MADHUSHA HOLDINGS P.LTD, MUMBAI V. ITO 3(2)(2), MUMBAI

ITA 6675/MUM/2013

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 0889 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 28-02-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 18-11-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: T A KHANDR
• Keywords: Transfer pricing; Earning of tax free income; Deemed dividend; Notional interest
• Section: 143(3); 153A; 14A; 132

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, B MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NOS.6675 & 6676/MUM/2013 ASSESSMENT YEARS: 2009-10 & 2010-11 M/S MADHUSHA HOLDINGS P. LTD.(FORMERLY KNOWN AS UCIL INVESTMENT LTD.), 69A MITTAL CHAMBERS, NARIMAN POINT, MUMBAI-400021 / VS. INCOME TAX OFFICER-3(2)(2), R. NO.609, 6 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400020 ( / REVENUE) ( !'# $ /ASSESSEE) PAN. NO.AAACV4048D % & $ ' / DA TE OF HEARING : 25/01/2018 & $ ' / DATE OF ORDER: 25/01/2018 !'# $ ! / ASSESSEE BY SHRI MANI JAIN ! / REVENUE BY SHRI T.A. KHAN-DR ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 2 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THESE TWO APPEALS ARE BY THE ASSESSEE AGAINST THE IMPUGNED ORDERS BOTH DATED 20/09/2013 FOR ASSESSMEN T YEAR 2009-10 AND 2010-11, OF THE LD. FIRST APPELLAT E AUTHORITY, MUMBAI. THE FIRST COMMON GROUND RAISED B Y THE ASSESSEE PERTAINS TO UPHOLDING THE ADDITION OF RS.7 LAKH (ASSESSMENT YEAR 2009-10) AND RS.17,38,138/- MADE T O THE RETURNED INCOME U/S 2(22)(E) OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT). 2. DURING HEARING, THE CRUX OF ARGUMENT ADVANCED ON BEHALF OF THE ASSESSEE IS THAT THIS ISSUED IS CO VERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN ITA NO.2005/MUM/2012, ORDER DATED 16/09/2015. OUR ATTENTION WAS INVITED TO PAGE-5 (PARA-4) OF THE ORD ER. THIS CONTENTION OF THE ASSESSEE WAS ADMITTED TO BE CORRE CT BY SHRI T.A. KHAN, LD. DR. 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN VIEW O F THE ABOVE, WE ARE REPRODUCING HEREUNDER THE RELEVANT PO RTION ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 3 FROM THE AFORESAID ORDER OF THE TRIBUNAL FOR READY REFERENCE AND ANALYSIS:- THIS APPEAL HAS BEEN FILED BY THE REVENUE ON FOLLOWING GROUNDS:- 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) IS CORRECT IN DELETING ADDITION OF RS. 68,1.8,134/ - MADE U/S 2(22)(E) OF THE ACT, BY ACCEPTING ASSESSEES CONTENTION THAT IT WAS NOT ENGAGED IN MONEY LENDING BUSINESS, WITHOUT APPRECIATING THE FACT THAT IN THE COURSE OF ASSESSMEN T PROCEEDINGS THE ASSESSEE HAD TAKEN A CONTRADICTORY STAND AND CATEGORICALLY STATED THAT IT IS ENGAGED IN THE BUSINESS OF MONEY LENDING. THUS, THE LD. CIT(A) HAS ACCEPTED FRESH EVIDENCE/ CONTENTION OF THE ASSESSEE WITHOUT PROVIDING ANY OPPORTUNITY TO THE AO TO REBUT THE SAME AS REQUIRED UNDER RULE 46AOF THE I.T. RULES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. C1T(A) IS CORRECT IN DELETI NG ADDITION MADE U/S 2(22)(E) OF THE ACT FOLLOWING THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF ARVINDKUMAR JAIN IN 1TA NO. 589 OF 2011. DATED 30.9.2011, WITHOUT APPRECIATING THE FACT THAT DECISI ON RELIED UPON IS DISTINGUISHABLE FROM THE FACTS IN ASSESSEES CASE AS THE AMOUNT RECEIVED BY THE ASSESSEE COMPANY WAS NOT TO GIVE EFFECT TO A COMMERCIAL TRANSACTION AND CONSIDERING THE ASSESSEE'S SHARE HOLDING OF 46,33% IN EURO LIFE HEALTH CARE PVT. LTD. WHICH WAS HAVING ACCUMULATED PROFITS, THE TRANSACTION CLEARLY CAME WITHIN THE AMBI T OF SECTION 2(22)(E) 3. APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESS I NG OFFICER BE RESTORED. 2. BRIEF FACTS OF THE CASE, ARE THAT THE SOURCE OF INCOME OF THE ASSESSEE COMPANY IS FROM RENT AND INCOME FRO M OTHER SOURCES. THE ASSESSING OFFICER MADE AN ADDITI ON OF `. 6818134/- U/S 2(22)(E) OF THE INCOME TAX ACT, 1961. THE MATTER CARRIED BEFORE THE CITA) IN APPEAL AND T HE ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 4 CIT(A) AFTER CONSIDERING THE DETAILED SUBMISSION MADE BEFORE HIM, GRANTED RELIEF TO THE ASSESSEE BY DELETING THE ADDITION. AGGRIEVED BY THE DECISION OF CIT(A), THE REVENUE IS IN APPEAL BEFORE US. THE LD. D.R. CO NTENDED BEFORE US THAT THE CIT(A) ERRED IN DELETING THE ADD ITION OF RS. 68,18,134/- MADE U/S 2(22)(E) OF THE ACT BY ACCEPTING THE ASSESSEE'S CONTENTION. HE SUBMITTED THAT THE CIT(A) IS NOT JUSTIFIED IN DELETING THE ADDITION WH ICH IS VIOLATION OF RULE 46A OF THE INCOME TAX RULES,. 1962, HENCE THE ORDER OF THE CIT(A) BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. ON THE OTHER HAND, THE LD. COUNSEL FOR TH E ASSESSEE STRONGLY SUPPORTED THE ORDER OF THE CIT(A). 3. HAVING CONSIDERED THE RIVAL SUBMISSION AND MATER IAL PLACED ON RECORD, WE FIND THAT THE ASSESSING OFFICER MADE THE ADDITIO N IN QUESTION BY OBSERVING THAT THE ASSESSEE IS A SHAREHOLDER IN M/S EUROLIFE HEALTHCARE P. LTD. HAVING 139000 SHARES WHICH IS 46.33% OF TOT AL SHAREHOLDING. ON PERUSAL OF THE BALANCE SHEET OF M/S. EUROLIFE HEALTHCARE P. LTD., THE ASSESSING OFFICER OBSERVED THAT THEY HAVE ACCUMULAT ED PROFIT IN THE FORM OF RESERVES AND SURPLUS OF `.68,18,134/-. THE ASSESSING OFFICER NOTED THAT DURING THE YEAR OF ACCOUNTING , THE ASSESSEE HAS RECEIVED LOANS/ADVANCES AMOUNTING TO `1,05,47,185/- FROM M/S EUROLIFE HEALTHCARE P. LTD. HENCE, HE APPLIED THE P ROVISIONS OF SECTION 2(22)(E) OF THE ACT ON SUCH ADVANCE AND ADD ED THE SAME TO THE INCOME OF THE ASSESSEE AS DEEMED DIVIDEND. THE STAND OF THE ASSESSEE IS THAT THE PROVISIONS OF SEC TION 2(22)(E) OF THE ACT ARE NOT APPLICABLE IN ITS CASE AS THE SAID TRANSACTIONS WERE IN THE ORDINARY COURSE OF BUSINESS OF LENDING MONEY. HOWEV ER, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS NO T DISCLOSED ANY INCOME FROM MONEY LENDING IN THE YEAR OF ACCOUNTING OR EVEN IN THE PRECEDING ASSESSMENT YEAR . THE ASSESSEE HAS , DISCLOSED ONLY INCOME FROM RENT AND DIVIDENDS. FIN ALLY, THE ASSESSING OFFICER CONCLUDED THAT THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT ARE APPLICABLE TO THE FACTS OF THE CASE. 3.1 BEFORE THE CIT(A), THE ASSESSEE VIDE ITS LETTER DATED 16.12.2010 EXPLAINED THAT THE SUM OF RS. 1,05,47,185/- WAS RECEIVED FROM MIS EUROLIFE HEALTH CARE P. LTD. WITH A VIEW TO SELL THE OFFICE PREMISES NO. 96 ON T HE 9TH FLOOR IN FREE PRESS HOUSE, FREE PRESS JOURNAL ROAD, NARIMAN POINT, MUMBAI FOR A SUM OF RS. 3,76,20,000/- WHICH WAS AGREED TO BE PAID FROM TIME TO TIME. AS PER THE ASSESSEE'S SUBMISSION, THE SAID PREMISES WERE NOT VACANT AND WAS OCCUPIED BY M/S MAJMUDAR & CO AS TENANT IT WAS THE UNDERSTANDING THAT THE BALANCE AMOUNT WI LL BE PAID ON GETTING VACANT, PEACEFUL POSSESSION OF THE PREMI SES FROM THE SAID TENANT SINCE THE SELLER UCIL INVESTME NTS LTD COULD NOT PROVIDE THE VACANT POSSESSION OF THE PREM ISES , THE BALANCE PAYMENT AS NOT MADE. THE COPY OF MEMORANDUM OF UNDERTAKING (MOU) ENTERED INTO BETWEEN UCIL INVESTM ENTS LTD. ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 5 & M/S EUROLIFE HEALTHCARE P. LTD WAS ALSO FILED BEFORE THE ASSESSI NG OFFICER AT THE RELEVANT POINT OF TIME. BUT, THE ASSESSING O FFICER DID NOT ACCEPT THIS EXPLANATION OF THE ASSESSEE. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE MOLT IS NOTHING BUT A SELF SERVING DOCUMENT ENTERED INTO BY THE ASSESSEE WITH ITS, ASSOCIATE CONCERN. HE FURTHER OBSERVED THAT THE MOU HAS NOT BEEN EVEN NOTARIZED AND HENCE THE DATE OF THE SAID DOCUMENT HAS NO AUTHENTICITY AND ACCORDING ADDED THE ADVANCES TREAT ING THE SAME AS DEEMED DIVIDED U/S 2(22)(E) OF THE ACT. HOWEVER, HE RESTRICTED THE SAME TO THE ACCUMULATED RESERVES AVAILABLE WITH THE COMPANY IE. RS. 68,18,134/-. THE STAND OF THE ASSES SEE HAS BEEN CONSISTENTLY THAT THE AMOUNT OF RS. 1,05,47,185/- R ECEIVED FROM M/S EUROLIFE HEALTHCARE . P. LTD. IS NOT AN ADVANCE OR LOAN. ACCORDING TO TH E ASSESSEE, THE SAID AMOUNT WAS RECEIVED IN ACCORDANCE WITH THE MOU ENTERED INTO WITH THE SAID PARTY FOR SALE OF OFFICE PREMISES IN FREE PRESS HOUSE AS DISCUSSED ABOVE. IN ORDER TO INVOKE THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT, THERE SHOULD BE A BENEFIT ARISING TO SH AREHOLDER. IT THE STARTING POINT FOR INVOCATION OF SECTION 2(22)(E) O F THE ACT. HOWEVER, IN THE CASE OF THE ASSESSEE THERE IS NO SUCH BENEFIT A VAILABLE HENCE, THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT ARE NOT A PPLICABLE. THE ASSESSEE ALSO FILED COPY OF LEDGER ACCOUNT OF M/S EUROLIFE HEALTH CARE P. LTD. IN THE BOOKS OF M/S UCIL . INVESTMENTS LTD. TO SUGGEST THAT THE AMOUNTS WERE PAID IN THE REGULAR COURSE OF BUSINESS WITH A VIEW TO -PURCHASE THE OFFICE PREMISES OWNED BY THE ASSESSEE. THE COPY OF MOU DATED 28.12.2006 WAS ALSO FILED BEFORE THE ASSESSIN G OFFICER IN THE ASSESSMENT PROCEEDINGS FOR RECORD. 4. WE FIND THAT THE ASSESSING OFFICER TREATED THE M OLT AS A SELF SERVING DOCUMENT AND IT WAS AN AFTERTHOUGHT. T HE ASSESSEE HAS FILED COPY OF THE FINAL ACCOUNTS OF M/ S EUROLIFE HEALTHCARE P. LTD. FOR YEAR ENDED 31-3-200 8 DURING APPEAL PROCEEDINGS WHEREIN THE ENTRY OF MOU WITH UC IL INVESTMENTS P. LTD. WERE MENTIONED IN THE NOTES TO ACCOUNTS. IN SUCH A SITUATION, THE ASSESSING OFFICE R WAS NOT JUSTIFIED IN REJECTING THE MOU EXECUTED ON 23.1 2.2006 TREATING THE SAME AS AN AFTERTHOUGHT AND A SELF SERVING DOCUMENT. THE BURDEN IS ON THE ASSESSING OFFICER TO PROVE THAT THE CASE IS STRICTLY FALLING WITHIN THE MISCHI EF OF DEEMING PROVISION WHICH IS REQUIRED TO BE STRICTLY CONSTRUED. THE ASSESSING OFFICER HAS NOT MADE ANY INVESTIGATION AND HAS NOT BROUGHT ON RECORD ANY MAT ERIAL TO SUGGEST THAT THE MOU WAS NOT EXISTING DURING THE ASSESSMENT PROCEEDINGS. THE ASSESSING OFFICER HAS NOT MADE ANY EFFORT TO CROSS EXAMINE M/S EUROLI FE HEALTHCARE P. LTD. IN THIS REGARD, THIS APPROACH OF THE ASSESSING OFFICER IS NOT JUSTIFIED IN REJECTING THE MOU MERELY SAYING AS A SELF SERVING DOCUMENT WITHOUT ANY BASIS. THUS, TAKING INTO CONSIDERATION ALL FACT S ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 6 AND CIRCUMSTANCES OF THE CASES ARE OF THE VIEW THAT THE CIT(A) WAS JUSTIFIED IN HOLDING THAT ASSESSING OFFI CER WAS NOT JUSTIFIED IN HIS ACTION WHILE REJECTING THE MOU MERELY SAYING AS A SELF SERVING DOCUMENT WITHOUT ANY BASIS OR DOCUMENTS FOR SUCH ASSERTION. THE TRADE ADVANCES WH ICH WERE IN THE NATURE OF MONEY TRANSACTED TO GIVE EFFECT TO A COMMERCIAL TRANSACTIONS DO NOT FAL L IN THE AMBIT OF SECTION 2(22)(E) OF THE ACT. ACCORDING LY, THE CI'T(A) WAS JUSTIFIED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER OF RS. 68,18.134/- U/S 2(22)(E) O F THE ACT AND WE UPHOLD THE SAME. 5. IN THE RESULT, APPEAL FILED BY THE REVENUE IS DISMISSED. 2.2. WE FIND THAT IN THE AFORESAID ORDER FOR ASSESSMENT YEAR 2008-09, THE TRIBUNAL CONSIDERED TH E FACTUAL MATRIX AND ON THE APPLICABILITY OF PROVISIO NS OF SECTION 2(22)(E) OF THE ACT, WHEREIN, THE LD. ASSES SING OFFICER TREATED THE MOU AS SELF SERVING DOCUMENT/ AFTERTHOUGHT, DISMISSED THE APPEAL OF THE REVENUE B Y HOLDING THE LD. COMMISSIONER OF INCOME TAX (APPEAL) WAS JUSTIFIED IN DELETING THE ADDITION MADE BY THE ASSE SSING OFFICER U/S 2(22)(E) OF THE ACT. NO CONTRARY DECISI ON WAS BROUGHT TO OUR NOTICE BY THE REVENUE. IN THE PRESEN T APPEAL BEFORE US, THE FACTS/ISSUES ARE SIMILAR, THEREFORE, FOLLOWING THE ORDER OF THE TRIBUNAL, IN THE CASE OF ASSESSEE ITSELF, FOR ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 7 ASSESSMENT YEAR 2008-09, WE ALLOW THIS GROUND IN FA VOUR OF THE ASSESSEE. 3. THE NEXT GROUND AGITATED BY THE LD. COUNSEL FOR THE ASSESSEE IS WITH RESPECT TO DIVIDEND INCOME. IT WAS CONTENDED THAT THE ADDITION MAY BE RESTRICTED TO TH E DIVIDEND INCOME EARNED BY THE ASSESSEE. THE LD. DR MERELY RELIED UPON THE ORDER OF THE LD. COMMISSIONER OF IN COME TAX (APPEAL). 3.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND T HAT THE CASE OF THE ASSESSEE IS COVERED BY THE DECISION OF THE TRIBUNAL IN THE CASE OF METROPOLITAN EXIM CHEM LTD. (ITA NO.5749/MUM/2014) ORDER DATED 01/08/2017, WHICH IS REPRODUCED HEREUNDER:- 1. THE ASSESSEE IS AGGRIEVED BY THE IMPUGNED ORDER DATED 13/06/2014 OF THE LD. FIRST APPELLATE AUTHORI TY, MUMBAI. THE ONLY GROUND RAISED BY THE ASSESSEE PERT AINS TO ADDING THE AMOUNT OF RS.13,46,717/- U/S 14A OF T HE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT). 2. DURING HEARING, THE CRUX OF ARGUMENTS ADVANCED BY SHRI SATISH R. MODY IS THAT THE ASSESSE E IS IN THE BUSINESS OF MANUFACTURING OF CHEMICAL AND EXPOR TS BY CLAIMING THAT THE DIVIDEND INCOME EARNED BY THE ASS ESSEE ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 8 IS RS.3,93,161/-, THEREFORE, THE DISALLOWANCE CANNO T BE MORE THAN THE DIVIDEND INCOME. IT WAS ALSO CLAIMED THAT THERE IS NO DIRECT INVESTMENT AND NO DISALLOWANCE W AS MADE IN EARLIER AND LATER YEARS. PLEA WAS ALSO RAIS ED THAT IN SUBSEQUENT YEAR I.E. 2011-12, THE LD. COMMISSION ER OF INCOME TAX (APPEAL) DELETED THE ADDITION AGAINST WH ICH NO APPEAL WAS FILED BY THE ASSESSEE. IT WAS ALSO CLAIM ED THAT THE ISSUE UNDER HAND IS COVERED BY THE DECISION OF THE TRIBUNAL IN THE CASE OF ZOOM ENTERTAINMENT NETWORK LTD. (ITA NO.3453/MUM/2016) ORDER DATED 21/04/2017. ON THE OTHER HAND, SHRI T.A. KHAN, LD. DR, THOUGH DEFE NDED THE ADDITION BUT DID NOT CONTROVERT THE ASSERTION M ADE BY THE ASSESSEE. 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN THE LI GHT OF THE ABOVE, BEFORE ADVERTING FURTHER, WE ARE REPRODUCING HEREUNDER THE RELEVANT PORTION FROM THE AFORESAID O RDER OF THE TRIBUNAL DATED 21/04/2017 FOR READY REFERENCE A ND ANALYSIS:- THE ASSESSEE IS AGGRIEVED BY THE IMPUGNED ORDER DA TED 29/02/2016 OF THE FIRST APPELLATE AUTHORITY, MUMBAI, CONFIRMING T HE DISALLOWANCE OF RS.27,19,404/- MADE U/S 14A(2) OF THE INCOME TAX AC T, 1961 (HEREINAFTER THE ACT) READ WITH RULE-8D OF THE RULE S. 2. DURING HEARING, SHRI S. VENKATARAMAN, LD. COUNS EL FOR THE ASSESSEE, ADVANCED ARGUMENTS, WHICH ARE IDENTIC AL TO THE GROUND RAISED. THE LD. COUNSEL ALSO RELIED UPON THE DECISI ON IN THE CASE OF M/S DAGA GLOBAL CHEMICALS VS ACIT (ITA NO.5592/MUM/2012 ), ORDER DATED 01/01/2015, NIMBUS COMMUNICATION LTD. VS ACIT (ITA NO.1424/MUM/2014), ORDER DATED 09/02/2016 AND TATA INDUSTRIES LTD. VS ITO (ITA NO.4894/MUM/2008), ORDER DATED 20/07/20 16. 2.1. ON THE OTHER HAND, THE LD. DR, SHRI RAJESH KU MAR YADAV, DEFENDED THE ADDITION AND PLACED RELIANCE UPON THE DECISION FROM DELHI ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 9 BENCH OF THE TRIBUNAL IN THE CASE OF BABA GLOBAL LT D. VS DCIT (ITA NO.1086 TO 1091/DEL./2015) ORDER DATED 05/05/2016. 2.2. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE LD. DR MAINLY RELIED UPON THE DECISION FROM DELHI BENCH OF THE TRIBUNAL IN THE CA SE OF BABA GLOBAL LTD. (SUPRA), THEREFORE, BEFORE COMING TO ANY CONCL USION, WE ARE REPRODUCING HEREUNDER THE RELEVANT PORTION OF THIS ORDER FOR READY REFERENCE AND ANALYSIS:- THESE ARE SIX APPEALS FILED BY THE ASSESSEE AGAINS T THE ACTION OF THE LEARNED DRP UPHOLDING THE ORDER PASSED BY TH E AO UNDER SECTION 153A READ WITH SECTION 144C OF THE AC T FOR ASSESSMENT YEARS 2006-07 TO 2010-11 AND UNDER SECTI ON 143(3) FOR ASSESSMENT YEAR 2011-12 CONSEQUENT TO TH E DIRECTION ISSUED BY THE LEARNED DISPUTE RESOLUTION PANEL. 2. IN THE APPEAL FILED FOR ASSESSMENT YEARS, 2006-0 7, 2007-08 AND 2008-09, BESIDES QUESTIONING THE VALIDITY OF AS SESSMENT FRAMED UNDER SECTION 153A OF THE INCOME-TAX ACT, 19 61, THE ONLY ISSUE IS THE ADDITION OF AMOUNT OF THE NOTIONA L INTEREST ON FOREIGN CURRENCY LOAN ADVANCED BY THE ASSESSEE COMP ANY TO ITS WHOLLY OWNED FOREIGN SUBSIDIARIES. WHEREAS FOR ASSE SSMENT YEARS 2009-10 TO 2011-12, BESIDES THE ABOVE ADJUSTM ENT ON ACCOUNT OF THE NOTIONAL INTEREST, THE ISSUE ALSO IS THAT OF ADDITION UNDER SECTION 14A OF THE INCOME TAX ACT. 3. THE ASSESSEE COMPANY IS ENGAGED IN MANUFACTURING OF FLAVOURED CHEWING TOBACCO, KIWAM, SCENTED ELAICHI, ETC. UNDER THE BRAND NAME BABA AND TULSI AND EXPORTED ITS 100% OF PRODUCTION DURING THE YEARS UNDER CONSIDERATION. 4. THE ORIGINAL ASSESSMENTS UNDER SECTION 143(3) WE RE COMPLETED IN RESPECT OF ASSESSMENT YEARS 2006-07, 2 007-08 AND 2008-09. THEREAFTER A SEARCH TOOK PLACE ON 21ST JANUARY, 2011. ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 10 5. THE AO THEREAFTER TOOK UP THE ASSESSMENT BY ISSU ING NOTICE UNDER SECTION 153A. DURING THE COURSE OF THE ASSESS MENT THE AO REFERRED THE MATTER TO THE TRANSFER PRICING OFFI CER. THE LEARNED TPO NOTED THAT THE ASSESSEE COMPANY HAS EXT ENDED LOANS TO ITS SUBSIDIARY COMPANIES AND HELD THAT THE ASSESSEE OUGHT TO HAVE CHARGED INTEREST IN RESPECT OF SUCH L OANS AND ACCORDINGLY THE TPO RECOMMEND THAT INTEREST AS PER THE PRIME LENDING RATE OF STATE BANK OF INDIA BE ADDED AS INC OME ON ACCOUNT OF ADJUSTMENT OF ARMS LENGTH PRICE. THEREA FTER THE AO PASSED THE DRAFT ASSESSMENT ORDER MAKING ADDITIONS AS RECOMMENDED BY THE TPO. 6. AGGRIEVED BY THE ORDER OF THE TPO, THE ASSESSEE FILED OBJECTION BEFORE THE DISPUTE RESOLUTION PANEL. IT W AS CONTENDED BY THE ASSESSEE THAT SINCE THE MONEY GIVE N AS LOAN TO ITS SUBSIDIARY COMPANIES WAS OWN MONEY AND HENCE NO ADJUSTMENT IS REQUIRED TO BE MADE. IT WAS FURTHER S UBMITTED THAT THE RATE OF INTEREST CHARGED CANNOT BE THE PRIME LE NDING RATE OF STATE BANK OF INDIA. THIS MONEY HAS BEEN ADVANCE D IN FOREIGN CURRENCY AND AS SUCH INTEREST IS TO BE CHAR GED AS PER THE INTEREST RATE IN FOREIGN CURRENCY I.E. LIBOR. 7. THE LEARNED DRP DID NOT AGREE WITH THE CONTENTIO N OF THE ASSESSEE. HOWEVER, IT GAVE A PART RELIEF BY HOLDING THAT THE INTEREST RATE BE CHARGED BE ONLY BASE RATE AND FURT HER ADJUSTED BY 150 BASIS POINT IN TERMS OF SAFE HARBOUR RULES. ON THE ISSUE OF ADDITION UNDER SECTION 14A, THE LEARNED DRP CONF IRMED THE ACTION OF THE AO. 8. AGGRIEVED BY THE ORDER OF THE LEARNED DRP AND TH E FINAL ASSESSMENT ORDER PASSED BY THE AO THE ASSESSEE IS I N APPEAL BEFORE US. 9. IT WAS CONTENDED BY THE LEARNED AR THAT THE AO WAS NOT JUSTIFIED IN TINKERING WITH THE ASSESSMENT FOR ASSE SSMENT YEARS ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 11 2006-07 TO 2008-09 AS THESE ASSESSMENTS HAVE NOT AB ATED CONSEQUENT TO THE SEARCH. THE SEARCH HAS TAKEN PLAC E ON 21ST JANUARY, 2011. NO INCRIMINATING MATERIAL WAS FOUND DURING THE COURSE OF THE SEARCH AS IS EVIDENT FROM THE ASSESSM ENT ORDER. IT WAS CONTENDED THAT IN THE ABSENCE OF ANY INCRIMINAT ING MATERIAL, THE AO SHOULD NOT HAVE MADE AN ADDITION. IN SUPPORT THEREOF THE LEARNED AR RELIED UPON THE ORDER OF THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE CIT (CENTRAL) III VE RSUS KABUL CHAWLA [2016] 380 ITR 573 (DEL). 10. ON THE ISSUE OF THE MERIT, IT WAS CONTENDED BY THE LEARNED AR THAT THE ADDITIONS ARE UNTENABLE AS THE ASSESSEE HAS PAID THE ADVANCES TO ITS SUBSIDIARY COMPANIES OUT OF EEF C ACCOUNTS. THE EEFC ACCOUNT EVEN OTHERWISE DOES NOT EARN ANY INTEREST. THE ADVANCES GIVEN TO THE SUBSIDIARY COMP ANIES WERE IN THE NATURE OF QUASI CAPITAL AND WERE FOR BUSINES S CONSIDERATION. THE MAIN PURPOSE OF GIVING ADVANCES TO ITS SUBSIDIARY COMPANIES WAS TO PROMOTE ITS EXPORT BUSI NESS AND TO HAVE FOOTHOLD IN THESE FOREIGN COUNTRIES. 11. IN THE ALTERNATIVE, IT WAS CONTENDED BY THE LEA RNED AR THAT THE RATE OF INTEREST CANNOT BE THAT OF THE INDIAN R UPEES. THE MONEY HAS BEEN ADVANCED IN FOREIGN CURRENCY AND INT EREST RATE TO BE CHARGED HAS TO BE THE INTEREST RATE OF SUCH F OREIGN CURRENCY. IF THE MONEY HAS BEEN ADVANCED IN US DOLL AR IT HAS TO BE LIBOR. IN RESPECT OF ADVANCES IN EURO THE INTERE ST RATE HAS TO BE EUR (LIBOR) AND IN RESPECT OF ADVANCES GIVEN IN SWISS FRANC THE INTEREST RATE HAS TO BE THAT OF CHF (LIBO R). IN SUPPORT OF ITS CONTENTION THE LEARNED AR RELIED UPO N THE JUDGMENT OF THE COORDINATE BENCH OF THE ITAT IN THE CASE OF COTTON NATURAL INDIA PVT. LTD. VS. DCIT, CIRCLE 3(1 ), NEW DELHI 142 ITD (DEL) 662 WHICH HAS ALSO BEEN CONFIRMED BY THE JURISDICTIONAL DELHI HIGH COURT. THE LEARNED AR ALS O RELIED UPON THE FOLLOWING JUDGMENTS OF THE ITAT:- ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 12 (I) SIVA INDUSTRIES & HOLDINGS LIMITED VS ACIT (20 11) 59 DTR 0182 (II) TATA AUTOCOMP SYSTEMS LIMITED VS ACIT (2012) 7 3 DTR 0220 (III) FOUR SOFT LTD. VS DCIT (2014) 106 DTR 0137(HY D) (IV) AURIONPRO SOLUTIONS LIMITED 12. IT WAS FURTHER CONTENDED THAT THE AMOUNT OF LOA N OUTSTANDING TO ITS SUBSIDIARY COMPANIES HAS BEEN CO NVERTED INTO SHARE APPLICATION MONEY IN THE ASSESSMENT YEAR 2011-12. THE SAID LOAN HAVING BECOME SHARE APPLICATION MONEY , THE TPO CANNOT CHANGE THE CHARACTERISTIC OF THE TRANSAC TION SO AS TO TREAT THE SHARE APPLICATION AS LOAN MONEY SO AS TO CHARGE INTEREST THEREON. IN SUPPORT THEREOF, THE LEARNED A R PLACED RELIANCE ON THE JUDGMENT OF THE COORDINATE BENCH OF THE ITAT IN THE CASE OF BHARTI AIRTEL LIMITED VS ACIT, ITA NO. 5816/D/2012 DATED 11.03.2014. THE LEARNED AR ALSO RELIED UPON T HE FOLLOWING JUDGMENTS:- (I) PAN INDIA NETWORK INFRAVEST PRIVATE LIMITED VS ACIT (ITA NO. 7026 & 7025 /MUMBAI/2013 DATED 04.12.2015 (II) CIT VS EKL APPLIANCES, ITA NO. 1068/2011 AND 1 070/2011 (III) PARLE BUISCUITS P LTD VS DCIT (ITA NO. 9010/M UM/2010) DATED 11.4.2014 ITAT MUMBAI (IV) ALL CARGO LOGISTICS LTD VS ACIT (2014) 150 IT D 0651 DATED. 10.6.2014 13. ON THE ISSUE OF DISALLOWANCE UNDER SECTION 14A MADE BY THE AO IN ASSESSMENT YEAR 2009-10 TO 2011-12, IT WA S SUBMITTED BY THE LEARNED AR THAT THE DISALLOWANCE H AS BEEN MADE BY THE AO WITHOUT RECORDING ANY SATISFACTION. THE AO HAS ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 13 STRAIGHTAWAY INVOKED THE PROVISIONS OF RULE 8D. IN SUPPORT THERE OF THE LEARNED AR HAS PLACED RELIANCE ON THE JUDGME NT OF THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF CIT VS. TAIKISHA ENGINEERING INDIA LTD., (2015) 370 ITR 0338 (DEL). 14. IT WAS FURTHER SUBMITTED THAT IN ANY CASE THE D ISALLOWANCE UNDER SECTION 14A CANNOT EXCEED THE DIVIDEND INCOME EARNED BY THE ASSESSEE COMPANY. 15. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDER PASSED BY THE TPO AS MODIFIED BY THE LEARNED DRP. I T WAS CONTENDED THAT THE ORDER PASSED BY THE TPO AS WELL AS THE LEARNED DRP ON THE ISSUE OF ADJUSTMENT OF INTEREST IS A SPEAKING ORDER. IT WAS FURTHER CONTENDED THAT ONCE THE SEARCH HAS BEEN INITIATED ALL THE ASSESSMENTS GET REOPENED CONSEQUENT TO THE ISSUE OF NOTICE UNDER SECTION 153 A AND AS SUCH THE AO IS ENTITLED TO MAKE ADJUSTMENT TO THE I NCOME AS PERMISSIBLE UNDER THE LAW. 16. ON THE ISSUE OF RATE OF INTEREST IT WAS CONTEND ED THAT THE RATE OF INTEREST HAS TO BE THAT OF INDIAN RUPEES AS ASSESSEE WOULD HAVE EARNED THE INTEREST IN INDIAN RUPEES HAD IT NOT ADVANCED THE MONEY TO ITS FOREIGN SUBSIDIARY. 17. AS REGARDS CONVERSION OF THE LOAN INTO SHARE AP PLICATION MONEY IN ASSESSMENT YEAR 2011-12 IT WAS CONTENDED T HAT THERE IS NO DIFFERENCE BETWEEN THE LOAN AND THE SHARE APP LICATION MONEY AND HENCE INTEREST HAS TO BE CHARGED FOR THAT YEAR ALSO. 18. ON THE ISSUE OF DISALLOWANCE UNDER SECTION 14A IT WAS CONTENDED THAT THE AO HAS INVOKED THE PROVISIONS OF RULE 8D AND MERE NOT RECORDING OF SATISFACTION WILL NOT MAK E SUCH DISALLOWANCE UNTENABLE IN THE EYE OF LAW. 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE ORDER PASSED BY THE AUTHORITIES BELOW. THE FIRST IS SUE IS ADDITION ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 14 MADE BY THE AO IN THE ASSESSMENT YEARS WHICH HAVE N OT ABATED CONSEQUENT TO THE SEARCH I.E. ASSESSMENT YEA RS 2006- 07, 2007-08 AND 2008-09. AS PER THE FACTS ON RECORD , THE SEARCH TOOK PLACE ON 21.1.2011. ASSESSMENTS FOR ALL THESE THREE YEARS HAVE BEEN COMPLETED UNDER SECTION 143(3 ) OF THE ACT. NO INCRIMINATING MATERIAL WAS FOUND DURING THE COURSE OF THE SEARCH. AS IS EVIDENT FROM THE ASSESSMENT ORDER THE ADDITION HAS BEEN MADE CONSEQUENT TO THE REFERENCE MADE BY THE AO TO TPO. THE ISSUE WHICH ARISES FOR CONSIDERA TION IS WHETHER THE AO COULD HAVE MADE ADDITION IN THESE AS SESSMENT YEARS WITHOUT THERE BEING ANY INCRIMINATING MATERIA L AND IN ABSENCE OF THE ABATEMENT OF ASSESSMENT ORDERS ALREA DY FRAMED. THIS ISSUE IS NOW SQUARELY COVERED BY THE J UDGMENT OF THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF CIT (CENTRAL) III VS. KABUL CHAWLA (SUPRA) WHEREIN THE HONBLE HI GH COURT HAS BEEN PLEASED TO HOLD AS UNDER:- 37. ON A CONSPECTUS OF SECTION 153A(1) OF THE ACT, READ WITH THE PROVISOS THERETO, AND IN THE LIGHT OF THE LAW E XPLAINED IN THE AFOREMENTIONED DECISIONS, THE LEGAL POSITION THAT E MERGES IS AS UNDER: I. ONCE A SEARCH TAKES PLACE UNDER SECTION 132 OF T HE ACT, NOTICE UNDER SECTION 153 A(1) WILL HAVE TO BE MANDA TORILY ISSUED TO THE PERSON SEARCHED REQUIRING HIM TO FILE RETURNS FOR SIX AYS IMMEDIATELY PRECEDING THE PREVIOUS YEAR REL EVANT TO THE AY IN WHICH THE SEARCH TAKES PLACE. II. ASSESSMENTS AND REASSESSMENTS PENDING ON THE DA TE OF THE SEARCH SHALL ABATE. THE TOTAL INCOME FOR SUCH AYS W ILL HAVE TO BE COMPUTED BY THE AOS AS A FRESH EXERCISE. III. THE AO WILL EXERCISE NORMAL ASSESSMENT POWERS IN RESPECT OF THE SIX YEARS PREVIOUS TO THE RELEVANT AY IN WHI CH THE SEARCH TAKES PLACE. THE AO HAS THE POWER TO ASSESS AND REA SSESS THE 'TOTAL INCOME' OF THE AFOREMENTIONED SIX YEARS IN S EPARATE ASSESSMENT ORDERS FOR EACH OF THE SIX YEARS. IN OTH ER WORDS THERE WILL BE ONLY ONE ASSESSMENT ORDER IN RESPECT OF EACH OF THE SIX AYS 'IN WHICH BOTH THE DISCLOSED AND THE UN DISCLOSED INCOME WOULD BE BROUGHT TO TAX'. IV. ALTHOUGH SECTION 153 A DOES NOT SAY THAT ADDITI ONS SHOULD BE STRICTLY MADE ON THE BASIS OF EVIDENCE FOUND IN THE COURSE OF ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 15 THE SEARCH, OR OTHER POST-SEARCH MATERIAL OR INFORM ATION AVAILABLE WITH THE AO WHICH CAN BE RELATED TO THE E VIDENCE FOUND, IT DOES NOT MEAN THAT THE ASSESSMENT 'CAN BE ARBITRARY OR MADE WITHOUT ANY RELEVANCE OR NEXUS WITH THE SEI ZED MATERIAL. OBVIOUSLY AN ASSESSMENT HAS TO BE MADE UN DER THIS SECTION ONLY ON THE BASIS OF SEIZED MATERIAL.' V. IN ABSENCE OF ANY INCRIMINATING MATERIAL, THE CO MPLETED ASSESSMENT CAN BE REITERATED AND THE ABATED ASSESSM ENT OR REASSESSMENT CAN BE MADE. THE WORD 'ASSESS' IN SECT ION 153 A IS RELATABLE TO ABATED PROCEEDINGS (I.E. THOSE PEND ING ON THE DATE OF SEARCH) AND THE WORD 'REASSESS' TO COMPLETE D ASSESSMENT PROCEEDINGS. VI. INSOFAR AS PENDING ASSESSMENTS ARE CONCERNED, T HE JURISDICTION TO MAKE THE ORIGINAL ASSESSMENT AND TH E ASSESSMENT UNDER SECTION 153A MERGES INTO ONE. ONLY ONE ASSESSMENT SHALL BE MADE SEPARATELY FOR EACH AY ON THE BASIS OF THE FINDINGS OF THE SEARCH AND ANY OTHER MATERIA L EXISTING OR BROUGHT ON THE RECORD OF THE AO. VII. COMPLETED ASSESSMENTS CAN BE INTERFERED WITH B Y THE AO WHILE MAKING THE ASSESSMENT UNDER SECTION 153 A ONL Y ON THE BASIS OF SOME INCRIMINATING MATERIAL UNEARTHED DURI NG THE COURSE OF SEARCH OR REQUISITION OF DOCUMENTS OR UND ISCLOSED INCOME OR PROPERTY DISCOVERED IN THE COURSE OF SEAR CH WHICH WERE NOT PRODUCED OR NOT ALREADY DISCLOSED OR MADE KNOWN IN THE COURSE OF ORIGINAL ASSESSMENT. CONCLUSION 38. THE PRESENT APPEALS CONCERN AYS, 2002-03, 2005- 06 AND 2006- 07.ON THE DATE OF THE SEARCH THE SAID ASSESSM ENTS ALREADY STOOD COMPLETED. SINCE NO INCRIMINATING MAT ERIAL WAS UNEARTHED DURING THE SEARCH, NO ADDITIONS COULD HAV E BEEN MADE TO THE INCOME ALREADY ASSESSED. 39. THE QUESTION FRAMED BY THE COURT IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. THE ABOVE VIEW HAS BEEN REITERATED BY THE HONBLE D ELHI HIGH COURT IN THE CASE OF CIT-7 VS. RRJ SECURITIES LTD. IN [2016] 380 ITR 612 (DEL) WHERE THE HONBLE COURT HAS BEEN PLEA SED TO HOLD AS UNDER:- IN RESPECT OF SUCH ASSESSMENTS WHICH HAVE ABATED, THE AO WOULD HAVE THE JURISDICTION TO PROCEED AND MAKE AN ASSESSMENT. HOWEVER, IN RESPECT OF CONCLUDED ASSESS MENTS, THE AO WOULD ASSUME JURISDICTION TOREASSESS PROVIDE D THAT THE ASSETS/DOCUMENTS RECEIVED BY THE AO REPRESENTOR IND ICATE ANY UNDISCLOSED INCOME OR POSSIBILITY OF ANY INCOME THA T MAY HAVE ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 16 REMAINED UNDISCLOSED IN THE RELEVANT ASSESSMENT YEA RS. THIS COURT IN COMMISSIONER OF INCOME TAX (CENTRAL)-III V . KABUL CHAWLA: ITA707/2014, DECIDED ON 28TH AUGUST, 2015 H AS HELD THAT COMPLETED ASSESSMENTS COULD ONLY BE INTERFERED WITH BY THE AO ON THE BASIS OF AN INCRIMINATING MATERIAL UN EARTHED DURING THE COURSE OF THE SEARCH OR REQUISITION OF T HE DOCUMENTS. IN ABSENCE OF ANY INCRIMINATING MATERIAL, THE AO DO ES NOT HAVE ANY JURISDICTION TO INTERFERE IN CONCLUDED ASSESSME NTS. IN THE PRESENT CASE, AS STATED HEREINABOVE, THE ADD ITION HAS BEEN MADE WITHOUT THERE BEING ANY INCRIMINATING MAT ERIAL AND IN ABSENCE OF PENDENCY OF ASSESSMENT. IN THE ABSENC E OF ANY INCRIMINATING MATERIAL, AS HELD BY THE HONBLE HIGH COURT, THE ADDITION CANNOT BE MADE IN AN ASSESSMENT UNDER SECT ION 153A. RESPECTFULLY FOLLOWING THE JUDGMENT OF THE JURISDIC TIONAL DELHI HIGH COURT, WE HOLD THAT THE AO WAS NOT JUSTIFIED I N MAKING THE ADDITION AND ACCORDINGLY THE ADDITION MADE BY THE A O IN THE ASSESSMENT YEARS 2006-07, 2007-08 AND 2008-09 ARE D IRECTED TO BE DELETED. CONSEQUENTLY THE APPEALS FILED FOR T HESE ASSESSMENT YEARS ARE ALLOWED. 20. AS REGARDS ASSESSMENT YEARS 2009-10 AND 2010-11 ARE CONCERNED THE LEARNED DRP HAS CONFIRMED THE ADDITIO N APPLYING THE BASE RATE OF STATE BANK OFINDIA PLUS 1 50 BASIS POINTS. IT WAS THE CONTENTION OF THE LEARNED AR THA T NO ADDITION CAN BE MADE AS THE ADVANCE MADE WAS OUT OF THE EEFC ACCOUNT WHICH CARRIES NO INTEREST. FURTHER AMOUNT A DVANCED WAS FOR PROMOTING ITS BUSINESS. ON THIS ISSUE WE AR E NOT IN AGREEMENT WITH THE CONTENTION OF THE LEARNED AR. TH E AMOUNT HAVING BEEN ADVANCED TO AN ASSOCIATED ENTERPRISES, THE SAME HAS TO BE EVALUATED BY APPLYING ARMS LENGTH PRICE. SINCE IT WAS A LOAN DURING THE ASSESSMENT YEARS 2009-10 AND 2010 -11, THE ASSESSEE COMPANY OUGHT TO HAVE COMPUTED THE ARMS L ENGTH PRICE IN RESPECT OF SUCH LOAN ADVANCED TO ITS SUBSI DIARY COMPANIES. HOWEVER, AS REGARDS THE INTEREST RATE WE ARE IN AGREEMENT WITH THE CONTENTION OF THE LEARNED AR THA T THIS CANNOT BE THE INTEREST RATE APPLICABLE TO INDIAN RU PEES. THESE ADVANCES HAVING BEEN MADE IN THE FOREIGN CURRENCY, THE RATE OF INTEREST HAS TO BE WITH REFERENCE TO THE INTEREST R ATE ON LOANS AND ADVANCES IN RESPECT OF FOREIGN CURRENCY. THIS I SSUE IS COVERED BY THE JUDGMENT OF THE JURISDICTIONAL DELHI HIGH COURT IN ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 17 THE CASE OF CIT VS. COTTON NATURALS (P) P LTD. (201 5) 276 CTR 0445 (DEL) WHEREIN THE HONBLE HIGH COURT HAS BEEN PLEASED TO HOLD AS UNDER:- 39. THE QUESTION WHETHER THE INTEREST RATE PREVAIL ING IN INDIA SHOULD BE APPLIED, FOR THE LENDER WAS AN INDIAN COMPANY/ASSESSEE, OR THE LENDING RATE PREVALENT IN THE UNITED STATES SHOULD BE APPLIED, FOR THE BORROWER WAS A RE SIDENT AND AN ASSESSEE OF THE SAID COUNTRY, IN OUR CONSIDERED OPINION, MUST BE ANSWERED BY ADOPTING AND APPLYING A COMMONS ENSICAL AND PRAGMATIC REASONING. WE HAVE NO HESITATION IN H OLDING THAT THE INTEREST RATE SHOULD BE THE MARKET DETERMINED I NTEREST RATE APPLICABLE TO THE CURRENCY CONCERNED IN WHICH THE L OAN HAS TO BE REPAID. INTEREST RATES SHOULD NOT BE COMPUTED ON THE BASIS OF INTEREST PAYABLE ON THE CURRENCY OR LEGAL TENDER OF THE PLACE OR THE COUNTRY OF RESIDENCE OF EITHER PARTY. INTEREST RATES APPLICABLE TO LOANS AND DEPOSITS IN THE NATIONAL CURRENCY OF T HE BORROWER OR THE LENDER WOULD VARY AND ARE DEPENDENT UPON THE FI SCAL POLICY OF THE CENTRAL BANK, MANDATE OF THE GOVERNMENT AND SEVERAL OTHER PARAMETERS. INTEREST RATES PAYABLE ON CURRENC Y SPECIFIC LOANS/ DEPOSITS ARE SIGNIFICANTLY UNIVERSAL AND GLO BALLY APPLICABLE. THE CURRENCY IN WHICH THE LOAN IS TO BE RE-PAID NORMALLY DETERMINES THE RATE OF RETURN ON THE MONEY LENT, I.E. THE RATE OF INTEREST. KLAUS VOGEL ON DOUBLE TAXATIO N CONVENTIONS (THIRD EDITION) UNDER ARTICLE 11 IN PAR AGRAPH 115 STATES AS UNDER:- THE EXISTING DIFFERENCES IN THE LEVELS OF INTEREST RATES DO NOT DEPEND ON ANY PLACE BUT RATHER ON THE CURRENCY CONC ERNED. THE RATE OF INTEREST ON A US $ LOAN IS THE SAME IN NEW YORK AS IN FRANKFURT-AT LEAST WITHIN THE FRAMEWORK OF FREE CAP ITAL MARKETS (SUBJECT TO THE ARBITRAGE). IN REGARD TO THE QUESTI ON AS TO WHETHER THE LEVEL OF INTEREST RATES IN THE LENDERS STATE OR THAT IN THE BORROWERS IS DECISIVE, THEREFORE, PRIMARILY DE PENDS ON THE CURRENCY AGREED UPON (BFH BST.B1. II 725 (1994), RE . 1 ASTG). A DIFFERENTIATION BETWEEN DEBT-CLAIMS OR DEB TS IN NATIONAL CURRENCY AND THOSE IN FOREIGN CURRENCY IS NORMALLY NO USE, BECAUSE, FOR INSTANCE, A US $ LOAN ADVANCED BY A US LENDER IS TO HIM A DEBT-CLAIM IN NATIONAL CURRENCY WHEREAS TO A GERMAN BORROWER IT IS A FOREIGN CURRENCY DEBT (THE SITUATION BEING DIFFERENT, HOWEVER, WHEN AN AGREEMENT IN A TH IRD CURRENCY IS INVOLVED). MOREOVER, A DIFFERENCE IN INTEREST LE VELS FREQUENTLY REFLECTS NO MORE THAN DIFFERENT EXPECTATIONS IN REG ARD TO RATES OF EXCHANGE, RATES OF INFLATION AND OTHER ASPECTS. HEN CE, THE CHOICE OF ONE PARTICULAR CURRENCY CAN BE JUST AS RE ASONABLE AS THAT OF ANOTHER, DESPITE DIFFERENT LEVELS OF INTERE ST RATES. AN ECONOMIC CRITERION FOR ONE PARTY MAY BE THAT IT WAN TS, IF POSSIBLE, TO AVOID EXCHANGE RISKS (FOR EXAMPLE, BY MATCHING THE CURRENCY OF THE LOAN WITH THAT OF THE FUNDS ANTICIP ATED TO BE ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 18 AVAILABLE FOR DEBT SERVICE), SUCH AS TAKING OUT A U S $ LOAN IF THE PROCEEDS IN US $ ARE EXPECTED TO BECOME AVAILABLE ( SAY FROM EXPORTS). IF AN EXCHANGE RISK WERE TO PROVE INCAPAB LE OF BEING AVOIDED (SAY, BY FORWARD RATE FIXING), THE APPROPRI ATE COURSE WOULD BE TO ATTRIBUTE IT TO THE ECONOMICALLY MORE P OWERFUL PARTY. BUT, EXACTLY WHERE THERE IS NO SPECIAL RELATIONSHIP, THIS WILL FREQUENTLY NOT BE POSSIBLE IN DEALINGS WITH SUCH PA RTY. CONSEQUENTLY, IT WILL NORMALLY NOT BE POSSIBLE TO R EVIEW AND ADJUST THE INTEREST RATE TO THE EXTENT THAT SUCH RA TE DEPENDS ON THE CURRENCY INVOLVED. MOREOVER, IT IS QUESTIONABLE WHETHER SUCH AN ADJUSTMENT COULD BE BASED ON ART. 11 (6).FO R ART. 11(6), AT LEAST ITS WORDING, ALLOWS THE AUTHORITIES TO ELIMINATE HYPOTHETICALLY THE SPECIAL RELATIONSHIPS ONLY IN R EGARD TO THE LEVEL OF INTEREST RATES AND NOT IN REGARD TO OTHER CIRCUMSTANCES, SUCH AS THE CHOICE OF CURRENCY. IF SUCH OTHER CIRCU MSTANCES WERE TO BE INCLUDED IN THE REVIEW, THERE WOULD BE D OUBTS AS TO WHERE THE LINE SHOULD BE DRAWN, I.E., WHETHER AN EX AMINATION SHOULD BE ALLOWED OF THE QUESTION OF WHETHER IN THE ABSENCE OF A SPECIAL RELATIONSHIP (I.E., FINANCIAL POWER, STRO NG POSITION IN THE MARKET, ETC., OF THE FOREIGN CORPORATE GROUP MEMBER ) THE BORROWING COMPANY MIGHT NOT HAVE COMPLETELY REFRAIN ED FROM MAKING INVESTMENT FOR WHICH IT BORROWED THE MONEY. THE AFORESAID METHODOLOGY RECOMMENDED BY KLAUS VOGEL AP PEALS TO US AND APPEARS TO BE THE REASONABLE AND PROPER P ARAMETER TO DECIDE UPON THE QUESTION OF APPLICABILITY OF INT EREST RATE. THE LOAN IN QUESTION WAS GIVEN IN FOREIGN CURRENCY I.E. US $ AND WAS ALSO TO BE REPAID IN THE SAME CURRENCY I.E. US $. I NTEREST RATE APPLICABLE TO LOANS GRANTED AND TO BE RETURNED IN I NDIAN RUPEES WOULD NOT BE THE RELEVANT COMPARABLE. EVEN IN INDIA , INTEREST RATES ON FCNR ACCOUNTS MAINTAINED IN FOREIGN CURREN CY ARE DIFFERENT AND DEPENDENT UPON THE CURRENCY IN QUESTI ON. THEY ARE NOT DEPENDENT UPON THE PLR RATE, WHICH IS APPLI CABLE TO LOANS IN INDIAN RUPEE. THE PLR RATE, THEREFORE, WOU LD NOT BE APPLICABLE AND SHOULD NOT BE APPLIED FOR DETERMININ G THE INTEREST RATE IN THE EXTANT CASE. PLR RATES ARE NOT APPLICABLE TO LOANS TO BE RE-PAID IN FOREIGN CURRENCY. THE INTERE ST RATES VARY AND ARE THUS DEPENDENT ON THE FOREIGN CURRENCY IN W HICH THE REPAYMENT IS TO BE MADE. THE SAME PRINCIPLE SHOULD APPLY. 21. ACCORDINGLY THE APPLICABLE RATE OF INTEREST SHA LL BE THE RATE OF INTEREST IN RESPECT OF SUCH FOREIGN CURRENCY IN WHICH THE LOANS HAVE BEEN ADVANCE. AS PER THE DETAILS AVAILABLE ON RECORD DURING THE ASSESSMENT YEARS 2009-10 AND 2010- 11 AS SESSEE HAS ADVANCED TO ITS SUBSIDIARY COMPANIES AS DETAILE D BELOW:- XXXXXXXXXXXXXXXX ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 19 TAKING INTO CONSIDERATION OF THE ABOVE FACTS, THE L EARNED AO IS DIRECTED TO VERIFY THE ABOVE INTEREST RATE AND RECO MPUTE THE ADJUSTMENT ON ACCOUNT OF INTEREST BY APPLYING THE RATE OF INTE REST OF THE RELEVANT CURRENCY IN THE AY 2009-10 & 2010-11. ACCORDINGLY T HIS GROUND OF THE ASSESSEE IS PARTLY ALLOWED FOR AY 2009-10 & 201 0-11. XXXXXXXXXXXXXXXXX 22. AS REGARDS THE ADDITION ON THIS ACCOUNT IN ASSE SSMENT YEAR 2011-12, THE ADVANCE GIVEN TO ITS SUBSIDIARY C OMPANIES STAND CONVERTED INTO SHARE APPLICATION MONEY. ONCE THE LOAN HAS BEEN CONVERTED INTO SHARE APPLICATION MONEY, FO R THE ISSUE OF THE SHARE CAPITAL, THEN SUCH AMOUNT CANNOT BE CONSIDERED AS LOAN. THE TPO IS NOT PERMITTED UNDER THE LAW TO RE-CHARACTERIZE THE TRANSACTION AND ACCORDINGLY WE ARE OF THE VIEW THAT NO INTEREST ON SUCH SHARE APPLICATION MON EY CAN BE CHARGED. THE ABOVE VIEW IS SUPPORTED BY THE JUDGMEN T OF THE COORDINATE BENCH OF THE ITAT IN THE CASE OF BHARTI AIRTEL LTD. VS. ACIT, [2014] 161 TTJ 0283 (DEL) WHEREIN THE ITA T HAS HELD AS UNDER:- 47. WE FIND THAT IN THE PRESENT CASE THE TPO HAS NOT DISPUTED THAT THE IMPUGNED TRANSACTIONS WERE IN THE NATURE OF PAYMENTS FOR SHARE APPLICATION MONEY, AND THUS, OF CAPITAL CONTRIBUTIONS. THE TPO HAS NOT MADE ANY ADJUSTMENT WITH REGARD TO THE ALP OF THE CAPITAL CONTRIBUTION. HE H AS, HOWEVER, TREATED THESE TRANSACTIONS PARTLY AS OF AN INTEREST FREE LOAN, FOR THE PERIOD BETWEEN THE DATES OF PAYMENT TILL THE DA TE ON WHICH SHARES WERE ACTUALLY ALLOTTED, AND PARTLY AS CAPITA L CONTRIBUTION, I.E. AFTER THE SUBSCRIBED SHARES WERE ALLOTTED BY THE SUBSIDIARIES IN WHICH CAPITAL CONTRIBUTIONS WER E MADE. NO DOUBT, IF THESE TRANSACTIONS ARE TREATED AS IN THE NATURE OF LENDING OR BORROWING, THE TRANSACTIONS CAN BE SUBJE CTED TO ALP ADJUSTMENTS, AND THE ALP SO COMPUTED CAN BE THE BASIS OF COMPUTING TAXABLE BUSINESS PROFITS OF THE ASSESS EE, BUT THE CORE ISSUE BEFORE US IS WHETHER SUCH A DEEMING FICT ION IS ENVISAGED UNDER THE SCHEME OF THE TRANSFER PRICING LEGISLATION OR ON THE FACTS OF THIS CASE. WE DONOT FIND SO. WE DONOT FIND ANY PROVISION IN LAW ENABLING SUCH DEEMING FICTION. IN VIEW OF THE ABOVE FACTS AND THE JUDGMENT OF COOR DINATE BENCH, THE AO IS DIRECTED TO VERIFY THE DATE OF CON VERSION OF ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 20 LOAN TO SHARE APPLICATION MONEY AND NOT TO MAKE ANY ADJUSTMENT ON ACCOUNT OF INTEREST POST CONVERSION O F LOAN TO SHARE APPLICATION MONEY AND ACCORDINGLY THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 23. AS REGARDS THE DISALLOWANCE UNDER SECTION 14A I N RESPECT OF THE EXPENDITURE INCURRED FOR EARNING EXEMPT INCO ME IS CONCERNED, WE NOTE THAT THE ASSESSEE HAS EARNED THE FOLLOWING INCOME IN THE ASSESSMENT YEARS 2009-10 TO 2011- 12:- XXXXXXXXXXXXXXXX 25. THE CONTENTION OF THE ASSESSEE IS THAT IN THE A BSENCE OF ANY SATISFACTION BEING RECODED DISALLOWANCE UNDER SECTI ON 14A CANNOT BE SUSTAINED. THE ALTERNATIVE CONTENTION OF THE LEARNED AR HAS BEEN THAT THE ADDITION IN ANY CASE CANNOT EX CEED THE EXEMPT INCOME. AS REGARDS FIRST CONTENTION THAT NO SATISFACTION HAS BEEN RECORDED WE NOTE FROM THE ASSESSMENT ORDER THAT THE AO HAS CONSIDERED THE EXPLANATION OF THE ASSESSEE A ND AFTER TAKING INTO CONSIDERATION THE EXPLANATION HE HAS IN VOKED RULE 8D. HAVING DONE SO, IT CANNOT BE SAID THAT THE AO H AS NOT TAKEN INTO CONSIDERATION THE EXPLANATION OF THE ASSESSEE. 26. HOWEVER, AS REGARDS THE SECOND CONTENTION OF TH E LEARNED AR THAT THE DISALLOWANCE CANNOT EXCEED THE EXEMPT I NCOME, WE ARE IN AGREEMENT WITH THIS CONTENTION. THIS VIEW IS SUPPORTED BY THE JUDGMENT OF THE HONBLE JURISDICTIONAL DELHI HI GH COURT IN THE CASE OF JOINT INVESTMENTS PVT. LTD. VERSUS COMMISSI ONER OF INCOME TAX [2015] 372 ITR 694 (DEL). ACCORDINGLY WE DIRECT THE AO TO RESTRICT THE ADDITION TO THE EXEMPT INCOME. A CCORDINGLY THIS GROUND IS PARTLY ALLOWED IN FAVOUR OF THE ASSE SSEE. 27. IN VIEW OF THE ABOVE FINDINGS THE ASSESSEES AP PEALS FOR THE A.Y. 2006-07 BEING ITA NO. 1086/DEL/2015, A.Y. 2007 -08 BEING ITA NO. 1087/DEL/2015, A.Y. 2008-09 BEING ITA NO. 1088/DEL/2015 ARE ALLOWED, APPEAL FOR A.Y. 2009-10 BEING ITA ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 21 NO. 1089/DEL/2015, A.Y. 2010-11 BEING ITA NO. 1090/ DEL/2015 AND A.Y. 2011-12 BEING ITA NO. 1091/DEL/2015 ARE PA RTLY ALLOWED. 2.3. WE FIND THAT IN THE PRESENT APPEAL, THE ISSUE RELATES TO DISALLOWANCE OF RS.27,19,404/- MADE U/S 14A(2) O F THE ACT READ WITH RULE-8D OF THE RULES. CONSIDERING THE TOTALITY OF FACTS, WE ARE OF THE VIEW THAT AT BEST, IF ANY DISALLOWANCE COULD BE MADE THAT CANNOT EXCEED THE EXEMPT INCOME. THE TRIBUNAL IN THE CASE OF NIMBUS COMMUNICATION LTD. (SUPRA) HAS MADE AN ELABORATE DI SCUSSION AND THEREAFTER REACHED TO A PARTICULAR CONCLUSION, THUS , THE RATIO LAID DOWN IN THE CASES MENTIONED BY THE LD. COUNSEL FOR THE ASSESSEE, CLEARLY SUPPORTS THE CASE OF THE ASSESSEE. SO FAR A S, THE CASE OF BABA GLOBAL LTD. VS DCIT (SUPRA), RELIED UPON BY LD. DR IS CONCERNED, EVEN IN THAT CASE IN PARA-26, THERE IS CATEGORICAL FINDI NG THAT THE DISALLOWANCE CANNOT EXCEED THE EXEMPT INCOME. THE R ATIO LAID DOWN IN JOINT INVESTMENT PVT. LTD. VS CIT (2015) 372 ITR 694 (DEL.) CLEARLY SUPPORTS THE CASE OF THE ASSESSEE, THUS THE CASE RE LIED UPON BY LD. DR IS OF NOT MUCH HELP TO THE REVENUE. THUS, THE AP PEAL OF THE ASSESSEE IS ALLOWED. FINALLY, THE APPEAL OF THE ASSESSEE IS ALLOWED. 2.2. IF THE OBSERVATION MADE IN THE ASSESSMENT ORDER, LEADING TO ADDITION MADE TO THE TOTAL INCOME , CONCLUSION DRAWN IN THE IMPUGNED ORDER, CONCLUSION DRAWN IN THE AFORESAID ORDER OF THE TRIBUNAL DATED 21/04/2017, MATERIAL AVAILABLE ON RECORD, ASSERTION S MADE BY THE LD. RESPECTIVE COUNSEL, IF KEPT IN JUXT APOSITION AND ANALYZED, WE NOTE THAT THE HON'BLE JURISDICTION AL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. 1 94 TAXMAN 203 HAS CLEARLY HELD THAT RULE -8D OF THE RU LES IS APPLICABLE FROM ASSESSMENT YEAR 2008-09. IN THE PR ESENT APPEAL, THE TOTAL DIVIDEND INCOME EARNED BY THE ASS ESSEE IS RS.3,93,161/-. THEREFORE, IF ANY DISALLOWANCE COULD BE MADE THAT CANNOT EXCEED THE EXEMPT INCOME. THE TRIB UNAL CONSIDERING THE DECISION OF NIMBUS COMMUNICATION LT D. HAS MADE AN ELABORATE DISCUSSION IN THE AFORESAID O RDER ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 22 DATED 21/04/2017. THE RATIO LAID DOWN IN JOINT INVESTMENT PVT. LTD. VS CIT (2015) 372 ITR 694 (DEL .) ALSO SUPPORTS THE CASE OF THE ASSESSEE. AS AGREED BY TH E LD. COUNSEL FOR THE ASSESSEE THAT THE DISALLOWANCE CANN OT BE MORE THAN THE DIVIDEND INCOME OF RS.3,93,161/-, WE DIRECT THE LD. ASSESSING OFFICER THAT AT BEST THE DISALLOW ANCE MAY BE RESTRICTED TO THE DIVIDEND INCOME EARNED BY THE ASSESSEE. THE APPEAL OF THE ASSESSEE IS ACCORDINGLY DISPOSED OF IN TERMS INDICATED HEREINABOVE. FINALLY, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOW ED. 2.2. IF THE RATIO LAID DOWN IN THE AFORESAID ORDER IS KEPT IN JUXTAPOSITION WITH THE FACTS OF THE PRESENT ISSUE BEFORE US, WE NOTE THAT THE LD. COMMISSIONER OF INC OME TAX (APPEAL) UPHELD THE DISALLOWANCE U/S 14A OF THE ACT AMOUNTING TO RS.8,83,323/-. THE CLAIM OF THE ASSESS EE IS THAT THE ASSESSEE DID NOT INCUR ANY EXPENDITURE ON THE EXEMPTED INCOME OF RS.2,14,457/-, BEING DIVIDEND IN COME. IT IS NOTED THAT RULE-8D WAS APPLIED BY THE ASSESSI NG OFFICER. CONSIDERING THE TOTALITY OF FACTS, WE ARE IN AGREEMENT WITH THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE DISALLOWANCE CANNOT BE MORE THAN THE DIVIDEND INCOME. IN THE PRESENT APPEAL, THE DIVIDEN D INCOME IS RS.2,14,547/-, THEREFORE, THE LD. ASSESSI NG OFFICER IS DIRECTED TO RESTRICT THE DISALLOWANCE TO THE EXTENT ITA NOS. 6675 & 6676/MUM/2013 MADHUSHA HOLDINGS P. LTD. 23 OF DIVIDEND INCOME EARNED BY THE ASSESSEE. THUS, TH IS GROUND OF THE ASSESSEE IS PARTLY ALLOWED. NO OTHER GROUND WAS AGITATED BY THE LD. COUNSEL FOR THE ASSESSEE. FINALLY, THE APPEALS OF THE ASSESSEE ARE DISPOSED O FF IN TERMS INDICATED HEREINABOVE. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF THE LD. REPRESENTATIVE FROM BOTH SIDES AT THE CONCLUSION OF THE HEARING ON 25/01/2018. SD/- SD/- ( RAJESH KU MAR ) (JOGINDER SINGH) '!# / ACCOUNTANT MEMBER $!# /JUDICIAL MEMBER MUMBAI; ( DATED : 25/01/2018 F{X~{T? P.S / /. . . %$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. *+,- / THE APPELLANT (RESPECTIVE ASSESSEE) 2. ./ ,- / THE RESPONDENT. 3. 0 0 1$ ( *+ ) / THE CIT, MUMBAI. 4. 0 0 1$ / CIT(A)- , MUMBAI, 5. 34.$ ! , 0 *+'*! 5 , / DR, ITAT, MUMBAI 6. 6'7 / GUARD FILE. / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI