The DCIT(OSD) Circle-8, Ahmedabad V. M/s. Torrent Pvt. Limited, Ahmedabad

ITA 2587/AHD/2014

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 6349 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 4 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-02-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 29-05-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 19-09-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S N SOPARKAR
• Keywords: Business income; Depreciation; Earning of tax free income; Initiation of penalty proceedings; Rule 8D; Capital Gains
• Section: 244A; 14A; 115JB; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH (BEFORE SHRI PRAMOD KUMAR, VICE PRESIDENT & SHRI MAHAVIR PRASAD, JUDICIAL MEMBER) ITA. NO: 2594 & 2587/AHD/2014 (ASSESSMENT YEAR: 2011-12) TORRENT PVT. LTD. TORRENT HOUSE, NR. DINESH HALL, OFF ASHRAM ROAD, AHMEDABAD-380009 V/S DCIT, (OSD), CIRCLE-8, AHMEDABAD (APPELLANT) (RESPONDENT) PAN: AAACT 5459R APPELLANT BY : SHRI S. N. SOPARKAR & PARIN SHAH , AR RESPONDENT BY : SHRI MUDIT NAGPAL, SR. D.R. ( )/ ORDER DATE OF HEARING : 01 -11-201 8 DATE OF PRONOUNCEMENT : 01-02-2019 PER MAHAVIR PRASAD, JUDICIAL MEMBER 1. THESE TWO CROSS APPEALS HAVE BEEN PREFERRED BY THE ASSESSEE AND REVENUE AGAINST EACH OTHER. THEREFORE FOR THE SAKE OF CONVE NIENCE, WE WOULD LIKE TO DISPOSE OF BOTH THE APPEALS TOGETHER. ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 2 2. FIRST WE TAKE UP IN ITA NO. 2587/AHD/2014. THE REVE NUE HAS TAKEN FOLLOWING GROUNDS OF APPEAL: 1). 'WHETHER THE COMMISSIONER OF INCOME-TAX (A PPEALS) HAS ERRED IN LAW AND ON FACTS IN DELETING DISALLOWANCE OF RS.12,27,015/- OUT OF TOTAL DISALLOWANCE OF RS.2,01,59,092/- U/S.14A OF THE ACT.' 2). 'WHETHER THE COMMISSIONER OF INCOME-TAX (A PPEALS) IS RIGHT IN LAW AND ON FACTS IN DIRECTING TO EXCLUDE THE ADDITION/ADJUSTME NT OF RS.2,01,59,092/- MADE ON ACCOUNT OF DISALLOWANCE U/S.!4A, WHILE COMPUTING TH E BOOK PROFIT COMPUTED U/S.LL5JBOFTHEACT.' 3). ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XIV, AHMEDABAD OUGHT TO HAVE U PHELD THE ORDER OF THE ASSESSING OFFICER. 4). IT IS THEREFORE, PRAYED THAT THE ORDER OF THE LD. COMMISSIONER OF INCOME- TAX (APPEALS)-XIV, AHMEDABAD MAY BE SET-A-SIDE AND THAT OF THE ORDER OF THE ASSESSING OFFICER BE RESTORED 3. THE FACTS OF THE CASE ARE EMANATED FROM IMPUGNED OR DER. (A)(I) 'ON PERUSAL OF THE DETAILS FILED BY THE ASSE SSEE COMPANY, IT WAS NOTICED THAT THE ASSESSEE HAD EARNED EXEMPT INCOME DURING THE RELEVANT F.Y. H OWEVER, THE ASSESSEE HAD DISALLOWED ONLY RS. 15,12,285/- UNDER SECTION 14A OF THE ACT. THE A SSESSEE WAS, ASKED VIDE ORDER SHEET ENTRY DATED 03.09.2013 AS TO HOW THE DISALLOWANCE U/S. 14 A HAS BEEN CALCULATED BY THE ASSESSEE AND _WHY IT WAS NOT AS PER METHOD LAID DOWN IN RULE 8D OF I.T.. RULES, 1962 IN.RESPONSE TO THE SAME THE ASSESSEE SUBMITTED VIDE LETTER DATED 07.10.2013 DETAILED REASONS AS TO WHY DISALLOWANCE UNDER SECTION14A.OFTHE ACT HAS NOT BEEN CALCULATED AS PER RULE 8D OF THE I.T. RULES, 1962. THE REASONS CITED BY THE ASSESSEE WERE AS UNDER:- I). 85% OF THE INVESTMENT MADE BY THE ASSESSEE IS I N SHARES OF SUBSIDIARY COMPANIES WHICH DO NOT REQUIRE ANY MONITORING. EARNING EXEMPT INCOME I S ANCILLARY TO THE MAIN OBJECTIVE OF INVESTMENT MADE IN SUBSIDIARY COMPANIES. II). NO BORROWED FUNDS ARE UTILIZED FOR THE PURPOSE OF MAKING SUCH INVESTMENT AND SO NO INTEREST EXPENDITURE IS ATTRIBUTABLE TO EARNING SUCH INCOME. III). 10% OF TOTAL REMUNERATION PAID TO EMPLOYE ES AS EXPENSE FOR EARNING ANY EXEMPT INCOME HAVE ALREADY BEEN DISALLOWED. IT WAS FURTHER STATED BY ASSESSEE THAT THE ADMINISTRATIVE EXPENSES DO NOT BEAR ANY NEXUS WITH THAT OF EARNING OF EXEMP T INCOME AND THEREFORE THERE CANNOT BE ANY DISALLOWANCE HI RESPECT OF THESE EXPENSES.' (A)(II) 'THE SUBMISSIONS MADE BY THE ASSESSEE WERE DULY CONSIDERED AND A DETAILED SHOW CAUSE WAS ISSUE D TO THE ASSESSEE ON 04.12.2013 WHEREIN THE SUBMISSIONS MADE BY THE ASSESSEE WERE NOT ACCEP TED IN VIEW OF THE FOLLOWING FACTS:- 'I). OUT OF THE TOTAL INCOME OF RS. 111,95,50,619/- EARNED BY YOU DURING THE YEAR, INCOME TO THE TUNE OF RS. 103,76,91,3907- IS CLAIMED EXEMPT BY YO U. THE REMAINING INCOME WHICH IS OFFERED TO TAX CONSISTS OF RS. 4,64,66,8067- ON SHORT CAPITAL GAIN ON SALE OF INVESTMENTS AND RS. 3,71,04,9977- ON INTEREST FROM FDRS. II). AGAINST THE SAID INCOME YOU HAVE CLAIMED EXPEN DITURE OF RS, 13,65,85,5717-. OUT OF THIS EXPENDITURE YOU CLAIM THAT YOU HAVE EXPENDED RS. 15 ,12,28S/- FOR EARNING EXEMPT INCOME OF RS. 103,76,91,3907- I.E. 1.11 % OF THE TOTAL EXPENDITUR E HAS BEEN INCURRED BY YOU FOR EARNING 92.7% OF YOUR TOTAL INCOME. THIS ANOMALY ITSELF EXPLAINS AS TO HOW THE EXPENDITURE CLAIMED TO HAVE BEEN INCURRED BY YOU FOR EARNING EXEMPT INCOME IS WRONG. ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 3 III). NO OTHER BUSINESS ACTIVITY IS BEING CARRIED O UT BY THE ASSESSEE APART FROM INVESTMENT. THEREFORE, IT CAN BE SAFELY ASSUMED THAT THE ENTIRE ADMINISTRATIVE SET UP IS BEING USED FOR MANAGING INVESTMENT PORTFOLIO THROUGH WHICH ASSESSE E EARNING/(MAY EARN IN FUTURE) EXEMPT INCOME IN THE FORM OF DIVIDEND /LONG TERM CAPITAL G AINS. IV). RULE 8D WAS INTRODUCED PRECISELY TO COVER THE SITUATIONS WHEREIN THE ASSESSEE WERE PUSHING THE EXPENSES RELATING TO EXEMPT INCOME TOWARDS TAXA BLE INCOME AND THEREBY REDUCING THE TAXABLE INCOME. THE INTENTION OF THE LEGISLATURE IS CLEARLY EVIDENT FROM THE MEMORANDUM EXPLAINING THE PROVISIONS CONTAINED IN THE FINANCE ACT, WHEREIN IT WAS EXPLAINED THAT ONLY THOSE EXPENSES COULD BE CLAIMED AS DEDUCTION WHICH ARE IN CURRED IN RELATION EARNING TAXABLE INCOME. IN VIEW OF THE REASONS CITED ABOVE I AM SATISFIED T HAT THE EXPENDITURE OF RS. 15,12,285/- CLAIMED TO HAVE BEEN INCURRED BY YOU FOR EARNING EXEMPT INC OME IS NOT CORRECT.' THE ASSESSEE WAS REQUESTED TO SHOW CAUSE AS TO WHY THE DISALLOWANCE U/S. 14A SHOULD NOT BE MADE AS PER PROVISIONS OF RULE 8D OF IT. RULES, 196 2.' (A)(III) IN RESPONSE TO THE SAID SHOW CAUSE THE ASS ESSEE SUBMITTED VIDE LETTER DATED 27.12.2013 THAT 1, AS REGARDS TO THE OBSERVATION OF YOUR GOODSELVES CONTAINED IN POINTS (I) AND (II) TO PARA 1 AS STATED ABOVE, THE ASSESSEE SUBMITS THE AMOUNT OF RS. 13,65,85,571/- STATED TO HAVE BEEN CLAIMED BY THE ASSESSEE IS WITJWUT TAKING IN TO ACC OIMT THE EXPENSES WHICH ARE ALREADY DISALLOWED IN THE RETURN OF INCOME. IN THIS CONNECT ION, THE ASSESSEE SUBMITS THE BREAK-UP OF THE TOTAL EXPENDITURE CLAIMED WHILE COMPUTING THE BUSIN ESS INCOME FOR THE YEAR UNDER CONSIDERATION, WHICH IS AS UNDER: A. EMPLOYEES REMUNERATION AND ADMINISTRATIVE EXPEND ITURE PARTICULARS TOT AL EXPENSES EXPENSES CLAIMED REMARKS EMPLOYEE REMUNERATION AND BENEFITS 151,22,852 1,36,10,567 (10% OF THE TOTAL DISALLOWED U/S 14A) DEMAT CHARGES 14,95,190 0 DISALLOWANCE IN THE RETURN RENT, RATES AND TAXES 2000 2000 REFER PARA 6 INSURANCE 3,65,553 3,65,553 REFER PARA 6 REPAIRS AND MAINTENANCE 5,32,208 5,32,203 TRAVELLING AND CONVEYANCE 2,56,267 2,86,167 FEES AND LEGAL EXPENSES 4,53,096 4,14,506 RS. 38,590/ - DISALLOIOED (RS.5,500 + RS. 33,090) AU DITOR'S REMUNERATION 2,62,411 2,61,411 REFER PARA 6 STATIONERY, PRINTING 19,032 19,032 ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 4 MISCELLANEOUS EXPENSES 34,452 34,482 TOTAL ADMINISTRATIVE EXPENSE 1,85,71,991 1,55,25,926 B. INTEREST EXPENDITURE PARTICULARS TOTAL EXPENSES EXPE NSES CLAIMED REMARKS INTEREST EXPENSE 11,34,19,004 10,12,50,821 RS.1,21,68,184/ - PERTAINING TO IDFC LOAN I ALREADY DISALLOWED IN VIEW OF THE ABOVE, IT IS DEAR THAT OUT OF TOTAL EXPENDITURE OF RS.13,19,90,995/- INCURRED ON EMPLOY EES REMUNERATION & ADMINISTRATIVE EXPENDITURE AND INTER EST; THE EXPENDITURE TO THE TUNE OF RS.11,67,76,747 /- HAS BEEN CLAIMED WHILE COMPUTING THE BUSINESS INCOM E FOR THE YEAR UNDER CONSIDERATION. 2.FURTHER, ON PERUSAL OF THE ABOVE TABLES, IT MAY B E AM BE OBSERVED THAT: MAJOR PORTION OF EXPENDITURE CLAIMED CONSISTS OF INTEREST EXPENSE INCURRED ON THE LOAN AVAILED FROM IDFC. TLIE SAME HAS BEEN CLAIMED AS DEDUCTION AGAIN ST INTEREST INCOME AS THE EXPENSE INCURRED FOR EARNING INTEREST INCOME, WHICH IS OFFERED TO TAX AS BUSINESS INCOME FOR THE YEAR UNDER CONSIDERATION. AND ADMINISTRATIVE EXPENDITURE OF ROUTINE AND GENERAL NATURE REQUIRED TO BE INCURRED, IRRESPECTIVE OF TH E FACT WHETHER ANY INVESTMENT ACTIVITY IS CARRIED OUT BY T HE COMPANY OR NOT HAVE BEEN CLAIMED, IN CONTEXT OF EXPENSES CLAIMED BY THE ASSESSES VIS- A-VIS THE DISALLOWANCE OF EXPENDITURE U/S 14A R.W.R IDE 8D, IT IS SUBMITTED THAT THESE EXPENSES DO NOT BEAR ANY NEXUS WITH THAT OF EARNING OF EXEMPT INCOME AN D THEREFORE THERE CANNOT BE ANY DISALLOWANCE IN RESPE CT OF THESE EXPENSES AS PER THE PROVISIONS OF SECTI ON T.4A R.U/.RULE SD. THE DETAILED EXPLANATION IN THIS REGARD IS GIVEN IN SUBSEQUENT PARAGRAPHS. 3. NO DISALLOWANCE OF INTEREST EXPENDITURE IT/S 14A R.W.RULE 8D OUT OF THE TOTAL INTEREST ON TERM LOAN FROM IDFC LT D. AMOUNTING TO RS.LL,34,19,OQ4/~, INTEREST EXPENSE OF RS.1,21,68,184/- PERTAINS TO IDFC LOAN I TAKEN IN E ARLIER YEARS FOR PURPOSE OF GENERAL CORPORATE REQUIREMENT OF THE ASSESSES COMPANY. THE SAID INTER EST SHOULD LIE ALLOWABLE WHILE COMPUTING THE BUSINESS INCOME OF THE COMPANY AS THE FUNDS BORROWED ARE UTI LIZED FOR THE BUSINESS OF THE COMPANY. HOWEVER, IN ORDER TO AVOID LITIGATION, THE SAID INTEREST LIAS B EEN DISALLOWED WHILE COMPUTING THE BUSINESS INCOME FOR THE YEAR UNDER CONSIDERATION. 4.1 THE REMAINING INTEREST EXPENDITURE OFRS.1 0,12,50,821/- CLAIMED IS IN RESPECT OF IDFC LOAN II . AS REGARDS THE SAID LOAN, IT MAY BE NOTED THAT THE ASS ESSEE COMPANY IS ENGAGED IN INVESTMENT ACTIVITY, FINANCIAL ACTIVITY AND IS ALSO REGISTERED WITH KBI AS NON-BANKING FINANCIAL COMPANY (NBFC). THE SAID LOAN FROM IDFC WAS TAKEN FOR THE FUND REQUIRED IN T HE COURSE OF THE SAID FINANCING ACTIVITIES. INTHIS CONTECT, IT MA BENOTED THAT THE ASSESSEE COMPANY HA D, IN EARLIER YEARS, GRANTED LOANS TO ANAGRAM SECURITIES LTD AND TORRENT POWER LTD, AND INTEREST WAS ALSO CHARGED FROM THEM. THE SAID INCOME WAS TREATED AS INCOME FROM BUSINESS AND PROFESSION AS T HE FINANCING ACTIVITY FALLS WITHIN THE OBJECT CLAUS E OF THE COMPANY. IN THE ASSESSMENT YEAR UNDER CONSIDERATION , IN ABSENCE OF ANY SUCH REQUIREMENTS OF THE SAID FUNDS, AS PER PRUDENT BUSINESS POLICY, THE ASSESSEE COMPANY HAS INVESTED TJIE IDLE FUNDS IN THE FIXED DEPOSITS OF BANKS, WHICH YIELDED INTEREST INCOME. T HE ASSESSEE COMPANY HAS OFFERED THE SAID INTEREST INCOME AS INCOME UNDER THE HEAD PROFITS AND CAINS F ROM BUSINESS AND PROFESSION. SINCE THE INTEREST WAS PAID ON AMOUNT BORROWED FOR THE PURPOSE OF FINANCIN G BUSINESS, THE SAME IS CLAIMED AS DEDUCTION. 4.2 AS EXPLAINED ABOVE, THE IDFC LOAN-II IS AV AILED TO PROMOTE THE BUSINESS PURPOSE OF THE ASSESS EE COMPANY AND HENCE, THE EXPENDITURE INCURRED ON THE SAME IS CONSIDERED AS BUSINESS EXPENSE AND CLAIMED AS DEDUCTION AGAINST INTEREST INCOME. HENCE, THE AS SESSEE COMPANY STATES THAT THERE SHOULD NOT BE ANY DISALLOWANCE OUT OF INTEREST EXPENDITURE. ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 5 5. MOREOVER, THE ASSESSEE COMPANY SUBMITS TH E CLASSIFICATION OF INVESTMENTS EXISTING AS ON MARC H 31,2011, AS UNDER - INVESTMENTS LONG TER M INVESTMENT CURRENT INVESTMENTS TOTAL ; IN SUBSIDIARY COMPANIES 4,51,92,71,744 1,84,99,73,861 6,36,92,45,605 IN OTHERS COMPANIES 1,05,25,05,621 -- 1,05,25,05,621 TOTAL INVESTMENTS 5,57,17,77,365 1,84,99,73,861 7,42,17,51,226 FROM THE ABOVE CLASSIFICATION OF INVESTMENTS, IT IS EVIDENT THAT THE INVESTMENTS TO THE EXTENT OF 85.82% ARE MADE IN THE SUBSIDIARY COMPANIES OF THE ASSESSEE COMPANY. THE ASSESSEE COMPANY FURTHER SUBMITS THAT THESE ARE STRATEGIC IN VESTMENT MADE IN THE GROUP COMPANIES WHICH DO NOT REQUIRE ANY MONITORING OR CONSTANT ADMINISTR ATION. IN CASE OF THESE INVESTMENTS ONCE THE FUNDS ARE INVESTED, THE HOLDING OF THE SAID INVESTM ENTS HAS YIELDED SOME DIVIDEND. HOWEVER, THE INVESTMENTS HAVE BEEN MADE IN THE GROUP COMPANIES A S PART OF STRATEGIC BUSINESS MOVE AND NOT WITH A VIEW OF EARNING DIVIDEND INCOME. EXEMPT INCOME IS ANCILLA RY TO THE MAIN OBJECTIVE OF THE INVESTMENTS MADE IN THE SUBSIDIARY COMPANIES. 5.1 THESE ARE LONG TERM STRATEGIC INVESTMENTS MADE BY THE ASSESSEE COMPANY IN EARLIER YEARS. THE ASSESSEE COMPANY SUBMITS THAT IT HAS MAD E INVESTMENTS FROM OWNED FUNDS AND NO AMOUNT OF BORROWED FUNDS IS UTILIZED FOR THE PURPOS E OF MAKING SUCH INVESTMENTS. MOREOVER, THE ASSESSEE COMPANY BRINGS TO YOUR KIND NOTICE THAT A SMALL AMOUNT OF INVESTMENTS WERE MADE DURING THE YEAR UNDER CONSIDERATION AND THE SAME CA N BE VERIFIED FROM SCHEDULE V TO THE BALANCE SHEET FOR THE YEAR UNDER CONSIDERATION. IT IS SUBMI TTED THAT IT HAS NOT UTILIZED AM/ BORROWED FUNDS TO MAKE THESE INVESTMENTS. SO THERE IS NO INTEREST EXPENDITURE WHICH IS ATTRI BUTABLE TO EARNING OF SUCH EXEMPT INCOME ACCRUED FROM THE, INVESTMENTS OF THE ASSESSEE COMPANY. 5.2 AT THIS POINT, IT MAY ALSO BE NOTED THAT T LIE SAID LOAN HAS NOT 'BE OBTAINED BY THE ASSESSEE COMPANY DURING THE YEAR UNDER CONSIDERATION. THE IS SUE RELATING UTILIZATION OF THE FUNDS OBTAINED THROUGH THE SAID LOAN AND THE ALLOWABITLIY OF INTER EST THEREON HAS BEEN EXTENSIVELY EXAMINED DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR THE EARLIER YEARS AND THE SAME HAS BEEN ALLOWED AS DEDUCTION THEREAFTER. IN VIEW OF ABOVE, THE ASSESSEE COMPANY STATES THAT THERE SHOULD NOT BE ANY DISALLOWANCE OUT OF INTEREST EXPENDITURE. 6. NO FURTHER DISALLOWANCE OF ADMINISTRATIVE EXPENSE U/S 14A R.W.RULE 8D IT IS WELL KNOWN FACT THAT THE PURPOSE OF DISALLOWA NCE U/S 14A IS TO EXCLUDE THE EXPENSES WHICH HAVE BEEN INCURRED TO EARN EXEMPT INCOME AND SO THE EXPENSES WHICH CANNOT BE SAID TO HAVE ANY DIRECT OR INDIRECT NEXUS WITH THE EXEMPT INCOME , SHOULD NOT BE DISALLOWED U/S 14A R.W.R. 8D. IN THIS CONTEXT, THE ASSESSEE COMPANY STATES THAT I T HAS INCURRED VARIOUS ADMINISTRATIVE EXPENSES WEE EMPLOYEES REMUNERATION, DEMAT CHARGES, RENT, RA TES AND TAXES, INSURANCE, REPAIR & MAINTENANCE, TRAVELING & CONVEYANCE EXPENSES, FEES & LEGAL EXPENSES, AUDITORS REMUNERATION, STATIONERY-PRINTING, AND OTHER MISCELLANEOUS EXPENS ES DURING THE YEAR UNDER CONSIDERATION. 6.1 OUT OF ALL THESE EXPENSES, THE ASSESSEE CO MPANY HAD ALREADY DISALLOWED 10% OF THE TOTAL REMUNERATION PAID TO THE EMPLOYEES AND DEMAT CHARGE S AS EXPENSE FOR EARNING EXEMPT INCOME, AND SO NO FURTHER DISALLOWANCE IN THIS RESPECT IS N EEDED'. 6.2 FURTHER, EXPENSES OF RENT, RATES AND TAXES , FEES & LEGAL EXPENSES, AUDITORS REMUNERATION ETC. ARE REQUIRED TO BE INCURRED, IRRESPECTIVE OF T HE FACT WHETHER ANY INVESTMENT ACTIVITY IS CARRIED OUT BY THE COMPANY OR NOT. EVEN IN ABSENCE OF ANY ACTIVE BUSINESS ACTIVITY, T HESE EXPENSES ARE REQUIRED TO BE INCUNED, WHICH ARE NECESSARY FOR MAI NTAINING THE STATUS OF THE COMPANY. THE REMAINING EXPENSES OF INSURANCE, REPAIR & MAINTENAN CE, TRAVELING & CONVEYANCE EXPENSES, STATIONERY-PRINTING AND OTHER MISC. EXPENSES ARE OF GENERAL NATURE AND INCURRED BY THE ASSESSEE FOR GENERAL ADMINISTRATIVE PURPOSE. ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 6 IT IS THUS SUBMITTED THAT THESE EXPENSES DO NOT BEA R ANY NEXUS WITH THAT OF EARNING OF EXEMPT INCOME AND THEREFORE THERE CANNOT BE ANY DISALLOWAN CE IN RESPECT OF THESE EXPENSES AS PER THE PROVISIONS OF SECTION 14A R.W.RULESD. 7. IN VIEW OF THE ABOVE, IT IS CLEAR THAT THE EXPEN SES WHICH HAVE BEEN CLAIMED BI/ THE ASSESSEE WHILE COMPUTING THE BUSINESS INCOME DO NOT BEAR ANY NEXUS WITH THE EXEMPT INCOME. MERELY BECAUSE MAJOR PORTION OF THE INCOME OF THE ASSESSES CONSISTS OF EXEMPT INCOME, IT CANNOT BE ASSUMED THAT MAJOR PORTION OF EXPENSES WOULD HAVE B EEN INCURRED _TO EARN THE SAID INCOME. IT IS VERY MUCH IMPORTANT TO NOTE THAT NO MAJOR EFF ORTS ARE NEEDED TO MANAGE THE INVESTMENT PORTFOLIO, MORE PARTICULARLY WHEN ALL THE INVESTMEN TS ARE LONG-TERM STRATEGIC INVESTMENTS IN SUBSIDIARY COMPANIES AND THAT EXEMPT INCOME IS ANCILLARY TO THE MAIN OB JECTIVE OF THE INVESTMENTS MADE IN THE SUBSIDIARY COMPANIES. THERE FORE, THE REASONS FOR NOT ACCEPTING SUBMISSION OF THE ASSESSES, GIVEN IN POINT NO (I) A ND (II) TO PARA 3 OF THE NOTICE, ARE BASED ON INCORRECT ASSUMPTIONS, MORE SPECIFICALLY BECAUSE IT HAS BEEN CONCLUSIVELY ESTABLISHED BY THE ASSESSEE THAT THAT THERE IS NO NEXUS BETWEEN THE EX PENSES INCURRED AND THE EXEMPT INCOME. 8. IN POINT NO (HI) TO PARA 3 OF THE NOTICE, IT HAS BEEN STATED THAT 'IT CAN BE SAFELY ASSUMED THAT THE ENTIRE ADMINISTRATIVE SET UP IS BEING USED FOR MANAGING INVESTMENT PORTFOLIO THROUGH WHICH ASSESSEE EARNING/ (MAY EARN IN FUTURE) EXEMPT INCOME IN THE FORM OF DIVIDEND/LONG TERM CAPITAL GAINS.' IN CONNECTION WITH SAME, AS ALREADY EXPLAINED IN PA RA-4.1 ABOVE, THE ASSESSEE COMPANY IS ENGAGED IN INVESTMENT ACTIVITY FINANCIAL ACTIVITY A ND IS ALSO REGISTERED WITH RBI AS NON-BANKING FINANCIAL COMPANY (NBFC). THIS FACT CAN ALSO BE VER IFIED FROM THE ACTIVITIES OF THE ASSESSEE COMPANY IN VARIOUS EARLIER YEARS. MOREOVER, AS EXPLAINED ABOVE, THE INVESTMENTS BEIN G LONG TERM STRATEGIC INVESTMENTS, NO MAJOR EFFORTS ARE NEEDED TO MANAGE THE INVESTMENT PORTFOLIO AND THAT EXEMPT INCOME IS ANCILLARY TO THE MAIN OBJECTIVE OF THE INVESTMENTS MADE IN THE SUBSIDIARY COMPANIES. THEREFORE, YOUR ASSUMPTION AS STATED PARA-3(II) OF THE NOTICE IS NOT VALID. 9. FURTHER, VIDE POINT (IV) TO PARA 3 OF NOT ICE, YOUR GOODSELVES HAVE MENTIONED THAT RULE 8D WAS INTRODUCED PRECISELY TO COVER THE SITUATIONS WH EREIN THE ASSESSEE WERE PUSHING THE EXPENSES RELATING TO EXEMPT INCOME TOWARDS TAXABLE INCOME AND THEREBY REDUCING THE TAXABLE INCOME. IN THIS CONTEXT, IT IS SUBMITTED THAT IN VI EW OF THE ABOVE DETAILED SUBMISSION, IT IS CLEAR TH AT ASSESSEE HAS NOT INCURRED EXPENSES WHICH HAVE BEEN CLAIMED) TOWARDS EARNING EXEMPT INCOME. THIS CAN BE PROVED BY ANSWERING A SIMPLE QUESTION A S TO WHETHER THE DIVIDEND INCOME WOULD HAVE STOPPED, HAD THE ASSESSEE NOT INCURRED THE EXP ENSES WHICH ARE DEBITED TO ITS PROFIT & LOSS ACCOUNT? THE ANSWER IS CLEAR 'NO'. THE INCOME FROM DIVIDEND WOULD CONTINUE TO BE EARNED SO LONG AS THE SUBSIDIARY COMPANIES ARE PAYING DIVIDEN D AND THE FACT WHETHER THE ASSESSEE COMPANY INCURS ANY ADMINISTRATIVE EXPENDITURE OR NO T WOULD NOT HAVE ANY IMPACT ON IT. THE ABOVE POINT CONCLUSIVELY PROVES THAT THE ASSESS EE HAS NOT INCURRED ANY ADMINISTRATIVE EXPENSE _ FOR EARNED DIVIDEND INCOME AND THEREFORE, IT IS CLEAR THAT NO EXPENSES HAVE BEEN PUSHED TOWARDS TAXABLE INCOME AND THE_CLAIM_OF THE ASSESSEE IS VERY MUCH GENUINE. 10. WITHOUT PREJUDICE TO ABOVE, AS REGARD THE ADMINISTRATIVE EXPENDITURE, IT IS STATED THAT THE ASSESSEE COMPANY HAS AVERAGE INVESTMENT OF RS.6,99, 85,14,760/-. THEREFORE, BY APPLYING RULE 8D THE SAID DISALLOWANCE WOULD WORK OUT TO RS 3,49, 92,573/- BEING 0.5% OF THE AVERAGE INVESTMENT. HOWEVER, THE TOTAL ADMINISTRATIVE EXPEN DITURE IS ONLY RS.. 1.85,71,9927-. OUT OF THESE EXPENSES DEMAT CHARGES OF RS,14,95,190/-, CHARGES O N DOCUMENTS OFDEBENHIRENAGAR__OFRS,5,500/-AND SHARE REGISTRAR E XPENSES AMOUNTING TO RS.33,090/- CLASSIFIED UNDER THE HEAD FEES AND LEGAL EXPENDITUR E AND RS. 15,12,285/- AS AN EXPENSE INCLINED TO EARN TO EXEMPT INCOME HAS ALREADY BEEN DISALLOWE D WHILE COMPUTING THE BUSINESS INCOME. THUS, OUT OF EXPENSES OF RS 1,85,71,9937- DEBITED T O PROFIT_AND LOSS ACCOUNT, THE ASSESSEE COMPANY HAS CLAIMED EXPENSES OF RS.1,55,25,926/-, AS EXPLAINED IN PARA-2 (A) ABOVE. THEREFORE, THE DISALLOWANCE AS STATED ABOVE IF MADE WILL EXCEE D THE TOTAL AMOUNT OF ADMINISTRATIVE EXPENSES CLAIMED; HOWEVER, THE TOTAL DISALLOWANCE TI/S 14A R .W.R8D CANNOT EXCEED_THE TOTAL AMOUNT OF ADMINISTRATIVE EXPENDITURE. HENCE, RULE 8D IS NOT APPLICABLE. (A)(IV) 'THE REPLY OF THE ASSESSEE HAS BEEN CONSIDE RED AND IS NOT FOUND TO BE ACCEPTABLE IN VIEW OF THE FOLLOWING FACTS AND LEGAL PROVISIONS:- I). SEC. 14A OF THE ACT RELATES TO EXPENDITURE INCU RRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. SEC. 14A(1) STATES THAT FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 7 NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDI TURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. II). SEC. 14A(2') FURTHER STATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME ... WHICH, DOES, NOTFORM PART OF. TOTAL INCOME UNDER THE ACT, IN ACCORDANCE WITH SUCH METHOD AS MAY BE P RESCRIBED (RULE 8D) IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NO T SATISFIED WITH, THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELA TION TO INCOME WHICH DOES NOT FROM PART OF TOTAL INCOME. III). THUS, THE ASSESSING OFFICER IS BOUND TO CALCU LATE THE DISALLOWANCE U/S. 14A IN ACCORDANCE WITH RULE 8D IF HE IS SATISFIED THAT THE DISALLOWAN CE MADE BY THE ASSESSEE U/ S. 14A OF THE ACT IS NOT CORRECT. IV). IN THE INSTANT CASE THE ASSESSEE HAS DISALLOWE D RS. 15,12,285/- U/S. 14A OF THE ACT. THE TOTAL EXPENDITURE CLAIMED BY THE ASSESSEE IN THE P&L ACCO UNT IS RS, 13,65,85/571/-. THE TOTAL INCOME EARNED BY THE ASSESSEE DURING THE YEAR IS RS. 111,9 5,50,619/- WHICH IS UNDER FOLLOWING HEADS DIVIDEND INCOME RS. 102,26,21,939 PROFIT ON SALE OF INVESTMENT RS. 4,64,66,806/- INTEREST RS. 3,71,04,997/- SHARE IN PROFIT OF PARTNERSHIP RS. 1,31,56,877/- TORRENT FINANCERS THUS, THE 95.49% INCOME IS FROM INVESTMENT MADE BY THE ASSESSEE, 3.1% IS FROM FIXED DEPOSITS MADE BY THE ASSESSEE AND THE REMAINING INCOME IS FR OM PARTNERSHIP FIRM. THUS, THE MAJOR PORTION OF INCOME OF THE ASSESSEE IS FROM INVESTMENT MADE B Y IT WHICH IS EXEMPT NO OTHER BUSINESS ACTIVITY HAS BEEN CARRIED OUT BY THE ASSESSEE DURIN G THE YEAR. THE ASSESSEE HAS CLAIMED THAT IT IS NBFC. HOWEVER, DURING THE YEAR ME ASSESSEE HAS ADVA NCE LOANS/ADVANCE OF ONLY RS. 17,15,522/-. THUS, THE ONLY ACTIVITY CARRIED OUT BY THE ASSESSEE DURING THE YEAR WAS INVESTMENT IN SHARES/MUTUAL FUND WHICH IS CAPABLE OF EARNING EXEM PT INCOME. AS AGAINST THIS THE ASSESSEE HAS DISALLOWED ONLY RS. 15,12,2857- U/S. 14A WHICH IS M ERE 1.1% OF TOTAL EXPENDITURE CLAIMED BY THE ASSESSEE IN THE P&L ACCOUNT IN VIEW OF THE FACTS S TATED ABOVE, I AM SATISFIED THAT DISALLOWANCE CLAIMED BY THE ASSESSEE U/S. 14A OF THE ACT IS NOT CORRECT. THEREFORE, AS PER PROVISIONS OF THE SEC. 14A(2) OF THE ACT THE DISALLOWANCE HAS TO BE M ADE AS PER RULE 8D OF THE IT. RULES, 1962.' (A)(V) THE AO COMPUTED DISALLOWANCE AS PER RULE 8D AS FOLLOWS: 'AS PER PROVISIONS OF RULE 8D(1) 'WHERE THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR IS NOT SATISFIED WITH THE CORRECTNESS OF CLAIM OF E XPENDITURE MADE BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FROM PART OF TOTAL INCOME UND ER THE ACT FOR THE PREVIOUS YEAR, HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH PROVISIONS OF SUB - RULE(2)'. AS PER PROVISIONS OF SUB RULE (2) OF RULE 8D THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NO T FORM PART OF TOTAL INCOME SHALL BE AGGREGATE OF FOLLOWING AMOUNTS:- I). THE AMOUNT OF EXPENDITURE DIRECTLY RELATED TO I NCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. IN THIS CASE THE ASSESSEE HAS DISALLOWED ONLY 10% O F TOTAL REMUNERATION ,& OTHER BENEFITS PAID TOJ?MPLOYEES I.E. RS. 15,12,285. FURTHER ASSESSEE H AS DISALLOWED DEMAT CHARGES OF RS. 14,95,1907- (THOUGH NOT UNDER SECTION 14A). THE ASSESSEE HAS CONTENDED THAT IT HAS INCURRED VARIOUS ADMINISTRATIVE EXPENSES LIKE EMPLOYEES REMU NERATION DEMAT CHARGES, RENT, RATES & TAXES, INSURANCE REPAIR AND MAINTENANCE, TRAVELLING & CONV EYANCE EXPENSES, FEES & LEGAL EXPENSES, AUDITORS REMUNERATION, STATIONERY PRINTING AND OTHE R MISCELLANEOUS EXPENSES DURING THE YEAR UNDER CONSIDERATION. OUT OF ALL THESE EXPENSES, THE ASSESSEE COMPANY HAD ALREADY DISALLOWED 10% OF THE TOTAL REMUNERATION PAID TO THE EMPLOYEES AND DEMAT CHARGES AS EXPENSES FOR EARNING EXEMPT INCOME AND SO FURTHER DISALLOWANCE WAS NEEDE D. THE CONTENTION OF THE ASSESSEE IS NOT AT ALL ACCEPT ABLE IN VIEW OF THE FACT THAT NO OTHER BUSINESS ACTIVITY IS_ BEING CARRIED OUT BY THE ASSESSEE EXCE PT INVESTMENT. BY NO STRETCH OF IMAGINATION IT CAN BE ASSUMED THAT THE ASSESSEE COMPANY IS PAYING RS. 1,51,22,8527- TO EMPLOYEES AS REMUNERATION AND OTHER BENEFITS FOR DOING NOTHING. DURING THE ENTIRE YEAR THE ASSESSEE HAS DONE NO OTHER ACTIVITY APART FROM TRADING IN SHARES/MUTU AL FUNDS AND MANAGING ITS INVESTMENT PORTFOLIO. ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 8 DURING THE YEAR NO NEW INVESTMENT HAS BEEN MADE BY THE ASSESSEE IN ITS SUBSIDIARY COMPANIES. THEREFORE, IN VIEW OF THE FACTS STATED ABOVE IT IS CLEAR THAT THE DIRECT EXPENSES ATTRIBUTABLE TO EARNING OF EXEMPT INCOME ARE A). REMUNERATION & OTHER BENEFITS OF EMPLOYEES . RS. 1,51,22,852/- B). DEMAT CHARGES RS. 14,95,1907- RS. 1,66,18,0 42/- II). INTEREST EXPENDITURE - NIL (AS HELD IN EA RLIER YEARS). III). AN AMOUNT EQUAL TO ONE HALF PERCENT OF TH E AVERAGE OF THE VALUE OF INVESTMENT INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART TO TOTAL INCO ME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE P REVIOUS YEAR. IN THE INSTANCE CASE IT IS 0.5% (700,79,22,775 + 698,91,06,746) = RS. 3,49,92,573 2 HOWEVER, TILLS AMOUNT HAS TO BE RESTRICTED TO THE A CTUAL EXPENDITURE CLAIMED BY THE ASSESSEE IN THE RETURN OF INCOME I.E. RS. 65,48 F 525/-/ / (VI) THE AO THEREFORE HELD - 'THUS, THE TOTAL DISALLOWANCE U/S. 14A R.W.S. 8D CO MES OUT TO BE RS. 2,31,66,567'/- OUT OF WHICH THE ASSESSEE HAS ALREADY DISALLOWED RS. 15,12,285/- U/S. 14A AND DEMAT CHARGES OF RS. 14,95,190. THEREFORE, THE AMOUNT OF DISALLOWANCE U/ S. 14A R.W.R. 8D IS RESTRICTED TO RS. 2,01,59,0927-. IT IS ALSO IMPORTANT TO MENTION HERE THAT SIMILAR D ISALLOWANCE WAS MADE IN A.Y. 2009-10 WHICH HAS BEEN EVEN CONFIRMED BY CIT(A). THE CIT(A) HAS HELD THAT 'THE ACTION OF THE ASSESS ING OFFICER (APPLYING RULE 8D) IS FULLY JUSTIFIED IN VIEW OF TH E FACT THAT THERE IS NO OTHER ACTIVITY WHICH IS BEI NG CARRIED OUT BY THE APPELLANT EXCEPT MAKING THE INVE STMENT IN OTHER GROUP COMPANIES. ALL ACTIVITIES OF THE COMPANY ARE RELATED TO EARNING OF DIVIDEND F ROM EXEMPT INVESTMENT AND INCOME WHICH IS EXEMPT FROM TAX AND THE OTHER INCOME IS NEGLIGIBLE COMPARED TO EXEMPT INCOME'. (B) THE AO FURTHER OBSERVED THAT (I) 'DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTICED THAT THE ASSESSEE HAS VALUED CLOSING STOCK OF 44,95,437 SHARES OF M/S. GUJARAT L EASE FINANCING LTD AT MARKET VALUE OF RS. I/- PER SHARE. THUS, THE VALUATION OF CLOSING STOCK OF SHARES OF M/S, GUJARAT LEASE FINANCING LTD (GLFL) WAS AT RS. 44,95,437. IT WAS FURTHER SEEN TH AI AS..PER THE. DM AT A/C STATEMENT SUBMITTED BY THE ASSESSEE VIDE HIS SUBMISSION DATED 07.10.201 3 (COPY ENCLOSED) THAT DIE SHARES OF GUJARAT LEASE FINANCING LTD WERE SHOWN AT MARKET RATE OF RS . 3.7/- PER SHARE AS ON 31.03.2011. IT WAS ALSO SEEN FROM THE WEBSITE OF NATIONAL STOCK EXCHAN GE (NSE) (COPY ENCLOSED) THAT THE MARKET VALUE OF SHARES OF M/S. GUJARAT LEASE FINANCING LTD HAVE BEEN VALUED AT RS, 3.7/-AS ON 31.03.2011. AS PER PROVISIONS OF SEC. 145A OF THE ACT THE VALUA TION OF INVENTORY FOR THE PURPOSES OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD 'P ROFITS AND GAINS OF BUSINESS OR PROFESSION' SHALL BE IN ACCORDANCE WITH THE METHOD OF ACCOUNTIN G REGULARLY EMPLOYED BY THE ASSESSEE. AS PER POINT NO. 12(A) OF THE TAX AUDIT REPORT IN F ORM NO. 3CD SUBMITTED BY THE ASSESSEE IT WAS STATED THAT CLOSING STOCK IS VALUED AT COST OR MARK ET VALUE WHICHEVER IS LOWER. IN THE INSTANT CASE THE SHARES OF M/S. GUJARAT LEASE FINANCING LTD WERE VALUED AT MARKET VALUE OF RS. IF- PER SHARE RATHER THAN THE MARKET VALUE OF RS. 3.7/- PER SHARE FAS PER DMAT STATEMENT AND AS PER NSE WEBSITE). ACCORDINGLY THE ASSESSEE WAS GIVEN SHOW CAUSE VIDE LETTER DATED 04.12.2013 AS TO WHY THE SHARES OF M/S. GUJARAT LEASE FINANCING LTD BE N OT TAKEN AT RS. 3,7/-PER SHARE INSTEAD OF RS. I/- PER SHARE AS CLAIMED BY THE ASSESSEE.' (II) 'THE ASSESSEE VIDE HIS REPLY DATED 26.12 .2013 STATED THAT 1.1 IN THIS REGARDS, AT THE OUTSET IT IS SUBMI TTED THAT THE SHARES OF GLFL, HELD AS STOCK-IN-TRAD E HAVE BEEN VALUED ON THE BASIS OF THE METHOD OF VALU ATION CONSISTENTLY FOLLOWED BY THE ASSESSEE COMPANY FROM YEAR TO YEAR I.E. COST OR MARKET VALUE W.E.LESS. IN ORDER TO JUSTIFY THAT THE SAID SHARES HAVE BEEN VALUED CORRECTLY AT THE RATE O F R S.L/- SHARE AS ON THE LAST DAY OF THE PREVIOUS YEAR UNDER CONSIDERATION, IT IS IMPORTANT TO UNDERS TAND THE BACKGROUND OF THE PURCHASE OF GLFL SHARES, HELD AS STOCK-IN-TRADE. THE BRIEF FACTS REG ARDING THE PURCHASE OF GLFL SHARES, HELD AS ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 9 STOCK-IN-TRADE AND EXPLANATION REGARDING VALUING TH E SAME AT THE RATE OF RS.L/- PER SHARE IS DEALT WITH IN SUBSEQUENT PARAGRAPHS OF THIS SUBMISSION. 1.2 THE ASSESSEE COMPANY HOLDS SHARES OF GLFL AS A CO-PROMOTER OF THE COMPANY. GLFL IS A JOINT SECTOR COMPANY OF GOVERNMENT OF GUJARAT (GO G), TORRENT LEASE AND FINANCE PRIVATE LIMITED AND THE ASSESSEE COMPANY (WHICH WAS EARLIER KNOWN AS TORRENT INVESTMENTS PRIVATE LIMITED). THE SAID SHARES ARE HELD AS PER 'SHAREHOL DERS AGREEMENT' DATED 3 RD FEBRUARY, 1994 AND 'MODIFICATION AGREEMENT TO THE SHAREHOLDERS AGR EEMENT' DATED 25 TH APRIL, 1994 WAS ENTERED IN TO BETWEEN: A) GUJARAT INDUSTRIAL INVESTMENT CORPORATION LIMIT ED, A PUBLIC SECTOR UNIT OF GOG (GHC) [REFERRED TO AS 'THE CORPORATION' (CORPN) IN THE AGREEMENT] AND B) TORRENT LEASE AND FINANCE PRIVATE LIMITED & T HE ASSESSEE COMPANY [JOINTLY REFERRED TO AS 'JOINT SECTOR PARTNERS (JSPS) IN THE AGREEMENT] THE COPIES OF THE SAID AGREEMENTS ARE ATTACHED HERE WITH VIDE ANNEXURE-1 FOR YOUR KIND PERUSAL. ON PERUSAL OF THE AGREEMENTS, IT CAN BE OBSERVED TH AT THE ASSESSEE COMPANY INITIALLY PURCHASED 33,00,000 EQUITY SHARES OF GLFL FROM GIIC AND SIMUL TANEOUSLY, IT WAS AGREED UPON TO CONVERT THE GLFL INTO A_ JOINT SECTOR COMPANY, BETWEEN THE GOG, TORRENT LEASE AND FINANCE PRIVATE LIMITED AND ASSESSEE COMPANY. SUBSEQUENTLY, TORRENT LEASE AND FINANCE PRIVATE LIMITED WAS MERGED INTO ASSESSEE COMPANY. 1.3 RESTRICTIONS ON TRANSFER OF SHARES THUS, THE SHARES OF GLFL WERE INITIALLY PURCHASED B Y THE ASSESSEE FROM GIIC. THE ASSESSEE COMPANY HOLDS IN TOTAL 44,95,437 SHARES OF GLFL AS STOCK IN TRADE AS ON THE LAST DAY OF THE PREVIOUS YEAR UNDER CONSIDERATION. IN THIS CONTEXT, IT IS TO BE NOTED THAT THE SHARE HOLDING OF THE. GLFL SHARES, HELD AS STOCK IN TRADE WAS SUBJECT TO THE TERMS AND CONDITIONS OF THE 'SHAREHOLDERS AGREEMENT'. THE RELEVANT PORTION OF SUCH TERMS AND CONDITIONS IS REPRODUCED AS UNDER: '2.10 PRIOR CONSENT OF THE CORPN REQUIRED BY THE JS PS TO SELL OR ENCUMBER ETC THEIR SHAREHOLDING. THE JSPS SHALL NOT, EXCEPT WITH THE PRIOR CONSENT O F THE CORPORATION, TRANSFER, SELL OR ENCUMBER IN ANY MANNER WHATSOEVER THEIR SHAREHOLDINGS, INCLUDIN G ADDITIONAL SHARES OFFERED/ALLOTTED BY WAY OF RIGHT OR BONUS ISSUE SHAREHOLDING OR IN ANY OTHER M ANNER IN THE COMPANY TILL SUCH TIME ANY UNDERTAKINGS OR GUARANTEES GIVEN BY IT EITHER TO TH E FINANCIAL INSTITUTIONS OR TO THE BANKS OR TO THE CORPORATION SUBSISTS AND CONTINUES TO BE IN FORCE. PROVIDED, HOWEVER, THAT THE JSPS SHALL BE ENTITLED TO ENCUMBER ITS SHAREHOLDING IN THE COMPANY TO THE FINANCIAL INSTITUTIONS OR BANKS FOR UNDERTAKING OR GUARANTEE GIVEN BY IT IN RESPECT OF IMPLEMENTATION OF ANY PROJECT OF THE COMPANY. 2.11 PRIOR CONSENT OF THE JSPS REQUIRED BY THE COR PN TO TRANSFER, SELL OR ENCUMBER ETC THEIR SHAREHOLDING 2.17 REDUCTION OF SHAREHOLDING BY THE JSPS SO LONG AS THE CORPORATION HOLDS 6.5% OF THE PAID U P EQUITY SHARE CAPITAL OF THE COMPANY, THE JSPS CAN REDUCE ITS SHAREHOLDING ONLY WITH THE PRIOR CONSENT OF THE CORPORATION AND TO SUCH PERSON/S, COMPANIES, AND IN STITUTIONS ACCEPTABLE TO THE CORPORATION PROVIDED THAT BEFORE OFFERING THE SHARES TO ANY OIL IER PERSON, COMPANIES, AND INSTITUTIONS, THE JSPS SHALL OFFER THE SHARES FIRST TO THE CORPORATIO N AND IN CASE THE CORPORATION ACCEPTS TIN OFFER THE PRICE OF THE SHARES SHALL BE DETERMINED ON THE BASIS OF ANY OF THE METHODS REFERRED TO IN SUB-CLAUSE 2.14 HERE IN. PROVIDED FURTHER THAT......' ON PERUSAL OFTLIE ABOVE CLAUSES OF THE AGREEMENT, I T IS OBSERVED THAT THERE ARE RESTRICTIONS ON TRANSFER OF SHAREHOLDING OF GLFL HELD BY THE ASSESS EE COMPANY I.E. CERTAIN TERMS AND CONDITIONS ARE TO BE COMPLIED WITH BEFORE TRANSFERRING THE SHA REHOLDING. IT IS TO BE NOTED THAT THE SHARES OF GLFL CANNOT BE TRANSFERRED INDEPENDENTLY BY THE ASSESSEE COMPANY. A PRIOR WRITTEN CONSENT O F GILDS REQUIRED FOR TRANSFER OF THE SAID SHARES. THE CLAUSE IS APPLICABLE FOR T HE WHOLE SHAREHOLDING, INCLUDING THE ADDITIONAL SHARES OFFER ED/ALLOTTED BY WAY OF RIGHT OR BONUS ISSUE SHAREHOLDING OR IN ANY OTHER MANNER IN THE COMPANY. MOREOVER, BEFORE OFFERING THE SAID SHARES TO OTHER PERSONS, THE ASSESSEE IS REQUIRED TO OFFER THE SHARES FIRST TO THE GIIC (GOG) AND INCASE THE OFFER IS ACCEPTED THE PRICE OF THE SHARES SHALL BE ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 10 DETERMINED ON THE BASIS OF ANY OF THE METHODS REFER RED TO IN PARA 2.14 OF THE 'SHAREHOLDERS AGREEMENT'. 1.4 IN VIEW OF THE ABOVE, IT IS CLEAR THAT THERE AR E RESTRICTIONS ON TRANSFER OF SHARES OF GLFL AND FIRST OF ALL THE SHARES HAVE TO BE OFFERED TO GJJC BEFORE OFFERING TO OTHER PERSONS SO LONG AS GIIC HOLDING 6.5% OF THE PAID UP EQUITY SHARE CAPITAL OF THE _ COMPANY.. MOREOVER, IT IS REITERATED THAT WRITTEN CONSENT OF GIIC IS TO BE TAKEN BEFORE TRANS FERRING THE SAID SHARES. THUS, PRACTICALLY IT IS DIFFICULT TO SELL OFF THE S AID SHARES IN THE MARKET DUE TO THE RESTRICTIONS IMPOSED ON IT VIDE THE 'SHARE AGREEMENT'. ACCORDINGLY, THE SHARES OF GLFL CANNOT BE VALUED A T THE RATE OFRS.3.70/- PER SHARE AS ON THE LAST DAY O F THE PREVIOUS YEAR UNDER CONSIDERATION. 2. GLFL SHARES CANNOT BE SOLD AT THE RATE OF RS.3.70/- PER SHARE IN THE MARKET -ILLIQUIDITY FURTHER, EVEN IF GIIC PERMITS THE ASSESSEE COMPANY TO TRANSFER THE SHARES TO OTHER PERSONS, IT CANNOT SELL OFF THE SHARES AT THE RATE OF RS.3.70/- PER SHARE FOR THE, REASONS EXPLAINED HEREIN AS UNDER. 2.1 IT IS REITERATED THAT THE ASSESSEE COMPANY HOLDS IN TOTAL 44,95,437 SHARES OF GLFL AS STOCK-IN-TRADE AS ON THE LAST DAY OF THE PREVIOUS Y EAR UNDER CONSIDERATION. IN THIS CONNECTION, IT SHALL BE NOTED THAT THE SHARES OF GLFL ARE LISTED O N THE BSE AND NSE. THE STATEMENT SHOWING QUANTUM OF SHARES TRADED DURING THE F.Y.2010-11 ON BSE, ITS PRICES, THE AVERAGE DAILY QUANTUM SHARES TRADED DURING THIS PERIOD ALONG WITH THE QUA NTUM OF SHARES TRADED ON DELIVER:/ BASIS OUT OF TOTAL SHARES TRADED , IS ATTACHED HEREWITH VIDE ANENXURE-2 FOR YOUR READY REFERENCE. ON PERUSAL OF THE STATEMENT, IT MAY BE OBSERVED AS UNDER: A) THE AVERAGE DAILY QUANTUM OF GLFL SHARES TRADED ON BSE ON DELIVERY BASIS IS 13,166 SHARES DURING THE FINANCIAL YEAR 2010-11. B) THE MAXIMUM NUMBER OF SHARES TRADED ON BSE ON AN Y DAY DURING THE FINANCIAL YEAR UNDER CONSIDERATION I.E. ON 25/05/2010 WAS 2,67,5071 SHAR ES IN TOTAL AND ONLY 1,46,180 SHARES ON DELIVERY BASIS. C) THE TOTAL QUANTUM OF GLFL SHARES TRADED ON BSE DURING THE FINANCIAL YEAR 2010-11 WAS 32,25,648 SHARES ONLY ON DELIVERY BASIS. 2.2 AS AGAINST THIS, THE VOLUME OF SHARES THAT THE ASSESSEE COMPANY IS HOLDING AS STOCK IN TRADE, BEING THE CO-PROMOTER OF THE COMPANY IS 44,9 5,437 SHARES AND FOLLOWING SHALL BE NOTED: A) THE AVERAGE DAILY QUANTUM OF SHARES TRADED ON B SE ON DELIVERY BASIS DURING THE F.Y. 2010- 11 IS APPROXIMATELY JUST 0.30% OF TOTAL VOLUME OF S HARES HELD AS STOCK IN TRADE BY THE ASSESSEE COMPANY. B) THE VOLUME OF SHARES HELD AS STOCK IN TRADE BY THE ASSESSEE COMPANY IS ALMOST 30.75 TIMES THE MAXIMUM QUANTUM OF SHARES TRADED ON BSE ON ANY DAY DURING THE FINANCIAL YEAR 2010-11. C) THE TOTAL QUANTUM OF SHARES TRADED ON BSE DURIN G THE WHOLE FINANCIAL YEAR IS ALSO LESS THAN VOLUME OF SHARES HELD BY THE ASSESSEE AS ON THE LA ST DAY OF THE PREVIOUS YEAR UNDER CONSIDERATION. D) MOREOVER, THE TOTAL SHARES TRADED ON DELIVERY BA SIS ARE NEARLY 85% OF THE TOTAL QUANTUM OF SHARES TRADED ON BSE DURING THE WHOLE FINANCIAL YEA R. THUS, IN VIEW OF THE ABOVE, IT MAY BE ABSENTED THAT THE PRICES ON THE STOCK EXCHANGES ARE FOR SMALLER LOTS OF SHARES AND THAT THERE IS NO MARKET FOR 44,95,437 SHARES HELD BY THE ASSESSEE COMPANY. 2.3 AT THIS POINT, IT IS IMPORTANT TO UNDERSTA ND AS TO HOW THE PRICES OF THE SHARES ARE DETERMINED IN THE STOCK EXCHANGE. STOCK PRICES ARE A FUNCTION OF SUPPLY AND DEMAND AND IT HAS A DIRECT IMPACT ON THE PRICE OF THE SHARES. THE INTER -RELATIONSHIP BETWEEN SUPPLY, DEMAND AND A STOCK'S PRICE NEEDS TO BE UNDERSTOOD AND IT IS EXPL AINED IN FOLLOWING PARAGRAPH. 2.4 THE STOCK EXCHANGE IS A PLATFORM WHERE THE TRANSACTIONS IN SHARES TAKE PLACE BETWEEN WILLING BUYERS AND SELLERS. THE PRICES IN THE STOCK EXCHANGE ARE DETERMINED BY THE FORCES OF DEMAND AND SUPPLY OF SHARES ON THE STOCK EXCHANGE. IT IS VERY WELL KNOWN PRINCIPLE THAT THE PRICES OF ANY COMMODITY / SHARES FALL, WHERE THE SU PPLY IS HIGHER THAN THE DEMAND THEREOF. CONVERSELY, THE PRICES OF ANY COMMODITY / SHARES IN CREASE, WHERE THE SUPPLY IS LOWER THAN THE DEMAND THEREOF. THIS PRINCIPLE IS IN BUILT IN THE S TOCK EXCHANGE MECHANISM. IF DEMAND FOR A STOCK EXCEEDS THE SUPPLY, ITS PRICE WILL RISE. HOWEVER, IT WILL ONLY RISE TILL 'THE PO INT WHERE SUPPLY OF SHARES IS EQUAL TO THE DEMAND FOR T HE SAME. AT ANY POINT AFTER THIS, THE PRICES WOULD DECREASE, AS SUPPLY OF SHARES IS HIGHER THAN THE DEMAND FOR THE SAME AND SUCH SELLERS MAY HAVE RIDDEN THE PRICE UP. SINCE, THERE WILL BE MORE SUPPLY AS COMPARED TO THE DEMAND OF THE ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 11 STOCK, THE PRICE BEGINS TO FALL AND THE HOLDER OF T HE STOCK LOWERS THE PRICE DOWN TO ATTRACT A BUYER. THEREFORE, THE INVESTORS WOULD DEMAND A DISCOUNT ON THE EXISTING PRICE FOR BUYING SUCH SHARES. THUS, DEMAND-SUPPLY MECHANISM IS ONE OF THE MOST IM PORTANT FACTORS THAT DETERMINE THE PRICES. THE PRICE OF THE SHARES WILL FLUCTUATE AS AND WHEN THERE IS A MISMATCH BETWEEN THE DEMAND AND SUPPLY. IF DEMAND EXCEEDS SUPPLY, THE PRICE OF THE SHARE WILL RISE AND ALTERNATIVELY, IT WILL DECLINE IF THE SUPPLY EXCEEDS DEMAND. 2.6 IN LIGHT OF THE ABOVE, THE POINTS STATED A T PARA 2.2 ABOVE SHALL BE REFERRED TO. AT THIS POIN T, IT SHALL BE NOTED THAT THE VOLUME OF GLFL SHARES, H ELD AS STOCK IN TRADE BY THE ASSESSEE ON 31/03/2011 WAS 44,95,437 SHARES. THIS IS TOO HIGH A VOLUME AS COMPARED TO THE QUANTUM OF MAXIMUM NUMBER OF SHARES TRADED ON ANY DAY DURING T HE FINANCIAL YEAR 2010-11 AS WELL AS THE AVERAGE DAILY QUANTUM OF SHARES TRADED ON BSE. HAD THIS MUCH VOLUME OF SHARES BEEN SOLD IN THE MAR KET, THERE WOULD HAVE BEEN A SITUATION OF MISMATCH BETWEEN THE DEMAND AND THE SUPPLY OF THE S AID SHARES. THERE WOULD HAVE BEEN A, DRASTIC INCREASE IN SUPPLY AS COMPARED TO THE AVERA GE DAILY TRADING OF THE SHARES AND EVEN ANNUAL QUANTIFY OF GLFL SHARES TRADED ON BSE. CONSEQUENTLY THE PRICE OF THE SHARES WOULD HAVE FALLEN AND INFACT, THERE WOULD NOT HAVE BEEN ANY BU YER FOR THE SAID SHARES WHEN THE ASSESSEE BECOMES THE SELLER IN THE MARKET HENCE, IT IS CLEAR THAT PRICE QUOTED ON THE STOCK EXCHANGE ON THE LAST DAY OF THE FINANCIAL YEAR DOES NOT REPRESENT T HE MARKET VALUE OF THE GLFL SHARES HELD BY THE ASSESSEE. 3. FURTHER, IT IS TO BE NOTED THAT HAD THE ASSESSEE SOLD THE SAID SHARES IN THE MARKET, CIRCUIT BREAKER WOULD HAVE BEEN ATTRACTED DUE TO SUBSTANTIA L FALL IN PRICE OF THE SHARE OF GLFL. IN THIS CONTEXT, IT WOULD BE IMPORTANT TO UNDERSTAND THE SA ID TERM 'CIRCUIT BREAKER', WHICH IS EXPLAINED HEREIN BELOW: 3.1 CIRCUITS ARE OF TWO TYPES - CIRCUIT FOR A N INDEX AND FOR A STOCK. SO, IF AN INDEX OR THE PRI CE OF A STOCK INCREASES OR DECLINES BEYOND A SPECIFIED TH RESHOLD IT IS SAID TO HAVE ENTERED INTO A CIRCUIT. SECURITIES AND EXCHANGE BOARD OF INDIA SPECIFIES TH IS THRESHOLD AS A PERCENTAGE OF THE PRIOR DAY'S CLOSING FIGURES. 3.2 CIRCUIT BREAKER FOR A STOCK A PRICE BAND SPECIFIES THE SPAN OR PRICE RANGE FOR A STOCK TO MOVE WITHOUT ANY INTERFERENCE FROM REGULATORY AUTHORITIES. ONLY WHEN THE STOCK PRICES MOVE BEYOND THE RANGE, IT IS CONSIDERED AS ENTERING INTO A CIRCUIT AND CIRCUIT BREAKERS ARE AP PLIED. DAILY PRICE BANDS OF 2 PER CENT, 5 PER CENT AND 10 PER CENT ARE APPLICABLE TO DIFFERENT EQUITY STOCKS. PRICE BANDS OF 20 PER CENT ARE APPLICABLE TO ALL REMAINING SCRIP LIKE PREFERENCE S HARES OR DEBENTURES. FOR EXAMPLE, FOR A STOCK WITH A PRICE BAND OF 5 PER CENT MAT CLOSES AT RS 10 0 ON THE PREVIOUS DAY, THE PRICE BAND WILL BE BETWEEN RS 105 ANDRS95. 3.3 WHAT ARE AN UPPER CIRCUIT AND LOWER CIRCUI T? STOCK PRICES CAN EITHER MOVE UP OR DOWN AND HENCE C IRCUIT BREAKERS ARE REQUIRED FOR MOVEMENTS IN BOTH DIRECTIONS. AN UPWARD MOVEMENT OVER THE THR ESHOLD WILL CAUSE A STOCK TO ENTER AN UPPER CIRCUIT. SIMILARLY A DOWNWARD MOVEMENT IN STOCK PRI CE BEYOND THE THRESHOLD WILL CAUSE A STOCK TO ENTER A LOWER CIRCUIT, FURTHER, SETT OF HUGE QUANTI TY OF SHARES HAVE EFFECT OF REDUCING THE PRICES OF SHARES. THE OBJECTIVE OF CIRCUIT BREAKERS IS TO CONTROL THE STOCK MARKETS AT TIMES WHEN THEY MOVE BEYOND REASONABLE LIMITS. WHEN A STOCK ENTERS AN UPPER CIR CUIT, IT HELPS AN INVESTOR EARN LOT OF MONEY, WHO HAS ALREADY INVESTED IN THE STOCK AT AN ADVANTA GE. ON THE CONTRARY A STOCK MOVEMENT INTO A LOWER CIRCUIT PLACES THE INVESTOR AT A DISADVANTAGE BECAUSE IT IS NOW DIFFICULT TO SELL OFF THESE SHARES, AS THEY HAVE LOST A LOT OF MONEY. 3.4 FROM THE ABOVE, IT CAN BE SAID THAT ONCE T HE SHARE PRICE OF ANY COMPANY MOVES IN TO LOWER CIRCUIT PLACE, IT IS NOT POSSIBLE TO SELL THE SHARE S OF THE SAID COMPANY. THEREFORE, THE SHARES OF THE SAID COMPANY BECOME ILLIQUID, EVEN AT SUCH LOWER PR ICES. IN THIS CONTEXT, IT IS IMPORTANT TO NOTE THAT IF THE 44/95,437 SHARES OF GLFL WERE SOLD IN T HE MARKET, IT WAS LIKELY TO HAVE TRIGGERED LOWER CIRCUIT ON STOCK EXCHANGE, WHEN THE AVERAGE DAILY V OLUME OF TRADING OF SHARES OF THE GLFL ON BSE ON DELIVERY BASIS 0.30% OF THE TOTAL NUMBER OF SHARES HELD BY THE ASSESSE COMPANY. 4. NEGATIVE NETWORTH OF GLFL - NO UNDERLYING ASSETS HELD BY GLFL IN ADDITION TO ABOVE, IT IS IMPORTANT TO NOTE THAT GLFL IS NOT CARRYING ON ANY BUSINESS SINCE MANY YEARS AND, THE COMPANY HAS HUGE ACCUMULATED LOSSES WHICH MAKES ITS NETWORTH TO BE NEGATIVE, THE COMPUTATION OF NET WORTH OF GLFL AS ON 31/03/20 11 IS AS UNDER: ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 12 PARTICULARS AMI (RS. IN LAKHS.) SHARE CAPITAL 2,716.05 RESERVES AND SURPLUS (5,623.42) NETWORTH AS ON 31/03/2011 (2,907.37) THUS, THERE IS NEGATIVE BOOK VALUE OF THE SHARES OF GLFL. UNDER THE CIRCUMSTANCES AS STATED ABOVE, HAD THE AS SESSES COMPANY DECIDED TO SELL OFF THE SAID SHARES, HELD AS INVENTORY IN THE MARKET; IT WOULD N OT HAVE GOT ANY BUYER AND THAT TOO FOR SUCH HUGE QUANTUM THERE WOULD HAVE BEEN MANY OTHER IMPLI CATIONS AS A RESULT OF MISMATCH BETWEEN DEMAND AND SUPPLY AS EXPLAINED ABOVE. THEREFORE, TH ERE ARE NO ASSETS HELD BY GLFL SO AS TO COMMAND EVEN A VALUE OF RS.L/- PER SHARE. THEREFORE, KEEPING IN MIND THE ABOVE CIRCUMSTANCES CLUBBED WITH THE RESTRICTION ON TRANSFER OF SHARES OF GLFL BY THE ASSESSE COMPANY, BEING THE CO -PROMOTER OF GLFL; THE ASSESSEE COMPANY HAS VALUED THE SHARES OF GLFL, AT A NOTIONAL RATE O F RS.L/- PER SHARE AS AGAINST ITS NEGATIVE BOOK VALUE DUE TO HUGE ACCUMULATED LOSSES.' THE AO REJECTED ASSESSEE'S EXPLANATION AND OBSERVED THAT - 'THE ASSESSEE HAS BROADLY STATED FOLLOWING REASONS FOR VALUATION OF SHARES OF GUJARAT LEASE FINANCING LTD (GLFU AT RS. I/-. (A). THE ASSESSEE COMPANY CANNOT TRANSFER THE SHARE S OF GLFL WITHOUT PRIOR WRITTEN CONSENT OF GIIC. (B). EVEN IF GIIC PERMITS THE ASSESSEE TO TRANSFER THE SHARES TO OTHERS IT CANNOT SELL THE SHARES AT RS. 3.7/- AS THE PRICES ON THE STOCK EXCHANGES ARE FOR SMALLER LOTS OF SHARES AND THAT THERE IS N O MARKET FOR 44,95,437 SHARES HELD BY THE ASSESSEE CO MPANY. (C). THE GLFL HAS NEGATIVE NET WORTH _AND__THAT GLF L HAS NOT BEEN CARRYING ON ANY BUSINESS SINCE MANY YEARS. THE POINT WISE REBUTTAL OF ASSESSEE'S CONTENTION IS AS UNDER:- (A). THE ASSESSEE'S CONTENTION THAT IT CANNOT TRANS FER THE SHARES OF GLFL WITHOUT PRIOR CONSENT OF GIIC DOES NOT HAVE ANY IMPACT ON BASIS OF VALUATION OF CLOSING STOCK OF GLFL SHARES. MOREOVER, IF THAT WOULD HAVE BEEN THE CASE THEN WHY THE ASSES SEE IS SHOWING THE SHARES OF GLFL AS STOCK IN TRADE. IT IS IMPORTANT TO MENTION HERE THAT ME A SSESSEE IS SHOWING THE SHARES OF GLFL BOTH AS INVESTMENT (23,04,312 SHARES) AND AS STOCK IN TRADE (44,95,437). IF THERE WAS RESTRICTION ON TRANSFER OF SHARES THEN THE ASSESSEE COULD HAVE SHO WN THE ENTIRE SHARES AS INVESTMENT. HOWEVER, THE ASSESSEE CHOSE TO SHOW 44,95,437 SHARE S OF GLFL AS STOCK IN TRADE THEREBY EMPHASIZING THE FACT THAT THE SAID SHARES WERE HELD FOR TRADING. MOREOVER, IRRESPECTIVE OF THE FACT THAT THERE WAS RESTRICTION ON TRANSFER OF SHARES OR NOT, THE FACT REMAINS THAT VALUATION OF CLOSING STOCK WAS NOT DONE AS PER MARKET VALUE. (B). THE ASSESSEE'S CONTENTION THAT THE SHARES OF G LFL COULD NOT BE TRANSFERRED AT RS. 3.7/- PER SHARE BECAUSE THE PRICES ON THE STOCK EXCHANGES ARE FOR SMALLER LOT OF SHARES AND THAT THERE IS NO MARKET FOR 44,95,437 SHARES HELD BY THE ASSESSEE CO MPANY IS ALSO NOT ACCEPTABLE. IT IS TRUE THAT GLFL IS A LISTED COMPANY. IT'S SHAR ES ARE TRADED ON NSE. IF AN INDEPENDENT BUYER WANTS TO BUY THE SHARES OF M/S. GLFL THEN THE QUOTE D PRICE OF SHARES OF GLFL AS ON 31.03.2011 WAS RS. 3.7/-. THE ASSESSEE'S CONTENTION THAT MERE IS NO MARKET V ALUE FOR 44,95,437 SHARES OF GLFL IS NOT ACCEPTABLE BECAUSE VALUATION OF CLOSING STOCK IS DONE ON THE BASIS OF UNIT PRICE. IT IS NEVER ASSUMED THAT IF THE ENTIRE CLOSING STOCK IS S OLD THEN THE PRICE PER UNIT WILL DECREASE. WHILE VALUING THE CLOSING STOCK METHOD THAT IS ADOPTED IS TO MULTIPLY THE MARKET VALUE PER UNIT OF THE CLOSING STOCK WITH THE TOTAL QUANTITY OF THE CLOSIN G STOCK. IT IS NEVER EVER ASSUMED THAT IF THE ASSESSEE SELLS THE ENTIRE CLOSING STOCK THE TOTAL V ALUE RECEIVED BY THE ASSESSES WOULD BE MUCH LOWER. IF THAT WOULD HAVE BEEN THE CASE THEN IT WOU LD NEVER HAVE BEEN POSSIBLE TO VALUE THE CLOSING STOCK ON THE BASIS OF MARKET VALUE. IN THE INSTANT CASE THE SHARES OF GLFL HELD AS STO CK IN TRADE BY THE ASSESSEE HAVE BEEN VALUED BY HIM AT A NOTIONAL VALUE (AS STATED BY ASSESSEE) OF RS. I/- PER SHARE. THIS BASIS OF VALUING THE CLOSIN G STOCK IS IRRATIONAL. IT IS AN ESTABLISHED FACT TH AT ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 13 THE SHARES ARE LISTED AND THAT THE VALUE OF GLFL SH ARES WAS RS. 3.T,/-ON 31.03.2011 AS PER NSE /DMAT ACCOUNT STATEMENT GIVEN BY ASSESSEE. (C). THE ASSESSEE'S CONTENTION THAT GLFL IS NOT CAR RYING ON ANY BUSINESS AND THAT IT HAS NEGATIVE NET WORTH IS ALSO NOT RELEVANT TO THE VALUATION OF DOSING STOCK. IF IT IS A LISTED COMPANY AND THE SHARES ARE BEING TRADED AT NSE AT PRICE OF RS. 3.77 - PER SHARE AS ON 31.03.2011 THEN IRRESPECTIVE OF THE FACT,THAT_WHETHER THE COMPANY IS HAVING NEGA TIVE NET WORTH OR NOT THE SHARES WOULD BE TRADED AT RS. 3.7/- ONLY.' (IV) THE AO THEREFORE HELD THAT - 'IN VIEW OF THE DETAILED REASONING GIVEN ABOVE, THE CLOSING STOCK OF SHARES OF M/S. GLFL IS TO BE VALUED AT MARKET VALUE OF RS. 3.7/- PER SHARE RATHE R THAN THE VALUE OF RS. I/- PER SHARES. THUS, THE ADDITION OF RS. 2.7'/- PER SHARE IS BEING MADE TO T HE DOSING STOCK OF 44,95,437 SHARES OF GLFL RESULTING INTO INCREASE IN VALUE OF CLOSING STOCK B Y RS. 1,21,37,680/-.' (B) THE APPELLANT IN THE STATEMENT OF FACTS CONTEN TED THAT THE APPELLANT IS A COMPANY INCORPORATED UNDER THE C OMPANIES ACT, 1956. IT IS REGULARLY ASSESSED TO TAX SINCE INCEPTION. BEING A COMPANY, ITS ACCOUN TS ARE SUBJECT TO AUDIT UNDER THE COMPANIES ACT, 1956. ITS ACCOUNTS FOR THE PRESENT ASSESSMENT YEAR WERE ALSO AUDITED PURSUANT TO THE PROVISIONS OF SECTION 44AB OF THE INCOME-TAX ACT, 1 961. A COPY OF THE ANNUAL REPORT FOR THE PRESENT ASSESSMENT YEAR CONTAINING AUDITED ANNUAL A CCOUNTS IS ATTACHED AT ANNEXURE-A HEREOF. 2.1 THE APPELLANT'S RETURN FOR THE PRESENT AS SESSMENT YEAR WAS BASED ON ITS ANNUAL ACCOUNTS WHICH WERE AUDITED AS MENTIONED ABOVE. A PERUSAL OF THE STATEMENT OF COMPUTATION OF TOTAL INCOME AS PER THE APPELLANT'S RETURN (COPY ATTACHED AT ANNEXURE-B ) WOULD SHOW THAT THE RETURNED NEGATIVE TOTAL INCOME OF RS.3,12,09,341 WAS MADE UP OF INCOME UNDER THE FOLLOWING HEADS LOSS UNDER THE HEAD PROFITS AND GAINS OF BUSINESS O R PROFESSION ( - ) 8,28,77,901 SHORT TERM CAPITAL GAINS 4,45,59,760 INCOME FROM OTHER SOURCES BEING INCOME U/S, 56(2)(V IIA) 71,08,800 TOTAL INCOME ( - )3,12,09,341 2.2 A PERUSAL OF THE ATTACHED COPY OF THE STATEMENT OF COMPUTATION OF TOTAL INCOME WOULD ALSO SHOW THAT LOSS UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION VIZ., RS. 8.28,77,901. HAD BEEN COMPUTED BEGINNING WITH PROFIT BEFORE TAX AS PER PROFIT AND LOSS ACCOUNT AS DETAILED BELOW: PROFITS & GAINS OF BUSINESS OR PROFESSION PROFIT BEFORE TAX AS PER P&L ACCOUNT (ITEM 43 OF PROFIT & LOSS A/C) 98 2965048 ADD: DISALLOWANCE/ADDITIONS DEPREDATION TREATED SEPARATELY 4594576 DISALLOWANCE U/S.14A 1512285 DOCUMENT CHARGES 5500 ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 14 INTEREST ON LOAN FROM IDFC 121581S4 DMAT CHARGES 1495190 SHARE REGISTRAR CHARGES 3 3090 19808825 LESS: INCOME CONSIDERED SEPARATELY DIVIDEND 102262193 9 SHARE OF PROFIT 13156877 PROFIT ON SALE OF INVESTMENTS 1907047 PROFIT ON SALE OF INVESTMENTS 44559760 ( - ) 1082245623 LESS: DEDUCTIONS/EX PENSES CLAIMED DEPRECIATION AS PER STATEMENT ( - ) 3406151 ( - ) 82877901 2.3 IT WOULD BE PERTINENT TO NOTE THAT THE APPELLA NT HAS BEEN ENGAGED IN THE BUSINESS OF MAKING INVESTMENTS AND IN DEALING WITH THEM AND THAT ALL I TS INCOME FROM INVESTMENTS (OTHER THAN EXEMPT INCOME AND INCOME ASSESSABLE AS CAPITAL GAINS) INCL UDING INTEREST INCOME HAS BEEN CONSISTENTLY ASSESSED AS BUSINESS INCOME. A PERUSAL OF THE STATEMENT OF COMPUTATION OF TOTAL INCOME (ANNEXURE-B) WOULD FURTHER SHOW THAT THE APPELLANT HAD COMPUTED ITS RETURNED BOOK PROFIT U/S. 115JB AT RS. NIL AS UNDER: BOOK PROFIT U/S. 115JB BOOK PROFIT AS PER COMPANIES ACT, 1956 982965048 ADD: STATUTORY ADDITIONS DISALLOWANCE U/S. 14A 6 1512285 LESS STATUTOR Y DEDUCTIONS SHARE OF PROFIT 2 13156877 DIVIDEND FROM TRADE INVESTMENTS 2 15738111 DIVIDEND FROM OTHER INVESTMENTS 2 503441914 ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 15 DIVIDEND FROM OTHER INVESTMENTS WEALTH TAX 2 503441914 93748 ( - ) 1035872564 NIL 18.00% OF BOOK PROFIT U/S. 115JB NIL 4.1 AS AGAINST THE RETURNED BUSINESS TOSS OF RS.8 ,28,77,901, THE LEARNED ASSESSING OFFICER HAS ASSESSED THE SAME AT A LOSS OF RS.5,.05,81,129 AFTE R MAKING THE FOLLOWING ADDITIONS: RETURNED BUSI NESS LOSS ( - ) 8,28,77,901 ADD: DISALLOWANCE U/S. 14A READ WITH RULE 8D 2,01,59,092 ADDITION ON ACCOUNT OF VALUATION OF CLOSING STOCK 1,21,37.680 ASSESSED BUSINESS LOSS ( - ) 5,05,81,129 4.2 CONSEQUENT UPON THE ABOVE ADDITIONS, THE APP ELLANT'S TOTAL INCOME HAS BEEN ASSESSED AT A POSITIVE FIGURE OF RS.10,87,431 AS AGAINST THE RETU RNED NEGATIVE TOTAL INCOME OF RS.3,12,09,341. 4.3 WHILE COMPUTING THE APPELLANT'S BOOK PROF IT U/S. 115JB, THE LEARNED ASSESSING OFFICER HAS ADDED RS.2,01,59,092 ON ACCOUNT OF DISALLOWANCE MAD E U/S. 14A IN ADDITION TO THE SUO MOTU DISALLOWANCE MADE BY THE APPELLANT. IN THE APPELLANT'S HUMBLE SUBMISSION, FOR THE REAS ONS EXPLAINED IN AN ELABORATE NOTE ATTACHED AT ANNEXURE - D, IT WAS NOT OPEN TO THE LEARNED ASSESSING OFFICER TO MAKE THIS ADDITION. 5. THE LEARNED ASSESSING OFFICER HAS ALSO WI THDRAWN INTEREST AMOUNTING TO RS.1,62,545 EARLIER GRANTED U/S. 244A AND FURTHER LEVIED INTERE ST AMOUNTING TO RS.53.069 U/S. 234D. 6. THE LEARNED ASSESSING OFFICER HAS ALSO O RDERED FOR INITIATION OF PENALTY PROCEEDINGS U/S.271(L)(C). 7. DISALLOWANCE U/S. 14A - RS.2,01,59,092 7.1 A PERUSAL OF THE PROFIT AND LOSS ACCOUNT FOR TH E PRESENT ASSESSMENT YEAR WOULD SHOW THAT IT HAS BEEN DEBITED WITH THE FOLLOWING EXPENSES AND DEPRECIATION: EMPLOYEE REMUNERATION AND BENEFITS 1,51,22,852 GENERAL AND ADMINISTRATION EXPENSES 34,49,139 INTEREST AND OTHER FINANCE CHARGES 11,34,19,004 DEPRECIATION 45,94,575 ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 16 IT MAY BE POINTED OUT HERE ITSELF THAT EVEN AS THE APPELLANT'S PROFIT & LOSS ACCOUNT HAD BEEN DEBITED WITH DEPRECIATION OF RS. 45,94,576, WH ILE COMPUTING TOTAL INCOME, DEDUCTION FOR DEPRECIATION WAS CLAIMED ONLY AT RS. 34,06,151. 7.2 A PERUSAL OF SCHEDULE XLTL FORMING PART O F THE AUDITED ANNUAL ACCOUNTS WOULD FURTHER SHOW THAT THE GENERAL AND ADMINISTRATION EXPENSES OF RS. 34,49,139 WERE MADE UP AS UNDER: DEMAT CHARGES 1.495,190 RENT RATES AND TAXES 2,000 INSURANCE 365,533 REPAIRS AND MAINTENANCE 532,20S TRAVELLING AND CONVEYANCE EXP ENSES 286,167 FEES AND LEGAL EXPENSES 453,036 AUDITORS REMUNERATION 251,411 STATIONERY, PRINTING, TELEPHONE AND TELEX EXPENSES 19,032 MISCELLANEOUS EXPENSES 34,482 TOTAL 3,449,133 8.1 A PERUSAL OF THE RELEVANT PORTION OF THE S TATEMENT OF COMPUTATION OF TOTAL INCOME QUOTED AT PARA 2.2 HEREINABOVE WOULD ALSO SHOW THAT WHILE COMPUTING ITS BUSINESS INCOME, THE APPELLANT HAD MADE THE FOLLOWING SUP. MOTU DISALLOWANCES: DISALLOWANCE U/S. 14A BEING 10% OF TOTAL EMPLOYEE REMUNERATION AND BENEFITS OF RS. 1,51,22,852 15,12,285 DISALLOWANCE OF FOLLOWING EXPENSES INCLUDED IN GENERAL AND ADMINISTRATION EXPENSES: DOCUMENT CHARGES 5,500 DMAT CHARGES 14,95,190 SHARE REGISTRAR CHARGES 33,090 15,33,780 ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 17 8.2 AS POINTED OUT BEFORE, THE APPELLANT'S BUSINESS IS THAT OF AN INVESTMENT COMPANY AND THE APPELLANT IS ALSO REGISTERED WITH THE RESERVE BANK OF INDIA AS A NON-BANKING FINANCE COMPANY (NBFCJ. AS A MATTER OF FACT, THE APPELLANT'S INCOME FROM INVESTMENTS IS CONSISTENTLY ASSESSED AS BUSINESS INCOME. CONSIDERING THAT OVER 85% OF ITS I NVESTMENTS HAD BEEN MADE IN THE APPELLANT'S SUBSIDIARY COMPANIES WHICH DID NOT REQUIRE ANY DEAL ING OR MONITORING OR MAINTENANCE AS SUCH IN THE COURSE OF THE YEAR/S DURING WHICH THE INVESTMEN TS WERE HELD, THEY BEING STRATEGIC INVESTMENTS, OUT OF ABUNDANT CAUTION, THE APPELLANT HAD MADE A DISALLOWANCE OF 10% OF ITS TOTAL EMPLOYEE REMUNERATION AND BENEFITS U/S. 14A. IT HAD ALSO DISALLOWED IN FULL THE EXPENSES BY WAY OF DEMAT CHARGES. 9.1 EVEN IN THE BACKGROUND OF THE ABOVE FACTS, THE LEARNED ASSESSING OFFICER CONSIDERED IT APPROPRIATE TO RAISE AN ISSUE ON THE SUBJECT OF DIS ALLOWANCE U/S. 14A READ WITH RULE 8D IN THE FOLLOWING TERMS '1. DISALLOWANCE U/S. 14A R.W.R. 8D ON PERUSAL OF THE DETAILS FILED BY THE ASSESSEE COM PANY, IT WAS NOTICED THAT THE ASSESSEE HAD EARNED EXEMPT INCOME DURING THE RELEVANT F.Y. HOWEV ER, THE ASSESSEE HAD DISALLOWED ONLY RS.15,12,285/- UNDER SECTION 14A OF THE ACT. THE AS SESSEE WAS ASKED VIDE ORDER SHEET ENTRY DATED 03.09.2013 AS TO HOW THE DISALLOWANCE U/S. 14 A HAS BEEN CALCULATED BY THE ASSESSEE AND WHY IT WAS NOT AS PER METHOD LAID DOWN IN RULE 8D O F I. T. RULES, 1962 IN RESPONSE TO THE SAME THE ASSESSEE SUBMITTED VIDE LETTER DATED 07-10.2013 DETAILED REASONS AS TO WHY DISALLOWANCE UNDER SECTION 14A OF THE ACT HAS NOT BEEN CALCULATE D AS PER RULE SD OF THE I. T. RULES, 1962. THE REASON CITED BY THE ASSESSEE WERE AS UNDER:- I) 85% OF THE INVESTMENT MADE BY THE ASSESSEE IS IN SHARES OF SUBSIDIARY COMPANIES WHICH DO NOT REQUIRE ANY MONITORING. EARNING EXEMPT INCOME I S ANCILLARY TO THE MAIN OBJECTIVE OF INVESTMENT MADE IN SUBSIDIARY COMPANIES. II) NO BORROWED FUNDS ARE UTILIZED FOR THE PURPOSE OF MAKING SUCH INVESTMENT AND SO NO INTEREST EXPENDITURE IS ATTRIBUTABLE TO EARNING SUCH INCOME. III) 10% OF TOTAL REMUNERATION PAID TO EMPLOYEES AS EXPENSE FOR EARNING ANY EXEMPT INCOME HAVE ALREADY BEEN DISALLOWED. IT WAS FURTHER STATED BY A SSESSEE THAT THE ADMINISTRATIVE EXPENSES DO NOT BEAR ANY NEXUS WITH THAT OF EARNING OF EXEMPT I NCOME AND THEREFORE THERE CANNOT BE ANY DISALLOWANCE IN RESPECT OF THESE EXPENSES. THE SUBMISSION MADE BY THE ASSESSEE WERE DULY CONSI DERED AND A DETAILED SHOW CAUSE WAS ISSUED TO THE ASSESSEE ON 04.12.2013 WHEREIN THE SU BMISSIONS MADE BY THE ASSESSEE WERE NOT ACCEPTED IN VIEW OF THE FOLLOWING FACTS:- I) OUT OF THE TOTAL INCOME OF RS.111,95,50,619/- E ARNED BY YOU DURING THE YEAR, INCOME TO THE TUNE OF RS.103,76,91,390/- IS CLAIMED EXEMPT BY YOU. THE REMAINING INCOME WHICH IS OFFERED TO TAX CONSISTS OF RS.4,64,66,806/- ON SHORT CAPITA L GAIN ON SALE OF INVESTMENTS AND RS,3,71,04,997/- ON INTEREST FROM FDRS, II) AGAINST THE SAID INCOME YOU HAVE CLAIMED EXPEND ITURE OF RS.13,65,85,571/- OUT OF THIS EXPENDITURE YOU CLAIM THAT YOU HAVE EXPENDED RS.15, 12,285/- FOR EARNING EXEMPT INCOME OF RS.103,76,91,390/- I.E. 1.11% OF THE TOTAL EXPENDIT URE HAS BEEN INCURRED BY YOU FOR EARNING 92.7% OF YOUR TOTAL INCOME. THIS ANOMALY ITSELF EXP LAINS AS TO HOW THE EXPENDITURE CLAIMED TO HAVE BEEN INCURRED BY YOU FOR EARNING EXEMPT INCOME IS WRONG. III) NO OTHER BUSINESS ACTIVITY IS BEING CARRIED OU T BY THE ASSESSES APART FROM INVESTMENT. THEREFORE, IT CAN BE SAFELY ASSUMED THAT THE ENTIRE ADMINISTRATIVE SET UP IS BEING USED FOR MANAGING INVESTMENT PORTFOLIO THROUGH WHICH ASSESSE E EARNING/(MAY EARN IN FUTURE) EXEMPT INCOME IN THE FORM OF DIVIDEND/LONG TERM CAPITAL GA INS. IV) RULE 8D WAS INTRODUCED PRECISELY TO COVER THE S ITUATIONS WHEREIN THE ASSESSEE WERE PUSHING THE EXPENSES RELATING TO EXEMPT INCOME TOWARDS TAXA BLE INCOME AND THEREBY REDUCING THE TAXABLE INCOME. THE INTENTION OF THE LEGISLATURE IS CLEARLY EVIDENT FROM THE MEMORANDUM EXPLAINING THE PROVISIONS CONTAINED IN THE FINANCE ACT, WHEREIN IT WAS EXPLAINED THAT ONLY THOSE EXPENSES COULD BE CLAIMED AS DEDUCTION WHICH ARE IN CURRED IN RELATION EARNING TAXABLE INCOME. IN VIEW OF THE REASONS CITED ABOVE I AM SATISFIED T HAT THE EXPENDITURE OF RS.15,12,285/- CLAIMED TO HAVE BEEN INCURRED BY YOU FOR EARNING EXEMPT INCOME IS NOT CORRECT. ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 18 THE ASSESSEE WAS REQUESTED TO SHOW CAUSE AS TO WHY THE DISALLOWANCE U/S. 14A SHOULD NOT BE MADE AS PER PROVISIONS OF RULE 8D OF 1. T. RULE, 19 62. IN RESPONSE TO THE SAID SHOW CAUSE THE ASSESSEE SUBMITTED VIDE LETTER DATED 27,12.2013' 9.2 WHEREAS THE ABOVE QUOTED PORTION OF THE IMPUGNE D ORDER DOES SPEAK FOR ITSELF, THE APPELLANT BEGS TO EMPHASISE THE FOLLOWING: (A) THAT AT THE STAGE OF ISSUING THE VERY SHOW CAUS E NOTICE CALLING UPON THE APPELLANT TO EXPLAIN WHY DISALLOWANCE U/S. 14A SHOULD NOT BE MADE, THE L EARNED ASSESSING OFFICER HAD ALREADY BEEN SATISFIED THAT THE APPELLANT'S CLAIM IN THE MATTER OF EXPENDITURE IN RELATION TO EXEMPT INCOME WAS NOT CORRECT; (B) THAT THE REAL REASON FOR THE LEARNED ASSE SSING OFFICER TO MAKE THE IMPUGNED DISALLOWANCE HAS TO BE FOUND IN THE FACT THAT THE LEARNED ASSESS ING OFFICER HAD CONSIDERED THE SUO MOTU DISALLOWANCE U/S. 14A TO BE TOO LITTLE COMPARED WIT H THE QUANTUM OF THE TAX EXEMPT DIVIDEND INCOME; (C) THAT THE LEARNED ASSESSING OFFICER HAS P ROCEEDED ON THE BASIS THAT THE APPELLANT'S SUO MOTU DISALLOWANCE SHOULD HAVE BEEN ARRIVED AT AS PE R RULE 8D WHICH CONCLUSIVELY SHOWS THAT THE LEARNED ASSESSING OFFICER OBLIVIOUS OF PRECISEL Y WHAT THE PROVISION OF SUB-SECTION (2) OF SECTION 14A ENJOINED UPON HIM [AND WHICH HAS BEEN V ERY WELL SETTLED FOLLOWING THE DECISION OF THE BOMBAY HIGH COURT IN GODREJ & BOYCE MFG. CO. LT D. V. DCIT (2010) 328 ITR 81(BOM}] VIZ., THAT IT IS ONLY IF THE ASSESSING OFFICER IS SATISFI ED, AFTER CONSIDERING ALL RELEVANT FACTORS, THAT TH E APPELLANT'S CLAIM WAS NOT CORRECT THAT HE CAN ASSUM E JURISDICTION FOR MAKING A DISALLOWANCE U/S. 14A AND ONCE HE ASSUMES THAT JURISDICTION, HE HAS N O DISCRETION IN THE MATTER EXCEPT TO ARRIVE AT THE QUANTUM OF DISALLOWANCE IN THE MANNER PRESCRIBE D BY RULE 8D. (D) THAT THE LEARNED ASSESSING OFFICER HAS C LEARLY PERMITTED HIMSELF TO BE CARRIED AWAY BY THE CIRCUMSTANCE THAT THE APPELLANT'S SUO MOTU DISALLOW ANCE U/S. 14A FORMED A VERY SMALL PORTION OF THE TOTAL EXPENDITURE OF RS.13.66 CRORE DEBITED TO ITS PROFIT & LOSS ACCOUNT EVEN AS THE EXEMPT INCOME AMOUNTED TO A SIZEABLE PORTION OF THE TOTAL INCOME CREDITED TO IT; THAT HE HAS CLEARLY FAILED TO APPRECIATE THE FOLLOWING: (1) THAT THE APPELLANT'S SUO MOTU DISALLOWAN CE WAS NOT ONLY FORLO% OF EMPLOYEE REMUNERATION BUT ALSO FOR THE ENTIRE AMOUNT OF DMAT CHARGES WHICH HAD A RELATION TO EARNING EXEMPT DIVIDEND INCOME; (2) THAT THE REASON FOR THE SUO MOTU DISALLOW ANCE TO APPEAR TO FORM A RELATIVELY SMALL PORTION OF THE TOTAL EXPENDITURE WAS THAT THE TOTAL EXPENDI TURE OF RS.13.65 CRORE INCLUDED 11.34 CRORE ON ACCOUNT OF INTEREST AND FINANCE CHARGES WHICH, AS H E HAD HIMSELF BEEN SATISFIED, HAD NO RELATION TO THE EARNING OF TAX EXEMPT INCOME; THAT IT ALSO I NCLUDED DEPRECIATION AMOUNTING TO RS.45.95 LACS WHICH TOO HAD NOTHING TO DO WITH THE APPELLANT'S EA RNING TAX EXEMPT INCOME; (3) THAT, AS ELABORATELY EXPLAINED TO HIM, AL L THE EXPENSES INCLUDED IN GENERAL AND ADMINISTRATION EXPENSES {OTHER THAN DMAT CHARGES SU O MOTU DISALLOWED) WOULD HAVE HAD TO BE INCURRED WHETHER OR NOT THE APPELLANT HAD MADE INVE STMENTS; (4) THAT THE APPELLANT'S PROFIT AND LOSS ACCO UNT HAD INDEED BEEN CREDITED WITH THE INCOME AMOUNTING TO RS.3.73 CRORE WHICH HAD BEEN ACTUALLY ASSESSED BY HIM UNDER THE HEAD 'PROFITS AND GAINS FROM BUSINESS OR PROFESSION' AND RS.4.46 CROR E WHICH TOO HAD BEEN ASSESSED AS SHORT TERM CAPITAL GAINS; THAT, THEREFORE, IT WAS NOT OPEN TO HIM TO ATTRIBUTE THE APPELLANT'S ENTIRE CORPORATE SET UP AS IF IT WERE MERELY INTENDED TO EARN TAX EX EMPT INCOME, FOR SOMEHOW OR ANYHOW JUSTIFYING DISALLOWANCE OF THE ENTIRE AMOUNT OF GENERAL AND AD MINISTRATION EXPENSES DEBITED TO THE APPELLANT'S PROFIT AND LOSS ACCOUNT; (5) THAT, WHEREAS THE APPELLANT WAS ENGAGED I N THE BUSINESS OF INVESTMENTS, THE FACT REMAINED THAT 85% OF ITS INVESTMENTS WHICH WERE MAD E IN ITS OWN SUBSIDIARIES DID NOT REQUIRE INCURRENCE OF ANY ADMINISTRATIVE EXPENDITURE AS SUC H DURING THE LONG YEARS THEY WERE HELD AND THEREFORE, A VERY INSIGNIFICANT PORTION OF ITS GENE RAL AND ADMINISTRATIVE EXPENDITURE COULD BE ATTRIBUTED TO THOSE INVESTMENTS AND THAT WAS MORE T HAN ADEQUATELY TAKEN CARE OF BY THE APPELLANT MAKING SUO MOTU DISALLOWANCE OF 10% OF ITS EMPLOYEE REMUNERATION AND OF DMAT CHARGES IN ENTIRE. 10. WHEREAS A COPY OF THE APPELLANT'S ELABORA TE SUBMISSIONS VIDE ITS LETTER DATED 27.12.2013 IS ATTACHED AT ANNEXURE-C, THE APPELLANT BEGS TO PO INT OUT THE FOLLOWING PORTION THEREOF IN PARTICULAR: '6. NO FURTHER DISALLOWANCE OF ADMINISTRATIVE EXPENSE U/S 14A R.W.RULE 8D ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 19 IT IS WELL KNOWN FACT THAT THE PURPOSE OF DISALLOWA NCE U/S 14A IS TO EXCLUDE THE EXPENSES WHICH HAVE BEEN INCURRED TO EARN EXEMPT INCOME AND SO THE EXPENSES WHICH CANNOT BE SAID TO HAVE ANY DIRECT OR INDIRECT NEXUS WITH THE EXEMPT INCOME , SHOULD NOT BE DISALLOWED U/S 14A R.W.R. 8D, IN THIS CONTEXT, THE ASSESSEE COMPANY STATES THAT I T HAS INCURRED VARIOUS ADMINISTRATIVE EXPENSES LIKE EMPLOYEES REMUNERATION, DEMAT CHARGES, RENT, R ATES AND TAXES, INSURANCE, REPAIR & MAINTENANCE, TRAVELING & CONVEYANCE EXPENSES, FEES & LEGAL EXPENSES, AUDITORS REMUNERATION, STATIONERY-PRINTING, AND OTHER MISCELLANEOUS EXPENS ES DURING THE YEAR / UNDER CONSIDERATION. . 6.1 OUT OF ALL THESE EXPENSES, THE ASSESSEE CO MPANY HAD ALREADY DISALLOWED 10% OF THE TOTAL REMUNERATION PAID TO THE EMPLOYEES AND DEMAT CHARGE S AS EXPENSE FOR EARNING EXEMPT INCOME, AND SO NO FURTHER DISALLOWANCE IN THIS RESPECT IS N EEDED. 6.2 FURTHER, EXPENSES OF RENT, RATES AND TAXE S, FEES & LEGAL EXPENSES, AUDITORS REMUNERATION ETC. ARE REQUIRED TO BE INCURRED, IRRESPECTIVE OF T HE FACT WHETHER ANY INVESTMENT ACTIVITY IS CARRIED OUT BY THE COMPANY OR NOT. EVEN IN ABSENCE OF ANY ACTIVE BUSINESS ACTIVITY, TH ESE EXPENSES ARE REQUIRED TO BE INCURRED, WHICH ARE NECESSARY FOR MA INTAINING THE STATUS OF THE COMPANY. THE REMAINING EXPENSES OF INSURANCE, REPAIR & MAINTENAN CE, TRAVELING & CONVEYANCE EXPENSES, STATIONERY-PRINTING AND OTHER MISC. EXPENSES ARE OF GENERAL NATURE AND INCURRED BY THE ASSESSEE FOR GENERAL ADMINISTRATIVE PURPOSE. !T IS THUS SUBMITTED THAT THESE EXPENSES DO NOT BEA R ANY NEXUS WITH THAT OF EARNING OF EXEMPT INCOME AND THEREFORE THERE CANNOT BE ANY DISALLOWAN CE IN RESPECT OF THESE EXPENSES AS PER THE PROVISIONS OF SECTION 14A R.W.RULE 8D. 7. IN VIEW OF THE ABOVE, IT IS CLEAR THAT TH E EXPENSES WHICH HAVE BEEN CLAIMED BY THE ASSESSEE WHILE COMPUTING THE BUSINESS INCOME DO NOT BEAR ANY NEXUS WITH THE EXEMPT INCOME. MERELY BECAUSE MAJOR PORTION OF THE INCOME OF THE A SSESSEE CONSISTS OF EXEMPT INCOME, IT CANNOT BE ASSUMED THAT MAJOR PORTION OF EXPENSES WOULD HAVE BEEN INCU RRED TO EARN THE SAID INCOME. IT IS VERY MUCH IMPORTANT TO NOTE THAT NO MAJOR EFFORT S ARE NEEDED TO MANAGE THE INVESTMENT PORTFOLIO, MORE PARTICULARLY WHEN ALL THE INVESTMEN TS ARE LONG-TERM STRATEGIC INVESTMENTS IN SUBSIDIARY COMPANIES AND THAT EXEMPT INCOME IS ANCI LLARY TO THE MAIN OBJECTIVE OF THE INVESTMENTS MADE IN THE SUBSIDIARY COMPANIES. THERE FORE, THE REASONS FOR NOT ACCEPTING SUBMISSION OF THE ASSESSEE, GIVEN IN POINT NO (!) A ND (II) TO PARA 3 OF THE NOTICE, ARE BASED ON INCORRECT ASSUMPTIONS, MORE SPECIFICALLY BECAUSE IT HAS BEEN CONCLUSIVELY ESTABLISHED BY THE ASSESSEE THAT THAT THERE IS NO NEXUS BETWEEN THE EXPENSES INCURRED AND THE EXEMPT INCOME. 8. IN POINT NO (III) TO PARA 3 OF THE NOTIC E, IT HAS BEEN STATED THAT 'IT CAN BE SAFELY ASSUME D THAT THE ENTIRE ADMINISTRATIVE SET UP IS BEING USED FOR MANAGING INVESTMENT PORTFOLIO THROUGH WHICH ASSESSE EARNING/(MAY EARN IN FUTURE) EXEMPT I NCOME IN THE FORM OF DIVIDEND /LONG TERM CAPITAL GAINS.' IN CONNECTION WITH SAME, AS ALREADY EXPLAINED IN PA RA-4.1 ABOVE, THE ASSESSEE COMPANY IS ENGAGED IN INVESTMENT ACTIVITY, FINANCIAL ACTIVITY AND IS ALSO REGISTERED WITH RBI AS NON-BANKING FINANCIAL COMPANY (NBFC). THIS FACT CAN ALSO BE VER IFIED FROM THE ACTIVITIES OF THE ASSESSEE COMPANY IN VARIOUS EARLIER YEARS. MOREOVER, AS EXPL AINED ABOVE, THE INVESTMENTS BEING LONG TERM STRATEGIC INVESTMENTS, NO MAJOR EFFORTS ARE NE EDED TO MANAGE THE INVESTMENT PORTFOLIO AND THAT EXEMPT INCOME IS ANCILLARY TO THE MAIN OBJECTI VE OF THE INVESTMENTS MADE IN THE SUBSIDIARY COMPANIES. THEREFORE, YOUR ASSUMPTION AS STATED PARA-S(II) OF THE NOTICE IS NOT VALID. 9. FURTHER, VIDE POINT (IV) TO PARA 3 OF NO TICE, YOUR GOODSELVES HAVE MENTIONED THAT RULE 8D WAS INTRODUCED PRECISELY TO COVER THE SITUATIONS WH EREIN THE ASSESSEE WERE PUSHING THE EXPENSES RELATING TO EXEMPT INCOME TOWARDS TAXABLE INCOME AND THEREBY REDUCING THE TAXABLE INCOME. IN THIS CONTEXT, IT IS SUBMITTED THAT IN VI EW OF THE ABOVE DETAILED SUBMISSION, IT IS CLEAR TH AT ASSESSEE HAS NOT INCURRED EXPENSES (WHICH HAVE BEEN CLAIMED TOWARDS EARNING EXEMPT INCOME. THIS CAN BE PROVED BY ANSWERING A SIMPLE QUESTION A S TO WHETHER THE DIVIDEND INCOME WOULD HAVE STOPPED, HAD THE ASSESSEE NOT INCURRED THE EXP ENSES WHICH ARE DEBITED TO ITS PROFIT & LOSS ACCOUNT? THE ANSWER IS CLEAR 'MO'. THE INCOME FROM DIVIDEND WOULD CONTINUE TO BE EARNED SO LONG AS THE SUBSIDIARY COMPANIES ARE PAYING DIVIDEN D AND THE FACT WHETHER THE ASSESSEE COMPANY INCURS ANY ADMINISTRATIVE EXPENDITURE OR NO T WOULD NOT HAVE ANY IMPACT ON IT. THE ABOVE POINT CONCLUSIVELY PROVES THAT THE ASSESS EE HAS NOT INCURRED ANY ADMINISTRATIVE EXPENSE FOR EARNED DIVIDEND INCOME AND THEREFORE, I T IS CLEAR THAT NO EXPENSES HAVE BEEN PUSHED TOWARDS TAXABLE INCOME AND THE CLAIM OF THE ASSESSEE IS VERY MUCH GENUINE.' ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 20 11. IN THE APPELLANT'S HUMBLE SUBMISSION, IF THE LE ARNED ASSESSING OFFICER HAD NOT PERMITTED HIMSELF TO BE CARRIED AWAY BY THE ABSOLUTE FIGURES OF TAX EXEMPT INCOME AND INSTEAD, CONSIDERED RELEVANT FACTORS, HE WOULD HAVE APPRECIATED THAT TH E SUO MOTU DISALLOWANCE MADE BY THE APPELLANT WAS INDEED MORE THAN ADEQUATE AND THAT, T HEREFORE, IT WAS JUST NOT POSSIBLE FOR HIM NOT TO BE SATISFIED WITH THE APPELLANT'S CLAIM AS ENVIS AGED BY SUB-SECTION (2) OF SECTION 14A. UNFORTUNATELY, AS THE RELEVANT DISCUSSION IN THE IM PUGNED ORDER SHOWS, THE LEARNED ASSESSING OFFICER HAS PERMITTED HIMSELF TO BE CARRIED AWAY BY IRRELEVANT CONSIDERATIONS POINTED OUT BEFORE AND IGNORED RELEVANT CONSIDERATIONS ELABORATELY EXP LAINED TO HIM AND MADE THE IMPUGNED DISALLOWANCE WHICH HAS BEEN ARRIVED AT AS UNDER (EM PHASIS SUPPLIED): ' THE CONTENTION OF THE ASSESSEE IS NOT AT ALL ACCE PTABLE IN VIEW OF THE FACT THAT NO OTHER BUSINESS ACTIVITY IS BEING CARRIED OUT BY THE ASSESSEE EXCEP T INVESTMENT. BY NO STRETCH OF IMAGINATION IT CAN BE ASSUMED THAT THE ASSESSEE COMPANY IS PAYING RS.1 ,51,22,852/- TO EMPLOYEES AS REMUNERATION AND OTHER BENEFITS FOR DOING NOTHING. DURING THE ENTIRE YEAR THE ASSESSEE HAS DONE NO OTHER ACTIVITY APART FROM TRADING IN SHARES/MUTU AL FUNDS AND MANAGING ITS INVESTMENT PORTFOLIO. DURING THE YEAR NO NEW INVESTMENT HAS BEEN MADE BY THE ASSESSEE IN ITS SUBSIDIARY COMPANIES. THEREFORE, IN VIEW OF THE FACTS STATED ABOVE IT IS CLEAR THAT THE DIRECT EXPENSES ATTRIBUTABLE TO EARNING OF EXEMPT INCOME ARE A) REMUNERATION & OTHER BENEFITS OF EMPLOYE ES RS. 1,51,22,852/- B) DEMAT CHARGES RS. 14,95,190 RS. 1,66,18,042/- II) INTEREST EXPENDITURE-NIL {AS HELD IN EA RLIER YEARS) III) AN AMOUNT EQUAL TO ONE HALF PERCENT OF THE AVE RAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART TO TOTAL INCO ME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE P REVIOUS YEAR. IN THE INSTANT CASE IT IS 0.5% (700,79,22,775 + 698,91,06,746) = RS.3,49,92,573 HOWEVER, THIS AMOUNT HAS TO BE RESTRICTED TO THE AC TUAL EXPENDITURE CLAIMED BY THE ASSESSEE IN THE RETURN OF INCOME I.E. RS.65,48,525/- THUS, THE TOTAL DISALLOWANCE U/S. 14A R.W.R. 8D COM ES OUT TO BE RS 2,31,66,567/- OUT OF WHICH THE ASSESSEE HAS ALREADY DISALLOWED RS.15,12,285/- U/S. 14A AND DEMAT CHARGES OF RS.14,95,190. THEREFORE, THE AMOUNT OF DISALLOWANCE U/S. 14A R.W. R. 8D IS RESTRICTED TO RS.2,01,59,092/-. PENALTY PROCEEDINGS U/S. 271(L)(C) OF THE ACT ARE BEING INI TIATED SEPARATELY FOR FURNISHING INACCURATE PARTICULARS OF INCOME.' 12.1 QUITE APART FROM THE FACT THAT THE LEARNED ASSESSING OFFICER HAS MADE THE IMPUGNED DISALLOWANCE WITHOUT JURISDICTION (SINCE, IN THE PE CULIAR FACTS OF THE APPELLANT'S CASE, IT WAS JUST N OT POSSIBLE FOR HIM NOT TO BE. SATISFIED WITH THE APPE LLANT'S CLAIM BASED ON SUO MOTU DISALLOWANCES MADE BY IT), THE MANNER IN WHICH HE HAS ARRIVED AT THE QUANTUM OF DISALLOWANCE ALSO NEEDS TO BE CONSIDERED, IN ORDER THAT THIS MAY BE APPRECIATED, THE APPELLANT BEGS TO GIVE HERE BELOW THE BREAKUP OF THE AMOUNT DISALLOWED BY THE LEARNED ASS ESSING OFFICER (AS THE SAME IS NOT READILY DISCERNABLE FROM THE IMPUGNED ORDER): TOTAL AMOUNT OF EMPLOYEE REMUNERATION AND BENEFITS DEBITED TO THE APPELLANT'S PROFIT AND LOSS ACCOUNT 1,51,22,852 LES S: SUO MOTU DISALLOWANCE BY THE APPELLANT 15,12,285 1,36,10,567 ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 21 TOTAL GENERAL ADMINISTRATIVE EXPENSES DEBITED TO THE APPELLANT'S PROFIT AND LOSS ACCOUNT 34,49,139 LESS: DRNAT CHARGES INCLUDED IN THE ABOVE SUO MOTU DISALLOWED BY THE APPELLANT 14,95.190 19,53,949 DEPRECIATION DEBITED TO THE APPELLANT'S PROFIT AND LOSS ACCOUNT 45.94,576 TOTAL 2,01.59,092 12.2 IT WILL BE SEEN FROM THE ABOVE THAT EVEN AS TH E LEARNED ASSESSING OFFICER HAS STATED THAT HE HAS RESTRICTED THE QUANTUM OF THE DISALLOWANCE TO T HE ACTUAL AMOUNT OF ADMINISTRATIVE EXPENSES DEBITED TO THE APPELLANT'S PROFIT AND LOSS ACCOUNT (SINCE THAT WAS LESS THAN THE QUANTUM ARRIVED AT BY THE FORMULA PRESCRIBED IN RULE 8D), IN REALIT Y, WHAT HE HAS DONE IS TO DISALLOW DEPRECIATION AMOUNTING TO RS.45,94,576 DEBITED TO THE PROFIT AND LOSS ACCOUNT AS WELL. PERTINENTLY, HE HAS DONE THIS WITHOUT ANY DISCUSSION IN THE ASSESSMENT ORDER AND WITHOUT PROVIDING ANY OPPORTUNITY TO THE APPELLANT TO EXPLAIN WHY IT CANNOT BE DISALL OWED. IN THE PROCESS, HE HAS COMPLETELY IGNORED THE FACT THAT DEPRECIATION, AS HELD BY THE HON'BLE SUPREME COURT IN NECTOR BEVERAGES P. LTD. V. DCIT (314 ITR 314), WAS A STATUTORY ALLOWANCE AND N OT EXPENDITURE TO WHICH ALONE SECTION 14A COULD BE APPLIED. IN THIS CONNECTION, THE APPELLANT BEGS TO RELY ON THE DECISION OF THE HON'BLE ITAT, AHMEDABAD, SPECIAL BENCH IN VISHNU ANANT MAHA JAN V. ACIT [137 ITD 189). RELEVANT EXTRACTS FROM THE SAID DECISION ARE GIVEN BELOW FOR THE SAKE OF IMMEDIATE REFERENCE (EMPHASIS SUPPLIED): FROM THE HEAD NOTES 'COMING TO THE QUESTION REGARDING DEPRECIATION BEIN G AN EXPENDITURE OR NOT, IT HAS BEEN HELD IN THE CASE OF HOSHANG D. NANAVATI V. ACIT [I.T. APPEA L NO. 3567 (MUM.) OF 2007, DATED 18-3- 2011] THAT SECTION 14A DEALS ONLY WITH THE EXPENDIT URE AND NOT WITH ANY STATUTORY ALLOWANCE ADMISSIBLE TO THE ASSESSEE. THE DECISION HAS BEEN A RRIVED AT AFTER CONSIDERING THE DECISION IN THE CASE OF NECTAR BEVERAGES (P.) LTD. V. DY. CIT [2009 ] 314 ITR 314 / 182 TAXMAN 319 (SC). THE COMMISSIONER HAS NOT BEEN ABLE TO DISPLACE THE RATI O OF THESE CASES. THUS, ON CONSIDERATION, IT IS FOUND THAT SECTION 14A USES THE WORDS 'EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME'. A STATUTORY ALLOWANCE UNDER SECTION 32 IS NOT AN EXPENDITURE. THEREFORE, THE DECISION OF THE DIVISION BENCH IN THE CASE OF HOSHANG D. NANAVA TI (SUPRA) HAS TO BE AGREED WITH. [PARA 8]' 12.3 APART FROM THE ABOVE, THE LEARNED ASSESSING OF FICER HAS ALSO IGNORED THE FACT THAT THE APPELLANT HAD SUO MOTU DISALLOWED THE FOLLOWING ITE MS OF EXPENSES AGGREGATING TO RS. 38,590 INCLUDED IN THE GENERAL AND ADMINISTRATIVE EXPENSES DEBITED IN ITS PROFIT AND LOSS ACCOUNT AND BEING SUCH, HIS DISALLOWING THE SAME AGAIN HAD RESU LTED INTO DOUBLE DISALLOWANCE FOR THE SAME EXPENDITURE: DOCUMENT CHARGES 5,500 SHARE REGISTRAR CHARGES 33,000 38,590 ADDITION ON ACCOUNT OF ALLEGED UNDERVALUATION OF ST OCK OF SHARES - RS. 1,21,37,680 13.1 THE APPELLANT COMPANY IS PART OF THE TORRENT GROUP WHICH, ALONG WITH THE GOVERNMENT OF GUJARAT (THROUGH ITS INVESTMENT ARM 'GIIC') HAD PRO MOTED GUJARAT LEASE FINANCE LIMITED (GLFL, FOR SHORT). ACCORDINGLY, THE APPELLANT HAS BEEN HOL DING 44,95,437 SHARES OF GLFL HAVING PAID UP ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 22 VALUE OF RS.10 EACH SINCE A NUMBER OF YEARS, GLFL H AS DISCONTINUED ITS BUSINESS AND ITS PAID UP CAPITAL AND RESERVES HAVE BEEN FULLY WIPED OFF AND IT IS A COMPANY HAVING NEGATIVE NET WORTH, ITS NET WORTH AS AT THE LAST DAY OF THE PRESENT YEAR WA S A NEGATIVE FIGURE OF RS.2907.37 LACS. 13.2 WHEREAS THE AFORESAID SHARES OF GLFL HAVE BEE N HELD BY THE APPELLANT AS PART OF ITS STOCK IN TRADE SINCE A NUMBER OF YEARS, CONSIDERING THE A BOVE PECULIAR FACTS OF GLFL, EVEN AS THE APPELLANT VALUED ITS STOCK OF SHARES AT COST OR MAR KET VALUE WHICHEVER IS LOWER, CONSIDERING THE FACT THAT THE PRICE .OBTAINING ON THE STOCK EXCHANG ES ON THE BASIS OF RELATIVELY SPARSE TRADING TRANSACTIONS ON THE STOCK EXCHANGES DID NOT REFLECT A PRICE AT WHICH THE APPELLANT COULD POSSIBLY SELL ITS HUGE HOLDING IN THE SHARES IN THE MARKET, WITH EFFECT FROM 31-3-2009, IT HAD TAKEN THE MARKET VALUE AT A NOTIONAL AMOUNT OF RUPEE 1 (ONE) PER SHARE (EVEN AS THE APPELLANT VERY WELL KNEW THAT IF IT WERE TO SELL THE SHARES IN THE MARK ET, THEY WOULD NOT FETCH EVEN THAT PRICE OF RUPEE 1 PER SHARE). IN THE PRESENT ASSESSMENT YEAR TOO, T HE APPELLANT HAS CONTINUED TO SHOW THESE SHARES AT THE SAME VALUE OF RUPEE 1 PER SHARE CONSI STENTLY WITH WHAT IT HAD DONE IN THE PRECEDING ASSESSMENT YEAR WHICH HAD BEEN ACCEPTED B Y THE DEPARTMENT. UNFORTUNATELY, HOWEVER, THE LEARNED ASSESSING OFFICER MAKING THE A SSESSMENT FOR THE PRESENT ASSESSMENT YEAR HAS RAISED THE ISSUE ON THE GROUND THAT THE PRICE O F THE SHARES PREVAILING IN THE STOCK EXCHANGE AS AT 31.3.2011 WAS RS.3,70 PER SHARE AND THAT THE APPELLANT'S ACTION OF VALUING THEM AT RUPEE 1 PER SHARE AMOUNTED TO UNDERVALUATION OF CLOSING STO CK TO THE EXTENT OF RS, 1,21,37,680. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, IN RESPON SE TO THE LEARNED ASSESSING OFFICER'S SHOW CAUSE NOTICE IN THIS BEHALF, THE APPELLANT HAD ADDR ESSED A LETTER DATED 26,12.2013 TENDERING ITS ELABORATE EXPLANATION. WHEREAS THE APPELLANT'S SAID LETTER HAS BEEN REPRODUCED IN THE IMPUGNED ASSESSMENT ORDER AT PAGES 14 TO 22, THE APPELLANT B EGS TO EMPHASIZE THE FOLLOWING PORTION THEREOF IN PARTICULAR: '1.1 IN THIS REGARDS, AT THE OUTSET IT IS SUBMI TTED THAT THE SHARES OF GLFL, HELD AS STOCK-IN-TRAD E HAVE BEEN VALUED ON THE BASIS OF THE METHOD OF VALU ATION CONSISTENTLY FOLLOWED BY THE ASSESSEE COMPANY FROM YEAR TO YEAR I.E. COST OR MARKET VALUE W.E. LESS. IN ORDER TO JUSTIFY THAT THE SAID SHARES HAVE BEEN VALUED CORRECTLY AT THE RATE OF RS .L/- SHARE AS ON THE LAST DAY OF THE PREVIOUS YEAR UNDER CONSIDERATION, IT IS IMPORTANT TO UNDERS TAND THE BACKGROUND OF THE PURCHASE OF GLFL SHARES, HELD AS STOCK-IN-TRADE. THE BRIEF FACTS REG ARDING THE PURCHASE OF GLFL SHARES, HELD AS STOCK-IN-TRADE AND EXPLANATION REGARDING VALUING TH E SAME AT THE RATE OF RS.L/- PER SHARE IS DEALT WITH IN SUBSEQUENT PARAGRAPHS OF THIS SUBMISSION. 1.3 RESTRICTIONS ON TRANSFER OF SHARES THUS, THE SHARES OF GLFL WERE INITIALLY PURCHASED B Y THE ASSESSEE FROM G1IC. THE ASSESSEE COMPANY HOLDS IN TOTAL 44,95,437 SHARES OF GLFL AS STOCK IN TRADE AS ON THE LAST DAY OF THE PREVIOUS YEAR UNDER CONSIDERATION, IN THIS CONTEXT, IT IS TO BE NOTED THAT THE SHAREHOLDING OF THE GLFL SHARES, HELD AS STOCK IN TRADE WAS SUBJECT TO THE TERMS AND CONDITIONS OF THE 'SHAREHOLDERS AGREEMENT'. THE RELEVANT PORTION OF SUCH TERMS AND CONDITIONS IS REPRODUCED AS UNDER: 1.4 IN VIEW OF THE ABOVE, IT IS CLEAR THAT TH ERE ARE RESTRICTIONS ON TRANSFER OF SHARES OF GLFL AND FIRST OF ALL THE SHARES HAVE TO BE OFFERED TO G I1C BEFORE OFFERING TO OTHER PERSONS SO LONG AS GI1C IS HOLDING 6.5% OF THE PAID UP EQUITY SHARE CA PITAL OF THE COMPANY. MOREOVER, IT IS REITERATED THAT WRITTEN CONSENT OF GI1C IS TO BE TAKEN BEFORE TRANSFERRING THE SAID SHARES. THUS, PRACTICALLY IT IS DIFFICULT TO SELL OFF THE S AID SHARES IN THE MARKET DUE TO THE RESTRICTIONS IMPOSED ON IT VIDE THE 'SHARE AGREEMENT'. ACCORDING LY, THE SHARES OF GLFL CANNOT BE VALUED AT THE RATE OF RS.3.70/- PER SHARE AS ON THE LAST DAY OF THE PREVIOUS YEAR UNDER CONSIDERATION. 2. GLFL SHARES CANNOT BE SOLD AT THE RATE O F RS.3.70/- PER SHARE IN THE MARKET - ILLIQUIDITY FURTHER, EVEN IF GIIC PERMITS THE ASSESSE COMPANY T O TRANSFER THE SHARES TO OTHER PERSONS, IT CANNOT SELL OFF THE SHARES AT THE RATE OF RS.3.70/- PER SHARE FOR THE REASONS EXPLAINED HEREIN AS UNDER: 2.1 IT IS REITERATED THAT THE ASSESSEE COMPAN Y HOLDS IN TOTAL 44,95,437 SHARES OF GLFL AS STOCK-IN-TRADE AS ON THE LAST DAY OF THE PREVIOUS Y EAR UNDER CONSIDERATION. IN THIS CONNECTION, IT SHALL BE NOTED THAT THE SHARES OF GLFL ARE LISTED O N THE BSE AND NSE. THE STATEMENT SHOWING QUANTUM OF SHARES TRADED DURING THE F.Y.2010-11 ON BSE, ITS PRICES, THE AVERAGE DAILY QUANTUM SHARES TRADED DURING THIS PERIOD ALONG WITH THE QUA NTUM OF SHARES TRADED ON DELIVERY BASIS OUT OF ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 23 TOTAL SHARES TRADED , IS ATTACHED HEREWITH VIDE ANE NXURE-2 FOR YOUR READY REFERENCE. ON PERUSAL OF THE STATEMENT, IT MAY BE OBSERVED AS UNDER: D) THE AVERAGE DAILY QUANTUM OF GLFL SHARES TRADED ON BSE ON DELIVERY BASIS IS 13,166 SHARES DURING THE FINANCIAL YEAR 2010-11. E) THE MAXIMUM NUMBER OF SHARES TRADED ON BSE ON AN Y DAY DURING THE FINANCIAL YEAR UNDER CONSIDERATION I.E. ON 25/05/2010 WAS 2,67,5071 SHAR ES IN TOTAL AND ONLY 1,46,180 SHARES ON DELIVERY BASIS. C) THE TOTAL QUANTUM OF GLFL SHARES TRADED ON BSE DURING THE FINANCIAL YEAR 2010-11 WAS 32,25,648 SHARES ONLY ON DELIVERY BASIS. 2.2 AS AGAINST THIS, THE VOLUME OF SHARES THA T THE ASSESSEE COMPANY IS HOLDING AS STOCK IN TRADE, BEING THE CO-PROMOTER OF THE COMPANY IS 44,9 5,437 SHARES AND FOLLOWING SHALL BE NOTED: E) THE AVERAGE DAILY QUANTUM OF SHARES TRAD ED ON BSE ON DELIVERY BASIS DURING THE F.Y.2010-11 IS APPROXIMATELY JUST 0.30% OF TOTAL VO LUME OF SHARES HELD AS STOCK IN TRADE BY THE ASSESSE COMPANY. F) THE VOLUME OF SHARES HELD AS STOCK IN TRADE BY T HE ASSESSEE COMPANY IS ALMOST 30.75 TIMES THE MAXIMUM QUANTUM OF SHARES TRADED ON BSE ON ANY DAY DURING THE FINANCIAL YEAR 2010-11. G) THE TOTAL QUANTUM OF SHARES TRADED ON BS E DURING THE WHOLE FINANCIAL YEAR IS ALSO LESS THAN VOLUME OF SHARES HELD BY THE ASSESSEE AS ON TH E LAST DAY OF THE PREVIOUS YEAR UNDER CONSIDERATION. H) MOREOVER, THE TOTAL SHARES TRADED ON DEL IVERY BASIS ARE NEARLY 85% OF THE TOTAL QUANTUM OF SHARES TRADED ON BSE DURING THE WHOLE FINANCIAL YEA R. THUS, IN VIEW OF THE ABOVE, IT MAY BE OBSERVED THAT THE PRICES ON THE STOCK EXCHANGES ARE FOR SMALLER LOTS OF SHARES AND THAT THERE IS NO MARKET FOR 44,95,437 SHARES HELD BY THE ASSESSEE COMPANY. . 3.4 FROM THE ABOVE, IT CAN BE SAID THAT ONCE THE SHARE PRICE OF ANY COMPANY MOVES IN TO LOWER CIRCUIT PLACE, IT IS NOT POSSIBLE TO SELL THE SHARES OF THE SAID COMPANY. THEREFORE, THE SHARES OF THE SAID COMPANY BECOME ILLIQUID, EVE N AT SUCH LOWER PRICES. IN THIS CONTEXT, IT IS IMPORTANT TO NOTE THAT IF THE 44,95,437 SHARE S OF GLFL WERE SOLD IN THE MARKET, IT WAS LIKELY TO HAVE TRIGGERED LOWER CIRCUIT ON STOCK EXC HANGE, WHEN THE AVERAGE DAILY VOLUME OF TRADING OF SHARES OF THE GLFL ON BSE ON DELIVERY BA SIS 0.30% OF THE TOTAL NUMBER OF SHARES HELD BY THE ASSESSE COMPANY. 4. NEGATIVE NETWORTH OF GLFL- NO UNDERLYING ASSETS HELD BY GLFL IN ADDITION TO ABOVE, IT IS IMPORTANT TO NOTE THAT GLFL IS NOT CARRYING ON ANY BUSINESS SINCE MANY YEARS AND THE COMPANY HAS HUGE ACCUMULATED LOSSES W HICH MAKES ITS NETWORTH TO BE NEGATIVE. THE COMPUTATION OF NETWORTH OF GLFL AS ON 31/03/201 1 IS AS UNDER: PARTICULARS AMT (RS. IN LAKHS.) SHARE CAPITAL 2,716.05 RESERVES AND SURPLUS (5,623,42) NET WORTH AS ON 31/03/2011 (2,907.37) THUS, THERE IS NEGATIVE BOOK VALUE OF THE SHARES O F GLFL. 5. UNDER THE CIRCUMSTANCES AS STATED ABOVE, HAD THE ASSESSEE COMPANY DECIDED TO SELL OFF THE SAID SHARES, HELD AS INVENTORY IN THE MARKET; I T WOULD NOT HAVE GOT ANY BUYER AND THAT TOO FOR SUCH HUGE QUANTUM THERE WOULD HAVE BEEN MANY OTHER IMPLICATIONS AS A RESULT OF MISMATCH BETWEEN DEMAND AND SUPPLY AS EXPLAINED ABOVE. THERE FORE, THERE ARE NO ASSETS HELD BY GLFL SO AS TO COMMAND EVEN A VALUE OF RS.L/- PER SHARE. THEREFORE, KEEPING IN MIND THE ABOVE CIRCUMSTANCES CLUBBED WITH THE RESTRICTION ON TRANSFER OF SHARES OF GLFL BY THE ASSESSE COMPANY, BEING THE CO -PROMOTER OF GLFL; THE ASSESSEE COMPANY ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 24 HAS VALUED THE SHARES OF GLFL, AT A NOTIONAL RATE O F RS.L/- PER SHARE AS AGAINST ITS NEGATIVE BOOK VALUE DUE TO HUGE ACCUMULATED LOSSES.' 14. UNFORTUNATELY, HOWEVER, THE LEARNED ASSESS ING OFFICER HAS REFUSED TO APPRECIATE THE GROUND REALITIES ON THE BASIS OF THE PECULIAR FACTS OF THE CASE WHICH CLEARLY SHOWED THAT IT WOULD BE IMPOSSIBLE FOR THE APPELLANT TO SELL ITS HUGE HO LDING IN THE SHARES OF GLFL AT THE PRICE QUOTED ON THE STOCK EXCHANGE ON THE LAST DAY OF THE YEAR O N THE BASIS OF SPARSE TRADING IN THE SHARES. FURTHER, THE TRANSFER OF THE SHARES BY THE APPELLAN T WAS ALSO SUBJECT TO RESTRICTIONS AS DETAILED IN ITS SUBMISSIONS. IT WAS BECAUSE OF THESE FACTORS TH AT, AS EXPLAINED BEFORE, THE APPELLANT HAD TO DECIDE TO VALUE THE SHARES ON A NOTIONAL VALUE OF R UPEE 1 PER SHARE. THE LEARNED ASSESSING OFFICER HAS ACCORDINGLY GONE AHEAD WITH MAKING AN A DDITION OF RS.1,21,37,680 ON THE GROUND THAT THE SHARES WERE REQUIRED TO BE VALUED AT RS,3.70 PE R SHARE AND NOT RUPEE 1 AS DONE BY THE APPELLANT. IN THE PROCESS, THE LEARNED ASSESSING OF FICER HAS OMITTED TO CONSIDER YET ANOTHER VITAL FACT VIZ., THAT THE SHARES HAD BEEN VALUED AT RUPEE 1 PER SHARE IN ASSESSMENT YEARS 2009-10 AND 2010-11 WHICH VALUATION HAS ALSO BEEN ACCEPTED BY T HE DEPARTMENT, THE LEARNED ASSESSING OFFICER HAS, ACCORDINGLY, FAILED TO APPRECIATE THAT HIS OBJECTING TO THE VALUATION IN THE PRESENT ASSESSMENT YEAR CREATES ARTIFICIAL INCOME OF RS. 1, 21,37,680 IN THE PRESENT ASSESSMENT YEAR RESULTING FROM DISCARDING OF CONSISTENT VALUATION F ROM YEAR TO YEAR AS MENTIONED BEFORE. IN THE APPELLANT'S HUMBLE SUBMISSION, IF THE LEARNED ASSES SING OFFICER'S APPROACH WERE TO BE ACCEPTED, THAT WOULD CALL FOR REVISION OF THE APPELLANT'S ASS ESSMENT FOR ASSESSMENT YEARS 2009-10 AND 2010-11 AS WELL. SUCH REVISION WOULD ALSO MEAN A RE VISION OF THE OPENING STOCK FOR THE PRESENT ASSESSMENT YEAR ON THE BASIS OF THE MARKET PRICE AC TUALLY RULING ON 31.3.2010. CONSIDERING THAT THE PRICE OF GLFL'S SHARES AS PER THE STOCK EXCHANG E QUOTATION ON 31.3.2010 WAS RS.3.96 PER SHARE AND THAT IT IS ALSO WELL SETTLED THAT THE OPE NING STOCK OF AN ASSESSMENT YEAR MUST NECESSARILY BE THE SAME AS THE CLOSING STOCK OF THE PRECEDING ASSESSMENT YEAR, THE ADJUSTMENT FOR THE PRESENT ASSESSMENT YEAR WOULD BE DIAGONALLY OPPOSITE OF WHAT THE LEARNED ASSESSING OFFICER HAS DONE.' 4(C) CONSIDERING DISCREPANCIES HIGHLIGHTED BY APPEL LANT IN RESPECT OF DISALLOWANCE OF EXPENSES VIS-A-VIS ALREADY DISALLOW ED EXPENSES AND CLAIM OF DIFFERENT DEPRECIATION, THE AO WHO ATTENDE D HEARING ON 12.06.2014 WAS ASKED TO SUBMIT A REPORT. THE DY.C.I .T.(OSD) CIR.8, AHMEDABAD SUBMITTED FOLLOWING REPORT; 'KINDLY REFER TO THE ABOVE. 2. DURING THE COURSE OF APPELLATE PROCEEDINGS, THE UNDERSIGNED HAS ATTENDED THE HEARING IN THE ABOVE MENTIONED CASE ON 12.06.2014 AND YOUR HONOUR HAS DIRECTED THE UNDERSIGNED VIDE ORDER SHEET ENTRY DATED 12.06.2014 TO VERIFY THE DISALLOW ANCE MADE U/S.!4A OF THE ACT OF RS.38,590/- AND SUBMIT A REPORT. 3. IN THIS CONTEXT, THE FACTUAL REPORT IS A S UNDER : ON VERIFICATION OF THE CASE RECORDS AND COMPUTATION OF INCOME FILED BY THE ASSESSEE, IT WAS FOUND THAT THE ASSESSEE HAS HIMSELF DISALLOWED THE FOLLOW ING EXPENSES : I) DISALLOWANCE U/S.14 A RS.15,12,285/- II) CHARGES OF DOCUMENT OF DEBENTURE RS. 5,500/- III) DEMAT CHRGES RS.14,95,190/- IV) SHARE REGISTER CHARGES RS. 33,090/- HOWEVER, WHILE PASSING THE ASSESSMENT ORDER U/S.L43 (3) OF THE ACT DATED 09.01.2014, THE COMPUTATION OF DISALLOWANCE U/S.14A OF THE ACT WAS MADE AS UNDER: TOTAL DISALLOWANCE COMPUTED U/S.!4AR.W.R.8D RS.2,31 ,66,567/- LESS: DISALLOWANCE ALREADY MADE BY THE ASSESSEE (I) DISALLOWANCE U/S. 14A RS. 15,12,285/- (II) DEMAT CHARGES RS. 14,95,190/- ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 25 DISALLWONCE MADE IN ASSESSMENT ORDER RS. 2,01.59,0 92/- 4. AND IN APPEAL BEFORE THE LD. CIT(A) ASSESSEES APPE AL WAS PARTLY ALLOWED BY THE LD. CIT(A). 5. NOW DEPARTMENT HAS COME BEFORE US IN APPEAL AGAINS T THE DELETING THE DISALLOWANCE OF RS. 12,27,015/- OUT OF TOTAL DISALL OWANCE OF RS. 2,01,59,092/- U/S. 14A. THE A.O. HAS DISUSED THE ISSUE IN PARA N O. 3.1 ON PAGES NOS. 2 TO 13 OF THE ASSESSMENT ORDER AND LD. CIT(A) DELETED THE ADDITION FOLLOWING THE APPELLATE ORDER OF HIS PREDECESSOR FOR ASSESSMENT Y EAR 2010-11. AND THEREAFTER SAID ORDER WAS CHALLENGED BY THE REVENUE BEFORE ITA T AND BENCH DISMISSED THE APPEAL OF THE REVENUE AND DECIDED MATTER IN FAV OUR OF REVENUE AND COPY OF THE ITAT ORDER HAS BEEN FILED BEFORE US AND OPERATI NG PARA OF THE SAME IS AS FOLLOWS: WE HAVE GONE THROUGH THE RELEVANT RECORD AND IMPU GNED ORDER. SIMILAR ISSUE HAS COME UP BEFORE THE ITAT IN ASSESSMENT YEAR 2007-08 & 200 8-09 AND LD. CIT(A) FOLLOWED THE ITAT ORDER IN THE CASE OF GUJARAT STATE ENERGY GENE RAL ORDER DATED 15.04.2011 IN ITA NO. 1777 & 2028/AHD/2009 AND DIRECTED TO DELETE THE ADD ITION MADE BY THE ASSESSING OFFICER. 6. THEREFORE, IN PARITY WITH THE ORDER OF THE BENCH, W E DISMISS THIS GROUND OF APPEAL OF THE REVENUE. 7. NOW WE COME TO NEXT GROUND FOR DELETION OF DISALLOW ANCE OF RS. 2,01,59,092/- MADE U/S. 14A WHILE COMPUTING BOOK PROFIT U/S. 115J B OF THE ACT. 8. LD. CIT(A) HAS DELETED THE ADDITION VIDE PARA 5.4 O N PAGES 43 & 44 OF HIS ORDER. AT THE TIME OF HEARING, LD. A.R. POINTED OUT THAT OVER AND ABOVE DECISION ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 26 RELIED UPON BY LD. CIT(A) THE ISSUE IS NOW WELL SET TLED BY THE SPECIAL BENCH DECISION IN THE CASE OF VIREET INVESTMENT REPORTED IN 165 ITD 27. AND IN SIMILAR CIRCUMSTANCES, CO-ORDINATE BENCH GRANTED RE LIEF IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2010-11 IN ITA NO. 1718 & 1 648/AHD/2014. THEREFORE, HAVING PARITY WITH THE SAID ORDER, WE D ISMISS THIS GROUND OF APPEAL OF THE REVENUE. 9. IN THE RESULT, APPEAL FILED BY THE REVENUE IS DISMI SSED. 10. NOW WE COME TO ASSESSEES APPEAL IN ITA 2594/AHD/20 14. THE ASSESSEE HAS TAKEN FOLLOWING GROUNDS OF APPEAL: 1. IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE, THE LEARNED CIT(A) HAS GROSSLY ERRED IN DISMISSING GROU ND NO.1 OF THE APPELLANT'S APPEAL BEFORE HIM CHALLENGING THE VALIDITY OF THE A SSESSMENT ORDER IMPUGNED BEFORE HIM, INTER ALIA, ON THE GROUND THAT IT HAD B EEN PASSED WITHOUT APPLICATION OF MIND. 2.1 IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE, THE LEARNED CIT(A) HAS GROSSLY ERRED IN ORDERING FOR A MERE REDUCTION IN THE QUANTUM OF THE DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE EX PENSES U/S.14A READ WITH RULE 8D FROM RS.2,01,59,092 MADE IN THE ASSESSMENT ORDER TO RS.1,89,32,077, THEREBY GRANTING A RELIEF OF ONLY RS.12,27,015 INST EAD OF ORDERING FOR THE DELETION OF THE ENTIRE DISALLOWANCE CONSIDERING THE PECULIAR FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE AND ALSO CONSIDERING THAT THE APPE LLANT HAD MADE A SUO MOTU DISALLOWANCE OF RS.30,40,565 (RS.14,95,190, ON ACCO UNT OF DEMAT CHARGES, RS.33,090 ON ACCOUNT OF REGISTRATION CHARGES AND RS .15,12,285 ON ACCOUNT OF OTHER ADMINISTRATIVE EXPENSES). 2.2 WITHOUT PREJUDICE TO THE FOREGOING, IN LAW A ND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE, THE LEARNED CIT(A) HAS GROSSLY ERRED IN FAILING TO APPRECIATE THAT ALLOWANCE OF DEPRECIATIO N U/S.32 CANNOT BE THE SUBJECT MATTER OF A DISALLOWANCE U/S.14A AND IN UPHOLDING T HE LEARNED ASSESSING OFFICER'S ACTION OF MAKING A DISALLOWANCE ON ACCOUNT OF ADMIN ISTRATIVE EXPENSES U/S.14A INCLUSIVE OF DEPRECIATION CLAIMED U/S.32 OF THE ACT . ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 27 3(A) IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE, THE LEARNED CIT(A) HAS GROSSLY ERRED IN UPHOLDING THE A DDITION OF RS.1,21,37,680 MADE BY THE LEARNED ASSESSING OFFICER AFTER ALLEGING THA T THE APPELLANT'S CLOSING STOCK OF SHARES, TO THE EXTENT IT CONSISTED OF 44,95,437 SHARES OF GLFL, HAD BEEN UNDERVALUED BY THAT AMOUNT. HE OUGHT TO HAVE APPREC IATED, INTER ALIA, THAT WHEN THE SHARES IN QUESTION HAD BEEN VALUED AT THE SAME PRICE OF RE.1 PER SHARE AT WHICH THEY HAD BEEN VALUED CONSISTENTLY FROM YEAR T O YEAR AND FOR WHICH REASON, THEY HAD ALSO COME TO BE VALUED AT THAT VERY RATE O F RE.1 PER SHARE IN THE OPENING STOCK FOR THE PRESENT ASSESSMENT YEAR, THERE COULD BE NO QUESTION FOR VALUING THEM BY ADOPTING ANOTHER RATE (FOR THE SAME QUANTIT Y OF THE SHARES VIZ. 44,95,437, AS AT THE END OF THE YEAR) WHILE VALUING CLOSING STOCK. HE OUGHT ALSO TO HAVE APPRECIATED THAT IN THE PECULIAR FACTS AND CIR CUMSTANCES OF THE APPELLANT'S CASE, AND ESPECIALLY CONSIDERING THAT THE SHARES OF GLFL HAD BEEN VERY THINLY TRADED ON THE STOCK EXCHANGES, THE STOCK EXCHANGE Q UOTATION COULD NOT PROVIDE A CORRECT BASIS FOR VALUING THE HUGE QUANTITY OF SHAR ES OF GLFL WHICH THE APPELLANT WAS HOLDING. THE LEARNED CIT(A) OUGHT, ACCORDINGLY, TO HAVE ORDERED FOR THE DELETION OF THIS ADDITION. (B) WITHOUT PREJUDICE TO WHATEVER STATED ABOVE, I T IS SUBMITTED THAT ADDITION CANNOT BE MADE ON THIS ACCOUNT, IN THE YEAR UNDER C ONSIDERATION, PARTICULARLY WHEN THE OPENING VALUATION OF THE AFO.RESAID SHARES WAS ALSO HIGH AND THERE BEING NO SUBSTANTIAL RISE IN THE VALUATION OF CLOSI NG STOCK AS COMPARED TO THE OPENING STOCK. 4. IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE, THE LEARNED CIT(A) HAS GROSSLY ERRED IN HOLDING THAT WI THHOLDING OF INTEREST OF RS.1,62,542 ON REFUND .EARLIER GRANTED TO THE APPEL LANT U/S.244 AND LEVYING OF INTEREST AMOUNTING TO RS.53,069 U/S.234D WERE MEREL Y CONSEQUENTIAL MATTERS, INSTEAD OF HOLDING THAT THE INTEREST ON REFUND HAD BEEN WRONGLY WITHHELD AND LEVY OF INTEREST U/S.234D WAS UNJUSTIFIED. 5.IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE, THE LEARNED CIT(A) HAS GROSSLY ERRED IN DISMISSING GROUND NO.6 OF THE APPELLANT'S APPEAL CHALLENGING INITIATION OF PENALTY PROCEEDINGS U/S.2 71(1)(C) ON THE GROUND THAT IT WAS PREMATURE. HE OUGHT TO HAVE APPRECIATED, INTER ALIA, THAT IN THE PECULIAR FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE, SI NCE THERE WAS ABSOLUTELY NO WARRANT/JUSTIFICATION FOR INITIATING THE PENALTY PR OCEEDINGS, THEY DESERVED TO BE DROPPED, THEREBY SAVING BOTH THE APPELLANT AND THE DEPARTMENT FROM LONG DRAWN UNNECESSARY LITIGATION. ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 28 11. SINCE IN CONNECTING APPEAL, ON SIMILAR GROUND WE HA VE DISMISSED THE DEPARTMENT APPEAL. AND NOW ASSESSEE GRIEVANCE IS TH AT LD. CIT(A) HAS WRONGLY MADE DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE EXPE NSES U/S. 14A R.W.R. 8D FROM RS. 2,01,59,092/- MADE IN ASSESSMENT ORDER TO 1,89,32,077/- THEREBY GRANTING RELIEF OF ONLY 12,27,015/- INSTEAD OF ORDE RING FOR THE DELETION OF ENTIRE DISALLOWANCE. 12. AS WE CAN SEE, ASSESSEE HAS RAISED THE ISSUE REGARD ING CONFIRMING THE DISALLOWANCE U/S. 14A OF RS. 1,89,32,077/- MADE BY A.O. BY FOLLOWING RULE 8D. LD. CIT(A) HAS FOLLOWED THE PRECEDING ASSESSMEN T YEAR OF ORDER OF HIS PREDECESSOR FOR ASSESSMENT YEAR 2010-11 AND ITAT IN SIMILAR CIRCUMSTANCES, IN ASSESSEES OWN CASE GRANTED RELIEF TO THE ASSESSEE IN ITA NO. 1777 & 2028/AHD/2009 AND DELETED THE ADDITION MADE BY THE LOWER AUTHORITIES. THEREFORE, IN PARITY WITH THE BENCH ORDERS, WE ALLO W THIS GROUND OF APPEAL BY THE ASSESSEE AND DIRECTED TO DELETE THE ADDITION OF RS. 1,89,32,077/-. 13. NOW WE COME NEXT GROUND RELATING TO UPHOLDING THE A DDITION BY THE LD. CIT(A) OF RS. 1,21,37,680/- MADE BY THE A.O. ALLEGING THAT ASSESSEE CLOSING STOCK OF SHARES TO THE EXTENT IT CONSISTED OF 4495437 SHARES OF GLFL HAD NOT UNDER VALUED BY THAT AMOUNT AND LD. CIT(A) HAS NOT CONSID ERED THE FACT THAT SHARE IN QUESTION HAD NOT VALUED AT THE SAME PRICE OF RS. 1 PER SHARE AT WHICH THEY HAVE BEEN VALUED CONSISTENTLY FROM YEAR TO YEAR FOR WHIC H REASON, THEY HAD ALSO COME TO BE VALUED AT THE VARY RATE OF RS. 1 PER SHA RE IN THE OPENING STOCK FOR THE PRESENT ASSESSMENT YEAR. 14. THE LD. A.O. HAS DISCUSSED THIS ISSUE AT PAGE 11 TO 18 OF THE ASSESSMENT ORDER. LD. CIT(A) HAS CONFIRMED THE SAID DISALLOWANCE VIDE PARA 5.3 ON PAGES 41 TO 43 ITA NO. 2587 & 2594/AHD/2015 . A.Y. 2011-1 2 29 OF HIS ORDER. AT THE TIME OF HEARING, LD. A.R. POIN TED OUT THAT METHOD AND RELIANCE PUT BY THE LD. A.O. CONFIRMED BY THE LD. C IT(A) IS TOTALLY WRONG AND ARGUED AND ON THE BASIS OF DISCUSSION MADE IN PARA 13 OF STATEMENT OF FACTS ON PAGES 16 TO 21 OF THE PAPER BOOK. MORE PARTICULARLY THERE BEING RESTRICTION ON TRANSFER OF SHARES AND NEGATIVE NET WEALTH OF GLFL AND VALUE OF RS. 1 PER SHARE SHOWN IN ASSESSMENT YEAR 2009-10 AND ASSESSMENT YEA R 2010-11 HAS BEEN ACCEPTED BY THE DEPARTMENT. THEREFORE, ON THE PRINC IPLE OF THE CONSISTENCY, WE ALLOW THIS GROUND OF APPEAL OF THE ASSESSEE. 15. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLO WED. ORDER PRONOUNCED IN OPEN COURT ON 01 - 02- 2019 SD/- SD/- (PRAMOD KUMAR) (MAHAVIR PRASAD) VICE PRESIDENT TRUE COPY JUDICIAL MEMBER AHMEDABAD: DATED 01/02/2019 RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHME DABAD