Hopeful Traders Pvt. Ltd., Pune V. Joint Commissioner of Income-tax,

ITA 2270/PUN/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 7214 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-01-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 22-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HITENDRA NINAWE
• Assessee Lawyers: N C LAHOTI
• Keywords: Business expenditure; Charitable institution; Earning of tax free income; Retrospective amendment; Commercial expediency; Capital expenditure
• Section: 143(3); 14A; 12

Judgement Text

] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI R.P. TOLANI, JM AND SHRI ANIL CHATURVEDI, AM / ITA NO.2270/PUN/2014 / ASSESSMENT YEAR : 2011-12 HOPEFUL TRADERS PVT LTD. 365, J N. ROAD, PIMPIRI 411017. PAN NO.AABCH1928E. . / APPELLANT V/S JOINT COMMISSIONER OF INCOME - TAX , RANGE 9, PUNE. . / RESPONDENT / APPELLANT BY : SHRI N.C. LAHOTI / RESPONDENT BY : SHRI HITENDRA NINAWE / ORDER PER ANIL CHATURVEDI, AM : THIS APPEAL OF THE ASSESSEE IS EMANATING OUT OF THE ORDE RS OF COMMISSIONER OF INCOME TAX (A) V, PUNE DATED 07.10.20 14 FOR THE ASSESSMENT YEAR 2011-12. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER:- / DATE OF HEARING : 20.12.2016 / DATE OF PRONOUNCEMENT: 27.01.2017 2 ITA NO.2270/PN/2014 AY.NO.2011-12 2.1 ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE BUSINESS OF WHOLESALE TRADING OF COUNTRY LIQUOR. ASSESSEE ELECTRONICALLY FILED ITS RETURN OF INCOME FOR A.Y. 2011-12 ON 29.07.2011 DECLARING TOTAL INCOME OF RS.32,21,985/-. THE CAS E WAS SELECTED FOR SCRUTINY AND THEREAFTER THE ASSESSMENT WAS FRAMED U/S 143(3) VIDE ORDER DT.30.01.2014 AND THE TOTAL INC OME WAS DETERMINED AT RS.59,17,770/-. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD. CIT(A), WHO VIDE ORDER DT.07.10.2014 (IN APPEAL NO.PN/CIT(A)V/JT. CIT, RG-9/728/13- 14) GRANTED PARTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY T HE ORDER OF LD. CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RA ISED THE FOLLOWING GROUNDS : 1. AO AND CIT APPEAL ERRED IN LAW AND FACT WHILE DISALLOWING INTEREST PAID ON BORROWED FUNDS BY ASSE SSEE TO THE EXTENT INTEREST FREE LOAN GIVEN TO SENTOSA RESORT PVT LTD FOR THE PURPOSE OF BUSINESS. 2. A.O. AND CIT APPEALS ERRED IN LAW WHILE DISALLOW ING EXPENDITURE U/S 14A & RULE 8D WHEN THERE IS NO TAX FREE INCOME CLAIMED IN THE RETURN FILED TO APPRECIATE VA RIOUS CASE LAWS BROUGHT TO THEIR NOTICE DURING THE ASSESS MENT PROCEEDINGS. 3. ASSESSEE RESERVE RIGHT TO ADD, ALTER, AMEND, DEL ETE THE GROUNDS APPEAL BEFORE OR DURING THE COURSE OF HEARI NG. 3. FIRST GROUND IS WITH RESPECT TO DISALLOWANCE OF INTEREST. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO NOTIC ED THAT ASSESSEE HAD GIVEN ADVANCES TO M/S. SENTOSA RESO RT PVT. LTD, A SISTER CONCERN, AND HAD NOT CHARGED ANY INTEREST ON THE AMOUNTS ADVANCED EVEN THOUGH ASSESSEE HAD BORROWED FUND OF ABOUT RS.3.74 CRORES AND HAD INCURRED INTEREST COST OF 3 ITA NO.2270/PN/2014 AY.NO.2011-12 RS.50,31,483/-. ASSESSEE WAS THEREFORE ASKED TO EXPLAIN A S TO WHY INTEREST EXPENSE AT 12% BE NOT DISALLOWED TO WHICH A SSESSEE INTER-ALIA SUBMITTED THAT THE LOANS AND ADVANCE WAS GIVEN AS IT WAS A MAJOR SHAREHOLDER AND FOR THE BUSINESS NEEDS OF THAT COMPANY. IT WAS ALSO SUBMITTED THAT THE AMOUNTS WAS AD VANCED OUT OF BUSINESS EXIGENCY AND WAS A CONSCIOUS BUSINESS DE CISION AND THE AMOUNT ADVANCED WOULD HELP THE COMPANY TO YIELD THE BENEFITS IN THE FUTURE. THE SUBMISSIONS OF THE ASSESSEE WE RE NOT FOUND ACCEPTABLE TO THE AO. AO WAS OF THE VIEW THAT ASS ESSEE HAD MADE HUGE INTEREST FREE ADVANCES EVEN BEFORE IT BE CAME MAJOR SHAREHOLDER OF SENTOSA RESORT PVT. LTD AND SINCE ASSESSEE HAD NOT RECEIVED ANY DIVIDEND INCOME IN THE CURRENT, PRE SENT OR SUCCEEDING YEAR FROM SENTOSA RESORT PVT. LTD, THE BENEFIT EXPECTED TO BE DERIVED BY THE ASSESSEE OUT OF INVESTME NTS WERE FAR-FETCHED AND DID NOT WARRANT THE BURDENING OF HUGE INT ERESTS. HE THEREAFTER DISALLOWED PROPORTIONATE AMOUNT OF INTEREST BY CALCULATING THE INTEREST DISALLOWANCE AT 20% AND ACCORDING LY MADE TOTAL DISALLOWANCE OF RS.24,41,962/-. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD. CIT(A), WHO UPHELD THE DISALLOWANCE BY HOLDING AS UNDER : 9. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE A S WELL AS REPLY OF THE APPELLANT. IT IS SEEN THAT TH E REPLY OF THE APPELLANT IS GENERAL IN NATURE WITHOUT EFFECTIV ELY ADDRESSING THE POINTS RAISED BY THE ASSESSING OFFIC ER THAT LOANS AND ADVANCES WERE GIVEN TO M/S. SENTOSA RESORT PVT LTD EVEN BEFORE THE APPELLANT BECAME MAJ ORITY SHAREHOLDER. FURTHER, THE SHARES WERE ISSUED TO THE APPELLANT BY PARTLY CONVERTING THE LOANS/ADVANCES I NTO SHARE CAPITAL. THIS FACTUAL FINDING OF THE ASSESSIN G OFFICER MAKES THE CASE OF THE APPELLANT QUITE SLIPPERY AS F AR AS THE CLAIM OF ADVANCE GIVEN IN THE CAPACITY OF MAJOR SHAREHOLDER IS CONCERNED. FURTHER, THE APPELLANT H AS FAILED TO DEMONSTRATE THAT LOANS AND ADVANCES WERE GIVEN ON ACCOUNT OF COMMERCIAL EXPEDIENCY AND HAS SIMPLY RELIED ON GENERAL SUBMISSIONS AND TERMINOLOG Y LIKE QUASI CAPITAL WITHOUT ACTUALLY PROVING THE S AME 4 ITA NO.2270/PN/2014 AY.NO.2011-12 EITHER TO THE SATISFACTION OF THE ASSESSING OFFICER OR THE UNDERSIGNED. THE RELIANCE OF THE APPELLANT ON THE CASE OF S.A. BUILDERS (SUPRA) IS ALSO MISPLACED AS M/S. SEN TOSA RESORT PVT. LTD. IS NOT A SUBSIDIARY OF THE APPELLA NT. THIS BEING SO, I DO NOT FIND ANY MERIT IN THE SUBMISSION S OF THE APPELLANT AND GROUND NO.1, 2 AND 3 ARE ACCORDINGLY DISMISSED. 5. AGGRIEVED BY THE ORDER OF LD. CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US. 6. BEFORE US, LD.A.R. REITERATED THE SUBMISSIONS MADE BEFORE AO AND LD. CIT(A) AND FURTHER SUBMITTED THAT ASSESSEE UNDE RTOOK A STRATEGIC BUSINESS DECISION TO FORM A COMPANY ALONGWITH OTHER EXPERIENCED PERSONS AS ASSESSEE WANTED TO DO THE BUS INESS OF HOTEL, RESTAURANT AND AMUSING AND ACCORDINGLY SENTOSA R ESORT PVT LTD WAS FORMED WHEREIN ASSESSEE HELD MAJORITY SHARE S (49.72%). SENTOSA RESORT PVT LTD REQUIRED HUGE CAPITAL EXPENDITURE AND FOR WHICH THE MANAGEMENT OF THE ASSESSE E DECIDED TO FINANCE PARTLY AS INTEREST FREE ADVANCE AND P ARTLY IN THE FORM OF FULLY PAID SHARES. THE OTHER SHARE-HOLDERS O F SENTOSA RESORT PVT LTD ALSO HAD AGREED TO LEND INTEREST FREE LOA NS TO SENTOSA RESORT PVT LTD. HE FURTHER SUBMITTED THAT THE ASSESSEE HAD ADVANCED THE AMOUNT FOR DIVERSIFICATION AND THE BENEFIT OF WHICH WOULD ACCRUED TO THE ASSESSEE IN FUTURE. WITH RESP ECT TO THE A.OS AND LD. CIT(A) OBSERVATION THAT ASSESSEE WAS NO T A MAJOR SHARE-HOLDER AT THE TIME OF ADVANCING THE AMOUNT, HE SUBMITTED THAT THE AFORESAID OBSERVATION IS INCORRECT AND IN SUPPORT OF WHICH HE POINTED TO THE CERTIFICATES OF THE CO MPANY SECRETARY WHICH WERE PLACED AT PAGES 66 TO 73, WHEREIN IT IS CERTIFIED THAT THE ASSESSEE IS A MAJOR SHAREHOLDER OF SEN TOSA RESORTS P LTD IN THE YEARS 2008 TO 2015. HE FURTHER SU BMITTED 5 ITA NO.2270/PN/2014 AY.NO.2011-12 THAT LD. CIT(A)S OBSERVATION THAT THE REPLY OF THE ASS ESSEE WAS GENERAL IN NATURE IS ALSO FACTUALLY INCORRECT BECAUSE THE ASSESSEE HAD FURNISHED ALL THE REQUIRED DETAILS BEFORE THE AUTHORITIES . LD A.R. FURTHER RELYING ON THE DECISION OF APEX COURT IN THE CASE OF S A BUILDERS VS CIT (2007) 288 ITR 1 (SC) SUBMITTED THAT TH E EXPRESSION COMMERCIAL EXPEDIENCY IS AN EXPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. HE FURTHER SUBMITTED THAT HBLE APEX COURT HAS HELD THAT IF THE AM OUNT IS ADVANCED TO A SUBSIDIARY OR ASSOCIATED COMPANY OR ANY OTHER PARTY AS A MEASURE OF COMMERCIAL EXPEDIENCY THE INTEREST EXPENSES WAS ALLOWABLE. HE THEREFORE SUBMITTED THAT IN TH E PRESENT CASE NO DISALLOWANCE OF INTEREST WAS CALLED FOR. LD DR ON THE OTHER HAND SUPPORTED THE ORDER OF AO AND LD CIT(A). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT GROUND IS WIT H RESPECT TO DISALLOWANCE OF INTEREST. AS EVIDENCED BY THE CERTIFICATES OF PRACTICING COMPANY SECRETARY, IT IS AN UNDISP UTED FACT THAT ASSESSEE IS A MAJOR SHAREHOLDER OF SANTOSA RE SORTS PVT LTD, A COMPANY TO WHOM THE ASSESSEE HAS ADVANCED LOANS AND IT IS A MAJOR SHAREHOLDER SINCE THE YEAR 2008. IN VIE W OF THE AFORESAID WE ARE OF THE VIEW THAT THE OBSERVATION OF THE AO THAT THE ASSESSEE HAD ADVANCED LOANS EVEN BEFORE ASSESSEE HAD BECAME A MAJOR SHARE-HOLDER IS FACTUALLY INCORRECT. THE SUBMISSION OF THE ASSESSEE THAT TO DIVERSIFY INTO NEW BUS INESS, SENTOSA RESORTS PVT LTD WAS FORMED AND THE ASSESSEE HAS ADVANCED LOANS TO IT ON ACCOUNT OF COMMERCIAL EXPEDIENCY HAS 6 ITA NO.2270/PN/2014 AY.NO.2011-12 NOT BEEN CONTROVERTED BY REVENUE BY PLACING ANY MATER IAL ON RECORD. WE FIND THAT HONBLE APEX COURT IN THE CASE OF S.A . BUILDERS LIMITED (SUPRA) HAS HELD THAT THE EXPRESSION COMMERCIAL EXPEDIENCY IS OF ONE WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PUR POSE OF BUSINESS. IT FURTHER HELD THAT THE EXPENDITURE MAY NOT H AVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION BUT YET IT IS AN ALLOWABLE BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. IT HELD THAT THE TRUE TEST IS WHET HER THE AMOUNT ADVANCED TO SUBSIDIARY OR ASSOCIATED COMPANY OR ANY OTHER PARTY WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. IF SO, INTEREST WAS DEDUCTIBLE. THE RELEVANT OBSERVATIONS OF HONBLE APEX COURT ARE AS UNDER : THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN EXPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDI TURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRE D UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. THE HONBLE APEX COURT FURTHER HELD THAT : WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COU RT IN CIT VS. DALMIA CEMENT (BHART) LTD. (2002) 254 ITR 3 77 THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BE TWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS (WH ICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSE E ITSELF), THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PU T ITSELF IN THE ARM-CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HO W MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE ITS PROFIT. THE INCOME TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FR OM THEIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINESSMAN. A S ALREADY STATED ABOVE, WE HAVE TO SEE THE TRANSFER O F THE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT O F VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS . 7 ITA NO.2270/PN/2014 AY.NO.2011-12 BEFORE US, REVENUE HAS NOT PLACED ANY MATERIAL ON RECORD TO DEMONSTRATE THAT THE AMOUNT THAT WAS ADVANCED BY AS SESSEE TO SENTOSA RESORTS PVT LTD WAS FOR SENTIMENTAL OR PERSONA L REASONS AND WAS NOT ON THE GROUND OF COMMERCIAL EXPEDIENCY. IN SUCH A SITUATION, WE ARE OF THE VIEW THAT THE RATIO OF THE DECISION IN THE CASE OF S.A. BUILDERS (SUPRA) IS SQUARELY APPLICABLE TO THE P RESENT FACTS. WE THEREFORE RELYING ON THE AFORESAID DECISION OF TH E HONBLE APEX COURT, ARE OF THE VIEW THAT IN THE PRESENT CASE, NO DISALLOWANCE OF INTEREST COULD HAVE BEEN MADE BY AO. WE THEREFORE SET ASIDE THE ORDER OF AO AND THUS, THE GROUND OF ASSESSEE IS ALLOWED. 8. SECOND GROUND IS WITH RESPECT TO DISALLOWANCE OF EXPENDITURE U/S 14A OF THE ACT. 9. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO NOTICE D THAT ASSESSEE HAD MADE INVESTMENT TO THE TUNE OF RS.47,67,400/-. HE ALSO NOTICED THAT ASSESSEE HAD BORROWE D FUNDS TO THE EXTENT OF RS 3.74 CRORES AND HAD INCURRED INTEREST EXPENDITURE OF RS.50,31,843/-. HE NOTICED THAT SINCE ASSES SEE HAS NOT FURNISHED DAY-TO-DAY MOVEMENT OF OWN FUNDS AND BORROWED FUNDS, THE ASSESSEES CONTENTION OF HAVING MADE INVESTMENTS OUT OF NON-INTEREST BEARING FUNDS CANNOT BE ACCEPTED. HE WAS FURTHER OF THE VIEW THAT ONCE THE FUN DS ARE INVESTED IN THE BOOK, IT LOOSES ITS IDENTITY AND IT IS FOR THE ASSESSEE TO ESTABLISH THAT THERE WERE DEDICATED FREE FUN DS WHICH ALONE WERE USED FOR MAKING INVESTMENT IN TAX FREE SECURITIE S. HE ALSO NOTICED THAT THE RATIO OF BORROWING FUNDS (RS 3.74 CRO RES) 8 ITA NO.2270/PN/2014 AY.NO.2011-12 WAS MORE THAN FOUR TIMES THAN OWN TAX FREE FUNDS (RS 93.4 9 LAKHS). HE THEREFORE CONCLUDED THAT ASSESSEE HAS FAILED TO DISCHARGE AND PROVE THAT INVESTMENTS ARE OUT OF INTERES T FREE FUNDS. HE WAS FURTHER OF THE VIEW THAT THE PROVISIONS OF R ULE 8D BEING MANDATORY IN NATURE, DISALLOWANCE U/S 14A WAS REQUIR ED TO BE MADE. HE ACCORDINGLY, WORKED OUT THE DISALLOWANCE U/S 14A READ WITH RULE 8D OF THE INCOME TAX RULES AT RS.2,4 8,823/-. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATT ER BEFORE LD. CIT(A), WHO UPHELD THE ORDER OF AO BY HOLDING AS UNDER: 12. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AS WELL AS REPLY OF THE APPELLANT. AS REGARDS THE CLAIM OF THE APPELLANT THAT SEC. 14A R.W.R 8D WILL NOT APPLY IN CASE NO EXEMPT INCOME IS SHOWN, IT IS SEEN THAT CBDT IN IT'S CIRCULAR NO. 5/2014 DATED 11.02.2014 HAS CLARIFIED THE ISSUE AND HAS SAID THAT DISALLOWANCE U/S. 14A R/W RULE 8D WILL NOT APPLY EVEN IF EXEMPT INCOME HAS NOT BEEN SHOWN IN A PARTICULAR YEAR. THE SAME IS REPRODUCED AS UNDER : SECTION 14A OF THE INCOME-TAX ACT, 1961('ACT') PROVIDES FOR DISALLOWANCE OF EXPENDITURE IN RELATION TO INCOME NOT ''INCLUDIBLE' IN TOTAL INCOME. 2. A CONTROVERSY HAS ARISEN IN CERTAIN CASES AS TO WHETHER DISALLOWANCE CAN BE MADE BY INVOKING SECTION 14A OF THE ACT EVEN IN THOSE CASES WHERE NO INCOME HAS BEEN EARNED BY AN ASSESSEE WHICH HAS BEEN CLAIMED AS EXEMPT DURING THE FINANCIAL YEAR. 3. THE MATTER HAS BEEN EXAMINED IN THE BOARD. IT IS PERTINENT TO MENTION THAT SECTION 14A OF THE ACT WAS INTRODUCED BY THE FINANCE ACT, 2001 WITH RETROSPECTIVE EFFECT FROM 01.04.1962. THE PURPOSE FOR INTRODUCTION OF SECTION 14A WITH RETROSPECTIVE EFFECT SINCE INCEPTION OF THE ACT WAS CLARIFIED VIDE CIRCULAR NO. 14 OF 2001 CERTAIN INCOMES ARE NOT INCLUDIBLE WHILE COMPUTING THE TOTAL INCOME, AS THESE ARE EXEMPT UNDER VARIOUS PROVISIONS OF THE ACT. THERE HAVE BEEN CASES WHERE DEDUCTIONS HAVE BEEN CLAIMED IN RESPECT OF SUCH EXEMPT INCOME. THIS IN EFFECT MEANS THAT THE TAX INCENTIVE GIVEN BY WAY OF EXEMPTIONS TO, 9 ITA NO.2270/PN/2014 AY.NO.2011-12 CERTAIN CATEGORIES OF INCOME IS BEING USED TO REDUCE ALSO THE TAX PAYABLE ON THE NON-EXEMPT INCOME BY DEBITING THE EXPENSES INCURRED TO EARN THE EXEMPT INCOME AGAINST TAXABLE INCOME. THIS IS AGAINST THE BASIC PRINCIPLES OF TAXATION WHEREBY ONLY THE NET INCOME, I.E. GROSS INCOME MINUS THE EXPENDITURE, IS TAXED. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO IN RESPECT OF THE NET INCOME. EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME THUS, LEGISLATIVE INTENT IS TO ALLOW ONLY THAT EXPENDITURE WHICH IS RELATABLE TO EARNING OF INCOME AND IT THEREFORE FOLLOWS THAT THE EXPENSES WHICH ARE RELATABLE TO EARNING OF EXEMPT INCOME HAVE TO BE CONSIDERED FOR DISALLOWANCE, IRRESPECTIVE OF THE FACT WHETHER ANY SUCH INCOME HAS BEEN EARNED DURING THE FINANCIAL YEAR OR NOT. 4. THE ABOVE POSITION IS FURTHER CLARIFIED BY THE USAGE OF TERM 'INCLUDIBLE' IN THE HEADING TO SECTION 14A OF THE ACT AND ALSO THE HEADING TO RULE 8D OF I.T. RULES, 1961 WHICH INDICATES THAT IT IS NOT NECESSARY THAT EXEMPT INCOME SHOULD NECESSARILY BE INCLUDED IN A PARTICULAR YEAR'S INCOME, FOR DISALLOWANCE TO BE TRIGGERED. ALSO, SECTION 14A OF THE ACT DOES NOT USE THE WORD 'INCOME OF THE YEAR' BUT 'INCOME UNDER THE ACT'. THIS ALSO INDICATES THAT FOR INVOKING DISALLOWANCE UNDER SECTION 14A, IT IS NOT MATERIAL THAT ASSESSEE SHOULD HAVE EARNED SUCH EXEMPT INCOME DURING THE FINANCIAL YEAR UNDER CONSIDERATION. 5. THE ABOVE POSITION IS FURTHER SUBSTANTIATED BY THE LANGUAGE USED IN RULE 8D(2(II) & 8D(2)(III) OF I. T. RULES WHICH ARE EXTRACTED BELOW: (II) IN A CASE WHERE THE ASSSESSEE 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 FOLLOWING FORMULA NAMELY; A*B/C WHERE. B= THE AVERAGE OF VALUE OF INVESTMENT. INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE. ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. (III) AN AMOUNT EQUAL TO ONE-HALF PERCENT OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME. AS APPEARING IN THE BALANCE- 10 ITA NO.2270/PN/2014 AY.NO.2011-12 SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR.' (EMPHASIS ADDED) 6. THUS, IN LIGHT OF ABOVE, CENTRAL BOARD OF DIRECT TAXES, IN EXERCISE OF ITS POWERS UNDER SECTION 119 OF THE ACT HEREBY CLARIFIES THAT RULE 80 READ WITH SECTION 14A OF THE ACT PROVIDES FOR DISALLOWANCE OF THE EXPENDITURE EVEN TAXPAYER IN A PARTICULAR YEAR HAS NOT EARNED ANY EXEMPT INCOME. 7. THIS MAY BE BROUGHT TO THE NOTICE OF AL/ CONCERNED. ' 13. FURTHER, HON'BLE CHENNAI 'A' BENCH IN THE CASE OF M/S. LAKSHMI RING TRAVELLERS VS. ACIT IN ITA NO. 2083(MDS)/2011 FOR A.Y. 2008-09 HAS HELD THAT RULE 8D APPLIES EVEN WHEN THE APPELLANT CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED. FOR THE SAKE OF CLAR ITY THE RELEVANT PORTION OF THE ORDER IS REPRODUCED: WE CONSIDERED THE ARGUMENTS OF BOTH THE SIDES IN DETAIL. SEC.14A(1) DECLARES THE LAW THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT SHALL NOT BE ALLOWED AS A DEDUCTION IN COMPUTING THE TAXABLE INCOME OF THE ASSESSEES. SEC.14A(2) PROVIDES FOR DETERMINING THE QUANTUM OF SUCH EXPENDITURE WHICH SHALL NOT BE ALLOWED AS A DEDUCTION. THAT IS THE MACHINERY PROVISION AS FAR AS SEC.14A IS CONCERNED. IN THAT PROVISION, IT HAS BEEN PROVIDED THAT IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE COMPUTATIONS MADE BY AN ASSESSEE, HE SHALL COMPUTE THE QUANTUM IN ACCORDANCE WITH THE METHOD THAT MAY BE PRESCRIBED. FOR THIS MATTER RULE 8D HAS ALREADY BEEN PRESCRIBED. SUB-SEC.(3) FURTHER PROVIDES THAT EVEN IN A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE WAS INCURRED, THE ASSESSING AUTHORITY HAS TO PRESUME THE INCURRING OF SUCH EXPENDITURE AS PROVIDED UNDER SUB-SEC.(2) READ WITH RULE PRESCRIBED. THEREFORE, IT BECOMES CLEAR THAT EVEN IN A CASE WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE WAS SO INCURRED, THE STATUTE HAS PROVIDED FOR A PRESUMPTIVE EXPENDITURE WHICH HAS TO BE DISALLOWED BY FORCE OF THE STATUE. IN A DIST ANT MANNER, LITERALLY SPEAKING, IT MAY EVEN BE CONSIDERED FOR THE PURPOSE OF CONVENIENCE AS A DEEMING PROVISION. WHEN SUCH DEEMING PROVISION IS MADE ON THE BASIS OF STATUTORY PRESUMPTION, THE REQUIREMENT OF FACTUAL EVIDENCE IS REPLACED BY STATUTORY PRESUMPTION AND THE ASSESSING OFFICER HAS TO FOLLOW THE CONSEQUENCES STATED IN THE STATUTE. IT MEANS THAT EVEN IN A CASE WHERE NO EXPENDITURE IS STATED TO HAVE BEEN INCURRED, THE ASSESSING AUTHORITY HAS TO APPLY RULE 8D. AS THE STATUTORY PRESUMPTION SUBSTITUTES THE REQUIREMENT OF FACTUAL EVIDENCE, THE QUESTION OF ENQUIRY DOES NOT ARISE. THEREFORE, WE ARE UNABLE TO AGREE WITH THE ARGUMENT OF THE LEARNED CA.. 11 ITA NO.2270/PN/2014 AY.NO.2011-12 14.THEREFORE, CONSIDERING THE TOTALITY OF FACTS, I DO NOT FIND ANY MERIT IN THE SUBMISSIONS OF THE APPELLANT. ACCORDINGLY, THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING RS 2,48,873 U/S 14A BY APPLYING RULE 8D IS UPHELD. ACCORDINGLY, GROUND NO 4 IS DISMISSED 10. AGGRIEVED BY THE ORDER OF LD. CIT(A) ASSESSEE IS IN APPEAL BEFORE US. BEFORE US, LD.A.R. REITERATED THE SUBMISSIONS MAD E BEFORE LD. CIT(A) AND AO AND FURTHER SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION, THE INVESTMENTS ON WHICH DISALLOWANCE U/S 14A HAS BEEN MADE HAS NOT YIELDED ANY T AX FREE INCOME IN THE FORM OF DIVIDEND AND THEREFORE IN THE AB SENCE OF TAX FREE INCOME, NO DISALLOWANCE OF EXPENDITURE U/S 14A O F THE ACT WAS CALLED FOR. HE SUBMITTED THAT AGAINST THE INVESTM ENT OF RS 47.68 LACS ASSESSEE HAD TAX FREE FUNDS IN THE FORM O F SHARE CAPITAL AND RESERVES OF MORE THAN RS 90 LACS AND THEREFO RE IT IS TO BE PRESUMED THAT INVESTMENTS ARE OUT OF OWN INTERES T FREE FUNDS AND THEREFORE NO DISALLOWANCE OF INTEREST IS CALLED FOR AND FOR THIS PROPOSITION HE RELIED ON THE DECISION OF HONBLE BOM BAY HIGH COURT IN THE CASE OF CIT VS. HDFC BANK LIMITED. HE THEREFORE SUBMITTED THAT IN ANY CASE, NO DISALLOWANCE U/S 14A WAS CALLED FOR IN THE PRESENT CASE. LD. D.R. ON THE OTHER H AND SUPPORTED THE ORDER OF AO AND LD. CIT(A) AND FURTHER SUB MITTED THAT THE PROVISIONS OF RULE 8D ARE MANDATORY. HE FURTHER SUBMITTED THAT CBDT ALSO VIDE CIRCULAR NO.5/2014 DATED 11.02.2014 HAS CLARIFIED THAT FOR INVOKING DISALLOWANCE U/S 14A , IT IS NOT NECESSARY THAT ASSESSEE SHOULD HAVE EARNED E XEMPT INCOME AND THEREFORE EVEN WHEN NO EXEMPT INCOME IS EARN ED, DISALLOWANCE U/S 14A HAS TO BE MADE. HE THEREFORE SUBMIT TED THAT THE AO WAS FULLY JUSTIFIED IN DISALLOWING THE EXPENDITURE U/S 12 ITA NO.2270/PN/2014 AY.NO.2011-12 14A READ WITH RULE 8D. HE THUS, SUPPORTED THE ORDER OF AO AND LD. CIT(A). 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH RESPECT TO DISALLOWANCE U/S 14A. BEFORE US, IT IS LD.A.R. SUBMISSION THA T NO DISALLOWANCE IS CALLED FOR IN THE PRESENT CASE ON ACCOUN T OF TWO REASONS NAMELY, THE INTEREST FREE FUNDS AVAILABLE ARE MORE THAN THE INVESTMENTS MADE AND THEREFORE THE PRESUMPT ION IS THAT INTEREST FREE FUNDS HAVE BEEN USED FOR MAKING INVEST MENTS AND SECONDLY ASSESSEE HAS NOT EARNED ANY TAX FREE INC OME FROM THE INVESTMENTS FROM WHICH DISALLOWANCE IS MADE AND THERE FORE ALSO NO DISALLOWANCE IS CALLED FOR. AS FAR AS FIRST REASON OF L D AR IS CONCERNED, IT IS SEEN THAT THE INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES ARE TO THE EXTENT OF RS 93.4 9 LAKHS AS AGAINST THE INVESTMENTS OF RS.47.67 LAKHS MEANING THE REBY THAT THE INTEREST FREE FUNDS ARE MUCH MORE THAN THE INV ESTMENTS. WE FIND THAT HONBLE BOMBAY HIGH COURT IN THE CASE OF LD. C IT(A) VS. RELIANCE UTILITIES AND POWERS REPORTED IN (2009) 313 ITR 340 (BOM) HAS HELD THAT IF THERE ARE FUNDS AVAILABLE BOTH INTERE ST FREE, OVERDRAFTS AND LOANS TAKEN THEN A PRESUMPTION WOULD ARISE THAT THE INVESTMENTS ARE OUT OF INTEREST FREE FUNDS. IN THE PRESENT CASE, IN VIEW OF THE RATIO LAID DOWN BY HONBLE BOM BAY HIGH COURT IN THE AFORESAID DECISION, WE ARE OF THE VIEW THA T THE PRESUMPTION OF INVESTMENTS TO BE OUT OF INTEREST FREE FUND S IS ESTABLISHED AND THEREFORE NO DISALLOWANCE ON ACCOUNT OF IN TEREST COULD BE MADE BY INVOKING THE PROVISIONS OF SEC.14A R/W RU LE 8D OF IT RULES 1962. AS FAR AS THE DISALLOWANCE OF OTHER 13 ITA NO.2270/PN/2014 AY.NO.2011-12 EXPENSES UNDER RULE 8D IS CONCERNED, IT IS ASSESSEES SUBMISSION THAT THE INVESTMENTS ON WHICH THE DISALLOWANCE U/S 14A HAS BEEN MADE HAS NOT YIELDED ANY TAX FREE INCOME T HE AFORESAID SUBMISSION OF THE ASSESSEE HAS NOT BEEN CONTRO VERTED BY THE REVENUE. WE FIND THAT LD. CIT(A) HAS RELIED UPON CBD T CIRCULAR NO.5/2014 DATED 11.02.2014 TO HOLD THAT EVEN WHE N ASSESSEE HAS NOT EARNED ANY TAX FREE INCOME, PROVISIONS OF SEC.14A ARE APPLICABLE. AT THE SAME TIME WE FIND THAT THE HONBLE DELHI HIGH IN THE CASE OF CHEMINVEST LTD. VS. CIT REPORTED IN 2015 378 ITR 33 HAS HELD THAT PROVISIONS OF SEC.14A WILL NOT APPLY IF NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR. THE RELEVANT OBSERVA TION OF HONBLE HIGH COURT READS AS UNDER: 23. IN THE CONTEXT OF THE FACTS ENUMERATED HEREINBEFORE THE COURT ANSWERS THE QUESTION FRAMED BY HOLDING THAT THE EXPRESSION DOES NOT FORM PART O F THE TOTAL INCOME IN SECTION 14A OF THE ACT ENVISAGE S THAT THERE SHOULD BE AN ACTUAL RECEIPT OF INCOME, WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME, DURING T HE RELEVANT PREVIOUS YEAR FOR THE PURPOSE OF DISALLOWING ANY EXPENDITURE INCURRED IN RELATION TO THE SAID INCOME. IN OTHER WORDS, SECTION 14A WILL NOT APPLY IF NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR. 12. APART FROM HONBLE DELHI HIGH COURT, WE FIND THAT THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. CORR TECH ENERGY PVT. LTD (2015) 372 ITR 97 (GUJ) AND HONBLE PUNJA B AND HARYANA HIGH COURT IN THE CASE OF CIT VS. WINSOME TEXTILE INDUSTRIES LTD. (2009) 319 ITR 204 HAVE CONCLUDED THAT S EC.14A HAS NO APPLICATION WHEN THERE IS NO EXEMPT INCOME. IN SU CH A SITUATION, CONSIDERING THE HIERARCHICAL JUDICIAL SYSTEM THAT WE HAVE, ONCE AN AUTHORITY HIGHER THAN THIS TRIBUNAL HAS EXP RESSED 14 ITA NO.2270/PN/2014 AY.NO.2011-12 AN OPINION ON AN ISSUE, WE HAVE TO RESPECTFULLY FOLLOW THE S AME EVEN THOUGH THE HIGH COURT BE OF A DIFFERENT STATE AN D FOR THIS PROPOSITION WE RELY ON THE DECISION OF HONBLE BOMBAY HIG H COURT IN THE CASE OF CIT VS. GODAVARI DEVI SARAF (1978) 11 3 ITR 589 (BOM). AS FAR AS THE BINDING NATURE OF CBDT CIRCULAR IS CONCERNED, IT IS A SETTLED LAW THAT AN ASSESSEE IS ENTITLED TO IGNORE A CIRCULAR IF ITS TERMS ARE BEYOND THE PROVISIONS O F THE ACT AND IT IS ONLY A BENEVOLENT CIRCULAR WHICH IS BINDING AND TH AT TOO ON REVENUE. FURTHER, THE TRIBUNAL IS NOT BOUND TO TAKE JUDICIAL NOTICE OF THE CIRCULARS ISSUED BY THE BOARD. IN THIS CONN ECTION, WE WOULD ALSO LIKE TO REPRODUCE THE OBSERVATIONS OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. DILIP SHIRODKAR REPORTED IN (2005) 93 ITD 0041. 9.AS FOR LEARNED DEPARTMENTAL REPRESENTATIVE'S RELIANCE ON THE CBDT COMMUNICATION, WE HARDLY NEED TO STATE THAT LAW IS TRITE THAT A CIRCULAR, EVEN UNDER S. 119, CANNOT BE THRUST UPON THE ASSESSEE. THE ASSESSEE CA N DERIVE ADVANTAGE FROM A CIRCULAR BUT IT DOES NOT BI ND THE ASSESSEE IN ANY WAY NOR CAN IT IMPOSE ANY TAXABILIT Y ON THE ASSESSEE. THE ASSESSEE IS ENTITLED TO IGNORE A CIRCULAR IF ITS TERMS ARE BEYOND THE PROVISIONS OF THE ACT. IT IS ONLY A BENEVOLENT CIRCULAR WHICH IS BINDING, AND TH AT TOO ON THE REVENUE. IF AUTHORITY IS NEEDED, THE SAME IS CONTAINED IN NUMEROUS JUDICIAL PRECEDENTS INCLUDING JUDGMENTS OF HON'BLE JURISDICTIONAL HIGH COURT IN T HE CASE OF SMT. K. BHOOMIAMMA VS. CIT (1991) 98 CTR (KAR) 184 : (1992) 194 ITR 723 (KAR), OF HON'BLE CA LCUTTA HIGH COURT IN THE CASE OF CIT VS. RAMCHANDRA PODDAR CHARITABLE TRUST (1987) 164 ITR 666 (CAL). AS THE HON'BLE SUPREME COURT HAS OBSERVED IN THE CASE OF KESHAVJI RAVJI & CO. VS. CIT (SUPRA), BOARD CANNOT PRE- EMPT A JUDICIAL INTERPRETATION OF SCOPE AND AMBIT O F A PROVISION OF THE ACT BY ISSUING A CIRCULAR ON THE S UBJECT. IT IS ALSO WELL SETTLED IN LAW THAT TRIBUNAL IS NOT BOUND TO TAKE JUDICIAL NOTICE OF THE CIRCULARS, ISSUED BY TH E BOARD, AS IS HELD IN THE CASE OF MOTOR INDUSTRIES CO. LTD. VS. CIT (1986) 55 CTR (KAR) 36 : (1987) 163 ITR 659 (KAR), BY THE HON'BLE JURISDICTIONAL HIGH COURT. 15 ITA NO.2270/PN/2014 AY.NO.2011-12 13. BEFORE US REVENUE HAS NOT PLACED ANY CONTRARY BINDIN G DECISION IN ITS SUPPORT. CONSIDERING THE TOTALITY OF AFORESAID FACTS AND RELYING ON THE DECISIONS OF HONBLE HIGH COURTS CITED HEREINABOVE, WE ARE OF THE VIEW THAT NO DISALLOWANCE OF U/S 14A COULD BE MADE IN THE PRESENT CASE. THUS, THIS GROUND OF THE ASSESSEE IS ALLOWED . 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON 27 TH OF JANUARY, 2017. SD/- SD/- (R.P. TOLANI) ( ANIL CHATURVEDI ) / JUDICIAL MEMBER ! / ACCOUNTANT MEMBER PUNE; ! DATED : 27 TH JANUARY, 2017. YAMINI '#$%&'&$ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3 . 4. 5. 6. CIT(A)-V, PUNE. CIT-V, PUNE. #$% &&'(, * '(, / DR, ITAT, B PUNE; %+, - / GUARD FILE / BY ORDER , //// // TRUE COPY // T // //TRUE // TRUE COPY // // ./0 &1 '2 / SR. PRIVATE SECRETARY * '( , / ITAT, PUNE