Sh. Anil Kumar Singhania, Ludhiana V. ACIT, Ludhiana

ITA 1349/CHANDI/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80812 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 24-07-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 28-12-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH
• Assessee Lawyers: NAVNEET SEHGAL
• Keywords: Business income; Earning of tax free income; Retrospective amendment; Question of law
• Section: 234B; 14A; 37; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A, CHANDIGARH BEFORE SHRI T.R. SOOD, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO. 1349 & 1350/CHD/2012 ASSESSMENT YEARS : 2008-09 & 2009-10 ANIL KUMAR SINGHANIA V A.C.I.T. C.C. IV PROP. DURGA CHEMICAL LUDHIANA AGENCY, GILL ROAD LUDHIANA AFIPS 5562E (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI NAVNEET SEHGAL RESPONDENT BY: SHRI M ANJIT SINGH DATE OF HEARING 24.7.2014 DATE OF PRONOUNCEMENT 8.8.2014 O R D E R PER T.R. SOOD, A.M THESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 31.10.2012 OF THE LD CIT(A)-II, LUDHIANA. 2. IN BOTH THESE APPEALS VARIOUS GROUNDS HAVE BEEN RAISED BUT AT THE TIME OF HEARING LD. COUNSEL FOR THE ASSE SSEE SUBMITTED THAT DISPUTE IS ONLY REGARDING ADDITION O N ACCOUNT OF DISALLOWANCE U/S 14A AND LEVY OF INTEREST U/S 234B OF THE ACT. 3 AFTER HEARING BOTH THE PARTIES WE FIND THAT IN AS SESSMENT YEAR 2008-09 (PERTAINING TO ITA NO. 1349/CHD/2012) DURING ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICE D THAT ASSESSEE HAS MADE INVESTMENT OF RS. 5,99,19,958/- I N EQUITY SHARES AS ON 31.3.2008 WHEREAS INVESTMENT AS ON 31. 3.2007 WAS ONLY RS. 6617351/-. THIS CLEARLY SHOWS THAT FRE SH INVESTMENTS HAVE BEEN MADE. THE ASSESSEE WAS ASKED THAT WHY DISALLOWANCE SHOULD NOT BE MADE U/S 14A R.W.R. 8D OF I.T. RULES. IN RESPONSE THE ASSESSEE SUBMITTED THE DETA ILS OF 2 INTEREST AND INVESTMENTS. IT WAS FURTHER SUBMITTED THAT DISALLOWANCE U/S 14A COULD NOT BE MADE UNLESS EXPEN SES HAVE A NEXUS WITH THE INVESTMENT. RELIANCE WAS ALSO PLA CED ON CERTAIN CASE LAWS. THE ASSESSING OFFICER DID NOT FI ND FORCE IN THE SUBMISSIONS AND OBSERVED THAT THE ASSESSEE HAD COMPLICATED FLOW OF FUND AND IT WAS DIFFICULT TO ID ENTIFY WHICH FUNDS HAVE BEEN USED WHERE WHICH MEANS THE ASSESSEE HAD MIX FUNDS. ACCORDINGLY HE INVOKED THE PROVISIONS O F SECTION 14A R.W.R. 8D AND COMPUTED THE TOTAL DISALLOWANCE A T RS. 3759641/-. 4 ON APPEAL THE LD. CIT(A) REFERRED TO VARIOUS DECI SIONS INCLUDING THE DECISION OF CHANDIGARH BENCH OF THE T RIBUNAL IN CASE OF CIT V SUNDER FORGING IN ITA NO. 1059/CHD/20 11 AND CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OF FICER. 5 BEFORE US. THE LD. COUNSEL FOR THE ASSESSEE SUBMI TTED THAT THE ASSESSEE HAS SUFFICIENT FUNDS PARTICULARLY FROM THE PROFITS AND THEREFORE IT CANNOT BE SAID THAT THE IN TEREST BEARING FUNDS HAVE BEEN INVESTED IN PURCHASE OF SHARES. HE PARTICULARLY REFERRED TO THE INVESTMENT MADE IN EAR LIER YEAR AND THE OBSERVATION OF THE TRIBUNAL IN ASSESSMENT YEAR 2006-07 THAT THE ASSESSEE HAD INVESTED FUNDS TO EARN EXEMPT INCOME FROM HIS OWN SOURCES. HOWEVER, ON A QUERY BY THE BE NCH HE ADMITTED THAT NATURE OF INVESTMENT HAS CHANGED IN T HIS YEAR AND IT IS NOT A CASE WHERE INVESTMENTS HAVE BEEN CA RRIED OVER FROM EARLIER YEARS. HE FURTHER SUBMITTED THAT DISAL LOWANCE COULD NOT BE MADE UNLESS AND UNTIL ASSESSING OFFICE R POINTS THAT HOW EXPENDITURE IS RELATABLE TO THE EXEMPT INC OME AND 3 WHAT IS THE REASON FOR NOT ACCEPTING THE DISALLOWAN CE MADE BY THE ASSESSEE. 6 ON THE OTHER HAND, THE LD. D.R. FOR THE REVENUE SUPPORTED THE ORDER OF THE LD. CIT(A) AND SUBMITTED THAT LD. CIT(A) HAS MERELY FOLLOWED THE DECISION OF THE TRIB UNAL. HE ALSO SUBMITTED THAT THE TRIBUNAL HAS ALREADY MADE D ETAILED DISCUSSION REGARDING DISALLOWANCE TO BE MADE U/S 14 A IN CASE OF CHADHA SUPER CARS, ITA NO. 1241/CHD/2011 WHEREIN FOLLOWING DECISION OF HON'BLE HIGH COURT OF PUNJAB & HARYANA IN CASE OF CIT V PUNJAB STATE INDUSTRIAL DEVELOPMEN T CORPORATION LTD, ITA NO. 565/CHD/2006 VIDE ORDER DA TED 18.7.2011 THE DISALLOWANCE U/S 14A WAS HELD TO BE MAINTAINABLE. 7 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY AND DO NOT FIND ANY FORCE IN THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE. FIRST OF ALL THE OBSERVATION MADE BY THE TRIBUNAL IN ASSESSMENT YEAR 2006-07 ARE NOT RELEVANT BECAUSE SAME INVESTMENT ARE CARRIED FORWARD IN THIS YEAR. ADMIT TEDLY NEW INVESTMENTS HAVE BEEN MADE. SECONDLY ASSESSEE IS N OT HAVING SEPARATE ACCOUNT FOR SURPLUS FUNDS OR PROFIT EARNED DURING THE YEAR AND IT IS A CASE OF MIXED FUNDS. THEORY OF DI SALLOWANCE U/S 14A R.W.R. 8D ON PROPORTIONATE BASIS ITSELF IS BASED ON CONCEPT OF MIX FUNDS. IN FACT IN CASE OF CHADHA SU PER CARS (SUPRA) THE ISSUE WAS DISCUSSED IN PARA 17 TO 28 IN DETAIL WHICH ARE AS UNDER: 17 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY AND FIND THAT DURING THE YEAR THE ASSESSEE HAS MA DE INVESTMENT IN PARTNERSHIP AND MUTUAL FUND. THE PRO FIT FROM MUTUAL FUND IN THE FORM OF DIVIDEND IS EXEMPT. AS F AR AS SHARE PROFIT FROM PARTNERSHIP FIRM IS CONCERNED, TH E SAME IS ALSO COVERED U/S 10(2A), THEREFORE, THERE IS NO FO RCE IN THE 4 SUBMISSIONS THAT THE ASSESSEE HAS MADE INVESTMENT I N FIRM WHICH ITSELF IS PAYING TAX, THEREFORE, IT CANNOT B E CALLED THAT THE INVESTMENT HAS BEEN MADE TO EARN EXEMPT IN COME. SECTION 10(2A) READS AS UNDER: [(2A) IN THE CASE OF A PERSON BEING A PARTNER OF A FIRM WHICH IS SEPARATELY ASSESSED AS SUCH, HIS SHARE IN THE TOTAL INCOME OF THE FIRM. EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE, THE S HARE OF A PARTNER IN THE TOTAL INCOME OF A FIRM SEPARATELY ASSESSED A S SUCH SHALL, NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER LAW , BE AN AMOUNT WHICH BEARS TO THE TOTAL INCOME OF THE FIRM THE SAM E PROPORTION AS THE AMOUNT OF HIS SHARE IN THE PROFITS OF THE FIRM IN A CCORDANCE WITH THE PARTNERSHIP DEED BEARS TO SUCH PROFITS ;] IN ANY CASE BOMBAY BENCH OF THE TRIBUNAL HAD AN OCC ASION TO CONSIDER THIS ISSUE IN CASE OF DHARMASINGH M. POPAT V ACIT, 127 T TJ (MUM) 61. IN THAT CASE IT WAS HELD AS UNDER:- THOUGH THE PARTNERSHIP FIRM IS NOT A SEPARATE ENTI TY AS PER GENERAL LAW, FOR A SPECIFIC PURPOSE IT MAY BE TREATED AS IN DEPENDENT OF ITS PARTNERS UNDER THE PROVISIONS OF IT ACT, 1961. TO PUT IT DIFFERENTLY, THE CONCEPT OF PARTNERSHIP FIRM, BEING A COMPENDIUM OF ITS PARTNERS IS SUBJECT TO THE MODIFYING SUCH CONCEPT OF PARTNERSHI P LAW WHICH MEANS THAT IF THERE EXIST NO PROVISION IN THE TAX LAWS FOR A P ARTICULAR SITUATION, THEN, THE PROVISIONS OF PARTNERSHIP LAW WOULD BE TH E GUIDING FACTOR FOR ADJUDICATION OF THAT ISSUE. THE CURRENT JUDICIAL THOUGHT IS LEANING TOWARDS THE CONCEPT OF SEPARATE LEGAL ENTITY OF PAR TNERSHIP FIRM THAN THAT OF ITS PARTNERS FOR THE PURPOSES OF IT ACT, 1961. ' HERE WAS A JUDICIAL OPINION THAT ON DISTRIBUTION OR DIVISION OR ALLOTME NT OF ASSETS TO PARTNERS BY THE ON DISSOLUTION OR OTHERWISE THER E RESULTED NO GAIN EXIGIBLE TO TAX, HOWEVER, BY INCORPORATING S. -45(2 ), 45(3) AND 45(4), THE LEGISLATURE HAS DECLARED ITS INTENTION IN CLEAR TER MS THAT PARTNERS AND THE FIRM ARE TWO INDEPENDENT ENTITIES NOT ONLY FOR THE PURPOSES OF ASSESSMENT BUT ALSO FOR THE PURPOSE OF DETERMINING THE CHARGE OF INCOME-TAX ON THE TRANSACTIONS ENTERED INTO BETWEEN THEM. SIMILARLY, FROM ASST. YR. 1993-94 PARTNERSHIP FIRMS HAVE BEEN GIVEN A CORPORATE PERSONALITY IN A LIMITED SENSE BY MAKING NECESSARY AMENDMENTS IN THE PROVISIONS OF SS. 10(2A), 28(V), 40(B) AND RELEVANT PROCEDURAL SECTIONS WHICH CONCLUSIVELY PROVE THAT PARTNERSHIP FIRM AS SUCH IS INDEPENDENT FROM ITS PARTNERS AS FAR AS PRO VISIONS OF IT ACT, 1961 ARE CONCERNED. SPECIFIC PROVISIONS MENTIONED H EREINABOVE READ WITH CIRCULAR NO. 636, DT. 31ST AUG., 1992 GO TO SH OW THAT A FIRM IS TO BE TAXED AS SEPARATE ENTITY AND THE GROSS TOTAL INCOME OF THE FIRM IS TO BE DETERMINED IN THE NORMAL WAY UNDER DIFFERENT HEADS AS IN THE CASE OF ANY TAXABLE ENTITY, HENCE, ANY EXPENDITURE WHICH HA S BEEN INCURRED BY FIRM FOR THE PURPOSES OF ITS BUSINESS IS TO BE ALLO WED AS A DEDUCTION IN COMPUTING THE TOTAL INCOME OF THE FIRM SUBJECT TO A NY SPECIFIC LIMITATION/PROHIBITION PROVIDED FOR THE ALLOWANCE O F SUCH EXPENDITURE. HAVING REGARD TO JUDICIAL OPINION AND ALSO THE LEGI SLATIVE CHANGES IN THE ACT, A PARTNERSHIP FIRM IS A SEPARATE ENTITY THAN T HAT OF ITS PARTNERS UNDER THE IT ACT AND IF THERE EXISTS ANY SPECIFIC P ROVISION IN THE INCOME-TAX LAW MODIFYING THE PARTNERSHIP LAW THEN, SUCH SPECIFIC PROVISION SHALL BE APPLIED AND IF THE TAX LAW IS SI LENT ON A SPECIFIC ISSUE, THEN A REFERENCE WILL HAVE TO BE MADE TO THE PROVISIONS OF PARTNERSHIP LAW FOR THE ADJUDICATION OF THE SAME AND IN THE PRESENT CASE, P ROVISIONS OF LAW SUFFICIENTLY TAKE CARE OF THE ISSUE INVOLVED HE REIN, HENCE, THE ISSUE IS TO BE DECIDED ACCORDINGLY. THERE EXIST SPECIFIC PRO VISIONS FOR COMPUTING THE INCOME OF THE PARTNERSHIP FIRM AS WELL AS THAT OF ITS PARTNERS, HENCE, TOTAL INCOME OF BOTH IS LIABLE TO BE COMPUTE D IN ACCORDANCE WITH SUCH PROVISIONS. SINCE PARTNERSHIP FIRM, FOR T HE PURPOSE 5 OF IT ACT IS A SEPARATE ASSESSABLE ENTITY AND THEREFORE PARTNERS VIS-A-VIS PARTNERSHIP FIRM WOULD STAND ON THE SAME FOOTING OF SHAREHOLDERS VIS-A-VIS COMPANY. ACCORDINGLY INCOME CHARGED IN THE HANDS OF A PARTNERSHIP FIRM THEREFORE, PROVISIONS OF SECTION 1 4A WOULD BE APPLICABLE IN COMPUTING THE TOTAL INCOME O F SUCH PARTNER IN RESPECT OF HIS SHARE IN THE PROFITS OF SUCH FIRM - CIT V. A.W. FIGGIES & CO. & ORS (1953) 24 ITR 4 05 (S.C), DY CST (LAW) V K. KELUKUTTY (1985) 155 ITR 1 58 (S.C), BIST & SONS, VS. CIT (1979) 8 CTR (SC) 152 : (1979) 116 ITR 131 (SC), QT VS. KALURAM PURANMAL (1979) 12 CTR (BOM) 225 : (1979) 119 ITR 564 (BOM) AND CIT VS. CHASE TRADING CO. (1998) 147 CTR (BOM) 228 . (1999) 236 ITR 665 (BOM) APPLIED; CIT VS. R,M, CHIDAMBARARN.PILLAI 1977 CTR (SC) 71 : (1977) 106 I TR 292 (SC) DISTINGUISHED. THEREFORE, IT IS CLEAR THAT INVESTMENT MADE IN A FI RM IS TO BE TREATED AS INVESTMENT FOR EARNING EXEMPT INCOME. 18 COMING TO THE SECOND ASPECT OF THE ISSUE THAT WHETHER IN ANY NEXUS IS REQUIRED BETWEEN THE INVEST MENT AND THE DISALLOWANCE TO BE MADE U/S 14A, WE SHALL F IRST REFER TO THE DECISION RELIED ON BY THE LD. COUNSEL OF THE ASSESSEE IN CASE OF CIT V. WINSOM TEXTILE, 319 ITR 204. IN THAT CASE FOLLOWING QUESTION OF LAW WAS CONSIDER ED: WHETHER, IN THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HON'BLE INCOME-TAX APPELLATE TRIBUNAL W AS JUSTIFIED IN HOLDING THAT THE ORDER OF THE JURISDIC TIONAL HIGH COURT IN THE CASE OF CIT V. ABHISHEK INDUSTRIES LTD . REPORTED IN (2006) 286 ITR 1 (PH); 156 TAXMAN 257 ( PH) ARE NOT APPLICABLE IN THIS CASE AND THE DISALLOWANC E MADE BY THE ASSESSING OFFICER U/S 14A OF THE INCOME-TAX ACT IS NOT AS PER LAW. THE ASSESSEE WAS ENGAGED IN THE MANUFACTURING AND S ALE OF COTTON YARN AND HAD MADE CERTAIN INVESTMENTS. T HE ASSESSING OFFICER DISALLOWED INTEREST ON INVESTMENT IN SHARES U/S 14A BECAUSE DIVIDEND INCOME WAS EXEMPT. THE LD. CIT(A) DELETED THE DISALLOWANCE BY OBSERVING TH AT THE ASSESSEE HAD MADE INVESTMENT USING ITS OWN FUNDS AN D NO INTEREST WAS INCURRED. THE TRIBUNAL CONFIRMED T HE FINDINGS OF THE LD. CIT(A). BEFORE THE HON'BLE HIG H COURT THE CONTENTION WAS RAISED THAT EVEN IF THE ASSESSEE MADE INVESTMENT OUT OF ITS OWN FUNDS THE ASSESSEE HAD TA KEN LOANS ON WHICH INTEREST WAS PAID AND THEREFORE, THE MONEY AVAILABLE WITH THE ASSESSEE WAS IN COMMON KITTY IN VIEW OF THE DECISION OF THE COURT IN CASE OF CIT V.ABHIS HEK INDUSTRIES (SUPRA). HON'BLE HIGH COURT HELD VIDE P ARA 7 AS UNDER:- WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. THE JUDGMENT OF THIS COURT IN ABHISHEK INDUSTRIES LTD. (2006) 286 ITR 1 WAS ON THE ISSUE OF ALLOWABILITY OF INTER EST PAID ON LOANS GIVEN TO SISTER CONCERNS, WITHOUT INTEREST . IT WAS HELD THAT DEDUCTION FOR INTEREST WAS PERMISSIBLE WH EN LOAN 6 WAS TAKEN FOR BUSINESS PURPOSE AND NOT FOR DIVERTIN G THE SAME TO SISTER CONCERN WITHOUT HAVING NEXUS WITH TH E BUSINESS. THE OBSERVATIONS MADE THEREIN HAVE TO BE READ IN THAT CONTEXT. IN THE PRESENT CASED, ADMITTEDLY, THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN S UCH A SITUATION, SECTION 14A COULD HAVE NO APPLICATION. 19 SECOND DECISION RELIED ON IS THAT OF CIT V. HERO CYCLES (SUPRA). IN THAT CASE FOLLOWING QUESTION WA S RAISED BEFORE THE COURT: WHETHER ON THE FACTS AND IN LAW, THE HON'BLE INCOM E-TAX APPELLATE TRIBUNAL WAS LEGALLY JUSTIFIED IN DELETIN G THE DISALLOWANCE OF IGNORING THE EVIDENCE RELIED ON BY THE ASSESSING OFFICER AND HOLDING THAT A CLEAR NEXUS HA S NOT BEEN ESTABLISHED THAT THE INTEREST BEARING FUNDS HA VE BEEN VESTED FOR INVESTMENTS GENERATING TAX FREE DIV IDEND INCOME. 20 IN THIS CASE THE ASSESSING OFFICER MADE DISALLOWANCE U/S 14A(3) WHICH WAS PARTLY UPHELD BY THE LD. CIT(A). ON FURTHER APPEAL, THE TRIBUNAL HELD THAT THERE WAS NO NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE I NCOME GENERATED, THEREFORE, DISALLOWANCE CANNOT BE MADE. IT WAS ALSO OBSERVED THAT MAIN UNIT, LUDHIANA HAD MORE INT EREST INCOME THAN THE EXPENDITURE AND THE FUNDS FLOW POSI TION SHOWS THAT ONLY NON INTEREST BEARING FUNDS HAVE BEE N UTILIZED FOR MAKING THE INVESTMENT. 21 BEFORE THE COURT, THE DEPARTMENT ALSO CONTENDED THAT RULE 8D PROVIDE THAT EVEN WHERE THE ASSESSEE C LAIMED THAT NO EXPENSES HAVE BEEN INCURRED, CORRECTNESS OF SUCH CLAIM CAN BE GONE INTO BY THE ASSESSING OFFICER. H ON'BLE HIGH COURT HELD VIDE PARA 5 AS UNDER: IN VIEW OF THE FINDING REPRODUCED ABOVE, IT IS CLE AR THAT THE EXPENDITURE ON INTEREST WAS SET OFF AGAINST THE INC OME FROM INTEREST AND THE INVESTMENT IN THE SHARE AND FUNDS WERE OUT OF THE DIVIDEND PROCEEDS. IN VIEW OF THIS FINDING OF FACT, DISALLOWANCE U/S 14A WAS NO SUSTAINABLE. WHETHER, IN A GIVEN SITUATION, ANY EXPENDITURE WAS INCURRED WHICH WAS T O BE DISALLOWED, IS A QUESTION OF FACT. THE CONTENTION OF THE REVENUE THA T DIRECTLY OR INDIRECTLY SOME EXPENDITURE IS ALWAYS INCURRED WHICH MUST BE D ISALLOWED UNDER SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME W HICH MAY NULLIFY THE MANDATE OF SECTION 14A, CANNOT BE ACCEPTED. DISALLO WANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE WH ERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INC URRED, DISALLOWANCE UNDER SECTION 14A CANNOT STAND. IN THE PRESENT CASE, FINDING ON THIS ASPECT, AGAINST THE REVENUE, IS NOT SHOWN T O BE PERVERSE. CONSE- QUENTLY, DISALLOWANCE IS NOT PERMISSIBLE. WE HAVE T AKEN THIS VIEW EARLIER SO IN I. T. A. NO. 504 OF 2008 IN CIT V. WINSOME T EXTILE INDUSTRIES LTD. 1)09] 319 ITR 204 (P&H), (DECIDED O N AUGUST 25, 2009), WHEREIN IT WAS OBSERVED AS UNDER (PAGE 207) : 7 'THE CONTENTION RAISED ON BEHALF OF THE REVENUE IS THAT EVEN IF THE ASSESSEE HAD MADE INVESTMENT IN SHARES OUT OF I TS OWN FUNDS, THE ASSESSEE HAD TAKEN LOANS ON WHICH INTEREST WAS PAID AND ALL THE MONEY AVAILABLE WITH THE ASSESSEE WAS IN COMMON KIT TY, AS HELD BY THIS COURT IN CIT V. ABHISHEK INDUSTRIES LTD. [2006] 286 ITR 1 AND, THEREFORE, DISALLOWANCE UNDER SECTION 14A WAS JUSTI FIED. WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. THE JU DGMENT OF THIS COURT IN ABHISHEK INDUSTRIES LTD. [2006] 286 ITR 1 WAS ON THE ISSUE OF ALLOWABILITY OF INTEREST PAID ON LOANS GIVEN TO SISTER CONCERNS, WITHOUT INTEREST. IT WAS HELD THAT DEDUCTION FOR INTEREST W AS PERMISSIBLE WHEN LOAN WAS TAKEN FOR BUSINESS PURPOSE AND NOT FOR DIV ERTING THE SAME TO SISTER CONCERN WITHOUT HAVING NEXUS WITH THE BUSINE SS. OBSERVATIONS MADE THEREIN HAVE TO BE READ IN THAT CONTEXT. IN TH E PRESENT CASE, ADMITTEDLY, THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATION, SECTION 14A COULD HAVE NO APPLICA TION.' IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THAT N O SUBSTANTIAL QUESTION OF LAW ARISE. 22 IT IS CLEAR THAT BOTH THE ABOVE DECISIONS PERTAI N TO ASSESSMENT YEAR 2004-05 WHEN RULE 8D WAS NOT EVEN I N STATUTE BOOK. RULE 8D HAS BEEN INTRODUCED BY I.T. RULES (5 TH AMENDMENT) W.E.F. 24.3.2008. THEREFORE, IN BOTH T HE ABOVE CASES, RULE 8D COULD NOT HAVE BEEN POSSIBLY APPLIED. IN ANY CASE IN A LEADING JUDGMENT THE HON 'BLE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOYCEE MANUFACTURING V DCIT, 328 ITR 81 (BOM) HELD THAT RU LE 8D CAN NOT HAVE RETROSPECTIVE APPLICATION AND THE S AME CAN BE APPLIED ONLY FROM ASSESSMENT YEAR 2008-09. FURTHER IN CASE OF CIT V. WINSOM TEXTILE, 319 ITR 2 04, THE ISSUE WAS WHETHER THE PRINCIPLES LAID DOWN IN C ASE OF ABHISHEK INDUSTRIES (SUPRA) WERE APPLICABLE FOR THE DISALLOWANCE U/S 14A AND THE HON'BLE COURT HELD THA T THE DECISION OF ABHISHEK INDUSTRIES (SUPRA) OPERATES IN A DIFFERENT FIELD. SIMILARLY IN CASE OF HERO CYCLES ( SUPRA) THE TRIBUNAL HAS GIVEN A CATEGORICAL FINDING THAT T HE INVESTMENT HAS BEEN MADE OUT OF NON INTEREST BEARIN G FUNDS. FROM THESE TWO DECISIONS ONLY IT CAN BE CON CLUDED THAT IF INVESTMENT HAS BEEN MADE CLEARLY OUT OF NON INTEREST BEARING FUNDS THEN SECTION 14A IS NOT BE APPLICABLE. IN CASE BEFORE US, THE SITUATION IS DI FFERENT WHICH WE SHALL SEE LITTLE LATER. WE WOULD ALSO LIK E TO OBSERVE THAT EVEN HON'BLE PUNJAB & HARYANA HIGH COU RT IN A LATTER DECISION IN CASE OF CIT V. PUNJAB STATE INDUSTRIAL DEVELOPMENT COOPERATIVE LTD. HAS MADE OBSERVATIONS WHICH WE WILL ALSO LIKE TO DISCUSS LIT TLE LATER. 23 HON'BLE BOMBAY HIGH COURT CONSIDERED THE ISSUES ARISING OUT OF SECTION 14A AS WELL AS IMPLICATIONS OF RULE 8D. HON'BLE HIGH COURT REACHED THE FOLLOWING CONCL USION AT PARA 88 WHICH READS AS UNDER: 88 OUR CONCLUSION IN T HIS JUDGMENT ARE AS FOLLOWS : 8 (I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FA LLING WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME-TA X ACT, 1961, AS WAS APPLICABLE FOR THE ASSESSMENT YEAR 2002-03 I S NOT INCLUDIBLE IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE. CONS EQUENTLY, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITUR E INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIRTUE OF THE PROVIS IONS OF SECTION 14A(1) ; (II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTIO N 115- O(1) OF ADDITIONAL INCOME-TAX ON PROFITS DECLARED, DISTRIBUTED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS O F THE COMPANY. THE COMPANY IS CHARGEABLE TO TAX ON ITS PROFITS AS A DI STINCT TAXABLE ENTITY AND IT PAYS TAX IN DISCHARGE OF ITS OWN LIAB ILITY AND NOT ON BEHALF OF OR AS AN AGENT FOR ITS SHAREHOLDERS. IN T HE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DIVIDEND, INCOME BY WAY OF DIVIDEND DOES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROVISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS ; (III) THE PROVISIONS OF SUB-SECTIONS (2) AND '(3) O F SECTION 14A OF THE INCOME-TAX ACT 1961 ARE CONSTITUTIONALLY VALID ; (IV) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RU LES AS INSERTED BY THE INCOME-TAX (FIFTH AMENDMENT) RULES, 2008, ARE NOT ULTRA VIRES THE PROVISIONS OF SECTION 14A, MORE PARTICULARLY SUB-SECTION (2) AND DO NOT OFFEND ARTI CLE 14 OF THE CONSTITUTION ; (V) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RUL ES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24, 2008, SHALL APPLY WITH EFFECT FROM THE ASSESSMENT YEAR 2008-09 ; (VI) EVEN PRIOR TO THE ASSESSMENT YEAR 2008-09, WHE N RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORCE TH E PROVISIONS OF SUB- SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE A SSESSING OFFICER IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A R EASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FA CTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECOR D ; (YII) THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2002- 03 SHALL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICE R SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE ( DIRECT OR INDIRECT) IN RELATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUND S WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECT ION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SH ALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUN TS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. FROM ABOVE, IT IS CLEAR THAT EVEN THE TAXES PAID U/ S 115-O WHICH IS ALSO KNOWN AS DIVIDEND DISTRIBUTION TAXES, WOULD NOT MAKE DIVIDEND INCOME IN THE HANDS OF SHAREHOLDE R AS NON-EXEMPT. SIMILARLY THE TAXES PAID BY A FIRM WOUL D BE TAXES ON THE PROFIT OF THE FIRM AND NOT IN THE HAND S OF THE ASSESSEE. THE ABOVE DECISION ALSO HELD THAT RULE 8 D 9 WOULD BE APPLICABLE ONLY FROM ASSESSMENT YEAR 2008- 09. IN THIS DECISION THE THEORY OF APPORTIONMENT OF EXPENDITURE WHICH WAS CONFIRMED BY THE HON'BLE SUPR EME COURT IN CASE OF CIT V. WALFORT SHARE AND STOCK BRO KERS P LTD (2010) 326 ITR 1 (S.C), WAS FOLLOWED. IN FAC T BEFORE INTRODUCTION OF SECTION 14A, THE ASSESSEE HA D A RIGHT TO CLAIM ALL THE EXPENSES IF SUCH EXPENSES CO ULD NOT BE BI-FURCATED AGAINST NORMAL TAXABLE INCOME AS WEL L AS EXEMPTED INCOME IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN CASE OF RAJASTHAN WAREHOUSING COOPERATION V CIT, 242 ITR 450. THIS POSITION GOT CHANGED AFTER THE INTRODUCTION OF SECTION 14A BY FI NANCE ACT, 2001. THE MEMORANDUM EXPLAINING THE PROVISION S OF FINANCE BILL READS AS UNDER: CERTAIN INCOME ARE NOT INCLUDIBLE WHILE COMPUTATIN G THE TOTAL INCOME AS THESE ARE EXEMPT UNDER VARIOUS PROVISIONS OF THE ACT. THERE HAVE BEEN CASES WHERE DEDUCTIONS HAVE B EEN CLAIMED IN RESPECT OF SUCH EXEMPT INCOME. THIS IN EFFECT MEANS THAT THE TAX INCENTIVE GIVEN BY WAY OF EXEMPT IONS TO CERTAIN CATEGORIES OF INCOME IS BEING USED TO REDUC E ALSO THE TAX PAYABLE ON THE NON-EXEMPT INCOME BY DEBITING TH E EXPENSES INCURRED TO EARN THE EXEMPT INCOME AGAINST TAXABLE INCOME. THIS IS AGAIN THE BASIC PRINCIPLES OF TAXA TION WHEREBY ONLY THE NET INCOME, I.E., GROSS INCOME MINUS THE E XPENDITURE IS TAXED. ON THE SAME ANALOGY, THE EXEMPTION IS AL SO IN RESPECT OF THE NET INCOME. EXPENSES INCURRED CAN B E ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNIN G OF TAXABLE INCOME. IT IS PROPOSED TO INSERT A NEW SECTION 14A SO AS TO CLARIFY THE INTENTION OF THE LEGISLATURE SINCE THE INCEPTION OF THE INCOME- TAX ACT, 1961, THAT NO DEDUCTION SHALL BE MADE IN R ESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATIO N TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE INCOME- TAX ACT. THE PROPOSED AMENDMENT WILL TAKE EFFECT RETROSPECTI VELY FROM APRIL 1, 1962 AND WILL ACCORDINGLY, APPLY IN RELATI ON TO THE ASSESSMENT YEAR 1962-63 AND SUBSEQUENT ASSESSMENT Y EAR. 24 HON'BLE BOMBAY HIGH COURT NOTED THIS DECISION AN D THEN CONFIRMED THE THEORY OF APPORTIONMENT OF EXPEN SES AND HELD THAT SAME IS VERY MUCH APPLICABLE IN SECTI ON 14A. AT PLACITUM 28 IT HAS BEEN OBSERVED AS UNDER: DURING THE COURSE OF THIS JUDGMENT, IT WOULD BE NE CESSARY TO REVISIT THE DECISION OF HON'BLE SUPREME COURT IN WA LFORT. AT THIS STAGE, HOWEVER, IT NEEDS TO BE EMPHASIZED THAT THE PROVISIONS OF SECTION 14A WERE CONSTRUED IN WALFORT TO EVINCE PARLIAMENTARY INTENT NOT TO ALLOW DEDUCTION IN RESP ECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST TAXABLE INCOME. SECTION 14A IS CLARIFICATOR Y OF THE POSITION THAT EXPENSE CAN BE ALLOWED ONLY TO THE EX TENT THAT 10 THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME . ONLY THOSE EXPENSES WHICH ARE IN RESPECT OF THE EARNING OF TAXABLE INCOME CAN BE ALLOWED. THE SECTION 14A BROADENS TH E THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AN D NON-TAXABLE INCOME IS EVIDENT FROM THE FOLLOWING OB SERVATIONS OF THE HON'BLE SUPREME COURT PAGE 17) THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED U/S 14A. READING SECTION 14 IN JUXTAPOSITI ON WITH SECTIONS 15 TO 59, IT IS CLEAR THAT THE WORDS EXPENDITURE INCURRED IN SECTION 14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC ., IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37). THUS ON THE BASIS OF ABOVE, IT WAS HELD THAT AFTER INTRODUCTION OF SECTION 14A, IT WAS POSSIBLE TO APPORTION THE EXPEN DITURE BETWEEN TAXABLE INCOME AND EXEMPTED INCOME. 25 AS OBSERVED EARLIER, ALMOST SIMILAR OBSERVATIONS HAVE BEEN MADE BY THE HON'BLE PUNJAB & HARYANA HIGH COURT IN A RECENT JUDGMENT IN CASE OF CIT V. PUNJAB STATE INDUSTRIAL DEVELOPMENT COOPERATION LTD. IN ITA NO. 565 OF 2006 VIDE ORDER DATED 18.7.2011. 11. ADVERTING TO QUESTION NO.(II), LEARNED COUNSEL FOR THE REVENUE SUBMITTED THAT WHILE DETERMINING THE QUANTUM OF DED UCTION ADMISSIBLE TO THE ASSESSEE UNDER SECTION 80M OF THE ACT, THE EXPENDIT URE INCURRED RELATING TO THE EARNING OF DIVIDEND INCOME HAS TO BE EXCLUDED T HERE-FROM. ACCORDING TO THE LEARNED COUNSEL, THE EXPENDITURE WHICH WAS TO B E DEDUCTED WAS REQUIRED TO BE DEDUCTED ON PROPORTIONAL BASIS FOR I NCURRING OF SUCH EXPENDITURE. RELIANCE WAS PLACED ON SECTION 14A OF THE ACT WHICH WAS INCORPORATED BY FINANCE ACT 2001 RETROSPECTIVELY .W .E.F. 1.4,1962. SUPPORT WAS GATHERED FROM THE DECISION OF THE RAJASTHAN HIG H COURT IN SHEKHAVATI GENERAL TRADERS LTD. VS. COMMISSIONER OF INCOME TAX (1987) 167 ITR116 AND THE JUDGMENT OF THIS COURT IN INCOME TAX APPEAL NO. 530 OF 2006 (THE PUNJAB STATE COOPERATIVE MILK PRODUCER'S FEDERATION LTD, VS. COMMISSIONER OF INCOME TAX-IF AND ANOTHER) DECIDED ON 28,3,2011 AND OF THE APEX COURT IN COMMISSIONER OF INCOME TAX VS. WALFORT SHARE & STOCK BROKERS (P) LTD. (2010) 41 DTR JUDGMENTS 233. 12. CONTROVERTING THE AFORESAID SUBMISSION, LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE DECISION OF THE CA LCUTTA HIGH COURT IN COMMISSIONER OF INCOME TAX VS. UNITED COLLIERIES LT D. (1993) 203 ITR 857 (CALCUTTA). LEARNED COUNSE L ALSO RELIED UPON COMMISSIONER OF INCOME TAX VS. CENTRAL BANK OF INDI A (2003) 264 ITR 522 (BOMBAY) AND STATE BANK OF INDORE VS. COMMISSIONER OF INCOME TAX (2005) 275 ITR 23 (MP). IT WAS CONTENDED THAT IT WAS ONLY THE ACTUAL EXPENSE INCUR RED FOR EARNING DIVIDEND WHICH WAS TO BE DEDUCTED FROM THE DIVIDEND INCOME FOR CALCULATING THE ADMISSIBLE DEDUCTIONS UNDER SECTION 80M OF THE ACT. IT WAS URGED THAT THE PLEA OF THE REVENUE THAT PROP ORTIONAL EXPENSES SHOULD ALSO BE REDUCED, WAS AGAINST THE STATUTE. 13. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO THE RESPECTIVE SUBMISSIONS OF THE LEARNED COUNSEL FOR T HE PARTIES AND FIND 11 *FORCE IN THE SUBMISSIONS OF THE LEARNED COUNSEL FO R THE REVENUE. FINANCE ACT 2001 HAD INSERTED SECTION 14A WITH EFFECT FROM 1.4. 1962. ACCORDING TO THE SAID SECTION, ANY EXPENDITURE INCURRED BY THE ASSES SEE FOR EARNING INCOME WHICH DID NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT WAS NOT TO BE ALLOWED AS EXPENSES. THIS COURT IN THE CASE OF PUNJAB STATE COOPERATIVE MILK PRODUCER'S FEDERATION LTD.'S CASE (SUPRA) RELYING UPON THE DECISION OF THE APEX COURT IN WALFORT SHARE AND STOCK BROKERS'S CASE (SUPRA), WHEREIN, WHILE DEFINING THE SCOPE OF SECTION 14A OF THE ACT, INCORPORATED RETROSPECTIVELY W.E.F. 1.4.1962, IT HAD LAID DOWN AS UNDER: THE INSERTION OF SECTION 14A WITH RETROSPECTIVE EFFECT IS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT TO ALLOW DEDUCTION IN RESPECT OF ANY EXPENDIIURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST THE TAXABLE INCOME (SEE CIRCULAR NO. 14 OF 2001 DATED 22.11.2001 K IN OTHER WORDS, SECTION 14A CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSE S INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCO ME AND PARTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SECTION 14A, THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WAS BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDATE OF SECTION 14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME A GAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURR ED IN RELATION TO EXEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 1 4A IS THAT CERTAIN INCOMES ARE NOT INCLUDIBIE WHILE COMPUTING TOTAL INCOME AS THES E ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE ACT. IN THE PAST, THERE HAVE BEAN IN WHICH DEDUCTION HAS BEEN SOUGHT IN RESPECT OF SUCH INCOMES WHICH IN E FFECT WOULD MEAN THAT TAX INCENTIVES TO CERTAIN INCOMES WAS BEING USED TO RED UCE THE TAX PAYABLE ON THE NON-EXEMPT INCOME BY DEBITING THE EXPENSES, INCURRED TO EARN THE EXEMPT INCOME, AGAINST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXA TION IS TO TAX THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE. OH THE SA ME ANALOGY THE EXEMPTION IS ALSO IN RESPECT OF NET INCOME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE INCOME. THIS IS THE PURPORT OF S ECTION 14A. IN SECTION 14A, THE FIRST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS OF INCOME AS PRESCRIBED UNDER CHAPTER IV WOULD FALL WITHIN SECTION 14A. THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UND ER THE ACT'. IT MEANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 1 4A. FURTHER, SECTION 14 SPECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE CHARGEABLE, AN INCOME HAS TO BE BROUGHT UNDER ONE OF THE FIVE HEADS. SECTIONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX UNDER THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL INCOME CHARGEABLE TO TAX. THE PERMISSIBLE DEDUCTIONS ENUMERATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOWED ONLY WITH R EFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF THE ABOVE HEADS AND IS CHARGEA BLE TO TAX. IF AN INCOME LIKE DIVIDEND INCOME IS NOT A PART OF THE TOTAL INCOME, THE EXPENDITURE/DEDUCTION THOUGH OF THE NATURE SPECIFIED IN PART OF TOTAL INCOME COULD NOT BE ALLOWED AGAINST ORE INCOME INCLUDIBLE IN THE TOTAL INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT O F EXPENDITURES BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A. READING SECTION 14 IN JUXTAPOSIT ION WITH SECTIONS 15 TO 59, IT IS CLEAR THAT THE WORDS 'EXPENDITURE INCURRE D' IN SECTION 14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST,ETC. IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37) .' ' 12 14. THE APEX COURT HAD SPECIFICALLY RECORDED THAT THE THEORY OF APPORTIONMENT OF AMOUNT OF EXPENSE* BETWEEN TAXABLE AND NON- TAXABLE INCOME STOOD WIDENED BY INCORPORATION OF SE CTION 14A. IT WAS FURTHER NOTICED THAT THE EXPRESSION 'EXPENSES INCURRED' OCC URRING IN SECTION 14A REFERRED TO TAX, SALARY, INTEREST ETC. IN RESPECT' OF WHICH ALLOWANCES ARE PROVIDED FOR UNDER SECTIONS 30 TO 37 OF THE ACT. 15. IN ALL FAIRNESS TO THE ASSESSEE, IN THE JU DGMENTS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE, SECTI ON 14A AS INCORPORATED BY FINANCE ACT 2001, WITH EFFECT FROM 1.4.1962, WAS NOT UNDER CONSIDERATION AND, THEREFORE, THE SAME DO NOT COME TO THE RESCUE OF THE ASSESSEE. 16. IN VIEW OF THE ABOVE, THE SUBSTANTIAL QU ESTION NO.(II) IS ANSWERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. INCOME TAX APPEAL NOS. 565, 567 AND 569 STAND DISPOSED OF ACCORDINGLY. 26 THUS THEORY OF APPORTIONMENT AS APPROVED BY THE HON'BLE SUPREME COURT IN CASE OF CIT V. WALFORT SHA RE AND STOCK BROKERS P LTD (2010) 326 ITR 1 (S.C) FOLL OWED BY HON'BLE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOYCEE (SUPRA) HAS ALSO BEEN APPROVED BY HON'BLE PU NJAB & HARYANA HIGH COURT IN CASE OF CIT V. PUNJAB STATE INDUSTRIAL DEVELOPMENT COOP LTD. (SUPRA). 27 NOW THE QUESTION IS HOW SUCH EXPENDITURE CAN BE APPORTIONED. THERE MAY BE A SITUATION WHETHER THE EXPENSES OR INTEREST CANNOT BE IDENTIFIED AGAINST T HE PARTICULAR ITEM OF INCOME TO MEET THESE DIFFICULTIE S RULE 8D WAS INTRODUCED WHICH HAS BEEN HELD TO BE CONSTITUTI ONALLY VALID BY HON'BLE BOMBAY HIGH COURT IN CASE OF GODRE J AND BOYCEE (SUPRA). RULE 8D READS AS UNDER: RULE 8D READS AS UNDER: (1) WHERE THE ASSESSING OFFICER HAVING REGARD TO T HE ACCOUNT OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MAD E BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YE AR, HE HALL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RUL E (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGAT E OF FOLLOWING AMOUNTS, NAMELY:- (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; 13 (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPE NDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH I S NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR R ECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FO RMULA, NAMELY:- A X B C WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCUR RED 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 ASSET AS APPEARING IN THE 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 PER CENT OF THE A VERAGE OF THE 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 LAS T DAY OF THE PREVIOUS YEAR. (3) FOR THE PURPOSES OF THIS RULE, THE TOTAL ASSET S SHALL MEAN, TOTAL ASSET AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSET BU T INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS.) . 28 CLAUSE (II) OF SUB-RULE (2) CLEARLY SHOWS THAT I F THE ASSESSEE SHOW THAT INTEREST HAS BEEN INCURRED SPECI FICALLY FOR A PARTICULAR ITEM OF INCOME THEN IT HAS TO BE APPORTIONED. IN CASE BEFORE US, THE ASSESSEE HAS PROVIDED SOURCES OF FUNDS BUT THEY CANNOT BE SAID TO HAVE BEEN MAINTAINED SEPARATELY. FIRST OF ALL IT W AS CONCEDED THAT THE ASSESSEE IS HAVING MIXED FUNDS. THE DETAILS OF FUNDS WAS STATED TO BE AS UNDER BEFORE T HE LD. CIT(A): 31.3.2008 RS. IN LAKHS SHARE CAPITAL 78.36 RESERVES AND SURPLUSES 130.82 OWN FUNDS 209.18 WORKING CAPITAL BORROWINGS 1779.62 CURRENT ASSETS 2243.45 AMOUNT INVESTED IN EXCESS OF LOAN 463.83 TERM LOAN BORROWINGS 253.31 FIXED ASSETS 451.82 AMOUNT INVESTED IN EXCESS OF LOAN 198.51 14 AMOUNT INVESTED IN CHADHA MOTORS 255.96 CONSEQUENTLY BY SIMPLY SAYING THAT THE FUNDS INVEST ED IN FIXED ASSETS AND CURRENT ASSETS ARE MORE THAN THE BORROWED FUNDS, WOULD NOT SHOW THAT SPECIFIC FUNDS HAVE BEEN BORROWED FOR SPECIFIC PURPOSE. FOR EXAMPLE IT CAN BE VERY EASILY SAID THAT THE ASSESSEE SUPPORTED ITS BUSINESS WITH OWN FUNDS AND BORROWED LOANS HAVE BEE N USED FOR MAKING INVESTMENT IN ASSETS AS WELL AS IN INVESTMENTS WHICH GENERATE EXEMPTED INCOME. ONCE T HE FUNDS ARE MIXED, THERE IS NO WAY TO FIND OUT ACTUAL USAGE OF THE FUNDS. TO MEET THIS SITUATION ONLY RULE 8D WAS INSERTED TO REMOVE THE DIFFICULTIES. IN FACT THIS ASPECT WAS ALSO EXAMINED BY HON'BLE BOMBAY HIGH COURT IN CASE OF GODREJ & BOYCEE (SUPRA). MANY OBSERVATIONS WERE MA DE UNDER THE HEAD PARAMETERS OF JUDICIAL REVIEW AT PA RA 62 TO 72 OF THE ORDER. WITHOUT UNNECESSARILY BURDENI NG THIS ORDER WITH THESE OBSERVATIONS WE WILL QUOTE PARA 73 WHICH DEALS WITH JUSTIFICATION OF RULE 8D: IN THE AFFIDAVIT IN REPLY THAT HAS BEEN FILED ON BE HALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RATIONALE UNDERLYING RULE 8D. IN THE WRITTEN SUBMI SSIONS WHICH HAVE BEEN FILED BY THE ADDITIONAL SOLICITOR G ENERAL IT HAS BEEN STATED, WITH REFERENCE TO RULE 8D(2)(II ) THAT SINCE FUNDS ARE FUNGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACTUAL QUANTUM OF BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX FREE INVESTMENT. IT IS ONLY TH E INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONE D AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT W ILL BE TAKEN (AS A IN THE FORMULA) WILL EXCLUDE ANY EXPE NDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE T O ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLE ANY AS PECT OF THE ASSESSEES BUSINESS SUCH AS PLANT/MACHINERY ETC .). AS REGARDS RULE 8D(2)(III) IT HAS BEEN SUBMITTED TH AT SOME MECHANISM OR FORMULA HAD TO BE ADOPTED FOR ATTRIBUT ING PART OF THE ADMINISTRATIVE/MANAGERIAL EXPENSES TO T AX EXEMPT INVESTMENT INCOME. THE ADMINISTRATIVE EXPEN SES ATTRIBUTABLE TO TAX FREE INVESTMENT INCOME HAVE A F IXED COMPONENT AND A VARIABLE COMPONENT. A VIEW WAS TA KEN THAT THE DISALLOWANCE SHOULD ALSO BE LINKED TO THE VALUE OF THE INVESTMENT RATHER THAN THE AMOUNT OF EXEMPT INC OME. UNDER PORTFOLIO MANAGEMENT SCHEME (PMS) THE FEE CHARGED RANGES BETWEEN 2 AND 2.5 PER CENT OF THE PORTFOLIO VALUE WHICH WOULD BE INCLUSIVE OF A PROFI T ELEMENT FOR THE PORTFOLIO MANAGER. WHILE THE FIXED ADMINISTRATIVE EXPENSE WERE EXCLUDED, ON THE GROUND THAT IN THE CAASE OFA LARGE CORPORATE TAXPAYER THEY WOUL D BE SPREAD OVER A LARGE NUMBER OF VOLUMINOUS ACTIVITIES , THE VARIABLE EXPENSES WERE COMPUTED AT ONE-HALF PER CEN T OF THE VALUE OF THE INVESTMENT. THE JUSTIFICATION THA T HAS BEEN OFFERED IN SUPPORT OF THE RATIONALE FOR RULE 8 D CANNOT BE REGARDED AS BEING CAPRICIOUS, PERVERSE OR ARBITR ARY. APPLYING THE TESTS FORMULATED BY THE HON'BLE SUPREM E 15 COURT IT IS NOT POSSIBLE FOR THIS COURT TO HOLD THA T THERE IS WRIT ON THE STATUTE OR ON THE SUBORDINATE LEGISLATI ON PERVERSITY, CAPRICE OR IRRATIONALITY. THERE IS CER TAINLY NO MADNESS IN THE METHOD. THUS ABOVE RULE WAS FOUND TO BE VALID AND RATIONAL. COMING BACK TO THE CASE IN HAND, THE PERUSAL OF THE ASSESSMENT ORDER SHOWS AS OBSERVED EARLIER, NO WHE RE BEFORE THE ASSESSING OFFICER OR THE LD. CIT(A), THE ASSESSEE HAS MADE A SPECIFIC MENTION TO SHOW WHICH PARTICULAR FUNDS WERE BORROWED FOR WHICH PARTICULAR REQUIREMENT AND IN THE ABSENCE OF SUCH SPECIFIC UTILIZATION RULE 8D, WOULD BE APPLICABLE. PERUSAL OF THE ASSESSMENT ORDER SHOWS THAT DISALLOWANCE U/S 14A HA S BEEN WORKED OUT ON THE BASIS OF RULE 8D WHICH IS A S OBSERVED EARLIER APPLICABLE IN CASE OF THE ASSESSEE . THEREFORE, WE SET ASIDE THE ORDER OF THE LD. CIT(A ) AND RESTORE THAT OF THE ASSESSING OFFICER. FROM ABOVE IT IS CLEAR THAT IN CASE OF MIXED FUNDS DISALLOWANCE HAS TO BE MADE U/S 14A R.W.R. 8D. 8 FURTHER THERE IS NO FORCE IN THE SUBMISSIONS THAT THE ASSESSING OFFICER HAS NOT GIVEN ANY COGENT REASON F OR MAKING DISALLOWANCE IN THE SENSE THAT HE HAS NOT POINTED O UT WHICH EXPENDITURE IS RELATABLE. FIRST OF ALL THE ASSESSE E HAS NOT GIVEN ANY WORKING WHEREIN DISALLOWANCE WAS MADE BY THE ASSESSEE HIMSELF WHILE FILING RETURN. SECONDLY WHE N THE COMMON EXPENDITURE AND COMMON INTEREST IS INCURRED THEN ALLOCATION HAS TO BE MADE ON PROPORTIONATE BASIS IN TERMS OF SEC 14A R.W.R. 8D FOR WHICH DISCUSSION HAS BEEN MAD E IN CASE OF CHADHA SUPER CARS (SUPRA) AND RELEVANT PARAS HAV E ALREADY BEEN EXTRACTED ABOVE. THEREFORE WE FIND NOTHING WR ONG IN THE ORDER OF CIT(A) AND LD. CIT(A) HAS MERELY FOLLOWED THE ORDER OF THE TRIBUNAL AND CONFIRMED THE DISALLOWANCE. 9 THE ISSUE RELATING TO LEVY OF INTEREST U/S 234B I S OF CONSEQUENTIAL NATURE AND THE ASSESSING OFFICER IS D IRECTED TO LEVY INTEREST IN ACCORDANCE WITH LAW. 16 10 SINCE THE ISSUES IN BOTH THESE APPEALS ARE IDENT ICAL THE SAME STANDS DISPOSED OFF BY THIS ORDER. 11 IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 8.8.2014 SD/- SD/- (SUSHMA CHOWLA) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 8.8.2014 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/THE DR