Atul Kanodia, Kanpur V. ACIT-4, Kanpur

ITA 130/LKW/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 9170 (ITAT-LUCKNOW)
• Duration Of Justice: 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-01-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 17-01-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 19-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIVEK MISHRA
• Keywords: Opportunity of being heard; Earning of tax free income; Retrospective amendment
• Section: 14A; 147; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, B - BENCH, LUCKNOW. BEFORE SHRI H.L.KARWA, HON'BLE VICE PRESIDENT AND SHRI N.K.SAINI, ACCOUNTANT MEMBER I.T.A.NO.130(LKW.)/2010 A.Y. : 2006-07 SHRI ATUL KANODIA, VS. THE ACIT, RANGE 4., 511, KRISHNA TOWER, KANPUR. 15/63,CIVIL LINES, KANPUR. PAN AAZPK2316C (APPELLANT) (RESPONDENT) APPELLANT BY : NONE RESPONDENT BY : SHRI VIVEK MISHRA CIT (D.R.) O R D E R PER N.K.SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE O RDER DATED 12.1.2010 OF THE LD.CIT(A)-II, KANPUR. 2. THE FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS A PPEAL. 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX(APP EALS)-II, KANPUR HAS ERRED IN LAW AND ON FACTS IN SUSTAINING THE DISALLOWANCE OF RS.13,78,787/- MADE BY THE LEARNED ASSESSING OFFICER ALLEGEDLY U/S 14A READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 MERELY FOLLOWING THE DECISIONS REPORTED IN (26 SOT 603) AND (121 ITD 318) BUT IGNORING THE FACT THAT F ACTS IN THE CASE OF THE APPELLANT WERE DISTINGUISHABLE AND RATI O LAID DOWN IN THE CITED DECISIONS WERE NOT APPLICABLE. 2. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS)-II, 2 KANPUR HAS FAILED TO CONSIDER AND APPRECIATE THAT T HE LEARNED ASSESSING OFFICER FAILED TO ESTABLISH ANY NEXUS BET WEEN THE BORROWED FUNDS AND THE INVESTMENT IN SHARES AND SEC URITIES HELD AS STOCK-IN-TRADE PARTICULARLY IN VIEW OF THE FACTS THAT THE APPELLANT IS A SHARE-BROKER AND HIS PRINCIPAL BUSIN ESS ACTIVITY IS TRADING IN SHARES AND SECURITIES. 3. WITHOUT PREJUDICE TO THE ABOVE GROUNDS OF APPEAL , DISALLOWANCE MADE BY THE LEARNED ASSESSING OFFICER AND SUSTAINED BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-II, KANPUR IS UNJUSTIFIED, UNWARRANTED AND IN ANY CASE MUCH TOO HIGH AND EXCESSIVE. 4. THAT THE ORDER OF LEARNED COMMISSIONER OF INCOME -TAX (APPEALS)-II, KANPUR TO THE EXTENT STATED IN GROUND OF APPEAL NO. 1 TO 2 HERE- IN-ABOVE IS INSUPPORTABLE IN LAW A ND ON FACTS AND IS LIABLE TO BE QUASHED. 5. THAT ANY OTHER RELIEF OR RELIEFS AS YOUR HONOUR MAY DEEM FIT IN THE FACTS AND CIRCUMSTANCES OF THE CASE, BE GRANTED . YOUR HUMBLE APPELLANT CRAVES LEAVE TO ADD, AMEND OR WITHDRAW ANY GROUND OF APPEAL BEFORE THE DATE HEARING. 3. DURING THE COURSE OF HEARING, NOBODY WAS PRESENT ON BEHALF OF THE ASESSEE, HOWEVER, WRITTEN SUBMISSION DATED 8.1.201 1 HAS BEEN FILED, WHICH WE HAVE CONSIDERED ALONGWITH THE ARGUMENTS OF THE L D.D.R. WHILE DECIDING THIS APPEAL. 4. THE FACTS OF THE CASE, IN BRIEF, ARE THAT THE AS SESSEE IS A MEMBER OF U.P. STOCK EXCHANGE AND IS DERIVING INCOME FROM CA RRYING ON BUSINESS OF BROKING, DEALING IN SHARES, INTEREST AND DIVIDEND. THE ASSESSEE FILED THE RETURN OF INCOME ON 30.10.2006 DECLARING AN INCOME OF RS.63,90,350, WHICH INCLUDED LONG TERM CAPITAL GAIN ON SALE OF SHARES H ELD AS INVESTMENT AT RS.2,50,65,146 AND SHORT TERM CAPITAL LOSS ON SHARE S HELD AS INVESTMENT 3 AMOUNTING TO RS.3,274. THE AO COMPUTED THE DISALLOW ANCE UNDER SECTION 14A OF THE I.T.ACT READ WITH RULE 8D(2)(II) OF THE INCOME-TAX RUILES,1962. THE AO MADE THE DISALLOWANCE OF RS.13,78,787. 5. THE LD.CIT(A) CONFIRMED THE ORDER OF THE AO BY F OLLOWING THE DECISION OF THE ITAT, SPECIAL BENCH IN THE CASE OF DAGA CAPITAL MANAGEMENT, 26 SOT 603 (MUM.)(SB) AND CHEMINVEST LT D., 121 ITD 318(DEL.) (SB). 6. NOW, THE ASSESSEE IS IN APPEAL. 7. IN THE WRITTEN SUBMISSIONS, THE ASSESSEE HAS SU BMITTED AS UNDER : 1) THAT THE CAPITAL OF THE APPELLANT WAS RS.9,23, 07,893.50 AND RS.12,85,73,549.82 AS ON 01.04.2005 AND 31.03.2006 RESPECTIVELY. SIMILARLY THE TOTAL INVESTMENTS IN SHARES (EXCLUDIN G STOCK IN TRADE) ETC. WAS RS.5,61,10,737.34 AND RS.5,78,00,450.42 AS ON 01.040.2005 AND 31.03.2006 RESPECTIVELY. THUS IT IS CLEAR THAT: A) THE APPELLANT IS A SHARE BROKER AND ALSO DOING T RADING IN SHARES THEREFORE, INVESTMENT IN SHARES IS INCIDENTAL TO BU SINESS ACTIVITIES. B) THE SUBJECT INVESTMENTS ARE OLD AND THE CAPITAL (NON BORROWED FUNDS) WERE MORE THAN INVESTMENTS. C) THERE IS NO NEXUS BETWEEN ANY EXPENDITURE OR INT EREST AND THE INCOME CLAIMED AS EXEMPT. 2) THAT THE LD. C.LT.(A) HAS CONFIRMED THE DISALLO WANCE MADE BY THE LD. A.O. MERELY BY FOLLOWING THE DECISIONS I N THE CASE OF: A) DAGA CAPITAL MANAGEMENT (P) LTD. (2009) 312 I.T ..R. (AT) PAGE 1 (ITAT MUMBAI SPECIAL BENCH). 4 B) CHEM INVEST LTD., 121 ITD PAGE 318 (ITAT DELHI SPECIAL BENCH). THE LD. C.LT (APPEALS) HAS NEITHER DISCUSSED THE FA CTS NOR HAS GIVEN REASONS FOR CONFIRMING THE DISALLOWANCE/ADDIT IONS. 3) RECENTLY, THE HON'BLE BOMBAY HIGH COURT OF THE JUDICATURE AT MUMBAI HELD IN THE CASE OF GODREJ BOYACE MFG. CO. LTD. VS. DY.CIT. AND ANOTHER (2010)328 ITR 81 HELD THAT - A) ' ... .IT IS A TRITE PRINCIPLE OF LAW THAT THE LAW WHICH WOULD APPLY TO AN ASSESSMENT YEAR IS THE LAW PREVAILING O N THE FIRST DAY OF APRIL, CONSEQUENTLY, RULE 8D WHICH HAS BEEN NOTIFIED ON MARCH 24, 2008, WOULD APPLY WITH EFFECT FROM ASSESS MENT YEAR 2008-09 ... ' B) ' ... .ITO V. DAGA CAPITAL MANAGEMENT P. LTD. [2009] 312 ITR (AT) 1 (MUMBAI) [SB] IMPLIEDLY DISAP PROVED ON THIS POINT. .. ' 4) THAT THE RULE 8D OF INCOME TAX RULES 1962 WAS I NSERTED BY THE I.T. (FIFTH AMDT.) RULES 2008 WITH EFFECT FROM 24.03.2008, HENCE THE SAME WAS APPLICABLE ONLY FROM ASSESSMENT YEAR 2 008-2009 AND NOT THE EARLIER YEARS. 7.2 RELIANCE HAS ALSO BEEN PLACED ON THE FOLLOWING CASE LAWS: (I) DECISION OF THE ITAT, DELHI BENCH OF THE INCOME -TAX APPELLATE TRIBUNAL IN THE CASE OF IMPULSE (INDIA) PVT. LTD. VS.ACIT (2008) 22 SOT 368, (II) DECISION OF THE I.T.A.T., MUMBAI BENCH IN THE CASE OF M/S. GODREJ AGROVET LTD. VS. ACIT, RANGE 10(2), MUMBAI ( ITA NO.1629(MUM.)/09 FOR A.Y. 2005-06, (III) DECISION OF THE I.T.A.T., DELHI BENCH IN THE CASE OF MARUTI UDYOG LTD. VS. DY.CIT,92 ITD 119. (IV) WIMCO SEEDLINGS LTD. VS.DY.CIT, 107 ITD 267 (D EL.)TM, (V) CIT VS. RELIANCE UTILITIES AND POWER LTD.(2009) 313 ITR 40. 7.4 FINALLY, THE ASSESSEE, IN THE WRITTEN SUBMISSI ONS HAS PRAYED AS 5 UNDER : I) FROM THE DETAILED FACTS AND EXPLANATION SUBMITT ED HERE ABOVE, YOUR HONOURS WILL KINDLY APPRECIATE THAT THE AUTHOR ITIES BELOW HAVE MECHANICALLY MADE THE DISALLOWANCE ALLEGEDLY U /S 14A OF THE INCOME TAX ACT, 1961, READ WITH RULE 8D OF THE INCOME TAX RULE 1962, WITHOUT ESTABLISHING: A) NEXUS BETWEEN BORROWED FUNDS AND THE INVESTMENTS GIVING RISE TO EXEMPT INCOME. B) THAT THE EXPENSES AND INTEREST ARE ATTRIBUTABLE TO EXEMPT INCOME. C) SECTION 14A AND RULE 8D CAN BE APPLIED RETROSPEC TIVELY. II) THAT THE DISALLOWANCE U/S 14A OF THE I.T. ACT R EAD WITH RULE 8D OF I.T. RULES MADE BY THE LD. A.O. AND SUSTAINED BY THE LD. C.LT.(A)-II, KANPUR IS INSUPPORTABLE IN LAW AND ON FACTS AND THEREFORE, IS LIABLE TO BE QUASHED. 8. THE LD.D.R., IN HIS RIVAL SUBMISSIONS, SUPPORTED THE IMPUGNED ORDER PASSED BY THE LD.CIT(A). 9. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IT IS NOTICED THAT IDENTICAL ISSUE HAVING SIMILAR FACTS WAS A SUBJECT MATTER OF THE ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2006-07 IN I.T.A.NO.238(LUC.)/2 010 WHEREIN THE ISSUE HAD BEEN REMANDED BACK TO THE AO VIDE ORDER DATED 15.9.2010 BY OBSERVING AS UNDER: 8. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON T HE RECORD. IN THE PRESENT CASE, THE AO INVOKED THE PROVISIONS OF SEC TION 14A OF THE INCOME-TAX ACT, 1961. THE SAID PROVISION READS AS U NDER : 6 14A. (1) FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUN T OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, I F THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNT S OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT : PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOWE R THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154 , FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. 8.1 FROM THE ABOVE PROVISIONS IT WOULD BE CLEAR THA T THE MANDATE OF SECTION 14A IS TO PREVENT CLAIMS FOR DEDUCTION O F EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. THIS SECTION IS ENACTED TO ENSURE THAT O NLY EXPENSES INCURRED IN RESPECT OF EARNING TAXABLE INCOME ARE A LLOWED. ALL EXPENDITURE INCURRED IN RELATION TO INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME UNDER THE PROVISIONS OF THE I.T .ACT HAS TO BE DISALLOWED UNDER SECTION 14A. UNDER SUB-SECTION (2 ) OF SECTION 14, THE AO IS REQUIRED TO DETERMINE THE AMOUNT OF EX PENDITURE INCURRED 7 BY AN ASSESSEE IN RELATION TO SUCH INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. IN THE PRESENT CASE, ALTHOUGH T HE AO HAS NOT ESTABLISHED THE NEXUS BETWEEN THE EXPENDITURE AND THE EXEMPTED INCOME (DIVIDEND) TO WORK OUT THE EXPENDITURE BUT FOR MAKING DISALLOWANCE INVOKED THE PROVISIONS OF RULE 8D OF T HE INCOME-TAX RULES, 1962 WHICH ARE INSERTED BY THE INCOME-TAX ( FIFTH AMENDMENT) RULES,2008, W.E.F. 24.3.2008. HOWEVER, AS PER THE R ATIO LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA), THE PROVISIONS OF RULE 8D ARE APP LICABLE PROSPECTIVELY AND NOT RETROSPECTIVELY. IN THE SAID CASE, THEIR LORDSHIPS OF THE HON'BLE BOMBAY HIGH COURT, WHILE INTERPRETI NG THE PROVISIONS OF SECTION 14A OF THE ACT AND RULE 8D OF THE INCOM E-TAX RULES, 1962, OBSERVED AT PAAS 66 & 67 OF THE AFORESAID REFERRED TO ORDER (HEAD NOTE) AS UNDER : THE FIRST POINT TO BE NOTED ABOUT THE PROVISIONS O F S. 14A AND R. 8D IS THAT DIFFERENT DATES HAVE BEEN PROVIDED IN THESE PROVISIONS FOR THEIR ENFORCEMENT: (I) SUB-SEC. (1) OF S. 14A WAS INSERTED BY THE FINANCE ACT OF 2001 WITH RETROSPECT IVE EFFECT FROM 1ST APRIL, 1962; (II) SUB-SS. (2) AND (3) WERE INSERTED IN S. 14A BY THE FINANCE ACT OF 2006 W.E.F. 1ST APRIL, 20 07; (III) THE PROVISO WAS INSERTED BY THE FINANCE ACT OF 2002 WIT H RETROSPECTIVE EFFECT FROM 11TH MAY, 2001; (IV) RULE 8D WAS INSERTED BY THE IT (FIFTH AMENDMENT) RULES, 2008 BY PUBLICATION IN THE GAZETTE DT. 24TH MARCH, 2008. SU B-R. (2) OF R.1 STIPULATES THAT THE RULES SHALL COME INTO FORCE FROM THE DATE OF THEIR PUBLICATION IN THE OFFICIAL GAZETTE. THIS BY ITSELF IS NOT CONCLUSIVE. SECONDLY, PRIOR TO THE INSERTION OF S. 14A BY THE FINANCE ACT OF 2001 THE SUPREME COURT HAD HELD IN I TS DECISIONS IN CIT VS. INDIAN BANK LTD. AIR 1965 SC 1 473, CIT VS. MAHARASHTRA SUGAR MILLS LTD. 1973 CTR (SC) 489: (1971) 82 ITR 452 (SC):(1971) 3 SCC 543 AND RAJASTHAN STAT E WAREHOUSING CORPORATION VS. CIT (2000) 159 CTR (SC) 132 : (2000) 242 ITR 450 (SC) THAT IN THE CASE OF A COMPO SITE AND INDIVISIBLE BUSINESS WHICH RESULTED IN TAXABLE AND NON-TAXABLE INCOME, IT WAS IMPERMISSIBLE FOR THE AO TO APPORTIO N THE EXPENDITURE INCURRED IN RELATION TO SUCH BUSINESS A S BETWEEN THE EARNING OF TAXABLE AND NON-TAXABLE INCOME. SUB- SEC. (1) OF S. 14A WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 1ST APRIL, 8 1962 TO OVERCOME THE DECISIONS OF THE SUPREME COURT . AT THE SAME TIME, AS HAS BEEN NOTICED BY THE SUPREME COURT IN ITS DECISION IN CIT VS. WALFORT SHARE & STOCK BROKERS ( P) LTD. (2010) 233 CTR (SC) 42 : (2010) 41 DTR (SC) 233, TH E THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON- TAXABLE INCOME HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER S. 14A. READING S. 14 IN JUXTAPOSITION WITH SS. 15 TO 59, IT HAS BEEN OBSERVED THAT THE WORDS 'EXPENDITURE INCURRED' IN S . 14A REFER TO EXPENDITURE ON RENT, TAX, SALARY, INTEREST ETC. IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR. THIRDLY, SUB-SS. (2) AND (3) WERE INTRODUCED BY A LEGISLATIVE AMENDMENT BROUGHT ABOUT BY THE FINANCE ACT OF 2006. THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL OF 2006 RECOGNIZES T HAT THE EXISTING PROVISIONS OF S. 14A DID NOT PROVIDE A MET HOD OF COMPUTING THE EXPENDITURE INCURRED IN RELATION TO I NCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. CONSEQUENTL Y, THERE WAS A CONSIDERABLE AMOUNT OF DISPUTE BETWEEN THE TAXPAY ERS AND THE DEPARTMENT ON THE METHOD OF DETERMINING SUCH EXPEND ITURE. IT WAS IN VIEW OF THESE DISPUTES THAT PARLIAMENT INSER TED A NEW SUB-SEC. (2) TO PERMIT THE FRAMING OF SUBORDINATE L EGISLATION TO PROVIDE A MANDATORY METHOD FOR THE AO TO FOLLOW IN DETERMINING THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, IF TH E AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. THE MEMORANDUM PROVIDED THAT 'THIS AMENDMENT WILL TAKE EFFECT FROM 1ST APRIL, 2007 AND WILL, ACCORDINGLY APPLY IN RELATION TO THE ASST. YR. 2007-08 AND SUBSEQUENT YEARS'. A CIRC ULAR WAS ISSUED BY THE CBDT ON 28TH DEC., 2006 ONCE AGAIN CL ARIFYING THE POSITION THAT THE AMENDMENT WOULD BE APPLICABLE 'FROM THE ASST. YR. 2007-08 ONWARDS'. AT ANY RATE THIS CONSTR UCTION WHICH HAS BEEN PLACED ON THE AMENDMENT BOTH IN THE MEMORA NDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL OF 20 06 AND IN THE CIRCULAR OF THE CBDT DT. 28TH DEC., 2006 CAN BE REG ARDED AS A REASONABLE INTERPRETATION OF THE PROVISION. THE FOU RTH ASPECT OF THE MATTER WHICH WOULD MERIT EMPHASIS, IS THE PRINC IPLE OF LAW THAT IN DETERMINING AS TO WHETHER A RULE IN A PIECE OF SUBORDINATE LEGISLATION IS TO BE REGARDED AS PROSPE CTIVE OR RETROSPECTIVE, AN IMPORTANT ASPECT IS AS TO WHETHER THE RULE EMBODIES WHAT IS ESSENTIALLY A WELL KNOWN, A WELL S ETTLED OR WELL ACCEPTED METHOD. AS A MATTER OF FACT IN THE PR ESENT CASE 9 THERE CAN BE NO DOUBT ABOUT THE POSITION THAT R. 8D HAS ESSENTIALLY PUT INTO PLACE AN ARTIFICIAL METHOD OF ESTIMATING THE EXPENDITURE THAT CAN BE REGARDED AS BEING RELATABLE TO INCOME THAT DOES NOT FORM PART OF THE TOTAL INCOME UNDER T HE ACT. BEFORE THE INSERTION OF S. 14A, THERE WAS NO SPECIF IC METHOD OF DETERMINING THE EXPENDITURE INCURRED IN RELATION TO NONTAXABLE INCOME. LOOKING AT THE TOTALITY OF THE CIRCUMSTANCE S, THE MEASURE OF 0.5 PER CENT PROVIDED IN R. 8D(2)(III) I S REASONABLE. HENCE, WHILE THE METHOD OF COMPUTATION PROVIDED IN R. 8D IS FAIR AND REASONABLE TO PASS MUSTER UNDER ART. 14 , THE METHOD MUST TAKE EFFECT PROSPECTIVELY. FINALLY, SUB-SEC. ( 4) OF S. 295 EMPOWERS THE RULE-MAKING AUTHORITY TO GIVE RETROSPE CTIVE EFFECT TO SUBORDINATE LEGISLATION. HOWEVER, UNLESS EXPRESS LY OR BY NECESSARY IMPLICATION, A CONTRARY PROVISION IS MADE , NO RETROSPECTIVE EFFECT IS TO BE GIVEN TO ANY RULE SO AS TO PREJUDICIALLY AFFECT THE INTERESTS OF THE ASSESSEE. EVEN IN THE ABSENCE OF SUB-SS. (2) AND (3) OF S. 14A AND OF R. 8D, THE AO WAS NOT PRECLUDED FROM MAKING APPORTIONMENT. SUCH A N APPORTIONMENT WOULD HAVE TO BE MADE IN ORDER TO GIV E EFFECT TO THE SUBSTANTIVE PROVISIONS OF SUB-S. (1) OF S. 14A WHICH PROVIDE THAT NO DEDUCTION WOULD BE ALLOWED IN RESPECT OF EX PENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE CHANGE WHICH IS BRO UGHT ABOUT BY THE INSERTION OF SUB-SS (2) AND (3) INTO S. 14A BY THE FINANCE ACT OF 2006 W.E.F. 1ST APRIL, 2007 IS THAT IN A SIT UATION WHERE THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLA IM OF THE ASSESSEE IN REGARD TO THE EXPENDITURE INCURRED BY I T IN RELATION TO THE NON-TAXABLE INCOME, THE AO WOULD HAVE TO FOL LOW THE METHOD WHICH IS PRESCRIBED BY THE RULES. THE AMENDM ENT RULES WERE NOTIFIED TO COME INTO FORCE ON 24TH MARCH, 200 8. IT IS A TRITE PRINCIPLE OF LAW THAT THE LAW WHICH WOULD APP LY TO AN ASSESSMENT YEAR IS THE LAW PREVAILING ON THE FIRST DAY OF APRIL. CONSEQUENTLY, R. 8D WHICH HAS BEEN NOTIFIED ON 24TH MARCH, 2008 WOULD APPLY WITH EFFECT FROM ASST. YR. 2008-09 . THE RULE CONSEQUENTLY CANNOT HAVE APPLICATION IN RESPECT OF ASST. YR. 2002-03 WHICH IS THE YEAR UNDER CONSIDERATION IN TH IS CASE. 8.2 IN THE PRESENT CASE, SINCE THE AO APPLIED THE P ROVISIONS CONTAINED IN RULE 8D,WHICH ARE APPLICABLE WITH EFFE CT FROM A.Y. 2008- 09, WHILE THE ASSESSMENT YEAR INVOLVED IN THIS CASE IS 2006-07, 10 THEREFORE, WE ARE OF THE VIEW THAT THE LD.CIT(A) WA S NOT JUSTIFIED IN CONFIRMING THE ACTION OF THE AO BY CONSIDERING THE RATIO LAID DOWN BY THE I.T.A.T., SPECIAL BENCH IN THE CASE OF M/S. DAGA CAPITAL MANAGEMENT PRIVATE LTD., 312 ITR 1 (S.B.) MUMBAI, W HICH IS NOT A GOOD LAW IN VIEW OF THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE AFORESAID REFERRED TO CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA), WE, THEREFORE, SET ASIDE THE ORDER OF THE LD.CIT(A) AND REMAND THE ISSUE BACK TO THE FILE OF THE AO FOR FRE SH ADJUDICATION BY KEEPING IN VIEW THE GUIDELINES LAID DOWN BY THE HO N'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. L TD. (SUPRA) AND DIRECT THE AO TO COMPUTE THE DISALLOWANCE, IF ANY, BY APPLYING A REASONABLE METHOD HAVING REGARD TO THE FACTS AND CI RCUMSTANCES OF THE CASE. 9. SINCE THE FACTS FOR THE YEAR UNDER CONSIDERATION ARE IDENTICAL TO THE FACTS INVOLVED IN THE PRECEDING YEAR, THEREFORE , RESPECTFULLY FOLLOWING THE AFORESAID ORDER DATED 15 TH SEPTEMBER, 2010 IN ASSESSEES OWN CASE IN I.T.A.NO.238(LUC.)/2010, WE REMAND THE ISSUE BACK TO THE FILE OF THE AO FOR FRESH ADJUDICATION AS WAS DIRECTED IN THE PRECEDING YEAR. 10. RESPECTFULLY FOLLOWING THE DECISION OF THIS BEN CH OF THE TRIBUNAL IN THE CASE OF GOEL INVESTMENTS LTD. (SUPRA), WE REMAN D THE ISSUE BACK TO THE FILE OF THE AO FOR FRESH ADJUDICATION AFTER AFFORD ING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 10. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 19.1.11. SD. SD. (H.L.KARWA) (N.K.SAINI) VICE PRESIDENT ACCOUNTANT MEMBER JANUARY 19TH , 2011. COPY TO THE : 1. APPELLANT 2. RESPONDENT 3. CIT(A) (4) CIT 5.DR. A.R.,ITAT, LUCKNOW. SRIVASTAVA. 11