Income Tax Appellate Tribunal - Chandigarh
M/S Ludhiana Stock Exchange Ltd., ... vs Acit, Ludhiana on 17 October, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH 'A', CHANDIGARH
BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER
AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER
ITA No.15/Chd/2017
(Assessment Year : 2012-13)
M/s Ludhiana Stock Exchange Ltd., Vs. The A.C.I.T.,
Ludhiana. Circle-7,
Ludhiana.
PAN: AAACT5495M
(Appellant) (Respondent)
Appellant by : Shri Sudhir Sehgal
Respondent by : Shri Sandeep Dahiya, CI T DR
Date of hearing :25.07.2017
Date of Pronouncement : .10.2017
O RDE R
PER ANNAPURNA GUPTA, A.M.:
Th i s a p p e a l f i l ed b y t h e a s s e s se e i s d i r e c t e d ag a i n s t t h e o r d er o f l e a rn e d C o m mi s s i o ne r o f I nc o m e Ta x( A p p e a l s ) - 4 , L u d h i a n a d at e d 7 . 4 .2 0 1 5 r el a t i n g to a s se s sm e n t y e ar 2012-13.
2. Th e o n l y i s s u e i n t h e p r e se n t ap p e a l p e rt a i n s to t he d i s a l l o w an c e m ad e u / s 1 4A a m o un t i n g t o R s . 3 , 13 ,5 7 8 / - .
3. B r i e f l y s t at e d , th e a s s e s s e e c omp a n y i s e n g a g ed i n t h e b u s i n e s s o f p rom o t i o n o f r e g ul at i o n o f t r a d e o f s t o c k s a n d shares. As s e s sm e n t u/s 1 4 3( 3 ) was f r a m ed for the i m p u g n e d a s s e ssm e n t y ea r m ak i ng d i s a l l o w a n ce u/ s 1 4 A o f t h e A c t r. w . r . 8D o n a c c o un t o f e x p e n s e s a m o un t i n g t o R s . 3 , 1 3 , 5 7 8 /- i n c u rre d f o r e a r n i ng e xe m p t i n co m e i n re l a t i o n t o i n v e s t m e nt s m a de i n e q ui t y i n s tr u m e n t s o f t h e su b s i d i a r y 2 c o m p a n y o f t h e a s s e s s e e i . e. L S E S e c u r i t i e s L i mi t e d t o t h e e x t e n t o f R s . 3 , 45 , 1 7 , 6 2 5 /- . Th e s a m e w a s u p h e l d b y t h e L d . CI T( A p p e a l s ) .
4. A g g r i e v e d a g a i nst w h i c h t h e a s ses s e e h a s f i l e d p re s e n t a p p e a l b ef o r e us r a i s i n g t h e f ol l o w i n g g r o un d s :
1. That the Ld. CIT (A) has erred in confirming the order of the Assessing Officer in sustaining the addition of Rs.
3,13,578/- by invoking the provisions of section 14A because of the following facts:-
i). That no specific satisfaction has been recorded by the Assessing Officer with regard to disallowance made u/s 14A since the Assessing Officer has not recorded any reason for rejecting the claim of assessee and, as such, no disallowance could have made as per the binding judgment of Jurisdictional Hon'ble Punjab & High Court in the case of CIT Vs Kapson Associates as reported in 381 ITR 204.
ii). That the investment made by the assessee was statutory requirement of the Govt. and being strategic investment, no disallowance could be made u/s 14A since such investments are attributable to commercial expediency.
iii). That the assessee had sufficient interest free funds in the shape of 'Reserves and Surplus' and share capital and, thus, no borrowed funds having been utilized for the purpose of making the investment and, as such, no disallowance u/s 14A was required to be made.
2. Without prejudice to above, the Ld. CIT(A) has erred in stating that interest paid on member's security amounting to Rs.11,80,000/- should be considered for the purpose of the disallowance under Section 14A read with sub rule(2)ofRule8Donthecontention that the appellant had mixed funds and it could not be ascertained that which funds have been used for which purpose. The finding of the CIT (A) in this regard is not sustainable.
5. During the c ou r s e of h e a r i ng before us, learned c o u n s e l f o r t he a s s e s s e e c h a l l eng e d t h e d i s a l l o wa n c e m a d e o n s e v e r al c o u nts a s u n d er :
1) A b s e n c e o f s a t i s fa c t i o n r e co r d e d b y t h e A s s es s i n g Officer o f t h e i n c o r r e c tn e s s of the claim of the 3 a s s e s s e e th a t no e x p e n d i t ur e wa s i n c u r r ed v i s -à - v i s t h e s e i n ve s t m e nts .
2) Th a t in any case the entire i n v e s t m e n ts w e re m a d e o u t o f o wn i n t e r e s t fr e e fu n d s o f t h e a sse s s e e and no i n t e r es t bearing f u nd s has been used.
Th e r e f o r e no d i s a l l o w a nc e on interest e x p end i t u r e could be made.
3) W i t h p r e j u di c e to t h e a b o v e , t h e i n t e r e s t p a i d on s e c u r i t i es r e ce i ve d f r o m m e m b ers c o u l d n o t h a v e b e e n c o n s i d e r ed f o r th e p u r p os e o f di s a l l o w a nc e si n ce t h e s e c u r i t i es w e r e r e q u i r e d t o b e an d w e r e a l s o k ep t in F D R s a n d t h u s n o q u e s ti o n ar o se o f h av i n g u s e d t h e m f o r t h e pu r p o s e of t h e i mp u g n e d i n v e s t m e n t.
4) Th a t the said i n v e s tm e n t s were s t r a t egi c i n v e s t m e nt s an d, t h e r ef o r e n o di s a l l o w a nc e u/ s 1 4 A w a s w a r r an t e d .
6. W e s h a l l b e t a k i n g u p e a c h c o n te n t i o n o f t he a ss e s s ee one by one. Coming to the first c o n t e n ti on that the d i s a l l o w an c e u /s 1 4 A c o u l d n ot h a v e b e e n m ad e i n t h e absence of any s a t i s f ac t i o n r ec o r d e d by the Assessing Officer vi s - à - vi s the i n c or r e c t ne s s of t he claim of t he a s s e s s e e t h a t no e x p e n di t u r e ha d b e e n i n c ur r ed v i s - à- v i s t h e i m p u g ne d i n v e s t m e n t, L d . C o u n s e l fo r t he a s s e s s e e d r e w o u r a t t e n t i o n f i r s t t o t h e cl a i m m a d e b y t he a s s e s s e e b e f o r e t he A s se ss i n g O ff i c e r t h a t n o e x p e nd i t u r e h a d b e e n 4 incurred by t he a s s e s s ee v i s -à - v i s t h es e i n ve s t m e n t s, r e p r o d u c ed a t pag e 6 o f t h e o r de r a s u n d e r:
" In v ie w o f th e ab o v e , i t i s s u b mi t te d th a t, n o d ir e c t e x p e n d i tu r e was i n c u r r e d b y th e as s e s s e e an d n o b o r r o we d f u n d s was u til i z e d f o r th e p u r p o s e of in v e s ti n g in e q u i ty s h a r e s . As a r e s u l t, n o e x p e n d i tu r e o n ac c o u n t o f in te r e s t p ay me n t c an b e s ai d to h av e b e e n in c u r r e d f or th e p u r p o s e of e ar n in g t ax f re e in c o me . T h e en tir e i n v e s t me n t s , th e in c o me f r o m wh i c h wo u l d n o t f or m p ar t o f th e to tal i n c o me u n d e r th e A c t, h av e b e e n mad e o u t o f i n te r n al ac c r u al wi th o u t h av i n g in c u r r e d an y i n te r e s t e x p e n d i t u r e d u r in g th e ye ar .
H o we v e r , th e amo u n t o f d iv id e n d r e c e iv e d is d ir e c tl y c r e d i te d to th e ac c o u n t o f C o mp an y th r o u g h e - b an k i n g . T h e r ef or e , n o d ir e c t o r i n d ir e c t e x p e n d i tu r e h as b e e n in c u r r e d b y th e as s e s s e e an d th e r e f o r e n o d is al l o wan c e u n d e r s e c tio n 1 4 A ap p l ic ab l e to th e c o mp an y.
In v ie w th e r e o f , th e ap p l i c ab i l i ty o f R ul e 8 D d o es n o t ar i s e in th e c as e o f th e as s e s s e e .
F u r th e r , H o n ' b l e S u p r e me C o u r t i n c as e o f C IT v s. W al f o r t S h ar e & S to c k B r o k e r s P. L td . ( 2 0 1 0 ) 1 92 T ax man n 2 1 1 h e l d th a t f o r th e p u r p o s e of in v o k in g th e p r o v is io n o f s e c ti o n 1 4 A o f th e A c t, th e r e h as to b e a p r o x i ma te c au s e o f th e e x p e n d i tu r e wi th th e e x e mp t in c o me . In th e ab s e n c e o f th e p r o x i ma te c au s e f o r d is al l o wan c e , th e p r o v is io n o f s e c tio n 1 4 A c an n o t b e in v o k e d .
In th e c as e o f H ig h C o u r t o f Pu n jab & H ar y an a ( C o mmi s s io n e r o f In c o me T ax , J al an d h ar ) V s D e e p ak M i t t al , ( S e c tio n 1 4 A o f th e In c o me T ax A c t, 1 9 6 1 , r e ad wi th r u l e 8 D of th e In c o me T ax R u l e s , 1 9 6 2 - E x p en d i tu r e in c u r r e d in r e l ati o n to in c o me n o t i n c l u d ib l e in to t al i n c o me [ D i v id e n d i n c o me ] - A s s e s s me n t ye ar 2 0 0 7 - 0 8 ) - A ss es s e e h ad e ar n e d d iv id e n d i n c o me an d c o n s is te n t c as e o f as s e s s e e wa s th at h e h ad n o t mad e an y e x p e n d i tu r e o n e ar n in g such i n c o me . H o we v e r . A s s e s s me n t p r o c e e d in g s d is a g r e e in g wi th th e p l e a pf as s e s s e e h e l d th a t i n te r e s t b e ar i n g f u n d s had b e e n in v e s te d f or ge n e r ati n g d i v id e n d in c o me a n d h ad mad e an ad d i t i o n b y ma k in g d is al l o wan c e u n d e r s e c ti o n 1 4 A , r e ad wi th r u l e 8 D . W he th e r s in c e A s s e s s in g O f f ic e r in s te ad o f p r o c ee d in g to c o l l e c t ma te r i al o r e v id e n c e to d e te r mi n e e x p e n d i t u r e in c u r r e d b y 5 as s e s s e e , r e l ie d u p o n r u l e 8 D an d ap p l ie d i t as a f or mu l a, d i s al l o wa n c e was to b e d e l e te d . Held, ye s [ P ar a 9 ] ( in f av o u r o f as s e s s ee ) . " s
7. Th e r e a f t e r o u r a tt e n t i o n w a s d r a wn to the order of the Assessing O f f i cer where pu r p o rt e d l y s a ti s f a c ti on of the i n c o r r e c tn e s s of t h e c l a i m o f th e a s s e s s e e w a s r ec o r d e d b y t h e A s s e ss i n g Off i c e r at p a r a 2 . 4 a s u n d e r:
2.4 In view of the observations above and having regard to the accounts of the assessee I am not satisfied with the correctness of the claim of expenditure made by the assessee in relation to the income which does not form part of the total income under the act for the previous year. The method adopted by assessee cannot be accepted because it has been worked upon administrative expenses only on proportionate basis and a part of interest paid only. However, the expression of 'expenditure incurred' in section 14A of the I.T. Act refers to other expenditures also including rent, taxes, salaries interest etc. which cannot be apportioned unless Rule 8D is applied. Hence the amount of expenditure in relation to such income is required to be determined in accordance with the provisions of sub-rule 2 of rule 8D of the I.T. Rules.
8. Ld. C o u ns e l f or t h e a s se s s e e p o i n t e d o u t t hat the A s s e s s i n g O f f i c e r h a d s u m ma r i l y d i s m i s s e d t h e cl a i m o f th e a s s e s s e e a nd n o o b j e c t i v e s at i s fa c t i o n w a s r ec o rd e d h a v i n g r e g a r d t o t he ac c o u n t s o f th e a s s e s s e e t h a t e x p e n s e s i n r e l a t i o n t o t h e i m p u g n e d i n v e s tm e n t s h ad b e en i n c u r r e d by t h e a s s e ss e e . Ld c o u n s e l f o r t he a s s e s s ee p o i n te d t h a t t he A s s e s s i n g Of f i c e r h a d m e r e l y h a rp e d o n t h e m e t ho d a d o p ted b y t h e a s se s s e e b e i n g n o t a c c ep t a b l e s i n c e i t w o r k e d o nl y o n t h e a d m i n i s tr a t i v e e x pe n s e s a n d p a r t o f i n te r e s t o n l y a n d f u r th e r r ef er r e d t h at o t h er e x p e n s es a l s o h a d t o be i n c l u d e d . L d c ou n s e l f or t h e a ss e s s e e p oi n t e d th a t f i rs t l y 6 n o w o r ki n g or ca l c u l a t i on w as su b m i t t e d t o t h e A O a t a l l a n d t h e r ef o r e the o b s e r v at i o n s o f t h e A O i n t h i s re g a r d w e re w i t h o u t a n y b a si s . F u r t h e r L d . Co u n s e l s t a t e d t ha t c l e a r l y n o w h e r e i n t he s a t i s f a c ti o n re c or d e d , t he A s se s si n g O f fi c e r h a s m e n t i o n ed a s t o w h y t h e c l a i m o f t h e a ss e s s e e t h at since no borrowed funds w e re used for making t he i n v e s t m e nt s n o i n t e r e s t e x p e n di tu r e w a s t o be d i s a l l o w e d o r since the d i v i de n d r e c e i v ed is directly c re d i te d to the a c c o u n t o f t he a s s e s s e e n o e x pe n s e s a re i n cu r re d f o r t h e p u r p o s e o f e a rni n g d i v i d e nd i nc o m e , w a s i n cor r e c t . Ld c o u n s e l f o r t h e a s s e s s e e p oi n t e d o u t t h a t n o r efe r e n c e t o t h e e x p e nd i t u r e d e b i t e d i n t h e b o o k s o f a c c o un t s o f t he a s s e s s e e h a s b ee n m a d e b y t h e A O p o i n t i n g o u t t h a t s u c h e x p e n d i t ur e c o ul d b e s a i d t o ha v e b e e n i n cu r re d f o r t he purpose of e a rn i n g e x e mp t i nc o m e from the impugned i n v e s t m e nt for objective r e a s o ns . Ld. c o un s el for t he a s s e s s e e t he r e f or e s t a t e d t ha t th e s a t i s f ac t i o n re c o r d e d by t h e A s s e s s i n g O f f i c e r c o u l d n o t s a i d t o b e a n o b j e c t i ve s a t i s f a c ti o n . L d c o u n s e l f o r t he a s s e s s e e r el i e d on n u m b er o f j u d i ci a l d e ci s i o n s i n t hi s r e ga rd a s u n d er :
1 ) C I T V s . Ka p s o n s A s s o c i a t es , ( 2 0 16) 3 8 1 I TR 2 0 4 ( P&H ) 2 ) G a n e s h a y O v er se a s I nd u s t r i e s L t d . V s . D CI T, I TA N o . 1 8 6 / C hd / 2 0 15 d a t e d 19 . 1 0 . 201 5 3 ) D CI T Vs. L oi l H e a l t h f o od , I TA N o . 2 3 5/ C h d / 20 1 5 d a t e d 0 9 .0 9 . 2 0 15 7
9. Th e Ld DR, on the ot h e r ha n d , s t at e d tha t due s a t i s f a c ti o n h a d b e e n r e c o r de d by t h e A O a s p o i nt e d o u t b y the L d . C o u n se l for the a s s e ss e e at para 2. 4 of the a s s e s s m e nt o r d er a n d t h e c a se l a w s r e l i ed u po n b y t h e a s s e s s e e we r e no t a p p l i c ab l e i n t h e f a c t s o f t he p r e s e nt case.
10. We have h ea rd both the pa r t i e s vis-à-vis the c o n t e n t i on r e l a t i n g t o s a t i s f ac t i on o f t h e A O w i t h r e g a r d to t h e i n c o r r e ct n e ss o f the claim of t h e a s s e s s ee t h a t n o expenses were incurred for t he purpose of making t he i m p u g n e d i n ve s tm e n t s . Th e r e i s n o d i s p u t e v i s - a - v i s t h e p r o p o s i t i o n o f l a w t h a t b e f o r e m ak i n g d i s a l l o w a n ce u / s 1 4 A t h e A s s e s s i n g O ff i c e r h a s t o f i r s t o f a l l r e c o r d t h a t h a v i ng r e g a r d t o t h e a cc o u n t s o f t h e a ss e s s e e h e i s n o t s a t i s f i ed w i t h t h e c o r r e ctn e s s o f th e c l ai m o f t h e a s s e s see i n r e s pe c t o f e x p en d i t u re i n c u r r e d i n r e l a ti o n t o i n c om e wh i c h d oes n o t f o r m pa r t o f t o t a l i n co m e un d e r t h e A ct . Th e H o n ' b l e P u n j a b & H a r ya na H i g h C o u r t i n a l a t e s t d e c i s i o n i n P u n j a b Tr a c t o r s L t d . v s. C o m m i s s i on e r o f I nc o m e Ta x r e p o r t e d i n 7 8 t a x m a nn . c o m 6 5 w h i l e a n s we r i n g t h e q u e s ti o n f r a m e d b e f o r e i t w he t h e r i t i s n e c e s sa r y fo r t h e A s s e ss i n g O f f i c e r t o record hi s r e as o n s for not being s a ti s f i ed with t he c o r r e c t n es s o f t h e c l a i m o f t h e a s s e s s e e , a n s w er e d i n t h e a f f i r m a ti v e s ta t i n g t h a t th e m a tte r s t o o d c o n c l ude d i n v i e w o f t h e j u dg e m e nt o f t h e ju r i s d i ct i o n a l H i g h C ou r t i n t he 8 c a s e o f A b h i s h e k I n d u st r i e s . Th e H o n ' b l e H i g h C ou r t h e l d as under:
"The next question is as to whether it is necessary for the Assessing Officer to record his reasons for not being satisfied with the correctness of the assessee's claim.
19. It is mandatory for the Assessing Officer to record that having regard to the accounts of the assessee he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the Act or that he is not satisfied with the assessee's claim that no expenditure had been incurred by him in relation to the income which does not form part of the total income under the Act.
20. The matter stands concluded by a judgment of this Court dated 27.01.2015 inCommissioner of Income Tax-1, Ludhiana v. M/s Abhishek Industries Ltd. Ludhiana, ITA No. 320 of 2013, where the Division Bench held:-
"Section 14A of the Act requires the Assessing Officer to record satisfaction that interest bearing funds have been used to earn tax free income. The satisfaction to be recorded must be based upon credible and relevant evidence......................................"
21. The judgment in Maxopp Investment Ltd. (supra) also supports this view namely that the Assessing Officer must record reasons for not being satisfied with the correctness of the assessee's contentions with regard to the aspects mentioned in sub sections (2) and (3) of Section 14A. It is true that the Delhi High Court merely states that such rejection must be for disclosed cogent reasons. The disclosure, however, can only be in writing. It can 15 of 32hardly be suggested that the disclosure remains in the Assessing Officer's mind. The assessee is entitled to test the basis of the rejection of his contentions. This can be done only if the Assessing Officer records his reasons for his not being satisfied in writing."
11. H a v i n g s a i d s o , w h i l e a p p l y i n g th e a b o v e p r o p o s i t i o n t o t h e f a c t s o f t h e p r e s e n t ca s e a s p o i n t e d ou t b e f or e u s a nd a s i s e v i d e n t fr om a p e r u s a l o f th e o r d e r o f t h e A s s e s s i n g O f f i c e r p l a c e d be f o r e u s w e f i nd t h a t t he a s s es s e e h ad c o n t e n d e d be f o re t h e A s s e s s i n g O f f i c e r t h at n o e x p e n s e s e i t h e r i n t h e n a tu r e o f i n t e r es t or o t h e r h a d be en i n c u r re d 9 b y t h e a s s e s s ee i n r e l a t i o n t o t he s a i d i n v e s t m en t. Reasons f o r c l a i m i n g s o h a d a l s o b e e n g i v e n b y t h e a ss e ss e e s t a ti n g t h a t o w n f u n d s h a d b e e n u s e d fo r m a k i n g t h e i n v e s t m e n ts a n d s i n c e d i v i den d i s d i re c t l y c r ed i t e d t h ro u g h e-b a n k i n g no o t h e r e xp e n d i tu re i s a l s o i nc u r r ed . Th e A s s e ss i ng O f f i ce r , we find, r e je c te d the claim of the a s s e s see though p u r p o r t e dl y o n t h e b a s i s o f t h e b o o k s o f a c c o un t o f t h e a s e s s e e b u t n o ob j e c t i v e r e a so n s f o r r e je c t i n g t h e s a i d c l a i m is found. Th e A s s e s s i n g O f f i c er , a s r i g h t l y p o i nte d o u t b y the L d . c o u ns e l for the a s s e ss e e has simply s u m m a r i ly d i s m i s s e d th e cl a i m o f t h e a s se s s e e w i t h ou t sp e c i f i c al l y d e a l i n g w i t h t h e c o n t e n ti o n of t he a s e s s ee i n t h e c o n t e x t o f t h e b o ok s of a c co u n t o f t h e a s s es s e e . Th e AO w e f i n d w h i l e d i s m i s s i ng t h e c l a i m o f t h e a ss e s s e e h a s s t a ted t h a t t h e m e t h o d a d o p te d b y t h e a s s e s s ee c a n n o t b e a c c ep te d , w h i c h the L d . C o u n s el pointed out was incorrect since no calculation was done by the assessee at all. Th i s c o n t e n t i on h a s n o t b e e n co n t r ov e r t e d b y t h e Re v e n u e by pointing o ut an y such c a l c ul a t i o n submitted by the assessee. Th e r e fo r e , w e h o l d t h a t t h e A s s e s s i n g Of f i c e r h as p r o c e e d e d t o m ak e t h e d i s a l l o w an c e w i t h o u t r e c or d i n g a ny s a t i s f a c ti o n a b ou t t h e i n c or r e c tn e s s o f t h e c l ai m o f t he a s s e s s e e a nd t hu s t h e d i s a l l o w an c e s o m a d e i s l i a b l e t o b e quashed for this r e a s o ns alone in view of t he j u d i ci a l p r e c e d e n t i n t hi s r e g a r d ci t e d ab ov e .
12. Th e n e x t c o n t en ti o n r a i se d b y t he L d . Co u n s e l f or t h e a s s e s s e e w as t h at n o i n t e r e s t be ar i n g f u n d s w er e u t i l i z e d b y 10 t h e a s s e s s e d f o r m a k i n g i n v e s tm en t s i n t h e e q u i t y s h a r e s o f M / s L S E S ec u r i ti e s L i m i te d a n d , t h e r e f o re , n o d i s a l l o w a n ce o n a c c o u n t o f i n t e r e s t w as c a l l e d f o r . In this regard, ld c o u n s e l f o r t he a s s e s s e e d r e w ou r a t t e nt i o n to t h e d e t ai l f i l e d b e f o r e t he C I T ( A p p e a l s ) r e f l e c t i n g t h e f ac t t h a t n o borrowed funds were u t i l i ze d w h e n e v er i nv es t m e n t s in s h a r e s o f M N /s L S E S e c u r i ti e s Lt d . w a s m a d e i n d i f f e r e nt y e a r s , r e pr o d u c ed a t p a g e 1 0 o f th e CI T ( A p p e a l s ) o r d e r . Ld c o u n s e l f o r t h e a s s e s s e e p o i n t e d o u t t h a t t h e a f or e s a i d f a c t w a s s u b s ta n t i a te d f r o m th e b a l a n c e s h e et a n d p r o f i t a nd l o s s a c c o u n t f or t h e a b o v e m e n t i o n e d y e a r s w h i ch w a s a l s o f i l e d b e f or e t h e C I T ( A p p e al s ) . L d c o u n s e l f u r th e r s t a t e d t h a t i t w a s a l s o d e m o n s t r at e d bef o r e t he CI T ( A pp e a l s ) t h a t i n a l l t h e re l e v an t y e a r s w he n t he i n v e s t m en t w as m a d e t he assessee had s u f f i c i e nt own funds for ma k i n g t he i n v e s t m e nt s . A tt e n t i o n w as d r a w n t o t h e d e ta i l t a b u l a t i ng t h e s a i d f a c ts re p r o d u c e d a t p ar a 1 1 of t h e CI T ( A p p e a l s ) order as under:
Financial No. of Borrowed Borrowed Remarks Year shares funds as funds as o n purchased/ on 1 s t of 3 1 s t o f March (sold) April 1999-00 27,01,000 2004359 NIL This was a working capital loan that Was fully repaid on
13.04.1999 2000-01 13,00,000 NIL NIL No loan Was outstanding during the 11 year 2001-02 (1421,300) NIL 92,30,450 This was secured loan from Centurion Bank 2004-05 5,10,000 NIL NIL No loan Was outstanding during the Year 2009-10 2,41,375 NIL NIL No loan Was outstanding during the year Year Amount of Cash from Own funds in investment operations the beginning of the year 1999- 2.70,10,000/- 3,64,78,027 12,70,60,836 00 2000- 2,16,25,000/- 41608113 13,87,44,036 01 .
2004- 5I,00,000/- 91,71,215 15,38,35,753 05 2009- 36,20,625/- 1,08,53,140 17,58,76,643 10
13. L d c o u n s e l st a t ed t h a t i t w a s c l ea r l y e v i d en t f r om t h e a b o v e t h a t no b or r o w e d f u nd s h ad b e e n u s e d fo r m a k i n g t h e i n v e s t m e nt s a n d t h a t t h e s a m e h a d b e e n m a d e e n t i r e l y o u t of own f u nd s of the a s ses s e e and, t h er e f o r e , no d i s a l l o w an c e o f i n t e r e s t e x p end i t u r e c o u l d b e m a d e u / s 14A. R e l i a n c e wa s p l a c e d o n a nu m b e r o f de c i s i on s o f H i gh C o u r t s i n t h i s r eg a r d :
1) C I T V s . H D F C Ban k L t d . ( 20 1 4 ) 366 I TR 5 0 5 ( B o m )
2) C I T V s . R e l i a nc e U t i l i t i e s & P o w er L t d . ( 2 0 0 9 ) 3 13 I TR 3 4 0 ( Bo m ) 12
3) C I T V S . M a x I nd i a L t d . , I TA N o . 2 1 0 / C h d/ 2 0 1 3 d t . 0 8 - 0 3 -2 0 1 7
14. L d . D R o n t he o th e r h a n d r e l i e d u p o n t h e o r d er th e CI T ( A p p e a l s ) s t a t i ng t h a t i n v i e w of a v a i l a b i l i t y o f mi x e d f u n d s t h e d i s a l l o w a n ce w a s w a rr a n t e d .
15. H a v i n g he a r d t he c o n t e nt i o n s o f b o t h th e p ar t i es , w e f i n d m e r i t i n th e c o n t e n ti o n s o f t h e l d c o un se l f o r t h e assessee. W e f i nd t h a t t h e a s s e ss e e h a d d u l y d em o n s t r a t ed t h e f a ct t ha t th e i n v e s tm e n t s m ad e i n v a r i ou s ye ar s w a s n o t out of b o r ro w ed funds and having d e mo n s tr a t e d t he a v a i l a b i l i t y o f e no u g h o w n f u n ds t h e a s s e s s ee h a d a l s o d u l y d e m o n s t r at e d t ha t t h e r e w e r e su f f i c i e nt o w n i nt e r e s t fr e e f u n d s f o r m a k i ng t h e i m p u g n e d i n v e s t m e n ts . Th e r e f o r e , there wa s no reason fo r ma ki n g any d i s al l o w a n c e of i n t e r e s t. Th e r e l i a n c e pl a c e d b y t h e l d co u ns e l f o r t he a s s e s s e e o n t h e d e c i s i o n o f t h e Ju r i s d i c t i o n a l Hi gh C o u r t i n t h e c a s e of M a x I n d i a L t d . ( s u p r a) i s a p t w he r e i n it h a s b e e n h e l d t h a t i f a n a s s e s s e e e s ta b l i s h e s t h a t i t s i nt e r e s t f r ee f u n d s we r e e q u a l t o or m or e th a n t h e i n t e r es t be ar i n g f un d s i t w o u l d b e o p en t o i t to c o n t en d t h a t p re s u mp t i o n a r i s es that the e x p e nd i t u r e f or e a r ni n g i n t e re s t i nc o m e w as i n c u r r e d f r o m ou t o f i ts i n t er e st f r e e fu n d s . The r e l e v a nt f i n d i n g s o f t h e Ho n ' b l e H i g h C o urt a r e a s u n d e r :
"9. This presumption is unfounded. Merely because the interest free funds with the assessee have decreased during any period, it does not follow that the funds borrowed on interest were utilized for the purpose of investing in assets yielding exempt income. If even after the decrease the assessee has interest free funds sufficient to make the investment in assets yielding the exempt income, the presumption that it was such funds that were utilized for the said investment remains. There is no reason for it not to. The basis of the presumption as we will elaborate later is that an assessee would invest its 13 funds to its advantage. It gains nothing by investing interest free funds towards other assets merely on account of the interest free funds having decreased. In that event so long as even after the decrease thereof there are sufficient interest free funds the presumption that they would be first used to invest in assets yielding exempt income applies with equal force."
16. I n v i e w o f th e a b o v e we h o l d t h a t i n a n y c as e n o d i s a l l o w an c e o f i n t e r e s t e x p en d i tu r e u / s 1 4 A w as l i a b l e i n t h e p r e s en t c a se a n d t h e sa m e n ee d s t o b e d e l e te d.
17. Th e n e x t c o n t e nt i o n r a i s e d b y th e l d c o u n s e l f or t h e a s s e s s e e w as th a t t h e e n t i re i n v e s t m e nt s w e re s t r a t e g i c i n v e s t m e nt s a n d t h e s o l e o bj e c ti v e o f t h e i n v e st m e n t w as not to earn dividend or capital gain on sale of such share b u t t o p r o vi d e tr a d i n g p l at f o r m t o t h e g e n er a l pu b l i c . Ld c o u n s e l f o r th e a s s e s s e e d r e w ou r a t t e nt i o n t o th e d e t a i l e d s u b m i s s i on s m ad e b e f o r e t he l o w e r a u t h o ri t i e s r e p r o d u c ed a t p a g e No s . 1 7 an d 1 8 o f t h e CI T( A p p e a l s ) a s u n der :
• After the scam in stock market in year 1994 and formation of regulatory i.e. Securities and Exchange Board of India, the regulatory decided to discourage the functioning of regional stock exchanges in India and promoted a national level of stock exchange i.e. National stock exchange.
• Later on, it was felt by the regulatory that it was difficult to control and regulate the functions. Then the question arose as to what the members of regional stock exchanges would do in case of closure of stock exchanges and how to provide a trading platform to the investing public in the remote areas.
To solve this issue, a meeting of a group on revival of small stock exchanges was held on 8tk September 1999, to discuss the suggestions/ revival plans forwarded by small exchanges for their revival. The group considered the suggestion/ revival plans submitted by small exchanges and recommended that small exchanges may be permitted to promote a subsidiary which can acquire membership rights of larger stock exchanges viz. NSE/BSE/CSEADSE' or any other exchange subject to usual conditions applicable to the other members. Thereafter, a circular no. SMD-Il/policy/CIR-37/99 dated 26.11.1999 was passed, wherein it was held that the small stock exchanges may promote/ float a subsidiary company to acquire membership rights of other stock exchanges subject to 14 certain conditions. Copy of the said circular is enclosed on pages 76 of the paper book.
• Out of the said conditions, one condition was that the subsidiary company shall be 100% owned by the stock exchange promoting/ floating such a subsidiary/company.
• Further, a consequential amendment was made under Rule 17C of the Income tax rules to include the said kind of investments in the forms or mode of investment or deposit by a charitable or religious trust or institution, as specified in the said rule, to claim exemption under section 11 of the Act. The relevant clause of Rule 17C is mentioned below:
Rule 17C: The forms and modes of investment or deposits under clause
(xii) of sub-section (5) of section 11 shall be the following, namely:
A. which is engaged in dealing with securities or mainly associated with the securities market;
B, whose main object is to acquire the membership of another recognised stock exchange for the sole purpose of facilitating the members of the investor to trade on the said stock exchange through the investee in accordance with the directions or guidelines issued under the Securities and Exchange Board of India Act, 1992 (15 of 1992) by the Securities and Exchange Board of India established under section 3 of that Act; and C. in which at least fifty-one per cent of equity shares are held by the investor and the balance equity shares are held by members of such investor;
• On the basis of the above legal and factual submissions, it is submitted before your goodself that the investment made by the appellant in the equity shares of its subsidiary company i.e. LSE securities Ltd was not made for the purpose of earning dividend or profit on sale of such shares but for the purpose of creating a subsidiary company to provide a trading platform to the investing public in the remote areas i.e. the said investment was made to promote the objective of promotion of stock and shares.. Therefore, the provisions of Section 14A are not applicable in case of the appellant. In this regard, the appellant places reliance on the following judicial pronouncements:
18. I t w a s th e r e f or e c o n t e n d ed t h at t h e s a i d i n v es tm e n t b e i n g s t ra t e g i c i n n a t u r e n o di s a l l o w a nc e u / s 1 4 A w as w a r r a n t e d. R e l i an c e w a s p l ac e d on t h e d e c i si o n o f t h e D e l hi H i g h C o u r t i n th e c a s e o f C I T V s . O r i e n t a l S t ru c t u r a l P v t . L t d . i n I TA N o. 6 05 / 2 0 1 2 d at e d 1 5. 1 . 2 0 1 3 .
19. L d . D R , o n t he ot h e r h a n d , re l i ed u p o n t h e o r der s o f t h e l o w e r a u t h o ri t i e s a n d s t a t e d t h a t n o d i f f e r e nti a t i o n o n 15 account of s tr a t e g i c i n v es t me n t s or otherwise was p e r m i s s i bl e f o r th e p u r p o se o f app l i c a b i l i t y o f s e ct i o n 1 4 A .
20. H a v i n g he a r d b ot h t h e p a r t i es , w e a g r e e w i t h th e l d c o u n s e l fo r t h e a s s e s s e e . U n d ou b t e d l y an d u n di s p u t e d l y, t h e i n v es t m e n t m a d e i n s h a r e o f L S E S e cu r i t i es L t d . w a s f o r t h e p u r p o s e o f f ac i l i t a t i n g a n d p ro v i d i n g a t ra d i n g p l a t f o rm t o t h e g e n e r a l p u b l i c b y c r e a ti n g a s u b s i d i a r y c o m p a n y . H a v i n g s a i d s o , t h e c o m m e r ci a l e x p e d i e n c y o f m a k i n g t h e i m p u g n e d i nv e s tm e n t s t a n d s es ta b l i s h e d a nd t he i n t e r e s t e x p e n d i t ur e i n c ur r e d t h e r e on c a nn o t t h e r e f or e b e h e l d t o b e f o r a n y n o n b u s i n e s s p ur p o s e s o a s t o w a r r a nt d i s a l l o w a n ce o f t h e s a m e u /s 1 4 A of t h e A ct . R e l i a n c e p l ac e d b y l d . counsel for the assessee on the decision of the Delhi High C o u r t i n t h e cas e o f O r i e n ta l St r u c t u r a l En g i n ee r s P v t . i s apt wherein it has been c a te g o r i c a l l y held that the i n v e s t m e nt b e i ng attributable to commercial e x p e d i e n c e, e x p e n s e s i n c u r red i n r e l a t i o n t o th e s a m e c a n n o t b e t e r m e d t o h a v e b e e n i n c u r r e d f o r e a rn i n g e x e m p t i n co m e . We, t h e r e f o r e, h o l d t h a t s i n c e t h e i n v e s t m e n ts w e r e s t r a t e g i c i n v e s t m e nt s n o d i s a l l o w an c e c o ul d b e m a d e u / s 1 4 A o f t he Act.
21. I n v i e w o f t h e a bo v e , w e , t h e r e fo re , s e t a s i d e t h e o r d e r o f t h e L d . CI T( A p p e a l s ) an d d i r e c t t h a t th e d i s a l l o w a n ce m a d e u / s 1 4 A be d e l e te d . G r o un d o f a p p e a l N o .1 r a i s ed by t h e a s s e ss e e , th er e f o r e , s t a n d s a l l o w e d .
22. In g r o un d No . 2 the a s s e s se e has c o n t e st e d the inclusion of fu n d s p e r t ai n i ng to m e m b e rs security a m o u n t i n g t o R s. 1 1 , 8 0 , 0 00 / - r e ce i v e d b y t he a ss e s s e e f o r 16 the purpose of c a l c u l a ti n g the interest e x p e n s es d i s a l l o w ab l e u /s 14A. Since in ground N o .1 we have d e l e t e d t h e e n t i re d i s a l l o w a n ce ma d e u / s 1 4 A i n c l u d i n g the i n t e r e s t c om p o ne n t , t h e s a i d gro u n d b e c o m es i n f r u c t u o us a n d n e e d n o t b e a d j u d i c a te d u p on .
23. I n t h e re s u l t , t he a p p e a l o f t he a s s e s s e e i s , th e re f o r e , a l l o w e d i n a b o ve t e r m s .
O r d e r p r on o u n c ed i n t h e o p e n cou r t .
Sd/- Sd/-
(SANJAY GARG) (ANNAPURNA GUPTA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 17 t h October, 2017
*Rati*
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A)s
4. The CIT
5. The DR
Assistant Registrar,
ITAT, Chandigarh