBLE. 3.1. IN REPLY, ASSESSEE SUBMITTED THAT AS PER THE PROVISIONS OF ACCOUNTING STANDARD-11 (AS-11), ISSUED BY THE INSTI TUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI), THE EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES, INSOFAR AS THEY RELATE TO THE RECOGNITION OF LOSSES OR GAINS ARISING ON RE-STATEMENT OF LONG TERM FOREIGN CURRENCY MONET ARY ITEMS SHOULD : 3 : ITA NOS. 209 & 210/BANG/2014 BE RECOGNIZED. IN DOING SO, THE ASSESSEE HAS EXERC ISED HIS OPTION OF ADJUSTING TO THE COST OF THE ASSET, WHERE THE LONG- TERM FOREIGN CURRENCY MONETARY ITEM RELATE TO THE ACQUISITION OF A DEPREC IABLE CAPITAL ASSET (WHETHER PURCHASED WITHIN OR OUTSIDE INDIA), AND CO NSEQUENTLY, CLAIM DEPRECIATION OVER SUCH ASSETS BALANCE LIFE. THE A SSESSEE ALSO POINTED OUT THAT IN THE FINANCIAL YEAR ENDED 31-03-2018, IT HAD A GAIN/PROFIT CONSEQUENT TO FOREIGN EXCHANGE FLUCTUATION OF RS. 1 ,79,69,743/-, WHICH WAS OFFERED AS INCOME IN THAT YEAR. THE ASSESSEE S UBMITTED THAT IT WAS CONSISTENTLY OFFERING GAINS ON FOREIGN EXCHANGE TRA NSLATION TO TAX. THE ASSESSEE POINTED OUT THAT WHILE CLAIMING DEPRECIATI ON; IT HAD NOT INCREASED THE WRITTEN DOWN VALUE (WDV) OF THE FIXED ASSETS OVER WHICH DEPRECIATION WAS CLAIMED FOR INCOME TAX PURPO SES. 4. THE AO, HOWEVER, DID NOT AGREE WITH THE CONTENT ION OF THE ASSESSEE. HE PLACED RELIANCE ON THE PROVISIONS OF SECTION 43A OF THE ACT, WHICH PROVIDES THAT WHERE AN ASSET IS ACQUIRED FROM A COUNTRY OUTSIDE INDIA AND CONSEQUENT TO CHANGE IN THE RATE OF FOREIGN EXCHANGE, THERE IS AN INCREASE OR REDUCTION IN THE LIABILITY OF THE ASSESSEE AS EXPRESSED IN INDIAN CURRENCY AT THE TIME OF MAKING PAYMENT , SUCH LIABILITY OR GAIN SHOULD GO TO INCREASE OR R EDUCE THE WDV OF THE CORRESPONDING ASSET ON WHICH DEPRECIATIO N IS CLAIMED BY THE ASSESSEE . THE AO THEREFORE WAS OF THE VIEW THAT ONLY WHEN THERE IS AN ACTUAL PAYMENT AND IN THAT YEAR ADJUSTMENT ON AC COUNT OF FLUCTUATION OF FOREIGN EXCHANGE CURRENCY HAS TO BE GIVEN EFFECT . THE AO ACCORDINGLY DISALLOWED THE CLAIM OF ASSESSEE FOR DE DUCTION. : 4 : ITA NOS. 209 & 210/BANG/2014 5. ON APPEAL BY THE ASSESSEE, THE CIT(A) CONCURRED WITH THE VIEW OF THE AO. THE CIT(A) FIRSTLY HELD THAT THE FA CT OF THE GAIN ON FOREIGN EXCHANGE FLUCTUATION WAS OFFERED TO TAX BY THE ASSESSEE IN THE AYS. 2007-08 AND 2008-09 SHOULD NOT HAVE ANY BEARIN G FOR AY. 2009- 10 BECAUSE, EACH ASSESSMENT YEAR IS INDEPENDENT. T HEREAFTER, THE CIT(A) AFTER NOTICING THAT THE LOAN-IN-QUESTION WAS AVAILED FOR ACQUIRING CAPITAL ASSET, HELD THAT THE ONLY RECOURS E AVAILABLE TO THE ASSESSEE WAS AS PER THE PROVISIONS OF SECTION 43A O F THE ACT. IN PARAS 4.7 AND 4.8 THE CIT(A) SUMMED UP THE LEGAL POSITION AS LAID DOWN IN VARIOUS DECISIONS AS FOLLOWS: 4.7. SUM AND SUBSTANCES THE AFORESAID DECISION IS THAT THE LIABILITY EXPRESSED IN FOREIGN CURRENCY AT THE CLOSE OF THE Y EAR HAS TO BE INCREASED/DECREASED BASED ON THE RATES PREVAILING A T THE CLOSE OF THE YEAR WHEN CORRESPONDING INCREASE/DECREASE HAS TO BE EFFE CTED IN THE VALUE OF ASSETS. THE AMENDMENT OF SECTION 43A(1) AS STATED ABOVE PROVIDES FOR INCREASE/DECREASE ONLY FOR CURRENCY FLUCTUATION AT THE TIME OF PAYMENT. THIS WILL HAVE A MAJOR IMPLICATION FOR INCREASE/DECREASE IN UNPAID FOREIGN CURRENCY LIABILITY AS THOUGH VALUE OF ASSETS FOR TH E SAME HAS TO BE INCREASED/DECREASED IN THE BOOKS OF ACCOUNT. THE AM OUNT OF LIABILITY AS STATED ABOVE INCREASED/DECREASED DURING THE PREVIOU S YEAR ARE TAKEN INTO ACCOUNT AT THE TIME OF MAKING PAYMENT IRRESPECTIVE OF THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE SHALL BE ADDED A S THE CASE MAY BE DEDUCTED FROM ACTUAL COST OF ASSET. 4.8. IN VIEW OF THE DISCUSSION MADE ABOVE THE ACTIO N OF THE AO IS UPHELD. HOWEVER, AS PER RULING OF THE HON'BLE ITAT IN THE C ASE OF JSW STEEL LTD., VS. ACIT (SUPRA) DEPRECIATION IS TO BE ALLOWED ON T HE ENHANCED VALUE OF THE CAPITAL ASSETS. 5.1. AGGRIEVED BY THE AFORESAID ORDER OF CIT(A), A SSESSEE PREFERRED AN APPEAL BEFORE THE TRIBUNAL. : 5 : ITA NOS. 209 & 210/BANG/2014 6. BEFORE THE TRIBUNAL, THE ASSESSEE HAS FILED AN APPLICATION FOR ADMISSION OF THE FOLLOWING ADDITIONAL EVIDENCES : SL. NO. PARTICULARS OF DOCUMENTS 1 LOAN SANCTION LETTER DATED 31.12.2005, ISSUED BY ICICI BANK ADDRESSED TO THE APPELLANT. 2 LOAN SANCTION LETTER DATED 15.12.2005, ISSUED BY THE STATE BANK OF INDIA ADDRESSED TO THE APPELLANT. 3 AUDITED FINANCIAL STATEMENTS OF THE APPELLANT ALO NG WITH AUDITORS REPORT, FOR THE YEAR ENDING 31 ST MARCH 2007. 4 AUDITED FINANCIAL STATEMENTS OF THE APPELLANT ALO NG WITH AUDITORS REPORT, FOR THE YEAR ENDING 31 ST MARCH 2008. 5 AUDITED FINANCIAL STATEMENTS OF THE APPELLANT ALO NG WITH AUDITORS REPORT, FOR THE YEAR NEDING 31 ST MARCH 2009. 6 AUDIT REPORT ISSUED IN FORM 3CA, OF THE APPELLANT , FOR THE YEAR ENDED 31 ST MARCH 2007. 7 AUDIT REPORT ISSUED IN FORM 3CA, OF THE APPELLANT , FOR THE YEAR ENDED 31 ST MARCH 2008. 8 AUDIT REPORT ISSUED IN FORM 3CA, OF THE APPELLANT , FOR THE YEAR ENDED 31 ST MARCH 2009. 9 ASSESSMENT ORDER OF THE APPELLANT DATED 26.10.200 9, RELEVANT TO THE ASSESSMENT YEAR 2007-08, ALONG WITH THE SUBM ISSIONS OF THE APPELLANT MADE DURING THE ASSESSMENT PROCEEDING S. 10 ASSESSMENT ORDER OF THE APPELLANT DATED 26.10.20 09 RELEVANT TO THE ASSESSMENT YEAR 2008-09, ALONG WITH THE SUBMISS IONS OF THE APPELLANT MADE DURING THE ASSESSMENT PROCEEDING S. 11 AUDITED FINANCIAL STATEMENTS OF M/S. RUBTECH EXP ORTS PVT. LTD., ALONG WITH AUDITORS REPORT, FOR THE YEAR END ING 31 ST MARCH 2009. 12 AUDITED FINANCIAL STATEMENTS OF M/S. KEMWELL BIO PHARMA PVT. LTD., ALONG WITH AUDITORS REPORT, FOR THE YEAR END ING 31 ST MARCH 2009. 6.1. IN AN AFFIDAVIT FILED IN SUPPORT OF THE ABOVE ADDITIONAL EVIDENCES, THE ASSESSEE HAS EXPLAINED THE REASONS F OR FILING ADDITIONAL EVIDENCE, IN PARAS 2 TO 4, WHICH READS AS UNDER: : 6 : ITA NOS. 209 & 210/BANG/2014 2. I AFFIRM THAT THE ISSUE IN THE ABOVE APPEAL REL ATES TO (A) DISALLOWANCE OF FOREIGN CURRENCY FLUCTUATION DIFFERENCE UNDER SECTI ON 43A AND (B) DISALLOWANCE OF INTEREST U/S. 36(1)(III) R.W. SEC. 37 OF THE INCOME TAX ACT. 3. I AFFIRM THAT BOTH DURING THE ASSESSMENT PROCEED INGS AS WELL AS DURING THE FIRST APPELLATE PROCEEDINGS, ALLOWANCE OR OTHERWISE OF FOREIGN CURRENCY FLUCTUATION DIFFERENCE IN TERMS OF SEC.43A OF THE A CT WAS EXAMINED ON THE ANGLE OF WHETHER IT REQUIRES TO BE CAPITALIZED AND WHETHER IT IS ALLOWABLE ONLY ON CASH BASIS I.E., AS AND WHEN THE DIFFERENCE IS ACTUALLY PAID. 4. I AFFIRM THAT DURING THE COURSE OF PREPARATION F OR ADDRESSING THE ARGUMENTS BEFORE THIS HON'BLE TRIBUNAL BY OUR COUNS EL IN THE RECENT PAST, OUR COUNSEL EXAMINED THE SAID ISSUE ON A DIFFERENT ANGLE ALTOGETHER, AS TO WHETHER THE CAPITAL ASSETS WERE PURCHASED INDIGENOU SLY OR WERE IMPORTED FROM ABROAD, SINCE, THE APPLICATION OF SEC. 43 A OF THE ACT WOULD DEPEND ON THE SAID FACT AND IF THE CAPITAL ASSETS ARE PURCHAS ED INDIGENOUSLY, INVOKING OF SEC. 43 A OF THE ACT AND DISALLOWANCE THEREOF WO ULD NOT ARISE AT ALL. THIS PARTICULAR ANGLE WAS NOT GONE INTO EITHER DURING TH E COURSE OF ASSESSMENT OR THE FIRST APPELLATE PROCEEDINGS BOTH BY THE APPELLA NT AS WELL AS BY THE DEPARTMENT. THEREFORE, THE SAID ADDITIONAL DOCUMENT S WHICH ARE REQUIRED TO SUBSTANTIATE THE SAID FACT, COULD NOT BE PRODUCED D URING THE COURSE OF ASSESSMENT OR THE FIRST APPELLATE PROCEEDINGS. LIKE WISE, IN RESPECT OF THE DISALLOWANCE INTEREST U/S. 36 (1) (III) R.W. SEC. 3 7 OF THE INCOME TAX ACT, THE SAID ISSUE IN THE APPELLANT'S CASE IN RESPECT OF TH E EARLIER ASSESSMENT YEARS WERE RAISED BY THE ASSESSING OFFICER, AND THE PROPO SAL TO DISALLOW THE SAME WAS DROPPED BASED ON THE SUBMISSIONS OF THE APPELLA NT AND THE AUDITED FINANCIAL STATEMENTS OF THE COMPANIES TO WHICH ADVA NCES WERE MADE BY THE APPELLANT. NEITHER THE COUNSEL NOR THE APPELLANT RE ALISED THE NECESSITY OF RELYING AND PRODUCING THESE DOCUMENTS EITHER DURING THE ASSESSMENT PROCEEDINGS OR FIRST APPELLATE PROCEEDINGS, BY SHEE R INADVERTENCE. 6.2. AS CAN BE SEEN FROM THE AFORESAID CONTENTIONS , IN THE AFFIDAVIT FILED IN SUPPORT OF ADMISSION OF ADDITION AL EVIDENCES, THE ASSESSEE SEEKS TO CONTEND THAT SECTION 43A OF THE A CT WOULD APPLY ONLY WHEN CAPITAL ASSETS ARE ACQUIRED OUTSIDE INDIA FROM AND OUT OF FOREIGN CURRENCY LOAN AND CONSEQUENT TO FLUCTUATION OF FOREIGN CURRENCY, THE LIABILITY TO REPAY THE SAID LOAN WOUL D EITHER INCREASE OR : 7 : ITA NOS. 209 & 210/BANG/2014 DECREASE. IT IS BEING CLAIMED BY THE ASSESSEE THAT THE FOREIGN EXCHANGE FLUCTUATION IN QUESTION DID NOT RELATE TO ACQUISITI ON OF A CAPITAL ASSET FROM OUTSIDE THE COUNTRY. THIS STAND IS TOTALLY CO NTRADICTORY TO THE STAND TAKEN BEFORE THE REVENUE AUTHORITIES. APART FROM THE ABOVE THE ALLOWABILITY OF LOSS ON ACCOUNT OF FLUCTUATION IN F OREIGN CURRENCY AS A REVENUE EXPENDITURE IS DEPENDENT ON THE QUESTION WH ETHER THE FOREIGN CURRENCY LOAN WAS AVAILED FOR MEETING CAPITAL EXPEN DITURE OR REVENUE EXPENDITURE. IF THE FOREIGN CURRENCY LOAN IS AVAILE D FOR ACQUIRING CAPITAL ASSETS WHETHER IN INDIA OR OUTSIDE INDIA, WOULD NOT MAKE ANY DIFFERENCE, SINCE ACQUIRING CAPITAL ASSET IN INDIA WOULD ALSO BE A CAPITAL ITEM AND THEREFORE THE CLAIM OF LOSS AS EXPENDITURE AND ALLOWABLE DEDUCTION WHILE COMPUTING TOTAL INCOME WOULD BECOME INADMISSIBLE. 7. LD. COUNSEL FOR THE ASSESSEE COULD NOT EXPLAIN AS TO WHAT IS THE BASIS ON WHICH SUCH A CLAIM IS BEING MADE NO R THE DOCUMENTS THAT ARE SOUGHT TO BE FILED AS AN ADDITIONAL EVIDEN CE ESTABLISH THE CLAIM MADE IN THE AFFIDAVIT FILED IN SUPPORT OF LEAVE TO FILE ADDITIONAL EVIDENCE BEFORE TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE COULD NOT BRING TO OUR NOTICE ANY OTHER EVIDENCE ON THE C LAIM OF THE ASSESSEE AS MADE IN THE APPLICATION FOR ADMISSION OF ADDITIO NAL EVIDENCE. 8. IN THESE CIRCUMSTANCES, WE REFUSE TO ENTERTAIN THE REQUEST FOR ADMISSION OF ADDITIONAL EVIDENCE AS WE ARE OF T HE VIEW THAT THE ADDITIONAL EVIDENCES ARE TO BE FILED IS NOT NECESSA RY FOR ADJUDICATION OF THE ISSUE IN DISPUTE BEFORE THE TRIBUNAL. IN THIS REGARD, LD. COUNSEL FOR : 8 : ITA NOS. 209 & 210/BANG/2014 THE ASSESSEE WAS ALSO FILED AN APPLICATION UNDER RU LE 11 FOR RAISING THE FOLLOWING ADDITIONAL GROUND OF APPEAL: A. THE APPELLANT SUBMITS THAT BOTH THE RESPONDENT AS WELL AS THE FIRST APPELLATE AUTHORITY FAILED TO EXAMINE THE APPLICABI LITY OF SEC.43A R.W. SEC.37 OF THE INCOME TAX ACT, SINCE THE APPELLANT H AS PURCHASED CAPITAL ASSETS INDIGENOUSLY, WHICH ARE SUBSTANTIAL IN NATUR E. 8.1. THE APPLICATION FOR RAISING ADDITIONAL GROUND IS ALSO DISMISSED FOR THE VERY SAME REASONS. LD. COUNSEL F OR THE ASSESSEE SUBMITTED THAT SHRI HARISH, ADVOCATE WHO WAS HANDLI NG THE MATTER, COULD NOT MAKE APPEARANCE AND SOUGHT FOR TIME. THI S REQUEST WAS MADE AFTER HEARING OF THE APPEAL COMMENCED. FURTHE R, THIS APPEAL FILED IN THE YEAR 2014 AND HAS BEEN ADJOURNED ON SEVERAL OCCASIONS AT THE REQUEST OF THE ASSESSEE. IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT NO USEFUL PURPOSE WILL BE SERVED BY GRANTING ADJOUR NMENT. 8.2. WE FIND THAT THE CLAIM MADE BY THE ASSESSEE W AS CONTRARY TO THE PROVISIONS OF SECTION 43A OF THE ACT AND IN THE CIRCUMSTANCES, THE REVENUE AUTHORITIES WERE JUSTIFIED IN REJECTING THE CLAIM OF ASSESSEE. THE ARGUMENT THAT SIMILAR GAIN WAS OFFERED TO TAX IN THE EARLIER ASSESSMENT YEARS WILL NOT BE A GROUND TO ACCEPT THE CLAIM OF ASSESSEE IN THE PRESENT ASSESSMENT YEAR. WE THEREFO RE CONCUR WITH THE VIEW OF THE CIT(A) AND DISMISS THE RELEVANT GROUND OF APPEAL OF ASSESSEE. 9. THE NEXT GRIEVANCE PROJECTED BY THE ASSESSEE IN ITS APPEAL IS WITH REGARD TO DISALLOWANCE OF INTEREST U/S. 36( 1)(III) OF THE ACT. : 9 : ITA NOS. 209 & 210/BANG/2014 9.1. AS FAR AS THIS ISSUE IS CONCERNED, THE FACTS ARE THAT THE ASSESSEE HAD BORROWED FUNDS AND ON SUCH BORROWING, THE ASSESSEE HAD PAID INTEREST OF RS. 3,33,99,162/-. THE ASSESSEE HA D GIVEN INTEREST FREE LOANS AND ADVANCES OF RS. 5,52,44,519/- TO M/S. RUB TECH EXPORTS PVT. LTD., AND M/S. KEMWELL BIOPHARMA PVT. LTD., RS. 10, 36,815/-. THE AO WAS OF THE VIEW THAT BORROWED FUNDS ON WHICH INTERE ST WAS PAID HAD BEEN DIVERTED FOR NON-BUSINESS PURPOSES AND HE ACCO RDINGLY WORKED OUT PROPORTIONATE DISALLOWANCE OF INTEREST CLAIMED A DEDUCTION BY THE ASSESSEE AT THE SUM OF RS. 37,37,461/- AND ADDED TH E SAME TO THE TOTAL INCOME OF THE ASSESSEE. 10. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT THE INTEREST FREE LOANS AND ADVANCES WERE GIVEN TO THE AFORESAID COMPANIES, WHO WERE OF SISTER CONCERNS (WHOLLY OWNED SUBSIDIARY CO MPANIES), FOR BUSINESS PURPOSES AND OWING TO COMMERCIAL EXPEDIENC Y. THEREFORE, NO INTEREST WAS CHARGED. THE SUBMISSIONS WERE AS FOLL OWS: C.2.2 THE APPELLANT SUBMITS THAT DURING THE RELEVA NT YEAR, ONLY A SUM OF RS.36.20 LACS WAS ADVANCED TO RUBTECH EXPORTS. THE RESPONDENT HAS CONSIDERED THE ENTIRE SUM OF RS.5.52 CRORES AND RS. 10.36 LACS AS THE SUMS ADVANCED DURING THE RELEVANT YEAR AS AGAINST ONLY A SUM OF RS.36.20 LACS ADVANCED DURING THE RELEVANT YEAR AND DETERMINED TH E DISALLOWANCE, WHICH IS INCORRECT. C.2.3 THE APPELLANT SUBMITS THAT THERE IS NO PRESUM PTION AVAILABLE IN LAW FOR THE RESPONDENT TO PRESUME THAT THE ADVANCES ARE MADE OUT OF INTEREST BEARING FUNDS. THE RESPONDENT OUGHT TO HAVE GIVEN A SPECIFIC FINDING AND CLEARLY POINTED OUT BY WAY OF CALCULATION TO ARRIVE AT THE CONCLUSION THAT THE ADVANCES WERE OUT OF INTEREST BEARING FUNDS. THE RE SPONDENT HAS SERIOUSLY ERRED IN PRESUMING THAT THE ADVANCES WERE OUT OF IN TEREST BEARING FUNDS, WHICH IS NOTHING BUT A MERE IMAGINATION. : 10 : ITA NOS. 209 & 210/BANG/2014 C.2.4 THE APPELLANT SUBMITS THAT DURING THE RELEVAN T YEAR, THE APPELLANT HAD AN ACCUMULATED RESERVES AND SURPLUS OF RS. 42.18 CR ORES. THE APPELLANT RAISED A SUM OF RS.3.45 CRORES BY ALLOTTING EQUITY AND PREFERENCE SHARES. THE APPELLANT SUBMITS THAT THE ADVANCES FOR THE EAR LIER YEARS WERE MET BY THE APPELLANT OUT OF MONEY RAISED FOR THAT SPECIFIC PURPOSE AND ALSO OUT OF THE HUGE ACCUMULATED RESERVES AND SURPLUS OF THE AP PELLANT. THE MONEY ADVANCED DURING THE RELEVANT YEAR IS JUST RS.36.20 LAKHS AS AGAINST THE AVAILABLE ACCUMULATED RESERVES AND SURPLUS OF RS.42 .18 CRORES AND CAPITAL RAISED DURING THE YEAR TO AN EXTENT OF RS.3.45 CROR ES. THIS ITSELF CLEARLY PROVES BEYOND DOUBT THAT THE SAME WERE OUT OF INTER EST FREE FUNDS. C.2.5 THE APPELLANT SUBMITS THAT THERE WAS NO NECES SITY FOR THE APPELLANT TO BORROW FUNDS FOR INTEREST AND ADVANCE THE SAME WITH OUT ANY INTEREST. AS A MATTER OF FACT, NOT ONLY THE APPELLANT, BUT ANY PRU DENT BUSINESSMAN OR A CORPORATE ENTITY WOULD EVER OPT TO BORROW MONEY FOR INTEREST AND LEND IT FOR NO GAIN / PROFIT. IT IS ALSO TO BE APPRECIATED THAT THE APPELLANT HAS AVAILED WORKING CAPITAL FACILITY FROM ITS BANKERS. SUCH BEI NG THE CASE, THE BANKERS WOULD NOT PERMIT DIVERSION OF FUNDS OTHER THAN FOR BUSINESS PURPOSES. 10.1. THE CIT(A) ON A CONSIDERATION OF THE ABOVE S UBMISSIONS, ACCEPTED THE FACT THAT THE ASSESSEE HAD SUFFICIENT OWN FUNDS. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE CIT (A): 6.4 I HAVE CONSIDERED THE APPELLANTS SUBMISSION A ND IT IS TRUE THAT THE APPELLANT HAVING TAX FREE FUND OF RS. 50,19,32,748/ - AS ON 31/03/2009. IT IS ALSO TRUE THAT THE APPELLANT BORROWED FUND OF RS. 5 0,29,48,224/- ON WHICH INTEREST AND BANK CHARGES CLAIMED FOR RS. 3,33,99,1 62/- AND UTILIZATION OF BORROWED FUND UNDER COMMON POOL SINCE NO SEPARATE A CCOUNTS WERE MAINTAINED IN RESPECT OF INTEREST FREE FUNDS AND IN TEREST BEARING FUNDS. FURTHER, THE APPELLANT MADE PAYMENT TO ITS SUBSIDIA RY CONCERNS BY WAY OF LOANS AND ADVANCE. THE LOAN AND ADVANCES APPEARS A GAINST RUBTECH EXPORT PVT LTD., YEAR-WISE AS UNDER: : 11 : ITA NOS. 209 & 210/BANG/2014 FINANCIAL YEAR ASST. YEAR OUTSTANDING LOAN AND ADVANCES (IN RS.) 2005 - 06 2006 - 07 3,72,44,519 2006-07 2007-08 4,55,24,519 2007-08 2008-09 5,16,24,519 2008-09 2009-10 5,52,44,570 6.5. THUS IT MAY BE SEEN THAT LOAN AND ADVANCE TO R UBTECH EXPORT PVT. LTD., IN INCREASED TRACED SINCE ASSESSMENT YEAR 200 6-07, IT INDICATE THAT ADVANCED AMOUNT NOT UTILIZED FOR BUSINESS PURPOSE A ND PARKED SINCE LONG. AS DISCUSSED ABOVE, SINCE THE APPELLANT HAS NOT MAI NTAINED SEPARATE ACCOUNT, OBVIOUSLY PART OF THE INTEREST BEARING FUN D WAS GIVEN TO THE SAID COMPANY. 10.2. THE CIT(A), HOWEVER, PROCEEDED TO CONFIRM TH E ORDER OF AO ON THE BASIS THAT FIRSTLY THERE WAS NOTHING ON R ECORD TO SHOW THAT THE INTEREST FREE LOANS WERE GIVEN TO THE SISTER CO NCERN FOR BUSINESS PURPOSES OR OWING TO COMMERCIAL EXPEDIENCY. HE ALS O PROCEEDED TO HOLD THAT IF THE CLAIM OF ASSESSEE WAS THAT IT HAD OWN FUNDS, THEN, ASSESSEE OUGHT NOT TO HAVE BORROWED AND PAID INTERE ST AT ALL. ON THAT LINE OF REASONING, THE CIT(A) REJECTED THE CLAIM OF ASSESSEE. 10.3. AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSE E PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 11. WE HAVE HEARD THE RIVAL SUBMISSIONS. IT IS CL EAR FROM THE FACTS OF THE CASE THAT THE ASSESSEE HAD TAX FREE FU NDS TO THE TUNE OF RS. 50,19,32,748/-. IT HAS BEEN HELD BY THE HON'BLE BO MBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD. , (2009) [313 ITR 340] (BOM) THAT IF THE OWN FUNDS OF THE ASSESSEE ARE MORE THAN THE : 12 : ITA NOS. 209 & 210/BANG/2014 INTEREST FREE ADVANCES GIVEN TO THE SISTER CONCERN, THEN, THERE IS A PRESUMPTION THAT INTEREST FREE FUNDS WERE USED FOR GIVING LOANS TO SISTER CONCERNS AND THEREFORE NO DISALLOWANCE OF INTEREST PAID ON BORROWINGS CAN BE MADE . AS WE HAVE ALREADY STATED IN THE APPLICATION FIL ED FOR ADMISSION OF ADDITIONAL EVIDENCE, WHICH HAS BEEN RE JECTED BY US, THE ASSESSEE HAS SOUGHT TO FILE EVIDENCE TO SHOW THAT F UNDS GIVEN TO THE SISTER CONCERN WERE OUT OF OWN FUNDS. WITHOUT GOIN G INTO THE CORRECTNESS OF THAT CLAIM, WE ARE SATISFIED THAT IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE, THE INTEREST FREE FUNDS AVAILABLE WITH ASSESSEE WAS SUFFICIENT AT ALL MATERIAL POINT OF TI ME WHEN LOANS WERE ADVANCED TO THE SUBSIDIARY COMPANY AND HENCE DISALL OWANCE OF INTEREST U/S. 36(1)(III) OF THE ACT CANNOT BE SUSTAINED AND THE SAME IS DIRECTED TO BE DELETED. 12. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTL Y ALLOWED. ITA NO. 210/BANG/2014 (REVENUES APPEAL): 13. AS FAR AS THE APPEAL OF REVENUE IS CONCERNED, THE GROUND NOS. 1, 5 & 6 RAISED BY THE REVENUE ARE GENERAL IN NATURE AND CALLS FOR NO ADJUDICATION. 14. GROUND NOS. 2 & 3 RAISED BY THE REVENUE ARE WI TH REGARD TO DISALLOWANCE OF EXPENSES MADE BY THE REVENUE AUT HORITIES INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. AS FAR AS THIS ISSUE IS CONCERNED, THE FACTS ARE THAT THE ASSESSEE EARNED D IVIDEND INCOME ON ITS : 13 : ITA NOS. 209 & 210/BANG/2014 INVESTMENTS IN THE SHARES OF M/S. KEMFIN HOLDINGS P VT. LTD., CYPRUS NO OTHER DIVIDEND INCOME WAS EARNED FROM ANY INVEST MENT. THE DIVIDEND INCOME EARNED FROM M/S. KEMFIN HOLDINGS PV T. LTD., CYPRUS WAS CHARGEABLE TO TAX AND WAS NOT AN ITEM OF INCOME , WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER CHAPTER-III OF THE ACT. IN THE GIVEN CIRCUMSTANCES, THE QUESTION OF RE-CONSIDERATION IS AS TO WHETHER DISALLOWANCE CAN BE MADE U/S. 14A OF THE ACT IN THE ABSENCE OF EXEMPT INCOME. THE LAW IN THIS REGARD IS NOW FAIRLY WELL S ETTLED. THE BANGALORE BENCH OF ITAT IN THE CASE OF M/S UB INFRA STRUCTURE PROJECTS LTD., VS. DCIT, ITA NO. 2098/BANG/2016 (AY .2012-13) ORDER DATED 22-12-2017, THIS TRIBUNAL TOOK THE VIEW THAT THERE CAN BE NO DISALLOWANCE OF EXPENSES U/S 14A OF THE ACT, IF THERE IS NO EXEMPT INCOME EARNED DURING THE RELEVANT PREVIOUS YEAR. T HE FOLLOWING ARE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN THIS R EGARD. 3. HAVING CAREFULLY EXAMINED THE ORDERS OF AUTHOR ITIES BELOW, WE FIND THAT UNDISPUTEDLY THE ASSESSEE HAS N OT EARNED ANY EXEMPTED INCOME. NOW IT IS SETTLED POSITION OF LAW THAT WHENEVER ASSESSEE DID NOT EARN ANY EXEMPT INCOME, NO DISALLO WANCE COULD BE MADE U/S. 14A OF THE ACT. THE HONBLE DELHI HIGH CO URT IN THE CASE OF CHEMINVEST LTD. V. CIT, 378 ITR 33 (DEL) HAS CAT EGORICALLY HELD THAT SECTION 14A ENVISAGES THAT THERE SHOULD BE ACT UAL RECEIPT OF INCOME WHICH WAS NOT INCLUDIBLE IN THE TOTAL INCOME DURING THE RELEVANT PREVIOUS YEAR FOR THE PURPOSE OF DISALLOWI NG ANY EXPENDITURE IN RELATION TO THE SAID INCOME. WHEREVE R THERE IS NO EXEMPT INCOME INCLUDIBLE IN THE TOTAL INCOME OF THE ASSESSEE, THE PROVISIONS OF SECTION 14A CANNOT BE INVOKED. THE RE LEVANT OBSERVATIONS OF THE JUDGMENT OF THE HONBLE DELHI H IGH COURT ARE EXTRACTED HEREUNDER:- : 14 : ITA NOS. 209 & 210/BANG/2014 15. TURNING TO THE CENTRAL QUESTION THAT ARISES FO R CONSIDERATION, THE COURT FINDS THAT THE COMPLETE AN SWER IS PROVIDED BY THE DECISION OF THIS COURT IN CIT V. HO LOLCIM INDIA (P) LTD. (DECISION DATED 5TH SEPTEMBER 2014, IN I.T. A. NO. 486 OF 2014). IN THAT CASE, A SIMILAR QUESTI ON AROSE, VIZ., WHETHER THE INCOME-TAX APPELLATE TRIBU NAL WAS JUSTIFIED IN DELETING THE DISALLOWANCE UNDER SE CTION 14A OF THE ACT WHEN NO DIVIDEND INCOME HAD BEEN EAR NED BY THE ASSESSEE IN THE RELEVANT ASSESSMENT YEAR ? T HE COURT REFERRED TO THE DECISION OF THIS COURT IN MAX OPP INVESTMENT LTD. (SUPRA) AND TO THE DECISION OF THE SPECIAL BENCH OF THE INCOME-TAX APPELLATE TRIBUNAL IN THIS VERY CASE, I.E., CHEMINVEST LTD. V. CIT [2009] 317 !TR ( AT) 86 (DELHI) [SB]. THE COURT ALSO REFERRED TO THREE DECI SIONS OF DIFFERENT HIGH COURTS WHICH HAVE DECIDED THE ISSUE AGAINST REVENUE. THE FIRST WAS THE DECISION IN CIT V. LAKHANI MARKETING INCL. (DECISION DATED APRIL 2, 20 14, OF THE HIGH COURT OF PUNJAB AND HARYANA IN I. T. A. NO . 970 OF 2008)--SINCE REPORTED IN [2015] 4 ITR-OL 246 (P& H)-- WHICH IN TURN REFERRED TO TWO EARLIER DECISIONS OF THE SAME COURT IN CIT V. HERO CYCLES LTD. [2010] 323 IT R 518 (P&H) AND CIT V. WINSOME TEXTILE INDUSTRIES LTD. [2 009] 319 ITR 204 (P&H). THE SECOND WAS OF THE GUJARAT HI GH COURT IN CIT V. CORRTECH ENERGY (P.) LTD. [2014] 22 3 TAXMANN 130 (GUJ) ; [2015] 372 1TR 97 (GUJ) AND THE THIRD OF THE ALLAHABAD HIGH COURT IN CIT V. SHIVAM MOTORS (P) LTD. (DECISION DATED 5TH MAY, 2014, IN T .A. NO. 88 OF ITA NO.1 1071BANG12016 2014). THESE THREE DECISIONS REITERATED THE POSITION THAT WHEN AN ASSE SSEE HAD NOT EARNED ANY TAXABLE INCOME IN THE RELEVANT ASSESSMENT YEAR IN QUESTION 'CORRESPONDING EXPENDIT URE COULD NOT BE WORKED OUT FOR DISALLOWANCE.' 4. THIS WAS ALSO EXAMINED BY THE TRIBUNAL IN THE AS SESSEE'S OWN CASE FOR ASSESSMENT YEAR 2010-11 AND HELD THAT WHEN THERE IS NO EXEMPT INCOME, PROVISION OF SECTION 14 OF THE ACT CANNOT BE APPLIED. 5. IN THE LIGHT OF THE AFORESAID JUDGMENT, THE PROV ISIONS OF SECTION 14A CANNOT BE INVOKED AS THERE IS NO EXEMPT INCOME IN THE HANDS OF THE ASSESSEE. ACCORDINGLY, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(APPEALS) WHO HAS RIGHTLY DELETED T HE ADDITION. : 15 : ITA NOS. 209 & 210/BANG/2014 14.1. IN VIEW OF THE AFORESAID DECISION OF THE TRI BUNAL, WE ARE OF THE VIEW THAT THE DISALLOWANCE OF EXPENDITURE U/ S 14A OF THE ACT WAS RIGHTLY DELETED BY THE CIT(A). IN VIEW OF THE A BOVE LEGAL POSITION, THERE IS NO MERIT IN GROUND NOS. 2 & 3 RAISED. HEN CE, THESE TWO GROUNDS ARE DISMISSED. 15. GROUND NO. 4 RAISED BY THE REVENUE READS AS FO LLOWS: 4. THE CIT(A) ERRED IN DIRECTING THE AO TO ALLOW R EBATE OF RS. 68,60,902 WITHOUT APPRECIATING THE FACT THAT AS PER THE INDO- CYPRUS DTAA CREDIT COULD BE CLAIMED IN INDIA ONLY WHEN THE EXEMPTIONS OR INC ENTIVES GRANTED IN CYPRUS WERE DESIGNED TO PROMOTE ECONOMIC DEVELOPMEN T AS THE TREATY WITH CYPRUS STARTS WITH A RIDER THAT THE EXEMPTION IS AN INCENTIVE FOR ECONOMIC DEVELOPMENT AND HENCE THIS HAS TO BE FOLLOWED STRIC TLY. 15.1. BEFORE WE DEAL WITH THE AFORESAID GROUND OF APPEAL, WE NEED TO UNDERSTAND WHAT TAX SPARING CREDIT IS. TAX SPARING CREDIT, IN THE CONTEXT OF DOUBLE TAX AVOIDANCE CONVENTIONS, RE FERS TO THE PROVISIONS IN THE DTAA'S BETWEEN CONTRACTING STATES WHICH GIVE ENJOIN THE RESIDENCE COUNTRY TO GIVE CREDIT NOT ONL Y FOR TAXES ACTUALLY PAID IN THE SOURCE COUNTRY BUT ALSO FOR TAXES WHICH WOU LD HAVE BEEN PAID BUT FOR THE TAX INCENTIVES GRANTED IN THE SOURCE COUNTRY'S DOMESTIC LAW. THE OECD'S GLOSSARY OF TAX TERMS DEFINES TAX SPARING CREDIT AS TERM USED TO DENOTE A SPECIAL FORM OF DOUBLE TAXATION RELIEF IN TAX TREATIES WITH DEVELOPING COU NTRIES. WHERE A COUNTRY GRANTS TAX INCENTIVES TO ENCOURAGE FOREIGN INVESTMENT AND THAT COMPANY IS A RESIDENT OF ANOTHER COUNTRY WITH WHICH A TAX TREATY HAS BEEN CONCLUDED, THE OTHER COUNTRY MAY GIVE A CREDIT AGAINST ITS OWN TAX : 16 : ITA NOS. 209 & 210/BANG/2014 FOR THE TAX WHICH THE COMPANY WOULD HAVE PAID IF TH E TAX HAD NOT BEEN 'SPARED (I.E. GIVEN UP)' UNDER THE PROVISIONS OF TH E TAX INCENTIVES THE PURPOSE IS CLEAR, TO ENSURE THAT THE DOMESTIC LAW T AX INCENTIVE IN THE SOURCE COUNTRY IS NOT MADE INEFFECTIVE IN THE FOREI GN INVESTOR'S HAND IF THE COUNTRY OF RESIDENCE WERE TO DENY THE TAX CR EDIT TO THE EXTENT OF THE TAXES SPARED BUT NOT PAID IN THE SOURCE CO UNTRY. 15.2. AS FAR AS THIS GROUND OF APPEAL RAISED BY TH E REVENUE IS CONCERNED, THE FACTS ARE THAT ASSESSEE RECEIVED DIV IDEND FROM M/S. KEMFIN HOLDINGS PVT. LTD., CYPRUS DURING THE PREVIO US YEAR. IN ACCORDANCE WITH ARTICLE 25 OF THE DOUBLE TAXATION A VOIDANCE AGREEMENT (DTAA) BETWEEN INDIA AND CYPRUS, THE ASSE SSEE CLAIMED TAX RELIEF TO THE EXTENT OF TAX PAYABLE IN CYPRUS B UT WHICH WAS NOT PAID BECAUSE OF TAX INCENTIVE GIVEN BY THE CYPRUS GOVERN MENT ON DIVIDEND. ARTICLE 25 OF THE DTAA WHICH DEALS WITH AVOIDANCE O F DOUBLE TAXATION OF INCOME, IN PARA 1 OF ARTICLE 25 PROVIDES THAT THE TAXATION OF INCOME WOULD BE GOVERNED BY THE LAWS OF THE RESPECTIVE CON TRACTING STATES. PARA 2 OF ARTICLE 25 OF THE DOUBLE TAXATION AVOIDANCE AGRE EMENT (DTAA) BETWEEN INDIA CYPRUS ALLOWS CREDIT FOR TAXES PAID IN CYPR US, DIRECTLY OR BY DEDUCTION, IN COMPUTING THE INCOME TAX PAYABLE IN I NDIA. PARA 3 IS NOT RELEVANT IN THE PRESENT CASE. PARA 4 OF ARTICLE 25 ALLOWS CREDIT ON TAXES DEEMED TO HAVE BEEN PAID IN CYPRUS. AS PER PARA 4, TAX PAYABLE IN CYPRUS SHALL BE DEEMED TO INCLUDE THE TAX WHICH WOULD HAVE BEEN PAYABLE BUT FOR THE TAX INCENTIVES GRANTED UNDER THE LAWS OF CYPRUS AND WHICH ARE DESIGNED TO PROMOTE ECONOMIC DEVELOPMENT. PARA 4 QUANTIFIES THE QUANTUM OF TAX THAT SHALL BE DEEMED TO HAVE BEEN PAID IN RESPECT O F CERTAIN STREAMS OF : 17 : ITA NOS. 209 & 210/BANG/2014 INCOME. THIS IS POPULARLY TERMED AS THE TAX SPARI NG CREDIT. THE FOLLOWING TABLE CAPTURES THE SAID INFORMATION. SL.NO. ARTICLE PARTICULARS OF INCOME TAX DEEMED TO HAVE BE EN PAID 1 10 DIVIDEND 10% OF GROSS AMOUNT OF DIVIDENDS 2 11 INTEREST 10% OF GROSS AMOUNT OF INTEREST 3 12 ROYALTIES AND FEES FOR INCLUDED SERVICES 15% OF GROSS AMOUNT OF ROYALTIES AND FEES FOR INCLUDED SERVICES 4 13 TECHNICAL FEES 10% OF GROSS AMOUNT OF TECHNICA L FEES 15.3. THE ASSESSEE THEREFORE CLAIMED CREDIT FOR DE EMED TO HAVE BEEN PAID IN CYPRUS UNDER ARTICLE 25(4) OF THE DTAA BETWEEN INDIA AND CYPRUS. THE AO, HOWEVER, DID NOT ACCEPT THE CL AIM OF ASSESSEE AND HE HELD AS FOLLOWS: THE CONTENTION OF THE ASSESSEE IS NOT ACCEPTABLE. A) PARA 4 OF ARTICLE 25 OF THE INDO-CYPRUS DTAA, MA KES IT ABUNDANTLY CLEAR THAT CREDIT COULD BE CLAIMED IN INDIA FOR TAX PAYAB LE IN CYPRUS ONLY WHEN THE EXEMPTIONS OR INCENTIVES GRANTED IN CYPRUS WERE DESIGNED TO PROMOTE ECONOMIC DEVELOPMENT. THE ASSESSEE HAS FAILED TO PROVE THAT THIS REQUISITE CONDITION HAS BEEN FULFILLED. B) THE EVIDENCE RELIED UPON BY THE ASSESSEE INDICAT ES THE GENERAL CONDITIONS CONGENIAL TO FOREIGN INVESTMENTS. IT FAILS TO PROVE THAT THE EXEMPTION FOR DIVIDEND INCOME WAS PROVIDED AS AN INCENTIVE FOR EC ONOMIC DEVELOPMENT. C) IT IS NOTED THAT SECTION 8 OF THE CYPRUS INCOME TAX ACT IS AKIN TO SECTION 10 OF THE INDIAN INCOME TAX ACT AND THE EXEMPTIONS GRANTED U/S. 8 OF THE CYPRUS INCOME TAX ACT MAINLY CONCERNED EMOLUMENTS O F THE PRESIDENT, ETC., GRATUITY, PENSION, INCOME OF CHARITABLE INSTITUTION S, ETC. AS THE DIVIDEND IS ALSO BRACKETED U/S. 8, IT CANNOT BE SAID THAT IT WA S DESIGNED FOR ECONOMIC DEVELOPMENT. HENCE IT IS SEEN THAT A DIRECTION CONN ECTION HAS NOT BEEN ESTABLISHED BETWEEN THE EXEMPTION FOR DIVIDENDS AND ECONOMIC DEVELOPMENT. : 18 : ITA NOS. 209 & 210/BANG/2014 D) THOUGH TAX SPARING CREDIT IS COMMONLY SEEN IN TH E DOUBLE TAXATION AVOIDANCE AGREEMENTS, THE TREATY WITH CYPRUS ADDS A RIDER STATING THAT THE EXEMPTION IS AN INCENTIVE FOR ECONOMIC DEVELOPMENT AND HENCE THIS HAS TO BE FOLLOWED STRICTLY. IT IS ALSO NOTED THAT THE TAX RA TE FOR DIVIDENDS WAS ESSENTIAL FOR THE REASON THAT WITHOUT THE RATE TAX CREDIT CAN NOT BE COMPUTED. RELIANCE IS ALSO PLACED ON THE DECISION OF THE HON'BLE AAR I N THE CASE OF CYRIL EUGENE PEREIRA IN 239 ITR 0650 (AAR) WHEREIN IT WAS HELD THAT IF NO TAX WAS PAYABLE IN THE FOREIGN COUNTRY THERE WAS NO QUE STION OF AVAILING TAX CREDIT IN INDIA. E) RELIANCE IS ALSO PLACED ON THE FOLLOWING CASE LA WS. I. TARULATA SHAM AND OTHER 108 ITR 345 (SC) II. KESHAVJI RAOJI AND COMPANY 183 ITR 1 (SC) III. BUDHARAJA AND COMPANY 204 ITR 412 (SC) WHEREIN IT HAS BEEN HELD THAT WHEN THE WORDINGS IN THE STATUTE ARE CLEAR AND SPECIFIC, IT HAS TO BE FOLLOWED STRICTLY WITHOUT IM PORTING OR ASSESSING ANY OTHER MEANING OR INTENTION. BASED ON THE ABOVE, THE REBATE U/S. 90 OF RS. 68,60 ,892/- CLAIMED BY THE ASSESSEE IS DISALLOWED AND ADDED BACK TO INCOME. 15.4. ON APPEAL BY THE ASSESSEE, THE LD.CIT(A) NOT ICED THAT SIMILAR CLAIM MADE IN AY. 2008-09 WAS ALLOWED BY TH E CIT(A) AND THE REVENUE DID NOT PREFER APPEAL BEFORE THE ITAT ON TH E AFORESAID ORDER. LD.CIT(A) AGREED WITH THE CONCLUSIONS OF HIS PREDEC ESSOR WITH THE FOLLOWING OBSERVATIONS: 7.3 I HAVE GONE THROUGH THE APPELLANT'S SUBMISSIO N. SIMILAR ISSUE AROSE DURING THE ASSESSMENT YEAR 2008-09 AND MY PREDECESS OR IN THE APPELLATE ORDER IN ITA NO. 39/DCIT-LTU/CIT(A)LTU/10-11 DATED 29/03/2011 ANALYSED THE SIMILAR ISSUE IN DETAILS AND DECIDED I N FAVOUR OF THE APPELLANT, THE RELEVANT PART OF THE DECISION IS REPRODUCED BEL OW :- 5.1 BASED ON A CAREFUL CONSIDERATION OF THE APPELL ANT'S ARGUMENTS AS WELL AS THE AO'S CONTENTIONS, I AM INCLINED TO CONC LUDE THAT THE : 19 : ITA NOS. 209 & 210/BANG/2014 APPELLANT HAS RIGHTLY SOUGHT CREDIT OF 16% OF THE D IVIDEND INCOME EARNED BY IT IN ACCORDANCE WITH THE PROVISIONS OF A RTICLE 25 (4) OF THE INDIA - CYPRUS DTAA WHICH IS REPRODUCED AS UNDER:- 'THE TAX PAYABLE IN A CONTRACTING STATE MENTIONED I N PARAGRAPH 2 AND PARAGRAPH 3 OF THIS ARTICLE SHALL B E DEEMED TO INCLUDE THE TAX WHICH WOULD HAVE BEEN PAYABLE BUT FOR THE TAX INCENTIVES GRANTED UNDER TH E LAWS OF THE CONTRACTING STATES AND WHICH ARE DESIGN ED TO PROMOTE ECONOMIC DEVELOPMENT. FOR THE PURPOSE OF PARAGRAPH 2 OF ARTICLE 10 THE AMOUNT OF TAX SHALL B E DEEMED TO BE 10 PER CENT OR 15 PER CENT AS THE CASE MAY BE, OF THE GROSS AMOUNT OF DIVIDEND, FOR THE PURPOS E OF PARAGRAPH 2 OF ARTICLE 11, THE AMOUNT OF TAX SHALL BE DEEMED TO BE 10 PER CENT OF THE GROSS AMOUNT OF INT EREST AND FOR THE PURPOSE OF PARAGRAPH 2 OF ARTICLE 12, T HE AMOUNT OF TAX SHALL BE DEEMED TO BE 15 PER CENT OF THE GROSS AMOUNT OF ROYALTIES AND FEES FOR INCLUDED SER VICES AND FOR THE PURPOSE OF PARAGRAPH 2 OF ARTICLE 13, T HE AMOUNT OF TAX SHALL BE DEEMED TO BE 10 PER CENT OF THE GROSS AMOUNT OF TECHNICAL FEES. IT IS CRYSTAL CLEAR FROM A PLAIN READING OF PARA 4 OF ARTICLE 25 THAT THE FIRST PHASE OF THE SAID ARTICLE LAYS DOWN A CRITERI ON THAT CREDIT WOULD BE GIVEN FOR TAX WHICH WOULD HAVE BEEN PAYABLE BUT FOR THE TAX INCENTIVES GRANTED UNDER THE LAWS OF THE CONTRACTIN G STATES AND WHICH ARE DESIGNED TO PROMOTE ECONOMIC DEVELOPMENT. IN OTHER WORDS, THE TAX AMOUNT ELIGIBLE FOR CREDIT WOULD NEE D TO BE COMPUTED HAVING REGARD TO THE TAX INCENTIVES DESIGNED TO PRO MOTE ECONOMIC DEVELOPMENT. IT IS ALSO EVIDENT THAT NO MECHANISM O R YARDSTICK HAS BEEN PRESCRIBED FOR EITHER QUALIFYING OR QUANTIFYIN G ECONOMIC DEVELOPMENT AS A PRE-CONDITION FOR ALLOWING TAX SPA RING CREDIT. IT APPEARS THAT IN NONE OF THE TREATIES CERTIFICATION FROM THE AUTHORITIES OF THE SOURCE COUNTRY AS REGARDS ECONOMIC DEVELOPME NT WAS MADE A PRE-CONDITION FOR ALLOWING TAX SPARING CREDIT BY TH E RESIDENCE COUNTRY SINCE NO SYSTEM/MECHANISM WAS AVAILABLE IN ANY SOUR CE COUNTRY FOR ISSUE OF SUCH CERTIFICATES. NONE OF THE TREATIES CA ST THE BURDEN OF PROVING THAT THE TAX EXEMPTION WAS IN R/O ECONOMIC DEVELOPMENT ON THE CLAIMANT LET ALONE ESTABLISHING THAT THE TAX EX EMPTION IS IN R/O 'SPECIAL' ECONOMIC DEVELOPMENT. I AM OF THE CONSIDE RED OPINION THAT : 20 : ITA NOS. 209 & 210/BANG/2014 THE INSISTENCE BY THE AO OF SUCH PROOF AS A PRE-CON DITION FOR ALLOWING TAX SPARING CREDIT NEGATES THE VERY SCHEME OF TAX S PARING. MOREOVER AS REGARDS THE IMPLICATION OF THE PHRASE TO PROMOT E ECONOMIC DEVELOPMENT ECONOMIC DEVELOPMENT IN ORDINARY PARLA NCE REFERS TO SUSTAINABLE INCREASE IN LIVING STANDARDS THAT DELIV ERS INCREASE PER CAPITAL INCOME, BETTER EDUCATION AND HEALTH AS WELL AS ENVIRONMENTAL PROTECTION. THE PUBLIC POLICY OF ANY STAT AIMS AT C ONTINUOUS AND SUSTAINED ECONOMIC GROWTH AND EXPANSION OF NATIONAL ECONOMICS SO THAT DEVELOPING COUNTRIES BECOME DEVELOPED COUNT RIES. HENCE THE PHRASE TO PROMOTE ECONOMIC DEVELOPMENT' WOULD IMPL Y MEASURES UNDERTAKEN TO FURTHER/BOLSTER THE CAUSE OF INCREASI NG THE STANDARD OF LIVING OF THE PEOPLE BY MEANS OF SUSTAINED GROWTH. ATTRACTING AND ENCOURAGING NEW BUSINESSES IS DEFINITELY A TOOK TO IMPLEMENT THE CAUSE OF ECONOMIC DEVELOPMENT AND GIVING INCENTIVES IN THE NATURE OF EXEMPTION FROM LIABILITY TO TAX IN R/O DIVIDENDS IS A VERY ELEMENTARY METHOD BY WHICH RESOURCES COULD BE GARNERED TO BE I NVESTED IN NEW BUSINESS ETC., THEREBY PROMOTING ECONOMIC GROWTH AN D DEVELOPMENT. IN MY VIEW, NO OTHER SPECIFIC EVIDENCE IS MANDATED EITHER BY LAW OR COMMON SENSE TO ESTABLISH THAT THE EXEMPTION IN QUE STION IS DESIGNED TO PROMOTE ECONOMIC DEVELOPMENT. IN FACT, TO MY MIN D THERE IS NO ALTERNATIVE PLAUSIBLE CONCLUSION POSSIBLE AS THE RA TIONALE FOR THE PROVIDING OF THE SAID EXEMPTION OTHER THAN TO PROMO TE ECONOMIC ACTIVITY AND HENCE ECONOMIC DEVELOPMENT. TO SUM UP, IT SEEMS AS IF THE AO IS INDIRECTLY IMPOSING A PRE-CONDITION NOT M ANDATED IN ARTICLE 25(4). I AM OF THE FIRM VIEW THAT IN THE ABSENCE OF SPECIFIC WORDS NO REQUIREMENT/CONDITION CAN BE READ INTO A STATUTORY PROVISION AS HELD BY THE APEX COURT IN THE CASE OF CIT VS VIRMANI IND USTRIES P . LTD (1995) 216 ITR 607). IN OTHER WORDS, THE AO CANNOT ADDUCE ANY SPECIAL REQUIREMENTS WHERE THERE WAS NONE FOR THE P URPOSE OF AFFORDING THE EXEMPTION WHICH IS EXPLICITLY PROVIDE D UNDER THE TREATY OR IMPORT ADDITIONAL ADJECTIVES SUCH AS 'GENERAL' O R 'SPECIAL' ETC. WHEN SUCH A REQUIREMENT HAS NOT BEEN SPECIFICALLY L AID DOWN IN THE DTAA. BY GIVING EXEMPTION/ TAX INCENTIVE IN R/O DIV IDEND INCOME, CYPRUS WAS DEFINITELY CONTRIBUTING TO THE PROMOTION OF ITS ECONOMIC DEVELOPMENT. IT IS PERTINENT TO NOTE THAT BY GIVIN G EXEMPTION IN R/O DIVIDEND INCOME, MORE AND MORE ENTITIES ETC. WERE S UFFICIENTLY INCENTIVIZED TO INVEST IN SHARES OF COMPANIES BASED IN CYPRUS RESULTING IN COMPANIES HAVING MORE AND MORE CAPITAL TO INVEST FURTHER IN THE SETTING UP OF ORGANIZATION/INDUSTRIE S THEREBY CONTRIBUTING TO ITS ECONOMIC DEVELOPMENT. CONSEQUEN TLY S INCREASED : 21 : ITA NOS. 209 & 210/BANG/2014 EMPLOYMENT AND THE INCREASED STANDARDS OF LIVING RE SULTING FROM INCREASED BUSINESS INVESTMENTS WOULD NECESSARILY FU RTHER THE CAUSE OF ECONOMIC DEVELOPMENT. 5.1.1 IT IS OF RELEVANCE TO NOTE THAT SEVERAL HIGH COURTS AS WELL AS THE HON'BLE SUPREME COURT HAVE HELD THAT PROVISIONS OF TAX STATUTES GRANTING INCENTIVES AND BENEFITS FOR PROMOTING, GRO WTH AND DEVELOPMENT OF THE INDUSTRY ARE REQUIRED TO BE CONS TRUED LIBERALLY SO AS TO ADVANCE THE OBJECTIVE OF THE PROVISION VIZ., THE APEX COURT IN THE CASE OF CIT VS GWALLOR RAYON SILK MANUFACTURING CO. LTD. (1992) 196 ITR 149 AND P.R. PRABHKAR VS CIT (2006) 284 ITR 548, THE JURISDICTIONAL HIGH COURT IN THE CASE OF A. S. MANI VS UNION OF INDIA AND OTHERS [20031 204 ITR 5 AND THE HON' BLE ITAT, MUMBAI BENCH IN THE CASE OF HINDALCO INDUSTRIES LTD. VS. ASST. C IT (2005) 94 ITO 242 ETC. SIMILARLY, THE VIEW THAT A STRICT AND LITE RAL CONSTRUCTION SHOULD BE AVOIDED IN INTERPRETING A CLAUSE IN THE T REATY AND THE INTENTION AND PURPOSE BEHIND THE PROVISIONS INCORPO RATED IN THE TREATY SHOULD BE GIVEN DUE WEIGHT HAS BEEN TAKEN BY THE AUTHORITY OF ADVANCE RULING IN THE CASE OF CAL DIVE MARINE CONST RUCTION (MAURITIUS) LTD. IN RE [2009] 315 ITR 334 (AAR) AND THE HON'BLE ITAT, DELHI BENCH IN THE CASE OF ENSCO MARITIME LTD . VS DY. CIT [2004] 91 ITD 459 (PAGES 476-477) WHICH HAS ENUNCIA TED THE PRINCIPLES OF INTERPRETATION OF TREATIES. IT IS NOT EWORTHY THAT THE HON'BLE ITAT, MUMBAI BENCH IN THE CASE OF DY. DIT ( INTERNATIONAL TAXATION) VS BALAJI SHIPPING (UK) LTD. (2009) 315 I TR (AT) 62: (2008) 117 TTJ 865 (MUMBAI) ALSO HELD THAT THE RULE S OF INTERPRETATION FOR INTERPRETING A STATUE WERE NOT A PPLICABLE FOR INTERPRETING THE COVENANTS OF TAX TREATIES BETWEEN CONTRACTING STATES. FURTHER THE TRIBUNAL HAS OBSERVED THAT THE WORDS OR EXPRESSIONS USED IN THE TREATIES, IF NOT DEFINED IN THE TREATIES THE MSELVES, SHOULD BE UNDERSTOOD IN THE SENSE IN WHICH THE CONTRACTING ST ATES UNDERSTOOD THEM AT THE TIME THE TREATY WAS EXECUTED; I.E., CON TEMPORANEOUS THINKING. IN VIEW OF THE FOREGOING ANALYSIS, I AM I NCLINED TO UPHOLD THE APPELLANT'S CLAIM FOR CREDIT FOR DOUBLE TAXATIO N RELIEF AMOUNTING TO RS.342,532/- AND DIRECT THE AO TO ALLOW THE SAME . GROUNDS 2.1 TO 2.5, THEREFORE, SUCCEED. 7.4. SINCE THE ISSUE IS IDENTICAL FOR THIS YEAR AND IN ORDER TO MAINTAIN RULE OF CONSISTENCY, I HOLD SIMILAR VIEW. THE AO IS THEREFO RE DIRECTED TO ALLOW REBATE OF RS. 68,60,902/ -. THE APPEAL IN THIS GROU ND THUS SUCCEEDS. : 22 : ITA NOS. 209 & 210/BANG/2014 15.5. AGGRIEVED BY THE ORDER OF LD.CIT(A), REVENUE RAISED GROUND NO.4 BEFORE THE TRIBUNAL. 15.6. LD.DR REITERATED THE STAND OF THE REVENUE AS CONTAINED IN THE GROUNDS OF APPEAL. 15.7. WE ARE OF THE VIEW THAT THE CONCLUSIONS OF T HE LD.CIT(A) IN AY. 2008-09 ARE CORRECT AND DOES NOT CALL FOR AN Y INTERFERENCE. AS RIGHTLY HELD BY THE CIT(A) IN THE ORDER FOR AY. 200 8-09, THE IMPLICATION OF THE PHRASE TO PROMOTE ECONOMIC DEVE LOPMENT IN ORDINARY PARLANCE REFERS TO SUSTAINABLE INCREASE IN LIVING STANDARDS THAT DELIVERS INCREASE PER CAPITAL INCOME, BETTER EDUCAT ION AND HEALTH AS WELL AS ENVIRONMENTAL PROTECTION. THE PUBLIC POLICY OF ANY STATE AIMS AT CONTINUOUS AND SUSTAINED ECONOMIC GROWTH AND EXP ANSION OF NATIONAL ECONOMICS SO THAT DEVELOPING COUNTRIES B ECOME DEVELOPED COUNTRIES. HENCE THE PHRASE TO PROMOTE ECONOMIC D EVELOPMENT' WOULD IMPLY MEASURES UNDERTAKEN TO FURTHER/BOLSTER THE CAUSE OF INCREASING THE STANDARD OF LIVING OF THE PEOPLE BY MEANS OF SUSTAINED GROWTH. ATTRACTING AND ENCOURAGING NEW BUSINESSES I S DEFINITELY A TOOK TO IMPLEMENT THE CAUSE OF ECONOMIC DEVELOPMENT AND GIVING INCENTIVES IN THE NATURE OF EXEMPTION FROM LIABILIT Y TO TAX IN R/O DIVIDENDS IS A VERY ELEMENTARY METHOD BY WHICH RESO URCES COULD BE GARNERED TO BE INVESTED IN NEW BUSINESS ETC., THERE BY PROMOTING ECONOMIC GROWTH AND DEVELOPMENT. THE RATIONALE FOR PROVIDING EXEMPTION BY ITSELF IS PROOF THAT IT WAS FOR NO OTH ER PURPOSE OTHER THAN TO PROMOTE ECONOMIC ACTIVITY AND HENCE ECONOMIC DEV ELOPMENT. WE : 23 : ITA NOS. 209 & 210/BANG/2014 AGREE WITH THE FORESAID REASONING AND FIND NO GROUN DS INTERFERE WITH THE ORDER OF CIT(A). CONSEQUENTLY, GROUND NO. 4 RAI SED BY THE REVENUE IS DISMISSED. 16. IN THE RESULT, THIS APPEAL OF REVENUE IS DISMI SSED. 17. TO SUM-UP, THE APPEAL OF ASSESSEE IS PARTLY AL LOWED AND THE APPEAL OF REVENUE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 12 TH DAY OF APRIL, 2019 SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEV AN) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATE: 12 TH APRIL, 2019. TNMM : 24 : ITA NOS. 209 & 210/BANG/2014 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE