THE DCIT(OSD) CIRCLE-8,, AHMEDABAD vs. M/S. TORRENT PVT. LIMITED,, AHMEDABAD

PER MAHAVIR PRASAD, JUDICIAL MEMBER

ITA No. 2587 & 2594/Ahd/2015 2 . A.Y. 2011-12 2. First we take up in ITA No. 2587/Ahd/2014. The revenue has taken following grounds of appeal: 1). "Whether the Commissioner of Income-Tax (Appeals) has erred in law and on facts in deleting disallowance of Rs.12,27,015/- out of total disallowance of Rs.2,01,59,092/- U/S.14A of the Act." 2). "Whether the Commissioner of Income-Tax (Appeals) is right in law and on facts in directing to exclude the addition/adjustment of Rs.2,01,59,092/- made on account of disallowance u/s.!4A, while computing the book profit computed u/s.ll5JBoftheAct." 3). On the facts and in the circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad ought to have upheld the order of the Assessing Officer. 4). It is therefore, prayed that the order of the Ld. Commissioner of Income- Tax (Appeals)-XIV, Ahmedabad may be set-a-side and that of the order of the Assessing Officer be restored

ITA No. 2587 & 2594/Ahd/2015 3 . A.Y. 2011-12 iii). No other business activity is being carried out by the assessee apart from investment. Therefore, it can be safely assumed that the entire administrative set up is being used for managing investment portfolio through which assessee earning/(may earn in future) exempt income in the form of dividend /long term capital gains. iv). Rule 8D was introduced precisely to cover the situations wherein the assessee were pushing the expenses relating to exempt income towards taxable income and thereby reducing the taxable income. The intention of the legislature is clearly evident from the Memorandum explaining the provisions contained in the finance Act, wherein it was explained that only those expenses could be claimed as deduction which are incurred in relation earning taxable income. In view of the reasons cited above I am satisfied that the expenditure of Rs. 15,12,285/- claimed to have been incurred by you for earning exempt income is not correct." The assessee was requested to show cause as to why the disallowance u/s. 14A should not be made as per provisions of Rule 8D of IT. Rules, 1962." (a)(iii) In response to the said show cause the assessee submitted vide letter dated 27.12.2013 that 1, As regards to the observation of your goodselves contained in points (i) and (ii) to Para 1 as stated above, the assessee submits the amount ofRs. 13,65,85,571/- stated to have been claimed by the assessee is witJwut taking in to accoimt the expenses which are already disallowed in the return of income. In this connection, the assessee submits the break-up of the total expenditure claimed while computing the business income for the year under consideration, which is as under: A. Employees Remuneration and Administrative Expenditure Particulars Total Expenses Expenses Remarks claimed

Employee 151,22,852 1,36,10,567 (10% of the total remuneration and disallowed u/s 14A) benefits

Demat charges 14,95,190 0 Disallowance in the return

Rent, rates and 2000 2000 Refer Para 6 taxes

Insurance 3,65,553 3,65,553 Refer Para 6

Repairs and 5,32,208 5,32,203 maintenance

Travelling and 2,56,267 2,86,167 conveyance

Fees and legal 4,53,096 4,14,506 Rs. 38,590/- expenses disalloioed (Rs.5,500 + Rs. 33,090)

Auditor's 2,62,411 2,61,411 Refer Para 6 remuneration

Stationery, printing 19,032 19,032

ITA No. 2587 & 2594/Ahd/2015 4 . A.Y. 2011-12 Miscellaneous 34,452 34,482 expenses

Total Administrative 1,85,71,991 1,55,25,926 Expense

B. Interest Expenditure Particulars Total Expenses claimed Remarks Expenses

Interest 11,34,19,004 10,12,50,821 Rs.1,21,68,184/- pertaining to Expense IDFC Loan I already disallowed

in view of the above, it is dear that out of total expenditure of Rs.13,19,90,995/- incurred on Employees Remuneration & Administrative Expenditure and Interest; the expenditure to the tune of Rs.11,67,76,747/- has been claimed while computing the business income for the year under consideration. 2.Further, on perusal of the above tables, it may be am be observed that: • Major portion of expenditure claimed consists of interest expense incurred on the loan availed from IDFC. Tlie same has been claimed as deduction against interest income as the expense incurred for earning interest income, which is offered to tax as business income for the year under consideration. And • Administrative expenditure of routine and general nature required to be incurred, irrespective of the fact whether any investment activity is carried out by the company or not have been claimed, • In context of expenses claimed by the assesses vis-a-vis the disallowance of expenditure u/s 14A r.w.Ride 8D, it is submitted that these expenses do not bear any nexus with that of earning of exempt income and therefore there cannot be any disallowance in respect of these expenses as per the provisions of section T.4A r.u/.Rule SD. The detailed explanation in this regard is given in subsequent paragraphs. 3. No Disallowance of Interest Expenditure it/s 14A r.w.Rule 8D Out of the total interest on term loan from IDFC Ltd. amounting to Rs.ll,34,19,OQ4/~, interest expense of Rs.1,21,68,184/- pertains to IDFC Loan I taken in earlier years for purpose of general corporate requirement of the assesses company. The said interest should lie allowable while computing the business income of the company as the funds borrowed are utilized for the business of the company. However, in order to avoid litigation, the said interest lias been disallowed while computing the business income for the year under consideration. 4.1 The remaining interest expenditure ofRs.10,12,50,821/- claimed is in respect of IDFC loan II. As regards the said loan, it may be noted that the assessee company is engaged in investment activity, financial activity and is also registered with KBI as Non-Banking Financial Company (NBFC). The said loan from IDFC was taken for the fund required in the course of the said financing activities. Inthis contect, it ma benoted that the assessee company had, in earlier years, granted loans to Anagram Securities Ltd and Torrent Power Ltd, and interest was also charged from them. The said income was treated as income from Business and profession as the financing activity falls within the object clause of the company. In the assessment year under consideration, in absence of any such requirements of the said funds, as per prudent business policy, the assessee company has invested tJie idle funds in the fixed deposits of banks, which yielded interest income. The assessee company has offered the said interest income as income under the head Profits and Cains from Business and Profession. Since the interest was paid on amount borrowed for the purpose of financing business, the same is claimed as deduction. 4.2 As explained above, the IDFC loan-II is availed to promote the business purpose of the assessee company and hence, the expenditure incurred on the same is considered as business expense and claimed as deduction against Interest income. Hence, the assessee company states that there should not be any disallowance out of interest expenditure.

ITA No. 2587 & 2594/Ahd/2015 5 . A.Y. 2011-12 5. Moreover, the assessee company submits the classification of investments existing as on March 31,2011, as under - Investments Long term Current Investments Total ; Investment

In Subsidiary 4,51,92,71,744 1,84,99,73,861 6,36,92,45,605 Companies

In Others Companies 1,05,25,05,621 -- 1,05,25,05,621

Total Investments 5,57,17,77,365 1,84,99,73,861 7,42,17,51,226

From the above classification of investments, it is evident that the investments to the extent of 85.82% are made in the subsidiary companies of the assessee company. The assessee company further submits that these are strategic investment made in the group companies which do not require any monitoring or constant administration. In case of these investments once the funds are invested, the holding of the said investments has yielded some dividend. However, the investments have been made in the group companies as part of strategic business move and not with a view of earning dividend income. Exempt income is ancillary to the main objective of the investments made in the subsidiary companies. 5.1 These are long term strategic investments made by the assessee company in earlier years. The assessee company submits that it has made investments from owned funds and no amount of borrowed funds is utilized for the purpose of making such investments. Moreover, the assessee company brings to your kind notice that a small amount of investments were made during the year under consideration and the same can be verified from Schedule V to the Balance sheet for the year under consideration. It is submitted that it has not utilized am/ borrowed funds to make these investments. So there is no interest expenditure which is attributable to earning of such exempt income accrued from the, investments of the assessee company. 5.2 At this point, it may also be noted that tlie said loan has not "be obtained by the assessee company during the year under consideration. The issue relating utilization of the funds obtained through the said loan and the allowabitliy of interest thereon has been extensively examined during the course of assessment proceedings for the earlier years and the same has been allowed as deduction thereafter. In view of above, the assessee company states that there should not be any disallowance out of interest expenditure. 6. No Further Disallowance of Administrative Expense u/s 14A r.w.Rule 8D It is well known fact that the purpose of disallowance u/s 14A is to exclude the expenses which have been incurred to earn exempt income and so the expenses which cannot be said to have any direct or indirect nexus with the exempt income, should not be disallowed u/s 14A r.w.r. 8D. In this context, the assessee company states that it has incurred various administrative expenses Wee employees remuneration, demat charges, rent, rates and taxes, insurance, repair & maintenance, traveling & conveyance expenses, fees & legal expenses, auditors remuneration, stationery-printing, and other miscellaneous expenses during the year under consideration. 6.1 Out of all these expenses, the assessee company had already disallowed 10% of the total remuneration paid to the employees and demat charges as expense for earning exempt income, and so no further disallowance in this respect is needed". 6.2 Further, expenses of rent, rates and taxes, fees & legal expenses, auditors remuneration etc. are required to be incurred, irrespective of the fact whether any investment activity is carried out by the company or not. Even in absence of any active business activity, these expenses are required to be incuned, which are necessary for maintaining the status of the company. The remaining expenses of insurance, repair & maintenance, traveling & conveyance expenses, stationery-printing and other misc. expenses are of general nature and incurred by the assessee for general administrative purpose.

ITA No. 2587 & 2594/Ahd/2015 6 . A.Y. 2011-12

It is thus submitted that these expenses do not bear any nexus with that of earning of exempt income and therefore there cannot be any disallowance in respect of these expenses as per the provisions of section 14A r.w.RuleSD. 7. In view of the above, it is clear that the expenses which have been claimed bi/ the assessee while computing the business income do not bear any nexus with the exempt income. Merely because major portion of the income of the assesses consists of exempt income, it cannot be assumed that major portion of expenses would have been incurred_to earn the said income. It is very much important to note that no major efforts are needed to manage the investment portfolio, more particularly when all the investments are long-term strategic investments in subsidiary companies and that Exempt income is ancillary to the main objective of the investments made in the subsidiary companies. Therefore, the reasons for not accepting submission of the assesses, given in point no (i) and (ii) to para 3 of the notice, are based on incorrect assumptions, more specifically because it has been conclusively established by the assessee that that there is no nexus between the expenses incurred and the exempt income. 8. in point no (Hi) to para 3 of the notice, it has been stated that "it can be safely assumed that the entire administrative set up is being used for managing investment portfolio through which assessee earning/ (may earn in future) exempt income in the form of dividend/long term capital gains." In connection with same, as already explained in para-4.1 above, the assessee company is engaged in investment activity financial activity and is also registered with RBI as Non-Banking Financial Company (NBFC). This fact can also be verified from the activities of the assessee company in various earlier years. Moreover, as explained above, the investments being long term strategic investments, no major efforts are needed to manage the investment portfolio and that Exempt income is ancillary to the main objective of the investments made in the subsidiary companies. Therefore, your assumption as stated para-3(ii) of the notice is not valid. 9. Further, vide point (iv) to Para 3 of notice, your goodselves have mentioned that Rule 8D was introduced precisely to cover the situations wherein the assessee were pushing the expenses relating to exempt income towards taxable income and thereby reducing the taxable income. In this context, it is submitted that in view of the above detailed submission, it is clear that assessee has not incurred expenses which have been claimed) towards earning exempt income. This can be proved by answering a simple question as to whether the dividend income would have stopped, had the assessee not incurred the expenses which are debited to its Profit & Loss Account? The answer is clear "NO". The income from dividend would continue to be earned so long as the subsidiary companies are paying dividend and the fact whether the assessee company incurs any Administrative expenditure or not would not have any impact on it. The above point conclusively proves that the assessee has not incurred any Administrative expense _ for earned dividend income and therefore, it is clear that no expenses have been pushed towards taxable income and the_claim_of the assessee is very much genuine. 10. Without prejudice to above, as regard the administrative expenditure, it is stated that the assessee company has average investment of Rs.6,99,85,14,760/-. Therefore, by applying rule 8D the said disallowance would work out to Rs 3,49,92,573/- being 0.5% of the average investment. However, the total administrative expenditure is only Rs.. 1.85,71,9927-. Out of these expenses demat charges of Rs,14,95,190/-, charges on documents ofDebenhirenagar__ofRs,5,500/-and Share Registrar expenses amounting to Rs.33,090/- classified under the head Fees and legal expenditure and Rs. 15,12,285/- as an expense inclined to earn to exempt income has already been disallowed while computing the business income. Thus, out of expenses of Rs 1,85,71,9937- debited to profit_and loss account, the assessee company has claimed expenses of Rs.1,55,25,926/-, as explained in para-2 (A) above. Therefore, the disallowance as stated above if made will exceed the total amount of administrative expenses claimed; however, the total disallowance ti/s 14A r.w.r8D cannot exceed_the total amount of administrative expenditure. Hence, Rule 8D is not applicable. (a)(iv) "The reply of the assessee has been considered and is not found to be acceptable in view of the following facts and legal provisions:- i). Sec. 14A of the Act relates to expenditure incurred in relation to income not includible in total income. Sec. 14A(1) states that for the purpose of computing the total income under this chapter,

ITA No. 2587 & 2594/Ahd/2015 7 . A.Y. 2011-12 no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income. ii). Sec. 14A(2') further states that the Assessing Officer shall determine the amount of expenditure incurred in relation to such income ...which, does, notform part of. total income under the Act, in accordance with such method as may be prescribed (Rule 8D) 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 from part of total income. iii). Thus, the Assessing Officer is bound to calculate the disallowance u/s. 14A in accordance with Rule 8D if he is satisfied that the disallowance made by the assessee u/ s. 14A of the Act is not correct. iv). In the instant case the assessee has disallowed Rs. 15,12,285/- u/s. 14A of the Act. The total expenditure claimed by the assessee in the P&L Account is Rs, 13,65,85/571/-. The total income earned by the assessee during the year is Rs. 111,95,50,619/- which is under following heads Dividend Income Rs. 102,26,21,939 Profit on sale of investment Rs. 4,64,66,806/- Interest Rs. 3,71,04,997/- Share in profit of partnership Rs. 1,31,56,877/- Torrent Financers Thus, the 95.49% income is from investment made by the assessee, 3.1% is from Fixed Deposits made by the assessee and the remaining income is from partnership firm. Thus, the major portion of income of the assessee is from investment made by it which is exempt No other business activity has been carried out by the assessee during the year. The assessee has claimed that it is NBFC. However, during the year me assessee has advance loans/advance of only Rs. 17,15,522/-. Thus, the only activity carried out by the assessee during the year was investment in shares/mutual fund which is capable of earning exempt income. As against this the assessee has disallowed only Rs. 15,12,2857- u/s. 14A which is mere 1.1% of total expenditure claimed by the assessee in the P&L Account In view of the facts stated above, I am satisfied that disallowance claimed by the assessee u/s. 14A of the Act is not correct. Therefore, as per provisions of the sec. 14A(2) of the Act the disallowance has to be made as per Rule 8D of the IT. Rules, 1962." (a)(v) The AO computed disallowance as per Rule 8D as follows: "As per provisions of Rule 8D(1) "Where the Assessing Officer, having regard to the accounts of the assessee of a previous year is not satisfied with the correctness of claim of expenditure made by the assessee in relation to income which does not from part of total income under the Act for the previous year, he shall determine the amount of expenditure in relation to such income in accordance with provisions of sub - rule(2)". As per provisions of sub rule (2) of Rule 8D The expenditure in relation to income which does not form part of total income shall be aggregate of following amounts:- i). The amount of expenditure directly related to income which does not form part of total income. In this case the assessee has disallowed only 10% of total remuneration ,& other benefits paid toj?mployees i.e. Rs. 15,12,285. Further assessee has disallowed Demat Charges of Rs. 14,95,1907- (though not under section 14A). The assessee has contended that it has incurred various administrative expenses like employees remuneration demat charges, rent, rates & taxes, insurance repair and maintenance, travelling & conveyance expenses, fees & legal expenses, auditors remuneration, stationery printing and other miscellaneous expenses during the year under consideration. Out of all these expenses, the assessee company had already disallowed 10% of the total remuneration paid to the employees and demat charges as expenses for earning exempt income and so further disallowance was needed. The contention of the assessee is not at all acceptable in view of the fact that no other business activity is_ being carried out by the assessee except investment. By no stretch of imagination it can be assumed that the assessee company is paying Rs. 1,51,22,8527- to employees as remuneration and other benefits for doing nothing. During the entire year the assessee has done no other activity apart from trading in shares/mutual funds and managing its investment portfolio.

ITA No. 2587 & 2594/Ahd/2015 8 . A.Y. 2011-12 During the year no new investment has been made by the assessee in its subsidiary companies. Therefore, in view of the facts stated above it is clear that the direct expenses attributable to earning of exempt income are a). Remuneration & other benefits of employees. Rs. 1,51,22,852/- b). Demat Charges Rs. 14,95,1907- Rs. 1,66,18,042/- ii). Interest Expenditure - NIL (as held in earlier years). iii). An amount equal to one half percent of the average of the value of investment income from which does not or shall not form part to total income, as appearing in the balance sheet of the assessee on the first day and the last day of the previous year. In the instance case it is 0.5% (700,79,22,775 + 698,91,06,746) = Rs. 3,49,92,573 2 However, tills amount has to be restricted to the actual expenditure claimed by the assessee in the return of income i.e. Rs. 65,48f525/-// (vi) The AO therefore held - "Thus, the total disallowance u/s. 14A r.w.s. 8D comes out to be Rs. 2,31,66,567'/- out of which the assessee has already disallowed Rs. 15,12,285/- u/s. 14A and demat charges of Rs. 14,95,190. Therefore, the amount of disallowance u/s. 14A r.w.r. 8D is restricted to Rs. 2,01,59,0927-. It is also important to mention here that similar disallowance was made in A.Y. 2009-10 which has been even confirmed by CIT(A). The CIT(A) has held that "The action of the Assessing Officer (applying Rule 8D) is fully justified in view of the fact that there is no other activity which is being carried out by the appellant except making the investment in other group companies. All activities of the company are related to earning of dividend from exempt investment and income which is exempt from tax and the other income is negligible compared to exempt income". (b) The AO further observed that (i) "During the course of assessment proceedings it was noticed that the assessee has valued closing stock of 44,95,437 shares of M/s. Gujarat Lease Financing Ltd at Market value of Rs. I/- per share. Thus, the valuation of closing stock of shares of M/s, Gujarat Lease Financing Ltd (GLFL) was at Rs. 44,95,437. It was further seen thai as..per the. DM AT A/c statement submitted by the assessee vide his submission dated 07.10.2013 (copy enclosed) that die shares of Gujarat Lease Financing Ltd were shown at Market rate of Rs. 3.7/- per share as on 31.03.2011. It was also seen from the website of National Stock Exchange (NSE) (copy enclosed) that the market value of shares of M/s. Gujarat Lease Financing Ltd have been valued at Rs, 3.7/-as on 31.03.2011. As per provisions of sec. 145A of the Act the valuation of inventory for the purposes of determining the income chargeable under the head "Profits and Gains of Business or Profession" shall be in accordance with the method of accounting regularly employed by the assessee. As per Point No. 12(a) of the Tax Audit Report in Form No. 3CD submitted by the assessee it was stated that closing stock is valued at cost or market value whichever is lower. In the instant case the shares of M/s. Gujarat Lease Financing Ltd were valued at market value of Rs. If- per share rather than the market value of Rs. 3.7/- per share fas per DMAT statement and as per NSE website). Accordingly the assessee was given show cause vide letter dated 04.12.2013 as to why the shares of M/s. Gujarat Lease Financing Ltd be not taken at Rs. 3,7/-per share instead of Rs. I/- per share as claimed by the assessee." (ii) "The assessee vide his reply dated 26.12.2013 stated that 1.1 In this regards, at the outset it is submitted that the shares of GLFL, held as stock-in-trade have been valued on the basis of the method of valuation consistently followed by the assessee company from year to year i.e. cost or market value w.e.less. In order to justify that the said shares have been valued correctly at the rate o f Rs.l/- share as on the last day of the previous year under consideration, it is important to understand the background of the purchase of GLFL shares, held as stock-in-trade. The brief facts regarding the purchase of GLFL shares, held as

ITA No. 2587 & 2594/Ahd/2015 9 . A.Y. 2011-12 stock-in-trade and explanation regarding valuing the same at the rate of Rs.l/- per share is dealt with in subsequent paragraphs of this submission. 1.2 The assessee company holds shares of GLFL as a co-promoter of the company. GLFL is a joint sector company of Government of Gujarat (GoG), Torrent Lease and Finance Private Limited and the assessee company (which was earlier known as Torrent Investments Private Limited). The said shares are held as per "Shareholders Agreement" dated 3rd February, 1994 and "Modification Agreement to the Shareholders Agreement" dated 25th April, 1994 was entered in to between: a) Gujarat Industrial Investment Corporation Limited, a public sector unit of GoG (GHC) [referred to as "THE CORPORATION" (CORPN) in the Agreement] And b) Torrent Lease and Finance Private Limited & The Assessee company [jointly referred to as "JOINT SECTOR PARTNERS (JSPs) in the Agreement] The copies of the said agreements are attached herewith vide Annexure-1 for your kind perusal. On perusal of the agreements, it can be observed that the assessee company initially purchased 33,00,000 equity shares of GLFL from GIIC and simultaneously, it was agreed upon to convert the GLFL into a_ joint sector company, between the GoG, Torrent Lease and Finance Private Limited and assessee company. Subsequently, Torrent Lease and Finance Private Limited was merged into assessee company. 1.3 Restrictions on Transfer of shares Thus, the shares of GLFL were initially purchased by the assessee from GIIC. The assessee company holds in total 44,95,437 shares of GLFL as stock in trade as on the last day of the previous year under consideration. In this context, it is to be noted that the shareholding of the. GLFL shares, held as stock in trade was subject to the terms and conditions of the "Shareholders Agreement". The relevant portion of such terms and conditions is reproduced as under: "2.10 Prior consent of the Corpn required by the JSPs to sell or encumber etc their shareholding. The JSPs shall not, except with the prior consent of The Corporation, transfer, sell or encumber in any manner whatsoever their shareholdings, including additional shares offered/allotted by way of right or bonus issue shareholding or in any other manner in THE COMPANY till such time any undertakings or guarantees given by it either to the financial institutions or to the banks or to THE CORPORATION subsists and continues to be in force. PROVIDED, HOWEVER, that the JSPs shall be entitled to encumber its shareholding in THE COMPANY to the financial institutions or banks for undertaking or guarantee given by it in respect of implementation of any project of THE COMPANY. 2.11 Prior consent of the JSPs required by the CORPN to transfer, sell or encumber etc their shareholding 2.17 Reduction of Shareholding by the JSPs So long as THE CORPORATION holds 6.5% of the paid up equity share capital of THE COMPANY, the JSPs can reduce its shareholding only with the prior consent of THE CORPORATION and to such person/s, companies, and institutions acceptable to THE CORPORATION PROVIDED THAT before offering the shares to any oilier person, companies, and institutions, the JSPs shall offer the shares first to THE CORPORATION and in case THE CORPORATION accepts tin offer the price of the shares shall be determined on the basis of any of the methods referred to in sub-clause 2.14 here in. PROVIDED FURTHER THAT......" On perusal oftlie above clauses of the agreement, it is observed that there are restrictions on transfer of shareholding of GLFL held by the assessee company i.e. certain terms and conditions are to be complied with before transferring the shareholding. It is to be noted that the shares of GLFL cannot be transferred independently by the assessee company. A prior written consent of Gilds required for transfer of the said shares. The clause is applicable for the whole shareholding, including the additional shares offered/allotted by way of right or bonus issue shareholding or in any other manner in the company. Moreover, before offering the said shares to other persons, the assessee is required to offer the shares first to the GIIC (GoG) and incase the offer is accepted the price of the shares shall be

ITA No. 2587 & 2594/Ahd/2015 10 . A.Y. 2011-12 determined on the basis of any of the methods referred to in Para 2.14 of the "Shareholders Agreement". 1.4 In view of the above, it is clear that there are restrictions on transfer of shares of GLFL and first of all the shares have to be offered to GJJC before offering to other persons so long as GIIC holding 6.5% of the paid up equity share capital of the _ company.. Moreover, it is reiterated that written consent of GIIC is to be taken before transferring the said shares. Thus, practically it is difficult to sell off the said shares in the market due to the restrictions imposed on it vide the "Share Agreement". Accordingly, the shares of GLFL cannot be valued at the rate ofRs.3.70/- per share as on the last day of the previous year under consideration. 2. GLFL shares cannot be sold at the rate of Rs.3.70/- per share in the market -illiquidity Further, even if GIIC permits the assessee company to transfer the shares to other persons, it cannot sell off the shares at the rate of Rs.3.70/- per share for the, reasons explained herein as under. 2.1 It is reiterated that the assessee company holds in total 44,95,437 shares of GLFL as stock-in-trade as on the last day of the previous year under consideration. In this connection, it shall be noted that the shares of GLFL are listed on the BSE and NSE. The statement showing quantum of shares traded during the F.Y.2010-11 on BSE, its prices, the average daily quantum shares traded during this period along with the Quantum of shares traded on deliver:/ basis out of total shares traded , is attached herewith vide Anenxure-2 for your ready reference. On perusal of the statement, it may be observed as under: a) The average daily quantum of GLFL shares traded on BSE on delivery basis is 13,166 shares during the financial year 2010-11. b) The maximum number of shares traded on BSE on any day during the financial year under consideration i.e. on 25/05/2010 was 2,67,5071 shares in total and only 1,46,180 shares on delivery basis. c) The total quantum of GLFL shares traded on BSE during the financial year 2010-11 was 32,25,648 shares only on delivery basis. 2.2 As against this, the volume of shares that the assessee company is holding as stock in trade, being the co-promoter of the company is 44,95,437 shares and following shall be noted: a) The average daily quantum of shares traded on BSE on delivery basis during the F.Y. 2010- 11 is approximately just 0.30% of total volume of shares held as stock in trade by the assessee company. b) The volume of shares held as stock in trade by the assessee company is almost 30.75 times the maximum quantum of shares traded on BSE on any day during the financial year 2010-11. c) The total quantum of shares traded on BSE during the whole financial year is also less than volume of shares held by the assessee as on the last day of the previous year under consideration. d) Moreover, the total shares traded on delivery basis are nearly 85% of the total quantum of shares traded on BSE during the whole financial year. Thus, in view of the above, it may be absented that the prices on the stock exchanges are for smaller lots of shares and that there is no market for 44,95,437 shares held by the assessee company. 2.3 At this point, it is important to understand as to how the prices of the shares are determined in the stock exchange. Stock prices are a function of supply and demand and it has a direct impact on the price of the shares. The inter-relationship between supply, demand and a stock's price needs to be understood and it is explained in following paragraph. 2.4 The stock exchange is a platform where the transactions in shares take place between willing buyers and sellers. The prices in the stock exchange are determined by the forces of demand and supply of shares on the stock exchange. It is very well known principle that the prices of any commodity / shares fall, where the supply is higher than the demand thereof. Conversely, the prices of any commodity / shares increase, where the supply is lower than the demand thereof. This principle is in built in the stock exchange mechanism. If demand for a stock exceeds the supply, its price will rise. However, it will only rise till 'the point where supply of shares is equal to the demand for the same. At any point after this, the prices would decrease, as supply of shares is higher than the demand for the same and such sellers may have ridden the price up. Since, there will be more supply as compared to the demand of the

ITA No. 2587 & 2594/Ahd/2015 11 . A.Y. 2011-12 stock, the price begins to fall and the holder of the stock lowers the price down to attract a buyer. Therefore, the investors would demand a discount on the existing price for buying such shares. Thus, demand-supply mechanism is one of the most important factors that determine the prices. The price of the shares will fluctuate as and when there is a mismatch between the demand and supply. If demand exceeds supply, the price of the share will rise and alternatively, it will decline if the supply exceeds demand. 2.6 In light of the above, the points stated at Para 2.2 above shall be referred to. At this point, it shall be noted that the volume of GLFL shares, held as stock in trade by the assessee on 31/03/2011 was 44,95,437 shares. This is too high a volume as compared to the quantum of maximum number of shares traded on any day during the financial year 2010-11 as well as the average daily quantum of shares traded on BSE. Had this much volume of shares been sold in the market, there would have been a situation of mismatch between the demand and the supply of the said shares. There would have been a, drastic increase in supply as compared to the average daily trading of the shares and even annual quantify of GLFL shares traded on BSE. Consequently the price of the shares would have fallen and infact, there would not have been any buyer for the said shares when the assessee becomes the seller in the market Hence, it is clear that price quoted on the stock exchange on the last day of the financial year does not represent the market value of the GLFL shares held by the assessee. 3. Further, it is to be noted that had the assessee sold the said shares in the market, circuit breaker would have been attracted due to substantial fall in price of the share of GLFL. In this context, it would be important to understand the said term "circuit breaker", which is explained herein below: 3.1 Circuits are of two types - circuit for an index and for a stock. So, if an index or the price of a stock increases or declines beyond a specified threshold it is said to have entered into a circuit. Securities and Exchange Board of India specifies this threshold as a percentage of the prior day's closing figures. 3.2 Circuit Breaker for a stock A price band specifies the span or price range for a stock to move without any interference from regulatory authorities. Only when the stock prices move beyond the range, it is considered as entering into a circuit and circuit breakers are applied. Daily price bands of 2 per cent, 5 per cent and 10 per cent are applicable to different equity stocks. Price bands of 20 per cent are applicable to all remaining scrip like preference shares or debentures. For example, for a stock with a price band of 5 per cent mat closes at Rs 100 on the previous day, the price band will be between Rs 105 andRs95. 3.3 What are an Upper circuit and Lower circuit? Stock prices can either move up or down and hence circuit breakers are required for movements in both directions. An upward movement over the threshold will cause a stock to enter an upper circuit. Similarly a downward movement in stock price beyond the threshold will cause a stock to enter a lower circuit, further, sett of huge quantity of shares have effect of reducing the prices of shares. The objective of circuit breakers is to control the stock markets at times when they move beyond reasonable limits. When a stock enters an upper circuit, it helps an investor earn lot of money, who has already invested in the stock at an advantage. On the contrary a stock movement into a lower circuit places the investor at a disadvantage because it is now difficult to sell off these shares, as they have lost a lot of money. 3.4 From the above, it can be said that once the share price of any company moves in to lower circuit place, it is not possible to sell the shares of the said company. Therefore, the shares of the said company become illiquid, even at such lower prices. In this context, it is important to note that if the 44/95,437 shares of GLFL were sold in the market, it was likely to have triggered lower circuit on stock exchange, when the average daily volume of trading of shares of the GLFL on BSE on delivery basis 0.30% of the total number of shares held by the assesse company. 4. Negative Networth of GLFL - No underlying assets held by GLFL In addition to above, it is important to note that GLFL is not carrying on any business since many years and, the company has huge accumulated losses which makes its networth to be negative, The computation of net worth of GLFL as on 31/03/2011 is as under:

ITA No. 2587 & 2594/Ahd/2015 12 . A.Y. 2011-12 Particulars Ami (Rs. in lakhs.)

Share Capital 2,716.05

Reserves and Surplus (5,623.42)

Networth as on 31/03/2011 (2,907.37)

Thus, there is negative book value of the shares of GLFL. Under the circumstances as stated above, had the assesses company decided to sell off the said shares, held as inventory in the market; it would not have got any buyer and that too for such huge quantum there would have been many other implications as a result of mismatch between demand and supply as explained above. Therefore, there are no assets held by GLFL so as to command even a value of Rs.l/- per share. Therefore, keeping in mind the above circumstances clubbed with the restriction on transfer of shares of GLFL by the assesse company, being the co-promoter of GLFL; the assessee company has valued the shares of GLFL, at a notional rate of Rs.l/- per share as against its negative book value due to huge accumulated losses." The AO rejected assessee's explanation and observed that - "The assessee has broadly stated following reasons for valuation of shares of Gujarat Lease Financing Ltd (GLFU at Rs. I/-. (a). The assessee company cannot transfer the shares of GLFL without prior written consent of GIIC. (b). Even if GIIC permits the assessee to transfer the shares to others it cannot sell the shares at Rs. 3.7/- as the prices on the stock exchanges are for smaller lots of shares and that there is no market for 44,95,437 shares held by the assessee company. (c). The GLFL has negative net worth _and__that GLFL has not been carrying on any business since many years. The point wise rebuttal of assessee's contention is as under:- (a). The assessee's contention that it cannot transfer the shares of GLFL without prior consent of GIIC does not have any impact on basis of valuation of closing stock of GLFL shares. Moreover, if that would have been the case then why the assessee is showing the shares of GLFL as stock in trade. It is important to mention here that me assessee is showing the shares of GLFL both as investment (23,04,312 shares) and as stock in trade (44,95,437). If there was restriction on transfer of shares then the assessee could have shown the entire shares as investment. However, the assessee chose to show 44,95,437 shares of GLFL as stock in trade thereby emphasizing the fact that the said shares were held for trading. Moreover, irrespective of the fact that there was restriction on transfer of shares or not, the fact remains that valuation of closing stock was not done as per market value. (b). The assessee's contention that the shares of GLFL could not be transferred at Rs. 3.7/- per share because the prices on the stock exchanges are for smaller lot of shares and that there is no market for 44,95,437 shares held by the assessee company is also not acceptable. It is true that GLFL is a listed company. It's shares are traded on NSE. If an independent buyer wants to buy the shares of M/s. GLFL then the quoted price of shares of GLFL as on 31.03.2011 was Rs. 3.7/-. The assessee's contention that mere is no market value for 44,95,437 shares of GLFL is not acceptable because valuation of closing stock is done on the basis of unit price. It is never assumed that if the entire closing stock is sold then the price per unit will decrease. While valuing the closing stock method that is adopted is to multiply the market value per unit of the closing stock with the total quantity of the closing stock. It is never ever assumed that if the assessee sells the entire closing stock the total value received by the assesses would be much lower. If that would have been the case then it would never have been possible to value the closing stock on the basis of market value. In the instant case the shares of GLFL held as stock in trade by the assessee have been valued by him at a notional value (as stated by assessee) of Rs. I/- per share. This basis of valuing the closing stock is irrational. It is an established fact that

ITA No. 2587 & 2594/Ahd/2015 13 . A.Y. 2011-12 the shares are listed and that the value of GLFL shares was• Rs. 3.T,/-on 31.03.2011 as per NSE /DMAT account statement given by assessee. (c). The assessee's contention that GLFL is not carrying on any business and that it has negative net worth is also not relevant to the valuation of dosing stock. If it is a listed company and the shares are being traded at NSE at price of Rs. 3.77- per share as on 31.03.2011 then irrespective of the fact,that_whether the company is having negative net worth or not the shares would be traded at Rs. 3.7/- only." (iv) The AO therefore held that - "In view of the detailed reasoning given above, the closing stock of shares of M/s. GLFL is to be valued at market value of Rs. 3.7/- per share rather than the value of Rs. I/- per shares. Thus, the addition of Rs. 2.7'/- per share is being made to the dosing stock of 44,95,437 shares of GLFL resulting into increase in value of closing stock by Rs. 1,21,37,680/-." (B) The appellant in the Statement of Facts contented that – The appellant is a company incorporated under the Companies Act, 1956. It is regularly assessed to tax since inception. Being a company, its accounts are subject to audit under the Companies Act, 1956. Its accounts for the present assessment year were also audited pursuant to the provisions of Section 44AB of the Income-tax Act, 1961. A copy of the Annual Report for the present assessment year containing audited Annual Accounts is attached at Annexure-A hereof. 2.1 The appellant's return for the present assessment year was based on its Annual Accounts which were audited as mentioned above. A perusal of the Statement of Computation of Total Income as per the appellant's return (copy attached at Annexure-B ) would show that the returned negative total income of Rs.3,12,09,341 was made up of income under the following heads

Loss under the head Profits and Gains of Business or (-) 8,28,77,901 Profession

Short Term Capital Gains 4,45,59,760

Income from Other Sources being income u/s, 56(2)(viia) 71,08,800

Total income (-)3,12,09,341

2.2 A perusal of the attached copy of the Statement of Computation of Total Income would also show that loss under the head Profits and Gains of Business or Profession viz., Rs. 8.28,77,901. had been computed beginning with profit before tax as per Profit and Loss Account as detailed below:

PROFITS & GAINS OF BUSINESS OR PROFESSION

Profit before tax as per P&L account 982965048 (item 43 of Profit & Loss a/c)

Add: Disallowance/Additions

Depredation treated separately 4594576

Disallowance U/S.14A 1512285

Document Charges 5500

ITA No. 2587 & 2594/Ahd/2015 14 . A.Y. 2011-12 Interest on Loan from IDFC 121581S4

DMAT charges 1495190

Share Registrar Charges 33090 19808825

Less: Income considered separately

Dividend 102262193 9

Share of profit 13156877

Profit on sale of Investments 1907047

Profit on sale of investments 44559760 (-) 1082245623

Less: Deductions/Expenses claimed

Depreciation as per Statement (-) 3406151 (-) 82877901

2.3 It would be pertinent to note that the appellant has been engaged in the business of making investments and in dealing with them and that all its income from Investments (other than exempt income and income assessable as capital gains) including interest Income has been consistently assessed as business income. A perusal of the Statement of Computation of Total Income (Annexure-B) would further show that the appellant had computed its returned book profit u/s. 115JB at Rs. Nil as under: BOOK PROFIT U/S. 115JB

Book profit as per Companies Act, 1956 982965048

Add: Statutory additions

Disallowance u/s. 14A 6 1512285

Less Statutory Deductions

Share of profit 2 13156877

Dividend from Trade 2 15738111 Investments

Dividend from other 2 503441914 Investments

ITA No. 2587 & 2594/Ahd/2015 15 . A.Y. 2011-12

Dividend from other 2 503441914 (-) 1035872564 NIL Investments Wealth Tax 93748

18.00% of Book profit u/s. 115JB NIL

4.1 As against the returned business toss of Rs.8,28,77,901, the learned Assessing Officer has assessed the same at a loss of Rs.5,.05,81,129 after making the following additions:

Returned business loss (-) 8,28,77,901

Add: Disallowance u/s. 14A read with Rule 8D 2,01,59,092

Addition on account of valuation of closing stock 1,21,37.680

Assessed Business Loss (-) 5,05,81,129

4.2 Consequent upon the above additions, the appellant's total income has been assessed at a positive figure of Rs.10,87,431 as against the returned negative total income of Rs.3,12,09,341. 4.3 While computing the appellant's book profit u/s. 115JB, the learned Assessing Officer has added Rs.2,01,59,092 on account of disallowance made u/s. 14A in addition to the suo motu disallowance made by the appellant. In the appellant's humble submission, for the reasons explained in an elaborate Note attached at Annexure - D, it was not open to the learned Assessing Officer to make this addition. 5. The learned Assessing Officer has also withdrawn interest amounting to Rs.1,62,545 earlier granted u/s. 244A and further levied interest amounting to Rs.53.069 u/s. 234D. 6. The learned Assessing Officer has also ordered for initiation of penalty proceedings u/s.271(l)(c). 7. Disallowance u/s. 14A - Rs.2,01,59,092 7.1 A perusal of the Profit and Loss Account for the present assessment year would show that it has been debited with the following expenses and Depreciation: Employee Remuneration and Benefits 1,51,22,852

General and Administration Expenses 34,49,139

Interest and Other Finance Charges 11,34,19,004

Depreciation 45,94,575

ITA No. 2587 & 2594/Ahd/2015 16 . A.Y. 2011-12 It may be pointed out here itself that even as the appellant's Profit & Loss Account had been debited with Depreciation of Rs. 45,94,576, while computing total income, deduction for Depreciation was claimed only at Rs. 34,06,151. 7.2 A perusal of Schedule Xltl forming part of the audited Annual Accounts would further show that the General and Administration Expenses of Rs.34,49,139 were made up as under: DEMAT Charges 1.495,190

Rent rates and taxes 2,000

insurance 365,533

Repairs and maintenance 532,20S

Travelling and conveyance expenses 286,167

Fees and legal expenses 453,036

Auditors remuneration 251,411

Stationery, printing, telephone and telex 19,032 expenses

Miscellaneous expenses 34,482

TOTAL 3,449,133

8.1 A perusal of the relevant portion of the Statement of Computation of Total Income quoted at para 2.2 hereinabove would also show that while computing its business income, the appellant had made the following Sup. Motu disallowances:

Disallowance u/s. 14A being 10% of total 15,12,285 employee remuneration and benefits of Rs. 1,51,22,852

Disallowance of following expenses included in general and administration expenses:

Document charges 5,500

Dmat charges 14,95,190

Share Registrar Charges 33,090

15,33,780

ITA No. 2587 & 2594/Ahd/2015 17 . A.Y. 2011-12 8.2 As pointed out before, the appellant's business is that of an investment company and the appellant is also registered with the Reserve Bank of India as a Non-Banking Finance Company (NBFCJ. As a matter of fact, the appellant's income from investments is consistently assessed as business income. Considering that over 85% of Its investments had been made in the appellant's subsidiary companies which did not require any dealing or monitoring or maintenance as such in the course of the year/s during which the investments were held, they being strategic investments, out of abundant caution, the appellant had made a disallowance of 10% of its total employee remuneration and benefits u/s. 14A. It had also disallowed in full the expenses by way of Demat charges. 9.1 Even in the background of the above facts, the learned Assessing Officer considered it appropriate to raise an issue on the subject of disallowance u/s. 14A read with Rule 8D in the following terms

"1. Disallowance u/s. 14A r.w.r. 8D On perusal of the details filed by the assessee company, it was noticed that the assessee had earned exempt income during the relevant F.Y. However, the assessee had disallowed only Rs.15,12,285/- under section 14A of the Act. The assessee was asked vide order sheet entry dated 03.09.2013 as to how the disallowance u/s. 14A has been calculated by the assessee and why it was not as per method laid down in Rule 8D of I. T. Rules, 1962 in response to the same the assessee submitted vide letter dated 07-10.2013 detailed reasons as to why disallowance under section 14A of the Act has not been calculated as per Rule SD of the I. T. Rules, 1962. The reason cited by the assessee were as under:- i) 85% of the investment made by the assessee is in shares of subsidiary companies which do not require any monitoring. Earning exempt income is ancillary to the main objective of investment made in subsidiary companies. ii) No borrowed funds are utilized for the purpose of making such investment and so no interest expenditure is attributable to earning such income. iii) 10% of total remuneration paid to employees as expense for earning any exempt income have already been disallowed. It was further stated by assessee that the administrative expenses do not bear any nexus with that of earning of exempt income and therefore there cannot be any disallowance in respect of these expenses. The submission made by the assessee were duly considered and a detailed show cause was issued to the assessee on 04.12.2013 wherein the submissions made by the assessee were not accepted in view of the following facts:- i) Out of the total income of Rs.111,95,50,619/- earned by you during the year, income to the tune of Rs.103,76,91,390/- is claimed exempt by you. The remaining income which is offered to tax consists of Rs.4,64,66,806/- on short capital gain on sale of investments and Rs,3,71,04,997/- on interest from FDRs, ii) Against the said income you have claimed expenditure of Rs.13,65,85,571/- Out of this expenditure you claim that you have expended Rs.15,12,285/- for earning exempt income of Rs.103,76,91,390/- i.e. 1.11% of the total expenditure has been incurred by you for earning 92.7% of your total income. This anomaly itself explains as to how the expenditure claimed to have been Incurred by you for earning exempt income is wrong. iii) No other business activity is being carried out by the assesses apart from investment. Therefore, it can be safely assumed that the entire administrative set up is being used for managing investment portfolio through which assessee earning/(may earn in future) exempt income in the form of dividend/long term capital gains. iv) Rule 8D was Introduced precisely to cover the situations wherein the assessee were pushing the expenses relating to exempt income towards taxable income and thereby reducing the taxable income. The intention of the legislature is clearly evident from the Memorandum explaining the provisions contained in the finance Act, wherein it was explained that only those expenses could be claimed as deduction which are incurred in relation earning taxable income. In view of the reasons cited above I am satisfied that the expenditure of Rs.15,12,285/- claimed to have been incurred by you for earning exempt income is not correct.

ITA No. 2587 & 2594/Ahd/2015 18 . A.Y. 2011-12 The assessee was requested to show cause as to why the disallowance u/s. 14A should not be made as per provisions of Rule 8D of 1. T. Rule, 1962. In response to the said show cause the assessee submitted vide letter dated 27,12.2013" 9.2 Whereas the above quoted portion of the impugned order does speak for itself, the appellant begs to emphasise the following: (a) that at the stage of issuing the very show cause notice calling upon the appellant to explain why disallowance u/s. 14A should not be made, the learned Assessing Officer had already been satisfied that the appellant's claim in the matter of expenditure in relation to exempt income was not correct; (b) That the real reason for the learned Assessing Officer to make the impugned disallowance has to be found in the fact that the learned Assessing Officer had considered the suo motu disallowance u/s. 14A to be too little compared with the quantum of the tax exempt dividend income; (c) That the learned Assessing Officer has proceeded on the basis that the appellant's suo motu disallowance should have been arrived at as per Rule 8D — which conclusively shows that the learned Assessing Officer oblivious of precisely what the provision of sub-section (2) of Section 14A enjoined upon him [and which has been very well settled following the decision of the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. DCIT (2010) 328 ITR 81(Bom}] viz., that it is only if the Assessing Officer is satisfied, after considering all relevant factors, that the appellant's claim was not correct that he can assume jurisdiction for making a disallowance u/s. 14A and once he assumes that jurisdiction, he has no discretion in the matter except to arrive at the quantum of disallowance in the manner prescribed by Rule 8D. (d) That the learned Assessing Officer has clearly permitted himself to be carried away by the circumstance that the appellant's suo motu disallowance u/s. 14A formed a very small portion of the total expenditure of Rs.13.66 crore debited to its Profit & Loss Account even as the exempt income amounted to a sizeable portion of the total income credited to it; that he has clearly failed to appreciate the following: (1) that the appellant's suo motu disallowance was not only forlO% of employee remuneration but also for the entire amount of Dmat charges which had a relation to earning exempt dividend income; (2) that the reason for the suo motu disallowance to appear to form a relatively small portion of the total expenditure was that the total expenditure of Rs.13.65 crore included 11.34 crore on account of interest and finance charges which, as he had himself been satisfied, had no relation to the earning of tax exempt income; that it also included depreciation amounting to Rs.45.95 lacs which too had nothing to do with the appellant's earning tax exempt income; (3) that, as elaborately explained to him, all the expenses included in general and administration expenses {other than Dmat charges suo motu disallowed) would have had to be incurred whether or not the appellant had made investments; (4) that the appellant's Profit and Loss Account had indeed been credited with the income amounting to Rs.3.73 crore which had been actually assessed by him under the head "Profits and gains from business or profession" and Rs.4.46 crore which too had been assessed as short term capital gains; that, therefore, it was not open to him to attribute the appellant's entire corporate set up as if it were merely intended to earn tax exempt income, for somehow or anyhow justifying disallowance of the entire amount of General and administration expenses debited to the appellant's Profit and Loss Account; (5) that, whereas the appellant was engaged in the business of investments, the fact remained that 85% of its investments which were made in its own subsidiaries did not require incurrence of any administrative expenditure as such during the long years they were held and therefore, a very insignificant portion of its general and administrative expenditure could be attributed to those investments and that was more than adequately taken care of by the appellant making suo motu disallowance of 10% of its employee remuneration and of Dmat charges in entire. 10. Whereas a copy of the appellant's elaborate submissions vide its letter dated 27.12.2013 is attached at Annexure-C, the appellant begs to point out the following portion thereof in particular: "6. No Further Disallowance of Administrative Expense u/s 14A r.w.Rule 8D

ITA No. 2587 & 2594/Ahd/2015 19 . A.Y. 2011-12 It is well known fact that the purpose of disallowance u/s 14A is to exclude the expenses which have been incurred to earn exempt income and so the expenses which cannot be said to have any direct or indirect nexus with the exempt income, should not be disallowed u/s 14A r.w.r. 8D, In this context, the assessee company states that it has incurred various administrative expenses like employees remuneration, demat charges, rent, rates and taxes, insurance, repair & maintenance, traveling & conveyance expenses, fees & legal expenses, auditors remuneration, stationery-printing, and other miscellaneous expenses during the year / under consideration. . 6.1 Out of all these expenses, the assessee company had already disallowed 10% of the total remuneration paid to the employees and demat charges as expense for earning exempt income, and so no further disallowance in this respect is needed. 6.2 Further, expenses of rent, rates and taxes, fees & legal expenses, auditors remuneration etc. are required to be incurred, irrespective of the fact whether any investment activity is carried out by the company or not. Even in absence of any active business activity, these expenses are required to be incurred, which are necessary for maintaining the status of the company. The remaining expenses of insurance, repair & maintenance, traveling & conveyance expenses, stationery-printing and other misc. expenses are of general nature and incurred by the assessee for general administrative purpose. !t is thus submitted that these expenses do not bear any nexus with that of earning of exempt income and therefore there cannot be any disallowance in respect of these expenses as per the provisions of section 14A r.w.Rule 8D. 7. In view of the above, it is clear that the expenses which have been claimed by the assessee while computing the business income do not bear any nexus with the exempt income. Merely because major portion of the income of the assessee consists of exempt income, it cannot be assumed that major portion of expenses would have been incurred to earn the said income. It is very much important to note that no major efforts are needed to manage the investment portfolio, more particularly when all the investments are long-term strategic investments in subsidiary companies and that Exempt income is ancillary to the main objective of the investments made in the subsidiary companies. Therefore, the reasons for not accepting submission of the assessee, given in point no (!) and (ii) to para 3 of the notice, are based on Incorrect assumptions, more specifically because it has been conclusively established by the assessee that that there is no nexus between the expenses incurred and the exempt income. 8. in point no (iii) to para 3 of the notice, it has been stated that "it can be safely assumed that the entire administrative set up is being used for managing investment portfolio through which assesse earning/(may earn in future) exempt income in the form of dividend /long term capital gains." In connection with same, as already explained in para-4.1 above, the assessee company is engaged in investment activity, financial activity and is also registered with RBI as Non-Banking Financial Company (NBFC). This fact can also be verified from the activities of the assessee company in Various earlier years. Moreover, as explained above, the investments being long term strategic investments, no major efforts are needed to manage the investment portfolio and that Exempt income is ancillary to the main objective of the investments made in the subsidiary companies. Therefore, your assumption as stated para-S(ii) of the notice is not valid. 9. Further, vide point (iv) to Para 3 of notice, your goodselves have mentioned that Rule 8D was introduced precisely to cover the situations wherein the assessee were pushing the expenses relating to exempt income towards taxable income and thereby reducing the taxable income. In this context, it is submitted that in view of the above detailed submission, it is clear that assessee has not incurred expenses (which have been claimed towards earning exempt income. This can be proved by answering a simple question as to whether the dividend income would have stopped, had the assessee not incurred the expenses which are debited to its Profit & Loss Account? The answer is clear "MO". The income from dividend would continue to be earned so long as the subsidiary companies are paying dividend and the fact whether the assessee company incurs any Administrative expenditure or not would not have any impact on it. The above point conclusively proves that the assessee has not incurred any Administrative expense for earned dividend income and therefore, it is clear that no expenses have been pushed towards taxable income and the claim of the assessee is very much genuine."

ITA No. 2587 & 2594/Ahd/2015 20 . A.Y. 2011-12 11. In the appellant's humble submission, if the learned Assessing Officer had not permitted himself to be carried away by the absolute figures of tax exempt income and instead, considered relevant factors, he would have appreciated that the suo motu disallowance made by the appellant was indeed more than adequate and that, therefore, it was just not possible for him not to be satisfied with the appellant's claim as envisaged by sub-section (2) of Section 14A. Unfortunately, as the relevant discussion in the impugned order shows, the learned Assessing Officer has permitted himself to be carried away by irrelevant considerations pointed out before and ignored relevant considerations elaborately explained to him and made the impugned disallowance which has been arrived at as under (Emphasis supplied): " The contention of the assessee is not at all acceptable In view of the fact that no other business activity is being carried out by the assessee except investment. By no stretch of imagination it can be assumed that the assessee company is paying Rs.1,51,22,852/- to employees as remuneration and other benefits for doing nothing. During the entire year the assessee has done no other activity apart from trading in shares/mutual funds and managing its investment portfolio. During the year no new investment has been made by the assessee in its subsidiary companies. Therefore, in view of the facts stated above it is clear that the direct expenses attributable to earning of exempt income are a) Remuneration & other benefits of employees Rs. 1,51,22,852/- b) Demat Charges Rs. 14,95,190 Rs. 1,66,18,042/- ii) Interest expenditure-NIL {as held in earlier years) iii) An amount equal to one half percent of the average of the value of investment, income from which does not or shall not form part to total income, as appearing in the balance sheet of the assessee on the first day and the last day of the previous year. In the instant case it is 0.5% (700,79,22,775 + 698,91,06,746) = Rs.3,49,92,573 However, this amount has to be restricted to the actual expenditure claimed by the assessee in the return of income i.e. Rs.65,48,525/-

Thus, the total disallowance u/s. 14A r.w.r. 8D comes out to be Rs 2,31,66,567/- out of which the assessee has already disallowed Rs.15,12,285/- u/s. 14A and demat charges of Rs.14,95,190. Therefore, the amount of disallowance u/s. 14A r.w.r. 8D is restricted to Rs.2,01,59,092/-. Penalty proceedings u/s. 271(l)(c) of the Act are being initiated separately for furnishing inaccurate particulars of income."

12.1 Quite apart from the fact that the learned Assessing Officer has made the impugned disallowance without jurisdiction (since, in the peculiar facts of the appellant's case, it was just not possible for him not to be. satisfied with the appellant's claim based on suo motu disallowances made by it), the manner in which he has arrived at the quantum of disallowance also needs to be considered, in order that this may be appreciated, the appellant begs to give here below the breakup of the amount disallowed by the learned Assessing Officer (as the same is not readily discernable from the impugned order): Total amount of employee 1,51,22,852 remuneration and benefits debited to the appellant's Profit and Loss Account

Less: Suo motu disallowance by the 15,12,285 1,36,10,567 appellant

ITA No. 2587 & 2594/Ahd/2015 21 . A.Y. 2011-12 Total general administrative expenses 34,49,139 debited to the appellant's Profit and Loss Account

Less: Drnat charges included in the 14,95.190 19,53,949 above suo motu disallowed by the appellant

Depreciation debited to the appellant's 45.94,576 Profit and Loss Account

TOTAL 2,01.59,092

12.2 It will be seen from the above that even as the learned Assessing Officer has stated that he has restricted the quantum of the disallowance to the actual amount of administrative expenses debited to the appellant's Profit and Loss Account (since that was less than the quantum arrived at by the formula prescribed in Rule 8D), in reality, what he has done is to disallow depreciation amounting to Rs.45,94,576 debited to the Profit and Loss Account as well. Pertinently, he has done this without any discussion in the assessment order and without providing any opportunity to the appellant to explain why it cannot be disallowed. In the process, he has completely ignored the fact that depreciation, as held by the Hon'ble Supreme Court in Nector Beverages P. Ltd. v. DCIT (314 ITR 314), was a statutory allowance and not expenditure to which alone Section 14A could be applied. In this connection, the appellant begs to rely on the decision of the Hon'ble ITAT, Ahmedabad, Special Bench in Vishnu Anant Mahajan v. ACIT [137 ITD 189). Relevant extracts from the said decision are given below for the sake of immediate reference (Emphasis supplied): From the Head Notes "Coming to the question regarding depreciation being an expenditure or not, it has been held in the case of Hoshang D. Nanavati v. ACIT [I.T. Appeal No. 3567 (Mum.) of 2007, dated 18-3- 2011] that section 14A deals only with the expenditure and not with any statutory allowance admissible to the assessee. The decision has been arrived at after considering the decision in the case of Nectar Beverages (P.) Ltd. v. Dy. CIT [2009] 314 ITR 314 / 182 Taxman 319 (SC). The Commissioner has not been able to displace the ratio of these cases. Thus, on consideration, it is found that section 14A uses the words 'expenditure incurred by the assessee in relation to income'. A statutory allowance under section 32 is not an expenditure. Therefore, the decision of the division Bench in the case of Hoshang D. Nanavati (supra) has to be agreed with. [Para 8]" 12.3 Apart from the above, the learned Assessing Officer has also ignored the fact that the appellant had suo motu disallowed the following items of expenses aggregating to Rs. 38,590 included in the general and administrative expenses debited in its Profit and Loss Account and being such, his disallowing the same again had resulted into double disallowance for the same expenditure: Document charges 5,500 Share Registrar charges 33,000 38,590 Addition on account of alleged undervaluation of stock of shares - Rs. 1,21,37,680

13.1 The appellant company is part of the Torrent Group which, along with the Government of Gujarat (through its investment arm 'GIIC') had promoted Gujarat Lease Finance Limited (GLFL, for short). Accordingly, the appellant has been holding 44,95,437 shares of GLFL having paid up

ITA No. 2587 & 2594/Ahd/2015 22 . A.Y. 2011-12 value of Rs.10 each since a number of years, GLFL has discontinued its business and its paid up capital and reserves have been fully wiped off and it is a company having negative Net Worth, Its net worth as at the last day of the present year was a negative figure of Rs.2907.37 lacs. 13.2 Whereas the aforesaid shares of GLFL have been held by the appellant as part of its stock in trade since a number of years, considering the above peculiar facts of GLFL, even as the appellant valued its stock of shares at cost or market value whichever is lower, considering the fact that the price .obtaining on the Stock Exchanges on the basis of relatively sparse trading transactions on the Stock Exchanges did not reflect a price at which the appellant could possibly sell its huge holding in the shares in the market, with effect from 31-3-2009, it had taken the market value at a notional amount of Rupee 1 (one) per share (even as the appellant very well knew that if it were to sell the shares in the market, they would not fetch even that price of Rupee 1 per share). In the present assessment year too, the appellant has continued to show these shares at the same value of Rupee 1 per share consistently with what it had done in the preceding assessment year which had been accepted by the Department. Unfortunately, however, the learned Assessing Officer making the assessment for the present assessment year has raised the issue on the ground that the price of the shares prevailing in the Stock Exchange as at 31.3.2011 was Rs.3,70 per share and that the appellant's action of valuing them at Rupee 1 per share amounted to undervaluation of closing stock to the extent of Rs, 1,21,37,680. During the course of the assessment proceedings, in response to the learned Assessing Officer's Show Cause Notice in this behalf, the appellant had addressed a letter dated 26,12.2013 tendering its elaborate explanation. Whereas the appellant's said letter has been reproduced in the impugned assessment order at pages 14 to 22, the appellant begs to emphasize the following portion thereof in particular: "1.1 In this regards, at the outset it is submitted that the shares of GLFL, held as stock-in-trade have been valued on the basis of the method of valuation consistently followed by the assessee company from year to year i.e. cost or market value w.e. less. In order to justify that the said shares have been valued correctly at the rate of Rs.l/- share as on the last day of the previous year under consideration, it is important to understand the background of the purchase of GLFL shares, held as stock-in-trade. The brief facts regarding the purchase of GLFL shares, held as stock-in-trade and explanation regarding valuing the same at the rate of Rs.l/- per share is dealt with in subsequent paragraphs of this submission. 1.3 Restrictions on Transfer of shares Thus, the shares of GLFL were initially purchased by the assessee from G1IC. The assessee company holds in total 44,95,437 shares of GLFL as stock in trade as on the last day of the previous year under consideration, in this context, it is to be noted that the shareholding of the GLFL shares, held as stock in trade was subject to the terms and conditions of the "Shareholders Agreement". The relevant portion of such terms and conditions is reproduced as under: ………………… 1.4 In view of the above, it is clear that there are restrictions on transfer of shares of GLFL and first of all the shares have to be offered to GI1C before offering to other persons so long as GI1C is holding 6.5% of the paid up equity share capital of the company. Moreover, it is reiterated that written consent of GI1C is to be taken before transferring the said shares. Thus, practically it is difficult to sell off the said shares in the market due to the restrictions imposed on it vide the "Share Agreement". Accordingly, the shares of GLFL cannot be valued at the rate of Rs.3.70/- per share as on the last day of the previous year under consideration. 2. GLFL shares cannot be sold at the rate of Rs.3.70/- per share in the market - illiquidity Further, even if GIIC permits the assesse company to transfer the shares to other persons, it cannot sell off the shares at the rate of Rs.3.70/- per share for the reasons explained herein as under: 2.1 It is reiterated that the assessee company holds in total 44,95,437 shares of GLFL as stock-in-trade as on the last day of the previous year under consideration. In this connection, it shall be noted that the shares of GLFL are listed on the BSE and NSE. The statement showing quantum of shares traded during the F.Y.2010-11 on BSE, its prices, the average daily quantum shares traded during this period along with the quantum of shares traded on delivery basis out of

ITA No. 2587 & 2594/Ahd/2015 23 . A.Y. 2011-12 total shares traded , is attached herewith vide Anenxure-2 for your ready reference. On perusal of the statement, it may be observed as under: d) The average daily quantum of GLFL shares traded on BSE on delivery basis is 13,166 shares during the financial year 2010-11. e) The maximum number of shares traded on BSE on any day during the financial year under consideration i.e. on 25/05/2010 was 2,67,5071 shares in total and only 1,46,180 shares on delivery basis. c) The total quantum of GLFL shares traded on BSE during the financial year 2010-11 was 32,25,648 shares only on delivery basis. 2.2 As against this, the volume of shares that the assessee company is holding as stock in trade, being the co-promoter of the company is 44,95,437 shares and following shall be noted: e) The average daily quantum of shares traded on BSE on delivery basis during the F.Y.2010-11 is approximately just 0.30% of total volume of shares held as stock in trade by the assesse company. f) The volume of shares held as stock in trade by the assessee company is almost 30.75 times the maximum quantum of shares traded on BSE on any day during the financial year 2010-11. g) The total quantum of shares traded on BSE during the whole financial year is also less than volume of shares held by the assessee as on the last day of the previous year under consideration. h) Moreover, the total shares traded on delivery basis are nearly 85% of the total quantum of shares traded on BSE during the whole financial year. Thus, in view of the above, it may be observed that the prices on the stock exchanges are for smaller lots of shares and that there is no market for 44,95,437 shares held by the assessee company. …………. 3.4 From the above, it can be said that once the share price of any company moves in to lower circuit place, it is not possible to sell the shares of the said company. Therefore, the shares of the said company become illiquid, even at such lower prices. In this context, it is important to note that if the 44,95,437 shares of GLFL were sold in the market, it was likely to have triggered lower circuit on stock exchange, when the average daily volume of trading of shares of the GLFL on BSE on delivery basis 0.30% of the total number of shares held by the assesse company. 4. Negative Networth of GLFL- No underlying assets held by GLFL In addition to above, it is important to note that GLFL is not carrying on any business since many years and the company has huge accumulated losses which makes its networth to be negative. The computation of networth of GLFL as on 31/03/2011 is as under: Particulars Amt (Rs. in lakhs.)

Share Capital 2,716.05

Reserves and Surplus (5,623,42)

Net worth as on (2,907.37) 31/03/2011

Thus, there is negative book value of the shares of GLFL. 5. Under the circumstances as stated above, had the assessee company decided to sell off the said shares, held as inventory in the market; it would not have got any buyer and that too for such huge quantum there would have been many other implications as a result of mismatch between demand and supply as explained above. Therefore, there are no assets held by GLFL so as to command even a value of Rs.l/- per share. Therefore, keeping in mind the above circumstances clubbed with the restriction on transfer of shares of GLFL by the assesse company, being the co-promoter of GLFL; the assessee company

ITA No. 2587 & 2594/Ahd/2015 24 . A.Y. 2011-12 has valued the shares of GLFL, at a notional rate of Rs.l/- per share as against its negative book value due to huge accumulated losses." 14. Unfortunately, however, the learned Assessing Officer has refused to appreciate the ground realities on the basis of the peculiar facts of the case which clearly showed that it would be impossible for the appellant to sell its huge holding in the shares of GLFL at the price quoted on the Stock Exchange on the last day of the year on the basis of sparse trading in the shares. Further, the transfer of the shares by the appellant was also subject to restrictions as detailed in its submissions. It was because of these factors that, as explained before, the appellant had to decide to value the shares on a notional value of Rupee 1 per share. The learned Assessing Officer has accordingly gone ahead with making an addition of Rs.1,21,37,680 on the ground that the shares were required to be valued at Rs,3.70 per share and not Rupee 1 as done by the appellant. In the process, the learned Assessing Officer has omitted to consider yet another vital fact viz., that the shares had been valued at Rupee 1 per share in assessment years 2009-10 and 2010-11 which valuation has also been accepted by the Department, The learned Assessing Officer has, accordingly, failed to appreciate that his objecting to the valuation in the present assessment year creates artificial income of Rs. 1,21,37,680 in the present assessment year resulting from discarding of consistent valuation from year to year as mentioned before. In the appellant's humble submission, if the learned Assessing Officer's approach were to be accepted, that would call for revision of the appellant's assessment for assessment years 2009-10 and 2010-11 as well. Such revision would also mean a revision of the opening stock for the present assessment year on the basis of the market price actually ruling on 31.3.2010. Considering that the price of GLFL's shares as per the Stock Exchange quotation on 31.3.2010 was Rs.3.96 per share and that it is also well settled that the opening stock of an assessment year must necessarily be the same as the closing stock of the preceding assessment year, the adjustment for the present assessment year would be diagonally opposite of what the learned Assessing Officer has done." 4(C) Considering discrepancies highlighted by appellant in respect of disallowance of expenses vis-a-vis already disallowed expenses and claim of different depreciation, the AO who attended hearing on 12.06.2014 was asked to submit a report. The Dy.C.I.T.(OSD) Cir.8, Ahmedabad submitted following report; "Kindly refer to the above. 2. During the course of appellate proceedings, the undersigned has attended the hearing in the above mentioned case on 12.06.2014 and your honour has directed the undersigned vide order sheet entry dated 12.06.2014 to verify the disallowance made u/s.!4A of the Act of Rs.38,590/- and submit a report. 3. In this context, the factual report is as under : On verification of the case records and computation of income filed by the assessee, it was found that the assessee has himself disallowed the following expenses : i) Disallowance u/s.14 A Rs.15,12,285/- ii) Charges of Document of debenture Rs. 5,500/- iii) Demat Chrges Rs.14,95,190/- iv) Share Register Charges Rs. 33,090/- However, while passing the assessment order u/s.l43(3) of the Act dated 09.01.2014, the computation of disallowance U/S.14A of the Act was made as under: Total disallowance computed u/s.!4Ar.w.r.8D Rs.2,31,66,567/- Less: Disallowance already made by the assessee (i) Disallowance u/s. 14A Rs. 15,12,285/- (ii) Demat Charges Rs. 14,95,190/-

ITA No. 2587 & 2594/Ahd/2015 25 . A.Y. 2011-12 Rs. 2,01.59,092/- Disallwonce made in Assessment Order

ITA No. 2587 & 2594/Ahd/2015 26 . A.Y. 2011-12 relied upon by ld. CIT(A) the issue is now well settled by the Special Bench decision in the case of Vireet Investment reported in 165 ITD 27. And in similar circumstances, Co-ordinate Bench granted relief in assessee’s own case for the assessment year 2010-11 in ITA No. 1718 & 1648/Ahd/2014. Therefore, having parity with the said order, we dismiss this ground of appeal of the Revenue.

ITA No. 2587 & 2594/Ahd/2015 27 . A.Y. 2011-12 3(a) In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in upholding the addition of Rs.1,21,37,680 made by the learned Assessing Officer after alleging that the appellant's closing stock of shares, to the extent it consisted of 44,95,437 shares of GLFL, had been undervalued by that amount. He ought to have appreciated, inter alia, that when the shares in question had been valued at the same price of Re.1 per share at which they had been valued consistently from year to year and for which reason, they had also come to be valued at that very rate of Re.1 per share in the opening stock for the present assessment year, there could be no question for valuing them by adopting another rate (for the same quantity of the shares viz. 44,95,437, as at the end of the year) while valuing closing stock. He ought also to have appreciated that in the peculiar facts and circumstances of the appellant's case, and especially considering that the shares of GLFL had been very thinly traded on the Stock Exchanges, the Stock Exchange quotation could not provide a correct basis for valuing the huge quantity of shares of GLFL which the appellant was holding. The learned CIT(A) ought, accordingly, to have ordered for the deletion of this addition. (b) Without prejudice to whatever stated above, it is submitted that addition cannot be made on this account, in the year under consideration, particularly when the opening valuation of the afo.resaid shares was also high and there being no substantial rise in the valuation of closing stock as compared to the opening stock. 4. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in holding that withholding of interest of Rs.1,62,542 on refund .earlier granted to the appellant u/s.244 and levying of interest amounting to Rs.53,069 u/s.234D were merely consequential matters, instead of holding that the interest on refund had been wrongly withheld and levy of interest u/s.234D was unjustified. 5.In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in dismissing Ground No.6 of the appellant's appeal challenging initiation of penalty proceedings u/s.271(1)(c) on the ground that it was premature. He ought to have appreciated, inter alia, that in the peculiar facts and circumstances of the appellant's case, since there was absolutely no warrant/justification for initiating the penalty proceedings, they deserved to be dropped, thereby saving both the appellant and the Department from long drawn unnecessary litigation.

ITA No. 2587 & 2594/Ahd/2015 28 . A.Y. 2011-12 11. Since in connecting appeal, on similar ground we have dismissed the department appeal. And now assessee grievance is that ld. CIT(A) has wrongly made disallowance on account of administrative expenses u/s. 14A r.w.r. 8D from Rs. 2,01,59,092/- made in assessment order to 1,89,32,077/- thereby granting relief of only 12,27,015/- instead of ordering for the deletion of entire disallowance.

ITA No. 2587 & 2594/Ahd/2015 29 . A.Y. 2011-12 of his order. At the time of hearing, ld. A.R. pointed out that method and reliance put by the ld. A.O. confirmed by the ld. CIT(A) is totally wrong and argued and on the basis of discussion made in Para 13 of statement of facts on pages 16 to 21 of the paper book. More particularly there being restriction on transfer of shares and negative net wealth of GLFL and value of Rs. 1 per share shown in assessment year 2009-10 and assessment year 2010-11 has been accepted by the department. Therefore, on the principle of the consistency, we allow this ground of appeal of the Assessee.

Order pronounced in Open Court on 01 - 02- 2019

Sd/- Sd/- (PRAMOD KUMAR) (MAHAVIR PRASAD) VICE PRESIDENT True Copy JUDICIAL MEMBER Ahmedabad: Dated 01/02/2019 Rajesh Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) – 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER

Deputy/Asstt.Registrar ITAT,Ahmedabad