DCIT, New Delhi V. M/s. Indian Sugar Exim Corporation Ltd., New Delhi

ITA 2103/DEL/2012

• Counselvise Citation: 210320114 RSA 2012
• Duration Of Justice: 2 year(s) 4 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-09-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 01-09-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 03-05-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUNIL BAJPAI
• Assessee Lawyers: ASHWANI TANEJA
• Keywords: Business income; Business expenditure; Opportunity of being heard; Earning of tax free income; Source of fund; Retrospective amendment; Question of law; Onus to prove
• Section: 14A; 194C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH C : NEW DELHI) BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER AND SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.2103/DEL./2012 (ASSESSMENT YEAR : 2008-09) DCIT, CIRCLE 11 (1), VS. M/S. INDIAN SUGAR EXIM C ORPORATION LTD., NEW DELHI. C BLOCK, 2 ND FLOOR, ANSAL PLAZA, AUGUST KRANTI MARG, NEW DELHI 110 049. (PAN : AAACI1163M) ITA NO.1671/DEL./2012 (ASSESSMENT YEAR : 2008-09) M/S. INDIAN SUGAR EXIM CORPORATION LTD., VS. DCIT, CIRCLE 11 (1), C BLOCK, 2 ND FLOOR, ANSAL PLAZA, NEW DELHI. AUGUST KRANTI MARG, NEW DELHI 110 049. (PAN : AAACI1163M) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI ASHWANI TANEJA, ADVOCATE AND SHRI SUMIT JAIN, CA REVENUE BY : SHRI SUNIL BAJPAI, CIT DR ORDER PER B.C. MEENA, ACCOUNTANT MEMBER : BOTH THESE CROSS APPEALS FILED BY THE REVENUE AND ASSESSEE EMANATE FROM THE ORDER OF THE CIT (APPEALS)-XV, NEW DELHI D ATED 17.02.2012 FOR THE ASSESSMENT YEAR 2008-09. ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 2 2. THE ASSESSEE IS A COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956, ENGAGED IN THE BUSINESS OF EXPORT/IMPORT OF S UGAR. THE RETURN OF INCOME WAS FILED ON 29.09.2008 DECLARING INCOME AT RS.3,58,38,518/-. 3. THE GROUNDS OF APPEAL OF REVENUE READ AS UNDER : - 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS.98,33,833/- MADE ON ACCOUNT OF LOSS ON SALE OF INVESTMENT. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD. CIT (A) HAS ERRED IN RESTRICTING THE ADDITI ON OF RS.5,11,00,925/- TO THE EXTENT OF RS.1,89,70,367/- MADE U/S 14A READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 . 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD. CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS.10,79,68,722/- MADE ON ACCOUNT OF VALUATION OF C LOSING STOCK. 4. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEN D ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARIN G. THE GROUNDS OF APPEAL OF ASSESSEE READ AS UNDER :- L(A) THAT THE LEARNED CIT(A) ERRED, BOTH ON FACTS AND IN LAW IN SUSTAINING A DISALLOWANCE OF RS.1,89,70,367/ - (RS.64,60,071/- TOWARDS INTEREST AND RS.1,25,10,296 /- TOWARDS ADMINISTRATIVE EXPENDITURE) U/S 14A OF THE INCOME TAX ACT READ WITH RULE 8D OF THE INCOME TAX RULES. 1(B) THE ID CIT(A) FAILED TO APPRECIATE THAT THE AS SESSEE HAD MADE INVESTMENTS DURING THE YEAR FROM THE REDEM PTION PROCEEDS OF EARLIER INVESTMENTS / REALISATION FROM DEBTORS AND INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE AND AS SUCH DISALLOWANCE U/S 14A WITH RESPECT TO INTEREST OF RS.64,60,071/- DESERVES TO BE DELETED . ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 3 1(C) THAT THE LD CIT(A) IN THE FACTS AND CIRCUMSTAN CES OF THE CASE HAS ERRED IN SUSTAINING DISALLOWANCE OF RS.1,25,10,296/- U/S 14A TOWARDS ADMINISTRATIVE EXPENDITURE @ 0.5% OF THE AVERAGE VALUE OF INVESTME NTS IN A MECHANICAL MANNER. L(D) THAT THE LD CIT(A) HAS ERRED IN FAILING TO APP RECIATE THAT THE COMPUTATION OF THE AVERAGE VALUE OF INVEST MENTS, INCOME FROM WHICH DOES NOT FORM PART OF TOTAL INCOM E, IS INCORRECT. 2. THE LEARNED CIT(A) HAS GROSSLY ERRED IN SUSTAINI NG DISALLOWANCE OF RS.824,125/- IN RELATION TO TDS DED UCTED DURING THE FY 2007-08 AND DEPOSITED ON OR BEFORE DU E DATE OF FILING OF RETURN . 3. THAT THE LD CIT(A) HAS ERRED IN SUSTAINING DISALLOWANCE OF RS.1528/- TOWARDS INTEREST ON LATE PAYMENT OF TDS WITHOUT APPRECIATING THAT IT AN ALLOWABLE EXPENDITURE. 4. THAT THE APPELLANT CRAVES LEAVE TO ADD, AMEND, A LTER ANY GROUNDS OF APPEAL OF APPEAL. 4. GROUND NOS.1 (A) TO 1 (D) OF ASSESSEES APPEAL A ND GROUND NO.2 OF THE REVENUES APPEAL ARE WITH REGARD TO THE DISALLO WANCE OF RS.5,11,00,925/- MADE BY THE ASSESSING OFFICER BY I NVOKING THE PROVISIONS OF SECTION 14A OF THE INCOME-TAX ACT, 1961 READ WIT H RULE 8D OF THE INCOME-TAX RULES, 1962 WHICH HAS BEEN PARTLY ALLOWE D BY THE CIT (A) AND RESTRICTED ADDITION TO RS.1,89,70,367/- (INTEREST R S.64,60,071/- AND ADMINISTRATIVE EXPENSES RS.1,25,10,296/-). 5. WHILE PLEADING ON BEHALF OF THE ASSESSEE, LD. AR SUBMITTED THAT THE CIT (A) HAS SUSTAINED THE DISALLOWANCE OF RS.1,89,7 0,369/- ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 4 (RS.64,60,071/- TOWARDS INTEREST AND RS.1,25,10,296 /- TOWARDS ADMINISTRATIVE EXPENDITURE) U/S 14A READ WITH RULE 8D. IT WAS SUBMITTED BY THE LD. AR THAT INVESTMENTS MADE DURING THE YEAR WERE FROM THE REDEMPTION PROCEEDS OF EARLIER INVESTMENTS / REALIZ ATION FROM DEBTORS AND INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. I T WAS ALSO SUBMITTED THAT THE SUSTENANCE OF DISALLOWANCE OF RS.1,25,10,296/- BEING ADMINISTRATIVE EXPENSES WAS A MECHANICAL EXERCISE. IT WAS ALSO SU BMITTED THAT THE COMPUTATION OF THE AVERAGE VALUE OF INVESTMENTS, IN COME FROM WHICH DOES NOT FORM PART OF THE INCOME, WAS WRONGLY DONE. WHI LE PLEADING ON BEHALF OF THE ASSESSEE LD. AR SUBMITTED WRITTEN SUBMISSION S REPRODUCED AS UNDER:- DURING THE YEAR UNDER CONSIDERATION ASSESSEE COMPA NY HAS MADE INVESTMENTS TO THE TUNE OF RS.2,18,16,75,912.68 AND RECEIVED A SUM OF RS.2,16,09,61,251.25 FROM REDEMPTION OF INVESTMENTS. BESIDES, ASSESSEE COMPANY HAS ALSO SHO WN INCOME OF RS.2,37,40,339/- BY WAY OF INTEREST ON UT I BONDS (REFER PB 273,274) AND RS.55,23,351/- (REFER PB 273, 275) AS DIVIDEND INCOME ON MUTUAL FUNDS INVESTMENT WHICH WAS CLAIMED AS EXEMPT U/S 10(35) OF THE INCOM E TAX ACT, 1961. IT IS RESPECTFULLY SUBMITTED: AS REGARDS INTEREST INCOME OF RS. 64,60,071/- THAT DURING THE YEAR ASSESSEE COMPANY HAS MADE INVESTMENTS TO THE TUNE OF RS.2,18,16,75,912.68 AND RECEIVED A SUM OF RS.2,16,09,61,251.25 FROM REDEMPTION OF INVESTMENTS. ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 5 THAT PURCHASE OF INVESTMENTS IS FROM PROCEEDS OF REDEMPTION OF EXISTING INVESTMENTS AND OTHER CASH SURPLUS GENERATED DURING THE YEAR. THAT IT IS ALSO NOT OUT OF PLACE TO MENTION HERE THAT THE BALANCE OF GENERAL FUND AS ON 01-04- 2007 WAS MUCH MORE THAN THE INVESTMENTS AS ON 01-04-2007. THAT INTEREST EXPENDITURE WHICH WAS DEBITED TO INCOME AND EXPENDITURE ACCOUNT WAS WITH RESPECT TO IMPORT/ EXPORT OF SUGAR ALONE AND NOT FOR INVESTMENT ACTIVITY, DETAILED EVIDENCES OF WHICH WERE FILED DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND ALSO BEFORE LD. CIT(A). THAT ASSESSEE COMPANY IS PAYING BANK INTEREST ONLY IN RELATION TO PACKING CREDIT/ PACKING CREDIT IN FOREIGN CURRENCY UTILISED FOR EXPORT OF SUGAR FROM INDIA WHICH IS AS SUCH A SHORT TERM BORROWING FOR PURPOSES OF EXPORT. THE SAME WAS SUBMITTED BEFORE LD. CIT(A) VIDE ASSESSEES SUBMISSIONS DATED 18-08-2011 ENCLOSED AT PB 904 IN PARA 10.9. THAT SANCTION LETTERS FROM VARIOUS BANKS CONFIRMING THAT THE ASSESSEE IS ENJOYING ONLY PACKING CREDIT LIMIT (REFER PB 276-305) WAS ALSO FILED TO LD. CIT(A) VIDE ASSESSEES SUBMISSIONS DATED 09-10-2010 ( REFER PB 78- 193). THAT COPY OF CERTIFICATES FROM VARIOUS BANKS CERTIFYING THAT ONLY PACKING CREDIT IN FOREIGN CURRENCY LIMIT WERE UTILISED BY THE ASSESSEE COMPANY AND WAS NOT ENJOYING ANY CASH CREDIT LIMIT. THE SAME WAS SUBMITTED BEFORE LD. AO AS WELL AS BEFORE LD. CIT(A) VIDE ASSESSEES SUBMISSIONS DATED 20-10-2010 ENCLOSED AT PB 726-730. THAT, FROM A.Y. 2001-02 UPTO A.Y. 2007-08 HONBLE INCOME TAX APPELLATE TRIBUNAL HAS ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 6 HELD THAT NO INTEREST HAS BEEN INCURRED TOWARDS INVESTMENT ACTIVITY. MOREOVER, ORDER OF HONBLE ITAT FOR A.Y. 2001-02 HAS ALSO BEEN APPROVED BY HONBLE DELHI HIGH COURT. PB 73 -77 IS ASSESSEES LETTER DATED 04-10-2010 FILED TO LD. AO ENCLOSING DETAILS OF INVESTMENTS AS ON 31.03.2008. PB 905 WOULD SHOW THAT OUT OF RS.218.16 CRORES, RS.216.16 CRORES WERE AVAILABLE FROM THE PAST INVESTMENTS MADE FROM INTEREST FREE FUNDS. PB 276-305 ARE SANCTION LETTERS OF BANK FACILITIES CONFIRMING THAT THE ASSESSEE IS NOT ENJOYING ANY CASH CREDIT LIMIT. PB 306-725 ARE COPIES OF LEDGER ACCOUNT OF BANK INTEREST AND ALL BANK ADVISES FOR DEBITING INTEREST ON PACKING CREDIT IN FOREIGN CURRENCY FILED TO LD. AO VIDE ASSESSEE S SUBMISSIONS DATED 09-10-2010 ENCLOSED AT PB 78-193. PB 726-730 IS ASSESSEES SUBMISSION DATED 20-10- 2010 FILED BEFORE LD. AO SUBMITTING THAT ASSESSEE IS NOT ENJOYING ANY OVERDRAFT/ CASH CREDIT FACILITY AND IS HAVING CREDIT/ PACKING CREDIT IN FOREIGN CURRENCY FACILITY WHICH IS GIVEN TO EXPORTER FOR EXPORT PURPOSES. THESE FUNDS ARE TO BE UTILISED FOR PURCHASES ETC. FOR EXPORT AND CANNOT BE INVESTED IN MUTUAL FUNDS AND THEREFORE, NO PART OF INTEREST ON BANK LOANS IS ATTRIBUTABLE TO EARNING OF INTEREST INCOME. ALSO, ENCLOSED ARE THE BANK CERTIFICATES FROM VARIOUS BANKS CERTIFYING ONLY INTEREST ON PACKING CREDIT /PACKING CREDIT IN FOREIGN CURRENCY FOR EXPORTS HAS BEEN PAID BY THE ASSESSEE COMPANY. PB 898 - 907 IS DETAILED SUBMISSIONS FILED BEFORE LD. CIT(A) ON THE ABOVE ASPECT. PB 1042-1206 IS SUBMISSIONS DATED 13-12-2011 FILED BEFORE LD. CIT(A) TOGETHER WITH ANNEXURES SHOWING D ETAILS OF INVESTMENT MADE IN MUTUAL FUNDS AND TAX FREE BON DS FOR ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 7 THE YEAR ENDING 31-03-2008 AND COPY OF ICICI BANK STATEMENT SHOWING PURCHASE AND REDEMPTION OF INVEST MENTS DURING THE YEAR. PB 913-918 IS INVESTMENT SUMMARY SHOWING OPENING BALANCE, INVESTMENTS MADE DURING THE YEAR, INVESTME NTS REDEEMED DURING THE YEAR AND CLOSING BALANCE TOGETH ER WITH DETAILED LEDGER ACCOUNT OF INVESTMENTS . PB 925-926 IS DETAILED STATEMENT OF INVESTMENTS MADE DURING F.Y. 2007-08 TOGETHER WITH SOURCE OF INVESTM ENTS. PB 927 TO 963 COPIES OF BANK STATEMENT IDENTIFYING ENTRIES OF PURCHASE AND REDEMPTION OF INVESTMENTS MADE DURI NG F.Y. 2007-08. PB 1032 TO 1041 IS DETAILED SUBMISSIONS DATED 12-10-2011 FILED TO LD. CIT(A) REGARDING 14A. PB 1207 TO 1208 IS DETAILED STATEMENT OF INVESTMENTS MADE IN MUTUAL FUND AND TAX FREE BONDS DURING F.Y. 2006- 07 TOGETHER WITH SOURCE OF INVESTMENTS. AS REGARDS ADMINISTRATION AND OTHER EXPENSES I.E. 0 .5% OF AVERAGE VALUE OF INVESTMENTS OUR FIRST AND FOREMOST SUBMISSION IS THAT LD. CIT(A) HAS ERRED IN CALCULATING THE DISALLOWANCE AS PER CLAUSE (III) OF SUB-SECTION (2) OF RULE 8D O F INCOME TAX RULES, 1962. WHILE CALCULATING 0.5% OF AVERAGE VALUE OF INVESTMENT, LD. CIT(A) HAS WRONGLY TAKEN THE AVERAGE VALUE OF INVESTMENT AT RS.2,50,20,59,294/- INSTEAD OF RS.41,88,44,725/-, WHICH IS 16.94% OF RS.2,50,20,59,294, BEING INVESTMENT MADE DURING THE YEAR FROM THE MIXED FUNDS AS CALCULATED BY LD. CIT(A) IN HIS ORDER AT PAGE 16 . THEREFORE, 0.5% OF RS.41,88,44,725/- COMES TO RS.20,94,224/- AND TOTAL DISALLOWANCE COMES TO RS.85,54,295/- INSTEAD OF RS.1,89,70,367/- AS MADE BY LD. CIT(A). THEREFORE, IT IS PRAYED THAT RS.1,89,70,367/- OF ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 8 DISALLOWANCE MAY PLEASE BE SUBSTITUTED WITH RS.85,54,295/-. WITHOUT PREJUDICE TO ABOVE , IT IS RESPECTFULLY SUBMITTED THAT NO ADDITION ON THIS GROUND IS CALLED FOR ON AC COUNT OF THE FOLLOWING REASONS:- I) LD. CIT(A) AS WELL AS LD. AO HAS NOT SPECIFICALLY POINTED OUT ANY EXPENDITURE INCURRED BY ASSESSEE COMPANY TOWARDS INVESTMENTS/ INTERESTS. II) THE ASSESSEE HAD HUGE SURPLUS AND INTEREST FREE FUN DS AVAILABLE AT ITS DISPOSAL WHICH WERE MORE THAN THE INVESTMENTS MADE BY THE ASSESSEE DURING THE IMPUGNED YEAR. III) IT WAS ALSO SUBMITTED THAT INTEREST EXPENDITURE WAS INCURRED IN RELATION TO BUSINESS AND NOT IN RELATIO N TO INVESTMENT ACTIVITY. IV) FURTHER, IT IS SUBMITTED THAT INVESTMENTS IN DEBT B ASED GROWTH FUNDS SHOULD BE EXCLUDED WHILE CALCULATING AVERAGE INVESTMENTS FOR THE PURPOSES OF EXEMPT INCOME SINCE IT FORMS PART OF TAXABLE INCOME AND NO DIVIDEND CAN BE EARNED AS PER THE SCHEME OF INVESTMENTS ITSELF. THE SAME WAS SUBMITTED BEFORE LD. AO VIDE ASSESSEES SUBMISSIONS DATED 26-10- 2010 TOGETHER WITH EVIDENCES SHOWING THAT INVESTMENTS WERE MADE IN GROWTH FUNDS (REFER PB 731-846). V) MOREOVER, FLAT RATE OF 0.5% CANNOT BE MADE APPLICABLE ON THOSE INVESTMENTS ON WHICH TAXES ON LONG TERM CAPITAL GAIN HAVE ALREADY BEEN PAID BY TH E ASSESSEE COMPANY. VI) THAT UPTO A.Y. 2007-08 IT HAS BEEN HELD THAT NO INTEREST HAS BEEN INCURRED FOR EARNING OF EXEMPT INCOME BY THE ASSESSEE COMPANY. VII) HONBLE DELHI HIGH COURT IN A.Y. 2001-02 HAS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE STATIN G THAT NO INTEREST WAS INCURRED TOWARDS INVESTMENT ACTIVITY. ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 9 VIII) NO PART OF INTEREST WAS ATTRIBUTABLE TO INVESTMENTS MADE DURING THE YEAR, THEREFORE, NO DISALLOWANCE CA N BE MADE ON THIS GROUND. IX) WHEN NO EXPENDITURE RELATING TO EXEMPT INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME HAS EVER BEEN MADE PART OF INCOME AND EXPENDITURE ACCOUNT, THEN NO QUESTION OF DISALLOWANCE OF SUCH EXPENDITUR E ARISES. RELIANCE IS PLACED ON FOLLOWING JUDICIAL PRONOUNCEM ENTS (A) THE PRINCIPLE OF APPORTIONMENT EMBEDDED IN SECTION 14A, HAS APPLICATION ONLY WHEN IT IS NOT POSSIBLE T O DETERMINE THE ACTUAL EXPENDITURE IN RELATION TO THE EXEMPT INCOME. WHEN IT IS POSSIBLE TO DETERMINE THE ACTUAL EXPENDITURE IN RELATION TO EXEMPT INCOME OR, WHEN NO EXPENDITURE HAS BEEN INCURRED IN RELATION T O EXEMPT INCOME THE PRINCIPLE OF APPORTIONMENT HAS NO APPLICATION. -EXPENSES TOWARDS DIVIDEND INCOME EXEMPT UNDER S. 10(33)-EXPENDITURE WHICH THE AO SEEKS TO DISALLOW UNDER S. 14A SHOULD BE ACTUALLY INCURRED-THERE BEIN G NO MATERIAL WITH THE AO TO SHOW THAT ANY EXPENDITURE W AS INCURRED IN EARNING DIVIDEND INCOME, NOTHING COULD BE DISALLOWED UNDER S. 14A ON ESTIMATE BASIS, ACIT VS. EICHER LTD. 101 TTJ 369 (DEL) WHETHER IT IS FOR ASSESSING OFFICER TO IDENTIFY EXPENDITURE WHICH CAN BE REASONABLY SAID TO HAVE BE EN INCURRED TO EARN A TAX EXEMPT INCOME BEFORE INVOKIN G DISALLOWANCE UNDER SECTION 14A HELD YES DRESDNER BANK AG V. ADDL. CIT 11 SOT 158 (MUM.) WHETHER WHEN NO EXPENDITURE IS INCURRED BY AN ASSES SEE IN EARNING DIVIDEND INCOME ,NO NOTIONAL EXPENDITURE CAN BE DEDUCTED FROM SAID INCOME FOR PURPOSE OF COMPUT ING DEDUCTION UNDER SECTION 80MHELD, YES MAHARASHTRA APEX CORPORATION LTD. V/S CITVOL.155-TAXMAN-53(KAR.). ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 10 DISALLOWANCE UNDER S. 14A APPORTIONMENT OF EXPENDITUREDISALLOWANCE UNDER S. 14A REQUIRES FINDING OF INCURRING OF EXPENDITUREWHERE IT IS FOU ND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER S. 14A CANNOT STAND. CIT VS. HERO CYCLES LTD. 31 DTR 301(P&H) DCIT VS. JINDAL PHOTO LIMITED IN ITA N. 4539/DEL/2010 (DELHI ITAT) 18. NOW, AS PER SECTION 14A(2) OF THE ACT, 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 EXPENDITURE INCURRED IN RELATION TO I NCOME WHICH DOES NOT FORM PART OF THE ASSESSEES TOTAL IN COME UNDER THE ACT, THE AO SHALL DETERMINE THE AMOUNT INCURRED IN RELATION TO SUCH INCOME, IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, I.E., UNDER RULE 8D OF THE I.T. RULES. HOWEVER, IN THE PRESENT CASE, THE ASSESSMENT ORDER DOES NOT EVINCE ANY SUCH SATISFACT ION OF THE AO REGARDING THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. AS SUCH, RULE 8D OF THE RULES WAS NOT APPROPRIATELY APPLIED BY THE AO AS CORRECTLY HELD B Y THE CIT(A). IT HAS NOT BEEN DONE BY THE AO THAT ANY EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE FOR EARNING ITS DIVIDEND INCOME. MERELY, AN ADHOC DISALLOWANCE WAS MADE. THE ONUS WAS ON THE AO TO ESTABLISH ANY SUCH EXPENDITURE. THIS ONUS HAS NOT BEEN DISCHARGED. IN CIT VS. HERO CYCLES (P&H) 323 ITR 518, UNDER SIMILAR CIRCUMSTANCES, IT WAS HELD THAT THE DISALLOWANCE U/S 14A OF THE ACT REQUIRES A CLEAR FI NDING OF INCURRING OF EXPENDITURE AND THAT NO DISALLOWANC E CAN BE MADE ON THE BASIS OF PRESUMPTIONS. IN ACIT VS. EICHER LTD., 101 TTJ (DEL) 369, THAT IT WAS HELD T HAT THE BURDEN IN ON THE AO TO ESTABLISH NEXUS OF EXPEN SES INCURRED WITH THE EARNING OF EXEMPT INCOME, BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT. IN MA RUTI UDYOG VS. DCIT, 92 ITD 119 (DEL), IT HAS BEEN HELD THAT BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT, THE ONUS TO ESTABLISH THE NEXUS OF THE SAME WITH THE EX EMPT INCOME, IS ON THE REVENUE. IN WIMCO SEEDLINGS LIM ITED VS. DCIT, 107 ITD 267 (DEL) , IT HAS BEEN HELD TH AT ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 11 THERE CAN BE NO PRESUMPTION THAT THE ASSESSEE MUCH HAVE INCURRED EXPENDITURE TO EARN TAX FREE INCOME. SIMILAR ARE THE DECISIONS IN: 1. PUNJAB NATIONAL BANK VS. DCIT 103 TTJ 908 (DEL); 2. VIDYUT INVESTMENT LTD., 10 SOT 284 (DEL); AND 3. D.J. MEHTA VS. ITO 290 ITR 238 (MUM.)(AT) CCI LTD. VS. JCIT 206 TAXMAN 563 (KAR.) HIGH COURT DISALLOWANCE ON NOTIONAL BASIS IS INVALID. WHEN NO EXPENDITURE IS INCURRED BY THE ASSESSEE IN EARNING DIVIDEND INCOME, NOTIONAL EXPENDITURE CANNOT BE DISALLOWED U/S 14A. CIT VS. METALMAN AUTO P. LTD., 336 ITR 434 (P&H) IT HAS BEEN HELD THAT DISALLOWANCE UNDER SECTION 14 A OF PRESUMPTIVE EXPENDITURE IN ABSENCE OF ACTUAL EXPENDITURE COULD NOT BE TAKEN INTO ACCOUNT. LD.AO HAS MENTIONED IN PARA 10 ON PAGE 3 OF THE ASSESSMENT ORDER THAT IF THE ASSESSEE HAD SURPLUS FUNDS THEN IT SHOULD NOT MAKE BORROWING FOR WORKING CAPITAL PURPOSES IN REPLY IT IS RESPECTFULLY SUBMITTED THAT LD. A.O. CANNOT STEP INTO THE SHOES OF THE ASSESSEE COMPANY AND DEC IDE AS TO HOW IT SHOULD RUN ITS BUSINESS. IT IS ASSESSEE COMP ANYS PREROGATIVE TO DECIDE AND TAKE DECISIONS ACCORDINGL Y AS TO HOW IT RUNS ITS BUSINESS. THEREFORE, THE ACTION OF LD. A.O. IN MAKING THE DISALLOWANCE OF EXPENDITURE ON ACCOUNT OF INTEREST U/S 14A READ WITH RULE 8D IN THE ABSENCE O F ANY CONTRARY EVIDENCE IS NOT SUSTAINABLE UNDER ANY CIRCUMSTANCES. IT IS FURTHER SUBMITTED THAT NO EVIDENCE HAS BEEN B ROUGHT BY LD. A.O. TO ESTABLISH THAT ANY INTEREST EXPENDITURE IN RELATION ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 12 TO INVESTMENTS MADE, WAS INCURRED BY THE ASSESSEE COMPANY. APPARENT IS REAL UNLESS PROVED OTHERWISE BY THE PERSON MAKING ALLEGATIONS THAT IT IS NOT SO. TH IS PRINCIPLE WAS RECOGNIZED BY HONBLE SUPREME COURT I N THE CASE OF P.S. BEDI & COMPANY 230 ITR 518. BURDEN TO PROVE THIS ALLEGATION WAS ALL THE MORE STRINGENT ON THE SHOULDERS OF LD. A.O. AS NO SUCH EXPENDITURE HAVE B EEN PAID IN EARLIER YEARS AND STOOD ACCEPTED BY THE REV ENUE. THEREFORE, WHEN THE BUSINESS EXPEDIENCY OF SUCH EXPENSES HAS BEEN RECOGNIZED BY THE REVENUE IN EARL IER YEARS AND NOW TO SAY IN THE SAME BREATH THAT INTERE ST WAS PAID FOR INVESTMENT PURPOSES IS NOTHING BUT SEL F DEFEATING ARGUMENT OF LD. A.O. RELIANCE IS PLACED ON FOLLOWING JUDICIAL DECISIONS: - (A) RULE 8D CANNOT BE RESORTED TO UNLESS SATISFACTION I S RECORDED HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. REI AGRO LTD. VS. DCIT (KOL.) NO S. 14A DISALLOWANCE IF SATISFACTION NOT RECORDED WITH REFERENCE TO A/CS. UNDER RULE 8D(2)(II) LOANS FOR SPECIFIC BUSINESS PURPOSES CANNOT BE INCLUDED. UNDE R RULE 8D(2)(II) & (III) INVESTMENTS WHICH HAVE NOT Y IELDED INCOME CANNOT BE INCLUDED, WHEREIN :- IN AY 2008-09, THE ASSESSEE INVESTED RS.103 CRORES IN SHARES ON WHICH IT EARNED TAX-FREE DIVIDENDS OF RS. 1.3 LAKHS. THE ASSESSEE CLAIMED THAT THOUGH ITS BORROWI NGS HAD INCREASED BY RS. 122 CRORES, THE SAID INVESTMEN TS WERE FUNDED OUT OF OWN FUNDS LIKE CAPITAL AND PROFI TS. IT CLAIMED THAT NO EXPENDITURE HAD BEEN INCURRED TO EA RN THE DIVIDENDS AND NO DISALLOWANCE U/S 14A COULD BE MADE. THE AO APPLIED RULE 8D AND COMPUTED THE DISALLOWANCE AT RS. 4 CRORE. ON APPEAL BY THE ASSES SEE, THE CIT(A) REDUCED THE DISALLOWANCE TO RS. 26 LAKH. ON CROSS APPEALS, HELD BY THE TRIBUNAL: (I) WHEN THE AO DOES NOT ACCEPT THE ASSESSEES CLAI M REGARDING THE NON-APPLICABILITY/ QUANTUM OF ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 13 DISALLOWANCE U/S 14A, HE HAS TO RECORD SATISFACTION ON THAT ISSUE. THIS SATISFACTION CANNOT BE A PLAIN SAT ISFACTION OR A SIMPLE NOTE. IT HAS IS TO BE DONE WITH REGARD TO THE ACCOUNTS OF THE ASSESSEE. ON FACTS, AS THERE IS NO SATISFACTION BY THE AO, NO DISALLOWANCE U/S 14A CAN BE MADE ( BALARAMPUR CHINI MILLS 140 TTJ (KOL) 73 FOLLOWED) RELAXO FOOTWEARS LTD VS. ADDL. CIT (2012) 50 SOT 102 (DEL.) SATISFACTION OF THE AO IS A PREREQUISITE TO INVOKE THE PROVISION OF RULE 8D. AO HAS TO RECORD HIS SATISFACTION ABOUT CORRECTNESS OR OTHERWISE OF COMPUTATION MADE BY THE AO, WHICH MUTATIS MUTANDIS MEANS THAT IF THE CONTENTION IS TH AT NO EXPENDITURE HAS BEEN INCURRED, IT HAS TO BE REBUTTE D. JK INVESTORS (BOMBAY) LTD VS. ACIT IN ITA NO.7858/MUM/2011 ITA NO.7851/MUM/2011 DATED 13-03-2013 OF ITAT, MUMBAI BENCH THE CONDITION PRECEDENT FOR THE AO TO INVOKE RULE 8 D IS THAT HE FIRST MUST EXAMINE THE ACCOUNTS OF ASSESSEE AND THEN RECORD BY GIVING COGENT REASONS WHY HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASSESSEES CL AIM. IN THE ABSENCE OF AN EXAMINATION OF ACCOUNTS AND THE RECORDING OF SATISFACTION, RULE 8D CANNOT BE INVOKE D. (B) NO EXPENSE DISALLOWANCE IF INVESTMENT IS OUT OF OWN FUNDS OR OWN FUNDS ARE MORE THAN INVESTMENTS RELIANCE IS ALSO PLACED ON THE JUDGEMENT OF HONBLE MUMBAI TRIBUNAL IN CASE OF GODREJ INDUSTRIES LTD. (ITA NO. 1090/MUM/2009) WHEREIN IT WAS HELD THAT ASSESSEE HAD SUFFICIENT OWN FUNDS IN THE FORM OF OW N CAPITAL AND RESERVES TO MAKE THE INVESTMENTS. THE TRIBUNAL ALSO CONSIDERED THE FUND FLOW STATEMENT PRESENTED TO OBSERVE THAT ASSESSEE HAD GENERATED SUFFICIENT FUNDS FROM ITS OWN OPERATIONS TO MAKE ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 14 INVESTMENTS AND THUS DISALLOWANCE U/S 14A IS NOT JUSTIFIABLE. RELIANCE IN THIS REGARD IS PLACED ON THE JUDGEMENT OF HONBLE MUMBAI ITAT IN CASE OF AVSHESH MERCANTILE P. LTD. VS DCIT (ITAT MUMBAI) (ITA NO. 5779/MUM/2006) WHEREIN IT HAS BEEN HELD THAT THE INVESTMENT IN PREMIUM NOTES HAD THE POTENTIAL OF GENERATING TAXABLE INCOME IN THE FORM OF SHORT TERM CAPITAL GAINS ETC. AND IT IS IMMATERIAL WHETHER SUC H TAXABLE INCOME WAS EARNED IN THE YEAR UNDER CONSIDERATION OR NOT. THE MERE POSSIBILITY OF AN INVESTMENT HAVING THE POTENTIAL OF EARNING TAXABLE INCOME WAS ADEQUATE TO RULE THAT DISALLOWANCE U/S 1 4A COULD NOT BE MADE. SIMILAR VIEW HAS BEEN EXPRESSED BY HONBLE CHENNAI ITAT IN CASE OF MSA SECURITY SERVICES PVT. LTD. VS ACIT (ITA NO. 1523/MDS.2012). CIT V. LUBI SUBMERSIBLES LTD.; ITA 868/2010 DATED 25.07.2011 (GUJ) IN THIS CASE IT HAS BEEN HELD THAT IF THE INVESTMEN T IN TAX FREE INCOME YIELDING SECURITIES IS MADE FROM INTERE ST FREE FUNDS, NO DISALLOWANCE CAN BE MADE UNDER SECTION 14 A. G.D. MET STEEL (P) LTD V. ASSTT. CIT: (2011) 47 SOT 62 (MUM) WHEN INVESTMENTS ARE MADE FROM OWN FUNDS, MERELY BECAUSE THE ASSESSEE HAD TO SUBSEQUENTLY BORROW THE FUNDS FOR BUSINESS USE, IT CANNOT BE SAID THAT THE BORROWED FUNDS HAVE BEEN USED FOR THE PURPOSES OF INVESTMENTS. THERE WERE NO SUCH DISALLOWANCE IN THE EARLIER YEARS AND THE INVESTMENTS ARE OLD INVESTMEN TS. IN THESE CIRCUMSTANCES, THE ASSESSEE WAS QUITE JUSTIFI ED IN CONTENDING THAT NO PART OF THE INTEREST PAID ON BORROWINGS COULD BE TREATED AS HAVING BEEN USED FOR THE PURPOSES OF INVESTMENTS, AND, ACCORDINGLY, NO DISALLOWANCE UNDER SECTION 14A COULD BE MADE IN RESPECT OF THE SAME. THE DISALLOWANCE IN RESPECT OF INTEREST WAS TO BE DELETED. [PARA 10] ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 15 LD.CIT(A) HAS ALLEGED IN PARA 10 AT PAGE15-16 OF THE APPELLATE ORDER THAT THE INVESTMENT WORTH RS. 3 5 CRORES WERE MADE THROUGH MIXED FUNDS (REFER PB 15 OF CIT(A) ORDER) OUT OF TOTAL WORTH INVESTMENT OF RS.2,09,00,03,543/- DURING THE YEAR, WHICH COMES TO 16.94% OF TOTAL INVESTMENTS MADE DURING THE YEAR (35,00,00,000/2,09,00,03,543 X 100)( REFER PB 16 OF CIT(A) ORDER) . HENCE, FOR THE PURPOSE OF DISALLOWANCE OF INTEREST UNDER RULE 8D, SAME PERCENTAGE IS TAKEN, CALCULATION OF WHICH IS MENTIONED AT PAGE 16 OF HIS ORDER . IN REPLY IT IS RESPECTFULLY SUBMITTED THAT IT IS NO T DISPUTED THAT MIXED FUNDS WERE USED FOR INVESTMENT WORTH RS. 35 CRORES. BUT, IF THERE ARE SUBSTANTIAL RESERVES IN A DDITION TO OTHER RESERVES IN THE BOOKS OF THE ASSESSEE COMPANY AND IT CAN BE PROVED THAT THE INVESTMENTS WERE OUT OF OWN FUNDS, NO DISALLOWANCE ON ACCOUNT OF INTEREST U/S 14A COUL D BE MADE. RELIANCE IS PLACED IN THE CASE OF HARRISONS MALAYALAM LTD VS. ACIT (2008) 19 SOT 363 COCHIN. ALSO, A DATE WISE CHART OF PROCEEDS FROM REDEMPTION RECEIVED IN THE BANK ACCOUNTS OF THE ASSESSEE COMPA NY AND THE DATES ON WHICH THE INVESTMENTS WERE MADE WAS FI LED BEFORE LD. CIT(A), SHOWING THE SOURCE OF INVESTMENT S MADE. THE SAME HAS BEEN ALSO ACCEPTED BY LD. CIT(A) IN HIS ORDER IN PARA 10 AT PAGE 15. THE SAME IS AGAIN BEING REPRODUCED HEREUNDER:- (A) AS REGARDS BIRLA MUTUAL FUND INVESTMENT AMOUNTING TO RS 14 CRORES, DATED 21-6-2007 PB 925 IS DETAILED STATEMENT OF INVESTMENTS MADE IN MUTUAL FUND AND TAX FREE BONDS DURING F.Y. 2007-08 TOGETHER WITH SOURCE OF INVESTMENTS WHEREIN SERIAL NO. 10 SHOWS THAT INVESTMENT IN BIRLA SUN MUTUAL FUND HAS BEEN MADE FROM STANDARD CHARTERED BANK CURRENT ACCOUNT. PB 934 TO 937 IS STANDARD CHARTERED BANK CURRENT ACCOUNT STATEMENT WHEREIN PB 936 SHOWS THAT ON 19-06-2007 TWO DEPOSITS OF RS 2.69 CRORES AND RS 11.48 CRORES WERE RECEIVED, BEING RECEIPTS FROM SALE OF SUGAR WHICH W ERE TRANSFERRED FROM EEFC ACCOUNT TO STANDARD CHARTERED BANK CURRENT ACCOUNT AND WITHDRAWALS MADE ON 21-06-2007 ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 16 AGGREGATING TO RS. 14 CRORES VIDE CHEQUE NOS. 37065 3, 370654, 370655 FOR INVESTMENT IN BIRLA SUN MUTUAL F UND WERE OUT OF THE ABOVE MENTIONED SALE PROCEEDS. PB 938 IS COPY OF BANK STATEMENT OF ICICI BANK CURRENT ACCOUNT, SHOWING THAT RS 6.25 CRORES WERE R EFUNDED BY BIRLA MUTUAL FUND TO THE ASSESSEE COMPANY AND HA VE BEEN CREDITED IN BANK ACCOUNT ON 30-07-2007, AS THE INVESTMENT ALLOTTED WERE ONLY TO THE TUNE OF RS. 7. 75 CRORES AS AGAINST RS. 14 CRORES APPLIED BY THE APPELLANT O N 21.6.2007. PB 1022 PB 1023 (SECOND HALF PORTION) IS THE COPY OF EMAIL FROM SHRI JP SILSWAL (ACCOUNTANT OF APPELLANT COMPANY) ASKING FOR RATES ON 19.6.2007 AND 9.7.2007 ON WHICH USD TRANSFER FROM EEFC ACCOUNT TO CURRENT ACC OUNT OF USD 28 LACS AND USD 6.50 LACS HAS BEEN MADE. AN D PB 1022 (FIRST HALF PORTION) IS EMAIL GIVING THE EXCHANGE RATES IN RESPONSE TO THE ABOVE EMAIL. PB 1024 IS THE COPY OF EMAIL FROM STANDARD CHARTERED BANK TO SHRI JP SILSWAL (ACCOUNTANT OF APPELLANT CO MPANY) SHOWING RELEVANT EXTRACT OF EEFC BANK STATEMENT WHE REIN ENTRIES AMOUNTING TO USD 28 LACS AND USD 6.50 LACS DATED 19-06-2007 AND USD 35 LACS DATED 09-07-2007 ARE APPEARING AS TRANSFER TO STANDARD CHARTERED BANK CU RRENT ACCOUNT. PB 1017 TO 1020 IS COPY OF STANDARD CHARTERED EEFC BOOK LEDGER ACCOUNT IN THE BOOKS OF ASSESSEE COMPAN Y WHEREIN PB 1017 SHOWS THAT ON 10-7-2007 A COMBINED ENTRY FOR TRANSFER ON 19.6.2007 AND 9.7.2007 FROM E EFC TO CURRENT ACCOUNT HAS BEEN MADE, ESTABLISHING THAT SU GAR PROCEEDS WERE TRANSFERRED TO CURRENT ACCOUNT IMMEDI ATELY BEFORE INVESTMENT IN BIRLA SUN MUTUAL FUND WAS MADE . THIS SHOWS THAT THE SOURCE OF FUNDS OF RS 14 CRORES WAS MADE OUT OF EXPORT PROCEEDS. IN EEFC A/C COMPANY CAN KEEP CERTAIN PERCENTAGE OF EXPORT REALISATIONS. ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 17 EVEN OTHERWISE ALSO, IF WE SEE REDEMPTION OUT OF INVESTMENTS UP TO THE DATE OF INVESTMENT IN VARIOUS BANKS, THEN, THE TOTAL REDEMPTION PROCEEDS RECEIVED WERE ` 41CRORES (`14.89CRORES+`18.78CRORES+`8.38CRORES), WHEREAS INVESTMENTS MADE WERE `27.25CRORES (`10CRORES +`9CRORES+`8.25CRORES). HENCE, INVESTMENTS PROCEEDS UTILISED FOR SUGAR PAYMENTS WAS ABOUT `14CRORES. IN ANY CASE, IF WE SEE IMMEDIATE REDEMPTION AND IMM EDIATE INVESTMENTS THEN ALSO RS 10.69 CRORES WAS FROM INTE REST FREE FUNDS (SUGAR SALE PROCEEDS) PLS SEE EXCEL SHEE T (B) AS REGARDS JM MUTUAL FUND AMOUNTING TO RS 14 CRORES , INVESTMENT DATED 12 -07-2007 PB 925 IS DETAILED STATEMENT OF INVESTMENTS MADE IN MUTUAL FUND AND TAX FREE BONDS DURING F.Y. 2007-08 TOGETHER WITH SOURCE OF INVESTMENTS WHEREIN SERIAL NO. 11 SHOWS THAT INVESTMENT IN JM MUTUAL FUND HAS BEEN MA DE FROM STANDARD CHARTERED BANK CURRENT A/C. PB 1022 1023 (SECOND HALF PORTION) IS THE COPY OF EMAIL DATED 12-07-2007 FROM SHRI JP SILSWAL (ACCOUNTANT O F APPELLANT COMPANY) ASKING FOR RATES ON 19.6.2007 AN D 9.7.2007 ON WHICH USD TRANSFER FROM EEFC ACCOUNT TO CURRENT ACCOUNT OF USD 28 LACS AND USD 6.50 LACS H AS BEEN MADE. AND PB 1022 (FIRST HALF PORTION) IS EMAIL GIVING THE EXCHANGE RATES IN RESPONSE TO THE ABOVE EMAIL. PB 1024 IS THE COPY OF EMAIL FROM STANDARD CHARTERED BANK TO SHRI JP SILSWAL (ACCOUNTANT OF APPELLANT CO MPANY) SHOWING RELEVANT EXTRACT OF EEFC BANK STATEMENT WHE REIN ENTRIES AMOUNTING TO USD 28 LACS AND USD 6.50 LACS DATED 19-06-2007 AND USD 35 LACS DATED 09-07-2007 ARE APPEARING AS TRANSFER TO STANDARD CHARTERED BANK CU RRENT ACCOUNT. PB 1025 IS ASSESSEES LETTER DATED 09-07-2007 TO STANDARD CHARTERED BANK REQUESTING FOR TRANSFER OF FUNDS AMO UNTING TO USD 35 LACS FROM EEFC ACCOUNT TO STANDARD CHARTE RED BANK CURRENT ACCOUNT. ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 18 PB 1017 TO 1020 IS STANDARD CHARTERED EEFC BOOK LEDGER ACCOUNT IN THE BOOKS OF ASSESSEE COMPANY WHEREIN PB 1018 SHOWS THAT ON 13-07-2007 A COMBINED ENTRY FOR TRANSFER OF FUNDS ON 19.6.2007 AND 9.7.2007 FROM EE FC TO CURRENT ACCOUNT HAS BEEN MADE, ESTABLISHING THAT SU GAR PROCEEDS WERE TRANSFERRED TO CURRENT ACCOUNT. THIS SHOWS THAT THE SOURCE OF FUNDS OF RS 14 CRORES WAS MADE O UT OF EXPORT PROCEEDS. PB 939 - 940 IS STANDARD CHARTERED BANK CURRENT ACCOUNT STATEMENT SHOWING ON 09-07-2007 AN AMOUNT OF USD 35LACS @ 40.30 BEING TRANSFERRED FROM EEFC ACCOUNT TO STANDARD CHARTERED BANK CURRENT ACCOUNT. (C) AS REGARDS OPTIMIX MUTUAL FUND AMOUNTING TO RS 1 CRORE, INVESTMENT DATED 24 -07-2007 PB 938 IS ICICI BANK CURRENT ACCOUNT STATEMENT SHOWING THAT ON 24-07-2007 AN INVESTMENT OF RS. 1 CRORE WAS MADE BY ASSESSEE COMPANY VIDE CHEQUE NO. 733882. PB 938 IS ICICI BANK CURRENT ACCOUNT STATEMENT SHOWING CREDIT OF RS.1,26,11,952/-, BEING AMOUNT RECEIVED A S INCOME TAX REFUND VIDE CHEQUE NO. 554479. PB 938 IS ICICI BANK CURRENT ACCOUNT STATEMENT SHOWING CREDIT OF RS.8,90,64,500/-, BEING AMOUNT RECEIVED F ROM REDEMPTION OF TATA MUTUAL FUND. PB 985 IS CREDIT VOUCHER NO. 32 DATED 13-07-2007 SHOWING AMOUNT OF RS.1,26,11,952/- RECEIVED AS REFUND FROM INCOME TAX DEPARTMENT ISSUED BY DEPUTY COMMISSIONER OF INC OME TAX. PB 986 IS COPY OF CHEQUE NO. 554479 DATED 29-06-2007 SHOWING THE AMOUNT OF REFUND OF RS.1,26,11,952/- IS SUED IN THE NAME OF ASSESSEE COMPANY BY DEPUTY COMMISSIONER OF INCOME TAX FOR A.Y. 1995-96. ALL THE ABOVE MENTIONED EVIDENCES PROVE THAT ASSESS EE COMPANY HAD SUFFICIENT FUNDS TO INVEST IN MUTUAL FU NDS FROM ITS OWN SOURCES. ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 19 (D) AS REGARDS OPTIMIX MUTUAL FUND AMOUNTING TO RS 3 CRORES ( OUT OF RS. 6.25 CRORES INVESTED), INVESTME NT DATED 31 -07-2007 PB 938 IS ICICI BANK CURRENT ACCOUNT STATEMENT SHOWING THAT ON 30.7.2007 RS 6.25 CRORES RECEIVED FROM REDE MPTION OF BIRLA MF AS MENTIONED IN BANK NARRATION ITSELF. PB 938 IS ICICI BANK CURRENT ACCOUNT STATEMENT SHOWING THAT ON 31.7.2007 RS 6.25 CRORES WERE INVESTED IN O PTIMIX DYNAMIC MULTI MULTIPLIER BY THE ASSESSEE COMPANY. THUS, THE ENTIRE INVESTMENTS WERE FUNDED OUT OF THE PROCEEDS FROM REDEMPTION OF BIRLA SUN MUTUAL FUND. ALSO, IT CAN BE SEEN FROM THE ORDER OF LD. CIT(A), HE ITS ELF HAS MENTIONED IN HIS ORDER AT PAGE 15 RS.3CRORES (WHICH IS RATHER `30 LACS, MISINTERPRETED AS `3CRORES BY LD. CIT(A)) INVESTED OUT OF RS. 6.25 CRORES. THIS INVESTMENT HAS BEEN MADE OUT OF REFUND FROM BI RLA MUTUAL FUND (`14 - `7.75 = `6.25). REMAINING IS FRO M THE LEFT OVER PROCEEDS FROM TATA MUTUAL FUND AND INCOME TAX REFUND. EVEN OTHERWISE, ON 30.7.2007 AND 31.7.2007, TOTAL WITHDRAWALS OF RS 30,17,160 WERE MADE (THIS CAN BE FULLY COVERED FROM OPENING BALANCE OF `1.26 CRORES BEFOR E CREDIT OF `6.25CRORES) (E) AS REGARDS SBI MUTUAL FUND AMOUNTING TO RS 2 CRORES , INVESTMENT DATED 30 -10-2007 PB 925 IS DETAILED STATEMENT OF INVESTMENTS MADE IN MUTUAL FUND AND TAX FREE BONDS DURING F.Y. 2007-08 TOGETHER WITH SOURCE OF INVESTMENTS WHEREIN SERIAL NO. 22 SHOWS THAT INVESTMENT AMOUNTING TO RS. 2 CRORES IN SBI MUTUAL FUND HAS BEEN MADE FROM STANDARD CHARTERED B ANK CURRENT ACCOUNT OUT OF SALE PROCEEDS RECEIVED FROM DEPB LICENCES. PB 946 IS ICICI BANK CURRENT ACCOUNT STATEMENT SHOWING CREDIT OF RS.64,59,888/- AS ON 29-10-2007, BEING AM OUNT RECEIVED AS INCOME TAX REFUND. ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 20 PB 996 IS CREDIT VOUCHER NO. 55 DATED 27-10-2007 SHOWING AMOUNT OF RS. 64,59,888/- RECEIVED AS REFUND FROM I NCOME TAX DEPARTMENT ISSUED BY DEPUTY COMMISSIONER OF INC OME TAX. PB 997 IS COPY OF PAY-IN- SLIP SHOWING BANK NAME, NAME OF THE ASSESSEE COMPANY, DATE OF DEPOSIT OF AMOUNT, AM OUNT DEPOSITED, ACCOUNT NO. OF THE ASSESSEE COMPANY, BRANCH OF BANK AT WHICH AMOUNT IS DEPOSITED AND SEAL OF THE B ANK. PB 998, 999 ARE COPIES OF CHEQUE NO. 554556 DATED 17-10- 2007 SHOWING THE AMOUNT OF REFUND OF RS.64,59,888/- ISSUED IN THE NAME OF ASSESSEE COMPANY BY DEPUTY COMMISSIONER OF INCOME TAX FOR A.Y. 2002-03. ALL THE ABOVE MENTIONED EVIDENCES PROVE THAT ASSESS EE COMPANY HAD SUFFICIENT FUNDS TO INVEST IN MUTUAL FU NDS FROM ITS OWN SOURCES. INVESTMENTS MADE TILL THIS DATE IS LESS THAN THE RE DEMPTION PROCEEDS OF INVESTMENTS REINVESTED AND RS 28 CRORES INTRODUCED FROM EEFC ACCOUNT. UTI BOND DIVIDEND RS. 98.60 LACS CREDITED ON 4.10.0 7, BALANCE RS. 40 LACS NO SOURCE, AND ITS NOT FROM DEP B . FURTHER ON 27.9.07 LOTS OF MUTUAL FUNDS HAVE BEEN R EDEEMED AMOUNTING TO RS. 13.70 CR AND RS. 13.25 CR INVESTED AND BAL. CAN BE UTILISED???PB 945 (F) AS REGARDS PRUDENTIAL ICICI MUTUAL FUND AMOUNTING TO RS 1 CRORE , INVESTMENT DATED 19 -12- 2007 PLS SEE PAGE 1080 OF PAPER BOOK (BANK STATEMENT OF STANDARD CHARTERED CURRENT A/C WHEREIN LOAN PROCEED S ARE ALSO DEPOSITED) IT IS SUBMITTED THAT THE AMOUNT OF ` 1CRORE WAS INV ESTED OUT OF `2CRORES ( ` 1CRORE + ` 1CRORE) RECEIVED FROM SH RI VINAY KUMAR AND SHRI SHANTI LAL JAIN ON ACCOUNT OF ENDOR SEMENT OF KEYMAN UNIT LINK ENDOWMENT INSURANCE POLICY, WHI CH ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 21 WAS TAKEN BY THE CORPORATION (ISEC) FOR THE ABOVE N AMED PERSONS VIDE MINUTES DATED 30-10-2007. THIS RECEIPT WAS OFFERED FOR TAXATION ALSO DURING THE IMPUGNED YEAR BY THE ASSESSEE COMPANY. PB.. IS COPY OF MINUTES OF STEERING COMMITTEE MEETING HELD ON 30-10-2007 OF ASSESSEE COMPANY ACKNOWLEDGI NG THAT KEYMAN UNIT LINK ENDOWMENT INSURANCE SHALL BE ENDORSED TO SHRI VINAY KUMAR AND SHRI SHANTI LAL J AIN ON THE RECEIPT OF PAYMENT OF `1CRORE EACH FROM THEM. PB.. IS CHEQUE NO. 395253 RECEIVED FROM SHRI VINAY KUMAR FOR KEYMAN INSURANCE POLICY TRANSFERRED, DEPO SITED IN BANK ON 19-12-2007. PB.. IS CHEQUE NO. 263453 DATED 18-12-2007 RECEIVED FROM SHRI SHANTI LAL JAIN FOR KEYMAN INSURANCE POLI CY TRANSFERRED DEPOSITED IN BANK ON 19-12-2007. EVEN OTHERWISE ALSO, IT IS SUBMITTED THAT TOTAL RED EMPTION OF INVESTMENTS UPTO 19-12-2007 AMOUNTED TO `135 CRORE S (` 107 CRORES FROM REDEMPTION OF INVESTMENTS + INTRODU CTION OF ` 28 CRORES FROM EEFC FOR PURCHASE OF INVESTMENT S) AND TOTAL INVESTMENTS MADE UPTO 19-12-2007 AMOUNTED TO ` 118 CRORES. THEREFORE, IT CAN BE SEEN THAT THE NET PROC EEDS WERE PUT INTO MIXED FUNDS. ALSO, IN THE SUBSEQUENT YEAR I.E. A.Y. 2009-10, LD. CIT (A) HAS GIVEN A FINDING AT PB 21 OF HIS ORDER THAT OUT OF ` 35 CRORES, THE ASSESSEE HAS BROUGHT FORWARD INVESTMENT S OF `10.75 CRORES AS AT 1.4.2008 AND THE BALANCE ` 24.2 5 CRORES HAD ALREADY BEEN REDEEMED IN THE LAST YEAR. FURTHER , THESE INVESTMENTS OF `10.75 CRORES REMAINED THROUGHOUT TH E YEAR AND WERE ALSO HELD BY THE ASSESSEE AS AT 31/3/2009. IN VIEW OF THE SAME, FOR WORKING OUT DISALLOWANCE UNDER RUL E 8D (2)(II), AVERAGE INVESTMENTS OF ` 10.75 CRORES ALON E ARE BEING TAKEN, SINCE USE OF MIXED FUNDS COULD BE HELD ONLY TO THAT EXTENT. THE REMAINING INVESTMENTS MADE DURING THE YEAR, TAXABLE OR EXEMPT, WERE MADE OUT OF REDEMPTIO N PROCEEDS OF INVESTMENTS MADE IN EARLIER YEARS AND T HUS HELD TO BE NOT FROM INTEREST BEARING FUNDS. ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 22 ALL THE INVESTMENT AMOUNTING TO ` 35 CRORES ARE INT O GROWTH FUND EARNING CAPITAL GAINS. RELIANCE IS PLACED ON FOLLOWING JUDGEMENTS (A) NEXUS IS NECESSARY INGREDIENT TO INVOKE THE PROVISIONS OF SECTION 14A OF THE ACT. IF NO SUCH NE XUS COULD BE MADE BY THE LD. AO IN RESPECT OF ANY SUCH EXPENDITURE IN RELATION TO EXEMPT INCOME, RULE 8D CANNOT BE RESORTED TO. ITO VS. KARNAVATI PETROCHMEM PVT. LTD (ITAT AHMEDABAD) HELD NO NEXUS HAS BEEN ESTABLISHED BY THE AO BETWEEN THE EXPENDITURE INCURRED BY THE ASSESSEE AN D THE TAX FREE INCOME EARNED BY HIM. FURTHER, AS THE INTEREST INCOME WAS MORE THAN INTEREST EXPENSE AND THE ASSESSEE WAS HAVING NET POSITIVE INTEREST INCOME, T HE INTEREST EXPENDITURE CANNOT BE CONSIDERED FOR DISALLOWANCE U/S 14A AND RULE 8D DCIT VS. MAHARASHTRA SEAMLESS LTD. (ITAT DEL.) ITA NO. 4063/2006 DATED 16.12.2010. NO S. 14A DISALLOWANCE OF INTEREST ON BORROWED FUND S IF AO DOES NOT SHOW NEXUS BETWEEN BORROWED FUNDS & TAX - FREE INVESTMENT. CIT VS. WINSOME TEXTILE INDUSTRIES LTD. [319 ITR 204 (P&H)] NO S. 14A DISALLOWANCE IN ABSENCE OF NEXUS BETWEEN INVESTMENT IN TAX-FREE SECURITIES & BORROWED FUNDS. CIT VS. MAXOPP INVESTMENT LTD. [347 ITR 272 (DEL)] NO S. 14A OR RULE 8D DISALLOWANCE WITHOUT SHOWING HOW ASSESSEES CALCULATION IS WRONG. ONLY REAL EXPENDITURE CAN BE DISALLOWED ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 23 ACIT VS. JUSTICE SAM P BARUCHA [ITA NO.3889/MUM/2011] NO S. 14A DISALLOWANCE IN ABSENCE OF LIVE NEXUS BETWEEN EXPENDITURE & TAX-FREE INCOME. CIT VS. GUJARAT POWER CORPORATION [TAX APPEAL NO. 1587 OF 2009 (GUJ.) (HIGH COURT)] THE ASSESSEE HAS SUFFICIENTLY EXPLAINED THAT A MAJO RITY OF THE INVESTMENT IN THE TAX-FREE SECURITY WAS MADE BE FORE THE BORROWING. THE ASSESSEE HAD DEMONSTRATED THAT I T HAD OTHER SOURCES OF INVESTMENT AND THAT NO PART OF THE BORROWED FUND COULD BE STATED TO HAVE BEEN DIVERTED TO EARN TAX FREE INCOME. AS BORROWED FUNDS WERE NOT US ED FOR EARNING TAX-FREE INCOME, APPLYING S. 14A WAS NO T JUSTIFIED. ACIT VS. SIL INVESTMENT LTD. [ITA NO. 2431/DEL/2010] S. 14A: ONUS IS ON AO TO SHOW EXPENDITURE IS INCURR ED TO EARN TAX-FREE INCOME. THE CONTENTION OF THE REVENUE THAT SOME EXPENDITURE , DIRECTLY OR INDIRECTLY, IS ALWAYS INCURRED FOR EARN ING TAX- FREE INCOME CANNOT BE ACCEPTED. THE BURDEN IS ON TH E AO TO ESTABLISH THE NEXUS OF THE EXPENDITURE INCURR ED WITH THE EARNING OF EXEMPT INCOME BEFORE MAKING ANY DISALLOWANCE U/S 14A. CIT VS. WALFORT SHARE & STOCK BROKERS PVT. LTD. [326 ITR 1 (SC)] FOR ATTRACTING S. 14A, THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE, WHICH IS ITS RELATIONSHIP WITH TH E TAX EXEMPT INCOME. GODREJ & BOYCE MFG. CO. LTD. VS. DCIT & ANR. [(2010) 328 ITR 81] S. 14A SUPERSEDES THE PRINCIPLE OF LAW THAT IN THE CASE OF A COMPOSITE BUSINESS EXPENDITURE INCURRED TOWARDS T AX- FREE INCOME COULD NOT BE DISALLOWED AND INCORPORATE S AN ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 24 IMPLICIT THEORY OF APPORTIONMENT OF EXPENDITURE BET WEEN TAXABLE AND NON-TAXABLE INCOME. ONCE A PROXIMATE CAUSE FOR DISALLOWANCE IS ESTABLISHED WHICH IS TH E RELATIONSHIP OF THE EXPENDITURE WITH INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME A DISALLOWANCE U/S 14A HAS TO BE EFFECTED. MINDA INVESTMENTS VS. DCIT [(2011) 138 TTJ 240 (DELHI)] S. 14A DISALLOWANCE HAS TO BE ON BASIS OF NEXUS BET WEEN INCOME & EXPENDITURE & NOT ON ADHOC ESTIMATE BASIS. ACIT VS. YATISH TRADING CO. P. LTD. (2011) 50 DTR 158 (MUM) (TRIB.) THE EXPRESSION IN RELATION TO IN S. 14A MEANS DOMINANT AND IMMEDIATE CONNECTION OR NEXUS WITH THE EXEMPT INCOME. IN ORDER TO DISALLOW EXPENDITURE U/S 14A, THERE MUST BE A LIVE NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE TAX-FREE INCOME . DISALLOWANCE CANNOT BE MADE ON PRESUMPTIONS AND ESTIMATION BY THE AO. NOTIONAL EXPENDITURE CAN BE APPORTIONED FOR THE PURPOSE OF EARNING INCOME IF THERE IS NO ACTUAL EXPENDITURE INCURRED IN RELATION TO THE TAX-FREE INCOME. ACIT V PUNJAB STATE COOP & MKTG: ITA NO. 548/CHD/2011 & 579/CHD/2011 DATED 30.09.2011 IT HAS BEEN HELD THAT IF THERE IS NO NEXUS BETWEEN THE BORROWED FUNDS AND INVESTMENTS MADE IN PURCHASE OF SHARES DISALLOWANCE U/S 14A IS NOT WARRANTED. (B) INTEREST ON LOANS FOR SPECIFIC TAXABLE PURPOSES TO BE EXCLUDED ACIT VS. BEST & CROMPTON ENGINEERING LTD (ITAT CHENNAI) HELD: RULE 8D(2)(II) REFERS TO EXPENDITURE BY WAY O F INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. IF LOANS HAVE BEEN ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 25 SANCTIONED FOR SPECIFIC PROJECTS/EXPANSION AND HAVE BEEN UTILIZED TOWARDS THE SAME, THEN OBVIOUSLY THEY COULD NOT HAVE BEEN UTILIZED FOR MAKING ANY INVESTM ENTS HAVING TAX-FREE INCOMES AND HAVE TO BE EXCLUDED FRO M THE CALCULATION TO DETERMINE THE DISALLOWANCE UNDER RULE 8D(2)(II) (C) INVESTMENTS ON WHICH CAPITAL GAINS TAX HAS BEEN PAID TO BE EXCLUDED SUNDARAM ASSET MANAGEMENT CO. LTD VS. DCIT (ITAT CHENNAI) , I.T.A. NO. 1774/MDS/2012 SOME OF THE INVESTMENTS MADE BY THE ASSESSEE ARE SH ORT TERM. SINCE ASSESSEE IS PAYING CAPITAL GAINS TAX ON SHORT TERM INVESTMENTS, RULE 8D WILL NOT APPLY ON THEM AN D THE AO IS DIRECTED TO RECOMPUTE DISALLOWANCE U/S 14 A READ WITH RULE 8D AFTER EXCLUDING SHORT TERM INVESTMENTS. IN VIEW OF THE ABOVE SUBMISSIONS AND IN VIEW OF THE JUDICIAL PRONOUNCEMENTS RELIED UPON, THE ENTIRE INTEREST AMO UNTING TO RS.64,60,071/- DESERVES TO BE DELETED. 6. ON THE OTHER HAND, LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFICER AND ALSO PLEADED THAT THE RELIEF GRANTED BY THE CIT (A) WAS NOT JUSTIFIED. HE ALSO SUBMITTED THAT IF THE ISSUE IS RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER THEN IT SHOULD BE RESTORED IN TOTO. 7. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS MADE INVESTMENT TO THE TUNE OF RS.2,18,16,75,912/-. IT IS CLAIMED THAT RS.2,16,09 ,61,251/- WAS RECEIVED FROM REDEMPTION OF INVESTMENTS. THE ASSESSEES CLA IM THAT INVESTMENTS WERE FROM THE PROCEEDS OF REDEMPTION OF OLD INVESTM ENTS AND CASH SURPLUS ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 26 GENERATED BY WAY OF INTEREST INCOME ON UTI BONDS AN D DIVIDEND INCOME ON MUTUAL FUNDS INVESTMENT. IT WAS ALSO CLAIMED TH AT THE INTEREST EXPENDITURE DEBITED IN THE PROFIT & LOSS ACCOUNT WA S WITH RESPECT TO EXPORT AND IMPORT OF SUGAR ALONE AND IT WAS NOT AT ALL REL ATED TO ANY INVESTMENT ACTIVITY AND IT WAS CLAIMED THAT NO INTEREST WAS IN CURRED TOWARDS THE INVESTMENT ACTIVITY. THE ASSESSEE HAS ALSO RELIED ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2001-02 WHEREIN THE ITATS VIEW THA T NO INTEREST HAS BEEN INCURRED TOWARDS INVESTMENT ACTIVITY HAS BEEN ACCRUED. ON THIS, WE HOLD THAT THE RULE 8D IS APPLICABLE FOR ASSESSMENT YEAR 2008-09 AND EARLIER DECISION ON THE DISALLOWANCE U/S 14A SHALL NOT HAVE IMPACT FOR APPLICABILITY OF RULE 8D FOR THE YEAR UNDER CONSIDE RATION. WE WOULD ALSO LIKE TO STATE THAT RULE 8D OF THE INCOME-TAX RULES, 1962 IS MANDATORY BY USING THE WORD SHALL IN SECTION 14A(2), THE LEGIS LATURE MADE IT MANDATORY FOR THE ASSESSING OFFICER TO DETERMINE THE AMOUNT O F EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME ACCORDING TO THE PRESC RIBED METHOD. PRIOR TO INSERTION OF RULE 8D OF THE RULES, THE ASSESSING OF FICERS WERE HAVING DISCRETION TO DETERMINE EXPENDITURE ON A REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT OF EXPENDITURE BETWEEN THE EXEMPT TAXABLE INCOME AND EXEMPT INCOME. NOW, THE LEGISLATURE HAS PROVIDED IN RULES THE METHOD OF APPORTIONMENT OF EXPENDITURE BETWEEN THE EXEMPT INC OME AND TAXABLE ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 27 INCOME, THE ASSESSING OFFICER AS WELL AS THE OTHER STATUTORY AUTHORITIES UNDER THE ACT ARE REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME ACCORDING TO METHOD PRESC RIBED IN THE RULES. HOWEVER, THE ASSESSING OFFICER CAN EMBARK UPON DETERMINATION OF AMOUNT OF EXPENDITURE INCURRED IN RELATION TO THE EXEMPT INCOME ONLY IF HE RECORDS TH E FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. IN THE INSTANT CAS E, THE ASSESSING OFFICER HAS WORKED OUT THE DISALLOWANCE BY HOLDING AS UNDER :- 9. DURING THE INSTANT YEAR, THE ASSESSEE HAS SHOWN INCOME OF RS.2,37,46,339 BY WAY OF INTEREST ON UTI BONDS AND RS.55,23,351 AS DIVIDEND ON MUTUAL FUNDS WHICH WAS CLAIMED AS EXEMPT UNDER S ECTION 10 OF THE INCOME TAX ACT. VIDE QUESTIONNAIRE DATED 31/8/2010, THE AS SESSEE WAS REQUIRED TO EXPLAIN WHY DISALLOWANCE U/S 14A MAY NOT BE MADE. 10. THE ASSESSEE HAS MAINLY SUBMITTED THAT THE ASSE SSEE HAS HUGS SURPLUS AND INTEREST FREE FUNDS AVAILABLE AT ITS DISPOSAL W HICH ARE MORE THAN THE INVESTMENTS MADE BY THE ASSESSEE. IT HAS ALSO BEEN SUBMITTED BY THE ASSESSEE THAT INTEREST EXPENDITURE IS INCURRED IN RELATION T O BUSINESS OF THE ASSESSEE AND NOT IN RELATION TO INVESTMENT ACTIVITY. THE SUBMISS IONS OF THE ASSESSEE HAVE BEEN CONSIDERED. HOWEVER, THE SAME IS NOT ACCEPTABL E. IF THE ASSESSEE HAD SURPLUS FUNDS THEN IT SHOULD NOT MAKE BORROWINGS FO R WORKING CAPITAL PURPOSES. THEREFORE EXPENSES ATTRIBUTABLE TO EARNING OF EXEMP T INCOME ARE WORKED OUT AS UNDER : I. EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME NIL II. IN CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FORMULA, A: AMOUNT OF INTEREST EXPENDITURE OTHER THAN INCLUDED IN CLAUSE (I) A X B C = RS 7,68,45,729 X 250,20,59,294 498,23,64,227 = 385,90,629 ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 28 B: AVERAGE 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 FIRST AND LAST DATE OF THE ASSESSMENT YEAR. C: AVERAGE TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON A = INTEREST RS.7,68,45,729 B = AVERAGE INVESTMENTS = 31.3.2007 : 249,17,01,962 31.3.2008 : 251,24,16,625 B = AVERAGE INVESTMENTS = 250,20,59,294 C = AVERAGE TOTAL ASSETS = 31.3.2007 TOTAL ASSETS 322,43,39,582 31.3.2008 TOTAL ASSETS 674,03,88,872 AVERAGE TOTAL ASSETS = 498,23,64,227 III. 0.5% PERCENT OF THE AVERAGE 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 1/4/2007 AND 31/3/2008 AVERAGE INVESTMENTS AS CALCULATED ABOVE : 250,20,59,294 0.5% X 250,20,59,294 = 1,25,10,296 TOTAL 5,11,00,925 THE TOTAL DISALLOWANCE ON THIS ACCOUNT COMES TO RS.5,11,00,925/- . THE SAME IS THEREFORE, BEING DISALLOWED AND ADDED TO THE TOTAL INCOME. FROM THE SUBMISSIONS OF ASSESSEE AND FROM THE ORDER S OF THE REVENUE AUTHORITIES, WE FIND THAT THE ASSESSING OFFICER HAS NOT CONSIDERED ALL ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 29 RELEVANT FACTS ON RECORD AND HAS ALSO NOT VERIFIED THE CLAIM OF THE ASSESSEE WITH REGARD TO THE SOURCE OF INVESTMENT. TO REACH AT THE CONCLUSION THAT HE WAS NOT SATISFIED WITH THE CLAIM OF ASSESSEE WITH R EGARD TO EXPENSES INCURRED TO EARN EXEMPTED INCOME, THEN ONLY HE CAN INVOKE RULE 8D FOR WORKING OUT THE DISALLOWANCE. THEREFORE, IN OUR CO NSIDERED VIEW, THIS ISSUE REQUIRES A RELOOK AT THE LEVEL OF ASSESSING O FFICER. THE SAME IS RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR D ECIDING DE NOVO AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE ASSE SSEE. 7.1 SIMILARLY, IN THE CASE OF DISALLOWANCE WITH REG ARD TO THE ADMINISTRATIVE AND OTHER EXPENSES BEING 0.5% OF AVE RAGE VALUE OF INVESTMENT, THE ASSESSEES CLAIM IS THAT AVERAGE VA LUE OF INVESTMENT TAKEN BY THE ASSESSING OFFICER WAS RS.2,50,20,59,294/- IN STEAD OF RS.41,88,44,725/- WHICH IS ONLY 16.94% OF THE AVERA GE VALUE OF INVESTMENT TAKEN BY THE ASSESSING OFFICER. THEREFO RE, FOR THIS ASPECT ALSO, WE SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL DECIDE BOTH THESE DISALLOWANCES AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND CONS IDERING THE LEGAL POSITION ON THESE ISSUES. 8. GROUND NO.2 IN ASSESSEES APPEAL IS WITH REGARD TO THE SUSTENANCE OF DISALLOWANCE OF RS.8,24,125/- WHERE THE TDS DEDUCTE D DURING THE ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 30 FINANCIAL YEAR 2007-08 AND DEPOSITED ON OR BEFORE D UE DATE OF FILING THE RETURN. 9. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE. THE ASSESSEE HAS DEDUCTED TDS OF RS.8,21,625/- U/S 194C AND RS.2,500 /- U/S 194J OF THE ACT WHICH HAVE BEEN DEPOSITED ON 16.06.2008 AND 31. 05.2008 RESPECTIVELY. AFTER HEARING BOTH THE SIDES, WE HOL D THAT THIS ISSUE HAS BEEN SETTLED BY VARIOUS DECISIONS OF HIGH COURTS. THE H ON'BLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. VIRGIN CREATIONS IN IT A NO.302 OF 2011 HAS HELD THAT THE PROVISO TO SECTION 40(A)(IA) SHOULD B E DEEMED TO HAVE COME INTO FORCE FROM THE RETROSPECTIVE OPERATION FROM 1. 4.2005. THE RELIANCE WAS ALSO PLACED BY LD. AR ON THE DECISION OF HON'BL E DELHI HIGH COURT IN THE CASE OF CIT VS. TALBROS (P) LTD. IN ITA NO.218/ 2013 DATED 06.09.2013 WHEREIN THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. THE RELEVANT PARA WHICH STATES THE FACTS OF THE CASE ARE IN PARA 2 AND THE SAME IS REPRODUCED BELOW :- 2. THE CONTENTION OF THE REVENUE IS THAT THE INCOM E TAX APPELLATE TRIBUNAL (TRIBUNAL, FOR SHORT) IN THEIR I MPUGNED ORDERS DATED 21 ST MAY, 2012 (IN THE CASE OF NARESH KUMAR) AND 8 TH OCTOBER, 2012 (IN THE CASE OF TALBROS (P) LTD.), H AS ERRED IN HOLDING THAT THE AMENDMENTS MADE TO SECTIO N 40(A)(IA) OF THE ACT BY FINANCE ACT, 2010 SHOULD BE GIVEN RETROSPECTIVE EFFECT. THE CONTENTION OF THE REVENUE IS THAT THESE AMENDMENTS ARE W.E.F. 1 ST APRIL, 2010 AND ARE NOT RETROSPECTIVE AND, THEREFORE, NOT APPLICABLE TO THE ASSESSMENT YEAR IN QUESTION I.E. 2008-09. ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 31 THE DECISION OF HON'BLE DELHI HIGH COURT IN PARAS 2 6 & 27 READ AS UNDER:- 26. PRINCIPLE OF MATCHING WHICH IS DISTURBED BY SEC TION 40(A)(IA) OF THE ACT, MAY NOT MATERIALLY BE OF CONS EQUENCE TO THE REVENUE WHEN THE TAX RATES ARE STABLE AND UN IFORM OR IN CASES OF BIG ASSESSEES HAVING SUBSTANTIAL TURNOV ER AND EQUALLY HUGE EXPENSES AS THEY HAVE NECESSARY CUSHIO N TO ABSORB THE EFFECT. HOWEVER, MARGINAL AND MEDIUM TAXPAYERS, WHO WORK AT LOW G.P. RATE AND WHEN EXPEN DITURE WHICH BECOMES SUBJECT MATTER OF AN ORDER UNDER SECT ION 40(A)(IA) IS SUBSTANTIAL, CAN SUFFER SEVERE ADVERSE CONSEQUENCES AS IS APPARENT FROM THE CASE OF NARESH KUMAR. TRANSFERRING OR SHIFTING EXPENSES TO A SUBS EQUENT YEAR, IN SUCH CASES, WILL NOT WIPE OFF THE ADVERSE EFFECT AND THE FINANCIAL STRESS. NEVERTHELESS THE SECTION 40(A )(IA) HAS TO BE GIVEN FULL PLAY KEEPING IN MIND THE OBJECT AND P URPOSE BEHIND THE SECTION. AT THE SAME TIME, THE PROVISION CAN BE AND SHOULD BE INTERPRETED LIBERALLY AND EQUITABLE S O THAT AN ASSESSEE SHOULD NOT SUFFER UNINTENDED AND DELETERIO US CONSEQUENCES BEYOND WHAT THE OBJECT AND PURPOSE OF THE PROVISION MANDATES. CASE OF NARESH KUMAR IS NOT ONE OF RARE CASES, BUT ONE OF SEVERAL CASES AS WE FIND THA T SECTION 40(A)(IA) IS INVOKED IN LARGE NUMBER OF CASES. 27. ONE IMPORTANT CONSIDERATION IN CONSTRUING A MACHINERY SECTION IS THAT IT MUST BE SO CONSTRUED S O AS TO EFFECTUATE THE LIABILITY IMPOSED BY THE CHARGING SE CTION AND TO MAKE THE MACHINERY WORKABLE. HOWEVER, WHEN THE MACHINERY SECTION RESULTS IN UNINTENDED OR HARSH CONSEQUENCES WHICH WERE NOT INTENDED, THE REMEDIAL OR CORRECTION ACTION TAKEN IS NOT TO BE DISREGARDED BU T GIVEN DUE REGARD. THE HON'BLE HIGH COURT HAD HELD THE AMENDMENT TO BE INTERPRETED LIBERALLY AND RETROSPECTIVE. IN VIEW OF THESE, WE ALLOW THIS GROUND OF ASSESSEES APPEAL. ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 32 10. GROUND NO.3 IN THE ASSESSEES APPEAL WAS NOT PR ESSED AND THE SAME IS DISMISSED AS NOT PRESSED. 10. GROUND NO.4 IS GENERAL IN NATURE AND DOES NOT R EQUIRE ANY ADJUDICATION, HENCE, THE SAME IS DISMISSED. 11. GROUND NO.1 IN REVENUES APPEAL IS WITH REGARD TO THE DELETION OF ADDITION OF RS.98,33,833/- MADE ON ACCOUNT OF LOSS ON SALE OF INVESTMENT. 12. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE. THI S ISSUE HAS BEEN DEALT BY THE CIT (A) IN PARA 5 OF HIS ORDER, WHICH READ A S UNDER :- 5. GROUND OF APPEAL NO.3 RELATES TO ADDITION OF RS.98,33,833 ON ACCOUNT OF LOSS ON SALE OF INVESTME NT. THE APPELLANT HAS SUBMITTED THAT IT HAS SHOWN IN THE PR OFIT ON SALE OF INVESTMENT (NET) RS.9,31,58,877 IN ITS PROF IT AND LOSS ACCOUNT. THE APPELLANT HAS SUBMITTED THAT THE ABOVE AMOUNT IS NET OF LOSS ON SALE OF INVESTMENT OF RS.98,33,833 HAS BEEN DISALLOWED WITHOUT CONFRONTIN G THE APPELLANT. I HAVE CAREFULLY GONE THROUGH THE SUBMISSIONS OF TH E APPELLANT AND FOUND THAT ITS CONTENTION THAT LOSS O N SALE OF INVESTMENT HAS ALREADY BEEN CONSIDERED AS IT HAS SH OWN NET PROFIT ON SALE OF INVESTMENT IS CORRECT. IN THE COM PUTATION OF INCOME, THE APPELLANT WHILE COMPUTING THE BUSINE SS INCOME HAS EXCLUDED NET PROFIT ON SALE OF INVESTMEN T AND HAS ALSO CONSIDERED THE SAME UNDER THE HEAD CAPITAL GAINS. NO SEPARATE DISALLOWANCE OF RS.98,33,833 IS REQUIRE D TO BE MADE. HENCE, DISALLOWANCE OF RS.98,33,833 IS HEREBY DELETED. AFTER HEARING BOTH THE SIDES, WE FIND THAT THE REVE NUE HAS NOT CONTROVERTED THE FINDINGS OF THE CIT (A) THAT THE LOSS ON THE SA LE OF INVESTMENT HAS BEEN ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 33 EXCLUDED IN COMPUTATION OF BUSINESS INCOME AND THE SAME HAS BEEN CONSIDERED UNDER THE HEAD CAPITAL GAINS. IN SUCH A SITUATION, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT (A) AND THE SAME IS SUSTAINED ON THIS GROUND. ACCORDINGLY, THIS GROUND OF REVENUES APPE AL IS DISMISSED. 13. IN THE GROUND NO.3, THE REVENUE HAS RAISED THE DELETION OF ADDITION OF RS.10,79,68,722/- MADE ON ACCOUNT OF VALUATION OF C LOSING STOCK. 14. THIS ISSUE HAS BEEN DECIDED BY THE CIT (A) IN P ARA 11 WHICH READ AS UNDER :- 11. GROUND NO 9 RELATES TO ADDITION OF RS.10,79,68 ,722 TO THE VALUE OF CLOSING STOCK OF THE APPELLANT. DURING THE COURSE OF APPELLANT PROCEEDINGS, THE APPELLANT STAT ED THAT THE HON'BLE ITAT IN AY 1993-94 HAS DECIDED THIS ISSUE I N FAVOUR OF THE APPELLANT. THE ISSUE IS THAT THE APPELLANT VALUED THE CLOSING STOCK ON COST OR NET REALIZABLE VALUE WHICHEVER IS LOWER. TH IS METHOD OF VALUATION OF CLOSING STOCK WAS FOLLOWED BY THE A PPELLANT IN ASSESSMENT YEAR 1993-94 AND HAD BEEN ACCEPTED BY THE TRIBUNAL. SINCE THE FACTS OF THE CASE ARE IDENTICAL TO THE FACTS OF EARLIER YEARS AND SINCE THE APPELLANT IS FOLLOWI NG THE METHOD OF VALUATION CONSISTENTLY ON COST OR NET REA LIZABLE VALUE WHICHEVER IS LOWER, WHICH IS A PRESCRIBED MET HOD UNDER AS -2 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, THE ADDITION ON ACCOUNT OF CL OSING STOCK OF RS.10,79,68,722 IS HEREBY DELETED. THE ASSESSEE IS VALUING CLOSING STOCK ON COST OR NE T REALIZABLE VALUE WHICHEVER IS LOWER SINCE 1993. THE ISSUE WAS CONTE STED IN ASSESSMENT YEAR 1993-94 UP TO THE HON'BLE DELHI HIGH COURT WHE REIN THE CONTENTION OF THE ASSESSEE HAS BEEN ACCEPTED. LD. AR HAS SUBM ITTED A COPY OF THE ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 34 ORDER OF THE HON'BLE DELHI HIGH COURT IN ITA NO.645 /2005 & ORS. WHEREIN THE CONTROVERSY HAS BEEN DECIDED IN FAVOUR OF THE A SSESSEE. THE QUESTION OF LAW FRAMED BY HON'BLE HIGH COURT VIDE ORDER DATE D 30.01.2012 IS AS UNDER :- WHETHER INCOME TAX APPELLATE TRIBUNAL WAS CORRECT IN LAW IN DELETING THE ADDITION OF RS.3,64,584/- MADE BY THE ASSESSING OFFICER TO THE INCOME OF ASSESSEE ON ACCO UNT OF UNDER VALUATION OF CLOSING STOCK BY REJECTING THE C HANGE MADE BY THE ASSESSEE IN THE METHOD OF VALUATION OF CLOSING STOCK? THIS QUESTION HAS BEEN ANSWERED BY HON'BLE HIGH COU RT IN PARAS 19 & 20 WHICH READ AS UNDER :- 19. THE THIRD COMMON QUESTION RAISES A SEPARATE IS SUE. THE QUESTION IS WHETHER THE REIMBURSEMENT PAYABLE B Y THE MANUFACTURES SHOULD BE INCLUDED IN THE NET REALIZAB LE VALUE. THIS IS A DIFFERENT ASPECT AND RELATES TO CO MPUTATION OF NET REALIZABLE VALUE. WE HAVE QUOTED THE REASONI NG GIVEN BY THE ASSESSING OFFICER IN THE ASSESSMENT OR DER IN THE ASSESSMENT YEAR 1993-94. HE HAS STATED THAT THE INTERNATIONAL PRICE OF SUGAR WAS LOWER THAN THE DOM ESTIC PRICE AND THEREFORE WHEN THE RESPONDENT/ASSESSEE HA D INCURRED LOSSES ON EXPORTS. THE ASSESSING OFFICER H AS NOT DISPUTED OR STATED THAT THE INTERNATIONAL PRICE CAN NOT BE THE CRITERIA TO COMPUTE OR CALCULATE THE MARKET VALUE. INTERNATIONAL PRICE IS NOT DISPUTED. THIS IS NOT TH E CONTENTION OF THE REVENUE. THE ASSESSING OFFICER IN HIS REASO NING HAS MENTIONED THAT THE RESPONDENT ASSESSEE WAS RECEIVIN G REIMBURSEMENT OF THE LOSS ON EXPORT FROM THE SUGAR MANUFACTURERS AND LOSSES WERE REIMBURSED. THEREFORE , THE RESPONDENT/ASSESSEE SHOULD COMPUTE THE CLOSING STOC K ON COST BASIS I.E. NET REALIZABLE VALUE PLUS REIMBURSE MENT, WHICH IS NOTHING BUT THE COST PRICE. ITA NO.2103/DEL./2012 ITA NO.1671/DEL./2012 35 20. WE HAVE CONSIDERED THE SAID CONTENTION OF THE REVENUE BUT ARE UNABLE TO AGREE WITH THEM FOR SEVER AL REASONS. THE CIT (A) HAS GRANTED THE RELIEF BY RELYING ON TH E DECISION OF ITAT WHICH HAS BEEN CONFIRMED BY HON'BLE HIGH COURT. TH EREFORE, IN OUR CONSIDERED VIEW, THERE IS NO FAULT IN THE ORDER OF THE CIT (A) AND THE SAME IS SUSTAINED ON THIS ISSUE. THIS GROUND OF REVENUE S APPEAL IS DISMISSED. 15. GROUND NO.4 IS GENERAL IN NATURE AND DOES NOT R EQUIRE ANY ADJUDICATION, HENCE, THE SAME IS DISMISSED. 16. IN THE RESULT, THE APPEAL OF THE REVENUE AND TH E APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 15 TH DAY OF SEPTEMBER, 2014. SD/- SD/- (I.C. SUDHIR) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 15 TH DAY OF SEPTEMBER, 2013 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-XV, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.