Esthetic Finvest Private Limited, Vapi V. The ACIT, Vapi Circle, Vapi

ITA 2942/AHD/2015

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 2082 (ITAT-SURAT)
• Duration Of Justice: 2 year(s) 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2007-2008
• Appeal Filed On: 21-10-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R KAVITHA
• Keywords: Business expenditure; Earning of tax free income; Rule 8D
• Section: 14A; 36 (1) (iii)

Judgement Text

ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 1 OF 28 , , IN THE INCOME TAX APPELLATE TRIBUNAL SURAT BENCH, SURAT . . , . . , BEFORE SHRI C.M.GARG, JUDICIAL MEMBER AND SHRI O.P.MEENA, ACCOUNTANT MEMBER S. N. ORDER NO. APPELLANT / RESPONDENT 1 ITA NO.2942/AHD/2015 FOR A.Y. 2007-08 ESTHETIC FINVEST PVT. LTD. SHED NO. A-2/1 GIDC AREA VAPI PAN:AAACE5228M VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - VAPI 2 ITA NO.1325/AHD/2016 FOR A.Y. 2008-09 ESTHETIC FINVEST PVT. LTD. SHED NO. A-2/1 GIDC AREA VAPI PAN: AAACE5228M VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - VAPI 3 ITA NO.2943/AHD/2015 FOR A.Y. 2011-12 ESTHETIC FINVEST PVT. LTD. SHED NO. A-2/1 GIDC AREA VAPI PAN: AAACE5228M VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - VAPI /ASSESSEE BY SHRI SAURABH N . SOPARAKAR SENIOR ADVOCATE WITH SMT. URVASHI SHODHAN ADVOCATE /RESPONDENT BY MS. R. KAVITHA JCIT, SR. D.R. / DATE OF HEARING: 09.03.2018 /PRONOUNCEMENT DATE 26 .04.2018 /O R D E R PER O. P. MEENA, ACCOUTANT MEMBER: 1. THESE ARE THREE APPEALS FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE SEPARATE ORDERS OF LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)- VALSAD [IN SHORT THE CIT(A)] DATED 03.08.2015 FOR THE ASSESSMENT YEAR 2007-08 , DATED 02.03.2016 ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 2 OF 28 FOR THE ASSESSMENT YEAR 2008-09, AND DATED 04.08.2015 FOR THE ASSESSMENT YEAR 2011-12. THE ASSESSMENT YEAR WISES DECISION IS BEING GIVEN AS UNDER: I.T.A. NO. 2942/AHD/2015 A.Y. 2007-08 BY ASSESSEE. 2. GROUND NO. 1 STATES THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN UPHOLDING THE ACTION OF THE INCOME TAX OFFICER IN MAKING DISALLOWANCE OF EXPENSES AMOUNTING TO RS. 56,07,233 UNDER SECTION 36(I) (III) AND UNDER SECTION 14A READ WITH RULE 8D OF INCOME-TAX RULES, 1962. 3. GROUND NO. 2 STATES THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, , THE LD. CIT (A) ERRED IN DISALLOWING INTEREST PAID ON FUNDS BORROWED UNDER SECTION 36(I)(III) OF THE ACT BEING NOT USED FOR BUSINESS PURPOSE. 4. GROUND NO. 1 & 2 AS MENTIONED ABOVE ARE INTERLINKED AND REVOLVES AROUND SAME AMOUNT OF RS. 56.07,223/- AND SAME ISSUE HENCE, BEING DEALT WITH TOGETHER. 5. SUCCINCT FACTS ARE THAT THE ASSESSEE HAS COMPUTED TOTAL LOSS AT RS. 56,44,750. PERUSAL OF PROFIT & LOSS ACCOUNT SHOWED THAT THAT ONLY INCOME ON ACCOUNT OF DIVIDEND IS CREDITED AT RS.7,11,800. IT HAS CLAIMED TOTAL EXPENSES AT RS. 56,44,749 ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 3 OF 28 UNDER THE VARIOUS HEADS INCLUDING INTEREST OF RS. 56,07,233 PAID ON BORROWED FUNDS UTILIZED FOR INVESTMENT ON WHICH DIVIDEND INCOME OF RS.7,11,800 HAS BEEN CREDITED TO PROFIT & LOSS ACCOUNT AND CLAIMED EXEMPT UNDER SECTION 10(34) OF THE ACT. THEREFORE, THE ASSESSEE WAS ASKED TO FURNISH WORKING OF DISALLOWANCE UNDER RULE 8D. ACCORDINGLY, THE ASSESSEE HAS FILED WORKING OF DISALLOWANCE OF EXPENSES UNDER RULE 8D AT RS. 55,59,143. THE AO THEREFORE, DISALLOWED THE SAME U/S.14A WHICH RESULTED REDUCTION IN LOSS TO RS. 85,607 FROM 56,44,780 CLAIMED BY THE ASSESSEE. 6. BEING AGGRIEVED, THE ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT (A). BEFORE WHOM, IT WAS SUBMITTED THAT THE MAIN OBJECT OF ASSESSEE COMPANY IS TO INVESTMENT IN SECURITIES, LENDING AND BORROWING OF FUNDS ETC. THEREFORE, DIVIDEND AND INTEREST INCOME CONSTITUTE THE MAIN SOURCE OF INCOME, IN THE NORMAL COURSE OF BUSINESS IN LINE WITH OBJECT CLAUSE OF MEMORANDUM OF ASSOCIATION OF THE COMPANY. ACCORDINGLY, THE PROVISIONS ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 4 OF 28 CONTAINED IN SECTION 14A ARE NOT APPLICABLE. IT WAS NOTICED THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS. 7,11,800/- I.E. [RS. 24,300 FROM CHENNAI PETROLEUM+ RS. 6,87,500 FROM UNITED PHOSPHORUS LTD.] WHICH HAS BEEN CLAIMED AS EXEMPT UNDER SECTION 10(34) OF THE ACT. DURING THE YEAR, THE ASSESSEE COMPANY HAS PROVIDED INTEREST OF RS. 56,07,233 ON THE BORROWED FUNDS OF RS. 7.30 CRORES UTILIZED TOWARDS INVESTMENT WITH [ RS. 4 CRORE BORROWED FUNDS FROM BHARUCH ENVIRO INFRASTRUCTURE LTD. TO SEARCH ENVIRO LTD. + RS. 4 CRORE + RS. 3 CRORE BORROWED FROM ENVIRO TECHNOLOGY LTD. TO SEARCH ENVIRO LTD. AND RS. 30 LAKHS BORROWED FROM ENVIRON TECHNOLOGY LTD. TO SEARCH ENVIRON LTD.] .OUT OF TOTAL INVESTMENT OF RS. 17.30 CRORES , RS. 13.97 CRORES HAVE BEEN INVESTMENT IN SUBSIDIARY COMPANIES OF THE ASSESSEE. THESE INVESTMENTS CLAIMED TO HAVE BEEN FOR ACQUIRING CONTROLLING INTEREST. HENCE, NO DISALLOWANCE OF INTEREST WAS REQUIRED TO BE MADE UNDER SECTION 36(1) (III) OF THE ACT IN THE LIGHT OF DECISION IN THE CASE OF VIDYUT INVESTMENT ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 5 OF 28 LTD. V. ITO [20076] 10 SOT 284(DELHI) AND OTHERS AS REPRODUCED IN APPELLATE ORDER. THEREFORE, IT WAS CLAIMED THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE TO EARN DIVIDEND INCOME CLAIMED EXEMPT UNDER SECTION 10(34) AND THEREFORE, APPLICATION OF SECTION 14A DOES NOT ARISE. WITHOUT PREJUDICE TO ABOVE, THE ASSESSEE HAS CLAIMED THAT DISALLOWANCE IF ANY SHOULD BE RESTRICTED TO PROPORTIONATE TO ACTUAL EXPENDITURE OF RS. 35,515 DEBITED IN PROFIT & LOSS ACCOUNT. IT WAS SUBMITTED THAT RULE 8D IS NOT APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. THE CIT (A) OBSERVED THAT IT IS AN ADMISSIBLE FACT THAT THE APPELLANT HAS BORROWED FUNDS, WHICH WERE INVESTED IN THE GROUP COMPANIES AND EARNED EXEMPT DIVIDEND INCOME. THE APPELLANT FLOATED NUMBER OF SUBSIDIARY COMPANIES AND FUNDS ROUTED FROM ONE SUBSIDIARY COMPANY TO ANOTHER SUBSIDIARY COMPANY OF BORROWED FUNDS OF RS. 14 CRORES AND ALMOST INVESTED IN THE SUBSIDIARY COMPANY ON WHICH AN AMOUNT OF RS. 56, 07,233 HAS BEEN PAID AS INTEREST. WHEN ASKED ABOUT THE BUSINESS ACTIVITY OF ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 6 OF 28 THE SUBSIDIARY COMPANIES AS WELL AS PURPOSE OF INVESTMENT, IT WAS EXPLAINED THAT INVESTMENT IS MADE TO GAIN CONTROL ON THE SUBSIDIARY COMPANY. THEREFORE, CIT (A) OPINIONED THAT INTEREST BEARING FUNDS HAVE BEEN USED IN COMPANY WHERE NO BUSINESS ACTIVITIES IN DONE HENCE, PROVISION OF SECTION 36(1) (III) ARE ATTRACTED TO DISALLOW INTEREST EXPENSES. THE AO HAS CALCULATED DISALLOWANCE AS PER RULE 8D BUT THE ASSESSEE CONTENDED THAT RULE 8D IS NOT APPLICABLE. THE CIT (A) OBSERVED THAT HE IS INCLINED TO ACCEPT THAT THE APPLICATION OF RULE 8D IS NOT APPLICABLE BUT THE DISALLOWANCE CAN BE CALCULATED IN THE MANNER PROVIDED UNDER RULE 8D. SO KEEPING IN VIEW THE LEGAL POSITION AS WELL AS FACTS INVOLVED THE INTEREST EXPENSES OF RS. 56,07,233 WE HELD NOT TO BE ALLOWABLE AS DEDUCTION. THEREFORE, THE GROUND CONCERNING DISALLOWANCE OF INTEREST WAS DISMISSED. 7. BEING, AGGRIEVED THE ASSESSEE FILED THIS APPEAL BEFORE THE TRIBUNAL. THE LEARNED SENIOR ADVOCATE CONTENDED THAT NO DISALLOWANCE UNDER RULE 8D BE MADE AS RULE 8D IS APPLICABLE ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 7 OF 28 FROM ASSESSMENT YEAR 2008-09. AS HELD BY GODREJ AND BOYCE MFG. CO. LTD. V. DEPUTY CIT [2010] 328 ITR 81 (BOM) AND OTHER HIGH COURTS. THE DISALLOWANCE IN RELATION TO EXEMPT INCOME U/S. 14A BE RESTRICTED TO ACTUAL AMOUNT OF EXPENDITURE OF RS. 37,515 DEBITED TO PROFIT & LOSS ACCOUNT .THE INVESTMENT OF RS. 13.97 CRORES MADE IN SUBSIDIARY COMPANIES IS MADE TO ACQUIRE CONTROLLING INTEREST ON WHICH NO DIVIDEND INCOME HAS BEEN EARNED, HENCE, NO DISALLOWANCE IN RESPECT OF THESE INVESTMENT IS REQUIRED TO BE MADE. FURTHER, IT WAS CLAIMED THAT DISALLOWANCE SHOULD NOT EXCEEDED DIVIDEND INCOME EARNED DURING THE YEAR UNDER CONSIDERATION. THE LEARNED SENIOR ADVOCATE ALSO SUPPORTED HIS BY PLACING RELIANCE ON VARIOUS PRONOUNCEMENTS AS DISCUSSED IN ASSESSMENT YEAR 2008-09 IN THIS ORDER. THEREFORE, SAME ARE NOT BEING DISCUSSED HERE TO AVOID REPETITION. 8. PER CONTRA, THE LD. SR. DR SUPPORTED THE ORDER OF LOWER AUTHORITIES AND MADE SAME ARGUMENT NOT AS MADE FOR THE ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 8 OF 28 ASSESSMENT YEAR AS DISCUSSED BY US WHILE DEALING APPEAL FOR ASSESSMENT YEAR 2008-09 IN THIS ORDER. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT RULE 8D IS NOT APPLICABLE FOR THIS YEAR AS IT IS APPLICABLE FROM ASSESSMENT YEAR 2008-09. HOWEVER, DISALLOWANCE U/S. 14A IN RELATION TO EXEMPT INCOME HAVE TO BE WORKED OUT FOR THIS ASSESSMENT YEAR. AS OBSERVED BY THE CIT (A) THAT DISALLOWANCE CAN BE WORKED OUT IN THE MANNER LAID DOWN UNDER RULE 8D THOUGH IT IS NOT APPLICABLE. AS WE HAVE NOTED THE INVESTMENT IN SUBSIDIARY COMPANIES IS REQUIRED TO BE CONSIDERED FOR DISALLOWANCE AS HELD BY HON`BLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD. V. CIT [2018] 91 TAXMANN.COM 154(SC) AS DISCUSSED IN THE FINDINGS GIVEN FOR ASSESSMENT YEAR 2008-09 IN THIS APPELLATE ORDER BY US. THEREFORE, BASED ON REASONING AS GIVEN FOR A.Y. 2008-09, WE ARE OF THE VIEW THAT DISALLOWANCE U/S. 14A NEEDS TO BE MADE. CONSIDERING THE TOTALLY OF FACTS AND TAKING IN TO ACCOUNT THAT ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 9 OF 28 INTEREST BEARING FUNDS HAVE BEEN UTILIZED IN INVESTMENT IN SUBSIDIARY COMPANIES ON WHICH NO DIVIDEND INCOME HAS BEEN EARNED DURING THE YEAR UNDER CONSIDERATION, BUT A HUGE AMOUNT OF INTEREST OF RS. 56,07,233 HAS BEEN INCURRED BY THE ASSESSEE. THEREFORE, CONSIDERING THE JUDICIAL PRONOUNCEMENTS BY HON`BLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT PVT. LTD. V. CIT [2015] 59 TAXMANN.COM 295 (DELHI) AND HON`BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF PR. CIT V. EMPIRE PACKAGING PVT. LTD. [2017] 81 TAXMANN.COM 108 (P&H), WHEREIN IT WAS HELD THAT DISALLOWANCE U/S. 14A CANNOT EXCEED THE EXEMPT INCOME. WE DEEM IT FIT TO RESTRICT THE DISALLOWANCE TO EXEMPT INCOME I.E. DIVIDEND INCOME OF RS. 7,11,800/- EARNED DURING THE YEAR UNDER CONSIDERATION. IN VIEW OF THIS MATTER, GROUND NO. 1 AND 2 OF APPEAL OF THE ASSESSEE ARE PARTLY ALLOWED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR A.Y. 2007-08 IS PARTLY ALLOWED. I.T.A. NO. 1325/AHD/2016 A.Y. 2008-09 BY THE ASSESSEE: ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 10 OF 28 11. THE SOLITARY ISSUE RAISED IN THIS APPEAL RELATES TO CONFIRMING DISALLOWANCE OF RS. 27,28,532 U/S. 14A OF THE ACT READ WITH RULE 8D OF INCOME-TAX RULES, 1962. 12. FACTS APROPOS OF THIS GROUND ARE THAT THE ASSESSEE HAS DEBITED INTEREST EXPENSES ON BORROWED FUNDS AND MADE INVESTMENT IN SHARES OF GROUP COMPANIES I.E. INVESTED IN INSTRUMENTS THAT YIELDED EXEMPT INCOME. THEREFORE, THE ASSESSEE WAS ASKED TO EXPLAIN THE APPLICABILITY OF SECTION 14A OF THE ACT. IT WAS CONTENDED THAT THAT THE INVESTMENT IS MADE FOR BUSINESS PURPOSE AND THERE IS NO EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME, HENCE, THE PROVISIONS OF SECTION 14A DO NOT APPLY AS THE INVESTMENT WAS MADE IN RESPECTIVE COMPANIES TO ACQUIRE THE CONTROLLING INTEREST. HOWEVER, THE AO WAS OF THE VIEW THAT INVESTMENT YIELDED AND SHALL YIELD EXEMPT INCOME. MOREOVER, THE ASSESSEE COMPANY IS IN THE BUSINESS OF INVESTING AND THEREFORE, ARGUMENT OF THE ASSESSEE THAT INVESTMENT ARE MADE TO GAIN STRATEGIC CONTROL DO NOT HOLD GOOD. THEREFORE, THE ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 11 OF 28 INVESTMENT MADE IN COMPANY, WHICH MIGHT LATER DATE, ACCRUE DIVIDEND INCOME, WHICH IS EXEMPT IN NATURE, AND ATTRACT THE PROVISIONS OF SECTION 14A. THE AO, HOWEVER, COMPUTED THE DISALLOWANCE AS PER THE PROVISIONS OF SECTION 14A READ WITH RULE 8D AT RS.27,28,532 BY INVOKING FORMULA GIVEN IN RULE 8D AS UNDER: A=INTEREST EXPENDITURE = 1,14,21,670, B=AVERAGE VALUE OF INVESTMENT RS. 17,29,51,591 AND C= AVERAGE TOTAL ASSETS = RS. 28,04, 00,229 AND 0.5% OF AVERAGE INVESTMENT 8,64,758 I.E. BEING 0.5% OF AVERAGE INVESTMENT SHOWN IN BALANCE SHEET. A*B/C=1,14,21,670*17,29,51,591/28,04,00,229=18,63,774 +AVERAGE INVESTMENT RS. 8,64,758= TOTAL DISALLOWANCE RS. 27,28,532 ACCORDINGLY, THE AO MADE DISALLOWANCE OF RS.27,28,532 U/S. 14A READ WITH RULE 8D. ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 12 OF 28 6. BEING, AGGRIEVED THE ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT (A). THE ASSESSEE RAISED SAME ARGUMENT BEFORE THE CIT (A) AS MADE BEFORE THE AO. THE APPELLANT SUBMITTED THAT THE MAIN OBJECT OF ASSESSEE COMPANY IS TO INVESTMENT IN SECURITIES, LENDING AND BORROWING OF FUNDS ETC. THEREFORE, DIVIDEND AND INTEREST INCOME CONSTITUTE THE MAIN SOURCE OF INCOME, IN THE NORMAL COURSE OF BUSINESS IN LINE WITH OBJECT CLAUSE OF MEMORANDUM OF ASSOCIATION OF THE COMPANY AND ACCORDINGLY THE PROVISIONS CONTAINED IN SECTION 14A ARE NOT APPLICABLE. THE ASSESSEE ALSO RELIED IN THE CASE OF VIDYUT INVESTMENT LTD. V. ITO [20076] 10 SOT 284(DELHI) AND OTHERS AS REPRODUCED IN APPELLATE ORDER. THEREFORE, IT WAS CLAIMED THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE TO EARN DIVIDEND INCOME WHICH IS CLAIMED EXEMPT UNDER SECTION 10(34) AND THEREFORE, APPLICATION OF SECTION 14A DOES NOT ARISE. WITHOUT PREJUDICE TO ABOVE, THE ASSESSEE HAS CLAIMED THAT DISALLOWANCE IF ANY WERE TO BE MADE SHOULD NOT EXCEED RS. 4,022 BEING 2% OF DIVIDEND INCOME CLAIMED AS EXEMPT. FURTHER, THE MAXIMUM AMOUNT OF DISALLOWANCE SHOULD NOT EXCEED TO BE RS.87,263 AS PER SECTION 14A READ WITH RULE 8D WITH REFERENCE TO INVESTMENT MADE IN WHICH DIVIDEND HAD YIELDED (PB-35) WHILE CONSIDERING THE ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 13 OF 28 INVESTMENT IN DIVIDEND YIELDING. FURTHER, AGAIN SUBMITTED THAT DISALLOWANCE SHOULD NOT EXCEED EXEMPT INCOME OF DIVIDEND INCOME OF RS. 2,01,100 BEING DIVIDEND INCOME EARNED DURING THE YEAR (PB-6) (AS HELD BY CHANDIGARH TRIBUNAL PUNJAB STATE CO-OPERATIVE MARKETING PB-34 AND J K INVESTMENT PVT. LTD. V. CIT [2015] 59 TAXMANN.COM 295 (DELHI)). FURTHER, IT WAS SUBMITTED THAT DISALLOWANCE SHOULD NOT EXCEED RS. 2,11,869 AS WORKED OUT ON THE BASIS OF INVESTMENT IN SHARES IN QUOTED COMPANIES FURTHER, MORE IT WAS SUBMITTED THAT DISALLOWANCE SHOULD NOT EXCEED RS. 10,09,479 AS WORKED OUT BY APPLYING PROVISIONS OF SECTION 14A READ WITH RULE 8D WHILE CONSIDERING QUOTED INVESTMENT UNDER RULE 8D (II) AND COMPUTING DISALLOWANCE UNDER RULE 8D (II) HAS CONSIDERED THE VALUE OF INVESTMENT OF ENTIRE INVESTMENT. THE CIT (A) OBSERVED THAT IT IS AN ADMISSIBLE FACT THAT THE APPELLANT HAS BORROWED FUNDS, WHICH WERE INVESTED IN THE GROUP COMPANIES AND EARNED EXEMPT DIVIDEND INCOME. HOWEVER, THE CIT (A) NOTED THAT THE ASSESSEE SUO-MOTO DISALLOWED A MEAGRE SUM OF RS. 1,366 AS AGAINST EXEMPT INCOME WHICH CONFIRMS THAT PROVISION OF SECTION 14A READ WITH RULE 8D ARE APPLICABLE. THE APPELLANT PLEADS THAT DISALLOWANCE SHOULD BE OUT OF FOUR OPTION GIVEN. KEEPING IN THE ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 14 OF 28 FACTS OF THE CASE , THE CIT (A) HAS CONFIRMED THE DISALLOWANCE OF RS. 27,28,532 MADE BY APPLYING PROVISIONS OF SECTION 14A READ WITH RULE 8D. 7. BEING, AGGRIEVED THE ASSESSEE FILED THIS APPEAL BEFORE THE TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS. 2,01,000 FROM INVESTMENT IN THE SHARES OF CHENNAI PETROLEUM LTD. AND ADVANTA INDIA LTD. IN WHICH INVESTMENT WAS MADE IN PAST OUT OF OWN FUNDS AND INTEREST-FREE BORROWED FUNDS. DURING THE PREVIOUS YEAR RELEVANT A.Y. 2008-09, THE COMPANY HAS NOT MADE ANY NEW INVESTMENT. THE ASSESSEE COMPANY HAS MADE STRATEGIC INVESTMENT OF 80.87% OF ITS TOTAL INVESTMENT IN SHARES OF SUBSIDIARY COMPANY. THE INTEREST EXPENDITURE OF RS. 1,36,84,855 WAS INCURRED ON BORROWED FUNDS BUT SAID BORROWED FUNDS WERE PARTLY UTILIZED IN INVESTMENT MADE IN SUBSIDIARY COMPANY FOR ACQUIRING CONTROLLING INTEREST FOR WHICH THE ASSESSEE HAS NOT EARNED ANY DIVIDEND INCOME TILL DATE. THE FUNDS WERE PARTLY ADVANCED TO SUBSIDIARY COMPANY FROM WHICH INTEREST OF RS. 22,63,185 IS EARNED. SINCE EXPENDITURE ON INTEREST INCURRED FOR BUSINESS ACTIVITY AS GOING CONCERN, ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 15 OF 28 THEREFORE, INTEREST EXPENSES IS ALLOWABLE AS BUSINESS EXPENDITURE UNDER SECTION 36(1)(III) OF THE ACT. IN SUPPORT OF THIS CONTENTION THE LD. A.R. RELIED IN THE CASE OF CIT V HERO CYCLES LTD (2009) 323 ITR 518(P&H) AND WINSOME TEXTILE 319 ITR 204 (P&H) WHEREIN IT WAS HELD THAT NO DISALLOWANCE U/S.14A IS CALLED FOR IN ABSENCE OF NEXUS BETWEEN THE TAX FREE SECURITIES AND BORROWED FUNDS. FURTHER, IT WAS CONTENDED THAT NO DISALLOWANCE U/S. 14A IS TO BE MADE WHERE THE ASSESSEE HAS INVESTED IN SHARES FOR NOT EARNING DIVIDEND INCOME BUT FOR ACQUIRING CONTROLLING INTEREST IN THE RESPECTIVE COMPANIES FOR DOING BUSINESS. IN SUPPORT OF HIS CONTENTION, THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON DECISIONS IN THE CASE OF HOLCIM INDIA PVT. LTD. V. DCIT I.T.A. NO. 5123/24/DEL/, ACIT V. ORIENTAL STRUCTURAL ENGINEERING PVT. LTD. I.T.A. NO. 4245/DEL/2011 AND J M FINANCIAL LTD. V. ADDL. CIT 4521/MUM/2012. WITHOUT PREJUDICE TO ABOVE, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D BE RESTRICTED TO RS. 87,263 AS COMPUTED AS PER WORKING GIVEN ARE PB-35. WITHOUT PREJUDICE TO ABOVE, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED DISALLOWANCE U/S. 14A SHOULD BE RESTRICTED TO DIVIDEND INCOME ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 16 OF 28 CLAIMED EXEMPT AT RS. 2,01,100. IN SUPPORT OF THIS CONTENTION, THE LEARNED SENIOR ADVOCATE HAS PLACED RELIANCE ON THE JUDGEMENT OF HON`BLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT PVT. LTD. V. CIT [2015] 59 TAXMANN.COM 295 (DELHI) AND PR. CIT V. EMPIRE PACKAGING PVT. LTD. [2017] 81 TAXMANN.COM 108 (P&H), WHEREIN IT WAS HELD THAT DISALLOWANCE U/S. 14A CANNOT EXCEED THE EXEMPT INCOME WHICH IS THIS CASE IS AT RS. 2,01,100. 8. ON THE OTHER HAND, THE LD. SENIOR (DR) HEAVILY RELYING UPON THE ORDERS OF THE TAX AUTHORITIES. THE LD. SENIOR (DR) SUBMITTED THAT THE AO HAS MADE OUT A CASE THAT INVESTMENT SO MADE IS YIELDING EXEMPT INCOME AND WOULD ALSO ACCRUE EXEMPT INCOME. IT WAS HIS ARGUMENT THAT NECESSARILY THERE MUST BE INCIDENTAL EXPENDITURES OF COLLECTION, TELEPHONE, FOLLOW UP ETC. SINCE IN THE PRESENT CASE, OUT OF TOTAL FUNDS AVAILABLE/ RAISED BY THE ASSESSEE, A SUBSTANTIAL PORTION OF HAS BEEN INVESTED IN SHARES OF SUBSIDIARY COMPANY EXEMPT INCOME YIELDING COMPANY, THEREFORE, IT CAN BE HELD THAT EXPENDITURE IN RELATION TO EARNING OF EXEMPT DIVIDEND INCOME ARE EMBEDDED IN INDIRECT EXPENSES. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES AND PERUSED THE ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 17 OF 28 MATERIAL AVAILABLE ON RECORD. THE LEARNED SENIOR ADVOCATE HAS THAT THE BUSINESS OF THE ASSESSEE TO MAKE INVESTMENT AND ACQUIRE CONTROLLING INTEREST. THE INVESTMENT OF RS. 27.18 CRORES ( BEING 87.79% OF TOTAL INVESTMENT) MADE IN SEARCH ENVIRO LTD. ( NOW TATVA GLOBAL ENVIRONMENT LTD. ) ON WHICH INTEREST OF RS. 36 LAKH IS PAID HAS NOT YIELDED ANY DIVIDEND DURING YEAR. IT WAS SUBMITTED THE BUSINESS, COMMERCIAL AND ECONOMIC STRATEGY OF THE ASSESSEE AND ITS VISIONS AND TARGETS WHEN CONSIDERED WOULD INDICATE THAT THESE WERE STRATEGIC INVESTMENTS IN THE SUBSIDIARY COMPANIES FROM WHICH NO EXEMPT INCOME HAS BEEN EARNED. THESE FACTS WOULD GET SUPPORTS FOR THE FROM THE CHART PLACED AT PAPER BOOK PAGE NO. 31-32. ACCORDINGLY, IT WAS CONTENDED THAT THESE INVESTMENT SHOULD BE EXCLUDED FROM THE COMPUTATION OF DISALLOWANCE UNDER RULE 8D. HOWEVER, WE FIND THAT RECENTLY HON`BLE SUPREME COURT HAD DELIVERED A JUDGEMENT IN THE CASE OF MAXOPP INVESTMENT LTD. V. CIT [2018] 91 TAXMANN.COM 154(SC) WHERE IT WAS OBSERVED THAT DOMINANT PURPOSE FOR WHICH THE INVESTMENT INTO SHARES IS MADE BY AN ASSESSEE MAY NOT BE RELEVANT AS SECTION 14A APPLIES IRRESPECTIVE OF WHETHER SHARES ARE HELD TO GAIN CONTROL OR AS STOCK-IN TRADE. THUS, HON`BLE SUPREME COURT HAS SETTLED THE PROPOSITION THAT EVEN INVESTMENT ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 18 OF 28 MADE IN SUBSIDIARY COMPANIES OR TO GAIN CONTROL OVER IS NOT RELEVANT FOR THE PURPOSE OF APPLICATION OF PROVISION OF SECTION 14A OF THE ACT. 10. WITH REGARD TO CLAIM THAT THE DISALLOWANCE SHOULD NOT EXCEED DIVIDEND INCOME FOR WHICH THE LEARNED SENIOR ADVOCATE FOR THE ASSESSEE HAS RELIED IN THE CASE OF JOINT INVESTMENT PVT. LTD. V. CIT [2015] 59 TAXMANN.COM 295 (DELHI) OF HON`BLE DELHI HIGH COURT WHEREIN IT WAS HELD THAT DISALLOWANCE SHOULD NOT EXCEED EXEMPT INCOME. AND HON`BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF IN THE CASE OF PR. CIT VS EMPIRE PACKAGE (P.) LTD. [2017] 81 TAXMANN.COM 108 (P&H). FURTHER, THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. DEEPAK MITTAL [2014] 361 ITR 131 /[2013] 38 TAXMANN.COM 83/219 TAXMAN 314 ( PUNJ & HAR.) HELD THAT THE DISALLOWANCE U/S.14A READ WITH RULE 8D IN THE CASE OF THE ASSESSEE @.0.5% CANNOT EXCEED THE EXEMPT INCOME AND SHOULD BE RESTRICTED ACCORDINGLY. SIMILARLY THE CO-ORDINATE BENCH OF AHMEDABAD TRIBUNAL IN THE CASE OF K RATANCHAND & CO. V. ITO [2017] 83 TAXMANN.COM 242 (BAD TRIB) HELD THAT DIVIDEND SO EARNED IS INCIDENTAL TO NORMAL BUSINESS ACTIVITIES OF THE ASSESSEE. MOREOVER, THE ASSESSING OFFICER HAS MADE DISALLOWANCE OF RS. ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 19 OF 28 4,04,204 WHEREAS THE ASSESSEE HAS EARNED DIVIDEND OF RS. 58,963. EVEN ASSUMING THAT SOME EXPENDITURE IS REQUIRED TO BE DISALLOWED BUT SUCH DISALLOWANCE SHOULD NOT EXCEED THE QUANTUM OF EXEMPT INCOME. THEREFORE, THE ADDITION U/S. 14A CANNOT BE MORE THAN THE EXEMPT INCOME AND SHOULD THEREFORE, BE RESTRICTED TO RS. 58,963. 11. IN THE LIGHT OF ABOVE FACTS AND CIRCUMSTANCES, AND JUDICIAL PRONOUNCEMENTS AS CITED ABOVE AND FOLLOWING THE RATIO LAID DOWN BY HON`BLE DELHI HIGH COURT AND HON`BLE PUNJAB & HARYANA HIGH COURT , WE ARE OF THE CONSIDERED VIEW THAT DISALLOWANCE IS THIS CASE SHOULD NOT EXCEED THE DIVIDEND INCOME OF RS. 2,01,100. THEREFORE, RESPECTFULLY FOLLOWING THE AFORESAID JUDGEMENTS OF HON`BLE HIGH COURT AND CO-ORDINATE BENCH, WE DIRECT THE AO TO MAKE DISALLOWANCE OF DIVIDEND INCOME EARNED DURING THE YEAR UNDER CONSIDERATION ONLY. THIS GROUNDS OF APPEAL IS THEREFORE, PARTLY ALLOWED. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. I.T.A. NO.2943/AHD/2015 A.Y.2011-12 BY THE ASSESSEE: 13. GROUND NO. 1 STATES THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS)ERRED IN UPHOLDING THE ACTION OF THE INCOME TAX OFFICER IN MAKING DISALLOWANCE OF EXPENSES ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 20 OF 28 AMOUNTING TO RS. 56,07,233 UNDER SECTION 36(I) (III) AND UNDER SECTION 14A READ WITH RULE 8D OF INCOME-TAX RULES, 1962. 14. BRIEF FACTS ARE THAT THE ASSESSEE HAS WAS ASKED TO EXPLAIN AND JUSTIFY THE INTEREST EXPENDITURE OF RS. 3,18,28,916/- WAS MADE EXCLUSIVELY AND NECESSARY FOR THE BUSINESS PURPOSE. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY DISALLOWANCE U/S. 14A SHOULD NOT BE DISALLOWED IN RESPECT OF DIVIDEND INCOME OF RS. 53,557 SHOWN DURING THE YEAR UNDER CONSIDERATION AS IT DOES NOT FORM PART OF TOTAL INCOME AND HENCE, NO DEDUCTION CAN BE ALLOWED AGAINST THIS INCOME. IT WAS CONTENDED THAT ENTIRE INTEREST BEARING FUNDS WERE UTILIZED FOR THE PURPOSE OF BUSINESS. THE ASSESSEE EARNED INTEREST INCOME OF RS. 86,90,224. THE CIT (A) OBSERVED THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS INCURRED INTEREST EXPENSES OF RS. 3, 18, 28, 916/- ON THE BORROWINGS I.E. UNSECURED LOANS OF RS. 38, 41, 68, 000/-. AS ADMITTED BY THE ASSESSEE THAT DURING THE YEAR THERE FRESH INVESTMENTS TO THE TUNE OF RS. 29.69 CRORES AND MAJORITY OF THE INVESTMENT I.E. RS. 27.75 CRORES HAS MADE IN THE SUBSIDIARY COMPANY VIZ TATVA GLOBAL ENVIRONMENT LTD. FROM WHICH NO INCOME CLAIMED TO HAVE BEEN EARNED BY THE ASSESSEE. HOWEVER, THERE WOULD DIVIDEND INCOME FROM THIS INVESTMENT IN FUTURE, ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 21 OF 28 WHICH WOULD BE EXEMPT FROM TAX. THUS, THERE IS A DIRECT NEXUS FOR THE INVESTMENT MADE BY THE ASSESSEE IN THE SUBSIDIARY COMPANY OUT OF INTEREST BEARING FUNDS, THE INTEREST EXPENDITURE WHICH WAS INCURRED INDISPUTABLY IN RELATION TO ACQUISITION OF SHARES, INCOME FROM WHICH IS NOT TAXABLE CANNOT BE ALLOWED AS DEDUCTION WHILE COMPUTING THE INCOME FROM ANY OTHER SOURCE. IF IT TOTAL INCOME IS TO BE EXCLUDED FROM TOTAL INCOME, THIS IS NOT BE CONSIDERED AS INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. THE INCOME FROM SHARES WHICH IS IN THE FORM OF DIVIDEND HAS TO BE EXCLUDED FROM THE TOTAL INCOME WHETHER EARNED OR NOT AND, THEREFORE, SUCH INCOME CANNOT BE CONSIDERED AS INCOME FROM OTHER SOURCES THEREFORE, THE EXPENDITURE INCURRED ON BORROWINGS INVESTED IN SHARES CANNOT BE CONSIDERED WHILE COMPUTING THE INCOME FROM OTHER SOURCES. THEREAFTER ANALYZING THE VARIOUS CASE LAWS RELIED BY THE ASSESSEE THE AO CONSIDERED THE WORKING OF DISALLOWANCES UNDER SECTION 14A READ WITH RULE 8D TO RS.1, 47, 92, 328 AND DISALLOWED THE SAME BACK. SINCE, THE ASSESSEE ITSELF AS MADE DISALLOWANCE OF RS.1,98,914 IN THE COMPUTATION OF TOTAL INCOME, REMAINING AMOUNT OF RS.1, 45, 93, 414/- WAS BEING ADDED TO THE TOTAL INCOME UNDER SECTION 14A OF THE ACT. ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 22 OF 28 15. BEING AGGRIEVED, THE ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT (A). THE CIT (A) OBSERVED THAT THE APPELLANT HAS SHOWN DIVIDEND INCOME OF RS.53, 557 AND ON THE OTHER HAND, TOTAL INTEREST EXPENDITURE OF RS.3,18,28,916/- HAS BEEN CLAIMED. THE APPELLANT HAS ALSO HAD INTEREST INCOME TO THE TUNE OF RS. 86,90,224. THE APPELLANT WAS CONFRONTED AS TO WHY PROVISION OF SECTION 14A SHOULD NOT BE APPLIED. IN RESPONSE TO WHICH, THE APPELLANT SUBMITTED THAT TOTAL INVESTMENT OF RS. 29.69 CRORES WAS MADE DURING THE YEAR AND OUT OF WHICH RS. 29.53 COURSE WAS MADE IN SUBSIDIARY AND ASSOCIATES COMPANIES AND OUT OF THESE INVESTMENT NO DIVIDEND INCOME HAS BEEN EARNED. RS. 27.75 CRORES ALONE HAS BEEN INVESTED IN THE SUBSIDY COMPANY M/S. TATVA GLOBAL ENVIRONMENT LTD. WITH THE INTENTION OF GAINING CONTROL ON THE ENVIRONMENTAL BUSINESS AS A WHOLE. THESE INVESTMENTS HAVE BEEN MADE IN UNLISTED COMPANIES WHICH ARE PROFIT IS TAXABLE UNDER THE HEAD CAPITAL GAINS AS NO DIVIDEND INCOME HAD BEEN EARNED FROM THESE INVESTMENTS SO PROVISIONS OF SECTION 14A OF THE ACT ARE NOT APPLICABLE. ALL THESE CONTENTIONS OF THE APPELLANT WERE REBUTTED BY THE ASSESSING OFFICER. ACCORDING TO THE AO, A PERUSAL OF THE BOOKS OF ACCOUNTS OF THE APPELLANT INDICATE THAT PAID UP CAPITAL IS ONLY RS. 1, 00, 400/-, ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 23 OF 28 UNSECURED LOAN ARE RS. 54, 57, 55, 379/- ACCUMULATED LOSS ARE AT RS. 3, 10, 55, 611/- AND INVESTMENTS ARE AT RS. 29,68,50,728. FROM THIS DATA, THE AO OBSERVED THAT LOSSES ARE ESSENTIALLY ON ACCOUNT OF INTEREST, WHICH MEANS SUBSTANTIAL AMOUNT OF INTEREST BEARING FUNDS HAVE BEEN DEPLOYED IN THE INVESTMENTS. ADMITTEDLY, THE APPELLANT HAS UTILISED BORROWED FUNDS OF RS. 54,57,55,379/- IN COMPOSITE MANNER I.E. IN ADVANCING LOANS AND IN MAKING INVESTMENT IN THE SHARES MAINLY IN SUBSIDIARY COMPANIES. THE TOTAL INTEREST EXPENDITURE ON ACCOUNT OF THESE BORROWING COMES TO RS. 3,18,28,916. THE APPELLANT HAS FAILED TO BRING ON RECORD THE AVAILABILITY OF INTEREST-FREE FUNDS FROM INVESTMENT. THE FUNDS HAVE BEEN USED IN COMPOSITE MANNER WITH NO IDENTIFIABLE NEXUS BETWEEN THE INTEREST BEARING FUNDS AND THE DIVIDEND YIELDING INSTRUMENTS. IN VIEW OF THIS MATTER, THE CIT (A) HELD THAT THE PROVISION OF SECTION 14 A OF THE ACT READ WITH RULE 8D ARE CLEARLY ATTRACTED. THIS FACT HAS ALSO BEEN ADMITTED BY THE APPELLANT DURING THE ASSESSMENT PROCEEDINGS. WHERE THE ASSESSEE VIDE LETTER DATED 27.12.2013 HIMSELF REVISED THE DISALLOWANCE UNDER SECTION 14 A READ WITH RULE 8D AT RS.1,47,92,328/- WHICH WAS ACCEPTED BY THE ASSESSING OFFICER AND ACCORDINGLY DISALLOWED AN AMOUNT OF RS. 1,45,93,414 UNDER ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 24 OF 28 SECTION 14A OF THE ACT. NOW THE REVISED CLAIMED MADE BY THE APPELLANT DURING THE APPELLATE PROCEEDINGS, THAT THE INTEREST BE ALLOWED UNDER SECTION 36 (1) (III) DOES NOT CARRY ANY WEIGHT. THE AGREED IS NOT AGGRIEVED. IN VIEW OF THESE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) UPHELD THE DISALLOWANCE OF EXPENSES AT RS.1, 45, 90, 414/- AS MADE UNDER SECTION 14 A READ WITH RULE 8D. 16. BEING, AGGRIEVED THE ASSESSEE FILED THIS APPEAL BEFORE THE TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT THE ASSESSEE HAS EARNED DIVIDEND FROM INVESTMENT IN THE SHARES OF CHENNAI PETROLEUM LTD. AND ADVANTA INDIA LTD. IN WHICH INVESTMENT WAS MADE IN PAST OUT OF OWN FUNDS AND INTEREST-FREE BORROWED FUNDS. DURING THE PREVIOUS YEAR RELEVANT A.Y. 2011- 12, THE COMPANY OUT OF TOTAL INVESTMENT OF RS. 29.69 CRORES M INVESTMENT OF RS. 27.75 COURSE WERE MADE BY THE COMPANY IN TATAV GLOBAL ENVIRONMENT LTD., WHICH IN TURN HAS INVESTED IN VARIOUS INFRASTRUCTURE COMPANIES. THIS INVESTMENT WAS STRATEGIC INVESTMENT TO GAIN CONTROL HENCE; NO DISALLOWANCE U/S. 14A IS CALLED FOR IN VIEW OF DECISION IN THE CASE OF M/S. J. M. FINANCIAL LTD. V. ACIT I.T.A. NO. 4521/MUM/2012. IN RELYING ON CIT V. TORRENT POWER LTD. 44 TAXMANN.COM 441 (GUJ.) IT WAS CLAIMED ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 25 OF 28 THAT WHERE SUFFICIENT INTEREST-FREE FUNDS AVAILABLE, NO DISALLOWANCE U/S. 14A COULD BE MADE. FURTHER RELYING ON THE DECISION OF JOINT INVESTMENT PVT. LTD. V. CIT 59 TAXMANN.COM 295 (DELHI) IT WAS CLAIMED THAT DISALLOWANCE CANNOT BE MADE MORE THAN DIVIDEND INCOME. THE ASSESSEE COMPANY HAS MADE STRATEGIC INVESTMENT OF 80.87% OF ITS TOTAL INVESTMENT IN SHARES OF SUBSIDIARY COMPANIES. THE INTEREST EXPENDITURE OF RS.3,18,28,916 WAS INCURRED ON BORROWED FUNDS BUT SAID BORROWED FUNDS WERE PARTLY UTILIZED IN INVESTMENT MADE IN SUBSIDIARY COMPANY FOR ACQUIRING CONTROLLING INTEREST FOR WHICH THE ASSESSEE HAS NOT EARNED ANY DIVIDEND INCOME TILL DATE. THE FUNDS WERE PARTLY ADVANCED TO SUBSIDIARY COMPANY FROM WHICH INTEREST OF RS. 22,63,185 IS EARNED. SINCE EXPENDITURE ON INTEREST INCURRED FOR BUSINESS ACTIVITY AS GOING CONCERN, THEREFORE, INTEREST EXPENSES IS ALLOWABLE AS BUSINESS EXPENDITURE UNDER SECTION 36(1)(III) OF THE ACT. THE LD. A.R. RELIED IN THE CASE OF CIT V HERO CYCLES LTD (2009) 323 ITR 518(P&H) AND WINSOME TEXTILE 319 ITR 204 (P&H) WHICH HELD THAT DISALLOWANCE U/S. 14A UNWARRANTED AS ASSESSEE HAS NOT INVESTED IN SHARES FOR EARNING DIVIDEND BUT ACQUIRED CONTROLLING INTEREST IN THE RESPECTIVE COMPANIES FOR DOING BUSINESS, WHEREIN ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 26 OF 28 IT WAS HELD THAT DISALLOWANCE U/S 14A REQUIRES CLEAR FINDING OF INCURRING OF EXPENDITURE. ACCORDINGLY DISALLOWANCE OF ANY PORTION BY APPLYING RULE 8D DOES NOT ARISE AND UNWARRANTED. IN SUPPORT OF HIS CONTENTION, THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON DECISIONS IN THE CASE OF HOLCIM INDIA PVT. LTD. V. DCIT I.T.A. NO. 5123/24/DEL/, ACIT V. ORIENTAL STRUCTURAL ENGINEERING PVT. LTD. I.T.A. NO. 4245/DEL/2011 AND J M FINANCIAL LTD. V. ADDL. CIT 4521/MUM/2012. WITHOUT PREJUDICE TO ABOVE, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D BE RESTRICTED TO RS. 87,263 COMPUTED AS PER WORKING GIVEN ARE PB-35. WITHOUT PREJUDICE TO ABOVE, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED DISALLOWANCE U/S. 14A SHOULD BE RESTRICTED TO DIVIDEND INCOME CLAIMED EXEMPT AT RS53,557. IN SUPPORT OF THIS CONTENTION, THE LEARNED SENIOR ADVOCATE HAS PLACED RELIANCE IN THE CASE OF ACIT V. PUNJAB STATE CO- OPERATIVE MARKETING, ITAT CHANDIGARH, WHEREIN IT WAS HELD THAT DISALLOWANCE U/S. 14A CANNOT EXCEED THE EXEMPT INCOME 17. ON THE OTHER HAND, THE LD. SENIOR (DR) HEAVILY RELYING UPON THE ORDERS OF THE TAX AUTHORITIES. THE LD. SENIOR (DR) SUBMITTED THAT THE AO HAS MADE OUT A CASE THAT INVESTMENT SO ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 27 OF 28 MADE IS YIELDING EXEMPT INCOME AND WOULD ACCRUE EXEMPT INCOME. IT WAS HIS ARGUMENT THAT NECESSARILY THERE MUST BE INCIDENTAL EXPENDITURES OF COLLECTION, TELEPHONE, FOLLOW UP ETC. SINCE IN THE PRESENT CASE, OUT OF TOTAL FUNDS AVAILABLE/ RAISED BY THE ASSESSEE, A SUBSTANTIAL PORTION OF HAS BEEN INVESTED IN SHARES OF SUBSIDIARY COMPANY EXEMPT INCOME YIELDING COMPANY, THEREFORE, IT CAN BE HELD THAT EXPENDITURE IN RELATION TO EARNING OF EXEMPT DIVIDEND INCOME ARE EMBEDDED IN INDIRECT EXPENSES. 18. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACTS OF THIS ASSESSMENT YEAR ARE SIMILAR TO THAT OF ASSESSMENT YEAR 2008-09 WHEREIN WE HAVE GIVEN DETAILED FINDINGS AND HELD THE DISALLOWANCE SHOULD NOT EXCEED THE DIVIDEND INCOME OR EXEMPT INCOME. HOWEVER, IN THE PRESENT ASSESSMENT YEAR 2011-12, DIVIDEND INCOME IS ONLY AT RS. 53,557/- AND THE ASSESSEE HAS SUO-MOTO DISALLOWED RS.1,98,914 U/S. 14A IN THE RETURN OF INCOME HENCE, DISALLOWANCE IN THIS CASE ARE RESTRICTED TO RS. 1,98,914 AS SUO-MOTO DISALLOWED U/S. 14A BY THE ASSESSEE IN THE RETURN AND COMPUTATION OF INCOME. THIS GROUNDS OF APPEAL IS THEREFORE, PARTLY ALLOWED. ESTHETIC FINVEST PVT. LTD. V. ACIT-VAPI /I.T.A. NO. 2942&2943/AHD/2015 & 1325/AHD/2016/A.Y.:07-08,11-12,& 08-09 PAGE 28 OF 28 19. GROUND NO. 2 RELATES TO NON-EXCLUSION OF REVERSAL OF PROVISION FOR DIMINUTION IN VALUE OF SHARES AMOUNTING TO RS. 2, 14,705. 20. THIS GROUND HAS BEEN NOT PASSED BEFORE US DURING HEARING BY THE LEARNED COUNSEL FOR THE ASSESSEE HENCE; IT IS TREATED AS DISMISSED AS NOT PRESSED. 21. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 22. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEARS 2007-08, 2008-09 AND 2011-12 ARE PARTLY ALLOWED. 23. THE ORDER PRONOUNCED IN THE OPEN COURT ON 26.04.2018 SD/- SD/- ( C.M. GARG) (O.P.MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER / SURAT: / DATED : 26 TH APRIL, 2018/OPM COPY SENT TO- ASSESSEE/AO/PR. CIT/ CIT (A)/ ITAT (DR)/GUARD FILE OF ITAT. BY ORDER / / TRUE COPY / / ASSISTANT REGISTRAR, SURAT