ITO, New Delhi V. M/s. AVH Resources India Pvt. Ltd., New Delhi

ITA 538/DEL/2013

• Counselvise Citation: 53820114 RSA 2013
• Duration Of Justice: 2 year(s) 6 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 05-08-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 30-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y KAKKAR
• Assessee Lawyers: DR RAKESH GUPTA
• Keywords: Related party transaction; Transfer pricing; Earning of tax free income; Wholly owned subsidiary; Arm length price; Revised return
• Section: 143(3); 14A

Judgement Text

ITA NO. 538/ DEL/ 2013 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I , NEW DELHI BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SHRI H.S. SIDHU, JUDICIAL MEMBER I.T.A. NO. 538 /DEL/201 3 A.Y. : 200 9 - 10 INCOME TAX OFFICER, WARD 2(2), DELHI, ROOM NO. 389 - A, CR BUILDING, I.P. ESTATE, NEW DELHI 110 019 VS. AVH RESOURCES INDIA PVT. LTD., D - 139, FIRST FLOOR, EAST OF KAILASH, NEW DELHI 110 065 (PAN: - AADCB2711K) (APPELLANT) (RESPONDENT) DEPARTMENT BY : MS. Y. KAKKAR, SR. DR ASSESSEE BY : DR. RAKESH GUPTA, ADV. & SH. TARUN KUMAR, ADV. DATE OF HEARING : 05 - 0 8 - 201 5 DATE OF ORDER : 19 - 0 8 - 201 5 ORDER PER H.S. SIDHU : J M REVENUE HAS FILED THE PRESENT APPEAL AGAINST THE IMPUGNED ORDER DATED 2 6 .1 1 .20 12 PASSED BY THE LD. CIT(A) - V, NEW DELHI FOR THE ASSTT. YEAR 200 9 - 10 , ON THE FOLLOWING GROUNDS: - 1 (A) . WHETHER THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION OF RS. 20,41,412/ - MADE BY THE AO ON ACCOUNT OF DIFFERENCE IN ARMS LENGTH PRICE. 2. WHETHER THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN RESTRICTING DISALLOWANCE U/S. 14A TO RS . 1,21,752/ - THAT WAS IN ACCORDANCE TO THE PROVISIONS ITA NO. 538/ DEL/ 2013 2 OF RULE 8D WHICH OTHERWISE SHOULD HAVE BEEN RESTRICTED TO THE AMOUNT OF DIVIDEND RECEIPTS. 3. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIGHT TO AMEND, MODIFY ALTER, ADD OR FOREGO ANY GROUND(S) OF APPEAL AT ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEAL. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FILED ITS INCOME TAX RETURN DECLARING LOSS OF RS. (1563256), WAS TRANSMITTED ELECTRONICALLY BY THE ASSESSEE VIDE ACKNOWLEDGEMENT NUMBER 96585351300909 ON 30.9.2009. A REVISED RETURN WAS THEREAFTER TRANSMITTED ELECTRONICALLY VIDE ACKNOWLEDGEMENT NO. 101420671171109 DATED 17.11.2009 AGAIN DECLARING LOSS OF ( ) RS. 1563256. THE RETURN WAS PROCESSED U/S. 143(1) OF THE INCOME TAX ACT, 1961 O N 30.12.2010. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S. 143(2), DATED 23.8.2010, WAS ISSUED AND SERVED UPON THE ASSESSEE. THE ASSESSEE COMPANY IS A 100% SUBSIDIARY OF AVH NV, BELGIUM ESTABLISHED WITH AN OBJECTIVE OF ESTABLISHING JOINT VENTURES I N CEMENT, MINING, BUILDING MATERIALS, RENEWABLE ENERGY AND OTHER INFRASTRUCTURE SECTORS. THE AO HAS COMPLETED THE ASSESSMENT AT AN INCOME OF RS. 41,90,586/ - AGAINST THE RETURNED LOSS OF RS. 15,63,256/ - AFTER MAKING THE FOLLOWING ADDITIONS / DISALLOWANC ES, VIDE ASSESSMENT ORDER DATED 02.2.2012 PASSED U/S. 143(3) OF THE I.T. ACT, 1961. (A) DIFFERENCE ON A/C OF ARMS LENGTH PRICE : 20,41,412/ - (B) U/S 14A : 37,12,429/ - 3. ASSESSEE AGGRIEVED WITH THE ASSESSMENT ORDER DATED 02.2.2012 PASSED BY TH E AO , ASSESSEE PREFERRED AN APPEAL BEFORE ITA NO. 538/ DEL/ 2013 3 THE L D. FIRST APPELLATE AUTHORITY, WHO VIDE IMPUGNED ORDER DATED 26 .1 1 .20 12 PARTLY ALLOWED THE APPEAL FILED BY THE ASSESSEE . 4. AGGRIEVED WITH THE AFORESAID ORDER OF THE LD. CIT(A), REVENUE IS IN APPEAL BEFORE US. 5. MS. Y. KAKKAR, SR. DR HAS RELIED UPON THE ORDER OF THE ASSESSING OFFICER AND REITERATED THE CONTENTION RAISED IN THE GROUNDS OF APPEAL . WITH REGARD TO ADDITION OF RS . 20,41,412/ - ON ACCOUNT OF ARMS LENGTH TRANSACTION IS CONCERNED, THE LD. DR STATED THAT ASSESSEE HAS BEEN SET UP PRIMARILY WITH AN OBJECTIVE TO UNDERTAKE STUDIES ON BEHALF OF ITS HOLDING COMPANY IN INDIA AND TO IDENTIFY THE INVESTMENT POTENTIAL FOR ESTA BLISHING JOINT VENTURES (JVS) ON BEHALF AND FOR ITS HOLDING COMPANY ONLY; THAT THE SERVICES OF THE ASSESSEE ARE EXCLUSIVELY MEANT FOR HOLDING COMPANY I.E. AVH NV, BELGIUM ONLY; THAT THE AGREED CONSIDERATION FOR CONSULTANCY SERVICES HAS BEEN DECIDED AS PER THE SERVICE AGREEMENT TO BE DIRECT/ INDIRECT COST ATTRIBUTABLE TO SAID WORK PLUS 10% MARK UP. THEREFORE, THE ADDITION MADE BY THE ASSESSING OFFICER IS CORRECT AND ACCORDINGLY, SHE REQUESTED THAT THIS GROUND OF APPEAL MAY BE ALLOWED 5.1 AS REGARDS THE A NOTHER ADDITION OF RS. 37,12,429/ - MADE U/S. 14A R.W. RULE 8D OF THE I.T. RULES IS CONCERNED, LD. DR SUBMITTED THAT THE MAIN OBJECTIVE OF THE COMPANY IS TO ESTABLISH JVS IN CEMENT, MINING, BUILDING MATERIAL, RENEWABLE ENERGY AND OTHER INFRASTRUCTURE SEC TORS. THE MANNER OF DEPLOYMENT OF FUNDS ALSO REVEAL THAT THEY ARE UTILIZED FOR MAKING INVESTMENTS OR KEPT IN BANK. THE CONTENTION OF THE ASSESSEE THAT THE EXPENSES DEBITED IN P&L ACCOUNT HAVE NO NEXUS WITH EARNING EXEMPT INCOME IS NOT BORNE OUT FROM THE FACTS OF THE CASE. SHE FURTHER STATED THAT IT IS THE UTILIZATION OF THE DUE DILIGENCE STUDY CARRIED OUT BY CONSULTANTS THAT HAS LED TO THE DECISION OF DEPLOYMENT OF FUNDS IN THE FORM OF ITA NO. 538/ DEL/ 2013 4 INVESTMENTS IN EQUITY SHARES OF SAGAR CEMENTS LTD. AND DIVIDEND INCOME HAS ARISEN ON THESE INVESTMENTS ONLY. SHE ALSO STATED THAT HE MANNER OF DEPLOYMENT OF FUNDS MOSTLY IN THE FORM OF INVESTMENTS CLEARLY ARE WITH THE INTENTION TO EARN DIVIDEND INCOME WHICH IS EXEMPT U/S. 10(34) OR LONG TERM CAPITAL GAIN (EXEMPTED U/ S. 10(38) FROM THE SAME SHARES. SHE LASTLY THEREFORE, STATED THAT THE PROVISIONS OF SECTION 14A(2) OF THE INCOME TAX ACT, 1961 READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 ARE APPLICABLE, HENCE, THE DISALLOWANCE OF RS. 37,12,429/ - WAS RIGHTLY MADE BY THE AO WHICH NEEDS TO BE SUSTAINED AND ACCORDINGLY THE GROUND NO. 2 RAISED BY THE REVENUE MAY BE ALLOWED. 6 . ON THE CONTRARY, LD. COUNSEL OF THE ASSESSEE RELIED UPON THE ORDER PASSED BY THE LD. CIT(A). LD. COUNSEL OF THE ASSESEE FILED A PAPER BOOK CO NTAINING PAGES 1 TO 58 CONTAINING THE COPY OF COMPUTATION OF INCOME FOR AY 2009 - 10; COPY OF AUDITED BALANCE SHEET AND P&L A/C FOR AY 2009 - 10; COPY OF SERVICE AGREEMENT BETWEEN AVH BELGIUM AND THE ASSESSEE DATED 30.4.2008; COPY OF STATEMENT OF FACTS AND SUBMISSIONS MADE BEFORE THE LD. CIT(A) FOR AY 2009 - 10. HOWEVER, THE PAGE NO. 56 TO 58 WHICH IS THE COPY OF THE MEMORANDUM OF UNDERSTANDING WITH M/S ALPS IND U STRIES LTD HAVE NOT BEEN ENCLOSED WITH THE PAPER BOOK. 7 . WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORDS AVAILABLE WITH US, ESPECIALLY THE ORDERS OF THE REVENUE AUTHORITIES AND THE PAPER BOOK FILED BY THE ASSESSEE CONTAINING PAGES NO. 1 TO 58. BUT WE FIND THAT THE PAGES NO. 56 TO 58 WHICH IS THE COPY OF THE MOU WITH M/S ALPS INDUSTRIES LTD. WERE NOT FOUND ON RECORD, HENCE, WE HAVE NOT CONSIDERED IT. WE FIND THAT ASSESSEE FILED ITS INCOME TAX RETURN DECLARING LOSS OF RS. (1563256) ON 30.9.2009 AND SUBSEQUENTLY A REVISED RETURN WAS TRANSMITTED ELECTRONICALLY ON 17.11.2009 AGAIN DECLARI NG LOSS OF ( ) RS. 1563256. THE RETURN WAS ITA NO. 538/ DEL/ 2013 5 PROCESSED U/S. 143(1) OF THE INCOME TAX ACT, 1961 ON 30.12.2010. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S. 143(2), DATED 23.8.2010, WAS ISSUED AND SERVED UPON THE ASSESSEE. THE ASSESSEE COMPANY IS A 1 00% SUBSIDIARY OF AVH NV, BELGIUM ESTABLISHED WITH AN OBJECTIVE OF ESTABLISHING JOINT VENTURES IN CEMENT, MINING, BUILDING MATERIALS, RENEWABLE ENERGY AND OTHER INFRASTRUCTURE SECTORS. THE AO HAS COMPLETED THE ASSESSMENT AT AN INCOME OF RS. 41,90,586/ - AGAINST THE RETURNED LOSS OF RS. 15,63,256/ - AFTER MAKING THE ADDITIONS / DISALLOWANCES OF RS. 20,41,412/ - ON ACCOUNT OF DIFFERENCE ON A/C OF ARMS LENGTH PRICE AND RS. 37,12,429/ - U/S. 14A VIDE ASSESSMENT ORDER DATED 02.2.2012 PASSED U/S. 143(3) OF THE I.T. ACT, 1961. AGGRIEVED WITH THE ASSESSMENT ORDER DATED 02.2.2012 PASSED BY THE AO, ASSESSEE FILED AN APPEAL BEFORE THE LD. FIRST APPELLATE AUTHORITY, WHO VIDE IMPUGNED ORDER DATED 26.11.2012 PARTLY ALLOWED THE APPEAL FILED BY THE ASSESSEE. 7 .1 APROPOS G ROUND NO. 1 RELATING TO DELETION OF ADDITION OF RS. 20,41,412/ - MADE BY THE AO ON ACCOUNT OF DIFFERENCE IN ARMS LENGTH PRICE IS CONCERNED, WE FIND THAT THE BASIC ISSUES INVOLVED ARE (A) WHETHER THE APPELLANT IS A COMPANY DOING SERVICES TO THE PARENT COMP ANY ONLY ; OR IT IS IN ADDITION TO THE SERVICES BEING CARRIED FOR THE PARENT COMPANY THAT IT IS DOING SOME OTHER BUSINESS ACTIVITY ALSO AND (B) WHETHER MARK UP PERCENTAGE SHOULD BE APPLIED ON THE ENTIRE EXPENDITURE DEBITED TO P&L ETC OR IT SHOULD BE APPLIE D ONLY ON THE EXPENDITURE ATTRIBUTABLE TO THE SERVICES DONE FOR THE PARENT COMPANY. WE NOTE ON GOING THROUGH THE ASSESSMENT ORDER THAT AO HAS REFERRED TO THE SERVICE AGREEMENT DATED 30.4.2008 ONLY WITH THE PRINCIPEL COMPANY. HE HAS NOT ACCEPTED THE VERS ION OF THE ASSESSEE THAT IT IS CARRYING ON OTHER ACTIVITY ALSO (OTHER THAN MENTIONED IN THE SERVICE AGREEMENT) I.E. ALTHOUGH IT IS 100% SUBSIDIARY OF THE PARENT COMPANY, YET IT IS CARRYING ACTIVITY OTHER ITA NO. 538/ DEL/ 2013 6 THAN THAT MENTIONED IN THE SERVICE AGREEMENT. WE FIN D THAT WHILE WORKING OUT THE ARM LENGTH PRICE THE AO HAS NOT TAKEN INTO ACCOUNT THE MEMORANDUM OF ASSOCIATION ALTHOUGH IT HAS TAKEN INTO ACCOUNT THE SAME WHILE WORKING OUT THE DISALLOWANCE U/S 14A. 7.2 WE FURTHER NOTE THAT THE ASSESSEE IN ITS SUBMISSION S HAS DRAWN THE ATTENTION TO THE MEMORANDUM OF ASSOCIATION IN WHICH IT HAS BEEN CLEARLY NOTED THAT IN ADDITION TO THE SERVICES BEING GIVEN TO THE PARENT COMPANY THE APPELLANT WILL DO OTHER ACTIVITY ALSO. FOR READY REFERENCE WE ARE REPRODUCING THE MAIN OB JECTS OF THE COMPANY AS UNDER: - 'TO CARRY ON IN INDIA, OR ELSEWHERE, DIRECTLY OR THROUGH SUBSIDIARIES OR THROUGH STRATEGIC PARTNERSHIPS AND INVESTMENT ALLIANCES OR THROUGH JOINT VENTURES OR THROUGH ACQUISITION, THE BUSINESS OF MANUFACTURING, TREATING, PRO CESSING, PREPARING, REFINING, IMPORTING, EXPORTING, PURCHASING, SELLING IN ALL TYPES AND KINDS OF CEMENT OR ITS BY - PRODUCTS AS ALSO OTHER CEMENT PRODUCTS OF ALL DESCRIPTIONS, SUCH AS RMC, P IPES, POLES, SLABS, ASBESTOS SHEETS, BLOCKS, TILES, GA RDEN WARES, PLASTER OF PARIS, LIME PIPES, BUILDING MATERIALS USED IN IN FRASTRUCTURAL WORK AND CIVIL CONSTRUCTION AND OTHERWISE ARTICLES, THINGS, COMPOUNDS AND PREPARATIONS CONNECTED WITH THE AFORESAID PRODUCTS. TO PURCHASE, ACQUIRE, HOLD, TAKE ON LEASE, MANAGE AND OPERATE, MINES, QUARRIES, MINING LICENSES, MINING RIGHTS, MINING CLAIMS, META L LIFEROUS LAND RELATING TO SALINE OR CHEMICAL SUBSTANCES, MINERAL & METALS SUCH AS COAL, LIGNITE, ROCK - PHOSPHATE, BRIMSTONE, BRINE, BAUXITE, RARE EARTHS, WHICH MAY SEEM SUITABLE O R USEFUL FOR ANY OF THE COMPANY'S TREAT AND TO TURN TO ACCOUNT ORES, ALL SORTS OF MAJOR AND MINOR MINERALS, WORKING DEPOSITS A ND SUB SOIL MINERALS AND TO CRUSH WIN, SET, ITA NO. 538/ DEL/ 2013 7 QUARRY, SMELT, CALCINE, REFINE, DRESS, PRESERVE, AMALGAMATE, PROCESS, HARDEN, TEMPER, POLISH, MANUFACTURE, MANIPULATE AND PREPARE FOR MARKET METALS AND MINERAL SUBSTANCES, ALL TYPES OF STONES, AGGREGATES, LIME, CHALK, CLAY, REFRACTORIES, CERAMICS, STONE WARES, PORCELAIN WARES, OIL, COKE, COAL, GYPSUM DEPOSITS OR PRODUCTS AND TO DO ALL SUCH OTHER ACTS OR THINGS NECESSARY IN CONNECTION WITH THE SAME AND TO IMPORT, EXPORT, SELL, OR OTHERWISE DEAL IN ALL TYPES OF MINING MACHINES, TOOLS AND IMPLEMENTS, SMELTERS CRUSHING MACHINES, FURNACES AND OTHER EQUIPMENTS'. 7.3 FROM THE ABOVE, WE FIND THAT T HE ASSESSEE IS CARRYING OUT THE ACTIVITY OTHER THAN THAT MENTIONED IN THE SERVICE AGREEMENT STANDS ALSO CONFIRMED FROM AN AGREEMENT DATED 11.08.2010 WITH M/S ALPS INDUSTRIES LTD. , WHICH SHOWS THE ASSESSEE TO BE I N THE BUSINESS PROCESS OF HYDRO POWER GENER ATION ETC. BESIDES THIS, IT HAS MADE INVESTMENT IN SHARES OF M/S SAGAR CEMENT LTD. AS APPEARING IN THE B ALANCE SHEET. THE PROFIT AND LOSS A/C SHOWS SALES OF RS. 35,96,309/ - WHICH IS NOTHING BUT PAYMENTS RECEIVED ON ACCOUNT OF THE SERVICES RENDERED TO THE PARENT COMPANY AS PER THE SERVICE AGREEMENT. THE BOOKS OF ACCOUNTS ARE DULY AUDITED AND THE AUDITOR HAS REPORTED IN NOTES TO ACCOUNTS THAT TRANSACTION WITH RELATED PARTIES ARE AMOUNTING TO RS. 35,96,309/ - AND FURTHER THAT EARNING IN FOREIGN CURRENCY(ACCRU AL BASIS) - THE SE RVICE INCOME AT RS. 35,96,309/ - . 7.4 APART FROM THE AFORESAID THE EXPENDITURE HAS BEEN SHOWN AT RS. 51, 5 9,565/ - IN THE P& L ETC THE BREAKUP OF WHICH HAS BEEN PRODUCED IN THE SUBMISSIONS MADE BY THE APPELLANT NOTED ABOVE, THIS INCLUDES EXPENDITURE OF RS. 32,69,372/ - MADE FOR THE SERVICES RENDERED TO THE PRINCIPLE COMPANY. THE SALES HAVE BEEN SHOWN WITH 10% MARKUP OF RS. 32,69 ,372/ - AT 35,96,309/ - . ITA NO. 538/ DEL/ 2013 8 7.5 FROM THE ABOVE, IT IS CLEARLY ESTABLISHED THAT THE ASSESSEE IS CARRYING ON THE BUSINESS ACTIVITY OTHER THAN AS PER SERVICE AGREEMENT WITH THE PRINCIPLE. THEREFORE, THE 10% MARKUP IS TO BE MADE ONLY OF RS. 32,69,372/ - IN THE ABSENCE OF ANY COMPARABLE TRANSACTION. THE ACTION OF THE AO IN MAKING ADDITION OF RS. 20,41,412/ - IS NOT IN ORDER. IN VIEW OF ABOVE, WE FIND THAT THE LD. CIT(A) HAS RIGHTLY DELETED THE ADDITION OF RS. 20,41,412/ - ON THIS ACCOUNT . THEREFORE, WE ARE OF T HE VIEW THAT NO INTERFERENCE IS CALLED FOR IN THE WELL REASONED ORDER PASSED BY THE LD. CIT(A), HENCE, WE UPHOLD THE IMPUGNED ORDER ON THIS ISSUE AND REJECT THE GROUND NO. 1 RAISED BY THE REVENUE IN ITS APPEAL. 8. APROPOS GROUND NO. 2 IN RESTRICTING DISALLOWANCE U/S. 14A TO RS. 1,21,752/ - THAT WAS IN ACCORDANCE TO THE PROVISIONS OF RULE 8D WHICH OTHERWISE SHOULD HAVE BEEN RESTRICTED TO THE AMOUNT OF DIVIDEND RECEIPTS IS CONCERNED, WE FIND THAT RULE 8D IS APPLICABLE FROM THE AY 2008 - 09 (GODREJ AND BO YCE MANUFACTURING COMPANY LTD VS DCIT 328 ITR 81(BOMBAY) AND MAX OPP INVESTMENT LTD. VS. CIT 203 TAXMAN 364 (DEL) . IN THE APPEAL UNDER CONSIDERATION THE ASSESSMENT YEAR INVOLVED IS 2009 - 10, THEREFORE RULE 8D IS APPLICABLE IN CASE THE NECESSARY CONDITIONS A RE FULFILLED. WE FIND THAT THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. WALFORT SHARE AND STOCK BROKERS PVT. LTD. [2010] 326 ITR 1, HAD EXAMINED THE PROV I SIONS OF SECTION 14A AND HAD HELD THAT MANDATE OF SECTION 14A IS T O PREVENT CLAIMS FOR DEDUCTION OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IT WAS ALSO FURTHER HELD THAT THE BASIC PRINCIPLE OF TAXATION IS TO TAX NET INCOME AND THIS PRINCIPLE EVEN APPLIES FOR THE PURPOSES OF SECTION 14A AND EXPENSES TOWARDS NON - TAXABLE INCOME MUST BE EXCLUDED. WE FURTHER NOTE THAT THE IMPLICATIONS OF SEC.14A R.W.R.8D HAVE BEEN EXA MINED BY THE ITAT, DELHI G BENCH IN ITS ORDER DATED 7.02.2012 ITA NO. 538/ DEL/ 2013 9 IN ITA NO.3001/DEL/2011, ASSESSMENT YEAR 2007 - 08, IN THE CASE OF SHRI RAM GLOBAL ENTE RPRISES LTD., VS. JCIT. WE NOTE THAT THE TRIBUNAL HAS REF E RRED TO THE JUDGEMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF MA X OPP INVESTMENT LTD. VS. CIT 203 TAXMAN 364 (DEL) AND HAS OBSERVE D IN PARA - 6 OF THE ORDER THAT; 'IN THE SAID DECISION, IT HAS BEEN HELD THAT EVEN FOR THE PRE - RULE 8D PERIOD, WHENEVER THE ISSUE OF SECTION 14A ARISES BEFORE AN AO, HE HAS, FIRST OF ALL, TO ASCERTAIN THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THE AO WILL HAVE TO VERIFY THE CORRECTNESS OF SUCH CLAIM. IN CASE THE AO IS SATISFIED WITH THE CLAIM OF THE CORRECTNESS OF SUCH CLAIM. IN CASE THE AO IS SATISFIED WITH THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, THE AO IS TO ASCERTAIN THE CLAIM OF THE ASSESSEE IN SO FAR AS THE QUANTUM OF DISALLOWANCE UNDER SECTION 14A IS CONCERNED. IN SUCH EVENTUALITY, THE AO CANNOT EMBARK UPON A DETERMINATION OF THE MOUNT OF EXPENDITURE FOR THE PURPOSES OF SECTION 14A(1). IN CASE, THE AO IS NOT, ON THE BASIS OF OBJECTIVE CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY, SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE , H E SHALL HAVE TO REJECT THE CLAIM AND STATE THE REASONS FOR DOING SO. HAVING DONE SO, THE AO WILL HAVE TO DETERMINE THE AMOUNT OF EXPENDITURE INCURR ED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HE IS REQUIRED TO DO SO ON THE BASIS OF REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. ITA NO. 538/ DEL/ 2013 10 8.1 WE FURTHER FIND THAT THE RATIO OF THE ORDER OF THE ITAT AND OF THE JUDGMENT OF THE HIGH COURT OF DELHI IS APPLICABLE IN THE CASES PERTAINING TO THE ASSESSMENT YEARS SUBSEQUENT TO THE ASSTT YEARS 2007 - 08 ALSO. AS PER THE ORDER OF THE ITAT AND OF THE HIGH COURT THERE SHOULD BE SATISFACTION OF THE AO IN REJECTING THE A SSESSEE 'S CLAI M ARRIVED AT AFTER OBJECTIVE ANALYSIS OF FACTS. SATISFACTION IS SUBJECTIVE, THEREFORE THE 'STANDARD OF NORM AL PRUDENCE' IN SIMILAR FACTS AND CIRCUMSTANCES HAS TO BE APPLIED. FROM A PERUSAL OF THE ASST. ORDER - PAGE - 7, IT HAS BEEN SEEN THAT THE AO IS NOT SA TISFIED WITH THE VERSION OF THE A SSESSEE AND HAS GIVEN THE REASON AS 'THE MANNER OF D EPLOYMENT OF FUNDS MOSTLY IN THE FORM OF INVESTMENTS ARE WITH AN INTENTION TO EARN DIVIDEND INCOME WHICH IS EXEMPT U/S 10(34) OR LONG T ERM CAPITAL GAIN U/S 10(38) FROM THE SHARES OF SAGAR INVESTMENTS.' BUT THE AO HAS DISALLOWED EXPENDITURE OF RS.3 7,12,429/ - WHICH IS MORE THAN THE DIVIDEND INCOME OF RS. 20,32,762/ - ; AND HAS TAKEN THE SAME EXPENDITURE TWICE, ONCE FOR WORKING OUT THE ARMS LENGTH PRICE AS DISCUSSED ABOVE AND AGAIN FOR WORKING OUT DISALLOWANCE U/S 14A, WHICH IS AN ABSURDITY AND A CONTRADICTORY STAND. IT IS ALSO SEEN THAT AN AMOUNT OF RS. 32,69,372/ - HAS BEEN SPENT IN MANAGING THE CONSULTANCY SERVICES TO THE HOLDING COMPANY AVH BELGIUM AND AN AMOUNT OF RS. 18, 90,192 / - HAS BEEN SUBMITTED TO BE INCURRED FOR SETTING UP OF BUSINESS IN INDIA. THE LATER EXPENDITURE WAS DISCUSSED IN DETAIL WITH ITA NO. 538/ DEL/ 2013 11 THE AR OF THE ASSESSEE AND IT WAS POINTED OUT TO HIM THAT IT SHOWS TOTAL EXPENSES OF RS. 18,90,192/ - ON INDIAN OPERATIONS AN D THAT IT CANNOT BE RULED OUT THAT NO TIME WAS DEVOTED BY THE DIRECTORS OR THE PERSONNEL DEPLOYED BY THE A SSESSEE IN DECIDING THE MATTER OF M AKING INVESTMENTS OR IN WITHHOLDING THE INVESTMENTS ALREADY MADE. THE ASSESSEE HAS SUBMITTED THAT IT WAS NATURAL TH AT MAN HOURS WERE DEVOTED FOR MAKING THE DECISION AS TO THE INVESTMENTS ETC. IT HAS ACCORDINGLY OFFERED TO 10% OF THE EXPENSES AS UNDER: - 'WITHOUT PREJUDICE TO ABOVE, EVEN IN WE CONSIDER THAT EXPENSES INCURRED ON ACCOUNTING & INFRASTRUCTURE SERVICES AND AUDITOR'S REMUNERATION AMOUNTING TO RS. 9 ,98,524/ - AND RS. 2,18,994/ - RESPECTIVELY ARE PARTLY CONNECTED WITH THE EARNING OF DIVIDEND INCOME AND IN VESTMENT . SUCH DISALLOWANCE SHOULD NOT BE MORE THAN 10% OF EXPENSES OF RS. 12,17,518/ - (I.E. RS. 1,21,752/ - ) WHEN THE ASSESSEE HAS ALREADY DISALLOWED AND CAPITALIZED IN INVESTMENT A SUM OF RS. 3,08,710/ - .) 8.2 IN VIEW OF THE ABOVE DISCUSSION THE DISALLOWANCE , WE FIND THAT THE LD. CIT(A) HAS RIGHTLY RESTRICTED TO WHEN NO DIRECTOR'S REMUNERATION HAS BEEN CL A IMED BY THE LD. CIT(A) . THEREFORE, W E ARE OF THE VIEW THAT NO INTERFERENCE IS CALLED FOR IN THE WELL REASONED ORDER PASSED BY THE LD. CIT(A), HENCE, WE UPHOLD THE IMPUGNED ITA NO. 538/ DEL/ 2013 12 ORDER BY REJECTING THE GROUND NO. 2 RAISED BY THE REVENUE IN ITS APPEAL. 9 . IN THE RESULT, THE APPEAL FILED BY THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE O PEN C OURT ON 19 / 8 /20 1 5 . SD/ - SD/ - [ N.K. SAINI] [ H.S. SIDHU ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATE 19 / 8 /201 5 SRBHATNAGAR COPY FORWARDED TO: - 1. APPELLANT - 2. RESPONDENT - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES