The DCIT-1(1), Indore V. M/s. Brilliant Estate Pvt. Ltd., Indore

ITA 349/IND/2017

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9828 (ITAT-INDORE)
• Duration Of Justice: 1 year(s) 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-12-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 20-11-2018
• Assessment Year: 2012-2013
• Appeal Filed On: 09-05-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJEEB JAIN
• Assessee Lawyers: AJAY TULASIYAN; KAPIL SHAHCAS
• Keywords: Business expenditure; Earning of tax free income; Commercial expediency
• Section: 143(3); 14A; 115JB

Judgement Text

BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER ITA NO.349/IND/2017 ASSESSMENT YEAR 2012-13 REVENUE BY S HRI RAJEE B JAIN , SR.DR ASSESSEE BY S/ SHRI AJAY TULAS IYAN & KAPIL SHAH,CAS DATE OF HEARING 27 .11 . 2018 DATE OF PRONOUNCEMENT 13 .1 2 .2018 O R D E R PER MANISH BORAD, AM. THE ABOVE CAPTIONED APPEAL IS FILED AT THE INSTANCE OF REVENUE PERTAINING TO ASSESSMENT YEAR 2012-13 AND IS DIREC TED AGAINST THE ORDERS OF LD. COMMISSIONER OF INCOME TAX (APPEA LS)-III (IN SHORT LD.CIT(A)], INDORE DATED 28.02.2017 WHICH I S ARISING OUT OF THE ORDER U/S 143(3) OF THE INCOME TAX ACT 1961( IN SHORT THE ACT) DATED 23.03.2015 FRAMED BY DCIT-1(1), INDORE . DEPUTY CO MMISSIONER OF INCOME TAX 1(1), INDORE VS. M/S. BRILLIANT ESTATE PVT.LTD, PLOT NO.6A, BRILLIANT SOLTAIRE, PART-II, SCHEME NO.78, INDORE ( APPELLANT ) (RESPONDENT ) PAN NO. AAACB7115L BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 2 2. REVENUE HAD RAISED FOLLOWING GROUNDS OF APPEAL; 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE LEARNED CIT(A) HAS ERRED IN LAW BY DELETING THE ADDITION OF RS. 2,31,50,925/- MADE BY THE AO ON ACCOUNT OF DISA LLOWANCE MADE ON RULE 8D R.W.S. 14A OF THE ACT. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT (A) HAS ERRED IN LAW BY DELETING THE AD DITION OF RS. 2,00,000/- MADE BY THE AO ON ACCOUNT OF DISALLOWAN CE OF VARIOUS EXPENSES WITHOUT CONSIDERING THE FACT THAT THE ASSESSEE HAD FAILED TO FURNISH PROOF TO ESTABLISH G ENUINENESS OF VARIOUS EXPENSES IN THE LIGHT OF THE FACT THAT C ERTAIN EXPENSES WERE MADE IN CASH AND SOME VOUCHERS WERE S ELF PREPARED BY THE ASSESSEE. 3. BRIEFLY STATED THE FACTS AS CULLED OUT FROM THE RECORDS ARE THAT THE ASSESSEE IS A LIMITED COMPANY ENGAGED IN R EAL ESTATE AND CONSTRUCTION BUSINESS. INCOME OF RS.2,00,92,71 0/- DISCLOSED IN THE E-RETURN FILED FOR ASSESSMENT YEAR 2012-13 ON 30.9.2012. THE RETURN WAS FURTHER REVISED ON 13.4. 2014 DECLARING SAME INCOME AT RS.2,00,92,710/-. CASE PI CKED UP FOR SCRUTINY AND STATUTORY NOTICES U/S 143(2) AND 1 42(1) WAS DULY SERVED UPON THE ASSESSEE ALONG WITH QUESTIONNA IRE. LEARNED ASSESSING OFFICER (IN SHORT LD. A.O) OBSER VED THAT CONSIDERABLE AMOUNT HAS BEEN INVESTED BY THE ASSESS EE IN THE GROUP COMPANIES AND THOUGH NO EXEMPT INCOME HAS BEE N BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 3 EARNED BUT STILL DEDUCTION U/S 14A OF THE ACT IS C ALLED FOR, AS THE INTEREST BEARING FUNDS HAVE BEEN APPLIED TOWARD S INTEREST FREE LOANS AND ADVANCES AND INVESTMENTS GIVEN TO G ROUP CONCERNS. 4. IN REPLY TO THE SHOW CAUSE NOTICE FOR THE PROPOS ED DISALLOWANCE U/S 14A OF THE ACT, ASSESSEE SUBMITTED THAT NO EXEMPT INCOME HAS BEEN EARNED AND THEREFORE IN VIEW OF THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LIMITED VS CIT (2015) 378 ITR 033 (DELHI ) NO DISALLOWANCE U/S 14A OF THE ACT IS CALLED FOR. HOW EVER LD. A.O WAS NOT CONVINCED WITH THE REPLY SUBMITTED BY THE A SSESSEE AND DECIDED TO COMPUTE THE DISALLOWANCE U/S 14A OF THE ACT BY APPLYING THE METHOD PROVIDED IN RULE 8D OF IT RU LES THEREBY COMPUTING THE DISALLOWANCE OF RS.2,31,50,925/-. AP ART FROM THIS LD. A.O HAS ALSO MADE AD-HOC DISALLOWANCE OF RS.2,00,000/- OUT OF VARIOUS EXPENSES INCURRED TOWA RDS MISCELLANEOUS EXPENSES, REPAIR AND MAINTENANCE, STA TIONARY AND PRINTING, TRAVELLING, ADMINISTRATIVE EXPENSES E TC FOR WANT OF NECESSARY VERIFICATION MERELY ON THE BASIS THAT SOME OF THE EXPENDITURE HAS BEEN INCURRED IN CASH AND VOUCHERS ARE SELF PREPARED. AFTER MAKING THE DISALLOWANCE OF RS.2,31 ,50,925/- U/S 14A AND RS.2,00,000/- FOR DISALLOWANCE OF FACIL ITY MANAGEMENT EXPENSES, INCOME ASSESSED AT RS.4,34,43, 640/- 5. AGGRIEVED ASSESSEE PREFERRED APPEAL BEFORE LD.CI T(A) AND SUCCEED ON THE GROUNDS DELETING THE DISALLOWANCE OF BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 4 RS,2,31,50,925/- U/S 14A OF THE ACT AS WELL AS ADDI NG AD-HOC DISALLOWANCE OF RS.2,00,000/- FOR VARIOUS EXPENSES. 6. NOW THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL . 7. FIRST WE TAKE UP GROUND NO.1 RELATING TO DELETIO N OF ADDITION BY LD. CIT(A) OF RS. 2,31,50,925/- MADE BY LD. A.O ON ACCOUNT OF DISALLOWANCE MADE ON RULE 8D R.W.S. 1 4A OF THE ACT. 8. DEPARTMENTAL REPRESENTATIVE SUPPORTING THE FINDI NGS OF LD. A.O AND PLACED RELIANCE ON THE JUDGMENT OF HON BLE APEX COURT IN THE CASE OF MAXOPP INVESTMENT LTD V/S COMMISSIONER OF INCOME TAX 101 CCH 0092 ORDER DATED 12.2.2018 WHEREIN HONBLE APEX COURT HELD THAT IF THE EXPENDITURE INCURRED ON EARNING THE DIVIDEND INCOME , THEN THAT MUCH OF THE EXPENDITURE WHICH IS ATTRIBUTABLE TO THE DIVIDEND INCOME HAS TO BE DISALLOWED AND CANNOT BE TREATED AS BUSINESS EXPENDITURE. RELIANCE WAS ALSO PLACED O N THE DECISION OF HONBLE ITAT AMRITSAR BENCH IN THE CASE OF LALLY MOTORS INDIA (P) LTD V/S PRINCIPAL COMMISSIONER OF INCOME TAX (2018) 93 TAXMANN.COM 39. 9. ON THE OTHER HAND LD. COUNSEL FOR THE ASSESSEE R EFERRING TO THE WRITTEN SUBMISSION AS WELL AS VARIOUS JUDGME NTS WHICH ARE MENTIONED IN THE FORTHCOMING PARAGRAPHS SUBMITT ED THAT NO DIVIDEND INCOME WAS EARNED DURING THE YEAR AND O NLY THE FUNDS OUT OF THE SHARE CAPITAL AND THE ACCUMULATED RESERVE IN BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 5 SURPLUS WERE APPLIED FOR INVESTING IN THE GROUP COM PANIES. HE ALSO SUBMITTED THAT THERE IS NO SATISFACTION OF THE LD. A.O ON RECORD TO INDICATE ABOUT THE NEXUS OF INTEREST BEAR ING FUNDS BEING APPLIED FOR INVESTMENT IN THE GROUP COMPANIES . THE WRITTEN SUBMISSION FILED BY THE ASSESSEE READS AS F OLLOWS; 1. THE RESPONDENT COMPANY IS A CLOSELY HELD LIMITE D COMPANY INCORPORATED IN INDIA, DERIVING INCOME FROM REAL ES TATE BUSINESS, CONSTRUCTION AND LETTING OF IMMOVABLE PROPERTIES ON RENT. IT IS THE FLAGSHIP COMPANY OF THE GROUP OWNED AND OPERATED BY SHRI SANJAY CHOUDHARY STYLED AS BRILLIANT GROUP. 2. THE RESPONDENT COMPANY FILED ITS RETURN OF INCOM E ('ROI') INITIALLY FOR AY 2012-13 U/S 139(1) ON 30 SEPTEMBER 2012 VIDE ACK NOWLEDGEMENT NO. 505873361300912 DECLARING A TOTAL INCOME OF RS. 2,0 0,92,710/- UNDER NORMAL PROVISIONS AND RS. 5,61,10,685/- AS BOOK PRO FITS U/S 115JB. THE RESPONDENT FURTHER REVISED ITS ROL ON 13 MARCH 2014 VIDE ACKNOWLEDGMENT NO. 124285401130314 OFFERED THE SAME INCOME. THE TAXES AS PER BOOK PROFITS BEING HIGHER THE RESPONDE NT COMPANY PAID TAXES ACCORDING TO THE PROVISIONS OF SECTION 115JB AND CLAIMED A REFUND OF RS. 19,82,090/-. 3. THE ASSESSMENT WAS COMPLETED U/S 143(3) ON 23.03 .2015 BY MAKING THE FOLLOWING ADDITIONS AND CREATING A DEMAND OF RS . 12,07,550/-: RETURNED INCOME 2,00,92,710/ - ADD: DISALLOWANCES ON ACCOUNT OF DISALLOWANCE U/S 14A DISALLOWANCE OUT OF FACILITY AND FACILITY MANAGEMENT EXPENSES RS.2,31,50,925/- RS.2,00,000/- BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 6 TOTAL ASSESSED INCOME A S PER ORDER U/S 143(3) RS.4,34,43,635/ - ROUNDED OFF RS.4,34,43,640/ - 4. BEING AGGRIEVED BY THE ADDITIONS MADE BY THE LD. AO, THE RESPONDENT PREFERRED AN APPEAL BEFORE CIT(AL AND THE HON'BLE C IT(AL VIDE ORDER DATED 27.02.2017 IN IT-128/15-16 DELETED THE ADDITIONS MA DE ON ACCOUNT OF DISALLOWANCE UNDER SECTION 14A R.W.S. 8D AND AD-HOC DISALLOWANCE OF VARIOUS EXPENSES, AGAINST WHICH THE DEPARTMENT HAS PREFERRED THIS APPEAL. 5. AS REGARDS TO THE GROUND RAISED BY THE DEPARTME NT ON ACCOUNT OF DISALLOWNCE UNDER SECTION 14A R.W.R. 8D:- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LEARNED CIT(A) HAS ERRED IN LAW BY DELETING THE ADDITION OF RS. 2,31,50,925/ - MADE BY THE AO ON ACCOUNT OF DISALLOWANCE MADE ON R ULE 8D R.W.S. 14A OF THE ACT . FACTS OF THE CASE: 5.1 A DISALLOWANCE OF RS. 2,31,50,925/- U/S 14A WAS MADE IN THE ASSESSMENT ORDER. THE ISSUE IS DISCUSSED IN PARA NO . 4 ON PAGE NO. 2 TO PAGE NO. 7 OF THE ASSESSMENT ORDER. 5.2 THE ISSUE WAS RAISED DURING THE COURSE OF ASSES SMENT PROCEEDINGS AND THE RESPONDENT EXPLAINED ITS CASE THROUGH WRITT EN SUBMISSIONS FILED DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 5.3 THE RESPONDENT DURING THE YEAR UNDER CONSIDERAT ION HAS NOT EARNED ANY INCOME WHICH IS EXEMPT FROM TAX. BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 7 5.4 THE RESPONDENT HAD NO INVESTMENTS IN LISTED SHA RES AND THE ENTIRE INVESTMENTS IS IN THE SHARES OF PRIVATE/UNLISTED GR OUP/ ASSOCIATE COMPANIES MADE PURELY OUT OF COMMERCIAL AND BUSINES S EXPEDIENCY. 5.5 IN ADDITION TO THE OPENING INVESTMENTS, THE RES PONDENT MADE CERTAIN FRESH INVESTMENTS OF RS. 20,69,00,000/- IN TWO OF I TS EXISTING PRIVATE LIMITED ASSOCIATE/ GROUP COMPANIES DURING THE YEAR UNDER CONSIDERATION. 5.6 THE RESPONDENT COMPANY POSSESSED SHARE CAPITAL OF RS.5,85,88,OOO/- AND RESERVES AND SURPLUS OF RS. 33 ,42,56,695/- TOTALING TO RS.39,29,44,695/. IN ADDITION THE RESPO NDENT HAS A DEFERRED TAX LIABILITY RESERVE OF RS.4,49,42,853/ -. THUS TH E TOTAL SHARE CAPITAL AND RESERVES I.E' NET OWNED FUNDS' AMOUNTED TO RS. 43,7 7,87,548/-. 5.7 THE RESPONDENT COMPANY EXPLAINED THAT THE SALE OF SHARES OF PRIVATE/UNLISTED GROUP COMPANIES ARE SUBJECT TO CAP ITAL GAIN TAX UPON THEIR LIQUIDATION AND WILL NEVER YIELD ANY TAX FREE INCOME. THE INVESTMENTS HELD BY THE RESPONDENT IN ITS GROUP COM PANIES HAVE NEITHER EARNED ANY EXEMPT INCOME IN THE PAST NOR THERE IS A NY PROBABILITY OF FETCHING ANY TAX FREE INCOME IN THE FUTURE. SUCH IN VESTMENTS WERE PURELY OUT OF COMMERCIAL AND BUSINESS EXPEDIENCY TO PROMOT E THE BUSINESS OF \SUCH GROUP COMPANIES. THE RESPONDENT COMPANY IS AL SO NOT REQUIRED TO MONITOR THESE INVESTMENTS ON DAY TO DAY BASIS AN D THEREFORE NO EXPENSES WERE INCURRED IN RELATION TO THIS ACTIVITY . 5.8 THE LEARNED AO WITHOUT APPRECIATING THE FACTS O F THE CASE, PARTICULARLY THAT THE RESPONDENT COMPANY HAS NOT EA RNED ANY EXEMPT INCOME IN RESPECT OF ITS THESE INVESTMENTS MADE IN UNLISTED CLOSELY HELD COMPANIES, NOR IS THERE ANY POSSIBILITY OF EARNING SUCH INCOME, CONSIDERING THE FACT THAT CAPITAL GAINS ON LIQUIDAT ION OF SUCH INVESTMENTS WILL BE TAXABLE, WITHOUT DRAWING THE REQUISITE SATI SFACTION AS ENVISAGED BY SECTION 14A, AND RELYING ON THE DECISION OF THE HONOURABLE SPECIAL BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 8 BENCH OF DELHI ITAT IN THE CASE OF CHEMINVEST LTD. WORKED OUT THE DISALLOWANCE IN A MECHANICAL MANNER APPLYING THE MA THEMATICAL FORMULAE PRESCRIBED BY RULE 8D. 5.9 THE LEARNED CIT(A) CONSIDERING THE FACT THAT TH E DECISION OF HONOURABLE ITAT SPECIAL BENCH DELHI WAS REVERSED BY THE HONOURABLE DELHI HIGH COURT, DELETED THE DISALLOWANCE PRIMARIL Y FOR THE REASON THAT THE IMPUGNED INVESTMENTS DID NOT YIELDED ANY TAX EX EMPT INCOME AND ALSO CONSIDERING THE FACT THAT THE ASSESSEE COMPANY HAS EARNED CONSIDERABLE TAXABLE INCOME FROM THE GROUP COMPANIE S, IN WHICH THE INVESTMENTS WERE MADE BY THE RESPONDENT ASSESSEE CO MPANY, DELETED THE DISALLOWANCE. IT IS SUBMITTED THAT THE DISALLOWANCE HAS BEEN RIGH TLY DELETED BY THE LEARNED CIT(A ) ON THE FACTS OF THE CASE AND AFTER PROPER ANALYSIS OF THE BROAD LEGAL VIEW AND SETTLED PROPOSITION THAT IN TH E ABSENCE OF ANY EXEMPT INCOME DISALLOWANCE U/S 14A IS NOT ATTRACTED . 5.16 IT IS PERTINENT TO MENTION THAT, THE RESPONDEN T HAS ALSO EARNED CONSIDERABLE TAXABLE INCOME THROUGH THESE INVESTMEN TS IN GROUP CONCERNS, AS PER THE DETAILS ENCLOSED AT PAGE 90 OF THE PAPER BOOK. ON THE SIMILAR FACTS IT HAS BEEN HELD BY THE DELHI HIG H COURT IN CIT VS. ORIENTAL STRUCTURAL ENGINEERS P. LTD. [(2013) 35 TA XMANN.COM 210 DELHI] THAT EXPENDITURE ON ACQUIRING SHARES WAS OUT OF 'CO MMERCIAL EXPEDIENCY' AND TO EARN TAXABLE INCOME CANNOT BE DISALLOWED U/S 14A RULE 8D. THOUGH THE SAID DECISION WAS IN CONTEXT OF THE INVE STMENTS MADE IN THE SPVS WHO WERE AWARDED CONTRACTS BY NHAI, BUT THE UN DERLYING PROPOSITION WILL SQUARELY APPLY IN THE PRESENT CASE , AS THE RESPONDENT HAS MADE THESE INVESTMENTS OUT OF COMMERCIAL EXPEDI ENCY IN THE ASSOCIATE COMPANIES CARRYING ON IDENTICAL BUSINESS AND THE RESPONDENT HAS EARNED CONSIDERABLE INCOME FROM THESE COMPANIES WHICH WAS ALSO OFFERED FOR TAXATION. BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 9 RULE 8D CANNOT BE INVOKED DIRECTLY AND MECHANICALLY 5.17 FURTHER, IT IS SUBMITTED THAT THE LEARNED AO H AS MECHANICALLY APPLIED SECTION 14A(2) R.W.R 8D WHICH OUGHT TO HAVE BEEN APPLIED IN A CASE WHERE ACTUAL EXPENDITURE CANNOT BE DETERMINED AND THE ASSESSING OFFICER ESTABLISHES BEYOND DOUBT THAT SOME EXPENDIT URE HAS BEEN INCURRED BY THE RESPONDENT. IN OTHER WORDS, PROVISI ONS OF SUB-SECTION (2) TO SECTION 14A OF THE ACT DOES NOT AUTHORIZE OR EMP OWER THE ASSESSING OFFICER TO APPLY THE PRESCRIBED METHOD IRRESPECTIVE OF THE CLAIM MADE BY THE ASSESSEE. THE ASSESSING OFFICER HAS TO FIRST CO NSIDER THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE A CCOUNTS OF THE ASSESSEE. THE SATISFACTION OF THE ASSESSING OFFICER HAS TO BE OBJECTIVELY ARRIVED AT ON THE BASIS OF THOSE ACCOUNTS AND AFTER CONSIDERING ALL THE RELEVANT FACTS AND CIRCUMSTANCES. THE ASSESSING OFF ICER HAS NOT ESTABLISHED THE PROXIMITY BETWEEN FUND UTILIZED AND INVESTMENT MADE. 5.18 LACK OF RECORDING OF DISSATISFACTION: THERE IS NO DISSATISFACTION, OR EVEN A WHISPER OF DISSATISFACTION, AS ENVISAGED U/S 14A AND WHICH IS A SINE QUA NON FOR INVOKING THESE PROVISIONS. THIS BE ING A CHARGING SECTION, STRICT INTERPRETATION IS A LEGAL MANDATE. THE FACT THAT THE AO IS NOT SATISFIED WITH THE EXPLANATION OF THE RESPONDEN T REGARDING THE SOURCE FUNDS FOR THE INVESTMENT SHOULD BE OPINED BY WAY OF A CATEGORICAL FINDING, WHICH IS NOT AT ALL IN THIS CASE. A MERE O BSERVATION THAT THE EXPLANATION OFFERED IS NOT FOUND TO THE SATISFACTIO N OF THE AO DOES NOT MEET THE REQUIREMENTS OF LAW, RATHER THE LEARNED AO SHOULD HAVE BROUGHT IN CATEGORICAL FINDINGS AS TO HOW AND WHY H E IS NOT SO SATISFIED. THE SATISFACTION AS ENVISAGED U/S 14A OUGHT TO HAVE SPELLED OUT IN CLEAR AND UNAMBIGUOUS MANNER, WHICH IS NOT THE CASE AT AL L HERE. 5.19 THE LEARNED AO DID NOT RECORDED HIS SATISFACTI ON WHILE MAKING THE DISALLOWANCE UNDER SECTION 14A AS ON WHICH GROUND H E WAS NOT CONVINCED WITH THE CONTENTION OF THE RESPONDENT THA T NO EXPENSES HAVE BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 10 BEEN INCURRED FOR THE PURPOSE OF EARNING OF THE EXE MPT INCOME. 10. LD. COUNSEL FOR THE ASSESSEE RELIED ON THE FOLL OWING JUDGMENTS; (I) HON'BLE HIGH COURT OF DELHI IN THE CASE OF CHEM IVEST LTD. V/S CIT (2015) 278 ITR 0033 (DELHI) (II) HON'BLE HIGH COURT OF ALLAHABAD IN THE CASE OF CIT V/S SHIVAM MOTORS (P) LTD (2015) 230. (III) HON'BLE HIGH COURT OF DELHI IN THE CASE OF CI T V/S HOLICEM INDIA P. LTD (2014) 90 CCH 0081 (DELHI HC) (IV) HON'BLE HIGH COURT OF GUJARAT IN THE CASE OF CIT V/S CORRTECH ENERGY PVT. LTD (2015) 372 ITR 0097 (GUJ.) (V) HON'BLE HIGH COURT OF DELHI IN THE CASE OF JOIN T INVESTMENT PVT. LTD V/S C(2015) 372 ITR 0694 (DELHI) (VI) HON'BLE HIGH COURT OF DELHI IN THE CASE OF ACB INDIA LTD (FORMERLY MS ARYAN COL BENEFICATIONS (P) LTD V/S AC IT (2015) 374 ITR 0108 (DELHI) (VII) HON'BLE HIGH COURT OF DELHI IN THE CASE OF CI T V/S RELIANCE UTILITIES & POWER LTD. (2009) 313 ITR 0340 . (VIII) HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF CIT V/S HDFC BANK LTD. (2014) 366 ITR 0505. (IX) HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT V/S CHETTINAD LOGISTICS PVT. LTD (2017) 98 CCH 0151 CHE N HC. BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 11 (X) HON'BLE APEX COURT IN THE CASE OF COMMISSIONER OF INCOME TAX V/S CHETTINAD LOGISTICS PVT. LTD SLP ((CIVIL) D IARY NO.(S) 15631/2018. (XI) HON'BLE I.T.A.T. INDORE BENCH IN THE CASE OF R AVI SEEDS & RESEARCH PVT.LTD IN IT NO.976 & 978/IND/2016. (XII) HON'BLE HIGH COURT OF DELHI IN THE CASE OF PR . COMMISSIONER OF INCOME TAX V/S IL & FS ENERGY DEVEL OPMENT COMPANY LTD. (2017) 99 CCH 0190 DEL HC. (XIII) HON'BLE I.T.A.T. A BENCH MUMBAI IN THE CAZSE OF DCIT V/S L&T POWER DEVELOPMENT LTD ITA NO.5333/MUM/2015. (VI) BOMBAY HIGH COURT IN THE CASE OF CIT V/S ULTRA TECH CEMENT LTD IN I.T.A.NO.1401 OF 2014 (XIV) HON'BLE APEX COURT IN THE CASE OF COMMISSIONE R OF INCOME TAX-2 V/S M/S ULTRA TECH CEMENT LTD. SLP (CI VIL) DIARY NO.(S) 19601/2018 (XV) HON'BLE I.T.A.T. A BENCH BOMBAY IN THE CASE OF DCIT V/S L&T POWER DEVELOPMENT LTD IN I.T.A. NO.874/MUM/2017 . 11. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE RECORDS PLACED BEFORE US AND CAREFULLY GONE THROUGH THE JUD GMENTS REFERRED AND RELIED BY BOTH THE PARTIES. REVENUE IS AGGRIEV ED WITH THE FINDING OF LD.CIT(A) RELATING TO THE DISALLOWANCE O F RS.2,31,50,925/- MADE BY THE LD.A.O U/S 14A OF THE ACT BY APPLYING R ULE 8D OF THE BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 12 IT RULES FOR THE ALLEGED APPLICATION OF INTEREST BE ARING FUNDS BEING UTILIZED FOR INVESTMENT IN GROUP CONCERNS. THERE I S NO DISPUTE TO THE FACT THAT NO DIVIDEND INCOME/EXEMPT INCOME HAVE BEEN EARNED BY THE ASSESSEE DURING THE YEAR AND ALSO THERE IS N O SATISFACTION RECORDED IN THE BODY OF THE ASSESSMENT ORDER BY THE LD.A.O WHICH COULD SHOW THE PARTICULAR INSTANCE, WHERE THE INTER EST BEARING FUNDS HAVE FLOWN TO THE INVESTMENT IN GROUP CONCERN S WHICH ARE NOT FETCHING ANY INTEREST INCOME. 12. WE FIND THAT LD.CIT(A) DELETED THE IMPUGNED DIS ALLOWANCE MADE U/S 14A OF THE ACT AT RS.2,31,50,925/- RELYING ON VARIOUS JUDGMENTS BY OBSERVING AS FOLLOWS; 3.2. I HAVE GONE THROUGH THE APPELLANT'S CONTENTI ONS, THE ASSESSMENT ORDER AND VARIOUS DECISIONS IN THE MATTER. NO EXEMP T INCOME HAS BEEN EARNED FROM SUCH INVESTMENTS DURING THE YEAR AND IN THE PAST ALSO. THE DECISION OF SPECIAL BENCH DECISION OF ITAT, DELHI I N THE CASE OF CHEMINVEST LTD. HAS BEEN OVERRULED BY THE HON'BLE DELHI HIGH C OURT IN CHEMINVEST LTD. VS. CIT 2_Q_LS}'421 TAXMANN.COM 118 (DEL.). IN THE FOLLOWING CASES ALSO THE HIGH COURTS HAVE HELD THAT UNLESS AND UNTI L, THERE IS RECEIPT OF EXEMPTED INCOME FOR CONCERNED ASSESSMENT YEAR (DIVI DEND FROM SHARES), SECTION 14A CANNOT BE INVOKED. I) CIT V. LAKHANI MARKETING INC. [2014J 49 TAXMANRI .COM 257 (PUN. & HAR.) II)CIT V. CORRTECH ENERGY (P.) LTD. [2014J 45 TAXMA NN.CORN 116/223 TAXMAN . 130 (GUJ.) III) CIT V. SHIVAM MOTORS (P.) LTD. [2015J 55 TAXMA NN.COM 262 (ALL.) BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 13 3.3 THE APPELLANT COMPANY HAS NO INVESTMENTS IN LIS TED SHARES. IT HAS MADE THE ENTIRE INVESTMENTS IN SHARES OF PRIVATE/UN LISTED GROUP/ ASSOCIATE COMPANIES OUT OF COMMERCIAL AND BUSINESS EXPEDIENCY AND TO HOLD CONTROLLING STAKE IN THESE COMPANIES. THE HON' BLE ITAT, DELHI IN THE CASE OF ORIENTAL STRUCTURAL ENGINEERS (P.) LTD. HEL D THAT NO EXPENSES AND INTEREST ATTRIBUTABLE TO INVESTMENTS MADE BY THE AS SESSEE IN THE SPECIAL PURPOSE VEHICLES CAN BE DISALLOWED UNDER SECTION 14 A READ WITH RULE 8D SINCE IT CANNOT BE TERMED AS EXPENSES/INTEREST INCU RRED FOR EARNING EXEMPT INCOME BY OBSERVING AS UNDER: '3. APROPOS DISALLOWED UNDER SECTION 14A : IN THIS CASE RETURN OF INCOME HAD FILED ON SEPTEMBE R 30, 2008 DECLARING AN INCOME OF RS. 67,14,94,245. THE ASSESSMENT WAS FRAM ED UNDER SECTION 143(3) OF THE INCOME TAX ACT AT AN INCOME OF RS.68 ,05, 79,170, IN THE ASSESSMENT ORDER THE ASSESSING OFFICER DISALLOWED T HE EXPENSES RELATED TO EXEMPT INCOME UNDER SECTION 14.A READ WITH RULE 8D AMOUNTING TO RS. 35,85,121, 4. UPON THE ASSESSEE'S APPEAL THE LEARNED COMMISSIO NER OF INCOME-TAX (APPEALS) CONSIDERED THE ISSUE AND HELD AS UNDER: '1 HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT AND ALSO GONE THROUGH THE OBSERVATIONS OF THE ASSESSING OFFICER AS CONTAI NED IN THE ASSESSMENT ORDER, AS WELL AS THE JUDICIAL PRONOUNCEMENTS ON TH E ISSUE. IT IS SEEN THAT DURING THE YEAR UNDER CONSIDERATION EVEN THOUGH THE APPELLANT :COMPANY HAS MADE BORROWINGS FROM BANKS A ND FINANCIAL INSTITUTIONS ON WHICH I: R.C: PAID INTEREST, INVEST MENTS IN MUTUAL FUNDS AND SHORT-TERM FUNDS WERE MADE OUT OF SURPLUS FUNDS AV AILABLE WITH THE APPELLANT FROM TIME TO TIME AS PER THE BANK STATEME NTS PRODUCED, ONLY THE INTEREST OF RS. 2,96,731 WAS PAID ON FUNDS UTILISED FOR MAKING INVESTMENTS BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 14 ON WHICH EXEMPTED INCOME WAS RECEIVABLE (AS ADMITTE D BY THE APPELLANT DURING THE COURSE OF APPELLATE PROCEEDINGS) AND HEN CE THE SAME IS TREATED AS EXPENSE ATTRIBUTABLE TO EXEMPT INCOME, IN RESPECT OF INVESTMENTS OF RS. 60,77,75,000 MADE IN SUBSIDIARY COMPANIES AS PER DOCUMENTS PRODUCED BEFORE ME, THEY ARE ATTRIBUTABLE TO COMMERCIAL EXPERIENCED BECAUSE AS PER SUBMISSION MA DE BY THE APPELLANT, IT HAD TO FORM. SPECIAL PURPOSE VEHICLES (SPVS) IN ORDER TO OBTAIN CONTRACTS FROM THE NATIONAL HIGHWAY AUTHORITY C:' I NDIA AND THE SPECIAL PURPOSE VEHICLES SO FORMED ENGAGED THE APPELLANT CO MPANY (E CONTRACT TO EXECUTE THE WORKS AWARDED TO THEM (I.E. SPVS) BY TH E NATIONAL HIGHWAY AUTHORITY OF INDIA, IN ITS PROFIT AND LOSS ACCOUNT FOR THE YEAR, THE APPELLANT HAS SHOW, THE TURNOVER FROM EXECUTION OF THESE CONT RACTS AND THEREFORE NO EXPENSE AND INTEREST ATTRIBUTABLE TO THE INVESTMENT S MADE BY THE APPELLANT IN THE SPECIAL PURPOSE VEHICLES CAN BE DI SALLOWED UNDER SECTION 14A READ WITH RULE 8D BECAUSE IT CANNOT BE TERMED A S EXPENSE/ INTEREST INCURRED FOR EARNING EXEMPTED INCOME, IN VIEW OF THE FACTS MENTIONED ABOVE: (I) INTEREST EXPENSES AMOUNTING TO RS, 2,96,731 HAV E BEEN DIRECTLY FOUND TO BE INCURRED FOR EARNING EXEMPT INCOME AND HENCE DIS ALLOWED UNDER SECTION 14A (II) FURTHER, THE COMPANY HAS EARNED DIVIDEND IN RE SPECT OF INVESTMENTS MADE ANTI SOME ADMINISTRATIVE EXPENSES LIKE MANAGEM ENT'S SALARY, TELEPHONE, STATIONERY, POSTAGE EXPENSES, ETC, MUST HAVE BEEN INCURRED THEREON, KEEPING IN VIEW THE AFORESAID, I AM OF THE OPINION THAT ADDITION OF RS. 40,556 CALCULATED AT 2 PER CENT. O_: THE DIVIDE ND EARNED HAS TO BE MADE I.E. 2PER CENT. OF RS, 20,27,812. HENCE, ADDIT ION. MADE BY THE ASSESSING OFFICER IS UPHELD TO THE EXTENT OF RS. 3, 37,287 {RS.2,96, 731 + RS. 40,556). THIS GROUND OF APPEAL IS PARTLY ALLOWE D, BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 15 5. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPEAL BEFORE US. 6. WE HAVE HEARD THE RIVAL CONTENTIONS IN THE LIGHT OF THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON, 6.1. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDER OF THE ASSESSING OFFICER 6.2. LEARNED COUNSEL FOR THE ASSESSEE SUPPORTED THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS). HE PLACED REL IANCE UPON THE HON'BLE JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF M AXOPP INVESTMENT LTD. V, CIT IN I.T.A NO. 687 OF 2009 [2012] 347 ITR 272 (DE LHI) WHEREIN VIDE ORDER DATED NOVEMBER 18. 2011 THE HON'BLE JURISDICTIONAL HIGH COURT HAS EXPOUNDED THAT DETERMINATION OF HE AMOUNT OF EXPEND ITURE IN RELATION TO EXEMPT INCOME UNDER RULE 3D WOULD ONLY COME INTO PL AY WHEN THE ASSESSING OFFICER REJECTS THE CLAIM OF THE ASSESSEE IN THIS REGARD. IT IS FURTHER EXPOUNDED THAT CONDITION PRECEDENT FOR THE ASSESSING OFFICER TO HIMSELF DETERMINE THE AMOUNT OF EXPENDITURE IS THAT HE MUST RECORD HIS DISSATISFACTION WITH THE CORRECTNESS OF THE CLAIM O F EXPENDITURE MADE BY THE ASSESSEE OR WITH THE CORRECTNESS OF THE CLAIM M ADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED. IT IS ONLY WHEN THIS CONDITION PRECEDENT IS SATISFI ED THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF EXPE NDITURE IN RELATION TO INCOME NOT INCLUDABLE IN TOTAL INCOME IN THE MANNER INDICATED IN SUB-RULE (2) OF RULE 3D OF THE SAID RULES. 6.3 WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AN D PERUSED THE RECORDS. WE FIND THAT THE LEARNED COMMISSIONER OF I NCOME-TAX (APPEALS) HAS GIVEN A FINDING THAI ONLY INTEREST OF RS. 2,96, 731 WAS PAID ON FUNDS UTILISED FOR MAKING INVESTMENTS ON WHICH EXEMPTED I NCOME WAS RECEIVABLE. FURTHER, THE LEARNED COMMISSIONER OF IN COME-TAX (APPEALS) HAS BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 16 OBSERVED THAT IN RESPECT OF INVESTMENTS OF RS. 60,7 7,75,000 MADE IN SUBSIDIARY COMPANIES AS PER DOCUMENTS PRODUCED BEFO RE HIM, THEY ARE ATTRIBUTABLE TO COMMERCIAL EXPEDIENCY, BECAUSE AS P ER SUBMISSION MADE BY THE ASSESSEE, IT HAD TO FORM SPECIAL PURPOSE VEH ICLES (SPVS) IN ORDER TO OBTAIN CONTRACTS FROM THE NATIONAL HIGHWAY AUTHORIT Y OF INDIA AND THE SPECIAL PURPOSE VEHICLES SO FORMED ENGAGED THE ASSE SSEE-COMPANY AS CONTRACT TO EXECUTE THE WORKS AWARDED TO THEM (I.E. SPVS) BY THE NATIONAL HIGHWAY AUTHORITY OF INDIA. IN ITS PROFIT AND LOSS ACCOUNT FOR THE YEAR, THE ASSESSEE HAS SHOWN THE TURNOVER FROM EXECUTION OF T HESE CONTRACTS AND THEREFORE NO EXPENSE AND INTEREST ATTRIBUTABLE TO T HE INVESTMENTS MADE BY THE APPELLANT IN THE SPECIAL PURPOSE VEHICLES CAN B E DISALLOWED UNDER SECTION 14A READ WITH RULE 3D BECAUSE IT CANNOT BE TERMED AS EXPENSE/INTEREST INCURRED FOR EARNING EXEMPTED INCO ME. UNDER THE CIRCUMSTANCES, THE LEARNED COMMISSIONER OF INCOME-T AX (APPEALS) IS CORRECT IN HOLDING THAT DISALLOWANCE OF A FURTHER SUM RS. 4 0,556 CALCULATED AT 2 PER CEN. OF HE DIVIDEND EARNED IS SUFFICIENT. UNDER THE CIRCUMSTANCES, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LEARN ED COMMISSIONER OF INCOME-TAX (APPEALS), HENCE, WE UPHOLD THE SAME. ' 3.3.1 T'HE ABOVE DECISION OF THE DELHI TRIBUNAL WAS AFFIRMED BY THE HON'BLE DELLI HIGH COURT [2013] 35 TAXMANN.COM 210 (DELHI). THE HON'BLE ITAT, E AI BENCH RELYING ON THE DECISION OF THE HON 'BLE ITAT, DELHI IN THE CASE OF ORIENTAL STRUCTURAL ENGINEERS (P.) LTD. HEL D THAT AS THE ASSESSEE HAD TO SPECIAL PURPOSE VEHICLES IN ORDER TO OBTAIN CONTRACTS FROM NHAI AND AS USED TO EXECUTE WORKS AWARDED BY NHAI, THE EXPEN SES AND ATTRIBUTABLE TO INVESTMENTS MADE BY ASSESSEE IN SPE CIAL PURPOSE 'DE COULD NOT BE DISALLOWED UNDER SECTION 14A, READ WITH RULE 8D, AS IT COULD NOT BE TERMED AS EXPENSES INCURRED FOR EARNING EXEMPT INCO ME. 3.3.2 THE APPELLANT HAS ALSO SUBMITTED -THAT THE' I NVESTMENTS HAVE BEEN MADE ONLY WITH THE PURPOSE OF PROMOTING THE BUSINES S AND TO HAVE BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 17 CONTROLLING IN THESE COMPANIES. FURTHER, SUCH INVES TMENTS HAVE FETCHED CONSIDERABLE INCOME WHICH HAS BEEN OFFERED FOR TAXA TION . 3.4 IT IS ALSO SUBMITTED THAT THE APPELLANT COMPANY HAS SHARE CAPITAL OF RS. 5,85,88,000/- AND RESERVES AND SURPLUS OF RS. 33,42,56,695/- TOTALING TO RS.39,29,44,695/ -. IN ADDITION, IT HAS A DEFERRED TAX LIABILITY RESERVE OF RS. 4,49,42,853/-. THUS THE TOTAL SHARE CAPITAL AND RESERVES I.E. 'NET OWNED FUND AMOUNT TO RS. 43,77,87,548/-. AS A GAINST THIS THE CLOSING INVESTMENT IN THE SHARES OF PRIVATE LIMITED ASSOCIA TE CONCERNS IS RS. 40,18,12,600/-. 3.4.1 IT IS HELD BY VARIOUS COURTS THAT WHERE AN AS SESSEE IS HAVING SUFFICIENT INTEREST FREE FUNDS EXCEEDING THE VALUE OF INVESTMENTS, IT SHOULD BE CONSIDERED THAT THE INVESTMENTS HAVE BEEN MADE O UT OF INTEREST FREE FUNDS AND NO DISALLOWANCE UNDER SECTION 14A CAN BE MADE. RELIANCE IS PLACED IN THE FOLLOWING DECISIONS:- (I) CIT VS. RELIANCE UTILITIES & POWER LTD. (2009) 313 ITR 340 (BORN), (II) CIT VS. SBI DHFL LTD. (2015) 376 ITR 296 (BOM) . (III) CIT VS. M/S ABHISHEK INDUSTRIES LTD. (2016) 3 80 ITR 652 (P&H). (IV) CIT VS. GUJARAT APOLLO INDUSTRIES LTD. 2014 (1 2) TMI 178 (GUJ). (V) CIT VS. MAX INDIA LTD. (2016) 388 ITR 81 (P&H) . 3.4.2 THE ASSESSING OFFICER HAS STATED THAT THE ASS ESSEE DID NOT FURNISH ANY EVIDENCE TO SHOW THAT INTEREST BEARING FUNDS HA VE BEEN USED FOR INVESTMENT. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN M/ S ABHISHEK INDUSTRIES LTD (SUPRA) HAS HELD THAT THE ASSESSING OFFICER CANNOT BY RECORDING GCR.ECA. OBSERVATIONS, PARTICULARLY WHERE THE ASSESSEE HAS DENIED USING IN ERE S: BEARING FUNDS, PROCEED TO IN FER THAT INTEREST BEARING BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 18 INCOME MUST HAVE BEER. USED TO EARN EXEMPTED INCOME . SECTION 14A OF THE ACT, BEING IN THE NATURE OF :AN EXCEPTION, HAS TO B E CONSTRUED STRICTLY AND ONLY WHERE THE ASSESSING OFFICER RECORDS SATISFACTI ON, ON THE BASIS OF CLEAR AND COGENT MATERIAL, SHALL AN ORDER BE PASSED VI] S 14A DISALLOWING SUCH A CLAIM. THE HORI'BLE PUNJAZ & HARYANA HIGH COURT IN M/ S MAX INDIA LTD. (SUPRA) HAS HELD THAT PRESUMPTION AS REGARDS THE U TILIZATION OF INTEREST FEE FUNDS AND BORROWED FUNDS IN A MIXED POOL OUGHT TO B E IN FAVOUR OF ASSESSEE. THE DEPARTMENT COULD HAVE REBUTTED THIS P RESUMPTION BY CALLING FOR THE RECORDS FROM THE BANK ITSELF. THE HON'BLE G UJRAT HIGH COURT IN CIT VS. KALTHIA ENGINEERING AND CONSTRUCTI0N LTD. 2015 (2) TMI 666 GUJRAT HIGH COURT HAS ALSO HELD THAT WHERE BOTH INTEREST F REE FUNDS ARE 'AVAILABLE AND OVER DRAFT/ LOANS TAKEN THAN A PRESUMPTION WOUL D ARRIVES THAT THE INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST FREE FUNDS WERE S UFFICIENT TO MEET THE INVESTMENTS. 3.5 IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE C ASE THE DISALLOWANCE OF RS. 2,31,50,925/- MADE U/S 14A IS DELETED. GROUND N O.1 IS ALLOWED. 13. DURING THE COURSE OF HEARING LD. DEPARTMENTAL R EPRESENTATIVE STRONGLY RELIED ON THE JUDGMENTS OF HONBLE APEX CO URT IN THE CASE OF MAXOPP INVESTMENT LTD VS COMMISSIONER OF INCOME TAX (SUPRA). HOWEVER LD. COUNSEL FOR THE ASSESSEE MADE FOLLOWING WRITTEN SUBMISSIONS TO PROVE THAT THE FACTS OF THE ASSESSEE S CASE ARE DIFFERENT FROM THE FACTS ADJUDICATED BY THE HONBLE APEX COURT. THE RELEVANT EXTRACT OF THE WRITTEN SUBMISSION OF THE A SSESSEE COMPARING FACTS OF THE MAXOPP INVESTMENT LTD CASE W ITH THE ASSESSEES CASE ARE AS FOLLOWS:- BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 19 THE ASSESSEE SUBMITTED THAT THE HON'BLE SUPREME CO URT HAS RENDERED A JUDGMENT ON 12.02.2018 IN THE CASE OF MAXOPP INVEST MENT LTD. VS. COMMISSIONER OF INCOME TAX 101 CCH 0092. RELEVANT F ACTS AND JUDICIAL PRONOUNCEMENTS OF THE SAID CASE IS PLACED HEREUNDER : (I) MAXOPP INVESTMENT LIMITED (HEREINAFTER REFERRED TO AS 'MAXOPP') WAS ENGAGED IN THE BUSINESS OF FINANCE, INVESTMENT AND DEALING IN SHARES AND SECURITIES. INVESTMENTS WERE MADE IN THE QUOTED SHARES OF INVESTEE GROUP CONCERNS FOR THE PURPOSE OF RETAINING CONTROL LING INTEREST PARTICULARLY 'MAX INDIA LIMITED', A WIDELY HELD PUB LIC LIMITED COMPANY. DURING THE RELEVANT YEAR, MAXOPP ALSO EARNED HUGE D IVIDEND INCOME FROM THE SHARES OF THE INVESTEE GROUP COMPANY AND C LAIMED THE SAME AS EXEMPT IN THE RETURN OF INCOME AND NO EXPENDITURE W AS CONSIDERED FOR DISALLOWABLE UJS 14A ON THE GROUND THAT ALTHOUGH BO RROWED FUNDS WERE UTILIZED FOR THE PURPOSE 'OF MAKING INVESTMENTS IN THE SHARES OF THE GROUP COMPANY, THE INVESTMENT WAS MADE FOR RETAININ G CONTROLLING INTEREST. THE MATTER TRAVELLED TO THE HONOURABLE SU PREME COURT. THE HON'BLE SUPREME COURT CONSIDERING THE FACTS DIS CUSSED ABOVE, HAS HELD IN PARA 34 THAT 'WE ARE OF THE OPINION THAT TH E DOMINANT PURPOSE FOR WHICH THE INVESTMENT INTO SHARES IS MADE BY AN ASSESSEE MAY NOT BE RELEVANT. NO DOUBT, THE ASSESSEE LIKE MAXOPP INVEST MENT LIMITED MAY HAVE MADE THE INVESTMENT IN ORDER TO GAIN CONTROL O F THE IN VESTEE COMPANY. HOWEVER, THAT DOES NOT APPEAR TO BE A RELE VANT FACTOR IN DETERMINING THE ISSUE AT HAND. FACT REMAINS THAT SU CH DIVIDEND INCOME IS NON-TAXABLE. IN THIS SCENARIO, IF EXPENDITURE IS INCURRED ON EARNING THE DIVIDEND INCOME, THAT MUCH OF THE EXPENDITURE WHICH IS ATTRIBUTABLE TO THE DIVIDEND INCOME HAS TO BE DISALLOWED AND CANNOT BE TREATED AS BUSINESS EXPENDITURE' THE RESPONDENT HEREBY MOST HUMBLY SUBMITS THAT, THE FACTS OF THE RESPONDENT'S CASE ARE ALTOGETHER ON A DIVERGENT ALL EY AS COMPARED TO THE BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 20 FACTS OF THE CASE OF 'MAXOPP INVESTMENT LIMITED' WH EREIN INVESTMENTS WERE MADE IN LISTED CONCERNS DURING THE YEAR UNDER CONSIDERATION AND DIVIDEND INCOME WAS EARNED AND WAS CLAIMED AS EXEMP T IN THE RETURN OF INCOME. IT WAS AN ADMITTED POSITION THAT THE INVEST MENTS WERE MADE OUT OF BORROWED FUNDS. WHEREAS IN THE RESPONDENT'S CASE ALL THE INVESTMENTS HAVE BEEN MADE IN THE SHARES OF UNLISTED AND UNQUOT ED COMPANIES FROM WHICH IT NEVER EARNED ANY DIVIDEND INCOME OR ANY OT HER EXEMPT INCOME IN NUTSHELL, THE FACTS OF THE PRESENT CASE ARE DIS TINGUISHABLE FROM THE FACTS OF THE CASE OF MAXOPP INVESTMENTS LIMITED V/S CIT ON THE VARIOUS FOOTINGS TABULATED HEREUNDER: SL.NO FACTS OF MAXOPP INVESTMENT LTD. AND FINDINGS OF THE HON'BLE SUPREME COURT FACTS OF THE RESPONDENTS CASE AND ITS CONTENTIONS 1 MAJOR INVESTMENTS WERE MADE HERE THE ENTIRE INVESTMENTS IN THE SHARES OF WIDELY HELD ARE IN THE SHARES OF CLOSELY QUOTED/ LISTED PUBLIC LIMITED HELD UNLISTED/ UNQUOTED GROUP COMPANY. HERE THE ENTIRE INVESTMENTS ARE IN THE SHARES OF CLOSELY HELD UNLISTED/UNQUOTED GROUP COMPANIES. THE GAINS ARISING OUT OF SALE OF SUCH SHARES IS TAXABLE UNDER THE HEAD OF CAPITAL GAINS AND THE ASSESSEE HAS NEVER EARNED ANY EXEMPT INCOME IN RESPECT OF THESE INVESTMENTS 2 SUBSTANTIAL DIVIDEND INCOME WAS EARNED FROM THE INVESTMENTS IN THE SHARES OF NO DIVIDEND INCOME HAS BEEN EVER EARNED BY THE ASSESSEE FROM BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 21 INVESTEE LISTED GROUP COMPANY. THIS DIVIDEND INCOME WAS CLAIMED AS EXEMPT IN RETURN OF INCOME. THE INVESTMENTS IN THE SHARES OF PRIVATE COMPANIES. IN THIS SCENARIO, THE INSTIGATION OF PROVISION OF SECTION 14A IN RESPECT OF SUCH INVESTMENT FALLS AB- INITIO. 3 THE INTENT BEHIND THE LEGISLATION IN INSERTION OF SECTION 14A WAS NOT TO PERMIT THE ASSESSEE DOUBLE BENEFIT OF EXEMPT INCOME ON ONE HAND AND DEDUCTION OF EXPENSE ON ANOTHER (AS OBSERVED IN PARA 3 AND 16) IN THE PRESENT CASE DOUBLE BENEFIT CAN NEVER ARISE TO THE RESPONDENT COMPANY AS NO DIVIDEND INCOME WAS EARNED OR ACCRUED ON SUCH SHARES AND FURTHER, ANY GAIN WHICH MAY ARISE ON THE SALE OF SUCH UNQUOTED SHARES WILL ACCRUE TO THE ASSESSEE IN FORM OF TAXABLE INCOME ONLY. ON THE BASIS OF THE ABOVE DISTINGUISHABLE FACTS OF BOTH THE CASES IT IS MOST HUMBLY SUBMITTED THAT THE CASE OF THE ASSESSEE IS CLEARLY DISTINGUISHABLE ON FACTS AND IS ON A MUCH BETTER FO OTINGS THAN THE CASE OF MAXOPP INVESTMENTS LIMITED, RATHER THE OBSERVATI ONS OF THE HON'BLE APEX COURT FURTHER STRENGTHENS THE RESPONDENT'S CON TENTION IN SO FAR AS THAT THE DISALLOWANCE CAN BE CONTEMPLATED ONLY WHEN EXEMPT INCOME IS EARNED. THE HONOURABLE SUPREME COURT ALSO UPHELD IT S OWN FINDINGS RENDERED IN CIT V/S WALLFORT SHARES & STOCK BROKERS PVT. LTD. (2010) 326 BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 22 ITR 1 (SC) THAT THE BASIC PRINCIPAL OF TAXATION IS TO TAX THE NET INCOME AND ON THE SAME ANALOGY THE EXEMPTION IS ALSO IN RE SPECT OF NET INCOME ENTAILING THAT WHEN THERE IS NO EXEMPT INCOME, DISA LLOWANCE IS NOT ATTRACTED. THEREFORE, IT MOST RESPECTFULLY SUBMITTED THAT THE RATIO LAID DOWN IN THE CASE OF MAXOPP INVESTMENTS DOES NOT HOLD GOOD IN TH E PRESENT CASE BEFORE YOUR HONOUR. 14. FROM GOING THROUGH THE ABOVE DISCUSSIONS, WE AR E SATISFIED WITH THE SUBMISSION MADE BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF M AXOPP INVESTMENT LTD (SUPRA) IS NOT APPLICABLE ON THE ASSESSEE AS THE FACTS ARE DIFFERENT. SIMILARLY RELIANCE PLACED BY LD. DR ON THE DECISION OF I.T.A.T. AMRITSAR BENCH IS ALSO NOT APPLICABLE TO T HE FACTS OF THE ASSESSEE. 15. FURTHER WE ARE OF THE CONSIDERED VIEW THAT DISA LLOWANCE U/S 14A OF THE ACT IS NOT CALLED FOR IN THE CASE OF THE ASSESSEE AS THERE IS NO DIVIDEND INCOME EARNED DURING THE YEAR AND TH E ASSESSEES CASE IS SQUARELY COVERED IN THE JUDGMENT OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT V/S CORRTECH ENERGY (P) LT D ( SUPRA ) WHEREIN THE HONBLE HIGH COURT HAS HELD THAT WHERE THE ASSESSEE HAS NOT MADE ANY CLAIM FOR ANY EXEMPTION THEN IN SU CH SITUATION THE DISALLOWANCE U/S 14A OF THE ACT HAVE NO APPLICA TION. 16. PERUSAL OF THE AUDITED BALANCE SHEET OF THE ASS ESSEE SHOWS THAT AS ON 31.03.2012 THE TOTAL OF THE SHARE CAPITA L AND RESERVE AND SURPLUS AT THE END OF THE YEAR STANDS AT RS.39,28,4 4,695/- AND BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 23 AGAINST THESE INTEREST FREE FUNDS AVAILABLE WITH TH E ASSESSEE, THE AVERAGE VALUE OF INVESTMENT IS RS.29,83,62,600/-, WHICH MEANS THAT THE AVERAGE INVESTMENTS ARE LESS THAN THE INTE REST FREE FUND AVAILABLE WITH THE ASSESSEE. FURTHER THERE IS NO SP ECIFIC SATISFACTION BY THE LD.A.O WHICH COULD PROVE THAT INTEREST BEARI NG FUNDS HAVE BEEN APPLIED FOR THE INVESTMENTS IN GROUP CONCERNS FOR NON BUSINESS PURPOSES. IN SUCH SITUATION JUDGMENT OF H ONBLE HIGH COURT OF BOMBAY IN THE CASE OF CIT V/S RELIANCE UTI LITIES & POWER LTD ( SUPRA ) IS ALSO APPLICABLE AND IS IN FAVOUR OF THE ASSESS EE, WHEREIN THE HONBLE HIGH COURT WHILE ADJUDICATING S IMILAR ISSUE HELD THAT IF THERE ARE FUNDS AVAILABLE, BOTH INTEREST FREE AND OVER DRAFT OR LOANS TAKEN, THEN THE PRESUMPTION WOULD AR ISE THAT THE INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUND GENERATED BUT AVAILABLE WITH THE COMPANY, IF THE INTEREST FREE FU NDS WERE SUFFICIENT TO MEET THE INVESTMENTS. 17. SIMILAR VIEW WAS ALSO TAKEN BY HONBLE HIGH COU RT OF BOMBAY IN THE CASE OF CIT V/S HDFC BANK LTD ( SUPRA ) WHEREIN THE ASSESSEES CAPITAL, PROFIT, RESERVE SURPLUS AND CUR RENT ACCOUNT DEPOSITS WERE HIGHER THAN THE INVESTMENT IN TAX FR EE SECURITIES, THEN IT WOULD HAVE TO BE PRESUMED THAT INVESTMENT M ADE BY THE ASSESSEE WOULD BE OUT OF THE AVAILABLE INTEREST FRE E FUNDS. 18. WE THEREFORE RESPECTFULLY FOLLOWING THE ABOVE J UDGMENTS, DETAILED FINDING OF LD.CIT(A) AS WELL AS OUR DISCUS SIONS ABOVE ARE OF THE CONSIDERED VIEW THAT NO DISALLOWANCE U/S 14A W AS CALLED FOR BY THE LD.A.O AND THEREFORE WE FIND NO INFIRMITY IN TH E FINDING OF BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 24 LD.CIT(A) DELETING THE DISALLOWANCE U/S 14A OF THE ACT AT RS.2,31,50,925/-. IN THE RESULT GROUND NO.1 OF TH E REVENUE STANDS DISMISSED. 19. NOW WE TAKE UP GROUND NO.2 THROUGH WHICH THE R EVENUE IS AGGRIEVED WITH THE DELETION OF / ADDITION OF RS.2,0 0,000/- MADE BY THE LD.A.O 20. LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED THE F INDING OF LD.A.O. 21. PER CONTRA THE LD. COUNSEL FOR THE ASSESSEE REL YING ON THE FINDING OF LD.CIT(A) MADE FOLLOWING SUBMISSIONS; AS REGARDS TO THE GROUNDS RAISED BY THE DEPARTMENT ON ACCOUNT OF DISALLOWANCE OF VARIOUS EXPENSES; I) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN LAW BY DELETING THE ADDITION OF RS.2,00,000 / - MADE BY THE A0 ON ACCOUNT OF VARIOUS EXPENSES WITHOUT CO NSIDERING THE FACT THAT THE ASSESSEE HAD FAILED TO FURNISH PROOF TO ES TABLISH GENUINENESS OF VARIOUS EXPENSES IN THE LIGHT OF THE FACT THAT CERT AIN EXPENSES WERE MADE IN CASH AND SOME VOUCHERS WERE SELF PREPARED BY THE ASSESSEE. 6.1 THE RESPONDENT HAS CLAIMED ADMINISTRATIVE EXPEN SES IN THE NATURE OF MISC. EXPENSES, REPAIR AND MAINTENANCE, STATIONE RY AND PRINTING EXPENSES, TRAVELLING EXPENSES AND VEHICLE RUNNING E XPENSES OF RS. 20,51,319/-, OUT OF WHICH AN AD-HOC DISALLOWANCE AM OUNTING TO RS. 2,00,000/- HAS BEEN MADE BY OBSERVING THAT THE VOUC HERS WERE SELF PREPARED AND SOME OF THE PAYMENTS WERE MADE IN CASH AND THE SAME WERE NOT CROSS VERIFIABLE. BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 25 6.2 THE BOOKS OF ACCOUNTS ALONG WITH ALL THE BILLS AND VOUCHERS WERE PRODUCED BEFORE THE LEARNED AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND WERE SUBJECT TO TEST CHECK BY THE L EARNED AO AND IT WAS EXPLAINED THAT THE EXPENSES HAVE BEEN PROPERLY INCU RRED AND ALSO ACCOUNTED FOR AND THAT CONSIDERING THE NATURE AND V OLUME OF BUSINESS ALSO THE EXPENDITURE IS JUSTIFIED. 6.3 HOWEVER, THE DISALLOWANCE WAS MADE BY THE LEARN ED AO FOR THE SAKE OF MAKING THE DISALLOWANCE BY MAKING GENERAL AND VA GUE ALLEGATION WITHOUT POINTING OUT ANY SPECIFIC DEFECT IN ANY SPE CIFIC EXPENDITURE AND AN ADHOC DISALLOWANCE OF RS. 2,00,000/- WAS MADE. 6.4 THAT SINCE THE DISALLOWANCE WAS MADE WITHOUT PO INTING OUT ANY DISCREPANCY IN ANY SPECIFIC EXPENDITURE, THE DISALL OWANCE MADE WITHOUT ANY BASIS IS WRONG AND OUGHT TO BE DELETED. 22. LD. COUNSEL FOR THE ASSESSEE HAS ALSO PLACED RE LIANCE ON FOLLOWING JUDGMENTS; A) HON'BLE I.T.A.T. PUNE BENCH IN THE CASE OF LAVRI DS KNUDSEN MASKINFABRIK (INDIA) LTD. VS. ADDL. C.I.T REPORTED IN 102 TTJ 882 B) SONIC BIOCHEM EXTRACTION P. LTD. VERSUS INCOME T AX OFFICER 7(2)(4) [2013] IN ITA NOS 8136, 8138 AND 8137/ MUM/ 2011 C) SANGHI BROTHERS (INDIA) P. LTD. VERSUS DEPARTMEN T OF INCOME TAX _ (2012) ITAI INDORE BENCH IN ITA NO. 286/IND/ D) HONOURABLE SUPREME COURT IN THE CASE OF J.J. ENT ERPRISES VS. CIT 254 ITR 216 E) HONOURABLE DELHI HIGH COURT IN THE CASE OF FRIEN DS CLEARING AGENCY P. LTD. V. CIT: 332 ITR 269. BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 26 23. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE RECORDS PLACED BEFORE US. REVENUE IS AGGRIEVED WITH THE DEL ETION OF AD-HOC ADMINISTRATIVE EXPENSES TOTALING TO RS.2,00,000/- MADE BY LD.A.O. LD.CIT(A) DELETED THE AD-HOC ADDITION OF RS.2,00,00 0/- OBSERVING AS UNDER; 4.1 THE ASSESSING OFFICER HAS MADE ADHOC DISALLOWA NCE OF RS. 2,00,000/OUT OF THE VARIOUS EXPENSES WITHOUT POINTI NG OUT ANY SPECIFIC DEFECT. THE BOOKS OF ACCOUNTS OF THE APPELLANT ARE AUDITED AND WERE DULY PRODUCED BEFORE THE ASSESSING OFFICER. THERE ARE SE VERAL DECISIONS WHICH SUPPORT THE CONTENTION OF THE APPELLANT THAT DISALL OWANCE CANNOT BE MADE 011 ESTIMATED BASIS RELIANCE IS PLACED THE FOL LOWING DECISIONS:- ( I) CIT V/S DALMIA CEMENT (BL LTD 254 LTR 377(DELH I) (II) DCIT V/S SUPER TANNERY (INDIA) LTD. 274 ITR 33 8 (ALL) ( III) SAYAJI IRON & ENGG CO, VS CIT 253 ITR 749( G UJ) (IV) ARADHNA OIL MILLS LTD. 30 LTC 91 (INDORE) (V) CORE HEALTH CARE LTD. 70 TTJ 490 (AHD)(TM) (VI) MONARCH FOODS (P) LTD. V/S ACIT 54 TTJ 405 (A HD) (VII) DCIT V/S SURFACE FINISHING EQUIPMENT 81 TTJ 4 48 PDL 4.2 IN VIEW OF THE ABOVE, THE DISALLOWANCE OF RS. 2 ,00,000/ - IS DELETED. GROUND NO.2 IS ALLOWED. 24. WE FIND THAT THE ASSESSEE IS A LIMITED COMPANY AND HAS MAINTAINED REGULAR BOOKS OF ACCOUNTS AND FINANCIAL STATEMENTS ARE DULY AUDITED AND BOOKS RESULTS HAVE NOT BEEN REJECT ED BY THE BRILLIANT ESTATE PVT.LTD ITA NO.349/IND/2017 27 LD.A.O. NO MAJOR DISCREPANCIES HAVE BEEN NOTICED. DISALLOWANCE OF RS.2,00,000/- HAS BEEN MERELY MADE ON THE OBSERV ATION THAT SOME OF THE EXPENDITURE ARE INCURRED IN CASH AND S OME VOUCHERS ARE SELF MADE AND SURPRISINGLY THERE IS NO SPECIFIC OBSERVATION BY THE LD.A.O WHICH COULD PROVE THAT THE ASSESSEE HAS CLAIMED THE EXPENSES WITH A MOTIVE TO EVADE THE TAX NOR ANY OBS ERVATION HAS BEEN MADE BY THE LD.A.O FOR CHALLENGING THE GENUINE NESS OF THE PARTICULAR EXPENDITURE. IN THESE GIVEN FACTS AND C IRCUMSTANCES MERELY MAKING A AD-HOC DISALLOWANCE OF RS.2,00,000/ - AND COMPLETELY DISREGARDING THE AUDITED FINANCIAL STATE MENTS WAS CERTAINLY NOT JUSTIFIED ON THE PART OF LD.A.O. THER EFORE WE FIND NO INFIRMITY IN THE FINDING OF LD. CIT(A) DELETING THE DISALLOWANCE OF RS.2,00,000/- PLACING RELIANCE OF VARIOUS JUDGMENTS . IN THE RESULT GROUND NO.2 RAISED BY THE REVENUE STANDS DISMISSED. 25. IN THE RESULT GROUND NO.1 & 2 RAISED IN THE APP EAL OF THE REVENUE STANDS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 13.12.201 8. SD/- SD/- ( KUL BHARAT) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER / DATED : 13 TH DECEMBER, 2018 /DEV COPY TO: THE APPELLANT/RESPONDENT/CIT CONCERNED/CIT (A) CONCERNED/ DR, ITAT, INDORE/GUARD FILE. BY ORDER, ASSTT.REGISTRAR, I.T.A.T., INDORE