M/s Suprajit Engineering Ltd.,, Bangalore v. DCIT, Bangalore

ITA 261/BANG/2011 | 2008-2009
Pronouncement Date: 16-02-2012 | Result: Allowed

Appeal Details

RSA Number 26121114 RSA 2011
Assessee PAN AADCS1638L
Bench Bangalore
Appeal Number ITA 261/BANG/2011
Duration Of Justice 11 month(s) 5 day(s)
Appellant M/s Suprajit Engineering Ltd.,, Bangalore
Respondent DCIT, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 16-02-2012
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 16-02-2012
Date Of Final Hearing 05-01-2012
Next Hearing Date 05-01-2012
Assessment Year 2008-2009
Appeal Filed On 11-03-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.K. SAINI ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K. JUDICIAL MEMBER ITA NO. 261/BANG/2011 ASSESSMENT YEAR : 2008-09 M/S. SUPRAJIT ENGINEERING LTD. # 100 BOMMASANDRA INDUSTRIAL AREA BANGALORE 560 099. PAN : AADCS 1638L VS. THE DEPUTY COMMISSIONER OF INCOME TAX LTU BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI V. SRINIVASAN C.A. RESPONDENT BY : SMT. ARCHANA CHOWDHRY CIT-II(DR) DATE OF HEARING : 25.01.2012 DATE OF PRONOUNCEMENT : 16.02.2012 O R D E R PER N.K. SAINI ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDE R DATED 28.01.2011 OF THE CIT(APPEALS) LTU BANGALORE. 1. THE ORDERS OF THE AUTHORITIES BELOW IN SO FAR AS THEY ARE AGAINST THE APPELLANT ARE OPPOSED TO LAW EQUITY W EIGHT OF EVIDENCE PROBABILITIES FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE AUTHORITIES BELOW ARE NOT JUSTIFIED IN DISA LLOWING A SUM OF RS.20 22 143/- IN TERMS OF SECTION 14A READ WITH RULE 8D ITA NO.261/BANG/11 PAGE 2 OF 15 OF THE I.T.RULES UNDER THE FACTS AND IN THE CIRCUMS TANCES OF THE APPELLANT'S CASE. 3. THE APPELLANT DENIES ITSELF LIABLE TO BE CHARG ED TO INTEREST U/S. 234-D OF THE ACT WHICH UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANT'S CASE DESERVES TO B E CANCELLED. 4. FOR THE ABOVE AND OTHER GROUNDS THAT MAY BE UR GED AT THE TIME OF HEARING OF THE APPEAL YOUR APPELLANT HUMBL Y PRAYS THAT THE APPEAL MAY BE ALLOWED AND JUSTICE RENDERED AND THE APPELLANT MAY BE AWARDED COSTS IN PROSECUTING THE APPEAL AND ALSO ORDER FOR THE REFUND OF THE INSTITUTION FEES AS PART OF THE C OSTS. 2. GROUNDS 1 AND 4 ARE GENERAL IN NATURE SO DO NOT REQUIRE ANY COMMENTS ON OUR PART. 3. THE GRIEVANCE OF THE ASSESSEE VIDE GROUND NO.2 R ELATES TO CONFIRMATION OF DISALLOWANCE OF RS.20 22 143 MADE B Y THE AO BY INVOKING THE PROVISIONS OF SECTION 14A R.W. RULE 8D OF THE I .T. RULES 1962. 4. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE THA T THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF TWO-WHE ELER CABLES AND FILED RETURN OF INCOME ON 29.09.2008 DECLARING AN INCOME OF RS.7 71 72 250 WHICH WAS PROCESSED U/S. 143(1) OF THE INCOME-TAX A CT 1961 [HEREINAFTER REFERRED TO AS THE ACT IN SHORT] ON 13.05.2009. LATER ON THE CASE WAS SELECTED FOR SCRUTINY. DURING THE COURSE OF ASSESSM ENT PROCEEDINGS THE AO NOTICED THAT THE ASSESSEE IN THE COMPUTATION OF INCOME FILED WITH THE RETURN OF INCOME DISCLOSED INCOME FROM DIVIDENDS TO THE EXTENT OF RS.13 64 488. THE SAID INCOME WAS CLAIMED TO BE EX EMPT U/S. 10(34) OF THE ACT. THE AO ASKED THE ASSESSEE AS TO WHY THE P ROVISIONS OF SECTION 14A OF THE ACT R.W. RULE 8D OF THE I.T. RULES SHOUL D NOT BE APPLIED. IN RESPONSE THE ASSESSEE OBJECTED TO THE INVOKING OF PROVISIONS OF SECTION ITA NO.261/BANG/11 PAGE 3 OF 15 14A OF THE ACT AND STATED THAT THE INVESTMENT WAS M ADE WITH THE SURPLUS FUNDS AVAILABLE WITH IT AND NO LOAN WAS BORROWED FO R THE PURPOSE OF INVESTMENT THUS IT HAD NOT INCURRED ANY EXPENDIT URE TO BE DISALLOWED BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. THE AO DID NOT FIND MERIT IN THE ABOVE SUBMISSIONS OF THE ASSESSEE BY OBSERVI NG THAT SCHEDULE-VI TO THE FINANCIAL STATEMENTS OF THE ASSESSEE REVEALED T HAT DURING THE YEAR THE ASSESSEE HAD MADE SUBSTANTIAL INVESTMENTS IN MUTUAL FUNDS AND THERE WERE INVESTMENTS IN THE SUBSIDIARY COMPANIES WHICH WERE CONTINUING FROM THE EARLIER YEARS. ACCORDING TO HIM SUCH INVESTME NT ACTIVITIES COULD NOT BE MADE IN ROUTINE AND NO PRUDENT BUSINESSMAN WOULD MA KE ANY INVESTMENT WITHOUT APPLYING THE RESOURCES WISELY. THE AO WAS OF THE VIEW THAT SECTION 14A OF THE ACT DOES NOT ENVISAGE DISALLOWANCE OF DI RECT EXPENSES ALONE AND THAT THE PROVISIONS OF RULE 8D OF THE INCOME-TA X RULES CONTEMPLATED THAT THE DISALLOWANCE COULD BE MADE FOR BOTH DIRECT AS WELL AS INDIRECT EXPENSES. RELIANCE WAS PLACED ON THE DECISION OF T HE ITAT DELHI BENCH IN THE CASE OF INDIAN SUGAR EXIM CORPN. LTD. V. DCIT IN ITA NO.1402(DEL)/2005 DATED 05.12.2008. THE AO ALSO OBSERVED THAT THE ASSESSEES ARGUMENT THAT NO EXPENDITURE MORE PARTI CULARLY INTEREST WAS INCURRED ON THE INVESTMENT COULD NOT BE ACCEPTED F OR THE ANOTHER REASON THAT THE INVESTMENTS FLOW FROM A COMMON POOL OF FUN DS VIZ. THE CURRENT OR CASH CREDIT/OVERDRAFT ACCOUNTS. HE FURTHER OBSERVE D THAT THE BUSINESS RECEIPTS AND PAYMENTS AS WELL AS INVESTMENTS WERE M ADE FROM THOSE ACCOUNTS THEREFORE IT COULD NOT BE SAID WITH ANY D EGREE OF CERTAINTY THAT THE INVESTMENTS WERE MADE EXCLUSIVELY OUT OF NON-INTERE ST BEARING OR SURPLUS FUNDS. THE AO ACCORDINGLY INVOKED THE PROVISIONS OF SECTION 14A AND ITA NO.261/BANG/11 PAGE 4 OF 15 MADE THE DISALLOWANCE OF RS.20 22 143. RELIANCE WA S ALSO PLACED ON THE FOLLOWING CASE LAWS: (II) CIT V. WALFORT SHARE & STOCK BROKERS P LTD. 326 ITR 0001 (SC) (III) KARNATAKA FOREST PLANTATION CORPN. LTD. V. CIT 156 ITR 275 KAR. (IV) KARNATAKA STATE FINANCIAL CORPORATION V. CIT 174 IT R 206 KAR. (V) SMT. TARULATA SHYAM & ORS. V. CIT 108 ITR 345 SC. 5. THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A PPEALS) AND THE SUBMISSIONS MADE BEFORE HIM AS SUMMARIZED IN PARA 3 .1 OF THE IMPUGNED ORDER ARE REPRODUCED VERBATIM AS UNDER: (I) IT WAS CONTENDED THAT THE PROVISIONS OF SEC. 14A WERE WHOLLY INAPPLICABLE TO THE FACTS OF THE APPELLANT'S CASE. CONSEQUENTLY RULE 8D OF THE I.T. RULES ALSO HAD N O APPLICATION BECAUSE NO PORTION OF THE INTEREST PAID ON BORROWED FUNDS HAD BEEN UTILIZED BY THE APPELLANT FOR MAKING THE AFORE SAID INVESTMENTS IN SHARES OF SUBSIDIARY COMPANIES AS WE LL AS IN MUTUAL FUNDS. FIRSTLY THE APPELLANT SUBMITTED THAT IT HAD MADE CERTAIN INVESTMENTS IN CERTAIN SUBSIDIARIES ASSOCIATES AND OTHER COMPANIES IN THE EARLIER YEARS. IT WAS POINTED OUT THAT THESE INVESTMENTS MADE WERE OUT OF SURPLUS FUNDS AVAILABL E IN THE RELEVANT YEARS AND NONE OF THE INVESTMENTS MADE WAS OUT OF BORROWED FUNDS. THE APPELLANT ASSERTED THAT THIS AS PECT OF THE MATTER WAS CONCLUSIVELY ESTABLISHED BY THE FACT THA T THE ENTIRE INTEREST CLAIMED AS DEDUCTION IN THE EARLIER YEARS HAD BEEN ALLOWED BY THE AO AND NO DISALLOWANCE HAD BEEN MADE IN RESPECT OF ANY INTEREST LIABILITY IN THE EARLIER YEARS ON T HE GROUND THAT THE INVESTMENTS MADE IN THE EARLI E R YEARS WERE OUT OF BORROWED FUNDS. HENCE HAVING REGARD TO THE RATIO OF THE DEC ISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT V . SRIDEV ENTERPRISES 192 ITR 165 THE APPELLANT CLAIMED THAT THERE COULD BE NO DISALLOWANCE EITHER OF THE INTEREST PAID IN T HE YEAR UNDER APPEAL OR FOR THAT MATTER BY INVOKING THE PROVISION S OF SEC. 14A READ WITH RULE 8D OF THE I.T. RULES . ITA NO.261/BANG/11 PAGE 5 OF 15 (II) THE APPELLANT ALSO SUBMITTED THAT THE AO COULD NOT HAVE DERIVED THE NEGATIVE SATISFACTION ENVISAGED UNDER R ULE 8D(1) THAT THE CLAIM OF THE APPELLANT THAT NO EXPENDITURE WAS INCURRED TO EARN THE EXEMPT INCOME WAS INCORRECT AS WAS EVIDENT FROM THE EXTRACT OF RULE 8D(L ) REPRODUCED BELOW:- 'RULE 8D(1) - WHERE THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR IS NOT SATISFIED WITH - A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; OR B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PRE VIOUS YEAR HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROV ISIONS OF SUB-RULE [2]'. IT WAS POINTED OUT THAT THE PHRASE USED IN THE RULE WAS 'IS NOT SATISFIED' AND THAT THE USE OF THE WORD 'SATISFIED' CONNOTES THAT THERE MUST BE SOME POSITIVE MATERIAL WITH THE AO FR OM WHICH HE HAS DERIVED THE NEGATIVE SATISFACTION. IN OTHER WORDS THE AO MUST DEMONSTRATE HIS DISSATISFACTION WITH THE APPEL LANT'S CLAIM THAT THERE WERE NO EXPENSES INCURRED FOR EARNING TH E EXEMPT INCOME IN ORDER TO INVOKE THE PROVISIONS OF RULE 8D (L) TO COMPUTE THE DISALLOWANCE UNDER SUB-RULE (2) OF RULE 8D OF THE I.T. RULES. BRIEFLY PUT THE AO CANNOT MERELY STATE THAT HE BELIEVED THAT THE CLAIM OF THE APPELLANT WAS INCORR ECT. IT MUST BE DEMONSTRATED BY THE AO AFTER EXAMINATION OF THE APP ELLANT'S ACCOUNTS SINCE THE WORDS USED IN THE EARLIER PART O F THE PHRASE ARE 'HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE'. (III) IT WAS ALSO EMPHASIZED THAT THE ACCOUNTS OF THE . APPELLANT WERE CRYSTAL CLEAR IN THE SENSE THAT THE ENTIRE INV ESTMENT MADE IN THE SHARES OF GROUP COMPANIES ASSOCIATES AND MUTUA L FUNDS WERE FROM OUT OF SURPLUS FUNDS AND NOT BORROWED FUNDS AN D UNLESS IT WAS DEMONSTRATED THAT THE APPELLANT HAD UTILIZED BO RROWED FUNDS FOR MAKING THE INVESTMENT THE PROVISIONS OF THE RUL E 8D COULD NOT BE INVOKED . IT WAS SUBMITTED THAT THE AO HAD MADE THE IMPUGN E D DISALLOWANCE WITHOUT SHOWING ANY SATISFACTION AS TO WHY HE C ONSIDERED THE APPELLANT'S CLAIM THAT NO EXPENSES WE RE INCURRED TO EARN THE EXEMPTED INCOME AS INCORRECT. THE APPELLAN T WAS OF THE VIEW THAT THERE WAS NO PRESUMPTION THAT WHEN AMOUNTS WERE BORROWED A PORTION OF THE AMOUNT BORROWED WAS ATTRIBUTABLE TO INVESTMENTS MADE WHICH PRODUCED INC OME WHICH ITA NO.261/BANG/11 PAGE 6 OF 15 WAS EXEMPT UNDER THE PROVISIONS OF THE ACT IN ORDER TO INVOKE THE PROVISIONS OF SEC . 14A. RELIANCE WAS PLACED ON THE DECISION OF THE PUNJAB & HARYANA HIGH COURT IN THE CASE OF HERO CYCLES LTD. 323 ITR 518. FURTHERMORE ALTHOUGH AMOUNTS HAD BEEN BORROWED ITS CAPITAL AND RESERVES WERE FAR IN EXCESS OF THE INVESTMENTS MADE THE INCOME WHEREFROM WAS EXEMPT UNDER THE PRO VISIONS OF THE I . T. ACT AND UNDER THOSE CIRCUMSTANCES THE PRESUMPTI ON WAS THAT SUCH INVESTMENTS HAD BEEN MADE FROM THE CAPITA L AND RESERVES OF THE CAPITAL AND NOT OUT OF BORROWED FUN DS TO WARRANT ANY DISALLOWANCE WHILE COMPUTING THE INCOME. RELIAN CE WAS PLACED ON THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD . 313 ITR 340. HENCE THE APPELLANT OPINED THAT THE DISALLOWANCE MADE WAS OPP OSED TO LAW MISCONCEIVED AND LIABLE TO BE DELETED ON THIS SCO RE ALONE. (IV) WITHOUT PREJUDICE TO THE ABOVE AND ASSUMING FOR ARGUMENT'S SAKE THAT THE AO WAS JUSTIFIED IN INVOKING THE PROVISIONS OF RULE 8D OF THE I.T . RULES IT WAS SUBMITTED THAT THE EXTENT OF DISALLOWANCE IN TERMS OF RULE 8D(2) OF TH E I.T. RULES WAS HIGHLY EXCESSIVE AND UNREASONABLE. THE RELEVANT EXTRACT OF RULE 8D(2) OF THE LT. RULES I S REPRODUCED AS UNDER: 'RULE 8D(2) - THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWING AMOUNTS NAMELY:- (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME ; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA NAMELY:- AXB C WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR; B = THE AVERAGE OF VALUE OF INVESTMENT INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS ITA NO.261/BANG/11 PAGE 7 OF 15 APPEARING 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 THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; (III) AN AMOUNT EQUAL TO ONE-HALF PERCENT OF THE AVERAGE OF THE VALUE OF INVESTMENT INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARI NG IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR' . FIRSTLY THE APPELLANT CONTENDED THAT IN TERMS OF C LAUSE (I) OF RULE 8D(2) ANY EXPENDITURE WHICH WAS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR EXEMPT INCOME OR RECEIPT COULD BE DISALL OWED. IN THE APPELLANT'S CASE THERE WA S NO SUCH DISALLOWANCE MADE BY THE AO AND THE ENTIRE DISALLOWANCE WAS MADE IN R/O INTEREST EXPENDITURE IN TERMS OF RULE 8D(2)(II) OF THE RULES . IT WAS SUBMITTED THAT IN ORDER TO INVOKE THE PROVISIONS OF RULE 8D(2)(II) OF THE I.T. RULES THERE MUST BE INTEREST EXPENDITURE WHICH WAS NOT DI RECTL Y ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT . IN OTHER WORDS IF THE INTEREST EXPENDITURE INCURRED BY THE COMPANY WA S WITH REGARD TO SEVERAL BUSINESSES AND IT WAS NOT POSSIBLE TO AT TRIBUTE THE SAME TO A PARTICULAR I NCOME OR RECEIPT ONLY SUCH INTEREST WAS TO BE CONSIDERED FOR APPLICATION OF THE FORMULA TO WORK O UT THE EXTENT OF DISALLOWANCE. SECONDLY IT WA S SUBMITTED THAT THE ENTIRE INTEREST EXPENDITURE DEBITED BY THE COMPANY WAS DIR ECTLY ATTRIBUTABLE TO THE BUSINESS CARRIED ON BY THE APPE LLANT AND NO PART OF THE SAID INTEREST INCOME COULD BE REMOTELY CONSIDERED FOR PURPOSES OF INVESTMENT IN MUTUAL FUNDS DURING THE Y EAR UNDER APPEAL. FURTHERMORE IT WAS ASSERTED THAT THE APPE LLANT HAD ALSO CAPITALIZED CERTAIN EXPENDITURE OUT OF INTEREST WHI CH RELATED TO THE NEW PROJECT AND WHAT HAD BEEN CLAIMED AS A DEDUCTIO N WAS ONLY THE INTEREST WHICH WAS INCURRED FOR PURPOSES OF BUS INESS DURING THE YEAR UNDER APPEAL. ACCORDINGLY IT WAS SUBMITTE D THAT EVEN ASSUMING THAT THE PROVISIONS OF RULE 8D WERE APPLIC ABLE THE DISALLOWANCE U/S. 14A WAS TOTALLY MISCONCEIVED AND LIABLE TO BE DELETED. ITA NO.261/BANG/11 PAGE 8 OF 15 6. THE LD. CIT(APPEALS) AFTER CONSIDERING THE SUBM ISSIONS OF THE ASSESSEE OBSERVED THAT THE DISALLOWANCE OF RS.20 12 143 HAD BEEN RIGHTLY MADE BY THE AO U/S. 14A OF THE ACT. IN SUPPORT OF THE ABOVE THE LD. CIT(A) GAVE THE REASONS WHICH ARE MENTIONED IN PARA 3.2 OF THE IMPUGNED ORDER AND READ AS UNDER: A) WITH REGARD TO THE APPELLANT'S CONTENTION THAT IT H AD MADE THE AFORESAID INVESTMENTS IN CERTAIN SUBSIDIARIES ASSO CIATES AND OTHER COMPANIES IN EARLIER YEARS IT IS CRYSTAL CLEAR THA T DISALLOWANCE U/S 14A IS NOT ONLY IN R/O OF INVESTMENTS MADE DURING THE C URRENT YEAR. ACCORDING TO THE PROVISIONS OF THE SECTION T HE ONLY REQUIREMENT IS EARNING OF EXEMPTED INCOME. MOREOVER THE COMPUTATION OF DISALLOWANCE IS WITH REFERENCE TO TH E AVERAGE INVESTMENT AND NOT JUST THE INVESTMENT MADE DURING THE YEAR IN ACCORDANCE WITH THE METHOD PRESCRIBED IN RULE 8D. SECONDLY THE CONTENTION THAT NO SUCH DISALLOWANCE WAS MADE IN TH E EARLIER YEARS IS IRRELEVANT SINCE RULE 8D WHICH PROVIDES THE METHODOLOGY FOR COMPUTING SUCH DISALLOWANCE CAME I NTO FORCE W.E.F. 24-03-2008 I . E. AY 2008-09. HENCE THE APPELLANT'S RELIANCE ON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF SRIDEV ENTERPRISES (SUPRA) HAS NO RELEVANCE. IN ANY CASE THE PRINCIPLE OF ESTOPPEL DOES NOT APPLY TO INCOME- TAX PROCEEDINGS AND THE ARGUMENT THAT NO DISALLOWANCE W AS MADE IN THE EARLIER YEARS IS IMMATERIAL. B) AS FOR THE APPELLANT'S ARGUMENT THAT THE AO MUST DEMONSTRATE HIS DISSATISFACTION WITH THE APPELLANT'S CLAIM THAT THE RE WERE NO EXPENSES INCURRED FOR EARNING THE EXEMPT INCOME IN ORDER TO INVOKE THE PROVISIONS OF RULE 8D IT IS ESSENTIAL TO REPRODUCE PARA 5 . 4 OF THE ASSESSMENT ORDER WHEREIN IT HAS BEEN CATEG ORICALLY STATED THAT 'THE INVESTMENTS FLOW FROM A COMMON POOL OF FUNDS VIZ. THE CURRENT OR CASH CREDIT/OVERDRAFT ACCOUNTS . THE BUSINESS RECEIPTS AND PAYMENTS AS WELL AS INVESTMENTS ARE MA DE FROM THESE ACCOUNTS. THEREFORE IT CANNOT BE SAID WITH ANY DEGR EE OF CERTAINTY THAT THE INVESTMENTS WERE MADE EXCLUSIVELY OUT OF N ON-INTEREST BEARING OR SURPLUS FUNDS'. IT IS QUITE EVIDENT THEREFORE THAT COMMONALITY OF FUNDS WAS ONE OF THE CRUCIAL AND VIT AL FACTORS RESULTING IN THE AO DERIVING THE REQUISITE DISSATISFACTION WITH THE CLAIM THAT NO EXPENSES WERE INCURRED FOR EARNIN G EXEMPT INCOME. EVEN IF ONE WERE TO ACCEPT THE APPELLANT'S ARGUMENT THAT THE AO MUST DEMONSTRATE HIS DISSATISFACTION THE FACT THAT ALL INVESTMENTS AND FUND FLOWS WHETHER FOR PURPOSES OF BUSINESS OR OTHERWISE EMANATED FROM A COMMON POOL OF FUNDS CON STITUTED ITA NO.261/BANG/11 PAGE 9 OF 15 ADEQUATE BASIS FOR THE AO TO DERIVE HIS DISSATISFACTION IN RESPECT OF THE APPELLANT'S CLAIM. I AM UNABLE TO ACCEPT THE APPELLANT'S ARGUMENTS IN THIS REGARD. C) RELIANCE WAS PLACED ON THE DECISIONS OF THE PUNJAB & HARYANA HIGH COURT AS WELL AS THE BOMBAY HIGH COURT IN THE CASE OF HERO CYCLES LTD (SUPRA) AND RELIANCE UTILITIES (SUPRA) W HEREIN IT WAS HELD THAT WHEN TH E CAPITAL AND RESERVES OF THE COMPANY WERE FAR IN EXCESS OF THE INVESTMENTS MADE THE PRESUMPTION IS THAT SUCH INVESTMENTS W E RE MADE OUT OF THE CAPITAL AND RESERVES AND NOT OUT OF BORROWED FUNDS TO WARRANT ANY DISALLOWANCE WHILE COMPUTING THE INCOME. IT IS PERTINENT TO NOTE THAT THE AFORESAID JUDGEMENTS RELIED UPON BY THE APPELLANT RELATE TO THE PERIOD P RIOR TO 2008-09. IT IS ABUNDANTLY DEAR THAT RULE 8D WAS NOT IN OPERA TION IN THOSE YEARS AS IT CAME INTO EFFECT ONLY FROM 24-03-2008. CONSEQUENTLY ALL THAT IS REQUIRED OF THE AO IS DISSATISFACTION W ITH THE CLAIM OF THE APPELLANT FOLLOWED BY COMPUTATION OF THE EXPENS E TO BE DISALLOWED AS PER RULE 8D. THE DISSATISFACTIO N WITH REGARD TO THE CLAIM AS I HAVE ALREADY HELD ABOVE IS FOUN DED ON GOOD GROUNDS. THEREFORE ONCE THE DISSATISFACTION IS DE RIVED THE AO IS REQUIRED TO COMPUTE THE DISALLOWANCE IN ACCORDANCE WITH RULE 8D AND THE EXISTENCE OR OTHERWISE OF SUFFICIENT CAPITA L AND RESERVES IS IRRELEVANT. D) AS REGARD THE APPELLANT'S CLAIM THAT ONLY EXPENDITU RE DIRECTLY ATTRIBUTABLE TO ANY EXEMPT INCOME CAN BE DISALLOWED OR THAT INTEREST EXPENDITURE NOT DIRECTLY ATTRIBUTABLE TO A NY PARTICULAR INCOME OR RECEIPT ALONE CAN BE DISALLOWED IN ACCORD ANCE WITH RULE 8D(2)(1) AND (II) IT IS IMPERATIVE TO NOTE TH AT THE PROVISIONS OF SEC.14A(3) CLEARLY MANDATES THAT THE SECTION SHA LL ALSO APPLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAD BEEN INCURRED BY HIM TO EARN THE EXEMPT INCOME. IT IS APPARENT THAT THE METHODOLOGY OF COMPUTING THE DISA LLOWANCE AS LAID DOWN IN RULE 8D CONTEMPLATES THE DISALLOWANCE OF BOTH DIRECT EXPENSES AS WELL AS INDIRECT EXPENSES. IN TH IS CONNECTION ATTENTION IS DRAWN TO THE DECISIONS OF HON'BLE ITAT DELHI BENCH IN THE CASE OF INDIAN SUGAR EXIM CORPN. LTD. (SUPRA ) THE SUPREME COURT IN THE CASE OF WALFORT SHARE & STOCK BROKERS PVT. LTD. (SUPRA) AS WELL AS THE BOMBAY HIGH COURT IN GO DREJ & BOYCE MFG CO. LTD. (SUPRA) WHICH CATEGORICALLY HELD THAT DISALLOWANCE U/S 14A IS WITH REFERENCE TO BOTH DIRECT AND ALL INDIRECT E XPENSES SUCH AS ADMINISTRATIVE EXPENSES RENT SALARY INTE REST ETC. OBVIOUSLY IT IS QUITE EVIDENT FORM THE LANGUAGE OF THE PROVISION ITSELF THAT EVEN IN THE ABSENCE OF IDENTIFIABLE DIR ECT EXPENDITURE INDIRECT EXPENDITURE WOULD STILL HAVE TO BE ESTIMAT ED AND DISALLOWED. THE APPELLANT'S CLAIM THAT THE INTEREST EXPENDITURE ITA NO.261/BANG/11 PAGE 10 OF 15 ONLY PERTAINS TO BUSINESS AND THEREFORE FALLS OUTSI DE THE SCOPE OF WHAT THE AO CAN CONSIDER FOR DISALLOWANCE IS ALSO N OT BORNE OUT BY THE FACTS IN VIEW OF THE COMMONALITY OF FUNDS AN D THEIR DEPLOYMENT ACROSS THE BOARD FROM THE SAME FUND POOL FOR BUSINESS AND NON-BUSINESS PURPOSES. E) IN ADDITION THE APPELLANT'S ARGUMENT THAT NO PART OF THE BORROWED FUNDS WERE UTILIZED FOR INVESTMENTS HAS BEEN CAREFU LLY EXAMINED AND DISCUSSED IN-DEPTH IN PARAS 5 . 3 & 5 . 4 OF THE ASSESSMENT ORDER. THIS CLAIM HAS ALSO BEEN EXAMINED IN THIS ORDER SUP RA AND FOUND TO BE NOT ACCEPTABLE. MOREOVER THE APPELLANT'S CLA IM THAT EVEN ASSUMING THAT THE PROVISIONS OF RULE 8D WERE APPLIC ABLE DISALLOWANCE U/S 14A WAS TOTALLY MISCONCEIVED IS MEANINGLESS AND HOLLOW FOR THE REASON THAT WHEN THE PROVISIONS OF SEC. 14A ARE ATTRACTED THE APPLICABILITY OF RULE 8D AS PRES CRIBED IN SEC. 14A(2) IS AUTOMATIC AND MANDATORY. IT IS SIMPLY NOT THE OT HER WAY AROUND. THE APPELLANT SEEMS TO BE TRYING TO PUT THE CART BEFORE THE HORSE. F) FINALLY THE APPELLANT'S PLEA THAT THE PROVISIONS O F SEC. 14A CANNOT BE APPLIED TO INVESTMENTS MADE IN SUBSIDIARIES ON T HE GROUND THAT THESE INVESTMENTS HAD NOT YIELDED ANY INCOME DURING THE RELEVANT PREVIOUS YEAR WAS REJECTED BY THE AO IN PARA 5.7 OF HIS ORDER . THE AO RIGHTL Y PLACED RELIANCE ON THE DECISION OF THE HON'BLE ITAT DELHI BENCH IN THE CASE OF CHEMINVEST LTD. (SUPRA) WHEREIN IT WAS HELD THAT DISALLOWANCE U/S 14A SHOULD BE MADE EVEN IF NO INCOME HAD RESULTED OR WAS MADE OR EARNED BY THE AP PELLANT IN THE YEAR UNDER CONSIDERATION . G) IT IS THE CARDINAL RULE OF INTERPRETATION THAT WHER E THE LANGUAGE USED BY THE LEGISLATURE IS CLEAR AND UNAMBIGUOUS T HEN THE PLAIN AND NATURAL MEANING OF THE WORDS SHOULD BE SUPPLIED TO THE LANGUAGE USED AND RESORT TO ANY RULE OF INTERPRETATION TO UNFOLD THE INTENTION IS PERMISSIBLE ONLY WHERE THE LANGUAGE IS AMBIGUOUS. THERE ARE A PLETHORA OF DECISIONS OF THE APEX COURT WHICH SUPPORT THI S PROPOSITION NAMELY - SMT. TARULATA SHYAM VS CIT 108 ITR 345 SC - KESHAVJI RAVJI VS CIT (1990) 183 ITR 1 - GURU DEVDATA VKSS MARYADIT VS STATE OF MAHARASHTRA AIR 2001 SC 1980 - CIT VS ANJUM M.H. GHASWALA (2001) 252 ITR 1 - PRAKASH NATH KHANNA AND ANR VS CIT & ANR 266 ITR 1 ITA NO.261/BANG/11 PAGE 11 OF 15 THE ABOVE JUDGEMENTS MAKE IT CLEAR BEYOND A SHADOW OF DOUBT THAT COURTS ARE NOT REQUIRED TO LOOK INTO THE OBJECT OR INTENTION OF THE LEGISLATURE BY RESORTING TO AIDS TO INTERPRETATION WHERE THE LANGUAGE OF THE PROVISION IS CLEAR AND UNAMBIGUOUS. CONSEQUE NTLY THE MEANING OF EACH WORD USED BY THE LEGISLATURE IS TO BE GIVEN ITS PLAIN AND NATURAL MEANING AND NO WORD SHOULD BE IGN ORED WHILE INTERPRETING A PROVISION OF A STATUTE. THE JURISDIC TIONAL HIGH COURT ALSO HELD IN THE CASE OF KARNATAKA FOREST PLANTATIO NS CORPN. LTD. VS CIT 156 ITR 275 AND KARNATAKA STATE FINANCIAL CORPO RATION VS CIT 174 ITR 206 THAT IN A TAXING ACT ONE HAS TO LO OK MERELY AT WHAT IS SAID. THERE IS NO ROOM FOR ANY INTENDMENT. THERE IS NO PRESUMPTION AS TO TAX. NOTHING IS TO BE READ IN NO THING IS TO BE IMPLIED. ONE CAN ONLY LOOK FAIRLY AT THE LANGUAGE U SED. IT IS ABUNDANTLY CLEAR THAT THE PROVISIONS OF SEC . 14A(2 ) & (3) R . W . RULE 8D HAVE TO BE FOLLOWED SCRUPULOUSLY AND THERE IS NO QUESTION OF TWO POSSIBLE OPINIONS IN THE METHODOLOGY TO BE FOLL OWED IN DETERMINING THE AMOUNT OF EXPENDITURE INCURRED IN R ELATION TO SUCH EXEMPT INCOME. IN VIEW OF THE FOREGOING ANALYSIS I AM INCLINED AG REE WITH THE AO'S STAND AND UPHOLD THE DISALLOWANCE U/S. 14A OF RS. 2 0 22 143/- AS COMPUTED IN ANNEXURE - 1 TO THE ASSESSMENT ORDER. G ROUND 2 THEREFORE FAILS. 7. NOW THE ASSESSEE IS IN APPEAL. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORIT IES BELOW. IT WAS FURTHER SUBMITTED THAT THE AO HAD NOT ESTABLISHED A NY NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE DIVIDEND INCOME EARNED BY THE ASSESSEE. THEREFORE THE DISALLOWANCE MADE U/S. 14A R.W. RULE 8D OF THE INCOME-TAX RULES 1962 WAS NOT JUSTIFIED. RELIANCE WAS PLACE D UPON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. [2010] 328 ITR 81. 8. IN HER RIVAL SUBMISSIONS THE LD. CIT(DR) STRONG LY SUPPORTED THE IMPUGNED ORDER PASSED BY THE LD. CIT(A). ITA NO.261/BANG/11 PAGE 12 OF 15 9. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RE CORD. IN THE PRESENT CASE THE AO INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT. THE SAID PROVISIONS READ AS UNDER: 14A. (1) FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT. (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 ACT IN ACC ORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED IF THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS N OT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RES PECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FO RM 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 EXPENDIT URE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NO T 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 SECT ION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REF UND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE A SSESSEE UNDER SECTION 154 FOR ANY ASSESSMENT YEAR BEGINNING ON O R BEFORE THE 1ST DAY OF APRIL 2001. FROM THE ABOVE PROVISIONS IT WOULD BE CLEAR THAT TH E MANDATE OF SECTION 14A OF THE I.T. ACT IS TO PREVENT CLAIMS FOR DEDUCT ION OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. THIS SECTION IS ENACTED TO ENSURE THAT ON LY EXPENSES INCURRED IN RESPECT OF EARNING TAXABLE INCOME ARE ALLOWED. ALL EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE PROVISIONS OF THE I.T. ACT HAS TO BE DISALLOWED UND ER SECTION 14A. UNDER ITA NO.261/BANG/11 PAGE 13 OF 15 SUB-SECTION (2) OF SECTION 14 THE AO IS REQUIRED T O DETERMINE THE AMOUNT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. IN THE PRESENT CA SE ALTHOUGH NEITHER THE AO NOR THE LD. CIT(A) HAS ESTABLISHED THE NEXUS BETWEEN THE EXPENDITURE AND THE EXEMPTED INCOME (DIVIDEND) TO W ORK OUT THE EXPENDITURE BUT FOR MAKING DISALLOWANCE THE AO INVO KED THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RULES 1962 WHICH ARE INS ERTED 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 HIGH COURT IN THE CASE 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 T HE PROVISIONS OF SECTION 14A OF THE ACT AND RULE 8D OF THE INCOME-TAX RULES 1962 HELD AS UNDER: (HEAD NOTE): THAT THE PROVISIONS OF RULE 8D OF THE RULES WHICH HAVE BEEN NOTIFIED FROM MARCH 24 2008 WOULD APPLY WITH EFFE CT FROM ASSESSMENT YEAR 2008-09. EVEN PRIOR TO ASSESSMENT YEAR 2008- 09 WHEN RULE 8D WAS NOT APPLICABLE THE ASSESSING OFFICER HAD TO ENFORCE THE PROVISIONS OF SUB-SECTION (1) OF SEC TION 14A. FOR THAT PURPOSE ASSESSING OFFICER IS DUTY BOUND TO DE TERMINE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER ACT. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CON SISTENT WITH ALL RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHI NG A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MA TERIAL ON THE RECORD. THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-0 3 WOULD STAND REMANDED TO THE ASSESSING OFFICER. THE ASSES SING OFFICER SHOULD DETERMINE AS TO WHETHER THE ASSESSEE HAD INC URRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO DIV IDEND INCOME/INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED U/S. 14A. THE ASS ESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE ITA NO.261/BANG/11 PAGE 14 OF 15 APPORTIONMENT. WHILE MAKING THAT DETERMINATION TH E ASSESSING OFFICER SHOULD PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATE RIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 10. IN THE PRESENT CASE IT IS NOTICED THAT THE AO HAD NOT ESTABLISHED THE NEXUS BETWEEN THE EXPENDITURE INCURRED AND INCOME E ARNED. HE CONSIDERED THE ENTIRE AMOUNT OF EXPENDITURE BY WAY OF INTEREST AS WELL AS OF EXPENSES INCURRED TOWARDS IPO AS THE EXPENSES RELAT ED TO THE EARNING OF DIVIDEND INCOME. THE LD. CIT(A) ALSO CONFIRMED THE ACTION OF THE AO WITHOUT BRINGING ANY MATERIAL ON RECORD WHICH COUL D HAVE ESTABLISHED THE NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE DIVI DEND INCOME EARNED BY THE ASSESSEE. IN THE PRESENT CASE IT IS VERY S URPRISING THAT THE AO MADE THE DISALLOWANCE OF RS.20 22 143 FOR EARNING T HE DIVIDEND INCOME OF RS.13 64 488. IN OUR OPINION THE AO AS WELL AS TH E LD. CIT(A) HAVE NOT CONSIDERED THE FACTS OF THE PRESENT CASE IN THE RIG HT PERSPECTIVE. WE THEREFORE CONSIDERING THE TOTALITY OF THE FACTS D EEM IT APPROPRIATE TO SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICE R TO BE DECIDED AFRESH BY KEEPING IN VIEW THE GUIDELINES LAID DOWN BY THE HON BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. [ 2010] 328 ITR 81 (SUPRA) . 11. ANOTHER ISSUE RAISED BY THE ASSESSEE VIDE GROUN D NO.3 RELATES TO THE CHARGING OF INTEREST U/S. 234D OF THE ACT. REG ARDING THIS ISSUE THE COMMON CONTENTION OF BOTH THE PARTIES WAS THAT IT I S CONSEQUENTIAL IN NATURE. WE ORDER ACCORDINGLY. ITA NO.261/BANG/11 PAGE 15 OF 15 12. IN THE RESULT THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 16 TH DAY OF FEBRUARY 2012. SD/- SD/- ( GEORGE GEORGE K. ) ( N.K. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE DATED THE 16 TH FEBRUARY 2012. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT BANGALORE.