Consolidated Finvest & Holdings Ltd., New Delhi V. ACIT, New Delhi

ITA 729/DEL/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7342 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-09-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 02-09-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 07-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PARWINDER KAUR
• Assessee Lawyers: RUPESH J AIN
• Keywords: Earning of tax free income; Avoidance of tax; Capital receipt
• Section: 14A; 133(6); 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL DELHI DELHI DELHI DELHI BENCH BENCH BENCH BENCH B BB B : NEW DELHI : NEW DELHI : NEW DELHI : NEW DELHI BEFORE SHRI G.D. AGRAWAL, VICE BEFORE SHRI G.D. AGRAWAL, VICE BEFORE SHRI G.D. AGRAWAL, VICE BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT AND PRESIDENT AND PRESIDENT AND PRESIDENT AND SHRI SHRI SHRI SHRI H.S. SIDHU H.S. SIDHU H.S. SIDHU H.S. SIDHU, JUDICIAL , JUDICIAL , JUDICIAL , JUDICIAL MEMBER MEMBER MEMBER MEMBER ITA NO ITA NO ITA NO ITA NOS.729/DEL/2011 & 730/DEL/2011 S.729/DEL/2011 & 730/DEL/2011 S.729/DEL/2011 & 730/DEL/2011 S.729/DEL/2011 & 730/DEL/2011 ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEARS SS S : : : : 2006 2006 2006 2006- -- -07 & 2007 07 & 2007 07 & 2007 07 & 2007- -- -08 0808 08 M/S CONSOLIDATED FINVEST & M/S CONSOLIDATED FINVEST & M/S CONSOLIDATED FINVEST & M/S CONSOLIDATED FINVEST & HOLDIN HOLDIN HOLDIN HOLDINGS LIMITED, GS LIMITED, GS LIMITED, GS LIMITED, 11/5, BASEMENT 11/5, BASEMENT 11/5, BASEMENT 11/5, BASEMENT- -- -01, 01, 01, 01, PUSA ROAD, PUSA ROAD, PUSA ROAD, PUSA ROAD, NEW DELHI NEW DELHI NEW DELHI NEW DELHI 110 005. 110 005. 110 005. 110 005. PAN : AAACJ0090N. PAN : AAACJ0090N. PAN : AAACJ0090N. PAN : AAACJ0090N. VS. VS. VS. VS. ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF INCOME TAX, INCOME TAX, INCOME TAX, INCOME TAX, CIRCLE CIRCLE CIRCLE CIRCLE- -- -3(1), 3(1), 3(1), 3(1), NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. (APPELLANT) (RESPONDENT) ITA NO ITA NO ITA NO ITA NO.494/DEL/2011 .494/DEL/2011 .494/DEL/2011 .494/DEL/2011 ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR : : : : 2007 2007 2007 2007- -- -08 0808 08 DEPUTY COMMISSI DEPUTY COMMISSI DEPUTY COMMISSI DEPUTY COMMISSIONER OF ONER OF ONER OF ONER OF INCOME TAX, INCOME TAX, INCOME TAX, INCOME TAX, CIRCLE CIRCLE CIRCLE CIRCLE- -- -3(1), 3(1), 3(1), 3(1), NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. VS. VS. VS. VS. M/S CONSOLIDATED FINVEST & M/S CONSOLIDATED FINVEST & M/S CONSOLIDATED FINVEST & M/S CONSOLIDATED FINVEST & HOLDINGS LIMITED, HOLDINGS LIMITED, HOLDINGS LIMITED, HOLDINGS LIMITED, 11/5 11/5 11/5 11/5- -- -B, BASEMENT, B, BASEMENT, B, BASEMENT, B, BASEMENT, OPPOSITE TELEPHONE EXCHANGE, OPPOSITE TELEPHONE EXCHANGE, OPPOSITE TELEPHONE EXCHANGE, OPPOSITE TELEPHONE EXCHANGE, PUSA ROAD, PUSA ROAD, PUSA ROAD, PUSA ROAD, NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. PAN : AAACJ0090N. PAN : AAACJ0090N. PAN : AAACJ0090N. PAN : AAACJ0090N. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RUPESH JAIN, ADVOCATE AND SHRI GAURAV JAIN, CA. REVENUE BY : SMT. PARWINDER KAUR, SR.DR. ORDER ORDER ORDER ORDER PER G.D. AGRAWAL, VP PER G.D. AGRAWAL, VP PER G.D. AGRAWAL, VP PER G.D. AGRAWAL, VP : : : : ITA NO.729/DEL/2011 ITA NO.729/DEL/2011 ITA NO.729/DEL/2011 ITA NO.729/DEL/2011 ASSESSEES APPEAL FOR AY 2006 ASSESSEES APPEAL FOR AY 2006 ASSESSEES APPEAL FOR AY 2006 ASSESSEES APPEAL FOR AY 2006- -- -07 : 07 : 07 : 07 :- -- - THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF LEARNED CIT(A)-VI, NEW DELHI DATED 13 TH DECEMBER, 2010 FOR THE AY 2006-07. ITA-729, 730 & 494/D/2011 2 2. GROUND NO.1 OF THE ASSESSEES APPEAL READS AS UNDER:- THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) (THE CIT(A)) ERRED IN CONFIRMING THE ACTION OF THE ASSESSIN G OFFICER IN DISALLOWING LONG TERM CAPITAL LOSS OF RS.41,81,03,448 ARISING ON REDEMPTION OF PREFERENCE SHARES OF JINDAL POLYFILMS LIMITED (JPL), AS NOT BEIN G GENUINE. 3. THE OTHER GROUNDS RAISED BY THE ASSESSEE ARE ONLY ARG UMENTS IN SUPPORT OF ABOVE GROUND NO.1. 4. AT THE TIME OF HEARING BEFORE US, IT IS SUBMITTED B Y THE LEARNED COUNSEL THAT THE ASSESSEE HAS GIVEN LOAN FROM TIME TO TI ME TO JINDAL POLYFILMS LIMITED (JPL) AND AS ON 30 TH OCTOBER, 2000, THE TOTAL LOAN PAYABLE BY JPL TO THE ASSESSEE WAS ` 99 CRORES. THAT JPL WAS UNABLE TO PAY THE AMOUNTS DUE TO FINANCIAL CONSTRAINTS, THEREFOR E, JPL HAS OFFERED TO RESTRUCTURE THE SAID ADVANCES BY WAY OF ISSUE OF OPTI ONALLY CONVERTIBLE PREFERENCE SHARES (OCPS). ACCORDINGLY, JPL ISSUED 6,60,00,000 0% OCPS OF ` 10/- EACH AT A PREMIUM OF ` 5/- EACH. THE OCPS WERE CONVERTIBLE AT THE OPTION OF THE ASSESSEE INT O 10 EQUITY SHARES OF ` 10/- EACH FOR EVERY 33 OCPS. THE OPTION WAS TO BE EXERCISED WITHIN 18 MONTHS FROM THE DATE OF THE ISSUE OF THE DEBENTURES. THAT BEFORE THE COMPLETION OF 18 MONTH S FROM THE ISSUE OF THE DEBENTURES ON 2 ND MAY, 2001, THERE WAS CHANGE IN THE SEBI GUIDELINES WHICH RESTRICTED THE PROMOTERS HOLDING TO A CERTAIN PERCENTAGE. DUE TO ABOVE CHANGE IN THE SEBI GUIDEL INES, THE OPTION OF CONVERSION OF PREFERENCE SHARES INTO EQUITY SHARES BECAM E UNVIABLE AS IT WAS LEGALLY NOT PERMISSIBLE. THEREFORE, JPL PROPOSE D MODIFICATION IN THE TERMS OF 0% OCPS BY WHICH THE OCPS WERE CONVERTE D INTO 2% REDEEMABLE CUMULATIVE PREFERENCE SHARES (RCPS). THA T OUT OF ITA-729, 730 & 494/D/2011 3 6,60,00,000 OCPS ALLOTTED TO THE ASSESSEE, 1,60,00,000 OCPS WERE SOLD ON 9 TH MARCH, 2002 AT THE RATE OF ` 7/- PER OCPS. THAT LOSS ARISING FROM SUCH SALE WAS CLAIMED IN THE RETURN OF INCOME FOR AY 2002-03 AND WAS ACCEPTED BY THE REVENUE. THAT DURING THE ACCOUN TING YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION, TH E ASSESSEE REDEEMED REMAINING 5,00,00,000 RCPS AND REALIZED ` 50 CRORES. THAT AFTER APPLYING THE INDEXATION, THE ASSESSEE WORKED OUT THE LONG TERM CAPITAL LOSS OF ` 41,81,03,448/-. SINCE THERE WAS NO LONG TERM CAPITA L GAIN WHICH COULD BE ADJUSTED AGAINST THE SAID LONG TER M CAPITAL LOSS, THE ASSESSEE CLAIMED FOR THE CARRY FORWARD OF LONG TERM CAPITAL LOSS OF ` 41,81,03,448/-. HOWEVER, THE ASSESSING OFFICER DISALLOW ED THE LOSS BY ALLEGING THAT THE WHOLE TRANSACTION WAS A SHAM TRANSA CTION WHICH WAS ENTERED INTO WITH THE SOLE PURPOSE OF TRANSFERRING FUN DS FROM ONE COMPANY TO ANOTHER AND IN THE PROCESS TO GENERATE HU GE LONG TERM CAPITAL LOSS IN THE HANDS OF THE ASSESSEE COMPANY. WHILE DOING SO, THE ASSESSING OFFICER ALSO RELIED UPON THE DECISION OF HONBL E APEX COURT IN THE CASE OF MCDOWELL AND CO.LTD. VS. COMMERCIAL TAX O FFICER [1985] 154 ITR 148. IT IS SUBMITTED BY THE LEARNED COUNSEL THAT THE FINDING OF THE ASSESSING OFFICER IS PURELY BASED ON PRESUMPTION AND SU SPICION WHICH IS CONTRARY TO THE FACTS ON RECORD. THAT THERE IS NO QUESTION OF TRANSFERRING OF FUNDS FROM THE ASSESSEE TO JPL DURING THE YEAR UNDER CONSIDERATION. IN FACT, DURING THE YEAR UNDER CONSID ERATION, THE ASSESSEE REALIZED ` 50 CRORES WHICH WAS HELD UP SINCE LONG WITH JPL. HE REITERATED THAT THE LOAN OF ` 99 CRORES WAS GIVEN BY THE ASSESSEE TO JPL PRIOR TO THE YEAR 2000. IN THE YEARS IN WHICH LOAN WAS GIVEN, THE GENUINENESS OF GRANTING OF LOAN BY THE ASSESSEE TO JPL W AS NEVER DOUBTED AND NEVER HELD AS SHAM TRANSACTION. THAT THE ASSESSEE AND JPL ARE BOTH ASSESSED TO TAX AND JPL IS A PUBLIC LISTED COMPANY. THEREAFTER, THE LOAN WAS CONVERTED INTO OCPS ON 30 TH OCTOBER, 2000 AND IN THE ASSESSMENT OF AY 2001-02 OF BOTH THE ASSESSEE AN D JPL, THIS FACT WAS EVIDENT AND THE REVENUE NEVER HELD IT TO BE A SHAM ITA-729, 730 & 494/D/2011 4 TRANSACTION EITHER IN THE HANDS OF THE ASSESSEE OR JPL. THAT PART OF THE OCPS I.E. 1,60,00,000 WAS SOLD ON 9 TH MARCH, 2002 AND THE LOSS SUFFERED BY THE ASSESSEE ON SALE OF OCPS WAS CLAIMED IN THE RETURN OF INCOME WHICH WAS ACCEPTED BY THE REVENUE. AT THAT T IME ALSO, THE TRANSACTION WAS NOT HELD TO BE A SHAM OR BOGUS TRANSACT ION. THEREFORE, WHEN DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE ONLY REALIZED THE VALUE OF THE RCPS ON ITS REDEMPTION, HO W THE TRANSACTION CAN BE SAID TO BE SHAM OR BOGUS? HE FURTHER SUBMITTE D THAT THE FACTS OF THE ASSESSEES CASE ARE ALTOGETHER DIFFERENT THAN THE FACTS BEFORE THE HONBLE APEX COURT IN THE CASE OF MCDOWELL AND C O.LTD. (SUPRA). THE SAID DECISION WOULD BE APPLICABLE ONLY WHEN THERE IS A COLORABLE DEVICE TO AVOID TAX. THAT IN THE CASE OF THE ASSESSEE, THERE IS NO DEVICE AT ALL AND THERE IS NO AVOIDANCE OF TAX ALSO. THE LOAN WAS ADVANCED BY THE ASSESSEE TO JPL LONG BACK. GENUINENESS OF SUCH LOAN WAS ACCEPTED BY THE REVENUE IN THE CASE OF JPL AS WELL AS ASSESSEE. THE LOAN WAS CONVERTED INTO OCPS IN THE YEAR 2000 WH ICH WAS AGAIN ACCEPTED BY THE REVENUE. PART OF THE OCPS WAS SOLD I N THE YEAR 2002 WHICH WAS ALSO ACCEPTED BY THE REVENUE. THEREAFTER, OCPS WAS CONVERTED INTO RCPS WHICH WAS ALSO ACCEPTED BY THE RE VENUE. DURING THE YEAR UNDER CONSIDERATION, THERE WAS ONLY REDEMP TION OF SUCH RCPS. THEREFORE, BY NO STRETCH OF IMAGINATION, SUCH REDEMPT ION OF RCPS CAN BE SAID TO BE DEVICE SO AS TO AVOID THE PAYMENT OF TAX . HE, THEREFORE, SUBMITTED THAT THE ORDER OF THE ASSESSING OFFICER IS WIT HOUT ANY BASIS AND JUSTIFICATION. THE SAME SHOULD BE REVERSED AND THE ASSESSING OFFICER SHOULD BE DIRECTED TO CARRY FORWARD THE LONG TERM CAPITAL LOSS. IN SUPPORT OF HIS CONTENTION, HE RELIED UPON THE FOLL OWING DECISIONS WHEREIN THE DECISION OF HONBLE APEX COURT IN THE CA SE OF MCDOWELL AND CO.LTD. HAS BEEN CONSIDERED :- (I) CWT-II, AHMEDABAD VS. ARVIND NAROTTAM [1988] 173 I TR 479 (SC). ITA-729, 730 & 494/D/2011 5 (II) UNION OF INDIA AND ANOTHER VS. AZADI BACHAO ANDOLAN AND ANOTHER [2003] 263 ITR 706 (SC). (III) CIT VS. WALFORT SHARE AND STOCK BROKERS P.LTD. [201 0] 326 ITR 1. (IV) VODAFONE INTERNATIONAL HOLDINGS B.V. VS. UNION OF IND IA AND ANOTHER [2012] 341 ITR 1 (SC). 5. LEARNED DR, ON THE OTHER HAND, RELIED UPON THE O RDERS OF AUTHORITIES BELOW AND SHE STATED THAT IT IS A CLEAR CA SE WHERE THE TRANSACTION WAS BETWEEN TWO RELATED PARTIES. THOUGH THE ASSESSEE CLAIMED THAT JPL WAS FACING FINANCIAL CONSTRAINTS BUT NO DOCUMENTARY EVIDENCE TO SUPPORT SUCH CONTENTION WAS FURNISHED BEFOR E THE LOWER AUTHORITIES. SIMILARLY, THE ASSESSEE STATED THAT THE CON VERSION OF OCPS INTO SHARES WAS BARRED BY SEBI GUIDELINES BUT HERE AGAI N, NO EVIDENCE WAS FILED IN SUPPORT OF THIS CONTENTION. SHE FURTHER SUBMITTED THAT THE LOAN WAS GIVEN JUST TO HELP THE ASSESSEE AND, AT THE SAME TIME, GENERATE LONG TERM CAPITAL LOSS IN THE CASE OF THE ASSE SSEE. SHE, THEREFORE, SUBMITTED THAT ON THE FACTS OF THE PRESENT CASE, THE DECISION OF HONBLE APEX COURT IN THE CASE OF MCDOWELL AND CO .LTD. (SUPRA) WOULD BE SQUARELY APPLICABLE AND WAS RIGHTLY APPLIED BY THE ASSESSING OFFICER. SHE, THEREFORE, SUBMITTED THAT THE ORDER O F THE ASSESSING OFFICER IS RIGHTLY UPHELD BY THE CIT(A) AND THE SAME SHOULD BE SUSTAINED. 6. IN THE REJOINDER, IT IS STATED BY THE LEARNED COUN SEL THAT THE SEBI REGULATIONS IS IN PUBLIC DOMAIN AND THE PERCENTAGE OF SHARES HELD BY THE ASSESSEE IN JPL IS ALSO ON RECORD. THEREFORE, THERE WAS NO QUESTION OF SUBMISSION OF ANY DOCUMENTARY EVIDENCE THAT ON CONV ERSION OF OCPS INTO SHARES, THERE WAS VIOLATION OF SEBI REGULATI ONS. ITA-729, 730 & 494/D/2011 6 7. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF BOTH THE SIDES AND PERUSED RELEVANT MATERIAL PLACED BEFORE US. THE UNDISPUTED FACTS ARE THAT THE ASSESSEE HAD ADVANCED HUGE SUMS FROM TIME TO TOME TO JPL. AS ON 30 TH DECEMBER, 2012, THE AGGREGATE AMOUNT OUTSTANDING AGAINST JPL WAS ` 99 CRORES. THAT THE JPL WAS UNABLE TO PAY THE AMOUNT DUE TO FINANCIAL CONSTRAINTS AND THEREFORE, IT OFFERE D TO RESTRUCTURE THE SAID ADVANCE BY WAY OF ISSUE OF OCPS. THE SAME WAS ACCE PTED BY THE ASSESSEE AND ACCORDINGLY, AGAINST THE OUTSTANDING ADVANCE OF ` 99 CRORES, JPL ISSUED 6,60,00,000 0% OCPS OF ` 10/- EACH AT A PREMIUM OF ` 5/- EACH. PART OF THE OCPS I.E. 1,60,00,000 WAS SOLD BY THE ASSESSEE DURING THE ACCOUNTING YEAR RELEVANT TO ASSESSMENT YEAR 2002-03. THE LOSS SUFFERED ON AFORESAID SALE OF OCPS WAS NOT DISPUTED BY THE REVENUE. SUBSEQUENTLY, 0% OCPS WAS MODIFIED TO 2% RC PS. DURING THE ACCOUNTING YEAR RELEVANT TO THE ASSESSMENT YEAR UND ER CONSIDERATION, RCPS WAS REDEEMED AND ASSESSEE RECEIVED ` 50 CRORES. THE ASSESSEE CLAIM THE LOSS ON THE REDEMPTION OF RCPS AS L ONG TERM CAPITAL LOSS AMOUNTING TO ` 41,81,03,448/-. THE SAME WAS CLAIMED TO BE CARRIED FORWARD BECAUSE SUCH LOSS WAS NOT ADJUSTED AG AINST ANY OTHER CAPITAL GAIN DURING THE YEAR UNDER CONSIDERATI ON. THE ASSESSING OFFICER DISALLOWED THE ASSESSEES CLAIM OF LONG TERM CAPI TAL LOSS AND ITS CARRY FORWARD WITH THE FOLLOWING FINDING:- THE INFORMATION U/S 133(6) WAS ALSO CALLED FROM M/S JI NDAL POLYFILMS LTD. ON THIS ISSUE. AS PER THE DETAILS GATHERE D IT TRANSPIRES THAT THE ASSESSEE DURING THE FY 00-01 THE CO. PURCHASED 6,60,00,000 SHARES (OCPS) OF M/S JINDAL POLYFILMS LTD. AT RS.10/- EACH AT A PREMIUM OF RS.5/- PER SHARE AGGREGATING TO RS.99 CR. AGAINST WHICH RS.66 CR. WAS PAID ON A/C OF OCP SHARE CAPITAL AND RS.33 CR. ON A/C OF PREMIUM. WITH EFFECT FROM 03.03.04, THESE 0% OCPS W ERE CHANGED AND RENAMED TO 2% RCPS. DURING THE FY 05-0 6, THESE 2% RCPS WERE REDEEMED BY THE COMPANY AT FACE VALUE OF RS.10/- EACH. THE SHARE PREMIUM AMOUNT WAS FORFEITED WHICH RESULTED IN LOSS AND AFTER INDEXATION , A SUM ITA-729, 730 & 494/D/2011 7 OF RS.418103448/- HAS BEEN CLAIMED AS LONG TERM CAPITA L LOSS TO BE CARRIED FORWARD. DURING THE COURSE OF ASSTT. PROCEEDINGS, THE ASSESSEE WAS SPECIFICALLY ASKED TO JUSTIFY THIS LOSS. QUERY WAS ALSO G IVEN TO M/S JINDAL POLYFILMS LTD. TO PROVIDE THE REASONS FOR CONVERSION OF 0% OCP SHARES TO 2% RCP SHARES. IT WAS SUBMITTED THAT THIS CONVERSION BECAME NECESSARY BECAUSE THESE OCPS SHARES WERE HELD BY PROMOTER COMPANIES AND CONVERSION OF THESE OCP SHARES INTO EQUITY SHARES WOULD HAVE RESULTED IN INCREASE OF PROMOTERS SHARE HOLDING BEYOND 85% IN M/S JINDAL POLYFILMS LTD., WHICH WAS NOT PERMISSIBLE UNDER THE PREVAILING SEBI GUIDELINES. THE REPLY OF THE ASSESSEE HAS BEEN CONSIDERED BUT CANNOT BE ACCEPTED. AS MENTIONED ABOVE BOTH THE ASSESSEE CO. AND M/S JINDAL POLYFILMS LTD. ARE CONTROLLED BY ONE A ND THE SAME PROMOTERS. MOREOVER M/S JINDAL POLYFILMS LTD. IS A CLOSELY HELD CO. AND ITS SHARES ARE NOT QUOTED IN THE MARKET. IN SUCH A SCENARIO, IT WAS NOT DIFFICULT FOR THE PROMOTER TO MANIPULATE THE WHOLE TRANSACTIONS IN SUCH A MANNER THAT IT IS RESULTING IN CAPITAL RECEIPTS IN THE HANDS OF ONE COMPANY NAMELY M/S JINDAL POLYFILMS LTD. AND I N THE HANDS OF ASSESSEE CO. I.E. M/S CONSOLIDATED FINVEST HOLDINGS LTD., IT IS BOOKED AS CAPITAL LOSS. THUS THE WHOLE TRANSACTION IS A SHAM TRANSACTION WITH THE SOLE PURPOSE OF TRANSFERRING FUNDS FROM ONE CO. TO ANOTHER AND IN THE PROCESS THERE IS GENERATION OF HUGE LONG TERM CAPITAL LOSS WHICH IS COMPLETELY BOGUS. IT WILL NOT BE OUT OF CON TEXT TO TREAT THIS TRANSACTION AS A DEVICE OF TAX AVOIDANCE I N FUTURE AS HELD BY THE HON'BLE SUPREME COURT IN CASE OF MCDOW ELL & CO.LTD. 8. THE SAME IS SUSTAINED BY THE LEARNED CIT(A). NOW, T HE QUESTION BEFORE IS WHETHER ON THESE FACTS, THE WHOLE TRANSACTIO N CAN BE SAID TO BE SHAM TRANSACTION WITH THE SOLE PURPOSE OF TRANSFERRIN G FUNDS FROM ONE COMPANY TO ANOTHER AND GENERATING HUGE LONG TER M CAPITAL LOSS SO AS TO AVOID THE TAX AND WHETHER ON THESE FACTS, THE DE CISION OF HONBLE APEX COURT IN THE CASE OF MCDOWELL AND CO.LTD. (SUPRA ) IS APPLICABLE. AFTER CONSIDERING THE ARGUMENTS OF BOTH THE SIDES AND E XAMINING THE FACTS OF THE CASE IN DETAIL, WE ARE UNABLE TO AGREE W ITH THE ABOVE ITA-729, 730 & 494/D/2011 8 FINDING OF THE ASSESSING OFFICER. THE LOAN WAS ADVANCE D FROM TIME TO TIME PRIOR TO 30 TH OCTOBER, 2000. THUS, THE LOAN WAS ADVANCED AT LEAST SIX YEARS BEFORE THE REDEMPTION OF RCPS DURING THE YE AR UNDER CONSIDERATION. THE ASSESSEE AS WELL AS JPL BOTH ARE REGUL ARLY ASSESSED TO INCOME TAX AND IN THE YEARS IN WHICH LOAN WAS ADVA NCED, THE GENUINENESS OF THE LOAN WAS NEVER DOUBTED BY THE REVEN UE EITHER IN THE CASE OF THE ASSESSEE OR IN THE CASE OF JPL. THE LOAN WAS CONVERTED INTO OCPS ON 30 TH OCTOBER, 2000 AND IN THE ASSESSMENT OF THE ASSESSEE AS WELL AS JPL FOR AY 2001-02, SUCH CONVERSION OF LOAN INTO OCPS WAS NOT HELD TO BE BOGUS OR SHAM TRANSACTION. PART OF THE OCPS WAS SOLD BY THE ASSESSEE ON 9 TH MARCH, 2002 AND IN THE RETURN OF INCOME FOR AY 2002-03, LOSS ARISING FROM SUCH SALE WAS CLAIMED. IN THI S YEAR ALSO, THE REVENUE HAS NOT HELD THE TRANSACTION OF CONVERSION OF LOAN INTO OCPS AND THE SALE OF OCPS AS BOGUS OR SHAM TRANSACTION. ON 24.01.2004, 0% OCPS WAS CONVERTED INTO 2% RCPS AND IN THE ASSESSMENT FOR 2004- 05, THE TRANSACTION OF CONVERSION OF 0% OCPS TO 2% RC PS WAS NOT HELD TO BE NOT GENUINE OR BOGUS. DURING THE ACCOUNTING Y EAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE RECEIV ED THE SUM OF ` 50 CRORES ON REDEMPTION OF RCPS AND SUDDENLY, THE ASSESSI NG OFFICER HELD THE WHOLE TRANSACTION AS A SHAM TRANSACTI ON WHICH IS COMPLETELY BOGUS. WE ARE UNABLE TO ACCEPT THIS CONTE NTION OF THE REVENUE BECAUSE THERE ARE A SERIES OF TRANSACTIONS IN A NUMBER OF YEARS AND IN ALL THE EARLIER YEARS IN THE CASE OF THE ASSESSEE AS WELL JPL, THE GENUINENESS OF THE TRANSACTIONS WAS ACCEPTED. IN THE YEAR UNDER CONSIDERATION, NO SIGNIFICANT EVENT TOOK PLACE EXCEPT THE REDEMPTION OF 2% RCPS. THE ASSESSING OFFICER HAS NOT BROUGHT ON RECO RD AN IOTA OF EVIDENCE IN HOLDING THE TRANSACTION TO BE A SHAM TRAN SACTION OR BOGUS TRANSACTION. HE HAS NOT GIVEN EVEN A SINGLE REASONING WHY SUCH TRANSACTION IS BEING HELD AS BOGUS OR SHAM TRANSACTION E XCEPT THAT THE TRANSACTION HAS RESULTED INTO LONG TERM CAPITAL LOSS WHI CH MAY BE ADJUSTED AGAINST THE LONG TERM CAPITAL GAIN IN FUTURE . IN OUR OPINION, ITA-729, 730 & 494/D/2011 9 MERELY BECAUSE THE TRANSACTION HAS BEEN ENTERED INTO B ETWEEN TWO SISTER CONCERNS OR IT HAS RESULTED INTO LOSS MAY BE A GOOD GROUND FOR INVESTIGATING THE TRANSACTION IN DEEP. BUT, THAT, BY ITSELF, IS NOT SUFFICIENT TO HOLD THE TRANSACTION AS A SHAM TRANSACTION OR A BOGUS TRANSACTION. IN THIS CASE, WE FIND THAT THE ASSESSING OFF ICER DID INVESTIGATE THE MATTER BY CALLING THE INFORMATION UN DER SECTION 133(6) FROM JPL ON THIS ISSUE. HOWEVER, DESPITE SUCH ENQUIRY O R INVESTIGATION, HE HAS NOT FOUND ANY MATERIAL OR EVIDENCE TO JUSTIFY HIS PRESUMPTION THAT THE TRANSACTION BETWEEN THE ASSESSEE AND JPL WAS BOG US TRANSACTION OR SHAM TRANSACTION. THAT THE TRANSACTION HAD BEEN EXAMINED IN THE NUMBER OF EARLIER YEARS IN THE CASE O F THE ASSESSEE AS WELL AS JPL AND NEVER THE REVENUE HELD THE TRANSACTIO N AS BOGUS OR SHAM TRANSACTION. WHEN THERE IS A LONG SERIES OF TRANSA CTIONS, THE REVENUE WHICH ACCEPTED ALL THE TRANSACTION OF SERIES C ANNOT HELD THE WHOLE TRANSACTION TO BE SHAM OR INVALID IN THE YEAR W HEN THE LAST TRANSACTION OF THE SERIES TOOK PLACE AND, SPECIALLY, WH EN THERE IS NO BASIS OR EVIDENCE TO HOLD SO. ON THESE FACTS, IN OUR OP INION, THE DECISION OF HONBLE APEX COURT IN THE CASE OF MCDOWEL L AND CO.LTD. (SUPRA) WOULD NOT BE APPLICABLE WHEREIN THEIR LORDSHI PS HELD AS UNDER:- TAX PLANNING MAY BE LEGITIMATE PROVIDED IT IS WITH IN THE FRAMEWORK OF THE LAW. COLOURABLE DEVICES CANNOT BE PART OF TAX PLANNING AND IT IS WRONG TO ENCOURAGE OR ENTE RTAIN THE BELIEF THAT IT IS HONOURABLE TO AVOID THE PAYME NT OF TAX BY DUBIOUS METHODS. IT IS THE OBLIGATION OF EVERY CIT IZEN TO PAY THE TAXES HONESTLY WITHOUT RESORTING TO SUBTERFUGES. THERE IS BEHIND TAXATION LAWS AS MUCH MORAL SANCTION AS IS BEHIND ANY OTHER WELFARE LEGISLATION AND IT IS A PRET ENCE TO SAY THAT AVOIDANCE OF TAXATION IS NOT UNETHICAL AND T HAT IT STANDS ON NO LESS A MORAL PLANE THAN HONEST PAYMENT OF TAXATION. THE PROPER WAY TO CONSTRUE A TAXING STATUT E, WHILE CONSIDERING A DEVICE TO AVOID TAX, IS NOT TO AS K WHETHER THE PROVISIONS SHOULD BE CONSTRUED LITERALLY O R LIBERALLY NOR WHETHER THE TRANSACTION IS NOT UNREAL AND NOT PROHIBITED BY THE STATUTE, BUT WHETHER THE TRANSACTIO N IS A ITA-729, 730 & 494/D/2011 10 DEVICE TO AVOID TAX AND WHETHER THE TRANSACTION IS SU CH THAT THE JUDICIAL PROCESS MAY ACCORD ITS APPROVAL TO IT. IT IS NEITHER FAIR NOR DESIRABLE TO EXPECT THE LEGISLATURE TO INTERVENE AND TAKE CARE OF EVERY DEVICE AND SCHEME T O AVOID TAXATION. IT IS UP TO THE COURT TO TAKE STOCK TO DETERMINE THE NATURE OF THE NEW AND SOPHISTICATED LEG AL DEVICES TO AVOID TAX AND TO EXPOSE THE DEVICE FOR WHA T THEY ARE REALLY ARE AND TO REFUSE TO GIVE JUDICIAL BENEDICTION. 9. FROM THE ABOVE, IT IS EVIDENT THAT THE ABOVE DECI SION WOULD BE APPLICABLE ONLY WHEN THE ASSESSEE HAS INDULGED INTO A CO LORABLE DEVICE TO AVOID THE TAX. IN THE CASE UNDER APPEAL BEFORE U S, THERE IS NO COLORABLE DEVICE WITH THE INTENTION OF TAX AVOIDANC E. ON THE OTHER HAND, IT IS A CASE OF A TRANSACTION OF A LOAN WHICH WA S GIVEN BY THE ASSESSEE TO ITS ASSOCIATE CONCERN LONG BACK AND SINCE THE A SSOCIATE CONCERN WAS NOT ABLE TO MAKE THE PAYMENT OF THE LOAN , THE SAME WAS RESTRUCTURED IN THE FORM OF 0% OCPS. SUBSEQUENTLY, P ART OF OCPS WAS SOLD AND PART WAS CONVERTED INTO 2% RCPS. THIS WHOLE SERIES OF TRANSACTION WAS ACCEPTED TO BE GENUINE BY THE REVENU E. DURING THE YEAR UNDER CONSIDERATION, THERE WAS ONLY REDEMPTION O F 2% RCPS AND REALIZATION OF CASH OF ` 50 CRORES BY THE ASSESSEE. WE DO NOT FIND ANY DEVICE IN THE WHOLE SERIES OF TRANSACTIONS WHICH TOOK P LACE OVER A PERIOD OF TIME AND WHEN ALL THE TRANSACTIONS IN THE SE RIES BUT FOR THE REDEMPTION OF THE 2% RCPS WAS ACCEPTED BY THE REVENU E AS A GENUINE BUSINESS TRANSACTION. HOW, ON THE REALIZATION OF THE RCPS DURING THE YEAR UNDER CONSIDERATION, THE WHOLE SERIES OF TRANSACTIONS BECAME COLORABLE DEVICE, HAS NOT BEEN POINTED OUT BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER OR BY THE REVENUE AT TH E TIME OF HEARING BEFORE US. IN VIEW OF THE ABOVE, WE HOLD TH AT THE DECISION OF HONBLE APEX COURT IN THE CASE OF MCDOWELL AND CO.LT D. (SUPRA) RELIED UPON BY THE LEARNED DR IS NOT APPLICABLE TO THE FACT S OF THE ASSESSEES CASE. THAT MOREOVER, HONBLE APEX COURT IN THE SUBSEQ UENT DECISIONS I.E., IN THE CASE OF CWT-II, AHMEDABAD VS. ARVIND NAR OTTAM [1988] ITA-729, 730 & 494/D/2011 11 173 ITR 479, UNION OF INDIA AND ANOTHER VS. AZADI BA CHAO ANDOLAN AND ANOTHER [2003] 263 ITR 706 AND CIT VS. WALFORT SHA RE AND STOCK BROKERS P.LTD. [2010] 326 ITR 1, HELD THAT EVEN WH EN TRANSACTIONS ARE PREPLANNED BUT THERE IS NOTHING TO IMPEACH THE GENUI NENESS OF THE TRANSACTIONS, THE RULE OF TAX AVOIDANCE IN MCDOWELL A ND CO.LTD. WOULD NOT BE APPLICABLE BECAUSE THE CITIZEN IS FREE TO CARR Y ON ITS BUSINESS WITHIN THE FOUR CORNERS OF THE LAW. AFTER CONSIDERIN G THE FACTS OF THE ASSESSEES CASE, WE ARE OF THE OPINION THAT ON THESE FACTS, THE DECISION OF HONBLE APEX COURT IN THE CASE OF MCDOWELL AND CO .LTD. (SUPRA) WOULD NOT BE APPLICABLE BUT THE DECISIONS OF HONBLE APEX COURT IN THE CASE OF ARVIND NAROTTAM (SUPRA), AZADI BACHAO ANDOLAN AND ANOTHER (SUPRA) AND WALFORT SHARE AND STOCK BROKERS P.LTD. (S UPRA) WOULD BE APPLICABLE BECAUSE IN THE CASE OF THE ASSESSEE, THERE IS NOTHING ON RECORD TO HOLD THE SERIES OF THE TRANSACTIONS AS NOT GE NUINE. ON THE OTHER HAND, IN THE PAST SEVERAL YEARS, ALL THE TRANSACT IONS OF THE SERIES HAVE BEEN ACCEPTED BY THE REVENUE AS GENUINE BUSINESS T RANSACTIONS. THEREFORE, IN THE YEAR OF REDEMPTION OF THE 2% RCPS , THE TRANSACTIONS CANNOT BE PRESUMED TO BE SHAM OR BOGUS MERELY BECAUSE I T HAS RESULTED INTO LONG TERM CAPITAL LOSS WHICH MAY BE ADJU STED AGAINST THE LONG TERM CAPITAL GAIN, IF ANY, ARISING IN FUTURE TO THE ASSESSEE. IN VIEW OF THE ABOVE, RESPECTFULLY FOLLOWING THE DECISIONS OF HON'BLE SUPREME COURT IN THE CASE OF ARVIND NAROTTAM (SUPRA), AZADI B ACHAO ANDOLAN AND ANOTHER (SUPRA) AND WALFORT SHARE AND STOCK BROK ERS P.LTD. (SUPRA), WE DIRECT THE ASSESSING OFFICER TO ACCEPT LONG TERM CAPITAL LOSS OF ` 41,81,03,448/- AND CARRY FORWARD THE SAME IN ACCORDA NCE WITH LAW. ITA NO.730/DEL/2011 ITA NO.730/DEL/2011 ITA NO.730/DEL/2011 ITA NO.730/DEL/2011 ASSESSEES APPEAL FOR AY 2007 ASSESSEES APPEAL FOR AY 2007 ASSESSEES APPEAL FOR AY 2007 ASSESSEES APPEAL FOR AY 2007- -- -08 : 08 : 08 : 08 :- -- - 10. THE ONLY GROUND RAISED IN THIS APPEAL BY THE ASSESSEE READS AS UNDER:- ITA-729, 730 & 494/D/2011 12 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED O N FACTS AND IN LAW IN DISALLOWING SET OFF OF BROUGHT FOR WARD LONG TERM CAPITAL LOSS TO THE EXTENT OF RS.56,12,985, ARISING IN RESPECT OF REDEMPTION OF PREFERENCE SHARES OF JINDA L POLYFILMS LIMITED IN THE ASSESSMENT YEAR 2006-07, AGAINST LONG TERM CAPITAL GAINS (WITHOUT PAYMENT OF SECURITI ES TRANSACTION TAX) EARNED DURING THE RELEVANT PREVIOUS YEAR WHILE FOLLOWING THE ASSESSMENT ORDER AND OWN ORDER IN APPEAL FOR THE ASSESSMENT YEAR 2006-07. 11. AT THE TIME OF HEARING BEFORE US, BOTH THE PARTI ES FAIRLY AGREED THAT THIS GROUND IS ONLY CONSEQUENTIAL TO THE OUTCOME OF THE ASSESSEES APPEAL FOR AY 2006-07. FOR THE DETAILED DISCUSSION IN PARAGRAPH NO.7 TO 9 ABOVE, WE HAVE ALLOWED THE CARRY FORWARD OF LO NG TERM CAPITAL LOSS. THEREFORE, WE DIRECT THE ASSESSING OFFICER TO ALLO W THE SET OFF OF THE SAME AGAINST LONG TERM CAPITAL GAINS FOR THE YEAR UNDER CONSIDERATION. ACCORDINGLY, THE APPEAL OF THE ASSESSEE IS ALLOWED. ITA NO.494/DEL/2011 ITA NO.494/DEL/2011 ITA NO.494/DEL/2011 ITA NO.494/DEL/2011 REVENUES APPEAL FOR AY 2007 REVENUES APPEAL FOR AY 2007 REVENUES APPEAL FOR AY 2007 REVENUES APPEAL FOR AY 2007- -- -08 : 08 : 08 : 08 :- -- - 12. THE ONLY GROUND RAISED IN THIS APPEAL BY THE REVE NUE READS AS UNDER:- THE LD.CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELET ING ADDITION OF RS.1,42,16,868/- ON ACCOUNT OF DISALLOWAN CES ATTRIBUTABLE TO EXEMPT INCOME U/S 14A OF THE I.T.ACT . LD.CIT(A) HAS FAILED TO TAKE COGNIZANCE OF SUB-SECTION (3) OF SECTION 14A WHICH SPECIFIES THAT EVEN IF THE ASSESSEE MAKES A CLAIM THAT NO EXPENDITURE HAS BEEN INCURRED I N EARNING THE EXEMPTED INCOME, SUB-SECTION (2) OF SECTIO N 14A SHALL APPLY, MEANING THEREBY, DISALLOWANCE U/S 14A (1) IS CALLED FOR. 13. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND PERUSED RELEVANT MATERIAL PLACED BEFORE US. THE FACTS OF TH E CASE ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE RECEIV ED DIVIDEND INCOME OF ` 1,33,72,955/-. THE ASSESSEE HAS CLAIMED THAT IT INCURRE D THE SUM OF ` 7,73,525/- FOR EARNING OF EXEMPT INCOME AND, THEREF ORE, ITA-729, 730 & 494/D/2011 13 THE ASSESSEE HAD SUO MOTU DISALLOWED THE SAME UNDER SECTION 14A. THE ASSESSING OFFICER HELD THAT THE DISALLOWANCE IS TO BE COMPUTED AS PER RULE 8D AND HE, THEREFORE, WORKED OUT THE DISALL OWANCE AS PER RULE 8D AT ` 1,49,90,393/- FROM WHICH AFTER THE DEDUCTING THE SUM OF ` 7,73,525/- WHICH WAS ALREADY DISALLOWED BY THE ASSESSEE M ADE FURTHER DISALLOWANCE OF ` 1,42,19,868/-. ON APPEAL, LEARNED CIT(A) DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER W ITH THE FOLLOWING FINDING:- I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF LD.AR AN D HAVE GONE THROUGH THE ASSESSMENT ORDER. ALTHOUGH THE ASSESSING OFFICER HAS OBSERVED THAT FOR EARNING EXEMPT INCOME, EXPENSES MUST HAVE BEEN INCURRED. HOWEVER, THESE GENERAL OBSERVATIONS ARE NOT SUPPORTED BY ANY SPECIFIC INSTANCES. THE ASSESSING OFFICER HAS NOT POINTED OUT ANY DISCREPANCY IN THE DISALLOWANCES WORKED OUT BY THE APPELLANT ITSELF NOR ANY MATERIAL HAS BEEN BROUGH T ON RECORD TO LINK-UP THE FURTHER EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO EXEMPT INCOME. THE DISALLOW ANCE HAS BEEN MADE BY APPLYING RULE 8D IN THE LIGHT OF TH E DECISION OF DAGA CAPITAL MANAGEMENT (P) LTD., SUPRA. HOWEVER, THE SAID DECISION OF HONBLE SPECIAL BENCH O F THE ITAT HAS BEEN OVERRULED BY HON'BLE BOMBAY HIGH COUR T IN THE CASE OF GODREJ & BOYCE MFG.CO.LTD. VS. DCIT ITA N O.626 OF 2010 AND W.P. NO.758 OF 2010 WHEREIN IT HAS BEEN HELD THAT THE PROVISIONS OF RULE 8D OF THE INCOME TAX RUL ES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24 TH MARCH, 2008 SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09. I N THE PRESENT APPEAL, THE ASSESSMENT YEAR INVOLVED IS 2007- 08. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE M UMBAI HIGH COURT, THE DISALLOWANCE WORKED OUT BY THE ASSESSIN G OFFICER BY APPLICATION OF RULE 8D IS DIRECTED TO BE DELETED. THE APPELLANT HAS RAISED OTHER OBJECTIONS/ARGUMENTS AL SO. HOWEVER, SINCE THE DISALLOWANCE WORKED OUT AS PER RULE 8D IS DIRECTED TO BE DELETED, THE OTHER OBJECTIONS BECOM E ONLY OF ACADEMIC NATURE AND DO NOT CALL FOR SPECIFIC COMM ENTS. THESE GROUNDS OF APPEAL ARE, THEREFORE, TREATED AS ALLOWED. ITA-729, 730 & 494/D/2011 14 14. THE REVENUE, AGGRIEVED WITH THE ORDER OF LEARNE D CIT(A), IS IN APPEAL BEFORE US. 15. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF BOTH THE SIDES AND PERUSED RELEVANT MATERIAL PLACED BEFORE US. NOW, IT IS SETTLED LAW THAT RULE 8D IS APPLICABLE FOR AND FROM AY 2008-09 A ND NOT FOR EARLIER YEARS. WHILE TAKING THIS VIEW, THE CIT(A) HAS RELIED UPON THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG.CO.LTD. IN ITA NO.626 OF 2010 AND W.P. NO.758 O F 2010. HOWEVER, NOW THIS ISSUE HAS ALSO BEEN SET AT REST BY HON'BLE JURISDI CTIONAL HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT, N EW DELHI [2012] 347 ITR 272 (DELHI). THEREFORE, THERE IS NO INFIRMITY IN THE ORDER OF LEARNED CIT(A) HOLDING THAT RULE 8D WAS NOT APPLI CABLE. NOW, COMING TO THE QUANTUM OF DISALLOWANCE UNDER SECTION 14A OF THE ACT, SECTION 14A READS AS UNDER:- 14A. 14A. 14A. 14A. [(1)] FOR THE PURPOSES OF COMPUTING THE TOTAL IN COME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELAT ION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCO ME UNDER THIS ACT.] [(2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATIO N TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCO ME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO APPLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER T HIS ACT :] ITA-729, 730 & 494/D/2011 15 [PROVI PROVI PROVI PROVIDED DED DED DED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASIN G THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR AN Y ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001.]. 16. FROM SUB-SECTION (1) OF SECTION 14A, IT IS EVIDENT THAT THE LEGISLATURE HAS PROVIDED THAT NO DEDUCTION SHALL BE AL LOWED IN RESPECT OF THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. THEREFORE , INCURRING OF SOME EXPENDITURE BY THE ASSESSEE IN RELATION TO EXEMPT INCOM E IS ESSENTIAL SO AS TO INVOKE THE PROVISIONS OF SECTION 14A(1) BY THE ASSESSING OFFICER. AS PER SUB-SECTION (2) OF SECTION 14A, THE A SSESSING OFFICER IS EMPOWERED TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME PROVIDED HE IS NOT SATISFIED WITH THE C ORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RELATION TO THE INCURRING OF E XPENDITURE FOR EARNING OF EXEMPT INCOME. AS PER SUB-SECTION (3), THE ASSESSING OFFICER IS EMPOWERED TO DETERMINE THE EXPENDITURE EV EN WHEN THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO EARNING OF EXEMPT INCOME PROVIDED THE A SSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. FROM A COMBINED READING OF SUB-SECTION (2) & (3) OF SECTION 14A, IT IS EVIDENT THAT FIRST THE ASSESSEE HAS TO STATE WHETHER ANY EXPENDITU RE WAS INCURRED BY HIM FOR EARNING OF EXEMPT INCOME, IF YE S, THEN, HE HAS TO SPECIFY THE EXPENDITURE WHICH WAS INCURRED FOR EARNIN G OF EXEMPT INCOME. THEREAFTER, THE ASSESSING OFFICER IS REQUIRED T O EXAMINE THE ASSESSEES CLAIM WITH REGARD TO INCURRING OF NO EXPENDIT URE OR WITH REGARD TO THE AMOUNT OF EXPENDITURE CLAIMED TO HAVE BEEN INCURRED BY THE ASSESSEE FOR EARNING OF EXEMPT INCOME. IF THE ASSESSIN G OFFICER IS SATISFIED WITH THE CLAIM OF THE ASSESSEE, THEN, NO FURTHE R ACTION UNDER ITA-729, 730 & 494/D/2011 16 SECTION 14A IS REQUIRED EXCEPT TO DISALLOW THE AMOUN T OF EXPENDITURE, IF ANY, WHICH ASSESSEE CLAIMED TO HAVE INCURRED FOR EA RNING OF EXEMPT INCOME. HOWEVER, WHEN THE ASSESSING OFFICER IS NOT SATISF IED WITH THE CLAIM OF THE ASSESSEE WITH REGARD TO INCURRING OF NO E XPENDITURE OR THE AMOUNT OF EXPENDITURE SPECIFIED BY THE ASSESSEE FOR EARN ING OF EXEMPT INCOME, THEN, HE IS REQUIRED TO DETERMINE THE AMOUN T OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO EARNING OF EXE MPT INCOME. SUCH EXPENDITURE IS TO BE DETERMINED BY HIM IN ACCOR DANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. IN THIS CASE, THE ASSESSEE HA S WORKED OUT THE DISALLOWANCE UNDER SECTION 14A AT ` 7,73,525/-. THE ASSESSING OFFICER DID NOT RECORD ANY SATISFACTION THAT SUCH WOR KING IS WRONG. HE SIMPLY SAYS THAT DISALLOWANCE IS TO BE WORKED OUT AS PER RULE 8D. WE HAVE ALREADY HELD THAT FOR AY 2007-08, RULE 8D WAS N OT APPLICABLE AND THEREFORE, DISALLOWANCE NEED NOT BE COMPUTED AS PER R ULE 8D. THE ASSESSING OFFICER HAS NOT RECORDED ANY SATISFACTION WITH R EGARD TO ANY MISTAKE IN THE WORKING OF DISALLOWANCE UNDER SECTION 14A AT ` 7,73,525/- BY THE ASSESSEE. ON THESE FACTS, WE DO NOT FI ND ANY JUSTIFICATION TO INTERFERE WITH THE ORDER OF LEARNED CIT(A). THE SAME IS SUSTAINED AND REVENUES APPEAL IS DISMISSED. 17. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE ALLOW ED WHEREAS THE APPEAL OF THE REVENUE IS DISMISSED. DECISION PRONOUNCED IN THE OPEN COURT ON 10 TH SEPTEMBER, 2014. SD/- SD/- ( (( (H.S. SIDHU H.S. SIDHU H.S. SIDHU H.S. SIDHU) )) ) (G.D. AGRAWAL (G.D. AGRAWAL (G.D. AGRAWAL (G.D. AGRAWAL) )) ) JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER VICE PRESIDENT VICE PRESIDENT VICE PRESIDENT VICE PRESIDENT DATED : 10.09.2014 VK. ITA-729, 730 & 494/D/2011 17 COPY FORWARDED TO: - 1. APPELLANT : M/S CONSOLIDATED FINVEST & HOLDING S LIMITED, M/S CONSOLIDATED FINVEST & HOLDINGS LIMITED, M/S CONSOLIDATED FINVEST & HOLDINGS LIMITED, M/S CONSOLIDATED FINVEST & HOLDINGS LIMITED, 11/5, BASEMENT 11/5, BASEMENT 11/5, BASEMENT 11/5, BASEMENT- -- -01, PUSA ROAD, 01, PUSA ROAD, 01, PUSA ROAD, 01, PUSA ROAD, NEW DELHI NEW DELHI NEW DELHI NEW DELHI 110 005. 110 005. 110 005. 110 005. 2. RESPONDENT : DEPUTY COMMISSIONER OF INCOME TAX, DEPUTY COMMISSIONER OF INCOME TAX, DEPUTY COMMISSIONER OF INCOME TAX, DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE CIRCLE CIRCLE CIRCLE- -- -3(1), NEW DELHI. 3(1), NEW DELHI. 3(1), NEW DELHI. 3(1), NEW DELHI. 3. CIT 4. CIT(A) 5. DR, ITAT ASSISTANT REGISTRAR