Gruh Finance Ltd.,, Ahmedabad v. The Dy.CIT.,Circle-4,, Ahmedabad

ITA 1881/AHD/2015 | 2011-2012
Pronouncement Date: 30-09-2016 | Result: Partly Allowed

Appeal Details

RSA Number 188120514 RSA 2015
Bench Ahmedabad
Appeal Number ITA 1881/AHD/2015
Duration Of Justice 1 year(s) 3 month(s) 7 day(s)
Appellant Gruh Finance Ltd.,, Ahmedabad
Respondent The Dy.CIT.,Circle-4,, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 30-09-2016
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 30-09-2016
Date Of Final Hearing 20-09-2016
Next Hearing Date 20-09-2016
Assessment Year 2011-2012
Appeal Filed On 23-06-2015
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH AHMEDABAD BEFORE SHRI N. K. BILLAIYA ACCOUNTANT MEMBER AND SHRI S. S. GODARA JUDICIAL MEMBER. ITA. NOS.1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) GRUH FINANCE LTD. GRUH NETAJI MARG MITHAKALI SIX ROADS ELLISBRIDGE AHMEDABAD - 380006 APPELLANT VS. DY. COMMISSIONER OF INCOME-TAX CIRCLE 4 AHMEDABAD RESPONDE NT / BY ASSESSEE : SHRI M. G. PATEL WITH SHRI A. N. SHAH A.R. / BY REVENUE : SHRI K. MADHUSUDAN SR.D.R. /DATE OF HEARING : 20.09.2016 /DATE OF PRONOUNCEMENT : 30.09.2016 ORDER PER S. S. GODARA JUDICIAL MEMBER THESE FOUR ASSESSEES APPEALS FOR ASSESSMENT YEARS 2008- 09 TO 2011-12 ARISE FROM SEPARATE ORDERS OF CIT(A)- 2 CIT(A)-4 CIT(A)-VIII & CIT(A)-2 AHMEDABAD DATED 31.03.2015 (IN FIRST AND LAST CASE) DATED 08.03.2016 & 19.08.2013 IN C ASE NO. CIT(A)-2/DCIT CIR.4/118/13-14 CIT(A)-4/160/DCIT ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 2 - CIR.2(1)(2)/14-15 CIT(A)-VIII/ACIT/CIR.4/104/12-13 & CIT(A)- 2/DCIT CIR.4/215/13-14; RESPECTIVELY; IN PROCEEDIN GS U/S.143(3) R.W.S. 263 143(3) RW.S. 147 & 143(3) (I N LAST TWO ASSESSMENT YEARS) OF THE INCOME TAX ACT 1961 IN S HORT THE ACT. A PERUSAL OF ASSESSEES PLEADINGS IN APPEAL PERTAIN ING TO ASSESSMENT YEARS 2008-09 & 2009-10 ITA NOS. 1880/AHD/2015 & 776/AHD/2016 REVEALS THAT IS ITS ID ENTICAL SUBSTANTIVE GRIEVANCES THEREIN CHALLENGES THE CIT(A )S ORDERS ENHANCING SECTION 14A R.W. RULE 8D DISALLOWANCE (S) FROM RS.1 03 33 474/- TO RS.3 28 52 064/- IN FORMER AND FROM RS.1 24 70 377/- TO RS.5 55 97 599/- IN THE LATTER ASSESSMENT YEAR BEFORE US. BOTH THE LD. REPRESENTATIVES INFOR M US THAT THE RELEVANT BACKDROP OF FACTS IS IDENTICAL IN THESE TW O ASSESSMENT YEARS. WE THUS TAKE UP ITA NO.1880/AHD/2015 AS THE LEAD CASE. 2. THIS ASSESSEE COMPANY IS ENGAGED IN HOUSING FIN ANCE BUSINESS AND OTHER ACTIVITIES. IT FILED RETURN ON 29.09.2008 STATING INCOME OF RS.50 51 78 789/-. THE ASSESSING OFFICER COMPLETED REGULAR ASSESSMENT ON 29.10.2010 DETERMIN ING TOTAL INCOME AS RS.53 61 37 830/-. THE CIT(A) THEREAFTER REVISED THE SAID REGULAR ASSESSMENT VIDE ORDER DATED 11.01.2013 BY EXERCISING SECTION 263 REVISIONAL JURISDICTION ON T HE GROUND THAT THE ASSESSING OFFICER HAD NOT PROPERLY COMPUTE D SECTION 14A DISALLOWANCE AS PER LAW. ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 3 - 3. THE ASSESSING OFFICER TOOK UP CONSEQUENTIAL PROC EEDINGS. THERE IS NOT DISPUTE ABOUT THE ASSESSEES EXEMPT IN COME FROM DIVIDENDS AMOUNTING TO RS.1 89 42 065/-. IT HAS SU O MOTO DISALLOWED OF RS.9 45 960/-. THE ASSESSING OFFICER SOUGHT TO APPLY RULE 8D. THE ASSESSEE FILED REPLY INTER ALIA PLEADING THAT ITS SUO MOTO DISALLOWANCE HEREINABOVE WAS JUST AND PROPER IT HAD NOT INCURRED ANY DIRECT EXPENDITURE IN EARNING THE ABOVE EXEMPT INCOME PROPORTIONAL EXPENDITURE DISALLOWANC E FORMULA DID NOT APPLY SINCE ITS BALANCE SHEET SCHEDULE WOUL D REFLECT TAXABLE INCOME ONLY SO WAS THE CASE QUA ADMINISTRA TIVE EXPENDITURE DISALLOWANCE AND IT RAISED A CLAIM TO H AVE UTILIZED INTEREST FREE FUNDS ONLY. THE ASSESSING OFFICER FR AMED CONSEQUENTIAL ASSESSMENT ON 27.09.2013 REJECTION AL L ABOVE PLEAS. HE OBSERVED FIRST OF ALL THAT THERE WAS NO DIRECT EXPENDITURE INVOLVED IN DERIVING THE ABOVE EXEMPT I NCOME. THE ASSESSING AUTHORITY THEN COMPUTED PROPORTIONATE AND ADMINISTRATIVE EXPENDITURE DISALLOWANCE UNDER RULE 8D (2)(II & III) OF RS.1 13 72 901/- AND RS.8 52 493/-; RESPEC TIVELY AGGREGATING TO RS.1 22 25 394/-. 4. THE ASSESSEE PREFERRED AN APPEAL. THE CIT(A) EN HANCES THE ABOVE DISALLOWANCE TO RS.3 28 52 064/- AS UNDER ; 2.3 DECISION: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE THE ASSESSMENT ORDER AND THE WRITTEN SUBMISSION OF THE APPELLANT. THE AO HAS MADE A DISALLOWANCE UNDER SECTION 14 A B Y APPLYING THE PROVISIONS OF RULE 8D. THE APPELLANT H AS EARNED DIVIDEND INCOME OF RS. 1 89 42 065/- ON WHICH THE E XEMPTION HAS BEEN CLAIMED BY IT IN THE RETURN OF INCOME. T HE APPELLANT HAS ALSO MADE A SUO MOTU DISALLOWANCE OF EXPENDITUR E FOR EARNING THE DIVIDEND INCOME BY WORKING OUT THE ADMI NISTRATIVE EXPENSES IN PROPORTION TO THE EXEMPT INCOME AND THE REGULAR ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 4 - INCOME. THE ASSESSING OFFICER DID NOT ACCEPT THE SUBMISSION OF THE APPELLANT AND WORKED OUT THE DISALLOWANCE OF RS.1 12 79 434/- BY APPLYING THE PROVISIONS OF RUL E 8D. THE APPELLANT ON THE OTHER HAND HAS SUBMITTED THAT IT H AS ALREADY MADE A DISALLOWANCE OF ADMINISTRATIVE EXPENSES UNDE R SECTION 14 A FOR EARNING THE EXEMPT INCOME. THE INVESTMENT WHICH ARE REFLECTED IN THE BALANCE SHEET OF THE APPELLANT WERE TAXABLE INVESTMENTS. THE INCOME ARISING FROM THESE INVESTMENTS ARE TAXABLE AND THE SAME HAS ALSO BEEN OFFERED BY I T IN THE RETURN OF INCOME. IN THE FORMULA PROVIDED IN RULE 8D THE FIGURE OF 'AVERAGE INVESTMENT' WOULD BE NIL IN THE CASE OF THE APPELLANT AS THERE IS NO EXEMPT INVESTMENT AT THE B EGINNING AS WELL AS AT THE CLOSING OF FINANCIAL YEAR. THE APPEL LANT HAS THEREFORE SUBMITTED THAT NO DISALLOWANCE OUT OF IN TEREST AS WELL AS OUT OF ADMINISTRATIVE EXPENSES CAN BE MAD E AS THE VALUE OF AVERAGE INVESTMENT WOULD BE ZERO. ON A CAREFUL CONSIDERATION OF ENTIRE FACTS OF THE C ASE IT IS NOTED I THAT THE CONTENTION OF THE APPELLANT THAT T HERE IS NO TAX EXEMPT INVESTMENT IN THE BALANCE SHEET AS ON 01/04/ 2007 AND 31/03/2008 IS FACTUALLY CORRECT. ACCORDINGLY THE F IGURE OF AVERAGE INVESTMENT WHICH IS USED IN THE FORMULA IN RULE 8D FOR WORKING OUT THE DISALLOWANCE UNDER SECTION 14 A WOULD BE ZERO AND THEREFORE THE FIGURE OF DISALLOWANCE UNDER SECOND AND THIRD LIMB OF RULE 8D WOULD BE ZERO. ACCORDINGLY T HE DISALLOWANCE MADE BY THE AO BY APPLYING THE PROVISI ONS OF RULE 8D IS DIRECTED TO BE DELETED. THE DISALLOWANCE IS T O BE RESTRICTED TO THE DISALLOWANCE ALREADY MADE BY THE APPELLANT B Y ALLOCATING THE ADMINISTRATIVE EXPENSES IN PROPORTION TO THE EX EMPT INCOME. DURING THE COURSE OF APPELLATE PROCEEDINGS IT WAS NOTED THAT THE APPELLANT HAS MADE SUBSTANTIAL INVESTMENT IN THE UNITS OF MUTUAL FUNDS AND HAS ALSO EARNED SUBSTANTIAL DIV IDEND INCOME WHICH HAS ALSO BEEN CLAIMED AS EXEMPT FROM T AX. HOWEVER SINCE THE OPENING AND CLOSING BALANCE OF I NVESTMENT IN MUTUAL FUND APPEARING IN THE BALANCE SHEET OF TH E APPELLANT WAS NIL NO DISALLOWANCE U/S. 14A COULD BE MADE BY APPLYING THE PROVISIONS OF RULE 8D. IT WAS ALSO OBSERVED THA T THE APPELLANT IS BORROWING MONEY FROM VARIOUS FINANCIAL INSTITUTIONS FOR THE PURPOSE OF ITS BUSINESS OF HOME LOAN FINANC E. THE APPELLANT WAS ACCORDINGLY REQUESTED TO FURNISH THE COPIES OF BANK ACCOUNTS FROM WHICH THE INVESTMENT IN UNITS OF MUTUAL FUNDS WAS MADE BY IT. IT WAS ALSO REQUESTED TO FURN ISH DETAILS OF PURCHASE AND SALES OF MUTUAL FUND AND DIRECT EXP ENSES INCURRED THEREON. ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 5 - A PERUSAL OF THE DETAILS FURNISHED AND THE BANK ACC OUNT REFLECTED THAT THE APPELLANT IS PARKING THE FUNDS W HICH ARE AVAILABLE WITH IT FOR A SHORT PERIOD OF TIME IN CAS E THE SAME ARE NOT REQUIRED FOR THE PURPOSE OF GIVING FINANCE FOR HOME LOAN PURPOSE. THE APPELLANT IS BORROWING MONEY FROM NATI ONAL HOUSING BANK IDFC AND OTHER BANKS AND AS SOON AS T HE MONEY IS CREDITED IN ITS BANK ACCOUNT AND THE SAME IS NOT REQUIRED FOR FINANCING THE HOME LOANS IT IS PARKED IN THE MUTUA L FUNDS FOR A SHORT PERIOD TILL IT IS REQUIRED FOR FINANCING. IT WAS FURTHER OBSERVED THAT THE APPELLANT IS MAINTAINING TWO BANK ACCOUNTS FOR THE PURPOSE OF BUSINESS. ONE ACCOUNT IS MAINTAI NED WITH HDFC BANK AND THE OTHER WITH 1DBI BANK AHMEDABAD. T HE APPELLANT IS PARKING THE FUNDS WHICH ARE NOT REQUIR ED FOR THE TIME BEING FROM BOTH THE ACCOUNTS WITH MUTUAL FUND S. IT IS FURTHER OBSERVED THAT THE ACCOUNTS WITH IDBI BANK W AS PRIMARILY USED BY THE APPELLANT FOR CREDITING THE B ORROWINGS MADE FROM IDBI BANK AND OTHER FINANCIAL INSTITUTION S. IT IS NOTED FROM THE PERUSAL OF THAT ACCOUNT THAT WHENEVER A LA RGE AMOUNT OF BORROWED MONEY WAS RECEIVED IN THAT ACCOUNT THE APPELLANT IMMEDIATELY TRANSFERRED THE FUNDS TO HDFC CASH MANAGEMENT SAVINGS DIVIDEND PLAN. THE OTHER ACCOU NT IN HDFC BANK IS UTILISED BY THE APPELLANT FOR DAY-T O-DAY BUSINESS FOR DISBURSE! OF LOAN FOR COLLECTION OF BUSINESS RECEIPTS FROM VARIOUS BRANCHES. FURTHER EXAMINATION OF THE APPELLANT'S ACCOUNT WITH HDFC BANK REVEALED THAT I N THIS ACCOUNT ALSO THERE ARE CERTAIN INSTANCES WHERE THE APPELLANT HAS RECEIVED LARGE AMOUNT OF BORROWED MONEY FROM OT HER FINANCIAL INSTITUTIONS ON WHICH THE APPELLANT HAD T O PAY INTEREST AND THE NAME HAS ALSO BEEN PARKED IN THE MUTUAL FUN D AS WAS DONE FROM THE IDBI BANK ACCOUNT. THERE WAS AN IMMED IATE AND DIRECT NEXUS OF THE INVESTMENT MADE IN THE MUTUAL F UNDS WITH THE BORROWED MONEY AS THE APPELLANT'S BANK ACCOUNT CLEARLY SHOWED FUNDS IN THE BANK CONSISTED OF THE BORROWED MONEY AT THAT POINT OF TIME. THE ABOVE INSTANCES OF INVESTME NT WERE POINTED OUT TO THE APPELLANT DURING THE COURSE OF APPELLATE PROCEEDINGS AND IT WAS ALSO ASKED TO GIVE THE WORK ING OF INTEREST ATTRIBUTABLE TO THE PERIOD FOR WHICH THESE FUNDS WERE INVESTED IN MUTUAL FUND. THEREFORE THE AMOUNT OF I NVESTMENT MADE FROM IDBI BANK IS CLEARLY OUT OF BORROWED MONE Y AND THERE IS A DIRECT NEXUS. SIMILARLY THE AMOUNT OF I NVESTMENT MADE FROM HDFC BANK ACCOUNT IN RESPECT OF CERTAIN I NSTANCES OF INVESTMENT IS CLEARLY OUT OF BORROWED MONEY AS T HERE WAS A DIRECT NEXUS OF THE LOAN MONEY RECEIPT AND THE INVE STMENT IN MUTUAL FUND. OTHER INVESTMENTS WHICH HAVE BEEN MADE FROM HDFC BANK ACCOUNT ARE OUT OF MIXED FUNDS. THE APPEL LANT WAS ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 6 - THEREFORE SHOW CAUSED AS TO WHY INTEREST DISALLOWA NCE UNDER SECTION 14 A BE NOT MADE AS THERE WAS A DIRECT INTE REST EXPENDITURE FOR MAKING THE INVESTMENT AND MUTUAL FU NDS OUT OF BORROWED FUNDS. THE APPELLANT HAS CONTENDED THAT NO DISALLOWANCE OU T OF INTEREST SHOULD BE MADE AS THE INTEREST FREE FUNDS I.E. SHARE CAPITAL AND RESERVES WERE MORE THAN THE INVESTMENT MADE IN MUTUAL FUNDS. THE APPELLANT HAS SUBMITTED THAT IT H AD GOT SUFFICIENT OWN FUNDS TO MAKE THE INVESTMENT IN MUTU AL FUNDS THOUGH THE SAME MAY BE MADE OUT OF BORROWED FUNDS U SED FOR TEMPORARY PURPOSE. IT IS ALSO BEEN SUBMITTED BY THE APPELLANT THAT THE END STATEMENT OF INVESTMENT SHOW THAT AT N O POINT OF TIME THE INVESTMENT MADE IN MUTUAL FUND EXCEEDS TH E OWN FUND. THE APPELLANT HAS THEREFORE SUBMITTED THAT NO FURTHER DISALLOWANCE SHOULD BE MADE IN ADDITION TO WHAT HAS ALREADY BEEN MADE BY IT SUO MOTO IN THE RETURN OF INCOME. ON A CAREFUL CONSIDERATION OF ENTIRE FACTS RELATED TO THE ISSUE IT IS NOTED THAT THE CLAIM OF THE APPELLANT THAT ITS SHARE CAPITAL AND RESERVES AND SURPLUS I.E. THE INTEREST FREE FUNDS AVAILABLE WERE MORE THAN THE INVESTMENT MADE IN MUT UAL FUNDS IS NOT ACCEPTABLE. IT IS A GENERAL ARGUMENT WHICH MAY BE ACCEPTED IN CASE NO NEXUS BETWEEN THE INVESTMENT IN MUTUAL FUNDS AND THE INTEREST-BEARING FUNDS CAN BE ESTAB LISHED. IN THE PRESENT CASE THERE IS A CLEAR NEXUS AND EVIDEN CE TO PROVE THAT THE BORROWED FUNDS HAVE BEEN DIVERTED AND PARK ED IN THE MUTUAL FUND THE INCOME FROM WHICH IS CLAIMED AS EX EMPT. THEREFORE THE INTEREST EXPENDITURE FOR THE PERIOD IN WHICH THE INTEREST-BEARING FUNDS WERE USED FOR MAKING THE INVESTMENT IN MUTUAL FUND CANNOT BE CONSIDERED AS RESPECT FOR EARNING THE BUSINESS INCOME BUT THE SAME WAS SPENT FOR EARN ING EXEMPT INCOME. IN THESE CIRCUMSTANCES IT IS HEREBY HELD THAT HAVING REGARD TO THE ACCOUNTS OF THE APPELLANT I AM NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE APPELLANT IN RE SPECT OF NO INTEREST EXPENDITURE IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. THERE IS A CLEAR NEXUS OF BORROWED FUNDS WITH THE INVESTMENT MADE IN MUTUAL F UNDS. ACCORDINGLY THE INTEREST EXPENDITURE PERTAINING TO SAME SHOULD BE DISALLOWED UNDER THE PROVISIONS OF SECTION 14 A. THE RULE 8D WHICH HAS BEEN PROVIDED FOR COMPUTING THE DISALLOWA NCE UNDER THIS SECTION HAS FIRST LIMB WHICH PROVIDES FOR THE DIRECT EXPENDITURE INCURRED FOR EARNING THE EXEMPT INCOME. THIS INTEREST EXPENDITURE IS DIRECT IN NATURE AS THERE I S A DIRECT NEXUS ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 7 - BETWEEN THE FUNDS AND THE INVESTMENT IN MUTUAL FUND S WHICH HAS GIVEN RISE TO THE EXEMPT INCOME CLAIMED BY THE APPELLANT. AS MENTIONED ABOVE THE APPELLANT IS USING THE ACCO UNT WITH THE IDBI BANK FOR DEPOSITING THE LOANS RECEIVE D BY IT FOR THE PURPOSE OF BUSINESS. THE FUNDS RECEIVED ON LOAN ARE SUBSEQUENTLY PARKED IN MUTUAL FUND FOR A SMALL PERI OD TILL IT IS REQUIRED TO BE DISBURSED AS LOAN FOR HOUSING. A PER USAL OF THE BANK ACCOUNT CLEARLY SHOWS THAT THERE IS A DIRECT N EXUS OF THE FUNDS RECEIVED ON LOAN AND THE INVESTMENT IN MUTUAL FUND. THESE INSTANCES WERE POINTED OUT TO THE APPELLANT A ND THE APPELLANT WAS ALSO ASKED TO GIVE A WORKING OF THE I NTEREST ATTRIBUTABLE TO THE PERIOD DURING WHICH THE BORROWE D MONEY WAS INVESTED IN MUTUAL FUNDS. THE APPELLANT HAS GIV EN A WORKING OF THE INTEREST WITHOUT PREJUDICE TO THE W RITTEN SUBMISSIONS WHICH IS TO BE DISALLOWED UNDER SECTIO N 14 A. FOR WORKING OUT THE DISALLOWANCE THE APPELLANT HAS SUBMITTED THAT IT HAS PAID INTEREST AT THE RATE OF 8% ON THESE LOANS. THE APPELLANT HAS ALSO GIVEN A WORKING OF TH E DISALLOWANCE TO BE MADE ON WITHOUT PREJUDICE BASIS FOR THE INVESTMENT MADE IN MUTUAL FUND OUT OF THE BORROWED FUNDS. FOR THIS PURPOSE THE APPELLANT HAS TAKEN THE PRODUCT ME THOD FOR CALCULATING THE INTEREST. THE INITIAL AMOUNT OF INV ESTMENT HAS BEEN MENTIONED ON DAY ONE AND SUBSEQUENT WITHDRAWAL S HAVE BEEN REDUCED FROM THAT FUND AND THE INTEREST AMOUNT HAS ACCORDINGLY BEEN CALCULATED ON THE REDUCED AMOUNT B Y COUNTING THE NUMBER OF DAYS FOR WHICH THE AMOUNT WAS INVESTE D. THE METHOD GIVEN BY THE APPELLANT IS ACCEPTABLE. THE WO RKING OF INTEREST ON THE AMOUNT IS ENCLOSED WITH THE ORDER A S ANNEXURE- 1. ACCORDINGLY DISALLOWANCE OF RS.1 10 75 570/- IS HER EBY MADE AS DIRECT COST OF INTEREST UNDER SECTION 14 A FOR MAKING THE INVESTMENT IN MUTUAL FUNDS ON WHICH THE APPELLA NT HAS EARNED DIVIDEND INCOME. AS DISCUSSED ABOVE THERE ARE CERTAIN INSTANCES OF DIRECT NEXUS OF THE BORROWED MONEY AND THE INVESTMENT IN M UTUAL FUND IN THE HDFC BANK ACCOUNT ALSO. WHEREVER THE AP PELLANT HAS RECEIVED LARGE AMOUNT OF BORROWED MONEY FROM OT HER FINANCIAL INSTITUTIONS SUCH AS NATIONAL HOUSING BAN K IDBI BANK ETC ON WHICH THE APPELLANT HAD TO PAY INTEREST TH E SAME HAS ALSO BEEN PARKED IN THE MUTUAL FUND AS WAS DONE FRO M THE IDBI BANK ACCOUNT. THERE IS AN IMMEDIATE AND DIRECT NEXU S OF THE ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 8 - INVESTMENT MADE IN THE MUTUAL FUNDS WITH THE BORROW ED MONEY AS THE APPELLANT'S BANK ACCOUNT CLEARLY SHOWED THE FUNDS INVESTED CONSISTED OF THE BORROWED MONEY AT THAT PO INT OF TIME. THE INSTANCES OF THESE INVESTMENTS WERE POINTED OUT TO THE APPELLANT DURING THE COURSE OF APPELLATE PROCEEDING S AND IT WAS ALSO ASKED TO GIVE THE WORKING OF INTEREST ATTRIBUT ABLE TO THE PERIOD FOR WHICH THESE FUNDS WERE INVESTED IN MUTUA L FUND. THE APPELLANT HAS GIVEN THE WORKING OF THE INVESTMENT O F BORROWED FUNDS IN MUTUAL FUND BY TAKING THE WITHDRAWAL OF FU NDS FROM BOTH THE ACCOUNTS I.E. HDFC AND IDBI. FOR WORKING O UT THE INTEREST IT HAS ADOPTED THE SAME METHOD BY TAKING THE INVESTMENT AT INITIAL STAGE AND REDUCING THE WITHDR AWALS FROM THE MUTUAL FUNDS FOR WORKING OUT THE INTEREST BY AP PLYING THE PRODUCT METHOD. THE INTEREST WHICH IS TO BE DISALLO WED BY TAKING THE FUNDS OF BOTH THE BANKS AS PER THE WORK ING GIVEN BY THE APPELLANT COMES TO RS.2 26 51 475/-. THE WORKIN G OF INTEREST ON THE AMOUNT IS ENCLOSED WITH THE ORDER A S ANNEXURE- 2. SINCE THE DISALLOWANCE OF INTEREST FOR THE WITHDRAW ALS FROM IDBI ACCOUNT AMOUNTING TO RS.1 10 75 570/- HAS ALREADY B EEN MADE IN THE PREVIOUS DISCUSSION THE BALANCE AMOUNT OF D ISALLOWANCE WHICH IS TO BE MADE CORRESPONDING TO THE UTILISATIO N OF INTEREST- BEARING FUNDS FROM HDFC BANK ACCOUNT WILL COME TO R S. 1 15 75 905/-. ACCORDINGLY THIS AMOUNT IS ALSO DISA LLOWED UNDER SECTION 14 A OF THE ACT. FURTHER IT IS NOTED THAT THE MAJORITY OF THE FUNDS DEPLOYED IN THE BUSINESS BY THE APPELLANT ARE BORROWED FUNDS . AS POINTED OUT IN THE PRECEDING DISCUSSION THAT WHENE VER THE APPELLANT HAD SURPLUS IDLE FUNDS IT USED TO PARK TH E SAME IN HDFC MUTUAL FUND FOR EARNING SOME DIVIDEND. THE APP ELLANT HAS EARNED DIVIDEND WHICH IS EXEMPT FROM TAX AND HA S ALSO CLAIMED THE EXEMPTION ON THE SAME. THEREFORE THE A MOUNT OF INTEREST WHICH HAS BEEN PAID BY IT ON THE BORROWED FUND WHICH HAS BEEN PARKED FOR SOME PERIOD IN THE MUTUAL FUND SHOULD ALSO BE DISALLOWED UNDER SECTION 14 A. THIS INTEREST IS CLEARLY ATTRIBUTABLE TO THE EARNING OF EXEMPT INCOME. THE A PPELLANT WAS ACCORDINGLY REQUESTED TO EXPLAIN AS TO WHY THIS DIS ALLOWANCE BE NOT MADE AND ALSO GIVE THE WORKING FOR THE SAME. T HE APPELLANT HAS RELIED ON THE EXPLANATION GIVEN BY IT STATING THAT AT ANY POINT OF TIME THE INVESTMENT IN MUTUAL FUND NEVER EXCEEDED THE RESERVES AND SHARE CAPITAL WHICH WERE INTEREST FREE. HOWEVER WITHOUT PREJUDICE TO THE SUBMISSION AND OBJECTION TO THE ADDITION THE APPELLANT HAS ALSO G IVEN A WORKING ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 9 - OF THE TOTAL AMOUNT OF INTEREST WHICH CAN BE / ATTR IBUTED TO THE UTILISATION OF FUND FOR INVESTMENT IN MUTUAL FUNDS. THE WORKING OF INTEREST ON THE AMOUNT IS ENCLOSED WITH THE ORDE R AS ANNEXURE-3. IT IS NOTED THAT THE APPELLANT HAS ALSO INCLUDED TH E FUNDS WITHDRAWN FROM IDFC BANK AND HDFC BANK ACCOUNT WHIC H WERE HAVING A DIRECT NEXUS OF THE INTEREST-BEARING FUNDS FOR WORKING OUT THE INTEREST DISALLOWANCE. THE TOTAL IN TEREST WORKED OUT BY THE APPELLANT IN THE ABOVE FABLE ALSO INCLUD ES THE INTEREST ATTRIBUTABLE TO THE FUNDS WHICH HAVE DIRECT NEXUS W ITH THE INVESTMENT. DISALLOWANCE OF INTEREST ON ACCOUNT OF DIRECT NEXUS OF FUNDS WITH THE INVESTMENT HAS ALREADY BEEN MADE IN THE PRECEDING DISCUSSION AND THE SAME TOTALS TO RS.2 26 51 475I-. ACCORDINGLY THE NET AMOUNT WHICH REMAINS TO BE DIS ALLOWED COMES TO RS. 1 02 00 589/-. ACCORDINGLY FURTHER DI SALLOWANCE OUT OF INTEREST OF RS. 1 02 00 589/-IS ALSO MADE UN DER SECTION 1 4 A. AO IS HOWEVER DIRECTED TO CHECK THE WORKING GIVEN BY THE APPELLANT IN RESPECT OF VARIOUS DISALLOWANCE OF INT EREST ENCLOSED WITH THIS ORDER AS ANNEXURES 1 2 AND 3. IN CASE AN Y DISCREPANCY IS NOTED THE SAME MAY BE BROUGHT TO TH E KNOWLEDGE OF THIS OFFICE SO THAT IT CAN BE RECTIFIE D. THE APPELLANT HAS ALSO PLACED RELIANCE ON THE JUDGM ENT OF GUJARAT HIGH COURT IN THE CASE OF TORRENT POWER LTD [363 ITR 474]. IT WAS HELD BY THE HONOURABLE HIGH COURT THA T SINCE THE SHAREHOLDERS FUNDS WERE SUFFICIENT FOR MAKING THE I NVESTMENT AND THE APPELLANT HAD NOT USED THE BORROWED FUNDS F OR SUCH PURPOSE NO DISALLOWANCE COULD BE MADE. I HAVE CARE FULLY PERUSED THE JUDGMENT RELIED BY THE APPELLANT. FIRST OF ALL IT IS NOTED THAT THE JUDGMENT RELATES TO A. Y. 2006 - 07 AND IN THAT YEAR RULE 8D WAS NOT APPLICABLE. SECONDLY IN THAT CASE THERE WAS NO DIRECT NEXUS OF THE INTEREST-BEARING FUNDS W ITH THE INVESTMENT. THE FACTS OF THE PRESENT CASE ARE DIFFE RENT AS THERE IS A DIRECT NEXUS OF BORROWED MONEY AND THE INVESTM ENT IN MUTUAL FUNDS FROM WHICH EXEMPT INCOME HAS BEEN EARN ED. THE JUDGMENT RELIED BY THE APPELLANT IS THEREFORE RES PECTFULLY DISTINGUISHED. THE APPELLANT HAS ALSO PLACED RELIANCE ON THE JUDGE MENT OF HONOURABLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENTS PVT LTD 1 16 DTR 289. I HAVE CAREFULLY GONE THROUG H THE JUDGEMENT GIVEN BY THE HONOURABLE COURT AND IT HAS BEEN HELD ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 10 - THAT THE COMPUTATION OF THE ASSESSEE OR CLAIM THAT NO EXPENDITURE WAS INCURRED FOR EARNING EXEMPT INCOME SHOULD BE EXAMINED WITH REFERENCE TO THE ACCOUNTS AND ONLY IF THE ASSESSEE'S EXPLANATION IS UNSATISFACTORY CAN THE A O PROCEED FURTHER; THAT APART BY NO STRETCH OF IMAGINATION C AN SECTION 14 A OR RULE 8D BE INTERPRETED SO AS TO MEAN THAT THE EN TIRE TAX EXEMPT INCOME IS TO BE DISALLOWED. ON FURTHER EXAMI NING THE FACTS OF THE CASE DECIDED BY THE HIGH COURT IT IS NOTED THAT THE DISALLOWANCE WAS WORKED OUT ON PROPORTIONATE BASIS BY APPLYING THE FORMULA GIVEN IN RULE 8D. THE FACTS OF THE PRESENT CASE ARE ENTIRELY DIFFERENT FROM THAT CASE. IN PRES ENT CASE THE SCRUTINY OF THE BANK ACCOUNT CLEARLY REVEALS THAT T HE INTEREST- BEARING FUNDS HAVE BEEN INVESTED IN MUTUAL FUNDS FO R EARNING THE DIVIDEND INCOME. THEREFORE THERE IS A DIRECT NE XUS OF INTEREST EXPENDITURE AND THE DIVIDEND INCOME. FURTHER THE C LAIM OF NO EXPENDITURE HAS ALSO BEEN EXAMINED IN THE PRECEDING DISCUSSION AND THE FINDING U/S. 14A(2) TO THAT EFF ECT HAS ALSO BEEN GIVEN IN THE ORDER. THE JUDGEMENT GIVEN BY THE HONOURABLE DELHI HIGH COURT IS THEREFORE RESPECTFULLY DISTINGU ISHED. REGARDING THE DISALLOWANCE OUT OF ADMINISTRATIVE EXPENDITURE WHICH IS ALSO REQUIRED TO BE MADE UNDER SECTION 14 A IT IS NOTED THAT THE APPELLANT HAS ITSELF MADE A DISALLOWANCE OF RS. 9 .45 960/- BY CONSIDERING THE RATIO OF EXEM PT INCOME TO THE TOTAL INCOME EARNED BY THE APPELLANT AND APPORT IONING THAT MISTREATED EXPENSES IN THAT RATIO. AS HAS BEEN DISC USSED IN THE PRECEDING PAGES THAT SINCE THERE IS NO OPENING AND CLOSING BALANCE OF EXEMPT INVESTMENT IN THE BALANCE SHEET O F THE APPELLANT THE THIRD LIMB OF RULE 8D CANNOT BE APPL IED FOR MAKING THE DISALLOWANCE. SINCE THE APPELLANT HAS FO LLOWED SYSTEMATIC METHOD FOR MAKING THE DISALLOWANCE NO F URTHER DISALLOWANCES ARE REQUIRED TO BE MADE UNDER SECTION 14 A OUT OF ADMINISTRATIVE EXPENSES. TO SUM UP TOTAL DISALLOWANCE OF RS.3 28 52 064/- CONSISTING OF FOLLOWING AMOUNTS IS MADE OUT OF INT EREST UNDER SECTION 14 A: - I. RS 1 10 75 570/- FOR THE INTEREST-BEARING FUNDS WITHDRAWN FROM IDBI BANK ACCOUNT AND INVESTED IN MUTUAL FUNDS II. RS. 1 1 5 75 905/- FOR THE INTEREST-BEARING FUN DS WITHDRAWN FROM HDFC BANK ACCOUNT AND INVESTED IN MUTUAL FUNDS AND ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 11 - III. RS. 1 02 00 589/- FOR THE BALANCE FUNDS UTILIS ED FOR MAKING THE INVESTMENT IN MUTUAL FUND. ACCORDINGLY THE DISALLOWANCE MADE BY THE AO IS DIR ECTED TO BE DELETED AND THE INCOME IS ENHANCED ON ACCOUNT OF DISALLOWANCE MADE UNDER SECTION 14 A AS DISCUSSED A BOVE. WITHOUT PREJUDICE TO THE DISALLOWANCE MADE UNDER SE CTION 14 A AS DISCUSSED ABOVE THE ABOVE INTEREST IS ALS O NOT ALLOWABLE AS DEDUCTION UNDER SECTION 37 OF THE ACT AS THE SAME HAS NOT BEEN INCURRED FOR THE PURPOSE OF BUSINESS B UT HAS BEEN INCURRED FOR THE PURPOSE OF MAKING INVESTMENT IN MU TUAL FUNDS AND EARNING THE EXEMPT INCOME. THE GROUND OF APPEAL IS ACCORDINGLY PARTLY ALLOWED AND THE INCOME IS ENHANCED. 5. LD. COUNSEL REPRESENTING ASSESSEE FIRSTLY ARGUE THAT IT IS AN NBFC ARRANGING FUNDS FROM NATIONAL HOUSING BANK NHB FOR DISBURSING THE SAME IN HOUSING LOAN SECTOR. IT SHARE CAPITAL RESERVES AND SURPLUS OF RS.190.26 CRORES A RE STATED TO BE EXCEEDING TAX FREE INVESTMENT OF RS.16 64 21 520 /- LEAVING BEHIND NO SCOPE OF SECTION 14A DISALLOWANCE. IT IS FURTHER STATED THAT THERE IS NO OPENING OR CLOSING BALANCE OF THE IMPUGNED TAX FREE INVESTMENTS FOR THE PURPOSE OF IN VOKING PROPORTIONATE EXPENSES DISALLOWANCE. LD. COUNSEL P LEADS THAT THE RESERVE BANK OF INDIA AND NHB ARE THE RELEVANT REGULATOR IN THE FILED. ALL THE ASSESSEES INVESTMENTS ARE I N THE NATURE OF FUNDS AVAILED FROM NHB AS DEPUTED IN MUTUAL FUNDS F OR A MAXIMUM PERIOD OF A DAY OR TWO IN ORDER TO COMPLETE THE NECESSARY PAPER FORMALITY OF HOUSING LOAN DISBURSEM ENT. LD. COUNSEL CONTENDS THAT THE CIT(A) HAS ORDERED THE IM PUGNED ENHANCEMENT UNDER CHALLENGE WITHOUT FOLLOWING PRINC IPLES OF NATURAL JUSTICE. THIS PLEA IS GIVEN UP AFTER SOMET IME IN THE COURSE OF HEARING. LD. COUNSELS LAST SUBMISSION I S THAT ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 12 - SECTION 14A DISALLOWANCE CANNOT EXCEED THE EXEMPT I NCOME ITSELF AS PER THIS TRIBUNALS ORDER IN K. RATANCHAN D & CO. VS. ITO 45 ITR (TRIBUNAL) 608 (AHD) AND JOINT INVESTMEN TS VS. CIT (2015) 372 ITR 694 (DELHI). HE ACCORDINGLY PRAYS F OR ACCEPTANCE OF THE INSTANT APPEAL. 6. LD. DEPARTMENTAL REPRESENTATIVE APPEARING AT REV ENUES BEHEST STRONGLY SUPPORTS THE CIT(A)S ORDER. HE IN TER ALIA SUBMITS THAT THERE IS NO DISPUTE ABOUT ITS SUO MOTO DISALLOWANCE OF RS.945960/- THE ASSESSEE HAS BEEN MAINTAINING TWO SEPARATE BANK ACCOUNTS QUA HOUSING LOAN DISBURSAL AND THE ONE DERIVING IMPUGNED EXEMPT INCO ME. HE HIGHLIGHT THE FACT THAT THE IMPUGNED DISALLOWANCE I S OF DIRECT EXPENDITURE AND NOT OF ANY PROPORTIONATE OR ANY ADM INISTRATIVE EXPENSES. THE REVENUE ACCORDINGLY PRAYS FOR CONFIR MING CIT(A)S FINDINGS UNDER CHALLENGE. 7. WE HAVE HEARD BOTH THE PARTIES. THERE IS NO DIS PUTE ABOUT THE RELEVANT FACTS AND FIGURE INVOLVED IN ASS ESSEES EXEMPT INCOME TAX FREE INVESTMENTS AND AVAILABILIT Y OF INTEREST FREE FUNDS. THERE IS FURTHER NO QUARREL THAT THE A SSESSING OFFICER HAD NOT DISALLOWED ANY DIRECT EXPENDITURE R ELATING TO ASSESSEES EXEMPT INCOME. THE FACTUAL POSITION IN THE LOWER APPELLATE PROCEEDINGS IS THAT THE CIT(A) HAS DEALT WITH EACH AND EVERY ASPECT OF ASSESSEES EXEMPT INCOME AND CORRESPONDING INVESTMENT TO ESTABLISH A DIRECT NEXU S BETWEEN THE LATTER AND ITS INTEREST BEARING FUNDS AVAIL FRO M NHB. HE HAS FURTHER ARRIVED AT A CONCLUSION THAT THE ASSESS EE HAS BEEN MAINTAINING SEPARATE ACCOUNTS (SUPRA). THE ASSESSE E IS UNABLE ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 13 - TO REBUT THIS FACTUAL POSITION. WE THUS FIND NO RE ASON TO INTERFERE IN THE LOWER APPELLATE ORDER SO FAR AS FI RST TWO DIRECT EXPENDITURE DISALLOWANCES OF RS.1 10 75 570/- FOR I NTEREST BEARING FUNDS WITHDRAWN FROM IDBI ACCOUNT AND RS.1 15 75 905/- DRAWN FROM HDFC BANK ACCOUNT; BOTH INVESTED IN MUTUAL FUNDS ARE CONCERN. WE PROCEED T O DEAL WITH THE THIRD FIGURE OF RS.1 02 00 589/- STATED TO BE I NVOLVING BALANCE FUNDS UTILIZED IN MUTUAL FUNDS INVESTMENT. WE REPEAT THAT WE ARE DEALING WITH A CASE FALLING UNDER DIREC T EXPENDITURE DISALLOWANCE COVERED BY RULE 8D (2)(I) OF THE INCOM E TAX RULES. THE CIT(A) HAS NO WHERE ESTABLISH A DIRECT LINK BET WEEN ASSESSEES INTEREST BEARING FUND VIS A VIS ITS IMPU GNED TAX FREE INVESTMENT. IT HAS FURTHER COME ON RECORD THAT ASS ESSEES INTEREST FREE FUNDS FAR EXCEED ITS TAX FREE INVESTM ENT. WE OBSERVE IN THESE FACTS THAT AN INFERENCE AS PER HON BLE JURISDICTIONAL DECISION (2015) 376 ITR 553 (GUJ) PC IT VS. INDIA GELATINE AND CHEMICALS LTD. CAN SAFELY WITHDRAWN TH AT THE IMPUGNED TAX FREE FUNDS HAVE BEEN MADE FROM NON INT EREST BEARING FUNDS. WE THUS DELETE THIS THIRD ITEM OF D ISALLOWANCE. WE ACCORDINGLY UPHOLD CIT(A)S ENHANCEMENT ACTION U NDER CHALLENGE IN PRINCIPLE. WE NOW COME TO AN EQUALLY IMPORTANT ASPECT AS TO WHETHER SECTION 14A R.W. RULE 8D DISALLOWANCE COULD EXCEED THE EXEMPT INCOME AMOUNT OR NOT. A COORDINATE BENC H OF THIS TRIBUNAL AS WELL AS DELHI HIGH COURT (SUPRA) HAVE A LREADY HELD THAT THE SAME CANNOT IN ANY CASE BE COMPUTED BEYOND THE EXEMPT INCOME AMOUNT. WE THUS DIRECT THE ASSESSING ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 14 - AUTHORITY TO FRAME CONSEQUENTIAL COMPUTATION RESTRI CTING THE IMPUGNED SECTION 14A DISALLOWANCE TO THE EXTENT OF EXEMPT INCOME OF RS.1 89 42 065/- ONLY. THIS SUBSTANTIVE GROUND AS WELL AS THE MAIN APPEAL ITA NO.1880/AHD/2015 FOR A. Y. 2008- 09 IS PARTLY ACCEPTED. 8. SAME ORDER TO FOLLOW IN ASSESSEES APPEAL ITA NO.776/AHD/2016 FOR A.Y. 2009-10 SINCE BOTH THE LD. REPRESENTATIVES HAVE ALREADY INDICATED THAT THE CIT (A) HAS FOLLOWED THE VERY REASONING AS IN PRECEDING ASSESSM ENT YEAR FOR ENHANCING SECTION 14A DISALLOWANCE FROM RS.1 25 70 377/- TO RS.5 55 97 599/-. WE QUOTE OUR DISCUSSION HEREINAB OVE AND DIRECT THE ASSESSING OFFICER TO FINALIZE NECESSARY COMPUTATION IN SAME TERMS. ITA NO.776/AHD/2016 PARTLY SUCCEEDS . 9. WE NOW COME TO ASSESSMENT YEAR 2010-11 INVOLVING ASSESSES APPEAL ITA NO.2536/AHD/2013 RAISING THE F OLLOWING SUBSTANTIVE GROUNDS: 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VIII AHMEDABAD HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING DISALLOWANCE OF RS.6 00 997/- MADE BY TH E ASSESSING OFFICER OUT OF NCD EXPENSES AFTER HOLDING THAT THE SAME HAS TO BE ALLOWED EQUALLY FOR 5 YEARS AS N CD ARE FOR 5 YEARS PERIOD AND THE APPELLANT HAS ALSO N OT CHARGED THE SAME TO THE PROFIT & LOSS ACCOUNT. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VIII AHMEDABAD HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING DISALLOWANCE OF BAD DEBT OF RS.2 71 30 6 25/- MADE BY THE ASSESSING OFFICER AFTER HOLDING THAT TH E SAME HAS NOT BECOME BAD DURING THE YEAR UNDER CONSIDERAT ION. 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VIII AHMEDABAD HAS ERRED IN LAW AND ON FACTS OF THE CASE BY ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 15 - CONFIRMING THE FINDINGS GIVEN BY THE ASSESSING OFFI CER THAT DEDUCTION U/S 36(1)(VIII) CANNOT BE ALLOWED ON BAD DEBT RECOVERED IN RESPECT OF LONG TERM HOUSING FINANCE A ND EMI RESIDUALS OFFERED FOR TAXATION ON ACCRUAL BASIS DUR ING THE ASSESSMENT YEAR AND ACCORDINGLY HAS UPHELD THE REDUCTION OF CLAIM U/S 36(1)(VIII) BY RS. 18 05 205 /-. 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VIII AHMEDABAD HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING DISALLOWANCE OF PREPAYMENT CHARGES OF RS.25 80 740/- MADE BY THE ASSESSING OFFICER. 10. LD. COUNSEL REPRESENTING ASSESSEE FILES BEFORE US A COMPILATION CHART. HE INTER ALIA STATES THAT FIRS T TWO ISSUES OF NCB EXPENSES AND BAD DEBT CLAIM OF RS.6 00 997/- AN D RS.2 71 30 625/- ARE COVERED BY THIS TRIBUNALS ORD ER IN ASSESSEES FAVOUR IN ITS OWN CASES FOR ASSESSMENT Y EARS 2005- 06 TO 2009-10 DECIDED ON 17.08.2016. COPIES OF TRI BUNALS ORDER FORM PART OF THE CASE RECORD. LD. DEPARTMENT AL REPRESENTATIVE FAILS TO REBUT THIS FACTUAL POSITION . WE ACCEPT ASSESSEES CONTENTION QUA ITS FIRST TWO GROUNDS IN LIGHT OF COORDINATE BENCH DECISION HEREINABOVE. 11. WE COME TO THE THIRD ISSUE OF SECTION 36(1)(VII I) DEDUCTION OF RS.18 05 205/- COMPRISING OF BAD DEBTS RECOVERED AND EMI RESIDUAL OFFERED FOR TAXATION. THE ASSESSEE SUBMIT S THAT THIS TRIBUNALS ORDER DATED 17.08.2016 (SUPRA) HAS UPHEL D ITS CLAIM QUA FORMER LIMB AND HAS TURNED DOWN ITS CONTENTIONS QUA LATTER ONE. THERE IS NO REBUTTAL OF THIS LEGAL AND FACTUAL POSITION COMING FROM REVENUES SIDE. WE THUS ACCEP T ASSESSES ARGUMENT ON BAD DEBT ASPECTS AND DECLINE TO INTERFE RE IN THE CIT(A) S FINDING QUA EMI RESIDUAL ISSUE. THE ASSE SSING OFFICER ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 16 - IS ACCORDINGLY DIRECTED TO FRAME NECESSARY COMPUTAT ION. THIS THIRD SUBSTANTIVE GROUND IS TREATED AS PARTLY ALLOW ED. 12. ASSESSEES NEXT SUBSTANTIVE GROUND CHALLENGES DISALLOWANCE OF HOUSING LOANS PREPAYMENT CHARGES OF RS.25 80 740/- MADE BY BOTH THE LOWER AUTHORITIES. LD. COUNSEL REPRESENTING BOTH THE PARTIES INFORM THE BE NCH THAT THE ASSESSEE HAS ALREADY SUCCEEDED ON THIS ISSUE BE FORE THE TRIBUNAL IN ASSESSMENT YEARS 2005-06 TO 2009-10 DEC IDED ON 17.08.2016 (SUPRA). NO DISTINCTION ON FACTS IS POI NTED OUT AT THE REVENUES BEHEST. WE THUS DIRECT THE ASSESSING OFFICER TO ACCORDINGLY ALLOW ASSESSEES CLAIM QUA THE IMPUGNED PREPAYMENT CHARGES IN TUNE WITH THE TRIBUNALS ORDE R IN ABOVE ASSESSMENT YEARS. 13. THE ASSESSEES LAST SUBSTANTIVE GROUND PLEADS T HAT BOTH THE LOWER AUTHORITIES HAVE ERRED IN MAKING DISALLOW ANCE OF RATE REVISION CHARGES OF RS.47 13 412/-. IT HAS AVAILED LOAN FROM NHB AT THE RATE BETWEEN 9.5% TO 13.75% IN FLOATING SCHEME. THESE RATES CAME DOWN SUBSEQUENTLY. THE ASSESSEE T HEN APPROACHED NHB FOR REDUCTION AND THIS INTEREST RATE . THIS LENDER IN TURN SOUGHT TO INVOKE THE IMPUGNED RATE R EVISION CHARGES. THE ASSESSEE PAID THE SAME. ALL THIS LEA D TO INTEREST RATE DEDUCTION BETWEEN 8.6% TO 8.75%. THE ASSESSEE RAISED THE IMPUGNED CLAIM ON PAYMENT BASIS. IT AMORTIZED THE SAME IN BOOKS OF ACCOUNTS AND FURTHER DEBITED THESE SUMS IN P&L ACCOUNT. THE ASSESSING OFFICER FOLLOWED HIS REASON ING AS ADOPTED IN ASSESSMENT YEAR 2005-06 TO DISALLOW THIS ASSESSEES ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 17 - CLAIM. THE CIT(A) CONFIRMS THIS DISALLOWANCE BY OB SERVING AS UNDER: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE THE ASSESSMENT ORDER AND THE WRITTEN SUBMISSION OF THE APPELLANT. IT IS NOTED THAT THE ISSUE IS COVERED AGAINST THE A PPELLANT BY THE ORDER OF MY PREDECESSOR FOR ASSESSMENT YEAR 2005 - 06 VIDE ORDER NO.CIT(A)-VIII/ACIT/JC-4/2I7/07-08 DTD 30/01/ 2009. THE ISSUE HAS BEEN DISCUSSED IN THE ORDER IN PARAGR APH 5.5 AND 5.6 ON PAGE 4 AND THE DECISION HAS BEEN GIVEN IN PA RA 5.12 ON PAGE 9. WHILE DECIDING THE APPEAL THE CLAIM OF THE APPELLANT HAS BEEN DISCUSSED AND DISMISSED BY FOLLOWING THE DECIS ION OF HONOURABLE SUPREME COURT IN THE CASE OF MADRAS INDU STRIAL INVESTMENT CORPORATION TO 25 ITR 802 AND THE DECISI ON OF HONOURABLE BOMBAY HIGH COURT IN THE CASE OF TAPARIA TOOLS LTD 260 ITR 102. RESPECTFULLY FOLLOWING THE DECISION OF MY PREDECESSOR THE DISALLOWANCE MADE BY THE AO ON ACCO UNT OF PREPAYMENT CHARGES AND THE RATE REVISION CHARGES IS UPHELD. THE GROUND OF APPEAL IS THEREFORE DISMISSED. 14. HEARD BOTH SIDES REITERATING THEIR RESPECTIVE S TANDS. THERE IS NO DISPUTE BETWEEN THE PARTIES QUA ACTUAL PAYMENT OF THE IMPUGNED RATE REVISION CHARGES. THE CIT(A) FOL LOWS HONBLE BOMBAY HIGH COURTS DECISION IN TAPARIA TOOLS (SUPR A) TO REITERATE HIS FINDINGS IN ASSESSMENT YEAR 2005-06 R EJECTING THE VERY CLAIM. HONBLE APEX COURT IN ITS DECISION REP ORTED THAT (2015) 372 ITR 605 (SC) HAS REVERSED THE SAME IN VE RY ASSESSEES APPEAL. IT ALSO CONSIDERS THE OTHER CAS E LAW OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. (SUPR A). THE NET COROLLARY THAT FLOWS THEREFROM IS THAT THE CIT( A)S FINDINGS UNDER CHALLENGE HAVE NO LEGAL BASIS TO BE SUSTAINED . THERE IS FURTHER NO DISPUTE THAT THE ASSESSEE HAS BEEN DECLA RING THE CORRESPONDING HOUSING LOAN INCOME AS ITS BUSINESS I NCOME. WE THUS ALLOW ITS INSTANT SUBSTANTIVE GROUND IN VIE W OF THE ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 18 - ABOVE FACTS AND CIRCUMSTANCES. ITS APPEAL ITA NO.2536/AHD/2013 IS PARTLY ALLOWED. 15. THIS LEAVES US WITH LAST ASSESSMENT YEAR 2011-1 2 INVOLVING ASSESSEES APPEAL ITA NO.1881/AHD/2015 RA ISING THE FOLLOWING SUBSTANTIVE GROUNDS: 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S)-2 AHMEDABAD HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING THE DISALLOWANCE OF RS.33 56 232/- MADE BY THE ASSESSING OFFICER IN RESPECT OF NCD EXPENSES. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS )-2 AHMEDABAD HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING THE DISALLOWANCE OF RS.L 25 83 792/- MAD E BY THE ASSESSING OFFICER IN RESPECT OF BAD DEBTS. 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S)-2 AHMEDABAD HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING REDUCTION IN CLAIM U/S.36(L)(VIII) OF RS.25 44 385/- MADE BY THE ASSESSING OFFICER HOLDIN G THAT BAD DEBTS RECOVERED IN RESPECT OF LONG TERM HO USING FINANCE IS NOT ELIGIBLE FOR DEDUCTION U/S.36(L)(VII I). 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS )-2 AHMEDABAD HAS ERRED IN LAW AND ON FACTS OF THE CASE BY HOLDING THAT IN THE PRESENT CASE DISALLOWANCE U/S. 14A R.W.R. 8D IS REQUIRED TO BE MADE AND ACCORDINGLY HAS ERRED IN ENHANCING THE DISALLOWANCE BY RS.3 55 20 4 88/- FROM RS.2 25 92 673/- MADE BY THE ASSESSING OFFICER WHICH HAS RESULTED INTO TOTAL DISALLOWANCE U/S.UA A T RS.5 81 13 161/-. 4.1 THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S)-2 AHMEDABAD HAS ERRED IN ENHANCING THE DISALLOWANCE U/S.14A R.W.R. 8D WITHOUT ALLOWING ANY OPPORTUNITY TO THE APPELLANT AS REQUIRED BY SECTION 251(2) AND THEREF ORE ACTION OF ENHANCING THE DISALLOWANCE BY LEARNED C.IT.(APPEALS) IS ILLEGAL AND BAD AT LAW. 4.2 THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S)-2 AHMEDABAD HAS DIED IN LAW AND ON FACTS OF THE CASE BY ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 19 - NOT ACCEPTING THE CONTENTION OF THE APPELLANT THAT DISALLOWANCE U/S. 14A CANNOT EXCEED THE EXEMPT INCO ME WHICH IS OF RS.3 28 02 115/- ONLY IN CASE OF APPELL ANT. 4.3 THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S)-2 AHMEDABAD HAS ERRED IN LAW AND ON FACTS OF THE CASE BY NOT ACCEPTING THE CONTENTION OF THE APPELLANT THAT THE APPELLANT HAS SUFFICIENT OWN FUND TO MAKE THE INVES TMENT THE INCOME OF WHICH IS EXEMPT AND IN VIEW OF THIS NO DISALLOWANCE U/S.14A CAN BE MADE. 5. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS )-2 AHMEDABAD HAS ERRED IN LAW AND ON FACTS OF THE CASE IN CONFIRMING THE ADDITION OF RS.23 05 334/- MADE BY T HE ASSESSING OFFICER IN RESPECT OF INTEREST INCOME ON NPA AS PER RULE 6EB OF INCOME TAX RULES 1962 R.W.R. 43D(B ). 16. LD. COUNSEL REPRESENTING ASSESSEE FILES BEFORE US A COMPILATION CHART STATING THEREIN THAT ITS FIRST TH REE SUBSTANTIVE GROUNDS OF NCD EXPENSES BAD DEBTS AND SECTION 36(1 )(VIII) DEDUCTION OF RS.33 56 232/- RS.1 25 83 792/- & RS.25 44 385; RESPECTIVELY ARE COVERED IN ITS FAVOU R BY TRIBUNALS ORDER DATED 17.08.2016 FOR ASSESSMENT YE ARS 2005- 06 TO 2009-10. SECTION 14A R.W. DISALLOWANCE OF RS.5 81 13 161/- IS STATED TO BE SIMILAR AS ADJUDIC ATED IN ASSESSMENT YEAR 2008-09 HEREINABOVE. LD. DEPARTMEN TAL REPRESENTATIVE IS FAIR ENOUGH IN NOT DISPUTING CORR ECTNESS THEREOF. WE THUS ACCEPT FIRST THREE SUBSTANTIVE GR OUND IN TUNE WITH THIS TRIBUNALS EARLIER ORDER. WE COME TO THE FOURTH ISSUE OF SECTION 14A DISALLOWANCE. IT HAS ALREADY COME O N RECORD THAT OUR ADJUDICATION IN ASSESSMENT YEAR 2008-09 ON THE VERY ISSUE HAS RESTRICTED THE SAME TO THE EXTENT OF EXEM PT INCOME. WE ADOPT THE SAME REASONING HEREIN AS WELL AND DIRE CT ASSESSING OFFICER TO MODIFY THE IMPUGNED DISALLOWAN CE TO THE ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 20 - TUNE OF ASSESSEES EXEMPT INCOME OF RS.3 28 02 115/ - EARNED FROM DIVIDENDS. THIS GROUND IS PARTLY ALLOWED. 17. THIS LEAVES US WITH ASSESSEES LAST SUBSTANTIVE GROUND CHALLENGING DISALLOWANCE/ADDITION OF RS.23 05 334/- IN RESPECT OF INTEREST INCOME ON NPAS AS PER RULE 6EB R.W.S 43 D(B) OF THE ACT. THE ASSESSING OFFICER INVOKED THE SAME BY OBS ERVING THAT THE ASSESSEE HAD BEEN FOLLOWING MERCANTILE SYSTEM O F ACCOUNTING. HIS VIEW ACCORDINGLY WAS THAT INCOME I N RESPECT OF BAD AND DOUBTFUL DEBTS IS REQUIRED TO BE TAXED ON A CCRUAL BASIS BARRING EXCEPTIONS PROVIDED UNDER RULE 6EA R.W.S. 4 3D OF THE ACT. ALL THIS REASONING LEAD TO THE IMPUGNED ADDIT ION BEING MADE IN ASSESSEES HAND. 18. THE CIT(A) UPHOLDS THE ASSESSING OFFICERS FIND INGS AS FOLLOWS: 6.3. DECISION: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE THE ASSESSMENT ORDER AND THE WRITTEN SUBMISSION OF THE APPELLANT. THE APPELLANT HAS CLAIMED DEDUCTION ON INCOME ON AC COUNT OF NPA WITH THE APPELLANT IN ACCORDANCE WITH THE RBI P OLICY. THE AO HAS POINTED OUT THAT THERE IS A DIFFERENCE BETWE EN THE POLICY OF RBI AND THE PROVISIONS OF THE INCOME TAX ACT RUL E 6EA READ WITH SECTION 43D OF THE ACT. IT HAS BEEN HELD BY TH E ASSESSING OFFICER THAT THE INCOME IN RESPECT OF BAD AND DOUBT FUL DEBT IS REQUIRED TO BE TAXED ON ACCRUAL BASIS EXCEPT FOR TH E EXCEPTIONS PROVIDED IN RULE 6EA READ WITH SECTION 43 D OF THE ACT. IT HAS BEEN HELD BY HIM THAT THE STICKY ADVANCES WHICH HAV E NOT BEEN CONSIDERED BY THE APPELLANT FOLLOWING RBI GUIDELINE S CANNOT BE EXCLUDED AND THE SAME SHOULD HAVE BEEN CONSIDERED. HE ACCORDINGLY MADE AN ADDITION OF RS. 23 05 334/-. TH E APPELLANT ON THE OTHER HAND HAS SUBMITTED THAT IT WAS REGULAR LY FOLLOWING THE GUIDELINES AND DIRECTIONS OF THE NATIONAL HOUSI NG BANK FOR THE PURPOSE OF NON-RECOGNITION OF INTEREST INCOME O N NPA WHICH HAVE ALSO BEEN ACCEPTED BY THE DEPT. THE APPELLANT COMPANY ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 21 - WAS A HOUSING FINANCE COMPANY REGULATED BY NHB AND THEREFORE IT HAS TO COMPLY WITH THE PRUDENTIAL NORM S PRESCRIBED BY THE NHB. IT IS SUBMITTED BY THE APPELLANT THAT U NDER THE INCOME TAX ACT ONLY REAL INCOME CAN BE TAXED AND IN CASE OF NPA WHEN THE PRINCIPAL AMOUNT WAS NOT REALISED NO INTEREST CAN BE RECOGNISED IN RESPECT OF THOSE ADVANCES WHIC H HAVE BECOME NPA. ON A CAREFUL CONSIDERATION OF THE ENTIRE FACTS IT I S NOTED THAT THE ASSESSING OFFICER HAS PROPERLY DEALT THE I SSUE OF CONTRADICTION BETWEEN THE RULES GIVEN IN THE INCOME TAX ACT AND THE RBI GUIDELINES. I AM IN COMPLETE AGREEMENT WITH THE FINDINGS GIVEN BY HIM IN PARA 7.4 TO 7.8 OF HIS ORD ER. THE RULES GIVEN IN THE INCOME TAX ACT WILL PREVAIL OVER THE O THER GUIDELINES. UNLESS OTHERWISE PROVED THAT THE RULES ARE ULTRA VIRES THE SAME HAVE TO BE CONSIDERED FOR DETERMINI NG THE INCOME. IN VIEW OF THE DETAILED DISCUSSION GIVEN BY THE AO IN HIS ORDER THE ADDITION TO INCOME OF RS. 23 05 334/- IS UPHELD. PENALTY PROCEEDINGS U/S. 271(1)(C) ARE AL SO INITIATED AS THE APPELLANT HAS FURNISHED INACCU RATE PARTICULARS OF ITS INCOME. 19. LD. COUNSEL FOR THE ASSESSEE STRONGLY ARGUED TH AT BOTH THE LOWER AUTHORITIES HAVE ERRED IN MAKING THE IMPUGNED ADDITION OF INTEREST INCOME ON NPAS ON ACCRUAL BASIS. THE R EVENUE QUOTES BEFORE US A COORDINATE BENCH OF THIS TRIBUNA L IN ITA NO.1874/MUM/2010 GIC HOUSING FINANCE LTD. VS. ACIT DECIDED ON 09.02.2011 ALREADY REJECTING REAL INCOME PLEA AFTER PLACING RELIANCE ON HONBLE APEX COURTS DECISION I N SOUTHERN TECHOLOGIES LTD. VS. JCIT 320 ITR 577 (SC). 20. THE ASSESSEE AT THIS STAGE TAKE AN ALTERNATIVE PLEA THAT THE THREE MONTHS DEADLINE FOR THE PURPOSE OF DECLAR ING NPAS EXTENDS UPTO THE SUCCEEDING ASSESSMENT YEAR. ITS C ASE IS THAT THE SAME MAY ALSO RESULTING DOUBLE DISALLOWANCE IN THIS MANNER. WE ARE OF THE VIEW THAT THIS ALTERNATIVE P LEA IS TOO ITA NO. 1880/AHD/2015 776/AHD/2016 2536/AHD/2013 & 1881/ AHD/2015 (ASSESSMENT YEARS:2008-09 TO 2011-12) (GRUH FINANCE LTD.) - 22 - PREMATURE AT THIS STAGE IN THE IMPUGNED PRECEDING A SSESSMENT YEAR. HOWEVER WE OBSERVE THAT THE ASSESSEE DESERV ES TO BE GRANTED LIBERTY TO RAISE THE SAME IN ASSESSMENT PRO CEEDINGS OF SUCCEEDING ASSESSMENT YEAR IN CASE IT SUCCESSFULLY MAKES OUT A CASE OF DOUBLE ADDITION BY TENDERING SUPPORTIVE EVI DENCE. WE REJECT THIS SUBSTANTIVE GROUND WITH THESE OBSERVATI ONS. ITA NO.1881/AHD/2015 IS TAKEN AS PARTLY ALLOWED. 21. ALL THESE FOUR APPEALS ARE PARTLY ALLOWED. [PRONOUNCED IN THE OPEN COURT ON THIS THE 30 TH DAY OF SEPTEMBER 2016.] SD/- SD/- (N. K. BILLAIYA) (S. S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD: DATED 30/09/2016 TRUE COPY S.K.SINHA / COPY OF ORDER FORWARDED TO:- / REVENUE 2 / ASSESSEE ! / CONCERNED CIT 4 !- / CIT (A) ( )*+ --. . /0 / DR ITAT AHMEDABAD 1 +23 / GUARD FILE. BY ORDER / . // . /0