TAKE Solutions Limited, CHENNAI V. ACIT, CHENNAI

ITA 816/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7755 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-12-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 01-04-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SIVA SRINIVAS
• Assessee Lawyers: R SIVARAMAN
• Keywords: Sale consideration of property below Jantri Value; Depreciation; Rectification of order; Earning of tax free income; Wholly owned subsidiary; Capital expenditure
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , A B ENCH, CHENNAI . , ! ' . # , % & BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICI AL MEMBER ./ I.T.A.NO.816/MDS/2016 ( / ASSESSMENT YEAR: 2011-12) M/S. TAKE SOLUTIONS LTD., 8B, OLD NO.18B, ADYAR CLUB GATE ROAD, CHENNAI-600 028. VS THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-3(1), CHENNAI. PAN: AABCT3684M ( /APPELLANT) ( /RESPONDENT) & ./ I.T.A.NO.932/MDS/2016 ( / ASSESSMENT YEAR: 2011-12) THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-3(1), CHENNAI. VS M/S. TAKE SOLUTIONS LTD., 8B, OLD NO.18B, ADYAR CLUB GATE ROAD, CHENNAI-600 028. PAN: AABCT3684M ( /APPELLANT) ( /RESPONDENT) ASSESSEE BY : MR. R.SIVARAMAN, ADVOCATE REVENUE BY : MR. SIVA SRINIVAS, JCIT /DATE OF HEARING : 3 RD NOVEMBER,2016 /DATE OF PRONOUNCEMENT : 28 TH DECEMBER, 2016 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND T HE REVENUE RESPECTIVELY AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-11, CHENNAI DA TED 21.01.2016 IN ITA NO.51/2015-16/CIT(A)-11 PASSED U NDER SECTION 143(3) R.W.S. 92CA(4) & 250(6) OF THE ACT. 2 ITA NOS.816 & 932/MDS/2016 2. THE ASSESSEE HAS RAISED SEVERAL GROUNDS IN ITS A PPEAL, HOWEVER, THE CRUXES OF THE ISSUES ARE AS FOLLOWS:- I) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE ORDER OF THE LEARNED ASSESSING OFFICER WHO HAD DISALLOWED THE CLAIM OF ` 1,23,48,099/- BEING PRODUCT DEVELOPMENT EXPENSES BY TREATING IT AS CAPITAL IN NATURE. II) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN PARTLY CONFIRMING THE ORDER OF THE LEARNED ASSESSING OFFICER WHO HAD DISALLOWED ` 1,21,40,766/- TOWARDS EXPENDITURE ATTRIBUTABLE FOR EARNING EXEMPT INCOME BY INVOKING THE PROVISIONS OF SECTION 14A R.W.R 8D. 3. THE REVENUE HAS RAISED SEVERAL GROUNDS IN ITS AP PEAL, HOWEVER THE CRUX OF THE ISSUE IS THAT:- THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN DIRECTING THE LEARNED ASSESSING OFFICER TO RECALCULATE THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT IN THE LIGHT OF HIS OBSERVATIONS & FINDINGS. 4. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOP MENT SERVICES FILED ITS RETURN OF INCOME FOR THE ASSESS MENT YEAR 2011-12 ON 29.09.2011 DECLARING TOTAL INCOME OF ` 11,11,61,930/- . THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) WAS ISSUED TO THE ASSES SEE ON 3 ITA NOS.816 & 932/MDS/2016 25.09.2012. SUBSEQUENTLY, THE LEARNED ASSESSING OF FICER HAS COMPLETED THE ASSESSMENT ON 30.03.2015 UNDER SECTION 143(3) R.W.S 92CA(4) OF THE ACT WHEREIN HE MADE CERTAIN DISALLOWANCES AMONGST WHICH ONE OF THE DISALLOWANCE WAS ` 1,23,48,099/- BEING PRODUCT DEVELOPMENT EXPENSES BY TREATING IT AS A CAPITAL EX PENDITURE AND THE OTHER BEING DISALLOWANCE OF ` 1,21,40,766/- UNDER SECTION 14A R.W.R 8D . ITA NO.816/MDS/2016 ( ASSESSEES APPEAL) A.Y.2011-12: GROUND NO.1: DISALLOWANCE OF PRODUCT DEVELOPMENT EXPENSES AMOUNTING TO ` `` ` 1,23,48,099/- : 5. 1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS OBSERVED THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF RS.4,46,89,000/- AS PRODUCT DEVELOPMENT EXPENSES. T HE ASSESSEE HAD AMORTIZED THE SAME AS SIMILAR EXPENDIT URE WAS AMORTIZED DURING THE PRECEDING ASSESSMENT YEARS. F URTHER IT WAS REVEALED THAT FOR THE EARLIER ASSESSMENT YEARS THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS GR ANTED RELIEF TO THE ASSESSEE BY TREATING IT AS REVENUE EX PENDITURE BUT THE SAME WAS REVERSED BY THE TRIBUNAL, TREATING THOSE 4 ITA NOS.816 & 932/MDS/2016 EXPENSES TO BE IN THE NATURE OF CAPITAL EXPENDITURE . THEREFORE, FOR THE RELEVANT ASSESSMENT YEAR ALSO LE ARNED ASSESSING OFFICER TREATED THE SAME AS CAPITAL EXPEN DITURE, HOWEVER GRANTED THE BENEFIT OF DEPRECIATION @ 25% AND RESTRICTED THE ADDITION TO RS.1,23,48,099/-. 5.2 ON APPEAL, THE LEARNED COMMISSIONER OF INCOME T AX (APPEALS) FOLLOWING THE DECISION OF THE TRIBUNAL FO R THE EARLIER YEAR, DISMISSED THE APPEAL OF THE ASSESSEE. 5.3 BEFORE US, THE LEARNED AUTHORIZED REPRESENTATIV E SUBMITTED THAT SINCE THE ASSESSEE HAS APPEALED TO T HE HONBLE HIGH COURT, THE MATTER MAY BE REMITTED BACK TO THE FILE OF THE LEARNED ASSESSING OFFICER SO THAT THE L D.A.O WILL HAVE THE BENEFIT OF THE DECISION OF THE HONBLE HIG H COURT AND FOLLOW THE SAME. 5.4 THE LEARNED DEPARTMENTAL REPRESENTATIVE OPPOSED TO THE SUBMISSIONS OF THE LEARNED AUTHORIZED REPRESENT ATIVE AND PLEADED THAT THE ORDER OF THE LD.CIT(A) MAY BE CONFIRMED AS HE HAS ONLY THE ORDER OF THE TRIBUNAL. 5 ITA NOS.816 & 932/MDS/2016 5.5 AFTER HEARING BOTH THE SIDES, WE DO NOT FIND AN Y MERIT IN THE CONTENTION OF THE LEARNED AUTHORIZED REPRESENTA TIVE, SINCE THE IDENTICAL ISSUE IS ALREADY DECIDED BY THE TRIBUNAL AGAINST THE ASSESSEE; THERE IS NO REASON FOR US TO REMIT BACK THE MATTER TO THE FILE OF THE LEARNED ASSESSING OFF ICER. THEREFORE FOLLOWING THE EARLIER ORDER OF THE TRIBUN AL, WE DO NOT HAVE ANY HESITATION TO HOLD THAT THE EXPENDITUR E INCURRED BY THE ASSESSEE IS CAPITAL IN NATURE, ACCORDINGLY W E HEREBY CONFIRM THE ORDER OF THE LD.CIT(A). GROUND NO.2: DISALLOWANCE OF ` `` ` 1,21,40,766/- U/S.14A R.W.R 8D: 6.1 IT WAS NOTICED BY THE LEARNED ASSESSING OFFICER THAT THE INVESTMENT FOLIO OF THE ASSESSEE AS ON 31.03.2011 STOOD AT RS. 79,40,21,000/- AND THE ASSESSEE HAD EARNED DIVI DEND INCOME OF RS.12,75,000/- WHICH WAS CLAIMED AS EXEMP T INCOME UNDER SECTION 10(34) OF THE ACT. THEREFORE, THE LEARNED ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 14A R.W.R 8D OF THE ACT AND WORKED OUT THE EXPENDIT URE RELATE TO EARNING EXEMPT INCOME AT RS.1,21,40,766/-. 6 ITA NOS.816 & 932/MDS/2016 6.2 ON APPEAL, THE LEARNED COMMISSIONER OF INCOME T AX (APPEALS) DIRECTED THE LEARNED ASSESSING OFFICER TO RE- COMPUTE THE DISALLOWANCE BY OBSERVING AS FOLLOWS:- 8.3 I HAVE GONE THROUGH THE AO'S OBSERVATION IN THE ORIGINAL ASSESSMENT ORDER AND ALSO THE SUBSEQUENT RECTIFICATION ORDER MENTIONED ABOVE UNDER PARA 8.1. I HAVE ALSO GONE THROUGH THE APPELLANT'S ELABORATE SUBMISSION MENTIONED UNDER PARA 8.2. I HAVE PERUSED THE AO'S RECTIFICATION ORDER DATED 01.05.2015 IN WHICH THE AO HAS RESTRICTED THE DISALLOWANCE U/S 14A R.W. RULE 8D TO RS.70,93,182/-. HOWEVER, IN THE SAID RECTIFICATION ORDER, THE BASIS FOR RESTRICTION OF THE DISALLOWANC E IS NOT MENTIONED. AS THE RECTIFICATION ORDER IS NOT SELF-EXPLANATORY, I AM GIVING THE FOLLOWING FINDING BASED ON THE APPELLANT'S SUBMISSION BEFORE ME : A) IN VIEW OF THE HON'BLE DELHI HIGH COURT'S DECISION MENTIONED ABOVE UNDER PARA 8.2 RELIED ON BY THE APPELLANT, THE DISALLOWANCE U/S 14A HAS TO BE RESTRICTED UPTO THE DIVIDEND INCOME EARNED BY THE APPELLANT . B) FURTHER, I AGREE WITH THE APPELLANT THAT IF THE INVESTMENTS WERE MADE OUT OF OWN FUNDS, THE INTEREST EXPENDITURE SHOULD NOT BE CONSIDERED FOR DISALLOWANCE U/S 14A . 8.3.1 BESIDES, WHILE COMPUTING THE AMOUNT OF DISALLOWANCE UNDER RULE 8D(II), THE AO IS DIRECTED NOT TO TAKE THE VALUE OF INVESTMENTS WHICH HAVE NOT EARNED EXEMPT INCOME DURING THE RELEVANT PREVIOUS YEAR. THE AO IS FURTHER DIRECTED NOT TO CONSIDER THE VALUE OF INVESTMENTS IN FOREIGN SUBSIDIARIES AS INCOME FROM INVESTMENTS IN FOREIGN SUBSIDIARIES IS TAXABLE AND THEREFORE, THE VALUE OF SUCH INVESTMENTS HAVE TO BE EXCLUDED 7 ITA NOS.816 & 932/MDS/2016 WHILE COMPUTING THE DISALLOWANCE U/ S 14A. 8.3.2 HOWEVER, I DO NOT AGREE WITH THE APPELLANT THAT IF NO EXPENDITURE WAS INCURRED, THERE WOULD NO T BE DISALLOWANCE U/S 14A. IN VIEW OF SEC. 14A(3), THE DISALLOWANCE U/ S 14A IS VALID EVEN THOUGH THE ASSESSEE DID NOT INCUR ANY EXPENDITURE TO EARN THE EXEMPT INCOME. 8.3.3 HENCE, THE AO IS DIRECTED TO RE-COMPUTE THE DISALLOWANCE U/ S 14A R.W. RULE 8D ON THE OBSERVATIONS AND FINDINGS GIVEN BY THE CIT(A) IN THE ABOVE MENTIONED PARAGRAPHS. ACCORDINGLY, THE GROUNDS ARE PARTLY ALLOWED . 6.3 BEFORE US, THE LEARNED AUTHORIZED REPRESENTATIV E ARGUED BY STATING THAT THE ASSESSEE HAD MADE INVEST MENTS IN ITS SUBSIDY COMPANIES THEREFORE, THE PROVISIONS OF SECTION 14A WOULD NOT BE APPLICABLE. 6.4 THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND, RELIED IN THE ORDER OF THE LEARNED ASSESSING OFFICER AND VEHEMENTLY ARGUED BY STATING THAT THE PROVISIONS OF SECTION 14A WOULD BE APPLICABLE TO THE CASE OF THE ASSESSEE . 6.5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFUL LY PERUSED THE MATERIALS ON RECORD. FROM THE FACTS OF THE CASE IT 8 ITA NOS.816 & 932/MDS/2016 IS APPARENT THAT THE ASSESSEE HAD NEITHER NOT CLAIM ED BEFORE THE LEARNED ASSESSING OFFICER NOR THE LEARNED COMMI SSIONER OF INCOME TAX (APPEALS) THAT THE INVESTMENTS WERE M ADE IN THE SUBSIDIARY COMPANIES. FOR THE FIRST TIME, THE L EARNED AUTHORIZED REPRESENTATIVE HAS SUBMITTED BEFORE US T HAT THE INVESTMENTS WERE MADE BY THE ASSESSEE IN ITS SUBSID IARY COMPANIES. FRESH CLAIM BEFORE US AT THIS JUNCTURE A ND THAT TOO WITHOUT FURNISHING ANY DOCUMENTARY EVIDENCE IS NOT APPRECIABLE. HOWEVER, IN THE INTEREST OF JUSTICE, WE REMIT BACK THE MATTER TO THE FILE OF THE LEARNED ASSESSIN G OFFICER FOR DE NOVO CONSIDERATION, KEEPING IN FAITH ON THE ORAL SUBMISSIONS OF THE LEARNED AUTHORIZED REPRESENTATIVE, THOUGH IT IS NOT BASED ON ANY DOCUMENTARY EVIDENCE. FURTHER WE BRING TO THE NOTI CE OF THE LD.A.O THAT WE HAD MADE SEVERAL OBSERVATIONS AN D SET RATIOS ON THE IDENTICAL ISSUE RECENTLY IN THE CASE M/S. SIMPSON & CO.LTD., VS. DCIT IN ITA NO.2329/MDS/2016 VIDE ORDER DATED 22.12.2016, WHICH IS EXTRACTED HER EIN BELOW FOR REFERENCE ALONG WITH OUR FURTHER OBSERVAT IONS MENTIONED HEREIN BELOW WHICH SHALL BE FOLLOWED WHIL E DECIDING THE CASE OF THE ASSESSEE:- 9 ITA NOS.816 & 932/MDS/2016 8. AFTER HEARING BOTH SIDES, WE FIND MERIT IN T HE SUBMISSION OF THE LEARNED AUTHORIZED REPRESENTATIVE .ON THE IDENTICAL ISSUE THE CHENNAI BENCH OF THE TRIBUN AL IN THE ASSESSEES OWN CASE FOR THE EARLIER ASSESSMENT YEARS (SUPRA) HAS REMITTED BACK THE MATTER TO THE FILE OF THE LEARNED ASSESSING OFFICER TO PASS APPROPRIATE ORDER S ON MERIT & LAW WITH CERTAIN DIRECTIONS. THE RELEVANT P ORTION OF THE ORDER IS EXTRACTED HEREIN BELOW FOR REFERENCE:- 16. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY PERUSED THE MATERIALS AVAILABLE ON RECORD . FROM THE WRITTEN SUBMISSION FURNISHED BY THE LEARNED AUTHORI ZED REPRESENTATIVE, IT IS REVEALED THAT THE ASSESSEE HA D MADE THE FOLLOWING INVESTMENTS FOR THE RELEVANT ASSESSME NT YEARS:- S.NO. BREAK-UP OF INVESTMENTS ASSESSMENT YEAR 2008-09 ASSESSMENT YEAR 2009-10 ASSESSMENT YEAR 2010-11 1. IN SHARES OF SUBSIDIARIES / GROUP COMPANIES WHICH ARE HISTORICAL 100.14 CRORES 93.81 CRORES 93.81 CRORES 2. IN SHARES OF OTHER COMPANIES 0.91 CRORES 0.91 CRORES 0.77 CRORES 3 IN MUTUAL FUNDS , INCOME FROM WHICH ARE EXEMPT 2.50CRORES 48.21 CRORES 53.51 CRORES 4. IN BONDS AND MUTUAL FUNDS, INCOME FROM WHICH ARE TAXABLE 35.55 CRORES 42.30 CRORES 34.30 CRORES TOTAL 139.10 CRORES 185.23 CRORES 182.39 CRORES FROM THE ABOVE, IT IS EVIDENT THAT THE ASSESSEE HAS INVESTED IN SHARES OF SUBSIDIARIES/GROUP COMPANIES, MUTUAL FUND S AND IN BONDS AND MUTUAL FUNDS INCOME FROM WHICH ARE TAXABL E. AS REGARDS INVESTMENTS MADE IN SUBSIDIARIES AND GROUP COMPANIES, CHENNAI BENCH OF THE TRIBUNAL, ON THE EA RLIER OCCASION, IN THE CASE OF RANE HOLDINGS LTD. VS. ACI T IN ITA NO.115/MDS/2015 VIDE ORDER DATED 06.01.2016, EXTRAC TED HEREIN BELOW, HAS HELD THAT, WHERE INVESTMENTS ARE MADE IN SISTER CONCERNS OR GROUP CONCERNS FOR STRATEGIC REA SONS, NO EXPENSES CAN BE INFERRED TO HAVE BEEN INCURRED IF S UCH INVESTMENTS ARE MADE OUT OF NON-INTEREST BEARING FU NDS OF THE ASSESSEE. THE GIST OF THE RELEVANT ORDER IN ITA NO.115/MDS/2015 DATED 06.01.2016 OF THIS TRIBUNAL I S REPRODUCED HEREIN BELOW FOR REFERENCE:- 10 ITA NOS.816 & 932/MDS/2016 5. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PE RUSED THE MATERIALS AVAILABLE ON RECORD. ON THE IDENTICAL ISSUE AS POIN TED OUT BY THE LD. A.R. THE CHENNAI BENCH OF THE TRIBUNAL IN ITA NO.156/MDS /2013 VIDE ORDER DATED 20/08/13 FOR THE ASSESSMENT YEAR 2009-10 HAS REMITTED BACK THE MATTER TO THE LD. ASSESSING OFFICER TO DECIDE THE M ATTER ONCE AGAIN AFRESH BASED ON THE FINDINGS WHETHER THE ASSESSEE H AD ACTUALLY INCURRED ANY EXPENDITURE IN EARNING THE DIVIDEND INCOME. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED HEREIN BELOW FOR REFERENCE:- FURTHER, ON THE IDENTICAL ISSUE VARIOUS BENCHES OF THE TRIBUNAL AND THE HONBLE BOMBAY HIGH COURT HAVE HELD AS FOLLOWS:- I) GARWARE WALL ROPES LTD., VS. ACIT REPORTED IN (2 014) 65 SOT 086 (MUM.) HELD AS FOLLOWS:- II) WHEN ASSESSEE HAS PRIMA FACIE BROUGHT OUT CASE THA T NO EXPENDITURE HAS BEEN INCURRED FOR EARNING INCOME, W HICH DOES NOT FORM PART OF TOTAL INCOME, THEN IN ABSENCE OF A NY FINDING THAT EXPENDITURE HAS BEEN INCURRED FOR EARNING EXEMPT IN COME PROVISIONS 14A CANNOT BE APPLIED.. III) INTEGLOBE ENTERPRISES LTD., VS. DCIT REPORTED IN (2014) 40 CCH 0022(DEL. TRIB.) HELD AS FOLLOWS:- NO DISALLOWANCE OF INTEREST IS REQUIRED TO BE MADE UNDER RULE 8D(I) & 8D(II) WHERE NO DIRECT OR INDIRECT INT EREST EXPENDITURE WAS INCURRED FOR MAKING INVESTMENTS.WHE RE THE ASSESSEE HAD UTILIZED INTEREST FREE FUNDS FOR M AKING FRESH INVESTMENTS AND THAT TOO INTO ITS SUBSIDIARIE S, WHICH WAS NOT FOR THE PURPOSE OF EARNING EXEMPT INCOME AN D WHICH WAS FOR STRATEGIC PURPOSES ONLY, NO DISALLOWA NCE OF INTEREST WAS REQUIRED TO BE MADE UNDER RULE 8D(I) & 8D(II) AND STRATEGIC INVESTMENT HAS TO BE EXCLUDED FOR PUR POSE OF ARRIVING AT DISALLOWANCE UNDER RULE 8D(III). IV) M/S.JM FINANCIAL LTD., VS. ACIT REPORTED IN 201 4- TIOL-202-ITAT-MUM HELD AS FOLLOWS: THE DEPARTMENT HAS NOT DISPUTED THIS FACT OUT OF THE TOTAL INVESTMENT ABOUT 98% OF THE INVESTMENT ARE IN SUBSI DIARY COMPANIES OF THE ASSESSEE AND, THEREFORE, THE PURPO SE OF INVESTMENT IS NOT FOR EARNING THE DIVIDEND INCOME B UT HAVING CONTROL AND BUSINESS PURPOSE AND CONSIDERATION. THE ASSESSEE HAS BROUGHT OUT A CASE TO SHOW THAT NO EXPENDITURE HAS BEEN INCURRED FOR MAINTAINING THE 98% OF THE INVESTMENT MADE IN T HE SUBSIDIARY COMPANIES, THEREFORE, IN THE ABSENCE OF ANY FINDING THAT ANY EXPENDITURE HAS BEEN INCURRED FOR EARNING THE EXEMP T INCOME, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS NOT J USTIFIED, ACCORDINGLY THE SAME IS DELETED. 11 ITA NOS.816 & 932/MDS/2016 (IV) CIT VS. BHARTI TELEVENTURE LTD. REPORTED IN (2 011) 331 ITR 0502. WHERE THE ASSESSEE WAS FOUND TO BE HAVING ADEQUATE NON- INTEREST BEARING FUND BY WAY OF SHARE CAPITAL AND R ESERVES AND THERE WAS NO NEXUS BETWEEN THE BORROWALS OF ASSESSE E AND THE ADVANCES GIVEN, NO DISALLOWANCE FOR INTEREST WAS CA LLED FOR . (V) CIT VS. RELIANCE UTILITIES & POWER LTD., REPORT ED IN (2009) 313 ITR 0340(BOM.) HAS HELD AS FOLLOWS:- TRIBUNAL HAVING RECORDED A CLEAR FINDING THAT THE ASSESSEE POSSESSED SUFFICIENT INTEREST-FREE FUNDS OF ITS OWN WHICH WERE GENERATED IN THE COURSE OF THE RELEVANT FINANCIAL Y EAR, APART FROM SUBSTANTIAL SHAREHOLDERS FUND, PRESUMPTION STANDS E STABLISHED THAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE B Y THE ASSESSEE OUT OF INTEREST FREE FUNDS AND THEREFORE NO PART OF INTEREST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTMENTS WERE MADE OUT OF INTEREST BEARING FUNDS. (VI) EIH ASSOCIATED HOTELS LTD VS. DCIT REPORTED IN 2013- TIOL-796-ITAT-MAD . THE INVESTMENTS MADE BY THE ASSESSEE IN THE SUB SIDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNIN G CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAVE BEE N MADE BY THE ASSESSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOTEL INDUSTRY. THE ASSESSEE IS NOT INTOTHE BUSINESS OF I NVESTMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXPEDIENCY. ANY DIVIDEND EARNED BY THE ASSESSEE FRO M INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENTAL. THEREFO RE THE INVESTMENT MADE BY THE ASSESSEE IN ITS SUBSIDIARY I S NOT TO BE RECKONED FOR DISALLOWANCE U/S.14A R.W.R.8D. THE ASS ESSING OFFICER IS DIRECTED TO RE-COMPUTE THE AVERAGE VALUE OF INVESTMENT UNDER THE PROVISIONS OF RULE 8D AFTER DELETING INVE STMENTS MADE BY THE ASSESSEE IN SUBSIDIARY COMPANY. TAKING NOTE OF THE ABOVE DECISIONS AND THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN ITA NO.156/MDS/13 CITED SUPRA, WE HEREBY REMIT THE MATTER BACK TO THE FILE OF LD. ASSESSING OFFICER TO EXAMINE THE ISSUE INVOLVED IN THIS CASE AFRESH AND PASS APPROPRIATE ORDER AS PER LAW AND ME RITS AND IN THE LIGHT OF THE DECISIONS CITED HEREIN ABOV E. WHILE DOING SO, WE ALSO DIRECT THE LD. ASSESSING OFFICER TO CONSIDER THE DECISION OF THE TRIBUNAL IN THE CASE M /S AGILE ELECTRIC SUB ASSEMBLY PVT. LTD. CITED SUPRA WHEREIN IT WAS HELD AS FOLLOWS:- 7.2 IN REGARD TO APPLICABILITY OF SECTION 14A OF THE ACT READ WITH RULE 8D ALSO; THE ABOVE VIEW WILL BE APPLICABL E. MOREOVER IN THE CASE EIH ASSOCIATED HOTELS LTD V. D CIT REPORTED IN 2013 (9) TMI 604 IN ITA NO.1503, 1624/MDS/2012 DATED 17 TH JULY, 2013, IT HAS BEEN HELD BY THE CHENNAI BENCH OF THE TRIBUNAL AS FOLLOWS:- 12 ITA NOS.816 & 932/MDS/2016 DISALLOWANCE U/S. 14A RW RULE 8D CIT UPHELD DISAL LOWANCE HELD THAT INVESTMENTS MADE BY THE ASSESSEE IN T HE SUBSIDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNING CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVE STMENTS HAVE BEEN MADE BY THE ASSESSEE TO PROMOTE SUBSIDIAR Y COMPANY INTO THE HOTEL INDUSTRY. A PERUSAL OF THE ORDER OF THE CIT(APPEALS) SHOWS THAT OUT OF TOTAL INVESTMENT OF RS.64,18,19,775/-, RS.63,31,25,715/- IS INVESTED IN WHOLLY OWNED SUBSIDIARY. THIS FACT SUPPORTS THE CASE OF TH E ASSESSEE THAT THE ASSESSEE IS NOT INTO THE BUSINESS OF INVES TMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXPEDIENCY. ANY DIVIDEND EARNED BY THE ASSESSEE FRO M INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENT AL. THEREFORE, THE INVESTMENTS MADE BY THE ASSESSEE IN ITS SUBSIDIARY ARE NOT TO BE RECKONED FOR DISALLOWANCE U/S. 14A R.W.R. 8D. THE ASSESSING OFFICER IS DIRECTED TO RE- COMPUTE THE AVERAGE VALUE OF INVESTMENT UNDER THE PROVISIONS OF RULE 8D AFTER DELETING INVESTMENTS MADE BY THE ASSESSEE IN SUBSIDIARY COMPANY DECIDED IN FAVOUR OF ASSESSEE. FOR THE ABOVE SAID REASONS, WE HEREBY HOLD THAT IN THE CASE OF THE ASSESSEE THE PROVISIONS OF SECTION 14A READ WITH RU LE 8D WILL NOT BE APPLICABLE IN REGARD TO INVESTMENTS MADE FOR ACQUIR ING THE SHARES OF THE ASSESSEES SISTER CONCERNS. ACCORDINGLY WE REST RAIN OURSELVES FROM INTERFERING WITH THE ORDER OF THE LD.CIT(A) ON THIS REGARD. THEREFORE, FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, WE HEREBY DIRECT THE LEARNED ASSESSING OF FICER TO DELETE THE ADDITION MADE BY INVOKING THE PROVISI ONS OF SECTION 14A R.W. RULE 8D OF THE ACT, SUBJECT TO VERIFICATION THAT INVESTMENTS ARE MADE BY THE ASSES SEE IN ITS SISTER CONCERNS ONLY AND FROM ITS INTEREST F REE FUNDS. 17. FROM THE ABOVE DECISION, IT IS CLEAR THAT PROVI SIONS OF SECTION 14A AND RULE 8D WILL NOT BE APPLICABLE, WHERE INVESTMENTS ARE MADE IN SISTER CONCERNS OR SUBSIDIA RY COMPANIES FOR STRATEGIC PURPOSES. HOWEVER, WITH RES PECT TO INVESTMENT MADE IN MUTUAL FUNDS, THERE WILL BE C ERTAIN COST INVOLVED WITH RESPECT TO THE DECISION MAKING P ROCESS OF CHOOSING THE MUTUAL FUND WHERE INVESTMENT / DISINVESTMENT HAS TO BE MADE AND MONITORING SUCH INVESTMENT. THEREFORE, PROVISIONS OF SECTION 14A A ND RULE 8D OF THE ACT WILL BE APPLICABLE IN SUCH CASES . AND FINALLY WITH RESPECT TO INVESTMENT MADE IN MUTUAL F UNDS AND BONDS, THE INCOME RECEIVED FROM WHICH ARE TAXAB LE, THE PROVISIONS OF SECTION 14A WILL NOT BE APPLICABL E SINCE IT IS APPLICABLE ONLY IN THE CASES WHERE EXPENDITU RE ARE INCURRED BY THE ASSESSEE RELATING TO INCOME WHICH DOES 13 ITA NOS.816 & 932/MDS/2016 NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. SI NCE THESE ASPECTS WERE NOT EXAMINED BY THE LEARNED ASSESSING OFFICER, WE HEREBY REMIT THE MATTER BACK TO THE FILE OF THE LEARNED ASSESSING OFFICER FOR FRESH CONSIDERATION IN THE LIGHT OF OUR ABOVE OBSERVATION S, AND THEREAFTER TO PASS APPROPRIATE ORDER ON MERITS AND AS PER LAW AFTER AFFORDING SUFFICIENT OPPORTUNITY TO THE A SSESSEE OF BEING HEARD. 9. ACCORDINGLY, WE HEREBY REMIT THIS RELEVANT ISSUE BEFORE US ALSO TO THE FILE OF THE LEARNED ASSESSING OFFICER WITH SIMILAR DIRECTIONS, AND SLIGHTLY MODIFIED OBSERVATIONS FOR THE SAKE OF CLARITY, VIZ., THE PROVISIONS OF SECTION 14A AND RULE 8D WILL NOT BE APPLICABLE, WHERE INVESTMENTS ARE MADE FROM NON-INTEREST BEARING FUNDS IN THE SISTER CONCERNS OR SUBSIDIARY COMPANIES OF THE ASSESSEE FOR STRATEGIC PURPOSES BECAUSE NO EXPENDITURE CAN BE ATTRIBUTABLE FOR MAKING SUCH INVESTMENTS. HOWEVER IF THE INVESTMENTS ARE MADE OUT OF INTEREST BEARING FUNDS, THEN THE PROVISIONS OF SECTION 14A OF THE ACT WOULD BE ATTRACTED BECAUSE THE INTEREST EXPENDITURE AND OTHER RELEVANT EXPENDITURE FOR OBTAINING SUCH BORROWINGS ALONE AND NO OTHER EXPENDITURE(BECAUSE ALL OTHER EXPENSE WOULD BE ATTRIBUTABLE TO THE BUSINESS OF THE ASSESSEE AS THE INVESTMENTS ARE MADE IN THE SISTER CONCERN FOR THE STRATEGIC BUSINESS REASON OF THE ASSESSEES BUSINESS.) WOULD BE ATTRIBUTABLE FOR EARNING EXEMPT DIVIDEND INCOME. FURTHER IF THE INVESTMENTS ARE MADE (WHEREIN THE INCOME DERIVED OUT OF THE SAME ARE EXEMPT FROM TAX) IS LESS THAN THE AGGREGATE OF GENERAL RESERVES AND OWN CAPITAL THEN SUCH INVESTMENTS ARE TO BE CONSIDERED AS INVESTMENTS MADE OUT OF NON- INTEREST BEARING FUNDS, BECAUSE THE ASSESSEE IS AT LIBERTY TO DIVERT SUCH FUNDS (GENERAL RESERVE/OWN CAPITAL) FROM ITS BUSINESS FOR ANY OTHER PURPOSE OTHER THAN DISTRIBUTION OF PROFITS IN THE CASE OF OWN CAPITAL WHEN THE ASSESSEE IS 14 ITA NOS.816 & 932/MDS/2016 A LIMITED COMPANY. HOWEVER, WITH RESPECT TO INVESTMENT MADE IN MUTUAL FUNDS WHEREIN THE INCOME DERIVED OUT OF IT IS NON-TAXABLE, THERE WILL BE CERTAIN COST INVOLVED WITH RESPECT TO THE DECISION MAKING PROCESS OF CHOOSING THE MUTUAL FUND WHERE INVESTMENT / DISINVESTMENT HAS TO BE MADE AND MONITORING SUCH INVESTMENT AND INTEREST EXPENSE IF ANY AS DESCRIBED HEREIN ABOVE, THEN THE PROVISIONS OF SECTION 14A AND RULE 8D OF THE ACT WILL BE APPLICABLE IN SUCH CASES. AND FINALLY WITH RESPECT TO INVESTMENT MADE IN MUTUAL FUNDS AND BONDS, THE INCOME RECEIVED FROM WHICH ARE TAXABLE, THE PROVISIONS OF SECTION 14A WILL NOT BE APPLICABLE SINCE IT IS APPLICABLE ONLY IN THE CASES WHERE EXPENDITURE ARE INCURRED BY THE ASSESSEE RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT . 6.6 FURTHER, WE ALSO MAKE IT CLEAR THAT WITH RESPEC T TO COMPUTATION OF RULE 8D, STRICT COMPLIANCE HAS TO BE ADHERED TO AND THERE IS NO SCOPE OF RESTRICTING THE DISALLO WANCE TO THE EXEMPT DIVIDEND INCOME EARNED BY THE ASSESSEE. THAT IS BECAUSE THE COST INVOLVED IN MANAGING THE FUNDS OF THE ASSESSEE IS DISTINCT FROM EARNING DIVIDEND INCOME A ND SUCH EARNING OF DIVIDEND INCOME WHICH IS EXEMPT FROM TAX DO NOT HAVE ANY BEARING ON THE COST INVOLVED IN MANAGING T HE INVESTMENTS PORTFOLIO. HOWEVER, WE AGREE WITH THE VIEW OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) TH AT IF THE 15 ITA NOS.816 & 932/MDS/2016 ASSESSEE HAD MADE INVESTMENTS OUT OF ITS OWN FUNDS VIZ. GENERAL RESERVE / OWN CAPITAL, AS EXPLAINED HEREIN ABOVE, INTEREST EXPENDITURE SHOULD NOT BE CONSIDERED FOR DISALLOWANCE UNDER SECTION 14A OF THE ACT BECAUSE S UCH FUNDS ARE NON-INTEREST BEARING FUNDS TO THE ASSESSE E. FURTHER, WE AGREE WITH THE VIEW OF THE LEARNED COMM ISSIONER OF INCOME TAX (APPEALS) THAT IN THE CASE OF INVESTM ENTS WHEREIN THE INCOME DERIVED FROM THE SAME IS TAXABLE , NOTIONAL DISALLOWANCE UNDER SECTION 14A WILL NOT AP PLY BECAUSE ON THE BASIS OF MATCHING PRINCIPAL DEDUCTIO N HAS TO BE GRANTED FOR ACTUAL EXPENDITURE INCURRED FOR EARN ING TAXABLE INCOME ACCRUED FROM SUCH INVESTMENT. FOLLOWING THE SAME ANALOGUE, FOR THE INVESTMENTS MADE IN FOREIGN SUBSI DIARIES PROVISIONS OF SECTION 14A WILL NOT APPLY BECAUSE TH E INCOME ACCRUED FROM SUCH INVESTMENTS ARE TAXABLE, INCLUDIN G THE DIVIDEND INCOME. THE VIEW OF THE LEARNED COMMISSIO NER OF INCOME TAX (APPEALS) THAT IF NO EXPENDITURE IS INCU RRED FOR EARNING EXEMPT INCOME, YET THE PROVISIONS OF SECTIO N 14A WILL BE APPLICABLE IN VIEW OF SECTION 14A (3) OF THE ACT IS ALSO APPROPRIATE BECAUSE FOR PORTFOLIO MANAGEMENT THERE WOULD BE CERTAINLY SOME COST UNLESS THE INVESTMENTS ARE N ON COST 16 ITA NOS.816 & 932/MDS/2016 BEARING AND MADE IN SISTER/SUBSIDY CONCERNS OF THE ASSESSEE FOR STRATEGIC REASONS. ITA NO.932/MDS/2016 ( REVENUES APPEAL) A.Y.2011- 12: GROUND 1 :- DIRECTING THE LEARNED ASSESSING OFFICER TO RECALCULATE THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT WITH CERTAIN DIRECTIONS. 7. SINCE WE HAVE REMITTED BACK THE ISSUE WITH RESP ECT TO THE DISALLOWANCE UNDER SECTION 14A OF THE ACT WITH DIRECTIONS IN THE ASSESSEES APPEAL HEREIN ABOVE, THIS GROUND RAISED BY THE REVENUE WILL NOT SURVIVE AND ACCORDINGLY DISPOS ED OFF. 8. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AS INDICATED HEREIN ABOVE AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 28 TH DECEMBER, 2016 SD/- SD/- ( ! ' . # ) ( . ) ( DUVVURU RL REDDY ) ( A. MOHAN ALANKAMONY ) ! # / JUDICIAL MEMBER # / ACCOUNTANT MEMBER ! /CHENNAI, ' /DATED 28 TH DECEMBER, 2016 SOMU )* +* /COPY TO: 1. APPELLANT 2. RESPONDENT 3. , () /CIT(A) 4. , /CIT 5. * 0 /DR 6. /GF