Kalyani Steels Ltd, Pune V. Addl C.I. T, Pune

ITA 1733/PUN/2012

• Counselvise Citation: 173324514 RSA 2012
• Duration Of Justice: 1 year(s) 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 27-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K MODI
• Keywords: Earning of tax free income
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHE B, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI G.S. PANNU, ACCOUNTANT MEMBER ITA NO.1733/PN/2012 (ASSESSMENT YEAR : 2008-09) KALYANI STEELS LTD., MUNDHWA, PUNE 411 036. PAN : AAACK7315D . APPELLANT VS. ADDL. COMMISSIONER OF INCOME TAX, RANGE 11, PUNE. . RESPONDENT APPELLANT BY : MR. NIKHIL PATHAK RESPONDENT BY : MR. A. K. MODI DATE OF HEARING : 10-01-2014 DATE OF PRONOUNCEMENT : 30-01-2014 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 09.02.2012 WHICH, IN TURN, HAS ARISEN FROM AN ORDER DATED 27.12.2010 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 DISPUTE RAISED BY T HE ASSESSEE IS THAT THE INCOME-TAX AUTHORITIES ARE NOT JUSTIFIED IN ENHANCI NG THE DISALLOWANCE U/S 14A OF THE ACT TO RS.1,05,46,918/- INSTEAD OF RS.5,00,0 00/- DISALLOWED BY THE ASSESSEE COMPANY IN ITS COMPUTATION OF TOTAL INCOME . 3. IN BRIEF, THE RELEVANT FACTS ARE THAT THE APPELL ANT IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 AND IS INTER-ALIA ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF HOT METAL, PIG IRON, STEEL BILLETS, AND GENERATION OF POWER, ETC. . FOR THE ASSESSMENT YEAR UNDER ITA NO.1733/PN/2012 A.Y. 2008-09 CONSIDERATION, IT FILED ITS RETURN OF INCOME ON 27. 09.2008 DECLARING TOTAL INCOME OF RS.58,17,36,890/-. FOR THE ASSESSMENT YEAR UNDE R CONSIDERATION, THE TOTAL INCOME DECLARED INCLUDED A SUM OF RS.5,45,58,685/- REPRESENTING DIVIDEND INCOME WHICH WAS EXEMPT U/S 10(38) OF THE ACT. IN THE COMPUTATION OF INCOME, THE ASSESSEE HAD OFFERED A SUM OF RS.5,00,0 00/- FOR DISALLOWANCE U/S 14A OF THE ACT ON THE GROUND THAT SUCH EXPENDITURE WAS INCURRED IN RELATION TO THE EXEMPT INCOME. THE ASSESSING OFFICER DID NOT F IND THE DISALLOWANCE ACCEPTABLE AND INSTEAD CALCULATED A DISALLOWANCE OF RS.1,05,46,918/-. IN DOING SO, THE ASSESSING OFFICER APPLIED THE PROVISI ONS OF RULE 8D OF THE INCOME TAX RULES, 1962 (IN SHORT THE RULES). THE DISALL OWANCE OF RS.1,05,46,918/- HAS BEEN WORKED OUT AS PER SUB-CLAUSE (III) OF SUB- RULE(2) OF RULE 8D OF THE RULES. SINCE ASSESSEE HAD ALREADY DISALLOWED A SUM OF RS.5,00,000/- IN COMPUTATION OF INCOME, THE BALANCE OF RS.1,00,46,91 8/- WAS DISALLOWED AND ADDED TO THE TOTAL INCOME. SUCH ENHANCEMENT OF DIS ALLOWANCE BY THE ASSESSING OFFICER U/S 14A OF THE ACT WAS CARRIED IN APPEAL BEFORE THE CIT(A). 4. IN APPEAL, ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN APPLYING RULE 8D OF THE RULES IN ORDER TO COMPUTE THE DISALLOWANCE INASMUCH AS THE PRE-REQUISITE FOR INVOKING RULE 8D OF THE RULES IS NOT SATISFIED IN THE PRESENT CASE. ACCORDING TO THE ASSESSEE, IT WAS A PRE-REQUISITE FOR THE ASSESSING OFFICER TO RECORD A SATISFACTION ABOUT TH E IN-CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE IN RELATION TO THE EXEMPT INCOME, BECAUSE IN THE PRESENT CASE ASSESSEE HAD SUO MOTU DISALLOWED A SUM OF RS.5,00,000/- AS HAVING BEEN INCURRED IN RELATION T O THE EXEMPT DIVIDEND INCOME. THE ASSESSEE FURTHER JUSTIFIED THE QUANTUM OF DISALLOWANCE OF RS.5,00,000/- BY POINTING OUT THAT MOST OF THE INVE STMENTS WHICH HAVE YIELDED THE EXEMPT INCOME WERE MADE IN PRECEDING YEARS AND THE OTHER INVESTMENTS WERE MADE OUT OF PROFITS FOR THE YEAR UNDER CONSIDE RATION AND THEREFORE THE AMOUNT OF DISALLOWANCE MADE BY THE ASSESSEE ON AN A PPLICATION OF SECTION 14A OF THE ACT WAS ADEQUATE. IT WAS ALSO POINTED O UT BEFORE THE CIT(A) THAT IN ITA NO.1733/PN/2012 A.Y. 2008-09 ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2007-08, IT HAS BEEN HELD THAT 5% OF THE EXEMPT INCOME CAN BE CONSIDERED AS A FAIR AN D REASONABLE ESTIMATE OF EXPENDITURE INCURRED FOR EARNING SUCH INCOME AND IF IT IS SO APPLIED FOR THE YEAR UNDER CONSIDERATION THE DISALLOWANCE U/S 14A OF THE ACT COULD AT BEST BE TO THE TUNE OF RS.27,27,934/-. APART FROM THE AFORESAID, ASSESSEE ASSERTED BEFORE THE CIT(A) THAT THERE IS A COMPOSITE BUSINESS CONSI STING OF ACTIVITIES GENERATING TAX-FREE AS WELL AS TAXABLE INCOME AND T HE BUSINESS BEING INDIVISIBLE, EXPENSES COULD NOT BE APPORTIONED BETW EEN THE TWO ACTIVITIES AND A PART OF IT BE DISALLOWED. MOREOVER, IT WAS POINT ED OUT THAT THERE IS NO EXPENDITURE HAVING DIRECT NEXUS WITH EXPENDITURE AN D THE EARNING OF THE TAX- FREE INCOME. IT WAS, FURTHER, EXPLAINED THAT EVEN IF A PORTION OF EXPENDITURE IS TO BE CONSIDERED FOR HAVING BEEN INCURRED FOR EARNI NG THE EXEMPT INCOME THEN FACTUALLY SPEAKING IT COULD BE A VERY SMALL AMOUNT LIKE EMPLOYEE COST, CONVEYANCE EXPENDITURE INCURRED FOR DEPOSITING THE DIVIDEND CHARGES IN THE BANK, ETC. . FOR ALL THE ABOVE REASONS, ASSESSEE ASSAILED THE ACTION OF THE ASSESSING OFFICER IN COMPUTING THE DISALLOWANCE U/S 14A OF THE ACT R.W. RULE 8D OF THE RULES OF RS.1,05,46,918/- AS AGAINST RS.5 ,00,000/- DETERMINED BY THE ASSESSEE IN ITS COMPUTATION OF INCOME. 5. THE CIT(A) HAS DISMISSED THE APPEAL OF THE ASSES SEE AND HAS INSTEAD UPHELD THE DISALLOWANCE MADE BY THE ASSESSING OFFIC ER. FIRSTLY, AS PER THE CIT(A), THE ASSESSING OFFICER IN PARA 4.1 OF THE AS SESSMENT ORDER HAS DERIVED HER SATISFACTION IN RESPECT OF THE INCORRECTNESS OF THE DISALLOWANCE COMPUTED BY THE ASSESSEE U/S 14A OF THE ACT. SECONDLY, AS P ER THE CIT(A), THE ASSESSING OFFICER WAS JUSTIFIED IN APPLYING RULE 8D OF THE RULES AS THE SAME WAS MANDATORY FROM ASSESSMENT YEAR 2008-09. FOR TH E SAID REASONS, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER HAS BEEN RETAINED. NOT BEING SATISFIED WITH THE ORDER OF THE CIT(A), ASSESSEE IS IN FURTHER APPEAL BEFORE US. ITA NO.1733/PN/2012 A.Y. 2008-09 6. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS VEHEMENTLY ARGUED THAT THE CIT(A) ERRED IN CONFIRMING THE DISA LLOWANCE MADE BY THE ASSESSING OFFICER WHEN IT WAS APPARENT THAT THE ASS ESSING OFFICER HAS NOT RECORDED ANY SATISFACTION IN THE ASSESSMENT ORDER A BOUT THE INCORRECTNESS OF THE COMPUTATION OF DISALLOWANCE MADE BY THE ASSESSE E. IT WAS, FURTHER, CANVASSED THAT RECORDING OF SUCH SATISFACTION IN TE RMS OF SECTION 14A(2) OF THE ACT WAS MANDATORY AS PER LAW LAID DOWN BY THE HONB LE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. V S. DCIT, 328 ITR 81 (BOM). THE LEARNED COUNSEL HAS POINTED OUT THAT DU RING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESSEE HAD FURNISHED THE REASONS AND THE JUSTIFICATION FOR THE DISALLOWANCE OF RS.5,00,000/- COMPUTED BY THE ASSESSEE IN TERMS OF SECTION 14A OF THE ACT AND THE SUBMISSIONS OF THE ASSESSEE HAVE BEEN PARTLY ACCEPTED, INASMUCH AS THE ASSESSING OFF ICER HAS ACCEPTED THE PLEA OF THE ASSESSEE THAT THERE WAS NO INTEREST EXP ENDITURE INCURRED IN RELATION TO THE EXEMPT INCOME AS THERE WAS NO DISALLOWANCE M ADE OUT OF INTEREST EXPENDITURE AS PER CLAUSE (II) OF SUB-RULE (2) OF R ULE 8D OF THE RULES. THE LEARNED COUNSEL POINTED OUT THAT NO REASON HAS BEEN ADVANCED BY THE ASSESSING OFFICER AS TO WHY HE HAS REJECTED THE ASS ESSEES CLAIM OF THE DISALLOWANCE OF RS.5,00,000/- U/S 14A OF THE ACT. FURTHER, EXPLAINING THE FACTUAL POSITION A REFERENCE WAS MADE TO PARA 4.3.1 OF THE ORDER OF THE CIT(A) WHEREIN IS REPRODUCED THE EXPLANATION FURNISHED BY THE ASSESSEE. ON THAT BASIS IT IS SOUGHT TO BE MADE OUT THERE WAS NO FRES H INVESTMENTS MADE DURING THE YEAR IN SHARES WHICH WOULD RESULT IN EXEMPT INC OME. THE SAID PROCEEDS OF MUTUAL FUNDS WERE INVESTED IN BUYING OF DEBENTURES, WHICH IN ANY CASE RESULTED IN TAXABLE INTEREST INCOME. IT WAS, THUS, POINTED OUT THAT ALL THE INVESTMENTS WHICH HAVE YIELDED EXEMPT INCOME HAVE B EEN MADE IN THE PAST YEAR AND THERE WAS NO FRESH INVESTMENTS MADE AND TH EREFORE IT WOULD SHOW THAT THE ONLY EXPENDITURE WHICH CAN BE RELATABLE TO SUCH INCOME WOULD ONLY RELATE TO THE ACTIVITY OF DEPOSIT OF DIVIDEND CHEQU ES OR OTHER SMALL OVERHEADS, ITA NO.1733/PN/2012 A.Y. 2008-09 ETC. . FOR THAT PURPOSE THE DISALLOWANCE OF RS.5,00,000/ - MADE BY THE ASSESSEE WAS SUFFICIENT. 7. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE APPEARING FOR THE REVENUE HAS POINTED OUT THAT THE CIT(A) COR RECTLY INTERFERED THAT THE REQUIRED SATISFACTION ABOUT THE IN-CORRECTNESS OF T HE ASSESSEES CLAIM WAS DERIVED BY THE ASSESSING OFFICER. IN THE ALTERNATI VE, THE LEARNED DEPARTMENTAL REPRESENTATIVE POINTED OUT THAT IN THE PRESENT CASE NO SEPARATE ACCOUNTS HAVE BEEN MAINTAINED FOR THE EARNING OF THE EXEMPT INCOME AND THEREFORE THERE IS A IMPLIED SATISFACTION CONTEMPLATED U/S 14 A(2) OF THE ACT. ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, THE COM PUTATION OF DISALLOWANCE BY INVOKING RULE 8D OF THE RULES IN THE PRESENT CAS E IS QUITE JUSTIFIED. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. SECTION 14A OF THE ACT CONTEMPLATES THAT FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITUR E INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT. SUB-SECTION (2) OF SECTION 14A OF THE ACT PRE SCRIBES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE I NCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, SUCH PRESCRIBED METHOD BEING CONTAINED IN RULE 8D OF THE RULES. HOWEVER, THE AFORESAID EMPOWERMEN T OF THE ASSESSING OFFICER TO INVOKE APPLICATION OF RULE 8D OF THE RUL ES IS SUPERSCRIBED BY A CONDITION CONTAINED IN SUB-SECTION (2) OF SECTION 1 4A OF THE ACT WHICH IS TO THE EFFECT THAT THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED 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 DISALLOWANCE U/S 14A OF THE AC T IS NEITHER AUTOMATIC AND NOR IS TRIGGERED MERELY BECAUSE ASSESSEE HAS EARNED AN EXEMPT INCOME. THE ITA NO.1733/PN/2012 A.Y. 2008-09 INVOKING OF RULE 8D OF THE RULES IS PERMISSIBLE ONL Y WHEN THE ASSESSING OFFICER RECORDS THE SATISFACTION IN REGARD TO THE INCORRECT NESS OF THE CLAIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSE SSEE. IN OTHER WORDS, SECTION 14A(2) OF THE ACT ENVISAGED A CONDITION PRE CEDENT FOR INVOKING RULE 8D OF THE RULES AND COMPUTING DISALLOWANCE THEREOF ONL Y IF THE ASSESSING OFFICER RECORDS THAT HE IS NOT SATISFIED WITH THE CORRECTNE SS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE, HAVING REG ARD TO THE ACCOUNT OF THE ASSESSEE. IN THIS CONTEXT, IT WOULD BE APPROPRIATE TO REFER TO THE FOLLOWING OBSERVATIONS OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (SUPRA) :- 70. NOW, IN DEALING WITH THE CHALLENGE IT IS NECESSARY TO ADVERT TO THE POSITION THAT SUB-SECTION (2) OF SECTION 14A PRESCR IBES A UNIFORM METHOD FOR DETERMINING THE AMOUNT OF EXPENDITURE IN CURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME ONLY IN A SITUATION WHERE THE ASSESSING OFFICER, HAVING REGAR D TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. IT, THEREF ORE, MERITS EMPHASIS THAT SUB-SECTION (2) OF SECTION 14A DOES NOT AUTHO RIZE OR EMPOWER THE ASSESSING OFFICER TO APPLY THE PRESCRIBED METHOD I RRESPECTIVE OF THE NATURE OF THE CLAIM MADE BY THE ASSESSEE. THE ASSE SSING OFFICER HAS TO FIRST CONSIDER THE CORRECTNESS OF THE CLAIM OF T HE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE SATISFA CTION OF THE ASSESSING OFFICER HAS TO BE OBJECTIVELY ARRIVED AT ON THE BASIS OF THOSE ACCOUNTS AND AFTER CONSIDERING ALL THE RELEVANT FAC TS AND CIRCUMSTANCES. THE APPLICATION OF THE PRESCRIBED ME THOD ARISES IN A SITUATION WHERE THE CLAIM MADE BY THE ASSESSEE IN R ESPECT OF EXPENDITURE WHICH IS RELATABLE TO THE EARNING OF IN COME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IS FOUN D TO BE INCORRECT. IN SUCH A SITUATION A METHOD HAD TO BE DEVISED FOR APP ORTIONING THE EXPENDITURE INCURRED BY THE ASSESSEE BETWEEN WHAT I S INCURRED IN RELATION TO THE EARNING OF TAXABLE INCOME AND THAT WHICH IS INCURRED IN RELATION TO THE EARNING OF NON-TAXABLE INCOME. AS A MATTER OF FACT, THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL, 2006, AND THE CENTRAL BOARD OF DIRECT TAXES CIRCULAR DATED DE CEMBER 28, 2006, STATE THAT SINCE THE EXISTING PROVISIONS OF SECTION 14A DID NOT 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 DEPARTMENT ON THE METHOD OF DETERMINING SUCH EXPENDITURE. IT WAS IN THIS BACKGR OUND THAT SUB- SECTION (2) WAS INSERTED SO AS TO PROVIDE A UNIFORM METHOD APPLICABLE WHERE THE ASSESSING OFFICER IS NOT SATISFIED WITH T HE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. SUB-SECTION (3) CLARIFIES TH AT THE APPLICATION OF THE METHOD WOULD BE ATTRACTED EVEN TO A SITUATION W HERE THE ASSESSEE 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 EXPENDITURE INCURRED IN RELATION TO THE ITA NO.1733/PN/2012 A.Y. 2008-09 EARNING OF NON-TAXABLE INCOME BY ADOPTION OF THE PR ESCRIBED METHOD. THE INVOCATION OF THE POWER IS MADE CONDITIONAL ON THE OBJECTIVE SATISFACTION OF THE ASSESSING OFFICER IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNT S OF THE ASSESSEE. WHEN A STATUTE POSTULATES THE SATISFACTION OF THE A SSESSING OFFICER 'COURTS WILL NOT READILY DEFER TO THE CONCLUSIVENES S OF AN EXECUTIVE AUTHORITY'S OPINION AS TO THE EXISTENCE OF 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 OFFICER HAS TO BE ARRIVED AT IN GOOD FAITH ON RELEVANT CONSIDERATIONS. THE ASSESSING OFFICER MUST FURNISH TO THE ASSESSEE A REASONABLE OPPORTUNITY TO SHOW CAUSE ON THE CORRECT NESS 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 ASSES SEE, HE MUST RECORD REASONS FOR HIS CONCLUSION. THESE SAFEGUARDS WHICH ARE IMPLICIT IN THE REQUIREMENTS OF FAIRNESS AND FAIR PROCEDURE UNDER ARTICLE 14 MUST BE OBSERVED BY THE ASSESSING OFFICER WHEN HE A RRIVES AT HIS SATISFACTION UNDER SUB-SECTION (2) OF SECTION 14A. AS WE SHALL NOTE SHORTLY HEREAFTER, SUB-RULE (1) OF RULE 8D HAS ALS O INCORPORATED THE ESSENTIAL REQUIREMENTS OF SUB-SECTION (2) OF SECTI ON 14A BEFORE 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 ITA NO.1733/PN/2012 A.Y. 2008-09 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 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. 10. IN THE AFORESAID BACKGROUND, NOW, WE MAY EXAMIN E THE FACTS OF THE PRESENT CASE. IN THIS CASE, ASSESSEE HAS EARNED BY WAY OF DIVIDENDS A SUM OF RS.5,45,58,685/-, WHICH IS EXEMPT U/S 10(38) OF THE ACT AND THUS THE SAME DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T. IN THE COMPUTATION OF INCOME, ASSESSEE HAVING REGARD TO SECTION 14A OF TH E ACT, DETERMINED THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME AT RS.5,00,000/-. THE ASSESSING OFFICER HAS NOT FOUND IT ACCEPTABLE A ND HAS INSTEAD DETERMINED THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOM E BY APPLYING RULE 8D OF THE RULES. OSTENSIBLY, THE ACTION OF THE ASSESSING OFFICER CANNOT BE UPHELD UNLESS HE HAS COMPLIED WITH THE PRE-REQUISITE OF IN VOKING RULE 8D OF THE RULES, NAMELY, RECORDING OF AN OBJECTIVE SATISFACTION WITH REGARD TO THE CLAIM OF THE ASSESSEE THAT AN EXPENDITURE OF RS.5,00,000/- HAS B EEN INCURRED IN RELATION TO THE EXEMPT INCOME, IS INCORRECT. IN ORDER TO EXAMI NE THE AFORESAID COMPLIANCE WITH THE PRE-CONDITION, WE HAVE PERUSED THE PARA 4 TO 4.2 OF THE ASSESSMENT ORDER AND FIND THAT NO REASONS HAVE BEEN ADVANCED A S TO WHY THE DISALLOWANCE DETERMINED BY THE ASSESSEE WAS FOUND T O BE INCORRECT, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE ONLY P OINT MADE BY THE ASSESSING OFFICER IS TO THE EFFECT THAT THE SAID DISALLOWANCE WAS NOT ACCEPTABLE. IN-FACT, WE FIND THAT THE ASSESSEE MADE DETAILED SUBMISSIONS TO THE ASSESSING OFFICER, WHICH HAVE BEEN REPRODUCED B Y THE CIT(A) IN PARA ITA NO.1733/PN/2012 A.Y. 2008-09 3.2.1 OF HIS ORDER. AS PER THE ASSESSEE, THE DETER MINATION OF DISALLOWANCE U/S 14A OF THE ACT OF RS.5,00,000/- WAS BASED ON THE EM PLOYEE COSTS AND OTHER COSTS INVOLVED IN CARRYING OUT THIS ACTIVITY. FUR THER, ASSESSEE ALSO EXPLAINED THAT THE SHARES WHICH HAVE YIELDED EXEMPT INCOME WE RE ACQUIRED LONG BACK OUT OF OWN FUNDS AND NO BORROWINGS WERE UTILIZED. T HE MUTUAL FUND INVESTMENTS WERE CLAIMED TO BE ALSO MADE OUT OF SUR PLUS FUNDS. IT WAS SPECIFICALLY CLAIMED THAT NO FRESH INVESTMENTS HAVE BEEN MADE DURING THE YEAR UNDER CONSIDERATION IN SHARES YIELDING EXEMPT INCOM E. ALL THE AFORESAID POINTS RAISED BY THE ASSESSEE HAVE NOT BEEN ADDRESSED BY T HE ASSESSING OFFICER AND THE SAME HAVE BEEN BRUSHED ASIDE BY MAKING A BLAND STATEMENT THAT THE DISALLOWANCE IS NOT ACCEPTABLE . THEREFORE, IN OUR VIEW, IN THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT RECORDED ANY OBJECTIV E SATISFACTION IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, WHICH IS MANDATORILY REQUIRED IN TERMS OF SECTION 14A(2) OF THE ACT AND THEREFORE HI S ACTION OF INVOKING RULE 8D OF THE RULES TO COMPUTE THE IMPUGNED DISALLOWANCE I S UNTENABLE. ACCORDINGLY, THE ORDERS OF THE AUTHORITIES BELOW AR E SET-ASIDE ON THIS ASPECT AND THE ASSESSING OFFICER IS DIRECTED TO RETAIN THE DISALLOWANCE U/S 14A OF THE ACT TO THE EXTENT OF RS.5,00,000/-, AS RETURNED BY THE ASSESSEE. 11. BEFORE PARTING, WE MAY REFER TO THE OBJECTION O F THE LEARNED DEPARTMENTAL REPRESENTATIVE, WHICH IS TO THE EFFECT THAT SINCE ASSESSEE WAS NOT MAINTAINING SEPARATE ACCOUNTS WITH REGARD TO TH E ACTIVITY OF EARNING EXEMPT INCOME, THE SATISFACTION CONTEMPLATED U/S 14 A OF THE ACT BE CONSIDERED AS IMPLIED. IN OUR CONSIDERED OPINION, THE AFORESAID OBJECTION IS CONTRARY TO HOW THE IMPLICATIONS OF SUB-SECTION (2) OF SECTION 14A OF THE ACT HAVE BEEN UNDERSTOOD AND EXPLAINED BY THE HONBLE B OMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. ( SUPRA) AND ALSO BY THE HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVE STMENT LTD. (SUPRA). ITA NO.1733/PN/2012 A.Y. 2008-09 12. IN CONCLUSION ON THE BASIS OF THE AFORESAID DIS CUSSION, WE HOLD THAT THE LOWER AUTHORITIES WERE NOT JUSTIFIED IN ENHANCING T HE DISALLOWANCE U/S 14A OF THE ACT TO RS.1,05,46918/- AGAINST RS.5,00,000/- DI SALLOWED BY THE ASSESSEE COMPANY IN ITS RETURN OF INCOME. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED, AS ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH JANUARY, 2014. SD/- SD/- (SHAILENDRA KUMAR YADAV) (G . S. PANNU) JUDICIAL MEMBER ACCOUNT ANT MEMBER PUNE, DATED : 30 TH JANUARY, 2014 SUJEET 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