DCIT (OSD) CIR 3(3), MUMBAI v. THE BANK OF RAJASTHAN LTD ( NOW ME W.E.F 12/08/2010)RGED WITH ICICI BANK, RAIGAD

ITA 3655/MUM/2012 | 2008-2009
Pronouncement Date: 03-07-2013 | Result: Allowed

Appeal Details

RSA Number 365519914 RSA 2012
Assessee PAN AAACT7434N
Bench Mumbai
Appeal Number ITA 3655/MUM/2012
Duration Of Justice 1 year(s) 1 month(s) 11 day(s)
Appellant DCIT (OSD) CIR 3(3), MUMBAI
Respondent THE BANK OF RAJASTHAN LTD ( NOW ME W.E.F 12/08/2010)RGED WITH ICICI BANK, RAIGAD
Appeal Type Income Tax Appeal
Pronouncement Date 03-07-2013
Appeal Filed By Department
Order Result Allowed
Bench Allotted D
Tribunal Order Date 03-07-2013
Assessment Year 2008-2009
Appeal Filed On 23-05-2012
Judgment Text
D IN THE INCOME TAX APPELLATE TRIBUNAL D BENC H MUMBAI . . ! # $%& $ BEFORE SHRI D. MANMOHAN VICE PRESIDENT AND SHRI D. KARUNAKARA RAO AM $ /.I.T.A. NO.3655/M/2012 ( ' ( )( / ASSESSMENT YEAR : 2008-2009) DCIT CIRCLE-3(1) ROOM NO.607 6 TH FLOOR AAYAKAR BHAVAN MUMBAI-20. / VS. M/S. THE BANK OF RAJASTHAN LTD. (NOW MERGED WITH ICICI BANK LTD W.E.F. 12.8.2010) ICICI BANK TOWERS 9 TH FLOOR SOUTH EAST WING BANDRA (E) MUMBAI 400 051. &* # $ ./PAN : AAACT 7434 N ( *+ /APPELLANT) .. ( -*+ / RESPONDENT) C.O. NO.115/M/2013( ARISING OUT OF I.T.A. NO.3655/M/ 2012)(AY: 2008-2009) ICICI BANK LTD. ERSTWHILE THE BANK OF RAJASTHAN LTD ICICI BANK TOWERS 9 TH FLOOR SOUTH EAST WING BANDRA (E) MUMBAI 400 051. / VS. DCIT CIRCLE-3(1) ROOM NO.607 6 TH FLOOR AAYAKAR BHAVAN MUMBAI-20. &* # $ ./PAN : AAACT 7434 N ( *+ /APPELLANT) .. ( -*+ / RESPONDENT) *+ . / $ / APPELLANT BY : SHRI PRAVIN KUMAR CIT-DR -*+ . / $ / RESPONDENT BY : MS. ARATI VISSANJI $ . 0# /DATE OF HEARING : 17.6.2013 1) . 0# /DATE OF PRONOUNCEMENT : 3.7.2013 %2 %2 %2 %2 / O R D E R PER D. KARUNAKARA RAO AM: THERE ARE TWO APPEALS UNDER CONSIDERATION AND THEY ARE CROSS APPEALS. APPEAL ITA NO.3655/M/2012 IS FILED BY THE REVENUE A ND C.O. NO.115/M/2013 IS FILED BY THE ASSESSEE. AS A MATTER OF RULE AND THE CONNEC TION OF THE ISSUES WE HAVE 2 CLUBBED HEARD THEM TOGETHER AND BEING DISPOSED IN THIS CONSOLIDATED ORDER. APPEAL WISE AND GROUND WISE ADJUDICATION IS GIVEN IN THE F OLLOWING PARAGRAPHS. ITA NO. 3655/M/2012 REVENUES APPEAL 2. FIRSTLY WE SHALL TAKE UP ITA NO. 3655/M/2012 WH ICH IS FILED BY THE REVENUE ON 23.5.2012 AGAINST THE ORDER OF THE CIT (A)-7 MU MBAI DATED 30.01.2012 FOR THE AY 2008-2009. IN THIS APPEAL REVENUE RAISED THE F OLLOWING EFFECTIVE GROUND WHICH READ AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD CIT (A) ERRED IN RESTRICTING THE ADDITION MADE U/S 14A R.W. RULE-8D( 2)(II) OF THE ACT TO 1% OF GROSS DIVIDEND AT RS. 3 01 838/- AS AGAINST RS. 1 93 74 441/- MADE BY THE AO FOLLOWING HONBLE ITAT DECISION IN THE CASE OF HDFC BANK LTD IN ITA NO.4529/M/2005 DATED 30.1.2012 WHEREIN IT IS HELD T HAT IF THE ASSESSEES OWN FUNDS AND NON-INTEREST BEARING FUNDS ARE MORE THAN THE IN VESTMENT IN TAX FREE SECURITIES THERE CAN BE NO BASIS FOR DEEMING THAT THE ASSESSEE HAS USED BORROWED FUNDS FOR MAKING INVESTMENT IN TAX FREE SECURITIES WITHOUT A PPRECIATING THE FACT THAT AS PER THE PROVISIONS OF RULE-8D ONCE THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE CLAIMED HE HAS NO OPTION BUT TO DISALLOW SUCH EXPENDITURE IN ACCORDANCE WITH METHOD PRESCRIBED UN DER RULE-8D(2)(II) THE APPLICATION OF WHICH IS MANDATORY. 3. BRIEFLY STATED RELEVANT FACTS ARE THAT THE ASSES SEE A BANK FILED ITS RETURN DECLARING INCOME OF RS. 178.66 CRS (ROUNDED OF) AND THE ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT DETERMINING THE ASSESSED INCO ME AT RS. 192 84 89 690/-. DURING THE ASSESSMENT PROCEEDINGS AO MADE ADDITION OF RS. 1 93 74 441/- INVOKING THE PROVISIONS OF SECTION 14A READ WITH RU LE-8D OF THE ACT WHICH IS THE SUBJECT MATTER OF THE PRESENT DISPUTE BETWEEN THE P ARTIES IN BOTH THE APPEAL AND THE CROSS OBJECTION. 3.1. RELEVANT FACTS RELATING TO THIS ADDITION ARE THAT THE ASSESSEE DECLARED THE EXEMPT DIVIDEND INCOME OF RS. 3 01 83 832/-. IN THE TAX AUDIT REPORT UNDER CLAUSE 17(I) OF 3CD REPORT AUDITORS MENTIONED THAT RS. 20 25 559/- WAS DISALLOWED AND NOT CLAIMED IN COMPUTATION OF RETURN AS PER ANN EXURE-K-1 . THIS AMOUNT IS ATTRIBUTABLE TO THE AVERAGE COST OF THE I NVESTMENT IN INVESTMENTS AND THEREFORE THE PRESENT DISPUTE IS RESTRICTED TO THE EXTENT OF ADMINISTRATIVE AND OTHER EXPENDITURE INCURRED BY THE COMPANY FOR EARNING OF THE SAID EX EMPT DIVIDEND AND INTEREST INCOME FOR THE PURPOSE OF DIS ALLOWANCE U/S 14A OF THE ACT. IN THIS REGARD ASSESSEE FILED WRITTEN SUBMISSIONS MEN TIONING THAT ASSESSEE INVESTED 3 EARNINGS OUT OF INTERNAL ACCRUALS AND NO BORROWED F UNDS WERE INVESTED FOR EARNING OF THE EXEMPT INCOME. THEREFORE NO INTEREST EXPENSES HAVE BEEN INCURRED. HOWEVER ASSESSEE OFFERED 0.5% OF AVERAGE VALUE OF INVESTMEN T IE RS. 20 25 559/-. THE OTHER SUBMISSIONS MADE BY THE ASSESSEE ARE NARRATED IN PA RA 5.5 OF THE ASSESSMENT ORDER. BRIEFLY STATED ASSESSEE PRO-RATING THE COMMON EXPE NDITURE IN FAVOUR OF ONLY DIRECT EXPENDITURE WHICH IS CLEARLY ALLOCABLE TO THE EARNI NG OF THE INCOME AND RELIANCE WAS PLACED ON THE NEXUS THEORY AND NOT ON AD-HOC ESTIMA TION. WITHOUT PREJUDICE ASSESSEE SUBMITTED THAT 1% OF THE GROSS DIVIDEND INCOME AMOUNTING TO RS. 3 01 838/- SHOULD BE CONSIDERED AS A DISALLOWABLE E XPENDITURE U/S 14A TOWARDS ADMINISTRATIVE EXPENSES ATTRIBUTABLE TO THE EARNING OF THE DIVIDEND INCOME. 4. PER CONTRA AFTER CONSIDERING THE ABOVE STAND OF THE ASSESSEE THE ASSESSING OFFICER HEAVILY RELIED ON THE BOMBAY HIGH COURT JUD GMENT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT FOR THE PROPOSITION TH AT ASSESSING OFFICER WHEN NOT SATISFIED WITH THE ASSESSEES METHOD OF DETERMINING THE DISALLOWABLE EXPENDITURE IS JUSTIFIED IN REJECTING THE ASSESSEES METHOD AND AD OPTING THE REASONABLE BASIS U/S 14A OF TE ACT. HE ALSO MENTIONED THAT FOR THE AY 2008-2009 APPLICATION OF RULE-8D IS MANDATORY AND AUTOMATIC AND THE DISALLOWANCE HAS TO BE WORKED OUT ON AS PER THE SAID RULE AND NOT ON THE BASIS OF ANY ADHOC ESTIMATION IE 1% OF THE GROSS DIVIDEND AS DISCUSSED ABOVE. FURTHER AO DISCUSSED THE ASSESSEES RESPONSIBILITY / DISCHARGING OF THE ONUS IN MATTER OF QUANTIFYING OF THE DISALLOWABLE EXPENDITURE IN THE LIGHT OF VARIOUS DECISIONS NAMELY THE JUDGMENT OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF HARYANA LAND RECLAMATION & DEVELOPMENT CORPORATION VS. CIT (302 ITR 218) WHEREIN IT WAS HELD THAT ONCE THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE BEFORE THE AUTHOR ITIES ABOUT THE EXTENT OF EXPENDITURE INCURRED FOR EARNING OF EXEMPT INCOME AO BECOMES DISSATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE THUS LEADING TO MAKING OF DISALLOWANCE U/S 14A IN ACCORDANCE WITH RULE-8D OF THE INCOME TAX RULES 1962 . HE FURTHER MENTIONED THAT APPORTIONING OF EXPENSES IS PERMITTE D UNDER THE JUDGMENTAL LAW AND IN THIS REGARD HE RELIED ON THE COORDINATE BENCH D ECISION OF ITAT IN THE CASE OF M/S. GHERZI EASTERN LIMITED VIDE ITA NO.6562/BOM/94 DATED 23 RD SEPTEMBER 2002 WHEREIN THE TRIBUNAL HELD THAT IT CANNOT BE DENIED THAT SOME ADMINISTRATIVE 4 EXPENDITURE WAS DEFINITELY ATTRIBUTABLE TOWARDS EAR NING OF THIS DIVIDEND INCOME AND THAT HAD TO BE DEDUCTED WHILE ALLOWING DEDUCTION UN DER SECTION 80M . FURTHER AO ALSO DERIVED STRENGTH FROM THE JUDGMENT OF THE HON BLE SUPREME COURT IN THE CASE OF DISTRIBUTORS (BORADA) PVT. LTD. (155 ITR 120) AN D THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF MAGGANLAL CHAGGANL AL PVT. LTD. (236 ITR 456). REGARDING THE ISSUE OF RECORDING THE SATISFACTION O F THE AO AS PER THE PROVISIONS OF SECTIN 14A(2) IT IS DISCUSSED IN PARA 5.9 OF THE A SSESSMENT ORDER THAT WHERE NO SEPARATE ACCOUNTS RELEVANT FOR THE EXEMPT INCOME/IN VESTMENTS ARE MAINTAINED ASSESSEE IS UNDER OBLIGATION TO ESTABLISH THE EXTEN T OF EXPENDITURE OUT OF ALL THE ACCOUNTS DEBITED TO THE P & L ACCOUNT AS SUCH ASSES SEE WOULD NOT MAKE INVESTMENT IN ISOLATION. MERE DISALLOWING SALARIES OF FEW EMP LOYEES DO NOT AMOUNT TO COMPLETE THE EXERCISE OF IDENTIFYING THE RELATABLE EXPENDITU RE TO THE EXEMPT INCOME. IN THIS CASE ASSESSEE FAILED TO IDENTIFY THE EXTENT OF EXP ENDITURE FROM ALL THE ACCOUNTS THEREFORE ASSESSING OFFICER IS NOT SATISFIED WITH THE METHOD ADOPTED BY THE ASSESSEE. FINALLY ASSESSING OFFICER MADE A COMPUT ATION OF DISALLOWANCE UNDER RULE-8D AND DETERMINED SUCH DISALLOWABLE AMOUNT AT RS. 1 93 74 441/- WHICH INCLUDES RS. 20 25 559/- WHICH IS INITIALLY QUANTI FIED BY THE AUDITORS AS EVIDENT FROM THE TAX AUDIT REPORT. IN FACT RS.2.14 CRS IE APPO RTIONED EXPENDITURE RELATABLE TO THE EXEMPT INCOME IS THE BONE OF CONTENTION HERE. AGGR IEVED WITH THE SAME ASSESSEE FILED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORIT Y. 5. DURING THE PROCEEDINGS BEFORE THE FIRST APPELLAT E AUTHORITY IN CONNECTION WITH THE DISALLOWANCE OF AN AMOUNT OF RS. 2.14 CRS ASSE SSEE VEHEMENTLY ARGUED AND FILED THE WRITTEN SUBMISSIONS WHICH IS REPRODUCED I N PARA 5.1 OF THE IMPUGNED ORDER. THE SAID SUBMISSION CONTAINS THE ARGUMENT THAT THE INVESTMENT BY THE ASSESSEE WAS MADE IN THE GOVERNMENT SECURITIES IN ACCORDANCE WIT H THE POLICY OF THE GOVERNMENT AND THE TOTAL INVESTMENT IN SUCH SECURITIES IS LESS THAN THEIR OWN FUNDS AND NOT OUT OF ANY INTEREST BEARING FUNDS. THEREFORE NO INTER EST PAID EXPENDITURE IS RELATABLE TO THE SAID INVESTMENT IN SECURITIES. IN THIS REGARD A SSESSEE MENTIONED THAT THE COST FREE FUNDS AMOUNTING TO RS. 938.61 CRS IS AVAILABLE AS ON 31.3.2008 AND THE INVESTMENT IN SHARES STANDS AT RS. 17.28 CRS ONLY. ASSESSEE ALSO SUBMITTED THAT IN CASE OF AN INDIVISIBLE BUSINESS ACTIVITIES ENTIRE EXPENDITURE IS ALLOWABLE WITHOUT ANY 5 APPORTIONMENT. IN THIS REGARD HE RELIED ON THE J UDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF RAJASTHAN STATE WAREHOUSING CO RPORATION VS. CIT (242 ITR 450). ASSESSEE FURTHER ARGUED THAT FOR INVOKING TH E PROVISIONS OF SECTION 14A THERE SHOULD A POSITIVE RELATIONSHIP BETWEEN THE EXPENDIT URE UNDER THE CONSIDERATION AND THE EARNING OF NONTAXABLE INCOME. ASSESSEE ALSO RE LIED ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RE LIANCE UTILITIES & POWER LTD (313 ITR 340) FOR THE PROPOSITION THAT IF THE ASSESSEE P OSSESSES INTEREST FREE FUNDS OF ITS OWN THEN NO PART OF INTEREST ON BORROWINGS CAN BE DISALLOWED IN VIEW OF PRESUMPTION MENTIONED IT THE SAID JUDGMENT. RELYING ON THE JUDGMENT OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCL ES (323 ITR 518) LD COUNSEL ARGUED THAT WHEN THERE IS NO EXPENDITURE IS INCURRE D NO DISALLOWANCE IS REQUIRED TO BE MADE U/S 14A. WITHOUT PREJUDICE ASSESSEE MENTIO NED THAT MAKING DISALLOWANCE ON AD-HOC BASIS @ 1% GROSS DIVIDED RECEIVED AMOUNTI NG TO RS. 3 01 838/- CAN BE CONSIDERED AS AMOUNT DISALLOWABLE U/S 14A OF THE AC T UNDER THE ADMINISTRATIVE EXPENSES ATTRIBUTABLE TO THE EXEMPT INCOME. ON CON SIDERING THE ABOVE SUBMISSIONS OF THE ASSESSEE CIT (A) DISALLOWED ONLY A SUM OF RS. 20 25 559/- AND A SUM OF RS. 3 01 838/- AS EXPENDITURE RELATABLE TO THE EARNING OF THE EXEMPT INCOME AND GRANTED RELIED ON THE BALANCE AMOUNT IE (RS. 1 93 7 4 441 RS. 23 27 397). RELEVANT DISCUSSION WAS GIVEN IN PARA 5.2 OF THE IM PUGNED ORDER JUSTIFYING THE RELIEF GRANTED TO THE ASSESSEE. AGGRIEVED WITH THE RELIEF GRANTED BY THE CIT (A) REVENUE FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL BY RAI SING THE ABOVE MENTIONED GROUNDS. BEFORE THE TRIBUNAL 6. DURING THE PROCEEDINGS BEFORE US LD DR EXPLAINE D THE ABOVE MENTIONED FACTS RELATING TO THE ADDITION OF RS. 1 93 74 441/- U/S 14A OF THE ACT AND SUBMITTED THAT THE CIT (A) ERRED IN RESTRICTING THE ADMINISTRATIVE EXPENSES ONLY TO 1% OF THE DIVIDEND INCOME INSTEAD OF DISALLOWING THE ALL EXPE NSES RELATABLE TO THE EXEMPT INCOME AND INSTEAD OF APPRECIATING THE FACT AO APP LIED RULE-8D TO THE PRESENT ASSESSMENT YEAR 2008-09 IN COMPLIANCE OF THE BINDIN G JUDGMENT IN THE CASE OF GODREJ & BOYCE MFG. CO.LTD. LD DR ALSO ALLEGED THA T CIT (A) CONVENIENTLY SHIFTED THE ONUS TO THE ASSESSING OFFICER INSTEAD OF APPREC IATING THE FACT THAT THE ASSESSEE 6 FAILED TO DISCHARGE THE ONUS OF ESTABLISHING THE IN VESTMENTS MADE OUT OF THE INTEREST FREE FUNDS AND ASSESSEE FAILED TO DISTINGUISH AND I DENTIFY THE EXPENDITURE OUT OF COMMON EXPENSES. REGARDING THE DISSATISFACTION OF T HE AO ABOUT THE METHOD ADOPTED BY THE ASSESSEE LD DR MENTIONED THAT THE I NVESTMENT IS NEVER MADE IN ISOLATION QUA THE COMMON EXPENDITURE INCURRED IN CONNECTION WITH EARNING OF OTHER TAXABLE INCOMES. THERE IS AN EXPENDITURE IN EVERY NORMAL AMOUNT ATTRIBUTABLE TO THE EARNING OF THE EXEMPT INCOME THEREFORE ASSESS EE FAILED TO DISCHARGE THE ONUS AND THE AO HAS RIGHTLY DISSATISFIED WITH THE METHOD ADOPTED BY THE ASSESSEE. ASSESSEE CANNOT SAY THAT THAT NO EXPENDITURE IS INC URRED OUT OF THE ADMINISTRATIVE EXPENSES. FURTHER LD DR MENTIONED THAT THE ASSESS EE OFFERED WITHOUT PREJUDICE 1% OF THE DIVIDEND INCOME WHICH IS RELATABLE TO THE EARNING OF THE EXEMPT INCOME AND IT IS ON AD-HOC ESTIMATIONS WHICH ARE NOT PERMI TTED UNDER SECTION 14A OF THE ACT. THEREFORE AS PER THE LD DR AOS REJECTION O F THE METHOD ADOPTED BY THE ASSESSEE BY PROVIDING REASONS WAS NOT MERELY A CASE OF REJECTING THE ASSESSEES CLAIM WITHOUT DISCUSSION AND DISCUSSION. WHAT IS R EQUIRED IS ONLY PRELIMINARY SATISFACTION ON THE INACCURACY OF THE METHOD ADOPTE D BY THE ASSESSEE AND THE EXPLANATION GIVEN BY THE ASSESSEE. FURTHER LD DR MENTIONED THAT ONUS IS ON THE ASSESSEE TO DEMONSTRATE THE NEXUS OF ASSESSEE WITH EXEMPT AS WELL AS TAXABLE UNITS. THE ONUS IS ON THE ASSESSEE TO DEMONSTRATE THE CORR ECT QUANTIFICATION OF THE EXPENSES ALLOCABLE TO THE UNITS FAILING WHICH AO CA N ADOPT THE CORRECT / REASONABLE METHOD FOR MAKING DISALLOWANCE. ON THE ONUS RELATED ARGUMENT LD DR RELIED ON JUDGMENT OF THE HONBLE KERALA HIGH COURT IN THE CA SE OF COMMISSIONER OF INCOME- TAX VS SMT. LEENA RAMACHANDRAN (KER) 339 ITR 296. F URTHER SPEAKING GENERALLY LD DR REASONED THAT THE BORROWED FUND IS ALWAYS COSTLI ER VIS--VIS THE DIVIDEND YIELD BY SUCH INVESTMENTS AND THEREFORE EXPENDITURE SHOULD BE LINKED TO THE COST OF INVESTMENT AND EXEMPT INCOME AND NOT THE DIVIDEND A MOUNT. 7. ON THE OTHER HAND MS. ARATI VISSANJI LD COUNSE L FOR THE ASSESSEE ESSENTIALLY REITERATED THE ARGUMENTS NARRATED ABOVE AND THE WRI TTEN SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES. SHE ALSO MEN TIONED THAT THE DECISIONS RELIED ON BY THE LD DR ARE DISTINGUISHABLE AND THEY ARE RE LATING TO ASSESSMENT YEARS PRIOR TO THE AMENDMENT TO SECTION 14A AND INSERTION OF RU LE-8D. SHE REITERATED THE FACT 7 THAT THE ASSESSING OFFICER CANNOT AUTOMATICALLY INV OKE THE PROVISIONS OF THE SAID RULE-8D IN CASES OF ALL MIXED ACCOUNTS INVOLVING TA XABLE AND NON-TAXABLE INCOME OF THE ASSESSEE. FURTHER SHE FILED COPY OF THE DECIS ION OF COORDINATE BENCH OF THE ITAT MUMBAI IN THE CASE OF J.K. INVESTORS (BOMBAY) LTD. VS. ACIT VIDE ITA NO.7858/MUM/2011 FOR THE PROPOSITION THAT RULE-8D C ANNOT BE APPLIED WHERE ASSESSEE MADE AN CERTAIN DISALLOWANCE AND WHERE ASS ESSING OFFICER FAILED TO RECORD THE DISSATISFACTION ABOUT THE CLAIMS OF THE ASSESSE E. DURING THE REBUTTAL TIME LD DR MENTIONED THAT THE SAID DECISION IN THE CASE OF J.K . INVESTORS (SUPRA) IS DECIDED IN THE CONTEXT OF THE FACTS WHICH ARE SPECIFIC TO THAT CASE AND MENTIONED THAT IT DOES NOT ESTABLISH ANY LEGAL PROPOSITION APPLICABLE TO E VERY CASE. WE AGREE WITH THE SAME. SHE WAS ALSO CRITICAL OF THE SAID JUDGMENTS M ENTIONING THAT THE ONUS WAS RIGHTLY PLACED ON THE ASSESSING OFFICER IN THAT CAS E. LD COUNSEL ALSO RELIED ON THE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT IN THE C ASE OF CIT VS. UTI BANK LTD [2013] 32 TAXMANN.COM 370 (GUJARAT) FOR THE PROPOSI TION THAT REGARDING THE PRESUMPTION THAT INTEREST FREE FUNDS AND NOT LOANED FUNDS ARE INVESTED IN THE TAX FREE INCOME WHICH YIELDED EXEMPT INCOME PROVIDED S UFFICIENT FREE FUNDS ARE AVAILABLE. THIS IS THE CASE RELEVANT FOR THE ASSESS MENT YEAR 2003-2004. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE O RDERS OF THE REVENUE AUTHORITIES AS WELL AS THE DECISIONS CITED BY THE L D REPRESENTATIVES OF BOTH THE PARTIES. THERE IS NO DISPUTE ABOUT THE BASIC FACTS THAT THE ASSESSEE MADE AN INVESTMENT IN SHARES WHICH YIELDED DIVIDEND INCOME AND INTEREST INCOME OF RS. 3 01 83 832/-. IT IS AN ADMITTED FACT THAT ASSESSE E OFFERED ITSELF AVERAGE COST OF INVESTMENT AMOUNTING TO RS. 20 25 559/-. HOWEVER T HERE IS A DISPUTE WITH REGARD TO THE DISALLOWANCE OF A PORTION OF ADMINIST RATIVE EXPENSES ALSO U/S 14A R W R 8D. APPLYING THE PROVISIONS OF THE SAID RULE ASSESSI NG OFFICER IS OF THE OPINION THAT RS. 2.14 CRS IS THE ADMINISTRATIVE EXPENSES WHICH ARE TO BE DISALLOWED U/S 14A OF THE ACT. PER CONTRA ASSESSEE OPINED THAT NO ADMINISTRATIVE EXPENSES ARE REQUIRED TO BE DISALLOWED. HOWEVER W ITHOUT PREJUDICE ASSESSEE OFFERED 1% OF THE DIVIDEND INCOME AMOUNTING TO RS. 3 01 838/-. CIT (A) ACCEPTED THE ASSESSEES OFFER MADE BY THE ASSESSEE WITHOUT P REJUDICE AND DISAPPROVED THE AOS DECISION OF APPLYING THE SAID RULE 8D. THUS IT IS THE CASE WHERE THE ASSESSEE 8 DISALLOWS THE COST OF INVESTMENT APPLYING THE RATE OF 0.5% OF THE AVERAGE COST OF THE INVESTMENT IN ACCORDANCE WITH THE RULE 8D(2)(III) O F THE INCOME TAX RULES 1962 BUT NOT OUT OF THE ADMINISTRATIVE EXPENDITURE AS PER TH E PROVISIONS OF CLAUSE (I) AND (II) OF THE SAID RULE 8D(2). AO ARGUES THAT A PORTION OF THE SAID ADMINISTRATIVE EXPENDITURE INCLUDES DIRECT AND OTHER EXPENDITURE I NCURRED FOR EARNING OF THE EXEMPT INCOME. 9. REGARDING THE LEGAL PROPOSITIONS ON THE ISSUE W E FIND THAT IT IS A CASE OF CLAIM OF EXEMPT INCOME AND THE PROVISIONS OF SECTION 14A( 2)OF THE ACT SUGGESTS FOR MAKING DISALLOWANCE OF SUCH RELATABLE EXPENDITURE E VEN IF NO EXPENDITURE IS CLAIMED TO HAVE BEEN INCURRED BY THE ASSESSEE AND OF COURSE AFTER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE AND WHEN THE AO IS NOT SAT ISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. IN THE CASES LIKE THE PRE SENT WHERE THE ACCOUNTS FOR EXEMPT AND TAXABLE INCOME ARE MAINTAINED COMMONLY IT CANNOT BE DENIED THAT SOME ADMINISTRATIVE EXPENDITURE WAS DEFINITELY ATTR IBUTABLE TOWARDS THE EARNING OF THE DIVIDEND INCOME. ALTHOUGH THE DECISION OF THE T IBUNAL IN THE CASE OF M/S. GHERZI EASTERN LIMITED VIDE ITA NO.6562/BOM/94 DATED 23 RD SEPTEMBER 2002 WAS DECIDED IN THE CONTEXT OF THE PROVISIONS OF SECTION 80M OF THE ACT THE LEGAL PROPOSITION IS STILL RELEVANT FOR THE PROVISIONS OF SECTION 14A OF THE ACT. THIS DECISION SUPPORTS THE PRINCIPLE OF APPORTIONMENT. FURTHER T HE JUDGMENT OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF HARYANA LAND RECLAMATION & DEVELOPMENT CORPORATION VS. CIT (302 ITR 218) IS RELEVANT FOR THE PROPOSI TION THAT ONCE THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE BEFORE T HE AUTHORITIES ABOUT THE EXTENT OF EXPENDITURE INCURRED FOR EARNING OF EXEMPT INCOME AO BECOMES DISSATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE THUS LEADING TO MAKING OF DISALLOWANCE U/S 14A IN ACCORDANCE WITH RULE-8D OF THE INCOME TA X RULES 1962 . REGARDING THE DECISION IN THE CASE OF J.K. INVESTORS (SUPRA) RELIE D HEAVILY BY THE LD COUNSEL FOR THE ASSESSEE WE FIND THAT THE SAID JUDGMENT DOES NOT E STABLISH ANY LEGAL PROPOSITION AND IT IS DECIDED IN THE CONTEXT OF THE FACTS WHICH ARE SPECIFIC TO THAT CASE. 10. AFTER CONSIDERING THE ABOVE FACTUAL AND LEGAL P OSITION ON THE ISSUE WE FIND THAT THE AY IN QUESTION IS 2008-09 AND RIGHTLY THE ASSES SEES TAX AUDITORS APPLIED THE PROVISIONS OF RULE 8D IN MAKING THE DISALLOWANCE OF RS 20 25 559/- BUT IT WAS ONLY 9 UNDER CLAUSE (III) OF RULE 8D(2) AND KEPT THE ADMIN ISTRATIVE EXPENDITURE AWAY FROM THE SAID RULE 8D(2)(1)&(II) FROM MAKING ANY THE DIS ALLOWANCE. ASSESSEE IS ENGAGED IN THE BANKING ACTIVITY AND IT IS AN ADMITTED FACT THE CURRENT BALANCE IS THE SOURCE OF INVESTMENT IN SHARES AND ASSESSEE HAS NOT DEMONSTRA TED HOW THE INTEREST BEARING FUNDS ARE LYING IN THE CURRENT ACCOUNTS OF THE ASSE SSEE A BANKING COMPANY. NORMALLY EVERY AMOUNT LYING IN THE CURRENT ACCOUNT S IS INTEREST BEARING ONES THEREFORE THE PROVISIONS OF CLAUSE-(III) OF RULE-8 D(2) IS RIGHTLY APPLICABLE. IN OUR OPINION SUCH PARTIAL APPLICATION OF THE RULE IS NO T PROPER AND NOT SUSTAINABLE IN LAW. ONCE RULE BECOME APPLICABLE AND THE SAME HAS TO BE APPLIED FULLY. FURTHER THE ASSESSEE OFFERS 1% OF THE EXEMPT INCOME AS THE EXPE NDITURE ATTRIBUTABLE TO EARNING OF THE EXEMPT INCOME. THIS LINE OF ADJUDICATION BY THE CIT(A) IS NOT PROPER CONSIDERING THE LEGAL PROVISIONS OF SECTION 14A THA T WHAT IS TO BE DISALLOWED IS THE EXPENDITURE INCURRED FOR EARNING OF THE EXEMPT INCO ME AND NOT THE PART OF THE EXEMPT INCOME. THEREFORE IN SUBSTANCE WE DISMISS THE APPROACH OF THE CIT(A). REGARDING THE ISSUE OF RECORDING OF THE SATISFACTIO N BY THE AO WE FIND THAT THE ASSESSEE MAINTAINED THE ACCOUNTS COMMON TO BOTH INV ESTMENT ACTIVITY AND OTHER ACTIVITIES AND IN SUCH CIRCUMSTANCES ASSESSEE HAS TO DISCHARGE THE ONUS AS HELD BY THE HARYANA LAND RECLAMATION & DEVELOPMENT CORPORATION VS. CIT (302 ITR 218). IN ANY CASE WHAT IS REQUIRED IS THE PRIMA FAC IE SATISFACTION FOR THE AO THAT THE CLAIM OF THE ASSESSEE IS INCORRECT. CONSIDERING TH E FACTUAL MATRIX OF THE CASE AND THE LEGAL FRAMEWORKS DISCUSSED ABOVE WE ARE OF THE OPI NION THE ORDER OF THE CIT(A) IS REQUIRED TO BE REVERSED ON THIS ISSUE OF DISALLOWAN CE U/S 14A R W S RULE 8D OF THE I T RULES 1962 AND UPHOLD THE DECISION OF THE AO. AC CORDINGLY THE GROUND RAISED BY THE REVENUE IS ALLOWED . 11. IN THE RESULT THE APPEAL OF THE REVENUE IS ALLOWED . C.O. NO.115/M/2013( ARISING OUT OF I.T.A. NO.3655/M /2012) (AY: 2008-2009) 12. IN THE SAID CO THE ASSESSEE RAISED THE OBJECTI ONS AGAINST THE FINDING OF THE CIT(A) IN CONFIRMING THE 1% OF THE GROSS DIVIDEND A S EXPENDITURE IN ADDITION TO THE 0.5% OF THE AVERAGE INVESTMENT IE RS 20 25 559/-. T HESE ISSUES ARE DISCUSSED AT 10 LENGTH BY US WHILE DEALING WITH THE GROUNDS RAISED BY THE REVENUE VIDE THE MAIN APPEAL I.T.A. NO.3655/M/2012. THERE AFTER EXAMINING THE SPECIFIC FACTS OF THE SAID CASE AND ALSO THE PREVAILING LEGAL PROPOSITION S WE HELD THAT THE ASSESSEE ATTRACTS THE PROVISIONS OF SECTION 14A OF THE ACT R W R 8D OF THE I T RULES 1962 AND ALLOWED THE APPEAL OF THE REVENUE. CONSEQUENTLY WE CONFIRMED THE ADDITION OF RS 1 93 74 441/- AFTER REDUCING THE SUM OF RS 20 25 55 9 DISALLOWED BY THE ASSESSEE SUO MOTTO VIDE THE PARA 5.11 OF THE AO. THEREFORE THE OBJECTIONS RAISED IN THE CO STANDS DISMISSED . 13. IN THE RESULT THE CO FILED BY THE ASSESSEE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 3.7.2013 . %2 . 1) # 3%4 3.7.2013 . 5 SD/- SD/- (D. MANMOHAN ) (D. KARUNAKARA RAO ) / VICE PRESIDENT # $%& / ACCOUNTANT MEMBER MUMBAI; 3% 3.7.2013 . ' . $ ./ OKK SR. PS %2 %2 %2 %2 . .. . '067 '067 '067 '067 87)0 87)0 87)0 87)0 / COPY OF THE ORDER FORWARDED TO : 1. *+ / THE APPELLANT 2. -*+ / THE RESPONDENT. 3. 9 ( ) / THE CIT(A)- 4. 9 / CIT 5. 7 :5 '0' / DR ITAT MUMBAI 6. 5( ; / GUARD FILE. $-70 '0 //TRUE COPY// %2 $ %2 $ %2 $ %2 $ / BY ORDER / $ $ $ $ < < < < (DY./ASSTT. REGISTRAR) / ITAT MUMBAI