Lahar Trading & Investment Pvt. Ltd.,, Ahmedabad v. The ACIT., Circle-4,, Ahmedabad

ITA 3057/AHD/2004 | 2001-2002
Pronouncement Date: 04-11-2011 | Result: Partly Allowed

Appeal Details

RSA Number 305720514 RSA 2004
Assessee PAN AAACL3469P
Bench Ahmedabad
Appeal Number ITA 3057/AHD/2004
Duration Of Justice 7 year(s) 20 day(s)
Appellant Lahar Trading & Investment Pvt. Ltd.,, Ahmedabad
Respondent The ACIT., Circle-4,, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 04-11-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 04-11-2011
Date Of Final Hearing 05-10-2011
Next Hearing Date 05-10-2011
Assessment Year 2001-2002
Appeal Filed On 14-10-2004
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH AHMEDABAD .. !'# $ $ $ $ %% % & ' ( # BEFORE SHRI G.D.AGARWAL VICE-PRESIDENT (AZ) AND SHRI MUKUL KR.SHRAWAT JUDICIAL MEMBER $./ I.T.A. NO.3057/AHD/2004 ( * * * * / / / / ASSESSMENT YEAR : 2001-02) LAHAR TRADING & INVESTMENT PVT.LTD. 100 ASHIMA HOUSE NR.M.J. LIBRARY KAVI NANALAL MARG AHMEDABAD / VS. THE ACIT CIRCLE-4 AHMEDABAD '+ ( $./- $./ PAN/GIR NO. : AAACL 3469 P ( +. / // / APPELLANT ) .. ( /0+. / RESPONDENT ) +. 1 ( / APPELLANT BY : SHRI S.N. SOPARKAR A.R. /0+. 2 1 ( / RESPONDENT BY : SHRI SATISH KUMAR GUPTA CIT-D.R. % 3 2 & / / / / DATE OF HEARING : 05/10/2011 45* 2 & / DATE OF PRONOUNCEMENT : 04/11/2011 (6 / O R D E R PER SHRI MUKUL KR. SHRAWAT JUDICIAL MEMBER : THIS IS AN APPEAL AT THE BEHEST OF THE ASSESSEE WH ICH HAS EMANATED FROM THE ORDER OF LEARNED CIT(APPEALS)-VII I AHMEDABAD DATED 21/09/2004 PASSED FOR ASSESSMENT YEAR 2001-0 2. GROUNDS RAISED BY THE ASSESSEE ARE HEREBY DECIDED AS FOLLOWS: 2. GROUND NO.1 READS AS UNDER:- ITA NO. 3057/AHD/2004 LAHAR TRADING & INVESTMENT P.LTD.VS. ACIT ASSESSMENT YEAR 2001-02 - 2 - 1. IN LAW AND IN THE FACTS AS WELL AS THE CIRCUMS TANCES OF THE APPELLANTS CASE THE CIT(A) HAS GROSSLY ERRED IN UP HOLDING THE DISALLOWANCE OF LOSS OF RS.1 03 87 002 ARISING OUT OF EXCHANGE RATE FLUCTUATION IN RESPECT OF WORKING CAPITAL BORROWED BY THE ASSESSEE FROM THE AMERICAN EXPRESS BANK WHEN HE OUG HT TO HAVE DELETED THE ADDITION. IN NOT DOING SO HE HAS FAIL ED TO APPRECIATE THE FOLLOWING AMONGST THE OTHERS. (A) THAT THE APPELLANT HAS ACCOUNTED FOR THE LOSS ON FOREIGN EXCHANGE FLUCTUATION AND OUTSTANDING BALANCE ON THE WORKING CAPITAL LOAN TAKEN IN FOREIGN CURRENCY FROM AMERICAN EXPRESS BANK AS PER THE ACCOUNTING STANDAR D AS- 11 ISSUED BY THE COUNCIL OF INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. (B) THAT THE LOSS/LIABILITY WAS NOT CONTINGENT AS HELD BY THE CIT(A) BUT WAS QUANTIFIED BY THE EXCHANGE RATE FLUC TUATION. THIS HON TRIBUNAL MAY THEREFORE BE PLEASED TO HO LD THAT THERE IS NO JUSTIFICATION IN UPHOLDING THE DISALLOWANCE OF R S.1 03 87 002 AND DIRECT THE DELETION THEREOF. 2.1. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDI NG ASSESSMENT ORDER PASSED U/S. 143(3)(I) OF THE IT ACT 1961 DATED 28 /11/2003 WERE THAT THE ASSESSEE-COMPANY IS IN THE BUSINESS OF TRADING OF COTTON FABRICS. ASSESSEE IS ALSO DEALING IN SHARES AND SECURITIES. AS PER P&L ACCOUNT ASSESSEE HAS CLAIMED LOSS ON FOREIGN EXCHANGE FLUCT UATION OF RS.1 03 87 002/-. IT WAS EXPLAINED THAT THE ASSE SSEE HAS TAKEN A LOAN OF US $ 25 LACS FOR WORKING CAPITAL FINANCE. THE LOAN WAS TAKEN FROM AMERICAN EXPRESS BANK LTD. THE CLAIM WAS MADE ON T HE BASIS OF ACCOUNTING STANDARD-11. AOS VIEW WAS THAT THE SA ID CLAIM WAS NEITHER ITA NO. 3057/AHD/2004 LAHAR TRADING & INVESTMENT P.LTD.VS. ACIT ASSESSMENT YEAR 2001-02 - 3 - DE-FACTO NOR DE-JURE ALLOWABLE. IN HIS OPINION TH E LOSS WAS NOT ACTUALLY SUFFERED BY THE ASSESSEE. THE LOSS WAS MERELY ON ACCOUNT OF FLUCTUATION IN THE FOREIGN EXCHANGE RATE. IT WAS AN UNASCERTAI NED AND CONTINGENT LIABILITY. AS PER AO THE LIABILITY WAS NOT CRYS TALLIZED. THE CLAIM WAS DISALLOWED. THE MATTER WAS CARRIED BEFORE THE FIRS T APPELLATE AUTHORITY. 3. BEFORE LD.CIT(A) A CORRESPONDENCE WITH THE AMER ICAN EXPRESS BANK WAS PLACED ON RECORD TO DEMONSTRATE THAT THE N ATURE OF LOAN FACILITY WAS DEMAND LOAN FOR WORKING CAPITAL FINANCING. LD.CIT(A) WAS AGAIN OF THE VIEW THAT NO LOSS WAS IN FACT HAD INC URRED BUT IT WAS AN ADDITIONAL LIABILITY OF LOAN REQUIRED TO BE REPAID HENCE NOT AN ALLOWABLE REVENUE EXPENDITURE. BEING AGGRIEVED NOW THE ASSE SSEE IS FURTHER IN APPEAL. 4. PARTIES HEARD. AT THE OUTSET A DECISION OF THE H ONBLE SUPREME COURT IS CITED PRONOUNCED IN THE CASE OF OIL & NATURAL GAS CORPORATION LTD. VS. CIT 322 ITR 180 (SC) WHEREIN IT WAS HELD AS UNDER:- HELD REVERSING THE DECISION OF THE HIGH COURT (I) THAT THE LOSS CLAIMED BY THE APPELLANT ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF THE BALANCE-SHEE T WAS ALLOWABLE AS EXPENDITURE UNDER SECTION 37(1) ; AND (II) THAT THE APPELLANT WAS ENTITLED TO ADJUST THE ACTUAL COST OF IMPORTED ASSETS ACQUIRED IN FOREIGN CURRENCY ON ACC OUNT OF FLUCTUATION IN THE RATE OF EXCHANGE AT EACH OF THE RELEVANT BALANCE- SHEET DATES PENDING ACTUAL PAYMENT OF THE LIABILIT Y UNDER SECTION 43A PRIOR TO ITS AMENDMENT BY THE FINANCE ACT 200 2. ITA NO. 3057/AHD/2004 LAHAR TRADING & INVESTMENT P.LTD.VS. ACIT ASSESSMENT YEAR 2001-02 - 4 - 4.1. SINCE ALMOST ON IDENTICAL CIRCUMSTANCES A VIE W HAS ALREADY BEEN TAKEN BY THE HONBLE APEX COURT THEREFORE RESPECT FULLY FOLLOWING THE SAME THIS GROUND IS HEREBY ALLOWED. 5. GROUND NO.2 READS AS UNDER: 2. IN LAW AND IN THE FACTS AS WELL AS THE CIRCUMST ANCES OF THE APPELLANTS CASE THE CIT(A) HAS GROSSLY ERRED IN U PHOLDING THE DISALLOWANCE OF RS.81 62 234 OUT OF THE EXPENDITURE OF PAYMENT OF INTEREST BY APPLYING THE PROVISIONS OF SECTION 14A OF THE I.T. ACT WHEN HE OUGHT TO HAVE DELETED THE ADDITION MORE PAR TICULARLY WHEN THE INVESTMENT IN SHARES WERE A BUSINESS PROPOSITIO N AND THEREFORE THE DIVIDEND INCOME WAS A BUSINESS INCOME THOUGH TA XED UNDER THE HEAD INCOME FROM OTHER SOURCES. 5.1 THE OBSERVATION OF THE AO WAS THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.37 68 788/- WHICH WAS CLAIMED AS EXEMPT U/S.10(33) OF THE I.T.ACT. IT HAS ALSO BEEN OBSERVED BY THE AO THAT AN EXPENDITURE OF INTEREST PAYMENT OF RS.3 33 25 454/- WAS CLAIMED. AO HAS THUS OBSERVED THAT PART OF THE INTEREST EXPE NDITURE WAS RELATED TO THE EARNING OF DIVIDEND INCOME. IT HAS ALSO BEEN N OTED THAT THE ASSESSEE HAS ADMITTED THE SAID FACT AND VOLUNTARILY DISALLOW ED THE SAID AMOUNT OF RS.37 68 788/-. HOWEVER AOS ALLEGATION WAS THAT THE SAID VOLUNTARY DISALLOWANCE WAS NOT PROPORTIONATE TO THE EXPENDITU RE INCURRED BY WAY OF INTEREST FOR EARNING THE SAID DIVIDEND INCOME. IT WAS OBSERVED THAT THERE WAS CLOSING STOCK OF SHARES OF RS.9 85 62 416/-. IT HAS ALSO BEEN NOTED THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF T RADING IN SHARES THEREFORE INTEREST WAS DEDUCTIBLE U/S.36(1)(III) OF I.T.ACT. ASSESSEE HAS EXPLAINED THAT A LOAN WAS TAKEN FROM AMERICAN EXPRE SS BANK LTD. OF RS.7 69 62 997/-. THE SAID LOAN WAS UTILIZED FOR R EPAYMENT OF LOAN TAKEN ITA NO. 3057/AHD/2004 LAHAR TRADING & INVESTMENT P.LTD.VS. ACIT ASSESSMENT YEAR 2001-02 - 5 - EARLIER FOR THE PURPOSE OF PURCHASE OF SHARES AND A LSO FOR THE PURPOSE OF WORKING CAPITAL. THEREFORE AS PER ASSESSEE THE STOCK OF SHARES HAD BEEN ACQUIRED OUT OF BORROWED FUNDS. HOWEVER THE AO HA S THEREAFTER CALCULATED THE PROPORTIONATE INTEREST AS FOLLOWS:- 5 . THEREFORE IT IS EVIDENT THAT THE SHARES WHICH ARE HELD BY THE ASSESSEE AS CLOSING STOCK AMOUNTING TO RS.9 85 62 416/- HAS BEEN ACQUIRED NOT OUT OF THE OWN FUNDS OF THE ASSES SEE BUT OUT OF THE BORROWED FUNDS. THE UNSECURED LOANS AS ON 31.0 3.2011 OF THE ASSESSEE COMPANY AGGREGATED TO RS.27 53 02 250/-. THE EXPENDITURE ON PAYMENT OF INTEREST DURING THE YEAR AMOUNTED TO RS.3 33 25 454/-. THE VALUE OF THE SHARES HELD IN STOCK WHICH HAS YIELDED DIVIDEND INCOME OF RS.37 68 788/- AMOUNTED TO RS.9 85 62 416/-. THE EXPENDITURE ON PAYMENT OF IN TEREST WHICH RELATES TO ACQUISITION AND MAINTENANCE OF THE AFORE SAID SHARES WHICH HAVE YIELDED DIVIDEND INCOME OF RS.3768788/- WHICH IS EXEMPTED U/S.10(33) WOULD WORK OUT TO RS.1 19 31 02 2/- (33325454 / 275302250 X 98562416). ACCORDINGLY AN AMOUNT OF RS.1 19 31 022/- IS TREATED AS EXPENDITURE RELATING TO EARNING THE INCOME FROM DIVIDEND WHICH IS EXEMPT. IN ACCORDANC E WITH THE PROVISIONS OF SECTION-14A THE SAID EXPENDITURE IS LIABLE TO BE DISALLOWED. HOWEVER SINCE THE ASSESSEE ITSELF HAD SUO-MOTU DISALLOWED AN AMOUNT OF RS.37 68 788/- THE NET DIS ALLOWANCE U/S.14A WOULD WORK OUT TO RS.81 62 234/-. 5.2. BEING AGGRIEVED THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. 6. BEFORE LD.CIT(A) IT WAS CONTESTED THAT THE CLA IM OF INTEREST WAS NOT UNDER THE HEAD INCOME FROM OTHER SOURCES BUT IT WAS AGAINST THE BUSINESS INCOME OF THE ASSESSEE ON ACCOUNT OF TRA DING IN SHARES. LD.CIT(A) HAS COMMENTED THAT WHILE COMPUTING THE TA XABLE INCOME THE SAID AMOUNT WAS ADDED BACK BY THE ASSESSEE ITSELF F OR SEPARATE ITA NO. 3057/AHD/2004 LAHAR TRADING & INVESTMENT P.LTD.VS. ACIT ASSESSMENT YEAR 2001-02 - 6 - CONSIDERATION THEREFORE THAT ACTION ITSELF PROVED THAT THE INTEREST WAS NOT TAKEN BY THE ASSESSEE AS PART OF BUSINESS INCOME. IT HAS ALSO BEEN NOTED BY LD.CIT(A) THAT EVEN IN THE P&L ACCOUNT THE DIVID END INCOME WAS NOT SHOWN AS PROFITS AND GAINS OF BUSINESS BUT IT WAS SEPARATELY SHOWN AS DIVIDEND INCOME. THE ACTION OF THE AO WAS CONFIR MED AS PER THE FOLLOWING OBSERVATION:- 2.2. THERE IS NO AMBIGUITY THAT ANY EXPENDITURE CL AIMED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTA L INCOME IS NOT ALLOWABLE U/S.14A OF THE ACT. THE ASSESSEES REPRE SENTATIVE SHRI NITIN PARIKH WAS ALSO INQUIRED WHETHER ANY OF THE ASSESSEES OWN CAPITAL OR INTEREST FREE FUNDS HAVE BEEN USED FOR I NVESTMENT IN SHARES OF RS.9 85 62 416/-. THIS COULD NOT BE CO RRELATED TO ANY OF THE SAID INTEREST FREE FUNDS OR ASSESSEES OWN CAPI TAL WHICH IS SHOWN AT RS.44 66 000/- BOTH AS ON 31.3.2000 AND 31 .3.2001. THEREFORE NO ALLOWANCE CAN BE GIVEN TO THE ASSESSE E ON THIS ACCOUNT ALSO. ACCORDINGLY THE WORKING OF THE AO O N PAGE 6 OF THE ASSESSMENT ORDER OF APPORTIONING THE INTEREST PAYME NT OF RS.3 33 25 454/- ON THE BASIS OF INVESTMENTS IN SHA RES ETC. ON WHICH THE DIVIDEND INCOME NOT FORMING PART OF TOTAL INCOME HAS BEEN EARNED AND ALSO HAVING REGARD TO THE TOTAL UNS ECURED LOANS (ON WHICH INTEREST HAS BEEN PAID) BEING RS.27 53 02 250/- IS CORRECT AND THE SAME IS THEREFORE UPHELD. SINCE TH E ASSESSEE HAD ALREADY DISALLOWED RS.37 68 788/- THE BENEFIT OF TH E SAME HAS BEEN ALLOWED BY THE AO WHILE WORKING OUT THE DISALL OWANCE OF RS.81 62 234/-. IT WOULD ALSO BE RELEVANT TO PLACE ON RECORD THAT OUT OF THE TOTAL SHARES AND SECURITIES HELD BY THE ASSESSEE COMPANY AS ON 31.3.2001 THE FOLLOWING SHARES PERTAIN TO TH E ASSESSEE COMPANYS SISTER CONCERNS : SR. NO. NAME OF SCRIP OPENING STOCK PURCHASES SALES/ADJUSTMENTS CLOSING STOCK QTY VALUE QTY VALUE QTY VALUE QTY. VALUE 2. ASHIMA LTD. 2272346 73851245 450 14763 - - 2272796 72729472 3. NACHMO KNITEX LTD. 659695 19790850 - - - - 659695 21110240 ITA NO. 3057/AHD/2004 LAHAR TRADING & INVESTMENT P.LTD.VS. ACIT ASSESSMENT YEAR 2001-02 - 7 - 2.3. IN BOTH THESE CASES THERE HAS BEEN NO PURCHAS E OR SALES DURING THE YEAR AND ON THIS ACCOUNT ALS9O THE INVE STMENT DOES NOT APPEAR TO BE FOR BUSINESS PURPOSES. THE A.O. MAY E XAMINE THIS POINT IN THE YEAR OF INVESTMENTS AND TAKE APPROPRIA TE ACTION. 7. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE ORD ERS OF THE AUTHORITIES BELOW. AT THE OUTSET IT IS WORTH TO M ENTION THAT DURING THE ASSESSMENT PROCEEDINGS AS ALSO DURING THE APPELLAT E PROCEEDINGS BEFORE CIT(A) THE LATEST DEVELOPMENT IN RESPECT OF LEGAL INTERPRETATION OF SECTION 14A AS PRONOUNCED BY HONBLE COURTS WAS N OT AVAILABLE. WE ARE OF THE CONSIDERED VIEW THAT NOW THIS ISSUE DESE RVES TO BE DECIDED IN THE LIGHT OF A LATEST DECISION OF HONBLE BOMBAY HI GH COURT DECIDED IN THE CASE OF GODREJ & BOYCE MFG. CO.LTD.328 ITR 81 ( BOM. IT IS ALSO NECESSARY TO REFER AT THIS STAGE THAT THE APPLICABI LITY OF RULE 8D HAS NOW BEEN DECIDED BY THE HON'BLE BOMBAY HIGH COURT IN TH E CASE OF GODREJ & BOYCE MFG. CO.LTD( SUPRA). THEREFORE WE DEEM IT P ROPER TO FOLLOW THE SAID VERDICT. IN THIS JUDGEMENT AT THE END THE HON'BLE COURT HAS RECAPITULATED THE CONCLUSION AND PRONOUNCED THAT A FINDING IS REQUIRED WHETHER THE INVESTMENT IN SHARES IS MADE OUT OF OWN FUNDS OR OUT OF BORROWED FUNDS. A NEXUS IS REQUIRED TO BE ESTABLIS HED BETWEEN THE INVESTMENTS AND THE BORROWINGS. IN SECTION 14A OF THE ACT EXPENDITURE INCURRED IN RELATION TO EXEMPTED INCOME IS TO BE DI SALLOWED ONLY IF THE ASSESSING OFFICER IS SATISFIED WITH THE EXPENDITURE CLAIMED BY THE ASSESSEE PERTAINING TO THE SAID EXEMPT INCOME. RATHER THE COURT WAS VERY SPECIFIC THAT IN CASE NO SUCH EXERCISE WAS CA RRIED OUT BY THE ASSESSING OFFICER THEN THE MATTER IS TO BE REMANDED BACK FOR AFRESH INVESTIGATION. IT HAS ALSO BEEN MADE CLEAR THAT THE PROVISO TO SE CTION 14A OF THE ACT WAS EFFECTIVE FROM 2001-02. THE HO N'BLE COURT HAS ALSO ITA NO. 3057/AHD/2004 LAHAR TRADING & INVESTMENT P.LTD.VS. ACIT ASSESSMENT YEAR 2001-02 - 8 - POINTED OUT THE IMPORTANCE OF RULE 8D OF THE I.T.RU LES 1962. IT WAS MADE CLEAR THAT SUB-SECTION (1) TO SECTION 14A WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 01/04/1962 HOWEVER SUB- 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 (FIFTH AMENDMENT) RULES 2008 BY PUBLICATION IN THE GAZETTE DATED 24/03/2008 RELEVA NT 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 ITA NO. 3057/AHD/2004 LAHAR TRADING & INVESTMENT P.LTD.VS. ACIT ASSESSMENT YEAR 2001-02 - 9 - 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. 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 ITA NO. 3057/AHD/2004 LAHAR TRADING & INVESTMENT P.LTD.VS. ACIT ASSESSMENT YEAR 2001-02 - 10 - 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; 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. 3057/AHD/2004 LAHAR TRADING & INVESTMENT P.LTD.VS. ACIT ASSESSMENT YEAR 2001-02 - 11 - 7.1. 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 CONSIDERATION FOR THE PURPOSE OF INVOCATION OF THE PROVISIONS OF SECTION 14A OF THE I.T. ACT 1961. 7.2. APART FROM THE ABOVE DISCUSSION AN ANOTHER CASE LAW SHOULD ALSO NOT ESCAPE THE ATTENTION AS PRONOUNCED IN THE CASE OF WALFORT 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 ITA NO. 3057/AHD/2004 LAHAR TRADING & INVESTMENT P.LTD.VS. ACIT ASSESSMENT YEAR 2001-02 - 12 - 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 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. ITA NO. 3057/AHD/2004 LAHAR TRADING & INVESTMENT P.LTD.VS. ACIT ASSESSMENT YEAR 2001-02 - 13 - 7.3. 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 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 . 7.4. 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 THE LAW APPLICABLE. NOW WE HAVE GOT CERTAIN 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 ITA NO. 3057/AHD/2004 LAHAR TRADING & INVESTMENT P.LTD.VS. ACIT ASSESSMENT YEAR 2001-02 - 14 - AFRESH HENCE THIS GROUND OF THE ASSESSEE MAY BE T REATED AS ALLOWED BUT STATISTICAL PURPOSES. 8. IN THE RESULT THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED. SD/- SD/- ( G.D. AGARWAL ) ( MUKUL KR. SHRAWAT ) VICE PRESIDENT (AZ) JUDICIAL ME MBER AHMEDABAD; DATED 4TH/ NOV /2011 ORDER PRONOUNCED IN THE OPEN COURT SD/- SD/- AKG MKS (AM) (JM) 4.11.11 7.. . ../ T.C. NAIR SR. PS (6 2 /&8 (8*& (6 2 /&8 (8*& (6 2 /&8 (8*& (6 2 /&8 (8*&/ COPY OF THE ORDER FORWARDED TO : 1. +. / THE APPELLANT 2. /0+. / THE RESPONDENT. 3. $$ & %9 / CONCERNED CIT 4. %9() / THE CIT(A)-VIII AHMEDABAD 5. 8<= /& / DR ITAT AHMEDABAD 6. = >3 / GUARD FILE. (6 (6 (6 (6 % % % % / BY ORDER 08& /& //TRUE COPY// ! !! !/ // / $ $ $ $ ( DY./ASSTT.REGISTRAR) / ITAT AHMEDABAD 1. DATE OF DICTATION.. 05/10/2011 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 07/10/2011 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.S 4.11.2011 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 4.11.2011 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