DCIT, New Delhi V. M/s Cedar Support Services Ltd., New Delhi

ITA 2950/DEL/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3533 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2012-2013
• Appeal Filed On: 24-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S R SENAPATI
• Keywords: Earning of tax free income; Wholly owned subsidiary
• Section: 14A; 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E , NEW DELHI BEFORE SHRI N.K. SAINI , ACCOUNTANT MEMBER AND SMT. SUCHITRA KAMBLE , JUDICIAL MEMBER I.T.A. NO. 2950 /DEL /201 6 ASSESSMENT YEAR: 20 12 - 13 DCIT CIRCLE - 5 ( 2 ) NEW DELHI VS. CEDAR SUPPORT SERVICES LTD., 1, BHARTI CRESCENT, NELSON MANDELA MARG, NEW DELHI PAN - AADCB1156C [APPELLANT] [RESPONDENT] DEPARTMENT BY: SH. S.R. SENAPATI, SR. DR RESPONDENT BY: SH. ANIL BHALLA, ADVOCATE DATE OF HEARING: 06 0 2 2018 DATE OF PRONOUNCEMENT: 12 02 2018 O R D E R PER N.K. SAINI , A.M: THIS IS AN APP EAL BY THE DEPARTMENT AGAINST THE ORDER DATED 29.2.2016 OF CIT(A) - 2, NEW DELHI. FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEAL: - I . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) IS NOT JUSTIFIED IN DELETING THE ADDITION OF RS. 1,90,46,924/ - ON ACCOUNT OF SECTION 14A OF THE I.T. ACT READ WITH RULE 8D OF I.T. RULES. II . THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIGHT TO AMEND, MODIFY, ALTER AND ANY GROUND(S) OF APPEAL AT ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEAL. ITA NO. 2950/DEL /201 6 2 2. FACTS OF THE CASE, IN BRIEF ARE THAT , THE ASSESSEE FILED ITS RETURN DIGITALLY ON 28.9.2012 DECLARING A LOSS OF RS. 15,19,95,132/ - . LATER ON, THE CASE WAS SELECTED FOR SCRUTINY. DURING THE C OURSE OF ASSESSM ENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAD BEEN REGULARLY MAKING INVESTMENT IN MUTUAL FUNDS AND THAT THE INVESTMENT INTO EQUITY SHARES WERE ALSO MADE IN THE COMPANY WHO ENTERED INTO JOINT VENTURE WITH THE ASSESSEE. ACCORDING TO THE AO , THE ASSESSEE WILL RECEIVE A DIVIDEND IN COME WHICH WILL BE EXEMPT IN HIS HAND. HE, THEREFORE, ASKED THE ASSESSEE TO JUSTIFY AS TO WHY THE DISALLOWANCE U/S 14A OF THE I.T. ACT , 1961 (IN SHORT THE ACT) READ WITH RULE 8D OF I.T. RULES, 1962 BE NOT MADE IN ITS CASE . IN RESPONSE, THE ASSESSEE SUBMITTED AS UNDER: - DISALLOWANCE U/S 14A READ WITH RULE 8D: IN CURRENT ASSESSMENT PROCEEDINGS, YOUR GOODSELF, ASSESSEE HAS NEITHER INCURRED ANY EXPENSES FOR EARNING THE EXEMPT INCOME NOR EARNED ANY EXEMPT INCOME. SINCE THE AS SESSEE HAS ALREADY PRODUCE ALL THE RELEVANT DETAILS AS AND WHEN REQUIRED BY YOU, KINDLY DO NOT MAKE THE ADDITION FOR THE CLAUSE 3. THE AO, HOWEVER, MADE THE DISALLOWANCE OF RS. 1,90,46,924/ - U/S 14A OF THE INCOME TAX ACT , 1961 READ WITH RULE 8D OF THE I. T. RULES, 1962 AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE. 4. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER TO THE LEARNED CIT(A) AND SUBMITTED AS UNDER: - 1.1 THE LEARNED ASSESSING OFFICER HAS ERRED BOTH ON FACTS AND IN LAW IN DISALLOWING EXPENSES AMOUNTING TO RS. 1,90,46,924 / - BY WRONGLY APPLYING THE PROVISIONS OF SECTION 14A READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 ALLEGEDLY ON THE GROUND THAT THE SAME HAVE BEEN INCURRED FOR THE PURPOSE OF EARNING EXEMPT INCOME AND THEREBY NOT FOL LOWING THE DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF HOLICIM INDIA PVT. LTD. (ITA NOS. 486/2014 & 299/2014) FPB 208 - 215]. 1.2 IT IS IMPORTANT TO MENTION HERE THE FACT THAT THE INVESTMENT CONSIDERED FOR CALCULATION OF DISALLOWANCE OF EXPENDITURE ON EXEMPT INCOME BY THE LEARNED AO IS INVESTMENT MADE IN WHOLLY OWNED SUBSIDIARY OF THE ASSESSEE COMPANY I.E. BHARTI RETAIL LIMITED AND IN THE COMPANY WITH WHOM THE ASSESSEE HAS ENTERED INTO JOINT VENTURE I.E. BHARTI WALLMART PRIVATE LIMITED. 1. 2.1. WE SUBMIT THAT THE LEARNED AO HAS CONSIDERED THE TOTAL VALUE OF INVESTMENTS FOR THE PURPOSE OF CALCULATING AVERAGE VALUE OF INVESTMENTS WHICH INCLUDE INVESTMENTS IN JV, INVESTMENTS IN WHOLLY OWNED SUBSIDIARY, SHARE APPLICATION MONEY AND QUOTED ITA NO. 2950/DEL /201 6 3 INVE STMENTS IN MUTUAL FUNDS. 1.2.2. WITHOUT PREJUDICE TO ABOVE WE SUBMIT THAT THE INVESTMENTS MADE IN SHARE APPLICATION MONEY AND QUOTED INVESTMENTS IN MUTUAL FUNDS DID NOT RESULT IN ANY TYPE OF EXEMPT INCOME THEREFORE IT MUST NOT BE INCLUDED IN CALCULATION OF AVERAGE INVESTMENTS. 1.3 THE COMPANY HAS NOT EARNED ANY EXEMPT INCOME AND NO DISALLOWANCE CAN BE MADE U/S 14A. [ CIT VS HOLCIM INDIA (P) LTD. (2014) 90 CCH 0081 DEL HC] 1.4 THE INVESTMENT MADE IN WHOLLY OWNED SUBSIDIARY IS TO OBTAIN CONTROLLING STAKE INSTE AD OF RECEIVING DIVIDEND. 1.5 WE FURTHER SUBMIT THAT THE ASSESSEE COMPANY VIDE HIS LETTER DATED 15/05/2014 [PB 33 - 34] PLACED ON RECORD THE COPY OF FINANCIAL STATEMENTS AND TAX AUDIT REPORT FOR FY 2011 - 12. THE ASSESSEE COMPANY HAS ALSO SUBMITTED THE DETAIL S OF EXPENSES DEBITED IN P&L A/C VIDE ITS LETTER DATED 13/11/2014 [PB 35 - 37], THE ASSESSEE VIDE ITS LETTER DATED 13/01/2015 SUBMITTED THE DETAILS OF RENT EXPENSES DEBITED TO P&L A/C IN POINT NO. 4. IN ADDITION TO THIS, THE ASSESSEE VIDE ITS LETTER DATED 13 /01/2015 IN POINT NO. 7 SUBMITTED THE DETAILS OF TRAINING EXPENSES AMOUNTING TO RS. 19,45,324/ - AND IN POINT NO. 8 SUBMITTED THE DETAILS OF TRAVELLING EXPENSES AMOUNTING TO RS. 16,45,37,830/ - . 1 . 5 . 1 . ONCE ALL THE DETAILS WERE MADE AVAILABLE ALONG WITH THE ENTIRE ACCOUNTS OF THE ASSESSEE, THE ASSESSING OFFICER WAS REQUIRED TO RECORD HIS 'SATISFACTION' OR SATISFY HIMSELF THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, THE CLAIM OF THE ASSESSEE THAT NO EXPENSE IS DISALLOW ABLE U/S 14A WAS NOT CORRECT AND THERE CO ULD HAVE BEEN CERTAIN OTHER EXPENDITURE WHICH CAN BE SAID TO HAVE BEEN INCURRED IN RELATION TO THE EARNING OF EXEMPT INCOME. THE DISALLOWANCE UNDER SECTION 14A (1) CAN ONLY BE TRIGGERED, ONCE THE CONDITIONS UNDER SUB SECTION (2) ARE SATISFIED. 1 . 5 . 2 . TO WORK OUT THE DISALLOWANCE UNDER RIDE 8D, THE ASSESSING OFFICER HAS TO FIRST EXAMINE THE ACCOUNTS OF THE ASSESSEE AS TO WHETHER THERE IS EXEMPT INCOME AND THEN THE CORRECTNESS OF THE CLAIM AND THEN, IF HAVING REGARD TO SUCH ACCOUNTS AND THE CLAIM HE IS NOT SATISFIE D WITH EITHER THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE OR MADE A CLAIM THAT NO EXPENDITURE AT ALL HAS BEEN INCURRED FOR THE PURPOSE OF EARNING THE EXEMPT INCOME, THEN ONLY HE CAN RESORT TO RIDE 8D. 1 . 5 . 3 . THE LEARNED AO HAS GIVEN A REASONING THAT THE ASSESSEE COMPANY WILL RECEIVE DIVIDEND INCOME WHICH IS MERELY A HYPOTHESIS. THE LEARNED AO FURTHER IN HIS ORDER DATED 16/01/2015 AT PAGE 2 [ REFER PB 26] PLACED HIS COMMENTS ON EXPENSES INCURRED BY THE ASSESSEE WHICH IS AGAIN BASED ON HIS IMAGINATION RATHER THAN FACT: QUOTE IT CANNOT BE DENIED THAT TO MONITOR THE INVESTMENT MADE BY THE ASSESSEE AND THE EXEMPT INCOME EARNED IN THE FORM OF DIVIDEND INCOME AND LONG TERM CAPITAL GAIN, UNDOUBTEDLY MANAGEMENT/ESTABLI SHMENT EXPENSES AND OTHER OFFICE OVER HEADS MUST HAVE BEEN INCURRED TO TAKE CARE OF INCOME RECEIVED, INVESTMENT MADE AND OTHER ALLIED ACTIVITIES INVOLVED. FURTHER THE BANK/FINANCIAL INSTITUTION MUST ALSO HAVE LEVIED ITS CHARGE/FEES. ITA NO. 2950/DEL /201 6 4 UNQUOTE 1 . 5 . 4 . IN FACT THERE WAS NO MANASERIAL OR ADMINISTRATIVE EXPENSE INCURRED FOR MANAGEMENT OF THESE INVESTMENTS AS THE DECISION OF INVESTMENTS WAS MADE IN THE PREVIOUS YEARS INSTEAD OF YEAR UNDER APPEAL. IT IS APPARENT FROM THE PERUSAL OF SCHEDULE 4 INVESTMENTS OF THE FINANCI AL STATEMENTS OF FY 2011 - 12 THAT SHARE APPLICATION MONEY FOR INVESTMENTS IN BHARTI RETAIL LIMITED WERE MADE IN FY 2009 - 10 ITSELF WHICH WAS SUBSEQUENTLY INCREASED TO THE AMOUNT OF SHARE CAPITAL IN FY 2010 - 11. SINCE, NO MANAGEMENT DECISION RELEVANT TO INVEST MENT IN SUBSIDIARY WAS TAKEN DURING THE YEAR, IT IS APPARENT THAT NO EXPENSES OF SUCH NATURE CAN BE ATTRIBUTED TO EXEMPT INCOME. THE LEARNED AO COMPLETELY OVERLOOKED THIS FACT. IN ANY CASE THE COMPANY HAS NOT EARNED ANY EXEMPT INCOME. 1 . 5 . 5 . IN THE PRESENT CASE, THE ASSESSING OFFICER STRAIGHTAWAY PROCEEDED TO APPLY RULE 8D FOR THE PURPOSE OF DISALLOWANCE UNDER SECTION 14A WITHOUT SATISFYING OR COMPLYING WITH THE MANDATORY REQUIREMENT OF SECTION 14A(2) OR RULE 8D(1). IT IS WELL SETTLED PRINCIPLE IN LAW THAT DISALL OWANCE U/S 14A WITHOUT POINTING OUT ANY DIRECT EXPENSE BEING INCURRED FOR EARNING EXEMPT INCOME WAS UNJUSTIFIED. 1 . 5 . 6 . IT IS TO BE NOTED HERE THAT THE LEARNED AO COMPLETELY MISUNDERSTOOD THE NATURE OF INVESTMENT IN CLASSIFYING THE LONG TERM CAPITAL GAINS AS EXEMPT INCOME. WE WOULD LIKE TO DRAW YOUR HONOUR S ATTENTION TO THE INVESTMENT MADE BY THE ASSESSEE COMPANY IN ITS SU BSIDIARY AND JV PARTNER [ KINDLY REFER PAGE 58 . BOTH THE INVESTMENTS IF SOLD WILL GENERATE CAPITAL GAINS WHICH WILL BE TAXABLE. 1 . 6 . IT IS ALSO IMPORTANT TO NOTE HERE THAT NO EXEMPT INCOME WAS EARNED DURING THE YEAR BY THE ASSESSEE COMPANY ON SUCH INVESTMENTS. IT WAS EXPLAINED TO THE SATISFACTION OF THE LEARNED AO BY ASSESSEE COMPANY VIDE ITS LETTER DATED 16/01/2015 [ PB 44 - 51], 1 . 5 . 6 . IT IS ALSO TO BE NOTED HERE THAT THE INVESTMENTS IN SUBSIDIARIES WERE MADE WITH AN INTENTION TO HOLD CONTROLLING STAKE RATHER THAN TO E ARN ANY DIVIDEND INCOME . 5 . IT WAS ALSO STATED THAT THE PURPOSE OF INVESTMENT WAS TO OBTAIN THE CONTROLLING INTEREST IN SUBSIDIARY COMPANY RATHER THAN TO EARN DIVIDEND AND THAT NO EXEMPT INCOME WAS EARNED BY THE ASSESSEE DURING THE YEAR, THEREFORE, THE PROVISION OF SECTION 14A OF THE ACT WERE NOT APPLICABLE. THE RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: - I . ACIT VS. M BHASKARAN [2014] 50 TAXMANN.COM 138 (CHENNAI) II. CIT VS. SHIVAM MOTORS (P) LTD. [2015] 55 TAXMANN.COM 262 (ALLD) III . CIT VS. LAKHANI MARKETING INC. [201] 49 TAXMANN.COM 257 (P & H) IV . CIT VS. CORRTECH ENERGY (P) LTD. [2014] 45 TAXMANN.COM 116 (GUJ) V . CIT VS. WINSOME TEXTILE INDUSTRIES LTD. [2009] 319 ITR 204 (P& H) VI . CIT VS. HOLCIM INDIA PVT. LTD. (2014 ) 90 CCH 81 (DEL) ITA NO. 2950/DEL /201 6 5 6 . IT WAS ALSO STATED THAT NO EXEMPT INCOME WAS EARNED BY THE ASSESSEE, THEREFORE THE PROVISIONS OF SECTION 14A WERE NOT APPLICABLE. THE RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: - I. SIVA INDUSTRIES AND HOLDINGS LTD. VS. ACIT [2011] 11 TAXMANN.COM 404 (CHENNAI) II. CIT VS. WALFORT SHARE & STOCK BROKERS (P) LTD. [2010] 326 ITR 1 / 192 TAXMANN 211 (SC) III. CIT VS. HOLCIM INDIA (P) LTD. [2014] 90 CCH 0081 ( DEL HC ) IV. WALFORT SHARES & STOCK (P) LTD. (326 ITR 1) V. MAXOPP INVESTMENT LTD. VS. CIT [2012] 347 ITR 272/[2011] 203 TAXMANN 364/15 TAXMANN.COM 390 (DELHI) V I . PRIYA EXHIBITORS (P) LTD. VS. ACIT [2012] 27 TAXMANN.COM 88 (DEL) 7 . THE LEARNED CIT(A) AFTER CONSIDERING THE SUBMISSION OF THE ASSESSED DELETED THE DISALLOWANCE MADE BY THE AO BY OBSERVING AS UNDER: - I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE A/R OF THE APPELLANT COMPANY, THE FACTS OF THE CASE AS WELL AS THE FINDINGS OF THE A.O. GROUNDS NOS. 3 & 4 OF THE APPEAL ARE DIRECTED AGAINST THE DISALLOWANCE MADE BY THE A.O. AS PER THE PROVISIONS OF SECTION 14A READ WITH RULE 8D OF THE I.T. RULES, 19 62. THE BRIEF FACTS OF THE CASE ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO OBSERVED FROM THE BALANCE SHEET OF THE APPELLANT THAT INVESTMENTS HAD BEEN MADE BY THE APPELLANT IN MUTUAL FUNDS AND EQUITY SHARES. THE AO ASKED THE APPELLANT TO S HOW CAUSE AS TO WHY DISALLOWANCE U/S 14A READ WITH RULE 8D NOT BE MADE. THE APPELLANT IN THE ASSESSMENT PROCEEDINGS SUBMITTED THAT IN THE CURRENT ASSESSMENT PROCEEDINGS APPELLANT HAS NEITHER INCURRED ANY EXPENSES FOR EARNING THE EXEMPT INCOME NOR EARNED AN Y EXEMPT INCOME. 3.2.2 THE A.O. IN THE ASSESSMENT PROCEEDINGS ACCEPTED THAT NO DIRECT EXPENDITURE WAS INCURRED BY THE APPELLANT FOR EARNING EXEMPT INCOME AND THEREFORE, NO DISALLOWANCE OF DIRECT EXPENSE WAS CALLED FOR. FURTHER, THE A.O. STATED THAT THE INVESTMENTS AND THE INCOME THAT WOULD BE REALIZED WILL NOT USUALLY REQUIRE DIRECT ADMINISTRATIVE OR MANAGEMENT EXPENSES, AND SINCE THESE ARE USUALLY ACCOUNTED FOR IN COMMON WITH ALL THE OTHER BUSINESSES OF THE APPELLANT, LOGIC REQUIRES THAT SOME MECHANISM OR FORMULA BE ADOPTE D FOR ATTRIBUTING PART OF THE ADMINISTRATIVE/MANAGERIAL EXPENSES TO THE TAX EXEMPT INVESTMENT/INCOME. FURTHER, THE A.O. STATED THAT IT IS COMMON KNOWLEDGE THAT UNDER THE PORTFOLIO MANAGEMENT SCHEME, PORTFOLIO MANAGERS CHARGE ABOUT 2 TO 2.5 PERCENT OF THE P ORTFOLIO VALUE AS A FEE. THEREFORE, ADOPTING A CERTAIN PERCENTAGE OF THE AVERAGE VALUE OF THE INVESTMENT (INCOME FROM WHICH IS TAX EXEMPT) IS NOT UNREASONABLE AND ITA NO. 2950/DEL /201 6 6 RESULTS IN IDENTIFICATION OF EXPENDITURE WHICH HAS A CONNECTION WITH THE TAX EXEMPT INCOME. T HE A.O. FURTHER OBSERVED THAT TO MONITOR THE INVESTMENT MADE BY THE APPELLANT AND THE EXEMPT INCOME EARNED IN THE FORM OF DIVIDEND INCOME AND LONG TERM CAPITAL GAIN, UNDOUBTEDLY MANAGEMENT/ESTABLISHMENT EXPENSES AND OTHER OFFICE OVER HEADS MUST HAVE BEEN I NCURRED TO TAKE CARE OF INCOME RECEIVED, INVESTMENTS MADE AND OTHER ALLIED ACTIVITIES INVOLVED AND THE BANK/FINANCIAL INSTITUTION MUST ALSO HAVE LEVIED ITS CHARGES/FEES. THE A.O. PLACED RELIANCE ON THE DECISION OF HON'BLE HIGH COURT OF MUMBAI IN THE CASE O F GODREJ AND BOYCE MANUFACTURING COMPANY LTD. V. DCIT 234 CTR 1 WHERE IT WAS HELD THAT EXPENSES CONNECTED WITH THE EXEMPT INCOME HAVE TO BE DISALLOWED IRRESPECTIVE OF THE FACT THAT THEY ARE DIRECT OR INDIRECT, FIXED OR VARIABLE, MANAGERIAL OR FINANCIAL, IN ACCORDANCE WITH THE PROVISIONS OF THE LAW. THUS, THE A.O. DISALLOWED RS. 1,90,46,924/ - U/S 14A OF THE I.T. ACT READ WITH RULE 8D OF THE I.T. RULES AND ADDED BACK TO THE TOTAL INCOME OF THE APPELLANT. 3.2.3 THE APPELLANT IN THE APPELLATE PROCEEDINGS SUBMIT TED THAT THE INVESTMENT CONSIDERED FOR CALCULATION OF DISALLOWANCE OF EXPENDITURE ON EXEMPT INCOME BY THE AO IS INVESTMENT MADE IN ITS WHOLLY OWNED SUBSIDIARY I.E., BHARTI RETAIL LIMITED AND IN THE COMPANY WITH WHOM THE APPELLANT HAS ENTERED INTO JOINT VEN TURE I.E. BHARTI WALLMART PRIVATE LIMITED. FURTHER, THE A.O. HAS CONSIDERED THE TOTAL VALUE OF INVESTMENTS FOR THE PURPOSE OF CALCULATING AVERAGE VALUE OF INVESTMENTS WHICH NOT ONLY INCLUDE INVESTMENTS IN JOINT VENTURE AND INVESTMENTS IN WHOLLY OWNED SUBSI DIARY (AS DISCUSSED ABOVE) BUT ALSO SHARE APPLICATION MONEY AND QUOTED INVESTMENTS IN MUTUAL FUNDS. THE APPELLANT FURTHER SUBMITTED THAT INVESTMENTS MADE IN SHARE APPLICATION MONEY AND QUOTED INVESTMENTS IN MUTUAL FUNDS DID NOT RESULT IN ANY TYPE OF EXEMPT INCOME, THE INVESTMENTS IN MUTUAL FUNDS HAVING BEEN DISPOSED OF DURING THE YEAR WITH RESULTANT SHORT TERM CAPITAL GAIN. THE APPELLANT FURTHER PLACED ITS RELIANCE ON THE JUDG MENT IN THE CASE OF CAT VS HOLCIM INDIA (P) LTD. (2014) 90 CCH 0081 DEL HC AND SUB MITTED THAT SINCE THE COMPANY HAD NOT EARNED ANY EXEMPT INCOME, NO DISALLOWANCE CAN BE MADE U/S 14A. THE PURPOSE OF INVESTMENT IN WHOLLY OWNED SUBSIDIARY WAS STATED TO BE TO OBTAIN CONTROLLING STAKE, INSTEAD OF RECEIVING DIVIDEND. FURTHER, THE APPELLANT SU BMITTED THAT THERE WAS NO MANAGERIAL OR ADMINISTRATIVE EXPENSE INCURRED FOR MANAGEMENT OF THESE INVESTMENTS AS THE DECISION OF INVESTMENT WAS MADE IN THE EARLIER YEARS INSTEAD OF THE YEAR UNDER APPEA L . 3.2.4 IT IS APPARENT FROM THE FINANCIAL STATEMENTS OF THE APPELLANT THAT SHARE APPLICATION MONEY FOR INVESTMENT IN BHARTI RETAIL LIMITED WAS MADE IN F.Y. 2009 - 10 ITSELF WHICH WAS SUBSEQUENTLY INCREASED TO THE AMOUNT OF SHARE CAPITAL IN F.Y. 2010 - 11. SINCE, NO MANAGEMENT DECISION RELEVANT TO INVESTMENT IN SUB SIDIARY WAS TAKEN DURING THE YEAR, IT IS APPARENT THAT NO EXPENSES OF SUCH NATURE CAN BE ATTRIBUTED TO EXEMPT INCOME. ALSO, THE COMPANY HAS NOT EARNED ANY EXEMPT INCOME DURING THE YEAR. 3.2.4. SECTION 14A READS AS FOLLOWS: - 14A. EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL ITA NO. 2950/DEL /201 6 7 INCOME: - ( 1 ) FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. ( 2 ) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PR ESCRIBED, IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER TH IS ACT. ( 3 ) THE PROVISIONS OF SUB - SECTION (2) SHALL ALSO APPLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT: PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. 3.2.6 WITH THE DISCUSSION OF LEGAL PROVISIONS OF SECTION 14A, THE SCOPE AND APPLICABILITY OF SECTION W.E.F. 1 - 4 - 2007 ARE AS UNDER: THE ASSESSEE MUST HAVE INCURRED EXPENDITURE IN RELATION TO EARN INCOME WHICH IS EXEMPTED UNDER THE INCOME - TAX ACT, 1961. THE ASSESSEE MUST HAVE AN EXEMPTED INCOME WHICH IS NOT INCLUDIBLE IN HIS TOTAL INCOME. PRESCRIBED FORMULA CAN BE APPLIED ONLY WHERE THE A SSESSING OFFICER IS NOT SATISFIED WITH ACCOUNT OF THE ASSESSEE WITH REGARD TO CORRECTNESS OF THE CLAIM OF EXPENSES OR ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED. IN OTHER CASES, WHATEVER EXPENSES HAVE BEEN DECLARED BY THE ASSESSEE WITH REGARD TO EARNING EXEMPTED INCOME THEY ARE TO BE ADDED FOR DETERMINATION OF TOTAL INCOME. ONLY EXPENSES INCURRED FOR EARNING AN INCOME WHICH IS EXEMPT FROM TAX, WILL BE COVERED BY SECTION 14A. IN OTHER WORDS, IT IS ONLY SUCH AN EXPENDITURE WHICH IS LINKED TO THE I NCOME WHICH IS FREE FROM TAX THAT CAN BE SUBJECTED TO DISALLOWANCE UNDER SECTION 14A. 3.2.7 THE DISALLOWANCE UNDER SECTION 14A (1) CAN ONLY BE TRIGGERED, ONCE THE CONDITIONS UNDER SUB - SECTION (2) ARE SATISFIED. TO WORK OUT THE DISALLOWANCE UNDER RULE 8D, THE ASSESSING OFFICER HAS TO FIRST EXAMINE THE ACCOUNTS OF THE APPELLANT AND THE CORRECTNESS OF THE CLAIM AND THEN, IF HAVING REGARD TO SUCH ACCOUNTS AND ITA NO. 2950/DEL /201 6 8 THE CLAIM, HE IS NOT SATISFIED WITH EITHER THE CORRECTNESS OF THE CLAIM MADE BY THE APPELLANT OR THE CLAIM THAT NO EXPENDITURE AT ALL HAS BEEN INCURRED FOR THE PURPOSE OF EARNING THE EXEMPT INCO ME, THEN ONLY HE CAN RESORT TO RULE 8D. IN THE INSTANT CASE, THE ASSESSING OFFICER PROCEEDED TO APPLY RULE 8D FOR THE PURPOSE OF DISALLOWANCE UNDER SECTION 14A WITHOUT SATISFYING OR COMPLYING WITH THE MANDATORY REQUIREMENT OF SECTION 14A (2). IT IS WELL SE TTLED PRINCIPLE IN LAW THAT DISALLOWANCE U/S 14A WITHOUT POINTING OUT ANY EXPENSE BEING INCURRED FOR EARNING EXEMPT INCOME IS UNJUSTIFIED. AS PER SCHEDULE - 4 TO THE FINAL ACCOUNTS, OUT OF TOTAL INVESTMENTS OF RS.535.85 CRORES AS ON 31.03.2012 MADE BY THE CO MPANY, INVESTMENTS TO THE TUNE OF RS.532.86 WERE MADE IN M/S. BHARTI RETAIL LTD. (SUBSIDIARY), RS.2.00 CRORES IN M/S. BHARTI WALLMART PVT. LTD. AND RS.1.05 CRORES WAS SHARE APPLICATION MONEY. AS PER DECISIONS OF HON BLE COURTS, SUCH INVESTMENTS ARE NOT TO BE CONSIDERED FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE U/S 14A. NOT ONLY THIS, THE EXPENSES CLAIMED AS PER SCHEDULES 12 & 13 OF THE ANNUAL ACCOUNTS VIZ. S ALARIES, WAGES & BONUS, GRATUITY, RATES & TAXES, TRAVELLING & CONVEYANCE, LEGAL & PROFESSIONAL C HARGES, INSURANCE EXPENSES, REPAIR & MAINTENANCE, TELEPHONE EXPENSES, RECRUITMENT AND TRAINING EXPENSE, STAFF WELFARE, ETC. CANNOT BE STATED TO HAVE BEEN INCURRED FOR THE PURPOSE OF MAINTAINING THE APPELLANT S INVESTMENTS IN ITS SUBSIDIARY COMPANY OR IN JO INT VENTURE. THE A.O. HAS THUS ERRED IN MAKING DISALLOWANCE U/S 14A IN THE APPELLANT S CASE FOR THE YEAR AND THE SAME IS DIRECTED TO BE DELETED. THES E GROUNDS OF APPEAL STAND ALLOW ANCE U/S 14A IN THE APPELLANT S CASE FOR THE YEAR AND THE SAME IS DIRECTED T O BE DELETED. THESE GROUNDS OF APPEAL STAND ALLOWED. 8 . NOW THE DEPARTMENT IS IN APPEAL. 9 . THE LEARNED SR. DR REITERATED THE OBSERVATIONS MADE BY THE AO AND STRONGLY SUPPORTED THE ASSESSMENT ORDER DATED 16.1.2015 . 10 . IN HIS RIVAL SUBMISSIONS THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LEARNED CIT(A) AND STRONGLY SUPPORTED THE IMPUGNED ORDER. 1 1 . WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, IT IS AN ADMITTED FACT THAT THE ASSESSEE WAS NOT HAVING ANY EXEMPT INCOME WHICH IS EVIDENT FROM PARA 3.2.4 OF THE IMPUGNED ORDER PASSED BY THE LEARNED CIT(A) WHEREIN IT HAS BEEN CATEGORICALLY STATED THAT THE ASSESSEE COMPANY H AD NOT EARNED ANY EXEMPT INCOME DURING THE YEAR. THE SAID OBSERVATION OF THE ITA NO. 2950/DEL /201 6 9 LEARNED CIT(A) WAS NOT REBUTTED. NOW THIS ISSUE HAS BEEN SETTLED BY THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CHEMINVEST LTD. VS CIT - IV (2015) 378 ITR 33 (DEL.) WHEREIN IT HAS BEEN HELD AS UNDER: THE EXPRESSION 'DOES NOT FORM PART OF THE TOTAL INCOME' IN SECTION 14A OF THE INCOME - TAX ACT, 1961, ENVISAGES THAT THERE SHOULD BE AN ACTUAL RECEIPT OF INCOME, WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME, DURING THE RELEVANT PRE - VIOUS YEAR FOR THE PURPOSE OF DISALLOWING ANY EXPENDITURE INCURRED IN RELATION TO THE INCOME. IN OTHER WORDS, SECTION 14A WILL NOT APPLY IF NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR. 12 . IN THE PRESENT CASE ALSO NO EXEMPT INCOME WAS CLAIMED BY THE ASSESSEE THEREFORE, THE DISALLOWANCE MADE BY THE AO U/S 14A OF THE ACT WAS RIGHTL Y DELETED BY THE LEARNED CIT(A). IN THAT VIEW OF THE MATTER, WE DO NOT SEE ANY MERIT IN THIS APPEAL OF THE DEPARTM ENT. 1 3 . IN THE RESULT, APPEAL OF THE DEPARTMENT I S DISMISSED. (ORDER P RONOUNCE D IN THE OP EN COURT ON 12 . 0 2 .2018. ) SD/ - SD/ - [ SUCHITRA KAMBLE ] [ N.K. SAINI ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 12 .02 .2018 SH COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR