ACIT, New Delhi V. M/s Modland Wears Pvt. Ltd., New Delhi

ITA 3587/DEL/2011

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 7699 (ITAT-DELHI)
• Duration Of Justice: 8 year(s) 6 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2020
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 23-05-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 19-07-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRAMITA M BISWAS
• Keywords: Gift; Business income; Earning of tax free income; Cost of acquisition; Date of conversion; Rule 8D; Liquidation; Capital Gains
• Section: 143(3); 14A; 13; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: E, NEW DELHI BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER ITA NO.3587/DEL/2011 ASSESSMENT YEAR: 2008-09 ACIT, CIRCLE-5(1), C.R. BUILDING, NEW DELHI VS. M/S. MOODLAND WEARS PVT. LTD., S-137, (2 ND FLOOR), GREATER KAILASH-II, NEW DELHI PAN :AAACM0216F (APPELLANT) (RESPONDENT) AND C.O. NO.299/DEL/2011 [IN ITA NO.3587/DEL/2011] ASSESSMENT YEAR: 2008-09 M/S. MOODLAND WEARS PVT. LTD., S-137, (2 ND FLOOR), GREATER KAILASH-II, NEW DELHI VS. ACIT, CIRCLE-5(1), C.R. BUILDING, NEW DELHI PAN : AAACM0216F (APPELLANT) (RESPONDENT) DEPARTMENT BY MS. PRAMITA M. BISWAS, CIT(DR) ASSESSEE BY SHRI TARANDEEP SINGH, ADV. DATE OF HEARING 14.01.2020 DATE OF PRONOUNCEMENT 28.01.2020 2 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 ORDER PER O.P. KANT, AM: THIS APPEAL BY THE REVENUE AND THE CROSS OBJECTIO N BY THE ASSESSEE ARE DIRECTED AGAINST ORDER DATED 24/05/201 1, PASSED BY THE LD. CIT (APPEALS)-VIII, NEW DELHI [IN SHORT THE LD. CIT(A)] FOR ASSESSMENT YEAR 2008-09. 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE RE PRODUCED AS UNDER: 1. THE ORDER OF THE LD. CIT(APPEALS) IS ERRONEOUS A ND CONTRARY TO FACTS AND LAW. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS .14,19,57,154/- MADE ON ACCOUNT OF DIFFERENCE BETWEEN THE VALUE OF SHARES AND THE COST SHARES TAKEN BY ASSESSEE ON CONVERSION OF SHARES FROM STOCK IN TRADE TO INVESTMENT. 2.1 THE LD. CIT(A) IGNORED THE FINDING RECORDED BY THE AO AND THE ACT THAT THE VALUE OF THE SHARES WAS CALCULATED BY AO A T THE PREVAILING RATES OF THE SHARES IN THE SHARE MARKET ON THE DAY OF CONVERSION. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) HAS ERRED IN RESTRICTING THE DISALLOWAN CE U/S 14A OF THE ACT TO RS.7,04,000/- AS AGAINST RS.3,56,96,487/- MA DE BY THE AO. 3.1 THE LD. CIT(A) IGNORED THE FINDING RECORDED BY THE AO AND THE ACT THAT THE DISALLOWANCE WAS CORRECTLY CALCULATED BY T HE AO IN ACCORDANCE WITH THE PROVISIONS OF RULE 8D OF THE IT RULES, 1962. 4. THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER, OR AMEND ANY GROUNDS OF THE APPEAL RAISED ABOVE AT THE TIME OF HEARING. 2.1 GROUNDS OF CROSS OBJECTION BY THE ASSESSEE ARE REP RODUCED AS UNDER: 3 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 1. THAT ON FACTS AND IN LAW, THE LEARNED COMMISSIO NER OF INCOME TAX (APPEALS)-VIII [LD.CIT(A)], NEW DELHI HAS ERRED IN UPHOLDING THE ADDITION OF RS.7,04,411 WITHOUT APPRECIATING TH E CONTENTION OF THE APPELLANT COMPANY THAT DISALLOWANCE OF EXPENDIT URE IN TERMS OF SECTION 14A READ WITH CLAUSE (III) OF SUB-RULE ( 2) OF RULE 8D CAN NOT EXCEED THE AMOUNT OF EXPENDITURE 'INCURRED' BY THE APPELLANT COMPANY AT RS.8,43,942 AS IT IS AGAINST THE SPIRIT / INTENTION OF SECTION 14A WHICH CLEARLY ENVISAGES THE WORDS 'EXPE NDITURE INCURRED' THEREIN. 2. THAT ON FACTS AND IN LAW, THE LD.CIT(A) HAS ERR ED IN NOT CONSIDERING THE CONTENTION OF THE APPELLANT COMPANY THAT IT WAS HOLDING THE SHARES OF THREE COMPANIES (CONVERTED FR OM STOCK-IN- TRADE TO INVESTMENTS AS ON 1ST APRIL, 2007) FOR LON G TERM PURPOSES AND NOT FOR TRADING PURPOSES AS THERE WAS NO TRADIN G SINCE ITS ACQUISITION IN THE LAST 6-7 YEARS. 3. WITHOUT PREJUDICE TO THE ABOVE, THE LD.CIT(A) H AS ERRED IN NOT GIVING THE HOLDING THAT, EVEN IF THE DIFFERENCE BET WEEN THE MARKET PRICE AND COST IS TO BE TREATED AS BUSINESS INCOME, THE SAME WOULD BE CHARGEABLE TO TAX ONLY IN THE YEAR OF SALE / TRANSFER AND NOT IN THE YEAR UNDER APPEAL. 4. THAT ON FACTS AND IN LAW, THE APPELLANT CRAVES L EAVE TO ADD, ALTER OR AMEND ANY GROUND AT OR BEFORE THE TIME OF HEARIN G. 3. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSE SSEE CARRIED OUT BUSINESS OF ACCEPTING AND GRANTING LOANS AS WEL L AS BUSINESS OF TRADING AND INVESTMENT IN SHARES/DEBENTURES ETC. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE FILED RETURN OF I NCOME ON 28/09/2008, DECLARING TOTAL INCOME OF 23,80,990/-, WHICH WAS SUBSEQUENTLY REVISED, THOUGH THE TOTAL INCOME REMAI NED THE SAME. THE CASE WAS SELECTED FOR A SCRUTINY ASSESSME NT AND STATUTORY NOTICES UNDER THE INCOME-TAX ACT, 1961 (I N SHORT THE ACT) WERE ISSUED AND COMPLIED WITH. THE SCRUTINY A SSESSMENT UNDER SECTION 143(3) OF THE ACT WAS COMPLETED ON 03 /11/2010 AFTER MAKING CERTAIN ADDITIONS/DISALLOWANCE TO THE RETURNED 4 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 INCOME. ON FURTHER APPEAL BY THE ASSESSEE, THE LD. CIT(A) ALLOWED THE APPEAL PARTLY. 3.1 AGGRIEVED WITH THE FINDING OF THE LD. CIT(A), BOTH THE REVENUE AND ASSESSEE ARE BEFORE THE TRIBUNAL BY WAY OF APPEAL AND CROSS OBJECTION RESPECTIVELY. 4. THE GROUND NOS. 1 OF APPEAL BEING GENERAL IN NATUR E, WE ARE NOT REQUIRED TO ADJUDICATE UPON. 5. THE GROUND NO. 2 AND 2.1 ARE RELATED TO ADDITION O F 14,19,57,154/- DELETED BY LD. CIT(A), WHICH WAS MAD E BY THE ASSESSING OFFICER ON ACCOUNT OF THE DIFFERENCE BETW EEN THE VALUE OF THE SHARES AND COST OF ACQUISITION ON CONVERSION OF SHARES FROM STOCK-IN-TRADE INTO INVESTMENT. THE GROUNDS NO. 2 & 3 OF THE CROSS OBJECTION OF THE ASSESSEE ARE RELATED TO THE ISSUE OF ADDITION RELATED TO CONVERSION OF STOCK IN TRADE INTO INVEST MENT. 5.1 THE FACTS QUA THE ISSUE IN DISPUTE ARE THAT THE A SSESSEE COMPANY WAS HOLDING SHARES OF M/S OSCAR INVESTMENT LTD.; M/S RANBAXY LABORATORIES LTD. AND M/S FORTIS FINANCIAL SERVICES LTD. DURING THE YEAR UNDER CONSIDERATION ON 04/01/2007, BY WAY OF A BOOK ENTRY THE ASSESSEE CHANGED THE CLASSIFICATION OF SHARES OF THREE COMPANIES (QUOTED) HELD BY IT FROM STOCK IN TRADE (I.E. CURRENT ASSETS) TO THE INVESTMENTS. THE BOOK ENTR Y HAD BEEN PASSED AT THE AMOUNT EQUAL TO THE COST OF THE SHARE S, AT WHICH THOSE SHARES WERE ACQUIRED BY THE ASSESSEE IN EARLI ER YEARS AS A STOCK IN TRADE. ACCORDING TO THE ASSESSING OFFICER, THOSE SHARES WERE TREATED BY THE ASSESSEE AS ITS TRADING STOCK ( CURRENT ASSETS) AND REFLECTED AS SUCH IN THE ACCOUNTS, WHICH IMPLIE D THAT SALE OF THE SHARES WOULD RESULT IN NORMAL BUSINESS PROFIT, BUT UPON BEING CONVERTED TO INVESTMENTS, THE PROFIT ON SALE OF SUC H SHARES WOULD 5 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 AMOUNT TO LONG-TERM CAPITAL GAINS, WHICH IS FREE FR OM THE CHARGEABILITY OF THE INCOME-TAX. IN VIEW OF THE ASS ESSING OFFICER, MERELY BY CHANGE OF CLASSIFICATION OF THE SHARES, T HE ASSESSEE CONVERTED ITS TAXABLE BUSINESS PROFIT TO TAX-FREE L ONG-TERM CAPITAL GAINS. ON BEING CONFRONTED BY THE ASSESSING OFFICER AS WHY THE DIFFERENCE OF MARKET VALUE OF THOSE SHARES ON THE D ATE OF THE TRANSFER AND THE COST OF THE SHARES SHOULD NOT BE T AKEN AS BUSINESS INCOME OF THE ASSESSEE, IT WAS SUBMITTED T HAT: - THERE IS NO PROVISION IN THE ACT FOR TAXING SUCH IN COME; - THE SHARES OF THE COMPANIES WERE ERRONEOUSLY CLASSI FIED UNDER STOCK IN TRADE IN EARLIER YEARS INSTEAD OF IN VESTMENT AND NOW RECTIFIED. 5.2 THE EXPLANATION GIVEN BY THE ASSESSEE WAS REJECTED BY THE ASSESSING OFFICER ON THE GROUND THAT SEPARATE ACCOU NT IN RESPECT OF STOCK IN TRADE AS WELL AS INVESTMENT WERE MA INTAINED AND REFLECTED IN THE AUDITED ACCOUNT. HE ALSO REJECTED THE CLAIM OF THE ASSESSEE THAT SHARES OF THE AFOREMENTIONED COMPANIE S WERE HELD AS INVESTMENT ONLY BUT WERE INADVERTENTLY SHOWN IN STOCK-IN- TRADE IN THE BOOKS OF ACCOUNTS. ACCORDING TO THE A SSESSING OFFICER, THE CONVERSION OF SHARES HELD IN STOCK-IN- TRADE INTO INVESTMENT WAS CONSCIOUS AND DELIBERATE ATTEMPT ON THE PART OF THE ASSESSEE SO AS TO ENSURE THAT NO TAXES WOULD BE PAID AT THE TIME OF SALE OF THE SHARES CLAIMING THE PROFIT AS L ONG-TERM CAPITAL GAIN, WHICH IS EXEMPTED FROM THE TAX. THE ASSESSING OFFICER ALSO REJECTED THE CONTENTION THAT THERE ARE NO PROVISION S IN THE ACT TO TAX THE INCOME ON CONVERSION OF SHARES FROM STOCK I N TRADE TO INVESTMENT. 6 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 5.3 THE ASSESSING OFFICER TREATED THE DIFFERENCE OF MA RKET VALUE OF THE SHARES ON THE DATE OF BOOK ENTRY OF CONVERTI NG THE STOCK INTO INVESTMENT AND COST OF THE SHARES AS BUSINESS INCOME OF THE ASSESSEE. THE DETAILED COMPUTATION OF THE PROFIT BY THE ASSESSING OFFICER IS REPRODUCED AS UNDER: NAME OF COMPANY NO. OF SHARES COST OF SHARES MARKET RATE ON 01.04.07 MARKET VALUE ON DATE OF TRANSFER (01.04.07) DIFFERENCE FORTIS FIN. SERVICES LTD. 16,13,099 1,04,86,807. (*) 91.50 14,75,98,558 13,71,11,751 OSCAR INVESTMENTS LTD. 86,280 50,51,511 (**) 238.75 2,05,99,350 1,55,47,839 RANBAXY LTD. 1,21,160 4,78,54,146 (**) 349.00 4,22,84,840 - 55,69,306 TOTAL 6,33,92,464 21,04,82,748 14,70,90,284 5.4 THE ASSESSING OFFICER REDUCED A SUM OF RS.51,33,13 0/-, WHICH WAS INCLUDED BY THE ASSESSEE IN ITS INCOME BY WAY OF TAKING VALUE OF 1,21,160 SHARES OF RANBAXY LTD AT C OST PRICE OF RS.4,78,54,146/- ON THE DATE OF CONVERSION OF STOCK -IN-TRADE TO INVESTMENT AS AGAINST DECLARED VALUE OF 4,27,21,016/- ON THE BASIS OF MARKET PRICE AS ON 30 01/03/2007, AND THIS BALANCE AMOUNT OF 14,19,57,154/- WAS ADDED TO THE BUSINESS INCOME OF THE ASSESSEE. 5.5 ON FURTHER APPEAL, THE LD. CIT(A) REJECTED THE CON TENTION OF THE ASSESSEE OF INTENTION BEHIND HOLDING THE SHARES IN DISPUTE AS LONG-TERM INVESTMENT. ON THE ISSUE OF TREATMENT OF DIFFERENCE IN MARKET PRICE AS ON THE DATE OF CONVERSION OF HIS S TOCK IN TRADE INTO INVESTMENT AND THE COST PRICE, THE LD. CIT(A) DISCUSSED THE RATIO OF FOLLOWING JUDGMENTS: 7 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 (I) WESTMINISTER BANK LTD. VS. OSLER (INSPECTOR OF TAXES) [1993] 1 ITR 65 (HL); (II) ROYAL INSURANCE CO. LTD. VS. STEPHEN [1928] 14 TC22(KB) (III) CALIFORNIAN COPPER SYNDICATE VS. HARRIS [190 4] 5 TC 159(C. EXCHQ.) (IV) RAJA MOHAN RAJA BAHADUR VS. CIT [1967] 66 ITR 378; (V) BRITISH SOUTH AFRICA CO. VS. VARTY (INSPECTOR O F TAXES) [1966] AC 381; (VI) SIR KIKABHAI PREMCHAND VS. CIT, (1953) 24 ITR 506 (SC) (VII) CIT VS. DHANUKA & SONS, (1980), 124 ITR 24(C AL.) (VIII) ACIT VS. BRIGHT STAR INVESTMENT (P) LTD. (IT AT-MUM.) (IX) CIT VS. BAI SHIRINBAI K. KOOKA 5.6 IN VIEW OF THE RATIO OF THE JUDGMENTS, THE LD. CIT (A) DELETED THE ADDITION OF 14,19,57,154 OBSERVING AS UNDER: 5.9 THUS, IT MAY BE SEEN THAT THE VIEW TAKEN BY TH E HONBLE COURTS IN THE AFOREMENTIONED CASES IS THAT TO BRING TO TAX ANY BUSINESS INCOME THERE HAS TO BE A SALE/TRANSFER IN COMMERCIA L SENSE. MERE CONVERSION OF TRADING ASSETS INTO INVESTMENT IS NOT SUFFICIENT TO ENTITLE THE REVENUE TO FASTEN TAX LIABILITY ON THE TAX PAYERS. THE HONBLE COURTS HAVE DEALT WITH DIFFERENT FACT SITUA TIONS BEFORE COMING TO THIS CONCLUSION. IT MAY BE SEEN THAT IN A SITUATION WHERE SHARES OF A PARTICULAR COMPANY ARE SURRENDERED/EXCH ANGED FOR SHARES OF ANOTHER COMPANY FOR A HIGHER AMOUNT, THE DIFFERENCE HAS BEEN HELD TO BE TAXABLE AS BUSINESS INCOME. HOWEVER , WHEN THE FACTS OF THE PRESENT CASE ARE ANALYZED IN LIGHT OF THE BASIC PARAMETERS LAID DOWN BY THE COURTS FOR DECIDING THE ISSUE OF CHANGE IN CHARACTER OF HOLDING OF TRADING ASSETS, IT MAY B E SEEN THAT AFTER CONVERTING SHARES OF THE AFOREMENTIONED THREE COMPA NIES, NO REAL TRANSFER/SALE HAD TAKEN PLACE IN REAL BUSINESS SENS E DURING THE FY UNDER CONSIDERATION RESULTING INTO ANY INCOME TO TH E APPELLANT COMPANY. IT HAS TO BE APPRECIATED THAT THE LEGISLAT URE HAS PROVIDED FOR TAXATION O.F CAPITAL GAINS IN THE EVENT OF CONV ERSION OF INVESTMENT INTO STOCK-IN-TRADE IN TERMS OF SECTION 45 (2) OF T HE IT ACT, 1961 IN THE YEAR'OF ACTUAL SALE/TRANSFER OF THE SHARES/INVE STMENT IN QUESTION. HOWEVER, THERE IS NO SUCH PROVISION IN SO FAR AS THE CONVERSION OF TRADING ASSETS INTO INVESTMENT IS CON CERNED. IN VIEW OF THE ABOVE FACTS AND THE LEGAL POSITION AS ELABORATE D BY THE HONBLE COURTS, I HAVE NO HESITATION IN HOLDING THAT THE AO WAS NOT JUSTIFIED IN BRINGING TO TAX THE AMOUNT OF RS. 141957154/- ON ACCOUNT OF MERE CONVERSION OF SHARES OF M/S OSCAR INVESTMENTS LTD., M/S RANBAXY LABORATORIES LTD. AND M/S FORTIS FINANCIAL SERVICES LTD. 8 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 AS THERE IS NO TRANSACTION BETWEEN THE APPELLANT CO MPANY AND ANY THIRD PARTY WHICH IS A PREREQUISITE FOR DETERMINING THE BUSINESS INCOME. ACCORDINGLY, THE ADDITION OF RS. 141957154/ - IS BEING DELETED. THIS DISPOSES OF THE GROUND NO. 1 AND 1.3 OF THE APPEAL. 6. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE REL IED ON THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT T HE LD. CIT(A) IS NOT JUSTIFIED IN DELETING THE BUSINESS INCOME ARISI NG ON CONVERSION OF SHARES HELD AT THE STOCK IN TRADE INT O INVESTMENT IN THE YEAR UNDER CONSIDERATION. 7. ON THE CONTRARY, THE LD. COUNSEL OF THE ASSESSEE F ILED A PAPER-BOOK IN TWO VOLUMES FROM PAGES 1 TO 21 AND FR OM 22 TO 108. IT WAS SUBMITTED BY THE LD COUNSEL THAT DURING THE YEAR SHARES WERE CONVERTED FROM STOCK-IN TRADE TO INVEST MENT IN ITS BOOKS OF ACCOUNT AND THERE WAS NO TRANSFER OR SALE OF SHARES TO THIRD PARTIES, THUS THERE WAS NO REAL INCOME IN THE HANDS OF THE ASSESSEE. THE LD. COUNSEL RELIED ON THE ORDER OF T HE LD. CIT(A) AND SUBMITTED THAT DURING RELEVANT PERIOD, THERE WA S NO PROVISION IN THE ACT TO TREAT THE NOTIONAL INCOME ARISING ON ACCOUNT OF CONVERSION OF STOCK-IN-TRADE INTO INVESTMENT. THE L D. COUNSEL REFERRED TO AMENDMENT INTRODUCED BY WAY OF INSERTIO N OF SUB- SECTION (VIA) TO SECTION 28 OF THE ACT WITH EFFECT FROM 01/04/2019, WHERE INCOME ON CONVERSION OF STOCK-IN-TRADE HAS BE EN BROUGHT TO TAX. THUS, ACCORDING TO THE LEARNED COUNSEL, THE RE WAS NO PROVISION IN THE ACT PRIOR TO THE AMENDMENT INTRODU CED WITH EFFECT FROM 01/04/2019, AS THE RELEVANT PERIOD IN T HE CASE OF THE ASSESSEE IS PREVIOUS YEARS CORRESPONDING TO ASSESSM ENT YEAR 2008-09. THE LEARNED COUNSEL ALSO REFERRED TO EXPLA NATORY NOTES 9 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 TO THE FINANCE ACT, AVAILABLE ON PAGE 28 OF THE PAP ER-BOOK. THE COUNSEL SUBMITTED THAT IN THE CASE OF BRIGHT STAR I NVESTMENT PRIVATE LIMITED, REPORTED IN 122 TTJ 498 (MUMBAI), THE TRIBUNAL WAS OF THE OPINION THAT TO DEAL WITH THE SITUATION OF CONVERSION OF STOCK-IN-TRADE INTO INVESTMENT, THERE CAN BE TWO FO RMULAS FOR COMPUTING THE INCOME. FIRST FORMULA, WHICH WAS ADOP TED BY THE ASSESSING OFFICER I.E. DIFFERENCE BETWEEN THE BOOK VALUE OF THE SHARES AND THE MARKET VALUE OF THE SHARES AS ON THE DATE OF THE CONVERSION SHOULD BE TAKEN AS BUSINESS INCOME AND D IFFERENCE BETWEEN THE SALE PRICE OF THE SHARES AND THE MARKET VALUE OF THE SHARES ON THE DATE OF CONVERSION, BE TAKEN AS CAPIT AL GAIN. THE SECOND FORMULA, WHICH WAS ADOPTED BY THE ASSESSEE, I.E., THE DIFFERENCE BETWEEN THE SALE PRICE OF THE SHARES AND COST OF ACQUISITION OF THE SHARES, WHICH IS THE BOOK VALUE AS ON DATE OF THE CONVERSION WITH INDEXATION FROM THE DATE OF CON VERSION SHOULD BE COMPUTED AS CAPITAL GAIN. THE TRIBUNAL HELD THAT IN THE ABSENCE OF A SPECIFIC PROVISION, OUT OF THESE TWO F ORMULAS, THE FORMULA WHICH WAS FAVOURABLE TO THE ASSESSEE SHOULD BE ACCEPTED. HE FURTHER SUBMITTED THAT THE HONBLE BOM BAY HIGH COURT REJECTED THE APPEAL OF THE REVENUE IN THE CAS E OF CIT VS SYNCHEM CHEMICALS (I) LIMITED REPORTED IN 384 ITR 4 98 (BOMBAY) ON IDENTICAL GROUND IN VIEW OF DECISION OF THE TRIB UNAL ACCEPTED BY THE REVENUE IN THE CASE OF BRIGHT STAR INVESTMEN T (SUPRA). 7.1 THE LEARNED COUNSEL SUBMITTED THAT SHARES WERE NOT SOLD OR TRANSFERRED TO 3 RD PARTIES DURING THE YEAR UNDER CONSIDERATION AND NO LONG-TERM CAPITAL GAIN HAS BEEN CLAIMED DURING T HE YEAR UNDER CONSIDERATION. HE SUBMITTED THAT GAIN ON SALES OF S HARES DECLARED IN THE SUBSEQUENT YEAR HAS BEEN ACCEPTED BY THE DEP ARTMENT AND 10 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 THEREFORE, NO INCOME IS TAXABLE IN THE YEAR UNDER C ONSIDERATION. IN SUPPORT OF HIS CONTENTION THAT NO INCOME ARISES ON MERE CONVERSION OF STOCK-IN-TRADE INTO INVESTMENT, HE RE LIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F KIKABHAIPREMCHAND VS CIT (1953) 24 ITR 506 (SC). 8. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTIES AND PERUSED THE RELEVANT MATERIAL ON RECORD. AS FAR AS FACTS OF CONVERSION OF SHARES OF THREE COMPANIES FROM STOCK- IN-TRADE INTO INVESTMENT ARE CONCERNED, SAME HAVE NOT BEEN DISPUT ED BEFORE US. THE ONLY DISPUTE IS REGARDING WHETHER SUCH CONV ERSION IN THE YEAR UNDER CONSIDERATION WOULD RESULT INTO INCOME I N THE HANDS OF THE ASSESSEE. WE FIND THAT THE LD. CIT(A) HAS RE LIED ON THE RATIO LAID DOWN IN VARIOUS JUDGMENTS DISCUSSED IN THE IMP UGNED ORDER. WE FIND THAT HONBLE SUPREME COURT IN THE CASE OF K IKABHAI PREMCHAND (SUPRA) CONCLUDED THAT WITHDRAWAL OF THE STOCK-IN- TRADE FOR NON-BUSINESS PURPOSE DOES NOT RESULT IN I NCOME AND IT CAN BE VALUED AT COST PRICE, WHERE ASSESSEE NORMA LLY VALUED ITS STOCK AT COST PRICE. THE PARAGRAPH OF THE DECISION OF THE HONBLE SUPREME COURT (MAJORITY) IS REPRODUCED AS UNDER: 7. WE ARE OF OPINION THAT THE LEARNED ATTORNEY-GENERA L'S SECOND CONTENTION IS UNSOUND BECAUSE, FOR INCOME-TAX PURPO SES, EACH YEAR IS A SELF-CONTAINED ACCOUNTING PERIOD AND WE CAN ON LY TAKE INTO CONSIDERATION INCOME, PROFITS AND GAINS MADE IN THA T YEAR AND ARE NOT CONCERNED WITH POTENTIAL PROFITS WHICH MAY BE M ADE IN ANOTHER YEAR ANY MORE THAN WE ARE WITH LOSSES WHICH MAY OCC UR IN THE FUTURE. 8. AS REGARDS THE FIRST CONTENTION, WE ARE OF OPINION THAT THE APPELLANT WAS RIGHT IN ENTERING THE COST VALUE OF T HE SILVER AND SHARES AT THE DATE OF THE WITHDRAWAL, BECAUSE IT WA S NOT A BUSINESS TRANSACTION AND BY THAT ACT THE BUSINESS MADE NO PR OFIT OR GAIN, NOR 11 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 DID IT SUSTAIN A LOSS, AND THE APPELLANT DERIVED NO INCOME FROM IT. HE MAY HAVE STORED UP A FUTURE ADVANTAGE FOR HIMSELF B UT AS THE TRANSACTIONS WERE NOT BUSINESS ONES AND AS HE DERIV ED NO IMMEDIATE PECUNIARY GAIN THE STATE CANNOT TAX THEM, FOR UNDER THE IT ACT THE STATE HAS NO POWER TO TAX A POTENTIAL FU TURE ADVANTAGE. ALL IT CAN TAX IS INCOME, PROFITS AND GAINS MADE IN THE RELEVANT ACCOUNTING YEAR. 9. IT WAS CONCEDED THAT IF THESE ASSETS HAD BEEN SOLD AT COST PRICE THE STATE COULD HAVE CLAIMED NOTHING, FOR A MAN CAN NOT BE COMPELLED TO MAKE A PROFIT OUT OF ANY PARTICULAR TRANSACTION. IT WAS ALSO CONCEDED THAT IF THE SILVER AND STOCKS HAD LAIN WHE RE THEY WERE, THEN AGAIN THERE WOULD HAVE BEEN NO ADVANTAGE TO TH E STATE BECAUSE THE APPELLANT WOULD HAVE BEEN ENTITLED TO E NTER THEIR CLOSING VALUES AT COST AT THE END OF THE YEAR. THE LEARNED ATTORNEY-GENERAL EVEN CONCEDED THAT IF THEY HAD BEEN SOLD AT A LOSS THE APPELLANT WOULD HAVE BEEN ENTITLED TO SET THAT OFF AGAINST HI S OTHER GAINS, BUT HE SAID THAT THAT IS BECAUSE ALL THOSE ARE BUSINESS TRANSACTIONS AND THAT IS THE WAY THE LAW DEALS WITH SUCH MATTERS WHE N THEY OCCUR IN THE ORDINARY COURSE OF BUSINESS. BUT, HE ARGUED, WH EN THERE IS A WITHDRAWAL AND NO SALE OR ITS EQUIVALENT, THE MATTE R IS DIFFERENT. AS THIS IS A BUSINESS, ANY WITHDRAWAL OF THE ASSETS IS A BUSINESS MATTER AND THE ONLY FEASIBLE WAY OF REGARDING IT IN A BUSINESS LIGHT IS TO ENTER THE MARKET PRICE AT THE DATE OF THE WIT HDRAWAL AND WHETHER THAT HAPPENS TO FAVOUR THE ASSESSEE OR THE STATE IS IMMATERIAL. WE DO NOT AGREE. 10. IT IS WELL RECOGNISED THAT IN REVENUE CASES REGARD MUST BE HAD TO THE SUBSTANCE OF THE TRANSACTION RATHER THAN TO ITS MERE FORM. IN THE PRESENT CASE DISREGARDING TECHNICALITIES IT IS IMPO SSIBLE TO GET AWAY FROM THE FACT THAT THE BUSINESS IS OWNED AND RUN BY THE ASSESSEE HIMSELF. IN SUCH CIRCUMSTANCES WE ARE OF OPINION TH AT IT IS WHOLLY UNREAL AND ARTIFICIAL TO SEPARATE THE BUSINESS FROM ITS OWNER AND TREAT THEM AS IF THEY WERE SEPARATE ENTITIES TRADIN G WITH EACH OTHER AND THEN BY MEANS OF A FICTIONAL SALE INTRODUCE A F ICTIONAL PROFIT WHICH IN TRUTH AND IN FACT IS NON-EXISTENT. CUT AWA Y THE FICTIONS AND YOU REACH THE POSITION THAT THE MAN IS SUPPOSED TO BE SELLING TO HIMSELF AND THEREBY MAKING A PROFIT OUT OF HIMSELF WHICH ON THE FACE OF IT IS NOT ONLY ABSURD BUT AGAINST ALL CANONS OF MERCANTILE AND IT LAW. AND WORSE. HE MAY KEEP IT AND NOT SHOW A PROFI T. HE MAY SELL IT TO ANOTHER AT A LOSS AND CANNOT BE TAXED BECAUSE HE CANNOT BE COMPELLED TO SELL AT A PROFIT. BUT IN THIS PURELY F ICTIONAL SALE TO HIMSELF HE IS COMPELLED TO SELL AT A FICTIONAL PROF IT WHEN THE MARKET RISES IN ORDER THAT HE MAY BE COMPELLED TO PAY TO G OVERNMENT A TAX WHICH IS ANYTHING BUT FICTIONAL. 11. CONSIDER THIS SIMPLE ILLUSTRATION. A MAN TRADES IN RICE AND ALSO USES RICE FOR HIS FAMILY CONSUMPTION. THE BAGS ARE ALL STORED IN ONE 12 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 GODOWN AND HE DRAWS UPON HIS STOCK AS AND WHEN HE F INDS IT NECESSARY TO DO SO, NOW FOR HIS BUSINESS, NOW FOR H IS OWN USE. WHAT HE KEEPS FOR HIS OWN PERSONAL USE CANNOT BE TAXED H OWEVER MUCH THE MARKET RISES; NOR CAN HE BE TAXED ON WHAT HE GI VES AWAY FROM HIS OWN PERSONAL STOCK, NOR, SO FAR AS HIS SHOP IS CONCERNED, CAN HE BE COMPELLED TO SELL AT A PROFIT. IF HE KEEPS TWO S ETS OF BOOKS AND ENTERS IN ONE ALL THE BAGS WHICH GO INTO HIS PERSON AL GODOWN AND IN THE OTHER THE RICE WHICH IS WITHDRAWN FROM THE GODO WN INTO HIS SHOP, RICE JUST SUFFICIENT TO MEET THE DAY-TO-DAY DEMANDS OF HIS CUSTOMERS SO THAT ONLY A NEGLIGIBLE QUANTITY IS LEFT OVER IN THE SHOP AFTER EACH DAY'S SALES, HIS PRIVATE AND PERSONAL DEALINGS WITH THE BAGS IN HIS PERSONAL GODOWN COULD NOT BE TAXED UNLESS HE SELLS THEM AT PROFIT. WHAT HE CHOOSES TO DO WITH THE RICE IN HIS GODOWN I S NO CONCERN OF THE IT DEPARTMENT PROVIDED ALWAYS THAT HE DOES NOT SELL IT OR OTHERWISE MAKE A PROFIT OUT OF IT. HE CAN CONSUME I T, OR GIVE IT AWAY, OR JUST LET IT ROT. WHY SHOULD IT MAKE A DIFFERENCE IF INSTEAD OF KEEPING TWO SETS OF BOOKS HE KEEPS ONLY ONE ? HOW C AN HE BE SAID TO HAVE MADE AN INCOME PERSONALLY OR HIS BUSINESS A PROFIT, BECAUSE HE USES TEN BAGS OUT OF HIS GODOWN FOR A FEAST FOR THE MARRIAGE OF HIS DAUGHTER ? HOW CAN IT MAKE ANY DIFFERENCE WHETHER T HE BAGS ARE SHIFTED DIRECTLY FROM THE GODOWN TO THE KITCHEN OR FROM THE GODOWN TO THE SHOP AND FROM THE SHOP TO THE KITCHEN, OR FR OM THE SHOP BACK TO THE GODOWN AND FROM THERE TO THE KITCHEN ? AND Y ET, WHEN THE REASONING OF THE LEARNED ATTORNEY-GENERAL IS PUSHED TO ITS LOGICAL CONCLUSION, THE FORM OF THE TRANSACTION IS OF ITS E SSENCE AND IT IS TAXABLE OR NOT ACCORDING TO THE ROUTE THE RICE TAKE S FROM THE GODOWN TO THE WEDDING FEAST. IN OUR OPINION, IT WOULD MAKE NO DIFFERENCE IF THE MAN INSTEAD OF GIVING THE FEAST HIMSELF HANDS O VER THE RICE TO HIS DAUGHTER AS A GIFT FOR THE MARRIAGE FESTIVITIES OF HER SON. 12. THE APPELLANT'S METHOD OF BOOK-KEEPING REFLECTS TH E TRUE POSITION. AS HE MAKES HIS PURCHASES HE ENTERS HIS S TOCK AT THE COST PRICE ON ONE SIDE OF THE ACCOUNTS. AT THE CLOSE OF THE YEAR HE ENTERS THE VALUE OF ANY UNSOLD STOCK AT COST ON THE OTHER SIDE OF THE ACCOUNTS THUS CANCELLING OUT THE ENTRIES RELATING T O THE SAME UNSOLD STOCK EARLIER IN THE ACCOUNTS; AND THEN THAT IS CAR RIED FORWARD AS THE OPENING BALANCE IN THE NEXT YEAR'S ACCOUNTS. THIS C ANCELLING OUT OF THE UNSOLD STOCK FROM BOTH SIDES OF THE ACCOUNTS LE AVES ONLY THE TRANSACTIONS ON WHICH THERE HAVE BEEN ACTUAL SALES AND GIVES THE TRUE AND ACTUAL PROFIT OR LOSS ON HIS YEAR'S DEALIN GS. IN THE SAME WAY, THE APPELLANT HAS REFLECTED THE TRUE STATE OF HIS FINANCES AND GIVEN A TRUTHFUL PICTURE OF THE PROFIT AND LOSS IN HIS BUSINESS BY ENTERING THE BULLION AND SILVER AT COST WHEN HE WIT HDREW THEM FOR A PURELY NON-BUSINESS PURPOSE AND UTILISED THEM IN A TRANSACTION WHICH BROUGHT HIM NEITHER INCOME NOR PROFIT NOR GAI N. 13. THERE IS NO CASE QUITE IN POINT. THE LEARNED ATTORN EY-GENERAL RELIED ON GOLD COAST SELECTION TRUST LIMITED VS. HU MPHREY (H.M. 13 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 INSPECTOR OF TAXES) (1949) 30 TAX CASES 209 (HL) : (1949) 17 ITR SUPPL 19 (HL), BUT THERE THE ASSESSEE RECEIVED A NE W AND VALUABLE ASSET IN EXCHANGE FOR ANOTHER IN THE ORDINARY COURS E OF HIS TRADE. IT WAS HELD THAT HE WAS BOUND TO ACCOUNT FOR THE RECEI PT AT A FAIR MARKET VALUATION, FOR THOUGH THE RECEIPT WAS NOT MO NEY IT WAS CAPABLE OF BEING VALUED IN TERMS OF MONEY. IN THE P RESENT CASE, THE ASSESSEE'S BUSINESS RECEIVED NOTHING IN EXCHANGE FO R THE WITHDRAWAL OF THE ASSETS, NEITHER MONEY NOR MONEY'S WORTH, THEREFORE THE ONLY FAIR WAY OF TREATING THE MATTER WAS TO DO JUST WHAT THE APPELLANT DID, NAMELY TO ENTER THE PRICE AT WHI CH THE ASSETS WERE VALUED AT THE BEGINNING OF THE YEAR SO THAT THE ENT RIES WOULD CANCEL EACH OTHER OUT AND LEAVE THE BUSINESS WITH NEITHER A GAIN NOR A LOSS ON THOSE TRANSACTIONS. THE LEARNED ATTORNEY-GENERAL CONTENDED THAT IF THAT WAS ALLOWED GREAT LOSS WOULD ENSUE TO THE STATE BECAUSE ALL A M AN NEED DO AT THE END OF THE YEAR WOULD BE TO WITHDRAW ALL ASSETS WHICH HAD RISEN IN VALUE AND LEAVE ONLY THOSE WHICH HAD DEPRECIATED AND THUS EITHER SHOW A LOSS OR REDUCE HIS TAXABLE PROFITS. 14 . THIS ARGUMENT CAN ONLY PREVAIL ON THE ASSUMPTION THAT THE STATE CAN TAX POTENTIAL PROFITS BECAUSE, EXCEPT FOR THAT, THE STATE WOULD NEITHER GAIN NOR LOSE IN A CASE OF THIS KIND. HAD T HE ASSETS BEEN LEFT WHERE THEY WERE, THEY WOULD HAVE BEEN VALUED AT THE END OF THE YEAR AS THEY WERE AT THE BEGINNING, AT THE COST PRI CE AND WE WOULD STILL BE WHERE WE ARE NOW. BUT THE ASSUMPTION THAT THERE WOULD BE A GAIN AT SOME FUTURE INDEFINITE DATE IS MERE GUESS W ORK, FOR EQUALLY THERE MIGHT BE LOSS. APART, HOWEVER, FROM THAT THE LEARNED ATTORNEY- GENERAL'S RULE IS EQUALLY CAPABLE OF ABUSE. A MAN C OULD AS EASILY WITHDRAW FROM THE BUSINESS ASSETS WHICH HAD DEPRECI ATED AND ENTER IN HIS BOOKS THE DEPRECIATED MARKET VALUE AND LEAVE AT COST PRICE THE ASSETS WHICH HAD RISEN. 15. THERE ARE TWO CASES WHICH BEAR A SUPERFICIAL RESEM BLANCE TO THIS CASE. THEY ARE INRE, CHOUTHMALGOLAPCHAND (1938 ) 6 ITR 733 (CAL) : TC14R.495 AND IN RE SPANISH PROSPECTING CO. LTD. (1911) 1 CH 92. WE REFRAIN FROM EXPRESSING ANY OPINION ABOUT THEM E SPECIALLY AS THEY APPEAR TO REACH DIFFERENT CONCLUSIONS, BECAUSE THE FACTS ARE NOT THE SAME AND THE QUESTIONS WHICH AROSE ON THE FACTS THERE WERE NOT ARGUED HERE. THEY RAISE MATTERS OF WIDER IMPORT WHI CH WILL REQUIRE CONSIDERATION IN A SUITABLE CASE. THESE CASES WERE NOT CASES OF A BUSINESS OWNED AND RUN BY A SINGLE OWNER AND SO THE FICTION OF TREATING THE BUSINESS AS A SEPARATE ENTITY FROM ITS OWNER ACTUALLY TRADING WITH HIM, WHICH WE ARE ASKED TO APPLY HERE, DOES NOT ARISE. IN THE NEXT PLACE, THE BUSINESSES THERE WERE NOT CO NTINUING AS HERE. 14 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 IN THE CALCUTTA CASE, A PARTNERSHIP WAS WOUND UP AN D THE QUESTION RELATED TO THE VALUATION OF ASSETS CONSISTING OF ST OCKS AND SHARES, ON THE DISSOLUTION. IN THE ENGLISH CASE, A COMPANY WIT H NO FIXED CAPITAL WAS UNDER LIQUIDATION AND THE QUESTION WAS WHETHER THE MARKET VALUE OF CERTAIN DEBENTURES WHICH THE COMPANY HAD P URCHASED OUGHT TO BE BROUGHT INTO THE PROFIT AND LOSS ACCOUN T SO AS TO AUGMENT THE PROFITS ACTUALLY SHOWN IN THE BALANCE-SHEET. TH E COMPANY WISHED TO TREAT THOSE DEBENTURES AS OF NO VALUE AND THUS SHOW A MUCH SMALLER PROFIT THAN WOULD OTHERWISE HAVE BEEN THE CASE. ON THE ANSWER TO THAT QUESTION HUNG THE FATE OF TWO SE RVANTS OF THE COMPANY WHO UNDER THE TERMS OF THEIR AGREEMENT WITH THE COMPANY, COULD ONLY BE PAID THEIR SALARIES OUT OF THE PROFIT S OF THE COMPANY. NEITHER CASE IS, IN OUR OPINION, APPOSITE HERE. 16. THE QUESTIONS REFERRED WERE : '(1) WHETHER, IN THE CIRCUMSTANCES OF THE CASE, ANY INCOME AROSE TO THE ASSESSEE AS A RESULT OF THE TRANSFER OF SHARES AND SILVER BARS TO THE TRUSTEE ? (2) IF THE ANSWER TO QUESTION (1) IS IN THE AFFIRMA TIVE, WHETHER THE METHOD EMPLOYED BY THE AAC AND UPHELD BY THE TRIBUN AL IN COMPUTING THE ASSESSEE'S INCOME FROM THE TRANSFER I S THE PROPER METHOD FOR COMPUTING THE INCOME ?' 17. OUR ANSWER TO THE FIRST QUESTION IS THAT IN THE CI RCUMSTANCES OF THIS CASE NO INCOME AROSE TO THE APPELLANT AS A RES ULT OF THE TRANSFER OF THE SHARES AND SILVER BARS TO THE TRUSTEES. IN V IEW OF THAT, THE SECOND QUESTION DOES NOT ARISE. 8.1 IN THE INSTANT CASE, THERE IS NO REAL INCOME IN TH E HANDS OF THE ASSESSEE AS THE SHARES IN REFERENCE HAVE NOT EI THER SOLD OR TRANSFERRED BY THE ASSESSEE IN THE YEAR UNDER CONSI DERATION. THERE IS NO EXPRESS OR SPECIFIC PROVISION DURING RE LEVANT PERIOD IN THE ACT TO DEAL WITH THE EVENT OF CONVERSION OF STO CK-IN-TRADE INTO INVESTMENT. IN ABSENCE OF SPECIFIC PROVISION, NOTIO NAL INCOME IF ANY, CANNOT BE TAXED IN THE YEAR UNDER CONSIDERATIO N. WE FIND THAT THE LD. CIT(A) HAS FOLLOWED THE RATIO OF THE A BOVE DECISION OF THE HONBLE SUPREME COURT ALONG WITH OTHER DECISION S. IN VIEW OF THE BINDING PRECEDENTS FOLLOWED BY THE LD. CIT(A), WE DO NOT FIND 15 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 ANY ERROR IN THE ORDER OF THE LD. CIT(A) ON THE ISS UE IN DISPUTE, AND THUS, WE UPHOLD THE SAME. ACCORDINGLY, GROUNDS NO. 2 & 2.1 OF THE APPEAL OF THE REVENUE ARE DISMISSED. 9. AS FAR AS GROUND NO. 2 OF THE CROSS OBJECTION OF T HE ASSESSEE IS CONCERNED, WE FIND THAT THE LD. CIT(A) HAS GIVEN DETAILED REASONING FOR NOT CONSIDERING THE CONTENTION OF THE ASSESSEE THAT IT WAS HOLDING THREE SHARES AS INVESTMENT FROM VERY BEGINNING. THE RELEVANT FINDING OF THE LD. CIT(A) IS REPRODUCE D AS UNDER: 5.7 IN VIEW OF THE ABOVE FACTUAL POSITION, I DO NO T FIND MYSELF IN AGREEMENT WITH THE .APPELLANT COMPANY THAT THE SHAR ES OF M/S OSCAR INVESTMENTS LTD., M/S RANBAXY LABORATORIES LT D. AND M/S FORTIS FINANCIAL SERVICES LTD. WERE BEING HELD BY T HE APPELLANT COMPANY AS INVESTMENT PRIOR TO THE DATE OF CONVERSI ON AS ON 1.04.2007. I ALSO DO NOT AGREE WITH THE CLAIM OF TH E APPELLANT COMPANY THAT THE INTENTION BEHIND HOLDING OF THE SH ARES WAS TO KEEP THEM AS LONG TERM INVESTMENTS AS THE APPELLANT COMP ANY HAS NOT FURNISHED ANY CREDIBLE EVIDENCE/ MATERIAL TO SUBSTA NTIATE ITS CLAIM. IT HAS TO BE APPRECIATED THAT THE SHARES IN QUESTIO N WERE BEING HELD BY THE APPELLANT COMPANY AS TRADING ASSETS TO BE EX PLOITED COMMERCIALLY AND THE FACT THAT THE APPELLANT COMPAN Y HAD TO PASS A RESOLUTION ON 02.04.2007 ITSELF SUGGESTS THAT THE S HARES WERE NOT HELD AS INVESTMENTS. AS STATED EARLIER, AS PER THE INCIDENTAL AND ANCILLARY OBJECTS OF THE APPELLANT COMPANY, SHARES COULD BE ACQUIRED AS INVESTMENT AS WELL AS STOCK-IN-TRADE. IN VIEW OF THE AFORESAID, GROUND NOS. 1.1 AND 1.2 ARE BEING REJECTED. 9.1 BEFORE US, THE LEARNED COUNSEL FAILED TO ADDUCE AN Y EVIDENCE OTHER THEN SUBMITTED BEFORE THE LD. CIT(A) TO ESTAB LISH THAT THE SHARES WERE INADVERTENTLY CHARACTERIZED AS A STOCK- IN-TRADE. IN VIEW OF THE REASONING GIVEN BY THE LD. CIT(A), WE D O NOT FIND ANY ERROR IN THE ORDER OF THE LD. CIT(A) ON THE ISSUE I N DISPUTE AND ACCORDINGLY, WE UPHOLD THE SAME. THE CROSS OBJECTIO N NO. 2 OF THE ASSESSEE IS DISMISSED. 16 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 10. THE GROUND NO. 3 OF THE CROSS OBJECTION IS IN RELAT ION TO NOT GIVING ANY FINDING BY THE LD. CIT(A) FOR THE YEAR I N WHICH BUSINESS INCOME SHOULD BE CONSIDERED. IN OUR OPINION, THE GR OUND IS INFRUCTUOUS WHEN THE LD. CIT(A) HAS ALREADY ALLOWED THE GROUND IN FAVOUR OF THE ASSESSEE. ACCORDINGLY, THE CROSS O BJECTION NO. 3 OF THE ASSESSEE IS DISMISSED. 11. THE GROUND NO. 3 AND 3.1 OF THE APPEAL RELATES TO DISALLOWANCE OF 3,56,96,487/-UNDER SECTION 14A OF THE ACT MADE BY ASSESSING OFFICER, WHICH HAS BEEN RESTRICTED BY THE LD. CIT(A) TO 7,04,000/-. THE GROUND NO. 1 OF THE CROSS OBJECTIO N OF THE ASSESSEE IS ALSO RELATED TO THE DISALLOWANCE UNDER SECTION 14A OF THE ACT, WHEREIN ACCORDING TO THE ASSESSEE THE DISA LLOWANCE UNDER RULE 8D(2)(III) OF RULES, CANNOT EXCEED THE AMOUNT EXPENDITURE ACTUALLY INCURRED BY THE ASSESSEE. 11.1 THE BRIEF FACTS QUA THE ISSUE IN DISPUTE ARE THAT THE ASSESSEE MADE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D OF INCOME-TAX RULES, 1962 AT 1,77,79,925/-. THE ASSESSEE FOLLOWED DIRECT NEXUS METHOD IN ACCORDANCE WITH RULE 8D(2)(I ) OF INCOME TAX RULES, 1962 AND MADE ENTIRE DISALLOWANCE UNDER RULE 8D(2)(I) ONLY. THIS DISALLOWANCE MADE BY THE ASSESSEE WAS NO T FOUND TO BE CORRECT BY THE ASSESSING OFFICER. ACCORDING TO THE ASSESSING OFFICER, THE ASSESSEE COMPANY WAS MANAGING ITS BUSI NESS WITH THE HELP OF BORROWED FUNDS AND MADE INVESTMENT IN S HARES OF 33.80 CRORES, THE INCOME FROM WHICH WOULD NOT FORM PART OF THE TAXABLE INCOME, AND HE ACCORDINGLY NOT BEING SATISF IED WITH THE CLAIM OF THE ASSESSEE, INVOKED PROVISIONS OF RULE 8 D OF INCOME TAX RULES AND COMPUTED THE DISALLOWANCE AT 5,34,76,412/- AND AFTER REDUCING THE SUMO DISALLOWANCE BY THE ASSESSE E, HE MADE 17 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 ADDITION FOR 3,56,96,487/-. THE DISALLOWANCE COMPUTED BY THE ASSESSING OFFICER IS REPRODUCED AS UNDER: TOTAL RS.5,34,76,412/- LESS: DISALLWOANCE U/S 14A ADDED BY ASSESSEE HIMSEL F IN COMPUTATION OF INCOME RS.1,77,79,925/- FURTHER ADDITION ON ACCOUNT OF DISALLOWANCE U/S 14 A RS.3,56,96,487/- 11.2 BEFORE THE LD. CIT(A) THE ASSESSEE SUBMITTED THAT DISALLOWANCE FOR EXPENSES OF 1,77,79,925 /- INCLUDING INTEREST EXPENSES DIRECTLY RELATED TO INVESTMENT WAS ALREADY MADE BY THE ASSESSEE, THUS NO DISALLOWANCE COULD BE MADE TOWARD S INTEREST EXPENDITURE INDIRECTLY RELATED TO INVESTMENT IN SHA RES YIELDING EXEMPT INCOME. THE LD. CIT(A), AFTER CONSIDERING SU BMISSION OF THE ASSESSEE, WAS OF THE VIEW THAT NO DISALLOWANCE UNDER RULE 8D(2)(II)B RELATED TO INDIRECT INTEREST EXPENDITURE WAS NOT REQUIRED BUT HE JUSTIFIED DISALLOWANCE UNDER RULE 8D(2)(III) AMOUNTING TO 15,48,353/- IN THE CASE OF THE ASSESSEE. IT WAS CON TESTED BY THE ASSESSEE THAT TOTAL EXPENDITURE OF 8,43,942 /- WAS ONLY CLAIMED BY THE ASSESSEE, THEREFORE DISALLOWANCE CANNOT BE M ADE MORE 18 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 THAN THAT. HOWEVER, ACCORDING TO THE LD. CIT(A), ON CE THE RULE 8D HAS BEEN INVOKED, THE DISALLOWANCE HAS TO MADE ACC ORDING TO THE RULES AND THEREFORE TOWARDS THE DISALLOWANCE UNDER 80D(2)(III), HE COMPUTED THE DISALLOWANCE OF 15,48,353/- AND SUSTAINED THE DISALLOWANCE TO THE EXTENT OF THE 7.04 LAKHS OUT OF THE DISALLOWANCE OF 3,56,96,487 MADE BY THE ASSESSING OFFICER. 11.3 THE LEARNED DR RELIED ON THE ORDER OF THE ASSESS ING OFFICER AND SUBMITTED A LIST OF THE DECISIONS IN SUPPORT OF THE ORDER OF THE ASSESSING OFFICER. THE LIST OF THE DECISIONS IS REP RODUCED AS UNDER: 1 MAXOPP INVESTMENT LTD. VS CIT [2018] 91 TAXMANN.C OM 154 (SC) 2. INDIABULLS FINANCIAL SERVICES LTD. VS DCIT [2016 ] 76 TAXMANN.COM 268 (DELHI) 3. GODREJ & BOYCE MANUFACTURING COMPANY LTD. VS DCI T [2017] 81 TAXMANN.COM 111 (SC)/[2017] 247 TAXMAN 361(SC)/[201 7] 394 ITR 449 (SC)/[2017] 295 CTR 121 (SC) (COPY ENCLOSED) 4. PUNJAB TRACTORS LTD VS CIT [2017-TIQL-353-HC-P&H -IT] 5. AVON CYCLES LTD VS CIT F20151 53 TAXMANN.COM 297 (PUNJAB & HARVANA)/[2015] 228 TAXMAN 368 (PUNJAB & HARYANA)(M AG.) 6. NAHAR SPINNING MILLS LTD. VS CIT [2017] 82 TAXMA NN.COM 154 (PUNJAB & HARYANA) 7. DY. CIT V. VIRAI PROFILES LTD. 156 ITD 721 46/ I TR 626/177 TTJ 466 8. NYK LINE INDIA LTD. V. ACIT [175 TTJ 180/132 DTR 7] 9. SUPER AUTO FORGE (P.) LTD. VS. ACIT (157 JTD 467 ) 10. VIPIN MALIK VS.ACIT (45 ITR 589) 11.4 THE LEARNED COUNSEL OF THE ASSESSEE, ON THE OTHER HAND, RELIED ON THE SUBMISSION MADE BEFORE THE LD. CIT(A) AND 19 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 SUBMITTED THAT DISALLOWANCE UNDER RULE 8D(2)(III) O F THE INCOME TAX RULES, 1962, FOR ADMINISTRATIVE EXPENSES CANNOT EXCEED THE TOTAL EXPENSES CLAIMED IN THE PROFIT AND LOSS ACCOU NT. THE LD. COUNSEL REFERRED TO PAGE 1 OF THE PAPER-BOOK AND SU BMITTED THAT DURING THE YEAR THE ASSESSEE HAS SHOWN EXEMPTED INC OME FROM DIVIDENDS OF 10, 35, 890 UNDER SECTION 10(34) OF THE ACT .HE RELIED ON THE DECISION OF THE HONBLE DELHI HIGH CO URT IN THE CASE OF JOINT INVESTMENT PRIVATE LIMITED REPORTED IN 372 ITR 694 (DEL) AND SUBMITTED THAT DISALLOWANCE OF EXPENSES UNDER S ECTION 14A SHOULD BE LIMITED TO THE EXEMPTED INCOME ONLY. 12. WE HAVE HEARD THE RIVAL SUBMISSION OF THE PARTIES AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND TH AT THE ASSESSEE HAS DISPUTED THE DISALLOWANCE OF 7.04 LAKHS SUSTAINED BY THE LD. CIT(A) FOR THE ADMINISTRATIVE EXPENSES U NDER RULE 8D(2)(III) OF THE INCOME-TAX RULES, 1962. THE REVEN UE, ON THE OTHER HAND, HAS DISPUTED THE RELIEF ALLOWED BY THE LD. CIT(A) TOWARDS DISALLOWANCE UNDER RULE 8D(2)(II) OF THE RU LES AND RELIEF ALLOWED FOR DISALLOWANCE UNDER RULE 8D(2)(III) OF T HE INCOME-TAX RULES, 1962. AS FAR AS DELETION OF DISALLOWANCE UND ER RULE 8D(2)(II) IS CONCERNED, THE LD. CIT(A) HAS MADE DETAILED ANAL YSIS OF THE MONEY BORROWED AND UTILISATION TOWARDS THE INVESTME NT, WHICH IS REPRODUCED AS UNDER: 6.5 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MAD E ON BEHALF OF THE APPELLANT COMPANY AND THE FINDINGS RECORDED BY THE LD. AO. ON CONSIDERATION I FIND THAT OUT OF TOTAL DISALLOWANCE OF RS. 53476412/- WORKED OUT BY THE LD .AO IN TERMS OF CLAUSES (I), ( II) AND (III) OF SUB-RULE (2) OF RULE 8D, A DISALLOWANCE OF RS. 45593493/- HA S BEEN CALCULATED IN TERMS OF CLAUSE (II) OF SUB-RULE (2) OF RULE 8D ON THE GROUND THAT THE APPELLANT COMPANY HAS NOT BEEN ABLE TO EXPLAIN THE SOURCE OF OPENING INVESTMENT OF RS. 281351500/- BROUGHT FORWARD AS ON 01.04.2007. THEREFORE, IN ORDER TO FIND OUT THE IMMEDIATE SOURC E OF INVESTMENT OF 20 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 OPENING INVESTMENT OF RS. 281351500/- , THE LD. COU NSEL WAS ASKED TO SUBMIT THE BREAKUP OF THE AFORESAID INVESTMENT ALON G WITH IMMEDIATE SOURCES THEREOF. IN RESPONSE TO THE AFORESAID, A WR ITTEN REPLY HAS BEEN FILED BY THE LD. COUNSEL FOR THE APPELLANT, VIDE HI S LETTER DATED 29.04.2011 AS UNDER:- KINDLY REFER TO OUR DISCUSSIONS HELD ON 27TH APRIL, 2011 IN CONNECTION WITH THE CAPTIONED APPEAL. AS DESIRED DU RING THE COURSE OF PROCEEDINGS, WE WISH TO SUBMIT AS UNDER: 1. THE INVESTMENTS IN THE CASE OF APPELLANT AS ON 1ST APRIL, 2007 (I.E. AT THE BEGINNING OF THE YEAR UNDER REFERENCE) WERE TO THE TUNE OF RS. 28.14 CRS. (PLEASE SEE PAGE 78 OF PAPER BOOK). THE SAME WERE MAINLY ACQUIRED IN THE YEARS ENDED 31ST MARCH, 2007 AND 31ST MARCH, 2006. THE DETAILS OF ACQUISITION AND SOURCE THEREOF IS GIVEN AS UNDER: I) INVESTMENTS MADE IN Y.E.31.03.2007 (A.Y. 2007-0 8) - OPTIONALLY CONVERTIBLE DEBENTURES OF - 5.00 CRS. M/S. DELTA AROMATICS PVT. LTD. - OPTIONALLY CONVERTIBLE DEBENTURES OF - 10.00 CRS. M/S. OSCAR PHARMACEUTICALS PVT. LTD. --------- 15. 00 CRS. [THE AFORESAID INVESTMENTS WERE ACQUIRED DIRECTLY O UT OF 0% OCDS AMOUNTING TO RS. 40CRS. RAISED FROM M/S. SHIMAL RES EARCH LABORATORIES LTD. - AS DULY EXPLAINED DURING THE CO URSE OF ASSESSMENT PROCEEDINGS FOR THE ASSTT. YEAR 2007-08 -PLEASE REF ER PAGES 56 TO 66 (RELEVANT PAGE - 66) OF PAPER BOOK.] (II) INVESTMENTS MADE IN Y.E.31.03.2006 (A.Y.2006-07) - OPTIONALLY CONVERTIBLE DEBENTURES OF - 9.90 CRS. M/S. ORLANDO TRADING COMPANY [THE AFORESAID INVESTMENTS WERE MADE DIRECTLY PUT O F LOAN TAKEN FROM M/S.OSCAR PHARMACEUTICALS PVT. LTD. COPY OF BA NK STATEMENT ATTACHED AT PAGE 68 OF PAPER BOOK. THE SAME WAS DUL Y EXPLAINED DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR THE ASSTT. YEAR 2006- 07. THE SAID LOAN WAS REPAID TO M/S. OSCAR PHARMACE UTICALS PVT. LTD. ON 2ND MARCH, 2007 OUT OF 0% OCDS AMOUNTING TO RS. 40 CRS. RAISED FROM M/S. SHIMAL RESEARCH LABORATORIES LTD.- PLEASE REFER PAGE 65 OF PAPER BOOK] (III) REMAINING INVESTMENTS MADE IN EARLIER YEARS 3.24 CRS. [THE SAID INVESTMENTS WERE MADE IN EARLIER YEARS OU T OF BORROWED FUNDS/LOANS AND THE SAID LOAN OF RS. 3.24 CRS. WAS REPAID OUT OF 0% OCDS AMOUNTING TO RS. 40 CRS. RAISED FROM M/S. SHI MAL RESEARCH LABORATORIES LTD. IN MARCH, 2007] TOTAL - 28.14 CRS. 2. ON PERUSAL OF THE YEAR-WISE DETAILS AS ABOVE, YOUR HONORS WOULD KINDLY OBSERVE THAT THE OPENING INVESTMENTS (I.E. O N 1ST APRIL, 2007) WERE OSTENSIBLY WITHOUT THE BURDEN OF INTEREST COST AS THE APPELLANT 21 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 HAD EITHER ACQUIRED THEM DIRECTLY OUT OF 0% OCDS O F RS. 40 CRS. RAISED IN FEBRUARY/MARCH, 2007 OR HAD UTILIZED THE 0% OCDS AMOUNT OF RS. 40 CRS. FOR REPAYMENT OF LOANS TAKEN EARLIER FOR MAKING SUCH INVESTMENTS. HOWEVER, AS DISCUSSED, THE DISALLOWANCE OF DIRECT I NTEREST COST ON INVESTMENTS MADE DURING THE YEAR UNDER CONSIDERA TION OUT OF BORROWINGS MADE, WAS DULY MADE IN THE STATEMENT OF TAXABLE INCOME IN TERMS OF CLAUSE (I) OF SUB-RULE (2) OF RU LE 8D (PLEASE REFER PAGE 42 OF PAPER BOOK). 3. IN VIEW OF THE ABOVE, IT IS RESPECTFULLY SUBMITTED THAT SINCE THE APPELLANT HAD SUO MOTO WORKED OUT THE DISALLOWANCE OF INTEREST COST AS PER DIRECT NEXUS METHOD, AS CONSISTENTLY FOLLOWE D IN THE PAST AND AS DULY ACCEPTED BY THE DEPARTMENT IN THE SCRUTINY ASSESSMENTS (COPIES OF ORDERS ENCLOSED AT PAGE 30 & 31 OF PAPER BOOK), THE QUESTION OF APPLICABILITY OF CLAUSE (II) OF SUB-RUL E (2) OF RULE 8D SHOULD NOT ARISE. WE THUS HUMBLY SUBMIT THAT THE LD. AO BE DIRECTED T O KINDLY ACCEPT THE APPELLANTS DIRECT NEXUS METHOD OF DISALLOWANCE OF INTEREST COST IN TERMS OF CLAUSE (I) OF SUB-RULE (2) OF RULE 8D AND THE ADDITIONALDISALLOWANCE OF INTEREST COST AMOUNTING T O RS. 3,49,92,076/- MADE BY THE LD. AO BE DELETED. 6.6 ALONG WITH THE AFORESAID REPLY, THE LD. COUNSEL HAS ALSO FILED COPY OF BANK STATEMENT MAINTAINED WITH STANDARD CHARTERE D BANK EVIDENCING THE RECEIPT OF 0% OCDS RAISED FROM M/S S HIMAL RESEARCH LABORATORY LTD. UTILIZED FOR INVESTMENT IN OCDS OF M/S DELTA AROMATICS (P) LTD. -RS. 5 CRS. AND OCDS OF M/S OSCA R PHARMACEUTICALS (P) LTD. - RS. 10 CRS. AS ALSO REPA YMENT OF LOAN OF RS. 99000000/- RAISED FOR PURCHASE OF OCDS OF M/S O RLANDO TRADING COMPANY WORTH RS. 9.90 CRS. AND OTHER LOAN OF RS. 3.24 CRS. RAISED FOR INVESTMENTS IN EARLIER YEARS. CONFI RMATION OF M/S SHIMAL RESEARCH LABORATORY LTD. AND COPY OF ACCOUNT OF M/S RELIGARE SECURITIES LTD. HAVE ALSO BEEN FIND. 6.7 IN VIEW OF THE AFORESAID, IT MAY BE SEEN THAT T HE OPENING INVESTMENT OF RS. 281351500/- HAS BEEN DULY EXPLAINED BY THE L D. COUNSEL. THE CASH FLOW STATEMENT FILED BY THE LD .COUNSEL CL EARLY ESTABLISHES THAT OUT OF OPENING INVESTMENTS OF RS. 28.14 CRS., INVESTMENT OF RS. 15 CRS. IN OCDS OF M/S DELTA AROMATICS (P) LTD. AND M/S OSCAR PHARMACEUTICALS (P) LTD. WAS DIRECTLY LINKED WITH T HE OCDS OF RS. 40 CRS. RAISED FROM M/S SHIMAL RESEARCH LABORATORY LTD . FURTHER, INVESTMENT OF RS. 9.90 CRS. IN OCDS OF M/S ORLANDO TRADING COMPANY, THOUGH WAS MADE OUT OF LOANS OF IDENTICAL AMOUNT RAISED FROM M/S OSCAR PHARMACEUTICALS (P) LTD., THE SAME W AS REPAID ON 2ND MARCH, 2007 OUT OF 0% OCDS OF M/S SHIMAL RESEAR CH LABORATORY LTD. SIMILARLY, BALANCE LOANS OF RS. 3.2 4 CRS. RAISED IN EARLIER YEARS FOR INVESTMENT WERE ALSO REPAID OUT O F 0% OCDS M/S SHIMAL RESEARCH LABORATORY LTD. THEREFORE, I DO NOT FIND ANY MERIT IN THE FINDINGS RECORDED BY THE AO THAT THE APPELLA NT COMPANY FAILED TO ESTABLISH NEXUS' BETWEEN THE 0% OCDS OF R S. 40 CRS. 22 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 RAISED FROM M/S SHIMAL RESEARCH LABORATORY LTD. AND INVESTMENT OF RS. 281351500/- BROUGHT FORWARD AS ON 01.04.2007 . ACCORDINGLY, I HOLD THAT NO DISALLOWANCE IN TERMS O F CLAUSE (II) OF SUB-RULE (2) OF RULE 8D WAS CALLED FOR IN THE CASE OF THE APPELLANT COMPANY. 12.1 IN VIEW OF THE DETAILED ANALYSIS, WE AGREE WITH TH E FINDING OF THE LD. CIT(A), THAT NO DISALLOWANCE IS REQUIRED FO R INDIRECT EXPENSES FOR EARNING EXEMPT INCOME, WHEN THE ASSESS EE HAS FOLLOWED DIRECT NEXUS METHOD AND ALREADY MADE DISAL LOWANCE OF 1,77,79,925/- UNDER RULE 8D(2)(I) OF THE INCOME-TAX RULES, 1962. 12.2 AS REGARD TO THE DISALLOWANCE UNDER RULE 8D(2)(III ) OF THE INCOME TAX RULES, 1962 IS CONCERNED, WE FIND THAT I N VIEW OF THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF JOINT INVESTMENT PRIVATE LIMITED (SUPRA), DISALLOWA NCE TOWARDS ADMINISTRATIVE EXPENSES CANNOT BE EXCEEDED THE EXEM PTED INCOME. THE RELEVANT PARAGRAPH OF THE DECISION IS R EPRODUCED AS UNDER: 9. IN THE PRESENT CASE, THE AO HAS NOT FIRSTLY DIS CLOSED WHY THE APPELLANT/ASSESSEE'S CLAIM FOR ATTRIBUTING `2,97,44 0/- AS A DISALLOWANCE UNDER SECTION 14A HAD TO BE REJECTED. TAIKISHA SAYS THAT THE JURISDICTION TO PROCEED FURTHER AND DETERM INE AMOUNTS IS DERIVED AFTER EXAMINATION OF THE ACCOUNTS AND REJEC TION IF ANY OF THE ASSESSEE'S CLAIM OR EXPLANATION. THE SECOND ASPECT IS THERE APPEARS TO HAVE BEEN NO SCRUTINY OF THE ACCOUNTS BY THE AO - AN ASPECT WHICH IS COMPLETELY UNNOTICED BY THE CIT (A) AND TH E ITAT. THE THIRD, AND IN THE OPINION OF THIS COURT, IMPORTANT ANOMALY WHICH WE CANNOT BE UNMINDFUL IS THAT WHEREAS THE ENTIRE TAX EXEMPT INCOME IS `48,90,000/-, THE DISALLOWANCE ULTIMATELY DIRECTED WORKS OUT TO NEARLY 110% OF THAT SUM, I.E., `52,56,197/-. BY NO STRETCH OF IMAGINATION CAN SECTION 14A OR RULE 8D BE INTERPRET ED SO AS TO MEAN THAT THE ENTIRE TAX EXEMPT INCOME IS TO BE DISALLOW ED. THE WINDOW FOR DISALLOWANCE IS INDICATED IN SECTION 14A, AND I S ONLY TO THE EXTENT OF DISALLOWING EXPENDITURE 'INCURRED BY THE ASSESSEE IN RELATION TO THE TAX EXEMPT INCOME'. THIS PROPORTION OR PORTION OF THE 23 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 TAX EXEMPT INCOME SURELY CANNOT SWALLOW THE ENTIRE AMOUNT AS HAS HAPPENED IN THIS CASE. 12.3 IN THE CASE, THE DISALLOWANCE UNDER RULE 8D(2)(I II) HAS BEEN COMPUTED BY THE AO AT RS. 15,48,353/-. THE LD. CIT( A), HOWEVER, RESTRICTED THE DISALLOWANCE TO RS.7.04 LAKHS OBSERV ING AS UNDER: 6.8 AS REGARDS, DISALLOWANCE AS PER CLAUSE (III) O F SUB-RULE (2) OF RULE 8D AMOUNT INTO RS. 1548353/- MADE ON ACCOUNT O F OTHER EXPENSES, THE GRIEVANCE OF THE APPELLANT IS THAT AF TER TAKING INTO ACCOUNT THE DISALLOWANCE OF RS. 25.72 LACS, ONLY EX PENDITURE OF RS. 8.44 WAS LEFT TO BE CONSIDERED IN TERMS OF SECTION 14A OF THE IT ACT, 1961. THEREFORE, IT IS ARGUED THAT THE DISALLOWANCE AS PER CLAUSE (III) OF SUB-RULE (2) OF RULE 8D SHOULD HAVE BEEN RESTRIC TED TO THE ACTUAL EXPENDITURE CLAIMED BY THE APPELLANT COMPANY. 6.9 HOWEVER, ON A CAREFUL CONSIDERATION, I FIND THA T THE PROVISIONS OF RULE 8D ARE APPLICABLE TO THE FACTS OF THE PRESENT AY AND THE AO WAS UNDER OBLIGATION TO WORK OUT THE DISALLOWANCE S TRICTLY AS PER THE MECHANISM PROVIDED IT UNDER THE AFORESAID RULE. I A M IN AGREEMENT WITH THE APPELLANT, COMPANY THAT THE DISALLOWANCE O F AN AMOUNT WHICH IS GREATER THAN THE ACTUAL EXPENDITURE MAY CA USE GENUINE HARDSHIP TO THE TAX PAYERS. HOWEVER, IN MATTERS OF TAXATION STATUTES, THE REVENUE AUTHORITIES ARE OBLIGED TO EXECUTE THE PROVISIONS OF LAW STRICTLY AND SHOULD NOT EMPLOYEE ANY INTERPRETATION OF THEIR OWN. THEREFORE, THE DISALLOWANCE OF RS.1548353/- MADE BY THE AO IS IN ORDER AND THE SAME IS BEING SUSTAINED. IN VIEW OF T HE AFORESAID, OUT OF TOTAL DISALLOWANCE OF RS.25696487/-, DISALLOWANC E TO THE EXTENT OF RS. 7.04 LACS IS ONLY BEING SUSTAINED. THE AO IS DIRECTED TO GRANT CONSEQUENTIAL RELIEF TO THE APPELLANT COMPANY. 12.4 SINCE IN THE CASE OF THE ASSESSEE THE DIVIDEND INCO ME EARNED IS OF RS.10,35,890/-, FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT IN JOINT INVESTMENT PRIVATE LTD. ( SUPRA), WE RESTRICT THE DISALLOWANCE OF ADMINISTRATIVE EXPENSE S TO RS.10,35,890/-. 13. IN THE RESULT, THE GROUND NOS. 3 AND 3.1 OF THE AP PEAL OF REVENUE IS PARTLY ALLOWED, WHEREAS THE GROUND NO. 1 OF THE CROSS OBJECTION OF ASSESSEE IS DISMISSED. 24 ITA NO.3587/DEL/2011 & C.O. NO. 299/DEL/2011 14. TO SUM UP, THE APPEAL OF THE REVENUE AND THE CROSS OBJECTION OF THE ASSESSEE BOTH ARE PARTLY ALLOWED. ORDER IS PRONOUNCED IN THE OPEN COURT ON 28 TH JANUARY, 2020. SD/- SD/- (BHAVNESH SAINI) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 28 TH JANUARY, 2020. RK/-(D.T.D.) COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI