TMI Blog2016 (2) TMI 1353X X X X Extracts X X X X X X X X Extracts X X X X ..... n perusal of the records, we find that the co-ordinate bench in assessee s own case has decided similar issue [ 2010 (11) TMI 1128 - ITAT AHMEDABAD] confirm the order of the CIT (A) in vacating the disallowance of depreciation on sale and lease back transactions and dismiss the grounds of appeal of the revenue for all the years under consideration. Disallowance u/s 14A r.w.r. 8D - proportionate disallowance of interest expenditure u/s 14A - HELD THAT:- As per provisions of section 14A of the Act the duty is cast upon the Assessing Officer to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act. We find that average investments of the assessee are approximately 40% of the total share capital and reserve surplus, addition in the reserve and surplus is arising mainly due to the exempted income earned by the assessee in previous years as well as during Asst. Years 2005-06 to 2007-08 which gives a holistic view that the company s main business activities of sale of newspapers and printing material is not giving considerable profits to the company and its overall revenue from the main business activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 for Asst. Year 2005-06, on 30.12.2008 for Asst. Year 2006-07, on 22.12.2009 for Asst. Year 2007-08, on 29.11.2010 for Asst. Year 2008-09 on 28.12.2011 for Asst. Year 2009-10 and made certain additions. 4. Ground No.1 of ITA No.637, 638/Ahd/2011 and Ground no.3 of ITA No.639/Ahd/2011, Ground No.2 of ITA No.62/Ahd/2012 and Ground No.1 of ITA No.1659 relate to deletion of addition of business development expenses by ld. CIT(A) and not holding them as capital expenses. 5. The ld. AO has disallowed the business development expenses and treated them as capital expenditure for following Asst. Years:- Asst. Year Amount 2005-06 25,96,09,700/- 2006-07 22,25,22,761/- 2007-08 19,56,96,676/- 2008-09 19,32,98,364/- 2009-10 9,89,60,372/- 6. The ld. DR supported the orders of Assessing Officer. 7. At the outset ld. AR of the assessee submitted that similar grounds relating to business development expenditure being business expenses and not ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder consideration. The only dispute was regarding the nature of expenditure as to whether capital or revenue and whether the expenditure was incurred out of commercial expediency or not. It is not in dispute that by incurring the expenditure under consideration, the assessee has not acquired any new capital asset. Thus, in our considered view, the contention of the revenue that the expenditure incurred was capital in nature, is wholly unsustainable. Only because an expenditure may result in some benefit in the unspecified subsequent period, does not make the revenue expenditure as capital expenditure. The other reason given by the AO that there is no direct corelation between the amount of expenditure and number of subscribers, is also irrelevant for deciding the nature of expenditure or the allowability of the expenditure. For an expenditure being allowable, it is not necessary that the expenditure must have yielded immediate or quantifiable benefit to the assessee. In respect of the other argument of the revenue that expenditure was incurred gratuitously and not exclusively for the purposes of business, we find that it is not in dispute that the expenditure was incurred for givi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order dated 19.11.2010. 13 We have heard the rival contentions and perused the material on record. After considering the facts of the case and material on record, we find that the issue involved in this ground is that the assessee company bought certain assets from RSEB in previous years and the same were leased back to RSEB. The assessee has been showing income from lease from RSEB and also claiming depreciation on the assets leased to RSEB. This fact that depreciation has not been claimed by RSEB and only claimed by assessee is not controverted by the Revenue. Further on perusal of the records, we find that the co-ordinate bench in assessee s own case has decided similar issue in ITA No.479/Ahd/2005 for Asst. Year 2001-02 and others, vide order dated 19.11.2010 in the following manner:- 2. Ground No 1 in the appeal of the revenue for assessment year 2001-02, ground No 2 in assessment year 2002-03, and ground No. 1 in the A.Y. 2004- 05 are directed against the order of the CIT(A) deleting the disallowance of depreciation Rs. 9,04,59,142 in A.Y. 2001-02, Rs. 6,78,44,356 in A.Y. 2002-03 and Rs. 1,76,67,150 in A.Y. 2004-05. 3. At the outset, the Ld. AR submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SEB, it received lease rent from RSEB which has been offered to tax. The details of lease rent received and depreciation claimed in respective years as noted by the Ld. CIT(A) are as under:- Asstt. Years Lease Depreciation 1996-97 99,43,526 5,12,48,38,250 1997-98 8,02,87,259 28,58,95,559 1998-99 9,77,24,689 21,44,21,668 1999-00 11,63,31,388 16,08,16,251 2000-01 14,55,12,762 12,06,12,188 2001-02 19,40,03,963 9,04,59,142 2002-03 24,01,74,952 6,78,44,356 2003-04 26,69,24,757 5,08,83,267 2004-05 13,09,492 3,81,62,451 2005-06 11,87,844 2,47,74,630 2006-07 11,87,844 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee [lessor] and RSEB [lessee] into a hire purchase agreement. (d) In the present case, it is undisputed that RSEB the lessee [who will be the hire purchaser in case the agreement of lease ] has not claimed any depreciation in respect of these assets. Therefore, it will be the assessee who continues to be an owner as long as the hire purchaser does not comply with all the terms of agreement, who will be entitled to depreciation. Therefore, taking into consideration the totality of the facts and circumstances of the case we direct the AO to allow depreciation to the assessee in respect of the disputed assets in accordance with law. Accordingly, ground of appeal no. [1] is allowed. Following the above order of the tribunal, Ld. CIT(A) allowed the claim of depreciation this year also. 6. Ld. D.R. submitted that these transactions are only paper transaction or at best a financial transaction because the assets have not been actually transferred from RSEB to the assessee. They are in the premises of the RSEB and used by the RSEB itself prior to the arrangement and the subsequent to arrangement. At best, it is only a financial transaction whereby the assessee has provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been held to be genuine and accordingly, depreciation has been allowed to them on sale and lease back assets, then similar treatment has to be given to the sale and lease back of assets in the case of present assessee. Respectfully following the above decision of the Hon. Rajasthan High court and Gujarat High court and also the decision of the tribunal, we uphold the order of the Ld. CIT (A) and dismiss this ground of the revenue. 7. In the assessment years under present appeals also, depreciation in question relates to assets which were for the first time leased out in A.Y. 1996-97 and which has been on continuous lease since then. It is not in dispute that the depreciation under dispute does not relate to any new asset which was acquired during the years under appeal. Further, it is also not in dispute that the assessee derived similar lease rental income in respect of assets in question in all the years under present appeal which were derived by it in the A.Ys 1999-2000 and 2000- 01. As the tribunal has already accepted the transactions as operating lease in respect of which depreciation was allowable to the assessee in the earlier years, we find no error in the order of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Asst. Year 2005-06 was ₹ 538.27 crores and the impugned revised disallowable interest calculated was ₹ 1,23,49,193/-. 18. Aggrieved, assessee went in appeal before ld. CIT(A). After taking into consideration the submissions of assessee, he gave part relief to the assessee by mentioning that proportionate disallowance can be arrived at after dividing investment in equity shares by total assets of the company, which in the case of assessee was at ₹ 538.27 crores and by applying the figure of total assets of ₹ 538.27 crores the disallowance of interest arrived at ₹ 1,23,49,193/- which has been computed as under :- 8 crores x 83.09 crore = 1,23,49,193 538.27 crores 19 Aggrieved, Revenue is now in appeal before the Tribunal. 20 Ld. DR relied on the orders of Assessing Officer. 21 Ld. AR submitted that assessee company is having sufficient interest free funds in the form of share capital, reserve and surplus which are much more than the investments in shares and mutual funds. So there should not be any reason for any disallowance of interest because intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground for the assessment year 2003-04 which relates to the disallowance of interest of ₹ 24,20,456/- in place of Rs. .95,59,825/- by invoking provisions of sec. 14A. 40. The brief facts of the case are that the assessee company made investment of ₹ 106.73 crores as on 31-3-2003 as compared to ₹ 99.79 crores as on 31-3- 2002. The entire investment except ₹ 10 crores in Ahmedabad Municipal Corporation City Bond Rs. 40.00 crores in Sardar Sarovar Narmada Nigam Limited tax free bond and ₹ 2.50 crores in flexi-bonds of IDBI, were in shares of mutual fund which gave either capital gain or dividend income. The interest income on tax free bonds was offered for tax. The assessee did not submit details of investment in shares and mutual fund during the year under consideration nor it substantiated that only interest free funds were used for making the investment. In absence of the details of source of investment in shares and mutual fund, the Learned Assessing Officer concluded that during the year assessee company invested interest bearing funds for making investment in shares and mutual fund. Accordingly, he disallowed proportionate interest expenditure o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e details of interest, it is noted that the appellant has paid ₹ 1.91 crores as interest on the loan account against fixed deposit account and therefore this interest is tobe apportioned under section 14A towards the investment of ₹ 50 crores which has been made for the bonds on which interest free income has been earned. As the appellant's accounts are mixed, proportionate interest will be disallowed following ITAT's judgment in the case of H.K.Bhatt Vs. ITO, 91 TTJ 311 (Ahmedabad). It is also noted that the investment of ₹ 40 crores in Sardar Sarovar Narmada Nigam Ltd. has been made on 20.09.2002 and ₹ 10 crores was invested in the bonds of AMC on 21.03.2002. During this assessment year, dividend income of the appellant was taxable and therefore the appellant has offered total income of dividend amounting to ₹ 1,16,79,641/- as taxable. However, the income which was not taxable during this year, which has been shown by the appellant as tax free, is interest on bonds of Sardr Sarovar Narmada Nigam Ltd., Series-I and bonds of Ahmedabad Municipal Corporation. The basic question which is to be decided is the amount of interest which is relatable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 69.51 61.99 114.35 6. Dividend 2.08 3.83 3.00 7. Profit on sale of investment 43.20 43.06 68.85 8. Secured loan 120.00 2.15 54.60 9. % of investment of share capital and reserve surplus 42.% 53% 39% 26 From analyzing the above figures, we find that average investments of the assessee are approximately 40% of the total share capital and reserve surplus, addition in the reserve and surplus is arising mainly due to the exempted income earned by the assessee in previous years as well as during Asst. Years 2005-06 to 2007-08 which gives a holistic view that the company s main business activities of sale of newspapers and printing material is not giving considerable profits to the company and its overall revenue from the main business activity is also going at the same pace without any major ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, Assessing Officer has framed the assessments by treating surplus from sale of investments as business income except allowing the claim of long term capital gain from sale of shares whereas ld. CIT(A) has partly given relief to the assessee by holding that except the transactions of sale of shares which have been held for more than one month, remaining transactions should be treated as short term capital gain and income from mutual funds earned through the reserves of portfolio manager as business income. 31. From going through the assessment order for Asst. Year 2005- 06 we find that Assessing Officer has mentioned about huge transactions of purchase/sales of shares as well as acquisition of shares of certain IPOs. We are reproducing below some portion of the assessment order :- 2. Income under the head 'Capital Cain' 2.6 The facts of the assessec's case arc discussed with reference to the above tests hercjunder: (i) The subject matter of realisation : As mentioned in para 2.1 above, the details of turnover made in shares and mutual fund is reproduced hereunder: Capital gain I Purchase cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0900 20.04.2004 07.10.2004 Datamatics 33775 08.05.2004 08.11.2004 GAIL 20000 03.06.2004 28.10.2004 ICICI Bank 42132 20.04.2004 31.12.2004 NTPC 50000 05.11.2004 08.11.2004 TCS 110111 23.08.2004 31.10.2004 to 14.12.2004 The above data indicates that the assessee's period of holding remained short in most of the cases. Thus, the result of this test is not in favour of assessee. (iii) The frequency or number of transaction by the same person : It can be verified from the details of purchase and sale of shares as mention/d in para 2.1 above, the assessee indulged into similar transactions very frequently Scrutiny of the profit and loss account reveals that if the capital gain of ₹ 43,19,73,163/- on sale of shares/units is put outside then there is a loss of ₹ 13 crores in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. The assessee also made funds available to Ganpati, S.H. Vora, etc. for making multiple applications in IPO of TCS .Records shows that the assessee has employed total of ₹ 980205 137- in IPO of TCS. Similarly, in IPO of Punjab National Bank, Dena Bank, NTPC and Vishal Exports, total fund employed by the assessee is ₹ 12,51,68,1007-, ₹ 2,70,00,0007-, ₹ 6,75,35,4017- and ₹ 54,00,0007- respectively. Through this activity, the assessee managed to buy shares at the lowest possible price with a clear cut intention to sale them at profit. Buying of shares at the time when price was low and selling them on profit subsequently is considered to be the activity as adventure in nature of trade Dalhousie Investment Trust Co. Ltd. 68 ITR 486 (SC) (c) The assessee transferred the funds to certain persons just prior to the date of closing of the IPOs who in turn transferred the said funds to the persons involved in the IPO scam. The details are summarized as under: Name of the IPO Date of closure To whom funds transferred by the assessee Amount (Rs.) Date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompared to the interest. Therefore, the purchase of shares must be for purpose of earning profit on their sale and hence the transaction of such nature amounted to adventure in the nature of trade. Since multiple applications have been made and borrowed funds have been used for acquiring maximum number of shares, the assessee cannot be an investor but is found to be a trader. In the case of H.Mohammad Co. Vs. CIT (1977) 107 ITR 637, the Gujarat High Court observed that It is possible that one and the same commodity may in the case of one assessee be his stock-in-trade, whereas in the case of another assessee it may be his capital asset. For example, in the case of an assessee who carries on the business of buying and selling land, land may be his stock-in-trade but in the case of an assessee who has invested his savings in land and gets income from the land or the structures put up on the land, the land is his capital asset. Therefore, one of the indications for deciding as to what is stock-in-trade is whether a particular assessee is buying or selling the commodity or whether he has merely invested his amount with a view to earn further income or with a view to carry on his other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax or taxed at a lower rate and on the other hand, the expenses have been claimed from the business income. This proves that the surplus on short term share transactions is nothing but business income. As the surplus on share trading is being taxed as business income, the securities service charges are allowed as deduction. 2.8 Applying the above tests to the transactions entered into by the assessee as discussed above, it is clear that the surplus arising out of sale of shares and mutual fund is nothing but the business income as the assessee held the shares as trading assets. This view also finds support from the CBDT Instruction No. 1827 dated 31.08.1989 and supplementary instructions in the form of Circular No. 4 of 2007 dated 15.06.2007. The magnitude of the activity indicates that the assessee ceases to be an investor and become trader. The short term capital gain on sale of shares/securities and mutual fund as declared, for the reasons discussed in detail in foregoing paras, is taxed as business income of the assessee. 2.9 In view of above stated facts, the short term capital gain of ₹ 622726487- on sale of shares and short term capital gain of ₹ 55327815/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me should be taxed as business income at normal rates. Recently the Hon'ble Ahmedabad ITAT in case of Shri Sugamchand C. Shah in ITA No. 3554/Ahd/2008 vide order dated 29th January, 2010 on issue identical to this case, has held as under: 11 When we examine the facts of the case, we find assessee has maintained the books of account in respect of dealing in shares and assessee has shown the transactions in shares as investment and not as stock-in-trade. It has been shown consistently for several years in. the past and Department has not challenged the book keeping or accounting 'of shares' as investment. No contrary material or facts have been pointed out by the Revenue to show that facts in the current year are different than the facts in earlier years. It is also not pointed out by the Revenue that frequency and number of transactions are abnormally high in the current year as compared to what was done in earlier years. 12 There is also no material to come to the conclusion that the valuation of investment has been done on cost or net reliable value whichever is low. The assertion of the assessee is that entire portfolio has been valued at cost as at the end of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod of the shares is from '0' days to '366' days. In some cases, the frequency of transactions are apparently substantial as on one day the assessee has purchased several scripts and sold several of them on the same day. 15 The question is whether therefore, merely from frequency of the transactions carried on by the assessee, he is treated as dealer in shares or still he is held as investor. As found in the case of Samath Infrastructure (P) Ltd. vs. Asstt. CIT (supra) also, assessee adduced evidence to show that his holdings are for investment as recorded in the books of account. The holdings are valued at cost, and such accounting has been accepted by the Revenue in earlier years. There is no material to show that assessee has declared himself as a trader in shares and legal requirements therefore have been complied with. It is also a fact that he has not borrowed any money for investing in shares. Merely because, assessee had some borrowed funds it would not by itself show that they were deployed in investment. Notwithstanding, even borrowing are required to settle payments obligations in respect of investments, like one takes loan for purchasing a house. In a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not held even say for a month, then the intention is clearly to reap profit by acting as a trader and he did not intend to hold them in investment portfolio. We believe that if a person intends to hold his purchases of shares as investment, he would watch the fluctuation of rates in the market for which a minimum time is necessary, which we estimate at one month. Where shares are held for more than a month, they should be treated as investment and on their sale short term capital gain should be charged. When shares are held for less than a month, gain on them should be treated as profit from business. The Assessing officer has also accepted income from long term capital as such and only dispute is regarding treatment given from shares and mutual funds held for less than 365 days as income from short term capital gain. In case of income shown as short term capital gain, the appellant has entered into frequent transactions of purchase and sales and in many :cases, the period of holding is even less than a month Applying the ratio of decision of Ahmedabad ITAT referred herein above, profit on sale of shares wherein shares are held for less than one month is treated as income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IPOs of companies. After allotment, these shares have been transferred to appellant. Such an activity has to be termed as an organized and systematic activity, carried on continuously with a view to earn profits. The sole intention at the time of acquisition of shares through such mode was to sell these shares at a profit. Such an activity has to be construed as adventure in the nature of trade. In such a situation, the surplus arising on sale of shares acquired in aforesaid IPOs has to be treated as income from adventure in the nature of trade and the same has to be taxed as business income. During the course of appellate proceedings, the appellant was asked to submit details of surplus earned from these IPOs. In response to which, the learned counsel of appellant submitted that in respect of the allotment made under IPO of Sasken Comm., the appellant company is still holding these shares and no sale has been effected in respect of the said securities for the assessment years under appeal. Even with regards to issue of Punjab national bank, Appellant has been holding the shares. In respect of others, it is noticed that the appellant has earned capital gain as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for Asstt. Year 2005-06, we find that Assessing Officer has made detailed analysis in regard to the short term capital gain and long term capital gain shown by the assessee under the head sale of investment shown in the profit and loss account. During Asst. Year 2005-06 total income from transactions relating to shares and investment has been shown at ₹ 44.39 crores and the respective heads of such income are as below :- i) Long term capital gain on shares 32.56 crores ii) Short term capital gain on shares 6.23 crores iii) Short term capital gain on mutual funds 5.53 crores iv) Future option trading 0.07 crores Total 44.39 crores Out of the above, Assessing Officer has accepted the claim of long term capital gain made by assessee for ₹ 32.56 crores and only the balance income from shares transactions assessee company has itself shown profit from future option trading as business income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 Kalpesh C. Shah Vs. ACIT has already disagreed with the former bench marking. The Hon'ble jurisdictional high court in (2012) 347 ITR 149 CIT vs. Niraj A. Surti holds that usage of borrowed 's in share transaction does give the resultant profits colour of business income. The CIT(A) twin reasoning stands overruled accordingly. The short question that arises for our dependent adjudication in these appeals is as to whether the assessee s income derived from sale of shares/mutual funds is to be treated as short term capital gains or business income. In our considered opinion, this is a perennial issue to be decided as per facts of each case. The hon'ble jurisdictional high court in case Tax Appeal No.77 of 2010 decided on 27.6.2012 CIT vs. Vaibhav J. Shah holds that the most important test for judging nature of profits arising from sale purchase of shares has to be based on volume, frequency, continuity and regularity of transactions withholding period, usage of borrowed funds, assessee's books maintained etc. It transpires that the assessee had chosen to invest interest and non interest bearing funds on share investments acquired at IPO stage in HNI category. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Revenue that assessee company has been regularly deriving income from short term and long term capital gain from sale of shares in past many years and the same have been accepted by the department in the assessment orders framed u/s 143(3) of the Act. Ddetails of accepting transactions of purchase/sale on shares as short term and long term capital gain for Asst. Year 2001-02, 2003-04 2004-05 is mentioned below :- Asst. Year STCG/STCL LTCG/(LTCL) Date of asst. order u/s 143(3) 2001-02 (15,61,33,149) (52,28,340) 11.03.2004 2003-04 1,56,58,030 (72,68,961) 30.11.2005 2004-05 (7,63,08,132) 2,17,92,444 21.12.2006 38. However, ld. CIT(A) has taken a view of bifurcating the transactions shown by the assessee under the head short term capital gain from sale of shares and mutual funds on the basis of period of holding and has held that shares held for more than 30 days to be treated as short term cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of holding period of shares/mutual funds as the term of holding transaction as short term capital gain or business income as the test of holding. Accordingly, the ground of Revenue is dismissed. 40. Now we take up ground No.2 of Revenue s appeal in ITA No.1657/Ahd/2012 for Asst. Year 2009-10 against the order of ld. CIT(A) deleting the disallowance of Rs..1,24,38,771/- in respect of outstanding creditors u/s 41(1) of the Act. During the course of assessment proceedings on going through the details of sundry creditors remaining outstanding for more than 3 years, Assessing Officer took a view that as most of the amounts are small amounts and there can be no reason for them to remain outstanding for more than 3 years and therefore, he went ahead to make addition of ₹ 1,24,38,771/- u/s 41(1) of the Act for cessation of liability. However, in the assessment order no specific observations of the sundry creditors about their whereabouts and inability of the creditors to pay the liability has been recorded. 41. Aggrieved, assessee went in appeal before CIT(A) who has deleted the impugned disallowance made u/s 41(1) of the Act by observing as under :- 10 During the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... editors nor the specific amounts, without discussing any fact about any one creditor. How many are there no body knows. Further the case laws relied upon by the appellant given in the preceding paragraph support is case. 42. Aggrieved, Revenue is now in appeal before the Tribunal. The ld. DR vehemently supported the order of Assessing Officer. 43. On the other hand the ld. AR of the assessee submitted that Assessing Officer has made lump sum disallowance just on the basis of amount not paid for last three years without mentioning about any single creditor. Ld. AR submitted that assessee company is a Limited company and its books of accounts are regularly audited under various Acts and no specific defects have been pointed out in the books of accounts. Ld. AR further relied on the decision of Hon. Jurisdictional High Court in the case of CIT vs.Nitin S. Garg (2012) 22 taxmann.com 59 (Guj) wherein on similar ground Revenue lost the case. 44. We have heard the rival contentions and perused the material on record. We find that Assessing Officer made disallowance of ₹ 1,24,38,772/- u/s 41(1) of the Act on account of cessation of liability. We further find that no speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st many years, it could not be inferred that the said liabilities has ceased to exist. The Tribunal had rightly observed that the Assessing Officer would have to prove that the assessee had obtained the benefits in respect of such trading liabilities by way of remission or cessation thereof. Merely because the assessee obtained benefit of reduction in the earlier years and balance was carried forward in the subsequent year, it would not prove that the trading liabilities of the assessee had become non-existent. [Para 15] In view of aforesaid, impugned order passed by the Tribunal was to be upheld. 45. Respectfully following the decision of Hon. Jurisdictional High Curt, we find that the facts of the case of assessee are quite similar to the facts being discussed in the above referred decision wherein it has been held that no disallowance u/s 41(1) of the Act can be made merely because liabilities were outstanding for last many years and it cannot be inferred that said liabilities ceased to exist for the very reason that assessee has duly shows its liability in its balance sheet and no specific fact controverting the same has been brought before us by Revenue. We, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd no.3 of ITA No.529/Ahd/2011 for Asst. Year 2006-07, ground nos.4 5 of ITA No.530/Ahd/2011 for Asst. Year 2007-08, ground no.1 of ITA No.3194/Ahd/2011 for Asst. Year 2008-09 and grund no. 2 of ITA No.1510/Ahd/2012 for Asst. Year 2009-10 in relation to disallowance u/s 14A of the Act. 50. During the course of assessment proceedings disallowance u/s 14A of the Act for all the five years under appeal have been made for proportionate disallowance of interest expenditure. In the case for Asst. Year 2007-08 for disallowing administrative expenses calculated on the basis of 0.5% value of investment and for Asst. Year 2008-09 Asst. Year 2009-10 applying the method mentioned in Rule 8D of the IT Rules r.w.s. 14A of the Act. 51. While dealing with the Revenue s appeals we have decided that on the basis of co-ordinate bench decision in assessee s own case that ld. CIT(A) has made no error in confirming the proportionate disallowance of interest expenditure u/s 14A of the Act. In view of our decision made in the Revenue s appeals discussed at para 26 27 of this order, we dismiss the grounds of assessee relating to disallowance of interest expenditure u/s 14A of the Act and conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 of the assessment order, it has been stated by the Assessing Officer that the assessee had made huge investments in Mutual funds and shares and has earned tax free dividend and interest income. Investment in Mutual funds Rs.21 0,68,82,923 Dividend income earned Rs.11, 98,42,1 50 Investment in shares of funds / actually tax free bonds. ₹ 68,23,75,470 Tax free interest ₹ 3,80,00,000 Total investment Rs.278,92,59,830 5. The Assessing Officer has noted in para 4.2 that as per balance-sheet (as on 31.3.2009), the assessee has Secured loans of ₹ 3,56,36,111. He has also noted that the assessee has debited interest of ₹ 19,69,881 in the profit and loss account. His point is that secured funds on which interest has been paid, have been diverted into making investments, on which tax free income , has been earned. In 4.3 of the assessment order, the Assessing Officer has applied Rule 8D for calculating disallowance of proportionate expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and it cannot be denied in the given facts that a part of the aforementioned expenses were indeed incurred on earning tax-free income. And such proportionate expenses came to ₹ 88,86,693 as per Rule 8D calculation. It is equally important to mention here that the formula of Rule 8D calculation adopted by the Assessing Officer and the figures taken by him have not been disputed by the appellant. It is also relevant to mention here that in the immediately preceding assessment year that is AY 2008-09, the CIT(A)-III, Ahmedabad vide his order dated 21.10.2011 in the case of the appellant has upheld similar disallowance U/S.14A of ₹ 1,02,39,404. 54. Ld. AR referred and relied on the decision of Hon ble Jurisdictional High Court in the case of Principal CIT-2 vs. India Gelatine Chemicals Ltd. in Tax Appeal No.276 277 of 2015 wherein their Lordships have confirmed the view taken by the Tribunal while deleting the disallowance of interest expenses u/s 14A of the Act by observing as under :- [5.1] Now, so far as the deletion of disallowance of interest expenses under Section 14A of the Act by the learned Tribunal / CIT(A) is concerned, it is required to be noted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akhs during the year. He, therefore, held that disallowance made by the Assessing Officer u/s.36(i)(iii) was of ₹ 40,10,861/- was not justified. 7. The Departmental Representative has merely relied upon the order of the Assessing Officer. He has not pointed out any specific error in the order of the Commissioner of Income Tax (Appeals). He could not bring any material on record to show that the assessee could not have advanced interest free loans or loans at lower rate of interest to the sister concerns out of its interest free funds available with it. Therefore, we find no infirmity in the order of the Commissioner of Income Tax (Appeals) which is confirmed and the ground no. 1 of appeal of the Revenue is dismissed. 8. Further, the Assessing Officer abo made disallowance of ₹ 8,22,228/- out of administrative expenses, but had restricted the disallowance made to ₹ 6,22,228/- as the assessee himself had made disallowance of ₹ 2,00,000/- as expenses incurred for earning tax free divided income. The Commissioner of Income Tax (Appeals) observed that the said expenses must have been incurred by the assessee in making the investments and therefore con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll as investments purposes and it was incumbent upon the Assessing Officer to extract as well as bifurcate such expenditure and make proper satisfaction. Certainly disallowance u/s 14A of the Act rests upon the facts and circumstances of each case and most of the times decisions are based on the fact that either exempt income is too meager or small portion of interest free funds have been applied in investments or Assessing Officer is not able to satisfy the basis for disallowance and expenditure on the contrary in some situation certain investments are made in a year but the fruits in the shape of long term gain and tax free income may arise in the future. 57. Going through the history of section 14A of the Act, we are able to gather that the same has been included by Finance Act 2001 with retrospective effect from 1.4.1962 to nullify the judgment of Hon. Supreme Court in the case of Rajasthan State Ware Housing Corporation vs. CIT 242 ITR 450 wherein their Lordships have held as under :- in computing Rs. profits and gains of business or profession when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. 2. New Rule 8D : 2.1 In exercise of the powers given in S. 14A(2) C.B.D.T. has issued a Notification No. S.O. 547(E) on 24-3-2008 (299 ITR (ST) 88). This notification amends the Income-tax Rules by insertion of a new Rule 8D providing for a Method for determining amount of expenditure in relation to income not includible in total income . Reading this Rule it is evident that the Rule provides for disallowance of not only direct expenditure incurred for earning the exempt income but also for disallowance of proportionate indirect expenditure. This is clearly contrary to the main objective with which S. 14A was enacted. 2.2 Broadly stated, the new Rule 8D provides as under : (i) The method prescribed in the Rule is to be applied only if the AO is not satisfied with : (a) The correctness of the claim of expenditure incurred for earning the exempt income made by the assessee or (b) The claim made by the assessee that no expenditure has been incurred for earning exempt income. (ii) The method prescribed in the Rule states that the expenditure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of such expenditure incurred for earning exempt income. In reply to this query assessee simply denied and submitted that no such expenditure has been incurred in relation to exempt income earned in the form of dividend at ₹ 11.98 crores, tax free interest of ₹ 3.8 crores and other income earned from investments. Further Assessing Officer further looked into the balance sheet of the assessee and found that there was an investment of ₹ 278.92 crores in mutual funds/shares/tax-free bonds. Once assessee has denied to have incurred any such expenditure liable to be disallowed u/s 14A of the Act Assessing Officer was satisfied that there is no correctness in the claim made by assessee looking to the fact of investment made as well as tax free income earned by the assessee and accordingly Assessing Officer proceeded towards calculation of such expenditure to be disallowed u/s 14a of the Act on the basis of method given in Rule 8D of IT Rules. We find that ld. CIT(A) has rightly confirmed the same and accordingly we dismiss this ground of assessee for Asst. Year 2009-10. 60. Now we take up ground no.3 of ITA No.528/Ahd/2011 for Asst. Year 2005-06 and ground no.4 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been made for the purpose of business. 66. We further find that assessee has only provided the details before us for Asst. Year 2006-07 at Sl. No.7 of the paper book at page no.160 of the paper book and no such details is available in the paper book for asst. year 2005-06. It seems that either assessee is not having proper details to prove such expenditure as the same have not been done so far before lower authorities also and as regards details for Asst. Year 2006-07 are concerned they do not specifically exhibit the details of persons or the company to whom the representative of the assessee company has met in relation to business and what kind of information have been gathered, which can be linked to the business purpose of the company. In such circumstances we find that assessee is not having any material details to support its claim of foreign travel expenses looking towards the proceedings before the lower authorities and even before us and, therefore, we reject this ground of assessee and confirm the order of ld. CIT(A) on this issue. 67. Ground Nos.1,5,6,7 8 of ITA No.538Ahd/2011 for Asst. Year 2005-06, ground nos.5 6 for appeal in ITA No.529/Ahd/2011 for Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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