ACIT, Circle, Panchkula V. M/s Janak Global Resources Pvt. Ltd., Panchkula

ITA 470/CHANDI/2018

• Counselvise Citation: [2018] 112 COUNSELVISE.COM (IT) 5286 (ITAT-CHANDIGARH)
• Duration Of Justice: 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 13-04-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: MANOJ KUMAR MS CHANDERKANTA
• Keywords: Business expenditure; Earning of tax free income; Question of law; Wholly owned subsidiary; Assessment record; Commercial expediency; Rule 8D; Set aside
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH A, CHANDIGARH , !' #! $ % , &' BEFORE: SHRI SANJAY GARG, JM & SMT. ANNAPURNA GUPTA , AM ./ ITA NO. 470/CHD/2018 / ASSESSMENT YEAR : 2014-15 THE A.C.I.T., PANCHKULA CIRCLE, PANCHKULA. M/S JANAK GLOBAL RESOURCES PVT. LTD., PLOT NO.315, INDL- AREA, PH-1, PANCHKULA. ./PAN NO: AACCJ4466C /APPELLANT /RESPONDENT /ASSESSEE BY : SHRI MANOJ KUMAR ,MS.CHANDERKANTA SR.DR / REVENUE BY : SHRI PARIKSHIT AGGARWAL, CA ! ' /DATE OF HEARING : 06.07.2018/16.10.18 #$%&' /DATE OF PRONOUNCEMENT : 16 .10.2018 &( / ORDER PER ANNAPURNA GUPTA, AM : THIS APPEAL HAS BEEN PREFERRED BY THE REVENUE AGAIN ST THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (AP PEALS), PANCHKULA (HEREINAFTER REFERRED TO AS CIT(APPEALS) DATED 21.2.2018 RELATING TO ASSESSMENT YEAR 2014-15. 2. GROUND NO.1 RAISED BY THE REVENUE READS AS UNDER : 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE THE LD. CIT(A) HAS ERRED IN ALLOWING THE APPEAL OF TH E ASSESSEE AND DELETING THE DISALLOWANCE OF RS.18,44,482/-U/S 36(L)(III) WHICH IS NOT CORRECT BECAUSE THE ASSESSEE HAS GIVEN INTEREST FREE ADVANCES OF RS.3,55,00,000/- TO SHIVAKS IMPEX LIMITED, SISTER CONCERN WHICH IS FOR NON BUSINESS PURPOSES. ITA NO.470/CHD/2018 A.Y. 2014-15 2 3. BRIEF FACTS RELEVANT TO THE ISSUE ARE THAT DURIN G ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD GIVEN INTEREST FREE ADVANCE OF RS.3,55 ,00,000/- TO SHIVAKS IMPEX LTD., A SISTER CONCERN. ON THE OTH ER HAND, THE ASSESSEE HAD PAID INTEREST OF RS.33,40,780/- ON LOAN RAISED FROM BANKS BUT HAD NOT CHARGED ANY INTEREST ON THE LOANS ADVANCED TO M/S SHIVAKS IMPEX LTD. THE ASSESS ING OFFICER ASKED THE ASSESSEE AS TO WHY INTEREST EXPEN SES SHOULD NOT BE DISALLOWED U/S 36(L)(III) OF THE INCO ME TAX ACT, 1961 (IN SHORT THE ACT) AND ADDED TO THE TAXABLE INCOME. THE ASSESSEE FILED ITS REPLY, WHICH IS REPRODUCED I N PARA 2 OF THE ASSESSMENT ORDER. BRIEFLY PUT THE ASSESSEE CONT ENDED THAT THE IMPUGNED ADVANCES WERE BUSINESS ADVANCES A ND THEREFORE NO DISALLOWANCE, OF INTEREST PAID ON FUND S UTILIZED IF ANY FOR MAKING THE ADVANCES, WAS WARRANTED. THE ASSESSEE ALSO CONTENDED ALTERNATELY THAT IT HAD UTILIZED ITS OWN INTEREST FREE FUNDS FOR MAKING THE ADVANCES AND THE REFORE ALSO NO DISALLOWANCE OF INTEREST U/S.36(1)(III) WAS WARRANTED. AFTER CONSIDERING THE REPLY FILED BY THE ASSESSEE, THE AO REJECTED THE SAME AND ON THE BASIS OF REASONS RECOR DED IN PARA 2.1 OF THE ASSESSMENT ORDER INTEREST AMOUNTING TO RS.18,44,482/- WAS DISALLOWED AND ADDED TO THE INCO ME OF THE ASSESSEE. THE AO HELD THAT THE ASSESSEE HAD FAI LED TO PROVE BUSINESS EXIGENCY FOR MAKING THE ADVANCES, AN D THEREFORE, AS PER THE DECISION OF THE JURISDICTIONA L HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES LTD., REPO RTED IN 286 ITR 1 AND OF THE APEX COURT IN THE CASE OF S.A. BUILDERS, ITA NO.470/CHD/2018 A.Y. 2014-15 3 REPORTED IN 288 ITR 1, THE DISALLOWANCE OF INTEREST WAS WARRANTED . 4. DURING APPELLATE PROCEEDINGS THE ASSESSEE CONTEN DED THAT IT HAD SUFFICIENT OWN FUNDS FOR MAKING THE INV ESTMENT AND, THEREFORE, NO DISALLOWANCE U/S.36(1)(III) OF T HE ACT WARRANTED. RELIANCE WAS PLACED ON A NUMBER OF DECIS IONS OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THIS REGAR D AND ALSO ON DECISIONS OF THE ITAT CHANDIGARH BENCH. THE LD.CIT(APPEALS) ON APPRECIATING THE CONTENTION OF T HE ASSESSEE DELETED THE DISALLOWANCE MADE FOLLOWING TH E DECISION OF THE HON'BLE JURISDICTIONAL IN THE CASE OF CIT VS. MAX INDIA LTD. IN ITA NO.210/CHD/2013 AND CIT VS. S TOCK KAPSONS ASSOCIATES, 381 ITR 204 (P&H). THE RELEVANT FINDINGS OF THE CIT(A) AT PARA 5.2 OF THE ORDER IS AS UNDER: 5.2 I HAVE GONE THROUGH THE FACTS OF THE CASE AND WRITTEN SUBMISSION FILED BY THE APPELLANT. IT IS NO TED FROM THE BALANCE SHEET FROM A.Y.2013-14 & A.Y.2014-15 RESPECTIVELY THAT APPELLANT'S SHARE CAPITAL, FREE RESERVES AND INTEREST FREE CURRENT LIABILITIES FAR EXCEEDED THE ADVANCE OF RS.3.55 CRORES GIVEN TO THE SISTER CONCE RN SHIVAKS IMPEX LTD. DURING ASSESSMENT YEAR 2013-14 . THE AVERAGE FREE FUNDS AVAILABLE IN THE A.Y.2013-14 ARE RS.1560 LACS AND IN A.Y.2014-15 ARE RS.1491 LACS. T HUS THE APPELLANT HAS DEMONSTRATED THE AVAILABILITY OF ENOUGH SURPLUS FUNDS FOR MAKING INTEREST FREE ADVANCE TO T HE SISTER CONCERN. THE HON'BLE JURISDICTIONAL HIGH COU RT HAS HELD IN THE CASE OF CIT VS MAX INDIA LTD. ITA NO.210/CHD/2013 DATED 08.03.2017 THAT IF AN ASSESSE E ESTABLISHES THAT ITS INTEREST FREE FUNDS WERE EQUAL TO OR MORE THAN THE INTEREST BEARING FUNDS IT WOULD BE OPEN TO IT T O CONTEND THAT PRESUMPTION ARISES THAT INVESTMENTS HAVE BEEN MADE OUT OF THE SAME. SIMILARLY RELIANCE PLACED BY THE APPELLANT ON CIT VS. KAPSONS ASSOCIATES, 381 ITR 204(P&H) IS ALSO FOUND TO BE SU PPORTING THE ITA NO.470/CHD/2018 A.Y. 2014-15 4 FACTS OF ITS CASE. THEREFORE, NO PORTION OF THE INT EREST PAID ON BORROWED FUNDS IS REQUIRED TO BE DISALLOWED IN THE CASE OF THE APPELLANT AND ADDITION MADE ON THIS ACCOUNT FOR BOT H THE YEARS UNDER APPEAL ARE ORDERED TO BE DELETED. THIS GROUND OF APPEAL IS ALLOWED. 5. AGGRIEVED BY THE SAME THE REVENUE HAS COME UP IN APPEAL BEFORE US. 6. DURING THE COURSE OF HEARING BEFORE US, THE LD. DR CONTENDED THAT THE PROPOSITION LAID DOWN BY THE HON 'BLE JURISDICTIONAL HIGH COURT IN THE DECISION RELIED UP ON BY HE CIT(APPEALS) WHILE DELETING THE DISALLOWANCE WAS N O LONGER GOOD LAW. IT WAS POINTED OUT THAT THE HON'BLE JURIS DICTIONAL HIGH COURT IN VARIOUS DECISIONS HAD LAID DOWN THAT WHERE THE ASSESSEE COULD DEMONSTRATE SUFFICIENCY OF OWN F UNDS, THE PRESUMPTION THAT WOULD ARISE WAS THAT IT HAD USED I TS OWN FUNDS FOR THE PURPOSE OF MAKING INTEREST FREE NON B USINESS ADVANCES, CALLING FOR NO DISALLOWANCE OF INTEREST U /S. 36(1)(III) OF THE ACT. THE LD. DR POINTED OUT THAT THIS PRESUMPTION THEORY HAD NOW BEEN OVERRULED BY THE HO N'BLE APEX COURT IN ITS DECISION IN GROUP OF CASES WITH T HE LEAD CASE BEING MAXOPP INVESTMENT LTD. VS. CIT (2018) 40 2 ITR 640 (SC), WHEREIN IN THE CONTEXT OF SECTION 14A THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CAS E OF AVON CYCLES LTD. VS. CIT IN ITA NO.277 OF 2013 WAS ALSO UNDER CONSIDERATION. THE LD. DR POINTED OUT FROM THE ORDE R OF THE HON'BLE APEX COURT THAT IN THE SAID CASE THE HON'BL E JURISDICTIONAL HIGH COURT HAD UPHELD THE DISALLOWAN CE OF INTEREST U/S 14A WHERE MIXED FUNDS WERE DEPLOYED BY THE ASSESSEE, AND THIS PROPOSITION WAS AFFIRMED BY THE HON'BLE ITA NO.470/CHD/2018 A.Y. 2014-15 5 APEX COURT ALSO IN THE AFOREMENTIONED APPEAL BEFORE IT. OUR ATTENTION WAS DRAWN TO PARA 42 OF THE ORDER OF THE HON'BLE APEX COURT IN THIS REGARD AS UNDER: 40. CIVIL APPEAL NO. 1423 OF 2015 IS FILED BY M/S. AVON CYC LES LIMITED, LUDHIANA, WHEREIN THE AO HAD INVOKED SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES AND APPORTIONED THE EXPENDIT URE. THE CIT(A) HAD SET ASIDE THE DISALLOWANCE, WHICH VIEW WAS UPTURNE D BY THE ITAT IN THE FOLLOWING WORDS: '...ADMITTEDLY THE ASSESSEE HAD PAID TOTAL INTEREST OF R S.2.92 CRORES OUT OF WHICH INTEREST PAID ON TERM LOAN RAISED FOR SPECIFIC PURPOSE TOTALS TO RS.1.70 CRORES AND BALANCE INTEREST PAID BY THE ASSESSEE IS RS.1.21 CRORES. THE FUNDS UTILIZED BY THE ASSESSEE BEING MIXED FUNDS AND IN VIEW OF THE PROVISIONS OF RULE 8D(2)(II) OF THE INCOME TAX RULES THE DISALLOWANCE IS CONFIRMED AT RS.10,49,851/-, WE FIND NO MERIT IN THE AD HOC DISALLOWANCE MADE BY THE CIT (APPEALS) RS.5,00,000/-. CONSEQUENTLY, GROU ND OF APPEAL RAISED BY THE REVENUE IS PARTLY ALLOWED AND GROUND RAISED BY THE ASSESSEE IN CROSS-OBJECTION IS ALLOWED...'- TAKING NOTE OF THE AFORESAID FINDING OF FACT, THE H IGH COURT HAS DISMISSED THE APPEAL OF THE ASSESSEE OBSERVING AS UNDER: 'IN THE PRESENT CASE, AFTER EXAMINING THE BALANCE-SHE ET OF THE ASSESSEE, A FINDING OF FACT HAS BEEN RECORDED THAT T HE FUNDS UTILIZED BY THE ASSESSEE BEING MIXED FUNDS, THEREFOR E, THE INTEREST PAID BY THE ASSESSEE IS ALSO AN INTEREST ON THE INVE STMENTS MADE. SUCH BEING A FINDING OF FACT, WE DO NOT FIND THAT AN Y SUBSTANTIAL QUESTION OF LAW ARISES FOR CONSIDERATION OF THIS COURT. AFTER GOING THROUGH THE RECORDS AND APPLYING THE PR INCIPLE OF APPORTIONMENT, WHICH IS HELD TO BE APPLICABLE IN SUCH C ASES, WE DO NOT FIND ANY MERIT IN CIVIL APPEAL NO. 1423 OF 2015, WHICH IS ACCORDINGLY DISMISSED. THE LD. DR STATED THAT IT WAS CLEARLY EVIDENT FROM THE ABOVE ORDER OF THE HON'BLE APEX COURT THAT THE PRES UMPTION ITA NO.470/CHD/2018 A.Y. 2014-15 6 THEORY LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT IN VARIOUS DECISIONS, NOW STOOD OVERRULED AND WHERE MI XED FUNDS WERE DEPLOYED BY THE ASSESSEE, DISALLOWANCE O F INTEREST ON PROPORTIONATE BASIS WAS TO BE MADE TO T HE EXTENT OF INTEREST FREE NON BUSINESS ADVANCES MADE BY THE ASSESSEE. IN SUM AND SUBSTANCE, THE LD. DR CONTENDED THAT THE MIXED FUNDS THEORY HAD BEEN CONFIRMED TO BE THE LAW OF TH E LAND AS OPPOSED TO THE PRESUMPTION THEORY LAID DOWN BY T HE HON'BLE JURISDICTIONAL HIGH COURT. 7. THE LD. COUNSEL FOR ASSESSEE, ON THE OTHER HAND, VEHEMENTLY OPPOSED THIS CONTENTION OF THE LD. DR. T HE LD. COUNSEL FOR ASSESSEE POINTED OUT THAT THE DECISION RENDERED IN THE CASE OF AVON CYCLES LTD. (SUPRA) WAS ON A DI FFERENT SET OF FACTS AND THE PROPOSITION LAID DOWN THEREIN WAS TO BE READ IN THE CONTEXT OF THE FACTS RELATING TO IT. IT WAS CONTENDED THAT BEFORE THE HON'BLE SUPREME COURT THE ONLY FACT BEFORE THE HONBLE COURT WAS THAT THERE WERE MIXED FUNDS A VAILABLE WITH THE ASSESSEE AND IN THE LIGHT OF THIS LIMITED FACT, THE HON'BLE SUPREME COURT UPHELD THE DISALLOWANCE OF IN TEREST U/S 14A OF THE ACT AFTER HOLDING IN THE LEAD CASE I .E. MAXOPP INVESTMENT LTD. (SUPRA) THAT THE APPORTIONMENT RULE WAS TO BE APPLIED FOR THE PURPOSE OF MAKING DISALLOWANCE O F EXPENSES INCURRED IN RELATION TO EARNING EXEMPT INC OME,AS PER SECTION 14A OF THE ACT. THE CONTENTION OF THE L D. COUNSEL FOR ASSESSEE WAS THAT IT WAS NEITHER SUBMITTED TO T HE COURT THAT SUFFICIENT OWN INTEREST FREE FUNDS WERE AVAILA BLE, NOR WERE ANY ARGUMENTS MADE RAISING THE PRESUMPTION THA T ITA NO.470/CHD/2018 A.Y. 2014-15 7 WOULD ARISE IN SUCH CASE. IT WAS POINTED OUT THAT E VEN THE QUESTION BEFORE THE HONBLE COURT WAS NOT RELATING TO THE CORRECTNESS OF THE PRESUMPTION THEORY AND THEREFORE , ALSO THE DISALLOWANCE U/S 14A WAS NOT DEALT WITH BY THE HON'BLE SUPREME COURT IN THIS CONTEXT. IT WAS CONTENDED THE REFORE, THAT THE DECISION RENDERED IN THE CASE OF AVON CYCL ES LTD. (SUPRA) HAD TO BE READ IN THE RESTRICTED SENSE, OF MEANING THAT WHERE THE FACT SITUATION REVEALED THE LIMITED FACT OF MIXED FUNDS AVAILABLE WITH THE ASSESSEE, DISALLOWAN CE U/S 14A WAS WARRANTED. THE LD. COUNSEL FOR ASSESSEE THE REAFTER CONTENDED THAT IN FACT THE HON'BLE APEX COURT, IN T HE CASE OF HERO CYCLES PVT. LTD. VS. CIT, 379 ITR 347(SC), HAD UPHELD THE PRESUMPTION THEORY OF UTILIZATION OF OWN INTERE ST FREE FUNDS FOR MAKING NON BUSINESS ADVANCES WHERE SUFFIC IENCY OF SUCH FUNDS IS ADEQUATELY DEMONSTRATED. IT WAS POINT ED OUT THAT THE HONBLE SUPREME COURT IN THE SAID CASE ,ON THE ISSUE OF DISALLOWANCE OF INTEREST U/S 36(1)(III) ON ADVANCES MADE TO DIRECTORS HAD HELD THAT WHERE THE ASSESSEE HAD SUFFICIENT SURPLUSES IT COULD HAVE UTILIZED THOSE F UNDS FOR GIVING ADVANCES TO ITS DIRECTORS. 8. THE LD. COUNSEL FOR ASSESSEE STATED THAT IT IS C LEARLY EVIDENT FROM THE ABOVE THAT THE HON'BLE APEX COURT HAD UPHELD THE PROPOSITION THAT WHERE SUFFICIENT OWN IN TEREST FREE FUNDS ARE AVAILABLE NO DISALLOWANCE OF INTERES T U/S 36(1)(III) OF THE ACT WAS WARRANTED. OUR ATTENTION WAS ALSO DRAWN TO VARIOUS DECISIONS OF THE HON'BLE JURISDICT IONAL HIGH ITA NO.470/CHD/2018 A.Y. 2014-15 8 COURT WHICH HAD ALSO UPHELD THE PRESUMPTION THEORY AS UNDER: 1. BRIGHT ENTERPRISES P. LTD. VS. CIT, (2016) 381 I TR 107 (P&H) 2. CIT VS. KAPSONS ASSOCIATES, (2015) 381 ITR 204 ( P&H) 3. GURDAS GARG VS. CIT, ITA NO.413/2014 DATED 16.7.2015 (P&H), 4. PR.CIT VS. M/S. MALHOTRA BOOK DEPOT, ITA NO.31 O F 2017 DATED 23.02.2017 (P&H) 5. PR.CIT VS. M/S. HOLY FAITH INTERNATIONAL PVT. LT D., ITA NO.87 OF 2017 DATED 24.07.2017 (P&H) 6. TRIDENT INFOTECH CORPORATION LTD. VS. CIT & ANR, (2016) 385 ITR 335 (P&H) 7. CIT VS. MAX INDIA LTD., (2017) 398 ITR 209 (P&H) 9. WE HAVE CAREFULLY CONSIDERED THE CONTENTIONS OF BOTH THE PARTIES AND HAVE ALSO GONE THROUGH VARIOUS CASE LAWS REFERRED TO BEFORE US. THE ISSUE TO BE ADJUDICATED, AS NARROWED DOWN FROM THE ARGUMENTS MADE BEFORE US BY BOTH THE PARTIES, IS WHETHER IN RELATION TO DISALLOWANC E OF INTEREST MADE U/S.36(1)(III) OF THE ACT, THE PROPOS ITION LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT IN A NUMBER OF DECISIONS, THAT WHERE THE ASSESSEE HAD SUFFICIEN T OWN INTEREST FREE FUNDS ALONG WITH INTEREST BEARING FUN DS AND HAD MADE OR ADVANCED SUMS FOR NON BUSINESS PURPOSES WIT HOUT CHARGING ANY INTEREST, THE PRESUMPTION THAT WOULD ARISE IS THAT THE INVESTMENT HAD BEEN MADE OUT OF INTEREST F REE FUNDS GENERATED OR AVAILABLE WITH THE ASSESSEE, IS STILL A GOOD LAW IN THE LIGHT OF THE DECISION OF THE HON'BLE APEX CO URT IN THE CASE OF HERO CYCLES LTD. (SUPRA). ITA NO.470/CHD/2018 A.Y. 2014-15 9 10. WE ARE IN AGREEMENT WITH THE CONTENTION OF THE LD. COUNSEL FOR ASSESSEE. UNDOUBTEDLY, PROPOSITION OF L AW LAID DOWN BY COURTS HAVE TO BE READ IN THE CONTEXT OF TH E FACTS BEFORE THEM AND THE ISSUE DEALT WITH BY THEM. RELIA NCE SHOULD NOT BE PLACED ON A DECISION WITHOUT DISCUSSI NG HOW THE FACTUAL SITUATION FITS IN WITH THE FACTUAL SITU ATION OF THE DECISION ON WHICH RELIANCE IS PLACED. THE HONBLE H IGH COURT OF BOMBAY IN THE CASE OF CIT VS SUDHIR, 214 ITR 154 (BOM) HAS OBSERVED THAT A CASE IS AN AUTHORITY FOR WHAT I T ACTUALLY DECIDES AND NOT WHAT MAY COME TO FOLLOW FROM SOME OBSERVATION WHICH MAY FIND PLACE THEREIN. THE HONB LE HIGH COURT OBSERVED AS UNDER: IT IS WELL-SETTLED THAT THE RATIO OF A DECISION AL ONE IS BINDING, BECAUSE A CASE IS ONLY AN AUTHORITY FOR WHAT IT ACTUALLY DECI DES AND NOT WHAT MAY COME TO FOLLOW FROM SOME OBSERVATIONS WHICH FIND PL ACE THEREIN. THE RATIO OF THE DECISION HAS TO BE DISTINGUISHED FROM PROPOSITI ONS ASSUMED BY THE COURT TO BE CORRECT FOR THE PURPOSE OF DISPOSING OF THE P ARTICULAR CASE, BECAUSE IT IS THE RATIO AND NOT THE PROPOSITIONS WHICH ARE REL EVANT AND BINDING. IT IS, THEREFORE, NOT PROPER TO REGARD EVERY WORD, CLAUSE OR SENTENCE OCCURRING IN A JUDGMENT OF THE COURT AS CONTAINING A FULL EXPOSI TION OF THE LAW. JUDGMENTS OF THE COURTS SHOULD NOT BE CONSTRUED AS STATUTES. THEY MUST BE READ AS A WHOLE AND OBSERVATIONS MADE THEREIN SHOUL D BE CONSIDERED IN THE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THAT CASE A ND THE QUESTIONS BEFORE THE COURT. A DECISION OF THE COURT TAKES ITS COLOUR FROM THE QUESTIONS INVOLVED IN THE CASE IN WHICH IT IS RENDERED. IN THE CASE OF CIT VS SUN ENGINEERING WORKS PVT. LT D. 198 ITR 297(SC), THE HONBLE SUPREME COURT OBSERVED THAT JUDGEMENTS MUST BE READ AS A WHOLE AND OBSERVATIONS IN JUDGEMENTS SHOULD BE CONSIDERED IN THE CONTEXT IN W HICH ITA NO.470/CHD/2018 A.Y. 2014-15 10 THEY ARE MADE AND IN THE LIGHT OF THE QUESTION THAT WERE BEFORE THE COURT: IT IS NEITHER DESIRABLE NOR PERMISSIBLE TO PICK OUT A WORD OR A SENTENCE FROM THE JUDGEMENT OF THE SUPREME COU RT DIVORCED FROM THE CONTEXT OF THE QUESTION UNDER CONSIDERATION AND TREAT IT TO BE THE COMPLETE LAW D ECLARED BY THE COURT. THE JUDGEMENT MUST BE READ AS A WHOLE AND THE OBSERVATION FROM THE JUDGEMENT HAVE TO BE CONSI DERED IN THE LIGHT OF THE QUESTIONS WHICH WERE BEFORE THE COURT.A DECISION OF THE SUPREME COURT TAKES ITS COL OUR FROM THE QUESTION INVOLVED IN THE CASE IN WHICH IT IS RENDERED AND WHILE APPLYING THE DECISION TO A LATER CASE,COURTS MUST CAREFULLY TRY TO ASCERTAIN THE TRU E PRINCIPLE LAID DOWN BY THE DECISION. 11. THE HONBLE APEX COURT IN THE CASE OF GOODYEAR INDIA LTD & ORS VS STATE OF HARYANA & ANOTHER AND STATE O F MAHARASHTRA & ANOTHER REPORTED IN 188 ITR 402(1991) HAVE HELD THAT A DECISION ON A QUESTION THAT HAS NOT BE EN ARGUED CANNOT BE TREATED AS A PRECEDENT. THE HONBLE KERAL A HIGH COURT IN THE CASE OF CIT VS K. RAMAKRISHNAN (1993) 202 ITR 997 HELD THAT A PRECEDENT IS AN AUTHORITY ONLY FOR WHAT IT ACTUALLY DECIDES AND NOT FOR WHAT MAY REMOTELY OR E VEN LOGICALLY FOLLOW FROM IT. HAVING SAID SO WE FIND THAT IN THE CASE OF AVON CYCLES LTD. (SUPRA) THE ISSUE WAS RELATING TO DISALLOWANCE OF EXPENDITURE U/S 14A OF THE ACT. THE HON'BLE APEX CO URT DEALING WITH THE BUNCH OF CASES RELATING TO SAID IS SUE, TOOK UP THE CASE OF MAXOPP INVESTMENT LTD. (SUPRA) AS TH E LEAD CASE AND PROCEEDED TO ANSWER THE QUESTION WHICH ARO SE UNDER VARIOUS CIRCUMSTANCES BEFORE THEM THAT WHETHE R THE ITA NO.470/CHD/2018 A.Y. 2014-15 11 INVESTMENT MADE IN SHARES AND STOCKS FOR THE PURPOS E OF RETAINING THE CONTROL OVER THE COMPANY OR AS STOCK- IN-TRADE AND FROM WHICH EXEMPT INCOME BY WAY OF DIVIDEND WAS GENERATED WOULD ATTRACT THE PROVISIONS OF SECTION 1 4A OF THE ACT, CALLING FOR DISALLOWANCE OF EXPENDITURE INCURR ED IN RELATION TO EARNING THE SAID DIVIDEND INCOME AND TH E QUESTION AROSE FOR THE REASON THAT IT WAS THE CONTE NTION OF THE ASSESSEE, WHICH HAD BEEN UPHELD BY VARIOUS HIGH COURTS, THAT THE DOMINANT PURPOSE FOR MAKING THE INVESTMENT IN THE SHARES NOT BEING EARNING OF DIVID END INCOME, IT CALLED FOR NO DISALLOWANCE OF EXPENDITUR E U/S 14A OF THE ACT. ANSWERING THIS QUESTION THE HON'BLE SUP REME COURT HELD THAT THE DOMINANT PURPOSE TEST WAS IRREL EVANT AND THE FACT REMAINING THAT THE EXEMPT INCOME HAD B EEN EARNED WHICH WAS ATTRIBUTABLE TO THE DIVIDEND INCOM E HAD TO BE DISALLOWED AND COULD NOT BE TREATED AS BUSINESS EXPENDITURE. THE HON'BLE APEX COURT REAFFIRMED THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NO N TAXABLE INCOME LAID DOWN BY IT IN THE CASE OF CIT V S. WALFORT SHARE & STOCK BROKERS PVT. LTD., 326 ITR 1. AFTER H OLDING SO, THE HON'BLE APEX COURT DEALT WITH THE APPEAL FILED IN THE CASE OF AVON CYCLES LTD. (SUPRA) AND TAKING NOTE TH AT THE FACT IN THAT CASE WAS THAT THE FUNDS UTILIZED BY TH E ASSESSEE WERE MIXED FUNDS, THE HON'BLE APEX COURT HELD THAT THE PRINCIPLE OF APPORTIONMENT WAS TO BE APPLIED AND, T HEREFORE, DISMISSED THE APPEAL OF THE ASSESSEE. THE SAME IS E VIDENT FROM A BARE READING IN THE CASE OF MAXOPP INVESTMEN T LTD. (SUPRA) AND MORE SPECIFICALLY PARA 42 OF THE SAID O RDER ITA NO.470/CHD/2018 A.Y. 2014-15 12 WHEREIN THE CASE OF AVON CYCLES LTD. (SUPRA) HAS B EEN DEALT WITH AND WHICH IS REPRODUCED AGAIN HEREUNDER: 41. CIVIL APPEAL NO. 1423 OF 2015 IS FILED BY M/S. AVON CYC LES LIMITED, LUDHIANA, WHEREIN THE AO HAD INVOKED SECTION 14A OF THE AC T READ WITH RULE 8D OF THE RULES AND APPORTIONED THE EXPENDITURE. THE CIT(A) HAD SET ASIDE THE DISALLOWANCE, WHICH VIEW WAS UPTURNED BY THE ITAT IN THE FOLLOWING WORDS: '...ADMITTEDLY THE ASSESSEE HAD PAID TOTAL INTEREST OF R S.2.92 CRORES OUT OF WHICH INTEREST PAID ON TERM LOAN RAISED FOR SPECIF IC PURPOSE TOTALS TO RS.1.70 CRORES AND BALANCE INTEREST PAID BY THE ASSESS EE IS RS.1.21 CRORES. THE FUNDS UTILIZED BY THE ASSESSEE BEING MIX ED FUNDS AND IN VIEW OF THE PROVISIONS OF RULE 8D(2)(II) OF THE INCOM E TAX RULES THE DISALLOWANCE IS CONFIRMED AT RS.10,49,851/-, WE FIND NO ME RIT IN THE AD HOC DISALLOWANCE MADE BY THE CIT (APPEALS) RS.5,00,000/-. CONSEQUENTLY, GROUND OF APPEAL RAISED BY THE REVENUE IS PARTLY ALLOWED AND GROUND RAISED BY THE ASSESSEE IN CROSS-OBJ ECTION IS ALLOWED...' TAKING NOTE OF THE AFORESAID FINDING OF FACT, THE HI GH COURT HAS DISMISSED THE APPEAL OF THE ASSESSEE OBSERVING AS UNDER: 'IN THE PRESENT CASE, AFTER EXAMINING THE BALANCE-SHE ET OF THE ASSESSEE, A FINDING OF FACT HAS BEEN RECORDED THAT THE FUNDS UTILIZED BY THE ASSESSEE BEING MIXED FUNDS, THEREFORE, THE INTEREST PA ID BY THE ASSESSEE IS ALSO AN INTEREST ON THE INVESTMENTS MADE. SUCH BEING A FINDING OF FACT, WE DO NOT FIND THAT ANY SUBSTANTIAL Q UESTION OF LAW ARISES FOR CONSIDERATION OF THIS COURT. AFTER GOING THROUGH THE RECORDS AND APPLYING THE PR INCIPLE OF APPORTIONMENT, WHICH IS HELD TO BE APPLICABLE IN SUCH CASES, WE DO NOT FIND ANY MERIT IN CIVIL APPEAL NO. 1423 OF 2015, WHICH IS ACCORDINGLY DISMISSED. 12. IT IS EVIDENT FROM THE ABOVE THAT THE ISSUE BEF ORE THE HON'BLE APEX COURT WAS NOT WHETHER THE PRESUMPTION THEORY WOULD APPLY OR NOT WHERE THERE ARE MIXED FUNDS AND THE ASSESSEE HAD DEMONSTRATED AVAILABILITY OF SUFFICIEN T OWN ITA NO.470/CHD/2018 A.Y. 2014-15 13 FUNDS FOR MAKING THE INVESTMENTS . NO DISCUSSION ON THIS ASPECT HAS ALSO BEEN DONE BY THE HON'BLE APEX COURT AND MERELY NOTING THAT THE ASSESSEE HAD UTILIZED MIXED FUNDS, THE HON'BLE APEX COURT HELD THAT THE PRINCIPLE OF APPORTIONMENT WOULD APPLY. WITHOUT ANY DISCUSSION O R DELIBERATION ON THE PRESUMPTION THEORY, THE PROPOSI TION LAID DOWN IN THE CASE OF AVON CYCLES LTD. (SUPRA) BY THE HON'BLE APEX COURT HAS TO BE RESTRICTED TO THE EXTENT OF TH E ISSUE BEFORE THE HON'BLE APEX COURT AND FACTS BEFORE IT A ND NOT BEYOND THAT. AND ON THAT BASIS THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF AVON CYCLES LTD. (SUPR A) CAN BE READ ONLY TO THE EXTENT OF UPHOLDING THE PRINCIP LE OF APPORTIONMENT OF EXPENSES INCURRED IN THE CONTEXT O F THE LIMITED FACT OF MIXED FUNDS AVAILABLE WITH ASSESSEE AND NO FURTHER. THE PROPOSITION LAID DOWN CANNOT BE STRETC HED EVEN LOGICALLY TO ADDRESS THE FACT SITUATION WHERE SUFFI CIENT OWN INTEREST FREE FUNDS ARE AVAILABLE WITH ASSESSEE, WH ICH FACT WAS NOT THERE BEFORE THE HONBLE APEX COURT IN THE CASE OF AVON CYCLES (SUPRA), AND TO NEGATE THE PRESUMPTION THAT THE OWN FUNDS WERE USED FOR MAKING THE INVESTMENT, WHIC H WAS NEITHER THE QUESTION RAISED BEFORE THE APEX COURT A ND THEREFORE NOT ADDRESSED BY IT ALSO. 13. GOING FURTHER FROM HERE WE FIND THAT THE PRESUM PTION THEOORY WAS UPHELD BY THE HON'BLE SUPREME COURT IN THE CASE OF HERO CYCLES PVT. LTD. (SUPRA) WHEREIN ON TH E ISSUE OF DISALLOWANCE OF EXPENDITURE U/S.36(1)(III) OF THE A CT ON INTEREST FREE ADVANCE MADE TO DIRECTORS, THE HON'BL E APEX ITA NO.470/CHD/2018 A.Y. 2014-15 14 COURT HELD THAT IN VIEW OF THE FINDINGS OF FACT THA T THE ASSESSEE HAD SUFFICIENT CREDIT BALANCE IN ITS BANK ACCOUNT FOR MAKING THE IMPUGNED ADVANCES AND HAD SUFFICIENT OWN INTEREST FREE FUNDS, THE ASSESSEE COMPANY COULD IN ANY CASE UTILIZE THOSE FUNDS FOR GIVING ADVANCES TO ITS DIRE CTORS. THE FINDINGS OF THE HON'BLE APEX COURT AT PARA 16 OF TH IS ORDER TO THIS EFFECT ARE AS UNDER: 16. INSOFAR AS THE LOANS TO DIRECTORS ARE CONCERNED, IT COULD NOT BE DISPUTED BY THE REVENUE THAT THE ASSESSEE HAD A CREDIT BALANCE IN THE BANK ACCOUNT WHEN THE SAID ADVANCE OF RS.34 LAKHS WAS GIVEN. REMARKABLY, AS OBSERVED BY THE CIT(A) IN HIS ORDER, THE COMPANY HAD RESERVE/SURPLUS TO THE TUNE OF ALMOST RS.15 CRORES AND, THEREFORE, THE ASSESSEE COMPANY COULD IN ANY CASE, UTILISE THOSE FUNDS FOR GIVING ADVANCE TO ITS DIRECTORS. 14. IT IS EVIDENT FROM THE ABOVE THAT THE HON'BLE A PEX COURT HAD IN VERY CLEAR TERMS HELD THAT WHERE SUFFICIENT OWN INTEREST FREE FUNDS ARE AVAILABLE WITH THE ASSESSEE , THE PRESUMPTION ARISES THAT THE ASSESSEE HAD UTILISED T HOSE FUNDS FOR THE PURPOSE OF MAKING INTEREST FREE NON B USINESS ADVANCES. THUS IN VERY CLEAR TERMS THE HON'BLE APEX COURT IN THE CASE OF HERO CYCLES PVT. LTD. (SUPRA) HAVE U PHELD HE PRESUMPTION THEORY. 15. CONSIDERING BOTH THE JUDGMENTS OF THE HON'BLE A PEX COURT AND READING AND INTERPRETING THEM IN THE LIGH T OF FACTS AND THE ISSUE BEFORE THE HON'BLE APEX COURT WE FIND THAT THE JUDGMENTS COMPLIMENT EACH OTHER. IN THE CASE OF AV ON CYCLES LTD. (SUPRA) THE HON'BLE APEX COURT HELD THA T IN THE ITA NO.470/CHD/2018 A.Y. 2014-15 15 FACT SITUATION WHERE MIXED FUNDS ARE UTILIZED BY TH E ASSESSEE, THE DISALLOWANCE OF INTEREST TO THE EXTEN T THE FUNDS ARE UTILIZED FOR THE PURPOSE OF NON BUSINESS ADVANC E IS WARRANTED. GOING FORWARD FROM THERE, THE PRESUMPTIO N THEORY WOULD COME INTO OPERATION IF IN THE CASE OF MIXED FUNDS, THE ASSESSEE IS ABLE TO DEMONSTRATE/ ESTAB LISH AVAILABILITY OF INTEREST FREE FUNDS EQUAL TO OR MO RE THAN INTEREST FREE NON BUSINESS ADVANCES/INVESTMENTS THUS RAISING THE PRESUMPTION THAT THE SAME HAVE BEEN MAD E OUT OF THE INTEREST FREE FUNDS OF THE ASSESSEE. 16. IN VIEW OF THE ABOVE, WE HOLD THAT THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF AVON CYCLES LTD. (SUPRA) DOES NOT DISPLACE THE PRESUMPTION THEORY WHICH HAS BEEN UPHELD BY THE HON'BLE APEX COURT IN THE CASE OF HER O CYCLES PVT. LTD. (SUPRA) AND THE SAME STILL HOLDS. IN VIEW OF THE ABOVE, SINCE THE LD.CIT(APPEALS), WE FIND, HAS ALLO WED THE ASSESSEES APPEAL DELETING THE DISALLOWANCE OF INTE REST MADE ON FINDING THAT IT HAD SUFFICIENT OWN INTEREST FREE FUNDS FOR MAKING THE INVESTMENT, WHICH FACT HAS NOT BEEN CONT ROVERTED BY THE REVENUE, WE SEE NO REASON TO INTERFERE IN TH E ORDER OF THE LD.CIT(APPEALS) AND THE GROUND RAISED BY THE RE VENUE, THEREFORE, IS DISMISSED. 17. THE LD. COUNSEL FOR ASSESSEE HAD ALSO RAISED TH E CONTENTION BEFORE US THAT THE ADVANCE MADE WAS FOR BUSINESS PURPOSE. IN THIS REGARD, THE LD. COUNSEL FOR ASSESS EE CONTENDED THAT THE ADVANCE WAS MADE TO SHIVAKS IMPE X LTD. WHICH WAS A STEP DOWN SUBSIDIARY OF THE ASSESSEE CO MPANY. ITA NO.470/CHD/2018 A.Y. 2014-15 16 THE LD. COUNSEL FOR ASSESSEE STATED THAT THE ASSESS EE HAD INVESTED IN A WHOLLY OWNED SUBSIDIARY WHICH IN TURN WAS THE HOLDING COMPANY OF SHIVAKS IMPEX LTD. AND WHICH MAD E SHIVAKS IMPEX LTD. A STEP DOWN SUBSIDIARY OF THE AS SESSEE COMPANY, MEANING THEREBY THAT THE ASSESSEE HAD A IN DIRECT INTEREST AND CONTROL OVER THE SHIVAKS IMPEX LTD.. T HE LD. COUNSEL FOR ASSESSEE FURTHER STATED THAT THE ADVANC ES MADE TO SHIVAKS IMPEX LTD., WHO WAS IN THE SAME LINE OF BUSINESS AS WAS THE ASSESSEE, WAS UTILIZED FOR THE PURPOSE P URCHASING RAW MATERIAL.IN THIS REGARD OUR ATTENTION WAS DRAW N TO THE COPY OF BANK ACCOUNT OF SHIVAKS IMPEX LTD. REFLECTI NG THE DEPOSIT OF ADVANCE MADE BY THE ASSESSEE OF RS.3.55 CRORES IN THE SAME AND THE UTILIZATION OF THE SAME FOR THE PU RPOSE OF RELEASING A LETTER OF CREDIT ISSUED IN THE REGULAR COURSE OF ITS BUSINESS. THE LD. COUNSEL FOR ASSESSEE, THEREFORE, STATED THAT THE ADVANCE HAD BEEN MADE FOR THE PURPOSE BUSI NESS OF SHIVAKS IMPEX LTD. WHICH BEING A STEP DOWN SUBSIDIA RY OF THE ASSESSEE, IT WAS CONTENDED THAT THE ASSESSEE CO MPANY WOULD HAVE BEEN SEVERELY IMPACTED IF THE SAID ADVAN CE WOULD NOT HAVE BEEN MADE. OUR ATTENTION WAS DRAWN TO THE FOLLOWING DOCUMENTS PLACED IN THE PAPER BOOK FILED ON 06-07- 18, TO SUBSTANTIATE ITS AFORESAID CONTENTION: (I) COPY OF LEDGER ACCOUNT OF SHIVAKS IMPEX LTD. IN THE BOOKS OF APPELLANT FOR ASSESSMENT YEAR 2013- 14. ITA NO.470/CHD/2018 A.Y. 2014-15 17 (II) COPY OF LEDGER ACCOUNT OF SHIVAKS IMPEX LTD. IN THE BOOKS OF APPELLANT FOR ASSESSMENT YEAR 2014- 15. (III) COPY OF RELEVANT BANK STATEMENTS OF SHIVAKS IMPEX LTD. (IV) SHAREHOLDER LIST OF VARIOUS GROUP COMPANIES. 18. THE LD. DR, ON THE OTHER HAND, RELIED UPON THE ORDER OF THE ASSESSING OFFICER REJECTING THIS CONTENTION OF THE ASSESSEE AND STATED THAT NO BUSINESS EXIGENCY FOR M AKING THE ADVANCE HAD BEEN ESTABLISHED BY THE ASSESSEE. 19. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE HOLD THAT COMMERCIAL EXPEDIENCY OF THE SAID ADVANCE HAD BEEN ADEQUATELY ESTABLISHED BY THE ASSESSEE. THE FACTS R ELATING TO THE IMPUGNED TRANSACTION HAVE NOT BEEN CONTROVERTED BY THE REVENUE. THAT SHIVAKS IMPEX LTD. WAS A STEP DOWN SUBSIDIARY OF THE ASSESSEE COMPANY, HAS NOT BEEN D ISPUTED BY THE REVENUE. THE FACT THAT THE ASSESSEE, ITS SUB SIDIARY AND SHIVAKS IMPEX LTD. WERE ALL IN THE SAME LINE OF BUSINESS HAS ALSO NOT BEEN DISPUTED BY THE REVENUE. IT IS AL SO NOT DISPUTED THAT THE ADVANCE MADE HAS BEEN UTILIZED FO R THE PURPOSE OF MAKING PURCHASES. IT IS EVIDENT THAT HAD THE SAID ADVANCE NOT BEEN MADE IT WOULD HAVE SERIOUSLY AFFEC TED THE BUSINESS OF SHIVAKS IMPEX LTD., WHICH IN TURN WOULD HAVE AFFECTED THE ASSESSEE ALSO SINCE THE VALUE OF ITS I NVESTMENT IN ITS SUBSIDIARY WOULD HAVE BEEN AFFECTED ON ACCOU NT OF THE POOR RESULTS SHOWN BY SHIVAKS IMPEX LTD.. THEREFORE , THE ITA NO.470/CHD/2018 A.Y. 2014-15 18 COMMERCIAL EXPEDIENCY OF THE ADVANCE HAS BEEN ESTAB LISHED AND FOR THIS REASON ALSO, NO DISALLOWANCE U/S 36(1) (III) OF THE ACT COULD HAVE BEEN MADE. 20. IN VIEW OF THE ABOVE WE HOLD THAT ON ACCOUNT OF THE AVAILABILITY OF SUFFICIENT OWN FUNDS AND ON ACCOUNT OF THE ADVANCES HAVING BEEN MADE FOR BUSINESS PURPOSE ,NO DISALLOWANCE OF INTEREST PERTAINING TO FUNDS UTILIZ ED FOR MAKING THE SAME WAS WARRANTED. WE THEREFORE UPHOLD THE ORDER OF THE CIT(A) DELETING THE DISALLOWANCE OF IN TEREST U/S 36(1)(III) OF THE ACT, AMOUNTING TO RS.18,44,482/-. 21. GROUND OF APPEAL NO.1 RAISED BY THE REVENUE IS THEREFORE DISMISSED. 22. GROUND NO.2 RAISED BY THE REVENUE READS AS UNDER: 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE THE LD. CIT(A) HAS ERRED IN ALLOWING THE APPEAL OF THE ASSESSEE AND DE LETING THE DISALLOWANCE OF RS. 25,43,299/- U/S 14A WHICH IS NOT CORRECT BECAUS E THE ASSESSEE HAD MADE INVESTMENTS, TO THE TUNE OF RS. 5,23,00,000/- AND O N THE OTHER SIDE, ASSESSEE HAS SHOWN OUTSTANDING SECURED LOAN FROM BANKS ON WH ICH THE ASSESSEE HAS CLAIMED INTEREST EXPENSES OF RS. 1,13,06,258/-. 23. THE ABOVE GROUND RELATES TO DISALLOWANCE MADE O F EXPENSES RELATING TO EXEMPT INCOME EARNED BY THE ASSESSEE AS PER THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962. 24. BRIEFLY STATED THE IMPUGNED DISALLOWANCE WAS MA DE BY THE ASSESSING OFFICER IN RELATION TO THE INVESTMENTS MA DE BY THE ASSESSEE IN THE SHARES OF SISTER CONCERN M/S. KVS I NTERNATIONAL PVT. LTD. OF RS.5,23,00,000/-. THE ASSESSING OFFICE R RELYING UPON VARIOUS JUDGMENTS MADE A DISALLOWANCE OF RS.25,43,2 99/- U/S.14A OF THE ACT. ITA NO.470/CHD/2018 A.Y. 2014-15 19 25. LD. CIT(A) DELETED THE DISALLOWANCE MADE ON FIN DING THAT NO EXEMPT INCOME HAD BEEN EARNED BY THE ASSESSEE FROM THE IMPUGNED INVESTMENTS MADE. RELEVANT FINDINGS OF THE LD. CIT(A) AT PARAGRAPH 6.2 OF OUR ORDER DELETING THE SAID DISALL OWANCE IS AS UNDER: 6.2 I HAVE GONE THROUGH THE FACTS OF THE CASE AND WRITT EN SUBMISSION FILED BY THE APPELLANT. AS NO EXEMPT INCOME HAS BEEN EARNED DURING THE YEAR ON THE IMPUGNED INVESTMENTS MADE IN SHARES OF SISTER CONCERN IN THE EARLIER YEAR AND THERE IS NO CLAIM OF ANY OTHER EXEMPT INCOME IN THE COMPUTATION OF INCOME, THEREFO RE PLACING RELIANCE ON THE RATIO OF CIT VS. M/S LAKHANI MARKETING INC. [2014] 272 CTR 265 (P&H) AND JURISDICTIONAL ITAT CHANDIGARH DECISION I N THE CASE OF SWAMI AUTOMOBILES (P) LTD. ITA NO.74/CHD/2015 DATED 10.02.2016, IT IS HELD THAT NO DISALLOWANCE U/S 40A READ WITH R ULE 8D OF THE INCOME TAX RULES WAS WARRANTED IN THIS CASE . THEREFORE AD DITION OF RS.25,43,299/- MADE BY THE AO ON THIS ACCOUNT FOR A .Y.2014-15 IS ORDERED TO BE DELETED. THIS GROUND OF APPEAL IS ALL OWED. 26. DURING THE COURSE OF HEARING BEFORE US, LD. DR, THOUGH RELIED UPON THE ORDER OF THE ASSESSING OFFICER, WAS UNABLE TO CONTROVERT THE FACTUAL AND THE LEGAL FINDINGS OF THE LD. CIT(A ), WE THEREFORE SEE NO REASON TO DIFFER WITH THE LD. CIT(A) DELEING THE DISALLOWANCE MADE U/S.14A IN THE LIGHT OF THE ADMITTED FACT THAT NO EXEMPT INCOME WAS EARNED BY THE ASSESSEE DURING THE IMPUGN ED YEAR FROM THE IMPUGNED INVESTMENTS MADE. OUR DECISION IS FORFEITED BY THE ORDER OF THE HONB LE APEX COURT IN THE CASE OF COMMISSIONER OF INCOME TAX,(CE NTRAL),1 VS CHETTINAD LOGISTICS (P) LTD DATED 2 ND JULY 2018,.REPORTED IN 257 TAXMAN 2, IN WHICH THE HONB LE APEX COURT HAS, WE FIND, DISMISSED ON MERITS THE SL P FILED BY THE REVENUE AGAINST ORDER OF THE HONBLE MADRAS HIGH COURT HOLDING THAT WHERE NO EXEMPT INCOME WAS EARNE D NO DISALLOWANCE U/S 14A WAS WARRANTED. THE HONBLE HIGH COURT HAD IN ITS ORDER, REPORTED IN 248 TAXMAN 55, HELD AS UNDER: ITA NO.470/CHD/2018 A.Y. 2014-15 20 6.THE RECORD SHOWS THAT DURING THE COURSE OF ARGUM ENTS BEFORE THE TRIBUNAL, THE ASSESSEE ADVANCED A SUBMISSION, TO TH E EFFECT, THAT IN CASES, WHERE, INVESTMENTS ARE MADE IN SISTER CONCERN (S), OUT OF INTEREST FREE FUNDS, FOR STRATEGIC PURPOSES, THE PROVISIONS OF SECTION 14 A OF THE ACT, COULD NOT BE INVOKED. IN SUPPORT OF THIS SUBMI SSION, THE ASSESSEE RELIED UPON THE JUDGMENT OF THE TRIBUNAL IN THE CAS E OF: RANE HOLDINGS LTD., VS. ACIT, PASSED IN ITA NO.115/MDS/2015, DATE D 06.01.2016. 7. IT IS, IN THIS BACKGROUND, THAT THE TRIBUNAL REM ANDED THE MATTER TO THE ASSESSING OFFICER, SO AS TO REACH A CONCLUSION AS T O WHETHER INVESTMENTS HAD BEEN ACTUALLY MADE, IN SISTER CONCERNS OF THE A SSESSEE, OUT OF INTEREST FREE FUNDS, ALBEIT, FOR STRATEGIC PURPOSES. 8. ACCORDING TO US, THIS EXERCISE, IN THE GIVEN FAC TS WHICH EMERGE FROM THE RECORD, WAS CLEARLY UNNECESSARY, AS THE CIT(A) HAD RETURNED THE FINDING OF FACT THAT NO DIVIDEND HAD BEEN EARNED IN THE RELEVA NT ASSESSMENT YEAR, WITH WHICH, WE ARE CONCERNED, IN THE PRESENT APPEAL . 9. IN OUR OPINION SECTION 14 A OF THE ACT, CAN ONLY BE TRIGGERED, IF, THE ASSESSEE SEEKS TO SQUARE OFF EXPENDITURE AGAINST IN COME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. 9.1. THE LEGISLATURE, IN ORDER TO DO AWAY WITH THE PERNICIOUS PRACTICE ADOPTED BY THE ASSESSEES', TO CLAIM EXPENDITURE, AG AINST INCOME EXEMPT FROM TAX, INTRODUCED THE SAID PROVISION. 10. IN THE INSTANT CASE, THERE IS NO DISPUTE THAT N O INCOME I.E., DIVIDEND, WHICH DID NOT FORM PART OF TOTAL INCOME OF THE ASSE SSEE WAS EARNED IN THE RELEVANT ASSESSMENT YEAR. 10.1. THEREFORE, TO OUR MINDS, THE ADDITION MADE BY THE ASSESSING OFFICER BY RELYING UPON SECTION 14 A OF THE ACT, WAS COMPLE TELY CONTRARY TO THE PROVISIONS OF THE SAID SECTION. 10.2. MR.SENTHIL KUMAR, WHO APPEARS FOR THE REVENUE , SUBMITTED THAT THE REVENUE COULD DISALLOW THE EXPENDITURE EVEN IN SUCH A CIRCUMSTANCE BY TAKING RECOURSE TO RULE 8D. 10.3. ACCORDING TO US, RULE 8D, ONLY PROVIDES FOR A METHOD TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO I NCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. ITA NO.470/CHD/2018 A.Y. 2014-15 21 10.4. RULE 8 D, IN OUR VIEW, CANNOT GO BEYOND WHAT IS PROVIDED IN SECTION 14 A OF THE ACT. 11. FURTHERMORE, WE MAY NOTE THAT A SIMILAR ARGUMENT WAS SOUGHT TO BE ADVANCED BY THE REVENUE IN THE MATTER CONCERNING, M /S.REDINGTON (INDIA) LIMITED VS. THE ADDITIONAL COMMISSIONER OF INCOME TA X, WHICH WAS, SUBJECT MATTER OF T.C.A.NO.520 OF 2016. 11.1. A CO-ORDINATE BENCH OF THIS COURT, VIDE JUDGM ENT DATED 23.12.2016, REJECTED THE PLEA OF THE REVENUE ADVANCED IN THAT B EHALF. 11.2. AS A MATTER OF FACT, A PERUSAL OF THE JUDGMEN T WOULD SHOW THAT THE REVENUE HAD SOUGHT TO ARGUE THAT BECAUSE EXEMPT INC OME COULD BE EARNED IN FUTURE YEARS, THEREFORE, RECOURSE COULD B E TAKEN TO THE PROVISIONS OF SECTION 14A OF THE ACT, TO DISALLOW E XPENDITURE. IN OTHER WORDS THE STAND TAKEN BY THE REVENUE WAS IRRESPECTI VE OF THE FACT WHETHER OR NOT INCOME WAS EARNED IN THE CONCERNED A SSESSMENT YEAR EXPENDITURE UNDER SECTION 14A COULD BE DISALLOWED A GAINST ANTICIPATED INCOME. 11.3. PERTINENTLY, THE DIVISION BENCH IN M/S.REDING TON (INDIA) LIMITED CASE HAS REPELLED THIS PRECISE ARGUMENT. 12. THE DIVISION BENCH, IN OUR VIEW, QUIET CORRECTL Y HELD THAT, THE COMPUTATION OF TOTAL INCOME, IN TERMS OF SECTION 5 OF THE ACT, IS MADE QUA REAL INCOME AND NOT, VIS-A-VIS, NOTIONAL INCOME. 12.1. THE DIVISION BENCH WENT ON TO HOLD THAT SECTI ON 4 OF THE ACT BRINGS TO TAX, THAT INCOME, WHICH IS RELATABLE TO THE ASSE SSMENT YEAR IN ISSUE. THE DIVISION BENCH, THUS, HELD THAT WHERE NO EXEMPT INCOME IS EARNED IN THE PREVIOUS YEAR, RELEVANT TO THE ASSESSMENT YEAR IN ISSUE, PROVISIONS OF SECTION 14 A OF THE ACT, READ WITH RULE 8 D COULD N OT BE INVOKED. 12.2. WHILE COMING TO THIS CONCLUSION, THE DIVISION BENCH ALSO TOOK NOTE OF THE AFOREMENTIONED CIRCULAR, ISSUED BY THE BOARD. 12.3. THE REASONING OF THE DIVISION BENCH IS CONTAI NED IN THE FOLLOWING PART OF THE JUDGMENT: 4. THE ADMITTED POSITION IS THAT NO EXEMPT INCOME HAS BEEN EARNED BY THE ASSESSEE IN THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR IN ISSUE. THE ORDER OF ASSESSMENT RECORDS A FINDING OF FACT TO THAT EFFECT. THE ISSUE TO BE DECIDED THUS LIES WITHIN THE SHORT COMP ASS OF WHETHER A DISALLOWANCE IN TERMS OF S.14A OF THE ACT READ WITH RULE 8D OF THE RULES ITA NO.470/CHD/2018 A.Y. 2014-15 22 CAN BE CONTEMPLATED EVEN IN A SITUATION WHERE NO EX EMPT INCOME HAS ADMITTEDLY BEEN EARNED BY THE ASSESSEE IN THE RELEV ANT FINANCIAL YEAR. 7. PER CONTRA, SRI T. RAVI KUMAR APPEARING ON BEHAL F OF THE REVENUE DREW OUR ATTENTION TO THE MARGINAL NOTES OF S.14 A POINT ING OUT THAT THE PROVISION WOULD APPLY NOT ONLY WHERE EXEMPTED INCOM E IS 'INCLUDED' IN THE TOTAL INCOME, BUT ALSO WHERE EXEMPT INCOME IS 'INCL UDABLE' IN TOTAL INCOME. 8. HE RELIED UPON A CIRCULAR ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES IN CIRCULAR NO.5 OF 2014 DATED 11.2.2014 TO THE EFFECT THAT S.14A WAS INTENDED TO COVER EVEN THOSE SITUATIONS WHETHER THE RE IS A POSSIBILITY OF EXEMPT INCOME BEING EARNED IN FUTURE. THE CIRCULAR, AT PARAGRAPH 4, STATES THAT IT IS NOT NECESSARY FOR EXEMPT INCOME T O HAVE BEEN INCLUDED IN THE INCOME OF A PARTICULAR YEAR FOR THE DISALLOWANC E TO BE TRIGGERED. ACCORDING TO THE LEARNED STANDING COUNSEL, THE PROV ISIONS OF S.14A ARE MADE APPLICABLE, IN TERMS OF SUB SECTION (1) THEREO F TO INCOME 'UNDER THE ACT' AND NOT 'OF THE YEAR' AND A DISALLOWANCE UNDER S.14A R.W. RULE 8D CAN THUS BE EFFECTED EVEN IN A SITUATION WHERE A TA X PAYER HAS NOT EARNED ANY TAXABLE INCOME IN A PARTICULAR YEAR. 9. WE ARE UNABLE TO SUBSCRIBE TO THE AFORESAID VIEW . THE PROVISIONS OF SECTION 14A WERE INSERTED AS A RESPONSE TO THE JUDG MENTS OF THE SUPREME COURT IN COMMISSIONER OF INCOME TAX VS. MAHARASHTRA SUGAR MILLS LIMITED (1971) (82 ITR 452) AND RAJASTHAN STATE WAR E HOUSING CORPORATION VS. COMMISSIONER OF INCOME TAX ((2002) 242 ITR 450) IN TERMS OF WHICH, EXPENDITURE INCURRED BY AN ASSESSEE CARRYING ON A COMPOSITE BUSINESS GIVING RISE TO BOTH TAXABLE AS W ELL AS NON-TAXABLE INCOME, WAS ALLOWABLE IN ENTIRETY WITHOUT APPORTION MENT. IT WAS THUS THAT S.14A WAS INSERTED PROVIDING THAT NO DEDUCTION SHAL L BE ALLOWABLE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO THE EARNING OF INCOME EXEMPT FROM TAXATION. AS OBSERVED BY THE SUPREME COURT IN THE JUDGMENT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. WALFORT SHAR E AND STOCK BROKERS (P) LTD (2010) 326 ITR 1 '.... THE MANDATE OF S.14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMP T INCOME AGAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL OF THE TA X INCENTIVE BY WAY OF AN EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY AP PORTIONMENT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME.' 10. THE PROVISION THIS IS CLEARLY RELATABLE TO THE EARNING OF ACTUAL INCOME AND NOT NOTIONAL OR ANTICIPATED INCOME. THE SUBMISS ION OF THE DEPARTMENT TO THE EFFECT THAT S.14A WOULD BE ATTRACTED EVEN TO EXEMPT INCOME 'INCLUDABLE' IN TOTAL INCOME WOULD ENTAIL THE ASSES SMENT OF NOTIONAL INCOME, ASSUMED TO BE EXEMPT IN THE FUTURE, IN THE PRESENT ASSESSMENT ITA NO.470/CHD/2018 A.Y. 2014-15 23 YEAR. THE COMPUTATION OF TOTAL INCOME IN TERMS OF S .5 OF THE ACT IS ON REAL INCOME AND THERE IS NO SANCTION IN LAW FOR THE ASSE SSMENT OF ADMITTEDLY NOTIONAL INCOME, PARTICULARLY IN THE CONTEXT OF EFF ECTING A DISALLOWANCE IN CONNECTION THEREWITH. 11.THE COMPUTATION OF DISALLOWANCE IN TERMS OF RULE 8D IS BY WAY OF A DETERMINATION INVOLVING DIRECT AS WELL AS INDIRECT ATTRIBUTION. THUS, ACCEPTING THE SUBMISSION OF THE REVENUE WOULD RESUL T IN THE IMPOSITION OF AN ARTIFICIAL METHOD OF COMPUTATION ON NOTIONAL AND ASSUMED INCOME. WE BELIEVE THIS WOULD BE CARRYING THE ARTIFICE TOO FAR . (EMPHASIS IS OURS) 13. MR. SENTHIL KUMAR, SEEKS TO DISTINGUISH THE JUD GMENT IN M/S. REDINGTON (INDIA) LIMITED CASE BASED ON THE FACT TH AT RULE 8D HAD NOT KICKED-IN BY AY 2007-08, WHICH WAS THE AY BEING CON SIDERED IN THE SAID CASE. 14. ACCORDING TO US, THIS WAS NOT THE ARGUMENT, PUT FORTH, BEFORE THE DIVISION BENCH. AS A MATTER OF FACT, THE REVENUE RE LIED HEAVILY ON RULE 8D. 14.1. MR. RAVI KUMAR, WHO APPEARED FOR THE REVENUE, IN THAT MATTER AND WHO IS PRESENT IN THIS COURT, INFORMS US THAT HE HA D IN FACT ARGUED THAT THE RULE WAS CLARIFICATORY IN NATURE AND WOULD APPL Y RETROSPECTIVELY, AND THAT, THE DIVISION BENCH, THEREFORE, DISCUSSED THE IMPACT OF RULE 8D OF THE RULES. 15. HOWEVER, IT IS, OUR VIEW, AS INDICATED ABOVE, I NDEPENDENT OF THE REASONING GIVEN IN M/S. REDINGTON (INDIA) LIMITED C ASE THAT RULE 8D CANNOT BE READ IN A MANNER, WHICH TAKES IT BEYOND TH E SCOPE AND CONTENT OF THE MAIN PROVISION, WHICH IS, SECTION 14 A OF TH E ACT. 15.1. THEREFORE, AS ADVERTED TO ABOVE, RULE 8D, CAN NOT COME TO THE RESCUE OF THE REVENUE. SLP FILED AGAINST THE SAID JUDGMENT WAS DISMISSED BY THE APEX COURT BOTH ON MERITS AS WELL AS ON THE GROUND OF DELAY. 27. IN VIEW OF THE ABOVE, WE UPHOLD THE ORDER OF TH E CIT(A) DELETING THE DISALLOWANCE MADE U/S. 14A OF THE ACT. ITA NO.470/CHD/2018 A.Y. 2014-15 24 28. GROUND NO.2 RAISED BY THE REVENUE IS DISMISSED. 29. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT. ' $ #! % (SANJAY GARG ) (ANNAPURNA GUPTA) / JUDICIAL MEMBER &' / ACCOUNTANT MEMBER * ! ./PKK* $' ()*) / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. + ! / CIT 4. + ! ( )/ THE CIT(A) 5. ),- . , '. , /01-2 / DR, ITAT, CHANDIGARH 6. -13 / GUARD FILE $' ! / BY ORDER, 4 / ASSISTANT REGISTRAR