EMCO LIMITED, THANE V. A.C.I.T., CIR.-1, THANE

ITA 2942/MUM/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 71263 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 23-09-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 13-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: HRIDAY NARAIN IZRFKHZ DH LS
• Keywords: Earning of tax free income; Wholly owned subsidiary; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 14A; 6

Judgement Text

M/S. EMCO LTD, - 1 - VK;DJ VIHYH; VF/KDJ.K BZ U;K;IHB EQACBZ ESAA IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUM BAI JH JKTSUNZ FLAG YS[KK LNL; ,OA JH VFER 'KQDYK] U;KF ;D LNL; DS LE{K BEFORE SHRI RAJENDRA SINGH ACCOUNTANT MEMBER AND SH RI AMIT SHUKLA JUDICIAL MEMBER VK;DJ VIHY LA[;K /ITA NO. 2942/MUM/2011 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2007-08 EMCO LTD, PLOT NO. F-5, ROAD NO. 28, WAGLE INDUSTRIAL ESTATE, THANE 400 604. CUKE@ VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -1, THANE VARDAN M.I.D.C., WAGLE INDUSTRIAL ESTATE THANE. VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT VK;DJ VIHY LA[;K /ITA NO. 2719/MUM/2011 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2007-08 ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -1, THANE VARDAN M.I.D.C., WAGLE INDUSTRIAL ESTATE THANE. CUKE@ VS. EMCO LTD, PLOT NO. F-5, ROAD NO. 28, WAGLE INDUSTRIAL ESTATE, THANE 400 604. VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT VK;DJ VIHY LA[;K /ITA NO. 8517/MUM/2011 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2008-09 EMCO LTD, PLOT NO. F-5, ROAD NO. 28, WAGLE INDUSTRIAL ESTATE, THANE 400 604 CUKE@ VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -1, THANE VARDAN M.I.D.C., WAGLE INDUSTRIAL ESTATE THANE. VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT M/S. EMCO LTD, - 2 - VK;DJ VIHY LA[;K /ITA NO. 533/MUM/2012 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2008-09 ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -1, THANE VARDAN M.I.D.C., WAGLE INDUSTRIAL ESTATE THANE. CUKE@ VS. EMCO LTD, PLOT NO. F-5, ROAD NO. 28, WAGLE INDUSTRIAL ESTATE, THANE 400 604. VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT VIHYKFKHZ DH VKSJ LS @ APPELLANT BY SHRI HRIDAY NARAIN IZR;FKHZ DH VKSJ LS @ RESPONDENT BY MS. R.M. MADHAVI VKNS'K@ VKNS'K@ VKNS'K@ VKNS'K@ ORDER PER RAJENDRA SINGH, AM THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDERS OF CIT(A) DATED 29.10.2010 AND 24.10.2011 FOR ASSESSMENT YEARS 2007 -08 AND 2008-09. THESE APPEALS WHICH WERE HEARD TOGETHER AND HAVE COMMON I SSUES ARE BEING DISPOSED OFF BY A SINGLE CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. WE FIRST TAKE UP THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2007-08 IN ITA NO. 2942/MUM/2011 . IN THIS APPEAL, THE ASSESSEE HAS RAISED DISPUTES ON TWO DIFFERENT GROUNDS. 2.1 THE FIRST DISPUTE IS REGARDING DISALLOWANCE OF FUNDS RAISING EXPENSES. THE ASSESSEE DURING THE YEAR HAD ISSUED 20,00,000 EQUITY SHARES OF RS. 10 LQUOKBZ DH RKJH[K @ DATE OF HEARING 23-09-2013 ?KKS'K.KK DH RKJH[K @ DATE OF PRONOUNCEMENT 27-09-2013 M/S. EMCO LTD, - 3 - EACH AT PREMIUM OF RS. 590/- PER EQUITY SHARES. THE ASSESSEE INCURRED EXPENDITURE OF RS. 2,70,35,500/- IN CONNECTION WITH THE SAID ISSUE OF SHARES WHICH WAS CLAIMED AS REVENUE EXPENDITURE. THE AO AS KED THE ASSESSEE TO EXPLAIN AS TO WHY THE EXPENSES SHOULD NOT BE DISALL OWED AS CAPITAL IN NATURE. THE ASSESSEE EXPLAINED THAT THE FUNDS RAISED THROUG H PUBLIC ISSUE HAD BEEN PARTLY KEPT IN FIXED DEPOSIT ON WHICH INTEREST INCO ME WAS EARNED WHICH WENT TO REDUCE THE FINANCE COST AND, THEREFORE, THE EXPE NDITURE SHOULD BE ALLOWED AS REVENUE EXPENDITURE. ALTERNATIVELY IT WAS ALSO SUBM ITTED THAT THE CLAIM MAY BE ALLOWED U/S 35D OF THE IT ACT. THE AO DID NOT ACCEP T THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT EXPENDITURE INCURRED FO R EXPANSION OF CAPITAL BASE HAS TO BE TREATED AS THE CAPITAL EXPENDITURE IN VIE W OF THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF PUNJAB STATE INDUSTRIAL DE VELOPMENT CORPORATION LTD VS. CIT ( 225 ITR 792). AO FURTHER OBSERVED TH AT DEDUCTION U/S 35D COULD BE ALLOWED ONLY IN RESPECT OF EXPENDITURE INC URRED IN CONNECTION WITH EXPANSION OF THE INDUSTRIAL UNDERTAKING OR IN CONNE CTION WITH SETTING UP OF A NEW INDUSTRIAL UNIT. SINCE THE FUNDS WERE NOT RAISE D IN CONNECTION WITH EXTENSION OR FOR SETTING UP OF A NEW INDUSTRIAL UND ERTAKING, THE AO DISALLOWED THE CLAIM U/S 35D. THUS THE ENTIRE CLAIM OF EXPENDI TURE WAS DISALLOWED. 2.1.1 IN APPEAL, CIT(A) AGREED WITH AO THAT EXPENDI TURE INCURRED IN CONNECTION WITH RAISING OF SHARE CAPITAL WAS CAPITA L IN NATURE. IN REGARD TO THE CLAIM OF DEDUCTION U/S 35D, CIT(A) OBSERVED THAT PR OCEEDS OF QIP HAD BEEN INVESTED IN OTHER COMPANIES OR FOR MAKING ADVANCES TO THE SUBSIDIARY WHICH COULD NOT BE CONSIDERED AS EXTENSION OF EXISTING BU SINESS OF THE ASSESSEE OR FOR SETTING UP OF A NEW BUSINESS. MOREOVER ONLY THE EXP ENDITURE IN RELATION TO PREPARATION OF FEASIBILITY, PROJECT REPORT, MARKET SURVEY/ENGINEERING SERVICES ETC. COULD BE CONSIDERED FOR DEDUCTION U/S 35D. CIT (A), THEREFORE, REJECTED THE M/S. EMCO LTD, - 4 - ALTERNATE CLAIM OF DEDUCTION U/S 35D ALSO, AGGRIEVE D BY WHICH THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 2.1.2 BEFORE US THE LEARNED AR FOR THE ASSESSEE SU BMITTED THAT SIMILAR ISSUE OF ALLOWABILITY OF FUNDS RAISING EXPENSES HAD BEEN CONSIDERED BY THE TRIBUNAL IN ASSESSEE OWN CASE IN ASSESSMENT YEAR 2006-07 AND THE ISSUE HAS BEEN SET ASIDE BY THE TRIBUNAL TO THE FILE OF AO. IT WAS, TH EREFORE, URGED THAT THIS YEAR ALSO THE ISSUE MAY BE RESTORED TO THE FILE OF AO. T HE LEARNED DR FAIRLY CONCEDED THAT THE ISSUE WAS COVERED BY THE DECISION OF TRIBUNAL. 2.1.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED TH E MATTER CAREFULLY. THE DISPUTE IS REGARDING ALLOWABILITY OF CLAIM OF FUNDS RAISING EXPENSES. THE ASSESSEE DURING THE YEAR HAD INCURRED EXPENDITURE O F RS. 2,70,35,500/- FOR ISSUE OF FRESH CAPITAL THROUGH QUALIFIED INSTITUTIO NAL PLACEMENT (QIP) ROUTE. THE EXPENDITURE HAD BEEN CLAIMED AS REVENUE EXPENDI TURE. THE AUTHORITIES BELOW FOLLOWING THE JUDGMENT OF HONBLE SUPREME COU RT IN CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION (SUPRA) HA VE HELD THAT EXPENDITURE INCURRED FOR EXPANSION OF CAPITAL BASE IS CAPITAL I N NATURE. THEY HAVE ALSO REJECTED THE ALTERNATE CLAIM OF THE ASSESSEE FOR AL LOWING THE EXPENDITURE U/S 35D OF THE IT ACT ON THE GROUND THAT THERE WAS NO E VIDENCE FOR ISSUE OF CAPITAL IN CONNECTION WITH EXTENSION OF THE EXISTING BUSINE SS OR FOR SETTING UP OF A NEW BUSINESS. WE FIND THAT THE SAME ISSUE REGARDING ALL OWABILITY OF FUND RAISIN EXPENSES HAD COME BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2006-07 IN WHICH YEAR THE TRIBUNAL HAD RESTORE D THE ISSUE TO THE FILE OF AO FOR PASSING AFRESH ORDER AFTER DETAILED EXAMINAT ION AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. FACTS IN TH IS YEAR ARE IDENTICAL TO WHICH BOTH THE PARTIES AGREED. WE, THEREFORE, SET ASIDE T HE ORDER OF CIT(A) AND RESTORE THE MATTER TO THE FILE OF AO FOR PASSING AF RESH ORDER AFTER NECESSARY M/S. EMCO LTD, - 5 - EXAMINATION IN THE LIGHT OF DECISION OF TRIBUNAL IN ASSESSMENT YEAR 2006- 07(SUPRA). 2.2 THE SECOND DISPUTE IS REGARDING DISALLOWANCE OF EXPENSES U/S 14A OF THE IT ACT. THE AO DURING THE ASSESSMENT PROCEEDING S NOTED THAT THE ASSESSEE HAD RECEIVED DIVIDEND INCOME OF RS. 11,55,228/- FRO M SHARES AND THE UNITS OF MUTUAL FUNDS WHICH WAS EXEMPT FROM INCOME TAX. THE ASSESSEE HAD HOWEVER NOT DISALLOWED ANY EXPENSES RELATING TO SUCH INCOME . AO, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE EXPENSES SHOULD N OT BE ALLOWED. THE ASSESSEE SUBMITTED THAT ALL THE INVESTMENTS HAD BEE N MADE FROM OWN FUNDS AND NOT FROM THE BORROWED FUNDS. THE ASSESSEE HAD, THEREFORE, NOT INCURRED ANY INTEREST EXPENDITURE. THE ASSESSEE HAD ALSO NOT INCURRED ANY OTHER DIRECT EXPENSES. AS REGARDS THE INDIRECT EXPENSES IT WAS S UBMITTED THAT THE SAME COULD BE MAXIMUM UPTO RS. 5,000/-. AO, HOWEVER, DID NOT ACCEPT THE ARGUMENTS ADVANCED. IT WAS OBSERVED BY HIM THAT DIS ALLOWANCE OF EXPENSES HAS TO BE MADE IN ACCORDANCE WITH RULE 8D WHICH HAD RETROSPECTIVE APPLICATION IN VIEW OF THE DECISION OF SPECIAL BENC H OF TRIBUNAL IN CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. (117 ITD 169). AO , THEREFORE, COMPUTED THE DISALLOWANCE AS PER RULE 8D WHICH CAME TO RS.10 ,90,851/- CONSISTING OF INTEREST EXPENDITURE OF RS. 10,14,395/- AND OTHER E XPENSES OF RS. 76,456/- 2.2.1 IN APPEAL CIT(A) OBSERVED THAT RULE 8D WAS MA NDATORY AND HAS TO BE FOLLOWED BY AO AND FOLLOWING THE DECISION IN ASSESS MENT YEAR 2006-07, CIT(A) CONFIRMED THE DISALLOWANCE MADE BY AO, AGGRI EVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 2.2.2 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE R ECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOW ANCE OF EXPENSES RELATING TO EXEMPT DIVIDEND INCOME. THE DISALLOWANCE OF EXPENSE S RELATING TO EXEMPT M/S. EMCO LTD, - 6 - INCOME U/S 14A IS REQUIRED TO BE COMPUTED AS PER RU LE NOTIFIED BY THE GOVERNMENT. GOVERNMENT HAVE SINCE NOTIFIED RULE 8D FOR THIS PURPOSE. HOWEVER HONBLE HIGH COURT OF BOMBAY IN CASE OF GOD REJ BOYCE MANUFACTURING CO LTD.(328 ITR 81) HAVE HELD THAT RU LE 8D IS APPLICABLE ONLY FROM ASSESSMENT YEAR 2008-09 AND IN RESPECT OF PRIO R YEARS IT HAS BEEN HELD THAT DISALLOWANCE OF BOTH INDIRECT AND INDIRECT EXP ENSES HAS TO BE MADE ON A REASONABLE BASIS AFTER ALLOWING OPPORTUNITY OF HEAR ING TO THE ASSESSEE. THE ASSESSMENT YEAR INVOLVED IN THE PRESENT APPEAL IS A SSESSMENT YEAR 2007-08 AND, THEREFORE, RULE 8D IS NOT APPLICABLE. WE, THER EFORE, SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE MATTER TO THE FILE OF AO FOR PASSING AFRESH ORDER AFTER NECESSARY EXAMINATION IN THE LIGHT OF JUDGMENT OF T HE HONBLE HIGH COURT OF BOMBAY IN CASE OF GODREJ BOYCE MANUFACTURING CO LTD . (SUPRA) AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 3. THE APPEAL OF THE DEPARTMENT IN ASSESSMENT YEAR 2007-08 IN ITA NO. 2719/MUM/2011 . THE ONLY DISPUTE RAISED BY THE REVENUE IN THIS AP PEAL IS REGARDING DISALLOWANCE OF INTEREST U/S 36(1) (III) OF THE IT ACT WHICH HAS BEEN DELETED BY CIT(A). 3.1 THE AO DURING THE ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE IN THE BALANCE SHEET HAD SHOWN LOAN LIABILITY OF RS. 1 85.27 CRORE ON WHICH INTEREST PAYMENT OF RS. 24.39 CORE HAD BEEN MADE. T HE AO ALSO NOTED THAT THE ASSESSEE HAD MADE INVESTMENT/ADVANCES TO RELATED CO NCERNS AS PER DETAILS GIVEN BELOW:- (I). INVESTMENT IN ASSOCIATE COMPANY RS. 27,40,87,4 90/- (II). ADVANCE TO SUBSIDIARY COMPANY RS. 5,08,23,815 /- (III). INVESTMENT IN SUBSIDIARY COMPANY RS. 5,00,0 00/- (IV). OTHER DEPOSITS (INCLUDES DEPOSIT M/S. EMCO LTD, - 7 - WITH PARTIES IN WHICH ONE OF THE DIRECTOR IS A MEMBER & DIRECTOR RS. 1,00,00,000/- (V). INTER CORPORATE DEPOSITS RS. 4,04,09,679/- 3.2 THE AO, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE PROPORTIONATE DISALLOWANCE OF EXPENDITURE RELATING TO THE ABOVE INVESTMENT SHOULD NOT BE MADE. THE ASSESSEE SUBMITTED THAT INV ESTMENTS OF RS. 27.41 CRORE IN ASSOCIATE COMPANY HAD BEEN MADE FROM OWN F UNDS AND NOT FROM BORROWED FUNDS AND, THEREFORE, NO DISALLOWANCE COUL D BE MADE IN RELATION THERETO. SIMILARLY ADVANCES OF RS. 5.08 CRORE TO TH E SUBSIDIARY HAD BEEN MADE FROM PROCEEDS OF QIP ISSUE AND NO INTEREST EXPENDIT URE WAS INVOLVED. IN REGARD TO OTHER INVESTMENT/DEPOSITS, IT WAS SUBMITT ED THAT THE SAME HAD BEEN MADE ON COMMERCIAL EXPEDIENCY. THE AO ACCEPTED THE CLAIM IN RELATION TO INVESTMENT/ADVANCES OF RS. 27.41 CRORE AND 5.08 CRO RE. IN RELATION TO OTHER INVESTMENT TOTALING RS. 5.09 CRORE, THE AO OBSERVED THAT THE ASSESSEE HAD FAILED TO EXPLAIN AS TO HOW THESE INVESTMENTS WERE RELATED TO THE BUSINESS OF THE ASSESSEE. AO, THEREFORE, DISALLOWED THE PROPORT IONATE INTEREST AMOUNTING TO RS. 6618258/- 3.3 THE ASSESSEE DISPUTED THE DECISION OF AO AND SU BMITTED BEFORE CIT(A) THAT INVESTMENT OF RS. 5,00,000/- HAD BEEN MADE IN WHOLLY OWN SUBSIDIARY I.E. EMCO ENERGY LTD. WHICH WAS ON COMMERCIAL EXPEDIENCY AND THE DEPOSIT OF RS. 1 CRORE HAD BEEN GIVEN IN CONNECTION WITH USE O F PREMISES AT 41/43, POLICE COURT, NARIMAN POINT FOR OFFICE PURPOSE. AS REGARDS THE INTER CORPORATE DEPOSIT OF RS. 4.04 CRORE IT WAS SUBMITTED THAT THE SAME WAS INTEREST BEARING. CIT(A) ACCEPTED THE CLAIM OF THE ASSESSEE AND DIREC TED THE AO TO THE DELETE THE ADDITION MADE IN THIS REGARD, AGGRIEVED BY THE WHICH THE REVENUE IS IN APPEAL BEFORE TRIBUNAL. M/S. EMCO LTD, - 8 - 3.4 BEFORE US THE LEARNED DR APPEARING FOR THE REVE NUE ASSAILED THE ORDER OF CIT(A). IT WAS SUBMITTED THAT BEFORE THE AO THE ASSESSEE HAD NOT PRODUCED ANY EVIDENCE THAT INVESTMENTS/ADVANCES HAD BEEN MAD E ON COMMERCIAL EXPEDIENCY OR THAT WERE INTEREST BEARING. THE CIT(A ) HAD ALLOWED THE RELIEF ON THE BASIS OF FRESH MATERIAL WHICH WAS NOT JUSTIF IED. THE LEARNED AR FOR THE ASSESSEE SUBMITTED THAT HE HAD NO OBJECTION IF THE MATTER WAS SENT TO THE AO FOR NECESSARY VERIFICATION. 3.5 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF INTEREST IN RE LATION TO INVESTMENTS/ADVANCES OF RS. 1CRORE, RS. 5 LAKH AND RS. 4.04 CRORE. THE AO HAD DISALLOWED THE INTEREST ON THE GROUND THAT THE ASSESSEE FAILED TO PRODUCE ANY EVIDENCE TO SHOW THAT INVESTMENTS/ADVANCES WERE FOR THE PURPOSE OF BUSINESS. IN APPEAL CIT(A) HAS ALLOWED THE RELIEF A PPARENTLY BASED ON SOME FRESH MATERIAL SUBMITTED BEFORE HIM. THE ASSESSEE H AS SUBMITTED THAT THE DEPOSITS WAS IN CONNECTION WITH USE OF OFFICE PREMI SES AND THE DEPOSIT OF RS. 4.04 CRORE WAS INTEREST BEARING AND THE BALANCE INV ESTMENT OF RS. 5 LAKH ON COMMERCIAL EXPEDIENCY. THESE CLAIMS ARE REQUIRED TO BE VERIFIED AT THE LEVEL OF AO. WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE MATTER TO THE FILE OF AO FOR PASSING AFRESH ORDER AFTER NECES SARY EXAMINATION AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 4. THE APPEAL OF THE ASSESSEE IN ITA NO. 8517/MUM/2012 FOR ASSESSMENT YEAR 2008-09. THE ASSESSEE IN THIS APPEAL HAS RAISE D DISPUTES ON TWO DIFFERENT GROUNDS. M/S. EMCO LTD, - 9 - 4.1 THE FIRST DISPUTE IS REGARDING DISALLOWANCE OF EXPENSES U/S 14A OF THE IT ACT. THE AO NOTED THAT THE ASSESSEE HAD RECEIVED DIVIDEND INCOME WHICH WAS NOT TAXABLE. BUT THE ASSESSEE HAD NOT DISALLOWE D ANY EXPENSES RELATING TO THE EXEMPT INCOME. AO, THEREFORE, ASKED THE ASSESSE E TO EXPLAIN AS TO WHY DISALLOWANCE OF EXPENSES SHOULD NOT BE MADE. THE AS SESSEE SUBMITTED THAT THE INVESTMENTS HAD BEEN MADE FROM OWN FUNDS AND NOT FR OM THE BORROWED FUNDS AND, THEREFORE, NO INTEREST EXPENDITURE WAS INVOLVE D. IT WAS ALSO SUBMITTED THAT NO OTHER DIRECT EXPENSES HAD BEEN INCURRED AND INDI RECT EXPENSES WERE NOMINAL NOT EXCEEDING RS. 5,000/-. AO HOWEVER OBSER VED THAT THERE WAS NO DISCRETION GIVEN TO THE AO IN MATTER OF DISALLOWANC E OF EXPENSES U/S 14A WHICH HAS TO BE MADE AS PER RULE 8D. HE, THEREFORE, COMPUTED THE DISALLOWANCE AS PER RULE 8D AT RS. 46,33,215/- CONS ISTING OF INTEREST EXPENDITURE OF RS. 42,45,521/- AND OTHER EXPENSES O F RS. 3,87,693/-. 4.1.2 IN APPEAL, CIT(A) OBSERVED THAT THE ASSESSEE HAD DISPUTED ONLY THE QUANTIFICATION OF EXPENSES AS THE AO HAD ADOPTED TH E FIGURE OF GROSS INTEREST WITHOUT REDUCING THE INTEREST CAPITALIZED AND HAD A LSO TAKEN AVERAGE VALUE OF INTEREST INCORRECTLY. CIT(A), THEREFORE, DIRECTED T HE AO TO VERIFY THE FIGURES WHILE CONFIRMING THE DISALLOWANCE MADE AS PER RULE 8D, AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 4.1.3 BEFORE US, THE LEANED AR FOR THE ASSESSEE SUB MITTED THAT THOUGH RULE 8D WAS APPLICABLE IN ASSESSMENT YEAR 2008-09, THE A O UNDER THE PROVISIONS OF SECTION 14(2) WAS REQUIRED TO RECORD FINDING NOT WHY HE WAS NOT SATISFIED REGARDING THE CLAIM OF THE ASSESSEE AS TO NO EXPEND ITURE HAD BEEN INCURRED. IN THIS CASE THE AO HAS NOT RECORDED ANY SATISFACTION AND CIT(A) ALSO DID NOT DEAL WITH THIS ISSUE, ALTHOUGH THE ASSESSEE HAD RAI SED A LEGAL GROUND THAT THE DISALLOWANCE WAS NOT LEGALLY CORRECT. IT WAS, THERE FORE, URGED THAT THE MATTER MAY BE EXAMINED AFRESH IN ACCORDANCE WITH LAW. THE LEARNED DR HAD NO M/S. EMCO LTD, - 10 - SERIOUS OBJECTION IN THE MATTER AND PLACED RELIANCE ON THE FINDINGS OF AUTHORITIES BELOW. 4.1.4 WE HAVE PERUSED THE RECORDS AND CONSIDERED MA TTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF EXPENSES RELAT ING TO EXEMPT INCOME. DISALLOWANCE OF SUCH EXPENSES U/S 14A IS REQUIRED T O BE MADE AS PER METHOD PRESCRIBED BY THE GOVERNMENT. THE GOVERNMENT HAVE S INCE NOTIFIED RULE 8D FOR THIS PURPOSE. THERE IS NO DISPUTE THAT RULE 8D IS APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. HOWEVER WE NOT E THAT SECTION 14A CLEARLY PROVIDES THAT THE AO WILL PROCEED TO MAKE D ISALLOWANCE AS PER RULE 8D ONLY AFTER HE IS NOT SATISFIED ABOUT THE CORRECT NESS OF THE CLAIM OF THE ASSESSEE. IN THIS CASE THE ASSESSEE HAD CLAIMED THA T IT HAD NOT INCURRED ANY INTEREST EXPENDITURE OR ANY OTHER DIRECT EXPENSES A ND THE INDIRECT EXPENSES WERE ONLY NOMINAL. THE AO HAD NOT RECORDED ANY FIND ING ON THIS CLAIM OF THE ASSESSEE NOR IT HAS BEEN DONE BY THE CIT(A). THEREF ORE, IN OUR VIEW, APPLYING RULE 8D STRAIGHTAWAY WITHOUT RECORDING ANY FINDING ON THE CLAIM OF THE ASSESSEE IS NOT CORRECT. WE, THEREFORE, SET ASIDE T HE ORDER OF CIT(A) AND RESTORE THE MATTER TO THE FILE OF AO FOR PASSING AF RESH ORDER AFTER NECESSARY EXAMINATION IN THE LIGHT OF OBSERVATIONS MADE IN TH IS ORDER AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 4.2 THE SECOND DISPUTE IS REGARDING DISALLOWANCE OF EXPENSES OF RS. 81,57,919/- CLAIMED BY THE ASSESSEE ON PROPORTIONAT E BASIS U/S 35D OF THE IT ACT. THE ASSESSEE HAD CLAIMED FUND RAISING EXPENSES RELATING TO ISSUE OF FRESH SHARE CAPITAL IN ASSESSMENT YEAR 2006-07 AND 2007-0 8, WHICH HAD BEEN DISALLOWED BY AO. IN ASSESSMENT YEAR 2006-07 THE FU ND RAISING EXPENSES HAD BEEN DISALLOWED BY AO BUT IN APPEAL CIT(A) HAD ALLO WED 1/5 TH OF SUCH EXPENSES U/S 35D OF THE IT ACT. BUT IN FURTHER APPE AL THE TRIBUNAL HAD RESTORED THE ISSUE TO THE FILE OF AO FOR FRESH DECI SION. IN ASSESSMENT YEAR M/S. EMCO LTD, - 11 - 2007-08 THE AO HAD AGAIN DISALLOWED THE EXPENSES WH ICH WAS CONFIRMED BY CIT(A). FURTHER APPEAL BY THE ASSESSEE ON THIS ISSU E HAS ALREADY BEEN CONSIDERED BY US AND VIDE PARA 2.4 OF THE ORDER, WE HAVE RESTORED THIS ISSUE TO THE FILE OF AO FOR FRESH DECISION. THEREFORE, THE C LAIM OF THE ASSESSEE U/S 35D IN THIS YEAR WILL DEPEND UPON THE DECISION TAKEN BY AO AND THE APPELLATE AUTHORITIES IN ASSESSMENT YEAR 2006-07 AND 2007-08 REGARDING ALLOWABILITY OF CLAIM U/S 35D. WE, THEREFORE, SET ASIDE THE ORDER O F CIT(A) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF AO TO BE DEALT WI TH AFRESH IN LINE WITH THE DECISION TAKEN ON THE ISSUE IN ASSESSMENT YEAR 2006 -07 AND 2007-08. 5. THE APPEAL OF THE REVENUE IN ASSESSMENT YEAR 200 8-09 IN ITA NO. 533/MUM/2012 . THE ONLY DISPUTE RAISED BY THE REVENUE IN THIS AP PEAL IS REGARDING DISALLOWANCE OF INTEREST U/S 36(1)(III) O F THE IT ACT., WHICH HAS BEEN DELETED BY CIT(A) 5.1 THE AO NOTED THAT IN THE BALANCE SHEET THE ASSE SSEE HAD SHOWN LOAN LIABILITY OF RS. 308.36 CRORE AGAINST WHICH THERE W AS INTEREST PAYMENT OF RS. 33.03 CRORE. THE AO ALSO NOTED THAT THE ASSESSEE HA D MADE INVESTMENT/ADVANCES AS PER DETAILS GIVEN BELOW:- SL. NO. PARTICULARS AMOUNT 1. ADVANCE TO SUBSIDIARY COMPANY 960,617,789 2. INVESTMENT IN SUBSIDIARY COMPANY 500,000 3. OTHER DEPOSITS (INCLUDING DEPOSIT WITH PARTIES IN WHICH ONE OF THE DIRECTOR IS A MEMBER AND DIRECTOR) 10,000,000 4. INTER CORPORATE DEPOSITS 45,909,679 TOTAL 1,017,027,468 M/S. EMCO LTD, - 12 - 5.2 AO, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY PROPORTIONATE DISALLOWANCE SHOULD NOT BE MADE. THE ASSESSEE EXPLA INED THAT ADVANCES TO SUBSIDIARY OF RS. 96.06 CRORE HAD BEEN MADE FROM OW N FUNDS RAISED THROUGH QIP ISSUE AND, THERE WERE NO BORROWINGS INVOLVED. T HEREFORE, THERE WAS NO INTEREST EXPENDITURE. THE DEPOSIT OF RS. 1,00,00,00 0/- WAS EXPLAINED IN CONNECTION WITH TAKING THE FURNISHED OFFICE PREMISE S ON LEAVE AND LICENSE FOR WHICH SECURITY DEPOSIT HAD TO BE GIVEN. AS REGARDS THE INTER CORPORATE DEPOSIT IT WAS SUBMITTED THAT THE SAME WAS INTEREST BEARING . IT WAS ACCORDINGLY URGED THAT NO DISALLOWANCE SHOULD BE MADE. THE AO ACCEPTE D THE CLAIM IN RELATION TO ADVANCE TO SUBSIDIARY. IN RELATION TO OTHER ADVA NCES/DEPOSITS THE AO OBSERVED THAT THE ASSESSEE HAD NOT EXPLAINED THE BU SINESS PURPOSE OF SUCH ADVANCES/DEPOSITS. HE, THEREFORE, DISALLOWED THE IN TEREST IN RELATION TO THREE ITEMS WHICH CAME TO RS. 62,05,065/-. 5.3 IN APPEAL, CIT(A) ACCEPTED THE CLAIM OF THE ASS ESSEE THAT THE INVESTMENT OF RS. 5,00,000/- IN THE WHOLLY OWN SUBSIDIARY WAS ON COMMERCIAL EXPEDIENCY AND SO WAS THE DEPOSIT OF RS. 1,00,00,00 0/-. CIT(A) ALSO HELD THAT INTER CORPORATE DEPOSIT WAS INTEREST BEARING. HE, T HEREFORE, DIRECTED THE AO THE DELETE THE ADDITION MADE. AGGRIEVED BY THE DECISION OF CIT(A) THE REVENUE IS IN APPEAL BEFORE TRIBUNAL. 5.4 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE REC ORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOW ANCE OF INTEREST PROPORTIONATE TO INVESTMENT OF RS. 5,00,000/- IN TH E WHOLLY OWNED SUBSIDIARY, DEPOSIT OF RS. 1,00,00,000/- AND INTER CORPORATE DE POSIT OF RS. 4.59 CRORE. THE AO HAD MADE PROPORTIONATE DISALLOWANCE OF INTEREST ON THE GROUND THAT THERE WAS NO BUSINESS PURPOSE INVOLVED IN MAKING SUCH DEP OSITS. IN APPEAL CIT(A) HAS ACCEPTED THE CLAIM OF THE ASSESSEE THAT INVESTM ENT OF RS. 5,00,000/- IN THE SUBSIDIARY WAS ON COMMERCIAL EXPEDIENCY WITHOUT GIV ING ANY BASIS AS TO HOW M/S. EMCO LTD, - 13 - THE INVESTMENT HAD PROMOTED THE BUSINESS OF THE ASS ESSEE. CIT(A) HAS ALSO ACCEPTED THE CLAIM THAT DEPOSIT OF RS. 1,00,00,000/ - WAS IN CONNECTION WITH HIRING OF OFFICE PREMISES AND THAT THE INTER CORPOR ATE DEPOSIT WAS INTEREST BEARING APPARENTLY WITHOUT ANY VERIFICATION. THIS A SPECT IN OUR VIEW ALSO REQUIRES VERIFICATION BY THE AO. LEARNED AR SUBMITT ED THAT HE HAD NO OBJECTION IF THE ISSUE IS RESTORED TO THE FILE OF AO FOR FRESH VERIFICATION. WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) AND RESTOR E THIS ISSUE TO THE FILE OF AO FOR PASSING AFRESH ORDER AFTER NECESSARY VERIFICATI ON AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 6. IN THE RESULT ALL THE APPEALS ARE ALLOWED FOR ST ATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 27 -9-201 3 SD/- SD/- (AMIT SHUKLA) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER SKS SR. P.S, MUMBAI DATED 27.9.2013 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, E BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI