SIL Investments Ltd., Rajasthan V. DCIT, New Delhi

ITA 5656/DEL/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7104 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-09-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 12-07-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 21-10-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANIMA BARNWAL
• Assessee Lawyers: ROHIT JAIN
• Keywords: Rule of consistency; Earning of tax free income; Proportionate interest; Difference of opinion
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : G NEW DELHI BEFORE SH. H.S. SIDHU , JUDICIAL M EMBER AND SH. O.P. KANT , ACCOUNTANT MEMBER ITA NO. 5656 /DEL/ 2013 ASSESSMENT YEAR: 2010 - 11 SIL INVESTMENTS LTD., PACHPA HAR ROAD, BHAWANIMANDI, DISTT. JHALAWAR, RAJASTHAN. VS. DCIT , CIRCLE - 8(1), ROOM NO. 163, FIRST FLOOR, C.R. BUILDING, I.P. ESTATE, NEW DELHI PAN : AABCS2899H (APPELLANT) (RESPONDENT) AND ITA NO. 6046 /DEL/ 2013 ASSESSMENT YEAR: 2010 - 11 DCIT, CIRCLE - 8(1), ROOM NO. 163, C.R. BUILDING , NEW DELHI VS. SIL INVESTMENTS LTD., PACHPAHAR ROAD, BHAWANIMANDI, DISTT. JHALAWAR, RAJASTHAN. PAN : AABCS2899H (APPELLANT) (RESPONDENT) ASSESSEE BY SH. ROHIT JAIN, ADV. DEPARTMENT BY SMT. ANIMA BARNWAL, SR.DR DATE OF HEARING 12.07.2016 DATE OF PRONOUNCEMENT 05.09.2016 ORDER PER O.P. KANT , A. M. : THESE TWO A PPEALS BY THE ASSESSEE AND THE R EVENUE RESPECTIVELY ARE DIRECTED AGAINST THE ORDER DATED 13/08/2013 OF 2 ITA NOS. 5656 & 6064/DEL/2013 AY: 2010 - 11 LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) - XI, NEW DELHI FOR ASSESSMENT YEAR 2010 - 11. AS BOTH THE APPEALS EMANAT E FROM THE SAME ORDER, BOTH ARE HEARD TOGETHER FOR THE SAKE OF CONVENIENCE AND DISPOSED OF BY THIS CONSOLIDATED ORDER. 2. T HE GROUNDS RAISED BY THE ASSESSEE IN THE APPEAL ARE AS UNDER: 1. THAT THE CIT(A) ERRED ON FACTS OF THE CASE AND IN LAW IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING AN AMOUNT OF RS.61,80,689/ - UNDER SECTION 14A OF THE INCOME - TAX ACT, 1961 ( THE ACT ) READ WITH RULE 8D OF THE INCOME - TAX RULES, 19 62 ( RULES ), WITHOUT APPRECIATING THAT RULE 8D WAS NOT APPLICABLE IN THE PRESENT CASE. 1.1 THAT THE CIT(A) ERRED ON FACTS OF THE CASE AND IN LAW IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN MAKING AFORESAID DISALLOWANCE UNDER SECTION 14A OF TH E ACT READ WITH RULE 8D(2)(III) OF THE RULES WITHOUT APPRECIATING THAT THE APPELLANT HAD SUO MOTU DISALLOWED EXPENSES AMOUNTING TO RS.24,55,186 UNDER SAID SECTION, WHICH WERE COMPUTED BY FOLLOWING A REASONABLE AND SCIENTIFIC METHOD REGULARLY AND CONSI STENTLY FOLLOWED BY THE APPELLANT. 1.2 THAT THE CIT(A) ERRED ON FACTS OF THE CASE AND IN LAW IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN MAKING AFORESAID DISALLOWANCE WITHOUT APPRECIATING THAT THE ASSESSING OFFICER HAD NOT RECORDED HIS SATISFA CTION AS TO INCORRECTNESS OF APPELLANT S SUO MOTU CLAIM OF DISALLOWANCE UNDER SECTION 14A OF THE ACT. 1.3 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN HOLDING THAT: (A) DISSATISFACTION OF THE ASSESSING OFFICER WITH THE CLAIM OF THE ASSESSEE WAS NOT R ELEVANT SINCE APPLICATION OF RULE 8D OF THE RULES WAS INEVITABLE; AND (B) SUCH DISSATISFACTION COULD EVEN BE RECORDED BY THE CIT(A). 1.4 THAT THE CIT(A) ERRED ON FACTS OF THE CASE AND IN LAW IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN MAKING AFORESAID DISALLOWANCE WITHOUT PROPERLY APPRECIATING THAT 3 ITA NOS. 5656 & 6064/DEL/2013 AY: 2010 - 11 SUCH DISALLOWANCE COULD BE MADE BY ASSESSING OFFICER ONLY AFTER ESTABLISHING/ SPECIFYING THE NEXUS OF AFORESAID EXPENDITURE WITH EARNING OF EXEMPT DIVIDEND INCOME. 2. WITHOUT PREJUDICE, THE C IT(A) ERRED ON FACTS OF THE CASE AND IN LAW IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN MAKING AFORESAID DISALLOWANCE, WITHOUT APPRECIATING THAT THE TOTAL AMOUNT OF DISALLOWANCE UNDER NO CIRCUMSTANCE CAN EXCEED THE EXPENDITURE OF RS.37,19,979, ACTUALLY INCURRED BY THE APPELLANT DURING THE RELEVANT ASSESSMENT YEAR. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR VARY FROM THE AFORESAID GROUNDS OF APPEAL AT OR BEFORE THE TIME OF HEARING. 3. THE GROUNDS RAISED BY THE R EVENUE IN THE APPEA L ARE AS UNDER: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN ALLOWING ASSESSEE S APPEAL AND RESTRICTING THE ADDITION ON ACCOUNT OF DISALLOWANCE U/S 14A OF THE INCOME TAX ACT, 1961 TO 61,80,68 9/ - FROM RS.7,20,91,704/ - . 2. THE APPELLANT CRAVES TO AMEND, MODIFY, ALTER, ADD, FOR FOREGO ANY GROUND(S) OF THE APPEAL AT ANY TIME BEFORE OR DURING THIS HEARING OF THIS APPEAL. 4. T HE FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF FINANCE AND RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED ON 23/09/2010 DE CLARING TOTAL INCOME OF RS. 98,46, 067/ - . THE CASE WAS SELECTED FOR SCRUTINY AND ASSESSME NT UNDER SECTION 143(3) OF THE I NCOME - TAX ACT, 1 961 (FOR SHORT THE A CT ) WAS COMPLETED ON 18/01/201 3 MAKING DISALLOWANCE OF RS. 7,20,90,704/ - UNDER SECTION 14A OF THE ACT INVOKING RULE 8D OF THE INCOME TAX 4 ITA NOS. 5656 & 6064/DEL/2013 AY: 2010 - 11 R ULES , 1962 . THE ASSESSING OFFICER OBSERVED EXEMPT INCOME O F RS. 7,01,09, 845/ - BEING DIVIDEND INCOME ON LONG - TERM INVEST MENT AND CURRENT INVESTMENT. THE ASSESSEE IN THE R ETURN OF INCOME FILED MADE SUO M OTU DISALLOWANCE OF RS. 24,55, 186/ - UNDER SECTION 14A OF THE ACT. THE ASSESSING OFFICER MADE DISALLOWANCE OF R S. 6,83,66, 201/ - UNDER R ULE 8D2(II) FOR PROPORTIONATE INTEREST DISA L LOWANCE AND DISALLOWANCE OF RS. 61,80,689/ - UNDER R ULE 8D2(III) AS 0.5% OF AVERAGE INVESTMENT TOWARDS ADMINISTRATIVE EXPENSES., AND THUS AFTER REDUCING THE DISALLOWANCE DECLARED BY THE ASSESSEE ITSELF, NET ADDITION OF RS. 7,20,91, 704/ - WAS MADE TO THE RETUR NED INCOME. AGGRIEVED , THE ASSESSEE FILED APPEAL BEFORE THE LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS), WHO AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE ALLOWED RELIEF IN RESPECT OF DISALLOWANCE O F PROPORTIONATE INTEREST OF RS.6,83,66, 201/ - FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSMENT YEAR 2006 - 07 BUT SUSTAINED DISALLOWANCE OF RS. 61,80, 689/ - UNDER RULE 8D2(III) OF THE INCOME TAX R ULES. AGGRIEVED , BOTH THE ASSESSEE AND THE R EVENUE ARE IN APPEAL RAISING GROUNDS AS REPRODUCED ABOVE. 5. FIRST WE TAKE UP GROUNDS IN THE APPEAL OF THE ASSESSEE. IN GROUND NO. 1 WHERE THE ASSESSEE HAS CHA LLENGED DISALLOWANCE OF RS. 61,80,689/ - ON THE GROUND THAT R ULE 8D OF THE INCOME T AX RULES, WAS NOT APPLICABLE AS THE ASSESSING OFFICER HAD NOT RECORDED HIS SATISFACTIO N AS TO INCORRECTNESS OF ASSESSEE S SUO M OTU CLAIM O F DISALLOWANCE UNDER SECTION 14 A OF THE ACT AND NO SUCH DISSATISFACTION COULD HAVE BEEN RECORDED BY THE LD. COMMISSIONER OF INCOME - TAX( APPEALS). 5 ITA NOS. 5656 & 6064/DEL/2013 AY: 2010 - 11 6. THE LEARNED AUTHORIZED R EPRESENTATIVE OF THE ASSESSEE R EFERRED TO THE PAGES 1 TO 3 OF THE ASSESSEE S PAPER BOOK AND SUBMITTED THAT THE ASSESSEE BIFURCATED THE TOTAL EXPENSES CLAIMED IN PROFIT AND LOSS ACCOUNT AS EXPENSES RELATED DIRECTLY TO FINANCIAL ACTIVITY OF RS.11,03,90, 466 / - AND INDIRECT EXPENSES OF RS.37 ,19,979/ - . FURTHER , THE ASSESSEE SEGREGATED DEPLOYMENT OF FUNDS TOWARDS LOANS AND ADVANCES (34%) AND INVESTMENTS (66%). THE ASSESSEE APPLIED THE RATIO 66% OV ER THE INDIRECT EXPENSES OF RS.37,19, 979/ - A ND COMPUTED DISALLOWANCE OF RS.24,55, 186/ - UNDER SECTIO N 14 A OF THE ACT. THE LEARNED AUTHORISED R EPRESENTATIVE OF THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSING OFFICER HAS NOT RECORDED SATISFACTION AS TO INCORRECTNESS OF DISALLOWANCE MADE BY THE ASSESSEE AND MADE DISA LLOWANCE DIRECTLY INVOKING THE RULE 8D OF THE INCOME TAX R ULES, WHICH IS NOT ALLOWED IN LAW AS HELD BY THE HON BLE DELHI HI GH COURT IN THE CASE OF MAXOPP I NVESTMENT LTD VS. COMMISSIONER OF INCOME TAX, REPORTED IN 347 ITR 272. FURTHER , THE LEARNED A UTHORISE D R EPRESENTATIVE OBJECTED TO THE SATISFACTION RECORDED BY THE LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) ON THE GROUND OF HAVING COTERMINOUS POWER WITH ASSESSING OFFICER. ACCORDING TO THE LEARNED AUTHORISED R EPRESENTATIVE, RECORDING OF SATISFACTION BY THE A SSESSING OFFICER IS SINE QUA NONE FOR INVOKING R ULE 8D OF THE INCOME TAX R ULES, AND THE LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) CANNOT SUBSTITUTE HIS SATISFACTION IN PLACE OF THE SATISFACTION OF THE ASSESSING OFFICER. 7. FURTHER , WITH REFERENCE TO GR OUND NO. 2 OF THE ASSESSEE S APPEAL, THE LEARNED AUTHORIZED R EPRESENTATIVE OF THE ASSESSEE, 6 ITA NOS. 5656 & 6064/DEL/2013 AY: 2010 - 11 WITHOUT PREJUDICE TO THE GROUND NO. 1, SUBMITTED THAT UNDER NO CIRCUMSTANCES DISALLOWANCE COULD EXCEED THE EXPENDITURE OF RS. 37,19,797/ - ACTUALLY INCURRED BY THE AS SESSEE DURING THE RELEVANT ASSESSMENT YEAR. HE FURTHER SUBMITTED THAT IN ASSESSMENT YEAR 2012 - 13, THE LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) FOLLOWING THE JUDGMENT OF THE HON BLE DELHI HIGH COURT IN THE CASE OF ACB INDIA LTD VS. ACIT REPORTED IN 347 ITR 108 RESTRICTED THE DISALLOWANCE UNDER R ULE 8D2(III) RESTRICTED AT THE RATE OF 0.5% OF THE AVERAGE INVESTMENT, WHICH ACTUALLY RESULTE D IN EXEMPT DIVIDEND INCOME. ACCORDINGLY, IN THE YEAR UNDER CONSIDERATION , ALSO DISALLOWANCE UNDER R ULE 8D2(III) CANNOT BE MADE MORE THAN THE 0.5% OF AVERAGE INVESTMENT, WHICH ACTUALLY RESULTED IN EXEMPT DIVIDEND INCOME. 8. WITH RESP ECT TO GROUND NO. 1 OF R EVENUE S APPEAL IN ALLOWING RELIEF BY THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) FOR PROPORTIONATE DISALLOWANCE OF INTEREST AMOUNTING TO RS.6,83,66, 201/ - THE LEARNED AUTHORIZED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT IN THE ASSESSMENT YEAR 2006 - 07, THE TRIBUNAL IN THE CASE OF THE ASSESSEE HAS ALREADY HELD THAT BORROWED FUNDS HAVE BEEN UTILIZED ONLY TOWARD FINA NCE ACTIVITY AND , THEREFORE , NO DISALLOWANCE FOR INTEREST TOWARDS EARNING EXEMPT INCOME WAS UPHELD. IN THE YEAR UNDER CONSIDERATION ALSO THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) AFTER ANALYZ ING THE BORROWED FUNDS AND DEPLOYMENT THEREON OBSERVED THA T THE ASSESSING OFFICER HAS NOT ESTABLISHED ANY NEXUS OF THE INTEREST - BEARING BORROWINGS AND CONSEQUENT INTEREST EXPENSES WITH THE INVESTMENTS RESULTING INTO TAX FREE DIVIDEND INCOME. THE LEARNED COMMISSIONER OF INCOME - TAX 7 ITA NOS. 5656 & 6064/DEL/2013 AY: 2010 - 11 ( APPEALS) HAS FOLLOWED FINDING OF THE TRIBUNAL IN THE ASSESSMENT YEAR 2006 - 07. FURTHER , THE LEARNED AUTHORISED R EPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT NO SUCH DISALLOWANCE HAS BEEN MADE BY THE ASSESSING OFFICER IN THE PRECEDING ASSESSMENT YEAR 2009 - 10 AS WELL AS IN AS SESSMENT YEAR 2 013 - 14, AND, THEREFORE , IN VIEW OF THE RULE OF CONSISTENCY NO ADDITION COULD HAVE BEEN MADE IN THE YEAR UNDER CONSIDERATION. 9. ON THE OTHER HAND , THE LEARNED SENIOR DEPARTMENTAL R EPRESENTATIVE, AS FAR AS THE GROUNDS OF THE ASSESSEE S APPEAL ARE CONCERNE D, RELIED ON THE FINDINGS OF THE AUTHORITIES BELOW AND SUBMITTED THAT DUE SATISFACTION AS TO THE INCORRECTNESS OF THE ASSESSEE S CLAIM OF DISALLOWANCE UNDER SECTION 14A OF THE ACT WA S MADE BY THE ASSESSING OFFICER . AS REGARD TO THE GROUND NO. 2 OF THE ASSE SSEE S APPEAL, SHE SUBMITTED THAT IN THE INDIRECT EXPENSES COMPUTED, THE ASSESSEE HAS NOT INCLUDED LEGAL AND PROFESSIONAL EXPENSES AND THEREFORE THE CLAIM OF THE AS SESSEE THAT EXPENSES OF RS. 37,19, 979/ - WERE ONLY ACTUALLY INCURRED DURING THE YEAR AND , THE REFORE , DISALLOWANCE UNDER R ULE 8D2(III) CANNOT EXCEED THE SAID AMOUNT , IS NOT TENABLE. AS REGARD TO THE GROUN DS RAISED IN THE APPEAL OF THE R EVENUE, SHE RELIED ON THE FINDING OF THE ASSESSING OFFICER ON THE ISSUE IN DISPUTE. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD INCLUDING THE PAPER BOOK SUBMITTED BY THE ASSESSEE. IN GROUND NO. 1, THE ASSES SEE HAS CHALLENGED INVOKING OF R ULE 8D ON THE GROUND THAT NO SATISFACTION AS TO INCORRECTNESS OF THE ASSESSEE S CLAIM OF DISALLOWA N CE UNDER SECTION 14 A OF THE ACT WAS RECORDED BY THE ASSESSING OFFICER. 8 ITA NOS. 5656 & 6064/DEL/2013 AY: 2010 - 11 HOWEVER , ON PERUSAL OF THE PARA - 3.1 OF ASSESSMENT ORDER WE FIND THAT THE ASSESSING OFFICER SPECIFICALLY ASKED TO PROVIDE EXPLANATION VIDE ORDER SHEET ENTRY DATED 16/10/2012 , ABOUT THE W ORKING OF THE DISALL OWANCE UNDER SECTION 14 A MADE BY THE ASSESSEE. THE ASSESSEE SUBMITTED WORKING OF DISALLOWANCE A MOUNTING TO RS. 24,55,186/ - IN I TS WRITTEN SUBMISSION DATED 17/ 11/2012. THE ASSESSING OFFICER DID NOT FIND THIS EXPLANATION OF THE ASSESSEE A CCEPTABLE. THIS FACT HAS BEEN CLEARLY RECORDED BY THE ASSESSING OFFICER. THE RELEVANT PARAGRAPH OF THE ASSESSMENT ORDER IS REPRODUCED AS UNDER: 3.1 THE ASSESSEE HAS CLAIMED EXEMPT INCOME OF RS.7,01,09,845/ - BEING DIVIDEND ON LONG TERM INVESTMENT AND CURRE NT INVESTMENT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS ASSESSEE WAS SPECIFICALLY ASKED VIDE ORDER SHEET ENTRY DATED 16.10.2012 ABOUT THE WORKING OF DISALLOWANCE U/S 14A READ WITH RULE 8D. THE ASSESSEE COMPANY THROUGH ITS AUTHORIZED REPRESENTATIVE HAS F ILED WRITTEN SUBMISSION DATED 17.11.2012 AND FURNISHED WORKING OF DISALLOWANCE U/S 14A, AS PER PARA 3 AND ITS ANNEXURE A AND B AND WORKED OUT DISALLOWANCE AT RS. 24,55,186/ - AND STATED THAT THE SAME AMOUNT HAS ALREADY BEEN OFFERED IN THE COMPUTATION OF INC OME AS PER RETURN. THE A.R. HAS FURTHER SUBMITTED WRITTEN SUBMISSION ON 16.01.2013 WHEREIN TOTAL DISALLOWANCE HAS BEEN WORKED OUT AT RS. 61,60,689/ - . THE EXPLANATION AND OFFER OF THE ASSESSEE IS NOT ACCEPTABLE IN VIEW OF THE PROVISIONS OF SECTION 14A OF TH E IT ACT, 1961. 11. AFTER RECORDING ABOVE DISSATISFACTION, THE ASSESSING OFFICER INVOKED RULE 8D OF THE INCOME TAX R ULES AND COMPUTED THE DISALLOWANCES ACCORDINGLY, THEREFORE , IN OUR VIEW THIS GROUND OF THE ASSESSEE IS NOT SUSTAINABLE AND ACCORDINGLY WE DISMISS GROUND S NO. 1 TO 1.2 OF THE APPEAL OF THE ASSESSEE. 9 ITA NOS. 5656 & 6064/DEL/2013 AY: 2010 - 11 12. FURTHER , SINCE WE HAVE ALREADY HELD THAT SATISFACTION AS TO INCORRECTNESS OF THE ASSESSE E S CLAIM UNDER SECTION 14 A HAS BEEN DULY RECORDED BY THE ASSESSING OFFICER, WE ARE NOT CONSIDERING THE ARGUMENTS OF THE LEARNED AUTHORISED R EPRESENTATIVE OF THE ASSESSEE WHETHER THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) COULD HAVE RE CORDED THE SAID SATISFACTION AS THE IS SUE IS RENDERED ONLY ACADEMIC. THUS , GROUND NO. 1.3 OF THE APPEAL IS DISMISSED AS INFRUCTUOUS. 13. IN GROUND NO. 1.4 , THE ASSESSEE HAS RAISED THE ISSUE THAT THE DISALLOWANCE AS UNDER R ULE 8D2(III) COULD BE MADE BY THE ASSESSING OFFICER ONLY AFTER ESTABLI SHING /SPECIFYING THE NEXUS OF THE EXPENDITURE WITH THE EARNING OF THE EXEMPT INCOME. WE FIND THAT, THE ASSESSEE ITSELF HAS ACCEPTED THE FACT OF NEXUS OF EXPENDITURE WITH THE EARNING OF THE EXEMPT INCOME BY DISALLOWING A PORTION OF THE EXPENSES SUO MOTU , TH OUGH NOT UNDER R ULE 8D , BUT ALBEIT BY ADOPTING A DIFFERENT METHOD, WHICH THE AS SESSEE THOUGHT TO BE REASONABLE . IN SUCH CIRCUMSTANCES, IN OUR OPINION , NO FURTHER ACTION IS REQUIRED ON THE PART OF THE ASSESSING OFFICER TO ESTABLISH THE NEXUS OF EXPENDITURE WITH THE EXEMPT INCOME, WHEN HE HAS INVOKED THE RULE 8D OF THE INCOME TAX R ULES. THUS , THE GROUND NO. 1.4 OF THE APPEAL IS ALSO DISMISSED. 14. AS REGARD TO THE GROUND NO. 2 OF THE ASSESSEE S APPEAL REQUESTING TO RESTRICT THE DISALLOWANC E TO THE EXPENDITUR E OF RS.37,19, 979/ - , WE FIND THAT THE ASSESSEE SEGREGATED TOTAL EXPENSES UNDER THE PROFIT AND LOSS ACCOUNT AS DIRECT EXPENSES RELATED TO FINANCE ACTIVITY AND INDIRECT EXPENSES. THE DIRECT EXPENSES OF FINANCE ACTIVITY INCLUDE EXPENSES ON LEGAL AND 10 ITA NOS. 5656 & 6064/DEL/2013 AY: 2010 - 11 PROFESSIO NAL CHARGES OF RS.17,37, 225/ - . THE ASSESSEE HAS NOT SUBMITTED DETAIL OF THE EXPENSES AS HOW THE SAME ARE REL ATED ONLY TO FINANCE ACTIVITY. IN SUCH CIRCUMSTANCES , THE CLAIM OF THE ASSESSEE THAT DISALLOWANCE CANNOT EXCEED RS.37,19,979/ - , IS NOT TENABLE. THE LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) HAS OBSERVED THAT IN THE YEAR UNDER C ONSIDERATION IN THIS CASE , THE AUDITOR APPROVED A PRESCRIBED FORMULA FOR ALLOCATING THE EXPENSES AND , THUS , THE ASSESSES QUANTIFIED IT TO RS.37,19, 979 / - , WAS NOT ACCEPTABLE , AS RULE 8D OF THE INCOME TAX R ULES, DOES NOT SUBSCRIBE TO SUCH BIFURCATIONS AND SAME HAS BEEN LINKED TO A PERCENT (0.5%) OF AVERAGE VALUE OF INVESTMENT , ACCORDINGLY , REJECTED THE FORMULA OF BIFURCATIONS ADOPTED BY THE ASSESSEE HAVING NO LEGAL SANCTITY. IN PARA - 8.10 OF THE IMPUGNED ORDER THE LEARNED COMMISSIONER OF INCOME - TAX (A PPEALS) HAS FURTHER OBS ERVED AS UNDER : 8.10 SO FAR AS THE APPELLANT S ANOTHER GROUND OF APPEAL RELATING TO THE QUANTUM OF DISALLOWANCE EXCEEDING THE ACTUAL CLAIM OF ITS EXPENSES IS CONCERNED, THE SAME IS NOT TRUE AS THE APPELLANT HAS NOT CONSIDERED THE OTHER NOTIONAL AND INCIDENTIAL EXPENSES, VIZ., DIRECTOR S REMUNERATION ETC. WHICH WERE DEFINITELY ATTRIBUTABLE TO THE GENERATION OF TAX FREE DIVIDEND INCOME. THEREFORE, THIS PLEA OF T HE APPELLANT IS ALSO REJECTED. 15. IN VIEW OF THE DISCUSSION, WE FIND NO INFIRMITY IN THE FINDING S OF THE LEARNE D COMMISSIONER OF INCOME - TAX ( APPEALS) ON THE ISSUE IN DISPUTE. 16. THE LEARNED AUTHORISED R EPRESENTATIVE HAS ALSO TAKEN PLEA THAT THE DISA LLOWANCE UNDER RULE 8D2(III) MAY BE RESTRICTED TO 0.5% OF THE INVESTMENT WHICH ACTUALLY HAVE RESULTED IN EXEMPT 11 ITA NOS. 5656 & 6064/DEL/2013 AY: 2010 - 11 DIVIDEND INCOME. WE FIND THAT HON BLE DELHI HIGH COURT IN THE CASE OF ACB INDIA LTD VS. ACIT (SUPRA), IT IS HELD THAT ONLY THOSE INVESTMENT WHIC H ACTUALLY HAVE RESULTED IN EXEMPT DIVIDEND INCOME, HAVE TO BE CONSIDERED FOR THE PURPOSE OF COM PUTING THE DISALLOWANCE AS PER R ULE 8D OF THE INCOME - TAX R ULES. THE ASSESSEE HAS GIVEN A COMPUTATION OF DISALLOWANCE IN VIEW OF THE DECISION OF THE HON BLE DELHI HIGH COU RT IN THE CASE OF ACB INDIA LTD ( SUPRA), ON PAGE S 232 AND 233 OF THE PAPER BOOK, WORKIN G OUT THE DISALLOWANCES RS. 41,97, 833 / - . SINCE THE DETAILS SUBMITTED BY THE ASSESSEE ARE NOT AVAILABLE ON THE RECORD OF THE ASSESSING OFFICER , WE RESPE CTFULLY FOLLOWING THE ABOVE DECISION OF THE HON BLE DELHI HIGH COURT, DIRECT THE ASSESSING OFFICER TO COMPUTE THE DISALLOWANCE UNDER R ULE 8D(III) OF THE INCOME - TAX R ULES AT THE RATE OF 0.5% OF THE INVESTMENT WHICH ACTUALLY HAVE RESULTED IN EXEMPT DIVIDEND INCOME RATHER THAN 0.5% OF THE AVERAGE OF TOTAL INVESTMENT. THUS , THE GROUND OF THE ASSESSEE IS PARTLY ALLOWED. 16. WI TH REGARD TO THE GROUND OF THE R EVENUE S APPEAL, WE FIND THAT THE LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) HAS DECIDED THE ISSUE AS U NDER: 8.7. KEEPING THESE FINANCIAL RESULTS IN MIND, NOW, THE AO'S COMPUTATION OF DISALLOWANCE U/S 14A IS ANALYZED, AS UNDER: (A) THE AO HAS OBSERVED THAT THERE ARE NO DIRECTLY ATTRIBUTABLE EXPENSES IN RESPECT OF TAX FREE DIVIDEND INCOME. THE APPELLANT HAS ALSO REITERATED THE SAME. THEREFORE, AS FAR AS DISALLOWANCE U/S 14A OF THE ACT READ WITH RULE 8D(2)(I) OF THE I.T. RULES IS C ONCERNED, THE SAME HAS BEEN RIGHTFULLY ACCEPTED AS NIL. 12 ITA NOS. 5656 & 6064/DEL/2013 AY: 2010 - 11 (B) THERE HAS BEEN A DIFFERENCE OF OPINION REGARDING THE ATTRIBUTABILITY OF INTEREST EXPENSES IN RESPECT OF TAX FREE DIVIDEND INCOME. THIS IS THE MAIN BONE OF CONTENTION OF THE APPELLANT COMPANY. THE AO HAS ATTRIBUTED INTEREST AMOUNTING TO RS. 10,61,78,431/ - (ENTIRE INTEREST EXPENSES DEBITED IN P & L ACCOUNT) AS RELATABLE TO TAX FREE DIVIDEND INCOME OF RS.7.01 CRORES SHOWN BY THE APPELLANT, AND FOLLOWING THE RULE 8D(2)(II) THE DISALLOWANCE HAS BEEN CO MPUTED AT RS. 6,83,66,201/ - . ON THE OTHER HAND, THE APPELLANT VERY ELABORATELY HAS GIVEN THE COMPLETE DETAILS OF ITS INTEREST INCOME AND PAYMENT OF INTEREST AS DEBITED IN THE PROFIT AND LOSS ACCOUNT. THE APPELLANT HAS ESTABLISHED THAT THE ACTIVITY OF FINAN CING FROM WHICH MAJOR PORTION OF INCOME AMOUNTING TO RS. 11.93 CRORES HAS BEEN EARNED, THE SAME HAS BEEN EARNED THROUGH DIFFERENTIAL RATE OF INTEREST IN BORROWING ON WHICH THE INTEREST AMOUNTING TO RS. 10.61 CRORES HAS BEEN PAID AND ADVANCING THE SAME AT A SLIGHTLY HIGHER RATE OF INTEREST TO THE CORPORATE ENTITIES, INCLUDING ITS GROUP COMPANIES. THE APPELLANT HAS CATEGORICALLY ESTABLISHED THE COMPLETE FLOW OF FUNDS FROM ITS BORROWINGS AT A LOWER RATE OF INTEREST AND THEIR DESTINATION TO DIFFERENT CORPORATE ENTITIES AT A SLIGHTLY HIGHER RATE OF INTEREST. THE DETAILS HAVE BEEN FURNISHED ON THE BASIS OF APPELLANT'S BANK ACCOUNT WITH THE PUNJAB NATIONAL BANK THROUGH WHICH ALL THESE FUNDS HAVE TRAVELLED. THEREFORE, THE APPELLANT HAS CLEARLY ESTABLISHED THE NEXUS OF INTEREST EXPENSES WITH ITS MAIN ACTIVITY OF FINANCING AND THERE WAS NOT A SINGLE AMOUNT OF INTEREST BEARING BORROWINGS WHICH COULD BE RELATED TO THE INVESTMENTS WHICH YIELDED TAX - FREE DIVIDEND INCOME. ON THE OTHER HAND, THE AO HAS NOT ESTABLISHED ANY NE XUS OF THE INTEREST BEARING BORROWINGS AND CONSEQUENT INTEREST EXPENSES WITH THE INVESTMENTS RESULTING INTO TAX - FREE DIVIDEND INCOME. SIMILAR ISSUE HAS ARISEN IN THE APPELLANT'S OWN CASE IN THE AY 2006 - 07, WHEREIN ALTHOUGH RULE 8D WAS NOT INTO EXISTENCE BU T NO SUCH ATTRIBUTABILITY OF INTEREST EXPENDITURE RELATING TO TAX FREE DIVIDEND INCOME WAS FOUND AT THE LEVEL OF HON'BLE ITAT. THE HON'BLE ITAT HAS GIVEN CATEGORICAL FINDING IN THE APPELLANT'S CASE AS UNDER: 13 ITA NOS. 5656 & 6064/DEL/2013 AY: 2010 - 11 NOTHING STOPPED THE AO FROM DETERMINING THE EX PENDITURE INCURRED IN RELATION TO THE EXEMPT INCOME EARNED BY THE ASSES SEE. BUT FOR DOING SO, A 'REASONABLE BASIS' HAD TO BE ADOPTED. AND THE MOST REASONABLE BASIS, RATHER, THE FIRST REASONABLE BASIS FOR SUCH DETERMINATION CAN BE NONE ELSE THAN THE NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE EXEMPT INCOME EARNED. NOW, EVIDENTLY, THE AO DID NOT ESTABLISH ANY SUCH NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE EXEMPT INCOME EARNED BY THE ASSESSEE COMPANY. EVEN THE CIT(A), THOUGH HE RESTRICTED THE DISALLOW ANCE FROM RS.47,33,200/ - TO RS.16,54,531/ - , DID NOT ESTABLISH ANY SUCH NEXUS AND IT WAS MERELY OBSERVED THAT THIS AMOUNT RELATED TO THE INVESTMENT ACTIVITY OF THE ASSESSEE COMPANY, WITHOUT CLARIFYING AS TO HOW IT WAS FOUND TO BE SO. IN APPELLANT'S OWN CA SE FOR AY 2009 - 10 ALSO, NO SUCH FINDING WAS GIVEN BY THE AO, ALTHOUGH RULE 8D WAS APPLIED BY THE AO. THERE WAS NO DISALLOWANCE UNDER RULE 8D(2)(II) OF THE I.T. RULES DURING THE PRECEDING YEAR.THEREFORE, IN VIEW OF THE VARIOUS DECISIONS AS QUOTED BY THE APP ELLANT IN ITS WRITTEN SUBMISSIONS AND THE DECISION OF HON'BLE ITAT IN APPELLANT'S OWN CASE, NO DISALLOWANCE UNDER RULE 8D(2)(II) OF THE I.T. RULES IS CALLED FOR. 17. W E FIND THAT THE ASSESSEE HAS SUCCESSFULLY DEMONSTRATED COMPLETE FLOW OF FUNDS FROM ITS BORROWING AT A LOWER INTEREST RATE TO THE DESTINATION TO DIFFERENT CORPORATE ENTITIES AT A SLIGHTLY HIGHER RATE OF INTEREST AND , THEREFORE , THE NEXUS OF THE INTEREST EXPENSES WITH ACTIVITY OF FINANCING HAS BEEN SUBSTANTIATED BY THE ASSESSEE AND THERE IS NOT A SINGLE AMOUNT OF INTEREST - BEARING BORROWINGS HAS BEEN FOUND TO BE RELATED TO THE INVESTMENT , WHICH YIELDED TAX FREE DIVIDEND INCOME. THE ASSESSING OFFICER HAS FAILED TO ESTABLISH ANY NEXUS BETWEEN THE INTEREST - BEARING BORROWED FUNDS AND THE INVESTMENT IN ASSETS YIELDING TAX - FREE INCOME. 18. IN OUR OPINION , THE FINDING S OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ON THE ISSUE IN DISPUTE IS WELL REASONED AND NO INTERFERENCE IS REQUIRED ON OUR SIDE. FURTHER , 14 ITA NOS. 5656 & 6064/DEL/2013 AY: 2010 - 11 THE ASSESSING OFFICER IN THE ASSESSMENT YEAR 2009 - 10 , HAS ALSO ACCEPTED THE FACT OF HAVING NO NEXUS BETWEEN THE BORROWED FUNDS AND THE INVESTMENT IN ASSETS YIELDING TAX - FREE INCOME AND ACCORDINGLY HAS N OT MADE ANY DISALLOWANCE UNDER R ULE 8D2(II) OF THE ACT. THUS , THE RULE OF CO NSISTENCY ALSO DEMAND THAT NO DISALLOWANCE UNDER SECTION R ULE 8D2(II) OF THE ACT CAN BE MADE IN THE YEAR UNDER CONSIDERATION. IN VIEW OF ABOVE, WE UPHOLD THE FINDINGS OF THE LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) ON THE ISSUE IN DISPUTE AND THE GROUN D OF THE A PPEAL OF THE R EVENUE IS DISMISSED. 19. IN THE RESULT, APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED AND APPEAL OF THE R EVENUE IS DISMISSED. THE DECISION IS PRONOUNCED IN THE OPEN COURT ON 5 TH SEPTEMBER , 2016 . SD/ - SD/ - ( H.S. SIDHU ) ( O.P. KANT ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 5 TH SEPTEMBER , 2016 . LAPTOP / - COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI