Assistant Commissioner Of Income Tax, Circle-2, Jaipur V. M/s. A U Financiers (India) Limited, Jaipur

ITA 760/JPR/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 6902 (ITAT-JAIPUR)
• Duration Of Justice: 7 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-01-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 31-05-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VARINDER MEHTA
• Keywords: Recovery proceedings; Business income; Transactions in derivatives; Earning of tax free income; Bad and doubtful debts; Speculative transactions
• Section: 14A; 37(1); 43(5)

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHE S,A JAIPUR JH FOT; IKY JKO] U;KF;D LNL; ,OA JH FOE FLAG ;KNO] YS[KK LNL; DS LE{K BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM VK;DJ VIHY LA-@ ITA. NO. 760/JP/2018 FU/KZKJ.K O'K Z@ ASSESSMENT YEARS : 2014-15 THE ACIT, CIRCLE-2, JAIPUR. CUKE VS. M/S A U FINANCIERS (INDIA) LTD. (NOW A.U SMALL FINANCE BANK LTD.), 19A, DHULESHWAR GARDEN, AJMER ROAD, JAIPUR. LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO.: AAACL 2777 N VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ L S@ ASSESSEE BY : SHRI SANJAY JHANWAR (ADV.) JKTLO DH VKSJ LS @ REVENUE BY : SHRI VARINDER MEHTA (CIT) LQUOKBZ DH RKJH[ K@ DATE OF HEARING : 09/10/2018 MN?KKS'K.KK DH RKJH[ K@ DATE OF PRONOUNCEMENT : 07/01/2019 VKNS'K@ ORDER PER: VIKRAM SINGH YADAV, A.M. THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF LD. CIT(A), JAIPUR DATED 28.03.2018 FOR THE ASSESSMENT YEAR 2014-15 WHEREIN THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS OF APPEAL:- 1 WHETHER IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE ENTIRE ADDITION OF RS. 10,62,00,000/- WITH THE OBSERVATION THAT THE TR ANSACTIONS WERE SPOT ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 2 TRANSACTION WITHOUT APPRECIATING THE FACT THAT THE CONTRACT NOTES ONLY STATE ABOUT THE DERIVATIVE TRANSACTIONS? 2. WHETHER IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) WAS JUSTIFIED IN NOT APPRECIATING TH E FACT THAT THE TRANSACTIONS MADE BY ASSESEE IS NOT VALID AS PER SE CTION 45V OF THE RBI ACT SINCE THE TRANSACTION WERE DERIVATIVE TRANSACTI ONS? 3. WHETHER IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) WAS CORRECT IN DELETING THE DISALLOW ANCE MADE U/S 14A R.W.R. 8D OF THE ACT AND WHETHER THE SHOW CAUSE NOT ICE ISSUED TO THE ASSESSEE WITH REGARD TO APPLICABILITY OF SEC. 14A R .W.R. 8D IS NOT SUFFICIENT COMPLIANCE TO THE OBSERVATION OF THE HON BLE SUPREME COURT IN MAXOPP INVESTMENT PVT. LTD. VS. CIT IN CIVIL APP EAL NO. 104-109 OF 2015 DATED 12.02.2018? 2. BRIEFLY THE FACTS OF THE CASE ARE THAT DURING TH E COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER RECEI VED CERTAIN INFORMATION THAT THE ASSESSEE COMPANY HAS CARRIED O UT TRADING THROUGH CERTAIN REGISTERED BROKERS ON NATIONAL SPOT EXCHANG E LIMITED (NSEL) AND FOR VARIOUS REASONS, THE TRADING ON THE NSEL EX CHANGE PLATFORM HAD STOPPED ON 31.07.2013 AND IN RESPECT OF MANY TR ADERS, THEIR OUTSTANDING RECEIVABLE AMOUNTS HAD REMAINED UNSETTL ED. THE HONBLE BOMBAY HIGH COURT HAD SUBSEQUENTLY SET UP A COMMITT EE WHICH HAS STARTED RECOVERY PROCEEDINGS AND CERTAIN AMOUNTS HA VE BEEN RECOVERED. HOWEVER, LIKE OTHER BROKERS/TRADERS, THE ASSESSEE COMPANY HAS CLAIMED THE OUTSTANDING AMOUNT AS BAD DEBTS OF RS. 11.04 CRORE. 3. A SHOW CAUSE WAS ACCORDINGLY ISSUED TO THE ASSES SEE BY THE ASSESSING OFFICER. IN RESPONSE, THE ASSESSEE SUBMI TTED THAT IT HAS UTILIZED ITS SHORT TERM FUNDS FOR TRADING IN COMMOD ITIES ON NSEL THROUGH ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 3 VARIOUS BROKERS TO EARN ASSURED MARGINAL INCOME BY PURCHASE AND SALE OF COMMODITIES ON SAME DAY. IT WAS FURTHER SUBMITTE D THAT IT HAS EARNED INCOME OF RS. 36.54 LACS ON THESE TRANSACTIO NS IN THE INITIAL PERIOD OF 2-3 MONTHS WHICH HAS BEEN SHOWN AS INCOME FROM INVESTMENTS UNDER THE HEAD OTHER INCOME. IT WAS F URTHER SUBMITTED THAT AS RECOVERY FROM NSEL WAS DOUBTFUL, THE ASSESS EE HAS WRITTEN OFF THE SUM OF RS. 10.62 CRORE PERTAINING TO NSEL IN IT S BOOKS OF ACCOUNT DURING THE FINANCIAL YEAR 2013-14 AND WHENEVER SUBS EQUENT RECOVERY WILL BE MADE, IT WILL ACCOUNT FOR THE SAME IN ITS B OOKS OF ACCOUNT. 4. THE REPLY SO FILED BY THE ASSESSEE WAS CONSIDERE D BUT NOT FOUND ACCEPTABLE TO THE ASSESSING OFFICER. AS PER THE ASS ESSING OFFICER, THE COMMITTEE WHICH HAS BEEN SET UP BY THE HONBLE BOMB AY HIGH COURT IS PURSUING THE RECOVERY WITH FULL THRUST AND AN AMOUN T OF RS. 381.52 CRORES OF TOTAL OUTSTANDING DUES HAS BEEN RECOVERED BY NSEL WHICH SHOWS THAT PROCESS IS STILL ALIVE AND THERE IS VERY POSSIBILITY OF RECOVERY OF DUES IN NEAR FUTURE. THE ASSESSING OFFICER ACCOR DINGLY HELD THAT IT IS QUITE ABNORMAL ON PART OF THE ASSESSEE COMPANY TO W RITE OFF THE SAME AS BAD DEBTS DUE TO UNCERTAINTY OF RECOVERY. 5. THE ASSESSING OFFICER FURTHER HELD THAT THE INVE STMENT MADE BY THE ASSESSEE IS OUT OF ITS BUSINESS ACTIVITIES WHIC H PRIMA FACIE COMPRISE SMALL LOANS, VEHICLE LOANS, SMALL AND MEDIUM ENTERP RISE LOANS IN RURAL AND SEMI-URBAN AREAS AND SUCH INVESTMENT IN COMMODI TIES IS NO WHERE RELATED WITH THE BUSINESS ACTIVITIES OF THE ASSESSE E AS PERMITTED BY THE RBI. THEREFORE, IT WAS HELD BY THE ASSESSING OFFICE R THAT BAD DEBTS ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 4 WRITTEN OFF AS CLAIMED BY THE ASSESSEE DURING THE YEAR TO THE TUNE OF RS. 10.62 CRORES ARE NOT ALLOWABLE EXPENSES U/S 36( 1)(VII) OF THE ACT. 6. THE ASSESSING OFFICER FURTHER HELD THAT AS PER S ECTION 45V OF RBI ACT, NBFC COMPANIES ARE RESTRICTED FROM TRADING IN ANY DERIVATIVE CONTRACTS, UNLESS THE COUNTER PARTY IS A BANK. IN T HE INSTANCE CASE, THE COUNTER PARTY WAS NOT A BANK AND THEREFORE THE ACTI VITY CARRIED OUT BY NBFC IS ILLEGAL, RESTRICTED AND CONTRARY TO PUBLIC POLICY. ACCORDINGLY, THE CLAIM IS ALSO NOT ELIGIBLE U/S 37(1) READ WITH EXPL ANATION THERETO. 7. IN LIGHT OF THE AFORESAID REASONING, THE ASSESSI NG OFFICER DISALLOWED THE CLAIM OF BAD DEBTS OF RS. 10.62 CROR ES SO CLAIMED BY THE ASSESSEE AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) WHO HAS ALLOWED THE NECESSARY RELIEF TO THE ASSESSEE COMPANY. AGAINST THE SAID FINDINGS OF THE LD CIT(A), THE REV ENUE IS NOW IN APPEAL BEFORE US. 8. DURING THE COURSE OF HEARING, LD CIT DR SUBMITT ED THAT THE ASSESSEE COMPANY HAS UNDERTAKEN CERTAIN TRANSACTION S IN COMMODITIES ON THE NSEL PLATFORM DURING THE YEAR AND HAS CLAIME D DEDUCTION OF RS 10.62 CRORES BY WAY OF WRITE OFF OF AMOUNT IN RE LATION TO SUCH TRANSACTIONS. IT WAS SUBMITTED THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN DELETING THE ADDITION OF RS 10.62 CRORES HOLDING TH ESE TRANSACTIONS AS SPOT TRANSACTIONS WITHOUT APPRECIATING THE FACT THA T THE CONTRACT NOTES ONLY STATE ABOUT THE DERIVATIVE TRANSACTIONS AND TH ERE IS NOTHING ON RECORD TO SUGGEST THAT THE TRANSACTIONS INVOLVES DE LIVERY OF ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 5 COMMODITIES. IT WAS ACCORDINGLY SUBMITTED THAT LOSS IN RESPECT OF DERIVATE TRANSACTIONS IS IN THE NATURE OF SPECULATI VE LOSS AND THE SAME CANNOT BE ALLOWED AS SET OFF AGAINST NORMAL BUSINES S INCOME. IT WAS FURTHER SUBMITTED THAT THE DERIVATE TRANSACTIONS SO UNDERTAKEN BY THE ASSESSEE COMPANY WERE ALSO NOT VALID AS PER SECTION 45V OF THE RBI ACT AND AS PER EXPLANATION TO SECTION 37(1) OF THE ACT, THE SAME CANNOT BE ALLOWED AS AN ALLOWABLE DEDUCTION IN THE HANDS OF T HE ASSESSEE COMPANY. FURTHER, HE HAS PLACED RELIANCE ON THE DE CISION OF THE ASSESSING OFFICER WHICH WE HAVE ALREADY NOTED ABOVE AND HAVE NOT REPRODUCED THE SAME FOR SAKE OF BREVITY. IT WAS AC CORDINGLY SUBMITTED THAT THE ORDER OF THE LD CIT(A) SHOULD BE SET-ASIDE AND THE ORDER OF THE ASSESSING OFFICER SHOULD BE SUSTAINED. 9. PER CONTRA, THE LD AR SUBMITTED THAT THE ASSESSE E COMPANY HAD CARRIED OUT CERTAIN COMMODITY TRANSACTIONS THROUGH REGISTERED BROKERS WITH NSEL DURING THE YEAR UNDER CONSIDERATION. THE ASSESSEE COMPANY HAD ENTERED INTO PAIRED CONTRACTS AND PURCHASES WER E MADE AT T+2 CYCLE AND SALES WERE MADE AT T+25 OR T+35 CYCLE. TH E STOCKIEST PUT UP THESE CONTRACTS FOR SALE AT T+2 CYCLE ON THE NSEL, WHICH WERE BOUGHT BY THE ASSESSEE COMPANY. IN THIS PAIRED CONTRACTS, THE STOCKIEST OF COMMODITY DEPOSITED THE COMMODITY WITH THE EXCHANGE ACCREDITED WAREHOUSE AND RECEIVED A WAREHOUSE RECEIPT. THE ASS ESSEE COMPANY MADE FULL PAYMENT FOR PURCHASE IMMEDIATELY AND DELI VERY LYING IN THE WAREHOUSE WAS ASSIGNED TO IT AND THE TRANSACTION WA S SUBJECT TO VAT AND DELIVERY CHARGES. AS FAR AS SALE IS CONCERNED, THE ASSESSEE COMPANY IMMEDIATELY PUT A CONTRACT FOR SALE ON T+25 OR T+35 . THE SAID CONTRACTS WERE BOUGHT BY THE USERS/STOCKISTS AND DE LIVERY WAS ASSIGNED ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 6 FROM THE BUYER TO THE SELLER. IT WAS ACCORDINGLY S UBMITTED THAT THESE TRANSACTIONS WERE SUBJECT TO VAT AND DELIVERED CHAR GES, AND ARE BASICALLY SPOT TRANSACTIONS MADE BY THE ASSESSEE CO MPANY IN COMMODITIES ON NSEL WHICH REQUIRE COMPULSORY DELIVE RY. 10. IT WAS FURTHER SUBMITTED BY THE LD AR THAT THES E SPOT DELIVERY BASED TRANSACTIONS ARE DIFFERENT IN NATURE FROM DER IVATIVE TRANSACTIONS AS ENVISAGED U/S 45V OF THE RBI ACT AND THEREFORE, THERE IS NO VIOLATION OF THE RBI ACT AS SO CONTENDED BY THE LD CIT DR. IT WAS FURTHER SUBMITTED THAT THE SAID TRANSACTIONS ALSO DOES NOT FALL IN THE DEFINITION OF TERM SPECULATIVE TRANSACTION AS THE SAME WERE SETTLED THROUGH DELIVERY. IT WAS SUBMITTED THAT IN RESPECT OF SALES TRANSACTIONS, IT HAS RECEIVED THE PAYMENT AGAINST THE SALES MADE IN THE MONTH OF APRIL AND MAY 2013, HOWEVER IT COULD NOT RECEIVE THE AMOUNT A GAINST THE LAST SALES TRANSACTION DONE AT NSEL IN THE MONTH OF JUNE AND JULY, 2013 AND IN VIEW OF THE SCAM IN NSEL, NEITHER THE STOCK NOR MONEY COULD BE RECOVERED. THE DUES FROM THE NSEL TO THE TUNE OF RS . 10.62 CRORE BECAME DOUBTFUL AND WERE WRITTEN OFF AS BAD DEBTS I N THE BOOKS OF ACCOUNT. AT THE SAME TIME, IT WAS SUBMITTED THAT TH E ASSESSEE COMPANY IS REGULARLY FOLLOWING THE RECOVERY PROCESS IN THE LEGAL PURSUIT AS THE RECOVERY AND DISTRIBUTION OF MONEY OF INVESTORS IS UNDER THE CONTROL OF HONBLE BOMBAY HIGH COURT. IT WILL ACCOUNT FOR THE SAME IN ITS BOOKS OF ACCOUNTS AS AND WHEN THE MONEY WILL BE RECEIVED BY IT. IT WAS FURTHER SUBMITTED THAT THE TRANSACTIONS WERE COVERED BY THE MAIN OBJECT CLAUSE AS STATED IN ITS MEMORANDUM OF ASSOCIATION AND THE CLAIM OF WRITTEN OFF OF BAD DEBTS FROM NSEL AMOUNTING TO RS. 10.62 CRORE IS COMPLETELY LEGAL AND FULLY ALLOWABLE AS BAD DEBTS U/S 36(1)(VI I) OF THE ACT AS WELL AS ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 7 U/S 37(1) OF THE ACT. IT WAS SUBMITTED THAT THE LD CIT(A) HAS EXAMINED AND RIGHTLY APPRECIATED THE NATURE OF THE TRANSACTI ONS BEING IN THE NATURE OF SPOT TRANSACTIONS AND NOT DERIVATE TRANSA CTIONS AND THERE IS NO INFIRMITY IN HIS FINDINGS WHICH SHOULD BE CONFIR MED. 11. IT WAS FURTHER SUBMITTED BY THE LD AR THAT ONCE THE ASSESSEE COMPANY HAS WRITTEN OFF THE BAD DEBTS IN ITS BOOKS OF ACCOUNTS, THE SAME IS IN COMPLIANCE WITH THE PROVISIONS OF SECTIO N 36(1)(VII) OF THE ACT. IN SUPPORT OF HIS CONTENTIONS, HE DRAWN OUR R EFERENCE TO THE DECISION OF THE HONBLE SUPREME COURT IN CASE OF T. R.F. LTD. VS. CIT 323 ITR 397, CIRCULAR NO. 12/2016 DATED 30.05.2016 ISSU ED BY CBDT, DECISION OF HONBLE BOMBAY HIGH COURT IN CASE OF DC IT (INTERNATIONAL TAXATION) VS. OMAN INTERNATIONAL BANK SAOC 184 TAXM AN 314 (BOM) AND DECISION OF HONBLE DELHI HIGH COURT IN CASE OF CIT VS. SAMARA INDIA (P.) LTD. 356 ITR 12. 12. WE HAVE HEARD THE RIVAL CONTENTIONS AND PURUSED THE MATERIAL AVAILABLE ON RECORD. BROADLY, THE REVENUE HAS CONT ESTED THE FINDINGS OF THE LD CIT(A) ON TWO ACCOUNTS. FIRSTLY, THE TRANSA CTIONS UNDERTAKEN BY THE ASSESSEE COMPANY ARE IN THE NATURE OF DERIVATE TRANSACTIONS AND LOSS ARISING THEREFROM IS IN THE NATURE OF SPECULAT IVE LOSS WHICH CANNOT BE ALLOWED SET OFF AGAINST NORMAL BUSINESS INCOME. SECONDLY, THE SPECULATIVE TRANSACTIONS ARE NOT IN COMPLIANCE WITH SECTION 45V OF THE RBI ACT AND HENCE, IN VIEW OF EXPLANATION TO SECTIO N 37(1), THE SAME CANNOT BE ALLOWED AS AN ALLOWABLE DEDUCTION IN THE HANDS OF THE ASSESSEE COMPANY. ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 8 13. IT WOULD, THEREFORE, BE RELEVANT TO EXAMINE THE REASONING WHICH HAS BEEN ADOPTED BY THE LD. CIT(A) AND HIS FINDINGS IN RELATION THERETO WHILE ALLOWING THE CLAIM OF THE ASSESSEE COMPANY. 14. IN HIS ORDER, THE LD. CIT(A) HAS REFERRED TO TH E NSEL FUNCTIONING AS A SPOT EXCHANGE FOR TRADING IN COMMODITIES AND S TATED THAT IT PROVIDES AN ELECTRONIC TRADING PLATFORM TO WILLING PARTICIPANTS FOR SPOT TRADING OF COMMODITIES, SUCH AS BULLION, AGRICULTUR AL PRODUCE, METALS, ETC. THE LD. CIT(A) OBSERVED THAT THE INVESTORS/TRA DERS PURCHASES COMMODITIES BY TAKING DELIVERY OF THESE COMMODITIES THROUGH WAREHOUSE RECEIPTS AND THEN SELLING THE COMMODITIES BY GIVING DELIVERY IN THE FORM OF THE WAREHOUSE RECEIPTS. THESE TRANSA CTIONS WERE BEING DONE ON A REGULAR AND SYSTEMATIC BASIS AND THEREFOR E CONSTITUTE A BUSINESS AND THE DIFFERENCE BETWEEN THE PURCHASE AN D SALE PRICE WAS TAXABLE AS BUSINESS PROFITS. IT WAS FURTHER OBSERV ED BY THE LD CIT(A) THAT ON ACCOUNT OF SCAM WHICH BROKE OUT AT THE NSEL DURING THE FINANCIAL YEAR 2013-14, A LARGE NUMBER OF INVESTORS /TRADERS LOST THEIR MONEY AS THE NSEL FAILED TO FULFILL ITS COMMITMENTS . IT WAS ACCORDINGLY HELD BY THE LD. CIT(A) THAT WHERE THERE IS A LOSS O N ACCOUNT OF TRANSACTIONS AT NSEL, SUCH A LOSS WOULD BE A TRADIN G LOSS. SINCE THE TRADE UNDER CONSIDERATION IS NOT ONE THAT IS SETTLE D WITHOUT DELIVERY BUT IS A TRANSACTION WHICH CANNOT BE COMPLETED DUE TO R EGULATORY ISSUES, SUCH A LOSS IS MORE A TYPE OF BAD DEBT IN RELATION TO TRADE RECEIVABLES. 15. THEREAFTER COMING TO THE SPECIFIC FACTUAL MATRI X OF THE ASSESSEE COMPANY, THE LD CIT(A) STATED THAT THE ASSESSEE COM PANY HAS EXECUTED A NUMBER OF TRANSACTIONS ON REGULAR BASIS AT NSEL P LATFORM FROM ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 9 22.04.2013 TO 16.07.2013 THROUGH FOUR BROKERS AND H AS EARNED A PROFIT OF RS. 36,54,098/- WHICH HAS BEEN DULY DECLARED IN ITS PROFIT AND LOSS ACCOUNT UNDER THE HEAD OTHER INCOME IN VIEW OF RE QUIREMENTS OF SCHEDULE II OF THE COMPANIES ACT. IT WAS ALSO NOTE D BY THE LD CIT(A) THAT THE ASSESSEE COMPANY HAS PAID VAT ON PURCHASE AND SALE OF THESE TRANSACTIONS ALONG WITH DELIVERY CHARGES. THEREFORE , IT WAS HELD BY THE LD CIT(A) THAT THESE SYSTEMATIC AND REGULAR TRANSAC TIONS IN THE COMMODITIES AT NSEL PLATFORM ARE NOTHING BUT BUSINE SS ACTIVITIES OF THE APPELLANT WHICH WERE DISCONTINUED BY THE APPELLANT BECAUSE OF CRISES AT NSEL. 16. REGARDING THE CONTENTIONS OF THE ASSESSING OFFI CER THAT THE SUBJECT TRANSACTIONS ARE IN THE NATURE OF DERIVATIV E TRANSACTIONS WHICH ARE PROHIBITED BY THE RBI ACT. THE LD. CIT(A) HAS G ONE THROUGH THE PROVISIONS OF RBI ACT IN DETAIL AND IN PARTICULAR, SECTION 45V, 45U, EXPLANATION TO SECTION 17(6A) OF THE RBI ACT AND AL SO THE GUIDELINES ON DERIVATIVES ISSUED BY THE RBI VIDE ITS CIRCULAR DAT ED 20.04.2007 AND HELD THAT THE DERIVATIVE IS A FINANCIAL INSTRUMENT WHOSE VALUE CHANGES IN RESPONSE TO THE CHANGE IN THE UNDERLYING ASSETS AND THAT REQUIRES NO INITIAL NET INVESTMENT OR LITTLE INITIAL NET INVEST MENT AND THAT IS SETTLED AT A FUTURE DATE. AS AGAINST THAT IN RESPECT OF TRANSA CTION UNDER CONSIDERATION EXECUTED ON NSEL PLATFORM, FULL PAYME NT WAS MADE IMMEDIATELY FOR PURCHASE OF CONTRACTS THEREON AND T HE CONTRACT WAS SETTLED ON THE SAME DATE AS THE CORRESPONDING QUANT ITY OF GOODS PURCHASED WERE ALSO SOLD ON THE SAME DATE. THUS, TH E FULL INVESTMENT WAS REQUIRED FOR CONDUCTING TRADE ON NSEL IN SPOT M ARKET AGAINST NIL OR A LITTLE INVESTMENT AS REQUIRED IN DERIVATIVES. FUR THER, THE LD. CIT(A) HELD ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 10 THAT PURCHASE AS WELL AS SALE PRICE WAS FIXED ON TH E DATE OF TRANSACTIONS ITSELF AND IT DID NOT VARY AS A RESULT OF VARIATION IN THE PRICE OF UNDERLYING ASSETS. FURTHER, THE LD. CIT(A) STATED T HAT THE COMMODITY DERIVATIVE IN THE FORM OF COMMODITY FUTURES AND OPT IONS ARE BEING TRADED ON MULTI COMMODITY EXCHANGE AND NATIONAL COM MODITY & DERIVATIVE EXCHANGE. IT WAS ACCORDINGLY HELD THAT A DERIVATIVE TRANSACTION IS COMPLETELY DIFFERENT FROM THE SPOT T RANSACTION. IN THE DERIVATIVE TRANSACTIONS, THE TRANSACTIONS ARE NOT D ELIVERY BASED BUT ARE BASED ON FUTURE PRICES, HOWEVER IN RESPECT OF SPOT TRANSACTION, TRANSACTION IS DONE AT THE SPOT ITSELF AT THE PRICE PREVAILING AT THE TIME OF TRANSACTION ITSELF AND THE REALIZATION OF THE TR ANSACTION MAY BE AT A FUTURE DATE. THEREFORE, THE TRANSACTION ON THE SPOT MARKET ARE DELIVERY BASED HAVING CERTAINTY OF THEIR VALUES. IT WAS ACCO RDINGLY HELD THAT THE TRANSACTIONS DONE BY THE ASSESSEE COMPANY ARE NOT D ERIVATIVE TRANSACTIONS AND THEREFORE, NOT RECOVERED BY THE PR OVISIONS OF SECTION 45V OF RBI ACT. FURTHER, THE LD CIT(A) HELD THAT TH E TRANSACTIONS BEING SPOT TRANSACTIONS ARE NOT PROHIBITED OR RESTRAINED BY RBI AND THEREFORE, THE SAME CANNOT BE HELD TO BE ILLEGAL AND AGAINST T HE PUBLIC POLICY AND CONSEQUENTLY, THE EXPLANATION 1 TO SECTION 37(1) OF THE ACT IS NOT APPLICABLE. 17. WE AGREE WITH THE FINDINGS OF THE LD CIT(A) THA T CONCEPTUALLY, THE DERIVATIVE TRANSACTIONS ARE NOT DELIVERY BASED BUT ARE BASED ON FUTURE PRICES, HOWEVER THE TRANSACTION ON THE SPOT MARKET ARE DELIVERY BASED HAVING CERTAINTY OF THEIR VALUES. HOWEVER, QUESTION THAT ARISES FOR CONSIDERATION IS WHETHER IN THE INSTANT CASE, THE T RANSACTION OF PURCHASE AND SELL OF COMMODITIES ARE DELIVERY BASED OR NOT A ND A RELATED ISSUE OF ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 11 WHETHER THEY ARE SPECULATIVE TRANSACTION OR NOT. B OTH THE ISSUES ARE CLOSELY LINKED AND CONNECTED, AND NEEDS TO BE EXAMI NED THOROUGHLY TO DETERMINE THE EXACT NATURE OF THE TRANSACTION AND T REATMENT THEREOF FOR TAX PURPOSES. ONCE IT IS DECIDED THAT THE TRANSAC TIONS ARE DELIVERY BASED AND THUS NOT SPECULATIVE IN NATURE, THE QUEST ION OF ALLOWABILITY OF CLAIM OF BAD DEBT UNDER SECTION 36(1)(VII) WILL ARI SE FOR CONSIDERATION. 18. A SPECULATIVE TRANSACTION HAS BEEN DEFINED UNDE R SECTION 43(5) OF THE ACT AND THE RELEVANT PROVISIONS READ AS UNDER: (5) 66 'SPECULATIVE TRANSACTION' 67 MEANS A TRANSACTION IN WHICH A CONTRACT 67 FOR THE PURCHASE OR SALE OF ANY COMMODITY 67 , INCLUDING STOCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY 67 SETTLED 67 OTHERWISE THAN BY THE ACTUAL DELIVERY 67 OR TRANSFER OF THE COMMODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE (A ) A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCHANDI SE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR MERCHANTING BUSINESS TO GUARD AGAI NST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT O F HIS CONTRACTS FOR ACTUAL DEL IVERY OF GOODS MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HIM; OR (B ) A CONTRACT IN RESPECT OF STOCKS AND SHARES ENTERED INTO BY A DEALER OR INVESTOR THEREIN TO GUARD AGAINST LOSS IN HIS HOLDINGS OF STOCKS AND SHARES THROUGH PRICE FLUCTUA TIONS; OR (C ) A CONTRACT ENTERED INTO BY A MEMBER OF A FORWARD MA RKET OR A STOCK EXCHANGE IN THE COURSE OF ANY TRANSACTIO N IN THE NATURE OF JOBBING OR ARBITRAGE TO GUARD AGAINST LOSS WHICH MAY ARISE IN THE ORDINARY COURSE OF HIS 68 B USINESS ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 12 AS SUCH MEMBER; 69 [OR] 69 [(D ) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES 70 REFERRED TO IN CLAUSE 71 [(AC)] OF SECTION 2 72 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) CARRIED OUT IN A RECOGNISED STOCK EXCHANGE; 73 [OR]] 73 [(E ) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN CO MMODITY DERIVATIVES 70 CARRIED OUT IN A RECOGNISED ASSOCIATION 74 [, WHICH IS CHARGEABLE TO COMMODITIES TRANSACTION TAX UNDER CHAPTER VII OF THE FINANCE ACT, 2013 (17 OF 2013),] ] SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION . 75 [ 76 [EXPLANATION 1].FOR THE PURPOSES OF 77 [CLAUSE (D )], THE EXPRESSIONS (I ) 'ELIGIBLE TRANSACTION' MEANS ANY TRANSACTION, (A ) CARRIED OUT ELECTRONICALLY ON SCREEN- BASED SYSTEMS THROUGH A STOCK BROKER OR SUB- BROKER OR SUCH OTHER INTERMEDIARY REGISTERED UNDER SECTION 12 O F THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (15 OF 1992) IN ACCORDANCE WITH THE PROVISIONS OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) OR THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (15 OF 1992) OR THE DEPOSITORIES A CT, 1996 (22 OF 1996) AND THE RULES, REGULATIONS OR BYE- LAWS MADE OR DIRECTIONS ISSUED UNDER THOSE ACTS OR BY BANKS OR MUTUAL FUNDS ON A RECOGNISED STOCK EXCHANGE; AND (B ) WHICH IS SUPPORTED BY A TIME STAMPED CONTRACT NOTE ISSUED BY SUCH STOCK BROKER OR SUB- BROKER OR SUCH OTHER INTERMEDIARY TO EVERY CLIENT INDICATING IN TH E CONTRACT NOTE THE UNIQUE CLIENT IDENTITY NUMBER ALLOTTED UNDER ANY ACT REFERRED TO IN SUB-CLAUSE (A ) ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 13 AND PERMANENT ACCOUNT NUMBER ALLOTTED UNDER THIS ACT; (II ) 'RECOGNISED STOCK E XCHANGE' MEANS A RECOGNISED STOCK EXCHANGE AS REFERRED TO IN CLAUSE (F) OF SECTION 2 78 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) AND WHICH FULFILS SUCH CONDITIONS AS MAY BE PRESCRI BED AND NOTIFIED 79 BY THE CENTRAL GOVERNMENT FOR THIS PURPOSE;] 80 [EXPLANATION 2.FOR THE PURPOSES OF CLAUSE (E ), THE EXPRESSIONS (I ) 'COMMODITY DERIVATIVE' SHALL HAVE THE MEANING AS ASSIGNED T O IT IN CHAPTER VII OF THE FINANCE ACT, 2013; (II ) 'ELIGIBLE TRANSACTION' MEANS ANY TRANSACTION, (A ) CARRIED OUT ELECTRONICALLY ON SCREEN- BASED SYSTEMS THROUGH MEMBER OR AN INTERMEDIARY, REGISTERED UNDER THE BYE- LAWS, RULES AND REGULATIONS OF THE R ECOGNISED ASSOCIATION FOR TRADING IN COMMODITY DERIVATIVE IN ACCORDANCE WITH THE PROVISIONS OF THE FORWARD CONTRACTS (REGULATION) ACT, 1952 (74 OF 1952) AND THE RULES, REGULATIONS OR BYE- LAWS MADE OR DIRECTIONS ISSUED UNDER THAT ACT ON A RECOGNISED ASSOCIATION; AND (B ) WHICH IS SUPPORTED BY A TIME STAMPED CONTRACT NOTE ISSUED BY SUCH MEMBER OR INTERMEDIARY TO EVERY CLIENT INDICATING IN THE CONTRACT NOTE, THE UNIQUE CLIENT IDENTITY NUMBER ALLOTTED UNDER THE ACT, RULES, REGULATIONS OR BYE-LAWS REFERRED TO IN SUB - CLAUSE (A ), UNIQUE TRADE NUMBER AND ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 14 PERMANENT ACCOUNT NUMBER ALLOTTED UNDER THIS ACT; (III ) 'RECOGNISED ASSOCIATION' MEANS A RECOGNISED ASSOCIATION AS REFERRED TO IN CLAUSE (J) OF SECTION 2 81 OF THE FORWARD CO NTRACTS (REGULATION) ACT, 1952 (74 OF 1952) AND WHICH FULFILS SUCH CONDITIONS AS MAY BE PRESCRIBED 82 AND IS NOTIFIED 83 BY THE CENTRAL GOVERNMENT FOR THIS PURPOSE; 19. IN LIGHT OF ABOVE, IT NEEDS TO BE EXAMINED WHE THER THE PURCHASE AND SALE OF COMMODITIES IN THE INSTANT CASE HAS BEE N PERIODICALLY OR ULTIMATELY SETTLED THROUGH ACTUAL DELIVERY OR TRANS FER OF COMMODITY OR NOT. IT HAS BEEN CONTENDED BY THE LD AR THAT THE A SSESSEE COMPANY HAD ENTERED INTO PAIRED CONTRACTS AND PURCHASES WER E MADE AT T+2 CYCLE AND SALES WERE MADE AT T+25 OR T+35 CYCLE. TH E STOCKIEST PUT UP THESE CONTRACTS FOR SALE AT T+2 CYCLE ON THE NSEL, WHICH WERE BOUGHT BY THE ASSESSEE COMPANY. IN THIS PAIRED CONTRACTS, THE STOCKIEST OF COMMODITY DEPOSITED THE COMMODITY WITH THE EXCHANGE ACCREDITED WAREHOUSE AND RECEIVED A WAREHOUSE RECEIPT. THE ASS ESSEE COMPANY MADE FULL PAYMENT FOR PURCHASE IMMEDIATELY AND DELI VERY LYING IN THE WAREHOUSE WAS ASSIGNED TO IT AND THE TRANSACTION WA S SUBJECT TO VAT AND DELIVERY CHARGES. AS FAR AS SALE IS CONCERNED, THE ASSESSEE COMPANY IMMEDIATELY PUT A CONTRACT FOR SALE ON T+25 OR T+35 . THE SAID CONTRACTS WERE BOUGHT BY THE USERS/STOCKISTS AND DE LIVERY WAS ASSIGNED FROM THE BUYER TO THE SELLER. IT WAS ACCORDINGLY S UBMITTED THAT THESE TRANSACTIONS WERE SUBJECT TO VAT AND DELIVERED CHAR GES, AND ARE BASICALLY SPOT TRANSACTIONS MADE BY THE ASSESSEE CO MPANY IN COMMODITIES ON NSEL WHICH REQUIRE COMPULSORY DELIVE RY. THE SAID ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 15 CONTENTIONS NEED TO BE SUPPORTED THROUGH VERIFIABLE AND DEMONSTRATIVE EVIDENCE WHICH SHOWS THAT THERE IS ACTUAL DELIVERY OF COMMODITIES THROUGH ASSIGNMENT OF WAREHOUSE RECEIPTS. HOWEVER, WE FIND THAT THE LD CIT(A) HAS MERELY STATED THAT THE ASSESSEE COMPA NY HAS EXECUTED A NUMBER OF TRANSACTIONS ON REGULAR BASIS AT NSEL PLA TFORM FROM 22.04.2013 TO 16.07.2013 THROUGH FOUR BROKERS AND T HAT THE ASSESSEE COMPANY HAS PAID VAT ON PURCHASE AND SALE OF THESE TRANSACTIONS ALONG WITH DELIVERY CHARGES. 20. ON PERUSAL OF SAMPLE CONTRACT NOTES AVAILABLE A T ASSESSEES PAPERBOOK AT PAGES 202-205, IT IS NOTED THAT THERE IS PURCHASE OF CERTAIN COMMODITY AND SIMULTANEOUS SALE OF SAME QUA NTITY OF COMMODITY SO PURCHASED AT THE SAME TIME AND DATE OF PURCHASE. THUS, EVERY PURCHASE OF COMMODITY WITH PURPORTED DELIVERY IS SIMULTANEOUSLY SQUARED OFF BY CORRESPONDING SALE MARKED WITH PURPO RTED DELIVERY. HOWEVER, WE FIND THAT BESIDES THE CONTRACT NOTES, T HERE IS NOTHING ON RECORD WHICH SUGGEST THAT THE DELIVERY AGAINST PURC HASE IS OBTAINED BY NSEL ON BEHALF OF THE ASSESSEE ON SPOT AGAINST PAYM ENT BY THE ASSESSEE AND IS SUBSEQUENTLY DELIVERED ON BEHALF OF THE ASSESSEE AGAINST SALE AT A FUTURE DATE AND SALE CONSIDERATIO N IS RECEIVED ON DELIVERY OF SUCH COMMODITY. IN OTHER WORDS, WHETHER THERE IS ANY ACTUAL STOCK OF COMMODITY OF REQUISITE QUANTITY WHICH IS P HYSICALLY STORED IN THE WAREHOUSE OR NOT, AND WHOSE PURCHASE AND SELL H AS BEEN CONTRACTED AND DELIVERY THEREOF HAS HAPPENED THROUG H ASSIGNMENT OF WAREHOUSE RECEIPT OR NOT, THESE FACTS ARE NOT EMERG ING FROM RECORDS. IT IS ALSO NOT CLEAR WHETHER VAT CHARGES SO CLAIMED TO HAVE BEEN COLLECTED AS PER THE CONTRACT NOTES HAVE ACTUALLY BEEN DEPOSI TED WITH RELEVANT ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 16 AUTHORITIES. MERELY STATING THAT THE VAT CHARGES H AVE BEEN LEVIED AS PER CONTRACT NOTES WOULD NOT MAKE THE TRANSACTION A S THAT OF SALE AND DELIVERY UNLESS THE TRANSACTION IS DEMONSTRATED BY ACTUAL STOCK OF COMMODITY AND TRANSFER THROUGH DELIVERY. ONCE IT I S DETERMINED THAT THERE WAS ACTUAL STOCK OF REQUISITE QUANTITY WHICH HAS BEEN CONTRACTED TO BE PURCHASED AND SOLD AND THE DELIVERY THEREOF H AS HAPPENED, THE TRANSACTION WOULD BE CONSIDERED AS DELIVERY BASED T RANSACTION AND NOT A SPECULATIVE TRANSACTION. THEREAFTER, THE ALLOWABIL ITY OF CLAIM UNDER SECTION 36(1)(VII) WILL ARISE FOR CONSIDERATION AND NEED TO BE RECONSIDERED BY THE AO IN LIGHT OF LEGAL PROPOSITIO N SO LAID DOWN BY THE VARIOUS COURTS, SO RELIED UPON BY THE LD AR, WHEREI N IT HAS BEEN HELD THAT WHEN THE ASSESSEE TREATS THE DEBT AS A BAD DEB T IN HIS BOOKS, THE DECISION HAS TO BE A BUSINESS OR COMMERCIAL DECISIO N AND NOT WHIMSICAL OR FANCIFUL. THE DECISION MUST BE BASED ON MATERIAL THAT THE DEBT IS NOT RECOVERABLE AND THE DECISION MUST BE BONA FIDE. TH E ASSESSEE COMPANY HAS TO SHOW THAT BAD DEBT HAS BEEN WRITTEN OFF AS IRRECOVERABLE IN ITS BOOKS OF ACCOUNTS AND CONDITIO NS SPECIFIED U/S 36(2) HAVE BEEN SATISFIED. IN LIGHT OF THE SAME, THE ALL OWABILITY OF CLAIM UNDER SECTION 36(1)(VII) WILL NEED TO BE RECONSIDERED BY THE AO INCLUDING ON THE POINT OF SATISFACTION OF CONDITIONS SPECIFIED U /S 36(2) OF THE ACT. IN VIEW OF THE ABOVE DISCUSSIONS AND IN THE ENTIRETY O F FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE SETTING ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE MATTER AFRESH IN LIGHT OF ABOVE DIRECTIONS AFTER PROVIDING REASONABLE OPPORTUNITY T O THE ASSESSEE. IN THE RESULT, GROUND OF REVENUES APPEAL IS ALLOWED F OR STATISTICAL PURPOSES. ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 17 21. NOW COMING TO GROUND NO. 2 OF THE REVENUES APP EAL, BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE DURING T HE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSER VED THAT THE ASSESSEE HAS MADE HUGE INVESTMENTS AND ON SUCH INVE STMENTS, THE ASSESSEE COMPANY HAS EARNED INCOME WHICH HAS BEEN C LAIMED AS EXEMPT U/S 10 OF THE ACT. A SHOW CAUSE DATED 05.12. 2016 WAS ISSUED TO THE ASSESSEE AS TO WHY APPROPRIATE DISALLOWANCE U/S 14A READ WITH RULE 8D MAY NOT BE MADE. IN COMPLIANCE, THE ASSESS EE COMPANY FILED ITS REPLY WHICH WAS CONSIDERED BUT NOT FOUND ACCEPT ABLE. THE ASSESSING OFFICER THEREAFTER MADE DISALLOWANCE OF RS. 72,25,5 30 UNDER AMENDED RULE 8D AT THE RATE OF 1% OF THE AVERAGE INVESTMENT . 22. ON APPEAL, THE LD. CIT(A) NOTED THAT AS ON 31.0 3.2014, THE TOTAL INVESTMENTS WERE TO THE TUNE OF RS. 113.56 CRORE WH ICH INCLUDES INVESTMENTS IN SUBSIDIARY AND ASSOCIATES COMPANIES AMOUNTING TO RS. 55.04 CRORE ON WHICH NO DIVIDEND INCOME HAS BEE N RECEIVED BY THE APPELLANT. IT WAS ALSO NOTED THAT AS ON 31.03.2014, THE APPELLANT WAS HAVING INTEREST FREE FUNDS OF RS. 641.27 CRORE CONS ISTING OF SHARE CAPITAL, RESERVE & SURPLUS AND FURTHER INVESTMENT I N THE MUTUAL FUNDS WAS TO THE TUNE OF RS. 0.20 CRORE. THESE FACTS CLEA RLY REVEAL THAT INTEREST FREE OWN FUNDS OF THE APPELLANT WERE SUFFI CIENT TO MEET THE INVESTMENTS, THE INCOME FROM WHICH DOES NOT FORM PA RT OF THE TOTAL INCOME OF THE ASSESSEE COMPANY. 23. THE LD. CIT(A) ALSO REFERRED TO THE DECISION OF BOMBAY HIGH COURT IN CASE OF CIT VS. SHARADA ERECTORS (P.) LTD. [2016 ] 76 TAXMANN.COM 107 (BOMBAY), GUJARAT HIGH COURT IN CASE OF PR. CIT VS. SINTEX ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 18 INDUSTRIES LTD. [2017] 82 TAXMANN.COM 171 (GUJARAT) AND CIT VS. MAX INDIA LTD [2017] 80 TAXMANN.COM 98 (PUNJAB & HARYAN A) AND HELD THAT: IT IS EVIDENT FROM THE ABOVE JUDICIAL PRONOUNCEMEN TS THAT IN A CASE WHERE THE ASSESSEE WAS HAVING ITS OWN INTEREST FREE FUNDS (I.E. SHARE CAPITAL AND RESERVE AND SURPLUS) AND IN TEREST BEARING BORROWED FUNDS AND IT HAS MADE INVESTMENTS, THE INC OME FROM WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE, THEN IT WOULD BE PRESUMED THAT ITS OWN INTEREST FRE E FUNDS WERE USED FOR MAKING SUCH INVESTMENT UNLESS THE AO ESTAB LISH A NEXUS BETWEEN THE BORROWED FUNDS AND SUCH INVESTMENT. IT HAS ALREADY BEEN OBSERVED EARLIER THAN IN THE INSTANT CASE UNDE R CONSIDERATION, THE APPELLANT WAS HAVING ITS OWN INT EREST ITS OWN INTEREST FREE FUNDS SUFFICIENT TO MEET THE INVESTME NTS, THE INCOME FROM WHICH DOES NOT FORM PART OF ITS TOTAL INCOME A ND THUS, IT COULD BE VERY WELL PRESUMED THAT THE SAID INVESTMEN T WAS MADE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE APPEL LANT AS THERE IS NO EVIDENCE ON RECORD WHICH MAY ESTABLISH ANY NEXUS BETWEEN THE BORROWED FUNDS AND SUCH INVESTMENTS. 24. THE LD CIT(A) FURTHER HELD THAT THE APPELLANT H AS ITSELF DISALLOWED A SUM OF RS. 49,095/- U/S 14A OF THE ACT AND THE AO HAS DISALLOWED THE EXPENSES U/S 14A OF THE ACT R.W. RULE 8D WITHOUT EL UCIDATION AND EXPLAINING THAT THE ABOVE EXPENDITURE DISALLOWED BY THE APPELLANT ITSELF WAS NOT CORRECT. IT IS TO BE NOTED THAT FOR ATTRACT ING THE PROVISIONS OF SECTION 14A OF THE ACT, THERE SHOULD BE PROXIMATE C AUSE FOR DISALLOWANCE WHICH HAS RELATIONSHIP WITH THE TAX EX EMPT INCOME AS HELD BY THE HON'BLE SUPREME COURT IN CASE OF CIT VS. WAL FORT SHARE AND ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 19 STOCK BROKERS P. LTD. (2010) 326 ITR 1). IT MAY BE MENTIONED THAT IN THE CASE OF CIT VS. TAIKISHA ENGINEERING INDIA LTD. , (2014) 90 CCH 0344 (DEL.)/(2015) 370 ITR 0338 (DEL.) IT WAS HELD BY TH E HONBLE DELHI HIGH COURT THAT: 20. HOWEVER, IN THE PRESENT CASE WE NEED NOT REFER TO SUB RULE (2) TO RULE 8D OF THE RULES AS CONDITIONS MENTIONED IN SUB SECTION (2) TO SECTION 14A OF THE ACT READ WITH SUB RULE (1) TO RULE 8D OF THE RULES WERE NOT SATISFIED AND THE ASS ESSING OFFICER ERRED IN INVOKING SUB RULE (2), WITHOUT ELUCIDATING AND EXPLAINING WHY THE VOLUNTARY DISALLOWANCE MADE BY THE ASSESSEE WAS UNREASONABLE AND UNSATISFACTORY. WE DO NOT FIND ANY SUCH SATISFACTION RECORDED IN THE PRESENT CASE BY THE AS SESSING OFFICER, BEFORE HE INVOKED SUB RULE (2) TO RULE 8D OF THE RU LES AND MADE THE RE-COMPUTATION. THEREFORE, THE RESPONDENT ASSES SEE WOULD SUCCEED AND THE APPEAL SHOULD BE DISMISSED.' 25. THE LD CIT(A) FURTHER REFERRED TO THE DECISION OF HONBLE SUPREME COURT IN CASE OF MAXOPP INVESTMENT LTD. VS CIT (CIVIL APPEAL NOS. 104- 109 OF 2015 DATED 12.02.2018) , WHEREIN IT WAS HELD AS UNDER: '41) HAVING REGARD TO THE LANGUAGE OF SECTION 14A(2 ) OF THE ACT, READ WITH RULE 8D OF THE RULES, WE ALSO MAKE IT CLE AR THAT BEFORE APPLYING THE THEORY OF APPORTIONMENT, THE AO NEEDS TO RECORD SATISFACTION THAT HAVING REGARD TO THE KIND OF THE ASSESSEE, SUO MOTO DISALLOWANCE UNDER SECTION 14A WAS NOT CORRECT . IT WILL BE IN THOSE CASES WHERE THE ASSESSEE IN HIS RETURN HAS HIMSELF APPORTIONED BUT THE AO WAS NOT ACCEPTING THE SAID ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 20 APPORTIONMENT. IN THAT EVENTUALITY, IT WILL HAVE TO RECORD ITS SATISFACTION TO THIS EFFECT. FURTHER, WHILE RECORDI NG SUCH A SATISFACTION, NATURE OF LOAN TAKEN BY THE ASSESSEE FOR PURCHASING THE SHARES/MAKING THE INVESTMENT IN SHARES IS TO BE EXAMINED BY THE AO. (VIII) IT MAY BE MENTIONED THAT IN THE CASE OF PCIT VS. IL & FS ENERGY DEVELOPMENT COMPANY LTD. [2017] 84 TAXMANN.C OM 186 (DELHI), VIDE ITS ORDER DATED 16.08.2017, IT WAS HE LD BY THE HONBLE HIGH COURT OF DELHI THAT: 23.FURTHER, THE MERE FACT THAT IN THE AUDIT REP ORT FOR THE AY IN QUESTION, THE AUDITORS MAY HAVE SUGGESTED THAT T HERE SHOULD BE A DISALLOWANCE CANNOT BE DETERMINATIVE OF THE LE GAL POSITION. THAT WOULD NOT PRECLUDE THE ASSESSEE FROM TAKING A STAND THAT NO DISALLOWANCE UNDER SECTION 14A OF THE ACT WAS CALLE D FOR IN THE AY IN QUESTION BECAUSE NO EXEMPT INCOME WAS EARNED. 24. FOR ALL THE AFOREMENTIONED REASONS, THIS COURT IS OF THE VIEW THAT THE CBDT CIRCULAR DATED 11TH MAY 2014 CAN NOT OVERRIDE THE EXPRESSED PROVISIONS OF SECTION 14A READ WITH R ULE 8D. 26. THE LD CIT(A) FURTHER REFERRED TO THE DECISIONS OF THE COORDINATE BENCHES IN ASSESSEES OWN CASE WHERE, ON THE ISSUE OF DISALLOWANCE UNDER SECTION 14A, THE APPEALS OF THE DEPARTMENT FO R AY 2011-12 TO 2013-14 WERE DISMISSED AND DECIDED IN FAVOUR OF THE ASSESSEE COMPANY. 27. WE HAVE HEARD THE RIVAL CONTENTIONS AND PURUSED THE MATERIAL AVAILABLE ON RECORD. UNDISPUTEDLY, IN THE EARLIER Y EARS, THE MATTER HAS ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 21 BEEN DECIDED IN FAVOUR OF THE ASSESSEE COMPANY AND THUS, WHAT HAS TO BE SEEN IS THE FRESH INVESTMENTS WHICH HAVE BEEN MA DE DURING THE YEAR. ON PERUSAL OF FINANCIAL STATEMENTS, WE FIND THAT THE FRESH INVESTMENTS HAVE BEEN MADE IN SUBSIDIARY COMPANY M/ S AU HOUSING FINANCE LIMITED AND M POWER MICRO FINANCE PRIVATE LIMITED BESIDES INVESTMENTS UNDER PTC. THE INVESTMENTS IN SUBSIDIA RY COMPANIES HAVE BEEN MADE OUT OF FRESH CAPITAL RAISED DURING THE YE AR AND FURTHER, THERE HAS BEEN NO DIVIDEND INCOME IN RESPECT OF INVESTMEN T IN SUBSIDIARY DURING THE YEAR AND HENCE, THE SAID INVESTMENT WILL NOT FORM PART OF DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D. IN RESPECT OF FRESH INVESTMENTS UNDER PTC AMOUNTING TO RS 17.07 CRORES DURING THE YEAR, THE ASSESSEE COMPANY HAS SUFFICIENT INTEREST FREE F UNDS AND IT HAS BEEN STATED THAT TAX HAS ALREADY BEEN PAID BY THE ASSESS EE COMPANY. IN LIGHT OF THE SAME, FOLLOWING THE ORDER OF THE COORD INATE BENCHES IN THE EARLIER YEAR, THE AO WAS NOT JUSTIFIED IN MAKING DI SALLOWANCE U/S 14A OF THE ACT R.W. RULE 8D AMOUNTING TO RS. 72,22,530/- A ND THUS THE SAME IS HEREBY DELETED. HENCE, THIS GROUND OF APPEAL IS HER EBY DISMISSED. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 07/01/2019. SD/- SD/- FOT; IKY JKO FOE FLAG ;KNO (VIJAY PAL RAO) (VIKRAM SINGH YADAV) U;KF;D LNL;@ JUDICIAL MEMBER YS[KK LNL;@ ACCOUNTANT MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 07/01/2019. ITA NO. 760/JP/2018 ACIT VS. M/S A U FINANCIERS (INDIA) LTD. 22 *SANTOSH VKNS'K DH IZFRFYFI VXZSFKR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT- ACIT, CIRCLE-2, JAIPUR. 2. IZR;FKHZ@ THE RESPONDENT- M/S A U FINANCIERS (INDIA) LTD., JA IPUR. 3. VK;DJ VK;QDR@ CIT 4. VK;DJ VK;QDR@ CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR. 6. XKMZ QKBZY@ GUARD FILE { ITA NO. 760/JP/2018} VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASST. REGISTRAR