UMA POLYMERS LTD, MUMBAI V. DCIT CIR 3(3), MUMBAI

ITA 3329/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8036 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-03-2017
• Appeal Filed By: Assessee
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 02-06-2015
• Court: TRIBUNAL
• Department Lawyers: POOJA SWAROOP
• Keywords: Earning of tax free income; Retrospective amendment; Question of law
• Section: 14A; 6; 10; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL F , BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI SANDEEP GOSAIN , JM ITA NO. 3329 / MUM/201 5 ( ASSESSMENT YEAR : 2011 - 12 ) M/S. UMA POLYMERS LTD., 115, RAHEJA PLAZA OF VEERA DESAI ROAD, ANDHERI (W), MUMBAI 400 053 VS. DCIT CIR 3(3), MUMBAI PAN/GIR NO. AAACU0748E APPELLANT ) .. RESPONDENT ) ITA NO. 3884/MUM/2015 ( ASSESSMENT YEAR :2011 - 12 ) DCIT CC4(4), MUMBAI VS. M/S. UMA POLYMERS LTD., 115, RAHEJA PLAZA OF VEERA DESAI ROAD, ANDHERI (W) , MUMBAI 400 053 PAN/GIR NO. AAACU0748E APPELLANT ) .. RESPONDENT ) ASSESSEE BY SHRI RAJENDRA JAIN REVENUE BY MS. POOJA SWAROOP DATE OF HEARING 09 / 02 /2017 DATE OF PRONOUNCEMENT 03 / 03 /201 7 / O R D E R PER R.C.SHARMA (A.M) : THESE ARE THE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE AGAINST THE ORDER OF CIT(A) - 8, MUMBAI DATED 27/03/2015 FOR THE A.Y.2011 - 12, IN THE MATTER OF ORDER PASSED U/S.143(3) OF THE IT ACT. 2. REVENUE IS AGGRIEVED FOR RESTRICTING DISALLOWANC E U/S.14A READ WITH RULE 8D TO RS.12,27,785/ - IN PLACE OF RS.53,01,885/ - , HOWEVER, ASSESSEE IS AGGRIEVED FOR UPHOLDING DISALLOWANCE OF RS.12,27,785/ - UNDER RULE 8D( 2)(III). 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. 4. FACTS IN BRIEF ARE THAT ASSESSEE IS ENGAGED IN MANUFACTURING AND DEALING OF FLEXIBLE PACKAGING MATERIAL. DURING THE COURSE OF SCRUTINY ASSESSMENT, AO MADE DISALLOWANCE U/S.14A IN RESPECT OF INTEREST ITA NO. 3329 & 3884 /MUM/2015 M/S. UMA POLYMERS LTD., 2 EXPENDITURE AND OTHER ADMINISTRATIVE EXPENSES. AO OBSERVED THAT ASSESSEE IS IN R ECEIPT OF DIVIDEND INCOME OF RS.32,400/ - WHICH WAS CLAIMED AS EXEMPT FROM TAX U/S.10 ( 34 ) . ACCORDINGLY, BY APPLYING RULE 8D, AO MADE DISALLOWANCE ON ACCOUNT OF INTEREST AND OTHER EXPENDITURE. BY IMPUGNED ORDER CIT(A) DELETED THE DISALLOWANCE ON ACCOUNT OF I NTEREST AFTER OBSERVING AS UNDER: - 5. GROUND NO.1 , 2. & 3 5.1 THE' ABOVE GROUNDS ARE TAKEN TOGETHER AS THEY ADDRESS A COMMON ISSUE. I FIND FROM THE BALANCE SHEET OF THE APPELLANT COMPANY AS AT 31.03.2011 THAT .THE SHARE CAPITAL (RS.11, 15,51,500/ - ) AND RESERVE & SURPLUS OF (RS.41,85,79,205/ - ) TOTALLING TO RS.53,01,30,705/ - ARE MORE THAN THE INVESTMENT MADE OF RS.28,23,07,012 / - . IN THE CASE OF CIT V. HDFC LTD,(ITA NO. 330 OF 2012) ORDER DATED 23 / 07 / 2014,THE HON'BLE BOMBAY HIGH COURT H ELD THAT IN VIEW OF THE FACTUAL POSITION AS PER THE JUDGEMENT IN THE CASE OF CL'F V. RELIANCE UTILITIES' AND POWER LTD. :(2009) '313 ITR 340 [BOM], IT WOULD HAVE TO BE PRESUMED THAT THE INVESTMENT MADE BY THE ASSESSEE WOULD BE OUT OF THE INTEREST FREE FUND S AV A I LABL E WITH, THE ASSESSEE. IN: THE RELEVANT YEARS, THE ASSESSEE CHURNED THAT NO DIS ALLOWANCE OF INTEREST BE MADE U/S. 14A OF THE LT. ACT, 1961 IN VIEW OF THE FACT THAT THE ASSESSEE HAD INTEREST FREE FUNDS AVAILABLE MORE THAN THE INVESTMENT IN TAX FREE SECURITIES. THE AO REJECTED THE CLAIM AND MADE DISALLOWANCE OF INTEREST UJ.S.14A ON PROPORTIONATE BASIS. THE TRIBUNAL D ELETE D THE ADDITION; ON APPEAL BY THE REVENU E, THE BOMBAY HIGH COURT UPHELD THE DECISION OF THE TRIBUNAL AND HELD AS UNDER: I) 'WE F I ND THAT THE FACTS OF THE PRESENT CASE ARE SQUARELY COVERED BY THE JUDGEMENT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. '313 ITR340 (BORN). THE FINDINGS OF FACT GIVEN BY THE ITA T IN THE PRESENT CASE IS THAT THE AS S E SSEE'S OWN FUNDS AND OTHER NON - ' I NTERES T BEARING FUNDS WERE MORE THAN THE INVESTMENT IN THE TAX - FREE SECURITIES. II] IN THE PRESENT CASE, UNDISPUTEDLY THE ASSESSEE'S CAPITAL, PROFIT RESERVE, SURPLUS .AND CURRENT' ACCOUNT DEPOSITS WERE HIGHER THAN THE INVESTMENT IN THE TAX - FREE, SECURIT IES. IN VIEW OF ITA NO. 3329 & 3884 /MUM/2015 M/S. UMA POLYMERS LTD., 3 THE FACTUAL POSITION, - AS PER THE JUDGEMENT OF THIS COURT IN THE CASE OF 'RELIANCE UTILITIES AND POWER LTD. 313 ITR 340 (BORN), IT WOULD HAVE TO BE PRESUMED THAT THE INVESTMENT MADE BY THE ASSESSEE WO ULD BE' OUT OF THE INTEREST - FREE FUNDS AVAILABLE WITH THE ASSESSEE. III) WE THEREFORE, ARE UNABLE TO AGREE WITH THE SUBMISSION OF SURESH KUMAR THAT THE TRIBUNAL HAD ERRED IN DISMISSING THE APPEAL OF THE REVENUE ON THIS GROUND . IV)' .WE DO NOT FIND THAT THE QUESTION GIVES RISE TO ANY SUBSTA NTIAL QUESTION OF LAW. - APPEAL IS THEREFORE RE J ECTED. IN VIEW O F THE ABOVE, THE DISALLOWANCE OF RS.40,74,100/ - MA DE BY THE AO UNDER RUL E 8D (2)(II) IS DELETED. 5.2 HO N 'BLE SUPREME COURT IN THEIR DECISION DATED 6.7.2010 IN C I T V. WALFORTSHARE & STOCK'BR OKERS (P.)LTD.,326 ITR 1, INTER ALIA, OBSERVED THAT THE THEORY OF APP O RTI O NMENT OF EXPENDITURE BETWEEN TAXABLE AND NON - TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A. IN THE WORDS OF HON'BLE SU PREME COURT: '17 . THE IN SERTION OF SECTION 1 4A WITH RETROSPECTIVE EFFECT IS THE SERIOUS ATTEMPT ON THE PART OF TH E PARLIAMENT NOT TO ALLO W' DEDUCTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO IN C OME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST THE T AXABL E INCOME (SEE CIRCULAR NO. 14 OF 2001, DATED 22 - 11 - 200 1). IN OTHE R WORDS, SECTION 14A CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSES INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCOME AND PARTLY TO THE T AXABLE INCOME. IN THE ABSENCE OF SECTION 14A; THE - EXPENDITURE INCURRED IN RESPECT. 'OF EXEMPT INCO M E WAS BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDATE OF SECTION 14A IS C LEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTION 'OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENS ES INCURRED IN RELATION TO EXEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN IN COMES ARE NOT INCLUDIBLE WHILE COMPUTING TOTAL INCOME AS THESE ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE' ACT. IN THE PAST, THERE HAVE BEEN CASES IN WHICH DEDUCTION HAS BEEN SOUGHT IN RESPECT OF SUCH INCOMES WHICH IN EFFECT WOULD MEAN T HAT TAX INCENTIVES TO CERTAIN INCOMES WAS BEING U SED TO ITA NO. 3329 & 3884 /MUM/2015 M/S. UMA POLYMERS LTD., 4 REDUCE THE TAX PAYABLE ON THE .NON - EXEMPT INCOME BY DEBITING THE EXPENSES, INCURRED TO EARN THE EXEMPT INCOM E, AGAINST TAXABLE IN C OME: THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET IN COME , I.E., GROSS INCOME MINUS THE EXPENDITURE. ON THE SAME ANALOGY THE EXEM PTIONS ALSO IN RESPECT OF NET INCOME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE I NCOME. THIS IS THE PURPORT OF SECTION 14A. IN SECTION 14A, THE FIRST PHRASE IS 'FOR THE PURPOSES OF COMP UTING THE TOTAL INCOME UNDER THIS CHAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS' OF INCOME AS PRESCRIBED UNDER CHAPTER IV W OULD FALL WITHIN SECTI O N 14A.THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH DOES NOT FORM P ART OF TOTAL INCOME UNDER THE AC T' .IT MEANS 'THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOME, THEN THE RELA TED EXPENDITURE IS OUTSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 14A. F URTHER, SECTION 14 SPECI FIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE CHARGEABLE, AN INCOME HAS TO BE BROUGHT UNDER ONE OF THE FIVE HEADS. SECTIONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR THE PURPOSE OF C H ARGEABILITY T O TAX UNDER THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL I NCOME '.CHARGEABLE TO TAX, THE 'PERMISSIBLE DEDUCTIONS ENUMERATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOWED ONLY WITH, R EFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF THE ABOVE HEADS .AND I S CHARGEABLE TO TAX. IF AN INCOME LIKE DIVIDEN D INCOME IS NOT APART OF THE TOTAL INCOME, THE EXPENDITURE/DEDUCTION THOUGH OF TH E N AT URE SPECIFIED IN SECTIONS 15 TO ~9BUT RELATED TO THE INCOME NOT FORMING PART OF TOTAL INCOME COULD NOT BE A LLOWED AGAINST OT HER INCOME INCL UDIBLE IN THE TOTAL INCOME FOR THE 'P URPO SE OF CHARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT OF EXPE N DI TURES BETWEEN T AXABLE AND NON - T AXA BLE HAS, IN PRINCIPLE, B EEN NOW WIDENED UNDE R SEC TION 1 4A. READING SECTION 14 IN JUX TAPOSITION WITH SECTIONS 15 TO 59, IT IS C LEAR THAT TH E , WORD S 'EXPENDITURE INCU RRED 'IN S ECTIO N 14A R EFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST, .ETC. IN RESPECT OF WH ICH ALLOWANCES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37.)' IN MAICOPP INVESTMENT LTD. V. C L'I' [2011] 15 TAXMANN.COM 390 (DELHI), THE COURT EXPLAINED THE METHOD PRESCRIBED BY RULE8D(2) AS UNDER: IF ONE EXAMINES SUB - RULE (2) O F RULE 8D, IT IS FOUND THAT THE METHOD FOR DETERMINING THE EXPENDITURE IN RELATION TO EXEMPT INCOME HAS THREE COMPONE NTS. THE FIRST COMPONENT BEING THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. ITA NO. 3329 & 3884 /MUM/2015 M/S. UMA POLYMERS LTD., 5 T HE - SECOND COMPONENT BEING COMPUTED, ON THE BASIS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSESSEE INCURS EX PENDITURE BY WAY OF INTEREST WHICH WA S NOT DIRECTLY ATTRI BUTA BLE TO ANY PARTICULAR INCOME OR RECEIPT . 'THE FORMULA ESSENTIALLY APPORTIONS THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST [OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I)]INCURRED DURING THE PREVIOUS YEAR IN THE RATIO OF THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT 'FORM PART OF THE TOTAL INCOME TO THE AVERAGE OF THE TOTAL ASSETS OF TH E ASSESSEE'. 'THE THIRD COMPONENT IS AN ARTIFI CIAL FIGURE - 0 .5% OF THE AVER AGE VALUE OF THE INVESTMENT INCOME FROM WHI C H DO E S NOT OR SHALL NOT 'FO RM PART OF THE TOTAL INCOME, A S APPEARING I N TH E BAL ANCE SHEETS OF THE ASSESSEE; ON THE F IRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. IT IS THE AGGREGATE OF THESE THREE' COMPONENT S WHICH WOULD CONSTITUTE THE EXPENDIT URE IN R ELATION TO EXEMPT INCOME AND IT IS THIS AMOUNT OF EXPENDITUR E WHICH WOULD BE DISALLOWED UN DER SECTION 14A.' IT IS THEREFORE , C LEAR THAT IN TERM S' OF THE SAID RULE, THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMP T INCOME HAS TWO ASPECTS - (A) DIRECT AND (B) INDIRECT. THE DIRECT EXPENDITURE IS STRAIGHTAWAY TAKEN INTO ACCOUNT BY VIRTUE OF CLAUSE{I] OF SUB - RULE (2) OF RULE 8 D . 'THE INDIRECT EXPENDITURE, WHERE IT IS, BY WAY OF INTEREST, IS COMPUTED THROUGH THE PRI NCIPLE OF APPORTIONMENT, AS INDICATED ABOVE. , IN CASES WHERE THE INDIRECT EXPENDITURE IS NOT BY WAY OF INTEREST, A R ULE OF THUMB FIGURE OF 0.5% OF TH E AVERAGE VALUE OF THE INVESTMENT, INCOM E FROM WHICH DO ES NOT OR SHALL NOT FORM PART OF THE TOTA L INCO ME, IS T A KEN.'' IN VIEW O F TH E AB O VE, THE D ISALLOWANCE OF RS.12,27,785/ - MADE BY THE AO AS PER RU LE 8D(2)(II I) IS CONFIRMED.' , 5.3,' THE', HON'BLE I TAT, 'MUMBAI 'H' BENCH ILL THE CASE OF HINDUSTAN CONSTRUCTION COMPANY LTD., . V.DCIT (2013) 140 ITD 642 (MUM) HAS HELD THE FOLLOWING; 'THE HON 'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA ) HAS CLEARLY HELD THAT, SECTION 14A HAS IMPLICIT WITHIN A NOTION OF APPORTIONMENT, SUB - SEC. (2) &(3) ARE ONLY MACHINERY PROVISIONS FO R THE PURPOSE OF COMPUTATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME. THEREFORE SOFAR AS THE E XPENDITURE INCURRED IN RELATION TO THE INCOME WHICH DOES' NOT FORM PART O F THE T OTAL IN COM E AS PER ITA NO. 3329 & 3884 /MUM/2015 M/S. UMA POLYMERS LTD., 6 'SECTION 10 OF THE IT ACT, THE SAID E XPENDITURE CLEAR LY FALLS UNDER CLAUSE (F) OF EX PLANATION 1 TO SEC. 115 JB . THEREFORE, IN VIEW OF TH E DECISION OF THE HON'BLE HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA ) ,ANY EXPENDITURE WHICH IS DISALLOWED U/S. 14A AND ATTAINED THE FINALI TY HAS TO BE ADDED BACK WHILE COMPUTING THE BOOK PROFIT.' IN ITO V. RBK SHARE BROKING (P) LTD. (2013) 37 TAXMANN.COM 128 MUM - TRIB) IT WAS HELD AS UNDER: IT WOULD BE RELEVANT TO NOTE THAT 'BOOK PROFIT' U/S. . 11 5 JB IS COMPUTED AS PER EXPLANATION 1 TO SUB - SECTION (2) OF SECTION 11SJB. A BARE PERUSAL OF CLAUSE (F) OF EXPLANATION 1 MAKES IT ABUNDANTLY CLEAR THAT THE AMOUNT OF EXPENDITURE 'RELATABLE TO' ANY EXEMPT INCOME, OTHER THAN SECTION 10(38), IS LIABLE TO BE A DDED BACK TO THE AMOUNT' OF NET PROFIT AS SHOWN IN THE PROFIT' AND LOSS ACCOUNT. AS PER SECTION 14A, IT TRANSPIRES THAT IT TALKS OF DISALLOWING ANY E XP ENDITUR E INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN THE TOTAL INCOM E 'THE EXPRESSION 'IN RELATION TO' USED FOR MAKING DISALLOWANCE U /S. 14AHAS BEEN EMPLOYED IN EXPLANATION 1 TO SECTION'115JB(2) AS EXPENDITURE 'RELATABLE TO', IRI MORE OR LESS THE SAME FORM. I T IS MANIFEST, THAT THE AMOUNT OF DIVIDEND IS EXEMPT ED U / S. 10(33) [NOT SECTION 10(38)] OF THE ACT. THUS,' ANY EXPENDITURE 'RE LATABLE TO' THE EXEMPT DIVIDEND INCOME WOULD FALL UNDER CLAUSE (F). THE ASSESSEE. ARGUED THAT, UNLESS AN AMOUNT IS SPECIFICALLY DEBITED TO. THE PROFIT AND LOSS ACCOUNT IN RESPECT OF AN EXEMPT , INCOME, THE SAME CANNOT 'HE BROUGHT WITHIN THE PURVIEW OF CLAUSE (F) OF THE EXPLANATION 1 TO SECTION 115 JB(2). HE STATED THAT SINCE THE DISALLOWANCE U/S.14A IS COMPUTED AS PER RULE 8D, THE ORIGIN OF THE EXPENSES DISALLOWED CANNOT BE TRACED TO THE PROFIT AND LOSS ACCOUNT AND HENCE IT CANNOT BE COVERED WITHIN ' THE M ISCHIEF OF CLAUSE (F) OF THE, EXPLANATION. THERE WAS NO LOGIC IN THIS SUBMISSION BECAUSE OF THE CLEAR 'LANGUAGE OF THE EXPLANATION 1, WHICH PROVIDES IN UNEQUIVOCAL TERMS .THAT THE AMOUNT OF EXPENDITURE 'RELATABLE TO' EXEMPT ' INCOME SHALL BE ADDED BACK ' 'NEITHER, THE LANGUAGE OF C1AU~E' (F) EXPRESSLY REFERS TO THE AMOUNT ' SPECIFICALLY DEBITED TO THE PROFIT AND LOSS ACCOUNT NOR CAN THERE BE AN IMPLICATION IN THIS REGARD. 'WHAT HAS BEEN CONTEMPLATED BY T HE PROVISION IS THE AMOUNT OF THE EXPENDITURE 'RELATABLE TO' 'EXEMPT INCOME . 'FURTHE R THE AMOUNT DISALLOWABLE U/S.14A IS ALWAYS PART OF THE. ',EXPENSES SP ECI FICALLY DEBITED 'TO THE PROFIT AND LOSS ACCOUNT. ITA NO. 3329 & 3884 /MUM/2015 M/S. UMA POLYMERS LTD., 7 IT IS AXIOMATIC THAT UNLESS, ANY EXPENDITURE IS INCURRED AND CLAIMED AS D EDUCTION, THERE CAN BE NO QUESTION OF ANY HYPOTHETICAL DISALLOWANCE U/ S.14A . IT, THEREFORE, FOLLOWS THAT THE .AMOUNT DISALLOWABLE U/S.14A IS COVERED UNDER CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB(2). IN THE CASE OF DABUR INDIA LTD. V. ACIT (2013 ) 37 TAXMANN.COM 289 '(MUM - TRI B),IT WAS - HELD THAT: THE CLEA R LANGUAGE OF THE EXPLANATION 1 , PROVIDES IN UNEQUIVOCAL TERMS THAT THE AM OUNT OF EXPENDITURE RELATABLE TO THE EXEMPT INCOME SHALL BE ADDED BACK . IN VIEW OF THE ABOVE DECISIONS, AND ALSO THE F INDINGS AT PARA 5.2 HERE- IN - ABOVE, THE AO IS: DIRECTED TO RESTRICT THE DISALLOWANCE U/ S. 14A R.W. RULE 8D TO'RS.12,27,785/ - IN PLACE OF RS.53,OL,885/ - DONE BY HIM TO THE NORMAL PROFIT AS WE LL AS THE BOOK P ROFIT. 5. AGAINST THE ABOVE ORDER OF CIT(A) , BOTH ASSESSEE AND REVENUE ARE IN APPEAL BEFORE US. 6. LEARNED AR MR. RAJENDRA JAIN, CHARTERED ACCOUNTANT ON BEHALF OF ASSESSEE CONTENDED THAT DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE COMPANY HAS DEPLOYED ITS OWN CAPITAL RESERVE AND SURPLUS FOR MAKING INVESTMENT IN SHARES, THUS THERE WAS NO USE OF ANY BO RROWED FUNDS THEREFORE NO DISALLOWANCE OF INTEREST UNDER RULE 8D (2)(II ) WAS WARRANTED . 7. OUR ATTENTION WAS ALSO INVITED TO THE AUDITED ACCOUNTS FOR THE YEAR UNDER CONSIDERATION. LEARNED AR PRECISELY POINTED OUT THE FACT THAT ASSESSEE COMPANY HAS INVESTED IN UMEX PACKAGING LTD., FOR HAVING CONTROLLING INTEREST THEREIN, IT ACQ U IRED ALMOST'100% EQUITY SHARE CAPITAL OF THE ABOVE COMPANY BY RAISING ITS OWN EQUITY SHARE CAPITAL LARGELY AND PARTLY FRO M FRE E RESERVE S AND SURPLUSES OF THE ASSESSEE COMPANY. ITA NO. 3329 & 3884 /MUM/2015 M/S. UMA POLYMERS LTD., 8 8. OUR ATTENTION WAS ALSO INVITED TO THE CASH FLOW STATEMENT PLACED IN THE PAPER BOOK WHICH INDICATED THAT THE ENTIRE INVESTMENT OF RS.28 , 23 , 07,012/ - AS AT 31.03.2011 SHOWN IN THE BALANCE SHEET OF THE ASSESS EE COMPANY YIELDING TAX FREE INCOME HAS COME OUT OF INTEREST FREE FUN DS' I .E. EQUITY SHARE CAPITAL AND FREE RESERVES. RELIANCE WAS PLACED BY HIM ON THE DECISION IN THE CASE OF CIT VS HDFC BANK LTD. (2014) 366 ITR SOS (BOM) WHEREIN IT HAS BEEN HELD THAT NO D ISALLOWANCE WAS CALLED UPON OUT OF INTEREST PAID ON BORROWINGS IF ASSESSEE'S OWN FUNDS AND NON INTEREST BEARING FUND EXCEEDS INVESTMENT IN TAX FREE SECURITIES. 9. LEARNED AR FURTHER ARGUED THAT STRATEGIC INVESTMENT MADE IN SUBSIDIARY COMPANIES THAT HAVE C ONTROLLING INTEREST, NO DISALLOWANCE IS WARRANTED U/S.14A. IN SUPPORT OF THIS PROPOSITION, RELIANCE WAS PLACED ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS, WHICH WAS ALSO PLACED ON RECORD. GARWARE WALL ROPES VS. ADDL. CIT (2004)65 SOT 86 (ITAT MUMBAI BENCH) J M FINANCIAL LTD., VS. ADDL CIT (ITA 4521/MUM/2012) ORDER DT 26.03.2014. CIT VS. ORIENTAL STRUCTURAL ENGG. (PVT.) LTD., (ITA 605/2012) (DELHI HIGH COURT DECISION DT. 15/01/2013) 10. AS PER LEARNED AR, INVESTMENT NOT YIELDING TAX FREE INCOME DURING THE ASSES SMENT YEAR IS REQUIRED TO BE EXCLUDED FROM INVESTMENT WHILE COMPUTING AVERAGE INVESTMENT IN RULE 8D (2)(III). FOR THIS PURPOSE RELIANCE WAS PLACED ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS. COAL INDIA LTD., VS.ADDL.CIT (2015) 172 TTJ 0103 (KOL) ITA NO. 3329 & 3884 /MUM/2015 M/S. UMA POLYMERS LTD., 9 REI AGRO LT D., VS. DCIT (2013) 144 ITD 141 (KOL BENCH) 11. ON THE OTHER HAND, LEARNED DR RELIED ON THE ORDER OF THE LOWER AUTHORITIES. 12. WE HAVE CONSIDERED RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE HAD ALSO DELIBERATED ON THE JUDICIAL PRONOUNCEMENTS REFERRED BY LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS AS WELL AS CITED BY LEARNED AR DURING THE COURSE OF HEARING BEFORE US IN THE CONTEXT OF FACTUAL MATRIX OF THE CASE. FROM THE RECORD , WE FOUND THAT AS PER THE AUDITED BALAN CE SHEET ON RECORD, ASSESSEE WAS HAVING ITS OWN CAPITAL AND FREE RESERVES WHICH WERE MUCH MORE THAN THE INVESTMENT MADE IN TAX FREE SECURITIES. A CATEGORICAL FINDING HAS BEEN RECORDED BY CIT(A) TO THE EFFECT THAT ASSESSEE COMPANY WAS HAVING ITS OWN CAPITAL AS ON 31/03/2011 AT RS.11,15,51,500/ - AND RESERVES AND SURPLUS OF RS.41,85,75,205/ - TOTAL TO RS.53,01,30,705/ - . THESE CAPITAL AND RESERVES WERE MUCH MORE THAN THE INVESTMENT MADE OF RS.28,23,07,012/ - . I N TERMS OF THE DECISION OF JURISDICTIONAL HIGH COURT IN CASE OF HDFC BANK (SUPRA) AND RELIANCE UTILITIES (SUPRA) , IT WOULD HAVE TO BE PRESUMED THAT INVESTMENT MADE BY ASSESSEE WOULD BE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. 13. THE RATIO AND THE PRINCIPLE LAID DOWN BY THE HON'BLE BOMBAY HI GH COURT IN THE CASE OF RELIANCE UTILITIES LTD., (SUPRA) AND HDFC BANK, (SUPRA) ARE CLEARLY APPLICABLE, WHEREIN THEIR LORDSHIPS HAVE REITERATED SEVERAL TIMES THAT IF THE ASSESSEE HAS SURPLUS FUNDS IN THE FORM OF RESERVES & SURPLUS OR SHARE CAPITAL, THEN PR ESUMPTION IS THAT INVESTMENT ITA NO. 3329 & 3884 /MUM/2015 M/S. UMA POLYMERS LTD., 10 WOULD HAVE BEEN MADE FROM SURPLUS FUNDS/INTEREST FREE FUNDS AND NOT FROM THE BORROWED FUNDS. 1 4 . APPLYING THE PROPOSITION OF LAW LAID DOWN BY JURISDICTIONAL HIGH COURT TO THE FINDING S RECORDED BY CIT(A) WHICH ARE AS PER MATERIA L ON RECORD, WE DO NOT FIND ANY REASON TO INTERFERE IN THE FINDINGS OF CIT(A) DELETING THE DISALLOWANCE OF INTEREST U/S.14A READ WITH RULE 8D (2)(II) . ACCORDINGLY APPEAL FILED BY REVENUE IS DISMISSED. 15 . IN THE APPEAL OF ASSESSEE, ASSESSEE IS AGGRIEVED FO R RESTRICTING DISALLOWANCE OF OTHER EXPE NDITURE UNDER RULE 8D (2)(III) TO RS.12,27,785/ - . A S PER THE JUDICIAL PRONOUNCEMENTS IN CASE OF GARWARE WALL ROPES (SUPRA) AND JM FINANCIAL LTD., (SUPRA) AND ORIENTAL STRUCTURAL ENGG.(P) LTD., (SUPRA) , I NTERGLOBE ENT ERPRISES LTD VS DCIT ITA NOS, 1362/DE1/2013, 1032/DEL/2013 AND 1580/DE1/2013 (DELHI ITAT); M/S. BINANI INDUSTRIES LIMITED ITA NO.L44/KO1/2013 (KOL ITAT); EIH ASSOCIATED HOTELS LIMITED ITA NO.1503 & 1624/MDS/2012 (MADRAS ITAT); THE STRATEGIC INVESTME NT MADE IN SUBSIDIARY COMPANIES FOR HAVING CONTROLLING INTEREST SHOULD BE EXCLUDED FROM THE AVERAGE INVESTMENT WHILE COMPUTING DISALLOWANCE UNDER RULE 8D (2)(III). SIMILARLY IN THE CASE OF COAL INDIA LTD., 172 TTJ 0103 AND REI AGRO LTD., 144 ITD 141, INVES TMENT NOT YIELDING TAX FREE INCOME SHOULD BE EXCLUDED FROM INVESTMENT WHILE COMPUTING AVERAGE INVESTMENT UNDER RULE 8D (2)(III). 1 6 . IN VIEW OF THESE JUDICIAL PRONOUNCEMENTS WE ARE INCLINED TO AGREE WITH LD. COUNSEL OF ASSESSEE THAT THE INVESTMENTS FROM WH ERE INCOME IS TAXABLE OR THE INVESTMENTS WHICH ARE FOR BUSINESS OR STRATEGIC REASONS ITA NO. 3329 & 3884 /MUM/2015 M/S. UMA POLYMERS LTD., 11 NEED TO BE REMOVED FROM THE WORKING OF THE AVERAGE VALUE OF INVESTMENTS AS CONTEMPLATED IN RULE 8D(2)(III). THESE PROPOSITION S HA VE BEEN CONSISTENTLY HELD IN CATENA OF CA SES BY THIS TRIBUNAL AS REFERRED TO BY LD. COUNSEL BEFORE US. 1 7 . APPLYING PROPOSITION OF LAW DISCUSSED IN ABOVE JUDICIAL PRONOUNCEMENTS WE HAVE TO EXCLUDE THE STRATEGIC INVESTMENT MADE IN THE GROUP CONCERNS, WHICH WORKS OUT TO 98% OF THE INVESTMENT SO MAD E. THE OTHER INVESTMENTS A RE EARLIER INVESTMENTS AND NOT MADE DURING THE YEAR. ACCORDINGLY, NO DISALLOWANCE OF OTHER EXPENDITURE IS WARRANTED UNDER RULE 8D(2)(III) TO THIS EXTENT. 18 . LEARNED AR MR. RAJENDRA JAIN ALSO RELIED ON FOLLOWING JUDICIAL PRONOUNCE MENTS IN SUPPORT OF THE PROPOSITION THAT DISALLOWANCE U/S.14A READ WITH RULE 8D(2)(III) CANNOT EXCEED THE EXEMPT INCOME. JOINT INVESTMENT (P) LTD., VS. CIT (ITA 117 / 2015) DELHI HIGH COURT ORDER DATED 25/02/2015. - PR CIT VS. EMPIRE PACKAGE (P) LTD. ,(ITA 415 OF 2015 (O & M) PUNJAB AND HARYANA COURT ORDER DATED 12/01/2016. DAGA GLOBAL CHEMICALS (P) LTD., VS. ACIT (ITA 5592/MUM/2012) DT. 01/01/2015. 19 . FROM THE RECORD WE FOUND THAT DURING THE YEAR UNDER CONSIDERATION ASSESSEE WAS IN RECEIPT OF DIVIDEND INCO ME OF RS.32,400/ - WHICH WAS CLAIMED U/S.10(34). KEEPING IN VIEW THE TOTALITY IN FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS JUDICIAL PRONOUNCEMENTS DISCUSSED ABOVE, WE DIRECT THE AO TO RESTRICT DISALLOWANCE UNDER RULE ITA NO. 3329 & 3884 /MUM/2015 M/S. UMA POLYMERS LTD., 12 8D(2)(III) AT RS.32,400/ - I.E., TO THE EX TENT OF EXEMPT INCOME RECEIVED BY ASSESSEE DURING THE YEAR UNDER CONSIDERATION. WE DIRECT ACCORDINGLY. 19. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED WHEREAS APPEAL OF THE ASSESSEE IS ALLOWED IN PART. O RDER PRONOUNCED IN THE OPEN COURT ON THI S 03 / 03 /2017 SD/ - ( SANDEEP GOSAIN ) SD/ - ( R.C.SHARMA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 03 / 03 /201 7 KARUNA SR. PS COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//