ACIT, Faridabad V. M/s Laksons Footwear P. Ltd., Faridabad

ITA 2118/DEL/2011

• Counselvise Citation: 211820114 RSA 2011
• Duration Of Justice: 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-03-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 06-02-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 29-04-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: Y KAKKAR
• Assessee Lawyers: MK MUTHAM
• Keywords: Opportunity of being heard; Earning of tax free income; Source of fund; Commercial expediency
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: D NEW DELHI BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI B.C.MEENA, ACCOUNTANT MEMBER ITA NO: 2117 & 2118/DEL/2011 A.Y. : 2006-07 & A.Y.: 2007-08 ACIT, CIRCLE II VS. M/S LAKSONS FOOTWEAR P.LTD. NEW DELHI PLOT NO.131 SECTOR 24 FARIDABAD (APPELLANT) (RESPONDENT) APPELLANT BY : SMT. Y.KAKKAR, SR.D.R.. RESPONDENT BY : SHRI MK MUTHAM, ADV. O R D E R PER DIVA SINGH, JUDICIAL MEMBER THESE ARE APPEALS FILED BY THE REVENUE AGAINST S EPARATE ORDERS DT. 20 TH JANUARY, 2011 PERTAINING TO A.Y. 2006-07 AND 2007 -08 OF CIT(A), FARIDABAD ON IDENTICAL ISSUES. IT WAS A CO MMON STAND OF THE PARTIES BEFORE THE BENCH THAT THE ARGUMENTS FOR BOT H THE APPEALS ON BEHALF OF THE ASSESSEE AND THE DEPARTMENT WILL BE S IMILAR EXCEPT THE FACT THAT IN 2006-07 AY IN ITA 2117/DEL/11 NO DIVIDEND I NCOME HAS BEEN EARNED BY THE ASSESSEE. FOR READY REFERENCE WE REP RODUCE GROUNDS RAISED IN ITA 2117/DEL/11. I TA 2117 & 2118/DEL/2011 PAGE 2 OF 15 M/S LAKSONS FOOTWEAR P.LTD. A.Y. 2006-07 & 2007-08 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD.CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETIN G DISALLOWANCE MADE BY THE A.O. OF INTEREST LIABILIT Y AMOUNTING TO RS. 19,32,077/- BY INVOKING PROVISIO NS OF SECTION 14A OF THE INCOME TAX ACT, 1961 TAKING A VI EW CONTRARY TO JUDGEMENTS PRONOUNCED BY VARIOUS COURTS (I) 286 ITR 1 (P&H), (II) 105 ITD 669 (ITAT MUMBAI G BE NCH), (III) 89 ITD 44 (ITAT CALCUTTA C BENCH), (IV) 97 IT J 493 (ITAT MUMBAI BENCH), (V) 91 ITD 311 (ITAT HYDERABAD B BEN CH), WHEN THE DIVIDEND INCOME FROM SHARES OF M/S LAKHANI INDIA LTD. ARE NOT FORMING PART OF THE TOTAL INCOME BY VIRTUE OF SECTION 10(33) OF THE INCOME TAX ACT AND WHEN TH E FINANCIAL BURDEN INCURRED BY THE ASSESSEE FOR ACQUI RING THESE SHARES WOULD HAVE BEEN PROPORTIONATELY DISALL OWED BY INVOKING PROVISIONS OF SECTION 14A OF THE INCOM E TAX ACT, 1961. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD.CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETIN G DISALLOWANCE MADE BY THE A.O. OF INTEREST LIABILIT Y AMOUNTING TO RS. 19,32,077/- BY INVOKING PROVISIO NS OF SECTION 14A OF THE INCOME TAX ACT, 1961 IN CONTRAVE NTION OF HONBLE PUNJAB AND HARYANA HIGH COURT JUDGEMENT IN THE CASE OF ABHISHEK INDUSTRIES LTD. REPORTED IN 286 IT R 1 (P&H) AS PER WHICH NO NEXUS IS REQUIRED TO BE PROVE D. 3. THAT THE APPELLANT CRAVES FOR THE PERMISSION TO ADD, DELETE OR AMEND THE GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING OF APPEAL. 2. THE RELEVANT FACTS ARE THAT THE A.O. OBSERVED TH AT AS PER THE BALANCE SHEET OF THE ASSESSEE THE ASSESSEE HAD MADE INVESTMENT OF RS.5,81,58,214/- WITH M/S LAKHANI INDIA LTD., BY WA Y OF INVESTMENT IN 670416 EQUITY SHARES. IT WAS FURTHER OBSERVED THAT THE ASSESSEE BESIDES SHARE CAPITAL AND RESERVES AND SURPLUS, HAS TAKEN S ECURED LOAN FROM BANK OF INDIA, FARIDABAD FOR RS.1,57,20,774/- AS ON 31.3.2006. DURING THE YEAR THE ASSESSEE HAD PAID INTEREST ON LOAN TO BANK OF INDIA AMOUNTING TO RS.19,32,077/-. THE ASSESSEE WAS REQUI RED TO EXPLAIN VIDE ORDER SHEET ENTRY DT.13.10.2008 AS TO WHY PROPORTIO NATE INTEREST IN I TA 2117 & 2118/DEL/2011 PAGE 3 OF 15 M/S LAKSONS FOOTWEAR P.LTD. A.Y. 2006-07 & 2007-08 RESPECT OF INVESTMENT IN SISTER CONCERN/GROUP COMP ANY MAY NOT BE DISALLOWED OUT OF INTEREST DEBITED TO PROFIT AND LO SS ACCOUNT . THE ASSESSEES REPLY DT. 22.10.2008 IS INCLUDED AT PAG E 2 OF THE ASSESSMENT ORDER. THE ASSESSEE IN ITS REPLY STATED THAT THE I NVESTMENTS ARE MADE IN THE EARLIER YEARS AND HAS BEEN ENVISAGED IN A COMPA NY MANUFACTURING SHOES WITHIN THE GROUP AS SUCH THE INVESTMENT WAS F OR THE BUSINESS PURPOSES AND THE JUDGEMENT OF THE APEX COURT IN S.A .BUILDERS LTD. VS. CIT (2006), 206 CTR 631 (S.C.) IS APPLICABLE. RELI ANCE WAS PLACED UPON ORDERS IN ASSESSEES FAVOUR FOR 2003-04 AND 2004-05 A.YS WHICH WERE DECIDED BY THE CIT(A) IN ASSESSEES FAVOUR. THE A. O. OBSERVED THAT THE ASSESSEE HAD INCURRED LIABILITY FOR MAKING INVESTME NT IN M/S LAKHANI INDIA LTD. AND PAYMENT OF INTEREST OF RS.19,32,07 7/-; FOR SECURED LOAN OF RS.1,57,20,774/- OUT OF THE TOTAL FUND OF RS.4,9 8,64,453/- AS ON 31.3.2006 HAS BEEN NECESSITATED. THE FUNDS INVESTE D IN THE SISTER CONCERN IT WAS OBSERVED WERE ALSO A PART OF THE BUS INESS FUNDS WHICH ARE LOCKED IN INVESTMENT AND THUS CARRY A COST OF INTER EST BECAUSE THE ASSESSEE HAD BORROWED FUNDS ON INTEREST TO MEET OUT THE BUSINESS REQUIREMENTS. TAKING INTO CONSIDERATION THE JUDGEM ENT OF P&H HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES LTD. REPOR TED IN 286 ITR 1 (P&H) AND THE ORDER OF THE TRIBUNAL KOLKATA A BENCH IN K.V.TRADING CO.LTD. VS DCIT IN ITA NO.924/KOL/2003 FOR A.Y. 199 8-99 ORDER DT. FEB.,2004 THE A.O. WAS OF THE VIEW THAT THE ASSESSE E HAS MAINTAINED COMPOSITE ACCOUNT OF EXPENDITURE FOR BOTH THE EXEMP TED INCOME AND I TA 2117 & 2118/DEL/2011 PAGE 4 OF 15 M/S LAKSONS FOOTWEAR P.LTD. A.Y. 2006-07 & 2007-08 NON-EXEMPTED INCOME THEN IT IS FOR THE ASSESSEE TO PROVE THAT THE EXPENDITURE INCURRED BY HIM WAS IN RELATION TO NON- EXEMPTED INCOME AS IT IS THE ASSESSEE WHICH WAS CLAIMING DEDUCTION. T HIS IS SO BECAUSE ALL MATERIAL FACTS ARE IN HIS SPECIAL AND EXCLUSIVE KNO WLEDGE. ACCORDINGLY IN THE CIRCUMSTANCES IT IS FOR THE ASSESSEE TO PROVE T HAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS IN RELATION TO NON-EXE MPTED INCOME RELYING UPON ITAT KOLKATA BENCH IN THE CASE OF DCIT VS. S.G .INVESTMENTS & INDUSTRIES LTD. (89 ITD 44). HE WAS OF THE VIEW TH AT THE EXPRESSION IN RELATION TO MEANS TO BRING INTO ASSOCIATION OR CO NNECTION WITH. THIS TERM IS EQUIVALENT TO CONCERNING WITH OR PERTAI NING TO. THE TERM IN RELATION TO HAS BROADER MEANING THEN THE WORD F OR THE PURPOSE OF EARNING INCOME AS USED IN SEC.57 (III) OF THE ACT. THUS HOLDING THAT THE AMOUNT OF INVESTMENT OF RS.5,81,58,214/- WITH M/S L AKHANI INDIA LTD., IS MORE THAN THE SUM TOTAL OF SOURCE OF FUNDS OF R S.4,98,64,453/-. IT WAS CLEAR THAT THE ASSESSEE WOULD NOT HAVE TO PAY A NY INTEREST IF THERE WAS NO INVESTMENT WITH THE SISTER CONCERN. AS SUCH INTEREST OF RS.19,32,077/- WAS DISALLOWED. 3. IN APPEAL BEFORE THE CIT(A) IT WAS URGED THAT TH E ASSESSEE HAS NOT MADE ANY SPECIFIC BORROWING FOR THE ABOVE PURPOSE. THE PAYMENTS HAVE BEEN MADE FROM THE COMMON KITTY WHEREIN THE PROFITS OF THE COMPANY ARE ALSO DEPOSITED AND THE ASSESSEE HAS EARNED PROF ITS DURING THE YEAR UNDER CONSIDERATION AS WELL AS IN THE EARLIER YEARS . RELIANCE WAS PLACED I TA 2117 & 2118/DEL/2011 PAGE 5 OF 15 M/S LAKSONS FOOTWEAR P.LTD. A.Y. 2006-07 & 2007-08 UPON THE JUDGEMENT OF BOMBAY HIGH COURT IN RELIANCE UTILITIES AND POWER LTD. WHEREIN THE ASSESSEE HAD MIXED FUNDS INT EREST FREE AND OVERDRAFT AVAILABLE WITH THEM. IN THE CIRCUMSTANCE S THE PRESUMPTION IS THAT THE INTEREST FREE FUNDS HAVE BEEN UTILIZED FOR THE PURPOSE OF MAKING ANY INVESTMENT. RELIANCE WAS ALSO PLACED UPON ACI T VS. LAKHANI MARKETING INCORPORATION ITA NOS. 3784 & 3782/DEL/20 04 FOR A.YS 2001- 2002 AND 2002-2003. CONSIDERING THESE SUBMISSIONS THE CIT(A) PROCEEDED TO DECIDE THE ISSUE VIDE PARA 6 AT PAGES 4 TO 9 OF THE IMPUGNED ORDER. 4. A PERUSAL OF THE SAME SHOWS THAT THE CIT(A) WAS OF THE VIEW THAT THE FACTS REGARDING THE INVESTMENT IN SHARES OF GRO UP CONCERN LAKHANI INDIA PLTD. AND CLAIM OF INTEREST EXPENDITURE OF SE CURED LOAN AVAILED FROM BANK OF INDIA ARE NOT IN DISPUTE. SIMILARLY THE FACT THAT THE ASSESSEE IS ENGAGED IN TRADING FOR FOOT WEAR BY MA KING PURCHASES FROM GROUP CONCERN LAKHANI INDIA P.LTD. AND SELLING IT T O THE RETAILERS IS ALSO NOT IN DISPUTE. HE TOOK INTO COGNIZANCE COPY OF AC COUNTS OF LAKHANI INDIA P.LTD. IN ITS BOOKS OF ACCOUNTS FOR F.Y. 2005 -06 WHICH ACCORDING TO CIT(A) ESTABLISHED THE FACT THAT THE ASSESSEE PURC HASED GOODS WORTH RS. 2.14 CRORES FROM LAKHANI INDIA LTD REFERRING TO TH E PROVISIONS OF S.14A THE CIT(A)WAS OF THE VIEW THAT IT IS THUS EVIDENT F ROM THE PROVISIONS THAT ANY EXPENDITURE INCURRED IN EARNING ANY INCOME W HICH DOES NOT FORM PART OF THE TOTAL INCOME I.E. EXEMPTED INCOME SHALL NOT BE ALLOWED AS I TA 2117 & 2118/DEL/2011 PAGE 6 OF 15 M/S LAKSONS FOOTWEAR P.LTD. A.Y. 2006-07 & 2007-08 EXPENDITURE WHETHER THE EXEMPTED INCOME IS RECEIVED IN A PARTICULAR YEAR OR NOT IT WAS CONCLUDED AS OF BEING OF NO CONSEQUEN CE SO LONG AS THE INVESTMENT HAS BEEN MADE IN ASSETS FROM WHICH INCOM E IS EXEMPTED AND THE EXPENDITURE HAS BEEN INCURRED IN EARNING SUCH EXEMPTED INCOME IN A PARTICULAR YEAR. CONSIDERING THE PROVISIONS OF S .36(1)(III) OF THE ACT IN THE CONTEXT OF THE JUDGEMENT OF THE P&H HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES LTD. (288 ITR 1); AND S.A.BUILD ERS LTD. VS CIT (269 ITR 535) OF THE APEX COURT HE WAS OF THE VIEW THAT EVEN IF THERE IS A NEXUS OF BORROWED FUNDS THAT THE FUNDS ADVANCED INT EREST FREE THE MEASURE OF COMMERCIAL EXPEDIENCY HAS TO BE NECESSA RILY LOOKED INTO BEFORE MAKING DISALLOWANCE OF INTEREST ON BORROWED FUNDS. REFERRING TO THE JUDGEMENT OF THE APEX COURT IN THE CASE OF MUNJ AL SALES CORPORATION VS CIT 298 ITR 298 HE WAS OF THE VIEW THAT ESTABLIS HMENT OF NEXUS OF BORROWED FUNDS WITH THE FUNDS ADVANCED INTEREST FRE E OR INVESTED IN ASSETS GENERATING INCOME WHICH DOES NOT FORM TOTAL INCOME WAS AND REMAINED THE CONDITION PRECEDENT TO DISALLOWANCE OF INTEREST ON BORROWED FUNDS AND THE QUESTION OF EXAMINING COMMER CIAL EXPEDIENCY IS A SUBSEQUENT MATTER TO BE DECIDED IN TERMS OF THE JUDGEMENT RENDERED IN THE CASE OF S.A.BUILDERS. THE CIT(A) WAS OF THE VIEW THAT THE A.O. HAS NOT CARRIED OUT INSPECTION AS TO IN WHICH YEAR AND AS TO WHAT EXTENT THE INVESTMENT IN SHARES WAS MADE VIS A VIS AVAILABILI TY OF RESERVES AND SURPLUS INTEREST FREE AND INTEREST BEARING FUNDS AN D ACCORDINGLY FOLLOWING DETAILS WERE CULLED OUT BY HIM. I TA 2117 & 2118/DEL/2011 PAGE 7 OF 15 M/S LAKSONS FOOTWEAR P.LTD. A.Y. 2006-07 & 2007-08 DETAIL OF INVESTMENTS MADE IN LAKHANI INDIA LTD. S.NO. PARTICULARS NO. OF SHARES AMOUNT OF INVESTMENTS BALANCE OF INVESTMENT AT YAR END RESERVES & SURPLUS SECURED LOANS AS ON BALANCE 1. SHARES PURCHASED IN 1994-95 1,20,610 10,85,500 10,85,500 31-3-1995 25,20,202 0 2. SHARES SOLD IN 1998-99 - 11,195 -1,50,250 9,35,250 31-3-1999 1,02,62,201 0 3. SHARES PURCHASED IN 1999-00 1,48,830 98,89,388 1,08,24,638 31.3.2000 1,43,31,172 0 4. SHARES PURCHASED IN 2000-01 2,72,655 2,96,63,476 4,04,88,114 31.3.2001 1,78,98,183 3,00,00,000 5. SHARES PURCHASED IN 2001-02 1,27,876 1,44,08,092 5,48,96,206 31.03.2002 2,15,56,023 3,52,39,896 6. SHARES PURCHASED IN 2002-03 48,596 55,16,424 6,04,12,630 31.03.2003 2,21,41,979 3,39,47,068 7. SHARES SOLD IN 2003-04 -37,956 -22,51,416 5,81,61,214 31.03.2004 2,49,27,821 2,56,24,406 INVESTMENT AS ON 31/03/2006 & 31/03/2007 6,69,416 5,81,61,214 4.1. ACCORDINGLY HE WAS OF THE VIEW THAT IT CANNOT BE INFERRED THAT ENTIRE INVESTMENT IN SHARES HAS BEEN MADE OUT ON BORROWED FUNDS AND INVESTMENT HAS BEEN MADE FROM A.Y. 1994-95, 1995 TO 2000-2003 THE ASSESSEE HAD ACCUMULATED RESERVES & SURPLUS OF RS. 2.21 CRORES AND SHARE CAPITAL OF RS.9 LAKHS UPTO 31.3.2003 AS SUCH HE WAS OF THE VIEW THAT INVESTMENT IN SHARES TO THE EXTENT OF RS.2.30 CRORES CAN BE INFERRED TO HAVE BEEN MADE OF RESERVES & SURPLUS AND SHARE C APITAL. REFERRING TO THE CASH FLOW STATEMENT FILED BY THE ASSESSEE HE WA S OF THE VIEW THAT IT IS I TA 2117 & 2118/DEL/2011 PAGE 8 OF 15 M/S LAKSONS FOOTWEAR P.LTD. A.Y. 2006-07 & 2007-08 EVIDENT THAT INVESTMENT OF RS.2.21 CRORES IN SHARE S WAS MADE ONLY ON INTEREST BEARING UNSECURED LOANS OF RS.3 CRORES AN D SINCE THE AMOUNT OF LOAN IN THE YEAR UNDER CONSIDERATION ON WHICH INTER EST HAS BEEN CLAIMED IS LESS THAN THE LIMIT IT WAS CONCLUDED THAT IT CAN BE INFERRED THAT THE INVESTMENT IN SHARES WAS MADE OUT OF INTEREST BEARI NG LOANS IN F.Y. 2000-2001. THE ARGUMENTS OF THE ASSESSEE THAT IN 2 003-04 AND 2004-05 AND 2005-06 HAS DELETED THE ADDITIONS WERE FOUND TO BE NOT RELEVANT IN VIEW OF THE FACT THAT THE TRIBUNAL VIDE ITS ORDER D T6. 16.5.09 IN ITA 2233 AND 4525/DEL/07 HAD SET ASIDE THE SAID ORDER AND R ESTORED THE MATTER BACK TO A.O. ONLY FOR COMMERCIAL EXPEDIENCY AFRESH. AS SUCH THE ORDERS OF CIT(A) ON WHICH RELIANCE HAS BEEN PLACED IT WAS HELD NO LONGER REMAIN IN FORCE CONSEQUENT TO THE ORDERS OF THE TRIBUNAL. 5. IN THE LIGHT OF THIS FACTUAL AND LEGAL POSITION THE CIT(A) PROCEEDED TO CONSIDER COMMERCIAL EXPEDIENCY WHICH HE WAS OF T HE VIEW THAT WAS TO BE CONSIDERED FROM THE VIEW POINT OF THE ASSESSEE I N THE LIGHT OF BUSINESS PRUDENCE. HE FURTHER CAME TO THE CONCLUSION THAT T HE ASSESSEE HAS NOT MADE ANY SPECIFIC BORROWINGS FOR THE PURPOSE OF INV ESTMENT IN SHARES AND THE PAYMENTS HAVE BEEN MADE FROM THE COMMON FUN DS WHEREIN THE PROFITS OF THE COMPANY WERE ALSO DEPOSITED. CONSID ERING THE JUDGEMENT OF MUMBAI HIGH COURT IN THE CASE OF RELIANCE UTILI TIES AND POWERS LTD. 221 CTR 435 HE WAS OF THE VIEW THAT THE SAID DECISI ON IS APPLICABLE ONLY WHEN THE INTEREST FREE FUNDS ARE SUFFICIENT TO MEE T THE INVESTMENT IN SHARES AND ON THE OTHER HAND IN ASSESSEES CASE THE INVESTMENT IN I TA 2117 & 2118/DEL/2011 PAGE 9 OF 15 M/S LAKSONS FOOTWEAR P.LTD. A.Y. 2006-07 & 2007-08 SHARES EXCEEDS PROFITS EARNED OVER THE YEARS AS SEE N FROM THE RESERVES & SURPLUS OF ONLY RS.2.49 CRORES ON 31.3.2004 AND SHARE CAPITAL RS.9 LAKHS AS AGAINST INVESTMENT OF RS.5.81 CRORES. CON SIDERING THE ARGUMENTS OF THE ASSESSEE THAT IT WAS A COMMERCIAL MATTER BY VIRTUE OF ORDER OF TRIBUAL IN ACIT VS. LAKHANI MARKETING IN C. FOR A.YS. 2000-2001 & 2001-2002 IN ITA NO. 3784/DEL/2004 AND 3782/DEL/2 004, WHEREIN THE DECISION OF CIT(A) IN DELETING ADDITION HAD BEE N AFFIRMED BY ITAT AGAINST WHICH DEPARTMENTS APPEAL WAS DISMISSED BY THE JURISDICTIONAL HIGH COURT AND TAKING INTO CONSIDERATION THE JUDGEM ENT OF THE JURISDICTIONAL HIGH COURT IN CIT VS. HERO CYCLES 32 3 ITR 518 HE HELD THAT THE A.O. HAS NOWHERE GIVEN A FINDING THAT THE INTEREST EXPENDITURE INCURRED BY ASSESSEE WAS FOR THE PURPOSE OF EARNING OF DIVIDEND INCOME ONLY AND THAT THE BORROWED FUNDS WERE NOT USED FOR THE PURPOSE OF BUSINESS BUT DISALLOWED THE INTEREST ONLY ON THE PR ESUMPTION THAT THE INVESTMENT IN SHARES WAS MORE THAN THE MONEY BORROW ED FROM BANK. THUS RELYING UPON THE GROUP CONCERN CASE THE ADDITI ON MADE BY WAY OF DISALLOWANCE WAS DELETED. 6. AGGRIEVED BY WHICH THE REVENUE IS IN APPEAL BEF ORE THE TRIBUNAL. THE LD.D.R. VEHEMENTLY RELYING UPON THE JUDGEMENT O F MUMBAI HIGH COURT IN GODREJ&BOYCE MFG. CO.LTD. VS DCIT&ANOTHER, 328 ITR 81 (BOM.) SUBMITTED THAT THEIR LORDSHIPS IN THE SAID J UDGEMENT HAD NOWHERE LAID DOWN THAT DISALLOWANCE CANNOT BE MADE AND THEY HAVE LAID I TA 2117 & 2118/DEL/2011 PAGE 10 OF 15 M/S LAKSONS FOOTWEAR P.LTD. A.Y. 2006-07 & 2007-08 DOWN THAT THE ISSUE HAS TO BE EXAMINED BY THE A.O. SIMILARLY IN THE JUDGEMENT RENDERED ON 18.11.2009 BY HONBLE DELHI H IGH COURT IN THE CASE OF MAXOPP VS. CIT IN ITA 667/2009 THEIR LORDSH IPS HAVE LAID DOWN ELABORATE DIRECTIONS AS TO HOW THE ISSUE HAS TO BE DECIDED. THE ARGUMENT WHICH MAY BE ADVANCED ON BEHALF OF THE ASS ESSEE THAT THERE IS NO INCOME FROM THE DIVIDEND IN THE YEAR UNDER CONS IDERATION HAS TO BE CONSIDERED IN THE LIGHT OF THE ORDER OF THE TRIBUN AL IN THE CASE OF RENAISSANCE ASSET MANAGEMENT CO.PVT. LTD. VS.A.O. 2 ITR (TRIBUNAL) 765 DELHI. REFERRING TO THE PROVISIONS OF THE ACT IT WAS HER STAND THAT THE SCHEME OF THE ACT AND THE PROVISION NOWHERE STA TES THAT EXEMPT INCOME HAS TO BE RECEIVED IN A PARTICULAR YEAR AND ONLY THEN THE DISALLOWANCE CAN BE MADE. IT WAS HER ARGUMENT THAT SO LONG AS INVESTMENT IS MADE IN THE ASSETS FROM WHICH THE INC OME IS EXEMPTED THE EXPENDITURE INCURRED FOR EARNING SUCH EXEMPTED INCO ME HAS TO BE DISALLOWED WHETHER IT IS EARNED IN A PARTICULAR YEA R OR NOT IS AN IRRELEVANT ARGUMENT. IT WAS HER VEHEMENT STAND IF THE ANALOG Y ADVANCED BY THE ASSESSEE IS ACCEPTED THEN IT WOULD LEAD TO A VERY P RECARIOUS SITUATION NOT ENVISAGED UNDER THE PROVISIONS OF THE ACT. REFERRI NG TO THE OBSERVATIONS MADE IN THE IMPUGNED ORDER QUA THE ASSESSMENT ORDER IT WAS HER STAND THAT BIFURCATION PERTAINING TO EXEMPT INCOME AND NO T EXEMPTED INCOME HAS TO BE GIVEN BY ASSESSEE AS IT IS EXCLUSIVELY I N THE PERSONAL KNOWLEDGE AND DOMAIN OF ASSESSEE AND NO SUCH EXERCISE HAS BEE N DONE. IT WAS ARGUED THAT SEPARATE ACCOUNTS FOR THE SAME HAVE TO BE MAINTAINED AND I TA 2117 & 2118/DEL/2011 PAGE 11 OF 15 M/S LAKSONS FOOTWEAR P.LTD. A.Y. 2006-07 & 2007-08 EVIDENCE IS REQUIRED TO BE LED BY THE ASSESSEE TO SHOW THAT IT IS NOT PERTAINING TO THE EXEMPT INCOME. THE CIT(A) IT WAS ARGUED HAS MERELY ACCEPTED THE BALD ASSERTIONS OF THE ASSESSEE AND HAS ARRIVED AT INFERENCES IGNORING THE FACT THAT IT IS NOT INFERE NCES AND BALD STATEMENTS BUT VALID, COGENT FACTS AND EVIDENCES WHICH CAN BE LEGALLY ACCEPTED UNDER LAW SO AS TO SUPPORT THE CLAIM THAT NO DISALLOWAN CE CAN BE MADE. IT WAS ARGUED THAT IT IS AN ENTRY BY ENTRY EXAMINATIO N REQUIRED QUA EACH EXPENDITURE AND AVAILABLE INCOME WHICH HAS TO BE D EMONSTRATED IN THE CASH FLOW STATEMENT BY THE ASSESSEE AND SIMPLY ACC EPTING THE BALD STATEMENT OF THE ASSESSEE CANNOT SATISFY A JUDICIAL AND REASONABLE SCRUTINY WHICH AS PER THE JUDGEMENTS IS REQUIRED TO BE DONE. THE DECISION ARRIVED AT ON THE BASIS OF LEGAL PROPOSIT IONS WHERE FACTS HAVE NOT BEEN TAKEN INTO CONSIDERATION IT WAS ARGUED IS PALPABLY WRONG. AS SUCH HEAVY RELIANCE WAS PLACED UPON THE ASSESSMENT ORDER. 7. LD.A.R. ON THE OTHER HAND RELYING UPON THE IMPU GNED ORDER CONTENDED THAT IN 2006-07 NO DIVIDEND HAS BEEN EARN ED BY ASSESSEE AS SUCH HE WOULD PLACE HEAVY RELIANCE UPON CIT VS. WIN SOME TEXTILE INDUSTRIES LTD. 319 ITR 204 OF P&H WHICH IS THE JU RISDICTIONAL HIGH COURT FOR THE ASSESSEE SITUATED AT FARIDABAD. RELI ANCE WAS ALSO PLACED UPON WNS GLOBAL SERVICES P.LTD. VS ACIT(2011), 9 IT R (TRIB), 662 (MUM); AND ORDER OF THE CHENNAI BENCH OF THE ITAT DT. 20 TH MAY, 2011 IN M/S SIVA INDUSTRIES & HOLDINGS LTD. VS ACIT IN ITA 2148 /MDS/2010. THE I TA 2117 & 2118/DEL/2011 PAGE 12 OF 15 M/S LAKSONS FOOTWEAR P.LTD. A.Y. 2006-07 & 2007-08 RELIANCE WAS PLACED ON THE IMPUGNED ORDER FOR BOTH THE YEARS AND THE ABOVE NAMED JUDGEMENTS. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ON A CAREFUL CONSIDERATION OF SOME IT IS SEEN THAT THE CIT(A) HAS MADE AN EXERCISE OF CONSIDERING THE INVESTMENT IN SHARES OF LAKHANI INDIA LTD. VIS--VIS THE AVAILABILITY OF RESERVES AND SURPLUS, INTEREST FREE FUNDS AND INTEREST BEARING FUNDS ON T HE BASIS OF WHICH HE CAME TO THE CONCLUSION THAT IT CANNOT BE INFERRED T HAT THE ENTIRE INVESTMENT IN SHARES HAS BEEN MADE OUT OF THE BORRO WED FUNDS. THEREFORE HE HAS GONE ON TO CONSIDER COMMERCIAL EXP EDIENCY AND ALSO THE CONTENTION THAT THE PAYMENTS HAVE BEEN MADE FRO M THE COMMON FUNDS WHEREIN THE PROFITS OF THE COMPANY WERE ALSO DEPOSITED. FOR THIS HE CAME TO THE CONCLUSION THAT THE PRINCIPLE LAID D OWN IN RELIANCE UTILITIES AND POWER 221 ITR 435 (MUM) WOULD APPLY O NLY WHEN THE INTEREST FREE FUNDS ARE SUFFICIENCY TO MEET THE INV ESTMENT IN SHARES WHEREAS IN ASSESSEES CASE INVESTMENT IN SHARES EXC EEDS THE PROFITS EARNED OVER THE YEARS. 8.1. WHEREAS FOR COMMERCIAL EXPEDIENCY HE HAS DISCU SSED THAT THE CONCEPT OF COMMERCIAL EXPEDIENCY IS VERY WIDE BUT T HE MAIN GUIDING FACTORS IN DETERMINING THE COMMERCIAL EXPEDIENCY ARE WHETHER THE BUSINESS OF THE APPELLANT IS LIKELY TO BE CLOSED OR ADVERSELY AFFECTED HAD NO SUCH INVESTMENT BEEN MADE OR WHETHER SUCH AN INV ESTMENT WOULD HAVE DIRECT EFFECT IN EARNING OF MORE INCOME OR WHE THER THE INVESTMENT I TA 2117 & 2118/DEL/2011 PAGE 13 OF 15 M/S LAKSONS FOOTWEAR P.LTD. A.Y. 2006-07 & 2007-08 WOULD RESULT IN FURTHER EXPANSION OF BUSINESS OF LA KHANI INDIA LTD. LEADING TO MORE AND WIDER OPPORTUNITIES FOR THE ASS ESSEE TO EXPAND ITS OWN BUSINESS AND EARN HIGHER INCOME. THE ASPECTS ARE REQUIRED TO BE SEEN FROM THE VIEW POINT OF ASSESSEE IN THE CONTEXT OF BUSINESS PRUDENCE. 8.2. IN THE CASE OF THE ASSESSEE THE CIT(A) HAS FOL LOWED THE JURISDICTIONAL HIGH COURTS DECISION RENDERED IN TH E CASE OF A GROUP CONCERN NAMELY LAKHANI MARKETING INCORPORATION FOR 2000-2001 A.Y. AND LACK OF FINDING GIVEN BY THE ASSESSING OFFICER THAT INTEREST EXPENDITURE INCOME BY THE ASSESSEE WAS FOR THE PURP OSE OF EARNING OF DIVIDEND INCOME ONLY AND THE BORROWED FUNDS WERE NO T USED FOR THE PURPOSE OF BUSINESS AND HAS BEEN FAULTED FOR MAKING A DISALLOWANCE OF THE INTEREST ON THE PRESUMPTION THAT INVESTMENT IN SHARES WAS MORE THAN THE MONEY BORROWED FROM THE BANK. THE A.O. IT IS SEEN ON THE OTHER HAND HAS FAULTED THE ASSESSEE FOR FAILING TO PROVE THAT THE EXPENDITURE INCURRED BY HIM IS IN RELATION TO NON-EXEMPTED AS I T IS THE ASSESSEE WHO IS CLAIMING A DEDUCTION ESPECIALLY SINCE THESE ARE MATERIAL FACTS IN THE SPECIAL AND EXCLUSIVE KNOWLEDGE OF THE ASSESSEE. 8.3. IN THE LIGHT OF THE AFOREMENTIONED PECULIAR FA CTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT IT IS APPROP RIATE TO RESTORE THE ISSUE BACK TO THE FILE OF THE A.O. AS IT IS SEEN T HAT ON FACTS NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE CIT(A) TO CONCLUD E THAT FACTS QUA THE GROUP CONCERN NAMELY LAKHANI MARKETING INCORPORATIO N IN 2000-2001 I TA 2117 & 2118/DEL/2011 PAGE 14 OF 15 M/S LAKSONS FOOTWEAR P.LTD. A.Y. 2006-07 & 2007-08 A.Y. ARE EXACTLY IDENTIFIED TO THE FACTS OF THE ASS ESSEE IN A.Y. 2006-07 AND 2007-08. IT IS SEEN THAT NO SUCH EXERCISE HAS BEEN DONE BY THE A.O. ACCORDINGLY, THE APPLICABILITY OF THE FACTS PERTAI NING TO COMMERCIAL EXPEDIENCY AS CONSIDERED IN THE FACTS OF GROUP CONC ERN NEEDS TO BE AEEN AND BROUGHT ON RECORD. THE A.O. SHALL IN THE LIGHT OF THE JUDGEMENTS OF THE APEX COURT AND JURISDICTIONAL HIGH COURT SHALL EXAMINE AND DISCUSS EACH AND EVERY TIME FUNDS WERE ADVANCED BY THE ASSE SSEE TO LAKHANI INDIA LTD. IN THE CONTEXT OF NEXUS AND COMMERCIA L EXPEDIENCY AS HAS BEEN LAID DOWN BY THE APEX COURT IN THE CASE OF S. A.BUILDERS 288 ITR 1(SC) AND MUNJAL SALES CORPORATION 298 ITR 298 (SC) . THUS NOT ONLY THE FACTS QUA THE LAKHANI MARKETING INCORPORATION STATE D TO BE IDENTICAL TO ASSESSEES CASE IN THE CONTEXT OF COMMERCIAL EXPED IENCY NEED TO BE TAKEN INTO CONSIDERATION BUT ALSO THE FINDING IN A SSESSEES OWN CASE IN 2003-04 AND 2004-05 A.YS IS ALSO RELEVANT AS THE ISSUE IN THE EARLIER YEARS IN THE CASE OF THE ASSESSEE HAS BEEN RESTORED TO THE A.O. VIDE ORDER DT. 16.4.2009 IN ITA 2233 AND 4545/DEL/2007. ACCOR DINGLY AFTER MARSHALLING THE FACTS, THE CASE LAW CAN BE APPLIED. 8.4. ACCORDINGLY FOR THE DETAILED REASONS GIVEN HER EINABOVE THE ISSUE IS RESTORED TO THE FILE OF THE A.O. FOR BOTH THE YEARS WITH THE DIRECTION TO DECIDE THE SAME IN ACCORDANCE WITH LAW BY WAY OF A SPEAKING ORDER. NEEDLESS TO SAY THAT THE ASSESSEE SHALL BE AFFORDED A REASONABLE OPPORTUNITY OF BEING HEARD. I TA 2117 & 2118/DEL/2011 PAGE 15 OF 15 M/S LAKSONS FOOTWEAR P.LTD. A.Y. 2006-07 & 2007-08 9. IN THE RESULT THE APPEALS OF REVENUE ARE ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 2 ND MARCH, 2012. SD/- SD/- (B.C.MEENA) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 2 ND MARCH, 2012 *MANGA COPY OF THE ORDER FORWARDED TO: 1. APPELLANT; 2.RESPONDENT; 3.CIT; 4.CI T(A); 5.DR; 6.GUARD FILE BY ORDER DY. REGISTRAR // C O P Y //