DCIT, CHENNAI V. Karmen International P Ltd., CHENNAI

ITA 64/CHNY/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 90404 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-05-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 22-04-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 12-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S DASGUPTA
• Assessee Lawyers: A S SRIRAMAN
• Keywords: Depreciation; Business expenditure; Earning of tax free income; Services rendered outside India
• Section: 14A

Judgement Text

, , IN THE INCOME-TAX APPELLATE TRIBUNAL B BENCH, CHE NNAI , . !' !' !' !' , # # # # $% $% $% $% BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER & SHRI V. DURGA RAO, JUDICIAL MEMBER ./ I.T.A.NO.57/MDS/2015 # ' &' / ASSESSMENT YEAR :2010-11 M/S. KARMEN INTERNATIONAL P. LTD., DP NO. 48 & 51, SIDCO INDUSTRIAL ESTATE, THIRUMAZHISAI, CHENNAI 602 107. [PAN: AAACK8998A] VS. THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II(4), CHENNAI. ( '( '( '( '( /APPELLANT ) ( )*'( )*'( )*'( )*'( / RESPONDENT ) ./ I.T.A.NO.64/MDS/2015 # ' &' / ASSESSMENT YEAR :2010-11 THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE 4(2), IV FLOOR, MAIN BUILDING, 121, N.H. ROAD, CHENNAI 600 034. VS. M/S. KARMEN INTERNATIONAL P. LTD., DP NO. 48 & 51, SIDCO INDUSTRIAL ESTATE, THIRUMAZHISAI, CHENNAI 602 107. ( '( '( '( '( /APPELLANT ) ( )*'( )*'( )*'( )*'( / RESPONDENT ) ASSESSEE BY : SHRI A.S. SRIRAMAN, ADVOCATE DEPARTMENT BY : SHRI S. DASGUPTA, JCIT + , / DATE OF HEARING : 22.04.2015 -.& + , /DATE OF PRONOUNCEMENT : 29.05.2015 / / / / / O R D E R PER V. DURGA RAO, JUDICIAL MEMBER : BOTH THE CROSS APPEALS FILED BY THE ASSESSEE AND TH E REVENUE ARE DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) II, CHENNAI, DATED 18.09.2014 RELEVANT TO THE ASSES SMENT YEAR 2010-11. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .57 & 64 57 & 64 57 & 64 57 & 64/M/ /M/ /M/ /M/1 11 15 55 5 2 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE H AS FILED ITS RETURN OF INCOME BY DECLARING TOTAL INCOME OF .6,98,67,820/-. THE ASSESSING OFFICER, WHILE COMPLETING THE ASSESSMENT UNDER SECTION 143(3 ) OF THE INCOME TAX ACT, ASSESSED THE INCOME OF THE ASSESSEE AT .7,79,65,080/- BY MAKING VARIOUS ADDITIONS/DISALLOWANCES. ON APPEAL, THE LD. CIT(A) CONFIRMED/DELETED SOME OF THE ADDITIONS/DISALLOWANCES AGAINST WHICH B OTH THE ASSESSEE AS WELL AS REVENUE ARE IN APPEAL BEFORE US. 3. THE FIRST GROUND OF APPEAL OF THE ASSESSEE IS R ELATING TO DISALLOWANCE OF EXPORT COMMISSION PAYMENT. THE ISSUE RAISED BY T HE ASSESSEE HAS BEEN CONSIDERED BY THE LD. CIT(A) AND GAVE A FINDING THA T SINCE THE ASSESSING OFFICER HAS NOT TAKEN THE AMOUNT OF .25,63,409/- INTO CONSIDERATION IN THE FINAL COMPUTATION OF TAXABLE INCOME, NO SEPARATE RE LIEF IS REQUIRED WHILE GIVING EFFECT TO THIS ORDER. THE RELEVANT PORTION O F THE ORDER OF THE LD. CIT(A) IS EXTRACTED AS UNDER: 4.1.2 I HAVE CONSIDERED THE ASSESSEE'S SUBMISS IONS AS WELL AS THE ORDERS OF THE HON'BLE ITAT IN THE CASE OF A.Y.2007- 08 (IN ITA NO.225/MDS/2013 DATED 30.05.2013). THE FACTS INVOLV ED IN THE A.Y.2007-08 ARE EXACTLY SIMILAR TO THOSE INVOLVED I N THE PRESENT A.Y.2010-11 ALSO. THE PAYMENTS MADE TO THE NON-RESI DENTS IN THE A.Y.2007-08 WITHOUT MAKING TDS, WERE SIMILAR TO THO SE MADE BY THE ASSESSEE COMPANY IN THE PRESENT A.Y.2010-11. IN THE A.Y.2007-08, THE ASSESSING OFFICER DISALLOWED THE PAYMENTS U/S.40(A) (I) FOR NON- DEDUCTION OF TDS U/S.195 OF THE ACT. THE CIT(A) ALL OWED THE APPEALS OF THE SAID COMPANIES. THE REVENUE PREFERRED AN APPEAL S TO THE ITAT AGAINST THE ORDERS OF THE CIT(A). THE HON'BLE INCOM E TAX APPELLATE TRIBUNAL OF CHENNAI, VIDE ITS ORDERS MENTIONED ABOV E, HAS HELD THAT THE SERVICES PROVIDED BY THE CONCERNED NON-RESIDENTS NE ITHER AMOUNTS TO I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .57 & 64 57 & 64 57 & 64 57 & 64/M/ /M/ /M/ /M/1 11 15 55 5 3 MANAGERIAL / TECHNICAL SERVICES NOR THE PAYMENTS AR E ASSESSABLE TO TAX IN INDIA AND HENCE THE PROVISIONS OF SEC. 195 OF TH E ACT ARE NOT APPLICABLE TO THE FACTS OF THE SAID COMPANIES. THE RELEVANT PORTION OF THE ORDER OF THE ITAT (IN ITA NO.225/MDS/2013 DATED 30.05.2013) IS REPRODUCED AS UNDER: 5. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRES ENTATIVE OF BOTH SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHO RITIES BELOW. THE ASSESSEE HAS PAID COMMISSION TO FOREIGN AGENT M /S. MET- TECH INTERNATIONAL PTE, SINGAPORE FOR PROCURING EXP ORT ORDERS FOR THE ASSESSEE FROM COMPANIES-LOCATED IN JAPAN, I NDONESIA AND UK. THE COMMISSIONER OF INCOME TAX (APPEALS) HA S GIVEN CATEGORIC FINDING THAT THE FOREIGN AGENT HAD NOT EX TENDED ANY TECHNICAL SERVICES BUT HAD ONLY PROCURED EXPORT ORD ERS. THE COMMISSION WAS PAID BY THE ASSESSEE ON VARIOUS DATE S THROUGH BANKING CHANNELS FOR THE SERVICES RENDERED OUTSIDE INDIA. THE COMMISSION HAS BEEN REMITTED IN FOREIGN CURRENCY OU TSIDE INDIA. THE FINDINGS OF THE COMMISSIONER OF INCOME TAX (APP EALS) ON THE ISSUE REMAIN UN-REBUTTED. THE HON'BLE SUPREME C OURT IN THE CASE OF GE INDIA TECHNOLOGY VS. CIT REPORTED AS 327 ITR 456 HAS HELD THAT, IF THE INCOME CHARGEABLE TO TAX IS N OT ASSESSABLE IN INDIA, THERE IS NO QUESTION OF DEDUCTION OF TAX AT SOURCE. IN VIEW OF THE WELL SETTLED LAW AND THE FACTS OF THE CASE, WE DO NOT FIND ANY ERROR IN THE FINDINGS OF THE COMMISSIONER OF IN COME TAX (APPEALS) ON THE ISSUE. 4.1.3 IN THE PRESENT ASSESSMENT YEAR ALSO THE FACTS AND CIRCUMSTANCES ARE EXACTLY IDENTICAL TO THOSE INVOLVED IN THE A.Y. 2007-08, AND HENCE THE ABOVE DECISION OF THE ITAT, (IN ITA NO.225/MDS/ 2013 DATED 30.05.2013), IS EQUALLY APPLICABLE TO THE PRESENT A SSESSMENT YEAR ALSO. FURTHER, THE HON'BLE HIGH COURT OF MADRAS IN THE CA SE OF CIT V. FAIZAN SHOES P LTD (48 TAXMANN.COM 48)(MAD), HAS HELD THAT 'SALES COMMISSION' PAID TO THE NON-RESIDENTS FOR PROCURING EXPORT ORDERS, ARE NOT WITHIN THE PURVIEW OF SECTION 40(A)(I) OF THE A CT. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF ITAT, IN THE ASSESSEE'S OWN CASE AND ALSO THE DECISION OF THE HON'BLE HIGH COURT IN THE CASE OF CIT V. FAIZAN SHOES P LTD (48 TAXMANN.COM 48)(MAD), I HOLD THAT THE ABOVE PAYMENTS OF 'EXPORT SALES COMMISSION' TO THE NON-RE SIDENTS FOR PROCURING EXPORT ORDERS, ARE NOT ASSESSABLE TO TAX IN INDIA AND CONSEQUENTLY THE ASSESSEE COMPANY IS NOT UNDER ANY OBLIGATION TO DEDUCT THE TDS ON THE ABOVE COMMISSION PAYMENTS U/S .195 OF THE ACT. THE PROVISIONS OF SEC.40(A)(I) HAVE NO APPLICATION IN THE PRESENT CASE. ACCORDINGLY, THE ADDITIONS MADE BY THE ASSESSING OF FICER, ON ACCOUNT OF I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .57 & 64 57 & 64 57 & 64 57 & 64/M/ /M/ /M/ /M/1 11 15 55 5 4 DISALLOWANCE OF 'EXPORT SALES COMMISSION' PAYMENTS OF RS.25,63,409/- FOR NON-DEDUCTION OF TDS U/S.40(A)(I) R.W.S. 195 OF THE ACT, ARE NOT JUSTIFIED AND DELETED. HOWEVER, AS THE ASSESSING OF FICER HAS NOT TAKEN THE AMOUNT OF RS.25,63,409/- INTO CONSIDERATION IN THE FINAL COMPUTATION OF TAXABLE INCOME, NO SEPARATE RELIEF I S REQUIRED WHILE GIVING EFFECT TO THIS ORDER. 4. AFTER HEARING BOTH SIDES, KEEPING IN VIEW OF TH E ABOVE ORDER PASSED BY THE LD. CIT(A) SINCE THE ASSESSING OFFICER HAS NOT TAKEN THE AMOUNT OF .25,63,409/- INTO CONSIDERATION IN THE FINAL COMPUT ATION OF TAXABLE INCOME, NO SEPARATE RELIEF IS REQUIRED AND THUS, WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A). ACCORDINGLY, THE GROUND R AISED BY THE ASSESSEE IS DISMISSED. 5. THE NEXT GROUND RAISED BY THE ASSESSEE IN GROUN D NO.3 WAS NOT PRESSED AT THE TIME OF HEARING AND ACCORDINGLY THE GROUND IS DISMISSED AS NOT PRESSED. 6. GROUND NOS. 4 AND 5 IN THE GROUNDS OF APPEAL IS RELATING TO DISALLOWANCE UNDER SECTION 14 OF THE ACT. IN THE AS SESSMENT ORDER, THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HA D PAID AN INTEREST OF .2,41,54,530/- AGAINST TERM LOANS. IT IS ALSO SEEN THAT THE ASSESSEE HAS MADE HUGE INVESTMENTS DURING THE YEAR. ACCORDINGLY, THE ASSESSING OFFICER BY APPLYING SECTION 14A OF THE ACT READ WITH RULE 8 D, DISALLOWED AN AMOUNT OF .37,23,755/-. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .57 & 64 57 & 64 57 & 64 57 & 64/M/ /M/ /M/ /M/1 11 15 55 5 5 7. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFOR E THE LD. CIT(A). THE LD. CIT(A) HAS OBSERVED THAT AS PER THE PROFIT AND LOSS ACCOUNT, THE ASSESSEE HAS SEVERAL ACTIVITIES INCLUDING INVESTMENTS IN SHA RES. FOR THE PURPOSE OF MAKING THESE INVESTMENTS, ETC. THE SAME MANAGEMENT, MANPOWER, MACHINERY AND INFRASTRUCTURAL FACILITIES OF THE ASS ESSEE ARE BEING USED. HENCE, THERE IS AN ELEMENT OF EXPENDITURE INVOLVED IN THE PROCESS. THIS EXPENDITURE MAY NOT BE DIRECT. THE LD. CIT(A) HAS F URTHER OBSERVED THAT THE ASSESSEE IS NOT MAINTAINING ANY SEPARATE BOOKS OF A CCOUNTS FOR THE INVESTMENT MADE IN SHARES NOR THERE WAS SEPARATE ES TABLISHMENT TO LOOK AFTER THE INVESTMENTS IN SHARES/FUNDS. THE ASSESSEE MAY BE HAVING SUBSTANTIAL INTEREST FREE OWN FUNDS (IN THE FORM OF CAPITAL/RESERVES ETC.). BUT, IT DOES NOT MEAN THAT THE INVESTMENTS ARE MADE ONLY FROM THESE OWN INTEREST FREE FUNDS, ESPECIALLY THE BOOKS ARE NOT MAINTAINED SEPARATELY. FURTHER, ALL THE FUNDS, I.E. THE INTEREST-FREE OWN FUNDS AND THE INTEREST BEARING BORROWED FUNDS ARE PUT INTO A COMMON KITTY AND ALL THE OUTGOINGS (I.E. INVESTMENTS IN SHARES, REGULAR BUSINESS EXPENSES ETC.) ARE MET WITH. WITH THE ABOVE OBSERVATIONS, BY FOLLOWING VARIOUS DECISIONS OF THE ITAT, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS CONF IRMED BY THE LD. CIT(A). THE RELEVANT PORTION OF THE ORDER OF THE LD . CIT(A) IS EXTRACTED AS UNDER: 4.3.2 I HAVE CONSIDERED THE ASSESSEE'S SUBMISSION S CAREFULLY. THE TOTAL INVESTMENTS IN SHARES/FUNDS WERE RS.8.75 CRORES AS ON 31.03.2010 (AND I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .57 & 64 57 & 64 57 & 64 57 & 64/M/ /M/ /M/ /M/1 11 15 55 5 6 RS.6.86 CRORES AS ON 31.03.2009), AS COULD BE SEEN FROM THE INVESTMENTS OF THE BALANCE DURING THE FINANCIAL YEA R 2009-10, AND ALSO EARNED DIVIDENDS OF RS.5,55,455/- AND CLAIMED THE S AME AS EXEMPT U/S.10(34) OF THE ACT. 4.3.3 THE ASSESSEE IS NOT MAINTAINING ANY SEPARATE BOOKS OF ACCOUNTS FOR THE INVESTMENTS IN SHARES. NOR THERE WAS A SEPA RATE ESTABLISHMENT TO LOOK AFTER THE INVESTMENTS IN SHARES/FUNDS. THE ASS ESSEE MAY BE HAVING SUBSTANTIAL INTEREST FREE OWN FUNDS (IN THE FORM OF CAPITAL/RESERVES AND SURPLUSES ETC). BUT THIS DOES NOT MEAN THAT THE INV ESTMENTS ARE MADE ONLY FROM THESE OWN INTEREST FREE FUNDS, ESPECIALLY IF THE BOOKS ARE NOT MAINTAINED SEPARATELY. FURTHER, ALL THE FUNDS, I.E. THE INTEREST-FREE OWN FUNDS AND THE INTEREST BEARING BORROWED FUNDS ARE P UT INTO A COMMON POOL OF FUNDS. FROM THIS COMMON KITTY ALL THE OUTGO INGS (I.E. INVESTMENTS IN SHARES, REGULAR BUSINESS EXPENSES ET C) ARE MET WITH. IN OTHER WORDS, ONCE THE FUNDS, I.E. WHETHER THE INTER EST-FREE OWN FUNDS OR THE INTEREST BEARING BORROWED FUNDS, ARE PUT INTO A COMMON POOL OF FUNDS, THEY WILL LOOSE THEIR DISTINCTION AND ALL TY PES OF FUNDS WILL BE TREATED ALIKE. IN SUCH A SITUATION, THE ONLY WAY TO ASCERTAIN THE INVESTMENTS MADE FROM THE BORROWED FUNDS, IF ANY, I S ON A PROPORTIONATE BASIS. THEREFORE, THE INTEREST EXPENS ES, WHICH COULD NOT BE DIRECTLY LINKED TO ANY ACTIVITY, ARE TO BE TREAT ED AS COMMON INTEREST EXPENSES AND CONSIDERED IN THE STEP-2 OF THE FORMUL A GIVEN IN RULE-8D FOR THE PURPOSE OF ATTRIBUTING THE INDIRECT INTERES T BURDEN ON THE INVESTMENTS MADE, ON A PROPORTIONATE BASIS. EVEN BO MBAY HIGH COURT, IN THE CASE OF GODREJ BOYCE MFG CO LTD V. CIT, DECI DED ON 12.08.2010, HELD THAT SEC. 14A(2) & (3) OF THE ACT, IS CONSTITU TIONALLY VALID AND IS APPLICABLE FROM ASSESSMENT YEAR 2008-09 ONWARDS. IN THIS CASE, THE HIGH COURT HAS CLEARLY AND CATEGORICALLY HELD THAT 'THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES WHICH HAVE BEEN NOT IFIED WITH EFFECT FROM 24 MARCH 2008 SHALL APPLY WITH EFFECT FROM ASS ESSMENT YEAR 2008-09'. 4.3.4 THE DISALLOWANCE OF EXPENSES U/S.14A R.W. RU LE 8D IS IN RELATION TO THE EARNING OF THE EXEMPT INCOME AND NOT IN RELA TION TO THE EXEMPT INCOME EARNED AS SUCH. THE DISALLOWANCE OF EXPENSES IS ALWAYS IN RELATION TO THE EFFORTS MADE FOR EARNING SUCH EXEMP T INCOME AND NOT PROPORTIONATE TO THE EXEMPT INCOME EARNED. IT IS PA RTICULARLY SO BECAUSE, IN SOME YEARS THE INCOME SO EARNED MAY BE LESS OR NIL. THEREFORE, THE DISALLOWANCE TO BE COMPUTED SHOULD A LWAYS BE WITH REFERENCE TO THE INVESTMENTS MADE IN SUCH ACTIVITY AND THE EFFORT MADE THEREIN, AS HELD BY SPECIAL BENCH OF ITAT DELHI IN THE CASE OF I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .57 & 64 57 & 64 57 & 64 57 & 64/M/ /M/ /M/ /M/1 11 15 55 5 7 CHEMINVEST LTD. V. ITO [2009] (121 ITD 318)(DEL)(SB ) / (124 TTJ 577)(DEL) (SB), WHICH IS AS UNDER: CHEMINVEST LTD. V. ITO [2009] (121 ITD 318)(DEL)(SB ) SECTION 14A, READ WITH SECTION 10(34), OF THE INCOM E-TAX ACT, 1961 - EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCL UDIBLE IN TOTAL INCOME ASSESSMENT YEAR 2004-05 - WHETHER SINCE DIVIDEND INCOME IS EXEMPTED FROM TAX BY VIRTUE OF SECTION 10(34), INTEREST PAID ON BORROWED CAPITAL U TILIZED IN PURCHASE OF SHARES, BEING EXPENDITURE INCURRED IN RELATION T O DIVIDEND INCOME NOT FORMING PART OF ASSESSEE'S TOTAL INCOME, CANNOT BE ALLOWED AS A DEDUCTION - HELD, YES- WHETHER SUCH DISALLOWANCE UNDER SECTION 14A CAN BE MADE EVEN IN A YEAR IN WHICH NO EXEMPT INCOME HAS BEEN EARNED OR R ECEIVED BY ASSESSEE - HELD, YES 4.3.5 THUS, FROM THE ABOVE DECISION IT IS CLEAR TH AT THE AMOUNT OF EXEMPT INCOME EARNED DURING THE YEAR IS NOT RELEVAN T FOR THE PURPOSE OF DISALLOWANCE OF EXPENSES U/S.14A READ WITH RULE 8D. WHAT IS TO BE SEEN THE AMOUNT OF INVESTMENTS MADE AND THE EFFORTS TAKE N BY THE ASSESSEE IN THE SAID PROCESS. THEREFORE THE AMOUNT OF DISALLOWA NCE IS TO BE WORKED OUT PROPORTIONATE TO THE INVESTMENTS MADE AND THE E XPENSES (EITHER DIRECT OR INDIRECT) INVOLVED IN THE PROCESS, EVEN I F THERE ARE NO SUCH EXEMPT INCOME EARNED DURING THE YEAR. 4.3.6 AS COULD BE SEEN FROM THE P&L ACCOUNT, THE A SSESSEE HAS SEVERAL ACTIVITIES INCLUDING INVESTMENTS IN SHARES. FOR THE PURPOSE OF MAKING THESE INVESTMENTS ETC, THE SAME MANAGEMENT, MANPOWE R, MACHINERY AND INFRASTRUCTURAL FACILITIES OF THE ASSESSEE ARE BEING USED. HENCE, THERE IS AN ELEMENT OF EXPENDITURE INVOLVED IN THE PROCESS. THIS EXPENDITURE MAY NOT BE DIRECT. THUS, THERE IS AN EX PENDITURE INVOLVED IN MAKING THESE INVESTMENTS. THEREFORE, THERE IS A NEE D TO IDENTIFY AND APPORTION A REASONABLE AMOUNT OF EXPENSES AS ATTRIB UTABLE FOR EARNING THE EXEMPTED INCOME. FOR THIS PURPOSE RELIANCE PLAC ED ON THE FOLLOWING DECISIONS: DY. CIT V. SREI INTERNATIONAL FINANCE LTD. (2006/10 SOT 722 (DELHI)- TRIB.): IN LIGHT OF CLEAR PROVISIONS OF SECTION 14A, EVEN I N CASE IT IS NOT POSSIBLE TO IDENTIFY EXPENSES INCURRED IN EARNI NG INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, DISALLOWA NCE HAS TO BE MADE ON SOME BASIS. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .57 & 64 57 & 64 57 & 64 57 & 64/M/ /M/ /M/ /M/1 11 15 55 5 8 MAREZBAN BHARUCHA V. ASSTT. CIT [2007/12 SOT 133 (M UM.-TRIB.): WHERE AN EXPENDITURE IS COMPOSITE ONE, I.E., RELATI NG TO TAXABLE RECEIPTS AS WELL AS NON-TAXABLE RECEIPTS, A SSESSING OFFICER IS DUTY-BOUND TO DISALLOW PROPORTIONATE AMO UNT OF EXPENDITURE RELATABLE TO NON-TAXABLE OR EXEMPTED IN COME BY INVOKING PROVISIONS OF SECTION 14A. 4.3.7 IN ORDER TO ARRIVE AT A REASONABLE AMOUNT OF EXPENDITURE, WHICH MAY VARY FROM CASE TO CASE AND SITUATION TO SITUATI ON, THE LEGISLATURE, AFTER TAKING VARIOUS FACTORS INTO CONSIDERATION, CA ME TO A CONCLUSION THAT SUCH EXPENSES CAN BE REASONABLY CALCULATED @ 0 .5% OF THE AVERAGE INVESTMENTS MADE BY THE ASSESSEE. FOR THIS PURPOSE, THE LEGISLATURE HAS ARRIVED AT A COMMON FORMULA TO CALC ULATE THE EXPENSES @ 0.5% OF THE AVERAGE INVESTMENTS MADE AS PER STEP- 3 OF THE FORMULA GIVEN IN RULE-8D. ACCORDINGLY THE LEGISLATURE INCOR PORATED AND INTRODUCED THE RULE-8D. 4.3.8 FURTHER, AS COULD BE SEEN FROM THE ASSESSMEN T ORDER, THE ASSESSING OFFICER HAS ANALYSED THE ASSESSEE'S ACTIV ITY OF INVESTING IN SHARES AND OBSERVED THAT THERE WILL BE SOME ELEMENT OF EXPENDITURE, BOTH IN TERMS OF FINANCIAL BURDEN (INTEREST ELEMENT ) AS WELL AS THE IN TERMS OF USE OF MANPOWER AND INFRASTRUCTURAL FACILI TIES IN MAKING THE INVESTMENTS IN SHARES/FUNDS. HENCE THERE WAS A SATI SFACTION OF THE ASSESSING OFFICER THAT THERE WAS SOME ELEMENT OF EX PENSES INCURRED BY THE ASSESSEE IN RELATION TO THE INVESTMENTS IN SHAR ES AND EARNING THE EXEMPT INCOME, WHICH NEEDS TO BE QUANTIFIED AND DIS ALLOWED U/S.14A OF THE ACT. ACCORDINGLY, AS PROVIDED U/S.14A OF THE AC T THE ASSESSING OFFICER QUANTIFIED THE SAID EXPENSES AT RS.37,23,75 5/-, BY USING THE RULE 8D, AND DISALLOWED U/S.14A OF THE ACT. 4.3.9 THUS, THE ASSESSING OFFICER IS SATISFIED THA T THERE WAS AN ELEMENT OF EXPENSES INVOLVED IN MAKING INVESTMENTS WHOSE IN COME IS EXEMPT FROM TAX. THE ASSESSING OFFICER IS DUTY BOUND TO IN VOKE THE PROVISIONS OF RULE-8D. ONCE THE PROVISIONS OF RULE 8D ARE INVO KED, THE ASSESSING OFFICER HAS NO OPTION BUT TO ARRIVE AT THE EXPENSES @ 0.5% AS PER STEP- 3 OF THE FORMULA WHICH IS MANDATORY. IN FACT, THE A SSESSING OFFICER IN HIS ORDER HAS CLEARLY STATED THESE FACTS BEFORE INV OKING THE PROVISIONS OF SECTION 14A R.W.R.8D. HENCE THE ASSESSING OFFICER R IGHTLY INVOKED THE RULE-8D AND ARRIVED AT THE DISALLOWANCE OF EXPENSES U/S.14A R.W.RULE- 8D. 4.3.10 IN VIEW OF THE ABOVE, THE ASSESSING OFFICER' S ACTION OF DETERMINING THE EXPENSES ATTRIBUTABLE FOR EARNING E XEMPT INCOME AT I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .57 & 64 57 & 64 57 & 64 57 & 64/M/ /M/ /M/ /M/1 11 15 55 5 9 RS.37,23,755/-, U/S.14A R.W.R.8D, IS AS PER THE LAW AND JUSTIFIED. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS CONFI RMED. 8. ON APPEAL, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT NO BORROWED FUNDS ARE USED FOR THE PURPOSE OF INVESTME NT AND ALSO SUBMITTED THAT NO INVESTMENT WAS ALSO MADE IN THIS YEAR. SO F AR AS THIS ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE IS CONCERNED, THE ASSE SSEE HAS NOT ABLE TO ESTABLISH THAT THE BORROWED FUNDS ARE NOT USED FOR THE PURPOSE OF INVESTMENTS AND EVEN THE ASSESSEE HAS FAILED TO EST ABLISH THAT NO INVESTMENT IS MADE IN THE YEAR UNDER CONSIDERATION. THEREFORE, THIS ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE IS REJ ECTED. 9. ALTERNATIVELY, HE HAS SUBMITTED THAT THE ASSESS ING OFFICER HAS, WITHOUT GIVING PROPER OPPORTUNITY, ESTIMATED THE DISALLOWAN CE UNDER SECTION 14A OF THE ACT. WE FIND THAT THE ASSESSING OFFICER, AFTER CONSIDERING THE DETAILS FILED BY THE ASSESSEE, QUANTIFIED THE DISALLOWANCE UNDER SECTION 14A OF THE ACT AND ALSO THE LD. CIT(A) PASSED VERY DETAILED ORDER AND GAVE SPECIFIC FINDINGS THAT THE ASSESSEE HAS NOT MAINTAINED ANY SEPARATE B OOKS OF ACCOUNT FOR THE INVESTMENT IN SHARES, THERE WAS NO SEPARATE ESTABLI SHMENT TO LOOK AFTER THE INVESTMENTS. EVEN BEFORE US, THE ASSESSEE HAS NOT A BLE TO ESTABLISH THAT NO INTEREST BORROWING FUNDS WERE USED FOR INVESTMENTS IN SHARES. FURTHER, THE LD. CIT(A), AFTER CONSIDERING THE DETAILED EXPLANAT ION AND BOOKS OF ACCOUNTS GIVEN BY THE ASSESSEE THE ADDITION MADE BY THE ASSE SSING OFFICER WAS I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .57 & 64 57 & 64 57 & 64 57 & 64/M/ /M/ /M/ /M/1 11 15 55 5 10 SUSTAINED. ACCORDINGLY, WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A) AND THEREFORE, THE GROUND RAISED BY THE ASSE SSEE IS DISMISSED. I.T.A. NO. 64/MDS/2015 10. IN THE APPEAL OF THE REVENUE, THE ONLY GROUND RAISED IS WITH REGARD TO DISALLOWANCE UNDER SECTION 80IA OF THE INCOME TAX A CT. THE LD. CIT(A), BY FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONA L HIGH COURT IN THE CASE OF VELAYUDHASWAMY SPINNING MILLS (P) LTD. V. ACIT 231 CTR 368 AND ALSO BY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF GRT FIRMS & OTHERS IN I.T.A. NOS.528 TO 530/MDS/2012 DATED 04.06.2012, HE LD THAT THE DEPRECIATION WHICH WAS ALREADY SET OFF CANNOT BE CARRY FORWARD N OTIONALLY TO THE SUBSEQUENT YEARS FOR THE PURPOSE OF COMPUTING THE P ROFITS OF THE WINDMILLS ON STAND-ALONE BASIS AND DIRECTED THE ASSESSING OFF ICER TO ALLOW THE ASSESSEES CLAIM OF DEDUCTION UNDER SECTION 80IA OF THE ACT. THE RELEVANT PORTION OF THE ORDER OF THE LD. CIT(A) IS EXTRACTED AS UNDER: 4.4.3 I HAVE CONSIDERED THE ASSESSEE'S SUBMISSIONS AS WELL AS THE ORDERS OF THE HON'BLE ITAT IN THE CASE OF M/S. GRT FIRM AND OTHERS (IN ITA NOS.528 TO 530/MDS/2012 DATED 04.06.2012). THE FACTS AND CIRCUMSTANCES OF PRESENT APPEALS ARE EXACTLY IDENTI CAL TO THOSE INVOLVED IN THE CASE OF M/S. GRT FIRM. IN THE SAID CASE, THE ASSESSING OFFICER DISALLOWED THE DEDUCTIONS CLAIMED UJS.80-IA OF THE ACT ON THE GROUND THAT THERE WILL BE LOSSES IF THE PROFITS ARE COMPUT ED ON STANDALONE BASIS. THE CIT(A) ALLOWED THE APPEALS. THE REVENUE PREFERR ED AN APPEALS TO THE ITAT AGAINST THE ORDERS OF THE CIT(A). THE HON' BLE TRIBUNAL, VIDE ITS ORDERS MENTIONED ABOVE, BY RELYING ON THE DECIS ION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF VELAYUDHAS WAMY SPINNING MILLS & OTHER VS. ACIT (231 CTR 368)(MAD),HAS HELD THAT THE DEPRECIATION WHICH WAS ALREADY SET OFF, CANNOT BE C ARRIED FORWARD NOTIONALLY FOR THE PURPOSE OF COMPUTING THE PROFITS OF THE WINDMILLS ON STAND-ALONE BASIS. THE RELEVANT PORTION OF THE ORDE R OF THE ITAT (ITA I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .57 & 64 57 & 64 57 & 64 57 & 64/M/ /M/ /M/ /M/1 11 15 55 5 11 NOS.528 TO 530/MDS/2012 DATED 04.06.2012, IN THE CA SE OF M/S. GRT FIRM AND OTHERS) IS REPRODUCED AS UNDER: 2. THE ONLY AND THE COMMON ISSUE RAISED BY THE REVE NUE IN THESE APPEALS IS THAT THE COMMISSIONER OF INCOME TA X (APPEALS) HAS ERRED IN DIRECTING THE ASSESSING AUTHORITY TO A LLOW THE CARRIED FORWARD DEPRECIATION AND/ OR LOSS OF EARLIE R YEARS PERTAINING TO WINDMILLS, IF THE DEPRECIATION AND/OR LOSS OF EARLIER YEARS WERE NOT NOTIONAL. IT IS THE CASE OF THE REVE NUE THAT THE DECISION OF THE HON'BLE MADRAS HIGH COURT ON THE VE RY SAME SUBJECT, RENDERED IN THE CASE OF VELAYUDHASWAMY SPI NNING MILLS AND OTHERS VS. ACIT, 231 CTR 368 AND THE ORDERS OF THE INCOME-TAX APPELLATE TRIBUNAL IN THE GROUP CASES HA VE NOT BECOME FINAL. 3. THE ISSUE HAS BEEN CONSIDERED BY THE INCOME-TAX APPELLATE TRIBUNAL, C-BENCH, CHENNAI THROUGH THEIR ORDER DATED 30-9-2010 IN ASSESSEES' OWN GROUP CASES. RELYING ON THE JUDGMENT OF THE HON'BLE MADRAS HIGH COURT, RENDERED IN THE CASE OF VELAYUDHASWAMY SPINNING MILLS, THE TRIBUNAL HELD THAT ONCE THE SET OFF OF DEPRECIATION/ LOSS IS TAKEN PLA CE IN EARLIER YEAR AGAINST THE OTHER INCOME OF THE ASSESSEE, THE REVENUE CANNOT REWORK THE SET OFF AMOUNT AND BRING IT NOTIO NALLY. AS HELD BY THE TRIBUNAL, THE ISSUE IS COVERED BY THE JUDGME NT OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF VELAYUDHASWAMY SPINNING MILLS AND OTHERS, 231 CTR 3 68. IN VIEW OF THE MATTER, WE HOLD THAT THE COMMISSIONER O F INCOME-TAX (APPEALS) HAS PASSED PROPER ORDERS, WHICH ARE SUSTA INABLE IN LAW. THERE IS NO ROOM FOR US TO INTERFERE IN HIS OR DERS. 4.4.4 THEREFORE, SINCE THE ISSUE INVOLVED IN THE P RESENT APPEALS IS THE SAME AND THE FACTS ARE EXACTLY IDENTICAL, THE ABOVE DECISIONS OF THE ITAT, (M/S. GRT FIRM AND OTHERS) AND JURISDICTIONAL HIGH COURT IN THE CASE OF VELAYUDHASWAMY SPINNING MILLS & OTHER VS. A CIT (231 CTR 368)(MAD), ARE EQUALLY APPLICABLE TO THE FACTS OF T HE PRESENT APPEALS OF THE ASSESSEE FOR A.Y. 2010-11. RESPECTFULLY FOLLOWI NG THE DECISION OF ITAT, IN THE CASE OF M/S. GRT FIRM AND OTHERS (IN I TA NOS.528 TO 530/MDS/2012 DATED 04.06.2012), I HOLD THAT THE DEP RECIATION WHICH WAS ALREADY SET OFF, CANNOT BE CARRIED FORWARD NOTI ONALLY TO THE SUBSEQUENT YEARS FOR THE PURPOSE OF COMPUTING THE P ROFITS OF THE WINDMILLS ON STAND-ALONE BASIS. THE ASSESSING OFFIC ER IS DIRECTED TO ALLOW THE ASSESSEE'S CLAIM OF DEDUCTION U/S. 80-IA OF THE ACT. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .57 & 64 57 & 64 57 & 64 57 & 64/M/ /M/ /M/ /M/1 11 15 55 5 12 11. AFTER HEARING BOTH SIDES AND AFTER CAREFUL CON SIDERATION OF THE ASSESSMENT ORDER AND THE ORDER OF THE LD. CIT(A), W E FIND THAT THE LD. CIT(A), BY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CA SE OF GRT FIRMS & OTHERS(SUPRA) AS WELL AS JUDGEMENT OF THE HONBLE J URISDICTIONAL HIGH COURT IN THE CASE OF VELAYUDHASWAMY SPINNING MILLS V. ACI T (SUPRA), DIRECTED THE ASSESSING OFFICER TO ALLOW THE ASSESSEES CLAIM OF DEDUCTION UNDER SECTION 80IA OF THE ACT. THUS, WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A) AND ACCORDINGLY, THE APPEAL FILED BY THE REV ENUE IS DISMISSED. 12. IN THE RESULT, BOTH THE APPEALS FILED BY THE A SSESSEE AS WELL AS REVENUE ARE DISMISSED. ORDER PRONOUNCED ON FRIDAY, THE 29 TH OF MAY, 2015 AT CHENNAI. SD/- SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER (V. DURGA RAO) JUDIC IAL MEMBER CHENNAI, DATED, THE 29.05.2015 VM/- / + )#,01 21&, /COPY TO: 1. '( / APPELLANT, 2. )*'( / RESPONDENT, 3. 3 ( ) /CIT(A), 4. 3 /CIT, 5. 14! )#,# /DR & 6. !5' 6 /GF.