M/s. A.G. Industries Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 4657/DEL/2016

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 4962 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-11-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 01-09-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY KAPOOR
• Keywords: Business income; Earning of tax free income; Rule 8D
• Section: 143(3); 14A; 80IC; 80HH

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH: A: NEW DELHI) BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND SHRI ANADEE NATH MISSHRA, ACCOUNTANT ME MBER ITA NO:- 4657/DEL/2016 (ASSESSMENT YEAR: 2012-13) A.G. INDUSTRIES PVT. LTD., HOUSE NO. 26, ANANDLOK, NEW DELHI PAN-AAACA0885C VS ACIT, CIRCLE - 1(1), NEW DELHI APPELLANT RESPONDENT APPELLANT BY SH. ASHWANI KUMAR, C.A. RESPONDENT BY SH. SANJAY KAPOOR, SR. DR ORDER PER ANADEE NATH MISSHRA, AM [A]. THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGA INST THE ORDER DATED 24.06.2016 PASSED BY LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-I, NEW DELHI [IN SHORT LD.CIT(A)] PE RTAINING TO ASSESSMENT YEAR 2012-13. THE ASSESSEE HAS RAISED F OLLOWING GROUNDS OF APPEAL:- 1. THAT ORDER PASSED U/S 250(6) OF THE INCOME TAX ACT, 1961 IS AGAINST LAW AND FACTS ON THE FILE IN AS MUCH AS THE LD. COM MISSIONER OF INCOME TAX (APPEALS) WAS NOT JUSTIFIED TO ARBITRARI LY UPHOLD DISALLOWANCE U/S 14A READ WITH RULE 8D AMOUNTING TO RS. 7,24,2 91/- P ERTAINING TO THE TAXABLE UNIT OF THE APPELLANT AND RS. 6,48,149/- PERTAINING TO EXEMPTED HARIDWAR UNIT (TO TAL RS. 13,72,440/-). 2. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) WAS FURTHER NOT JUSTIFIED TO UPHOLD ACTION OF THE LD. ASSESSING OFF ICER IN DISALLOWANCE OF DEDUCTION U/S 80-IC AMOUNTING TO RS. 28,81,388/- . ITA NO: - 4657/DEL/2016 PAGE | 2 3. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) WAS FURTHER NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE LD. ASSESS ING OFFICER IN NOT ALLOWING DEDUCTIONS U/S 80-IC ON DISALLOWED AMOUNT OF RS. 6,48,149/- U/S 14A. [B]. ASSESSMENT ORDER DATED 27.3.2015 WAS PASSED BY THE AO UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961. IN THIS ASSESSMENT ORDER, THE ASSESSING OFFICER MADE A FURTHER DISALLOWANCE O F RS. 13,72,440/- UNDER SECTION 14A OF THE INCOME TAX ACT R.W.R. 8D I NCOME TAX RULES IN ADDITION TO SUO MOTO DISALLOWANCE OF RS. 01,18,44,660/- MADE BY THE ASSESSEE UNDER SECTION 14A. FURTHER THE ASSESSING O FFICER DISALLOWED AN AMOUNT OF RS. 28,81,388/- OUT OF DEDUCTION UNDER SECTION 80IC OF INCOME TAX ACT, 1961 AMOUNTING TO RS. 32,49,88,100/ - CLAIMED BY THE ASSESSEE. THE RELEVANT PORTIONS OF THE ASSESSMENT O RDER AS REPRODUCED BELOW FOR EASE OF REFERENCE:- DISALLOWANCE U/S 14A READ WITH RULE 8D DURING THE YEAR ASSESSEE HAS EARNED EXEMPT INCOME/D IVIDEND INCOME OF RS.2,33,42,646/- AND MADE DISALLOWANCE OF RS. 1,18,44,660/- ON ACCOUNT OF EXPENDITURE INCURRED IN RELATION TO THE SAID INCOME U/S 14A. OUT OF THIS DISALLOWANCES OF R S. 50,86,500/- HAS BEEN MADE IN TAXABLE UNITS AND RS. 67,58,160/- IN EXEMPT UNIT. IN THIS CONNECTION THE ASSESSEE HAS SUBMITTED DETAILED WORKING OF DISALLOWANCES U/S 14A MADE AS PER COMPUT ATION OF INCOME. SUBMISSION / CALCULATION OF THE ASSESSEE IS ANALYZED IN LIGHT OF THE METHOD PRESCRIBED AS PER RULE-8D OF TH E I.T. RULES, IN THE FOLLOWING TABLE. ITA NO: - 4657/DEL/2016 PAGE | 3 4] DISALLOWANCES ON ACCOUNT OF EXCESS CLAIM OF DEDUCTI ON U/S 80 IC AS PER FORM 10 CCB THE ASSESSEE HAS CLAIMED DEDUCTI ON U/S 80 IC IN HARIDWAR UNIT TO THE TUNE OF RS. 32,49,88,100/-. TH E SAID DEDUCTION HAS BEEN CLAIMED ON PROFIT AND GAINS OF RS.36,22,45,554 /-. THE SAID PROFIT AND GAINS INCLUDE OTHER INCOME (INTEREST) OF RS. 28,81, 388/-. THE ASSESSEE WAS ITA NO: - 4657/DEL/2016 PAGE | 4 ASKED TO EXPLAIN THAT WHY DEDUCTIONS U/S 80 IC SHOU LD NOT BE DISALLOWED ON OTHER INCOME (INTEREST) OF HARIDWAR UNIT. ASSESSEE VIDE LETTER DATED 16.03.2015 SUBMITTED TH AT THE ASSESSEE HAS EARNED INTEREST AT RS. 2881388/-FROM THE FDRS E TC WHICH ARE PREPARED FOR MARGIN MONEY ETC. OTHERWISE ALSO, IT I S PERTINENT TO MENTION THAT THE ASSESSEE HAS PAID HUGE FINANCE COS T (I.E. INTEREST) FOR THE SAID ELIGIBLE UNIT. THE INTEREST EARNED IS LESS THAN THE INTEREST PAID AND THE ASSESSEE COULD HAVE SHOWN THE NET INTE REST AFTER SET OFF THE SAME WITHIN THE INTEREST HEAD. IT IS ALSO N OT OUT OF PLACE TO MENTION HERE THAT THE INTEREST INCOME EARNED WOULD HAVE NOT BEEN THERE HAD THE FUNDS NOT INVESTED AND WERE UTILIZED DIRECTLY FOR THE ELIGIBLE BUSINESS AND WOULD HAVE REDUCED THE FINANC E COST (INTEREST PAID).THEREFORE, THE INTEREST EARNED IS ACTUALLY, I N VIEW OF THE ABOVE DISCUSSIONS, IS PART AND PARCEL OF THE INCOME DERIV ED FROM THE ELIGIBLE UNIT ONLY. IT IS A MATTER OF PRESENTATION ONLY. NOTWITHSTANDING ANYTHING CONTRARY TO HERE IN ABOVE, HAD THERE BEEN NO INTEREST EXPENSES AND ONLY INTEREST INCOME, IT CAN BE SAID T HAT THE ASSESSEE HAD EARNED INTEREST PURELY ON INVESTMENTS. THE EXPLANATION OF THE ASSESSEE IS NOT ACCEPTABLE. SECTION 80IC OF THE INCOME TAX ACT, 1961 PROVIDES THAT, (1) WHERE THE GROSS TOTAL INCOME OF AN ASSESSEE IN CLUDES ANY PROFITS AND GAIN DERIVED BY AN UNDERTAKING OR AN ENTERPRISE FRO M ANY BUSINESS REFERRED TO IN SUB-SECTION (2), THERE SHALL, IN ACC ORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION, BE ALLOWED, IN COMP UTING THE TOTAL INCOME OF THE ASSESSEE, A DEDUCTION FROM SUCH PROFITS AND GAI NS, AS SPECIFIED IN SUB- SECTION (3). (3) THE DEDUCTION REFERRED TO IN SUB-SECTION (1) SH ALL BE-(I) IN THE CASE OF ANY UNDERTAKING OR ENTERPRISE REFERRED TO IN SUB-CLAUSE S (I) AND (III) OF CLAUSE (A) OF SUB-CLAUSES (I) AND (III) OF CLAUSE (B), OF SUB- SECTION (@), ONE HUNDRED PERCENT OF SUCH PROFITS AND GAINS FOR TEN ASSESSMEN T YEARS COMMENCING WITH THE INITIAL ASSESSMENT YEAR; (II) IN THE CASE OF ANY UNDERTAKING OR ENTERPRISE R EFERRED TO IN SUB-CLAUSES (II) OF CLAUSE (A) OF SUB-CLAUSES (II) OF CLAUSE (B ) OF SUB-SECTION (2), ONE HUNDRED PERCENT OF SUCH PROFITS AND GAINS FOR FIVE ASSESSMENT YEARS COMMENCING WITH THE INITIAL ASSESSMENT YEAR AND THE REAFTER TWENTY- FIVE PERCENT OF PROFIT AND GAINS. AS PER ABOVE, IT IS ESTABLISHED THAT THE DEDUCTION U/S 80IC OF IT' ACT, 1961 SHALL BE ALLOWED ON THE PROFITS AND GAINS FROM BUSI NESS. HOWEVER THE INTEREST INCOME EARNED SHALL BE TAXED UNDER INCOME FROM OTHER SOURCES. HENCE, IT IS CLEAR THAT INTEREST FROM FIXED DEPOSIT S IS NOT ENTITLED FOR DEDUCTION U/S 80IC OF THE ACT. RELIANCE IS PLACED I N THE CASE OF PANDIAN CHEMICALS LTD. VS. CIT [262 ITR 278 (SC)], WHEREIN THE APEX COURT HELD THAT DERIVATION OF INTEREST ON PROFITS ON DEPOSIT WITH THE ELECTRICITY BOARD COULD NOT BE SAID TO BE FLOWING DIRECTLY FROM THE INDUSTR IAL UNDERTAKING AND, THEREFORE, DEDUCTION UNDER SECTION 80HH COULD NOT B E ALLOWED IN RESPECT THEREOF. ITA NO: - 4657/DEL/2016 PAGE | 5 IN VIEW OF THE ABOVE FACTS, IT IS CLEAR THAT THE AS SESSEE IS NOT ENTITLED FOR DEDUCTION U/S 80 IC OF IT ACT ON INTEREST INCOME FR OM FIXED DEPOSITS OF RS. 28,81,388/- AND THE SAME IS BEING DISALLOWED. (ADDITION: RS. 28,81,388/-) IN VIEW OF ABOVE DISCUSSIONS I AM SATISFIED THAT AS SESSEE HAS FURNISHED INACCURATE PARTICULARS AND CONCEALED HIS INCOME. TH EREFORE, PENALTY PROCEEDINGS U/S 271(1) (C) IS INITIATED SEPARATELY. [C] THE ASSESSEE FILED APPEAL BEFORE THE LEARNED CI T(A), WHO CONFIRMED BOTH THE AFORESAID ADDITIONS. THE RELEVAN T PORTIONS OF THE AFORESAID IMPUGNED APPELLATE ORDER DATED 24.6.2016 ARE REPRODUCED AS UNDER FOR THE EASE OF REFERENCE:- I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT AND OBSERVATION OF THE AO MADE IN THE ASSESSMENT ORDER ON THE ISSUE IT IS SEEN THAT THE AO HAS DISALLOWED RS. 1,32,17,100/- A S EXPENSES PERTAINING TO EARNING EXEMPT INCOME AS AGAINST 1,18 ,44,660/- DISALLOWED BY THE APPELLANT IN THE COMPUTATION OF I NCOME. THE APPELLANT HAS CALCULATED THE COST OF INTEREST INCUR RED BY REDUCING THE AMOUNT OF INTEREST INCOME EARNED BY THE APPELLANT F ROM THE GROSS INTEREST EXPENSES WHILE WORKING OUT DISALLOWANCE TH E APPELLANT HAS TAKEN THE NET INTEREST EXPENSES AFTER REDUCING THE INTEREST EARNED BY IT FROM THE INTEREST EXPENSES WHEREAS THE AO HAS TAKEN THE INTEREST COST AS GROSS INTEREST EXPENDITURE INCURRED BY THE APPEL LANT FOR WORKING OUT DISALLOWANCE UNDER RULE 8D ON GOING THROUGH THE PRO VISIONS OF RULE 8D, IT IS SEEN THAT FOR WORKING OUT DISALLOWANCE THE AM OUNT OF INTEREST EXPENDITURE INCURRED BY THE APPELLANT DURING THE PR EVIOUS YEAR HAS TO BE TAKEN FOR WORKING OUT DISALLOWANCE THE PROVISION OF RULE 8D (2) (II) IS REPRODUCE HEREUNDER: - 'IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTE D IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY: - AX B C WHERE A= AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR; B= THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES ITA NO: - 4657/DEL/2016 PAGE | 6 NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS A PPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR: C= THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BAL ANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY O F THE PREVIOUS YEAR ' THE PROVISION OF RULE 8D (2)(II) TALKS ABOUT INTERE ST EXPENDITURE INCURRED BY THE ASSESSEE AND IT NOWHERE SAYS THAT N ET INTEREST EXPENDITURE HAS TO BE TAKEN FOR CALCULATION, THEREF ORE, THE CONTENTION OF THE APPELLANT THAT FOR WORKING OUT DISALLOWANCE UND ER RULE 8D, THE INTEREST COST TO THE ASSESSEE HAS TO BE TAKEN IS NO T CORRECT. THE VARIOUS CASE LAWS RELIED UPON BY THE APPELLANT DOES NOT DEA L WITH THE ISSUE INVOLVED HERE, THEREFORE, THE SAME ARE NOT APPLICAB LE TO THE FACTS OF THE APPELLANTS CASE HENCE, THE DISALLOWANCE WORKED OUT BY THE AO UNDER RULE 8D (2)(II) TAKING THE GROSS INTEREST EXPENDITU RE FOR WORKING OUT DISALLOWANCE OF INTEREST EXPENSES PERTAINING TO EAR NING EXEMPT INCOME IS CORRECT AND NO INTERFERENCE IS CALLED FOR. THERE FORE, THIS GROUND OF APPEAL IS REJECTED. 7. GROUND NO. 2 VIDE THIS GROUND OF APPEAL THE APPE LLANT HAS CHALLENGED DISALLOWANCE OF DEDUCTION U/S 80 1C OF RS 28,81.388 /- CLAIMED BY THE APPELLANT ON THE INTEREST INCOME RECEIVED. THE OBSE RVATION MADE BY THE ASSESSING OFFICER IS REPRODUCED HEREUNDER - '........... AS PER FORM 10 CCS THE ASSESSEE HAS CL AIMED DEDUCTION U/S 80IC IN HARIDWAR UNIT TO THE TUNE OF RS.32,49,88,100/-. THE SAID DEDUCTION HAS BEEN CLAIMED ON PROFIT AND GAINS OF RS. 36,22,45,55 4/-. THE SAID PROFIT AND GAINS INCLUDE OTHER INCOME (INTEREST) OF RS.28, 81,388/- THE ASSESSEE WAS ASKED TO EXPLAIN THAT WHY DEDUCTION U/S 80IC SH OULD NOT BE DISALLOWED ON OTHER INCOME (INTEREST) OF HARIDWAR U NIT. ASSESSEE VIDE LETTER DATED 16.03.2015 SUBMITTED THAT THE ASSESSEE HAS EARNED INTEREST AT RS. 28,81,388/- FROM THE FDRS ETC WHICH ARE PREP ARED FOR MARGIN MONEY ETC , OTHERWISE ALSO, IT IS PERTINENT TO MENT ION THAT THE ASSESSEE HAS PAID HUGE INTEREST FOR THE SAID ELIGIBLE UNIT. THE INTEREST EARNED IS LESS THAN THE INTEREST PAID THE ASSESSEE COULD HAVE SHOW N THE NET INTEREST AFTER SET OFF THE SAME WITHIN THE INTEREST HEAD. IT IS ALSO NOT OUT OF PLACE TO MENTION HERE THAT THE INTEREST INCOME EARNED WOULD HAVE NOT BEEN THERE HAD THE FUNDS NOT INVESTED AND WERE UTILIZED DIRECT LY FOR THE ELIGIBLE BUSINESS AND WOULD HAVE REDUCED THE FINANCE COST (I NTEREST PAID) THEREFORE, THE INTEREST EARNED IS ACTUALLY, IN VIEW OF THE ABOVE DISCUSSIONS, IS PART AND PARCEL OF THE INCOME DERIV ED FROM THE ELIGIBLE UNIT ONLY IT IS A MATTER OF PRESENTATION ONLY NOTWITHSTA NDING ANYTHING CONTRARY HERE IN ABOVE, HAD THERE BEEN NO INTEREST EXPENSES AND ONLY INTEREST INCOME, IT CAN BE SAID THAT THE ASSESSEE HAD EARNED INTEREST PURELY ON INVESTMENTS. ITA NO: - 4657/DEL/2016 PAGE | 7 THE EXPLANATION OF THE ASSESSEE IS NOT ACCEPTABLE. SECTION 80 IC OF THE IT ACT, 1961 PROVIDES THAT, (1) WHERE THE GROSS TOTAL INCOME OF AN ASSESSEE IN CLUDES ANY PROFITS AND GAIN DERIVED BY AN UNDERTAKING OR AN ENTERPRISE FRO M ANY BUSINESS REFERRED TO IN SUBSECTION (2) THERE SHALL, IN ACCOR DANCE WITH AND SUBJECT TO THE PROVISIONS OF THE IS SECTION BE ALLOWED, IN COM PUTING THE TOTAL INCOME OF THE ASSESSEE, A DEDUCTION FROM SUCH PROFITS AND GAINS, AS SPECIFIED IN SUB SECTION 93). (3) THE DEDUCTION REFERRED TO IN SUB-SECTION (1) SH ALL BE (I) IN THE CASE OF ANY UNDERTAKING OR ENTERPRISE REFERRED TO IN SUB-CL AUSES (I) AND (HI) OF CLAUSE (A) OF SUB-CLAUSES (I) AND (III) OF CLAUSE ( B) OF (2) ONE HUNDRED PERCENT OF SUCH PROFITS AND GAINS FOR TEN ASSESSMEN T YEARS COMMENCING WITH THE INITIAL ASSESSMENT YEAR. (II) IN THE CASE OF ANY UNDERTAKING OR ENTERPRISE R EFERRED TO IN SUB-CLAUSES (II) OF CLAUSE (A) OF SUB-CLAUSES (II) OF CLAUSE (B ) OF SUB-SECTION (2) ONE HUNDRED PERCENT OF SUCH PROFITS AND GAINS FOR FIVE ASSESSMENT YEARS COMMENCING WITH THE INITIAL ASSESSMENT YEAR AND THE REAFTER TWENTY-FIVE PERCENT OF PROFIT AND GAINS. AS PER ABOVE, IT IS ESTABLISHED THAT THE DEDUCTION U/S 80 1C OF IT ACT, 1961 SHALL BE ALLOWED ON THE PROFITS AND GAINS FROM BUSINESS HOWEVER THE INTEREST INCOME EARNED SHALL BE TAXED UNDER INCOME FROM OTHER SOURCES' HENCE, IT IS CLEAR THAT INTEREST FROM FIXED DEPOSIT S IS NOT ENTITLED FOR DEDUCTION U/S 80 1C OF THE ACT. RELIANCE IS PLACED IN THE CASE OF PANDIAN CHEMICALS LTD. VS CIT [262 ITR 278(SC)], WHEREIN TH E APEX COURT HELD THAT DERIVATION OF INTEREST ON PROFITS ON 'DEPOSIT WITH THE ELECTRICITY BOARD COULD NOT BE SAID TO BE FLOWING DIRECTLY FROM THE INDUSTR IAL UNDERTAKING AND, THEREFORE, DEDUCTION U/S 80 HH COULD NOT BE ALLOWED IN RESPECT THEREOF' IN VIEW OF THE ABOVE FACTS, IT IS CLEAR THAT THE AS SESSEE IS NOT ENTITLED FOR DEDUCTION U/S 80 1C OF IT ACT ON INTEREST INCOME FR OM FIXED DEPOSITS OF RS.28,81,388/- AND THE SAME IS BEING DISALLOWED. SUBMISSION OF THE APPELLANT DISALLOWANCE OF DEDUCTION CLAIMED UNDER SECTION 80- 1C AMOUNTING TO RS 28.81.388/- ON ACCOUNT OF INTEREST INCOME EARNED AT EXEMPTED UNIT, HARIDWAR IT IS RESPECTFULLY SUBMITTED THAT THE ASSE SSEE HAS EARNED INTEREST AT RS. 28,81,388/- FROM THE FDRS ETC WHICH WERE PRE PARED FOR MARGIN MONEY ETC., IN OTHER WORDS FOR THE PURPOSES OF THE INDUSTRIAL BUSINESS OF THE EXEMPTED UNIT ONLY. IT IS PERTINENT TO MENTION THAT THE ASSESSEE HAS PAID HUGE INTEREST FOR THE SAID ELIGIBLE UNIT THE INTERE ST EARNED IS LESS THAN THE INTEREST PAID. THE ASSESSEE COULD HAVE SHOWN THE NE T INTEREST AFTER SET OFF THE SAME WITHIN THE INTEREST HEAD. IT IS ALSO NOT OUT OF PLACE TO MENTION HERE THAT TH E INTEREST INCOME EARNED WOULD HAVE NOT BEEN THERE HAD THE FUNDS NOT INVESTE D AND WERE UTILIZED DIRECTLY FOR THE ELIGIBLE BUSINESS AND WOULD HAVE R EDUCED THE FINANCE COST (INTEREST PAID). ITA NO: - 4657/DEL/2016 PAGE | 8 THEREFORE THE INTEREST EARNED IS ACTUALLY, IN VIEW OF THE ABOVE DISCUSSIONS, IS PART AND PARCEL OF THE INCOME DERIVED FROM THE E LIGIBLE UNIT ONLY. IT IS A MATTER OF PRESENTATION ONLY NOTWITHSTANDING ANYTHING CONTRARY HERE IN ABOVE, HA D THERE BEEN NO INTEREST EXPENSES AND ONLY INTEREST INCOME, IT CAN BE SAID THAT THE ASSESSEE HAD EARNED INTEREST PURELY ON INVESTMENTS. RELIANCE IS PLACED ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS: DCIT VS. HIMACHAL EXICOM COMMUNICATION ..ON MAY, 2007 BENCH: I BANSAL, R SHARMA ORDER 1. THIS IS AN APPEAL FILED BY THE REVENUE AGAINST T HE ORDER OF CIT (APPEALS) DATED 23-1 -2006 FOR THE ASSESSMENT YEAR 2001 -02. IN THE MATTER OF ORDER PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 WHEREIN FOLLOWING GROUNDS OF APPEAL HAVE BEEN RAISE D. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT (APPEALS) ERRED IN I. ALLOWING DEDUCTION UNDER SECTION 80-IB OF THE INCOME TAX ACT, ON INTEREST INCOME ON MARGIN MONEY DEPOSITED WITH BANK FOR OPENING LETTER OF CREDIT AND OBTAINING BANK GUARANTEES FOR BUSINES S. II. THE APPELLANT CRAVES LEAVE TO ADD , TO ALTER, OR AMEND ANY GROUND OF THE APPEAL RAISED ABOVE AT THE TIME OF THE HEARING. 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PER USED BRIEF FACTS IN THIS CASE ARE THAT THE ASSESSEE-COMPANY IS ENGAGED IN THE MANUFACTURE OF TELECOMMUNICATION EQUIPMENTS. THE ASSESSEE CLAIM ED DEDUCTION UNDER SECTION 80-IB OF THE ACT @ 30% OF THE ELIGIBL E PROFITS. DURING THE COURSE OF ASSESSMENT UNDER SECTION 143(3) THE ASSES SING OFFICER OBSERVED THAT ASSESSEE IS CLAIMING; DEDUCTION ON TH E BASIS OF PROFIT AS PER PROFIT AND LOSS ACCOUNT WHEREAS DEDUCTION UNDER SECTION 80-IA OF THE ACT IS AVAILABLE ON THE ELIGIBLE PROFIT ONLY I. E. THE PROFIT FROM MANUFACTURING ACTIVITY OF ELIGIBLE UNIT. THE ASSESS ING OFFICER ASSESSED INTEREST INCOME ON FDRS WITH BANKS AGAINST MARGIN M ONEY AND CORPORATE LOANS, AS 'INCOME FROM OTHER SOURCES' INS TEAD OF ELIGIBLE BUSINESS PROFITS CLAIMED BY THE ASSESSEE ACCORDINGL Y, DEDUCTION UNDER SECTION 80- IB WAS DECLINED ON THE INTEREST INCOME. 3. BY THE IMPUGNED ORDER, CIT (APPEALS) ALLOWED ASS ESSEES CLAIM OF INTEREST INCOME BY OBSERVING THAT ASSESSEE WAS REQUIRED TO INVEST IN FDRS FOR MARGIN MONEY NOT FOR THE SAKE OF EARNING I NCOME FROM INVESTMENT OF SURPLUS FUNDS BUT AS A MANDATORY REQU IREMENT IN ORDER TO OBTAIN ORDERS FOR SALE. IT COULD NOT HAVE FLUCTUATE D TENDERS WITHOUT FILING BANK GUARANTEE AND WITHOUT THESE BANK GUARANTEES, I T COULD NOT HAVE OBTAINED ANY ORDERS. ACCORDINGLY, HE HELD THAT THES E FDRS WERE PURCHASED OUT OF BUSINESS COMPULSION AND WERE INEXT RICABLY LINKED WITH THE ASSESSEES BUSINESS ACTIVITIES. THE INTERES T INCOME OF RS 34.91 ITA NO: - 4657/DEL/2016 PAGE | 9 LAKHS WAS THUS HELD TO QUALIFY FOR INCLUSION IN THE PROFITS OF THE BUSINESS FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 80-IB OF THE ACT. 4. AGGRIEVED BY THE ABOVE ORDER OF THE CIT (APPEALS ), THE REVENUE IS IN APPEAL BEFORE US IT WAS CONTENDED BY THE LEARNED SR . DR SHRI. R.L MEENA THAT BY NO STRETCH OF IMAGINATION INTEREST EA RNED ON BANK DEPOSITS CAN BE SAID TO HAVE DERIVED FROM INDUSTRIA L UNDERTAKING SO AS TO QUALIFY FOR SPECIAL DEDUCTION UNDER SECTION 80-IB OF THE ACT FIE RELIED ON THE PROPOSITION LAID DOWN BY HONBLE SUPREME COU RT IN CASE OF CIT V. STERLING FOODS , WHEREIN THE HONBLE SUPREME COURT HAS HELD THAT ' THERE MUST BE, FOR THE APPLICATION OF THE WORDS DERIVED F ROM A DIRECT NEXUS BETWEEN THE PROFITS AND GAINS AND INDUSTRIAL UNDERT AKING' AS PER LEARNED DR IN THE PRESENT CASE, THE EARNING OF INTE REST WAS INCIDENTAL TO THE BUSINESS OF THE ASSESSEE, THEREFORE, CIT (APPEA LS) WAS NOT AT ALL JUSTIFIED IN TREATING SUCH INTEREST INCOME, AS DIRE CTLY FLOWING FROM THE INDUSTRIAL UNDERTAKING FOR ALLOWING CLAIM OF DEDUCT ION UNDER SECTION 80- IB OF THE ACT. 4. ON THE OTHER HAND, LEARNED AR SHRI. R.S. SINGHVI VE HEMENTLY ARGUED THAT ASSESSEE-COMPANY WAS EXCLUSIVELY ENGAGE D IN THE BUSINESS OF TELECOMMUNICATION EQUIPMENTS AS AN INDU STRIAL UNDERTAKING AND THE ENTIRE INCOME WAS COVERED FOR T HE STATUTORY DEDUCTION UNDER SECTION 80-IBOF THE ACT AS PER LEAR NED AR. DEPOSIT TO THE BANK WAS GIVEN AS A BUSINESS COMPULSION AND NOT AS PER A SWEET WILL OF THE ASSESSEE. AND THE SAME WAS MEANT FOR OB TAINING BANK GUARANTEE, LCS ETC. WITHOUT WHICH IT IS NOT POSSIBL E TO THINK OF CARRYING ON OF MANUFACTURING AND SALE OF TELECOMMUNICATION E QUIPMENT THE BUSINESS HE FURTHER CONTENDED THAT IN THE GROUNDS O F APPEAL, THE REVENUE HAS NOT DISPUTED THE FINDINGS OF CIT (APPEA LS) ABOUT THE INTEREST AS BUSINESS INCOME THERE WAS NO DISPUTE TH AT ASSESSEE WAS AN INDUSTRIAL UNDERTAKING, ENTIRE INCOME WAS COVERE D FOR STATUTORY DEDUCTION UNDER SECTION 80-IB, AND RECEIPTS OF INTE REST ON FDRS PURCHASED OUT OF BORROWED FUNDS AS A MATTER OF BUSI NESS COMPULSION AND EXPEDIENCY, IS IN THE NATURE OF BUSINESS, THE B ENEFIT OF DEDUCTION UNDER SECTION 80-IB SHOULD HAVE BEEN ALLOWED. HE DR AW OUR ATTENTION TO THE LANGUAGE OF SECTION 80-IB WHICH READS AS 'WH ERE THE GROSS TOTAL INCOME OF THE ASSESSEE INCLUDES ANY PROFIT AND GAIN S DERIVED FROM ANY BUSINESS REFERRED TO IN SUBSECTION (3) TO (II), (II A) AND (OB)....'MR. SINGHVI FURTHER CONTENDED THAT ON IDENTICAL FACTS, BENEFIT UNDER SECTION 80-IB HAS BEEN ALLOWED IN THE PRECEDING YEAR, THEREFORE, REVENUE CANNOT BE ALLOWED TO CHANGE ITS STAND, WITHOUT THERE BEING CH ANGE IN THE FACTS AND CIRCUMSTANCES DURING THE YEAR UNDER CONSIDERATI ON. HE FURTHER SUBMITTED THAT EVEN OTHERWISE THERE IS NO INFIRMITY IN THE ORDER OF CIT (APPEALS), AS BENEFIT OF NETTING IS TO BE ALLOWED E VEN AS PER THE DECISION OF HONBLE DELHI HIGH COURT IN CASE OF CIT V. SHRI RAM HONDA POWER EQUIP. LTD THE PURCHASE OF FDRS WERE OUT OF BORROWE D FUNDS, THEREFORE, THERE IS ON REASON TO DECLINE NETTING OF THE INTEREST EXPENDITURE OUT OF THE INTEREST INCOME WHILE BRINGI NG THE NET INTEREST INCOME FOR TAXATION UNDER THE HEAD 'INCOME FROM OTH ER SOURCES' HE FURTHER RELIED ON VARIOUS DECISIONS OF THE FOLLOWIN G CO-ORDINATE BENCHES WHEREIN BANK INTEREST INCOME WAS CONSIDERED AS INEX TRICABLY RELATED TO CARRYING OUT ON BUSINESS OF INDUSTRIAL UNDERTAKING AND CONSIDERED FOR DEDUCTION UNDER SECTION 80-1A OF THE ACT. ITA NO: - 4657/DEL/2016 PAGE | 10 1. ASSISTANT COMMISSIONER V. MAXCARE LABORATORIES L TD. (2005) 92 ITD 11 (CTK.) THE BANK INTEREST INCOME WAS CONSIDERED AS I NEXTRICABLY RELATED TO CARRYING OUT ON OF BUSINESS OF INDUSTRIAL UNDERTAKI NG AND CONSIDERED FOR DEDUCTION UNDER SECTION 80-IA. 2. CENTEX PUBLICATION (P.) LTD. V. DY. CIT (2003) 133 TAXMAN 42 (DELHI)(MAG). THE INTEREST INCOME WAS CONSIDERED AS DERIVED FROM INDUSTRIAL UNDERTAKING AND ELIGIBLE FOR DEDUCTION U NDER SECTION 80-L 3. PICRIC LTD V JT. CIT THE INTEREST ON FIXED DEPOS IT WITH THE BANK TOWARDS VARIOUS CREDIT LIMITS CONSIDERED AS DERIVED FROM AN ATTRIBUTABLE TO BUSINESS AND BENEFIT WAS ALLOWED UNDER SECTION 80HH C 4. LEATHER AGE V. ITO (2003) 86 ITD 4822 (LUCK) THE ASSESSEE IS A EXPORT ORIENTED UNIT - INTEREST ON FDR WAS CONSIDERED AS B USINESS INCOME. 5. CIT V. PUNIT COMMERCIAL LTD (MUM) THE ASSESSEE I S A 100% EXPORT ORIENTED UNIT - INTEREST ON FDR WAS CONSIDERED AS B USINESS INCOME. 6. CIT V. SSC SHOES LTD THE INTEREST ON BANK DEPOSI T CONSIDERED AS BUSINESS INCOME AND BENEFIT WAS ALLOWED UNDER SECTI ON 80HHC. IT IS THEREFORE, CLEAR THAT THE INTEREST INCOME SO EARNED BY THE ASSESSEE FORMS PART OF THE INCOME OF THAT VERY EXEMPTED UNIT AND IS ELIGIBLE FOR DEDUCTION U/S 80-IC. I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT AND OBSERVATION OF THE AO MADE IN THE ASSESSMENT ORDER ON THE ISSUE. I T IS SEEN THAT THE APPELLANT HAD CLAIMED DEDUCTION U/S 80 1C OF RS.32, 49,88.100/- ON THE PROFITS AND GAINS OF THE INDUSTRIAL UNDERTAKING. TH E SAID PROFITS AND GAINS INCLUDE OTHER INCOME (INTEREST) OF RS.28.81,388/- R ECEIVED FROM FDRS THE AO HAS HELD THAT 80 IC DEDUCTIONS SHALL BE ALLOWED ONLY ON THE PROFITS AND GAINS FROM BUSINESS AND INTEREST INCOME EARNED WILL BE TAXED UNDER THE HEAD OTHER SOURCES. THE AO HAS OBSERVED THAT IN TEREST HAS BEEN RECEIVED FROM THE FIXED DEPOSIT PREPARED BY THE APP ELLANT FOR MARGIN MONEY AND IT HAS NOT BEEN DERIVED FROM THE INDUSTRI AL UNDERTAKING, THEREFORE, AO DISALLOWED THE CLAIM OF DEDUCTION. DU RING THE COURSE OF APPELLANT PROCEEDINGS AR OF THE APPELLANT REITERATE D HIS CLAIM OF DEDUCTION AND RELIED UPON THE JUDGMENT OF ITAT, DEL HI IN THE CASE OF DCIT VS. HIMACHAL EXICOM COMMUNICATIONS TO SUPPORT HIS C LAIM. HOWEVER, IT IS SEEN THAT THIS JUDGMENT DOES NOT FAVOUR THE APPELLA NTS CLAIM, ON THE CONTRARY THE JUDGMENT SUPPORTS THE AOS VIEW. THE H ONBLE SUPREME COURT IN THE CASE OF CIT VS. STERLING FOOD HAS HELD THAT THERE MUST BE FOR THE APPLICATION OF WORDS DERIVED FROM A DIRECT NEXU S BETWEEN THE PROFITS AND GAINS AND INDUSTRY UNDERTAKING. THE EARNING OF INTEREST TO THE APPELLANTS CASE WAS INCIDENTAL TO THE BUSINESS AND NOT INEXTRICABLY LINKED TO THE INDUSTRIAL UNDERTAKING. THEREFORE, IN TEREST INCOME IS NOT ENTITLED FOR DEDUCTION UNDER SECTION 80IC. IN THIS REGARD RELIANCE IS PLACED ON FOLLOWING JUDICIAL PRONOUNCEMENT:- [2015] 56 TAXMANN.COM 415 (CALCUTTA)/[2015] 231 TAX MAN 585 (CALCUTTA) ITA NO: - 4657/DEL/2016 PAGE | 11 SECTION 80-IC OF THE INCOME-TAX ACT, 1961 - DEDUCT IONS- SPECIAL PROVISIONS IN RESPECT OF CERTAIN UNDERTAKINGS OR ENTERPRISES I N CERTAIN SPECIAL CATEGORY STATES (INTEREST INCOME) - ASSESSMENT YEAR 2007-08 - ASSESSEE- COMPANY DEPOSITED PROFITS AND GAINS OF ITS UNDERTAK ING AND EARNED INTEREST INCOME FROM THOSE FIXED DEPOSITS - IT CLAI MED DEDUCTION UNDER SECTION 80-IC IN RESPECT OF SAID INCOME - WHETHER I NTEREST INCOME EARNED BY ASSESSEE WOULD NOT BE TREATED AS INCOME DERIVED FROM BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING B Y ASSESSEE'S INDUSTRIAL UNDERTAKING FOR PURPOSE OF GRANTING RELIEF UNDER SE CTION 80-IC - HELD, YES [PARA 20] [IN FAVOUR OF REVENUE]' [2015] 62 TAXMANN.COM 252 (PUNJAB & HARYANA) HIGH C OURT OF PUNJAB & HARYANA COMMISSIONER OF INCOME-TAX, PATIAL A VS. H.M. STEELS LTD.* S.J. VAZIFDAR, ACTG. CJ. AND G.S. SANDHAWAL/A , J. IT APPEAL NO. 352 OF 2013 (O & M) AUGUST 4, 2015 SECTION 80-IC OF THE INCOME-TAX ACT, 1961 - DEDUCT IONS - SPECIAL PROVISIONS IN RESPECT OF CERTAIN UNDERTAKINGS OR ENTERPRISES I N CERTAIN SPECIAL CATEGORY STATES (COMPUTATION OF DEDUCTION) - ASSESSMENT YEAR 2007-08 - WHETHER ANY INDUSTRIAL UNDERTAKING OR ENTERPRISE WOULD BE E NTITLED TO DEDUCTION UNDER SUB-SECTION (1) OF SECTION 80-IC ONLY TO EXTE NT OF PROFITS DERIVED FROM SUCH AN INDUSTRIAL UNDERTAKING AND NOT ON ACCOUNT O F ANY REBATE OR INCENTIVE MADE AVAILABLE TO IT BY GOVERNMENT - HELD , YES - WHETHER, THEREFORE, ASSESSEE WAS NOT ENTITLED TO BENEFIT OF SECTION 80-IC IN RESPECT OF SALES TAX REBATE OBTAINED BY IT - HELD, YES [PARAS 10 AND 15] [IN FAVOUR OF REVENUE]' THE FACTS OF THE ABOVE JUDICIAL PRONOUNCEME NTS ARE IDENTICAL WITH THE FACTS OF THE APPELLANT'S CASE THEREFORE THE RATIO O F THE SAID JUDGMENTS IS SQUARELY APPLICABLE IN THE CASE OF APPELLANT. IN VI EW OF THE ABOVE JUDICIAL PRONOUNCEMENTS THE CLAIM OF THE APPELLANT OF DEDUCT ION UNDER SECTION 80 IC ON INTEREST INCOME RECEIVED FROM FIXED Y DEPOSIT IS NOT SUSTAINABLE AND THE DISALLOWANCE IS UPHELD. [D]. THE ASSESSEE HAS FILED THIS PRESENT APPEAL IN INCOME TAX APPELLATE TRIBUNAL (ITAT FOR SHORT) AGAINST THE AFO RESAID IMPUGNED ORDER DATED 24.06.2016 OF THE LEARNED CIT(A). [E]. WE TAKE UP GROUND NO. 1 OF APPEAL FIRST. AT TH E TIME OF HEARING BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED THAT FOR THE PURPOSES OF COMPUTATION OF DISALLOWANCE UNDER SECTI ON 14A OF I.T. ACT, THE DISALLOWANCE UNDER RULE 8D OF I.T. RULES IS TO BE DONE BY ITA NO: - 4657/DEL/2016 PAGE | 12 CONSIDERING THE NET AMOUNT OF EXPENDITURE BY WAY OF INTEREST AND NOT THE GROSS AMOUNT OF EXPENDITURE BY WAY OF INTEREST. FOR THIS PURPOSE, THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE FOLLOWING PRECEDENTS:- 1. PCIT VS. NIRMA CREDIT & CAPITAL (P.) LTD. (2017) 85 TAXMANN.COM 72 (GUJARAT HIGH COURT) 2. RAPID DIAGNOSTIC PVT. LTD. VS. ITO (2014) 40 CCH 597 (ITAT DELHI). 3. DCIT VS. DLF ASSETS PVT. LTD. (2018) IT NO. 167/ DEL/2016 (ITAT DELHI) 4. DCIT VS. ADANI GAS LTD. & ANR. (2018) 54 CCH 90 (ITAT AHMEDABAD) 5. DCIT VS. MACHINO FINANCE PVT. LTD. (2016) ITA NO . 312/KOL/2014 (ITAT KOLKATA) 6. DCIT VS. TRADE APARTMENT LTD. (2012) ITA NO. 127 7/KOL/2011 (ITAT KOLKATA) [F]. HOWEVER, THE LEARNED DEPARTMENTAL REPRESENTATI VE SUBMITTED THAT THE DISALLOWANCE OF EXPENDITURE IS TO BE DONE UNDER RULE 8D OF I.T. RULES R.W.S. 14A OF I.T. ACT BY CONSIDERING GROSS A MOUNT OF INTEREST EXPENDITURE. FOR THIS PURPOSE, HE RELIED ON THE ORD ERS OF THE ASSESSING OFFICER AND THE LEARNED CIT(A). IN THE CASE OF PR. CIT VS. NIRMA CREDIT & CAPITAL (P.) LIMITED (SUPRA), IT WAS HELD BY HONBL E GUJARAT HIGH COURT THAT AMOUNT OF EXPENDITURE BY WAY OF INTEREST WOULD BE INTEREST PAID BY ASSESSEE ON BORROWINGS MINUS TAXABLE INTEREST EARNE D DURING THE FINANCIAL YEAR, FOR THE PURPOSES OF APPLYING FACTOR S IN CLAUSE (II) OF SUB RULE (2) OF RULE 8D WHERE ASSESSEE PAYS INTEREST ON BORROWINGS, AS ALSO EARNS TAXABLE INTEREST ON INVESTMENTS. SAME VIEW HA S ALSO TAKEN BY COORDINATE BENCHES OF ITAT IN THE CASE OF DCIT VS. DLF ASSET PVT. LTD. ITA NO: - 4657/DEL/2016 PAGE | 13 (SUPRA), DCIT VS. MACHINO FINANCE LIMITED (SUPRA) A ND DCIT VS. TRADE APARTMENT LIMITED (SUPRA), COPIES OF THESE PRECEDEN TS WERE FILED BY THE LEARNED COUNSEL FOR THE ASSESSEE, AND ARE PLACED ON RECORD. THE RELEVANT PORTIONS FROM THESE PRECEDENTS ARE REPRODU CED BELOW FOR THE CASE OF REFERENCE:- FROM DCIT VS. DLF ASSET PVT. LTD. (SUPRA) 5. THE DECISION OF HONBLE HIGH COURT IN PCIT VS. NIR MA CREDIT & CAPITAL (P) LTD. IS BROUGHT TO OUR NOTICE AND IT IS SO HELD IN THE SAID DECISION THAT FOR THE PURPOSE OF APPLYING FACT ORS CONTENDED IN CLAUSE (II) OF SUB-RULE (2) OF RULE 8D, PRIOR TO IT S AMENDMENT W.E.F. 02.06.2016, AMOUNT OF EXPENDITURE BY WAY OF INTERES T WOULD BE THE INTEREST PAID BY THE ASSESSEE ON BORROWINGS MIN US TAXABLE INTEREST EARNED DURING THE FINANCIAL YEAR. AS A MAT TER OF FACT LD. CIT (A) ALSO PLACED ON RELIANCE ON THE DECISIONS OF THE ITAT REPORTED IN THE CASE OF INCOME TAX OFFICER, AHMEDAB AD VS. KARNAVATI PETROCHEM PVT. LTD. (ITA NO.2228/AHD./201 2 A. Y. 2008-09), AND OF MUMBAI TRIBUNAL IN CASE OF MORGAN STANLEY INDIA SECURITIES PVT. LTD. VS. ACIT ITA NO. 5072/MUM/2005 & 6774/MUM./2008 (A. Y. S. 200-02 & 2004-05) AND ALSO THE DECISION OF HIS PREDECESSOR IN ASSESSEES OWN CASE FOR A. Y. 2008- 09 AND 2009-10. 6. NO CIRCUMSTANCES ARE BROUGHT TO OUR NOTICE TO SAY A S TO WHY THE DECISIONS OF THE TRIBUNAL STATED ABOVE AND ALSO THE DECISION OF HONBLE GUJARAT HIGH COURT SHALL NOT BE MADE APPLIC ABLE FACTS OF THE PRESENT CASE. WE ARE CONVINCED WITH THE REASONI NG ADOPTED BY THE LD. CIT(A) IN PARAGRAPH 7.3 AND 7.4 OF HIS ORDE R. CONSEQUENTLY WE DO NOT FIND ANY ILLEGALITY OR REGULARITY IN SUCH FINDING, AND THEREFORE, WHILE UPHOLDING THE SAME DISMISS THIS GR OUND NO. 1 OF THIS APPEAL. FROM DCIT VS. MACHINO FINANCE LIMITED (SUPRA) 10. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH T HE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. AT THE O UTSET WE FIND THAT THE ASSESSEE WAS HAVING NO LOAN IN THE PREVIOUS YEAR AN D THE INVESTMENT MADE WAS OF RS. 18.31 CRORES. SO IT IS CLEAR THAT T HE INVESTMENT WAS MADE OUT OF THE OWNED FUND IN THE PREVIOUS YEAR. TH E INVESTMENT AND ITA NO: - 4657/DEL/2016 PAGE | 14 LOAN IN THE YEAR UNDER CONSIDERATION HAS INCREASED BY RS. 2.98 CRORES AND 12.25 CRORES RESPECTIVELY. SO AT THE MOST THE I NTEREST PERTAINING TO THE INCREASED INVESTMENT OF RS. 2.98 CRORES CAN PRO PORTIONATELY BE DISALLOWED. BESIDES THE ABOVE WE ALSO FIND THAT THE AO HAS FAILED TO ESTABLISH WHETHER THE BORROWED FUND WAS UTILIZED FO R THE INVESTMENT IN THE SHARES. IT IS ALSO IMPORTANT TO NOTE THAT THE A SSESSEE IS HAVING BOTH INTEREST INCOME AND INTEREST EXPENSES. IN THIS CONN ECTION VARIOUS COURTS HAVE DECIDED TO TAKE THE NET OF INTEREST AMOUNT WHI LE MAKING THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D OF INCOME TAX RULES 1962. THEREFORE WE ARE RELYING IN THE ORDER OF JURI SDICTIONAL TRIBUNAL IN THE CASE OF DCIT VS. TRADE APARTMENT LIMITED ITA NO . 1277/KO 1/2011. THE RELEVANT EXTRACT IS EXTRACTED BELOW : 3. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CA SE AS ALSO THE APPLICABLE LEGAL POSITION. 4. AS LEARNED CIT(A) HAS RIGHTLY OBSERVED, ONCE THE RE IS NO NET INTEREST EXPENDITURE, AS IS THE CASE BEFORE US - UP ON SETTING OFF INTEREST CREDITED TO PROFIT AND LOSS ACCOUNT, NO PA RT OF INTEREST DEBITED CAN BE DISALLOWED AS ATTRIBUTABLE TO EARNIN G TAX FREE DIVIDEND. THE CIT(A) WAS THUS QUITE JUSTIFIED IN DE LETING THE INTEREST DISALLOWANCE. WE HAVE ALSO NOTED THAT ENTI RE EXPENSES INCURRED BY THE ASSESSEE HAVE BEEN OFFERED FOR DISA LLOWANCE, AND ONCE THAT HAPPEN, NOTHING REMAINS FOR FURTHER DISAL LOWANCE U/S. 14A. THE DISALLOWANCE UNDER SECTION 14A CAN COME IN TO PLAY ONLY OUT OF EXPENSES CLAIMED/OR DEDUCTION AND EXPENSES H AVE BEEN CLAIMED FOR DEDUCTION, THERE CANNOT BE ANY DISALLOW ANCE EITHER. THE CONCLUSIONS ARRIVED AT BY THE CIT(A) ARE, THERE FORE, CORRECT AND ADMIT NO INTERFERENCE BY US. WE, APPROVE AND CONFIR M THE ORDER OF THE CIT(A). IN THE INSTANT CASE THE ID. CIT(A) HAS CALCULATED T HE DISALLOWANCE UNDER SECTION 14A R.W.R. 8D OF INCOME TAX RULES AFTER TAK ING THE NET INTEREST EXPENDITURE. WE FIND THAT THE VIEW TAKEN BY THE ID. CIT(A) IS SUPPORTED WITH THE ORDER OF TRADE APARTMENTS LIMITED (SUPRA). IN VIEW OF THE ABOVE PROPOSITION OF LAW, WE FIND NO REASON TO INTERFERE IN THE ORDER OF ID. CIT(A). HENCE THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. FROM DCIT VS. TRADE APARTMENT LIMITED (SUPRA) 4.AS LEARNED CIT(A) HAS RIGHTLY OBSERVED, ONCE THE RE IS NO NET INTEREST EXPENDITURE, AS IS THE CASE BEFORE US - UPON SETTIN G OFF INTEREST CREDITED TO PROFIT AND LOSS ACCOUNT, NO PART OF INTEREST DEBITE D CAN BE DISALLOWED AS ATTRIBUTABLE TO EARNING TAX FREE DIVIDEND. THE CIT( A) WAS THUS QUITE JUSTIFIED IN DELETING THE INTEREST DISALLOWANCE. WE HAVE ALSO NOTED THAT ENTIRE EXPENSES INCURRED BY THE ASSESSEE HAVE BEEN OFFERED FOR DISALLOWANCE, AND ONCE THAT HAPPEN, NOTHING REMAINS FOR FURTHER ITA NO: - 4657/DEL/2016 PAGE | 15 DISALLOWANCE U/S. 14A. THE DISALLOWANCE UNDER SECTI ON 14A CAN COME INTO PLAY ONLY OUT OF EXPENSES CLAIMED FOR DEDUCTIO N AND EXPENSES HAVE BEEN CLAIMED FOR DEDUCTION, THERE CANNOT BE ANY DIS ALLOWANCE EITHER. THE CONCLUSIONS ARRIVED AT BY THE CIT(A) ARE, THEREFORE , CORRECT AND ADMIT NO INTERFERENCE BY US. WE, APPROVE AND CONFIRM THE ORD ER OF THE CIT(A). [F.1]. RESPECTFULLY FOLLOWING THESE PRECEDENTS IN T HE CASE OF PR. CIT VS. NIRMA CREDIT & CAPITAL (P.) LTD. (SUPRA), DCIT VS. ASSET PVT. LTD. (SUPRA), DCIT VS. MACHINO FINANCE LIMITED (SUPRA) A ND DCIT VS. TRADE APARTMENT LIMITED (SUPRA), WE DECIDE THE ISSUE IN D ISPUTE IN FAVOUR OF THE ASSESSEE AND DIRECT THE AO TO COMPLETE DISALLOW ANCE UNDER RULE 8D OF I.T. RULES R.W.S. 14A OF THE I.T. ACT BY CONSIDE RING NET INTEREST (INTEREST PAID BY THE ASSESSEE ON BORROWINGS MINUS TAXABLE INTEREST EARNED DURING THE YEAR) FOR PURPOSE OF CLAUSE (II) OF SUB RULE (2) OF RULE 8D. [G]. AS FAR AS SECOND GROUND OF APPEAL IS CONCERNED , THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE SUBMISSIONS MADE BEFORE THE LEARNED CIT(A) DURING APPELLATE PROCEEDINGS BEFORE HIM. THESE SUBMISSIONS HAD ALREADY BEEN CONSIDERED BY THE LEAR NED CIT(A) RELEVANT PORTION OF WHICH HAS BEEN REPRODUCED IN FO REGOING PARAGRAPH C OF THIS ORDER. WE ARE OF THE VIEW THAT THE ORDE R OF LEARNED CIT(A) ON THIS ISSUE IS JUST AND FAIR AND IN ACCORDANCE WITH LAW, HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE. THE LEARNE D COUNSEL FOR THE ASSESSEE HAS NOT BROUGHT ANY FURTHER MATERIALS FOR OUR CONSIDERATION TO PERSUADE AS TO TAKE VIEW DIFFERENT FROM THE VIEW TA KEN BY THE LEARNED ITA NO: - 4657/DEL/2016 PAGE | 16 CIT(A). THE ORDER OF THE LEARNED CIT(A) IS WELL REA SONED, DETAILED AND SPEAKING ORDER, IN WHICH THERE IS NO SUCH INFIRMITY WHICH WARRANTS ANY INTERFERENCE BY US. THEREFORE, SECOND GROUND OF APP EAL IS DISMISSED. [H]. WE NOW COME TO THE THIRD GROUND OF APPEAL. THE RELEVANT PORTION OF THE ORDER OF THE LEARNED CIT(A) IS REPRODUCED AS UNDER:- 6. GROUND NO. 3 PERTAINS TO THE CLAIM OF THE APPELLANT THAT EXPENSE S DISALLOWED U/S 14A FOR EARNING EXEMPT INCOME SHOULD BE CONSIDERED FOR DEDUCTION U/S 80 IC OF THE IT ACT, 1961 OF RS.6,48, 149/- SUBMISSION OF THE APPELLANT ' ......... NOTWITHSTANDING ANY THING CONTRARY HERE IN ABOVE IN THE DISCUSSION OF GROUND NO 1. IF AT ALL, YOUR GOOD SEL F TAKES THE VIEW THAT THE DISALLOWANCE U/S 14A IS TO BE CALCULATED ON NET INTEREST AS CALCULATED BY THE ID AO, THEN IN THAT CASE, THE DIS ALLOWANCE CALCULATED BY THE LD AO FOR THE EXEMPTED UNIT, IS ALLOWED U/S 80-IC. THE LD AO HAS ARBITRARILY AND WRONGLY NOT ALLOWED THE DEDUCTION U NDER SECTION 80-IC ON DISALLOWANCE UNDER SECTION 14A PERTAINING TO EXEMPT ED UNIT AT RS. 6,48,149/-. DECISION I HAVE CONSIDERED THE SUBMISSION OF THE APPE LLANT, IT IS SEEN THAT EXPENSES DISALLOWED U/S 14A PERTAINS TO EARNIN G OF THE EXEMPT INCOME AND SUCH DISALLOWANCE OF EXPENSES HAS TO BE MADE U/S 14A WHICH HAS GOT OVER RIDING AFFECTS ON SECTIO N 80 IC. THESE EXPENSES WERE PERTAINING TO EARNING EXEMPT INCOME A ND SAME CANNOT BE CONSIDERED FOR DEDUCTION U/S 80 IC. THERE FORE, THIS GROUND OF APPEAL OF THE APPELLANT IS REJECTED. [H.1]. WE ARE OF THE VIEW THAT THE ORDER OF LEARNED CIT(A) ON THIS ISSUE IS JUST AND FAIR AND IN ACCORDANCE WITH LAW, HAVING RE GARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED COUNSEL FOR T HE ASSESSEE HAS ALSO NOT BROUGHT ANY FURTHER MATERIALS FOR OUR CONSIDERA TION TO PERSUADE AS TO TAKE A VIEW DIFFERENT FROM THE VIEW TAKEN BY THE LEARNED CIT(A). THE ORDER OF THE LEARNED CIT(A) IS WELL REASONED, DETAI LED AND SPEAKING ITA NO: - 4657/DEL/2016 PAGE | 17 ORDER. NO SUCH INFIRMITY IN THE ORDER OF LD. CIT(A) HAS BEEN BROUGHT TO OUR NOTICE BY LD. COUNSEL OF THE ASSESSEE, WARRANTI NG ANY INTERFERENCE BY US. IN FACT, NO SPECIFIC SUBMISSIONS WERE MADE B Y THE LD. COUNSEL FOR THE ASSESSEE, EXCEPT THAT THIS GROUND OF APPEAL WAS CONSEQUENTIAL TO GROUND NO. 2 OF APPEAL. AS NO SUBMISSIONS WERE MADE ON MERITS OF THIS GROUND OF APPEAL, BY LEARNED COUNSEL FOR THE ASSESS EE; AND AS WE FIND NO INFIRMITY IN THE ORDER OF LD. CIT(A), WE DECLINE TO INTERFERE WITH THE ORDER OF THE LEARNED CIT(A). ACCORDINGLY, THIRD GRO UND OF APPEAL IS DISMISSED. [I]. IN THE RESULT, SECOND AND THIRD GROUNDS RAISED BY THE ASSESSEE IN THIS APPEAL ARE ALLOWED. [J]. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. O RDER PRONOUNCED IN OPEN COURT ON 07.11.2019. SD/- SD/- (H.S. SIDHU) (ANADEE NA TH MISSHRA) JUDICIAL MEMBER ACCOUNTANT MEM BER DATED: 07.11.2019 SH COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR