Asst. Commissioner of Income-Tax, Bangalore V. M/s.Kausthubha Project Private Limited, Bangalore

ITA 1310/BANG/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 7218 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 4 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-11-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 24-07-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 08-07-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Question of law; Onus to prove
• Section: 14A

Judgement Text

ITA.1310/BANG/2016 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU BENCH 'C', BENGALURU BEFORE SHRI. INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI. LALIT KUMAR, JUDICIAL MEMBER I.T.A NO.1310/BANG/2016 (ASSESSMENT YEAR : 2012-13) ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 4(1)(1), BENGALURU .. APPELLANT V. M/S. KAUSTHUBHA PROJECT P. LTD, NO.4065, 18 TH MAIN, 30 TH CROSS, BSK II STAGE, BENGALURU 560 070 .. RESPONDENT PAN : AACCK4123B ASSESSEE BY : NONE REVENUE BY : SHRI. M. K. BIJU, JCIT HEARD ON : 09.11.2017 PRONOUNCED ON : 17.11.2017 O R D E R PER LALIT KUMAR, JUDICIAL MEMBER : THE PRESENT APPEAL IS FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT (A) -4, BENGALURU, DT.26.04.2016, FOR THE ASSES SMENT YEAR 2012-13, ON THE FOLLOWING EFFECTIVE GROUNDS : ITA.1310/BANG/2016 PAGE - 2 2. ON FACTS OF THE CASE, THE LD. CIT (A) HAS ERRED IN HOLDING THAT IN CASE THE NEXUS BETWEEN THE INVESTMENT AND I NTEREST BEARING FUNDS IS NOT ESTABLISHED, SECTION 14A R.W.R 8D HAS NOT APPLICABILITY AT ALL, WHEN IT IS STATED IN CIRCULAR NO.5/2014 DATED 11/02/2014 THAT THE DISALLOWANCE U/S.14A R.W.R 8D H AS TO BE MADE EVEN WHEN THE TAX PAYER ON A PARTICULAR YEAR H AS NOT EARNED ANY EXEMPTED INCOME. 3. ON FACTS OF THE CASE, THE LD. CIT(A) IS NOT JUST IFIED IN DELETING THE 14A ADDITION MADE UNDER RULE 8D WHEN T HE AO HAS RIGHTLY MADE THE DISALLOWANCE AFTER ANALYSING THE I NVESTMENT PORTFOLIO AND THE BALANCE SHEET GIVEN BY THE ASSESS EE. 02. BRIEF FACTS ARE, THE ASSESSEE IS ENGAGED IN THE BUSINESS OF REAL ESTATE PROPERTY DEVELOPMENT. THE AO DISALLOWED AN AMOUNT OF RS.62,38,066/- BY INVOKING THE PROVISIONS OF SECTION 14A R.W.R 8D. FEELING AGGRIEVED BY THE DISALLOWANCE, THE ASSESSEE FILED APPEAL BEFORE THE CIT (A), WHO HAS ALLOWED THE GROUND OF APPEAL OF THE ASSESSEE VIDE T HE IMPUGNED ORDER. THEREFORE THE REVENUE IS IN APPEAL BEFORE US. 03. THE LD. DR HAS SUBMITTED THAT THE ORDER PASSED BY THE CIT (A) IS IN CONTRADICTION OF THE CIRCULAR NO.5/2014, DT.11.02.2 014, AND HAS SUBMITTED THAT THE ORDER PASSED BY THE CIT (A) IS WITHOUT ANY MERIT AND IS LIABLE TO BE SET ASIDE. 04. NO APPEARANCE WAS MADE ON BEHALF OF THE ASSESSE E. THEREFORE WE DECIDE THIS APPEAL IN THE ABSENCE OF ANY ASSISTANCE BY THE ASSESSEE. 05. WE HAVE HEARD THE LD. DR. THE AO HAD MADE TWO DISALLOWANCES AS FOLLOWS : ITA.1310/BANG/2016 PAGE - 3 I) RS.55,77,766/- BEING INDIRECT INTEREST WORKED OU T UNDER RULE 8D(2)(II) II) RS.6,66,300/- BEING 0.5% OF AVERAGE AMOUNT OF T AX EXEMPT INVESTMENT UNDER RULE 8D(2)(III). 06. WE WILL FIRST DEAL WITH THE GROUND PERTAINING T O RULE 8D(2)(II). IN THIS REGARD THE CIT (A) HAS REPRODUCED THE FUND-FLO W OF THE TERM LOAN IN HIS ORDER WHICH IS AS FOLLOWS : (RS. IN CRORES) APPLICATION OF FUNDS AMOUNT PURCHASE OF FIXED ASSETS 8.56 DEPOSITS (CURRENT ASSETS) 1.11 BUSINESS PURPOSE (INVESTMENT IN AMETHYST HOSPITALITY P. LTD AND OTHER BUSINESS PURPOSE 6.79 INTEREST ON TERM LOAN 0.33 TOTAL 16.79 BESIDES THAT IT WAS THE CASE OF THE ASSESSEE BEFORE THE CIT (A) THAT THE ASSESSEE WAS HAVING SURPLUS FUNDS AND NO EVIDENCE W AS BROUGHT ON RECORD TO PROVE THAT THE BORROWED FUNDS WERE DIVERTED TOWA RDS THE INVESTMENT. THE HONBLE KARNATAKA HIGH COURT IN THE MATTER OF MICROLABS LTD. * [2017] 79 TAXMANN.COM 365 (KARNATAKA) 5. FOR THE SECOND QUESTION, THE OBSERVATIONS MADE BY THE TRIBUNAL IN THE IMPUGNED ORDER READS AS UNDER: '32. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FO LLOWS:- '2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) HAS ERRED IN SUSTAINING THE ADDITIONS MADE BY THE ASSESSING OFFI CER U/S. 14A READ WITH RULE 8D ON THE GROUND THAT THE APPELLANT HAS N OT PRODUCED THE EVIDENTIARY SUPPORT IN RELATION TO DISPERSAL OF LOA N AND UTILIZATION OF LOAN. WHEREAS THE APPELLANT HAS PRODUCED THE EVIDEN CE THAT THE ITA.1310/BANG/2016 PAGE - 4 AMOUNT INVESTED WAS OUT OF POSITIVE BANK BALANCE AN D NO BORROWINGS WERE UTILIZED FOR THE PURPOSE OF INVESTMENT.' 33. THE ASSESSEE EARNED DIVIDEND INCOME OF RS.38,75 ,857. IT QUANTIFIED A SUM OF RS.3,22,426 AS EXPENDITURE INCU RRED IN EARNING TAX FREE INCOME DIVIDEND INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND WHICH IS TO BE DISALLOWED U/S. 14A OF THE ACT. 34. THE BREAK-UP OF THE SUM OF RS.3,22,426 IS NOT S PECIFICALLY GIVEN, BUT IS STATED TO BE RELATING TO MANAGEMENT FEE, LEG AL & PROFESSIONAL CHARGES, SECURITY TRANSACTION CHARGES AND NSDL CHAR GES. IT IS THUS CLEAR THAT THE ASSESSEE BY IMPLICATION HAD CLAIMED THAT THERE WAS NO EXPENDITURE INCURRED BY WAY OF INTEREST, EITHER DIR ECTLY OR INDIRECTLY, WHICH IS ATTRIBUTABLE TO THE BORROWED FUNDS WHICH W ERE USED FOR THE PURPOSE OF INVESTMENT WHICH YIELDED TAX FREE INCOME . 35. THE AO OBSERVED THAT SCHEDULE G TO THE FINANCIA L STATEMENTS OF THE ASSESSEE HAD SHOWN INVESTMENT TO THE TUNE OF RS .28,45,29,937 IN SHARES MUTUAL FUNDS OF VARIOUS COMPANIES. HE WAS OF THE VIEW THAT SUCH INVESTMENTS CANNOT BE MADE ROUTINELY. NO PRUDE NT BUSINESSMAN WOULD MAKE ANY INVESTMENT WITHOUT APPLYING THE RESO URCES WISELY. OBVIOUSLY THIS ENTAILS EXPENDITURE, DIRECT AS WELL AS INDIRECT. HE THEREAFTER PROCEEDED TO MAKE DISALLOWANCE U/S. 14A OF THE ACT, WHICH IS GIVEN AS ANNEXURE TO THE ASSESSMENT ORDER AND EN CLOSED AS ANNEXURE-II TO THIS ORDER. 36. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(APPEALS). 37. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT INTE REST BEARING LOANS WERE BORROWED FOR SPECIFIC PURPOSES AND NOT FOR INV ESTMENT PURPOSES AND IN SUPPORT OF THE ABOVE CONTENTION, THE ASSESSE E FILED COPIES OF BALANCE SHEETS AS ON 31.03.2003 UPTO 31.03.2009 TO SHOW THAT THE VARIOUS LOANS AVAILED FROM BANKS WERE ALL TAKEN FOR SPECIFIC PURPOSES AND COULD NOT HAVE BEEN UTILIZED FOR MAKIN G ANY INVESTMENTS OUT OF WHICH EXEMPT INCOME WAS EARNED. THESE LOANS INCLUDE SHORT TERM LOANS FROM IDBI BANK, EXIM BANK, BARCLAYS BANK AND STANDARD CHARTERED BANK IN RESPECT OF WHICH IT WAS EXPLAINED THAT THE LOANS COULD NOT HAVE BEEN USED FOR MAKING ANY LONG TERM INVESTMENT. COPIES OF SOME COMMUNICATIONS FROM BANK S REGARDING SANCTION OF THE LOANS WERE ALSO FILED BEFORE ME TO SUBSTANTIATE THE NATURE OF THE LOAN. IN RESPECT OF IDBI LOAN, IT WAS SUBMITTED THAT THE ITA.1310/BANG/2016 PAGE - 5 SAME HAD BEEN RETURNED BACK BEFORE THE YEAR END, TH US BRINGING THE BALANCE TO NIL. 38. ON CONSIDERATION OF THE ABOVE SUBMISSIONS AND O N PERUSAL OF THE RELEVANT DOCUMENTS, THE CIT(A) WAS OF THE VIEW THAT THE CLAIM OF THE ASSESSEE WAS NOT EVIDENCED FROM THE DOCUMENTS SUBMI TTED IN VIEW OF THE LOANS AND OTHER SOURCES OF FUNDS BEING MIXED UP IN THE COMMON POOL OF FUNDS. THE CIT(A) FURTHER HELD THAT THE BUR DEN OF PROOF IN THIS MATTER CLEARLY CONTINUES TO REST WITH THE ASSE SSEE AND THAT IT WAS NOT ENOUGH TO MERELY SHOW THAT SURPLUS FUNDS WERE A VAILABLE OR THAT BANK LOANS HAD BEEN AVAILED FOR SPECIFIC PURPOSES I NCLUDING SHORT TERM REASONS. A ONE-TO-ONE CORRELATION MUST ALSO BE ESTABLISHED TO PROVE THAT THE LOANS WERE ABSOLUTELY UTILIZED FOR T HE PURPOSE FOR WHICH THEY WERE CLAIMED. THE CIT(A) ALSO HELD THAT THERE WAS NO UTILIZATION CERTIFICATE FROM THE BANK FILED BEFORE THE AO NOR WAS SUCH EVIDENCE FURNISHED BEFORE THE CIT(A). THE CIT(A) AL SO HELD THAT THE DOCUMENTS SUBMITTED FROM THE BANK DURING THE COURSE OF APPEAL ONLY REFER TO THE DISBURSAL OF THE LOAN AND EVEN THESE S PECIFY CERTAIN CONDITIONS REQUIRED TO BE MET. THE DATE-WISE ACTUAL DISBURSAL AND UTILIZATION IS NOT PROVED FROM THE LEDGER COPIES AS SUBMITTED. THE CIT(A) ALSO REFERRED TO THE DECISION OF MUMBAI ITAT IN THE CASE OF HERCULES HOISTS LTD. (ITA NO.7944, 7946, 2255 & 794 3/MUM/2011), WHEREIN IT WAS HELD THAT WITH THE INTRODUCTION OF R ULE 8D THE BURDEN OF PROOF ON THE ASSESSEE HAS BECOME 'MORE STRINGENT , SO THAT RATHER THAN SHOWING EXISTENCE OF SUFFICIENT CAPITAL, THE M ATTER WOULD BE REQUIRED TO BE EXAMINED FROM THE STAND POINT OF UTI LIZATION OF THE BORROWED INTEREST BEARING FUNDS.' IN THE ABSENCE OF CATEGORICAL UTILIZATION CERTIFICATE FROM THE BANK, THE CIT(A) W AS OF THE VIEW THAT THERE WAS NO EVIDENTIARY SUPPORT OF THE ASSESSEE'S CLAIM. HENCE, THE DISALLOWANCE U/S.14A OF THE ACT AS MADE BY THE AO W AS UPHELD BY THE CIT(A). 39. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE HAS RAISED GROUND NO.2. 40. WE HAVE HEARD THE RIVAL SUBMISSIONS. A COPY OF THE AVAILABILITY OF FUNDS AND INVESTMENTS MADE WAS FILED BEFORE US WHIC H IS AT PAGES 38 TO 42 OF THE ASSESSEE'S PAPER BOOK AND THE SAME IS ENCLOSED AS ANNEXURE-III TO THIS ORDER. IT IS CLEAR FROM THE SA ID STATEMENT THAT THE AVAILABILITY OF PROFIT, SHARE CAPITAL AND RESER VES & SURPLUS WAS MUCH MORE THAN INVESTMENTS MADE BY THE ASSESSEE WHI CH COULD YIELD TAX FREE INCOME. ITA.1310/BANG/2016 PAGE - 6 41. THE HON'BLE BOMBAY HIGH COURT IN RELIANCE UTILI TIES & POWER LTD. 313 ITR 340 (BOM) HAS HELD THAT WHERE THE INTE REST FREE FUNDS FAR EXCEED THE VALUE OF INVESTMENTS, IT SHOULD BE C ONSIDERED THAT INVESTMENTS HAVE BEEN MADE OUT OF INTEREST FREE FUN DS AND NO DISALLOWANCE U/S. 14A TOWARDS ANY INTEREST EXPENDIT URE CAN BE MADE. THIS VIEW WAS AGAIN CONFIRMED BY THE HON'BLE BOMBAY HIGH COURT IN CIT V. HDFC BANK LTD., ITA NO.330 OF 2012, JUDGM ENT DATED 23.7.14, WHEREIN IT WAS HELD THAT WHEN INVESTMENTS ARE MADE OUT OF COMMON POOL OF FUNDS AND NON-INTEREST BEARING FUNDS WERE MORE THAN THE INVESTMENTS IN TAX FREE SECURITIES, NO DIS ALLOWANCE OF INTEREST EXPENDITURE U/S. 14A CAN BE MADE. 42. IN THE LIGHT OF ABOVE SAID DECISIONS, WE ARE OF THE VIEW THAT DISALLOWANCE OF INTEREST EXPENSES IN THE PRESENT CA SE OF RS.49,42,473 MADE UNDER RULE 8D(2)(II) OF THE I.T. RULES SHOULD BE DELETED. WE ORDER ACCORDINGLY.' THE AFORESAID SHOWS THAT THE TRIBUNAL HAS FOLLOWED A DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF CIT V. HDFC BANK L TD. [2014] 366 ITR 505/226 TAXMAN 132 (MAG.)/49 TAXMANN.COM 33 5 . WHEN THE ISSUE IS ALREADY COVERED BY A DECISION OF THE H IGH COURT OF BOMBAY WITH WHICH WE CONCUR, WE DO NOT FIND ANY SUB STANTIAL QUESTION OF LAW WOULD ARISE FOR CONSIDERATION AS CA NVASSED. 07. SIMILAR VIEW WAS ALSO EXPRESSED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE MATTER OF CIT V. KARNATAKA STATE INDUS TRIAL & INFRASTRUCTURE DEVELOPMENT CORPORATION [(2016) 65 TAXMANN.COM 295] IN PARA 5, WHICH IS AS UNDER : 5. AS REGARDS THE ISSUE OF COMPUTATION OF THE EXPENDI TURE, RULE 8D OF THE RULES CONTAINS THREE LIMBS, NAMELY: (I) EXPENDITURE DIRECTLY RELATED TO THE EARNING OF EXEM PT INCOME; (II) INTEREST EXPENDITURE NOT DIRECTLY ATTRIBUTABLE TO A NY PARTICULAR INCOME; AND (III) AMOUNT EQUAL TO ONE-HALF PER CENT OF THE AVERAGE VA LUE OF ITA.1310/BANG/2016 PAGE - 7 INVESTMENTS, INCOME FROM WHICH DOES NOT FORM PART O F TOTAL INCOME. AS REGARDS THE 1ST AND 3RD LIMBS OF RULE 8D MENTION ED SUPRA, THERE IS NO DISPUTE IN THIS MATTER. AS REGARDS THE INTERE ST REFERRED TO IN THE SECOND LIMB OF RULE 8D OF THE RULES, THE ASSESSEE C ONTENDS THAT THE AMOUNTS OF INVESTMENT IN SUCH SECURITIES IN THE PER IOD UNDER CONSIDERATION IS MUCH LESS THAN THE AMOUNT OF CAPIT AL AND SURPLUS FUNDS AVAILABLE WITH THE COMPANY AND NO PORTION OF THE BORROWED FUNDS WERE UTILIZED TO MAKE SUCH INVESTMENTS. IT IS NOW WELL SETTLED PRINCIPLE THAT THE DISALLOWANCE TOWARDS INTEREST IS NOT TENABLE IF THE INVESTMENTS ARE MADE OUT OF OWN FUNDS OR NON-INTERE ST BEARING FUNDS AND IT IS NECESSARY TO ESTABLISH A NEXUS BETW EEN THE INTEREST BEARING FUNDS IN INVESTMENTS MADE. THEREFORE, THE A PPELLATE AUTHORITIES HAVE RIGHTLY SET ASIDE THE ORDER PASSED BY THE ASSESSING OFFICER, WHICH DOES NOT ESTABLISH NEXUS BETWEEN THE INVESTMENTS AND INTEREST BEARING FUNDS. RESPECTFULLY FOLLOWING THE ABOVE JUDGMENTS OF THE J URISDICTIONAL HIGH COURT, THE GROUND OF THE REVENUE WITH PROPORTIONATE INDIRECT INTEREST OF RS.55,77,766/- DISALLOWED UNDER RULE 8D(2)(II) I S DISMISSED. 08. THE SECOND GROUND IS WITH RESPECT TO THE DISALL OWANCE OF RS.6,60,000/- BEING 0.5% OF THE AVERAGE AMOUNT OF T AX-EXEMPT INVESTMENTS. IN THIS REGARD, THE ASSESSEE HAS BROU GHT ON RECORD THAT DURING THE ASSESSMENT YEAR UNDER CONSIDERATION, NO EXEMPT INCOME WAS EARNED BY THE ASSESSEE AND THEREFORE THE ORDER OF THE AO IN DISALLOWING THE AMOUNT OF RS.6,60,000/- WAS WITHOUT ANY BASIS. IN OUR VIEW THIS ISSUE IS ALSO NO MORE RES INTEGRA. T HE HONBLE DELHI HIGH COURT IN THE MATTER OF PCIT-04 V. IL & FS ENER GY DEVELOPMENT CO., [(2017) 84 TAXMANN.COM 186] IN PARAS 11 TO 23 HAS HELD AS UNDER: ITA.1310/BANG/2016 PAGE - 8 11. AT THE OUTSET, IT REQUIRES TO BE NOTICED THAT WE A RE CONCERNED WITH THE AY 2011-12 AND, THEREFORE, THE QUESTION OF THE APPLICABILITY OF RULE 8D, WHICH WAS INSERTED WITH EFFECT FROM 24TH M ARCH 2008, IS NOT IN DOUBT. 12. SECTION 14A OF THE ACT, WHICH WAS INSERTED WITH RE TROSPECTIVE EFFECT FROM 1ST APRIL 1962, PROVIDES FOR DISALLOWAN CE OF THE EXPENDITURE INCURRED IN RELATION TO INCOME EXEMPTED FROM TAX. FROM 11TH MAY 2001, A PROVISO WAS INSERTED IN SECTION 14 A TO CLARIFY THAT IT COULD NOT BE USED TO REOPEN OR RECTIFY A COMPLETED ASSESSMENT. SUB- SECTIONS (2) AND (3) OF SECTION 14A WERE INSERTED W ITH EFFECT FROM 1ST APRIL, 2007 TO PROVIDE FOR METHODOLOGY FOR COMPUTIN G OF DISALLOWANCE UNDER SECTION 14A. HOWEVER, THE ACTUAL METHODOLOGY WAS PROVIDED IN TERMS OF RULE 8D ONLY FROM 24TH MARCH 2008. THERE W AS A FURTHER AMENDMENT TO RULE 8D WITH EFFECT FROM 2ND JUNE 2016 LIMITING THE DISALLOWANCE THE AGGREGATE OF THE AMOUNT OF EXPENDI TURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTA L INCOME AND AN AMOUNT EQUAL TO ONE PER CENT OF THE ANNUAL AVERAGE OF THE MONTHLY AVERAGE OF THE OPENING AND CLOSING BALANCES OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IT IS ALSO PROVIDED THAT THE AMOUNT SHALL NOT EXCEE D THE TOTAL EXPENDITURE CLAIMED BY THE ASSESSEE. 13. IN THE ABOVE BACKGROUND, THE KEY QUESTION IN THE P RESENT CASE IS WHETHER THE DISALLOWANCE OF THE EXPENDITURE WILL BE MADE EVEN WHERE THE INVESTMENT HAS NOT RESULTED IN ANY EXEMPT INCOM E DURING THE AY IN QUESTION BUT WHERE POTENTIAL EXISTS FOR EXEMPT INCO ME BEING EARNED IN LATER AYS. 14. IN THE EXPLANATORY MEMORANDUM TO THE FINANCE ACT 2 001, BY WHICH SECTION 14A WAS INSERTED WITH EFFECT FROM 1ST APRIL 1962, IT WAS CLARIFIED THAT 'EXPENSES INCURRED CAN BE ALLOWED ON LY TO THE EXTENT THEY ARE RELATABLE TO THE EARNED INCOME OF TAXABLE INCOME'. THE OBJECT BEHIND SECTION 14A WAS TO PROVIDE THAT 'NO DEDUCTIO N SHALL BE MADE IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSES SEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE INCOME TAX ACT'. 15. WHAT IS TAXABLE UNDER SECTION 5 OF THE ACT IS THE 'TOTAL INCOME' WHICH IS NEITHER NOTIONAL NOR SPECULATIVE. IT HAS T O BE 'REAL INCOME'. THE SUBSEQUENT AMENDMENT TO SECTION 14A DOES NOT PA RTICULARLY CLARIFY WHETHER THE DISALLOWANCE OF THE EXPENDITURE WOULD APPLY EVEN ITA.1310/BANG/2016 PAGE - 9 WHERE NO EXEMPT INCOME IS EARNED IN THE AY IN QUEST ION FROM INVESTMENTS MADE, NOT IN THAT AY, BUT EARLIER AYS. 16. RULE 8D (1) OF THE RULES IS HELPFUL, TO SOME EXTEN T, IN UNDERSTANDING THE ABOVE ISSUE. IT READS AS UNDER: '8D. (1) WHERE THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN REL ATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RUL E (2).' 17. THE WORDS 'IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YE AR' IN THE ABOVE RULE 8 D (1) INDICATES A CORRELATION BETWEEN THE EX EMPT INCOME EARNED IN THE AY AND THE EXPENDITURE INCURRED TO EA RN IT. IN OTHER WORDS, THE EXPENDITURE AS CLAIMED BY THE ASSESSEE H AS TO BE IN RELATION TO THE INCOME EARNED IN 'SUCH PREVIOUS YEA R'. THIS IMPLIES THAT IF THERE IS NO EXEMPT INCOME EARNED IN THE AY IN QUESTION, THE QUESTION OF DISALLOWANCE OF THE EXPENDITURE INCURRE D TO EARN EXEMPT INCOME IN TERMS OF SECTION 14A READ WITH RULE 8D WO ULD NOT ARISE. 18. THE CBDT CIRCULAR UPON WHICH EXTENSIVE RELIANCE IS PLACED BY MR. HOSSAIN DOES NOT REFER TO RULE 8D (1) OF THE RU LES AT ALL BUT ONLY REFERS TO THE WORD 'INCLUDIBLE' OCCURRING IN T HE TITLE TO RULE 8D AS WELL AS THE TITLE TO SECTION 14A. THE CIRCULAR C ONCLUDES THAT IT IS NOT NECESSARY THAT EXEMPT INCOME SHOULD NECESSARILY BE INCLUDED IN A PARTICULAR YEAR'S INCOME FOR THE DISALLOWANCE TO BE TRIGGERED. 19. IN THE CONSIDERED VIEW OF THE COURT, THIS WILL BE A TRUNCATED READING OF SECTION 14 A AND RULE 8D PARTICULARLY WH EN RULE 8D (1) USES THE EXPRESSION 'SUCH PREVIOUS YEAR'. FURTHER, IT DOES NOT ITA.1310/BANG/2016 PAGE - 10 ACCOUNT FOR THE CONCEPT OF 'REAL INCOME'. IT DOES N OT NOTE THAT UNDER SECTION 5 OF THE ACT, THE QUESTION OF TAXATION OF ' NOTIONAL INCOME' DOES NOT ARISE. AS EXPLAINED IN CIT V. WALFORT SHAR E & STOCK BROKERS (P.) LTD. [2010] 326 ITR 1/192 TAXMAN 211 (SC) , THE MANDATE OF SECTION 14A OF THE ACT IS TO CURB THE PR ACTICE OF CLAIMING DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME BEING TAXABLE INCOME AND AT THE SAME TIME AV AIL OF THE TAX INCENTIVES BY WAY OF EXEMPTION OF EXEMPT INCOME WIT HOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. CONSEQUENTLY, THE COURT IS NOT PERSUADED TH AT IN VIEW OF THE CIRCULAR OF THE CBDT DATED 11TH MAY 2014, THE D ECISION OF THIS COURT IN CHEMINVEST LTD. (SUPRA) REQUIRES RECONSIDE RATION. 20. IN REDINGTON (INDIA) LTD. V. ADDL. CIT [2017] 392 ITR 633/77 TAXMANN.COM 257 (MAD.) , A SIMILAR CONTENTION OF THE REVENUE WAS NEGATED. THE COURT THERE DECLINED TO AP PLY THE CBDT CIRCULAR BY EXPLAINING THAT SECTION 14A IS 'CLEARLY RELATABLE TO THE EARNING OF THE ACTUAL INCOME AND NOT NOTIONAL INCOM E OR ANTICIPATED INCOME.' IT WAS FURTHER EXPLAINED THAT, 'THE COMPUTATION OF TOTAL INCOME IN TERMS OF RULE 8 D IS BY WAY OF A DETERMINATION INVOLVING DIRECT AS WELL AS INDIRECT ATTRIBUTION. THUS, ACCEPTING THE SUBMISSION OF THE REVENUE WOULD RESUL T IN THE IMPOSITION OF AN ARTIFICIAL METHOD OF COMPUTATION O N NOTIONAL AND ASSUMED INCOME. WE BELIEVE THUS WOULD BE CARRYING T HE ARTIFICE TOO FAR.' 21. THE DECISIONS IN CIT V. LAKHANI MARKETING INC. [2014] 49 TAXMANN.COM 257/226 TAXMAN 45 (MAG.) , CIT V. WINSOME TEXTILE INDUSTRIES LTD. [2009] 319 ITR 204 , CIT V. SHIVAM MOTORS (P.) LTD. [2015] 230 TAXMAN 63/55 TAXMANN.COM 262 (ALL.) HAVE ALL TAKEN A SIMILAR VIEW. THE DECISION IN TAI KISHA ENGINEERING INDIA (P.) LTD. (SUPRA) DOES NOT SPECIF ICALLY DEAL WITH THIS ISSUE. 22. IT WAS SUGGESTED BY MR. HOSSAIN THAT, IN THE CONTE XT OF SECTION 57(III), THE SUPREME COURT IN CIT V. RAJENDRA PRASA D MOODY [1978] 115 ITR 519 EXPLAINED THAT DEDUCTION IS ALLOWABLE EVEN WHERE INCOME WAS NOT ACTUALLY EARNED IN THE AY IN QUESTION. THIS ASPECT OF THE MATTER WAS DEALT WITH BY THIS CO URT IN CHEMINVEST LTD. (SUPRA) WHERE IT REVERSED THE DECISION OF THE SPECIAL BENCH OF THE ITAT BY OBSERVING AS UNDER: ITA.1310/BANG/2016 PAGE - 11 '20. SINCE THE SPECIAL BENCH HAS RELIED UPON THE DE CISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY (SUPRA), IT IS CONSIDERED NECESSARY TO DISCUSS THE TRUE PURPORT OF THE SAID D ECISION. IT IS NOTICED TO BEGIN WITH THAT THE ISSUE BEFORE THE SUP REME COURT IN THE SAID CASE WAS WHETHER THE EXPENDITURE UNDER SECTION 57 (III) OF THE ACT COULD BE ALLOWED AS A DEDUCTION AGAINST DIVIDEN D INCOME ASSESSABLE UNDER THE HEAD 'INCOME FROM OTHER SOURCE S'. UNDER SECTION 57 (III) OF THE ACT DEDUCTION IS ALLOWED IN RESPECT OF ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY OR EXCLUSIV ELY FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME. THE SUPRE ME COURT EXPLAINED THAT THE EXPRESSION 'INCURRED FOR MAKING OR EARNING SUCH INCOME', DID NOT MEAN THAT ANY INCOME SHOULD IN FAC T HAVE BEEN EARNED AS A CONDITION PRECEDENT FOR CLAIMING THE EX PENDITURE. THE COURT EXPLAINED: 'WHAT S. 57(III) REQUIRES IS THAT THE EXPENDITURE M UST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INCOME. IT IS THE PURPOSE OF THE EXPENDITUR E THAT IS RELEVANT IN DETERMINING THE APPLICABILITY OF S. 57(III) AND THAT PURPOSE MUST BE MAKING OR EARNING OF INCOME. S. 57(III) DOES NOT REQUIRE THAT THIS PURPOSE MUST BE FULFILLED IN ORDER TO QUALIFY THE E XPENDITURE FOR DEDUCTION. IT DOES NOT SAY THAT THE EXPENDITURE SHA LL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED. THERE IS IN F ACT NOTHING IN THE LANGUAGE OF S. 57(III) TO SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY INTO ANY BENEFI T BY WAY OF RETURN IN THE SHAPE OF INCOME. THE PLAIN NATURAL CO NSTRUCTION OF THE LANGUAGE OF S. 57(III) IRRESISTIBLY LEADS TO THE CO NCLUSION THAT TO BRING A CASE WITHIN THE SECTION, IT IS NOT NECESSAR Y THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE.' 21. THERE IS MERIT IN THE CONTENTION OF MR. VOHRA T HAT THE DECISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY (SUPR A) WAS RENDERED IN THE CONTEXT OF ALLOWABILITY OF DEDUCTIO N UNDER SECTION 57(III) OF THE ACT, WHERE THE EXPRESSION USED IS 'F OR THE PURPOSE OF MAKING OR EARNING SUCH INCOME.' SECTION 14A OF THE ACT ON THE OTHER HAND CONTAINS THE EXPRESSION 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME.' THE DECISI ON IN RAJENDRA PRASAD MOODY (SUPRA) CANNOT BE USED IN THE REVERSE TO CONTEND THAT EVEN IF NO INCOME HAS BEEN RECEIVED, THE EXPENDITUR E INCURRED CAN BE DISALLOWED UNDER SECTION 14A OF THE ACT.' ITA.1310/BANG/2016 PAGE - 12 23. THE DECISIONS OF THE ITAT IN RATAN HOUSING DEVELOP MENT LTD. (SUPRA) AND RELAXO FOOTWEARS LTD. (SUPRA), TO THE EXTENT THAT THEY ARE INCONSISTENT WITH WHAT HAS BEEN HELD HEREI NBEFORE DO NOT MERIT ACCEPTANCE. FURTHER, THE MERE FACT THAT IN TH E AUDIT REPORT FOR THE AY IN QUESTION, THE AUDITORS MAY HAVE SUGGESTED THAT THERE SHOULD BE A DISALLOWANCE CANNOT BE DETERMINATIVE OF THE LEGAL POSITION. THAT WOULD NOT PRECLUDE THE ASSESSEE FROM TAKING A STAND THAT NO DISALLOWANCE UNDER SECTION 14 A OF THE ACT WAS CALLED FOR IN THE AY IN QUESTION BECAUSE NO EXEMPT INCOME WAS EAR NED. 09. RESPECTFULLY FOLLOWING THE ORDER OF THE HONBLE DELHI HIGH COURT, WE DISMISS THE GROUND RELATING TO DISALLOWAN CE UNDER RULE 8D(2)(III). 10. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 17TH DAY OF NOVEMBER, 2017. SD/- SD/- (INTURI RAMA RAO) (LALIT KUMAR) ACCOUNTANT MEMBER JUDICIAL M EMBER BENGALURU DATED : 17.11.2017 MCN* COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME-TAX 4. COMMISSIONER OF INCOME-TAX(A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER SENIOR PRIVATE SECRETARY