Siegwerk India Pvt. Ltd., New Delhi V. Addl. CIT, New Delhi

ITA 4774/DEL/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 65271 (ITAT-DELHI)
• Duration Of Justice: 9 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-08-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 04-07-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 02-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BANITA DEVI
• Keywords: Deemed dividend; Revenue expenditure
• Section: 14A; 37(1); 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G: NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI C.M. GARG, JUDICIAL MEMBER ITA NO. 4774/DEL/2011 ASSESSMENT YEAR: 2008-09 M/S SIEGWERK INDIA P. LTD. 904A, 904B, VIJAYA BLDG., 17, BARAKHAMBA ROAD, NEW DELHI. AAACG4845N VS. ADDL. CIT, RANGE-8, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SH. AJAY VOHRA, ADV., & S H. NEERAJ JAIN, ADV. & MS. SHAILY GUPTA, ADV. RESPONDENT BY : SMT. BANITA DEVI, SR. DR O R D E R PER S.V. MEHROTRA, A.M. THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGA INST THE ORDER OF LD. CIT(A) DATED 08/08/2011 FOR A.Y. 2008-09. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, A PRIVATE LIMITED COMPANY, WAS INCORPORATED IN 1992. IN THE RELEVANT ASSESSMENT YEAR THE COMPANY CARRIED ON THE BUSINESS OF MANUFACTURING OF PRINTING AND PACKING INKS. THE COMPANY WAS INITIALLY KNOWN AS PIBU INK (INDIA PRIVATE LIMITED) ITA NO. 4774/DEL/2011 2 WHICH AFTER CHANGE OF NAME IS NOW KNOWN AS SIEGWERK INDIA PVT. LTD. COMPANY. IT HAD FILED ITS RETURN OF INCOME DECLARI NG TOTAL INCOME OF RS. 29,05,85,320/-. THE ASSESSMENT WAS COMPLETED AT A TOTAL INCOME OF RS. 30,68,65,410/- AFTER MAKING FOLLOWING ADDITIONS: - 1) FOREIGN EXCHANGE VARIATIONS NATIONAL LOSS (DETAIL S AS PER ANNEXURE 14 OF REPLY DATED 13 DEC. 2010) RS. 6,21,988/- 2) INTER COMPANY MANAGEMENT CHARGES RS. 1,43,87,079/ - 3) DISALLOWANCE U/S 14A RS. 12,71,020 /- TOTAL INCOME RS. 30,68,65,4 07 /- 3. LD. CIT(A) DISMISSED THE ASSESSEES APPEAL. 4. BEING AGGRIEVED WITH THE ORDER OF LD. CIT(A), T HE ASSESSEE IS IN APPEAL BEFORE US AND HAS TAKEN FOLLOWING GROUNDS OF APPEAL: - 1. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN SUSTAINING DISALLOWANC E OF LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION OF RS. 6,21,988/- HOLDING THE SAME TO BE A NOTIONAL OR UNREALIZED LOSS NOT ALLOWABLE AS DEDUCTION. 1.1THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ER RED ON FACTS AND IN LAW IN UPHOLDING THAT LOSS ON ACCOU NT OF FOREIGN EXCHANGE FLUCTUATION COULD ONLY BE ALLOW ED AT THE TIME OF REMITTANCE. 2. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN UPHOLDING ADDITION OF RS. 1,43,87,079/- BEING PAYMENT TOWARDS INTER-COMPANY MANAGEMENT CHARGES (ICM CHARGES) TO RELATED CONCERNS, VIZ., M/S SIEGWERK (ASIA PACIFIC) P. LTD. (RS. 1,02,61,041), M/S SIEGWERK BENELUX NV (RS. 25,72,716) AND M/S SIEGWERK DRUKFARBEN (RS. 15,53,321), HOLDING THE SAME TO BE DEEMED DIVIDEND COVERED U/S 2(22)(E) OF THE INCOME-TAX ACT, 1961 ( THE ACT). ITA NO. 4774/DEL/2011 3 2.1 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN UPHOLDING THE ACTION O F THE AO IN HOLDING PAYMENT TOWARDS ICM CHARGES TO BE DEEMED DIVIDEND COVERED U/S 2(22)(E) OF THE ACT ON THE GROUND THAT (I) THE SAME WAS NOTHING BUT PAYMEN T UNDER GUISE AND COLLUSIVE AGREEMENT BETWEEN THE PARTIES AND (II) THE APPELLANT HAS TRANSFERRED ITS PROFIT TO HOLDING COMPANY IN THE GARB OF ICM CHARGES. 2.2THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ER RED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE PAYMENT TOWARDS ICM CHARGES WAS BONAFIDE EXPENDITURE INCURRED IN THE COURSE OF CARRYING ON O F THE BUSINESS AND WAS PURELY DRIVEN BY COMMERCIAL CONSIDERATION. 2.3 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN HOLDING THAT THE APPEL LANT HAD MADE PAYMENT TO ITS SUBSTANTIAL SHAREHOLDERS, VIZ., SIEGWERK DRUKFARBEN AND OTHER TWO SISTER CONCERN M/S SIEGWERK BENELUX NV AND M/S SIEGWERK (ASIA PACIFIC) P. LTD. 2.4WITHOUT PREJUDICE THAT THE COMMISSIONER OF INCOM E TAX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT M/S SIEGWERK BENELUX NV AND M/S SIEGWERK (ASIA PACIFIC) P. LTD. WERE NOT THE SHAREHOLDERS OF THE APPELLANT AND SECTION 2(22)(E) OF THE ACT COULD NOT BE INVOKED IN THIS CASE. 3. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ER RED ON FACTS AND IN LAW IN UPHOLDING THE DISALLOWANCE O F RS. 12,71,020/- INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. 5. BRIEF FACTS APROPOS GROUND NO. 1 ARE THAT ASSES SING OFFICER NOTICED THAT ASSESSEE HAD DEBITED RS. 10,09,034/- IN THE PR OFIT AND LOSS ACCOUNT AS EXCHANGE DIFFERENCE. THE ASSESSEE REPLIED AS UNDER : - REFERENCE TO YOUR POINT NO. 11 PART II ON EXCHANGE DIFFERENCE OF RS. 10,09,034/- WE HAVE GIVE N YOUR GOOD SELF THE DETAILS OF REALIZED AND UNREALIZ ED GAIN. ITA NO. 4774/DEL/2011 4 HERE WE FURTHER WANT TO EMPHASIS THAT WE FOLLOW THI S PRACTICE OF RESTATING THE EXCHANGE RATE OF ALL FORE IGN TRANSACTION OUT STANDING AS ON BALANCE SHEET DATE. THIS PRACTICE WE ARE FOLLOWING SINCE BEGINNING AND THIS IN LINE WITH THE AS-11 AS PER INDIAN GAAP AS CERTIFICATE OF EXCHANGE RATES GIVEN BY THE BANK ON THE 31 ST MARCH. WE WANT TO FURTHER CLARIFY THAT WE DO NOT HAVE ANY FOR WARD COVERAGE/EXCHANGE HEDGING AS PER THE COMPANYS POLI CY. KEEPING IN VIEW ALL THESE IN MIND WE REQUEST YOU AG AIN TO ALLOW THESE EXPENSES AS NORMAL BUSINESS EXPANSES IN THE ASSESSMENT YEAR. 6. THE AO DID NOT ACCEPT THE ASSESSEES CONTENTION AND DISALLOWED THE ASSESSEES CLAIM OBSERVING THAT THE LOSS CLAIME D WAS NOTIONAL IN NATURE AND NOT ACTUAL LOSS. 7. BEFORE LD. CIT(A), THE ASSESSEE EXPLAINED THAT IN THE BODY OF ASSESSMENT ORDER THE DISALLOWANCE IS OF RS. 10,09,0 34/- BUT IN THE FINAL COMPUTATION IT IS TAKEN AS 6,21,988/-. THE ASSESSEE EXPLAINED THAT IT IS A NET LOSS CLAIMED IN THE PROFIT AND LOSS ACCOUNT. T HE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE AO. LD. CIT(A) DISMISSED T HE ASSESSEES CONTENTION, INTER-ALIA, OBSERVING THAT ACTUAL LOSS WOULD ARISE ONLY AT THE TIME OF REMITTANCE AND NOT BEFORE. AT THE TIME OF HEARI NG, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE IS NOW COVERED I N FAVOUR OF ASSESSEE BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F CIT VS. WOODWARD GOVERNOR INDIA P. LTD. (SC), 312 ITR 254. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORD OF THE CASE. WE FIND THAT THIS ISSUE IS COV ERED IN FAVOUR OF ASSESSEE ITA NO. 4774/DEL/2011 5 IN THE CASE OF WOODWARD GOVERNOR INDIA (P) LTD. (SU PRA), WHEREIN IT HAS BEEN, INTER-ALIA, HELD AS UNDER: - 17. HAVING COME TO THE CONCLUSION THAT VALUATION IS A PART OF THE ACCOUNTING SYSTEM AND HAVING COME TO THE CONCLUSION THAT BUSINESS LOSSES ARE DEDUCTIBLE U/S 37(1) ON THE BASIS OF ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING AND HAVING COME TO THE CONCLUSION THAT THE CENTRAL GOVERNMENT HAS MADE ACCOUNTING STANDARD-11 MANDATORY, WE ARE NOW REQUIRED TO EXAMINE THE SAID ACCOUNTING STANDARD (AS). 18. AS-11 DEALS WITH GIVING OF ACCOUNTING TREATMENT FOR THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATE S. AS-11 DEALS WITH EFFECTS OF EXCHANGE DIFFERENCES. UNDER PARAGRAPH 2, REPORTING CURRENCY IS DEFINED TO MEAN THE CURRENCY USED IN PRESENTING THE FINANCIAL STATEMENTS. SIMILARLY, THE WORDS MONETARY ITEMS ARE DEFINED TO MEAN MONEY HELD AND ASSETS AND LIABILITIES TO BE RECEIVED OR PAID IN FIXED AMOUNTS , E.G. CASH, RECEIVABLES AND PAYABLES. THE WORD PAID IS DEFINED U/S 43(2). THIS HAS BEEN DISCUSSED EARLIER . SIMILARLY, IT IS IMPORTANT TO NOTE THAT FOREIGN CUR RENCY NOTES, BALANCE IN BANK ACCOUNTS DENOMINATED IN A FOREIGN CURRENCY, AND RECEIVABLES/PAYABLES AND LOAN S DENOMINATED IN A FOREIGN CURRENCY AS WELL AS SUNDRY CREDITORS ARE ALL MONETARY ITEMS WHICH HAVE TO BE VALUED AT THE CLOSING RATE UNDER AS-11. UNDER PARAGRAPH 5, A TRANSACTION IN A FOREIGN CURRENCY HA S TO BE RECORDED IN THE REPORTING CURRENCY BY APPLYIN G TO THE FOREIGN CURRENCY AMOUNT THE EXCHANGE RATE BETWEEN THE REPORTING CURRENCY AND THE FOREIGN CURRENCY AT THE DATE OF THE TRANSACTION. THIS IS K NOWN AS RECORDING OF TRANSACTION ON INITIAL RECOGNITION . PARAGRAPH 7 OF AS-11 DEALS WITH REPORTING OF THE EFFECTS OF CHANGES IN EXCHANGE RATES SUBSEQUENT TO INITIAL RECOGNITION. PARAGRAPH 7(A), INTER-ALIA, S TATES THAT ON EACH BALANCE SHEET DATE MONETARY ITEMS, ENUMERATED ABOVE, DENOMINATED IN A FOREIGN CURRENCY SHOULD BE REPORTED USING THE CLOSING RATE. IN CASE OF ITA NO. 4774/DEL/2011 6 REVENUE ITEMS FALLING U/S 37(1), PARAGRAPH 9 OF AS- 11 WHICH DEALS WITH RECOGNITION OF EXCHANGE DIFFERENCE S, NEEDS TO BE CONSIDERED. UNDER THAT PARAGRAPH, EXCHANGE DIFFERENCES ARISING ON FOREIGN CURRENCY TRANSACTIONS HAVE TO BE RECOGNIZED AS INCOME OR AS EXPENSE IN THE PERIOD IN WHICH THEY ARISE, EXCEPT A S STATED IN PARAGRAPH 10 AND PARAGRAPH 11 WHICH DEALS WITH EXCHANGE DIFFERENCES ARISING ON REPAYMENT OF LIABILITIES INCURRED FOR THE PURPOSE OF ACQUIRING F IXED ASSETS, WHICH TOPIC FALLS U/S 43A OF THE 191 ACT. AT THIS STAGE, WE ARE CONCERNED ONLY WITH PARAGRAPH 9 WHICH DEALS WITH REVENUE ITEMS. PARAGRAPH 9 OF AS- 11 RECOGNISES EXCHANGE DIFFERENCES AS INCOME OR EXPENSE. IN CASES WHERE, E.G., THE RATE OF DOLLAR RISES VIS--VIS THE INDIAN RUPEE, THERE IS AN EXPENSE DUR ING THAT PERIOD. THE IMPORTANT POINT TO BE NOTED IS TH AT AS-11 STIPULATES EFFECT OF CHANGES IN EXCHANGE RATE VIS--VIS MONETARY ITEMS DENOMINATED IN A FOREIGN CURRENCY TO BE TAKEN INTO ACCOUNT FOR GIVING ACCOUNTING TREATMENT ON THE BALANCE SHEET DATE. THEREFORE, AN ENTERPRISE HAS TO REPORT THE OUTSTAND ING LIABILITY RELATING TO IMPORT OF RAW MATERIALS USING THE CLOSING RATE OF EXCHANGE. ANY DIFFERENCE, LOSS OR GAIN, ARISING ON CONVERSION OF THE SAID LIABILITY AT THE CLOSING RATE, SHOULD BE RECOGNIZED IN THE PROFIT AN D LOSS ACCOUNT FOR THE REPORTING PERIOD. 9. THEREFORE, LOSS SUFFERED BY THE ASSESSEE ON ACC OUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE, AS ON THE DATE OF THE BALANCE SHEET, IS AN ITEM OF EXPENDITURE U/S 37(1) OF THE I.T. ACT. 10. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (P) LTD. (SUPRA ), THIS GROUND IS ALLOWED. ITA NO. 4774/DEL/2011 7 11. BRIEF FACTS APROPOS GROUND NO. 2 ARE THAT ASSES SEE WAS ASKED TO EXPLAIN AND JUSTIFY DEBITING OF RS. 1,43,87,079/- A S MANAGEMENT CONSULTANCY FEES. THE AO REQUIRED THE ASSESSEE TO FURNISH DETAILS OF PARTIES TO WHOM MANAGEMENT CONSULTANCY FEES PAYMENT S WERE MADE INDICATING IF THEY WERE FALLING WITHIN THE CATEGORY OF SECTION 40A(2)(B) OF THE INCOME TAX ACT. THE ASSESEES REPLY HAS BEEN REPRO DUCED AT PAGE 3 & 4 OF THE ASSESSMENT ORDER. 12. AFTER CONSIDERING THE ASSESSEES SUBMISSIONS, A O CONCLUDED THAT THE PAYMENTS WERE MADE BY THE ASSESSEE COMPANY TO T HEIR FOLLOWING RELATED CONCERNS: - A) M/S SIEGWERK (ASIA PACIFIC) PVT. LTD. RS. 10,2 61,041/- B) SIEGWERK BENELUX N.V. RS. 2,572,716/- C) SIEGWERK DRUK FARBEN RS. 1,553,321/- 13. HE OBSERVED THAT OUT OF THESE COMPANIES, SEIGWE RK INDIA PVT. LTD. IS SUBSTANTIAL SHAREHOLDER OF THE ASSESSEE COMPANY AND THE OTHER TWO COMPANIES ARE SISTER CONCERNS OF SEIGWERK DRUK FARB EN. HE, THEREFORE, DISALLOWED THE ASSESSEES CLAIM FOR THREE REASONS: - (I) THAT ASSESSEE HAS TRANSFERRED ITS PROFIT TO THE HOLDING COMPANY IN THE NAME AND GARB OF INTER COMPANY MANAGEMENT CHARGES A ND, THEREFORE, IT WAS HIT BY SECTION 2(22)(E) OF THE I.T. ACT. (II) THAT THIS PAYMENT IS NOTHING BUT BASICALLY A PAYMENT UNDER THE GUISE OF COLLUSIVE AGREEMENT BETWEEN THE RESPECTIVE PARTI ES AND, THEREFORE, IT IS PAYMENT OTHER THAN MEANT FOR BUSINESS EXIGENCIES AND DISALLOWABLE U/S 37(1); (III) THAT THESE ARE THE PAYMENTS GIVEN TO THE HOLD ING COMPANY AND ITS CONCERNS TO USE THE BRAND NAME OF THE FOREIGN BASED COMPANY AND SO IT ITA NO. 4774/DEL/2011 8 IS FOR ENDURING BENEFIT TO THE INDIAN ASSESSEE COMP ANY AND, THEREFORE, CAPITAL IN NATURE. HE THEREFORE, MADE A DISALLOWAN CE OF RS. 1,43,87,679/-. 14. BEFORE LD. CIT(A), THE ASSESSEE, INTER-ALIA, SU BMITTED AS UNDER: TO CONTRADICT SUCH ARGUMENT IT IS SAID: - I) IN THE INSTANT CASE THE APPELLANT HAS NOT GIVEN ANY ADVANC E, IRRESPECTIVE OF THE FACT THAT THERE ARE COMMON DIRE CTORS HOLDING 20% OR MORE ABOVE SHARES INTEREST. THE APPELLANT HAS TAKEN THE SERVICES AND HAS MADE THE PAYMENT AND IT WILL NOT HIT BY 2(22)(E). II) THE H OLDING COMPANY HAS PROVIDED VARIOUS SERVICES SUCH AS GLOBA L PURCHASING THROUGH IMPORT AND THE CENTRALIZED PURCH ASES WAS PROCESS THROUGH THE HOLDING COMPANY. THE HOLDI NG COMPANY IS ALSO PROVIDING IT SERVICES INCLUDING TRA INING, E-MAIL SERVER ETC. THE APPELLANT HAS PAID THE FORE IGN HOLDING COMPANY AT THE BASIS OF COST MARK UP WHICH IS ANYTHING BETWEEN 3 TO 4%. THE APPELLANT HAS PAID ROYALTY TO THE HOLDING COMPANY @ .5% WHICH HAS BEEN STARTED FROM THE ASSTT. YEAR UNDER REVIEW AND THE A MOUNT CAME TO RS. 15,12,580/-. THE PAYMENT WHICH WAS DISALLOWED BY THE AO WAS FOR SERVICES RENDERED AND THE LD. AO IGNORING THE CLAIM OF THE APPELLANT HAS DISA LLOWED THE ENTIRE AMOUNT. THE TOTAL NET SALE DURING THE R ELEVANT PERIOD WAS RS. 117.00 CRORE AND THE PURCHASE WAS RS . 64.32 CRORE. THE PAYMENT MADE BY THE APPELLANT TO THE HOLDING COMPANY FOR THE REASON OF PROCURING THE PURCHASES AND OTHER IT SERVICES AS STATED ABOVE, HR SERVICES ETC. III) THIS AMOUNT WILL ALSO NOT FALL U NDER DEFERRED REVENUE EXPENDITURE AS THE SERVICES RENDER ED WAS NOT IN THE FORM OF CAPITAL BUT PURELY ON REVENU E BASIS. THE AGREEMENT WAS ENTERED UPON BETWEEN THE APPELLANT AND THE HOLDING COMPANY ON 01/01/08 AND A S PER THIS AGREEMENT THE SERVICE CHARGES WAS REIMBURS ED AT COST + MARK UP OF 3 TO 4%. ITA NO. 4774/DEL/2011 9 15. LD. CIT(A) DISMISSED THE ASSESSEES APPEAL, INT ER-ALIA, OBSERVING AS UNDER: - THE LD. AO ELABORATELY DISCUSSED THE MATTER BOTH ON FACTS AND ON MERIT. AFTER GOING THROUGH THE SUBMISSION MADE BY THE APPELLANT I DO NOT FIND THER E IS ANY GROUND REFUTING THE CHARGES FRAMED IN THE ASSTT . ORDER OF THE LD. AO. THE SUPREME COURT HAS ALREADY HELD THAT LOAN OR ADVANCE MADE BY THE SHAREHOLDER HAS BE EN REPAID BEFORE THE CLOSE OF THE ACCOUNTING YEAR WILL NOT INDICATE THAT ON THE DATE OF WITHDRAWAL, IT WAS NOT A LOAN OR ADVANCE BY THE COMPANY. I AGREE WITH THE LD. AO THAT THE APPELLANT HAS MADE PAYMENT TO ITS SUBSTANTIAL SHAREHOLDER NAMELY SIEGWERK DRUKFARBEN AND OTHER TW O CONCERNS ARE ALSO THE SISTER CONCERN OF SIEGWERK DRUKFARBEN. ALL THE PREREQUISITES AS SPELT OUT IN SEC. 2(22)(E) HAS BEEN SATISFIED IN THE RELEVANT PERIOD. I AGREE WITH THE ACTION OF THE AO IN HOLDING RS. 1,43,87,07 9/- AS INCOME OF THE ASSESSEE WITHIN THE MEANING OF SEC. 2(22)(E) READ WITH SEC. 56 OF THE ACT AND SUCH ACTI ON IS SUSTAINED. 16. LD. COUNSEL, SHRI AJAY VOHRA, FOR THE ASSESSEE SUBMITTED THAT ASSESSEE WAS PRIMARILY MAKING THE PAYMENT FOR PROCU RING IT AND HR SERVICES, ETC. HE SUBMITTED THAT THE AO INVOKED SE CTION 2(22)(E) WITHOUT GIVING ANY NOTICE IN THIS REGARD AND LD. CIT(A) CON FIRMED THE AOS ACTION ON THIS COUNT WITHOUT PROPERLY APPRECIATING THE FACTS. HE, THEREFORE, SUBMITTED THAT ASSESSEE DID NOT GET OPPORTUNITY TO EXPLAIN IT S CASE AND, THEREFORE, THE MATTER MAY BE RESTORED BACK TO THE FILE OF AO FOR E XAMINING THE ISSUE AFRESH. 17. LD. DR RELIED ON THE ORDER OF LD. CIT(A). ITA NO. 4774/DEL/2011 10 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORD OF THE CASE. 19. WE FIND FROM THE ASSESSMENT ORDER THAT PRIMARIL Y THE AO HAD REQUIRED THE ASSESSEE TO SUBSTANTIATE ITS CLAIM THA T THE PAYMENTS WERE MADE FOR BUSINESS PURPOSES AND WERE NOT COLLUSIVE I N NATURE BECAUSE PAYMENTS WERE MADE TO PARTIES FALLING WITHIN THE CA TEGORIES OF SECTION 40A(2)(B). HOWEVER, AFTER CONSIDERING THE ASSESSEE S REPLY HE, INTER-ALIA, CONCLUDED THAT THE PAYMENT WAS HIT BY SECTION 2(22) (E). THE AO HAD NOT GIVEN ANY NOTICE IN THIS REGARD TO ASSESSEE. 20. BEFORE LD. CIT(A), THE ASSESSEE HAD FILED DET AILED NOTE ABOUT THE OBJECT AND PURPOSE OF PAYMENT OF IMPUGNED AMOUNT. HOWEVER, WITHOUT CONSIDERING THE ASSESSEES SUBMISSIONS, LD. CIT(A) CONFIRMED THE FINDINGS OF AO THAT THE PAYMENT WAS HIT BY SECTION 2(22)(E). HE DID NOT CONSIDER THE ASSESSEES REPLY THAT THE PAYMENTS WERE MADE FOR PR OCURING SERVICES. UNDER SUCH CIRCUMSTANCES, WE ARE OF THE OPINION THA T SINCE BOTH THE LOWER REVENUE AUTHORITIES HAVE NOT COMMENTED UPON THE ASS ESSEES PLEA, THE MATTER SHOULD BE RESTORED BACK TO THE FILE OF AO FO R DENOVO EXAMINATION. WE DIRECT ACCORDINGLY. 21. IN THE RESULT, THIS GROUND IS ALLOWED FOR STATI STICAL PURPOSES. 22. GROUND NO. 3 IS REGARDING DISALLOWANCE U/S 14A. THE AO HAD MADE DISALLOWANCE U/S 14A APPLYING RULE 8D. HE HAD ALLOCATED RS. 2,84,000/- OUT OF INTEREST EXPENSES BY APPLYING THE RATIO BETWEEN AVERAGE VALUE OF INVESTMENT RELATING TO TAX FREE INCOME TO AVERAGE TOTAL ASSETS IN ITA NO. 4774/DEL/2011 11 BALANCE SHEET. HE ALSO ALLOCATED RS. 9,87,020/- BE ING .5% OF AVERAGE VALUE OF INVESTMENT TOWARDS DEEMED EXPENSES RELATIN G TO TAX FREE INCOME. 23. LD. CIT(A) UPHELD THE AOS ACTION. LD. COUNSEL SUBMITTED THAT NO EXPENDITURE WAS ALLOCABLE TOWARDS EARNING OF INCOME WHICH DID NOT FORM PART OF THE TOTAL INCOME OF ASSESSEE. HE SUBMITTED THAT AO HAS NOT CONSIDERED THE ASSESSEES SUBMISSION IN THIS REGARD AND HAS APPLIED RULE 8D. 24. LD. DR RELIED ON THE ORDER OF LOWER REVENUE AUT HORITIES. 25. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORD OF THE CASE. 26. ADMITTEDLY FOR A.Y. 2008-09 RULE 8D WAS APPLICA BLE. HOWEVER, AS PER SECTION 14A SUB-SECTION (2), THE AO COULD APPLY RULE 8D PROVIDED HE WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME W HICH DID NOT FORM PART OF THE TOTAL INCOME OF ASSESSEE. THE AO HAS NOT COMME NTED UPON THE ASSESSEES CLAIM THAT NO EXPENDITURE WAS ALLOCABLE TOWARDS EARNING OF EXEMPTED INCOME. THE MANDATE OF SECTION 14A(2) CLEA RLY REQUIRES THE AO TO FIRST CONSIDER THE ASSESSEES CLAIM AND AFTER RE JECTING THE SAME SHOULD RESORT TO RULE 8D. WE, THEREFORE, CONSIDER IT IN T HE INTEREST OF JUSTICE THAT THE MATTER SHOULD BE RESTORED BACK TO THE FILE OF A O FOR DENOVO CONSIDERATION IN TERMS OF ABOVE OBSERVATIONS. 27. IN THE RESULT, THIS GROUND IS ALLOWED FOR STATI STICAL PURPOSES. ITA NO. 4774/DEL/2011 12 28. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 09.08.2012 SD/- SD/- (C.M. GARG) JUDICIAL MEMBER (S.V. MEHROTRA) ACCOUNTANT MEMBER DATED: 09.08.12 *KAVITA COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. TRUE COPY BY ORDER DEPUTY REGISTRAR