ASST CIT 5(3), MUMBAI V. TAG OFFSHORE LTD, MUMBAI

ITA 1184/MUM/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8029 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 5 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 24-07-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 09-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PITAMBAR DAS
• Assessee Lawyers: RACH NA AGARWAL
• Keywords: Business income; Earning of tax free income; Deemed to accrue or arise in india
• Section: 143(3); 80HHC; 14A; 12

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUMBAI , , , BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEMB ER . / ITA NO. 710 /MUM./ 201 1 ( / ASSESSMENT YEAR : 20 0 7 08 ) M/S. TAG OFFSHORE LIMITED 137/138A, JOLLY MAKER CHAMBERS II NARIMAN POINT, MUMBAI 400 021 .. / APPELLANT V/S ASSTT. COMMISSIONER OF INCOME TAX 5(3) AAYAKAR BHAVAN, 101, M.K. ROAD MUMBAI 400 020 .... / RESPONDENT ./ PERMANENT ACCOUNT NUMBER AABCT8019L . / ITA NO. 1184/MUM./2011 ( / ASSESSMENT YEAR : 2007 08 ) ASSTT. COMM ISSIONER OF INCOME TAX 5(3) AAYAKAR BHAVAN, 101, M.K. ROAD MUMBAI 400 020 .. / APPELLANT V/S M/S. TAG OFFSHORE LIMITED 137/138A, JOLLY MAKER CHAMBERS II NARIMAN POINT, MUMBAI 400 021 .... / RESPOND ENT ./ PERMANENT ACCOUNT NUMBER AABCT8019L / REV E NUE BY : SHRI PITAMBAR DAS / ASSESSEE BY : MS. RACHNA AGARWAL / DATE OF HEARING 2 4 . 0 7 .2014 / DATE OF ORDE R 08.08.2014 M/S. TAG OFFS HORE LIMITED 2 / ORDER , / PER AMIT SHUKLA , J.M. THE SE CROSS APPEAL S ARE DIRECTED AGAINST THE IMPUGNED ORDER DATED 25 TH NOVEMBER 2010 , PASSED BY THE LEARNED COMMISSIONER (APPEALS) IX , MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) , OF THE INCOME TAX ACT, 1961 (FOR SHORT 'THE ACT' ) FOR THE ASSESSMENT YEAR 20 07 08 . WE FIRST TAKE UP ASSESSEES APPEAL IN ITA NO.710/MUM./2011, VIDE WHICH, FOLLOWING GROUND S HAVE BEEN RAISED: 1. T HE LEARNED CIT(A) HAS ERRED IN TREATING THE FOREIGN CURRENCY TRANSLATION GAIN OF ` 26,06,402 AS BUSINESS INCOME FROM SEPARATE BUSINESS ACTIVITY AS DURING THE YEAR THE APPELLANT DOES NOT HAVE ANY OTHER BUSINESS ACTIVITIES EXCEPT INCOME FROM CHARTER HIRE WHI CH IS TONNAGE TAX ACTIVITY. 2. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING DISALLOWANCE U/S 14A. AS THE COMPANY IS SUBJECTED TO TAX U/S 115VA, NO EXPENSE WAS CLAIMED IN THE FIRST PLACE WHICH COULD HAVE BEEN DISALLOWED . 2 . FACTS IN BRIEF : THE ASSESSEE IS E NGAGED IN THE BUSINESS OF OPERATION OF SHIPS. IT HAS DECLARED ITS RECEIPTS FROM CHARTER HIRE EARNING AT ` 136,35,90,840. HOWEVER, THE ASSESSEE OPTED FOR TONNAGE TAX SCHEME UNDER SECTION 115VA, CHAPTER XIIG. IN THE RETURN OF INCOME, THE ASSESSEE HAD SHOWN I NCOME FROM SHIPPING BUSINESS I.E., M/S. TAG OFFS HORE LIMITED 3 UNDER TONNAGE TAX DEEMED INCOME AT ` 2,32,898, AND OTHER INCOME OF ` 28,24,761, WHICH WORKED OUT AS UNDER: INCOME (LOSS) FROM BUSINESS: TONNAGE TAX DEEMED INCOME ` 2,32,898 OTHER INCOME DIVIDEND ON INVESTMENTS ` 37 ,21,710 LESS: EXEMPT ` ( ) 37,21,710 INTEREST ON BANK MARGIN DEPOSITS ` 6,30,454 OTHER INTEREST INCOME ` 21,94,307 ` 28,24,761 TOTAL: ` 30,57,659 ======= 3 . THE ASSESSING OFFICER NOTED THAT OTHER INCOME SHOWN BY THE ASSESSEE CONSIST S OF DIVIDEND FROM MUTUAL FUND AND EQUITY SHARES AT ` 37,21,710, WHICH HAS BEEN CLAIMED AS EXEMPT ; FURTHER , THE INTEREST ON BANK MARGIN DEPOSIT AND OTHER INTEREST INCOME HAS BEEN SHOWN AT ` 6,30,454 AND ` 21,94,307 RESPECTIVELY. FROM THESE DETAILS, HE OBSERVED THAT THER E WAS FOREIGN CURRENCY TRANSLATION GAIN OF ` 26,06,402, WHICH HAS NOT BEEN INCLUDED IN THE COMPUTATION OF TOTAL INCOME AND THE SAME SHOULD ALSO HAVE BEEN OFFERED FOR TAX. ACCORDINGLY, HE ADDED THE SAID AMOUNT IN THE TOTAL INCOME OF THE ASSESSEE. THE REASON HE HELD THAT THE FOREIGN CURRENCY TRANS L ACTION GAIN IS THOUGH ARISING IN THE COURSE OF BUSINESS OF THE ASSESSEE BUT NOT OUT OF SHIPPING ACTIVITY TO WHICH SECTION 115VA APPLIES . THEREFORE, T HE M/S. TAG OFFS HORE LIMITED 4 ASSESSEE SHOULD HAVE OFFERED THIS AMOUNT SEPARATELY UNDER THE H EAD BUSINESS . 4 . THEREAFTER, T HE ASSESSING OFFICER PROCEEDED TO MAKE DISALLOWANCE UNDER SECTION 14A, ON THE DIVIDEND INCOME EARNED BY THE ASSESSEE ON INVESTMENTS. HE HELD THAT SUCH AN INCOME CANNOT BE HELD TO BE PART OF INCOME DECLARED FROM SHIPPING ACTIVI TY. ANY OTHER INCOME WOULD NOT QUALIFY FOR APPLICATION OF SECTION 115VA AND THE SAME WILL HAVE TO BE CONSIDERED AND TREATED SEPARATELY. THUS, HE WORKED OUT THE DISALLOWANCE UNDER SECTION 14A, AFTER TAKING 0.5% OF THE AVERAGE INVESTMENT AND THEREBY DISALLOW ING SUM OF ` 11,45,445, AS PER THE WORKING GIVEN AT PAGE 6 OF THE ASSESSMENT ORDER. 5 . BEFORE THE LEARNED COMMISSIONER (APPEALS), INSOFAR AS THE FIRST ISSUE IS CONCERNED, IT WAS SUBMITTED BY THE ASSESSEE THAT THE FOREIGN CURRENCY TRANSLATION GAIN HAS ARISEN OUT OF DEBTORS AND CREDITORS DURING THE COURSE OF CHARTER HIRE LINE BUSINESS AND CHARTER HIRE DEPOSITS WITH OVERSEAS BANK OF THE ASSESSEE. THUS, IT IS AN INCOME ARISING FROM CORE ACTIVITY OF SHIPPING BUSINESS ONLY. SUCH FLUCTUATION OF FOREIGN CURRENCY AND ANY GAIN IN LOSS THEREOF DERIVES ITS CHARACTER FROM THE SHIPPING INCOME ONLY. THE LEARNED COMMISSIONER (APPEALS) REJECTED THE ASSESSEES CONTENTION AND HELD THAT ONCE THE INCOME IS EARNED FROM SHIPPING BUSINESS, IT HAS NOTHING TO DO WITH FOREIGN M/S. TAG OFFS HORE LIMITED 5 CURRENCY G AIN OR LOSS AND THE CONSEQUENTIAL EFFECT OF FOREIGN CURRENCY FLUCTUATION IS A NORMAL BUSINESS PROFIT OR LOSS AND THE SAME HAS BEEN RIGHTLY TAXED BY THE NORMAL BUSINESS INCOME BY THE ASSESSING OFFICER. ON THE ISSUE OF SECTION 14A, THE LEARNED COMMISSIONER ( APPEALS) HELD THAT THE DISALLOWANCE UNDER SECTION 14A, IS REQUIRED TO BE MADE AS THE ASSESSEE HAS OTHER INCOME ALSO AND ACCORDINGLY REJECTED THE ASSESSEES CONTENTION THAT NO EXPENDITURES HAVE BEEN CLAIMED BY THE ASSESSEE, THEREFORE, NO DISALLOWANCE SHOULD BE MADE UNDER SECTION 14A. RELYING UPON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. V/S DCIT, (2010), 328 ITR 081 (BOM.), HE HELD THAT A REASONABLE DISALLOWANCE SHOULD BE MADE WHEN THE PROVISIONS OF RULE 8D, ARE N OT APPLICABLE IN THE ASSESSMENT YEAR 2007 08. THEREFORE, RELYING UPON THE DECISION OF THE TRIBUNAL IN VIP INDUSTRIES LTD. V/S DCIT, ITA NO.7242/MUM./2008, ITA NO.1004/MUM. /2008, HE HELD THAT 5% OF DIVIDEND INCOME IS A REASONABLE BASIS FOR THE PURPOSE OF D ISALLOWANCE. ACCORDINGLY, HE RESTRICTED THE DISALLOWANCE TO ` 1,86,085. 6 . BEFORE US, THE LEARNED COUNSEL, MS. RACHANA AGARWAL, SUBMITTED THAT THE ASSESSEES ONLY BUSINESS IS OPERATION OF SHIPS I.E., CARRYING OUT SHIPPING ACTIVITY. FOREIGN CURRENCY FLUCTUATI ON GAIN HAVE ARISEN OUT OF SUNDRY CREDITOR AND DEBTORS IN THE COURSE OF SHIPPING ACTIVITY ONLY AND M/S. TAG OFFS HORE LIMITED 6 SUCH A GAIN OR LOSS IN FOREIGN EXCHANGE WILL FORM PART OF THE SAME BUSINESS. IT IS NOT THE BUSINESS OF THE ASSESSEE TO TRADE IN FOREIGN EXCHANGE AND , THEREFO RE, IF THERE IS ANY GAIN OR LOSS IN FOREX, THE SAME WILL DERIVE ITS CHARACTER FROM THE UNDERLYING STRATUM I.E., SHIPPING BUSINESS . SHE ALSO FILED THE DETAILS OF FOREIGN EXCHANGE FLUCTUATION AND POINTED OUT THAT IT IS OUT OF SHIPPING ACTIVITY ONLY. THE VIEW TAKEN BY THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS) THAT IT HAS TO BE TAKEN AS SEPARATE BUSINESS INCOME IS WHOLLY ERRONEOUS. IN SUPPORT OF HER CONTENTION, SHE RELIED UPON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN CIT V/S A MBAR EXPORTS, [2001] 326 ITR 455 (BOM.), WHEREIN IN THE CONTEXT OF DEDUCTION UNDER SECTION 80HHC ON THE EXCHANGE RATE DIFFERENCE PERTAINING TO EXPORTS, THE HON'BLE JURISDICTIONAL HIGH COURT HELD THAT THE SAME IS A PART OF EXPORT BUSINESS ONLY AND HAS TO BE INCLUDED IN THE TURNOVER FOR COMPUTING THE DEDUCTION UNDER SECTION 80HHC. SHE FURTHER RELIED UPON THE DECISION OF THE KARNATAKA HIGH COURT IN CIT V/S INFOSYS TECHNOLOGIES LTD., [2012] 349 ITR 606 (KAR.), WHEREIN IT WAS HELD THAT THE FLUCTUATION IN THE VAL UATION OF CURRENCY HAS A DIRECT NEXUS TO THE EXPORT OF SOFTWARE AND CANNOT BE INCLUDED AS INCOME FROM OTHER SOURCES. THUS, SHE SUBMITTED THAT THE GAIN IN FOREIGN EXCHANGE CANNOT BE SEGREGATED WITH THE SHIPPING BUSINESS. M/S. TAG OFFS HORE LIMITED 7 7 . REGARDING DISALLOWANCE UNDER SECTIO N 14A, THE LEARNED COUNSEL SUBMITTED THAT THE ASSESSEE HAS NOT CLAIMED ANY EXPENDITURE WHICH WERE DEBITED TO THE PROFIT & LOSS ACCOUNT AND THE ENTIRE BASIS OF THE INCOME HAS BEEN SHOWN UNDER THE DEEMING PROVISIONS OF TONNAGE TAX SCHEME. ONCE NO EXPENDITURE HAS BEEN CLAIMED, THEN THERE IS NO QUESTION OF ANY DISALLOWANCE UNDER SECTION 14A. EVEN THE DIVIDEND INCOME HAS BEEN SHOWN ON GROSS BASIS. SHE REFERRED TO THE COMPUTATION OF INCOME AND ALSO PROFIT & LOSS ACCOUNT AND SUBMITTED THAT ULTIMATELY NO EXPENDITUR ES WHICH HAVE BEEN DEBITED IN THE PROFIT & LOSS ACCOUNT WHICH CAN BE SAID TO HAVE BEEN CLAIMED IN THE RETURN OF INCOME. THE DISALLOWANCE UNDER SECTION 14A, CAN ONLY BE MADE WHEN THE EXPENDITURE HAS BEEN INCURRED AND CLAIMED BY THE ASSESSEE IN RELATION TO T HE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE DISALLOWANCE UNDER SECTION 14A, CAN ONLY BE MADE WHEN THE EXPENDITURE WHICH HAS BEEN INCURRED AND CLAIMED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. O NCE NO EXPENDITURE HAS BEEN CLAIMED THEN, THERE IS NO QUESTION OF ANY DISALLOWANCE UNDER SECTION 14A. IN SUPPORT OF THIS CONTENTION, SHE RELIED UPON THE DECISION OF THE TRIBUNAL, MUMBAI BENCH, IN ACIT V/S VARUN SHIPPING CO. LTD., ITA NO.2167/MUM./2011, ORD ER DATED 29 TH JULY 2012. M/S. TAG OFFS HORE LIMITED 8 8 . ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE ISSUE OF DISALLOWANCE OF TRADING FOREIGN CURRENCY TRANSLATION GAIN AS BUSINESS INCOME , SEPARATE FROM SHIPPING ACTIVITY, HE SUBMITTED THAT THE SHIPPING INCOME OF THE ASSESSEE HAS BEEN ASSESSED UNDER A SPECIFIC PROVISION OF TONNAGE TAX SCHEME WHICH IS A DEEMING PROVISION , THEREFORE, THE GAIN WHICH HAS ARISEN ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION CANNOT BE SAID TO BE TAXED UNDER TONNAGE TAX SCHEME. IT DOES NOT F ALL WITHIN THE CORE ACTIVITY OF THE ASSESSEES BUSINESS BUT AN INCIDENTAL ACTIVITY AND, THEREFORE, THE LEARNED COMMISSIONER (APPEALS) HAS RIGHTLY CONFIRMED THE SAID ADDITION. 9 . REGARDING SECTION 14A, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT ON CE THE ASSESSEE HAD EARNED INCOME WHICH IS EXEMPT FROM TAXATION, THEN DISALLOWANCE UNDER SECTION 14A, IS TRIGGERED AND HAS TO BE NECESSARILY MADE. THE ASSESSEE HAS DEBITED HUGE EXPENDITURE IN THE PROFIT & LOSS ACCOUNT AND SOME OF THE EXPENDITURE CAN BE SAI D TO BE ATTRIBUTABLE FOR THE EARNING OF THE EXEMPT INCOME. UNDER SECTION 115VA, WHILE COMPUTING THE INCOME ON THE BASIS OF TONNAGE TAX SCHEME, THE EXPENDITURE IS DEEMED TO HAVE BEEN ALLOWED TO THE ASSESSEE AND IF THERE IS OTHER INCOME, THEN CERTAIN EXPENDI TURE WHICH HAVE BEEN DEBITED CAN BE SAID TO BE ATTRIBUTABLE FOR EARNING OF M/S. TAG OFFS HORE LIMITED 9 SUCH INCOME. HE THUS, STRONGLY RELIED UPON THE REASONING GIVEN BY THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS). 10 . WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE REL EVANT FINDINGS OF THE AUTHORITIES BELOW AND THE MATERIAL AVAILABLE ON RECORD. INSOFAR AS THE FIRST ISSUE IS CONCERNED, THAT IS THE ADDITION OF ` 26,06,402, ON ACCOUNT OF FOREIGN CURRENCY TRANSLATION GAIN, WE FIND THAT BOTH THE AUTHORITIES HAVE HELD THAT SU CH A GAIN IS NOT OUT OF SHIPPING ACTIVITY BUT IT HAS TO BE CONSIDERED AS SEPARATE BUSINESS INCOME. AT THE SAME TIME, IT IS UNDISPUTED FROM THE MATERIAL ON RECORD THAT T HE ONLY BUSINESS ACTIVITY WHICH IS BEING CARRIED OUT BY THE ASSESSEE IS SHIPPING BUSINES S I.E., OPERATION OF SHIPS , WHICH IS ITS CORE ACTIVITY. THE FOREIGN EXCHANGE GAIN HAS ARISEN TO THE ASSESSEE ON ACCOUNT OF SUNDRY CREDIT ORS AND DEBTOR S WHICH WERE IN THE COURSE OF SHIPPING BUSINESS ONLY. THIS IS EVIDENT FROM THE DETAILS FILED BY THE ASSESS EE FROM WHERE IT IS SEEN THAT THE NATURE OF TRANSACTION S ARE CHARTER HIRE INCOME, CHARTER HIRE DEPOSIT S AND INSURANCE DURING THE COURSE OF TRANSACTION OF GOODS. THE GAIN AND LOSS IN THE FOREIGN EXCHANGE IS INCIDENTAL WHEN THE RE ARE CROSS BORDER TRANSACTION S I.E., WITH FOREIGN COUNTRIES, AS TH E GAIN AND LOSS ON ACCOUNT OF SUCH BUSINESS ACTIVITY ALONE. NO SEPARATE TREATMENT CAN BE GIVEN TO FOREIGN EXCHANGE GAIN OR LOSS SO AS TO HOLD THAT IT IS SOME KIND OF SEPARATE M/S. TAG OFFS HORE LIMITED 10 BUSINESS TO BE TAXED SEPARATELY AS NORMAL BU SINESS INCOME. SUCH GAIN OR LOSS IS INTEGRAL TO THE SUB STRATUM FROM WHICH IT HAS ARISEN. THE CHARACTER OF FOREIGN EXCHANGE GAIN / LOSS DERIVES FROM THE U NDERL YING BUSINESS ACTIVITY ONLY, THAT IS, THE INCOME OF WHICH IS COMPUTED FOR THE TAXABLE PURPOSE. IF THE FOREIGN EXCHANGE GAIN HAS ARISEN TO THE ASSESSEE DURING THE COURSE OF SHIPPING BUSINESS, THEN THE SAME DERIVES ITS CHARACTER FROM SUCH BUSINESS ONLY AND NO SEPARATE TREATMENT CAN BE GIVEN. ONCE THE ASSESSEES SHIPPING INCOME IS TAXED UNDER A SPECIAL P ROVISION, THEN ALSO, IT WILL NOT MAKE A DIFFERENCE AS ONLY THE SHIPPING INCOME IS TO BE TAXED . THERE CAN BE NO SEPARATE ASSESSMENT ON FOREIGN EXCHANGE GAIN ON THE GROUND THAT IT IS DIFFERENT FROM OPERATION OF SHIPS. IN THE CONTEXT OF COMPUTATION OF DEDUCTI ON UNDER SECTION 80HHC , AS CITED BY THE LEARNED COUNSEL, THE COURTS HAVE IN VARIABLY HELD THAT THE FOREIGN EXCHANGE GAIN OR LOSS DIRECTLY RELATES TO THE EXPORT AND SAME IS QUALIFIED FOR THE PURPOSE OF DEDUCTION. THE SAME LOGIC WILL FOLLOW HERE ALSO AND, THE REFORE, ANY FOREIGN EXCHANGE GAIN OR LOSS HAS TO BE IN RELATION TO THE SHIPPING INCOME. THERE IS NO BASIS FOR SEPARATELY TAXING IT AS SOME OTHER KIND OF BUSINESS ACTIVIT Y . THUS, WE ARE NOT INCLINED TO AGREE WITH THE REASONING AND CONCLUSION DRAWN BY THE LE ARNED COMMISSIONER (APPEALS) AND THE SAME IS ACCORDINGLY REVERSED. GROUND NO.1, RAISED BY TH E ASSESSEE IS ALLOWED. M/S. TAG OFFS HORE LIMITED 11 11 . GROUND NO.2, RELATES TO DISALLOWANCE MADE UNDER SECTION 14A. 12 . HERE IN THIS CASE, BOTH THE ASSESSING OFFICER AS WELL AS THE LEARNED COMMISSI ONER (APPEALS) HAVE HELD THAT ONCE THE ASSESSEE HAS EARNED EXEMPT INCOME, THEN IT IS A NATURAL COROLLARY THAT IT ENTAILS DISALLOWANCE UNDER SECTION 14A. THE LOGIC OF THE ASSESSING OFFICER IS THAT SUB SECTION (3) OF SECTION 14A, SPECIFICALLY PROVIDES THAT T HE DISALLOWANCE SHOULD BE DETERMINED IN RELATION TO A CASE WHERE THE ASSESSEE CLAIMS NO EXPENDITURE IN RELATION TO EXEMPT INCOME. ON A PERUSAL OF THE PROFIT & LOSS ACCOUNT, IT IS SEEN THAT THE ASSESSEE HAS SHOWN INCOME FROM CHARTER HIRE EARNING I.E., SHIPP ING INCOME AT ` 31,35,90,840 AND OTHER INCOME AT ` 30,71,697. AS AGAINST THIS, THE ASSESSEE HAS DEBITED EXPENDITURE OF FLEET OPERATING EXPENSES AT ` 11,82,99,500, AND ESTABLISHMENT AND OTHER EXPENSES OF ` 22,73,35,488. THE OTHER INCOME ALSO INCLUDES GROSS DIVIDEND OF ` 37,21,710. HOWEVER, IN THE RETURN OF INCOME, THE ASSESSEE HAS NOT MADE THE PROFIT & LOSS ACCOUNT AS THE BASIS OF COMPUTING TAX LIABILITY OR ITS SHIPPING INCOME AND INSTEAD CHOSEN DEEMING PROVISIONS UNDER CHAPTER XIIG, WHICH IS TONNAGE TAX SCH EME FOR THE SHIPPING INCOME. ONCE THE ASSESSEE HAS OFFERED ITS INCOME UNDER TONNAGE TAX SCHEME, THEN NONE OF THE EXPENSES WHICH HAVE BEEN DEBITED IN THE PROFIT & LOSS ACCOUNT, HAS BEEN CONSIDERED OR CLAIMED. IN OTHER WORDS, THE PROFIT & M/S. TAG OFFS HORE LIMITED 12 LOSS ACCOUNT IS COMPLETELY IGNORED FOR THE PURPOSE OF COMPUTATION OF INCOME UNDER CHAPTER IV OF THE ACT. ACCORDINGLY, THE ASSESSEE HAS NOT CLAIMED ANY EXPENDITURE AS DEDUCTION IN THE COMPUTATION OF TOTAL INCOME FILED ALONG WITH THE RETURN OF INCOME. INSOFAR AS THE DIVIDE ND INCOME IS CONCERN ED , THE ASSESSEE HAD SHOWN THE INCOME ON GROSS BASIS AND THE ENTIRE DIVIDEND HAS BEEN CLAIMED AS EXEMPT. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD NOT CLAIMED ANY EXPENSES EITHER TOWARDS THE TAXABLE INCOME OR NON TAX A BLE INCOME. 13 . NOW, IN SUCH A SITUATION, WHETHER IT CAN BE HELD THAT THE DISALLOWANCE UNDER SECTION 14A, IS REQUIRED TO BE MADE. SECTION 14A, READS AS UNDER: 14A. [(1)] FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT.] (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PAR T OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDI TURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB - SECTION (2) SHALL ALSO APPLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT :] M/S. TAG OFFS HORE LIMITED 13 FROM THE READING OF THE ABOVE PROVISIONS , IT IS EVIDENT THAT SUB SECTION (1) PROVIDES THAT FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME UNDER CHAPTER IV , DEALING WITH THE COMPUTATION OF INC OME UNDER VARIOUS HEADS OF INCOME, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE EXPENDITURE WHICH HAS BEEN INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT I.E., INCOME WHICH AR E EXEMPT FROM T AX. THE TRIGGERING POINT FOR DISALLOWANCE UNDER SECTION 14A IS SUB SECTION (1). IT ENVISAGES THAT FIRST OF ALL THE EXPENDITURE MUST HAVE BEEN INCURRED BY THE ASSESSEE IN RELATION TO THE EXEMPT INCOME AND , SECONDLY, SUCH EXPENDITURE MUST HAVE BEEN CLAIMED B Y THE ASSESSEE AS DEDUCTION WHILE COMPUTING HIS TOTAL INCOME UNDER THE ACT . THE PROVISIONS CONTAINED IN SUB SECTION (2) AND (3) ONLY COMES INTO FOREPLAY ON THE SECOND STAGE WHEN DEDUCTION OF EXPENSES HAVE BEEN CLAIMED BY THE ASSESSEE WHILE COMPUTING OF THE TOTAL INCOME AS ENVISAGED IN SUB SECTION (1). THE PROVISIONS OF S UB SECTION (2) & (3) MERELY PROVIDE MECHANISM THROUGH WHICH THE ASSESSING OFFICER HAS TO DETERMINE THE AMOUNT OF EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO THE EXEMPT INCOME OR IS AT TRIBUTABLE TO EARNING OF SUCH INCOME. SUB SECTION (2) PROVIDES THAT IF THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE EXPENDITURE INCURRED IN RELATION TO THE M/S. TAG OFFS HORE LIMITED 14 EXEMPT INCOME, THEN THE ASSESSING OFFICER HAS TO DETERMINE THE AMOUNT OF EXPENDITURE ATTRIBUTABLE TO SUCH EXEMPT INCOME I.E., IF THE ASSESSEE HAS CLAIMED THAT IT HAS INCURRED X AMOUNT FOR THE PURPOSE OF EARNING EXEMPT INCOME AND THE ASSESSING OFFICE R IS NOT SATISFIED WITH SUCH A CLAIM, THEN HE HAS TO DETERMINE THE AMOUNT OF EXPENDITURE AS PRESCRIBED UNDER RULE 8D , AFTER TAKING INTO ACCOUNT VARIOUS FACTORS AND NATURE OF EXPENDITURE VIS A VIS THE AMOUNT DEBITED AND CLAIMED AS EXPENDITURE . SUB SECTION ( 3) FURTHER PROVIDES THAT SUCH A DETERMINATION BY THE ASSESSING OFFICER UNDER SUB SECTION (2) WILL ALSO APPLY WHERE THE ASSESSEE CLAIMS THAT HE HAS NOT INCURRED ANY EXPENDITURE FOR THE PURPOSE OF EARNING EXEMPT INCOME. IN OTHER WORDS, IT ENVISAGES A SITUATI ON WHEN THE ASSESSEE HAS INCURRED THE EXPENDITURE DURING THE COURSE OF EARNING EXEMPT INCOME AND CLAIMS THAT SUCH AN EXPENDITURE HAS NOT BEEN INCURRED OR CAN BE SAID TO BE ATTRIBUTABLE FOR EARNING EXEMPT INCOME, THEN ALSO, THE ASSESSING OFFICER IS EMPOWERE D TO DETERMINE THE CORRECTNESS OF THE ASSESSEES CLAIM IN THE MANNER PROVIDED UNDER SUB SECTION (2) . SUB SECTION (3) HAS TO BE READ IN CONSONANCE WITH SUB SECTION (2) AND NOT IN ISOLATION , BECAUSE ONLY SUB SECTION (2) PROVIDES A MECHANISM AND THE CIRCUMST ANCES UNDER WHICH THE ASSESSING OFFICER HAS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED FOR THE PURPOSE OF EXEMPT INCOME. THE INTERPRETATION OF THE ASSESSING OFFICER THAT SUB SECTION (3) M/S. TAG OFFS HORE LIMITED 15 INDEPENDENTLY PROVIDES THAT IN CASE NO CLAIM OF EXPENDITURE HAS B EEN MADE BY THE ASSESSEE THAN ALSO THE DISALLOWANCE UNDER SECTION 14A HAS TO BE MADE , IS COMPLETELY MISPLACED AND IS LEGALLY NOT TENABLE. THUS, IN OUR CONCLUSION, ONL Y WHEN THE PRECEDENT CONDITIONS OF SUB SECTION (1) ARE SATISFIED , THEN ONLY PROVISIONS OF SUB SECTION (2) AND (3) WILL COME INTO FOREPLAY , FOR THE PURPOSE OF DETERMINATION OF QUANTUM OF DISALLOWANCE. ACCORDINGLY, NO DISALLOWANCE UNDER SECTION 14A IS WARRANTED IN THIS CASE WHEN THE ASSESSEE HAS ADMITTEDLY NOT CLAIMED ANY EXPENDITURE , TOWARDS TAX ABLE INCOME I.E., IT HAS NOT CLAIMED ANY DEDUCTION OF EXPENDITURE DEBITED IN THE PROFIT & LOSS ACCOUNT WHILE COMPUTING THE TOTAL INCOME. THUS, GROUND NO.2, AS RAISED BY THE ASSESSEE, IS ALLOWED. 14 . 1 4 . IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. THE DEPARTMENT HAS RAISED FOLLOWING GROUNDS: 1. WHETHER ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE, LEARNED CIT(A) IS RIGHT IN DIRECTING TO ALLOW TO MAKE DISALLOWANCE OF ` 1,86,085 AS AGAINST DISALLOWANCE OF ` 11,45,445 MADE AS PER THE PROVISION OF SECTION 14A. 2. WHETHER ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) IS RIGHT IN DECIDING THE ISSUE RELYING ON THE JUDGMENT IN THE CASE OF M/S. GODREJ & BOYCE MFG,. CO. LTD. WHEN THE DECISION WAS MADE ACCEPTED BY THE REVENUE AND CHALLENGED BEFORE THE APEX COURT . M/S. TAG OFFS HORE LIMITED 16 15 . SINCE WE HAVE ALREADY HELD THAT NO DISALLOWANCE UNDER SECTION 14A, CAN BE MADE, THEN THE GROUND RAISED BY THE DEPARTMENT BECOMES INFRUCTUOUS. TH US, GROUND RAISED BY THE DEP ARTMENT IS DISMISSED. 16 . 1 6 . IN THE RESULT, REVENUES APPEAL IS DISMISSED. 8 TH AUGUST 2014 ORDER PRONOUNCED IN THE OPEN COURT O N 8 TH AUGUST 2014 SD/ - SANJAY ARORA ACCOUNTANT MEMBER SD/ - AMIT SHUKLA JUDICIAL MEMBER MUMBAI, DATED : 8 TH AUGUST 2014 / COPY OF THE ORDER FORWARDED TO : ( 1 ) / THE ASSESSEE ; ( 2 ) / THE REVENUE; ( 3 ) ( ) / THE CIT(A ) ; ( 4 ) / THE CIT, MUMBAI CITY CONCERNED ; ( 5 ) , , / THE DR, ITAT, MUMBAI ; ( 6 ) / GUARD FILE . / TRUE COPY / BY ORDER . / PRADEEP J. CHOWDHURY / SR. PRIVATE SECRETARY / / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI