VTM Ltd., Virudhunagar v. ACIT, Virudhunagar

IN THE INCOMETAX APPELLATE TRIBUNAL: B- BENCH:CHENN AI (BEFORE U.B.S.BEDI JUDICIAL MEMB ER AND SHRI ABRAHAM P. GEORGE. ACCOUNTANT MEMBER ) ITA NO.1209/ MDS/10 & CO NO.70/MDS/10 (ASST. YEAR 20078- 08) THE ACT CIR. I VIRUDHUNAGAR VS M/S VTM LIMITED SULAKARAI VIRUDHUNAGAR 626003 (PAN AAACV3775E) (APPELLANT) (RESPONDENT/CROSS-OBJECTOR) APPELLANT BY: RESPONDENT/CROSS OBJECTOR BY: SHRI P.B.SEKARAN CIT-DR SHRI R.SRINIVASAN ORDER PER ABRAHAM P.GEORGE ACCOUNTANT MEMBER THESE ARE APPEAL OF THE REVENUE AND CROSSOBJECTIO NS OF THE ASSESSEE AGAINST THE ORDER DATED 20-04-2010 OF THE CIT(A) FOR THE ASSESSMENT YEAR 2007-08. ITA.1209&CO.70/MDS/10 2 2. GRIEVANCE RAISED BY THE REVENUE IN ITS APPEAL I S THAT THE CIT(A) DELETED DISALLOWANCE OF ` 90 71 755/- WHICH WAS EFFECTED BY THE AO FOR NON DEDUCTION OF TAX ON PAYMENTS MADE TO FOREIGN AG ENTS. AS PER THE AO SUCH PAYMENTS REQUIRED DEDUCTION OF TAX AT SOURCE I N TERMS OF SEC.195 OF THE INCOME-TAX ACT 1961 (THE ACT FOR SHORT) AND THEREFORE ASSESSEE HAVING NOT MADE ANY SUCH DEDUCTION THE AMOUNT WAS REQUIRED TO BE DISALLOWED UNDER SEC.40(A)(I)(A) OF THE ACT. 3. SHORT FACTS ARE THAT ASSESSEE IN THE BUSINESS O F RUNNING TEXTILE MILL CLAIMED PAYMENT OF COMMISSION OF ` 90 71 755/- TO PARTIES OUTSIDE INDIA. NO DEDUCTION OF TAX AT SOURCE WAS MADE ON SUCH PAYM ENTS. ACCORDING TO THE AO TAX WAS DEDUCTIBLE AT SOURCE ON SUCH PAYMEN TS AND ASSESSEE HAVING NOT DEDUCTED IT THE CLAIM HAD TO BE DISALLO WED UNDER SEC. 40(A)(I)(A) OF THE ACT. 4. IN ITS APPEAL BEFORE THE CIT(A) ARGUMENT OF THE ASSESSEE WAS THAT COMMISSION WAS PAID TO THE FOREIGN AGENTS FOR SELLI NG PRODUCTS OF THE ASSESSEE IN SUCH COUNTRY AND THEREFORE SUCH FOREIG N AGENTS WERE NOT LIABLE TO PAY ANY INCOME-TAX UNDER THE ACT. ACCORDI NG TO THE ASSESSEE IT DID NOT EFFECT ANY DEDUCTION OF TAX UNDER SEC. 195 SINCE THERE WAS NO INCOME ARISING OUT OF SUCH PAYMENTS TO THE RECIPIEN T WHICH WAS CHARGEABLE TO TAX IN INDIA. RELIANCE WAS PLACED ON THE CBDT CI RCULAR NO.23 DATED 23- ITA.1209&CO.70/MDS/10 3 07-1969 AND CIRCULAR NO.786 DATED 07-02-2000 IN THI S REGARD. LD. CIT(A) WAS OF THE OPINION THAT THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF TRANSMISSION CORPORATION OF INDIA P. LTD. VS. CI T (239 ITR 587) SUPPORTED THE CASE OF THE ASSESSEE THAT LIABILITY T O DEDUCT TAX AT SOURCE AROSE ONLY WHEN THE AMOUNT PAID TO THE NON RESIDEN T WAS CHARGEABLE TO TAX. HE THUS DELETED THE DISALLOWANCE. 5. NOW BEFORE US THE LD. DR ASSAILING THE ORDER OF THE CIT(A) SUBMITTED THAT THE DECISION OF SPECIAL BENCH OF THI S TRIBUNAL IN THE CASE OF ITO VS. PRASAD PRODUCTIONS LTD. (37 DTR 418) DID SU PPORT THE VIEW THAN AN ASSESSEE UNDER A BONAFIDE BELIEF THAT NO PART OF PAYMENT MADE TO A NON-RESIDENT WAS CHARGEABLE TO TAX WAS NOT OBLIGED TO DEDUCT TAX AT SOURCE. HOWEVER ACCORDING TO THE LD. DR HERE THER E WAS NOTHING ON RECORD TO SHOW HOW THE ASSESSEE CAME TO A BONAFIDE BELIEF REGARDING THE PAYMENTS EFFECTED BY IT TO THE NON-RESIDENT AGENTS BEING NOT CHARGEABLE TO TAX. ACCORDING TO HIM CIT(A) HAD SIMPLY RELIED ON CIRCULAR NOS.23 AND 786 MENTIONED SUPRA FOR DELETING THE DISALLOWANCE M ADE BY THE AO WITHOUT VERIFYING THE BONAFIDE NATURE OF THE CLAIM OF THE ASSESSEE THAT THE AMOUNTS WERE NOT TAXABLE IN INDIA. 6. PER CONTRA THE LD. AR SUBMITTED THAT THE AO HAD INDEED EXAMINED THE CLAIM MADE BY THE ASSESSEE THAT NO PART OF THE PAYMENT OF COMMISSION ITA.1209&CO.70/MDS/10 4 MADE TO THE NON-RESIDENT WERE CHARGEABLE TO TAX IN INDIA. BUT HE NEVERTHELESS MADE DISALLOWANCE UNDER SEC. 40(A) OF THE ACT WITHOUT PROPERLY APPRECIATING THE SUBMISSIONS OF THE ASSESS EE. ACCORDING TO THE LD. AR CIRCULAR NO.23 DATED 23-07-1969 READ ALONG WITH CIRCULAR NO.786 DATED 07-02-2000 WOULD CLEARLY GO TO SHOW THAT PAYM ENT OF COMMISSION TO NON-RESIDENT AGENTS WHERE SUCH NON-RESIDENT AGENTS OPERATED OUTSIDE THE COUNTRY WOULD NOT BE LIABLE FOR DEDUCTION OF TAX U NDER SEC. 195 OF THE ACT. ACCORDING TO LD. AR CIRCULAR NO.7 DATED 22-10-2009 WITHDRAWING THE ABOVE MENTIONED EARLIER CIRCULARS HAD EFFECT ONLY FROM THAT DATE AND WOULD NOT ACT RETROSPECTIVELY. FOR THIS PROPOSITION RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COU RT IN THE CASE OF CIT VS. PRASAD PRODUCTIONS P. LTD. (179 ITR 147) HONBLE B OMBAY HIGH COURT IN THE CASE OF UNIT TRUST OF INDIA V. P.K.UNNY (249 IT R 612) AND BASF (INDIA) LTD.& ANOTHER VS. W. HASAN CIT (280 ITR 136). 7. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL S UBMISSIONS CAREFULLY. THE QUESTION OF DEDUCTION OF TAX AT SOUR CE UNDER SEC. 40(A)(I) WOULD ARISE ONLY IF THE PAYMENT MADE BY THE ASSESSE E WAS A SUM CHARGEABLE UNDER THE ACT ON WHICH TAX WAS DEDUCTIBL E AT SOURCE UNDER CHAPTER XVII-B AND NO SUCH DEDUCTION WAS EFFECTED. UNDER THE SAID CHAPTER SEC. 195 DEALS WITH PAYMENTS MADE TO NON-RE SIDENTS. THERE COULD ITA.1209&CO.70/MDS/10 5 BE NO DOUBT THAT THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF PRASAD PRODUCTS LTD. (SUPRA) CLEARLY HELD T HAT IT WAS THE PAYER WHO WAS THE FIRST PERSON TO DECIDE WHETHER THE PAYMENT HE WAS MAKING BORE ANY INCOME CHARACTER OR NOT. SPECIAL BENCH ALSO HEL D THAT WHEN PAYER HELD A BONAFIDE BELIEF THAT NO PORTION OF THE PAYMENT HA D ANY PART CHARGEABLE TO TAX THEN SEC. 195 WOULD BE TOTALLY INAPPLICABLE. T HIS VIEW HAS BEEN UPHELD BY THE HONBLE APEX COURT IN THE CASE OF G.E. INDIA TECHNOLOGY P. LTD. V. CIT IN CA 7541 AND 7542 OF 2010 DATED 09-09-2010. A FTER REFERRING TO ITS OWN EARLIER DECISION IN TRANSMISSION CORPORATION (S UPRA) RELIED ON BY HIM THE LD. CIT(A) FOR GIVING RELIEF TO THE ASSESSEE I T WAS HELD BY THE HONBLE APEX COURT THAT SEC. 195(1) OF THE ACT ITSELF CLEAR LY LAID DOWN THAT TAX AT SOURCE WAS DEDUCTIBLE ONLY FROM SUM CHARGEABLE UNDE R THE PROVISIONS OF THE ACT VIZ. UNDER SECTIONS 4 5 AND 9 OF THE ACT. HONBLE APEX COURT AFTER GOING THROUGH SEC.195 OF THE ACT FURTHER HELD THAT THE WORDS ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT HA D TO BE GIVEN DUE WEIGHTAGE WHILE INTERPRETING THE ISSUE REGARDING L IABILITY TO TAX AT SOURCE. BUT NEVERTHELESS THERE CAN BE NO DOUBT THAT AN ASSE SSEE HAD TO CARRY A BONAFIDE BELIEF THAT THE PAYMENT HE WAS EFFECTING T O THE NON-RESIDENT WAS NOT CHARGEABLE TO TAX IN INDIA FOR CLAIMING THAT HE WAS NOT LIABLE TO MAKE ANY DEDUCTION OF TAX AT SOURCE THEREON UNDER SEC. 1 95 OF THE ACT. AS PER THE ASSESSEE CIRCULAR NO.23 DATED 23-07-1969 OF TH E CBDT CLARIFIED THAT INCOME ACCRUING OR ARISING TO A NON-RESIDENT WOULD BE TAXABLE IN INDIA ONLY ITA.1209&CO.70/MDS/10 6 IF THERE IT WAS HAVING A BUSINESS CONNECTION IN IND IA. WE FIND THAT PARA- FOUR OF THE ABOVE CIRCULAR CLEARLY MENTIONS THAT CO MMISSION RECEIVED BY FOREIGN AGENTS OF INDIAN EXPORTERS WHO OPERATED IN THEIR OWN COUNTRY WAS NOT PART OF ANY INCOME OF SUCH FOREIGN AGENTS ARISI NG IN INDIA IF COMMISSION WAS REMITTED DIRECTLY TO SUCH FOREIGN AG ENTS AND SUCH AGENTS WERE NOT LIABLE TO INCOME-TAX IN INDIA ON THE COMMI SSION. AGAIN IN CIRCULAR NO.786 DATED 07-02-2000 AT PARA-2 CBDT DECLARED AS UNDER: 2. THE DEDUCTION OF TAX AT SOURCE UNDER S.195 WOUL D ARISE IF THE PAYMENT OF COMMISSION TO THE NON-RESIDENT AGENT IS CHARGEABLE TO TAX IN I NDIA. IN THIS REGARD ATTENTION TO CBDT CIRCULAR NO.23 DATED 23 RD JULY 1969 IS DRAWN WHERE THE TAXABILITY OF FORE IGN AGENTS OF INDIAN EXPORTERS WAS CONSIDERED ALONG WITH CERTAIN OTHER SPECIFIC SITUATIONS. IT HAD BEEN CLARIFIED THEN THAT THERE WHERE THE NON-RESIDENT AG ENT OPERATES OUTSIDE THE COUNTRY NO PART OF HIS INCOME ARISES IN INDIA. FURTHER SINCE THE PAYMENT IS USUALLY REMITTED DIRECTLY ABROAD IT CANNOT BE HELD TO HAVE BEEN RECEIVED BY O R ON BEHALF OF THE AGENT IN INDIA. SUCH PAYMENTS WERE THEREFORE HELD TO BE NOT TAXABL E IN INDIA. THE RELEVANT SECTIONS NAMELY SEC. 5(2) AND SEC. 9 OF THE INCOME-TAX ACT 1961 NOT HAVING UNDERGONE ANY CHANGE IN THIS REGARD THE CLARIFICATION IN CIRCULA R NO..23 STILL PREVAILS. NO TAX IS THEREFORE DEDUCTIBLE UNDER SEC. 195 AND CONSEQUENTLY THE EXPE NDITURE ON EXPORT COMMISSION AND OTHER RELATED CHARGES PAYABLE TO A NON-RESIDENT FOR SERVICES RENDERED OUTSIDE INDIA BECOMES ALLOWABLE EXPENDITURE. ON BEING APPRISED OF THIS POSITION THE COMPTROLLER & AUDITOR GENERAL HAVE AGREED TO DROP THE OBJECTION R EFERRED TO ABOVE. 8. NO DOUBT THESE CIRCULARS WOULD ABSOLVE THE ASSE SSEE FROM THE LIABILITY TO DEDUCT TAX ON COMMISSION PAID TO THE F OREIGN AGENTS WHERE SUCH FOREIGN AGENTS OPERATED OUTSIDE THE COUNTRY AND NO PART OF ITS INCOME AROSE IN INDIA. HOWEVER THESE CIRCULARS WOULD NOT ABSOLVE THE ASSESSEE FROM DISCHARGING ITS ONUS THAT IT HELD A BONAFIDE B ELIEF REGARDING NON DEDUCTIBILITY OF TAX AT SOURCE ON PAYMENTS OF COMMI SSION MADE BY IT TO THE NON-RESIDENT BASED ON CONDITIONS SET OUT IN THE SAI D CIRCULARS. HERE IN THE CASE BEFORE US THE AO HAD SIMPLY MADE A DISALLOWAN CE ON A PREMISE THAT ITA.1209&CO.70/MDS/10 7 TDS WAS ALWAYS DEDUCTIBLE ON PAYMENTS MADE TO A NON -RESIDENT. AS AGAINST THIS LD. CIT(A) WENT BY THE ARGUMENT OF TH E ASSESSEE THAT THE FOREIGN AGENTS WERE SELLING THE PRODUCT OF THE ASSE SSEE IN THEIR COUNTRY AND SUCH AGENTS WERE NOT LIABLE TO PAY INCOME-TAX U NDER THE ACT IN INDIA. THERE WAS NO VERIFICATION OF THE BONAFIDE NATURE OF THE BELIEF HELD BY THE ASSESSEE THAT PAYMENTS MADE BY IT TO THE FOREIGN AG ENTS WERE NOT LIABLE TO TAX IN INDIA BASED ON CIRCULAR NO.23 DATED 23-07-19 69 AND CIRCULAR NO.786 DATED 07-02-2000. THAT THESE CIRCULARS WERE TIME AN D AGAIN USED FOR CLAIMING RELIEF WHICH WAS NOT INTENDED HAS BEEN CL ARIFIED AT PARA-2 OF THE CIRCULAR NO.7 PF 2009 DATED 22-10-2009 OF THE CBDT WHEREBY EARLIER CIRCULARS MENTIONED SUPRA WERE WITHDRAWN. NO DOUBT WE DO APPRECIATE THE CONTENTIONS OF LD. AR THAT CIRCULAR DATED 22-10-200 9 WITHDRAWING THE EARLIER CIRCULARS HAD ONLY PROSPECTIVE AND AGREE WI TH IT. NEVERTHELESS AS ALREADY STATED BY US THERE WAS NO DEMONSTRATION BY THE ASSESSEE AT ANY STAGE OF THE PROCEEDINGS NOR ANY VERIFICATION DONE BY THE AUTHORITIES BELOW REGARDING THE BONAFIDE NATURE OF ITS BELIEF THAT TH E PAYMENTS WHICH WERE EFFECTED BY IT TO THE FOREIGN AGENTS WERE NOT EXIGI BLE TO TAX IN INDIA UNDER THE ACT. WE ARE THEREFORE OF THE OPINION THAT THE MATTER NEEDS TO BE REVISITED BY THE AO. WE THEREFORE SET ASIDE THE O RDERS OF THE AUTHORITIES BELOW AND REMIT THE ISSUE REGARDING DISALLOWANCE FO R NON-DEDUCTION OF TAX ON PAYMENTS EFFECTED TO FOREIGN AGENTS BACK TO THE FILE OF THE AO FOR FRESH CONSIDERATION REGARDING THE BONAFIDE NATURE OF THE CLAIM OF THE ASSESSEE. ITA.1209&CO.70/MDS/10 8 ASSESSEE SHOULD BE GIVEN AN OPPORTUNITY TO PRESENT NECESSARY EVIDENCE IN THIS REGARD. 9. APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. 10. NOW WE TAKE UP THE CROSS-OBJECTION RAISED BY TH E ASSESSEE. GRIEVANCE OF THE ASSESSEE IN THIS CROSS-OBJECTION I S THAT THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF EXPENDITURE MADE BY THE AO UNDER SEC.14A OF THE ACT READ WITH RULE 8D OF THE INCOME- TAX RULES 1962 (THE RULES FOR SHORT). 11. FACTS APROPOS THIS ISSUE ARE THAT ASSESSEE HAD DURING THE RELEVANT PREVIOUS YEAR RECEIVED DIVIDEND OF ` 79 00 382/- WHICH IT CLAIMED AS EXEMPT UNDER SEC.10(34) OF THE ACT. AO PUT THE ASS ESSEE ON NOTICE THAT EXPENSES INCURRED FOR EARNING EXEMPT INCOME HAD TO BE DISALLOWED UNDER SEC.14A OF THE ACT. ASSESSEES CONTENTION WAS THAT DEMAT CHARGES ALONE WAS INCURRED FOR EARNING THE INCOME AND NOTHING ELS E. AO WAS HOWEVER NOT HAPPY WITH IT FOR ACCORDING TO HIM OTHER EXP ENSES LIKE INTEREST WOULD HAVE BEEN INCURRED BY THE ASSESSEE AND RULE 8D OF THE I.T. RULES HAD TO BE APPLIED FOR WORKING OUT THE EXPENSES WHICH WERE TO BE DISALLOWED UNDER SEC.14A OF THE ACT. ASSESSEE WAS REQUIRED TO GIVE A WORK OUT FOR THE DISALLOWANCE. THEREUPON IT GAVE A STATEMENT WHE REIN THE DISALLOWABLE ITA.1209&CO.70/MDS/10 9 AMOUNT WAS MENTIONED AS ` 1 91 002/-. HOWEVER AO WAS OF THE OPINION THAT THE ASSESSEE HAD MADE EXCLUSION OF INTEREST PA ID WHILE WORKING OUT THE SAID SUM. HE THEREFORE WORKED OUT THE DISALLOW ANCE UNDER SEC. 14A AND FIXED IT AT ` 3 69 470/-. 12. BEFORE THE CIT(A) ARGUMENT OF THE ASSESSEE WAS THAT THE AO HAD CONSIDERED THE ENTIRE INTEREST PAID INCLUDING INTER EST PAID ON TERM LOAN FOR PURCHASING MACHINERY FOR CALCULATING THE DISALLOWA NCE. ACCORDING TO ASSESSEE INTEREST ON TERM LOAN AVAILED FOR PURCHAS ING MACHINERY COULD NEVER BE CONSIDERED WHILE WORKING OUT THE DISALLOWA NCE UNDER SEC. 14A OF THE ACT. FURTHER ACCORDING TO THE ASSESSEE ONLY IF THE AO WAS DISSATISFIED WITH THE WORKING GIVEN BY ASSESSEE HE COULD RESORT TO RULE 8D OF THE RULES. HENCE IT WAS ARGUED THAT EXCEPT FOR DEMAT CH ARGES OF ` 1 116/- NOTHING ELSE COULD HAVE BEEN DISALLOWED UNDER SEC. 14A OF THE ACT. 13. LD. CIT(A) HOWEVER DID NOT ACCEPT THE AVERMEN TS OF THE ASSESSEE. ACCORDING TO HIM RULE 8D PROVIDED FOR DISALLOWANCE OF PROPORTIONATE EXPENDITURE INCURRED BY WAY OF INTEREST AND THERE W AS NO PROVISION FOR EXCLUDING ANY INTEREST PAID FOR SPECIFIC PURPOSE WH ILE MAKING SUCH CALCULATION. HE THEREFORE CONFIRMED THE DISALLOWA NCE MADE BY THE AO. ITA.1209&CO.70/MDS/10 10 14 NOW BEFORE US THE LD. AR SUBMITTED THAT DISALL OWANCE UNDER SEC. 14A OF THE ACT COULD BE MADE ONLY IF THERE WAS A PR OXIMATE NEXUS BETWEEN THE EXEMPT INCOME EARNED AND EXPENDITURE INCURRED. RELIANCE WAS PLACED ON THE DECISION OF HONBLE APEX COURT IN THE CASE O F CIT VS. WALFORT SHARE & STOCK BROKERS (P) LTD.(326 ITR 1). FURTHER ACCORD ING TO HIM RULE 8D WHICH WAS NOTIFIED ON 24-03-2008 WOULD APPLY ONLY F ROM ASST. YEAR 2008- 09 AND THE DECISION OF THE SPECIAL BENCH OF THE TRI BUNAL IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT P .LTD. (117 ITD 169) D ID NOT HOLD THE FIELD IN VIEW OF THE DECISION OF HONBLE BOMBAY HIGH COUR T IN THE CASE OF GODREJ &BOYCE MFG. CO. LTD. VS. DCIT (ITA NO.626 & WP 758 OF 2010 DATED 12- 08-2010). FURTHER ACCORDING TO HIM HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES LTD. (323 ITR 5 18) HAD HELD THAT UNLESS AN EXPENDITURE WAS INCURRED FOR EARNING THE EXEMPT INCOME NO DISALLOWANCE UNDER SEC. 14A OF THE ACT COULD BE MAD E. 15. PER CONTRA LD. DR STRONGLY RELIED ON THE ORDER OF THE AO AND SUBMITTED THAT THE DISALLOWANCE WAS CORRECTLY WORKE D OUT. 16. WE HAVE PERUSED THE ORDERS AND HEARD BOTH THE P ARTIES. AS PER THE ASSESSEE THE ONLY AMOUNT EXPENDED FOR EARNING DIVI DEND OF ` 79 00 382/- WAS DEMAT CHARGES OF ` 1 116/- AND NOTHING ELSE. AS FOR THE WORK OUT GIVE N BY THE ASSESSEE WHEREIN ` 1 91 002/- WAS SHOWN TO BE THE AMOUNT ITA.1209&CO.70/MDS/10 11 DISALLOWABLE UNDER RULE 8D OF THE RULES CIT(A) HAS CLEARLY MENTIONED THAT THIS WAS FURNISHED AT THE BEHEST OF THE AO. HE NCE SUCH A WORKING OUT CANNOT BE CONSIDERED AS AN ADMISSION BY THE ASSESSE E FOR MAKING A DISALLOWANCE UNDER RULE 8D OF THE RULES. NO DOUBT IN THE CASE OF DAGA CAPITAL MANAGEMENT P. LTD. (SUPRA) THE SPECIAL BENC H OF THIS TRIBUNAL DID HOLD THAT RULE 8D APPLIED RETROSPECTIVELY AND SUB-S ECTIONS (2) AND (3) OF SEC. 14A OF THE ACT WERE PROCEDURAL IN NATURE AND A PPLIED FOR ALL PENDING MATTERS. HOWEVER HONBLE BOMBAY HIGH COURT IN THE CASE OF GODRAJ & BOYCE MFG. CO. LTD. (SUPRA) CLEARLY HELD THAT RULE 8D WHICH WAS NOTIFIED ON 24-03-2008 WOULD APPLY W.E.F. ASST. YEAR 2008-09 ON LY. HONBLE BOMBAY HIGH COURT ALSO HELD THAT EVEN PRIOR TO ASST. YEAR 2008-09 WHEN RULE 8D WAS NOT APPLICABLE AO HAD TO ENFORCE THE PROVISION S OF SUB-SEC. (1) OF SEC.14A OF THE ACT. THUS THOUGH THE DECISION OF TH E SPECIAL BENCH THAT RULE 8D HAD RETROSPECTIVE EFFECT WAS OVERTURNED BY THE BOMBAY HIGH COURT IT WAS ALSO CLEARLY HELD THAT THE AO WAS DUT Y BOUND TO DISALLOW THE EXPENDITURE WHICH WAS INCURRED IN RELATION TO INCOM E WHICH DID NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HONBLE BOM BAY HIGH COURT FURTHER HELD THAT AO HAD TO ADOPT A REASONABLE BASIS OR MET HOD CONSISTENT WITH ALL RELEVANT FACTS AND CIRCUMSTANCES AFTER GIVING A RE ASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON RECOR D. NO DOUBT HONBLE APEX COURT IN THE CASE OF WALFORT SHARE & STOCK BRO KERS (P) LTD.S CASE (SUPRA) HELD THAT FOR ATTRACTING SEC. 14A OF THE AC T THERE HAD TO BE A ITA.1209&CO.70/MDS/10 12 PROXIMATE CAUSE BETWEEN THE EXEMPT INCOME AND EXPEN SES. HONBLE APEX COURT WAS SEIZED OF AN ISSUE REGARDING BUSINESS LOS S SET OFF AGAINST DIVIDEND INCOME ON UNITS BOUGHT CUM DIVIDEND AND SO LD EX-DIVIDEND. CONTENTION OF THE DEPARTMENT IN THAT CASE WAS THAT EXPENDITURE CLAIMED BY THE ASSESSEE SHOULD BE TREATED AS INCURRED FOR PURP OSE OF EARNING EXEMPT INCOME AND HENCE IT HAD TO BE DISALLOWED. IT WAS NO T A CLAIM FOR EXPENDITURE BUT A CLAIM FOR BUSINESS LOSS ARISING OUT OF PURCHASES OF UNITS CUM DIVIDEND AND THEREAFTER SELLING IT AT LOWER COS T ON EX DIVIDEND BASIS AFTER RECEIVING THE DIVIDEND. HONBLE APEX COURT H ELD THAT THE ONLY IMPACT ON THE EXEMPTING PROVISION SEC.10(33) FOR UNITS IN COME IS BY SEC. 94(7) OF THE ACT AND ONE COULD NOT INTERPRET SEC.14A AS LEAD ING TO THE SAME CONCLUSION AS THEN SEC. 94(7) OF THE ACT WOULD BE RENDERED NUGATORY. THE CASE OF HERO CYCLES LTD. (SUPRA) OF HONBLE P&B HI GH COURT WAS AN APPEAL FILED BY DEPARTMENT WHICH WAS DISMISSED AS NOT INVOLVING SUBSTANTIAL QUESTION OF LAW. THE REASON MENTIONED B Y THE HONBLE P&B HIGH COURT WAS THAT WHEN FOR EARNING EXEMPT INCOME NO EXPENDITURE WAS INCURRED DISALLOWANCE UNDER SEC.14A WOULD NOT STAN D. 17. WE ARE OF THE OPINION THAT THE VARIOUS DECISION S MENTIONED BY US SUPRA WOULD LEAD TO FOLLOWING VIEW WITH REGARD TO A PPLICATION OF SEC.14A AND RULE 8D AS IT STANDS TODAY. : ITA.1209&CO.70/MDS/10 13 1. THOUGH SEC. 14A HAS BEEN INSERTED WITH RETROSPEC TIVE EFFECT FROM 01-04-1962 AND SINCE RULE 89D HAS BEEN NOTIFIE D ONLY ON 24- 03-2008 IT WOULD BE EFFECTIVE ONLY FROM ASST. YEAR 2008-09 ONWARDS. 2. FOR EARLIER ASST. YEARS THOUGH THE EXPENSES PER TAINING TO EXEMPT INCOME ARE NOT ALLOWABLE THE DISALLOWANCE H AS TO BE ON A REASONABLE BASIS HAVING REGARD TO THE ACCOUNTS OF T HE ASSESSEE AND AFTER FURNISHING A REASONABLE OPPORTUNITY FOR T HE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON RECORD. . 3. THIS IN EFFECT WOULD MEAN THAT THE DISALLO WANCE UNDER SEC.14A READ WITH RULE 8D CANNOT EXCEED ACTUAL EXPENSES DEB ITED IN THE P&L ACCOUNT AND THAT THE NOTIONAL DISALLOWANCE SPEC IFIED IN THE RULE 8D(2) CANNOT EXCEED THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE AS AN EXPENDITURE WHICH HAS NOT BEEN INCU RRED AND CLAIMED CANNOT BE DISALLOWED. 18. WE FIND THAT IN THE INSTANT CASE BEFORE US THE AUTHORITIES BELOW HAD GONE BY AN ASSUMPTION THAT RULE 8D OF THE RULES APP LIED FOR THE IMPUGNED ASST. YEAR THOUGH SUCH RULE WAS NOTIFIED ONLY ON 22 -03-2008. AS ALREADY MENTIONED BY US AS THE LAW STANDS TODAY SUCH RULE HAD ONLY PROSPECTIVE EFFECT. THE CASE OF THE ASSESSEE HAS NOT BEEN TESTE D BASED ON THE LAW THAT EMERGES OUT OF THE VARIOUS DECISIONS MENTIONED SUPRA. ASSESSEE IN FACT IN ITS APPEAL BEFORE THE CIT(A) NEVER RAISED THE CONTENTION REGARDING NON APPLICABILITY OF RULE 8D IN THE IMPUGNED ASST. YEAR. BUT AT THE SAME TIME AS ALREADY MENTIONED BY US ASSESSEE HAD ALWA YS ARGUED THAT ONLY DEMAT CHARGES PAID WAS INCURRED FOR EARNING DIVID END INCOME AND IT WAS CONSTRAINED TO GIVE A WORK OUT BASED ON RULE 8D AT THE BEHEST OF THE AO. ITA.1209&CO.70/MDS/10 14 19. WE ARE THEREFORE OF THE OPINION THAT THIS MAT TER NEED REVISIT BY THE AO. WE THEREFORE SET ASIDE THE ORDERS OF THE AUTH ORITIES BELOW AND REMIT THE MATTER TO THE AO TO CONSIDER THE DISALLOWANCE IF ANY IF REQUIRED TO BE MADE UNDER SEC. 14A OF THE ACT BASED ON THE VARIOUS JUDGMENTS MENTIONED SUPRA. ASSESSEE WOULD BE FREE TO PRODUCE NECESSARY EVIDENCE AND RECORDS IN SUPPORT OF ITS CLAIM BEFORE THE AO AS ALSO ANY OTHER DECISION OF HIGHER JUDICIAL AUTHORITIES WHICH HAVE TO BE DULY CONSIDERED BY THE AO. 20. IN THE RESULT CROSS-OBJECTION FILED BY THE ASS ESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 21. TO SUMMARISE THE RESULT BOTH THE APPEAL OF THE REVENUE AS WELL AS CROSS-OBJECTION OF THE ASSESSEE ARE TREATED AS ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 25-02-2011. SD/- SD/- ( U.B.S.BEDI) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI: 25 TH FEBRUARY 2011. NBR CC: ASSESSEE/ ASSESSING OFFICER/ CIT(A)/ CIT/ D .R/ GUARD FILE. ITA.1209&CO.70/MDS/10 15