MULTI COMMODITY EXCHANGE OF (INDIA) LTD, MUMBAI V. DCIT CEN CIR 46, MUMBAI

ITA 1050/MUM/2010

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 7265 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 28-07-2011
• Assessment Year: 2008-2009
• Appeal Filed On: 09-02-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SATBIR SINGH
• Assessee Lawyers: CHETAN A KARIA
• Keywords: Earning of tax free income; Retrospective amendment
• Section: 14A; 147; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH B, MUMBAI BEFORE SHRI R.S.SYAL(A.M) AND SHRI N.V.VASUDEVAN(J. M) ITA NO.1050/MUM/2010(A.Y.2008-09) M/S. MULTI COMMODITY EXCHANGE OF (INDIA) LIMITED., EXCHANGE SQUARE, CTS NO.255, SUREN ROAD, CHAKALA, MUMBAI 400 093 PAN: AADCM 8239K (APPELLANT) VS. THE DCIT, CEN. CIR. 46, MUMBAI. (RESPONDENT) APPELLANT BY : SHRI CHETAN A. KARIA RESPONDENT BY : SHRI SATBIR SINGH DATE OF HEARING : 28/07/2011 DATE OF PRONOUNCEMENT : 05/08/2011 ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 4/12/2009 OF CIT(A)-38, MUMBAI RELATING TO ASSESSMENT YEAR 20 08-09. 2. THE ASSESSEE IS A COMPANY. IT IS A REGULATOR AN D CARRIES ON THE ACTIVITY OF A COMMODITY EXCHANGE. THE ACTIVITIES OF THE EXC HANGE ARE CARRIED ON BY MEMBERS OF THE EXCHANGE ON AN ELECTRONIC PLATFORM A ND INFRASTRUCTURE PROVIDED BY THE ASSESSEE. THE ACTIVITIES OF THE ME MBERS ARE SUPERVISED AND MONITORED BY THE ASSESSEE. THE MAJOR SOURCE OF INC OME OF THE ASSESSEE IS RECEIPT OF MEMBERSHIP FEE ON GRANT OF MEMBERSHIP TO NEW MEMBERS, ANNUAL RECURRING FEES AND TRANSACTION PROCESSING CHARGES F OR TRANSACTION CARRIED OUT ON THE PLATFORM PROVIDED BY THE ASSESSEE. IN ORDER TO CARRY OUT VARIOUS TRANSACTIONS SMOOTHLY AND ON A REGULAR AND CONSISTE NT BASIS, THE ASSESSEE ALSO INVITES DEPOSITS FROM THE CONSTITUENTS. SUCH DEPOSITS ARE ALSO ALLOWED ITA NO.1050/MUM/2010(A.Y.2008-09) 2 TO BE TREATED AS MARGIN MONEY FOR TRANSACTION CARRI ED OUT BY THEM. THE AMOUNTS RECEIVED ARE INVESTED IN TO FIXED DEPOSITS OF BANKS AND UNITS OF MUTUAL FUNDS. WHILE NO INTEREST IS PAID TO THE CON STITUENTS ON SUCH DEPOSITS, THE ASSESSEE EARNS INTEREST ON SUCH DEPOS ITS OR EARNS DIVIDEND FROM MUTUAL FUND. THE ASSESSEE HAD MADE VARIOUS I NVESTMENTS INTO VARIOUS SCHEME OF MUTUAL FUNDS AND HAD EARNED DIVID END INCOME AS ALSO SHORT TERM AND LONG TERM CAPITAL GAINS ON SUCH INVE STMENTS ON SALE. THE DIVIDEND EARNED DURING THE YEAR WAS RS. 20,80,89,62 4/-. ACCORDING TO THE ASSESSEE, THE ENTIRE INVESTMENTS WAS MADE OUT OF OW N FUNDS AND OUT OF VARIOUS INTEREST FREE DEPOSITS RECEIVED FROM MEMBER S. WHILE THE CAPITAL GAINS WERE TAXED AT APPROPRIATE RATES, THE DIVIDEND INCOME WAS CLAIMED AS EXEMPT DIVIDEND INCOME UNDER SECTION 10(35) (A) OF THE INCOME TAX ACT, 1961. SINCE THE DIVIDEND INCOME WAS EXEMPT THE AO EXAMINED THE QUESTION OF DISALLOWANCE OF EXPENSES IN EARNING EXEMPT INCOM E IN VIEW OF SEC. 14A OF THE INCOME TAX ACT, 1961 (THE ACT). 3. THE ASSESSEE CLAIMED THAT IT HAD NOT PAID ANY I NTEREST EXCEPT INTEREST ON CAR LOANS AND INTEREST ON LOANS FOR BUSINESS PURPOS ES TO THE EXTENT OF RS.1,93,070/-(INCLUDING INTEREST ON DELAYED TAX PAY MENT OF RS. 57,739/-). NO INTEREST WAS PAID FOR ANY LOAN TO EARN EXEMPT IN COME. THERE IS NO DISPUTE ON THIS CLAIM OF THE ASSESSEE AS THE SAME W AS ACCEPTED BY THE AO. 4. THE ASSESSEE CLAIMED THAT IT HAD NOT INCURRED A NY DIRECT EXPENSES TO EARN THE INCOME BY WAY OF DIVIDEND WHICH WAS CLAIMED TO BE EXEMPT. THE REASON FOR NOT INCURRING ANY DIRECTS EXPENSES ACCORDING TO THE ASSESSEE WERE AS UNDER: A. THE ENTIRE INVESTMENT WAS MADE UNDER THE ADVICE AND GUIDANCE OF DISTRIBUTORS OF MUTUAL FUNDS. B. NO DIRECT PAYMENT WAS MADE BY THE COMPANY TO SUC H DISTRIBUTORS. ITA NO.1050/MUM/2010(A.Y.2008-09) 3 C. THE ACTIVITY OF INVESTING AS ALSO DISINVESTING I NVOLVED BANKING ACTIVITIES AS ALSO REQUESTING MUTUAL FUNDS FOR ACCE PTING FRESH FUNDS TOWARDS ADDITIONAL INVESTMENTS AS ALSO REDEMPTION O F EXISTING INVESTMENT. THESE ACTIVITIES WERE FULLY SUPPORTED BY THE EMPLOYEES OF DISTRIBUTORS OF MUTUAL FUNDS. D. AS SUCH NO DIRECT COST EITHER IN TERMS OF INTERE ST COST OR EMPLOYEES COST WAS INVOLVED. SINCE THERE WERE NO OTHER DIRECT EXPENSES INCURRED NO AMOUNT WAS DISALLOWED BY THE ASSESSEE ON ITS OWN U/S.14A OF TH E ACT. 5. AS FAR AS INDIRECT EXPENSES ARE CONCERNED, THE ASSESSEE CLAIMED THAT IT HAD INCURRED SOME OF THE INDIRECT EXPENSES TO EARN SUCH INCOME THEY WERE IN THE FORM OF COST OF EMPLOYEES WHO SHALL TAKE DECISI ON OF MAKING INVESTMENTS/ DISINVESTMENTS AS ALSO COST OF EMPLOYE ES CARRYING OUT ACCOUNT ENTRIES OF SUCH TRANSACTIONS. THE ASSESSEE HAD WOR KED OUT THE DETAILS OF SUCH INDIRECT EXPENSES AND FILED SUCH DETAILS BEFOR E THE ASSESSING OFFICER. BASED ON SUCH DETAILS, THE AMOUNT DISALLOWED WERE A S UNDER: NATURE OF EXPENSES AMOUNT RENT 167562 SALARY 408807 STAFF WELFARE EXPENSES 9452 TELEPHONE EXPENSES 18000 TOTAL 603821 THE ASSESSEE HAD ALSO EXPLAINED TO THE ASSESSING OF FICER AS TO HOW NO AMOUNT WAS DISALLOWABLE ON ACCOUNT OF DIRECT EXPENS ES TO EARN SUCH EXEMPT INCOME AND THAT RS. 6,03,821/- WAS INCURRED BY WAY OF INDIRECT EXPENSES. THE ASSESSEE SUBMITTED THAT IN ORDER TO MAKE INVEST MENTS THE COMPANY HAD A DEDICATED PERSON LOOKING AFTER INVESTMENT DECISIO N AND ACCOUNTING THEREOF. HE WAS ALSO SUPPORTED BY A PEON. HE WAS ALSO PROVI DED WITH A COMPUTER. ITA NO.1050/MUM/2010(A.Y.2008-09) 4 HE WAS USING OFFICE PREMISES WHICH WERE ON RENTAL B ASIS. HE WAS USING TELEPHONE SERVICES ETC. THE ASSESSEE HAD PROVIDED FOR ALL SUCH EXPENSES WHICH WERE INCURRED BY THE ASSESSEE FOR RECORD KEEP ING OF SUCH TRANSACTION AND HAD ARRIVED AT EXPENSES SET OUT ABOVE, ON SCIEN TIFIC BASIS AND HAS OFFERED THE SAME TO BE DISALLOWED. IN ARRIVING AT THE SALARY OF THE PERSONS, THE ASSESSEE POINTED OUT THAT IT HAD WORKED OUT THE SALARY OF ALL PERSONS INVOLVED IN THE TREASURY OPERATION COVERING THE INV ESTMENT INTO MUTUAL FUNDS FROM WHICH EXEMPT INCOME IN THE FORM OF DIVIDEND WA S EARNED BY THE ASSESSEE. SIMILARLY ALL EXPENSES SUCH AS RENT, TEL EPHONE, CONVEYANCE, ELECTRICITY EXPENSES AND SECURITY EXPENSES WERE WOR KED OUT ON THE BASIS OF NUMBER OF EMPLOYEES WHO HAD CONTRIBUTED TO THE TOTA L NUMBER OF EMPLOYEES EMPLOYED BY THE COMPANY. 6. THE AO HOWEVER WAS OF THE VIEW THAT THE DISALLOW ANCE UNDER SECTION 14A OF THE ACT HAS TO BE MADE IN ACCORDANCE WITH RU LE 8D OF THE IT RULES AND HE, THEREFORE, WORKED OUT DISALLOWANCE AT A SUM OF RS.2,14,41,162/- BY APPLYING THE PROVISIONS OF RULE 8D OF IT RULES 1962 . 7. ON APPEAL BY THE ASSESSEE THE CIT(A) WAS OF THE VIEW THAT ONCE IT IS ADMITTED THAT THE ASSESSEE HAS INCURRED SOME EXPEND ITURE FOR EARNING INCOME WHICH IS EXEMPT, PROVISIONS OF SECTION 14A(2 ) AND 14A(3) R.W.R. 8D OF THE RULES WOULD AUTOMATICALLY APPLY. THE CIT(A), T HEREFORE, HELD THAT THE DISALLOWANCE MADE BY THE AO WAS JUSTIFIED. THE ASS ESSEE HAD ALSO CONTENDED BEFORE THE CIT(A) THAT THE COMPUTATION O F DISALLOWANCE MADE BY THE AO EVEN AS PER THE PROVISIONS OF RULE 8D WERE N OT CORRECT. THIS ARGUMENTS WAS ALSO REJECTED BY THE CIT(A). 8. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESSE E HAS PREFERRED THE PRESENT APPEAL BEFORE THE CIT(A) AND RAISED THE FOL LOWINGS GROUNDS OF APPEAL. ITA NO.1050/MUM/2010(A.Y.2008-09) 5 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN CONFIRMING DISALLOWANCE MADE BY THE ASSESSING OFFIC ER U/S. 14A. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) FAILED TO APPRECIATE THAT THE DISALLOWANCE U/S. 14A IS WITHO UT JURISDICTION AND BAD IN LAW. 3. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) FAI LED TO APPRECIATE THAT RULE 8D IS ULTRA VIRES THE PROVISIONS OF S.1 4A AND THE SAME COULD NOT BE APPLIED TO MAKE DISALLOWANCE U/S. 14A. 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) FAILED TO APPRECIATE THAT THE APPELLANT HAD MADE DISALLOWANCE U/S. 14A AND THEREFORE PROVISIONS OF RULE 8D COULD NOT BE APPLIE D TO THE CASE OF THE APPELLANT. 9. WE HAVE HEARD THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE, WHO SUBMITTED THAT THE AO WAS NOT JUSTIFIED IN APPL YING RULE 8D OF THE INCOME TAX RULES. IN THIS REGARD THE LD. COUNSEL F OR THE ASSESSEE DREW OUR ATTENTION TO THE PROVISIONS OF SECTION 14A(2) OF TH E ACT AND SUBMITTED THAT ASSESSEE HAD CLAIMED BEFORE THE AO THAT ONLY A SUM OF RS. 6,03,821/- CAN BE CONSIDERED AS EXPENSES INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. WHEN SUCH CLAIM IS MADE BY THE ASSESSEE THE AO WAS REQUIRED T O APPLY HIS MIND TO THE PLEA OF THE ASSESSEE. HE WAS ALSO EXPECTED TO GI VE A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE. THE AO ALSO EXPECTED TO SPELL OUT THE REASONS AS TO WHY TH E CLAIM MADE BY THE ASSESSEE CANNOT BE ACCEPTED. IT IS ONLY AFTER DOI NG SO THAT THE AO CAN RESORT TO THE PROVISIONS OF RULE 8D OF THE RULES. IN THIS REGARD OUT ATTENTION WAS ALSO DRAWN TO THE DECISION OF THE HONBLE BOMBAY HI GH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURING CO. LTD., 328 ITR 81(BOM ), WHEREIN THE BOMBAY HIGH COURT HAS LAID DOWN THAT RULE 8D CAN BE INVOKE D ONLY IF THE AO REJECTS THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE R EGARDING EXPENSES INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME ITA NO.1050/MUM/2010(A.Y.2008-09) 6 UNDER THE ACT. IN OTHER RESPECTS LD. COUNSEL FOR T HE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE REVENUE AUTHORITIES. 10. THE LD. D.R SUBMITTED THAT THE VERY FACT THAT T HE AO INVOKED THE PROVISIONS OF RULE 8D OF THE RULES ONLY IMPLIES THA T HE WAS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENS ES INCURRED IN EARNING THE EXEMPT INCOME. IN OTHER WORDS, IT WAS SUBMITTED BY THE LD. D,R THAT THE SATISFACTION OF THE AO IS IMPLIED. ON MERITS IT WA S SUBMITTED THAT THE AO HAS RIGHTLY APPLIED RULE 8D OF THE RULES AND THE AS SESSEE CANNOT HAVE ANY GRIEVANCE. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSION. THE H ONBLE BOMBAY HIGH COURT IN INCOME TAX APPEAL NO.626 OF 2010 IN THE C ASE OF GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS. DY. COMMISSIONER OF I NCOME TAX,RANGE 10(2), MUMBAI & ANR. 328 ITR 81 (BOM) HAS HELD AS FOLLOWS: INSERTION OF SUBSECTIONS (2) AND (3) TO SECTION 14 A : 25. SUBSECTIONS (2) AND (3) OF SECTION 14A WERE INS ERTED BY AN AMENDMENT BROUGHT ABOUT BY THE FINANCE ACT OF 2006 WITH EFFECT FROM 1 APRIL 2007. SUBSECTIONS (2) AND (3) PROVIDE AS F OLLOWS : 14A(2) THE ASSESSING OFFICER SHALL DETERMINE THE A MOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACC ORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS N OT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES N OT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUBSECTION (2) SHALL ALSO APP LY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NO T FORM PART OF THE TOTAL INCOME UNDER THIS ACT: PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHA LL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UN DER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR RE DUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIA BILITY OF THE ITA NO.1050/MUM/2010(A.Y.2008-09) 7 ASSESSEE UNDER SECTION 154 FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. (THE PROVISO WAS INSERTED EARLIER BY THE FINANCE AC T OF 2002 WITH RETROSPECTIVE EFFECT FROM 11.5.2001) UNDER SUBSECTION (2), THE ASSESSING OFFICER IS REQU IRED TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED BY AN ASSESSEE I N RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. T HE METHOD, HAVING REGARD TO THE MEANING OF THE EXPRESSION PRE SCRIBED IN SECTION 2(33), MUST BE PRESCRIBED BY RULES MADE UNDER THE A CT. WHAT MERITS EMPHASIS IS THAT THE JURISDICTION OF THE ASSESSING OFFICER TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, IN ACCORDANCE WITH T HE PRESCRIBED METHOD, ARISES IF THE ASSESSING OFFICER IS NOT SATI SFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE WHICH THE ASSESSEE CLAIMS TO HAVE INCURRED IN RELAT ION TO INCOME WHICH DOES NOT PART OF THE TOTAL INCOME. MOREOVER, THE SATISFACTION OF THE ASSESSING OFFICER HAS TO BE ARRIVED AT, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. HENCE, SUB SECTION (2) DO ES NOT IPSO FACTO ENABLE THE ASSESSING OFFICER TO APPLY THE METHOD PR ESCRIBED BY THE RULES STRAIGHTAWAY WITHOUT CONSIDERING WHETHER THE CLAIM MADE BY THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS COR RECT. THE ASSESSING OFFICER MUST, IN THE FIRST INSTANCE, DETERMINE WHET HER THE CLAIM OF THE ASSESSEE IN THAT REGARD IS CORRECT AND THE DETERMIN ATION MUST BE MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE SATISFACTION OF THE ASSESSING OFFICER MUST BE ARRIVED AT ON AN OBJECTIV E BASIS. IT IS ONLY WHEN THE ASSESSING OFFICER IS NOT SATISFIED WITH TH E CLAIM OF THE ASSESSEE, THAT THE LEGISLATURE DIRECTS HIM TO FOLLO W THE METHOD THAT MAY BE PRESCRIBED. IN A SITUATION WHERE THE ACCOUNT S OF THE ASSESSEE FURNISH AN OBJECTIVE BASIS FOR THE ASSESSING OFFICE R TO ARRIVE AT A SATISFACTION IN REGARD TO THE CORRECTNESS OF THE CL AIM OF THE ASSESSEE OF THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THERE WOULD BE NO WARRANT FOR TAKING RECOURSE TO THE METHOD PRESCRIBED BY THE RUL ES. FOR, IT IS ONLY IN THE EVENT OF THE ASSESSING OFFICER NOT BEING SO SAT ISFIED THAT RECOURSE TO THE PRESCRIBED METHOD IS MANDATED BY LAW. SUB SECTION (3) OF SECTION 14A PROVIDES FOR THE APPLICATION OF SUB SEC TION (2) ALSO TO A SITUATION WHERE THE ASSESSEE CLAIMS THAT NO EXPENDI TURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NO T FORM PART OF THE TOTAL INCOME UNDER THE ACT. UNDER THE PROVISO, IT H AS BEEN STIPULATED THAT NOTHING IN THE SECTION WILL EMPOWER THE ASSESS ING OFFICER, FOR AN ASSESSMENT YEAR BEGINNING ON OR BEFORE 1 APRIL 2001 EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCI NG THE ITA NO.1050/MUM/2010(A.Y.2008-09) 8 ASSESSMENT OR REDUCING THE REFUND ALREADY MADE OR O THERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECT ION 154. 26. THE CIRCUMSTANCES IN WHICH THE PROVISIONS OF SU B SECTIONS (2) AND (3) WERE INTRODUCED BY AN AMENDMENT HAVE BEEN ADVER TED TO IN A CIRCULAR OF THE CBDT DATED 28 DECEMBER 2006. (CIRCU LAR 14 OF 2006) THE CIRCULAR NOTES THAT IN THE EXISTING PROVISIONS OF SECTION 14A NO METHOD FOR COMPUTING THE EXPENDITURE INCURRED IN RE LATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME HAD BE EN PROVIDED. AS A RESULT THERE WAS A CONSIDERABLE DISPUTE BETWEEN TAX PAYERS AND THE REVENUE ON THE METHOD OF DETERMINING SUCH EXPENDITU RE. IN THIS BACKGROUND, SUB SECTION (2) WAS INSERTED SO AS TO M AKE IT MANDATORY FOR THE ASSESSING OFFICER TO DETERMINE THE AMOUNT O F EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH THE METHOD THAT MAY BE PR ESCRIBED. THE CIRCULAR, HOWEVER, REITERATES THAT THE ASSESSING OF FICER HAS TO FOLLOW THE PRESCRIBED METHOD IF HE IS NOT SATISFIED WITH T HE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. (UNDERLINING BY US FOR EMPHASIS) 12. IT IS CLEAR FROM THE OBSERVATIONS OF THE HONB LE BOMBAY HIGH COURT REFERRED TO ABOVE THAT THE APPLICATION OF RULE 8D O F THE RULES IS NOT AUTOMATIC. WHEN THE ASSESSEE MAKES THE CLAIM REGAR DING THE QUANTUM OF EXPENSES TO BE DISALLOWED IN TERMS OF SECTION 14A O F THE ACT, IT WAS INCUMBENT ON THE PART OF THE AO TO CONSIDER THE CLA IM OF THE ASSESSEE. IT IS ONLY WHEN THE AO IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE HE CAN HAVE RECOURSE WITH THE PROVISIONS OF RULE 8D OF THE INCO ME TAX RULES. THE SATISFACTION THAT THE CLAIM MADE BY THE ASSESSEE RE GARDING EXPENSES INCURRED IN RELATION TO THE INCOME WHICH DOES NOT F ORM PART OF THE TOTAL INCOME UNDER THE ACT, IS NOT CORRECT, HAS TO BE A RRIVED AT BY THE AO, ON AN OBJECTIVE BASIS. IN THE PRESENT CASE, WE FIND THAT THE AO HAS PROCEEDED TO APPLY RULE 8D WITHOUT GIVING ANY FINDING WITH REGAR D TO THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE REGARDING THE DISALL OWANCE TO BE MADE UNDER SECTION 14A OF THE ACT. THE CIT(A) HAS ALSO PROCEEDED ON THE SAME BASIS. WE ARE, THEREFORE, OF THE VIEW THAT THE ORD ERS OF THE CIT(A) HAS TO BE ITA NO.1050/MUM/2010(A.Y.2008-09) 9 SET ASIDE AND THE ISSUE SHOULD BE REMANDED TO THE A O FOR FRESH CONSIDERATION. THE AO WILL CONSIDER THE CLAIM OF T HE ASSESSEE WITH REGARD TO THE DISALLOWANCE TO BE MADE UNDER SECTION 14A OF TH E ACT IN THE LIGHT OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT REFERRED TO ABOVE. THE AO WILL DECIDE THE ISSUE AFTER AFFORDING THE ASSESSEE OPPOR TUNITY OF BEING HEARD. FOR STATISTICAL PURPOSES THE APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TR EATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON T HE 5 TH DAY OF AUG., 2011. SD/- SD/- (R.S.SYAL) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 5 TH AUG.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RB BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.1050/MUM/2010(A.Y.2008-09) 10 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 29/7/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 01/8/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER