M/s. Tanmarg Investment & Trading Co. Pvt. Ltd., Pune V. Deputy Commissioner of Income-tax,Circle -7, Pune

CO 05/PUN/2018

• Counselvise Citation: [2018] 123 COUNSELVISE.COM (IT) 3735 (ITAT-PUNE)
• Duration Of Justice: 3 month(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 18-04-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 17-04-2018
• Assessment Year: 2010-2011
• Appeal Filed On: 17-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Earning of tax free income
• Section: 14A; 11

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE . , , BEFORE SHRI D.KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.378/PUN/2016 / ASSESSMENT YEAR : 2010-11 DCIT, CIRCLE-7, PUNE . /APPELLANT VS. M/S. TANMARG INVESTMENT AND TRADING COMPANY PVT. LTD., IST FLOOR, SHANGRILA GARDEN, OPP. BUND GARDEN, PUNE 411 001 PAN : AAACT7585L . / RESPONDENT C.O.NO.05/PUN/2018 (ARISING OUT OF ITA NO.378/PUN/2016) ASSESSMENT YEAR 2010-11 M/S. TANMARG INVESTMENT AND TRADING COMPANY PVT. LTD., IST FLOOR, SHANGRILA GARDEN, OPP. BUND GARDEN, PUNE 411 001 PAN : AAACT7585L . CROSS OBJECTOR VS. DCIT, CIRCLE-7, PUNE . APPELLANT IN THE APPEAL ASSESSEE BY : SHRI C.H. NANIWADEKAR REVENUE BY : SHRI AJAY MODI, JCIT / DATE OF HEARING : 17.04.2018 / DATE OF PRONOUNCEMENT: 18.04.2018 / ORDER PER D. KARUNAKARA RAO, AM : THE REVENUE FILED THE MAIN APPEAL ITA NO.378/PUN/2016 AN D THE ASSESSEE FILED THE CROSS OBJECTION AGAINST THE ORDER OF CIT(A)-5, PUNE, DATED 22-12-2015 FOR THE ASSESSMENT YEAR 2010-11. 2 2. BRIEFLY STATED RELEVANT FACTS ARE THAT THE ASSESSEE IS A COMPANY AND IS ENGAGED IN THE BUSINESS OF INVESTMENT AND TRADING IN SHARES. ASSESSEE FILED THE RETURN OF INCOME ON 11-10-2010 DECLAR ING TOTAL INCOME OF RS.46,22,151/-. ASSESSEE CLAIMED CAPITAL GAINS ON S ALE OF SHARES. HOWEVER, THE SAID CAPITAL GAINS IS TREATED AS BU SINESS INCOME BY THE AO IN THE ASSESSMENT U/S.143(3) OF THE ACT. THE T OTAL INCOME IS DETERMINED AT RS.1.70 CRORES (ROUNDED OFF). IN ADDITION, AO INVOKED THE PROVISIONS OF SECTION U/S.14A R.W. RULE 8D OF THE I.T. RULE S, 1962 AND MADE AN ADDITION OF RS.14,98,985/ TOO-. WHILE FILING THE RETURN OF INCOME, ASSESSEE SUO MOTO DISALLOWED THE ENTIRE PMS FEE PA ID TO THE DSP MERRILL LYNCH AS EXPENDITURE RELATABLE TO THE EARNING OF THE EXEMPT INCOME. 3. DURING THE FIRST APPELLATE PROCEEDINGS, ASSESSEE SUBMIT TED THAT THE ASSESSEE ENGAGED THE PORTFOLIO MANAGER IN EARNING TH E SAID INCOME ON SALE OF SHARES. THEREFORE, ASSESSEE JUSTIFIED THE CLAIM OF PROFITS ON SALE OF SHARES AS CAPITAL GAINS/INVESTMENT ACTIVITY. FOR THIS PROPOSITION, ASSESSEE RELIED ON THE ORDER OF CIT(A) IN THE CASE OF SISTE R CONCERN OF THE ASSESSEE BY NAME M/S. YUSMARG INVESTMENT AND TRADING COMPANY LTD. WHERE ASSESSEE GOT RELIEF IN THAT CASE ON SIMILAR FACTS. D SP MERRILL LYNCH IS THE COMMON PORTFOLIO MANAGER IN BOTH THE CASE S. ASSESSEE ALSO RELIED ON THE DECISIONS OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF KRA HOLDING & TRADING PVT. LTD. VS. DCIT ITA NO. 500/PN/ 2008, DATED 31-05-2011FOR THE A.Y. 2004-05 AND SHRI APOORVA P ATNI VS. ACIT ITA NO.239/PN/2011, DATED 21-06-2012 FOR THE A.Y. 2006 -07. HE ALSO RELIED ON THE CBDT CIRCULAR NO.04/2007 DATED 15-06- 2007 AND THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE O F CIT VS. GOPAL PUROHIT 222 CTR 582. EVENTUALLY, THE CIT(A) GRANT ED RELIEF TO THE ASSESSEE ON THIS ISSUE RELATING TO PROPER HEAD OF INCOM E FOR TAXING THE GAINS ON PURCHASE/SALE OF SHARES. CONTENTS OF PARA NO.5.4 ARE RELEVANT 3 IN THIS REGARD. FURTHER, ON THE ISSUE OF SECTION 14A, THE CIT(A) CONFIRMED THE SAME. THEREFORE, THE ASSESSEE IS IN APPEAL ON THE ISSUE RELATING TO DISALLOWANCE U/S.14A OF THE ACT. AGAINST THE RE LIEF GRANTED BY THE CIT(A) ON THE ISSUE OF HEAD OF INCOME - CAPITAL GAINS VS. BUSINESS INCOME, THE REVENUE IS IN APPEAL BEFORE US. WE SHALL FIRST TAKE UP THE APPEAL OF THE REVENUE. ITA NO.378/PUN/2016 BY REVENUE A.Y. 2010-11 4. THE ONLY GROUND RAISED BY THE REVENUE READS AS UNDER : WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE HONBLE CIT(A) WAS JUSTIFIED IN HOLDING THE ACT IVITY OF TRANSACTION IN SHARES/MUTUAL FUND BY ENGAGING PMS WAS AN INVESTMEN T ACTIVITY AND RESULTANT GAIN/LOSS WAS ASSESSABLE UNDER THE HEAD CAPITAL GAINS. 5. BEFORE US, AT THE VERY OUTSET, LD. COUNSEL FOR THE ASS ESSEE SUBMITTED THAT EARNING OF PROFITS ON PURCHASE AND SALE OF SHARES EMPLOYING THE SERVICES OF PORTFOLIO MANAGEMENT SERVICES IS TAXABLE UNDER THE HEAD CAPITAL GAINS. FURTHER, LD. COUNSEL SUBMITT ED THAT, ON SIMILAR FACTS, THE PUNE BENCH OF THE TRIBUNAL HAS DECIDED NUM BER OF CASES TREATING THE SAID INCOME AS CAPITAL GAINS ONLY. BEFO RE US, LD. COUNSEL FOR THE ASSESSEE FILED THE ORDER OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF YUGMARG INVESTMENT & TRADING PVT. LTD. VS . DCIT ITA NO.310/PUN/2015, DATED 12-05-2017 FOR THE A.Y. 2008-09 . LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DECISION IS R ELEVANT FOR THE SIMILAR PROPOSITION. THE SAID DECISION WAS DELIVERED RELYING O N THE DECISIONS OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF KRA HOLDING & TRADING PVT. LTD. VS. DCIT DATED 31-05-2011 AND SHRI APO ORVA PATNI VS. ACIT, DATED 21-06-2012. 6. LD. DR FOR THE REVENUE RELIED ON THE ORDER OF THE AO DUTIFULLY. 4 7. WE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE ON THIS ISSUE AND THE DECISIONS RELIED ON BY THE ASSESSEE . WE PROCEED TO EXTRACT THE FINDING OF TRIBUNAL IN THE CASE OF YUSMARG I NVESTMENT & TRADING PVT. LTD. (SUPRA) AND THE SAME READS AS UNDER : 8. WE FIND THAT SIMILAR ISSUE HAD COME UP BEFORE T HE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF SHRI APOORVA PATNI V S. ADDL. COMMISSIONER OF INCOME TAX (SUPRA). THE TRIBUNAL IN THE SAID CAS E AFTER CONSIDERING THE DECISIONS RENDERED IN THE CASES OF KRA HOLDING & TR ADING P. LTD. VS. DY. COMMISSIONER OF INCOME TAX (SUPRA) AND ARA TRADING & INVESTMENTS P. LTD. VS. DY. COMMISSIONER OF INCOME TAX (SUPRA) HEL D THAT THE PROFIT ARISING ON INVESTMENT CARRIED OUT BY THE ASSESSEE T HROUGH PMS DOES NOT RESULT IN GAIN ASSESSABLE UNDER THE HEAD BUSINESS I NCOME. THE RELEVANT EXTRACT OF THE FINDINGS OF TRIBUNAL ARE AS UNDER : '10. IN ANY CASE, IN SO FAR AS THE VERY NATURE OF D ISCRETIONARY PORTFOLIO MANAGEMENT SCHEME IS CONCERNED, THE SAME HAS ALREADY BEEN CONSIDERED BY OUR CO-ORDINATE BENCH IN THE CAS E OF ARA TRADING & INVESTMENTS (P.) LTD. (SUPRA) AND KRA HOL DING & TRADING (P.) LTD (SUPRA). ACCORDING TO THE TRIBUNAL , THE SCHEME IS FOR AN ACTIVITY OF WEALTH MAXIMIZATION RATHER THAN A PROFIT MAXIMIZATION AND ACCORDINGLY, IT HAS BEEN HELD THAT GAIN FROM SUCH ACTIVITY WAS LIABLE TO BE CONSIDERED AS DERIVE D FROM AN ACTIVITY OF INVESTMENTS AND NOT TRADING. THEREFORE, ON THIS ASPECT OF THE CONTROVERSY, WE FIND THAT THE COMMISSIONER OF I NCOME-TAX (APPEALS) MADE NO MISTAKE IN FOLLOWING THE ORDER OF THE TRIBUNAL IN THE CASE OF ARA TRADING & INVESTMENTS (P.) LTD. (SU PRA) AND KRA HOLDING & TRADING (P.) LTD (SUPRA) AND IN HOLDING T HAT THE ASSESSEE WAS INDEED ENGAGED IN AN INVESTMENT ACTIVITY WHILE APPOINTING THE PMS PROVIDER WITH REGARD TO THE STATED TRANSACTIONS . 11. IN SO FAR AS OTHER OBJECTIONS OF THE ASSESSING OFFICER THAT THERE WAS VOLUME AND FREQUENCY OF TRANSACTIONS WAS LARGE SO AS TO CONSTITUTE BUSINESS ACTIVITY, WE FIND THAT THE FACT UAL MATRIX HAS BEEN APPROPRIATELY ANALYZED BY THE COMMISSIONER OF I NCOME-TAX (APPEALS) IN PARA 4.20 OF THE IMPUGNED ORDER, WHICH IS AS UNDER: 'SO FAR AS VOLUME AND FREQUENCY OF TRANSACTIONS ARE CONCERNED, IT HAS BEEN EXPLAINED THAT ACTUALLY THE NUMBER OF SCRI P TRADED WAS NOT VERY LARGE BEING 62 ACROSS ALL THE 3 PMSS, ENGA GED DURING THE YEAR, WHICH WAS NOT MUCH CONSIDERING THAT ABOUT 200 0 COMPANIES' SHARES WERE ACTIVELY TRADED IN THE STOCK EXCHANGES. IT WAS ALSO CLARIFIED THAT THE FREQUENCIES OF TRANSACTIONS WAS NOT MUCH. SOMETIMES SEVERAL TRANSACTIONS MAY HAVE TO BE MADE IN THE SAME SCRIP, WHICH INCREASES THE FREQUENCY. IT WAS EMPHAS ISED THAT THE TOTAL SALES TURNOVER IN THE INVESTMENTS MADE THROUG H PMS DURING THE YEAR WAS 19.06 CRORES INVOLVING 62 SCRIPS, WHER EAS, IN THE SHARE TRADING BUSINESS SEPARATELY SHOWN BY THE APPE LLANT, THE SALES TURNOVER WAS 73.21 CRORES INVOLVING 76 SCRIPS . THIS SHOWS THAT IN THE SHARE TRADING BUSINESS ACTIVITY, THE TU RNOVER WAS ALMOST 4 TIMES HIGHER EVEN THOUGH THE NUMBER OF SCR IPS WERE ONLY MARGINALLY HIGH. IT WAS EMPHASIZED THAT IN THE TRAD ING ACTIVITY EVEN THOUGH THE SHARES INVOLVED WERE PROPORTIONATEL Y MUCH LESS AS COMPARED TO THE TURNOVER, SINCE THE INTENTION WA S TO CARRY ON BUSINESS ACTIVITY, THE SAME WAS SHOWN UNDER THE HEA D BUSINESS INCOME'. IT ALSO INCLUDED SPECULATIVE TRANSACTION AND DAY TRADING, WHEREAS NO SUCH TRANSACTIONS WERE ENTERED INTO BY T HE PMS. THE APPELLANT HAS ALSO EMPHASIZED THAT I WAS PRUDENT IN VESTMENT ACTIVITY OF THE PMS TO BUY A TARGET QUANTITY OF A P ARTICULAR SCRIP IN SMALL LOTS FOR AVERAGING PURPOSE; AND IT SHOULD NOT BE TREATED AS 5 FREQUENT AND REPETITIVE TRANSACTIONS. THE APPELLANT THEN GOES ON TO CITE THE DECISION OF THE ITAT, MUMBAI BENCH IN THE CASE OF JANAK S. RANGWALA, 11 SOT 627 IN WHICH IT WAS OBSERVED TH AT MERE VOLUME AND MAGNITUDE OF TRANSACTION WILL NOT ALTER THE NATURE OF TRANSACTION IF THE INTENTION WAS TO HOLD THE SHARES AS INVESTMENT AND NOT AS STOCK IN TRADE. SIMILAR EXPLANATION HAS BEEN GIVEN ONCE AGAIN BY THE LETTER DT 14.6.2010 BY THE APPELLANT IN RESPONSE TO THE AO'S REPORT.' WE HAVE EXAMINED THE POSITION, IN PARTICULAR THE AN ALYSIS MADE OUT BY THE COMMISSIONER OF INCOME-TAX (APPEALS) IN T HE EXTRACTED PORTION WITH REFERENCE TO THE STATEMENT AND TRANSAC TIONS WHICH HAVE BEEN PLACED N THE PAPER BOOK FILED BEFORE US. IN OUR CONSIDERED OPINION, THE INFERENCE DRAWN OUT BY THE COMMISSIONER OF INCOME-TAX (APPEALS) CLEARLY ESTABLISHES THAT TH E VOLUME AND FREQUENCY OF TRANSACTIONS SOUGHT TO BE MADE OUT BY THE ASSESSING OFFICER WITH REGARD TO THE IMPUGNED ACTIVITY STANDS ON AN ENTIRELY DIFFERENT FOOTING AND IS QUITE DISTINCT FROM THE AC TIVITY OF TRADING IN SHARES CARRIED OUT BY THE ASSESSEE. IN FACT, IT IS NOTABLE THAT IN THE SHARE TRADING BUSINESS CARRIED ON BY THE ASSESSEE, HE HAS CARRIED OUT CERTAIN SPECULATIVE AND TRADING ACTIVITIES AND THAT IN THE CASE OF A PMS PROVIDER, SUCH ACTIVITIES ARE PROHIBITED I N LAW. HAVING REGARD TO THE AFORESAID DISCUSSION BY THE COMMISSION ER OF INCOME- TAX (APPEALS), WHICH IS BORNE OUT OF THE RECORD, WE , THEREFORE, FIND NO REASONS TO UPHOLD THE PLEA OF THE ASSESSING OFFI CER ON THE BASIS OF THE VOLUME AND FREQUENCY OF TRANSACTIONS. 12. THE ASSESSING OFFICER HAS ALSO POINTED OUT THAT EARNING OF DIVIDENDS WAS NOT AT ALL THE MOTIVE OF SUCH TRANSAC TIONS, BECAUSE THE SHARES HAVE BEEN SOLD JUST BEFORE THE SAME BECA ME EX- DIVIDEND ON THE STOCK EXCHANGES. IN THIS REGARD, WE FIND THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS FACTUALLY F OUND THE SAME TO BE CONTRARY TO MATERIAL ON RECORD AS PER TH E DISCUSSION IN PARA 4.15 OF THE ORDER, WHICH IS AS UNDER: '4.15 FOR THE PROPOSITION THAT EARNING OF DIVIDEND WAS NOT THE MOTIVE, THE AO HAS CITED INSTANCES WHEN THE APP ELLANT HAS SOLD SOME SHARES JUST BEFORE THE DATES OF THE S HARES BECOMING EX-DIVIDEND ON THE STOCK EXCHANGES. HOWEVE R, A PERUSAL OF THE CHART GIVEN IN THE ASSESSMENT ORDER SHOWED THAT THE INFORMATION REGARDING DATE OF DECLARATION OF DIVIDEND HAS NOT BEEN GIVEN. FOR EXAMPLE, IN THE CA SE OF SCRIP OF AMTEK AUTO, THE SALE WAS MADE ON 19.9.2005 WHEREAS THE EX-DIVIDEND DATE WAS 22.12.2005; I.E. T HE SALE WAS MADE MORE THAN 3 MONTHS BEFORE THE SHARES BECAM E EXDIVIDEND. IT DOES NOT NECESSARILY FOLLOW THAT THE DIVIDEND WAS ALREADY DECLARED IN THIS CASE AND STILL THE APP ELLANT SOLD THE SAME BEFORE THE SHARES BECOMING EX-DIVIDEN D. SIMILARLY, IN THE CASE OF ACC, TWO PARTICULAR SALE D ATES MENTIONED WHEN THE SCRIP WAS TRANSACTED BY DSPML, W ERE 24.3.2005 AND 16.11.05, WHEREAS THE EX- DIVIDEND DA TE HAS BEEN MENTIONED AS 29.3.2006. IT CANNOT THEREFOR E BE SAID THAT THE APPELLANT HAD KNOWINGLY SOLD THE SHAR ES AFTER DECLARATION OF THE DIVIDEND BEFORE IT BECAME EX-DIV IDEND. AGAIN IN RESPECT OF SHARES OF JET AIRWAYS, THE EXDI VIDEND DATE HAS BEEN MENTIONED AS 14.9.2005 BY THE AO, AND THE DATE OF SALE HAS BEEN MENTIONED AS 17.10.2005 AND 23.1.2006 IN THE CASE OF TWO DIFFERENT PMS'S. THIS INSTANCE POINTS OUT TO A WRONG CONCLUSION BY THE AO AS HERE THE SHARES HAVE BEEN SOLD AFTER THOSE HAVE BECOME EX- DIVIDEND. COMING TO TWO MORE INSTANCES POINTED OUT BY THE AO IN THIS CHART, SHARES OF NALCO HAVE BEEN SOLD ON 6 30.3.2006 WHICH WAS AFTER THE EX-DIVIDEND DATE OF 23.9.2005; AND THE SALE OF ONGC SHARES BY DSPML WAS MADE ON 30.12.2005, WHICH ALSO IS AFTER THE EX-DIVI DEND DATE OF 1.9.2005. IT IS, THEREFORE, CLEAR THAT THE INSTANCES POINTED OUT BY THE AO DID NOT SUPPORT THIS ARGUMENT , EXCEPT IN THE CASE OF TWO OR THREE INSTANCES, WHERE THE SA LE HAS BEEN MADE JUST BEFORE THE SHARES BECOMING EX-DIVIDE ND; AND THERE WAS A POSSIBILITY THAT THE DIVIDEND WOULD HAVE BEEN DECLARED AND KNOWN TO THE PMS. HOWEVER, SUCH INSTANCES ARE FEW AND FAR BETWEEN; AND IT CANNOT LE AD TO A CONCLUSION OF INDULGING IN A BUSINESS ACTIVITY. MOR EOVER, AS HAS BEEN EXPLAINED ELSEWHERE BY THE APPELLANT, SUCH DAY TO DAY DECISIONS REGARDING PURCHASE AND SALE OF PARTI CULAR SCRIPS ARE NOT THAT OF THE APPELLANT, BUT OF THE PO RTFOLIO MANAGER SINCE THE APPELLANT'S CASE WAS THAT OF ENGA GEMENT OF DISCRETIONARY PORTFOLIO MANAGEMENT SERVICES. IT WAS EXPLAINED THAT AS PER SEBI REGULATIONS, THERE WERE TWO TYPES OF PMSS I.E. DISCRETIONARY AND NON- DISCRETIO NARY. IT WAS EXPLAINED THAT IN CASE OF DISCRETIONARY PMS AS AVAILED BY THE APPELLANT, HE APPELLANT DID NOT HAVE CONTROL ON THE DAY TO DAY ACTIVITIES AND DID NOT GIVE ANY DIRECTIO NS, EXCEPT FOR THE BROAD GUIDELINE FOR NOT PURCHASING THE SHAR ES OF PATNI COMPUTERS SYSTEMS LTD. SINCE IT WAS PROMOTED BY THE APPELLANT AND HIS FAMILY MEMBERS. IT WAS ALSO EXPLA INED DURING THE APPELLATE PROCEEDINGS THAT IN ACCORDANCE WITH THE ACCOUNTING STANDARD AND CBDT CIRCULAR, DIVIDEND EARNING WAS NOT THE ONLY CRITERION AND IN ANY CASE SUBSTANTIAL AMOUNT OF DIVIDEND OF RS 16,31,796/- WA S ALSO EARNED DURING THE YEAR IN THE INVESTMENTS THROUGH T HE PMS. THUS, THIS POINT IS ADEQUATELY EXPLAINED.' ON THIS ASPECT ALSO, WE FIND NO MATERIAL TO DIFFER WITH THE FINDINGS OF THE COMMISSIONER OF INCOME-TAX (APPEALS), WHICH WE HEREBY AFFIRM. 13. ANOTHER ASPECT MADE OUT BY THE ASSESSING OFFICE R WAS TO THE EFFECT THAT BY ITS VERY NATURE, SALES AND PURCHASES CARRIED OUT BY THE PMS PROVIDER WAS OF SHORT-TERM NATURE AND, THER EFORE, IT WAS TO BE REGARDED AS A BUSINESS ACTIVITY. FACTUALLY SPEAK ING, ON THIS ASPECT THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS DEALT WITH THE SAME IN PARA 4.17 OF HIS ORDER, WHICH IS AS UND ER: '4.17 THE AO ALSO POINTED OUT TO SOME INSTANCES WHE N SHARES OF THE SAME COMPANY HAVE BEEN REPURCHASED SOMETIMES AFTER THE SALE. IN THIS CONNECTION, IT IS EXPLAINED THAT SUCH INSTANCES WERE NOT MUCH AND THERE WERE RE ASONS FOR CHURNING OF THE INVESTMENTS BY THE PORTFOLIO MA NAGER AT DIFFERENT INSTANCES DURING THE YEAR. IT IS RELEVANT TO NOTICE THAT THE APPELLANT ALSO POINTED OUT THAT THERE WERE MANY SHARES HELD FOR A LONG TIME, EVEN UPTO 18 MONTHS, B Y THE PMS, AND SUBSTANTIAL AMOUNT OF LONG TERM CAPITAL GA IN OF RS 83,09,187/- WAS ALSO SHOWN. IN FACT, THE AO HAS TRE ATED EVEN THIS LTCG OF RS 83,09,187/- AS BUSINESS INCOME , WHICH CANNOT BE JUSTIFIED. ON THE OTHER HAND, DEPEN DING ON THE MARKET CONDITIONS, VIS-A-VIS THE ANALYSIS OF TH E FUNDAMENTALS OF PARTICULAR SCRIP, DECISION MAY HAVE TO BE TAKEN TO EXIT AT A PARTICULAR POINT OF TIME, AND TO RE-ENTER AFTER A FEW MONTHS ON CHANGE OF FUNDAMENTALS. THIS DOES NOT MEAN THAT IT WAS IN THE NATURE OF REPEATED TRAD ING ACTIVITIES IN THE SAME COMMODITY; IN WHICH CASE THE RE COULD BE MULTIPLE REPETITIONS WITHIN A FEW DAYS; OR EVEN DURING THE SAME DAY.' 7 14. IN THIS CONTEXT, WE FIND THAT THE ASSESSING OFF ICER HAS TREATED EVEN THE GAIN ON INVESTMENTS HELD FOR MORE THAN 12 MONTHS ALSO AS BUSINESS INCOME. QUITE CLEARLY AS PER THE STATEM ENT IN RESPECT OF GAINS AND INVESTMENT IN SHARES THROUGH PMS PROVI DER PLACED AT PAGE 73 OF THE PAPER BOOK, THE HOLDING PERIOD GOES UPTO EVEN 18 MONTHS BEFORE THE INVESTMENT WAS LIQUIDATED. BE THA T AS IT MAY, THE FACTOR OF PERIOD OF HOLDING CANNOT BE ASCRIBED TO THE ASSESSEE, INASMUCH AS IT HAS NO CONTROL ON SUCH DECISION MAKI NG IN A DISCRETIONARY PMS ARRANGEMENT, BECAUSE SUCH DECISIO NS ARE TAKEN BY THE PMS PROVIDER AS WE HAVE OBSERVED EARLIER. IN ANY CASE, IN SO FAR AS THE PRESENT CASE IS CONCERNED, THE INVEST MENT OBJECTIVE OF THE ASSESSEE MANDATED TO THE PMS PROVIDER WAS TO ACHIEVE GROWTH PROSPECTS AND THE ACTUALITY OF TRANSACTIONS CARRIED OUT BY THE PMS PROVIDER IN ORDER TO ACHIEVE THE STATED INV ESTMENT OBJECTIVE OF THE ASSESSEE CANNOT BE MADE A BASIS TO CHARGE THE ASSESSEE OF HAVING A DIFFERENT OBJECTIVE. CONSIDERI NG THE AFORESAID MATTERS, WE, THEREFORE, ARE OF THE VIEW THAT THE OB JECTIONS MADE OUT BY THE ASSESSING OFFICER HAVE BEEN ADEQUATELY ADDRE SSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) IN COMING TO HI S FINDINGS THAT THE INVESTMENTS CARRIED OUT BY THE ASSESSEE THROUGH THE PMS PROVIDER DO NOT RESULT IN A GAIN ASSESSABLE AS BUSINESS INCOME. 15. IN VIEW OF THE AFORESAID DISCUSSION, AND HAVING REGARD TO THE REASONINGS EXTENDED BY THE COMMISSIONER OF INCOME-TA X (APPEALS) WITH WHICH WE HEREBY AFFIRM, WE FIND THAT THE GRIEV ANCE OF THE REVENUE IN THIS APPEAL IS MISDIRECTED AND ACCORDING LY THE CONCLUSION ARRIVED AT BY THE COMMISSIONER OF INCOME -TAX (APPEALS) ON THIS ASPECT IS HEREBY AFFIRMED. THUS, ON THIS GR OUND, REVENUE FAILS.' 9. THE LD. DR HAS NEITHER BEEN ABLE TO DISTINGUISH THE ABOVE DECISION OF THE TRIBUNAL, NOR HAS HE BROUGHT ON RECORD ANY CONT RARY DECISION. THUS, IN VIEW OF THE FACTS OF THE CASE AND THE DECISIONS OF CO-ORDINATE BENCH, WE DO NOT FIND ANY MERIT IN THE APPEAL OF THE DEPART MENT. ACCORDINGLY, THE SAME IS DISMISSED. CONSIDERING THE SETTLED NATURE OF THE ISSUE, WE CONFIRM THE ORDER OF CIT(A) HOLDING THE ACTIVITY OF PURCHASE AND SALE OF SHARES BY ENGAGING PMS CONSTITUTES AN INVESTMENT ACTIVITY AND THE RESULTANT GAIN/LOSS IS ASSESSABLE UNDER THE HEAD CAPITAL GAINS. THE GROUND RA ISED BY THE REVENUE IS DISMISSED. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMISSED. C.O.NO.05/PUN/2018 (ARISING OUT OF ITA NO.378/PUN/2016 A.Y. 2010-11 9. ASSESSEE FILED THE FOLLOWING SOLITARY CROSS OBJECTION AND THE SAME READS AS UNDER : 8 THE LD.CIT(A) ERRED ON THE FACTS AND IN LAW IN UPH OLDING DISALLOWANCE TO THE EXTENT OF RS.11,61,912/- U/S.14A OF THE INCOME TAX ACT, 1961. HE FAILED TO APPRECIATE THE CONTENTIONS AND ARGUMENTS ADVANCED IN THIS BEHALF. 10. ELABORATING THE SAID GROUND, LD. COUNSEL FOR THE ASSES SEE SUBMITTED THAT THIS IS A CASE WHERE AO INVOKED THE PRO VISIONS OF SECTION 14A READ WITH RULE 8D OF THE I.T. RULES, 1961 WITHOUT RECO RDING ANY SATISFACTION WITH REGARD TO THE APPLICABILITY OF THE SAID PRO VISIONS BEFORE MAKING DISALLOWANCE OF RS.14,98,985/-. 11. IN THIS REGARD, LD. COUNSEL FOR THE ASSESSEE DREW OU R ATTENTION TO THE ASSESSMENT ORDER IN GENERAL AND THE CONTENTS OF PA RA NO.4 IN PARTICULARS AND DEMONSTRATED THE FACT OF ABSENCE OF SAT ISFACTION OF ANY KIND BEFORE MAKING DISALLOWANCE UNDER THE SAID SECTION/RULES AMOUNTING TO RS.14,98,985/-. 12. LD. DR FOR THE REVENUE RELIED HEAVILY ON THE ORDER OF THE AO. 13. WE HEARD BOTH THE SIDES ON THIS ISSUE. WE PROCEED TO EXTRACT PARA NO.4 OF THE ASSESSMENT ORDER WHICH READS AS UNDER : 4. DISALLOWANCE UNDER SEC. 14A OF IT ACT : THE ASSESSEE HAS EARNED DIVIDEND FROM THE ACTIVITI ES OF SHARE TRANSACTIONS IN PERSONAL ACCOUNT, FROM PMS AND FROM MUTUAL FUND INVESTMENTS. HENCE, DISALLOWANCE NEEDS TO BE MADE IN RESPECT OF THE EXPENDITURE CLAIMED FOR EARNING EXEMPT INCOME AS PE R THE PROVISIONS OF SECTION 14 OF THE I.T. ACT. THE ASSESSEE WAS ASKED TO FILE ITS REPLY WHICH WAS SUBMITTED ON 03-12-2012 AND AN EXTRACT OF WHICH IS REPRODUCED BELOW : 1. DISALLOWANCE U/S.14A : THE DIVIDEND INCOME OF RS.11,61,912/- WHICH IS CLAI MED AS EXEMPTED INCOME FOR WHICH NO EXPENDITURE IS TAKEN FOR DISALL OWANCE WITH THE FOLLOWING RATIONALE. FOR S.14A TO APPLY THERE SHOULD BE PROXIMATE RELATI ONSHIP BETWEEN THE EXPENDITURE AND THE TAX-FREE INCOME. NO SUCH EXPEN DITURE HAS BEEN INCURRED FOR EARNING THE EXEMPT INCOME. IN ORDER T O DISALLOW THE EXPENDITURE U/S.14A, THERE MUST BE A LIVE NEXUS BET WEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF TOTAL I NCOME. NO NOTIONAL EXPENDITURE CAN BE APPORTIONED FOR THE PURPOSE OF E ARNING EXEMPT INCOME UNLESS THERE IS AN ACTUAL EXPENDITURE IN RELATION T O EARNING THE TAX-FREE INCOME. IF THE EXPENDITURE IS INCURRED WITH A VIEW TO EARN TAXABLE INCOME AND THERE IS APPARENT DOMINANT AND IMMEDIATE CONNECT ION BETWEEN THE 9 EXPENDITURE INCURRED AND TAXABLE INCOME, THEN NO DI SALLOWANCE CAN BE MADE U/S.14A MERELY BECAUSE SOME TAX EXEMPT INCOME IS RECEIVED. THE RELEVANT WORKING AS PER RULE 8D IS AS FOLLOWS : . . . . . . . . . . . . RULE 8D HAS BEEN INSERTED IN THE INCOME TAX RULES S INCE 01-04-2007. FOR THIS PURPOSE, RELIANCE IS PLACED ON THE DECISIO N OF HONBLE SPECIAL BENCH, MUMBAI ITAT IN THE CASE OF ITO VS. M/S. DAGA CAPITAL MANAGEMENT PVT. LTD. ITA NO. 8057/M/03, SPECIAL BEN CH MUMBAI WHEREIN FOLLOWING PRONOUNCEMENT HAVE BEEN MADE : . . . . . . . . . . . . ACCORDINGLY, THE DISALLOWANCE UNDER SECTION 14A WOR KS OUT TO RS.14,98,985/- AND IS ADDED BACK TO THE INCOME OF T HE ASSESSEE. ASSESSEE HAS DURING THE YEAR TRANSACTED HEAVILY IN SHARES DIRECTLY AS WELL AS THROUGH THE PORTFOLIO MANAGEMENT SERVICE PR OVIDERS. THE INCOME EARNED THROUGH PORTFOLIO MANAGEMENT SERVICE PROVIDE RS (PMS) HAS BEEN SHOWN AS INCOME FROM CAPITAL GAINS. THE ASSESSEE H AS ALSO EARNED INCOME FROM INVESTMENTS IN MUTUAL FUNDS. THE PMS P ROVIDER THROUGH WHOM ASSESSEE HAS TREATED IN SCRIPS DURING THE FINA NCIAL YEAR RELEVANT TO ASSESSMENT YEAR 2010-11 WAS DSP MERRILL LYNCH FUND MANAGERS. FROM THE ABOVE, ON GOING THROUGH THE ABOVE PARAGRAPH, WE FIND THE AO HAS NOT RECORDED THE SATISFACTION OF ANY KIND BEFO RE RESORTING TO QUANTIFICATION OF DISALLOWANCE U/S.14A R.W. RULE 8D OF THE I.T. RULES, 1961. IT IS SETTLED LEGAL PROPOSITION THAT THE AO IS UNDE R OBLIGATION TO GIVE A SATISFACTION IN WRITING HAVING REGARD TO THE BOOKS OF ACCOUNT OF THE ASSESSEE, BEFORE REJECTING THE ASSESSEES CLAIM OF QUANTIFICATION OF DISALLOWABLE EXPENDITURE RELATABLE TO THE EARNING OF EXEMPT INCOME. IN THIS CASE, ASSESSEE DISALLOWED THE ENTIRE PMS FEE THE O NLY EXPENDITURE INCURRED BY HIM FOR EARNING OF THE EXEMPT INCOME. WITHOUT GIVING ANY SATISFACTION AND REASONS AO REJECTED THE SAME BEFORE AP PLYING THE SAID PROVISIONS AND DISALLOWING A SUM OF RS.14,98,985/-. IN OU R VIEW, THIS KIND OF APPROACH OF THE AO IS UNSUSTAINABLE IN LAW. 14. WE FIND, ON SIMILAR FACTS, THE PUNE BENCH OF THE TRIBUNA L IN THE CASE OF CAPGEMINI TECHNOLOGY SERVICES INDIA LIMITED VS. DCIT ITA NOS. 216 & 360/PUN/2015, DATED 25-01-2018 FOR THE A.Y. 2 010 DISMISSED THE APPEAL FILED BY THE REVENUE BY HOLDING AS UNDER : 10 34. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE RECORD. THE ASSESSING OFFICER WHILE PASSING THE ASSESSMENT ORDE R IN PARA 10 HAD OBSERVED THAT THE ASSESSEE HAD EARNED SIGNIFICANT A MOUNT OF TAX FREE DIVIDENDS AND IN THE COMPUTATION OF INCOME, THE ASS ESSEE HAS DISALLOWED SUM OF RS.50 LAKHS UNDER SECTION 14A OF THE ACT. T HEN, REFERENCE IS MADE TO THE NOTE FILED BY THE ASSESSEE ON EXPENDITU RE DISALLOWABLE UNDER SECTION 14A OF THE ACT. THE ASSESSING OFFICE R THEREAFTER, TAKES NOTE OF THE CONTENTS OF SAID EXPLANATION AND OBSERVED AS UNDER:- I HAVE GONE THROUGH THE SUBMISSIONS MADE BY THE AS SESSEE. IT IS OBSERVED THAT APART FROM INVESTMENTS IN THE OVERSEA S SUBSIDIARIES (WHERE THERE IS NO TAX-FREE INCOME SINCE THE DIVIDE ND IS ALSO TAXABLE) THE INVESTMENTS MADE BY THE ASSESSEE ARE I N MUTUAL FUNDS. THE ENTIRE INVESTMENT IN MUTUAL FUND IS IN NON-EQUITY SCHEME. IN RESPECT OF INVESTMENT IN MUTUAL FUNDS, EXCEPT FOR GROWTH FUNDS, THE COMPANY RECEIVES TAX FREE DIVIDEN D. THE AMOUNT OF DIVIDEND RECEIVED BY THE COMPANY IS SUBST ANTIAL. THIS IS A CLEAR CASE FOR APPLICATION OF RULE 8D. HENCE, THE CONTENTION OF THE ASSESSEE CANNOT BE ACCEPTED. THE DISALLOWANCE U/S 14A IS REQUIRED TO BE MADE BY APPLYING RULE 8D. AS PER TH E WORKING OF DISALLOWANCE U/S 14A AS PER RULE 8D, THE AMOUNT OF D ISALLOWANCE COMES TO RS.5,68,32,323/-. THE ASSESSEE HAS ALREAD Y DISALLOWED RS.50,00,000/- IN THE COMPUTATION OF INCOME. 35. THE REQUIREMENT OF SECTION 14(2) OF THE ACT IS THAT THE ASSESSING OFFICER IS TO RECORD AS TO WHY THE DISALLOWANCE MAD E BY THE ASSESSEE I.E. RS.50 LAKHS UNDER SECTION 14A OF THE ACT IS NOT COR RECT. THE ASSESSING OFFICER TAKES NOTE OF THE DISALLOWANCE, CONSIDERS T HE EXPLANATION OF ASSESSEE AND HOLDS THAT THE CONTENTION OF ASSESSEE CANNOT BE ACCEPTED. THE PRELIMINARY SATISFACTION TO BE RECORDED BY ASSE SSING OFFICER, BEFORE MAKING DISALLOWANCE UNDER SECTION 14A OF THE ACT RE AD WITH RULE 8D OF THE RULES, IS MISSING IN THE CASE; IN THE ABSENCE O F THE SAME, THERE IS NO MERIT IN THE DISALLOWANCE MADE BY THE ASSESSING OFF ICER. WE FIND SUPPORT FROM THE RATIO LAID DOWN BY THE HON'BLE SUP REME COURT IN GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT & ANR. (201 7) 394 ITR 449 (SC). 37. WE DO NOT SEE HOW IN THE AFORESAID FACT SITUAT ION A DIFFERENT VIEW COULD HAVE BEEN TAKEN FOR THE ASSESSMENT YEAR 2002-03. SUB-SECTIONS (2) AND (3) OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES MERELY PRESCRIBE A FORMULA FOR DETERMI NATION OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN A SITUATI ON WHERE THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM O F THE ASSESSEE. WHETHER SUCH DETERMINATION IS TO BE MADE ON APPLICA TION OF THE FORMULA PRESCRIBED UNDER RULE 8D OR IN THE BEST JUD GMENT OF THE ASSESSING OFFICER, WHAT THE LAW POSTULATES IS THE R EQUIREMENT OF A SATISFACTION IN THE ASSESSING OFFICER THAT HAVING R EGARD TO THE ACCOUNTS OF THE ASSESSEE, AS PLACED BEFORE HIM, IT IS NOT POSSIBLE TO GENERATE THE REQUISITE SATISFACTION WITH REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE . IT IS ONLY THEREAFTER THAT THE PROVISIONS OF SECTION 14A(2) AND (3) READ WITH RULE 8D OF THE RULES OR A BEST JUDGMENT DETERMINATION, AS EARLIER PREVAILING, WOUL D BECOME APPLICABLE. (UNDERLINE PROVIDED BY US FOR EMPHASIS) 11 36. THE RATIO LAID DOWN BY THE HONBLE HIGH COURT O F DELHI IN INDIABULLS FINANCIAL SERVICES LTD. VS. DCIT (SUPRA) IS THUS, NOT APPLICABLE. THE GROUND OF APPEAL NO.3 RAISED BY THE REVENUE IS THUS, DISMISSED. 15. FURTHER, WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE CASE POONAWALLA INVESTMENT & INDUSTRIES PVT. LTD. VS. DCIT I TA NOS. 245 TO 250/PUN/2016, DATED 28-02-2018 HAS HELD AS UNDER : 30. WE HEARD BOTH THE PARTIES ON THE ISSUE RELATIN G TO THE ISSUE OF RECORDING OF SATISFACTION AND PERUSED THE ABOVE EXT RACTED SATISFACTION RECORDED BY THE AO ON THIS ISSUE. WE FIND THE LEGA L POSITION WAS EXPLAINED BY THE HONBLE APEX COURT AND THE PARA NO .37 OF THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF GODREJ AND BOY CE MANUFACTURING COMPANY LTD. (SUPRA) ARE RELEVANT. HONBLE SUPREME COURT EXPLAINED THE PROVISIONS OF SUB-SECTION (2) AND (3) OF SECTION 14 A OF THE ACT. FOR THE SAKE OF COMPLETENESS, WE PROCEED THE EXTRACT THE SA ME HERE AS UNDER : 37. WE DO NOT SEE HOW IN THE AFORESAID FACT SITUAT ION A DIFFERENT VIEW COULD HAVE BEEN TAKEN FOR THE ASSESSMENT YEAR 2002-03. SUB-SECTIONS (2) AND (3) OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES MERELY PRESCRIBE A FORMULA FOR DETERMI NATION OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN A SITUATI ON WHERE THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM O F THE ASSESSEE. WHETHER SUCH DETERMINATION IS TO BE MADE ON APPLICA TION OF THE FORMULA PRESCRIBED UNDER RULE 8D OR IN THE BEST JUD GMENT OF THE ASSESSING OFFICER, WHAT THE LAW POSTULATES IS THE R EQUIREMENT OF A SATISFACTION IN THE ASSESSING OFFICER THAT HAVING R EGARD TO THE ACCOUNTS OF THE ASSESSEE, AS PLACED BEFORE HIM, IT IS NOT POSSIBLE TO GENERATE THE REQUISITE SATISFACTION WITH REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE . IT IS ONLY THEREAFTER THAT THE PROVISIONS OF SECTION 14A(2) AND (3) READ WITH RULE 8D OF THE RULES OR A BEST JUDGMENT DETERMINATION, AS EARLIER PREVAILING, WOUL D BECOME APPLICABLE. (EMPHASIS SUPPLIED). 31. THE ABOVE RATIO WAS ADOPTED BY THE PUNE BENCH O F THE TRIBUNAL IN THE CASE OF CAPGEMINI TECHNOLOGY SERVICES INDIA LIMI TED, (IN THE MATTER OF IGATE COMPUTER SYSTEMS LIMITED, (FORMERLY PATNI COMP UTER SYSTEMS LIMITED AMALGAMATED WITH IGATE GLOBAL SOLUTIONS LIM ITED AND NAME CHANGED) VS. DCIT VIDE ITA NOS. 216 AND 360/PUN/201 5, ORDER DATED 25-01-2018 AND ALLOWED THE ISSUE IN FAVOUR OF THE A SSESSEE. FOR THE SAKE OF COMPLETENESS, RELEVANT OPERATIONAL PARAS AR E EXTRACTED HERE AS UNDER : 34. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE RECORD. THE ASSESSING OFFICER WHILE PASSING THE AS SESSMENT ORDER IN PARA 10 HAD OBSERVED THAT THE ASSESSEE HAD EARNE D SIGNIFICANT AMOUNT OF TAX FREE DIVIDENDS AND IN THE COMPUTATION OF INCOME, THE ASSESSEE HAS DISALLOWED SUM OF RS.50 LAKHS UNDER SE CTION 14A OF THE ACT. THEN, REFERENCE IS MADE TO THE NOTE FILED BY THE ASSESSEE ON EXPENDITURE DISALLOWABLE UNDER SECTION 14A OF TH E ACT. THE ASSESSING OFFICER THEREAFTER, TAKES NOTE OF THE CON TENTS OF SAID EXPLANATION AND OBSERVED AS UNDER:- I HAVE GONE THROUGH THE SUBMISSIONS MADE BY THE AS SESSEE. IT IS OBSERVED THAT APART FROM INVESTMENTS IN THE OVERSEA S SUBSIDIARIES (WHERE THERE IS NO TAX-FREE INCOME SINCE THE DIVIDE ND IS ALSO TAXABLE) THE INVESTMENTS MADE BY THE ASSESSEE ARE I N MUTUAL FUNDS. THE ENTIRE INVESTMENT IN MUTUAL FUND IS IN NON-EQUITY 12 SCHEME. IN RESPECT OF INVESTMENT IN MUTUAL FUNDS, EXCEPT FOR GROWTH FUNDS, THE COMPANY RECEIVES TAX FREE DIVIDEN D. THE AMOUNT OF DIVIDEND RECEIVED BY THE COMPANY IS SUBST ANTIAL. THIS IS A CLEAR CASE FOR APPLICATION OF RULE 8D. HENCE, THE CONTENTION OF THE ASSESSEE CANNOT BE ACCEPTED. THE DISALLOWANCE U/S 14A IS REQUIRED TO BE MADE BY APPLYING RULE 8D. AS PER TH E WORKING OF DISALLOWANCE U/S 14A AS PER RULE 8D, THE AMOUNT OF D ISALLOWANCE COMES TO RS.5,68,32,323/-. THE ASSESSEE HAS ALREAD Y DISALLOWED RS.50,00,000/- IN THE COMPUTATION OF INCOME. 35. THE REQUIREMENT OF SECTION 14(2) OF THE ACT IS THAT THE ASSESSING OFFICER IS TO RECORD AS TO WHY THE DISALL OWANCE MADE BY THE ASSESSEE I.E. RS.50 LAKHS UNDER SECTION 14A OF THE ACT IS NOT CORRECT. THE ASSESSING OFFICER TAKES NOTE OF THE D ISALLOWANCE, CONSIDERS THE EXPLANATION OF ASSESSEE AND HOLDS THA T THE CONTENTION OF ASSESSEE CANNOT BE ACCEPTED. THE PRE LIMINARY SATISFACTION TO BE RECORDED BY ASSESSING OFFICER, B EFORE MAKING DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES, IS MISSING IN THE CASE; IN THE ABSENCE O F THE SAME, THERE IS NO MERIT IN THE DISALLOWANCE MADE BY THE ASSESSI NG OFFICER. WE FIND SUPPORT FROM THE RATIO LAID DOWN BY THE HON'BL E SUPREME COURT IN GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT & ANR. (2017) 394 ITR 449 (SC). 37. WE DO NOT SEE HOW IN THE AFORESAID FACT SITUAT ION A DIFFERENT VIEW COULD HAVE BEEN TAKEN FOR THE ASSESS MENT YEAR 2002-03. SUB-SECTIONS (2) AND (3) OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES MERELY PRESCRIBE A FORMULA FOR DETERMINATION OF EXPENDITURE INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME UNDER THE ACT IN A SITUATION WHERE THE ASSESSING OF FICER IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE. WHET HER SUCH DETERMINATION IS TO BE MADE ON APPLICATION OF THE F ORMULA PRESCRIBED UNDER RULE 8D OR IN THE BEST JUDGMENT OF THE ASSESSING OFFICER, WHAT THE LAW POSTULATES IS THE REQUIREMENT OF A SATISFACTION IN THE ASSESSING OFFI CER THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, AS P LACED BEFORE HIM, IT IS NOT POSSIBLE TO GENERATE THE REQU ISITE SATISFACTION WITH REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE . IT IS ONLY THEREAFTER THAT THE PROVISIONS OF SECTION 14A(2) AND (3) READ WITH RULE 8D OF THE RUL ES OR A BEST JUDGMENT DETERMINATION, AS EARLIER PREVAILING, WOULD BECOME APPLICABLE. (UNDERLINE PROVIDED BY US FOR EMPHASIS) 36. THE RATIO LAID DOWN BY THE HONBLE HIGH COURT O F DELHI IN INDIABULLS FINANCIAL SERVICES LTD. VS. DCIT (SUPRA) IS THUS, NOT APPLICABLE. THE GROUND OF APPEAL NO.3 RAISED BY TH E REVENUE IS THUS, DISMISSED. 32. FROM THE ABOVE, WE ARE OF THE VIEW THAT THE SAT ISFACTION RECORDED BY THE AO IN PARA NO.5.1 IS EXTREMELY BASED ON THE SUSPICION AND SURMISES. THE SATISFACTION ARRIVED AT BY THE AO WI TH REFERENCE TO THE ENTRIES IN THE BOOKS OF ACCOUNT OF THE ASSESSEE AND ALSO HAVING REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. IN T HAT SENSE OF THE MATTER, THE SATISFACTION RECORDED BY THE AO IS EXTREMELY GE NERIC AND WHICH FALLS SHORT OF THE LEGAL REQUIREMENT FOR ASSUMING JURISDI CTION U/S.14A OF THE ACT. 13 CONSIDERING THE ABOVE POSITION, WE ARE OF THE VIEW THAT THE AO FAILED TO RECORD THE SUSTAINABLE SATISFACTION BEFORE INVOKIN G THE PROVISIONS OF SECTION 14A OF THE ACT. THEREFORE, THE DISALLOWANC E MADE BY THE AO IS UNSUSTAINABLE TECHNICALLY. ACCORDINGLY, THIS PART O F THE ARGUMENT OF GROUND NO.1 IS ALLOWED. WE FIND ADJUDICATION OF TH E OTHER ISSUES OF THE SAID GROUND RELATING TO MERITS BECOMES AN ACADEMIC EXERCISE. THEREFORE, THE SAME ARE DISMISSED AS ACADEMIC. IN THE PRESENT CASE, AO FAILED TO RECORD SATISFACTION HAVIN G REGARD TO THE BOOKS OF ACCOUNT OF THE ASSESSEE BEFORE RESORTIN G TO INVOKING THE PROVISIONS OF SECTION 14A R.W. RULE 8D OF THE I.T. RULES. IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE OPINION THAT THE DISALLOWANC E MADE BY THE AO IS REQUIRED TO BE DELETED IN THE ABSENCE OF ANY SATISFACTION RECORDED BY HIM WHILE MAKING DISALLOWANCE U/S.14A OF THE ACT . THUS, THE ONLY CROSS OBJECTION RAISED BY THE ASSESSEE IS ALLOWED IN HIS FAVOU R. 16. IN THE RESULT, CROSS OBJECTION OF THE ASSESSEE IS ALLOWED. 17. TO SUM UP, APPEAL FILED BY THE REVENUE IS DISMISSED AN D THE CROSS OBJECTION FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 18 TH DAY OF APRIL, 2018. SD/- SD/- (VIKAS AWASTHY) (D. KARUNAKARA RAO) /JUDICIAL MEMBER / ACCOUNTANT MEMBER PUNE; DATED : 18 TH APRIL, 2018 / COPY OF THE ORDER FORWARDED TO : / BY ORDER, //TRUE COPY// //TRUE COPY// SENIOR PRI VATE SECRETARY , / ITAT, PUNE 1. / THE APPELLANT 2. / THE RESPONDENT 3. THE CIT(A)-5, PUNE 4. CIT-5, PUNE 5. , , A BENCH PUNE; 6. / GUARD FILE.