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M/s Consolidated Finvest & Holdings Limited,Holdings Basement-01,Pusa Road, New Delhi 110 005. Vs. Assistant Commissioner of Income Tax, Circle-Circle-3(1),New Delhi.
September, 11th 2014
               IN THE INCOME TAX APPELLATE TRIBUNAL
                                 `B' : NEW DELHI
                    DELHI BENCH `B

           BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT AND
                           SIDHU, JUDICIAL MEMBER
                 SHRI H.S. SIDHU,

                       Nos.729/Del/2011 & 730/Del/2011
                   ITA Nos.729/Del/2011
                              Years : 2006-
                  Assessment Years              2007-08
                                      2006-07 & 2007-


M/s Consolidated Finvest &      Vs.    Assistant Commissioner of
Holdings Limited,
Holdings                               Income Tax,
      Basement-01,
11/5, Basement-                        Circle-
                                       Circle-3(1),
Pusa Road,                             New Delhi.
New Delhi ­ 110 005.
PAN : AAACJ0090N.
    (Appellant)                            (Respondent)


                              No.494/Del/2011
                          ITA No.494/Del/2011
                                         2007-08
                       Assessment Year : 2007-


        Commissioner of
Deputy Commissioner             Vs.    M/s Consolidated Finvest &
Income Tax,                            Holdings Limited,
Circle-
Circle-3(1),                           11/5-B, Basement,
                                       11/5-
New Delhi.                             Opposite Telephone Exchange,
                                       Pusa Road,
                                       New Delhi.
                                       PAN : AAACJ0090N.
    (Appellant)                            (Respondent)

             Assessee by         :    Shri Rupesh Jain, Advocate and
                                      Shri Gaurav Jain, CA.
             Revenue by          :    Smt. Parwinder Kaur, Sr.DR.

                                 ORDER

PER G.D. AGRAWAL, VP :
                                               2006-07 :-
ITA No.729/Del/2011 ­ Assessee's appeal for AY 2006-   :-
     This appeal by the assessee is directed against the order of
learned CIT(A)-VI, New Delhi dated 13th December, 2010 for the AY
2006-07.
                                   2                  ITA-729, 730 & 494/D/2011




2.   Ground No.1 of the assessee's appeal reads as under:-


     "That on the facts and circumstances of the case and in
     law, the Commissioner of Income-tax (Appeals) ("the
     CIT(A)") erred in confirming the action of the Assessing
     Officer in disallowing long term capital loss of
     Rs.41,81,03,448 arising on redemption of preference
     shares of Jindal Polyfilms Limited ("JPL"), as not being
     genuine."

3.    The other grounds raised by the assessee are only arguments in
support of above ground No.1.


4.   At the time of hearing before us, it is submitted by the learned
counsel that the assessee has given loan from time to time to Jindal
Polyfilms Limited (JPL) and as on 30th October, 2000, the total loan
payable by JPL to the assessee was `99 crores. That JPL was unable to
pay the amounts due to financial constraints, therefore, JPL has offered
to restructure the said advances by way of issue of Optionally
Convertible Preference Shares (OCPS).         Accordingly, JPL issued
6,60,00,000 0% OCPS of `10/- each at a premium of `5/- each. The
OCPS were convertible at the option of the assessee into 10 equity
shares of `10/- each for every 33 OCPS.        The option was to be
exercised within 18 months from the date of the issue of the
debentures. That before the completion of 18 months from the issue
of the debentures on 2nd May, 2001, there was change in the SEBI
guidelines which restricted the promoters holding to a certain
percentage. Due to above change in the SEBI guidelines, the option of
conversion of preference shares into equity shares became unviable as
it was legally not permissible. Therefore, JPL proposed modification in
the terms of 0% OCPS by which the OCPS were converted into 2%
Redeemable Cumulative Preference Shares (RCPS).             That out of
                                   3                  ITA-729, 730 & 494/D/2011



6,60,00,000 OCPS allotted to the assessee, 1,60,00,000 OCPS were
sold on 9th March, 2002 at the rate of `7/- per OCPS. That loss arising
from such sale was claimed in the return of income for AY 2002-03 and
was accepted by the Revenue.           That during the accounting year
relevant to the assessment year under consideration, the assessee
redeemed remaining 5,00,00,000 RCPS and realized `50 crores. That
after applying the indexation, the assessee worked out the long term
capital loss of `41,81,03,448/-. Since there was no long term capital
gain which could be adjusted against the said long term capital loss,
the assessee claimed for the carry forward of long term capital loss of
`41,81,03,448/-. However, the Assessing Officer disallowed the loss by
alleging that the whole transaction was a sham transaction which was
entered into with the sole purpose of transferring funds from one
company to another and in the process to generate huge long term
capital loss in the hands of the assessee company. While doing so, the
Assessing Officer also relied upon the decision of Hon'ble Apex Court in
the case of McDowell and Co.Ltd. Vs. Commercial Tax Officer ­ [1985]
154 ITR 148. It is submitted by the learned counsel that the finding of
the Assessing Officer is purely based on presumption and suspicion
which is contrary to the facts on record. That there is no question of
transferring of funds from the assessee to JPL during the year under
consideration.   In fact, during the year under consideration, the
assessee realized `50 crores which was held up since long with JPL. He
reiterated that the loan of `99 crores was given by the assessee to JPL
prior to the year 2000.    In the years in which loan was given, the
genuineness of granting of loan by the assessee to JPL was never
doubted and never held as sham transaction. That the assessee and
JPL are both assessed to tax and JPL is a public listed company.
Thereafter, the loan was converted into OCPS on 30th October, 2000
and in the assessment of AY 2001-02 of both the assessee and JPL, this
fact was evident and the Revenue never held it to be a sham
                                     4                ITA-729, 730 & 494/D/2011






transaction either in the hands of the assessee or JPL. That part of the
OCPS i.e. 1,60,00,000 was sold on 9th March, 2002 and the loss
suffered by the assessee on sale of OCPS was claimed in the return of
income which was accepted by the Revenue. At that time also, the
transaction was not held to be a sham or bogus transaction.
Therefore, when during the year under consideration the assessee only
realized the value of the RCPS on its redemption, how the transaction
can be said to be sham or bogus? He further submitted that the facts
of the assessee's case are altogether different than the facts before
the Hon'ble Apex Court in the case of McDowell and Co.Ltd. (supra).
The said decision would be applicable only when there is a colorable
device to avoid tax.    That in the case of the assessee, there is no
device at all and there is no avoidance of tax also.      The loan was
advanced by the assessee to JPL long back. Genuineness of such loan
was accepted by the Revenue in the case of JPL as well as assessee.
The loan was converted into OCPS in the year 2000 which was again
accepted by the Revenue. Part of the OCPS was sold in the year 2002
which was also accepted by the Revenue.         Thereafter, OCPS was
converted into RCPS which was also accepted by the Revenue. During
the year under consideration, there was only redemption of such RCPS.
Therefore, by no stretch of imagination, such redemption of RCPS can
be said to be device so as to avoid the payment of tax. He, therefore,
submitted that the order of the Assessing Officer is without any basis
and justification.   The same should be reversed and the Assessing
Officer should be directed to carry forward the long term capital loss.
In support of his contention, he relied upon the following decisions
wherein the decision of Hon'ble Apex Court in the case of McDowell
and Co.Ltd. has been considered :-


   (i)      CWT-II, Ahmedabad Vs. Arvind Narottam ­ [1988] 173 ITR
            479 (SC).
                                         5                   ITA-729, 730 & 494/D/2011



     (ii)         Union of India and Another Vs. Azadi Bachao Andolan and
                  Another ­ [2003] 263 ITR 706 (SC).
     (iii)        CIT Vs. Walfort Share and Stock Brokers P.Ltd. ­ [2010] 326
                  ITR 1.
     (iv)         Vodafone International Holdings B.V. Vs. Union of India and
                  Another ­ [2012] 341 ITR 1 (SC).


5.          Learned DR, on the other hand, relied upon the orders of
authorities below and she stated that it is a clear case where the
transaction was between two related parties.            Though the assessee
claimed that JPL was facing financial constraints but no documentary
evidence to support such contention was furnished before the lower
authorities. Similarly, the assessee stated that the conversion of OCPS
into shares was barred by SEBI guidelines but here again, no evidence
was filed in support of this contention. She further submitted that the
loan was given just to help the assessee and, at the same time,
generate long term capital loss in the case of the assessee.                   She,
therefore, submitted that on the facts of the present case, the decision
of Hon'ble Apex Court in the case of McDowell And Co.Ltd. (supra)
would be squarely applicable and was rightly applied by the Assessing
Officer.       She, therefore, submitted that the order of the Assessing
Officer is rightly upheld by the CIT(A) and the same should be
sustained.


6.          In the rejoinder, it is stated by the learned counsel that the SEBI
regulations is in public domain and the percentage of shares held by
the assessee in JPL is also on record. Therefore, there was no question
of submission of any documentary evidence that on conversion of
OCPS into shares, there was violation of SEBI regulations.
                                     6                 ITA-729, 730 & 494/D/2011



7.    We have carefully considered the submissions of both the sides
and perused relevant material placed before us. The undisputed facts
are that the assessee had advanced huge sums from time to tome to
JPL. As on 30th December, 2012, the aggregate amount outstanding
against JPL was `99 crores. That the JPL was unable to pay the amount
due to financial constraints and therefore, it offered to restructure the
said advance by way of issue of OCPS. The same was accepted by the
assessee and accordingly, against the outstanding advance of `99
crores, JPL issued 6,60,00,000 0% OCPS of `10/- each at a premium of
`5/- each. Part of the OCPS i.e. 1,60,00,000 was sold by the assessee
during the accounting year relevant to assessment year 2002-03. The
loss suffered on aforesaid sale of OCPS was not disputed by the
Revenue. Subsequently, 0% OCPS was modified to 2% RCPS. During
the   accounting   year   relevant   to   the   assessment    year     under
consideration, RCPS was redeemed and assessee received `50 crores.
The assessee claim the loss on the redemption of RCPS as long term
capital loss amounting to `41,81,03,448/-. The same was claimed to
be carried forward because such loss was not adjusted against any
other capital gain during the year under consideration. The Assessing
Officer disallowed the assessee's claim of long term capital loss and its
carry forward with the following finding:-


      "The information u/s 133(6) was also called from M/s Jindal
      Polyfilms Ltd. on this issue. As per the details gathered it
      transpires that the assessee during the FY 00-01 the co.
      purchased 6,60,00,000 shares (OCPS) of M/s Jindal
      Polyfilms Ltd. at Rs.10/- each at a premium of Rs.5/- per
      share aggregating to Rs.99 cr. against which Rs.66 cr. was
      paid on a/c of OCP share capital and Rs.33 cr. on a/c of
      premium. With effect from 03.03.04, these 0% OCPS were
      changed and renamed to 2% RCPS. During the FY 05-06,
      these 2% RCPS were redeemed by the company at face
      value of Rs.10/- each. The share premium amount was
      forfeited which resulted in loss and after indexation, a sum
                                   7                  ITA-729, 730 & 494/D/2011



     of Rs.418103448/- has been claimed as long term capital
     loss to be carried forward.

     During the course of asstt. proceedings, the assessee was
     specifically asked to justify this loss. Query was also given
     to M/s Jindal Polyfilms Ltd. to provide the reasons for
     conversion of 0% OCP shares to 2% RCP shares. It was
     submitted that this conversion became necessary because
     these OCPS shares were held by promoter companies and
     conversion of these OCP shares into equity shares would
     have resulted in increase of promoters share holding
     beyond 85% in M/s Jindal Polyfilms Ltd., which was not
     permissible under the prevailing SEBI guidelines.

     The reply of the assessee has been considered but cannot
     be accepted. As mentioned above both the assessee co.
     and M/s Jindal Polyfilms Ltd. are controlled by one and the
     same promoters. Moreover M/s Jindal Polyfilms Ltd. is a
     closely held co. and its shares are not quoted in the
     market. In such a scenario, it was not difficult for the
     promoter to manipulate the whole transactions in such a
     manner that it is resulting in capital receipts in the hands
     of one company namely M/s Jindal Polyfilms Ltd. and in the
     hands of assessee co. i.e. M/s Consolidated Finvest
     Holdings Ltd., it is booked as capital loss. Thus the whole
     transaction is a sham transaction with the sole purpose of
     transferring funds from one co. to another and in the
     process there is generation of huge long term capital loss
     which is completely bogus. It will not be out of context to
     treat this transaction as a device of tax avoidance in future
     as held by the Hon'ble Supreme Court in case of McDowell
     & Co.Ltd."

8.   The same is sustained by the learned CIT(A). Now, the question
before is whether on these facts, the whole transaction can be said to
be sham transaction with the sole purpose of transferring funds from
one company to another and generating huge long term capital loss so
as to avoid the tax and whether on these facts, the decision of Hon'ble
Apex Court in the case of McDowell And Co.Ltd. (supra) is applicable.
After considering the arguments of both the sides and examining the
facts of the case in detail, we are unable to agree with the above
                                    8                   ITA-729, 730 & 494/D/2011



finding of the Assessing Officer. The loan was advanced from time to
time prior to 30th October, 2000. Thus, the loan was advanced at least
six years before the redemption of RCPS during the year under
consideration. The assessee as well as JPL both are regularly assessed
to income tax and in the years in which loan was advanced, the
genuineness of the loan was never doubted by the Revenue either in
the case of the assessee or in the case of JPL. The loan was converted
into OCPS on 30th October, 2000 and in the assessment of the assessee
as well as JPL for AY 2001-02, such conversion of loan into OCPS was
not held to be bogus or sham transaction. Part of the OCPS was sold
by the assessee on 9th March, 2002 and in the return of income for AY
2002-03, loss arising from such sale was claimed. In this year also, the
Revenue has not held the transaction of conversion of loan into OCPS
and the sale of OCPS as bogus or sham transaction. On 24.01.2004,
0% OCPS was converted into 2% RCPS and in the assessment for 2004-
05, the transaction of conversion of 0% OCPS to 2% RCPS was not held
to be not genuine or bogus. During the accounting year relevant to
the assessment year under consideration, the assessee received the
sum of `50 crores on redemption of RCPS and suddenly, the Assessing
Officer held the whole transaction as a sham transaction which is
completely bogus.     We are unable to accept this contention of the
Revenue because there are a series of transactions in a number of
years and in all the earlier years in the case of the assessee as well JPL,
the genuineness of the transactions was accepted. In the year under
consideration, no significant event took place except the redemption of
2% RCPS. The Assessing Officer has not brought on record an iota of
evidence in holding the transaction to be a sham transaction or bogus
transaction.   He has not given even a single reasoning why such
transaction is being held as bogus or sham transaction except that the
transaction has resulted into long term capital loss which may be
adjusted against the long term capital gain in future. In our opinion,
                                   9                  ITA-729, 730 & 494/D/2011



merely because the transaction has been entered into between two
sister concerns or it has resulted into loss may be a good ground for
investigating the transaction in deep.     But, that, by itself, is not
sufficient to hold the transaction as a sham transaction or a bogus
transaction.   In this case, we find that the Assessing Officer did
investigate the matter by calling the information under Section 133(6)
from JPL on this issue. However, despite such enquiry or investigation,
he has not found any material or evidence to justify his presumption
that the transaction between the assessee and JPL was bogus
transaction or sham transaction.       That the transaction had been
examined in the number of earlier years in the case of the assessee as
well as JPL and never the Revenue held the transaction as bogus or
sham transaction.   When there is a long series of transactions, the
Revenue which accepted all the transaction of series cannot held the
whole transaction to be sham or invalid in the year when the last
transaction of the series took place and, specially, when there is no
basis or evidence to hold so.     On these facts, in our opinion, the
decision of Hon'ble Apex Court in the case of McDowell and Co.Ltd.
(supra) would not be applicable wherein their Lordships held as under:-


      "Tax planning may be legitimate provided it is within the
      framework of the law. Colourable devices cannot be part
      of tax planning and it is wrong to encourage or entertain
      the belief that it is honourable to avoid the payment of tax
      by dubious methods. It is the obligation of every citizen to
      pay the taxes honestly without resorting to subterfuges.

      There is behind taxation laws as much moral sanction as is
      behind any other welfare legislation and it is a pretence to
      say that avoidance of taxation is not unethical and that it
      stands on no less a moral plane than honest payment of
      taxation. The proper way to construe a taxing statute,
      while considering a device to avoid tax, is not to ask
      whether the provisions should be construed literally or
      liberally nor whether the transaction is not unreal and not
      prohibited by the statute, but whether the transaction is a
                                  10                   ITA-729, 730 & 494/D/2011



     device to avoid tax and whether the transaction is such
     that the judicial process may accord its approval to it. It is
     neither fair nor desirable to expect the Legislature to
     intervene and take care of every device and scheme to
     avoid taxation. It is up to the court to take stock to
     determine the nature of the new and sophisticated legal
     devices to avoid tax and to expose the device for what
     they are really are and to refuse to give judicial
     benediction."

9.   From the above, it is evident that the above decision would be
applicable only when the assessee has indulged into a colorable device
to avoid the tax.   In the case under appeal before us, there is no
colorable device with the intention of tax avoidance.       On the other
hand, it is a case of a transaction of a loan which was given by the
assessee to its associate concern long back and since the associate
concern was not able to make the payment of the loan, the same was
restructured in the form of 0% OCPS. Subsequently, part of OCPS was
sold and part was converted into 2% RCPS.         This whole series of
transaction was accepted to be genuine by the Revenue. During the
year under consideration, there was only redemption of 2% RCPS and
realization of cash of `50 crores by the assessee. We do not find any
device in the whole series of transactions which took place over a
period of time and when all the transactions in the series but for the
redemption of the 2% RCPS was accepted by the Revenue as a
genuine business transaction.    How, on the realization of the RCPS
during the year under consideration, the whole series of transactions
became colorable device, has not been pointed out by the Assessing
Officer in the assessment order or by the Revenue at the time of
hearing before us. In view of the above, we hold that the decision of
Hon'ble Apex Court in the case of McDowell And Co.Ltd. (supra) relied
upon by the learned DR is not applicable to the facts of the assessee's
case. That moreover, Hon'ble Apex Court in the subsequent decisions
i.e., in the case of CWT-II, Ahmedabad Vs. Arvind Narottam ­ [1988]
                                   11                   ITA-729, 730 & 494/D/2011






173 ITR 479, Union of India and Another Vs. Azadi Bachao Andolan and
Another ­ [2003] 263 ITR 706 and CIT Vs. Walfort Share and Stock
Brokers P.Ltd. ­ [2010] 326 ITR 1, held that even when transactions are
preplanned but there is nothing to impeach the genuineness of the
transactions, the rule of tax avoidance in McDowell And Co.Ltd. would
not be applicable because the citizen is free to carry on its business
within the four corners of the law. After considering the facts of the
assessee's case, we are of the opinion that on these facts, the decision
of Hon'ble Apex Court in the case of McDowell And Co.Ltd. (supra)
would not be applicable but the decisions of Hon'ble Apex Court in the
case of Arvind Narottam (supra), Azadi Bachao Andolan and Another
(supra) and Walfort Share and Stock Brokers P.Ltd. (supra) would be
applicable because in the case of the assessee, there is nothing on
record to hold the series of the transactions as not genuine. On the
other hand, in the past several years, all the transactions of the series
have been accepted by the Revenue as genuine business transactions.
Therefore, in the year of redemption of the 2% RCPS, the transactions
cannot be presumed to be sham or bogus merely because it has
resulted into long term capital loss which may be adjusted against the
long term capital gain, if any, arising in future to the assessee. In view
of the above, respectfully following the decisions of Hon'ble Supreme
Court in the case of Arvind Narottam (supra), Azadi Bachao Andolan
and Another (supra) and Walfort Share and Stock Brokers P.Ltd.
(supra), we direct the Assessing Officer to accept long term capital loss
of `41,81,03,448/- and carry forward the same in accordance with law.


                                               2007-08 :-
ITA No.730/Del/2011 ­ Assessee's appeal for AY 2007-   :-
10.   The only ground raised in this appeal by the assessee reads as
under:-
                                   12                  ITA-729, 730 & 494/D/2011



      "That the Commissioner of Income-tax (Appeals) erred on
      facts and in law in disallowing set off of brought forward
      long term capital loss to the extent of Rs.56,12,985, arising
      in respect of redemption of preference shares of Jindal
      Polyfilms Limited in the assessment year 2006-07, against
      long term capital gains (without payment of Securities
      Transaction Tax) earned during the relevant previous year
      while following the assessment order and own order in
      appeal for the assessment year 2006-07."

11.   At the time of hearing before us, both the parties fairly agreed
that this ground is only consequential to the outcome of the assessee's
appeal for AY 2006-07. For the detailed discussion in paragraph No.7
to 9 above, we have allowed the carry forward of long term capital
loss. Therefore, we direct the Assessing Officer to allow the set off of
the same against long term capital gains for the year under
consideration. Accordingly, the appeal of the assessee is allowed.


                                              2007-08 :-
ITA No.494/Del/2011 ­ Revenue's appeal for AY 2007-   :-
12.   The only ground raised in this appeal by the Revenue reads as
under:-


      "The ld.CIT(A) has erred on facts and in law in deleting
      addition of Rs.1,42,16,868/- on account of disallowances
      attributable to exempt income u/s 14A of the I.T.Act.
      Ld.CIT(A) has failed to take cognizance of sub-section (3) of
      section 14A which specifies that even if the assessee
      makes a claim that no expenditure has been incurred in
      earning the exempted income, sub-section (2) of section
      14A shall apply, meaning thereby, disallowance u/s 14A(1)
      is called for."

13.   We have heard the arguments of both the sides and perused
relevant material placed before us.     The facts of the case are that
during the year under consideration, the assessee received dividend
income of `1,33,72,955/-. The assessee has claimed that it incurred
the sum of `7,73,525/- for earning of exempt income and, therefore,
                                  13                  ITA-729, 730 & 494/D/2011



the assessee had suo motu disallowed the same under Section 14A.
The Assessing Officer held that the disallowance is to be computed as
per Rule 8D and he, therefore, worked out the disallowance as per Rule
8D at `1,49,90,393/- from which after the deducting the sum of
`7,73,525/- which was already disallowed by the assessee made
further disallowance of `1,42,19,868/-.    On appeal, learned CIT(A)
deleted the disallowance made by the Assessing Officer with the
following finding:-


      "I have carefully considered the submissions of ld.AR and
      have gone through the assessment order. Although the
      Assessing Officer has observed that for earning exempt
      income, expenses must have been incurred. However,
      these general observations are not supported by any
      specific instances. The Assessing Officer has not pointed
      out any discrepancy in the disallowances worked out by
      the appellant itself nor any material has been brought on
      record to link-up the further expenditure which has been
      incurred in relation to exempt income. The disallowance
      has been made by applying Rule 8D in the light of the
      decision of Daga Capital Management (P) Ltd., supra.
      However, the said decision of Hon'ble Special Bench of the
      ITAT has been overruled by Hon'ble Bombay High Court in
      the case of Godrej & Boyce Mfg.Co.Ltd. vs. DCIT ITA No.626
      of 2010 and W.P. No.758 of 2010 wherein it has been held
      that the provisions of Rule 8D of the Income Tax Rules
      which have been notified with effect from 24th March, 2008
      shall apply with effect from Assessment year 2008-09. In
      the present appeal, the assessment year involved is 2007-
      08. Respectfully following the decision of Hon'ble Mumbai
      High Court, the disallowance worked out by the Assessing
      Officer by application of Rule 8D is directed to be deleted.

      The appellant has raised other objections/arguments also.
      However, since the disallowance worked out as per rule 8D
      is directed to be deleted, the other objections become only
      of academic nature and do not call for specific comments.
      These grounds of appeal are, therefore, treated as
      allowed."
                                   14                  ITA-729, 730 & 494/D/2011



14.   The Revenue, aggrieved with the order of learned CIT(A), is in
appeal before us.


15.   We have carefully considered the submissions of both the sides
and perused relevant material placed before us. Now, it is settled law
that Rule 8D is applicable for and from AY 2008-09 and not for earlier
years. While taking this view, the CIT(A) has relied upon the decision
of Hon'ble Bombay High Court in the case of Godrej & Boyce
Mfg.Co.Ltd. in ITA No.626 of 2010 and W.P. No.758 of 2010. However,
now this issue has also been set at rest by Hon'ble Jurisdictional High
Court in the case of Maxopp Investment Ltd. Vs. CIT, New Delhi ­
[2012] 347 ITR 272 (Delhi). Therefore, there is no infirmity in the order
of learned CIT(A) holding that Rule 8D was not applicable.              Now,
coming to the quantum of disallowance under Section 14A of the Act,
Section 14A reads as under:-



      "14A. [(1)] For the purposes of computing the total income
      under this Chapter, no deduction shall be allowed in
      respect of expenditure incurred by the assessee in relation
      to income which does not form part of the total income
      under this Act.]

      [(2) The Assessing Officer shall determine the amount of
      expenditure incurred in relation to such income which does
      not form part of the total income under this Act in
      accordance with such method as may be prescribed, if the
      Assessing Officer, having regard to the accounts of the
      assessee, 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 this Act.

      (3) The provisions of sub-section (2) shall also apply in
      relation to a case where an assessee claims that no
      expenditure has been incurred by him in relation to income
      which does not form part of the total income under this Act
      :]
                                  15                  ITA-729, 730 & 494/D/2011



       Provided
      [Provi
       Provi ded that nothing contained in this section shall
      empower the Assessing Officer either to reassess under
      section 147 or pass an order enhancing the assessment or
      reducing a refund already made or otherwise increasing
      the liability of the assessee under section 154, for any
      assessment year beginning on or before the 1st day of
      April, 2001.]."


16.   From sub-section (1) of Section 14A, it is evident that the
legislature has provided that no deduction shall be allowed in respect
of the expenditure incurred by the assessee in relation to income
which does not form part of total income. Therefore, incurring of some
expenditure by the assessee in relation to exempt income is essential
so as to invoke the provisions of Section 14A(1) by the Assessing
Officer. As per sub-section (2) of Section 14A, the Assessing Officer is
empowered to determine the expenditure incurred in relation to
exempt income provided he is not satisfied with the correctness of the
claim of the assessee in relation to the incurring of expenditure for
earning of exempt income.      As per sub-section (3), the Assessing
Officer is empowered to determine the expenditure even when the
assessee claims that no expenditure has been incurred by him in
relation to earning of exempt income provided the Assessing Officer is
not satisfied with the correctness of the claim of the assessee. From a
combined reading of sub-section (2) & (3) of Section 14A, it is evident
that first the assessee has to state whether any expenditure was
incurred by him for earning of exempt income, if yes, then, he has to
specify the expenditure which was incurred for earning of exempt
income. Thereafter, the Assessing Officer is required to examine the
assessee's claim with regard to incurring of no expenditure or with
regard to the amount of expenditure claimed to have been incurred by
the assessee for earning of exempt income. If the Assessing Officer is
satisfied with the claim of the assessee, then, no further action under
                                  16                  ITA-729, 730 & 494/D/2011



Section 14A is required except to disallow the amount of expenditure,
if any, which assessee claimed to have incurred for earning of exempt
income. However, when the Assessing Officer is not satisfied with the
claim of the assessee with regard to incurring of no expenditure or the
amount of expenditure specified by the assessee for earning of exempt
income, then, he is required to determine the amount of expenditure
incurred by the assessee in relation to earning of exempt income.
Such expenditure is to be determined by him in accordance with such
method as may be prescribed. In this case, the assessee has worked
out the disallowance under Section 14A at `7,73,525/-. The Assessing
Officer did not record any satisfaction that such working is wrong. He
simply says that disallowance is to be worked out as per Rule 8D. We
have already held that for AY 2007-08, Rule 8D was not applicable and
therefore, disallowance need not be computed as per Rule 8D.             The
Assessing Officer has not recorded any satisfaction with regard to any
mistake in the working of disallowance under Section 14A at
`7,73,525/- by the assessee.     On these facts, we do not find any
justification to interfere with the order of learned CIT(A). The same is
sustained and Revenue's appeal is dismissed.


17.   In the result, the appeals of the assessee are allowed whereas
the appeal of the Revenue is dismissed.
      Decision pronounced in the open Court on 10th September, 2014.


                 Sd/-                                Sd/-
                SIDHU)
          (H.S. SIDHU)                               AGRAWAL)
                                               (G.D. AGRAWAL)
        JUDICIAL MEMBER                        VICE PRESIDENT

Dated : 10.09.2014
VK.
                                  17                  ITA-729, 730 & 494/D/2011



Copy forwarded to: -

1.   Appellant    : M/s Consolidated Finvest & Holdings Limited,
                          Basement-01, Pusa Road,
                    11/5, Basement-
                    New Delhi ­ 110 005.

2.   Respondent : Deputy Commissioner of Income Tax,
                  Circle-
                  Circle-3(1), New Delhi.
3.   CIT
4.   CIT(A)
5.   DR, ITAT

                             Assistant Registrar

 
 
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