A.C.I.T., CENTRAL CIRCLE-3(1), KOLKATA, Kolkata V. M/S. SPECIALTY RESTAURANTS LTD., Kolkata

ITA 922/KOL/2017

• Counselvise Citation: [2018] 122 COUNSELVISE.COM (IT) 4273 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 02-05-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Proportionate interest; Tax effect
• Section: 14A

Judgement Text

1 ITA NO. 922/KOL/2017 SPECIALTY RESTAURANTS LTD.AY 2010-11 , A , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: KOL KATA ( ) BEFORE . . , /AND . , ) [BEFORE SHRI A. T. VARKEY, JM & SHRI M. BALAGANESH , AM] I.T.A. NO. 922/KOL/2017 ASSESSMENT YEAR: 2010-11 ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-3(1), KOLKATA. VS. M/S. SPECIALTY RESTAURANTS LTD. (PAN: AAECS6802M) APPELLANT RESPONDENT DATE OF HEARING 24.09.2018 DATE OF PRONOUNCEMENT 10.10.2018 FOR THE APPELLANT SHRI ALTAF HUSSAIN, ADDL. CIT FOR THE RESPONDENT SHRI RAVI TULSIYAN, FCA ORDER PER SHRI A.T.VARKEY, JM THIS APPEAL PREFERRED BY THE REVENUE IS AGAINST THE ORDER OF THE LD. CIT(A)-17, KOLKATA DATED 30.08.2016 FOR AY 2010-11. 2. GROUND NO. 1 OF REVENUES APPEAL IS AGAINST THE ACTION OF LD. CIT(A) IN DELETING THE ADDITIONS MADE ON ACCOUNT OF RENT/LEASE PAID TO THE TUNE OF RS.4,44,59,597/-. 3. BRIEFLY STATED THE FACTS ARE THAT THE AO OBSERVE D FROM THE ACCOUNTS OF THE ASSESSEE THAT ASSESSEE HAS DEDUCTED RS.4,44,59,597/- TOWARDS RENT EQUALIZATION CHARGES IN ITS ACCOUNTS. DURING THE COURSE OF ASSESSMENT PROCEEDI NGS, ASSESSEE WAS ASKED TO PROVIDE DETAILS AND ALLOWABILITY OF SUCH CLAIM OF EXPENDITU RE. IN REPLY, ASSESSEE HAS SUBMITTED THAT SINCE THE ASSESSEE HAS STARTED FOLLOWING ACCOUNTING STANDARD- AS-19 FROM THIS YEAR, ASSESSEE HAS DEBITED IN ITS P&L ACCOUNT ACCRUAL OF RENT AS PER SAID THE SAID ACCOUNTING STANDARD. HOWEVER SINCE THE ACTUAL RENT PAYABLE FOR THE YEAR WAS MORE, IT HAS CLAIMED AS DEDUCTION FOR COMPUTATION OF TAXABLE INCOME. THE AF ORESAID CONTENTION OF ASSESSEE WAS NOT 2 ITA NO. 922/KOL/2017 SPECIALTY RESTAURANTS LTD.AY 2010-11 ACCEPTED BY THE AO BECAUSE, ACCORDING TO HIM, IN CA SE OF OPERATING LEASE (OL) AS-19 REQUIRES RECOGNITION OF RENT PAYABLE AS PER STRAIGH T LINE METHOD OR ANY OTHER METHOD WHICH IS BETTER REPRESENTATIVE OF RENT ACCRUAL. FURTHER, ACC ORDING TO AO, ONCE ASSESSEE HAS FOLLOWED AS-19, NO DEPARTURE IS ALLOWED TO ARRIVE AT TAXABLE INCOME. ACCORDING TO AO, THIS VIEW IS FURTHER SUBSTANTIATED BY THE HON'BLE APEX COURT'S R ECENT OBSERVATION IN THE CASE OF JK INDUSTRIES LTD. [(2007) 165 TAXMAN 323] WHEREIN THE HON'BLE APEX COURT HAS OBSERVED THAT: MAIN OBJECT SOUGHT TO BE ACHIEVED BY ACCOUNTING ST ANDARDS WHICH ARE NOW MADE MANDATORY IS TO SEE THAT ACCOUNTING INCOME IS ADOPTED AS TAXABLE INCOME AND NOT MERELY AS THE BASIS FROM WHICH TAXABLE INC OME IS TO BE COMPUTED. THEREFORE, ACCORDING TO AO IT IS CLEAR THAT ONCE AS SESSEE ON ITS OWN ADOPTS AN ACCOUNTING STANDARD, THERE IS LITTLE FREEDOM LEF T FOR THE ASSESSEE TO CLAIM RENTAL EXPENSE MORE THAN ACCRUAL AMOUNT DEBITED IN THE P&L A/C. AS PER AS-19. IN VIEW OF THIS, ACCORDING TO AO, THOUGH THE ASSESSEE CLAIMED THAT THE OVERALL TAX EFFECT OVER A PERIOD OF TIME APPEARS TO BE NEUTRALIZED, THE AO DID NOT ACCEPT THE SAID R EASON TO DEVIATE FROM ACCOUNTING STANDARD. ACCORDINGLY, THE ASSESSEE'S CLAIM OF DEDUCTION AS R ENT EQUALIZATION CHARGES AMOUNTING TO RS.4,44,59,597/- WAS DISALLOWED AND ADDED BACK TO T HE TOTAL INCOME OF THE ASSESSEE. 4. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE T HE LD. CIT(A), WHO DELETED THE ADDITION BY OBSERVING AS UNDER: THE ASSESSEE, DURING THE PREVIOUS YEAR PAID THE LE ASE RENTAL AMOUNT OF RS.217651599/- AND CLAIMED IT AS A DEDUCTION U/S. 30 OF THE ACT. THE A SSESSEE HAD DEBITED RS. 173192002/- IN THE BOOKS OF ACCOUNTS TOWARDS THE LEASE RENT AS PER THE ACCOUNTING STANDARD - 19 (AS-19) WHICH PROVIDES 'LEASE PAYMENTS UNDER AN OPERATING LEASE S HOULD BE RECOGNIZED AS AN EXPENSE IF THE STATEMENT OF PROFIT AND LOSS ON A STRAIGHT-LINE BAS IS OVER THE LEASE TERM, UNLESS ANOTHER SYSTEMATIC BASIS IS MORE REPRESENTATIVE OF THE TIME PATTERN OF THE USER'S BENEFIT'. ACCORDINGLY, THE ASSESSEE DEBITED IN THE ACCOUNTS, TOWARDS RENT EQUALIZATION CHARGE, FOLLOWING STRAIGHT-LINE METHOD AN AMOUNT OF RS. 44459597/-. THE AO DISALLOW ED THE CLAIM 'OF THE ASSESSEE STATING THAT 'ONCE ASSESSEE ON ITS OWN ADOPTS AND ACCOUNTIN G STANDARD, THERE IS LITTLE FREEDOM LEFT FOR THE ASSESSEE TO CLAIM RENTAL EXPENSE MORE THAN ACCR UAL AMOUNT DEBITED IN THE P&L ALC AS PER AS-19. IN VIEW OF THIS, THOUGH ASSESSEE CLAIMED THA T THE OVERALL TAX EFFECT OVER A PERIOD OF TIME APPEARS TO BE NEUTRALIZED, BUT THAT CANNOT BE THE R EASON FOR ASSESSEE TO DEVIATE FROM ACCOUNTING STANDARD'. I HAVE GONE THROUGH THE SUBMISSIONS OF THE ASSESSEE AND THE FINDINGS OF THE AO CAREFULLY. IN THE EARLIER YEARS RENTAL HAS BEEN CLAIMED ACCORDING TO THE PROVISIONS OF THE SECTION 30 OF THE IT ACT WHICH ENVISAGES THAT RENT PAID FOR PREMISES OCCUPIED BY THE ASSESSEE FOR BUSINESS PURPOSES IS AN ALLOWABLE EXPENSE. IN EARLIER YEARS THE TOTAL RENT DEBITED AND PAID BY THE ASSESSEE HAS BEEN ALLOWED BY THE AO. IN THE IMPUGNE D ASSESSMENT YEAR THE ASSESSEE HAS MADE A VARIATION ON ACCOUNT OF AS-19 AND THE RENT DEBITE D IN THE BOOKS OF ACCOUNTS IS RS.173192002/-. HOWEVER, THE ACTUAL RENT PAID DURIN G THE YEAR WAS RS. 217651599/- WHICH HAS BEEN CLAIMED, UNDER THE PROVISIONS OF SECTION 3 0, IN THE COMPUTATION FILED WITH THE RETURN 3 ITA NO. 922/KOL/2017 SPECIALTY RESTAURANTS LTD.AY 2010-11 OF INCOME. ON ACCOUNT OF LEASE EQUALIZATION CHARGES IT IS SEEN IN THE TABLE BELOW THAT IN THE IMPUGNED YEAR THE AMOUNT PAID TOWARDS LEASE RENTAL IS MORE THAN WHAT IS DEBITED IN THE BOOKS OF ACCOUNTS. AMOUNT (RS.) A.Y.201O-11 ACTUAL RENT PAID 217651599.00 RENT BOOKED IN PROFIT & LOSS A/C AS PER AS-19 17 3192002.00 DIFFERENCE: 44459597.00 HOWEVER, IN THE SUBSEQUENT YEARS THE ACTUAL RENT PA ID IS LESS THAN THE AMOUNT DEBITED IN THE PROFIT AND LOSS ACCOUNT. THEREFORE THE AMOUNTS HAVE BEEN REVERSED BY THE ''ASSESSEE ON ACCOUNT OF LEASE EQUALIZATION CHARGES. FOR ASSESSME NT YEAR 2011-12 AND 2012-13 ALSO THE ASSESSEE HAS CLAIMED ONLY THE RENT PAID UNDER THE P ROVISIONS OF SECTION 30 AND THE DIFFERENCE AMOUNT HAS BEEN OFFERED TO TAX AS CAN BE SEEN IN TH E TABLES BELOW: A.Y. 2011-12 ACTUAL RENT PAID 259854818.00 RENT BOOKED IN PROFIT & LOSS A/C AS PER AS-19 28 7026729.00 DIFFERENCE: 27171911.00 HERE IT IS SEEN THAT THE ASSESSEE HAS DISALLOWED RS . 27171911.00 WHILE FILING THE INCOME TAX RETURN SINCE ACTUAL RENT PAID WAS LESS THAN RENT DE BITED UNDER AS-19 ACCORDING TO THE PRINCIPLES OF CONSISTENCY. THEREFORE IT IS SEEN THAT THE ASSESSEE HAS APPLIED THE PRINCIPLE OF AS-19 CONSISTENTLY OVER THE THREE ASSESSMENT YEARS DISCUSSED ABOVE. ON THE ISSUE OF LEASE RENTALS THE ASSESSEE HAS PLAC ED RELIANCE ON THE DECISION OF THE HON'BLE ITAT HYDERABAD IN THE CASE OF DEPUTY COMMISSIONER O F INCOME TAX VS NAGARJUNA INVESTMENT TRUST LTD [65 ITD I7],WHEREIN IT WAS HELD AS UNDER: 'WE HOLD THAT SO FAR AS INCOME BY WAY OF LEASE RENT AL IS CONCERNED, THE ONLY INCOME WHICH ACCRUES IN THE RELEVANT YEAR IS THE MONTHLY I NSTALLMENT SPECIFIED IN THE RESPECTIVE LEASE AGREEMENTS AND IN NO CIRCUMSTANCE, THE INCOME IN EXCESS OF THE MONTHLY LEASE INSTALLMENT CAN BE SAID TO HAVE ACCRU ED IN LAW. THE EXCESS INCOME BEYOND THE MONTHLY LEASE INSTALLMENT ACCOUNTED FOR AS INCOME ON THE BASIS OF SOD METHOD/INDEX METHOD DOES NOT COME WITHIN THE AMBIT AND RANGE OF TAXABLE INCOME WITHIN THE MEANING OF CHARGING PROVISIONS OF THE AC T AND, THEREFORE, SUCH EXCESS INCOME, TERMED AS DIFFERENTIAL INCOME IN RELATION T O LEASE AGREEMENTS CANNOT BE BROUGHT TO TAX. SIMILARLY IN THE CASE OF RELIANCE INDUSTRIALS THE H ON'BLE MUMBAI TRIBUNAL VIDE THEIR ORDER DATED 04.06.2001 HAS DISCUSSED A SIMILAR ISSUE. THE BASIC FACT WAS THAT THE ASSESSEE-COMPANY RECORDED ANNUAL LEASE RENTAL BY DEBITING RS.70.83 L AKHS IN ITS BOOKS OF ACCOUNT. HOWEVER, WHEN RETURN WAS FILED, ASSESSEE WROTE BACK THE AMOU NT OF RS.70,83,671 AND CLAIMED DEDUCTION OF RS. 2,11,13,040. THE AO DISALLOWED THIS DIFFEREN CE OF RS.1,40,29,369 ON THE GROUND THAT THE ASSESSEE WAS NOT ENTITLED TO CLAIM THE LARGER AMOUN T IF A LOWER AMOUNT HAS BEEN DEBITED IN THE BOOKS BECAUSE PROVISIONS OF SECTION 145(1) MAKE IT CLEAR THAT ONCE THE ASSESSEE REGULARLY FOLLOWED A PARTICULAR METHOD OF ACCOUNTING, IT IS B INDING ON IT AUTHORITIES AND ON THE ASSESSEE. THE FACTS OF THE IMPUGNED CASE BEFORE ME ARE QUITE SIMILAR TO THE FACTS OF RELIANCE INDUSTRIALS DISCUSSED ABOVE. THE DISALLOWANCE MADE BY THE AO IS ON SIMILAR GROUND. 4 ITA NO. 922/KOL/2017 SPECIALTY RESTAURANTS LTD.AY 2010-11 THE HON'BLE TRIBUNAL IN THIS CASE HAS GONE BY THE P RINCIPLE LAID BY THE APEX COURT IN THE CASE OF KEDARNATH JUTE MFG. CO. LTD WHERE THE IMPORTANCE OF ENTRIES IN THE BOOKS OF ACCOUNTS HAS BEEN DISCUSSED. THE APEX COURT HAS OBSERVED SUCH TA XABILITY AND DEDUCTIBILITY ARE NOT HOWEVER DEFEATED BY MAKING OF ENTRY OR NOT MAKING E NTRY IN THE BOOKS OF ACCOUNT. THUS, IF THE ASSESSEE OMITS TO PROVIDE AN INCOME IN THE BOOKS OF ACCOUNT AND IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, IT IS OPEN TO THE AO TO BRING TO TAX SUCH INCOME DESPITE THE FACT THAT NO ENTRY IS MADE IN THE BOOKS OF ACCOUNT. SIMILARLY, T HIS PRINCIPLE IS APPLICABLE TO THE AMOUNT DEDUCTIBLE IRRESPECTIVE OF WHETHER THE ENTRY IS MAD E IN THE BOOKS OF ACCOUNT OR NOT. THEREFORE, DEDUCTIBILITY OF AN AMOUNT IN THE MERCANTILE SYSTEM OF ACCOUNTING IS NOT A PRISONER OF ENTRIES BEING MADE OR NOT BEING MADE. SO THE ASSESSMENT OF INCOME AND ALLOW ABILITY OF EXPENDITURE ARE DEPENDENT ON THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE AND NOT DEPENDENT ON ENTRIES MADE IN THE BOOKS OF ACCOUNT. ACCORDINGLY, FOLLOWING THE PRINCIPLE LAID DOWN BY T HE APEX COURT, THE HON'BLE MUMBAI HAS ALLOWED THE CLAIM OF THE ASSESSEE. FINALLY, THE ASSESSEE HAS ALSO PLACED RELIANCE ON T HE DECISION OF THE APEX COURT IN THE CASE OF TAPARIA TOOLS LTD .., 372 ITR 605(SC) WHEREIN IT HA S BEEN HELD AS UNDER: '(IV) THAT THE ASSESSEE DID NOT SEEK TO SPREAD THIS EXPENDITURE OVER A PERIOD OF FIVE YEARS AS IN ITS RETURN, IT HAD CLAIMED THE ENTIRE I NTEREST PAID UPFRONT AS DEDUCTIBLE EXPENDITURE IN THE SAME YEAR. WHEN THIS COURSE OF A CTION WAS PERMISSIBLE IN LAW TO THE ASSESSEE AS IT WAS IN CONSONANCE WITH THE PROVISION S OF THE ACT WHICH PERMIT THE ASSESSEE TO CLAIM THE EXPENDITURE IN THE YEAR IN WH ICH IT WAS INCURRED, THE FACT THAT A DIFFERENT TREATMENT WAS GIVEN IN THE BOOKS OF ACCOU NT COULD NOT BE A FACTOR WHICH WOULD BAR THE ASSESSEE FROM CLAIMING THE ENTIRE EXP ENDITURE AS A DEDUCTION. ONCE A RETURN IN THAT MANNER WAS FILED, THE AO WAS BOUND T O CARRY OUT THE ASSESSMENT APPLYING THE PROVISIONS OF THE ACT AND NOT TO GO BE YOND THE RETURN. THERE IS NO ESTOPPELS AGAINST THE STATUTE AND THE ACT ENABLES A ND ENTITLES THE ASSESSEE TO CLAIM THE ENTIRE EXPENDITURE IN THE MANNER IT IS CLAIMED.' THE GIST OF THE ABOVE DECISION IS THAT IF AN EXPEND ITURE HAS BEEN CLAIMED AS PER LAW AND IS ALLOWABLE IN THE YEAR IN WHICH IT HAS BEEN INCURRED THEN THE FACT THAT A DIFFERENT TREATMENT HAS BEEN GIVEN IN THE BOOKS OF ACCOUNTS WOULD NOT BE A BAR ON THE ASSESSEE FROM CLAIMING THE ENTIRE EXPENDITURE AS A DEDUCTION. HEREIN APPLYING THE SAID RATIO IT IS OBSERVED THAT THE LEASE RENTAL OF RS. 217651599/- WAS PAID DURING THE PREVI OUS YEAR. THE SAID LEASE RENTAL IS ALLOWABLE ON PAID BASIS AS PER THE PROVISIONS OF SE CTION 30. THE SAME HAS BEEN ALLOWED IN THE EARLIER YEARS ON PAYMENT BASIS. THEREFORE, IN THE B OOKS OF ACCOUNTS THE LEASE RENTAL DEBITED OF RS. 173192002/- ON ACCOUNT OF AS-19 WOULD NOT BA R THE ASSESSEE FROM CLAIMING THE ENTIRE EXPENDITURE PAID DURING THE PREVIOUS YEAR AS A DEDU CTION. ACCORDINGLY, THE ADDITION MADE BY THE AO OF RS. 4,44,59,597/- ON THIS GROUND IS HEREB Y DELETED. AGGRIEVED BY THE AFORESAID ACTION OF LD CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. WE NOTE THAT THE ASSESSEE HAS INCURRED ACTUA L RENT TO THE TUNE OF RS.21.76 CR. AND AS PER AS 19 HAS SHOWN RS.17.31 CR. IN ITS P&L ACCOUNT WHICH IS PERUSED FROM PAGE 15 OF THE PAPER BOOK AND THE LD. CIT(A) HAS TAKEN NOTE THAT T HE ASSESSEE HAS CONSISTENTLY BEEN 5 ITA NO. 922/KOL/2017 SPECIALTY RESTAURANTS LTD.AY 2010-11 FOLLOWING THE ACCOUNTING STANDARD AS 19 FOR AYS 201 0-11, 2011-12 AND 2012-14. THIS FINDING OF FACT HAS CRYSTALLIZED, SINCE THE DEPARTM ENT HAS NOT CHALLENGED THE FINDING OF FACT AS RECORDED BY THE LD. CIT(A). WE NOTE THAT IN EARL IER YEARS THE TOTAL RENT DEBITED AND PAID BY THE ASSESSEE HAS BEEN ALLOWED BY THE AO. IN THE IMPUGNED ASSESSMENT YEAR THE ASSESSEE HAS MADE A VARIATION ON ACCOUNT OF AS-19 AND THE RE NT DEBITED IN THE BOOKS OF ACCOUNTS IS RS.17,31,92,002/-. HOWEVER, THE ACTUAL RENT PAID DU RING THE YEAR WAS RS. 21,76,51,599/- WHICH HAS BEEN CLAIMED, UNDER THE PROVISIONS OF SEC TION 30, IN THE COMPUTATION FILED WITH THE RETURN OF INCOME. IT HAS TO BE KEPT IN MIND TH AT IF AN EXPENDITURE HAS BEEN CLAIMED AS PER LAW AND IS ALLOWABLE IN THE YEAR IN WHICH IT HA S BEEN INCURRED, THEN THE FACT THAT A DIFFERENT TREATMENT HAS BEEN GIVEN IN THE BOOKS OF ACCOUNTS WOULD NOT BE A BAR FOR THE ASSESSEE FROM CLAIMING THE ENTIRE EXPENDITURE AS A DEDUCTION. WE FIND THAT THE LEASE RENTAL OF RS. 217651599/- WAS PAID DURING THE PREVIOUS YEAR. THE SAID LEASE RENTAL IS ALLOWABLE ON PAID BASIS AS PER THE PROVISIONS OF SECTION 30 OF T HE ACT. WE NOTE THAT THE SAME HAS BEEN ALLOWED IN THE EARLIER YEARS ON PAYMENT BASIS. THER EFORE, IN THE BOOKS OF ACCOUNTS THE LEASE RENTAL DEBITED OF RS. 173192002/- ON ACCOUNT OF AS-19 WOULD NOT BAR THE ASSESSEE FROM CLAIMING THE ENTIRE EXPENDITURE PAID DURING TH E PREVIOUS YEAR AS A DEDUCTION. ACCORDINGLY, WE FIND NO INFIRMITY IN THE ACTION OF THE LD. CIT(A) IN DELETING THE ADDITION MADE BY THE AO OF RS. 4,44,59,597/-. THEREFORE, WE CONFIRM THE ACTION OF LD CIT(A). THIS GROUND OF APPEAL OF REVENUE IS DISMISSED. 6. THE NEXT GROUND OF REVENUES APPEAL IS AGAINST T HE ACTION OF LD. CIT(A) IN DELETING THE DISALLOWANCE MADE BY AO U/S. 14A OF THE ACT. B RIEFLY STATED FACTS AS OBSERVED BY THE AO ARE AS UNDER: 3. ON PERUSAL OF THE AUDITED BALANCE SHEET IT REV EALS THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD TAX EXEMPT DIVIDEND INCOME OF RS.6,63, 717/- OUT OF ITS INVESTMENT IN SHARES/UNITS OF MUTU AL FUND. BUT THE ASSESSEE HAS OFFERED NOTHING FOR DIS ALLOWANCE UNDER SEC. 14A, IN ITS RETURN OF INCOME. THE ASSESSEE WAS ASKED TO GIVE COMPUTATION OF 14A DISAL LOWANCE AS PER RULE 8D. THE A/R MADE A WRITTEN SUBMISSION IN THIS CONNECTION, BUT COULD NOT PROVID E ANY SATISFACTORY EXPLANATION FOR NOT DEDUCTING AM OUNT OF EXPENSES IN RELATION TO EARNING EXEMPT INCOME AS PER PROVISIONS OF RULE 8D. THE CONTENTION OF THE ASSESSEE IS NOT ACCEPTABLE BECAUSE ASSESSEE HAS SUB STANTIAL INVESTMENT FROM WHICH ASSESSEE HAS EARNED SUBSTANTIAL EXEMPTED INCOME. ASSESSEE HAS NOT MAINT AINED SEPARATE ACCOUNTS WHICH PROVE THAT ASSESSEE H AS INCURRED EXPENSE IN RELATION TO EARNING EXEMPT INCO ME ONLY TO THE EXTENT OF CLAIM OF THE ASSESSEE. THE REFORE, THE DISALLOWANCES UNDER SECTION 14A IS CALLED FOR A ND COMPUTED AS UNDER: I) AS PER RULE 8D(2)(I): NIL 6 ITA NO. 922/KOL/2017 SPECIALTY RESTAURANTS LTD.AY 2010-11 II) AS PER RULE 8D(2)(II): DISALLOWANCE UNDER RULE 8D(2)(II) = INTEREST (A) X (B)/(C) WHERE, 'A' STANDS FOR 'AMOUNT OF EXPENDITURE BY WAY OF INTERES T OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE YEAR; 'B' STANDS FOR 'THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT FORM PART OF THE TOTAL INCOME, AS AP PEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR ; AND 'C' STANDS FOR 'THE AVERAGE OF TOTAL ASSETS A S APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR '. ON PERUSAL OF AUDITED BALANCE SHEET SUBMITTED BY AS SESSEE IT IS SEEN THAT THE AVERAGE VALUE OF INVESTMENTS IN SHARES AND UNITS OF MUTUAL FUNDS IS RS.2,77,34,496/- (B). AVERAGE VALUE OF ASSETS IS (RS.81,61,34,1501- + RS.95,82,97,165/-) / 2 = RS.88 ,72,15,658/- (C) AND EXPENDITURE BY WAY OF INTEREST IS RS.14266169/- (A) THEREFORE, DISALLOWANCE UNDER RULE 8D(2)(II) = INTE REST ( A) X ( B ) 1 ( C) = RS. 14266169/- X RS.27734496/- RS.887215658/- = RS.4,45,963/- III) THE AVERAGE VALUE OF INVESTMENT WHICH AS PER R ULE 8D(2)(III) IS WORKED OUT AS : OPENING INVESTMENT + CLOSING INVESTMENT = RS.L5,000/- + RS.5,54,53,991/- 2 2 = RS. 2,77,34,496/- THEREFORE, DISALLOWANCE U/S.8D(2)(III) = 0.5% OF TH E AVERAGE OF VALUE OF INVESTMENT = 0.5% OF RS.2,77,34,496/- = RS.L,38,672/- 3.1 TOTAL DISALLOWANCE AS PER RULE 8D(2)(I) 8D(II) & 8D(2)(III) COMES TO RS.5,84,635/- {RS.4,45,963/- + RS.L,38,672/- - RS. 1,47,702/- (ALREADY DISALLOWED) } = RS. 4,36,933/- AND THE SAME IS ADDED BACK IN COMPUTING THE INCOME. 7. AGGRIEVED BY THE SAID ORDER, ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A), WHO DELETED THE ADDITION BY OBSERVING AS UNDER: THE ASSESSEE HAS SUO MOTO MADE A DISALLOWANCE U/S. L4A OF RS 1,47,702/-. THE AO OBSERVED THAT THE ASSESSEE HAD MADE SUBSTANTIAL INV ESTMENTS DURING THE PREVIOUS YEAR FROM WHICH IT HAD EARNED A SIGNIFICANT AMOUNT, OF EXEMPT ED INCOME. AS THE ASSESSES HAD NOT MAINTAINED SEPARATE ACCOUNTS WITH REGARD TO EXPENSE S INCURRED FOR EARNING EXEMPTED AND TAXABLE INCOME THE AO WAS NOT SATISFIED WITH THE DI SALLOWANCE OFFERED BY THE ASSESSEE OF RS.147702/- AND ACCORDINGLY HE INVOKED RULE 8D. THE TOTAL DISALLOWANCE AS PER RULE 8D CAME TO RS. 584635/- AND AFTER EXCLUDING THE DISALLOWANC E OFFERED BY THE ASSESSEE OF RS.147702/- THE AO MADE THE ADDITION OF RS.436933/-. I HAVE PERUSED THE SUBMISSIONS OF THE ASSESSEE. ON PERUSAL OF THE ACCOUNTS OF THE ASSESSEE IT IS SEEN THAT THE INVESTMENT IN MUTUAL F UNDS INCREASED FROM A MEAGER SUM OF RS.15000/- TO RS. 5,54,78,991/-. IT IS THEREFORE SE EN THAT ALMOST THE ENTIRE INVESTMENT IN MUTUAL FUNDS HAS BEEN MADE BY THE ASSESSEE DURING THE RELE VANT PREVIOUS YEAR. ON PERUSAL OF THE BALANCE SHEET IT IS OBSERVE AT SECURE LOANS HAVE IN CREASED FROM RS. 18.21 CR TO RS.19.47CR. THE ASSESSEE HAS ARGUED THAT OWN FUNDS HAVE BEEN UT ILIZED FOR THE PURPOSES OF MAKING INVESTMENTS. THE ASSESSEE HAS ACCORDINGLY CONSIDERE D PROPORTIONATE INTEREST EXPENDITURE TO THE TUNE OF RS. 290114/- FOR COMPUTING THE DISALLOW ANCE UNDER RULE 8D(2)(II). THE AO 7 ITA NO. 922/KOL/2017 SPECIALTY RESTAURANTS LTD.AY 2010-11 HOWEVER HAS TAKEN THE ENTIRE INTEREST EXPENDITURE O F RS. 1,39,76,056/- . THE ASSESSEE HAS ALSO SUBSTANTIATED THE PURPOSE OF THE LOANS: (A) TERM LOAN (B) FOREIGN CURRENCY NON RESIDENT LOA N (C) CASH CREDIT (D) CAR LOAN ON CONSIDERATION OF ALL THE FACTS ABOVE IT IS SEEN THAT THE CLAIM OF THE ASSESSEE THAT THE INVESTMENT HAS BE MADE FROM THE OWN FUNDS SEEMS REA SONABLE. THE RESERVES AND SURPLUS OF THE ASSESSEE INCREASED FROM RS. 55.23 CRS. TO RS. 64.88 CRS. THE SHARE APPLICATION MONEY RECEIVED DURING THE YEAR WAS RS. 4CRS. PROPORTIONATE DISALLO WANCE OUT OF TERM LOAN INTEREST OF RS.290114/- HAS SUO MOTO BEEN CONSIDERED BY THE ASS ESSEE. THEREFORE, NO FURTHER DISALLOWANCE OUT OF INTEREST EXPENSES, UNDER RULE 8D(2)(II), IS WARRANTED IN THIS CASE AS THE INVESTMENTS DURING THE PREVIOUS YEAR WERE ACQUIRED OUT OF OWN F UNDS. THE ADDITION MADE OF RS. 4,36,933/- MADE BY THE AO IS HEREBY DELETED. AGGRIEVED BY THE AFORESAID ORDER OF LD CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 8. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE NOTE THAT THE LD. CIT(A) HAS TAKEN NO TE THAT THE ASSESSEE HAS MADE INVESTMENTS TO EARN EXEMPT INCOME FROM FUNDS WHICH INCLUDED ITS OWN FUNDS IN SUFFICIENT QUANTITY. IN SUCH A SCENARIO, THEN A PRESUMPTION C AN BE DRAWN THAT ITS OWN FUNDS WERE UTILIZED FOR EARNING EXEMPT INCOME. THIS FACTUAL F INDING OF THE LD. CIT(A) WE CONCUR AFTER HAVING PERUSED THE BALANCE SHEET AND THIS FINDING O F FACT RECORDED BY THE LD. CIT(A) COULD NOT BE DISLODGED BY THE DEPARTMENT BEFORE US. IN S UCH A SCENARIO, RELYING ON THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN CIT-VS.- R ELIANCE UTILITIES & POWER LTD. REPORTED IN 313 ITR 340 (BOM.), WE CONFIRM THE ORDE R OF LD. CIT(A). THEREFORE, THIS GROUND OF APPEAL OF REVENUE IS DISMISSED. 9. IN THE RESULT, APPEAL OF REVENUE IS DISMISSED. ORDER IS PRONOUNCED IN THE OPEN COURT ON 10/10/201 8 SD/- SD/- (M. BALAGANESH) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 10TH OCTOBER, 2018 JD.(SR.P.S.) 8 ITA NO. 922/KOL/2017 SPECIALTY RESTAURANTS LTD.AY 2010-11 COPY OF THE ORDER FORWARDED TO: 1 APPELLANT ACIT, CENTRAL CIRCLE-3(1), KOLKATA. 2 RESPONDENT M/S. SPECIALTY RESTAURANTS LTD., UNIW ORTH HOUSE, 3A, GURUSDAY ROAD, KOLKATA-700 019. 3 4 5 CIT(A)-17, KOLKATA. (SENT THROUGH E-MAIL) CIT , KOLKATA DR, KOLKATA BENCHES, KO LKATA (SENT THROUGH E-MAIL) / TRUE COPY, BY ORDER, SR. PVT. SECRETARY