PRIYA LTD., MUMBAI V. DCIT (OSD),CIR 2(3), MUMBAI

ITA 3231/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8386 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-02-2017
• Appeal Filed By: Assessee
• Bench Allotted: Not Allotted
• Assessment Year: 2010-2011
• Appeal Filed On: 28-05-2015
• Court: TRIBUNAL
• Department Lawyers: B S BISTDR
• Keywords: Capital asset; Business income; Business expenditure; Earning of tax free income; Question of law
• Section: 143(3); 14A; 260A; 10

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E, MUMBAI , . . , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI N.K. PRADHAN, ACCOUNTANT MEMBER ITA NO.3231/MUM/2015 ASSESSMENT YEAR: 2010-11 PRIYA LTD. 209-210, KIMATRAJ BUILDING 02 FLOOR, 77/79 M.K. ROAD, MUMBAI-400002 / VS. DCIT(OSD), CIRCLE-2(3), R. NO. 552, 5 TH FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 ( '# $ /ASSESSEE) ( % / REVENUE) P.A. NO. AAACP2210Q ITA NO.3526/MUM/2015 ASSESSMENT YEAR: 2010-11 DCIT(OSD), CIRCLE-2(3), R. NO. 552, 5 TH FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 / VS. PRIYA LTD. 209-210, KIMATRAJ BUILDING 02 FLOOR, 77/79 M.K. ROAD, MUMBAI-400002 ( % / REVENUE) ( '# $ /ASSESSEE) P.A. NO. AAACP2210Q M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 2 '# $ / ASSESSEE BY SHRI J.P. BAIRAGRA % / REVENUE BY SHRI B.S. BIST-DR & % ' $ ( / DATE OF HEARING : 13/02/2017 ' $ ( / DATE OF ORDER: 21/02/2017 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THE ASSESSEE AS WELL AS REVENUE IS IN CROSS APPEAL AGAINST THE IMPUGNED ORDER DATED 31/03/2015 OF THE LD. FIRST APPELLATE AUTHORITY, MUMBAI. 2. FIRST, WE SHALL TAKE UP THE APPEAL OF THE ASSES SEE, WHEREIN, FIRST GROUND RAISED PERTAINS TO HOLDING TH AT PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT, 19 61 (HEREINAFTER THE ACT) ARE APPLICABLE TO THE CASE OF THE ASSESSEE IN SPITE OF THE FACT THAT NO EXPENDITURE WAS INCURR ED FOR EARNING EXEMPT INCOME AND RATHER NO EXEMPT INCOME W AS EARNED DURING THE YEAR. THE LD. COUNSEL FOR THE ASS ESSEE, SHRI J.P. BAIRAGRA, ADVANCED IDENTICAL ARGUMENTS AS MENT IONED IN THE GROUNDS OF APPEAL. THE LD. DR, SHRI B.S. BIST, THOUGH DEFENDED THE ADDITION/DISALLOWANCE BUT DID NOT CONT ROVERT THE FACTUAL MATRIX. IN REPLY, THE LD. COUNSEL FOR THE ASSESSEE RELIED UPON THE DECISION OF THE TRIBUNAL (ITA NO.5671/MUM/ 2011) FOR ASSESSMENT YEAR 2008-09, ORDER DATED 02/08/2013 IN ITS OWN CASE. M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 3 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IF THE OB SERVATION MADE IN THE ASSESSMENT ORDER, LEADING TO ADDITION M ADE TO THE TOTAL INCOME, CONCLUSION DRAWN IN THE IMPUGNED ORDE R, MATERIAL AVAILABLE ON RECORD, ASSERTIONS MADE BY TH E LD. RESPECTIVE COUNSEL AND THE ORDER OF THE TRIBUNAL DA TED 02/08/2013, IF KEPT IN JUXTAPOSITION AND ANALYZED, WE FIND THAT AN ELABORATE DISCUSSION HAS BEEN MADE BY THE T RIBUNAL IN THE OWN CASE OF THE ASSESSEE. NO CONTRARY DECISION/ FACTS WERE BROUGHT TO OUR NOTICE BY EITHER SIDE AND MORE SPECI FICALLY THE REVENUE. HON'BLE DELHI HIGH COURT IN CHEM INVEST L TD. VS CIT (2015) 378 ITR 33 (DEL.) ; (2015) 281 CTR 447 (DEL. ) HELD THAT SECTION 14A OF THE ACT WILL NOT APPLY, WHERE NO EXE MPT INCOME IS RECEIVED OR RECEIVABLE DURING THE RELEVANT ASSES SMENT YEAR. WHILE COMING TO THIS DECISION, THE HON'BLE HIGH COU RT FOLLOWED THE DECISION OF CIT VS HOLCIM INDIA P. LTD. (2015) 57 TAXMAN.COM 28(DEL.)(PARA-19) AND ANOTHER DECISION I N MAXOPP INVESTMENT LTD. VS CIT (2012) 347 ITR 272 (DEL.). THE RELEVANT PORTION FROM THE ORDER OF CHEMINVEST LTD. (SUPRA) I S REPRODUCED HEREUNDER FOR READY REFERENCE AND ANALYS IS:- 1. THIS IS AN APPEAL FILED BY THE ASSESSEE UNDER S ECTION 260A OF THE INCOME TAX ACT, 1961 (ACT) AGAINST THE ORDER DATE D 4TH JANUARY, 2013 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL (ITAT ) IN ITA NO.87/DEL/2008 FOR THE ASSESSMENT YEAR (AY) 2004- 05. 2. ADMIT . 3. THE FOLLOWING SUBSTANTIAL QUESTION OF LAW IS ARI SES FOR DETERMINATION: WHETHER DISALLOWANCE UNDER SECTION 14A OF THE ACT CAN BE MADE IN A YEAR IN WHICH NO EXEMPT INCOME HAS BEEN EARNED OR R ECEIVED BY THE ASSESSEE? M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 4 4. THE APPELLANT IS ENGAGED IN THE BUSINESS OF MAKI NG INVESTMENT IN SHARES AND ACCEPTING/GRANTING OF LOANS. THE ASSESSE E IS ONE OF THE CO- PROMOTERS OF MAX INDIA LTD. 5. IN THE AY IN QUESTION, THE APPELLANT BORROWED FU NDS ON WHICH INTEREST EXPENDITURE OF RS.1,21,03,367/- WAS INCURRED. THE F ACTUAL ASSERTION OF THE APPELLANT, WHICH HAS NOT BEEN CONTROVERTED, IS THAT IN THE RELEVANT AY NO DIVIDEND INCOME WAS EARNED BY THE APPELLANT F ROM THE AMOUNT INVESTED IN VARIOUS SHARES. FOR THE AY IN QUESTION, THE APPELLANT FILED A RETURN OF INCOME DECLARING A LOSS OF RS.13,84,086/- . THIS CASE WAS PICKED UP FOR SCRUTINY AND THE ASSESSING OFFICER (A O) COMPLETED THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT DISALLOW ING RS.97,87,570/- OUT OF THE TOTAL EXPENDITURE INCURRED DURING THE YE AR UNDER SECTION 14A OF THE ACT. THE REASON RECORDED BY THE AO FOR THIS DISALLOWANCE WAS THAT THE BORROWED FUNDS WERE UTILIZED FOR THE PURPOSE OF PURCHASE OF SHARES FOR THE PURPOSE TO EARN DIVIDEND INCOME WHICH IS EX EMPTED UNDER SECTION 10(33) OF THE ACT AND THUS, NOT FORMING A P ART OF THE TOTAL INCOME, AND THEREFORE THE INTEREST PAID THEREON HAD TO BE DISALLOWED UNDER SECTION 14A. 6. IT MAY BE MENTIONED AT THIS STAGE THAT THE ASSES SEE HAS MADE A DISTINCTION BETWEEN INVESTMENTS IN UNQUOTED SHARES, WHICH WAS IN THE SUM OF RS.4,16,155/-, AND INVESTMENTS IN SHARES (OT HER THAN TRADE) ON LONG TERM BASIS TO THE EXTENT OF RS.6,88,70,000/-. BASED ON THE AFOREMENTIONED DISTINCTION, THE AO IN THE ASSESSMEN T ORDER DATED 28TH DECEMBER, 2006, COMPUTED THE DISALLOWANCE AS RS.97, 87,570/- BEING THE INTEREST PAID ON BORROWED FUNDS INVESTED IN LON G TERMS SHARES. 7. MR. AJAY VOHRA, LEARNED SENIOR COUNSEL APPEARING FOR THE ASSESSEE, PRODUCED THE BALANCE SHEET AND PROFIT AND LOSS ACCO UNT AS WELL AS THE COMPUTATION OF INCOME PREPARED BY THE ASSESSEE FOR THE AY IN QUESTION I.E. 2004-05. IN THE BALANCE SHEET, IT IS SEEN THAT THE INVESTMENT IN QUOTED SHARES OF MAX INDIA LIMITED IS SHOWN UNDER T HE HEAD QUOTED- OTHER THAN TRADE-LONG TERM. AN INVESTMENT OF APPRO XIMATELY RS.2,13,38,698 OVER THE PREVIOUS YEAR HAS BEEN MADE IN THE SHARES OF MAX INDIA LTD. IT IS ALSO SEEN THAT THE INVESTMENTS IN OTHER INVESTMENT COMPANIES TO THE EXTENT OF RS.4,61,155 IS SHOWN UND ER THE SUB-HEAD UNQUOTED-TRADE-LONG TERM. THIS FIGURE HAS REMAINE D UNCHANGED OVER THE PREVIOUS YEAR. IN THE COMPUTATION FILED FOR THE PURPOSES OF THE INCOME TAX RETURN, THE DETAILS OF INVESTMENTS HAVE BEEN SHOWN IN TWO BROAD CATEGORIES OF CAPITAL ASSETS AND TRADING A SSETS AND THE INVESTMENT IN MAX INDIA LIMITED IS UNDER THE HEAD TRADING ASSETS WITH THE INVESTMENTS IN THE INVESTMENT COMPANIES SHOWN U NDER THE HEAD OF CAPITAL ASSETS. 8. THE AO APPEARS TO HAVE PROPORTIONATELY DISALLOWE D, FOR THE PURPOSES OF SECTION 14A OF THE ACT, THE INTEREST ATTRIBUTABL E TO THE LONG TERM INVESTMENT (OTHER THAN TRADE) FOR THE PURPOSES OF E ARNING EXEMPTED INCOME. SINCE THE UNSECURED LOAN BORROWED FOR THE P URPOSE WAS RS.6,88,70,000 THE DISALLOWANCE OF THE AMOUNT UNDER SECTION 14 A OF THE ACT WAS CALCULATED THUS: '1,21,03,367 X 6,88,70,000/8,51,65,000' = RS. 97,87 ,570 M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 5 9. THE CIT (A) BY AN ORDER DATED 27TH SEPTEMBER 200 7 UPHELD THE APPLICABILITY OF SECTION 14A OF THE ACT BUT AGREED WITH THE CONTENTION OF THE APPELLANT THAT ONLY THE NET INTEREST AMOUNT DEB ITED IN THE PROFIT AND LOSS ACCOUNT WAS REQUIRED TO BE PROPORTIONATELY DIS ALLOWED UNDER SECTION 14A OF THE ACT. 10. IN THE APPEALS FILED BOTH BY THE REVENUE AND TH E ASSESSEE BEFORE THE ITAT, A SPECIAL BENCH WAS CONSTITUTED TO DECIDE THE QUESTION REGARDING APPLICABILITY OF SECTION 14A OF THE ACT I N AN YEAR WHEN NO EXEMPT INCOME HAD BEEN EARNED. THE SPECIAL BENCH BY AN ORDER DATED 5TH AUGUST 2009 ANSWERED THE QUESTION BY INTER ALIA REFERRING TO THE DECISION OF THE SUPREME COURT IN CIT V. RAJENDRA PRASAD MOODY [1978] 115 ITR 519 (SC) . THE REASONING OF THE SPECIAL BENCH WAS AS UNDER: 22. THE CONTROVERSY RAISED IN THIS CASE IS THAT TH E ASSESSEE HAD NOT EARNED OR RECEIVED ANY DIVIDEND IN THE YEAR UNDER C ONSIDERATION AND, THEREFORE, NO DISALLOWANCE CAN BE MADE BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. WE DO NOT FIND ANY FORCE IN THIS CONTENTION OF THE ASSESSEE. WHEN THE EXPENDITURE OF INTEREST IS INCUR RED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, IT HAS TO SUFFER THE DISALLOWANCE IRRESPECTIVE OF THE FACT WHETHER ANY I NCOME IS EARNED BY THE ASSESSEE OR NOT. SECTION 14A DOES NOT ENVISAGE ANY SUCH EXCEPTION. THIS IS EVEN IF THE INTEREST PAID ON BORROWINGS FOR THE PURCHASE OF SHARE WERE ALLOWABLE U/S 57 AS AN EXPENDITURE INCURRED FO R EARNING OR MAKING INCOME AS HELD BY THE SUPREME COURT IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA) OR U/S 36(1)(III) AS AN EXPENDITURE I NCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS AS HELD BY VARIOUS DECISIONS RIGHT FROM BEGINNING OF THE INCOME TAX ACT. WHEN, P RIOR TO INTRODUCTION OF SECTION 14A, AN EXPENDITURE BOTH U/S 36 AND 57 W AS ALLOWABLE TO AN ASSESSEE WITHOUT SUCH REQUIREMENT OF EARNING OR REC EIPT OF INCOME, WE CANNOT IMPORT ANY SUCH CONDITION WHEN IT COMES FOR DISALLOWANCE OF THE SAME EXPENDITURE U/S 14A OF THE ACT. THIS IS WHAT I S HELD BY THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF HARI SH KRISHNAKANT BHAT (SUPRA) WHEN IT OBSERVED THAT INTEREST ON MONIES BO RROWED FOR PURCHASE OF SHARES HELD AS INVESTMENT IS NOT ALLOWABLE WHETH ER OR NOT THERE IS ANY YIELD OF DIVIDEND. IT IS SO HELD BY APPLYING THE DE CISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY (SUPRA) IN THE REVER SE CASE WHEREIN IT IS THAT IRRESPECTIVE OF DIVIDEND RECEIPT, EXPENDITURE HAS TO BE ALLOWED. NOW SINCE DIVIDEND IS EXEMPT, AS A CONSEQUENCE THEREOF EXPENDITURE HAS TO BE DISALLOWED.' 11. THE SPECIAL BENCH OF THE ITAT NEGATIVED THE SUB MISSION OF THE APPELLANT THAT THE LANGUAGE OF BOTH SECTIONS 57 (II I) AND SECTION 14A OF THE ACT WERE MATERIALLY DIFFERENT. THE APPELLANT'S FURTHER CONTENTION AND THAT SINCE THE DECISION IN RAJENDRA PRASAD MOODY (SUPRA) WAS ONLY IN THE CONTEXT OF PURCHASE OF SHARES IN WHICH CASE A D EDUCTION OF EXPENSES CAN BE CLAIMED UNDER SECTION 57(III) OF THE ACT WHE REAS IN THE PRESENT CASE THE ASSESSEE WAS ENTITLED TO DEDUCTION OF EXPE NSES UNDER SECTION 36(1)(III) OF THE ACT AND, THEREFORE, SECTION 14A C ANNOT BE APPLIED, WAS ALSO REJECTED. 12. THE MATTER WAS THEN PLACED BEFORE THE REGULAR B ENCH OF THE ITAT WHICH PASSED THE IMPUGNED ORDER ON 4TH JANUARY 2013 REMANDING THE MATTER TO THE FILE OF THE AO FOR RECONSIDERATION OF THE ISSUE AFRESH. THE M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 6 ITAT REFERRED TO THE DECISION OF THIS COURT IN MAXOPP INVESTMENT LTD. V. COMMISSIONER OF INCOME-TAX, NEW DELHI (2012) 347 ITR 272 (DEL) . 13. AT THE HEARING OF THIS CASE ON 6TH JULY 2015, T HE COURT HAD ASKED THE PARTIES TO ALSO ADDRESS THE ISSUE OF WHETHER TH E INTEREST PAID ON BORROWINGS FOR THE PURPOSES OF INVESTMENT BY THE AS SESSEE COULD BE TREATED AS BUSINESS EXPENDITURE? 14. MR. VOHRA HAS PLACED BEFORE THE COURT A LARGE N UMBER OF DECISIONS INCLUDING THE DECISION OF THIS COURT IN EICHER GOODEARTH LTD. V. COMMISSIONER OF INCOME-TAX [2015] 60 TAXMANN.COM 268 (DELHI) WHICH ANSWERED THE QUESTION IN THE AFFIRMATIVE. MR. VOHRA HAS ALSO PLACED RELIANCE ON DECISIONS OF THE SUPREME CO URT IN CIT V. CHUGANDAS & CO. [1964] 55 ITR 17 (SC) AND CIT V. COCANADA RADHASWAMI BANK LTD. [1965] 57 ITR 306 (SC) WHICH HOLD THAT WHERE SHARES WERE HELD AS BUSINESS INVESTMENT, THE DIVIDEND INCOME THOUGH ASSESSABLE TO TAX UNDER THE HEAD INCOME FRO M OTHER SOURCES, WOULD RETAIN ITS CHARACTER AS BUSINESS INCOME FOR A LL INTENTS AND PURPOSES. IN THE LATTER DECISION IT WAS SPECIFICALL Y HELD THAT THE INCOME FROM SECURITIES WHICH FORMS PART OF THE ASSESSEES TRADING ASSETS OR PART OF ITS INCOME IN BUSINESS IF LOSS INCURS IN BUSINES S WOULD BE SET OFF AGAINST THAT INCOME IN SUCCEEDING YEARS. MR. VOHRA POINTED OUT THAT EVEN IN THE ASSESSEES CASE THE BUSINESS LOSS OF PR EVIOUS YEAR HAS BEEN SET OFF AGAINST THE INCOME OF THE SUBSEQUENT YEARS. 15. TURNING TO THE CENTRAL QUESTION THAT ARISES FOR CONSIDERATION, THE COURT FINDS THAT THE COMPLETE ANSWER IS PROVIDED BY THE DECISION OF THIS COURT IN CIT V. HOLCIM INDIA (P) LTD. (DECISION DATED 5TH SEPTEMBER 2014 IN ITA NO. 486/2014). IN THAT CASE A SIMILAR Q UESTION AROSE, VIZ., WHETHER THE ITAT WAS JUSTIFIED IN DELETING THE DISA LLOWANCE UNDER SECTION 14A OF THE ACT WHEN NO DIVIDEND INCOME HAD BEEN EARNED BY THE ASSESSEE IN THE RELEVANT AY? THE COURT REFERRED TO THE DECISION OF THIS COURT IN MAXOPP INVESTMENT LTD. (SUPRA) AND TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THIS VERY CASE I.E. CHEMINVEST LTD. V. CIT (2009) 317 ITR 86 . THE COURT ALSO REFERRED TO THREE DECISIONS OF DIFFERENT HIGH COURTS WHICH HAVE DECIDED THE ISSUE AGAINST REVENUE. THE FIRST WAS THE DECISION IN COMMISSIONER OF INCOME TAX, FARIDABAD V. M/S. LAKHANI MARKETING INCL. (DECISION DATED 2ND APRIL 2014 OF THE HIGH COURT OF PUNJAB AND HARYANA IN ITA NO. 970/200 8) WHICH IN TURN REFERRED TO TWO EARLIER DECISIONS OF THE SAME COURT IN CIT V. HERO CYCLES LIMITED [2010] 323 ITR 518 AND CIT V. WINSOME TEXTILE INDUSTRIES LTD. [2009] 319 ITR 204 . THE SECOND WAS OF THE GUJARAT HIGH COURT IN COMMISSIONER OF INCOME TAX-I V. CORRTECH ENERGY (P) LTD. [2014] 223 TAXMANN 130 (GUJ.) AND THE THIRD OF THE ALLAHABAD HIGH COURT IN COMMISSIONER OF INCOME TAX, KANPUR V. SHIVAM MOTORS (P) LTD. (DECISION DATED 5TH MAY 2014 IN ITA NO. 88/2014). THESE THREE DECISIONS REITERATED THE POSI TION THAT WHEN AN ASSESSEE HAD NOT EARNED ANY TAXABLE INCOME IN THE R ELEVANT AY IN QUESTION CORRESPONDING EXPENDITURE COULD NOT BE WO RKED OUT FOR DISALLOWANCE. 16. IN CIT V. HOLCIM INDIA (P) LTD. (SUPRA), THE COURT FURTHER EXPLAINED AS UNDER: M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 7 15. INCOME EXEMPT UNDER SECTION 10 IN A PARTICULAR ASSESSMENT YEAR, MAY NOT HAVE BEEN EXEMPT EARLIER AND CAN BECOME TAX ABLE IN FUTURE YEARS. FURTHER, WHETHER INCOME EARNED IN A SUBSEQUE NT YEAR WOULD OR WOULD NOT BE TAXABLE, MAY DEPEND UPON THE NATURE OF TRANSACTION ENTERED INTO IN THE SUBSEQUENT ASSESSMENT YEAR. FOR EXAMPLE, LONG TERM CAPITAL GAIN ON SALE OF SHARES IS PRESENTLY NOT TAX ABLE WHERE SECURITY TRANSACTION TAX HAS BEEN PAID, BUT A PRIVATE SALE O F SHARES IN AN OFF MARKET TRANSACTION ATTRACTS CAPITAL GAINS TAX. IT I S AN UNDISPUTED POSITION THAT RESPONDENT ASSESSEE IS AN INVESTMENT COMPANY A ND HAD INVESTED BY PURCHASING A SUBSTANTIAL NUMBER OF SHARES AND TH EREBY SECURING RIGHT TO MANAGEMENT. POSSIBILITY OF SALE OF SHARES BY PRI VATE PLACEMENT ETC. CANNOT BE RULED OUT AND IS NOT AN IMPROBABILITY. DI VIDEND MAY OR MAY NOT BE DECLARED. DIVIDEND IS DECLARED BY THE COMPAN Y AND STRICTLY IN LEGAL SENSE, A SHAREHOLDER HAS NO CONTROL AND CANNO T INSIST ON PAYMENT OF DIVIDEND. WHEN DECLARED, IT IS SUBJECTED TO DIVI DEND DISTRIBUTION TAX. 17. ON FACTS, IT WAS NOTICED IN CIT V. HOLCIM INDIA (P) LTD. (SUPRA) THAT THE REVENUE HAD ACCEPTED THE GENUINENESS OF TH E EXPENDITURE INCURRED BY THE ASSESSEE IN THAT CASE AND THAT EXPE NDITURE HAD BEEN INCURRED TO PROTECT INVESTMENT MADE. 18. IN THE PRESENT CASE, THE FACTUAL POSITION THAT HAS NOT BEEN DISPUTED IS THAT THE INVESTMENT BY THE ASSESSEE IN THE SHARE S OF MAX INDIA LTD. IS IN THE FORM OF A STRATEGIC INVESTMENT. SINCE THE BU SINESS OF THE ASSESSEE IS OF HOLDING INVESTMENTS, THE INTEREST EXPENDITURE MUST BE HELD TO HAVE BEEN INCURRED FOR HOLDING AND MAINTAINING SUCH INVE STMENT. THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE IS IN RELATION TO SUCH INVESTMENTS WHICH GIVES RISE TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. 19. IN LIGHT OF THE CLEAR EXPOSITION OF THE LAW IN HOLCIM INDIA (P) LTD. (SUPRA) AND IN VIEW OF THE ADMITTED FACTUAL POSITIO N IN THIS CASE THAT THE ASSESSEE HAS MADE STRATEGIC INVESTMENT IN SHARES OF MAX INDIA LTD.; THAT NO EXEMPTED INCOME WAS EARNED BY THE ASSESSEE IN THE RELEVANT AY AND SINCE THE GENUINENESS OF THE EXPENDITURE INCURR ED BY THE ASSESSEE IS NOT IN DOUBT, THE QUESTION FRAMED IS REQUIRED TO BE ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 20. SINCE THE SPECIAL BENCH HAS RELIED UPON THE DEC ISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY (SUPRA), IT IS CONSIDERED NECESSARY TO DISCUSS THE TRUE PURPORT OF THE SAID DECISION. IT I S NOTICED TO BEGIN WITH THAT THE ISSUE BEFORE THE SUPREME COURT IN THE SAID CASE WAS WHETHER THE EXPENDITURE UNDER SECTION 57 (III) OF THE ACT C OULD BE ALLOWED AS A DEDUCTION AGAINST DIVIDEND INCOME ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. UNDER SECTION 57 (III) OF THE ACT DEDUCTION IS ALLOWED IN RESPECT OF ANY EXPENDITURE LAID OUT OR E XPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING SU CH INCOME. THE SUPREME COURT EXPLAINED THAT THE EXPRESSION 'INCURR ED FOR MAKING OR EARNING SUCH INCOME, DID NOT MEAN THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A CONDITION PRECEDENT FOR CLAIMING T HE EXPENDITURE. THE COURT EXPLAINED: WHAT S. 57(III) REQUIRES IS THAT THE EXPENDITURE M UST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INCOME. IT IS THE PURPOSE OF THE EXPENDITURE THAT I S RELEVANT IN DETERMINING THE APPLICABILITY OF S. 57(III) AND THA T PURPOSE MUST BE M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 8 MAKING OR EARNING OF INCOME. S. 57(III) DOES NOT RE QUIRE THAT THIS PURPOSE MUST BE FULFILLED IN ORDER TO QUALIFY THE E XPENDITURE FOR DEDUCTION. IT DOES NOT SAY THAT THE EXPENDITURE SHA LL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED. THERE IS IN FACT N OTHING IN THE LANGUAGE OF S. 57(III) TO SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY INTO ANY BENEFIT BY WAY OF RET URN IN THE SHAPE OF INCOME. THE PLAIN NATURAL CONSTRUCTION OF THE LANGU AGE OF S. 57(III) IRRESISTIBLY LEADS TO THE CONCLUSION THAT TO BRING A CASE WITHIN THE SECTION, IT IS NOT NECESSARY THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE.' 21. THERE IS MERIT IN THE CONTENTION OF MR. VOHRA T HAT THE DECISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY (SUPRA) WAS RENDERED IN THE CONTEXT OF ALLOWABILITY OF DEDUCTION UNDER SECT ION 57(III) OF THE ACT, WHERE THE EXPRESSION USED IS FOR THE PURPOSE OF MA KING OR EARNING SUCH INCOME. SECTION 14A OF THE ACT ON THE OTHER HAND C ONTAINS THE EXPRESSION IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME. THE DECISION IN RAJENDRA PRASAD MOODY (SUPRA) CANNOT BE USED IN THE REVERSE TO CONTEND THAT EVEN IF NO INCO ME HAS BEEN RECEIVED, THE EXPENDITURE INCURRED CAN BE DISALLOWE D UNDER SECTION 14A OF THE ACT. 22. IN THE IMPUGNED ORDER, THE ITAT HAS REFERRED TO THE DECISION IN MAXOPP INVESTMENT LTD. (SUPRA) AND REMANDED THE MATTER TO THE AO FOR RECONSIDERATION OF THE ISSUE AFRESH. THE ISSUE IN MAXOPP INVESTMENT LTD. (SUPRA)WAS WHETHER THE EXPENDITURE (INCLUDING INTEREST ON BORROWED FUNDS) IN RESPECT OF INVESTMEN T IN SHARES OF OPERATING COMPANIES FOR ACQUIRING AND RETAINING A C ONTROLLING INTEREST THEREIN WAS DISALLOWABLE UNDER SECTION 14 A OF THE ACT. IN THE SAID CASE ADMITTEDLY THERE WAS DIVIDEND EARNED ON SUCH INVEST MENT. IN OTHER WORDS, IT WAS NOT A CASE, AS THE PRESENT, WHERE NO EXEMPT INCOME WAS EARNED IN THE YEAR IN QUESTION. CONSEQUENTLY, THE S AID DECISION WAS NOT RELEVANT AND DID NOT APPLY IN THE CONTEXT OF THE IS SUE PROJECTED IN THE PRESENT CASE. 23. IN THE CONTEXT OF THE FACTS ENUMERATED HEREINBE FORE THE COURT ANSWERS THE QUESTION FRAMED BY HOLDING THAT THE EXP RESSION DOES NOT FORM PART OF THE TOTAL INCOME IN SECTION 14A OF TH E ENVISAGES THAT THERE SHOULD BE AN ACTUAL RECEIPT OF INCOME, WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME, DURING THE RELEVANT PREVIOUS YEAR FOR THE P URPOSE OF DISALLOWING ANY EXPENDITURE INCURRED IN RELATION TO THE SAID IN COME. IN OTHER WORDS, SECTION 14A WILL NOT APPLY IF NO EXEMPT INCOME IS R ECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR. 24. CONSEQUENTLY, THE IMPUGNED ORDER OF THE ITAT IS SET ASIDE AND THE APPEAL IS ALLOWED IN THE ABOVE TERMS. THIS COURT SH OULD NOT BE UNDERSTOOD TO HAVE EXPRESSED ANY OPINION ON THE ISS UE OF WHETHER FOR THE AY IN QUESTION THE INTEREST EXPENDITURE INCURRE D BY THE ASSESSEE WOULD BE ALLOWABLE AS BUSINESS EXPENDITURE UNDER SE CTION 36 (1)(III) OF THE ACT. 2.2. IT IS ALSO NOTED THAT IDENTICALLY THE MUMBAI BENCH OF THE TRIBUNAL (WHEREIN ONE OF US IS SIGNATORY TO THE ORDER) IN THE M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 9 CASE OF M/S KALPANA TRADING CORPORATION VS INCOME T AX OFFICER(ITA NO.652/MUM/2012) ORDER DATED 08/09/2014 HELD AS UNDER:- THE ASSESSEE IS AGGRIEVED BY THE IMPUGNED ORDER DA TED 21-11- 2011 OF THE LD. FIRST APPELLATE AUTHORITY BROADLY C ONFIRMING THE DISALLOWANCE OF SUM OF RS.10,12,366/-, BEING THE AD MINISTRATIVE EXPENSES OF RS.1,13,291/- AND FINANCE CHARGES (INTE REST PAID) OF RS.8,99,344/- FOR THE MONEY BORROWED ON THE AMOUNT UTILIZED FOR PURCHASE OF SHARES U/S. 14A OF THE INCOME TAX ACT, 1961 WHILE COMPUTING THE TOTAL INCOME OF THE ASSESSEE. 2. DURING HEARING OF THIS APPEAL, WE HAVE HEARD SHR I J.P. BAIRAGRA, LD. COUNSEL FOR THE ASSESSEE AND SHRI ASGHAR ZAIN V .P., LD. DR. THE CRUX OF THE ARGUMENT ADVANCED ON BEHALF OF THE ASSESSEE IS THAT SINCE THE ASSESSEE COMPANY HAS NOT CLAIMED ANY EXEMPT INCOME, THEREFORE, THERE IS NO QUESTION OF DISALLOWANCE OF EXPENDITURE FOR WHICH RELIANCE WAS PLACED UPON THE DECISIONS IN THE CASE OF M/S. SIVA INDUSTRIES AND HOLDING LTD. VS. ACIT( CHENNAI TRIBUNAL ), CIT VS. SHIVAM MOTORS PVT. LTD. (ITA NO.88 OF 2014 ) AND ITA NO.1717/MAD/2013 ORDER DATED 31/07/2014 IN THE CASE OF ACIT VS. MR. M. BASKARAN . 2.1 ON THE OTHER HAND THE LD. SR. DR DEFENDED THE A DDITION BY PLACING RELIANCE UPON THE SPECIAL BENCH DECISION FROM DELHI TRIBUNAL IN THE CASE OF CHEMINVEST LTD. VS. ITO (2009) (124 TTJ (DEL.)(SB) 577) ORDER DATED 5/8/2009. 3. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL AVAILABLE ON RECORD. THE FACTS IN BRIEF AR E THAT AT THE RELEVANT TIME THE ASSESSEE FIRM WAS ENGAGED IN THE BUSINESS OF COTTON TRADING ALONG WITH BUSINESS OF IMPORT OF CERTAIN SPECIAL CH EMICALS FROM GERMANY/SWITZERLAND AND SOLD IN THE LOCAL MARKET. I T WAS OBSERVED BY THE AO THAT THE BORROWED FUND ON WHICH INTEREST WAS PAID WAS USED FOR INVESTMENT RELATING TO INCOME EXEMPT FROM TAXAT ION, CONSEQUENTLY, THE AO COMPUTED DISALLOWANCE U/S. 14A R.W. RULE 8D OF THE INCOME TAX RULES RESULTING INTO DISALLOWANCE OF RS.10,12,366/-. 3.1 THE AGGRIEVED ASSESSEE PREFERRED APPEAL BEFORE THE LD. CIT(A) WHEREIN FOLLOWING THE SPECIAL BENCH DECISION IN THE CASE OF CHEMINVEST LTD. VS. ITO (SUPRA), AFFIRMED THE VIEW TAKEN BY THE AO. WE NOT E THAT THE SPECIAL BENCH WHILE COMING TO A PARTICULAR CONC LUSION HELD THAT M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 10 WHEN THE EXPENDITURE OF INTEREST IS INCURRED IN REL ATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, IT HAS TO SUFFER THE DISALLOWANCE IRRESPECTIVE OF THE FACT WHETHER AN IN COME IS EARNED BY THE ASSESSEE OR NOT. IN THIS DECISION IT WAS ALSO H ELD THAT SECTION 14A DOES NOT ENVISAGE ANY SUCH EXCEPTION WHETHER ANY EXPENDITURE WAS INCURRED BY THE ASSESSEE IN RELATION TO AN INCOME T HAT DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE UNDER THE ACT AND IF THE ANSWER IS IN THE AFFIRMATIVE THEN THE EXPENDITURE C ANNOT BE ALLOWED IRRESPECTIVE OF THE FACT THAT IT WAS ALLOWABLE UNDE R DIFFERENT PROVISIONS OF THE ACT. FURTHER, DISALLOWANCE HAS TO BE OF THE ENTIRE AMOUNT OF THE EXPENDITURE SO RELATED AND CANNOT BE REDUCED BY THE RECEIPT OF INTEREST WHICH HAS NO RELATION TO SUCH EXPENDITURE. HOWEVER, HONBLE ALLAHABAD HIGH COURT IN THE CASE OF M/S. SHIVAM MOTORS PVT. LTD. (2014-TIOL-754-HC-ALL-IT) VIDE ORDER DATED 6-05-2014 WHILE DECIDING AN IDENTICAL QUESTION U/S. 14A VIDE PARA 10 HELD AS UNDER:- 1 0. AS REGARDS THE SECOND QUESTION, SEC.14A OF THE ACT PROVIDES THAT FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THE CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM P ART OF THE TOTAL INCOME UNDER THE ACT. HENCE, WHAT SECTION 14A PROVIDE S IS THAT IF THERE IS ANY INCOME WHICH DOES NOT FORM PART OF INCOME UND ER THE ACT, THE EXPENDITURE WHICH IS INCURRED FOR EARNING AN INCOME IS N OT AN ALLOWABLE DEDUCTION. FOR THE YEAR IN QUESTION, THE FINDING F FA CT IS THAT THE ASSESSEE HAS NOT EARNED ANY TAX FREE INCOME. HENCE, I N THE ABSENCE OF ANY TAX FREE INCOME THE CORRESPONDING EXPENDITURE COULD NOT BE WORKED OUT FOR DISALLOWANCE. THE VIEW OF THE CIT(A), WHICH HAS BEEN AFFIRMED BY THE TRIBUNAL, HENCE DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW, HENCE, THE DELETION OF DISALLOWANC E OF RS.2,03,752/- MADE BY THE AO WAS IN ORDER. 3.2 IN A LATER DECISION DATED 31/07/2014, THE CHENNAI BENCH IN THE CASE OF ACIT VS. MR. M. BASKARAN ALSO FOLLOWED THE AFORESAID DECISION FROM HONBLE ALLAHABAD HIGH COURT IN THE CASE OF M/S. SHIVAM MOTORS PVT. LTD. AND ALSO CONSIDERED THE SPECIAL BENCH DECISION FROM DELHI TRIBUNAL IN CHEMINVEST LTD. VS. ITO (SUPRA). THE BENCH ALSO FOLLOWED AND DISCUSSED VARIOUS OTHER DECISIONS INCLUDING DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CORRTECH ENERGY PVT. LTD.(TAX APPEAL NO.239 OF 2014 DATED 24/03/2014, WHEREIN IT WAS HELD AS UNDER :- M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 11 WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION OF THE FA CTS AND THE DECISIONS RELIED UPON BY LD.AR. THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. WINSOME TEXTILE INDUSTRI ES LTS. REPORTED AT (2009) 319 ITR 204 (P&H) HAS HELD THAT IN THE PRESEN T CASE, ADMITTEDLY, THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. I N SUCH A SITUATION, SEC.14. A COULD HAVE NO APPLICATION. IN THIS CASE ALSO, THE ASSESSEE HAS NOT CLAIMED ANY EXEMPT INCOME IN THIS YEAR. THEREFORE, RESP ECTFULLY FOLLOWING THE JUDGEMENT OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. WINSOME TEXTILES INDUSTRIES LTD . (SUPRA), WE HEREBY ALLOW THIS GROUND AND DIRECT THE AO TO DELETE THE AD DITION. 3.3 IN ANOTHER CASE HONBLE BOMBAY HIGH COURT IN CIT VS. DELITE ENTERPRISES(TAX APPEAL NO.110 OF 2009 ORDER DATED 26 F EB. 2009) , HERO CYCLES LTD. (320 ITR 518) AND M/S. LAKHANI MARKETING INCL (ITA NO.970 OF 2008) DATED 2/4/2014 AND CIT VS. WINSOME TEXTILE INDUSTRIES LTD. (319 ITR 204) FROM HONBLE PUNJAB & HARYANA HIGH COURT HELD THAT WHERE THERE IS NO CLAIM FOR EXEMPTION OF INCOME IN SUCH SITUATION SEC. 14A HAS NO APPLICATION. IN THE PRESENT APPEAL ALSO SINCE THE ASSESSEE COMPANY HAS NOT CLAIMED ANY EXEMPT INCOME DURING TH E YEAR, THEREFORE, THERE IS NO QUESTION OF DISALLOWANCE OF EXPENDITURE. RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS WE D ELETE THE DISALLOWANCE MADE U/S. 14A OF THE ACT AS THE ASSESS EE HAS NOT CLAIMED ANY EXEMPT INCOME DURING THE YEAR. WE ALLOW THE APP EAL OF THE ASSESSEE. 4. FINALLY THE APPEAL OF THE ASSESSEE IS ALLOWED. 2.3. IT IS ALSO NOTED THAT THE RATION LAID DOWN IN THE CASE OF CIT VS SHIVAM MOTORS PVT. LTD. (2015) 55 TAXMAN. COM 262 (ALL.) SUPPORTS THE CASE OF THE ASSESSEE. IDENTICAL LY, HON'BLE GUJARAT HIGH COURT IN CIT VS CORRETECH ENERGY (PVT. ) LTD. (2014) 272 CTR 262 (GUJ); (2015) 372 ITR 97 (GUJ.) HELD THAT, WHERE THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMP TION OF ANY INCOME FROM PAYMENT OF TAX DISALLOWANCE, U/S 14 A COULD NOT BE MADE. IDENTICALLY, THE PUNJAB & HARYANA HIGH COURT IN CIT VS LAKHANI MARKETING INC. (2014) 49 TAXMAN.COM 257 (P & H), RELYING UPON THE DECISION IN CIT VS HERO CYCLES LTD. (2010) M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 12 223 ITR 518 (P & H) AND CIT VS WINSOME TEXTILE INDU STRIES LTD. (2009) 319 ITR 204 (PARA-6) HELD THAT SECTION 14A CANNOT BE INVOKED WHERE THE ASSESSEE HAS NOT RECEIVED ANY DIVIDEND INCOME DURING THE RELEVANT YEAR. THUS, FOLLOWING TH E RATIO LAID DOWN IN THE AFORESAID CASES, WE DECIDE THIS ISSUE I N FAVOUR OF THE ASSESSEE AS NO EXEMPT INCOME WAS EARNED BY THE ASSESSEE DURING THE RELEVANT ASSESSMENT YEAR. 3. THE NEXT GROUND PERTAINS TO CONFIRMING THE DISALLOWANCE OF PROVISION FOR WARRANTY OF RS.3,06,3 65/- AS AGAINST CORRECT DISALLOWANCE OF RS.34,029/-. AT TH E OUTSET, THE LD. DR POINTED OUT THAT THIS ISSUE IS COVERED AGAIN ST THE ASSESSEE BY THE DECISION OF THE TRIBUNAL FOR ASSESS MENT YEAR 2005-06 (ITA NO.8725/MUM/2010). THE LD. COUNSEL FOR THE ASSESSEE DID NOT CONTROVERT THIS FACTUAL MATRIX. HO WEVER, HE CONTENDED THAT THE ASSESSING OFFICER MAY BE DIRECTE D TO QUANTIFY THE CORRECT DISALLOWANCE. 3.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN VIEW O F THE ABOVE, WE ARE REPRODUCING HEREUNDER THE RELEVANT PORTION F ROM THE AFORESAID ORDER OF THE TRIBUNAL FOR READY REFERENCE AND ANALYSIS:- ITA NO.8725/MUM/2010 -AY.2005-06 2.FIRST GROUND OF APPEAL PERTAINS TO CONFIRMATION OF TH E DISALLOWANCE OF PROVISION FOR WARRANTY FOR AFTER SALES SERVICE OF RS.10,10,378/-.DURING THE ASSESSMENT PROCEEDINGS AO F OUND THAT M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 13 THE ASSESSEE HAD DEBITED AN AMOUNT OF RS.19.04 LACS AS WARRANTY REPLACEMENT EXPENSES. THE ASSESSEE HAD DEBITED AN AM OUNT OF RS. 19,04,996/- AS WARRANTY REPLACEMENT EXPENSES. ON VERIFI CATION OF THE DETAILS FURNISHED BY THE ASSESSEE, IT IS NOTICED THAT THE EXPENSES INCLUDE PROVISIONS OF RS. 10, 10,378/-. HE DIRECTED THE ASSESSEE TO FILE JUSTIFICATION FOR THE CLAIM. AFTER CONSIDERING TH E REPLY OF THE ASSESSEE DATED 3.9.2007 ,HE HELD THAT THE CONTENTIO N OF THE ASSESSEE WAS NOT ACCEPTABLE, THAT AS PER SECTION 37( 1), ANY EXPENDITURE (NOT BEING IN THE NATURE OF CAPITAL EXPE NDITURE OR PERSONAL EXPENDITURE) LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, SHOULD BE ALLOWED, THAT FOR CLAIMING DEDUCTION AMOUNT IN QUESTION SHOULD HAVE BEEN LAID OUT OR EXPENDED DURING THE PREVIOUS YEAR ,THAT THE ASSESSEE H AD NOT INCURRED THE EXPENDITURE DURING THE YEAR UNDER CONSIDERATI ON, THAT IT HAD NOT FURNISHED THE BASIS OF ESTIMATE OF THE LI ABILITY, THAT THE AMOUNT CLAIMED WAS NOTHING BUT A PROVISION FOR FUTURE EXPENDITURE THAT MIGHT OR MIGHT NOT BE INCURRED, THAT CONTINGENT L IABILITIES DID NOT CONSTITUTE EXPENDITURE AND COULD NOT BE THE SUBJ ECT MATTER OF DEDUCTION EVEN UNDER MERCANTILE SYSTEM OF ACCOUNTING. FINALLY, HE MADE A DISALLOWANCE OF RS.10.10 LACS . 2.1.AGAINST THE ORDER OF THE AO, ASSESSEE PREFERRED AN A PPEAL BEFORE THE FIRST APPEAL AUTHORITY (FAA).AFTER CONSIDERIN G THE SUBMISSIONS OF THE ASSESSEE AND THE ASSESSMENT ORDER , HE HELD THAT THERE WAS NO MERIT IN THE CONTENTIONS OF THE APPELLAN T, THAT THE AO HAD DISALLOWED ONLY THE PROVISION OUT OF AGGREGATE AM OUNT OF RS 19.04 LAKH DEBITED AS WARRANTY EXPENSES, THAT THE ASS ESSEE HAD BEEN ALLOWED DEDUCTION ON ACTUAL EXPENSES THAT NOTH ING WAS BROUGHT ON RECORD THAT THE SAME WAS ASCERTAINED LIABIL ITY, THAT NO BASIS FOR ARRIVING AT THE FIGURE HAD BEEN FURNISHED, THA T AD HOC PROVISION COULD NOT BE ALLOWED, THAT THE EXPENDITURE WHICH WAS DEDUCTIBLE FOR INCOME TAX PURPOSES WAS ONE WHICH WAS TOWARDS A LIABILITY ACTUALLY EXISTING AT THE RELEVANT TIME, TH AT PUTTING ASIDE OF MONEY WHICH MIGHT BECOME EXPENDITURE ON THE HAPPENIN G OF AN EVENT WAS NOT AN ALLOWABLE ITEM, THAT CONTINGENT LI ABILITIES DID NOT CONSTITUTE EXPENDITURE AND COULD NOT BE SUBJECT MATT ER OF DEDUCTION EVEN UNDER THE MERCANTILE SYSTEM OF ACCOUNT ING, THAT IF M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 14 THE LIABILITY HAD ACCRUED AND THOUGH DISCHARGED AT A LATER DATE WOULD BE DEDUCTIBLE, THAT IT SHOULD BE CAPABLE OF B EING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFIC ATION MIGHT NOT BE POSSIBLE, THAT IN THE CASE UNDER CONSIDERATION THESE FACTS WERE MISSING, THAT LIABILITY WOULD ARISE ONLY WHEN AN Y CLAIM WAS MADE BY THE PURCHASERS AND NOT BEFORE. HE PLACED RELIAN CE ON THE JUDGMENTS OF INDIAN MOLASSES CO. P. LTD (37 ITR 66) ,CALCUTTA CO. LTD (37ITR1) SAJJAN MILL LTD (156 ITR 585). HE FINALLY HELD THAT THE ASSESSEE HAD MADE A PROVISI ON REGARDING CHARGES PAYABLE IN TERMS OF SALE WHICH HAD NOT CRYSTA LLISED ,THAT THE ASSESSEE FAILED TO PROVE THE ACTUAL INCURRENCE OF LIABILITY UNDER THE WARRANTY CAUSE, THAT IN ABSENCE OF ANY SUCH DETAI LS, ACCEPTANCE OF THE CLAIM WITHOUT ANY BASIS COULD NOT BE ALLOWED, THAT THE AO WAS JUSTIFIED IN MAKING THE IMPUGNED DI SALLOWANCE. 2.2.BEFORE US, AUTHORISED REPRESENTATIVE(AR) SUBMITTED THAT THE ASSESSEE WAS INCURRING EXPENDITURE UNDER THE HEAD WARRANT Y FOR AFTER SALES SERVICE, THAT DURING THE YEAR ASSESSEE HAD INCURRED WARRANTY EXPENDITURE OF RS.9 LACS FOR THE YEAR UNDER CONS IDERATION, THAT THE ASSESSEE HAD MADE PROVISIONS FOR THE FIRST TI ME, THAT IN SUBSEQUENT YEAR NECESSARY ENTRIES WERE PASSED IN BOOKS OF A/CS., THAT IN THE BALANCE-SHEET SAID FACT WAS MENTIONED I N FORM OF A NOTE, THAT SALES OF THE ASSESSEE HAS INCREASED IN TH E YEAR UNDER CONSIDERATION AS COMPARED TO LAST YEAR, THAT PROVISION MADE WAS REASONABLE CONSIDERING THE SALES. HE REFERRED TO PAGE NO .1,11,12OF THE PAPER-BOOK (PB).HE RELIED UPON THE JUDGMENT OF T HE HONBLE SUPREME COURT DELIVERED IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD.(314ITR62).HE ALSO REFERRED TO THE ORDER OF THE BANG ALORE ITAT DELIVERED IN THE CASE OF LENOVO (INDIA)PVT. LTD.(21TAXMANN.COM.256).DEPARTMENTAL REPRESENTATIVE ( DR) SUBMITTED THAT NO SCIENTIFIC BASIS FOR CALCULATING W ARRANTY WAS PROVIDED BY THE ASSESSEE, THAT ACTUAL EXPENDITURE HAD GONE DOWN WITH THE INCREASED SALES, THAT THERE WAS NO DIRECT RELA TION WITH THE SALE, THAT PROVISION WAS AD-HOC AND COULD NOT BE ALL OWED. HE RELIED UPON THE CASE OF MICRO LAND INDIA LTD. (18TAXMANN.8 0- HIGH COURT OF KARNATAKA). M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 15 2.3.WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL BEFORE US. EXPENDITURE INCURRED BY AN ASSESSEE FOR WARRANT Y LIABILITY IS ALLOWABLE EXPENDITURE, PROVIDED IT IS CO VERED BY THE PRINCIPLES ENUMERATED BY THE COURTS, FROM TIME TO TIME , IN THIS REGARD. AS PER THE ESTABLISHED LAW WARRANTY LIABILITY CA N BE CONSIDERED PART AND PARCEL OF THE SALE AND MIGHT BE AL LOWED IN COMPUTING THE TAXABLE INCOME. BUT, FOR CLAIMING THE ALLOWANCE ONE HAS TO FURNISH A FAIR, SCIENTIFIC AND REASONABLE BAS IS TO THE AO. TO ARRIVE AT THE CONCLUSION THAT THE ASSESSEE IS FOLLOWI NG A REASONABLE AND SCIENTIFIC METHOD WITH REGARD TO WARRANTY LIABILITI ES, AS DIRECTED BY THE HONBLE SUPREME COURT IN THE MATTER OF ROTORK CONTROLS INDIA PVT. LTD.(SUPRA),FACTS AND FIGURES OF THE EARLIER YEARS ARE ESSENTIAL. BESIDES, AO SHOULD ALSO CONSIDER AS-WH AT WAS THE POLICY PRACTISED BY THE ASSESSEE IN EARLIER YEARS, WHAT WAS THE BASIS FOR CALCULATING A CERTAIN PERCENTAGE OF SALES FOR DETERM INING WARRANTY LIABILITY, AND WHAT WAS THE RATE OF REVERSALS O F LIABILITIES IN THE EARLIER YEARS. WE FIND THAT IN THE CASE UNDER CONSI DERATION, THE ASSESSEE DID NOT PROVIDE MATERIAL WITH REGARD TO WARRANT Y LIABILITIESTO THE AO OR TO FAA DURING ASSESSMENT/APPE LLATE PROCEEDINGS. WE FIND THAT THE AO HAS SPECIFICALLY ME NTIONED THAT ASSESSEE HAD FILED ANY BASIS OF CALCULATING THE AMO UNT OF WARRANTY. IT IS FOUND THAT ASSESSEE-COMPANY HAS NOT CERTIFIED THE PAPER-BOOK AS REQUIRED BY RULE,18 OF ITAT, RULES 1963 AND IT HAS NOT MENTIONED THAT ALL THE PAPERS, INCLUDING PAPER NO.1,W ERE PRODUCED BEFORE THE AO.PG.1 OF THE PB CONTAINS BASIS OF WARRANT Y EXPENDITURE. IN ABSENCES OF THE CERTIFICATE AS WHETHE R THE PAPER NO.1 WAS BEFORE THE AO OR NOT WE CAN SAFELY SAY THAT SAME WAS NOT MADE AVAILABLE TO HIM. EVEN IF IT WAS FURNISHED TO HIM, IN OUR OPINION IT IS OF NO USE. WE FIND THAT THE COMPANY H AS NOT SCRUTINISED THE HISTORICAL TREND OF WARRANTY PROVISIONS MADE AND COMPARED IT WITH THE ACTUAL EXPENSES INCURRED. APPELLA NT HAS FAILED TO PROVE THAT FIGURES FURNISHED BY IT ARE BASED ON A S ENSIBLE ESTIMATE. WE FIND THAT EVIDENCE OF YEARLY REASSESSM ENT OF SUCH ESTIMATES WERE NOT PRODUCED. IN OTHER WORDS APPELLANT HAS NOT MAINTAINED DATA SYSTEMATICALLY. ASSESSEE HAS CLAI MED THAT GROSS SALES HAD INCREASED OVER THE YEARS. WE FIND THAT THE A SSESSEE IN NOT ONLY DEALING IN COMPUTER PERIPHERALS, BUT IT IS ALSO E NGAGED IN THE M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 16 BUSINESS OF EXPORTING OF CHEMICALS AND DYE STUFF, BU LK PHARMACEUTICALS AND INTERMEDIARIES. IT IS NOT KNOWN WH ETHER THE INCREASE IN SALES WAS RESULT OF SELLING OF COMPUTERS O R OTHER ITEMS. DR HAS RIGHTLY POINTED OUT THAT THERE IS NO CORRELATIO N BETWEEN THE INCREASED SALES AND WARRANTY EXPENDITURE ON WARRANTY LIAB ILITY HAS GONE DOWN WITH INCREASE IN SALES. IN THESE CIRCUMSTAN CES, WE ARE OF THE OPINION THAT PROVISION MADE BY THE ASSESSEE WAS FOR CONTINGENT LIABILITY. WE HAVE PERUSED THE JUDGMENTS DELIVERED BY THE HONBLE APEX COURT DELIVERED IN THE CASE OF ROTORK CONTROLS IN DIA PVT. LTD. (SUPRA).IN OUR HUMBLE OPINION THAT CASE RATHER SUPPORTS THE VIEWS EXPRESSED BY THE AO AND THE FAA. WE FIND THAT IN THE SUBMISSIONS MADE BY THE ASSESSEE HISTORICAL TREND OF WARRANTY PROV ISIONS SENSIBLE ESTIMATE AND YEARLY REASSESSMENT OF SUCH ESTIMATES WERE EXISTING. IN OTHER WORDS ASSESSEE HAS NOT MAINTA INED DATA SYSTEMATICALLY, AS DESIRED BY THE HONBLE SUPREME CO URT. IN THE CASE OF LENOVO (INDIA) PVT. LTD.(SUPRA)ASSESSEE COMP ANY HAD TAKEN OVER BUSINESS FROM IBM. CONSIDERING THE ABOVE FACT TRIB UNAL HELD THAT AS IBM WAS MAKING PROVISIONS IN EARLIER YEARS, SO ASSESSEE CAN USE THE DATA FOR WARRANTY EXPENDITURE. IT WAS FURTHER HE LD THAT IF ESTIMATE WAS MADE ON A SCIENTIFIC BASIS, SAME COULD BE ALLOWED. IN THE MATTER BEFORE US, SCIENTIFIC DATA IS NOT AVAILABL E. IN THESE CIRCUMSTANCES WE HOLD THAT THERE IS NO NEED TO INTERF ERE WITH THE ORDER OF THE FAA. UPHOLDING HIS ORDER WE DECIDE GROUND N O.1 AGAINST THE ASSESSEE. IN THE LIGHT OF THE ABOVE, IN PRINCIPLE, WE DECIDE THIS ISSUE AGAINST THE ASSESSEE, HOWEVER, WE DIRECT THE LD. AS SESSING OFFICER TO EXAMINE THE FACTUAL MATRIX AND DISALLOW THE CORRECT AMOUNT, IF ANY, ACCORDINGLY. THUS, THE APPEAL OF THE ASSESSEE IS DISPOSED OFF IN TERMS OF INDICATED HEREINABOVE. M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 17 4. NOW, WE SHALL TAKE UP THE APPEAL OF THE REVENUE (ITA NO.3526/MUM/2015), WHEREIN, THE ONLY GROUND RA ISED BY THE ASSESSEE PERTAINS TO DIRECTING THE ASSESSING OF FICER TO RECOMPUTED THE DISALLOWANCE U/S 14A OF THE ACT R.W. R. 8D OF THE RULES AFTER EXCLUDING THE LONG TERM CAPITAL INV ESTMENT IN SUBSIDIARY/GROUP CONCERNS RELYING UPON THE DECISION OF THE TRIBUNAL IN THE CASE OF GARWARE WALL ROAPS LTD. (65 SOT 86) IGNORING THE FACT THAT THE DECISION OF THE TRIBUNAL HAS NOT BEEN ACCEPTED BY THE DEPARTMENT. 4.1. DURING HEARING, THE LD. DR ADVANCED ARGUMENTS , WHICH IS IDENTICAL TO THE GROUND RAISED. THE LD. CO UNSEL FOR THE ASSESSEE DEFENDED THE ORDER OF THE TRIBUNAL. WE HAV E CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MA TERIAL AVAILABLE ON RECORD. WE FIND THAT WHILE COMING TO A CONCLUSION, THE LD. COMMISSIONER OF INCOME TAX (APPEAL) HAS DEL IBERATED UPON THE FACTUAL MATRIX AND VARIOUS CASE LAWS INCLU DING FROM HON'BLE JURISDICTIONAL HIGH COURT AND THE TRIBUNAL. WE FIND NO INFIRMITY IN THE SAME. SO FAR AS, THE CONTENTION O F THE LD. DR THAT THE ORDER OF THE TRIBUNAL IS UNDER CHALLENGE B EFORE THE HON'BLE HIGH COURT, IS CONCERNED, WE ARE OF THE VIE W THAT ORDER OF THE HON'BLE HIGH COURT WILL BE BINDING UPON BOTH THE PARTIES BUT AS ON DATE THE ISSUE IS IN FAVOUR OF TH E ASSESSEE, THEREFORE, WE DISMISS THE APPEAL OF THE REVENUE. FINALLY, THE APPEAL OF THE ASSESSEE IS DISPOSED OFF IN TERMS INDICATED HEREINABOVE AND THE APPEAL OF THE R EVENUE IS DISMISSED. M/S PRIYA LTD. ITA NOS.3231 & 3526/MUM/2015 18 THIS ORDER WAS PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF LD. REPRESENTATIVES FROM BOTH SIDES AT THE CONCLUSION OF THE HEARING ON 13/02/2017. SD/- SD/- ( N.K. PRADHAN ) (JOGINDER SINGH) ' # / ACCOUNTANT MEMBER $ # / JUDICIAL MEMBER MUMBAI; * DATED : 21/02/2017 F{X~{T? P.S / +% !%$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. ,-./ / THE APPELLANT 2. 0./ / THE RESPONDENT. 3. 1 1 & 2$ ( ,- ) / THE CIT, MUMBAI. 4. 1 1 & 2$ / CIT(A)- , MUMBAI 5. 4%5$ , 1 ,-(, 6 , & / DR, ITAT, MUMBAI 6. 7'8 / GUARD FILE. / BY ORDER, 04-$$ //TRUE COPY// / (DY./ASSTT. REGISTRAR) , & / ITAT, MUMBAI,