CHHAGANLAL KHIMJI & CO. P.LTD, MUMBAI V. AST CIT OSD 10(1), MUMBAI

ITA 7629/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 101133 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-09-2015
• Appeal Filed By: Assessee
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 30-12-2013
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Business expenditure; Earning of tax free income; Question of law; Wholly owned subsidiary; Fair market value; Difference of opinion; Notional interest; Revenue expenditure
• Section: 14A; 56

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C , BENCH MUMBAI . . , , BEFORE SHRI R.C.SHARMA , A M & SHRI PAWAN SINGH , J M ./ ITA NO . 7629 / MUM/20 1 3 ( / ASSESSMENT YEAR : 20 10 - 20 11 ) M/S CHHAGANLAL KHIMJI & CO. PVT. LTD., 702, MARATHON MAX, MULUND - GOREGAON LINK ROAD, MULUND (W), MUMBAI - 400080 VS. ACIT, OSD - 10(1), MUMBAI ./ ./ PAN/GIR NO. : A A AC C 1874 H ( / APPELLANT ) .. ( / RESPONDENT ) AND ./ ITA NO .76 74 / MUM/20 13 ( / ASSESSMENT YEAR :2010 - 2011 ) ACIT, OSD - 10(1), MUMBAI VS. M/S CHHAGANLAL KHIMJI & CO. PVT. LTD., 702, MARATHON MAX, MULUND - GOREGAON LINK ROAD, MULUND (W), MUMBAI - 400080 ./ ./ PAN/GIR NO. : A AACC 1874 H ( / APPELLANT ) .. ( / RESPONDENT ) /REVENUE BY : SHRI NIMESH YADAV /ASSESSEE BY : SHRI J.P.BAIRAGRA / DATE OF HEARING : 27 /0 8 / 2015 / DATE OF PRONOUNCEMENT 23/09 2015 / O R D E R PER R.C.SHARMA (A.M) : TH ESE ARE THE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE AGAINST THE ORDER OF CIT(A) , MUMBAI , DATED 4 - 1 0 - 2013 FOR T HE ASSESSMENT YEAR 20 10 - 11 , IN THE MATTER OF ORDER PASSED U/S.143(3) OF THE I.T.ACT . ITA NO. 7629&7674 /1 3 2 2. THE ASSESSEE HAS TAKEN FOLLOWING GROUNDS IN ITS APPEAL : - BEING AGGRIEVED BY THE ORDER OF THE COMMISSIONER OF INCOME TAX APPEALS - 22, MUMBA I , THIS APPEAL PETITION IS BEING SUBMITTED ON THE FOLLOWING GROUNDS, WHICH IT IS PRAYED MAY BE CONSIDERED WITHOUT PREJUDICE TO ONE ANOTHER. 1. THE LEARNED COMMISSIONER OF INCOME TAX APPEALS - 22, ERRED IN UPHOLDING THE CONTENTION OF THE ASSESSING OFFICER THAT ENTIRE INVESTMENT OF RS. 110 CRORES IN REDEEMABLE CUMULATIVE PREFERENCE SHARES OF PARMEKA PVT LTD IS MADE TOWARDS SHARE CAPITAL AND HENCE THE ENTIRE INTEREST PAYMENT OF RS. 1,46,49,245 / - NEEDS TO BE INCLUDED WHILE CALCULATING THE DISALLOWANCE U/S. 14A OF THE INCOME TAX ACT, 19 61 READ WITH RULE 8D OF THE INCOME TAX RULES, 1962. WHEN: THE FINANCE ARRANGEMENT FOR INVESTMENT IN JOINT VENTURE WITH M/ S. PARMEKA PVT. LTD FOR DEVELOPMENT OF COMMERCIAL COMPLEX KNOWN AS MARATHONE FUTURE X SITUATED IN LOWER PAREL, MUMBAI WAS AS UNDER : 81,500 11% REDEEMABLE CUMULATIVE PREFERENCE SHARES OF RS. 100/ - EACH AT A PREMIUM OF RS.1 3,400/ - PER SHARE A GGREGATING TO RS. 110,02,50,000 / - IMPLYING THAT AMOUNT PAYABLE BY WAY OF FACE VALUE OF PREFERENCE SHARES WAS RS.81,50,000/ - AND AMOUNT PAYAB LE BY WAY OF PREMIUM WAS RS. 109,21,00,000. IN RETURN, YOUR APPELLANT IS ENTITLED TO : DIVIDEND BY WAY OF 11% ON FACE VALUE OF PREFERENCE SHARES OFRS. 81,50,000/ - AN AMOUNT EQUAL TO 15% PER ANNUM, INTERNAL RATE OF RETURN ON PREMIUM AMOUNT OF RS. 1, 09,21,00,0001 - OTHER WISE THAN BY WAY OF DIVIDEND. THE DIVIDEND IS ALWAYS PAYABLE ON FACE VALUE OF THE SHARES (IGNORING THE SHARE PREMIUM) AND ACCORDINGLY, THE DIVIDED AT 11% ON PREFERENCE SHARES OF RS. 81,50,000/- WAS EXEMPT INCOME U/S. 10 (34) OF THE INCOME TAX ACT, 1964 BUT INCOME RECEIVABLE @ 15% P. A. BY WAY OF INTERNAL RATE OF RETURN ON PREMIUM AMOUNT OF RS.109,21,00,000/ - IS A TAXABLE INCOME. THIS IS IN TERMS OF THE PROVISIONS OF RULE 8D (2) (II) OF THE IT RULES ACCORDINGLY, OUT OF THE FOLLOW ING INTEREST PAID BY YOUR APPELLANT ONLY INTEREST OF RS.1,08,518/ - SHOULD HAVE BEEN CONSIDERED AT ALL AS ITA NO. 7629&7674 /1 3 3 THAT INCLUDIBLE WHILE CALCULATING THE DISALLOWANCE U/S. 14A OF THE INCOME TAX ACT, 1961 SL.NO. NAME OF THE PARTY INTEREST 1 MARATHON NEXTGEN REALTY LTD. - TOWARDS INVESTMENT IN 11% CRPS OF FACE VALUE OF RS.100/ - EACH (81,,500 NOS.) TOTALING TO RS.81,50,000/ - 1,08,518/ - MARATHON NEXTGEN REALTY LTD. - TOWARDS INVESTMENT IN 11% CRPS OF FACE VALUE OF RS.100/ - EACH (81,,500 NOS.) TOTALING TO RS.81,50,000/ - 1 ,45,40,727/ - TOTAL RS. 1,46,49,245/ - 2. THE LEARNED CIT APPEAL ERRED IN UPHOLDING THE WORKING ADOPTED BY THE ASSESSING OFFICER BEING RS.17,54,95,547/ - FOR MAKING DISALLOWANCE U/S.14A OF THE INCOME TAX ACT, 1961. WHEN: THE TOTAL INTEREST PAID BY Y OUR APPELLANT DURING THE FINANCIAL YEAR 2010 - 11 WAS RS.2,31,96,641 / - OF WHICH A SUM OF RS.1,46,49,245 / - WAS ALREADY DISALLOWED BY THE ASSESSING OFFICER WHIL E CALCULATING DISALLOWANCE U/S. 14A R.W.R 8D IN ITEM NO. 1 OF THE FORMULA. HOWEVER, IN ITEM NO. 2 OF THE TABLE IN THE FORMULA GIVEN IN RULE 8D THE ASSESSING OFFICER CONSIDERED A SUM OF RS. 17,54,95,547/ - AS 'AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN (I) INCURRED DURING THE PREVIOUS YEAR'. HERE, THE ASSESSIN G OFFICER HAS MADE A FACTUAL ERROR. HAVING ACCEPTED THE FACT THAT TOTAL INTEREST PAID AND DEBITED TO PROFIT AND LOSS ACCOUNT FOR THE YEAR TOTALING TO RS. 2,31,96,641 / - AND HAVING DISALLOWED A SUM OF RS.1,46,49,245 / - UNDER ITEM N O.1, HE COULD HAVE DISAL LOWED ONLY THE BALANCE SUM OF RS.85,47,396 / - . HOWEVER, INADVERTENTLY HE HAS DISALLOWED A SUM OF RS. 17,54,95,547/- INSTEAD OF RS. 85,47,396/ - . THIS IS A FACTUAL ERROR ON PART OF THE ASSESSING OFFICER. THE SUM OF RS.17,54,95,547/- CONSIDERED BY HIM IN ITEM NO. 2 IS NOT INTEREST BUT T H E DIFFERENCE BETWEEN OPENING STOCK & CLOSING STOCK OF WORK IN PROGRESS WHICH CANNOT BE CONSIDERED WHILE COMPUT ING DISALLOWANCE UNDER IN RULE 8 D. BECAUSE OF THIS FACTUAL MISTAKE, THE TOTAL DISALLOWANCE ON ACCOUNT OF INT EREST & OTHER EXPENSES COMES TO RS. 3,14,02,200 / - , WHEN ACTUALLY, THE TOTAL INTEREST PAID AMOUNTED TO RS.2,31,96,641/ - . THE REVENUE HAS TAKEN FOLLOWING GROUNDS IN ITS APPEAL : - ITA NO. 7629&7674 /1 3 4 1. (I) 'ON THE FACTS AND IN THE CIRCUMSTANCES' OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE AO TO TREAT INTEREST INCOME AS BUSINESS INCOME' INSTEAD OF INCOME FROM OTHER SOURCES AS HELD BY THE AO.' 1 (II) 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN NOT APPRECIATING THE FAC T THAT THE ASSESSEE WAS ONLY INVOLVED IN THE CONSTRUCTION BUSINESS AND NOT IN THE FINANCING AND LENDING ACTIVITIES AND HENCE INTEREST INCOME WAS TO BE TAXED UNDER THE HEAD' INCOME FROM OTHER SOURCES' AS HELD BY HON'BLE BOMBAY HIGH COURT IN THE CASE REPORTE D IN 274 ITR 21'. 2 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE AO TO ALLOW INTEREST EXPENDITURE OF RS. 2,31,96,641/ - EITHER AS BUSINESS EXP ENDITURE U/ S 36( L)(III) OR U/ S 57(III) OF I . T. ACT AND NOT TO CARRY IT TO THE WIP WITHOUT APPRECIATING THAT: - (A) INTEREST PAID ON BORROWED FUNDS FOR INVESTMENT IN SHARES OF PPL HAS NO NEXUS WITH INTEREST INCOME EARNED DURING THE PREVIOUS YEAR AND ON THE CONTRARY, THERE IS A DIRECT NEXUS BETWEEN FUNDS BORRO WED AND FUNDS INVESTED AS THE FUNDS BORROWED FROM MNRL SPECIFICALLY TO INVEST IN PREFERENCE SHARES OF PPL, AND (B) THE ASSESSEE COMPANY HAS NEITHER BORROWED NOR LENT MONEY TO PPL AND THE FUNDS WERE TRANSFERRED DIRECTLY FROM BANK ACCOUNT OF MRPL TO PPL. B ORROWING AS WELL AS LENDING OF RS. 110 CRORES IS PASSED THROUGH JOURNAL ENTRY ONLY AND NOT THROUGH BANK TRANSACTION. 3 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE A O NOT CARRY INTEREST EXPENDITURE OF RS.2,31,96,641/ - TO THE WIP WITHOUT APPRECIATING THE FACT THAT IN THE INSTANT CASE INTEREST EXPENSE FOR CONSTRUCTION ACTIVITIES SHALL FORM PART OF COST OF CLOSING STOCK AND IS NOT FOR EARNING OF INTEREST INCOME.' 4 'ON THE FACTS AND IN THE CIRCUMSTANC ES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE AO NOT TO REDUCE THE DISALLOWANCE OF RS. 3,27,70,258/ - U/S 14A FROM THE WIP WHEREAS ONLY COST RELATED TO OPERATION AND CREATION OF WIP IS TRANSFERRED TO WIP.' 5 'ON THE FACTS AND IN THE CIRC UMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT ADMINISTRATIVE AND SELLING EXPENSES OF RS. 58,55,328/ - NEEDS TO BE DEBITED TO THE P&L ACCOUNT AND NOT TO THE CLOSING STOCK OF WIP WITHOUT APPRECIATING THE FACTS THAT ASSESSEE HAS BEEN C ONSISTENTLY ADOPTING THE METHOD FOR CONSIDERING SUCH EXPENSES AS EXPENSES FORMING PART OF CLOSING STOCK IN EARLIER YEARS AND ALSO IN ABSENCE OF ANY INCOME FROM BUSINESS ACTIVITY, ALL RELATED EXPENSES SHOULD BE ALLOWED IN THE YEAR OF ACCRUAL OF INCOME.' ITA NO. 7629&7674 /1 3 5 3 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE IS PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF CONSTRUCTION OF COMMERCIAL & RESIDENTIAL COMPLEXES AND INVESTMENTS. THE ASSESSEE COMPANY IS INTER ALIA AUTHORI ZED TO LEND AND ADVANCE MONEY AS PER CLAUSE 42 OF ITS OBJECT CLAUSE OF ITS MEMORANDUM AND ARTICLE OF ASSOCIATION. THE COMPANY IS A GROUP CONCERN OF MARATHON GROUP WHICH CONSISTS OF VARIOUS COMPANIES. 4 . DURING THE COURSE OF SCRUTINY ASSESSMENT THE AO TREAT ED THE INTEREST INCOME EARNED BY THE ASSESSEE AS INCOME FROM OTHER SOURCES. THE AO ALSO DIRECTED TO TREAT THE INTEREST EXPENDITURE AS DIRECT COST AND FOR TAKING THE SAME TO CLOSING WORK - IN - PROGRESS. THE AO ALSO DISALLOWED INTEREST PAID ON BORROWINGS AGAINS T THE INTEREST INCOME. BY THE IMPUGNED ORDER THE CIT(A) ALLOWED ALL THE ABOVE THREE GROUNDS OF THE ASSESSEE IN ITS FAVOUR. HOWEVER, THE CIT(A) CONFIRMED AOS ACTION OF DISALLOWANCE U/S.14A. AGAINST THE ORDER OF CIT(A) BOTH ASSESSEE AND REVENUE ARE IN APPEA L BEFORE US. 5 . RIVAL CONTENTIONS HAVE BEEN CONSIDERED AND RECORD PERUSED. FROM THE RECORD WE FOUND THAT T HE ASSESSEE IS ENGAGED IN THE BUSINESS OF REAL ESTATE AND FINANCING. FOLLOWING ARE THE GROUP COMPANIES WHOSE MAIN OBJECT IS DEVELOPMENT OF REAL ESTATE . I. MARATHON REALTY PVT. LTD. (MRPL) IS THE FLAGSHIP OF THE MARATHON GROUP. II. CHHAGANLAL KHIMJI & CO PVT. LTD. (CKCL) IS A SUBSIDIARY OF MRPL. III. PARMEKA PVT. LTD . (PPL) IS A 100% SUBSIDIARY OF MRPL. IV MARATHON NEXTGEN REALTY LTD. (MNRL) IS A LI STED COMPANY. THE PPL IS ENGAGED IN THE CONSTRUCTION OF A STATE OF THE ART COMMERCIAL COMPLEX ALONG WITH MRPL AT LOWER PAREL KNOWN AS' MARATHON F U TURE X . ITA NO. 7629&7674 /1 3 6 PPL NEEDED TO AUGMENT ITS CAPITAL BASE THEREFORE, DECIDED TO ISSUE PREFERENCE SHARES TO A GROUP CONCE RN WHICH WOULD SHARE - IN ITS PROFITABILITY. MNRL HAD THE REQUIRED FUNDS AND HAD OBTAINED PERMISSION FROM ITS SHAREHOLDERS TO INVEST ITS SURPLUS FUNDS IN THE FORM OF INTER CORPORATE DEPOSITS WITH CKCL WITH A COUPON RATE NOT BELOW THE REPO RATE. IT HAD DURING THE CURRENT ASSESSMENT YEAR ADVANCED RS.120 CRORES TO CKCL. CKCL IN TURN SUBSCRIBED TO. THE PREFERENCE SHARES OF PPL THE BROAD CONTOURS OF WHICH ARE AS FOLLOWS: I. 81,500 REDEEMA BLE CUM. PREF. SHARES OF RS.100/ - EACH 81,50,000/ - II. PREMIUM OF RS.13,400 ON 8150 0 R CPS 1,09,21,00,000 / - III. AGGREGATING TO 1,10,02,50,000 / - THE CKCL HAD ENTERED INTO A JOINT VENTURE IN THE FORM OF A MEMORANDUM OF UNDERSTATING WITH PPL WHEREIN CKCL WOULD RECEIVE A TAX FREE DIVIDEND OF 11 % ON THE FACE VAL UE OF THE PREFERENCE SHARES' AND A RETURN OF 15% O N THE PREMIUM PAID. THIS ARRANGEMENT HAS BEEN AUTHORIZED BY THE RESPECTIVE BOARD OF DIRECTORS OF THE CONCERNED COMPANIES. 6 . WHILE FRAMING THE ASSESSMENT ORDER, THE ASSESSING OFFICER CAME TO A CONCLUSION TH AT INTEREST INCOME EARNED FROM INTEREST FREE ADVANCES FROM CUSTOMERS AND BORROWED FUNDS INVESTED WH ICH RESULTED IN1NTEREST'INCOME MUST BE ASSESSED U/S. 56 OF THE I N COME TAX ACT, 1961 AS INCOME FROM OTHER SOURCES AND ACCORDINGLY INTEREST RECEIVED BY THE ASS ESSEE TO THE TUNE OF RS. 3,65,62,742/ - WAS ASSESSED AS INCOME FROM OTHER SOURCES AS AGAINST PROFITS AND GAINS OF BUSINESS AS RETURNED BY THE ASSESSEE. WHILE DOING SO, THE AO PLACED RELIANCE ON THE JUDGMENT OF HONBLE SUPREME ITA NO. 7629&7674 /1 3 7 COURT IN THE CASE OF TUTICORIN A LKALI CHEMICALS & FERTILIZERS LTD. V/S. COMMISSIONER OF INCOME TAX, 227 ITR 172 . 7 . BY THE IMPUGNED ORDER THE CIT(A) DECIDED IN FAVOUR OF THE ASSESSEE AND HELD THAT INTEREST INCOME WAS TAXABLE UNDER THE HEAD OF BUSINESS INCOME AFTER OBSERVING AS UNDER : - 2. 3 I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE APPELLANT AND THE IMPUGNED ASSESSMENT ORDER. THE BACKGROUND MENTIONED ABOVE IN PARA 2.1 CLEARLY REVEALS THAT THE APPELLANT COMPANY IS INTO THE REAL ESTATE BUSINESS, DEVELOPING, SELLING RESIDENTIAL ACCOM MODATION AND COMMERCIAL SPACE. PRESENTLY, THE APPELLANT IS ENGAGED IN DEVELOPING A PROPERTY AT MULUND. AS PER THE SUBMISSION MADE, THE STOCK - IN - TRADE AS ON 31.03.2009 AND 31.03.2010 WAS IN THE ORDER OF RS.75.57 CROES AND RS.104.49 CRORES RESPECTIVELY AND T HERE WAS AN INCREASE OF RS.28.91 CRORES TO THE STOCK - IN - TRADE DURING THIS YEAR WHICH INCLUDE THE COST OF BORROWING. OUT OF RS.11.63 CRORES BORROWING COST ( I. E: BASICALLY INTEREST PAID ON THE A SUM OF RS.1 0,89,78,43/ - WAS APPORTIONED AND IT WAS TAKEN TO STO CK - IN - TRADE BY THE APPELLANT. 2.4 DURING THE YEAR THE APPELLANT HAD BORROWED RS.110.02 CRORES FROM M/S MARATHON NEXTGEN REALTY LTD.(MNRPL}. THE BORROWED FUNDS WERE IN TURN INVESTED WITH M/S.PARMEKA PVT. LTD. (PPL) A JOINT VENTURE COMPANY IN WHICH APPELLAN T IS ONE OF THE JOINT VENTURE PARTNER. CKCL WOULD RECEIVE A TAX FREE DIVIDEND OF 1,1 % ON THE FACE VALUE OF THE PREFERENCE SHARES AND A RETURN OF 15% ON THE PREMIUM PAID. ON THE BORROWAL MADE FOR THE INVESTMENT IN PREFERENTIAL SHARES RS.81.50 LAKHS AND ON THE BA1ANCE PREMIUM RS.109.21 CRORES APPELLANT NEEDS TO PAY INTEREST @11 % TO MNRPL. THE JOINT VENTURE COMPANY IS CONSTRUCTING A COMMERCIAL COMPLEX BY NAME MARATHONE FUTURE X SITUATED AT LOWER PAREL, MUMBAI. 2.5 THE BREAK - UP OF INTEREST RECEIVED AVAILABL E IN THE SUBMISSION IS REPRODUCED HEREUNDER FOR THE SAKE OF CONVENIENCE. SL. NO. NAME OF THE PARTY OUTSTANDING AS ON 31 ST MARCH 2010 INTEREST EARNED DURING THE FINANCIAL YEAR 2009 - 10 1 CHETAN R SHAH 0 38,86,010 2 SONAL M SHAH (603814) 91,15,121 3 SHAIL AJA C SHAH 0 75,12,540 4 MATRIX ENCLAVES PROJECTS DEVELOPMENT PVT. LTD. 6,94,10,379 32,33,754 5 MATRIX WATER MANAGEMENT PVT. LTD. 7,49,03,500 33,92,778 6 MARATHON REALTY PVT. LTD. (10,00,000) 86,59,334 7 PARMEKA PVT. LTD. 25,00,00,000 0 TOTAL RS. 3 9,43,13,879 3,57,99,537 ITA NO. 7629&7674 /1 3 8 2.6 IT IS THE CLAIM OF THE APPELLANT THAT THE INVESTMENT AND LENDING ACTIVITY WAS A SEPARATE STREAM OF BUSINESS APART FROM THE BUSINESS ACTIVITY IN REAL ESTATE. IT WAS ALSO POINTED OUT THAT IN THE MEMORANDUM OF ASSOCIATION (MOA), THERE IS A SPECIFIC CLAUSE WHICH AUTHORIZES THE APPELLANT TO CARRY ON THE FINANCE/MONEY LENDING ACTIVITY. COPY OF THE MOA WAS FILED BEFORE ME IN SUPPORT OF THIS. PERUSAL OF CLAUSE 55 REVEALS THAT THE APPELLANT IS PERMITTED TO CARRY ON FINANCE MONEY LENDING AS ONE OF ITS OBJECTIVE. THE CONTENT OF THIS CLAUSE IS REPRODUCED HERE UNDER: (55) TO CARRY O N BUSINESS AS FINANCIERS, CONCESSIONARIES AND MERCHANTS AND - TO UNDERTAKE AND CARRY OUT AND EXECUTE ALL KINDS OF FINANCIAL, COMMERCIAL AND OTHER OPERATIONS AND TO C A RRY OUT ANY OTHER, BUS INESS ( EXCEPT INSURANCE AND BANKING BUSINESS) WHICH MAY SEEM TO BE CAPABLE OF BEING CONVENIENTLY CARRIED ON IN CONNECTION WITH ANY OF THE AFORESAID OBJECTS OR CALCULATED DIRECTLY OR INDIRECTLY TO ENHANCE THE VALUE OF OR FACILITAT E THE REALIZATION OF OR RENDER PROFITABLE ANY OF THE COMPANYS PROPERTY OR RIGHTS. THUS, WHEN THE OBJECT CLAUSE PERMITS THE APPELLANT TO CARRY ON SPECIFICALLY FINANCE/ M ONEY LENDING ACTIVITY, IT NEEDS TO BE TREATED AS ONE OF THE STREAM OF BUSINESS AND HEN CE I AM CONVINCED THAT THE INTEREST EARNED NEEDS TO BE TREATED AS INCOME FROM BUSINESS AND NOT FROM OTHER SOURCES. 2.7 I FIND THE ADVANCES RECEIVED FROM THE CUSTOMERS, BORROWED FUNDS AND SURPLUS BUSINESS FUNDS ONLY WERE LENT TO THE GROUP CONCERNS WHICH H AVE EARNED THE INTEREST INCOME AND HENCE IT CONSTITUTE THE BUSINESS ACTIVITY OF THE APPELLANT. THE APPELLANT IS IN TO BUSINESS OF REAL ESTATE AND IT REQUIRES FUND FOR MAKING INVESTMENT AND TO CARRY ON THE CONSTRUCTION ACTIVITY. AS MENTIONED ABOVE FUNDS BOR ROWED FROM MNRPL WAS IN TURN INVESTED IN PPL WHICH IS ENGAGED IN CONSTRUCTION OF A COMMERCIAL COMPLEX BY NAME MARATHONE FUTURE X. APPELLANT BEING ONE OF THE JV PARTNER THE BORR OW AL IS UTILIZED ONLY IN THE CONSTRUCTION ACTIVITY AND THERE IS NO ROOM FOR ANY DO UBT. ALTERNAT I VELY IT CAN BE TREATED AS PART OF ACTIVITY IN CONSTRUCTION BUSINESS. THE AO ,DID NOT CONTROVERT THIS CLAIM OF THE APPELLANT . THE TABLE ABOVE SHOWS THAT, THE APPELLANT DID, NOT RECEIVE ANY INTEREST FRO M PPL FOR THE INVESTMENT MADE. MERE NON RECEIPT OF INTEREST INCOME 'DURING THE YEAR CANNOT LEAD TO THE CONCLUSION THAT THE APPELLANT IS NOT INTO FINANCE ACTIV I TY . IN, MY VIEW BOTH CONSTRUCTION AS WELL AS LENDING CONSTITUTE THE BUSINESS ACTIVITY HENCE, THE CLAIM OF THE APPELLANT THAT THE INTERES T INCOME EARNED IS FROM BUSINESS IS IN ORDER. IN VIEW OF THE ABOVE DISCUSSION I AM CONVINCED THAT THE CLAIM OF THE APPELLANT, THAT THE INTEREST EARNED IS BUSINESS INCOME AND ACCORDINGLY THE TREATMENT GIVEN BY THE AO THAT IT IS INTEREST FROM OTHER SOURCES H AS NO MERITS. THIS GROUND OF APPEAL IS ALLOWED . ITA NO. 7629&7674 /1 3 9 8 . WITH REGARD TO DISALLOWANCE OF INTEREST EXPENDITURE AGAINST INTEREST INCOME, THE CIT(A) HELD AS UNDER : - 2.8 THE AO AFTER TREATING THE ENTIRE INCOME AS OTHER SOURCES DID NOT ALLOW THE INTEREST EXPENDITUR E AMOUNTING TO RS. 2,31 ,96,641/ - . THE BREAK - UP OF THE INTEREST PAID AVAILABLE IN THE SUBMISSION IS REPRODUCED HEREUNDER FOR THE SAKE OF CONVENIENCE. SL. NO. NAME OF THE PARTY INTEREST 1 MARATHON NEXTGEN REALTY LTD. - TOWARDS INVESTMENT IN 11% CRPS OF FACE VA LUE OF RS.100/ - EACH (81,500 NOS.) TOTALING TO RS.81,50,000/ - 1,08,518/ - MARATHON NEXTGEN REALTY LTD. - TOWARDS PREMIUM INVESTMENT IN 11% CRPS OF RS.13,400/ - EACH (81,500 NOS.) TOTALING TO RS.1,09,21,00,000/ - 1,45,40,727 MARATHON NEXTGEN REALTY LTD. - TOWA RDS LOANS & WORKING CAPITAL 67,01,248/ - 2 OTHERS - TOWARDS LOANS & WORKING CAPITAL 18,46,148/ - TOTAL INTEREST ON UNSECURED LOANS DEBITED TO P&L ACCOUNT 2,31,96,641/ - 2.9 THE AO FOUND THAT THE NO INTEREST WAS RECEIVED FROM M/S.PPL FOR THE HUGE INVESTMENT MADE AND AT THE SAME TIME INTEREST TO THE TUNE OF RS.1.45 CRORES AND RS.1.08 LAKHS WAS PAID. TO M/S.MNRPL TOWARDS THE BORROWAL. THE A O WAS UNDER THE IMPRESSION THAT THE INVESTMENT MADE IN M/S.PPL HAD NOT GENERATED ANY INTEREST INCOME AND HENCE, THE INTERE ST PAID TO M/S.MNRPL SHOULD NOT BE ALLOWED U/S57(III) 2.10 THE AO WAS ALSO OF THE VIEW THAT THE SURPLUS FUND FROM M/S MNRPL WAS ROUTED THROUGH THE APPELLANT COMPANY TO M/S PPL. M/S PPL IS 100% SUBSIDIARY OF MRPL AND THE APPELLANT COMPANY IS ALSO SUBSIDIAR Y OF MRPL WHICH IS HOLDING 98.99% OF THE SHARES AND HENCE, M/S PPL SHOULD HAVE DIRECTLY BORROWED THE SURPLUS FUNDS FROM M/S MNRPL RATHER THAN THROUGH THE APPELLANT COMPANY. IN SUCH A SITUATION THERE SHALL BE NO INTEREST COST DEBITED IN THE APPELLAN T'S BOOK S AND MNRPL WOULD' HAVE EARNED THE INTEREST DIRECTLY FROM M/S.PPL AND THE COST OF INTEREST WOULD HAVE BOOKED ONLY BY M/S.PPL. 2.11 THE CRUX OF THE FINDING OF THE A O IS THAT INCOME FROM JV WOULD BE ADMITTED IN FUTURE AND HENCE, EXPENSES CANNOT BE ALLOWED IN THE CURRENT YEAR. WHEN NO INCOME IS GENERATED THEN NO EXPENDITURE IS ALLOWABLE EITHER U/S.57 OR U/S.36(1)(III). ALLOWING OF EXPENDITURE SHOULD HAVE NEXUS TO GENERATION OF INCOME. THE A O HAD DISCUSSED ABOUT THE MATCHING CONCEPT AND SINCE NO INCOME WAS OF FERED DURING THE CURRENT YEAR, HE WAS OF THE VIEW THAT NO EXPENDITURE CAN BE ALLOWED. FURTHER ACCORDING TO THE A O , THE INTEREST EXPENDITURE FORMS THE PART OF CONSTRUCTION EXPENDITURE AND HENCE, IT HAS TO BE TAKEN TO ITA NO. 7629&7674 /1 3 10 THE CLOSING STOCK AND IN VIEW OF THIS, A PPELLANT IS NOT ELIGI BLE FOR DEDUCTION U/S.57(III). 2.12 THE ABOVE FINDING OF THE AO CANNOT BE ACCEPTED. THE ENTIRE INTEREST EXPENDITURE NEEDS TO BE ALLOWED U/S.36(1)(III) OF THE I.T.ACT. AS - BUSINESS EXPENDITURE IN VIEW THE CLEAR FINDING GIVEN BY ME IN PA RA 2.6 AND 2.7 THAT .THE APPELLANT IS C ARRYING ON THE CONSTRUCTION ACTIV ITY / MONEY LENDING ACTIVITY. WHEN M/S.PPL IS IN T H E NEED OF FUNDS AND APPELLANT BEING ONE OF THE JV PARTNER, THERE IS LEGALLY NO BAR IN ROUTING SUCH FUNDS THROUGH THE APPELLANT COMPANY, WHEN IT GOES TO PAY THE INTEREST FOR THE BORROWALS M ADE AND AT THE SAME TIME IT IS ALSO GOING TO RECEIVE INTEREST ON THE INVESTMENT MADE. 2.13 ALTERNATIVELY THE INTEREST EXPENDITURE NEEDS TO BE ALLOWED U/S 57 (III) AS IT WAS LAID OUT WHOLLY AND EXCLUSIVE LY FOR THE PURPOSE OF EARNING THE INTEREST INCOME. IN SUPPORT OF IT'S CONTENTION THAT THE INTEREST SHOULD BE AN ALLOWABLE DEDUCTION THE APPELLANT HAD RELIED ON THE DECISION OF HON'BLE SUPREME COURT 11, THE CASE OF RAJENDRA PRASAD MOODY REPORTED IN 115 ITR 519 FOR THE PROPOSITION THAT 'EARNING OF INTEREST INCOME IS NOT NECESSARY IN ORDER TO QUALIFY THE INTEREST EXPENDITURE FOR DEDUCTION'. THE HEAD NOTE AND THE RELEVANT PORTION OF THE FINDING OF THE HON'BLE SUPREME COURT IS AS UNDER - NCOME FROM OTHER SOURC ES - DEDUCTIONS - EXPENDITURE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME - DEDUCTION OF SUCH EXPENDITURE WHETHER CONDITIONAL UPON MAKING OR EARNING INCOME - DIVIDENDS - INTEREST PAID ON MONIES BORROWED FOR INVESTMENT IN SHARES NO DIVIDENDS RECEIVED INTEREST WHETHER DEDUCTIBLE - INCOME - TAX ACT,1961, SS.37(1), 57(III) . THE PLAIN NATURAL CONSTRUCTION OF THE LANGUAGE OF SECTION 57(III) OF THE I.T. ACT, 1961, IRRESISTIBLY LEADS TO THE CONCLUSION THAT TO BRING A CASE WITHI N THAT SECTION IT IS NOT NECESSARY THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE. WHAT SECTION 57(III) REQUIRES IS THAT THE EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNIN G INCOME. THE SECTION DOES NOT REQUIRE THAT THIS PURPOSE MUST BE FULFILLED IN ORDER TO QUALIFY THE EXPENDITURE FOR DEDUCTION IT DOES NOT SAY THAT THE EXPENDITURE SHALL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED. WHERE THE ASS ESSEE BORROWED MONIES FOR THE P URPOSE OF MAKING INVESTMENT IN CERTAIN SHARES AND PAID INTEREST THEREON DURING THE ACCOUNTING PERIOD RELEVANT TO THE A SSESSMENT YE A R BUT DID NOT RECEIVE ANY DIVIDEND ON THE SHARES PURCHASED WITH THOSE MONIES: HELD, ACCORDINGLY, THAT THE INTERES T ON MONIES BORROWED FOR INVESTMENT IN SHARES WHICH HAD NOT YIELDED ANY DIVIDEND WAS ADMISSIBLE AS A DEDUCTION UNDER SECTION 57(III) OF THE INCOME - TAX ACT, 1961, IN COMPUTING ITS INCOME FROM DIVIDEND UNDER THE HE A D 'INCOME FROM OTHER SOURCES'. ITA NO. 7629&7674 /1 3 11 EASTERN IN VESTMENTS LTD. V. CIT [1951J 20 ITR 1 (SE) AND HUGHES V. BANK OF NEW ZF!ALAND [1938].6 ITR 636 (HL) RELIED ON APPA RAO [1962J 46 ITR 511 (MAD), MOHAMED GHOUSE V. CIT [1963J 49 ITR '127 (MAD), ORMERODS (INDIA) P. F:.TD. V. CIT [1959] 36 ITR 329 (BOM), CHHAI L BEHARI LAL V. CIT [1960J 39 ITR 696 (ALL), CIT V. DR. FIDA HUSSAIN G. ABBASI [1969]71ITR 314 (MP), M.N. RAMASWAMY IYER V. CIT [1969 ] 71 ITR 218 (KER) AND CIT V. GOPAL CH. PATNAIK [1978J 111 ITR 86 (ORISSA) APPROVED. MAHARAJADHIRAJ SIR KAMESHWAR SINGH V . CIT [1957J 32 ITR 377 (PAT) AND MADANLAL SOHANLAL V. CIT [19 63J 47 ITR 1 (CAL) OVERRULED I AM FULLY IN AGREEMENT WITH THIS CONTENTION OF THE APPELLANT AND ACCORDINGLY, THE CONCLUSION DRAWN BY THE AO THAT UNLESS INTEREST INCOME IS EARNED, THE INTEREST P AID CANNOT BE ALLOWED IS NOT ACCEPTED. THE AO HAD PLACE RELIANCE ON THE JUDGMENT OF HON'BLE SUPREME COURT IN CASE OF TUTICORIN ALKALI CHEMICALS & FERTILISERS LTD REPORTED IN 227 ITR 172 WHICH IS NOT APPLICABLE TO THE FACTS OF THIS CASE. HENCE I DIRECT THE AO TO ALLOW THE INTEREST PAID AS DEDUCTION U/S 57(III) OF THE I,T ACT AS AN ALTERNATE REMED Y . 2.14 ACCORDING TO THE AO, M/S.PPL CANNOT CLAIM THE INTEREST EXPENSES AS REVENUE EXPENDITURE SINCE THE PROJECT UNDERTAKEN WAS NOT COMPLETED DURING THE YEAR AND M ORE OVER IT WAS NOT FOR EARNING OF I N TEREST. NO INCOME WAS ALSO OFFERED BY THE APPELLANT FROM THIS PROJECT DURING THE YEAR AND HENCE, THE AO WAS UNDER THE IMPRESSION THAT THE ENTIRE FINANCE COST NEEDS TO GO TO WIP AND SHALL FORM PART OF THE BALANCE SHEET I NSTEAD OF P&L ACCOUNT . 2.15 I HAVE CAREFULLY CONSIDERED THE' 'SUBMISSION OF THE APPELLANT AND THE IMPUGNED ASSESSMENT ORDER. IN VIEW OF MY FINDING THAT THE INTEREST EXPENDI TURE INCURRED R S. 2,31 , 96,641/ - NEED S TO BE ALL O WED EITHER AS BUSINESS EXPENDITURE U/S.36(1)(III) OR U/S.57(III), IT IS NOT CORRECT ON THE PART OF THE AO TO CARRY INTO THE WIP. AS MENTIONED ABOVE O UT OF R S .11.63 CRORES INTEREST PAID ,ON THE LOANS TAKEN A SUM OF RS.10,89,78,431/ - WAS APPORTIONED AND IT WAS TAKEN TO STOCK - IN - TRA DE BY THE APPELLANT. THE APPELLANT'S CONTENTION IS FOUND TO BE ACCEPTABLE AND HENCE THE CONCLUSION DRAWN BY THE AO CANNOT BE ACCEPTED 2.16 IN VIEW OF THE ABOVE DISCUSSION THE APPELLANT GETS RELIEF ON ALL THE THREE GROUNDS AND THESE GROUNDS ARE ALLOWED. 9 . IT IS CLEAR FROM THE FINDINGS RECORDED BY THE CIT(A) THAT THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF CONSTRUCTION AS WELL AS LENDING OF MONEY, BOTH CONSTITUTE ITS MAIN BUSINESS ACTIVITY. BOTH THESE OBJECTS WERE CLEAR FROM THE MEMORANDUM AND ARTICLES OF ASSOCIATION OF ITA NO. 7629&7674 /1 3 12 ASSESSEE COMPANY. FROM THE RECORD WE FOUND THAT THE INVESTMENT AND LENDING ACTIVITY WAS A SEPARATE STREAM OF BUSINESS APART FROM THE BUSINESS ACTIVITY IN REAL ESTATE. AS PER CLAUSE 55 OF MEMORANDUM AND ARTICLES OF ASSOCIATION, ASSESSEE WAS A UTHORIZED TO CARRY BUSINESS OF MONEY LENDING. THE DETAILED FINDING TO THIS EFFECT HAS ALSO BEEN RECORDED BY CIT(A) AS REPRODUCED ABOVE, WHICH HAS NOT BEEN C ONTROVERTED BY LD. DR BY BRINING ANY POSITIVE MATERIAL ON RECORD. ACCORDINGLY, WE DO NOT FIND ANY IN FIRMITY IN THE ORDER OF CIT(A) FOR DIRECTING THE AO TO TREAT THE INTEREST INCOME AS BUSINESS INCOME RATHER THAN INCOME FROM OTHER SOURCES. 10 . WITH REGARD TO DISALLOWANCE OF RS. 3,14,02,300/ - U/S.14A OF IT ACT, THE AO HAD DISCUSSED THE I SSUE IN PARA 5.1 T O 5.3.1 OF THE ASSESSMENT ORDER. THE AO WAS OF THE VIEW THAT ON THE INVESTMENT OF RS .110 CRORES TOWARDS ACQUISITION OF 11 % PREFERENCE SHARES IN M/S.PPL, THE DIVIDEND INCOME EARNED FROM THE SHARES ARE EX EMPT THEREFORE, PROVISIONS OF S EC.14A APPLIES TO THE FACTS OF THE ASSESSEE 'S CASE. FURTHER, THE AO WAS OF THE VIEW THAT THE ASSESSEE HA S USED THE BORROWED FUNDS TOWARDS M AKING INVESTMENT IN THE PREFERENCE SHARES AND THE INTEREST EXPENDITURE ON THE BORROWING NEEDS TO BE DISALLOWED U/S.14A. THE ASSESSEE HAD WO RKED OUT TH E DISALLOWANCE OF RS.1,28,893/ - U/ S 14A WHICH WAS NOT ACCEPTED BY THE AO, AS THE ASSESSEE DID NOT TAKE INTO CONSIDERATION THE INTEREST PAID TOWARDS THE PREMIUM ON PURCHASE OF 11 % PREFERENTIAL SHARES. THE A O HAD FINALLY, ARRIVED AT RS.3, 14,02,30 0/ ON ACCOUNT OF INTEREST DISALLOWANCE AS WELL AS DISALLOWANCE ON ACCOUNT OF TH E ADMINISTRATIVE EXPENSES ETC. ITA NO. 7629&7674 /1 3 13 1 1 . BY THE IMPUGNED ORDER THE CIT(A) CONFIRMED THE DISALLOWANCE MADE U/S.14A AFTER OBSERVING AS UNDER : - 3.3 I HAVE CAREFULLY CONSIDERED THE SUB MISSION OF THE APPELLANT AND THE IMPUGNED ASSESSMENT ORDER. AS DISCUSSED ABOVE IN PARA 2.1 WHILE GIVING THE BACKGROUND TOWARDS INVESTMENT OF RS.110 CRORES INTO THE PREFERENTIAL SHARES OF M/S PPL, THE APPELLANT HAD BIFURCATED THE SAME IT INTO TWO PORTIONS. A SUM OF RS.81.50 LAKHS WAS TOWARDS FACE VALUE OF 81,500 , 11% REDEEMABLE PREFERENCE SHARES AND ANOTHER PORTION WAS TOWARDS PREMIUM OF RS.13,400/ - PER SHARE. AS FAR AS THE INVESTMENT IN FACE VALUES OF SHARES IS CONCERNED, IT EARNS DIVIDEND INCOME AT 11% AS PER THE MOU. ACCORDING TO ME THE ENTIRE PAYMENT OF RS.110 MADE INCLUSIVE OF THE PREMIUM PAID, WAS TOWARDS THE INVESTMENT MADE IN THE PREFERENCE SHARES. PREMIUM PAID IS PART AND PARCEL OF THE INVESTMENT IN SHARES. HENCE, I AM OF THE VIEW THAT THE ENTIRE I NVESTMENT OF RS.110 CRORES IS MADE TOWARDS THE SHARE CAPITAL AND HENCE THE ENTIRE INTEREST PAYMENT RS.1,46,49,245/ - NEEDS TO BE INCLUDED WHILE CALCULATING THE DISALLOWANCE U/S.14A. TO THIS EXTENT, I AM IN AGREEMENT WITH THE AO AND ACCORDINGLY, UPHOLD HIS A CTION. 3.4 THE GRIEVANCE OF THE APPELLANT IN GROUND OF APPEAL NO.5 WAS THAT WHILE COMPUTING THE DISALLOWANCE AS PER IN THE FORMULA IN RULE 8D, INTEREST EXPENDITURE CONSIDERED BY THE AO RS.17,54,95,547 INCLUDES THE INTEREST DISALLOWED RS.2,31,96,641. AC CORDING TO THE APPELLANT SINCE THE INTEREST WAS ALREADY DISALLOWED, IT SHOULD NOT BE INCLUDED IN THE FORMULA FOR COMPUTATION OF DISALLOWANCE U/S.14A. AS I HAVE ALREADY DIRECTED THE AO TO ALLOW THE CLAIM OF INTEREST AS BUSINESS EXPENDITURE OR/DEDUCTION U/S. 57(III), THE WORKING ADOPTED BY THE AO RS.17,54,95,547 FOR MAKING THE DISALLOWANCE IS IN ORDER. 3. 5 STRICTLY GOING BY RULE 8D(2)(II) AND (III), I FIND THE WORKING GIVEN BY THE AO IN PARA 5.3.1 IS IN ORDER AND THERE IS NO NEED TO INTERFERE WITH HIS ACTION. THE APPELLANT FAILS IN THESE GROUNDS AND HENCE IT IS DISMISSED 1 2 . WITH REGARD TO CONSIDERING THE ADMINISTRATIVE AND SELLING EXPENSES AMOUNTING TO RS.58,55,328/ - TOWARDS CLOSING STOCK OF WORK - IN - PROGRESS(WIP) T HE AO HAD DISCUSSED THE ISSUE IN PARA 6.1 O F THE ASSESSMENT ORDER. THE AO FOUND THAT THE ASSESSEE HAD CONSIDERED BOTH THE DI RECT AS WELL AS I NDIRECT COST INCURRED TOWARDS CONSTRUCTION AS A PART OF CLOSING STOCK TILL AY 2009 - 10. HOWEVER, DURING THE ASSESSMENT YEAR ITA NO. 7629&7674 /1 3 14 UNDER CONSIDERATION ONLY DIRECT COS T HAVE BEEN TAKEN LEAVING THE INDIRECT COST AS A PART OF CLOSING WIP . THE AO HAD GIVEN AN OPPORTUNITY TO JUSTIFY THE CHANGE OF METHOD ADOPTED BY THE ASSESSEE . HOWEVER, NO REPLY WAS RECEIVED. SINCE THE ASSESSEE HAD CONSISTENTLY FOLLOWED CONSIDERING BOTH DIR ECT AS WELL AS INDIRECT EXPENSES AND HENCE, THE AO HAD TRANSFERRED RS.58,55,328/ - TO CLOSING STOCK AND DID NOT ALLOW THE SAME AS EXPENSES TO BE DEBITED IN THE P&L ACCOUNT. 1 3 . BY THE IMPUGNED ORDER THE CIT(A) DELETED THE DISALLOWANCE AFTER OBSERVING AS UN DER : - 4.4 HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE APPELLANT AND THE IMPUGNED ASSESSMENT ORDER. AS PER THE SUBMISSION MADE, 'AS - 7 IS NO MORE APPLICABLE TO THE REAL ESTATE TRANSACTIONS AND BUILDERS DOING DEVELOPMENT ACTIVITY FALLS INTO AS - 9 . ACCORD ING TO THE GUIDANCE NOTE ISSUED BY THE INSTITUTE ON ACCOUNTING FOR REAL ESTATE TRANSACTIONS, PARTICULARLY CLAUSE 2.4, THE FOLLOWING COST SHOULD NOT BE INCLUDED UNDER THE CONSTRUCTION COST AND DEVELOPMENT COST. '2.4 THE FOLLOWING COSTS S H OULD NOT BE CONSI DERED PART OF CONSTRUCTION COSTS AND DEVELOPMENT COSTS IF THEY ARE MATERIAL : (A) GENERAL ADMINISTRATION COSTS; (B) SELLING COSTS; (C) RESEARCH AND DEVELOPMENT COSTS; (D) DEPRECIATION OF I DLE PLANT AND EQUIPMENT; (E ) COST OF UNCONSUMED OR UNINSTALLED MATERIAL DELIVERED AT SITE ; AND (F) PAYMENTS MADE TO SUB - CONTRACTORS I N ADVANCE OF WORK PERFORMED: THUS, ACCORDING TO THE DIRECTIONS ISSUED BY THE INSTITUTE, THE ADMINISTRATIVE AND SELLING EXPENDITURE NEEDS TO BE DEBITED TO THE P&L ACCOUNT AND NOT TO TH E CLOSIN G STOCK OF WIP, IN VIEW OF THIS I AM NOT IN AGREEMENT WITH THE FINDING OF THE AO AND ACCORDINGLY THE APPELLANT GETS RELIEF. THIS GROUND OF APPEAL IS ALLOWED. 1 4 . THE DISALLOWANCE MADE U/S.14A BY REDUCING CLOSING STOCK OF WORK IN PROGRESS DECIDED BY THE CIT(A) IN ASSESSEES FAVOUR AFTER OBSERVING AS UNDER : - ITA NO. 7629&7674 /1 3 15 4.1 IN PAGE NO .15 OF THE ASS E SSMENT ORDER, THE AO HAD LEFT A NOTE BELOW THE TABLE CONTAINING THE WORKING OF DISALLOWANCE U/S.14A TO THE EFFECT THAT RS.3,27,70,258/ - IS REDUCED FROM CLOSING WI P OF RS.1 04.49 CRORES TO ARRIVE. AT THE CLOSING WIP AS RS.1 01.21 CRORES. 4.2 I FIND THE AO HAD ATTEMPTED TO REDUCE THE 14A DISALLOWANCE FROM THE WIP. IN VIEW OF MY FINDING IN PARA 2.15 THAT THE INTERE ST EXPENDITURE INCURRED RS.2,31 ,96,641/ - . NEEDS TO BE ALLOWED EITHER AS BUSINESS EXPENDITURE U/S 36(1 )(III) OR U/S 57(III) AND IN LIGHT OF MY FINDING IN PARA 4.4 THAT THE DIRECT COST SHOULD BE. TAKEN TO THE PROFIT AND LOSS ACCOUNT, I FEEL IT IS NOT PROPER ON THE PART OF THE A O TO REDUCE THE 14A DISALLOWANCE FROM THE WIP. IN VIEW OF THIS, THE CONCLUSION DRAWN BY THE A O CANNOT BE ACCEPTED AND THE A O IS D IRECTED TO TAKE THE WIP AT RS.1 04.49 CRORES T HIS GROUND OF APPEAL I S AL LOWED. 1 5 . WITH REGARD TO SHORT TERM CAPITAL GAIN TREATED BY THE AO AS INCOME FROM OTH ER SOURCE, THE CIT(A) FOUND THAT THE AO HAD COMMITTED A MISTAKE BY ADDING THE INCOME TWICE. ACCORDINGLY, HE DIRECTED TO REDUCE RS.6,25,714/ - FROM THE TOTAL INCOME. THE PRECISE OBSERVATION OF THE CIT(A) IS AS UNDER : - 6 .1 THERE WAS NO SPECIFIC DISCUSSION BY THE A O IN THE ASSESSMENT ORDER HOWEVER, IN THE COMPUTATION OF TOTAL INCOME IN PAGE 16 OF THE ASSESSMENT ORDER UNDER THE HEAD CAPITAL GAINS, A SUM OF RS.6,25,714/ - WAS ADDED. AS INCOME UNDER THE HEAD CAPITAL GAINS. 6.2 THE SUBMISSION OF THE APPELLANT I S AS UNDER : - 'THE LEARNED ASSESSING OFFICER ERRED IN WRONGLY TAXING SHORT TERM CAPITAL GAIN OF RS. 6,25,714/- ON SALE OF UNITS OF UTI LIQUID CASH PLAN AS INCOME FROM OTHER SOURCES WHILE FRAMING THE ASSESSMENT ORDER, THE ASSESSING OFFICER ASSESSED TH E INCOME FROM OTHER SOURCES AT RS.3,65,62,742 / - , THE DETAILED BREAK UP OF WHICH IS AS UNDER: SR.NO ITEM AMOUNT 1 SHORT TERM CAPITAL GAIN ON SALE OF UNITS OF UTI 6,35,714/ - 2 INTEREST ON LOANS AND ADVANCES (WHICH WAS OFFERED TO TAX BY YOUR APPELLANT AS INCOME FROM BUSINESS 3,59,17,004/ - 3 INTEREST ON INCOME TAX REFUND 10,024/ - TOTAL 3,65,62,742/ - ITA NO. 7629&7674 /1 3 16 HOWEVER, IF YOU HONOUR GOES THROUGH T HE COMPUTATION PART OF THE ASSESSMENT ORDER ON PAGE NO.18, YOUR HONOUR WOULD FIND THAT THE ASSESSING OFFICER HAS ALSO TAXED CAPITAL GAIN OF RS.6,35,714/ - SEPARATELY. IN VIEW OF THE ABOVE YOUR APPELLANT SUBMITS THAT THE INCOME FROM CAPITAL GAIN HAS BEEN TAXED TWICE. ONCE UNDER THE HEAD CAPITAL GAIN AND THE OTHER UNDER THE HEAD INCOME FROM OTHER SOURCES. YOUR APPELLANT TH E REFOR E SUBMITS THAT THE COMPUTATION OF ASSESSED INCOME MAY PLEASE BE REVISED ACC O R DINGLY. 6.3 I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE APPELLANT AND THE IMPUGNED ASSESSMENT ORDER. THE BREAK UP OF THE INCOME FROM OTHER SOURCES IN THE ABOVE TA BLE SHOWS THAT THE AO TOOK THE SUM RS.6,25,714/ - WHICH IS A SHORT TERM CAPITAL GAIN AS INCOME FR OM OTHER SOURCES AND FINALLY COMPUTED RS.3,65,62,742/ - UNDER THIS HEAD. THE ABOVE SUBMISSION MAKES IT CLEAR THAT THE AO HAD BY MISTAKE TAKEN THE SHORT TERM CAPI TAL GAIN ON SALE OF UNITS OF UTI ALSO TO THE TOTAL INCOME, HENCE, THE SUM RS.6,25,714/ - HAS BEEN TAXED TWICE. THE SUBMISSION OF THE APPELLANT, HENCE IS ACCEPTABLE. THUS THE AO HAD COMMITTED A MISTAKE BY ADDING THE INCOME TWICE ACCORDINGLY, HE IS DIRECTED T O REDUCE RS.6,25,714/ - FROM THE TOTAL INCOME. THIS GROUND OF APPEAL IS ALLOWED. 7. IN THE RESULT, APPEAL IS PARTLY ALLOWED. 1 6 . AS PER THE FINDINGS GIVEN HEREINABOVE THE CIT(A) HAS CORRECTLY HELD THAT INTEREST EXPENDITURE WAS INCURRED FOR THE PURPOSE OF BUSINESS, THEREFORE, SAME IS DEDUCTIBLE U/S.36(1)(IIII) OF THE ACT OR U/S.57 OF THE ACT. A CLEAR FINDING HAS BEEN RECORDED BY CIT(A) THAT INTEREST EXPENDITURE HAVE DIRECT NEXUS WITH THE GENERATION OF INCOME, THEREFORE, AS AN ALTERNATE, THE SAME IS ALSO AL LOWABLE U/S.57 OF THE ACT. THE CIT(A) HAS DEALT IN GREAT DETAILS AOS OBSERVATION TO THE EFFECT THAT UNLESS INTEREST INCOME IS EARNED, THE INTEREST PAID CANNOT BE ALLOWED AND HELD THAT THE DECISION RELIED ON BY THE AO IN CASE OF TUTICORIN ALKALI CHEMICALS & FERTILISERS LTD. VS. CIT, 227 ITR 172 ARE NOT APPLICABLE TO THE FACTS OF THE CASE, INSOFAR AS ASSESSEE WAS ALREADY IN THE BUSINESS OF CONSTRUCTION. THE CIT(A) HAS ALSO FOUND THAT THE ASSESSEE HAS ALREADY CREDITED INTEREST ELEMENT OF RS.10,89,78,431/ - TO THE W ORK - I N - PROGRESS OUT OF TOTAL INTEREST ITA NO. 7629&7674 /1 3 17 OF RS.11.63 CRORES PAID ON THE LOANS TAKEN, THEREFORE, THERE IS NO NEED TO FURTHER APPORTION INTEREST TO THE WORK - IN - PROGRESS. THIS FINDING IS BASED ON MATERIAL ON RECORD, THEREFORE, DO NOT REQUIRE OUR INTERFERENC E. AS THE ASSESSEE HAD ALREADY CREDITED INTEREST OF RS.10.89 CRORES TO WORK IN PROGRESS OUT OF TOTAL INTEREST OF RS.11.63 CRORES, NO FURTHER INTEREST IS REQUIRED TO BE CREDITED TO WORK - IN - PROGRESS. ACCORDINGLY, WE CONFIRM THE ACTION OF CIT(A) IN THIS REGAR D. 1 7 . WITH REGARD TO THE DISALLOWANCE OF INTEREST U/S.14A, THE CONTENTION OF LD. AR WAS THAT ONLY INTEREST ATTRIBUTABLE TO FACE VALUE OF PREFERENCE SHARES AMOUNTING TO RS.81.50 LAKHS IS LIABLE TO BE DISALLOWED AND NOT THE INTEREST ON THE AMOUNT BORROWED A ND UTILIZED AS A PREMIUM ON PREFERENCE SHARES AMOUNTING TO RS.1,09,21,00,000/ - . FROM THE RECORD WE FOUND THAT N O DIRECT EXPENSES INCURRED FOR THE INVESTMENT IN THE PREFERENCE SHARES AS PER THE JOINT VENTURE AGREEMENT EXCEPT THAT THE AMOUNT BORROWED FOR MAK ING INVESTMENT IN THE SHARES FROM MARATHON NEXTGEN REALTY PVT. LTD. TO THE EXTENT OF FACE VALUE OF PREFERENCE SHARES OF RS.81,50,000/ - ON WHICH DIVIDEND IS GOING TO RECEIVE IS DIRECT EXPENDITURE AS PER CLAUSE (I) OF RULE 8D(2) AND THAT COMES TO RS.1,08,518 / - . OTHER THAN THAT NO DIRECT OR INDIRECT EXPENDITURE WERE INCURRED FOR INVESTMENT IN THE PREFERENCE SHARES. THEREFORE, THE BALANCE INTEREST PAID OF RS.1,45,40,727/ - ON THE MONEY BORROWED FOR PREMIUM PAID ON THE PREFERENCE SHARES IS NOT COVERED BY THE PROV ISIONS OF SECTION 14A, AS THE ASSESSEE COMPANY IS GOING TO GET INTERNAL RATE OF RETURN ON THIS AMOUNT @15% WHICH WILL BE TAXABLE INCOME AND HENCE INVESTMENT AMOUNTING TO RS.10,09,21,00,000/ - ITA NO. 7629&7674 /1 3 18 TO THE EXTENT OF PREMIUM OF RS.13,400/ - PAID FOR 81,500/ - PREFERE NCE SHARES SHOULD NOT BE CONSIDERED AS TAX FREE INVESTMENT AND HENCE IT SHOULD NOT BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE U/S.14A OF THE ACT. IN THE INSTANT CASE THE ASSESSEE WAS IN RECEIPT OF 15% BY WAY OF INTERNAL RATE OF RETURN ON PREMIUM ON PREF ERENCE SHARES OF RS.109.21 CRORES WHICH IS LIABLE TO BE TAXED, THEREFORE, THERE IS NO JUSTIFICATION FOR DISALLOWANCE OF INTEREST ATTRIBUTABLE TO SUCH FUNDS UTILIZED FOR PAYMENTS OF PREMIUM ON THE PREFERENCE SHARES. 18 . DURING THE YEAR THE ASSESSEE COMPANY HAS RECEIVED INTEREST INCOME RS.3,59,27,028/ - AS AGAINST WHICH TOTAL INTEREST PAID IS RS.2,31,96,641/ - AND THEREFORE, THERE IS A NET INTEREST RECEIVED BY THE ASSESSEE COMPANY IS RS.1,27,20,363/ - . ACCORDINGLY AS PER CLAUSE (III) OF RULE 8D(2) NO DISALLOWAN CE TO BE MADE. THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF MORGAN STANLEY INDIA SECURITIES PVT. LTD. VS. ACIT, ITA NO.5072/MUM/2005, DATED 13 - 4 - 2011 AND THE AHMEDABAD TRIBUNAL IN THE CASE OF ITO VS. KARNAVATI PETROCHEM PVT. LTD., ITA NO.2228/AHD/ 2012, DATED 5 - 7 - 2013, HELD THAT FOR THE PURPOSE OF SECTION 14A R.W.R. 8D INTEREST EXPENDITURE HAS TO BE NETTED AGAINST INTEREST INCOME AND ONLY THE DIFFERENCE, IF ANY, CAN BE CONSIDERED FOR DISALLOWANCE. 1 9 . LD. AR HAS TAKEN A GROUND THAT SINCE THE ASSESSEE WAS NOT IN RECEIPT OF ANY EXEMPT INCOME DURING THE YEAR, THEREFORE, NO DISALLOWANCE IS WARRANTED U/S.14A. FOR THIS PURPOSE, RELIANCE WAS PLACED ON THE DECISION OF HONBLE HIGH COURT IN THE CASE OF M/S SHIVAM MOTORS PVT. LTD., ITA NO. 7629&7674 /1 3 19 2014 - TIOL - 754 - HC - ALL - IT, WHEREIN T HE HON BLE HIGH COURT HELD AS UNDER : - 10. AS REGARDS THE SECOND QUESTION, SECTION 14A OF THE ACT PROVIDES THAT FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THE CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESS EE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HENCE, WHAT SECTION 14A PROVIDES IS THAT IF THERE IS ANY INCOME WHICH DOES NOT FORM PART OF THE INCOME UNDER THE ACT, THE EXPENDITURE WHICH IS INCURRED FOR EARNING THE INC OME IS NOT AN ALLOWABLE DEDUCTION. FOR THE YEAR IN QUESTION, THE FINDING OF FACT IS THAT THE ASSESSEE HAD NOT EARNED ANY TAX FREE INCOME. HENCE, IN THE ABSENCE OF ANY TAX FREE INCOME, THE CORRESPONDING EXPENDITURE COULD NOT BE WORKED OUT FOR DISALLOWANCE. THE VIEW OF THE CIT(A), WHICH HAS BEEN AFFIRMED BY THE TRIBUNAL, HENCE DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. HENCE, THE DELETION OF THE DISALLOWANCE OF RS.2,03,752/ - MADE BY THE ASSESSING OFFICER WAS IN ORDER. 20 . FURTHER RELIANCE WAS PLACED ON THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CORRTECH ENERGY (P) LTD., 45 TAXMANN.COM 116 - 372 ITR 97, WHEREIN IT WAS HELD THAT WHE RE THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION OF ANY INCOME FROM PAYMENT OF TAX, DISALLOWANCE UNDER SECTION 14A COULD NOT BE MADE. 2 1 . FURTHER RELIANCE WAS PLACE ON THE DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF LAKHANI MARKETING INC., 272 CTR 265, WHEREIN IT WAS HELD THAT NO DISALLOWANCE U/S.14A CAN BE MADE WHEN THE ASSESSEE IS NOT IN RECEIPT OF ANY EXEMPT INCOME. LD. AR ALSO PLACED RELIANCE ON THE DECISION OF COORDINATE BENCH OF CHENNAI TRIBUNAL IN THE CASE OF MR. M. BASKARAN, ITA NO.1717/MDS/2013, DATED 31 - 7 - 2014, WHEREIN THE ISSUE WITH REGARD TO DISALLOWANCE U/S.14A HAS BE EN DETAIL IN GREAT DETAIL AND IT WAS HELD THAT NO DISALLOWANCE CAN BE MADE U/S.14A WHEN THERE IS NO EXEMPT INCOME. ITA NO. 7629&7674 /1 3 20 2 2 . ON THE OTHER HAND, LD. DR RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. 2 3 . FROM THE RECORD WE FOUND THAT DURING THE YEAR UNDER CONSID ERATION THE ASSESSEE COMPANY WAS NOT IN RECEIPT OF ANY EXEMPT INCOME, THEREFORE, AS PER THE PROPOSITION OF LAW LAID DOWN IN THE FOLLOWING CASES, NO DISALLOWANCE U/S.14A IS WARRANTED : - A) IN THE CASE OF M/S. SHIVAM MOTORS P.LTD. (SUPRA), BEFORE THE HONBLE ALLAHABAD HIGH COURT, THE REVENUE RAISED THE FOLLOWING QUESTION OF LAW: - WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE INCOME TAX APPELLATE TRIBUNAL WAS JUSTIFIED IN UPHOLDING THE DECISION OF CIT(A) IN DELETING THE DISALLOWAN CE OF RS. 2,03,752/ - U/S.14A IGNORING THE FACT THAT THERE IS DIFFERENCE OF OPINION OF VARIOUS COURTS ON THE VIEW TAKEN BY THE ITAT THAT IN THE ABSENCE OF TAX FREE INCOME, NO DISALLOWANCE U/S.14A IS PERMISSIBLE. B) THE HIGH COURT WHILE ANSWERING THE SAID QUESTION HELD AS UNDER: - AS REGARDS THE SECOND QUESTION, SECTION 14A OF THE ACT PROVIDES THAT FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THE CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION T O INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HENCE, WHAT SECTION 14A PROVIDES IS THAT IF THERE IS ANY INCOME WHICH DOES NOT FORM PART OF THE INCOME UNDER THE ACT, THE EXPENDITURE WHICH IS INCURRED FOR EARNING THE INCOME IS NOT AN AL LOWABLE DEDUCTION. FOR THE YEAR IN QUESTION, THE FINDING OF FACT IS THAT THE ASSESSEE HAD NOT EARNED ANY TAX FREE INCOME. HENCE, IN THE ABSENCE OF ANY TAX FREE INCOME, THE CORRESPONDING EXPENDITURE COULD NOT BE WORKED OUT FOR DISALLOWANCE. THE VIEW OF THE CIT(A), WHICH HAS BEEN AFFIRMED BY THE TRIBUNAL, HENCE DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. HENCE, THE DELETION OF THE DISALLOWANCE OF RS.2,03,752/ - MADE BY THE ASSESSING OFFICER WAS IN ORDER. C) THE GUJARAT HIGH COURT IN THE CASE OF C IT VS. CORRTECH ENERGY PVT.LTD.(SUPRA) HELD AS UNDER: - WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO THE FACTS AND THE DECISION RELIED UPON BY THE ID AR. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. WINSOME TEXTILE INDUSTRIES LTD. REPOR TED AT (2009) 3191TR 204(P&H) HAS ITA NO. 7629&7674 /1 3 21 HELD THAT IN THE PRESENT CASE, ADMITTEDLY, THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATION, SECTION 14A COULD HAVE NO APPLICATION. IN THIS CASE ALSO, THE ASSESSEE HAS NOT CLAIMED ANY EXEMPT INCOME IN THIS YEAR. THEREFORE, RESPECTFULLY FOLLOWING THE JUDGEMENT OF HON'BLE HIGH COURT OF PUNJAB & HARYANA IN THE CASE OF CIT VS. WINSOME TEXTILE INDUSTRIES LTD. (SUPRA), WE HEREBY ALLOW THIS GROUND AND DIRECT THE AO TO DELETE THE ADDITION. THEREFORE, GROUND NO S 1 TO 1.2 RAISED BY THE ASSESSEE IN ITS CROSS OBJECTION ARE ALLOWED.' 4. COUNSEL FOR THE REVENUE SUBMITTED THAT THE ASSESSING OFFICER AS WELL AS CIT(APPEALS) HAD APPLIED FORMULA OF RULE 80 OF THE INCOME TAX RULES, SINCE THIS CASE AROSE AFTER THE ASSESSM ENT YEAR 20092010. SINCE IN THE PRESENT CASE, WE ARE CONCERNED WITH THE ASSESSMENT YEAR 2009 - 2010, SUCH FORMULA WAS CORRECTLY APPLIED BY THE REVENUE. WE HOWEVER, NOTICE THAT SUBSECTION (1) OF SECTION 14A PROVIDES THAT FOR THE PURPOSE OF COMPUTING TOTAL INC OME UNDER CHAPTER IV OF THE ACT, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN THE PRESENT CASE, THE TRIBUNAL HAS RECORDED THE FINDING O F FACT THAT THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION OF ANY INCOME FROM PAYMENT OF TAX. IT WAS ON THIS BASIS THAT THE TRIBUNAL HELD THAT DISALLOWANCE UNDER SECTION 14A OF THE ACT COULD NOT BE MADE. IN THE PROCESS TRIBUNAL RELIED ON THE DECISION OF DIVISION BENCH OF PUNJAB AND HARYANA HIGH COURT IN CASE OF COMMISSIONER OF INCOME TAX V WINSOME TEXTILE INDUSTRIES LTD REPORTED IN (2009) 319 ITR 204 (PUNJ & HAR) IN WHICH ALSO THE COURT HAD OBSERVED AS UNDER: '7. WE DO NOT FIND ANY MERIT IN THIS SUBMIS SION. THE JUDGEMENT OF THIS COURT IN ABHISHEK INDUSTRIES LTD (2006) 286 ITR 1 WAS ON THE ISSUE OF ALLOWABILITY OF INTEREST PAID ON LOANS GIVEN TO SISTER CONCERNS, WITHOUT INTEREST. IT WAS HELD THAT DEDUCTION FOR INTEREST WAS PERMISSIBLE WHEN LOAN WAS TAKEN FOR BUSINESS PURPOSE AND NOT FOR DIVERTING THE SAME TO SISTER CONCERN WITHOUT HAVING NEXUS WITH THE BUSINESS. THE OBSERVATIONS MADE THEREIN HAVE TO BE READ IN THAT CONTEXT. IN THE PRESENT CASE, ADMITTEDLY THE ASSESSE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATION SECTION 14A COULD HAVE NO APPLICATION.' 5. WE DO NOT FIND ANY QUESTION OF LAW ARISING, TAX APPEAL IS THEREFORE DISMISSED. D) THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. DELITE ENTERPRISES (SUPRA) HELD AS UNDER : - THE REVE NUE IS IN APPEAL ON THE FOLLOWING QUESTIONS: - ITA NO. 7629&7674 /1 3 22 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE AND IN LAW THE HON'BLE TRIBUNAL WAS RIGHT IN DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER OF INTEREST PAID BY THE ASSESSEE COMPANY ON BORRO WED FUNDS AMOUNTING TO RS.241.10 LAKHS OVERLOOKING THE FACT THAT THE BORROWED FUNDS WERE USED BY THE ASSESSEE COMPANY TO INVEST IN THE CAPITAL OF ANOTHER PARTNERSHIP FIRM AND SINCE PROFITS DERIVED BY THE ASSESSEE COMPANY FROM A PARTNERSHIP FIRM WERE EXEMPT FROM TAX U/S.10(2A) OF THE INCOME - TAX ACT, THE INTEREST EXPENSE RELATED TO SUCH TAX FREE PROFITS IS TO BE DISALLOWED U/S.14A OF THE INCOME TAX ACT? (B) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE AND IN LAW THE HON'BLE TRIBUNAL WAS RIGHT IN HOLDING THAT THE ASSESSING OFFICER CANNOT CONSIDER NOTIONAL INTEREST ON DEPOSIT RECEIVED BY THE ASSESSEE COMPANY WHILE ARRIVING AT THE FAIR MARKET VALUE U/S.23(1) (A) OF THE INCOME - TAX ACT?' 2. IN SO FAR AS QUESTION (A) IS CONCERNED, ON FACTS WE FIND THA T THERE IS NO PROFIT FOR THE RELEVANT ASSESSMENT YEAR. HENCE THE QUESTION AS FRAMED WOULD NOT ARISE. E) SIMILAR VIEW HAS BEEN TAKEN BY THE HONBE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. M/S. LAKHANI MARKETING INCL. IN ITA NO.970 OF 2008 DATED 2.4.2014. THE HONBLE HIGH COURT WHILE AFFIRMING THE DECISIONS OF CIT(A) AS WELL AS THE TRIBUNAL IN DELETING THE DISALLOWANCE MADE UNDER SECTION 14A OBSERVED AS UNDER: - 7. AFTER HEARING LEARNED COUNSEL FOR THE PARTIES, WE DO NOT FIND ANY MERIT IN THE AP PEALS. 8. THE PRIMARY ISSUE THAT ARISES FOR CONSIDERATION IN THESE APPEALS IS WHETHER THE CIT(A) AS WELL AS THE TRIBUNAL WERE RIGHT IN ALLOWING DEDUCTION OF INTEREST LIABILITY OUT OF OTHER INCOME AND THE CLAIM OF THE REVENUE TO DISALLOW THE SAME UNDER SE CTION 14A OF THE ACT WAS JUSTIFIED. 9. THE CIT(A) VIDE ORDER DATED 24.6.2004 ANNEXURE A.II RECORDED AS UNDER: - '7.2 KEEPING IN VIEW THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE IT IS HELD THAT THE AO WAS NOT CORRECT IN APPLYING SECTION 14A OF THE IT A CT IN DISALLOWING THE EXPENDITURE ON ACCOUNT OF INTEREST AMOUNTING TO RS.46,91,684/ - . IT WAS INCUMBENT ON THE AO TO ESTABLISH A NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME WHICH WAS EXEMPT UNDER THE ACT. FACTS CLEARLY DO NOT SUPPORT THE ACTION OF THE AO. DISALLOWANCE IS ACCORDINGLY DELETED. THE AO IS DIRECTED TO RECOMPUTE THE INCOME ACCORDINGLY.' 10. VIDE ORDER DATED 16.5.2008, ANNEXURE A.III, THE TRIBUNAL ON APPEAL BY THE REVENUE WHILE UPHOLDING THE FINDING RECORDED BY THE CIT(A) NOTICED AS UND ER: - ITA NO. 7629&7674 /1 3 23 'WE HAVE HEARD RIVAL SUBMISSIONS AND HAVE PERUSED THE MATERIAL ON RECORD. FROM THE READING OF SECTION 14A OF THE ACT, IT IS CLEAR THAT BEFORE MAKING ANY DISALLOWANCE THE FOLLOWING CONDITIONS ARE TO EXIST: - A) THAT THERE MUST BE INCOME TAXABLE UNDE R THE ACT, AND B) THAT THIS INCOME MUST NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, AND C) THAT THERE MUST BE AN EXPENDITURE INCURRED BY THE ASSESSEE, AND D) THAT THE EXPENDITURE MUST HAVE A RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. 9. THEREFORE, UNLESS AND UNTIL, THERE IS RECEIPT OF EXEMPTED INCOME FOR THE CONCERNED ASSESSMENT YEARS (DIVIDEND FROM SHARES), WE ARE OF THE VIEW, SECTION 14A OF THE ACT CANNOT BE INVOKED. IN THIS APPEAL, THE REVENUE HAS NOT DISPELLED THE FINDINGS OF THE CIT(A), NOR THE STATEMENT OF THE ASSESSEE BEFORE AO THAT ASSESSEE IS NOT IN RECEIPT OF ANY DIVIDEND INCOME AND HENCE ACCORDING TO US, THE ASSESSING OFFICER HAS ERRED IN INVOKING SECTION 14A OF THE ACT, TO DISALLOW VARIOUS INTE REST PAYMENTS ON CAPITAL ACCOUNT, SECURITY DEPOSITS AND UNSECURED LOANS. THIS CONCLUSION OF OURS FINDS SUPPORT IN THE DECISION OF BOMBAY BENCH OF THE TRIBUNAL IN THE CASE OF JOINT COMMISSIONER OF INCOME TAX V. HOLLAND EQUIPMENT CO. B.V. REPORTED IN (2005) 3 SOT 810 (MUMBAI) AND THE RELEVANT PORTION OF THE ORDER OF THE BOMBAY BENCH OF THE TRIBUNAL IS REPRODUCED BELOW: - 'REGARDING APPLICATION OF SECTION 14A OF THE ACT, THE CONTENTION OF THE LEARNED DEPARTMENT REPRESENTATIVE HAS TO BE REJECTED ON THE FACE OF IT INASMUCH AS THE ENTIRE INCOME OF THE ASSESSEE IS TAXABLE UNDER THE ACT. SECTION 14A IS APPLICABLE ONLY WHEN ANY PART OF THE INCOME IS NOT TO BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE AND THE EXPENDITURE RELATING TO THAT PART OF INCOME IS CLAIMED B Y THE ASSESSEE AS DEDUCTION. IN SUCH CASES ONLY, THE EXPENDITURE RELATING TO THE EXEMPTED INCOME CAN BE DISALLOWED AND NOT OTHERWISE. SINCE IN THE PRESENT CASE THE ENTIRE INCOME IS FOUND TO BE TAXABLE, NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE A CT.' 10. MOREOVER, THE AO HAS NOT ESTABLISHED THE NEXUS BETWEEN INVESTED FUNDS AND THE INTEREST BEARING FUNDS, SINCE THE INVESTMENTS IN SHARES ARE IN THE YEARS 1995 - 96, 1998 - 99 AND 1999 - 2000 AND THE INTEREST DISALLOWANCE IS FOR THE ASSESSMENT YEARS 2000 - 01 AND 2001 - 02. ON THE CONTRARY PERUSAL OF THE BALANCE SHEET FOR THE YEAR ENDING 31.3.1995, 31.3.1998 AND 31.3.1999, IT IS CLEAR THAT INTEREST BEARING FUNDS HAVE NOT BEEN UTILIZED FOR INVESTMENT FOR PURCHASE OF SHARES. 11. FOR THE AFORESAID REASONS, WE SEE NO REASON TO INTERFERE WITH THE ORDER OF CLT(A) CONCERNING ASSESSMENT YEAR 2000 - ITA NO. 7629&7674 /1 3 24 01 AND 2001 - 02 AND HENCE THE DECISION OF CIT (A) IN DELETING THE DISALLOWANCE OF INTEREST BY INVOKING SECTION 14A OF THE ACT IS CORRECT AND IN ACCORDANCE WITH LAW.' 2 4 . R ESPECTFULLY FOLLOWING THE AFORESAID DECISIONS, WE DO NOT FIND ANY MERIT FOR THE DISALLOWANCE SO MADE BY THE AO U/S.14A. 2 5 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED, WHEREAS APPEAL OF THE REVENUE IS DISMISSED . O RDER PRONOUNCED IN THE OPEN COURT ON THIS 23/09 / 201 5 . SD/ - SD/ - ( ) ( PAWAN SINGH ) ( . . ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 23 /09 /201 5 . . /PKM , . / PS / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / ( ASSTT. REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. //TRUE COPY//