SUASHISH DIAMONDS LTD, MUMBAI V. ADDL CIT RG 5(3), MUMBAI

ITA 7508/MUM/2014

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 1719 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2010-2011
• Appeal Filed On: 16-12-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANISH KUMAR SINGH
• Assessee Lawyers: DR K SHIVARAM
• Keywords: Transfer pricing; International transaction; Rule of consistency; Earning of tax free income; Proportionate interest; Notional interest; Rule 8D
• Section: 143(3); 14A; 115JB; 201

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES J , MUMBAI BEFORE SHRI C. N. PRASAD, JUDICIAL MEMBER, AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ITA NOS.7508/MUM/2014 ASSESSMENT YEAR: 2010-11 SUASHISH DIAMONDS LTD. MEHTA MAHAL, 11 TH FLOOR, 15 MATHEW ROAD, OPERA HOUSE, MUMBAI-400004 / VS. ADDL. CIT, RANGE-5(3), ROOM NO.521, AAYAKAR BHAVAN, MUMBAI-400020 ( /ASSESSEE) ( / REVENUE) P.A. NO. AAACS8246H ITA NOS.7058/MUM/2014 ASSESSMENT YEAR: 2010-11 ADDL. CIT, RANGE-5(3), ROOM NO.521, AAYAKAR BHAVAN, MUMBAI-400020 / VS. SUASHISH DIAMONDS LTD. MEHTA MAHAL, 11 TH FLOOR, 15 MATHEW ROAD, OPERA HOUSE, MUMBAI-400004 ( / REVENUE) ( /ASSESSEE) P.A. NO. AAACS8246H / DATE OF HEARING : 14/05/2019 / DATE OF ORDER: 31/05/2019 / ASSESSEE BY DR. K. SHIVARAM / REVENUE BY SHRI MANISH KUMAR SINGH 2 ITA NOS.7508 & 7058/MUM/2014 / O R D E R PER G. MANJUNATHA (ACCOUNTANT MEMBER) THESE CROSS APPEAL FILED BY THE ASSESSEE, AS WELL A S THE REVENUE ARE DIRECTED AGAINST ORDER OF THE LD. CIT(A)-15, MUMBAI, DATED 1 0/09/2014, FOR ASSESSMENT YEAR 2010-11. SINCE FACTS ARE IDENTICAL AND ISSUES ARE C OMMON, FOR THE SAKE OF CONVENIENCE, THESE APPEALS WERE HEARD TOGETHER AND ARE DISPOSED OF BY THIS CONSOLIDATED ORDER. 2. THE ASSESSEE HAS FILED FOLLOWING GROUNDS OF APP EAL:- 1.0 GROUND NO. 1 THE HON'BLE COMMISSIONER OF INCOME TAX (APPEALS)-1' 5,MUMBAI [THE CIT (A)] HAS ERRED IN LAW AND ON FACTS AND IN CIRCU MSTANCES OF THE CASE IN UPHOLDING ADDITION OF RS.29,66,742 IN RESPECT OF SH ARE APPLICATION MONEY ADVANCED TO ASSOCIATE ENTERPRISE ('AE'). 2.0 GROUND NO. 2 THE HON'BLE CIT(A) HAS ERRED IN LAW AND ON FACTS AN D IN CIRCUMSTANCES OF THE CASE IN UPHOLDING THE ADDITION OF INTEREST OF R S.9,53,074 ON DELAY IN REALIZATION OF EXPORT RECEIVABLES FROM AES. 3.0 GROUND NO.3 THE HON'BLE CIT(A) HAS ERRED IN LAW AND FACTS IN UP HOLDING THE ADDITIONAL DISALLOWANCE OF RS.74,44,433; ONE-HALF PER-CENT OF THE AVERAGE VALUE OF INVESTMENTS UNDER SECTION 14A OF THE INCOME TAX ACT , 1961 {'THE ACT'} BY APPLYING RULE 8D OF THE INCOME TAX RULES, 1962 ('TH E RULES). 4.0 GROU ND NO.4 THE HON'BLE CIT (A) HAS ERRED IN LAW AND ON FACTS A ND IN CIRCUMSTANCES OF THE CASE IN UPHOLDING THE ADDITIONAL DISALLOWANCE O F RS.74,44,433; ONE- HALF PER-CENT OF THE AVERAGE VALUE OF INVESTMENTS U NDER SECTION 14A OF THE ACT IN COMPUTING THE BOOK PROFIT UNDER SECTION 115J B OF THE ACT. 3. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPE AL:- 1. 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW,THE LD.CIT(A) HAS ERRED IN DIRECTIONG TO CONSIDER NET I NTEREST DEBIT TO PROFIT & LOSS ACCOUNT FOR CALCULATION OF DISALLOWANCE U/S14A R. W. RULE 8D OF THE IT RULES 1962, WITHOUT APPRECIATING THE FACT THAT THER E IS NO SUCH CONCEPT OF 3 ITA NOS.7508 & 7058/MUM/2014 NETTING OF INTEREST IN THE PROVISIONS OF SECTION 14 A R.W.RULE 8D OF IT RULES 1962' 2. 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) HAS NOT APPRECIATED THE FACT THAT THE ASS ESSEE HAS NOT ESTABLISHED NEXUS OF INTEREST EXPENDITURE WITH ANY PARTICULAR INCOME OR RECEIPT AND HENCE, THE PROVISIONS OF RULE 8D(2)(II) ARE NOT ATTACHED' 4. THE BRIEF, FACTS OF THE CASE ARE THAT THE ASSESS EE IS A PRIVILEGED SIGHTHOLDER OF DIAMOND TRADING COMPANY ENGAGED IN THE BUSINESS OF TRADING OF DIAMONDS. THE ASSESSEE HAS FILED ITS RETURN OF INCOME FOR AY. 201 0-11 ON 09/10/2010 DECLARING TOTAL INCOME FOR RS.38,21,31,102/- AS PER NORMAL PROVISIO NS AND RS.79,88,52,940/- U/S 115JB OF THE ACT. THE CASE WAS SELECTED FOR SCRUTIN Y AND DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A REFERENCE WAS MADE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING ARMS LENGTH PRICE (ALP) IN RELATIO N TO INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES (AE). THE TPO, VIDE ORDER DA TED 09/05/2013 U/S-92CA(3) OF THE ACT CALLED UPON THE ASSESSEE TO JUSTIFY INTERES T RECEIVED ON SHARE APPLICATION MONEY GIVEN TO ITS AE ALONG WITH INTEREST ON EXPORT RECEIVABLES. IN RESPONSE, THE ASSESSEE SUBMITTED THAT IT HAS RECEIVED INTEREST ON SHARE APPLICATION MONEY ON THE BASIS OF LIBOR PLUS 200 BPS AND SUCH RATE IS BASED ON THE RECOMMENDATIONS OF THE RBI VIDE CIRCULAR NO 7 OF 2009-10 DATED 1ST JULY 20 09, WHEREIN IT IS MENTIONED THAT TRADE CREDIT COULD BE AVAILED AT MAXIMUM COST OF 6 MONTHS LIBOR PLUS 200 BPS. IT WAS SUBMITTED THAT INTEREST CHARGED BY THE ASSESSEE ON SHARE APPLICATION MONEY TO AES WAS AT PAR WITH THE INTEREST RATE ON FOREIGN CU RRENCY LOAN AVAILED BY THE ASSESSEE. THEREFORE, ITS TRANSACTIONS WITH AE IS AT ALP. SIMI LARLY, THE TPO CALLED UPON THE ASSESSEE TO EXPLAIN WHY INTEREST ON EXPORT RECEIVAB LES SHALL NOT BE CHARGED TO 4 ITA NOS.7508 & 7058/MUM/2014 WORKOUT ALP BECAUSE OF EXORBITANT DELAY IN RECEIVAB LES FROM EXPORT SALES. IN RESPONSE, THE ASSESSEE SUBMITTED THAT CREDIT PERIOD IN CASE OF EXPORT AND LOCAL SALES DIFFERS FROM CUSTOMERS TO CUSTOMERS ON THE TERMS AN D CONDITIONS OF WHICH THE GOODS ARE SOLD. THE CREDIT PERIOD IS ALSO DEPENDS UPON TH E CREDIBILITY OF THE CUSTOMERS. COMMERCIAL RATIONAL BEHIND NON-CHARGING OF INTEREST IS INDUSTRIAL PRACTICE CONSIDERED FOR DETERMINING ALP. 5. THE TPO AFTER CONSIDERING THE RELEVANT SUBMISSIO NS HELD THAT LIBOR PLUS MARK UP APPROACH ADOPTED BY THE ASSESSEE TO CHARGE INTER EST ON SHARE APPLICATION MONEY TO ITS AES IS NOT ACCEPTABLE, BECAUSE ADDING MARK U P TO THE LIBOR COVERS THE RISK REWARD ONLY WHEN THE TRANSACTION IS MADE IN FOREX. WHEN MONEY IS ADVANCED TO THE AE BY BUYING HARD CURRENCIES FROM SELLING INR, THER E IS ADDITIONAL RISK OF EXCHANGE RATE DIFFERENCE. THE ASSESSEE HAS NOT COVERED ITSEL F AGAINST CURRENCY RISK, ENTITY RISK, COUNTRY RISK AND ADMINISTRATIVE COST IN CHARGING LI BOR PLUS 200 BPS TO THE AE. A MARK UP OF 300 BPS IS THEREFORE APPLIED TO THE RATE OF INTEREST CHARGED BY THE ASSESSEE. ACCORDINGLY WORKOUT INTEREST RECEIVABLES ON SHARE APPLICATION MONEY AND DETERMINED TOTAL INTEREST OF RS.81,58,533/- AND ALS O AFTER REDUCING INTEREST RECEIVED BY THE ASSESSEE OF RS.51,91,791/-, THE BALANCE AMOUNT OF RS.29,66,742/- HAS BEEN SUGGESTED TO MAKE ADJUSTMENT TOWARDS INTEREST RECEI VED ON SHARE APPLICATION MONEY. SIMILARLY, IN RESPECT OF INTEREST ON EXPORT RECEIVA BLES, AFTER ANALYZING THE FACTS, THE AO OBSERVED THAT THE ASSESSEE HAS ALLOWED UNDUE BENEFI T TO ITS AE BY EXTENDING CREDIT PERIOD WHICH IS MORE THAN CREDIT PERIOD ALLOWED TO NON-AES, THEREFORE, TAKING NOTE OF 5 ITA NOS.7508 & 7058/MUM/2014 THE FACT THAT THE ASSESSEE HAS CHARGED INTEREST OF RS.2.73 CRORES WHICH IS INCLUDED INTEREST ON PACKING CREDIT TO FOREIGN CURRENCY LOAN AND ALSO THE RATE OF INTEREST INVOLVED IN PACKING CREDIT EXPOSURE, DETERMINED INTEREST REC EIVABLES OF RS. 9,53,074/- AND SUGGESTED ADJUSTMENT UNDER TRANSFER PRICING REGULAT IONS. 6. THE AO, ON THE BASIS OF TPOS ORDER COMPLETED AS SESSMENT U/S 144C(3) R.W.S. 143(3) OF THE ACT ON 24/01/2014 AND DETERMINED TOTA L INCOME AT RS.39,04,97,800/- WHERE HE HAD MADE ADDITIONS TOWARDS TRANSFER PRICIN G ADJUSTMENT AS RECOMMENDED BY THE TPO IN ITS ORDER DATED 09/05/2013 TOWARDS IN TEREST ON SHARE APPLICATION MONEY TO AES AND ALSO INTEREST ON EXPORT RECEIVABLES FROM AES. IN ADDITION, THE AO HAS MADE ADDITIONS OF RS.44,25,829/-U/S 14A BY INVOKING PROV ISIONS OF RULE-8D TOWARDS EXPENSES INCURRED IN RELATION TO EXEMPT INCOME, ON THE GROUND THAT ALTHOUGH THE ASSESSEE HAS EARNED HUGE DIVIDEND INCOME BUT FAILED TO DETERMINE CORRECT AMOUNT OF DISALLOWANCES IN RESPECT OF EXPENSES INCURRED IN RE LATION TO EXEMPT INCOME, THEREFORE BY APPLYING PRESCRIBED FORMULA PROVIDED UNDER RULE- 8D, DETERMINED DISALLOWANCE OF RS.94,27,894/- WHICH INCLUDES AMOUNT OF DIRECT EXPE NDITURE RELATING TO EXEMPT INCOME OF RS.3,07,453/- PROPORTIONATE SHARE OF INTEREST AT TRIBUTABLE TO THE EXEMPT INCOME AS PER RULE 8D-2(II) OF RS.16,76,007/- AND AN AMOUNT E QUAL TO ONE AND HALF PERCENT AT THE AVERAGE VALUE OF INVESTMENT WHICH SHALL NOT PART FO RM OF TOTAL INCOME FOR RS.74,44,433/-. AFTER REDUCING SUO-MOTO DISALLOWANC E MADE BY THE ASSESSEE OF RS. 50,02,065/- , HE MADE FURTHER ADDITION OF RS.44,25, 829/-. 6 ITA NOS.7508 & 7058/MUM/2014 7. AGGRIEVED BY THE ASSESSMENT ORDER, ASSESSEE PREF ERRED AN APPEAL BEFORE THE LD. CIT(A).THE ASSESSEE HAS CHALLENGED ADDITIONS MA DE BY THE AO TOWARDS TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF INTEREST CHARGED O N SHARE APPLICATION MONEY GIVEN TO ITS AE ALONG WITH ADJUSTMENT MADE TOWARDS INTEREST RECEIVABLES ON EXPORT RECEIVABLES. THE ASSESSEE HAS ALSO CHALLENGED THE ADDITIONS MADE BY THE AO TOWARDS DISALLOWANCE OF EXPENSES INCURRED IN RELATION TO EX EMPT INCOME. THE LD CIT(A) AFTER CONSIDERING RELEVANT SUBMISSIONS OF THE ASSESSEE, P ARTLY ALLOWED APPEAL FILED BY THE ASSESSEE, WHERE HE HAS CONFIRMED ADDITIONS MADE BY THE AO TOWARDS TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF INTEREST CHARGED ONN SHARE APPLICATION MONEY AND ALSO TRANSFER PRICING ADJUSTMENT IN RESPECT OF OUTSTANDI NG EXPORT RECEIVABLES BUT, ALLOWED PARTIAL RELIEF IN RESPECT OF ADDITIONS MADE TOWARDS DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME U/S 14A BY DIRECTING T HE AO TO CONSIDER ONLY NET INTEREST EXPENDITURE FOR THE PURPOSE OF DISALLOWANCE UNDER R ULE-8D-2(II) OF THE RULES, 1962. 8. AGGRIEVED BY THE ORDER OF THE LD. CIT((A), THE A SSESSEE AS WELL AS THE REVENUE IS IN APPEAL BEFORE US. 9. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM GROUND NO.1 OF THE ASSESSEES APPEAL IS TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF INTEREST CHARGED ON SHARE APPLICATION MONEY FORWARDED TO AE FOR RS.28,6 6,742/-. 10. THE FACTS WITH REGARD TO IMPUGNED DISPUTE ARE T HAT THE ASSESSEE HAS CHARGED INTEREST AT 6 MONTHS LABOR PLUS 200 BPS AS INTEREST ON SHARE APPLICATION MONEY 7 ITA NOS.7508 & 7058/MUM/2014 GIVEN TO AE. THE SAID LOAN WAS FORWARDED IN US $. T HE ASSESSEE HAS AVAILED OVERDRAFT FACILITY FROM LOCAL BANK AT BOTSWANA AT I NTEREST RATE OF 2.5%. ALL THESE EVIDENCES ARE PART OF ASSESSMENT PROCEEDINGS. THE TPO HELD THAT NEITHER PULA NOR INR ARE BASKET CURRENCY OF LIBOR, HENCE IT IS NOT A PPLICABLE TO THE ASSESSEE. THE TPO FURTHER HELD THAT THE LIBOR WAS NOT ACCEPTABLE BECAUSE THE MARK-UP TO THE LIBOR COVERS THE RISK REWARD ONLY WHEN THE TRANSACT ION IS MADE IN FOREX. SINCE, THE ASSESSEE HAD NOT CONSIDERED ITSELF AGAINST CURRENCY RISK, ENTITY RISK, COUNTRY RISK AND ADMINISTRATIVE COST IN CHARGING LIBOR PLUS 200 BPS, HE HAD MADE ADJUSTMENT OF ADDITIONAL 500 BPS @ 5.5%. THE LD. CIT(A) HAS UPHEL D THE ADJUSTMENT MADE BY THE TPO/AO. 11. THE LD. AR FOR THE ASSESSEE SUBMITTED THAT TPO/ AO WAS ERRED IN WORKING OUT INTEREST ON SHARE APPLICATION MONEY FORWARDED TO AE BY TAKING LIBOR PLUS 500 BPS WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS GIVEN SHARE APPLICATION MONEY TO ITS AE OUT OF OWN FUNDS AND ALSO INTEREST CHARGED B Y THE ASSESSEE @ 3.5% IS COMPARABLE WITH THE RATE ON WHICH BORROWING IS MADE , HENCE, NO ADJUSTMENT IS REQUIRED TO BE MADE. THE AR FURTHER SUBMITTED THAT INTEREST RATE SHOULD BE MARKET DETERMINED INTEREST RATE APPLICABLE TO THE CURRENCY CONCERNED IN WHICH THE LOAN HAS TO BE REPAID. INTEREST RATE SHOULD NOT BE COMPARED ON THE BASIS OF INTEREST PAYABLE ON THE CURRENCY OR LEGAL TENDER OF THE PLACE OR COUNTRY OR RESIDENT OF EITHER PARTY. SINCE, SHARE APPLICATION MONEY WAS FORWARDED IN US $, LIBOR RATE SHOULD BE CONSIDERED AS BENCH MARK. THE LD. AR FURTHER SUBMITTED THAT WHEN THE T PO HIMSELF STATED CURRENCY OF 8 ITA NOS.7508 & 7058/MUM/2014 BOTSWANA PULA AND INDIAN RUPEE DO NOT FALL IN THE BASKET OF LIBOR CURRENCY, HAS ERRED IN MADE ADJUSTMENT OF 500 BPS UPON THE INTER EST CHARGED BY THE ASSESSEE WITHOUT ANY BASIS. THE LD. AR FURTHER SUBMITTED THA T THE DEPARTMENT HAS ACCEPTED IN EARLIER YEAR WHEN THE ASSESSEE HAS CHARGED LIBOR PL US 300 BPS WITHOUT ANY DISTURBANCE, THEREFORE, WITHOUT THERE BEING ANY CHA NGE IN FACTS MAKING FURTHER ADJUSTMENT OF 500 BPS IS INCORRECT AND ALSO OPPOSIT E TO THE PRINCIPLE OF RULE OF CONSISTENCY. IN THIS REGARD, THE ASSESSEE HAS RELIE D UPON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS COTTON NATURALS (I ) (P.) LTD. [2015] 276 CTR 445 (DEL.) AND ALSO THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS TECH MAHINDRA LTD. (2015) 229 TAXMAN 298 (BOM.). THE ASS ESSEE HAS ALSO RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF BH ARAT SANCHAR NIGAM LTD. VS UOI (2006) 282 ITR 273 (SC). 12. THE LD. DR ON THE OTHER HAND, SUBMITTED THAT AL THOUGH THE ASSESSEE HAS BENCH MARKED INTEREST CHARGED ON SHARE APPLICATION MONEY FORWARDED TO AE BY TAKING LIBOR PLUS 200 BPS, BUT FAILED TO OFFER ANY EXPLANA TION WHY IT HAS DEVIATED FROM EARLIER YEAR RATE OF LIBOR PLUS 300 BPS CHARGED ON SHARE APPLICATION MONEY GIVEN TO AE. THOUGH, THE ASSESSEE HAS ADVOCATING PRINCIPLE O F CONSISTENCY, BUT ASSESSEE ITSELF DID NOT FOLLOW CONSISTENCY IN CHARGING INTEREST ON SHARE APPLICATION MONEY WHICH IS EVIDENT FROM THE FACT THAT THE ASSESSEE HAS CHARGED LIBOR PLUS 300 BPS IN EARLIER YEAR, WHEREAS CHANGED RATE OF INTEREST TO LIBOR PLU S 200 BPS FOR THE YEAR UNDER CONSIDERATION WITHOUT THERE BEING ANY CHANGE IN FAC TS. THEREFORE, THERE IS NO ERROR IN 9 ITA NOS.7508 & 7058/MUM/2014 THE ADJUSTMENT MADE BY THE TPO/AO IN RESPECT OF INT ERNATIONAL TRANSACTIONS AND HENCE THE ADDITIONS MADE BY THE AO SHOULD BE SUSTAI NED. 13. WE HAVE HEARD BOTH PARTIES, PERUSED THE MATERIA L AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THERE IS N O DISPUTE WITH REGARD TO THE FACT THAT ASSESSEE HAS CHARGED INTEREST ON SHARE APPLICATION MONEY FORWARDED TO AE AND SUCH INTEREST HAS BEEN CHARGED BY APPLYING LIBOR PLUS 20 0 BPS AND LATER CONVERTED INTO INDIAN RUPEE TO DETERMINED INTEREST RECEIVABLE FROM AE. THE ASSESSEE HAS JUSTIFIED CHARGING LIBOR PLUS 200 BPS ON THE GROUND THAT INTE REST RATE SHOULD BE MARKET DETERMINED APPLICABLE TO THE CURRENCY CONCERNED IN WHICH LOAN HAS TO BE REPAID. INTEREST RATE SHOULD NOT BE COMPUTED ON THE BASIS O F INTEREST PAYABLE OR THE CURRENCY OR LEGAL TENDER OF THE PLACE OR COUNTRY OR RESIDENT OF EITHER PARTY. ACCORDINGLY, IT HAS APPLIED LIBOR PLUS 200 BPS CONSIDERING CURRENCY RIS K, ENTITY RISK, COUNTRY RISK AND ADMINISTRATIVE COST. THE AO HAS DETERMINED INTEREST RECEIVABLE ON SHARE APPLICATION MONEY FORWARDED TO AE BY APPLYING LIBOR PLUS 500 BP S @ 5.5% ON THE GROUND THAT ASSESSEE HAS NOT COVERED ITSELF AGAINST CURRENCY RI SK, ENTITY RISK, COUNTRY RISK AND ADMINISTRATIVE COST IN CHARGING INTEREST ON LIBOR P LUS 200 BPS TO THE AE. WE FIND THAT THE ASSESSEE HAS CHARGED INTEREST BY APPLYING LIBOR PLUS 300 BPS FOR IMMEDIATELY PRECEDING YEAR AND SUCH RATE HAS BEEN A CCEPTED BY THE DEPARTMENT WITHOUT ANY FURTHER ADJUSTMENT. THE ASSESSEE HAS CH ANGED RATE OF INTEREST TO LIBOR PLUS 200 BPS WITHOUT THERE BEING CHANGE IN CIRCUMST ANCES. ALTHOUGH, THE ASSESSEE ADVANCED RULE OF CONSISTENCY, BUT YET IT HAS FAILED TO EXPLAIN WHY RATE OF INTEREST HAS 10 ITA NOS.7508 & 7058/MUM/2014 BEEN CHANGED FROM LIBOR PLUS 300 BPS TO LIBOR PLUS 200 BPS. FURTHER, THE ASSESSEE HAS FAILED TO MAKE OUT A SUFFICIENT REASON FOR CHANGING RATE OF INTEREST APPLYING ON SHARE APPLICATION MONEY FORWARDED TO IT S AE. THEREFORE, CONSIDERING THE ASSESSEES OWN CALCULATION OF LIBOR PLUS 300 BPS FO R AY 2011-12 AND 2013-14 AND SUCH RATE HAS BEEN ACCEPTED BY THE DEPARTMENT, WE A RE OF THE CONSIDERED VIEW THAT ASSESSEE OUGHT TO HAVE CHARGED LIBOR PLUS 300 BPS O N SHARE APPLICATION MONEY FORWARDED TO ITS AE. THEREFORE, WE DIRECT THE AO/TP O TO RECALCULATE INTEREST RECEIVABLES ON SHARE APPLICATION MONEY FORWARDED TO AE BY APPLYING LIBOR PLUS 300 BPS. 14. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM GROUND NO. 2 IS TRANSFER PRICING ADJUSTMENT ON OUTSTANDING EXPORT RECEIVABLE S OF RS.9,53,074/-. THE ASSESSEE, DURING THE YEAR HAD OUTSTANDING RECEIVABLES FROM BO TH AE AND NON-AE. THE ASSESSEE HAS NOT CHARGED INTEREST ON OUTSTANDING RECEIVABLES TO BOTH AE AND NON-AE CUSTOMERS. TO SUPPORT ITS ARGUMENTS, THE ASSESSEE H AS FURNISHED A LETTER FROM GEM & JEWELLERY COUNCIL TO ESTABLISH THAT NON CHARGING OF INTEREST ON RECEIVABLES WAS AN INDUSTRY PRACTICE. THE TPO ASKED THE ASSESSEE TO PR OVIDE WEIGHTED AVERAGE PERIOD FOR RECEIVABLES FORM BOTH AE AND NON AE. THE ASSESS EE SUBMITTED THAT WEIGHTED AVERAGE DAYS FOR RECEIVABLE FROM NON AE WERE 85 DAY S AND THAT FROM AE WAS 39 DAYS. THE TPO HAS MADE AN ADJUSTMENT ON ALL EXPORT INVOICE WHERE EXPORT REALIZATION WAS BEYOND THE PERIOD OF 85 DAYS BY APPLYING INTERE ST @ 4.5% BEING 200 BPS MARK UP ON THE INTEREST TAKEN ON PACKING CREDIT AS AVAIL ED ON 2.5% BY THE ASSESSEE. THE 11 ITA NOS.7508 & 7058/MUM/2014 LD. CIT(A) AFFIRMED THE ADDITIONS MADE BY THE AO ON THE GROUND THAT THERE WAS NO COMPLETE UNIFORMITY BETWEEN CREDIT PERIOD TO AE AND NON AE AND HENCE TRANSACTION WAS NOT AT ARMS LENGTH. THE LD. CIT(A) ALSO HELD T HAT WEIGHTED AVERAGE AS COMPUTED BY THE ASSESSEE FOR ESTABLISHING 39 DAY CREDIT PERI OD TO AE INCLUDED THE ADVANCES RECEIVED BY IT AND HENCE REJECTED THE COMPARISON. 15. THE LD. AR FOR THE ASSESSEE SUBMITTED THAT WHER E THERE IS A COMPLETE UNIFORMITY OF ACT OF THE ASSESSEE IN NOT CHARGING INTEREST FROM BOTH AE AND NON-AE DEBTORS FOR DELAY IN REALIZATION OF EXPORT PROCEEDS , THE AO WAS NOT JUSTIFIED IN MAKING ADDITION OF NOTIONAL INTEREST TO ASSESSEES ALP ON AFORESAID GROUND IN COURSE OF TRANSFER PRICING ADJUSTMENTS. THE LD. AR FURTHER SU BMITTED THAT THE AO HAS TAKEN ONE OR TWO SOLITARY INSTANCE OF DELAY OVER AND ABOVE NO RMAL PERIOD ALLOWED TO NON-AES TO COMPARE THE PERIOD OF DELAY IN RELATION TO EXPORT R ECEIVABLES WITHOUT CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE THAT WEIGHTED AVER AGE PERIOD OF DELAY IN CASE OF AE IS LESS THAN THE DELAY IN RELATION TO DEBTORS FR OM NON-AES. THE LD. AR FURTHER SUBMITTED THAT THE WEIGHTED AVERAGE DELAY IN REALIZ ATION OF EXPORT CANNOT BE AN APPROPRIATE BENCH MARK TO CARRY TRANSFER PRICING AD JUSTMENT AS MANY TRANSACTION WITH NON-AE SHALL HAVE A LONGER PERIOD THAN AE. THE TPO HIMSELF OBSERVED THAT IN THE PERIOD OF 85 DAYS, ONLY 62.09% OF TOTAL EXPORTS TO NON-AE WERE REALISED, WHILE 88.16% OF SALES TO AE WERE REALISED DURING SAME PERIOD, TH EREFORE, COMPARISON OF PERIOD BY TAKING ONE OR TWO INSTANCE TO BENCH MARK RECEIVABLE S IS INCORRECT. 12 ITA NOS.7508 & 7058/MUM/2014 16. THE LD. DR ON THE OTHER HAND, SUBMITTED THAT TH E AO HAS BROUGHT OUT CLEAR FACTS TO EFFECT THAT THE ASSESSEE HAS ALLOWED UNDUE BENEFIT BY EXTENDING CREDIT PERIOD TO AES OVER AND ABOVE THE NORMAL CREDIT PERIOD ALLO WED TO NON AE IN CASE OF EXPORT RECEIVABLES, THEREFORE, THE AO/TPO WAS RIGHT IN BEN CH MARKING EXPORT RECEIVABLES BY COMPARING THE PERIOD OF CREDIT ALLOWED TO NON-AES A ND HENCE THERE IS NO REASON TO DEVIATE FROM THE FINDINGS RECORDED BY THE TPO IN OR DER TO GIVE BENEFIT TO THE ASSESSEE. 17. WE HAVE HEARD BOTH PARTIES, PERUSED MATERIAL AV AILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THERE IS N O DISPUTE WITH REGARD TO THE FACT THAT THE ASSESSEE HAS NOT CHARGED ANY INTEREST ON RECEIV ABLES FROM BOTH AE AS WELL AS NON-AE. FURTHER, WHERE THERE IS COMPLETE UNIFORMITY IN ACT OF ASSESSEE IN NOT CHARGING INTEREST FROM BOTH AE AND NON-AE DEBTORS FOR DELAY IN RELATION OF EXPORT PROCEEDS, THEREFORE, THE AO IS NOT JUSTIFIED IN MAKING ADDITI ON OF NOTIONAL INTEREST TO THE ASSESSEE ALP ON AFORESAID GROUND IN COURSE OF TRANSFER PRICI NG ADJUSTMENT. AS WEIGHTED AVERAGE REALIZATION IN CASE OF AE WAS LESSER THAN N ON-AE, NO TP ADJUSTMENT SHOULD BE MADE. THIS FINDING IS FORTIFIED BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS VS INDO AMERICAN JEWELLERY LTD. [2014] 223 TAXMAN 8 (BOM.), WHERE IT WAS HELD THAT THERE WAS COMPLETE UNIFORMIT Y IN ACT OF ASSESSEE IN NOT CHARGING INTEREST FROM BOTH AE AND NON-AE DEBTORS F OR DELAY IN REALIZATION OF EXPORT PROCEEDS, NO ADJUSTMENT TO ALP IN COURSE OF TRANSFE R PRICING PROCEEDINGS. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE AO/TPO WAS E RRED IN MAKING ADDITION TOWARDS 13 ITA NOS.7508 & 7058/MUM/2014 NOTIONAL INTEREST RECEIVABLES ON EXPORT RECEIVABLES AND HENCE DIRECT THE AO TO DELETE THE ADDITIONS MADE TOWARDS INTEREST ON EXPORT RECEI VABLES. 18. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM GROUND NO.3 IS DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE FACTS WITH REGARD TO THE IMPUGNED DISPUTE ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS EARNED EXEMPT INCOME BEING DIVIDEND OF RS.3,62,07,763/-, WHICH WAS CLAIMED EXEMPT U/S 10(34) OF THE ACT. THE ASSESSEE HAS ALSO MADE SUO-MOTO DISALLOWANCE OF RS.50,02,065/- TOWARDS EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE AO HAS DETERMINED DISALLOWANCES CONTEMP LATED U/S 14A BY APPLYING THE PRINCIPLES PROVIDED UNDER RULE-8D(2) AND DETERMINE D TOTAL DISALLOWANCE OF RS.94,27,894/- WHICH INCLUDES DIRECT EXPENDITURE AT TRIBUTABLE TO EARNING EXEMPT INCOME OF RS.3,07,453/- PROPORTIONATE INTEREST ATT RIBUTABLE TO THE EXEMPT INCOME AS PER THE FORMULA PRESCRIBED UNDER RULE-8D(2)(II) AT RS.16,76,007/- AND AMOUNT OF RS.74,44,433/- IN RESPECT OF OTHER EXPENSES UNDER R ULE-8D(2)(III) OF THE RULES. FURTHER, AFTER REDUCING SUO-MOTO DISALLOWANCE ALREA DY MADE BY THE ASSESSEE, HE MADE FURTHER ADDITIONS OF RS.44,25,829/-. ON APPEAL BEFORE THE LD. CIT(A), THE LD. CIT(A) ALLOWED PARTIAL RELIEF IN RESPECT OF DISALLO WANCE OF INTEREST EXPENDITURE AND DIRECT THE AO TO CONSIDER ONLY NET INTEREST EXPENDI TURE FOR THE PURPOSE OF DISALLOWANCES. AGGRIEVED BY THE LD. CIT(A)S FINDI NG, THE ASSESSEE AS WELL AS REVENUE IS IN APPEAL BEFORE US. 14 ITA NOS.7508 & 7058/MUM/2014 19. THE LD. AR FOR THE ASSESSEE, AT THE TIME OF HEA RING, SUBMITTED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF ITAT, MUMBAI BENCH, IN ASSESSEES OWN CASE FOR AY 2008-09 AND 2009-10, WHE RE IT WAS HELD THAT UNLESS THE AO RECORDED SATISFACTION AS REQUIRED U/S 14A(2), HA VING REGARD TO THE BOOKS OF ACCOUNTS OF THE ASSESSEE THAT SUO-MOTO DISALLOWANCE MADE BY THE ASSESSEE IS NOT CORRECT, THEN THE AO CANNOT APPLY THE PROCEDURE PRO VIDED UNDER RULE-8D(2) TO COMPUTE DISALLOWANCES OF EXPENDITURE IN RELATION TO EXEMPT INCOME U/S 14A OF THE ACT. THE LD. AR SUBMITTED THAT THIS PROPORTION IS FURTHE R SUPPORTED FROM THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. VS DCIT (2010) 328 ITR 81(BOM.)(HC) AND ALSO FROM THE DECIS ION OF HONBLE SUPREME COURT IN THE CASE OF MAXOFF INVESTMENT LTD. VS CIT (2018) 40 2 ITR 640(SC) WHERE IT WAS HELD THAT IN THOSE CASES, WHERE THE AO HAS NOT ACCEPTED SUO-MOTO DISALLOWANCES COMPUTED BY THE ASSESSEE, THEN THE AO IS REQUIRED T O RECORD HIS SATISFACTION HAVING REGARD TO THE BOOKS OF ACCOUNTS OF THE ASSESSEE THA T DISALLOWANCE COMPUTED BY THE ASSESSEE IS NOT CORRECT. 20. THE LD. DR ON THE OTHER HAND, STRONGLY SUPPORTI NG ORDERS OF THE AO/TPO SUBMITTED THAT THE AO HAS RIGHTLY APPLIED THE PRESC RIBED PROCEDURE PROVIDED UNDER RULE-8D TO COMPUTE DISALLOWANCE OF EXPENDITURE INC URRED IN RELATION TO EXEMPT INCOME U/S 14A OF THE ACT, WHICH IS MANDATORY IN NA TURE FROM AY 2009-10 ONWARDS AND HENCE, THERE IS NO MERIT IN THE ARGUMENT OF ASS ESSEE, ACCORDINGLY, THE ADDITIONS MADE BY THE AO SHOULD BE UPHELD. 15 ITA NOS.7508 & 7058/MUM/2014 21. WE HAVE HEARD BOTH PARTIES, PERUSED MATERIAL A VAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. BOTH THE P ARTIES NEVER DISPUTED APPLICABILITY OF PROVISION OF SECTION 14A R.W.R.8D(2). IN FACT, THE ASSESSEE HAS COMPUTED SUO-MOTO DISALLOWANCE OFRS.50, 02,065/- IN RESPECT OF EXPEND ITURE INCURRED IN RELATION TO EXEMPT INCOME. THE AO REJECTED SUO-MOTO DISALLOWANCE COMPU TED BY THE ASSESSEE AND INVOKED RULE-8D(2) TO DETERMINE DISALLOWANCE OF EXP ENSES. THE ASSESSEE CHALLENGED THE ACTION OF THE AO IN LIGHT OF PROVISIONS OF SUB- SECTION (2) OF SECTION 14A TO ARGUE THAT THERE IS NO CLEAR CUT SATISFACTION FROM THE AO BEFORE INVOKING PROVISIONS OF RULES- 8D(2) WHICH IS MANDATORILY REQUIRED TO BE RECORDED BEFORE COMPUTING DISALLOWANCE BY APPLYING PRESCRIBED PROCEDURE UNDER RULES-8D(2). WE FIND THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE CO-ORDINATE BENCH IN ASSESSE ES OWN CASE FOR AY 2008-09 AND 2009-10, WHERE UNDER IDENTICAL FACTS AND CIRCUM STANCES, THE TRIBUNAL DELETED ADDITIONS MADE BY THE AO TOWARDS FURTHER DISALLOWAN CES OVER AND ABOVE SUO-MOTO DISALLOWANCES MADE BY THE ASSESSEE TOWARDS EXPENDIT URE INCURRED IN RELATION TO EXEMPT INCOME ON THE GROUND THAT BEFORE INVOKING PR OVISIONS OF RULE-8D, THE AO REQUIRED TO RECORD SATISFACTION HAVING REGARD TO TH E BOOKS OF ACCOUNTS OF THE ASSESSEE THAT SUO-MOTO DISALLOWANCE COMPUTED BY THE ASSESSEE IS INCORRECT. THE RELEVANT FINDINGS OF THE TRIBUNAL ARE AS UNDER:- 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND THE CASE LAW RELIED ON. THE A SSESSING OFFICER WHILE COMPLETING THE ASSESSMENT NOTICED THAT ASSESS EE HAS RECEIVED DIVIDEND INCOME IN BOTH THESE ASSESSMENT YEARS AND ALSO SUO MOTU DISALLOWED EXPENDITURE AGAINST THE EXEMPT INCOME. T HE ASSESSING OFFICER REQUIRED THE ASSESSEE TO FURNISH DETAILS OF DIVIDEND INCOME 16 ITA NOS.7508 & 7058/MUM/2014 EARNED AND EXPENSES INCURRED FOR THIS DIVIDEND INCO ME. THE ASSESSEE- COMPANY WAS ALSO ASKED AS TO WHY INTEREST EXPENDITU RE SHOULD NOT BE DISALLOWED IN RESPECT OF EXPENDITURE INCURRED TOO O N EXEMPT INCOME APPLYING RULE 8D. ASSESSEE FURNISHED ITS EXPLANATIO N STATING THAT DURING THE YEAR AND EARLIER YEARS, ASSESSEE-COMPANY HAD MADE INVESTMENT IN SHARES AND MUTUAL FUNDS OUT OF ITS OW N-SURPLUS FUNDS AND INTEREST FREE FUNDS. THE DIVIDEND INCOME ON SUC H SHARES AND MUTUAL FUNDS IS DIRECTLY CREDITED TO THE BANK ACCOU NT OF THE COMPANY, THEREFORE, IT WAS CONTENDED THAT NO SPECIFIC EXPEND ITURE HAS BEEN INCURRED TO EARN DIVIDEND INCOME. IT WAS FURTHER SU BMITTED THAT THE ASSESSEE-COMPANY CONSIDERED THE DIRECT AND INDIRECT EXPENSES AS IDENTIFIED AND APPORTIONED BY THE MANAGEMENT AND DI SALLOWED U/S.L4A OF THE ACT IN THE COMPUTATION OF INCOME. IT WAS FUR THER CONTENDED BY THE ASSESSEE THAT THE INVESTMENTS ARE MADE OUT OF A CCUMULATED FUNDS AND A DETAILED WORKING HAS BEEN SUBMITTED SHOWING T HAT ASSESSEE- COMPANY IS HAVING AMPLE FUNDS TO MAKE INVESTMENT IN SHARES AND MUTUAL FUNDS FROM ITS OWN FUNDS AND RESERVES AND SU RPLUS AND NO BORROWED FUNDS HAVE BEEN UTILIZED FOR INVESTMENT. I T WAS CONTENDED BY THE ASSESSEE-COMPANY THAT THE COMPANY HAS INVEST ED RS.186.71 CRORES INCOME FROM WHICH IT IS EXEMPT FROM TAX AGAI NST OWN FUNDS OF RS.584.41 CRORES. THEREFORE, BY NO STRETCH OF IMAGI NATION IT CAN BE CONTENDED THAT COMPANY HAS UTILIZED PART OF THE BOR ROWED FUNDS FOR THE PURPOSE OF MAKING .INVESTMENTS. 12. THE ASSESSEE FURTHER CONTENDED THAT IT HAS O BTAINED THE ENTIRE INTEREST BEARING FUNDS IN THE FORM OF PACKING CREDI T FACILITIES (IN INDIAN RUPEES), POST SHIPMENT (PSC/PSCFC) CREDIT FACILITIE S (IN INDIAN PCFC/EBRD/FOREIGN CURRENCY LOANS. THE ASSES SEE CONTENDED THAT THE BANK PROVIDES THESE CREDIT FACILITIES FOR EXPORT AND IMPORT BUSINESS AND USED FOR A PARTICULAR EXPORT AND IMPOR T. THE BANK DOES NOT PROVIDE FUND FOR MAKING INVESTMENT IN SHARES ET C. AS SUCH THE AMOUNT BORROWED FROM THE BANKS CANNOT BE UTILIZED B Y THE ASSESSEE FOR ANY OTHER PURPOSES. SINCE, THERE IS END USE RES TRICTION FROM THE BANK, IT WAS CONTENDED THAT THE ASSESSEE-COMPANY HA S UTILIZED WHOLE INTEREST BEARING FUND OF RS. 187.40 CRORES TOWARDS BUSINESS INVESTMENT FOR BUSINESS PURPOSES NOT FOR INVESTMENT IN SHARES. THUS CONTENDED THAT ASSESSEE-COMPANY HAS NOT BORROWED ANY MONEY FO R INVESTMENT IN SHARES OF OTHER COMPANY FOR EARNING DIVIDEND INCOME . 13, ASSESSEE FURTHER CONTENDED THAT SINCE IT HAD IN CURRED CERTAIN DEMAT CHARGES/EXPENSES, THOSE EXPENSES MAY DIRECTLY ATTRIBUTABLE TO EXEMPT INCOME. THUS, THE COMPANY HAS DISALLOWED RS. 10,45,5677- AND RS.55,62,9707- U/S.!4A OF THE ACT IN THE COMPUT ATION OF INCOME FOR THE ASSESSMENT YEAR 2008-09 AND 2009-10 RESPECT IVELY, AND THEREFORE, THE DISALLOWANCE MAY BE RESTRICTED TO TH IS COUNT. HOWEVER, THE ASSESSING OFFICER NOT APPRECIATING THE SUBMISSI ON OF THE ASSESSEE 17 ITA NOS.7508 & 7058/MUM/2014 INVOKING THE PROVISIONS OF RULE 8D DISALLOWED RS. 1 ,76,10,0697- AND RS.2,76,59,8247-. ON A PERUSAL OF THE ASSESSMENT OR DER, WE FIND THAT THE ASSESSING OFFICER HAS SIMPLY STATED THAT SINCE ASSESSEE HAS NOT DISCLOSED ANY INTEREST EXPENSES FOR EARNING DIVIDEN D INCOME IN ITS RETURN OF INCOME, HE IS SATISFIED THAT THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENSES INCURRED FOR EARNING DIVIDEN D INCOME IS INCORRECT, THEREFORE, THE PROVISIONS OF SECTION 14A READ WITH RULE 8D ARE INVOKED. ON A PERUSAL OF THE ASSESSMENT ORDER, WE FIND THAT THE SO CALLED SATISFACTION RECORDED BY THE ASSESSING OFFIC ER HAVING REGARD TO THE ACCOUNTS AND THE SUO MOTU DISALLOWANCE MADE BY THE ASSESSEE IS NO RECORDING OF SATISFACTION AT ALL. THE ASSESSING OFFICER HAS NOT GIVEN ANY REASON AS TO WHY THE WORKING OF THE ASSESSEE RE GARDING SUO MOTU DISALLOWANCE IS WRONG OR INSUFFICIENT TO MEET THE E XPENSES ATTRIBUTABLE FOR EARNING THE DIVIDEND INCOME. THE ONLY REASON GI VEN BY THE ASSESSING OFFICER IS THAT SINCE ASSESSEE HAS NOT DI SALLOWED INTEREST HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM WHICH CANNOT BE SUSTAINABLE AT ALL. HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. I.P. SUPPORT SERVICES INDIA (P.) LTD. (378 ITR 420), CON SIDERED THE EFFECT OF NON RECORDING OF SATISFACTION WITH A PROVISION O F SECTION 14A AND IT WAS HELD THAT WHILE REJECTING THE CLAIM OF THE ASSE SSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE AS THE CASE MAY B E IN RELATION TO THE EXEMPT INCOME HE HAS TO GIVE COGENT REASONS AS TO W HY VOLUNTARY DISALLOWANCE MADE BY THE ASSESSEE WAS UNREASONABLE AND UNSATISFACTORY. HON'BLE DELHI HIGH COURT OBSERVED HAVING HEARD THE LEARNED COUNSEL FOR THE PARTIES, THE COURT FIND S THAT THE A ASSESSING OFFICER HAS INDEED PROCEEDED O N THE ERRONEOUS PREMISE THAT THE INVOCATION OF SECTION 14A IS AUTOM ATIC AND COMES INTO OPERATION AS SOON AS THE DIVIDEND INCOME IS CLAIMED EXEMPT. IN MAXOPP INVESTMENT LTD. (SUPRA) THIS COURT HELD (PAGE 290 O F 34 7 ITR) '30. SUB-SECTION (2) OF SECTION 14A CF THE SAID ACT PROVIDES THE MANNER IN WHICH THE ASSESSING OFFICER IS TO DETERMI NE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME. HOWEVER, IF WE EXAMINE THE PRO VISION CAREFULLY, WE WOULD FIND THAT THE ASSESSING OFFICER IS REQUIRE D TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ONLY IF THE ASSESSING OF FICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE,. IS NOT SAT ISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, THE REQUIREMENT OF THE ASSESSING OFFICER EMBARKING UPON A DETERMINA TION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMP T INCOME WOULD BE TRIGGERED ONLY IF THE ASSESSING OFFICER RETURNS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THEREFORE, THE C ONDITION PRECEDENT FOR THE ASSESSING OFFICER ENTERING UPON A DETERMIN ATION OF THE 18 ITA NOS.7508 & 7058/MUM/2014 AMOUNT OF THE EXPENDITURE INCURRED IN RELATION TO E XEMPT INCOME IS THAT THE ASSESSING OFFICER MUST RECORD THAT HE IS N OT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSES- SEE IN R ESPECT OF SUCH EXPENDITURE. SUB-SECTION (3) IS NOTHING BUT AN OFFS HOOT OF SUBSECTION (2) OF SECTION 14A. SUB-SECTION (3) APPLIES TO CASE S WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURR ED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, SUB-SECTION (2) DEALS WITH CAS ES WHERE THE ASSESSEE SPECIFIES A POSITIVE AMOUNT OF EX PENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT AND SUB-SECTION (3) APPLIES TO CASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDITURE HAD BEEN INCURRED IN RELATION TO EXEMPT INCOME. IN BOTH CASES, THE ASSESSING OFFICER, IF SATISFIED WITH THE CORRECTNE SS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR NO EXPEN DITURE, AS THE CASE MAY BE, CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE IN ACCORDANCE WITH ANY PRESCRIBED METHO D, AS MENTIONED IN SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT. IT IS ONLY IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, IN BOTH CASES, THAT TH E ASSESSING OFFICER GETS JURISDICTION TO DETERMINE THE AMOUNT OF E XPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FOR M PART OF THE TOTAL INCOME UNDER THE SAID ACT IN ACCORDANCE WITH THE PR ESCRIBED METHOD. THE PRESCRIBED METHOD BEING THE METHOD STIP ULATED IN RULE 8D OF THE SAID RULES. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER WO ULD HAVE TO INDICATE COGENT REASONS FOR THE SAME,' (EMPHASIS' S UPPLIED) 9. IN CIT VS TAIKISHA ENGINEERING INDIA LTD, [20151 370 1TR 338 (DELHI), ON SIMILAR CIRCUMSTANCES, COURT DISAPPROVE D OF AN ASSESSING OFFICER INVOKING SECTION 14A READ WITH RULE 8D(2) OF THE RU LES WITHOUT RECORDING HIS SATISFACTION AND NOTED THAT THE RECOR DING OF SATISFACTION AS TO WHY 'THE VOLUNTARY DISALLOWANCE MADE BY THE A SSESSEE WAS UNREASONABLE AND UNSATISFACTORY' IS A MANDATORY REQ UIREMENT OF THE LAW. 14. IN THIS CASE, ALSO WE FIND THAT THE ASSESSING OFFICER HAS NOT GIVEN ANY COGENT REASONS TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE AND THERE WAS NO COGENT REASON AS TO WHY T HE VOLUNTARY DISALLOWANCE MADE BY THE ASSESSEE WAS UNREASONABLE AND UNSATISFACTORY. IN THE ABSENCE OF ANY SUCH REASON F OR REJECTING THE CLAIM, IT CANNOT BE SAID THAT ASSESSING OFFICER HAS RECORDED HIS SATISFACTION REGARDING THE CLAIM OF THE ASSESSEE. I N THESE CIRCUMSTANCES, WE HOLD THAT THE ASSESSING OFFICER H AS WRONGLY INVOKED THE PROVISIONS OF RULE 8D R.W.S. 14A OF THE ACT. THUS, WE DIRECT THE ASSESSING OFFICER TO ACCEPT THE WORKING OF SUO MOTU DISALLOWANCE MADE BY THE ASSESSEE AS THE EXPENSES A TTRIBUTABLE FOR EARNING DIVIDEND INCOME AND NO FURTHER DISALLOWANCE '-U/S.14A IS 19 ITA NOS.7508 & 7058/MUM/2014 WARRANTED IN THE FACTS AND CIRCUMSTANCES OF THE ASS ESSEE'S CASE. THUS, WE DIRECT THE ASSESSING OFFICER TO DELETE THE DISAL LOWANCE MADE U/S.14A OF THE ACT. ' 22. IN THIS VIEW OF THE MATTER AND CONSISTENT WITH VIEW TAKEN BY THE CO-ORDINATE BENCH, WE DIRECT THE AO TO DELETE FURTHER DISALLOWA NCE MADE TOWARDS EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME U/S 14A OF TH E ACT. 23. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM GROUND NO.4 IS COMPUTATION OF BOOK PROFIT U/S 115 JB OF THE ACT, B Y MAKING ADJUSTMENT TOWARDS DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. 24. THE LD. AR FOR THE ASSESSEE, AT THE TIME OF HEA RING SUBMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE ITAT, DELHI SPECIAL BENCH IN THE CASE OF ACIT VS VIREET INVESTMENT P. LTD. [2017 ] 82 TAXMANN.COM 415 (DEL. TRIB.)(SB), WHERE THE TRIBUNAL HELD THAT COMPUTATIO N UNDER CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB(2) IS TO BE MADE WITHOUT RESTORING TO COMPUTATION AS CONTEMPLATED UNDER SECTION 14A R.W.R. 8D. 25. HAVING HEARD BOTH SIDES AND CONSIDERED MATERIAL AVAILABLE ON RECORD, WE FIND THAT ISSUE IS ALSO SQUARELY COVERED IN FAVOUR OF TH E ASSESSEE BY THE DECISION OF THE ITAT DELHI SPECIAL BENCH IN THE CASE OF ACIT VS VIR EET INVESTMENT P. LTD. (SUPRA), WHERE THE TRIBUNAL CATEGORICALLY HELD THAT PROVISIO N OF CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB(2) IS TO BE MADE WITHOUT RESTORING TO COMPUTATION AS CONTEMPLATED UNDER SECTION 14A R.W.R. 8D. THEREFORE, CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE AND ALSO BY FOLLOWING THE DECISION OF THE COOR DINATE BENCH OF DELHI ITAT, SPECIAL 20 ITA NOS.7508 & 7058/MUM/2014 BENCH, IN THE CASE OF VIREET INVESTMENT P. LTD. (SU PRA), WE DIRECT THE AO/TPO NOT TO MAKE ADJUSTMENT TOWARDS DISALLOWANCE AS COMPUTED U/ S 14A OF THE ACT READ WITH RULE-8D WHILE COMPUTING BOOK PROFITS. 26. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AND APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31/05/2019. SD/- SD/- ( C.N. PRASAD ) (G. MANJUNATHA) ! ' /JUDICIAL MEMBER # ' / ACCOUNTANT MEMBER MUMBAI; DATED : 31/05/2019 F{X~{T? F{X~{T? F{X~{T? F{X~{T? P.S P.S P.S P.S / /. /./. /. !. . %!&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. ! / THE APPELLANT (RESPECTIVE ASSESSEE) 2. ' #$ ! / THE RESPONDENT. 3. %$ %$ & ( ) / THE CIT, MUMBAI. 4. %$ %$ & / CIT(A)- , MUMBAI, 5. ()* $' + , %$ $+ - , / DR, ITAT, MUMBAI 6. *./ / GUARD FILE. / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI