Mallo Gems & Jewellery Ltd., (Presently known as Lypsa Gems & Jewellery Limited), Ahmedabad V. The CIT-II, Ahmedabad

ITA 316/AHD/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 8209 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2010-2011
• Appeal Filed On: 12-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VASUNDHARA UPMANYA
• Assessee Lawyers: KALPESH S DOSHI
• Keywords: Earning of tax free income; Prejudicial to interest
• Section: 14A; 263

Judgement Text

, *MH *MH*MH *MH* ** * IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD IZEKSN DQEKJ IZEKSN DQEKJ IZEKSN DQEKJ IZEKSN DQEKJ BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SHRI MAHAVIR PRASAD, JUDICIAL MEMBER I.T.A. NO.316/AHD/2015 ( / ASSESSMENT YEAR : 2010-11) MALOO GEMS & JEWELLERY LTD. (PRESENTLY KNOWN AS LYPSA GEMS & JEWELLERY LIMITED) 2 ND FLOOR, DIAMOND PARK BUILDING, DARGAH ROAD, OPP. AMBIKANAGAR SOCIETY, NAVSARI 396445, GUJARAT VS. COMMISSIONER OF INCOME TAX-II, AHMEDABAD. ! PAN/GIR NO. : AABCM 0649 K ( ' / APPELLANT ) .. ( #' RESPONDENT ) '$ APPELLANT BY : SHRI KALPESH S. DOSHI, A.R. #'%$ / RESPONDENT BY : SHRI VASUNDHARA UPMANYA, CIT-DR & ' (%) * / DATE OF HEARING 11/08/2017 +,-. %) * / DATE OF PRONOUNCEMENT 27/10/2017 / O R D E R PER SHRI MAHAVIR PRASAD, JUDICIAL MEMBER : THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE OR DER OF THE COMMISSIONER OF INCOME TAX(APPEALS)-II, AHMEDABAD, DATED 05/12/2014 FOR THE ASSESSMENT YEAR (AY) 2010-11, ON THE FOLLOWING GROUNDS: ITA NO.316/AHD/ 2015 MALOO GEMS & JEWELLERY LTD. (PRESENTLY KNOWN AS LY PSA GEMS & JEWELLERY LTD.) VS. CIT ASST.YEAR 2010-11. - 2 - I. THE LD.CIT HAS GROSSLY ERRED IN LAW AND ON FACTS IN ASSUMING JURISDICTION U/S.263 OF THE ACT ON THE ERRONEOUS GR OUND THAT THE IMPUGNED ASSESSMENT ORDER IS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF THE REVENUE. II. LD. CIT GROSSLY ERRED IN NOT APPRECIATING THAT IN ORDER TO INVOKE S.263, TWO CONDITIONS MUST BE FULFILLED VIZ. THE IM PUGNED ASSESSMENT ORDER MUST BE ERRONEOUS AND THAT ERROR M UST BE PREJUDICIAL TO THE INTEREST OF THE REVENUE. IN THE PRESENT CASE, LD. AO HAS PASSED THE REASONED ASSESSMENT ORDER AFTER A NALYZING ALL DETAILS AND THEREFORE THERE WAS NO ERROR IN THE IMP UGNED ASSESSMENT ORDER SO AS TO JUSTIFY ACTION U/S.263 OF THE ACT. UNDER THE CIRCUMSTANCES, THE VERY ASSUMPTION OF POWER U/S .263 OF THE ACT IS UNJUSTIFIED AND BAD IN LAW AND THEREFORE, OR DER U/S.263 OF THE ACT DESERVED TO BE QUASHED. III. ALTERNATIVELY AND WITHOUT PREJUDICE, LD. CIT ERRED IN LAW AND ON FACTS IN HOLDING THAT THE PROVISIONS OF S.14A READ WITH RULE 8D ARE APPLICABLE AND MANDATORY DISALLOWANCE OF EXPEND ITURE IS REQUIRED TO BE MADE. IV. IN ANY CASE, LD.CIT FURTHER ERRED IN INVOKING PROVI SIONS OF EXPLANATION TO S.73 THAT TOO WITHOUT RAISING THE SA ME IN THE NOTICE U/S 263 OF THE ACT. V. ALTERNATIVELY AND WITHOUT PREJUDICE, LD.CIT ERRED I N LAW AND ON FACTS IN HOLDING THAT THE VALUATION OF CLOSING STOC K IS NOT PROPER AND AS PER THE ACCEPTED METHODS OF ACCOUNTING CONSI STENTLY FOLLOWED BY THE ASSESSEE. VI. THE LD.CIT HAS FURTHER ERRED IN LAW IN NOT COMING T O ANY CONCRETE CONCLUSION AND WITHOUT CONDUCTING ANY INQU IRY OR INVESTIGATING THE ISSUE, MERELY DIRECTED THE AO TO FRAME THE ASSESSMENT ORDER AFRESH. WITHOUT THERE BEING ANY PO SITIVE AND EXACT FINDING ABOUT ORDER BEING ERRONEOUS AND PREJU DICIAL TO THE INTEREST OF THE REVENUE, THE ACTION OF LD. CIT IS W ITHOUT JURISDICTION AND ILLEGAL AND HENCE DESERVES TO BE D ELETED. ITA NO.316/AHD/ 2015 MALOO GEMS & JEWELLERY LTD. (PRESENTLY KNOWN AS LY PSA GEMS & JEWELLERY LTD.) VS. CIT ASST.YEAR 2010-11. - 3 - VII. LD. CIT HAS ERRED IN NOT CONSIDERING VARIOUS FACTS, SUBMISSIONS, EXPLANATION AND CLARIFICATIONS AS GIVEN BY THE APPE LLANT AND FURTHER ERRED IN NOT APPRECIATING THE FACTS AND LAW IN THEIR PROPER PERSPECTIVE. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERI ALS ON RECORD ARE AS UNDER:- IN THIS CASE, THE ASSESSEE IS ENGAGED IN THE BUSIN ESS OF MANUFACTURING & TRADING IN DIAMONDS AND ALLIED PROD UCTS. THE VARIOUS ISSUES ARISING OUT OF THE SCRUTINY OF ACCOUNTS OF T HE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS ARE DISCUSSED IN T HE SUBSEQUENT PARAS. 2.2 DISALLOWANCE OF EXPENSES U/S.14A ON PERUSAL OF THE RETURN OF INCOME IT WAS NOTICED THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.19,28,694/- DURING THE YEAR AND CLAIMED AS EXEMPT U/S.10(33) OF THE INCOME TAX ACT, 1961. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSEE WAS R EQUESTED TO SHOW- CAUSE AS TO WHY THE PROVISIONS OF SECTION 14A READ WITH RULE 8D OF THE INCOME TAX SHOULD NOT BE APPLIED IN THIS REGARD. TH E ASSESSEE VIDE ITS REPLY DATED 26/11/2012 HAS SUBMITTED AS UNDER: D DISALLOWANCE U/S 14A 1. THE COMPANY HAS MADE INVESTMENTS IN SHARES AND SECURITIES FOR SOME TIME OF PERIOD I.E. TILL AUGUST 2009. 2. THERE WAS A CHANGE IN THE OWNERSHIP AND MANAGEM ENT OF THE COMPANY AND THE PRESENT PROMOTERS TOOK OVER IN AY 2009-10 AND STARTED THE BUSINESS ACTIVITIES IN AUGU ST 2009. 3. UNTIL THAT PERIOD THE ENTIRE AMOUNT OF CAPITAL WAS INVESTED IN KOTAK BANK FLEXI MUTUAL FUND PLAN. DIVI DEND AMOUNTING TO RS.19,28,693 WAS RECEIVED. THE COPY OF THE ITA NO.316/AHD/ 2015 MALOO GEMS & JEWELLERY LTD. (PRESENTLY KNOWN AS LY PSA GEMS & JEWELLERY LTD.) VS. CIT ASST.YEAR 2010-11. - 4 - LEDGER ACCOUNTS OF MUTUAL FUND AND DIVIDEND ARE ENCLOSED AT PAGE NUMBER 53-57. 4. IT CAN BE OBSERVED FROM THE LEDGER ACCOUNTS SUBM ITTED THAT THE ENTIRE AMOUNT INVESTED IN MUTUAL FUNDS WAS WITHDRAWN ON 27-08-2009, 5. WHEREAS THE LOANS ON WHICH INTEREST WAS PAID WERE RECEIVED ONLY IN MARCH 2010. 6. HENCE THERE IS NO DIRECT NEXUS BETWEEN THE DI VIDEND INCOME EARNED, THE AMOUNT BORROWED AND THE INTEREST PAID ON THE LOANS. 7. IN ABSENCE OF ANY DIRECT NEXUS BETWEEN EXEMPT IN COME AND INTEREST PAID THE PROVISIONS SECTION 14A READ W ITH RULE 8D WILL NOT BE APPLICABLE. 8. WE ARE ALSO ENCLOSING THE DETAILS EXPENDITURE IN CURRED UNTIL 27-08-2009 I.E. TILL THE TIME OF WITHDRAWING OF THE INVESTMENTS FROM MUTUAL FUNDS AT PAGE NUMBER 58. IT CAN BE OBSERVED FROM THE SAME THAT NO EXPENDITURE HAS B EEN INCURRED TO EARN THE DIVIDEND INCOME. 9. IN RESPECT OF THE APPLICABILITY OF SECTION 14A R EAD WITH RULE 8D RELIANCE IS PLACED ON THE FOLLOWING DECISIO NS: M/S AUCHTEL PRODUTS LTD, VS. ACIT 22 TAXMAN.99 (MUM ) (ITA NOS.3189, 2649 & 3185/MUM/2010) IN A.Y.2008-09, THE ASSESSEE CLAIMED THAT IT HAD NO T INCURRED ANY EXPENDITURE IN EARNING DIVIDEND INCOME AND NO DISALLOWANCE U/S.14A COULD BE MADE. HOWEVER, THE AO COMPUTED DISALLOWANCE U/S.14A & RULE 8D OF RS.12.81 LAKHS. T HE HON'BLE TRIBUNAL HELD THAT S.I4A(2) EMPOWERS THE AO TO DETE RMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO TAX-F REE INCOME IF, 'HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE'. THE SATISFACTION OF THE AO AS TO THE INCORRECT CLAIM MA DE BY THE ASSESSEE IS SINE QUA NON FOR INVOKING THE APPLICABI LITY OF RULE 8D. THE SATISFACTION CAN BE REACHED ONLY WHEN THE C LAIM OF THE ASSESSEE IS VERIFIED. IF THE ASSESSEE PROVES BEFORE THE AO THAT IT INCURRED A PARTICULAR EXPENDITURE IN RESPECT OF EAR NING THE EXEMPT INCOME AND THE AO IS SATISFIED, THEN THERE I S NO REQUIREMENT TO PROCEED WITH THE COMPUTATION UNDER R ULE 8D. THE ITA NO.316/AHD/ 2015 MALOO GEMS & JEWELLERY LTD. (PRESENTLY KNOWN AS LY PSA GEMS & JEWELLERY LTD.) VS. CIT ASST.YEAR 2010-11. - 5 - AO WRONGLY PROCEEDED ON THE PREMISE THAT RULE 8D IS AUTOMATIC IRRESPECTIVE OF THE GENUINENESS OF THE ASSESSEE'S C LAIM IN RESPECT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. THE CORRECT SEQUENCE FOR MAKING ANY DISALLOWANCE U/S.14A IS TO FIRSTLY, EXAMINE THE ASSESSEE'S CLAIM OF HAVING INCURRED SOM E EXPENDITURE OR ON EXPENDITURE IN RELATION TO EXEMPT INCOME. IF THE AO IS SATISFIED WITH THE SAME, THEN THERE IS NO NEED TO COMPUTE DISALLOWANCE AS PER RULE 8D. IT IS ONLY WHE N THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR NO EXPENDITURE HAVIN G BEEN INCURRED IN RELATION TO EXEMPT INCOME, THAT THAT MA NDATE OF RULE 8D WILL OPERATE. JUSTICE SAM P BHARUCHA VS. ACIT (ITAT MUMBAI) (ITA 3889/M/2011) THE ASSESSEE EARNED TAX-FREE INCOME FROM SHARES AND UNITS AND CLAIMED THAT HE HAD NOT INCURRED ANY EXPENDITURE ON EARNING THE TAX-FREE INCOME AND SO NO DISALLOWANCE U/S.14A WAS PERMISSIBLE. THE AO & CIT(A) REJECTED THE CLAIM AND DISALLOWED R S.2.26 LAKHS U/S.14A AS EXPENDITURE INCURRED TO EARN THE T AX FREE INCOME. THE HONBLE TRIBUNAL HELD THAT S.14A HAS WI THIN IT IMPLICIT NOTION OF APPORTIONMENT IN CASES WHERE EXP ENDITURE IS INCURRED FOR COMPOSITE/INDIVISIBLE ACTIVITIES IN WH ICH TAXABLE AND NONTAXABLE INCOME IS RECEIVED. BUT WHEN IT IS POSSI BLE TO DETERMINE THE ACTUAL EXPENDITURE IN RELATION TO EXE MPT INCOME OR WHEN NO EXPENDITURE HAS BEEN INCURRED IN RELATION T O EXEMPT INCOME, THEN THE PRINCIPLE OF APPORTIONMENT EMBEDDE D IN S.14A HAS NO APPLICATION. FOR S.14A TO APPLY, THERE SHOUL D BE A PROXIMATE RELATIONSHIP BETWEEN THE EXPENDITURE AND THE TAX-FREE INCOME. IF THE ASSESSEE CLAIMS THAT NON EXPENDITURE AND THE TAX- FREE INCOME. IF THE ASSESSEE CLAIMS THAT NO EXPENDI TURE HAS BEEN INCURRED FOR EARNING THE EXEMPT INCOME, IT IS FOR T HE AO TO DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED A NY EXPENDITURE IN RELATION TO THE TAX-FREE INCOME AND, IF SO, TO QUANTIFY THE EXTENT OF DISALLOWANCE. IN ORDER TO DI SALLOW THE EXPENDITURE U/S.14A, THERE MUST BE A LIVE NEXUS BET WEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PAR T OF TOTAL INCOME. NO NOTIONAL EXPENDITURE CAN BE APPORTIONED FOR THAT ITA NO.316/AHD/ 2015 MALOO GEMS & JEWELLERY LTD. (PRESENTLY KNOWN AS LY PSA GEMS & JEWELLERY LTD.) VS. CIT ASST.YEAR 2010-11. - 6 - PURPOSE OF EARNING EXEMPT INCOME UNLESS THERE IS AN ACTUAL EXPENDITURE IN RELATION TO EARNING THE TAX-FREE INC OME. IF THE EXPENDITURE IS INCURRED WITH A VIEW TO EARN TAXABLE INCOME AND THERE IS APPARENT DOMINANT AND IMMEDIATE CONNECTION BETWEEN THE EXPENDITURE INCURRED AND TAXABLE INCOME, THEN N O DISALLOWANCE CAN BE MADE U/S.14A MERELY BECAUSE SOM E TAX EXEMPT INCOME IS RECEIVED BY THE ASSESSEE. ON FACTS , FROM THE DETAILS OF THE EXPENDITURE, IT IS CLEAR THAT THE EX PENDITURE INCURRED BY THE ASSESSEE HAS DIRECT NEXUS WITH THE PROFESSIONAL INCOME OF THE ASSESSEE. IT IS NOT THE CASE OF THE R EVENUE THAT THE ASSESSEE HAS USED HIS OFFICIAL MACHINERY AND ESTABL ISHMENT FOR EARNING THE EXEMPT INCOME. THE AO HAS NOT GIVEN ANY FINDING THAT ANY OF THE EXPENDITURE INCURRED AND CLAIMED BY THE ASSESSEE IS ATTRIBUTABLE FOR EARNING THE EXEMPT INCOME. CONS EQUENTLY, S.14A DISALLOWANCE IS NOT PERMISSIBLE 10. THEREFORE, CONSIDERING THE FACTS OF CASE, NO D ISALLOWANCE U/S 14A IS REQUIRED TO MADE.' 2.3 THE SUBMISSIONS OF THE ASSESSEE WAS PURSUED CAREFULLY AND CONSIDERED. AS SUBMITTED BY THE ASSESSEE THAT THE I NVESTMENTS IN SHARES AND SECURITIES WERE MADE TELL AUGUST 2009, THE PROFIT A ND LOSS A/C UP TO 27/08/2009 WAS PERUSED. IT WAS OBSERVED THAT THE AS SESSEE HAS DEBITED EXPENSES TO THE TUNE OF RS.8,465/- UNDER THE HEAD C OMMISSIONER OF BROKERAGE AND ANOTHER EXPENSES OF RS.39,708/- UNDER THE HEAD CDSL FEES. SINCE THESE EXPENSES WERE INCURRED TO EARN THE EXEMPTED DIVIDEN D INCOME, THEREFORE THE TOTAL AMOUNT OF RS.48,173/- WAS DISALLOWED U/S.14A OF THE ACT AND ADDED TO TOTAL INCOME OF THE ASSESSEE. 3. THEREAFTER, LEARNED CIT CALLED FOR EXAMINED THE RECORD OF THE ASST. PROCEEDING FOR ASST. YEAR 2010-11. IN THIS CASE, CI T WAS OF THE OPINION THAT ASSESSMENT ORDER PASSED ON 14/03/2013 U/S.143(3) OF THE I.T. ACT WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE RE VENUE, ON THE FOLLOWING GROUNDS: ITA NO.316/AHD/ 2015 MALOO GEMS & JEWELLERY LTD. (PRESENTLY KNOWN AS LY PSA GEMS & JEWELLERY LTD.) VS. CIT ASST.YEAR 2010-11. - 7 - 1. ALTHOUGH THE ASSESSEE HAD EARNED TAX EXEMPT INCO ME IN THE NATURE OF DIVIDEND TO THE TUNE OF RS.19,28,693/-, H OWEVER, NO DISALLOWANCE U/S.14A R.W.S. 8D OF THE ACT, WAS MADE . 2. IT WAS ALSO NOTICED FROM PERUSAL OF CASE RECORDS THAT, VERACITY OF VALUATION OF THE CLOSING STOCK WAS NOT MADE AT THE TIME OF FINALIZATION OF ASSESSMENT. 3. IN THE LIGHT OF THE ABOVE, NOTICE U/S.263 OF THE ACT WAS ISSUED TO THE ASSESSEE ON 25 TH SEPTEMBER, 2014 REQUIRING ASSESSEE TO SHOW- CAUSE AS TO WHY THE ASSESSMENT ORDER FINALIZED ON 1 4/03/2013 SHOULD NOT BE SET ASIDE AND ASSESSING OFFICER DIREC TED TO MODIFY THE SAME ON THE ISSUES MENTIONED ABOVE. 4. IN RESPONSE TO THE NOTICE ASSESSEE FILED A WRITTED SUBMISSION DTD. 14/10/2014 ON 17/10/2014 CONTENDING THE FOLLOWING: IN THIS REGARD WE HAVE TO STATE THE NOTICE WITH RE FERENCE TO BOTH THE ISSUES ARE CORRECT AS NEITHER THE ASSESSMENT ORDER IS PREJUDICIAL TO INTEREST OF REVENUE, NOR IT ERRONEOUS FOR THE FOLLO WING REASONS: A. DISALLOWANCE UNDER SECTION 14A. I. THE ASSESSEE COMPANY IS ASSESSED TO TAX SINCE PA ST MANY YEARS. I. THE ASSESSEE COMPANY WAS MAINLY HAVING ACTIVITIES O F INVESTMENT IN SHARES AND SECURITIES TILL AUGUST 2009. II. THERE WAS A CHANGE IN THE OWNERSHIP AND MANAGEMENT OF THE COMPANY AND THE PRESENT PROMOTERS TOOK OVER BUSINES S AND STARTED ACTIVITIES IN AUGUST 2009. III. THE COMPANY HAS MADE INVESTMENTS IN SHARES AND SECU RITIES FOR SOME PERIOD OF TIME I.E. TILL AUGUST 2009. IV. THE COMPANY HAD INVESTED THE ENTIRE CAPITAL IN KOTA K BANK FLEXI MUTUAL FUND PLAN TILL AUGUST 2009. THE COMPANY HAD NOT BORROWED ANY INTEREST BEARING FUND TO MAKE INVESTME NT IN MUTUAL FUND. V. THE COMPANY HAD INITIALLY MADE INVESTMENTS IN KOTAK MONTHLY PLAN SERIES II AMOUNTING TO RS. 96,22,405/- AND IN KOTAK FLEXI DEBT OF RS.1,30,44,291/-. THE INVESTMENT IN KOTAK M ONTHLY PLAN SERIES- II ALONG WITH DIVIDEND WAS TRANSFERRED TO K OTAK FLEXI DEBT ON 08/04/2009. VI. DURING THE PERIOD TILL AUGUST 2009 THE ASSESSEE COM PANY HAS EARNED DIVIDEND INCOME AMOUNTING TO RS.79,28,693/- ITA NO.316/AHD/ 2015 MALOO GEMS & JEWELLERY LTD. (PRESENTLY KNOWN AS LY PSA GEMS & JEWELLERY LTD.) VS. CIT ASST.YEAR 2010-11. - 8 - VII. ONCE THERE WAS CHANGE IN THE MANAGEMENT, THE NEW MA NAGEMENT STARTED THE DIAMOND BUSINESS IN AUGUST 2009. THE IN VESTMENT IN MUTUAL FUND MATURED ON 27/08/2009. THE TOTAL AMOUNT OF INVESTMENT ALONG WITH THE DIVIDEND WAS RECEIVED BAC K. VIII. TO ESTABLISH THIS FACT, WE HAVE ALSO FURNISHED THE INTERIM PROFIT & LOSS ACCOUNT AND BALANCE SHEET AS ON 27/08/2009 A S WELL AS THE LEDGER ACCOUNT OF INVESTMENTS DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THE SAME IS ENCLOSED FOR YO UR REFERENCE AT PAGE NO. 39-40 IX. THEREFORE, IT WAS DULY EXPLAINED DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT THE INVESTMENT IN SHARES AND SECUR ITIES HAS BEEN MADE TILL AUGUST 2009 AND DIVIDEND HAS ALSO BEEN RE CEIVED TILL AUGUST 2009. X. IT IS ALSO FURTHER SUBMITTED THAT THE ASSESSEE COMP ANY HAD STARTED BUSINESS OF DIAMONDS W.E.F. AUGUST 2009 AND THE LOA NS BOTH SECURED AND UNSECURED HAVE BEEN AVAILED MAINLY FOR THE PURPOSE OF DIAMOND BUSINESS AND NONE OF THE AMOUNT BORROWED HAS BEEN INVESTED IN SHARES AND SECURITIES. XI. THE LOAN AMOUNT HAS BEEN MAINLY AVAILED IN THE MONT H OF MARCH 2010. THE COPY OF LEDGERS OF ALL THE LOANS WERE SUB MITTED BEFORE THE LEARNED AO DURING THE COURSE OF ASSESSMENT PROC EEDINGS, THE SAME IS ENCLOSED FOR YOUR REFERENCE AT PAGE NUMBER 46-70. XII. THEREFORE, THE EXEMPT INCOME HAS BEEN EARNED UPTO A UGUST 2009, WHEREAS THE LOAN HAS BEEN BORROWED IN MARCH 2010 AN D THEREFORE THE INTEREST HAS BEEN PAID ONLY FOR THE P ERIOD MARCH 2010. XIII. THEREFORE, FROM THE ABOVE FACTS IT IS DULY ESTABLIS HED THAT THERE IS NO NEXUS BETWEEN INVESTMENTS MADE WHICH HAVE GENERA TED THE EXEMPT INCOME AND THE BORROWED FUNDS ON WHICH INTER EST HAS BEEN PAID. XIV. IT WAS ALSO FURTHER ESTABLISHED DURING THE COURSE O F ASSESSMENT PROCEEDINGS THAT THE PAID UP SHARE CAPITAL AND THE RESERVES & SURPLUS AS ON 31/03/2009 WAS RS.5,89,58,697/- AND T HE INVESTMENTS WHICH GENERATED DIVIDEND INCOME WAS RS.2,26,66,696/-. THEREFORE, THE INVESTMENTS WERE M ADE BY THE COMPANY OUT OF ITS PAID UP CAPITAL AND RESERVES & S URPLUS. THEREFORE, NONE OF THE BORROWED FUND HAD BEEN INVES TED IN SHARES AND SECURITIES AND THEREFORE THERE WAS NO QU ESTION ABOUT THE APPLICABILITY OF PROVISIONS OF SECTION 14A. ITA NO.316/AHD/ 2015 MALOO GEMS & JEWELLERY LTD. (PRESENTLY KNOWN AS LY PSA GEMS & JEWELLERY LTD.) VS. CIT ASST.YEAR 2010-11. - 9 - XV. IN THIS REGARD, YOUR KIND ATTENTION IS INVITED TO S ECTION 14A(2), WHICH STATES THAT THE AO WILL DETERMINE THE EXPENDI TURE INCURRED TO EARN EXEMPT INCOME, AND IF THE AO IS SATISFIED W ITH CORRECTNESS OF THE CLAIM THEN AO WOULD NOT DISTURB THE ACCOUNTS AND WOULD NOT APPLY SECTION 14A ACCORDINGLY. XVI. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO HAS CONSIDERED ALL THE RELEVANT ASPECTS AND DULY COME T O THE CONCLUSION THAT THE INTEREST EXPENSES DO NOT HAVE A NY NEXUS WITH THE DIVIDEND INCOME AND TO THAT EXTENT THE INTEREST HAS NOT BEEN CONSIDERED IN DETERMINING DISALLOWANCE U/S.14A. XVII. DURING THE COURSE OF ASSESSMENT PROCEEDING, WE HAVE ALSO PLACED RELIANCE ON THE APPLICABILITY OF SECTION 14A READ WITH RULE 8D ON THE FOLLOWING DECISIONS: M/S AUCHTEL PRODUCTS LTD, VS. ACIT 22 TAXMAN.99(MU M) (ITA NOS. 3189,2649 &3185/MUM/2011) IN A.Y. 2008-09, THE ASSESSEE CLAIMED THAT IT HAD NOT INCURRED ANY EXPENDITURE IN EARNING DIVIDEND INCOME AND NO DISAL LOWANCE U/S.14A COULD BE MADE. HOWEVER, THE AO COMPUTED DISALLOWANCE U/S. 14A & RULE 8D RS.12.81 LAKHS. THE HON'BLE TRIBUNAL HELD T HAT S.14A(2) EMPOWERS THE AO TO DETERMINE THE AMOUNT OF EXPENDIT URE INCURRED IN RELATION TO TAX-FREE INCOME IF, 'HAVING REGARD TO T HE ACCOUNTS OF THE ASSESSEE, HE IS NOT SATISFIED WITH THE CORR ECTNESS OF THE CLAIM OF THE ASSESSEE THE SATISFACTION OF THE AO AS TO THE INCORRECT CLAIM MADE BY THE ASSESSEE IS SINE QUA NON FOR INV OKING THE APPLICABILITY OF RULE 8D. THE SATISFACTION CAN BE R EACHED ONLY WHEN THE CLAIM OF THE ASSESSEE IS VERIFIED. IF THE ASSESSEE PROVES BEFORE THE AO THAT IT INCURRED A PARTICULAR EXPENDITURE IN RESPEC T OF EARNING THE EXEMPT INCOME AND THE AO IS SATISFIED, THEN THERE I S NO REQUIREMENT TO PROCEED WITH THE COMPUTATION UNDER RULE 8D. THE AO WRONGLY PROCEEDED ON THE PREMISE THAT RULE 8D IS AUTOMATIC IRRESPECTIVE OF THE GENUINENESS OF THE ASSESSEE'S CLAIM IN RESPECT OF E XPENSES INCURRED IN RELATION TO EXEMPT INCOME. THE CORRECT SEQUENCE FOR MAKING ANY DISALLOWANCE U/S.14A IS TO, FIRSTLY, EXAMINE THE AS SESSEE'S CLAIM OF HAVING INCURRED SOME EXPENDITURE OR NO EXPENDITURE IN RELATION TO EXEMPT INCOME. IF THE AO IS SATISFIED WITH THE SAME , THEN THERE IS NO NEED TO COMPUTE DISALLOWANCE AS PER RULE 8D. IT IS ONLY WHEN THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT ITA NO.316/AHD/ 2015 MALOO GEMS & JEWELLERY LTD. (PRESENTLY KNOWN AS LY PSA GEMS & JEWELLERY LTD.) VS. CIT ASST.YEAR 2010-11. - 10 - OF SUCH EXPENDITURE OR NO EXPENDITURE HAVING BEEN I NCURRED IN RELATION TO EXEMPT INCOME, THAT THE MANDATE OF RULE 8D WILL OPERATE. JUSTICE SAM P BHARUCHA VS. ACIT (ITAT MUMBAI) 53 SOT 192(MUMBAI)(URO), 25 TAXMANN.COM 38KITA 3889/M/ 2011) THE ASSESSEE EARNED TAX-FREE INCOME FROM SHARES AND UNITS AND CLAIMED THAT HE HAD NOT INCURRED ANY EXPENDITURE ON EARNING THE TAX-FREE INCOME AND SO NO DISALLOWANCE U/S.14A WAS PERMISSIBLE. THE AO & CIT(A) REJECTED THE CLAIM AND DISALLOWED RS. 2.26 LAKHS U/ S.14A AS EXPENDITURE INCURRED TO EARN THE TAX-FREE INCOME. THE HON'BLE T RIBUNAL HELD THAT S. 14A HAS WITHIN IT IMPLICIT NOTION OF APPORTIONMENT IN CASES WHERE EXPENDITURE IS INCURRED FOR COMPOSITE/INDIVISIBLE A CTIVITIES IN WHICH TAXABLE AND NON-TAXABLE INCOME IS RECEIVED. BUT WHE N IT IS POSSIBLE TO DETERMINE THE ACTUAL EXPENDITURE IN RELATION TO EXE MPT INCOME OR WHEN NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO EXE MPT INCOME, THEN THE PRINCIPLE OF APPORTIONMENT EMBEDDED IN S.14A HAS NO APPLICATION. FOR S.14A TO APPLY, THERE SHOULD BE A PROXIMATE RELATIO NSHIP BETWEEN THE EXPENDITURE AND THE TAX-FREE INCOME. IF THE ASSESSE E CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED FOR EARNING THE EXEMP T INCOME, IT IS FOR THE AO TO DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED ANY EXPENDITURE IN RELATION TO THE TAX-FREE INCOME AND, IF SO, TO QUANTIFY THE EXTENT OF DISALLOWANCE. IN ORDER TO DISALLOW THE EX PENDITURE U/S.14A, THERE MUST BE A LIVE NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF TOTAL INCOME. NO NOTIONA L EXPENDITURE CAN BE APPORTIONED FOR THE PURPOSE OF EARNING EXEMPT IN COME UNLESS THERE IS AN ACTUAL EXPENDITURE IN RELATION TO EARNING THE TA X-FREE INCOME. IF THE EXPENDITURE IS INCURRED WITH A VIEW TO EARN TAXABLE INCOME AND THERE IS APPARENT DOMINANT AND IMMEDIATE CONNECTION BETWEEN THE EXPENDITURE INCURRED AND TAXABLE INCOME, THEN NO DISALLOWANCE C AN BE MADE U/S.14A MERELY BECAUSE SOME TAX EXEMPT INCOME IS RE CEIVED BY THE ASSESSEE. ON FACTS, FROM THE DETAILS OF THE EXPENDI TURE, IT IS CLEAR THAT THE EXPENDITURE INCURRED BY THE ASSESSEE HAS DIRECT NEXUS WITH THE PROFESSION INCOME OF THE ASSESSEE. IT IS NOT THE CA SE OF THE REVENUE THAT THE ASSESSEE HAS USED HIS OFFICIAL MACHINERY AND ES TABLISHMENT FOR EARNING THE EXEMPT INCOME. THE AO HAS NOT GIVEN ANY FINDING THAT ANY OF THE EXPENDITURE INCURRED AND CLAIMED BY THE ASSE SSEE IS ATTRIBUTABLE FOR EARNING THE EXEMPT INCOME. CONSEQUENTLY, S.14A DISALLOWANCE IS NOT PERMISSIBLE ITA NO.316/AHD/ 2015 MALOO GEMS & JEWELLERY LTD. (PRESENTLY KNOWN AS LY PSA GEMS & JEWELLERY LTD.) VS. CIT ASST.YEAR 2010-11. - 11 - XVIII. THEREFORE, FROM THE ABOVE FACTS IT IS DULY SUBMITTE D THAT THE ASSESSEE COMPANY HAS SUBMITTED ALL THE RELEVANT DET AILS TO PROVE THAT THE INTEREST SHALL NOT FORM PART OF DISALLOWAN CE AND WHICH IS ALSO DULY ACCEPTED BY THE LEARNED AO AFTER GOING TH ROUGH DETAILED SUBMISSIONS. XIX. AS PER SECTION 263 OF THE I.T. ACT, THE ORDER SHOUL D BE ERRONEOUS AND ERROR HAS RESULTED INTO PREJUDICE TO THE INTERE ST OF THE REVENUE THEN ONLY SUCH ORDER CAN BE REVISED AS HELD IN THE CASE OF TARADEVI 88 ITR 323 (SC). XX. AT THE FIRST INSTANCE THE ORDER OF THE LEARNED AO I S NOT ERRONEOUS SO FAR AS THE FACTS ARE CONCERNED AND THE VIEW TAKE N IS DULY SUPPORTED BY THE LEGAL PRINCIPLES AND ALSO UNDER TH E PROVISION OF THE LAW. XXI. WITHOUT PREJUDICE TO THE ABOVE, WE WOULD LIKE TO ST ATE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE LEARNED AO HAS MADE DETAILED INQUIRIES ABOUT THE EXPENSES INCURRED ON E ARNING THE EXEMPT INCOME AS WELL AS THE APPLICABILITY OF SECTI ON 14A. XXII. THE ASSESSEE VIDE ITS SUBMISSION DATED 26/11/2012 H AD GIVEN A DETAILED EXPLANATION, CITING RELEVANT CASE LAWS AND STATING THAT THE PROVISIONS OF SECTION 14A R.W. RULE 8D ARE NOT APPLICABLE TO THE ASSESSSEE. XXIII. THE ASSESSEE HAD ALSO SUBMITTED VARIOUS DETAILS TO PROVE THE CONTENTION DURING THE COURSE OF ASSESSMENT PROCEEDI NGS. THE 'A' HAD FURNISHED FOLLOWING DOCUMENTS: - LEDGER ACCOUNTS OF ALL THE INVESTMENTS IN MUTU AL FUND - LEDGER ACCOUNTS OF DIVIDEND INCOME - LEDGER ACCOUNTS OF UNSECURED LOANS WERE ALSO SU BMITTED TO ESTABLISH THAT THE SAME WERE RECEIVED AFTER THE EXE MPT INCOME WAS EARNED I.E. ON 27/08/2009. - BREAK UP OF EXPENDITURE INCURRED TILL 27/08/2 009 - PROFIT AND LOSS ACCOUNT AS ON 27/08/2009 - LEDGER ACCOUNTS OF ALL THE SECURED LOANS AND UNSECURED LOANS WERE ALSO SUBMITTED AND IT WAS EXPLAINED THAT ALL THE LOANS WERE RECEIVED IN THE MONTH OF MARCH 2010 WHILE THE EXEMPT INCOME WAS EARNED TILL AUGUST 2009. - FURTHER, THE PROVISIONAL BALANCE SHEET AS ON 27/8/2009 WAS CALLED FOR AND THE SAME WAS SUBMITTED VIDE SUBMISSION DATED 18/12/2012. ITA NO.316/AHD/ 2015 MALOO GEMS & JEWELLERY LTD. (PRESENTLY KNOWN AS LY PSA GEMS & JEWELLERY LTD.) VS. CIT ASST.YEAR 2010-11. - 12 - XXV. FURTHER, THE BIFURCATIONS OF THE VARIOUS ITEMS OF THE PROVISIONAL BALANCE SHEET AS AT 27/08/2009 WAS ALSO GIVEN VIDE SUBMISSION DATED 25/01/2013. XXIV. THEREFORE, FROM THE ABOVE IT IS CLEAR THAT THE LEAR NED AO DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS HAS MADE D ETAILED INQUIRIES ABOUT THE APPLICABILITY OF SECTION 14A. XXV. SECTION 14A(2) ALSO STATES THAT THE AO WILL DISALLO W THE EXPENSES ONLY IF HE IS NOT SATISFIED WITH THE EXPLANATION OF THE ACCOUNTS SUBMITTED BY THE 'A'. XXVI. IT IS DULY SUBMITTED THAT JURISDICTION U/S.263 CAN BE INVOKED ONLY IF THE TWIN CONDITIONS ARE SATISFIED, BEING A) THE ORDER IS ERRONEOUS AND B) IT IS ALSO PREJUDICIAL TO THE INTEREST OF THE RE VENUE. IF ANY ONE OF THE CONDITIONS IS ABSENT THEN THE CIT CANNOT INVOKE THE PROVISIONS OF SECTION 263. XXVII. IT CAN BE SEEN FROM THE RECORDS THAT THE ASSESSEE H AS MADE DETAILED SUBMISSIONS DURING THE COURSE OF ASSESSMEN T PROCEEDINGS, THE ASSESSEE HAS SUBMITTED AS MANY AS 9 WRITTEN SUBMISSIONS TO PROVE THE CONTENTIONS AND THEREFORE WHILE PASSING THE ORDER U/S.143(3), THE LEARNED AO HAS VERIFIED E ACH AND EVERY ASPECTS IN DETAIL AND THEREFORE SUCH AN ORDER CANNO T BE CONSIDERED AS ERRONEOUS AND PREJUDICIAL TO THE INTE REST OF THE REVENUE AND THEREFORE SUCH ORDER CANNOT BE REVISED U/S.263 OF THE I.T. ACT. XXVIII. THE LEARNED AO HAS ALSO RELIED ON TWO DIRECT DECISI ONS WHILE CONSIDERING THE SUBMISSION AND THEREFORE THE VIEW T AKEN BY AO IS ALSO JUDICIALLY ACCEPTABLE VIEW. XXIX. WE MAY DRAW YOUR KIND ATTENTION TO PARA 4, PAGE 2 O F THE ASSESSMENT ORDER, THE LEARNED AO HAS ISSUED SPECIFI C SHOW CAUSE NOTICE FOR DISALLOWANCE OF EXPENSES U/S.14A, THE LD . AO HAS CONSIDERED IN DETAIL, THE SUBMISSION OF THE ASSESSE E AND HAS FINALLY AFTER GOING THROUGH THE PROVISIONAL PROFIT & LOSS ACCOUNT AS ON 27/08/2009 HAS DISALLOWED THE EXPENSES IN PAR A 4.1 PAGE 4 OF THE ASSESSMENT ORDER. XXX. THE LEARNED AO HAS DETERMINED THE DISALLOWANCE U/S 14A SHOULD BE RESTRICTED TO THE EXTENT OF RS.48,171/- BEING TH E COMMISSION AND BROKERAGE EXPENSES AND CDSL FEES AFTER THOROUGH EVALUATION OF FACTS, SUCH AN ORDER CANNOT BE REGARD ED AS ERRONEOUS. ITA NO.316/AHD/ 2015 MALOO GEMS & JEWELLERY LTD. (PRESENTLY KNOWN AS LY PSA GEMS & JEWELLERY LTD.) VS. CIT ASST.YEAR 2010-11. - 13 - XXXI. IT IS ALSO ONE OF THE LEGAL PRINCIPLE THAT EVERY LO SS OF REVENUE AS A CONSEQUENCE OF AN ORDER CANNOT BE CONSIDERED AS PRE JUDICIAL TO THE INTEREST OF THE REVENUE. XXXII. AN ORDER WHICH HAS BEEN PASSED AFTER APPLICATION OF MIND AND DETAILED INQUIRIES CANNOT BE REGARDED AS ERRONEOUS NOR WOULD IT BE PREJUDICIAL TO THE INTEREST OF THE REVENUE. XXXIII. THUS, AS THE ASSESSEE HAS SUBMITTED ALL THE REQUISI TE DETAILS AT THE TIME OF ASSESSMENT PROCEEDINGS, THE REVISION U/S.26 3 IS NOT JUSTIFIED AT ALL. XXXIV. IN THIS REGARDS RELIANCE IS PLACED IN THE CASE OF G IRDHRILAL LAL 176 CTR 092 (RAJ) 4. WE HAVE GONE THROUGH THE RELEVANT RECORD AND IMP UGNED ORDER. IN ASST. ORDER IN PARA 4 LD.AO ISSUED A NOTICE WITH REGARD T O DIVIDEND INCOME OF RS.19,28,694/- DURING THE YEAR AND CLAIMED AS EXEMP T U/S.10(33) OF THE I.T. ACT, 1961 AND ASSESSEE WAS ALSO ISSUED A NOTICE AND ASSESSEES REPLY IN DETAIL AND ASSESSING OFFICER ALSO DULY CONSIDERED WITH THE CASES LAW AND MADE DISALLOWANCE OF RS.48,173/- U/S.14(A) OF THE ACT AN D ADDED TO THE TOTAL INCOME OF THE ASSESSEE, BUT ON SIMILAR GROUND LD.CIT HAS N OT NOTICED. SAME HAS BEEN MENTIONED IN PARA 4 OF THE LD.CIT. THE ASSESSEE HAS ALSO FILED A DETAILED REPLY AND STATED THAT HE HAS GIVEN ALL THE INFORMATION TO THE AUTHORITIES BELOW WITH REGARD TO SECTION 14A R.W. RULE 8D AND SAME WAS CLE ARLY VERIFIED. 4.2 IN SUPPORT OF ITS CONTENTION ASSESSEE CITED A J UDGMENT OF HONBLE SUPREME COURT (243 ITR 0083) IN THE CASE OF MALABAR INDUSTRIAL CO. LTD. VS. CIT, IT HAS BEEN HELD BY THE APEX COURT THAT AS PER SECTION 263 THERE MUST BE TWO CONDITIONS TO BE SATISFIED FOR APPLICATION OF L AW OF 263 THAT THE ORDER SHOULD BE ERRONEOUS AS WELL AS PREJUDICIAL TO THE I NTEREST OF THE REVENUE, IF THE ASSESSING OFFICER HAS MADE PROPER ENQUIRY AND ONE O F THE POSSIBLE STEP HAS ITA NO.316/AHD/ 2015 MALOO GEMS & JEWELLERY LTD. (PRESENTLY KNOWN AS LY PSA GEMS & JEWELLERY LTD.) VS. CIT ASST.YEAR 2010-11. - 14 - BEEN TAKEN THE SAME CANNOT BE CONSIDERED AS ERRONEO US AND THEREFORE, CIT IS NOT JUSTIFIED IN INVOKING SECTION 263. 4.3 IN THE CASE OF CIT VS. MAX INDIA LTD.295 ITR 28 2 (SC), IT HAS BEEN HELD THAT THE PHRASE PREJUDICIAL TO THE INTEREST OF REV ENUE IN SECTION 263 HAS TO BE READ IN CONJECTURE WITH THE EXPRESSION ERRONEOUS. WHEN THE AO TAKES ONE OF THE TWO VIEWS PERMISSIBLE IN LAW AND WHICH THE COMM ISSIONER DOES NOT AGREE AND WHICH RESULTS INTO LOSS OF REVENUE. UNLESS THE VIEW TAKEN BY THE ASSESSING OFFICER COMPLETELY UNTENABLE IN LAW. 5. IN VIEW OF THE AFORESAID APEX COURT JUDGMENT, WE HOLD THAT LEARNED CIT HAS ERRED IN LAW AND ON FACTS IN ASSUMING JURISDICT ION U/S.263 OF THE ACT. 6. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS A LLOWED. THIS ORDER PRONOUNCED IN OPEN COURT ON 27/10/2017 SD/- SD/- IZEKSN DQEKJ IZEKSN DQEKJ IZEKSN DQEKJ IZEKSN DQEKJ EGKOHJ IZLKN EGKOHJ IZLKN EGKOHJ IZLKN EGKOHJ IZLKN YKS[KK LN YKS[KK LN YKS[KK LN YKS[KK LNL; L; L; L; U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; (PRAMOD KUMAR) ( MAHAVIR PRASAD ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 27/10/2017 PRITI YADAV, SR.PS ITA NO.316/AHD/ 2015 MALOO GEMS & JEWELLERY LTD. (PRESENTLY KNOWN AS LY PSA GEMS & JEWELLERY LTD.) VS. CIT ASST.YEAR 2010-11. - 15 - !'# $#! COPY OF THE ORDER FORWARDED TO : 1. ' / THE APPELLANT 2. #' / THE RESPONDENT. 3. 012) & 3) / CONCERNED CIT 4. & 3) 45 / THE CIT(A)-II AHMEDABAD. 5. 67 8)'12 *12. 0 / DR, ITAT, AHMEDABAD 6. 8 9: ( GUARD FILE. % & / BY ORDER, # 6)) //TRUE COPY // '/& () ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD 1. DATE OF DICTATION 24/10/2017 (DICTATION-PAD 8 PA GES ATTACHED AT THE END OF THIS APPEAL-FILE) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 26/10/2017 3. OTHER MEMBER 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S. 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER