Goel Investments Limited, Bareilly v. Addl. CIT, Bareilly

ITA 238/LKW/2010 | 2006-2007
Pronouncement Date: 15-09-2010 | Result: Allowed

Appeal Details

RSA Number 23823714 RSA 2010
Assessee PAN AAACG5286F
Bench Lucknow
Appeal Number ITA 238/LKW/2010
Duration Of Justice 5 month(s) 7 day(s)
Appellant Goel Investments Limited, Bareilly
Respondent Addl. CIT, Bareilly
Appeal Type Income Tax Appeal
Pronouncement Date 15-09-2010
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 15-09-2010
Date Of Final Hearing 15-09-2010
Next Hearing Date 15-09-2010
Assessment Year 2006-2007
Appeal Filed On 07-04-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL B - BENCH LUCKNOW. BEFORE SHRI H.L.KARWA HON'BLE VICE PRESIDENT AND SHRI N.K.SAINI ACCOUNTANT MEMBER I.T.A.NO.238(LUC.)/2010 A.Y. : 2006-07 M/S. GOEL INVESTMENTS LTD. VS. THE ADDL.CIT RANGE I 13 CIVIL LINES BAREILLY. BAREILLY. PAN AAACG5286F (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI AKSHYA KUMAR GUPTA C.A. RESPONDENT BY : MRS. SHEFALI SWARUP D.R. O R D E R PER N.K.SAINI ACCOUNTANT MEMBER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE O RDER DATED 9.12.2009 OF THE LD.CIT(A) BAREILLY. THE EFFECTIVE GROUND RAISED IN THIS APPEAL READS AS UNDER : LD.ADDL.COMMISSIONER OF INCOME-TAX (ADDL.CIT) HAS ERRED IN LAW AND ON FACTS IN INVOKING THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT 1961 AND IN MAKING THE ADDITION OF RS.13 91 511. 2. THE FACTS OF THE CASE IN BRIEF ARE THAT THE AS SESSEE IS A PUBLIC COMPANY ENJOYING INCOME FROM LEASING FINANCE AND I NVESTMENT BUSINESS. THE ASSESSEE FURNISHED RETURN OF INCOME ON 30.11.2 006 DECLARING A TOTAL INCOME OF RS.63 07 481. THE SAID RETURN WAS PROCESS ED UNDER SECTION 143(1) ON 13.9.2007. LATER ON THE CASE WAS SELECTE D FOR SCRUTINY. THE AO DURING THE ASSESSMENT PROCEEDINGS NOTICED THAT THE ASSESSEE HAD RECEIVED INCOME OF RS.60 27 520 AS DIVIDEND FROM SHARES OF M/S. DHAMPUR SUGAR 2 MILLS BUT CLAIMED IT AS EXEMPT FROM TOTAL INCOME O FFERED FOR TAXATION. THE AO ASKED THE ASSESSEE TO PROVIDE DETAILS OF EXEMPT INCOME FROM DIVIDEND INCOME ALONGWITH DETAILS OF EXPENSES INCURRED ON R EALIZING DIVIDEND INCOME. IN COMPLIANCE TO THAT THE ASSESSEE SUBMITT ED THAT ANY EXPENDITURE IN RESPECT OF DIVIDEND INCOME EARNED DURING THE YEAR HAD NOT BEEN INCURRED. THE CONTENTION OF THE ASSESSEE WAS EXAMINED BY THE AO WITH RELEVANT AUDITED BOOKS OF ACCOUNT AND OTHER DETAILS. HE DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE BY OBSERVING THAT THE EXPENDITURE R EFLECTED IN PROFIT AND LOSS ACCOUNT UNDER VARIOUS HEADS ENVISAGED THE PORTION O F EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH WAS NOT DIRECTLY AT TRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. HE THEREFORE REJECTED THE CLAI M OF THE ASSESSEE THAT NO EXPENDITURE HAD BEEN INCURRED IN RELATION TO THE DI VIDEND INCOME. THE AO MADE THE DISALLOWANCE OF RS.13 91 511 BY OBSERVING AS UNDER : THE DISALLOWANCE OF PROPORTIONATE EXPENSES FOR E ARNING OF DIVIDEND INCOME IS CALCULATED WITH FORMULA AS UNDER : 1. A X B/C WHERE A = AMOUNT OF AVERAGE EXPENDITURE BY WAY OF INTEREST; B = THE AVERAGE OF VALUE OF INVESTMENT INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS A PPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN TH E BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. 2. AN AMOUNT EQUAL TO ONE-HALF PERCENT OF AVERAGE OF THE VALUE OF INVESTMENT INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE OR THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. 3 3. THUS FOLLOWING THE FORMULA THE CALCULATION OF DI SALLOWABLE EXPENDITURE NOT RELATED WITH INCOME FORMING PART OF THE TOTAL INCOME IS MADE AS UNDER : 1. INCOME CLAIMED EXEMPT RS.60 27 520 A= TOTAL INTEREST PAID AS RS.7 61 314 C= AVERAGE VALUE OF TOTAL ASSETS RS.24 08 63 832 B = AVERAGE VALUE OF INVESTMENT RS.19 57 58 088 195758088 761314 X 240863832 = 618745 DISALLOWABLE INTEREST = RS.6 18 745 ADD 2. 1/2% OF AVERAGE VALUE OF INVESTMENT = RS.9 78 79 0 AGGREGATE DISALLOWANCE OF EXPENDITURE ATTRIBUTABLE TO EARNING OF EXEMPT INCOME NOT INCLUDED IN TOTAL INCOME OF PAID FOR TAXATION. RS.15 97 535 IN VIEW OF AFORESAID DISCUSSION THE AGGREGATE DISA LLOWANCE OF EXPENDITURE IS ADDED BACK IN TO TOTAL INCOME OF ASS ESSEE. THE ASSESSEE HAS FAILED TO PROJECT THE TRUE SHARE OF TOTAL INCO ME IN SHAPE OF INHERENT EXPENSES NOT DISCLOSED IN P & L ACCOUNT. IT IS SE EN THAT THE TOTAL EXPENSES DEBITED TO P & L ACCOUNT ARE RS.13 91 511. IN THE CIRCUMSTANCES THE AGGREGATE DISALLOWANCE TO BE ADD ED BACK IS RESTRICTED TO RS.13 91 511. 3. THE ASSESSEE CARRIED THE MATTER TO THE LD.CIT( A) AND THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE LD. CIT(A) ARE REPR ODUCED VERBATIM AS UNDER: THE A.R. OF THE ASSESSEE SUBMITTED THAT - '1. LD. ADDL.CIT HAS ERRED IN INVOKING THE PROVISIO NS OF SECTION 4 14A OF THE INCOME TAX ACT 1961 IN THE FACTS AND CI RCUMSTANCES OF THE CASE. THE COMPANY EARNED DIVIDEND OF RS.60 27 520 DURING THE YEAR ON ITS INVESTMENT IN EQUITY SHARES OF M/S. DHAMPUR SUGAR MILLS LIMITED. (A) SECTION 14A OF THE ACT AS IT STOOD IN THE RELE VANT A.Y. READ AS UNDER: 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UND ER THIS CHAPTER NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDI TURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT F ORM PART OF THE TOTAL INCOME UNDER THIS ACT.' THUS THE ADDITION COULD HAVE BEEN MADE ONLY IN RES PECT OF THE EXPENDITURE WHICH HAD A RELATION TO THE INCOME WHIC H DID NOT FORM PART OF THE TOTAL INCOME DURING THE YEAR. HOWEVER THE LD. ADDL. CIT HAS FAILED TO ESTABLISH THE NEXUS OF THE EXPENDITUR E INCURRED BY THE COMPANY WITH THE EXEMPTED INCOME (DIVIDEND) AND HA S MADE AN ADDITION OF RS.13 91 511 TO THE TOTAL INCOME. THE DETAILED BREAK UP OF THE EXPENSES RS.13 91 511 DISALLOWED IS AS UNDER AS PER THE COPY OF THE PROFIT & LOSS ACCOUNT ENCLOSED HEREWITH: SALARY RS.3 14 997 INTEREST RS.7 61 314 REPAIRS RS.54 588 TRAVELLING RS.84 859 POSTAGE EXPENSES RS.11 596 STATIONERY RS.9 498 AUDIT FEE RS.7 857 PROFESSIONAL FEE RS.40 360 BAD DEBTS WRITTEN OFF RS.10 804 MISCELLANEOUS EXPENSES RS.10 040 BANK CHARGES RS.13 600 13 19 513 IT WOULD BE NOTICED BY YOUR HONOUR THAT NONE OF TH E EXPENSES WERE DIRECTLY RELATED TO THE EARNING OF THE DIVIDEND INC OME. FURTHER THE 5 APPELLANT HAD SURRENDERED AN AMOUNT OF RS.76 087/- AT THE TIME OF FURNISHING THE RETURN OUT OF AFORESAID WHICH HAS' B EEN ADDED AGAIN IN MAKING THE ADDITION. IN ANY CASE THE AMOUNT OF TOT AL EXPENSES IS RS.13 19 513/- AND NOT RS.13 91 511/-. (B) THE APPELLANT HAD EARNED INCOME FROM RENT INTE REST AND LICENSE FEE ALSO DURING THE YEAR UNDER CONSIDERATION. IT IS VERY NATURAL THAT ANY PERSON WOULD INCUR SOME SORT OF EXPENDITUR E TO MAKE THE EARNING. BY MAKING THE ADDITION OF RS.13 91 513 /- AS AFORESAID IT APPEARS THAT LD. ADDL. CIT HAS PRESU MED THAT NO EXPENDITURE HAD BEEN INCURRED TO EARN THOSE INCOME (S). (C) IN MAKING THE ADDITION LD. ADDL. CIT HAS DEVE LOPED A FORMULA TO COMPUTE THE PROPORTIONATE EXPENSES FOR EARNING T HE DIVIDEND INCOME AS GIVEN IN THE ASSESSMENT ORDER AT PAGE 2 WHICH READS AS UNDER: A X B/C WHERE A=AMOUNT OF AVERAGE EXPENDITURE BY WA Y OF INTEREST; B=THE AVERAGE VALUE OF INVESTMENT INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST D AY AND THE LAST DAY OF THE PREVIOUS YEAR; AND C=THE AVERAGE VALUE OF TOTAL ASSETS AS APPEARING I N THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. 2. AN AMOUNT EQUAL TO ONE HALF PERCENT OF AVERAGE O F THE VALUE OF INVESTMENT INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHE ET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE P REVIOUS YEAR. COPY OF THE BALANCE SHEET IS ENCLOSED FOR READY REF ERENCE. THE DIVIDEND WAS EARNED FROM THE SHARES OF DHAMPUR SUGA R MILLS LIMITED ONLY WHEREIN THE INVESTMENT WAS RS.15 46 74 008/-. IT IS SUBMITTED THAT LD. ADDL. CIT HAS NOT GIVEN AN Y BASIS FOR THIS FORMULA. THE LD. ADDL. CIT HAS NO JURISDICTION OR POWER TO EVOLVE OR APPLY SUCH FORMULA IN RELEVANT ASSESSMENT YEAR. AS PER 6 SECTION 14A HE HAS SIMPLY TO DISALLOW THE EXPENDIT URE IF ANY INCURRED IN RELATION INCOME WHICH DOES NOT FORM PA RT OF TOTAL INCOME. THE INTEREST PAID DURING THE YEAR OF RS.7 61 314 I S ON BORROWINGS MADE IN EARLIER YEARS AND THE SAME HAS BEEN ALWAYS ALLOWED AS BUSINESS EXPENSES AGAINST INCOME FROM RENTS INTERE ST AND OTHER INCOMES. THESE DO NOT PERTAIN TO INVESTMENTS AND SH ARES. SO FAR OTHER EXPENSES ARE CONCERNED THESE ARE NORMAL ADMINISTRA TIVE AND STATUTORY EXPENSES AND CANNOT HAVE ANY RELATION TO DIVIDEND I NCOME. FURTHER BY MAKING THE ADDITION ON THE BASIS OF THE FORMULA THE LD. ADDL. CIT HAS MADE ADDITION EVEN IN RESPECT OF THOSE INVESTMENTS FROM WHICH THE APPELLANT DID NOT EARN ANY INCOME DU RING THE YEAR WHICH IS BEYOND THE LEGISLATIVE INTENTION.' 4. THE LD.CIT(A) AFTER CONSIDERING THE SUBMISSION S OF THE ASSESSEE OBSERVED THAT THE ASSESSEE RECEIVED INCOME FROM DIV IDENDS OF RS.60 27 520 DURING THE YEAR OUT OF INVESTMENT IN SHARES OF DHAM PUR SUGAR MILLS LTD. THE INVESTMENT INVOLVED WAS RS.15 46 74 008. ACCORDING TO THE LD.CIT(A) THE ASSESSEE DID NOT HAVE ANY OTHER INCOME WHICH WAS TA XABLE FROM THE SAID INVESTMENT AND THEREFORE THE PRECISE QUANTUM OF E XPENDITURE IN THE FORM OF INTEREST AND OTHER EXPENSES SUCH AS REPAIRS AND M AINTENANCE OF OFFICE STATIONERY STAFF AND MISCELLANEOUS EXPENSES ETC. W AS NOT DETERMINABLE. IN SUCH FACTS AND CIRCUMSTANCES OF THE CASE THE AO H AD DETERMINED THE QUANTUM OF EXPENDITURE RELATED TO THE EARNING OF EX EMPT INCOME IN ACCORDANCE WITH THE METHOD PRESCRIBED IN RULE 8D OF THE I.T.RULES 1962. THE LD.CIT(A) POINTED OUT THAT THE DISALLOWANCE O F CLAIM OF EXPENSES WHICH WERE RELATED TO THE INCOME NOT INCLUDIBLE I N THE TOTAL INCOME OF THE ASSESSEE WAS OF RS.13 91 511 AND THE DISALLOWANCE AS PER METHOD UNDER RULE 8D WAS WORKED OUT TO RS.15 97 535. HOWEVER T HE EXPENSES CLAIMED WERE ONLY OF RS.13 91 511. THEREFORE THE DISALLO WANCE OF CLAIM WAS RESTRICTED TO THAT EXTENT ONLY. THE LD.CIT(A) POI NTED OUT THAT THE ACTION OF 7 THE AO WAS SUPPORTED BY THE RATIO LAID DOWN IN THE RULINGS IN THE CASES OF M/S. DAGA CAPITAL MANAGEMENT PVT. LTD. 312 ITR 1 ( SB) (MUMBAI) AND CHEM INVESTMENT LTD. AND UTI (NOW AXIS BANK LTD.) INTERVENER 317 ITR 86 (ITAT)(DEL.)(SB). ACCORDINGLY THE LD.CIT(A) CON FIRMED THE ACTION OF THE AO. 5. NOW THE ASSESSEE IS IN APPEAL. 6. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ADDITION UNDER SECTION14A OF THE INCOME-TAX ACT 1961 COULD HAVE BE EN MADE ONLY IN RESPECT OF THE EXPENDITURE WHICH HAD A RELATION TO THE INCOME WHICH DID NOT FORM PART OF THE TOTAL INCOME DURING THE YEAR. HOW EVER IN THE PRESENT CASE THE AO FAILED TO ESTABLISH NEXUS OF THE EXPENDITUR E INCURRED BY THE ASSESSEE WITH THE EXEMPTED INCOME (DIVIDEND) AND HAD MADE A N ARBITRARY ADDITION OF RS.13 91 511 TO THE TOTAL INCOME. IT WAS STATED THA T THE PROVISIONS OF RULE 8D APPLIED BY THE AO ARE NOT APPLICABLE IN THE ASSESSE ES CASE SINCE THE SAID PROVISIONS ARE APPLICABLE ONLY FOR THE ASSESSMENT Y EAR 2008-09 WHILE THE ASSESSEES CASE RELATES TO ASSESSMENT YEAR 2006-07. HE THEREFORE REQUESTED TO DELETE THE ADDITION MADE BY THE AO AND CONFIRME D BY THE LD.CIT(A). RELIANCE WAS PLACED ON THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ &BOYCE MFG. CO. LTD. VS. DY. CIT (2010) 234 CTR (BOM.)1. 7. IN HIS RIVAL SUBMISSIONS THE LD.D.R. STRONGLY S UPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND FURTHER SUBMITTED THAT TH E AO HAD TAKEN A REASONABLE VIEW AND RIGHTLY MADE THE ADDITION. THER EFORE THE LD.CIT(A) WAS JUSTIFIED IN CONFIRMING THE ADDITION MADE BY THE AO . 8 8. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE THE AO INVOKED THE PROVISIONS OF SECTION 14A OF THE IN COME-TAX ACT 1961. THE SAID PROVISION READS AS UNDER : 14A. (1) FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER NO DEDUCTION SHALL BE ALLOWED IN RESPECT O F EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H 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 WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHO D AS MAY BE PRESCRIBED IF THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE H AS 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 ALREA DY 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 OF E XPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. THIS SECTION IS ENACTED TO ENSURE THAT ONLY EXPENSES I NCURRED IN RESPECT OF EARNING TAXABLE INCOME ARE ALLOWED. ALL EXPENDITURE INCURRED IN RELATION TO 9 INCOME WHICH DOES 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 TH E AMOUNT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WI TH SUCH METHOD AS MAY BE PRESCRIBED. IN THE PRESENT CASE ALTHOUGH THE A O HAS NOT ESTABLISHED THE NEXUS BETWEEN THE EXPENDITURE AND THE EXEMPTED INC OME (DIVIDEND) TO WORK OUT THE EXPENDITURE BUT FOR MAKING DISALLOWAN CE INVOKED THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RULES 1962 WHICH ARE INSERTED BY THE INCOME-TAX (FIFTH AMENDMENT) RULES 2008 W.E.F. 24.3.2008. HOWEVER AS PER THE RATIO LAID DOWN BY THE HON'BLE BOMBAY HI GH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA) THE PROVISION S OF RULE 8D ARE APPLICABLE PROSPECTIVELY AND NOT RETROSPECTIVELY. I N 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 AFORESAID RE FERRED TO ORDER (HEAD NOTE) AS UNDER : 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 PR OVISIONS FOR THEIR ENFORCEMENT: (I) SUB-SEC. (1) OF S. 14A WAS INSERTE D BY THE FINANCE ACT OF 2001 WITH RETROSPECTIVE EFFECT FROM 1ST APRI L 1962; (II) SUB-SS. (2) AND (3) WERE INSERTED IN S. 14A BY THE FINANCE ACT OF 2006 W.E.F. 1ST APRIL 2007; (III) THE PROVISO WAS INSERTED BY THE FINANCE ACT OF 2002 WITH 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. SUB-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 ITS DECISIONS IN CIT VS. INDIAN BANK LT D. AIR 1965 SC 1473 CIT VS. MAHARASHTRA SUGAR MILLS LTD. 1973 CTR (SC) 489: 10 (1971) 82 ITR 452 (SC):(1971) 3 SCC 543 AND RAJASTH AN STATE WAREHOUSING CORPORATION VS. CIT (2000) 159 CTR (SC) 132 : (2000) 242 ITR 450 (SC) THAT IN THE CASE OF A COMPOSITE AN D INDIVISIBLE BUSINESS WHICH RESULTED IN TAXABLE AND NON-TAXABLE INCOME IT WAS IMPERMISSIBLE FOR THE AO TO APPORTION THE EXPENDITU RE INCURRED IN RELATION TO SUCH BUSINESS AS 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 DECISIO NS 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 BROKE RS (P) LTD. (2010) 233 CTR (SC) 42 : (2010) 41 DTR (SC) 233 THE THEOR Y OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NO N-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 EXP ENDITURE ON RENT TAX SALARY INTEREST ETC. IN RESPECT OF WHICH ALLO WANCES ARE PROVIDED FOR. THIRDLY SUB-SS. (2) AND (3) WERE INTRODUCED B Y A LEGISLATIVE AMENDMENT BROUGHT ABOUT BY THE FINANCE ACT OF 2006. THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL OF 2006 RECOGNIZES THAT THE EXISTING PROVISIONS OF S. 14A D ID NOT PROVIDE A METHOD OF COMPUTING THE EXPENDITURE INCURRED IN REL ATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. CONSE QUENTLY THERE WAS A CONSIDERABLE AMOUNT OF DISPUTE BETWEEN THE TAXPAY ERS AND THE DEPARTMENT ON THE METHOD OF DETERMINING SUCH EXPEND ITURE. IT WAS IN VIEW OF THESE DISPUTES THAT PARLIAMENT INSERTED A N EW SUB-SEC. (2) TO PERMIT THE FRAMING OF SUBORDINATE LEGISLATION TO PR OVIDE A MANDATORY METHOD FOR THE AO TO FOLLOW IN DETERMINING THE EXPE NDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME IF THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF TH E CLAIM OF THE ASSESSEE. THE MEMORANDUM PROVIDED THAT 'THIS AMENDM ENT WILL TAKE EFFECT FROM 1ST APRIL 2007 AND WILL ACCORDINGLY A PPLY IN RELATION TO THE ASST. YR. 2007-08 AND SUBSEQUENT YEARS'. A CIRC ULAR WAS ISSUED BY THE CBDT ON 28TH DEC. 2006 ONCE AGAIN CLARIFYING T HE POSITION THAT THE AMENDMENT WOULD BE APPLICABLE 'FROM THE ASST. Y R. 2007-08 ONWARDS'. AT ANY RATE THIS CONSTRUCTION WHICH HAS B EEN PLACED ON THE AMENDMENT BOTH IN THE MEMORANDUM EXPLAINING THE PRO VISIONS OF THE FINANCE BILL OF 2006 AND IN THE CIRCULAR OF THE CBD T DT. 28TH DEC. 2006 CAN BE REGARDED AS A REASONABLE INTERPRETATION OF THE PROVISION. THE FOURTH ASPECT OF THE MATTER WHICH WOULD MERIT E MPHASIS IS THE PRINCIPLE OF LAW THAT IN DETERMINING AS TO WHETHER A RULE IN A PIECE OF 11 SUBORDINATE LEGISLATION IS TO BE REGARDED AS PROSPE CTIVE OR RETROSPECTIVE AN IMPORTANT ASPECT IS AS TO WHETHER THE RULE EMBODIES WHAT IS ESSENTIALLY A WELL KNOWN A WELL SETTLED OR WELL ACCEPTED METHOD. AS A MATTER OF FACT IN THE PRESENT CASE THE RE CAN BE NO DOUBT ABOUT THE POSITION THAT R. 8D HAS ESSENTIALLY PUT I NTO PLACE AN ARTIFICIAL METHOD OF ESTIMATING THE EXPENDITURE THAT CAN BE RE GARDED AS BEING RELATABLE TO INCOME THAT DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. BEFORE THE INSERTION OF S. 14A THERE WAS NO SPECIFIC METHOD OF DETERMINING THE EXPENDITURE INCURRED IN RELATION TO NONTAXABLE INCOME. LOOKING AT THE TOTALITY OF THE CIRCUMSTANCE S THE MEASURE OF 0.5 PER CENT PROVIDED IN R. 8D(2)(III) IS REASONABL E. HENCE WHILE THE METHOD OF COMPUTATION PROVIDED IN R. 8D IS FAIR AN D REASONABLE TO PASS MUSTER UNDER ART. 14 THE METHOD MUST TAKE EFF ECT PROSPECTIVELY. FINALLY SUB-SEC. (4) OF S. 295 EMPOWERS THE RULE-M AKING AUTHORITY TO GIVE RETROSPECTIVE EFFECT TO SUBORDINATE LEGISLATIO N. HOWEVER UNLESS EXPRESSLY OR BY NECESSARY IMPLICATION A CONTRARY P ROVISION 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 A BSENCE OF SUB-SS. (2) AND (3) OF S. 14A AND OF R. 8D THE AO WAS NOT PREC LUDED FROM MAKING APPORTIONMENT. SUCH AN APPORTIONMENT WOULD H AVE TO BE MADE IN ORDER TO GIVE EFFECT TO THE SUBSTANTIVE PRO VISIONS OF SUB-S. (1) OF S. 14A WHICH PROVIDE THAT NO DEDUCTION WOULD BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCO ME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE CH ANGE 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 IS THAT IN A SITUATION WHERE THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN REGARD TO THE EXPENDITURE INCURRED BY I T IN RELATION TO THE NON-TAXABLE INCOME THE AO WOULD HAVE TO FOLLOW THE METHOD WHICH IS PRESCRIBED BY THE RULES. THE AMENDMENT RULES WER E NOTIFIED TO COME INTO FORCE ON 24TH MARCH 2008. IT IS A TRITE PRINC IPLE OF LAW THAT THE LAW WHICH WOULD APPLY TO AN ASSESSMENT YEAR IS THE LAW PREVAILING ON THE FIRST DAY OF APRIL. CONSEQUENTLY R. 8D WHICH H AS BEEN NOTIFIED ON 24TH MARCH 2008 WOULD APPLY WITH EFFECT FROM ASST. YR. 2008-09. THE RULE CONSEQUENTLY CANNOT HAVE APPLICATION IN RESPEC T OF ASST. YR. 2002- 03 WHICH IS THE YEAR UNDER CONSIDERATION IN THIS CA SE. 12 8.2 IN THE PRESENT CASE SINCE THE AO APPLIED THE P ROVISIONS CONTAINED IN RULE 8D WHICH ARE APPLICABLE WITH EFFECT FROM A.Y. 2008-09 WHILE THE ASSESSMENT YEAR INVOLVED IN THIS CASE IS 2006-07 T HEREFORE WE ARE OF THE VIEW THAT THE LD.CIT(A) WAS NOT JUSTIFIED IN CONFIR MING 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 WHICH IS NOT A GOOD LAW IN VIEW OF THE JU DGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE AFORESAID REFERRED TO CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA) WE THEREFORE SET ASIDE T HE ORDER OF THE LD.CIT(A) AND REMAND THE ISSUE BACK TO THE FILE OF THE AO FOR FRESH 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. LTD. ( SUPRA) AND DIRECT THE AO TO COMPUTE THE DISALLOWANCE IF ANY BY APPLYING A REASONABLE METHOD HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE. 9. IN THE RESULT THE APPEAL IS ALLOWED FOR STATIST ICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 15.9.201 0. SD. SD. (H.L.KARWA) (N.K.SAINI) VICE PRESIDENT ACCOUNTANT MEMBER SEPTEMBER 15 2010. COPY TO THE : 1. APPELLANT 2. RESPONDENT 3. CIT(A) (4) CIT 5.DR. A.R. ITAT LUCKNOW. SRIVASTAVA.