M/s. Vireet Investment Pvt. Ltd., New Delhi V. ACIT, New Delhi

CO 68/DEL/2014

• Counselvise Citation: [2017] 119 COUNSELVISE.COM (IT) 3400 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 21 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 16-06-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Assessment Year: 2008-2009
• Appeal Filed On: 25-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S D SRIVASTAVA PRINCIPAL
• Assessee Lawyers: AJAY VOHRA SR MR DEEPESH JAIN
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Opportunity of being heard; Transactions in derivatives; Earning of tax free income; Retrospective amendment; Question of law; Reasonable cause; Fair market value; Notional interest; Tax effect; Unabsorbed depreciation; Capital expenditure
• Section: 80HHC; 14A; 115JB; 32; 37; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH H (SPECIAL BENCH), NEW DELHI BEFORE SHRI S.V. MEHROTRA: VICE PRESIDENT AND SHRI I.C. SUDHIR: JUDICIAL MEMBER AND SHRI AMIT SHUKLA: JUDICIAL MEMBER ITA NO.502/DEL/2012 ASSTT. YR.: 2008-09 ACIT, CIRCLE 17(1), VS. VIREET INVESTMENT PVT. LT D., NEW DELHI. 12, A/3, FRIENDS COLONY (W), NEW DELHI. PAN: AAACV 2033 M AND C.O. NO. 68/DEL/2014 (IN ITA NO. 502/DEL/2012) ASSTT. YR.: 2008-09 VIREET INVESTMENT PVT. LTD., VS. ACIT, CIRCLE 17(1) , 12, A/3, FRIENDS COLONY (W), NEW DELHI. NEW DELHI. (APPELLANT ) (RESPONDENT) DEPARTMENT BY : SH. S.D. SRIVASTAVA PRINCIPAL CIT( DR) ASSESSEE BY : SHRI AJAY VOHRA SR. ADVOCATE MR. DEEPESH JAIN, CA DATE OF HEARING : 20/04/2017. DATE OF ORDER : 16/06/2017. O R D E R 2 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. PER S.V. MEHROTRA VP: THE CAPTIONED DEPARTMENTAL APPEAL AND THE ASSESSEE S CROSS- OBJECTIONS HAVE BEEN PREFERRED AGAINST THE ORDER DA TED 01-11-2011 PASSED BY THE LD. COMMISSIONER OF INCOME-TAX (APPEA LS)-XIX, NEW DELHI IN APPEAL NO. 131/2010-11 RELATING TO ASSESSM ENT YEAR 2008-09. 2. THE HONBLE PRESIDENT, INCOME-TAX APPELLATE TRIB UNAL, HAS CONSTITUTED THIS SPECIAL BENCH TO ADJUDICATE THE FO LLOWING QUESTION: WHETHER THE EXPENDITURE INCURRED TO EARN EXEMPT IN COME COMPUTED U/S 14A COULD NOT BE ADDED WHILE COMPUTING BOOK PROFIT U/S 115JB OF THE ACT. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY WAS CARRYING ON THE BUSINESS AS FINANCE AND INVESTMENT COMPANY, MAKING INVESTMENT IN SHARES AND SECURITIES AND ADVANCING M ONEYS AND BORROWING MONEYS TO/ FROM INDUSTRIAL ENTERPRISES. T HE ASSESSEE HAD FILED ITS RETURN OF INCOME SHOWING INCOME OF RS. 6, 17,39,487/-. HOWEVER, THE TAX WAS PAID U/S 115JB AT AN INCOME OF RS. 32,18,30,990/-. 3.1. THE AO NOTICED THAT THE ASSESSEE HAD SHOWN INC OME FROM OPERATION AT RS. 43,98,75,523/- WHICH INCLUDED THE FOLLOWING INCOMES UNDER VARIOUS HEADS, AS FOLLOWS: I. SPECULATION PROFIT (PROFIT/LOSS) ON F&O RS. -185/- II. INTEREST INCOME RS. 44,44,186/- III. SHORT TERM GAIN ON SALE OF INVESTMENTS RS. 7,10,20 ,860/- IV. WINNING FROM RACE HORSES RS. 486/- RS. 7 ,54,65,532/- 3 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 3.2. HE FURTHER NOTED THAT AS PER SCHEDULE 13 & 14 OF THE P&L A/C, THE ASSESSEE HAD CLAIMED EXPENSES AT A TOTAL AMOUNT OF RS. 3,42,11,767/- [UNDER THE HEAD SALARY & OTHER BENEF ITS AT RS. 2,00,035/- AND ADMINISTRATION AND OTHER EXPENSES AT RS. 3,40,11,732/-]. THIS INCLUDED THE AMOUNT OF RS. 1,1 9,257/- TOWARDS HORSE RACE EXPENSES. THE AO, ACCORDINGLY, CONCLUDED THAT APART FROM THE HORSE RACE EXPENSES, IN RESPECT OF WHICH AN INC OME OF RS. 486/- HAD BEEN SHOWN BY THE ASSESSEE, THE EXPENSES CLAIME D BY THE ASSESSEE WERE AT RS. 3,40,92,510/-. HE, ACCORDINGLY, POINTED OUT THAT IF THE AMOUNT OF RS. 1,19,257/- (SIC CORRECT FIGURE RS. 486/-), WAS CONSIDERED SEPARATELY, THE AMOUNT OF RS. 7,53,45,78 9/- (SIC CORRECT FIGURE RS. 7,54,65,046), [I.E. 7,54,65,532-1,19,25 7/- (SIC CORRECT FIGURE RS. 486/-], WAS THE INCOME FROM ITS OPERATIO NS. APART FROM THIS, AMOUNT OF RS. 7,54,65,532/-, WHICH HAD BEEN OFFERED FOR TAX, THE REMAINING AMOUNT OF RS. 36,44,09,991/- (I.E. 43,98, 75,523- 7,54,65,532) HAD BEEN CLAIMED BY THE ASSESSEE COMPA NY AS EXEMPT INCOME. THIS AMOUNT COMPRISED OF EXEMPT DIVIDENDS, TAX FREE INTEREST INCOME AND LONG TERM CAPITAL GAINS. 3.3. THE AO NOTICED THAT ASSESSEE HAD OFFERED DISAL LOWANCE OF RS. 33,95,401/- U/S 14A AS PER RULE 8D, WHICH, AS PER A SSESSEE, WAS WORKED OUT @ .5% OF AVERAGE VALUE OF ITS INVESTMENT ON THE BASIS OF THEIR VALUE AS AT OPENING AND CLOSING OF THE RELEVA NT FINANCIAL YEAR. AS PER ASSESSEES WORKING, DISALLOWANCE U/S 14A AMOUNT ING TO RS. 14,73,715/- WAS IN RESPECT OF EXEMPT DIVIDEND INCOM E AND RS. 19,21,687/- WAS IN RESPECT OF LONG TERM CAPITAL GA IN, CLAIMED EXEMPT U/S 10(38) OF THE I.T. ACT. 4 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 3.4. HOWEVER, AO DID NOT ACCEPT THE ASSESSEES CONT ENTION AS THE MAIN SOURCE OF ASSESSEES INCOME WAS FROM DIVIDEND AND OTHER TAX FREE INCOMES. KEEPING IN VIEW THE EXEMPT INCOME, CL AIMED BY THE ASSESSEE, BEING RS. 36,44,09,991/-, THE AO COMPUTED THE PROPORTIONATE EXPENSES U/S 14A AS UNDER: 3,40,92,510 X 7,53,45,789 / 43,97,56,266 (I.E. 43,9 8,75,523- 1,19,257)= 58,41,251 (RELATING TO REGULAR OPERATIONS). 3.5. THE PROPORTIONATE EXPENSE FOR NET DISALLOWANCE U/S 14A IN RESPECT OF EARNING OF THE ASSESSEE RELATED TO NON T AXABLE INCOME COMES TO RS. 2,82,51,259/- (RS. 3,40,92,510-58,41,251). H E, ACCORDINGLY, MADE ADDITION OF RS. 2,82,51,259/- 3.6. THE AO, WHILE COMPUTING THE BOOK PROFITS U/S 1 15JB, MADE THE ADDITION OF RS. 2,82,51,260/- ON ACCOUNT OF DISALLO WANCE U/S 14A AS PER P&L A/C. 3.7. IN COURSE OF ASSESSMENT PROCEEDINGS THE AO FUR THER NOTICED THAT IN RESPECT OF DIVIDEND INCOME FROM MUTUAL FUNDS, CL AIMED EXEMPT BY THE ASSESSEE, SUBSEQUENT CAPITAL LOSSES ( SHORT TER M AND LONG TERM) WERE INCURRED ON ACCOUNT OF SALE/ TRANSFER OF SUCH MUTUAL FUND UNITS. FROM THE DETAIL FURNISHED BY ASSESSEE IT WAS NOTICE D THAT AN AMOUNT OF RS. 64,000/- HAD BEEN TAKEN AS THE AMOUNT DISALLOWA BLE U/S 94(7) IN RESPECT OF SHORT TERM CAPITAL GAINS WITHOUT SECURIT Y TRANSACTION TAX. SIMILARLY, AN AMOUNT OF R.S 25,686/- HAD BEEN TAKEN AS THE AMOUNT DISALLOWABLE U/S 94(7) IN RESPECT OF SHORT TERM CAP ITAL GAIN. 3.8. ON PERUSAL OF THE DETAILS, THE AO NOTICED THAT THE AMOUNT OF RS. 64,000/- WAS THE NET LOSS ON SALE/ PURCHASE OF UNI TS OF VARIOUS MUTUAL FUNDS. HE FOUND THAT ASSESSEE HAD CLAIMED LOSS ON S ALE OF INVESTMENT IN CONTRAVENTION OF PROVISIONS OF SEC. 94(7), AS TH E INVESTMENT HAD 5 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. BEEN CLEARED BY THE ASSESSEE WITHIN A PERIOD OF 3 M ONTHS PRIOR TO THE RECORD DATE FOR DIVIDEND AND WERE WITHIN A PERIOD O F 3 MONTHS AFTER SUCH RECORD DATE. HE, ACCORDINGLY, MADE AN ADDITION OF RS. 64,000/- AND RS. 25,686/-. 3.9. THE AO FURTHER NOTICED THAT ASSESSEE COMPANY H AD GIVEN LOANS TO VARIOUS PERSONS AND ENTITIES AS NOTED AT PAGE 8 PARA IV.3 OF HIS ORDER. FROM THE DETAILS FURNISHED, THE AO FOUND THA T EXCEPT IN THE CASE OF SNAM INVESTMENT PVT. LTD., TO WHICH INTEREST @ 6 % HAD BEEN CHARGED, NO INTEREST HAD BEEN CHARGED/ RECEIVED BY THE ASSESSEE IN RESPECT OF LOANS/ ADVANCES GIVEN TO THE OTHER PARTI ES. 3.10. AFTER CONSIDERING THE ASSESSEES REPLY, HE MA DE ADDITION TO ASSESSEES TOTAL INCOME ON ACCOUNT OF INTEREST INCO ME COMPUTED @ 12% AS PER DETAILS GIVEN FROM PAGES 11 TO 12 OF HIS ORDER AND MADE ADDITION OF RS. 4,02,58,032/-. 3.11. BEFORE LD. CIT(A), THE ASSESSEES REPRESENTAT IVE OBJECTED TO THE METHOD OF WORKING OUT DISALLOWANCE U/S 14A BY AO AN D POINTED OUT THAT THE ASSESSEE, WHILE WORKING OUT THE DISALLOWA NCE, HAD TAKEN ONLY THE VALUE OF INVESTMENT YIELDING TAX EXEMPT IN COME INSTEAD OF TOTAL VALUE OF INVESTMENTS. . HOWEVER LD. CIT(A), I N VIEW OF THE DECISION OF SPECIAL BENCH OF THE ITAT IN THE CASE OF CHEMINVEST LTD. VS. ITO 121 ITD 318 (DEL)(SB), DID NOT AGREE W ITH THIS CONTENTION OF ASSESSEE AND REQUIRED IT TO WORK OUT DISALLOWANCE BY TAKING THE VALUE OF INVESTMENT AS PER BOOKS OF A/C, WHICH WAS WORKED OUT AT RS. 91,95,698/- AS UNDER: OPENING BALANCE OF INVESTMENT = RS. 1,81,95,07,31 8/- CLOSING BALANCE OF INVESTMENT = RS. 1,85,87,71,9 86/- AVERAGE VALUE OF INVESTMENT = RS. 1,83,91,39,652 /- % OF AVERAGE VALUE OF INVESTMENT 6 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. U/R 8D(2)(III) = RS. 91,95,698/- 3.12. THUS, THE LD. CIT(A) COMPUTED THE DISALLOWAN CE UNDER RULE 8D(2)(III) AND NO DISALLOWANCE WAS MADE UNDER RULE 8D(2)(I) AND RULE 8D(2)(II). THE ASSESSEE HAS FILED CROSS OBJECT ION AGAINST THE FINDINGS OF LD. CIT(APPEALS) IN CONSIDERING THE VAL UE OF INVESTMENTS AS PER BOOKS OF ACCOUNT INSTEAD OF ONLY THOSE INVES TMENTS WHICH YIELDED TAX FREE INCOME FOR COMPUTING DISALLOWANCE UNDER RULE 8D(2)(III) AND REVENUE IS AGGRIEVED AS NO DISALLOWA NCE WAS MADE UNDER RULE 8D(2)(I) AND RULE 8D(2)(II). 3.13. IN REGARD TO THE COMPUTATION OF BOOK PROFIT U /S 115JB, IT WAS SUBMITTED BEFORE LD. CIT(A) THAT ONLY EXPENDITURE R ELATED TO THE TAX FREE INCOME OTHER THAN INCOME U/S 10(38) COULD BE A DDED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 115JB. IT WAS FURTHER ARGUED THAT ONLY 24.9% OF EXPENSES, RELATED TO IN COME DECLARED U/S 10(34) AND 10(35), IS TO BE ADDED IN VIEW OF FOLLO WING BREAK UP OF EXPENDITURE ON PROPORTIONATE BASIS: PARTICULARS AMOUNT PERCENTAGE TO TOTAL INCOME EXEMPT UNDER SUB-SECTION (38) OF SECTION 10 24,22,20,566/- 75.6% DIVIDEND INCOME EXEMPT UNDER SUB-SECTION (34) OF SECTION 10 7,88,64,220/- 24.44% INTEREST INCOME ON UNIT SCHEME 1964 EXEMPT UNDER SUB-SECTION (35) OF SECTION 10 16,32,987/ - 0.50% TOTAL 32,27,17,773/- 100% 3.14. LD. CIT(A) OBSERVED THAT AS PER CLAUSE (F) OF EXPLANATION 1 TO SEC. 115JB(2), ONLY THE EXPENDITURE RELATING TO INC OME OTHER THAN INCOME ASSESSABLE U/S 10(38) WAS TO BE ADDED WHILE CALCULATING BOOK PROFITS U/S 115JB PROFITS. HE, ACCORDINGLY, DIRECTE D THE AO TO ADD 7 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. ONLY RS. 22,93,407/- (BEING 24.9% OF RS. 91,95,698/ -) OF THE DISALLOWANCE OF EXPENDITURE UPHELD BY HIM. REVENUE IS AGGRIEVED BY THE FINDING OF LD. CIT(APPEALS) IN CONSIDERING ONL Y RS. 22,93,407/- INSTEAD OF RS.91,95,698/- FOR MAKING ADJUSTMENT OF DISALLOWANCE COMPUTED UNDER SECTION 14A, READ WITH RULE 8D, WHIL E COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT. 3.15. AS REGARDS THE DISALLOWANCE OF SUM OF RS. 89 ,686/- U/S 94(7) BY AO, THE ASSESSEE POINTED OUT BEFORE LD. CIT(A) T HAT THERE HAS BEEN AN ARITHMETICAL ERROR IN COMPUTATION OF DISALLOWANC E U/S 94(7). THE COMPUTATION WAS DONE WITH RESPECT TO DATE OF RECEIP T OF DIVIDEND WHILE SECTION 94(7) SPECIFIES THE REFERENCE DATE AS THE RECORD DATE. HE, ACCORDINGLY, REVISED COMPUTATION U/S 94(7) WITH REF ERENCE TO RECORD DATE, WHICH WAS SUBMITTED BEFORE LD. CIT(A), ACCOR DING TO WHICH DISALLOWANCE WORKED OUT TO RS. 2,884/- ONLY, WHICH, LD. CIT(A) REFERRED TO THE AO FOR VERIFICATION. 3.16. AS REGARDS THE ADDITION OF RS. 4,02,58,032/- AS NOTIONAL INTEREST INCOME ON INTEREST FREE LOANS AND ADVANCES GIVEN BY THE ASSESSEE, LD. CIT(A) DELETED THE ADDITION, INTER ALIA, OBSERVING THAT ASSESSEE HAD NOT CLAIMED ANY INTEREST EXPENDITURE AND THE AO COU LD NOT CHARGE INTEREST ON AMOUNTS ADVANCED ON NOTIONAL BASIS DIS REGARDING THE FACT THAT THERE WAS NO FINDING BY THE AO THAT THE ASSESS EE ACTUALLY RECEIVED INTEREST AMOUNT. 3.17. BEING AGGRIEVED WITH THE ORDER OF LD. CIT(A) THE DEPARTMENT HAS FILED APPEAL BEFORE THE ITAT IN WHICH FOLLOWING GROUNDS WERE RAISED: 1. ' ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LD. CIT(A) HAS ERRED IN DELETING THE ADD ITION OF RS. 1,90,55,561/- MADE U/S/14A OF THE I.T. ACT 1961 BY 8 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. HOLDING THAT THE AO FAILED TO GIVE A FINDING THAT S OME EXPENSES WERE INCURRED FOR EARNING EXEMPT INCOME AN D THAT THERE WAS NO INTEREST PAYMENT AND HENCE DISALL OWANCE UNDER RULE 8D(I)AND 8D(II)WAS NOT CALLED FOR.' 2. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A) ERRED IN DIRECTING THAT THE SUM OF RS.L,90,55,561/- BE NOT TREATED AS INCOME OF THE AS SESSEE COMPANY WHILE COMPUTING BOOK PROFITS U/S 115JB IF T HE INCOME TAX ACT,1961.' 3.'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) ERRED IN GIVING DIRECTIONS T O THE AO TO VERIFY THE CALCULATIONS U/S 94(7) OF THE INCO ME TAX ACT,1961 WITHOUT THERE BEING NO BASIS FOR THAT.' '4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A) ERRED IN DELETING AN ADDITIO N OF RS.4,02,5S,032/- ON ACCOUNT OF INTEREST INCOME WITH OUT APPRECIATING THE FACTS THAT THE ASSESSEE HAD FAILED TO JUSTIFY AND EXPLAIN NON- CHARGING OF INTEREST FROM VARIOUS PARTIES WITHOUT ANY BASIS.' 5. 'THE APPELLANT CRAVES LEAVE FOR RESERVING THE RI GHT TO AMEND, MODIFY, ALTER, ADD OR FOREGO ANY GROUND (S) OF APPEAL AT ANY TIME BEFORE OR DURING THE HEARING OF APPEAL.' 3.18. THEREAFTER ON 25-2-2014 THE ASSESSEE FILED CR OSS-OBJECTIONS, TAKING FOLLOWING GROUNDS: 1. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN CONFIRMING THE DISALLO WANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 14A THE INCOME TAX ACT, 1961 ('THE ACT') TO THE EXTENT OF R S. 91.95,698 BY OBSERVING THAT FOR THE PURPOSE OF COMP UTING DISALLOWANCE UNDER RULE 8D OF THE INCOME TAX RULES, 1962 ('THE RULES'), TOTAL INVESTMENTS AS APPEARING IN THE BALANCE SHEET NEEDS TO BE CONSIDERED AS AGAINST THO SE INVESTMENTS WHICH ARE CAPABLE OF EARNING EXEMPT INC OME. 2. THAI THE COMMISSIONER OR INCOME TAX ( APPEALS) ERRED ON FACTS AND IN LAW IN UPHOLDING THE ACTION O F THE ASSESSING OFFICER IN MAKING UPWARD ADJUSTMENT OF DISALLOWANCE COMPUTED UNDER SECTION 14A, READ WITH RULE 8D, WHILE COMPUTING 'BOOK PROFIT' UNDER SECTION 115 JB OF THE ACT. 2.1 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) E RRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE DISALLOWANCE COMPUTED UNDER SECTION 14A OF THE ACT READ 9 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. WITH RULE 8D OF THE RULES DOES NOT REPRESENT ACTUAL EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME AND THE SAME, THEREFORE, NEED NOT TO BE ADDED BACK WHILE COMPUTING 'BOOK PROFIT' UNDER SECTION 115JB OF THE ACT. 3.19. THE ASSESSEE HAS FILED APPLICATION FOR CONDON ATION OF DELAY IN FILING THE MEMORANDUM OF CROSS OBJECTIONS. IT IS ST ATED IN THE PETITION THAT THERE IS A DELAY OF APPROXIMATELY 686 DAYS IN FILING THE CROSS OBJECTION IS BECAUSE WHEN THE APPEAL WAS DECIDED BY LD. CIT(APPEALS), THE THEN COUNSEL ADVISED FOR NOT FILI NG THE APPEAL/CROSS OBJECTION. HOWEVER, THE CROSS-OBJECTION HAS BEEN FI LED ON LEGAL ADVICE OF NEW COUNSEL, ENGAGED BY ASSESSEE. FURTHER, FROM THE FACTS NARRATED IN THE PETITION, IT IS EVIDENT THAT SINCE NO EFFECT IVE HEARING TOOK PLACE BETWEEN 4-4-2012 TO 10-2-2014, THE ASSESSEE WAS PR EVENTED BY REASONABLE CAUSE FROM RAISING THE VARIOUS ISSUES BE FORE TRIBUNAL BY INVOKING RULE 27. CONSIDERING THESE FACTS IN ORDER TO IMPART SUBSTANTIAL JUSTICE TO ASSESSEE, WE ARE OF THE OPI NION THAT THE DELAY IN FILING THE CROSS-OBJECTION DESERVES TO BE CONDONED BECAUSE ASSESSEE IS PRIMARILY RAISING A LEGAL ISSUE AND WAS UNDER A BON A FIDE BELIEF THAT THERE WAS NO PRESSING NEED FOR FILING SEPARATE APPE AL OR FILING CROSS- OBJECTION AS PER THE ADVICE OF ITS EARLIER COUNSEL. IT IS WELL SETTLED LAW THAT IF ASSESSEE IS ACTING UNDER A LEGAL ADVICE TH EN, IF, PREJUDICE IS LIKELY TO BE CAUSED ON ACCOUNT OF SUCH LEGAL ADVICE , THEN THE DELAY IN PREFERRING APPEAL SHOULD BE CONDONED. WE, ACCORDING LY, CONDONE THE DELAY IN FILING THE CROSS-OBJECTION. 3.20. THEREAFTER, VIDE FURTHER ORDER DATED 10-9-201 4 THE CROSS OBJECTION, FILED BY ASSESSEE, WAS ALSO DIRECTED TO BE LISTED ALONG WITH THE APPEAL BEFORE THE SPECIAL BENCH FOR DISPOSAL IN ACCORDANCE WITH LAW. ACCORDINGLY, WE FIRST PROCEED TO DECIDE THE MA IN QUESTION REFERRED FOR DECISION OF SPECIAL BENCH. 10 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. FIRST WE WILL TAKE UP THE DEPARTMENTAL APPEAL AS FAR AS GROUND NO. 1 IS CONCERNED, THE CONTENTIO N OF ASSESSEE BEFORE ASSESSING OFFICER AS WELL AS BEFORE LD. CIT( APPEALS) WAS THAT ASSESSEE HAD NO INTEREST BEARING LOANS AND HENCE T HERE WAS NO LIABILITY TO PAY INTEREST. FURTHER, NO INTEREST EXP ENDITURE HAD BEEN INCURRED OR CLAIMED IN THE P/L ACCOUNT. THEREFORE, NO DISALLOWANCE WAS MADE BY LD. CIT(APPEALS) INVOKING RULE 8D(2)(I) AND RULE 8D(2)(II). NOTHING HAS BEEN BROUGHT ON RECORD TO CO NTROVERT THE FINDINGS OF LD. CIT(APPEALS) BY REVENUE. WE, THEREF ORE, DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDINGS OF LD. CI T(APPEALS). IN THE RESULT THIS GROUND IS DISMISSED. 4. AT THE OUTSET LD. COUNSEL SUBMITTED THAT KEEPING IN VIEW THE VARIOUS GROUNDS RAISED BY THE DEPARTMENT AND IN CRO SS OBJECTION, THE QUESTION REFERRED FOR ADJUDICATION BEFORE SPECIAL B ENCH MAY BE REFRAMED AS UNDER: WHETHER IN TERMS OF CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB, ANY ADJUSTMENT IS REQUIRED TO BE MADE FOR TH E DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 WHILE COMPUTI NG BOOK PROFIT OF THE APPELLANT ON THE GROUND THAT T HE SAME REPRESENTS THE ACTUAL EXPENDITURE INCURRED FOR EARN ING OF THE EXEMPT INCOME 4.1. LD. COUNSEL REFERRED TO RELEVANT PROVISIONS OF CLAUSE (F) TO EXPLANATION 1 TO SECTION 115JB WHICH ARE REPRODUCED HEREUNDER: 'SPECIAL PROVISION FOR PAYMENT OF TAX BY CERTAIN COMPANIES. 115JB. (1) NOTWITHSTANDING ANYTHING CONTAINED IN AN Y OTHER PROVISION OF THIS ACT, WHERE IN THE CASE OF A N ASSESSEE, BEING A COMPANY, THE INCOME-TAX, PAYABLE ON THE TOTAL INCOME AS COMPUTED UNDER THIS ACT IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMME NCING ON OR AFTER THE 1ST DAY OF APRIL, 2012, IS LESS THA N EIGHTEEN 11 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. AND ONE-HALF PER CENT OF ITS BOOK PROFIT, SUCH BOOK PROFIT SHALL BE DEEMED TO BE THE TOTAL INCOME OF THE ASSES SEE AND THE TAX PAYABLE BY THE ASSESSEE ON SUCH TOTAL INCOM E SHALL BE THE AMOUNT OF INCOME-TAX AT THE RATE OF EIGHTEEN AND ONE-HALF PER CENT. (2) EVERY ASSESSEE,- (A) BEING A COMPANY, OTHER THAN A COMPANY REFERRED TO IN CLAUSE (B), SHALL, FOR THE PURPOSES OF THIS SECTION , PREPARE ITS PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIO US YEAR IN ACCORDANCE WITH THE PROVISIONS OF PART II OF SCHEDU LE VI TO THE COMPANIES ACT, 1956 (1 OF 1956); OR . EXPLANATION 1 - FOR THE PURPOSES OF THIS SECTION, ' BOOK PROFIT' MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UND ER SUB- SECTION (2), AS INCREASED BY- ------------ (F) THE AMOUNT OR AMOUNTS OF EXPENDITURE RELATABLE TO ANY INCOME TO WHICH SECTION 10 (OTHER THAN PROVISIONS CONTAINED IN CLAUSE (38) THEREOF) OR SECTION 11 OR SECTION 12 APPLY; --------------- IF ANY AMOUNT REFERRED TO IN CLAUSES (A) TO (I) IS DEBITED TO THE PROFIT AND LOSS ACCOUNT, AND AS REDUCED BY- (I) THE AMOUNT OF INCOME TO WHICH ANY OF THE PROVISIONS OF [SECTION 10 (OTHER THAN THE PROVISION S CONTAINED IN CLAUSE (38) THEREOF) J OR SECTION 11 O R SECTION 12 APPLY, IF ANY SUCH AMOUNT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT; OR 4.2. LD. COUNSEL HAS FILED DETAILED SUBMISSIONS BY WAY OF BROAD PROPOSITIONS, WHICH ARE PLACED ON RECORD, IN WHICH, ON THIS ASPECT, IT HAS BEEN POINTED OUT THAT SECTION 14A CANNOT BE R EAD INTO IN SECTION 115JB FOR THE FOLLOWING REASONS: I. SECTION 115JB IS A COMPLETE CODE IN ITSELF AND IT O VERRIDES ALL OTHER PROVISIONS OF THE ACT . THE BOOK PROFIT IS DEEMED TO BE TOTAL INCOME OF ASSESSEE AND PROVIDES MECHANISM FOR COMPUTING SU CH BOOK PROFIT AND CONSEQUENTIAL TAX LIABILITY THEREON. HE , INTER -ALIA, RELIED ON THE 12 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. DECISION OF HONBLE SUPREME COURT IN THE CASE OF A JANTA PHARMA LTD. V. CIT 327 ITR 305 II. SECTION 115JB BY A DEEMING FICTION DEEMS BOOK PROF IT AS THE TOTAL INCOME OF THE ASSESSEE, AT VARIANCE WITH THE INCOM E COMPUTED UNDER NORMAL PROVISIONS OF THE ACT. HE RELIED ON THE DECI SION IN THE CASE OF AJANTA PHARMA LTD. (SUPRA) AND ALSO ON CIT V. NALWA SONS INVESTMENTS LTD. 327ITR 543 (DELHI) III. SECTION 115JB OF THE ACT DOES NOT AUTHORIZE THE AO TO GO BEYOND THE AUDITED FINANCIAL STATEMENT OF THE ASSESSEE. HE, IN TER-ALIA, RELIED ON THE DECISION IN THE CASE OF APOLLO TYRES 255 ITR 273(SC ) 4.3. HE, ACCORDINGLY, SUBMITTED THAT THERE COULD NO T BE ANY ROOM FOR MAKING ADJUSTMENT IN ACCORDANCE WITH ANY OTHER PROV ISION OF THE ACT, EXCEPT TO THE EXTENT SPECIFIED UNDER EXPLANATION 1 TO THAT SECTION. 4.4. LD. COUNSEL SUBMITTED THAT TAX LIABILITY U/S 1 15JB OF THE ACT IS TO BE WORKED OUT ONLY ON THE BASIS OF ADJUSTED BOOK PROFIT AND NOT ON THE BASIS OF INCOME/ PROFIT COMPUTED UNDER REGULAR PROVISIONS OF THE ACT. 4.5. TO BUTTRESS HIS SUBMISSION LD. COUNSEL POINTED OUT THAT CLAUSE (IV) OF EXPLANATION 1 TO SECTION 115JB (AS APPLICA BLE UP TO ASSESSMENT YEAR 2005-06) PROVIDED THAT BOOK PROFIT HAD TO BE REDUCED BY THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION U/S 80HHC, COMPUTED UNDER CLAUSE (A) OR CLAUSE (B) OR CLAUSE (C) OF SUB -SECTION (3) OR SUB- SECTION (3A), AS THE CASE MAY BE, OF THAT SECTION. HE POINTED OUT THAT, AS PER THE ASSESSEE, THE BOOK PROFIT HAD TO BE REDU CED BY THE AMOUNT OF DEDUCTION ADMISSIBLE, COMPUTED WITH REFERENCE T O BOOK PROFIT. THE REVENUE, ON THE OTHER HAND, CONTENDED THAT DEDUCTIO N U/S 80HHC ADMISSIBLE UNDER THE NORMAL PROVISIONS OF THE ACT, HAD ONLY TO BE REDUCED FROM THE BOOK PROFIT. HE POINTED OUT THAT I T WAS HELD THAT SECTION 115J/ 115JA/ 115JB BEING COMPLETE CODE, DED UCTION ADMISSIBLE U/S 80HHC, TO BE REDUCED FROM BOOK PROFI T, IN TERMS OF CLAUSE (IV) OF THE EXPLANATION HAD TO BE COMPUTED W ITH 13 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. REFERENCE TO BOOK PROFIT. HE HAS RELIED ON VARIOUS DECISIONS IN SUPPORT OF HIS CONTENTION. 4.6. LD. COUNSEL FURTHER POINTED OUT THAT IN CERTAI N DECISIONS, IN CONTEXT OF PROVISIONS OF CLAUSE (III) OF EXPLANATIO N 1 TO SECTION 115JB OF THE ACT, IT HAS BEEN HELD THAT LOWER OF LOSS OR UNABSORBED DEPRECIATION HAD TO BE DETERMINED IN ACCORDANCE WIT H THE FIGURES APPEARING IN THE BOOKS OF A/C AND NOT ON THE BASIS OF NORMAL PROVISIONS. 4.7. LD. COUNSEL HAS SUBMITTED THAT CLAUSE (F) AND CLAUSE (II) OF SECTION 115JB ARE BASED ON MATCHING PRINCIPLES OF A CCOUNTING. THE WRITTEN SUBMISSIONS ARE REPRODUCED HEREUNDER: 4. CLAUSE (F) AND CLAUSE (II) OF SECTION 115JB BASE D ON MATCHING PRINCIPLE OF ACCOUNTANCY. MAT REGIME WAS FIRST INTRODUCED BY INSERTION OF SEC TION 115J VIDE FINANCE ACT, 1987 W.E.F. 01.04.1988, AND LATER SUBSTITUTED BY SECTION 115JA OF THE ACT W.E.F. 01.0 4.1997. UNDER BOTH THESE SECTIONS, THE ABOVE CLAUSES (II) A ND CLAUSE (F) OF SECTION 115JB OF THE ACT DID FIND MEN TION IN THE EXPLANATION TO THAT SECTIONS INASMUCH AS WHILE COMPUTING ADJUSTED BOOK PROFIT, EXEMPT INCOME CREDI TED TO THE PROFIT AND LOSS ACCOUNT WAS REQUIRED TO BE EXCL UDED AND SIMULTANEOUSLY, UPWARD ADJUSTMENT WAS TO BE MAD E ON ACCOUNT OF CORRESPONDING ACTUAL EXPENDITURE DEBITED TO THE PROFIT AND LOSS ACCOUNT RELATABLE THERETO. THIS TRE ATMENT IS, IN OUR RESPECTFUL SUBMISSION, BASED ON THE MATCHING PRINCIPLE OF ACCOUNTANCY WHICH PROVIDES THAT EXPENS ES ARE RECOGNIZED IN THE PROFIT AND LOSS ACCOUNT ONLY TO T HE EXTENT RELATABLE TO THE ACCRUAL OF THE CORRESPONDING INCOM E. THE MATCHING PRINCIPLE FINDS MENTION UNDER THE ACCR UAL CONCEPT, WHICH IS ONE OF THE FUNDAMENTAL ACCOUNTING ASSUMPTIONS, OUTLINED IN ACCOUNTING STANDARD-L 'DISCLOSURE OF ACCOUNTING POLICIES' ISSUED BY THE I NSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA ( ICAI). REFERENCE, IN THIS REGARD, MAY ALSO BE MADE TO THE FRAMEWORK ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA ('ICAI') [SEE PAGES 498-503 @5 01 OF THE PAPER BOOK], WHEREIN IT HAS BEEN MENTIONED AS U NDER: 14 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. '93. EXPENSES ARE RECOGNIZED IN THE STATEMENT OF PR OFIT AND LOSS WHEN A DECREASE IN FUTURE ECONOMIC BENEFITS RE LATED TO A DECREASE IN AN ASSET OR AN INCREASE OF A LIABILIT Y HAS ARISEN THAT CAN BE MEASURED RELIABLY. THIS MEANS, I N EFFECT, THAT RECOGNITION OF EXPENSES OCCURS . SIMULTANEOUSL Y WITH THE RECOGNITION OF AN INCREASE 'OF LIABILITIES OR A DECREASE IN ASSETS (FOR EXAMPLE; THE ACCRUAL OF EMPLOYEES', SALARIES OR THE DEPRECIATION OF PLANT AND MACHINERY). 94. MAN V EXPENSES ARE RECOGNISED IN THE STATEMENT OF PROFIT AND LOSS ON THE BASIS OF A DIRECT ASSOCIATIO N BETWEEN THE COSTS INCURRED AND THE EARNING OF SPECIFIC ITEM S OF INCOME. THIS PROCESS, COMMONLY REFERRED TO AS THE MATCHING OF COSTS WITH REVENUES, INVOLVES THE SIMULTANEOUS OR COMBINED RECOGNITION OF REVENUES AND EXPENSES THAT RESULT DIRECTLY AND JOINTLY FROM THE SAME TRANSACTIONS OR OTHER EVENTS; FOR EXAMPLE, THE VARIOUS COMPONENTS OF EXPE NSE MAKING UP THE COST OF GOODS SOLD ARE RECOGNISED AT THE SAME TIME AS THE INCOME DERIVED FROM THE SALE OF TH E GOODS. HOWEVER, THE APPLICATION OF THE MATCHING CON CEPT UNDER THIS FRAMEWORK DOES NOT ALLOW THE RECOGNITION OF ITEMS IN THE BALANCE SHEET WHICH DO NOT MEET THE DE FINITION OF ASSETS OR LIABILITIES.' (EMPHASIS SUPPLIED) ON PERUSAL OF THE ABOVE EXTRACTS OF THE FRAMEWORK, IT WILL BE APPRECIATED THAT UNDER THE MATCHING PRINCIPLE, O NLY THOSE COSTS ARE RECOGNIZED IN THE PROFIT AND LOSS A CCOUNT WHICH HAVE DIRECT ASSOCIATION WITH THE EARNING OF I NCOME. THE ABOVE MATCHING PRINCIPLE HAS ALSO BEEN DISCUSSE D BY THE SUPREME COURT IN THE CASE OF ROTORK CONTROLS IN DIA PVT. LTD. V. CIT: 314 ITR 62 @ 73, WHILE UPHOLDING DEDUCTION OF WARRANTY LIABILITY PROVIDED IN THE BOO KS, AS UNDER: '13. IN THIS CASE' WE ARE CONCERNED WITH PRODUCT WARRANTIES. TO GIVE AN EXAMPLE OF PRODUCT WARRANTIES, A COMPANY DEALING IN COMPUTERS GIVES WARRANTY FOR A PERIOD OF 36 MONTHS FROM THE DATE OF SUPPLY. THE SAID COMPANY CONSIDERS FOLLOWING OPTIONS: (A) ACCOUNT FOR WARRANTY EXPENSE IN THE YEAR IN WHICH IT IS INCURRED; (B) IT MAKES A PROVISION FOR WARRANTY ONLY WHEN THE CUSTOMER MAKES A CLAIM; AND (C) IT PROVIDES FOR WARRANTY AT 2 PER CENT OF TURNOVER OF THE COMPANY BASED ON PAST EXPERIENCE {HISTORICAL TREND}. THE FIRST OPTION IS UNSUSTAINABLE SINCE IT WOULD TANTAMOUNT TO 15 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. ACCOUNTING FOR WARRANTY EXPENSES ON CASH BASIS, WHICH IS PROHIBITED BOTH UNDER THE COMPANIES ACT. AS WELL AS BY THE ACCOUNTING STANDARDS WHICH REQUIRE ACCRUAL CONCEPT TO BE FOLLOWED. IN THE PRESENT CASE, THE DEPARTMENT IS INSISTING ON THE FIRST OPTION WHICH, AS STATED ABOVE, IS ERRONEOUS AS IT RULES OUT THE ACCRUAL CONCEPT. THE SECOND OPTION IS ALSO INAPPROPRIATE SINCE IT DOES NOT REFLECT THE EXPECTED WARRANTY COSTS IN RESPECT OF REVENUE ALREADY RECOGNIZED (ACCRUED). IN OTHER WORDS, IT IS NOT BASED ON MATCHING CONCEPT. UNDER THE MATCHING CONCEPT, IF REVENUE IS RECOGNIZED THE COST INCURRED TO EARN THAT REVENUE INCLUDING WARRANTY COSTS HAS TO BE FULLY PROVIDED (OR. WHEN VALVE ACTUATORS ARE SOLD AND THE WARRANTY COSTS ARE AN INTEGRAL PART O(THAT SALE PRICE THEN THE APPELLANT HAS TO PROVIDE (OR SUCH WARRANTY COSTS IN ITS ACCOUNT (OR THE RELEVANT YEAR, OTHERWISE THE MATCHING CONCEPT (AILS. IN SUCH A CASE THE SECOND OPTION IS ALSO INAPPROPRIATE. UNDER THE CIRCUMSTANCES, THE THIRD OPTION IS MOST APPROPRIATE BECAUSE IT FULFILS ACCRUAL CONCEPT AS WELL AS THE MATCHING CONCEPT. FOR DETERMINING AN APPROPRIATE HISTORICAL TREND, IT IS IMPORTANT THAT THE COMPANY HAS A PROPER ACCOUNTING SYSTEM FOR CAPTURING RELATIONSHIP BETWEEN THE NATURE OF THE SALES, THE WARRANTY PROVISIONS MADE AND THE ACTUAL EXPENSES INCURRED AGAINST IT SUBSEQUENTLY. THUS, THE DECISION ON THE WARRANTY PROVISION SHOULD BE BASED ON PAST EXPERIENCE OF THE COMPANY. A DETAILED ASSESSMENT OF THE WARRANTY PROVISIONING POLICY IS REQUIRED PARTICULARLY IF THE EXPERIENCE SUGGESTS THAT WARRANTY PROVISIONS ARE GENERALLY REVERSED IF THEY REMAINED UNUTILIZED AT THE END OF THE PERIOD PRESCRIBED IN THE WARRANTY. THEREFORE, THE COMPANY SHOULD SCRUTINIZE THE HISTORICAL TREND OF WARRANTY PROVISIONS MADE AND THE ACTUAL EXPENSES INCURRED AGAINST IT. ON THIS BASIS A SENSIBLE ESTIMATE SHOULD BE MADE. THE WARRANTY PROVISION FOR THE PRODUCTS SHOULD BE BASED ON THE ESTIMATE AT YEAR END OF FUTURE WARRANTY EXPENSES. SUCH ESTIMATES 16 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. NEED REASSESSMENT EVERY YEAR. AS ONE REACHES CLOSE TO THE END OF THE WARRANTY PERIOD, THE PROBABILITY THAT THE WARRANTY EXPENSES WILL BE INCURRED IS CONSIDERABLY REDUCED AND THAT SHOULD BE REFLECTED IN THE ESTIMATION AMOUNT. WHETHER THIS SHOULD BE DONE-THROUGH A PRO - RATA REVERSAL OR OTHERWISE WOULD REQUIRE ASSESSMENT OF HISTORICAL TREND. IF WARRANTY PROVISIONS ARE BASED ON EXPERIENCE AND HISTORICAL TREND(S) AND IF THE WORKING IS ROBUST THEN THE QUESTION OF REVERSAL IN THE SUBSEQUENT TWO YEARS, IN THE ABOVE EXAMPLE, MAY NOT ARISE IN A SIGNIFICANT WAY. IN OUR VIEW, ON THE FACTS AND CIRCUMSTANCES OF THIS CASE, PROVISION FOR WARRANTY IS RIGHTLY MADE BY THE APPELLANT-ENTERPRISE BECAUSE IT HAS INCURRED A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS. THERE IS ALSO AN OUTFLOW OF RESOURCES. A RELIABLE ESTIMATE OF THE OBLIGATION WAS ALSO POSSIBLE: THEREFORE, THE APPELLANT HAS INCURRED A LIABILITY, ON THE FACTS AND CIRCUMSTANCES OF THIS CASE, DURING THE RELEVANT ASSESSMENT YEAR WHICH WAS ENTITLED TO DEDUCTION UNDER SECTION 37 OF THE 1961 ACT. THEREFORE, ALL THE THREE CONDITIONS FOR RECOGNIZING A LIABILITY FOR THE PURPOSES OF PROVISIONING STANDS SATISFIED IN THIS CASE. IT IS IMPORTANT TO NOTE THAT THERE ARE FOUR IMPORTANT ASPECTS OF PROVISIONING. THEY ARE - PROVISIONING WHICH RELATES TO PRESENT OBLIGATION, IT ARISES OUT OF OBLIGATING EVENTS, IT INVOLVES OUTFLOW OF RESOURCES AND LASTLY IT INVOLVES RELIABLE ESTIMATION OF OBLIGATION. KEEPING IN MIND ALL THE FOUR ASPECTS, WE ARE OF THE VIEW THAT THE HIGH COURT SHOULD NOT TO HAVE INTERFERED WITH THE DECISION OF THE TRIBUNAL IN THIS CASE. ' (EMPHASIS SUPPLIED) IN VIEW OF THE ABOVE, IT WILL BE NOTICED THAT MATCH ING PRINCIPLE OF ACCOUNTANCY IS CLEARLY EMBEDDED UNDER THE MAT REGIME INASMUCH AS WHILE EXCLUDING EXEMPT INCOM E CREDITED TO THE PROFIT & LOSS ACCOUNT IN TERMS OF C LAUSE (II), PROFITS ARE CONSEQUENTLY ADJUSTED BY ADDING B ACK EXPENDITURE ACTUALLY RELATABLE THERETO WHICH IS DEB ITED TO THE PROFIT AND LOSS ACCOUNT. READING CLAUSE (T) AND CLAUSE (II) OF EXPLANATION T O SECTION 115JB OF THE ACT TOGETHER, IT IS THE SUBMISSION OF THE ASSESSEE RESPONDENT THAT ONLY EXPENSES DEBITED TO T HE 17 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. PROFIT AND LOSS ACCOUNT WHICH HAVE DIRECT AND PROXI MATE NEXUS WITH THE EXEMPT INCOME CREDITED TO THE PROFIT AND LOSS ACCOUNT, WHICH IS EXCLUDED IN TERMS OF CLAUSE (II), HAVE TO BE ADDED BACK. 4.8. LD. COUNSEL SUBMITTED THAT SECTION 14A CONTEMP LATES DISALLOWANCE OF BOTH DIRECT AND INDIRECT EXPENDITUR E HAVING PROXIMATE CONNECTION WITH THE EXEMPT INCOME. HE SUBMITTED THA T IN TERMS OF SUB-SECTION (1) OF SECTION 14A OF THE ACT, ANY EXPE NDITURE INCURRED IN RELATION TO EXEMPT INCOME IS NOT AN ALLOWABLE DEDUCTION THUS, T HE PRE-REQUISITE CONDITION FOR APPLYING THE PROVISIONS OF SECTION 14A OF THE ACT IS THAT SOME EXPENDITURE MUST BE INCURRED IN RELATION TO THE EARNING OF EXEMPT INCOME. THE SAID EXPRESSION IN R ELATION TO HAS BEEN JUDICIOUSLY EXPLAINED TO MEAN SOME REAL AND DO MINANT RELATIONSHIP. 4.9. IN THIS REGARD LD. COUNSEL HAS RELIED ON THE D ECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. WALFORD SHARE & STOCK BROKERS 326 ITR 1, WHEREIN IT HAS BEEN HELD BY THE APEX COU RT THAT THERE MUST BE PROXIMATE RELATIONSHIP OF EXPENDITURE WITH THE E XEMPT INCOME FOR THE PURPOSE OF MAKING DISALLOWANCE U/S 14A OF THE A CT. THIS DECISION WAS FOLLOWED BY THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. CIT 328 ITR 81. 4.10. HE FURTHER REFERRED TO THE DECISION OF HON BLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. 347 ITR 272, WHEREIN IT HAS BEEN HELD THAT NO DISALLOWANCE COULD BE MADE UN DER THE SAID SECTION WHERE NO EXPENDITURE HAD ACTUALLY BEEN IN CURRED BY THE ASSESSEE IN RELATION TO EARNING OF THE EXEMPT INCOM E. THE HONBLE DELHI HIGH COURT APPROVED THE CONTENTION RAISED BY THE ASSESSEE THAT THE TERM EXPENDITURE INCURRED APPEARING IN SEC. 1 4A(1) OF THE ACT WOULD MEAN ACTUAL EXPENDITURE INCURRED. THUS, THE P ROVISIONS OF SEC. 18 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 14A OF THE ACT WOULD BE APPLICABLE ONLY WHEN THE AS SESSEE HAD ACTUALLY INCURRED CERTAIN EXPENDITURE WHICH HAD PRO XIMATE NEXUS WITH EARNING OF EXEMPT INCOME. 4.11. LD. COUNSEL POINTED OUT THAT THE CONTENTION O F REVENUE THAT DISALLOWANCE CALCULATED U/S 14A READ WITH RULE 8D O F THE I.T. RULES SHOULD BE IPSO FACTO INCORPORATED IN CLAUSE (F) OF EXPLANATION 1 OF SECTION 115JB OF THE ACT ON THE GROUND THAT THE SCO PE OF BOTH THE PROVISIONS ARE SIMILAR IS NOT CORRECT INASMUCH AS W HILE U/S 14A THE EXPRESSION USED IS IN RELATION, U/S 115JB OF THE ACT, THE TERM USED IS RELATABLE TO. 4.12. LD. COUNSEL SUBMITTED THAT THIS REASONING IS LEGALLY UNTENABLE BECAUSE SEC. 14A CONTAINED IN CHAPTER IV OF THE ACT BEGINS WITH THE PHRASE FOR THE PURPOSES OF COMPUTING THE TOTAL INC OME UNDER THIS CHAPTER. IT WAS POINTED OUT THAT INCOME UNDER THE NORMAL PROVISIONS OF THE ACT IS COMPUTED UNDER THE FIVE HEADS SPECIFI ED IN SECTION 14. PROVISIONS RELATING TO COMPUTATION OF INCOME UNDER DIFFERENT HEADS ARE CONTAINED IN SECTIONS 14 TO 59, FORMING PART OF CHAPTER IV OF THE ACT. IN OTHER WORDS, THE SAID CHAPTER PROVIDES FOR COMPUTATION OF INCOME OF AN ASSESSEE UNDER THE NORMAL PROVISIONS O F THE ACT. AS A NECESSARY COROLLARY, PROVISIONS OF SECTION 14A CANN OT BE EXTENDED TO ANY CHAPTER, OTHER THAN CHAPTER IV OF THE ACT. 4.13. SECTION 115JB FINDS PLACE UNDER CHAPTER XII-B OF THE ACT. BEING SO, PROVISIONS OF SEC. 14A CONTAINED IN CHAPT ER IV CANNOT BE IMPORTED AND INCORPORATED U/S 115JB MORE SO WHEN CL AUSE (F) TO EXPLANATION 1 TO THE SAID SECTION CONTAINS NO REFER ENCE TO SECTION 14A OF THE ACT. 19 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 4.14. LD. COUNSEL SUBMITTED THAT IF PROVISIONS OF S EC. 14A ARE TO BE IMPORTED INTO SECTION 115JB OF THE ACT, THE SAME WO ULD TANTAMOUNT TO READING ADDITIONAL WORDS INTO THE STATUTE WHICH IS NOT PERMISSIBLE AND WOULD BE AGAINST THE CARDINAL RULE OF LITERAL INT ERPRETATION. IN THIS REGARD LD. COUNSEL HAS RELIED ON FOLLOWING DECISION S: - JUGAL KISHORE SARAF V. RAW COTTON CO. LTD. AIR 1955 SC 376, WHEREIN IT HAS BEEN OBSERVED AS UNDER: ' THE CARDINAL RULE OF CONSTRUCTION OF STATUTES IS TO READ THE STATUTES LITERALLY, THAT IS, BY GIVING TO THE WORDS THEIR OR DINARY, NATURAL AND GRAMMATICAL MEANING. IF, HOWEVER, SUCH A READING LE ADS TO ABSURDITY AND THE WORDS ARE SUSCEPTIBLE OF ANOTHER MEANING, THE C OURT MAY ADOPT THE SAME. BUT IF NO SUCH ALTERNATIVE CONSTRUCTION IS PO SSIBLE, THE COURT MUST ADOPT THE ORDINARY RULE OF LITERAL INTERPRETATION. IN THE PRESENT CASE, THE LITERAL CONSTRUCTION LEADS TO NO APPARENT ABSURDITY AND THEREFORE, THERE CAN BE NO COMPELLING REASON FOR DEPARTING FROM THAT GOLDEN RULE OF CONSTRUCTION. ' 4.15. HE ALSO RELIED ON VARIOUS OTHER SUPREME COURT DECISIONS AS MENTIONED IN THE BROAD PROPOSITION ADVANCED BY THE LD. COUNSEL. LD. COUNSEL ALSO REFERRED TO THE JURISDICTIONAL HIGH CO URT IN THE CASE OF GREAT EASTERN EXPORTS V. CIT 332 ITR 14, WHEREIN AL SO IT HAS BEEN HELD THAT IF THE LANGUAGE OF THE STATUTE IS PLAIN A ND CAPABLE OF ONE AND ONLY ONE MEANING, THAT OBVIOUS MEANING IS TO BE GIV EN TO THE SAID PROVISION. 4.17. ACCORDINGLY, LD. COUNSEL SUBMITTED THAT APPLI CABILITY OF PROVISIONS OF SEC. 14A IS CONFINED TO COMPUTATION O F TAX LIABILITY UNDER THE FIVE HEADS OF INCOME ENUMERATED IN SEC. 1 4 UNDER NORMAL PROVISIONS CONTAINED IN CHAPTER IV OF THE ACT. THE SAID SECTION 14A CANNOT BE EXTENDED AND READ INTO SECTION 115JB, FAL LING UNDER CHAPTER XII-B OF THE ACT. 20 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 4.18. LD. COUNSEL FURTHER SUBMITTED THAT SCOPE OF S ECTION 14A AND SECTION 115JB OF THE ACT ARE ENTIRELY DIFFERENT. HE SUBMITTED THAT U/S 14A OF THE ACT DISALLOWANCE IS MADE OF EXPENDITURE IN RELATION TO THE EARNING OF INCOME NOT FORMING PART OF THE TOTAL INC OME. THUS, SECTION 14A TAKES WITHIN ITS SWEEP BOTH DIRECT AND INDIRECT EXPENDITURE HAVING PROXIMATE CONNECTION WITH EARNING OF EXEMPT INCOME. HOWEVER, UNDER CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB OF THE ACT, ONLY THOSE EXPENDITURE DEBITED TO THE PROFIT AND LOSS AM OUNT, WHICH ARE RELATABLE TO EARNING OF INCOME EXEMPT U/S 10 (EXCLU DING SECTION 10(38) OR SECTION 11 OR SECTION 12 ARE ADDED BACK W HILE COMPUTING ADJUSTED BOOK PROFIT. THUS, ONLY DIRECT EXPENDITURE ASSOCIATED WITH THE EARNING OF SAID INCOME WOULD BE ADDED BACK. 4.19. LD. SENIOR COUNSEL VIDE HIS PETITION DT. OCTO BER 8, 2016, POINTED OUT THAT HONBLE DELHI HIGH COURT IN THE CA SE OF PR. CIT V. BHUSHAN STEEL LTD.:ITA NO.593/2015 HAS UPHELD THE D ECISION OF THE TRIBUNAL IN HOLDING THAT DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D CANNOT BE ADDED WHILE COMPUTING BOOK PROFIT S AS PER SECTION 115JB AS EXPLANATION TO THAT SECTION DOES NOT SPECI FICALLY MENTIONS SECTION 14A OF THE INCOME TAX ACT, 1961. HE FURTHE R POINTED OUT THAT REVIEW PETITION FILED BY REVENUE HAS BEEN DISMISSED BY HON,BLE HIGH COURT VIDE ORDER DT. 3-3-17. HE, THEREFORE, SUBMITT ED THAT NOW THIS DECISION HOLDS THE FIELD. 5. LD. PRINCIPAL CIT(DR), SHRI S.D. SRIVASTAVA, AT THE OUTSET SUBMITTED THAT IN ORDER TO APPRECIATE THE REAL CONT ROVERSY, IT IS NECESSARY TO FIND OUT THE INTENTION BEHIND THE INSE RTION OF SECTION 14A. IN THIS REGARD HE REFERRED TO MEMORANDUM, EXPLAININ G THE PROVISION --- 248 ITR (STAT.) 162 PAGE 195, WHEREIN IT HAS BEEN H ELD AS UNDER: 21 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 'NO DEDUCTION FOR EXPENDITURE INCURRED IN RESPECT O F EXEMPT INCOME AGAINST TAXABLE INCOME CERTAIN INCOM ES ARE NOT INCLUDIBLE WHILE COMPUTING THE TOTAL INCOME AS THESE ARE EXEMPT UNDER VARIOUS PROVISIONS OF THE AC T. THERE HAVE BEEN CASES WHERE DEDUCTIONS HAVE BEEN CLAIMED IN RESPECT OF SUCH EXEMPT INCOME. THIS IN E FFECT MEANS THAT THE TAX INCENTIVE GIVEN BY WAY OF EXEMPT IONS TO CERTAIN CATEGORIES OF INCOME IS BEING USED TO REDUC E ALSO THE TAX PAYABLE ON THE NON- EXEMPT INCOME BY DEBITI NG THE EXPENSES INCURRED TO EARN THE EXEMPT INCOME AGAINST TAXABLE INCOME. THIS IS AGAINST THE BASIC PRINCIPLE S OF TAXATION WHEREBY ONLY THE NET INCOME, I.E., GROSS I NCOME MINUS THE EXPENDITURE, IS TAXED. ON THE SAME ANALOG Y, THE EXEMPTION IS ALSO IN RESPECT OF THE NET INCOME. EXP ENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IT IS PROPOSED TO INSERT A NEW SECTION 14A SO AS TO CLARIFY THE INTENTION OF THE LEGISLATURE SINCE THE INCEPTIO N OF THE INCOME- TAX ACT, 1961, THAT NO DEDUCTION SHALL BE M ADE IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE INCOME- TAX ACT. THE PROPOSED AMENDMENT WILL TAKE EFFECT RETROSPECTI VELY FROM APRIL 1, 1962, AND WILL ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YEAR 1962-63 AND SUBSEQUENT ASSES SMENT YEARS. 5.1. LD. PRINCIPAL CIT(DR) POINTED OUT THAT IN PUR SUANCE OF THIS AMENDMENT, CIRCULAR NO. 14 WAS ISSUED. HE POINTED O UT THAT THIS AMENDMENT WAS A FALL OUT OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF RAJASTHAN STATE WAREHOUSING CORPORAT ION VS. CIT 242 ITR 450, RENDERED ON 23-2-2000 AND OTHER JUDGMENTS LAYING DOWN THE SAME RATIO DECIDENDI, AS UNDER: THE FOLLOWING PRINCIPLES MAY BE LAID DOWN: (I) IF THE INCOME OF AN ASSESSEE IS DERIVED FROM VARIOUS HEADS OF INCOME, HE IS ENTITLED TO CLAIM DEDUCTION PERMISSIB LE UNDER THE RESPECTIVE HEAD, WHETHER OR NOT COMPUTATION UND ER EACH HEAD RESULTS IN TAXABLE INCOME; (II) IF THE IN COME OF AN ASSESSEE ARISES UNDER ANY OF THE HEADS OF INCOME BUT FROM DIFFERENT ITEMS, E.G., DIFFERENT HOUSE PROPERT IES OR DIFFERENT SECURITIES, ETC., AND INCOME FROM ONE OR MORE ITEMS ALONE IS TAXABLE WHEREAS INCOME FROM THE OTHE R ITEM IS EXEMPT UNDER THE ACT, THE ENTIRE PERMISSIBLE EX PENDITURE 22 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. IN EARNING THE INCOME FROM THAT HEAD IS DEDUCTIBLE; AND (III) IN COMPUTING THE 'PROFITS AND GAINS OF BUSIN ESS OR PROFESSION WHEN AN ASSESSEE IS CARRYING ON BUSINESS IN VARIOUS VENTURES AND SOME AMONG THEM YIELD TAXABLE INCOME AND THE OTHERS DO NOT, THE QUESTION OF ALLOW ABILITY OF THE EXPENDITURE UNDER SECTION 37 OF THE INCOME-T AX ACT, 1961, WILL DEPEND ON : (A) FULFILLMENT OF REQUIREME NTS OF THAT PROVISION, NAMELY, THAT (I) THE EXPENDITURE SH OULD NOT BE IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE; (II) IT SHOULD HAVE BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION; AND (III) IT SHOULD HAVE BE EN EXPENDED IN THE PREVIOUS YEAR; AND (B) ON THE FACT WHETHER ALL THE VENTURES CARRIED ON BY HIM CONSTITUTED ONE INDIVISIBLE BUSINESS OR NOT; IF THEY DO THE ENTIRE EXPENDITURE WILL BE PERMISSIBLE DEDUCTION, BUT IF THEY DO NOT, THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDITURE WILL APPLY, BECAUSE THERE WILL BE NO NEXUS BETWEEN THE EXPENDIT URE ATTRIBUTABLE TO THE VENTURE NOT FORMING AN INTEGRA L PART OF THE BUSINESS AND THE EXPENDITURE SOUGHT TO BE DEDUC TED AS THE BUSINESS EXPENDITURE OF THE ASSESSEE. 5.2. THUS, THE LEGISLATIVE INTENT WAS THAT NO DEDUC TION WAS TO BE ALLOWED IN RESPECT OF ANY EXPENDITURE INCURRED BY T HE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE INCOME-TAX ACT. IT HAS FURTHER BEEN MADE CLEAR THAT THE PURPOSE OF INSERTION OF SECTION 14A WAS NOT TO MAKE ANY DISALL OWANCE OF EXPENDITURE IN RELATION TO THE EXEMPT INCOME FOR TH E FIRST TIME, BUT IT WAS ALWAYS THE INTENTION OF THE ACT FOR NOT ALLOWIN G SUCH DEDUCTION AND THIS INSERTION WAS MADE ONLY TO CLARIFY THE INT ENTION OF THE LEGISLATURE AS IT WAS SINCE INCEPTION. HE POINTED O UT THAT SINCE SECTION 14A DID NOT PROVIDE THE METHOD OF COMPUTING THE EXP ENDITURE, THEREFORE, BY FINANCE BILL 2006, SUB-SECTION (2) TO SECTION 14A WAS INSERTED SO AS TO PROVIDE THAT IT WOULD BE MANDATOR Y FOR THE AO TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN REL ATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. 23 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 5.3. LD. PRINCIPAL CIT(DR) FURTHER SUBMITTED THAT P ROVISIONS OF SECTION 14A ONLY REITERATE THE SETTLED LAW AS REGAR DING MATCHING PRINCIPLES OF ACCOUNTANCY AS PER WHICH AGAINST THE CURRENT INCOME ONLY CURRENT EXPENDITURE IS TO BE ALLOWED AND AGAIN ST THE EXEMPT INCOME NO EXPENDITURE IS TO BE ALLOWED, WHETHER DIR ECT OR INDIRECT, OTHERWISE MATCHING PRINCIPLE GETS DISTURBED BECAUSE ASSESSEE WHO DEBITED ONLY DIRECT EXPENDITURE AGAINST EXEMPT INCO ME DERIVES A DOUBLE BENEFIT BY TAKING THE BENEFIT OF INDIRECT EX PENDITURE AGAINST TAXABLE INCOME THOUGH PART OF WHICH IS RELATABLE TO EXEMPT INCOME. IN THIS REGARD LD. CIT(DR) REFERRED TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ESCORTS LTD. & ANOTHER VS. UNI ON OF INDIA & OTHERS 199 ITR 43, WHEREIN IT HAS BEEN HELD AS UNDE R: THERE IS A FUNDAMENTAL, THOUGH UNWRITTEN, AXIOM TH AT NO LEGISLATURE COULD HAVE AT ALL INTENDED A DOUBLE DED UCTION IN REGARD TO THE SAME BUSINESS OUTGOING; AND IF IT IS INTENDED, IT WILL BE CLEARLY EXPRESSED. IN OTHER WO RDS, IN THE ABSENCE OF CLEAR STATUTORY INDICATION TO THE CONTRA RY, THE STATUTE SHOULD NOT BE READ SO AS TO PERMIT AN ASSES SEE TWO DEDUCTIONS BOTH UNDER SECTION 10(2)(VI) AND SECTI ON 10(2)(XIV) OF THE 1922 ACT OR BOTH UNDER SECTION 32 (1)(II) AND SECTION 35(1)(IV) OF THE 1961 ACT.: 5.4. LD. PRINCIPAL CIT(DR), THEREFORE, SUBMITTED TH AT THE CONTENTION OF LD. COUNSEL FOR THE ASSESSEE THAT UNDER CLAUSE ( F) TO EXPLANATION 1 TO SECTION 115JB ONLY DIRECT EXPENDITURE ARE CONTEMPLA TED IS AGAINST THE BASIC PRINCIPLE OF TAXATION. HE SUBMITTED THAT PRO XIMATE WILL MEAN DIRECT AS WELL AS INDIRECT EXPENDITURE AND DEPENDS ON FACTS OF EACH CASE. LD. CIT(DR) SUBMITTED THAT THE EXPRESSION IN RELATION TO USED IN SECTION 14A AND THE EXPRESSION EXPENDITURE RELA TABLE TO ANY INCOME AS USED IN CLAUSE (F) OF EXPLANATION 1 TO S ECTION 115JB ARE IN THE SAME CONTEXT AND WILL, THEREFORE, HAVE TO BE UN DERSTOOD IN THE SAME SENSE. HE SUBMITTED THAT THE EXPRESSION USED I N CLAUSE (F) TO 24 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. EXPLANATION 1 OF SECTION 115JB(2) WILL TAKE COLOUR FROM THE EXPRESSION IN RELATION TO AS USED IN SECTION 14A. 5.5. LD. PRINCIPAL CIT(DR) FURTHER POINTED OUT THAT IN THE CASE OF CIT VS. WALFORT SHARE & STOCK BROKERS 326 ITR 1 (SC ); AND IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. CIT 328 IT R 81 (BOM), IT HAS BEEN HELD THAT ALL THE EXPENSES HAVING PROXIMAT E CONNECTION TO THE EARNING OF EXEMPT INCOME HAVE TO BE DISALLOWED WHIC H WILL INCLUDE INDIRECT EXPENSES ALSO. 5.6. LD. PRINCIPAL CIT(DR) SUBMITTED THAT SECTION 1 4A(2)/(3) AND RULE 8D INCORPORATED IN THE STATUTE ONLY APPLY THIS PRINCIPLE OF LAW AND ACCOUNTANCY. THIS PRINCIPLE WILL APPLY BOTH TO THE NORMAL PROFITS AS WELL AS BOOK PROFITS, OTHERWISE THE MATCHING PRI NCIPLE OF ACCOUNTANCY WILL GET DISTURBED AND ASSESSEE WILL GE T A DOUBLE BENEFIT WHICH IS NOT PERMISSIBLE BOTH IN LAW AND ACCOUNTS. 5.7. LD. PRINCIPAL CIT(DR) FURTHER REFERRED TO THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF GOETZE IND IA LTD. 361 ITR 505 WHEREIN AT PAGE 530 OF THE REPORT IT HAS BEEN O BSERVED AS UNDER: LD. COUNSEL FOR THE RESPONDENT-ASSESSEE, DURING TH E COURSE OF HEARING, HAS FAIRLY CONCEDED THAT THE FIR ST QUESTION HAS TO BE ANSWERED IN FAVOUR OF THE REVENU E AND AGAINST THE ASSESSEE IN VIEW OF THE SPECIFIC PRO VISIONS IN THE EXPLANATION 1 BELOW SECTION 115JB(2) CLAUSE (F) .. 5.8. LD. PRINCIPAL CIT(DR) SUBMITTED THAT WHEN LD. COUNSEL WAS CONFRONTED WITH THE SPECIFIC PROVISIONS OF CLAUSE ( F) TO EXPLANATION 1 BELOW SECTION 115JB, LD. COUNSEL FAIRLY CONCEDED. H E POINTED OUT THAT THIS WAS NOT A CONCESSION ON ANY FACT, BUT WHEN FAC ED WITH THE CLEAR PROVISIONS OF LAW, THE COUNSEL COULD NOT COUNTER IT AND, THEREFORE, THE COURT GAVE THIS VERDICT BASED ON THE ABOVE ISSUE. 25 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 5.9. LD. PRINCIPAL CIT(DR) REFERRED TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. K.Y. PILLIAH & SONS 1967 63 ITR 411 (SC), WHEREIN IN PARA 10 IT HAS BEEN OBSERV ED AS UNDER: ............ 'THE ITAT IS THE FINAL FACT FINDING AUTHORITY AND NORMALLY IT SHOULD RECORD ITS CONCLUSION ON EVERY D ISPUTED QUESTION RAISED BEFORE IT, SETTING OUT ITS REASONS IN SUPPORT OF ITS CONCLUSION. BUT, IN FAILING TO RECORD REASON S, WHEN THE APPELLATE TRIBUNAL FULLY AGREES WITH THE VIEW E XPRESSED BY THE APPELLATE ASSISTANT COMMISSIONER AND HAS NO OTHER GROUND TO RECORD IN SUPPORT OF ITS CONCLUSION, IT D OES NOT ACT ILLEGALLY OR IRREGULARLY, MERELY BECAUSE IT DOE S NOT REPEAT THE GROUNDS OF THE APPELLATE ASSISTANT COMMISSIONER ON WHICH THE DECISION WAS GIVEN AGAINS T THE ASSESSEE OR THE DEPARTMENT ' 5.10. HE POINTED OUT THAT WHEN THE COUNSEL FAIRLY C ONCEDED THE MATTER IN THE HONBLE DELHI HIGH COURT, THE HONBLE DELHI HIGH COURT WAS NOT REQUIRED TO REPEAT THE REASONS AS STATED IN TH E COURT BY THE LD. COUNSEL FOR THE ASSESSEE FOR CONCEDING THE SAME. RA THER IT AGREED WITH IT AND GAVE ITS DECISION. LD. CIT(DR), THEREFORE, S UBMITTED THAT AO IS EMPOWERED TO ADOPT THE DISALLOWANCE U/S 14A WHILE M AKING THE ADDITION AS CONTEMPLATED UNDER CLAUSE (F) OF EXPLAN ATION 1 TO SEC. 115JB(2). LD. CIT(DR), THEREFORE, SUBMITTED THAT TH IS ISSUE IS, THEREFORE, NO LONGER RES INTEGRA AND, THEREFORE THE QUESTION REFERRED TO BY HONBLE PRESIDENT FOR ANSWER IS SQUARELY COVERED BY THE DECISION OF HONBLE DELHI HIGH COURT. 5.11. AS REGARDS RELIANCE PLACED BY LD. SENIOR COUN SEL ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF BHUSHAN STEEL (SUPRA), LD. CIT(DR) SUBMITTED THAT THE SAID DECISI ON HAS BEEN RENDERED WITHOUT CONSIDERING THE BINDING DECISION O F CO-ORDINATE BENCH OF EQUAL STRENGTH AND, THEREFORE, CANNOT HOLD THE FIELD. 26 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 6. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. THERE CANNOT BE ANY QUARREL WITH THE SUBMISSIONS OF LD. SR. COUNSEL FOR THE ASSESSEE THAT SECTION 115JB IS A COMPLETE C ODE IN ITSELF. CHAPTER XII-B PROVIDES ALTERNATE SCHEME FOR COMPUTI NG TAX LIABILITY OF CERTAIN COMPANIES, WHOSE TOTAL INCOME UNDER NORM AL PROVISIONS IS BELOW THE THRESHOLD BOOK PROFIT AS PRESCRIBED UNDER CHAPTER XII-B. UNDER SECTION 115JB THIS THRESHOLD LIMIT IS 18.5%. THUS, TOTAL INCOME AS COMPUTED UNDER THE NORMAL PROVISIONS OF THE ACT IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMME NCING ON OR AFTER THE 1 ST DAY OF APRIL 2012, IS LESS THAN 18.5% OF ITS BOOK PROFIT, SUCH BOOK PROFIT SHALL BE DEEMED TO BE THE TOTAL INCOME OF THE ASSESSEE AND TAX SHALL BE PAYABLE ON SUCH TOTAL INCOME @18.5%. T HUS, THE SCHEME OF THE ACT IS THAT THE COMPUTATION IS FIRST MADE UN DER THE NORMAL PROVISIONS OF INCOME-TAX ACT AND, THEREAFTER, UNDER AN ALTERNATE SCHEME PROVIDED U/S 115JB FOR COMPUTING TOTAL INCOM E AS PER THE PRESCRIBED METHOD. IF THE TAX LIABILITY ON THE BASI S OF TOTAL INCOME AS PER MAT PROVISIONS IS MORE THAN THE TAX COMPUTED UN DER THE NORMAL PROVISIONS OF THE ACT, THEN THE FORMER BECOMES THE FINAL TAX LIABILITY OF THE ASSESSEE. THE MODE OF COMPUTATION OF BOOK P ROFIT HAS BEEN PRESCRIBED UNDER MAT PROVISIONS. THE ISSUE POSED FO R OUR CONSIDERATION IS WHETHER COMPUTATION PROVISIONS PRE SCRIBED FOR COMPUTATION OF TOTAL INCOME UNDER NORMAL PROVISIONS WITH REFERENCE TO SECTION 14A CAN OR CANNOT BE TAKEN INTO CONSIDER ATION WHILE COMPUTING BOOK PROFITS UNDER MAT PROVISIONS. 27 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 6.1. SECTION 14A HAS BEEN INSERTED BY THE FINANCE A CT, 2001 WITH RETROSPECTIVE EFFECT FROM 1-4-1962. THE OBJECT FOR INSERTING SECTION 14A, WAS TO DENY THE EXPENDITURE RELATABLE TO THE E ARNING OF EXEMPT INCOME BEING ALLOWED AS DEDUCTION AGAINST THE TAXAB LE INCOME. THE PURPOSE WAS TO DENY DOUBLE DEDUCTION TO ASSESSEE FIRSTLY BY CLAIMING THE ENTIRE INCOME AS EXEMPT INCOME AND THE N AGAIN CLAIMING THE EXPENSES INCURRED RELATABLE TO THE EXEMPT INCOM E AGAINST THE TAXABLE INCOME. THIS WOULD HAVE RESULTED IN REDUCTI ON OF THE TAXABLE INCOME TO THE EXTENT OF THE EXPENSES RELATABLE TO EXEMPT INCOME. IN ORDER TO OVERCOME THIS ANOMALY, SECTION 14A WAS INS ERTED. CHAPTER XIIB HAS BEEN INSERTED BY THE FINANCE ACT, 1987 W.E.F. 1-4-1988 AND THE OBJECT WAS TO MAKE THE COMPANIES W HICH WERE NOT AT ALL PAYING ANY TAXES TO PAY THE TAX ON THE BASIS OF BOOK PROFITS AS PER THE DEEMING PROVISIONS CONTAINED IN THE CHAPTER. TH E COMPUTATION OF BOOK PROFIT HAS BEEN SPECIFICALLY PRESCRIBED IN THE SECTION ITSELF AND THE STARTING POINT OF THE SAME IS THE NET PROFIT AS SHOWN IN THE P&L A/C PREPARED IN ACCORDANCE WITH SCHEDULE VI TO THE COMP ANIES ACT, WHICH IS TO BE INCREASED BY VARIOUS ITEMS CONTEMPLA TED IN THE EXPLANATION AND ALSO TO BE REDUCED BY VARIOUS ITEMS , MENTIONED IN THE EXPLANATION ITSELF. THE ADJUSTMENTS CONTEMPLATED IN THE EXPLANATION ARE BROADLY THE SAME AS ARE BEING MADE WHILE COMPUT ING PROFITS OF BUSINESS IN CASE OF COMPANIES UNDER NORMAL PROVISIO NS OF ACT. UNDER THIS CHAPTER SPECIFIC ITEMS HAVE BEEN PRESCRIBED F OR COMPUTATION OF BOOK PROFIT. THE SAME HAVE TO BE FOLLOWED AND THE C OMPUTATION AS CONTEMPLATED UNDER CHAPTER IV OF THE INCOME-TAX ACT FOR COMPUTATION OF BUSINESS INCOME CANNOT BE IMPORTED I N WHOLE SUM PER SE UNDER THIS CHAPTER. HOWEVER, THE CONTENTION OF L D.CIT (DR) IS THAT THE PROVISIONS OF CLAUSE (F) TO EXPLANATION 1 TO SE CTION 115JB REQUIRES 28 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. THE NET PROFIT AS SHOWN IN THE P&L A/C TO BE INCREA SED BY THE AMOUNT OR AMOUNTS OF EXPENDITURE RELATABLE TO ANY INCOME T O WHICH SECTION 10 (OTHER THAN THE PROVISIONS CONTAINED IN CLAUSE (38) THEREOF) OR SECTION 11 OR SECTION 12 APPLY AND AS PER CLAUSE (II) OF TH E EXPLANATION, THE NET PROFIT IS TO BE REDUCED BY THE AMOUNT OF INCOME TO WHICH ANY OF THE PROVISIONS OF SECTION 10 (OTHER THAN THE PROVISIONS CONTAINED IN CLAUSE (38) THEREOF), OR SECTION 11 OR SECTION 12 APPLY, I F ANY SUCH AMOUNT IS CREDITED IN THE P&L A/C. THUS, THE SUBMISSION IS TH AT THE PROVISIONS OF CLAUSE (F) TO EXPLANATION 1 OF SECTION 115JB(2) ARE AKIN TO SECTION 14A. 6.2. NOW THE QUESTION BEFORE US IS, WHETHER THE AMO UNT OR AMOUNTS OF EXPENDITURE RELATABLE TO EXEMPT INCOME AS CONTE MPLATED IN CLAUSE (F) TO EXPLANATION 1 TO SECTION 115JB(2) COULD BE A RRIVED AT BY RESORTING TO PROVISIONS OF SECTION 14A OR NOT. THE SUBMISSION OF LD. PRINCIPAL CIT (DR) IS THAT IT CANNOT BE DISPUTED T HAT THE OBJECT OF SECTION 14A WAS ONLY TO DETERMINE THE EXPENDITURE I N RELATION TO EXEMPT INCOME AS NOTED EARLIER. HIS CONTENTION, THE REFORE, IS THAT THE OBJECT OF SEC. 14A AND CLAUSE (F) TO EXPLANATION 1 TO SECTION 115JB(2) IS SAME AND, THEREFORE, IT CANNOT BE DISPUTED THAT SECTION 14A CAN BE RESORTED TO FOR FINDING OUT THE EXPENDITURE RELATAB LE TO ANY INCOME WHICH IS EXEMPT. IN THIS REGARD LD. PRINCIPAL CIT(D R) HAS REFERRED TO SOME OF THE WELL SETTLED PRINCIPLES OF STATUTORY IN TERPRETATION WHICH ARE DISCUSSED HEREUNDER. 6.3. WHEN THE QUESTION ARISES AS TO THE APPLICABILI TY OF SIMILAR PROVISIONS IN DIFFERENT PARTS OF THE STATUTE, THEN IT IS NOT ONLY LEGITIMATE BUT PROPER TO READ BOTH THE PROVISIONS IN THEIR CON TEXT. IF CONTEXT IS SAME, DIFFERENT MEANING CANNOT BE ASSIGNED. IT IS TO BE FOUND OUT THAT 29 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. WHAT MISCHIEF WAS INTENDED TO BE REMEDIED BY INSERT ING A PARTICULAR SECTION. THE INTENTION OF THE LEGISLATURE ONCE IS M ANIFESTED IN A PARTICULAR SECTION IN THE STATUTE THEN SAID INTENT ION CANNOT BE GIVEN A DIFFERENT MEANING, IF A SIMILAR PROVISION HAS BEEN INCORPORATED IN A DIFFERENT SECTION IN THE STATUTE. THE INTENTION OF THE LEGISLATURE MUST BE FOUND OUT BY READING THE STATUTE AS A WHOLE. 6.4. LITERAL MEANING CANNOT ALWAYS BE FOLLOWED LOG ICALLY, BECAUSE SOMETIMES IT TENDS TO DEFEAT THE OBVIOUS INTENTION OF THE LEGISLATURE AND RESULTS IN PRODUCING A WHOLLY UNREASONABLE RES ULT. TO ACHIEVE THE OBVIOUS INTENTION AND TO PRODUCE A REASONABLE RESUL T. 6.5. THE HONBLE SUPREME COURT IN THE CASE OF N.B. SANJANA V. ELPHINSTONE SPINNING & WEAVING MILLS LTD. AIR 1971 SC 2039, EXAMINED RULE 10 UNDER THE CENTRAL EXCISE ACT, 194 4 OBSERVING, INTER ALIA, AS UNDER: THIS RULE RELATES TO RAISING OF DEMAND FOR SHORT-L EVY WITHIN A E LIMIT IN CASES WHERE LESSER AMOUNTS HAVE BEEN PAID. THE PETITIONERS ARGUED THAT WHERE NO PAYMENT S HAD BEEN MADE AND WHERE NIL ASSESSMENTS E BEEN MADE, TH ERE WOULD BE NO APPLICATION OF THIS RULE AND NO DEMAND COULD BE RAISED. THE SUPREME COURT OBSERVED THAT WE CANNO T TAKE A LITERAL INTERPRETATION IN SUCH A CASE. IT SH OULD BE AN INTERPRETATION IN THE CONTEXT WHICH I MEAN APPROPRI ATELY THAT THE WORD 'PAID' WOULD INCLUDE 'OUGHT TO HAVE B EEN PAID' AND ASSESSMENTS WOULD COVER 'NIL' ASSESSMENT. THE MACHINERY OF THE TAX - S STEM SHOULD BE MADE WORKAB LE AND THE CLEAR INTENTION SHOULD NOT BE PREVENTED. 6.6. IN THE CASE OF ASSTT. COLLECTOR OF CENTRAL EXC ISE V. NATIONAL TOBACCO COMPANY LTD. AIR 1972 SC 2563, THE HONBLE SUPREME COURT HAS OBSERVED AS UNDER: THIS IS A CASE UNDER THE CENTRAL EXCISES ACT AND RULES, 1944 (AS THEY '7 STOOD BEFORE 1-8-1959) WHERE THE R ULES 10 AND 1 OA HAVE AGAIN COME FOR FURTHER DISCUSSION EVE N AFTER IT WAS SETTLED IN SANJANA'S CASE (AIR 1971 SC 2039) 30 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. THAT WHILE RULE 10 WAS FOR SHORT-LEVY (FOR SPECIFIE D REASONS), RULE 10A WAS FOR NON-LEVY OR SHORT-LEVY O R FOR REASONS OTHER THAN IN RULE 10. RULE 10 COVERED CASE S OF INADVERTENCE, ERROR, COLLUSION, MISCONSTRUCTION AND MISSTATEMENT. IN SANJANA'S CASE THE SUPREME COURT HARMONISED THE TWO RULES BY INDICATING THAT RULE 10 A WHICH WAS RESIDUARY IN CHARACTER WOULD BE INAPPLICA BLE IF A CASE FELL WITHIN A SPECIFIED CATEGORY OF CASES ME NTIONED IN RULE 10. RULE 10 IS CONFINED TO CASES WHERE THE DEMAND IS TO BE MADE FOR SHORT-LEVY CAUSED BY THE REASONS IN THAT RULE 10 ITSELF SO THAT AN ASSESSMENT HAS TO BE REOP ENED. THE HIGH COURT OF CALCUTTA IN THIS CASE HAD DECIDED THAT THE DEMAND COULD NOT BE RAISED UNDER RULE 10 BECAUS E IT IS A CASE OF INADVERTENCE. BUT THE SUPREME COURT OBSER VED IN THIS CASE THAT THE HIGH COURT HAS CALLED IT A CASE OF NO ASSESSMENT AT ALL AND IN THAT CASE IT FALLS UNDER R ULE 10A (WHICH IS FOR CASES WHERE THERE IS NO ASSESSMENT, T HAT IS NON-LEVY). MOREOVER, THERE ARE OTHER CIRCUMSTANCES SUCH AS INSUFFICIENT INFORMATION GIVEN BY THE PETITIONER S WHICH IS NOT COVERED BY RULE 10. THAT MAKES THE DEMAND VALID UNDER RULE 10A. IF RULE 10 IS INTERPRETED VERY BROA DLY AS DONE BY THE CALCUTTA HIGH COURT THEN THE RULE 10A W OULD BECOME USELESS. THE SUPREME COURT, THEREFORE, HELD THE DEMAND VALID UNDER RULE 10A WHICH IS WHERE THERE HA S BEEN NO ASSESSMENT OR WHERE THERE IS SHORT-LEVY DUE TO REASONS OTHER THAN SPECIFIED IN RULE 10. THOUGH RUL E 1 OA WAS NOT MENTIONED IN THE DEMAND, QUOTING A WRONG RU LE DOES NOT MAKE IT INVALID. THE SUPREME COURT HAS ELABORATED THE APPLICATION OF SOME FUNDAMENTAL PRIN CIPLES OF INTERPRETATION WHILE SETTING ASIDE THE JUDGMENT OF THE CALCUTTA HIGH COURT. FIRST, THE HIGH COURT CONSIDERED THE APPLICABILITY OF RULE 10 ALONE AND NOT OF RULE 10A SINCE ONLY RULE 10 WAS MENTIONED. THE SHUTTING OUT OF THE OTHER RULE 10A, UNDER WHICH ALSO DEMAND COULD BE VALID, HAS BEEN WRONG. W HAT THE HIGH COURT FOLLOWED WAS THE MAXIM: EXPRESSIO UN IUS EST EXCLUSIO ALTERIS. BUT THIS PRINCIPLE, OBSERVED THE SUPREME COURT, IS A VALUABLE SERVANT BUT A DANGEROU S MASTER. ''THE RULE IS SUBSERVIENT TO THE BASIC PRIN CIPLE THAT COURTS MUST ENDEAVOUR TO ASCERTAIN THE LEGISLATIVE INTENT AND PURPOSE AND ADOPT A RULE OF CONSTRUCTION WHICH EFFECTUATES RATHER THAN ON THAT WHICH MAY DEFEAT TH ESE.' THE HIGH COURT IGNORED IN THIS CASE THE LEGISLATIVE INTENT IN HAVING RULE 10A. RULE 10A WAS FOR 'SPECIAL CIRCUMSTANCES NOT FORESEEN BY THE FRAMERS OF THE AC T OR THE RULES'. THE HIGH COURT DID NOT CONSIDER AT ALL WHET HER THE DEMAND WOULD FALL UNDER RULE 10A BUT MERELY INTERPR ETED BROADLY RULE 10 TO CONCLUDE THAT THE DEMAND DID NOT FALL IN THAT RULE. THAT CLEARLY GOES AGAINST THE LEGISLATIV E INTENT. 31 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. THE SUPREME COURT THEREFORE SET ASIDE THE HIGH COUR T ORDER AND UPHELD THE DEMAND UNDER RULE 10A THOUGH THAT RULE WAS NOT QUOTED IN THE DEMAND DOING SO THE SUPR EME COURT UPHELD THE BASIC PRINCIPLE OF LEGISLATIVE INT ENT AND PURPOSE. 6.7. AGAIN IN THE CASE OF K.P. VARGHESE V. ITO AIR 1981 SC 1922, WHILE EXAMINING THE TRUE MEANING OF SECTION 52(2), WHICH ENABLED THE REVENUE TO CHARGE TAX ON THE CAPITAL GAINS DEEMED TO ACCRUE, WHEREVER THE DECLARED VALUE FOR TRANSFER OF PROPERT Y WAS LESS BY 15% OR MORE COMPARED TO THE FAIR MARKET VALUE, THE HON BLE SUPREME COURT REFUSED TO ACCEPT THE STRICT LITERAL MEANING, CALLING IT ABSURD. THE HONBLE COURT GAVE SOME EXAMPLES ON THE BASIS O F STRICT INTERPRETATION AND POINTED OUT THAT IT WOULD BE ABS URD AND UNREASONABLE TO APPLY SEC. 52(2) ACCORDING TO ITS S TRICT LITERAL CONSTRUCTION. THE HONBLE COURT FURTHER OBSERVED TH AT WE MUST, THEREFORE, GIVE UP LITERALNESS IN THE INTERPRETATION OF SEC. 52(2) AND TRY TO ARRIVE AT A N INTERPRETATION WHICH AVOIDS THIS ABSURDITY AND MISC HIEF AND MAKES THE PROVISION RATIONAL AND SENSIBLE, UNLE SS, OF COURSE, OUR HANDS ARE TIED AND WE CANNOT FIND ANY E SCAPE FROM THE TYRANNY OF THE LITERAL INTERPRETATION. IT WAS FURTHER OBSERVED THAT IT IS NOW A WELL SETTLED RULE OF CONSTRUCTION THAT WHERE THE PLAIN LITERAL INTERPRETATION OF A STATUTORY PROVISI ON PRODUCES A MANIFESTLY ABSURD AND UNJUST RESULT WHIC H COULD NEVER HAVE BEEN INTENDED BY THE LEGISLATURE, THE COURT MAY MODIFY THE LANGUAGE USED BY THE LEGISLATU RE OR EVEN DO SOME VIOLENCE TO IT SO AS TO ACHIEVE THE OBVIOUS INTENTION OF THE LEGISLATURE AND PRODUCE A RATIONAL CONSTRUCTION. 6.8. ACCORDINGLY, HONBLE SUPREME COURT HELD THAT A FAIR AND REASONABLE CONSTRUCTION WOULD BE THAT THE REVENUE M UST SHOW NOT ONLY THAT THE FAIR MARKET VALUE OF THE CAPITAL ASSET EXC EEDS THE DECLARED VALUE BY 15% OR MORE, AND ALSO THAT IT IS NOT A BON A FIDE DECLARATION 32 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. AND THE ASSESSEE HAS ACTUALLY RECEIVED UNDERHAND PA YMENT APART FROM WHAT HAS BEEN ACTUALLY DECLARED BY HIM. 6.9. IN THE CASE OF CANADA SUGAR REFINERY CO. VS. R (1898) AC 735 AT PAGE 742, IT WAS OBSERVED THAT EVERY CLAUSE OF A STATUTE IS TO BE CONSTRUED WITH REFERENCE TO THE CONTEXT AND OTHER C LAUSES OF THE ACT AS FAR AS POSSIBLE TO MAKE A CONSISTENT ENACTMENT OF THE WHOLE STATUTE OR SERIES OF STATUTES RELATING TO THE SUBJECT MATTER. 6.10. THUS, THE SUBMISSION OF LD. CIT(DR) IS THAT W HEN BASIC OBJECT AND PURPOSE OF SECTION 14A AND CLAUSE (F) TO EXPLAN ATION 1 TO SECTION 115JB(2) IS SAME, THEN IT CANNOT BE SAID THAT MEREL Y BECAUSE SECTION 14A HAS NOT BEEN MENTIONED IN CLAUSE (F), THEREFORE , IT HAS NO APPLICATION. THE MODE OF COMPUTATION WITH SAME PURP OSE CANNOT BE DIFFERENTLY MADE MERELY BECAUSE SECTION 115JB CREAT ES A DEEMING SECTION. THE OBJECT OF DEEMING PROVISIONS IS TO SUB STITUTE THE TOTAL INCOME COMPUTED UNDER NORMAL PROVISIONS BY THAT COM PUTED UNDER MAT PROVISIONS. SUBMISSION OF LD. CIT(DR) IS THAT T HIS CANNOT BE EXTENDED TO COMPUTATION FOR SAME ITEMS UNDER NORMAL AS WELL AS MAT PROVISIONS. UNDER THE PROVISIONS OF SECTION 14A, BO TH DIRECT AND INDIRECT EXPENSES IN RELATION TO EARNING OF EXEMPT INCOME ARE TO BE REDUCED. THEREFORE, DIFFERENT MEANING CANNOT BE ASC RIBED IN CLAUSE (F) AND, THEREFORE, THE SUBMISSION OF LD. COUNSEL FOR T HE ASSESSEE THAT ONLY DIRECTLY RELATABLE EXPENDITURE IS TO BE REDUCED, CA NNOT BE ACCEPTED. 6.11. LD. CIT(DR) FURTHER SUBMITTED THAT THE TERM RELATABLE TO USED IN CLAUSE (F) CANNOT BE ASCRIBED A RESTRICTIVE MEAN ING AS COMPARED TO THE TERM USED IN RELATION TO IN SECTION 14A. BOTH TERMS ARE WITH THE SAME PURPORT AND OBJECT. 33 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 6.12. LD. COUNSEL HAS SUBMITTED THAT THE AO CANNOT GO BEYOND AUDITED FINANCIAL STATEMENTS OF THE ASSESSEE WHILE COMPUTING BOOK PROFITS U/S 115JB. HOWEVER, THE SUBMISSION OF LD. C IT(DR) IS THAT THIS ARGUMENT IS FALLACIOUS, BECAUSE HERE THE AO IS NOT GOING BEYOND THE AUDITED ACCOUNTS BUT IS COMPUTING THE EXPENDITU RE DEBITED IN THE P&L A/C, WHICH IS RELATABLE TO EARNING OF EXEMPT IN COME. THIS IS AS PER CLAUSE (F) ITSELF. 6.13. FURTHER REASONING ADVANCED BY LD. CIT(DR) IS THAT SECTION 14A HAS BEEN INCORPORATED MUCH AFTER THE INCORPORATION OF CHAPTER XIIB IN 1987. SECTION 14A WAS INCORPORATED JUST AFTER SECTI ON 14, WHICH CLASSIFIES THE HEAD OF INCOME FOR COMPUTATION OF TO TAL INCOME. THIS SECTION WAS MADE APPLICABLE WITH RESPECT TO DETERMI NATION OF TOTAL INCOME. THE MAT PROVISIONS ARE FOR COMPUTATION OF INCOME FROM BUSINESS IN CASE OF SPECIFIC COMPANIES. THEREFORE, IT CANNOT BE SAID THAT SECTION 14A HAD NO APPLICABILITY TO MAT PROVIS IONS, WHICH WERE EXISTING WHEN SECTION 14A WAS INTRODUCED FOR THE FI RST TIME. THEREFORE, SECTION 14A IS APPLICABLE FOR ALL KINDS OF INCOMES, WHICH ARE CLAIMED AS EXEMPT BY ASSESSEE IN THE INCOME-TA X ACT. 6.14. THERE CANNOT BE ANY QUARREL WITH THE PROPOSIT ION THAT CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB(2) IS IN CONFORMI TY TO MATCHING PRINCIPLES OF ACCOUNTING. LD. COUNSEL HAS SUBMITTED THAT MATCHING PRINCIPLE OF ACCOUNTANCY PROVIDES THAT EXPENSES ARE DEBITED IN THE P&L A/C ONLY TO THE EXTENT RELATABLE TO THE ACCRUAL OF THE CORRESPONDING INCOME AND, THEREFORE, ONLY EXPENSES DEBITED TO THE P&L A/C WHICH HAVE DIRECT AND PROXIMATE NEXUS WITH THE EXEMPT INCOME CREDITED TO THE P&L A/C ARE TO BE ADDED BACK . 34 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 6.15. LD. CIT(DR), HOWEVER, SUBMITS THAT THIS ARGUM ENT CANNOT BE ACCEPTED BECAUSE IF ASSESSEE HAS MADE PROVISION IN RESPECT OF EXPENDITURE ACCRUED, A PART OF WHICH IS RELATABLE T O EXEMPT INCOME, THEN IT DOES NOT IMPLY THAT TO THAT EXTENT THE EXPE NDITURE SHOULD NOT BE ADDED BACK. 6.16. THE SUBMISSION OF LD. CIT(DR) IS, THUS, THAT THE PHRASE IN RELATION TO AS USED IN SECTION 14A AND THE EXPRESS ION EXPENDITURE RELATABLE TO, AS USED IN CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB(2), ARE IN THE SAME CONTEXT AND, THEREFORE, H AVE TO BE UNDERSTOOD IN THE SAME SENSE. 6.17. LD. PRINCIPAL CIT(DR) HAS POINTED OUT THAT TH E PHRASE EXPENDITURE RELATABLE TO AS USED IN CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB(2) WILL TAKE ITS COLOR FROM THE PHRAS E IN IN RELATION TO, USED IN SECTION 14A. THE CONTENTION OF LD. CIT(DR) IS THAT IF WE APPLY PRINCIPLES OF LITERAL INTERPRETATION, THEN T HAT WOULD LEAD TO AN ANOMALOUS SITUATION, IN WHICH HIGHER EXPENDITURE, TO THE EXTENT OF INDIRECT EXPENSES, WILL BE CHARGED TOWARDS THE EARN ING OF EXEMPT INCOME U/S 14A, THEREBY REDUCING THE EXEMPT INCOME AS COMPARED TO EXPENDITURE CHARGE WHILE COMPUTING BOOK PROFITS U/S 115JB BECAUSE NO INDIRECT EXPENDITURE WILL BE ALLOCATED TOWARDS E ARNING OF EXEMPT INCOME. THE SUBMISSION IS THAT OBVIOUSLY, THIS CANN OT BE THE INTENTION OF LEGISLATURE. AS PER THE PROVISIONS OF SECTION 1 15JB(1), A COMPARISON OF THE TOTAL INCOME COMPUTED UNDER THE N ORMAL PROVISIONS OF THE INCOME-TAX ACT IS TO BE MADE WITH THE BOOK P ROFITS AS COMPUTED U/S 115JB. THIS MAKES IT CLEAR THAT TOTAL INCOME AS CONTEMPLATED UNDER NORMAL PROVISIONS IS INEXTRICABLY LINKED TO BOOK PR OFITS UNDER MAT PROVISIONS AND IT IS WRONG TO SUGGEST THAT BOTH OPE RATE IN ENTIRELY 35 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. DIFFERENT FIELDS. THIS INTERPRETATION OVERLOOKS THE VERY OBJECT OF INSERTION OF MAT PROVISIONS. THEREFORE, THE SUBMISS ION IS THAT WHEN WE RESORT TO COMPARISON BETWEEN COMPUTATION UNDER N ORMAL PROVISIONS OF THE INCOME-TAX ACT AND MAT PROVISIONS , THE COMPARISON WILL NOT BE ON SAME FOOTING. SUBMISSION OF LD. CIT(DR) IS THAT IT CANNOT BE DENIED THAT THE LEGISLATIVE INTEN T REGARDING DISALLOWANCE OF EXPENDITURE RELATING TO EARNING OF EXEMPT INCOME WAS SAME, WHETHER UNDER NORMAL PROVISIONS OR UNDER THE MAT PROVISIONS. HENCE, THE WHOLE OBJECT OF COMPARISON BETWEEN THE T OTAL INCOME UNDER NORMAL PROVISIONS AND MAT PROVISIONS WILL GET FRUSTRATED. 6.18. LD. CIT(DR) SUBMITTED THAT THE ABOVE INTERPRE TATION, WILL ENSURE IN ARRIVING AT THE SAME FIGURE OF EXPENDITUR E RELATABLE TO EXEMPT INCOME UNDER NORMAL PROVISIONS AND ALSO WHIL E COMPUTING THE BOOK PROFITS U/S 115JB. IF DIFFERENT MODES OF COMPU TATION ARE FOLLOWED U/S 14A AND IN CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB(2), THEN THE COMPARISON WILL NOT BE ON SAME F OOTING AND WILL PRODUCE ABSURD RESULTS. HE FURTHER CLARIFIED THAT E VEN IF WE RESORT TO PLAIN MEANING RULE, THE PHRASE IN RELATION TO USE D IN SECTION 14A AND THE PHRASE EXPENDITURE RELATABLE TO EARNING OF EXE MPT INCOME, UNDER CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB(2), TH E WORD RELATABLE TO HAS WIDER CONNOTATION THAN THE WORDS IN RELATI ON TO, WHERE THE PROXIMATE RELATIONSHIP IS REQUIRED AND, THEREFORE, THE CONTENTION OF LD. COUNSEL FOR THE ASSESSEE THAT, WHILE COMPUTING BOOK PROFIT U/S 115JB, ONLY THOSE EXPENSES WHICH HAVE DIRECT NEXUS TO THE EARNING OF EXEMPT INCOME HAVE TO BE CONSIDERED UNDER CLAUSE (F) OF EX PLANATION 1 TO SECTION 115JB(2), CANNOT BE ACCEPTED. 36 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 6.19 LD. CIT(DR)S AFOREMENTIONED SUBMISSIONS ARE F ORTIFIED BY THE DECISION OF HONBLE DELHIT HIGH COURT IN THE CASE O F GOETZE (INDIA) LTD.(SUPRA). ADMITTEDLY THE DECISION IS ON THE POIN T IN ISSUE UNDER CONSIDERATION. THE SUBMISSION OF LD. SENIOR COUNSEL IS THAT THE DECISION OF HONBLE DELHI HIGH COURT IS BY WAY OF C ONCESSION BY ASSESSEE AS THEY HAVE RECORDED THE STATEMENT OF ASS ESSEES COUNSEL TO ANSWER THE QUESTION OF LAW. PER CONTRA THE SUBMISSI ON OF LD. PRINCIPAL CIT(DR) IS THAT THE DECISION IS AFTER DUE CONSIDERA TION OF PROVISIONS OF LAW. WE FIND CONSIDERABLE FORCE IN THE SUBMISSIO N OF LD. CIT(DR) THAT THE DECISION CANNOT BE SAID TO BE BY WAY OF C ONCESSION MORE PARTICULARLY WHEN A SUBSTANTIAL QUESTION OF LAW AND NOT QUESTION OF FACT WAS UNDER CONSIDERATION OF HONBLE HIGH COURT. IN THAT CASE PROCEEDINGS U/S 263 WERE INITIATED, INTER ALIA, ON THE GROUND THAT THE EXPENDITURE OF RS. 183.63 LACS, INCURRED FOR EARNIN G OF EXEMPT DIVIDEND INCOME U/S 14A OF THE ACT WAS NOT DISALLOW ED, THOUGH THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS. 157.85 L ACS, WHICH WAS EXEMPT U/S 10(33) OF THE ACT. THE COMPUTATION OF I NCOME WAS MADE U/S 115JA AND IN THAT CONTEXT THE HONBLE HIGH COUR T, INTER ALIA, OBSERVED AS UNDER: BY ORDER DATED MAY 16, 2012, THE FOLLOWING SUBSTAN TIAL QUESTIONS OF LAW WERE FRAMED IN THE PRESENT APPEALS . (I) WHETHER THE INCOME-TAX APPELLATE TRIBUNAL WAS RIGHT IN HOLDING THAT WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 115JA (SIC. SECTION 115JB) OF THE INCOME- TAX ACT, 1961, NO DISALLOWANCE UNDER SECTION 14A WAS REQUIRED TO BE MADE? (II) WHETHER THE INCOME-TAX APPELLATE TRIBUNAL WAS RIGHT IN DELETING INTEREST UNDER SECTION 234D OF THE INCOME-TAX ACT, 1961? 37 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. LEARNED COUNSEL FOR THE RESPONDENT-ASSESSEE, DURING THE COURSE OF HEARING, HAS FAIRLY CONCEDED THAT THE FIR ST QUESTION HAS TO BE ANSWERED IN FAVOUR OF THE REVENU E AND AGAINST THE ASSESSEE IN VIEW OF THE SPECIFIC PROVIS IONS IN THE EXPLANATION 1 BELOW SECTION 115JB(2) CLAUSE (F) . THE ASSESSING OFFICER IT IS STATED HAD MADE AN ADDITION OF RS. 88,292 TO THE BOOK PROFITS TOWARDS EXPENDITURE INCU RRED HAVING NEXUS WITH DIVIDEND INCOME, WHICH WERE EXEMP T UNDER SECTION 10(33). RECORDING THE SAID STATEMENT, THE FIRST QUESTION IS ANSWERED IN FAVOUR OF THE APPELLA NT- REVENUE AND AGAINST THE RESPONDENT-ASSESSEE. 6.20. THUS, IT CANNOT BE SAID THAT HONBLE DELHI HI GH COURT HAS NOT CONSIDERED THIS ISSUE AND MERELY ALLOWED THE REVENU ES APPEAL ON CONCESSION. THE SUBSTANTIAL QUESTION OF LAW FRAMED BY HONBLE DELHI HIGH COURT CLEARLY SHOWS THAT THE SPECIFIC ISSUE WA S WHETHER DISALLOWANCE U/S 14A WAS REQUIRED TO BE MADE WHILE COMPUTING BOOK PROFIT U/S 115JA/ 115JB. THE HONBLE DELHI HIGH COU RT HAS NOT ONLY RECORDED ASSESSEES PLEA OF MERELY NOT CONTESTING T HE ISSUE IN VIEW OF SPECIFIC PROVISIONS BUT HAS RECORDED THAT THE COUNS EL FAIRLY CONCEDED. THE EXPRESSION FAIRLY IMPLIES THAT HONBLE HIGH C OURT WAS ALSO OF THE VIEW THAT THE PROVISIONS OF SECTION 14A WERE AP PLICABLE WITH FULL FORCE TO THE CORRESPONDING PROVISIONS U/S 115J. 6.21. LD. PRINCIPAL CIT(DR) HAS, IN THIS REGARD, RE FERRED TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF C IT VS. K.Y. PILLIAH & SONS (1967) 63 ITR 411 (SC), WHEREIN IN P ARA 10, IT HAS BEEN OBSERVED AS UNDER: 10. THE FORM OF THE SECOND QUESTION NEEDS SOME EXPLANATION. THE INCOME-TAX OFFICER WORKED OUT THE GROSS PROFIT ON THE ESTIMATED TURNOVER OF RS. 12 LAKHS AT 6.5% AND THAT THE PROFIT AMOUNTED TO RS. 78,000. THE ASS ESSEES HAD BY THEIR RETURN DISCLOSED A GROSS PROFIT OF RS. 36,858. IN ADOPTING THE RATE OF 6.5% ON THE ESTIMATED TURNO VER, THE INCOME-TAX OFFICER ADDED TO THE INCOME RETURNED RS. 41,142 BEING THE ADDITIONAL PROFIT, AND LEVIED TAX THEREON. 38 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. IT WAS NOT SUGGESTED THAT THERE WERE ANY OTHER ADMI SSIBLE OUTGOINGS WHICH COULD NOT DEBITED AGAINST THAT AMOU NT. THE QUESTION WHETHER RS. 41,142 WERE LIABLE TO BE T AXED FALLS TO BE DETERMINED UNDER THE FIRST QUESTION. TH E SECOND QUESTION ONLY RELATES TO THE AMOUNT OF RS. 7,000 WH ICH WAS THE CASH CREDIT ITEM WHICH REPRESENTED AN UNEXPLAIN ED ENTRY IN THE BOOKS OF ACCOUNT OF THE ASSESSEES. IN RESPECT OF THAT AMOUNT, THE INCOME-TAX OFFICER HELD THAT THE EXPLANATION OF THE ASSESSEE WAS UNTRUE AND THE APPE LLATE ASSISTANT COMMISSIONER AND THE TRIBUNAL AGREED WITH THE VIEW. THE INCOME-TAX APPELLATE TRIBUNAL IS THE FINA L FACT- FINDING AUTHORITY AND NORMALLY TO SHOULD RECORD ITS CONCLUSION ON EVERY DISPUTED QUESTION RAISED BEFORE , IT SETTING OUT ITS REASONS IN SUPPORT OF ITS CONCLUSIO N. BUT, IN FAILING TO RECORD REASONS, WHEN THE APPELLATE TRIBU NAL FULLY AGREES WITH THE VIEW EXPRESSED BY THE APPELLA TE ASSISTANT COMMISSIONER AND HAS NO OTHER GROUND TO R ECORD IN SUPPORT OF ITS CONCLUSION, IT DOES NOT ACT ILLEG ALLY OR IRREGULARLY, MERELY BECAUSE IT DOES NOT REPEAT THE GROUNDS OF THE APPELLATE ASSISTANT COMMISSIONER ON WHICH TH E DECISION WAS GIVEN AGAINST THE ASSESSEE OR THE DEPA RTMENT. THE CRITICISM MADE BY THE HIGH COURT THAT THE TRIBU NAL HAD 'FAILED TO PERFORM ITS DUTY MERELY AFFIRMING. T HE CONCLUSION OF THE APPELLATE ASSISTANT COMMISSIONER IS APPARENTLY UNMERITED. ON THE MERITS OF THE CLAIM FO R EXCLUSION OF THE AMOUNT OF RS. 7,000, THERE IS NO Q UESTION OF LAW WHICH COULD BE SAID TO ARISE OUT OF THE ORDE R OF THE TRIBUNAL. THE ASSESSEES HAD CREDITED SAMPANGAPPA WI TH TWO SUMS OF RS. 6,000 AND RS. 1,000 IN THE MONTHS O F NOVEMBER AND DECEMBER, 1950, RESPECTIVELY. IT WAS C LEAR THAT SAMPANGAPPA HAD NOT ADVANCED AT THE MATERIAL T IME ANY AMOUNT TO THE ASSESSEES. THE EXPLANATION OF THE ASSESSEES WAS, THEREFORE, UNTRUE. THUS, IT IS EVIDENT THAT IN EVERY CASE IT IS NOT N ECESSARY THAT LONG DRAWN REASONING SHOULD BE GIVEN BEFORE ARRIVING AT ANY CONCLUSION MORE PARTICULARLY WHEN BOTH THE PARTIES ARE AGREED ON CERTAIN PROVISION OF LAW. WE, THEREFORE, REJECT THE ASSES SEES CONTENTION THAT THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT I N GOETZE (INDIA) LTD. DOES NOT CONSTITUTE A BINDING PRECEDENT MORE PARTICULARLY IN RESPECT OF SUBORDINATE COURTS INCLUDING TRIBUNAL FU NCTIONING WITHIN ITS JURISDICTION. 39 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. HOWEVER, LD. SENIOR COUNSEL HAS RELIED ON THE DEC ISION IN THE CASE OF BHUSHAN STEEL (SUPRA) WHEREIN IT HAS BEEN H ELD AS UNDER:- ITA 593/2015 PR. CIT .. APPELLANT THROUGH: MR. N.P. SAHNI, SENIOR STANDING COUNSEL WITH MR. NITIN GULATI, ADVOCATE. VERSUS BHUSHAN STEEL LTD .. RESPONDENT THROUGH: MS. KAVITA JHA, ADVOCATE WITH MS. ROOPALI GUPTA, ADVOCATE. O R D E R 29.09.2015 1. . . 7. QUESTION NO.6 CONCERNS DELETION OF ADDITION OF RS.89,00,000 MADE BY THE AO FOR COMPUTATION OF THE INCOME FOR THE PUR POSES OF MINIMUM ALTERNATE TAX (MAT) UNDER SECTION 115 JB OF THE A CT. THIS PERTAINED TO THE EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME UNDER SECTION 14A READ WITH RULE 8D. THE ITAT HAS RIGHTLY HELD THAT THIS BEING IN THE NATURE OF DISALLOWANCE, AND WITH EXPLANATION 115JB NOT SPE CIFICALLY MENTIONING SECTION 14A OF THE ACT, THE ADDITION OF RS.89,00,00 0 WAS NOT JUSTIFIED. THE VIEW TAKEN BY THE ITAT CANNOT BE FAULTED WITH. IT IS CONSISTENT WITH THE DECISION IN APOLLO TYRES LTD. V. COMMISSIONER OF IN COME TAX (2002) 255 ITR 273 (SC) WHICH HELD THAT THE ASSESSING OFFICER DOES NOT HAVE THE JURISDICTION TO GO BEHIND THE NET PROFIT SHOWN IN T HE PROFIT AND LOSS ACCOUNT EXCEPT TO THE EXTENT PROVIDED IN THE EXPLAN ATION TO SECTION 115J. THE COURT DECLINES TO FRAME A QUESTION ON THE ABOVE ISSUE. 40 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. THUS, THIS DECISION IS ALSO ON THE SAME ISSUE TAKIN G CONTRARY VIEW. UNDER SUCH CIRCUMSTANCES THE ISSUE BEFORE US IS AS TO FOLLOW WHICH DECISION. LD. CIT(DR) IN COURSE OF HEARING FILED THE DECISION OF TRIBUNAL IN THE CASE OF GOETZE (INDIA) LTD. AND REFERRED TO PARA 6 OF THE SAID DECISION WHICH IS REPRODUCED HEREUNDER:- 6. COMING TO THE SUSTENANCE OF DISALLOWANCE OF RS. 88,290/- U/S 115JB, THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS UPHELD THE DISALLOWANCE UNDER CLAUSE (F) OF EXPLANATION TO SEC TION 115JB(2) OF THE ACT. UNDER SECTION 115JB OF THE ACT, THE ASSESSEE IS REQUIRED TO PAY TAX ON ITS BOOK PROFIT SUBJECT TO CERTAIN CONDITIONS. THE BOOKS PROFIT IS TO BE DETERMINED U/S 115JB(2) AS PER PART II & III OF SCH EDULE VI TO COMPANYS ACT, 1956. EXPLANATION (1) TO SECTION 115JB(2) DEF INES THE EXPRESSION BOOK PROFIT AND MEANS THE NET PROFIT AS SHOWN IN THE P&L A/C FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB-SECTION ( 2) AS INCREASED BY THE AMOUNTS SPECIFIED IN CLAUSE (A) TO (H) OF THE EXPLA NATION 1. CLAUSE (F) OF THE EXPLANATION 1 REFERS TO THE AMOUNT OR AMOUNTS O R EXPENDITURE RETABLE TO ANY INCOME TO WHICH SECTION 10 (OTHER THAN PROVI SIONS CONTAINED IN CLAUSE 38 THEREOF) OR SECTION 11 OR SECTION 12 APPL Y. FOR APPLYING THE PROVISIONS OF CLAUSE (F) OF EXPLANATION TO SECTION 115JB(2), THERE SHOULD BE NEXUS BETWEEN THE AMOUNT OF EXPENDITURE RELATABL E TO THE INCOME EXEMPT U/S 10 OF THE ACT. THE DIVIDEND INCOME IS E XEMPT U/S 10(33) FOR ASSESSMENT YEAR 2001-02. SINCE THE EXPENDITURE INC URRED HAS NOT BEEN IDENTIFIED AND NO NEXUS HAS BEEN ESTABLISHED WITH T HE DIVIDEND INCOME, THE EXPENDITURE COULD NOT BE DISALLOWED UNDER CLAUSE (F ) OF THE EXPLANATION. AS PER THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD., THE ASSESSING OFFICER IS NOT ENTITLED TO TINK ER WITH THE BOOK PROFITS AS DETERMINED AS PER PROVISIONS OF COMPANYS ACT UNLES S THE AMOUNT IS SPECIFIED IN CLAUSES (A) TO (H) OF THE EXPLANATION. THE AMOUNT OF RS.88,290/- HAS NOT BEEN ESTABLISHED TO HAVE NEXUS WITH THE DIVIDEND INCOME. THE AMOUNT OF RS.88,290/- HAS BEEN ESTIMAT ED AT 1% OF THE INCOME. IN OUR VIEW, NO DISALLOWANCE COULD BE MADE . ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO DELETE THE AMOUNT O F RS.88,290/- FROM THE BOOK PROFIT. THUS, HE SUBMITTED THAT THE DECISION OF HONBLE SU PREME COURT IN THE CASE OF APOLLO TYRES LTD. WAS DULY CONSIDERE D BY TRIBUNAL BEFORE TAKING CONTRARY VIEW IN THE MATTER. BUT HON BLE DELHI HIGH COURT DID NOT ACCEPT THE TRIBUNALS REASONING. LD. CIT(DR) FURTHER 41 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. SUBMITTED THAT THE DECISION IN THE CASE OF BHUSHAN STEEL HAS BEEN RENDERED WITHOUT TAKING INTO CONSIDERATION THE DECI SION IN THE CASE OF GOETZE (INDIA) LTD. (SUPRA) OF CO-ORDINATE BENCH OF EQUAL STRENGTH AS BOTH SIDES HAD NOT, BROUGHT TO THE NOTICE OF THE BENCH THE SAID DECISION IN THE CASE OF GOETZE (INDIA) LTD. AND, T HEREFORE, DOES NOT CONSTITUTE BINDING PRECEDENT. LD. CIT(DR) VEHEMENT LY CONTENDED THAT WHEN DECISION IN BHUSHAN STEEL WAS RENDERED, T HE ISSUE WAS NO MORE RES-INTEGRA IN VIEW OF GOETZE DECISION. LD. CI T(DR) SUBMITTED THAT REVENUE HAD FILED REVIEW PETITION BEFORE HONB LE HIGH COURT IN THE CASE OF BHUSHAN STEEL WHICH HAS BEEN DISMISSED IN-LIMINE AT THE THRESHOLD ON THE GROUND OF DELAY IN FILING THE SAID REVIEW PETITION AND, THEREFORE, DOES NOT CONSTITUTE A BINDING PRECE DENT. IN SUPPORT OF HIS CONTENTION HE HAS RELIED ON THE COMMENTARY OF K ANGA & PALKHIVALA, VOL. I , VIITH EDN.,PAG 43 WHICH IS REP RODUCED HEREUNDER:- 43. CIRCUMSTANCES THAT DESTROY OR WEAKEN THE BINDIN G FORCE OF PRECEDENT. A PRECEDENT LOSSES ALL OR SOME OF ITS BINDING FORCE IN THE FOLLOWING CIRCUMSTANCES: (I) IF IT IS REVERSED OR OVERRULED BY A HIGHER COURT REVERSAL OCCURS WHEN THE SAME DECISION IS TAKEN ON APPEAL AND IS RE VERSED BY THE HIGHER COURT, WHILE OVERRULING OCCURS WHEN THE HIGH ER COURT DECLARES IN ANOTHER CASE THAT THE EARLIER CASE WAS WRONG DECIDED; (II) WHEN IT IS AFFIRMED OR REVERSED ON A DIFFERENT GROU ND, DEPENDING ON THE CIRCUMSTANCES OF SUCH AFFIRMATION OR REVERSAL; (III) WHEN THE LEGISLATURE ENACTS A STATE THAT IS INCONSI STENT WITH THE PRECEDENT; (IV) WHEN IT IS INCONSISTENT WITH THE EARLIER DECISIONS OF A HIGHER COURT OR A COURT OF THE SAME RANK; (V) IF IT IS A PRECEDENT SUB SILENTIO OR NOT FULLY ARGU ED; (VI) WHEN IT IS RENDERED PER INCURIAM, IE, IN IGNORANCE OF A STATUTORY PROVISION OR BINDING PRECEDENT HOWEVER, THE RULE OF PER INCURIAM IS OF LIMITED APPLICATION, AND IF THE PROVISION OF THE ACT WAS NOTICED AND CONSIDERED, THEN THE JUDGMENT CANNOT BE IGNORED AS BEING PER INCURIAM MERELY ON THE GROUND THAT IT HAS ERRONEOUS LY REACHED THE CONCLUSION; AND (VII) WHEN IT IS AN ERRONEOUS DECISION, IE, A DECISION CO NFLICTING WITH THE FUNDAMENTAL PRINCIPLES OF LAW. 42 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. LD. PRINCIPAL CIT(DR) FURTHER RELIED ON THE DECISIO N OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. THANA ELECT RICITY SUPPLY LTD. 206 ITR 727 WHEREIN HONBLE COURT WHILE SUMMAR IZING THE GENERAL PRINCIPLES WITH REGARD TO PRECEDENTS, INTER -ALIA, OBSERVED AS UNDER:- (III) WHERE THERE ARE CONFLICTING DECISIONS OF COURTS OF CO-ORDINATE JURISDICTION, THE LATER DECISION IS TO BE PREFERRED IF REACHED AFTER FULL CONSIDERATION OF THE EARLIER DECISIONS. LD. PRINCIPAL CIT(DR) HAS ALSO RELIED ON FOLLOWING DECISIONS :- - CIT VS. PAMWI TISSUES LIMITED, 313 ITR 137 - INDIAN OIL CORPORATION LTD. VS. STATE OF BIHAR, 167 ITR 897 - KUNHAYAMMED & ORS. VS. STATE OF KERALA & ANR., 245 ITR 360 LD. PRINCIPAL CIT(DR) HAS SUBMITTED FOLLOWING WRITT EN SUBMISSIONS IN THIS REGARD:- THE ASSESSEE HAD FILED A COMPILATION OF CASE LAWS ON 20/04/2017 AND THE DEPTT. HAD TO REPLY TO THE ABOVE. THE REPLY OF THE DEPTT. IS AS FOLLOWS :- 1. THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF SUNDEEP KUMAR BAFNA V/S STATE OF MAHARASHTRA AND ANOTHER AI R 2014 SC 1745 HAS HELD AS FOLLOWS IN PARA 12 OF THE JUDGEMEN T :- IF THE THIRD SENTENCE OF PARA 48 IS DISCORDANT TO NIRANJAN SINGH, THE VIEW OF THE CO-ORDINATE BENCH OF EARLIER VINTAGE MU ST PREVAIL, AND THIS DISCIPLINE DEMANDS AND CONSTRAINS AS ALSO TO ADHERE TO NIRANJAN SINGH, ERGO, WE REITERATE AGAIN IN PARA 15 OF THE JUDGMENT IT HAS BEEN STATED AS FOLLOWS :- 15. IT CANNOT BE OVER EMPHASIZED THAT THE DISCIP LINE DEMANDED BY A PRECEDENT OR THE DISQUALIFICATION OR DIMUNITION OF A DECISION ON THE APPLICATION OF THE PER INCURIAM RUL E OF GREAT IMPORTANCE, SINCE WITHOUT IT, CERTAINITY OF LAW, CO NSISTENCY OF RULINGS AND COMITY OF COURTS WOULD BECOME A COSTLY CASUALTY . A DECIRION OR 43 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. JUDGEMENT CAN BE PER INCURIAM ANY PROVISION IN A ST ATUTE, RULE OR REGULATION, WHICH WAS NOT BROUGHT TO THE NOTICE OF THE COURT. A DECISION OR JUDGEMENT CAN ALSO BE PER INCURIAM IF I T IS NOT POSSIBLE TO RECONCILE ITS RATIO WITH THAT OF A PREVIOUSLY PRONO UNCED JUDGEMENT OF A CO-EQUAL OR LARGER BENCH, OR IF THE DECISION OF A H IGH COURT IS NOT IN CONSONANCE WITH THE VIEWS OF THIS COURT. IT MUST I MMEDIATELY BE CLARIFIED THAT THE PER INCURIAM RULE IS STRICTLY AN D CORRECTLY APPLICABLE TO THE RATIO DECIDENDI AND NOT TO OBITER DICTA. IT IS OFTEN ENCOUNTERED IN HIGH COURTS THAT TWO ARE MORE MUTUAL LY IRRECONCILABLE DECISIONS OF THE SUPREME COURT ARE CITED AT THE BAR . WE THINK THAT THE INVIOLABLE RECOURSE IS TO APPLY THE EARLIEST VIEW A S THE SUCCEEDING ONES WOULD FALL IN THE CATEGORY OF PER INCURIAM. THUS, BOTH PARAS 12 AND PARA 15 CITED ABOVE, IN THE SUPREME COURT JUDGEMENT IN SANDEEP KUMAR BAFNAS CASE (SUPR A) HOLD VERY CLEARLY THAT THE EARLIER DECISION IS TO BE FOLLOWED AND NOT THE LATER ONE OF CO-QUAL BENCH WHEN GIVEN IN IGNORANCE OF THE E ARLIER DECISION WHICH IN THE PRESENT CASE MAKES IT VERY CLEAR THA T THE DECISION RENDERED IN THE CASE OF GOETZE SHOULD BE FOLLOWED A ND NOT THE LATER DECISION GIVEN IN THE CASE OF BHUSHAN STEEL. FURTHER, THE HONBLE SUPREME COURT IN THE CASE OF M AMALESHWAR PRASAD V/S KANHAIYA LAL (DEAD) AIR 1975 SC 907 OBSE RVED AS FOLLOWS :- CERTAINITY OF THE LAW, CONSISTENCY OF RULINGS AND COMITY OF COURTS ALL FLOWERING FROM THE SAME PRINCIPLE CONVERGE TO T HE CONCLUSION THAT A DECISION ONCE RENDERED MUST LATER BIND LIKE CASES. WE DO NOT INTEND TO DETRACT FROM THE RULE THAT, IN EXCEPTIONAL INSTANCE S WHERE BY OBVIOUS INADVERTENCE OR OVER SIGHT A JUDGEMENT FAILS TO NOT ICE A PLAIN STATUTORY PROVISION OR OBLIGATORY AUTHORITY RUNNING COUNTER T O THE REASONING AND RESULT REACHED, IT MAY NOT HAVE THE SWAY OF BINDING PRECEDENTS. IT SHOULD BE A GLARING CASE, AN OBTRUSIVE OMISSION. ALTHOUGH THE ABOVE OBSERVATIONS ARE NOT RATIO BUT THEN AS HELD IN THE CASE OF (1) KHARAWALA V/S ITO 147 ITR PAGES 67, 85 :- THE OBSERVATION OF THE SUPREME COURT ON THE TRUE IN TERPRETATION OF SUB-S. (1) CANNOT, THEREFORE, BE REGARDED AS MERE P ASSING OBSERVATIONS. AT THE HIGHEST, THEY MAY BE TREATED AS AN OBITER DICTUM, THAT IS TO SAY THE EXPRESSION OF OPINION ON A POINT WHICH IT WAS NOT NECESSARY FOR THE DECISION OF THE CASE. EVEN IF TH EY ARE CONCEIVABLY REGARDED AS OBITER DICTUM IT IS SETTLED THAT IF AN OPINION IS EXPRESSED BY THE SUPREME COURT ON THE INTERPRETATION OF A SECTIO N AFTER CAREFUL CONSIDERATION AND SUCH OPINION IS DELIBERATELY AND ADVISEDLY GIVEN, THE OPINION WOULD BE BINDING ON THE HIGH COURT SEE MOHA NDAS ISSARDAS V. A.N. SATTANATHAN (1955) 56 BLR 1156; AIR 1955 BO M 113. UNDER THESE CIRCUMSTANCES, WERE ARE UNABLE TO ACCEDE TO T HIS SUBMISSION MADE ON BEHALF OF THE REVENUE. (2) CIT V/S AP RIDING CLUB 168 ITR PAGES 393, 404 IT IS NOW-SETTLED THAT EVEN THE OBITER DICTUM OF TH EIR LORDSHIPS OF THE SUPREME COURT IS BINDING ON THE HIGH COURTS UNDER A RTICLE 141 OF CONSTITUTION OF INDIA. 44 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. THE OBITER DICTA OF SUPREME COURT HAS TO BE FOLLO WED. HENCE, BOTH THE CASES OF SANDEEP KUMAR BAFNA AND MA MALESHWAR PRASAD V/S KANHAIYA LAL MAKE IT VERY CLEAR THAT T HE EARLIER DECISION CONSTITUTES THE BINDING PRECEDENT AND SHOULD BE F OLLOWED IN PREFERENCE TO THE LATER DECISION GIVEN IN IGNORANCE OF THE EAR LIER DECISION OF CO-EQUAL STRENGTH. HENCE, IT IS REQUESTED THAT THE HONBLE SPECIAL BEN CH MAY KINDLY FOLLOW THE EARLIER DECISION OF GOETZE IN PREFERENCE TO THE LATER DECISION OF BHUSHAN STEEL. PER CONTRA, LD. SENIOR COUNSEL, WITHOUT PREJUDICE T O HIS SUBMISSION THAT THE DECISION IN THE CASE OF GOETZE (INDIA) LTD . ON THIS ISSUE WAS BY OF CONCESSION, SUBMITTED THAT IN CASE OF CONFLI CT/DIVERGENT VIEW EXPRESSED IN TWO SEPARATE PRONOUNCEMENTS OF A COUR T BY A BENCH OF CO-EQUAL STRENGTH, THE DECISION BEING LATER IN POIN T OF TIME IS BINDING ON THE LOWER COURTS. IN SUPPORT OF THIS PROPOSITION OF LAW HE HAS RELIED ON FOLLOWING DECISIONS :- 1. BHIKA RAM V. UOI : 238 ITR 113 (DEL.). 2. GOVINDANAIK G. KALAGHTIGI V. WEST PATENT PRESS CO. LTD.: AIR 1980 KAR 92 (FB). 3. VASANT TATOBA HARGUDE V. DIKKAYA MUTTAYA PUJARI : A IR 1980 BOMBAY 341. 4. PEEDIKKAKUMBHI JOSEPH V. SPECIAL TAHSILDAR : 2001 ( 1) KLT 747 (FB). 5. DATAMATICS FINANCIAL SERVICES LTD. V. JCIT : 95 ITD 23 (MUM. TRIB.) THE SECOND PROPOSITION ADVANCED BY LD. SENIOR COUNS EL IS THAT IN CASE OF CONFLICT/DIVERGENT VIEW EXPRESSED IN TWO S EPARATE PRONOUNCEMENTS OF A COURT BY A BENCH OF CO-EQUAL S TRENGTH, THE LOWER COURT SHALL FOLLOW THE JUDGMENT WHICH APPEAR S TO IT TO STATE THE 45 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. LAW MORE ELABORATELY AND ACCURATELY. IN THIS REGARD HE HAS RELIED ON FOLLOWING DECISIONS :- 1. INDO SWISS TIME LIMITED V. UMRAO : AIR 1981 P&H 213 2. AMAR SINGH YADAV V. SHANTI DEVI : AIR 1987 PAT 191 3. T.P. NAIK V. UOI : AIR 1998 MP 83 THIRD PROPOSITION ADVANCED BY LD. SENIOR COUNSEL IS THAT A LOWER AUTHORITY/COURT CANNOT DECLARE A JUDGMENT OF A HIGH ER COURT AS PER INCURIUM. IN THIS REGARD HE HAS RELIED ON FOLLOWING DECISIONS:- 1. CASSEL & CO. LTD. VS. BROOME [1972] 1 ALL ER 801 (H OUSE OF LORDS) QUOTED IN ITO V. MODERN INTERNATIONAL : ITA NO.1253 /KOL/2011. 2. CIT V. B.R. CONSTRUCTION : 202 ITR 222 (AP)(FB). THUS, WE ARE PITTED AGAINST TWO DECISIONS OF HONBL E JURISDICTIONAL HIGH COURT TAKING DIVERGENT VIEWS AN D, UNDER SUCH CIRCUMSTANCES WE HAVE TO DECIDE WHICH DECISION TO F OLLOW. WE FIND FROM THE DECISIONS RELIED UPON BY LD. SENIOR COUNSE L MORE PARTICULARLY IN THE CASE OF BHIKA RAM (SUPRA) THAT LATER PRONOUNCEMENT BY A BENCH OF CO-EQUAL STRENGTH SHOUL D BE FOLLOWED EVEN IF EARLIER DECISION WAS NOT CONSIDERED. WE ARE NOT CONVINCED WITH THE SUBMISSION OF LD. SENIOR COUNSEL THAT TRIB UNAL CAN DECIDE WHICH DECISION STATE THE LAW MORE ELABORATELY AND A CCURATELY. WE ARE OF THE VIEW THAT DECISION IN THE CASE OF CASSEL & CO. LTD. V. BROOME (SUPRA) SHOULD GUIDE THE COURSE OF ACTION WHEREIN I T HAS BEEN OBSERVED AS UNDER:- THOUGH A JUDGMENT RENDERED PER INCURIAM CAN BE IGN ORED EVEN BY A LOWER COURT, YET IT APPEARS THAT SUCH A COURSE OF A CTION WAS NOT APPROVED BY THE HOUSE OF LORDS IN CASSELL & CO. LTD. V. BROO ME [1972] 1 AII ER 801, WHEREIN THE HOUSE OF LORDS DISAPPROVED THE JUD GMENT OF THE COURT OF 46 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. APPEAL TREATING AN EARLIER JUDGMENT OF THE HOUSE OF LORDS AS PER INCURIUM. LORD HAILSHAM OBSERVED (AT PAGE 809) : IT IS NOT OPEN TO THE COURT OF APPEAL TO GIVE GRAT UITOUS ADVICE TO JUDGES OF FIRST INSTANCE TO IGNORE DECISIONS OF THE HOUSE OF LORDS IN THIS WAY. IT IS RECOGNIZED THAT THE RULE OF PER INCURIAM IS O F LIMITED APPLICATION AND WILL BE APPLICABLE ONLY IN THE RAREST OF RARE CASES . THEREFORE, WHEN A LEARNED SINGLE JUDGE OR A DIVISION BENCH DOUBTS THE CORRECTNESS OF AN OTHERWISE BINDING PRECEDENT, THE APPROPRIATE COURSE WOULD BE TO REFER THE CASE TO A DIVISION BENCH OF FULL BENCH, AS THE CASE MAY BE, FOR AN AUTHORITATIVE PRONOUNCEMENT ON THE QUESTION INVOLVE D AS INDICATED ABOVE. THE ABOVE-SAID TWO QUESTIONS ARE ANSWERED AS INDICA TED ABOVE. IN SUCH A SCENARIO, IN OUR HUMBLE OPINION, PROPER COURSE WOULD BE TO FOLLOW THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT V. VEGETABLE PRODUCTS LTD. (S.C.) 88 ITR 192. IN THIS CASE THE FACTS WERE LIKE THIS. THE RELEVANT ASSESSMENT YEAR WAS 1960-61 . IN THAT REGARD THE INCOME-TAX OFFICER ISSUED A NOTICE UNDER SECTION 22 (2) OF THE INDIAN INCOME-TAX ACT, 1922 ON JUNE1, 1960 ,SERVED ON ASS ESSEE ON JUNE 13, 1960, REQUIRING THE ASSESSEE TO SUBMIT ITS RETURN O N OR BEFORE JULY18, 1960. ASSESSEE SOUGHT EXTENSION OF TIME FOR SUBMI TTING ITS RETURN WHICH WAS EXTENDED BY ITO FOR TWO MONTHS WITH RIDER FOR NO FURTHER EXTENSION. THE ASSESSEE FAILED TO FURNISH THE RETUR N OF INCOME WITHIN THE EXTENDED TIME. THEREAFTER, A NOTICE UNDER SECT ION 28(3) OF THE 1922 ACT WAS SERVED ON THE ASSESSEE ON JANUARY 16, 1961. ON THE VERY NEXT DAY, VIZ., JANUARY 17, 1961, THE ASSESSEE FILED ITS RETURN FOR THE ASSESSMENT YEAR IN QUESTION. THE ASSESSMENT WA S COMPLETED BY ITO ON OCTOBER 31, 1962. MEANWHILE, ON APRIL 1, 196 2, THE INCOME- TAX ACT, 1962( CAME INTO FORCE. AS UNDER THE PROVIS IONS OF SECTION 297(2)(G) OF THE ACT, THE PROCEEDINGS FOR THE IMPOS ITION OF THE PENALTY HAD TO BE INITIATED AND COMPLETED UNDER THE ACT, A FRESH NOTICE WAS SERVED ON THE ASSESSEE. THE ITO DETERMINED THE TAX DUE FROM THE ASSESSEE FOR THE ASSESSMENT YEAR AT RS.1,25,512.10 AND ON THAT BASIS, 47 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. THE PENALTY PAYABLE BY THE ASSESSEE WAS FIXED AT RS .12,734.10. IT MAY BE POINTED OUT THAT ON FEBRUARY 2, 1961, A PROVISIO NAL ASSESSMENT WAS MADE BY THE ITO UNDER SECTION 23B OF THE 1922 ACT. IMMEDIATELY THEREAFTER , THE ASSESSEE DEPOSITED RS. 92,294.55. IN DETERMINING THE PENALTY DUE FROM THE ASSESSEE, THE ITO TOOK INTO CO NSIDERATION NOT THE AMOUNT DEMANDED UNDER SECTION 156 OF THE ACT BUT TH E AMOUNT ASSESSED UNDER SECTION 143 OF THE ACT. IN THE BACK DROP OF THESE FACTS THE CONTROVERSY BEFORE HONBLE SUPREME COURT WAS W HETHER THE PENALTY WAS TO BE LEVIED ON THE TAX ASSESSED UNDER SECTION 143 OR AS DEMANDED UNDER SECTION 156 BEING TAX ASSESSED MINUS THE AMOUNT PAID UNDER THE PROVISIONAL ASSESSMENT ORDER. HONBL E SUPREME COURT BEFORE RESORTING TO THE INTERPRETATION OF TERM IN ADDITION TO THE AMOUNT OF THE TAX, IF ANY, PAYABLE BY HIM AS APPEARING IN SECTION 271(1)(A)(I) OBSERVED AS UNDER:- ON THE OTHER HAND, IT TWO REASONABLE CONSTRUCTIONS OF A TAXING PROVISION ARE POSSIBLE, THAT CONSTRUCTION WHICH FAVOURS THE A SSESSEE MUST BE ADOPTED. THIS IS A WELL-ACCEPTED RULE OF CONSTRUCT ION RECOGNIZED BY THIS COURT IN SEVERAL OF ITS DECISIONS. HON SUPREME COURT HELD AS UNDER:- WE MUST FIRST DETERMINE WHAT IS THE MEANING OF THE EXPRESSION THE AMOUNT OF THE TAX, IF ANY, PAYABLE BY HIM IN SECTI ON271(1)(A)(I). DOES IT MEAN THE AMOUNT OF TAX ASSESSED UNDER SECTION 143 O R THE AMOUNT OF TAX PAYABLE UNDER SECTION 156. THE WORD ASSESSED IS A TERM OFTEN USED IN TAXATION LAW. IT IS USED IN SEVERAL PROVISIONS IN THE ACT. QUANTIFICATION OF THE TAX PAYABLE IS ALWAYS REFERRED TO IN THE ACT AS A TAX ASSESSED. A TAX PAYABLE IS NOT THE SAME THING AS TAX ASSESSED. THE TAX PAYABLE IS THAT AMOUNT FOR WHICH IS A DEMAND NOTICE IS ISSUED UNDER SECTION 156. IN DETERMINING THE TAX PAYABLE, THE TAX ALREADY PAID H AS TO BE DEDUCTED. HENCE, THERE CAN BE NO DOUBT THAT THE EXPRESSION T HE AMOUNT OF THE TAX, IF ANY, PAYABLE BY HIM REFERRED TO IN THE FIRST PART OF SECTION 271(1)(A)(I) REFERS TO THE TAX PAYABLE UNDER A DEMAND NOTICE. 48 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. WE HAVE , THEREFORE, TO FOLLOW THE LATER DECISION O F HONBLE DELHI HIGH COURT IN THE CASE OF BHUSHAN STEEL (SUPRA). 6.22. IN VIEW OF ABOVE DISCUSSION, WE ANSWER THE QU ESTION REFERRED TO US IN FAVOUR OF ASSSESSEE BY HOLDING THAT THE COMPU TATION UNDER CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB(2), IS TO BE MADE WITHOUT RESORTING TO THE COMPUTATION AS CONTEMPLATED U/S 1 4A READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962. 7. NOW COMING TO THE CROSS OBJECTION FILED BY ASSES SEE, WHEREIN THE MAIN ISSUE IS IN REGARD TO MODE OF COMPUTATION UNDER RULE 8D(2)(III). IN ORDER TO APPRECIATE THE CONTROVERSY, WE REPRODUCE RULE 8D [METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. 8D. (1) WHERE THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH- (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHA LL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PRO VISIONS OF SUB-RU LE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGAT E OF FOLLOWING AMOUNTS, NAMELY:- (I) THE AMOUNT 0/ EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; (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 49 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY:- A X B/C WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR; B = THE AVERAGE OF 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 AND-THE LAST DAY OF THE PREVIOUS YEAR; C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAS T DAY OF THE PREVIOUS YEAR; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE A VERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARI NG IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. (3) FOR THE PURPOSES OF THIS RULE, THE 'TOTAL ASSET S' SHALL MEAN, TOTAL ASSETS AS APPEARING IN THE BALANCE SHEE T EXCLUDING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATIO N OF ASSETS.]' 7.1. IN THE PRESENT CASE, WE ARE ONLY CONCERNED WIT H CLAUSE (III) TO RULE 8D(2), REPRODUCED ABOVE. THE ASSESSEES FIRST CONTENTION IS THAT WHILE CONSIDERING THE AVERAGE VALUE OF INVESTMENT, ONLY THOSE INVESTMENTS ARE TO BE TAKEN INTO CONSIDERATION WHIC H HAVE YIELDED EXEMPT INCOME AND NOT THOSE INVESTMENTS, WHICH DID NOT YIELD ANY EXEMPT INCOME DURING THE YEAR. THE SECOND CONTENTIO N IS THAT PHRASE SHALL NOT IN CLAUSE (III), REFERS ONLY TO THOSE I NVESTMENTS, FROM WHICH INCOME EARNED CAN NEVER BE TAXABLE INCOME. THE CONT ENTION IS THAT MERELY BECAUSE THE INCOME IS EXEMPT IN A PARTICULAR YEAR, BUT CAN BECOME TAXABLE ON ACCOUNT OF AMENDMENT IN SUBSEQUEN T YEAR, THEN THE SAID INVESTMENTS ARE NOT TO BE TAKEN INTO CONSIDERA TION WHILE COMPUTING THE AVERAGE VALUE OF INVESTMENT. 50 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 8. LD. COUNSEL SUBMITTED THAT AS REGARDS INVESTME NTS, NOT YIELDING EXEMPT INCOME, THERE CAN BE TWO TYPES OF I NVESTMENTS (A) INVESTMENT, INCOME WHEREFROM IS TAXABLE; (B) INVESTMENT, INCOME FROM WHICH THOUGH NOT EARNED D URING THE YEAR, IF EARNED, WOULD HAVE BEEN EXEMPT. 8.1. LD. COUNSEL POINTED OUT THAT AS FAR AS INVESTM ENTS MENTIONED IN CLAUSE (A) ARE CONCERNED, THE SAME HAS TO BE EXCLUD ED WHILE COMPUTING AVERAGE VALUE OF INVESTMENT IN TERMS OF R ULE 8D(2). HOWEVER, AS REGARDS THE INVESTMENT CONTEMPLATED IN CLAUSE (B), THE CASE OF THE DEPARTMENT IS THAT IRRESPECTIVE OF A PA RTICULAR INVESTMENT, CAPABLE OF EARNING EXEMPT INCOME, ACTUALLY FETCHED INCOME DURING THE YEAR OR NOT, THE SAME IS TO BE CONSIDERED FOR CALCU LATING AVERAGE INVESTMENT UNDER RULE 8D OF THE I.T. RULES. 8.2. LD. COUNSEL POINTED OUT THAT MANDATE OF SECTIO N 14A IS THAT EXPENDITURE INCURRED IN RELATION TO INCOME, WHICH D OES NOT FORM PART OF TOTAL INCOME UNDER THE ACT, SHALL NOT BE ALLOWED AS DEDUCTION. THIS CLEARLY IMPLIES THAT ASSESSEE SHOULD HAVE EARNED SO ME INCOME DURING THE RELEVANT PREVIOUS YEAR, WHICH DOES NOT FORM PAR T OF THE TOTAL INCOME UNDER THE PROVISIONS OF THE ACT AND SOME EXP ENDITURE HAS BEEN INCURRED BY THE ASSESSEE IN RELATION TO THE AF ORESAID INCOME, WHICH IS NOT INCLUDED IN THE TOTAL INCOME. UNLESS T HESE TWO CONDITIONS ARE SATISFIED, THE PROVISION OF SECTION 14A CANNOT BE INVOKED. 8.3. LD. COUNSEL REFERRED TO THE COLLINS COBUILD ST UDENTS DICTIONARY, WHEREIN THE EXPRESSION DOES REFERS TO THIRD PERSON SINGULAR OF THE PRESENT TENSE OF DO, WHICH MEANS THE ACT DONE IN 51 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. PRESENT. THEREFORE, THE WORD DOES REFERS TO AN A CT OF THE PRESENT AND NOT THE FUTURE. 8.4. LD. COUNSEL SUBMITTED THAT IF THE DEPARTMENTS CONTENTION IS TO BE ACCEPTED, THEN IT IMPLIES THAT FIRSTLY THE INCOM E FROM SUCH INVESTMENT WOULD BE EARNED IN FUTURE AND SECONDLY S UCH INCOME WOULD CONTINUE TO REMAIN EXEMPT FROM TAX I.E. THE LAW AT PRESENT WOULD PREVAIL IN THE SUBSEQUENT YEAR. HE SUBMITTED THAT THERE IS NO CERTAINTY THAT THE INCOME WHICH IS EXEMPT IN CURREN T YEAR WILL REMAIN EXEMPT IN SUBSEQUENT YEAR. HE POINTED OUT THAT THE TERM SHALL IN CLAUSE (III) TO RULE 8D(2) IMPLIES THAT IN THE CURR ENT YEAR ONE SHOULD BE SURE OF INCOME ACCRUING IN SUBSEQUENT YEAR TO RE MAIN EXEMPT. IN SUPPORT OF HIS CONTENTION, HE POINTED OUT THAT DIVI DEND WAS FIRST EXEMPT FROM TAX BY INSERTION OF SEC. 10(33) BY FIN ANCE ACT, 1997 W.E.F. 1-4-1998 BY THE FINANCE ACT 2002, THE EXEMPT ION WAS REMOVED AND DIVIDENDS WERE MADE TAXABLE IN THE AY 2003-04. THE EXEMPTION WAS AGAIN RESTORED BY INSERTION OF SECTION 10(34) B Y FINANCE ACT 2003. THUS, HE SUBMITTED THAT IT IS NOT NECESSARY T HAT, IF, IN ANY OF THE YEAR, ANY ITEM OF INCOME IS EXEMPT, THEN THE SAME W OULD CONTINUE REMAIN EXEMPT IN FUTURE ALSO. 8.5. SIMILARLY, HE POINTED OUT THAT WITH RESPECT TO EXEMPTION FROM TAX OF LONG TERM CAPITAL GAIN THE LEGISLATIVE HIST ORY IS AS UNDER: SECTION 10(38), PROVIDING EXEMPTION OF LTCG EARNED ON SALE OF EQUITY SHARES/ SECURITIES ON WHICH STT IS PAID, WAS INSERTED BY FINANCE ACT, 2004 W.E.F. 1-4-2005. PRIOR THERETO, S UCH LTCG WAS ALSO CHARGEABLE TO TAX. IT IS FURTHER TO BE NOTED THAT U NTIL AMENDMENT BEING MADE VIDE FINANCE ACT 2006, W.E.F. 01.04. 2007 IN C LAUSE (II) TO EXPLANATION 1 TO SECTION 115JB, SUCH LTCG REMAINED TAXABLE UNDER 52 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. MAT EVEN THOUGH THE SAME WAS EXEMPT UNDER NORMAL PR OVISIONS BY VIRTUE OF SECTION 10(38) OF THE ACT. 8.6. LD. COUNSEL RELIED ON THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. HOLCEM INDIA PVT. LTD. (ITA NO. 486/2014 AND 299/14), 8.7. HE POINTED OUT THAT ONE OF THE ASSESSMENT YEAR S INVOLVED IN THE ABOVE APPEALS BEFORE THE HONBLE HIGH COURT WAS AS SESSMENT YEAR 2008-09 AND THE HONBLE COURT HAS SPECIFICALLY CONS IDERED, IN THE JUDGMENT, THE APPLICABILITY OF RULE 8D FOR THE SAID YEAR. 8.8. LD. COUNSEL ALSO RELIED ON FOLLOWING DECISIONS : - CIT V. M/S SHIVAM MOTORS (P) LTD. ITA 88 OF 2014 (A LL.); - CIT V. WINSOME TEXTILE INDUSTRIES LTD. 319 ITR 204 (P&H) - CIT VS. M/S LAKHANI MARKETING ITA 970 OF 2008 (P&H) - CORRTECH ENERGY PVT. LTD. 223 TAXMAN 130 (GUJ.). 8.9. IN ALL THESE CASES IT HAS BEEN HELD THAT UNLES S AND UNTIL THE ASSESSEE HAS ACTUALLY EARNED INCOME DURING THE RELE VANT YEAR AND WHICH DOES NOT FORM PART OF THE TOTAL INCOME, SECTI ON 14A OF THE ACT WOULD HAVE NO APPLICATION. 8.10. LD. COUNSEL SUBMITTED THAT RULE 8D(2)(III) HA S TO BE READ HARMONIOUSLY WITH SECTION 14A BECAUSE RULE CANNOT O VERRIDE THE PROVISIONS OF THE ACT. 8.11. HE ALSO RELIED ON THE DECISION OF KOLKATA BEN CH OF THE ITAT IN THE CASE OF REI AGRO LTD. V. DCIT 160 TTJ 107, UPHO LDING THE AFOREMENTIONED VIEW. 9. LD. PRINCIPAL CIT(DR) SUBMITTED THAT THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE LTD. 328 I TR 81 HAS HELD THAT RULE 8D, SECTION 14A, 14A(2) AND 14A(3) ARE RE ASONABLE, PROPER 53 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. AND VALID AND, THEREFORE, THE AO HAS USED RULE 8D A ND HAS, ACCORDINGLY, TAKEN ALL INVESTMENTS, CAPABLE OF YIEL DING EXEMPT INCOME, WHETHER ACTUALLY YIELDED OR NOT. HE SUBMITT ED THAT THE ACTION OF AO CANNOT BE STRUCK DOWN BY THE ITAT BECAUSE AO HAS ONLY FOLLOWED THE MANDATE OF RULE 8D(2)(III). HE SUBMITT ED THAT NONE OF THE DECISIONS RELIED UPON BY LD. COUNSEL FOR THE AS SESSEE HAVE CONSIDERED THE PRINCIPLES LAID DOWN BY HONBLE SUPR EME COURT IN THE CASE OF RAJEDNRA PRASAD MOODY 115 ITR 519 (SC), WH EREIN IT HAS BEEN HELD THAT AN EXPENDITURE TO BE ALLOWABLE, NEED NOT BE PROFITABLE, MEANING THEREBY THAT MERELY BECAUSE THERE IS NO EXE MPT INCOME, EXPENDITURE IN RELATION TO THIS UNEARNED EXEMPT IN COME CANNOT BE DISALLOWED. HE SUBMITTED THAT SINCE THE VARIOUS DEC ISIONS RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE ARE AGAINST THE RATIO OF THE HONBLE SUPREME COURTS DECISION IN THE CASE OF RAJENDRA PR ASAD MOODY (SUPRA), IT IS NOT BINDING ON THE TRIBUNAL. 9.1. LD. PRINCIPAL CIT(DR) FURTHER REFERRED TO THE DECISION OF SPECIAL BENCH OF THE ITAT IN THE CASE OF CHEMINVEST LTD. (SUPRA), WHEREIN THE CONTROVERSY WAS THAT THE ASSESSEE HAD N OT EARNED OR RECEIVED ANY DIVIDEND IN THE YEAR UNDER CONSIDERATI ON AND, THEREFORE, ASSESSEES CLAIM WAS THAT NO DISALLOWANCE COULD BE MADE BY INVOKING THE PROVISIONS OF SECTION 14A AND THIS ARGUMENT WAS REJECTED BY SPECIAL BENCH FOLLOWING THE DECISION OF HONBLE SUP REME COURT IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA). 10. IN REJOINDER LD. COUNSEL REITERATED THE SUBMISS IONS WHICH WERE ADVANCED BEFORE THE SPECIAL BENCH OF THE ITAT IN TH E CASE OF CHEMINVEST LTD. VS. ACIT 317 ITR (AT) 86. LD. COUN SEL VIDE HIS LETTER DT. SEPTEMBER 7, 2015 SUBMITTED THAT HONBLE DELHI HIGH COURT 54 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. VIDE ORDER DT.02.09.2015 IN THE CASE OF CHEMINVEST LIMITED V. CIT IN ITA NO. 749/2014 REVERSED THE DECISION OF SPECIAL B ENCH AND , FOLLOWING THE EARLIER DECISION OF THE HONBLE HIGH COURT IN THE CASE OF CIT V. HOLCIM INDIA (P) LTD.: 272 CTR 282, HELD THAT WHERE NO EXEMPT INCOME HAS BEEN RECEIVED BY THE ASSESSEE IN THE PREVIOUS YEAR, DISA LLOWANCE UNDER SECTION 14A OF THE ACT IS NOT WARRANTED.THE HONBLE HIGH COURT HAS FURTHER HELD THAT RELIANCE PLACED BY THE SPECIAL BENCH ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF RAJENDRA PRASAD MOODY: 115 ITR 519 WAS MISP LACED. IT HAS BEEN OBSERVED BY THE HONBLE HIGH COURT THAT DECISION OF HONBLE SUPREME COURT IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA) DEALT WIT H THE INTERPRETATION OF SECTION 57(III) OF THE ACT, WHICH IS AN ALLOWANCE PROVISION , WOULD NOT APPLY WITH RESPECT TO INTERPRETATION OF SECTION 14A OF THE ACT, WHICH IS FOR COMPUTING DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EARNING OF E XEMPT INCOME. LD. SR. COUNSEL FURTHER POINTED OUT THAT NO SLP HAS BEEN FILED BY DEPARTMENT AGAINST THE SAID JUDGMENT. LD. CIT(DR) SUBMITTED THAT THE DECISION OF HONBLE DELHI HIGH COURT IS CONTRARY TO THE VIEW TAKEN BY HONBLE SUPR EME COURT IN THE CASE OF RAJENDRA PRASAD MODI (SUPRA). AS REGARDS NO N-FILING OF SLP, LD. CIT(DR) SUBMITTED THAT THE SAME WAS NOT FILED BECAUSE OF THE SMALLNESS OF AMOUNT. IN THIS REGARD HE REFERRED TO THE LETTER DT. 18/4/17 OF AO IN WHICH IT IS STATED TAX EFFECT INVOLVED WAS RS.5,72,107/-, WHICH WAS BELOW THE MONETARY LIMIT LAID DOWN AS PER THE INSTRUCTION NO.5 OF 2014 IN F.NO. 279/MISC.142/2007-ITJ(PT.) DA TED 10.07.2014 FOR FILING OF SLP. THE CASE WAS ALSO NOT FOUND COV ERED UNDER THE EXEMPTION CLAUSE AS PER SUB PARA (B) OF PARA 8 OF T HE SAID INSTRUCTION NO.5/2014. IN VIEW OF THESE FACTS, FILING OF SLP W AS NOT APPROVED BY THE BOARD. LD. CIT(DR) REFERRED TO PARA 6 OF CIRCULAR NO.21/2 015 WHICH IS REPRODUCED HEREUNDER:- 55 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 6. IN A CASE WHERE APPEAL BEFORE A TRIBUNAL OR A C OURT IS NOT FILED ONLY ON ACCOUNT OF THE TAX EFFECT BEING LESS THAN T HE MONETARY LIMIT SPECIFIED ABOVE, THE COMMISSIONER OF INCOME-TAX SHA LL SPECIFICALLY RECORD THAT EVEN THOUGH THE DECISION IS NOT ACCEPTABLE, A PPEAL IS NOT BEING FILED ONLY ON THE CONSIDERATION THAT THE TAX EFFECT IS LE SS THAN THE MONETARY LIMIT SPECIFIED IN THIS INSTRUCTION. FURTHER, IN SUCH C ASES, THERE WILL BE NO PRESUMPTION THAT THE INCOME-TAX DEPARTMENT HAS ACQU IESCED IN THE DECISION ON THE DISPUTED ISSUES. THE INCOME-TAX DE PARTMENT SHALL NOT BE PRECLUDED FROM FILING AN APPEAL AGAINST THE DISPUTE D ISSUES IN THE CASE OF THE SAME ASSESSEE FOR ANY OTHER ASSESSMENT YEAR, OR IN THE CASE OF ANY OTHER ASSESSEE FOR THE SAME OR ANY OTHER ASSESSMENT YEAR, IF THE TAX EFFECT EXCEEDS THE SPECIFIED MONETARY LIMITS. LD. CIT(DR) FURTHER REFERRED TO SECTION 268A(4) WHI CH READS AS UNDER:- FILING OF APPEAL OR APPLICATION FOR REFERENCE BY I NCOME-TAX AUTHORITY. 268A. (1) .. (4) THE APPELLATE TRIBUNAL OR COURT, HEARING SUCH A PPEAL OR REFERENCE, SHALL HAVE REGARD TO THE ORDERS, INSTRUCTIONS OR DI RECTIONS ISSUED UNDER SUB-SECTION (1) AND THE CIRCUMSTANCES UNDER WHICH S UCH APPEAL OR APPLICATION FOR REFERENCE WAS FILED OR NOT FILED IN RESPECT OF ANY CASE. HE, THEREFORE, SUBMITTED THAT THE DECISION IN THE C ASE OF CHEMINVEST OF HONBLE DELHI HIGH COURT HAS NO PRECEDENT VALUE. IN THIS REGARD HE ALSO FILED INSTRUCTIONS OF CBDT ON OBJECT OF INSERT ION OF SECTION 268A WHICH, INTER-ALIA, READS AS UNDER:- WHERE AN INCOME-TAX AUTHORITY HAS NOT FILED ANY AP PEAL OR APPLICATION FOR REFERENCE ON ANY ISSUE IN THE CASE OF AN ASSESS EE FOR ANY ASSESSMENT YEAR, DUE TO ABOVEMENTIONED ORDER/INSTRUCTION/DIREC TION OF THE BOARD, SUCH AUTHORITY SHALL NOT BE PRECLUDED FROM FILING A N APPEAL OR APPLICATION FOR REFERENCE ON THE SAME ISSUE IN THE CASE OF (A) THE SAME ASSESSEE FOR ANY OTHER ASSESSMENT YEAR; OR (B) ANY OTHER ASSESSEE FOR THE SAME OR ANY OTHER ASSESS MENT YEAR. HE, THEREFORE, SUBMITTED THAT, IN VIEW OF STATUTORY PROVISIONS, CIRCULAR SHOULD BE GIVEN DUE WEIGHTAGE. 56 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. LD. CIT(DR) FURTHER REFERRED TO 378 ITR 22 (JOURNA L SECTION) WHEREIN IT IS COMMENTED BY S. RAJARATNAM ON THE DEC ISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST (SUPRA) AS UNDER:- SECTION 14A PROVIDES FOR DISALLOWANCE OF EXPENDITU RE RELATING TO EXEMPT INCOME. WHERE THE EXEMPT SOURCE WAS INTACT BUT THERE WAS NO INCOME DURING THE YEAR, IT WAS DECIDED THAT SECTION 14A COULD HAVE NO APPLICATION, IN CHEMINVEST LTD. V. CIT [2015] 378 I TR 33 (DELHI). THE ARGUMENT OF THE REVENUE WAS THAT THERE NEED NOT BE INCOME FOR EVERY YEAR FROM A SOURCE TO MERIT DEDUCTION OR EXPENDITURE REL ATING TO SUCH A SOURCE AS DECIDED BY THE SUPREME COURT IN CIT V. RAJENDRA PRASAD MOODY [1978] 115 ITR 519 (SC), SO THAT THERE CANNOT BE A DIFFERENCE VIEW IN RESPECT OF DISALLOWANCE OF EXPENDITURE. THE REASON ING FOR NON-ACCEPTANCE OF THIS ARGUMENT WAS THAT THE LANGUAGE OF SECTION 5 7(3) UNDER WHICH THE DECISION WAS RENDERED IS DIFFERENT FROM THE LANGUAG E UNDER SECTION 14A. THE DECISION MAY NEED REVIEW BECAUSE THE MERE ACCID ENT THAT FOR A PARTICULAR YEAR THERE WAS NO INCOME AS FOR EXAMPLE IN THE CASE OF DIVIDEND INCOME, CANNOT MEAN THAT THE ASSESSEE WOULD GET ENT ITLED TO THE EXPENDITURE RELATING TO INVESTMENT ON SHARES IN THE YEAR IN WHICH DIVIDEND IS RECEIVED BUT NOT FOR A YEAR IN WHICH THERE WAS N O DECLARATION OF DIVIDEND. IT LEADS TO UNEVEN RESULT, SO THAT THERE WAS PROBABLY NO ADEQUATE REASON FOR NON-APPLICATION OF RAJENDRA PRA SAD MOODYS CASE (SUPRA) IN RESPECT OF THIS ISSUE BEFORE THE COURT. 11. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. THE BASIC ISSU E FOR CONSIDERATION IS THAT THE INVESTMENT, WHICH DID NOT YIELD ANY EXE MPT INCOME, SHOULD ENTER OR NOT ENTER INTO THE COMPUTATION UNDER RULE 8D, WHILE ARRIVING AT THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHI CH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME. 11.1. IN THE PRESENT CASE, OUR DECISION IS RESTRICT ED ONLY TO THE EXTENT OF INTERPRETATION OF LANGUAGE EMPLOYED IN RULE 8(2) (III). THE SUBMISSION OF LD. COUNSEL FOR THE ASSESSEE IS THAT THIS ISSUE IS NOW COVERED BY THE DECISION OF THE HONBLE DELHI HIGH C OURT IN THE CASE OF CIT VS. HOLCIN INDIA (P) LTD. (SUPRA), WHEREIN IT HAS BEEN HELD THAT IF NO DIVIDEND INCOME WAS EARNED, SECTION 14A COULD NOT BE INVOKED. 57 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. THE HONBLE DELHI HIGH COURT HAS REFERRED TO THE DE CISIONS, WHICH WE HAVE NOTED EARLIER I.E.: - CIT V. M/S SHIVAM MOTORS (P) LTD. ITA 88 OF 2014 (A LL.); - CIT V. WINSOME TEXTILE INDUSTRIES LTD. 319 ITR 204 (P&H) - CIT VS. M/S LAKHANI MARKETING ITA 970 OF 2008 (P&H) - CORRTECH ENERGY PVT. LTD. 223 TAXMAN 130 (GUJ.). - CIT VS. HERO CYCLES LTD. 323 ITR 518. 11.2. THE SUBMISSION OF LD. PRINCIPAL CIT(DR) IS TH AT ITAT IN THE CASE OF DELHI SPECIAL BENCH IN THE CASE OF CHEMINV EST LTD. (SUPRA) HAS SPECIFICALLY HELD THAT EVEN IF THERE IS NO EXEM PT INCOME, THE PROVISIONS OF SECTION 14A ARE APPLICABLE IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF RAJEDNRA PRASA D MOODY (SUPRA). HIS SUBMISSION IS THAT THE DECISION OF HON BLE DELHI COURT REVERSING THE DECISION OF SPECIAL BENCH IN CHEMINVE ST SHOULD NOT BE FOLLOWED BECAUSE THAT IS CONTRARY TO THE PRINCIPLES LAID DOWN IN RAJENDRA PRASAD MODI(SUPRA). 11.3. IT IS AGAINST THESE SUBMISSIONS, WE FIRST REF ER TO THE FACTS AS WERE OBTAINING IN THESE TWO DECISIONS. 11.4. IN THE CASE OF CHEMINVEST LTD. (SUPRA), THE A SSESSEE HAD BORROWED FUNDS OF RS. 8,51,65,000/- AND DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2004-05 PAID INTEREST O F RS. 1,21,02,367/- THEREON. OUT OF THIS UNSECURED LOAN, THE ASSESSEE I NVESTED A SUM IN PURCHASE OF SHARES, WHICH WAS SHOWN AS INVESTMENT F OR THE PURPOSE OF LONG TERM CAPITAL GAINS. THE AO DISALLOWED INTEREST PROPORTIONATE TO THE INVESTMENT IN SHARES, THOUGH NO EXEMPT INCOME W AS EARNED DURING THE YEAR. THE CIT(A) AFFIRMED THIS BUT HELD THAT THE NET INTEREST DEBITED TO THE P&L A/C WAS REQUIRED TO BE APPORTION ED AND NOT THE GROSS INTEREST EXPENDITURE. THE TRIBUNAL HELD THAT INTEREST EXPENDITURE 58 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. INCURRED BY THE ASSESSEE WAS FOR BORROWING USED FOR THE PURPOSES OF INVESTMENT IN SHARES, BOTH HELD FOR TRADING AS WELL AS INVESTMENT PURPOSES. IRRESPECTIVE OF WHETHER OR NOT THERE WAS ANY YIELD OF DIVIDEND ON THE SHARES PURCHASED, THE INTEREST INCU RRED WAS RELATABLE TO EARNING OF DIVIDEND ON THE SHARES PURCHASED. THE DIVIDEND INCOME BEING EXEMPTED FROM TAX BY VIRTUE OF SECTION 10(34) OF THE ACT, THE INTEREST PAID ON BORROWED CAPITAL UTILIZED IN PURCH ASE OF SHARES, BEING THE EXPENDITURE INCURRED IN RELATION TO DIVIDEND IN COME NOT FORMING PART OF THE ASSESSEES TOTAL INCOME, WAS HELD TO BE NOT AN ALLOWABLE DEDUCTION. IN COMING TO THE CONCLUSION, THE SPECIAL BENCH PRIMARILY RELIED ON THE RATIO LAID DOWN BY THE HONBLE SUPREM E COURT IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA). 11.5. IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA), THE FACTS WERE THAT THE ASSESSEES WERE BROTHERS AND EACH OF THEM H AD BORROWED MONEYS FOR THE PURPOSES OF MAKING INVESTMENT IN SHA RES OF CERTAIN COMPANIES. DURING THE RELEVANT ASSESSMENT YEAR THEY PAID INTEREST ON THE MONEYS BORROWED BUT DID NOT RECEIVE ANY DIVIDEN D ON THE SHARES PURCHASED WITH THESE MONEYS. BOTH OF THEM MADE A CL AIM FOR DEDUCTION OF THE AMOUNT OF INTEREST PAID ON BORROWE D MONEYS BUT THIS CLAIM WAS NEGATED BY THE ITO AND ON APPEAL BY THE A AC ON THE GROUND THAT DURING THE RELEVANT ASSESSMENT YEAR THE SHARES DID NOT YIELD ANY DIVIDEND AND, THEREFORE, INTEREST PAID ON THE BORROWED MONEYS COULD NOT BE REGARDED AS EXPENDITURE LAID OU T OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF MAKING O R EARNING INCOME CHARGEABLE UNDER THE HEAD INCOME FROM OTHER SOURCE S, SO AS TO BE ALLOWABLE AS A PERMISSIBLE DEDUCTION U/S 57(III). T HE TRIBUNAL, HOWEVER, ON FURTHER APPEAL, DISAGREED WITH THE VIEW TAKEN BY THE 59 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. TAXING AUTHORITIES AND UPHELD THE CLAIM OF EACH OF THE TWO ASSESSEES FOR DEDUCTION U/S 57(III). 11.6. IN THE BACKDROP OF THESE FACTS THE TRIBUNALS ORDER WAS UPHELD BY THE HONBLE HIGH COURT AND HONBLE SUPREME COUR T. THE HONBLE SUPREME COURT, INTER ALIA, HELD THAT IT IS THE PURP OSE OF THE EXPENDITURE THAT IS RELEVANT IN DETERMINING THE APPLICABILITY O F SECTION 57(III) AND THAT PURPOSE MUST BE MAKING OR EARNING OF INCOME. I T WAS FURTHER HELD THAT SECTION 57(III) DOES NOT REQUIRE THAT THIS PUR POSE MUST BE FULFILLED IN ORDER TO QUALIFY THE EXPENDITURE FOR DEDUCTION. IT DOES NOT SAY THAT THE EXPENDITURE SHALL BE DEDUCTIBLE ONLY IF ANY INC OME IS MADE OR EARNED. THERE IS IN FACT NOTHING IN THE LANGUAGE OF SECTION 57(III) TO SUGGEST THAT THE PURPOSE, FOR WHICH THE EXPENDITURE IS MADE, SHOULD FRUCTIFY INTO ANY BENEFIT BY WAY OF RETURN IN THE S HAPE OF INCOME. 11.7. THUS, IN BOTH THE DECISIONS VIZ. IN THE CASE OF CHEMINVEST LTD. (SUPRA), AND IN THE CASE OF RAJENDRA PRASAD MOODY ( SUPRA), THE ISSUE RELATED TO ALLOWABILITY OF EXPENDITURE WHICH HAD DI RECT NEXUS WITH THE EARNING OF INCOME. THE BORROWING IN BOTH THE CASES HAS NOT BEEN DISPUTED BEING FOR ACQUIRING SHARES. HONBLE DELHI HIGH COURT HAS SPECIFICALLY HELD IN PARA 21 AS UNDER:- 21. THERE IS MERIT IN THE CONTENTION OF MR. VOHRA THAT THE DECISION OF THE SUPREME COURT IN RAJENDRA PRASAD MODDY (SUPRA) WAS RENDERED IN THE CONTEXT OF ALLOWABILITY OF DEDUCTION UNDER SECT ION 57(III) OF THE ACT, WHERE THE EXPRESSION USED IS FOR THE PURPOSE OF MA KING OR EARNING SUCH INCOME. SECTION 14A OF THE ACT ON THE OTHER HAND CONTAINS THE EXPRESSION IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE DECISION IN RAJENDRA PRASAD MOODY (SUPRA) CANNOT BE USED IN THE REVERSE TO CONTEND THAT EVEN IF NO INCOME HAS BEEN RECEIVED , THE EXPENDITURE INCURRED CAN BE DISALLOWED UNDER SECTION 14A OF THE ACT. 11.8. IN THE CASE OF HOLCIN INDIA (P) LTD. (SUPRA) THE FACTS WERE THAT THE RESPONDENT- ASSESSEE WAS A SUBSIDIARY OF HOLDER IND INVESTMENTS 60 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. LTD., MAURITIUS, WHICH WAS FORMED AS A HOLDING COM PANY FOR MAKING DOWNSTREAM INVESTMENTS IN CEMENT MANUFACTURING VENT URES IN INDIA. IN THE RETURN OF INCOME FILED FOR THE ASSESSMENT YE AR 2007-08, THE RESPONDENT-ASSESSEE DECLARED LOSS OF RS. 8.56 CRORE S APPROXIMATELY. THE RESPONDENT-ASSESSEE HAD DECLARED REVENUE RECEIP TS OF RS. 18,02,274/- WHICH INCLUDED INTEREST OF RS. 726/- FR OM FIXED DEPOSIT RECEIPTS AND PROFIT ON SALE OF FIXED ASSETS OF RS. 16,52,225/-. AS AGAINST THIS, THE RESPONDENT ASSESSEE HAD CLAIMED A DMINISTRATIVE AND MISCELLANEOUS EXPENDITURE WRITTEN OFF AMOUNTING TO RS. 8.75 CRORES. FOR THE ASSESSMENT YEAR 2008-09, THE ASSESSEE HAD F ILED RETURN DECLARING LOSS OF RS. 6.60 CRORES APPROXIMATELY. TH E ASSESSEE HAD DECLARED REVENUE RECEIPTS IN THE FORM OF FOREIGN CU RRENCY FLUCTUATION DIFFERENCE GAIN OF RS. 12,46,595/-. IT HAD CLAIMED EXPENSES AMOUNTING TO RS. 7.02 CRORES AS PERSONAL EXPENSES, OPERATING AND OTHER EXPENSES, DEPRECIATION AND FINANCIAL EXPENSES. 11.9. IN BOTH THE ASSESSMENT ORDERS, THE ASSESSING OFFICER HELD THAT THE RESPONDENT-ASSESSEE HAD NOT COMMENCED BUSINESS ACTIVITIES AS THEY HAD NOT UNDERTAKEN ANY MANUFACTURING ACTIVITY OR MADE DOWNSTREAM INVESTMENTS. IT WAS OBSERVED THAT THE RE SPONDENT- ASSESSEE, AFTER RECEIVING APPROVAL OF FOREIGN INVES TMENT PROMOTION SOARD (FIPS) DATED 20.12.2000 ACQUIRED SHARES CAPIT AL OF AMBUJA CEMENT INDIA LTD. THIS, THE ASSESSING OFFICER FELT, WAS NOT SUFFICIENT TO INDICATE OR HOLD THAT THE RESPONDENT-ASSESSEE HA D STARTED THEIR BUSINESS. HE, ACCORDINGLY, DISALLOWED THE ENTIRE EX PENDITURE OF RS. 8.75 CRORES FOR THE ASSESSMENT YEAR 2007-08 AND RS. 7.02 CRORES FOR THE ASSESSMENT YEAR 2008-09. 61 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 11.10. LD. CIT(A) DID NOT AGREE WITH THE FINDINGS OF ASSESSING OFFICER THAT THE BUSINESS OF THE RESPONDENT- ASSESS EE HAD NOT BEEN SET UP OR COMMENCED. THE CIT(A) OBSERVED THAT THE RESPO NDENT-ASSESSEE HAD BEEN SET UP WITH THE BUSINESS OBJECTIVE OF MAKI NG INVESTMENT IN CEMENT INDUSTRY AFTER DUE APPROVAL GIVEN BY THE GOV ERNMENT OF INDIA, MINISTRY OF COMMERCE AND INDUSTRY VIDE LETTER DATED 18.12.2002 AND 20.12.2012. IT WAS OBSERVED THAT IN FACT, THE RESPO NDENT-ASSESSEE WAS NOT TO UNDERTAKE ANY MANUFACTURING ACTIVITY THEMSEL VES. AFTER CONSIDERING THE FIPS APPROVAL AND THE PURCHASE OF SHARES IN THE SAID COMPANY OF RS. 1850.91 CRORES, LD. CIT(A), INTER ALIA, OBSERVED THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF HO LDING OF INVESTMENT AND WAS ENTITLED TO CLAIM EXPENDITURE PR OVIDED. THERE WAS A DIRECT CONNECTION BETWEEN EXPENDITURE INCURRE D AND BUSINESS OF THE ASSESSEE COMPANY. HOWEVER, HE POINT ED OUT THAT SINCE THE BUSINESS OF THE RESPONDENT ASSESSEE WAS T O ACT AS A HOLDING COMPANY FOR DOWNSTREAM INVESTMENT AND AS IT WAS AN ACCEPTED FACT THAT THEY HAD INCURRED EXPENSES TO PR OTECT THEIR BUSINESS AND EXPLORE NEW AVENUES OF INVESTMENT, THE PROVISIONS OF SECTION 14A WERE APPLICABLE. 11.11. THE HONBLE HIGH COURT OBSERVED THAT THE REA SONING GIVEN BY THE CIT(A) WAS AMBIGUOUS AND UNCLEAR AND O N CLARITY BEING SOUGHT FROM THE REVENUE IT WAS POINTED OUT T HAT THE STAND OF THE ASSESSEE CONTAINED A CONTRADICTION TO THE EX TENT THAT ON THE ISSUE OF SETTING UP OF BUSINESS, IT WAS STATED THA T THE ASSESSEE HAD INCURRED EXPENDITURE ON ACQUIRING THE SHARES, THERE FORE, THE ASSESSEE COULD NOT NOW TAKE DIFFERENT STAND THAN TH E ONE TAKEN IN THE FIRST ISSUE. 62 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 11.12. THE HONBLE HIGH COURT, AFTER CONSIDERING IN DETAIL THE DECISION OF LD. CIT(A) FINALLY OBSERVED IN PAR A 13 AS UNDER: 13. WE ARE CONFUSED ABOUT THE STAND TAKEN BY THE APPELLANT-REVENUE. THUS, WE HAD ASKED SR. STANDING COUNSEL FOR THE REVENUE, TO STATE IN HIS OWN WORDS, THEIR STAND BEFORE US. DURING THE COURSE OF HEARING, THE SUBMISSION RAISED WAS THAT THE SHARES WOULD HAVE YI ELDED DIVIDEND, WHICH WOULD BE EXEMPT INCOME AND THEREFOR E, THE CIT(A) HAD INVOKED SECTION 14A TO DISALLOW THE ENTIRE EXPENDITURE. THE AFORESAID SUBMISSION DOES NOT FIND ANY SPECIFIC AND CLEAR NARRATION IN THE REASONS OR THE GROUNDS GIVEN BY THE CIT(A) TO MAKE THE SAID ADDITION. POSS IBLY, THE CIT(A), THOUGH IT IS NOT ARGUED BEFORE US, HAD TAKEN THE STAND THAT THE RESPONDENT-ASSESSEE HAD MADE INVESTM ENT AND EXPENDITURE WAS INCURRED TO PROTECT THOSE INVES TMENTS AND THIS EXPENDITURE CANNOT BE ALLOWED UNDER SECTIO N 14A. 11.13. THUS, HONBLE DELHI HIGH COURT PRIMARILY DEC IDED THE ISSUE REGARDING APPLICABILITY OF SECTION 14A EVEN IF NO D IVIDEND INCOME WAS EARNED. THE HONBLE HIGH COURT IN PARAS 14 TO 16 OF ITS DECISION OBSERVED AS UNDER: 14. ON THE ISSUE WHETHER THE RESPONDENT-ASSESSEE CO ULD HAVE EARNED DIVIDEND INCOME AND EVEN IF NO DIVIDEND INCOME WAS EARNED, YET SECTION 14A CAN BE INVOKED A ND DISALLOWANCE OF EXPENDITURE CAN BE MADE, THERE ARE THREE DECISIONS OF THE DIFFERENT HIGH COURTS DIRECTLY ON THE ISSUE AND AGAINST THE APPELLANT-REVENUE. NO CONTRARY DECI SION OF A HIGH COURT HAS BEEN SHOWN TO US. THE PUNJAB AN D HARYANA HIGH COURT IN COMMISSIONER OF INCOME TAX, FARIDABAD VS. MIS. LAKHANI MARKETING INCL., ITA NO. 970/2008, DECIDED ON 02.04.2014, MADE REFERENCE TO TWO EARLIER DECISIONS OF THE SAME COURT IN CIT VS. HERO CYCLES LIMITED, [2010]323 ITR 518 AND CIT VS. WINSOME TEXT ILE INDUSTRIES LIMITED, [2009] 319 ITR 204 TO HOLD THAT SECTION 14A CANNOT BE INVOKED WHEN NO EXEMPT INCOME WAS EARNED. THE SECOND DECISION IS OF THE GUJARAT H IGH COURT IN COMMISSIONER OF INCOME TAX-I VS. CORRTECH ENERGY (P.) LTD. [2014] 223 TAXMANN 130 (GUJ.). THE THIRD DECISION IS OF THE ALLAHABAD HIGH COURT IN IN COME TAX APPEAL NO. 88 OF 2014, COMMISSIONER OF INCOME T AX (II) KANPUR, VS. MIS. SHIVAM MOTORS (P) LTD. DECIDE D ON 05.05.2014. IN THE SAID DECISION IT HAS BEEN HELD:- 63 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 'AS REGARDS THE SECOND QUESTION, SECTION 14A OF THE ACT PROVIDES THAT FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THE 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 THE ACT. HENCE, WHAT SECTION 14A PROVIDES IS THAT IF THERE IS ANY INCOME WHICH DOES NOT FORM PART OF THE INCOME UNDER THE ACT, THE EXPENDITURE WHICH IS INCURRED FOR EARNING THE INCOME IS NOT AN ALLOWABLE DEDUCTION. FOR THE YEAR IN QUESTION, THE FINDING OF FACT IS THAT THE ASSESSEE HAD NOT EARNED ANY TAX FREE INCOME. HENCE, IN THE ABSENCE OF ANY TAX FREE INCOME, THE CORRESPONDING EXPENDITURE COULD NOT BE WORKED OUT FOR DISALLOWANCE. THE VIEW OF THE CIT(A), WHICH HAS BEEN AFFIRMED BY THE TRIBUNAL, HENCE DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. HENCE, THE DELETION OF THE DISALLOWANCE OF RS.2,03,752/- MADE BY THE ASSESSING OFFICER WAS IN ORDER '15. INCOME EXEMPT UNDER SECTION 10 IN A PARTICULAR ASSESSMENT YEAR, MAY NOT HAVE BEEN EXEMPT EARLIER A ND CAN BECOME TAXABLE IN FUTURE YEARS. FURTHER, WHETHE R INCOME EARNED IN A SUBSEQUENT YEAR WOULD OR WOULD N OT BE TAXABLE, MAY DEPEND UPON THE NATURE OF TRANSACTION ENTERED INTO IN THE SUBSEQUENT ASSESSMENT YEAR. FOR EXAMPLE, LONG TERM. CAPITAL GAIN ON SALE OF SHARES IS PRESENTLY NOT TAXABLE WHERE SECURITY TRANSACTION TA X HAS BEEN PAID, BUT A PRIVATE SALE OF SHARES IN AN OFF M ARKET TRANSACTION ATTRACTS CAPITAL GAINS TAX: IT IS AN UN DISPUTED POSITION THAT RESPONDENT ASSESSEE IS AN INVESTMENT COMPANY AND HAD INVESTED BY PURCHASING A SUBSTANTIA L NUMBER OF SHARES AND THEREBY SECURING RIGHT TO MANAGEMENT. POSSIBILITY OF SALE OF SHARES BY PRIVAT E PLACEMENT ETC. CANNOT BE RULED OUT AND IS NOT ALL IMPROBABILITY. DIVIDEND MAY OR MAY NOT BE DECLARED. DIVIDEND IS DECLARED BY THE COMPANY AND STRICTLY IN LEGAL SENSE, A SHAREHOLDER HAS NO CONTROL AND CANNOT INSI ST ON PAYMENT OF DIVIDEND. WHEN DECLARED, IT IS SUBJECTED TO DIVIDEND DISTRIBUTION TAX. 16. WHAT IS ALSO NOTICEABLE IS THAT THE ENTIRE OR W HOLE EXPENDITURE HAS BEEN DISALLOWED AS IF THERE WAS NO EXPENDITURE INCURRED BY THE RESPONDENT-ASSESSEE FOR CONDUCTING BUSINESS. THE CIT(A) HAS POSITIVELY HELD THAT THE BUSINESS WAS SET UP AND HAD COMMENCED. THE SAID 64 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. FINDING IS ACCEPTED. THE RESPONDENT-ASSESSEE, THERE FORE, HAD TO INCUR EXPENDITURE FOR THE BUSINESS IN THE FO RM OF INVESTMENT IN SHARES OF CEMENT COMPANIES AND TO FUR THER EXPAND AND CONSOLIDATE THEIR BUSINESS. EXPENDITURE HAD TO BE ALSO INCURRED TO PROTECT THE INVESTMENT MADE. TH E GENUINENESS OF THE SAID EXPENDITURE AND THE FACT TH AT IT WAS INCURRED FOR BUSINESS ACTIVITIES WAS NOT DOUBTED BY THE ASSESSING OFFICER AND HAS ALSO NOT BEEN DOUBTED BY THE CIT(A). 11.14. NOW THE POSITION OF LAW AS STANDS IS THAT TH E DECISION OF HONBLE JURISDICTION HIGH COURT IS DIRECTLY ON T HE POINT IN DISPUTE WHEREAS THE DECISION OF HONBLE SUPREME COU RT IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA) HAS BEEN REND ERED IN THE CONTEXT OF SECTION 57(III), THE APPLICABILITY OF WH ICH HAS BEEN RULED OUT BY HONBLE DELHI HIGH COURT IN THE CASE O F CHEMINVEST (SUPRA). 11.15. UNDER ARTICLE 227 OF THE CONSTITUTION OF IND IA, THE COURTS FUNCTION UNDER THE SUPERVISORY JURISDICTION OF HONBLE HIGH COURT. THE DECISIONS RENDERED BY HONBLE HIGH COURT ARE BINDING ON ALL SUBORDINATE COURTS WORKING WITHIN IT S JURISDICTION. IN THIS REGARD WE MAY REFER TO THE FOLLOWING DECISI ONS: (I) CIT V. THANA ELECTRICITY SUPPLY LTD. (1994) 206 ITR 727 (BOM.), WHEREIN ON THE ISSUE OF WHOSE DECISION IS BINDING ON WHOM, THE HONBLE BOMBAY COURT CONSIDERED IN DETAIL THE HIERA RCHY OF THE COURTS AND HAS OBSERVED AS UNDER: IT IS ALSO WELL-SETTLED THAT THOUGH THERE IS NO SPECIFIC PROVISION MAKING THE LAW DECLARED BY THE HIGH COURT BINDING ON SUBORDINATE COURTS, IT IS IMPLICIT IN THE POWER OF SUPERVISION CONFERRED ON A SUPERIOR TRIBUNAL THAT THE TRIBUNALS SUBJECT TO ITS SUPERVISION WOULD CONFORM TO THE LAW LAID DOWN BY IT. IT IS IN THAT VIEW OF THE MATTER THAT THE SUPRE ME COURT IN EAST INDIA COMMERCIAL CO. LTD. V. COLLECTOR OF CUSTOMS, AIR 1962 SC 1893 (AT PAGE 1905) DECLARED : 65 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. WE, THEREFORE, HOLD THAT THE LAW DECLARED BY THE HIGHEST COURT IN THE STATE IS BINDING ON AUTHORITIES OR TRIBUNALS UNDER ITS SUPERINTENDENCE, AND THEY CANNOT IGNORE IT. .. .' THIS POSITION HAS BEEN SUMMED UP BY THE SUPREME COURT IN MAHADEOLAL KANODIA V. ADMINISTRATOR GENERAL OF WEST BENGAL, AIR 1960 SC 936 (AT PAGE 941) AS FOLLOWS : JUDICIAL DECORUM NO LESS THAN LEGAL PROPRIETY FORMS THE BASIS OF JUDICIAL PROCEDURE. IF ONE THING IS MORE NECESSARY IN LAW THAN ANY OTHER THING, IT IS THE QUALITY OF CERTAINTY. THAT QUALITY WOULD TOTALLY DISAPPEAR IF JUDGES OF CO-ORDINATE JURISDICTION IN A HIGH COURT START OVERRULING ONE ANOTHERS DECISIONS. IF ONE DIVISION BENCH OF A HIGH COURT IS UNABLE TO DISTINGUISH A PREVIOUS DECISION OF ANOTHER DIVISION BENCH, AND HOLDING THE VIEW THAT THE EARLIER DECISION IS WRONG, ITSELF GIVES EFFECT TO THAT VIEW, THE RESULT WOULD BE UTTER CONFUSION. THE POSITION WOULD BE EQUALLY BAD WHERE A JUDGE SITTING SINGLY IN THE HIGH COURT IS OF OPINION THAT THE PREVIOUS DECISION OF ANOTHER SINGLE JUDGE ON A QUESTION OF LAW IS WRONG AND GIVES EFFECT TO THAT VIEW INSTEAD OF REFERRING THE MATTER TO A LARGER BENCH. THE ABOVE DECISION WAS FOLLOWED BY THE SUPREME COURT IN BARADAKANTA MISHRA V. BHIMSEN DIXIT, AIR 1972 SC 2466, WHEREIN THE LEGAL POSITION WAS REITERATED IN THE FOLLOWING WORDS (AT PAGE 2469) : IT WOULD BE ANOMALOUS TO SUGGEST THAT A TRIBUNAL OVER WHICH THE HIGH COURT HAS SUPERINTENDENCE CAN IGNORE THE LAW DECLARED BY THAT COURT AND START PROCEEDINGS IN DIRECT VIOLATION OF IT. IF A TRIBUNA L CAN DO SO, ALL THE SUBORDINATE COURTS CAN EQUALLY D O SO, FOR THERE IS NO SPECIFIC PROVISION, JUST LIKE I N THE CASE OF SUPREME COURT, MAKING THE LAW DECLARED BY THE HIGH COURT BINDING ON SUBORDINATE COURTS. IT IS IMPLICIT IN THE POWER OF SUPERVISION CONFERRED ON A SUPERIOR TRIBUNAL THAT ALL THE TRIBUNALS SUBJECT TO ITS SUPERVISION SHOULD CONFORM TO THE LAW LAID DOWN BY IT. SUCH OBEDIENCE WOULD ALSO BE CONDUCIVE TO THEIR SMOOTH WORKING; OTHERWISE THERE WOULD BE 66 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. CONFUSION IN THE ADMINISTRATION OF LAW AND RESPECT FOR LAW WOULD IRRETRIEVABLY SUFFER.' (II) CIT V. SUNIL KUMAR (1995) 212 ITR 238 (RAJ.), IT WAS OBSERVED AS UNDER: THE POINT WHICH HAS BEEN RAISED COULD HAVE BEEN CONSIDERED TO BE DEBATABLE BECAUSE OTHER HIGH COURTS HAVE TAKEN A DIFFERENT VIEW. BUT SINCE THE VIEW TAKEN BY THIS COURT IS BINDING ON THE TRIBUNAL AND OTHER AUTHORITIES UNDER THE ACT IN THIS STATE, IT COULD NOT BE CONSIDERED TO BE A DEBATABLE POINT IN VIEW OF THE DECISION OF THIS COURT IN THE CASE OF C IT V. M.L. SANGHI (1988) 170 ITR 670. (III) INDIAN TUBE COMPANY LTD. V. CIT & OTHERS (1993) 203 ITR 54 (CAL.) , IT WAS OBSERVED AS UNDER: IN THE IMPUGNED ORDER, RESPONDENT NO.1 HAS REJECTED THE PETITIONERS CONTENTION BY STATING THA T, ALTHOUGH THE CALCUTTA HIGH COURT HAD HELD THAT AN ASSESSEE WAS ENTITLED TO INTEREST ON SUCH REFUND CALCULATED UP TO THE DATE OF THE ORDER PASSED CONSEQUENT UPON AN APPEAL OR REVISION OF THE ORIGINAL ASSESSMENT, THIS VIEW HAD NOT BEEN ACCEPTED BY THE BOMBAY HIGH COURT, THE ALLAHABAD HIGH COURT AND THE KERALA HIGH COURT. RESPONDENT NO.1, ACCORDINGLY, CHOSE TO ACCEPT THE VIEW OF THE BOMBAY, ALLAHABAD AND KERALA HIGH COURTS IN PREFERENCE TO THE VIEW OF THE CALCUTTA HIGH COURT. IN MY VIEW, THE ORDER OF RESPONDENT NO.1 CANNOT BE SUSTAINED ON THE SIMPLE GROUND THAT RESPONDENT NO. 1 IS AN AUTHORITY OPERATING WITHIN THE STATE OF WES T BENGAL AND IS BOUND BY THE DECISIONS OF THE HIGH COURT OF THIS STATE ( SEE CIT V. INDIAN PRESS EXCHANGE LTD. [1989] 176 ITR 331 (CAL) ; EAST INDIA COMMERCIAL CO. LTD. V. COLLECTOR OF CUSTOMS AIR 1962 SC 1993, PARAGRAPH 29). IN THAT VIEW OF THE MATTER, THE IMPUGNED ORDER MUST BE SET ASIDE AND THE COMMISSIONER IS DIRECTED TO CONSIDER THE MATTER AFRESH IN KEEPING WITH THE DECISIONS OF THIS COURT AFTER GIVING THE PETITIONER S AN OPPORTUNITY OF BEING HEARD. AT LEAST 48 HOURS' CLEAR NOTICE MUST BE GIVEN TO THE PETITIONERS. THE COMMISSIONER WILL COMMUNICATE THE FINAL ORDER TO THE PETITIONER WITHIN EIGHT WEEKS FROM THE DATE OF HEARING. 67 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. (IV) CIT VS. J.K. JAIN (1998) 230 ITR 839 (P&H), OBSERVING AS UNDER: WE HAVE CAREFULLY EXAMINED THE RECORDS AND HAVE HEARD LEARNED COUNSEL REPRESENTING THE PARTIES. WE ARE IN RESPECTFUL AGREEMENT WITH THE VIEW EXPRESSED BY THE ALLAHABAD HIGH COURT IN OMEGA SPORTS AND RADIO WORKS CASE [1982] 134 ITR 28, AS ALSO THE DECISION OF THIS COURT IN MOHAN LAL KANSALS CASE [1978] 114 ITR 583. FOLLOWING THE DECISION IN THE TWO CASES REFERRED TO ABOVE, WE HOLD THAT IT WAS NO T A CASE OF DIVERGENCE OF OPINION INASMUCH AS THE OPINION EXPRESSED BY THIS COURT WAS BINDING UPON THE TRIBUNAL. 11.16. THEREFORE, IN OUR CONSIDERED OPINION, NO CON TRARY VIEW CAN BE TAKEN UNDER THESE CIRCUMSTANCES. WE, AC CORDINGLY, HOLD THAT ONLY THOSE INVESTMENTS ARE TO BE CONSIDER ED FOR COMPUTING AVERAGE VALUE OF INVESTMENT WHICH YIELDED EXEMPT INCOME DURING THE YEAR. 11.17. AS FAR AS ARGUMENT RELATING TO MEANING TO B E ASCRIBED TO THE PHRASE SHALL NOT USED IN RULE 8D( 2)(III) IS CONCERNED, THE REVENUES CONTENTION IS THAT IT REFE RS TO THOSE INVESTMENTS WHICH DID NOT YIELD ANY EXEMPT INCOME D URING THE YEAR BUT IF INCOME WOULD HAVE BEEN YIELDED IT WOULD HAVE REMAIN EXEMPT. THERE IS NO DISPUTE THAT IF AN INVESTMENT HAS YIELDED EXEMPT INCOME IN A PARTICULAR YEAR THEN IT WILL ENT ER THE COMPUTATION OF AVERAGE VALUE OF INVESTMENTS FOR THE PURPOSES OF RULE 8D(2)(III). THE ASSESSEES CONTENTION THAT IF THERE IS NO CERTAINTY THAT AN INCOME, WHICH IS EXEMPT IN CURREN T YEAR, WILL CONTINUE TO BE SO IN FUTURE YEARS AND, THEREFORE, T HAT INVESTMENT SHOULD ALSO BE EXCLUDED, IS HYPOTHETICAL AND CANNOT BE ACCEPTED. 68 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 11.18. IN VIEW OF ABOVE DISCUSSION, THE MATTER IS R ESTORED BACK TO THE FILE OF AO FOR RECOMPUTING THE DISALLOW ANCE U/S 14A IN TERMS OF ABOVE OBSERVATIONS. THUS, REVENUES APP EAL IS DISMISSED AND ASSESSEES CROSS-OBJECTION, ON THE IS SUE IN QUESTION, STAND ALLOWED FOR STATISTICAL PURPOSES, IN TERMS INDICATED ABOVE. 12. NOW WE WILL CONSIDER THE OTHER TWO GROUNDS. AS FAR AS GROUND NO. 3 IS CONCERNED, WE DO NOT FIND ANY REASO N TO INTERFERE WITH THE ORDER OF LD. CIT(A) BECAUSE LD. CIT(A) HAS ONLY REFERRED THE MATTER TO AO FOR VERIFYING THE REVISED COMPUTAT ION U/S 94(7) WITH REFERENCE TO RECORD DATE AND NOT WITH RESPECT TO DATE OF RECEIPT OF DIVIDEND. WE DO NOT FIND ANY INFIRMITY I N THE ORDER OF CIT(A) ON THIS ISSUE. 13. AS REGARDS ADDITION OF RS. 4,02,58,032/-, WE FI ND THAT THE ENTIRE ADDITION HAD BEEN MADE BECAUSE ASSESSEE DID NOT CHARGE ANY INTEREST FROM LOANEES. HOWEVER, ADMITTEDLY ASSE SSEE HAD NOT CLAIMED ANY INTEREST EXPENDITURE AND, THEREFORE, TH ERE WAS NO REASON FOR MAKING ANY ADDITION ON THE GROUND OF IN TEREST BEING NOT CHARGED BY ASSESSEE. LD. COUNSEL HAS RELIED ON FOLLOWING DECISIONS FOR THE PROPOSITION THAT ONLY REAL INCOME CAN BE TAXED AND NOT NOTIONAL INCOME. - SHOORJI VALLABHDAS & CO. 46 ITR 144 (SC); - GODHRA ELECTRICITY CO. LTD. . CIT 225 ITR 746 (SC); - CIT VS. A. RAMAN & CO. 67 ITR 11(SC); - UCO BANK V. CIT 237 ITR 889 (SC); - AIRPORT AUTHORITY OF INDIA V. CIT 340 ITR 407 (DEL. )(FB); - CIT V. MOTOR CREDIT CO. P. LTD. 127 ITR 572 (MAD.); - JCIT V. PANKAJ OXYGEN LTD. 78 TTJ 119 (NAG.) - ACIT VS. MANICK CHAND DAMANI 72 TTJ 675 (CAL.). 69 TA 502/D/12 & CO 68/D/2014 VIREET INVESTMENT P. LTD. 13.1. AFTER HEARING BOTH THE PARTIES, WE DO NOT FIN D ANY REASON TO INTERFERE IN THE ORDER OF LD. CIT(A), BECAUSE THE I SSUE THAT ONLY REAL INCOME AND NOT NOTIONAL INCOME IS TAXABLE, IS NO MORE RES- INTGRA IN VIEW OF AFOREMENTIONED DECISIONS, PARTICU LARLY WHEN NO INTEREST WAS PAID BY ASSESSEE ON ITS BORROWINGS. WE , THEREFORE, CONFIRM THE ORDER OF LD. CIT(A). THIS GROUND IS DI SMISSED. 14. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOW ED AND THE ASSESSEES CROSS-OBJECTION STANDS ALLOWED FOR STATI STICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 16/06/2017. SD/- SD/- SD/- (AMIT SHUKLA) (I.C. SUDHIR) (S.V. MEHROTRA) JUDICIAL MEMBER JUDICIAL MEMBER VI CE PRESIDENT DATED: 16-06-2017. SUJEET/DOC COPY TO : 1. ASSESSEE 2. AO 3. CIT(A) 4. CIT 5. DR (ITAT) //TRUE COPY// ASSISTANT REGISTRAR ITAT, NEW DELHI