Bafna Auto Engg Pvt Ltd., Pune V. DCIT, Pune

ITA 1462/PUN/2012

• Counselvise Citation: 146224514 RSA 2012
• Duration Of Justice: 1 year(s) 8 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 06-11-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 04-07-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S P WALIMBE
• Assessee Lawyers: NILESH KHANDELWAL
• Keywords: Earning of tax free income
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHE B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.1462/PN/2012 (ASSESSMENT YEAR : 2008-09) BAFNA AUTO ENGG. PVT. LTD., MZSK & ASSOCIATES (FORMERLY SHAH KHANDELWAL JAIN & ASSOCIATES) CHARTERED ACCOUNTANTS, LEVEL 3, BUSINESS BAY, PLOT NO.84, WELLESLEY ROAD, NEAR RTO, PUNE 411 001. PAN : AAACB7029D . APPELLANT VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(1), PUNE. . RESPONDENT ASSESSEE BY : MR. NILESH KHANDELWAL DEPARTMENT BY : MR. S. P. WALIMBE DATE OF HEARING : 03-01-2014 DATE OF PRONOUNCEMENT : 20-03-2014 ORDER PER G. S. PANNU, AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST AN ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-I, PUNE DATED 27.12.2011 WHICH, IN TURN, HAS ARISEN FROM AN ORDER DATED 30.12.2010 PAS SED BY THE ASSESSING OFFICER U/S 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT), PERTAINING TO THE ASSESSMENT YEAR 2008-09. 2. IN THIS APPEAL THE SOLITARY GRIEVANCE OF THE ASS ESSEE IS WITH REGARD TO AN ADDITION OF RS.5,03,032/- MADE BY THE ASSESSING OFF ICER BY INVOKING SECTION 14A OF THE ACT. 3. IN BRIEF, THE RELEVANT FACTS ARE THAT ASSESSEE I S A COMPANY ENGAGED IN THE BUSINESS OF DEALERSHIP OF TATA MOTORS LTD.- COM MERCIAL VEHICLES AT PUNE. FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, IT FIL ED A RETURN OF INCOME DECLARING TOTAL INCOME OF RS.42,16,850/-. THE ASSE SSING OFFICER NOTICED THAT ITA NO.1462/PN/2012 A.Y. : 2008-09 ASSESSEE HAD DECLARED DIVIDEND INCOME OF RS.36,247/ - WHICH WAS EXEMPT U/S 10(34) OF THE ACT AND RS.19,98,045/- ON ACCOUNT OF LONG TERM CAPITAL GAIN ON SALE OF SHARES, WHICH WAS EXEMPT U/S 10(38) OF THE ACT. THE ASSESSING OFFICER SHOW-CAUSED THE ASSESSEE AS TO WHY DISALLOW ANCE SHOULD NOT BE MADE IN TERMS OF SECTION 14A OF THE ACT WITH RESPEC T TO THE EXPENDITURE INCURRED IN RELATION TO EARNING OF INCOME WHICH WAS EXEMPT. IN RESPONSE, ASSESSEE SUBMITTED THAT THE EQUITY SHARES WHICH WER E SOLD DURING THE YEAR RESULTING IN EXEMPT CAPITAL GAIN OF RS.19,98,045/- WERE ACQUIRED OUT OF OWN FUNDS MORE THAN 10 YEARS AGO AND NO BORROWED FUNDS WERE USED TO MAKE SUCH INVESTMENT. DURING THE YEAR, ASSESSEE HAD MAD E ONLY INVESTMENT OF RS.1,00,000/- IN MUTUAL FUND. IT WAS POINTED OUT T HAT THE INTEREST EXPENDITURE DEBITED IN THE PROFIT & LOSS ACCOUNT WAS ENTIRELY F OR THE FUNDS UTILIZED IN THE BUSINESS OF TATA COMMERCIAL VEHICLES DEALERSHIP AND IT PERTAINED TO THE DEALER FUND FACILITY PROVIDED BY THE FINANCIAL INST ITUTIONS. ON THIS BASIS, IT WAS SOUGHT TO BE MADE OUT THAT NO BORROWED FUNDS WERE U TILIZED FOR MAKING ANY INVESTMENT IN SHARES/MUTUAL FUNDS DURING THE YEAR U NDER CONSIDERATION. FURTHER, WITH REGARD TO THE DIVIDEND INCOME, ASSESS EE EXPLAINED THAT THE ENTIRE DIVIDEND INCOME EARNED BY THE ASSESSEE WAS OUT OF I NVESTMENTS MADE MORE THAN 10 YEARS AGO AND IN ANY CASE, ASSESSEE WAS REC EIVING DIVIDEND INCOME DIRECTLY THROUGH THE ELECTRONIC CLEARING FACILITY ( ECS) OF THE BANK AND NO EXPENDITURE WAS INCURRED FOR EARNING SUCH INCOME EX CEPT FOR NOMINAL BANK CHARGES WHICH MAY NOT EXCEED RS.1,000/- DURING THE YEAR. 4. THE ASSESSING OFFICER CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND PARTLY ACCEPTED IT. THE ASSESSING OFFICER ACCEPTED THE POSITION THAT THERE WAS NO DIRECT EXPENDITURE INCURRED BY THE ASSESSEE IN R ELATION TO THE EXEMPT INCOME. HOWEVER, THE ASSESSING OFFICER WAS OF THE VIEW THAT IT IS DIFFICULT TO ASSUME THAT ALL THE TAX FREE INCOME EARNED BY ASSES SEE HAS BEEN EARNED WITHOUT ANY EXPENDITURE. FOR THE SAID REASON, HE HAS COMPUTED THE DISALLOWANCE IN TERMS OF CLAUSES (II) AND (III) OF SUB-RULE (2) OF RULE 8D OF THE INCOME TAX RULES, 1962 (IN SHORT THE RULES) ON AC COUNT OF INDIRECT ITA NO.1462/PN/2012 A.Y. : 2008-09 EXPENDITURE BY WAY OF INTEREST AND OTHER EXPENDITUR E RESPECTIVELY HAVING BEEN INCURRED FOR EARNING OF THE EXEMPT INCOMES. ACCORD INGLY, TOTAL DISALLOWANCE OF RS.5,03,032/- HAS BEEN MADE COMPRISING OF RS.4,85,7 84/- ON ACCOUNT OF INTEREST INDIRECTLY INCURRED AND RS.17,248/- BEING INDIRECT EXPENSES INCURRED. THE CIT(A) HAS CONFIRMED THE SAID ADDITION, AGAINST WHICH ASSESSEE IS IN FURTHER APPEAL BEFORE US. 5. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS VEHEMENTLY ARGUED THAT THE STAND OF THE ASSESSEE HAS BEEN UNJU STLY DISREGARDED BY THE LOWER AUTHORITIES INASMUCH AS ASSESSEE HAD DEMONSTR ATED THAT THERE WAS NO INTEREST EXPENDITURE INCURRED IN RELATION TO THE EA RNING OF THE EXEMPT INCOME. MOREOVER, THE LEARNED COUNSEL FURTHER SUBMITTED THA T FOLLOWING THE RATIO OF THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF RELIANCE UTILITIES AND POWER LTD. 313 ITR 340 (BOM) WHERE THE INTEREST -FREE FUNDS ARE SUFFICIENT TO COVER THE INVESTMENT, IT WOULD LEAD TO A PRESUMP TION THAT SUCH INVESTMENTS HAVE BEEN MADE OUT OF INTEREST-FREE FUNDS AND NOT O UT OF INTEREST BEARING FUNDS. THE LEARNED COUNSEL SUBMITTED THAT IF THE A FORESAID PROPOSITION IS APPLIED TO THE PRESENT CASE, NO INTEREST EXPENDITUR E CAN BE RELATABLE TO THE INTEREST INCOME INASMUCH AS THE INTEREST-FREE FUNDS AVAILABLE WITH THE ASSESSEE IN THE FORM OF SHARE CAPITAL (NET OF THE D EBIT BALANCE IN PROFIT & LOSS ACCOUNT) EXCEED THE TOTAL INVESTMENTS MADE BY THE A SSESSEE AS ON 31.03.2008. IN ANY CASE, IT IS SOUGHT TO BE MADE T HAT THE IMPUGNED INVESTMENTS WERE MADE 10 YEARS AGO AND NO INTEREST EXPENDITURE CAN BE ATTRIBUTED TO THE SAME. 6. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE APPEARING FOR THE REVENUE HAS POINTED OUT THAT THE ASSESSING OFFICER WAS JUSTIFIED IN MAKING THE IMPUGNED DISALLOWANCE BECAUSE THE APPLIC ATION OF RULE 8D OF THE RULES IN ORDER TO COMPUTE THE DISALLOWANCE WAS MAND ATORY FOR THE INSTANT ASSESSMENT YEAR. ITA NO.1462/PN/2012 A.Y. : 2008-09 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. SECTION 14A OF THE ACT CONTEMPLATES THAT FOR THE PURPOSES OF COMPUTING TOTAL INCOME NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO AN INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE STAND OF THE REVENUE IN THE PRESENT CASE IS THAT AS SESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST AS WELL AS OTHER ADM INISTRATIVE EXPENDITURE WHICH ARE INDIRECTLY RELATABLE TO THE EARNING OF EX EMPT INCOME, THOUGH THE ASSESSING OFFICER IS SATISFIED THAT NO DIRECT EXPEN DITURE HAS BEEN INCURRED IN RELATION TO THE EXEMPT INCOME. 8. IN A SITUATION LIKE THE PRESENT, IT IS QUITE CLE AR THAT INVOKING OF RULE 8D OF THE RULES IS SUBJECT TO FULFILLMENT OF CONDITION PR ESCRIBED IN SECTION 14A(2) OF THE ACT. SECTION 14A(2) OF THE ACT REQUIRES THE AS SESSING OFFICER TO BE SATISFIED WITH THE INCORRECTNESS OF THE CLAIM OF TH E ASSESSEE IN RESPECT OF EXPENDITURE CLAIMED TO HAVE BEEN INCURRED OR NOT IN CURRED IN RELATION TO THE EXEMPT INCOME. THE ENTIRE GAMUT OF SUCH AN EXERCIS E HAS BEEN A SUBJECT- MATTER OF CONSIDERATION BY THE PUNE BENCH OF THE TR IBUNAL IN THE CASE OF KALYANI STEELS LTD. VIDE ITA NO.1733/PN/2012 DATED 30.01.2014 WHEREIN ONE OF US WAS MEMBER OF THE BENCH. THE TRIBUNAL HAS CO NSIDERED THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GOD REJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT, 328 ITR 81 (BOM) A S WELL AS THE JUDGEMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF MAXO PP INVESTMENT LTD. & ORS. VS. CIT, (2012) 247 CTR 162 (DEL) AND HELD THAT THE INVOKING OF RULE 8D OF THE RULES IN ORDER TO COMPUTE THE DISALLOWANCE U/S 14A OF THE ACT IS CONDITIONAL TO RECORDING OF AN OBJECTIVE SATISFACTION BY THE ASSES SING OFFICER WITH REGARD TO THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE, HAV ING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE DETAILED DISCUSSION IN THIS R EGARD CONTAINED IN THE ORDER OF THE TRIBUNAL DATED 30.01.2014 (SUPRA) IS AS UNDE R :- 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. SECTION 14A OF THE ACT CONTEMPLATES THAT FOR THE PURPOSES O F COMPUTING THE TOTAL INCOME, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY ITA NO.1462/PN/2012 A.Y. : 2008-09 THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT F ORM PART OF THE TOTAL INCOME UNDER THE ACT. SUB-SECTION (2) OF SECTION 1 4A OF THE ACT PRESCRIBES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, S UCH PRESCRIBED METHOD BEING CONTAINED IN RULE 8D OF THE RULES. HOWEVER, THE AFORESAID EMPOWERMENT OF THE ASSESSING OFFICER TO INVOKE APPL ICATION OF RULE 8D OF THE RULES IS SUPERSCRIBED BY A CONDITION CONTAINED IN S UB-SECTION (2) OF SECTION 14A OF THE ACT WHICH IS TO THE EFFECT THAT THE ASSE SSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED W ITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INC URRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . THEREFORE, THE INVOKING OF RULE 8D OF THE RULES IN ORDER TO COMPUTE THE DIS ALLOWANCE U/S 14A OF THE ACT IS NEITHER AUTOMATIC AND NOR IS TRIGGERED MERELY BE CAUSE ASSESSEE HAS EARNED AN EXEMPT INCOME. THE INVOKING OF RULE 8D OF THE R ULES IS PERMISSIBLE ONLY WHEN THE ASSESSING OFFICER RECORDS THE SATISFACTION IN REGARD TO THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. IN OTHER WORDS, SECTION 14A(2) OF TH E ACT ENVISAGED A CONDITION PRECEDENT FOR INVOKING RULE 8D OF THE RULES AND COM PUTING DISALLOWANCE THEREOF ONLY IF THE ASSESSING OFFICER RECORDS THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE, HAVING REGARD TO THE ACCOUNT OF THE ASSESSEE. IN T HIS CONTEXT, IT WOULD BE APPROPRIATE TO REFER TO THE FOLLOWING OBSERVATIONS OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING C O. LTD. (SUPRA) :- 70. NOW, IN DEALING WITH THE CHALLENGE IT IS NECESSARY TO ADVERT TO THE POSITION THAT SUB-SECTION (2) OF SECTION 14A PR ESCRIBES A UNIFORM METHOD FOR DETERMINING THE AMOUNT OF EXPEND ITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME ONLY IN A SITUATION WHERE THE ASSESSIN G OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NO T SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF SUCH EXPENDITURE. IT, THEREFORE, MERITS EMPHASIS TH AT SUB- SECTION (2) OF SECTION 14A DOES NOT AUTHORIZE OR E MPOWER THE ASSESSING OFFICER TO APPLY THE PRESCRIBED METHOD I RRESPECTIVE OF THE NATURE OF THE CLAIM MADE BY THE ASSESSEE. T HE ASSESSING OFFICER HAS TO FIRST CONSIDER THE CORRECT NESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE SATISFACTION OF THE ASSESSING OFFICER HAS TO BE OBJECTIVELY ARRIVED AT ON THE BASIS OF THOSE ACCOUN TS AND AFTER CONSIDERING ALL THE RELEVANT FACTS AND CIRCUMSTANCE S. THE APPLICATION OF THE PRESCRIBED METHOD ARISES IN A SI TUATION WHERE THE CLAIM MADE BY THE ASSESSEE IN RESPECT OF EXPEND ITURE WHICH IS RELATABLE TO THE EARNING OF INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IS FOUND TO BE INCORRECT. IN SUCH A SITUATION A METHOD HAD TO BE DEVISED FOR APPORTIONING THE EXPENDITURE INCURRED BY THE ASSESSEE BETWEEN WH AT IS INCURRED IN RELATION TO THE EARNING OF TAXABLE INCO ME AND THAT WHICH IS INCURRED IN RELATION TO THE EARNING OF NON -TAXABLE INCOME. AS A MATTER OF FACT, THE MEMORANDUM EXPLAI NING THE PROVISIONS OF THE FINANCE BILL, 2006, AND THE CENTR AL BOARD OF DIRECT TAXES CIRCULAR DATED DECEMBER 28, 2006, STAT E THAT SINCE THE EXISTING PROVISIONS OF SECTION 14A DID NO T PROVIDE A METHOD OF COMPUTING THE EXPENDITURE INCURRED IN REL ATION TO INCOME WHICH DID NOT FORM PART OF THE TOTAL INCOME, THERE WAS A CONSIDERABLE DISPUTE BETWEEN TAXPAYERS AND THE DEPA RTMENT ON THE METHOD OF DETERMINING SUCH EXPENDITURE. IT W AS IN THIS ITA NO.1462/PN/2012 A.Y. : 2008-09 BACKGROUND THAT SUB-SECTION (2) WAS INSERTED SO AS TO PROVIDE A UNIFORM METHOD APPLICABLE WHERE THE ASSESSING OFFIC ER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. SUB-SECTION (3) CLARIFIES THAT THE APPLICATION OF T HE METHOD WOULD BE ATTRACTED EVEN TO A SITUATION WHERE THE AS SESSEE HAS CLAIMED THAT NO EXPENDITURE AT ALL WAS INCURRED IN RELATION TO THE EARNING OF NON-TAXABLE INCOME. 71. PARLIAMENT HAS PROVIDED AN ADEQUATE SAFEGUARD T O THE INVOCATION OF THE POWER TO DETERMINE THE EXPENDITUR E INCURRED IN RELATION TO THE EARNING OF NON-TAXABLE INCOME BY ADOPTION OF THE PRESCRIBED METHOD. THE INVOCATION OF THE POWER IS MADE CONDITIONAL ON THE OBJECTIVE SATISFACTION OF THE AS SESSING OFFICER IN REGARD TO THE CORRECTNESS OF THE CLAIM O F THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSE SSEE. WHEN A STATUTE POSTULATES THE SATISFACTION OF THE A SSESSING OFFICER 'COURTS WILL NOT READILY DEFER TO THE CONCL USIVENESS OF AN EXECUTIVE AUTHORITY'S OPINION AS TO THE EXISTENCE O F A MATTER OF LAW OR FACT UPON WHICH THE VALIDITY OF THE EXERCISE OF THE POWER IS PREDICATED'. (M. A. RASHEED V. STATE OF KERALA [ 1974] AIR 1974 SC 2249*). A DECISION BY THE ASSESSING OFFICE R HAS TO BE ARRIVED AT IN GOOD FAITH ON RELEVANT CONSIDERATIONS . THE ASSESSING OFFICER MUST FURNISH TO THE ASSESSEE A RE ASONABLE OPPORTUNITY TO SHOW CAUSE ON THE CORRECTNESS OF THE CLAIM MADE BY HIM. IN THE EVENT THAT THE ASSESSING OFFICE R IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE, HE MUST RECORD REASONS FOR HIS CONCLUSION . THESE SAFEGUARDS WHICH ARE IMPLICIT IN THE REQUIREMENTS O F FAIRNESS AND FAIR PROCEDURE UNDER ARTICLE 14 MUST BE OBSERVE D BY THE ASSESSING OFFICER WHEN HE ARRIVES AT HIS SATISFACTI ON UNDER SUB- SECTION (2) OF SECTION 14A. AS WE SHALL NOTE SHORTL Y HEREAFTER, SUB-RULE (1) OF RULE 8D HAS ALSO INCORPORATED THE ESSENTIAL REQUIREMENTS OF SUB-SECTION (2) OF SECTION 14A BEF ORE THE ASSESSING OFFICER PROCEEDS TO APPLY THE METHOD PRE SCRIBED UNDER SUB-RULE (2). [UNDERLINED FOR EMPHASIS BY US] 9. THE AFORESAID OBSERVATIONS OF THE HONBLE HIGH C OURT CLEARLY SHOW THAT THE SATISFACTION OF THE ASSESSING OFFICER WITH REGA RD TO THE CORRECTNESS OR OTHERWISE OF THE CLAIM MADE BY THE ASSESSEE MUST BE BASED ON REASONS AND ON RELEVANT CONSIDERATIONS. OSTENSIBLY, THE INVOKI NG OF RULE 8D OF THE RULES IN ORDER TO COMPUTE THE DISALLOWANCE U/S 14A OF THE AC T IS TO BE UNDERSTOOD AS BEING CONDITIONAL ON THE OBJECTIVE SATISFACTION OF THE ASSESSING OFFICER WITH REGARD TO THE INCORRECTNESS OF THE CLAIM OF THE ASS ESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. AT THIS STAGE, WE MAY ALS O TOUCH-UPON A SIMILAR VIEW EXPRESSED BY THE HONBLE DELHI HIGH COURT IN T HE CASE OF MAXOPP INVESTMENT LTD. & ORS. VS. CIT, (2012) 247 CTR 162 (DEL), WHEREIN REFERENCE HAS BEEN MADE TO THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (SUPRA). AS PER THE HONBLE DELHI HIGH COURT, THE REQUIREMENT OF THE ASSESSING OFFICE R EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME IN TERM OF RULE 8D OF THE RULES WOULD BE TRI GGERED ONLY IF THE ASSESSING OFFICER RECORDS A FINDING THAT HE WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E. ACCORDING TO THE HONBLE DELHI HIGH COURT, SUB-SECTION (2) OF SECTIO N 14A OF THE ACT DEALS WITH CASES WHERE THE ASSESSEE SPECIFIES A POSITIVE AMOUN T OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AND SUB-SECTION (3) APPLIES TO CASES WHERE THE ASSE SSEE ASSERTS THAT NO ITA NO.1462/PN/2012 A.Y. : 2008-09 EXPENDITURE HAS BEEN INCURRED IN RELATION TO SUCH E XEMPT INCOME. EXPLAINING FURTHER, AS PER THE HONBLE HIGH COURT IN BOTH THE CASES THE RECOURSE TO RULE 8D OF THE RULES IS POSSIBLE ONLY IF THE ASSESSING O FFICER RECORDS A FINDING THAT HE WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CL AIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. 9. IN THE AFORESAID BACKGROUND, WE NOW EXAMINE THE FACTS OF THE PRESENT CASE. IN THIS CASE, ASSESSEE HAS EARNED INCOMES BY WAY OF DIVIDEND AND LONG TERM CAPITAL GAIN OF RS.36,247/- AND RS.19,98,045/- , WHICH HAVE BEEN CLAIMED AS EXEMPT UNDER SECTION 10(34) AND SECTION 10(38) O F THE ACT RESPECTIVELY. IN THE COMPUTATION OF INCOME FILED, ASSESSEE HAS NOT D ETERMINED ANY EXPENDITURE INCURRED IN RELATION TO SUCH INCOME HAV ING REGARD TO PROVISIONS OF SECTION 14A OF THE ACT. EVEN IN THE ASSESSMENT PRO CEEDINGS, ASSESSEE CANVASSED THAT NO EXPENDITURE WAS INCURRED IN RELAT ION TO SUCH EXEMPT INCOME EXCEPT TO THE EXTENT OF RS.1,000/- ESTIMATED ON ACC OUNT OF BANK CHARGES. THE ASSESSING OFFICER HAS NOT FOUND IT FULLY ACCEPTABLE INASMUCH AS HE HAS PARTLY ACCEPTED THE ASSESSEES ASSERTION THAT THERE WAS NO DIRECT EXPENDITURE INCURRED IN RELATION TO THE EXEMPT INCOME. HOWEVER , AS PER THE ASSESSING OFFICER, A PORTION OF THE INTEREST EXPENDITURE AND OTHER EXPENDITURE INCURRED CAN BE ATTRIBUTABLE TO THE EARNING OF SUCH EXEMPT INCOM E AND ACCORDINGLY IN TERMS OF CLAUSES (II) AND (III) OF SUB-RULE (2) OF RULE 8 D OF THE RULES, DISALLOWANCE OF RS.4,85,784/- AND RS.17,248/- ON ACCOUNT OF INTERES T AND OTHER EXPENDITURE RESPECTIVELY HAS BEEN MADE. OSTENSIBLY, THE ACTION OF THE ASSESSING OFFICER CAN BE UPHELD ONLY IN CASE THE PRE-REQUISITE OF INV OKING RULE 8D OF THE RULES IS SATISFIED. AS HELD BY THE PUNE BENCH OF THE TRIBUN AL IN THE CASE OF KALYANI STEELS LTD. (SUPRA), THE ASSESSING OFFICER IS REQUI RED TO RECORD AN OBJECTIVE SATISFACTION WITH REGARD TO THE CLAIM OF THE ASSESS EE THAT NO EXPENDITURE ON ACCOUNT OF INTEREST OR ANY OTHER HEAD HAS BEEN INCU RRED IN RELATION TO THE EXEMPT INCOME. IN THIS CONTEXT, WE ARE TEMPTED TO REPRODUCE HEREINAFTER THE RELEVANT DISCUSSION MADE BY THE ASSESSING OFFICER I N PARA 4.2 OF THE ASSESSMENT ORDER WHICH READS AS UNDER :- 4.2 SUBMISSION OF THE ASSESSEE CAREFULLY PERUSED. THE CONTENTION RAISED BY THE ASSESSEE IS NOT ACCEPTABLE. THE ASSES SEE HAS STATED THAT THE ITA NO.1462/PN/2012 A.Y. : 2008-09 SAID INVESTMENT WAS MADE OUT OF OWN FUNDS 10 YEARS AGO. AS INVESTMENT BEING FROM ITS OWN FUNDS NO DISALLOWANCE SHOULD BE MADE. ASSESSEE HAS STATED THAT THE INTEREST INCURRED IS SOLELY FOR THE DEALER FUNDING FACILITY PROVIDED TO THE ASSESSEE-COMPANY BY VARIOUS FINANCIAL INSTIT UTIONS. THE FUNDS HAVE BEEN UTILIZED BY THE ASSESSEE COMPANY ONLY FOR COND UCTING THE BUSINESS OF THE TATA COMMERCIAL VEHICLE DEALERSHIP OF THE ASSES SEE COMPANY. NO FUNDS OUT OF THESE BORROWED FUNDS HAVE BEEN UTILIZED FOR MAKING ANY INVESTMENTS IN SHARES. REGARDING THE DIVIDEND INCOME IT IS STATED THAT DIVIDEND RECEIVED THROUGH THE ECS FACILITY AND NO EXPENDITURE CAN BE ATTRIBUTABLE TO THE EARNING OF THIS INCOME. THE CONTENTIONS OF THE ASSESSEE ARE NOT ACCEPTABLE. IT IS AGREED THAT THERE ARE NO DIRECT EXPENDITURES WHICH PERTAINS TO THE INCOME WHICH IS EXEMPT FROM THE TAX. THOUGH THERE NO DIREC T EXPENSES, INDIRECT EXPENSES ARE TO BE ATTRIBUTED / APPORTIONED FOR COM PUTING THE DISALLOWANCE U/S 14A OF THE ACT. IT IS SEEN THAT ASSESSEE HAS DEBITE D EXPENDITURES AGAINST THE INTEREST IN THE PROFIT AND LOSS ACCOUNT. IT IS DIFF ICULT TO ASSUME THAT ALL THE TAX FREE INCOME EARNED BY ASSESSEE HAS BEEN EARNED WITH OUT ANY EXPENDITURE. THERE IS ELEMENT OF A INDIRECT EXPENDITURE THOUGH D IRECT EXPENDITURES ARE NOT SEEN. THUS, THE EXPENSES RELATED TO EXEMPTED INCOME ARE PROPOSED TO BE CALCULATED AS PER SECTION 14A OF THE I. T. ACT, 196 1 R.W. RULE 8D OF THE I.T. RULES. 10. IN TERMS OF THE AFORESAID DISCUSSION, IT IS QUI TE EVIDENT THAT THE ASSESSEE ASSERTED THAT THE INVESTMENT WAS MADE OUT OF OWN FUNDS 10 YEARS AGO AND THAT THE INTEREST BEARING FUNDS DURING THE YEAR HAVE BEEN UTILIZED ONLY FOR THE TATA COMMERCIAL VEHICLES DEALERSHIP AND NOT FOR MAKING ANY INVESTMENTS AND SHARES. WHILE CONCURRING WITH THE ASSESSEE THAT THERE ARE NO DIRECT EXPENDITURE WHICH PERTAIN TO THE EXEMPT INCO ME, THE ASSESSING OFFICER HAS NOT POINTED OUT ANY REASON AS TO WHY HE PROCEED ED TO DISAGREE WITH THE ASSERTION OF THE ASSESSEE THAT NO INTEREST EXPENDIT URE IS ATTRIBUTABLE TO THE EXEMPT INCOME. THE ONLY POINT MADE BY THE ASSESSIN G OFFICER IS TO THE EFFECT THAT IT IS DIFFICULT TO ASSUME THAT THE TAX-FREE INCOME HAS BEEN EARNED WITHOUT ANY EXPENDITURE. IN OUR VIEW, THE SAME DOES NOT AM OUNT TO RECORDING OF AN OBJECTIVE SATISFACTION REQUIRED IN SECTION 14A(2) O F THE ACT AS PER THE PARITY OF REASONING LAID DOWN BY THE HONBLE BOMBAY HIGH COUR T IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (SUPRA). THEREFORE, IN SO FAR AS THE DISALLOWANCE OF RS.5,03,032/- OUT OF INTEREST EXPEN DITURE IS CONCERNED WE ARE UNABLE TO UPHOLD THE ACTION OF THE INCOME-TAX AUTHO RITIES. ACCORDINGLY, WE SET- ASIDE THE ORDER OF THE CIT(A) ON THIS ASPECT AND DI RECT THE ASSESSING OFFICER TO DELETE SUCH ADDITION. ITA NO.1462/PN/2012 A.Y. : 2008-09 11. IN RELATION TO THE DISALLOWANCE MADE OUT OF THE OTHER EXPENDITURE OF RS.17,248/-, WE FIND THAT IN THE PROCEEDINGS BEFORE THE ASSESSING OFFICER, ASSESSEE ITSELF CAME FORWARD AND ESTIMATED CERTAIN EXPENDITURE ON ACCOUNT OF BANK CHARGES WHICH COULD BE SAID TO BE ATTRIBUTABLE TO THE EXEMPT INCOME. THEREFORE, ON THIS ASPECT, WE ARE INCLINED TO UPHOL D THE DISALLOWANCE WORKED OUT BY THE ASSESSING OFFICER AT RS.17,248/-. WE HO LD SO. 12. IN THE RESULT, THE ORDER OF THE CIT(A) IS SET-A SIDE AND THE ASSESSING OFFICER IS DIRECTED TO RE-COMPUTE THE DISALLOWANCE U/S 14A OF THE ACT, AS ABOVE. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH MARCH, 2014. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 20 TH MARCH, 2014. SUJEET/GCVSR COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-I PUNE; 4) THE CIT-I, PUNE; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// SR. PRIVATE SECRETARY I.T.A.T., PUNE