Kranti SSK Ltd, Sangli V. Assistant Commissioner of Income tax, Sangli

ITA 1021/PUN/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9165 (ITAT-PUNE)
• Duration Of Justice: 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-07-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 24-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUDHANSHU SHEKHAR
• Keywords: Earning of tax free income; Onus to prove
• Section: 143(3); 14A; 11

Judgement Text

] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI ANIL CHATURVEDI, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.1021/PUN/2015 / ASSESSMENT YEAR : 2011-12 LABINDIA INSTRUMENTS PRIVATE LIMITED., 34/38, BHARAT KUNJ SOCIETY II, ERANDWANE, PUNE 411004. PAN : AAACL5140P. . / APPELLANT V/S ASST. COMMISSIONER OF I NCOME TAX CIRCLE -11(2), PUNE. . / RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK. REVENUE BY : SHRI SUDHANSHU SHEKHAR / ORDER PER ANIL CHATURVEDI, AM : THIS APPEAL OF THE ASSESSEE IS EMANATING OUT OF THE ORDE R OF COMMISSIONER OF INCOME TAX (A) 7, PUNE DATED 12.05.2015 FOR THE ASSESSMENT YEAR 2011-12. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE A S UNDER :- 2.1 ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE BUSINESS OF MARKETING, TRADING, MANUFACTURING, SERVICING OF ANALYTICAL BIO- TECHNOLOGY AND OTHER INSTRUMENTS AND EXIGENCIES. ASSESS EE FILED ITS RETURN OF INCOME FOR A.Y. 2011-12 ON 30.09.2011 DECLARING TO TAL INCOME AT RS.40,60,89,262/-. THE CASE WAS SELECTED FOR SCRUTINY A ND THEREAFTER / DATE OF HEARING : 22.05.2017 / DATE OF PRONOUNCEMENT: 26.07.2017 2 ASSESSMENT WAS FRAMED U/S 143(3) OF THE ACT VIDE ORDER DT.19.03.2014 AND THE TOTAL TAXABLE INCOME WAS DETERMINED AT RS.43,75,74 ,980/-. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATT ER BEFORE LD.CIT(A) WHO VIDE ORDER DT.12.05.2015 (IN APPEAL NO.PN/CIT(A)- 7/ CIR- 11(2)/190/2014-15) GRANTED PARTIAL RELIEF TO THE ASSESSEE . AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS : 1.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND P REVAILING L AW, THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN NOT DE LETING THE DISALLOWANCE UNDER SECTION 14A(1) READ WITH RULE 8D 2(II) AND (I I I) OF RS. 4,61,364/- MADE BY THE ASSESS I NG OFFICE R. 2. THE LEARNED COMMISSIONER OF INCOME TAX HAS FAILE D TO APPRECIATE THAT NONE OF TH E ACTIVITIES FROM WH I CH TAX FREE INCOME (DIVIDEND ON SHARES AND PROFIT FROM PARTNE R SHIP FIRM) IS GENERATED , DO NOT REQUIRE ANY EXPENDITURE OF ANY NATURE TO BE INCURRED ROUT I NE L Y ON YEAR TO YEAR BASIS OR OTHERWISE. 3. THE LEARNED COMMISSIONER OF INCOME TAX HAS FAILED T O APPRECIATE THAT THE ASSESSEE HAS OWN FUNDS EXCEEDING INVESTMENTS EA RNING TAX FREE INCOME AND THEREFORE PRESUMPTION WOULD ARISE THAT I NVESTMENT WOULD BE OUT OF INTEREST FREE FUNDS GENERATED OR AVAILABLE W ITH THE COMPANY IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET T H E INVESTMENTS. AND HENCE DISALLOWANCE UNDER SECTION 14A(1) RULE 8D(II) IS NO T JUSTIFIED. 3. ALL THE GROUNDS BEING INTER-CONNECTED ARE CONSIDERED TOGETHE R. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO NOTICE D THAT ASSESSEE HAD CLAIMED SUM OF RS.7,12,340/-, BEING INCOME N OT CHARGEABLE TO TAX (COMPRISING OF DIVIDEND AND EARNINGS FRO M PARTNERSHIP FIRMS). HE ALSO NOTICED THAT ASSESSEE HAD SUO -MOTU DISALLOWED RS.2,00,000/- IN RESPECT OF EXPENDITURE INCURRED T O EARN EXEMPT INCOME. AO WAS OF THE VIEW THAT IN VIEW OF INSERTION OF RULE 8D TO THE INCOME TAX RULES SINCE 24.03.2008, DISALLOWANCE U/S 14A OF THE ACT WAS CALLED FOR AS ASSESSEE HAD EARNED EXEMPT INCOME . HE THEREAFTER BY APPLYING THE PROVISIONS OF RULE 8D, DETERMINE D THE EXPENDITURE OF DISALLOWANCE U/S 14A OF THE ACT AT RS.6,61 ,364/- AND AFTER GIVING THE CREDIT FOR DISALLOWANCE SUO MOTU MADE BY THE ASSESSEE, MADE A NET DISALLOWANCE OF RS.4,61,364/-. AGGRIEVED BY THE ORDER OF 3 AO, ASSESSEE CARRIED THE MATTER BEFORE LD. CIT(A), WHO UPH ELD THE ORDER OF AO BY HOLDING AS UNDER : 3.4 I HAVE CONSIDERED THE SUBMISSION MADE BY THE APPELLAN T AND PERUSED MATERIAL ON RECORD. THE ONLY ISSUE CONTESTE D RELATES TO THE DISALLOWANCE OF RS. 4,61,364/- U/S 14A R.W. RULE 8D . IT IS UNDISPUTED THAT THE APPELLANT IS IN RECEIPT OF EXEMPT INCOME I N THE FORM OF DIVIDEND AND SHARES OF PROFIT FROM PARTNERSHIP FIRM, HOWEVER , THE APPELLANT HAS ON ITS OWN DISALLOWED A SUM OF RS. 2 LACS ON ACCOUNT O F EXPENDITURE INCURRED IN EARNING OF THE SAID EXEMPT INCOME. THE ASSESSING OFFICER HAS EXAMINED THE CLAIM OF THE APPELLANT AND FOUND THAT NO EXPENDITURE IN RELATION TO EXEMPT INCOME HAS BEEN CLAIMED TO HAVE I NCURRED AND, THEREFORE, AFTER RECORDING ITS SATISFACTION ON THE CORRECTNESS OF THE APPELLANT'S CLAIM WITH REGARD TO THE ACCOUNTS HAS P ROCEEDED WITH THE DISALLOWANCE U/S 14A R.W RULE 8D. THE FINANCE ACT 2 001 HAD INSERTED SECTION 14A IN THE I.T. ACT WITH RETROSPECTIVE EFFE CT FROM 01.04.1962 I.E. A.Y. 1962-63 SO AS TO CLARIFY THAT NO DEDUCTION SHA LL BE ALLOWED IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE F INANCE ACT 2006, HAS INSERTED SUB-SECTION (2) AND (3) IN SECTION 14A AS SO AS TO LAY AT REST THE CONTROVERSY REGARDING A.O'S POWER TO APPORTION EXPE NDITURE FOR DISALLOWANCE. THE PROCEDURE FOR COMPUTATION OF DISA LLOWANCE HAS THUS BEEN PROVIDED IN SUB-SECTIONS (2) AND (3) OF SECTIO N 14A, WHICH SEEKS TO ACHIEVE THE UNDERLYING OBJECT OF SECTION 14A(1) THA T ANY EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME SHOULD NOT BE ALLOWED AS DEDUCTION. THE TERM 'EXPENDITURE' OCCURRING IN SECTION 14A WOU LD THUS TAKE IN ITS SWEEP NOT ONLY DIRECT EXPENDITURE BUT ALSO ALL FORM S OF EXPENDITURE REGARDLESS OF ITS FORM. PROVISIONS OF SECTION 14A A RE CONTROLLING THE COMPUTATION OF INCOME AND OTHER PROVISIONS OF THE A CT AND HAVE THE SUPERVENING EFFECT OVER OTHER PROVISIONS. THEREFORE , EVEN IF THE EXPENDITURE WAS ALLOWABLE UNDER ANY PROVISIONS OF T HE ACT, IT HAS TO SUFFER THE DISALLOWANCE BECAUSE OF THE OVERRIDING E FFECT OF SECTION 14A BE THAT SECTION 36(1)(III) OR SECTION 57. FURTHER, THE APPELLANT HAS NOT KEPT THE FUNDS IN SEPARATE ACCOUNTS IN THE PROCESS OF ITS UT ILIZATION, RATHER THE SAME IS MIXED AND THE APPELLANT HAS NOT BEEN ABLE T O DEMONSTRATE THE ABOVE ASPECT BY WAY OF A CASH FLOW STATEMENT TO JUS TIFY THAT THE SAID EXPENSES HAVE NOT BEEN INCURRED IN RELATION TO EARN ING OF TAX FREE INCOME. HENCE, THE RELIANCE PLACED BY THE APPELLANT ON THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF CIT VS HDFC BANK C ITED SUPRA IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE, THEREF ORE, DISTINGUISHABLE. THUS ALREADY SEE, SUB-SECTION (3) OF SECTION 14A M AKES IT CLEAR AND PROVIDES FOR THE APPLICATION OF SUB-SECTION (2) ALS O TO A SITUATION WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN IN CURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME SHOULD BE IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. AS A CONSEQUENCE THEREOF, THE INCOME TA X (FIFTH AMENDMENT) RULES 2008 HAS INSERTED A NEW RULE 8D IN THE I.T. R ULES SO AS TO PROVIDE THE METHOD OF DETERMINING AMOUNT OF SUCH EXPENDITUR E IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS DCIT, 328 ITR 81 (BOM), HAS HELD THAT SECTION 14A(2) IS APPLICABLE FROM A.Y. 20 07-08 AND RULE 8D IS APPLICABLE FROM A.Y. 2008-09. 3.5 SO FAR AS THE APPLICABILITY OF RULE 8(2)(II) IS CONCERNED, UNTIL AND UNLESS THE ASSESSEE SPECIFIED THE APPLICATION OF TH E BORROWED CAPITAL TOWARDS SPECIFIC ASSETS, THE PRESUMPTION OF A GENER AL POOL OF FUNDS HYPOTHESIS WOULD PREVAIL SO THAT ALL THE ASSETS WOU LD BE CONSIDERED TO BE FINANCED PROPORTIONATELY FROM THE AVAILABLE FUNDS, INCLUDING THE BORROWED FUNDS AS HAS BEEN HELD BY THE MUMBAI ITAT IN THE CA SE OF DUFON LABORATORIES P. LTD. VS DCIT, ITA NO.7565/MUM/2011 DATED 4 31.05.2013. IT IS FURTHER HELD THAT THE ASSESSEE CL AIMING NON-COMPLIANCE OF THE CONDITION OF SECTION 14A(2) SO THAT NO DISAL LOWANCE U/S 14A(1) COULD BE MADE, NO DOUBT THE SAME IS A PREREQUISITE FOR THE ASSESSING AUTHORITIES TO DETERMINE THE EXPENDITURE INCURRED B Y THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF ITS TOTAL INCOME. THE INITIAL BURDEN TO PROVE IS ON THE ASSESSEE OF NOT HAVING IN CURRED ANY EXPENDITURE. THEREAFTER, ON AN EXAMINATION OF ASSES SEE'S CLAIM, IT BECOMES INCUMBENT ON AO TO ACCEPT THE SAME OR STATE HIS REASONS FOR HIS DISSATISFACTION THEREWITH, SO THAT THE DISALLOWANCE U/S 14A COULD NOT BE CHALLENGED ON THE GROUND THAT THE AO HAD NOT EXPRES SED HIS DISSATISFACTION WITH THE ASSESSEE'S CLAIM OF HAVING NOT INCURRED THE EXPENDITURE. THEREFORE, THE INITIAL ONUS IS ON THE ASSESSEE TO EXHIBIT, WITH REFERENCE TO ITS ACCOUNTS THAT IT HAS NOT INCURRED ANY EXPENDITURE AS BEING CLAIMED BY IT. RULE 8D ONLY SEEKS ESTIMATION O F THE DISALLOWANCE IN RESPECT OF THE EXPENDITURE INCURRED SEPARATELY QUA ITS VARIOUS PARTS BY PRESCRIBING A UNIFORM METHOD FOR THE SAME. HENCE, UNTIL AND UNLESS THE ASSESSEE IS ABLE TO ACTUALLY ESTABLISH THAT NO PART OF THE BORROWED FUNDS HAS BEEN UTILIZED FOR INVESTMENT IN TAX-FREE SECURI TIES, ALLOWANCE QUA THE INTEREST EXPENDITURE INCURRED WOULD FOLLOW, GIVEN T HE MANDATE OF RULE 8D(2)(II). 3.6 THERE CANNOT BE ANY INCOME WITHOUT ANY KIND OF EXPENSES, HOWEVER, SMALL IT MAY BE HENCE, THE ASSESSING OFFICER WAS JU STIFIED IN CALCULATING THE DISALLOWANCE ON THE EXEMPTED INCOME. THE APPELL ANT HAS UNDISPUTEDLY EARNED EXEMPT INCOME HENCE THE SEC 14A IS APPLICABLE WHERE IT PROVIDES THAT NO DEDUCTION IN RESPECT OF E XPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO EXEMPTED INCOME WILL BE ALLOWED. THERE ARE EXPENSES INCURRED FOR EARNING THE EXEMPT INCOME AS WELL AS EARNING OF OTHER INCOMES. THE EXEMPT INCOME DOES INVOLVE DIREC T AS WELL AS INDIRECT EXPENSES AS IS ALSO EVIDENT FROM THE MATERIAL ON RE CORD. THE SEC 14A DOES NOT TAKE CARE OF ONLY DIRECT EXPENSES BUT INDI RECT EXPENSES ARE ALSO TO BE ALLOCATED TO THE EXEMPTED INCOME. THE ASSESSI NG OFFICER HAS SPECIFICALLY POINTED OUT TO THE EXPENSES DIRECTLY A S WELL AS INDIRECTLY INCURRED FOR EARNING EXEMPT INCOME AND THE APPELLAN T HAS NOT BEEN ABLE TO CONTROVERT THE FINDINGS OF THE ASSESSING OFFICER OR HAS BROUGHT ANY SUCH MATERIAL WHICH IS CONTRARY TO THE FINDING OF T HE ASSESSING OFFICER. IN THE CASE OF ACIT VS CHAMPION COMMERCIAL CO LTD (201 2) 139 ITD 108 (KOL) IT WAS HELD THAT A DISALLOWANCE U/S 14A CAN A LSO BE MADE IN A CASE IN WHICH THE ASSESSEE CLAIMS THAT NO EXPENDITURE HA S BEEN INCURRED FOR EARNING TAX EXEMPT INCOME. THEREFORE, WHEN THE ASSE SSEE DOES NOT OFFER ANY DISALLOWANCES U/S 14A ON HIS OWN, THE PROVISION S OF SEC 14A (2) READ WITH RULE 8D CAN BE INVOKED WITHOUT THERE BEIN G ANY NEED TO EXPRESS SATISFACTION AND INCORRECTNESS OF SUCH A CL AIM THOUGH THE APPELLANT IS SEEN TO HAVE DISALLOWED A SUM OF RS. 2 LACS ON AN AD HOC BASIS . THOUGH THE ASSESSING OFFICER IN THE PRESENT CASE HAS RECORDED ITS SATISFACTION IN REGARD TO THE CORRECTNESS OF THE CL AIM OF THE APPELLANT AND ONLY THEREAFTER HAS INVOKED RULE 8D. THE EARNING OF DIVIDEND INCOME HAS EMANATED FROM THE INVESTMENTS MADE BY THE APPELLANT AND SO IS THE CASE WITH THE EARNING OF SHARE OF PROFIT FROM FIRMS. FUR THER PROVISION OF SEC 14A APPLY TO DISALLOW EXPENDITURE INCURRED ON EARNING S HARE INCOME OF A PARTNERSHIP FIRM AS WAS HELD BY THE SPECIAL BENCH O F AHEMDABAD ITAT IN THE CASE OF VISHNU ANANT MAHAJAN VS CIT (2012? 16 I TR (TRIB) 621 (AHD) 147TIJ 1.42 (AHD) SB. SIMILAR VIEW WAS EXPRESSED IN THE CASE OF HOSHANG O. NANAVATI VS ACIT (2012) 161 ITR 614 (TRI B.)(MUM.) 3.7 AT THIS JUNCTURE I CONSIDER IT APPROPRIATE TO R EPRODUCE RULE 8D OF THE IT RULES WHICH IS AS FOLLOWS : (1) WHERE THE ASSESSING OFFICER HAVING REGARD TO THE AC COUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE 5 OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHA LL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOM E IN ACCORDANCE WITH THE PROVISION OF SUB-RULE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NO T FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWING AM OUNTS, NAMELY (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCO ME WHICH DOES NOT FORM PART OF TOTAL INCOME; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITU RE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT D IRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, A N AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA N AMELY A X B C WHERE A= AMOUNT OF EXPENDITURE BY WAY OF INTEREST O THER THAN THE AMOUNT OF INTEREST INCLUDED THE CLAUSE (I) INCU RRED 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 TH E 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 PERCENT OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALAN CE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. A PLAIN READING OF THE ABOVE RULE SHOWS THAT 8D(2) CAN BE APPLIED IN THE PRESENT CASE. THE UNDISPUTED FACT REMAINS THAT THE APPELLANT IS IN RECEIPT OF INCOME WHICH IS EXEMPT FROM TAX AND NO EXPENDITU RE CLAIMED IN EARNING OF THE SAID INCOME. THE HON. BOMBAY HIGH CO URT IN THE CASE OF GODREJ & BOYCE, 328 ITR 81 (BOM) AUTHORIZE THE ASSESSING OFF ICER TO RECOMPUTE THE DISALLOWANCE U/S 14A AS PER PRESCRIBED METHOD ONLY IN CASE THE ASSESSING OFFICER IS NOT SATISFIED WITH TH E CLAIM OF THE ASSESSEE HAVING REGARD TO ITS ACCOUNTS. THE SAID PRINCIPLE H AS ALSO BEEN UPHELD BY THE ITAT MADRAS IN THE CASE OF M/S SIVA INDUSTRIES OF HOLDINGS LTD VS ACIT IN ITS ORDER DATED 20-05-2011, ITA NO 2148/MDS/2010 AND ALSO BY THE DELHI TRIBUNAL IN DCIT VS M/S JINDAL PHOTO LTD, ITA NO 814/DEL/2011 DATED 23-9-2011. THE ASSESSING OFFICER IN THE PRESE NT CASE IS NOTICED TO BE NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE AND FINDING NO EXPENDITURE HAVING BEEN INCURRED IN RELA TION TO EXEMPT INCOME APPLIED RULE 8D FOR WORKING OUT THE DISALLOWANCE, W HICH APPEARS TO BE THE CORRECT METHOD ADOPTED BY THE AO. THE SATISFACT ION AS TO NON- DISALLOWANCE OF EXPENSES AGAINST EXEMPT INCOME IS A NY CASE DISCERNING FROM THE OBSERVATION OF THE AO. THE FACT ON RECORD CLEARLY INDICATE THAT THE APPELLANT IS IN RECEIPT OF EXEMPT INCOME IN THE FORM OF DIVIDEND AND SHARE PROFIT FROM THE FIRM AND THE APPELLANT HAS MA DE DISALLOWANCE ON AN ADHOC BASIS U/S 14A IN RESPECT OF THE EXPENSES RELATABLE TO THE ABO VE EXEMPT INCOME, WHICH HAS EMANATED OUT OF THE INVEST MENTS OF THE APPELLANT. THUS THE ISSUE IN APPEAL LIES IS A VERY NARROW COMPASS OF 6 UNDISPUTED MATERIAL FACTS. HENCE IN PRINCIPLE THE D ISALLOWANCE U/S 14A R.W. RULE 8D GETS ATTRACTED AND THE SAME HAS BEEN R IGHTLY APPLIED BY THE AO. WHILE WORKING OUT THE DISALLOWANCE. 3.8 THE APPELLANT IS SEEN TO HAVE TAKEN SUBSTANTIAL LOAN FUND AND IT CAN REASONABLY BE INFERRED IF THE SURPLUS FUNDS WERE AV AILABLE IT WOULD NOT HAVE BEEN NECESSARY TO TAKE LOANS. THE CONTENTION O F THE APPELLANT THAT THE SHARE CAPITAL AND THE RESERVES WERE USED FOR MA KING INVESTMENT ALSO DO NOT GET JUSTIFIED IN VIEW OF THE FACT THAT THERE ARE VARIOUS OTHER ASSETS WHEREIN THE APPELLANT HAS UTILIZED SUCH FUNDS. THE MATERIAL BROUGHT ON RECORD BY THE ASSESSING OFFICER DO INDICATE A NEXUS OF THE BORROWED FUNDS TO HAVE BEEN UTILIZED FOR MAKING TAX FREE INVESTMENTS. THE APPELLANT HAS ALSO NOT BEEN ABLE TO JUSTIFY AND NOT FURNISHED ANY EXPLANATION THAT THE LOAN FUNDS ON WHICH INTEREST I S PAID HAS NOT BEEN UTILIZED FOR MAKING TAX FREE INVESTMENTS. THE APPEL LANT HAS ALSO NOT FURNISHED ANY CASH FLOW STATEMENT OR ANY OTHER SUCH MATERIAL WHICH COULD ESTABLISH THAT BORROWED FUNDS HAD NOT BEEN UT ILIZED FOR EARNING THE EXEMPT INCOME. SECTION 14A INCLUDES WITHIN ITS AMBI T BOTH DIRECT AS WELL AS INDIRECT EXPENDITURE QUA RELEVANT INCOME. 3.9 THE ASSESSING OFFICER IN THE PRESENT CASE HAS MADE THE DISALLOWANCE AFTER PROPER APPROPRIATION AND ALSO HAVING BEEN NOT SATISFIED WITH THE CLAIM OF THE APPELLANT AND THEREAFTER, HAS WORKED O UT THE DISALLOWANCE AS PER THE PRESCRIBED METHOD ENSHRINED IN RULE 8D. THIS IS NOT A CASE OF ANY AD HOC DISALLOWANCE DONE BY THE ASSESSING OFFIC ER. SECTION 14A(1) PROVIDES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT IN ACCORDANCE WITH SU CH METHOD AS MAY BE PRESCRIBED AND AS A CONSEQUENCE A NEW RULE 8D HAS B EEN INSERTED WHICH PROVIDES THE METHOD FOR DETERMINING THE AMOUNT OF E XPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. AS PER SUB RULE (1) OF RULE 8D WHERE THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE FOR A PREVIOUS YEAR IS NOT SATISFIED WITH: I) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE OR II) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO EXEMPT INCOME, THE ASSESSIN G OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN ACCORDANCE W ITH THE PROVISION OF SUB RULE (2). THE ASSESSING OFFICER HAS THUS WORKED OUT THE DISAL LOWANCE AS PER RULE 8D(2)(II) AND (III) AND SO LONG AS THERE IS IDENTIF ICATION OF THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THE AMOUNT SO IDENTIFIED HAS TO BE DISALLOWED. THE CONTENTION THUS RAISED BY THE APPEL LANT IN THIS REGARD IS FOUND TO BE NOT TENABLE. 3.9.1 IN THE CASE OF ACIT VS CITICORP FINANCE (INDIA) LTD (2008) 300 ITR 391 (MUM TRIB) (2007) 12 SOT 248 IT WAS HELD THAT S EC 14A CLEARLY MAKES A DISTRIBUTION BETWEEN EXEMPT INCOME AND TAX ABLE INCOME. IT WAS FURTHER HELD AS 11. SEC.14A CLEARLY MAKES A DISTINCTION BETWEEN EX EMPT INCOME AND TAXABLE INCOME. IT TREATS BOTH OF THEM AS SEPARATE CLASSES FOR COMPUTATION OF INCOME AFTER ALLOCATION OF EXPENDITU RE RELATING THERETO AND MANDATES THAT NO DEDUCTION IN RESPECT OF ANY EXPEND ITURE SHALL BE ALLOWED AGAINST TAXABLE INCOME WHICH IS INCURRED IN RELATION TO EXEMPT INCOME. THE UNDERLYING OBJECT IS TO COMPUTE BOTH TH E EXEMPT INCOME AND TAXABLE INCOME CORRECTLY, WHICH IS POSSIBLE ONLY AF TER THE EXPENDITURE INCURRED IN RELATION THERETO IS ALLOCATED TO THEM. IN OTHER WORDS, S. 14A BARS THE DEDUCTION OF EXPENDITURE INCURRED IN RELAT ION TO EXEMPT INCOME OUT OF TAXABLE INCOME, AS THIS WOULD HAVE THE EFFEC T OF ARTIFICIALLY INFLATING 7 THE EXEMPT INCOME AND THEREBY DEFLATING THE TAXABLE INCOME. 12. . . . . . . . . . . . . . THE TERM 'EXPENDITURE' OCCURRING IN S. 14A WOULD THUS TAKE IN ITS SWEEP NOT ONLY DIRECT EXPEND ITURE BUT ALSO ALL FORMS OF EXPENDITURE REGARDLESS OF WHETHER THEY ARE FIXED, VARIABLE, DIRECT, INDIRECT, ADMINISTRATIVE, MANAGER IAL OR FINANCIAL. . . . . . . . . . . . . . 13. IT IS DIFFICULT TO ACCEPT THE HYPOTHESIS THAT O NE CAN EARN SUBSTANTIAL DIVIDEND INCOME WITHOUT INCURRING ANY E XPENSES WHATSOEVER INCLUDING MANAGEMENT OR ADMINISTRATIVE E XPENSES. BY SAME LOGIC, IT IS EQUALLY DIFFICULT TO ACCEPT THAT THE ONLY EXPENSES INVOLVED IN EARNING THE DIVIDEND INCOME AR E THOSE INCURRED ON COLLECTION OF DIVIDEND OR ON ENCASHING A FEW DIVIDEND WARRANTS. A COMPANY CANNOT EARN DIVIDEND WITHOUT IT S EXISTENCE AND MANAGEMENT. INVESTMENT DECISIONS ARE VERY COMPL EX IN NATURE. THEY REQUIRE SUBSTANTIAL MARKET RESEARCH, D AY-TO-DAY ANALYSIS OF MARKET TRENDS AND DECISIONS WITH REGARD TO ACQUISITION, RETENTION AND SALE OF SHARES AT THE MO ST APPROPRIATE TIME. THEY REQUIRE HUGE INVESTMENT IN SHARES AND CO NSEQUENTIAL BLOCKING OF FUNDS. IT IS WELL KNOWN THAT CAPITAL HA S COST AND THAT ELEMENT OF COST IS REPRESENTED BY INTEREST. BESIDES , INVESTMENT DECISIONS ARE GENERALLY TAKEN IN THE MEETINGS OF TH E BOARD OF DIRECTORS FOR WHICH ADMINISTRATIVE EXPENSES ARE INC URRED. IT IS THEREFORE NOT CORRECT TO SAY THAT DIVIDEND INCOME C AN BE EARNED BY INCURRING NO OR NOMINAL EXPENDITURE. 14. . . . . . . . . . . . . 15. THE PROCEDURE FOR COMPUTATION OF DISALLOWANCE H AS NOW BEEN PROVIDED IN SUB-SS. (2) AND (3) OF S. 14A OF THE IT ACT. IT IS NO LONGER OPEN TO THE AO TO APPLY HIS DISCRETION IN CO MPUTING THE DISALLOWANCE OR MAKE AD HOC DISALLOWANCE UNDER S. 1 4A. SUBSTANTIVE PROVISIONS ARE CONTAINED IN SUB-SO (1) OF S. 14A PROHIBITING DEDUCTION IN RESPECT OF EXPENDITURE INC URRED IN RELATION TO EXEMPT INCOME WHILE PROCEDURAL PROVISIONS REGARD ING COMPUTATION OF THE AFORESAID DISALLOWANCE ARE CONTA INED IN SUB- SS. (2) AND (3) THEREOF SUB-SS. (2) AND (3) SEEK TO ACHIEVE THE UNDERLYING OBJECT OF S.14A(1) THAT ANY EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME SHOULD NOT BE ALLOWED DED UCTION. IT IS FAIRLY WELL-SETTLED BY A CATENA OF DECISIONS THAT P ROCEDURAL PROVISIONS APPLY TO ALL PENDING MATTERS AND THAT TH E RULE AGAINST RETROSPECTIVELY DOES NOT HIT THEM. THE BENCH ALSO HELD THAT DIVIDEND IN SUBSTANTIAL AM OUNT CANNOT BE EARNED BY INCURRING NO COSTS. IT WAS HELD THAT IT IS DIFFICULT TO ACCEPT THE HYPOTHESIS THAT ONE CAN EAR N SUBSTANTIAL DIVIDEND INCOME WITHOUT INCURRING ANY EXPENSES, WHA TSOEVER INCLUDING MANAGEMENT OR ADMINISTRATIVE EXPENSES. 3.9.2 IN SOUTHERN PETRO CHEMICAL INDUSTRIES VS DCIT (2008) 3 SOT 157 (CHEN- TRIB) AFTER COMPREHENSIVE CONSIDERAT ION OF ALL THE RELEVANT ASPECTS OF THE CASE INCLUDING THE PROV ISION OF LAW, THE CHENNAI BENCH HAS HELD THAT INVESTMENT DECISION S ARE VERY STRATEGIC DECISION IN WHICH TOP MANAGEMENT IS INVOL VED AND THEREFORE, PROPORTIONATE MANAGEMENT EXPENSES ARE RE QUIRED TO BE DEDUCTED WHILE COMPUTING THE EXEMPT INCOME FROM DIVIDEND. 3.10. IN VIEW OF THE ABOVE FACTS AND RATIO OF JUDIC IAL DECISIONS THE GROUNDS OF APPEAL NO.1 RAISED BY THE APPELLANT IS TREATED AS DISMISSED. 8 AGGRIEVED BY THE ORDER OF LD. CIT(A), ASSESSEE IS NOW IN AP PEAL BEFORE US. 5. BEFORE US, LD.A.R. REITERATED THE SUBMISSIONS MADE BEFORE AO AND LD. CIT(A). HE SUBMITTED THAT THE TOTAL DISALLOWANCE U/ S 14A IS MADE UP OF DISALLOWANCE OF INTEREST UNDER RULE 8D IS OF RS. 2,41,489/- AND OF ADMINISTRATIVE EXPENSES UNDER RULE 8D OF RS.4,19,874/ -. WITH RESPECT TO DISALLOWANCE OF INTEREST HE POINTED TO THE COP Y OF BALANCE- SHEET WHICH IS PLACED AT PAGE 12 OF THE PAPER BOOK AND SUBMITTED THAT ASSESSEE HAS INTEREST FREE FUNDS IN THE FORM OF SHARE CAP ITAL AND RESERVES AND SURPLUS TO THE EXTENT OF RS.109.65 CRORE A S AGAINST THE INVESTMENT OF RS.9.29 CRORES. HE FURTHER POINTED TO THE IN VESTMENT DETAILS AT PAGE 31 OF THE PAPER BOOK AND SUBMITTED THAT DURING THE YEAR FRESH INVESTMENTS ARE ONLY OF RS.20,625,000/- IN THE SHARE S OF THREE COMPANIES. HE THEREFORE SUBMITTED THAT SINCE THE INTERES T FUNDS AVAILABLE WITH THE ASSESSEE ARE MORE THAN THE INVESTMENT S, IT IS TO BE PRESUMED THAT INTEREST FREE FUNDS HAVE BEEN UTILIZED FOR MAKING INVESTMENTS AND THEREFORE NO DISALLOWANCE ON ACCOUNT OF INTEREST IS CALLED FOR AND FOR THIS PROPOSITION, HE RELIED ON THE DECIS ION IN THE CASE OF CIT VS. HDFC BANK LTD. REPORTED IN (2014) 368 ITR 37 7(BOM). HE ALSO RELIED ON THE DECISION OF PUNE TRIBUNAL IN THE CASE OF M/S. KOLTE PATIL DEVELOPERS LIMITED IN ITA NOS.1656 AND 1657/PUN/201 4 ORDER DT.29.04.2016. HE ALSO PLACED ON RECORD THE COPY OF THE AFORESAID DECISION. LD.A.R. THEREAFTER POINTED TO PAGE 31 OF THE P APER BOOK AND SUBMITTED THAT ASSESSEE HAS EARNED EXEMPT INCOME IN TH E FORM OF DIVIDEND FROM THE SHARES OF ONLY ONE COMPANY AND THE SH ARE OF PROFIT HAS ALSO BEEN EARNED FROM ONLY ONE FIRM. FROM OTHER CO MPANIES / FIRMS ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME. HE FUR THER 9 SUBMITTED THAT BEFORE INVOKING PROVISIONS OF SEC.14A, AO HAS NOT RECORDED SATISFACTION. HE THEREFORE SUBMITTED THAT NO D ISALLOWANCE U/S 14A IS CALLED FOR. 6. LD.D.R. ON THE OTHER HAND SUPPORTED THE ORDER OF AO A ND TOOK US THROUGH THE FINDINGS OF LD. CIT(A) AND SUPPORTED THE ORDER OF LOWER AUTHORITIES. HE FURTHER SUBMITTED THAT ASSESSEE HAS NOT MAINTAINED SEPARATE BANK ACCOUNT SO AS TO JUSTIFY THE USE OF INTE REST FREE FUNDS FOR MAKING INVESTMENTS. HE FURTHER SUBMITTED THAT THE RATIO OF DECISION RELIED UPON BY THE ASSESSEE IN THE CASE OF KOLTE PATIL DEV ELOPERS (SUPRA) CANNOT BE APPLIED BECAUSE IN THAT CASE SEPARATE BANK A CCOUNT WAS MAINTAINED TO DEMONSTRATE THAT THE INVESTMENTS WERE M ADE FROM INTEREST FREE FUNDS AND SUCH IS NOT IN THE CASE OF ASS ESSEE. HE THEREFORE SUBMITTED THAT THE RATIO OF DECISION IN THE CASE OF KOLTE PATIL DEVELOPERS (SUPRA) IS OF NO HELP TO THE ASSESSEE. HE THUS SUPPORTE D THE ORDER OF LOWER AUTHORITIES. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH RESPECT TO DISALLOWANCE OF RS.4,61,364/- U/S 14A OF THE ACT. THE PERUSAL OF THE BA LANCE-SHEET WHICH IS PLACED AT PAGE 12 OF THE PAPER BOOK REVEALS THA T AGAINST THE INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL AND RESERV ES AND SURPLUS AGGREGATING TO RS.109.65 CRORES, THE INVESTMENTS ARE ONLY TO THE EXTENT OF RS.9.29 CRORES MEANING THEREBY THAT THE AVAILABILITY OF INTEREST FREE FUNDS ARE FAR IN EXCESS OF THE INVESTMENTS. FURTHER ON PERUSAL OF SCHEDULE OF INVESTMENTS, IT IS SEEN THAT THE NEW INVESTMENTS MADE BY THE ASSESSEE ARE ONLY TO THE EXTENT OF RS.2.07 CRORES AND REST OF ALL INVESTMENTS ARE BROUGHT FORWARD FROM EARLIER YEARS. 10 8. ON THE ISSUE THAT WHEN INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE ARE IN EXCESS OF INVESTMENTS, WE FIND THAT HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POW ER LIMITED REPORTED IN (2009) 313 ITR 340 (BOM) HAS HELD THAT IN SUC H CASES, ASSESSEE IS TO PRESUMED THAT INVESTMENTS ARE OUT OF INT EREST FREE FUNDS. THE RELEVANT OBSERVATIONS OF HONBLE BOMBAY HIGH COURT ARE AS UND ER : 15. IT IS CLEAR THAT FOR THE FIRST TIME IN THE CAS E OF HDFC BANK LTD. (SUPRA) THAT THIS COURT TOOK A VIEW THAT THE PRESUM PTION WHICH HAS BEEN LAID DOWN IN RELIANCE UTILITIES AND POWER LTD. (SUP RA) WITH REGARD TO INVESTMENT IN TAX FREE SECURITIES COMING OUT OF ASS ESSEES OWN FUNDS IN CASE THE SAME ARE IN EXCESS OF THE INVESTMENTS MADE IN THE SECURITIES (NOTWITHSTANDING THE FACT THAT THE ASSESSEE CONCERN ED MAY ALSO HAVE TAKEN SOME FUNDS ON INTEREST) APPLIES, WHEN APPLYIN G SECTION 14A OF THE ACT. THUS, THE DECISION OF THIS COURT IN HDFC BANK LTD.(SUPRA) FOR THE FIRST TIME ON 23RD JULY, 2014 HAS SETTLED THE ISSUE BY HOLDING THAT THE TEST OF PRESUMPTION AS HELD BY THIS COURT IN RELIAN CE UTILITIES AND POWER LTD. (SUPRA) WHILE CONSIDERING SECTION 36(1)(III) O F THE ACT WOULD APPLY WHILE CONSIDERING THE APPLICATION OF SECTION 14A OF THE ACT. THE AFORESAID DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA) ON THE ABOVE ISSUE HAS ALSO BEEN ACCEPTED BY THE REVENUE INASMUCH AS EVEN THOUGH THEY HAVE FILED AN APPEAL TO THE SUPREME COURT AGAINST THAT O RDER ON THE OTHER ISSUE THEREIN, VIZ., BROKEN PERIOD INTEREST, NO APP EAL HAS BEEN PREFERRED BY THE REVENUE ON THE ISSUE OF INVOKING THE PRINCIP LES LAID DOWN IN RELIANCE UTILITIES AND POWER LTD. (SUPRA) IN ITS AP PLICATION TO SECTION 14A OF THE ACT. THEREFORE, THE ISSUE WHICH AROSE FOR CO NSIDERATION BEFORE THE TRIBUNAL HAD NOT BEEN DECIDED BY THIS COURT IN GODR EJ AND BOYCE MANUFACTURING CO. LTD. (SUPRA). IT AROSE AND WAS SO DECIDED FOR THE FIRST TIME BY THIS COURT IN HDFC BANK LTD. (SUPRA). THUS, THERE IS NO CONFLICT AS SOUGHT TO BE MADE OUT BY THE IMPUGNED ORDER. THU S, IMPUGNED ORDER HAS PROCEEDED ON A FUNDAMENTALLY ERRONEOUS BASIS AS THE RATIO DECIDENDI OF THE ORDER IN GODREJ AND BOYCE MANUFACTURING CO. LTD. (SUPRA) HAD NOTHING TO DO WITH THE REST OF PRESUMPTION CANVASSE D BY THE PETITIONER BEFORE THE TRIBUNAL ON THE BASIS OF THE RATIO OF TH E DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA). 16. AT THE HEARING MR. SURESH KUMAR, LEARNED COUNSE L FOR THE REVENUE URGED THAT ON THE FACTS OF THIS CASE NO FAULT CAN B E FOUND WITH THE ORDER OF THE TRIBUNAL. IT IS SUBMITTED THAT, THE PETITIONER WAS NOT ABLE TO ESTABLISH BEFORE THE ASSESSING OFFICER AND THE CIT(A) THAT TH E AMOUNTS INVESTED IN THE INTEREST FREE SECURITIES CAME OUT OF INTEREST F REE FUNDS AVAILABLE WITH THE PETITIONER. IN THAT VIEW OF THE MATTER, IT IS S UBMITTED BY HIM THAT THE ORDER OF THIS COURT IN HDFC BANK LTD.(SUPRA) WOULD NOT APPLY TO THE FACTS OF THE PRESENT CASE. WE ARE UNABLE TO UNDERSTAND TH E ABOVE SUBMISSION. THE ASSESSING OFFICER PASSED THE ASSESSMENT ORDER O N 22ND DECEMBER, 2010 UNDER SECTION 143(3) OF THE ACT. THE CIT(A) PA SSED AN ORDER ON 21ST NOVEMBER, 2011 DISMISSING THE PETITIONERS APPEAL. ON BOTH THE DATES, WHEN THE ORDERS WERE PASSED BY THE ASSESSING OFFICE R AND CIT(A), THE AUTHORITIES DID NOT HAVE THE BENEFIT OF THE ORDER O F THIS COURT IN HDFC BANK LTD. (SUPRA) RENDERED ON 23RD JULY, 2014. ONCE THE ISSUE IS SETTLED BY THE DECISION OF THIS COURT IN HDFC BANK LTD. (SU PRA), THERE IS NOW NO NEED FOR THE ASSESSEE TO ESTABLISH WITH EVIDENCE TH AT THE AMOUNTS WHICH HAS BEEN INVESTED IN THE TAX FREE SECURITIES HAVE C OME OUT OF INTEREST FREE FUNDS AVAILABLE WITH IT. THIS IS BECAUSE ONCE THE A SSESSEE IS POSSESSED OF INTEREST FREE FUNDS SUFFICIENT TO MAKE THE INVES TMENT IN TAX FREE 11 SECURITIES, IT IS PRESUMED THAT IT HAS BEEN PAID FO R OUT OF THE INTEREST FREE FUNDS. CONSEQUENTLY, WE DO NOT FIND ANY MERIT IN TH E ABOVE SUBMISSION MADE AT THE HEARING ON BEHALF OF THE REVENUE. 9. BEFORE US, REVENUE HAS NOT PLACED ANY CONTRARY BINDING DECISION IN ITS SUPPORT. IN VIEW OF ALL THESE FACTS, WE ARE OF THE VI EW THAT NO DISALLOWANCE OF INTEREST UNDER RULE 8D(2) IS CALLED FOR. AS FAR AS THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES UNDER RULE 8D(3) IS C ONCERNED. IT IS SEEN THAT THE DISALLOWANCE OF RS.4,61,364/- HAS BEEN WORKED OUT U/S 14A R.W.R. 8D(2). WE FIND THAT AO WHILE PROCEEDING WITH DISALLOWING THE EXPENSES HAS NOT RECORDED ANY SATISFACTION AS REQUIRED U/S 14A(2) OF THE ACT. AS PER SEC.14A(2), FOR INVOCATION OF R ULE 8D, THE AO HAS TO RECORD SATISFACTION ABOUT THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, IN RESPECT OF THE EXPENDITURE INCURRED IN RELATI ON TO THE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. IN THE PRESENT CASE, WE FIND THAT NO SATISFACTION HAS BEEN RECORDED BY THE AO WHILE DISALLOWING THE EXPENSE U/S 14A OF THE ACT. ON THE ISSUE OF NECESSITY OF RECORDING OF SATISFACTION WHILE DISALLOWING EXPENSES U/S 14A WE HAVE COME ACROSS A RECENT DECISION RENDERED BY HONBLE PUNJ AB AND HARYANA HIGH COURT IN THE CASE OF PUNJAB TRACTORS LTD., VS. CIT R EPORTED IN (2017) 393 ITR 223 (P&H) WHEREIN HONBLE HIGH COURT HAS HE LD THAT AO MUST RECORD SATISFACTION THAT CLAIM REGARDING EXPENDITURE IS NOT SATISFACTORY. THE RELEVANT OBSERVATIONS BY HONBLE HIGH C OURT ARE REPRODUCED HEREUNDER : 11.SECTION 14A SPECIFIES THE CIRCUMSTANCES IN WHIC H THE ASSESSING OFFICER IS ENTITLED TO DETERMINE THE AMOUNT OF EXPE NDITURE INCURRED IN RELATION TO EXEMPT INCOME IN ACCORDANCE WITH SUCH M ETHOD AS MAY BE PRESCRIBED. THE METHOD PRESCRIBED IS IN RULE 8D OF THE INCOME-TAX RULES, 1962 WHICH WAS INTRODUCED WITH EFFECT FROM THE ASSE SSMENT YEAR 2008- 09. THE CONDITIONS SPECIFIED IN SUB-SECTIONS (2) AN D (3) OF SECTION 14A MUST EXIST IN ORDER TO ENTITLE THE ASSESSING OFFICE R TO INVOKE RULE 8D. THIS IS CLEAR FROM THE LANGUAGE OF THESE SUB-SECTIO NS. SUB-SECTION (2) PROVIDES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME IN ACCORDANCE WITH THE METHOD PRESCRIBED, I.E., RULE 8D 'IF' HAVING REGAR D TO THE ACCOUNTS OF THE ASSESSEE, HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASSESSEE'S 12 CLAIM IN RESPECT OF SUCH EXPENDITURE IN RELATION TO EXEMPT INCOME. THE WORD 'IF' INDICATES THAT TO INVOKE THE METHOD PRESC RIBED NAMELY RULE 8D, THE ASSESSING OFFICER MUST NOT BE SATISFIED WITH TH E CORRECTNESS OF THE ASSESSEE'S SAID CLAIM. 12. SUB-SECTION (3) PROVIDES THAT THE PROVISIONS OF SUB-SECTION (2) SHALL APPLY IN RELATION TO A CASE WHERE THE ASSESSEE CLAI MS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO EXEMPT INCOME. THE OPENING WORDS OF SUB-SECTION (3) MAKE THE PROVISION S OF SUB-SECTION (2) APPLICABLE IN RELATION .TO CASES UNDER SUB-SECTION (3). THUS WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCUR RED BY HIM IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER CA N RESORT TO RULE 8D ONLY IF HAVING REGARD TO THE ACCOUNTS OF THE ASSESS E IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE THAT N O EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. THUS UNDER SUB-SECTION (2) AND (3) OF SECTION 14A, AN ASSESSING OFFICER CAN RESORT TO RULE 8D ONLY IF HE IS NOT SATISFIED W ITH THE CORRECTNESS OF THE ASSESSEES CLAIM IN RESPECT OF THE EXPENDITURE IN R ELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT OR IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASSESSEES CL AIM THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO SUCH INCOME . THE HONBLE HIGH COURT FURTHER OBSERVED AS UNDER 18. THE NEXT QUESTION IS AS TO WHETHER IT IS NECESS ARY FOR THE ASSESSING OFFICER TO RECORD HIS REASONS FOR NOT BEING SATISFI ED WITH THE CORRECTNESS OF THE ASSESSEE'S CLAIM. 19. IT IS MANDATORY FOR THE ASSESSING OFFICER TO RE CORD THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPEND ITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT OR THAT HE IS NOT SATISFIED WITH THE ASSESSEE'S CLAIM THAT NO EXPENDITURE HAD BEEN INCURRED BY HIM IN RELATION TO THE INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. 20. THE MATTER STANDS CONCLUDED BY A JUDGMENT OF TH IS COURT DATED JANUARY 27, 2015 IN CIT VS. ABHISHEK INDUSTRIES LT D. I T A. NO. 320 OF 2013- REPORTED IN [2016] 380 I1R 652 (P&H), WHERE THE DIVISION BENCH HELD (PAGE 657) :- 'SECTION 14A OF THE ACT REQUIRES THE ASSESSING OFFI CER TO RECORD SATISFACTION THAT INTEREST BEARING FUNDS HAVE BEEN USED TO EARN TAX- FREE INCOME. THE SATISFACTION TO BE RECORDED M UST BE BASED UPON CREDIBLE AND RELEVANT EVIDENCE ... ' 21. THE JUDGMENT IN MAXOPP INVESTMENT LTD. (SUPRA) ALSO SUPPORTS THIS VIEW NAMELY THAT THE ASSESSING OFFICER MUST RECORD REASONS FOR NOT BEING SATISFIED WITH THE CORRECTNESS OF THE ASSESSEE' CON TENTIONS WITH REGARD TO THE ASPECTS MENTIONED IN SUB-SECTIONS (2) AND (3) O F SECTION 14A. IT IS TRUE THAT THE DELHI HIGH COURT MERELY STATES THAT SUCH R EJECTION MUST BE FOR DIS-CLOSED COGENT REASONS. THE DISCLOSURE, HOWEVE R, CAN ONLY BE IN WRITING. IT CAN HARDLY BE SUGGESTED THAT THE DISCLO SURE REMAINS IN THE ASSESSING OFFICER'S MIND. THE ASSESSEE IS ENTITLED TO TEST THE BASIS OF THE REJECTION OF HIS CONTENTIONS. THIS CAN BE DONE ONLY IF THE ASSESSING OFFICER RECORDS HIS REASONS FOR HIS NOT BEING SATISFIED IN WRITING. 13 WE FURTHER FIND THAT THE CO-ORDINATE BENCH OF THE TRIBUNA L, PUNE IN ITA NO.2114/PN/2012 DT.27.05.2014 IN THE CASE OF ACIT VS. MAG ARPATTA TOWNSHIP DEVELOPMENT AND CONSTRUCTION COMPANY LIMITED HA S ALSO HELD THAT WHEN AO DID NOT RECORD ANY SATISFACTION AS REQ UIRED BY SEC.14A(II), DISALLOWANCE U/S 14A R.W.R. 8D WAS UNJUSTIFIED. CONSIDERING THE TOTALITY OF THE AFORESAID FACTS AND RELYING ON THE AFORESAID DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT , WE ARE OF THE VIEW THAT IN THE PRESENT CASE NO DISALLOWANCE U/S 14 A OVER AND ABOVE THAT HAS BEEN SUO-MOTO DISALLOWED BY ASSESSEE IS CALLED FOR SINCE NO SATISFACTION FOR DISALLOWING THE EXPENSES U/S 14A HAS B EEN RECORDED BY AO. WE THEREFORE SET ASIDE THE ADDITIONAL DISALLOWANCE U/S 14A OF THE ACT MADE BY AO. THUS, THE GROUNDS OF THE ASSESSEE ARE ALLOWED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED ON THE 26 TH DAY OF JULY, 2017. SD/- SD/- ( VIKAS AWASTHY ) ( ANIL CHATURVEDI ) / JUDICIAL MEMBER ! / ACCOUNTANT MEMBER PUNE; DATED : 26 TH DAY OF JULY, 2017. YAMINI '#$%&'&$ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3 . 4. 5 6. THE CIT(A)-7, PUNE THE CIT - 6, PUNE. '#$ %%&',) &', / DR, ITAT, B PUNE; $*+,/ GUARD FILE. / BY ORDER , // TRUE COPY // //TRUE COPY// -./%0&1 / SR. PRIVATE SECRETARY ) &', / ITAT, PUNE.