D.C.I.T., Circle-4, Kolkata, Kolkata V. M/S. Rossell India Ltd., Kolkata

ITA 2774/KOL/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 9161 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 3 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-03-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 29-09-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 13-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T VARKEY JUDIC IA L M EMBER
• Assessee Lawyers: SUBHRO DAS JCITSRDR MANI
• Keywords: Business income; Earning of tax free income; Proportionate interest; Additional evidence
• Section: 143(3); 14A; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH A KOLKATA BEFORE SHRI ABY.T VARKEY, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER ITA NO. 2774 / KOL / 2013 ASSESSMENT YEAR:2009-10 DCIT, CIRCLE-4, KOLKATA P-7, CHOWRINGHEE SQUARE, KOLKATA-69 V/S . M/S ROSSELL INDIA LTD. 21/1A/3, DARGA ROAD, JINDAL TOWERS, BLOCK B, 4 TH FLOOR, PARK CIRCUS, KOLKTA-700 017 [ PAN NOAABCR 3736 J ] /APPELLANT .. / RESPONDENT /BY APPELLANT SHRI SUBHRO DAS, JCIT-SR-DR /BY RESPONDENT MANISH SHETH, AR /DATE OF HEARING 09-01-2017 /DATE OF PRONOUNCEMENT 15-03-2017 / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:- THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-IV, KOLKATA DA TED 19.08.2013. ASSESSMENT WAS FRAMED BY JCIT(OSD), CIRCLE-4, KOLKA TA U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS T HE ACT) VIDE HIS ORDER DATED 27.12.2011 FOR ASSESSMENT YEAR 2009-10. SHRI SUBHRO DAS, LD. DEPARTMENTAL REPRESENTATIVE RE PRESENTED ON BEHALF OF REVENUE AND SHRI MANISH SHETH, LD. AUTHORIZED REPRE SENTATIVE APPEARED ON BEHALF OF ASSESSEE. 2. GROUNDS RAISED BY REVENUE PER ITS APPEAL ARE AS UNDER:- 1. THE LD. CIT(A) ERRED IN LAW AS WELL AS ON FACTS IN HOLDING THAT CESS ON GREEN LEAF OF RS.5741347/- IS AN ALLOWABLE EXPENDIT URE, IGNORING THE FACT THAT IT ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 2 IS DIRECTLY ATTRIBUTABLE TO CORE AGRICULTURE ACTIVI TIES WHICH IS TAXABLE UNDER STATE AGRICULTURE INCOME TAX, BEYOND THE PURVIEW OF CENTR AL INCOME TAX AND ON THE SAME ISSUE SLP IS PENDING IS THE CASE OF AFT INDUST RIES. 2. THE LD. CIT(A) ERRED IN LAW AS WELL AS ON FACTS IN HOLDING THAT THE DISALLOWANCE U/S. 14A IS NOT APPLICABLE IN THIS CAS E, IGNORING THE FATS THAT THE ASSESSEE FAILED TO PROVE THAT BORROWED FOUND WAS NO T USED FOR INVESTMENT THROUGH FUND FLOW STATEMENT WITH DATE OF TRANSACTIO NS. 3. THE LD. CIT(A) ERRED IN LAW AS WELL AS ON FACTS IN DELETING THE DISALLOWANCE U/S 14A FOR COMPUTING BOOK PROFIT U/S. 115JB. 3. THE FIRST ISSUE RAISED IN THIS APPEAL IS WHETHER THE LD. CIT-A IS JUSTIFIED IN DELETING THE DISALLOWANCE OF EXPENDITURE INCURRED F OR RS.57,41,347/- TOWARDS THE CESS ON GREEN LEAF FROM COMPOSITE INCOME. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A LIMITED COMPANY AND ENGAGED IN THE BUSINESS OF CULTIVATION, MANUFAC TURE AND SALE OF TEA. THE AO DURING ASSESSMENT OBSERVED THAT THE ASSESSEE HAD DEBITED A SUM OF RS.57.41 LACS UNDER THE HEAD ' CESS ON GREEN LEAF ' WHICH WERE PAID TO GOVERNMENTS OF ASSAM. THE AO PLACED RELIANCE ON TH E DECISION OF THE HON'BLE GAUHATI HIGH COURT IN THE CASE OF JORHAT GROUP LTD VS AGRICULTURAL ITO REPORTED IN 226 ITR 622 (GAU) WHEREIN IT WAS HELD THAT THE CESS ON GREEN LEAF IS DEDUCTIBLE FROM THE AGRICULTURAL INCOME ONL Y AND NOT FROM THE COMPOSITE INCOME. THE ASSESSEE PLACED RELIANCE ON THE DECISIO N OF THE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS A.F.T. INDUSTRIES LTD REPORTED IN (2004) 270 ITR 167 (CAL) WHEREIN IT WAS HELD THAT THE SAME WAS TO BE FULLY ALLOWED FROM THE COMPOSITE INCOME. AS THE APPEAL AGAINST THE ORD ER OF THE HON'BLE CALCUTTA HIGH COURT WAS PREFERRED BEFORE THE HON'BLE APEX CO URT BY THE REVENUE, THE AO IN ORDER TO KEEP THE MATTER ALIVE THOUGHT IT FIT TO MAKE THE DISALLOWANCE AND ACCORDINGLY MADE THE SAME. THE LD CIT(A) HOWEVER FO LLOWED THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE O F A.F.T INDUSTRIES LTD. (SUPRA) RELIED UPON BY THE ASSESSEE AND DELETED THE DISALLOWANCE. BEING AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US . ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 3 5. THE LD DR FAIRLY AGREED THAT THE ISSUE DECIDED B Y THE ORDER OF THE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF AFT INDUSTRIES LTD (SUPRA) HAVE BEEN APPROVED BY THE HON'BLE APEX COURT IN THE CASE OF M/S APEEJAY TEA CO LTD IN CIVIL APPEAL NO. 1105 OF 2006 AND ACCORDINGLY AG REED WITH THE ORDER OF THE LD CIT(A) IN THIS REGARD. 6. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; IN CLUDING THE JUDICIAL PRONOUNCEMENTS CITED AND PLACED RELIANCE UPON. WE F IND THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION RELIED UPON (SUPRA ) IN FAVOUR OF THE ASSESSEE AND ESSENCE OF THE DECISION IS ALREADY DISCUSSED IN THE FACTS ABOVE. RESPECTFULLY FOLLOWING THE SAME, WE DISMISS THE GRO UND NO.1 RAISED BY THE REVENUE. 7. THE NEXT ISSUE RAISED BY THE REVENUE IN THIS APP EAL IS THAT LD CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE AO U/S 1 4A OF THE ACT. 8. THE ASSESSEE IN THE YEAR UNDER CONSIDERATION HAS EARNED DIVIDEND INCOME FOR RS.2,54,101/- ONLY WHICH WAS CLAIMED EXE MPTED U/S 10(34) OF THE ACT. THE ASSESSEE, DURING THE ASSESSMENT PROCEEDING S HAS OFFERED THE DISALLOWANCES OF THE EXPENSES U/S 14A OF THE ACT FO R RS.2,17,552/- IN THE RELATION TO IMPUGNED EXEMPTED INCOME. THE ASSESSEE ALSO CLAIMED THAT NO BORROWING FUND HAS BEEN USED IN THE INVESTMENT FROM WHICH DIVIDEND INCOME HAS BEEN EARNED. ALL THE INVESTMENTS WERE MADE OUT OF THE OWN FUND AND FROM INTERNAL ACCRUALS ONLY. HOWEVER, THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT THE DISALLOWANCE U/S 14A OFFERED BY THE ASSESSEE IS NOT IN ACCORDANCE WITH THE PROVISIONS OF RULE 8D OF INCOME TAX RULES 1962 (HEREINAFTER REFERRED AS THE RULE). THE AO FURTHE R OBSERVED THAT THE INVESTMENTS HAVE BEEN MADE OUT OF THE MIXED BANK AC COUNT MAINTAINED BY THE ASSESSEE. THEREFORE, THE CLAIM OF THE ASSESSEE THAT NO BORROWED FUND HAS BEEN UTILIZED IN MAKING THE AFORESAID INVESTMENT IS NOT MAINTAINABLE. ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 4 ACCORDINGLY THE AO INVOKED THE PROVISIONS OF RULE 8 D OF THE RULE R.W.S. 14A OF THE ACT AND WORKED OUT THE DISALLOWANCES AS UNDER : DIRECT EXPENSES NIL INTEREST EXPENSES 38,28,749.00 ADMINISTRATIVE EXPENSES 7,64,556.00 THE AFORESAID AMOUNT WAS DISALLOWED UNDER THE PROVI SIONS OF RULE 8D READ WITH SECTION 14A OF THE ACT AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 9. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE L D. CIT(A). THE ASSESSEE BEFORE LD. CIT(A) SUBMITTED AS UNDER : 1. THE SURPLUS FUND HAS BEEN INVESTED IN SHARES AND SECURITIES. THE DECISION FOR THE INVESTMENT WAS TAKEN BY THE EXECUT IVE CHAIRMAN OF THE COMPANY WHO HAS BEEN VESTED WITH THE AUTHORITY BY T HE BOARD OF DIRECTORS FOR MAKING THE INVESTMENTS. THEREFORE 10% OF THE TOTAL EXPENSES INCURRED FOR THE CHAIRMAN OFFICE HAVE BEEN DISALLOWED UNDER SECTION 14A OF THE ACT. THERE WAS NO OTHER EXPENDIT URE INCURRED DIRECTLY OR INDIRECTLY FOR EARNING SUCH DIVIDEND INCOME. THE AO WITHOUT FINDING ANY DEFECT IN THE WORKING OF DISALLOWANCES MADE BY THE ASSESSEE HAS INVOKED THE PROVISIONS OF RULE 8D READ WITH SECTION 14A OF THE ACT WHICH IS CONTRARY TO THE DECISION OF VARIOUS COURTS. AS S UCH THE AO HAS DISREGARDED THE DISALLOWANCE MADE BY THE ASSESSEE W ITHOUT GIVING ANY COGENT REASONS AND INVOKED THE PROVISIONS OF RULE 8 D OF INCOME TAX RULES. 2. THERE WAS USED NO BORROWED FUND IN THE IMPUGNED INVESTMENT AND THEREFORE THERE IS NO QUESTION OF MAKING ANY DISALL OWANCE FOR THE INTEREST EXPENSES INCURRED BY THE ASSESSEE. THE INT EREST EXPENSES ARE INCURRED IN RELATION TO THE NORMAL AND TAXABLE BUSI NESS ACTIVITIES. THERE WAS SUFFICIENT OWNED FUND AVAILABLE WITH THE ASSESS EE FOR SUCH INVESTMENTS AND THERE WAS NO INFORMATION SUGGESTING THAT THE BORROWED FUND HAS BEEN UTILIZED IN THE INVESTMENTS. ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 5 3. THE ASSESSEE USED THE SAME BASIS FOR THE DISALLO WANCE UNDER SECTION 14A OF THE ACT FOR THE SUBSEQUENT ASSESSMENT YEAR 2 010-11 WHICH WAS DULY ACCEPTED BY THE ASSESSING OFFICER. 4. THE ASSESSEE ALSO SUBMITTED THE DETAILS OF INVES TMENT MADE BY THE ASSESSEE DURING THE YEAR AS DETAILED UNDER : SL.NO PARTICULARS AMOUNT (RS) 1 PURCHASE OF 83,305 EQUITY SHARES OF 1/- EACH FULLY PAID UP OF CELSIA HOTELS PVT. LTD. (EARLIER KNOWN AS AMIT PROMOTERS & CONTRACTORS PVT.LTD.) 12,50,00805 2 19,26,000 EQUITY SHARES OF 1/- EACH OF PSK HOTELS AND RESORTS PVT. LTD. 5,20,02,000 3 OTHER INVESTMENTS MADE DURING THE YEAR. 48,29,511 5. THE MAJOR PART OF FUNDING IN RESPECT OF SAID INV ESTMENTS WERE MADE OUT OF THE PROCEEDS RECEIVED BY THE COMPANY ON ISSUE OF PREFERENTIAL ALLOTMENT OF EQUITY SHARES TO FIIS AS UNDER:- NAME OF FII NO. OF EQUITY SHARES AMOUNT (RS) ELARA INDIA OPPORTUNITIES FUND LTD. 7,00,000 7,00,00,000 SOPHIA GROWTH 3,25,000 3,25,00,000 TOTAL 10,25,000 10,25,000,000 THE BALANCE AMOUNT WAS FUNDED OUT OF THE INTERNAL A CCRUALS, RESERVE FUNDS AND PROCEEDS GENERATED ON SALE OF INVESTMENTS MADE DURING THE YEAR. THE ASSESSEE FURTHER SUBMITTED THAT NO TERM L OAN AND WORKING CAPITAL LOAN HAVE BEEN USED IN THE AFORESAID INVEST MENTS. 6. THE ASSESSEE FURTHER SUBMITTED THAT FOR MAKING T HE DISALLOWANCE AS PER RULE 8D THE INVESTMENT WHICH HAS GIVEN DIVIDEND INC OME IN THE YEAR UNDER CONSIDERATION WILL ONLY BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE. ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 6 THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE DELETED THE ADDITION BY AO BY OBSERVING AS UNDER:- 4.2 I HAVE EXAMINED THE ASSESSMENT ORDER AS WELL AS THE CONTENTION OF THE APPELLANT. THE APPELLANT HAS SUBMITTED THAT NO DIRE CT EXPENSES HAVE BEEN INCURRED FOR EARNING OF EXEMPT DIVIDEND INCOME. IT IS OBSERVED THAT THE APPELLANT HAS SUO-MOTTO IDENTIFIED AND OFFERED 10% OF OFFICE EXPENSES OF RS.2,17,552/- OF ITS EXECUTIVE CHAIRMAN OFFICE AT D ELHI WHO ARE ENGAGED IN TAKING INVESTMENT DECISION. IT IS OBSERVED THAT THE SAID BASIS WAS ALSO FOLLOWED IN SUBSEQUENT YEAR WHICH HAS BEEN ACCEPTED IN ASSESSMENT AND NO DISALLOWANCE WAS INFLICTED U/S 14A. THE ASSESSING O FFICER HAS NOT GIVEN ANY FINDING FOR REJECTING THE BASIS ADOPTED BY THE APPE LLANT AND APPLYING RULE 8D. THE APPELLANT HAS RELIED UPON VARIOUS JUDGMENTS WHE REIN IT HAS BEEN HELD THAT PROVISIONS OF RULE 8D COMES INTO PLAY ONLY WHE N THE AO RECORDS A FINDING THAT HE NOT SATISFIED WITH THE APPELLANT'S METHOD A ND HENCE THE SAID RULE CANNOT BE ARBITRAL APPLIED BY THE ASSESSING OFFICER WITHOUT SHOWING HOW THE APPELLANT'S METHOD OF CALCULATION OF DISALLOWANCE U /S 14A IS INCORRECT. 4.3 HAVING CONSIDERED THE ABOVE FACT, DURING THE CO URSE OF APPELLATE PROCEED THE APPELLANT IN THE LIGHT OF THE DECISION OF CALCU TTA HIGH COURT IN THE CASE OF DHANUKA SONS VS. CIT 339 ITR 319 WAS CALLED UPON TO SUBSTANTIATE WITH EVIDENCE THAT THE INVESTMENT MADE DURING THE YEAR W ERE OUT OF OWNED FUNDS AND NOT LOAN FUNDS. 4.4 THE APPELLANT HAS SUBMITTED DETAIL REPLY IN SUP PORT OF THE SAME VIDE SUBMISSION DATED 07-08-2013. IT IS OBSERVED THAT TH E MAJOR INVESTMENT MADE DURING THE YEAR WAS SUBSTANTIALLY FUNDED OUT OF PRO CEEDS OF PREFERENTIAL ALLOTMENT OF EQUITY SHARES TO FIIS. THE EQUITY ISSU E WAS MADE AFTER OBTAINING APPROVAL FROM THE GOVERNMENT OF INDIA, MINISTRY OF FINANCE, DEPARTMENT OF ECONOMIC AFFAIRS, AS PER WHICH THE PROCEEDS OF THE ISSUE WERE REQUIRED TO BE UTILIZED FOR DOWNSTREAM INVESTMENT IN HOTEL/RESTAUR ANT BUSINESS IN INDIA. IT IS FURTHER OBSERVED FROM THE BALANCE-SHEET THAT THE AP PELLANT HAD SUFFICIENT RESERVES AND SURPLUS AND SALE OF INVESTMENT DURING THE YEAR WHICH WENT TO FUND BALANCE INVESTMENT. THE APPELLANT HAS ALSO PLA CED ON RECORD VARIOUS EVIDENCES IN SUPPORT OF THE FACT THAT THE VARIOUS L OANS RAISED WERE SPECIFIC PURPOSE LOAN TO FUND THE WORKING CAPITAL NEEDS OF T HE COMPANY OR WERE RAISED TO REPAY LOAN TAKEN FOR ACQUISITION OF TEA ESTATE/C AR LOAN AND DID NOT ANYWAY WENT IN FUNDING OF INVESTMENT. IT IS OBSERVED THAT THE ASSESSING OFFICER COULD NOT BRING ANY EVIDENCE ON RECORD THAT ANY LOAN FUND S WERE UTILIZED IN MAKING INVESTING OUT OF WHICH EXEMPT INCOME HAS BEEN EARNE D-EXCEPT OBSERVING THAT THE INVESTMENT HAVE BEEN FROM MIXED ACCOUNTS. 4.5 THE APPELLANT HAS ARGUED THAT AS PER RULE 8D(2) (II), ONLY THOSE EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTL Y ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT IS REQUIRED TO BE CONS IDERED FOR DISALLOWANCE U/S 14A. SINCE IN ITS CASE, THE INTEREST COST WAS INCUR RED IN RESPECT OF SPECIFIC PURPOSE LOAN AND WERE DIRECTLY ATTRIBUTABLE IN EARN ING BUSINESS INCOME HENCE NO DISALLOWANCE OF INTEREST COST WAS CALLED FOR U/S 14A READ WITH RULE 8D(2)(II). IT WAS FURTHER ARGUED THAT THE ASSESSING OFFICER HAS FAILED TO PROVIDE ANY EVIDENCE THAT THE LOAN FUNDS WERE UTILISED FOR MAKING INVESTMENT. THE ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 7 APPELLANT HAS PLACED RELIANCE ON THE RECENT DECISIO N OF JURISDICTIONAL KOLKATA TRIBUNAL IN THE CASE OF REI AGRO LTD. -VS.- DCIT [2 013] 3S TAXMANN.COM 404 (KOLKATA - TRIB.) TO SUPPORT ITS ARGUMENT. 4.6 THE APPELLANT'S ARGUMENT IN RESPECT OF NON-DISA LLOWANCE OF INTEREST COST UNDER RULE BD(2)(II), MERITS CONSIDERATION. THE APP ELLANT HAS PLACED SUFFICIENT EVIDENCE ON RECORD TO PROVE THAT INVESTMENT WERE FU NDED OUT OF EQUITY RAISED DURING THE YEAR/RESERVES AND SALE PROCEEDS OF INVES TMENT SOLD. THE ASSESSING OFFICER ARGUMENT THAT THE INVESTMENT WERE MADE OUT OF MIXED FUNDS DOES NOT BY ITSELF PROVE THAT THE LOAN FUNDS WERE UTILIZED IN MAKING INVESTMENT WHEN THE APPELLANT HAS BROUGHT VARIOUS E VIDENCE OF FUNDING OF INVESTMENT. 4.7 EVEN OTHERWISE IT IS OBSERVED THAT THE LOANS ON WHICH INTEREST COST HAS BEEN INCURRED BY THE APPELLANT WERE SPECIFIC PURPOS E LOAN TO MEET WORKING CAPITAL NEED/OTHER SPECIFIC PURPOSE AND WERE NOT PE RMITTED FOR INVESTMENT IN SHARES. IT IS OBSERVED THAT IN THE CASE OF DHANUKA & SONS THE APPELLANT HAD FAILED TO PROVIDE ANY EVIDENCE OF THE FACT THAT THE INVESTMENT WERE MADE OUT OF OWNED FUNDS. HOWEVER, IN THE INSTANT CASE, THE A PPELLANT HAS BROUGHT VARIOUS EVIDENCES ON RECORD TO PROVE THAT INVESTMEN T WERE OUT OF OWNED FUNDS AND NOT LOAN FUNDS. THE JURISDICTIONAL KOLKAT A TRIBUNAL IN REI AGRO LTD. - VS.- DCIT [2013] 35 TAXMANN.COM 404 (KOLKATA - TRIB .) WHILE DECIDING SIMILAR MATTER AS INVOLVED IN APPELLANT'S CASE HAS HELD THA T NO INTEREST COST IS DISALLOWABLE UNDER RULE 8(2)(II). HENCE, RESPECTFUL LY FOLLOWING THE JURISDICTIONAL TRIBUNAL DECISION IN THE CASE OF REI AGRO LTD. -VS. - DCIT, DISALLOWANCE OF INTEREST COST OF RS. 38,28,749/- UNDER RULE 8D(2)(I I) IS DELETED. 4.8 AS REGARD THE DISALLOWANCE MADE IN RESPECT OF R ULE 8D(2)(III), THE APPELLANT HAS ARGUED THAT IN COMPUTING ANY DISALLOW ANCE UNDER RULE 8D(2)(III) BEING NUMERATOR B IN RULE 8D(2)(II), THE ASSESSING OFFICER OUGHT TO HAVE CONSIDERED ONLY THOSE INVESTMENT FROM WHICH THE APP ELLANT EARNED DIVIDEND AND NOT THE TOTAL INVESTMENT AT THE BEGINNING OF TH E YEAR AND AT THE END OF THE YEAR. IN CASE, IN COMPUTING THE AVERAGE VALUE OF IN VESTMENT AS PROVIDED IN NUMERATOR B, AVERAGE INVESTMENT OUT OF WHICH NO DIV IDEND INCOME WAS EARNED IS EXCLUDED, THE DISALLOWANCE UNDER RULE 8D (2)(III) WOULD REDUCE TO RS.1,06,531/- BEING A FIGURE LOWER THAN THE AMOUNT ALREADY OFFERED TO TAX BY THE ASSESSEE. RELIANCE IN THIS REGARD HAS BEEN PLAC ED ON THE DECISION OF JURISDICTIONAL KOLKATA TRIBUNAL IN THE CASE OF REI AGRO LTD. (SUPRA) WHEREIN IT HAS BEEN HELD THAT ONLY THOSE INVESTMENTS ON WHICH DIVIDEND HAS BEEN EARNED BY THE APPELLANT SHOULD HAVE BEEN CONSIDERED FOR COMPUTING 0.5% OF AVERAGE VALUE OF INVESTMENTS AND NOT ALL INVESTMENT S ON WHICH NO DIVIDEND HAS BEEN EARNED DURING THE RELEVANT FINANCIAL YEAR. 4.9 I HAVE GONE THROUGH THE JUDGEMENT OF KOLKATA TR IBUNAL IN THE REGARD. IT IS OBSERVED THAT OBSERVED THAT JURISDICTIONAL KOLKATA TRIBUNAL IN REI AGRO LTD. VS- DCIT [2013] 35 TAXMANN.COM 404 (KOLKATA - TRIB. ) HAS HELD THAT IN COMPUTING ANY DISALLOWANCE UNDER RULE 8D(2)(III), B EING 112% OF AVERAGE VALUE OF INVESTMENT, THE ASSESSING OFFICER OUGHT TO HAVE CONSIDERED ONLY THOSE INVESTMENT FROM WHICH THE APPELLANT EARNED DI VIDEND AND NOT THE TOTAL INVESTMENT AT THE BEGINNING OF THE YEAR AND AT THE END OF THE YEAR. THE ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 8 APPELLANT HAS PROVIDED DETAILS OF INVESTMENT FROM W HICH IT HAS EARNED DIVIDEND. IT IS OBSERVED THAT ON CONSIDERING 0.5% O F AVERAGE VALUE OF ONLY THOSE INVESTMENT FROM WHICH DIVIDEND HAS BEEN EARNE D, THE DISALLOWANCE UNDER RULE 8D(2)(III) AMOUNTS TO RS. 1,06,531/- BEI NG LOWER THAN THE AMOUNT IDENTIFIED AND OFFERED BY THE APPELLANT. 4.10 IT IS FURTHER OBSERVED THAT IN AY 2010-11, THE APPELLANT ADOPTED SIMILAR METHODOLOGY WHILE CONSIDERING THE AMOUNT DISALLOWAB LE U/S 14A OF THE ACT. THE SAME WAS DULY BEEN ACCEPTED BY THE ASSESSING OF FICER AND NO FURTHER DISALLOWANCE HAS BEEN INFLICTED. HENCE, THE DISALLO WANCE OF RS. 5,93,305/- AS MADE BY THE ASSESSING OFFICER IS DELETED AND THE AM OUNT AS COMPUTED BY THE APPELLANT IN ITS RETURN OF INCOME IS CONSIDERED FOR ADDITION UNDER SECTION 14A OF THE ACT. BEING AGGRIEVED BY THIS, REVENUE HAS COME UP IN APP EAL BEFORE US. 10. BEFORE US LD. DR FOR THE REVENUE SUBMITTED THA T THE FINDING OF LD. CIT(A) THAT ASSESSING OFFICER HAS NOT GIVEN ANY FIN DING FOR REJECTING THE BASIS ADOPTED BY ASSESSEE AND APPLYING RULE 8D IS NOT COR RECT. AS THE A.O. HAD DISCUSSED ALTHOUGH IN BRIEF AT LAST PARA OF THE ASS ESSMENT ORDER THE REASONS FOR REJECTING ASSESSEE'S CLAIM AND APPLYING RULE 8D . THE SUBMISSION FILED BY ASSESSEE FOR THE SOURCE OF INVESTMENT IS A FRESH SUBMISSION NOT PLACED BEFORE THE ASSESSING OFFICER. THE LD. CIT(A) WITHOUT ALLOWING THE OPPORTUNITY TO THE AO OF EXAMINING THE SAME UNDER RULE 46A OUGHT NOT TO HAVE ADMITTED SUCH SUBMISSION AND BASE D HIS CONCLUSION. IT WAS ALSO SUBMITTED THAT AS PER SUB-SECTION (3) TO SEC. 14A CLEARLY STIPULATES THAT EVEN IF ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEE N INCURRED FOR EARNING EXEMPT INCOME, EVEN THEN THE PROVISIONS OF RULE 8D SHALL BE APPLIED. THE WORD IS ' SHALL ' AND NOT ' MAY '. THIS MEANS THAT APPLICATION OF RULE 8D IS MANDATORY IF A.O. IS NOT SATISFIED WITH ASSESSEE'S CLAIM AND EVEN IF ASSESSEE CLAIMS THAT NO RELATED EXPENSES HAVE BEEN INCURRED. THE OBSERVATION OF LD. CIT(A) THAT THE ASSESSEE HAD FUNDS FROM SELL OF INV ESTMENTS IS NOT CORRECT AS SALE OF INVESTMENTS ARE NOT SEPARATELY REFLECTED IN BALANCE SHEET. FUNDS, IF ANY, FROM SUCH ACTIVITY WOULD BE INCLUDED IN THE RE SERVES AND SURPLUS ITSELF. AT THE SAME TIME IT IS TO BE STATED THAT, IT IS FACT T HAT THE ASSESSEE HAD SUBSTANTIAL RESERVES AND SURPLUS. BUT IT IS ALSO FACT THAT THER E IS NO EVIDENCE TO SUBSTANTIATE ASSESSEE'S CLAIM THAT THE ENTIRE INVES TMENT IN SHARES OF RS. 7.84 ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 9 CRORES AS ON 31/3/2008 AND RS.22.73 CRORE AS ON 31/ 3/2009 WAS FUNDED SOLELY BY SUCH SURPLUS FUND. THE ASSESSEE HAD BORROWED FUN DS OF RS.16.57 CRORES AS ON 31/3/2008 AND RS.21.51 CRORE AS ON 31/3/2009. THERE IS ALSO NO EVIDENCE TO PROVE THAT NO PART OF SUCH BORROWED FUN DS WAS UTILIZED IN ACQUIRING THE ASSETS UNDER INVESTMENT. MOST SIGNIFICANTLY, THE BORROWED FUNDS INCLUDED UNS ECURED LOANS OF RS. 10.78 CRORES AS ON 31/3/2008 AND RS. 5 CRORES AS ON 31.03 .2009. SCHEDULE-4 APPEARING IN PAGE-35 OF PAPER BOOK REVEALS THAT SUC H UNSECURED LOANS WERE OBTAINED FROM OTHER CORPORATE AND DIRECTORS WITHOUT ANY SPECIFIC PURPOSES, SO ASSESSEE'S CLAIM THAT THE ENTIRE BORROWED FUND WAS OBTAINED OR SPECIFIC PURPOSES OF THE TEA BUSINESS ACTIVITY IS ONLY PARTL Y CORRECT. IN FACT, ASSESSEE HAD CLEVERLY LEFT OUT THE UNSECURED LOAN PORTION WH ILE FILING SUBMITTING BEFORE LD. CIT(A) AS IS EVIDENT FROM THE FACTS DISCUSSED B Y LD. CIT(A) IN PAGE-13 & 14 OF HIS ORDER. IT IS ALSO IMPORTANT TO NOTE THAT THE INVESTMENTS ON WHICH THE EXEMPT DIVIDEND WERE EARNED WERE MADE OVER A PERIOD OF SEVERAL YEARS INCLUDING THE CURRENT YEAR. AT THE SAME TIME, THE B ORROWED FUNDS WERE ALSO OBTAINED OVER A PERIOD OF SEVERAL YEARS. AS ALREADY STATED, THERE IS NO EVIDENCE TO ESTABLISH THE FACT AS TO WHAT PORTION O F THE INVESTMENT WAS FUNDED BY ASSESSEE'S OWN CAPITAL AND WHAT PORTION BY BORRO WED FUNDS. IT IS EXACTLY DUE TO SUCH A SITUATION WHICH HAS NECESSITATED THE INTRODUCTION OF RULE 8D BY THE CBDT SO AS TO STANDARDIZE THE PROCEDURE FOR DIS ALLOWANCE U/S 14A. SO KEEPING ALL THESE IN VIEW AND ALSO THE PROVISIONS O F SUB-SECTIONS (2) AND (3) OF SEC. 14A AND SUB-RULE(L) OF RULE 80, ASSESSING OFFI CER HAD RIGHTLY INVOKED THE SAID RULES FOR DETERMINING THAT PORTION OF INTEREST WHICH IS TO BE DISALLOWED U/S 14A. LD. CIT(A)'S OBSERVATION WAS NOT CORRECT MORE SO WHEN NO OPPORTUNITY WAS ALLOWED TO A.O. UNDER RULE 46A TO EXAMINE THE F RESH SUBMISSION MADE BY ASSESSEE. SO LD. CIT(A)'S DECISION DELETING THE DISALLOWANCE OF RS.38,28,749/- U/S 14A READ WITH RULE 8D(2)(II) SHO ULD BE REVERSED. NOW COMING TO THE LD. CIT(A)'S OBSERVATION REGARDIN G DISALLOWANCE MADE UNDER RULE 8D(2)(III), ASSESSING OFFICER HAD MADE A DISALLOWANCE OF ONE HALF PERCENT ON THE AVERAGE OF TOTAL INVESTMENTS OVER A PERIOD OF TWO YEARS. AT ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 10 PARA-4.8 AND 4.9 OF HIS ORDER, LD.CIT(A) HAS QUOTED THE JUDGMENT OF THIS TRIBUNAL IN THE CASE OF REI AGRO LTD. VS DCIT REPORTED IN 35 TAXMAN.COM 404 WHERE THE REASONING GIVEN IS THAT WHILE DETERMINING THE AVERAGE OF INVESTMENT, ONLY THOSE INVESTMENTS SHOULD BE CONSID ERED WHICH RESULTED IN EXEMPT INCOME AND THOSE INVESTMENTS WHICH DID NOT R ESULT ANY SUCH INCOME SHOULD BE EXCLUDED. IN THIS REGARD THE LD. DR DREW OUR ATTENTION TO CBDT'S CIRCULAR NO. 5 OF 2014 WHICH CLARIFIES THE ISSUE AND HELD THAT DISALLOWAN CE U/S 14A READ WITH SUB-RULES (II) AND (III) OF RULE 8D S HALL BE APPLICABLE EVEN IN RELATION TO SUCH INVESTMENTS WHICH DID NOT RESULT I N ANY EXEMPT INCOME IN ANY PARTICULAR YEAR. THIS CIRCULAR HAS BEEN BROUGHT OUT AFTER THIS TRIBUNAL'S JUDGMENT IN THE REI AGRO CASE AND THEREFORE SHOULD BE CONSIDERED THE PRESENT STATUS. 10.1 AT PARA-4.10, LD. CIT(A) HAS OBSERVED THAT SIN CE RULE 8D WAS NOT INVOKED BY AO IN ASSESSEE'S OWN CASE FOR THE A.Y.20 1O-11, THE SAME SHOULD ALSO NOT BE INVOKED FOR THIS YEAR ALSO. IN THIS REG ARD, IT IS WELL SETTLED LAW THAT THE DOCTRINE OF RES JUDICATA IS NOT APPLICABLE IN INCOME TAX PROCEEDINGS. IN FACT, IN SEVERAL JUDGMENTS, VARIOUS HON'BLE HIGH CO URTS AND EVEN HON'BLE SUPREME COURT HAS HELD THAT TO ERR IS HUMAN'S NATUR E. THAT DOES NOT MEAN THAT AN INCORRECT JUDGMENT SHALL BECOME THE PRECEDE NCE. IN THIS CONTEXT, RELIANCE WAS PLACED ON THE JUDGMENT DELIVERED BY FI VE JUDGE BENCH OF HON'BLE SUPREME COURT IN DISTRIBUTORS (BARODA) PVT. LTD. VS UNION OF INDIA (1985) REPORTED IN 22 TAXMAN 49. THE ISSUE WAS U/S 80M OF THE ACT WHICH IS NOT RELEVANT IN THE CONTEXT OF THIS ARGUMENT BUT TH E INTENTION CAN BE DRAWN FROM THE SAME AS HELD THAT ' TO PERPETUATE AN ERROR IS NO HEROISM. TO RECTIFY IT IS THE COMPULSION OF JUDICIAL CONSCIENCE . IN THIS WE DERIVE COMFORT AND STRENGTH FROM THE WISE AND INSPIRING WO RDS OF JUSTICE BRONSON IN PIERCE VS A.M Y DELAMETER - ' A JUDGE OUGHT TO BE WISE ENOUGH TO KNOW THAT HE IS FALLIBLE AND THEREFORE EVER READ Y TO LEARN, GREAT AND HONEST ENOUGH TO DISCARD ALL MERE PRIDE OF OPINION AND FOL LOW TRUTH WHEREVER IT MAY LEAD AND COURAGEOUS ENOUGH TO ACKNOWLEDGE HIS ERROR S'. THE LD. DR VEHEMENTLY SUPPORTED THE ORDER OF AO. ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 11 ON THE OTHER HAND THE LD. AR BEFORE US SUBMITTED TH AT THE AO FAILED TO DISCHARGE HIS ONUS OF ESTABLISHING THAT ANY EXPENDI TURE OVER AND ABOVE INDENTIFIED BY THE RESPONDENT WAS INCURRED IN EARNI NG DIVIDEND INCOME. HENCE, BASIC CONDITIONS FOR DISALLOWANCE U/S. 14A(1) WAS N OT SATISFIED. THE AO HAS ALSO FAILED TO PROVIDE ANY REASON FOR REJECTING THE BASIS ADOPTED BY THE RESPONDENT IN COMPUTING THE AMOUNT DISALLOWABLE U/S . 14A AND HAS ARBITRARILY AND INCORRECTLY APPLIED RULE 8D. DISALLOWANCE U/S. 14A(I) IS CALLED FOR ONLY IN RESPECT OF EXPENDITURE ACTUALLY INCURRED BY THE RES PONDENT DIRECTLY AND FOR THE OBJECT OF/IN RELATION TO OR IN CONNECTION WITH EARN ING EXEMPT INCOME. THUS, DISALLOWANCE U/S 14A OF THE ACT REQUIRES FACTUAL FI NDING BY THE AO OF INCURRENCE OF EXPENSES IN RELATION TO EARNING EXEMP T INCOME. THE AO HAS FAILED TO DISCHARGE HIS ONUS OF ESTABLISHING THE FA CT THAT ANY EXPENDITURE OVER AND ABOVE IDENTIFIED BY THE RESPONDENT WAS INCURRED IN EARNING DIVIDEND INCOME. RELIANCE IS PLACED ON THE FOLLOWING JUDGMEN TS :- CIT VS. WALFORT SHARE & STOCK BROKERS P LTD. (2010) 326 ITR 1 (SC) CIT VS. ASHISH JHUNJHUNWALA [GA NO.2990 OF 2013](CA L) DCIT VS. ALLAHABAD BANK [ITA NO.1282 OF 2012 DATED 01.06.2016 (KOL) ACIT VS. PAWAN KUMAR JHUNJHUNWALA (2016) 157 ITD 66 7 (KOL) CIT VS. HERO CYCLES LTD (2010) 323 ITR 518 (P&H) GODREJ AND BOYEE MFG. CO. LTD. VS. DCIT (2010) 328 ITR 81 (BOM) AS PER SEC. 14A(2), PROVISIONS OF RULE 8D COMES INT O PLAY ONLY WHEN THE AO RECORDS A FINDING THAT HE IS NOT SATISFIED WITH THE RESPONDENTS METHOD. THE AO HAS FAILED TO RECORD ANY FINDING/REASONS AS TO WHY HE WAS NOT SATISFIED WITH RESPONDENTS METHOD. HENCE, RECOURSE TO RULE 8D FOR COMPUTING DISALLOWANCE U/S. 14A WAS INCORRECT. RELIANCE IS PLACED ON THE F OLLOWING JUDICIAL PRONOUNCEMENTS WHERE IT HAS BEEN HELD THAT RULE 8D CANNOT BE ARBITRARILY APPLIED BY AO WITHOUT SHOWING HOW THE RESPONDENTS METHOD OF CALCULATION WAS INCORRECT. CIT VS. REI AGRO LTD. [ITAT 161 OF 2013 DTD. 23.12. 2003 CAL HC] INTEGRATED COAL MINING LTD VS. DCIT (2016) 67 TAXMA NN.COM 260 (KOL) ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 12 DAMODAR VALLEY CORPORATION VS. ACIT (2016) 157 ITD 415 (KOL) ACIT VS. CHAMPION COMMERCIAL CO. LTD. (2013) 152 TT J 241 (KOL) CIT VS. TAIKISHA ENGINEERING INDIA LTD. (2015) 370 ITR 272 (DEL) MAXOPP INVESTMENTS LTD VS. CIT (2012) 347 ITR 272 ( DEL) CIT VS. CONSOLIDATED PHOTO & FINVEST LTD. (2013) 35 8 ITR 310(DEL) AUCHTEL PRODUCTS LTD. VS. ACIT (2012) 52 SOT 39 (MU M) WITHOUT PREJUDICE TO ABOVE, ASSUMING THOUGH NOT ADM ITTING THAT RULE 8D OF THE IT RULES WAS AT ALL APPLICABLE IN THE CASE OF THE R ESPONDENT, THE QUANTUM OF DISALLOWANCE MADE BY AO IS INCORRECT OWING TO FOLLO WING REASONS:- I) AS REGARD COMPUTATION OF INTEREST DISALLOWED UND ER RULE 8D(2)(II) IN COMPUTING THE AMOUNT OF DISALLOWANCE OF RS.45,93 ,305/- THE AO WAS NOT JUSTIFIED IN DISALLOWING AN AMOUNT OF RS.38 ,28,749/- ON ACCOUNT OF INTEREST COST BY APPLYING RULE 8D. II) THE AO FAILED TO APPRECIATE THAT THERE WERE SUF FICIENT OWN FUNDS OUT OF WHICH THE INVESTMENT HAS BEEN MADE AND NOTHING H AS BEEN BROUGHT ON RECORD TO SOW THAT THE INVESTMENT WAS MA DE OUT OF BORROWED FUNDS. THE MAJOR PART OF FUNDING IN RESPEC T OF SAID INVESTMENTS WERE MADE OUT OF PROCEEDS RECEIVED BY T HE COMPANY ON ISSUE OF PREFERENTIAL ALLOTMENT OF EQUITY SHARES TO FIIS. [REFER PG. 264 OF THE PB]. THE BALANCE INVESTMENT WAS ALSO FUNDED BY THE RESPONDENT OUT OF INTERNAL ACCRUALS, RESERVE FUNDS AND PROCEEDS GENERATED ON SALE OF INVESTMENT MADE DURING THE YEA R. [REFER PAGE 60 OF THE PB EVIDENCING THE FACT THAT THERE WERE SU FFICIENT SURPLUS FUNDS PUT OF WHICH THE INVESTMENTS WERE MADE]. HENC E, NO DISALLOWANCE OF INTEREST COULD BE MADE BY INVOKING PROVISIONS OF SECTION 14A R.W. RULE 8D. III) RELIANCE IN THIS REGARD IS ALSO PLACED ON FOLL OWING DECISIONS WHEREIN IT HAS BEEN HELD THAT IN CASE THE APPELLANT HAS SUF FICIENT OWNED FUNDS NO DISALLOWANCE COULD BE MADE BY INVOKING RULE 8D:- CIT VS. MAX INDIA LTD (2016) 388 ITR 81 (P&H) RANIGANJ CO-OPERATIVE BANK LTD. VS. DCIT [ITA NO. 1 983 & 1984/KOL/2014 DTD. 02.09.2016] DCIT VS. EIH LTD. (2015) ITA NO. 426/KOL/2006 CIT VS. KARNATAKA STATE INDUSTRIAL & INFRASTRUCTURE DEVELOPMENT CORPORATION LTD. (2016) 237 TAXMN 240 ( KAR) CIT VS. UTI BANK LTD. (2013) 215 TAXMAN 8 (GUJ) ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 13 ACIT VS. MOHAN EXPORTS (P) LTD (2012) 138 ITD 108 ( DEL) CIT VS. HERO CYCLES LTD. (2010) 323 ITR 518 (P&H) CIT VS. RELIANCE UTILITIES & POWER LTD. (2009) 178 TAXMAN 135 (BOM) SHRENO LTD. VS. ACIT (2016) ITA NO. 1452/AHD/2012 D TD. 2712.2016] IV) AS JUDICIALLY HELD ONLY COMMON INTEREST EXPENSE S ARE REQUIRED TO BE ALLOCATED IN TERMS OF THE FORMULA UNDER RULE 8D(2)( I). IN OTHER WORDS, INTEREST EXPENSES AS ARE (A) DIRECTLY ATTRIBUTABLE TO BORROWINGS SPECIFICALLY USED FOR TAX EXEMPT INCOMES OR (B) ARE DIRECTLY ATTRIBUTABLE TO BORROWINGS SPECIFICALLY USED FOR EARNING TAXABLE INCOMES ARE REQUIRED TO BE EXCLUDED. IN THE CASE OF THE COMPANY, THERE A RE NO SPECIFIC BORROWINGS WHICH HAVE BEEN TAKEN FOR MAKING INVESTM ENTS OUT OF WHICH TAX EXEMPT INCOME HAS BEEN EARNED. V) THE INTEREST EXPENDITURE HAS BEEN PRIMARILY INCU RRED ON LOANS WHICH HAVE BEEN SANCTIONED/RAISED/USED FOR SPECIFIC PURPOSES AND/OR FOR MEETING WORKING CAPITAL REQUIREMENTS. [REFER PA GE 261 OF THE PB]. THE SAID LOANS WERE NEITHER AVAILABLE FOR UTILIZATI ON/NOR ACTUALLY UTILIZED FOR MAKING INVESTMENTS ON WHICH EXEMPT INCOME HAS B EEN EARNED. SINCE THE UTILIZATION OF SUCH LOANS HAVE RESULTED I N EARNING TAXABLE INCOME, INTEREST EXPENDITURE ON SUCH LOANS ARE NOT REQUIRED TO BE CONSIDERED FOR RULE 8D(2)9II) PURPOSES. RELIANCE IS PLACED ON THE DECISIONS OF THE KOLKATA ITAT IN THE CASE OF ACIT VS. CHAMPION COMMERCIAL CO. LTD. (2013) 152 TTJ 241 (KOL), DCT VS. REI AGRO LTD. (2013) 144 ITD 141 (KOL) AND THE DECISION OF THE CH ENNAI ITAT IN THE CASE OF ACIT VS. BEST & CROMPTON ENGINEERING LTD. (2013) 60 SOT 53 (CHENNAI). VI) WITHOUT PREJUDICE TO ABOVE, IN CASE ANY INTERES T EXPENDITURE IS AT ALL REQUIRED TO BE DISALLOWED, THE SAME HAS TO BE NETTE D OFF AGAINST THE INTEREST INCOME AND ONLY THE DIFFERENCE, IF ANY, CA N BE CONSIDERED FOR DISALLOWANCE OF PROPORTIONATE INTEREST COST. [RS.1, 78,79,108/- (I.E. ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 14 INTEREST EXPENDITURE OF RS.2,09,53,520/- (-) INTERE ST INCOME OF RS.30,74,412/-)]. RELIANCE IN THIS REGARD IS PLACED ON THE FOLLOWING JUDGMENT OF KOLKATA TRIBUNAL IN THE CASE OF DCIT VS . TRADE APARTMENT LTD.[ITA NO. 1277/KOL/2011]. RELIANCE IS ALSO PLACE D ON THE DECISION OF HON'BLE AHMEDABAD TRIBUNAL IN THE CASE OF ITO VS. K ARNAVATI PETROCHEM PVT. LTD. [ ITA NO.2228/AHD/2012 ] 4) WITHOUT PREJUDICE TO THE ABOVE, IT IS FURTHER SU BMITTED THAT WHILE CONSIDERING THE AVERAGE VALUE OF INVESTMENTS FOR TH E PURPOSE OF APPLYING RULE 8D(2)(II) AND 8D(2)(III), THE AO ERRED IN CONS IDERING ALL INVESTMENTS. I) IT IS HUMBLY SUBMITTED THAT INVESTMENTS WHICH HA VE NOT EARNED ANY EXEMPT DIVIDEND INCOME DURING THE RELEVANT PREVIOUS YEAR SHOULD NOT FORM PART OF DISALLOWANCE U/S. 14A. II) THE AO TOOK INTO CONSIDERATION THE AVERAGE VALU E OF INVESTMENT OF RS.13.23 CRORES, WHICH HAS NOT EARNED ANY DIVIDEND OR EXEMPT INCOME. III) IT IS HUMBLY SUBMITTED THAT FOR CONSIDERING AV ERAGE VALUE OF INVESTMENT, ONLY THOSE INVESTMENT FROM WHICH THE AS SESSEE EARNED DIVIDEND WAS REQUIRED TO BE CONSIDERED AND NOT THE TOTAL INVESTMENT AT THE BEGINNING OF THE YEAR AND AT THE END OF THE YEA R. [REFER PAGE 315 OF THE PB] IV) SIMILARLY, IN COMPUTING ANY DISALLOWANCE UNDER RULE 8D(2)(III), THE AO OUGHT TO HAVE CONSIDERED ONLY THOSE INVESTMENT F ROM WHICH THE ASSESSEE EARNED DIVIDEND AND NOT THE TOTAL INVESTME NT AT THE BEGINNING OF THE YEAR AND AT THE END OF THE YEAR. V) RELIANCE IN THIS REGARD IS PLACED ON THE DECISIO N OF JURISDICTIONAL KOLKATA TRIBUNAL IN THE CASE OF RANIGANJ CO-OPERAT IVE BANK LTD. VS. CIT (2016) ITA NO.1983 & 1984/KOL/2014 DATED 02.09.2016 , REI AGRO LTD. VS. DCIT (2013) 144 ITD 141 (KOL TRIB.) USHA MARTIN VENTURES LTD. VS. DCIT [ITA NO. 847/KOL/2013], INTEGRATED COAL MINING LTD. S. DICIT [ITA NO. 1146/KOL/2012], ALL BANK FINANE LTD. VS. JCIT [ ITA NO. 465/KOL/2013], ACB INDIA LTD. VS. ACIT (2015) 374 I TR 108 (DEL) AND CHEMINVEST LTD VS. CIT (2015) 378 ITR 33 (DEL). ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 15 5) WITHOUT PREJUDICE TO THE ABOVE, IT IS FURTHER SU BMITTED THAT WHILE CONSIDERING THE AVERAGE VALUE OF ASSETS FOR THE PUR POSE OF APPLYING RULE 8D(2)(II) AO ERRED IN CONSIDERING INCORRECT FIGURE OF AVERAGE VALUE OF TOTAL ASSETS AMOUNTING TO RS.83,68,33,876/- WHICH SHOULD BE RS.137,16,71,303/- [REFER PAGE 262 OF THE PB] 6) IN ADDITION TO ABOVE, IT IS HUMBLY SUBMITTED BEF ORE YOUR KINDSELF THAT THE RESPONDENT WHILE FILING THE RETURN FOR THE SUBSEQUE NT ASSESSMENT YEAR I.E., AY 2010-11 ADOPTED THE SAME METHOD/BASIS IN QUANTIF YING THE AMOUNT REQUIRED O BE DISALLOWED U/S. 114. THE AO HAS ACCEP TED THE METHOD ADOPTED BY THE RESPONDENT IN QUANTIFYING THE DISALL OWANCE U/S. 14A I.E., 10% OF THE EXPENDITURE INCURRED FOR THE EXECUTIVE C HAIRMAN OFFICE AT DELHI AND HAS NOT INFLICTED ANY DISALLOWANCE IN AY 2010-1 1 U/S. 14A READ WITH RULE 8D. 11. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS A LSO THE APPLICABLE LEGAL POSITION. THE GRIEVANCE OF THE DEPARTMENT IN THIS A PPEAL IS WITH REGARD TO DELETION OF ADDITION OF RS.45,93,305/- MADE UNDER T HE PROVISIONS OF RULE 8D R.W.S. 14A OF THE ACT. HOWEVER, THE SAME WAS DELET ED BY THE LEARNED CIT(A). WITH REGARD TO THE ALLEGATION THAT NO SATISFACTION WAS RECORDED BY THE AO BEFORE INVOKING THE PROVISIONS OF RULE 8D READ WITH SECTION 14A OF THE ACT, IN THIS REGARD WE FIND THAT THE ASSESSEE IN THE YEAR U NDER CONSIDERATION HAS EARNED DIVIDEND INCOME BUT NO EXPENSE WAS DISALLOWE D BY THE ASSESSEE IN ITS RETURN OF INCOME. THE ASSESSEE HAS MADE THE DISALLO WANCE DURING THE COURSE OF ASSESSMENT PROCEEDINGS WHEN THE ISSUE WAS RAISED BY THE AO. IT WAS ALSO SUBMITTED THAT THE ASSESSEE AT THE TIME OF ASSESSME NT HAS NOT FURNISHED NECESSARY DETAILS WITH REGARD TO THE SOURCE OF INVE STMENT. IT WAS ALSO OBSERVED BY THE AO THAT THE INVESTMENTS HAVE BEEN M ADE OUT OF THE MIXED BANK ACCOUNT OF THE ASSESSEE. HOWEVER ON PERUSAL OF THE ASSESSEES PAPER BOOK,WE FIND THAT ALL THE NECESSARY DETAILS WITH REGARD TO THE SOURCE OF INVE STMENT WAS DULY FURNISHED ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 16 TO THE AO AT THE TIME OF ASSESSMENT PROCEEDINGS AND THE NECESSARY DETAILS ARE PLACED AT PAGE 178 & 179 OF THE PAPER BOOK WHIC H READ AS UNDER:- DURING THE YEAR THERE HAVE BEEN TWO MAJOR INVESTMEN TS AS UNDER:- SL. NO. PARTICULARS AMOUNT (RS) 1. PURCHASE OF 83,305 EQUITY SHARES OF RS.1 EACH FULLY PAID UP OF CELSIA HOTELS P VT. LTD. (EARLIER KNOWN AS AMIT PROMOTERS & CONTRACTORS PVT. LTD) 12,50,00,805 2. 19,26,000 EQUITY SHARES OF RS.1 EACH OF PSK HOTELS AND RESORTS PVT. LTD. 5,20,02,000 THE PAYMENT WAS MADE AGAINST THE ABOVE INVESTMENTS AS UNDER:- DATE OF DEBIT IN THE BANK STATEMENT AMOUNT (RS) NAME OF BANK 20.05.2008 6,00,00,000 ABN AMRO BANK 14.05.2008 2,50,00,000 -DO- 05.06.2008 1,00,00,000 -DO- 12.06.2008 3,00,00,000 -DO- 805 -DO- TOTAL PAID 12,50,00,805 17.10.2008 5,20,00,000 HDFC BANK 11.04.2009 2,000 ABN AMRO BANK TOTAL PAID FOR SL. NO. 2 ABOVE 5,20,02,000 COPIES OF THE RELEVANT BANK STATEMENT ARE ENCLOSED. THE FUNDS TO THE ABN AMRO BANK WERE EARLIER TRANSFE RRED FROM HDFC BANK LTD. AND STATE BANK OF INDIA. THE RELEVANT BAN K STATEMENT FOR THAT TRANSACTION IS ALSO ENCLOSED. PLEASE NOTE THAT DURING THE YEAR THE COMPANY MADE A PREFERENTIAL ISSUE AND ALLOTMENT OF 10,25,000 EQUITY SHARES OF RS.10 E ACH AT A PREMIUM OF RS.90 PER EQUITY SHARE AGGREGATING TO RS.100 PER EQ UITY SHARE TO THE FOLLOWING FIIS: NAME OF FII NO. OF EQUITY SHARES AMOUNT (RS) ELARA INDIA OPPORTUNITIES FUND LTD. 7,00,000 7, 00,00,000 SOPHIA GROWTH 3,25,000 3,25,00,000 TOTAL 10,25,000 10,25,00,000 THE ABOVE ISSUE AND ALLOTMENT WAS MADE AFTER OBTAIN ING APPROVAL FROM THE GOVERNMENT OF INDIA, MINISTRY OF FINANCE, DEPAR TMENT OF ECONOMIC ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 17 AFFAIRS, FIPB UNIT AS PER THEIR APPROVAL LETTER NO. FC.I.225 (2008)/ 258(2008) DATED NOVEMBER, 24, 2008. A COPY OF THE S AID APPROVAL LETTER IS ENCLOSED. THE SAID APPROVAL LETTER CLEARLY INDIC ATED THAT THE PROCEEDS OF THE ISSUE WERE REQUIRED TO BE UTILIZED FOR DOWNS TREAM INVESTMENT IN HOTEL / RESTAURANT BUSINESS IN INDIA. THUS, THE PRO CEEDS OF RS.10,25,00,000 WERE FULLY UTILIZED FOR THE ABOVE I NVESTMENTS, WHICH IN THE INTERIM WAS FINANCED OUT OF LONG TERM INTERNAL WORKING CAPITAL. THIS HAS ALSO BEEN STATED IN NOT 3 IN SCHEDULE 18 TO THE ACCOUNTS. THE PROCEEDS AGAINST THE ABOVE ISSUE WERE RECEIVED AT OUR HDFC BANK LTD. ON AUGUST, 04, 2008 AND DECEMBER 03,2008 RESPE CTIVELY. COPIES OF THE RELEVANT BANK STATEMENT ARE ENCLOSED. THUS, THE NET INCREASE OF RS.14,88,80,878 IN INVEST MENTS WAS FINANCED AS UNDER: 1. PROCEEDS OF 10,25,000 EQUITY SHARES OF 10/-EACH RS.10,25,00,000 2. SALE OF INVESTMENTS MADE IN EARLIER YEARS AND INTERNAL ACCRUALS ARISING OUT OF CASH PROFITS FROM BUSINESS OPERATIONS RS. 4,63,80,878 TOTAL RS.14,88,80,878 11.1 WE ALSO FIND IN THE IMMEDIATE PRECEDING ASSESS MENT YEAR THAT INVESTMENT OF RS. 7.84 CRORES HAS BEEN SHOWN WHEREA S THE SHAREHOLDERS FUND WAS SHOWN FOR RS. 101.21 CRORES. THUS FROM THE ABO VE IT IS CLEAR THAT THERE WAS SUFFICIENT OWNED FUND AVAILABLE WITH THE ASSESS EE FOR MAKING THE INVESTMENT. NOW THE ISSUE ARISES WITH REGARD TO THE INVESTMENT MADE DURING THE YEAR WHETHER IT WAS OUT OF THE BORROWED FUND OR OWN FUNDS OF THE ASSESSEE. FROM THE AFORESAID DETAILS SUBMITTED BY T HE LEARNED AR WHICH ARE PLACED ON PAGES 178 AND 179 OF THE PAPER BOOK THE A SSESSEE HAS CLARIFIED THE SOURCES OF THE FUND FOR THE INVESTMENTS MADE DURING THE YEAR. IN VIEW OF ABOVE WE FIND THAT NO DISALLOWANCE UNDER RULE 8D(II ) IS WARRANTED. WHILE HOLDING SO WE RELY IN THE CASE OF CIT VERSUS MAX IN DIA LTD REPORTED IN 388 ITR 81 WHERE THE HONBLE PUNJAB AND HARYANA HIGH COURT HAS HELD AS UNDER : THE TRIBUNAL WAS CERTAINLY ENTITLED TO DRAW SUCH AN INFERENCE. IT IS A REASONABLE INFERENCE. THE TRIBUNAL ADDRESSED ITSELF TO THE CORRECT QUESTION, NAMELY, TO DETERMINE IF THERE WAS ANY NEXUS BETWEEN THE ADDITIONAL INVESTMENTS WITH THE INTEREST FREE BORROWED FUNDS. THE FOLLOWING FINDINGS OF FACT OF THE TRIBUNAL ARE OF VITAL IMPORTANCE: THE A SSESSEE HAD DURING THE RELEVANT TIME INVESTED AN AGGREGATE AMOUNT OF RS.15 2.05 CRORES OUT OF WHICH AN AMOUNT OF RS. 28.18 CRORES WAS MADE IN SHARES OF FOREIGN COMPANIES. THE ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 18 DIVIDEND FROM THE FOREIGN COMPANIES WAS TAXABLE. TH IS, THEREFORE, LEFT AN AMOUNT OF RS. 123.87 CRORES WHICH YIELDED DIVIDENDS WHICH WERE EXEMPT FROM INCOME TAX. THE ASSESSEE REALIZED 117.97 CRORES FRO M THE SALE OF ITS INVESTMENTS IN THE EARLIER YEARS; RS. 46 CRORES WAS GENERATED FROM THE ASSESSEE'S OPERATING ACTIVITIES; RS. 6.87 CRORES WA S RECEIVED FROM SALE OF FIXED ASSETS AND THERE WAS AN OPENING CASH BALANCE OF RS. 8.90 CRORES. THE AGGREGATE OF SURPLUS FUNDS ON WHICH THERE WAS NO IN TEREST BURDEN WAS RS. 179.74 CRORES. THIS AMOUNT WAS AVAILABLE DURING THE RELEVANT PREVIOUS YEAR. THUS SUCH FUNDS WERE IN EXCESS OF THE INVESTMENT OF RS. 123.87 CRORES. IN ADDITION THERETO THE ASSESSEE HAD GENERATED CASH FR OM ITS FINANCING ACTIVITIES OF AN AGGREGATE AMOUNT OF RS. 24.24 CRORES. IT HAD PURCHASED FIXED ASSETS AGGREGATING ONLY TO RS. 54.62 CRORES DURING THE REL EVANT PERIOD. THE FINDINGS, THEREFORE, THAT THE ASSESSEE HAD SUFFICIENT INTERES T FREE FUNDS TO MAKE THE INVESTMENT YIELDING TAX FREE RETURNS CANNOT BE FAUL TED. THE ABSENCE OF BANK BOOKS IN THESE CIRCUMSTANCES WOULD NOT JUSTIFY AN A DVERSE INFERENCE BEING DRAWN FOR WHICHEVER WAY THE MATTER IS VIEWED, THE A SSESSEE HAD SUFFICIENT FUNDS AVAILABLE TO IT ON WHICH NO INTEREST WAS PAYA BLE. THIS BRINGS US TO THE LEGAL ISSUE OF A PRESUMPTION TO BE MADE WHEN THERE IS A POOL OF FUNDS WHICH INCLUDE INTEREST BEARING FUNDS AND INTEREST FREE FU NDS. IN VIEW OF ABOVE, WE FIND THAT NO DISALLOWANCE FOR THE INTEREST IS WARRANTED UNDER THE PROVISIONS OF RULE 8D READ WITH SECTION 1 4A OF THE ACT. 11.2 ADMITTEDLY, THE ASSESSEE MADE NO DISALLOWANCE IN ITS RETURN OF INCOME BUT DURING ASSESSMENT PROCEEDINGS THE ASSESSEE HAS OFFERED DISALLOWANCES U/S 14A OF THE ACT ALONG WITH SUPPORTING DOCUMENTS. BUT ON PERUSAL OF AO'S ORDER, WE FIND THAT NO DEFECT HAS BEEN MADE OUT BY THE AO IN THE AMOUNT OF DISALLOWANCE OFFERED BY THE ASSESSEE. IT IS ALSO IM PORTANT TO NOTE THAT ON THE SAME REASONING THE DISALLOWANCE MADE BY THE ASSESSE E IN THE SUBSEQUENT ASSESSMENT YEAR I.E. 2010-11 WAS DULY ADMITTED BY T HE AO. THUS, WE FIND NO ADDITIONAL DISALLOWANCE IS REQUIRED TO BE MADE UNDE R THE PROVISIONS OF RULE 8D(III) READ WITH SECTION 14A OF THE ACT. 11.3 THE ALLEGATION OF THE LD. DR THAT THE RELIEF H AS BEEN GIVEN BY THE LD CIT(A) ON THE BASIS OF ADDITIONAL EVIDENCES DOES NO T HOLD GOOD AS NO SUCH GROUND IS ARISING FROM THE APPEAL FILED BY THE REVE NUE. 11.4 IN VIEW OF ABOVE, WE HOLD THAT NO SATISFACTION AS REQUIRED UNDER THE PROVISIONS OF SECTION 14A OF THE ACT FOR MAKING THE DISALLOWANCE WAS ITA NO.2774/KOL/2013 A.Y 2009-10 DCIT CIR-4, KOL VS. M/S ROSSELL INDIA LTD. PAGE 19 RECORDED. THUS THE ADDITIONS MADE BY THE AO UNDER T HE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULE S ARE NOT SUSTAINABLE. AS SUCH WE FIND NO INFIRMITY IN THE ORDER OF LD CIT(A) . HENCE THIS GROUND OF REVENUES APPEAL IS DISMISSED. 12. THE LAST ISSUE RAISED BY THE REVENUE IN THIS AP PEAL IS THAT LD CIT(A) ERRED IN DELETING THE DISALLOWANCES MADE UNDER SECT ION 14A OF THE ACT WHILE COMPUTING THE BOOK PROFIT U/S 115JB OF THE ACT. 13. AT THE OUTSET, WE FIND THAT THE ADDITIONS MADE BY THE AO UNDER RULE 8D READ WITH SECTION 14A OF THE ACT HAS BEEN DELETED B Y OUR ORDER VIDE PARA-11 TO 11.2 OF THIS ORDER. THEREFORE, THE INSTANT ISSUE DOES NOT REQUIRE ANY ADJUDICATION. HENCE, THE GROUND RAISED BY REVENUE I S NOT MAINTAINABLE AND HENCE DISMISSED. 14. IN THE RESULT, REVENUES APPEAL STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT 15 /03/2017 SD/- SD/- (ABY. T. VARKEY) (WASEEM AHMED) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) KOLKATA, *DKP !- 15 / 03 /201 7 / COPY OF ORDER FORWARDED TO:- 1. /APPELLANT-DCIT, CIRCLE-4, P-7, CHOWRINGHEE SQUARE, KOLKATA-69 2. /RESPONDENT-M/S ROSSELL INDIA LTD., 21/1A/3, DARGA ROAD, JINDAL TOWERS, BLOCK B, 4 TH FLOOR, PARK CIRCUS, KOLKATA-17 3. ) *+, , - / CONCERNED CIT KOLKATA 4. , , -- / CIT (A) KOLKATA 5.01233*+, , *+ , / DR, ITAT, KOLKATA 6.26789 / GUARD FILE. BY ORDER/ ,, /TRUE COPY/ / , *+ ,