M/s. Arcata Tradlink Pvt.Ltd.,, Ahmedabad v. The Income tax Officer,Ward-1(2),, Ahmedabad

ITA 1128/AHD/2009 | 2004-2005
Pronouncement Date: 29-07-2011 | Result: Partly Allowed

Appeal Details

RSA Number 112820514 RSA 2009
Assessee PAN AABCA7891H
Bench Ahmedabad
Appeal Number ITA 1128/AHD/2009
Duration Of Justice 2 year(s) 3 month(s) 15 day(s)
Appellant M/s. Arcata Tradlink Pvt.Ltd.,, Ahmedabad
Respondent The Income tax Officer,Ward-1(2),, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 29-07-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 29-07-2011
Date Of Final Hearing 29-06-2011
Next Hearing Date 29-06-2011
Assessment Year 2004-2005
Appeal Filed On 13-04-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'A' BEFORE SHRI D K TYAGI JM & SHRI A N PAHUJA AM ITA NO.1128/AHD/2009 (ASSESSMENT YEAR:-2004-05) M/S ARCATA TRADE-LINKS PVT. LTD. 91 MADHUBAN NEAR UNDERBRIDGE ELLIS- BRIDGE AHMEDABAD-380006 V/S INCOME-TAX OFFICER WARD- 1(2) AHMEDABAD PAN: AABCA 7891 H [APPELLANT] [RESPONDENT] ASSESSEE BY :- SHRI SANJAY R SHAH AR REVENUE BY:- SHRI RAVINDRA KUMAR DR O R D E R A N PAHUJA: THIS APPEAL BY ASSESSEE AGAINST AN ORDER DATED 18- 12- 2008 OF THE LD. CIT(APPEALS)-VI AHMEDABAD FOR THE ASSESSMENT YEAR 2004-05 RAISES THE FOLLOWING GROUNDS:- [1] THE LEARNED CIT(APPEALS) ERRED IN LAW AND ON FACTS IN CONFIRMING DISALLOWANCE OF RS.7 00 815/- BEING THE ELECTRICITY CHARGE S PAID TO TORRENT POWER AEC LTD. ON GROUND THAT OUT OF THE AB OVE SUM A SUM OF RS.4 19 289/- REPRESENTS PENALTY FOR INFRACTION OF LAW AND IS THUS COVERED BY EXPLANATION TO SECTION 37(1) OF THE ACT AND THAT A SUM OF RS.2 81 526/- REPRESENTS EARLIER YEAR'S EXPENSES. YO UR APPELLANT RESPECTFULLY SUBMITS THAT AN AMOUNT OF RS.4 19 819/- IS NOT PENALTY FOR INFRACTION OF LAW BUT IS THE AMOUNT OF ELECTRICITY DEMANDED BY SUPPLIER DURING THE YEAR DUE TO SLOW RUNNIN G OF METER AND THAT A SUM OF RS.2 81 526/- PERTAINS TO THE DEMAND RAISED BY ELECTRICITY COMPANY DURING THE YEAR UNDER CONSIDERATION. YO UR APPELLANT THEREFORE SUBMITS THAT THE DISALLOWANCE CONFI RMED BY LEARNED CIT (APPEALS) BE DELETED. [2] THE LEARNED CIT(APPEALS) ERRED IN LAW AND ON FACT S IN CONFIRMING THE ORDER OF LEARNED A.O. REDUCING COMPUTATION OF BE NEFIT U/S.80- HHC FROM RS.16 75 641/- CLAIMED BY THE APPELLANT TO RS. 7 94 470/- COMPUTED BY LEARNED A.O. YOUR APPELLANT SUBMITS THAT T HE LEARNED CIT (APPEALS) HAS FAILED TO APPRECIATE THE CORRECT WORKI NG GIVEN BY THE APPELLANT DURING THE COURSE OF APPELLATE PROCEEDI NGS AND ONLY WENT BY THE VERSION OF THE LEARNED A.O. WHILE DISMISSIN G THIS GROUND OF APPEAL OF THE APPELLANT. YOUR APPELLANT SUBMITS T HAT THE CORRECT AMOUNT OF DEDUCTION U/S.80-HHC AS COMPUTED BY THE APPELL ANT BE GRANTED TO IT. 2 ITA NO.1128/AHD/2009 [3] THE LEARNED CIT(APPEALS) GROSSLY ERRED IN LAW AND O N FACTS IN CONFIRMING THE DISALLOWANCE OF RS.1 52 611/- AS ATTRIBUT ABLE TO INTEREST ON BORROWED FUNDS UTILIZED FOR EARNING TAX FR EE INCOME AND RS.12 000/- TOWARDS ESTIMATED ADMINISTRATIVE EXPENSES FOR EARNING SUCH EXEMPT INCOME BY INVOKING PROVISIONS OF SECTION 14A OF THE ACT. IT IS SUBMITTED THAT THE PROVISIONS OF SECTION 14A ARE NOT APPLICABLE TO THE FACTS OF THE APPELLANT AND THAT DISAL LOWANCE MADE BY LEARNED AO AS CONFIRMED BY CIT(APPEALS) BE DELETED. YOUR APPELLANT PRAYS FOR LEAVE TO ADD ALTER AND / OR AMEND ALL OR ANY OF THE GROUNDS BEFORE THE FINAL HEARING OF APPEAL. 2. ADVERTING FIRST TO GROUND NO.1 IN THE APPEAL F ACTS IN BRIEF AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING INCO ME OF RS.49 85 020/- FILED ON 26-10-2004 BY THE ASSESSEE TRADING IN CHEMICALS AFTER BEING PROCESSED ON 14-03-2005 U/S 143(1) OF THE INCOME-TAX ACT 1961 [HEREINAFTER REFERRED TO AS TH E ACT] WAS SELECTED FOR SCRUTINY WITH THE SERVICE OF A NOTICE U/S 143(2) OF THE ACT ISSUED ON 29-07-2005.DURING THE COURSE OF ASSES SMENT PROCEEDINGS THE ASSESSING OFFICER[AO IN SHORT] NOT ICED THAT THE ASSESSEE DEBITED ELECTRICITY EXPENSES OF RS.9 13 68 5/- IN P&L ACCOUNT UNDER THE HEAD ADMINISTRATIVE & OTHER EXPE NSES AS AGAINST RS.2 79 436/- IN THE PRECEDING YEAR. ON PER USAL OF DETAILS SUBMITTED BY THE ASSESSEE THE AO NOTICED THAT TO RRENT POWER AEC LTD. RAISED A DEMAND OF RS.7 00 815/- IN RESPECT O F ELECTRICITY SERVICE NO. 858454 AT AAVAS MOURIPOZ FARM SG HIG HWAY AHMEDABAD CORPORATE OFFICE OF THE ASSESSEE-COMPANY AND BREAKUP OF THE AMOUNT WAS AS UNDER: NORMAL CHARGES RS.2 79 526 PENAL CHARGES RS.4 19 289 INCIDENTAL CHARGES RS. 2 000 -------------- RS.7 00 815 2.1 TO A QUERY BY THE AO THE ASSESSEE REPLIED THA T THE AFORESAID LIABILITY CRYSTALLISED ONLY DURING THE CURRENT YEAR & THERE WAS NO ELEMENT OF PENALTY IN THE SAID AMOUNT. HOWEVER THE AO DID NOT ACCEPT THE SUBMISSIONS OF 3 ITA NO.1128/AHD/2009 THE ASSESSEE ON THE GROUND THAT THE AMOUNT OF RS.7 00 815/- INCLUDED AMOUNT OF RS.4 19 289/- ON ACCOUNT PENALTY AS MENTIONED BY TH E ELECTRICITY COMPANY IN THEIR LETTER DATED 14.11.2006 . ACCORDINGLY THE AMO UNT OF RS.4 19 289/- PAID BY THE ASSESSEE ON ACCOUNT OF PENALTY WAS DISALLOWED BESIDES DISALLOWANCE OF RS.2 81 526/- PERTAINING TO THE PRIOR PERIOD. 3. ON APPEAL THE LD. CIT(A) UPHELD THE DISALLOWANC E IN THE FOLLOWING TERMS:- KEEPING IN VIEW THE AFORESAID FACTS CIRCUMSTANCES AND VARIOU S JUDICIAL PRONOUNCEMENTS THE FACT EMERGES THAT TORRENT POWER AEC LTD. HAS RAISED THE DEMAND OF RS.7 00 815/- AGAINST THE APPELLA NT IN RESPECT OF ELECTRICITY SERVICES AT 'AAVAS' MOURIPOZ FARM S.G. HIGHWAY ATIMEABAD WHICH IS THE APPELLANT'S CORPORATE OFFICE. CONSEQUENTLY TORRENT POWER AEC LTD. WAS SPECIFICALLY ASKED VIDE LETTER DATED 6.11.2006 TO INFORM ABOUT THE EXACT NATURE OF THE RECOVERY MADE AND WHETHER THE WHOLE AMOUNT OR IN PART OF THE SAME IS IN THE NATURE OF PEN ALTY. IN ITS REPLY DATED 14.11.2006; TORRENT POWER. AEC LTD. STATED THE BREAKU P OF THE AMOUNT OF RS.7 00 815/- SUCH AS (I.E. NORMAL CHARGES- RS.2 79 526/- ; PENAL CHARGES RS.4 19 281/- AND INCIDENTAL CHARGES RS.2 000/-). AS IS A BUNDANTLY CLEAR FROM THE EXPLANATION TO SECTION 37(1) THAT ANY EXPENDITU RE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHI BITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE. CONSEQUENTLY THE PENALTIES PA ID FOR VIOLATION OF THE LAW DURING THE COURSE OF THE CONDUCT OF THE BUSI NESS CANNOT BE REGARDED AS DEDUCTIBLE EXPENDITURE PARTICULARLY AFTER T HE INSERTION OF EXPLANATION TO SECTION 37(1) BY THE FINANCE (NO.2) ACT 1998 (CIT VS. RANE BRAKE LININGS LTD. (2001) 115 TAXMAN 367 (MAD); MALWA VANASPATI AND CHEMICALS CO. VS. CIT (1997) 225 ITR 383 (SC); SI MPLEX STRUCTURAL WORKS VS. CIT (1983) 140 ITR 782 (MP) AND PARAMJIT BHAI N AND OTHERS VS. UNION OF INDIA DATED 9-11-2005 REPORTED IN AIR 20 06 440 (SC). IT IS ALSO A FACT THAT IT WILL BE AGAINST THE PUBLIC POL ICY TO ALLOW THE BENEFIT OF DEDUCTION UNDER ONE STATUTE OF ANY EXPENDITURE INCURR ED IN VIOLATION OF THE PROVISIONS OF ANOTHER STATUTE OR ANY PENALTY IMPOSED UNDER ANOTHER STATUTE. (MADDI VENKATRAMAN & CO. (P) LTD. V. CIT 22 9 ITR 534 (SC) DATED 2.12.1997. KEEPING IN VIEW THE AFORESAID FACTS AND CIRCUMSTANCES IT IS CRYSTAL CLEAR THAT THE EXPENDITURE WHICH CAN BE DEDUCTED IS ONLY IN RESPECT OF BUSINESS CARRIED ON BY THE APPELLANT. THE PENALTY PAID FOR VIOLA TION OF LAW IN THE COURSE OF CONDUCT OF BUSINESS CANNOT BE REGARDED AS DEDUCTI BLE EXPENDITURE AS THE ASSESSEE IS EXPECTED TO CARRY ON THE BUSINE SS IN ACCORDANCE WITH THE LAW. PENALTY OR INTEREST OR FINE UN DER DIRECT TAXES IS NOT DEDUCTIBLE FOR EXAMPLE INTEREST LEVIED ON THE ASS ESSEE FOR DELAY IN 4 ITA NO.1128/AHD/2009 FILING RETURN WILL NOT BE ALLOWABLE AS A BUSINESS EXPEN DITURE AS HELD IN THE CASE OF BHARAT COMMERCE AND INDUSTRIES LTD. V. CIT (1998 ) (230 ITR 733/98 TAXMAN 151 (SC). KEEPING IN VIEW THE-AFORESAID FACTS CIRCUMSTANCES AND VARIOU S JUDICIAL PRONOUNCEMENTS IT IS ABUNDANTLY CLEAR THAT THE AFORESAI D IS COGNIZABLE OFFENCE; THE INFRINGEMENT OF LAW THEREBY THE PAYMENT IN QUESTION IS PENAL IN NATURE AND NOT AT ALL RELATE TO APPELLANT'S REGUL AR BUSINESS. WITH THE RESULT THE SAME CANNOT BE ALLOWED AS AN ALLOWABLE EXP ENDITURE UNDER THE PROVISIONS OF SECTION 37(1) OF THE INCOME-TAX ACT 1961. W ITH THE RESULT THE AMOUNT OF RS.4 19 289/-; BEING PENAL IN NATURE IS NOT ALLOWABLE IN VIEW OF EXPLANATION TO SECTION 37(1). FURTHER AS THE REMAININ G AMOUNT OF RS.2 81 526/- PERTAINS TO EARLIER PERIOD THEREBY THE SAME IS DISALLOWED. IN THE GIVEN FACTS AND CIRCUMSTANCES THE AO HAS RIGHTLY DISALLOW ED THE AMOUNT OF RS.7 00 815/- AND ADDED BACK TO THE TOTAL I NCOME OF THE APPELLANT. WITH THE RESULT THE ACTION OF THE AO IS CON FIRMED ON THIS GROUND. 4. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARNED AR ON B EHALF OF THE ASSESSEE WHILE REITERATING THEIR SUBMISSIONS BEFORE THE LEARNED CIT(A) CONTENDED THAT THE AMOUNT PAID WAS CONTRACTU AL LIABILITY AND DID NOT RELATE TO THE PRIOR YEARS LIABILITY HAVING CRYSTALLISED IN THE YEAR UNDER CONSIDERATION. HE ADDED THAT THE AMOUNT OF RS.4 19 289/- WAS NOT CHARGED BY WAY OF PENALTY. IN TER ALIA THE LD. AR RELIED ON DECISION IN CIT VS. JK COTTON SPINNING & WEAVING MILLS LTD.123 ITR 911(ALL.) THE LEARNED DR ON THE OTHER HAND SUPPORTED THE FINDINGS OF THE LD. CIT(A) AND POINTED OUT THAT THEFT OF ELECTRICITY BEING CRIMINAL OFFENCE UNDER THE GUJRAT ELECTRICITY ACT THE AMOUNT OF RS.4 19 289/- COULD NOT BE ALLOWED IN VIEW OF EX PLANATION TO SEC. 37(1) OF THE ACT INSERTED BY THE FINANCE ACT 1998 W .E.F 1.4.1962. SINCE THE DECISION RELIED UPON BY THE AR WAS RENDER ED PRIOR TO INSERTION OF EXPLANATION TO SEC. 37(1) OF THE ACT THE SAID DECISION WAS NOT APPLICABLE. HE ADDED THAT THERE WAS NOTHING TO SUGGEST THAT LIABILITY OF RS.2 81 526/- CRYSTALLISED IN THE YEAR UNDER CONSID ERATION. 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS WELL AS THE DECISION RELIED UPON BEFORE US BY THE LEARNED AR. THE ISSUE BEFORE US RELATES TO DISALLOWANCE O F RS.4 19 289 5 ITA NO.1128/AHD/2009 STATED TO BE PENAL CHARGES AND AN AMOUNT OF RS. 2 81 5 26/- ON ACCOUNT OF ELECTRICITY CHARGES FOR THE EARLIER YEARS. INDISPUTABLY THE AO DISALLOWED THE AMOUNT IN THE LIGHT OF REPLY OF THE ELECTRICITY COMPA NY IN THEIR LETTER DATED 14.11.2006 . THE LD. CIT(A) UPHELD THE DISALLOWANCE OF RS.4 19 289 /- ON THE GROUND THAT THE PENALTY PAID FOR VIOLATION OF LAW I N THE COURSE OF CONDUCT OF BUSINESS CANNOT BE REGARDED AS DEDUCTIBLE EXPENDITURE IN VIEW OF EXPLANATION TO SEC. 37(1) OF THE ACT. WE FIND THAT NEITHER THE AO NO R THE LD. CIT(A) ANALYSED THE RELEVANT PROVISIONS OF THE GUJRAT ELECTRICTY ACT IN ORDER TO ASCERTAIN AS TO WHETHER OR NOT THE AMOUNT OF RS.4 19 289/- CHARGED WAS COMPENSATORY OR PENAL IN NATURE. EVEN IF IT RELATED TO SOME OFFENC E THE RELEVANT PROVISIONS HAVE NOT EVEN BEEN IDENTIFIED. THE COPIES OF RELEVANT PA GES PLACED AT PAGE 27 TO 33 OF THE PAPER BOOK ARE IN GUJRATI AND DESPITE REQUEST THE IR ENGLISH TRANSLATION HAS NOT BEEN PLACED BEFORE US. IN THESE CIRCUMSTANCES IT IS NOT EVIDENT AS TO WHETHER THE AMOUNT LEVIED IS COMPENSATORY OR PENAL IN NATURE OR RELATED TO SOME OFFENCE. EVEN THE COPY OF REPLY FILED BY THE ASSESSEE BEFORE THE ELECTRICITY AUTHORITIES IN RESPONSE TO THEIR SHOWCAUSE NOTICE HAS NOT BEEN MADE AVA ILABLE. 5.1 IN MAHALAKSHMI SUGAR MILLS CO. V. CIT [1980] 12 3 ITR 429 HONB;E APEX COURT AFTER ANALYSING THE PROVISIONS OF THE SUGARCANE CESS ACT 1956 CONCLUDED THAT INTEREST PAID UNDER SECTION 3(3) BY THE DEFAULTER FOR DELAYED PAYMENT OF THE CESS COULD NOT BE DESCRIBED AS A PENALTY IMPOSED UPON HIM FOR INFRINGEMENT OF THE LAW. 5.2 IN CIT V. HYDERABAD ALLWYN METAL WORKS LTD. [1988] 172 ITR 113 A DIVISION BENCH OF THE HONBLE ANDHRA PRADESH HIGH COUR T HAD TO DECIDE TWO QUESTIONS (1) WHETHER THE DAMAGES PAID BY THE RESPONDE NT-ASSESSEE UNDER SECTION 14B OF THE EMPLOYEES' PROVIDENT FUNDS AND MISCELL ANEOUS PROVISIONS ACT 1952 WAS AN ALLOWABLE DEDUCTION UNDER SECTION 37( 1) OF THE INCOME-TAX ACT AND (II) WHETHER THE INTEREST PAID UNDER THE BOMBAY SALES TAX ACT FOR DELAYED PAYMENT OF SALES TAX THEREUNDER WAS AN ALLOWABLE DEDUCT ION UNDER SECTION 37(1) OF THE INCOME-TAX ACT. FOR DECIDING QUESTION (I) THE D IVISION BENCH REFERRED TO THE VIEW OF A. P. SEN J. OF THE HONBLE SUPREME C OURT FOUND IN A PASSAGE OF HIS CONCURRING JUDGMENT IN ORGANO CHEMICAL INDUSTRIES V. UN ION OF INDIA AIR 1979 6 ITA NO.1128/AHD/2009 SC 1803 ; [1979] 55 FIR 283 304 ON THE EXPRESSION ' DAMAGES' OCCURRING IN SECTION 14B OF THE CENTRAL ACT OF 1952 WHICH READS TH US (AT PAGE 118 OF 172 ITR ) : ' THE EXPRESSION 'DAMAGES' OCCURRING IN SECTION 14B IS IN SUBSTANCE A PENALTY IMPOSED ON THE EMPLOYER FOR THE BREACH OF THE STATUTORY OBLIGATION. THE OBJECT OF IMPOSITION OF PENALTY UNDER SECTION 14B IS NOT MERELY 'TO PROVIDE COMPENSATION FOR THE EMPLOYEES'. WE ARE CLEARLY OF THE OPINION THAT THE IMPOSITION OF DAMAGES UNDER SECTION 14B SERVES BOTH THE PURPOSES. IT IS MEANT T O PENALISE DEFAULTING EMPLOYERS AS ALSO TO PROVIDE REPARATION FOR THE AMOUNT O F LOSS SUFFERED BY THE EMPLOYEES. IT IS NOT ONLY A WARNING TO EMPLOYERS IN GENER AL NOT TO COMMIT A BREACH OF THE STATUTORY REQUIREMENTS OF SECTION 6 BUT A T THE SAME TIME IT IS MEANT TO PROVIDE COMPENSATION OR REDRESS TO THE BENEFICIARIES I.E. TO RECOMPENSE THE EMPLOYEES FOR THE LOSS SUSTAINED BY THEM. THERE IS NOTHIN G IN THE SECTION TO SHOW THAT THE DAMAGES MUST BEAR RELATIONSHIP TO THE LOSS WHI CH IS CAUSED TO THE BENEFICIARIES UNDER THE SCHEME. THE WORD 'DAMAGES' IN SE CTION 14B IS RELATED TO THE WORD 'DEFAULT'. THE WORDS USED IN SECTION 14B ARE 'DEFAULT IN THE PAYMENT OF CONTRIBUTION' AND THEREFORE THE WORD 'DEFAULT' MUST BE CONSTRUED IN THE LIGHT OF PARA. 38 OF THE SCHEME WHICH PROVIDES THAT THE PAYMENT O F CONTRIBUTION HAS GOT TO BE MADE BY THE 15TH OF THE FOLLOWING MONTH AND T HEREFORE THE WORD 'DEFAULT' IN SECTION 14B MUST MEAN 'FAILURE IN PERFORMANCE' OR 'FAIL URE TO ACT'. AT THE SAME TIME THE IMPOSITION OF DAMAGES UNDER SECTION 14B IS TO PROVIDE REPARATION FOR THE AMOUNT OF LOSS SUFFERED BY THE EMPLOYEES. 5.21 ACCORDINGLY HONBLE AP HIGH COURT HELD THAT D AMAGES PAID BY THE CONCERNED ASSESSEE-RESPONDENT COULD NOT HAVE BEEN TREATED BY THE TRIBUNAL AS PURELY COMPENSATORY. WHILE RECORDING SUCH FINDING THE R EAL DISTINCTION THAT EXISTS BETWEEN AN IMPOST WHICH IS COMPENSATORY AND AN IMPOST WHI CH IS A PENALTY IS POINTED OUT THUS (AT PAGE 119 OF 172 ITR): 'THE QUESTION WHETHER ANY SUCH IMPOST IS IN ESSENCE COMPENSAT ORY OR IS BY WAY OF PENALTY WILL HAVE TO BE DECIDED HAVING REGARD TO TH E RELEVANT PROVISIONS OF THE LAW UNDER WHICH IT IS IMPOSED AND THE CIRCUMSTANCES UNDER W HICH IT HAS BEEN IMPOSED. THE MERE NOMENCLATURE AS INTEREST PENALTY OR DA MAGES IN THE ACT MAY NOT BE CONCLUSIVE FOR THE PURPOSE OF ALLOWING IT AS A DED UCTION UNDER THE INCOME- TAX ACT. SIMILARLY THE CIRCUMSTANCE THAT A FIXED RATE OF I NTEREST HAS TO BE PAID ALSO MAY NOT BE CONCLUSIVE. SECTION 14B OF THE ACT PROVIDES FOR LEVY OF DAMAGES FOR DELAYED PAYMENT AS A PERCENTAGE OF THE AMOUNT DUE UP T O A PRESCRIBED MAXIMUM. SUCH DETERMINATION IS TO BE DONE BY THE APPROP RIATE AUTHORITY AFTER GIVING AN OPPORTUNITY TO THE EMPLOYER. THUS THE LEVY W ILL BE BY A SPEAKING ORDER OF THE AUTHORITY FIXING QUANTUM OF DAMAGES. AS HELD BY T HE SUPREME COURT THE SAID AMOUNT COMPRISES BOTH AN ELEMENT OF PENAL LEVY AS WEL L AS COMPENSATORY PAYMENT. IT WILL BE FOR THE AUTHORITY UNDER THE INCOM E-TAX ACT TO DECIDE WITH REFERENCE TO THE PROVISIONS OF THE EMPLOYEES' PROVIDENT FUNDS ACT AND THE REASONS GIVEN IN THE ORDER IMPOSING AND QUANTIFYING THE DAMAGES TO DETERMINE WHAT PROPORTION SHOULD BE TREATED AS PENAL AND WHAT PROPORTION AS 7 ITA NO.1128/AHD/2009 COMPENSATORY. THE ENTIRE SUM CAN NEITHER BE CONSIDERED AS M ERE PENALTY NOR AS MERE INTEREST.' THEN DEALING WITH QUESTION (II) RELA TING TO INTEREST PAID BY THE CONCERNED RESPONDENT-ASSESSEE UNDER THE BOMBAY SALES TAX ACT W HICH THE TRIBUNAL HAD TREATED AS AN ALLOWABLE DEDUCTION UNDER SECTION 37(1) OF THE INCOME-TAX ACT THE DIVISION BENCH CONSIDERED THE RELEVANT PROVISIONS OF THE BOMBAY SALES TAX ACT BEARING ON THE QUESTION AND HELD THUS ( AT PAGE 121 OF 172 ITR) : ' FROM A READING OF THE AFORESAID PROVISION AND IN THE BACKGROUND OF THE VARIOUS SECTIONS MENTIONED ABOVE IT CANNOT BE SAID THAT THE LEVY UNDER SECTION 36(3) THOUGH CALLED A PENALTY IS MERELY COMPENSAT ORY OR IN THE SHAPE OF INTEREST FOR DELAYED PAYMENT OR PENAL IN CHARACTER. THE ACT DOES NOT PROVIDE FOR AUTOMATIC PAYMENT OF INTEREST DUE TO DELAY IN PAYMENT. THE LEVY UNDER SUB- SECTION (3) OF SECTION 36 IS TO BE MADE AFTER GIVING NOTI CE TO THE DEALER AND AFTER RECORDING REASONS FOR IT WHERE THE TAX HAS NOT BEEN PAI D WITHIN THE TIME CONTEMPLATED FOR PAYMENT BY THE ACT. THE COMMISSIONER H AS ALSO THE POWER TO REMIT THE WHOLE OR ANY PART OF THE INTEREST CALCULATED IN THE MANNER MENTIONED IN IT WHICH CAN BE ONLY ON RELEVANT GROUNDS. SUB-SECTION (5) OF SECTION 36 WHICH IS EXTRACTED ABOVE INDICATES THAT AFTER THE LEVY OF THIS AM OUNT UNDER SUB-SECTION (3) IMMUNITY IS GRANTED FROM PROSECUTION ON THE SAME FA CTS. THESE INDICATE THAT THE IMPOSITION THOUGH CALLED A PENALTY IS A COMPOSITE O NE COMPRISING BOTH A PENALTY AND A COMPENSATION FOR DELAYED PAYMENT. THE TR IBUNAL THEREFORE WAS NOT RIGHT IN TREATING THE ENTIRE PAYMENT AS MERELY INT EREST FOR DELAYED PAYMENT. AS ALREADY INDICATED WHILE DISCUSSING QUESTION NO. (1) THE N OMENCLATURE OF THE LEVY AS INTEREST DAMAGES OR PENALTY MAY NOT BE CONCLUSIVE.' 5.3 A SIMILAR VIEW WAS TAKEN BY THE HONBLE APEX COU RT IN PRAKASH COTTON INDUSTRIES LTD. VS. CIT (1993) 201 ITR 684 (SC) WHER EIN IT WAS HELD THAT WHENEVER ANY STATUTORY IMPOST PAID BY AN ASSESSEE BY WAY OF DAMAGES OR PENALTY OR INTEREST IS CLAIMED AS AN ALLOWABLE EXPENDIT URE UNDER SECTION 37(1) OF THE ACT THE ASSESSING AUTHORITY IS REQUIRED TO EXAMINE T HE SCHEME OF THE PROVISIONS OF THE RELEVANT STATUTE PROVIDING FOR PAYME NT OF SUCH IMPOST NOTWITHSTANDING THE NOMENCLATURE OF THE IMPOST AS GIVE N BY THE STATUTE TO ASCERTAIN AS TO WHETHER IT IS COMPENSATORY OR PENAL IN N ATURE. THE AUTHORITY HAS TO ALLOW DEDUCTION UNDER SECTION 37(1) OF THE ACT WHEN EVER SUCH EXAMINATION REVEALS THE CONCERNED IMPOST TO BE PURELY COMPENSATORY I N NATURE. WHEREVER SUCH IMPOST IS FOUND TO BE OF A COMPOSITE NATURE THAT IS PARTLY OF COMPENSATORY NATURE AND PARTLY OF PENAL NATURE THE AUTHORITIES A RE OBLIGATED TO BIFURCATE THE TWO COMPONENTS OF THE IMPOST AND GIVE DEDUCTION TO THAT COM PONENT WHICH IS COMPENSATORY IN NATURE AND REFUSE TO GIVE DEDUCTION TO THAT COMPONENT WHICH IS PENAL IN NATURE. 8 ITA NO.1128/AHD/2009 6. IN THE INSTANT CASE BEFORE US AS IS EVIDENT FROM T HE AFORECITED FACTS THE AO AND THE LD. CIT(A) REFUSED TO ALLOW THE CLAIM OF RS.4 19 289/- MADE BY THE ASSESSEE UNDER SECTION 37(1) OF THE INCOME-TAX ACT WITHOU T ANY EXAMINATION OF THE SCHEME OF THE PROVISIONS OF THE GUJRAT ELECTRICITY ACT TO ASCERTAIN AS TO WHETHER OR NOT PENAL CHARGES PAID BY THE ASSESSEE WERE COMPENSATORY OR PENAL IN NATURE OR WERE COMPOSITE OR EVEN RELATED TO ANY OFFENCE COMMITTED BY THE ASSESSEE UNDER THE PROVISIONS OF GUJRAT ELECTRICITY ACT . S IMILARLY THE LD. CIT(A) REJECTED THE CLAIM OF RS. 2 81 526/- WITHOUT ASCERTAINI NG AS TO WHETHER OR NOT THE SAID LIABILITY ACTUALLY CRYSTALLISED IN THE YEAR UNDER CONSIDERATION EVEN THOUGH RELATED TO THE EARLIER YEARS. IN THESE CIRCUMSTANCES WE CONSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO HIS FILE FOR DECIDING THE CLAIM OF DEDUCTION OF AFORESAID AMOUNT OF RS.4 19 289/-& RS. 2 81 526/- RAISED IN THE GROUND NO.1 IN THE APPE AL AFRESH IN ACCORDANCE WITH LAW IN THE LIGHT OF OUR AFORESAID OBSERVATIONS AND VAR IOUS JUDICIAL PRONOUNCEMENTS INCLUDING THOSE REFERRED TO ABOVE AFTE R ALLOWING SUFFICIENT OPPORTUNITY TO BOTH THE PARTIES. NEEDLESS TO SAY THAT W HILE REDECIDING THE ISSUE THE LEARNED CIT(A) SHALL PASS A SPEAKING ORDER KEEPING I N MIND INTER ALIA THE MANDATE OF PROVISIONS OF SEC. 250(6) OF THE ACT BRINGIN G OUT CLEARLY AS TO WHETHER OR NOT AMOUNT OF RS.4 19 289/- WAS COMPENSATORY OR PENA L IN NATURE OR WAS COMPOSITE OR RELATED TO SOME OFFENCE UNDER THE GUJRAT ELECTRICITY ACT BESIDES ANALYZING AS TO WHETHER OR NOT THE LIABILITY OF RS. 2 81 526/- CRYSTALLISED IN THE YEAR UNDER CONSIDERATION. WITH THESE OBSERVATIONS GR OUND NO.1 IN THE APPEAL IS DISPOSED OF. 7. GROUND NO.2 IN THE APPEAL RELATES TO DEDUCTION U/S 80HHC ACT. THE ASSESSEE CLAIMED DEDUCTION OF RS.16 75 64 1/- U/S 80HHC OF THE ACT. THE AO NOTICED THAT PERUSAL OF THE FORM NO. 10CCAC THAT DEDUCTION WAS NOT WORKED OUT CORRECTLY TOTAL TURN OVER HAVING BEEN CLAIMED AS EXPORT TURNOVER EVEN WHEN THE ASSESSEE M ADE LOCAL SALES. MOREOVER THE ASSESSEE WORKED OUT INDIRECT COST OF RS.84 49 093/- AS AGAINST RS.92 50 349/-.IN THEIR C OMPUTATION OF INDIRECT COST THE ASSESSEE REDUCED AN AMOUNT OF R S.12 85 299/- AS COST ATTRIBUTABLE TO OTHER INCOME IN ADDITION TO 90 % OF THE INCENTIVE 9 ITA NO.1128/AHD/2009 AND OTHER INCOME REDUCED FROM THE TOTAL BUSINESS IN COME. ACCORDINGLY THE AO COMPUTED DEDUCTION OF RS. 7 95 470/-U/S 80HHC AS PER WORKING IN PARA 3 OF THE ASSESSMENT O RDER RESULTING IN DISALLOWANCE OF RS.8 81 171/-. 8. ON APPEAL THE ASSESSEE VIDE THEIR SUBMISSIONS DATED 11-10- 2008 STATED THAT THE ASSESSEE WAS ELIGIBLE FOR DEDUCTION U/S.80HHC FOR A SUM OF RS.12 90 051/- .WHILE REFERRING TO PROVISIONS OF SEC. 80HHC OF THE ACT THE ASSESSEE INTER ALIA RELIED UPON DECISIONS IN HINDUSTAN LE VER LTD. V. CIT 239 ITR 297(SC); CIT V. STERLING FOODS 237 ITR 579(SC); PANDIAN CHEMICALS LTD. V. CIT 262 ITR 278 (SC) CAMBAY ELECTRIC SUPPLY INDUSTRI AL CO. LTD. VS. CIT (1978) 113 ITR 84 (SC);. ABAD ENTERPRISES V. CIT (2002) 253 ITR 319 (KER); CIT V. JOSE THOMAS (2002) 170 TAXATION 176 (KER) 336; TRACO CABLE CO. LTD. V. CIT (1969) 72 ITR 503 (KER);. CIT V. PAREKH BROS. (2002) 253 ITR 43 (KER); COLLIS LINE (P) LID. Y. HO (1982) 135 IIR 390 (KER) AND SRI MAHALAKS HMI FLOOR MILLS V. ACIT (2002) 77 TTJ(BANG-TRIB) 1009. IN THE LIGHT OF SUBMISSI ONS OF THE ASSESSEE THE LD. CIT(A) CONCLUDED AS UNDER: WHEN THE AFORESAID IS CONSIDERED VIS-A-VIS THE FACTS AND CI RCUMSTANCES OF THE GROUND OF APPEAL UNDER CONSIDERATION THE FACT EME RGES THAT THE APPELLANT HAS ALSO MADE LOCAL SALES. CONSEQUENTLY AS STATE D BY THE APPELLANT THE EXPORT TURNOVER OF RS.8 12 01 807/- IS N OT-CORRECT. FURTHER AS AGAINST RS.92 50 349/- THE APPELLANT HAS WORKED O UT THE INDIRECT COST AT RS.84 49 093/- BECAUSE WHILE COMPUTING INDIRECT COST; THE APPELLANT HAS REDUCED THE AMOUNT OF RS.12 85 299/-AS COST ATTRIBUTA BLE TO OTHER INCOME WHICH IS IN ADDITION TO 90% OF THE INCENTIVE AND OTHER INCOME RECEIVED FROM TOTAL BUSINESS INCOME. IN THIS WAY THE APPE LLANT HAS ALREADY REDUCED THE TOTAL EXPENDITURE FROM INDIRECT EXPENSES. FU RTHER GRANTING OF EXPENDITURE BY ADOPTING 90% OF SUCH SUM IS IN FACT IN THE NATURE OF GRANTING ADDITIONAL CREDIT WHICH IS TOTALLY INCORRECT. KEEPING IN VIEW THE AFORESAID FACTS AND CIRCUMSTANCES AND VARIOUS JUDICIAL PRONO UNCEMENTS THE ASSESSING OFFICER HAS RIGHTLY RECOMPUTED THE DEDUCTION U/S. 80HHC OF THE INCOME-TAX ACT 1961 AS ABOVE AND HAS RIGHTLY DISALLOW ED THE EXCESS DEDUCTION RS.8 81 771/-. WITH THE RESULT THE ACTION OF THE ASSESSING OFFICER IS CONFIRMED ON THIS GROUND. 9. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARNED AR ON B EHALF OF THE ASSESSEE WHILE REITERATING THEIR SUBMISSIONS BEFOR E THE LEARNED 10 ITA NO.1128/AHD/2009 CIT(A) INVITED OUR ATTENTION TO PAGE 6 OF THE PAPER BOOK AND CONTENDED THAT THE ASSESSEE WAS ENTITLED TO DEDUCT ION OF RS.12 90 051/- U/S 80HHC OF THE ACT. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE FINDINGS OF THE LEARNED CIT(A). TO A QUERY BY THE BENCH BOTH THE PARTIES AGREED THAT THE LD. CIT(A ) HAVING NOT RECORDED ANY FINDINGS ON THE COMPUTATION SUBMITTED BY THE ASSESSEE AS PER PAGE 6 OF THE PAPER BOOK MATTER IS REQUIRED TO BE RESTORED TO HIS FILE. 10. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. AS IS APPARENT FROM THE AFORECITED FACTS AND CIRCUMSTANCES THE LD. CIT(A) WHILE AFFIRMING THE FINDINGS OF THE AO DID NOT EVEN WHISPER ON THE COMPUTATION OF DEDUCTIO N U/S 80HHC TO THE EXTENT OF RS.12 90 051/- PLACED ON PAGE 6 OF TH E PAPER BOOK FILED BEFORE US. SINCE BOTH THE PARTIES AGREED THAT THIS COMPUTATION REQUIRES VERIFICATION WE CONSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO HI S FILE WITH THE DIRECTIONS TO READJUDICATE THE ISSUE IN THE LIGHT OF AFORESAID COMPUTATION OF DEDUCTION U/S 80HHC TO THE EXTENT OF RS.12 90 051/- PLACED ON PAGE 6 OF THE PAPER BOOK AFTER ALLOWING SUFFICIENT OPPORTUNITY TO BOTH THE PARTIES. NEEDLESS TO SAY THAT WHILE REDECIDING THE LD . CIT(A) SHALL PASS A SPEAKING ORDER IN RELATION TO CLAIM MADE BY THE ASSESSEE. WITH THESE DIRECTIONS GROUND NO.2 IN THE APPEAL IS DISPOSED OF. 11. GROUND NO.3 IN THE APPEAL RELATES TO DISALLOWAN CE U/S 14A OF THE ACT. ON PERUSAL OF RETURN THE AO NOTICED THAT ASSESSEE EARNED DIVIDEND INCOME AMOUNTING TO RS.2 07 623/- CLAIMED EXEMPT U/S. 10(34) OF THE ACT. SINCE THE ASSESSEE CLAIMED AN A MOUNT RS.16 89 517/- TOWARDS INTEREST THE AO WAS OF THE OPINION THAT PROPORTIONATE INTEREST EXPENSES WERE REQUIRED TO BE DISALLOWED AS PER PROVISIONS OF SECTION 14A OF THE ACT. IN RESPON SE TO A SHOWCAUSE NOTICE ISSUED BY THE AO THE ASSESSEE SUBMITTED THA T THERE WAS 11 ITA NO.1128/AHD/2009 FRESH INVESTMENT OF RS.20.69 LACS IN SHARES AND NO DIVIDEND INCOME WAS RECEIVED ON SUCH SHARES. THE DIVIDEND RECEIVED WAS ON OLD SHARES. SINCE THE COMPANY HAD INTEREST FREE FUNDS O F RS.10.73 LACS AND HAD NOT INCURRED ANY DIRECT EXPENSES TO EARN TH E EXEMPT INCOME NO DISALLOWANCE COULD BE MADE. HOWEVER THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE AND RELYING UPON DECISION OF THE HONBLE SUPREME COURT IN RAJASTHAN STATE WAREHOU SING CORPORATION LTD. VS. CIT 242 ITR 450(SC) DISALLOWED PROPORTIONAT E INTEREST EXPENSES AMOUNTING TO RS.1 52 611/- COMPUTED AS UNDER:- TOTAL INTEREST PAYMENT X INVESTMENT EARNING EXEMPTE D INCOME TOTAL FUNDS AVAILABLE RS.16 89 517/- X RS.61 02 450/- ---------------------------------------- = RS.1 52 611/- RS6 75 58 305/- 12. BESIDES AN AMOUNT @ RS.2 000/- PER MONTH OUT OF OTHER EXPENSES IN ORDER TO MANAGE INVESTMENTS IN TAX FREE INCOME WAS ALSO DISALL OWED RESULTING IN TOTAL DISALLOWANCE U/S 14A OF RS.1 76 111/- [RS.1 52 611/- + R S.24 000/-). 13. ON APPEAL THE ASSESSEE CONTENDED THAT THE WORD S 'IN RELATION TO EARNING EXEMPT INCOME' IN SEC. 14A MEAN THE EXPENSES WHICH ARE DIRECTLY RELATED TO EARNING EXEMPT INCOME AND NOT INDIRECT EXP ENSES AS HELD IN DY. CIT VS. M/S.ING INVESTMENT MANAGEMENT (INDIA) & WIMCO SEED LINGS PVT. LTD. VS. CIT 107 ITD 267 .BESIDES THE AMENDMENT MADE TO. THE PROVISIONS OF SECTION 14A GIVING FORMULA FOR CALCULATING DISALLOWANCE ULS.14A IS APPLICABLE PROSPECTIVELY FROM AY. 2008-09 ONWARDS AND NOT FOR EA RLIER YEARS. UNDER THE' CIRCUMSTANCES NO DISALLOWANCE COULD BE MADE THE ASSESSEE PL EADED. HOWEVER THE LD. CIT(A) DID NOT ACCEPT THESE SUBMISSIONS A ND CONCLUDED AS UNDER: KEEPING IN VIEW THE AFORESAID FACTS CIRCUMSTANCES AND VAR IOUS JUDICIAL PRONOUNCEMENTS THE FACT EMERGES THAT THE APPELLANT HAS EARNED DIVIDEND INCOME AMOUNTING TO RS.2 07 623/- DURING THE YEAR UNDE R APPEAL WHEREAS THE APPELLANT HAS CLAIMED RS.16 89 517/- ON ACCOUNT OF I NTEREST PAID AS DEDUCTION. BUT THE PROPORTIONATE INTEREST EXPENSES HAVE NOT BEEN 12 ITA NO.1128/AHD/2009 DISALLOWED.- AS IS CRYSTAL CLEAR FROM ABOVE AS PER THE PRO VISIONS OF SECTION 14A OF THE INCOME-TAX ACT 1961 THE PROPORTIONATE INT EREST AND ADMINISTRATIVE EXPENSES ARE REQUIRED TO BE DISALLOWED. I N THE GIVEN FACTS AND CIRCUMSTANCES; AS OUT OF TOTAL FUNDS AVAILABLE (I.E. R S.6 75 58 305/-) TOTAL INTEREST PAYMENT IS RS.16 89 517/-AND INVESTMENT EA RNING EXEMPTED INCOME IS RS.61 02 450/- THE ASSESSING OFFICER HAS RIGHTLY DISALLOWED THE PROPORTIONATE INTEREST EXPENSES (I.E. RS.1 52 611/-) AN D ADDED BACK TO THE TOTAL INCOME OF THE APPELLANT . AS FAR AS ADMINISTRATIVE EXPENSES INCURRED FOR EARNING EXEMPT INCOME IS CONCERNED KEEPING IN VIEW THE VOLUME SIZE AND MAGNITUDE OF THE EARNING OF THE EXEMPTED INCOME THE AO HAS RIGHTLY CAME TO THE CONCLUSION THAT THE APPELLANT MUST HAVE INCUR RED CERTAIN AMOUNTS PER MONTH TO EARN THE EXEMPTED INCOME. HOWEVER THE ESTIMATION OF THE AO AT RS.2 000/- PER MONTH TO EARN THE EXEMPT INCOME APPEARS TO BE ON HIGHER SIDE; HENCE RESTRICTED TO RS.1 0 00/- PER MONTH (I.E. RS.12 000/- FOR THE WHOLE YEAR). WITH THE RESULT THE APPEAL IS PARTLY ALLOWED ON THIS ACCOUNT . 14. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARNED AR ON B EHALF OF THE ASSESSEE WHILE REITERATING THEIR SUBMISSIONS BEFOR E THE LEARNED CIT(A) DID NOT PRESS GROUND RELATING TO DISALLOWANC E OF OTHER EXPENSES OF RS.12 000/-.AS REGARDS DISALLOWANCE OF INTEREST IT WAS PLEADED THAT NO PORTION OF BORROWED FUNDS HAVE BEEN UTILISED IN EARNING DIVIDEND INCOME THE ENTIRE BORROWINGS HAV ING BEEN UTILISED IN THE EXPORT BUSINESS. TO A QUERY BY THE BENCH T HE LD. AR SUBMITTED THAT THIS PLEA WAS NOT TAKEN BEFORE THE L D. CIT(A) AND THEREFORE MATTER IS REQUIRED TO BE RESTORED TO HIS FILE . THE LEARNED DR ON THE OTHER HAND ALSO REQUESTED THAT THE MATT ER OF DISALLOWANCE OF INTEREST IS REQUIRED TO BE RESTORED TO THE FILE OF THE LD. CIT(A) FOR READJUDICATION. 15. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. WE FIND THAT THE AO MADE AN ESTIMATED DIS ALLOWANCE OF INTEREST ON BORROWED FUNDS ON THE GROUND THAT THE ASSESSEE INVESTED IN SHARES FOR THE PURPOSE OF EARNING EXEMP T DIVIDEND INCOME. THE LD. CIT(A) MERELY UPHELD THE FINDINGS O F THE AO. THERE IS NOTHING TO SUGGEST AS TO WHETHER THE LD. CIT(A) ASCERTAINED THAT 13 ITA NO.1128/AHD/2009 THE BORROWED FUNDS INDEED HAVE BEEN UTILISED IN AC QUIRING THE AFORESAID SHARES. 15.1 WE FURTHER FIND THAT RECENTLY HONBLE BOMB AY HIGH COURT IN THEIR DECISION DATED 12.8.2010 IN CASE OF GODREJ & BOY CE MFG.CO.LTD. MUMBAI. IN THE ITA NO. 626/2010 WHILE ADJUDICATING A SIMILAR ISSUE IN THE CONTEXT OF PROVISIONS OF SEC. 14A OF THE ACT AND RULE 8D OF THE IT RULES 1962 CONCLUDED THAT RULE 8D INSERTED W.E.F 24.3.2008 CANNOT BE R EGARDED AS RETROSPECTIVE BECAUSE IT ENACTS AN ARTIFICIAL METHOD OF ESTIMATING EXP ENDITURE RELATABLE TO TAX- FREE INCOME. IT APPLIES ONLY W.E.F AY 2008-09. FOR T HE ASSESSMENT YEARS WHERE RULE 8D DOES NOT APPLY THE AO WILL HAVE TO DETERMIN E THE QUANTUM OF DISALLOWABLE EXPENDITURE BY A REASONABLE METHOD HAVIN G REGARD TO ALL FACTS AND CIRCUMSTANCES THE HONBLE HIGH COURT CONCLUDED. 15.2. HONBLE SUPREME COURT IN THEIR DECISI ON DATED 6.7.2010 IN CIT V. WALFORT SHARE & STOCK BROKERS (P.) LTD. 326 ITR 1 INT ER ALIA OBSERVED THAT FOR ATTRACTING SECTION 14A OF THE ACT THERE HAS TO BE A PR OXIMATE CAUSE FOR DISALLOWANCE WHICH IS ITS RELATIONSHIP WITH THE TAX EXE MPT INCOME. HONBLE APEX COURT OBSERVED IN THE CONTEXT OF PROVISIONS SEC.14A OF T HE ACT IN THE FOLLOWING TERMS: 17. THE INSERTION OF SECTION 14A WITH RETROSPECTIVE EFFECT I S THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT TO ALLOW DEDUCTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST THE TAXABLE INCOME ( SEE CIRCULAR NO. 14 OF 2001 DATED 22-11-2001). IN OTHER WORDS SECTION 14A CL ARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELA TABLE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSES INCURRE D BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCOME AND PARTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SECTION 14A THE EXPENDITURE INCURRED I N RESPECT OF EXEMPT INCOME WAS BEING CLAIMED AGAINST TAXABLE INCOME. THE MAND ATE OF SECTION 14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTIO N OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AND A T THE SAME TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEMPT INCOME WITHO UT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO EXEMP T INCOME. THE BASIC REASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN INCOME S ARE NOT INCLUDIBLE WHILE COMPUTING TOTAL INCOME AS THESE ARE EXEMPT UNDER CERTA IN PROVISIONS OF THE ACT. IN THE PAST THERE HAVE BEEN CASES IN WHICH DEDUCTION HAS BEEN SOUGHT IN RESPECT OF SUCH INCOMES WHICH IN EFFECT WOULD MEAN THAT T AX INCENTIVES TO CERTAIN INCOMES WAS BEING USED TO REDUCE THE TAX PAYABLE ON THE N ON-EXEMPT INCOME BY 14 ITA NO.1128/AHD/2009 DEBITING THE EXPENSES INCURRED TO EARN THE EXEMPT INCO ME AGAINST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOME I.E. GROSS INCOME MINUS THE EXPENDITURE. ON THE SAME ANALOGY THE EXEMPTIO N IS ALSO IN RESPECT OF NET INCOME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EA RNING OF TAXABLE INCOME. THIS IS THE PURPORT OF SECTION 14A. IN SECTION 14 A THE FIRST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS OF INCOME AS PRESCRIBED UNDER CHA PTER IV WOULD FALL WITHIN SECTION 14A. THE NEXT PHRASE IS 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT'. IT MEANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOME THEN THE RELATED EXPENDITURE IS OUTSI DE THE AMBIT OF THE APPLICABILITY OF SECTION 14A. FURTHER SECTION 14 SPECIFIE S FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE CHARGEABLE AN INCOME HAS TO BE BROUGHT UNDER ONE OF THE FIVE HEADS. SECTIONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR THE PURPOSE OF CHARGEABILITY TO TA X UNDER THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL INCOME CHARGEABLE T O TAX. THE PERMISSIBLE DEDUCTIONS ENUMERATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOWED ONLY WITH REFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF THE ABOVE HEADS AND IS CHARGEABLE TO TAX. IF AN INCOME LIKE DIVIDEND INCOME IS NO T A PART OF THE TOTAL INCOME THE EXPENDITURE/DEDUCTION THOUGH OF THENATURE SPECIFIED IN SECTIONS 15 TO 59 BUT RELATED TO THE INCOME NOT FORMING PART OF TOT AL INCOME COULD NOT BE ALLOWED AGAINST OTHER INCOME INCLUDIBLE IN THE TOTAL INCOME FO R THE PURPOSE OF CHARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT OF E XPENDITURES BETWEEN TAXABLE AND NON-TAXABLE HAS IN PRINCIPLE BEEN NOW WID ENED UNDER SECTION 14A. READING SECTION 14 IN JUXTAPOSITION WITH SECTIONS 15 TO 5 9 IT IS CLEAR THAT THE WORDS 'EXPENDITURE INCURRED' IN SECTION 14A REFERS TO EXPE NDITURE ON RENT TAXES SALARIES INTEREST ETC. IN RESPECT OF WHICH ALLOWANCES A RE PROVIDED FOR (SEE SECTIONS 30 TO 37) 15.3. WE ALSO FIND THAT HONBLE KERALA HIGH COUR T IN THEIR DECISION DATED 17.6.2010 IN THE CASE OF CIT VS. SMT. LEENA RAMACHANDRAN IN ITA.NO. 1784 OF 2009 HELD N THE CONTEXT OF PROV ISIONS OF SEC.14A OF THE ACT AS UNDER: 4. ON FACTS WE FIND THAT THE INTEREST PAID BY THE ASSESSE E DURING THE PREVIOUS YEAR FOR THE FUNDS BORROWED FOR ACQUISITION OF SHARES IN THE COMPANY WAS AT THE RATE OF 24% P.A. AND THE TOTAL INTEREST PAID IN THE ACCOUNTING YEAR ALONE IS AS MUCH AS RS.17 44 310/-. IT IS ON RECORD THAT ASSESSEE HAD R ECEIVED ONLY A DIVIDEND INCOME OF RS.3 LAKHS AND NO OTHER BENEFIT IS DER IVED FROM THE COMPANY FOR THE BUSINESS CARRIED ON BY IT. THE DISALLOWANCE PROHIB ITED UNDER SECTION 14A IS EXPENDITURE INCURRED FOR EARNING ANY INCOME WHICH DOE S NOT CONSTITUTE TOTAL INCOME OF THE ASSESSEE. IN OTHER WORDS ANY EXPENDITURE I NCURRED FOR EARNING ANY INCOME WHICH IS NOT TAXABLE UNDER THE ACT IS NOT AN ALLO WABLE EXPENDITURE. DIVIDEND INCOME IS EXEMPT UNDER SECTION 10(33) OF THE INCOME TAX ACT AND SO MUCH SO DIVIDEND EARNED BY THE ASSESSEE ON THE SHARES ACQUIRE D BY HER WITH BORROWED FUNDS DOES NOT CONSTITUTE TOTAL INCOME IN THE HANDS OF THE ASSESSEE. SO MUCH SO IN OUR VIEW DISALLOWANCE WAS RIGHTLY MADE BY THE ASSESSING OFFICER. IN 15 ITA NO.1128/AHD/2009 FACT THE TRIBUNAL ITSELF HAS ESTIMATED DISALLOWANCE OF RS.2 LAKHS BY APPLYING SECTION 14A. WE DO NOT KNOW HOW THE TRIBUNAL CAN RESTRI CT THE DISALLOWANCE TO RS.2 LAKHS AND ALLOW BALANCE ABOVE RS.15 LAKHS WHEN THE WH OLE BORROWED FUNDS WERE UTILISED BY THE ASSESSEE FOR PURCHASE OF SHARES IN TH E COMPANY. IN OUR VIEW THE REASONING GIVEN BY THE TRIBUNAL FOR DISALLOWANCE O F RS.2 LAKHS I.E. BY APPLYING SECTION 14A SQUARELY APPLIES FOR THE INTEREST PAID ON BORROWED FUNDS BECAUSE IT IS ON RECORD THAT THE ENTIRE FUNDS BORROWED WERE UTILI SED FOR ACQUISITION OF SHARES BY THE ASSESSEE IN THE COMPANY. IN FACT IN OUR VIEW ASSESSEE WOULD BE ENTITLED TO DEDUCTION OF INTEREST UNDER SECTION 36(1)(III) OF T HE ACT ON BORROWED FUNDS UTILISED FOR THE ACQUISITION OF SHARES ONLY IF SHARES ARE HELD AS STOCK IN TRADE WHICH ARISES ONLY IF THE ASSESSEE IS ENGAGED IN TRADING IN SHARES. SO FAR AS ACQUISITION OF SHARES IS IN THE FORM OF INVESTMENT AND THE ONLY BENEF IT ASSESSEE DERIVED IS DIVIDEND INCOME WHICH IS NOT ASSESSABLE UNDER THE ACT THE DISALLOWANCE UNDER SECTION 14A IS SQUARELY ATTRACTED AND THE ASSESSING OFFICER IN OUR VIEW RIGHTLY DISALLOWED THE CLAIM. AS ALREADY POINTED OUT THE CALCU TTA HIGH COURT DECISION WHICH PERTAINS TO THE PERIOD PRIOR TO INTRODUCTION OF SECTION 14A HAS NO APPLICATION. THE DECISION OF THE SUPREME COURT ALSO DOE S NOT APPLY BECAUSE IN THIS CASE APART FROM INVESTMENT IN SHARES OF THE COMPANY TH ERE IS NOTHING TO INDICATE THAT THE ASSESSEE'S BUSINESS WAS FULLY LINKED WITH TH E BUSINESS OF THE LEASING COMPANY OR THAT ASSESSEE'S BUSINESS IS SOLELY DEPENDEN T ON THE BUSINESS OF THE LEASING COMPANY. IN FACT THE WHOLE TRANSA CTION WAS A TOTAL FIASCO IN AS MUCH AS AS AGAINST RS.17 44 310/- PAID TOWARDS INTE REST ON BORROWED FUNDS SERVICED AT THE RATE OF INTEREST OF 24% P.A. THE DIVIDEND INCOME RECEIVED BY THE ASSESSEE DURING THE PREVIOUS YEAR WAS A MEAGRE SUM OF RS.3 LAKHS. THIS ONLY SHOWS THAT THE BUSINESS CARRIED ON BY THE LEASING COM PANY WAS NOT VERY SUBSTANTIAL TO JUSTIFY THE ASSESSEE'S INVESTMENT THROUGH B ORROWED FUNDS. THEREFORE IN OUR VIEW THE PRINCIPLE OF COMMERCIAL EXPE DIENCY GONE INTO BY THE SUPREME COURT DOES NOT APPLY TO THE FACTS OF THIS CASE. TH EREFORE WE HOLD THAT THE TRIBUNAL IN PRINCIPLE RIGHTLY HELD THAT THE UTILI SATION OF BORROWED FUNDS FOR ACQUISITION OF SHARES WILL NOT ENTITLE THE ASSESSEE FOR CLA IMING DEDUCTION OF INTEREST PAID ON SUCH BORROWED FUNDS. HOWEVER WE HOLD THAT THE TRIBUNAL WAS NOT JUSTIFIED IN ALLOWING THE CLAIM IN EXCESS OF RS.2 LAKHS. FOR THE SAME REASONING APPLIED BY THE TRIBUNAL THE ASSESSEE IS NOT ENTITLED TO DEDUCTION OF ANY AMOUNT TOWARDS INTEREST PAID ON FUNDS BORROWED BY WAY OF FIXED D EPOSITS TAKEN FOR ACQUISITION OF SHARES IN THE COMPANY WHICH HELPED TH E ASSESSEE ONLY TO EARN SOME DIVIDEND. 15.4 HONBLE PUNJAB & HARYANA HIGH COURT IN THEI R DECISION IN CIT VS. HERO CYCLES LTD. 323 ITR 518 HAVE OBSERVED THAT DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPE NDITURE AND WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITUR E HAS BEEN INCURRED DISALLOWANCE UNDER SECTION 14A CANNOT STAND. 15.5 AS ALREADY POINTED OUT SINCE THE LD. CIT( A) HAVE NOT CARED TO ASCERTAIN AS TO WHETHER OR NOT BORROWED FUNDS H AVE INDEED BEEN 16 ITA NO.1128/AHD/2009 UTILISED TOWARDS INVESTMENT IN SHARES NOR THE LD. CIT(A) HAD BENEFIT OF THE VIEW TAKEN IN THE AFORESAID DECISIONS WHILE THE LD. AR HAS NOW TAKEN A PLEA BEFORE US THAT THE ENTIRE BORROWINGS W ERE UTILISED IN THE EXPORT BUSINESS WE CONSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO HIS FILE FOR DECIDING THE ISSUE OF DISALLOWANCE OF INTEREST RAISED IN THE GROUND NO.3 IN THE APPEAL AFRESH IN ACCORDANCE WITH LAW IN THE LIGHT OF VARIOUS JUDICIAL PR ONOUNCEMENTS INCLUDING THOSE REFERRED TO ABOVE AFTER ALLOWING SUFFICIENT OPP ORTUNITY TO BOTH THE PARTIES. NEEDLESS TO SAY THAT WHILE REDECIDING THE ISSUE THE LEAR NED CIT(A) SHALL PASS A SPEAKING ORDER KEEPING IN MIND INTER ALIA THE MAND ATE OF PROVISIONS OF SEC. 250(6) OF THE ACT BRINGING OUT CLEARLY AS TO WHETHER OR NOT BORROWED FUNDS HAD INDEED BEEN UTILISED IN INVESTMENT IN SHARES FOR EARNI NG EXEMPT INCOME. WITH THESE OBSERVATIONS GROUND NO.3 IN THE APPEAL OF THE ASSESSEE IS DISPOSED OF. 16 NO ADDITIONAL GROUND HAVING BEEN RAISED BEFORE U S IN TERMS OF RESIDUARY GROUND IN THE APPEAL ACCORDINGLY THIS G ROUND IS DISMISSED. 17. NO OTHER PLEA OR SUBMISSION WAS MADE BEFORE US . 18. IN THE RESULT APPEAL IS PARTLY ALLOWED BUT FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT TODAY ON 29-07-2011 SD/- SD/- ( D K TYAGI ) JUDICIAL MEMBER ( A N PAHUJA ) ACCOUNTANT MEMBER DATED : 29-07-2011 COPY OF THE ORDER FORWARDED TO: 1. M/S ARCATA TRADELINK PVT. LTD. 91 MADHUBAN N R. UNDERBRIDGE ELLIS-BRIDGE AHMEDABAD-380006 2. ITO WARD-1(2) AHMEDABAD 3. CIT CONCERNED 4. CIT(A)-VI AHMEDABAD 17 ITA NO.1128/AHD/2009 5. DR ITAT AHMEDABAD BENCH-A AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY RE GISTRAR/ ASSISTANT REGISTRAR ITAT AHMEDABAD