M/s Ambica Capital Markets Ltd., Howrah V. DCIT, Circle -1, Kolkata, Kolkata

ITA 754/KOL/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74965 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 8 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 11-05-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A S MONDAL
• Assessee Lawyers: SOUMITRA CHOW DHURY
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

I.T.A. NOS.: 754/KOL./2012 & 796/K OL/2012 ASSESSMENT YEAR : 2008-09 PAGE 1 TO 13 1 IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA A BENCH, KOLKATA CORAM : SHRI ABRAHAM P. GEORGE (ACCOUNTANT MEMBER) AND SHRI GEORGE MATHAN (JUDICIAL MEMBER) I.T.A. NO.: 754/KOL./ 2012 ASSESSMENT YEAR : 2008-2009 M/S. AMBICA CAPITAL MARKETS LTD.,................. ...APPELLANT 3, HAREN MUKHERJEE ROAD, BELUR, HOWRAH-711 202 [PAN : AAECA 3328 G] -VS.- DEPUTY COMMISSIONER OF INCOME TAX,................. ..........RESPONDENT CIRCLE-1, KOLKATA, P-7, CHOWRINGHEE SQUARE, KOLKATA-700 069 & I.T.A. NO.: 796/KOL./ 2012 ASSESSMENT YEAR : 2008-2009 DEPUTY COMMISSIONER OF INCOME TAX,................. .............APPELLANT CIRCLE-1, KOLKATA, P-7, CHOWRINGHEE SQUARE, KOLKATA-700 069 -VS.- M/S. AMBICA CAPITAL MARKETS LTD.,................. ... RESPONDENT 3, HAREN MUKHERJEE ROAD, BELUR, HOWRAH-711 202 [PAN : AAECA 3328 G] APPEARANCES BY: SHRI SOUMITRA CHOWDHURY, ADVOCATE, FOR THE ASSESSEE SHRI A.S. MONDAL, ADDL. SR. D.R., FOR THE DEPARTMEN T DATE OF CONCLUDING THE HEARING : JANUARY 15, 2014 DATE OF PRONOUNCING THE ORDER : JANUARY 29, 2014 O R D E R PER ABRAHAM P. GEROGE : 1. THESE ARE CROSS APPEALS OF THE ASSESSEE AND REVE NUE RESPECTIVELY DIRECTED AGAINST THE ORDER DATED 24.02.2012 OF LD. COMMISSIONER OF INCOME TAX(APPEALS)-1, KOLKATA FOR IMPUGNED ASSESSM ENT YEAR. THE I.T.A. NOS.: 754/KOL./2012 & 796/K OL/2012 ASSESSMENT YEAR : 2008-09 PAGE 1 TO 13 2 ISSUES RAISED BY BOTH THE PARTIES REVOLVE AROUND TH E DISALLOWANCES MADE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 (IN S HORT THE ACT) READ ALONGWITH RULE 8D OF THE INCOME TAX RULES, 1962 (IN SHORT THE RULES). 2. FACTS APROPOS ARE THAT ASSESSEE ENGAGED IN THE B USINESS OF FINANCE AND INVESTMENT HAD DECLARED A LOSS OF RS.52,73,074/ - IN ITS RETURN FILED ON 24.09.2008. ASSESSEE HAD DIVIDEND INCOME OF RS.18,0 2,954/- AND LONG TERM CAPITAL GAIN OF RS.23,15,724/- WHICH WERE CLAI MED BY IT AS EXEMPT UNDER SECTION 10(34) AND 10(38) OF THE ACT, RESPECT IVELY. IN THE RETURN FILED ASSESSEE HAD NOT MADE ANY DISALLOWANCE BY ITS ELF FOR EXPENDITURE INCURRED IN RELATION TO SUCH EXEMPT INCOME. WHEN TH IS WAS PUT TO THE ASSESSEE, IT REPLIED WITH A CALCULATION, INTER ALIA , SHOWING THAT INTEREST BEARING BORROWED FUNDS OF RS.4,06,32,865/- ALONE WE RE USED FOR INVESTMENT. ASSESSING OFFICER WAS NOT IMPRESSED BY THE REPLY GIVEN BY ASSESSEE. ACCORDING TO HIM ASSESSEE WAS UNABLE TO S UBSTANTIATE ITS CLAIM THAT INTEREST BEARING FUNDS UTILIZED FOR INVESTMENT CAME TO ONLY RS.4,06,32,865/-. FURTHER AS PER THE ASSESSING OFFI CER, ASSESSEE HAD IN ITS PROFIT & LOSS ACCOUNT DEBITED INTEREST OF RS.2,04,7 6,526/- AND IT WAS HAVING A BORROWED CAPITAL OF RS.23.77 CRORES. AS PE R ASSESSING OFFICER, ASSESSEE HAD TAKEN FRESH LOAN OF RS.13.82 CRORES DU RING THE RELEVANT PREVIOUS YEAR OF WHICH RS.6.73 CRORES WAS UTILIZED FOR THE PURPOSE OF INVESTMENT. IN ANY CASE, AS PER ASSESSING OFFICER T OTAL RESOURCES IN THE NATURE OF SHARES AND RESERVES CAME TO RS.10.27 CROR ES AND EVEN IF WHOLE OF SUCH AMOUNT WAS UTILIZED FOR MEETING THE INVESTM ENT COST OF RS.16.84 CRORES, THERE WAS STILL LEFT A SUM OF RS.6.57 CRORE S. HE, THEREFORE, APPLIED RULE 8D(2)(II) OF THE INCOME TAX RULES AND HELD THA T 43.61% OF THE TOTAL INTEREST OF RS.2,04,76,526/- COULD BE ATTRIBUTED AS INTEREST RELATABLE TO THE EXEMPT INCOME. RATE OF 43.61% WAS ARRIVED BY AP PLYING THE RATIO OF AVERAGE INVESTMENT TO AVERAGE ASSET. 3. ASSESSING OFFICER ALSO FOUND THAT ASSESSEE HAD D EBITED DEMAT CHARGES OF RS.36,445/-, PORTFOLIO MANAGEMENT FEES O F RS.3,26,181/- AND I.T.A. NOS.: 754/KOL./2012 & 796/K OL/2012 ASSESSMENT YEAR : 2008-09 PAGE 1 TO 13 3 MANAGEMENT FEES OF RS.15,57,041/-, AGGREGATING TO R S.19,19,667/-, WHICH WERE, AS PER ASSESSING OFFICER, EXPENSES DIRECTLY R ELATABLE TO THE EXEMPT INCOME. HE HELD THAT SUCH AMOUNT WAS TO BE DISALLOW ED UNDER RULE 8D(2)(I). 4. ASSESSING OFFICER CONSIDERED 0.5% OF THE AVERAGE INVESTMENT OF RS.13.46 CRORES, FOR THE PURPOSE OF APPLYING RULE 8 D(2)(III) AND MADE A DISALLOWANCE OF RS.6,73,000/-, AS WELL. 5. IN SHORT DISALLOWANCE MADE BY THE ASSESSING OFFI CER BY APPLYING SECTION 14A OF THE ACT, COULD BE SUMMARIZED AS UNDE R :- (I) DISALLOWANCE UNDER RULE 8D(2)(I) BEING EXPENDIT URE DIRECTLY RELATED TO EXEMPT INCOME - RS.19,19,667/-; (II) DISALLOWANCE UNDER RULE 8D(2)(II) FOR INTEREST - RS.89,29,812/-; (III) DISALLOWANCE UNDER RULE 8D(2)(III) AT 0.5% OF AVERAGE INVESTMENT OF RS.13.46 CRORES - RS.6,73,000/-. 6. AGGRIEVED BY THE ABOVE DISALLOWANCES, ASSESSEE M OVED IN APPEAL BEFORE THE LD. CIT(APPEALS). ARGUMENT OF THE ASSESS EE BEFORE LD. CIT(APPEALS) WAS THAT DISALLOWANCES MADE BY THE ASS ESSING OFFICER WERE ALL WRONGLY WORKED OUT. AS PER ASSESSEE, SUM OF RS. 15,57,041/- INCURRED FOR MANAGEMENT FEES AND RS.3,26,181/- INCURRED FOR PORTFOLIO MANAGEMENT FEES WERE PAID TO BROKERS WHO WERE DOING SHARE TRADING ON ASSESSEES BEHALF WHICH RESULTED IN EITHER SHORT TE RM CAPITAL GAINS OR PROFITS WHICH WERE ALL TAXABLE. AS PER THE ASSESSEE THESE WERE NOT AT ALL RELATED TO ANY EXEMPT INCOME. THEREFORE, ASSESSING OFFICER, ERRED IN CONSIDERING THESE AMOUNTS AS DIRECT EXPENDITURE REL ATABLE TO THE EXEMPT INCOME, FOR MAKING A DISALLOWANCE UNDER RULE 8D(2) (I). 7. VIS-A-VIS DISALLOWANCES MADE UNDER RULE 8D(2)(II ), CLAIM OF ASSESSEE WAS THAT IT HAD EARNED INTEREST OF RS.89,2 9,812/- DURING THE I.T.A. NOS.: 754/KOL./2012 & 796/K OL/2012 ASSESSMENT YEAR : 2008-09 PAGE 1 TO 13 4 RELEVANT PREVIOUS YEAR. AS PER THE ASSESSEE, ASSESS ING OFFICER HAD CONSIDERED ONLY GROSS INTEREST PAYMENT BUT DID NOT RECKON THE INTEREST RECEIPT OF RS.89,29,812/-. IF SUCH INTEREST RECEIPT S WERE REDUCED FROM THE TOTAL INTEREST OUTGO OF RS.2,04,76,526/-, AS PER AS SESSEE, NET INTEREST PAYMENT WOULD COME DOWN TO RS.110.88 LAKHS. FURTHER AS PER ASSESSEE THE AVERAGE NON-TAXABLE INVESTMENT CAME ONLY TO RS. 362.03 LAKHS. ACCORDINGLY BY APPLYING THE FORMULA MENTIONED IN RU LE 8D(2)(II), WHAT COULD BE DISALLOWED WAS ONLY RS.13 LAKHS. 8. VIS-A-VIS DISALLOWANCES MADE UNDER RULE 8D(2)(II I), CLAIM OF ASSESSEE WAS THAT THE AVERAGE VALUE OF INVESTMENT T HAT COULD BE CONSIDERED FOR THE PURPOSE OF APPLYING THE RULE WAS INVESTMENTS, INCOME OF WHICH DID NOT FORM PART OF THE TOTAL INCOME. AS PER THE ASSESSEE OUT OF THE TOTAL AVERAGE INVESTMENT OF RS.13.46 CRORES, TH E NON-TAX BEARING INVESTMENT CAME TO ONLY RS.3,62,02,840/-. HENCE IF 0.5% WAS APPLIED ON THE SAID AMOUNT, DISALLOWANCE COULD AT THE BEST BE ONLY RS.1,18,040/-. 9. LD. CIT(APPEALS) AFTER CONSIDERING THE SUBMISSIO NS OF THE ASSESSEE HELD THAT IN SO FAR AS PORTFOLIO MANAGEMENT FEES OF RS.3,26,181/- WAS CONCERNED, THE SAID PAYMENT HAD RESULTED IN SHORT-T ERM CAPITAL GAINS TO THE ASSESSEE WHICH WAS NOT EXEMPT. FURTHER ACCORDI NG TO HIM, A SUM OF RS.15,57,041/- WAS PAID AS FEES FOR TRADING IN SHAR ES, AND ASSESSEE HAD DISCLOSED THE RESULTS OF SUCH TRADING IN ITS PROFIT & LOSS ACCOUNT. IT HAD NEVER CLAIMED ANY SURPLUS AS EXEMPT. THEREFORE, ACC ORDING TO HIM, SUCH EXPENDITURE ON MANAGEMENT FEES COULD NOT BE CONSIDE RED AS RELATABLE TO ANY EXEMPT INCOME. HENCE ON THE TOTAL DISALLOWANCE OF RS.1919,667/- MADE BY THE ASSESSING OFFICER APPLYING RULE 8D(2)(I ), LD. CIT(APPEALS) GAVE A RELIEF OF RS.18,83,222/- TO THE ASSESSEE. 10. IN SO FAR AS DISALLOWANCE MADE UNDER RULE 8D(2) (II) WAS CONCERNED, LD. CIT(APPEALS) WAS OF THE OPINION THAT ASSESSING OFFICER ERRED IN NOT GIVING CREDIT FOR THE INTEREST EARNED, WHILE APPLYI NG THE FORMULA FOR I.T.A. NOS.: 754/KOL./2012 & 796/K OL/2012 ASSESSMENT YEAR : 2008-09 PAGE 1 TO 13 5 DISALLOWANCE OF INTEREST AS SPECIFIED UNDER THE SAI D RULE. HE, THEREFORE, PARTLY ACCEPTED THE ARGUMENT OF ASSESSEE AND ARRIVE D AT THE DISALLOWANCE THAT COULD BE MADE UNDER RULE 8D(2)(II) AT RS.55.57 LAKHS, BASED ON A WORK-OUT, WHICH IS REPRODUCED AS UNDER :- RS.110.88 LAKH X (RS.16.84 CRORE + 10.09 CRORE) (AV ERAGE INVESTMENT) RS.34.07 CRORE + RS.19.66 CRORE (AVERAGE TOTAL AS SETS) 11. VIS-A-VIS THE DISALLOWANCE UNDER RULE 8D(2)(III ), LD. CIT(APPEALS) WAS OF THE OPINION THAT ASSESSEE COULD NOT ESTABLIS H THAT AVERAGE INVESTMENT FOR NON-TAX YIELDING INSTRUMENTS CAME TO RS.3.60 CRORES ONLY. HE, THEREFORE, DID NOT DISTURB THE DISALLOWANCE OF RS.6,73,000/- MADE BY THE ASSESSING OFFICER UNDER THE SAID RULE. 12. NOW BEFORE US, ASSESSEE IS AGGRIEVED ON DISALLO WANCE OF INTEREST UNDER RULE 8D(2)(II) TO THE EXTENT OF RS.55.57 LAKH S AND DISALLOWANCE OF RS.6,73,000/- UNDER RULE 8D(2)(III) OF THE INCOME T AX RULES. AS AGAINST THIS REVENUE IS AGGRIEVED ON CIT(APPEALS) REDUCING THE DISALLOWANCE UNDER RULE 8D TO A SUM OF RS.57,30,122/-. 13. LD. COUNSEL FOR THE ASSESSEE IN SUPPORT OF HIS ARGUMENTS SUBMITTED THAT PAGE NO. 5 OF HIS PAPER BOOK GAVE DETAILED CAL CULATION MADE BY ASSESSEE UNDER SECTION 14A OF THE ACT. AS PER LD. A R, TOTAL INCREASE IN INVESTMENT OF RS.6,75,43,190/- WAS FUNDED TO THE EX TENT OF RS.21,107,802/- BY WAY OF DECREASE IN STOCK-IN-TRAD E AND RS.58,02,523/- BY WAY OF INCREASE IN SHARE CAPITAL. THEREFORE, ACC ORDING TO HIM, BORROWED FUNDS USED FOR INVESTMENT CAME TO RUPEES O NLY 4,06,32,865/-, INTEREST THEREON CALCULATED AT 8% WOULD COME TO RS. 32,50,629/-. AGAIN AS PER THE LD. AR, OUT OF THE INCREASE IN INVESTMENT O F RS.6,75,43,191/-, NON- TAX YIELDING INSTRUMENTS CAME TO RUPEES ONLY 2,92,5 1,995/-. A SUM OF RS.3,82,91,196/- REPRESENTED TAX YIELDING INVESTMEN T. THEREFORE, ACCORDING TO HIM OUT OF THE TOTAL INTEREST OF RS.32 ,50,629/- WHAT COULD BE ATTRIBUTABLE TO NON-TAX YIELDING INCOME INVESTMENT WAS ONLY I.T.A. NOS.: 754/KOL./2012 & 796/K OL/2012 ASSESSMENT YEAR : 2008-09 PAGE 1 TO 13 6 RS.14,07,801/-. LD. AR POINTED OUT THAT ALL THE DAT A IN SUCH CALCULATION WAS BASED ON A CASH FLOW PREPARED FROM THE AUDITED BALANCE-SHEET FOR THE RELEVANT PREVIOUS YEAR PLACED AT PAPER BOOK PAGE NO . 17. RELYING ON RULE 8D(2)(II) LD. AR SUBMITTED THAT THE INVESTMENT THAT COULD BE CONSIDERED WHILE APPLYING FORMULA MENTIONED IN THE SAID RULE W AS THOSE INVESTMENTS, THE INCOME FROM WHICH DID NOT OR WOULD NOT FORM PART OF TOTAL INCOME. ASSESSING OFFICER AS WELL AS LD. CIT( APPEALS) HAD CONSIDERED THE TOTAL OF INVESTMENTS WITHOUT CONSIDERING THE BI FURCATION OF THE INVESTMENT BETWEEN TAXABLE AND NON-TAXABLE, RESULTI NG IN AN ERROR. WHAT COULD AT THE BEST BE CONSIDERED FOR A DISALLOWANCE WAS RS.14,07,801/- ONLY. 14. VIS-A-VIS DISALLOWANCE MADE UNDER RULE 8D(2)(II I) LD. AR SUBMITTED THAT THE LOWER AUTHORITIES FELL IN ERROR, IN CONSID ERING THE AVERAGE VALUE OF INVESTMENT AS SUCH. THE FORMULA REQUIRED CONSIDE RATION OF AVERAGE VALUE OF INVESTMENT INCOME WHICH DID NOT FORM PART OF TOTAL INCOME. AS PER LD. AR, SUCH NON-TAX YIELDING INVESTMENT CAME T O RS.3.62 CRORES AND, THEREFORE, DISALLOWANCE THAT COULD HAVE BEEN MADE W AS RS.1,18,040/- ONLY. 15. PER CONTRA AND IN SUPPORT OF REVENUES GROUNDS, LD. D.R. SUBMITTED THAT LD. CIT(APPEALS) HAD MIS-APPLIED RULE 8D. ACCO RDING TO HIM, RULE 8D(2)(II) DID NOT SPEAK ABOUT NET INTEREST BUT ONLY ABOUT EXPENDITURE BY WAY OF INTEREST. THE PRINCIPLE OF NETTING APPLIED B Y THE LD. CIT(APPEALS) FOR GIVING RELIEF TO THE ASSESSEE WAS UNKNOWN TO LA W. HOWEVER ACCORDING TO LD. DR, LD. CIT(APPEALS) WAS JUSTIFIED IN DISREG ARDING THE CLAIM OF THE ASSESSEE THAT PART OF ITS INVESTMENT ALONE WERE FOR NON-TAXABLE INCOME EARNING INVESTMENT WHEN NO EVIDENCE IN THIS REGARD WAS PRODUCED BY THE ASSESSEE. WHEN NOTHING WAS PRODUCED BY THE ASSESSEE TO SHOW THAT PART OF THE INVESTMENT PORTFOLIO CONSISTED OF NON-TAX YI ELDING INSTRUMENTS, BOTH THE LOWER AUTHORITIES WERE JUSTIFIED IN TAKING THE TOTAL VALUE OF INVESTMENT AS SHOWN BY THE ASSESESE IN ITS BALANCE- SHEET. IN ANY CASE AS I.T.A. NOS.: 754/KOL./2012 & 796/K OL/2012 ASSESSMENT YEAR : 2008-09 PAGE 1 TO 13 7 PER LD. DR, LD. CIT(APPEALS) MADE A FRESH CALCULATI ON FOR THE PURPOSE OF WORKING OUT DISALLOWANCE UNDER RULE 8D OF THE INCOM E TAX RULES WITHOUT CONFRONTING SUCH CALCULATION TO THE ASSESSING OFFIC ER. HENCE, ACCORDING TO HIM RELIEF GIVEN BY THE LD. CIT(APPEALS) WAS NOT JU STIFIED. 16. AD LIBITUM REPLY OF THE LD. AR WAS THAT IN SUBS EQUENT ASSESSMENT YEARS 2009-10 AND 2010-11 BIFURCATION BETWEEN TAXAB LE AND NON-TAXABLE INVESTMENTS WERE ALL ACCEPTED BY THE ASSESSING OFFI CER. FURTHER ACCORDING TO HIM COORDINATE BENCH OF THIS TRIBUNAL IN THE CAS E OF REI AGRO LIMITED VS.- DCIT IN ITA NO. 1331/KOL/2011 AND 1423/KOL/201 1 ORDER DATED 19.06.2013 HAD HELD THAT IF THE ASSESSEE HAD NOT MA DE ANY SUO MOTU DISALLOWANCE IN ITS RETURN OF INCOME, THAT ITSELF S HOWED THAT NO SUCH EXPENDITURE WAS INCURRED. ACCORDING TO HIM IN THIS DECISION COORDINATE BENCH OF THIS TRIBUNAL CLEARLY HELD THAT IT WAS REQ UIRED FOR ASSESSING OFFICER TO EXPRESS HIS SATISFACTION REGARDING THE C ORRECTNESS OF THE CLAIM OF ASSESSEE EVEN WHERE THE CLAIM WAS THAT THERE WAS NO EXPENDITURE INCURRED FOR THE PURPOSE OF EARNING ANY EXEMPT INCO ME. FURTHER ACCORDING TO HIM, IN THE SAME DECISION OF COORDINAT E BENCH HAD ALSO HELD THAT FOR APPLYING RULE 8D(2)(II) ASSESSING OFFICER HAS TO SHOW THAT INTEREST WAS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTI CULAR INCOME OR RECEIPT. IN ANY CASE, ACCORDING TO HIM IN RULE 8D(2)(II) MEN TIONED AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT FORM OR S HALL NOT FORM PART OF THE TOTAL INCOME AND THE AUTHORITIES BELOW DISREGAR DED THIS STIPULATION, DESPITE CALCULATIONS SUBMITTED BY THE ASSESSEE. 17. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ISSUES RAISED BY BOTH THE PARTIES REVOLVE AROUND THE DISALLOWANCE MADE UNDER SECTION 14A READ WITH R ULE 8D. AS PER THE ASSESSEE, INCREASE IN INVESTMENT OF RS.6,75,43,190/ - WAS FUNDED BY BORROWED MONEY TO THE EXTENT OF RS.4,06,32,865/-. E VEN THE INCREASE IN INVESTMENT COMPRISED OF TWO COMPONENTS WHICH INCLUD ED TAX-YIELDING INSTRUMENTS OF RS.3,82,91,196/- AND NON-TAX YIELDIN G INSTRUMENTS OF I.T.A. NOS.: 754/KOL./2012 & 796/K OL/2012 ASSESSMENT YEAR : 2008-09 PAGE 1 TO 13 8 RS.2,92,51,995/-. WE FIND FROM PAPER BOOK PAGE NO. 5 THAT ASSESSEE HAS GIVEN A WORK-OUT OF THE POSSIBLE INTEREST DISALLOWA NCE ON EXEMPT INVESTMENTS, WHICH IS REPRODUCED HERE UNDER :- CALCULATION OF 14A AMOUNT AMOUNT INCREASE IN LOAN TAKEN (OP.99589362-237771070 CL. 138,181,708 LESS : INCREASE IN LOAN GIVEN OP. 88233511-151768756 CL. 63,535,245 LESS : REPAYMENT OF CURRENT LIABILITY OP. 59025945-25167727 CL.) 33,858,218 LESS : REPAYMENT OF SECURED LOAN OP.196450-41070 CL.) 155,380 97,548,843 BORROWED FUND UTILIZED FOR INVESTMENT 40,632,865 OPENING CLOSING AMOUNT INCREASE IN INVESTMENT 100,891,588 168,434,778 67,543,190 LESS: DECREASE IN STOCK IN TRADE 62,757,496 41,649,694 21,107,802 46,435,388 LESS: UTILIZATION OF OWN FUND BY INCREASE IN SHARES CAPITAL 7,788,000 (-) CASH LOSS AS PER PROFIT & LOSS ACCOUNT (1,521,620) (-) INCREASE /DECREASE OF OTHER CURRENT ASSET ( 463,857) 5,802,523 UTILISATION OF BORROWED FUND FOR TOTAL INVESTMENT 40,632,865 INTEREST ON BORROWED FUND @ 8% 3.250,629 SEGREGATION OF INTEREST BETWEEN TAXABLE & NON-TAXAB LE INVESTMENT AMOUNT % INCREASE IN TAXABLE INVESTMENT 38,291,196 56.69 1,842,828 I.T.A. NOS.: 754/KOL./2012 & 796/K OL/2012 ASSESSMENT YEAR : 2008-09 PAGE 1 TO 13 9 (OP. 793144746- 117605942 CL.) INCREASE IN NON- TAXABLE INVESTMENT 29,251,995 43.31 1,407,801 (OP. 21576842- 50828837 CL.) 67,543,191 100 3,250,629 INTEREST ON EXEMPT INVESTMENT LIABLE TO BE TREATED U/S 14A .....1,407,801 THE FIGURES APPEARING IN THE ABOVE CALCULATION, WHI CH IS A NON- STANDARDISED VERSION OF A CASH FLOW SEEMS TO HAVE B EEN PREPARED BY THE ASSESSEE, FOR EXPLAINING ITS ARGUMENT THAT SUBSTANT IAL PART OF THE INVESTMENTS WENT OUT OF OWN FUNDS. WE HAVE ATTEMPTE D TO VERIFY THE FIGURES IN THE ABOVE STATEMENT WITH THE AUDITED BAL ANCE-SHEET AVAILABLE AT PAGE 17 OF THE PAPER BOOK. WE FIND THAT THE SUM OF RS.77,88,000/- SHOWN AS INCREASE IN SHARE CAPITAL DOES NOT TALLY WITH TH E FIGURES GIVE IN THE BALANCE SHEET. THE INCREASE IN SHARE CAPITAL CAME T O ONLY RS.12,98,000/- AND INCREASE IN RESERVES AND SURPLUS CAME TO ONLY R S.47,54,484/-. FURTHER, SEGREGATION OF INVESTMENT BETWEEN TAXABLE AND NON-TAXABLE SHOWN BY ASSESSEE IN THE ABOVE STATEMENT HAS NOT BE EN SUBJECTED TO VERIFICATION BY ANY OF THE AUTHORITIES BELOW. FOR T HE APPLICATION OF RULE 8D(2)(II) WHAT IS REQUIRED TO BE CONSIDERED IN THE NUMERATOR IS AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME. IT IS NOT INCREASE IN INVESTMENT THAT IS TO BE RECKONED. NEVERTHELESS FOR APPLYING THIS FORMULA, ASSESSEE HA S NECESSARILY TO GIVE A BIFURCATION OF ITS INVESTMENT AS APPEARING IN ITS B ALANCE SHEET ON THE FIRST AND LAST DAY OF THE PREVIOUS YEAR. ASSESSMENT ORDER CLEARLY MENTIONS THAT ASSESSEE HAD NOT MADE ANY DISALLOWANCE BY ITSELF, I N ITS RETURN OF INCOME, AGAINST THE EXEMPT INCOME CLAIMED BY IT. NEVERTHELE SS DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESESE HAD FILED A CAL CULATION SCHEDULE WHEREIN IT CLAIMED THAT BORROWED FUNDS TO THE EXTEN T OF RS.4,06,32,865/- ALONE WAS SHOWN AS UTILIZED FOR MAKING INVESTMENT. NEVERTHELESS BIFURCATION OF THE INVESTMENT BETWEEN TAXABLE AND N ON-TAX YIELDING I.T.A. NOS.: 754/KOL./2012 & 796/K OL/2012 ASSESSMENT YEAR : 2008-09 PAGE 1 TO 13 10 INSTRUMENTS HAS NOT BEEN CONSIDERED BY ANY OF THE A UTHORITIES BELOW. AS FOR THE VIEW TAKEN BY THE LD. CIT(APPEALS) THAT INT EREST HAS TO BE NETTED BEFORE APPLYING THE FORMULA GIVEN IN RULE 8D(2)(II) , WE ARE UNABLE TO APPRECIATE. WHAT IS TO BE SEEN IS WHETHER ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST. EARNINGS OF INTERES T HAS NOTHING TO DO WITH THIS. INTEREST EARNED WILL HAVE NO BEARING ON INTEREST PAID BY THE ASSESSEE FOR INVESTING IN NON-TAXABLE INCOME EARNIN G INSTRUMENTS. HENCE NETTING OF THE TYPE SOUGHT BY THE ASSESSEE AND ALLO WED BY THE CIT(APPEALS) CANNOT BE ACCEPTED. AS MENTIONED BY LD . D.R., THE LAW DOES NOT ALLOW OR CALL FOR SUCH A NETTING. 18. COMING TO THE DIRECT EXPENDITURE CONSIDERED BY THE ASSESSING OFFICER AS ATTRIBUTABLE TO EARNING OF EXEMPT INCOME , LD. CIT(APPEALS) HAS GIVEN A CLEAR FINDING THAT THESE WERE OF SHARE BROK ER FEES AND PORTFOLIO MANAGEMENT FEES, RESULT OF WHICH WAS EITHER PROFIT/ LOSS OR SHORT-TERM CAPITAL GAINS. WE CANNOT FIND ANY ERROR IN THE FIND ING OF LD. CIT(APPEALS) THAT SUCH EXPENDITURE WAS NOT ATTRIBUTABLE TO ANY E XEMPT INCOME MADE BY THE ASSESSEE. THEREFORE, IN SO FAR AS APPLICATION O F RULE 8D(2)(I) WAS CONCERNED, WE ARE OF THE OPINION THAT LD. CIT(APPEA LS) WAS JUSTIFIED IN DELETING THE DISALLOWANCE MADE THEREUNDER TO THE EX TENT OF RS.18,83,222/-. 19. COMING TO THE THIRD LIMB OF THE DISALLOWANCE WH ICH IS UNDER RULE 8D((2)(III), ASSESSING OFFICER HAS CONSIDERED THE A VERAGE VALUE OF THE INVESTMENT INSTEAD OF AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME . THE DIFFERENCE BETWEEN AVERAGE VALUE OF INVESTMENT AND AVERAGE VAL UE OF INVESTMENT INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART O F THE TOTAL INCOME AND WHY A DISALLOWANCE CANNOT BE MADE UNDER RULE 8D WIT HOUT EXPRESSING SATISFACTION WITH REGARD TO THE CLAIM OF THE ASSESS EE ON SUCH EXPENDITURE HAVE BEEN ELABORATELY DEALT WITH BY THE COORDINATE BENCH OF THIS TRIBUNAL I.T.A. NOS.: 754/KOL./2012 & 796/K OL/2012 ASSESSMENT YEAR : 2008-09 PAGE 1 TO 13 11 IN THE CASE OF REI AGRO LIMITED (SUPRA) VIDE PARA 6 TO 8.1 OF ITS ORDER WHICH IS REPRODUCED HEREUNDER :- 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. A PER USAL OF THE PROVISIONS OF SECTION 14A, MORE SPECIFICALLY SUB-SECTION (2), SHO WS THAT IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, THEN THE AO SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT. FOR THIS THE METHOD IS PRESCR IBED IN RULE 8D. THE PROVISION OF SECTION 14A, SUB-SECTION (3) SPECIFIES THE PROVISIO N OF 14A(2) WOULD ALSO APPLY WHERE THE ASSESSEE MAKES A CLAIM THAT THERE IS NO EXPENDI TURE INCURRED. THIS IS BECAUSE IF THE ASSESSEE DOES NOT MAKE A DISALLOWANCE UNDER SEC TION 14A IN ITS COMPUTATION OF TOTAL INCOME, WHEN FILING THE RETURN, THEN IF SUBSE CTION (3) WAS NOT AVAILABLE, THE AO MIGHT NOT BE ABLE TO MAKE A DISALLOWANCE UNDER SECT ION 14A. THUS, WHERE THE ASSESSEE MAKES A CLAIM THAT ONLY A PARTICULAR AMOUN T IS TO BE DISALLOWED UNDER SECTION 14A OR WHERE THE ASSESSEE DOES NOT MAKE A D ISALLOWANCE UNDER SECTION 14A, IF THE AO PROPOSES TO INVOKE THE SECTION 14A, HE IS TO RECORD A SATISFACTION ON THAT ISSUE. THIS SATISFACTION CANNOT BE A PLAIN SATISFAC TION OR A SIMPLE NOTE. IT IS TO BE DONE WITH REGARD TO ACCOUNTS OF THE ASSESSEE. IN THE PRE SENT CASE, THERE IS NO SATISFACTION BY THE AO AND CONSEQUENTLY, IN VIEW OF THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF BALARAMPUR CHINI MILLS LTD. REFERRED TO SUPRA, NO DISALLOWANCE UNDER SECTION 14A CAN BE MADE. 7. NOW COMING TO THE MERITS OF THE ISSUE. A PERUSA L OF THE PROVISION OF SECTION 14A(1) CLEARLY SHOWS THE WORDINGS, IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. IN THE PRESENT CASE, THIS INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, IS THE DIVIDEND INCOME OF RS.1,32,638/-. THEREFORE, IF ANY DISALLOWANCE IS TO BE MADE IN RES PECT OF EXPENDITURE INCURRED, IT SHOULD BE IN RELATION TO THIS DIVIDEND INCOME OF RS .1,32,638/-. IF AN ASSESSEE HAS INVESTED IN SHARES, WHICH COULD GET DIVIDEND OR THE RE IS INVESTMENT WHICH GENERATES DIVIDEND INCOME OR EXEMPT INCOME AS ALSO INVESTMENT WHICH DOES NOT GENERATE EXEMPT INCOME, IT IS ONLY SUCH INVESTMENTS IN RESPE CT OF WHICH THE DIVIDEND INCOME OR EXEMPTED INCOME HAS BEEN EARNED WHICH CAN BE CONSID ERED WHEN COMPUTING THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D. A PERUSAL OF THE PROVISIONS OF RULE 8D ALSO TALKS OF SATISFACTION IN SUB-RULE (1). RULE 8D(2) HAS THREE SUB-PARTS. THE FIRST SUB-PART I.E. (I) DEALS WITH THE AMOUNT OF EXPENDIT URE DIRECTLY RELATING TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THAT ISSUE IS NOT IN DISPUTE HERE AND THEREFORE, WE DO NOT GO INTO IT IN THIS CASE. IN SE COND SUB-PART I.E.(II), IT IS A COMPUTATION PROVIDED IN RESPECT OF EXPENDITURE INCU RRED BY THE ASSESSEE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THIS CLEARLY MEANS THAT IF THERE IS ANY INTEREST EXPENDITURE, WHICH IS DIRECTLY RELATABLE TO ANY PARTICULAR INCOME OR RECE IPT, SUCH INTEREST EXPENDITURE IS NOT TO BE CONSIDERED UNDER RULE 8D(2)(II). IN THE ASSESSEE S CASE HERE THE INTEREST HAS BEEN PAID BY THE ASSESSEE ON THE LOANS TAKEN FROM THE BA NKS FOR ITS BUSINESS PURPOSE. THERE IS NO ALLEGATION FROM THE BANKS NOR THE AO TH AT THE LOAN FUNDS HAVE BEEN DIVERTED FOR MAKING THE INVESTMENT IN SHARES OR FOR NON-BUSINESS PURPOSES. FURTHER RULE 8D(2)(II) CLEARLY IS WORDED IN THE NEGATIVE WI TH THE WORDS NOT DIRECTLY ATTRIBUTABLE. THUS FOR BRINGING ANY INTEREST EXPENDITURE, CLAIMED BY THE ASSESSEE, UNDER THE AMBIT OF RULE 8D(2)(II) IT WILL HAVE TO BE SHOWN BY THE A O THAT THE SAID INTEREST IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. W HY WE SAY HERE THAT IT IS TO BE SHOWN BY THE AO IS ON ACCOUNT OF THE WORDS IN RULE 8D(1) BEING WHERE THE ASSESSING OFFICER, IS NOT SATISFIED WITH. (A) .. (B) .. IN RELATION TO INCOME., HE SHALL DETERMINE THE AM OUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SU B-RULE (2). IN THE ASSESSEES CASE, ADMITTEDLY, THE ASSESSEE HA S SUBSTANTIAL CAPITAL. THE INCREASE IN THE CAPITAL ITSELF IS TO AN EXTENT OF RS.4 CRORE S AND IN RESPECT OF RESERVES AND SURPLUS, THE INCREASE IS RS.112 CRORES. THE LOANS T AKEN DURING THE YEAR ADMITTEDLY ARE I.T.A. NOS.: 754/KOL./2012 & 796/K OL/2012 ASSESSMENT YEAR : 2008-09 PAGE 1 TO 13 12 FOR THE LETTERS OF CREDIT AND THE ASSESSEE IS BOUND TO PROVIDE THE BANK STOCK STATEMENT AND OTHER DETAILS TO SHOW THE UTILIZATION OF THE LO ANS. NO BANK WOULD PERMIT THE LOAN GIVEN FOR ONE PURPOSE TO BE USED FOR MAKING ANY INV ESTMENT IN SHARES. THE LD. CIT(A), IT IS NOTICED THAT AFTER CONSIDERING THESE FACTS TH AT THE ASSESSEE HAD NOT USED ANY OF ITS BORROWINGS FOR PURCHASING THE SHARES, HAS DELETED T HE DISALLOWANCE. ON THIS GROUND ITSELF, THE DELETION AS MADE BY THE LD. CIT(A) IS L IABLE TO BE CONFIRMED AND WE DO SO. 7.1 IN ANY CASE, THE WORKING OF THE DISALLOWANCE U NDER SUB-PART (II) OF SUB-CLAUSE (2) OF RULE 8D AS MADE BY THE AO ALSO SUFFERS FROM A SUBSTANTIAL ERROR IN SO FAR AS IN THE SAID RULE IN REGARD TO THE NUMERATOR B, THE WOR DS USED ARE THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT FORM OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE-SHEET AS ON THE FIRST DAY AND IN THE LAST DAY OF THE PREVIOUS YEAR. HERE THE AO HAS TAKEN INTO CONSIDERA TION THE INVESTMENT OF RS.103 CRORES MADE THIS YEAR, WHICH HAS NOT EARNED ANY DIV IDEND OR EXEMPT INCOME. IT IS ONLY THE AVERAGE OF THE VALUE OF THE INVESTMENT FROM WHI CH THE INCOME HAS BEEN EARNED WHICH IS NOT FALLING WITHIN THE PART OF THE TOTAL I NCOME THAT IS TO BE CONSIDERED. THIS IS WHY THE QUESTION OF SATISFACTION IS PROVIDED IN SEC TION 14A AND RULE 8D(1), THAT RELATES TO THE ACCOUNTS OF THE ASSESSEE. THUS, IT IS NOT TH E TOTAL INVESTMENT AT THE BEGINNING OF THE YEAR AND AT THE END OF THE YEAR, WHICH IS TO BE CONSIDERED BUT IT IS THE AVERAGE OF THE VALUE OF INVESTMENTS WHICH HAS GIVEN RISE TO TH E INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME WHICH IS TO BE CONSIDERED. A QU ESTION MAY ARISE AS TO WHY THE TERM AVERAGE OF THE VALUE OF INVESTMENT IS THEN USED. THE TERM AVERAGE OF THE VALUE OF INVESTMENT WOULD BE TO TAKE CARE OF CASES WHERE THE RE IS THE ISSUE OF DIVIDEND STRIPING. IN ANY CASE, AS WE HAVE ALREADY HELD THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME, THE FINDINGS OF THE LD. CIT(A) ON THE ISSUE STAND CONFIRMED AND CONSEQUENTLY THE APPEAL FILED BY THE REVENUE STANDS DISMISSED. 8. IN RESPECT OF PROVISIONS OF RULE 8D(2)(III), WH ICH IS THE SUBJECT-MATTER OF THE APPEAL IN THE ASSESSEES HAND, A PERUSAL OF THE SAI D PROVISION SHOWS THAT WHAT IS DISALLOWABLE UNDER RULE 8D(2)(III) IS THE AMOUNT EQ UAL TO PERCENTAGE OF THE AVERAGE VALUE OF INVESTMENT THE INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME. THUS, UNDER SUB-CLAUSE (III), WHAT IS DISAL LOWED IS PERCENTAGE OF THE NUMERATOR B IN RULE 8D(2)(II). AGAIN THIS IS TO BE CALCULATED IN THE SAME LINE AS MENTIONED EARLIER IN RESPECT OF NUMERATOR B IN RULE 8D(2)(II) OF THE ACT. 8.1 THUS, NOT ALL INVESTMENTS BECOME THE SUBJECT-MA TTER OF CONSIDERATION WHEN COMPUTING DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D. THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D IS TO BE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND THIS CAN BE DONE ONLY BY TA KING INTO CONSIDERATION THE INVESTMENT WHICH HAS GIVEN RISE TO THIS INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. UNDER THE CIRCUMSTANCES, THE COMPUTATION OF THE DISALLOWA NCE UNDER SECTION 14A READ WITH RULE 8D(2)(III), WHICH IS ISSUE IN THE ASSESSEES APPEAL , IS RESTORED TO THE FILE OF THE AO FOR RE- COMPUTATION IN LINE WITH THE DIRECTION GIVEN ABOVE. NO DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D(2)(I) AND (II) CAN BE MADE IN THI S CASE. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION THAT THE WORK-OUT OF DISALLOWANCES UNDER RULE 8D(2)(II) AND 8D(2)(III) REQUIRES A FRESH LOOK BY THE ASSESSING OFFICER SO AS TO CONSID ER THE CLAIM OF ASSESSEE THAT PART OF ITS INVESTMENT COMPRISED OF TAX YIELDI NG INSTRUMENTS AND SUBSTANTIAL INTEREST BEARING FUNDS WERE UTILIZED FO R THE PURPOSE OF MAKING INVESTMENTS IN NON-TAX YIELDING INSTRUMENTS AND FOR CORRECTING I.T.A. NOS.: 754/KOL./2012 & 796/K OL/2012 ASSESSMENT YEAR : 2008-09 PAGE 1 TO 13 13 THE ERROR COMMITTED BY THE LD. CIT(APPEALS) IN ALLO WING THE NETTING OF INTEREST, CLAIMED BY THE ASSESSEE. WE, THEREFORE, S ET ASIDE THE ORDER OF AUTHORITIES BELOW AND REMIT THE ISSUE REGARDING DIS ALLOWANCE UNDER SECTION 14A READ ALONG WITH RULE 8D(2)(II) AND RULE 8D(2)(III) OF THE RULES BACK TO THE FILE OF ASSESSING OFFICER FOR CON SIDERATION AFRESH IN ACCORDANCE WITH LAW. 20. IN THE RESULT, APPEALS OF BOTH THE PARTIES ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH DAY OF JANUARY, 2014. SD/- SD/- GEORGE MATHAN ABRAHAM P. GEORGE (JUDICIAL MEMBER) (ACC OUNTANT MEMBER) KOLKATA, THE 29 TH DAY OF JANUARY, 2014 COPIES TO : (1) THE APPELLANT (2) THE RESPONDENT (3) CIT(APPEALS) (4) CIT (5) THE DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ETC ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCHES, KOLKATA LAHA/SR. P.S.