ACIT, Circle- 21(1), New Delhi V. Religare Finvest Ltd., New Delhi

ITA 2364/DEL/2018

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 7852 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2007-2008
• Appeal Filed On: 05-04-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SATISH KR GUPTA
• Assessee Lawyers: ROHIT JAIN ADV MS SOMYA JAIN
• Keywords: Depreciation; Rectification of order; Earning of tax free income; Question of law; Fair market value; Deemed dividend; Revenue expenditure; Capital expenditure; Rule 8D; Set aside
• Section: 271(1)(c); 143(3); 14A; 260A; 37(1); 143(2); 13; 22; 37; 263; 28; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: F NEW DELHI BEFORE SHRI O.P. KANT, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIALMEMBER ITA NO.1947/DEL./2018 ASSESSMENT YEAR: 2007-08 M/S. RELIGARE FINVEST LTD., 1 ST FLOOR, PRIUS GLOBAL, PLOT NO. 11, A-3,4,5, SECTOR-125, NOIDA VS. ADDL. CIT, RANGE-21, NEW DELHI PAN : AAAFC6801H (APPELLANT) (RESPONDENT) AND ITA NO.2364/DEL./2018 ASSESSMENT YEAR: 2007-08 ADDL. CIT, RANGE-21(1), NEW DELHI VS. M/S. RELIGARE FINVEST LTD., 2 ND FLOOR, RAJLOK BUILDING, NEHRU PLACE, NEW DELHI PAN :AAAFC6801H (APPELLANT) (RESPONDENT) AND ITA NO.6474/DEL./2016 ASSESSMENT YEAR: 2009-10 M/S. RELIGARE FINVEST LTD., D3, P3B, DISTRICT CENTRE, SAKET, NEW DELHI VS. DCIT, RANGE-21(1), NEW DELHI PAN :AAAFC6801H (APPELLANT) (RESPONDENT) 2 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 AND ITA NO.5872/DEL./2016 ASSESSMENT YEAR: 2009-10 ACIT, RANGE-21(1), NEW DELHI VS. M/S. RELIGARE FINVEST LTD., D3, P3B, DISTRICT CENTRE, SAKET, NEW DELHI PAN : AA AFC6801H (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI ROHIT JAIN, ADV. MS. SOMYA JAIN, CA DEPARTMENT BY SHRI SATISH KR. GUPTA, SR. DR DATE OF HEARING 21.08.2020 DATE OF PRONOUNCEMENT 24.08.2020 ORDER PER O.P. KANT, A.M.: THESE CROSS APPEALS BY THE ASSESSEE AND THE REVENUE ARE DIRECTED AGAINST TWO SEPARATE ORDERS DATED 22/01/20 18 AND 30/08/2016 PASSED BY THE LEARNED CIT(APPEALS) FOR A SSESSMENT YEAR 2007-08 AND 2009-10 RESPECTIVELY. ALL THE APPE ALS BEING CONNECTED TO ONE ASSESSEE, SAME HAVE BEEN HEARD TOG ETHER AND DISPOSED OFF BY WAY OF THIS CONSOLIDATED ORDER FOR CONVENIENCE. 2. FIRST, WE TAKE UP THE APPEAL OF THE ASSESSEE AND THE REVENUE FOR ASSESSMENT YEAR 2007-08.THE GROUNDS RAISED BY T HE ASSESSEE IN ITA NO. 1947/DEL/2018 ARE REPRODUCED AS UNDER: 1. THAT THE CIT(A), HAS ERRED ON FACTS AND IN LAW I N UPHOLDING ADDITIONAL DISALLOWANCE OF RS.1,085,806/- (I.E. EXE MPT DIVIDEND INCOME OF RS.3.509,948 LESS SUO-MOTU DISALLOWANCE M ADE BY THE 3 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 APPELLANT RS.2,424,142) UNDER SECTION 14A OF THE IN COME TAX ACT, 1961 ( THE ACT ) 1.1 THAT THE CIT(A) HAS ERRED ON FACTS AND IN LAW I N MECHANICALLY RESTRICTING THE DISALLOWANCE UNDER SECTION 14A OF T HE ACT TO THE EXEMPT DIVIDEND INCOME, WITHOUT APPRECIATING FULFI LLMENT OF CONDITION FOR APPLYING PROVISIONS OF THE SAID SECTI ON AS CONTAINED IN SUB-SECTION (2) OF THAT SECTION, VIZ., THE REQUIREM ENT OF THE ASSESSING OFFICER NOT BEING SATISFIED WITH THE CORRECTNESS OF CLAIM OF EXPENDITURE. 1.2 THAT THE CIT(A) HAS ERRED ON FACTS AND IN LAW IN COMPUTING DISALLOWANCE UNDER SECTION 14A OF THE ACT WITHOUT A PPRECIATING THAT THE APPELLANT HAS ALREADY MADE A DISALLOWANCE OF AL L THE EXPENSES DEBITED TO THE PROFIT AND LOSS ACCOUNT AGGREGATING TO RS.685,436,878 LESS EXPENSES SUO-MOTU DISALLOWED IN THE COMPUTATIO N UNDER VARIOUS SECTIONS AGGREGATING TO RS.12,970,624, PROPORTIONAT E TO THE EXEMPT DIVIDEND INCOME OF RS.3,509,948. 1.3 THAT THE CIT(A) HAS ERRED ON FACTS AND IN LAW I N NOT APPRECIATING THAT RULE 8D OF THE INCOME TAX RULES, 1962 (THE RULES) IS NOT APPLICABLE FOR THE SUBJECT AY FOR DISALLOWANCE UNDER SECTION 1 4A OF THE INCOME TAX ACT, 1961 (THE ACT). 2.1 THE GROUNDS RAISED BY THE REVENUE IN ITA NO. 2364/DEL/2018 ARE REPRODUCED AS UNDER: 1. ON THE FACTS AND UNDER CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAS ERRED IN LAW AND FACTS IN DELETING THE DISALLOWANCE OF RS.1,80,83,891/- MADE BY THE ASSESSING OFFICER U/S 14A R.W.R. 8D BY IGNORING THE MANDATORY PROVISIONS OF RULE 8D R.W .S. 14A OF THE INCOME-TAX, 1961 AND CBDT CIRCULAR NO. 5/2014 DATED 11.02.2014. 2. ON THE FACTS AND UNDER CIRCUMSTANCES OF THE CASE , LD. CIT(A) HAS ERRED IN LAW AND FACTS IN DELETING THE ADDITION OF RS.10,94,00,000/- ON ACCOUNT OF DEEMED DIVIDEND IGNORING THAT THE ASS ESSEE COMPANY & M/S. RELIGARE SECURITIES LTD. ARE BOTH THE SUBSID IARY OF M/S. RELIGARE ENTERPRISES LTD. AND THE LOAN AMOUNT OF RS .10,94,00,000/- RECEIVED BY THE ASSESSEE COMPANY FROM M/S. RELIGARE SECURITIES LTD. IS TO BE CONSIDERED AS DEEMED DIVIDEND ON SUBSTANTI VE BASIS. 3. THE APPELLANT CRAVES TO BE ALLOWED TO ADD AND AL TER ANY FRESH GROUNDS OF APPEAL AND/OR DELETE OR AMEND ANY OF THE GROUND(S) OF APPEAL. 4 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 3. BRIEFLY STATED FACTS OF THE CASE AT THAT THE ASS ESSEE, A NONBANKING FINANCIAL COMPANY (NBFC), WAS ENGAGED IN PROVIDING DIFFERENT KIND OF SERVICES INCLUDING GRAN TING OF LOANS, PROVIDING CORPORATE ADVISORY SERVICES, DISTRIBUTION OF MUTUAL FUNDS ETC. FOR THE YEAR UNDER CONSIDERATION, THE AS SESSEE FILED RETURN OF INCOME ON 30/10/2007 DECLARING INCOME OF 28,33,97,440/-. THE RETURN FILED BY THE ASSESSEE WA S SELECTED FOR SCRUTINY ASSESSMENT AND NOTICE UNDER SECTION 143(2) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) WAS ISSUE D AND COMPLIED WITH. THE SCRUTINY ASSESSMENT UNDER SECTION 143(3) OF THE ACT WAS COMPLETED ON 31/12/2009 AFTER MAKING CERTAIN ADDITION/DISALLOWANCES TO THE RETURNED INCOME. AGGR IEVED, THE ASSESSEE FILED APPEAL BEFORE THE LD. CIT(A), WHO PA RTLY ALLOWED THE APPEAL OF THE ASSESSEE. AGGRIEVED WITH THE FINDING OF THE LD. CIT(A), BOTH THE ASSESSEE AND THE REVENUE ARE IN AP PEAL BEFORE THE TRIBUNAL RAISING THE GROUNDS AS REPRODUCED ABOV E. 3.1 ALL THE GROUNDS RAISED BY THE ASSESSEE ARE IN R ELATION TO SUSTAINING DISALLOWANCE OF 10,85,806/- UNDER SECTION 14A OF THE ACT. THE GROUND NO. 1 OF THE APPEAL OF THE REVENUE IS IN RELATION TO DELETING THE PART DISALLOWANCE (OF 1,80,83,891/-) UNDER SECTION 14A OF THE ACT. 3.2 BRIEF FACTS QUA THE ISSUE IN DISPUTE ARE THAT T HE ASSESSEE REPORTED DIVIDEND INCOME OF 35,09,948/-AS EXEMPTED UNDER SECTION 10(34) OF THE ACT AND MADE SUMO DISALLOWANC E OF 24,24,142/-AGAINST THE SAID EXEMPT INCOME. THE ASSE SSEE ALLOCATED EXPENSES TOWARDS EXEMPTED DIVIDEND INCOME IN THE RATIO OF DIVIDEND RECEIPT TO TOTAL RECEIPTS DURING THE YE AR UNDER CONSIDERATION, AS UNDER: 5 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 D ISALLOWANCE UNDER SECTION 14A OF THE ACT = (DIVIDEND RECEIPT/TOTAL RECEIPTS)X ALLOWABLE EXPENSES FOR THE YEAR = (3509948/973248925)/672173271 = 2424142 3.3 THE ASSESSING OFFICER DID NOT ACCEPT THE ABOVE WORKING OF THE DISALLOWANCE BY THE ASSESSEE DUE TO TWO REASONS . FIRSTLY, THE INTEREST COST HAS NOT BEEN TAKEN INTO CONSIDERATION WHILE ALLOCATING THE EXPENSES TOWARDS EXEMPTED INCOME. SE CONDLY, THE FUNDS GENERATING TAX-FREE INCOME ARE AT A TIME MUCH MORE AS COMPARED TO OTHER ASSETS AND THUS EXPENSES TOWARDS TAX-FREE INCOME COMPUTED ON THE BASIS OF THE RECEIPT IS NOT GIVING CORRECT ALLOCATION. THE ASSESSING OFFICER OBSERVED THAT 72. 5% OF THE FUNDS OF THE ASSESSEE ARE INTEREST-BEARING AND COST OF TH OSE FUNDS OF 50,59,10,687/-WAS DEBITED IN THE BOOKS OF ACCOUNTS. HE FURTHER OBSERVED THE APPLICATION OF THE FUNDS TOWARDS INVES TMENT FROM THE CASH FLOW STATEMENT. HE NOTICED THAT THE ASSESS EE HAS SHOWN PURCHASE OF INVESTMENT OF 1599,47,66,321/- , SALE OF INVESTMENT OF RS.1560,35,65,787/- AND CASH OUT USED IN THE INV ESTMENT ACTIVITY AT THE END OF THE YEAR WAS OF RS.3,58,84,4 42/. IN VIEW OF THE OBSERVATION, THE ASSESSING OFFICER CONCLUDED TH AT ASSESSEE HAS HEAVILY USED FUNDS FOR INVESTMENT ACTIVITY BUT THE INTEREST COST WAS NOT ATTRIBUTED TOWARD EARNING EXEMPT INCOM E IN PROPORTION OF THE FUNDS UTILIZED FOR INVESTMENT. TH E ASSESSING OFFICER RECORDED HIS DISSATISFACTION ON THE DISALLO WANCE WORKED OUT BY THE ASSESSEE AND INVOKING SECTION 14A OF THE ACT WITH RULE 8D OF THE INCOME-TAX RULES, 1962 (IN SHORT THE RUL ES) COMPUTED DISALLOWANCE OF RS.1,80,83,891 AS UNDER: 6 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 3.4 THE ASSESSEE CONTESTED BEFORE THE LD. CIT(A) TH AT TOTAL BORROWING OF THE ASSESSEE IS RS, 450 CRORES, WHEREA S THE MONEY LENT IS MORE THAN 561 CRORES AND THUS ASSESSEE HAS USED HIS OWN FUNDS FOR GRANTING LOAN AND THE FINDING OF THE ASSESSING OFFICER OF UTILIZING BORROWED FUNDS FOR INVESTMENT WAS TOTALLY INCORRECT. THE ASSESSEE SUBMITTED THAT 100% BORROWE D FUNDS HAVE BEEN UTILIZED FOR THE PURPOSE OF THE BUSINESS. THE LD. CIT(A) HOWEVER RESTRICTED THE DISALLOWANCE UNDER SECTION 1 4A TO THE EXTENT OF EXEMPTED INCOME OF 35,09,948/-. AS THE ASSESSEE MADE SUMO DISALLOWANCE OF 24,24,142/-, HE SUSTAINED THE BALANCE AMOUNT OF 10,85,806/-OUT OF THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 7 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 3.5 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE FILED A PAPER- BOOK CONTAINING PAGES 1 TO 293 AND MADE VARIOUS ARG UMENT IN SUPPORT OF THE GROUNDS RAISED. 3.6 FIRSTLY, THE LEARNED COUNSEL SUBMITTED THAT THE SUO-MOTU DISALLOWANCE OF 24,24,142/-WAS MADE IN SCIENTIFIC MANNER AND THE ASSESSING OFFICER HAS REJECTED THE CONTENTION O F THE ASSESSEE BASED ON WRONG ASSUMPTION OF THE FACTS AND WITHOUT RECORDING PROPER DISSATISFACTION TO THE CLAIM OF THE ASSESSEE . 3.7 SECONDLY, HE REFERRED TO PAGE 19 OF THE PAPER-B OOK, WHICH IS BALANCE-SHEET OF THE ASSESSEE COMPANY AS ON 31/03/2 007 AND SUBMITTED THAT UNDER THE HEAD INVESTMENT OPENING AM OUNT AS ON 31/03/2006 WAS NIL AND CLOSING AMOUNT IS 35,35,35,421/-. HE REFERRED TO PAGE 24 OF THE PAPER-BOOK, WHICH IS DET AIL OF THE INVESTMENTS AND SUBMITTED THAT DURING THE YEAR THE ASSESSEE HAS MADE INVESTMENT IN 22,60,000 SHARES OF KARNATAKA BANK LTD AT VALUE OF RS. 35,35,35,421/-. THE LEARNEDCOUNSEL REF ERRED TO REPORT OF THE ACCOUNTANT OBTAINED IN RELATION TO EX PENSES INCURRED FOR EARNING EXEMPT INCOME, A COPY OF WHICH IS AVAIL ABLE ON PAGE 75 TO 92 THE PAPER-BOOK. HE REFERRED TO PAGE 85 OF THE PAPER-BOOK REGARDING EXPLANATION OF THE INVESTMENT IN EQUITY S HARES OF KARNATAKA BANK LTD. ACCORDING TO HIM, THE INVESTMEN T IN SHARES OF THE KARNATAKA BANK LTD WAS MADE OUT OF THE SHARE APPLICATION MONEY OF 125 CRORES AND PROFIT ACCRUED DURING THE YEAR UNDE R CONSIDERATION UPTO THE DATE OF THE INVESTMENT ON PR O RATA BASIS, WHICH WORKS OUT TO 22.09 CRORES. THE COUNSEL REFERRED TO PAGE 101 OF THE PAPER-BOOK, WHICH IS ACOPY OF THE BANK STATEMENT OF THE ASSESSEE , TO SHOW THAT IMMEDIATE SOURCE OF INV ESTMENT IN THE SHARES OF THE KARNATAKA BANK LTD WAS OUT OF THE SHA RE 8 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 APPLICATION MONEY RECEIVED. HE FURTHER SUBMITTED TH AT NO DIVIDEND INCOME WAS EARNED FROM THE SHARES OF THE K ARNATAKA BANK LTD. AND NO EXPENSES HAVE BEEN INCURRED FOR MA KING THIS INVESTMENT. THUS, EVEN AFTER INVOKING THE RULE 8D OF THE RULES , THE DISALLOWANCE UNDER SECTION 14A OF THE ACT WOULD BE NIL. 3.8 THIRDLY, SUBMITTED THAT THERE IS NET INTEREST I NCOME AND THUS NO INTEREST EXPENDITURE IS REQUIRED TO BE ALLO CATED TOWARDS THE INVESTMENT IN ASSETS YIELDING EXEMPT INCOME. FU RTHER, HE REFERRED TO PAGE 111 TO 115 OF THE PAPER-BOOK, WHIC H CONTAIN DETAILS OF CAPITAL GAIN OF 1,21,48,156/- EARNED ON TRADING OF MUTUAL FUNDS, ON WHICH ASSESSEE HAS PAID TAXES AND THUS NO INTEREST EXPENDITURE CORRESPONDING TO THE INVESTMEN T IN MUTUAL FUND SHOULD BE DISALLOWED. HE SUBMITTED THAT ALL TH E INVESTMENTS IN MUTUAL FUNDS WERE MADE IN ACCORDANCE WITH THE GU IDELINES OF THE RESERVE BANK OF INDIA FOR THE PURPOSE OF THE BU SINESS OF THE ASSESSEE, AND THUS DISALLOWANCE FOR THE INTEREST EX PENDITURE SHOULD BE MADE TOWARDS EXEMPTED INCOME. 3.9 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES O N THE ISSUE IN DISPUTE. THE HONBLE BOMBAY HIGH COURT IN ITS DE CISION DATED 12/-8/2010 IN THE CASE OF GODREJ BOYCE AND MANUFACT URING CO LTD VS DCIT , MUMBAI AND ANR. (2010) 328 ITR 8 (BOM) HELD THE RULE 8D OF THE RULES TO BE PROSPECTIVE FROM ASSES SMENT YEAR 2008-09. FURTHER, HONBLE SUPREME COURT RECENTLY IN CIVIL APPEAL NO. 2165 OF 2012 IN THE CASE OF CIT-5, MUMBAI VS M/ S ESSAR TELEHOLDING LTD APPROVED THE DECISION OF THE HONBL E BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE AND MANUFACT URING CO .LTD OBSERVING AS UNDER: , 9 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 48. APPLYING THE PRINCIPLES OF STATUTORY INTERPRETATION FOR INTERPRETING RETROSPECTIVITY OF A FISCAL STATUTE AN D LOOKING INTO THE NATURE AND PURPOSE OF SUBSECTION (2) AND SUB- SECTION (3) OF SECTION 14A AS WELL AS PURPOSE AND INTENT OF RULE 8D COUPLED WITH THE EXPLANATORY NOTES IN TH E FINANCE BILL, 2006 AND THE DEPARTMENTAL UNDERSTANDING AS RE FLECTED BY CIRCULAR DATED 28.12.2006, WE ARE OF THE CONSIDERED OP INION THAT RULE 8D WAS INTENDED TO OPERATE PROSPECTIVELY. 49. IT IS RELEVANT TO NOTE THAT IMPUGNE D JUDGMENT IN THIS APPEAL RELIES ON EARLIER JUDGMENT OF BOMBAY HIGH COUR T IN GODREJ AND BOYCE MANUFACTURING COMPANY LIMITED V ERSUS DEPUTY COMMISSIONER OF INCOME TAX, MUMBAI AND ANOTHER, (20 17) 7 SCC 421, WHERE THE DIVISION BENCH OF THE BOMBAY HIGH CO URT AFTER ELABORATELY CONSIDERING THE PRINCIPLES TO DETERMINE T HE PROSPECTIVITY OR RETROSPECTIVITY OF THE AMENDMENT HAS CONCLUDED THAT RULE 8D IS PROSPECTIVE IN NATURE. AG AINST THE AFORESAID JUDGMENT OF THE BOMBAY HIGH COURT DATED 1 2.08.2010 AN APPEAL WAS FILED IN THIS COURT WHICH HAS BEEN DE CIDED BY VIDE ITS JUDGMENT REPORTED IN GODREJ AND BOYCE MANUFACT URING COMPANY LIMITED VS. DEPUTY COMMISSIONER OF INCOME T AX, MUMBAI & ANR. (2017) 7 SCC 421. THIS COURT, WHILE DECIDING THE ABOVE APPEAL REPELLED THE CHALLENGE RAISED BY THE ASSESSE E REGARDING VIRES OF SECTION 14A. IN PARA 36 OF THE JUDGMENT, THIS CO URT NOTICED THAT WITH REGARD TO RETROSPECTIVITY OF PROVISIONS REVENUE HAD FILED APPEAL, HENCE THE SAID QUESTION W AS NOT GONE INTO THE AFORESAID APPEAL. IN THE ABOVE CASE, TH IS COURT SPECIFICALLY LEFT THE QUESTION OF RETROSPECTIVITY TO BE DECIDED IN OTHER APPEALS FILED BY THE REVENUE. WE T HUS HAVE PROCEEDED TO DECIDE THE QUESTION OF RETROSPECTIVITY OF RULE 8D IN THESE APPEALS. 50. IN VIEW OF OUR OPINION AS EXPRESSED ABOVE, DISM ISSAL OF THE APPEAL BY THE BOMBAY HIGH COURT IS FULLY SUSTAI NABLE. AS HELD ABOVE, THE RULE 8D IS PROSPECTIVE IN OPERATION AND COULD NOT HAVE BEEN APPLIED TO ANY ASSESSMENT YEAR PRIOR TO ASSESSMENT YEAR 200809. 3.9.1 THE HONBLE SUPREME COURT IN THE CASE OF MAXO PP INVESTMENT LTD. VS CIT REPORTED IN 402 ITR 640 HAS AFFIRMED THE VIEW HELD IN THE CASE OF ESSAR TELEHOLDINGS LTD. (S UPRA) AS UNDER: 10 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 43. FEW APPEALS ARE FILED BY THE REVENUE AGAINST THE ASSESSEES WHICH PERTAINED TO THE PERIOD PRIOR TO THE INTRODUC TION OF RULE 8D OF THE RULES. HERE, THE CASE IS DECIDED IN FAVOUR OF T HE ASSESSEES ALSO ON THE GROUND THAT RULE 8D OF THE RULES IS PROSPECT IVE IN NATURE AND COULD NOT HAVE BEEN MADE APPLICABLE IN RESPECT OF T HE ASSESSMENT YEARS PRIOR TO 2007 WHEN THIS RULE WAS INSERTED. TH IS VIEW HAS ALREADY BEEN UPHELD BY THIS COURT IN CIVIL APPEAL N O. 2165 OF 2012 ( COMMISSIONER OF INCOME TAX, MUMBAI V. M/S. ESSAR TELEHOLDINGS LTD. THROUGH ITS MANAGER ), PRONOUNCED ON JANUARY 31, 2018, THAT THE SAID RULE IS PROSPECTIVE IN NATU RE. ON THIS GROUND ALONE, THESE APPEALS OF THE REVENUE FAIL AS IT IS N OT NECESSARY TO GO INTO THE OTHER ISSUES. 3.9.2 IN VIEW OF THE ABOVE DECISION ON THE OPERATI ON OF THE RULE 8D OF THE RULES, THE ACTION OF THE ASSESSIN G OFFICER OF INVOKING RULE 8D OF INCOME-TAX RULES IN THE YEAR U NDER CONSIDERATION (I.E. ASSESSMENT YEAR 2007-08), IS NO T JUSTIFIED. 3.10. IN THE CASE, WHILE DISALLOWING SUO-MOTO EXPE NSES TOWARDS EARNING EXEMPTED INCOME , THE ASSESSEE HAS NOT TAKEN INTEREST EXPENDITURE TOWARDS ALLOCATION FOR EARNING EXEMPT DIVIDEND INCOME ON THE GROUND THAT INVESTMENT WAS M ADE OUT OF OWN FUNDS RATHER THAN BORROWED FUNDS. THIS CLAIM OF THE ASSESSEE AS FAR AS INVESTMENT IN SHARES OF KARNATAKA BANK L TD (KBL) OF RS. 35.35 CRORES, IS CONCERNED IS FOUND TO BE ACCEP TABLE FROM THE EXPLANATION GIVEN IN THE REPORT OF THE CHARTERED AC COUNTANT AVAILABLE ON PAGE 85-86 OF THE PAPER-BOOK. THE RELE VANT PART OF THE SAID REPORT IS REPRODUCED AS UNDER: 7.2 IN THE FY 2006-07, RFL HAS INVESTED IN EQUITY SHRES OF KBL AMOUNTING RS.35.35 CRORES. THE SAID INVESTMENTS WERE MADE ON SEVERAL DATES DURING THE SAID FINANCIAL YEAR. 11 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 ANALYSIS IN THE ASSESSMENT PROCEEDINGS, THE COMPANY HAS STAT ED THAT THE SAID INVESTMENT WAS MADE OUT OF OWN FUNDS. ON A CLOSE SC RUTINY OF THE BOOKS OF ACCOUNT, WE FIND THAT: A. THE COMPANY HAD RECEIVED SHARE APPLICATION MONEY AM OUNTING TO RS.125 CRORES DURING THE PERIOD DECEMBER 12, 2006 T O DECEMBER 21, 2006. B. THE INVESTMENT IN THE KBL SHARES AMOUNTING TO RS.35 .35 CRORES HAS BEEN MADE DURING THE PERIOD DECEMBER 27, 2006 TO JA NUARY 5, 2007/ C. THE PROFITS BEFORE DEPRECIATION AND TAXES OF RFL FO R THE YEAR ENDED MARCH 31, 2007 AMOUNTED TO RS.29.46 CRORES. IF IT I S PRESUMED THAT THE PROFITS ACCRUE EVENLY THROUGHOUT THE YEAR, THEN THE PROFITS ACCRUING UPTO THE DATE OF INVESTMENT IN KBL SHARES ON A PRO-RATA BASIS, WOULD AMOUNT TO RS.22.09 CRORES (APPROXIMATELY) D. HERE, THE AGGREGATE OF SHARE APPLICATION MONEYS AND THE PROFITS ACCRUING DURING THE YEAR UPTO THE DATES OF INVESTME NTS IN KBL SHARES ARE FAR IN EXCESS OF THE INVESTMENT IN KBL SHARES. HAVING REGARD TO THE ABOVE FACTS AND THE LEGAL PRIN CIPLES DISCUSSED IN PARAS 6.3 TO 6.7 ABOVE, IT CAN BE SAFELY INFERRED T HAT THE INVESTMENT IN KBL SHARES IS INDEED OUT OF OWN FUNDS. AS A CROSS-CHECK WE HAVE ALSO REVIEWED THE YEARLY F UNDS FLOW STATEMENT EXTRACTED FROM THE AUDITED FINANCIALS OF FY 2006-07. THE SAID YEARLY FUNDS FLOW STATEMENT, SHOWING THE INCREMENTA L FUNDS POSITION FOR FY 2006-07. THE SAID YEARLY FUNDS FLOW STATEMENT, S HOWING THE INCREMENTAL FUNDS POSITION FOR FY 2006-07 IS ANNEXE D AND MARKED AS ANNEXURE 3. THE SUMMARY OF THE INCREMENTAL YEARLY F UNDS POSITION IS AS UNDER: (RS. IN CRORES) PARTICULARS FY 2006-07 SHAREHOLDERS FUNDS A 112.82 LOAN FUNDS B 86.23 DEFERRED TAX LIABILITY (NET) C 0.22 TOTAL D=A+B+C 199.27 FIXED ASSETS E 1.67 IN VESTMENTS TAX FREE INVESTMENTS F 35.35 OTHERS G NIL NET CURRENT ASSETS: H 162.25 TOTAL I=E+F+G+H 199.27 AS WOULD BE OBSERVED FROM THE ABOVE, THE YEAR IN WH ICH INVESTMENT IN EQUITY SHARES OF KBL HAS BEEN MADE, THE INCREMENTA L BORROWINGS (RS.86.23 CRORES) FOR THAT YEAR WERE MUCH LESSER TH EN THE NET INCREASE IN THE FIXED ASSETS AND NET CURRENT ASSETS (RS.163.92 CRORES = RS.1.67 CRORES + RS.162.25 CRORES). THUS, BASED ON THE JUDI CIAL PRINCIPLES 12 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 DISCUSSED IN PARA 6 ABOVE, IT CAN BE SAID THAT THE BORROWINGS HAVE BEEN FULLY UTILIZED FOR THE BUSINESS PURPOSES AND NOT FO R THE PURPOSE OF MAKING INVESTMENTS. THEREFORE, IT CAN BE SAFELY INF ERRED THAT THE QUESTION OF ALLOCATING INTEREST U/S 14A OF THE ACT TOWARDS INVESTMENTS IN THE SHARES OF KBL DOES NOT ARISE. IN FACT, THE INTE RNAL ACCRUAL DURING THE SAID YEAR IS MUCH HIGHER THAN THE AMOUNT OF INVESTM ENTS MADE IN KBL. 3.11 THE SOURCE OF THE INVESTMENT IN SHARES OF KBL IS OUT OF SHARE APPLICATION MONEY IS ALSO EVIDENT FROM THE CO PY OF THE BANK STATEMENT AVAILABLE ON PAGE 101 OF THE PAPER-BOOK. 3.12. BUT, WE FIND THAT THE ASSESSEE HAS ALSO MAD E INVESTMENT IN MUTUAL FUNDS. ACCORDING TO THE DETAIL OF INVESTMENT AVAILABLE ON SCHEDULE TO THE BALANCE SHEET ON PAGE 24 AND 25 OF THE PAPER- BOOK, WE FIND THAT DURING THE YEAR ASSESSEE TRADED IN MUTUAL FUNDS WORTH 1545.84 CRORES. THE ASSESSEE HAS NOT EXPLAINED SOURCE OF INVESTMENT IN THOSE MUTUAL FUNDS. IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F MAXOPP INVESTMENT LTD. REPORTED IN 402 ITR 640(SC) THE EXP ENDITURE ON ASSETS WHICH MAY YIELD EXEMPT INCOME AS WELL AS TAX ABLE INCOME, NEED TO BE APPORTIONED TOWARDS BOTH THE EXEMPTED AN D NON- EXEMPTED INCOME. THUS, THE CERTAIN INTEREST EXPENDI TURE TOWARDS INVESTMENT IN MUTUAL FUND CLEARLY NEEDS TO BE DISAL LOWED, WHICH THE ASSESSEE HAS NOT CONSIDERED IN ITS SUO-MOTU DIS ALLOWANCE. NO SUCH BREAKUP OF PROPORTIONATE EXPENSES TOWARDS EXEM PTED AND NON-EXEMPTED INCOME FROM INVESTMENT IN MUTUAL FUNDS HAS BEEN PROVIDED EITHER LOWER AUTHORITIES OR BEFORE US. IN ABSENCE OF ANY SUCH WORKING PROVIDED BY THE ASSESSEE, IT IS NOT PO SSIBLE FOR US TO QUANTIFY THE PROPORTIONATE DISALLOWANCE OUT OF THE INTEREST EXPENDITURE INCURRED FOR INVESTMENT IN MUTUAL FUNDS . 13 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 3.13 WE FIND THAT HONBLE DELHI HIGH COURT IN THE C ASE OF JOINT INVESTMENT COMPANY PRIVATE LIMITED VS. CIT: 372 ITR 694 (DEL.) HAS RESTRICTED THE DISALLOWANCE UNDER SECTION 14A T O THE EXTENT OF THE EXEMPTED INCOME. FOLLOWING THE FINDING OF THE H ONBLE DELHI HIGH COURT IN THE CASE OF JOINT STOCK INVESTMENT LT D. (SUPRA), THE LD CIT(A) HAS RESTRICTED THE DISALLOWANCE U/S 14A O F THE ACT IN THE CASE OF THE ASSESSEE TO THE EXTENT OF EXCEPTED INCOME. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE DO NOT FIND ANY ERROR IN THE ORDER OF THE LD. CIT(A) ON THE ISSUE IN DISPUTE IN FOLLOWING A BINDING PRECEDENT OF THE JURISDICTIONAL HIGH COURT. AND ACCORDINGLY, WE UPHOLD THE SAME. THE GROUNDS OF THE APPEAL OF THE ASSESSEE AS WELL AS GROUND NO. 1 OF THE REVENUE ARE ACCORDINGLY DISMISSED. 4. THE GROUND NO.2, OF THE APPEAL OF THE REVENUE RE LATES TO DEEMED DIVIDEND INCOME OF 10,94,00,000/-, WHICH HAS BEEN DELETED BY THE LD. CIT(A). 4.1 THE FACTS QUA THE ISSUE IN DISPUTE ARE THAT THE ASSESSEE HAS TAKEN A LOAN OF 10,94,00,000/- FROM M/S. RELIGARE SECURITIES LTD. (RSL), WHICH IS SUBSIDIARY OF M/S RELIGARE ENT ERPRISES LTD (REL). THE REL HOLDS 2,71,42,200 SHARES IN RSL OUT OF TOTAL SHARES OF 27142800. THE ASSESSEE RFL IS ALSO SUBSID IARY OF REL AND 8,74,94,400 SHARES OF THE ASSESSEE OUT OF TOTAL SHARES OF 87500000, ARE HELD BY REL. THE ASSESSING OFFICER HE LD THAT MONEY LENDING IS NOT THE BUSINESS OF THE RSL, AND T HEREFORE THE LOAN RECEIVED BY THE ASSESSEE FROM RSL, ( A SUBSIDI ARY OF REL HAVING SHARE HOLDING MORE THAN 90%) FALLS UNDER THE DEFINITION OF THE DEEMED DIVIDEND IN TERMS OF SECTION 2(22)(E ) O F THE ACT. THE LD. CIT(A) DELETED THE ADDITION. 14 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 4.2 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES O N THE ISSUE IN DISPUTE AND PERUSED THE RELEVANT METAL ON RECORD . THE LD. CIT(A) HAS DELETED THE ADDITION OBSERVING AS UNDER: 13.3 I HAVE EXAMINED THE FACTS AT HAND. I HAVE STU DIES THE APPELLANTS SUBMISSIONS. IT HAS BEEN ESTABLISHED TH AT THE APPELLANT IS NOT A SHARE HOLDER IN M/S. RELIGARE SECURITIES L TD., FROM WHOM IT HAD OBTAINED A LOAN. IN THIS CONNECTION, I PLACE RE LIANCE UPON ORDER OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. ANKITECH (P) LTD., 340 ITR 14 DELHI (PARAS 33 AND 34 OF THIS ORDER, RE LATED SPECIFICALLY TO THIS PROPOSITION). THIS ORDER OF HONBLE DELHI H IGH COURT HAS BEEN APPROVED BY THE HONBLE SUPREME COURT VIDE ORDER DA TED 05.10.2017. THUS, AS THE APPELLANT IS NOT A SHARE H OLDER OF M/S. RELIGARE SECURITIES LTD., PROVISIONS OF SECTION 2(2 2)(E) ARE NOT APPLICABLE. ACCORDINGLY, GROUNDS 8 AND 9 ARE ADJUDI CATE IN FAVOUR OF THE APPELLANT. 4.3 IT IS UNDISPUTED THAT ASSESSEE IS NOT A SHAREHO LDER IN RSL FROM WHICH IT HAS OBTAINED A LOAN. THE ADDITION OF DEEMED DIVIDEND CAN BE MADE ONLY IN THE HAND OF THE SHAREH OLDERS AND NOT OTHERWISE. THUS, WE DO NOT FIND ANY INFIRMITY I N THE FINDING OF THE LD. CIT(A), WHERE HE HAS FOLLOWED BINDING PRECE DENT OF THE HONBLE JURISDICTIONAL HIGH COURT. ACCORDINGLY, THE FINDING OF THE LEARNED CIT(A) ON THE ISSUE IN DISPUTE IS UPHELD. T HE GROUND OF THE APPEAL OF THE REVENUE IS ACCORDINGLY DISMISSED. 5. THE GROUND NO.3 OF THE APPEAL OF THE REVENUE WHI CH IS GENERAL IN NATURE, WE ARE NOT REQUIRED TO ADJUDICAT E UPON AND ACCORDINGLY DISMISSED. 6. NOW, WE TAKE UP THE CROSS APPEALS OF THE ASSESSE E AND THE REVENUE FOR ASSESSMENT YEAR 2009-10.THE GROUNDS RAI SED BY THE ASSESSEE IN ITA NO. 6474/DEL./2016 ARE REPRODUCED A S UNDER: 1. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) { CIT(A)] ERRED ON FACTS AND IN LAW IN SUSTAINING THE DISALLOWANCE OF RS. 20,00,369 MADE BY THE ASSESSING OFFICER ON ACCOUNT OF THE DIF FERENCE BETWEEN 15 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 PURCHASE PRICE OF STOCK APPRECIATION RIGHT (SAR ) AND THE SALE PRICE OF SUCH SAR AT THE TIME OF EXERCISE BY THE EMPLOYEE S, HOLDING THE SAME TO BE CAPITAL LOSS NOT ALLOWABLE AS BUSINESS D EDUCTION. 1.1 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN NO T APPRECIATING THAT THE ABOVE DIFFERENTIAL AMOUNT ACTUALLY REPRESENTS THE L OAN GRANTED BY THE APPELLANT TO RELIGARE ENTERPRISES LTD. EMPLOYEE S SAR TRUST (THE TRUST ) FOR THE PURPOSE OF ADMINISTERING EMPLOYEE STOCK APPRECIATION RIGHT SCHEME (SAR SCHEME), WHICH WAS NOT MEANT TO BE AND, IN FACT, NOT RECOVERED FROM THE LATER IN AC CORDANCE WITH THE SAR SCHEME. 1.2 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN NO T APPRECIATING THAT THE ABOVE SAR SCHEME WAS IMPLEMENTED TO MOTIVATE, REWAR D AND RETAIN KEY EMPLOYEES WHEREBY EACH SAR GRANTED TO THE EMPL OYEES OF THE APPELLANT STOOD EQUIVALENT TO ONE SHARE OF RELIGARE ENTERPRISES LTD. (REL) AND THE AFORESAID DIFFERENTIAL AMOUNT WAS, THUS, IN THE NATURE OF EMPLOYEE BENEFIT ALLOWABLE UNDER SECTION 37(1) OF THE INCOME TAX ACT, 1961 (THE ACT). 1.3 WITHOUT PREJUDICE, THE CIT(A) ERRED ON FACTS AN D IN LAW IN NOT ALLOWING DEDUCTION OF THE AFORESAID AMOUNT OF LOAN WRITTEN OFF AS LOSS INCIDENTAL TO BUSINESS UNDER SECTION 28 OF THE ACT. 2. THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN UPH OLDING THE DISALLOWANCE OF RS.18,60,898 ON ACCOUNT OF DIFFEREN CE BETWEEN THE SALE PRICE OF AR AND THE EXERCISE PRICE OF SAR (PRE FIXED AT RS.140 PER SAR) PAID TO THE EMPLOYEES OF THE APPELLANT, HOLDIN G THE SAME TO BE CAPITAL EXPENDITURE INCURRED IN RELATION TO ISSUE O F SHARES OF EMPLOYEES. 2.1 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN NO T APPRECIATING THAT THE ABOVE DIFFERENTIAL AMOUNT OF RS.18,60,898/- WAS IN THE NATURE OF EMPLOYEE COMPENSATION ALLOWABLE AS DEDUCTION UNDER SECTION 37(1) OF THE ACT. 7. THE GROUNDS RAISED BY THE REVENUE IN ITA NO. 5872/DEL/2016 ARE REPRODUCED AS UNDER: 1. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN RESTRICTING THE ADDITION/DISALLOWANCE OF RS.1,12 ,82,534/- TO RS. 27,90,535/- AS THE INCOME TAX ACT DOES NOT ALLOW FO R PROVISION FOR EXPENSE AS DEDUCTIBLE EXPENSES. 2. THAT ON FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. CIT(A) HAS ERRED IN RESTRICTING THE DISALLOWANCE OF RS.11, 45,94,648/- TO RS. 2,77,17,070/- U/S 14A WHICH IS AGAINST THE CBDT CIR CULAR NO. 5/2004 DATED 11.02.2014 WHICH CLARIFIES THAT RULE 8D READ WITH SECTION 14A OF THE ACT PROVIDES FOR DISALLOWANCE OF THE EXPENDITURE EVEN WHERE TAXPAYER IN A PARTICULAR YEAR HAS NOT EA RNED ANY EXEMPT INCOME. 3. THE APPELLANT CRAVES TO BE ALLOWED TO ADD ANY FR ESH GROUND OF APPEAL OR DELETED OR AMEND ANY OF THE GROUND OF APP EAL. 16 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 8. THE ASSESSEE HAS ALSO RAISED ADDITIONAL GROUND B Y WAY OF APPLICATION DATED 04/09/2018 AND SUBMITTED THAT SAM E MIGHT BE ADMITTED IN VIEW OF THE DECISION OF THE HONBLE SUP REME COURT IN THE CASE OF NATIONAL THERMAL POWER COMPANY LIMITED VERSUS CIT 229 ITR 383. THE ADDITIONAL GROUNDS RAISED BY THE A SSESSEE ARE REPRODUCED AS UNDER: 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED ON FACTS AND IN LAW IN UPHOLDING DISALLOWANCE MADE BY THE ASSESSING OFFICER TO THE EXTENT OF RS.2,77,17,070 UNDER SECT ION 14A OF THE INCOME TAX ACT, 1961 (THE ACT) [RESTRICTED TO DIV IDEND INCOME] AS AGAINST SUO-MOTU DISALLOWANCE OF RS.49,25,241 MADE BY THE APPELLANT. 3.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE CIT(A)/ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPUTING DISALLOWANCE UNDER SECTION 14A OF THE ACT BY INVOKI NG PROVISIONS OF RULE 8D OF THE INCOME TAX RULES, 1962 ( THE RULES ), WITHOUT APPRECIATING THAT NO PART OF BORROWED FUNDS WAS UTI LIZED FOR MAKING ANY INVESTMENT. 3.3 WITHOUT PREJUDICE, THAT ON FACTS AND CIRCUMSTAN CES OF THE CASE, THE CIT(A)/ASSESSING OFFICER GROSSLY ERRED IN COMPUTING DISALLOWANCE UNDER SECTION 14A OF THE ACT, INTER ALIA, BY WRONGL Y INCLUDING INVESTMENTS NOT ACTUALLY YIELDING EXEMPT INCOME DUR ING THE RELEVANT YEAR, WHILE APPLYING FORMULAE PRESCRIBED IN RULE 8D OF THE RULES. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED ON FACTS AND IN LAW IN UPHOLDING DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF PROVISION FOR EXPENSES TO THE EXTENT OF RS.27,90,535. 4.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE CIT(A) ERRED IN NOT APPRECIATING THAT THE AFORESAID AMOUNT OF RS.27 ,90,535/- HAS ALREADY BEEN OFFERED TO TAX IN SUBSEQUENT ASSESSMEN T YEAR 2010-11, THUS, RESULTING IN DOUBLE TAXATION OF THE SAID AMOU NT. 8.1 WE HAVE HEARD SUBMISSION OF THE PARTIES ON THE ADMISSION OF THE ADDITIONAL GROUND. WE FIND THAT THE ADDITION AL GROUNDS RAISED BY THE ASSESSEE BEING LEGAL IN NATURE AND NO T REQUIRING INVESTIGATION OF THE FRESH FACTS, FOLLOWING THE SET TLED LEGAL POSITION IN VIEW OF THE DECISION OF THE HONBLE SUPREME COUR T IN THE CASE 17 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 OF NTPC LTD VERSUS CIT (SUPRA), WE ADMIT THE ADDITI ONAL GROUND RAISED BY THE ASSESSEE. 8.2 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE FILED RETURN OF INCOME ON 29/09/2009 DECLARING TOTAL INCOME OF 71,34,32,349/-. THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT WAS COMPLETED AFTER MAKING CERTAIN ADDITIONS/DISALL OWANCES TO THE RETURNED INCOME. 8.3 ON FURTHER APPEAL, THE LD. CIT(A) ALLOWED THE A PPEAL PARTLY. AGGRIEVED, BOTH THE ASSESSEE AND THE REVENUE ARE IN APPEAL BEFORE THE TRIBUNAL RAISING THE GROUNDS ALONG WITH ADDITIONAL GROUNDS REPRODUCED AS ABOVE. 9. THE GROUND NO.1 TO 2.1 OF THE APPEAL OF THE ASSE SSEE RELATE TO DISALLOWANCE OF EXPENSES ON STOCK APPRECIATION RIGHT (SAR) WRITTEN OFF. 9.1 BRIEF FACTS QUA THE ISSUE IN DISPUTE ARE THAT R ELIGARE ENTERPRISES LTD (REL), THE HOLDING COMPANY OF THE A SSESSEE, LAUNCHED A STOCK APPRECIATION RIGHT SCHEME WITH EFF ECT FROM 01/04/2007 FOR EMPLOYEES RETENTION PURPOSE. THE GRA NT PRICE OF SAR WAS NIL TOUGH EACH SAR WAS EQUIVALENT TO ONE S HARE OF REL , HAVING VALUE OF RS. 140/- . VESTING OF SAR WAS SPRE AD OVER A PERIOD OF THREE YEARS WITH 1/3RS OF THE SARS VESTIN G IN AN EMPLOYEE EVERY YEAR. ON EXERCISE DATE THE EMPLOYEES MADE AN APPLICATION TO HIS EMPLOYER COMPANY FOR PAYMENT OF SAR COMPENSATION AGAINST VESTED SAR. THE SCHEME WAS ADMINISTERED THROUGH A SAR TRUST. THE TRUST PURCHAS ED SHARES OF THE REL FROM THE STOCK EXCHANGE AT AN AVERAGE PRICE OF 503 PER SHARE. THE FINANCING (FUNDING) OF SAID PURCHASE B Y THE TRUST WAS MADE BY WAY OF LOAN , WHICH WAS INITIALLY GIVEN BY THE REL, BUT 18 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 LATER ON THE RESPECTIVE COMPANIES PAID TO REL. ON E XERCISE OF THE SAR BY AN EMPLOYEE, THE TRUST SOLD THE CORRESPONDIN G NO. OF SHARES ON THE STOCK EXCHANGE AND AMOUNT REALIZED WA S PAID TO THE RESPECTIVE COMPANY AS A SETTLEMENT OF THE LOAN. THE COMPANY PAID TO THE EMPLOYEE AMOUNT WHICH WAS A DIFFERENCE BETWEEN THE SALE PRICE OF THE SHARES AND SAR VALUE OF 140 MULTIPLIED BY THE NO. OF SAR EXERCISED BY THE EMPLOYEE AFTER DEDUCTIN G TAXES SOURCE. IN RELATION TO THE SAR , THE ASSESSEE DEBIT ED TWO TYPE OF EXPENSES. FIRSTLY, THE BENEFIT WHICH WAS GRANTED TO THE EMPLOYEES DURING THE YEAR ON SALE OF SHARES( DIFFERENCE BETWE EN SALE PRICE OF THE SHARE AND BASE PRICE OF RS. 140/-) AND SECONDLY , THE LOAN WRITTEN OFF WHICH WAS ISSUED TO THE SAR TRUST FOR P URCHASE OF RESPECTIVE SHARES VESTED IN THE EMPLOYEES. THE CLAI M OF THE ASSESSEE IS THAT BOTH THESE EXPENSES ARE ALLOWABLE UNDER SECTION 37 OF THE ACT AS INCURRED WHOLLY AND EXCLUSIVELY FO R THE PURPOSE OF THE BUSINESS. 9.2 THE ASSESSING OFFICER MADE A ADDITION OF 78,18,311/-UNDER THE HEAD SAR EXPENSES TREATED AS LOSS OBSERVING AS UNDER: I HAVE CONSIDERED THE SUBMISSION OF THE ASSESSEE I N THIS REGARD. SARS, OR STOCK APPRECIATION RIGHTS, ARE CONTRACTUAL RIGHTS THAT ENTITLE ONE TO RECEIVE THE APPRECIATION FROM A CORRESPONDIN G NUMBER OF COMPANY SHARES AFTER THE GRANT DATE. INSTEAD OF EXE RCISING A STOCK OPTION, ONE EXERCISES THE SAR AND, DEPENDING ON THE PLANS DESIGN AND PRACTICES, RECEIVE IN EITHER CASH OR STOCK THE SPREAD BETWEEN THE EXERCISE PRICE AND THE FAIR MARKET VALUE ON THE DATE OF EXERCISE. FOR STOCK PLAN PARTICIPANTS, ALL THE OTHER RULES AN D FINANCIAL-PLANNING CONSIDERATIONS ARE SIMILAR TO THOSE OF STOCK OPTION S. IN THE INSTANT CASE THE TOTAL NUMBER OF SAR THAT WERE VESTED AND E XERCISED IS 10614 AND BOOKED A LOSS OF RS.50,29,087/-. THE ASSE SSEE HAS SHOWN AN AMOUNTOF RS.18,60,898/- AS SAR COMPENSATIO N PAID AND AN AMOUNT OF RS.20,00,369/- AS ADVANCE WRITTEN OFF. IT IS THIS AMOUNT OF RS.50,29,087/- WHICH THE ASSESSEE HAS CLA IMED AS A DEDUCTION IN THE COMPUTATION OF INCOME TREATING IT AS A LOSS INCIDENTAL TO THE BUSINESS. IT IS A CASE WHERE THE ASSESSEE HAS 19 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 INVESTED A PARTICULAR AMOUNT UNDER THE SAR THROUGH A TRUST. THIS IS ALSO A CASE WHERE UNRECOVERABLE ADVANCE HAS BEEN TR EATED AS A BUSINESS LOSS. IN FACT IT IS A CAPITAL LOSS AS CAPI TAL LOSS IS COMMONLY UNDERSTOOD TO BE THE DIFFERENCE BETWEEN THE PURCHAS E PRICE OF AN ASSET AND THE PRICE THAT THE INVESTOR ULTIMATELY SE LLS THAT SAME ASSET. IN INSTANCE WHEN THE SALE PRICE IS LESS THAN THE PURCHASE PRICE, THE INVESTOR REALIZES A NEGATIVE RETURN IN INVESTMENT. IN THIS CASE, THE ASSESSEE HAS HELD THE AMOUNT AS INVESTME NT. THUS, GOING BY THE PRESENTATION OF THE ACCOUNTS AND THE BALANCE SHEET GIVEN BY THE ASSESSEE ITSELF THE SHARES IN QUESTION WERE HEL D BY ASSESSEE NOT AS STOCK-IN-TRADE, BUT AS AN INVESTMENT AND CONSEQU ENTLY, THE LOSS INCURRED IN RESPECT THEREOF WOULD BE A CAPITAL LOSS AND NOT A BUSINESS OR TRADING LOSS. IN THIS VIEW OF THE MATTE R, THE VARIOUS DECISIONS RELIED UPON BY THE ASSESSEE ARE NOT APPLI CABLE TO THE FACTS OF THE CASE AS THEY ARE DISTINGUISHABLE ON FACTS. I , THEREFORE, DISALLOW THE CLAIM OF THE ASSESSEE IN THIS REGARD AMOUNTING TO RS.50,29,087/- UNDER THE HEAD SAR EXPENSES TREATED AS LOSS. FURT HER, ASSESSEE HAS CLAIM3ED PROVISION FOR INATVICE SARS RS.8,32,20 7/- WHICH IS DISALLOWED. ALSO THE ASSESSEE HAS SUBMITTED UNRECON CILED BALANCE RS.19,57,017/- AND THE SAME HAS BEEN CLAIMED UNDER SAR. THIS UNRECONCILED AMOUNT IS ALSO ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. PENALTY PROCEEDING U/S 271(1)(C) ARE INIT IATED SEPARATELY FOR FURNISHING INACCURATE PARTICULARS OF INCOME AND THEREBY CONCEALING INCOME. 9.3 ON FURTHER APPEAL, THE LD. CIT(A) ADJUDICATED T HE ISSUE FOLLOWING FINDING OF HIS PREDECESSOR IN EARLIER YEA RS. 9.4 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT ISSUE IN DISPUTE HAS BEEN DECIDED IN FAVOUR IN THE CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF ASSOCIATED C ASES BY THE TRIBUNAL. HE SUBMITTED THAT HONBLE DELHI HIGH COUR T UPHELD THE FINDING OF THE TRIBUNAL IN THE CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF RELIGARE SECURITIES LTD. THUS ISSUE I N DISPUTE BEING COVERED IN FAVOUR OF THE ASSESSEE, SHOULD BE DECIDE D IN FAVOUR OF THE ASSESSEE. 9.5 THE LEARNED DR, ON THE OTHER, AND RELIED ON THE ORDER OF THE LOWER AUTHORITIES. 20 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 9.6 WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE LD. C IT(A) HAS ADJUDICATED THE ISSUE IN DISPUTE OBSERVING AS UNDER : THEREFORE, CONSIDERING THE IDENTICAL FACTS AND CIR CUMSTANCES OF THE PRESENT CASE WITH THOSE OF A.Y. 2011-12 AND 2008-09 , I AM INCLINED TO FOLLOW THE JUDICIAL CONSISTENCY AND TREAT THE CLAIM OF DEDUCTION MADE ON ACCOUNT OF SAR EXPENSES OF RS.50,29,087/- BEING CAP ITAL IN NATURE. DURING THE APPELLANT PROCEEDINGS, LD. AR HAS REFERR ED THAT ADDITION OF RS.78,18,311/- HAS BEEN RESTRICTED TO RS.50,29,087/ - ONLY BY THE AO BY PASSING RECTIFICATION ORDER U/S. 154 OF THE ACT DAT ED 06.11.2015. A COPY OF WHICH HAS BEEN FURNISHED WHILE SUBMISSIONS DATED 23.11.2015. HENCE, ABOVE GROUNDS OF APPEAL ARE ALLOWED. THE REM AINING ADDITION OF RS.27,89,224/- HAS BEEN TREATED AS WITHDRAWN CONSID ERING THE FOLLOWING SUBMISSIONS MADE BY THE LD. AR: WHILE PASSING THE ASSESSMENT ORDER THE AO HAS DISA LLOWED A SUM OF RS.78,18,311 BEING THE SAR EXPENSES CLAIMED AS A DEDUCTION BY THE APPELLANT. VIDE ORDER DATED NOVEMBER 6, 2016 PA SSED UNDER SECTION 154 OF THE ACT THE AO HAS RECTIFIED THE SAI D DISALLOWANCE BY RESTRICTING IT TO RS.50,29,087. THE COPY OF THE REC TIFICATION ORDER HAS BEEN FILED WITH YOUR OFFICE VIDE OUR LETTER DATED N OVEMBER 23, 2015 AND LETTER DATED JUNE 17, 2016. THEREFORE, THE GROU ND OF APPEAL NO. 6 HAS BEEN WITHDRAWN BY THE APPELLANT. 9.7 WE HAVE PERUSED THE ADDITION MADE BY THE ASSESS ING OFFICER. THE ASSESSING OFFICER IN PARA 3 OF THE ASS ESSMENT ORDER HAS MENTIONED THAT THE TOTAL NUMBER OF SAR THAT WER E VESTED AND EXERCISED WAS 10614 AND BOOKED LOSS OF RS. 50,29,08 7/-. ACCORDING TO THE ASSESSING OFFICER THIS AMOUNT INCL UDED AMOUNT OF RS. 18,60,898 AS SAR COMPENSATION PAID TO EMPLOY EES AND RS.20,00,369/- AS ADVANCE WRITTEN OFF. THE ASSESSIN G OFFICER DISALLOWED THIS DEDUCTION OF RS. 50,29,087/-. FURTH ER, HE MADE DISALLOWANCE FOR PROVISION FOR INACTIVE SARS OF RS. 8,32,207/- AND UNRECONCILED BALANCE OF RS. 19,57,017/-. IN THIS MA NNER, THE AO MADE TOTAL DISALLOWANCE OF RS. 78,18,311/-. THE ASS ESSEE CHALLENGED THIS ADDITION BEFORE THE LD. CIT(A). HOW EVER, ON FURTHER RECTIFICATION APPLICATION OF THE ASSESSEE, THE LD. AO DELETED 21 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 THE ADDITION OF RS. 8,32,207/- AND RS. 19,57,017/-. THE LD CIT(A) MENTIONED THE FACT OF RECTIFICATION BY THE AO AND S USTAINED THE BALANCE AMOUNT OF ADDITION OF RS. 50,29,087/- IN VI EW OF THE DECISION OF LEARNED CIT(A) IN AY 2011-12 AND 2008-0 9. 9.8 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE HAS SUBMITTED THAT THE ISSUE-IN-DISPUTE IS COVERED IN F AVOUR OF THE ASSESSEE BY FOLLOWING A JUDICIAL DECISION OF THE TR IBUNAL IN THE CASE OF RELIGARE FINVEST LIMITED VS. ACIT, ITA NO. 2284/DEL./2013 FOR AY 2008-09 (DEL.-TRIB.) AND HON BLE DELHI HIGH COURT IN THE CASE OF PRINCIPAL COMMISSIONER OF INCOME TAX VS. M/S. RELIGARE SECURITIES LTD., ITA NO. 311/2018 , ORDER DATED 19.03.2018. THE RELEVANT FINDING OF THE TRIBUNAL IN THE CASE OF M/S. RELIGARE FINVEST LIMITED (SUPRA) IS REPRODUCED AS UNDER: 4.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIALS ON RECORD, ESPECIALLY THE ORDER OF ITAT PASSED IN THE CASE OF M/S RELIGARE COMMODITIES LTD. IN ITA NO S. 2283/DEL/2013 AND 3634/DEL/2014 (SUPRA) WHEREIN WE FIND THAT THE ISSUE IN DISPUTE HAS DECIDED IN FAVOUR OF THE A SSESSEE. THE RELEVANT PORTION OF THE DECISION IS REPRODUCED AS U NDER: 7. WE HAVE CAREFULLY ................. ............... 8. HONBLE MADRAS HIGH COURT HAS ALSO AN OCCASION T O CONSIDER THE ALLOWABILITY OF THE ESOP EXPENDITURE I N 211 TAXMAN 554 WHEREIN HONBLE HIGH COURT HAS HELD THAT THE CLAIM OF THE ESOP IS AN ASCERTAINED LIABILITY FOR D EDUCTION ON IS ALLOWABLE. SIMILARLY HONBLE DELHI HIGH COURT IN CASE OF CIT VERSUS LEMON TREE PAGE 25 OF 25 HOTELS LTD IN I TA NO. 107/2015 HAS HELD THAT THE EXPENSES DEBITED AS COST OF EMPLOYEE STOCK OPTION PLAN IN THE PROFIT AND LOSS A CCOUNT IS ALLOWABLE. IN VIEW OF THE ABOVE JUDICIAL PRECEDENTS OF SPECIAL BENCH OF TRIBUNAL AND DECISION OF THE HONBLE DELHI AND MADRAS HIGH COURTS, WE RESPECTFULLY HOLD THAT STOCK APPRECIATION RIGHT EXPENSES CLAIMED BY THE APPELLAN T, AMOUNTING TO RS. 393714/ IS NOT IN A CAPITAL EXPEN SES, BUT REVENUE EXPENDITURE AND ASCERTAINED LIABILITY THERE FORE IT IS ALLOWABLE EXPENSES. IN THE RESULT THE DISALLOWANCE MADE BY THE LD. AND ASSESSING OFFICER OF RS. 1147623/ AND ENHANCEMENT MADE TO THAT TAXABLE INCOME OF THE APPE LLANT BY LD. 1 ST APPELLATE AUTHORITY OF RS. 2789501/ IS HELD TO 22 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 BE ERRONEOUS AND THEREFORE SET ASIDE. IN THE RESULT THE APPEAL OF THE ASSESSEE FOR AY 2008-09 IS ALLOWED. 4.4 THUS, RESPECTFULLY FOLLOWING THE ABOVE FINDING S IN THE ABOVE ORDER, GROUNDS NO. 1 TO 2.2 OF THE APPEAL ARE ALLOWED. 9.9 FURTHER, THE HONBLE DELHI HIGH COURT IN THE CA SE OF RELIGARE SECURITIES LIMITED (SUPRA) HAS HELD AS UNDER: THE REVENUES APPEAL UNDER SECTION 260A OF THE INC OME TAX ACT ALLEGES THAT THE INCOME TAX APPELLATE TRIBUNAL (ITA T) ERRED IN ALLOWING T2,09,63,780/- AS A CAPITAL EXPENSE. THAT AMOUNT WAS THE QUANTUM OF DISCOUNT GIVEN IN RESPECT OF THE SAR (ST OCK APPRECIATION RIGHTS) - SIMILAR TO EMPLOYEE STOCK OPTION (ESO) OF FERED BY THE EMPLOYER TO THE WORK FORCE. THE ITAT FOLLOWED ITS P REVIOUS DECISION AND ALSO CITED A JUDGMENT OF THIS COURT IN COMMISSI ONER OF INCOME TAX VS. LEMON TREE HOTELS LTD, (ITA 107/2015 DECIDE D ON 18.08.2015). THE ITAT ALSO RELIED UPON THE JUDGMENT OF MADRAS HIGH COURT IN COMMISSIONER OF INCOME TAX-III, CHENNAI VS . PVP VENTURES LTD., TC(A) 1023 OF 2005. IN PVP VENTURES LTD. (SUPRA), MADRAS HIGH COURT DIS CUSSED THE RELEVANT ISSUES IN THE FOLLOWING MANNER : 7. ON THE ISSUE OF STAFF WELFARE EXPENDITURE, THE COMMISSIONER POINTED OUT THAT THE ASSESSEE HAD DEBI TED A SUM OF RS. 66.82 LAKHS UNDER THE HEAD OF STAFF WELF ARE EXPENDITURE. THE SAID SUM WAS INCURRED BY THE ASSES SEE IN RESPECT OF EMPLOYEES STAFF OPTION PLAN AND EMPLOYEE S STAFF PURCHASE SCHEME GUIDELINES. AS PER SEBI GUIDELINES, THE DIFFERENCE BETWEEN THE MARKET VALUE OF THE SHARES A ND THE VALUE AT WHICH THE SHARES WERE ALLOTTED TO THE EMPL OYEE IS ALLOWABLE AS AN EXPENDITURE. THE COMMISSIONER OF IN COME TAX REVISED THIS CLAIM ACCEPTED BY THE OFFICER AND HELD THAT THE ACCOUNTING TREATMENT PRESCRIBED BY SEBI, NOWHERE SU GGESTS THAT IT WAS A REVENUE EXPENDITURE TO BE DEBITED TO THE PROFIT AND LOSS ACCOUNT AS IT WAS ONLY A NOTIONAL AND CONT INGENT EXPENDITURE. IN THE CIRCUMSTANCES, THE COMMISSIONER OF INCOME TAX HELD THAT THE SHARES ALLOTTED UNDER EMPL OYEES STAFF OPTION PLAN AND EMPLOYEE STAFF PURCHASE SCHEM E GUIDELINES, 1999, HAVING NOT STATED ANYTHING ABOUT THE MANNER OF TREATMENT TO THIS EXPENDITURE, THE DIFFER ENCE IN THE VALUE AT WHICH THE SHARES WERE ALLOTTED AND THE MAR KET VALUE OF THE SHARES DID NOT WARRANT ANY ALLOWANCE AS EXPE NDITURE. ULTIMATELY, THE COMMISSIONER OF INCOME TAX PASSED A N ORDER DIRECTING THE ASSESSING OFFICER TO REVISE THE ASSES SMENT. THUS, HOLDING THAT THE REVISION PROCEEDINGS WERE VALIDLY INITIATED, 23 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 THE INCOME RECEIVED ON ACCOUNT OF EXCHANGE FLUCTUAT ION WAS HELD AS A REVENUE RECEIPT AND BE TAXED AS SUCH AND THE STAFF WELFARE EXPENDITURE WAS TO BE DISALLOWED. XXX XXX XXX 11. AS REGARDS THE SECOND ISSUE WHICH IS NOW CANVAS SED BEFORE THIS COURT VIZ., ON THE ISSUE OF EXPENDITURE OF 66.82 LAKHS TOWARDS THE ISSUE OF SHARES TO THE EMPLOYEES STOCK OPTION IS CONCERNED, THE TRIBUNAL POINTED OUT THAT THE SHARES WERE ISSUED TO THE EMPLOYEES ONLY FOR THE INTEREST OF THE BUSINESS OF THE ASSESSEE TO INDUCE EMPLOYEES TO WOR K IN THE BEST INTEREST OF THE ASSESSEE. THE ALLOTMENT OF SHA RES WAS DONE BY THE ASSESSEE IN STRICT COMPLIANCE OF SEBI R EGULATIONS, WHICH MANDATE THAT THE DIFFERENCE BETWEEN THE MARKE T PRICES AND THE PRICE AT WHICH THE OPTION IS EXERCISED BY T HE EMPLOYEES IS TO BE DEBITED TO THE PROFIT AND LOSS A CCOUNT AS AN EXPENDITURE. THE TRIBUNAL POINTED OUT THAT WHAT HAD BEEN ADOPTED WAS NOT NOTIONAL OR CONTINGENT AS HAD BEEN SUBMITTED BY THE REVENUE. POINTING OUT TO THE EMPLOYEES STOCK OPTION PLAN, THE TRIBUNAL IN ITS ORDER STATED THAT IT WAS A BENEFIT CONFERRED ON THE EMPLOYEE. SO FAR AS THE COMPANY IS CONCERNED, ONCE THE OPTION WAS GIVEN AND EXERCISED BY THE EMPLOYEE, THE LIABILITY IN THIS BEHALF GOT ASCERTAI NED. THIS WAS RECOGNISED BY SEBI AND THE ENTIRE EMPLOYEES STOCK O PTION PLAN WAS GOVERNED BY GUIDELINES ISSUED BY SEBI. ON THE FACTS THUS FOUND, THE TRIBUNAL HELD THAT IT WAS NOT A CAS E OF CONTINGENT LIABILITY DEPENDING ON THE VARIOUS FACTO RS ON WHICH THE ASSESSEE HAD NO CONTROL. THE EXPENDITURE IN THI S BEHALF WAS AN ASCERTAINED LIABILITY, THUS THE EXPENDITURE INCURRED BEING ON LINES OF THE SEBI GUIDELINES, THERE COULD BE NO INTERFERENCE IN THE RELIEF GRANTED BY THE ASSESSING AUTHORITY FOR THE EXPENDITURE ARISING ON ACCOUNT OF EMPLOYEES STOCK OPTION PLAN. THIS EXPENDITURE INCURRED AS PER SEBI GUIDELINES AND GRANTED BY THE OFFICER COULD NOT BE CONSIDERED AS ERRONEOUS ONE CALLING FOR EXERCISE OF JURISDICTION UNDER SECTION 263 OF THE ACT. IN VIEW OF THE ABOVE REASONING, THE COURT IS OF THE OPINION THAT THERE IS NO INFIRMITY WITH THE APPROACH OR ORDER OF THE T RIBUNAL. NO QUESTION OF LAW ARISES. THE APPEAL IS CONSEQUENTLY DISMISSED. 9.10 IN VIEW OF THE ABOVE DECISIONS, THE ISSUE-IN-D ISPUTE OF SAR EXPENSES AS REVENUE IN NATURE IS COVERED IN FAVOUR OF THE ASSESSEE. RESPECTFULLY FOLLOWING THE ABOVE DECISION S, WE SET ASIDE THE ORDER OF THE LEARNED CIT(A) AND DELETE THE ADDI TION OF 24 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 RS.50,29,087/- ON THE ISSUE. THE GROUNDS NO. 1 TO 2 .1 OF THE APPEAL ARE ACCORDINGLY ALLOWED. 10. THE ADDITIONAL GROUND NOS. 3 TO 3.3 OF THE ASSE SSEE AND GROUND NO.2 OF THE APPEAL OF THE REVENUE ARE RELATE D TO DISALLOWANCE UNDER SECTION 14A OF THE ACT. 10.1 THE FACTS IN BRIEF QUA THE ISSUE IN DISPUTE AR E THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE EARNED D IVIDEND INCOME AGGREGATING TO 2,77,17,070/-, WHICH WAS CLAIMED AS EXEMPT UNDER SECTION 10(34)/10(35) OF THE ACT AS UN DER: (I) RS.1,54,00,000/- ON EQUITY SHARES IN M/S KARNATAKA BANK LTD (KBL) HELD AS INVESTMENT AND (II) RS.1,23,17,070/- FROM VARIOUS MUTUAL FUNDS. 10.2 THE ASSESSEE SUO-MOTU MADE DISALLOWANCE OF 49,25,241/- UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF I NCOME-TAX RULES, 1962 ( IN SHORT THE RULES) AS UNDER: INVESTMENT DETAILS AS AT MARCH 31, 2009 AS AT MARCH 31, 2008 AMOUNT (RS.) AMOUNT (RS.) KARNATKA BANK LIMITED 215,716,571 215,716,571 HINDALCO INDUSTRIES LIMITED 503,500,000 - VISTAAR MEDIA FUND 140,000,000 - RELIGARE ART FUND 22,500,000 22,500,000 BIRLA CASH PLUS - 850,163,307 TOTAL 881,761,571 1,088,379,879 AVERAGE VALUE OF INVESTMENTS 985,070,725 0.5% OF AVERAGE VALUE OF INVESTMENTS 4,925,241 10.3 THE ASSESSING OFFICER HOWEVER COMPUTED THE DIS ALLOWANCE OF 11,95,19,889/-IN TERMS OF SECTION 14A OF THE ACT R EAD WITH RULE 8D OF THE RULES AS UNDER: 25 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 PARTICULARS 31.03.2009 31.03.2008 A.1 INVESTMENT IN SHARES AND MUTUAL FUND (SHOWN AS INVESTMENT) 881,716,571 2,088,379,878.00 A. TOTAL INVESTMENT 881,716,571 2,088,379,878 B. AVERAGE INVESTMENT 1,485,048,224.50 C. TOTAL ASSETS 21,780,570,613 21,210,852,105.00 D. AVERAGE ASSETS 21,495,711,359.00 E. INDIRECT INTEREST COSTS 1,622,542,721.00 1) DIRECT COSTS ATTRIBUTABLE - 2) INDIRECT COST OF INTEREST (TOTAL - CONSIDERED ABOVE) 112,094,647.47 3) OTHER EXPENSES (.5% OF AVERAGE INVESTMENT) 7,425,241.12 TOTAL DISALLOWANCE U/S 14A 119,519,888.60 10.4 BEFORE THE LD. CIT(A), THE ASSESSEE FILED A RE VISED COMPUTATION FOR DISALLOWANCE OF 2,77,57,100/-UNDER SECTION 14A OF THE ACT READ WITH RULE 8D AS UNDER: PARTICULARS AMOUNT(RS.) I) AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF INCOME 578,392 II) INTEREST COST NOT DIRECTLY ATTRIBUTABLE TO ANY INCOME OR RECEIPT 22,253, 467 III) 0.5% OF THE AVERAGE VAL UE OF INVESTMENTS, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME (DETAILED IN THE TABLE GIVEN ABOVE) 4,925,241 TOTAL 27,757,100 26 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 10.5 THE ASSESSEE PROVIDED DETAILED EXPLANATION AS WHY THE DISALLOWANCE OF INTEREST COST NOT DIRECTLY ATTRIBUT ABLE TO ANY INCOME OF THE RECEIPT IN TERMS OF RULE 8D(2)(II) SH OULD WORK OUT TO 2,22,53,467/-, WHICH THE LD. CIT(A) HAS REPRODUCED IN THE IMPUGNED ORDER ON PAGES 31 AS UNDER: 6. THE APPELLANT VIDE ITS SUBMISSION DATED 05.08.2 016 UNDER POINT NO. 4 HAS CLARIFIED THE FOREGOING FACTS RELAT ED TO THE DIVIDEND EARNED ON THE MUTUAL FUND UNITS AND HAS ALSO GIVEN THE BASIS OF CALCULATION OF THE AFORESAID AMOUNT OF DISALLOWANCE OF RS.2,22,53,467/- UNDER SECTION 14A OF THE ACT READ WITH RULE 8D(2)(II) OF THE INCOME TAX RULES. THE APPELLANT HA S SUBMITTED AS FOLLOWS: IT HAS INVESTED RS.850,000,000 ON MARCH 30, 2008 IN BIRLA CASH PLUS WHICH HAS BEEN REDEEMED BY IT ON APRIL 2, 2008. AS THE SAID INVESTMENT HAS BEEN FUNDED FROM BORROWINGS MADE BY IT DURING ASSESSMENT YEAR 2008-09 AT AN AVERAGE INTEREST RATE OF 12.43%, IT HAS ATTRIBUTED DIRECT INTEREST C OSTS OF RS.578,392 UNDER RULE 8D(2)(I) TO THE SAID INVESTME NT HELD BY IT FOR THE PERIOD APRIL 1-2, 2008. COPY OF THE DISA LLOWANCE COMPUTED BY THE APPELLANT UNDER SECTION 14A FOR AY 2008-09 DETAILING THE CALCULATION OF THE AVERAGE RATE OF IN TEREST OF BORROWING FOR THE PERIOD MARCH 30,2008 TO APRIL 2, 2008 AT 12.43% AS FURNISHED BEFORE THE AO DULY ACCEPTED BY HIM VIDE ORDER DATED DECEMBER 29, 2010 IS ENCLOSED AS ANNEXT URE(S) WITH REGARD TO THE DIVIDEND EARNED ON OTHER MUTUAL FUND UNITS WHICH BOUGHT AND LIQUIDATED IN DECEMBER 2008, THE I NTEREST COST ATTRIBUTABLE TO SUCH DIVIDEND INCOME WILL BE RS.22,253,467/-. CONSIDERING THAT THE AVERAGE RATE OF BORROWING FOR THE QUARTER ENDED DECEMBER 2008 WAS 1 5.04%. COPY OF THE SCRIP WISE DETAILS OF MUTUAL FUNDS UNIT S PURCHASED AND REDEEMED BY THE APPELLANT DIVIDEND EA RNED THEREON AND CORRESPONDING INTEREST COST ATTRIBUTED BY THE APPELLANT @ 15.04% TO THE VALUE OF SUCH UNITS OVER THE PERIOD OF HOLDING IS ENCLOSED AS ANNEXTURES 15 TO THE SUBM ISSION DATED OCTOBER 25, 2013. 10.6 THE ASSESSEE ALSO POINTED OUT BEFORE THE LD. C IT(A) AS WHY THE COMPUTATION OF DISALLOWANCE OF 11,95,19,889/- BY THE ASSESSING OFFICER IS NOT CORRECT DUE TO INCORRECT A VERAGE VALUE OF THE INVESTMENT TAKEN BY HIM. 27 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 10.7 THE ASSESSEE SUBMITTED THAT IN VIEW OF THE DEC ISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVES TMENT PRIVATE LIMITED VERSUS COMMISSIONER OF INCOME-TAX (2015) 59 TAXMANN.COM 295 (DELHI), THE DISALLOWANCE UNDER SEC TION 14A OF THE ACT CANNOT EXCEED THE EXEMPT INCOME DECLARED BY THE ASSESSEE. 10.8 IN VIEW OF THE SUBMISSIONS, THE LD. CIT(A) FOL LOWING THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT PRIVATE LIMITED (SUPRA), RESTRICTED THE DISALLOWANCE TO THE AMOUNT OF THE EXEMPTED INCOME OF 2,77,17,070/-. 10.9 THE DEPARTMENT IS IN APPEAL TO THE EXTENT OF T HE RELIEF ALLOWED BY THE LD. CIT(A) AND THE ASSESSEE HAS RAIS ED ADDITIONAL GROUND OF APPEAL FILED SEPARATE APPLICATION CHALLEN GING THE ACTION OF THE LEARNED CIT(A) IN RESTRICTING THE DISALLOWAN CE UNDER SECTION 14A OF THE ACT TO THE EXTENT OF THE DIVIDEND INCOME RECEIVED AND ACTION OF THE LEARNED ASSESSING OFFICER IN MECHANIC ALLY APPLYING RULE 8D OF THE RULES. 10.10 BEFORE US, THE LEARNED COUNSEL OF THE ASSESS EE HAS FILED A PAPER BOOK CONTAINING PAGES 1 TO 610. THE LD. COUNS EL SUBMITTED THAT THE ASSESSING OFFICER ERRED IN MECHANICALLY AP PLYING RULE 8D WITHOUT ESTABLISHING ANY NEXUS BETWEEN THE EARNING OF THE INCOME AND EXPENDITURE INCURRED (BEYOND SUO-MOTU DI SALLOWANCE MADE BY THE ASSESSEE) IS BEYOND THE JURISDICTION. I N SUPPORT OF THE CONTENTION THE LEARNED COUNSEL RELIED ON THE VA RIOUS DECISIONS INCLUDING THE DECISION OF THE HONBLE SUP REME COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING COMPANY LI MITED VS DCIT 394 ITR 449(SC). 28 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 10.11 THE LD. COUNSEL FURTHER SUBMITTED THAT NO EXP ENDITURE INCURRED IN RELATION TO EARNING OF THE EXEMPT DIVID END INCOME THOUGH THE ASSESSEE MADE SUO-MOTU DISALLOWANCE OF 49,25,241/-UNDER SECTION 14A OF THE ACT, WHICH WAS COMPUTED AT THE RATE OF 0.5% OF THE AVERAGE INVESTMENT. THE LEARNED COUNSEL FURTHER SUBMITTED THAT THE ASSESSEE SOUGHT REPORT OF THE CHARTERED ACCOUNTANT FIRM TO INDEPENDENTLY ANALYSE THE ENTIRE FACTS IN RELATION TO DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES, A COPY OF WHICH WAS MA DE AVAILABLE ON PAGE 423-451 OF THE PAPER-BOOK. THE SAID REPORT CON CLUDED THAT NO PART OF THE INTEREST EXPENDITURE WAS REQUIRED TO BE DISALLOWED UNDER SECTION 14A OF THE ACT. 10.12 THE LEARNED COUNSEL FURTHER SUBMITTED THAT T HE ASSESSING OFFICER HAS NOT RECORDED ANY DISSATISFACTION TO THE CLAIM OF THE ASSESSEE. HE SUBMITTED THAT ASSESSING OFFICER HAS W RONGLY ALLEGED THAT THE ASSESSEE HAD NOT ATTRIBUTED ANY ADMINISTRA TIVE EXPENSES TOWARDS EARNING OF THE EXEMPT INCOME, WITHOUT APPRE CIATING THAT THE ASSESSEE SUO-MOTU ATTRIBUTED AND DISALLOWED 0.5 % OF THE AVERAGE INVESTMENT FOR EARNING THE EXEMPT INCOME IN THE RETURN OF INCOME. THE LEARNED COUNSEL SUBMITTED THAT THE A SSESSING OFFICER HAS ERRED IN MECHANICALLY APPLYING RULE 8D OF THE RULES, AND ON THIS GROUND ALONE THE ADDITION MADE BY THE A SSESSING OFFICER AND PARTLY CONFIRMED BY THE LEARNED CIT(A) SHOULD BE DELETED 10.13 WITHOUT PREJUDICE TO THE ABOVE ARGUMENTS, THE LEARNED COUNSEL FURTHER SUBMITTED THAT THE COMPUTATION UNDE R RULE 8D OF THE RULES BY THE ASSESSING OFFICER IS ERRONEOU S DUE TO ATTRIBUTING INTEREST EXPENDITURE TOWARDS ASSETS YIE LDING EXEMPT 29 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 INCOME. ACCORDING TO HIM THE ASSESSEE HAS MADE INVE STMENT OUT OF OWN FUNDS AND NO BORROWED FUNDS HAVE BEEN UTILIZ ED BECAUSE THE RBI CIRCULAR PROHIBITED UTILIZATION OF THE BORR OWED FUNDS FOR INVESTMENT IN SHARES/SECURITIES. HE ALSO SUBMITTED THAT INVESTMENT IN SHARES OF KARNATAKA BANK LTD IN ASSES SMENT YEAR 2007-08 WAS MADE OUT OF OWN FUNDS. THE LEARNED COUN SEL ALSO SUBMITTED THAT NO DIVIDEND WAS RECEIVED FROM THE IN VESTMENT IN SHARES OF HINDALCO INDUSTRIES LTD. IN ASSESSMENT YE AR 2009-10 AMOUNTING TO 51 35 CRORES AND THEREFORE SAID INVESTMENT IS NOT RELEVANT FOR THE PURPOSE OF THE DISALLOWANCE UNDER SECTION 14A OF THE ACT. THE LEARNED COUNSEL SUBMITTED THAT INVESTM ENT IN UNITS OF VISTAAR MEDIA FUND (VMF) OF 14 CRORE MADE DURING THE YEAR UNDER CONSIDERATION WAS NOT OUT OF THE BORROWED FUN DS AND IT WAS OUT OF THE CASH PROFIT EARNED BY THE ASSESSEE DURIN G THE YEAR UNDER CONSIDERATION. THE LEARNED COUNSEL SUMMARISED THAT THE ASSESSEE HAS MADE INVESTMENT FROM ITS OWN INTEREST- FREE FUNDS AND NOT OUT OF BORROWED FUNDS. ACCORDINGLY, THE LEA RNED COUNSEL SUBMITTED THAT WHERE THE ASSESSEE HAD SUFFICIENT SU RPLUS FUND AND THERE WAS NO FINDING BY THE ASSESSING OFFICER O F ANY DIRECT NEXUS OF THE BORROWED FUNDS FOR THE INVESTMENT, NO DISALLOWANCE SHOULD BE MADE. 10.14 ALTERNATIVELY, THE LEARNED COUNSEL ALSO SUBMI TTED THAT IN VIEW OF THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF PCIT VS NIRMLA CREDIT AND CAPITAL (P) LTD 300 CTR 28 6, SUBMITTED THAT FOR THE PURPOSE OF COMPUTING DISALLOWANCE UNDE R SECTION 14A OF THE ACT, ONLY NET INTEREST EXPENDITURE SHOULD BE RECONSIDERED. 30 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 10.15 ON THE CONTRARY, THE LEARNED DR RELIED ON TH E ORDER OF THE LEARNED ASSESSING OFFICER AND SUBMITTED THAT DISALL OWANCE MADE BY HIM SHOULD BE SUSTAINED. 10.16 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIE S ON THE ISSUE IN DISPUTE AND PERUSED THE RELEVANT METAL ON RECORD . WE FIND THAT IN THE INSTANT CASE BEFORE THE LEARNED CIT(A), THE ASSESSEE ITSELF HAS FILED A REVISED COMPUTATION OF DISALLOWANCE UND ER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES, WHEREIN THE ASSESSEE COMPUTED DISALLOWANCE OF 2,77,57,100/-. THE ASSESSEE JUSTIFIED DISALLOWANCE BY WAY OF SUBMITTING DETAILED EXPLANAT IONS, WHICH THE LD. CIT(A) HAS REPRODUCED IN THE IMPUGNED ORDER . FURTHER THE ASSESSEE ITSELF SOUGHT TO FOLLOW THE DECISION OF TH E HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT PRIVATE LIMITED (SUPRA). IN VIEW OF THESE ARGUMENTS OF THE AUTHORISED REPRES ENTATIVE OF THE ASSESSEE BEFORE THE LEARNED CIT(A), HE RESTRICT ED THE DISALLOWANCE FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT PRIVATE LIMIT ED (SUPRA) TO THE AMOUNT OF THE EXEMPT INCOME OF 2,77,17,070/-. THE RELEVANT PART OF THE IMPUGNED ORDER OF THE LEARNED CIT(A) IS REPRODUCED AS UNDER: 4.6 I HAVE CAREFULLY CONSIDERED THE WRITTEN SUBMIS SIONS OF THE LD. AR AND ASSESSMENT ORDER PASSED BY THE AO, WHICH REVEALS THAT AO HAS MADE THE DISALLOWANCE UNDER SECTION 14A R.W. R. 8D OF THE IT RULES TAKING THE FIGURES OF AVERAGE INVESTMENT (RS.1,485,048,224.50/-), AVERAGE ASSETS (RS.21,495, 711,359/-) AND INDIRECT INTEREST COST (RS.1,622,542,721/-). ON THE BASIS OF ABOVE FIGURES, TOTAL DISALLOWANCE UNDER SECTION 14A WAS C OMPUTED AT RS.119,519,888/- AND AFTER GIVING BENEFIT OF SUO-MO TU DISALLOWANCE MADE BY THE APPELLANT OF RS.49,25,241/-, RESULTANT DISALLOWANCE WAS MADE TO THE EXTENT OF RS.11,45,94,648/-. 4.6.1 FROM THE ASSESSMENT ORDER PASSED, IT IS GATH ERED THAT ADDITION U/S 14A WAS BASED SINCE NO SEPARATE BANK A CCOUNTS WERE FOUND TO BE MAINTAINED BY THE APPELLANT IN RES PECT OF 31 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 INVESTMENTS AND OTHER ACTIVITIES, IN OTHER WORDS, C OMMON FUNDS WERE FOUND TO BE USED BY THE APPELLANT FOR BOTH THE ABOVE ACTIVITIES. FURTHER, IT WAS HELD BY THE AO THAT WHI LE COMPUTED THE DISALLOWANCE, APPELLANT DID NOT CONSIDER ADMINI STRATIVE EXPENSES WHICH WERE ALSO ATTRIBUTABLE TO EARN THE E XEMPT DIVIDEND INCOME. 4.6.2 DURING THE APPELLATE PROCEEDINGS, DETAILED SU BMISSION HAVE BEEN MADE BY THE LD. AR WHEREIN IT HAS BEEN EX PLAINED THAT AO HAS ERRED IN IGNORING THE FACT THAT INVESTM ENT HELD BY THE APPELLANT IN KARNATKA BANK LTD., HINDALCO INDUS TRIES LTD. AND VISTAAR MEDIA FUND WERE FUNDED THROUGH ITS OWN FUNDS. FURTHER, IT HAS BEEN CONTENDED THAT AO HAS ALSO ERR ED IN INCLUDING THE INVESTMENT HELD BY THE APPELLANT IN L OTUS INDIA LIQUID FUND INDIA FROM WHICH IS CHARGEABLE TO TAX. IN THIS CONNECTION, LD. AR PLACED RELIANCE ON THE APPELLATE ORDER PASSED BY LD. CIT(A)-XVIII, NEW DELHI IN APPEAL NO. 203/10-11 DATED 28.02.2013, THE RELEVANT PORTION OF WHICH IS REPRODUCED BELOW: 6.1 I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORDER AND THE SUBMISSIONS FILED BY THE APPELLANT. T HE FACTS OF THE CASE AS PER ASSESSMENT ORDER ARE THAT THE AO MADE A DISALLOWANCE U/S 14A R.W.R 8D BY COMPUTING THE DISALLOWANCE AT HALF PER CENT OF THE AVERAGE INVEST MENT HELD BY THE ASSESSEE DURING THE YEAR. THE ASSESSEE HAS CLAIMED DURING APPELLATE PROCEEDINGS THAT WHILE COM PUTING THE DISALLOWANCE, THE AO HAS INCLUDED THE AVERAGE INVESTMENTS FOR PURPOSE OF COMPUTATION OF DISALLOWA NCE U/S 14A, THE INVESTMENTS MADE IN GROWTH FUNDS, INCO ME FROM WHICH IS TAXABLE AND HAS BEEN OFFERED TO TAX. THE APPELLANT HAS MADE A SPECIAL REFERENCE TO ITS INVES TMENTS IN LOTUS INDIA MUTUAL FUND. THE ASSESSING OFFICER I S DIRECTED TO RECOMPUTED DISALLOWANCE U/S 14A R.W.R. 8D AFTER REDUCING INVESTMENT IN ANY FUND, THE INCOME F ROM WHICH HAS BEEN INCLUDED BY THE APPELLANT IN ITS TAX ABLE INCOME AND HAS BEEN OFFERED TO TAX. THIS GROUND OF APPEAL IS DISPOSED OF ACCORDINGLY. 4.6.3 APART FROM THE ABOVE, LD. AR HAS PLACED RELIA NCE ON THE JURISDICTIONAL HIGH COURTS ORDER IN THE CASE O F JOINT INVESTMENTS PVT. LTD. VS. COMMISSIONER OF INCOME TA X, DT. 25 FEBRUARY, 2015, THE BASIS ON WHICH IT HAS BEEN CLAI MED THAT DISALLOWANCE U/S. 14A CANNOT EXCEED TO THE EXEMPT I NCOME, WHICH IN THE INSTANT CASE IS RS.2,77,17,070/- 10.17 LD. CIT(A) FINALLY SUSTAINED THE DISALLOWANCE OF 2,77,17,070 HOLDING AS UNDER : 4.6.5 FROM THE ABOVE, IT IS CLEARLY ESTABLISHED TH AT THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT PVT. LTD. VS. CIT, VIDE ITS ORDER 32 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 DATED 25.02.2015, HAS HELD THAT DISALLOWANCE U/S 14 A CANNOT EXCEED THE AMOUNT OF EXEMPT INCOME. IT IS EVIDENT F ROM THE ABOVE JUDICIAL PRONOUNCEMENTS THAT THE RATIONALE BEHIND T HESE JUDGMENTS ARE THAT, THE AMOUNT OF DISALLOWANCE SHOULD NOT EXC EED THE EXEMPT INCOME. 4.6.6 THEREFORE, KEEPING IN VIEW THE RATION OF ABOV E PRONOUNCEMENTS, IT IS HELD THAT DISALLOWANCE U/S 14A READ WITH RULE 8D CA N BE INVOKED ONLY IN RESPECT OF EXEMPT INCOME AND DISALLOWANCE U NDER THIS SECTION CANNOT EXCEED THE EXEMPT INCOME. SINCE APPE LLANT HAS RECEIVED DIVIDEND INCOME OF RS.2,77,17,070/- ONLY, THE DISALLOWANCE UNDER SECTION 14A IS RESTRICTED TO THIS AMOUNT ONLY AS AGAINST THE DISALLOWANCE OF RS.11,45,94,648/- COMPUTED BY THE A O. HENCE, APPELLANT GETS RELIEF OF RS.8,68,77,578/-. 10.18 BEFORE THE LD AO, THE ASSESSEE MADE DISALLOW ANCE ACCORDING TO ITS OWN METHOD OF DISALLOWANCE , WHICH WAS NOT ACCEPTED BY THE LD AO AND INVOKED THE RULE 8D OF TH E RULES. IN OUR OPINION, WHEN HE REJECTED THE DISALLOWANCE COMP UTED BY THE ASSESSEE, THAT IN ITSELF IS DISSATISFACTION WITH TH E CLAIM OF THE ASSESSEE OF DISALLOWANCE. IT IS NOT NECESSARY THAT SUCH DISSATISFACTION HAS TO BE RECORDED IN EXPLICIT WORD S, WHEN THE IT IS EVIDENT FROM THE IMPLIED ACTION OF THE ASSESSING OF FICER. ACCORDINGLY, WE DISMISS THE PLEA OF THE ASSESSEE TH AT DISSATISFACTION WAS NOT RECORDED BY THE ASSESSING O FFICER WHILE INVOKING THE RULE 8D OF RULES. 10.19 FURTHER, IN VIEW OF THE ADMISSION BY THE ASS ESSEE ITSELF OF THE DISALLOWANCE IN TERMS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF RULES AND THEREAFTER REQUEST FOR RESTRIC TING THE DISALLOWANCE FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF JOINT INVESTMENT PRIVATE LIMITED (SUPRA), WE DO NOT FIND ANY JUSTIFICATION IN CHALLE NGING THE ISSUE AGAIN BEFORE THE TRIBUNAL, DISPUTING ITS OWN FACTUA L SUBMISSIONS MADE BEFORE THE LD. CIT(A). THE ASSESSEE HAS ADMITT ED BEFORE THE LD CIT(A) THE FACT OF INVESTMENT IN BIRLA CASH PLUS ON MARCH 30, 33 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 2008 OF RS. 85,00,00,000/- OUT OF FUNDS BORROWED AT THE INTEREST RATE OF 12.43% AND ADMITTED DISALLOWANCE OF DIRECT INTEREST COST OF RS.5,78,392/-. THE ASSESSEE HAS ALSO ADMITTED BEFOR E THE LD CIT(A) THE FACT OF INVESTMENT IN MUTUAL FUNDS OUT O F BORROWED FUNDS AND COMPUTED DISALLOWANCE OF RS. 2,22,53,467/ - TOWARDS INDIRECT INTEREST EXPENDITURE. IN VIEW OF THESE FAC TUAL ADMISSIONS, THE LD. CIT(A) DECIDED THE ISSUE PARTLY IN FAVOR OF THE ASSESSEE. NOW THE ASSESSEE CANNOT BE ALLOWED TO DISPUTE THOSE FACTUAL SUBMISSION AND LITIGATE THE ISSUES AGAIN, ONCE ITS FACTUAL SUBMISSIONS HAVE BEEN RELIED UPON BY THE FIRST APPE LLATE AUTHORITY AND ISSUE DECIDED IN ITS FAVOUR. ACCORDIN GLY, WE REJECT THE GROUNDS RAISED BY THE ASSESSEE CHALLENGING THE DISALLOWANCE SUSTAINED BY THE LD. CIT(A). AS FAR AS GROUNDS OF R EVENUE IS CONCERNED, IN OUR OPINION, THE ACTION OF THE LD. CI T(A) IN FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT IS IN ACCORDANCE WITH LAW AND WE DO NOT FIND ANY ERROR IN THE SAME. ACCOR DINGLY, WE ALSO REJECT THE GROUNDS RAISED BY THE REVENUE CHALL ENGING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT DELETED B Y LD CIT(A). THUS, BOTH, THE GROUNDS RAISED BY THE ASSESSEE AS W ELL AS THE REVENUE ARE DISMISSED. 11. THE GROUND NO.1 OF THE APPEAL OF THE REVENUE A ND ADDITIONAL GROUND NO.4 OF THE APPEAL OF THE ASSESSEE ARE RELAT ED TO DISALLOWANCE ON ACCOUNT OF PROVISION FOR EXPENSES. 11.1 BRIEF FACTS QUA THE ISSUE IN DISPUTE ARE THAT THE ASSESSEE FOR THE YEAR ENDED 31/03/2009 CREATED PROVISION FOR EXP ENSES AGGREGATING TO RS.1,63,83,690/-. THE ASSESSING OFFI CER DISALLOWED THE SAID PROVISION ON THE GROUND THAT SAME ARE NOT ALLOWABLE. THE ASSESSING OFFICER WHILE RECTIFICATION ORDER DATED 0 6/11/2015 34 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 DELETED THE DISALLOWANCE MADE ON ACCOUNT OF PROVISI ON FOR BONUS THUS REDUCING THE DISALLOWANCE TO RS.1,12,82,534/-. ON FURTHER APPEAL, THE LD. CIT(A) RESTRICTED THE DISALLOWANCE TO RS.27,90,535/-OBSERVING THAT DEDUCTION IS ALLOWABLE TO THE EXTENT PROVISION HAVE BEEN SETTLED/PAYMENTS HAVE BEEN MADE AGAINST THE SAID PROVISIONS SUBSEQUENTLY. 11.2 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER IN DISALLOWING THE SAID PROVISION AND PARTLY SUSTAINED BY THE LD. CIT(A) WAS BAD IN LAW A ND LIABLE TO BE DELETED THE LEARNED COUNSEL SUBMITTED THE DETAIL OF THE PROVISIONS AND PAYMENT/WRITTEN BACK IN SUBSEQUENT YEARS AS UND ER: S.NO. PARTICULARS AMOUNT (IN RS.) PAID IN AY 2010-11 REVERSED IN AY 2010-11 REMARKS 1. BONUS 51,01,156 51,01,156 DELETED BY AO VIDE RECTIFICATION ORDER DATED 06.11.2015 2. STOCK APPRECIATION RIGHT (SAR) EXPENSES 51,22,651 THIS ISSUES IS CONSIDERED TWICE BY THE ASSESSING OFFICER MOREOVER, ISSUE OF ALLOWABILITY OF SAR IS COVERED IN FAVOUR OF THE ASSESSEE- COMPANY [REFER GROUND NOS. 1 TO 2.1 SUPRA] 3. LEAVE TRAVEL ALLOWANCE 45,48,172 24,24,401 21,55,463 RS.24,24,401 PAID IN AY 2010-11. EMPLOYEES WISE PAYMENT DETAILS PLACED AT PAGES 266- 273 OF PB-VOL I EXCESS PROVISION OF RS.21,55,463 HAS BEEN REVERSED IN SUBSEQUENT ASSESSMENT YEAR. 4. FULL AND FINAL SETTLEMENT PAYABLE TO EMPLOYEES SERVING THEIR NOTICE PERIOD AS ON MARCH 31, 2009 9,83,218 8,32,877 1,50,341 EMPLOYEE WISE DETAILS OF PAYMENT OF MEDICAL REIMBURSEMENT AMOUNTING TO RS.8,32,877 MADE IN AY 2010-11 WAS FURNISHED VIDE LETTER 35 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 DATED 9.10.2013. EXCESS PROVISION OF RS.1,50,341 HAS BEEN REVERSED IN SUBSEQUENT ASSESSMENT YEAR. 5. OTHER ALLOWANCES PAYABLE TO EMPLOYEES 6,28,493 1,43,762 4,84,731 EMPLOYEE WISE DETAIL OF PAYMENT MADE IN AY 2010-11 IS PLACED AT PAGE 326 OF PN-VOL I EXCESS PROVISION OF RS.4,84,731 HAS BEEN REVERSED IN SUBSEQUENT ASSESSMENT YEARS. TOTAL 1,63,83,690 11.3 THE LEARNED COUNSEL FURTHER SUBMITTED THAT PRO VISIONS AGGREGATING TO RS. 1.63 CRORES WERE CREATED BY THE ASSESSEE FOR VARIOUS PERSONNEL COST PAYABLE BY IT TO ITS EMPLOYE ES IN RELATION TO SERVICES RENDERED BY THEM DURING THE RELEVANT ASSES SMENT YEAR 2009-10. ACCORDING TO THE LEARNED COUNSEL THE AFORE SAID PROVISION CREATED BY THE ASSESSEE WAS FOR THE AMOUN T PAYABLE BY IT TO ITS EMPLOYEES UNDER DIFFERENT SALARY HEADS AN D LEGALLY DUE TO THE EMPLOYEES IN ACCORDANCE WITH THE TERMS OF EMPLO YMENT. 11.4 HE FURTHER SUBMITTED THAT AFORESAID PROVISION S HAVE BEEN PAID IN ASSESSMENT YEAR 2010-11 AND EXCESS PROVISIO NS HAVE BEEN REVERSED AS STIPULATED ABOVE. HE SUBMITTED THA T THE ASSESSEE HAS CONSISTENTLY AND REGULARLY BEEN FOLLOW ING ACCRUAL SYSTEM OF ACCOUNTING FOR THE PURPOSE OF THE KEEPING BOOKS OF ACCOUNTS, WHICH HAS ALWAYS BEEN ACCEPTED BY THE REV ENUE. 11.5 THE LEARNED COUNSEL FURTHER SUBMITTED THAT UND ER THE MERCANTILE SYSTEM OF ACCOUNTING, THE EXPENSES ARE A LLOWABLE IN THE YEAR IN WHICH THE SAME ARE INCURRED AND LIABILI TY THEREOF ACCRUES, NOTWITHSTANDING THAT THE LIABILITY HAS TO BE DISCHARGED AT LATER DATE. ACCORDING TO THE LEARNED COUNSEL, AN AC CRUED 36 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 EXPENDITURE SHALL BE ALLOWABLE DEDUCTION IF THE LIA BILITY THEREOF CAN BE REASONABLY ESTIMATED AND DIFFICULTY IN EXACT ESTIMATION OF THE LIABILITY DOES NOT CATEGORIZE THE SAME AS CONTI NGENT LIABILITY. 11.6 THE LEARNED COUNSEL SUBMITTED THAT ABOVE PROVI SIONS ARE NOT A FUTURE OR A CONTINGENT LIABILITY. THE LIABILI TY TOWARDS PERSONNEL EXPENSES INCURRED AS WELL AS SERVICES REN DERED BY THE EMPLOYEES AND THEREFORE, IT IS A LIABILITY IN PRESE NTING AND DEFINITELY IN THE ACCOUNTING YEAR. 11.7 THE LEARNED COUNSEL IN SUPPORT OF THE CONTENTI ON RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF BHARAT EARTH MOVERS VS CIT 245 ITR 428. 11.8 THE COUNSEL ALTERNATIVELY SUBMITTED THAT IF TH E DISALLOWANCE MADE BY THE ASSESSING OFFICER IS UPHELD, THE ASSESS ING OFFICER MAY BE DIRECTED FOR ALLOWING THE AMOUNT IN THE SUBS EQUENT YEAR. WITHOUT PREJUDICE, THE ASSESSEE SUBMITTED THAT AS F AR AS AMOUNT OF REVERSAL OF PROVISION IS CONCERNED, THE ASSESSEE HAS ALREADY OFFERED FOR TAX A SUM OF RS.27,90,535/-IN SUBSEQUEN T ASSESSMENT YEAR AND THUS DISALLOWANCE OF THE SAME BY THE ASSES SING OFFICER AND SUSTAINED BY THE LD. CIT(A) HAS RESULTED IN A D OUBLE DISALLOWANCE. 11.9 ON THE CONTRARY, THE LEARNED DR RELIED ON THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT THE PROVISIONS FOR EXPENSES WERE PURELY UNDER ESTIMATE BASIS WITHOUT ASCERTAINI NG THE EXACT LIABILITY, WHICH IS CLEAR FROM THE FACT THAT IN SUB SEQUENT ASSESSMENT YEARS, THE ASSESSEE HAS REVERSED MOST PA RT OF THE PROVISIONS. ACCORDING TO HIM THE ASSESSEE CANNOT BE ALLOWED TO SHIFT THE TAX LIABILITY WHICH WAS TO BE PAID IN THE YEAR UNDER CONSIDERATION, TO THE SUBSEQUENT ASSESSMENT YEARS. 37 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 11.10 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES ON THE ISSUE IN DISPUTE AND PERUSED THE RELEVANT MATERIAL ON REC ORD. THE PROVISION IN RESPECT OF THE BONUS OF RS.51,01,156/- HAS ALREADY BEEN DELETED BY THE ASSESSING OFFICER WHILE RECTIFI CATION DATED 06/11/2015, WHICH IS NOT IN DISPUTE BEFORE US. THE SECOND PROVISIONS OF STOCK APPRECIATION RIGHT (SAR) FOR WH ICH SEPARATE ADDITION OF RS.51,22,651/- WAS ALSO MADE BY THE ASS ESSING OFFICER. THE ADDITION HAS BEEN DELETED IN VIEW OF T HE ISSUE COVERED IN THE FAVOUR OF THE ASSESSEE BY THE DECISION OF TH E COORDINATE BENCH OF THE TRIBUNAL IN AND THE HONBLE HIGH COURT . THEREFORE, IN OUR OPINION MAKING FURTHER ADDITION ON THE GROUN D OF UNASCERTAINED LIABILITY IS NOT JUSTIFIED. ACCORDING LY, WE DIRECT TO DELETE THE ADDITION MADE FOR PROVISION OF RS.51,22 651/- FOR STOCK APPRECIATION RIGHT (SAR). THE NEXT PROVISION MADE W AS OF RS. 45,48,172/-FOR LEAVE TRAVEL ALLOWANCE. IT IS CLAIME D BY THE ASSESSEE THAT OUT OF THE PROVISION, AND AMOUNT OF R S. 24,24,401/- HAS BEEN PAID IN ASSESSMENT YEAR 2010-11 AND REMAIN ING AMOUNT OF RS. 21,55,463/- HAS BEEN REVERSED IN SUBS EQUENT YEAR. FOR THE PAYMENT OF RS. 24,24,401/- THE ASSESSEE HAS PROVIDED EMPLOYEE -WISE DETAILS, WHICH IS AVAILABLE ON PAGE 266-273 OF THE PAPER-BOOK. THE ASSESSEE HAS NOT PROVIDED ANY JUSTI FICATION AS HOW THE ESTIMATE OF RS.45,48,172/- WAS MADE FOR LEA VE TRAVEL ALLOWANCE OF THE EMPLOYEES, WHEREAS ACTUALLY AMOUNT PAID TO THE EMPLOYEES WAS ONLY OF THE RS. 24,24,401/-. IN VIEW OF THE FACTS, WE AGREE WITH THE FINDING OF THE LD. CIT(A) IN DISA LLOWING THE EXCESS PROVISION MADE BY THE ASSESSEE. SIMILARLY, W E AGREE WITH THE FINDING OF THE LD. CIT(A) IN RESPECT OF THE PRO VISION FOR MEDICAL REIMBURSEMENT AND OTHER ALLOWANCES. THE ALTERNATIVE REQUEST OF 38 ITA NO.1947/DEL./2018 ; 2364/DEL.2018; 6474/DEL./2016 &5872/DEL./2016 THE ASSESSEETO DELETE THE ADDITION OF RS.27,90,535/ - ON THE GROUND THAT THE ASSESSEE HAS OFFERED THE SAME FOR T AX IN SUBSEQUENT ASSESSMENT YEAR, IS ALSO REJECTED BECAUS E THE ISSUE IN DISPUTE IS TO BE DECIDED IN ACCORDANCE WITH LAW AND NOT ACCORDING TO THE CHOICE OF THE ASSESSEE WHEN HE OFFER FOR TAX . HOWEVER, THE ASSESSEE IS AT LIBERTY TO MAKE REQUEST FOR RECTIFIC ATION IN THE SUBSEQUENT ASSESSMENT YEAR IN ACCORDANCE WITH LAW. THE GROUND NO. 1 OF THE APPEAL OF THE REVENUE IS ACCORDINGLY D ISMISSED AND THE ADDITIONAL GROUND NO.4 OF THE APPEAL OF THE ASS ESSEE IS ALSO DISMISSED. 12. IN THE RESULT, FOR ASSESSMENT YEAR 2007-08 THE APPEAL OF THE ASSESSEE AS WELL AS REVENUE ARE DISMISSED. FOR ASSE SSMENT YEAR 2009-10, THE APPEAL OF THE ASSESSEE IS ALLOWED PART LY, WHEREAS THE APPEAL OF REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH AUGUST, 2020. SD/- SD/- (KULDIP SINGH) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 24 TH AUGUST,2020. RK/- (D.T.D.S) COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI