Asstt.. Comm. Of Income Tax. Circle 1 (1), Panaji v. Infrastructure Logistics Pvt. Ltd., Goa

ITA 50/PAN/2013 | 2008-2009
Pronouncement Date: 31-07-2013 | Result: Dismissed

Appeal Details

RSA Number 5024114 RSA 2013
Assessee PAN AAACI9107R
Bench Panaji
Appeal Number ITA 50/PAN/2013
Duration Of Justice 4 month(s) 18 day(s)
Appellant Asstt.. Comm. Of Income Tax. Circle 1 (1), Panaji
Respondent Infrastructure Logistics Pvt. Ltd., Goa
Appeal Type Income Tax Appeal
Pronouncement Date 31-07-2013
Appeal Filed By Department
Order Result Dismissed
Bench Allotted DB
Tribunal Order Date 31-07-2013
Assessment Year 2008-2009
Appeal Filed On 13-03-2013
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH PANAJI BEFORE SHRI P.K. BANSAL HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA HONBLE JUDICIAL MEMBER ITA NO. 3 4 /PNJ/2013 : (ASST. YEAR : 200 8 - 0 9 ) M/S. INFRASTRUCTURE LOGISTICS PVT. LTD. CIDADE DE GOA VAINGUINIM BEACH DONAPAULA GOA 403 004. PAN AAACI9107R (APPELLANT) VS. ADDITIONAL COMMISSIONER OF INCOME TAX PANAJI GOA (RESPONDENT) ITA NO. 50/PNJ/2013 : (ASST. YEAR : 2008 - 09) ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE - 1(1) PANAJI GOA (APPELLANT) VS. M/S. INFRASTRUCTURE LOGISTICS PVT. LTD. CIDADE DE GOA VAINGUINIM BEACH DONAPAULA GOA 403 004. PAN AAACI9107R (RESPONDENT) REVENUE BY : AMRIT RAJ SINGH DR ASSESSEE BY : NISHANT THAKKAR DATE OF HEARING : 2 6 /06/2013 DATE OF PRONOUNCEMENT : 31 / 07 /2013 O R D E R PER P.K. BANSAL : 1. THESE CROSS APPEALS HAVE BEEN FILED AGAINST THE ORDER OF CIT(A) DT. 20.12.2012. THE ASSESSEE HAS TAKEN THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL : 1. CIT(APPEALS) ERRED IN UPHOLDING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES. 2. WITHOUT PREJUDICE WHILE GIVING PARTIAL RELIEF TO THE ASSESSEE THE CIT (APPEALS) ERRED IN CONFIRMING THE ASSESSING OFFICERS ACTION OF I. CONSIDERING THE TOTAL INTEREST EXPENDITURE OF RS.29 80 005/ - UNDER RULE 8D (2)(II) WHICH INCLUDES A SUM OF RS.27 22 570/ - TOWARDS THE INTEREST 2 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) ON TERM LOANS FOR ACQUISITION OF PLANT & MACHINERY TAKEN MUCH BEFORE THE INVESTMENTS IN MUTUAL FUNDS WERE MADE. II. CONSIDERING THE TOTAL VALUE OF INVESTMENTS AS APPEARING IN THE BALANCE SHEET FOR THE PURPOSE OF CALCULATING AVER AGE INVESTMENTS INSTEAD OF AVERAGE VALUE OF ONLY THOSE INVESTMENTS ON WHICH THE ASSESSEE HAS EARNED DIVIDEND INCOME DURING THE YEAR. THE REVENUE HAS TAKEN THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL : 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD . CIT(A) PANAJI ERRED IN ALLOWING THE EXPENDITURE OF RS.25 35 800/ - INCURRED ON REPAIR OF KHODGINIM ROAD WHEN THERE IS NO PROXIMATE NEXUS BETWEEN THE BUSINESS OF THE ASSESSEE. 2. THE LD. CIT(A) PANAJI ERRED IN ALLOWING EXCESS DEPRECIATION CLAIMED ON PU RCHASE OF UPS AS THE TECHNOLOGY INVOLVED IN MAKING OF UPS IS NOT DEVELOPING SO RAPIDLY TO MAKE IT OBSOLETE IN A SHORT SPAN OF TIME AS IN THE CASE OF COMPUTERS. ITA NO. 50/PNJ/2013 (REVENUES APPEAL) : 2. THE GROUND NO. 1 IN REVENUES APPEAL RELATES TO DELETION OF THE ADDITION OF RS.25 35 800/ - BEING INCURRED BY THE ASSESSEE AS HIS SHARE FOR THE REPAIR OF KHODGINIM ROAD. 2.1 THE BRIEF FACTS RELATING TO THIS GROUND ARE THAT THE AO DURING THE COURSE OF THE ASSESSMENT NOTED THAT THE ASSESSEE HAS DEBITED A SUM OF RS.25 35 800/ - AS CONTRIBUTION TO GOA INFRASTRUCTURE DEVELOPMENT CORPORATION TOWARDS REPAIR OF KHODGINIM ROAD. THE SAID ROAD WAS IN DILAPIDATED CONDITION AND WAS VERY CRUCIAL TO THE ASSESSEE FOR MOVEMENT OF IRON ORE EXTRACTED FROM ITS PISSURLEM M INES IN GOA. THE GOVERNMENT OF GOA ASKED THE MINE OWNERS WHO OWN MINES IN PISSURLEM AREA TO REPAIR THE ROAD AS THE ROAD WAS USED BY THEM FOR TRANSPORTATION OF MINERAL ORE. THE GOVERNMENT CLAIMED THAT THE ROAD HAS BEEN DAMAGED BECAUSE OF THE TRANSPORTATIO N UNDERTAKEN BY THE MINE OWNERS. THE ASSESSEE CLAIMED THAT ALL THE MINE OWNERS AGREED TO CONTRIBUTE FOR REPAIR OF THE 3 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) ROAD KEEPING IN VIEW THE BUSINESS EXIGENCIES. THE ROAD WAS CONSTRUCTED BY THE CONTRACTOR OF GOA INFRASTRUCTURE DEVELOPMENT CORPORATION A T A TOTAL COST OF RS.2.85 CRORES OUT OF WHICH THE ASSESSEE HAD TO PAY A SUM OF RS.25 35 800/ - . IT FACILITATED THE MOVEMENT OF IRON ORE EXTRACTED BY THE ASSESSEE. THE AO WAS NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE. HE DISALLOWED THE SAME HOLDIN G THAT THE EXPENDITURE HAS NOT BEEN INCURRED FOR THE PURPOSE OF THE BUSINESS AND IS NOT REVENUE EXPENDITURE. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A) THE ASSESSEE RELIED ON THE DECISION OF HON'BLE MADRAS HIGH COURT IN CIT VS. COA TS VYELLA INDIA LTD. 253 ITR 667 AND OF THE HON'BLE SUPREME COURT IN THE CASE OF L.H. SUGAR FACTORY VS. CIT 125 ITR 293 (SC). THE ASSESSEE TOOK THE PLEA THAT THE ASSESSEE HAS INCURRED THIS EXPENDITURE BY CONTRIBUTING TOWARDS THE REPAIR OF THE ROAD TO GO A INFRASTRUCTURE DEVELOPMENT CORPORATION SO THAT THE ASSESSEES BUSINESS MAY BE OPERATED MORE EFFICIENTLY. THE EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF THE BUSINESS. THERE WAS CLOSE PROXIMITY EXISTING BETWEEN CONSTRUCTION OF THE ROAD AND RUNNING OF THE FACTORY. WITHOUT THE ROAD ASSESSEE WOULD NOT ABLE TO CARRY ON ITS BUSINESS EFFICIENTLY. THE ASSESSEE WAS NOT THE OWNER OF THE ROAD AND THE ASSESSEE WAS NOT HAVING ANY RIGHT. THE ROAD WAS NOT MADE EXCLUSIVELY FOR THE ASSESSEE. CIT(A) ASKED FOR C ERTAIN DETAILS CONSISTING OF TOTAL TRANSACTIONS OF IRON ORE ENTERED INTO BY THE ASSESSEE DURING THE YEAR. THE ASSESSEE SUBMITTED THE DETAILS THAT DURING THE YEAR ASSESSEE HAS PURCHASED IRON ORE TO THE EXTENT OF 199264 MT AND SOLD IRON ORE TO THE EXTENT OF 220721 MT. CIT(A) DELETED THE DISALLOWANCE BY HOLDING AS UNDER : I HAVE GONE THROUGH THE FACTS OF THE CASE CONTENTS OF THE ASSESSMENT ORDER WRITTEN SUBMISSIONS FILED BY ASSESSEE AND VARIOUS CASE LAWS REFERRED AND RELIED THE AO AND THE ASSESSEE. THE ASSESSEE IN ITS SUBMISSION HAS HIGHLIGHTED THE BUSINESS REQUIREMENTS OF THE KHODGINIM ROAD AND THE REQUIREMENT FOR R EP AIR OF KHODGINIM ROAD TO CARRY ON THE ASSESSEES BUSINESS. THE ASSESSEE IN ITS SUBMISSION HAS RELIED UPON THE DECISION OF SUPREME COURT I N THE CASE OF L.H SUGAR FACTORY AND OIL MILLS (125 I TR 293) WHERE IN IT IS HELD THAT WHEN A 4 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) ROAD IS CONSTRUCTED IN ORDER TO FACILITATE TRANSPORT OF SUGARCANE TO SUGAR FACTORY AND THE OUTFLOW OF THE MANUFACTURED SUGAR TO THE MARKET SUCH CONSTRUCTION FACILI TATES THE BUSINESS OPERATION OF THE ASSESSEE AND ENABLES THE ASSESSEE TO CONDUCT THE BUSINESS MORE EFFICIENTLY AND PROFITABLY. THOUGH THE ADVANTAGE MAY BE OF LONG DURATION AS THE ROADS WOULD LAST LONG NEVERTHELESS IT WOULD NOT BE AN ADVANTAGE IN THE CAPI TAL FIELD AS NO TANGIBLE OR INTANGIBLE ASSET WAS ACQUIRED BY THE ASSESSEE NOR WAS THERE ANY ADDITION TO OR EXPANSION OF THE PROFIT - MAKING APPARATUS OF THE ASSESSEE. THAT JUDGEMENT WAS DELIVERED BY A THREE - JUDGE BENCH OF THE APEX COURT.). ANOTHER DECISIO N RELIED UPON BY THE ASSESSEE IS MADRAS HIGH COURT IN THE CASE OF COATS VYELLA INDIA LTD. 127 ITR 333 WHEREIN IT IS HELD THAT CONTRIBUTION TO GOVERNMENT FOR CONSTRUCTION OF A NEW BRIDGE IS ALLOWABLE AS REVENUE EXPENDITURE U/S 37(1). BRIDGE IS ESSENTIAL TO PROVIDE ACCESS TO ASSESSEES FACTORY. IT IS NOT OWNED BY THE ASSESSEE NOR ASSESSEE ACQUIRED ANY RIGHTS IN THE SHORT - TERM OR IN THE LONG RUN BY THE REASON OF THE CONTRIBUTION. BRIDGE MEARLY FACILITATES THE MOVEMENT OF WORKMAN TO GAIN ACCESS TO ASSESSEES FA CTORY AND ALSO MOVEMENT OF GOODS. AMOUNT RIGHTLY HELD TO BE REVENUE EXPENDITURE. FACT OF THE ASSESSES CASE ARE SQUARELY COVERED BY THESE DECISIONS. RESPECTFULLY FOLLOWING THE HONBLE SUPREME COURT DECISION AND MADRAS HIGH COURT DECISION I ALLOW THIS GROUND IN FAVOUR OF THE ASSESSEE. ON THE SIMILAR ISSUE IN THE CASE OF CHOWGULE AND CO. LTD. VS ACIT MARGAO GOA. THE H O NBLE ITAT. PANAJI BENCH PANAJI ITA NO.162/PNJ/ 200 6 FOR A.Y.2002 - 03 IT WAS HELD THAT CONTRIBUTION TO GOA INFRASTRUCTURAL D EVELOPMENT CO. PVT LTD. FOR REPAIRS AND MAINTENANCE OF ROADS FREQUENTLY USED BY THE COMPANY TO TRANSPORT ITS GOODS WHERE IN THE ASSESSING AUTHORITY HAS DISALLOWED EXPENDITURE ON THE GROUND THAT IT COULD BE A CAPITAL EXPENDITURE THE HONBLE ITAT. HELD THAT THE ROAD IS OWNED BY THE PUBLIC AUTHORITY IT IS A PUBLIC PROPERTY NOT OWNED BY THE ASSESSEE AND THE ROAD IS FREQUENTLY USED BY THE ASSESSEE COMPANY FOR ITS BUSINESS PURPOSE IN AS MUCH AS THE LOADS AND LOADS OF TRUCKS COMING AND GOING OUT THE ASSESSEES BUSINESS PL ACE ARE PLYING ON THE ROAD. THEREFORE THE LOCAL AUTHORITIES HAVE APPROACHED THE ASSESSEE COMPANY TO TAKE A SHARE IN THE REPAIR AND MAINTENANCE OF THE ROAD OF WHICH THE ASSESSEE IS ONE OF THE PRINCIPAL BENEFICIARIES. SUCH A SOCIAL OBLIGATION DEMANDED BY T HE LOCAL COMMUNITY CANNOT BE OVERLOOKED BY THE ASSESSEE AND SUCH EXPENDITURE SHOULD BE TREATED AS EXPENDITURE INCURRED FOR THE PURPOSE OF CARRYING ON ITS BUSINESS. THE ASSESSEE IS NOT OWNING AN ASSET OR PROPERTY IN THAT WAY. THEREFORE THE ASSESSEE CANNOT ACCOUNT THE EXPENDITURE BY WAY OF CAPITAL EXPENDITURE IN ITS BOOKS OF ACCOUNT. WE THEREFORE DIRECT THE ASSESSING AUTHORITY TO GIVE DEDUCTION FOR THE SAID AMOUNT OF EXPENDITURE. THIS GROUND IS ACCORDINGLY ALLOWED. TAKING THE SAME ANALOGY IN TO ACCOUNT T HAT THE ASSESSEE HAS CONTRIBUTED TO GOA INFRASTRUCTURAL DEVELOPMENT CO. PVT. LTD. AND THE BRIDGE ALSO PUBLIC PROPERTY USED BY THE ASSESSEE TO CARRY ON THE BUSINESS ALONG WITH OTHERS. IT IS A SOCIAL OBLIGATION DEMANDED BY THE LOCAL COMMUNITY CANNOT BE OVE R LOOKED BY THE ASSESSEE AND SUCH EXPENDITURE HAS TO BE TREATED AS EXPENDITURE INCURRED FOR THE PURPOSE OF CARRYING ITS BUSINESS. THEREFORE THE EXPENDITURE CANNOT BE TREATED AS A CAPITAL EXPENDITURE. 5 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) SO THE ADDITION MADE BY THE A O DELETED AND THE ASSESSE ES GROUND OF APPEAL IS ALLOWED.) 2.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. WE NOTED THAT CIT(A) WHILE DELETING THE SAID DISALLOWANCE RELIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF L.H. SUGAR FACTORY VS. CIT 125 ITR 293 (SC) ( SUPRA ) AND THAT OF CIT VS COATS VYELLA INDIA LTD. 253 ITR 667 ( SUPRA ). HE ALSO RELIED ON THE DECISION OF THE ITAT PANAJI BENCH IN ITA NO. 163/PNJ/2006 IN THE CASE OF CHOWGULE & CO. LTD. VS. ACIT IN WHICH THE HON'BLE TRIBUNAL HELD THAT THE CONTRIBUTION TO GOA INFRASTRUCTURE DEVELOPMENT CO. FOR REPAIR AND MAINTENANCE OF THE ROADS FREQUENTLY USED BY THE COMPANY TO TRANSPORT ITS GOODS IS NOT A CAPITAL EXPENDITURE BUT THE EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF T HE BUSINESS. IT IS A SOCIAL OBLIGATION DEMANDED BY THE LOCAL COMMUNITY WHICH CANNOT BE OVERLOOKED BY THE ASSESSEE. EVEN THOUGH THE LD. DR VEHEMENTLY RELIED ON THE ORDER OF THE AO NO CONTRARY DECISION WAS BROUGHT TO OUR KNOWLEDGE AND NO MATERIAL OR EVIDE NCE WAS BROUGHT TO OUR KNOWLEDGE WHICH MAY PROVE THAT THE ROAD BELONGED TO THE ASSESSEE AND IT REPRESENTS CAPITAL EXPENDITURE INCURRED BY THE ASSESSEE. UNDER THESE CIRCUMSTANCES WE DO NOT HAVE ANY OTHER ALTERNATIVE EXCEPT TO FOLLOW THE DECISION OF THIS T RIBUNAL IN THE CASE OF CHOWGULE & CO. LTD. ( SUPRA ) AND ACCORDINGLY WE CONFIRM THE ORDER OF CIT(A). THUS THIS GROUND STANDS DISMISSED. 3. GROUND NO. 2 RELATES TO THE CLAIM OF DEPRECIATION ON THE PURCHASE OF UPS. THE FACTS RELATING TO THIS GROUND ARE TH AT THE ASSESSEE HAS CLAIMED DEPRECIATION @ 60% TREATING IT TO BE PART OF COMPUTER WHILE THE AO ALLOWED DEPRECIATION @ 15%. THE ASSESSEE WENT IN APPEAL. CIT(A) DECIDED IN FAVOUR OF THE ASSESSEE. AFTER HEARING THE RIVAL SUBMISSIONS WE NOTED THAT THIS ISS UE IS DULY COVERED BY THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. ORIENT CERAMICS AND INDUSTRIES. NO CONTRARY DECISION WAS BROUGHT TO OUR KNOWLEDGE. 6 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE DELHI HIGH COURT WE CONFIRM THE ORDER OF CIT(A). THUS THIS GROUND STANDS DISMISSED. ITA NO. 34/PNJ/2013 (ASSESSEES APPEAL) 4. GROUND NOS. 1 & 2 IN ASSESSEES APPEAL RELATE TO DISALLOWANCE MADE U/S 14A R/W RULE 8D OF THE INCOME TAX ACT. THE BRIEF FA CTS OF THIS GROUND ARE THAT THE AO NOTED THAT THE ASSESSEE HAS RECEIVED DIVIDEND INCOME AMOUNTING TO RS.17 55 205/ - CLAIMED AS EXEMPT BUT HAS NOT DISALLOWED ANY EXPENDITURE U/S 14A. WHEN QUESTIONED THE ASSESSEE STATED THAT THE ASSESSEE HAS NOT INCURRED A NY EXPENDITURE FOR EARNING OF THE DIVIDEND INCOME. PART OF THE SURPLUS FUNDS ARE INVESTED IN MUTUAL FUNDS THROUGH THE MUTUAL FUND MANAGER WHO ARE ATTACHED TO THE BANK WITH WHOM THE ASSESSEE IS DEALING TO MAKE INVESTMENTS IN RESPECTIVE MUTUAL FUNDS. FOR KEEPING GOOD RELATION WITH THE BANKS AND FINANCIAL INSTITUTIONS THE ASSESSEE HAS TO MAKE INVESTMENT AND THE OFFICIALS OF THE MUTUAL FUNDS COME TO THE DOORSTEP OF THE ASSESSEE AND COLLECT THE FORMS AND CHEQUE AND RENDER ALL THE SERVICES AND THEREFORE NO EX PENDITURE IS BEING INCURRED BY THE ASSESSEE. THE AO WAS NOT SATISFIED ABOUT THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED ON THE EARNING OF THE DIVIDEND AND ACCORDINGLY HE WORKED OUT THE TOTAL INVESTMENT MADE BY THE ASSES SEE IN MUTUAL FUNDS AMOUNTING TO RS. 34 65 66 674/ - AND TOOK THE VIEW THAT THE INVESTMENT OF SUCH A MAGNITUDE CANNOT BE MADE WITHOUT A PROPER ANALYSIS OF THE MARKET CONDITION STOCK MOVEMENT ETC. THEREFORE HE REJECTED THE SUBMISSION OF THE ASSESSEE THAT I T DID NOT INCUR ANY COST AND THE SERVICES BY THE MUTUAL FUND OFFICIALS WERE RENDERED AT THE DOOR STEP OF THE ASSESSEE. ACCORDINGLY HE WORKED OUT THE DISALLOWANCE BY APPLYING RULE 8D IN RESPECT OF THE INTEREST NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR I NCOME AS PER CLAUSE (II) AND (III) OF RULE 8D AS UNDER : 7 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) (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= 43 05 983[A1 X RS. 22 64 68 127/ - [B] . RS. 17 96 64 593/ - [C] A. AM OUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE ( I ) INCURRED DURING THE PREVIOUS YEAR = 43 0 5 983 [A]. B. THE AVERAGE OF VALUE OF INVESTMENT INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTA L INCOME AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF PREVIOUS YEAR: OPENING INVESTMENT RS. 10 62 79 579/ - CLOSING INVESTMENT RS.34 66 56 674 / - A VERAGE INVESTMENT RS.22 64 68 127/ - [B] 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; FOR THE PURPOSES OF THIS RULE THE TOTAL ASSETS SHALL MEAN TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET EXCLUDING TH E INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. AVERAGE ASSETS TOTAL OPENING ASSETS RS.25 99 92 756/ - TOTAL CLOSING ASSETS RS. 9 93 36 429/ - AVERAGE ASSETS - RS.17 96 64 593/ - HENCE [A X B]/C = RS. 54 27 7 13 (III) AN AMOUNT EQUAL TO ONE - HALF PER CENT OF THE AVERAGE OF THE VALUE OF INVESTMENT INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AN D THE LAST DAY OF THE PREVIOUS YEAR.. AVERAG E INVESTMENTS OPENIN G INVESTMENT : RS.1 0 62 79 579/ CLOSING INVESTMENT : RS.34 66 56 674/ - AVERA GE INVESTMENT : RS.22 64 68 127/ 0.5 PERCENT OF AVERAGE INVESTMENTS = RS. 22 64 68 127/ - X 0 .005 = RS.1132341/ - 8 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) TOTAL EXPENSES DISALLOWABLE U/S 14A AS PER RULES 8D _ (I) + (II) + ( I II) RS. NI L/ - R S. 54 27 713/ + RS. 1132341/ - = RS. 65 60 054/ - LESS : AMOUNT ALREADY DISALLOWED BY THE ASSESSE = RS.NIL REMAINING AMOUNT TO BE DISALLOWED AS PER RULE 8D = RS. 65 60 054/ - THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). BEFORE CIT(A) THE ASSESSEE CONTENDED THAT THE INTEREST DOES NOT RELATE TO THE MONEY INVESTED IN MUTUAL FUND BUT INTEREST RELATES TO THE LOAN TAKEN IN THE EARLIER YEAR WHEN NO DIVIDEND YIE LDING INVESTMENTS WERE MADE AND LOANS WERE TAKEN FOR BUYING PLANT AND MACHINERY. IT WAS ALSO CONTENDED THAT THE DISALLOWANCE U/S 14A CAN BE ONLY WHEN THE INCOME IS NOT CHARGEABLE TO TAX. THE DIVIDEND INCOME IS CHARGEABLE TO TAX. THEREFORE THERE CANNOT BE ANY DISALLOWANCE. THE CHARGE OF THE TAX IS ON THE COMPANY AND THE INVESTOR RECEIVES LESS DIVIDEND. SEC. 10(33) PROVIDES THAT INCOME BY WAY OF DIVIDEND REFERRED TO IN SEC. 115 - O SHALL NOT BE INCLUDED IN THE TOTAL INCOME OF THE SHAREHOLDER WAS ONLY BECAUSE TAX ON SUCH INCOME HAD BEEN CHARGED FROM THE COMPANY. THIS SHIFTING OF MANNER OF COLLECTION OF TAX ON DIVIDEND INCOME FROM SHAREHOLDER TO THE COMPANY WAS DONE WITH THE OBJECT OF EASE OF COLLECTION FROM A SINGLE POINT I.E. FROM COMPANY RATHER THAN EACH INDIVIDUAL SHAREHOLDER. IT WAS ALSO SUBMITTED THAT EXEMPT INCOME FOR THIS PURPOSE CAN ONLY BE INCOME IN RESPECT OF WHICH NO TAX IS PAYABLE. IN RESPECT OF DIVIDEND INCOME IN FACT TAX WAS PAYABLE AS PER THE PROVISIONS OF SEC. 115 - O. IT WAS ALSO SUB MITTED BEFORE THE CIT(A) THAT THE AO HAS COMPUTED THE AVERAGE ASSET VALUE AT RS.17 96 64 593/ - WRONGLY. SIMILARLY THE AVERAGE INVESTMENT WAS ALSO CALCULATED AT RS.22 64 68 127/ - WRONGLY. DURING THE YEAR 2006 - 07 THE ASSESSEE HAD ONLY ONE MUTUAL FUND INVES TMENT OF RS.1 54 49 979/ - AND THREE MUTUAL FUND INVESTMENT IN F.Y 2007 - 08 AMOUNTING TO RS.19 87 05 184/ - . THUS THE AVERAGE INVESTMENT IN THE MUTUAL FUNDS WORKS OUT TO ONLY RS.10 70 77 582/ - 9 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) AND NOT RS.22 64 68 127/ - . EVEN THE APPLICATION OF RULE 8D WAS WRONG. THE TOTAL INTEREST WAS RS.43 05 983/ - WHILE THE DISALLOWANCE WAS CALCULATED AT RS.54 27 713/ - . SIMILARLY IT WAS STATED THAT THE DISALLOWANCE UNDER RULE 8D(2)(II) H AS ALSO BEEN CALCULATED WRONGLY . O N THE BASIS OF AVERAGE INVESTMENT OF RS.10 70 77 582/ - A PPLYING A PERCENTAGE OF 0.5 THE AMOUNT COULD BE ONLY RS.5 35 388/ - . THE FIGURE OF THE TOTAL INTEREST WAS ONLY RS. 29 80 005/ - INSTEAD OF RS.43 05 983/ - . THE AO HAS ALSO ACCEPTED THIS IN THE REMAND REPORT. CIT(A) ULTIMATELY STATISTICALLY ALLOWED THE GROUND OF THE ASSESSEE BY OBSERVING AS UNDER : I HAVE GONE THROUGH THE FACTS OF THE CASE CONTENTS OF THE ASSESSMENT ORDER WRITTEN SUBMISSIONS OF THE ASSESSEE CASE LAWS RE FERRED AND RELIED BY THE A O AND THE ASSESSEE AND THE R EMA ND REPORT OF THE A.O. ASSESSEE IN HIS SUBMISSION HAS MEN TIONED THAT THE A O HAS MADE A DISALLOWANCE U/S 14A AMOUNT OF RS 65 60 054/ - AGAINST THE DIVIDEND INCOME EARNED AMOUNTED RS 17 55 205/ - . INSPITE OF THE FACT THAT ASSESSEE HAS NOT INCURRED ANY EXPE NDITURE TO EARN THE DIVIDEND AND FURTHER THE HUGE DISALLOWANCE OF EXPENDITURE MUCH MORE THAN THE DIVIDEND EARNED IS MAINLY ON ACCOUNT OF CALCULATION MISTAKES WHILE APPLYING RULE 8 D. THOUGH ASSESSEE CLAIMS THAT THERE WAS NO EXPENDITURE WAS INCURRED FOR EAR NING THE EXEMPTED DIVIDEND INCOME AND THERE MAY BE INDIRECT EXPENDITURE AS HIGHLIGHTED BY THE HONORABLE MUMBA I HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG CO LTD. V/S DCIT 328 ITR 81. IN VIEW OF THE ABOVE DISCUSSIONS THE A O IS RIGHT IN APPLYING RULE 8D FOR CALCULATING DISALLOWANCE U/S 14A. FURTHER ASSESSEE HAS MENTIONED IN THE SUBMISSION THAT THE ASSESSING OFFICER ERRED IN CALCULATION OF RULE 8 D. WRITTEN SUBMISSION WAS SENT TO A O AND REMAND REPORT IS CALLED FOR AND THE A.O. HAS ACCEPTED TO CONSIDER RS . 2 9 80 005/ - AS INTEREST EXPENDITURE U/R 8D(2)(II). FURTHER THE A O IN HIS REMAND REPORT DATED 4/5/2012 IN POINT NO 3 HAS ACCEPTED AND AGREES THAT TOTAL ASSETS ARE TO BE TAKEN WITHOUT DEDUCTING CURRENT LIABILITIES. ACCOR DINGLY IT IS HELD THAT ASSESSEES CONTENTIONS ON THE ABOVE POIN TS ARE CORRECT. A O IS DIRECTED TO REWORK THE DISALLOWANCE AS PE R SECTION 14A AND RULE 8D AND ONLY EXPENDITURE INCURRED AN E XE MPTED INCOME HAS TO BE ADDED TO THE TOTAL INCOME. AS A RE SULT THE GROUND OF APPEAL IS ALLOWED FOR STA TISTICAL PURPOSE. 10 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) 4.1 BEFORE US THE LD. AR VEHEMENTLY CONTENDED THAT THE SATISFACTION OF THE AO IS NECESSARY ABOUT THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE SATISFACTION MUST BE WITH REGARD TO THE ACCOUNTS OF THE ASSESSEE. ATTENTION WAS DRAWN TOWARDS SEC. 14A(2). IT WAS POINTED OUT THAT WITHOUT RECORDING THE SATISFACTION ABOUT THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE THE AO CANNOT S TRAIGHTAWAY APPLY RULE 8D OF THE INCOME TAX ACT. OUR ATTENTION WAS DRAWN TOWARDS PARA 6.3 6.4 AND 6.5 OF THE ASSESSMENT ORDER AND IT WAS POINTED OUT THAT THE AO HAS NOWHERE RECORDED ANY SATISFACTION ABOUT THE DISCREPANCY IN THE ACCOUNTS OF THE ASSESSEE W ITH REGARD TO THE EXPENDITURE INCURRED IN RELATION TO THE DIVIDEND INCOME. THE AO MERELY OBSERVED THAT FROM A.Y 2008 - 09 ONWARDS THE POSITION IS THAT IN ALL CASES WHERE THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED ON EARNING S THAT DO NOT FORM PART OF THE TOTAL INCOME THE EXPENDITURE ON THIS ACCOUNT WILL NEED TO BE COMPUTED AS PER RULE 8D OF THE INCOME TAX ACT. OUR ATTENTION WAS ALSO DRAWN TOWARDS THE DECISION OF GODREJ & BOYCE MANUFACTURING C O. LTD. VS. DCIT 328 ITR 81 ( MUM ) . RELIANCE WAS ALSO PLACED ON THE SUBMISSIONS MADE BEFORE THE CIT(A). RELIANCE WAS ALSO PLACED ON THE DECISION OF THIS TRIBUNAL IN THE CASE OF ACIT VS. SESA GOA LTD. IN WHICH THIS TRIBUNAL VIDE ORDER DT. 8 .3.2013 HELD THAT THE APPLICATION OF PROVISIONS OF SUB - SECTION 2 & 3 OF SEC. 14A AND RULE 8D IS NOT AUTOMATIC IN EACH AND EVERY CASE WHERE THERE IS INCOME NOT FORMING PART OF THE TOTAL INCOME. BEFORE MAKING ANY DISALLOWANCE THE AO IS REQUIRED TO RECORD SATISFACTI ON HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE THAT THE CLAIM OF THE ASSESSEE THAT THE EXPENDITURE INCURRED IS NOT RELATED TO THE INCOME FORMING PART OF THE TOTAL INCOME IS INCORRECT. SUCH SATISFACTION MUST BE ARRIVED AT ON OBJECTIVE BASIS. ONCE THE SA TISFACTION IS MADE ONLY THEN THE APPLICABILITY OF RULE 8D WILL ARISE. IT WAS ALSO SUBMITTED THAT THE EXPENDITURE WHICH HAVE TO BE DISALLOWED UNDER RULE 8D MUST HAVE A PROXIMATE RELATIONSHIP WITH THE EARNING OF THE DIVIDEND 11 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) INCOME. FOR THIS ALSO RELIAN CE WAS PLACED ON THE DECISION OF THIS TRIBUNAL IN THE CASE OF ACIT VS. SESA GOA LTD. ( SUPRA ) DT. 8.3.2013 FOR WHICH THE UNDERSIGNED IS THE AUTHOR. IT WAS ALSO POINTED OUT THAT THE DECISION OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT 328 ITR 81 ( MUM ) ( SUPRA ) HAS DULY BEEN DISCUSSED BY THIS BENCH IN THAT CASE. IT WAS SUBMITTED THAT THERE IS NO SATISFACTION WHATSOEVER BEING RECORDED BY THE AO IN ACCORDANCE WITH SEC. 14A(2) AND THEREFORE IT IS A CASE WHERE RULE 8D COULD HAVE NOT BEEN APPLIED AND THERE COULD NOT BE ANY DISALLOWANCE AS PER SEC. 14A(2). 4.2 THE LD. DR ON THE OTHER HAND RELIED ON THE ORDER OF THE AO. 4.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. WE NOTED FROM THE PROVISIONS OF SEC. 14A(2) THAT BEFORE MAKING ANY DISALLOWANCE U/S 14A THE AO MUST RECORD SATISFACTION HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE THAT THE CLAIM OF THE ASSESSEE THAT THE EXPENDITURE INCURRED IS NOT RELATED TO THE INCOME FORMING PART OF THE TOTAL INCOME IS INCORRECT. WE HAVE GONE THROUGH PARA 6.3 6.4 6.5 6.6 AND 6.7 OF THE ASSESSMENT ORDER. WE NOTED THAT THE AO ONLY DISCUSSED THE PROVISIONS OF SE C. 14A(1) AND HAS NOT MADE OUT ANY SATISFACTION WHATSOEVER HOW THE EXPENDITURE INCURRED BY THE ASSESSEE DURING THE YEAR RELATE TO THE INCOME NOT FORMING PART OF THE TOTAL INCOME OF THE ASSESSEE. NO WHISPER W HAT TO TALK OF THE RELATIONSHIP OF THE EXPENDITU RE WITH THE EXEMPT INCOME IS MENTIONED. THE AO STRAIGHTAWAY JUMPED TO APPLYING RULE 8D RELYING ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT 328 ITR 81 (MUM) ( SUPRA ) HOLDING THAT RULE 8D PE RTAINS TO BOTH DIRECT AND INDIRECT EXPENDITURE INCURRED ON EARNING TAX EXEMPT INCOME AND IN THE JUDGEMENT IT WAS HELD THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELAT ION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT BY VIRTUE OF PROVISIONS OF SEC. 12 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) 14A(1) AND RULE 8D OF THE INCOME TAX RULES AND A CCORDINGLY THE AO COMPUTED THE DISALLOWANCE IN ACCORDANCE WITH RULE 8D FOR WHICH ALSO THE AO ACCEPTED IN THE REMAND REPORT MISTAKES IN CERTAI N FIGURES RELATING TO THE INTEREST EXPENDITURE TAKEN WHILE COMPUTING THE DISALLOWANCE UNDER RULE 8D( 2 ) AND ON THE BASIS OF WHICH CIT(A) HAS RESTORED THIS ISSUE TO THE FILE OF THE AO TO WORK OUT THE DISALLOWANCE CORRECTLY. CIT( A) WE NOTED HAS ALSO NOT DEALT WITH THE SUBMISSIONS OF THE ASSESSEE WITH REGARD TO THE SATISFACTION BEING RECORDED BY THE AO BEFORE APPLYING RULE 8D BUT DIRECTED THE AO TO RE - WORK THE DISALLOWANCE. THE MAIN CONTENTION OF THE ASSESSEE WHILE IS THAT THERE CANNOT BE ANY DISALLOWANCE UNDER THIS PROVISION. WE HAVE GONE THROUGH THE DECISION OF THIS BENCH IN THE CASE OF SESA GOA LTD. VS. JCIT ( SUPRA ) DT . 8.3.2013 FOR WHICH THE UNDERSIGNED IN THE AUTHOR. WE NOTED THAT THE CASE OF THE ASSESSEE IS DULY COVERED B Y THE SAID DECISION. IN THAT DECISION THIS TRIBUNAL HAS ELABORATELY DISCUSSED THE PROVISIONS OF SEC. 14A AS WELL AS RULE 8D AND ULTIMATELY HELD AS UNDER : 14. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS ALONG WITH THE ORDER OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH VARIOUS CASE LAWS AND THE PROVISIONS OF THE IT ACT IN THIS REGARD. THE ISSUE INVOLVED BEFORE US RELATE TO THE DISALLOWANCE MADE BY T HE AO BY APPLYING THE PROVISIONS OF SEC.14A OF THE IT ACT READ WITH RULE 8D OF THE IT RULES. SEC.14A WAS INSERTED BY THE FINANCE ACT 2001 W.E.F. 1.4.1962. ORIGINALLY THIS SEC. PROVIDES THAT IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. SUBSEQUENTLY BY FINANCE ACT 2002 WITH RETROSPECTIVE EFFECT FROM 11/5/2001 PROVISO WAS ADDED WHICH STAT ES THAT THIS SEC. SHALL NOT EMPOWER THE AO EITHER TO RE - ASSESS OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING THE REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE 1/4/2001. WITH EFFECT FROM 1/4/2007 BY FINANCE ACT 2006 SUB - SEC. (2) EMPOWERS THE AO TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH THE METHOD AS MAY BE PRESCRIBED. SUCH POWER I S TO BE EXERCISED IF THE AO HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE MENTIONED IN SUB - SEC.(1). BEFORE APPLYING RULE 8D IT IS APPARENT THAT THE AO MUST B E SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. SUCH SATISFACTION 13 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) IS AN OBJECTIVE SATISFACTION THAT IT HAS TO BE JUDICIOUS AND BASED ON THE MATERIAL ON RECORD. IT CANNOT BE AN IMPRESSION THAT IT IS MUCH MORE THAN THE GOSSIP OR HEARSAY IT MEANS JUDGMENT OR BELIEF THAT IT IS A BELIEF OR A CONNECTION RESULTING FROM WHAT ONE THINKS ON A PARTICULAR QUESTION. IT MUST BE BASED ON THE REASONS AND GROUND AS SEEMS GOOD TO HIM AND WHILE MAKING SUCH SATISFAC TION THE AO MUST GIVE REGARD TO THE ACCOUNTS OF THE ASSESSEE. HE MUST RECORD DEFICIENCY IN THE ACCOUNTS WITH REGARDS TO THE CLAIM OF THE ASSESSEE. SUB - SEC.(3) PROVIDES THAT PROVISIONS OF SUB - SEC.(2) SHALL ALSO APPLY WHERE ASSESSEE CLAIMS THAT NO EXPENDITU RE HAD BEEN INCURRED IN RELATION TO INCOME NOT FORMING PART OF THE TOTAL INCOME. THIS IS NOT THE CASE OF THE ASSESSEE AS IN THE CASE OF THE ASSESSEE ASSESSEE HIMSELF ESTIMATED THE EXPENSES RELATING TO THE EXEMPT INCOME AND DISALLOWED THE SAME. RULE 8D WAS INSERTED BY GAZETTE NOTIFICATION DATED 24/3/2008 IN VIEW OF THE POWER CONFERRED UNDER SUB - SEC (2). THIS RULE PRESCRIBES THE METHOD FOR COMPUTING THE EXPENDITURE INCURRED IN RELATION TO THE INCOME NOT FORMING PART OF THE TOTAL INCOME. THIS IS AN UNDISPUTED FACT THAT IN THIS CASE THE ASSESSEE HAS INVESTED IN DEBTS MUTUAL FUNDS. THE ASSESSEE COMPUTED DISALLOWANCE U/S 14A(2) AT RS.25 78 156/ - AND DISALLOWED THE SAME WHILE COMPUTING ITS TOTAL INCOME. THE WORKING OF THE SAID DISALLOWANCE CLAIMED BY THE ASSESSE E IS GIVEN HEREIN ABOVE IN THE SUBMISSIONS MADE BY THE ASSESSEE. THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE ESPECIALLY THE EXPLANATION OF THE ASSESSEE THAT NO ADMINISTRATIVE EXPENDITURE INCURRED ON EARNING THE DIVIDEND INCOM E. CONSIDERING THE MAGNITUDE OF THE INVESTMENTS AND THE DIVIDEND INCOME RECEIVED THE AO WAS OF THE VIEW THAT THE DISALLOWANCE MADE BY THE ASSESSEE U/S 14A OF THE IT ACT TOWARDS THE ADMINISTRATIVE EXPENDITURE IS LOW ON COMPARING THE MAGNITUDE OF PURCHASE A ND SALES MADE BY THE ASSESSEE AND THE INVESTMENTS OF LARGE MAGNITUDE CANNOT BE MADE WITHOUT PROPER ANALYSIS OF THE MARKET CONDITION/STOCK MOVEMENT ETC. THE REVENUE WAS OF THE OPINION THAT THE ASSESSEE HAS WORKED OUT THE ADMINISTRATIVE EXPENDITURE AND HAD NOT CONSIDERED ALL THE ADMINISTRATIVE EXPENDITURE. BOTH THE PARTIES BEFORE US VEHEMENTLY RELIED ON THE DECISION OF GODREJ BOYCE MFG CO. LTD. VS DCIT 328 ITR 81 (MUM). 15. WE HAVE GONE THROUGH THIS DECISION AND WE NOTED THAT IN THIS CASE THE ASSESSEE CLA IMED EXEMPTION IN RESPECT OF DIVIDEND INCOME OF 34.34 CRORES U/S 10(33). THE AO ISSUED NOTICES FOR DISALLOWANCE OF INTEREST U/S 14A OF THE IT ACT. THE EXPLANATION OF THE ASSESSEE WAS THAT (I) 95% OF THE SHARES WERE BONUS SHARES FOR WHICH NO COST WAS INCURR ED; (II) NO INVESTMENT IN SHARES WAS MADE IN THE CURRENT YEAR AND NO DISALLOWANCE WAS MADE IN EARLIER YEARS AND (III) THERE WERE SUFFICIENT INTEREST FREE FUNDS AVAILABLE IN THE FORM OF SHARE CAPITAL RESERVES ETC. WHICH WERE MORE THAN INVESTMENT IN SHARES. THE AO WAS NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE AND HE MADE DISALLOWANCE U/S 14A ON PRORATA BASIS. THE CIT(A) FOLLOWING HIS ORDERS FOR EARLIER YEARS ACCEPTED THE APPEAL OF THE ASSESSEE. THE TRIBUNAL FOLLOWING THE DECISION OF THE SPECIAL BEN CH IN THE CASE OF ITO VS DAGA CAPITAL MANAGEMENT (P) LTD 117 ITD 169 (SB) RESTORED THE MATTER TO THE FILE OF THE AO FOR THE CONSIDERATION IN THE LIGHT OF THE PROVISIONS OF SUB - SEC.(2) & (3) OF SEC.14A OF THE 14 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) IT ACT. THE ASSESSEE BEING AGGRIEVED FILED APP EAL AS WELL AS WRIT PETITION CHALLENGING THE CONSTITUTIONAL VALIDITY OF SUB - SEC. (2) & (3) AND RULE D. THE HON'BLE HIGH COURT GAVE THE FOLLOWING FINDINGS; 1. THE PROVISIONS OF SEC. 14A AND RULE 8D ARE CONSTITUTIONALLY VALID. 2. THE PROVISIONS OF SUB - SEC . (2) & (3) OF SEC.14A AND RULE 8D ARE PROSPECTIVE AND NOT RETROSPECTIVE IN NATURE AND THEREFORE WOULD APPLY FROM ASSESSMENT YEAR 2007 - 08. 3. THE BASIC OBJECT OF SEC.14A IS TO DISALLOW THE DIRECT AND INDIRECT EXPENDITURE INCURRED IN RELATION TO INCOME W HICH DOES NOT FORM PART OF THE TOTAL INCOME (PAGE 21). 4. THE INSERTION OF SEC.14A WAS CURATIVE AND DECLARATORY OF THE INTENT OF THE PARLIAMENT. THE BASIC PRINCIPLE OF TAXATION IS THAT ONLY NET INCOME NAMELY GROSS INCOME MINUS EXPENDITURE THAT IS TAXABL E. EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THAT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME (PAGES 22 - 23). THE TEST WHICH HAS BEEN ENUNCIATED IN WALLFORT FOR ATTRACTING THE PROVISIONS OF SEC.14A IS THAT THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE WHICH HAS ITS RELATIONSHIP WITH THE TAX EXEMPT INCOME. ONCE THE TEST OF PROXIMATE CAUSE BASED ON THE RELATIONSHIP OF THE EXPENDITURE WITH TAX EXEMPT INCOME IS ESTABLISHED A DISALLOWANCE WOULD HAVE TO BE EFFECTED UNDER SECTION 14A (PAGE 28) 5. WHAT MERITS EMPHASIS IS THAT THE JURISDICTION OF THE AO TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH THE PRESCRIBED METHOD ARISES IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE WHICH THE ASSESSEE CLAIMS TO HAVE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. MOREOVER THE SATISFACTION OF THE AO HAS TO BE ARRIVED AT HAVING REGA RD TO THE ACCOUNTS OF THE ASSESSEE. HENCE SUB - SEC (2) DOES NOT IPSO FACTO ENABLE THE AO TO APPLY THE METHOD PRESCRIBED BY THE RULES STRAIGHTAWAY WITHOUT CONSIDERING WHETHER THE CLAIM MADE BY THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS CORRECT. THE AO MUST IN THE FIRST INSTANCE DETERMINE WHETHER THE CLAIM OF THE ASSESSEE IN THAT REGARD IS CORRECT AND THE DETERMINATION MUST BE MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. T HE SATISFACTION OF THE AO MUST BE ARRIVED AT ON AN OBJECTIVE BASIS. IT IS ONLY WHEN THE AO IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE THAT THE LEGISLATURE DIRECTS HIM TO FOLLOW THE METHOD THAT MAY BE PRESCRIBED. IN A SITUATION WHERE THE ACCOUNTS OF T HE ASSESSEE FURNISH AN OBJECTIVE BASIS FOR THE AO TO ARRIVE AT A SATISFACTION IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE OF THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME THERE WOU LD BE NO WARRANT FOR TAKING RECOURSE TO THE METHOD PRESCRIBED BY THE RULES. FOR IT IS ONLY IN THE EVENT OF THE AO NOT BEING 15 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) SO SATISFIED THAT RECOURSE TO THE PRESCRIBED METHOD IS MANDATED BY LAW (PAGES 31 - 32). 6. IN THE EVENT THAT THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE HE MUST RECORD REASONS FOR HIS CONCLUSION (PAGE - 79). 7. THE EFFECT OF SEC.14A IS TO WIDEN THE THEORY OF THE APPORTIONMENT OF EXPENDITURE (PAGE 49). 8. THE EXPRESSION EXPENDITURE INCURRED; IN SEC.1 4A REFERS TO EXPENDITURE ON RENT TAXES SALARIES INTEREST ETC. IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (PAGE - 50). 9. SUB - SECTIONS (2) & (3) OF SEC.14A ARE INTENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS OF SUB - SEC (1) (PAGES 50). 10. EVEN IN THE ABSENCE OF SUB - SECTION (2) OF SEC.14A THE AO WOULD HAVE TO APPORTION THE EXPENDITURE AND TO DISALLOW THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE AO WOULD HAV E TO FOLLOW A REASONABLE METHOD OF APPORTIONING THE EXPENDITURE CONSISTENT WITH WHAT THE CIRCUMSTANCES OF THE CASE WOULD WARRANT AND HAVING REGARD TO ALL RELEVANT FACTS AND CIRCUMSTANCES. THE SAID DECISION OF THE JURISDICTIONAL HIGH COURT IS BINDING ON US. WHILE DECIDING THIS CASE THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS WALLFORT SHARES & STOCK BROKERS LTD. 233 CTR (SC) 42 WAS REFERRED TO. IN THIS DECISION WE NOTED THAT THE HON'BLE SUPREME COURT IN THAT CASE UPHELD THE VIEW OF T HE HON'BLE MUMBAI HIGH COURT IN THE CASE OF WALLFORT SHARES & STOCK BROKERS LTD. VS ITO 310 ITR 421. THE HON'BLE SUPREME COURT IN THIS DECISION AT PAGE - 31 OF THE ORDER HELD AS UNDER; TO ATTRACT SEC.14A THERE HAS TO BE PROXIMATE CAUSE FOR DISALLOWANCE W HICH HAS ITS RELATIONSHIP WITH THE TAX EXEMPT. PAY BACK OR RETURN OF INVESTMENT IS NOT SUCH PROXIMATE CAUSE. HENCE SEC.14A IS NOT APPLICABLE IN THE PRESENT CASE. THUS IN THE ABSENCE OF SUCH PROXIMATE CAUSE FOR DISALLOWANCE SEC.14A CANNOT BE INVOKED. 1 6. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS DCIT (SUPRA) THEREFORE AT PAGE - 28 HAS CLEARLY LAID DOWN THAT THERE MUST BE PROXIMATE CAUSE BASED ON THE RELATIONSHIP OF THE EXPENDITURE THAT TAX EXEMPT INCOME IS ESTABLISHED O NLY THEN A DISALLOWANCE WOULD HAVE TO BE EFFECTED U/S 14A OF THE IT ACT. THEREFORE IN VIEW OF THE DECISION OF THE JURISDICTIONAL HIGH COURT AND THE DECISION OF THE HON'BLE SUPREME COURT WE ARE OF THE VIEW THAT SEC.14A CANNOT BE APPLIED UNLESS THERE IS A PROXIMATE CAUSE FOR DISALLOWANCE. THE ONUS TO ESTABLISH THAT THERE IS PROXIMATE CAUSE BASED ON THE RELATIONSHIP OF THE EXPENDITURE WITH THE EXEMPT INCOME IN OUR OPINION IS ON THE REVENUE. THUS THE APPLICATION OF THE PROVISIONS OF SEC. (2) & (3) OF SEC.14A AND RULE 8D IS NOT AUTOMATIC IN EACH AND EVERY CASE WHERE THERE IS INCOME NOT FORMING PART OF THE TOTAL INCOME. SUB - SEC. (2) 16 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) & (3) ARE INTENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS OF SUB - SEC. (1). THEREFORE IT IS NECESSARY FOR THE AO FIRST TO ASCERT AIN WHETHER THERE IS PROXIMATE CONNECTION BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF THE TOTAL INCOME. IF SUCH PROXIMATE CONNECTION IS ESTABLISHED WITH THE EXEMPT INCOME THE AO WOULD BE JUSTIFIED IN APPLYING THE PROVISIONS OF SUB - SEC (2) & (3) OF SEC.14A AND RULE 8D OF THE IT ACT 1961. THE EXPENDITURE INCURRED U/S 14A WOULD INCLUDE DIRECT AND INDIRECT EXPENDITURE BUT RELATIONSHIP WITH EXEMPTED INCOME MUST BE PROXIMATE. IF THERE IS MATERIAL TO ESTABLISH THAT THERE IS DIRECT NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF TOTAL INCOME THEN DISALLOWANCE WOULD BE JUSTIFIED EVEN WHERE THERE IS NO RECEIPT OF EXEMPTED INCOME U/S 10 IN THE YEAR UNDER CONSIDERATION IN VIEW OF THE DECISION OF SPECIAL BENCH IN THE C ASE OF CHEMINVEST LTD. 124 TTJ 577 (DEL)(SB). 17. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOME. ON THE SAME ANALOGY THE EXEMPTION IS ALSO TO BE ALLOWED ON NET BASIS I.E. GROSS RECEIPTS MINUS RELATED EXPENSES. THEREFORE IF ANY EXPENDITURE IS DIRECTLY RELATED TO EXEMPTED INCOME IT CANNOT BE ALLOWED TO BE SET OFF AGAINST TAXABLE PROFIT. ON THE SAME ANALOGY IN OUR OPINION IF ANY EXPENDITURE IS DIRECTLY RELATED TO TAXABLE INCOME IT CANNOT BE ALLOWED TO BE SET OFF AGAINST THE EXEMPTED INCOME M ERELY BECAUSE SOME INCIDENTAL BENEFIT HAS ARISEN TOWARDS EXEMPTED INCOME. BEFORE MAKING ANY DISALLOWANCE U/S 14A THE AO IS REQUIRED TO RECORD A SATISFACTION HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE THAT CLAIM OF ASSESSEE THAT EXPENDITURE INCURRED I S NOT RELATED TO THE INCOME FORMING PART OF THE TOTAL INCOME IS INCORRECT. SUCH SATISFACTION MUST BE ARRIVED AT ON THE OBJECTIVE BASIS. HE IS ALSO REQUIRED TO RECORD THE REASONS FOR ARRIVING AT SUCH SATISFACTION. THE ASSESSING OFFICER IN THIS CASE WE NOTE D IS NOT SATISFIED WITH THE CORRECTNESS OF THE DISALLOWANCE MADE BY THE ASSESSEE EVEN THOUGH HE HAS ACCEPTED THE EXPLANATION OF THE ASSESSEE THAT NO INTEREST IS INCURRED WITH REGARD TO EXEMPT INCOME. HE REJECTED THE EXPLANATION OF THE ASSESSEE THAT NO ADMI NISTRATIVE EXPENDITURE INCURRED ON EARNING DIVIDEND INCOME CONSIDERING THE MAGNITUDE OF THE INVESTMENTS AND DIVIDEND INCOME RECEIVED AND THE DISALLOWANCE ACCORDING TO HIM MADE BY THE ASSESSEE U/S 14A TOWARDS ADMINISTRATIVE EXPENDITURE IS VERY LESS. THE ASS ESSING OFFICER NOWHERE POINTED OUT THE PROXIMATE CONNECTION OF OTHER EXPENSES NOT APPORTIONED BY THE ASSESSEE FOR THE EARNING OF THE DIVIDEND INCOME. HE MERELY OBSERVED THAT THE ADMINISTRATIVE EXPENSES DISALLOWED BY THE ASSESSEE IS VERY LESS BUT HOW THEY A RE LESS AND HOW THE OTHER EXPENSES INCURRED BY THE ASSESSEE RELATED TO THE DIVIDEND INCOME HAS NOT BEEN BROUGHT ON RECORD. EVEN THE AO HAS NOT POINTED OUT THE EXPENSES EXCLUDED BY THE ASSESSEE FOR DISALLOWANCE HAS PROXIMATE CONNECTION WITH DIVIDEND INCOME. IN OUR OPINION THE ASSESSING OFFICER BEFORE REJECTING THE DISALLOWANCE COMPUTED BY THE ASSESSEE MUST GIVE A CLEAR CUT FINDING HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE HOW THE OTHER EXPENDITURE CLAIMED BY THE ASSESSEE OUT OF NON EXEMPT INCOME IS RELA TED WITH THE EXEMPT INCOME. NO DISCREPANCY IN THE CLAIM OF THE ASSESSEE WAS POINTED OUT. THE ASSESSING OFFICER IN OUR OPINION IN VIEW OF THE JURISDICTIONAL HIGH COURT DECISION IS BOUND TO RECORD 17 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) SATISFACTION AS TO HOW THE EXPENSES CLAIMED BY THE ASSESSEE H AVE BEEN INCURRED ON EARNING DIVIDEND INCOME WERE NOT SUFFICIENT AND CORRECT. WE HAVE ALREADY HELD THAT THE ONUS TO PROVE IN THIS REGARD LIES ON THE ASSESSING OFFICER. ALTHOUGH THE LD. DR HAD VEHEMENTLY CONTENDED AND TRIED TO BUILD UP HIS CASE BY SUBSTITUT ING THE REASONS GIVEN BY THE CIT(APPEAL) IN PLACE OF THE AO BUT FAILED TO BRING ANY COGENT MATERIAL OR EVIDENCE IN THIS REGARD WHICH MAY PROVE THAT THE OTHER EXPENSES CLAIMED BY THE REVENUE FOR APPORTIONMENT HAD PROXIMATE CONNECTION WITH THE EARNING OF TH E DIVIDEND INCOME. IN OUR OPINION UNTIL AND UNLESS THIS IS PROVED OR ESTABLISHED BY THE REVENUE THE ASSESSING OFFICER DOES NOT HAVE ANY POWER TO REJECT THE ACCOUNTS OF THE ASSESSEE AND TAKE THE SHELTER OF RULE 8D FOR COMPUTING THE DISALLOWANCE OUT OF THE EXEMPT INCOME. WE ARE NOT AT ALL CONVINCED WITH THE SUBMISSION OF THE LD. DR RELYING ON THE DECISION OF CIT(APPEAL) IN RESPECT OF EXPLANATION BB TO SEC. 80HHC THAT 10% OF THE RECEIPTS UNDER THE SOURCES MENTIONED THEREIN ARE DEEMED TO BE THE EXPENDITURE. TH IS IN OUR OPINION WILL STRENGTHEN THE CASE OF THE ASSESSEE AS EXPLANATION BB TO SEC. 80HHC DOES NOT RECOGNIZE AMOUNT OF THE INVESTMENT MADE IN OTHER RECEIPT TO BE THE BASIS OF COMPUTING THE EXPENDITURE BEING INCURRED FOR THE EARNING OF THAT INCOME. SIMILAR VIEWS HAVE BEEN TAKEN BY HON'BLE TRIBUNAL IN THE FOLLOWING DECISIONS ALSO. IN THE CASE OF DCIT VS. JINDAL PHOTO LTD. HELD IN I.T.A.T. DELHI BENCH DATED 7.1.2011 IT WAS HELD AS FOLLOWS: NOW AS PER SECTION 14A(2) OF THE ACT IF THE AO HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE ASSESSEES TOTAL INCOME UNDER THE ACT THE AO SHALL DETERMINE THE AMO UNT INCURRED IN RELATION TO SUCH INCOME IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED I.E. UNDER RULE 8D OF THE I.T. RULES. HOWEVER IN THE PRESENT CASE THE ASSESSMENT ORDER DOES NOT EVINCE ANY SUCH SATISFACTION OF THE AO REGARDING THE CORRECTNES S OF THE CLAIM OF THE ASSESSEE. AS SUCH RULE 8D OF THE RULES WAS NOT APPROPRIATELY APPLIED BY THE AO AS CORRECTLY HELD BY THE CIT(A). IT HAS NOT BEEN DONE BY THE AO THAT ANY EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE FOR EARNING ITS DIVIDEND INCOME. ME RELY AN ADHOC DISALLOWANCE WAS MADE. THE ONUS WAS ON THE AO TO ESTABLISH ANY SUCH EXPENDITURE. THIS ONUS HAS NOT BEEN DISCHARGED. IN .CIT VS. HERO CYCLES. (P&H) 323 ITR 518 UNDER SIMILAR CIRCUMSTANCES IT WAS HELD THAT THE DISALLOWANCE U/S 14A OF THE ACT REQUIRES A CLEAR FINDING OF INCURRING OF EXPENDITURE AND THAT NO DISALLOWANCE CAN BE MADE ON THE BASIS OF PRESUMPTIONS. IN .ACIT VS. EICHER LTD.. 101 TTJ (DEL.) 369 THAT IT WAS HELD THAT THE BURDEN IS ON THE AO TO ESTABLISH NEXUS OF EXPENSES INCURRED WI TH THE EARNING OF EXEMPT INCOME BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT. IN MARUTI UDYOG VS. DCIT 92 ITD 119 (DEL.) IT HAS BEEN HELD THAT BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT THE ONUS TO ESTABLISH THE NEXUS OF 18 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) THE SAME WITH THE EXEMPT INCOME IS ON THE REVENUE. IN WIMCO SEEDLINGS LIMITED VS. DCIT. 107 ITD 267 (DEL.) (TM) IT HAS BEEN HELD THAT THERE CAN BE NO PRESUMPTION THAT THE ASSESSEE MUST HAVE INCURRED EXPENDITURE TO EARN TAX FREE INCOME. SIMILAR ARE THE DECISIONS IN: 1 . PUNJAB NATIONAL BANK VS. DCIT 103 TTJ 908 (DEL.); 2. VIDYUT INVESTMENT LTD. 10 SOT 284 (DEL.); AND 3. D.J. MEHTA VS. INCOME TAX OFFICER 290 ITR 238 (MUM.) (AT) IN VIEW OF THE ABOVE FINDING NO ERROR WITH THE ORDER OF THE CIT(A) ON THE POINT AT ISS UE THE SAME IS HEREBY CONFIRMED. GROUND NO.3 IS THUS REJECTED. IN THE CASE OF JINDAL PHOTO LTD. VS. DCIT HELD IN I.T.A.T. DELHI BENCH DATED 23.9.2011 IT WAS HELD AS FOLLOWS: IN THE YEAR UNDER CONSIDERATION IT IS SEEN THAT IT IS NOT INCORRECT WHEN THE ASSESSEE CONTENDS THAT NO SATISFACTION HAS BEEN RECORDED BY THE AO REGARDING THE ASSESSEES CALCULATION BEING INCORRECT. EVEN SO RULE 8D OF THE RULES HAS BEEN APPLIED. THIS IN OUR OPINION IS NOT CORRECT. SUCH SATISFACTION OF THE ASSESSING OFFICER IS A PRE - REQUISITE TO INVOKE THE PROVISIONS OF RULE 8D OF THE RULES. THE LEARNED CIT(A) THEREFORE ERRED IN PARTIALLY APPROVING THE ACTION OF THE ASSESSING OFFICER. IN THE CASE OF AVSHESH MERCANTILE P. LTD. VS. DCIT IN I.T.A.T. MUMBAI BENCH (I.T. ACT NO.5779/MUM/2006 & 208/MUM/2009) IT WAS HELD AS FOLLOWS: AT THE TIME OF HEARING THE CONTENTION RAISED BY THE LEARNED DR IN THIS REGARD IS THAT THE APPEAL OF THE REVENUE ON THE ISSU E HAVING BEEN DISMISSED BY THE HON'BLE BOMBAY HIGH COURT MERELY OBSERVING THAT NO QUESTION ARISES IT CANNOT BE TREATED AS A DECISION RENDERED BY THE HON'BLE HIGH COURT ON THE MERIT OF THE ISSUE WHICH IS BINDING ON THIS TRIBUNAL. WE ARE UNABLE TO ACCEPT TH IS CONTENTION OF THE LEARNED DR. IT IS WELL SETTLED PROPOSITION OF JUDICIAL PRECEDENTS THAT IS APPEAL THE HON'BLE HIGH COURT CONSIDERS FACTS PERTAINING TO THE ISSUE AND GIVES APPROVAL TO THE DECISION OF THE LOWER FORUM THE DECISION OF LOWER FORUM GETS MER GED WITH THE JUDGMENT AND ORDER OF THE HIGH COURT AND IT BECOMES BINDING PRECEDENT EVEN THOUGH APPROVAL TO DECISION OF LOWER FORUM/COURT IS SUMMARILY RECORDED. SIMILAR SITUATION HAD ARISEN FOR CONSIDERATION BEFORE THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF NIRMA INDUSTRIES LTD. 283 ITR 402 WHEREIN THE EFFECTS OF SUMMARY DISPOSAL OF APPEAL BY THE HIGH COURT WERE ANALYSED AND EXPLAINED BY THEIR LORDSHIPS. IT WAS CLARIFIED THAT WHILE HEARING AN APPEAL EVEN FOR DECIDING WHETHER SUBSTANTIAL QUESTION OF LAW AR ISES OR NOT FROM THE ORDER OF THE TRIBUNAL THE HIGH COURT DOES NOT EXERCISE EITHER THE ORIGINAL JURISDICTION OR THE JURISDICTION TO ISSUE 19 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) WRITS AND THE ONLY JURISDICTION EXERCISED BY THE HIGH COURT IN THE FIRST INSTANCE DECIDES WHETHER OR NOT SUBSTANTIAL QUESTION OF LAW ARISES FROM THE ORDER OF THE TRIBUNAL IT CANNOT BE SAID THAT THE HIGH COURT DOES NOT EXERCISE THE APPELLATE POWERS OR THAT THERE IS NO DECISION ON MERIT WHEN THE HIGH COURT DISMISSES AN APPEAL HOLDING THAT NO SUBSTANTIAL QUESTION OF LAW AR ISES FROM THE ORDER OF THE TRIBUNAL. IT WAS HELD THAT WHENEVER AN ORDER OF THE SUBORDINATE FORUM IS CARRIED IN APPEAL BEFORE THE HIGHER APPELLATE FORUM/COURT OPERATIVE PART THEREOF MERGES INTO THE JUDGMENT DECISION OR ORDER OF THE HIGHER COURT AFTER THE CONFIRMATION MODIFICATION OR REVERSAL AS THE CASE MAY BE AND THE DECISION OF THE LOWER COURT OR FORUM HAS NO INDEPENDENT EXISTENCE THEREAFTER IN RELATION TO THE ISSUE WHICH WAS CARRIED BEFORE THE APPELLATE COURT OR FORUM. IT WAS HELD THAT WHERE THE HIGH COURT COMES TO THE CONCLUSION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES ON A PARTICULAR ISSUE IT CANNOT BE STATED THAT THE SUBJECT MATTER OF CONTROVERSY BETWEEN THE PARTIES HAS NOT BEEN DEALT WITH BY THE HIGH COURT. IT WAS HELD THAT WHEN THE DECISION OF THE TRIBUNAL IS AFFIRMED ON THE ISSUE BROUGHT BEFORE THE HIGH COURT IT IS THE DECISION OF THE HIGH COURT WHICH BECOMES OPERATIVE AND WHICH IS CAPABLE OF BEING GIVEN EFFECT TO FOR ALL INTENTS AND PURPOSES. KEEPING IN VIEW THE DECISION OF HON'BLE GUJARAT H IGH COURT IN THE CASE OF NIRMA INDUSTRIES LTD. (SUPRA) WE HAVE NO HESITATION TO HOLD THAT THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF DELITE ENTERPRISE LTD. (SUPRA) IS A DECISION ON MERIT WHICH IS BINDING PRECEDENT ON US. AS THE ISSUE INV OLVED IN THE PRESENT CASES AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERETO ARE SIMILAR TO THAT OF THE CASE OF DELITE ENTERPRISE (SUPRA) WE RESPECTFULLY FOLLOW THE SAID DECISION OF THE JURISDICTIONAL HIGH COURT AND DELETE THE DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(A) ON ACCOUNT OF PREMIUM PAID BY THE ASSESSEES ON REDEMPTION OF PREMIUM NOTES (OCPN) BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. AS REGARDS THE CASE LAWS CITED BY THE LEARNED DR IT IS OBSERVED THAT IN NONE OF TH ESE CASES THE FACTS INVOLVED WERE SIMILAR TO THE CASE OF THE PRESENT ASSESSEES IN AS MUCH AS THE INVESTMENT MADE THEREIN WAS NOT FOUND TO BE CAPABLE OF EARNING TAXABLE AS WELL AS EXEMPT INCOME WHICH WAS ACTUALLY NOT EARNED BY THE ASSESSEE IN THE RELEVANT PERIOD AS ARE THE FACTS OF THE PRESENT CASE OR THAT OF THE CASE OF DELITE ENTERPRISE (SUPRA) DECIDED BY THE HON'BLE BOMBAY HIGH COURT. ACCORDINGLY WE DECIDE THE COMMON ISSUE INVOLVED IN ALL THESE APPEALS IN FAVOUR OF THE ASSESSEES FOLLOWING THE DECISION O F JURISDICTIONAL HIGH COURT IN THE CASE OF DELITE ENTERPRISES (SUPRA) AND ALLOW THE APPEALS OF ALL THE ASSESSEES. 18. WE HAVE ALSO GONE THROUGH THE DECISION RELIED UPON BY THE LEARNED DR ALSO. THE DECISION OF ACIT VS CITICORP FINANCE (IND.) LTD. 108 IT D 457 (BOM.) IS NO MORE RELEVANT IN VIEW OF THE DECISION OF THE HON'BLE MUMBAI HIGH COURT IN THE CASE OF GODREJ BOYCE MFG CO. LTD. (SUPRA). THE DECISION OF SPIC VS DCIT 93 TTJ (CHENNAI) 161 IS NOT APPLICABLE TO THE FACTS OF THE CASE. AS IN THAT CASE THE ASSESSEE 20 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) WAS REGULARLY INVESTING IN THE SHARES. THE ASSESSEE HAS NOT DISALLOWED ANY EXPENDITURE WITH REGARD TO THE EARNING OF THE DIVIDEND INCOME. UNDER THESE FACTS THE HON'BLE TRIBUNAL HELD THAT WHETHER TO INVEST OR NOT TO INVEST IS A VERY STRATEGIC DECI SION AND TOP MANAGEMENT INVOLVE IN TAKING THE DECISIONS. THIS DECISION RELATE TO ASSESSMENT YEAR 2000 - 01 MUCH PRIOR TO THE INSERTION OF PROVISION OF SEC.14A(2) OF THE IT ACT 1961. THE DECISION OF ACIT VS PREMIUM CONSOLIDATED CAPITAL TRUST 83 TTJ (BOM.) REL ATES TO ASSESSMENT YEAR 1991 - 92 PRIOR TO INSERTION OF 14A(2) HENCE WILL NOT ASSIST THE REVENUE. THE OTHER DECISION RELIED ON ARE ALSO NOT APPLICABLE TO THE FACTS OF THE CASE EXCEPT THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MF G. CO. LTD. VS DC IT & ANOTHER 328 ITR 81(BOM.). IN VIEW OF OUR AFORESAID DISCUSSION AND RESPECTIVELY FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT & ANOTHER 328 ITR 81 (BOM) WE DELETE THE D ISALLOWANCE MADE U/S 14A R.W. RULE 8D AND ACCORDINGLY THE GROUND TAKEN BY THE ASSESSEE IN THIS REGARD IS ALLOWED. 19. GROUND NO. 2 RELATES TO SUSTENANCE OF THE DISALLOWANCE OF RS. 9 88 29 729/ - TOWARDS THE PAYMENT OF THE SALES COMMISSION TO THE NON - RESI DENT AGENTS. THE ASSESSING OFFICER DISALLOWED THE COMMISSION PAID TO THE SALES AGENTS U/S 40(A)(I) OF THE INCOME - TAX ACT FOR THE REASON THAT THE ASSESSEE HAD NOT DEDUCTED TAX U/S 195 OF THE I.T. ACT ON SUCH PAYMENT. WHEN THE MATTER WENT BEFORE THE CIT(A) CIT(A) CONFIRMED THE DISALLOWANCE U/S 37 OF THE INCOME - TAX ACT IN THE FOLLOWING MANNER: - 6.3 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE BY THE ASSESSEE AND THE OBSERVATIONS OF THE ASSESSING OFFICER. I HAVE ALSO PERUSED THE ORDER OF THE HON'BLE ITA T IN ITA. NO. 113/PNJ/2010 DATED 10.3.2011 IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2005 - 06 IN WHICH THE SIMILAR ISSUE WAS CONSIDERED. WITH REGARD TO THE CONTROVERSY WHETHER THE ASSESSEE IS REQUIRED TO DEDUCT TAX AT SOURCE FOR THE COMMISSION PAID T O THE NON - RESIDENT AGENTS THE HON'BLE TRIBUNAL HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN THE ABOVE REFERRED APPEAL. IN THIS REGARD IT IS HELD THAT CIRCULAR NO. 7 OF 2009 WITHDRAWING THE CIRCULAR NO. 23 OF 1969 163 OF 1975 AND 786 OF 2000 WILL B E OPERATIVE ONLY FROM 22/10/2009 AND NOT PRIOR TO THAT DATE. IT WAS ACCORDINGLY HELD THAT THE CIRCULAR IS NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION I.E. 2005 - 06 AND ACCORDINGLY THE APPEAL OF THE ASSESSEE WAS ALLOWED. FOLLOWING THE RATIO OF THIS DEC ISION CIRCULAR NO. 7 OF 2009 WHICH WAS HELD TO BE OPERATIVE ONLY FROM 22/10/2009 SHOULD HAVE NO APPLICATION TO THE PRESENT CASE WHICH RELATES TO THE FINANCIAL YEAR 2008 - 09 RELEVANT TO THE ASSESSMENT YEAR 2009 - 10. ACCORDINGLY FOLLOWING THE DECISION OF T HE HON'BLE ITAT THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX IN RESPECT OF THE COMMISSION PAYMENTS MADE TO THE NON - RESIDENT AGENTS. THEREFORE AS FAR AS THE ISSUE OF NON DEDUCTION OF TAX IS CONCERNED THE ASSESSING OFFICER IS NOT JUSTIFIED IN 21 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) DISALLOWING THE COMMISSION PAYMENT BY INVOKING PROVISIONS OF SECTION 40(A)(I) OF THE INCOMES TAX ACT . 6.4 THE ASSESSING OFFICER WHILE MAKING THE DISALLOWANCE OF COMMISSION PAYMENT HAS ALSO REFERRED TO THE OBSERVATIONS OF THE CIT(A) ON THE SIMILAR ISSUE FOR THE ASSESS MENT YEAR 2006 - 07 AND STATED AS UNDER. FOR THE REASONS ELABORATELY DISCUSSED BY THE CIT (A) IN THE APPELLATE ORDER ITA NO.136/PNJ/2009 - 10 DT. 30.08.2011 FOR THE A.Y. 2006 - 07 IN THE ASSESSEES OWN CASE THE COMMISSION PAYMENTS MADE BY THE ASSESSEE ALSO N EEDS TO BE DISALLOWED AS THE ISSUES DURING THE YEAR UNDER CONSIDERATION ARE ALSO SIMILAR TO THE ISSUES FOR THE A.Y. 2006 - 07 APART FROM THE GROUND OF NON - DEDUCTION OF TDS U/S 40A(IA). IN VIEW OF THE AFORESAID DISCUSSION THE AMOUNT OF RS.9 88 29 729/ - IS A DDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. IT IS THEREFORE NECESSARY TO REFER TO THE ORDER OF THE CIT(APPEAL) FOR THE ASSESSMENT YEAR 2006 - 07 IN CONNECTION WITH THE ALLOWABILITY OF COMMISSION PAYMENT. DURING THE YEAR 2005 - 06 (RELEVANT FOR ASSESSMENT YEAR 2006 - 07) COMMISSION WAS PAID TO THREE CONCERNS INCLUDING RS.15 21 98 212/ - TO MITSUI & CO. JAPAN RS.2 71 86 975/ - TO AHMED JAFFAR & CO. LTD. KARACHI AND RS.66 86 324/ - TO ARI MPEKS DIS TICARET VE MUM LTD. IN THIS REGARD IN THE ORDER OF THE CIT (APPEAL) IT WAS HELD THAT SINCE THE ASSESSEE COMPANY IS DEALING WITH THE PURCHASERS OF IRON ORE YEAR AFTER YEAR EXPORTS ARE MADE DIRECTLY; PAYMENTS ARE RECEIVED DIRECTLY WITHOUT BEING ROUTED THROUGH THE COMMISSION AGENTS. THERE IS APPARENTLY NO JUSTIFIED REASON FOR PAYMENT OF COMMISSION WITHOUT SUBSTANTIATING THE AUTHENTICITY OF THE COMMISSION AGENTS AND WITHOUT HAVING FURNISHED REASONABLE PROOF OF CORRESPONDENCE AND ADEQUACY OF SERVICE S RENDERED BY THE COMMISSION AGENTS. THEREFORE FOR THE ASSESSMENT YEAR 2006 - 07 THE CIT (APPEAL) HAD HELD THAT THERE WAS NO NECESSITY FOR ENGAGING THE COMMISSION AGENTS AND ACCORDINGLY THE COMMISSION PAYMENT WAS NOT HELD TO BE ALLOWABLE AS BUSINESS EXPEND ITURE U/S 37 OF THE I.T. ACT . 6.5 IN THE PRESENT CASE IT IS OBSERVED THAT THE FACTS ARE VERY MUCH SIMILAR TO THAT OF THE CASE FOR ASSESSMENT YEAR 2006 - 07. FOR THE YEAR UNDER CONSIDERATION ASSESSEE HAS PAID COMMISSION OF RS.8 26 79 634/ - TO M/S MITSUI & CO. LTD. JAPAN AND RS.54 90 159/ - TO M/S OMEGA PVT. LTD. KARACHI PAKISTAN. THE BALANCE AMOUNT OF THE CLAIM REPRESENTS SERVICE TAX. DURING THE COURSE OF APPEAL PROCEEDINGS THE ASSESSEE HAD FURNISHED COPY OF AGREEMENT DATED 26.07.2007 BETWEEN SESA GOA L TD. AND OMEGA PVT. LTD. AND A COPY OF AN ADDENDUM AGREEMENT BETWEEN SESA GOA LTD. AND MITSUI JAPAN. THE ASSESSEE HAS ALSO RELIED ON EXTRACTS OF E - MAILS EXCHANGE BETWEEN THE APPELLANT 22 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) AND THE SALES AGENTS TO SUBSTANTIATE THE NATURE OF SERVICES RENDERED BY T HE SALES AGENTS. HOWEVER IT IS IMPORTANT TO NOTE THAT THE CLAIM OF PAYMENT OF COMMISSION TO THE EXTENT OF RS.9.88 CRORES CANNOT BE JUSTIFIED MERELY BY RELYING ON COPIES OF AGREEMENTS OR E - MAIL EXTRACTS. IT IS NOT DISPUTED THAT M/S MITSUI & CO. OR M/S OMEG A PVT. LTD. ARE KNOWN ENTITIES AS FAR AS THE ASSESSEE IS CONCERNED. IT IS POSSIBLE THAT THE ASSESSEE MAY HAVE SOME KIND OF BUSINESS RELATIONSHIP WITH THE ABOVE TWO COMPANIES. IT IS ALSO POSSIBLE THAT THERE MAY BE SOME CORRESPONDENCE WITH THE TWO COMPANIES WITH REGARD TO SALES OF IRON ORE ABROAD. BUT THIS SHALL NOT BE SUFFICIENT JUSTIFICATION TO PROVE THAT THE COMPANIES ABROAD HAVE RENDERED NECESSARY SERVICES FOR EFFECTING SALES SO AS TO JUSTIFY THE CLAIM OF COMMISSION . IT IS IMPORTANT TO OBSERVE THAT ALTHOUGH THE AGREEMENT BETWEEN THE ASSESSEE AND OMEGA PVT. LTD. IS DATED 26.7.2007 NO COMMISSION WAS PAID TO OMEGA LTD. DURING THE F.Y. 2007 - 08 WHICH IMPLIES THAT NO SERVICES WERE RENDERED DURING THAT YEAR NOTWITHSTANDIN G THE AGREEMENT. THIS DEMONSTRATES THAT ENTERING AN AGREEMENT DOES NOT NECESSARILY IMPLY THAT SERVICES ARE RENDERED. SIMILARLY THE ASSESSEE HAS NOT BEEN ABLE TO COUNTER THE OBSERVATIONS MADE BY THE CIT(APPEAL) IN RESPECT OF COMMISSION PAYMENT TO M/S MITSU I & CO. FOR THE ASSESSMENT YEAR 2006 - 07. IT IS ESTABLISHED IN LAW THAT MERE EXISTENCE OF AN AGREEMENT FOR PAYMENT OF COMMISSION SHALL NOT JUSTIFY THE CLAIM OF DEDUCTION U/S 37 OF THE I.T. ACT. IN THIS REGARD IT IS RELEVANT TO NOTE THE FOLLOWING OBSERVATIO NS OF THE SUPREME COURT IN THE CASE OF LAXMINARAYAN MADANLAL VS CIT (1972) 86 ITR 439 (SC). THE QUESTION WHETHER AN AMOUNT CLAIMED AS AN EXPENDITURE WAS LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS HAS TO BE DECIDED ON THE FACTS AND IN THE LIGHT OF THE CIRCUMSTANCES IN EACH CASE. THE MERE EXISTENCE OF AN AGREEMENT BETWEEN THE ASSESSEE AND ITS SELLING AGENTS OR PAYMENT OF CERTAIN AMOUNTS AS COMMISSION ASSUMING THERE WAS SUCH PAYMENT DOES NOT BIND THE ITO TO HOLD THAT PAYME NT WAS MADE EXCLUSIVELY AND WHOLLY FOR THE PURPOSE OF THE ASSESSEES BUSINESS. ALTHOUGH THERE MIGHT BE SUCH AN AGREEMENT IN EXISTENCE AND THE PAYMENTS MIGHT HAVE BEEN MADE IT IS STILL OPEN TO THE ITO TO CONSIDER THE RELEVANT FACTORS AND DETERMINE FOR HIMS ELF WHETHER COMMISSION SAID TO HAVE BEEN PAID TO THE SELLING AGENTS OR ANY PART THEREOF IS PROPERLY DEDUCTIBLE U/S 37 OF THE IT ACT. 6.6 IN THE PRESENT CASE IT IS SIGNIFICANT TO NOTE THAT ASSESSEE IS AN ESTABLISHED IRON ORE EXPORTER AND HAS BEEN EXPORT ING IRON ORE TO THE SAME COUNTRIES YEAR AFTER YEAR FOR SUBSTANTIALLY LONG TIME. IT IS ALSO OBSERVED THAT THE ASSESSEE HAS BEEN TRANSACTING WITH KNOWN BUSINESS CONCERNS AND THEREFORE THERE WAS NO REAL NECESSITY FOR AN AGENT TO RENDER ANY SERVICE FOR PROMOT ING SALES WITH SUCH CONCERNS WITH WHOM THE ASSESSEE HAS BEEN TRANSACTING FOR LONG. AS FAR AS MITUSI & CO. JAPAN IS CONCERNED IT IS PERTINENT TO NOTE THAT ASSESSEE HAS BEEN EXPORTING IRON TO THIS CONCERN FOR SUBSTANTIALLY LONG TIME 23 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) WHICH SHOULD NORMALLY NOT REQUIRE ANY SALES PROMOTION. CONSIDERING THE FACTS OF THE CASE AS DISCUSSED ABOVE THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE THE CLAIM FOR PAYMENT OF COMMISSION TO NON - RESIDENT AGENTS BY ADDUCING SPECIFIC AND TANGIBLE EVIDENCE TO DEMONSTRATE THAT SERVICES WERE RENDERED BY THE SALES AGENTS TO JUSTIFY COMMISSION PAYMENT AS CLAIMED BY THE ASSESSEE. THEREFORE IN VIEW OF THE ABOVE IT IS HELD THAT THE COMMISSION PAYMENT OF RS.9 88 29 729/ - WHICH IS CLAIMED TO HAVE BEEN PAID TO NON - RESIDENT AGENTS CANN OT BE ALLOWED AS BUSINESS EXPENDITURE U/S 37 OF THE I.T. ACT AND THEREFORE THE DISALLOWANCE OF RS.9 88 29 729/ - MADE BY THE ASSESSING OFFICER IS ACCORDINGLY CONFIRMED. THE GROUND OF APPEAL IS ACCORDINGLY DISMISSED. THE FINDING GIVEN BY THIS TRIBUNAL I N THE AFORESAID DECISION UNDER PARA 17 ARE EQUALLY APPLICABLE IN THE CASE OF THE ASSESSEE AS IN THE ASSESSMENT ORDER WE DO NOT FIND ANY WHISPER WHATSOEVER WHICH PROVES THAT THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPE CT OF EXPENDITURE WHICH THE ASSESSEE CLAIMS TO HAVE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE AO STRAIGHTAWAY WEN T ON APPLYING RULE 8D WHILE IN THE FIRST INSTANCE THE AO SH OULD HAVE DETERMINED WHETHER THE CLAIM OF THE ASSESSEE THAT IT HAS NOT INCURRED ANY EXPENDITURE WITH REGARD TO THE DIVIDEND INCOME IS CORRECT OR NOT AND SUCH DETERMINATION MUST HAVE BEEN MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE ON OBJECTIVE BASIS . IT IS ONLY WHEN THE AO IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE THE LEGISLATURE HAS EMPOWERED THE AO TO FOLLOW THE METHOD FOR CALCULATING THE DISALLOWANCE AS MAY BE PRESCRIBED I.E. RULE 8D. THE AO INSTEAD OF DISCHARGING HIS OBLIGATION STRAIGHTAWAY APPLIED RULE 8D AND MADE DISALLOWANCE. HE HAS PUT THE CART BEFORE THE HORSE WHICH IS NOT PERMISSIBLE UNDER LAW. THE CASE OF THE ASSESSEE IN OUR OPINION IS COVERED BY OUR AFORESAID DECISION IN THE CASE OF SESA GOA LTD. VS. JCIT ( SUPRA ) . RE SPECTFULLY FOLLOWING THE DECISION IN THE CASE OF SESA GOA LTD. VS. JCIT ( SUPRA ) WE DELETE THE DISALLOWANCE MADE U/S 14A. 24 ITA NOS. 34 & 50/PNJ/2013 (ASST. YEAR : 2008 - 09) 5. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS ALLOWED WHILE THE APPEAL FILED BY THE REVENUE STANDS DISMISSED. 6. ORDER PRO NOUNCED IN THE OPEN COURT ON 31 / 07 /2013. SD/ - (D.T.GARASIA) JUDICIAL MEMBER SD/ - (P.K. BANSAL) ACCOUNTANT MEMBER PLACE : PANAJI / GOA DATED : 31 / 07 / 2013 *SSL* COPY TO : (1) APPELLANT (2) RESPONDENT (3) CIT PANAJI (4) CIT(A) PANAJI (5) D.R (6) GUARD FILE TRUE COPY BY ORDER SR. P RIVATE S ECRETARY ITAT PANAJI GOA