DCIT 10(2), MUMBAI V. STANDARD GREASES & SPECIALITIES P.LTD, MUMBAI

ITA 7655/MUM/2013

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9835 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 6 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-07-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2010-2011
• Appeal Filed On: 30-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AGAINST DATED PASSED
• Keywords: Earning of tax free income; Retrospective amendment
• Section: 142(1); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI R.C. SHARMA , AM AND SHRI AMARJIT SINGH , JM / I .T.A. NO. 7655 / M/ 20 13 ( / ASSESSMENT YEAR: 20 10 - 11 ) DCIT 10(2) R.NO. 432, 4 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD MUMBAI - 4000 20 / VS. STANDARD GREASES & SPECIALITIES P. LTD. 101, 1 ST FLOOR, KETAN APARTMENT 233 R.P. MEHTA MARG, GHATKOPAR EAST MUMBAI - 400077 ./ ./ PAN/GIR NO. : AALCS 2136 B ( / APPELLANT ) .. ( / RESPONDENT ) / DATE OF HEARING : 05.07 .2017 / DATE OF PRONOUNCEMENT : 12 . 0 7 .2017 / O R D E R PER AMARJIT SINGH, JM: THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER DATED 22 .1 0 .201 3 PASSED BY THE COMMIS SIONER OF INCOME TAX (APPEALS) - 22 , MUMBAI [HEREINAFTER REFERRED TO AS THE CIT(A)] RELEVANT TO THE ASSESSMENT YEAR 20 10 - 11 . 2 . THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: - 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT THE DISALLOWANCE U/ S. 14A AS WORKED OUT BY THE AO(ASSESSING OFFICER) BY APPLYING RULE 8D AS ASSESSEE BY: SHRI MAYUR KISANDAWAL DEPARTMENT BY: SHRI RAM TIWARI, SR. AR STANDARD GREASES AND SPECIALITIES 2 PER THE EXISTING LAW AT RS. 1,53,65,602/ - , IS NOT CORRECT AND FURTHER ERRED IN NOT APPLYING PROVISIONS OF RULE 8D. 2.(I) 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LD. CIT(A) ERRED IN NOT APPRECIATING THAT THE PREVAILING LAW EXCLUSIVELY RECOGNIZES ONLY THE EXEMPT INCOME EARNED BY ASSESSEE WHICH IS NOT OFFERED FOR TAX AND THAT THE INCOME TAX ACT DOES NOT SEPARATELY RECOGNIZE IF THE INVESTMENT WAS MADE UNDER THE LACING BUSINESS EXIGENCY' AND THEREBY ERRED IN HOLDING THAT IT SHOULD BE EXCLUD ED FROM THE TERM 'INVESTMENTS' WHILE APPLYING RULE 8D OF THE INCOME TAX RULES THOUGH, DIVIDEND EARNED ON SUCH INVESTMENT IS EXEMPT FROM TAX. 2.(II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LD. CIT(A) ERRED IN DIRECTING AO TO EXCLUDE THE INTEREST COST OF RS.5, 13,53,827/ - INCURRED FOR THE CURRENT YEAR, FOR THE PURPOSE OF COMPUTING DISALLOWANCE U/S. 14A IGNORING THE FACT THAT THE INTEREST BEARING FUNDS ARE INTER - LACING AND INTER - FACING IN NATURE. 2.(III) ON THE FACTS AND IN TH E CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LD. CIT(A), WITHOUT PREJUDICE TO THE ABOVE, ERRED IN IGNORING THE APPLICABILITY OF DECISION OF THE HON'BLE SUPREME COURT IN CONSOLIDATED COFFEE LTD [248 ITR 432(SC)] AND RATHER BY ADJUDICATING THE ISSUE OF INTEREST - BEARING FUNDS NOT TO BE CONSIDERED FOR THE PURPOSE OF WORKING OF RULE SD BY RELYING ON THE DECISIONS OF THE LOWER COURTS. 3.(I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE 14. CIT(A) ERRED IN DIRECTING THE AO NOT TO C OMPUTE THE ADMINISTRATIVE & MANAGERIAL EXPENSES AT RS. 19,58,475/ - AS PER RULE 8D, BEING PART C THEREOF, OF THE INCOME TAX RULES WHICH IN FACT IS THE PREVALENT LAW AS ON DATE; INSTEAD ERRED IN DIRECTING THE AO TO WORK THE SAME ON AD - HOC BASIS AT 10% OF THE EXEMPT INCOME. 3.(II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LD. CIT(A), WITHOUT PREJUDICE TO THE ABOVE, FURTHER ERRED IN GRANTING EXCESS RELIEF OF RS.35,77,248/ - OUT OF THE ADMINISTRATIVE & MANAGERIAL EXPENSES. 4. THE AP PELLANT CRAVES LEAVE TO ADD, AMEND, VARY, OMIT OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS OF APPEAL AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF APPEAL 5. THE APPELLANT PRAYS THAT THE ORDER OF CIT(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ASSE SSING OFFICER BE RESTORED.' STANDARD GREASES AND SPECIALITIES 3 3 . THE BRIEF FACTS OF THE CASE ARE THAT T HE ASSESSEE COMPANY FILED ITS RETURN OF INCOME FOR A.Y. 2010 - 11 ON 27.09.2010 DECLARING TOTAL INCOME OF RS.53,63,64,130/ - . THE CASE WAS PROCESSED U/S 143(1) OF THE I.T. ACT, 1961 . THEREAFTER, THE CASE WAS SELECTED FOR SCRUTINY AND NOTICES U/S 143(2) AND 142(1) OF THE I.T. ACT WERE ISSUED AND SERVED UPON THE ASSESSEE. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF OILS & GREASES & WIND MILL POWER PROJECT. ON VERIF ICATION , IT WAS FOUN D THAT THE ASSESSEE COMPANY HAS SHOWN THE DIVIDEND INCOME TO THE TUNE OF RS. 39,74,720/ - BUT NO EXPENDITURE WAS SHOWN TO EARN THE EXEMPT INCOME , THEREFORE, THE EXPENDITURE TO THE TUNE OF RS. 1,53,65,602/ - WAS ASSESSED IN VIEW OF THE PROVI SION U/S 14A READ WITH RULE 8D OF THE I.T. RULES, 1962 AND ADDED TO THE INCOME OF THE ASSESSEE. THEREAFTER , THE ASSESSEE FILED AN APPEAL BEFORE CIT(A) WHO RESTRICTED THE ADDITION TO THE EXTENT OF RS.39,74,720/ - .BUT THE REVENUE WAS NOT SATISFIED, THEREFORE , FEELING AGGRIEVED THE REVENUE FILED THE PRESENT APPEAL BEFORE US. ISSUE NO.1 &2 : - 4 . UNDER THIS ISSUE THE REV ENUE HAS CHALLENGED THE DELETION OF THE ADDITION MADE BY THE AO IN VIEW OF THE PROVISION U/S 14A READ WITH SECTION RULE 8D. THE ASSESSEE RECEIVED THE EXEMPT INCOME TO THE TUNE OF RS.39,74,720/ - . THE ASSESSING OFFICER MADE THE INTEREST DISALLOWANCE OF RS.1,34,07,127/ - AND DI SALLOWED A SUM OF STANDARD GREASES AND SPECIALITIES 4 RS.19,58,475 / - BEING 0.5% OF THE AVERAGE INVESTMENT . THE CIT(A) HAS DELETED THE INTERES T DISALLOWANCE TO THE TUNE OF RS.1,34,07,127/ - AND ALSO RESTRICTED THE DISALLOWANCE TO THE EXTENT OF 10% OF THE TOTAL EXEMPT INCOME TO THE TUNE OF RS.39,74,720/ - . HOW , THE CIT(A) HAS ARRIVED AT THIS CONCLUSION IS REQUIRED TO BE VIEWED . THEREFORE, THE ORDER OF THE CIT(A) IN THIS REGARD IS HEREBY REPRODUCED BELOW FOR THE SAKE OF CONVENIENCE . : - 2.3 I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE APPELLANT AND THE IMPUGNED ASSESSMENT ORDER. THE TOTAL INVESTMENT MADE BY THE APPELLANT COMPANY IN VAR6US OTHER COMPANIES IS AVAILABLE IN ANNEXURE - 1 OF THE SUBMISSION WHICH IS REPRODUCED HEREUNDER : - SR. NO. NAME & ADDRESS FIELD OF ACTIVITY ISSUED CAPITAL NO. OF SHARES NO. OF SHARES FACE VALUE % INVESTMENT COST 1 TIDE WATER OIL CO.(IND) LTD. LUBRICANTS 8,71,200:00 126484 RS.10/ 14.52 39,3765,259,76 2 ROYAL CASTOR PRODUCTS LTD. CASTOR DERIVATUE 62,10,000,00 1560400 RS.10/ 25.13 1,56,04,000.00 3 PT GULF OIL LUBRICANTS INDONESIA LUBRICANTS 20,000,00 5000 US$10/ 25.00 2,26,97,247,.00 4 STANDARD GREEN BIO ENERGY P. LTD. BIO - FUEL 10,00,000,00 999400 RS.10 99.94 99,94,000.00 5 SWADESHI POLYTEX LTD. RS.10/ 45,660.00 TOTAL 44,21,06,166.76 IT IS THE CONTENTION OF THE APPELLANT THAT DURING THE YEAR RS.10.08 CRORES WAS MADE AS INVESTMENT WITH M/S. TIDE WATER OIL CO. LTD. IN SUPPORT OF THE CONTENTION THAT NO BORROWED FUNDS WERE UTILIZED, FOR MAKING THE INVESTMENTS, THE APPELLANT HAD FLIED COPY OF THE FINAL ACCOUNTS CLAIMED THAT THE PROFIT EARNED DURING THE YEAR WAS RS.45.26 CRORES AND THE RESERVES AND SURPLUS AS ON 31.03.2010 WAS RS.93.74 CRORES. I. AM CONVINCED FROM THE ABOVE SUBMISSION OF THE APPELLANT THAT OUT OF THE SURPLUS AND THE PROFIT EA RNED DURING THE YEAR, THE APPELLANT HAD MADE INVESTMENT OF RS.10.08 CRORES DURING THE YEAR. THE AO DID NOT BRING ANY, RAW MATERIAL ON RECORD TO SHOW THAT ONLY BORROWED FUNDS WERE UTILIZED FOR MAKING SUCH INVESTMENTS. 2.4 FURTHER, I FIND THE APPELLANT HAD M ADE THE ABOVE INVESTMENTS NOT WITH A VIEW TO EARN DIVIDEND INCOME OR CAPITAL GAINS BUT TO HAVE STANDARD GREASES AND SPECIALITIES 5 THE CONTROLLING STAKE ON THE 4 COMPANIES MENTIONED ABOVE. AS FAR AS THE INVESTMENT MADE IN M/S.ROYAL CASTOR PRODUCTS LTD. IS 'CONCERNED, THE APPELLANT IS HAVING 20% STAKE IN THE SAID COMPANY RIGHT FROM 1997. THE ITEMS MANUFACTURED BY THIS COMPANY ARE CONSUMED BY THE APPELLANT AS TA MATERIAL F M ANUFACTURE GREASES. HAPPE N BORRO W, MANUFACTURING UNIT AT GUJARAT. SIMILARLY, IN M/S.11DE WATER OIL CO. LTD. WHICH IS A PU BLIC SECTOR COMPANY, THE APPELLANT I& HAVING 15% STA KE. THE - APPELLANT IN ANTICIPATIO N OF - DISINVESTMENT, HAD TRIED TO ACQUIRE A MAJORITY STAKE. THE ENTIRE INVESTMENT MADE DURI N G THE YEAR WAS ONLY IN THIS COMPANY AND - A 1 RFLEHTTONSD ABOVE IT IS IT OF NON - I NTEREST BEARING FUNDS THE APPELLANT S A10 TIOKTLNG 2% STAKE WITH M/S P T GULF OIL LUBRICANTS (LDONASIA ). WHICH IS MANUFACTURINGFEATURING LUBRICANT SANDIFL STANDARD GREEN BIO EN ERGY LTD., THE A PPELLANT IS HOLDING 100% STAKE. THE ABOVE CLEARLY REVEALS THAT TH E INVESTMENTS MADE ARE RELATED TO BUSINESS ACTIVITY AND THERE IS NO INTENTION WHATSOEVER TO GET THE DIVIDEND FROM THE ABOVE COMPANIES. I AM ALSO CONVINCED THAT THE PRIMARY OBJECT WAS TO HAVE A CONTROLLING STAKE IN THE COMPANY RATHER THAN REAPING DIVIDEND I NCOME THE EARNING OF THERE DIVIDEND INCOME WAS O NLY INCIDENTAL. 25 TO SUBSTANTIATE THAT NONINTEREST BEARING FUNDS WERE UTILIZED FOR THE INVESTMENT THE APPELLANT WAS DIRECTED TO FILE COPY OF THE LOAN SANCTION FROM THE RESPECTIVE BANKS WHICH WAS FURNISHED ON 21.10.2013. THE PERUSAL OF LOAN SANCTION LETTER OF CITIBANK REVEALS THAT RS.590 MILLIONS WAS SANCTIONED FOR THE. PURPOSE OF WORKING CAPITAL. CLAUSE (III) OF THE LOAN SANCTION LETTER IS REPRODUCED HERE UNDER THE PROCEEDS OF THE FACILITIES ARE NOT TO BE UTI LIZED BY THE BORROWER FOR INVESTMENTS IN SHARES, DEBENTURES, ADV ANCES AND INTER - CORPORATE LOAN DEPOSITS TO OTHER COMPANIES (INCLUDING SUBSIDIARY AND OTHER GROUP COMPANIES). THUS THE APPELLANT WAS SPECIFICALLY PROHIBITED FROM UTILIZING THE BORROWED FUNDS FOR MAKING INVESTMENT IN SHARES, DEBENTURES, ETC. SIMILARLY, THE LOAN SANCTION LETTER FROM KOTAK MAHINDRA BANK REVEALS THAT RS 33 CRORES HAVE BEEN SANCTIONED TOWARDS WORKING CAPITAL WHICH IS MEANT FOR THE SPECIFIC PURPOSE THE AO FAILED TO NOTICE THAT THE LOANS BORROWED WERE NOT UTILIZED FOR THE PURPOSE OF INVESTMENT IN SHARES OF THE ABOVE COMPANIES AND IT IS ONLY OUT OF THE SURPLUS GENERATED AND THE RESERVES , THE APPELLANT HAD MADE THE ABOVE INVESTMENTS AND HENCE, NO INTEREST DISALLOWANCE IS CALLED FOR STANDARD GREASES AND SPECIALITIES 6 IN SUPPORT OF THE CONTENTION, THE APPELLANT HAD RELIED ON THE FOLLOWING DECISIONS WHICH SUPPORTS ITS CASE: (I) RELIANCE UTILITIES & POWER LTD. (BOMBAY HIGH COURT ) (II) EIH ASSOCIATED HOTELS LTD. VS. CIT (CHENNAI) (III) RELIANCE INDUSTRIES LTD. VS. ADDL.CIT & ORS. ITA NO.4475/MUMBAI (IV) M/S GODREJ AGROVET LTD., MUMBAI TRIBUNAL (V) HERO CYCLES LTD. 323 ITR 518 I FIND THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LTD. REPORTED IN 313 ITR 340 SQUARELY COVERS THE ISSUE. THE RELEVANT PO R TION OF THE FINDING IN PARA 1.0 IS AS UNDR.: - . N10 IF THERE BE INTEREST - FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SOME TIME THE ASSASSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST - FREE FUNDS AVAILABLE. IN OUR OPINION THE SUPREME COURT IN EAST INDIA PHARMACEUTICAL WORKS LTD. 'S CASE (SUPRA) HAD THE OCCASION TO CONSIDER THE DE CISION OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. 'S CASE (SUPRA) WHERE A SIMILAR ISSUE HAD ARISEN. BEFORE THE SUPREME COURT IT WAS ARGUED THAT IT SHOULD HAVE BEEN PRESUMED THAT IN ESSENCE AND TRUE CHARACTER THE TAXES WERE PAID OUT OF THE PROF ITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVERDTA* ACCOUNT FOR THE R UNNING OF THE BUSINESS; AND III RNESE CIRCUMSTANCES VIE A A PPELLANT WAS ENTITLED TO CLAIM VIE CEAUCVONS. 1 NE SUPREME COURT NOTED THAT4W. - ARGUMENT HAD CONSIDERABLE FAME, BUT CONSIDERING TH E FACT THAT THE CONTENTION HAD RIOT BEEN ADVANCED EARLIER IT DID NOT REQUIRE TO BE ANSWERED. IT THEN NOTED THAT IN WOOLCOMBERS OF INDIA LTD. 'S CASE (SUPRA) THE CALCUTTA HIGH COURT HAD COME TO THE CONCLUSION THAT THE PROFITS WERE SUFFICIENT TO MEET THE ADV ANCE TAX LIABILITY AND THE PROFITS WERE DEPOSITED IN THE OVERDRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOULD BE PRESUMED THAT THE TAXES WERE PAID OUT OF THE PROFITS OF THE YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS . IT NOTED THAT TO RAISE THE PRESUMPTION, THERE WAS SUFFICIENT MATERIAL AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HIGH COURT. INTEREST - FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS IN THIS CASE THIS PRESUMPTION IS ESTABLISHED CONSIDERING TH E FINDING OF FACT BOTH BY THE CIT (APPEALS) AND ITAT.' 2.6 IN VIEW OF THE ABOVE, INTEREST DISALLOWANCE RS..1,34,07,1271 - MADE ULS.14A OF THE I T ACT IS DELETED 27 NOW I DEAL WITH THE DISALLOWANCE MADE UNDER RULE 8D(2)(UI) SECTION 14A STANDARD GREASES AND SPECIALITIES 7 WAS INSERTED BY THE FI NANCE ACT, 2001, WITH RETROSPECTIVE EFFECT FROM ARIL 1, 1962 PR IOR TO THE INTRODUCTION OF SECTI ON 14A, THE LAW WAS THAT WHEN AN ASSESSEE HAD A COMPOSITE AND INDIVISIBLE BUSINESS WHICH HAD ELEMENTS OF BOTH TAXABLE AND NON - TAXABLE INCOME, THE ENTIRE EXPENDIT URE IN RESPECT OF THE BUSINESS WAS DEDUCTIBLE AND, IN SUCH A CASE, THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDITURE RELATING TO THE NON - TAXABLE INCOME DID NOT APPLY. HOWEVER, WHERE THE BUSINESS WAS DIVISIBLE, THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDIT URE WAS APPLICABLE AND THE EXPENDITURE APPORTIONED TO THE 'EXEMPT' INCOME OR INCOMENOT EXIGIBLE TO TAX, WAS NOT ALLOWABLE AS A DEDUCTION SUB - SECTION (1) OF SECTION 14A CLEARLY STIPULATES THAT FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER CHAPTER IV, NO;DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE 'INCURRED' BY THE ASSESSEE 'FL: RELATION TO' INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE EXPRESSION 'IN RELATION TO' IS, ORDINARILY, OF WIDE IMPORT IN THE, NORMAL COURSE, T HE EXPRESSION WOULD HAVE AN EXPANSIVE MEANING UNLESS, OF COURSE, THE CONTEXT WOULD OTHERWISE SUGGEST THE CONTEXT DOES NOT SUGGEST THAT A NARROW MEANING OUGHT TO BE GIVENTO THE EXPRESSION. 2.7 1 THE EXPRESSION 'IN RELATION .TO' DOES NOT HAVE ANY EMBEDDED OB JECT IT SIMPLY MEANS 'IN CONNECTION WTH' OR 'PERTAINS TO'. IF THE EXPENDITURE IN QUESTION HAS A RELATION OR CONNECTION WITH OR PERTAINS TO EXEMPT INCOME IT CANNOT BE ALLOWED AS A DEDUCTION EVEN IF IT Q UALIFIES UNDER OTHER PRVISION OF THE ACT. THE ACTUAL E XPENDITURE THAT IS IN CONTEMPLATION UNDER SECTION 14A(1) OF THE ACT IS THE 'ACTUAL' EXPENDITURE IN RELATION TO OR IN CONNECTION WITH OR PERTAINING 'TO EXEMPT INCOME. THE COROLLARY TO THIS IS THAT IF NO EXPENDITURE IS INCURRED IN RELATION TO THE EXEMPT INCO ME, NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE ACT. 2.7.2 SUB - SECTIONS (2) AND(3) WERE INSERTED BY THE FINANCE ACT, 2006, WITH EFFECT FROM SO APRIL I - HOWEVER, THE EXPRESSION 'SUCH METHOD AS MAY, BE PRESCRIBED' GOT MEANING ONLY BY THE INTRODUCTIO N OF RULE BD OF THE INCOME - TAX RULES, 1962. 2.7.3 SUB - SECTION (2) OF SECTION 14A OF THE ACT PROVIDES THE MANNER IN WHICH THE ASSESSING OFFICER IS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL IN COME. THE REQUIREMENT OF THE ASSESSING OFFICER EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO I EXEMPT INCOME WOULD BE TRIGGERED ONLY IF THE ASSESSING OFFICER RETURNS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTN ESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH STANDARD GREASES AND SPECIALITIES 8 EXPENDITURE. THEREFORE, THE CONDITION PRECEDENT FOR - THE ASSESSING OFFICER ENTERING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME IS THAT THE ASSESSING OFFICER MUST RECORD THAT HE IS NOT SATISFIED WITH THE CORRECTNESS' OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. 2.7.4 SUB - SECTION (3) IS NOTHING BUT AN OFFSHOOT OF SUB - SECTION (2) OF SECTION 14A SUBSECTION (3) APPLIES TO CASES WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN OTHER WORDS, SUB - SECTION ( 2) DEALS WITH CASES WHERE THE AS SESSEE SPECIFIES A POSITIVE AMOUNT OF EXPENDITURE IN RELATION TO INC OME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AND SUB - SECTION (3) APPLIES TO CASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDITURE HAD BEEN INCURRED IN RELATION TO EXEMPT IN COME IN BOTH CASES, THE ASSESSIMG OFFICER, IF SATISFIED WITH THE CO RRECTNESS OF THE CLAIM OF THE ASSESSES IG RE.PT OF SHPXPN4LURE OR NO EXPENDITURE , AS THE CASE MAY BE, CANNOT EMBARK MM A D,ERMINATLON OF THE AMOUNT OF EXPENDITURE IN ACCORDANC E WITH ANY PRESCRIBED METHOD, AS MENTIONED IN SUB - SECTION (2) OF SECTION 14A OF T HE ACT. IT IS ONLY IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, IN BOTH CASES, THAT THE ASSESSING OFFICER GETS JURISDICTION TO DETERMINE THE AMOUNT OF EXPENDITURES HURRIED IN RELATION TO SUCH INCOME WHICH DOE S NOT FORM PART OF THE' TOTAL INCOME UNDER THE ACT IN ACCORDANCE WITH THE PRESCRIBED METHOD. THE PRESCRIBED METHOD IS THE METHOD STIPULATED IN RULE 8D OF THE RULES. 2.7.5 IF ONE EXAMINES SUB - RULE (2) OF RULE 8D, THE METHOD FOR DETERMINING THE EXPENDITURE I N RELATION TO EXEMPT INCOME HAS THREE COMPONENTS. THE FIRST COMPONENT IS THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE SECOND IS BEING COMPUTED ON THE BASIS OF. THE FORMULA GIVEN THEREIN IN A CASE W HERE THE ASSESSEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE FORMULA ESSENTIALLY APPORTIONS THE AMOUNT OF EXPENDITURE BY WAY OF THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I)) INCU RRED DURING THE PREVIOUS YEAR IN THE RATIO OF THE AVERAGE VALUE OF INCOME FORM WHICH DE SNOT OR SHAW NFORH .. PART OF THE TOTAL INCO ME, TO THE AVERAGE OF THE TOTAL ASSETS OF THE ASSESSEE. THE THIRD COMPONENT IS AN ARTIFICIAL FIGURE - ONE HALF PER CENT. OF THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT OR STANDARD GREASES AND SPECIALITIES 9 SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE - SHEETS OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. IT IS THE AGGREGATE OF THESE THREE COMPONENT S WHICH WOULD CONSTITUTE THE EXPENDITURE IN RELATION TO EXEMPT INCOME AND IT IS THIS AMOUNT OF EXPENDITURE WHICH WOULD BE DIS - ALLOWED UNDER SECTION 14A OF THE ACT. IT IS,THEREFORE, CLEAR THAT IN TERMS OF THE RULE, THE AMOUNT OF EXPENDITURE IN RELATION TO E XEMPT INCOME HAS TWO ASPECTS - (A) DIRECT, AND (B) INDIRECT. THE DIRECT EXPENDITURE IS STRAIGHTAWAY TAKEN, INTO ACCOUNT BY VIRTUE OF CLAUSE (I) OF SUB - RULE (2) OF RULE 8D. THE INDIRECT EXPENDITURE, WHERE IT IS BY WAY OF INTEREST, IS COMPUTED THROUGH THE PRIN CIPLE OF APPORTIONMENT. 2.7.6 SECTION 14A EVEN PRIOR TO THE INTRODUCTION OF SUB - SECTIONS (2) AND (3) WOULD REQUIRE THE ASSESSING OFFICER TO FIRST REJECT THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXTENT OF SUCH EXPENDITURE AND SUCH REJECTION MUST BE FOR DISCLOSED COGENT REASONS. IT IS THEN; THAT THE QUESTION OF DETERMINATION OF SUCH EXPENDITURE BY THE ASSESSING OFFICER' WOULD ARISE. THE REQUIREMENT OF ADOPTING A SPECIFIC METHOD OF DETERMINING SUCH EXPENDITURE HAS BEEN INTRODUCED BY VIRTUE OF SUB - SECTION ( 2) OF SECTION 14A PRIOR TO THAT, THE ASSESSEE WAS FRE TO ADOPT ANY REASONABLE AND ACCEPTABLE METHOD. 2.7.7 SO, EVEN FOR THE PRE - RULE BDPERIOD, WHENEVER THE ISSUE OF SECTION 14A ARISES BEFORE AN ASSESSING OFFICER, HE HAS, FIRST OF ALT, TO ASCERTAIN THE CORR ECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. EVEN W HERE THE ASSESSEE CLAIMS .THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THE ASSESSING OFFICER WILL HAVE TO VERIFY THE CORRECTNESS OF SUCH CLAIM IN CASE, THE ASSESSING OFFICER IS SATISFIED WITH THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE NO EXPENDITURE, AS THE CASE MAY BE, TH E ASSESSING OFFICER IS TO ACCEPT THE CLAIM OF THE ASSESSEE IN SO FAR AS THE QUANTUM OF DISALLOWANCE UNDER SECTION 14A IS CONCERNED. IN SUCH EVENTUALITY, THE ASSESSING OFFICER CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE FOR THE PURPOSES OF SECTION 14A(1). IN CASE, THE ASSESSING OFFICER IS NOT ON THE BASIS OF THE OBJECTIVE CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY, SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. HE FAIL HAVE TO REFLECT THE CLAIM AND STATE THE. REASONS FOR DOING SO. HAVING DONE SQ. THE ASSESSING OFFICER WILL HAVE TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED - . IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOM E UNDER THE STANDARD GREASES AND SPECIALITIES 10 ACT..HE IS RESTRICTED TO DO SO ON THE BASIS OF A REAS ONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. 2.8 I FIND THE AO HAD CLEARLY RECORDED HIS SATISFACTION TO THIS EFFECT IN PARA 5.6 OF THE ASSESSMENT ORDER AND HENCE IN PRINCIPLE THE DISALLOWANCE MADE BY THE AO INVOKING THE PROVISIONS OF SECTION 14A R.W.R8 DIS UPHELD BY ME. 2.9 IT WAS HELD IN THE CASE OF GODREJ & BOYCE LTD REPORTED IN 328 ITR 81 THAT THE PROVISIONS OF RULE' 80 OF THE RULES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24 2008, WOULD APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008 - 09. EVEN PRIO R TO HAD TO ENFORCE THE PROVISIONS OF SUB - SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T. THE ASSESSING OFFICER JUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD. THE PROCEEDINGS FOR ASSESSMENT YEAR 2002 - 03 WOULD STAND REMANDED TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHOULD DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED ANY EXPENDITURE ' (DIRECT OR INDIRECT) RELATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART O F THE TOTAL INCOI4 AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASON - ABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHOULD PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRO DUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 2.10 THE JURISDICTIONAL ITAT IN THE CASE OF GODREL AGROVET VS. ACIT (ITA NO .1629/M/09 DATED 179 2010 HAS CONSIDERED THE DECIAJON RENDERED IN THE CASE OF HERO CYCLES REPORTED IN 323 ITR 518 & CIT VS. ABISHEIK'LNDUSTRIES REPORTED IN 286 ITR I AND CAME TO A CONCLUSION THAT IN THE' ABSENCE OF ANY INTERST EXPENDITURE, THE ASSESSING OFFICER CANNOT WORK OUT INTEREST DISALLOWANCE U/S. 'MA. HOWEVER, AFT ER CONSIDERING, THE UR1DICTIONAI HIGH COURT DECISION IN THE CASE OF GODREL BOYCE MFG. LTD IT CAME TO A CONCLUSION THAT A REASONABLE DISALLOWANCE IS PERMITTED TO H2R MADE U/S.,14A IN RESPECT OF COMMON ADMINISTRATIVE EXPENSES INC.'. GOING BY THE ABOVE DECISI ON, I FEEL IT WOULD BE FAIR AND REASONABLE.. TO,RES.ICT THE..DLSAL: LOWMICO TO. .397,472/..WH:I.CH. IS ..... I.Q.% OF THE TOTAL EXEMPTED INCOM E OF THE IPPO1FTT WE.39,74,7201 - TN VIEW OF STANDARD GREASES AND SPECIALITIES 11 THE ABOVE DETAILED DISCUSSION THE ASSESSING OFFICER DIRECTED O P RETCH THE DISALLO W A NCE TO R63,97,472L - 1 THE APPELLANT GETS RELIEF OF THE BALANCE,, RS.35,77,248 I - (RS.39,74,720 - RA. 3197,472). THIS GROUND OF APPEAL IS PARTLY ALLOWED. 3. GROUNDS OF APPEAL NO.5 TO 8 ARE DIRECTED AGAINST ADHOC DISALLOWANCE OF RS 3,80,8001 - O N ACCOUNT OF 20% OF THE PURCHASES MADE THE AO HAD DISCUSSED THE ISSUE IN PARA 6 OF THE ASSESSMENT ORDER. BASED ON THE INFORMATION RECEIVED FROM THE INVESTIGATION WING, THE PURCHASES FROM M/S.SIDDHIVINAYAK CORPORATION WERE DOUBTED BY THE AO. THE APPELLANT WAS DIRECTED TO PROVE THE CORRECTNESS OF THE PRICE MENTIONED IN THE INVOICE BY GIVING A COMPARABLE MARKET RATES OF DIFFERENT SUPPLIERS. SINCE THE APPELLANT COULD NOT PRODUCE THE SAME, THE AO FAILED THAT THE APPELLANT HAD INFLATED PURCHASES TO THE EXTENT OF O% AND HENCE, DISALLOWED THE PURCHASES TO THAT EXTENT. 3.2 THE SUBMISSION OF THE APPELLANT IS AS U NDER 'IN OTHER DISALLOWANCE OUT OF IMPUGNED PURCHASES, LEARNED A.O. HAD DISALLOWED 20% OF THE PURCHASE PRICE WHICH IS TOO EXCESSIVE AND FAR FROM COMPARABLE G. P. ASSESSOR'S GP IS %. FURTHER ASSESSEE COULD NOT PRODUCE COMPARABLE PRICES OF THE SAID MATERIAL AS TIME GIVEN BY THE A. 0. OF HALF DAY AND IT WAS NOT POSSIBLE TO GET COMPANY A FIGURES IN SUCH A SHORT TIME. NOW ASSESSEE HAS GOT ALTERNATE QUOTATIONS OF PRICES PREVALENT DURING THAT TIME AND OUR HONOR CAN SEE THAT PRICES DEBITED BY ASSESSEE ARE WITHIN TH AT LIMIT ONLY. SO WE REQUEST YOUR HONOR TO DELETE SUCH HUGE ADDITIONS. ASSESSEE HAS PROVED THAT MATERIEL HAS IN FACT PURCHASED AND IT IS ALSO USED IN MANUFACTURING. SO THE COST OF PURCHASES SHALL BE ALLOWED AND COST DEBITED IS COMPARABLE ALSO. SO, KINDLY T AKE LENIENT VIEW.' 3.3 I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE APPELLANT AND THE IMPUGNED ASSESSMENT ORDER. THE APPELLANT COULD NOT CONTROVERT THE FINDING OF THE AO AND HENCE, THE ADDITION MADE BY THE AO IS HEREBY. SUSTAINED. THE GROUND OF APPEAL I S DISMISSED. 4. I N THE RESULT, APPEAL IS PARTLY ALLOWED. 5 . ON APPRAISAL OF THE ABOVE MENTIONED ORDER , IT CAME INTO NOTICE THAT THE ASSESSEE WAS HAVING THE RESERVE S AND SURPLUS AS ON 30.03 .13 TO THE TUNE OF RS .93.74 CRORES WHE REAS HIS INVESTMENT IN THE TIDE WATER OIL COMPANY INDIA LTD. WAS TO THE TUNE OF RS. 10.08 CRORES DURING THE STANDARD GREASES AND SPECIALITIES 12 YEAR. THE ASSESSEES OWN RESERVES AND SURPLUS WAS MORE THAN INVESTMENT . F URTHER THE INVESTMENT IN THE 4 OTHER COMPANIES I.E., M/S ROYAL CASTOR PRODUCTS LTD., M/S PT GULF OIL LUBRICANTS (INDO NASIA), STANDARD GREEN BIO ENERGY LTD., SWADESHI POLYTEX LTD., WORTHY WAS THE STRATEGIC INVESTMENT . N O BORROWED FUNDS WERE UTILIZED FOR INVESTMENT . I N THE SAID CIRCUMSTANCES , T HE INTEREST DISALLOWANCE OF RS.1,34,07,127/ - WAS RIGHTLY DELETED U/S 14A OF THE I.T. ACT . THEREAFTER, CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE ASSESSEES EXEMPT INCOME TO THE TUNE OF RS .39,74,720/ - . THE 10% AMOUNT OF THE EXEMPT INCOME WAS DISALLOWED WHICH SEEMS JUSTIFIABLE . WE FOUND NO IL LEGALITY AND INFIRMITY IN TH E ORDER PASSED BY THE CIT(A ) IN QUESTION. THEREFORE, WE AFFIRMED THE FINDING OF THE CIT(A) ON THIS ISSUE AND DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. ISSUE N.3 6. SO FAR ISSUE NUMBER 3 IS CONCERNED, THE REVENUE HAS CHALLENGED THE DELETION OF THE DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE EXPENSES WHICH HAS BEEN RESTRICTED TO THE EXTENT OF 10% OF THE EXEMPT INCOME. ASSESSING OFFICER NOWHERE RECORDED HIS SATISFACTION WHILE DISALLOWING THE CLAIM OF ASSESSEE. WITHOUT RECORDING SATISFACTION ,THE CLAIM O F THE ASSESSEE IS NOT LIABLE TO BE DECLINED . IN THIS REGARD WE FIND SUPPORT OF LAW SETTLED IN: - STANDARD GREASES AND SPECIALITIES 13 1. CIT VS. TAIKISHA ENGINEERING INDIA LTD. (370 ITR 338 (DEL) ) 2. CIT VS. JOINT INVESTMENT (372 ITR 694 (DEL)) 3. MAXOPP INVESTMENT LTD. VS. DCIT (347 ITR 272 (DEL)) 4. DCI T VS. REI AGRO LTD (ITA| NO.1811/KOL/2012) 7 . THE CIT(A) HAS DISALLOWED THE ADMINISTRATIVE EXPENSES @ 10% OF THE EXEMPT INCOME ON THE BASIS OF THE CASE GODREJ IN BOYCE ITD REPORTED IN 328 ITR 381 . THE CIT(A) RESTRICTED ADMINISTRATIVE EXPENSES TO THE EXTENT OF THE 10% OF THE EXEMPT INCOME AS EXPENDITURE INCURRE D TO EARN THE EXEMPT INCOME . WE FIND IT JUSTIFIABLE SPECIFICALLY IN THE CIRCUMSTANCES AND NO MATERIAL OF ANY KIND WAS PRODUCED BEFORE US TO DEVIATE THE FINDING OF THE CIT(A) IN QUESTION. IN VIEW OF TH E SAID CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE CIT(A) HAS PASSED THE JUDICIOUSLY AND CORRECTLY WHICH IS NOT REQUIRED TO BE INTERFERE WITH AT THIS APPELLATE STAGE . 8 . IN THE RESULT , APPEAL OF THE REVENUE IS HEREBY ORDERED TO BE DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 12.07. 2017 SD/ - SD/ - ( R.C. SHARMA ) (AMARJIT SINGH) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; DATED : 12.07. 201 7 STANDARD GREASES AND SPECIALITIES 14 V.P. SINGH / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. / BY ORDER, //TRUE COPY// / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBAI