Appeal details
Counselvise Citation
[2017] 128 COUNSELVISE.COM (IT) 4252 (ITAT-CHENNAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 month(s) 28 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
19-06-2017
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
D
Next Hearing Date
25-04-2017
Assessment Year
2012-2013
Appeal Filed On
21-02-2017
Judgement Text
, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . ' # , $ #% BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER . / ITA NO. 450/MDS/2017 / ASSESSMENT YEAR : 2012-13 ABAN OFFSHORE LIMITED , 113 JANPRIYA CREST, PANTHEON ROAD, EGMORE, CHENNAI 600 008. PAN AAACA3012H ( /APPELLANT) V. THE DEPUTY COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE-1(1), CHENNAI. RESPONDENT) / APPELLANT BY : SHRI P. MURALI MOHANA RAO, CA / RESPONDENT BY : SHRI PATHLAVATH PEERYA, CIT ! / DATE OF HEARING : 25.04.2017 '# ! / DATE OF PRONOUNCEMENT : 19.06.2017 & / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ASSESSMENT ORDER DATED 31.01.2017 PASSED U/S.143(3) R.W. SECTION 92CA OF THE ACT CONSEQUENT TO THE DIRECTION S OF THE - - ITA 450 /17 2 DISPUTE RESOLUTION PANEL(DRP) DATED 16.12.2016 U/S .144C(5) OF THE ACT. 2. THE FIRST ISSUE IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE OF INTEREST OF 366,25,30,000/- U/S.36(1)(III) OF THE ACT . 3. THE FACTS OF THE ISSUE ARE THAT THE AO FAILED TO APPRECIATE THAT THE EXPENDITURE WAS REVENUE IN NATURE, AS IT W AS INCURRED FOR THE PURPOSE OF CARRYING OUT ASSESSEES OWN BUSINESS INCLUDING BUSINESS CONDUCTED THROUGH ITS VARIOUS SUBSIDIARIES LOCATED OUTSIDE INDIA AND THEREFORE, THE AO WAS NOT JUSTIFI ED IN DISALLOWING ENTIRE INTEREST ON TERM LOANS/WORKING C APITAL LOANS PAID TO BANKS/OTHERS TREATING THEM TO BE CAPITAL IN NATURE ON THE ASSUMPTION THAT ALL THESE LOANS WERE UTILIZED FOR I NVESTMENT IN ITS WHOLLY OWNED FOREIGN SUBSIDIARY I.E. ABAN HOLDINGS PTE LIMITED. 4. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE OP INION THAT THE SIMILAR ISSUE WAS CONSIDERED BY THE TRIBUNAL IN ASSESSES OWN CASE IN ITA NOS.585/MDS/2015 & 267/MDS/2016 FOR THE ASSESSMENT YEARS 2010-11 AND 2011-12 DATED 14.9.201 6 WHEREIN TRIBUNAL HELD THAT:- - - ITA 450 /17 3 31. WE FIND THAT THE RELIANCE PLACED ON BY THE LD. DR ON THE JUDGMENT OF MADRAS HIGH COURT IN THE CASE OF TRISHU L INVESTMENTS (SUPRA) IS MISPLACED. THE MAIN CONTENTION OF THE LD. DR IS THAT THE INTEREST EXPENDITURE ON BORROWINGS USED FOR INVESTM ENT IN WHOLLY OWNED SUBSIDIARY CANNOT BE ALLOWED AS DEDUCTION U/S .36(1)(III) OF THE ACT INSTEAD IT SHOULD BE ADDED TO THE COST OF INVES TMENT, IN VIEW OF THE ABOVE JUDGMENT OF THE MADRAS HIGH COURT. IN O UR OPINION, WHEN ACTIVITY IS UNDERTAKEN AS AN INVESTMENT ACTIVITY A ND INTEREST INCURRED UPTO THE ACQUISITION OF THE SHARES OF SUBSIDIARY CO MPANY COULD BE CONSIDERED AS PART OF INVESTMENT. ONCE IT IS ACQUI RED, THEN IT WILL BE A REVENUE EXPENDITURE. IN THE PRESENT CASE, IT IS AN ADMITTED FACT THAT THE WHOLLY OWNED SUBSIDIARY COMPANY HAS ALREAD Y ACQUIRED SHARES AND IT IS FUNCTIONING. 31.2 IN THIS CASE THE ASSESSEE CLAIMED THE INTE REST INCURRED ON LOAN WHICH WAS USED FOR THE PURPOSE OF PURCHASE OF SHARES AS REVENUE EXPENDITURE, BUT IT WAS NOT CAPITALIZED AS PART OF THE INVESTMENT IN SHARES. THE CONTENTION OF THE DR WAS THAT IT IS TO BE ADDED TO THE COST OF THE INVESTMENT SO AS TO INCREA SE THE VALUE OF THE CAPITAL ASSET. 31.3 IN THE PRESENT CASE, THERE IS NO DISPUTE T HAT THE ASSESSEE HAS BORROWED FUNDS FOR THE PURPOSE OF INVESTMENT IN SHA RES AND THEREAFTER THE ASSESSEE HAS INCURRED INTEREST ON IT . IN OUR OPINION, THE INTEREST IS TO BE CONSIDERED AS PART OF THE COST OF INVESTMENT TILL DATE OF ACQUISITION AND INTEREST PAID BY THE ASSESSEE CO MMENCING FROM THE DATE OF ACQUISITION OF SHARES TILL THE DATE OF SALE WOULD NOT FORM PART OF THE COST OF ACQUISITION. 31.4 FURTHER, IT IS A SETTLED LEGAL POSITION TH AT INCOME OF AN ASSESSEE HAS TO BE COMPUTED UNDER VARIOUS HEADS SPE CIFIED UNDER SECTION 14 OF THE ACT. THEREFORE, THE DEDUCTIONS AR E TO BE ALLOWED IN COMPUTING THE INCOME UNDER VARIOUS HEADS ONLY TO TH E EXTENT IT IS - - ITA 450 /17 4 PROVIDED BY THE LEGISLATURE UNDER THAT VERY HEADS. THE COMPUTATION OF CAPITAL GAIN IS PROVIDED IN SECTION 48 OF THE AC T. ACCORDING TO THIS SECTION, THE ONLY DEDUCTIONS WHICH ARE ALLOWABLE AR E - (1) THE COST OF ACQUISITION OF THE ASSET, (2) THE COST OF ANY IMPRO VEMENT THERETO AND (3) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH THE TRANSFER OF THE ASSET. THE COST OF ACQUISITION, IN OUR OPINION, MEANS THE AMOUNT PAID FOR ACQUIRING THE ASSET. ONCE THE A SSET IS ACQUIRED, THEN ANY EXPENDITURE INCURRED THEREAFTER CANNOT BE CONSIDERED AS THE COST OF ACQUISITION, SINCE SUCH EXPENDITURE WOULD N OT HAVE ANY NEXUS WITH THE ACQUISITION OF THE ASSET. WHEREVER THE LEG ISLATURE INTENDED TO ALLOW SUCH EXPENDITURE AS DEDUCTION, IT HAD SPEC IFICALLY PROVIDED SO UNDER VARIOUS HEADS. FOR EXAMPLE, IN COMPUTING T HE INCOME FROM HOUSE PROPERTY, THE ASSESSEE IS ALLOWED DEDUCTION U NDER SECTION 24 OF THE ACT ON ACCOUNT OF INTEREST PAID ON THE BORRO WED FUNDS UTILISED FOR ACQUIRING THE IMMOVABLE PROPERTY. SIMILARLY, WH EN THE INCOME IS TO BE COMPUTED UNDER THE HEAD 'PROFITS AND GAINS FR OM BUSINESS OR PROFESSION', THE DEDUCTION ACCOUNT OF INTEREST ON B ORROWED FUND IS PROVIDED UNDER SECTION 36(1)(III) THE ACT, WHERE TH E BUSINESS ASSETS ARE ACQUIRED OUT OF BORROWED FUNDS. AT THIS STAGE, IT MAY BE PERTINENT TO NOTE THAT DEPRECIATION IS ALSO ALLOWABLE AS DEDU CTION UNDER SECTION 32 IN RESPECT OF BUSINESS ASSETS ON THE COST OF ACQ UISITION. IN DETERMINING THE COST OF ACQUISITION, THE INTEREST C OMPONENT AFTER BRINGING THE ASSET INTO EXISTENCE IS NOT TAKEN INTO CONSIDERATION AS EXPLANATION 8 TO SECTION 43 OF THE ACT. IF THE INTE REST IS TO BE ADDED TO COST OF ACQUISITION, THEN THE ASSESSEE WOULD BE ENT ITLED TO DOUBLE DEDUCTION ONCE UNDER SECTION 36(1)(III) AND THE OTH ER UNDER SECTION 32 OF ACT, WHICH IS NOT PERMISSIBLE IN VIEW OF THE DECISION OF THE SUPREME COURT IN THE CASE OF ESCORTS LTD. V. UOI[19 93] 199 ITR 43. 31.6 SIMILARLY, WHEN THE SHARES ARE PURCHASED BY W AY OF INVESTMENT, AND THE DIVIDEND IS RECEIVED IN RESPECT OF SUCH SHARES, THE INTEREST PAID ON BORROWED FUNDS HAS BEEN HELD T O BE ALLOWABLE AS DEDUCTION AGAINST DIVIDEND INCOME. THE SUPREME COUR T HAS GONE A STEP FURTHER IN THE CASE OF CIT VS. RAJENDRA PRASAD MOODY [1978] 115 ITR 519, WHEREIN IT HAS BEEN HELD THAT DEDUCTIO N ON ACCOUNT OF - - ITA 450 /17 5 INTEREST PAID ON BORROWED FUNDS IS ALLOWABLE AS DED UCTION IN COMPUTING THE INCOME UNDER THE HEAD INCOME FROM OT HER SOURCES, EVEN WHERE THE DIVIDEND IS NOT RECEIVED IN A PARTI CULAR YEAR. IF THIS IS THE LEGAL POSITION, THEN WE ARE AFRAID, HOW THE INT EREST PAID BY THE ASSESSEE CAN BE CONSIDERED AS PART OF THE COST OF A CQUISITION OF THE SHARES. IF THE CONTENTION OF THE ASSESSEE IS ACCEPT ED THEN IT WOULD AMOUNT TO ALLOWING DOUBLE DEDUCTION I.E., UNDER SEC TION 57 AS WELL AS UNDER SECTION 48 OF THE ACT, WHICH CAN NEVER BE THE INTENTION OF THE LEGISLATURE. AS ALREADY STATED, THE DOUBLE DEDUCTIO N IS PROHIBITED AS LAID DOWN BY THE SUPREME COURT IN THE CASE OF ESCOR TS LTD. (SUPRA). THE ENTIRE SCHEME OF THE ACT, THEREFORE, REVEALS TH AT INTEREST COMPONENT AFTER THE DATE OF ACQUISITION AND TILL TH E DATE OF SALE CANNOT BE TREATED AS THE COST OF ACQUISITION. IT IS ONLY ALLOWABLE AS A REVENUE DEDUCTION ON YEAR TO YEAR BASIS AGAINST THE INCOME GENERATED FROM SUCH ASSET OR LIKELY TO BE GENERATED TO THE EXTENT PROVIDED BY THE LEGISLATURE UNDER DIFFERENT HEADS. 31.6 THE ABOVE VIEW IS ALSO FORTIFIED BY THE D ECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF MAC INTOSH FINANCE ESTATES LTD. VS. ACIT(12 SOT 324), WHEREIN IT HAS B EEN HELD 'ONCE WE FIND THAT INTEREST EXPENSES IS AN ALLOWABLE EXPE NDITURE UNDER THE HEAD 'INCOME FROM OTHER SOURCES, IT CANNOT BE ALLOWED TO BE ADDED TO THE COST OF INVESTMENT ONLY BECAUSE IN THI S YEAR NO DEDUCTION IS ALLOWABLE BECAUSE THE DIVIDEND INCOME HAS BEEN MADE EXEMPT. THE FOLLOWING OBSERVATIONS OF SUPREM E COURT IN THE CASE OF SAHARANPUR ELECTRIC SUPPLY CO. LTD VS. CIT (1992) 194 ITR 294 (SC) WERE RELIED ON BY THE COURT:- IN CASE MONEY IS BORROWED BY A NEWLY STARTED COMP ANY WHICH IS IN THE PROCESS OF CONSTRUCTING AND ERECTI NG ITS PLANT, THE INTEREST INCURRED BEFORE THE COMMENCEMEN T OF PRODUCTION ON SUCH BORROWED MONEY CAN BE CAPITALISE D AND ADDED TO THE COST OF THE FIXED ASSETS. 31.7 A BARE LOOK AT THE ABOVE OBSERVATIONS REVEALS THAT ACTUAL COST WOULD INCLUDE ALL EXPENDITURE NECESSARY TO BRING TH E ASSETS INTO EXISTENCE - - ITA 450 /17 6 AND PUT THEM IN WORKING CONDITION. NOWHERE IN THE ABOVE OBSERVATIONS, THE SUPREME COURT HELD THAT THE EXPENDITURE INCURRE D AFTER THE ACQUISITION OF ASSET WOULD BE INCLUDED IN THE COST OF ASSETS. THE TERMINAL POINT IS THE TIME WHEN THE ASSET IS BROUGHT INTO EX ISTENCE OR WHEN THE ASSET IS PUT IN A WORKING CONDITION. THEREFORE, ON THE BASIS OF THE SUPREME COURT JUDGMENT, IT CANNOT BE SAID THAT EXPE NDITURE INCURRED AFTER THE ASSET BROUGHT INTO EXISTENCE, I.E., AFTER THE ACQUISITION OF THE ASSET WOULD FORM PART OF THE ACTUAL COST. THE SUPR EME COURT LAID DOWN THE PROPOSITION THAT INTEREST PAID ON MONIES BORROW ED FOR ACQUISITION OF CAPITAL ASSET AND TO MEET EXPENSES CONNECTED WITH I TS INSTALLATION ETC. AND CAPITALIZED, HAS TO BE ADDED TO THE COST OF ASSET F OR THE PURPOSE OF DEPRECATION. 31.8 THUS IN OUR OPINION IF THE MONEY WAS BORROWED FOR PURCHASE OF SHARES OF SUBSIDIARY COMPANY FOR THE PU RPOSE OF ACQUIRING CONTROLLING INTEREST AND ACQUISITION OF S UCH CONTROLLING INTEREST WAS OF THE BUSINESS OF THE ASSESSEE AND IT RESULTED IN PROMOTE THE BUSINESS OF THE ASSESSEE AS WELL AS HE LPFUL TO THE ASSESSEE FOR HAVING MANAGEMENT CONTROL OVER SAID SU CH SUBSIDIARY COMPANY, THEN THE INTEREST EXPENDITURE SHOULD BE A LLOWED U/S.36(1)(III) OF THE ACT. FURTHER IF THE ASSESSING OFFICER FOUND THAT INVESTMENT IN SHARES OF SUBSIDIARY COMPANY NOT FOR MAINTAINING CONTROLLING INTEREST, THEN THE ASSESSING OFFICER SH OULD SEE THAT THERE CANNOT BE ANY DISALLOWANCE IN RESPECT OF INVESTMENT OF ASSESSEES OWN FUND. THIS IS SO BECAUSE THE BORROWED FUNDS AN D OWN FUNDS ARE ADMITTEDLY MIXED UP IN SUCH CASES, THE DISALLOW ANCE OF INTEREST HAS TO BE MADE ON PROPORTIONATE BASIS AND BENEFIT H AS TO BE GIVEN TO THE ASSESSEE TOWARDS INVESTMENT OF OWN FUND. IT IS ALSO TO BE NOTED THAT WHILE COMPUTING DISALLOWANCE IF ANY U/S. 36(1)(III) OF THE ACT, INTEREST CONSIDERED FOR DISALLOWANCE U/S.14A O F THE ACT WAS REQUIRED TO BE EXCLUDED. WITH THIS OBSERVATION, WE RESTORE THE ISSUE - - ITA 450 /17 7 TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONS IDERATION AFTER NECESSARY EXAMINATION AND AFTER ALLOWING OPPORTUNIT Y OF HEARING TO THE ASSESSEE. IN THE RESULT, ITA NO.585/MDS/2016 I S PARTLY ALLOWED FOR STATISTICAL PURPOSE. 4. RESPECTFULLY FOLLOWING THE AFORESAID ORDER OF T HE TRIBUNAL, WE ARE INCLINED TO REMIT THE ISSUE TO THE FILE OF A O ON SIMILAR DIRECTION. FURTHER, WE DIRECT THE AO TO VERIFY WHE THER THE INVESTMENT IS MADE IN SUBSIDIARY TO HAVE A CONTROLL ING INTEREST, OR TO AVOID THE DILUTION OF CONTROLLING INTEREST, OR T O KEEP THE CONTROLLING INTEREST INTACT AS PER OBJECT CLAUSE OF MEMORANDUM OF ASSOCIATION OF THE ASSESSEE COMPANY AND TO DECIDE T HEREUPON. HENCE, THIS GROUND IS PARTLY ALLOWED FOR STATISTICA L PURPOSES. 5. THE NEXT ISSUE IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE U/S. 14 A OF THE ACT. 6. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE ACC OUNTED AN AMOUNT OF 11,53,320/- AS DIVIDEND INCOME FROM MUTUAL FUNDS / SHARES DURING THE YEAR AND CLAIMED THE SAME AS EXEM PT U/S.10(34) OF THE ACT. AS PER THE PROVISIONS OF SE C.14A OF THE ACT, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EX PENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF - - ITA 450 /17 8 THE TOTAL INCOME. THE ASSESSEE WAS ASKED TO CLARIF Y AS TO WHY THE DISALLOWANCE SHALL NOT BE MADE U/S.14A R.W. RUL E 8D. THE ASSESSEE REPLIED THAT IT HAD NOT INCURRED ANY EXPEN DITURE IN CONNECTION WITH EARNING EXEMPT INCOME AND THE DISAL LOWANCE U/S. 14A OF THE ACT IS NOT CALLED FOR. THE CONTENT ION OF THE ASSESSEE IS NOT ACCEPTED FOR THE FOLLOWING REASONS: I) THE ASSESSEE HAS INCURRED AN AMOUNT OF 366.253 CRORES / AS FINANCE COST ON ITS BORROWED CAPITAL DURING TH E YEAR. THOUGH THE ASSESSEE CLAIMED THAT SUCH BORROWED FUND S WERE NOT UTILIZED FOR MAKING INVESTMENTS, IT COULD NOT CLEARLY ESTABLISH THE SAME. FUNDS FOR A COMPANY C OME IN A COMMON KITTY AND IT COMPRISES OF BORROWED FUNDS, SHARE CAPITAL AND RETAINED EARNINGS (RESERVES & SURPLUS). THEREFORE, TO ARGUE THAT NO PORTION OF THE INTEREST PAID RELATES TO INVESTMENT IS NOT VALID. II) A COMPANY CANNOT EARNED DIVIDEND WITHOUT ITS EX ISTENCE AND MANAGEMENT. INVESTMENT DECISIONS ARE VERY COMP LEX IN NATURE. THEY REQUIRE SUBSTANTIAL MARKET RESEARC H, DAY- TO-DAY ANALYSIS OF MARKET TRENDS AND DECISIONS WITH REGARD TO ACQUISITION, RETENTION AND SALE OF SHARES/UNITS OF MUTUAL FUNDS AT THE MOST APPROPRIATE TIME. THEY REQUIRE H UGE INVESTMENT IN SHARES/MUTUAL FUNDS AND CONSEQUENTIAL BLOCKING OF FUNDS. IT IS WELL-KNOWN THAT CAPITAL H AS COST AND THAT ELEMENT OF COST IS REPRESENTED INTEREST. BESI DES, INVESTMENT DECISIONS ARE GENERALLY TAKEN IN THE MEE TINGS OF THE BOARD OF DIRECTORS FOR WHICH ADMINISTRATIVE EXP ENSES ARE INCURRED. IT IS THEREFORE NOT CORRECT TO SAY T HAT DIVIDEND INCOME CAN BE EARNED BY INCURRING NO OR NOMINAL EXPENDITURE. III) IT IS LOGICAL TO CONCLUDE THAT A PORTION OF TH E ROUTINE EXPENDITURE TO MAINTAIN ITS ESTABLISHMENT AND ADMINISTRATION CAN BE ATTRIBUTABLE TOWARDS THE ACTI VITY OF - - ITA 450 /17 9 MAKING INVESTMENTS TO EARN DIVIDEND. FURTHER, IT I S A FACT THAT THE MANAGERIAL STAFF AND THE DIRECTORS ARE INV OLVED IN MAKING DECISIONS ON INVESTMENTS. HENCE, A PORTION OF THIS MANAGERIAL REMUNERATION AND DIRECTORS REMUNERATION DEFINITELY BE ATTRIBUTABLE TOWARDS EARNING SUCH EXE MPT INCOME. IV) FOR THE REASONS STATED ABOVE, THE UNDERSIGNED I S SATISFIED THAT WITHOUT ANY AMBIGUITY AND WITH CERTAINTY, IT C AN BE STATED THAT THE ASSESSEE WOULD HAVE DEFINITELY INCU RRED EXPENSES TOWARDS EARNING EXEMPT INCOME. V) TO DETERMINE THE EXPENSES ATTRIBUTABLE TO EARNIN G SUCH EXEMPT INCOME, THE FINANCE ACT, 2006 HAD BROUGHT IN THE PROVISIONS OF SECTION 14A(2) WHICH REQUIRES THE ASS ESSING OFFICER TO DETERMINE THE EXPENSES RELATING TO EXEMP T INCOME IN ACCORDANCE WITH RULE 8D. RELIANCE IS PLA CED ON THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE O F GODREJ & BOYCE VS. DCIT, WHEREIN IT HAS BEEN HELD T HAT DISALLOWANCE UNDER SEC.14A IS FAIR AND REASONABLE . ACCORDINGLY, THE DISALLOWANCE U/S.14A R.W. RULE 8D WORKED OUT TO 71,26,655/- AND ADDED BACK TO INCOME UNDER THE HEA D INCOME FROM BUSINESS OR PROFESSION. HOWEVER, SIN CE THE ENTIRE INTEREST EXPENSE HAS BEEN DISALLOWED, THE DISALLOWA NCE UNDER 2 ND LIMB IS IGNORED AND THE DISALLOWANCE U/S.14A R.W. RULE 8D IS RESTRICTED TO 4,91,750/- FOR THE PURPOSE OF TAX COMPUTATION. 7. AFTER HEARING THE SUBMISSIONS OF THE PARTIES, WE ARE OF THE OPINION THAT THIS ISSUE CAME FOR CONSIDERATION BEFO RE THE TRIBUNAL IN ASSESSEES OWN CASE ITA NOS.585/MDS/2015 & 267/M DS/2016 - - ITA 450 /17 10 FOR THE ASSESSMENT YEARS 2010-11 AND 2011-12 DATED 14.9.2016 WHEREIN IT WAS HELD THAT:- 20. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE LD. AR PLACED BEFORE US ABOUT NETTING OF INTEREST PAID WITH INTEREST RECEIVED. IN OUR OPINION, APPLICATION OF RULE 8D OF THE I.T. RULES DOES NOT A LLOW FOR NETTING OF ANY INTEREST INCOME WITH INTEREST EXPENDITURE. I F NETTING OF INTEREST INCOME IS ALLOWED, IT WOULD BE EQUIVALENT TO ADDING SOMETHING WHICH IS NOT THERE IN THE RULE BOOK, ACCO RDINGLY IMPERMISSIBLE. THUS, WE UPHOLD THE AOS APPLICATION OF RULE 8D(2)(II) READ WITH SEC.14A ON GROSS INTEREST, THRO UGH AO DID NOT CONSIDER INTEREST RECEIPTS AS INCOME FROM OTHE R SOURCES; THE TREATMENT OF INTEREST BY AO WOULD NOT CHANGE TH E NATURE OF TRANSACTION OR CHARACTER OF RECEIPTS. ACCORDINGLY, WE REVERSE THE FINDING OF THE CIT(APPEALS), ON THIS ISSUE. 20.1 HOWEVER, THE AO HAS TO CONSIDER THE AVAIL ABILITY OF SHARE CAPITAL, RESERVES AND SURPLUS WHILE INVOKING THE PROVISIONS OF SEC.14A READ WITH RULE 8D OF THE INCO ME-TAX RULES, AS THIS IS THE NON-INTEREST BEARING OWN FUND S AVAILABLE WITH THE ASSESSEE FOR INVESTMENTS. 21. WITH REGARD TO THE INTEREST ON BORROWINGS USED FOR THE SPECIFIC PURPOSE, IT IS TO BE NOTED THAT THIS ISSUE CAME FOR CONSIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF A CIT V. M/S. FARIDA SHOES PVT. LTD. IN ITA NOS.2102 & 2103/MDS/2 015 DATED 8.1.2016, WHEREIN IT WAS HELD AS UNDER : 5.1 COMING TO THE MERITS OF THE ISSUE REGARDING DI SALLOWANCE U/S.14A R.W. RULE 8D OF THE I.T.RULES, IN OUR OPINI ON, SIMILAR ISSUE WAS CONSIDERED BY THIS TRIBUNAL IN THE CASE O F ACIT V. M/S. BEST & CROMPTON ENGINEERING LTD. IN ITA - - ITA 450 /17 11 NO.1603/MDS/2012 DATED 16.7.2013, WHEREIN IT WAS OBSERVED THAT INTEREST ON BORROWINGS USED FOR THE B USINESS PURPOSE CANNOT BE CONSIDERED FOR THE PURPOSE OF COM PUTING DISALLOWANCE U/S.14A R.W. RULE 8D(2)(II) OF THE IT RULES AND THE RELEVANT PORTION IS REPRODUCED AS BELOW: 10. HEARD BOTH SIDES. PERUSED THE ORDERS OF LOWER AUTHORITIES AND THE DECISION OF CALCUTTA BENCH OF T HIS TRIBUNAL RELIED ON BY THE ASSESSEES COUNSEL. THIS ISSUE HAS BEEN CONSIDERED ELABORATELY BY THE COMMISSIONER OF INCOME TAX(APPEALS) AND DELETED THE INTEREST ON BANK LOAN AND TERM LOANS WHICH WERE NOT UTILIZED FO R MAKING ANY INVESTMENTS HAVING TAX FREE INCOME. WHI LE HOLDING SO, THE COMMISSIONER OF INCOME TAX (APPEALS ) HELD AS UNDER:- 5.2.1 HAV I NG HELD THAT PROVIS I ONS OF RU L E 8D ARE APPLICABLE , LET US NOW EXAMINE WHETHER THE AMOUNT HAS BEEN CORRECTLY QUANT I FIED. THE AO HAD CALCU LAT ED THE DISALLOWANCE AT NIL, 1,04,38,000/- AND 26,87,000/- UNDER (I), (I I ) & (III) OF RULE 80 ( 2)RESPECTIVELY . THERE IS NO DISPUTE REGARDING THE FIRST COMPONENT , BECAUSE IT IS N I L . WITH REGARD TO THE SECOND COMPONENT BE I NG THE EXPENDITURE BY W A Y O F INTEREST WHICH IS NOT DIRECT L Y AT T RIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT , THE AO HAS DE T ERMINED THE AMOUNT AT 1,04,38,000/ . THE AO HAS TAKEN I NTO ACCOUNT T H E ENT I RE IN T EREST EXPEND I TURE OF 5 , 79 , 46 ,000 /- FOR COMPUT I NG THE ABOVE D I SALLOWA N CE . THE I D . AR , IN H I S SUBMISS I ON , HAS G I VEN THE BREAK-UP OF INTEREST WH I CH INCLUDES ( 1) I NTEREST ON BANK LOANS: I 67,92 , 000/- (2) I NTEREST ON TERM LOANS 3,82 , 11 , 000/- AND (3) I NTEREST ON OTHER ACCOUNTS: 1,29 , 43,000/- . IF LOANS HAVE BEEN SANCT I ONED FOR SPEC I FIC PROJECTS/EXPANS I ON AND HAVE BEEN UT I LIZED TOWARDS THE SAME , THEN O B VIOUSLY THEY COULD NOT HAVE BEEN UTI L IZED FOR MAKING ANY INVESTMENTS HAVING TAX - FREE I NCOMES . FROM THE COPY OF THE SANCT I ON LETTERS FROM STATE BANK OF BIKANER & JAIPUR I T CAN BE SEEN THA T THE LOAN WAS GRANTED WITH A SPECIFIC R EQU I REMEN T T HA T - - ITA 450 /17 12 THE LOAN SHAL L BE UTI L IZE D FOR PURCHASE OF IMPOR T ED M A CHINERY WHI L E IN THE CASE OF LOAN FR O M FE D ERA L B ANK , I T I S SE E N T HAT T HE LOAN WAS TO BE U T I LI ZED FO R EXPANSION OF P R O J EC T S. S AN C T ION O F B OTH THESE LOANS PROHIB I T U T I L IZAT I ON OF FUNDS FOR PURPOSES OTHER THAN FOR THE U TILIZAT I ON F OR WHICH T HEY ARE S A NCTIONED . FROM THE LEDGER EX T RACT FOR THE YEAR ENDED 3 1. 03 . 2008 FOR BOTH LOAN ACCOU N TS, IT I S SEEN THAT NO AMOUNT HAS BEEN UT I LIZED F OR INVES T MENT IN SUBSID I ARIES WH I C H EARNS TAX-FREE INCOME . T HE LOAN AMOUNTS WERE FUL L Y D I SBU R S ED A N D U T IL IZ ED IN T H E YEA R ENDED 3 1. 03.2008 (A . Y . 2008-09) I T SE L F. TAK I NG IN T O A L L THE F A CTS AS ST AT ED ABOVE, I AM OF THE CONS I DERED OPINION THAT IF LOANS/BO R ROWED AMOUNTS ARE G RANTED F OR SPEC IF IC P R O J EC T S/EXPANS I ON AND NO AMOUNT FROM THE SAME H A S BEEN D IRECTLY U TILI ZED FOR I NVESTMEN T S , TH EN THE F I RS T AN D SECOND LIMB OF RU L E 80 A TT RI BUT ING THE I N T EREST PAYMENTS T O T HE I N VES T MEN T S WI L L NOT BE APPLICABLE. ACCORDING L Y, IN TE RES T ON BANK LOAN AND TERM LOAN AMOUNT I NG TO 67 , 92 , 000/- AND 3,82, 1 1,000/- R ESPECTIVE L Y ARE TO BE EXC L UDED FROM T HE CA L CULATION TO DETERM I NE THE D I SAL L OWANCE UNDER RULE 8D(2)(II). THE AO IS , THEREFORE, DIREC T ED TO T AKE INTO ACCOUNT ONLY T HE R EMAINING INTERES T ON OTHER ACCOUNTS AMOUNTING TO 1 , 29 , 43,000/- FOR COMPUTING THE PROPO R TIONATE DISA L LOWANCE UNDER RULE 8D(2)( I I) . 11. ON GOING THROUGH THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), WE FIND THAT THE COMMISSIONER OF INCOME TAX (APPEALS) EXCLUDED THE INTEREST ON BANK LOAN AND TERM LOANS FROM THE CALCULATION OF DISALLOWANCE UNDER RULE 8D(2)(II) AS THE ASSESSEE HAS UTILIZED THE BAN K LOAN AND TERM LOAN FOR THE PURPOSE OF PURCHASE OF MACHINERIE S AND FOR EXPANSION OF PROJECTS AND THESE LOANS WERE SPECIFIC ALLY SANCTIONED FOR SPECIFIC PROJECT AND SUCH LOANS WERE ALSO USED FOR THE PURPOSE FOR WHICH THEY WERE SANCTIONED. IN THE CIRCUMSTANCES, WE FIND THAT THE COMMISSIONER OF INC OME TAX (APPEALS) HAS RIGHTLY EXCLUDED SUCH INTEREST FROM T HE PURVIEW OF COMPUTATION OF DISALLOWANCE UNDER RULE 8D(2)(II ). 12. THE DECISION OF CALCUTTA BENCH OF THIS TRIBUNAL IN THE CASE OF CHAMPION COMMERCIAL CO. LTD. (SUPRA) ALSO S UPPORTS THE VIEW OF THE COMMISSIONER OF INCOME TAX (APPEALS ). THE TRIBUNAL HAD CONSIDERED A SITUATION WHEN THE LOANS WERE UTILIZED FOR THE PURCHASE OF MACHINERIES, INTEREST ARISING OUT OF SUCH LOANS, WHETHER SUCH INTEREST IS TO BE EXCLU DED FOR THE PURPOSE OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)( II), THE - - ITA 450 /17 13 TRIBUNAL HELD THAT SUCH INTEREST HAS TO BE EXCLUDED . WHILE HOLDING SO, IT HAS HELD AS UNDER:- 11. THERE IS NO DISPUTE ABOUT WORKING OF THIS METH OD SO FAR AS RULE 8D(2)(I) AND (III) IS CONCERNED. IT IS ONLY WITH REGARD TO THE COMPUTATION UNDER RULE 8D(2)(II) THAT THE ASSESSING OFFICER AND THE CIT(A) HAVE DIFFERENT APPROACHES. THIS PROVISION ADMITTEDLY DEALS WITH A SITUATION IN WHICH THE ASSESSEE HAS INCURRED EXPE NDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH I S NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR R ECEIPT . CLEARLY, THEREFORE, THIS SUB CLAUSE SEEKS TO ALLOCA TE COMMON INTEREST EXPENSES TO TAXABLE INCOME AND TA X EXEMPT INCOME. IN OTHER WORDS, GOING BY THE PLAIN WORDINGS OF RULE 8D(2)(II) WHAT IS SOUGHT TO BE ALL OCATED IS EXPENDITURE BY WAY OF INTEREST..WHICH IS NOT DI RECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT A ND THE ONLY CATEGORIES OF INCOME AND RECEIPT, SO FAR AS SC HEME OF RULE 8 D IS CONCERNED, ARE MUTUALLY EXCLUSIVE CATEG ORIES OF TAX EXEMPT INCOME AND RECEIPT AND TAXABLE INCOME AND RECEIPT. NO OTHER CLASSIFICATION IS GERMANE TO THE CONTEXT IN WHICH RULE 8 D IS SET OUT, NOR DOES THE SCHEME O F SECTION 14 A LEAVE ANY AMBIGUITY ABOUT IT. 12. IRONICALLY, HOWEVER, THE DEFINITION OF VARIABLE A EMBEDDED IN FORMULA UNDER RULE 8D(2)(II) IS CLEARLY INCONGRUOUS INASMUCH WHILE IT SPECIFICALLY EXCLUDES INTEREST EXPENDITURE DIRECTLY RELATED TO TAX EXEMPT INCOME, IT DOES NOT EXCLUDE INTEREST EXPENDITURE DIRECTLY R ELATED TO TAXABLE INCOME. RESULTANTLY, WHILE RULE 8D(2)(II) A DMITTEDLY SEEKS TO ALLOCATE EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT IT ENDS UP ALLOCATING EXPENDITURE BY WAY OF INTERE ST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCO ME OR RECEIPT, PLUS INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME (EMPHASIS BY UNDERLINING SUPPLIED BY US). THIS INCONGRUITY WILL BE MORE GLARING WITH THE HELP OF FOLLOWING SIMPLE EXAMPLE: IN THE CASE OF A & CO LTD , TOTAL INTEREST EXPENDITURE IS 1,00,000, OUT OF WHICH INTEREST EXPENDITURE IN RESPECT OF ACQUIRING SHARES FROM WHI CH TAX FREE DIVIDEND EARNED IS 10,000. OUT OF THE BALANCE 90,000, THE ASSESSEE HAS PAID INTEREST OF 80,000 FOR FACTORY BUILDING CONSTRUCTION WHICH CLEARLY RELATES TO THE TAXABLE INCOME. THE INTEREST EXPENDITURE WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR RECEIPT OR INCOME IS THUS ONLY 10,000. HOWEVER, IN TERMS OF THE FORMULA IN - - ITA 450 /17 14 RULE 8D (2)(II), ALLOCATION OF INTEREST WHICH IS NO T DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT WI LL BE FOR 90,000 BECAUSE, AS PER FORMULA THE VALUE OF A (I.E. SUCH INTEREST EXPENSES TO BE ALLOCATED BETWEEN TAX EXEMP T AND TAXABLE INCOME) WILL BE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST I NCLUDED IN CLAUSE (I) [ I.E. DIRECT INTEREST EXPENSES FOR T AX EXEMPT INCOME] INCURRED DURING THE PREVIOUS YEAR. LET US SAY THE ASSETS RELATING TO TAXABLE INCOME AND TAX EXEMPT IN COME ARE IN THE RATIO OF 4:1. IN SUCH A CASE, THE INTERE ST DISALLOWABLE UNDER RULE 8 D(2)(II) WILL BE 18,000 WHEREAS ENTIRE COMMON INTEREST EXPENDITURE WILL ONLY BE 10,000/-. 13. THE INCONGRUITY ARISES BECAUSE, AS THE WORDINGS OF RULE 8D(2)(II) EXIST, OUT OF TOTAL INTEREST EXPENSE S, INTEREST EXPENSES DIRECTLY RELATABLE TO TAX EXEMPT INCOME AR E EXCLUDED, INTEREST EXPENSES DIRECTLY RELATABLE TO T AXABLE INCOME, EVEN IF ANY, ARE NOT EXCLUDED. 14. THE QUESTION THEN ARISES WHETHER WE CAN TINKER WITH THE FORMULA PRESCRIBED UNDER RULE 8D(2)(II) OF THE INCOME TAX RULES, OR CONSTRUE IT ANY OTHER MANNER OTHER TH AN WHAT IS SUPPORTED BY PLAIN WORDS OF THE RULE 8 D (2 )(II). 15. WE FIND THAT NOTWITHSTANDING THE RIGID WORDS OF RULE 8D(2)(II), THE STAND TAKEN BY THE REVENUE AUTHORITI ES ABOUT ITS APPLICATION, AS WAS BEFORE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD VS DCIT (3 28 ITR 81) WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WA S IN CHALLENGE,IS THAT IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN ( AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PART ICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.). THEREFORE, IT IS NOT ONLY THE INTEREST DIRECTLY ATT RIBUTABLE TO TAX EXEMPT INCOME, I.E. UNDER RULE 6D(2)(I), BUT AL SO INTEREST DIRECTLY RELATABLE TO TAXABLE INCOME, WHIC H IS TO BE EXCLUDED FROM THE DEFINITION OF VARIABLE A IN FOR MULA AS PER RULE 6D(2)(II), AND RIGHTLY SO, BECAUSE IT IS O NLY THEN THAT COMMON INTEREST EXPENSES, WHICH ARE TO BE ALLO CATED AS INDIRECTLY RELATABLE TO TAXABLE INCOME AND TAX E XEMPT INCOME, CAN BE COMPUTED. THIS IS CLEAR FROM THE FOL LOWING OBSERVATIONS MADE BY THEIR LORDSHIPS OF HONBLE BOM BAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SUPRA): - - ITA 450 /17 15 60. IN THE AFFIDAVIT-IN-REPLY THAT HAS BEEN FILED ON BEHALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RATIONALE UNDERLYING R. 8D. IN THE WRITTEN SUBMISSIONS WHICH HAVE BEEN FILED BY THE ADDL. SOLICITOR GENERAL IT HAS BEEN STATED, WITH REFERENCE TO R. 8D(2)(II) THAT SINCE FUNDS ARE FUNG IBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACTUAL QUANTU M OF BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX- FREE INVESTMENTS. IT IS ONLY THE INTEREST ON BORROW ED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN ( AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO A NY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) THE JUSTIFICATION THAT HAS BEEN OFFERED IN SUPPORT OF THE RATIONALE FOR R. 8D CANNOT BE REGARDED AS BEING CAPRICIOUS, PERVERSE OR ARBITRARY. APPLYING THE TESTS FORMULATED BY THE SUPREME COURT IT IS NOT POSSIBLE FOR THIS COURT TO HOLD THAT THERE IS WRIT ON THE STATUTE OR ON THE SUBORDI NATE LEGISLATION PERVERSITY, CAPRICE OR IRRATIONALITY. T HERE IS CERTAINLY NO 'MADNESS IN THE METHOD'. 16. ONCE THE REVENUE AUTHORITIES HAVE TAKEN A PARTI CULAR STAND ABOUT THE APPLICABILITY OF FORMULA SET OUT IN RULE 8 D(2)(II), AND BASED ON SUCH A STAND CONSTITUTIONAL VALIDITY IS UPHELD BY HONBLE HIGH COURT, IT CANNOT BE OPEN TO REVENUE AUTHORITIES TO TAKE ANY OTHER STAND ON THE ISSUE WITH REGARD TO THE ACTUAL IMPLEMENTATION OF THE FOR MULA IN THE CASE OF ANY ASSESSEE. VIEWED THUS, THE CORRECT APPLICATION OF THE FORMULA SET OUT IN RULE 8D(2)(II ) IS THAT, AS HAS BEEN NOTED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE (SUPRA), AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN ( AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PART ICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) . ACCORDINGLY, EVEN BY REVENUES OWN ADMISSION, INTER EST EXPENSES DIRECTLY ATTRIBUTABLE TO TAX EXEMPT INCOME AS ALSO DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME, ARE R EQUIRED TO BE EXCLUDED FROM COMPUTATION OF COMMON INTEREST EXPENSES TO BE ALLOCATED UNDER RULE 8D(2)(II). 17. TO THE ABOVE EXTENT, THEREFORE, WE HAVE TO PROC EED ON THE BASIS THAT RIGOUR OF RULE 8 D (2)(II) IS RELAXE D IN ACTUAL - - ITA 450 /17 16 IMPLEMENTATION, AND REVENUE AUTHORITIES, HAVING TAK EN THAT STAND WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WAS IN CHALLENGE BEFORE HONBLE HIGH COURT, CANNOT NOW DEC LINE THE SAME. IDEALLY, IT IS FOR THE CENTRAL BOARD OF D IRECT TAXES TO MAKE THE POSITION CLEAR ONE WAY OR THE OTH ER EITHER BY INITIATING SUITABLE AMENDMENT TO RULE 8D( 2)(II) OR BY ADOPTING AN INTERPRETATION AS PER PLAIN WORDS OF THE SAID RULE, BUT EVEN ON THE FACE OF THINGS AS THEY ARE AT PRESENT , IN OUR HUMBLE UNDERSTANDING, REVENUE AUTHORITIES CA NNOT TAKE ONE STAND WHEN DEMONSTRATING LACK OF PERVERSI TY, CAPRICE OR IRRATIONALITY IN RULE 8D BEFORE HONBLE HIGH COURT, AND TAKE ANOTHER STAND WHEN IT COMES TO ACTU AL IMPLEMENTATION OF THE RULE IN REAL LIFE SITUATIONS. THEREFORE, EVEN AS WE ARE ALIVE TO THE FACT THAT THE STAND OF THE LEARNED DEPARTMENTAL REPRESENTATIVE IS IN ACCORDANC E WITH THE STRICT WORDING OF RULE 8D(2)(II), WE HAVE TO HOLD THAT, FOR THE REASONS SET OUT ABOVE, THIS RIGID STA ND CANNOT BE APPLIED IN PRACTICE. 13. IN VIEW OF THE DECISION OF THE CALCUTTA BENCH O F THIS TRIBUNAL CITED ABOVE, WE UPHOLD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN EXCLUDING THE INTEREST ON BANK LOAN AND TERM LOANS FOR THE PURPOS E OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)(II). THE GR OUNDS RAISED BY THE REVENUE ARE REJECTED ON THIS ISSUE. 21.1 IN VIEW OF THE ABOVE TRIBUNAL DECISION ( IN THE CASE OF ACIT V. M/S. FARIDA SHOES PVT. LTD. IN ITA NOS.2102 & 2103/ MDS/2015 DATED 8.1.20160 , WE ARE OF THE OPINION THAT THE INTEREST ON BORROW ING WHICH ARE MADE FOR SPECIFIC PURPOSE OF BUSINESS CANNOT BE CONSIDERED FOR THE PURPOSE OF RULE 8D OF THE INCOME TAX RULES. 21.2 FURTHER, INVESTMENTS IN SISTER CONCERNS OR SUB SIDIARIES WITH WHICH THE ASSESSEE IS HAVING BUSINESS TRANSACTIONS, THAT INVESTMENTS CANNOT BE CONSIDERED FOR THE PURPOSE OF APPLICABILI TY OF RULE-8D. FOR THIS PROPOSITION WE RELY ON THE JUDGMENTS OF TRIBU NAL IN THE CASE OF SUN - - ITA 450 /17 17 TV NETWORKS IN ITA NO.1340 & 1341/MDS./15 & 1578 TO 1579/MDS/15 WHEREIN HELD THAT:- 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EI THER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE AVAILABLE SH ARE CAPITAL INCLUDING RESERVES AND SURPLUS WAS 2385.7 CRORES AS ON 31.03.2010. THE AVAILABLE SHARE CAPITAL IS 1970.4 CRORES AND RESERVES AND SURPLUS IS 21,886.7 CRORES. THE INVESTMENTS MADE IN MUTUAL FUNDS INCLUDING SUBSIDIARY COMPANIES ARE ONLY 541.11 CRORES. THEREFORE, IT CANNOT BE SAID THAT TH E ASSESSEE HAS DIVERTED THE BORROWED FUNDS FOR MAKING ANY INVE STMENT EITHER IN THE SISTER CONCERNS OR IN THE MUTUAL FUNDS. WHEN THE ASSESSEE HAS SUFFICIENT SHARE CAPITAL, RESERVES AND SURPLUS, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THERE CANNOT BE ANY DISALLOWANCE TOWARDS THE INTEREST PAID ON THE BORROWED FUNDS UND ER SECTION 14A OF THE ACT. FOR THE PURPOSE OF DISALLOWING INTE REST INCOME UNDER SECTION 14A READ WITH RULE 8D, THERE SHOULD B E NEXUS BETWEEN THE BORROWED FUNDS AND INVESTMENT MADE BY T HE ASSESSEE IN THE SHARE CAPITAL AND MUTUAL FUNDS. IN THE ABSENCE OF ANY NEXUS, THE PRESUMPTION IS THAT THE ASSESSEE HAS INVESTED THE AVAILABLE INTEREST-FREE FUNDS IN SHARE CAPITAL AND MUTUAL FUNDS. FURTHERMORE, MAKING INVESTMENT IN SISTER CON CERNS IS FOR COMMERCIAL EXPEDIENCY IN VIEW OF THE JUDGMENT OF AP EX COURT IN S.A. BUILDERS LTD. V. CIT (2007) 288 ITR 1. IT IS N OT THE CASE OF THE REVENUE THAT THE SISTER CONCERN OR ANY OF THE D IRECTORS HAS MISUSED THE FUNDS INVESTED BY THE ASSESSEE. WHEN TH E SISTER CONCERN USES THE FUNDS ONLY FOR BUSINESS PURPOSE, T HERE WAS COMMERCIAL EXPEDIENCY FOR MAKING INVESTMENT. THEREF ORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THERE CA NNOT BE ANY DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962. - - ITA 450 /17 18 13. IN VIEW OF THE ABOVE, THIS TRIBUNAL IS UNABLE T O UPHOLD THE ORDERS OF THE LOWER AUTHORITIES. ACCORDINGLY, THE O RDERS OF THE LOWER AUTHORITIES ARE SET ASIDE. THE ENTIRE ADDITIO N MADE BY THE ASSESSING OFFICER IS DELETED. 21.3 FURTHER, WE ALSO MAKE IT CLEAR THAT THE OW N FUNDS WHICH IS IN THE FORM OF SHARE CAPITAL AND RESERVES AND SURPLUS, WHI CH WAS AVAILABLE TO THE ASSESSEE TO MAKE INVESTMENTS WHICH IS YIELDING EXEMPTED INCOME HAVE NO COST AND THEREFORE, IT IS TO BE GIVEN DUE W EIGHTAGE WHILE APPLYING THE FORMULA OF RULE 8D. THIS VIEW OF OURS IS FORTIFIED BY THE ORDER OF THE CO-ORDINATE BENCH IN THE CASE OF BEACH MINERS CO. PVT LTD. VS. ACIT IN ITA NO.2110/MDS./14 DATED 06.08.15 WHEREIN HELD THAT: 6.1. GROUND NO.3 DISALLOWANCE OF EXPENDITURE BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT FOR 3,11,34,630/- SINCE THE ASSESSEE HAD MADE INVESTMENTS OF 71,55,33,570/- FOR EARNING EXEMPT INCOME. AT THE OUTSET, WE FIND THAT THERE IS NO MERIT FOR THE REVENUE TO MAKE ADDITION OF 3,11,34,630/- INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT BECAUSE THE INVESTMENT MADE OF 71,55,33,570/-, BEARS NO COST IN THE FORM OF INTEREST OR WHATSOEVER , SINCE THE FUNDS BY WHICH THE INVESTMENT IS MADE IS ASSESSEES OWN F UNDS. FURTHER, THESE INVESTMENTS ARE MADE ONLY WITH SISTER COMPANI ES OF THE ASSESSEE AND NO COST CAN BE ATTRIBUTED FOR THE MANA GEMENT OF SUCH FUNDS. THEREFORE, WE HEREBY DELETE THE ADDITION OF 3,11,34,630/- MADE BY THE LD. ASSESSING OFFICER INVOKING THE PROV ISIONS OF SECTION 14A OF THE ACT. THIS GROUND RAISED BY THE ASSESSEE IS ALLOWED IN ITS FAVOUR. 21.4 IN VIEW OF THE ABOVE JUDGMENTS, THE AO HAS TO CONSIDER THE ASSESSEES OWN FUND I.E. CAPITAL AND RESERVES AS AV AILABLE ON THE DATE OF INVESTMENT WHICH YIELDS EXEMPTED INCOME AND THEREAF TER HE SHALL APPLY THE FORMULA IN RULE 8D AND ALSO EXCLUDE INVESTMENTS IN SUBSIDIARIES AS HELD BY THE ABOVE ORDER OF CO-ORDINATE BENCH. WITH THIS OB SERVATION, WE REMIT THE - - ITA 450 /17 19 ISSUE RELATING TO DISALLOWANCE U/S.14A R.W.R.8D TO THE FILE OF AO FOR FRESH CONSIDERATION. HENCE, THIS GROUND IS ALLOWED FOR ST ATISTICAL PURPOSES. 7.1 ACCORDINGLY, FOLLOWING THE AFORESAID ORDER OF THE TRIBUNAL, WE REMIT THIS ISSUE TO THE FILE OF THE AO FOR FRESH CONSIDERATION ON SIMILAR DIRECTION AND THIS GROUND OF APPEAL IS ALLO WED FOR STATISTICAL PURPOSES. 8. THE NEXT GROUND IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE OF ` 13,32,01,184/- U/S.40(A)(I) OF THE ACT. 9. THE FACTS OF THE ISSUE ARE THAT DURING THE COURS E OF ASSESSMENT PROCEEDINGS IT IS SEEN THAT THE ASSESSEE COMPANY HAS OFFERED ENTIRE INCOME TO TAX IN INDIA. THEREFO RE, ANY EXPENSES CORRESPONDING TO THE INCOME OFFERED IN IND IA IS DEEMED TO ACCRUE OR ARISE IN INDIA TO THE THIRD PAR TY. HENCE, THE ASSESSEE COMPANY IS NOT COVERED BY THE EXCLUSION CL AUSE PROVIDED IN SEC.9(1)(VII)(B) OF THE ACT. SINCE THE INCOME IS OFFERED IN THE BOOKS OF THE INDIAN COMPANY, THE SOU RCE RULE AS PROVIDED IN THE SECTION WOULD NOT BE APPLICABLE TO THE ASSESSEE. THE ASSESSEE WAS CAUSED TO EXPLAIN, AS TO WHY DISAL LOWANCE U/S.40(A)(I) OF THE ACT SHOULD NOT BE MADE IN RESPE CT OF EXPENSES - - ITA 450 /17 20 VIZ., MANAGEMENT FEES, CONSULTANCY FEES. THE ASS ESSEE HAS FURNISHED THE REPLY FOR NON-DEDUCTION OF TDS PAID T OWARDS MANAGEMENT FEES AND CONSULTANCY CHARGES. HOWEVER, IT IS OBSERVED THAT THE ASSESSEE SHOULD HAVE DEDUCTED TDS ON SUCH PAYMENTS/EXPENDITURE AS PER THE PROVISIONS OF THE A CT. ACCORDINGLY, THE EXPENDITURE INCURRED ON ACCOUNT OF MANAGEMENT FEES AND CONSULTANCY CHARGES PAID OUTSID E INDIA TO THE TUNE OF 13,32,01,184/- IS DISALLOWED U/S.40(A)(I) OF THE A CT. 10. THE LD. AR PLACED RELIANCE ON THE DECISION OF THE CO-ORDIANTE BENCH IN THE CASE OF FORD INDIA LTD., V S. DCIT IN ITA NO.643 & 840/MDS,/2015 DATED 31.01.2017 FOR THE ASS ESSMENT YEARS 2011-12 & 2012-13 AND IT WAS HELD IN PARA 76 TO 78 AS FOLLOWS:- 76 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION. 77. WE FIND THIS ISSUE IS COVERED, IN FAVOUR OF TH E ASSESSEE, BY A COORDINATE BENCH DECISION IN THE CASE OF DCIT VS AN DAMAN FOOD PRODUCTS PVT LTD [(2012):- 18 ITR TRIB 509 (KOL)] WHEREIN IT WAS, INTER ALIA, OBSERVED AS FOLLOWS: 6. THERE IS NO, AND CANNOT BE ANY, DISPUTE WIT H THE BASIC LEGAL POSITION, AS INHERENT IN THE SCHEME OF THE INDIAN - - ITA 450 /17 21 INCOME TAX ACT UNDER SECTION 90, THAT THE PROVISION S OF A DULY NOTIFIED DOUBLE TAXATION AVOIDANCE AGREEMENT W ILL OVERRIDE THE PROVISIONS OF THE INCOME TAX ACT, UNLE SS, AND TO THE EXTENT, THE LATTER ARE BENEFICIAL TO THE ASS ESSEE. AS LATE PROF. KLAUS VOGEL, IN HIS OFT REFERRED BOOK 'K LAUS VOGEL ON DOUBLE TAXATION CONVENTIONS', HAD OBSERVED THAT, 'THE TREATY ACTS LIKE A STENCIL THAT IS PLACE D OVER THE PATTERN OF DOMESTIC LAW AND COVERS OVER CERTAIN PAR TS'. DR. VOGEL'S PERCEPTION ON THIS ISSUE QUITE APPROPRIATEL Y SUMS UP THE LEGAL POSITION IN INDIA AS WELL. A TAX TREAT Y ESSENTIALLY RESTRICTS THE RIGHTS OF THE SOURCE STAT E ON TAXATION OF AN INCOME ARISING THEREIN, INASMUCH AS RESIDENCE COUNTRY GENERALLY HAS UNQUALIFIED RIGHT T O TAX GLOBAL INCOME OF ITS TAX SUBJECTS ANYWAY, AND, THER EFORE, IT IS USEFUL TO BEGIN BY EXAMINING, FROM A SOURCE COUN TRY'S PERSPECTIVE, WHETHER THE INCOME IN QUESTION CAN AT ALL BE TAXED IN THE SOURCE STATE UNDER THE APPLICABLE TAX TREATY. LET US, THEREFORE, BEGIN BY EXAMINING THE TAXABILIT Y OF CONSULTANCY FEE PAID TO GMPL IN THE LIGHT OF APPLIC ABLE TAX TREATY PROVISIONS. 7. WE FIND THAT THERE IS NO DISPUTE WITH THE FACTUA L POSITION THAT THE GMPL DID NOT HAVE ANY PERMANENT ESTABLISHM ENT IN INDIA, AND WITH THE LEGAL PRINCIPLE LAID DOWN IN THE APPLICABLE TAX TREATY THAT, IN THE ABSENCE OF THE P E OF GMPL, ITS BUSINESS PROFITS COULD NOT BE TAXED IN IN DIA. THE TAXABILITY UNDER THE SOURCE STATE UNDER ARTICLE 7 O F THE APPLICABLE TAX TREATY, THEREFORE, CLEARLY FAILS. WE FURTHER FIND THAT SO FAR AS TAXABILITY UNDER ARTICLE 12, I.E. WI TH RESPECT TO 'ROYALTIES AND FEES FOR TECHNICAL SERVICES' IS CONC ERNED, WE FIND THAT ARTICLE 12(4) PROVIDES THAT, 'THE TERM 'F EES FOR TECHNICAL SERVICES' AS USED IN THIS ARTICLE MEANS P AYMENTS OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR SERV ICES OF A MANAGERIAL, TECHNICAL OR CONSULTANCY NATURE (INCLUD ING THE PROVISION OF SUCH SERVICES THROUGH TECHNICAL OR OTH ER PERSONNEL) IF SUCH SERVICES : (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIB ED IN PARAGRAPH 3 IS RECEIVED ; OR (B) MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW OR PROCESSES, WHICH ENABLES THE PERSON ACQUIRING THE SERVICES TO APPLY THE TECHNOLOGY CONT AINED THEREIN ; OR - - ITA 450 /17 22 (C) CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TE CHNICAL PLAN OR TECHNICAL DESIGN, BUT EXCLUDES ANY SERVICE THAT DOES NOT ENABLE THE PERSON ACQUIRING THE SERVICE TO APPLY THE TECHNOLOGY CONTAINED THEREIN.' A PLAIN READING OF THIS PROVISIONS MAKES IT CLEAR THAT THE CASE OF THE GMPL COULD AT BEST FALL IN 12(4)(B) BUT, EVEN FOR THIS, IT IS A CONDITION PRECEDENT THAT THE SERVICES SHOULD ENABLE THE PERSO N ACQUIRING THE SERVICES TO APPLY TECHNOLOGY CONTAINE D THEREIN, BUT THEN IT IS NOBODY'S CASE THAT SERVICES RENDERED BY THE GMPL WERE SUCH THAT THE ASSESSEE WAS ENABLED TO APPLY TECHNOLOGY CONTAINED THEREIN. THE SERVICES WE RE SIMPLY CONSULTANCY SERVICES WHICH DID NOT INVOLVE A NY TRANSFER OF TECHNOLOGY. THE AMOUNTS RECEIVED BY THE GMPL COULD NOT BE TAXED AS 'FEES FOR TECHNICAL SERVICES EITHER. AS A MATTER OF FACT, LEARNED DEPARTMENTAL REPRESENTATI VE SUBMITS THAT THE CIT(A) WAS QUITE JUSTIFIED IN HOLD ING THAT THE INCOME IN THE HANDS OF THE GMPL IS NEITHER TAXA BLE AS A BUSINESS INCOME UNDER ARTICLE 7 OF AS FEES FOR TE CHNICAL SERVICE UNDER ARTICLE 12, EVEN THOUGH LEARNED DIREC TOR OF INCOME TAX (INTERNATIONAL TAXATION) SHRI SANJAY KUM AR, WHO WAS PRESENT IN THE COURT ROOM IN CONNECTION WIT H SOME OTHER CASE, IMMEDIATELY GOT UP TO DISOWN THIS ARGUM ENT AND SUBMIT THAT THE VIEWS SO EXPRESSED BY THE LEARN ED DEPARTMENTAL REPRESENTATIVE ARE QUITE AT VARIANCE W ITH THE STAND BEING TAKEN BY THE DIRECTORATE OF INTERNATION AL TAXATION IN ALL OTHER CASES. THAT DOES NOT MAKE ANY DIFFERENCE TO OUR DECISION ON THIS ISSUE, BECAUSE E VEN WITHOUT THIS BENEVOLENCE OF THE LEARNED DEPARTMENTAL REPRESENTATIVE, WE WILL STILL COME TO THE SAME CONCLUSION. THE REASON IS THIS. THERE ARE AT L EAST TWO NON-JURISDICTIONAL HIGH COURT DECISIONS, NAMELY HON 'BLE DELHI HIGH COURT IN THE CASE OF DIT VS GUY CARPENTE R & CO LTD (2012 TII 14 HC DEL INTL) AND HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS DE BEERS INDIA PVT LTD (TS-312-HC-2012), IN FAVOUR OF THE ASSESSEE, AND TH ERE IS NO CONTRARY DECISION BY HON'BLE JURISDICTIONAL HIGH COURT OR BY HON'BLE SUPREME COURT. WE BOW BEFORE HIGHER WISD OM OF HON'BLE COURTS ABOVE AND HOLD THAT UNLESS THERE IS A TRANSFER OF TECHNOLOGY INVOLVED IN TECHNICAL SERVIC ES EXTENDED BY SINGAPORE COMPANY, THE 'MAKE AVAILABLE' CLAUSE IS NOT SATISFIED AND, ACCORDINGLY, THE CONSI DERATION FOR SUCH SERVICES CANNOT BE TAXED UNDER ARTICLE 12( 4) OF INDIA SINGAPORE TAX TREATY. LEARNED DEPARTMENTAL REPRESENTATIVE, HOWEVER, PROCEEDS TO GIVE A NEW TWI ST TO THE CASE OF THE REVENUE. LEARNED DEPARTMENTAL REPRESENTATIVE HAS NOW COME UP WITH THE ARGUMENT TH AT - - ITA 450 /17 23 EVEN IF THE INCOME EMBEDDED IN PAYMENTS TO GMPL WER E NOT TAXABLE IN INDIA UNDER ARTICLE 7 (I.E. BUSINESS PROFITS) OR UNDER ARTICLE 12, THESE AMOUNTS WERE TAXABLE UNDER ARTICLE 23 OF THE APPLICABLE TAX TREATY. HE INVITES OUR ATT ENTION TO ARTICLE 23 WHICH PROVIDES THAT ' (I)TEMS OF INCOME WHICH ARE NOT EXPRESSLY MENTIONED IN THE FOREGOING ARTICLES OF THIS AGREEMENT MAY BE TAXED I N ACCORDANCE WITH THE TAXATION LAWS OF THE RESPECTIVE CONTRACTING STATES.' HIS INTERPRETATION OF THE SCOP E OF THIS PROVISION IS THAT WHEN TAXABILITY FAILS UNDER ALL A RTICLES OF THE APPLICABLE TAX TREATY, THE TAXABILITY AUTOMATICALLY ARISES UNDER THIS PROVISION. IN OTHER WORDS, FOR EXAMPLE, WHEN A BUSINESS PROFIT IS NOT TAXABLE UNDER ARTICLE 7, THI S NON TAXABILITY IS NOT THE END OF THE ROAD SO FAR AS TAX ABILITY IN THE SOURCE STATE IS CONCERNED, BECAUSE, ACCORDING TO TH E LEARNED DEPARTMENTAL REPRESENTATIVE, THE TAXABILITY OF BUSINESS PROFIT IN SUCH A SITUATION, THOUGH NOT TAX ABLE UNDER ARTICLE 7, AUTOMATICALLY SHIFTS TO THE TAXABI LITY UNDER ARTICLE 23, EFFECTIVELY UNDER THE DOMESTIC LAWS OF THE SOURCE STATE. HE HAS ALSO FILED A NOTE, THOUGH MORE LITTLE CAREFULLY WORDED THAN HIS ARGUMENTS IN THE COURT ROOM, WHICH ALSO LAYS LOT OF EMPHASIS ON THE SCOPE OF ARTICLE 23, AS ALSO THE FACT THAT THE FOREIGN COMPANY SHOULD 'HAVE APPROACH ED THE AUTHORITY FOR ADVANCE RULING AS PER THE PROVISIONS OF SECTIONS 245N TO 245V OF THE INCOME TAX ACT, 1961 T O BE ON THE RIGHT SIDE OF THE LAW, INSTEAD OF FAILING TO FULFIL THEIR TAX OBLIGATIONS AND PRESUMING AND ASSUMING NON APPLICABILITY OF CERTAIN PROVISIONS OF THE INCOME T AX ACT VIS- A-VIS THE DTAA BETWEEN INDIA AND SINGAPORE'. LEARNE D DEPARTMENTAL REPRESENTATIVE GOES ON TO STATE THAT ' THE ASSESSE HAS PREFERRED THE TORTUOUS (PATH) OVER THE STRAI GHT'. LEARNED DEPARTMENTAL REPRESENTATIVE HAS ALSO LAID L OT OF EMPHASIS ABOUT, WHAT HE PERCEIVES AS, LEARNED CIT(A )'S CATEGORICAL FINDING THAT THE PAYMENTS MADE TO GMPL WERE IN THE NATURE OF 'OTHER INCOME' AND, THEREFORE, SHO ULD BE TAXED UNDER ARTICLE 23 OF THE INDO SINGAPORE TAX TR EATY. 8. AS FOR LEARNED DEPARTMENTAL REPRESENTATIVE'S REF ERENCE TO THE ALLEGED FINDING OF THE CIT(A) REGARDING THE AMOUNT HAVING BEEN PAID TO GMPL FALLING WITHIN CATEGORY OF HE 'OTHER SUM', IT IS IMPORTANT TO NOTE THAT THE CIT(A ) H AD STATED THAT 'SECTION 40(A)(I) OF THE INCOME TAX ACT PROVIDES THAT IN COMPUTING INCOME OF AN ASSESSEE UNDER THE H EAD 'PROFITS AND GAINS OF BUSINESS', DEDUCTION WILL NOT BE - - ITA 450 /17 24 ALLOWED FOR ANY EXPENDITURE BEING ROYALTY, FEES FOR TECHNICAL SERVICES AND OTHER SUM CHARGEABLE UNDER T HE ACT, IF IT IS PAYABLE OUTSIDE INDIA, OR IN INDIA TO A NON RESIDENT, AND ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII B AND SUCH TAX HAS NOT BEEN DEDUCTED', AND IT WA S IN THIS CONTEXT THAT THE CIT(A) NOTED THAT THOUGH THE FEE PAID TO GMPL WAS NOT COVERED BY FEES FOR TECHNI CAL SERVICES, IT COULD FALL UNDER THE HEAD 'OTHER SUM' BUT SINCE THE SAID OTHER SUM WAS NOT CHARGEABLE TO TAX IN IND IA, THE ASSESSEE DID NOT HAVE ANY TAX WITHHOLDING OBLIGATIO N. THIS CLASSIFICATION OF INCOME WAS NOT IN THE CONTEXT OF TREATY CLASSIFICATION BUT IN THE CONTEXT OF, WHAT HE BELIE VED TO BE, TWO CATEGORIES OF INCOME REFERRED TO UNDER SECTION 40(A)(I), I.E. 'ROYALTIES AND FEES FOR TECHNICAL SERVICES' AN D 'OTHER SUMS CHARGEABLE TO TAX'. AS THE CIT(A) DID SO, HE M ISSED OUT THE EXPRESSION 'INTEREST' APPEARING IN SECTION 40(A)(I) BUT THAT IS HARDLY MATERIAL IN THE PRESENT CONTEXT. WHAT IS MATERIAL IS THAT THE EXPRESSION 'OTHER INCOME' WAS USED IN THE CONTEXT OF MANDATE OF SECTION 40(A)(I) AND NOT IN THE CONTEXT OF TREATY CLASSIFICATION OF INCOME. LEARNED DEPARTMENTAL REPRESENTATIVE HAS CLEARLY MISSED OUT THIS VITAL FA CT. LET US NOW TURN TO THE PROVISIONS OF ARTICLE 23 OF THE APP LICABLE TAX TREATY. AS WE HAVE NOTED EARLIER, THIS TREATY PROVI SION PROVIDES THAT 'ITEMS OF INCOME WHICH ARE NOT EXPRES SLY MENTIONED IN THE FOREGOING ARTICLES OF THIS AGREEME NT MAY BE TAXED IN ACCORDANCE WITH THE TAXATION LAWS OF TH E RESPECTIVE CONTRACTING STATES'. LEARNED DEPARTMENTAL REPRESENTATIVE'S ARGUMENT IS T HAT 'CONSULTANCY CHARGES, BROKERAGE, COMMISSION, AND INCOMES OF LIKE NATURE W HICH ARE PAYMENTS WHICH ARE COVERED BY THE EXPRESSION 'O THER SUMS' AS STATED IN SECTION 40(A)(I) AND CHARGEABLE TO TAX IN INDIA AS PER THE INCOME TAX ACT, AND ALSO LIABLE TO TAX AS PER TAXATION LAWS OF SINGAPORE' ARE SQUARELY COVERE D BY ARTICLE 23 OF THE INDIA SINGAPORE TAX TREATY. THIS ARGUMENT PROCEEDS ON THE FALLACIOUS ASSUMPTION THAT 'OTHER SUMS' UNDER SECTION 40(A)(I) CONSTITUTES AN INCOME WHICH IS NOT CHARGEABLE UNDER THE SPECIFIC PROVISIO NS OF DIFFERENT ARTICLES OF INDIA SINGAPORE TAX TREATY, W HEREAS NOT ONLY THIS EXPRESSION 'OTHER INCOME' IS TO BE READ I N CONJUNCTION WITH THE WORDS IMMEDIATELY FOLLOWING TH E EXPRESSION 'CHARGEABLE UNDER THE PROVISIONS OF THIS (I.E. THE INCOME TAX ACT 1961) ACT', IT IS IMPORTANT TO BEAR IN MIND - - ITA 450 /17 25 THAT THIS EXPRESSION, I.E. 'OTHER SUMS, ALSO COVERS ALL TYPES OF INCOMES OTHER THAN (A) INTEREST, AND (II) ROYALT IES AND FEES FOR TECHNICAL ERVICES. EVEN BUSINESS PROFITS A RE COVERED BY THE EXPRESSION 'OTHER SUMS CHARGEABLE UN DER THE PROVISIONS OF THE ACT' SO FAR AS THE PROVISIONS OF SECTION 40(A)(I) AND SECTION 195 ARE CONCERNED AND, THEREFO RE, GOING BY THIS LOGIC, EVEN A BUSINESS INCOME, WHEN N OT TAXABLE UNDER ARTICLE 7, CAN ALWAYS BE TAXED UNDER ARTICLE 23. THAT IS CLEARLY AN ABSURD RESULT. A TAX TREATY ASSIGNS TAXING RIGHTS OF VARIOUS TYPES OF INCOME TO THE SOU RCE STATE UPON FULFILMENT OF CONDITIONS LAID DOWN IN RESPECTI VE CLAUSES OF THE TREATY. WHEN THESE CONDITIONS ARE SA TISFIED, THE SOURCE STATE GETS THE RIGHT TO TAX THE SAME, BU T WHEN THOSE CONDITIONS ARE NOT SATISFIED, THE SOURCE STAT E DOES NOT HAVE THE TAXING RIGHT IN RESPECT OF THE SAID IN COME. WHEN A TAX TREATY DOES NOT ASSIGN TAXABILITY RIGHTS OF A PARTICULAR KIND OF INCOME TO THE SOURCE STATE UNDER THE TREATY PROVISION DEALING WITH THAT PARTICULAR KIND OF INCOME, SUCH TAXABILITY CANNOT ALSO BE INVOKED UNDER THE RE SIDUARY PROVISIONS OF ARTICLE 23 EITHER. THE INTERPRETATION CANVASSED BY THE LEARNED DEPARTMENTAL REPRESENTATIV E, IF ACCEPTED, WILL RENDER ALLOCATION OF TAXING RIGHTS U NDER A TREATY REDUNDANT. IN ANY CASE, TO SUGGEST THAT CONS ULTANCY CHARGES, BROKERAGE AND COMMISSION CAN BE TAXED UNDE R ARTICLE 23, AS HAS BEEN SUGGESTED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, OVERLOOKS THE FACT THA T THESE INCOMES CAN INDEED BE TAXED UNDER ARTICLE 7, ARTICL E 12 OR ARTICLE 14 WHEN CONDITIONS LAID DOWN IN THE RESPECT IVE ARTICLES ARE SATISFIED. 9. IT IS ALSO IMPORTANT TO BEAR IN MIND THE FACT T HAT ARTICLE 23 BEGINS WITH THE WORDS 'ITEMS OF INCOME N OT EXPRESSLY COVERED' BY PROVISIONS OF ARTICLE 6-22. T HEREFORE, IT IS NOT THE FACT OF TAXABILITY UNDER ARTICLE 6-22 WHICH LEADS TO TAXABILITY UNDER ARTICLE 23, BUT THE FACT OF INC OME OF THAT NATURE BEING COVERED BY ARTICLE 6-22 WHICH CAN LEAD TO TAXABILITY UNDER ARTICLE 23. THERE COULD BE MANY SU CH ITEMS OF INCOME WHICH ARE NOT COVERED BY THESE SPECIFIC T REATY PROVISIONS, SUCH AS ALIMONY, LOTTERY INCOME, GAMBLI NG INCOME, RENT PAID BY RESIDENT OF A CONTRACTING STAT E FOR THE USE OF AN IMMOVEABLE PROPERTY IN A THIRD STATE, AND DAMAGES (OTHER THAN FOR LOSS OF INCOME COVERED BY A RTICLES 6-22) ETC. IN OUR HUMBLE UNDERSTANDING, THEREFORE, ARTICLE 23 DOES NOT APPLY TO ITEMS OF INCOME WHICH CAN BE CLASSIFIED UNDER SECTIONS 6-22 WHETHER OR NOT TAXAB LE UNDER THESE ARTICLES, AND THE INCOME FROM CONSULTANCY CHA RGES - - ITA 450 /17 26 ON IS COVERED BY ARTICLE 7, ARTICLE 12 OR ARTICLE 1 4 WHEN CONDITIONS LAID DOWN THEREIN ARE SATISFIED. LEARNED DEPARTMENTAL REPRESENTATIVE'S ARGUMENT, EMPHATIC AN D ENTHUSIASTIC AS IT WAS, LACKS LEGALLY SUSTAINABLE M ERITS AND IS CONTRARY TO THE SCHEME OF THE TAX TREATY. WHILE DEALING WITH THE SCOPE OF RESIDUARY ARTICLE OF INCOME UNDER THE TAX TREATIES, AND IN SUPPORT OF THE ABOVE CONCLUSIONS, WE MAY ALSO REFER TO CERTAIN OBSERVATION, WITH WHICH WE AR E IN MOST RESPECTFUL AGREEMENT, MADE BY THE HON'BLE JUSTICE P V REDDI, ARTICULATING THE VIEWS OF THE AUTHORITY FOR ADVANCE RULING IN THE CASE OF GEARBULK AG (318 ITR 66), AND IN HIS FELICITOUS WORDS AS FOLLOWS THE QUESTION IS WHETHER THE PROFITS FROM THE SHIPPING OPERATIONS IN INTERNATIONAL TRAFFIC CAN BE SAID TO BE 'AN ITEM OF INCOME' 'NOT DEALT WITH' IN THE PREVIOUS ARTICLES OF DTAA ? WE DO NOT THINK SO. AMONG THE VARIOUS ITEMS OF INCOME IN THE FOREGOING ARTICLES, BUSINESS PROFITS INTO WHICH THE SHIPPING INCOME FALLS HAS BEEN DEALT WITH UNDER ARTICLE 7. P ROFITS FROM THE INTERNATIONAL OPERATION OF SHIPS ARE ONLY A SPECIES OF BUSINESS PROFITS JUST AS THE PROFITS FROM INTERN ATIONAL AIR TRANSPORT. THE LATTER IS DEALT WITH SEPARATELY IN A RTICLE 8 FOR THE REASON THAT IT DOES NOT FALL IN LINE WITH THE S CHEME OF TAXATION OF BUSINESS PROFITS UNDER ARTICLE 7. EXCLU SIVE RIGHT IS GIVEN TO THE STATE IN WHICH THE ENTERPRISE RESID ES. PERMANENT ESTABLISHMENT TEST IS IRRELEVANT UNDER AR TICLE 8. HENCE, A SEPARATE ARTICLE. AS FAR AS THE PROFITS FR OM INTERNATIONAL OPERATION OF SHIPS ARE CONCERNED, IT IS AN INTEGRAL PART OF BUSINESS PROFITS; AT THE SAME TIME , THEY ARE EXCLUDED FROM THE BUSINESS PROFITS - ARTICLE FOR TH E OBVIOUS REASON THAT IT IS NOT INTENDED TO BE COVERED BY THE TREATY. THAT INCOME HAS BEEN LEFT TO THE CARE OF DOMESTIC L AW UNDER WHICH THE BURDEN OF TAXATION ON SUCH INCOME H AS BEEN MINIMIZED (VIDE SECTION 172 OF INCOME-TAX ACT) . WE ARE OF THE CONSIDERED VIEW THAT A PARTICULAR SPECIE S OF INCOME WHICH IS SPECIFICALLY REFERRED TO IN ARTICLE 7 AND DELIBERATELY LEFT OUT OF ITS GENUS, NAMELY BUSINESS PROFITS, CANNOT BE SAID TO BE AN ITEM OF INCOME NOT DEALT WI TH UNDER ARTICLE 7. THE EXPRESSION 'DEAL WITH' IS A COMPREHE NSIVE EXPRESSION HAVING DIFFERENT SHADES OF MEANING. IN T HE NEW CHAMBERS THESAURUS, THE MEANINGS OF'DEAL WITH' ARE GIVEN THUS: '1. DEAL WITH A SITUATION, ATTEND TO, CONCERN, SEE TO, MANAGE, HANDLE, TACKLE, COPE WITH, GET TO GRIPS WITH, TAKE CARE OF, LOOK AFTER, SORT OUT, PROCESS.' - - ITA 450 /17 27 IN COLLINS COBUILD ENGLISH LANGUAGE DICTIONARY, IT IS STATED THUS: 'IF A BOOK, SPEECH, FILM ETC. DEALS WITH A PARTICUL AR THING, IT HAS THAT THING AS ITS SUBJECT OR IS CONCERNED WITH IT.' IN SHORTER OXFORD DICTIONARY (THUMB INDEX EDN.) ONE OF THE MEANINGS GIVEN IS: 'BE CONCERNED WITH (A THING) IN ANY WAY; BUSY OR OC CUPIED ONESELF WITH, ESP. WITH A VIEW TO DISCUSS OR REFUTA TION.' THE FOLLOWING MEANING GIVEN IN THE NEW OXFORD AMERI CAN DICTIONARY MAY ALSO BE NOTED : 'TAKE MEASURES CONCERNING (SOMEONE OR SOMETHING) . TAKE OR HAVE AS A SUBJECT; DISCUSS.' .. 9.1 THE APPLICANT'S COUNSEL SUBMITTED THAT AN ITEM OF INCOME CAN BE SAID TO HAVE BEEN DEALT WITH IN AN ARTICLE OF THE TREATY ONLY IF IT DEFINES ITS SCOPE AS WELL AS ALLOCATES THE RIGHT TO TAX SUC H INCOME BETWEEN THE TWO CONTRACTING STATES. MERE EXCLUSION OF SHIPPING BUSINESS PROFITS FROM ARTICLE 7 DOES NOT AMOUNT TO DEALING WITH THAT ITEM OF INCOME. WE FIND IT DIFFICULT TO ACCEPT THIS CONTENTION. ALLOCATION OF TAXING RIGHT TO THE SOURCE STATE CAN WELL BE DONE BY SUCH A PROC ESS OF EXCLUSION. THERE IS NO PARTICULAR MANNER OR METHODO LOGY OF ACHIEVING THAT RESULT. THE EXPRESSION 'DEALT WITH' DOES NOT NECESSARILY MEAN THAT THERE SHOULD BE A DETAILED OR ELABORATE TREATMENT OF THE SUBJECT. 10. CLEARLY, THEREFORE, THE INCOME FROM CONSULTANCY SERVICES, WHICH CANNOT BE TAXED UNDER ARTICLE 7, 12 OR 14 BECAUSE CONDITIONS LAID DOWN THEREIN ARE NOT SATISF IED, CANNOT BE TAXED UNDER ARTICLE 23 EITHER. IT IS ALSO ONLY ELEMENTARY THAT WHEN RECIPIENT OF AN INCOME DOES NO T HAVE THE PRIMARY TAX LIABILITY IN RESPECT OF AN INCOME, THE INDEPENDENT OF THE PAYER HAVING MOVED AN APPLICATIO N UNDER SECTION 195 OR NOT, OR ON THE PAYER OR THE PA YEE HAVING OBTAINED AN ADVANCE RULING IN THEIR FAVOUR O R NOT. THE LAW IS NOW VERY WELL SETTLED IN THIS REGARD BY HON'BLE SUPREME COURT'S JUDGMENT IN THE CASE OF GE INDIA - - ITA 450 /17 28 TECHNOLOGY CENTRE PVT LTD VS CIT (SUPRA) WHEREIN TH EIR LORDSHIPS HAVE CATEGORICALLY HELD THAT, 'WHERE A PE RSON RESPONSIBLE FOR DEDUCTION IS FAIRLY CERTAIN, THEN H E CAN MAKE HIS OWN DETERMINATION AS TO WHETHER THE TAX WA S DEDUCTIBLE AT SOURCE AND, IF SO, WHAT SHOULD BE THE AMOUNT THEREOF'. IN VIEW OF THESE DISCUSSIONS, AND BEARING IN MIND ENTIRETY OF THE CASE, WE APPROVE THE CONCLUSIONS AR RIVED AT BY THE CIT(A) AND DECLINE TO INTERFERE IN THE MATTE R. 78. THE APPROACH SO ADOPTED BY THE COORDINATE BENCH HAS APPROVAL OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF BANGKOK GLASS INDUSTRY (SUPRA) WHEREIN THEIR LORDSH IPS DECLINED TO EXAMINE TAXABILITY OF A RECEIPT IN THE NATURE OF FEES FOR TECHNICAL SERVICE, WHICH FAILED THE TEST OF TAXABILITY UNDER THE RESPECTIVE TREATY PROVISION, UNDER OTHER INCOME CLAUSE OF THE TREAT Y. THIS ASPECT OF THE MATTER AND THE IMPACT OF HONBLE JURISDICTIONAL HIGH COURTS DECISION IN THE CASE OF BANGKOK GLASS INDUSTRY (SUP RA) HAS BEEN DISCUSSED AT LENGTH IN DEALING WITH GROUND OF APPEA L NO. 2 OF THE APPEAL BY THE ASSESSING OFFICER FOR THE ASSESSMENT YEAR 2011-12. WE RELY UPON THE SAID ANALYSIS IN THIS CONTEXT AS W ELL. AS THE ISSUE REGARDING APPROACHING THE RESIDUARY INCOME CLAUSE, IN A CASE IN WHICH THE FTS TESTS FAIL, IS COVERED BY THE DECISIO N OF HONBLE JURISDICTIONAL HIGH COURT, IT IS NOT EVEN NECESSARY TO DEAL WITH HOW OTHER HONBLE HIGH COURTS HAVE DEALT WITH THE ISSUE . IN VIEW OF HONBLE JURISDICTIONAL HIGH COURTS AFORESAID DECIS ION ON THE ISSUE, AND IN THE ABSENCE OF ANY HONBLE SUPREME COURT DEC ISION TO THE CONTRARY, THE VIEW SO TAKE BY THE COORDINATE BENCH DECISION HOLDS GOOD IN LAW. RESPECTFULLY FOLLOWING THE VIEW SO TAK EN BY THE COORDINATE BENCH, WHICH IS ALSO IN HARMONY WITH HON BLE DELHI HIGH COURT IN THE CASE OF GUY CARPENTER (SUPRA), HONBLE KARNATAKA HIGH COURT IN THE CASE OF DE BEERS INDIA (SUPRA) AN D HONBLE JURISDICTIONAL HIGH COURT DECISION ON THIS ISSUE IN THE CASE OF BANGKOK GLASS INDUSTRIES (SUPRA), WE UPHOLD THE GRI EVANCE OF THE - - ITA 450 /17 29 ASSESSEE. THIS TAX WITHHOLDING DEMAND MUST ALSO, TH EREFORE, STAND DELETED. WE ORDER SO. 79. GROUND NO. 4 IS THUS ALLOWED. 10.1 FURTHER, HE RELIED ON IN THE CASE OF ABB FZ- LLC, (75 TAXMANN. 83) (BANG.), & IN THE CASE OF BHARTI AIRT EL LIMITED (67 TAXMANN.COM 223)(DELHI) AND IN THE CASE OF TUF BAY REN (INDIA) LTD. (23 TAXMANN.COM 127)(MUM.). 11. THE LD. DR SUBMITTED THAT IN EARLIER YEAR FOR T HE ASSESSMENT YEAR 2007-08, THIS ISSUE CAME FOR CONSID ERATION IN ITA NO.90/MDS./2012 AND 1159/MDS./2012 VIDE ORDER D ATED REMITTED THE ISSUE TO THE FILE OF ASSESSING OFFICER TO EXAMINE THE ISSUE IN THE LIGHT OF JUDGMENT OF BOMBAY HIGH COURT IN THE CAST OF DIT VS. ISHIKAWJIMA HARIMA HEAVY INDS. CO. LTD., IN 212 TAXMAN 273(BOM.). HOWEVER, HE SUBMITTED THAT THE SAID DECI SION WAS DELIVERED BEFORE THE AMENDMENT OF SEC.9(1) OF THE A CT. ACCORDING TO LD. D.R, IN THE PRESENT ASSESSMENT YEA R THE DRP CONSIDERED THE AMENDMENT TO SEC.9(1) AND OBSERVED T HAT TAX MUST BE DEDUCTED WHICH HAS NOT BEEN DONE AND THUS T HE ACTION - - ITA 450 /17 30 OF THE ASSESSING OFFICER IS CORRECT IN INVOKING THE PROVISIONS OF SEC.40(A)(I) OF THE ACT. 12. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL ON RECORD. THE EXPLANATION INCORPORATED IN SECTION 9 DECLARES THAT WHERE THE INCOME IS DEEMED TO ACCRUE OR ARIS E IN INDIA UNDER CLAUSE (V),(VI) AND (VII) OF SUB-SEC.(1), SUC H INCOME SHALL BE INCLUDED IN THE TOTAL INCOME OF THE NON-RESIDENT , WHETHER OR NOT BE RESIDENT AS A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA. THE PLAIN READING OF THE SAI D PROVISIONS SUGGESTS THAT CRITERION OF RESIDENCE, PLACE OF BUSI NESS OR BUSINESS CONNECTION OF A NON-RESIDENT IN INDIA HAS BEEN DONE AWAY WITH FOR FASTENING THE TAX LIABILITY. HOWEVER , THE CRITERIA OF RENDERING SERVICE IN INDIA AND THE UTILIZATION OF T HE SERVICE IN INDIA TO ATTRACT TAX LIABILITY U/S.9 (I)(VII) REMAI NED UNTOUCHED AND UNAFFECTED BY THE EXPLANATION TO SEC.9 OF THE ACT A ND OUTSIDE INDIA. THEREFORE, THE TWIN CRITERION OF RENDERING OF SERVICES IN INDIA AND UTILIZATION OF SERVICES IN INDIA BECOME E VIDENTLY NECESSARY CONDITION TO DEDUCT TAX HOWEVER, IN RESPE CT OF SAID PAYMENTS, THE RENDERING OF SERVICES BEING PURELY OF F SHORE AND - - ITA 450 /17 31 OUTSIDE INDIA, THE WHATEVER PAID TOWARDS SAID SERV ICES DOES NOT ATTRACT TAX LIABILITY. 12.1 IN VIEW OF THE ABOVE, WE INCLINED TO REMIT T HE ISSUE TO THE FILE OF ASSESSING OFFICER TO EXAMINE THE ISSUE AFRE SH IN THE LIGHT OF ABOVE ORDER ALONG WITH CONCERNED DTAA AND DECIDE THEREUPON. THE ISSUE IS PARTLY ALLOWED FOR STATIST ICAL PURPOSES. 13. THE NEXT ISSUE IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE OF DEPRECIATION OF 7,33,13,900/- U/S.32 OF THE ACT, FOR NON DEDUCTION OF TDS. 14. THE FACTS OF THE ISSUE ARE THAT THE DURING THE YEAR, THE ASSESSEE HAS CLAIMED DEPRECIATION @ 20% AMOUNTING T O 7,33,13,900/- TOWARDS DRY DOCKING EXPENSES, WHICH W AS CAPITALIZED TO THE TUNE OF 36,65,69,501/- FOR WHICH THE ASSESSEE SHOULD HAVE DEDUCTED TDS U/S.195 OF THE AC T. ACCORDING TO THE ASSESSEE, IT IS NOT SUBJECTED TO T DS. 15. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE O PINION THAT THE DEPRECIATION CANNOT BE DISALLOWED WHICH IS TO B E GRANTED ON - - ITA 450 /17 32 THE COST OF CAPITAL ASSETS ON WHICH THERE IS NO QUE STION OF TDS. FOR THIS PURPOSE, WE RELY ON THE DECISION OF THE TR IBUNAL IN THE CASE OF M/S. CRESCENT CHEMSOL PVT. LTD. VS. ACIT IN ITA NO.1497/MUM/2010 FOR THE ASST. YEAR 2006-07 DATED 0 9.03.2011 WHEREIN THE TRIBUNAL HELD THAT:- 10. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSES SEE HAS RAISED GROUND NO.3 BEFORE THE TRIBUNAL. WE HAVE HEARD THE RIVAL SUBMISSIONS. PROVISIONS OF SECTION 40(IA) OF THE IN COME TAX ACT, 1961 (THE ACT) READS AS FOLLOWS: 40. NOTWITHSTANDI NG ANYTHING TO THE CONTRARY IN SECTION 30 TO[38], THE FOLLOWING AM OUNTS SHALL NOT BE DEDUCTED IN COMPUTING THE INCOME CHARGEABLE UNDER T HE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION, (IA) ANY INTEREST, COMMISSION OR BROKERAGE,[RENT, ROYALTY]FEES FOR PRO FESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICES PAYABLE TO A RESIDENT, OR AMOUNTS PAYABLE TO A CONTRACTOR OR SUB-CONTRACTOR, BEING RESIDENT, FOR CARRYING OUT ANY WORK(INCLUDING SUPPLY OF LABOU R FOR CARRYING OUT ANY WORK), ON WHICH TAX IS DEDUCTIBLE AT SOURCE UND ER CHAPTER XVII- BAND SUCH TAX HAS BEEN DEDUCTED OR, AFTER DEDUCTION ,[HAS NOT BEEN PAID ON OR BEFORE THE DUE DATE SPECIFIED IN SUB-SEC TION(1) OF SECTION 139:] A PERUSAL OF THE ABOVE PROVISIONS SHOW THAT IT IS ONLY WHEN A DEDUCTION IS CLAIMED IN COMPUTING THE INCOME CHARGE ABLE UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION T HAT THE ABOVE PROVISION ARE ATTRACTED. THE DEDUCTION CLAIMED SHOU LD BE OF - - ITA 450 /17 33 INTEREST, COMMISSION OR BROKERAGE, RENT, ROYALTY, F EES FOR PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICE S. THE CLAIM FOR DEPRECIATION MADE BY THE ASSESSEE DOES NOT FALL WIT HIN ANY OF THE CATEGORIES MENTIONED IN THE AFORESAID PROVISION. TH EREFORE, IT IS NOT POSSIBLE TO MAKE THE IMPUGNED DISALLOWANCE BY RESOR TING TO THE PROVISIONS OF SECTION 40(IA) OF THE ACT. THE LEARNE D D.R. HOWEVER SUBMITTED THAT PROVISIONS OF SEC.40(A)(I) OF THE AC T WERE HELD TO APPLY EVEN TO CAPITAL EXPENDITURE BY THE ITAT MUMBA I IN SPACO CARBURETORS (I) LTD. VS. ACIT 2005 (3) SOT 798 (MUM ). WE FIND THAT THE SAID DECISION WAS RENDERED IN THE CONTEXT OF DEDUCTION OF CAPITAL EXPENDITURE WHILE COMPUTING INCOME, CLAIMED BY AN ASSESSEE U/S.35AB OF THE ACT. WE THEREFORE DO NOT F IND ANY RELEVANCE TO THE ITA NO.1486/MUM/2010(A.Y. 2005-06) 7 SAID DECISION TO THE PRESENT CASE. IN THAT VIEW OF THE M ATTER WE DIRECT THAT THE DISALLOWANCE MADE BE DELETED. GROUND NO.3 RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. IN VIEW OF THE ABOVE ORDER OF TRIBUNAL, THIS GROUND IS ALLOWED. 16. THE NEXT GROUND IN THIS APPEAL IS WITH REGARD T O DISALLOWANCE OF FCCB EXPENDITURE. - - ITA 450 /17 34 17. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE HA S NOT MADE A CLAIM OF PREMIUM ON FCCB OF 69,14,60,000/- IN THE RETURN OR REVISED RETURN. ACCORDING TO THE DRP, AS REGARDS THE OBJECTIONS, IT IS IMPORTANT TO EXAMINE AS TO WHETHE R THE ANY VARIATION HAS BEEN CAUSED TO THE INCOME OR LOSS AS RETURNED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION OR NOT. THE SCOPE OF REFERENCE TO DISPUTE RESOLUTION PANEL IS AS PER SUB SECTION 2 OF SEC.144C OF THE ACT, I.E. THE ASSESSEE CAN FILE HIS OBJECTIONS ONLY IN RELATION TO SUCH VARIATION AS IS REFERRED TO IN SUB SECTION 1 OF SEC.144C. SUB SECTION 1 OF SEC.14 4C OF THE ACT REFERS TO ANY VARIATION IN THE INCOME OR LOSS RETU RNED AS MADE BY THE ASSESSING OFFICER AS IS PREJUDICIAL TO THE I NTEREST OF THE ASSESSEE. THE ABOVE OBJECTIONS DO NOT AT ALL RELAT E TO ANY SUCH VARIATION MADE BY THE AO IN THE INCOME OR LOSS AS R ETURNED BY THE ASSESSEE IN ITS RETURN FOR ASST. YEAR 2012-13. SO THE ABOVE OBJECTIONS CANNOT BE ADJUDICATED BY THE PANEL, BEIN G BEYOND ITS SCOPE OF POWERS AND NOT ACCEPTED THE OBJECTIONS. - - ITA 450 /17 35 17.1 THE LD.A.R RELIED ON THE DECISION OF CO-ORDIN ATE BENCH OF MUMBAI TRIBUNAL IN THE CASE OF MAHINDRA & MAHINDRA LIMITED, IN M.A. NO. 397/MUM/2012 (ARISING OUT OF ITA NO. 7999/ MUM/2011) ASSESSMENT YEAR 2007-08 VIDE ORDER DATED 03-10-2012 FOR THE PROPOSITION THAT THE TRIBUNAL IS POWERED TO ADMIT T HE ADDITIONAL GROUND AND IT IS TO BE REMITTED TO THE FILE OF AO F OR FRESH CONSIDERATION. 18. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ISSUE RAISED BY THE ASSESSEE GOES T O THE ROOT OF THE MATTER AND THE ASSESSEE HAS TAKEN A PLEA BEFORE THE DRP TO CONSIDER THIS ISSUE, BUT REFUSED TO ENTERTAIN IT ON THE REASON THAT IT WAS NOT BEFORE THE TPO/AO. IN OUR OPINION, ALL THE FACTS ARE AVAILABLE ON RECORD AND ASSESSEE MADE A CLAIM, IT I S APPROPRIATE TO REMIT THE ISSUE TO THE FILE OF AO FOR HIS CONSID ERATION. IN VIEW OF THE JUDGEMENT OF SUPREME COURT IN THE CASE OF NATIO NAL THERMAL POWER CO. LTD. V. CIT (229 ITR 283), WHEREIN IT WAS HELD THAT A LEGAL GROUND CAN BE RAISED AT ANY STAGE OF APPEAL. FURTHER, THE CO-ORDIANTE BENCH IN THE CASE OF M/S.ABHINIHA FOUND ATION PVT LTD., IN ITA NO.281/MDS./2016 FOR THE A.Y 2011-12 T HE TRIBUNAL VIDE ORDER DATED 29.04.2016 WHEREIN ADMITTING THE ADDITIONAL - - ITA 450 /17 36 GROUND, THOUGH IT WAS NOT RAISED BEFORE THE ASSESSI NG OFFICER AND OBSERVED THAT THE ASSESSEE IS ENTITLED TO RAISE NOT MERELY BY ADDITIONAL LEGAL SUBMISSIONS BEFORE THE APPELLATE A UTHORITIES, BUT IS ALSO ENTITLED TO RAISE ADDITIONAL CLAIMS BEFORE THEM. THE APPELLATE AUTHORITIES HAVE THE DISCRETION WHETHER O R NOT TO PERMIT SUCH ADDITIONAL CLAIMS TO BE RAISED. IT CANNOT, HO WEVER, BE SAID THAT THEY HAVE NO JURISDICTION TO CONSIDER THE SAME . THAT THEY MAY CHOOSE NOT TO EXERCISE THEIR JURISDICTION IN A GIVEN CASE IS ANOTHER MATTER. THE EXERCISE OF DISCRETION IS ENTI RELY DIFFERENT FROM THE EXISTENCE OF JURISDICTION. THE JUDGMENT I N THE CASE OF GOETZ REPORTED 284 ITR 323(SC) WAS CONFINED TO A CA SE WHERE THE CLAIM WAS MADE ONLY BEFORE THE ASSESSING OFFICE R AND NOT BEFORE THE APPELLATE AUTHORITIES. THE COURT DID NOT LAY DOWN THAT A CLAIM NOT MADE BEFORE THE ASSESSING OFFICER CANNO T BE MADE BEFORE THE APPELLATE AUTHORITIES. THE JURISDICTION OF THE APPELLATE AUTHORITIES TO ENTERTAIN SUCH A CLAIM HAS NOT BEEN NEGATED BY THE SUPREME COURT IN THIS JUDGMENT. IN VIEW OF THE ABO VE DISCUSSION, THIS ISSUE IS REMITTED BACK TO THE FILE OF AO, IF REQUIRE, THE AO SHOULD CALL FOR REMAND REPORT FROM THE TPO A ND DECIDE THE ISSUE IN ACCORDANCE WITH LAW AND ON MERIT, WE R EFRAIN FROM - - ITA 450 /17 37 COMMENTING ON MERITS AS THE LOWER AUTHORITIES TO DE CIDE IT. HENCE, THIS GROUND IS REMITTED TO THE FILE OF AO FO R FRESH CONSIDERATION. 19. THE NEXT GROUND IN THIS APPEAL IS WITH REGARD TO CLAIM OF WITHHOLDING TAX OF 3,05,66,352/- U/S.90 OF THE ACT. 20. THE FACTS OF THE ISSUE ARE THAT THE ASSESSING OFFICER HAS GROSSLY ERRED IN NOT ALLOWING CREDIT FOR INCOME TAX PAID OUTSIDE INDIA U/S.90 (FOREIGN TAX) WHILE ASSESSING POSITIVE INCOME OF THE ASSESSEE AS AGAINST LOSS CLAIMED IN THE RETURN OF I NCOME FILED U/S.139 OF THE ACT. ACCORDING TO THE DRP, AS REG ARDS THE OBJECTIONS, IT IS IMPORTANT TO EXAMINE AS TO WHETHE R THE ANY VARIATION HAS BEEN CAUSED TO THE INCOME OR LOSS AS RETURNED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION OR NOT. THE SCOPE OF REFERENCE TO DISPUTE RESOLUTION PANEL IS AS PER SUB SECTION 2 OF SEC.144C OF THE ACT, I.E. THE ASSESSEE CAN FILE HIS OBJECTIONS ONLY IN RELATION TO SUCH VARIATION AS IS REFERRED TO IN SUB SECTION 1 OF SEC.144C. SUB SECTION 1 OF SEC.14 4C OF THE ACT REFERS TO ANY VARIATION IN THE INCOME OR LOSS RETU RNED AS MADE - - ITA 450 /17 38 BY THE ASSESSING OFFICER AS IS PREJUDICIAL TO THE I NTEREST OF THE ASSESSEE. THE ABOVE OBJECTIONS DO NOT AT ALL RELAT E TO ANY SUCH VARIATION MADE BY THE AO IN THE INCOME OR LOSS AS R ETURNED BY THE ASSESSEE IN ITS RETURN FOR ASST. YEAR 2012-13. SO THE ABOVE OBJECTIONS CANNOT BE ADJUDICATED BY THE PANEL, BEIN G BEYOND ITS SCOPE OF POWERS AND NOT ACCEPTED THE OBJECTIONS. 21. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE OPINION THAT THE SIMILAR ISSUE WAS CONSIDERED BY THE TRIBUNAL IN ASSESSES OWN CASE IN ITA NOS.585/MDS/2015 & 267/MDS/2016 FOR THE ASSESSMENT YEARS 2010-11 AND 2011-12 DATED 14.9.201 6 WHEREIN TRIBUNAL HELD THAT:- 23. WE HAVE HEARD BOTH THE PARTIES AND PERUSE D THE MATERIAL ON RECORD. THIS ISSUE CAME FOR CONSIDERATION IN A SSESSEES OWN CASE IN I.T.A.NO.1159/MDS/2012 CHALLENGING THE ACTI ON OF THE CIT(A) IN RESTRICTING THE ASSESSEES CLAIM OF RELI EF U/S 90 OF THE ACT OF 224,67,411/- TO THE EXTENT OF TAX PAYABLE IN INDIA ON NET INCOME OF 516,93,732/- I.E DIFFERENCE BETWEEN INTEREST EARNE D FROM M/S AHPL AND INTEREST PAID ON BORROWINGS MADE FOR ADVANCING THE LOANS TO M/S AHPL. THE TRIBUNAL WHIL E ADJUDICATING THE GROUNDS, PLACED RELIANCE ON THE ORDER OF THE TR IBUNAL IN THE CASE OF BANK OF BARODA VS CIT IN I.T.A.NO.2927/MDS/ 2011 DATED 25.7.2014 WHEREIN THE TRIBUNAL HAS GIVEN A DIRECTIO N THAT THE INCOME OF THE BRANCHES OF THE ASSESSEE SHALL ALSO TAXABLE IN INDIA - - ITA 450 /17 39 I.E IT WOULD BE INCLUDED IN THE RETURN OF INCOME FI LED BY THE ASSESSEE IN INDIA AND WHATEVER TAXES HAVE BEEN PAID BY THE BRANCHES IN THE OTHER CONTRACTING STATES I.E THE SO URCE COUNTRY, CREDIT OF SUCH TAXES SHALL BE GIVEN. THEREAFTER, T HE TRIBUNAL IN THIS CASE REMITTED THE ISSUE TO THE FILE OF THE ASSESSIN G OFFICER TO DECIDE AFRESH IN THE LIGHT OF THE ABOVE ORDER OF TH E TRIBUNAL IN THE CASE OF BANK OF BARODA IN I.T.A.NO.2927/MUM/2011 DA TED 25.7.2014. LATER ASSESSEE FILED MA IN MA NOS. 95 & 96/MDS/2016 STATING THAT THE DIRECTION GIVEN BY THE TRIBUNAL IS NOT APPROPRIATE. SINCE THE ASSESSEE HAS NO INCOME FROM ANY BRANCHES IN SINGAPORE, THAT DECISION CANNOT BE APPLIED TO THE A SSESSEES CASE. THE TRIBUNAL WHILE ADJUDICATING THE SAID MA VIDE OR DER DATED 29.7.2016 HELD AS FOLLOWS : WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. IN OUR OPINION, THE INTERPRETA TION OF THE ORDER OF THE TRIBUNAL BY THE LD. AR IS MISCONCEIVED . THE TRIBUNAL WAS OF THE OPINION THAT IF THE INCOME FROM FOREIGN COUNTRY IS OFFERED TO TAX BY THE ASSESSEE BY WHATE VER MEANS, THE ASSESSEE HAS TO GET TAX CREDIT TO THE EXTENT THE TAX WAS PAID IN FOREIGN COUNTRY. IN OTHER WORD S, ONCE THE INCOME IS INCLUDED EITHER IN THE PROFIT & LOSS ACCOUNT OR IN THE RETURN OF INCOME, THE CORRESPONDING TAX C REDIT ON THE SAME INCOME HAS TO BE GIVEN. ACCORDINGLY, WE A RE OF THE OPINION THAT THERE IS NO NEED OF APPREHENSION F OR THE ASSESSEE THAT THE ASSESSING OFFICER WILL MISINTERPR ET THE ORDER OF THE TRIBUNAL. THEREFORE, WE DO NOT FIND AN Y MERIT IN THE ARGUMENT OF THE LD. AR. ACCORDINGLY, THE MISCE LLANEOUS PETITION IS DISMISSED. IN VIEW OF THE ABOVE, FOLLOWING THE ABOVE ORDER OF THE TRIBUNAL, WE ARE INCLINED TO HOLD THAT ONCE THE INTEREST INCOME SUBJECT TO TAX IN ANY MANNER IN THE HANDS OF THE ASSESSEE, THE CORRES PONDING TAX CREDIT TO BE GIVEN. ACCORDINGLY, THIS GROUND IS RE MITTED TO THE AO TO EXAMINE THE ISSUE IN THE LIGHT OF OUR ABOVE FIND INGS. - - ITA 450 /17 40 RESPECTFULLY FOLLOWING THE AFORESAID ORDER OF THE T RIBUNAL, THIS ISSUE IS REMITTED TO THE FILE OF LD. ASSESSING OFFI CER AND DECIDE ACCORDINGLY. HENCE, THIS GROUND OF APPEAL IS PARTL Y ALLOWED. 21. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 19 TH JUNE, 2017. SD/- SD/- ( $% & ) ( ' ( ) $ ) *%+,-,./01,2345,.62,+778,293 : ;< /JUDICIAL MEMBER ! ;<=>>70.?,.?@A1BA2 ': /CHENNAI, C; /DATED, THE 19 TH JUNE, 2017. K S SUNDARAM ;D EFGF /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. H3 /CIT(A) 4. H /CIT 5. FIJ K /DR 6. JLM /GF.
