SAURASHTRA FUELS P.LTD, MUMBAI V. DCIT CIR 3(3), MUMBAI

ITA 7273/MUM/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3293 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 5 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-06-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 25-02-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 07-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RITESH MISHRADR
• Assessee Lawyers: B V JHAVERI
• Keywords: Capital asset; Business expenditure; Opportunity of being heard; Principle of natural justice; Diversion of income; Earning of tax free income; Retrospective amendment; Question of law; Cost of acquisition
• Section: 143(3); 14A; 115JB; 37

Judgement Text

E IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO. 7273-74 /MUM/2012 ( / ASSESSMENT YEAR : 2007-08 & 2009-10) SAURASHTRA FUELS PRIVATE LIMITED, C/O M/S KUCHERIA & ASSOCIATES, 59, JOLLY MAKER NO.-2 NARIMAN POINT, MUMBAI-400021 / V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(3) , 6 TH FLOOR, AAYAKAR BHAWAN, MUMBAI-400 020 ./ PAN : AAACS7271G ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY SHRI B.V.JHAVERI REVENUE BY : SHRI RITESH MISHRA(D.R.) / DATE OF HEARING : 08-03-2016 / DATE OF PRONOUNCEMENT : 06-06-2016 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER THESE TWO APPEALS, FILED BY THE ASSESSEE COMPANY, BEING ITA NO. 7273/MUM/2012 AND ITA NO. 7274/MUM/2012, ARE DIRECT ED AGAINST TWO SEPARATE APPELLATE ORDERS BOTH DATED 26-09-2012 PAS SED BY LEARNED COMMISSIONER OF INCOME TAX (APPEALS)- 7, MUMBAI (HE REINAFTER CALLED THE CIT(A)), FOR THE ASSESSMENT YEAR 2007-08 AND 2009- 10 RESPECTIVELY, THE APPELLATE PROCEEDINGS BEFORE THE LEARNED CIT(A) ARI SING FROM THE ASSESSMENT ORDERS DATED 26-10-2009 AND 25-03-2011 PASSED BY TH E LEARNED ASSESSING OFFICER (HEREINAFTER CALLED THE AO) U/S 143(3) OF THE INCOME TAX ACT,1961 (HEREINAFTER CALLED THE ACT) FOR THE ASSESSMENT Y EARS 2007-08 AND 2009-10 RESPECTIVELY. ITA 7273- 74/MUM/2012 2 2. FIRST WE SHALL DISPOSE OF APPEAL FOR THE ASSESSM ENT YEAR 2007-08 IN ITA NO. 7273/MUM/2012. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE COMPANY IN THE MEMO OF APPEAL FILED WITH THE INCOME TAX APP ELLATE TRIBUNAL, MUMBAI (HEREINAFTER CALLED THE TRIBUNAL) IN ITA NO. 7273 /MUM/2012 FOR THE ASSESSMENT YEAR 2007-08 READS AS UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED C.I.T. (A) HAS ERRED CONFIRMING THE ADDITION OF RS.1,19,77,254/- BEING DISALLOWANCE U/S 14A. YOUR APPELLANT PRAYS THAT THE SAME BE DELETED. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF RS.11,55,354/- BEING PMS MANAGEMENT FEE. YOUR APPELLANT PRAYS THAT THE SAME BE DELETED.. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY IS ENGAGED IN BUSINESS OF MANUFACTURING OF LOW ASH METALLURGICAL COKE. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) READ WITH SECTION 143(2) OF THE ACT, THE ASSESSEE COMPANY WAS ASKED B Y THE AO TO GIVE DETAILS OF EXPENSES INCURRED FOR EARNING EXEMPT INCOME AND ALS O ASKED BY THE AO THAT WHY EXPENSES INCURRED AND CLAIMED IN RESPECT OF EXE MPT INCOME SHOULD NOT BE DISALLOWED AS PER PROVISIONS OF SECTION 14A OF T HE ACT READ WITH RULE 8D OF INCOME TAX RULES, 1962. THE ASSESSEE COMPANY SUBMIT TED THAT RULE 8D OF INCOME TAX RULES,1962 CANNOT BE APPLIED RETROSPECTI VELY. THE AO REJECTED THE CONTENTIONS OF THE ASSESSEE COM PANY AND HELD THAT FINANCE ACT,2001 INTRODUCED SECTION 14A OF THE ACT WITH RETROSPECTIVE EFFECT FROM 01-04-1962 WHICH CLARIFIES THAT NO DEDUCTION S HALL BE ALLOWED TO THE TAX- PAYER IN RESPECT OF THE EXPENDITURE INCURRED BY THE TAXPAYER IN RELATION TO THE ITA 7273- 74/MUM/2012 3 INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . THE AO RELIED UPON THE DECISION OF THE ITAT, MUMBAI IN THE CASE OF GHERZI EASTERN LIMITED IN ITA NO 6562/BOM/94 DATED 23-09-2002 WHEREIN THE ITAT HELD THAT IT CANNOT BE DENIED THAT SOME ADMINISTRATIVE EXPENDITURE WAS DEF INITELY ATTRIBUTABLE TOWARDS EARNING OF THIS DIVIDEND INCOME AND THAT HA D TO BE DEDUCTED WHILE ALLOWING DEDUCTION U/S 80M OF THE ACT. THE RELIANCE WAS ALSO PLACED BY THE AO ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF DISTRIBUTORS(BARODA) PRIVATE LIMITED V. UOI ((1985) 155 ITR 120(SC)) AND BOMBAY HIGH COURT IN THE CASE OF MAGGANLAL CHAGGANL AL PRIVATE LIMITED ((1999) 236 ITR 456 (BOM.)) WHEREBY IT HAS BEEN HEL D THAT EXPENDITURE MAY BE ATTRIBUTABLE TO DIVIDEND INCOME. THE AO ALSO REL IED UPON THE DECISION OF SPECIAL BENCH , ITAT , MUMBAI IN THE CASE OF DAGA C APITAL MANAGEMENT PRIVATE LIMITED (2008) 312 ITR (AT)1(MUM) TO HOLD T HAT THE PROVISIONS OF RULE 8D OF INCOME TAX RULES, 1962 ARE RETROSPECTIVE IN N ATURE. THE AO WORKED OUT DISALLOWANCE UNDER RULE 8D OF INCOME TAX RULES, 196 2 AS UNDER: I) EXPENDITURE DIRECTLY RELATED TO EXEMPT INCOME = NI L II) INTEREST PAID A X B/C = X A = INTEREST = RS.22,97,73,171/- B = AVERAGE VALUE OF INVESTMENT = RS.24,93,62,66 7/- C = AVERAGE OF TOTAL INVESTMENT = RS.533,96,54,6 03/- = RS.1,07,30,441/- III) % OF AVERAGE VALUE OF INVESTMENTS % OF RS.24,93,62,667 = RS.12,46,813 AGGREGATE OF (I),(II) AND(III) = 0+10730441+1246813 = RS.1,19,77,254/- ITA 7273- 74/MUM/2012 4 IN VIEW OF THE ABOVE , AN AMOUNT OF RS.1,19,77,254/ - WAS TREATED BY THE AO AS AN EXPENDITURE INCURRED FOR EARNING EXEMPT INCOM E AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE COMPANY U/S 14A OF THE A CT READ WITH RULE 8D OF INCOME TAX RULES, 1962 AND THE SAME AMOUNT WAS ALSO ADDED TO BOOK PROFIT U/S 115JB OF THE ACT BY THE AO , VIDE ASSESSMENT OR DERS DATED 26.10.2009 PASSED U/S 143(3) OF THE ACT. PMS MANAGEMENT FEE THE AO OBSERVED FROM THE ACCOUNTS OF THE ASSESSEE C OMPANY THAT THE ASSESSEE COMPANY HAS CLAIMED AN EXPENSES OF RS.11,5 5,354/- IN ITS ACCOUNTS AS PORTFOLIO MANAGEMENT SERVICES FEE AND INCOME AR ISING FROM PORTFOLIO MANAGEMENT IS OFFERED AS CAPITAL GAINS. THE ASSESSE E COMPANY HAS PAID MONEY TO THE SERVICE PROVIDER TO INVEST MONEY ON BE HALF OF THE ASSESSEE COMPANY IN THE STOCK MARKET FOR WHICH PORTFOLIO MAN AGEMENT FEE HAS BEEN CHARGED BY THE SERVICE PROVIDER. IT WAS FURTHER OBS ERVED BY THE AO THAT THE TAX HAS NOT BEEN DEDUCTED AT SOURCE ON THESE PAYMEN TS OF PROFESSIONAL FEE. THE ASSESSEE COMPANY WAS ASKED TO EXPLAIN BY THE AO THAT WHY THESE PMS MANAGEMENT FEES BE NOT DISALLOWED AS IT WAS INCURRE D FOR EARNING CAPITAL GAINS. THE ASSESSEE COMPANY SUBMITTED THAT PAYMENTS WERE RETAINED BY THE SERVICE PROVIDER WITHOUT DEDUCTION OF TAX AT SOURCE AND ALSO SUBMITTED THAT THE SAME SHOULD BE ALLOWED AGAINST CAPITAL GAINS. THE AO HELD THAT THE EXPENSES ARE NOT THE BUSINESS EXPENSES OF THE ASSESSEE COMPANY AS THE GAINS ON SHARES IS TAXABLE UNDER THE HEAD CAPITAL GAINS. THE EXPENDITURE IS INCURRED IN RESPECT OF SERVICE CHARG ES COLLECTED BY THE PORTFOLIO MANAGEMENT SERVICE PROVIDER FOR DOING TRANSACTION O N BEHALF OF THE ASSESSEE COMPANY AND MAINTAINING THE PORTFOLIO OF THE ASSESS EE COMPANY . THE AO HELD THAT THERE IS NO PROVISION IN THE ACT TO ALLOW THE DEDUCTIONS FOR PMS MANAGEMENT FEE UNDER THE HEAD CAPITAL GAINS . THE AO DISALLOWED THE ITA 7273- 74/MUM/2012 5 EXPENSES ON THIS GROUND AS WELL ON THE GROUND THAT TAX WAS NOT DEDUCTED AT SOURCE ON THESE PAYMENT, VIDE ASSESSMENT ORDER DATE D 26-10-2009 PASSED BY THE AO U/S 143(3) OF THE ACT. 5. AGGRIEVED BY THE ASSESSMENT ORDERS DATED 26-10-2 009 PASSED BY THE AO U/S 143(3) OF THE ACT, THE ASSESSEE COMPANY FILED F IRST APPEAL BEFORE THE LEARNED CIT(A). 6. BEFORE THE LEARNED CIT(A), THE ASSESSEE COMPANY SUBMITTED THAT DIVIDEND INCOME RECEIVED BY THE ASSESSEE COMPANY IN RESPECT OF INVESTMENT IN SHARES AND MUTUAL FUNDS WAS RS.8,92,887/- IN RESPECT OF WH ICH THE ASSESSEE COMPANY HAS CLAIMED EXEMPTION U/S 10(34) AND 10(35) OF THE ACT. THE AO HAS ERRED IN INVOKING SECTION 14A OF THE ACT READ W ITH RULE 8D OF INCOME TAX RULES, 1962. THE AO ERRED IN RELYING ON THE DECISIO N OF SPECIAL BENCH OF THE ITAT, MUMBAI IN THE CASE OF DAGA CAPITAL MANAGEMENT PRIVATE LIMITED (SUPRA) WHEREBY THE SPECIAL BENCH OF THE ITAT HAS H ELD THAT RULE 8D OF INCOME TAX RULES, 1962 IS RETROSPECTIVE, WHILE HON BLE BOMBAY HIGH COURT HAS DISAPPROVED THE AFORE-SAID DECISION OF THE SPEC IAL BENCH OF ITAT, MUMBAI, IN THE CASE OF GODREJ AND BOYCE MANUFACTURI NG COMPANY LIMITED V. DCIT (2010) 328 ITR 81(BOM.) WHEREBY HONBLE BOMBAY HIGH COURT HELD THAT RULE 8D OF INCOME TAX RULES,1962 WAS NOTIFIED ON 24 -03-2008 AND HENCE APPLICABLE WITH EFFECT FROM ASSESSMENT YEAR 2008-09 . THUS, IT WAS SUBMITTED BY THE ASSESSEE COMPANY BEFORE THE LEARNED CIT(A) T HAT THE AO WAS NOT JUSTIFIED IN INVOKING SECTION 14A OF THE ACT READ W ITH RULE 8D OF INCOME TAX RULES, 1962 FOR THE INSTANT ASSESSMENT YEAR I.E.200 7-08. AS PER THE ASSESSEE COMPANY , THE HONBLE BOMBAY HIGH COURT HAD LAID DO WN THE PROPOSITION THAT ALL EXPENDITURE INCURRED IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE PROVISIONS OF THE ACT HAS TO BE DISALLOWED U/S 14A OF THE ACT. THUS, NO DEDUCTION OF THE EXPENDITURE CAN BE ALLOWED INCURRED BY THE TAX-PAYER IN RELATION TO THE INCOME WHICH DOES NOT PART FORM OF THE TOTAL ITA 7273- 74/MUM/2012 6 INCOME UNDER THE ACT. IT WAS HELD BY HONBLE BOMBAY HIGH COURT THAT EVEN FOR THE ASSESSMENT YEARS PRIOR TO 2008-09, THE AO M UST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FA CTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE TAX-PAYE R TO PLACE ALL GERMANE MATERIAL ON RECORD. THE HONBLE BOMBAY HIGH COURT I N GODREJ AND BOYCE MANUFACTURING COMPANY LIMITED(SUPRA) REMANDED THE P ROCEEDINGS FOR ASSESSMENT YEAR 2007-08 TO THE AO TO DETERMINE WHET HER THE TAX-PAYER HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RE LATION TO THE DIVIDEND INCOME /INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED U/S 14A OF THE ACT FOR WHICH THE AO C AN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. THE ASSESSEE COMPANY SUBMITTED THAT AO ERRED IN MAKING DISALLOWANCE OF RS.1,19,77,254/- U/S 14A OF THE ACT. THE AO ERRED IN ASSUMING THAT PART OF THE INTEREST OF R S.22.98 CRORES HAS BEEN PAID TO BANKS ON TERM LOANS, CC LIMIT WAS RELATING TO THE ACQUISITION OF THE INVESTMENT IN SHARES AND MUTUAL FUNDS. THE ASSESSEE COMPANY SUBMITTED THAT NO BORROWED FUNDS HAVE BEEN UTILIZED FOR THE P URPOSES OF MAKING INVESTMENTS IN SHARES/MUTUAL FUNDS AND NO PART OF I NTEREST CAN BE DISALLOWED. THE ASSESSEE COMPANY SUBMITTED THAT PAI D UP CAPITAL AND RESERVES OF THE ASSESSEE COMPANY AS AT 31-03-2006 W AS RS. 77.16 CRORES AND THE PAID UP CAPITAL AND RESERVES AS ON 31-03-2007 W AS RS.58.36 CRORES. AS AGAINST THE OWN FUNDS AS DETAILED ABOVE, THE INVEST MENT IN SHARES/MUTUAL FUNDS IS RS. 7.52 CRORES AS AT 31-03-2007. OUT OF T HE ABOVE INVESTMENTS , RS.1.10 CRORES IS IN SHARES OF FOREIGN COMPANY, DIV IDEND FROM WHICH IS LIABLE TO TAX UNDER THE PROVISIONS OF THE ACT AND HENCE TH E DIVIDEND INCOME FROM THESE FOREIGN SHAREHOLDING IS NOT EXEMPT INCOME UND ER THE PROVISIONS OF THE ACT. FURTHER, RS. 6 CRORES IS INVESTED IN SHARES OF SUBSIDIARY COMPANIES WHICH IS AN INVESTMENT MADE NOT FOR EARNING DIVIDEND , BU T TO ENABLE THE ASSESSEE COMPANY TO CARRY ON BUSINESS IN A MORE EFFICIENT MA NNER. THUS, THE INVESTMENT IN SHARES OF OTHER COMPANIES AND MUTUAL FUND IS TO THE TUNE OF RS.43.52 LACS IN RESPECT OF WHICH DIVIDEND INCOME H AS BEEN RECEIVED. THE ITA 7273- 74/MUM/2012 7 ASSESSEE COMPANY SUBMITTED THAT NO PORTION OF THE I NTEREST CAN BE DISALLOWED AS THE ENTIRE INVESTMENT IN SHARES AND MUTUAL FUNDS HAVE BEEN MADE OUT OF OWN FUNDS AND NOT OUT OF BORROWED FUNDS. THE ASSESS EE COMPANY RELIED UPON FOLLOWING JUDGMENTS IN SUPPORT OF ITS CONTENTIONS: A) DCIT V. MAHARASHTRA SEAMLESS LIMITED 138 TTJ 244(DE L) B) YATISH TRADING COMPANY PRIVATE LIMITED V. ACIT 129 ITD 237(MUM.) C) G.D.METSTEEL PRIVATE LIMITED V. ACIT 47 SOT 62(MUM. ) D) CIT V. WINSOME TEXTILES INDUSTRIES LIMITED 319 ITR 204(P&H HC) E) CIT V. HERO CYCLES 323 ITR 518(P&H) F) VOLTAS LIMITED V. JCIT 125 TTJ 601(MUM.) G) K.J.ARORA V. DCIT 180 TAXMAN 131(DEL.) H) DISHMAN PHARMACEUTICALS & CHEMICALS LIMITED V. DCIT 45 SOT 37(AHD.) I) ACIT V. DELITE ENTERPRISES PRIVATE LIMITED 135 TTJ 663(MUM.) J) GODREJ AND BOYCE MANUFACTURING COMPANY LIMITED 328 ITR 81 (BOM.) THE ASSESSEE COMPANY FURTHER SUBMITTED THAT OUT OF TOTAL EXPENDITURE OF RS 314.76 CRORES, THE DIRECT EXPENDITURE ON PURCHASE O F GOODS , MATERIAL CONSUMED AND OPERATIONAL EXPENDITURE WAS RS.306.33 CRORES, WHICH IS EVIDENT FROM THE FINANCIAL STATEMENTS. THE ADMINIST RATIVE EXPENSES ARE TO THE TUNE OF RS.8.43 CRORES , WHICH INCLUDE SELLING AND DISTRIBUTION EXPENSES OF RS.2.53 CRORES, RS 36 LACS FOR LEASE RENT RELATING TO MANUFACTURING ACTIVITY AND BALANCE RS 5.54 CRORES CAN BE CONSIDERED AS IND IRECT ADMINISTRATIVE EXPENSES. IT WAS SUBMITTED THAT NONE OF THESE EXPEN SES CAN BE CONSIDERED TO BE INCURRED FOR EARNING DIVIDEND INCOME . THE TOTAL REVENUE OF THE ASSESSEE COMPANY IS RS.314.32 CRORES WHICH INCLUDE DIVIDEND INCOME OF RS.8.93 LACS WHICH FORM 0.03% OF TOTAL REVENUE. THUS, THE ASSESS EE COMPANY SUBMITTED THAT DISALLOWANCE OF 0.03% OF THE INDIRECT EXPENDIT URE WHICH COMES TO RS. ITA 7273- 74/MUM/2012 8 16,621/- SHOULD BE MADE. IT WAS SUBMITTED THAT RS.1 7,000/- BE CONSIDERED FOR DISALLOWANCE AS EXPENSES RELATABLE TO THE EARNI NG OF DIVIDEND INCOME. THE LEARNED CIT(A) HELD THAT RULE 8D OF INCOME TAX RULES, 1962 IS APPLICABLE FROM THE ASSESSMENT YEAR 2008-09 ONWARDS AND IS NOT APPLICABLE FOR THE INSTANT ASSESSMENT YEAR 2007-08 UNDER APPEAL, AS HE LD BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MANUFACT URING COMPANY LIMITED(SUPRA). THUS, THE DIRECTIONS WERE GIVEN TO THE AO BY THE LEARNED CIT(A) TO WORK OUT DISALLOWANCE U/S 14A OF THE ACT OF THE EXPENSES INCURRED FOR EARNING EXEMPT INCOME IN ACCORDANCE WITH THE DE CISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MANUFACT URING COMPANY LIMITED(SUPRA). THE AO WAS DIRECTED BY LEARNED CIT( A) TO VERIFY THE SOURCES OF INVESTMENT IN ALL SUCH ASSETS, WHICH GENERATE EXEMP T INCOME VIS--VIS THE BORROWED FUNDS OF THE ASSESSEE COMPANY. THE LEARNED CIT(A) DIRECTED THE AO TO VERIFY THE CASH FLOW STATEMENT OF THE ASSESSEE C OMPANY TO ASCERTAIN THE EXPENDITURE IN RELATION TO THE EXEMPT INCOME IN ACC ORDANCE WITH THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MANUFACTURING COMPANY LIMITED(SUPRA), VIDE APPELLATE ORDERS DATED 26-09-2012 PASSED BY LEARNED CIT(A). PMS MANAGEMENT FEE THE ASSESSEE COMPANY SUBMITTED THAT IT HAS EARNED S HORT TERM CAPITAL GAINS OF RS.37,21,305/- AND IT ENTRUSTED THE WORK RELATIN G TO THE INVESTMENTS IN SHARES/MUTUAL FUNDS FOR THE PURPOSES OF PURCHASING AND SELLING OF SHARES AND UNITS OF MUTUAL FUNDS TO M/S KOTAK SECURITIES L IMITED WHO WERE RENDERING PORTFOLIO MANAGEMENT SERVICES. THE ASSESS EE COMPANY PAID RS.11,55,354/- FOR THE ABOVE PMS SERVICES. THE ASSE SSEE COMPANY SUBMITTED THAT PORTFOLIO MANAGERS USED TO PURCHASE SHARES/UNI TS AND SELL THE SAME AND ITA 7273- 74/MUM/2012 9 RENDER THE ACCOUNT FOR THE SAME TO THE ASSESSEE COM PANY. THE PORTFOLIO MANAGERS USED TO DEDUCT THEIR FEES OUT OF SERVICE O N SALE OF SHARES/UNITS OF MUTUAL FUNDS AND BALANCE WAS REMITTED TO THE ASSESS EE COMPANY. THE ASSESSEE COMPANY SUBMITTED THAT ABOVE EXPENDITURE O F RS.11,55,354/- IS AN ALLOWABLE EXPENDITURE WHILE COMPUTING SHORT TERM CA PITAL GAINS AND THE AO ERRED IN DISALLOWING THE SAME. THE ASSESSEE COMPANY RELIED UPON DECISION OF PUNE BENCH OF THE TRIBUNAL IN CASE OF KRA HOLDINGS AND TRADING PRIVATE LIMITED (2011) 54 SOT 493 (PUNE TRIB. ) TO CONTEND THAT THE PMS EXPENSES ARE ALLOWABLE EXPENSES WHILE COMPUTING CAPITAL GAIN S ON SALE OF SHARES AS THESE EXPENSES ARE INCURRED FOR SALE AND PURCHASE O F SECURITIES. THE ASSESSEE COMPANY SUBMITTED THAT PROVISIONS OF SECTION 40(A)( IA) OF THE ACT ARE INVOKED FOR THE PURPOSES OF DISALLOWANCE ON THE GROUNDS THA T TAX WAS NOT DEDUCTED AT SOURCE ON PMS CHARGES PAID BY THE ASSESSEE COMPANY WHILE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT ARE NOT APPLICABLE TO COST OF ACQUISITION U/S. 48 OF THE ACT AND THE SAID SECTION 40(A)(IA) OF THE ACT C AN BE INVOKED FOR COMPUTING DISALLOWANCE UNDER THE HEAD INCOME FROM BUSINESS O R PROFESSION AND NO DISALLOWANCE CAN BE MADE FOR COMPUTATION OF INCOME UNDER THE HEAD CAPITAL GAINS. THE LEARNED CIT(A) UPHELD THE ACTION OF THE AO AND HELD THAT THERE ARE NO PROVISIONS U/S 48 OF THE ACT TO ALLOW PMS CHARGES P AID BY THE ASSESSEE COMPANY AS THE SECTION 48 OF THE ACT CONTEMPLATE ON LY TWO DEDUCTIONS NAMELY, I) COST OF ACQUISITION AND COST OF IMPROVEM ENTS AND II) COST INCURRED WHOLLY AND EXCLUSIVELY RELATED TO TRANSFER. THUS, T HE LEARNED CIT(A) AFFIRMED THE ORDERS OF THE AO AND HELD THAT NO DEDUCTION IS PERMITTED UNDER THE ACT OF PMS FEE PAID BY THE ASSESSEE COMPANY, VIDE LEARNED CIT(A) APPELLATE ORDERS DATED 26-09-2012. 7. AGGRIEVED BY THE APPELLATE ORDERS DATED 26-09-20 12 PASSED BY THE LEARNED CIT(A) , THE ASSESSEE COMPANY FILED SECOND APPEAL W ITH THE TRIBUNAL. ITA 7273- 74/MUM/2012 10 8. THE LEARNED COUNSEL FOR THE ASSESSEE COMPANY REI TERATED ITS SUBMISSIONS BEFORE THE TRIBUNAL AS WERE MADE BEFORE THE AUTHORI TIES BELOW, WHICH ARE NOT REPEATED FOR SAKE OF BREVITY. THE LEARNED COUNSEL F OR THE ASSESSEE COMPANY SUBMITTED THAT THE ASSESSEE COMPANY HAS PAID UP CAP ITAL AND RESERVES OF RS. 58,35,86,981/- AS AT 31-03-2007 , WHILE THE SHARE C APITAL AND RESERVES AS AT 31-03-2006 WAS RS. 77,16,10,984/- . THE LEARNED COU NSEL DREW OUR ATTENTION TO PAGE 6 OF PAPER BOOK FILED BEFORE THE TRIBUNAL W HICH IS AN AUDITED BALANCE SHEET OF THE ASSESSEE COMPANY . THE LEARNED COUNSEL SUBMITTED THAT THE INVESTMENTS WERE ONLY RS.7,52,57,643/- AS PER AUDIT ED BALANCE SHEET AS AT 31-03-2007(PAPER BOOK/PAGE 6) . THE LEARNED COUNSEL SUBMITTED THAT NET OWNED FUNDS OF THE ASSESSEE COMPANY OF RS. 58.36 CR ORES AS AT 31-03-2007 ARE MORE THAN SUFFICIENT TO COVER THE INVESTMENTS O F RS.7.53 CRORES MADE BY THE ASSESSEE COMPANY AS AT 31-03-2007 AND HENCE THE RE IS A PRESUMPTION THAT THE INVESTMENTS ARE MADE BY THE ASSESSEE COMPA NY OUT OF THE NET OWNED FUNDS OF THE ASSESSEE COMPANY AND NO BORROWED FUNDS WERE UTILIZED BY THE ASSESSEE COMPANY FOR MAKING INVESTMENT OF RS.7.53 C RORES, RELYING ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F CIT V .RELIANCE UTILITIES AND POWER LIMITED , (2009) 313 ITR 340(BOM. HC) , C IT V. HDFC BANK LIMITED IN ITA NO 330 OF 2012 (366 ITR 505(BOM. HC) ) AND CIT V. HDFC BANK LIMITED(WP NO. 1753 OF 2016)((2016) 67 TAXMANN .COM 42(BOM.HC). THE LEARNED COUNSEL ALSO CONTENDED THAT THE INVESTMENTS OF RS1.10 CRORES HAS BEEN MADE IN FOREIGN SUBSIDIARY COMPANY WHEREBY DIV IDEND INCOME IS TAXABLE UNDER THE PROVISIONS OF THE ACT. HE DREW OUR ATTENT ION TO PAGE 11 /PAPER BOOK FILED WITH THE TRIBUNAL WHICH IS SCHEDULE F : INVE STMENTS TO AUDITED FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR 2006-07 TO CONTEN D THAT RS.1,10,30,000/- IS INVESTMENT OF THE ASSESSEE COMPANY IN ITS FOREIGN S UBSIDIARY COMPANY NAMELY SAURASHTRA WORLD HOLDINGS PRIVATE LIMITED WHEREBY THE ASSESSEE COMPANY HOLD 2,50,000 SHARES @ USD 1/- EACH. HE FURTHER DRE W OUR ATTENTION TO THE SAME SCHEDULE TO CONTENT THAT THE ASSESSEE COMPANY HOLDS SHARES OF RS.1.98 ITA 7273- 74/MUM/2012 11 CRORES IN ITS INDIAN SUBSIDIARY SAURASHTRA FERROUS PRIVATE LIMITED WHEREBY THE OBJECTIVE IS NOT TO EARN EXEMPT INCOME. SIMILAR LY , IT WAS SUBMITTED WITH REFERENCE TO SCHEDULE F THAT INVESTMENT OF RS 4.0 0 CRORES IS MADE IN PREFERENCE SHARES OF ITS INDIAN SUBSIDIARY COMPANY SAURASHTRA FERROUS PRIVATE LIMITED . THUS, IT WAS SUBMITTED THAT OUT O F TOTAL INVESTMENTS OF RS.7.53 CRORES AS AT 31-03-2007, THE INVESTMENTS OF RS.41.84 LACS HAS BEEN MADE IN MUTUAL FUNDS WHILE INVESTMENTS OF RS.1.69 L ACS HAS BEEN MADE IN QUOTED SHARES, WHICH ARE MADE FOR EARNING DIVIDEND INCOME , WHILE REST OF THE INVESTMENTS ARE IN SUBSIDIARY COMPANIES WHICH ARE S TRATEGIC INVESTMENTS. THE LEARNED COUNSEL STATED BEFORE THAT IN ANY CASE NO BORROWED FUNDS ARE UTILIZED FOR MAKING ANY INVESTMENTS IN SHARES AND M UTUAL FUNDS AND HENCE THERE IS NO QUESTION OF DISALLOWANCE OF INTEREST EX PENDITURE UNDER PROVISIONS OF SECTION 14A OF THE ACT. THE LEARNED COUNSEL RELI ED UPON THE FOLLOWING DECISIONS : 1. CIT V. ORIENTAL STRUCTURES ENGINEERS PRIVATE LIM ITED , 35 TAXMANN.COM 210 (DEL. HC) 2. GARWARE WALL ROPES LIMITED V. ACIT 65 SOT 86, MU M-TRIB. 3.JM FINANCIAL LIMITED V. ACIT (ITA NO. 4521/MUM/20 12) 4. SH JIGAR P. SHAH V. ACIT IN ITA NO 4366/MUM/2014 DATED 24-02-2016) THE LEARNED COUNSEL HAS SUBMITTED WRITTEN SUBMISSIO NS BEFORE THE TRIBUNAL WHICH WE HAVE GONE THROUGH AND TAKEN NOTE OF WHILE DECIDING INSTANT APPEAL. PMS MANAGEMENT FEE THE LEARNED COUNSEL REITERATED ITS SUBMISSIONS AS W ERE MADE BEFORE THE AUTHORITIES BELOW WHICH ARE NOT REPEATED FOR SAKE O F BREVITY. THE LEARNED COUNSEL FOR THE ASSESSEE COMPANY RELIED UPON THE WR ITTEN SUBMISSIONS FILED BEFORE THE TRIBUNAL WHICH WE HAVE GONE THROUGH AND TAKEN NOTE OF WHILE ITA 7273- 74/MUM/2012 12 DECIDING THIS APPEAL. THE LEARNED COUNSEL FOR THE A SSESSEE COMPANY RELIED UPON DECISION OF PUNE TRIBUNAL KRA HOLDINGS AND TRA DING PRIVATE LIMITED (2012) 54 SOT 493-(PUNE TRIB.) TO CONTEND THAT THE PMS MANAGEMENT FEE EXPENSES ARE ALLOWABLE WHILE COMPUTING CAPITAL GAIN S CHARGEABLE TO TAX. IT WAS ALSO SUBMITTED THAT SECTION 40 OF THE ACT IS NO T APPLICABLE FOR COMPUTING INCOME CHARGEABLE TO TAX UNDER THE HEAD CAPITAL GAI NS. 9. LEARNED DR RELIED UPON THE ORDERS OF THE LEARNED CIT(A) AND SUBMITTED THAT THE LEARNED CIT(A) HAS GIVEN DIRECTIONS TO AO TO COMPUTE DISALLOWANCE U/S 14A OF THE ACT IN ACCORDANCE WITH THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MANUFACTURING COMPANY LIMITED(SUPRA) . THE LEARNED DR SUBMITTED THAT THE PMS MANAGEMENT FEE EXPENSES ARE NOT AN ALLOWABLE EXPENSES WHILE COMPUT ING CAPITAL GAINS UNDER THE PROVISIONS OF THE ACT. THE LEARNED DR RELIED UP ON THE ORDERS OF LEARNED CIT(A). 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD INCLUDING CASE LAWS RELIED UPON BY BOTH THE PARTIES . WE HAVE OBSERVED THAT THE ASSESSEE COMPANY HAS MADE INVESTMENTS OF RS.7.5 3 CRORES IN SHARES OF COMPANIES AND UNITS OF MUTUAL FUND AS AT 31-03-2007 , WHILE THE ASSESSEE COMPANY HAS NET OWNED FUNDS OF RS.58.36 CRORES AS A T 31-03-2007 AND RS. 77.16 CRORES AS AT 31-03-2006 WHICH IS APPEARING IN THE AUDITED BALANCE SHEET OF THE ASSESSEE COMPANY AS AT 31-03-2007 FILE D IN PAPER BOOK WITH THE TRIBUNAL . THUS, IT IS DEMONSTRATED VIDE AUDITED FI NANCIAL STATEMENTS THAT THE ASSESSEE COMPANYS NET OWNED FUNDS ARE MUCH HIGHER THAN THE INVESTMENTS IN SECURITIES MADE BY THE ASSESSEE COMPANY. THUS, A S HELD BY HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LIMITED( SUPRA) AND TWO AFORE-STATED DECISIONS IN THE CASE OF HDFC BANK LIMITED (SUPRA), WE ARE OF CONSIDERED VIEW THAT NO DISALLOWANCE CAN BE MADE BY THE REVENUE ON ACCOUNT OF THE INTEREST EXPENDITURE AS THERE IS A P RESUMPTION THAT THE ITA 7273- 74/MUM/2012 13 ASSESSEE COMPANY HAS UTILIZED NET OWNED FUNDS FOR T HE PURPOSES OF MAKING INVESTMENTS IN SHARES AND MUTUAL FUND , AS THE NET OWNED FUNDS ARE IN FAR EXCESS OF THE INVESTMENTS MADE BY THE ASSESSEE COMP ANY IN THE SHARES AND MUTUAL FUNDS. THUS, KEEPING IN VIEW THE FACTUAL MA TRIX OF THE INSTANT CASE AS EMERGING FROM THE RECORDS BEFORE US , IN OUR CONSID ERED VIEW , NO DISALLOWANCE U/S 14A OF THE ACT IS WARRANTED TOWARD S INTEREST EXPENDITURE INCURRED BY THE ASSESSEE COMPANY. SINCE, THE INSTAN T ASSESSMENT YEAR IS 2007-08 , RULE 8D OF INCOME TAX RULES, 1962 IS NOT APPLICABLE AS THE SAME IS APPLICABLE FROM THE ASSESSMENT YEAR 2008-09 AS HELD BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MANUFACT URING COMPANY LIMITED(SUPRA). HOWEVER, THERE IS A REASONABLE DISA LLOWANCE TO BE MADE U/S 14A OF THE ACT FOR ADMINISTRATIVE AND OTHER INDIREC T EXPENSES INCURRED BY THE ASSESSEE COMPANY FOR EARNING EXEMPT INCOME HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE COMPANY AS LAID DOWN U/S 14A(2) OF THE ACT. SO, FAR AS THE CONTENTIONS OF THE ASSESSEE COMPANY ARE CONCERNED W ITH RESPECT TO THE INVESTMENT OF RS.1,10,30,000/- MADE IN FOREIGN SUBS IDIARY COMPANY, WE ARE IN AGREEMENT WITH THE ASSESSEE COMPANY THAT SUCH IN VESTMENTS IN FOREIGN SUBSIDIARIES SHALL NOT BE INCLUDED FOR COMPUTING DI SALLOWANCE U/S 14A OF THE ACT, AS THE INCOME BY WAY OF DIVIDEND IS CHARGEABLE TO TAX AND IS NOT AN EXEMPT INCOME UNDER THE PROVISIONS OF THE ACT. THUS , THE SAID INVESTMENTS OF RS.1,10,30,000/- IN FOREIGN SUBSIDIARY SHALL NOT BE INCLUDED FOR COMPUTING DISALLOWANCE OF INDIRECT EXPENDITURE UNDER SECTION 14A OF THE ACT. HOWEVER, WITH RESPECT TO THE CONTENTIONS OF THE ASSESSEE COM PANY REGARDING OTHER INVESTMENTS IN SHARES AND MUTUAL FUNDS, IN OUR CONS IDERED VIEW, THE SAME SHALL BE INCLUDED FOR COMPUTING DISALLOWANCE U/S 14 A OF THE ACT HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE COMPANY AS CONTEMPLATED U/S 14A(2) OF THE ACT . THE CONTENTIONS OF THE ASSESSEE COMPAN Y THAT THE INVESTMENTS ARE MADE IN SUBSIDIARIES COMPANIES AND HENCE NO DISALLO WANCE OF INDIRECT EXPENDITURE BE MADE UNDER SECTION 14A OF THE ACT CA NNOT BE ACCEPTED. IT IS ALSO A MATTER OF FACT AS EMERGING FROM PAPER BOOK/P AGE 11 FROM SCHEDULE F OF ITA 7273- 74/MUM/2012 14 AUDITED FINANCIAL STATEMENTS THAT INVESTMENTS AS AT 31-3-2006 WAS RS.4.23 CRORES WHILE INVESTMENTS AS AT 31-03-2007 WAS RS. 7 .53 CRORES, I.E. RS. 3.30 CRORES NET INVESTMENTS WERE MADE IN THE PREVIOUS YE AR RELEVANT TO THE INSTANT ASSESSMENT YEAR. WE HAVE OBSERVED THAT THERE ARE DI VERGENT VIEW OF THE TRIBUNAL ON THIS ISSUE AND MATTER PURELY BEING FACT UAL IS TO BE DECIDED ON THE FACTS OF THE CASE KEEPING IN VIEW MANDATE OF SECTIO N 14A OF THE ACT WHEREBY THE AO SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN CURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL I NCOME UNDER THE ACT HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE AS C ONTEMPLATED U/S 14A(2) OF THE ACT AND HENCE THE MATTER IS TO BE DECIDED ON TH E FACTS OF EACH CASE. WE HAVE DULY CONSIDERED THE JUDICIAL DECISIONS RELIED UPON BY THE ASSESSEE COMPANY. REFERENCE IS DRAWN TO THE DECISION OF TRI BUNAL , MUMBAI IN THE CASE OF UMA POLYMERS LIMITED V. ACIT IN ITA NO 5366 /MUM/2013 FOR THE ASSESSMENT YEAR 2009-10, WHICH WAS AUTHORED BY ONE OF US(ACCOUNTANT MEMBER) WHEREBY TRIBUNAL HELD AS UNDER: 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD AND CASE LAWS RELIED UPON BY THE ASSESEE COMPANY. WE FIND THAT SECTION 14A OF THE ACT READ WITH RULE 8D(2)(III) OF THE INCOME TAX RULES,1962 IS APPLICAB LE FROM THE ASSESSMENT YEAR 2008-09 AS HELD BY THE HON'BLE BOMB AY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. 2 34 CTR 1. THE ASSESSEE COMPANY HAS MADE AVERAGE INVESTMENTS OF RS . 14.44 CRORES COMPUTED AS PER RULE 8D(2)(III) OF INCOME T AX RULES,1962 . THE INVESTMENTS MADE BY THE ASSESSEE COMPANY INCLUD ES THE INVESTMENT OF RS.19.37 CRORES MADE IN 100% SUBSIDIA RY COMPANY. 13. COMING TO THE SUBMISSION OF ASSESSEE THAT THESE ARE STRATEGIC INVESTMENTS AND NO DISALLOWANCE MADE TOWARDS THE AD MINISTRATIVE ITA 7273- 74/MUM/2012 15 EXPENSES. WE WOULD LIKE TO MENTION THAT UNDER NORMA L CIRCUMSTANCES STRATEGIC INVESTMENT ARE MADE FOR THE PURPOSES OF DOING BUSINESS WITH A LONG TERM HORIZON AND IN THAT CASE NO DOUBT THAT THE OBJECTIVE IS TO EARN PROFITS/RETURNS FROM THE INVESTMENT BUT NORMALLY THE SAID PROFIT / RETURNS WILL COME BY WAY OF DIVIDEND(S) WHEN THE COMPANIES COME INTO PROFIT AND DECLARE DIV IDEND TO THE SHAREHOLDERS . SUCH DIVIDENDS IN THE HANDS OF SHARE HOLDERS SHALL BE EXEMPT FROM TAX. NO DOUBT , THE RETURNS CAN ALSO COME BY WAY OF DIVESTMENTS OF THESE INVESTMENTS BUT NORMALLY ST RATEGIC INVESTMENTS ARE MADE WITH LONG TERM HORIZON WHERE O BJECTIVE IS TO SET UP BUSINESS AND GROWTH OF THESE BUSINESS OVER A LONG PERIOD OF TIME. IN THESE TYPE OF STRATEGIC INVESTMENTS, THE I NVESTOR HAS TO NORMALLY DEVOTE SIGNIFICANT TIME TO PLAN, EXECUTE A ND MONITOR THESE INVESTMENTS REGULARLY AND PERIODICALLY TO ENSURE TH AT THESE STRATEGIC INVESTMENTS ARE TURNED VIABLE AND PROFITA BLE. THESE INVESTMENT DECISIONS ARE VERY COMPLEX IN NATURE. TH EY REQUIRE SUBSTANTIAL MARKET RESEARCH, DAY-TO-DAY ANALYSIS OF MARKET TRENDS AND DECISIONS WITH REGARD TO ACQUISITION, RETENTION AND SALE OF SHARES AT THE MOST APPROPRIATE TIME. THEY REQUIRE H UGE INVESTMENT IN SHARES AND CONSEQUENTIAL BLOCKING OF FUNDS. BESI DES, INVESTMENT DECISIONS ARE GENERALLY TAKEN IN THE MEETINGS OF TH E BOARD OF DIRECTORS / SHAREHOLDERS FOR WHICH ADMINISTRATIVE A ND MANAGEMENT EXPENSES ARE INCURRED AND IN SOME BUSINE SSES REGULATORY APPROVALS ARE REQUIRED BEFORE SETTING UP THE SAME. THERE WILL BE REGULAR MONITORING OF THESE INVESTMEN TS WHICH ALSO MAY REQUIRE PARTICIPATION IN THE MEETINGS OF COMMIT TEES, BOARD OF DIRECTOR AND SHAREHOLDER MEETINGS. THERE WILL DEFIN ITELY BE AN ITA 7273- 74/MUM/2012 16 EXPENDITURE INCURRED TOWARDS ADMINISTRATIVE AND MAN AGEMENT COST ETC. TOWARDS PLANNING, EXECUTING AND MAINTAINI NG THESE INVESTMENTS . OUR VIEW IS FORTIFIED BY THE FOLLOWIN G DECISIONS : 1. THE OBSERVATION MADE BY HON'BLE SUPREME COURT IN THE CASE OF CIT V. WALFORT SHARE & STOCK BROKERS PVT. LTD . (2010) 326 ITR 1(SC) DEFINING THE SCOPE OF SECTION 14A OF THE ACT INCORPORATED RETROSPECTIVELY WEF 1ST APRIL 1962. THE RELEVANT OB SERVATIONS ARE REPRODUCED AS UNDER: 'THE INSERTION OF SECTION 14A WITH RETROSPECTIVE EFFECT IS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT T O ALLOW DEDUCTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST THE TAXABLE INCOME (SEE CIRCULAR NO. 14 OF 2001 DATED 22-11-2001). IN OTHER WORDS, SECTION 14A CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO TH E EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSE S INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCOME AND PARTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SECTION 14A , THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WAS BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDATE OF SECTION 14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AND AT THE SAM E TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEM PT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURR ED IN ITA 7273- 74/MUM/2012 17 RELATION TO EXEMPT INCOME. THE BASIC REASON FOR INS ERTION OF SECTION 14A IS THAT CERTAIN INCOMES ARE NOT INCLUDIBLE WHILE COMPUTING TOTAL INCOME AS THESE ARE EXEMPT UN DER CERTAIN PROVISIONS OF THE ACT. IN THE PAST, THERE H AVE BEEN CASES IN WHICH DEDUCTION HAS BEEN SOUGHT IN RESPECT OF SUCH INCOMES WHICH IN EFFECT WOULD MEAN THAT TAX INCENTI VES TO CERTAIN INCOMES WAS BEING USED TO REDUCE THE TAX P AYABLE ON THE NON-EXEMPT INCOME BY DEBITING THE EXPENSES, INCURRED TO EARN THE EXEMPT INCOME, AGAINST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOM E, I.E., GROSS INCOME MINUS THE EXPENDITURE. ON THE SAME ANALOGY T HE EXEMPTION IS ALSO IN RESPECT OF NET INCOME. EXPENSE S ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE INCOME . THIS IS THE PURPORT OF SECTION 14A . IN SECTION 14A , THE FIRST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UND ER THIS CHAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS OF INCOME AS PRESCRIBED UNDER CHAPTER IV WOULD FALL WITHIN SECTION 14A . THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT'. IT ME ANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT OF THE APP LICABILITY OF SECTION 14A . FURTHER, SECTION 14 SPECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE CHARGEABLE, AN INCOME HAS TO BE BROUGHT UNDER ONE O F THE FIVE HEADS. SECTIONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR THE PURPOSE OF CHARGEABILITY T O TAX UNDER THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL ITA 7273- 74/MUM/2012 18 INCOME CHARGEABLE TO TAX. THE PERMISSIBLE DEDUCTION S ENUMERATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOWED ONLY WITH REFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF THE ABOVE HEADS AND IS CHARGEABLE TO TAX. IF AN INCOME LIKE DIVIDEND INCOME IS NOT A PART OF THE TOTAL INCOME, THE EXPENDITURE/DEDUCTION THOUGH OF THE NATURE SPECIFIE D IN SECTIONS 15 TO 59 BUT RELATED TO THE INCOME NOT FORMING PART OF TOTAL INCOME COULD NOT BE ALLOWED AGAINST O THER INCOME INCLUDIBLE IN THE TOTAL INCOME FOR THE PURPO SE OF CHARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT O F EXPENDITURES BETWEEN TAXABLE AND NON-TAXABLE HAS, I N PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A . READING SECTION 14 IN JUXTAPOSITION WITH SECTIONS 15 TO 59 , IT IS CLEAR THAT THE WORDS 'EXPENDITURE INCURRED' IN SECTION 14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, I NTEREST, ETC. IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FO R (SEE SECTIONS 30 TO 37 ). 2. THE ITAT,MUMBAI IN THE CASE OF ACIT V. CITICORP FINANCE (INDIA ) LIMITED (2007)108 ITD 457 HAS NEGATED THE CONTENTIO N OF THE ASSESSEE THAT IT HAD INCURRED NO EXPENDITURE FOR EARNING HIG H DIVIDENDS AS UNDER: 'IT IS DIFFICULT TO ACCEPT THE HYPOTHESIS THAT ONE CAN EARN SUBSTANTIAL DIVIDEND INCOME WITHOUT INCURRING ANY E XPENSES WHATSOEVER INCLUDING MANAGEMENT OR ADMINISTRATIVE E XPENSES. BY SAME LOGIC, IT IS EQUALLY DIFFICULT TO ACCEPT THAT THE ONLY EXPENSES INVOLVED IN EARNING THE DIVIDEND INCOME ARE THOSE I NCURRED ON COLLECTION OF DIVIDEND OR ON ENCASHING A FEW DIVIDE ND WARRANTS. A ITA 7273- 74/MUM/2012 19 COMPANY CANNOT EARN DIVIDEND WITHOUT ITS EXISTENCE AND MANAGEMENT. INVESTMENT DECISIONS ARE VERY COMPLEX I N NATURE. THEY REQUIRE SUBSTANTIAL MARKET RESEARCH, DAY-TO-DA Y ANALYSIS OF MARKET TRENDS AND DECISIONS WITH REGARD TO ACQUISIT ION, RETENTION AND SALE OF SHARES AT THE MOST APPROPRIATE TIME. TH EY REQUIRE HUGE INVESTMENT IN SHARES AND CONSEQUENTIAL BLOCKING OF FUNDS. IT IS WELL KNOWN THAT CAPITAL HAS COST AND THAT ELEMENT OF COS T IS REPRESENTED BY INTEREST. BESIDES, INVESTMENT DECISIONS ARE GENE RALLY TAKEN IN THE MEETINGS OF THE BOARD OF DIRECTORS FOR WHICH AD MINISTRATIVE EXPENSES ARE INCURRED. IT IS THEREFORE NOT CORRECT TO SAY THAT DIVIDEND INCOME CAN BE EARNED BY INCURRING NO OR NO MINAL EXPENDITURE. THIS ASPECT OF THE MATTER HAS ALSO REC EIVED CAREFUL ATTENTION OF CHENNAI BENCH OF THIS TRIBUNAL IN SOUTHERN PETRO CHEMICAL INDUSTRIES V. DY. CIT (2005) 3 SOT 157 (CHENNAI- TRIB). AFTER COMPREHENSIVE CONSIDERATION OF ALL THE RELEVA NT ASPECTS OF THE CASE INCLUDING THE PROVISIONS OF LAW, THE CHENNAI B ENCH HAS HELD THAT INVESTMENT DECISIONS ARE VERY STRATEGIC DECISI ONS IN WHICH TOP MANAGEMENT IS INVOLVED AND THEREFORE PROPORTIONATE MANAGEMENT EXPENSES ARE REQUIRED TO BE DEDUCTED WHILE COMPUTIN G THE EXEMPT INCOME FROM DIVIDEND. IN HARISH KRISHNAKANT BHATT V. INCOME TAX OFFICER (2004) 91 ITD 311 (AHD.), THE AHMEDABAD BENCH OF T HIS TRIBUNAL HAS HELD THAT, THE DIVIDEND INCOME BEING E XEMPT UNDER SECTION 10(33) , THE INTEREST ON CAPITAL BORROWED FOR ACQUISITION OF RELEVANT SHARES YIELDING SUCH DIVIDE ND CANNOT BE ALLOWED DEDUCTION BY OPERATION OF SECTION 14A . IN DY. CIT V. SG INVESTMENTS &INDUSTRIES LTD . (2004) 89 ITD 44 (CAL.), THE CALCUTTA BENCH OF THIS TRIBUNAL HAS LAID DOWN TWO PROPOSITIO NS: ONE, IN VIEW ITA 7273- 74/MUM/2012 20 OF SECTION 14A INSERTED IN THE INCOME TAX ACT WITH RETROSPECTIVE EFFECT FROM 1-4-1962, PRO RATA EXPENSES ON ACCOUNT OF INTEREST RELATABLE TO INVESTMENT IN SHARES FOR EARNING EXEMP T INCOME FROM DIVIDEND ARE TO BE DISALLOWED AGAINST TAXABLE INCOM E AND ONLY THE NET DIVIDEND INCOME IS TO BE ALLOWED EXEMPTION AFT ER DEDUCTING THE EXPENSES; AND TWO, THE EXPRESSION 'EXPENDITURE INCU RRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME' IN SECTION 14A HAS TO BE GIVEN A WIDER MEANING AND WOULD INCLUDE BOTH DIRECT AND INDIRECT RELATIONSHIP BETWE EN EXPENDITURE AND EXEMPT INCOME. FOLLOWING THE DECISION OF THE HO N'BLE SUPREME COURT IN CIT V. UNITED GENERAL TRUST LTD . (1993) 200 ITR 488 (SC), THE CALCUTTA BENCH OF THE TRIBUNAL HAS ALSO HELD TH AT THE INTEREST PAID BY THE ASSESSEE BEING ATTRIBUTABLE TO THE MONE Y BORROWED FOR THE PURPOSE OF MAKING THE INVESTMENT WHICH YIELDED THE DIVIDEND AND OTHER EXPENSES INCURRED IN CONNECTION WITH OR F OR MAKING OR EARNING THE DIVIDEND INCOME CAN BE REGARDED AS EXPE NDITURE INCURRED IN RELATION TO DIVIDEND INCOME. IN EVERPLUS SECURITIES & FINANCE LTD. V. DY. CIT (2006) 101 ITD 151 (DEL), THE DELHI BENCH OF THIS TRIBUNAL HAS HELD THAT MERELY BECAUSE THE A SSESSEE DID NOT EARN THE DIVIDEND OUT OF INVESTMENT IN CERTAIN SHAR ES DOES NOT IMPLY THAT THE PROVISIONS OF SECTION 14A WOULD NOT APPLY TO THAT EXTENT. IN ASSTT. CIT V. PREMIER CONSOLIDATED CAPITAL TRUST (I ). LTD. (2004) 83 TTJ (MUM.) 843, THE MUMBAI BENCH OF THIS TRIBUNAL HAS HELD THAT THE ASSESSING OFFICER IS JUSTIFIED IN ATT RIBUTING A PART OF THE FINANCIAL AND ADMINISTRATIVE EXPENSES AS EXPEND ITURE INCURRED IN RELATION TO EXEMPT INCOME AND DISALLOWING THE SA ME IN VIEW OF THE PROVISIONS OF SECTION 14A .' ITA 7273- 74/MUM/2012 21 3. THE ITAT, CHENNAI BENCH HAS HELD IN THE CASE OF SOUTHERN PETRO CHEMICALS INDUSTRIES V. DCIT(2005) 3 SOT 157 AS UND ER: ' WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERU SED THE RECORDS OF THE CASE. ADMITTEDLY, THESE INVESTMENTS IN SHARES WERE MADE DURING THE COURSE OF THE CARRYING ON OF BUSINE SS AND AS IS EVIDENT FROM THE RECORDS, SUBSTANTIAL INVESTMENTS H AD BEEN MADE BY THE ASSESSEE IN EARLIER YEARS, AND DURING THE CU RRENT YEAR AS WELL THE ASSESSEE MADE AN INVESTMENT OF RS. 19 CROR ES. WHETHER TO INVEST OR NOT TO INVEST AND WHETHER TO RETAIN THE I NVESTMENTS OR TO LIQUIDATE THE SAME ARE VERY STRATEGIC DECISIONS WHI CH THE MANAGEMENT IS CALLED UPON TO TAKE. THESE ARE MIND-B OGGLING DECISIONS AND TOP MANAGEMENT IS INVOLVED IN TAKING THESE DECISIONS. THIS DECISION MAKING PROCESS IS VERY COM PLICATED AND REQUIRES VERY CAREFUL ANALYSIS. MOREOVER, THE ASSES SEE HAS TO KEEP TRACK OF VARIOUS DIVIDEND INCOMES DECLARED BY THE I NVESTEE COMPANIES AND ALSO TO KEEP TRACK OF THE DIVIDEND IN COME HAVING BEEN REGULARLY RECEIVED BY THE ASSESSEE. THIS ACTIV ITY ITSELF CALLS FOR CONSIDERABLE MANAGEMENT ATTENTION AND CANNOT BE LEF T TO A JUNIOR CLERK. THE HON'BLE SUPREME COURT IN THE CASE OF UNI TED GENERAL TRUST LTD. (SUPRA), APPLYING THE DECISION OI HON'BL E SUPREME COURT IN THE CASE OF DISTRIBUTORS (BARODA) (P) LTD. V. UNION OF INDIA (1985) 47 CTR (SC) 349: (1985) 155 ITR 120 (SC), REVERSED THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN CIT V. UNITED GENERAL TRUST (P) LTD . (SUPRA), WHEREIN THE QUESTION WAS AS UNDER: 'WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL WAS JUSTIFIED IN APPLYING THE ITA 7273- 74/MUM/2012 22 DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF CIT V. NEW GREAT INSURANCE CO. LTD . (1973) 90 ITR 348 (BOM) TO THE ASSESSMENT YEAR IN QUESTION WITHOUT CONSIDERING THE EFFECT OF THE AMENDMENT OPERATIVE FROM IST APRIL, 1968, AND I N THUS HOLDING THAT THE ASSESSEE WOULD BE ENTITLED TO THE DEDUCTION UNDER SECTION 80M ON THE GROSS DIVIDEND BEFORE DEDUCTION OF THE PROPORTIONATE MANAGEMENT EXPENSES ?' THUS, WHEN THE DECISION OF THE HONBLE BOMBAY HIGH C OURT HAS BEEN REVERSED, THE PROPORTIONATE MANAGEMENT EXPENSES ARE REQUIRED TO BE DEDUCTED WHILE COMPUTING THE DIVIDEND INCOME. IN TH E DECISION OF THE HON'BLE CALCUTTA HIGH COURT, RELIED UPON BY THE LEA RNED COUNSEL FOR THE ASSESSEE, MR. DASTUR, IN THE CASE OF CIT V. UNITED COLLIERIES LTD . (SUPRA), IT HAS BEEN HELD THAT IF THE FACTS OF A PARTICULAR CASE SO WARRANT, THE ALLOCATION CAN BE MADE TOWARDS EXPENSES. IN VIEW OF THE AFOREMENTIONED DISCUSSION AND KEEPING IN VIEW THE SUBMISSIONS OF T HE LEARNED DEPARTMENTAL REPRESENTATIVE, WE RESTORE THIS MATTER TO THE ASSESSING OFFICER TO VERIFY THE QUANTUM OF DEDUCTION CLAIMED BY THE ASSESSEE IN EARLIER YEARS UNDER SECTION 57(I) FROM THE DIVIDEND INCOME (WHEN IT WAS TAXABLE) AND MAKE A PRO RATA ADJUSTMENT ON THE BASI S OF SUBSEQUENT INVESTMENTS MADE, INFLATION, ETC. THIS GROUND IS, A CCORDINGLY, ALLOWED FOR STATISTICAL PURPOSES 4. THE ITAT, KOLKATTA BENCH IN RECENT REPORTED JUDG MENT IN COAL INDIA LIMITED V. ACIT 2015 TAX PUB(DT)2496 IN ITA NO 1032/KOL/2012 PRONOUNCED RECENTLY ON 13TH MAY 2015 HAS CATEGORICA LLY HELD THAT EVEN STRATEGIC INVESTMENT IN GROUP CONCERNS FOR THE PURP OSE OF CONTROL AND NOT ITA 7273- 74/MUM/2012 23 FOR EARNING DIVIDEND ATTRACT DISALLOWANCE U/S 14 A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962. SINCE THE ASSESSEE COMPANY HAD CLAIMED THAT NO EXPE NDITURE WAS INCURRED, THE ASSESSING AUTHORITIES WERE CORRECT TO ESTIMATE THE INCURRING OF SUCH EXPENDITURE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D(2)(III) OF INCOME TAX RULES,1962. THE ASSESSING OFFICER HAS DISALLOWED BY COMPUTING T HE INDIRECT EXPENDITURE BEING ADMINISTRATIVE AND OTHER IN-DIREC T EXPENSES AFTER INVOKING RULE 8D(2) (III) OF INCOME TAX RULES ,1962 . WE, THEREFORE, HOLD THAT THE ASSESSING OFFICER HAS RIGHTLY INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D(2)(III) OF INCOME TAX RULES, 1962 FOR DISALLOWING THE EXPENDITURE OF RS. 7,22,027/- TOWARDS ADMINISTRATIVE AND OTHER INDIRECT EXPENSES WHICH WA S AFFIRMED BY THE CIT(A ) AND THE SAME IS ALSO HEREBY AFFIRM BY US AS WE HAVE FOUND NO INFIRMITY IN THE ORDERS OF THE AUTHORITIES BELOW. W E ORDER ACCORDINGLY. THE ASSESSEE COMPANY HAS RELIED UPON FOLLOWING DECI SIONS TO CONTEND THAT NO DISALLOWANCE SHOULD BE MADE U/S 14A OF THE ACT WIT H RESPECT TO STRATEGIC INVESTMENT / CONTROLLING INTEREST INVESTMENTS MADE BY THE ASSESSEE COMPANY: 1. CIT V. ORIENTAL STRUCTURES ENGINEERS PRIVATE LIMITE D , 35 TAXMANN.COM 210 (DEL. HC) THIS CASE WAS DECIDED BY HONBLE DE LHI HIGH COURT ON FACTS.THE TRIBUNAL GAVE FINDING THAT ONLY INTEREST OF RS. 2,96,731/- WAS PAID ON FUNDS UTILIZED FOR MAKING INVESTMENTS ON WH ICH EXEMPTED INCOME WAS RECEIVABLE. FURTHER IT WAS OBSERVED BY THE TRIB UNAL, THERE WAS SPV CREATED TO OBTAIN CONTRACTS FROM NHAI AND THE SPV S O FORMED ENGAGED THE ITA 7273- 74/MUM/2012 24 TAX-PAYER AS CONTRACT TO EXECUTE THE WORKS AWARDED TO THEM(SPV) BY THE NHAI . THE TAX-PAYER HAS SHOWN TURNOVER FROM THESE CONTRACTS AWARDED BY SPV IN ITS PROFIT AND LOSS ACCOUNT AND HENCE IT WAS HELD BY THE TRIBUNAL ON THE FACTS OF THE CASE THAT NO INTEREST CAN BE D ISALLOWED U/S 14A READ WITH RULE 8D OF INCOME TAX RULES, 1962 BECAUSE IT C AN NOT BE HELD THAT EXPENSES/INTEREST WERE INCURRED FOR EARNING EXEMPTE D INCOME. THE HONBLE DELHI HIGH COURT HELD THAT IT IS A QUESTION OF FACT AND NO QUESTION OF LAW MUCH LESS SUBSTANTIAL QUESTION OF LAW ARISES AND TH E APPEAL WAS DISMISSED . IN THE INSTANT CASE, IT IS NOT THE CASE OF THE AS SESSEE COMPANY THAT IT HAS GOT ANY BUSINESS CONTRACTS FROM ITS STRATEGIC INVES TMENTS/SUBSIDIARY COMPANIES IN WHICH CONTROLLING INTEREST WERE ACQUIR ED AND HENCE THE CASE ARE DISTINGUISHABLE ON FACTS. 2. GARWARE WALL ROPES LIMITED V. ACIT 65 SOT 86, MU M-TRIB.- IN THIS CASE, THE TAX-PAYER WAS HOLDING OLD INVESTMENTS MADE LONG BACK AND NO NEW INVESTMENTS WERE MADE DURING THE PREVIOUS YEAR AND ON FACTS OF THE CASE THE TRIBUNAL HELD THAT IT COULD BE CONCLUDED THAT THE T AX-PAYER DID NOT INCUR ANY EXPENDITURE FOR EARNING INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND HENCE DISALLOWANCE WAS DELETED. IN THE INSTANT APPEAL, THE ASSESSEE COMPANY DID MADE INVESTMENTS IN THE SUBSIDIARY COMP ANY DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR AND F URTHER NO FINDING OF FACT HAS BEEN BROUGHT ON RECORD THAT THE ASSESSEEE COMPA NY DID NOT INCUR ANY EXPENDITURE FOR EARNING EXEMPT INCOME. HENCE, WE AR E SETTING ASIDE THE MATTER TO THE FILE OF AO TO DETERMINE WHETHER THE A SSESSEE COMPANY HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RE LATION TO THE DIVIDEND INCOME /INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED U/S 14A OF THE ACT HAVING REGARDS TO T HE ACCOUNTS OF THE ASSESSEE COMPANY AS CONTEMPLATED U/S 14A(2) OF THE ACT FOR WHICH THE AO CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPO RTIONMENT, EXCLUDING THE ITA 7273- 74/MUM/2012 25 INTEREST EXPENDITURE INCURRED BY THE ASSESSEE COMPA NY WHICH SHALL NOT BE DISALLOWED AS DISCUSSED ABOVE BY US. 3.JM FINANCIAL LIMITED V. ACIT (ITA NO. 4521/MUM/20 12)-IN THIS CASE, THE TAX-PAYER MADE OUT A CASE TO SHOW THAT NO EXPENDIT URE HAS BEEN INCURRED FOR MAINTAINING THE INVESTMENT IN SUBSIDIARY COMPANIES AND THEREFORE IN THE ABSENCE OF FINDING THAT ANY EXPENDITURE HAS BEEN IN CURRED FOR EARNING THE EXEMPT INCOME, THE DISALLOWANCE MADE BY THE AO WAS HELD TO BE NOT JUSTIFIED BY THE TRIBUNAL. HOWEVER, IN THE INSTANT CASE THIS FACTS THAT NO EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE COMPANY HAS NOT B EEN BROUGHT ON RECORD HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE COMP ANY AND HENCE WE ARE SETTING ASIDE THIS APPEAL TO THE FILE OF THE AO TO DETERMINE WHETHER THE ASSESSEE COMPANY HAS INCURRED ANY EXPENDITURE (DIR ECT OR INDIRECT) IN RELATION TO THE DIVIDEND INCOME /INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED U/S 1 4A OF THE ACT HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE COMPANY AS CONTEMPLATED U/S 14A(2) OF THE ACT FOR WHICH THE AO CAN ADOPT A REASONABL E BASIS FOR EFFECTING THE APPORTIONMENT, EXCLUDING THE INTEREST EXPENDITURE I NCURRED BY THE ASSESSEE COMPANY WHICH SHALL NOT BE DISALLOWED AS DISCUSSED ABOVE BY US. 4. SH JIGAR P. SHAH V. ACIT IN ITA NO 4366/MUM/2014 DATED 24-02-2016)-IN THIS CASE ALSO THERE IS A FINDING OF FACT THAT THE TAX-PAYER HAS MADE INVESTMENTS WHICH WERE OLD INVESTMENTS AND THAT NO NEW INVESTMENTS WERE MADE DURING THE YEAR. . IN THE INSTANT APPEAL, THE ASSESSEE COMPANY DID MADE INVESTMENTS IN THE SUBSIDIARY COMPANY DURING T HE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR AND FURTHER NO FIND ING OF FACT HAS BEEN BROUGHT ON RECORD THAT THE ASSESSEE COMPANY DID NOT INCUR ANY EXPENDITURE FOR EARNING EXEMPT INCOME. HENCE, WE ARE SETTING AS IDE THE MATTER TO THE FILE OF AO TO DETERMINE WHETHER THE ASSESSEE COMPANY HA S INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO THE DIVIDEND INCOME /INCOME ITA 7273- 74/MUM/2012 26 FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE T OTAL INCOME AS CONTEMPLATED U/S 14A OF THE ACT HAVING REGARDS TO T HE ACCOUNTS OF THE ASSESSEE COMPANY AS CONTEMPLATED U/S 14A(2) OF THE ACT FOR WHICH THE AO CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPO RTIONMENT, EXCLUDING THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE COMPA NY WHICH SHALL NOT BE DISALLOWED AS DISCUSSED ABOVE BY US. 5. DAGA GLOBAL CHEMICALS PRIVATE LIMITED V. ACIT IN ITA NO. 5592/MUM/2012 THE TRIBUNAL HAS DECIDED THIS APPEA L BASED ON THE FACTS OF THE CASE WHEREBY IT WAS ESTABLISHED BY THE TAX-P AYER THAT ALL THE INVESTMENTS WERE MADE IN THE EARLIER YEARS OUT OF O WN FUNDS AND NO EXPENDITURE WAS INCURRED AND CLAIMED BY THE TAX-PAY ER . IN THE INSTANT APPEAL, THE ASSESSEE COMPANY DID MADE INVESTMENTS I N THE SUBSIDIARY COMPANY DURING THE PREVIOUS YEAR RELEVANT TO THE AS SESSMENT YEAR AND FURTHER NO FINDING OF FACT HAS BEEN BROUGHT ON RECO RD THAT THE ASSESSEEE COMPANY DID NOT INCUR ANY EXPENDITURE FOR EARNING E XEMPT INCOME. HENCE, WE ARE SETTING ASIDE THE MATTER TO THE FILE OF AO TO D ETERMINE WHETHER THE ASSESSEE COMPANY HAS INCURRED ANY EXPENDITURE (DIR ECT OR INDIRECT) IN RELATION TO THE DIVIDEND INCOME /INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED U/S 1 4A OF THE ACT HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE COMPANY AS CONTEMPLATED U/S 14A(2) OF THE ACT FOR WHICH THE AO CAN ADOPT A REASONABL E BASIS FOR EFFECTING THE APPORTIONMENT, EXCLUDING THE INTEREST EXPENDITURE I NCURRED BY THE ASSESSEE COMPANY WHICH SHALL NOT BE DISALLOWED AS DISCUSSED ABOVE BY US. RESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE CO -ORDINATE BENCHES OF MUMBAI ITAT IN THE CASE OF UMA POLYMERS LIMITED IN ITA NO.5366/MUM/2012 DATED 30-09-2015, AND ALSO OF THE DECISION OF KOLKATTA TRIBUNAL COAL INDIA LIMITED V. ACIT 2015 TAX PUB(DT)2496 IN ITA NO ITA 7273- 74/MUM/2012 27 1032/KOL/2012 PRONOUNCED ON 13TH MAY 2015 WHEREBY KOLKATTA TRIBUNAL HAS CATEGORICALLY HELD THAT EVEN STRATEGIC INVESTMENT I N GROUP CONCERNS FOR THE PURPOSE OF CONTROL AND NOT FOR EARNING DIVIDEND ATT RACT DISALLOWANCE U/S 14 A OF THE ACT ., WE HOLD THAT THE INVESTMENT MADE BY THE ASSESSE E COMPANY IN SHARES AND UNITS OF MUTUAL FUNDS( EXCLUDING INVESTMENT OF RS.1,10,30,000/- IN FOREIGN SUBSIDIARY) SHALL ATTRACT DISALLOWANCE U/S 14A OF T HE ACT . THE HONBLE BOMBAY HIGH COURT IN GODREJ AND BOYCE MANUFACTURING COMPAN Y LIMITED(SUPRA) REMANDED THE PROCEEDINGS FOR ASSESSMENT YEAR 2007-0 8 TO THE AO TO DETERMINE WHETHER THE TAX-PAYER HAS INCURRED ANY EX PENDITURE (DIRECT OR INDIRECT) IN RELATION TO THE DIVIDEND INCOME /INCOM E FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLA TED U/S 14A OF THE ACT FOR WHICH THE AO CAN ADOPT A REASONABLE BASIS FOR EFFEC TING THE APPORTIONMENT FOR DISALLOWANCE U/S 14A OF THE ACT. IN THE INSTANT AP PEAL , WE ARE ALSO INCLINED TO REMAND THE PROCEEDINGS FOR ASSESSMENT YEAR 2007- 08 TO THE FILE OF AO TO DETERMINE WHETHER THE ASSESSEE COMPANY HAS INCURRE D ANY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO THE DIVIDEND IN COME /INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED U/S 14A OF THE ACT HAVING REGARDS TO THE ACCOUNTS OF THE AS SESSEE COMPANY AS CONTEMPLATED U/S 14A(2) OF THE ACT FOR WHICH THE AO CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT, EXCLUDING TH E INTEREST EXPENDITURE INCURRED BY THE ASSESSEE COMPANY WHICH SHALL NOT BE DISALLOWED AS DISCUSSED ABOVE BY US. WE ORDER ACCORDINGLY. PMS MANAGEMENT FEE WE HAVE OBSERVED THAT THE ASSESSEE COMPANY HAS INCU RRED PMS MANAGEMENT FEE OF RS.11,55,354/- BEING PAID TO PORTFOLIO MANAG ERS WHO WERE MANAGING ITA 7273- 74/MUM/2012 28 THE PORTFOLIO OF SHARES AND MUTUAL FUNDS OF THE ASS ESSEE COMPANY. THE ASSESSEE COMPANY HAS CLAIMED DEDUCTIONS OF THE AFOR E-STATED EXPENSES FROM CAPITAL GAINS COMPUTED UNDER THE ACT FROM SALE OF S HARES. THE ASSESSEE COMPANY RELIED UPON THE DECISION OF PUNE TRIBUNAL I N THE CASE OF DCIT V. K.R.A. HOLDINGS AND TRADING PRIVATE LIMITED (SUPRA) . WE HAVE OBSERVED THAT ITAT MUMBAI HAS RECENTLY PASSED DETAILED ORDERS IN THE CASE OF CAPTAIN AVINASH CHANDER BATRA V. DCIT IN ITA NO 7407/MUM201 1 VIDE ORDERS DATED 30-03-2016 ( (2016) 68 TAXMANN.COM 366(MUM.TRIB.)) ,WHICH IS AUTHORED BY ONE OF US (THE ACCOUNTANT MEMBER) IN WHICH THE DECI SION OF THE PUNE BENCH OF THE ITAT IN K.R.A. HOLDINGS AND TRADING PRIVATE LIMITED(SUPRA) WAS DULY DISCUSSED. THE ORDER OF THE MUMBAI TRIBUNAL IN THE CASE OF CAPTAIN AVINASH CHANDER BATRA V. DCIT IN ITA NO 7407/MUM2011 IS RE PRODUCED HEREUNDER: 9. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND AL SO PERUSED THE MATERIAL AVAILABLE ON RECORD INCLUDING CASE LAWS RE LIED UPON BY THE RIVAL PARTIES. WE HAVE OBSERVED THAT THE ASSESSEE HAS PAI D PORTFOLIO MANAGEMENT SERVICES EXPENSES OF RS.22,64,272/- TO P ORTFOLIO MANAGERS NAMELY ICICI PRUDENTIAL ASSET MANAGEMENT COMPANY LI MITED AND OPTIMIX ING FOR MANAGING PORTFOLIO MANAGEMENT SERVI CES (PMS) ACCOUNTS OF THE ASSESSEE. THESE CHARGES OF RS.22,64,272 BEIN G PORTFOLIO MANAGEMENT FEES ARE STATED BY THE ASSESSEE TO BE PA ID ON PURCHASES AND SALES OF SHARES AND THE SAME HAS BEEN DISALLOWE D BY THE AUTHORITIES BELOW , EXCEPT TO THE TUNE OF RS.2,59,879/- WHICH W AS ALLOWED BY THE CIT(A) TOWARDS PMS CHARGES ON SALE OF SHARES ON WHI CH SHORT TERM CAPITAL GAINS HAS BEEN EARNED AND THE REVENUE HAS C HALLENGED THE SAME BEFORE THE TRIBUNAL, WHILE THE ASSESSEE IS IN APPEA L FOR THE DISALLOWANCE BY THE CIT(A) OF THE REST OF THE PMS EXPENSES OF RS .20,04,393/- VIDE THIS APPEAL . IT IS AN UN-DISPUTED AND ADMITTED POSITION BETWEEN THE RIVAL PARTIES THAT THE ASSESSEE HAS EARNED CAPITAL GAINS ON SALE OF SHARES HELD UNDER PORTFOLIO MANAGEMENT SERVICES ACCOUNT OF THE ASSESSEE WITH ICICI ITA 7273- 74/MUM/2012 29 PRUDENTIAL ASSET MANAGEMENT COMPANY LIMITED AND OTI MIX ING , WHICH IS MANAGED BY THE PORTFOLIO MANAGERS FOR WHICH PORT FOLIO MANAGEMENT SERVICES FEE OF RS.22,64,272/- HAS BEEN PAID BY THE ASSESSEE TO THE PORTFOLIO MANAGERS , THE INCOME ARISING THEREOF FRO M SALE OF SHARES IS CHARGEABLE TO TAX UNDER THE HEAD CAPITAL GAINS , FOR WHICH THE INCOME IS TO BE ASSESSED UNDER CHAPTER IV-E OF THE ACT AS PER THE PROVISIONS OF SECTION 45 TO 55A OF THE ACT. THE PROVISIONS OF SEC TION 48 OF THE ACT STIPULATES AS UNDER : SECTION 48 [MODE OF COMPUTATION. 48. THE INCOME CHARGEABLE UNDER THE HEAD 'CAPITAL G AINS' SHALL BE COMPUTED, BY DEDUCTING FROM THE FULL VALUE OF THE C ONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPI TAL ASSET THE FOLLOWING AMOUNTS, NAMELY : (I) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER (II) THE COST OF ACQUISITION OF THE ASSET AND THE C OST OF ANY IMPROVEMENT THERETO: ********** ********** THUS, AS COULD BE OBSERVED FROM PROVISIONS OF SECT ION 48 OF THE ACT , FOR COMPUTING CAPITAL GAINS, IT IS REQUIRED TO DEDUCT F ROM FULL VALUE OF CONSIDERATION, THE EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER AND ALSO THE COST OF ACQUISITION OF THE CAPITAL ASSET AND COST OF ANY IMPROVEMENT THERETO. WITH THE ABOVE BACKGROUND, WE HAVE TO SEE WHETHER T HE PORTFOLIO MANAGEMENT CHARGES OF RS. 22,64,272/- PAID BY THE A SSESSEE CAN BE ITA 7273- 74/MUM/2012 30 ALLOWED AS DEDUCTION FROM THE FULL VALUE OF CONSIDE RATION RECEIVED OR ACCRUING TO THE ASSESSE AS A RESULT OF TRANSFER OF THE CAPITAL ASSET BEING SHARES , PROVIDED THE SAID PMS CHARGES ARE EITHER E XPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH THE TRANS FER OF SHARES OR PMS CHARGES IS A COST OF ACQUISITION OR THE COST OF ANY IMPROVEMENT THERETO OF THE CAPITAL ASSET BEING SHARES AS PER MANDATE OF SE CTION 48 OF THE ACT. THE ASSESSEE TO SUPPORT HIS CONTENTIONS HAS RELIED ON THE SECURITIES AND EXCHANGE BOARD OF INDIA (PORTFOLIO MANAGERS) (AMEND MENT) RULES, 2002 TO CONTEND THAT THESE PMS CHARGES ARE ALLOWABLE EXP ENDITURE AS THE PORTFOLIO MANAGERS ARE ALLOWED TO BE PAID FEE ON R ETURN BASED FEE MEANING THEREBY THAT IT IS AN EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH THE TRANSFER OF SHAR ES AS THESE PMS CHARGES ARE CONNECTED WITH SALE AND PURCHASE OF SHA RES . BEFORE WE PROCEED FURTHER TO DECIDE WHETHER PMS CH ARGES PAID BY THE ASSESSEE IS ALLOWABLE AS DEDUCTION AS PER PROVISION S OF SECTION 48 OF THE ACT, WE MUST ANALYZE THE STATUTORY AND LEGAL FRAMEW ORK WITHIN WHICH PORTFOLIO MANAGERS CARRY ON THEIR ACTIVITIES IN IND IA AND THEIR ROLES AND RESPONSIBILITIES IN DISCHARGING THEIR DUTIES. THE BUSINESS ACTIVITIES OF PORTFOLIO MANAGERS IN IN DIA ARE REGULATED BY SECURITIES AND EXCHANGE BOARD OF INDIA ACT,1992(15 OF 1992) (IN SHORT SEBI ACT,1992) . THE SEBI ACT,1992 PROVIDES FOR AN ESTABLISHMENT OF THE BOARD (HEREINAFTER CALLED THE SEBI) TO PROTEC T THE INTERESTS OF INVESTORS IN SECURITIES AND TO PROMOTE THE DEVELOPM ENT OF, AND REGULATE , THE SECURITIES MARKET AND FOR MATTERS CONNECTED THE REWITH OR INCIDENTAL THERETO. IT IS PROVIDED IN CHAPTER IV OF THE SEBI A CT,1992 WHICH DEALS WITH POWER AND FUNCTIONS OF THE BOARD U/S.11(1) OF SEBI ACT,1992 THAT IT SHALL BE DUTY OF THE SEBI TO PROTECT THE INTERESTS OF INVESTORS IN SECURITIES AND TO PROMOTE THE DEVELOPMENT OF, AND REGULATE , T HE SECURITIES MARKET , ITA 7273- 74/MUM/2012 31 BY SUCH MEASURES AS IT THINKS FIT. SECTION 11(2)(B) OF SEBI ACT,1992 PROVIDES , INTER-ALIA, THAT SUCH MEASURES TO ACHIEV E THE OBJECTS OF SEBI ACT,1992 , THE BOARD MAY REQUIRE REGISTERING AND RE GULATING THE WORKING OF PORTFOLIO MANAGERS. IT IS PROVIDED , INTER-ALIA, IN CHAPTER V U/S 12(1) OF SEBI ACT,1992 THAT NO PORTFOLIO MANAGER WHO MAY BE ASSOCIATED WITH SECURITIES MARKET SHALL BUY, SELL OR DEAL IN SECURI TIES EXCEPT UNDER, AND IN ACCORDANCE WITH , THE CONDITIONS OF CERTIFICATE OF REGISTRATION OBTAINED FROM THE SEBI IN ACCORDANCE WITH THE REGULATIONS MA DE UNDER THE SEBI ACT,1992. THE SEBI ACT,1992 BY VIRTUE OF PROVISIONS OF SECTION 30 GRANTS THE POWER TO SEBI TO MAKE REGULATIONS BY NOTIFICATI ON CONSISTENT WITH THE SEBI ACT,1992 AND THE RULES MADE THERE-UNDER TO CAR RY OUT PURPOSES OF THE ACT WHICH IS PRIMARILY INVESTOR PROTECTION AND TO PROMOTE THE DEVELOPMENT OF, AND TO REGULATE THE SECURITIES MARK ET. IN EXERCISE OF POWERS U/S. 30 OF SEBI ACT,1992, SEBI CAME OUT WITH REGULATIONS TO REGULATE THE BUSINESS OF PORTFOLIO MANAGERS IN INDI A BY PROMULGATING SECURITIES AND EXCHANGE BOARD OF INDIA (PORTFOLIO MANAGERS) REGULATION,1993 WHICH WERE AMENDED FROM TIME TO TI ME . UNDER CLAUSE 2(CB) OF SECURITIES AND EXCHANGE BOARD OF INDIA (PO RTFOLIO MANAGERS) REGULATION,1993 , THE PORTFOLIO MANAGER IS DEFINED AS UNDER: (CB) PORTFOLIO MANAGER MEANS ANY PERSON WHO PURS UANT TO A CONTRACT OR ARRANGEMENT WITH A CLIENT, ADVISES OR DIRECTS OR UN DERTAKES ON BEHALF OF THE CLIENT (WHETHER AS A DISCRETIONARY PORTFOLIO MA NAGER OR OTHERWISE) THE MANAGEMENT OR ADMINISTRATION OF A PORTFOLIO OF SECU RITIES OR THE FUNDS OF THE CLIENT, AS THE CASE MAY BE;] CLAUSE 14 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (PORTFOLIO MANAGERS) REGULA TION,1993 , IT IS STIPULATED AS TO CONTRACT WHICH PORTFOLIO MANAGER I S REQUIRED TO ENTER WITH CLIENT AND DISCLOSURES TO BE MADE AS UNDER:- ITA 7273- 74/MUM/2012 32 [14. CONTRACT WITH CLIENTS AND DISCLOSURES. (1) (A) THE PORTFOLIO MANAGER SHALL, BEFORE TAKING UP AN ASSIGNMENT OF MANAGEMENT OF FUNDS OR PORTFOLIO OF SECURITIES ON BEHALF OF A CLIENT, ENTE R INTO AN AGREEMENT IN WRITING WITH SUCH CLIENT CLEARLY DEFINING THE INTER SE RELATIONSHIP, AND SETTING OUT THEIR MUTUAL RIGHTS, LIABILITIES AND OB LIGATIONS RELATING TO MANAGEMENT OF FUNDS OR PORTFOLIO OF SECURITIES CONT AINING THE DETAILS AS SPECIFIED IN SCHEDULE IV. (B) THE AGREEMENT BETWEEN THE PORTFOLIO MANAGER AND THE CLIENT SHALL, INTER ALIA, CONTAIN: (I) THE INVESTMENT OBJECTIVES AND THE SERVICES TO BE PR OVIDED; (II) AREAS OF INVESTMENT AND RESTRICTIONS, IF ANY, IMPOS ED BY THE CLIENT WITH REGARD TO THE INVESTMENT IN A PARTICULAR COMPA NY OR INDUSTRY; (III) TYPE OF INSTRUMENTS AND PROPORTION OF EXPOSURE; (IV) TENURE OF PORTFOLIO INVESTMENTS; (V) TERMS FOR EARLY WITHDRAWAL OF FUNDS OR SECURITIES B Y THE CLIENTS; (VI) ATTENDANT RISKS INVOLVED IN THE MANAGEMENT OF THE P ORTFOLIO; (VII) PERIOD OF THE CONTRACT AND PROVISION OF EARLY TERMI NATION, IF ANY; (VIII) AMOUNT TO BE INVESTED SUBJECT TO THE RESTRICTIONS P ROVIDED UNDER THESE REGULATIONS; (IX) PROCEDURE OF SETTLING CLIENT'S ACCOUNT INCLUDI NG FORM OF REPAYMENT ON MATURITY OR EARLY TERMINATION OF CONTR ACT; ITA 7273- 74/MUM/2012 33 (X)FEES PAYABLE TO THE PORTFOLIO MANAGER; (XI) THE QUANTUM AND MANNER OF FEES PAYABLE BY THE CLIENT FOR EACH ACTIVITY FOR WHICH SERVICE IS RENDERED BY THE PORTF OLIO MANAGER DIRECTLY OR INDIRECTLY (WHERE SUCH SERVICE IS OUT S OURCED); (XII) CUSTODY OF SECURITIES; (XIII) IN CASE OF A DI SCRETIONARY PORTFOLIO MANAGER A CONDITION THAT THE LIABILITY OF A CLIENT SHALL NOT EXCEED HIS INVESTMENT WITH THE PORTFOLIO MANAGER; (XIV) THE TERMS OF ACCOUNTS AND AUDIT AND FURNISHIN G OF THE REPORTS TO THE CLIENTS AS PER THE PROVISIONS OF THESE REGUL ATIONS; (XV) OTHER TERMS OF PORTFOLIO INVESTMENT SUBJECT TO THESE REGULATIONS. THE PORTFOLIO MANAGERS GENERAL RESPONSIBILITIES ARE DEFINED IN CLAUSE 15 OF THE SECURITIES AND EXCHANGE BOARD OF I NDIA (PORTFOLIO MANAGERS) REGULATION,1993 AS UNDER :- 15. GENERAL RESPONSIBILITIES OF A PORTFOLIO MANAGE R. (1) THE DISCRETIONARY PORTFOLIO MANAGER SHALL INDIVIDUALLY AND INDEPENDENTLY MANAGE THE FUNDS OF EACH CLIENT IN AC CORDANCE WITH THE NEEDS OF THE CLIENT IN A MANNER WHICH DOES NOT PARTAKE CHARACTER OF A MUTUAL FUND, WHEREAS THE NON-DISCRET IONARY PORTFOLIO MANAGER SHALL MANAGE THE FUNDS IN ACCORDA NCE WITH THE DIRECTIONS OF THE CLIENT. [(1A) THE PORTFOLIO MANAGER SHALL NOT ACCEPT FROM T HE CLIENT, FUNDS OR SECURITIES WORTH LESS THAN FIVE LACS RUPEES.] ITA 7273- 74/MUM/2012 34 (2) THE PORTFOLIO MANAGER SHALL ACT IN A FIDUCIARY CAPACITY WITH REGARD TO THE CLIENT'S FUNDS. [(2A) THE PORTFOLIO MANAGER SHALL KEEP THE FUNDS OF ALL CLIENTS IN A SEPARATE ACCOUNT TO BE MAINTAINED BY IT IN A SCHEDU LED COMMERCIAL BANK. EXPLANATION.FOR THE PURPOSES OF T HIS SUB- REGULATION, THE EXPRESSION SCHEDULED COMMERCIAL BA NK MEANS ANY BANK INCLUDED IN THE SECOND SCHEDULE TO THE RES ERVE BANK OF INDIA ACT, 1934 (2 OF 1934).] (3) THE PORTFOLIO MANAGER SHALL TRANSACT IN SECURIT IES WITHIN THE LIMITATION PLACED BY THE CLIENT HIMSELF WITH REGARD TO DEALING IN SECURITIES UNDER THE PROVISIONS OF THE RESERVE BANK OF INDIA ACT, 1934 (2 OF 1934). (4) THE PORTFOLIO MANAGER SHALL NOT DERIVE ANY DIRE CT OR INDIRECT BENEFIT OUT OF THE CLIENT'S FUNDS OR SECURITIES. [(4A) THE PORTFOLIO MANAGER SHALL NOT BORROW FUNDS OR SECURITIES ON BEHALF OF THE CLIENT.] [(5) THE PORTFOLIO MANAGER SHALL NOT LEND SECURITIE S HELD ON BEHALF OF CLIENTS TO A THIRD PERSON EXCEPT AS PROVIDED UNDER THESE REGULATIONS.] (6) THE PORTFOLIO MANAGER SHALL ENSURE PROPER AND T IMELY HANDLING OF COMPLAINTS FROM HIS CLIENTS AND TAKE APPROPRIATE ACTION IMMEDIATELY. THESE SECURITIES AND EXCHANGE BOARD OF INDIA (PORTF OLIO MANAGERS) REGULATION,1993 WERE AMENDED FROM TIME TO TIME AND THE RELEVANT ITA 7273- 74/MUM/2012 35 AMENDMENTS SO FAR CONCERNING ISSUES UNDER THIS APP EAL ARE REPRODUCED BELOW : THESE REGULATIONS MAY BE CALLED THE SECURITIES AN D EXCHANGE BOARD OF INDIA (PORTFOLIO MANAGERS) (AMENDMENT) REG ULATIONS, 2006. ******* 3. IN THE SECURITIES AND EXCHANGE BOARD OF INDIA (P ORTFOLIO MANAGERS) REGULATIONS, 1993: (I) IN REGULATION 2, CLAUSE (D) SHALL BE SUBSTITUTE D WITH THE FOLLOWING, NAMELY: (D) PRINCIPAL OFFICER MEANS AN EMPLOYEE OF THE P ORTFOLIO MANAGER WHO HAS BEEN DESIGNATED AS SUCH BY THE PORTFOLIO MA NAGER; (II) IN REGULATION 6, IN SUB-REGULATION (2), CLAUSE (C) SHALL BE SUBSTITUTED WITH THE FOLLOWING, NAMELY: (C) THE PRINCIPAL OFFICER OF THE APPLICANT HAS EIT HER (I) A PROFESSIONAL QUALIFICATION IN FINANCE, LAW, ACCOU NTANCY OR BUSINESS MANAGEMENT FROM A UNIVERSITY OR AN INSTITU TION RECOGNISED BY THE CENTRAL GOVERNMENT OR ANY STATE GOVERNMENT OR A FOREIGN UNIVERSITY; OR ITA 7273- 74/MUM/2012 36 (II) AN EXPERIENCE OF AT LEAST TEN YEARS IN RELATED ACTIVITIES IN THE SECURITIES MARKET INCLUDING IN A PORTFOLIO MANA GER, STOCK BROKER OR AS A FUND MANAGER. THESE REGULATIONS MAY BE CALLED THE SECURITIES AND EXCHANGE BOARD OF INDIA (PORTFOLIO MANAGERS) (SECON D AMENDMENT) REGULATIONS, 2006. C) AFTER CLAUSE (C) THE FOLLOWING CLAUSES SHALL BE INSERTED, NAMELY: (CA) PORTFOLIO MEANS THE TOTAL HOLDINGS OF SECUR ITIES BELONGING TO ANY PERSON; (CB) PORTFOLIO MANAGER MEANS ANY PERSON WHO PURSU ANT TO A CONTRACT OR ARRANGEMENT WITH A CLIENT, ADVISES OR DIRECTS OR UNDERTAKES ON BEHALF OF THE CLIENT (WHETHER AS A DISCRETIONARY PORTFOLIO MANAGER OR OTHERWISE) THE MANAGEMENT OR ADMINISTRATION OF A PORTFOLIO OF SECU RITIES OR THE FUNDS OF THE CLIENT, AS THE CASE MAY BE; THE PERUSAL OF SEBI ACT,1992 AND REGULATIONS MADE T HERE-TO CLEARLY REVEALS THAT BUSINESS OF PORTFOLIO MANAGERS IN INDIA IS A REGULATED AND CONTROLLED BUSINESS WHICH REQUIRES MANDATORY REGISTRATION WITH SEBI TO CARRY ON ACTIVI TIES OF PORTFOLIO MANAGEMENT IN INDIA AND IS SUBJECT TO CON TINUOUS CONTROL, REGULATION AND MONITORING BY SEBI WITH AN OBJECTIVE OF INVESTOR PROTECTION AND PROMOTE AND REGULATE SEC URITIES MARKET. THE QUALIFICATION AND EXPERIENCE OF THE POR TFOLIO ITA 7273- 74/MUM/2012 37 MANAGER IS ALSO SPECIFIED IN THE AFORE-STATED REGUL ATIONS SO THAT ONLY PROFESSIONAL, SKILLED, SPECIALIZED AND EX PERIENCED PERSONS ARE ENGAGED IN THE ACTIVITIES OF PORTFOLIO MANAGEMENT . THE ROLES AND RESPONSIBILITIES OF PORT FOLIO MANAGERS COVERS A VAST SPECTRUM OF ACTIVITIES PROVI DED TO CLIENTS FOR FEE RANGING FROM PROVIDING ADVISES , OR DIRECT OR UNDERTAKE ON BEHALF OF CLIENT THE MANAGEMENT OR ADMINISTRATION OF A PORTFOLIO OF SECURITIES OR FUND S OF THE CLIENT MEANING THEREBY THAT THE PORTFOLIO MANAGERS DOES NOT ACT MERELY AS A STOCK-BROKER TO BUY AND SELL SHARES OF THE CLIENTS IN EXECUTION OF THE INSTRUCTIONS OF THE CLI ENTS FOR A BROKERAGE/COMMISSION , BUT PORTFOLIO MANAGER RENDER S A VAST SPECTRUM OF ACTIVITIES WHICH INVOLVES GIVING A DVISES TO CLIENTS AND/OR MANAGEMENT AND ADMINISTRATION OF SEC URITIES OR FUND PORTFOLIOS OF THE CLIENT WHICH IS MANAGED BY EXPERIENCED, SPECIALIZED, SKILLED AND QUALIFIED PRO FESSIONALS WHO ACT AS PORTFOLIO MANAGERS TO RENDER THEIR EXPER TISE, SKILL AND SPECIALIZED KNOWLEDGE TO THE INVESTORS CLIENT FOR A FEE WITH AN OBJECTIVE TO CREATE WEALTH FOR THE INVESTOR CLIENTS AND MAXIMIZING GAINS FOR THESE INVESTORS CLIENT. TH E HIGHLY SPECIALIZED AND SKILL SERVICES ARE RENDERED BY THES E QUALIFIED AND EXPERIENCED PORTFOLIO MANAGERS ON CONTINUOUS BA SIS TO CLIENTS IN A HIGHLY VOLATILE AND COMPLEX SECURITIES MARKET WITH AN OBJECTIVE OF WEALTH CREATION AND MAXIMIZING GAINS FOR THE INVESTORS CLIENTS AND ARE NOT RENDERING ME RELY SERVICES CONNECTED WITH THE TRANSFER OF SHARES NOR ARE THEY CONNECTED WITH COST OF ACQUISITION OR SALE OF SHARE S EVEN IF THESE PMS CHARGES ARE PAID BASED AND CALCULATED ON PURCHASES AND SALES OF SHARES OR EVEN IF THESE PMS CHARGES ARE RETURN BASED FEES. THESE FEES HAVE A MAJOR COMP ONENT ITA 7273- 74/MUM/2012 38 TOWARDS ADVISORY CHARGES BEING HIGHLY SKILLED AND SPECIALIZED KNOWLEDGE AND EXPERTISE BASED SERVICES BEING MANAGERIAL AND CONSULTANCY SERVICES OF EXPERIENCED AND QUALIFIED PROFESSIONALS ACTING AS PORTFOLIO MANAGER S WHO RENDER THESE SPECIALIZED AND SKILLED SERVICES ON A CONTINUOUS BASIS TO INVESTOR CLIENT FOR FEE IN A HI GHLY VOLATILE AND COMPLEX SECURITIES MARKET TO MAXIMIZE GAINS AND TO CREATE WEALTH FOR THE INVESTORS , WHETHER THESE FEE PAID TO PORTFOLIO MANAGERS ARE CALCULATED BASED ON PURCHASE S OR SALES OF SECURITIES, OR A RETURN BASED FEE ETC. IS NOT RELEVANT AND MATERIAL BUT THE FACT OF THE MATTER IS THAT THE SE PMS CHARGES ARE NOT PAID TOWARDS COST OF ACQUISITION OF THE CAPITAL ASSETS OR FOR IMPROVEMENT OF THE CAPITAL AS SET NOR ARE THESE FEES BEING EXPENDITURE INCURRED WHOLLY AND EX CLUSIVELY IN CONNECTION WITH TRANSFER OF THE CAPITAL ASSET AN D HENCE THE SAME CANNOT BE ALLOWED AS DEDUCTION U/S. 48 OF THE ACT FROM THE FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUIN G TO THE ASSESSEE AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET BEING SHARES. OUR ABOVE VIEW IS FORTIFIED BY THE DECISION OF JURI SDICTIONAL MUMBAI-TRIBUNAL IN THE CASE OF DEVENDRA MOTILAL KOT HARI V. DCIT IN (2011) 13 TAXMAN.COM 15 (MUM.-TRIB.), HOMI K BHABHA V. ITO (2011)14 TAXMANN.COM 165(MUM-TRIB.) A ND PRADEEP KUMAR HARLALKA V. ACIT (2011) 14 TAXMANN.CO M 42(MUM-TRIB.). THE FINDINGS OF THE MUMBAI-TRIBUNAL IN THE CASE OF DEVENDRA MOTILAL KOTHARI(SUPRA) ON IDENTICA L ISSUE ARE AS UNDER: ITA 7273- 74/MUM/2012 39 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND A LSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSE RVED THAT THE PROFIT ARISING TO THE ASSESSEE ON SALE OF SHARE S AND SECURITIES CHARGEABLE TO TAX UNDER THE HEAD 'CAPITA L GAINS' AND THIS POSITION IS NOT IN DISPUTE. THE ONLY DISPU TE IS WHETHER THE FEES PAID BY THE ASSESSEE FOR PMS CAN B E ALLOWED AS DEDUCTION IN COMPUTING SUCH INCOME OR NO T. IN THIS REGARD, IT IS OBSERVED THAT THE CHARGE OF INCO ME-TAX IS CREATED BY VIRTUE OF THE PROVISIONS CONTAINED IN SE CTION 4 ACCORDING TO WHICH THE INCOME-TAX IS CHARGED FOR TH E RELEVANT ASSESSMENT YEAR IN ACCORDANCE WITH AND SUBJECT TO T HE PROVISIONS OF INCOME-TAX ACT IN RESPECT OF THE TOTA L INCOME OF THE RELEVANT PREVIOUS YEAR OF EVERY PERSON. AS PER THE SCHEME OF THE ACT, INCOME IS BROADLY CLASSIFIED UND ER FIVE DIFFERENT HEADS AND THE INCOME CHARGEABLE TO TAX UN DER THESE HEADS HAS TO BE COMPUTED AS PER THE RELEVANT PROVISIONS APPLICABLE TO RESPECTIVE HEADS OF INCOME SECTION 45 TO SECTION 55A FALLING UNDER CHAPTER IV-E DEAL W ITH ASSESSMENT OF INCOME UNDER THE HEAD 'CAPITAL GAINS' AND SECTION 48 IN PARTICULAR PRESCRIBES THE MODE OF COM PUTATION OF CAPITAL GAINS. AS PROVIDED IN SECTION 48, EXPEND ITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH TRANSFER AND THE COST OF ACQUISITION OF THE ASSET AND COST O F ANY IMPROVEMENT THERETO ARE DEDUCTIBLE FROM THE FULL VA LUE OF THE CONSIDERATION RECEIVED OR ACCRUING TO THE ASSESSEE AS A RESULT OF TRANSFER OF THE CAPITAL ASSETS. 13. IN THE PRESENT CASE, THE DEDUCTION ON ACCOUNT O F FEES PAID FOR PMS HAS BEEN CLAIMED BY THE ASSESSEE AS DE DUCTION IN COMPUTING CAPITAL GAINS ARISING FROM SALE OF SHA RES AND ITA 7273- 74/MUM/2012 40 SECURITIES. HE HOWEVER HAS FAILED TO EXPLAIN AS TO HOW THE SAID FEES COULD BE CONSIDERED AS COST OF ACQUISITIO N OF THE SHARES AND SECURITIES OR THE COST OF ANY IMPROVEMEN T THERETO. HE HAS ALSO FAILED TO EXPLAIN AS TO HOW THE SAID FE ES COULD BE TREATED AS EXPENDITURE INCURRED WHOLLY AND EXCLU SIVELY IN CONNECTION WITH SALE OF SHARES AND SECURITIES. ON T HE OTHER HAND, THE BASIS ON WHICH THE SAID FEES WAS PAID BY THE ASSESSEE SHOW THAT IT HAD NO DIRECT NEXUS WITH THE PURCHASE AND SALE OF SHARES AND AS RIGHTLY CONTENDED BY THE LD. DR, THE SAID FEES WAS PAYABLE BY THE ASSESSEE GOING BY THE BASIS THEREOF EVEN WITHOUT THERE BEING ANY PURCHASE OR SALE OF SHARES IN A PARTICULAR PERIOD. AS A MATTER OF FA CT, WHEN THE LD. CIT(A) REQUIRED THE ASSESSEE TO ALLOCATE THE FE ES PAID FOR PMS IN RELATION TO PURCHASE AND SALE OF SHARES AS W ELL AS IN RELATION TO THE SHARES HELD AS INVESTMENT ON THE LA ST DATE OF THE PREVIOUS YEAR, THE ASSESSEE COULD NOT FURNISH S UCH DETAILS NOR COULD HE GIVE ANY DEFINITE BASIS ON WHI CH SUCH ALLOCATION WAS POSSIBLE. HAVING REGARD TO ALL THESE FACTS OF THE CASE, WE ARE OF THE VIEW THAT THE FEES PAID BY THE ASSESSEE FOR PMS WAS NOT INEXTRICABLY LINKED WITH T HE PARTICULAR INSTANCE OF PURCHASE AND SALE OF SHARES AND SECURITIES SO AS TO TREAT THE SAME AS EXPENDITURE I NCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH SALE OR THE COST OF ACQUISITION/IMPROVEMENT OF THE SHARES AND S ECURITIES SO AS TO BE ELIGIBLE FOR DEDUCTION IN COMPUTING CAP ITAL GAINS UNDER SECTION 48. 14. AS REGARDS THE CASE LAWS CITED BY THE LD. COUNS EL FOR THE ASSESSEE IN SUPPORT OF THE ASSESSEE'S CASE ON THE P OINT UNDER CONSIDERATION, IT IS OBSERVED THAT THE FACTS INVOLVED ITA 7273- 74/MUM/2012 41 THEREIN WERE ALTOGETHER DIFFERENT IN AS MUCH AS THE RELEVANT AMOUNTS CLAIMED BY THE ASSESSEE AS DEDUCTION IN COM PUTING CAPITAL GAINS WERE FOUND TO BE IN THE NATURE OF EXPENDITURE/COST COVERED BY SECTION 48. FOR INSTANC E, IN THE CASE OF MATHURADAS MANGALDAS PAREKH (SUPRA), PAYMEN T OF BETTERMENT CHARGES MADE UNDER TOWN PLANNING SCHEME HAD RESULTED IN INCREASE IN POTENTIAL VALUE OF LAND AND THE SAME THEREFORE WERE HELD TO BE COST OF IMPROVEMENT OF TH E SAID LAND. SIMILARLY, IN THE CASE OF CHEMMANCHERRY ESTAT ES CO. ( SUPRA), FUNDS BORROWED BY THE ASSESSEE WERE UTILIZE D FOR ACQUISITION OF LAND AND THE INTEREST PAID THEREON T HUS WAS HELD TO THE FORMING PART OF THE COST OF ACQUISITION OF THE LAND. IN OTHER CASES ALSO, THE BROKERAGE EXPENSES INCURRE D BY THE ASSESSEE WERE IN RESPECT OF PARTICULAR SALE OF CAPI TAL ASSETS AND THE SAME THEREFORE WERE HELD TO BE DEDUCTABLE W HILE COMPUTING CAPITAL GAIN BEING EXPENDITURE INCURRED W HOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER/SA LE. 15. AT THE TIME OF HEARING BEFORE US, THE LD, COUNS EL FOR THE ASSESSEE HAS RAISED AN ALTERNATIVE CONTENTION IN SU PPORT OF THE ASSESSEE'S CLAIM FOR DEDUCTION ON ACCOUNT OF FE ES PAID FOR PMS IN COMPUTING THE CAPITAL GAINS RELYING ON THE T HEORY OF REAL INCOME AND THE RULE OF DIVERSION OF INCOME BY AN OVERRIDING TITLE. HE HAS CONTENDED THAT THE FEES FO R PMS BEING CONTRACTUAL LIABILITY DIRECTLY RELATABLE TO T HE CAPITAL GAINS, THERE WAS A DIVERSION OF INCOME FROM CAPITAL GAIN BY AN OVERRIDING TITLE TO THE EXTENT OF THE AMOUNT OF SUCH FEES AND THE SAME THEREFORE WAS NOT THE INCOME BELONGING TO THE ASSESSEE WHICH WAS CHARGEABLE TO TAX UNDER THE HEAD 'CAPITAL GAINS'. IN THIS REGARD, WE MAY OBSERVE THA T EVEN ITA 7273- 74/MUM/2012 42 THOUGH THE ASSESSEE WAS UNDER AN OBLIGATION TO PAY THE FEES FOR PMS, THE MERE EXISTENCE OF SUCH OBLIGATION TO P AY THE SAID AMOUNT WAS NOT ENOUGH FOR THE APPLICATION OF T HE RULE OF DIVERSION OF INCOME BY AN OVERRIDING TITLE. THE TRU E TEST FOR APPLICABILITY OF THE SAID RULE IS WHETHER SUCH OBLI GATION IS IN THE NATURE OF A CHARGE ON SOURCE I.E. THE PROFIT EA RNING APPARATUS ITSELF AND ONLY IN SUCH CASES WHERE THE S OURCE OF EARNING INCOME IS CHARGED BY AN OVERRIDING TITLE, T HE SAME CAN BE CONSIDERED AS DIVERSION OF INCOME BY AN OVER RIDING TITLE. 16. IN THE CASE OF SITALDAS TIRATHDAS (SUPRA), IT W AS HELD BY THE HON'BLE SUPREME COURT THAT THE TRUE TEST FOR TH E APPLICATION OF THE RULE OF DIVERSION OF INCOME BY A N OVERRIDING TITLE IS WHETHER THE AMOUNT SOUGHT TO BE DEDUCTED, IN TRUTH, NEVER REACHED THE ASSESSEE AS HIS INCOME. OBLIGATIO NS, NO DOUBT, ARE THERE IN EVERY CASE, BUT IT IS THE NATUR E OF THE OBLIGATION WHICH IS THE DECISIVE FACT. EXPLAINING, FURTHER, IT WAS OBSERVED BY THE HON'BLE SUPREME COURT THAT THER E IS A DIFFERENCE BETWEEN AN AMOUNT WHICH A PERSON IS OBLI GED TO APPLY OUT OF HIS INCOME AND AN AMOUNT WHICH BY THE NATURE OF THE OBLIGATION CANNOT BE SAID TO BE A PART OF TH E INCOME OF THE ASSESSEE. WHERE BY THE OBLIGATION, INCOME IS DI VERTED BEFORE IT REACHES TO THE ASSESSEE, IT IS DEDUCTIBLE , BUT WHERE THE INCOME IS REQUIRED TO BE APPLIED TO DISCHARGE A N OBLIGATION AFTER SUCH INCOME REACHES THE ASSESSEE, THE SAME CONSEQUENCE, IN LAW, DOES NOT FOLLOW. IT WAS HELD B Y THE HON'BLE SUPREME COURT THAT IT IS THE FIRST KIND OF PAYMENT WHICH CAN TRULY BE EXCLUDED AND NOT THE SECOND. THE SECOND PAYMENT IS MERELY AN OBLIGATION TO PAY ANOTHER A PO RTION OF ITA 7273- 74/MUM/2012 43 ONE'S OWN INCOME WHICH HAS BEEN RECEIVED AND IS SIN CE APPLIED. 17. IN THE PRESENT CASE, THE PROFIT ARISING FROM TH E SALE OF SHARES WAS RECEIVED BY THE ASSESSEE DIRECTLY WHICH CONSTITUTED ITS INCOME AT THE POINT WHEN IT REACHED OR ACCRUED TO THE ASSESSEE. THE FEE FOR PMS ON THE OTH ER HAND WAS PAID SEPARATELY BY THE ASSESSEE TO DISCHARGE HI S CONTRACTUAL LIABILITY. IT WAS THUS A CASE OF AN OBL IGATION TO APPLY INCOME WHICH HAD ACCRUED OR ARISEN TO THE ASS ESSEE AND THE SAME AMOUNTED TO A MERE APPLICATION OF INCO ME. WE, THEREFORE, HAVE NOT HESITATION TO HOLD THAT THE PAY MENT OF FEES BY THE ASSESSEE FOR PMS DID NOT AMOUNT TO DIVE RSION OF INCOME BY OVERRIDING TITLE AND THE CONTENTIONS RAIS ED BY THE ASSESSEE IN THIS REGARD CANNOT BE ACCEPTED BEING DE VOID OF ANY MERIT. 18. AS REGARDS THE CONTENTION OF THE LD. COUNSEL FO R THE ASSESSEE IN SUPPORT OF ASSESSEE'S CLAIM FOR DEDUCTI ON ON ACCOUNT OF FEES PAID FOR PMS BASED ON REAL INCOME T HEORY, WE AGREE WITH THE LD. DR THAT THE THEORY OF REAL IN COME CANNOT BE APPLIED TO ALLOW DEDUCTION TO THE ASSESSE E WHICH IS OTHERWISE NOT PERMISSIBLE UNDER THE INCOME-TAX A CT. IN THE CASE OF CIT V. UDAYAN CHINUBHAI [1996] 222 ITR 456 / 88 TAXMAN 114 (SC) IT WAS HELD BY THE HON'BLE SUPREME COURT IN THE SIMILAR CONTEXT THAT WHAT IS NOT PERMISSIBLE IN LAW AS DEDUCTION UNDER ANY OF THE HEADS CANNOT BE ALLOWED AS A DEDUCTION ON THE PRINCIPLE OF REAL INCOME THEORY. ITA 7273- 74/MUM/2012 44 19. FOR THE REASONS GIVEN ABOVE, WE FIND NO MERIT I N THE ARGUMENTS RAISED BY THE LD. COUNSEL FOR THE ASSESSE E IN SUPPORT OF THE ASSESSEE'S CASE ON THE ISSUE UNDER CONSIDERATION AND REJECTING THE SAME, WE HOLD THAT THE FEES PAID BY THE ASSESSEE FOR PMS WAS NOT DEDUCTIBLE IN COMPUTING THE CAPITAL GAINS AS RIGHTLY HELD BY THE ASSESSING OFFICER THE IMPUGNED ORDER OF THE LD. CIT(A) CONFI RMING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THIS ISSUE IS THEREFORE UPHELD DISMISSING THIS APPEAL FILED BY TH E ASSESSEE. 20. IN THE RESULT, THE ASSESSEE'S APPEAL IS DISMISS ED THE ASSESSEEE HAS PLACED RELIANCE ON DECISIONS OF PUNE BENCHES OF THE TRIBUNAL INCLUDING IN THE CASE OF KR A HOLDING AND TRADING PRIVATE LIMITED (SUPRA) WHICH IS DISTIN GUISHED BY THE MUMBAI TRIBUNAL IN THE CASE OF PRADEEP KUMAR HARLALKA(SUPRA ) AS UNDER:- 13. COMING TO THE DECISION OF PUNE BENCH OF THE TR IBUNAL IN THE CASE OF KRA HOLDING & TRADING (P.) LTD. (SUPRA) , AFTER PERUSING THE JUDGMENT VERY CAREFULLY WE FIND THAT I N THAT DECISION THE DECISION OF CO-ORDINATE BENCH OF MUMBA I TRIBUNAL IN THE CASE OF DEVENDRA MOTILAL KOTHARI (S UPRA) WAS DISTINGUISHED MAINLY ON THE BASIS OF DECISION OF HO N'BLE BOMBAY HIGH COURT IN THE CASE OF SMT. SHAKUNTALA KA NTILAL (SUPRA). THE PUNE BENCH REFERRED TO VARIOUS PARAS O F HON'BLE BOMBAY HIGH COURT'S DECISION IN PARA-22 AND ULTIMAT ELY CONCLUDED IN PARA-23 THAT WHAT WAS REQUIRED WAS THA T THE CLAIM SHOULD BE BONA FIDE AND CLAIM FOR SUCH GENUIN E ITA 7273- 74/MUM/2012 45 EXPENDITURE HAS TO BE ALLOWED SO LONG AS INCURRING OF THE EXPENDITURE IS A MATTER OF FACT AND NECESSITY. HOWE VER, AS POINTED OUT BY THE LD. DR THIS DECISION WAS SPECIFI CALLY OVER RULED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF ROSHANBABU MOHD. HUSSEIN MERCHANT (SUPRA) AND AT PLACITUM 18 IT HAS BEEN OBSERVED AS UNDER: 'AS REGARDS THE DECISIONS OF THIS COURT IN THE CAS E OF CIT V. SHAKUNTALA KANTILAL [1991] 190 ITR 56 FOLLOWED IN T HE CASE OF ABRAR ALVI [2001] 247 ITR 312] AND THE DECISION OF THE KERALA HIGH COURT IN THE CASE OF SMT. THRESSIAMMA ABRAHAM (NO. 1) [2001] 227 ITR 802WHICH ARE STRONGL Y RELIED UPON BY THE COUNSEL FOR THE ASSESSEE, WE ARE OF THE OPINION THAT THE SAID DECISIONS ARE NO LONGER GOOD LAW IN T HE LIGHT OF THE SUBSEQUENT DECISIONS OF THE APEX COURT REFERRED TO HEREINABOVE.' THUS, WITHOUT GOING INTO FURTHER DETAILS WE WOULD O NLY LIKE TO OBSERVE THAT THE DECISION IN THE CASE OF SMT. SHAKU NTALA KANTILAL (SUPRA) IS NO MORE A GOOD LAW IN VIEW OF T HE LATEST DECISION AND THEREFORE THAT DECISION CANNOT BE RELI ED FOR THE PROPOSITION THAT NECESSITY OF EXPENDITURE WOULD MAK E THE SAME ALLOWABLE. THUS, RESPECTFULLY FOLLOWING THE AFORE-STATED DECIS IONS OF THE CO-ORDINATE JURISDICTIONAL BENCHES OF THE MUMBA I TRIBUNAL AND OUR DETAILED DISCUSSIONS AND REASONING IN THIS ORDER, WE HOLD THAT THESE PMS EXPENSES OF RS.20,04, 393/- PAID TO PORTFOLIO MANAGERS BEING MANAGEMENT EXPENSE S INCURRED WITH RESPECT TO SECURITIES / FUNDS OF THE ASSESSEE ITA 7273- 74/MUM/2012 46 BEING MANAGED BY PORTFOLIO MANAGERS , BEING DISALLO WED BY THE AO AND CONFIRMED BY THE CIT(A), ARE NOT ALLOWAB LE AS DEDUCTION U/S 48 OF THE ACT FROM THE FULL VALUE OF CONSIDERATION ON SALE OF SECURITIES RECEIVED OR ACC RUING TO THE ASSESSEE . ACCORDINGLY, WE DISMISS THIS APPEAL FILE D BY THE ASSESSEE. WE ORDER ACCORDINGLY. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN ITA N0. 7407/MUM/2011 FOR THE ASSESSMENT YEAR 2008-09 IS DISMISSED. RESPECTFULLY FOLLOWING THE ORDERS OF THE MUMBAI TRI BUNAL IN THE CASE OF CAPTAIN AVINASH CHANDER BATRA V. DCIT IN ITA NO 740 7/MUM2011 , WE HOLD THAT THE ASSESSEE COMPANY IS NOT ENTITLED FOR DEDUC TIONS OF PMS MANAGEMENT FEE OF RS.11,55,354/- PAID TO PORTFOLIO MANAGERS FR OM THE INCOME COMPUTED UNDER THE HEAD CAPITAL GAINS. WE ORDER ACCORDINGLY. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE COMPANY IN ITA N0. 7273/MUM/2012 FOR THE ASSESSMENT YEAR 2007-08 IS PA RTLY ALLOWED. ITA NO. 7274/MUM/2012-ASSESSEES APPEAL FOR ASSESSM ENT YEAR 2009-10 12. NOW, WE WILL TAKE UP ASSESSEE COMPANYS APPEAL IN ITA NO. 7274/MUM/2012 FOR THE ASSESSMENT YEAR 2009-10 13. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE CO MPANY IN MEMO OF APPEAL FILED WITH THE TRIBUNAL READ AS UNDER: ITA 7273- 74/MUM/2012 47 1. ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF RS.2,58,415/- BEING INTEREST INCOME AS PER THE AIR INFORMATION. YOUR APPELLANT PRAY THAT THE SAME BE DELETED. 2. ON THE FACTS & IN CIRCUMSTANCE OF THE CASE AND IN L AW THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF RS.9 7,51,158/- BEING DISALLOWANCE U/S. 14A. YOUR APPELLANT PRAY THAT THE SAME BE DELETED. 14. DURING ASSESSMENT PROCEEDINGS IT WAS OBSERVED B Y THE AO ON VERIFICATION OF ITS DETAILS OF REVENUE DATA BASE WITH THE ACCOUN TS OF THE ASSESSEE COMPANY THAT THE ASSESSEE COMPANY FAILED TO RECONCI LE THE ITS DETAILS VIDE AIR INFORMATION WITH BOOKS OF ACCOUNTS OF THE ASSES SEE COMPANY AND THERE WAS DIFFERENCE AS UNDER: S.NO. NAME OF PARTY FROM WHOM SUM RECEIVED AS PER ITS DETAILS NATURE OF PARTY AS PER AIR AS PER ASSESSEES A/C DIFFERENCE 1. SUNFLAG IRON AND STEELS LTD. INTEREST 7532586 7310869 221717 2. SAL STEEL LTD. INTEREST 137590 100892 36698 TOTAL 258415 THE ASSESSEE COMPANY WAS ASKED BY THE AO TO EXPLAIN THE DIFFERENCE AND THE ASSESSEE COMPANY FAILED TO EXPLAIN THE DIFFERENCE. THE AO MADE THE ADDITIONS OF RS.2,58,415/- TO THE INCOME OF THE ASSESSEE COMP ANY , VIDE ASSESSMENT ORDERS DATED 25-03-2011 PASSED U/S 143(3) OF THE AC T. THE LEARNED CIT(A) CONFIRMED THE ASSESSMENT ORDERS DATED 25-03-2011 PA SSED BY THE AO U/S ITA 7273- 74/MUM/2012 48 143(3) OF THE ACT AS THE ASSESSEE COMPANY MERELY SU BMITTED THAT THE ASSESSEE COMPANY HAS NOT RECEIVED THE SAID AMOUNTS FROM THES E PARTIES WHILE IT FAILED TO RECONCILE THE AIR INFORMATION AS PER ITS DATABAS E WITH ITS BOOKS OF ACCOUNTS, VIDE APPELLATE ORDERS DATED 26-09-2012 PA SSED BY LEARNED CIT(A). ON SECOND APPEAL FILED BY THE ASSESSEE COMPANY BEFO RE THE TRIBUNAL , THE LEARNED COUNSEL FOR THE ASSESSEE COMPANY SUBMITTED THAT THE AO MAY CALL THESE PARTIES AND VERIFY THE CONTENTIONS OF THE ASS ESSEE COMPANY THAT THE ASSESSEE COMPANY HAS NOT RECEIVED ANY INCOME FROM T HESE PARTIES IN EXCESS OF WHAT IS DECLARED BY THE ASSESSEE COMPANY IN ITS BOO KS OF ACCOUNTS , AND THE AIR DETAILS AS PER ITS DATABASE IS INCORRECT. THE L EARNED DR SUBMITTED THAT HE HAS NO OBJECTION IF THE MATTER IS REMITTED BACK TO THE FILE OF AO FOR MAKING NECESSARIES ENQUIRIES AND EXAMINATION WITH THESE PA RTIES ABOUT THE INTEREST INCOME REFLECTED IN AIR INFORMATION AND WHAT IS REP ORTED BY THE ASSESSEE COMPANY AS PER ITS BOOKS OF ACCOUNTS. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MAT ERIAL ON RECORD AND IN OUR CONSIDERED VIEW, THIS ISSUE OF RECONCILIATION O F THE DIFFERENCE IN THE INTEREST INCOME EARNED BY THE ASSESSEE COMPANY VIDE ITS DATABASE OF THE REVENUE AND THE BOOKS OF ACCOUNTS OF THE ASSESSEE C OMPANY NEEDS TO BE SET ASIDE AND REMITTED BACK TO THE FILE OF THE AO FOR D ENOVO DETERMINATION OF THE ISSUE AFTER MAKING NECESSARY ENQUIRIES AND VERIFIC ATIONS WITH BOTH THE PARTIES WHO HAVE SUPPOSEDLY GIVEN INTEREST TO THE A SSESSEE COMPANY AS TO THE GRANT OF INTEREST IN FAVOUR OF THE ASSSESSEE COMPAN Y AS REFLECTED IN THE AIR INFORMATION DATABASE ITS. NEEDLESS TO SAY THE AO SH ALL GRANT PROPER AND ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE COMPANY IN ACCORDANCE WITH PRINCIPLES OF NATURAL JUSTICE IN ACCORDANCE WI TH LAW. THE ASSESSEE COMPANY WILL BE ALLOWED TO PRODUCE RELEVANT EVIDENC ES AND EXPLANATION BY THE AO IN ITS DEFENSE. WE ORDER ACCORDINGLY. ITA 7273- 74/MUM/2012 49 THE SECOND ISSUE IS WITH RESPECT TO DISALLOWANCE U/ S 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES, 1962. THE FACTS ARE ID ENTICAL TO THE FACTS IN THE ITA NO. 7273/MUM/2012 FOR ASSESSMENT YEAR 2007-08 W ITH ONLY EXCEPTION THAT THE INSTANT YEAR IS ASSESSMENT YEAR 2009-10 AN D RULE 8D OF INCOME TAX RULES, 1962 IS APPLICABLE W.E.F. 2008-09 , WHILE TH E APPEAL IN ITA NO. 7273/MUM/2012 WAS FOR ASSESSMENT YEAR 2007-08 WHERE BY RULE 8D OF INCOME TAX RULES, 1962 WAS NOT APPLICABLE. WE ARE N OT REPEATING THE FACTS FOR THE SAKE OF BREVITY WHICH ARE PARA MATERIA EXCEPT T HE ASSESSMENT YEAR BEING 2009-10. THE INVESTMENT AS MADE BY THE ASSESSEE COM PANY AS AT 31-03-2009 WAS RS. 37.45 CRORES WHILE THE INVESTMENT WERE AT R S.11.09 CRORES AS AT 31- 03-2008 WHILE ON THE OTHER HAND NET OWNED FUNDS AS AT 31-03-2009 WERE 55.87 CRORES AND NET OWNED FUNDS AS AT 31-03-2008 W ERE RS. 102.09 CRORES, AS BORNE OUT FROM THE AUDITED FINANCIAL STATEMENT F OR THE FINANCIAL YEAR 2008- 09 IN THE PAPER BOOK FILED WITH THE TRIBUNAL . IN O UR CONSIDERED VIEW, INTEREST EXPENDITURE CANNOT BE DISALLOWED UNDER RULE 8D(2)(I I) OF INCOME TAX RULES, 1962 AS IT IS DEMONSTRATED BY THE ASSESSEE COMPANY IN THE INSTANT APPEAL THAT THE ASSESSEE COMPANYS NET OWNED FUNDS ARE MUC H HIGHER THAN THE INVESTMENTS IN SHARES AND MUTUAL FUNDS MADE BY THE ASSESSEE COMPANY. THUS, AS HELD BY HONBLE BOMBAY HIGH COURT IN THE C ASE OF RELIANCE UTILITIES AND POWER LIMITED (SUPRA) AND TWO DECISIONS IN HDF C BANK LIMITED (SUPRA), WE ARE OF CONSIDERED VIEW THAT NO DISALLOWANCE CAN BE MADE BY THE REVENUE ON ACCOUNT OF THE INTEREST EXPENDITURE AS THERE WIL L BE PRESUMPTION THAT THE ASSESSEE COMPANY HAS UTILIZED ITS NET OWNED FUNDS W HICH ARE IN FAR EXCESS OF THE INVESTMENTS MADE BY THE ASSESSEE COMPANY IN SHA RES AND MUTUAL FUNDS, FOR THE PURPOSES OF MAKING INVESTMENTS IN SHARES AN D MUTUAL FUND. THUS, KEEPING IN VIEW THE FACTUAL MATRIX OF THE INSTANT C ASE , IN OUR CONSIDERED VIEW, NO DISALLOWANCE U/S 14A OF THE ACT READ WITH RULE 8 D(2)(II) OF INCOME TAX RULES, 1962 IS WARRANTED TOWARDS INTEREST EXPENDITU RE INCURRED BY THE ASSESSEE COMPANY.OUR DECISION IN ITA NO. 7273/MUM/2 012 FOR ASSESSMENT YEAR 2007-08 SHALL APPLY MUTATIS MUTANDIS WITH RESP ECT TO DISALLOWANCE OF ITA 7273- 74/MUM/2012 50 INTEREST EXPENDITURE UNDER SECTION 14A OF THE ACT I S CONCERNED AS NO DISALLOWANCE OF INTEREST EXPENDITURE OF RS.86,72,29 8/- AS MADE BY THE AO AND CONFIRMED BY LEARNED CIT(A) IS WARRANTED BASED ON FACTS AND CIRCUMSTANCES OF THE CASE. THE AO HAS NOT MADE ANY DISALLOWANCE UNDER SECTION 14A READ RULE 8D(2)(I) OF INCOME TAX RULES, 1962 IN HIS IMPUGNED ASSESSMEN T ORDER PASSED U/S 143(3) OF THE ACT , WHICH HAS ALSO ATTAINED FINALIT Y. WE HAVE NOTED THE SAME. HOWEVER. THE AO HAS MADE DISALLOWANCE OF 0.5% OF T HE AVERAGE VALUE OF INVESTMENTS UNDER SECTION 14A OF THE ACT READ WITH RULE 8D (2)(III) OF THE INCOME TAX RULES, 1962. THE LEARNED CIT(A) CONFIRM ED THE SAME VIDE HIS APPELLATE ORDERS . SO, FAR AS THE CONTENTIONS OF TH E ASSESSEE COMPANY ARE CONCERNED WITH RESPECT TO THE INVESTMENT OF RS.1,10 ,30,000/- MADE IN FOREIGN SUBSIDIARY COMPANY, WE ARE IN AGREEMENT WITH THE AS SESSEE COMPANY THAT SUCH INVESTMENTS IN FOREIGN SUBSIDIARIES SHALL NOT BE INCLUDED FOR COMPUTING DISALLOWANCE U/S 14A OF THE ACT READ WITH RULE 8D(2 )(III) OF INCOME TAX RULES, 1962 , AS THE INCOME BY WAY OF DIVIDEND IS CHARGEAB LE TO TAX AND IS NOT EXEMPT FROM TAX. THUS , THE SAID INVESTMENTS OF RS. 1,10,30,000/- IN FOREIGN SUBSIDIARY SHALL NOT BE INCLUDED FOR COMPUTING DISA LLOWANCE OF INDIRECT EXPENDITURE UNDER RULE 8D(2)(III) OF INCOME TAX RUL ES, 1962 READ WITH SECTION 14A OF THE ACT. HOWEVER, WITH RESPECT TO THE CONTENTIONS OF THE ASS ESSEE COMPANY REGARDING OTHER INVESTMENTS IN SHARES AND MUTUAL FUNDS, IN OU R CONSIDERED VIEW, THE SAME SHALL BE INCLUDED FOR COMPUTING DISALLOWANCE U /S 14A OF THE ACT HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE COMPANY AS CONTEMPLATED U/S 14A(2) OF THE ACT KEEPING IN VIEW THE PROVISIONS OF RULE 8 D (2)(III) OF INCOME TAX RULES, 1962 TO WORK OUT DISALLOWANCE U/S 14A OF THE ACT. THE CONTENTIONS OF THE ASSESSEE COMPANY THAT THE INVESTMENTS ARE MADE IN SUBSIDIARY ITA 7273- 74/MUM/2012 51 COMPANIES AND HENCE NO DISALLOWANCE OF INDIRECT EXP ENDITURE BE MADE UNDER RULE 8D(2)(III) OF INCOME TAX RULES, 1962 READ WITH SECTION 14A OF THE ACT BE MADE CANNOT BE ACCEPTED.IT IS A MATTER OF FACT AS B ORNE OUT FROM THE SCHEDULE F TO THE AUDITED FINANCIAL STATEMENTS (PAPER BOOK / PAGE 8) THAT THE INVESTMENTS AS AT 31-03-2008 WERE TO THE TUNE OF RS . 11.09 CRORES WHILE THE INVESTMENTS AS AT 31-03-2009 WERE RS.37.45 CRORES, THEREBY THE ASSESSEE COMPANY MADE NET INVESTMENTS OF RS. 26.36 CRORES DU RING THE PREVIOUS YEAR RELEVANT TO THE INSTANT ASSESSMENT YEAR. WE HAVE OB SERVED THAT THERE ARE DIVERGENT VIEW OF THE TRIBUNAL ON THIS ISSUE AND MA TTER PURELY BEING FACTUAL IS TO BE DECIDED ON THE FACTS OF THE CASE KEEPING IN V IEW MANDATE OF SECTION 14A OF THE ACT WHEREBY THE AO SHALL DETERMINE THE AMOUN T OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE AND HENCE THE MATTER IS TO BE DECIDED ON EACH CASE BASE D ON THE FACTS OF THE CASE. WE HAVE DULY CONSIDERED THE JUDICIAL DECISIONS RELI ED UPON BY THE ASSESSEE COMPANY. REFERENCE IS DRAWN TO THE DECISION OF TRIB UNAL , MUMBAI IN THE CASE OF UMA POLYMERS LIMITED V. ACIT IN ITA NO 5366/MUM/ 2013 FOR THE ASSESSMENT YEAR 2009-10, WHICH WAS AUTHORED BY ONE OF US(ACCOUNTANT MEMBER) WHEREBY TRIBUNAL HELD AS UNDER: 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD AND CASE LAWS RELIED UPON BY THE ASSESEE COMPANY. WE FIND THAT SECTION 14A OF THE ACT READ WITH RULE 8D(2)(III) OF THE INCOME TAX RULES,1962 IS APPLICAB LE FROM THE ASSESSMENT YEAR 2008-09 AS HELD BY THE HON'BLE BOMB AY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. 2 34 CTR 1. THE ASSESSEE COMPANY HAS MADE AVERAGE INVESTMENTS OF RS . 14.44 CRORES COMPUTED AS PER RULE 8D(2)(III) OF INCOME T AX RULES,1962 . ITA 7273- 74/MUM/2012 52 THE INVESTMENTS MADE BY THE ASSESSEE COMPANY INCLUD ES THE INVESTMENT OF RS.19.37 CRORES MADE IN 100% SUBSIDIA RY COMPANY. 13. COMING TO THE SUBMISSION OF ASSESSEE THAT THESE ARE STRATEGIC INVESTMENTS AND NO DISALLOWANCE MADE TOWARDS THE AD MINISTRATIVE EXPENSES. WE WOULD LIKE TO MENTION THAT UNDER NORMA L CIRCUMSTANCES STRATEGIC INVESTMENT ARE MADE FOR THE PURPOSES OF DOING BUSINESS WITH A LONG TERM HORIZON AND IN THAT CASE NO DOUBT THAT THE OBJECTIVE IS TO EARN PROFITS/RETURNS FROM THE INVESTMENT BUT NORMALLY THE SAID PROFIT / RETURNS WILL COME BY WAY OF DIVIDEND(S) WHEN THE COMPANIES COME INTO PROFIT AND DECLARE DIV IDEND TO THE SHAREHOLDERS . SUCH DIVIDENDS IN THE HANDS OF SHARE HOLDERS SHALL BE EXEMPT FROM TAX. NO DOUBT , THE RETURNS CAN ALSO COME BY WAY OF DIVESTMENTS OF THESE INVESTMENTS BUT NORMALLY ST RATEGIC INVESTMENTS ARE MADE WITH LONG TERM HORIZON WHERE O BJECTIVE IS TO SET UP BUSINESS AND GROWTH OF THESE BUSINESS OVER A LONG PERIOD OF TIME. IN THESE TYPE OF STRATEGIC INVESTMENTS, THE I NVESTOR HAS TO NORMALLY DEVOTE SIGNIFICANT TIME TO PLAN, EXECUTE A ND MONITOR THESE INVESTMENTS REGULARLY AND PERIODICALLY TO ENSURE TH AT THESE STRATEGIC INVESTMENTS ARE TURNED VIABLE AND PROFITA BLE. THESE INVESTMENT DECISIONS ARE VERY COMPLEX IN NATURE. TH EY REQUIRE SUBSTANTIAL MARKET RESEARCH, DAY-TO-DAY ANALYSIS OF MARKET TRENDS AND DECISIONS WITH REGARD TO ACQUISITION, RETENTION AND SALE OF SHARES AT THE MOST APPROPRIATE TIME. THEY REQUIRE H UGE INVESTMENT IN SHARES AND CONSEQUENTIAL BLOCKING OF FUNDS. BESI DES, INVESTMENT DECISIONS ARE GENERALLY TAKEN IN THE MEETINGS OF TH E BOARD OF DIRECTORS / SHAREHOLDERS FOR WHICH ADMINISTRATIVE A ND MANAGEMENT EXPENSES ARE INCURRED AND IN SOME BUSINE SSES ITA 7273- 74/MUM/2012 53 REGULATORY APPROVALS ARE REQUIRED BEFORE SETTING UP THE SAME. THERE WILL BE REGULAR MONITORING OF THESE INVESTMEN TS WHICH ALSO MAY REQUIRE PARTICIPATION IN THE MEETINGS OF COMMIT TEES, BOARD OF DIRECTOR AND SHAREHOLDER MEETINGS. THERE WILL DEFIN ITELY BE AN EXPENDITURE INCURRED TOWARDS ADMINISTRATIVE AND MAN AGEMENT COST ETC. TOWARDS PLANNING, EXECUTING AND MAINTAINI NG THESE INVESTMENTS . OUR VIEW IS FORTIFIED BY THE FOLLOWIN G DECISIONS : 1. THE OBSERVATION MADE BY HON'BLE SUPREME COURT IN THE CASE OF CIT V. WALFORT SHARE & STOCK BROKERS PVT. LTD . (2010) 326 ITR 1(SC) DEFINING THE SCOPE OF SECTION 14A OF THE ACT INCORPORATED RETROSPECTIVELY WEF 1ST APRIL 1962. THE RELEVANT OB SERVATIONS ARE REPRODUCED AS UNDER: 'THE INSERTION OF SECTION 14A WITH RETROSPECTIVE EFFECT IS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT T O ALLOW DEDUCTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST THE TAXABLE INCOME (SEE CIRCULAR NO. 14 OF 2001 DATED 22-11-2001). IN OTHER WORDS, SECTION 14A CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO TH E EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSE S INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCOME AND PARTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SECTION 14A , THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WAS BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDATE OF SECTION 14A IS CLEAR. IT DESIRES TO CURB THE ITA 7273- 74/MUM/2012 54 PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AND AT THE SAM E TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEM PT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURR ED IN RELATION TO EXEMPT INCOME. THE BASIC REASON FOR INS ERTION OF SECTION 14A IS THAT CERTAIN INCOMES ARE NOT INCLUDIBLE WHILE COMPUTING TOTAL INCOME AS THESE ARE EXEMPT UN DER CERTAIN PROVISIONS OF THE ACT. IN THE PAST, THERE H AVE BEEN CASES IN WHICH DEDUCTION HAS BEEN SOUGHT IN RESPECT OF SUCH INCOMES WHICH IN EFFECT WOULD MEAN THAT TAX INCENTI VES TO CERTAIN INCOMES WAS BEING USED TO REDUCE THE TAX P AYABLE ON THE NON-EXEMPT INCOME BY DEBITING THE EXPENSES, INCURRED TO EARN THE EXEMPT INCOME, AGAINST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOM E, I.E., GROSS INCOME MINUS THE EXPENDITURE. ON THE SAME ANALOGY T HE EXEMPTION IS ALSO IN RESPECT OF NET INCOME. EXPENSE S ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE INCOME . THIS IS THE PURPORT OF SECTION 14A . IN SECTION 14A , THE FIRST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UND ER THIS CHAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS OF INCOME AS PRESCRIBED UNDER CHAPTER IV WOULD FALL WITHIN SECTION 14A . THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT'. IT ME ANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT OF THE APP LICABILITY OF SECTION 14A . FURTHER, SECTION 14 SPECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE ITA 7273- 74/MUM/2012 55 CHARGEABLE, AN INCOME HAS TO BE BROUGHT UNDER ONE O F THE FIVE HEADS. SECTIONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR THE PURPOSE OF CHARGEABILITY T O TAX UNDER THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL INCOME CHARGEABLE TO TAX. THE PERMISSIBLE DEDUCTION S ENUMERATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOWED ONLY WITH REFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF THE ABOVE HEADS AND IS CHARGEABLE TO TAX. IF AN INCOME LIKE DIVIDEND INCOME IS NOT A PART OF THE TOTAL INCOME, THE EXPENDITURE/DEDUCTION THOUGH OF THE NATURE SPECIFIE D IN SECTIONS 15 TO 59 BUT RELATED TO THE INCOME NOT FORMING PART OF TOTAL INCOME COULD NOT BE ALLOWED AGAINST O THER INCOME INCLUDIBLE IN THE TOTAL INCOME FOR THE PURPO SE OF CHARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT O F EXPENDITURES BETWEEN TAXABLE AND NON-TAXABLE HAS, I N PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A . READING SECTION 14 IN JUXTAPOSITION WITH SECTIONS 15 TO 59 , IT IS CLEAR THAT THE WORDS 'EXPENDITURE INCURRED' IN SECTION 14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, I NTEREST, ETC. IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FO R (SEE SECTIONS 30 TO 37 ). 2. THE ITAT,MUMBAI IN THE CASE OF ACIT V. CITICORP FINANCE (INDIA ) LIMITED (2007)108 ITD 457 HAS NEGATED THE CONTENTIO N OF THE ASSESSEE THAT IT HAD INCURRED NO EXPENDITURE FOR EARNING HIG H DIVIDENDS AS UNDER: 'IT IS DIFFICULT TO ACCEPT THE HYPOTHESIS THAT ONE CAN EARN SUBSTANTIAL DIVIDEND INCOME WITHOUT INCURRING ANY E XPENSES ITA 7273- 74/MUM/2012 56 WHATSOEVER INCLUDING MANAGEMENT OR ADMINISTRATIVE E XPENSES. BY SAME LOGIC, IT IS EQUALLY DIFFICULT TO ACCEPT THAT THE ONLY EXPENSES INVOLVED IN EARNING THE DIVIDEND INCOME ARE THOSE I NCURRED ON COLLECTION OF DIVIDEND OR ON ENCASHING A FEW DIVIDE ND WARRANTS. A COMPANY CANNOT EARN DIVIDEND WITHOUT ITS EXISTENCE AND MANAGEMENT. INVESTMENT DECISIONS ARE VERY COMPLEX I N NATURE. THEY REQUIRE SUBSTANTIAL MARKET RESEARCH, DAY-TO-DA Y ANALYSIS OF MARKET TRENDS AND DECISIONS WITH REGARD TO ACQUISIT ION, RETENTION AND SALE OF SHARES AT THE MOST APPROPRIATE TIME. TH EY REQUIRE HUGE INVESTMENT IN SHARES AND CONSEQUENTIAL BLOCKING OF FUNDS. IT IS WELL KNOWN THAT CAPITAL HAS COST AND THAT ELEMENT OF COS T IS REPRESENTED BY INTEREST. BESIDES, INVESTMENT DECISIONS ARE GENE RALLY TAKEN IN THE MEETINGS OF THE BOARD OF DIRECTORS FOR WHICH AD MINISTRATIVE EXPENSES ARE INCURRED. IT IS THEREFORE NOT CORRECT TO SAY THAT DIVIDEND INCOME CAN BE EARNED BY INCURRING NO OR NO MINAL EXPENDITURE. THIS ASPECT OF THE MATTER HAS ALSO REC EIVED CAREFUL ATTENTION OF CHENNAI BENCH OF THIS TRIBUNAL IN SOUTHERN PETRO CHEMICAL INDUSTRIES V. DY. CIT (2005) 3 SOT 157 (CHENNAI- TRIB). AFTER COMPREHENSIVE CONSIDERATION OF ALL THE RELEVA NT ASPECTS OF THE CASE INCLUDING THE PROVISIONS OF LAW, THE CHENNAI B ENCH HAS HELD THAT INVESTMENT DECISIONS ARE VERY STRATEGIC DECISI ONS IN WHICH TOP MANAGEMENT IS INVOLVED AND THEREFORE PROPORTIONATE MANAGEMENT EXPENSES ARE REQUIRED TO BE DEDUCTED WHILE COMPUTIN G THE EXEMPT INCOME FROM DIVIDEND. IN HARISH KRISHNAKANT BHATT V. INCOME TAX OFFICER (2004) 91 ITD 311 (AHD.), THE AHMEDABAD BENCH OF T HIS TRIBUNAL HAS HELD THAT, THE DIVIDEND INCOME BEING E XEMPT UNDER SECTION 10(33) , THE INTEREST ON CAPITAL BORROWED FOR ITA 7273- 74/MUM/2012 57 ACQUISITION OF RELEVANT SHARES YIELDING SUCH DIVIDE ND CANNOT BE ALLOWED DEDUCTION BY OPERATION OF SECTION 14A . IN DY. CIT V. SG INVESTMENTS &INDUSTRIES LTD . (2004) 89 ITD 44 (CAL.), THE CALCUTTA BENCH OF THIS TRIBUNAL HAS LAID DOWN TWO PROPOSITIO NS: ONE, IN VIEW OF SECTION 14A INSERTED IN THE INCOME TAX ACT WITH RETROSPECTIVE EFFECT FROM 1-4-1962, PRO RATA EXPENSES ON ACCOUNT OF INTEREST RELATABLE TO INVESTMENT IN SHARES FOR EARNING EXEMP T INCOME FROM DIVIDEND ARE TO BE DISALLOWED AGAINST TAXABLE INCOM E AND ONLY THE NET DIVIDEND INCOME IS TO BE ALLOWED EXEMPTION AFT ER DEDUCTING THE EXPENSES; AND TWO, THE EXPRESSION 'EXPENDITURE INCU RRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME' IN SECTION 14A HAS TO BE GIVEN A WIDER MEANING AND WOULD INCLUDE BOTH DIRECT AND INDIRECT RELATIONSHIP BETWE EN EXPENDITURE AND EXEMPT INCOME. FOLLOWING THE DECISION OF THE HO N'BLE SUPREME COURT IN CIT V. UNITED GENERAL TRUST LTD . (1993) 200 ITR 488 (SC), THE CALCUTTA BENCH OF THE TRIBUNAL HAS ALSO HELD TH AT THE INTEREST PAID BY THE ASSESSEE BEING ATTRIBUTABLE TO THE MONE Y BORROWED FOR THE PURPOSE OF MAKING THE INVESTMENT WHICH YIELDED THE DIVIDEND AND OTHER EXPENSES INCURRED IN CONNECTION WITH OR F OR MAKING OR EARNING THE DIVIDEND INCOME CAN BE REGARDED AS EXPE NDITURE INCURRED IN RELATION TO DIVIDEND INCOME. IN EVERPLUS SECURITIES & FINANCE LTD. V. DY. CIT (2006) 101 ITD 151 (DEL), THE DELHI BENCH OF THIS TRIBUNAL HAS HELD THAT MERELY BECAUSE THE A SSESSEE DID NOT EARN THE DIVIDEND OUT OF INVESTMENT IN CERTAIN SHAR ES DOES NOT IMPLY THAT THE PROVISIONS OF SECTION 14A WOULD NOT APPLY TO THAT EXTENT. IN ASSTT. CIT V. PREMIER CONSOLIDATED CAPITAL TRUST (I ). LTD. (2004) 83 TTJ (MUM.) 843, THE MUMBAI BENCH OF THIS TRIBUNAL HAS ITA 7273- 74/MUM/2012 58 HELD THAT THE ASSESSING OFFICER IS JUSTIFIED IN ATT RIBUTING A PART OF THE FINANCIAL AND ADMINISTRATIVE EXPENSES AS EXPEND ITURE INCURRED IN RELATION TO EXEMPT INCOME AND DISALLOWING THE SA ME IN VIEW OF THE PROVISIONS OF SECTION 14A .' 3. THE ITAT, CHENNAI BENCH HAS HELD IN THE CASE OF SOUTHERN PETRO CHEMICALS INDUSTRIES V. DCIT(2005) 3 SOT 157 AS UND ER: ' WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERU SED THE RECORDS OF THE CASE. ADMITTEDLY, THESE INVESTMENTS IN SHARES WERE MADE DURING THE COURSE OF THE CARRYING ON OF BUSINE SS AND AS IS EVIDENT FROM THE RECORDS, SUBSTANTIAL INVESTMENTS H AD BEEN MADE BY THE ASSESSEE IN EARLIER YEARS, AND DURING THE CU RRENT YEAR AS WELL THE ASSESSEE MADE AN INVESTMENT OF RS. 19 CROR ES. WHETHER TO INVEST OR NOT TO INVEST AND WHETHER TO RETAIN THE I NVESTMENTS OR TO LIQUIDATE THE SAME ARE VERY STRATEGIC DECISIONS WHI CH THE MANAGEMENT IS CALLED UPON TO TAKE. THESE ARE MIND-B OGGLING DECISIONS AND TOP MANAGEMENT IS INVOLVED IN TAKING THESE DECISIONS. THIS DECISION MAKING PROCESS IS VERY COM PLICATED AND REQUIRES VERY CAREFUL ANALYSIS. MOREOVER, THE ASSES SEE HAS TO KEEP TRACK OF VARIOUS DIVIDEND INCOMES DECLARED BY THE I NVESTEE COMPANIES AND ALSO TO KEEP TRACK OF THE DIVIDEND IN COME HAVING BEEN REGULARLY RECEIVED BY THE ASSESSEE. THIS ACTIV ITY ITSELF CALLS FOR CONSIDERABLE MANAGEMENT ATTENTION AND CANNOT BE LEF T TO A JUNIOR CLERK. THE HON'BLE SUPREME COURT IN THE CASE OF UNI TED GENERAL TRUST LTD. (SUPRA), APPLYING THE DECISION OI HON'BL E SUPREME COURT IN THE CASE OF DISTRIBUTORS (BARODA) (P) LTD. V. UNION OF INDIA (1985) 47 CTR (SC) 349: (1985) 155 ITR 120 (SC), REVERSED THE DECISION OF ITA 7273- 74/MUM/2012 59 THE HON'BLE BOMBAY HIGH COURT IN CIT V. UNITED GENERAL TRUST (P) LTD . (SUPRA), WHEREIN THE QUESTION WAS AS UNDER: 'WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL WAS JUSTIFIED IN APPLYING THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF CIT V. NEW GREAT INSURANCE CO. LTD . (1973) 90 ITR 348 (BOM) TO THE ASSESSMENT YEAR IN QUESTION WITHOUT CONSIDERING THE EFFECT OF THE AMENDMENT OPERATIVE FROM IST APRIL, 1968, AND I N THUS HOLDING THAT THE ASSESSEE WOULD BE ENTITLED TO THE DEDUCTION UNDER SECTION 80M ON THE GROSS DIVIDEND BEFORE DEDUCTION OF THE PROPORTIONATE MANAGEMENT EXPENSES ?' THUS, WHEN THE DECISION OF THE HONBLE BOMBAY HIGH C OURT HAS BEEN REVERSED, THE PROPORTIONATE MANAGEMENT EXPENSES ARE REQUIRED TO BE DEDUCTED WHILE COMPUTING THE DIVIDEND INCOME. IN TH E DECISION OF THE HON'BLE CALCUTTA HIGH COURT, RELIED UPON BY THE LEA RNED COUNSEL FOR THE ASSESSEE, MR. DASTUR, IN THE CASE OF CIT V. UNITED COLLIERIES LTD . (SUPRA), IT HAS BEEN HELD THAT IF THE FACTS OF A PARTICULAR CASE SO WARRANT, THE ALLOCATION CAN BE MADE TOWARDS EXPENSES. IN VIEW OF THE AFOREMENTIONED DISCUSSION AND KEEPING IN VIEW THE SUBMISSIONS OF T HE LEARNED DEPARTMENTAL REPRESENTATIVE, WE RESTORE THIS MATTER TO THE ASSESSING OFFICER TO VERIFY THE QUANTUM OF DEDUCTION CLAIMED BY THE ASSESSEE IN EARLIER YEARS UNDER SECTION 57(I) FROM THE DIVIDEND INCOME (WHEN IT WAS TAXABLE) AND MAKE A PRO RATA ADJUSTMENT ON THE BASI S OF SUBSEQUENT INVESTMENTS MADE, INFLATION, ETC. THIS GROUND IS, A CCORDINGLY, ALLOWED FOR STATISTICAL PURPOSES ITA 7273- 74/MUM/2012 60 4. THE ITAT, KOLKATTA BENCH IN RECENT REPORTED JUDG MENT IN COAL INDIA LIMITED V. ACIT 2015 TAX PUB(DT)2496 IN ITA NO 1032/KOL/2012 PRONOUNCED RECENTLY ON 13TH MAY 2015 HAS CATEGORICA LLY HELD THAT EVEN STRATEGIC INVESTMENT IN GROUP CONCERNS FOR THE PURP OSE OF CONTROL AND NOT FOR EARNING DIVIDEND ATTRACT DISALLOWANCE U/S 14 A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962. SINCE THE ASSESSEE COMPANY HAD CLAIMED THAT NO EXPE NDITURE WAS INCURRED, THE ASSESSING AUTHORITIES WERE CORRECT TO ESTIMATE THE INCURRING OF SUCH EXPENDITURE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D(2)(III) OF INCOME TAX RULES,1962. THE ASSESSING OFFICER HAS DISALLOWED BY COMPUTING T HE INDIRECT EXPENDITURE BEING ADMINISTRATIVE AND OTHER IN-DIREC T EXPENSES AFTER INVOKING RULE 8D(2) (III) OF INCOME TAX RULES ,1962 . WE, THEREFORE, HOLD THAT THE ASSESSING OFFICER HAS RIGHTLY INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D(2)(III) OF INCOME TAX RULES, 1962 FOR DISALLOWING THE EXPENDITURE OF RS. 7,22,027/- TOWARDS ADMINISTRATIVE AND OTHER INDIRECT EXPENSES WHICH WA S AFFIRMED BY THE CIT(A ) AND THE SAME IS ALSO HEREBY AFFIRM BY US AS WE HAVE FOUND NO INFIRMITY IN THE ORDERS OF THE AUTHORITIES BELOW. W E ORDER ACCORDINGLY. THE ASSESSEE COMPANY HAS RELIED UPON FOLLOWING DECI SIONS TO CONTEND THAT NO DISALLOWANCE SHOULD BE MADE U/S 14A OF THE ACT WIT H RESPECT OF STRATEGIC INVESTMENT / CONTROLLING INTEREST INVESTMENTS MADE BY THE ASSESSEE COMPANY: ITA 7273- 74/MUM/2012 61 1. CIT V. ORIENTAL STRUCTURES ENGINEERS PRIVATE LIMITE D , 35 TAXMANN.COM 210 (DEL. HC) THIS CASE WAS DECIDED BY HONBLE DE LHI HIGH COURT ON FACTS.THE TRIBUNAL GAVE FINDING THAT ONLY INTEREST OF RS. 2,96,731/- WAS PAID ON FUNDS UTILIZED FOR MAKING INVESTMENTS ON WH ICH EXEMPTED INCOME WAS RECEIVABLE. FURTHER IT WAS OBSERVED BY T HE TRIBUNAL, THERE WAS SPV CREATED TO OBTAIN CONTRACTS FROM NHAI AND T HE SPV SO FORMED ENGAGED THE TAX-PAYER AS CONTRACT TO EXECUTE THE WO RKS AWARDED TO THEM(SPV) BY THE NHAI . THE TAX-PAYER HAS SHOWN TUR NOVER FROM THESE CONTRACTS AWARDED BY SPV IN ITS PROFIT AND LOSS ACC OUNT AND HENCE IT WAS HELD BY THE TRIBUNAL THAT NO INTEREST CAN BE D ISALLOWED U/S 14A READ WITH RULE 8D OF INCOME TAX RULES, 1962 BECAUSE IT CANNOT BE HELD THAT EXPENSES/INTEREST INCURRED FOR EARNING EXEMPTE D INCOME. THE HONBLE DELHI HIGH COURT HELD THAT IT IS A QUESTION OF FACT AND NO QUESTION OF LAW MUCH LESS SUBSTANTIAL QUESTION OF L AW ARISES AND THE APPEAL WAS DISMISSED . IN THE INSTANT CASE, IT IS N OT THE CASE OF THE ASSESSEE COMPANY THAT IT HAS GOT ANY BUSINESS CONTR ACTS FROM ITS STRATEGIC INVESTMENTS/SUBSIDIARY COMPANIES IN WHICH CONTROLLING INTEREST WERE ACQUIRED AND HENCE THE CASE ARE DISTI NGUISHABLE ON FACTS. 2. GARWARE WALL ROPES LIMITED V. ACIT 65 SOT 86, MU M-TRIB.- IN THIS CASE, THE TAX-PAYER WAS HOLDING OLD INVESTMENTS MADE LONG BACK AND NO NEW INVESTMENTS WERE MADE DURING THE PREVIOUS YEAR AND ON FACTS THE TRIBUNAL HELD THAT IT COULD BE CONCLUDED THAT THE TAX-PAYER DID NOT INCUR ANY EXPENDITURE FOR EARNING INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND HENCE DISALLOWANCE WAS DELETED. IN THE INSTANT APPEAL, THE ASSESSEE COMPANY DID MADE INVESTMENTS IN THE SUBSIDIARY COMP ANY DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR AND F URTHER NO FINDING OF FACT HAS BEEN BROUGHT ON RECORD THAT THE ASSESSEEE COMPA NY DID NOT INCUR ANY EXPENDITURE FOR EARNING EXEMPT INCOME. HENCE, WE AR E SETTING ASIDE THE MATTER TO THE FILE OF AO TO DETERMINE WHETHER THE A SSESSEE COMPANY HAS ITA 7273- 74/MUM/2012 62 INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RE LATION TO THE DIVIDEND INCOME /INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED U/S 14A OF THE ACT READ WITH RULE 8D(2 )((III) OF INCOME TAX RULES, 1962 HAVING REGARDS TO THE ACCOUNTS OF THE A SSESSEE COMPANY AS CONTEMPLATED U/S 14A(2) OF THE ACT , EXCLUDING THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE COMPANY WHICH SHALL NOT BE DISALLOWED AS DISCUSSED ABOVE BY US. 3.JM FINANCIAL LIMITED V. ACIT (ITA NO. 4521/MUM/20 12)-IN THIS CASE, THE TAX-PAYER WAS MADE OUT A CASE TO SHOW THAT NO EXPE NDITURE HAS BEEN INCURRED FOR MAINTAINING THE INVESTMENT IN SUBSIDIA RY COMPANIES AND THEREFORE IN THE ABSENCE OF FINDING THAT ANY EXPEND ITURE HAS BEEN INCURRED FOR EARNING THE EXEMPT INCOME, THE DISALLOWANCE MADE BY THE AO WAS HELD TO BE NOT JUSTIFIED BY THE TRIBUNAL. HOWEVER, IN THE INST ANT CASE THIS FACTS HAS NOT BEEN BROUGHT ON RECORD HAVING REGARDS TO THE ACCOUN TS OF THE ASSESSEE COMPANY AND HENCE WE ARE SETTING ASIDE THIS APPEAL TO THE FILE OF THE AO TO DETERMINE WHETHER THE ASSESSEE COMPANY HAS INCURRE D ANY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO THE DIVIDEND IN COME /INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED U/S 14A OF THE ACT READ WITH RULE 8D(2)((III) OF INCOME TAX RULES, 1962HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE COMPANY AS CONTEMPL ATED U/S 14A(2) OF THE ACT , EXCLUDING THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE COMPANY WHICH SHALL NOT BE DISALLOWED AS DISCUSSED ABOVE BY US. 4. SH JIGAR P. SHAH V. ACIT IN ITA NO 4366/MUM/2014 DATED 24-02-2016)-IN THIS CASE ALSO THERE IS A FINDING OF FACT THAT THE TAX-PAYER HAS MADE INVESTMENTS WHICH WERE OLD INVESTMENTS AND THAT NO NEW INVESTMENTS WERE MADE DURING THE YEAR. . IN THE INSTANT APPEAL, THE ASSESSEE COMPANY DID MADE INVESTMENTS IN THE SUBSIDIARY COMPANY DURING T HE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR AND FURTHER NO FIND ING OF FACT HAS BEEN ITA 7273- 74/MUM/2012 63 BROUGHT ON RECORD THAT THE ASSESSEEE COMPANY DID NO T INCUR ANY EXPENDITURE FOR EARNING EXEMPT INCOME. HENCE, WE ARE SETTING AS IDE THE MATTER TO THE FILE OF AO TO DETERMINE WHETHER THE ASSESSEE COMPANY HA S INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO THE DIVIDEND INCOME /INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE T OTAL INCOME AS CONTEMPLATED U/S 14A OF THE ACT READ WITH RULE 8D(2 )((III) OF INCOME TAX RULES, 1962 HAVING REGARDS TO THE ACCOUNTS OF THE A SSESSEE COMPANY AS CONTEMPLATED U/S 14A(2) OF THE ACT , EXCLUDING THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE COMPANY WHICH SHALL NOT BE DISALLOWED AS DISCUSSED ABOVE BY US. 5. DAGA GLOBAL CHEMICALS PRIVATE LIMITED V. ACIT IN ITA NO. 5592/MUM/2012 THE TRIBUNAL HAS DECIDED THIS APPEA L BASED ON THE FACTS OF THE CASE WHEREBY IT WAS ESTABLISHED BY THE TAX-P AYER THAT ALL THE INVESTMENTS WERE MADE IN THE EARLIER YEARS OUT OF O WN FUNDS AND NO EXPENDITURE WAS INCURRED AND CLAIMED BY THE TAX-PAY ER . IN THE INSTANT APPEAL, THE ASSESSEE COMPANY DID MADE INVESTMENTS I N THE SUBSIDIARY COMPANY DURING THE PREVIOUS YEAR RELEVANT TO THE AS SESSMENT YEAR AND FURTHER NO FINDING OF FACT HAS BEEN BROUGHT ON RECO RD THAT THE ASSESSEEE COMPANY DID NOT INCUR ANY EXPENDITURE FOR EARNING E XEMPT INCOME.HENCE, WE ARE SETTING ASIDE THE MATTER TO THE FILE OF AO TO D ETERMINE WHETHER THE ASSESSEE COMPANY HAS INCURRED ANY EXPENDITURE (DIR ECT OR INDIRECT) IN RELATION TO THE DIVIDEND INCOME /INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED U/S 1 4A OF THE ACT READ WITH RULE 8D(2)((III) OF INCOME TAX RULES, 1962 HAVING R EGARDS TO THE ACCOUNTS OF THE ASSESSEE COMPANY AS CONTEMPLATED U/S 14A(2) OF THE ACT , EXCLUDING THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE COMPA NY WHICH SHALL NOT BE DISALLOWED AS DISCUSSED ABOVE BY US. ITA 7273- 74/MUM/2012 64 RESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE CO -ORDINATE BENCHES OF MUMBAI ITAT IN THE CASE OF UMA POLYMERS LIMITED IN ITA NO.5366/MUM/2012 DATED 30-09-2015, AND ALSO OF THE DECISION OF KOLKATTA TRIBUNAL COAL INDIA LIMITED V. ACIT 2015 TAX PUB(DT)2496 IN ITA NO 1032/KOL/2012 PRONOUNCED ON 13TH MAY 2015 WHEREBY KOLKATTA TRIBUNAL HAS CATEGORICALLY HELD THAT EVEN STRATEGIC INVESTME NT IN GROUP CONCERNS FOR THE PURPOSE OF CONTROL AND NOT FOR EARNING DIVIDEND ATTRACT DISALLOWANCE U/S 14 A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962., WE HOLD THAT THE INVESTMENT MADE BY THE ASSESSEE COMPANY IN SHAR ES AND UNITS OF MUTUAL FUNDS( EXCLUDING INVESTMENT OF RS.1,10,30,000/- IN FOREIGN SUBSIDIARY) SHALL ATTRACT DISALLOWANCE U/S 14A OF THE ACT HAVING REGA RDS TO THE ACCOUNTS OF THE ASSESSEE COMPANY AS PROVIDED U/S 14A(2) OF THE ACT KEEPING IN VIEW RULE 8D(2)(III) OF THE INCOME TAX RULES, 1962,.WE ARE TH EREFORE INCLINED TO SET ASIDE THE MATTER TO THE FILE OF THE AO FOR DE-NOVO DETERM INATION AND QUANTIFICATION OF DISALLOWANCE U/S 14A OF THE ACT OF THE INDIRECT EXPENSES INCURRED BY THE ASSESSEE COMPANY IN RELATION TO SUCH INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE COMPANY AS PROVIDED U/S 14A(2) OF THE ACT AND ALSO KEEPING IN VIEW RULE 8D(2)(III) OF INCOME TAX RULES, 1962. WE ORDER ACCORDINGLY. 15. IN THE RESULT, ASSESSEE APPEAL IN ITA NO 7274/ MUM/2012 FOR ASSESSMENT YEAR 2009-10 IS PARTLY ALLOWED . 16. IN THE RESULT, ASSESSEE COMPANYS APPEAL IN ITA NO 7273/MUM/2012 FOR THE ASSESSMENT YEAR 2007-08 AND THE ASSESSEE COMPAN YS APPEAL IN ITA NO. 7274/MUM/2012 FOR THE ASSESSMENT YEAR 2009-10 ARE P ARTLY ALLOWED. ITA 7273- 74/MUM/2012 65 ORDER PRONOUNCED IN THE OPEN COURT ON 6 TH JUNE , 2016. # $% &' 06-06-2016 ( ) SD/- SD/- (SAKTIJIT DEY) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER $ MUMBAI ; & DATED 06-06-2016 [ .9../ R.K. R.K. R.K. R.K. , EX. SR. PS !'#$%&%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. : ( ) / THE CIT(A)- CONCERNED, MUMBAI 4. : / CIT- CONCERNED, MUMBAI 5. =>( 99?@ , ?@ , $ / DR, ITAT, MUMBAI B BENCH 6. (BC D / GUARD FILE. / BY ORDER, = 9 //TRUE COPY// / ( DY./ASSTT. REGISTRAR) , $ / ITAT, MUMBAI