M/s. Hari Orgochem Pvt.Ltd., Ahmedabad V. The Dy.CIT.,Circle-4, Ahmedabad

CO 197/AHD/2011

• Counselvise Citation: [2015] 123 COUNSELVISE.COM (IT) 1098 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 26 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 30-09-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 28-08-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 04-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHRINARENDRA SINGHSR
• Assessee Lawyers: P M MEHTA WITH SHRI G M THAKOR
• Keywords: Earning of tax free income; Proportionate interest
• Section: 143(3); 14A; 28; 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH AHMEDABAD , BEFORE: SHRIANIL CHATURVEDI, ACCOUNTANT MEMBER SHRIKUL BHARAT, JUDICIAL MEMBER ITA NO. 2120/AHD/2011 ASSESSMENT YEAR :2008-09 THE ACIT, CIRCLE-4, AHMEDABAD, NAVJIVAN TRUST BLDG., OFF. ASHRAM ROAD, AHMEDABAD. V/S . HARIORGOCHEM PVT. LTD. 1, AVADH APARTMENT, NR. PARIMAL RAILWAY CROSSING, PALDI, AHMEDABAD - 380007 (APPELLANT) .. (RESPONDENT) AND C.O. NO. 197/AHD/2011 ASSESSMENT YEAR :2008-09 HARIORGOCHEM PVT. LTD. 1, AVADH APARTMENT, NR. PARIMAL RAILWAY CROSSING, PALDI, AHMEDABAD - 380007 V/S . DY. CIT, CIRCLE 4, AHMEDABAD PAN NO. AAACH7088L (APPELLANT) .. (RESPONDENT) /BY REVENUE SHRINARENDRA SINGH,SR. D.R. /BY ASSESSEE SHRI P. M. MEHTA WITH SHRI G. M. THAKOR, A.R. /DATE OF HEARING 28.08.2015 /DATE OF PRONOUNCEMENT 30.09.2015 ITA NO. 2120/AHD/11 & C.O. NO.197/AHD/11 FOR A.Y. 0 8-09 (ACIT VS.HARIORGOCHEM PVT. LTD.) PAGE 2 O R D E R PER : KUL BHARAT, JUDICIAL MEMBER BOTH THE REVENUE AND ASSESSEE HAVE CHALLENGED THE O RDER OF CIT(A)-VIII, AHMEDABAD, DATED 15.06.2011 PERTAINING TO ASSESSMEN T YEAR 2008-09 BY FILING APPEAL AND CROSS OBJECTION RESPECTIVELY. BOTH THE APPEAL AND CROSS OBJECTION ARE TAKEN UP TOGETHER AND ARE BEING DISPOSED OF BY WAY OF THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST WE TAKE UP THE REVENUES APPEAL IN ITA NO. 2120/AHD/2011. 3. BRIEFLY STATED FACTS ARE THAT THE CASE OF THE AS SESSEE WAS TAKEN UP FOR SCRUTINY ASSESSMENT AND THE ASSESSMENT U/S.143(3) O F THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) WAS FRAMED V IDE ORDER DATED 24.12.2010. WHILE FRAMING ASSESSMENT, THE ASSESSING OFFICER (AO IN SHORT) MADE DISALLOWANCE OF RS.8,61,908/- BY APPLYING RULE 8D O F THE INCOME TAX RULES, 1962, DISALLOWANCE OF FEES AND LEGAL EXPENDITURE OF RS.12,00,000/- AND DISALLOWANCE ON EMPLOYEES CONTRIBUTION TO PROVIDENT FUND AMOUNTING TO RS.2,23,715/-. ASSESSING OFFICER ALSO REJECTED THE BOOK PROFIT ADOPTED BY THE ASSESSEE AND ADOPTED THE SAME AT RS.5,44,57,207/-. 4. ASSESSEE FEELING AGGRIEVED BY THE ORDER OF THE A SSESSING OFFICER, PREFERRED AN APPEAL BEFORE THE LD. CIT(A), WHO AFTE R CONSIDERING THE SUBMISSIONS OF THE ASSESSEE PARTLY ALLOWED THE APPE AL THEREBY THE LD. CIT(A) CONFIRMED THE ADDITION. IN RESPECT OF DISALLOWANCE OF RS.12 LACS, THE LD. CIT(A) DELETED ON THE GROUND THAT THE DISALLOWANCE WAS MER ELY ON THE BASIS OF PRESUMPTION AND IN RESPECT OF THE DISALLOWANCE OF E MPLOYEES CONTRIBUTION DELETED THE ADDITION. IN RESPECT OF BOOK PROFIT, T HE LD. CIT(A) DELETED THE ADDITION. ITA NO. 2120/AHD/11 & C.O. NO.197/AHD/11 FOR A.Y. 0 8-09 (ACIT VS.HARIORGOCHEM PVT. LTD.) PAGE 3 5. NOW, BOTH THE REVENUE AND THE ASSESSEE HAVE CHAL LENGED THE ORDER. 6. THE FIRST GROUND OF DELETION OF ADDITION OF RS.1 2 LACS MADE ON ACCOUNT OF DISALLOWANCE OUT OF FEES AND LEGAL EXPENSES. LD. S R. D.R., SHRI NARENDRA SINGH VEHEMENTLY ARGUED THAT LD. CIT(A) WAS NOT JUSTIFIED IN DELETING THE ADDITION. HE SUBMITTED THAT THE ASSESSING OFFICER HAD GIVEN FIND ING ON THE BASIS OF THAT PAYMENTS HAVE BEEN RECENTLY INTRODUCED. THE AGREEM ENT BETWEEN THE TWO CONCERNS UNDER THE SAME MANAGEMENT IS LOOSELY WORDE D AND DOES NOT HAVE ANY OUTLINED DETAILED NATURE, PURPOSE AND JUSTIFICATION OF THE AMOUNT IN QUESTION. HE SUBMITTED THAT THE ASSESSING OFFICER HAS OBSERVED T HAT ASSESSEE HAS NOT SUBMITTED ANY DETAIL OF SERVICES RENDERED BY THE EM PLOYEES OTHER THAN MENTIONING IN GENERAL THAT THE SECRETARIAL WORK OF THE COMPANY HAS INCREASED. FURTHER, IT HAS ALSO NOT BEEN EVIDENCED THAT THE EM PLOYEES ARE SOLELY AT THE DISPOSAL OF THE ASSESSEE COMPANY. ON THE CONTRARY, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FINDING OF THE ASSESSING OFFICER IS MISPLACED. LD. COUNSEL REITERATED THE SUBMISSIONS AS WERE MADE BEFORE THE CIT(A). 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE LD. CIT(A) HAS DECIDED THE ISSUE IN PARA-5.2 BY OBSERVING AS UNDER: 5.2 I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORD ER, FINDING OF ASSESSING OFFICER AND THE SUBMISSION OF THE APPELLANT. THE ASSESSING OFFICER HAS DISALLOWED 50% OF FEES AND LEGAL EXPENSES PAID BY APPELLANT TO DCPL MAINLY ON THE GROUND THAT PAYMENT IS TO RELATED CONCERN AND SAID RELATED COMPANY IS INCURRING LOSS HENCE PAYMENT MADE BY APPELLANT IS E XCESSIVE. THE APPELLANT BOTH AT THE TIME OF ASSESSMENT PROCEEDINGS AND APPE LLATE PROCEEDINGS SUBMITTED MOLL ENTERED BETWEEN BOTH THE PARTIES AND SUBMITTED THAT AS PRODUCTION OF CURRENT ASSESSMENT YEAR HAS BEEN INCR EASED AS WELL AS IT REQUIRED MORE PERSONS FOR LEGAL AND SECRETARIAL WOR K, SOME OF THE EMPLOYEES REFERRED HEREIN ABOVE HAVE WORKED FOR APPELLANT COMPANY FOR WHICH IT HAS MADE PAYMENT OF RS. 1 LACS PER MONTH. IN THE PRESEN T CASE, ASSESSING OFFICER HAS NEVER DENIED THAT APPELLANT HAS NOT USED THE SE RVICES OF EMPLOYEES AND CONSIDERING IT, AO HAS ALLOWED 50% OF PAYMENT MADE BY APPELLANT. EVEN DCPL IS MAKING PAYMENT OF ROUND ABOUT RS. 1.75 LACS TO 1.80 LACS TO PERSONS USED BY APPELLANT FOR DCPL HAS CHARGED RS. 2 PER M ONTH WHICH CANNOT BE TERMED AS EXCESSIVE, MORE PARTICULARLY WHEN ASSESSI NG OFFICER HAS NOT DISPUTED THE WORK CARRIED OUT BY SUCH PERSONS. SIMI LAR DISALLOWANCE WAS ITA NO. 2120/AHD/11 & C.O. NO.197/AHD/11 FOR A.Y. 0 8-09 (ACIT VS.HARIORGOCHEM PVT. LTD.) PAGE 4 MADE IN A.Y. 2007-08 AND IN APPEAL, VIDE MY ORDER DATED 22 ND OCTOBER, 2010 IN APPEAL NO. CIT(A)-VIII/DC-4/749/09-10 I HAVE D ELETED DISALLOWANCE MADE BY THE ASSESSING OFFICER. CONSIDERING THIS, T HE DISALLOWANCE MADE BY ASSESSING OFFICER ON PRESUMPTION IS NOT JUSTIFIED A ND IT IS DELETED AND RELATED GROUND OF APPEAL IS ALLOWED. 7.1. THE ASSESSING OFFICER MADE DISALLOWANCE ON TH E BASIS THAT THE PAYMENTS HAVE BEEN RECENTLY INTRODUCED. THE AGREEMENT BETWEE N TWO CONCERNS UNDER THE SAME MANAGEMENT IS LOOSELY WORDED AND DOES NOT HAVE ANY OUTLINED DETAILED NATURE, PURPOSE AND JUSTIFICATION OF THE AMOUNT IN QUESTION. FURTHER, THE ASSESSING OFFICER OBSERVED THAT NO SUPPORTING EVIDE NCE HAS BEEN PLACED ON RECORD. SERVICE RENDERED BY AFORESAID EMPLOYEES OF DHARNIDHAR CHEMICALS PVT. LTD. AND PROCEEDED TO HOLD THAT THE FEES FOR SERVIC ES OF THE EMPLOYEES OF THE DHARNIDHAR CHEMICALS PVT. LTD. AS EXCESSIVE BY 50% OF THE AMOUNT PAID TO THE ASSOCIATE CONCERN OF THE ASSESSEE WAS DISALLOWED AN D ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. HOWEVER, THE LD. CIT(A) DE LETED THE SAME ON THE BASIS THAT IN EARLIER YEAR SIMILAR DISALLOWANCE WAS MADE AND PREDECESSOR OF THE CIT(A) IN A.Y. 2007-08 HAD DELETED THE DISALLOWANCE . THIS FACT HAS NOT BEEN DISPUTED BY THE REVENUE. LD. COUNSEL FOR THE ASSES SEE HAD POINTED OUT THAT THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN ITA NO. 45/AH D/2011 HAS CONFIRMED THE FINDING OF THE LD. CIT(A). WE FIND THAT THE CO-ORD INATE BENCH IN ITA NO. 45/AHD/2011 FOR A.Y. 2007-08 HAS CONFIRMED THE ORDE R OF LD. CIT(A) IN PARA 13 BY OBSERVING AS UNDER: 13. WE FIND THAT NO SPECIFIC MISTAKE IN THE FINDIN GS OF THE LD.CIT(A) COULD BE POINTED OUT BY THE LD. DR. WE FIND THAT THE GENUINE NESS OF THE PAYMENT IS NOT IN DISPUTE. THE ASSESSING OFFICER AFTER OBSERVING ABOU T THE LOSS INCURRED BY THE ASSESSEE COMPANY HAS BROUGHT NO MATERIAL ON RECORD AFTER MAK ING INVESTIGATION TO SHOW THAT THE ASSESSEE HAS NOT RECEIVED THE SERVICES FOR WHIC H PAYMENTS WERE MADE BY THE ASSESSEE. RATHER, ON THE OTHER HAND, THE ALLOWANCE F DEDUCTION AT THE RATE OF 50% SHOWS THAT THE ASSESSING OFFICER ALSO AGREED THAT S ERVICES OF THE STAFF OF THE PAYEE COMPANY WERE UTILIZED BY THE ASSESSEE COMPANY FOR I TS BUSINESS PURPOSE. NO MATERIAL WAS BROUGHT ON RECORD TO SHOW THAT THE CONSIDERATIO N FOR SERVICES RECEIVED BY THE ASSESSEE WAS SO EXCESSIVE AS TO WARRANT ANY DISALLO WANCE OUT OF THE SAME. IT IS ALSO OBSERVED THAT THE AMOUNT OF CONSIDERATION PAID WAS AS PER MEMORANDUM OF UNDERSTANDING ENTERED INTO BY THE ASSESSEE WITH THE PAYEE COMPANY. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES, WE DO NOT FIND ANY G OOD REASON TO INTERFERE WITH THE ORDER OF THE LD.CIT(A), HENCE THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. ITA NO. 2120/AHD/11 & C.O. NO.197/AHD/11 FOR A.Y. 0 8-09 (ACIT VS.HARIORGOCHEM PVT. LTD.) PAGE 5 7.2 THE REVENUE HAS NOT POINTED OUT ANY CHANGE IN TO FACTS AND CIRCUMSTANCES. THEREFORE, TAKING A CONSISTENT VIEW, THIS GROUND O F REVENUES APPEAL IS REJECTED AND THE ORDER OF THE LD. CIT(A) IS CONFIRMED. 8. GROUND NO.2 IS AGAINST DELETION OF ADDITION OF R S.2,23,705/- ON ACCOUNT OF DISALLOWANCE OF EMPLOYEES CONTRIBUTION TO PROVIDENT FUND U/S.36(1)(VIA). LD. COUNSEL FOR THE ASSESSEE FAIRLY CONCEDED THAT THIS ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE IN A.Y. 2007-08 BY CO-ORDINATE BENCH I N ITA NO. 45/AHD/2011. WE FIND THAT CO-ORDINATE BENCH AT PARA 18 HAS DECID ED THE ISSUE BY FOLLOWING THE JUDGMENT OF HONBLE GUJARAT HIGH COURT IN CASE OF CIT VS. GUJARAT STATE ROAD TRANSPORT CORPORATION AS UNDER: 18. THE LD. DR FILED BEFORE US COPY OF THE ORDER O F HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. GUJARAT STATE ROAD TRANSPORT CO RPORATION (2014) 41 TAXMANN.COM 100 (GUJ.) AND SUBMITTED THAT THE HON'B LE HIGH COURT HAS HELD THAT WITH RESPECT TO THE SUM RECEIVED BY THE ASSESSEE FIRM FR OM ANY OF HIS EMPLOYEES TO WHICH PROVISIONS OF SUB-CLAUSE (X) OF CLAUSE (24) OF SECT ION (2) APPLIES, THE ASSESSEE SHALL BE ENTITLED TO DEDUCTION IN COMPUTING THE INCOME REFER RED TO IN SECTION 28 WITH RESPECT TO SUCH SUM CREDITED BY THE ASSESSEE TO THE EMPLOYEES' ACCOUNT IN THE RELEVANT FUND OR FUNDS ON OR BEFORE THE 'DUE DATE' MENTIONED IN EXPL ANATION TO SECTION 36(1)(VA).' 8.1. THEREFORE, FOLLOWING THE JUDGMENT OF HONBLE GUJARAT HIGH COURT AND THE DECISION OF THE CO-ORDINATE BENCH, WE HEREBY SET AS IDE THE ORDER OF LD. CIT(A) ON THIS ISSUE AND CONFIRMED THE ORDER OF ASSESSING OFFICER. THIS GROUND O REVENUES APPEAL IS ALLOWED. 9. GROUND NOS. 3 & 4 ARE GENERAL IN NATURE NEED NO SEPARATE ADJUDICATION. 10. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLOWED. 11. NOW, WE TAKE UP THE ASSESSEES C.O. NO. 197/AHD /2011 (ARISING OUT OF ITA NO.2120/AHD/2011 REVENUES APPEAL). 11.1 THE CONCISED GROUNDS RAISED IN CROSS OBJECTION ARE AS UNDER: 1. IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE RESPONDENT'S CASE, THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE U/S.14A READ WITH RULE 8D FOR ITA NO. 2120/AHD/11 & C.O. NO.197/AHD/11 FOR A.Y. 0 8-09 (ACIT VS.HARIORGOCHEM PVT. LTD.) PAGE 6 RS.7,61,9087-, WHEN NO SUCH DISALLOWANCE IS CALLED FOR. HE OUGHT TO HAVE DELETED THE ENTIRE ADDITION OF RS.8,61,908/-. 2. IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E RESPONDENT'S CASE, THE LD. CIT(A) ERRED IN SOLELY RELYING ON THE DECISION OF G ODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT AND ANOTHER, BY NOT CONSIDERING THE RATIO LAID DOWN BY OTHER JUDICIAL PRONOUNCEMENTS AVAILABL E ON THE ISSUE ON WHICH THE APPELLANT HAD RELIED. IN VIEW OF THE VARIOUS JU DICIAL PRONOUNCEMENTS CITED BY THE APPELLANT BEFORE THE CIT(A), THE CONFIRMATIO N OF ADDITION OF RS.7,61,9087- MADE BY HIM U/S.14A R.W. RULE 8D, DES ERVES TO BE DELETED. 3. THE RESPONDENT CRAVES LEAVE TO ADD, ALTER, AMEN D AND/OR WITHDRAW ANY GROUND OR GROUNDS EITHER BEFORE OR DURING THE COURSE OF HE ARING OF THE APPEAL. 12. THE ONLY EFFECTIVE GROUND IS AGAINST THE CONFIR MATION OF DISALLOWANCE MADE U/S.14A READ WITH RULE 8D OF RS.7,61,908/-. L D. COUNSEL FOR THE ASSESSEE SUBMITTED THAT AUTHORITIES BELOW WERE NOT JUSTIFIED IN MAKING DISALLOWANCE AND CONFIRMING THE SAME. LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE IN THE STATEMENT OF FACT-CUM-SYNOPSIS. LD. CO UNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE WAS HAVING SUFFICIENT I NTEREST FREE FUNDS. ON THE CONTRARY, LD. SR. D.R. SUPPORTED THE ORDER OF THE A UTHORITIES BELOW AND SUBMITTED THAT THERE IS NO INFIRMITY INTO THE ORDER OF THE AU THORITIES BELOW. 13. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THE CONTENTIONS OF THE ASSESSEE AGAINST T HE DISALLOWANCE AS SUBMITTED IN STATEMENT OF FACTS-CUM-SYNOPSIS ARE AS UNDER: 1. THE BRIEF FACTS OF THE CASE GIVING RISE TO THE PRESENT CROSS-OBJECTIONS ARE THAT THE ASSESSING OFFICER MADE FOLLOWING THREE DISALLOW ANCES IN HIS ORDER PASSED U/S. 143(3) OF THE ACT:- (I) DISALLOWANCE U/S. 14A R.W. RULE 8D 8,61,908 (II) DISALLOWANCE OF FEES & LEGAL EXPN. 12,00,000 (III) DISALLOWANCE U/S.36(1 )(VA) 2,23,715 1.1 THE LD.CIT(A) HAS CONFIRMED THE DISALLOWANCE MA DE U/S.14A AMOUNTING TO RS.7,61,908 BY SOLELY RELYING ON THE DECISION OF GO DREJ & BOYCE MFG. CO. LTD. VS. DCIT AND ANOTHER. HOWEVER, HE DELETED THE ADMIN ISTRATIVE EXPENSES OF RS.1,00,000 ALREADY SHOWN BY THE APPELLANT RELATING TO ITS INVESTMENTS IN SHARES AND MUTUAL FUNDS ETC. 2. AS REGARDS THE DISALLOWANCE MADE U/S.14A, AT TH E VERY OUTSET, THE APPELLANT WOULD LIKE TO SUBMIT THAT PROVISIONS OF SEC.14A PRO VIDE THAT NO DEDUCTION SHALL ITA NO. 2120/AHD/11 & C.O. NO.197/AHD/11 FOR A.Y. 0 8-09 (ACIT VS.HARIORGOCHEM PVT. LTD.) PAGE 7 BE MADE IN RESPECT OF EXPENDITURE INCURRED BY THE A SSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM THE PART OF THE TOTAL IN COME. FOR BETTER APPRECIATION OF THE LEGAL POSITION, THE RELEVANT PA RTS OF SECTION 14A ARE REPRODUCED BELOW:- 'EXPENDITURE INCURRED IN RELATION TO INCOME NOT INC LUDIBLE IN TOTAL INCOME. 14A.[(1)] FOR THE PURPOSES OF COMPUTING THE TOTAL I NCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT.] [(2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATI SFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURR ED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT' [EMPHASIS SUPPLIED] FROM PERUSAL OF THE ABOVE, IT CAN BE INFERRED THAT SECTION 14A IS APPLICABLE ONLY WHEN: (I) THE TAXPAYER GENERATES AN INCOME WHICH IS EXEM PT FROM TAX. (II) FOR EARNING SUCH INCOME SOME EXPENDITURE HAS BEEN INCURRED. (III) PROVISIONS OF RULE 8D CAN BE INVOKED ONLY WH EN HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF ASSESSEE IN RESPECT OF SUCH EXPENDITURE. IN THE ABOVE CONTEXT, THE APPELLANT WOULD LIKE TO S UBMIT THAT THE IMPUGNED DISALLOWANCE OF EXPENDITURE WAS MADE BY THE ASSESSI NG OFFICER, WHICH WAS CONFIRMED BY THE LD. CIT(A), BY SIMPLY ASSUMING THA T THE APPELLANT HAD INCURRED SOME EXPENDITURE TO EARN EXEMPT INCOME, HO WEVER, WHILE DOING SO, HE HAS FAILED TO ESTABLISH A PRE-REQUISITE NEXUS BE TWEEN THE EXPENDITURE DISALLOWED AND THE INVESTMENTS MADE FROM WHICH THE INCOME DERIVED IS EXEMPT FROM TAX. IN SUCH CIRCUMSTANCES, IT IS MOST RESPECT FULLY SUBMITTED THAT THERE CANNOT BE ANY PRESUMPTION THAT THE BORROWINGS WERE MADE FOR THE PURPOSE OF MAKING INVESTMENTS. FURTHER, AS REQUIRED IN CLAUSE (2) OF SEC. 14A, THE ASSESSING OFFICER HAS NOT RECORDED ANY PROPER SATIS FACTION ABOUT THE CORRECTNESS OF THE CLAIM IN RESPECT OF SUCH EXPENDI TURE. THE ASSESSING OFFICER HAD EVEN FAILED TO ACKNOWLEDGE THE FACT OF INCURRIN G OF ADMINISTRATIVE EXPENSES OF RS.1,00,000 SHOWN BY THE APPELLANT. 3. IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V/S. DC IT 43DTR 178 (2010) - THE HON. BOMBAY HIGH COURT IN PARAS 24 & 25 OF TH EIR JUDGMENT HAD EXPLAINED THE SCOPE OF APPLICABILITY OF SUB-S. (2) OF SEC.14A OF THE ACT IN ITA NO. 2120/AHD/11 & C.O. NO.197/AHD/11 FOR A.Y. 0 8-09 (ACIT VS.HARIORGOCHEM PVT. LTD.) PAGE 8 DETAIL; THE RELEVANT EXTRACTS OF WHICH ARE REPRODUC ED HERE BELOW FOR BETTER APPRECIATION OF THE FACTS:- 'WHAT MERITS EMPHASIS IS THAT THE JURISDICTION OF T HE AO TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH 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 INCUR RED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. MOREO VER, THE SATISFACTION OF THE AO HAS TO BE ARRIVED AT, HAVING REGARD TO THE ACCOU NTS OF THE ASSESSEE. HENCE, SUB-S.(2) DOES NOT IPSO FACTO ENABLE THE AO TO APPL Y THE METHOD PRESCRIBED BY THE RULES STRAIGHTAWAY WITHOUT CONSIDERING WHETH ER 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 ASSESS EE IN THAT REGARD IS CORRECT AND THE DETERMINATION MUST BE MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE SATISFACTION OF THE AO MUST BE ARRIVED AT ON AN OBJECTIVE BASIS. IT IS ONLY WHEN THE AO IS NOT SATISFIED WITH THE CL AIM OF THE ASSESSEE, THAT THE LEGISLATURE DIRECTS HIM TO FOLLOW THE METHOD THAT M AY BE PRESCRIBED.' [EMPHASIS SUPPLIED] 3.1 FROM PERUSAL OF THE AFORESAID OBSERVATIONS OF T HE HON. MUMBAI HIGH COURT, IT WOULD BE SEEN THAT SUB-S. (2) OF SEC.14A DOES NOT I PSO FACTO ENABLE THE AO TO APPLY THE METHOD PRESCRIBED BY THE RULE STRAIGHTAWA Y WITHOUT CONSIDERING WHETHER THE CLAIM MADE BY THE ASSESSEE IN RESPECT O F THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME IS CORRECT. THE SATISFACTION OF THE ASSESSING OFFICER MUST BE ARRIVED AT ON THE OBJECTIVE BASIS. IN THE LIGHT OF THE AFORESAID OBSERVATION OF THE COURT, IT WOULD BE SEEN THAT THE LD.CIT(A) CASUALLY FOLLOWED THE DECISION O F MUMBAI HIGH COURT CITED SUPRA WITHOUT CONSIDERING THE DETAILED OBSERVATIONS GIVEN IN THE JUDGMENT. IN FACT, THE AFORESAID MUMBAI HIGH COURT DECISION IS N ORMALLY QUOTED AND RELIED UPON IN THE FOLLOWING TWO AREAS:- (I) THE PROVISIONS OF SUB-SS. (2) & (3) OF SEC. 14A ARE CONSTITUTIONALLY VALID AND THE PROVISIONS OF RULE 8D OF THE IT. RULES ARE NOT ULTRA-VIRUS THE PROVISIONS OF SEC.14A AND DO NOT OFFEND ARTICLE 14 OF THE CONSTIT UTION; (II) THE PROVISIONS OF RULE 8D OF THE I.T. RULES W HICH HAVE BEEN NOTIFIED WITH THE EFFECT FROM 24TH MARCH 2008 SHALL APPLY W.E.F. A.Y. 2008-09 AND NOT PRIOR TO THAT. 4. THE APPELLANT SUBMITS THAT VARIOUS COURTS HAVE B EEN TAKING A CONSISTENT VIEW THAT DISALLOWANCE U/S.14A CAN BE MADE ONLY IF THERE IS AN ACTUAL NEXUS BETWEEN TAX-FREE INCOME AND EXPENDITURE INCURRED ON THE SAME. IN THIS CONNECTION RELIANCE MAY BE PLACED ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS:- 1. CIT VS. HERO CYCLES LTD. [2010] 189 TAXMAN 50 (P & H HIGH COURT) ITA NO. 2120/AHD/11 & C.O. NO.197/AHD/11 FOR A.Y. 0 8-09 (ACIT VS.HARIORGOCHEM PVT. LTD.) PAGE 9 EVEN UNDER RULE 8D OF S. 14A, DISALLOWANCE CAN BE M ADE ONLY IF THERE IS ACTUAL NEXUS BETWEEN TAX-FREE INCOME AND EXPENDI TURE THE ASSESSEE EARNED DIVIDEND INCOME ON SHARES WHICH WAS EXEMPT FROM TAX. THE AO TOOK THE VIEW THAT THE INVESTMENT IN SHARES WAS MADE OUT OF BORROWED FUNDS ON WHICH INTEREST EXPENDITURE WAS INCURRED AND CONSEQUENTLY MADE A DISALLOWANCE U/S 14A. THIS WAS PARTLY UPHELD BY THE CIT (A). ON FURTHER APPEAL BY THE ASSESSEE, THE TRIBUNAL DELETED THE DISALLOWANCE BY NOTING THAT THE ASSESSEE HAD PROVED THAT THE INVESTMENT IN SHARES WAS MADE OUT OF NON-INTEREST B EARING FUNDS. IT HELD THAT UNLESS THERE WAS EVIDENCE TO SHOW THAT TH E INTEREST - BEARING FUNDS HAD BEEN INVESTED IN THE TAX - FREE INVESTMEN TS AND THE NEXUS WAS ESTABLISHED BY THE REVENUE, S. 14A COULD NOT BE APPLIED ON MERE PRESUMPTION. THE REVENUE APPEALED TO THE HIGH COURT AND CLAIMED THAT IN VIEW OF S. 14A (2) AND RULE 8D (1) (B), A DISALLOWANCE COUL D BE MADE EVEN IF THE ASSESSEE CLAIMED THAT NO EXPENDITU RE HAD BEEN INCURRED IN RESPECT OF THE TAX - FREE INCOME. HELD, DISMISSING THE APPEAL: (I) IF THE INVESTMENT IN THE SHARES IS OUT OF THE N ON-INTEREST BEARING FUNDS, DISALLOWANCE U/S 14A IS NOT SUSTAINABLE; (II) THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE IS ALWAYS INCURRED WHICH MUST BE DISALL OWED U/S 14A CANNOT BE ACCEPTED; (III) DISALLOWANCE U/S 14A REQUIRES A FINDING OF INCURRIN G OF EXPENDITURE. IF IT IS FOUND THAT FOR EARNING EXEMPT ED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE U/S 14A CANNOT STAND; [EMPHASIS SUPPLIED] 2. MARUTI UDHYOG LIMITED VS. DCIT 92 ITD 119 (DELHI IT AT) FROM THE HEAD NOTES: SECTION 14A, READ WITH SECTION 36(1)(III) OF THE IN COME-TAX ACT, 1961 - EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCL UDIBLE IN TOTAL INCOME - ASSESSMENT YEAR 1999-2000 - ASSESSEE HAD P AID INTEREST TO CERTAIN PARTIES ON ADVANCES, DEPOSITS, ETC. - IT HA D ALSO INVESTED IN SHARES YIELDING TAX-FREE INCOME -ASSESSING OFFICER, RELYING ON SECTION 14A, CALCULATED INTEREST ON TOTAL INVESTMENT IN SHA RES AND MADE DISALLOWANCE -COMMISSIONER (APPEALS) ALSO HELD THAT THERE WAS DIRECT NEXUS BETWEEN FUNDS BORROWED AND INVESTMENT IN SHAR ES YIELDING TAX- FREE INCOME BUT, MADE DISALLOWANCE ON DAY TO DAY WO RKING PRODUCT METHOD - WHETHER NEXUS BETWEEN BORROWED FUNDS AND INVESTME NT CAN BE SAID TO BE ESTABLISHED ONLY WHERE IT IS SHOWN TH AT INTEREST FREE FUND ARE NOT AVAILABLE WITH ASSESSEE - HELD, YES - WHETH ER SINCE COMMISSIONER(APPEALS) HAD MERELY PICKED UP SOURCES ON WHICH INTEREST WAS PAID BY ASSESSEE AND HAD COMPLETELY IG NORED OTHER ITA NO. 2120/AHD/11 & C.O. NO.197/AHD/11 FOR A.Y. 0 8-09 (ACIT VS.HARIORGOCHEM PVT. LTD.) PAGE 10 SOURCES AND FURTHER THAT INTEREST FREE FUNDS WERE A VAILABLE TO ASSESSEE FOR MAKING INVESTMENT WHICH FAR EXCEEDED INVESTMENT IN SHARES ORDER OF COMMISSIONER (APPEALS) WAS TO BE SET ASIDE AND, ADDITION WAS TO BE DELETED - HELD, YES. [EMPHASIS SUPPLIED] ON PERUSAL OF THE ABOVE JUDICIAL DECISIONS , IT MAY BE CONCLUDED THAT IT IS THE ONUS OF THE ASSESSING OFFICER TO ESTABLISH A NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE SOURCE OF EXEMPT INCOME, IN THE EV ENT HE WANTS TO DISALLOW U/S 14A OF THE INCOME TAX ACT, 1961. IN THE FACTS OF THE CASE, NO NEXUS WHATSOEVER HAS BEEN ESTABLISHED BY THE ASSESSING OF FICER. THUS, DISALLOWANCE MADE BY ASSESSING OFFICER U/S 14A REQUIRES TO BE DE LETED. 5. WITHOUT PREJUDICE TO WHAT IS STATED HEREIN ABOVE , AND WITH REGARD TO DISALLOWANCE OF INTEREST EXPENDITURE, THE APPELLANT SUBMITS THAT APPELLANT HAS GOT FOLLOWING INTEREST-FREE FUNDS AVAILABLE WITH IT TO COVER INVESTMENTS MADE IN SHARES AND MUTUAL FUNDS: SHARE CAPITAL : RS. 32,00,200 RESERVE & SURPLUSES : RS. 28.38,41,330 TOTAL .. .. : RS. 28,70,41,530 IT CAN BE SEEN FROM AFORESAID DETAILS THAT AS APPEL LANT HAD SUFFICIENT INTEREST FREE FUNDS, PROPORTIONATE DISALLOWANCE OF INTEREST EXPENDITURE IS NOT JUSTIFIED. RELIANCE IS PLACED ON THE RATIO OF HON'BLE SUPREME COURT'S DECISION IN CASE OF MUNJAL SALES CORPORATION V/S COMMISSIONER OF INC OME-TAX 298ITR 298 ; WHEREIN THE APEX COURT HAS OBSERVED THAT THE ASSESS EE HAD ADVANCED INTEREST FREE LOAN TO ITS SISTER CONCERN AMOUNTING TO RS.5,0 0,000/-; WHEREAS THE OPENING BALANCE OF INTEREST FREE FUNDS AS ON 1 APRI L, 1994 WAS RS.1.91 CRORES, WHICH IS SUFFICIENT TO COVER THE IMPUGNED LOAN OF R S.5 LACS. HENCE, THERE CANNOT BE ANY DISALLOWANCE OF INTEREST UNDER SECTIO N 36(1)(III) OF THE ACT. APART FROM ABOVE, FOLLOWING DECISIONS ALSO SUPPORT THE CASE OF ASSESSEE: (I) TORRENT FINANCIERS VS. ACIT 73 TTJ 624, AHME DABAD; (II) CIT VS. RADICO KHAITAN LIMITED 142 TAXMAN 681, ALLAHABAD HIGH COURT 5.1 THE APPELLANT ALSO RELIES ON THE FOLLOWING DEC ISIONS IN SUPPORT OF ITS CLAIM THAT NO DISALLOWANCE U/S 14A IS REQUIRED TO BE MADE AS F AR AS INTEREST EXPENDITURE IS CONCERNED. (A) DECISION OF THE BOMBAY HIGH COURT IN CIT V. REL IANCE UTILITIES AND POWER LTD. (313 ITR 340): FROM THE HEAD NOTES: 'INTEREST ON BORROWED CAPITAL INVESTMENTS BY APPELLANT FINDING THAT INVESTMENTS WERE FROM INTEREST-FREE FUNDS AVAILABLE WITH APPELLANT ITA NO. 2120/AHD/11 & C.O. NO.197/AHD/11 FOR A.Y. 0 8-09 (ACIT VS.HARIORGOCHEM PVT. LTD.) PAGE 11 BORROWED CAPITAL USED FOR PURPOSES OF BUSINESS INTEREST DEDUCTIBLE INCOME-TAX ACT, 1961, S.36(1)( III). THE APPELLANT CLAIMED DEDUCTION OF INTEREST ON BORR OWED CAPITAL. THE ASSESSING OFFICER RECORDED A FINDING THAT THE SUM O F RS. 213 CRORES WAS INVESTED OUT OF ITS OWN FUNDS AND RS. 147 CRORE S WAS INVESTED OUT OF BORROWED FUNDS. ACCORDINGLY HE DISALLOWED INTEREST AMOUNTING TO RS. 4.40 CRORES CALCULATED AT 12 PER CENT PER ANNUM FOR THREE MONTHS FROM JANUARY, 2000 TO MARCH, 2000. THE COMMISSIONER (APPEALS) FOUND THAT THE APPELLANT HAD ENOUGH INTEREST-FREE F UNDS AT ITS DISPOSAL FOR INVESTMENT AND ACCORDINGLY DELETED THE ADDITION OF RS. 4.40 CORES MADE BY THE ASSESSING OFFICER AND DIRECTED HIM TO ALLOW THE DEDUCTION UNDER SECTION 36(1)(III). THE ORDER OF THE COMMISSIONER (APPEALS) WAS UPHELD BY THE TRIBUNAL. ON APPEAL TO THE HIGH COURT: HELD, DISMISSING THE APPEAL, THAT IF THERE WERE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVERDRAFT AND/OR LOANS TAKEN, THE N A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE IN TEREST-FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INT EREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPTION WAS ESTABLISHED CONSIDERING THE FINDING OF FACT BOT H BY THE COMMISSIONER (APPEALS) AND THE TRIBUNAL. THE INTERE ST WAS DEDUCTIBLE. EAST INDIA PHARMACEUTICAL WORKS LTD. V. CIT [1997] 224 ITR 627 (SC) AND WOOLCOMBERS OF INDIA LTD. V. CIT [ 1982] 134 ITR 219 (CAT) RELIED ON.' [EMPHASIS SUPPLIED] (B) DECISION OF THE ITAT, AHMEDABAD, IN ACIT V HIPOLIN LTD. (ITA NO. 4259/AHD/2007): '2. THE BRIEF FACTS OF THE CASE ARE THAT THE APPELL ANT IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF WASHING POWDER, DETERGENT CAKES , TOOTH PASTE, ETC. IN THE NAME OF 'HIPOLIN'. DURING THE YEAR UNDER CONSIDERAT ION, THE ASSESSING OFFICER FOUND THAT THE APPELLANT CLAIMED INTEREST OF RS.16. 78 LACS AS BANK CHARGES. THE ASSESSING OFFICER, FURTHER, FOUND THAT THE APPE LLANT HAS SHOWN INVESTMENT OF RS. 26, 71,053/- AS ON 31-03-2004 AS COMPARED TO RS.19, 49,725/- AS ON 31/03/2003. THUS, THE APPELLANT HAS MADE NEW INVEST MENT OF RS. 7,21,238/- IN SHARES. THE DIVIDEND INCOME ON THE ABOVE MENTIONED INVESTMENT WAS EXAMINED. THE ASSESSING OFFICER SOUGHT TO DISALLOW PROPORTIONATE INTEREST OUT OF THE INTEREST CLAIMED. IT WAS EXPLAINED TO THE ASSESSING OFFICER THAT THE APPELLANT HAS MADE INVESTMENT IN SHARES OUT OF THE HUGE INTEREST-FREE FUNDS AVAILABLE IN THE FORM OF PAID UPSHARE CAPITAL AND A CCUMULATED RESERVES . THE TOTAL INVESTMENT IN SHARES IS LESS THAN 1% OF THE S AID INTEREST-FREE FUNDS. THE ASSESSING OFFICER, HOWEVER, DID NOT AGREE WITH THE APPELLANT AND DISALLOWED PROPORTIONATE EXPENSES WHICH AMOUNTED TO RS.53,027/ - WHICH INCLUDED INTEREST OF RS.9,403/- AND ADMINISTRATIVE EXPENSES OF RS.43,624/-. 4. ITA NO. 2120/AHD/11 & C.O. NO.197/AHD/11 FOR A.Y. 0 8-09 (ACIT VS.HARIORGOCHEM PVT. LTD.) PAGE 12 6. ON THE OTHER HAND, THE LEARNED AUTHORISED REPRES ENTATIVE OF THE APPELLANT SUBMITTED THAT THE HON'BLE BOMBAY HIGH CO URT IN THE CASE OF CIT VS. RELIANCE UTILITIES POWER LTD. 313 ITR 340 (BOM) HAS HELD THAT IT HAS TO BE FIRST PRESUMED THAT THE INVESTMENT WERE MADE OUT OF INTEREST-FREE FUNDS AVAILABLE WITH THE APPELLANT. THEREFORE, NO DISALLO WANCE IS CALLED FOR . IT IS AN UNDISPUTED FACT THAT THE APPELLANT HAS SUBSTANTIATE SHARE CAPITAL AND RESERVES. THEREFORE, IT CANNOT BE SAID THAT INVESTMENTS IN SH ARES WERE MADE OUT OF INTEREST BEARING FUNDS. AFTER HEARING THE PARTIES, WE DECLINE TO INTERFERE WITH THE ORDER OF THE LEARNED CIT (APPEALS), WHICH IS CO NFIRMED. HENCE, THIS GROUND OF REVENUE IS DISMISSED.' [EMPHASIS SUPPLIED] 5.2 APART FROM ABOVE, ASSESSEE SUBMITS THAT AS AGA INST INTEREST EXPENDITURE OF RS. 2,25,918, IT HAS EARNED INTEREST INCOME OF RS. 10,6 5,299 AND AS INTEREST INCOME BEING IN EXCESS OF EXPENDITURE, NO DISALLOWA NCE UNDER SECTION 14A IS REQUIRED FOR PROPORTIONATE INTEREST EXPENDITURE. 6. WITH REGARD TO DISALLOWANCE OF ADMINISTRATIVE EXPENDITURE U/S.14A , IT IS SUBMITTED THAT ADMINISTRATIVE EXPENDITURE INCURRED DURING THE CURRENT YEAR ARE MAINLY FOR THE PURPOSE OF ASSESSEE'S MAIN BUSINESS. HOWEVER, IN ALL FAIRNESS, THE APPELLANT ITSELF HAS SHOWN RS.1,00,000 EXPENDITURE I NCURRED IN INVESTMENTS MADE BY IT IN THE SHARES AND MUTUAL FUNDS AND THE INCOME EARNED THERE FROM. IN FACT, THE LD.CIT(A) HAS NOT N EGATIVATED THE CLAIM OF THE APPELLANT RELATING TO EXPENSES OF RS. 1,00,000. NOT ONLY THIS, THE ASSESSING OFFICER HAS NOT CHALLENGED THE CORRECTNESS OF THE S AID CLAIM WITH FACTS & FIGURES AND THE LD.CIT(A) HAS ALSO CONSIDERED THE S AID EXPENDITURE OF RS.1,00,000 AND DELETED TO THE ABOVE EXTENT, OUT OF THE ADDITION OF RS.8,61,908, WHICH RESULTED INTO CONFIRMATION OF ADDITION OF RS. 7,61,908. HERE THE ASSESSING OFFICER WAS REQUIRED TO FIND OUT AND QUAN TIFY THE EXPENSES INCURRED BY THE APPELLANT FOR EARNING EXEMPTED INCOME BY EST ABLISHING A PROPER NEXUS BETWEEN THE TWO. IN FACT, THERE WAS NO NEED OF APPL ICATION OF RULE 8D, AS THE APPELLANT HAD ALREADY SHOWN THE ADMINISTRATIVE EXPE NDITURE INCURRED DURING THE YEAR AT RS.1,00,000. THE APPELLANT RELIES ON TH E FOLLOWING TWO DECISIONS AVAILABLE ON THE MATTER- (1) DECISION OF THIRD MEMBER DIVISION OF DELHI ITAT IN CASE OF WIMCO SEEDLINGS VS. DCIT 109 TTJ 462; (2) DECISION OF DELHI ITAT IN CASE OF MALWA INVE STMENTS LIMITED VS. DICT 3 DTR 455 CONSIDERING THIS, NO DISALLOWANCE OF ADMINISTRATIVE EXPENSES IS JUSTIFIED. 7. AS REGARDS THE GROUNDS OF APPEAL TAKEN BY THE D EPARTMENT AGAINST THE DELETION OF THE ADDITION OF RS.12,00,000 MADE ON AC COUNT OF DISALLOWANCE OUT OF FEES AND LEGAL EXPENSES, AND DELETION OF THE AD DITION OF RS.2,23,715 MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DISALLOWANCE OF EMPLOYEES' CONTRIBUTION TO PROVIDENT FUND U/S. 36(1)(VA) OF TH E ACT, THE APPELLANT WOULD FILE A DETAILED REPLY AT THE TIME OF HEARING OF THE APPEAL BEFORE YOUR HONOUR. ITA NO. 2120/AHD/11 & C.O. NO.197/AHD/11 FOR A.Y. 0 8-09 (ACIT VS.HARIORGOCHEM PVT. LTD.) PAGE 13 8. IN THE LIGHT OF THE FACTUAL AND LEGAL POSITION B ROUGHT OUT ABOVE, IT IS PRAYED THAT THE DISALLOWANCE OF RS.7,61,908CONFIRMED BY TH E CIT(A) MAY KINDLY BE DELETED AND THE GROUNDS OF APPEAL RAISED BY THE DEP ARTMENT AGAINST THE RELIEF GIVEN BY THE CIT(A) TO APPELLANT MAY KINDLY BE DISM ISSED. 13.1 THE ASSESSING OFFICER MADE DISALLOWANCE BY I NVOKING THE PROVISIONS OF SECTION 14A R.W. RULE 8D OF THE INCOME TAX RULES. AS PER ASSESSEE, THE AO HAS NOT ESTABLISHED ANY NEXUS BETWEEN THE EXPENDITU RE DISALLOWED AND INVESTMENT MADE FROM WHICH THE INCOME DENIED IS EXE MPT FROM TAX. SECONDLY, THE AO HAS NOT RECORDED ANY PROPER SATISFACTION ABO UT THE CORRECTNESS OF THE CLAIM IN RESPECT OF SUCH EXPENDITURE. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT THE ASSESSMENT YEAR UNDER APPEAL BEING 2008-20 09, THEREFORE, ANY DISALLOWANCE U/S.14A WOULD BE IN ACCORDANCE WITH TH E METHOD PRESCRIBED UNDER RULE 8 D OF THE INCOME TAX RULES, 1962. FOR THE SA KE OF CLARITY, THE RELEVANT PROVISIONS OF SECTION 14A ARE REPRODUCED HEREINBELO W: SECTION-14A :- EXPENDITURE INCURRED IN RELATION TO I NCOME NOT INCLUDIBLE IN TOTAL INCOME. [(1)] FOR THE PURPOSES OF COMPUTING THE TOTAL INCO ME UNDER THIS CHAPTER NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDI TURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT:] [PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SH ALL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREA DY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001.] [(2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHO D AS MAY BE PRESCRIBED, IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BE EN INCURRED BY HIM ITA NO. 2120/AHD/11 & C.O. NO.197/AHD/11 FOR A.Y. 0 8-09 (ACIT VS.HARIORGOCHEM PVT. LTD.) PAGE 14 IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THIS ACT.] 13.2. FROM THE CONJOINT READING OF THE ABOVE PROVIS ION, IT IS EVIDENT THAT MAKING OF DISALLOWANCE BY APPLYING RULE 8-D OF THE INCOME TAX RULES, 1962 IS NOT AUTOMATIC. THE AO HAS TO FIRST FIND OUT WHAT W AS THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOE S NOT FORM PAST OF THE TOTAL INCOME UNDER THE ACT (HEREINAFTER REFER TO AS THE E XEMPT INCOME). THEREFORE, FIRSTLY THE AO IS REQUIRED TO FIND OUT THE NEXUS BE TWEEN THE EXPENDITURE INCURRED AND EXEMPT INCOME. IF THE EXPENDITURE IS NOT RELAT ED TO THE EXEMPT INCOME, IN OUR CONSIDERED VIEW THE AO IS NOT EMPOWERED TO MAKE DISALLOWANCE U/S.14A OF THE ACT BY APPLYING RULE 8D OF THE INCOME TAX RULES . THUS, FIRST REQUIREMENT OF LAW IS THAT THE EXPENDITURE SHOULD BE RELATED TO THE EXEMPT INCOME. IN CASE, WHERE THE ASSESSEE MAKES A CLAIM THAT X AMOUNT IS RELATED TO THE EXEMPT INCOME OR OTHERWISE NO EXPENDITURE IS RELATED TO TH E EXEMPT INCOME, IN THAT EVENT, THE AO HAS TO SATISFY HIMSELF ABOUT THE CORR ECTNESS OF THE CLAIM HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE BEFORE PROCE EDING TO APPLY RULE 8 D OF THE INCOME TAX RULES, 1962 FOR COMPUTING DISALLOWAN CE. HENCE, ANOTHER REQUIREMENT OF LAW IS THAT THE AO HAS TO SATISFY HI MSELF ABOUT THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCO UNTS OF THE ASSESSEE. THE PROVISION OF SECTION 14A MANDATES THE AO TO EXAMINE THE ACCOUNTS OF THE ASSESSEE BEFORE PROCEEDING TO APPLY RULE 8D OF THE IT RULES. IN THE PRESENT CASE, THE AO HAS MADE DISALLOWANCE ON ACCOUNT OF IN TEREST EXPENDITURE AND ADMINISTRATIVE EXPENSES. SINCE ON BOTH THE COUNTS, THE AO HAS FAILED TO RECORD HIS FINDING, WE ARE OF THE CONSIDERED VIEW THAT DIS ALLOWANCE AS MADE BY THE AO CANNOT BE SUSTAINED. HENCE, AO IS HEREBY DIRECTED TO DELETE THE DISALLOWANCE. THUS, GROUNDS RAISED IN THE CROSS-OBJECTION ARE ALL OWED. ITA NO. 2120/AHD/11 & C.O. NO.197/AHD/11 FOR A.Y. 0 8-09 (ACIT VS.HARIORGOCHEM PVT. LTD.) PAGE 15 14. IN THE COMBINED RESULT, THE APPEAL OF THE REVEN UE IS PARTLY ALLOWED, WHEREAS CROSS-OBJECTION FILED BY THE ASSESSEE IS AL LOWED. THIS ORDER PRONOUNCED IN OPEN COURT ON 30/09/2015 SD/- SD/- (ANIL CHATURVEDI) (KUL BHARAT) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD, DATED : 30/ 09/2015 S.K.SINHA / COPY OF ORDER FORWARDED TO:- 1. / APPELLANT 2. / RESPONDENT 3. ! '# $ / CONCERNED CIT 4. $ - / CIT (A) 5. %&'(('# , '# , ! / DR, ITAT, AHMEDABAD 6. '+,-. / GUARD FILE. BY ORDER/ , //TRUE COPY// / '# , ! STRENGTHEN PREPARATION & DELIVERY OF ORDERS IN THE ITAT 1) DATE OF TAKING DICTATION 09.09.2015 2) DIRECT DICTATION BY MEMBER STRAIGHT ON COMPUTER/LAPTOP/DRAGON DICTATE XXX 3) DATE OF TYPING & DRAFT ORDER PLACE BEFORE MEMBER 16.09.2015 4) DATE OF CORRECTION 23/09/2015 5) DATE OF FURTHER CORRECTION 6) DATE OF INITIAL SIGN BY MEMBERS 7) ORDER UPLOADED ON 8) ORIGINAL DICTATION PAD HAS BEEN ENCLOSED IN THIS FILE 9) FINAL ORDER AND 2 ND COPY SEND TO BENCH CLERK ON 30/09/2015