M/s. Vipor Chemicals Pvt.Ltd.,, Baroda v. The A.CIT.,Circle-4,, Baroda

ITA 2537/AHD/2010 | 2007-2008
Pronouncement Date: 07-01-2011 | Result: Allowed

Appeal Details

RSA Number 253720514 RSA 2010
Assessee PAN AAACV6169L
Bench Ahmedabad
Appeal Number ITA 2537/AHD/2010
Duration Of Justice 4 month(s) 19 day(s)
Appellant M/s. Vipor Chemicals Pvt.Ltd.,, Baroda
Respondent The A.CIT.,Circle-4,, Baroda
Appeal Type Income Tax Appeal
Pronouncement Date 07-01-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted D
Tribunal Order Date 07-01-2011
Assessment Year 2007-2008
Appeal Filed On 19-08-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D BEFORE SHRI MUKUL KR. SHRAWAT JUDICIAL MEMBER AND SHRI A.N. PAHUJA ACCOUNTANT MEMBER DATE OF HEARING : 31/12/2010 DRAFTED ON: 4/ 1/10 ITA NO.2537/AHD/2010 ASSESSMENT YEAR : 2007-08 VIPOR CHEMICALS PVT.LTD. 301 IVORY TERRACE R.C. DUTT ROAD ALKAPURI DIST. VADODARA VS. ASST.CIT CIRCLE-4 VADODARA-7 PAN/GIR NO. : AAACV 6169 L ( APPELLANT ) .. ( RESPONDENT ) APPELLANT BY : SHRI M.K. PATEL RESPONDENT BY: SHRI S.S. SHUKLA SR. D.R. O R D E R PER SHRI MUKUL KR. SHRAWAT JUDICIAL MEMBER : THIS IS AN APPEAL AT THE BEHEST OF THE ASSESSEE W HICH HAS EMANATED FROM THE ORDER OF LEARNED CIT(APPEALS)-III BARODA DATED 07/05/2010. THE SUBSTANTIVE GROUND WHICH IS ARGUED BEFORE US IS GROUND NO.1; REPRODUCED BELOW:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW THE LD. ASST. COMMISSIONER OF INCOME TAX CIRCLE-4 BARODA ERRED IN DISALLOWING AND THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-III BARODA ERRED IN CONFIRMING THE DISAL LOWANCE OF AMOUNT OF RS.1 20 808/- U/S 14A OF THE INCOME TAX ACT 1961. ITA NO. 2537/AHD/2010 VIPOR CHEMICALS PVT.LTD. VS. ASST.CIT ASST.YEAR - 2007-08 - 2 - 2. IN RESPECT OF ABOVE ISSUE BARE MINIMUM FACTS WH ICH WE CONSIDER NECESSARY TO MENTION AS EXTRACTED FROM THE CORRESP ONDING ASSESSMENT ORDER PASSED U/S.143(3) OF THE ACT DATED 21/11/20 09 WERE THAT THE ASSESSEE-COMPANY IS IN THE BUSINESS OF MANUFACTURING AND EXPORT OF DRUGS AND CHEMICALS. IT WAS NOTED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.17 18 783/-. THE SAID DIVIDEND INCOME WAS UNDISPUTEDLY EXEMPTED INCOME. 3. ON THE OTHER HAND THE ASSESSEE HAS DEBITED INTE REST OF RS.6 84 890/-. ON ACCOUNT OF THE SAID REASON THE ASSESSING OFFICER HAS INVOKED THE PROVISIONS OF SECTION 14A OF THE I.T.AC T. THE CLAIM OF THE ASSESSEE WAS THAT THE INVESTMENT WAS MADE OUT OF TH E RESERVE FUNDS AVAILABLE WITH THE ASSESSEE. IT HAS ALSO BEEN EXP LAINED THAT THERE WAS NO NEXUS BETWEEN THE LOANS AND THE SAID INVESTMENT. PARTICULARLY FOR THE YEAR UNDER CONSIDERATION THE ASSESSEES EXPLANATIO N WAS THAT NO BORROWINGS HAVE BEEN MADE DURING THE YEAR WHICH WER E ALLEGED TO HAVE BEEN INVESTED IN MUTUAL FUNDS ETC. ON WHICH THE EX EMPTED DIVIDEND INCOME WAS EARNED. THE ASSESSING OFFICER WAS NOT C ONVINCED AND IN HIS OPINION SOME EXPENDITURE SHOULD HAVE BEEN INCURRED TO EARN THE EXEMPTED INCOME. RESULTANTLY 0.5% OF AVERAGE VALU E OF THE INVESTMENT WAS DISALLOWED. AS PER THE ASSESSING OFFICERS COM PUTATION THE AVERAGE VALUE OF INVESTMENT WAS RS.2 41 61 651/- AND BY APP LYING AN ESTIMATED PERCENTAGE OF EXPENDITURE AT 0.5% AN AMOUNT OF RS. 1 20 808/- WAS DISALLOWED. THIS WAS THE CAUSE OF GRIEVANCE WHICH WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. ITA NO. 2537/AHD/2010 VIPOR CHEMICALS PVT.LTD. VS. ASST.CIT ASST.YEAR - 2007-08 - 3 - 4. THE LEARNED CIT(APPEALS) HAS CONSIDERED THE PROV ISIONS OF SECTION 14A OF THE I.T.ACT AND AFFIRMED THE ACTION OF THE ASSESSING OFFICER VIDE PARAGRAPH NO.4.2 AS UNDER: 4.2. I HAVE GIVEN MY CAREFUL CONSIDERATION TO THE SUBMISSIONS MADE BY THE AR AS ALSO THE FACTS OF THE CASE. IT HAS BEEN NOTED BY THE AO THAT THE APPELLANT HAS CLAIMED EXEMPTED INCOME AT RS.17 18 783/- DURING THE YEAR. THE APPELLANT HAS HOWEVER NOT SHOWN ANY EXPENDITURE AGAINST THIS INCOME. AFTER C ONSIDERING THE SUBMISSIONS MADE AND THE FACTS OF THE CASE I AM OF THE OPINION THAT THE AO HAS RIGHTLY INVOKED THE PROVISIONS OF SEC.14A READ WITH RULE 8 D OF THE ACT. THE APPELLANT HAS NOT SH OWN ANY EXPENDITURE FOR EARNING THIS INCOME. HOWEVER IN V IEW OF THE EXPRESS PROVISIONS OF SEC. 14A(3) OF THE ACT THE C ONTENTION OF THE APPELLANT IS NOT SUSTAINABLE. SUB SECTION 3 OF SEC . 14A READS AS FOLLOWS: THE PROVISIONS OF SUB SECTION (2) SHALL ALSO APPLY 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. SINCE THE APPELLANT HAS NTO PROVIDED FOR EXPENDITUR E INCURRED AGAINST THIS INCOME THE AO HAS RIGHTLY INVOKED TH E PROVISIONS OF RULE 8D FOR WORKING OUT THE DISALLOWANCE. HOWEVER THOUGH THE AO HAS INVOKED RULE 8D HE HAS NOT GIVEN A WORKING OF DISALLOWANCE AS PER RULE 8D. HE IS DIRECTED TO DO SO. THIS GROUND OF APPEAL IS DISMISSED WITH ABOVE DIRECTION. ITA NO. 2537/AHD/2010 VIPOR CHEMICALS PVT.LTD. VS. ASST.CIT ASST.YEAR - 2007-08 - 4 - 5. HEARD BOTH THE SIDES. THOUGH THE ADMITTED FACTU AL POSITION IS THAT THE ASSESSEE HAS NOT CLAIMED ANY EXPENDITURE AGAINS T THE EXEMPTED INCOME BUT THE ASSESSING OFFICER HAS ADOPTED 0.5% OF THE AVERAGE VALUE OF EXPENDITURE FOR THE PURPOSE OF DISALLOWANCE BY APPLYING THE PROVISIONS OF SUB-SECTIONS (2) & (3) SECTION 14A. IT IS ALSO NECESSARY TO REFER AT THIS STAGE THAT THE APPLICABILITY OF RULE 8D HAS NOW BEEN DECIDED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GOD REJ & BOYCE MFG. CO.LTD. THEREFORE WE DEEM IT PROPER TO FOLLOW THE VERDIT OF THE HON'BLE BOMBAY HIGH COURT PRONOUNCED IN THE CASE OF GODREJ & BOYCE MFG. CO.LTD. MUMBAI VS. DY.CIT IN INCOME TAX APPEAL NO.626 OF 2010 AND WRIT PETITION NO.758 OF 2010 ORD ER DATED 12/08/2010 [ NOW REPORTED AS 328 ITR 81(BOM)]. IN THIS JUDGEMENT AT THE END THE HON'BLE COURT HAS ALSO RECAPITULATED T HE CONCLUSION AND PRONOUNCED THAT A FINDING IS REQUIRED WHETHER THE I NVESTMENT IN SHARES IS MADE OUT OF OWN FUNDS OR OUT OF BORROWED FUNDS. A NEXUS IS REQUIRED TO BE ESTABLISHED BETWEEN THE INVESTMENTS AND THE BORR OWINGS. IN SECTION 14A OF THE ACT EXPENDITURE INCURRED IN RELATION TO EXEMPTED INCOME IS TO BE DISALLOWED ONLY IF THE ASSESSING OFFICER IS SATI SFIED WITH THE EXPENDITURE CLAIMED BY THE ASSESSEE PERTAINING TO T HE SAID EXEMPT INCOME. RATHER THE COURT WAS VERY SPECIFIC THAT IN CASE NO SUCH EXERCISE WAS CARRIED OUT BY THE ASSESSING OFFICER T HEN THE MATTER IS TO BE REMANDED BACK FOR AFRESH INVESTIGATION. IT HAS ALS O BEEN MADE CLEAR THAT THE PROVISO TO SECTION 14A OF THE ACT WAS EFFECTIVE FROM 2001-02. THE HON'BLE COURT HAS ALSO POINTED OUT THE IMPORTANCE O F RULE 8D OF THE I.T.RULES 1962. IT WAS MADE CLEAR THAT SUB-SECTIO N (1) TO SECTION 14A WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 01/04/1 962 HOWEVER SUB- ITA NO. 2537/AHD/2010 VIPOR CHEMICALS PVT.LTD. VS. ASST.CIT ASST.YEAR - 2007-08 - 5 - SECTIONS (2) & (3) WERE MADE APPLICABLE WITH EFFECT FROM 01/04/2007. THE PROVISO WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 11/05/2001 HOWEVER RULE 8D WAS INSERTED BY THE INCOME TAX (FI FTH AMENDMENT) RULES 2008 BY PUBLICATION IN THE GAZETTE DATED 24/ 03/2008 RELEVANT FINDINGS ARE REPRODUCED BELOW:- A) THE ITAT HAD RECORDED A FINDING IN THE EARLIE R ASSESSMENTS THAT THE INVESTMENTS IN SHARES AND MUTUAL FUNDS HAVE BEE N MADE OUT OF OWN FUNDS AND NOT OUT OF BORROWED FUNDS AND THAT TH ERE IS NO NEXUS BETWEEN THE INVESTMENTS AND THE BORROWINGS. HOWEVER IN NONE OF THOSE DECISIONS WAS THE DISALLOWABILITY OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME EARNED OUT OF INVESTMENTS MADE OUT OF OWN FUNDS CONSIDERED. MOREOVER UNDER SECTION 14A EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME C AN BE DISALLOWED ONLY IF THE ASSESSING OFFICER IS NOT SAT ISFIED WITH THE CORRECTNESS OF THE EXPENDITURE CLAIMED BY THE ASSES SEE. IN THE PRESENT CASE NO SUCH EXERCISE HAS BEEN CARRIED OUT AND THEREFORE THE TRIBUNAL WAS JUSTIFIED IN REMANDING THE MATTER. B) SECTION 14A WAS INTRODUCED BY THE FINANCE ACT 20 01 WITH RETROSPECTIVE EFFECT FROM 1 APRIL 1962. HOWEVER I N VIEW OF THE PROVISO TO THAT SECTION THE DISALLOWANCE THEREUNDE R COULD BE EFFECTIVELY MADE FROM ASSESSMENT YEAR 2001-2002 ONW ARDS. THE FACT THAT THE TRIBUNAL FAILED TO CONSIDER THE APPLI CABILITY OF SECTION 14A IN ITS PROPER PERSPECTIVE FOR ASSESSMENT YEAR 2001-2002 WOULD NOT BAR THE TRIBUNAL FROM CONSIDERING DISALLO WANCE UNDER SECTION 14A IN ASSESSMENT YEAR 2002-2003. C) THE DECISIONS REPORTED IN SRIDEV ENTERPRISES (SUPRA) MUNJAL SALES CORPORATION (SUPRA) AND RADHASOAMI SATSANG (SUPRA) HOLDING THAT THERE MUST BE CONSISTENCY AND DEFINITE NESS IN THE APPROACH OF THE REVENUE WOULD NOT APPLY TO THE FACT S OF THE PRESENT CASE BECAUSE OF THE MATERIAL CHANGE INTRODUCED BY SECTION 14A BY WAY OF STATUTORY DISALLOWANCE IN CERTAIN CASES. TH ERE THE DECISIONS OF THE TRIBUNAL IN THE EARLIER YEARS WOUL D HAVE NO RELEVANCE IN CONSIDERING DISALLOWANCE IN ASSESSMENT YEAR 2002- 2003 IN THE LIGHT OF SECTION 14A OF THE ACT. ITA NO. 2537/AHD/2010 VIPOR CHEMICALS PVT.LTD. VS. ASST.CIT ASST.YEAR - 2007-08 - 6 - 73. FOR THE REASONS WHICH WE HAVE INDICATED WE HA VE COME TO THE CONCLUSION THAT UNDER SECTION 14A(1) IT IS FOR THE ASSESSING OFFICER TO DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED A NY EXPENDITURE IN RELATION TO THE EARNING OF INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THE ACT AND IF SO TO QUANTIFY THE EXTE NT OF THE DISALLOWANCE. THE ASSESSING OFFICER WOULD HAVE TO ARRIVE AT HIS DETERMINATION AFTER FURNISHING AN OPPORTUNITY TO TH E ASSESSEE TO PRODUCE ITS ACCOUNTS AND TO PLACE ON THE RECORD ALL RELEVANT MATERIAL IN SUPPORT OF THE CIRCUMSTANCES WHICH ARE CONSIDERE D TO BE RELEVANT AND GERMANE. FOR THIS PURPOSE AND IN LIGHT OF OUR OBSERVATIONS MADE EARLIER IN THIS SECTION OF THE JUDGMENT WE DEEM IT APPROPRIATE AND PROPER TO REMAND THE PROCEEDINGS BACK TO THE ASSESS ING OFFICER FOR A FRESH DETERMINATION. CONCLUSION : 74. OUR CONCLUSIONS IN THIS JUDGMENT ARE AS FOLLOWS ; I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FALLIN G WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME TA X ACT 1961 AS WAS APPLICABLE FOR ASSESSMENT YEAR 2002-03 IS NOT INCLUDIBLE IN COMPUTING THE TOTAL INCOME OF THE ASS ESSEE. CONSEQUENTLY NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT BY VIRTUE OF THE PROVISIONS OF SECTION 14A (1); II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTION 115 O(1) OF ADDITIONAL INCOME TAX ON PROFITS DECLARED DISTR IBUTED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS OF T HE COMPANY. THE COMPANY IS CHARGEABLE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAYS TAX IN DIS CHARGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT F OR ITS SHAREHOLDERS. IN THE HANDS OF THE SHAREHOLDER AS T HE RECIPIENT OF DIVIDEND INCOME BY WAY OF DIVIDEND DO ES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROV ISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS; ITA NO. 2537/AHD/2010 VIPOR CHEMICALS PVT.LTD. VS. ASST.CIT ASST.YEAR - 2007-08 - 7 - III) THE PROVISIONS OF SUB SECTIONS (2) AND (3) OF SECTI ON 14A OF THE INCOME TAX ACT 1961 ARE CONSTITUTIONALLY VALID; IV) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES A S INSERTED BY THE INCOME TAX (FIFTH AMENDMENT) RULES 2008 ARE NOT ULTRA VIRES THE PROVISIONS OF SECTION 14A MORE PARTICULARLY SUB SECTION (2) AND DO NOT OFFEND ARTI CLE 14 OF THE CONSTITUTION; V) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES W HICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24 MARCH 2008 S HALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09; VI) EVEN PRIOR TO ASSESSMENT YEAR 2008-09 WHEN RULE 8D WAS NOT APPLICABLE THE ASSESSING OFFICER HAS TO ENFORC E THE PROVISIONS OF SUB SECTION (1) OF SECTION 14A. FOR THT PURPOSE THE ASSESSING OFFICER IS DUTY BOUND TO DET ERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASON ABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FA CTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE R ECORD; VII) THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 SHALL S TAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESS ING OFFICER SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RE LATION TO DIVIDEND INCOME / INCOME FROM MUTUAL FUNDS WHICH DO ES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION THE ASSESSING OFFICER SHALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO. 2537/AHD/2010 VIPOR CHEMICALS PVT.LTD. VS. ASST.CIT ASST.YEAR - 2007-08 - 8 - 6.1. IN ADDITION TO THE ABOVE PRECEDENT WE ARE ALSO GOVERNED BY A DECISION OF RESPECTED ITAT MUMBAI BENCH PRONOUNCED IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT.LTD. REPORTED AS 117 IT D 169 (MUM.) WHEREIN ALSO IT WAS PRONOUNCED THAT IN ORDER TO ESC APE THE APPLICABILITY OF SECTION 14A ONUS IS ON THE ASSESSEE TO PROVE TH AT THE EXPENDITURE WAS INCURRED FOR EARNING ONLY TAXABLE INCOME. HOWEVER IT HAS ALSO BEEN PRESCRIBED THAT AFTER INTRODUCTION OF RULE 8D IT B ECOMES CLEAR THAT NOT ONLY THE EXPENDITURE DIRECTLY RELATING TO EXEMPTED INCOME BUT ALSO THE INDIRECT EXPENDITURE LIKE INTEREST WHICH IS NOT DIR ECTLY ATTRIBUTABLE TO ANY PARTICULAR: INCOME OR RECEIPT ARE TO BE TAKEN IN TO FOR THE PURPOSE OF INVOCATION OF THE PROVISIONS OF SECTION 14A OF THE I.T. ACT 1961. 6.2. APART FROM THE ABOVE DISCUSSION AN ANOTHER CASE LAW SHOULD ALSO NOT ESCAPE OUR ATTENTION AS PRONOUNCED IN THE CASE OF WAL FORT SHARES AND STOCK BROKERS LTD. [2009](310 ITR 421) [BOM]. THE OBSERVATION WAS THAT WHAT SECTION 14A OF THE ACT CONTEMPLATES I S THE EXPENDITURE ACTUALLY INCURRED FOR EARNING TAX-FREE INCOME AND N OT ASSUMED EXPENDITURE OR DEEMED EXPENDITURE. THEREFORE CONFIR MING THE DECISION OF THE RESPECTED SPECIAL BENCH { 96 TTJ 673(SB)(MUM.)} AN OBSERVATION WAS MADE THAT THERE WAS NO MERIT IN THE CONTENTION THAT THE LOSS ARISING FROM THE TRANSACTION WAS LIABLE TO BE TREATED AS A N EXPENDITURE INCURRED FOR EARNING THE TAX FREE INCOME AND HENCE DISALLOWA BLE UNDER SECTION 14A. ADMITTEDLY NO EXPENDITURE WAS INCURRED IN PUR CHASING THE DIVIDEND BEARING UNITS. THE TRIBUNAL WAS JUSTIFIED IN HOLDIN G THAT THE LOSS ARISING FROM THE TRANSACTION WAS LIABLE TO BE SET OFF AGAIN ST THE OTHER TAXABLE INCOME OF THE ASSESSEE. WHILE UPHOLDING THE DECISI ON OF HON'BLE HIGH ITA NO. 2537/AHD/2010 VIPOR CHEMICALS PVT.LTD. VS. ASST.CIT ASST.YEAR - 2007-08 - 9 - COURT THE HON'BLE SUPREME COURT { CIT VS WALFORT SHARE & STOCK BROKERS 326 ITR PG.1(SC) } HAS ALSO SAID THAT FOR ATTRACTING SECTION 14A OF THE ACT THERE HAS TO BE A PROXIMATE CAUSE FOR DI SALLOWANCE WHICH IS ITS RELATIONSHIP WITH THE TAX EXEMPT INCOME RELEVANT P ARA FROM THE HELD PORTION IS AS FOLLOWS :- SECTION 14A OF THE INCOME-TAX ACT 1961 CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATU RE OF EXPENSES INCURRED BY THE A MAY BE RELATABLE PARTLY TO EXEMPT INCOME AND PARTLY TO TAXABLE INCOME. IN THE ABSENCE OF SECT ION 14A THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WA S BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDATE OF SEC TION 14A IS CLEAR: IT DESIRES TO CURB THE PRACTICE OF CLAIMING DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAI NST TAXABLE INCOME AND AT THE SAME TIME AVAIL OF THE TAX INCENT IVE BY WAY OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF E XPENSES INCURRED IN RELATION TO EXEMPT INCOME. THE BASIC R EASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN INCOMES AR E NOT INCLUDIBLE WHILE COMPUTING THE TOTAL INCOME BECAUSE THESE ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE ACT. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET I NCOME I.E. GROSS INCOME MINUS EXPENDITURE. ON THE SAME ANALO GY EXEMPTION IS ALSO IN RESPECT OF NET INCOME. THE TH EORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NO N-TAXABLE HAS IN PRINCIPLE BEEN NOW WIDENED UNDER SECTION 1 4A. A PAY BACK IS NOT AN EXPENDITURE IN THE SCHEME OF S ECTION 14A; FOR ATTRACTING SECTION 14A THERE HAS TO BE A P ROXIMATE CAUSE FOR DISALLOWANCE WHICH IS IN RELATIONSHIP WITH THE TAX EXEMPT INCOME. PAY BACK OR RETURN OF INVESTMENT IS NOT SU CH PROXIMATE CAUSE. 6.3. IT IS WORTH TO MENTION AS HELD IN THE CASE OF HERO CYCLES (323 ITR 518)[P&H] THAT IF THERE IS SUFFICIENT MATERIAL ON RECORD TO E STABLISH ITA NO. 2537/AHD/2010 VIPOR CHEMICALS PVT.LTD. VS. ASST.CIT ASST.YEAR - 2007-08 - 10 - THAT INVESTMENT IN SHARES/UNITS WAS MADE OUT OF NON -INTEREST BEARING FUNDS THEN NO DISALLOWANCE HAS TO BE MADE OUT OF I NTEREST DEBITED TO PROFIT & LOSS ACCOUNT EVEN IF THERE IS DIVIDEND IN COME FROM SUCH INVESTMENT. WHERE THE EXPENDITURE INCURRED COULD NOT BE RELATED TO EXEMPTED INCOME THE PROVISIONS OF SECTION 14A WOUL D ALSO NOT BE ATTRACTED. IT IS ALSO A SETTLED LAW THAT THE THE ORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE INCOME HAS BEEN ACCEPTED. HOWEVER ASSESSING OFFICER HAS TO SATISFY HIMSELF A ND SUCH SATISFACTION MUST BE ARRIVED AT ON THE OBJECTIVE BASIS. IF BEN EFIT ARISING FROM INVESTMENT IN SHARES OUT OF INTEREST-BEARING FUND I S THE DIVIDEND INCOME EXEMPT U/S.10(34) OF THE ACT THE RELATED EXPENDITU RE HAS TO BE DISALLOWED . 6.4. HOWEVER IT DEPENDS ON THE FACTS OF EACH C ASE. BUT THE FACT OF THE PRESENT CASE WAS THAT THE ASSESSING OFFICER HAD NOT ENQUIRED THE ISSUE IN THE LIGHT OF THE ABOVE LEGAL PRONOUNCEMENTS. SPECIA LLY THE PRONOUNCEMENT OF THE HON'BLE BOMBAY HIGH COURT WAS NOT AVAILABLE AT THAT TIME HENCE THE ASSESSING OFFICERS ASSESSMEN T ORDER WAS DEVOID OF MERITS AS ALSO APPLICABLE LAW. NOW WE HAVE GOT CER TAIN GUIDELINES THOUGH CAN NOT BE SAID TO BE EXHAUSTIVE OR COMPLETE BUT ON THESE LINES THE ASSESSING OFFICER IS EXPECTED HENCEFORTH TO COM PUTE THE CORRECT DISALLOWANCE NEEDLESS TO SAY AFTER PROVIDING AN A DEQUATE OPPORTUNITY OF HEARING TO THE ASSESSEE. THEREFORE THE MATTER IS RESTORED TO BE DECIDED AFRESH HENCE THIS GROUND OF THE ASSESSEE MAY BE T REATED AS ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 2537/AHD/2010 VIPOR CHEMICALS PVT.LTD. VS. ASST.CIT ASST.YEAR - 2007-08 - 11 - 7. SINCE A VIEW HAS ALREADY BEEN TAKEN THAT THIS MA TTER HAS TO BE DECIDED AFRESH IN THE LIGHT OF THE DIRECTIONS OF TH E HON'BLE BOMBAY HIGH COURT THEREFORE ON THE SAME LINES WE DEEM IT JUS TIFIABLE TO RESTORE THIS GROUND AS WELL BACK TO THE STAGE OF ASSESSING OFFIC ER TO BE DECIDED DE NOVO AS PER THE GUIDELINES. 8. IN THE RESULT THE APPEAL OF THE ASSESSEE IS A LLOWED BUT FOR STATISTICAL PURPOSES. ORDER SIGNED DATED AND PRONOUNCED IN THE COURT ON 7 / 1 /2011. SD/- SD/- ( A.N. PAHUJA ) ( MU KUL KR. SHRAWAT ) ACCOUNTANT MEMBER JUDICIAL MEMBE R AHMEDABAD; DATED / /2011 T.C. NAIR SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE ASSESSEE. 2. THE DEPARTMENT. 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-III BARODA 5. THE DR AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER //TRUE COPY// (DY./ASSTT.REGISTRAR) ITAT AHMEDABAD ITA NO. 2537/AHD/2010 VIPOR CHEMICALS PVT.LTD. VS. ASST.CIT ASST.YEAR - 2007-08 - 12 - 1. DATE OF DICTATION.. 31/12/2010 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 04/01/2011 OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S7.1.11 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 7.1.11 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 9. DATE OF DESPATCH OF THE ORDER