Kalyani Steels Ltd., V. Joint Commissioner of Income-tax,

ITA 441/PUN/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 7454 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 13-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Earning of tax free income; Cost of acquisition
• Section: 143(3); 14A; 115JB

Judgement Text

] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO.441/PUN/2015 [ [ / ASSESSMENT YEAR : 2011-12 KALYANI STEELS LIMITED, MUNDHWA, PUNE 411 036. PAN : AAACK7315D. . / APPELLANT V/S JOINT COMMISSIONER OF INCOME TAX, RANGE 11, PMT BUILDING, SWARGATE, PUNE 411036. . / RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK. REVENUE BY : SHRI AJAY MODI. / ORDER PER ANIL CHATURVEDI, AM : THIS APPEAL FILED BY THE ASSESSEE IS EMANATING OUT OF THE ORDER OF COMMISSIONER OF INCOME TAX (A) I, PUNE DT.30.09.2014 FOR THE ASSESSMENT YEAR 2011-12. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER :- 2.1 ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE BUSINESS OF MANUFACTURING OF STEEL AND STEEL BASED PRODUCTS, FORGINGS AND / DATE OF HEARING : 11.07.2017 / DATE OF PRONOUNCEMENT: 20.09.2017 2 AUTOMOTIVE COMPONENTS. ASSESSEE ELECTRONICALLY FILED ITS RETURN OF INCOME FOR A.Y. 2011-12 ON 28.09.2011 DECLARING TOTAL INCOME OF RS.65,64,46,675/-. THE CASE WAS SELECTED FOR SCRUTINY AND THEREAFTER ASSESSMENT WAS FRAMED U/S 143(3) OF THE ACT VIDE ORDER DT.04.02.2014 AND THE TOTAL INCOME AS PER REGULAR PROVISIONS OF THE ACT WERE DETERMINED AT RS.66,02,59,180/- AND BOOK PROFIT U/S 115JB WAS DETERMINED AT RS.64,61,65,540/-. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD.CIT(A), WHO VIDE ORDER DT.30.09.2014 (IN APPEAL NO.PN/CIT(A)- I/JT. CIT RG.11/PN/422/2013-14) DISMISSED THE APPEAL OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF LD.CIT(A) ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS : 1. ON THE FACTS OF THE CASE AND IN LAW, THE LEARNED LD.CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF AN ADDITIONAL AMOUNT OF RS.38,12,500/- (OVER AND ABOVE OF RS.5,00,000/- DISALLOWED BY THE APPELLANT COMPANY IN ITS STATEMENT OF TOTAL INCOME) AS EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME U/S 14A BY APPLYING RULE 8D WHILE ASSESSMENT TOTAL INCOME AS PER REGULAR PROVISIONS OF THE INCOME TAX ACT, 1961 AND BOOK PROFIT U/S 115JB OF THE INCOME TAX ACT, 1961. 2. ON THE FACTS OF THE CASE AND IN LAW, THE LEARNED LD.CIT(A) FAILED TO APPRECIATE THAT THE LEARNED ASSESSING OFFICER HAD NOT RECORDED ANY SATISFACTION IN THE ASSESSMENT ORDER ABOUT THE CORRECTNESS OR OTHERWISE OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR AND HENCE, THERE WAS NO REASON TO APPLY THE PROVISIONS OF RULE 8D FOR MAKING THE DISALLOWANCE U/S 14A AND ACCORDINGLY, THE ENTIRE ADDITION MADE OF RS.38,12,500/- MAY KINDLY BE DELETED . 3. BOTH THE GROUNDS BEING INTER-CONNECTED ARE CONSIDERED TOGETHER. 3 4. AO ON PERUSING THE DETAILS FILED BY THE ASSESSEE NOTICED THAT ASSESSEE HAD CLAIMED EXEMPT INCOME OF RS.4,40,17,236/- U/S 10(34)/10(35) OF THE ACT AND HAD MADE SUO MOTU DISALLOWANCE OF RS.5,00,000/- U/S 14A OF THE ACT BEING EXPENSES RELATED TO EARN EXEMPT INCOME. THE ASSESSEE WAS ASKED TO SUBMIT THE COMPUTATION OF DISALLOWANCE U/S 14A OF THE ACT. THE ASSESSEE FURNISHED THE WORKING OF DISALLOWANCE U/S 14A ACCORDING TO WHICH THE DISALLOWANCE WAS WORKED OUT AT RS.43,12,500/-. AO ON THE BASIS OF WORKING FURNISHED BY THE ASSESSEE AND AFTER GRANTING THE CREDIT OF SUO MOTU AMOUNT DISALLOWANCE OF RS.5,00,000/- MADE A NET DISALLOWANCE OF RS.38,12,500/- U/S 14A OF THE ACT. THE DISALLOWANCE U/S 14A WAS ALSO ADDED TO BOOK PROFIT WHILE WORKING OUT THE TAX U/S 115JB OF THE ACT. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD.CIT(A), WHO UPHELD THE ORDER OF AO BY HOLDING AS UNDER : 4.2 THE CONTENTIONS PUT FORTH BY THE APPELLANT ARE CAREFULLY EXAMINED WITH REFERENCE TO THE FACTS OF THE CASE AND THE LEGAL POSITION UNDER SEC.14A AS APPLICABLE TO THE YEAR UNDER APPEAL. THERE IS NO DISPUTE TO THE FACT THAT THE APPELLANT HAS RECEIVED AND DECLARED EXEMPT DIVIDEND INCOME OF RS. 36,97,236/- ON MUTUAL FUNDS AND RS.4,03,20,000/- ON PREFERENCE SHARES OF KALYANI INVESTMENT CO. LTD. IN THE YEAR UNDER CONSIDERATION. THE APPELLANT ON ITS OWN HAS MADE DISALLOWANCE OF RS. 5,00,000/- IN RELATION TO SUCH EXEMPT INCOME IN THE COMPUTATION OF TOTAL INCOME FILED WITH THE RETURN OF INCOME. THE CONTENTION OF THE APPELLANT IN THIS REGARD IS THAT THE APPELLANT HAS DISALLOWED RS.5,00,000/- SUO MOTO TOWARDS EXPENDITURE INCURRED TO EARN THE EXEMPTED INCOME AND THEREFORE NO FURTHER DISALLOWANCE IS WARRANTED U/S.14A. 4.2.1 IN THE PRESENT CASE, HAVING REGARD TO THE COMPOSITE ACCOUNTS/ACTIVITIES MAINTAINED /CARRIED OUT BY THE APPELLANT AND SUBSTANTIAL EXPENDITURE INCURRED ON ACCOUNT OF SALARY (RS, 27.36 CRS.), LEGAL & PROFESSIONAL CHARGES (RS. 1.77 CR), MISCELLANEOUS EXPENSES (RS. 9.98 CRS) AND INTEREST (RS. 18.09 CRS) DURING THE YEAR, THE AO WAS NOT SATISFIED WITH THE 4 CLAIM OF THE APPELLANT THAT EXPENDITURE OF RS. 5,00,000/- WAS ONLY INCURRED IN RELATION TO EXEMPT INCOME OF RS. 4.40 CRS. THEREAFTER, THE ASSESSING OFFICER ASKED THE APPELLANT TO EXPLAIN AS TO WHY DISALLOWANCE OF EXPENDITURE IN RELATION TO THE EXEMPT INCOME SHOULD NOT BE MADE AND THE AO NOT BEING CONVINCED WITH THE EXPLANATION OF THE APPELLANT INVOKED RULE 80, WHICH IS NOTHING BUT AN IMPLIED RECORDING OF SATISFACTION AS ENVISAGED UNDER SUB-SECTION (2) OF SECTION 14(A). A CAREFUL READING OF THE PROVISIONS OF SECTION 14A(2) WOULD SHOW THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME, IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THIS SECTION NOWHERE STATES THAT THE SATISFACTION NEEDS TO BE RECORDED IN WRITING. FURTHER, ON CAREFUL PERUSAL OF THE BALANCE SHEET FOR THIS YEAR FILED BY THE APPELLANT IN THE COURSE OF PRESENT PROCEEDINGS, IT IS NOTICED THAT THE APPELLANT HOLDS SUBSTANTIAL INVESTMENTS TO THE EXTENT OF RS.83.24 CRORES IN SHARES AND DEBENTURES OF VARIOUS COMPANIES. IT IS ALSO NOTICED THAT MUTUAL FUNDS OF THE VALUE OF RS.6 CRS. WERE REDEEMED/SOLD DURING THE YEAR. BESIDES, AS PER SCHEDULE 6. OF THE BALANCE SHEET FOR THE YEAR, THE APPELLANT PURCHASED AND SOLD THE FOLLOWING INVESTMENTS DURING THE YEAR: PARTICULARS NO. OF UNITS PURCHASE VALUE (RS.) LICMF LIQUID FUND DAILY DIVIDEND PLAN 43,948,753 482,500,000 LICMF SAVING PLUS FUND DAILY DIVIDEND PLAN 92,919,533 927,061,702 HDFC CASH MANAGEMENT FUND SAVING PLAN DAILY DIVIDEND REINVESTMENT 820,500,000 820,500,000 HDFC CASH MANAGEMENT FUND TREASURY ADVANTAGE PLAN WHOLESALE DAILY DIVIDEND REINVESTMENT 129,271,351 433,522,658 PRUDENTIAL ICICI INSTITUTIONAL LIQUID PLAN SUPER INSTITUTIONAL DAILY DIVIDEND 1,49,871 115,000,000 ICICI PRUDENTIAL FLEXIBLE INCOME PLAN PREMIUM DAILY DIVIDEND 1,324,715 140,013,057 BARODA PIONEER TREASURY ADVANTAGE FUND INSTITUTIONAL DAILY DIVIDEND PLAN 2,949,064 29,500,000 UTI TREASURY ADVANTAGE FUND INSTITUTIONAL PLAN DAILY DIVIDEND 130,045 130,007,532 UTI LIQUID CASH PLAN INSTITUTIONAL DAILY INCOME OPTION RE-INVESTMENT 63,768 65,000,000 4.2.2 FURTHERMORE, AS PER NOTE NO.5 OF NOTES FORMING PART OF ANNUAL ACCOUNTS, LONG TERM INVESTMENTS ARE VALUED AT COST OF ACQUISITION LESS DIMINUTION IN THE VALUE, IF DIMINUTION IS OTHER THAN TEMPORARY IN NATURE IN RESPECT OF SUCH INVESTMENT. CURRENT INVESTMENTS ARE VALUED AT COST OF ACQUISITION LESS DIMINUTION IN THE VALUE AT THE CLOSE OF THE YEAR, IF REALIZABLE VALUE IS LOWER THAN CARRYING COST. ALL THESE NOTES IN THE 5 ACCOUNTS CLEARLY INDICATES THAT (A) MAINTAINING OR CONTINUING WITH EXISTING PORTFOLIO OF INVESTMENTS B) DECIDING EVEN THE TIME WHEN TO EXIT FROM ONE INVESTMENT TO ANOTHER C) VALUATION OF INVESTMENTS ARE WELL COORDINATED AND WELL INFORMED MANAGEMENT DECISIONS, INVOLVING NOT ONLY INPUTS FROM VARIOUS SOURCES BUT ALSO IT INVOLVES ACUMEN OF SENIOR MANAGEMENT PERSONNEL. THEREFORE, THE PLEA OF THE APPELLANT THAT THE COMPANY HAS INCURRED EXPENDITURE OF ONLY RS. 5,00,000/-, THAT TOO WITHOUT ANY BASIS, IN MAINTAINING THE EXISTING PORTFOLIO OF INVESTMENTS AND IN REDEMPTION OF MUTUAL FUNDS DOES NOT STAND TO REASON HAVING REGARD TO THE QUANTUM OF ADMINISTRATIVE EXPENDITURE INCURRED BY THE APPELLANT. THUS, HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, COMPOSITE ACCOUNTS AND THE NOTES IN THE ANNUAL ACCOUNTS, THE REQUISITE SATISFACTION MANDATED IN SECTION 14A OF THE ACT STANDS FULFILLED IN THE PRESENT CASE. IN SUCH CIRCUMSTANCES, THE AO IS JUSTIFIED IN PRINCIPLE IN INVOKING RULE 8D READ WITH SEC. 14A FOR DISALLOWANCE OF EXPENDITURE IN RELATION TO EXEMPT INCOME CLAIMED BY THE APPELLANT. 4.2.3 HAVING OBSERVED THAT REQUISITE SATISFACTION MANDATED IN SECTION 14A (2) OF THE ACT STANDS FULFILLED IN THE PRESENT CASE FOR INVOKING RULE 8D, IT IS NOW EXAMINED WHETHER THE QUANTUM OF DISALLOWANCE MADE BY THE AO UNDER RULE 8D(III) IS JUSTIFIED ON THE FACTS OF THE CASE. THE PRIME CONTENTION OF THE APPELLANT IN THIS REGARD IS THAT THE ASSESSING OFFICER HAS NOT BROUGHT ANYTHING ON RECORD TO SHOW THAT .THE COMPANY HAS INCURRED ANY INDIRECT EXPENDITURE IN RELATION TO EARNING OF TAX FREE INCOME BY WAY OF DIVIDEND ON MUTUAL FUNDS AND PREFERENCE SHARES. THIS CONTENTION OF THE APPELLANT HAS NO MERIT. AS ALREADY MENTIONED, IT IS COMMON KNOWLEDGE THAT (A) MAKING OF FRESH INVESTMENTS (B) MAINTAINING OR CONTINUING WITH EXISTING PORTFOLIO OF INVESTMENTS (C) DECIDING EVEN THE TIME WHEN TO EXIT FROM ONE INVESTMENT TO ANOTHER ARE WELL COORDINATED AND WELL INFORMED MANAGEMENT DECISIONS, INVOLVING NOT ONLY INPUTS FROM VARIOUS SOURCES BUT ALSO IT INVOLVES ACUMEN OF SENIOR MANAGEMENT PERSONNEL. IN FACT, AS ALREADY MENTIONED IN NOTE NO.5 OF NOTES FORMING PART OF ANNUAL ACCOUNTS, IT IS REPORTED LONG TERM INVESTMENTS ARE VALUED AT COST OF ACQUISITION LESS DIMINUTION IN THE VALUE, IF DIMINUTION IS OTHER THAN TEMPORARY IN NATURE IN RESPECT OF SUCH INVESTMENT. CURRENT INVESTMENTS ARE VALUED AT COST OF ACQUISITION LESS DIMINUTION IN THE VALUE AT THE CLOSE OF THE YEAR, IF REALIZABLE VALUE IS LOWER THAN CARRYING COST. THESE NOTES, OTHER DISCLOSURES RELATING TO INVESTMENTS AND RELATED PARTY TRANSACTIONS IN THE ANNUAL ACCOUNTS CLEARLY INDICATE THAT INVESTMENT DECISIONS ARE WELL COORDINATED AND STRATEGIC MANAGEMENT DECISIONS, WHICH CERTAINLY INVOLVE ADMINISTRATIVE EXPENDITURE. FURTHER, AS SHOWN IN THE TABLE DRAWN HEREINABOVE, THERE WAS CONTINUOUS SWITCHING OF THE INVESTMENTS IN MUTUAL FUNDS IN THE FORM OF PURCHASES AND SALES OF INVESTMENTS DURING THE YEAR. THEREFORE, THE PLEA OF THE APPELLANT THAT THE COMPANY HAS INCURRED INDIRECT EXPENDITURE OF ONLY RS.5,00,000/- IN DEPLOYING HUGE FUNDS FOR INVESTMENTS IN MUTUAL FUNDS, SHARES DURING THE YEAR, IN MAINTAINING EXISTING PORTFOLIO OF TAX FREE INVESTMENTS AND IN EARNING DIVIDEND FROM MUTUAL FUNDS AND PREFERENCE SHARES CANNOT BE ACCEPTED. IN THIS CONTEXT, REFERENCE CAN BE MADE TO THE DECISION OF ITAT MUMBAI IN THE CASE OF ACIT VS. CITICORP FINANCE (INDIA) LTD. 12 SOT 248, WHEREIN IT WAS HELD THAT 6 DIVIDEND IN SUBSTANTIAL AMOUNT CANNOT BE EARNED BY INCURRING NO COSTS AND IT IS DIFFICULT TO ACCEPT THE HYPOTHESIS THAT ONE CAN EARN SUBSTANTIAL DIVIDEND INCOME WITHOUT INCURRING ANY EXPENSES, WHATSOEVER INCLUDING MANAGEMENT OR ADMINISTRATIVE EXPENSES. IN THIS CONTEXT, IT MAY ALSO BE APPROPRIATE TO REFER TO THE DECISION OF ITAT CHENNAI IN THE CASE OF SOUTHERN PETRO CHEMICAL INDUSTRIES VS. DCIT (2008) 3 SOT 157 (CHEN-TRIB). THUS, INVESTMENT DECISION INVOLVING INVESTMENTS OF SUCH MAGNITUDE AS IN THE CASE OF THE APPELLANT ARE VERY STRATEGIC DECISIONS IN WHICH TOP MANAGEMENT IS INVOLVED AND THEREFORE IN A COMPOSITE ACTIVITY, ~ PROPORTIONATE MANAGEMENT/ ADMINISTRATIVE EXPENSES HAVE TO BE APPORTIONED TO THE EXEMPT INCOME. IN THE CASE OF THE APPELLANT ALSO, AS NOTICED FROM SCHEDULES OF THE BALANCE SHEET AND NOTES FORMING PART OF ANNUAL ACCOUNTS, THAT THERE WAS NOT ONLY REDEMPTION/SALE OF EXISTING MUTUAL FUNDS DURING THE YEAR BUT ALSO PURCHASE AND SALES OF INVESTMENTS OF SUBSTANTIAL VALUE AND THEREFORE IT IS NOT CORRECT TO SAY THAT ONLY ADMINISTRATIVE EXPENDITURE OF RS. 5,00,000/- WAS INCURRED FOR EARNING THE EXEMPT INCOME FROM THE TAX-FREE INVESTMENTS. THEREFORE, THE ASSESSING OFFICER HAS RIGHTLY INVOKED CLAUSE (III) OF RULE 8D FOR MAKING PROPORTIONATE DISALLOWANCE OF ADMINISTRATIVE EXPENDITURE IN RELATION TO EXEMPT INCOME. 4.2.4 ONE OF THE ARGUMENTS CANVASSED BY THE APPELLANT IS THAT THE INVESTMENT MADE IN THE PREFERENCE SHARES IS NOT A TAX FREE INVESTMENT SINCE THE DIVIDEND INCOME ON THE SAME IS ALREADY SUBJECTED TO DIVIDEND DISTRIBUTION TAX AND HENCE, DISALLOWANCE OF EXPENDITURE INVOKING SEC. 14A IS UNJUSTIFIED. THIS ARGUMENT WAS ALSO DEALT WITH BY THE HON'BLE BOMBAY HIGH COURT IN THE SAME CASE OF GODREJ & BOYCEE MFG. CO. LTD. (328 ITR 81) AND OBSERVED THAT THERE IS NO MERIT IN THIS CONTENTION BECAUSE ADDITIONAL TAX IS A TAX ON THE PROFITS OF THE COMPANY WHICH IS DISTRIBUTED AS DIVIDEND, WHEREAS TAX IN THE HANDS OF A SHAREHOLDER IS A TAX ON DIVIDEND INCOME. RESPECTFULLY FOLLOWING THE DECISION OF BOMBAY HC, THIS ARGUMENT OF THE APPELLANT IS HELD TO HAVE NO MERIT AND ACCORDINGLY REJECTED. 4.2.5 ADVERTING TO THE AUTHORITIES RELIED UPON BY THE APPELLANT, IN THE COURSE OF THE HEARING, THE LD. COUNSEL OF THE APPELLANT SUBMITTED A COPY OF THE DECISION OF ITAT, PUNE DATED 30/01/2014 RENDERED IN APPELLANTS CASE FOR THE A.Y. 2008- 09. I HAVE CAREFULLY AND METICULOUSLY PERUSED THE DECISION OF THE ITAT IN THE APPELLANTS CASE FOR THE A.Y. 2008-09. FOR THAT YEAR, THE ITAT NOTED THAT THE CONTENTIONS RAISED BY THE APPELLANT HAVE SIMPLY BEEN BRUSHED ASIDE BY THE ASSESSING OFFICER BY MAKING A BLAND STATEMENT THAT THE DISALLOWANCE MADE BY THE APPELLANT IS NOT ACCEPTABLE. IN THAT CONTEXT, THE ITAT OBSERVED THAT ASSESSING OFFICER HAS NOT RECORDED ANY OBJECTIVE SATISFACTION WITH REGARD TO THE CORRECTNESS OF THE CLAIM OF THE APPELLANT, WHICH IS MANDATORILY REQUIRED IN TERMS OF SEC. 14A(2) AND CONSEQUENTLY DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IN THAT YEAR. THE FACTS IN THE YEAR UNDER CONSIDERATION ARE TOTALLY DIFFERENT FROM THE FACTS BEFORE THE ITAT FOR THE A.Y. 2008-09. FOR THE YEAR UNDER CONSIDERATION, AS ALREADY DISCUSSED IN THE PRECEDING PARAGRAPHS, ON CAREFUL PERUSAL OF THE ANNUAL ACCOUNTS FILED BY 7 THE APPELLANT, IT IS EVIDENT THAT THE REQUISITE SATISFACTION AS MANDATED UNDER SEC. 14A(2) STANDS FULFILLED. IT NEEDS TO BE APPRECIATED HERE THAT NO SPECIFIC FORMAT HAS BEEN PRESCRIBED FOR RECORDING OR COMMUNICATION OF ASSESSING OFFICERS DISSATISFACTION ABOUT THE CORRECTNESS OF THE EXPENDITURE DISALLOWED BY THE APPELLANT. THE ACCOUNTS ARE ADMITTEDLY NOT MAINTAINED SECTOR-WISE OR ACTIVITY-WISE AND THE BOOKS OF ACCOUNTS ARE COMPOSITE AND THERE IS NO BREAK UP OF RESOURCES UTILIZED FOR BUSINESS ACTIVITY AND INVESTMENT ACTIVITY. THE CLAIM OF THE APPELLANT THAT THERE IS NO DIRECT NEXUS BETWEEN ADMINISTRATIVE COSTS AND EARNING TAX-FREE INCOME IS DEVOID OF ANY MERIT FOR THE REASON THAT THE APPELLANT ITSELF HAS MADE ADHOC DISALLOWANCE OF RS.5,00,000/- TOWARDS EXPENDITURE INCURRED FOR EARNING DECLARED EXEMPT INCOME. IT IS ALSO TO BE NOTED THAT DISALLOWANCE OF EXPENDITURE MADE BY THE AO IS RS.38,12,500/- WHICH ABOUT 9% OF THE EXEMPT INCOME AND THEREFORE, EVEN ON THE QUANTUM IT CANNOT BE SAID THAT THE DISALLOWANCE IS EXCESSIVE OR UNREASONABLE. THUS, IN VIEW OF COMPOSITE AND INDIVISIBLE ACTIVITY AND COMMON EXPENDITURE INCURRED TOWARDS TAXABLE INCOME AND TAX FREE INCOME, SECTION 14A R.W.R 8D WAS RIGHTLY INVOKED BY THE ASSESSING OFFICER FOR THE YEAR UNDER CONSIDERATION. IN SUCH A SITUATION, THE DECISION OF THE ITAT RENDERED FOR THE A.Y. 2008-09 ON CERTAIN PECULIAR FACTS AS NOTED IN THE ORDER OF THE ITAT DOES NOT PROVIDE ANY ASSISTANCE TO THE APPELLANT IN THIS YEAR. 4.2.6 TO SUM UP, ON THE FACTS OF THE CASE, THE EXPENDITURE OF RS.38,12,500/-, AFTER EXCLUDING EXPENDITURE OF RS.5,00,000/- ADDED BACK BY THE APPELLANT ITSELF, WAS RIGHTLY DISALLOWED BY THE ASSESSING OFFICER AS PER THE MODE OF COMPUTATION OF EXPENDITURE IN RELATION TO EXEMPTED INCOME PRESCRIBED UNDER RULE 8D(III) READ WITH SEC. 14A. ACCORDINGLY, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER OF RS.38,12,500/- ON THIS GROUND IS UPHELD. GROUNDS OF APPEAL NO.1.1 AND 1.2 ARE REJECTED. AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US. 5. BEFORE US, LD.A.R. REITERATED THE SUBMISSIONS MADE BEFORE AO AND LD.CIT(A) AND FURTHER POINTED TO THE BALANCE-SHEET PLACED AT PAGE 31 OF THE PAPER BOOK AND POINTED OUT THAT THE INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES AND SURPLUS WAS RS.321.42 CRORES AS AGAINST THE INVESTMENT OF RS.83.24 CRORES MEANING THEREBY THAT THE INTEREST FREE FUNDS WERE FAR IN EXCESS OF THE INVESTMENTS AND THEREFORE NO DISALLOWANCE ON ACCOUNT OF INTEREST IS CALLED FOR AND FOR THIS 8 PROPOSITION, HE RELIED ON THE DECISION IN THE CASE OF CIT VS. HDFC BANK LTD. REPORTED IN (2014) 366 ITR 505(BOM). HE THEREAFTER POINTED TO PAGE 60 WHICH CONTAINED THE DETAILS OF INVESTMENTS AND POINTED OUT THAT DURING THE YEAR NO NEW INVESTMENTS HAD BEEN PURCHASED BY THE ASSESSEE AND ON THE CONTRARY THE INVESTMENTS IN MUTUAL FUNDS TO THE EXTENT OF RS.6 CRORES HAVE BEEN LIQUIDATED. HE FURTHER SUBMITTED THAT ASSESSEE HAS EARNED EXEMPT INCOME IN THE FORM OF DIVIDEND FROM THE SHARES OF ONLY ONE COMPANY AND FROM MUTUAL FUNDS. HE THEREFORE SUBMITTED THAT SINCE NO DIVIDEND HAS BEEN RECEIVED FROM OTHER INVESTMENTS, NO DISALLOWANCE U/S 14A IS CALLED FOR. HIS OTHER ARGUMENT WAS THAT BEFORE INVOKING THE PROVISIONS U/S 14A OF THE ACT, AO IS REQUIRED TO RECORD SATISFACTION. IN THE PRESENT CASE, NO SATISFACTION HAS BEEN RECORDED BY THE AO AND THEREFORE ALSO NO DISALLOWANCE U/S 14A IS CALLED FOR AND FOR THIS PROPOSITION HE RELIED ON THE DECISION RENDERED BY PUNJAB & HARYANA HIGH COURT IN THE CASE OF PUNJAB TRACTORS LIMITED VS. COMMISSIONER OF INCOME TAX, PATIALA REPORTED IN [2017] 399 ITR 223 (P & H). HE ALSO PLACED RELIANCE ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING COMPANY LIMITED VS. DY.COMMISSIONER OF INCOME TAX REPORTED IN [2017] 394 ITR 449 (SC). 6. LD.D.R. ON THE OTHER HAND SUPPORTED THE ORDER OF AO AND TOOK US THROUGH THE FINDINGS OF LD. CIT(A) AND SUPPORTED THE ORDER OF LOWER AUTHORITIES. HE FURTHER SUBMITTED THAT IN THE PRESENT CASE THE AO IN THE ORDER HAS RECORDED SATISFACTION ABOUT 9 THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE WHICH IS GOOD ENOUGH FOR INVOKING THE PROVISIONS OF SEC.14A OF THE ACT. HE FURTHER SUBMITTED THAT ASSESSEE HAS NOT MAINTAINED SEPARATE BANK ACCOUNT SO AS TO JUSTIFY THE USE OF INTEREST FREE FUNDS FOR MAKING INVESTMENTS. HE THUS SUPPORTED THE ORDER OF LOWER AUTHORITIES. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH RESPECT TO DISALLOWANCE OF RS.38,12,500/- U/S 14A OF THE ACT. THE PERUSAL OF THE BALANCE-SHEET WHICH IS PLACED AT PAGE 31 OF THE PAPER BOOK REVEALS THAT THE INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES AND SURPLUS AGGREGATED TO RS.321.42 CRORES AS AGAINST THE INVESTMENTS OF RS.83.24 CRORES MEANING THEREBY THAT THE AVAILABILITY OF INTEREST FREE FUNDS ARE FAR IN EXCESS OF THE INVESTMENTS. WHEN THE INTEREST FREE FUNDS ARE IN EXCESS OF INVESTMENTS, THERE IS PRESUMPTION THAT THE INVESTMENTS ARE OUT OF INTEREST FREE FUNDS AND THEREFORE NO DISALLOWANCE ON AMOUNT OF INTEREST IS CALLED FOR. 8. ON THE ISSUE OF PRESUMPTION THAT WHEN INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE ARE IN EXCESS OF INVESTMENTS IT IS OUT OF INTEREST FREE FUNDS, WE FIND THAT HONBLE BOMBAY HIGH COURT IN THE CASE OF HDFC VS. DCIT REPORTED IN (2016) 383 ITR 529 (BOM) HAS OBSERVED AS UNDER : 15. IT IS CLEAR THAT FOR THE FIRST TIME IN THE CASE OF HDFC BANK LTD. (SUPRA) THAT THIS COURT TOOK A VIEW THAT THE PRESUMPTION WHICH HAS BEEN LAID DOWN IN RELIANCE UTILITIES AND POWER LTD. (SUPRA) WITH REGARD TO INVESTMENT IN TAX FREE SECURITIES COMING OUT OF ASSESSEES OWN FUNDS IN CASE THE SAME ARE IN EXCESS OF THE 10 INVESTMENTS MADE IN THE SECURITIES (NOTWITHSTANDING THE FACT THAT THE ASSESSEE CONCERNED MAY ALSO HAVE TAKEN SOME FUNDS ON INTEREST) APPLIES, WHEN APPLYING SECTION 14A OF THE ACT. THUS, THE DECISION OF THIS COURT IN HDFC BANK LTD.(SUPRA) FOR THE FIRST TIME ON 23RD JULY, 2014 HAS SETTLED THE ISSUE BY HOLDING THAT THE TEST OF PRESUMPTION AS HELD BY THIS COURT IN RELIANCE UTILITIES AND POWER LTD. (SUPRA) WHILE CONSIDERING SECTION 36(1)(III) OF THE ACT WOULD APPLY WHILE CONSIDERING THE APPLICATION OF SECTION 14A OF THE ACT. THE AFORESAID DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA) ON THE ABOVE ISSUE HAS ALSO BEEN ACCEPTED BY THE REVENUE INASMUCH AS EVEN THOUGH THEY HAVE FILED AN APPEAL TO THE SUPREME COURT AGAINST THAT ORDER ON THE OTHER ISSUE THEREIN, VIZ., BROKEN PERIOD INTEREST, NO APPEAL HAS BEEN PREFERRED BY THE REVENUE ON THE ISSUE OF INVOKING THE PRINCIPLES LAID DOWN IN RELIANCE UTILITIES AND POWER LTD. (SUPRA) IN ITS APPLICATION TO SECTION 14A OF THE ACT. THEREFORE, THE ISSUE WHICH AROSE FOR CONSIDERATION BEFORE THE TRIBUNAL HAD NOT BEEN DECIDED BY THIS COURT IN GODREJ AND BOYCE MANUFACTURING CO. LTD. (SUPRA). IT AROSE AND WAS SO DECIDED FOR THE FIRST TIME BY THIS COURT IN HDFC BANK LTD. (SUPRA). THUS, THERE IS NO CONFLICT AS SOUGHT TO BE MADE OUT BY THE IMPUGNED ORDER. THUS, IMPUGNED ORDER HAS PROCEEDED ON A FUNDAMENTALLY ERRONEOUS BASIS AS THE RATIO DECIDENDI OF THE ORDER IN GODREJ AND BOYCE MANUFACTURING CO. LTD. (SUPRA) HAD NOTHING TO DO WITH THE REST OF PRESUMPTION CANVASSED BY THE PETITIONER BEFORE THE TRIBUNAL ON THE BASIS OF THE RATIO OF THE DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA). 16. AT THE HEARING MR. SURESH KUMAR, LEARNED COUNSEL FOR THE REVENUE URGED THAT ON THE FACTS OF THIS CASE NO FAULT CAN BE FOUND WITH THE ORDER OF THE TRIBUNAL. IT IS SUBMITTED THAT, THE PETITIONER WAS NOT ABLE TO ESTABLISH BEFORE THE ASSESSING OFFICER AND THE CIT(A) THAT THE AMOUNTS INVESTED IN THE INTEREST FREE SECURITIES CAME OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE PETITIONER. IN THAT VIEW OF THE MATTER, IT IS SUBMITTED BY HIM THAT THE ORDER OF THIS COURT IN HDFC BANK LTD.(SUPRA) WOULD NOT APPLY TO THE FACTS OF THE PRESENT CASE. WE ARE UNABLE TO UNDERSTAND THE ABOVE SUBMISSION. THE ASSESSING OFFICER PASSED THE ASSESSMENT ORDER ON 22ND DECEMBER, 2010 UNDER SECTION 143(3) OF THE ACT. THE CIT(A) PASSED AN ORDER ON 21ST NOVEMBER, 2011 DISMISSING THE PETITIONERS APPEAL. ON BOTH THE DATES, WHEN THE ORDERS WERE PASSED BY THE ASSESSING OFFICER AND CIT(A), THE AUTHORITIES DID NOT HAVE THE BENEFIT OF THE ORDER OF THIS COURT IN HDFC BANK LTD. (SUPRA) RENDERED ON 23RD JULY, 2014. ONCE THE ISSUE IS SETTLED BY THE DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA), THERE IS NOW NO NEED FOR THE ASSESSEE TO ESTABLISH WITH EVIDENCE THAT THE AMOUNTS WHICH HAS BEEN INVESTED IN THE TAX FREE SECURITIES HAVE COME OUT OF INTEREST FREE FUNDS AVAILABLE WITH IT. THIS IS BECAUSE ONCE THE ASSESSEE IS POSSESSED OF INTEREST FREE FUNDS SUFFICIENT TO MAKE THE INVESTMENT IN TAX FREE SECURITIES, IT IS PRESUMED THAT IT HAS BEEN PAID FOR OUT OF THE INTEREST FREE FUNDS. CONSEQUENTLY, WE DO NOT FIND ANY MERIT IN THE ABOVE SUBMISSION MADE AT THE HEARING ON BEHALF OF THE REVENUE. 9. BEFORE US, REVENUE HAS NOT PLACED ANY CONTRARY BINDING DECISION IN ITS SUPPORT. IN VIEW OF ALL THESE FACTS, WE ARE OF THE VIEW THAT NO DISALLOWANCE OF INTEREST UNDER RULE 8D(2)(II) IS CALLED 11 FOR. AS FAR AS THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES UNDER RULE 8D(2)(III) IS CONCERNED, IT IS SEEN THAT THE DISALLOWANCE OF RS.38,12,500/- HAS BEEN WORKED OUT U/S 14A R.W.R. 8D(2)(III) BY AO. WE FIND THAT AO WHILE PROCEEDING WITH DISALLOWING THE EXPENSES HAS NOT RECORDED ANY SATISFACTION AS REQUIRED U/S 14A(2) OF THE ACT. AS PER SEC.14A(2), FOR INVOCATION OF RULE 8D, THE AO HAS TO RECORD SATISFACTION ABOUT THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. IN THE PRESENT CASE, WE FIND THAT NO SATISFACTION HAS BEEN RECORDED BY THE AO WHILE DISALLOWING THE EXPENSE U/S 14A OF THE ACT. ON THE ISSUE OF NECESSITY OF RECORDING OF SATISFACTION WHILE DISALLOWING EXPENSES U/S 14A WE HAVE COME ACROSS A RECENT DECISION RENDERED BY HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF PUNJAB TRACTORS LTD., VS. CIT REPORTED IN (2017) 393 ITR 223 (P&H) WHEREIN HONBLE HIGH COURT HAS HELD THAT AO MUST RECORD SATISFACTION THAT CLAIM REGARDING EXPENDITURE IS NOT SATISFACTORY. THE RELEVANT OBSERVATIONS BY HONBLE HIGH COURT ARE REPRODUCED HEREUNDER : 11.SECTION 14A SPECIFIES THE CIRCUMSTANCES IN WHICH THE ASSESSING OFFICER IS ENTITLED TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. THE METHOD PRESCRIBED IS IN RULE 8D OF THE INCOME-TAX RULES, 1962 WHICH WAS INTRODUCED WITH EFFECT FROM THE ASSESSMENT YEAR 2008-09. THE CONDITIONS SPECIFIED IN SUB-SECTIONS (2) AND (3) OF SECTION 14A MUST EXIST IN ORDER TO ENTITLE THE ASSESSING OFFICER TO INVOKE RULE 8D. THIS IS CLEAR FROM THE LANGUAGE OF THESE SUB-SECTIONS. SUB-SECTION (2) PROVIDES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME IN ACCORDANCE WITH THE METHOD PRESCRIBED, I.E., RULE 8D 'IF' HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASSESSEE'S CLAIM IN RESPECT OF SUCH EXPENDITURE IN RELATION 12 TO EXEMPT INCOME. THE WORD 'IF' INDICATES THAT TO INVOKE THE METHOD PRESCRIBED NAMELY RULE 8D, THE ASSESSING OFFICER MUST NOT BE SATISFIED WITH THE CORRECTNESS OF THE ASSESSEE'S SAID CLAIM. 12. SUB-SECTION (3) PROVIDES THAT THE PROVISIONS OF SUB-SECTION (2) SHALL APPLY IN RELATION TO A CASE WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO EXEMPT INCOME. THE OPENING WORDS OF SUB-SECTION (3) MAKE THE PROVISIONS OF SUB-SECTION (2) APPLICABLE IN RELATION .TO CASES UNDER SUB-SECTION (3). THUS WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER CAN RESORT TO RULE 8D ONLY IF HAVING REGARD TO THE ACCOUNTS OF THE ASSESSE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. THUS UNDER SUB-SECTION (2) AND (3) OF SECTION 14A, AN ASSESSING OFFICER CAN RESORT TO RULE 8D ONLY IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASSESSEES CLAIM IN RESPECT OF THE EXPENDITURE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT OR IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASSESSEES CLAIM THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO SUCH INCOME. THE HONBLE HIGH COURT FURTHER OBSERVED AS UNDER 18. THE NEXT QUESTION IS AS TO WHETHER IT IS NECESSARY FOR THE ASSESSING OFFICER TO RECORD HIS REASONS FOR NOT BEING SATISFIED WITH THE CORRECTNESS OF THE ASSESSEE'S CLAIM. 19. IT IS MANDATORY FOR THE ASSESSING OFFICER TO RECORD THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT OR THAT HE IS NOT SATISFIED WITH THE ASSESSEE'S CLAIM THAT NO EXPENDITURE HAD BEEN INCURRED BY HIM IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. 20. THE MATTER STANDS CONCLUDED BY A JUDGMENT OF THIS COURT DATED JANUARY 27, 2015 IN CIT VS. ABHISHEK INDUSTRIES LTD. I T A. NO. 320 OF 2013- REPORTED IN [2016] 380 I1R 652 (P&H), WHERE THE DIVISION BENCH HELD (PAGE 657) :- 'SECTION 14A OF THE ACT REQUIRES THE ASSESSING OFFICER TO RECORD SATISFACTION THAT INTEREST BEARING FUNDS HAVE BEEN USED TO EARN TAX- FREE INCOME. THE SATISFACTION TO BE RECORDED MUST BE BASED UPON CREDIBLE AND RELEVANT EVIDENCE ... ' 21. THE JUDGMENT IN MAXOPP INVESTMENT LTD. (SUPRA) ALSO SUPPORTS THIS VIEW NAMELY THAT THE ASSESSING OFFICER MUST RECORD REASONS FOR NOT BEING SATISFIED WITH THE CORRECTNESS OF THE ASSESSEE' CONTENTIONS WITH REGARD TO THE ASPECTS MENTIONED IN SUB-SECTIONS (2) AND (3) OF SECTION 14A. IT IS TRUE THAT THE DELHI HIGH COURT 13 MERELY STATES THAT SUCH REJECTION MUST BE FOR DIS-CLOSED COGENT REASONS. THE DISCLOSURE, HOWEVER, CAN ONLY BE IN WRITING. IT CAN HARDLY BE SUGGESTED THAT THE DISCLOSURE REMAINS IN THE ASSESSING OFFICER'S MIND. THE ASSESSEE IS ENTITLED TO TEST THE BASIS OF THE REJECTION OF HIS CONTENTIONS. THIS CAN BE DONE ONLY IF THE ASSESSING OFFICER RECORDS HIS REASONS FOR HIS NOT BEING SATISFIED IN WRITING. WE FURTHER FIND THAT THE CO-ORDINATE BENCH OF THE TRIBUNAL, PUNE IN ITA NO.2114/PN/2012 DT.27.05.2014 IN THE CASE OF ACIT VS. MAGARPATTA TOWNSHIP DEVELOPMENT AND CONSTRUCTION COMPANY LIMITED HAS ALSO HELD THAT WHEN AO DID NOT RECORD ANY SATISFACTION AS REQUIRED BY SEC.14A(II), DISALLOWANCE U/S 14A R.W.R. 8D WAS UNJUSTIFIED. CONSIDERING THE TOTALITY OF THE AFORESAID FACTS AND RELYING ON THE AFORESAID DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT, WE ARE OF THE VIEW THAT IN THE PRESENT CASE IN THE ABSENCE OF RECORDING OF SATISFACTION BY AO FOR DISALLOWING THE EXPENSES, NO DISALLOWANCE U/S 14A OVER AND ABOVE THAT HAS BEEN SUO-MOTO DISALLOWED BY ASSESSEE IS CALLED FOR. WE THEREFORE SET ASIDE THE ADDITIONAL DISALLOWANCE U/S 14A OF THE ACT MADE BY AO. THUS, THE GROUNDS OF THE ASSESSEE IS ALLOWED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON 20 TH DAY OF SEPTEMBER, 2017. SD/- SD/- ( SUSHMA CHOWLA ) ( ANIL CHATURVEDI ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER PUNE; DATED : 20 TH SEPTEMBER, 2017. YAMINI 14 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. 4. 5. 6. CIT(A)-I, PUNE. CIT-I, PUNE. , , / DR, ITAT, B PUNE; [ / GUARD FILE. / BY ORDER // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE.