LAUREL SECURITIES PVT LTD., Kolkata V. I.T.O Wd - 6(2),Kol., Kolkata

ITA 1849/KOL/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 78385 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 7 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2014
• Appeal Filed By: Assessee
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 14-12-2012
• Court: TRIBUNAL
• Department Lawyers: SABOORUL HASAN USMANI JCITSR
• Assessee Lawyers: GIRISH SHARMA
• Keywords: Earning of tax free income; Retrospective amendment; Question of law; Onus to prove
• Section: 80HHC; 14A; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH A , KOLKATA [BEFORE HONBLE SRI P.K.BANSAL, AM & HONBLE SRI MAHAVIR SINGH, JM] ITA NO.1849/KOL/2012 ASSESSMENT YEAR : 2009-10 ( APPELLANT ) - (RESPONDENT) LAUREL SECURITIES PVT. LTD., I.T.O., WARD-6(2) KOLKATA -VERSUS- KOLKATA (PAN:AAACL 4545 J) FOR THE APPELLANT: SHRI GIRISH SHARMA, FCA FOR THE RESPONDENT: SHRI SABOORUL HASAN USMANI, JCIT,SR.DR DATE OF HEARING : 24.07.2014 DATE OF PRONOUNCEMENT : 24.07.2014. / ORDER PER SHRI P.K.BANSAL, AM THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF LD. CIT(A)-VI, KOLKATA DATED 15.01.2012 BY TAKING THE FOLLOWING E FFECTIVE GROUNDS : 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CA SE THE LD. CIT(A) ERRED IN DISALLOWING RS.32,89,321/- AS PER RULE 8D READ WITH SECTION 14A OF THE INCOME TAX ACT, 1961. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE LD.COMMISSIONER (APPEALS)ERRED IN SETTING ASIDE THE CASE TO A.O. FOR CALCULATING DISA LLOWANCE UNDER SECTION 94(7) OF THE INCOME TAX ACT, 1961 ON EARNING OF DIVIDEND INCOME ON STOCK IN TRADE IN ADDITION TO DISALLOWANCE MADE ABOVE IN POINT NO.1. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE LD. COMMISSIONER (APPEALS) ERRED IN SETTING ASIDE THE CASE TO A.O. FOR CALCULATING DISA LLOWANCE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 ON EARNING OF DIVIDEND INCOME ON STOCK IN TRADE @ 10% IN ADDITION TO DISALLOWANCE MADE ABOVE IN POINT NO.1. 2. GROUND NOS. 1 TO 3 RELATE TO THE DISALLOWANCE M ADE U/S 14A OF THE I.T.ACT. THE AO NOTED THAT THE ASSESSEE HAS INCOME FROM BUSINESS OF SHARE TRADING AS WELL AS DIVIDEND INCOME DURING THE YEAR AND HE ALSO NOTED T HAT THE ASSESSEE HAS RECEIVED DIVIDEND OF RS.54,64,777/- ON INVENTORY OR STOCK OF TRADING SHARE AND RS.25,27,897/- ON SHARES AS WELL AS MUTUAL FUND LYING IN INVESTMEN T. THE ASSESSEE OFFERED DISALLOWANCE OF RS.3,39,802/- IN ITS COMPUTATION OF INCOME U/S 14A OF THE ACT. THE AO ASKED FOR FURTHER EXPLANATION OF THE ASSESSEE BU T HE REJECTED THE SUBMISSIONS OF THE ITA NO. 1849/KOL/2012 LAUREL SECURITIES PVT. LTD.,KOLKATA A.YR.2009-10 2 ASSESSEE BY OBSERVING THAT HE WAS NOT SATISFIED IN RESPECT OF DISALLOWANCE MADE AND OFFERED U/S 14A OF THE ACT. THEREFORE HE COMPUTED T HE DISALLOWANCE AS PER RULE 8D OF IT RULES AT RS.1,60,35,504/-. 3. THE ASSESSEE WENT IN APPEAL BEFORE CIT(A). THE C IT(A)CONFIRMED THE DISALLOWANCE IN RESPECT OF DIVIDEND INCOME WHICH TH E ASSESSEE EARNED FROM INVENTORY AND STOCK AND MUTUAL FUND AS INVESTMENT BUT IN RESP ECT OF THE DIVIDEND EARNED ON STOCK IN TRADE HE RESTORED THE MATTER TO THE FILE O F AO BY HOLDING AS UNDER :- V) THE EXPENDITURE INCURRED ON EARNING OF DIVIDEND INCOME ON STOCK IN TRADE WILL BE ESTIMATED @ 10% OF THE DIVIDEND INCOME (EARNED ON S TOCK IN TRADE ONLY). THE APPELLANT WILL SUBMIT THE INFORMATION TO THE ASSESSING OFFICE R WHO WILL VERIFY THE SAME AND THEN CALCULATE THE DISALLOWANCE ACCORDINGLY. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y CONSIDERED THE SAME. WE NOTED THAT IN THIS CASE THE ASSESSEE WHILE COMPUTIN G THE TAXABLE INCOME HAS DISALLOWED A SUM OF RS.3,39,802/- U/S 14A OF THE IT ACT. THE A O DID NOT AGREE WITH THE ASSESSEE BUT WITHOUT RECORDING HIS SATISFACTION WITH REFEREN CE TO THE ACCOUNTS OF THE ASSESSEE AND HOW HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE IN RELATION TO THE DIVIDEND INCO ME APPLIED RULE 8D OF IT RULES AND COMPUTED THE DISALLOWANCE IN ACCORDANCE WITH RULE 8 D. SECTION 14A(2) REQUIRES THE AO TO GIVE A FINDING IN RESPECT OF ITS NON SATISFAC TION FOR INCORRECT CLAIM OF THE ASSESSEE WITH REFERENCE TO THE BOOKS OF ACCOUNT. TH E AO, IN OUR OPINION, CANNOT DIRECTLY APPLY RULE 8D. OUR AFORESAID VIEW IS DULY SUPPORTED BY THE DECISION OF ITAT PANAJI BENCH IN ITA NO.72&85/PNJ/2012 IN THE CASE OF SESA GOA LTD, PANAJI,GOA LTD., PANAJI,GOA VS JCIT IN WHICH PANAJI BENCH OF THIS TRIBUNAL VIDE ITS ORDER DATED 08.03.2013 WHEREIN THE UNDERSIGNED WAS THE AUTHOR H AS HELD AS UNDER :- 14. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS ALONG WITH THE ORDER OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE T HROUGH VARIOUS CASE LAWS AND THE PROVISIONS OF THE IT ACT IN THIS REGARD. THE ISSUE INVOLVED BEFORE US RELATE TO THE DISALLOWANCE MADE BY THE AO BY APPLYI NG THE PROVISIONS OF SEC.14A OF THE IT ACT READ WITH RULE 8D OF THE IT R ULES. SEC.14A WAS INSERTED BY THE FINANCE ACT, 2001 W.E.F. 1.4.1962. ORIGINALL Y THIS SEC. PROVIDES THAT IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE NO DEDUC TION SHALL BE ALLOWED IN RESPECT OF THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. SUBSEQUENTLY, BY FINANCE ACT, 2002 WITH RETROSPECTIVE EFFECT FROM 11/5/2001 PROVISO WAS ADDED WHICH STATES THAT THIS SEC. SHALL NOT EMPOWER THE AO EITHER TO RE- ITA NO. 1849/KOL/2012 LAUREL SECURITIES PVT. LTD.,KOLKATA A.YR.2009-10 3 ASSESS OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING THE REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE 1/4/2001. WITH EFFECT FROM 1/4/2007 BY FINANCE ACT, 2006 SUB-SEC. (2) EMPOWERS THE AO T O DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH THE METHOD AS M AY BE PRESCRIBED. SUCH POWER IS TO BE EXERCISED IF THE AO HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE MENTIONED IN SUB-SEC.(1) . BEFORE APPLYING RULE 8D, IT IS APPARENT THAT THE AO MUST BE SATISFIED WI TH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. SUCH SATISFACTION IS AN OBJECTIVE SATISFACTION THAT IT H AS TO BE JUDICIOUS AND BASED ON THE MATERIAL ON RECORD. IT CANNOT BE AN IMPRESSION THAT IT IS MUCH MORE THAN THE GOSSIP OR HEARSAY, IT MEANS JUDGMENT OR BELIEF THAT IT IS A BELIEF OR A CONNECTION RESULTING FROM WHAT ONE THINKS ON A PART ICULAR QUESTION. IT MUST BE BASED ON THE REASONS AND GROUND AS SEEMS GOOD TO HI M AND WHILE MAKING SUCH SATISFACTION, THE AO MUST GIVE REGARD TO THE A CCOUNTS OF THE ASSESSEE. HE MUST RECORD DEFICIENCY IN THE ACCOUNTS WITH REGA RDS TO THE CLAIM OF THE ASSESSEE. SUB-SEC.(3) PROVIDES THAT PROVISIONS OF SUB-SEC.(2) SHALL ALSO APPLY WHERE ASSESSEE CLAIMS THAT NO EXPENDITURE HAD BEEN INCURRED IN RELATION TO INCOME NOT FORMING PART OF THE TOTAL INCOME. THIS I S NOT THE CASE OF THE ASSESSEE AS IN THE CASE OF THE ASSESSEE, ASSESSEE H IMSELF ESTIMATED THE EXPENSES RELATING TO THE EXEMPT INCOME AND DISALLOW ED THE SAME. RULE 8D WAS INSERTED BY GAZETTE NOTIFICATION DATED 24/3/200 8 IN VIEW OF THE POWER CONFERRED UNDER SUB-SEC (2). THIS RULE PRESCRIBES THE METHOD FOR COMPUTING THE EXPENDITURE INCURRED IN RELATION TO THE INCOME NOT FORMING PART OF THE TOTAL INCOME. THIS IS AN UNDISPUTED FACT THAT IN THIS CA SE, THE ASSESSEE HAS INVESTED IN DEBTS MUTUAL FUNDS. THE ASSESSEE COMPUT ED DISALLOWANCE U/S 14A(2) AT RS.25,78,156/- AND DISALLOWED THE SAME, W HILE COMPUTING ITS TOTAL INCOME. THE WORKING OF THE SAID DISALLOWANCE CLAIM ED BY THE ASSESSEE IS GIVEN HEREIN ABOVE IN THE SUBMISSIONS MADE BY THE A SSESSEE. THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE ESPECIALLY THE EXPLANATION OF THE ASSESSEE THAT NO ADMINISTRATIVE EXPENDITURE INCURRED ON EARNING THE DIVIDEND INCOME. CONSIDERING THE MAGN ITUDE OF THE INVESTMENTS AND THE DIVIDEND INCOME RECEIVED, THE AO WAS OF THE VIEW THAT THE DISALLOWANCE MADE BY THE ASSESSEE U/S 14A OF THE IT ACT TOWARDS THE ADMINISTRATIVE EXPENDITURE IS LOW ON COMPARING THE MAGNITUDE OF PURCHASE AND SALES MADE BY THE ASSESSEE AND THE INVESTMENTS OF LARGE MAGNITUDE CANNOT BE MADE WITHOUT PROPER ANALYSIS OF THE MARKE T CONDITION/STOCK MOVEMENT ETC. THE REVENUE WAS OF THE OPINION, THAT THE ASSESSEE HAS WORKED OUT THE ADMINISTRATIVE EXPENDITURE AND HAD N OT CONSIDERED ALL THE ADMINISTRATIVE EXPENDITURE. BOTH THE PARTIES BEFOR E US VEHEMENTLY RELIED ON THE DECISION OF GODREJ BOYCE MFG CO. LTD. VS DCIT 3 28 ITR 81 (MUM). 15. WE HAVE GONE THROUGH THIS DECISION AND WE NOTED THAT IN THIS CASE, THE ASSESSEE CLAIMED EXEMPTION IN RESPECT OF DIVIDEND I NCOME OF 34.34 CRORES U/S 10(33). THE AO ISSUED NOTICES FOR DISALLOWANC E OF INTEREST U/S 14A OF THE IT ACT. THE EXPLANATION OF THE ASSESSEE WAS THAT (I) 95% OF THE SHARES WERE BONUS SHARES FOR WHICH NO COST WAS INCURRED; (II) N O INVESTMENT IN SHARES WAS MADE IN THE CURRENT YEAR AND NO DISALLOWANCE WAS MA DE IN EARLIER YEARS AND ITA NO. 1849/KOL/2012 LAUREL SECURITIES PVT. LTD.,KOLKATA A.YR.2009-10 4 (III) THERE WERE SUFFICIENT INTEREST FREE FUNDS AVA ILABLE IN THE FORM OF SHARE CAPITAL, RESERVES ETC. WHICH WERE MORE THAN INVESTM ENT IN SHARES. THE AO WAS NOT SATISFIED WITH THE EXPLANATION OF THE ASSES SEE AND HE MADE DISALLOWANCE U/S 14A ON PRORATA BASIS. THE CIT(A) FOLLOWING HIS ORDERS FOR EARLIER YEARS, ACCEPTED THE APPEAL OF THE ASSESSEE . THE TRIBUNAL FOLLOWING THE DECISION OF THE SPECIAL BENCH IN THE CASE OF IT O VS DAGA CAPITAL MANAGEMENT (P) LTD 117 ITD 169 (SB) RESTORED THE M ATTER TO THE FILE OF THE AO FOR THE CONSIDERATION IN THE LIGHT OF THE PROVI SIONS OF SUB-SEC.(2) & (3) OF SEC.14A OF THE IT ACT. THE ASSESSEE, BEING AGGRIE VED, FILED APPEAL AS WELL AS WRIT PETITION CHALLENGING THE CONSTITUTIONAL VAL IDITY OF SUB-SEC. (2) & (3) AND RULE D. THE HONBLE HIGH COURT GAVE THE FOLLOWING FINDINGS; 1. THE PROVISIONS OF SEC. 14A AND RULE 8D ARE CONS TITUTIONALLY VALID. 2. THE PROVISIONS OF SUB-SEC. (2) & (3) OF SEC.14A AND RULE 8D ARE PROSPECTIVE AND NOT RETROSPECTIVE, IN NATURE AND TH EREFORE, WOULD APPLY FROM ASSESSMENT YEAR 2007-08. 3. THE BASIC OBJECT OF SEC.14A IS TO DISALLOW THE D IRECT AND INDIRECT EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME (PAGE 21). 4. THE INSERTION OF SEC.14A WAS CURATIVE AND DECLAR ATORY OF THE INTENT OF THE PARLIAMENT. THE BASIC PRINCIPLE OF TAXATION IS THAT ONLY NET INCOME, NAMELY, GROSS INCOME MINUS EXPENDITURE THAT IS TAXA BLE. EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THAT THE Y ARE RELATABLE TO THE EARNING OF TAXABLE INCOME (PAGES 22-23). THE TEST W HICH HAS BEEN ENUNCIATED IN WALLFORT FOR ATTRACTING THE PROVISION S OF SEC.14A IS THAT THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE WHICH HAS ITS RELATIONSHIP WITH THE TAX EXEMPT INCOME. ONCE THE TEST OF PROXIMATE CAUSE, BASED ON THE RELATIONSHIP OF THE EXPENDITURE WITH TAX EXEMPT INCOME IS ESTABLISHED, A DISALLOWANCE WOULD HAVE TO BE EFFECTED UNDER SECTION 14A (PAGE 28) 5. WHAT MERITS EMPHASIS IS THAT THE JURISDICTION O F THE AO TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, IN ACCORDANCE WITH T HE PRESCRIBED METHOD, ARISES IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE WHICH THE ASSESSEE CLAIMS TO HAVE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. MOREOVER, THE SATISFACTION O F THE AO HAS TO BE ARRIVED AT, HAVING REGARD TO THE ACCOUNTS OF THE AS SESSEE. HENCE, SUB- SEC (2) DOES NOT IPSO FACTO ENABLE THE AO TO APPLY THE METHOD PRESCRIBED BY THE RULES STRAIGHTAWAY WITHOUT CONSID ERING WHETHER THE CLAIM MADE BY THE ASSESSEE IN RESPECT OF THE EXPEND ITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS CORRECT. THE AO MUST, IN THE FIRST INSTANCE, DETER MINE WHETHER THE CLAIM OF THE ASSESSEE IN THAT REGARD IS CORRECT AND THE DETERMINATION MUST BE MADE HAVING REGARD TO THE ACCOUNTS OF THE A SSESSEE. THE SATISFACTION OF THE AO MUST BE ARRIVED AT ON AN OBJ ECTIVE BASIS. IT IS ONLY WHEN THE AO IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, THAT ITA NO. 1849/KOL/2012 LAUREL SECURITIES PVT. LTD.,KOLKATA A.YR.2009-10 5 THE LEGISLATURE DIRECTS HIM TO FOLLOW THE METHOD TH AT MAY BE PRESCRIBED. IN A SITUATION WHERE THE ACCOUNTS OF THE ASSESSEE F URNISH AN OBJECTIVE BASIS FOR THE AO TO ARRIVE AT A SATISFACTION IN REG ARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE OF THE EXPENDITURE WHI CH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THERE WOULD BE NO WARRANT FOR TAKING RECOUR SE TO THE METHOD PRESCRIBED BY THE RULES. FOR, IT IS ONLY IN THE E VENT OF THE AO NOT BEING SO SATISFIED THAT RECOURSE TO THE PRESCRIBED METHOD IS MANDATED BY LAW (PAGES 31-32). 6. IN THE EVENT THAT THE AO IS NOT SATISFIED WITH T HE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE, HE MUST RECORD REASONS FOR HIS CONCLUSION (PAGE-79). 7. THE EFFECT OF SEC.14A IS TO WIDEN THE THEORY OF THE APPORTIONMENT OF EXPENDITURE (PAGE 49). 8. THE EXPRESSION EXPENDITURE INCURRED; IN SEC.14 A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC ., IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (PAGE-50). 9. SUB-SECTIONS (2) & (3) OF SEC.14A ARE INTENDED T O ENFORCE AND IMPLEMENT THE PROVISIONS OF SUB-SEC (1) (PAGES 50). 10. EVEN IN THE ABSENCE OF SUB-SECTION (2) OF SEC. 14A THE AO WOULD HAVE TO APPORTION THE EXPENDITURE AND TO DISALLOW T HE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE AO WOULD H AVE TO FOLLOW A REASONABLE METHOD OF APPORTIONING THE EXPENDITURE C ONSISTENT WITH WHAT THE CIRCUMSTANCES OF THE CASE WOULD WARRANT AN D HAVING REGARD TO ALL RELEVANT FACTS AND CIRCUMSTANCES. THE SAID DECISION OF THE JURISDICTIONAL HIGH COURT IS BINDING ON US. WHILE DECIDING THIS CASE, THE DECISION OF THE HONBLE SUP REME COURT IN THE CASE OF CIT VS WALLFORT SHARES & STOCK BROKERS LTD., 233 CTR (SC) 42 WAS REFERRED TO. IN THIS DECISION, WE NOTED THAT THE HONBLE SUP REME COURT IN THAT CASE UPHELD THE VIEW OF THE HONBLE MUMBAI HIGH COURT IN THE CASE OF WALLFORT SHARES & STOCK BROKERS LTD. VS ITO 310 ITR 421. TH E HONBLE SUPREME COURT IN THIS DECISION, AT PAGE-31 OF THE ORDER HEL D AS UNDER; TO ATTRACT SEC.14A THERE HAS TO BE PROXIMATE CAUSE FOR DISALLOWANCE WHICH HAS ITS RELATIONSHIP WITH THE TAX EXEMPT. PAY BACK OR RETURN OF INVESTMENT IS NOT SUCH PROXIMATE CAUSE. HENCE, SEC. 14A IS NOT APPLICABLE IN THE PRESENT CASE. THUS, IN THE ABSENC E OF SUCH PROXIMATE CAUSE FOR DISALLOWANCE, SEC.14A CANNOT BE INVOKED. 16. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GO DREJ & BOYCE MFG. CO. LTD. VS DCIT (SUPRA) THEREFORE AT PAGE-28 HAS C LEARLY LAID DOWN THAT THERE MUST BE PROXIMATE CAUSE BASED ON THE RELATION SHIP OF THE EXPENDITURE THAT TAX EXEMPT INCOME IS ESTABLISHED, ONLY THEN A DISALLOWANCE WOULD HAVE TO BE EFFECTED U/S 14A OF THE IT ACT. THEREFORE, IN V IEW OF THE DECISION OF THE ITA NO. 1849/KOL/2012 LAUREL SECURITIES PVT. LTD.,KOLKATA A.YR.2009-10 6 JURISDICTIONAL HIGH COURT AND THE DECISION OF THE H ONBLE SUPREME COURT, WE ARE OF THE VIEW THAT SEC.14A CANNOT BE APPLIED UNLE SS THERE IS A PROXIMATE CAUSE FOR DISALLOWANCE. THE ONUS TO ESTABLISH THAT THERE IS PROXIMATE CAUSE BASED ON THE RELATIONSHIP OF THE EXPENDITURE WITH T HE EXEMPT INCOME IN OUR OPINION IS ON THE REVENUE. THUS, THE APPLICATION O F THE PROVISIONS OF SEC. (2) & (3) OF SEC.14A AND RULE 8D IS NOT AUTOMATIC IN EA CH AND EVERY CASE, WHERE THERE IS INCOME NOT FORMING PART OF THE TOTAL INCOM E. SUB-SEC. (2) & (3) ARE INTENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS OF SUB-SEC. (1). THEREFORE, IT IS NECESSARY FOR THE AO FIRST TO ASCERTAIN WHETH ER THERE IS PROXIMATE CONNECTION BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF THE TOTAL INCOME. IF SUCH PROXIMATE CONNECTION IS ESTABLISHED WITH THE EXEMPT INCOME, THE AO WOULD BE JUSTIFIED IN APPLYIN G THE PROVISIONS OF SUB- SEC (2) & (3) OF SEC.14A AND RULE 8D OF THE IT ACT, 1961. THE EXPENDITURE INCURRED U/S 14A WOULD INCLUDE DIRECT AND INDIRECT EXPENDITURE, BUT RELATIONSHIP WITH EXEMPTED INCOME MUST BE PROXIMATE . IF THERE IS MATERIAL TO ESTABLISH THAT THERE IS DIRECT NEXUS BETWEEN THE EX PENDITURE INCURRED AND THE INCOME NOT FORMING PART OF TOTAL INCOME THEN DISALL OWANCE WOULD BE JUSTIFIED EVEN WHERE THERE IS NO RECEIPT OF EXEMPTED INCOME U /S 10 IN THE YEAR UNDER CONSIDERATION IN VIEW OF THE DECISION OF SPECIAL BE NCH IN THE CASE OF CHEMINVEST LTD. 124 TTJ 577 (DEL)(SB). 17. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE N ET INCOME. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO TO BE ALLOWED ON NET BASIS I.E. GROSS RECEIPTS MINUS RELATED EXPENSES. THEREFORE, IF ANY EXPENDIT URE IS DIRECTLY RELATED TO EXEMPTED INCOME, IT CANNOT BE ALLOWED TO BE SET OFF AGAINST TAXABLE PROFIT. ON THE SAME ANALOGY, IN OUR OPINION, IF ANY EXPENDITUR E IS DIRECTLY RELATED TO TAXABLE INCOME, IT CANNOT BE ALLOWED TO BE SET OFF AGAINST THE EXEMPTED INCOME MERELY BECAUSE SOME INCIDENTAL BENEFIT HAS A RISEN TOWARDS EXEMPTED INCOME. BEFORE MAKING ANY DISALLOWANCE U/S 14A, THE AO IS REQUIRED TO RECORD A SATISFACTION, HAVING REGARD TO THE ACCOUNT S OF THE ASSESSEE, THAT CLAIM OF ASSESSEE THAT EXPENDITURE INCURRED IS NOT RELATED TO THE INCOME FORMING PART OF THE TOTAL INCOME IS INCORRECT. SUC H SATISFACTION MUST BE ARRIVED AT ON THE OBJECTIVE BASIS. HE IS ALSO REQUIRED TO RECORD THE REASONS FOR ARRIVING AT SUCH SATISFACTION. THE ASSESSING OFFI CER IN THIS CASE, WE NOTED IS NOT SATISFIED WITH THE CORRECTNESS OF THE DISALLOWA NCE MADE BY THE ASSESSEE EVEN THOUGH HE HAS ACCEPTED THE EXPLANATION OF THE ASSESSEE THAT NO INTEREST IS INCURRED WITH REGARD TO EXEMPT INCOME. HE REJECT ED THE EXPLANATION OF THE ASSESSEE THAT NO ADMINISTRATIVE EXPENDITURE INCURRE D ON EARNING DIVIDEND INCOME CONSIDERING THE MAGNITUDE OF THE INVESTMENTS AND DIVIDEND INCOME RECEIVED AND THE DISALLOWANCE ACCORDING TO HIM MADE BY THE ASSESSEE U/S 14A TOWARDS ADMINISTRATIVE EXPENDITURE IS VERY LESS . THE ASSESSING OFFICER NOWHERE POINTED OUT THE PROXIMATE CONNECTION OF OTH ER EXPENSES NOT APPORTIONED BY THE ASSESSEE FOR THE EARNING OF THE DIVIDEND INCOME. HE MERELY OBSERVED THAT THE ADMINISTRATIVE EXPENSES DI SALLOWED BY THE ASSESSEE IS VERY LESS BUT HOW THEY ARE LESS AND HOW THE OTHE R EXPENSES INCURRED BY THE ASSESSEE RELATED TO THE DIVIDEND INCOME HAS NOT BEE N BROUGHT ON RECORD. EVEN THE AO HAS NOT POINTED OUT THE EXPENSES EXCLUD ED BY THE ASSESSEE FOR DISALLOWANCE HAS PROXIMATE CONNECTION WITH DIVIDEND INCOME. IN OUR OPINION, THE ASSESSING OFFICER BEFORE REJECTING THE DISALLOW ANCE COMPUTED BY THE ASSESSEE MUST GIVE A CLEAR CUT FINDING HAVING REGAR D TO THE ACCOUNTS OF THE ITA NO. 1849/KOL/2012 LAUREL SECURITIES PVT. LTD.,KOLKATA A.YR.2009-10 7 ASSESSEE HOW THE OTHER EXPENDITURE CLAIMED BY THE A SSESSEE OUT OF NON EXEMPT INCOME IS RELATED WITH THE EXEMPT INCOME. NO DISCREPANCY IN THE CLAIM OF THE ASSESSEE WAS POINTED OUT. THE ASSESSI NG OFFICER IN OUR OPINION IN VIEW OF THE JURISDICTIONAL HIGH COURT DECISION IS B OUND TO RECORD SATISFACTION AS TO HOW THE EXPENSES CLAIMED BY THE ASSESSEE HAVE BE EN INCURRED ON EARNING DIVIDEND INCOME WERE NOT SUFFICIENT AND CORRECT. W E HAVE ALREADY HELD THAT THE ONUS TO PROVE IN THIS REGARD LIES ON THE ASSESS ING OFFICER. ALTHOUGH THE LD. DR HAD VEHEMENTLY CONTENDED AND TRIED TO BUILD UP H IS CASE BY SUBSTITUTING THE REASONS GIVEN BY THE CIT(APPEAL) IN PLACE OF TH E AO, BUT FAILED TO BRING ANY COGENT MATERIAL OR EVIDENCE IN THIS REGARD WHIC H MAY PROVE THAT THE OTHER EXPENSES CLAIMED BY THE REVENUE FOR APPORTIONMENT H AD PROXIMATE CONNECTION WITH THE EARNING OF THE DIVIDEND INCOME. IN OUR OPINION UNTIL AND UNLESS THIS IS PROVED OR ESTABLISHED BY THE REVENUE , THE ASSESSING OFFICER DOES NOT HAVE ANY POWER TO REJECT THE ACCOUNTS OF THE AS SESSEE AND TAKE THE SHELTER OF RULE 8D FOR COMPUTING THE DISALLOWANCE O UT OF THE EXEMPT INCOME. WE ARE NOT AT ALL CONVINCED WITH THE SUBMISSION OF THE LD. DR RELYING ON THE DECISION OF CIT(APPEAL) IN RESPECT OF EXPLANATION B B TO SEC. 80HHC THAT 10% OF THE RECEIPTS UNDER THE SOURCES MENTIONED THEREIN ARE DEEMED TO BE THE EXPENDITURE. THIS IN OUR OPINION WILL STRENGTHEN T HE CASE OF THE ASSESSEE AS EXPLANATION BB TO SEC. 80HHC DOES NOT RECOGNIZE AMO UNT OF THE INVESTMENT MADE IN OTHER RECEIPT TO BE THE BASIS OF COMPUTING THE EXPENDITURE BEING INCURRED FOR THE EARNING OF THAT INCOME. SIMILAR V IEWS HAVE BEEN TAKEN BY HONBLE TRIBUNAL IN THE FOLLOWING DECISIONS ALSO. IN THE CASE OF DCIT VS. JINDAL PHOTO LTD. HELD IN I .T.A.T. DELHI BENCH DATED 7.1.2011 IT WAS HELD AS FOLLOWS: NOW AS PER SECTION 14A(2) OF THE ACT, IF THE AO, H AVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INC URRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE ASSESSEES T OTAL INCOME UNDER THE ACT, THE AO SHALL DETERMINE THE AMOUNT INCURRED IN RELATION TO SUCH INCOME, IN ACCORDANCE WITH SUCH METHOD AS MAY BE PR ESCRIBED, I.E., UNDER RULE 8D OF THE I.T. RULES. HOWEVER, IN THE P RESENT CASE, THE ASSESSMENT ORDER DOES NOT EVINCE ANY SUCH SATISFACT ION OF THE AO REGARDING THE CORRECTNESS OF THE CLAIM OF THE ASSES SEE. AS SUCH, RULE 8D OF THE RULES WAS NOT APPROPRIATELY APPLIED BY TH E AO AS CORRECTLY HELD BY THE CIT(A). IT HAS NOT BEEN DONE BY THE AO THAT ANY EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE FOR E ARNING ITS DIVIDEND INCOME. MERELY, AN ADHOC DISALLOWANCE WAS MADE. T HE ONUS WAS ON THE AO TO ESTABLISH ANY SUCH EXPENDITURE. THIS ONU S HAS NOT BEEN DISCHARGED. IN CIT VS. HERO CYCLES (P&H) 323 ITR 518, UNDER SIMILAR CIRCUMSTANCES, IT WAS HELD THAT THE DISALLO WANCE U/S 14A OF THE ACT REQUIRES A CLEAR FINDING OF INCURRING OF EXPEND ITURE AND THAT NO DISALLOWANCE CAN BE MADE ON THE BASIS OF PRESUMPTIO NS. IN ACIT VS. EICHER LTD., 101 TTJ (DEL.) 369, THAT IT WAS HELD THAT THE BURDEN IS ON THE AO TO ESTABLISH NEXUS OF EXPENSES INCURRED WITH THE EARNING OF EXEMPT INCOME, BEFORE MAKING ANY DISALLOWANCE U/S 1 4A OF THE ACT. IN MARUTI UDYOG VS. DCIT, 92 ITD 119 (DEL.), IT HAS B EEN HELD THAT BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT, THE ONU S TO ESTABLISH THE NEXUS OF THE SAME WITH THE EXEMPT INCOME, IS ON THE REVENUE. IN ITA NO. 1849/KOL/2012 LAUREL SECURITIES PVT. LTD.,KOLKATA A.YR.2009-10 8 WIMCO SEEDLINGS LIMITED VS. DCIT, 107 ITD 267 (DE L.) (TM), IT HAS BEEN HELD THAT THERE CAN BE NO PRESUMPTION THAT THE ASSESSEE MUST HAVE INCURRED EXPENDITURE TO EARN TAX FREE INCOME. SIMILAR ARE THE DECISIONS IN: 1. PUNJAB NATIONAL BANK VS. DCIT, 103 TTJ 908 (DE L.); 2. VIDYUT INVESTMENT LTD., 10 SOT 284 (DEL.); AND 3. D.J. MEHTA VS. INCOME TAX OFFICER, 290 ITR 238 (MUM.) (AT) IN VIEW OF THE ABOVE, FINDING NO ERROR WITH THE OR DER OF THE CIT(A) ON THE POINT AT ISSUE, THE SAME IS HEREBY CONFIRMED. GRO UND NO.3 IS THUS REJECTED. IN THE CASE OF JINDAL PHOTO LTD. VS. DCIT HELD IN I.T.A.T. DELHI BENCH DATED 23.9.2011 IT WAS HELD AS FOLLOWS: IN THE YEAR UNDER CONSIDERATION, IT IS SEEN THAT IT IS NOT INCORRECT WHEN THE ASSESSEE CONTENDS THAT NO SATISFACTION HAS BEEN RECORDED BY THE AO REGARDING THE ASSESSEES CALCULATION BEING INCOR RECT. EVEN SO, RULE 8D OF THE RULES HAS BEEN APPLIED. THIS, IN OU R OPINION, IS NOT CORRECT. SUCH SATISFACTION OF THE ASSESSING OFFICE R IS A PRE-REQUISITE TO INVOKE THE PROVISIONS OF RULE 8D OF THE RULES. THE LEARNED CIT(A), THEREFORE, ERRED IN PARTIALLY APPROVING THE ACTION OF THE ASSESSING OFFICER. IN THE CASE OF AVSHESH MERCANTILE P. LTD. VS. DCIT IN I.T.A.T. MUMBAI BENCH (I.T. ACT NO.5779/MUM/2006 & 208/MUM/2009) IT WAS HELD AS FOLLOWS: AT THE TIME OF HEARING, THE CONTENTION RAISED BY T HE LEARNED DR IN THIS REGARD IS THAT THE APPEAL OF THE REVENUE ON THE ISS UE HAVING BEEN DISMISSED BY THE HON'BLE BOMBAY HIGH COURT MERELY O BSERVING THAT NO QUESTION ARISES, IT CANNOT BE TREATED AS A DECISION RENDERED BY THE HON'BLE HIGH COURT ON THE MERIT OF THE ISSUE WHICH IS BINDING ON THIS TRIBUNAL. WE ARE UNABLE TO ACCEPT THIS CONTENTION OF THE LEARNED DR. IT IS WELL SETTLED PROPOSITION OF JUDICIAL PRECEDENTS THAT IS APPEAL THE HON'BLE HIGH COURT CONSIDERS FACTS PERTAINING TO TH E ISSUE AND GIVES APPROVAL TO THE DECISION OF THE LOWER FORUM, THE DE CISION OF LOWER FORUM GETS MERGED WITH THE JUDGMENT AND ORDER OF THE HIGH COURT AND IT BECOMES BINDING PRECEDENT EVEN THOUGH APPROVAL TO D ECISION OF LOWER FORUM/COURT IS SUMMARILY RECORDED. SIMILAR SITUATI ON HAD ARISEN FOR CONSIDERATION BEFORE THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF NIRMA INDUSTRIES LTD. 283 ITR 402 WHEREIN THE EFFEC TS OF SUMMARY DISPOSAL OF APPEAL BY THE HIGH COURT WERE ANALYSED AND EXPLAINED BY THEIR LORDSHIPS. IT WAS CLARIFIED THAT WHILE HEARI NG AN APPEAL EVEN FOR DECIDING WHETHER SUBSTANTIAL QUESTION OF LAW ARISES OR NOT FROM THE ORDER OF THE TRIBUNAL, THE HIGH COURT DOES NOT EXER CISE EITHER THE ORIGINAL JURISDICTION OR THE JURISDICTION TO ISSUE WRITS AND THE ONLY JURISDICTION EXERCISED BY THE HIGH COURT IN THE FIR ST INSTANCE DECIDES WHETHER OR NOT SUBSTANTIAL QUESTION OF LAW ARISES F ROM THE ORDER OF THE TRIBUNAL, IT CANNOT BE SAID THAT THE HIGH COURT DOE S NOT EXERCISE THE APPELLATE POWERS OR THAT THERE IS NO DECISION ON ME RIT WHEN THE HIGH ITA NO. 1849/KOL/2012 LAUREL SECURITIES PVT. LTD.,KOLKATA A.YR.2009-10 9 COURT DISMISSES AN APPEAL HOLDING THAT NO SUBSTANTI AL QUESTION OF LAW ARISES FROM THE ORDER OF THE TRIBUNAL. IT WAS HELD THAT WHENEVER AN ORDER OF THE SUBORDINATE FORUM IS CARRIED IN APPEAL BEFORE THE HIGHER APPELLATE FORUM/COURT, OPERATIVE PART THEREOF MERGE S INTO THE JUDGMENT, DECISION OR ORDER OF THE HIGHER COURT AFTER THE CON FIRMATION, MODIFICATION OR REVERSAL, AS THE CASE MAY BE, AND THE DECISION O F THE LOWER COURT OR FORUM HAS NO INDEPENDENT EXISTENCE THEREAFTER IN RE LATION TO THE ISSUE WHICH WAS CARRIED BEFORE THE APPELLATE COURT OR FOR UM. IT WAS HELD THAT WHERE THE HIGH COURT COMES TO THE CONCLUSION THAT N O SUBSTANTIAL QUESTION OF LAW ARISES ON A PARTICULAR ISSUE, IT CA NNOT BE STATED THAT THE SUBJECT MATTER OF CONTROVERSY BETWEEN THE PARTIES H AS NOT BEEN DEALT WITH BY THE HIGH COURT. IT WAS HELD THAT WHEN THE DECISION OF THE TRIBUNAL IS AFFIRMED ON THE ISSUE BROUGHT BEFORE TH E HIGH COURT, IT IS THE DECISION OF THE HIGH COURT WHICH BECOMES OPERATIVE AND WHICH IS CAPABLE OF BEING GIVEN EFFECT TO FOR ALL INTENTS AN D PURPOSES. KEEPING IN VIEW THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF NIRMA INDUSTRIES LTD. (SUPRA), WE HAVE NO HESITATION TO H OLD THAT THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF DEL ITE ENTERPRISE LTD. (SUPRA) IS A DECISION ON MERIT WHICH IS BINDING PRE CEDENT ON US. AS THE ISSUE INVOLVED IN THE PRESENT CASES AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERETO ARE SIMILAR TO THAT OF THE CASE OF DELITE ENTERPRISE (SUPRA), WE RESPECTFULLY FOLLOW THE SAID DECISION O F THE JURISDICTIONAL HIGH COURT AND DELETE THE DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(A) ON ACCOUNT OF PREMIUM PAID BY THE ASSESSEES ON REDEMPTION OF PREMIUM NOTES (OCPN) BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. AS REGARDS THE CASE LAWS C ITED BY THE LEARNED DR, IT IS OBSERVED THAT IN NONE OF THESE CASES, THE FACTS INVOLVED WERE SIMILAR TO THE CASE OF THE PRESENT ASSESSEES IN AS MUCH AS THE INVESTMENT MADE THEREIN WAS NOT FOUND TO BE CAPABLE OF EARNING TAXABLE AS WELL AS EXEMPT INCOME WHICH WAS ACTUALLY NOT EARNED BY THE ASSESSEE IN THE RELEVANT PERIOD AS ARE THE FACTS OF THE PRESENT CASE OR THAT OF THE CASE OF DELITE ENTERPRISE (SUPRA) DECID ED BY THE HON'BLE BOMBAY HIGH COURT. ACCORDINGLY, WE DECIDE THE COMM ON ISSUE INVOLVED IN ALL THESE APPEALS IN FAVOUR OF THE ASSE SSEES FOLLOWING THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE O F DELITE ENTERPRISES (SUPRA) AND ALLOW THE APPEALS OF ALL THE ASSESSEES. 18. WE HAVE ALSO GONE THROUGH THE DECISION RELIED U PON BY THE LEARNED DR ALSO. THE DECISION OF ACIT VS CITICORP FINANCE (IND .) LTD., 108 ITD 457 (BOM.) IS NO MORE RELEVANT, IN VIEW OF THE DECISION OF THE HONBLE MUMBAI HIGH COURT IN THE CASE OF GODREJ BOYCE MFG CO. LTD. (SUP RA). THE DECISION OF SPIC VS DCIT 93 TTJ (CHENNAI) 161 IS NOT APPLICABLE TO T HE FACTS OF THE CASE. AS IN THAT CASE, THE ASSESSEE WAS REGULARLY INVESTING IN THE SHARES. THE ASSESSEE HAS NOT DISALLOWED ANY EXPENDITURE WITH REGARD TO T HE EARNING OF THE DIVIDEND INCOME. UNDER THESE FACTS, THE HONBLE TRIBUNAL HE LD THAT WHETHER TO INVEST OR NOT TO INVEST IS A VERY STRATEGIC DECISION AND TOP MANAGEMENT INVOLVE IN TAKING THE DECISIONS. THIS DECISION RELATE TO ASSESSMENT Y EAR 2000-01 MUCH PRIOR TO THE INSERTION OF PROVISION OF SEC.14A(2) OF THE IT ACT,1961. THE DECISION OF ACIT VS PREMIUM CONSOLIDATED CAPITAL TRUST 83 TTJ ( BOM.) RELATES TO ASSESSMENT YEAR 1991-92 PRIOR TO INSERTION OF 14A(2 ) HENCE WILL NOT ASSIST THE ITA NO. 1849/KOL/2012 LAUREL SECURITIES PVT. LTD.,KOLKATA A.YR.2009-10 10 REVENUE. THE OTHER DECISION RELIED ON ARE ALSO NOT APPLICABLE TO THE FACTS OF THE CASE, EXCEPT THE DECISION OF JURISDICTIONAL HIG H COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS DC IT & ANOTHER 328 ITR 81 (BOM.). IN VIEW OF OUR AFORESAID DISCUSSION AND RESPECTIVEL Y FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT & ANOTHER 328 ITR 81 (BOM), WE DELETE THE DISA LLOWANCE MADE U/S 14A R.W. RULE 8D AND ACCORDINGLY, THE GROUND TAKEN BY T HE ASSESSEE IN THIS REGARD IS ALLOWED. 4.1. RESPECTFULLY FOLLOWING THE DECISION OF ITAT, P ANAJI BENCH IN THE CASE OF SESA LTD, PANAJI, GOA (SUPRA) WE ALLOW GROUND NOS. 1 TO 3 OF ASSESSEES APPEAL 5. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE I S ALLOWED. ORDER PRONOUNCED IN THE COURT ON 24.07.2014. SD/- SD/- [MAHAVIR SINGH ] [P.K.BANSAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 24.07.2014. R.G.(.P.S.) COPY OF THE ORDER FORWARDED TO: 1. LAUREL SECURITIES PVT. LTD., 313, TODI CHAMBERS, 2, LAL BAZAR STREET, KOLKATA- 700001. 2 I.T.O., WARD-6(2), KOLKATA. 3 . CIT KOLKATA 4 . CIT(A)-VI, KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY, BY ORDER, DEPUTY /ASST. REGISTRAR , ITAT, KOLKATA BENCHES