M/s. Gujarat State Petronet Ltd., Gandhinagar V. The Add.CIT.,GNR Circle, Gandhinagar

ITA 2286/AHD/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 94841 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 2 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 15-09-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 09-09-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JAGDISH
• Keywords: Capital asset; Depreciation; Earning of tax free income; Question of law; Revised return; Revenue expenditure; Capital expenditure
• Section: 143(3); 142(1); 234B; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH AHMEDABAD BEFORE S/SHRI RAJPAL YADAV, JM, & MANISH BORAD, AM. ITA NO.2286/AHD/2011 ASST. YEAR: 2008-09 GUJARAT STATE PETRONET LTD., 5 TH FLOOR, GSPC BHAWAN, SECTOR-11, GANDHINAGAR. VS ADDL. CIT, GANDHINAGAR, 5 TH FLOOR, BLOCK NO.14, UDYOG BHAVAN, SECTOR-11, GANDHINAGAR. (APPELLANT) (RESPONDENT) PA NO.AABCG 1812 E AND ITA NO.2359/AHD/2011 ASST. YEAR: 2008-09 ADDL. CIT, GANDHINAGAR, 5 TH FLOOR, BLOCK NO.14, UDYOG BHAVAN, SECTOR-11, GANDHINAGAR VS GUJARAT STATE PETRONET LTD., 5 TH FLOOR, GSPC BHAVAN, SECTOR-11, GANDHINAGAR.. (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI S. N. SOPARKAR, AR REVENUE BY SHRI JAGDISH, CIT- DR DATE OF HEARING: 15/9/2015 DATE OF PRONOUNCEMENT: 07/12/2015 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER. THESE TWO APPEALS -ONE BY ASSESSEE IN ITA NO.2286/ AHD/2011 AND THE OTHER BY REVENUE IN ITA NO.2359/AHD/2011 BO TH FOR ASST.YEAR 2008-09 HAVE BEEN FILED AGAINST THE ORDER OF CIT(A), GANDHINAGAR, AHMEDABAD, DATED 23/6/2011 [THERE APPE ARS SOME ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 2 TYPOGRAPHICAL ERROR IN THE ORDER OF LD. CIT(A) WHIL E MENTIONING THE DATE OF ORDER AS 23.6.2010 BECAUSE THE APPEAL WAS I NSTITUTED ON 29.11.2010 AND IMPUGNED ORDER WAS COMMUNICATED TO T HE ASSESSEE ON 21.7.2011 AS DISCERNIBLE FROM FORM NO.36)]. ASSE SSMENT WAS FRAMED U/S 143(3) OF THE I.T. ACT, 1961 (HEREIN AFT ER REFERRED AS THE ACT) BY ADDL. COMMISSIONER OF INCOME-TAX, GANDHINAG AR RANGE, GANDHINAGAR ON 29.10.2010. SINCE BOTH THE APPEALS P ERTAIN TO THE SAME ASSESSEE AND THE ISSUES ARE COMMON, THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON O RDER FOR THE SAKE OF CONVENIENCE. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT AS SESSEE I.E. GUJARAT STATE PETRONET LTD. (IN SHORT GSPL) IS IN THE BUSINESS OF LAYING AND OPERATING NATURAL GAS TRANSPORTATION NET WORK THROUGH PIPELINE AND WORK IS CARRIED OUT ON PROJECT TO PROJ ECT BASIS AND DURING THE FY SOME PROJECTS ARE COMPLETED AND SOME PROJECT S ARE IN THE MIDDLE OF COMPLETION. THE ASSESSEE HAS FILED ITS RE TURN OF INCOME 30.9.2009 DECLARING TOTAL INCOME OF RS.113,56,66,38 4 AND SUBSEQUENTLY A REVISED RETURN OF INCOME WAS FILED O N 29.3.2010 SHOWING TOTAL INCOME OF RS.114,32,03,874/-. THE RET URN WAS SELECTED FOR SCRUTINY AND ASSESSMENT PROCEEDINGS WERE COMPLE TED BY THE AO UNDER SECTION 143(3) OF THE I.T. ACT, 1961. DETAILS AS REQUIRED BY THE ASSESSING OFFICER WERE SUBMITTED BY THE ASSESSEE DU RING ASSESSMENT PROCEEDINGS AND INCOME OF THE ASSESSEE W AS ASSESSED AT RS.127,85,81,330/-, AFTER MAKING ADDITIONS OF RS .13,53,77,456/- IN REGARD TO THE FOLLOWING :- ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 3 TOTAL INCOME AS PER STATEMENT OF INCOME FILED WITH THE REVISED RETURN OF INCOME AMOUNT (I) DISALLOWANCE OF DEPRECIATION ON ROU (CROP COMPENSATION), ROU (RELATED TO LAND USERS) ROW PAYMENTS AS DISCUSSED ABOVE. RS.10,77,16,139/- (II)DISALLOWANCE OF EXPENDITURE DIRECTLY ATTRIBUTABLE TO CAPITAL WORK-IN-PROGRESS RS.1,23,48,152/- (III)DISALLOWANCE U/S 14A RS.1,53,13,165/- TOTAL- RS.13,53,77,456/- 4. THE MATTER WAS TAKEN UP BEFORE THE CIT(A) AND AP PEAL OF THE ASSESSEE WAS PARTLY ALLOWED AND, THEREFORE, BOTH TH E ASSESSEE & THE REVENUE ARE IN APPEALS BEFORE THE TRIBUNAL. 5. FIRST WE TAKE UP REVENUES APPEAL IN ITA NO.2359 /AHD/2011 FOR ASST. YEAR 2008-09. GROUND NO.1 : THE LDD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF DEPRECIATION IN RESPEC T OF ROU CROP COMPENSATION OF RS.5,25,65,289/-. 6. LD. AR SUBMITTED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF LAYING PIPELINES AND TRANSPORTATION OF THE NATUR AL GAS TO CUSTOMERS. IN ORDER TO LAY DOWN SUCH PIPELINES THE ASSESSEE HA S TO ENTER THE PRIVATE PROPERTIES, FARMLANDS, CROSS NATIONAL HIGHW AYS ETC. TO DIG UP THE LAND AND LAY THE PIPELINES UNDERNEATH THE GROUN D. FOR ENTERING THE PRIVATE PROPERTIES, IT HAS TO OBTAIN A RIGHT/EN TITLEMENT FROM THE GOVERNMENT OF GUJARAT UNDER THE GUJARAT WATER AND G AS PIPELINES (ACQUISITION OF RIGHT OF USER IN LAND) ACT, 2000. S IMILARLY, THE ASSESSEE HAS OBTAINED RIGHT OF WAY FROM THE VARIO US AUTHORITIES ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 4 ALONG THE PIPELINE ROUTE FOR CROSSING NATIONAL HIGH WAYS, CANALS, RIVERS ETC. FOR THIS PURPOSE, THE ASSESSEE PAID COMPENSATI ON AS PRESCRIBED UNDER THE RELEVANT STATUTE, TO COMPENSATE THE OWNER OF LAND WHO HAS SUFFERED ANY DAMAGE OR LOSS OR INJURY IN THE LAND U NDER WHICH PIPELINE IS PROPOSED TO BE LAID OR HAS BEEN LAID. FURTHER, A SSESSEE WISHES TO SUBMIT THAT THE RIGHT OF USER IN LAND IS ACQUIRED BY THE STATE GOVERNMENT UNDER THE GUJARAT WATER AND GAS PIPELINE S (ACQUISITION OF RIGHT OF USER IN LAND) ACT 2000 (ACT) AND IN F URTHERANCE IS VESTED IN TO THE ASSESSEE VIA ISSUANCE OF NOTIFICATION IN THE OFFICIAL GAZETTE. ON VESTING OF SUCH RIGHT, THE ASSESSEE CAN ENTER UP ON THE LAND AND LAY PIPELINES OR DO ANY OTHER THING NECESSARY FOR L AYING OF PIPELINE. THE STATUTE GOVERNING THE GRANT OF RIGHT OF USER I N LAND PROVIDES THAT SUCH LAND CAN BE USED ONLY FOR LAYING THE PIPELINES AND FOR MAINTAINING, EXAMINING, REPAIRING, ALTERING AND REM OVING ANY SUCH PIPELINE. FURTHER SECTION 9 OF THE GUJARAT WATER AN D GAS PIPELINES (ACQUISITION OF RIGHT OF USER IN LAND) ACT 2000 (A CT) PROVIDES THAT THE OWNER OF THE LAND SHALL BE ENTITLED TO USE THE LAND FOR THE PURPOSE FOR WHICH IT WAS USED BEFORE THE SAME WAS ACQUIRED BY THE GOVERNMENT. THE OWNERSHIP RIGHTS REMAIN WITH THE OR IGINAL OWNER FROM WHOM THE VERY LIMITED RIGHT TO USE THE LAND AR E ACQUIRED BY THE GOVERNMENT OF GUJARAT AND IN TURN SUCH LIMITED RIGH T TO USE THE LAND (AS PER SECTION 5 & SECTION 7 OF THE ABOVE REFERRED ACT) ARE VESTED IN THE ASSESSEE. AS PER THE PRACTICE CONSISTENTLY FOLLOWED IN ALL TH E PAST YEARS, ASSESSEE CONSIDERS THE COST INCURRED TOWARDS CROP C OMPENSATION, ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 5 COMPENSATION FOR ACQUIRING RIGHT TO USE/RIGHT OF WA Y AS COST OF LAYING PIPELINES AND TREATED AS PART AND PARCEL COST OF PI PELINES AND ACCORDINGLY CAPITALIZED IT AS COST OF PLANT AND MAC HINERY AND CLAIMED DEPRECIATION ACCORDINGLY. THE BREAK-UP OF THE DEPRECIATION CLAIMED BY THE ASS ESSEE DURING THE YEAR UNDER CONSIDERATION IS AS UNDER :- I. ROU-RIGHT OF USER IN LAND RS.3,85,82,097/- II. CROP CMPENSATION - RS.5,25,65,289/- III. ROW PAYMENTS RS.1,65,68,753/- ----------------------------- RS.10,77,16,139/- ________________ IN RESPONSE TO THE ISSUES RAISED BY THE ASSESSING O FFICER, THE ASSESSEE SUBMITTED THAT THE COST SUBJECTED TO SCRUT INY HAS BEEN TREATED AS PART OF COST OF PIPELINE AND CAPITALIZED ACCORDINGLY AND MERGED WITH THE BLOCK OF ASSETS (PLANT AND MACHINER Y) TO WHICH SUCH PIPELINES HAVE BEEN ADDED AND ON SUCH COMBINED VALU E, THE DEPRECIATION HAS BEEN ALLOWED. IN VIEW OF THE RELEVANT PROVISIONS OF THE STATUTE G OVERNING THE GRANT OF AFORESAID RIGHTS, THE ASSESSEE CLAIMED THAT THE AMO UNT OF COMPENSATION PAID TO OWNERS/GOVERNMENT IS IN THE NA TURE OF EXPENDITURE INCURRED IN RELATION TO PUTTING ASSET T O USE I.E. PIPELINE AND HENCE HAS BEEN ADDED SUCH EXPENDITURE TO THE CO ST OF PIPELINES IN VIEW OF SECTION 43(1) OF THE ACT. ACCORDINGLY, T HE ASSESSEE CLAIMED DEPRECIATION ON THE TOTAL COST OF PIPELINES (INCLUD ING THE COST INCURRED ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 6 IN RELATION TO ACQUIRING THE RIGHT OF USER IN LAN D AND RIGHT OF WAY AND CROP COMPENSATION) AS PER THE PROVISIONS OF THE ACT . AS REGARDS CROP COMPENSATION, DURING THE APPELLATE PROCEEDINGS FOR ASST. YEAR 2006-07, ASSESSING OFFICER CONCEDED BEFO RE HONBLE CIT(A) THAT ONLY IN ABSENCE OF DETAILS, DEPRECIATIO N ON THE ELEMENT OF CROP COMPENSATION WAS DISALLOWED DURING THE ASSESSM ENT PROCEEDINGS AND ACCORDINGLY BASED ON HIS REMAND REP ORT STATING THIS FACT AS ALSO ON LEGAL GROUNDS HONBLE CIT(A) ALLOWE D THE SAME IN FAVOUR OF THE ASSESSEE. VIDE ORDERS FOR ASST. YEAR 2006-07 & 2007-08 HONBL E CIT(A) HAS DELETED THE DISALLOWANCE MADE BY LD. ASSESSING OFFI CER IN RESPECT OF CROP COMPENSATION AS WELL AS ROW PAYMENTS. HOWEVER, IN A YEAR UNDER CONSIDERATION, LD. ASSESSI NG OFFICER HAS DISALLOWED THE ABOVE INCURRED COSTS FOR ROU-LAND, C ROP COMPENSATION & ROW ON THE GROUND THAT THE ASSESSEE HAD ACQUIRED PERPETUAL RIGHT ON THE UNDERGROUND SPACE IN WHICH THE PIPELINE HAD BEEN LAID HENCE, THE UNDERLYING ASSET IS ONLY THE LAND AND LAND IS N OT A DEPRECIABLE ASSET AND, THEREFORE, ASSESSING OFFICER MADE AN ADJ USTMENT OF RS.10,77,16,139/- TO THE INCOME OF THE ASSESSEE, IN RESPECT OF DISALLOWANCE OF DEPRECIATION IN RESPECT OF ALL THRE E I.E. ROU-RIGHT OF USER IN LAND, CROP COMPENSATION AND ROW PAYMENTS. ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 7 7. AGGRIEVED, ASSESSEE WENT IN APPEAL BEFORE CIT(A) WHO ON THE BASIS OF VIEWS TAKEN BY HIS PREDECESSORS THAT CROP COMPENSATION GOES TOWARDS THE COST OF PIPELINE AND, THEREFORE, D EPRECIATION OF RS.5,25,65,289/- IS ALLOWABLE ON THE COST OF CROP C OMPENSATION AND ON THE OTHER HAND UPHELD THE ADDITION BY SUSTAINING DISALLOWANCE OF DEPRECIATION AT RS.385,82,097/- CLAIMED ON COST OF RIGHT OF USE IN LAND AND DEPRECIATION AT RS.165,68,753/- ON COST OF COMP ENSATION PAID FOR RIGHT OF WAY (ROW). 8. THE LD. DR SUPPORTED THE ORDER OF ASSESSING OFFI CER AND WAS OF THE VIEW THAT COMPENSATION PAID FOR CROP SHOULD BE ADDED TO THE COST OF LAND AND NO DEPRECIATION SHOULD BE ALLOWED. 9. ON THE OTHER HAND, LD. AR REFERRED TO THE ORDER OF CO-ORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO.3222/AHD/200 9 FOR ASST. YEAR 2006-07 AND OTHERS WHEREIN SIMILAR ISSUE HAS B EEN DECIDED. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE BEFORE US IS TO EXAMINE ABOUT THE ALLOWABILITY OF DEPRECIATION OF RS.5,25,65,289/- IN RESPECT OF PAYM ENT FOR CROP COMPENSATION. WE FIND THAT SIMILAR ISSUE WAS DEALT BY THE CO-ORDINATE BENCH IN ITA NO. 3222/AHD/2009 FOR ASST. YEAR 2006- 07, WHEREIN THE CO-ORDINATE BENCH VIDE ITS ORDER DATED 23.9.2011 HA S OBSERVED AS BELOW ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 8 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PER USED THE MATERIAL ON RECORD AND HAVE GONE THROUGH THE ORDERS OF AUTHORIT IES BELOW. WE FIND THAT THE ASSESSEE COMPANY HAD TO LAY DOWN THE PIPELINE O N LAND OF 3 RD PARTY TO WHOM THREE TYPES OF COMPENSATION WERE PAID BY THE A SSESSEE. 1 ST IS RIGHT TO USE OF LAND, 2 ND IS CROP COMPENSATION AND 3 RD IS RIGHT OF WAY.LD. CIT(A) HAS DECIDED THAT NO DEPRECIATION IS ALLOWABLE TO TH E ASSESSEE IN RESPECT OF RIGHT TO USE LAND. REGARDING RIGHT OF WAY, IT WAS D ECIDED BY THE LD. CIT(A) THAT DEPRECIATION CAN BE ALLOWED BUT THE REVENUE IS IN APPEAL. IT WAS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE ORDER OF CIT(A) ON THIS ASPECT MAY BE REVERSED AND THAT OF THE A.O. CA N BE RESTORED. THE 3 RD ASPECT IS REGARDING THE CLAIM OF THE ASSESSEE OF DE PRECIATION ON CROP COMPENSATION. WE FIND THAT CROP COMPENSATION IS PAY ABLE ONLY TO THOSE LAND OWNERS ON WHOSE LAND THERE WAS ANY STANDING CR OP OR STANDING TREES. FOR THE PURPOSE OF LAYING OF PIPELINE, THE ASSESSEE IS ACQUIRING THE LAND AND NOT THE CROP AND TREES WHICH WERE STANDING ON T HE LAND. BUT IN THE PROCESS OF LAYING DOWN THE PIPELINE BY USING THE LA ND ACQUIRED BY THE ASSESSEE, THE CROP AND TREES STANDING ON SUCH LAND GET DESTROYED AND HENCE, THE ASSESSEE WAS REQUIRED TO COMPENSATE THE LAND OWNER IN RESPECT OF SUCH CROP OR TREES STANDING ON THE LAND IN ADDITION TO THE LAND COMPENSATION. IN OUR CONSIDERED OPINION, COMPENSATI ON FOR SUCH DAMAGE TO THE LAND OWNER CANNOT BE ADDED TO THE COST OF LA ND BECAUSE EVEN AFTER ACQUIRING LAND, THE ASSESSEE COULD HAVE WAITED TILL THE CROP WAS HARVESTED BY THE LAND OWNER OR BY THE ASSESSEE AND IN THAT SI TUATION, NO COMPENSATION WOULD HAVE BEEN REQUIRED TO BE PAID BE CAUSE THERE WOULD HAVE BEEN NO LOSS OR DAMAGE TO THE CROP OR THE ASSE SSEE COULD HAVE REALIZED BACK BY SELLING THE CROP BUT IT WOULD HAVE RESULTED IN DELAY OF THE PROJECT AND TO AVOID THIS, ASSESSEE AGREED TO PAY C OMPENSATION FOR DAMAGE TO THE CROP ETC. IN ORDER TO AVOID THE DELAY IN THE PROJECT AND HENCE, SUCH COMPENSATION SHOULD BE ADDED TO THE COS T OF PIPELINE AND NOT TO THE COST OF LAND. IN THIS VIEW OF THE MATTER, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD. CIT(A) ON THIS ASPECT. WE, THEREFO RE HOLD TH AT THE LD. CIT(A) HAS RIGHTLY ALLOWED DEPRECIATION OF RS.1,36, 89,211/- BEING SPENT ON CROP COMPENSATION. WE HAVE ALREADY HELD ON THE BASI S OF SUBMISSION OF LD. COUNSEL OF THE ASSESSEE THAT GROUND NO.4 OF THE ASSESSEES APPEAL IS REJECTED AS NOT PRESSED. IT IS ALSO SUBMITTED BY TH E LD. COUNSEL FOR THE ASSESSEE IN RESPECT OF THE PART GROUND OF REVENUES APPEAL IN RESPECT OF DEPRECIATION ON ROW THAT THE DISALLOWANCE OF DEPREC IATION OF RS.1,80,82,119/- IN RESPECT OF LAND COMPENSATION FO R ROW MAY BE DECIDED AGAINST THE ASSESSEE AND HENCE, WE CONFIRM THE DISALLOWANCE OF DEPRECIATION OF 1,08,05,502/- IN RESPECT OF DEPRECI ATION OF ROW TOTAL RS.2,88,87,621/- IS CONFIRMED OUT OF THE TOTAL DISA LLOWANCE OF DEPRECIATION MADE BY THE A.O. OF RS.8,29,90,171/-. GROUND NO.4 O F THE ASSESSEES ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 9 APPEAL IS REJECTED AND GROUND NO.3 OF THE REVENUES APPEAL IS PARTLY ALLOWED. 11. THE FACTS OF THE CASE UNDER APPEAL ARE EXACTLY SIMILAR TO THE FACTS DISCUSSED IN ASSESSEES OWN CASE BY THE CO-OR DINATE BENCH AND APPLYING THE SAME RATIO, WE ARE OF THE CONSIDERED V IEW THAT DEPRECIATION AT RS. 5,25,65,289/- SHOULD BE ALLOWED ON THE COST OF COMPENSATION PAID FOR DAMAGE OF CROP TO THE LAND OW NER. ACCORDINGLY, THIS GROUND OF REVENUE IS DISMISSED. 12. GROUND NO.2 IS AS UNDER :- 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OUT OF CAPITAL WORK IN PROGRESS OF RS.1,23,48,152/-. THIS GROUND OF APPEAL IS INTER LINKED WITH GROUND N O.2 OF ASSESSEES APPEAL IN ITA NO.2286/AHD/2011 FOR ASST. YEAR 2008- 09 WHICH READS AS UNDER :- 2. THE LD. COMMISSIONER HAS ERRED IN SUSTAINING DIS ALLOWANCE OF @ 5% OF RS.12,34,81,520/- OF CERTAIN REVENUE EXPEND ITURE ASSUMING THE SAME AS CAPITAL EXPENDITURE TO BE INCL UDED IN CAPITAL WORK IN PROGRESS. SINCE BOTH THE GROUNDS ARE LINKED TOGETHER THEREFOR E, WE TAKE THEM TOGETHER. 13. THE LD. DR SUPPORTED THE ORDER OF ASSESSING OFF ICER AND VEHEMENTLY OBJECTED TO THE DELETION OF IMPUGNED DIS ALLOWANCE. ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 10 14. ON THE OTHER HAND, LD. AR SUBMITTED THAT THE BA LANCE SHEET OF THE ASSESSEE COMPANY SHOWS CAPITAL WORK IN PROGRESS (CWIP) FOR RS.588,79,26,366/- WHICH IS IN RELATION TO VARIOUS PROJECTS BEING SET UP. AS FAR AS CAPITALIZATION OF EXPENSES, IN LINE W ITH SECTION 43(1) OF THE ACT, THE COMPANY IS FOLLOWING THE PRACTICE OF C APITALIZING ALL THE EXPENDITURE INCURRED DIRECTLY ATTRIBUTABLE TO SUCH PROJECTS. THE COMPANY IS REGULARLY FOLLOWING THE PRACTICE AND IS ABIDING WITH THE ACCOUNTING STANDARD-10 ISSUED BY ICAI. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, VIDE V ERY FIRST NOTICE U/S 142(1) OF THE ACT LEARNED AO HAD INSTRUCTED THE ASSESSEE TO APPROPRIATE/BIFURCATE TOTAL EXPENDITURE DEBITED TO THE PROFIT AND LOSS ACCOUNT (I.E. RS.298,15,11,321) TOWARDS SUCH CWIP W ITHOUT SEEKING INFORMATION IN RESPECT OF ACCOUNTING DONE BY THE AS SESSEE AND WITHOUT VERIFYING THE BIFURCATION ALREADY UNDERGONE IN THIS REGARD IN THE BOOKS OF ACCOUNTS. IN RESPONSE TO THE SAID NOTICE, ASSESSEE HAD MADE A DETAILED SUBMISSION VIDE ITS LETTER DATED 31 ST AUGUST, 2010 STATING THAT THE COMPANY IS ENGAGED IN BUSINESS OF TRANSPORT OF GAS THROUGH PIPELINE FOR WHICH COMPANY CONSTRUCTS PIPELINE SYSTEM. CONST RUCTION WORK RELATED TO THE PIPELINE IS GIVEN TO A CONTRACTOR ON TURNKEY BASIS, WHERE ALL ACTIVITIES (INCLUDING INCIDENTAL & ANCILLARY WO RK) RELATED TO PIPELINE IS BEING DONE BY CONTRACTOR. SOME MINOR ADMINISTRAT IVE EXPENDITURE IS INCURRED BY COMPANY WHICH ALSO IS BEING ADDED TO THE COST OF THE PROJECT & BEING DULY FORMING PART OF CAPITAL WORK IN PROGRESS. BREAK UP OF PROJECT COST I S RECORDED IN OUR ACCOUNTING SYSTEM WHICH ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 11 DULY REFLECTS THAT ALL THE COST RELATED TO THAT PRO JECT IS CAPITALIZED ALONG WITH THE PROJECT. IT WAS FURTHER STATED BEFORE THE ASSESSING OFFICER THAT EXPENDITURE CHARGED IN P & L ACCOUNT ARE EXPENDITURE RELATED TO OPERATING & MAINTAINING THE OPERATIONAL PIPELINE WHICH ARE ALRE ADY PUT TO USE & SOME ADMINISTRATIVE EXPENDITURE WHICH ARE NOT CONNE CTED WITH ANY OF THE PROJECTS. 15. HOWEVER, ASSESSING OFFICER WAS NOT SATISFIED WI TH THE EXPLANATION OF ASSESSEE AND WENT AHEAD TO MAKE ADDI TION OF 10% TOTAL EMPLOYEES COST OF THE COMPANY AT RS.7,63,31,4 20/- AND DISALLOWANCE OF 10% OF VARIOUS ADMINISTRATIVE AND O THER EXPENSES OF RS.4,71,50,100/-. IN TOTAL ASSESSING OFFICER MADE A DDITION OF RS.1,23,48,152/-. 16. AGGRIEVED, ASSESSEE WENT IN APPEAL BEFORE CIT(A ) WHO SUSTAINED THE DISALLOWANCE AT 5% INSTEAD OF 10% TAK EN BY THE ASSESSING OFFICER BY OBSERVING AS UNDER :- 5.3 I HAVE CONSIDERED THE ISSUE IN ITS ENTIRETY. T HE FOLLOWING PERTINENT OBSERVATIONS ARE MADE : A. THERE IS NO DOUBT THAT DIRECT EXPENDITURE ATTRIB UTABLE TO CAPITAL ASSETS IS ONLY TO BE CAPITALIZED. B. HOWEVER, I AGREE WITH THE AO THAT THE ASSESSEE H AS TAKEN THE STAND THAT SINCE ITS SYSTEM IS MAINTAINED IN SAP WH ICH IS AN ERP SOLUTION, THE REQUIREMENT IS FULFILLED. HOWEVER , IT IS PERTINENT TO NOTE HERE THAT UNDER ERP SOLUTION, ONL Y WHAT IS TAGGED TO AN EXPENDITURE IS CLUBBED TOGETHER. THE T AGGING ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 12 REMAINS IN THE HANDS OF THE ASSESSEE. IF CERTAIN EX PENDITURE IS NOT TAGGED AS RELATABLE TO A PROJECT, IT WILL NOT B E CLUBBED. C. WHEN THE ASSESSEE SAYS THAT HIS COMPANY IS ISO 9 001, OHSAS 18001 COMPANY, IT WANTS TO TAKE ITS CLASSIFIC ATION AT THE FACE VALUE. THERE IS NO DENYING THE FACT THAT ONCE AN EXPENDITURE IS TAGGED AS NOT CONNECTED WITH SETTING UP A PARTICULAR ASSET, THE ACCOUNTING WOULD FOLLOW IT. H ERE THE EXPENDITURE CLAIMED CAPITALIZED NEEDS TO BE COMPARE D WITH EXPENSES TAKEN TO REVENUE HEAD. FOR EXAMPLE IN THE CAR HIRING, RUNNING AND MAINTENANCE EXPENSES AND TRAVELLING EXP ENSES THE FOLLOWING DETAILS ARE NOTE WORTHY: EXPENSES CLAIMED AS REVENUE CAR FUEL EXP. COMPANY VEHICLES 2,627,2 01 REPAIRS & MAINTENANCE EXP. VEHICLES 845,249 VEHICLE HIRING CHARGES 12,230,646 TRAVELLING EXPENSES-DIRECTOR 452,682 TRAVELLING EXPENSES OTHERS 7,202,687 AS AGAINST THE EXPENSES CLAIMED ATTRIBUTABLE TO PRO JECTS THE FOLLOWING EXPENSES HAVE BEEN SHOWN. VEHICLE HIRE CHARGES (I.E. RS.6,68,207/- IN BHADBH UT-GANA PIPELINE& RS.10,51,557/- IN RAJKOT-JAMNAGAR PIPEL INE) NOW, THE APPELLANT CLEARLY BOOKS ALL TRAVELLING EXP ENSES AND EXPENSES ON RUNNING AND MAINTENANCE OF COMPANY VEHI CLES AS REVENUE EXPENSES. IT IS NOT BELIEVABLE THAT EVEN A SINGLE PAISE OF THESE HUGE EXPENSES WAS NOT DIRECTLY RELATED TO SETTING UP OF ASSETS. EVEN ONLY AROUND 10%OF VEHICLE HIRING EXPEN SES ARE CAPITALIZED. THE CLASSIFICATION OF EXPENSES BY THE ASSESSEE IS NOT BELIEVABLE AS EXACTLY CORRECT IN THESE CIRCUMST ANCES. D. IN LIGHT OF ABOVE, THERE WAS A VALID REASON TO B ELIEVE FOR THE AO THAT THE REVENUE EXPENDITURE CLAIMED HAD AN ELEMENT OF COST DIRECTLY ATTRIBUTABLE TO SETTING UP OF PROJECTS. TH E EXACT QUANTIFICATION IS NOT POSSIBLE AND THE DISALLOWANCE OF REVENUE EXPENDITURE AND SUBSEQUENT CAPITALIZATION CAN ONLY BE AN ESTIMATE IN THESE CIRCUMSTANCES. ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 13 E. FOR ESTIMATING THE DISALLOWANCE, THE FOLLOWING M ATERIAL FACT OBSERVED BY THE AO IS ALSO OF IMPORT. SUCH EXPENDITURE IS MORE PERTINENT WHEN THE COMPAN Y IN GROWING AND IN THE PROCESS OF EXPANSION. THIS IS TR UE FOR THE PRESENT ASSESSEE TOO WHEREIN TOTAL REVENUE EARNED I S RS.447.27 CRORES WHILE TOTAL INVESTMENT ON CAPITAL WORK-IN- PROGRESS (AS ON 31.3.08) AMOUNTS TO RS.588.79 CRORE S. IT IS RELEVANT TO HIGHLIGHT HERE THAT TOTAL WORK IN PROGR ESS CONSTITUTE MORE THAN 25% OF TOTAL INVESTMENT MADE IN VARIOUS A SSETS AS PER BLOCK OF ASSETS (SCH.E OF BALANCE-SHEET). F. HOWEVER, THERE ARE CERTAIN EXPENSES LIKE BUSINES S PROMOTION EXPENSES WHICH CANNOT BE USUALLY TAKEN TO BE INCURR ED TOWARDS WORK IN PROGRESS. IN LIGHT OF ABOVE, I UPHOLD THAT CERTAIN PART OF TH E REVENUE EXPENDITURE CLAIMED HAD AN ELEMENT OF COST DIRECTLY ATTRIBUTABL E TO SETTING UP OF PROJECTS BUT I ESTIMATE IT TO BE 5% OF RS.12,34,81, 520/- INSTEAD OF 10% AS TAKEN BY THE AO; WHICH HAS TO BE DISALLOWED AND DIRECT IT TO BE ADDED TO CAPITAL WORK IN PROGRESS. THE AO IS DIR ECTED TO WORK OUT THE RESULTANT RELIEF. 17. AGGRIEVED, REVENUE IS NOW IN APPEAL BEFORE THE TRIBUNAL. 18. LD. DR IN SUPPORT OF THE ORDER OF ASSESSING OFF ICER SUBMITTED THAT IN THE CASE OF ASSESSEE TOTAL REVENUE FOR THE YEAR UNDER APPEAL IS RS.447.27 CRORES WHEREAS TOTAL INVESTMENT IN CAP ITAL WORK IN PROGRESS AS ON 31 ST MARCH, 2008 AMOUNTS TO RS.588.79 CRORES AND FURTHER TOTAL WORK IN PROGRESS CONSTITUTE MORE THAN 25% OF TOTAL INVESTMENT MADE IN VARIOUS ASSETS AS PER BLOCK OF A SSETS AND LOOKING TO THE QUANTUM OF BUSINESS ONE CANNOT DENY THE POSS IBILITY OF APPLICATION OF REVENUE EXPENDITURE CLAIMED AGAINST INCOME TO THE ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 14 CAPITAL WORK IN PROGRESS AND, THEREFORE, ASSESSING OFFICER WAS CORRECT IN HOLDING 10% DISALLOWANCE OF EXPENDITURE OF RS.12 ,34,81,520/-. 19. LD. AR SUBMITTED THAT THE ASSESSEE COMPANY IS A LISTED COMPANY AND IS REQUIRED TO PREPARE FINANCIAL STATEM ENT COMPLYING WITH VARIOUS ACCOUNTING STANDARDS APPLICABLE AS PER LAW ON SUCH TYPES OF COMPANIES. THESE STANDARDS ARE COMPULSORY IN NATURE AND ANY VARIATION FROM THE STANDARD LEADS TO QUALIFICAT ION IN AUDITORS REPORT. AS PER ACCOUNTING STANDARD 10 ACCOUNTING FOR FIXED ASSETS, EXTRACTS OF WHICH ARE REPRODUCED HEREUNDER FOR YOUR READY REFERENCE. .THE COST OF AN ITEM OF FIXED ASSET COMPRISES IT S PURCHASE PRICE.AND ANY DIRECTLY ATTRIBUTABLE COST OF BRINGI NG THE ASSET TO ITS WORKING CONDITION FOR ITS INTENDED USE WHICH IS IN LINE WITH SECTION 43(1) OF THE INCOME-T AX ACT, 1961 WHERE ACTUAL COST HAS BEEN DEFINED. COMPANY IS COMPLYING WITH THE ACCOUNTING STANDARDS PRESCRIBED BY ICAI & THE SAME IS BEING DULY VERIFIED BY MULTIPLE EXTERNAL PROFESSIONALS LIKE INTERNAL AUDITORS, STATUTORY AUD ITORS, TAX AUDITORS & C&AG AUDITORS. THE COMPANY IS FOLLOWING THE PRACTIC E OF CAPITALIZING ALL THE EXPENDITURE INCURRED FOR PROJECTS. ON THE O THER HAND EXPENDITURE RELATED TO OPERATIONAL ASSETS ARE CHARG ED TO P & L. ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 15 ALSO COMPANY IS ENGAGED IN BUSINESS OF TRANSPORT OF GAS THROUGH PIPELINE FOR WHICH COMPANY CONSTRUCTS PIPELINE SYST EM. CONSTRUCTION WORK RELATED TO THE PIPELINE IS GIVEN TO A CONTRACT OR ON TURNKEY BASIS, WHERE ALL ACTIVITIES (INCLUDING INCIDENTAL & ANCILL ARY WORK) RELATED TO PIPELINE IS BEING DONE BY CONTRACTOR. SOME MINOR AD MINISTRATIVE EXPENDITURE IS INCURRED BY COMPANY, THAT ALSO IS BE ING ADDED TO THE COST OF THE PROJECT & BEING DULY FORMING PART OF C APITAL WORK IN PROGRESS. BREAK-UP OF PROJECT COST IS RECORDED I N OUR ACCOUNTING SYSTEM WHICH REFLECTS THAT ALL THE COST RELATED TO THAT PROJECT IS CAPITALIZED ALONG WITH THE PROJECT AS TH E COMPANY IS MAINTAINING ITS ACCOUNTS IN SAP SYSTEM WHICH IS AN ERP (ENTERPRISE RESOURCE PLANNING) SOLUTION & A WORLD RENOWNED INTE GRATED SYSTEM OF RECORDING TRANSACTION WITH STRINGENT CONTROLS & ACCURACY. IN THIS SYSTEM, EACH & EVERY PROJECT RELATED EXPENDITURE IS TAGGED WITH THAT PROJECT & THEN WHENEVER THAT NATURE OF EXPENDITURE IS BOOKED, THE ERP SYSTEM AUTOMATICALLY ADDS THAT TO THE COST OF P ROJECT. EXPENDITURE CHANGED IN P & L ACCOUNT ARE EXPENDITUR E RELATED TO OPERATING & MAINTAINING THE OPERATIONAL PIPELINE WH ICH ARE ALREADY PUT TO USE & SOME ADMINISTRATIVE EXPENDITURE WHICH ARE NOT CONNECTED WITH THE PROJECT. SINCE, ALL EXPENDITURE CHARGED IN PROFIT & LOSS IS, RELATED TO NORMAL RUNNING OF BUSINESS & EXPENDITURE RELATED TO PROJEC T HAS ALREADY BEEN CAPITALIZED AS CAN BE SEEN FROM SCHEDULE F ARE NO ITEMS OF EXPENDITURE CHANGED TO P & L WHICH RELATES TO PROJE CT & HENCE NO DISALLOWANCE CAN BE MADE. ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 16 ALSO, BROAD ANALYSIS OF MAJOR EXPENDITURE HEADS OF P & L ALONG WITH JUSTIFICATION OF IT BEING REVENUE IS SUMMARIZED BEL OW FOR YOUR READY REFERENCE. EXPENDITURE HEAD AMOUNT (RS.) REMARKS EMPLOYEE COST 7,63,31,420 EMPLOYEE COST RELATES TO SALARY & VARIOUS EXPENDITURES INCURRED IN CONNECTION WITH THE WELFARE OF EMPLOYEES & DOES NOT SPECIFICALLY RELATE TO ANY PROJECT. GAS TRANSPORTATION CHARGES 1,44,87,981 IT RELATES TO GAS TRANSPORTATION CHARGE S PAID TO OTHER GAS TRANSPORTERS, WHOSE SERVICES ARE USED BY GSPL TO TRANSPORT GAS. IT IS RELATED TO OUR NORMAL BUSINESS & IN NO WAY CONNECTED WITH UNDER CONSTRUCTION PIPELINE(PROJECT) CONNECTIVITY CHARGES 11,21,94,929 IT RELATES TO REIMBURSEMENT OF CONNECT IVITY CHARGES TO GSPC, WHICH ARE PAID TO GAIL FOR TRANSPORTATION OF NATURAL GAS THROUGH GAILS PIPELINE. IT IS RELATED TO OUR NORMAL BUSINESS & IN NO WAY CONNECTED WITH UNDER CONSTRUCTION PIPELINE (PROJECT) ADMINISTRATIVE & OTHER EXPENSES 17,19,63,314 RELATES TO ADMIN. EXPENSES OF REGULAR BUSINESS & ADMIN. CHARGES TO THE EXTENT RELATED TO PROJECT HAS ALREADY BEEN CAPITALIZED AS CAN BE OBSERVED FROM ANNEXURE-15 TO THIS SUBMISSION. OPERATION & MAINTENANCE EXPENSES 15,92,10,364 AS CAN BE OBSERVED FROM NOMENCLATURE O F EXPENDITURE HEAD ITSELF THAT IT IS OPERATION & MAINTENANCERELATED EXPENSE WHICH CAN BE ONLY FOR OPERATIONAL PIPELINES & CAN NEVER BE FOR UNDER CONSTRUCTION PIPELINE(PROJECT) INTEREST & FINANCIAL CHARGES 81,51,37,556 OUT OF WHICH RS.1.28 CRORES OF FINANCI AL CHARGES RELATED TO PROJECT HAS ALREADY BEEN OFFERED FOR DISALLOWANCE, AS CAN BE SEEN FROM COMPUTATION OF TOTAL INCOME, BALANCE RELATES TO NORMAL BUSINESS OF THE COMPANY. EXPLAINED SEPARATELY IN POINT 29 TO THIS SUBMISSION. DEPRECIATION 1,63,21,85,757 BEING BOOK DEPRECIATION ALREADY OFFERED FOR DISALLOWANCE IN COMPUTATION OF TOTAL INCOME TOTAL 2,98,15,11,321 ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 17 20. LD. AR FURTHER SUBMITTED THAT DETAILED BREAK UP OF EACH AND EVERY EXPENDITURE HAS BEEN MADE AVAILABLE TO THE AS SESSING OFFICER AT THE TIME OF ASSESSMENT PROCEEDINGS WITH DETAILS OF APPLICATION OF SUCH EXPENDITURE. MORESOEVER, DETAIL OF CAPITAL EXP ENDITURE OF CAPITAL WORK IN PROGRESS FOR EACH SITE WAS MADE AVAILABLE A ND ASSESSEE HAS AT ITS OWN BIFURCATED THE EXPENDITURE UNDER CAPITAL HEAD WHICH NORMALLY ARE CLAIMED AS REVENUE EXPENDITURE. NO ERR OR HAS BEEN POINTED OUT BY ASSESSING OFFICER IN THESE DETAILS O F CAPITAL WORK-IN- PROGRESS. 21. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. ASSESSEE COMPANY IS A PUBLIC LISTED COMP ANY ENGAGED IN THE BUSINESS OF TRANSPORT OF GAS THROUGH PIPE LINES FOR WHICH COMPANY CONSTRUCTS PIPE LINES AND IN THIS BUSINESS PROCESS GENERALLY GIVES CONTRACT ON TURNKEY BASIS FOR VARIOUS SITES. THE MA IN REASON DUE TO WHICH ASSESSING OFFICER WENT AHEAD TO MAKE THE ADDI TION OF DISALLOWANCE AT 10% OF CERTAIN EXPENSES OF RS.12,34 ,81,520/- WAS THAT THE REVENUE OF THE ASSESSEE FOR THE YEAR UNDER APPEAL IS RS.447.27 CRORES WHEREAS TOTAL CAPITAL WORK IN PROG RESS AS ON 31.3.2008 IS RS.588.79 CRORES. FURTHER THE INVESTME NT IN CAPITAL WORK IN PROGRESS IS INCREASED BY APPROXIMATE RS.152 CROR ES DURING THE YEAR IN COMPARISON TO THE CAPITAL WORK IN PROGRESS OF RS.136.78 CRORES DURING ASST. YEAR 2007-08 I.E. F.Y.2006-07. DUE TO THIS VERY REASON THE ASSESSING OFFICER WAS OF THE VIEW THAT S OME PORTION OF THE EXPENDITURE CLAIMED BY THE ASSESSEE AS REVENUE EXPE NDITURE WOULD CERTAINLY HAVE BEEN SPENT FOR VARIOUS PROJECTS SHOW N UNDER CAPITAL WORK IN PROGRESS. ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 18 22. FROM PERUSAL OF DETAILS SUBMITTED BY ASSESSEE A ND WITH THE HELP OF LD. AR WE ARE ABLE TO SEE THAT ASSESSEE HAS SHOWN BIFURCATION OF EACH TYPE OF EXPENDITURE ALONG WITH MINUTE DETAI L AS TO THE APPLICATION OF THEIR EXPENDITURE. DETAILS HAVE ALSO BEEN PROVIDED FOR EACH SITE FALLING UNDER THE HEAD CAPITAL WORK IN PR OGRESS WHICH HAS BIFURCATION OF EACH EXPENDITURE AS COST ELEMENT AND THESE DETAILS OF PROJECT-WISE CAPITAL WORK IN PROGRESS APART FROM IN CLUDING COST OF CONSUMPTION OF SPARES AND MATERIAL ALSO INCLUDE COS T TOWARDS ADVERTISEMENT, RENT VEHICLE HIRING CHARGES, CONSTRU CTION, LEGAL EXPENSES, TELECOMMUNICATION ETC. 23. ASSESSING OFFICER HAS NOT CONTROVERTED TO THE F ACT THAT ASSESSEE COMPANY IS A PUBLIC LISTED COMPANY HAVING PROPER BOOKS OF ACCOUNT DULY AUDITED UNDER THE COMPANIES ACT BY CHA RTERED ACCOUNTANT AND IS NO DEFICIENCY HAS BEEN POINTED OU T IN BOOKS OF ACCOUNT AND NOR THE PROVISIONS OF SECTION 145(3) H AS BEEN INVOKED. 24. ASSESSING OFFICER HAS ALSO NOT CONTROVERTED TO THE FACT THAT REVENUE OF THE ASSESSEE HAS INCREASED FROM RS.335.0 2 CRORES IN F.Y.2006-07 TO RS.447.28 CRORES AND VIS--VIS PROFI TS HAS ALSO INCREASED FROM RS.89.38 CRORES TO RS.99.92 CRORES A ND CERTAINLY WHEN NO SPECIFIC DEFECT HAS BEEN POINTED OUT IN THE REVENUE OF THE ASSESSEE THEN ASSESSING OFFICER SHOULD HAVE APPRECI ATED THE FACT THAT INCOME OF THE ASSESSEE HAS ALSO INCREASED BY A LMOST 10 CRORES AND EARNING BY SHARE HAS INCREASED FROM 1.65 TO RS. 1.81 PER SHARE. ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 19 25. FROM ABOVE DISCUSSION, WE CAN INFER THAT NO SPE CIFIC DEFECT HAS BEEN POINTED OUT BY THE ASSESSING OFFICER IN THE BO OKS OF ACCOUNTS OF ASSESSEE MAINTAINED AS WELL AS DETAILS OF CAPITAL E XPENDITURE INCURRED FOR THE CAPITAL WORK IN PROGRESS INCURRED TO PROJECTS NOT COMPLETED UPTO THE END OF THE YEAR AND ALSO DID NOT CONTROVERT TO THE SUO MOTO ALLOCATION BY THE ASSESSEE OF CERTAIN REVE NUE EXPENDITURE WHICH RELATES TO THE PROJECT UNDER PROCESS. HOWEVER , LOOKING TO THE SIZE OF BUSINESS OF THE ASSESSEE AS WELL AS IMPOSSI BILITY OF BIFURCATION OF EACH AND EVERY EXPENDITURE FALLING UNDER VARIOUS HEADS AND ALSO LOOKING TO THE FIGURE OF CAPITAL WORK IN PROGRESS F OR THE YEAR UNDER APPEAL AT RS.588.97 CRORES VIS--VIS TOTAL REVENUE OF THE ASSESSEE AT RS.447.27 CRORES, IN ORDER TO MEET THE ENDS OF JUST ICE WE DEEM IT PROPER TO SUSTAIN DISALLOWANCE @ 1% OF TOTAL EMPLOY EE COST OF THE COMPANY AT RS.7,63,31,420/- AND 1% OF ADMINISTRATIV E AND OTHER EXPENSES OF RS.4,71,50,100/- AND ACCORDINGLY THE SU STAINED DISALLOWANCE WILL ARRIVE AT RS.12,35,815/-. THUS IN VIEW OF THE ABOVE, GROUND OF APPEAL RAISED BY REVENUE IS REJECTED AND THAT OF ASSESSEE IS PARTLY ALLOWED. 26. OTHER TWO GROUNDS ARE GENERAL IN NATURE. THESE NEED NO ADJUDICATION. 27. NOW WE TAKE UP ASSESSEES APPEAL IN ITA NO.228 6/AHD/2011 FOR ASST. YEAR 2008-09 WHEREIN GROUNDS OF APPEAL TA KEN BY ASSESSEE ARE NOT IN CONSONANCE WITH RULE 8 OF ITAT RULES, 19 63 AS THEY ARE DESCRIPTIVE AND ARGUMENTATIVE. THE MAIN ISSUES ARE - ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 20 1. THE ORDER PASSED BY THE LD. CIT(A) IS ERRONEOUS AND CONTRARY TO THE PROVISIONS OF LAW & FACTS OF THE CASE AND THERE FORE NEEDS TO BE SUITABLY MODIFIED. IT IS SUBMITTED THAT IT BE SO DONE NOW. 2. THE LD. COMMISSIONER HAS ERRED IN SUSTAINING DIS ALLOWANCE OF @ 5% OF RS.12,34,81,520/- OF CERTAIN REVENUE EXPEND ITURE ASSUMING THE SAME AS CAPITAL EXPENDITURE TO BE INCL UDED IN CAPITAL WORK IN PROGRESS. 3. LD. CIT(A) HAS ERRED IN NOT ACCEPTING THE CALCULATI ON MADE BY ASSESSEE IN RELATION TO THE AMOUNT )RS.2,87,511/-) DISALLOWED U/S 14A OF THE ACT READ WITH RULE 8D OF THE IT RULE S. 4. LD. COMMISSIONER ERRED IN FACT AND IN LAW IN HOL DING THAT CHARGING OF INTEREST U/S 234B & 234C IS MANDATORY B UT CONSEQUENTIAL. IT IS SUBMITTED THAT IN THE FACT AND CIRCUMSTANCES, NO INTEREST CAN BE LEVIED U/S 234B & 234C OF THE ACT. IT BE SO HELD NOW. 28. GROUND NO.1 IS OF GENERAL NATURE, WHICH NEEDS N O ADJUDICATION. 29. REGARDING GROUND NO.3 LD. AR SUBMITTED THAT W HILE FRAMING THE ASSESSMENT ORDER ASSESSING OFFICER APPLIED THE PROVISIONS OF SECTION 14A OF THE ACT AND ACCORDINGLY APPLIED RULE 8D, CALCULATED DISALLOWANCE U/S 14A AT RS.1,56,00,676/- AND REDUCE D THE DISALLOWANCE OF RS.2,87,511/- ALREADY ACCEPTED BY T HE ASSESSEE IN ITS STATEMENT OF TOTAL INCOME AND ACCORDINGLY MADE ADDI TION OF RS.1,53,13,165/- TO THE INCOME OF ASSESSEE. HOWEVER , LD. CIT(A) WHILE SUSTAINING THE ORDER OF ASSESSING OFFICER WIT H MINOR MODIFICATION OF REPLACING THE INVESTMENT VALUE TAKE N AT RS.35,57,49,990/- BY AN AVERAGE VALUE OF INVESTMENT I.E. 17,78,74,995/- OBSERVED AS FOLLOWS :- ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 21 6.2 I HAVE CONSIDERED THE ISSUE IN ITS ENTIRETY. T HE FOLLOWING PERTINENT OBSERVATIONS ARE MADE:- A) THE FACT THAT NO DIVIDEND HAS BEEN EARNED ON THE INVESTMENTS DURING THE YEAR DOES NOT MAKE ANY DIFFE RENCE TO THE DISALLOWABILITY OF INTEREST U/S 14A. THIS ISSUE WAS DISCUSSED AND DECIDED BY SPECIAL BENCH IN THE CASE OF DAGA CAPITAL MANAGEMENT P. LTD. 117 ITD 169, WHEREIN IT WAS HELD THAT WHETHER ULTIMATELY INCOME IS EARNED OR NO T DOES NOT MAKE ANY DIFFERENCE. THE HONBLE MUMBAI HIGH CO URT IN THE CASE OF GODREJ BOYCE HAS NOT ALTERED THIS POSIT ION. B) THE FACT OF THE CASE IS THAT LOANS HAVE BEEN TAK EN AND MIXED WITH OWN FUNDS. DIRECT NEXUS OF THE LOAN WITH THE INVESTMENTS OR OTHERWISE CANNOT BE ESTABLISHED. C) I DO NOT AGREE WITH THE ASSESSEE THAT AO HAS NOT RECORDED WITH THE SATISFACTION THAT ITS WORKING OF DISALLOWA NCE UNDER 14A IS NOT CORRECT. THE APPELLANT HAS NOT CONSIDERE D ANY INTEREST TOWARDS THE PURPOSE. IN FACT THE AO HAS IN DICATED THAT THE WORKING IS NOT CORRECT AS PER FIGURES (IMP LIED EXPENDITURE AND INVESTMENT) GIVEN IN THE BALANCE SH EET AND P & L A/C. HE HAS GONE ON TO ATTRIBUTE AND WORK OUT INTEREST DISALLOWABLE UNDER RULE 8D. D) I DO NOT AGREE WITH THE ASSESSEE THAT SINCE SHAR E APPLICATIONS HAVE BEEN INVESTED AFTER 23.08.2006; T HEREFORE, INTEREST PERTAINING TO THE LOANS ONLY SHOULD BE CON SIDERED WHILE WORKING OUT THE DISALLOWANCE UNDER RULE 8D. I N THAT CASE ACCORDING TO THE ASSESSEES LOG THE TOTAL ASSE TS (EXCLUDING EARLIER ASSETS) IN THE FORMULA WOULD ALS O CHANGE. FURTHER, THE FORMULA IN RULE 8D HAS TO BE APPLIED S TRICTLY (SHALL WORD HAS BEEN USED) AND IT DOES TALK OF TOTA L INTEREST (LESS INTEREST DIRECTLY ATTRIBUTABLE TO INVESTMENTS NOT GENERATING TAXABLE INCOME) TO BE APPORTIONED. SIMIL ARLY, I DO NOT AGREE THAT THE INTEREST OF 23 DAYS ONLY IS REQU IRED TO BE ALLOCATED AND DISALLOWED; AS THE FORMULA REQUIRES T HE ENTIRE INTEREST FOR THE YEAR TO BE APPORTIONED. THE AOS A CTION IN THIS REGARD IS CONFIRMED. ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 22 E) HOWEVER, I AGREE WITH THE APPELLANT THAT THE AVE RAGE INVESTMENT AND NOT THE TOTAL INVESTMENT SHOULD HAVE BEEN CONSIDERED FOR APPLYING RULE 14A. THEREFORE, THE LA ST FIGURE OF HALF PERCENT OF THE AVERAGE VALUE OF INVESTMENT TAK EN WRONGLY OF RS.35,57,49,990/- HAS INSTEAD TO BE TAKE N AT HALF PERCENT OF RS.17,78,74,995/-. I ALSO AGREE THAT FIG URE NEEDS TO BE RE-WORKED ACCORDING TO THE NOMENCLATURE IN TH E BALANCE SHEET (E.G. CURRENT LIABILITIES REDUCED FRO M CURRENT ASSET NEEDS TO BE GROSSED UP ETC.). THE AO IS DIRECTED TO RE-WORK THE DISALLOWANCE UNDE R RULE 14A AS DIRECTED ABOVE WHILE GIVING THE APPEAL EFFECT AF TER GIVING AN OPPORTUNITY TO THE ASSESSEE OF BEING HEARD. THE ASS ESSEE WOULD GET THE RELIEF ON THIS GROUND ACCORDINGLY. 30. AGGRIEVED, ASSESSEE IS NOW IN APPEAL BEFORE THE TRIBUNAL. THE LD. AR SUBMITTED THAT DURING THE YEAR UNDER CONSIDE RATION APPELLANT HAS NOT EARNED ANY DIVIDEND INCOME FROM THE INVESTM ENT MADE BY IT. THUS THERE WAS NO EXEMPT INCOME EARNED BY THE APPEL LANT DURING THE YEAR UNDER CONSIDERATION AND LD. AO HAS MADE A DISA LLOWANCE VIDE HIS ASSESSMENT ORDER, WITHOUT REBUTTING, COMMENTING UPON OR REJECTING THE DETAILED WORKING SUBMITTED BY THE APP ELLANT BEFORE HIM. HE HAS DISALLOWED ONLY ON THE BASIS THAT THE DISALL OWANCE MADE BY THE APPELLANT IS NOT IN LINE WITH RULE 8D AS PRESCR IBED U/S 14A OF THE ACT. WHILE CARRYING OUT THE CALCULATION OF DISALLOWANCE IN LINE WITH RULE- 8D, LD. AO HAS INCORRECTLY CONSIDERED THE AVERAGE V ALUE OF INVESTMENT (SCHEDULE G OF THE BALANCE SHEET) TO BE RS.35,57,49,990/- WHEREAS IT SHOULD HAVE BEEN RS.17 ,78,74,995/-. HERE LD. AO HAS MADE A MISTAKE IN NOT AVERAGING OPE NING AND ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 23 CLOSING BALANCE OF INVESTMENT. THE FIGURE WOULD BE RS.17,78,74,995/- DUE TO THE FACT THAT INVESTMENTS WERE MADE ONLY DUR ING THE YEAR AND OPENING INVESTMENT WERE NIL. IT IS SUBMITTED THAT THE AO HAS COME TO CONCLUSION THAT THE APPELLANTS COMPUTATION OF DISALLOWANCE U/S 14A IS INCORRECT SIMPLY BECAUSE IT DOES NOT TALLY WITH THE COMPUTATION AS P ER RULE 8D. RULE 8D IS TO BE INVOKED ONLY IF THE AO IS NOT SATISFIED WITH COMPUTATION OF DISALLOWANCE BY ASSESSEE AND SUCH SATISFACTION HAS TO BE BASED ON THE BASIS APPLIED BY THE APPELLANT IN WORKING OUT T HE DISALLOWANCE. THE INVESTMENTS FROM WHICH EXEMPT INCOME MAY GET GE NERATED, CAME INTO EXISTENCE DURING THE YEAR ONLY FROM 5 TH MARCH, 2008 AS TILL DATE THE MONIES WERE LYING IN SHARE APPLICATION MO NEY (FROM AUGUST 2006 UPTO FEBRUARY 2008) ON WHICH INTEREST WAS RECE IVED BY THE APPELLANT AND WAS OFFERED FOR TAXATION. IN VIEW OF THIS FACT, EVEN IF DISALLOWANCE IS TO BE MADE FOR THE YEAR UNDER CONSI DERATION, THE SAME MAY BE MADE ONLY FOR THE PERIOD OF ONE MONTH A S THE MONEY WERE LYING AS SHARE APPLICATION MONEY FOR 11 MONTHS DURING THE RELEVANT PREVIOUS YEAR AND INTEREST THERE-FROM WAS TAXED IN THE HANDS OF THE APPELLANT. FURTHER, LEARNED ASSESSING OFFICER HAS APPLIED RULE 8D AND HAS DISALLOWED PROPORTION (AVERAGE INVESTMENT, GENERATI NG EXEMPT INCOME, TO TOTAL INVESTMENTS OF THE APPELLANT) OF T OTAL INTEREST EXPENSES. IN THIS REGARD WITHOUT PREJUDICE IT IS TO BE SUBMITTED THAT THE INVESTMENTS WERE MADE OUT OF OWN FUNDS IN VIEW OF THE FACT THAT ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 24 THE APPELLANT COMPANY HAD AMPLE OWN FUNDS AS ALSO T HE FACT THAT THE BORROWED FUNDS WERE MOSTLY IN FORM OF TERM LOANS WH ICH WERE AVAILED FOR SPECIFIC PROJECTS. THE DETAILS OF THE OWN FUNDS OF THE APPELLANT ARE AS BELOW : PARTICULARS AMT. (RS.IN CRORES) AS ON AS ON 1/4/2007 1/4/2006 SHARE CAPITAL AT THE BEGINNING OF THE YEAR 543 543 RESERVE & SURPLUS AT THE BEGINNING OF THE YEAR 423 365 ACC. DEPRECIATION AT THE BEGINNING OF THE YEAR 32 2 221 TOTAL OWN FUNDS AT THE BEGINNING OF THE YEAR 1,288 1,129 TOTAL AMT. OF INVESTMENT FROM WHICH EXEMPT INCOME MAY GET GENERATED 35 IT COULD BE OBSERVED FROM ABOVE THAT THE APPELLANT WAS HAVING OWN FUNDS, AT THE BEGINNING OF THE YEARS, AMOUNTING TO RS.1,288 CRORES (AS ON 1/4/2007) AND AMOUNTING TO RS.1,129 (AS ON 1 /4/2006) WHEREAS THE AMOUNT OF INVESTMENT MADE BY THE APPELL ANT FROM AUGUST 2006 UPTO FEBRUARY 2008 WAS ONLY F RS.35 CRO RES. THIS FACT COUPLED WITH THE FACT THAT THE BORROWINGS ARE MAINL Y TERM LOANS, WHICH ARE BORROWINGS FOR PROJECTS, CLEARLY INDICATES THAT THE INVESTMENTS WERE MADE OUT OF OWN FUNDS AND NOT BORROWED FUNDS A ND THEREFORE THE QUESTION OF CONSIDERING INTEREST EXPENSES AS DI SALLOWABLE U/S 14A DOES NOT ARISE. IN THIS REGARD ATTENTION IS DRAWN T O THE PUNJAB & HARYANA HIGH COURT DECISION IN THE CASE OF CIT VS. HERO CYCLES 323 ITR 158. THE AO HAS DIRECTLY AKEN FIGURE FROM BALANCE SHEET WHEREAS THAT FIGURE NEEDS TO BE REWORKED ACCORDING TO THE NOMENC LATURE IN THE BALANCE SHEET (I.E. CURRENT LIABILITIES REDUCED FRO M CURRENT ASSET NEEDS ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 25 TO BE GROSSED UP. MISC. EXPENDITURE NEEDS TO BE ELI MINATED & DEFERRED TAX NEEDS TO BE IGNORED). 31. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORD ERS OF LOWER AUTHORITIES. 32. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE BEFORE US IS TO EXAMINE THE QU ANTUM OF DISALLOWANCE U/S 14A OF THE ACT AS THE ASSESSEE HAS ACCEPTED DISALLOWANCE OF RS.2,87,511/- IN ITS RETURN OF INCO ME AS PER PROVISIONS OF SECTION 14A BY LIMITING THE DISALLOWANCE TO THE EXPENDITURE ON SALARY OF EMPLOYEES AND GENERAL ADMINISTRATIVE EXPE NSES INCURRED FOR HANDLING THE ACTIVITIES RELATED TO INVESTMENT BUT D ID NOT INCLUDE DISALLOWANCE CALCULATED UNDER RULE 8D WITH REFERENC E TO INTEREST EXPENDITURE AS WELL AS 0.5% OF THE AVERAGE VALUE OF INVESTMENT AND ON THE OTHER HAND, THE ASSESSING OFFICER HAS ADDED RS.1,36,05,461/- FOR THE PROPORTIONATE EXPENDITURE ON INVESTMENT HEL D AND 0.5% OF INVESTMENTS (RS.35,57,49,990) AT RS.17,87,750/- IN TOTAL DISALLOWANCE MADE BY ASSESSING OFFICER U/S 14A READ WITH RULE 8D WAS CALCULATED AT RS.1,56,00,676/- IN PLACE OF RS.2,16,465/- BY T HE ASSESSEE. HOWEVER, IN APPEAL BEFORE CIT(A) THE ONLY RELIEF TO THE ASSESSEE WAS APPLYING OF AVERAGE VALUE OF INVESTMENT AT RS.17,78 ,74,995/- IN PLACE OF RS.35,57,49,990/- BECAUSE OPENING BALANCE OF INV ESTMENT WAS NIL AT THE BEGINNING OF THE YEAR. 33. BEFORE WE GO FURTHER, LET US EXAMINE THE MATTER OF DETERMINING THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN THE ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 26 TOTAL INCOME AS REFERRED UNDER RULE-8D READ WITH SE CTION 14A OF THE ACT. THE SALIENT FEATURES OF RULE 8D ARE AS UNDER AS PER SUB RULE 2 OF RULE 8D, THE EXPENDITURE IN RE LATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWING AMOUNTS (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPE NDITURE 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 FO RMULA - A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST (OTHER THAN THE AMOUNT OF INTEREST DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTA L INCOME) INCURRED DURING THE PREVIOUS YEAR. 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 BALAN CE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR . (III)AN AMOUNT EQUAL TO 0.5% 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 SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAS T DAY OF THE PREVIOUS YEAR. ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 27 FURTHER, THE TERM TOTAL ASSETS HAS BEEN DEFINED T O MEAN TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. FOR AN ASSESSING OFFICER FOR GOING AHEAD TO CALCULA TE THE EXPENDITURE DISALLOWABLE AS PER THE METHOD REFERRED IN SUB-RULE (2) OF RULE 8D, HE IS FIRST REQUIRED TO PLACE ON RECORD THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF CLAIM OF EXPENDITURE MADE BY THE ASS ESSEE OR THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR. IN THE CASE OF ASSE SSEE WHERE THE ASSESSEE HIMSELF HAS ACCEPTED DISALLOWANCE OF RS.2, 87,511/- U/S 14A, THE ASSESSING OFFICER HAS NOT MADE ANY WORKING BY WAY OF INVESTIGATING THE BOOKS OF ACCOUNTS OF ASSESSEE TO PROVE ANY INCIDENCE WHEREIN EITHER THE INTEREST BEARING FUNDS HAVE BEEN APPLIED TO MAKE INVESTMENTS OR ANY EXPENDITURE WHICH WAS DI RECTLY ATTRIBUTABLE IN EARNING INTEREST INCOME HAS NOT BEE N DISALLOWED AND HAS BEEN CLAIMED AS REVENUE EXPENDITURE. RATHER THA N MAKING ANY SUCH EFFORT, HE HAS SIMPLY INSERTED THE FIGURES IN THE FORMULA MENTIONED IN SUB-RULE (2) OF RULE 8D AND COMPUTED T HE TOTAL EXPENDITURE DISALLOWABLE U/S 14A AT RS.1,56,00,676/ -. IN OTHER WORDS THERE WAS NO PROPER SATISFACTION MADE ON THE PART O F ASSESSING OFFICER TO PROVE THAT HE WAS NOT SATISFIED WITH THE WORKING OF DISALLOWANCE BY THE ASSESSEE OR NOT SATISFIED WITH THE APPORTIONMENT OF EXPENDITURE AND DIVERSION OF FUND AS DISCUSSED A BOVE. FURTHER FROM THE PERUSAL OF THE BALANCE SHEET OF THE ASSESS EE COMPANY (WHICH IS A LISTED COMPANY) WE ARE ABLE TO UNDERSTA ND THAT THERE WAS NIL INVESTMENT IN THE OPENING BALANCE OF THE COMPAN Y AS ON ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 28 1.4.2007 AND INVESTMENTS IN TAX-FREE INVESTMENT WAS INITIATED FROM AUGUST, 2006 TO APRIL, 2008 AS SHARE APPLICATION MO NEY AND IT WAS FINALLY CONVERTED INTO INVESTMENT IN EQUITY SHARES ON 5 TH MARCH, 2008 AND THERE WAS NO EXEMPT INCOME EARNED BY THE COMPAN Y FROM THESE INVESTMENTS DURING THE YEAR. FURTHER FROM PERUSAL O F BALANCE SHEET WE ALSO OBSERVE THAT A TOTAL OF SHARE CAPITAL AND R ESERVE & SURPLUS WHICH ARE NON-INTEREST-BEARING FUNDS TO THE COMPANY STOOD AT RS.1140.94 CRORES AS ON 31 ST MARCH 2008 AND INVESTMENTS IN SHARES ON 31 ST MARCH, 2008 IS RS.35.57 CRORES WHICH MEANS THAT CO MPANY WAS HAVING SUFFICIENT TAX-FREE FUNDS WHICH COULD HA VE BEEN DIVERTED TO TAX FREE INVESTMENTS AND NO FACT AGAINST THIS PO SSIBILITY HAS BEEN BROUGHT BEFORE US BY LD. DR. 34. FURTHER LOOKING TO THE FACT THAT ASSESSEE HAD N OT EARNED ANY EXEMPT INCOME DURING THE YEAR THEN IN SUCH CASE APP LICABILITY OF PROVISIONS OF SECTION 14A WAS DECIDED IN A SIMILAR ISSUE IN THE CASE OF AGARWAL ROADLINES P. LTD. VS. ACIT IN ITA NO.623 /AHD/2012 FOR ASST. YEAR 2008-09 BY THE CO-ORDINATE BENCH VIDE IT S RECENT ORDER DATED 30/10/2015 BY FOLLOWING THE DECISION OF HONB LE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. CORRTECH ENERGY P . LTD. (2015) 372 ITR 97 (GUJ), WHEREIN IT WAS HELD AS UNDER :- 6. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND GONE THROUGH THE RECORD CAREFULLY. THE HONBLE GUJARAT HIGH COURT H AS CONSIDERED THIS ISSUE IN THE CASE OF CIT VS. CORRTECH ENERGY P. L TD (SUPRA) AND HELD THAT IF ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 29 THERE IS NO EXEMPT INCOME CLAIMED BY THE ASSESSEE, THEN THERE IS NO DISALLOWANCE OUGHT TO BE MADE U/S 14A OF THE INCOME -TAX ACT. THE FOLLOWING OBSERVATIONS ARE WORTH TO NOTE:- COUNSEL FOR THE REVENUE SUBMITTED THAT THE ASSESSI NG OFFICER AS WELL AS CIT(APPEALS) HAD APPLIED FORMULA OF RULE 8D OF THE INCOME TAX RULES, SINCE THIS CASE AROSE AFTER THE ASSESSMENT YEAR 200 9-2010. SINCE IN THE PRESENT CASE, WE ARE CONCERNED WITH THE ASSESSMENT YEAR 2009-2010, SUCH FORMULA WAS CORRECTLY APPLIED BY THE REVENUE. WE HO WEVER, NOTICE THAT SUB- SECTION(1) OF SECTION 14A PROVIDES THAT FOR THE PUR POSE OF COMPUTING TOTAL INCOME UNDER CHAPTER IV OF THE ACT, NO DEDUCTION SH ALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T. IN THE PRESENT CASE, THE TRIBUNAL HAS RECORDED THE FINDING OF FACT THAT THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION OF ANY INCOME FROM PAYMENT OF TAX. IT WAS ON THIS BASIS THAT THE TRIBUNAL HELD THAT DISALLOWANCE UNDE R SECTION 14A OF THE ACT COULD NOT BE MADE. IN THE PROCESS TRIBUNAL RELIED O N THE DECISION OF DIVISION BENCH OF PUNJAB AND HARYANA HIGH COURT IN CASE OF C OMMISSIONER OF INCOME TAX V WINSOME TEXTILE INDUSTRIES LTD REPORTE D IN (2009) 319 ITR 204 (P & H) IN WHICH ALSO THE COURT HAD OBSERVED AS UNDER (PAGE 207): '7. WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. TH E JUDGEMENT OF THIS COURT IN ABHISHEK INDUSTRIES LTD (2006) 286 IT R 1 (P&H) WAS ON THE ISSUE OF ALLOWABILITY OF INTEREST PAID ON LO ANS GIVEN TO SISTER CONCERNS, WITHOUT INTEREST. IT WAS HELD THAT DEDUCT ION FOR INTEREST WAS PERMISSIBLE WHEN LOAN WAS TAKEN FOR BUSINESS PU RPOSE AND NOT FOR DIVERTING THE SAME TO SISTER CONCERN WITHOUT HA VING NEXUS WITH THE BUSINESS. THE OBSERVATIONS MADE THEREIN HAVE TO BE READ IN THAT ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 30 CONTEXT. IN THE PRESENT CASE, ADMITTEDLY THE ASSESS EE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATION SECTIO N 14A COULD HAVE NO APPLICATION.' 5. WE DO NOT FIND ANY QUESTION OF LAW ARISING, TAX APPEAL IS THEREFORE DISMISSED. THE ISSUE IN DISPUTE IS SQUARELY COVERED BY THE AB OVE DECISION OF HONBLE GUJARAT HIGH COURT. WE, THEREFORE, ALLOW T HE APPEAL OF THE ASSESSEE AND DELETE THE DISALLOWANCE. AS THE ISSUE DEALT IN THE ABOVE REFERRED DECISION O F CO-ORDINATE BENCH IS SIMILAR TO THE ISSUE IN THE CASE OF ASSESS EE, WHEREIN THERE IS NO EXEMPT INCOME DURING THE YEAR, WE ARE OF THE VIE W THAT LD. CIT(A) WAS NOT JUSTIFIED IN PARTLY ALLOWING THIS ADDITION MADE BY ASSESSING OFFICER AND SET ASIDE THE ORDERS OF LOWER AUTHORITI ES AND ALLOW THIS GROUND OF ASSESSEE BY RESTRICTING THE DISALLOWANCE OF RS.2,87,511/- U/S 14A OF THE ACT WHICH HAS BEEN ACCEPTED BY THE A SSESSEE IN ITS RETURN OF INCOME. 35. GROUND NO.4 IS CONSEQUENTIAL IN NATURE. ITA NO._2286 & 2359/AHD/2011 ASST. YEAR 2008-09 31 36. IN THE RESULT, BOTH THE APPEALS OF REVENUE AS W ELL AS THAT OF ASSESSEE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 7/12/2015 SD/- SD/- (RAJPAL YADAV) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 7/12/2015 MAHATA/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST.. REGISTRAR, ITAT, AHMEDABAD 1. DATE OF DICTATION: 27/11/2015 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 3/12/2015OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 7/12/2015 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: