Sri Rakesh Kumar Agarwal, Kanpur v. The ACIT-3, Kanpur

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH 'B' LUCKNOW BEFORE SHRI H. L. KARWA HON'BLE VICE PRESIDENT AND SHRI N. K. SAINI ACCOUNTANT MEMBER I.T.A. NO.01/LUC/10 ASSESSMENT YEAR: 2005-2006 SHRI RAKESH KUMAR AGARWAL VS. A.C.I.T.-3 14/145-A CHUNNIGANJ KANPUR. KANPUR. PAN:ABTPA6652J (APPELLANT) (RESPONDENT) I.T.A. NO.58/LUC/10 ASSESSMENT YEAR: 2005-2006 A.C.I.T.-3 VS. SHRI RAKESH KUMAR AGARWAL KANPUR. KANPUR. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AMIT SHUKLA ADVOCATE REVENUE BY : SHRI P. K. BAJAJ D. R. O R D E R PER N. K. SAINI: THE CROSS APPEALS BY THE ASSESSEE AND THE DEPARTME NT ARE DIRECTED AGAINST THE ORDER DATED 06/11/2009 OF CIT (A)-II K ANPUR. SINCE THE APPEALS WERE HEARD TOGETHER SO THESE ARE BEING DISP OSED OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2 2. FIRST WE WILL DEAL WITH THE ASSESSEES APPEAL IN I.T.A. NO.01/LUC/10. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLOWIN G GROUNDS: 1. THAT THE LEARNED CIT (A)-II KANPUR HAS ERRED O N LAW AND FACTS IN ISSUING NOTICE FOR ENHANCEMENT DURING THE APPELLATE PROCEEDING ON A POINT WHICH WAS NOT SUBJE CT MATTER OF APPEAL. 2. THAT THE LEARNED CIT (A)-II KANPUR HAS ERRED ON FACTS AND IN LAW IN HOLDING THAT THE PROPORTIONATE DISALL OWANCE OF INTEREST AND OTHER EXPENSES INCURRED BY THE ASSE SSEE IN TERMS OF SECTION 14(A) OF THE I.T. ACT 1961 ARE TO BE DISALLOWED IN THE CASE OF THE ASSESSEE WITHOUT APPRECIATING THE FACTS PLACED BEFORE HIM. 3. THAT THE LEARNED CIT (A)-II KANPUR HAS ERRED ON FACTS AND IN LAW IN DIRECTING THE ASSESSING OFFICER TO DI SALLOW INTEREST AND OTHER EXPENSES IN TERMS OF RULE 8D OF THE INCOME TAX RULES BROUGHT ON THE STATUTE ON 24/03/20 08 WHEREAS THE ASSESSMENT RELATES TO FINANCIAL YEAR 06 -07 ENDING ON 31/03/2007. 4. THAT THE ORDER DATED 06/11/2009 PASSED BY THE LE ARNED CIT (A)-II KANPUR IS NOT BASED ON PROPER APPRECIAT ION OF FACTS AND LAW AND IS LIABLE TO BE QUASHED. 2.1 FROM THE ABOVE GROUNDS IT WOULD BE CLEAR THAT T HE ONLY GRIEVANCE OF THE ASSESSEE IN THIS APPEAL RELATES TO THE PROPORTI ONATE DISALLOWANCE OF INTEREST AND OTHER EXPENSES INCURRED BY THE ASSESSE E IN TERMS OF SECTION 14A OF THE I.T. ACT 1961 READ WITH RULE 8D OF THE I.T. RULES 1962. 3 3. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE T HAT THE ASSESSEE FILED ITS RETURN OF INCOME ON 29/10/2004 DECLARING AN INCOME OF `30 11 523/- WHICH WAS PROCESSED U/S 143(1) OF THE I.T. ACT ON 29/08/2 006. LATER ON THE CASE WAS SELECTED FOR SCRUTINY. THE ASSESSEE HAD EARNED AN INCOME OF `14 84 068/- AS DIVIDEND FROM INDIAN COMPANY/MF/UTI WHICH WAS CLAIMED AND ALLOWED AS EXEMPT INCOME U/S 10 OF THE I.T. ACT 1961. THE ASSESSEE HAD DEBITED A SUM OF `23 50 746/- AS INTEREST PAID ON BORROWINGS. THE ASSESSMENT WAS FRAMED BY THE ASSESSING OFFICER U/S 143(3) VIDE ORDER DATED 10/12/2007 AT AN INCOME OF ` 39 26 830/- BY MAKING CERTAIN ADDITIONS. WHEN THE ASSESSEE APPROACHED THE LEARNE D CIT (A) ON ACCOUNT OF VARIOUS ADDITIONS MADE BY THE ASSESSING OFFICER THE LEARNED CIT (A) ISSUED AN ENHANCEMENT NOTICE U/S 251 OF THE I.T. AC T DATED 19/08/2009 STATING THEREIN THAT IN VIEW OF THE PROVISIONS OF S ECTION 14A OF THE I.T. ACT FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER NO DEDUCTION SHALL BE ALLOWED TO THE ASSESSEE IN RESPE CT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. THE ASSESSEE REPL IED TO THE LEARNED CIT (A) AS UNDER: 4 'IN THE MATTER NOTED ABOVE THE APPELLANT HAS BEEN R EQUIRED TO EXPLAIN AS TO WHY PART OF THE INTEREST PAID ON BORR OWINGS SHOULD NOT BE DISALLOWED SINCE THE FUNDS HAVE BEEN UTILIZED FOR THE INVESTMENT IN THE MUTUAL FUNDS THE INCOME OF WHICH IS TAX FREE? RESPECTFULLY A DETAILED LIST OF TOTAL INVESTMENT (O LD AND NEW) MADE DURING THE YEAR UNDER CONSIDERATION IN THE MUT UAL FUNDS AND THE FIXED DEPOSITS WITH THE BANK IS ENCLOSE MAR KED ANNEXURE 'A' OUT OF WHICH THE TOTAL INVESTMENT IN MUTUAL FUNDS DURING THE YEAR IS ` 2 43 00 000/- AS DETAILED IN ANNEXURE 'B'. THE INVESTMENT IN MUTUAL FUNDS IS IN 'DAILY DIVIDEN D SCHEMES' WHICH ARE SUBJECT TO CAPITAL GAIN TAX AS SUCH THE INVESTMENT CAN NOT BE HELD TO BE IN THE EXEMPTED SE CURITIES. THE ASSESSEE APPELLANT HAS DECLARED THE CAPITAL GAI N ARISING ON TRANSFER ON THESE SECURITIES (EITHER IN THE FORM OF 'SWITCH OUT' OR REDEMPTION') THE INCOME IS TAKEN IN THE CO MPUTATION OF INCOME AS CAPITAL GAIN. THE DETAILED COMPUTATION OF INCOME IS ENCLOSED FOR READY REFERENCE MARKED ANNEX URE 'C'. SINCE THE INVESTMENTS DURING THE YEAR ARE IN THE SE CURITIES AND IN THE TERM DEPOSITS WITH THE BANKS ARE SUBJECT TO TAX AS PER THE PROVISIONS OF THE INCOME TAX ACT IT CAN NO T BE SAID THAT THE INVESTMENTS OF BORROWED FUNDS WERE MADE IN THE EXEMPTED SECURITIES QUALIFYING FOR PROPORTIONATE DI SALLOWANCE OF INTEREST. IT MAY FURTHER BE SUBMITTED THAT A SUM OF RS.179225 57/- WAS AVAILABLE TO THE APPELLANT IN THE CAPITAL ACCOUNT O F THE PROPRIETOR REFERENCE MAY KINDLY BE MADE TO ANNEXUR E 'B'. THUS IT IS EVIDENTLY CLEAR THAT ALL THE INVESTMENT MADE BY THE APPELLANT IN THE MUTUAL FUNDS THE INCOME OF WHICH IS SUBJECT TO TAX CAN NOT BE A MATTER OF DISALLOWANCE AS PROPO SED IN THE NOTICE UNDER REFERENCE. 5 SINCE THE BORROWED FUNDS HAVE BEEN UTILIZED ONLY FO R THE BUSINESS PURPOSES THE QUESTION OF ANY DISALLOWANCE OF THE INTEREST DOES NOT ARISE. THIS VIEW IS CONFIRMED BY THE CHANDIGARH BENCH OF /TAT IN THE CASE OF HERO CYCLES LTD. VS. JCIT (2009) 20 D.T. R. PAGE 213 (CHD); IT IS HELD T HAT WHEN THERE IS NO EVIDENCE TO SHOW THAT ANY INTEREST BEAR ING FUNDS WERE UTILIZED IN DIVIDEND EARNING INVESTMENT NO DI SALLOWANCE COULD BE MADE UNDER SECTION 14A ON PRESUMPTION BAS IS. ' IT IS ALSO PERTINENT TO NOTE HERE THAT THE INCOME D ISTRIBUTED BY THE MUTUAL FUNDS AND THE OTHER COMPANIES TO THE IND IVIDUAL INVESTORS ARE AFTER THE DEDUCTION OF ADDITIONAL INC OME TAX COMMONLY KNOWN AS TAX ON 'DISTRIBUTED PROFITS' THE REFORE IT CAN NOT BE SAID THAT THE INCOME EARNED BY THE ASSES SEE IS NOT SUBJECT TO TAX. ACCORDINGLY IT WILL NOT BE JUSTIFI ED TO HOLD THAT THE INCOME EARNED ON INVESTMENTS MADE IN MUTUAL FUN DS IS TAX FREE.' 3.1 THE LEARNED CIT(A) AFTER CONSIDERING THE SUBMI SSIONS OF THE ASSESSEE RESTORED THE ISSUE TO THE ASSESSING OFFICE R AND DIRECTED HIM TO COMPUTE AND DISALLOW INTEREST AND OTHER EXPENSES IN TERMS OF RULE 8D OF THE I.T. RULES. NOW THE ASSESSEE IS IN APPEAL. 4. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE BORROWED FUNDS WERE UTILIZED ONLY FOR THE BUSINESS PURPOSES THEREFORE THE QUESTION OF DISALLOWANCE OF ANY INTEREST DID NOT ARISE. IT WAS FURTHER SUBMITTED THAT THE SUBJECT INVESTMENTS ARE OLD AND THE CAPITAL (NO N BORROWED FUNDS) WERE MORE THAN INVESTMENTS. THERE IS NO NEXUS BETWEEN A NY EXPENDITURE OR 6 INTEREST AND THE INCOME CLAIMED AS EXEMPT. THAT TH E LD. C.IT.(A) HAS CONFIRMED THE DISALLOWANCE MERELY BY FOLLOWING THE DECISION IN THE CASE OF: A) DAGA CAPITAL MANAGEMENT (P) LTD. (2009) 26 SOT 603 (ITAT MUMBAI SPECIAL BENCH). 4.1 IT WAS FURTHER SUBMITTED THAT THE LD. C.I.T. (A PPEALS) HAS NEITHER DISCUSSED THE FACTS NOR HAS GIVEN REASONS FOR MAKIN G THE DISALLOWANCE/ADDITIONS. 4.2 IT WAS STATED THAT RECENTLY THE HON'BLE BOMBA Y HIGH COURT OF THE JUDICATURE AT MUMBAI HELD IN THE CASE OF GODREJ BO YACE MFG. CO. LTD. VS. DY.CIT. AND ANOTHER (2010)328 ITR 81 HELD THAT A) ' ... .IT IS A TRITE PRINCIPLE OF LAW THAT THE LAW WHICH WOULD APPLY TO AN ASSESSMENT YEAR IS THE LAW PREVAILING O N THE FIRST DAY OF APRIL CONSEQUENTLY RULE 8D WHICH HAS BEEN NOTIFIED ON MARCH 24 2008 WOULD APPLY WITH EFFECT FROM ASSESS MENT YEAR 2008-09 ... ' B) ' ... .ITO V. DAGA CAPITAL MANAGEMENT P. LTD. [2 009] 312 ITR (AT) 1 (MUMBAI) [SB] IMPLIEDLY DISAPPROVED ON THIS POINT. .. ' 4.3 IT WAS FURTHER STATED THAT RULE 8D OF INCOME T AX RULES 1962 WAS INSERTED BY THE I.T. (FIFTH AMDT.) RULES 2008 WITH EFFECT FROM 24.03.2008 HENCE THE SAME WAS APPLICABLE ONLY FROM ASSESSMENT YEAR 2008-2009 7 AND NOT THE EARLIER YEARS. 4.4 RELIANCE HAS ALSO BEEN PLACED ON THE FOLLOWING CASE LAWS: (I) DECISION OF THE ITAT DELHI BENCH OF THE INCOME -TAX APPELLATE TRIBUNAL IN THE CASE OF IMPULSE (INDIA) PVT. LTD. VS.ACIT (2008) 22 SOT 368 (II) DECISION OF THE I.T.A.T. MUMBAI BENCH IN THE CASE OF M/S. GODREJ AGROVET LTD. VS. ACIT RANGE 10(2) MUMBAI ( ITA NO.1629(MUM.)/09 FOR A.Y. 2005-06 (III) DECISION OF THE I.T.A.T. DELHI BENCH IN THE CASE OF MARUTI UDYOG LTD. VS. DY.CIT 92 ITD 119. (IV) WIMCO SEEDLINGS LTD. VS.DY.CIT 107 ITD 267 (D EL.)TM (V) CIT VS. RELIANCE UTILITIES AND POWER LTD.(2009) 313 ITR 40. FINALLY THE ASSESSEE HAS PRAYED AS UNDER : FROM THE DETAILED FACTS AND EXPLANATION SUBMITTED HERE ABOVE YOUR HONOURS WILL KINDLY APPRECIATE THAT THE AUTHOR ITIES BELOW HAVE MECHANICALLY MADE THE DISALLOWANCE ALLEGEDLY U /S 14A OF THE INCOME TAX ACT 1961 READ WITH RULE 8D OF THE INCOME TAX RULE 1962 WITHOUT ESTABLISHING: A) NEXUS BETWEEN BORROWED FUNDS AND THE INVESTMENTS GIVING RISE TO EXEMPT INCOME. B) THAT THE EXPENSES AND INTEREST ARE ATTRIBUTABLE TO EXEMPT INCOME. C) SECTION 14A AND RULE 8D CAN BE APPLIED RETROSPECTIVELY. 5. THE LD.D.R. IN HIS RIVAL SUBMISSIONS SUPPORTE D THE IMPUGNED ORDER PASSED BY THE LD.CIT(A). 8 6. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON TH E RECORD. IT IS NOTICED THAT AN IDENTICAL ISSUE WAS A SUBJECT MATTER OF THE ASSESSEES APPEAL IN THE CASE OF M/S. GOEL INVESTMENT LTD. VS. ADDL.CIT BAR EILLY FOR THE ASSESSMENT YEAR 2006-07 IN I.T.A.NO.238(LUC.)/2010 WHEREIN THE ISSUE HAD BEEN REMANDED BACK TO THE AO VIDE ORDER DATED 15.9.2010 BY OBSERVING AS UNDER: 8. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON T HE RECORD. IN THE PRESENT CASE THE AO INVOKED THE PROVISIONS OF SEC TION 14A OF THE INCOME-TAX ACT 1961. THE SAID PROVISION READS AS U NDER : 14A. (1) FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUN T OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED I F THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNT S OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. 9 (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT : PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOWE R THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154 FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL 2001. 8.1 FROM THE ABOVE PROVISIONS IT WOULD BE CLEAR THA T THE MANDATE OF SECTION 14A IS TO PREVENT CLAIMS FOR DEDUCTION O F EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. THIS SECTION IS ENACTED TO ENSURE THAT O NLY EXPENSES INCURRED IN RESPECT OF EARNING TAXABLE INCOME ARE A LLOWED. ALL EXPENDITURE INCURRED IN RELATION TO INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME UNDER THE PROVISIONS OF THE I.T .ACT HAS TO BE DISALLOWED UNDER SECTION 14A. UNDER SUB-SECTION (2 ) OF SECTION 14 THE AO IS REQUIRED TO DETERMINE THE AMOUNT OF EX PENDITURE INCURRED BY AN ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACC ORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. IN THE PRESENT CASE ALTHOUGH THE AO HAS NOT ESTABLISHED THE NEXUS BETWEEN THE EXPE NDITURE AND THE EXEMPTED INCOME (DIVIDEND) TO WORK OUT THE EXPENDI TURE BUT FOR MAKING DISALLOWANCE INVOKED THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RULES 1962 WHICH ARE INSERTED BY THE I NCOME-TAX (FIFTH AMENDMENT) RULES 2008 W.E.F. 24.3.2008. HOWEVER A S PER THE RATIO LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE C ASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA) THE PROVISIONS OF RULE 8D ARE APPLICABLE PROSPECTIVELY AND NOT RETROSPECTIVELY. IN THE SAID CASE THEIR LORDSHIPS OF THE HON'BLE BOMBAY HIGH COURT WHILE INTERPRETING THE PROVISIONS OF SECTION 14A OF THE ACT AND RULE 8D O F THE INCOME-TAX RULES 1962 OBSERVED AT PAAS 66 & 67 OF THE AFORE SAID REFERRED TO ORDER (HEAD NOTE) AS UNDER : 10 THE FIRST POINT TO BE NOTED ABOUT THE PROVISIONS O F S. 14A AND R. 8D IS THAT DIFFERENT DATES HAVE BEEN PROVIDED IN THESE PROVISIONS FOR THEIR ENFORCEMENT: (I) SUB-SEC. (1) OF S. 14A WAS INSERTED BY THE FINANCE ACT OF 2001 WITH RETROSPECT IVE EFFECT FROM 1ST APRIL 1962; (II) SUB-SS. (2) AND (3) WERE INSERTED IN S. 14A BY THE FINANCE ACT OF 2006 W.E.F. 1ST APRIL 20 07; (III) THE PROVISO WAS INSERTED BY THE FINANCE ACT OF 2002 WIT H RETROSPECTIVE EFFECT FROM 11TH MAY 2001; (IV) RULE 8D WAS INSERTED BY THE IT (FIFTH AMENDMENT) RULES 2008 BY PUBLICATION IN THE GAZETTE DT. 24TH MARCH 2008. SU B-R. (2) OF R.1 STIPULATES THAT THE RULES SHALL COME INTO FORCE FROM THE DATE OF THEIR PUBLICATION IN THE OFFICIAL GAZETTE. THIS BY ITSELF IS NOT CONCLUSIVE. SECONDLY PRIOR TO THE INSERTION OF S. 14A BY THE FINANCE ACT OF 2001 THE SUPREME COURT HAD HELD IN I TS DECISIONS IN CIT VS. INDIAN BANK LTD. AIR 1965 SC 1 473 CIT VS. MAHARASHTRA SUGAR MILLS LTD. 1973 CTR (SC) 489: (1971) 82 ITR 452 (SC):(1971) 3 SCC 543 AND RAJASTHAN STAT E WAREHOUSING CORPORATION VS. CIT (2000) 159 CTR (SC) 132 : (2000) 242 ITR 450 (SC) THAT IN THE CASE OF A COMPO SITE AND INDIVISIBLE BUSINESS WHICH RESULTED IN TAXABLE AND NON-TAXABLE INCOME IT WAS IMPERMISSIBLE FOR THE AO TO APPORTIO N THE EXPENDITURE INCURRED IN RELATION TO SUCH BUSINESS A S BETWEEN THE EARNING OF TAXABLE AND NON-TAXABLE INCOME. SUB- SEC. (1) OF S. 14A WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 1ST APRIL 1962 TO OVERCOME THE DECISIONS OF THE SUPREME COURT . AT THE SAME TIME AS HAS BEEN NOTICED BY THE SUPREME COURT IN ITS DECISION IN CIT VS. WALFORT SHARE & STOCK BROKERS ( P) LTD. (2010) 233 CTR (SC) 42 : (2010) 41 DTR (SC) 233 TH E THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON- TAXABLE INCOME HAS IN PRINCIPLE BEEN NOW WIDENED UNDER S. 14A. READING S. 14 IN JUXTAPOSITION WITH SS. 15 TO 59 IT HAS BEEN OBSERVED THAT THE WORDS 'EXPENDITURE INCURRED' IN S. 14A REFER TO EXPENDITURE ON RENT TAX SALARY INTEREST ETC. IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR. THIRDLY SUB- SS. (2) AND (3) WERE INTRODUCED BY A LEGISLATIVE AMENDMENT BROU GHT ABOUT BY THE FINANCE ACT OF 2006. THE MEMORANDUM EXPLAINI NG THE PROVISIONS OF THE FINANCE BILL OF 2006 RECOGNIZES T HAT THE 11 EXISTING PROVISIONS OF S. 14A DID NOT PROVIDE A MET HOD OF COMPUTING THE EXPENDITURE INCURRED IN RELATION TO I NCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. CONSE QUENTLY THERE WAS A CONSIDERABLE AMOUNT OF DISPUTE BETWEEN THE TAXPAYERS AND THE DEPARTMENT ON THE METHOD OF DETER MINING SUCH EXPENDITURE. IT WAS IN VIEW OF THESE DISPUTES THAT PARLIAMENT INSERTED A NEW SUB-SEC. (2) TO PERMIT TH E FRAMING OF SUBORDINATE LEGISLATION TO PROVIDE A MANDATORY METH OD FOR THE AO TO FOLLOW IN DETERMINING THE EXPENDITURE INCURRE D IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME IF THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CL AIM OF THE ASSESSEE. THE MEMORANDUM PROVIDED THAT 'THIS AMENDM ENT WILL TAKE EFFECT FROM 1ST APRIL 2007 AND WILL ACC ORDINGLY APPLY IN RELATION TO THE ASST. YR. 2007-08 AND SUBSEQUENT YEARS'. A CIRCULAR WAS ISSUED BY THE CBDT ON 28TH DEC. 2006 ONCE AGAIN CLARIFYING THE POSITION THAT THE AMENDMENT WO ULD BE APPLICABLE 'FROM THE ASST. YR. 2007-08 ONWARDS'. AT ANY RATE THIS CONSTRUCTION WHICH HAS BEEN PLACED ON THE AMEN DMENT BOTH IN THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL OF 2006 AND IN THE CIRCULAR OF THE CBD T DT. 28TH DEC. 2006 CAN BE REGARDED AS A REASONABLE INTERPRE TATION OF THE PROVISION. THE FOURTH ASPECT OF THE MATTER WHIC H WOULD MERIT EMPHASIS IS THE PRINCIPLE OF LAW THAT IN DET ERMINING AS TO WHETHER A RULE IN A PIECE OF SUBORDINATE LEGISLATIO N IS TO BE REGARDED AS PROSPECTIVE OR RETROSPECTIVE AN IMPORT ANT ASPECT IS AS TO WHETHER THE RULE EMBODIES WHAT IS ESSENTIA LLY A WELL KNOWN A WELL SETTLED OR WELL ACCEPTED METHOD. AS A MATTER OF FACT IN THE PRESENT CASE THERE CAN BE NO DOUBT ABOU T THE POSITION THAT R. 8D HAS ESSENTIALLY PUT INTO PLACE AN ARTIFICIAL METHOD OF ESTIMATING THE EXPENDITURE THAT CAN BE RE GARDED AS BEING RELATABLE TO INCOME THAT DOES NOT FORM PART O F THE TOTAL INCOME UNDER THE ACT. BEFORE THE INSERTION OF S. 14 A THERE WAS NO SPECIFIC METHOD OF DETERMINING THE EXPENDITU RE INCURRED IN RELATION TO NONTAXABLE INCOME. LOOKING AT THE TOTALITY OF THE CIRCUMSTANCES THE MEASURE OF 0.5 P ER CENT PROVIDED IN R. 8D(2)(III) IS REASONABLE. HENCE WHI LE THE METHOD OF COMPUTATION PROVIDED IN R. 8D IS FAIR AND REASO NABLE TO PASS MUSTER UNDER ART. 14 THE METHOD MUST TAKE EFF ECT 12 PROSPECTIVELY. FINALLY SUB-SEC. (4) OF S. 295 EMPO WERS THE RULE-MAKING AUTHORITY TO GIVE RETROSPECTIVE EFFECT TO SUBORDINATE LEGISLATION. HOWEVER UNLESS EXPRESSLY OR BY NECESSARY IMPLICATION A CONTRARY PROVISION IS MADE NO RETROSPECTIVE EFFECT IS TO BE GIVEN TO ANY RULE SO AS TO PREJUDICIALLY AFFECT THE INTERESTS OF THE ASSESSEE. EVEN IN THE ABSENCE OF SUB-SS. (2) AND (3) OF S. 14A AND OF R. 8D THE AO WAS NOT PRECLUDED FROM MAKING APPORTIONMENT. SUCH A N APPORTIONMENT WOULD HAVE TO BE MADE IN ORDER TO GIV E EFFECT TO THE SUBSTANTIVE PROVISIONS OF SUB-S. (1) OF S. 1 4A WHICH PROVIDE THAT NO DEDUCTION WOULD BE ALLOWED IN RESPE CT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE CHANGE WHICH IS BROUGHT ABOUT BY THE INSERTION OF SUB-SS (2) AND (3 ) INTO S. 14A BY THE FINANCE ACT OF 2006 W.E.F. 1ST APRIL 2007 I S THAT IN A SITUATION WHERE THE AO IS NOT SATISFIED WITH THE CO RRECTNESS OF THE CLAIM OF THE ASSESSEE IN REGARD TO THE EXPENDIT URE INCURRED BY IT IN RELATION TO THE NON-TAXABLE INCOME THE AO WOULD HAVE TO FOLLOW THE METHOD WHICH IS PRESCRIBED BY THE RUL ES. THE AMENDMENT RULES WERE NOTIFIED TO COME INTO FORCE ON 24TH MARCH 2008. IT IS A TRITE PRINCIPLE OF LAW THAT TH E LAW WHICH WOULD APPLY TO AN ASSESSMENT YEAR IS THE LAW PREVAI LING ON THE FIRST DAY OF APRIL. CONSEQUENTLY R. 8D WHICH HAS B EEN NOTIFIED ON 24TH MARCH 2008 WOULD APPLY WITH EFFECT FROM AS ST. YR. 2008-09. THE RULE CONSEQUENTLY CANNOT HAVE APPLICAT ION IN RESPECT OF ASST. YR. 2002-03 WHICH IS THE YEAR UNDE R CONSIDERATION IN THIS CASE. 8.2 IN THE PRESENT CASE SINCE THE AO APPLIED THE P ROVISIONS CONTAINED IN RULE 8D WHICH ARE APPLICABLE WITH EFFE CT FROM A.Y. 2008-09 WHILE THE ASSESSMENT YEAR INVOLVED IN THIS CASE IS 2006- 07 THEREFORE WE ARE OF THE VIEW THAT THE LD.CIT(A ) WAS NOT JUSTIFIED IN CONFIRMING THE ACTION OF THE AO BY CONSIDERING THE RATIO LAID DOWN BY THE I.T.A.T. SPECIAL BENCH IN THE CASE OF M/S. DAGA CAPITAL MANAGEMENT PRIVATE LTD. 312 ITR 1 (S.B.) MUMBAI W HICH IS NOT A GOOD LAW IN VIEW OF THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE AFORESAID REFERRED TO CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA) WE THEREFORE SET ASIDE THE ORDER OF THE LD.CIT(A) AND 13 REMAND THE ISSUE BACK TO THE FILE OF THE AO FOR FRE SH ADJUDICATION BY KEEPING IN VIEW THE GUIDELINES LAID DOWN BY THE HO N'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. L TD. (SUPRA) AND DIRECT THE AO TO COMPUTE THE DISALLOWANCE IF ANY BY APPLYING A REASONABLE METHOD HAVING REGARD TO THE FACTS AND CI RCUMSTANCES OF THE CASE. 9. SINCE THE FACTS FOR THE YEAR UNDER CONSIDERATION ARE IDENTICAL TO THE FACTS INVOLVED IN THE PRECEDING YEAR THEREF ORE RESPECTFULLY FOLLOWING THE AFORESAID ORDER DATED 15 TH SEPTEMBER 2010 IN ASSESSEES OWN CASE IN I.T.A.NO.238(LUC.)/2010 WE REMAND THE ISSUE BACK TO THE FILE OF THE AO FOR FRESH ADJUDIC ATION AS WAS DIRECTED IN THE PRECEDING YEAR. 7. SO RESPECTFULLY FOLLOWING THE DECISION OF THIS BENCH OF THE TRIBUNAL IN THE CASE OF M/S. GOEL INVESTMENTS LTD. VS. THE AD DL. CIT BAREILLY (SUPRA) WE REMAND THE ISSUE BACK TO THE FILE OF THE AO FOR FRESH ADJUDICATION AFTER AFFORDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 8. NOW WE WILL DEAL WITH THE DEPARTMENTAL APPEAL IN I.T.A. NO.58/LUC/10. IN THIS APPEAL THE DEPARTMENT HAS RA ISED THE FOLLOWING GROUNDS: 1. THE COMMISSIONER OF INCOME TAX (APPEALS)-LL KA NPUR HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDIT ION OF ` 7 50 000/-- MADE UNDER THE HEAD OF PREMIUM FOR KEYMAN INSURANCE POLICY WITHOUT APPRECIATING THE FA CT THE POLICY 'ALLIANZ BAJAJ UNIT GAIN PLUS - SINGLE' IS NOT A KEYMAN INSURANCE POLICY. 14 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -II KANPUR HAS ERRED ON FACT AND IN LAW IN DELETING THE ADDITION OF ` 7 50 000/- ON ACCOUNT OF PREMIUM FOR KEYMAN INSURANCE POLICY WITHOUT APPRECIATING THE FA CT THAT THE POLICY WAS NOT TAKEN WITHIN THE GUIDELINES ISSUED BY IRDA IN REGARD TO KEYMAN INSURANCE POLICY VIDE CIRCULAR NOS. LRDA/LIFE/006/2005-06 DATED 27.04.2005 AND 036/IRDA/LIFE/JAN-2006 DATED 30.01.2006. 3. THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-II KANPUR HAS ERRED ON FACTS AND IN LAW IN DELETING T HE ADDITION OF ` 29 409/- ON ACCOUNT OF DIFFERENCE IN COMMISSION RECEIPT WITHOUT APPRECIATING THE FACT TH AT THE ASSESSEE FAILED TO FURNISH ANY EXPLANATION IN RESPE CT OF SAID DIFFERENCE. 4. THAT THE ORDER OF THE LD. COMMISSIONER OR INCOME TAX (APPEALS)-LI KANPUR BEING ERRONEOUS IN LAW AND ON FACTS BE VACATED AND THE ORDER U/S 143(3) OF INCOM E TAX ACT 1961 DATED 10.12.2007 PASSED BY THE ASSESSING OFFICER BE RESTORED. 5. THAT THE APPELLANT CRAVES LEAVE TO MODIFY ANY OF THE GROUNDS OF APPEAL MENTIONED ABOVE AND/OR TO ADD ANY FRESH GROUNDS AS AND WHEN IT IS REQUIRED TO DO SO. 9. VIDE GROUND NO. 1 AND 2 THE GRIEVANCE OF THE DEP ARTMENT RELATES TO THE DELETION OF ADDITION OF ` .7 50 000/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF PREMIUM FOR KEYMAN INSURANCE POLICY. 10. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDINGS NOTICED THAT THE ASSESSEE HAD DEBITED 15 A SUM OF ` 7 93 959/- UNDER THE HEAD INSURANCE. HE ASKED THE ASSESSEE TO EXPLAIN THOSE INSURANCE EXPENSES. VIDE REPLY DATED 11/10/2007 THE ASSESSEE SUBMITTED THAT ` 7.50 000/- HAD BEEN PAID BY THE ASSESSEE FIRM FOR KEYMAN POLICY TAKEN FROM BAJAJ ALIANZE AND LIFE INSURANCE. THE ASSESSING OFFICER POINTED OUT THAT THE POLICY WAS T AKEN IN THE NAME OF MR. RAJEEV KUMAR AGARWAL AND NOT SHRI RAKESH KUMAR AGAR WAL WHO IS THE PROPRIETOR OF THE ASSESSEE FIRM AND THE DATE OF BIR TH OF THE ASSESSEE AS PER RETURN OF INCOME IS 25/09/1950 WHEREAS THE DATE OF BIRTH OF THE POLICY HOLDER IS 05/04/1968. THE ASSESSEE POINTED OUT THA T THE EVIDENCE FOR THIS NEW KEYMAN POLICY TAKEN FROM BAJAJ ALLIANZ LIFE INS URANCE COMPANY REVEALED THAT IT WAS A BONAFIDE EXPENDITURE AND SPE NT FOR THE SMOOTH RUNNING OF THE BUSINESS WHICH IS FULLY ALLOWABLE UN DER THE PROVISIONS OF THE I.T. ACT 1961. HOWEVER THE ASSESSING OFFICER DID NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE AND DISALLOWED A SUM OF ` 7 50 000/- AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE. 11. THE ASSESSEE CARRIED THE MATTER TO LEARNED CIT( A) WHO ALLOWED THE CLAIM OF THE ASSESSEE BY STATING THAT HE HAD VERIFI ED THE FACT THAT SHRI RAJEEV KUMAR AGARWAL IS KEY EMPLOYEE OF THE BUSINES S OF THE ASSESSEE 16 AND KEYMAN INSURANCE WAS TAKEN ON HIM AND NOT ON TH E ASSESSEE. NOW THE DEPARTMENT IS IN APPEAL. 12. THE LEARNED D. R. SUPPORTED THE ORDER OF THE AS SESSING OFFICER WHILE THE LEARNED COUNSEL FOR THE ASSESSEE IN HIS RIVAL SUBMISSIONS REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. 13. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND THE MATERIAL ON RECORD IT IS NOTICED FROM THE COPY OF THE KEYMAN INSURANCE PO LICY PLACED AT PAGE NO. 1 OF THE DEPARTMENTAL PAPER BOOK THAT THE POLIC Y WAS TAKEN ON BEHALF OF SHRI RAJEEV KUMAR AGARWAL EMPLOYEE OF THE ASSES SEE WHOSE DATE OF BIRTH IS 05/04/68 AND THE POLICY HOLDER IS M/S RAKE SH KUMAR RAMESH CHANDRA WHO IS PROPRIETOR OF THE ASSESSEE FIRM FRO M THE ABOVE FACTS IT IS CRYSTAL CLEAR THAT THE DATE OF BIRTH WHICH WAS MENT IONED BY THE ASSESSING OFFICER AS OF THE ASSESSEE IS ACTUALLY THE DATE OF BIRTH OF THE EMPLOYEE IN WHOSE NAME POLICY WAS TAKEN AND THE POLICY HOLDER I S NOT THE EMPLOYEE BUT THE ASSESSEE THEREFORE THE CLAIM OF THE ASSES SEE WAS ALLOWABLE. IN THAT VIEW OF THE MATTER WE DO NOT SEE ANY MERIT IN THIS GROUND OF THE DEPARTMENTAL APPEAL. 17 14. THE NEXT ISSUE OF THE DEPARTMENTAL APPEAL VIDE GROUND NO. 3 RELATES TO THE DELETION OF ADDITION OF ` 29 409/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DIFFERENCE IN COMMISSION RECE IPT. 15. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDINGS ASKED THE ASSESSE E TO RECONCILE THE TDS RECEIPT WITH THE INCOME SHOWN BY HIM. THE ASSE SSEE HAD SHOWN COMMISSION FROM SAKATA INX (INDIA) LIMITED AT ` 5 02 787/- AND CLAIMED CREDIT ON TAX DEDUCTED AT SOURCE. ACCORDING TO THE ASSESSING OFFICER THE RECONCILIATION OF TDS CERTIFICATES SHOWS THAT THE T OTAL COMMISSION RECEIVED WAS ` 5 32 196/-. HE THEREFORE ADDED THE DIFFERENCE OF ` 29 409/- TO THE INCOME OF THE ASSESSEE. 16. THE ASSESSEE CARRIED THE MATTER TO LEARNED CIT( A) AND SUBMITTED THAT A CREDIT NOTE ISSUED BY THE SAKATA INX (INDIA) LIMITED INCLUDED A SUM OF ` 40 100/- WHICH WAS PAID BY THE ASSESSEE ON BEHALF O F SAKATA INX (INDIA) LIMITED FOR BANK CHARGES. THE SAID AMOUNT WAS NOT DEBITED TO THE PROFIT & LOSS ACCOUNT BUT WAS DEBITED TO THE ACCOUN T OF SAKATA INX (INDIA) LIMITED AND WHILE REMITTING BACK THE SAID AMOUNT OF ` 40 100/- TO THE ASSESSEE SAKATA INX (INDIA) LIMITED INADVERTENTLY DEDUCTED TDS OF 18 ` 2 046/- ON THIS AMOUNT ALSO. THE ASSESSEE SUBMITTE D THE COPY OF THE ACCOUNT OF SAKATA INX (INDIA) LIMITED WHERE ALL THO SE ENTRIES APPEARED. 17. THE LEARNED CIT(A) AFTER CONSIDERING THE SUBMI SSIONS OF THE ASSESSEE POINTED OUT THAT THERE WAS A MISMATCH BET WEEN THE TOTAL OF CREDIT NOTES ISSUED AND TDS CERTIFICATES ISSUED BY SAKATA INX (INDIA) LIMITED. HE ALSO POINTED OUT THAT AS PER TDS CERT IFICATES ISSUED TOTAL COMMISSION PAID WAS ` 5 32 196/- WHICH INCLUDED THE AMOUNT OF ` 40 100/- (SUPRA) AND IF THE SAID AMOUNT OF ` 40 100/- WAS DEDUCTED FROM ` 5 32 196/- THE TOTAL COMMISSION AS PER TDS CERTIFICATES CAME T O ONLY ` 4 92 096/- WHEREAS THE ASSESSEE HAD OFFERED A SUM OF ` 5 02 787/- TO TAX. HE THEREFORE DELETED THE ADDITION MADE BY THE ASSESSI NG OFFICER. 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE RESPECTIVE ORDERS PASSED BY THE ASSESSING OFFICER A ND THE LEARNED CIT (A). IT APPEARS THAT THE ASSESSING OFFICER WITHOU T APPRECIATING THE FACTS MADE THE IMPUGNED ADDITION WHILE THE LEARNED CIT (A ) AFTER PROPER VERIFICATION OF THE FACTS FROM THE RECORD CAME TO THE CONCLUSION THAT THE ASSESSEE HAD OFFERED THE EXCESS AMOUNT ON ACCOUNT O F COMMISSION AT ` 5 02 787/- INSTEAD OF ` 4 92 096/-. WE THEREFORE CONSIDERING THE TOTALIT Y 19 OF THE FACTS DO NOT SEE ANY INFIRMITY IN THE ORDER OF THE LEARNED CIT (A) ON THIS ISSUE. ACCORDINGLY WE DO NOT SEE ANY MERIT I N THE GROUND RAISED BY THE DEPARTMENT ON THIS ISSUE. 19. GROUND NO. 4 AND 5 OF THE APPEAL ARE GENERAL AN D DO NOT REQUIRE ANY SPECIFIC ADJUDICATION AT OUR END. 20. IN THE RESULT THE APPEAL OF THE ASSESSEE IS AL LOWED FOR STATISTICAL PURPOSES WHILE THAT OF THE DEPARTMENT IS DISMISSED. (ORDER PRONOUNCED IN THE OPEN COURT ON 28/02/2011) SD/. ( H. L. KARWA ) VICE PRESIDENT SD/. (N. K. SAINI) ACCOUNTANT MEMBER DATED: 28/02/2011 *SINGH COPY FORWARDED TO THE: - 1. APPELLANT. 2. RESPONDENT. 3. CIT (A) 4. CIT 5. DR. ASSISTANT REGISTRAR