RAJSHRI PRODUCTIONS P. LTD, MUMBAI V. ASST CIT RG 16(1), MUMBAI

ITA 2049/MUM/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 4577 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-01-2016
• Appeal Filed By: Assessee
• Bench Allotted: SMC
• Assessment Year: 2009-2010
• Appeal Filed On: 09-04-2015
• Court: TRIBUNAL
• Department Lawyers: V S JADHAVDR
• Assessee Lawyers: M C NANIWADEKAR
• Keywords: Business income; Business expenditure; Earning of tax free income
• Section: 14A

Judgement Text

, - , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES SMC, MUMBAI , ! ' , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, ITA NO.2049/MUM/2015 ASSESSMENT YEAR: 2009-10 RAJSHRI PRODUCTIONS (P) LTD. BHAVANA, 1 ST FLOOR, 422, VEER SAVARKAR MARG, PRABHADEVI, MUMBAI-400025 / VS. ACIT, RANGE-16(1), AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 / ASSESSEE / REVENUE P.A. NO. AAACR4139G $ % & / ASSESSEE BY SHRI M.C. NANIWADEKAR $ % & / REVENUE BY SHRI V.S. JADHAV-DR / DATE OF HEARING 14/01/2016 & / DATE OF ORDER: 15/01/2016 & / O R D E R THE ASSESSEE IS AGGRIEVED BY THE IMPUGNED ORDER DATED 13/01/2015 OF THE LD. FIRST APPELLATE AUTHORI TY, MUMBAI. THE ONLY GROUND ARGUED BY THE LD. COUNSEL F OR THE ASSESSEE, SHRI M.C. NANIWADEKAR, IS THAT DISALLOWAN CE OF RS.5,40,531/- U/S 14A OF THE INCOME TAX ACT, 1961 ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 2 (HEREINAFTER THE ACT) READ WITH RULE 8D OF THE RULE S BY CALCULATING AT 0.5% OF THE AVERAGE INVESTMENT. 2. DURING HEARING, THE CRUX OF ARGUMENT ADVANCED BY LD. COUNSEL FOR THE ASSESSEE, IS THAT THE ASSESS EE, SUO- MOTO, DISALLOWED THE EXPENSES OF RS.1,59,356/-, PER TAINING TO SECTION 14A OF THE ACT. IT WAS CLAIMED THAT OWN FUNDS WERE EMPLOYED FOR EARNING THE DIVIDEND INCOME. PLEA S WAS ALSO RAISED THAT WHILE MAKING THE DISALLOWANCE, THE LD. ASSESSING OFFICER HAS NOT RECORDED ANY SATISFACTION TO THE EFFECT THAT EXPLANATION OF THE ASSESSEE IS NOT COGE NT AND FURTHER THE ASSESSEE HAS NOT INDICATED AS WHAT ARE THE OTHER EXPENSES, INCURRED BY THE ASSESSEE. RELIANCE WAS PLACED UPON THE DECISION IN THE CASE OF ACIT VS BAN DEKAR BROTHERS PVT. LTD. (2015) 155 ITD 1171 (PANJI TRIBU NAL), JK INVESTORS (BOM.) LTD. VS ACIT (ITA NO.7858 AND 7851/MUM/2011) ORDER DATED 13/03/2013 AND THE A DECISION FROM HONBLE JURISDICTIONAL HIGH COURT IN CIT VS I.P. SUPPORT SERVICES INDIA (P.) LTD. (ITA NO.283/2 014) ORDER DATED 24/09/2015. ON THE OTHER HAND, THE LD. DR, SHRI V.S. JADHAV, DEFENDED THE ADDITION MADE BY THE ASSESSING OFFICER AND SUSTAINED BY THE LD. COMMISSI ONER OF INCOME TAX (APPEALS). 2. I HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACT S AND BRIEF, ARE THAT THE ASSESSEE CLAIMED BUSINESS LOSS OF RS.54,77,116/- IN ITS RETURN FILED ON 29/09/2009, ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 3 DECLARING NIL INCOME, WHICH WAS PROCESSED U/S 143(1 ) OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT) ACCE PTING THE RETURN INCOME. SUBSEQUENTLY, THE CASE OF THE AS SESSEE WAS SELECTED FOR SCRUTINY, THEREFORE, REQUIRED NOTI CES WERE ISSUED TO THE ASSESSEE. THE ASSESSEE ATTENDED THE PROCEEDINGS FROM TIME TO TIME AND FURNISHED THE DET AILS AS CALLED FOR AS IS EVIDENT FROM PARA 3 (PAGE-2) OF TH E ASSESSMENT ORDER. THE ASSESSEE WAS ASKED TO JUSTIFY THE CLAIM WITH RESPECT TO DISALLOWANCE U/S 14A, READ WI TH RULE 8D. THE ASSESSEE CLAIMED THAT SUO-MOTO DISALLOWANC E OF RS.1,59,356/- HAS BEEN MADE BY THE ASSESSEE, WHICH WAS INCURRED FOR EARNING EXEMPT INCOME. THE ASSESSEE CL AIMED THAT NO OTHER EXPENSES WERE INCURRED FOR EARNING TH E TAX FREE DIVIDEND INCOME OF RS.47,96,497/- EXCEPT THE P ORTFOLIO MANAGEMENT FEE OF RS.1,59,356/-. THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF RS.5,40,531/- MADE A T THE RATE OF 0.5% OF THE AVERAGE OF THE VALUE OF THE INV ESTMENT. IT IS NOTED THAT THE LD. ASSESSING OFFICER NEITHER RECORDED ANY SATISFACTION FOR MAKING THE DISALLOWANCE NOR IN DICATED IN HIS ORDER WITH RESPECT TO ANY OTHER EXPENSES, IF ANY, CLAIMED BY THE ASSESSEE. SO FAR AS, APPLICATION OF RULE-8D IS CONCERNED, THERE IS A FORCE IN THE SUBMISSION OF THE LD. DR, SINCE, THE ASSESSMENT YEAR INVOLVED IS 2009-10, THEREFORE, IN VIEW OF THE DECISION FROM HONBLE JUR ISDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. LTD., 328 ITR 81 (BOM.), IT IS APPLICABLE. BUT QUESTION ARISES WHETHER RULE 8D OF THE RULES CAN BE BLINDLY APPLICABLE TO THE FACTS OF THE PRESENT ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 4 APPEAL, THEREFORE, I AM EXPECTED TO ANALYZE THE TOT ALITY OF FACTS. 2.1. SO FAR AS, INVOKING PROVISIONS OF SECTION 14A (2) IS CONCERNED, THE HONBLE JURISDICTIONAL HIGH COURT, W HILE UPHOLDING THE CONSTITUTION VALIDITY OF SECTION 14A AND RULE 8D HAS OBSERVED, WITH REFERENCE TO SUB-SECTION 2 & 3 OF SECTION 14A AS UNDER:- SUB-SECTIONS (2) AND (3) OF SECTION 14A WERE INSE RTED BY AN AMENDMENT BROUGHT ABOUT BY THE FINANCE ACT OF 2006 WITH EFFECT FROM APRIL 1, 2007. UNDER SUB-SECTION (2), T HE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF EXPE NDITURE INCURRED BY AN ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. SUB-SECTION (2) WAS INSERTED SO AS TO PROVIDE A UNIFORM METHOD APPLICAB LE WHERE THE ASSESSING OFFICER IS NOT SATISFIED WITH THE COR RECTNESS OF THE CLAIM OF THE ASSESSEE. PARLIAMENT HAS PROVIDED AN A DEQUATE SAFEGUARD TO THE INVOCATION OF THE POWER TO DETERMI NE THE EXPENDITURE INCURRED IN RELATION TO THE EARNING OF NON-TAXABLE INCOME BY ADOPTION OF THE PRESCRIBED METHOD. THE IN VOCATION OF THE POWER IS MADE CONDITIONAL ON THE OBJECTIVE SATI SFACTION OF THE ASSESSING OFFICER IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THESE SAFEGUARDS WHICH ARE IMPLICIT IN THE REQUIREM ENTS OF FAIRNESS AND FAIR PROCEDURE UNDER ARTICLE 14 MUST B E OBSERVED BY THE ASSESSING OFFICER WHEN HE ARRIVES AT HIS SAT ISFACTION UNDER SUB-SECTION (2) OF SECTION 14A. SUB-RULE (1) OF RULE 8D OF ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 5 THE INCOME-TAX RULES, 1962, HAS ALSO INCORPORATED T HE ESSENTIAL REQUIREMENTS OF SUB-SECTION (2) OF SECTION 14A BEFO RE THE ASSESSING OFFICER PROCEEDS TO APPLY THE METHOD PRES CRIBED UNDER SUB-RULE (2) .. (EMPHASIS SUPPLIED) 2.3. THE SAME OPINION WAS EXPRESSED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD AND OTHERS V. CIT 247 CTR 162 WHEREIN RELIANCE WAS PLAC ED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CA SE OF CIT VS. WALFORT SHARE & STOCK BROKERS PVT. LTD 326 ITR 1 (SC) AND THE DECISION OF THE HON'BLE BOMBAY HIGH CO URT IN THE CASE OF GODREJ AND BOYCE COMPANY LTD VS. DCIT ( 328 ITR 81). THE RELEVANT PORTIONS OF THE JUDGMENT OF H ON'BLE DELHI HIGH COURT ARE AS UNDER: 29. SUB-SECTION (2) OF SECTION 14 A OF THE SAID ACT PROVIDES THE MANNER IN WHICH THE ASSESSING OFFICER IS TO DETERMI NE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HOWEVER, IF WE EXAMINE THE PROVISION CAREFULLY, WE WOULD FIND THAT THE ASS ESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDI TURE ONLY IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNT S OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, THE REQUIREMENT OF THE ASSESSING OF FICER EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXP ENDITURE INCURRED IN RELATION TO EXEMPT INCOME WOULD BE TRIG GERED ONLY IF THE ASSESSING OFFICER RETURNS A FINDING THAT HE IS NOT SATISFIED ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 6 WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF SUCH EXPENDITURE. THEREFORE, THE CONDITION PRECEDEN T FOR THE ASSESSING OFFICER ENTERING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCURRED IN RELATION TO EXEMPT I NCOME IS THAT THE ASSESSING OFFICER MUST RECORD THAT HE IS NOT SA TISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RES PECT OF SUCH EXPENDITURE. SUB-SECTION (3) IS NOTHING BUT AN OFFS HOOT OF SUB- SECTION (2) OF SECTION 14A. SUBSECTION (3) APPLIES TO CASES WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS B EEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, SU B-SECTION (2) DEALS WITH CASES WHERE THE ASSESSEE SPECIFIES A POS ITIVE AMOUNT OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT AND SUB-SECTION (3) APPLIES TO CASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDI TURE HAD BEEN INCURRED IN RELATION TO EXEMPT INCOME. IN BOTH CASES, THE ASSESSING OFFICER, IF SATISFIED WITH THE CORRECTNES S OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR N O EXPENDITURE, AS THE CASE MAY BE, CANNOT EMBARK UPON A DETERMINAT ION OF THE AMOUNT OF EXPENDITURE IN ACCORDANCE WITH ANY PRESCR IBED METHOD, AS MENTIONED IN SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT. IT IS ONLY IF THE ASSESSING OFFICER IS NO T SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, IN BO TH CASES, THAT THE ASSESSING OFFICER GETS JURISDICTION TO DETERMIN E THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID AC T IN ACCORDANCE WITH THE PRESCRIBED METHOD. THE PRESCRIB ED METHOD BEING THE METHOD STIPULATED IN RULE 8D OF THE SAID RULES. WHILE ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 7 REJECTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER WOULD HAVE TO INDICATE COGENT REASONS FOR THE SAME. RULE 8D. 30. AS WE HAVE ALREADY NOTICED, SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT REFERS TO THE METHOD OF DETERMINATI ON OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMP T INCOME. THE EXPRESSION USED IS - 'SUCH METHOD AS MAY BE PRE SCRIBED'. WE HAVE ALREADY MENTIONED ABOVE THAT BY VIRTUE OF N OTIFICATION NO.45/2008 DATED 24/03/2008, THE CENTRAL BOARD OF D IRECT TAXES INTRODUCED RULE 8D IN THE SAID RULES. THE SAI D RULE 8D ALSO MAKES IT CLEAR THAT WHERE THE ASSESSING OFFICE R, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOU S YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION T O INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT FOR SUCH PREVIOUS YEAR, THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF THE EXPENDITURE IN RELATION TO SUCH I NCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE (2) OF R ULE 8D. WE MAY OBSERVE THAT RULE 8D(1) PLACES THE PROVISIONS O F SECTION 14A(2) AND (3) IN THE CORRECT PERSPECTIVE. AS WE HA VE ALREADY SEEN, WHILE DISCUSSING THE PROVISIONS OF SUB-SECTIO NS (2) AND (3) OF SECTION 14A, THE CONDITION PRECEDENT FOR THE ASS ESSING OFFICER TO HIMSELF DETERMINE THE AMOUNT OF EXPENDIT URE IS THAT HE MUST RECORD HIS DISSATISFACTION WITH THE CORRECT NESS OF THE ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 8 CLAIM OF EXPENDITURE MADE BY THE ASSESSEE OR WITH T HE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED. IT IS ONLY WHEN THIS CONDITION PRECEDENT IS SATISFIED THAT THE ASSESSING OFFICER I S REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDABLE IN TOTAL INCOME IN THE MANNER INDICATED IN SUB-RULE (2) OF RULE 8D OF THE SAID RULES. 31.IT IS, THEREFO RE, CLEAR THAT DETERMINATION OF THE AMOUNT OF EXPENDITURE IN RELAT ION TO EXEMPT INCOME UNDER RULE 8D WOULD ONLY COME INTO PL AY WHEN THE ASSESSING OFFICER REJECTS THE CLAIM OF THE ASSE SSEE IN THIS REGARD. IF ONE EXAMINES SUB-RULE (2) OF RULE 8D, WE FIND THAT THE METHOD FOR DETERMINING THE EXPENDITURE IN RELATION TO EXEMPT INCOME HAS THREE COMPONENTS. THE FIRST COMPONENT BE ING THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME W HICH DOES NOT FORM PART OF THE TOTAL INCOME. THE SECOND COMPO NENT BEING COMPUTED ON THE BASIS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSESSEE INCURS EXPENDITURE BY WAY OF INT EREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCO ME OR RECEIPT. THE FORMULA ESSENTIALLY APPORTIONS THE AMOUNT OF EX PENDITURE BY WAY OF INTEREST [OTHER THAN THE AMOUNT OF INTERE ST INCLUDED IN CLAUSE (I)] INCURRED DURING THE PREVIOUS YEAR IN TH E RATIO OF THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, TO THE AVE RAGE OF THE TOTAL ASSETS OF THE ASSESSEE. THE THIRD COMPONENT I S AN ARTIFICIAL FIGURE - ONE HALF PERCENT OF THE AVERAGE VALUE OF T HE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART O F THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEETS OF ASSES SEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR, IT IS THE ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 9 AGGREGATE OF THESE THREE COMPONENTS WHICH WOULD CON STITUTE THE EXPENDITURE IN RELATION TO EXEMPT INCOME AND IT IS THIS AMOUNT OF EXPENDITURE WHICH WOULD BE DISALLOWED UNDER SECT ION 14A OF THE SAID ACT. IT IS, THEREFORE, CLEAR THAT IN TERMS OF THE SAID RULE, THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INC OME HAS TWO ASPECTS (A) DIRECT AND (B) INDIRECT. THE DIRECT E XPENDITURE IS STRAIGHTAWAY TAKEN INTO ACCOUNT BY VIRTUE OF CLAUSE (I) OF SUB- RULE (2) OF RULE 8D. THE INDIRECT EXPENDITURE, WHER E IT IS BY WAY OF INTEREST, IS COMPUTED THROUGH THE PRINCIPLE OF A PPORTIONMENT, AS INDICATED ABOVE, AND, IN CASES WHERE THE INDIREC T EXPENDITURE IS NOT BY WAY OF INTEREST, A RULE OF THUMB FIGURE O F ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENT, INC OME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, IS TAKEN. 41. SUB-SECTION (2) OF SECTION 14A, AS WE HAVE SEEN , STIPULATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME 'IN ACCORDANCE WITH SUCH M ETHOD AS MAY BE PRESCRIBED'. OF COURSE, THIS DETERMINATION C AN ONLY BE UNDERTAKEN IF THE ASSESSING OFFICER IS NOT SATISFIE D WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THIS PART OF SECTION 14A(2) WHICH EXPL ICITLY REQUIRES THE FULFILLMENT OF A CONDITION PRECEDENT I S ALSO IMPLICIT IN SECTION 14A(1) [AS IT NOW STANDS] AS ALSO IN ITS INITIAL AVATAR AS SECTION 14A. IT IS ONLY THE PRESCRIPTION WITH RE GARD TO THE METHOD OF DETERMINING SUCH EXPENDITURE WHICH IS NEW AND ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 10 WHICH WILL OPERATE PROSPECTIVELY. IN OTHER WORDS, S ECTION 14A, EVEN PRIOR TO THE INTRODUCTION OF SUB-SECTIONS (2) AND (3) WOULD REQUIRE THE ASSESSING OFFICER TO FIRST REJECT THE C LAIM OF THE ASSESSEE WITH REGARD TO THE EXTENT OF SUCH EXPENDIT URE AND SUCH REJECTION MUST BE FOR DISCLOSED COGENT REASONS. IT IS THEN THAT THE QUESTION OF DETERMINATION OF SUCH EXPENDITURE B Y THE ASSESSING OFFICER WOULD ARISE. THE REQUIREMENT OF A DOPTING A SPECIFIC METHOD OF DETERMINING SUCH EXPENDITURE HAS BEEN INTRODUCED BY VIRTUE OF SUB-SECTION (2) OF SECTION 14A. PRIOR TO THAT, THE ASSESSING WAS FREE TO ADOPT ANY REASONABL E AND ACCEPTABLE METHOD. 2.4. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES LTD 323 ITR 518 (P&H) HAS AL SO HELD THAT DISALLOWANCE UNDER SECTION 14A COULD NOT STAND WHERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED: HELD - DISMISSING THE APPEAL, THAT THE EXPENDITURE ON INTEREST WAS SET OFF AGAINST THE INCOME FROM INTEREST AND TH E INVESTMENT IN THE SHARES AND FUNDS WERE OUT OF THE DIVIDEND PR OCEEDS. IN VIEW OF THIS FINDING OF FACT, DISALLOWANCE UNDER SE CTION 14A WAS NOT SUSTAINABLE. WHETHER, IN A GIVEN SITUATION, ANY EXPENDITURE WAS INCURRED WHICH WAS TO BE DISALLOWED, WAS A QUES TION OF FACT. THE CONTENTION OF THE REVENUE THAT DIRECTLY O R INDIRECTLY SOME EXPENDITURE WAS ALWAYS INCURRED WHICH MUST BE DISALLOWED UNDER SECTION 14A AND THE IMPACT OF EXPE NDITURE SO INCURRED COULD NOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY NULLIFY THE MANDATE OF SECTION 14A , COULD NOT ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 11 BE ACCEPTED. DISALLOWANCE UNDER SECTION 14A REQUIRE D FINDING OF INCURRING OF EXPENDITURE AND WHERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAD BEEN INC URRED, DISALLOWANCE UNDER SECTION 14A COULD NOT STAND. CON SEQUENTLY, THE DISALLOWANCE WAS NOT PERMISSIBLE. 2.5. THE COORDINATE BENCH IN THE CASE OF JUSTICE SA M P BHARUCHA VS. ADDL. CIT IN ITA NO.3889/MUM/2011 DATE D 25.07.2012 HAS ANALYZED SIMILAR ISSUE AND CAME TO T HE FOLLOWING CONCLUSION: 5 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. SECTION 14A HAS WITHIN IT IMPLICIT NOTION OF APPORTIONMENT IN THE CASES WHERE THE EXPE NDITURE IS INCURRED FOR THE COMPOSITE/INDIVISIBLE ACTIVITIES I N WHICH TAXABLE AND NON-TAXABLE INCOME IS RECEIVED. BUT WHE N IT IS POSSIBLE TO DETERMINE THE ACTUAL EXPENDITURE IN REL ATION TO THE EXEMPT INCOME OR WHEN NO EXPENDITURE HAS BEEN INCUR RED IN RELATION TO THE EXEMPT INCOME, THEN PRINCIPLE OF AP PORTIONMENT EMBEDDED IN SECTION 14 A HAS NO APPLICATION. THE OB JECTIVE OF SECTION 14 A IS NOT ALLOWING TO REDUCE TAX PAYABLE ON THE NORMAL EXEMPT INCOME BY DEBITING THE EXPENDITURE IN CURRED TO EARN THE EXEMPT INCOME. THUS, THE EXPENSES INCURRED TO EARN EXEMPT INCOME CANNOT BE ALLOWED AND THE EXPENSES SH ALL BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATED TO THE EARNING OF TAXABLE INCOME. IF THERE IS EXPENDITURE DIRECTLY OR INDIRECTLY INCURRED IN RELATION TO EXEMPT INCOME, THE SAME CAN NOT BE CLAIMED AGAINST THE INCOME, WHICH IS TAXABLE AS IT IS HELD BY THE HON'BLE SUPREME COURT IN CASE OF COMMISSIONER O F ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 12 INCOME-TAX V. WALFORT SHARE AND STOCK BROKERS P. LT D. REPORTED IN 326 ITR 1 THAT FOR ATTRACTING THE PROVI SIONS OF SECTION 14 A, THERE SHOULD BE PROXIMATE CAUSE FOR DISALLOWANCE WHICH AS RELATIONSHIP WITH THE TAX EXE MPT INCOME. 5.1 THE EXPENDITURE INCURRED IN RELATION TO THE INC OME WHICH DOES NOT FORM PART OF TOTAL INCOME HAS TO BE DISALL OWED. HOWEVER, IT SHOULD BE PROXIMATE RELATIONSHIP BETWEE N THE EXPENDITURE AND THE INCOME, WHICH DOES NOT FORM PAR T OF TOTAL INCOME. ONCE SUCH PROXIMITY RELATIONSHIPS EXIST, TH E DISALLOWANCE IS TO BE EFFECTED. IN CASE THE ASSESSE E HAD CLAIMED THAT NO EXPENDITURE HAS BEEN INCURRED FOR E ARNING THE EXEMPT INCOME, IT WAS FOR THE ASSESSING OFFICER TO DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED ANY EXPENDITUR E IN RELATION TO INCOME WHICH DID NOT FORM PART OF TOTAL INCOME AND IF SO TO QUANTIFY THE EXTENT OF DISALLOWANCE. THUS, IN ORDER TO DISALLOW THE EXPENDITURE UNDER SECTION 14A, THERE M UST BE A LIVE NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF TOTAL INCOME. NO NOTIONAL EXPEN DITURE CAN BE APPORTIONED FOR THE PURPOSE OF EARNING EXEMPT IN COME UNLESS THERE IS AN ACTUAL EXPENDITURE IN RELATION T O EARNING THE INCOME NOT FORMING PART OF TOTAL INCOME. IF THE EXP ENDITURE IS INCURRED WITH A VIEW TO EARN TAXABLE INCOME AND THE RE IS APPARENT DOMINANT AND IMMEDIATE CONNECTION BETWEEN THE EXPENDITURE INCURRED AND TAXABLE INCOME, THEN NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A MERELY B ECAUSE SOME TAX EXEMPT INCOME IS RECEIVED BY THE ASSESSEE. ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 13 5.2 AVERTING TO THE FACTS OF THE CASE IN HAND, THE ASSESSEE HAD MADE A CLAIM THAT NO EXPENDITURE HAS BEEN INCURRED OR CLAIMED FOR EARNING THE EXEMPT INCOME. FROM THE DET AILS OF THE EXPENDITURE, IT IS CLEAR THAT THE EXPENDITURE INCUR RED AND CLAIMED BY THE ASSESSEE HAS DIRECT NEXUS WITH THE P ROFESSIONAL INCOME OF THE ASSESSEE. IT IS NOT THE CASE OF THE R EVENUE THAT THE ASSESSEE HAS USED HIS OFFICIAL MACHINERY AND ESTABL ISHMENT FOR EARNING THE EXEMPT INCOME. THEASSESSING OFFICER HAS NOT GIVEN ANY FINDING THAT ANY OF THE EXPENDITURE INCUR RED AND CLAIMED BY THE ASSESSEE IS ATTRIBUTABLE FOR EARNING THE EXEMPT INCOME. IN OTHER WORDS WHEN THE ASSESSING OFFICER H AS NOT POINTED OUT THAT CERTAIN EXPENDITURE IS NOT INCURRE D FOR EARNING THE PROFESSIONAL INCOME; BUT ARE INCURRED IN RELATI ON TO DIVIDEND INCOME OR SUCH EXPENDITURE IS INCURRED FOR INSEPARABLE AND INDIVISIBLE ACTIVITIES COMPRISING P ROFESSIONAL AS WELL AS THE ACTIVITIES ON WHICH IS EXEMPT INCOME HAS BEEN EARNED BY THE ASSESSEE, THEN IN THE ABSENCE OF ANY SUCH INSTANCE OF EXPENDITURE, FINDING OF ASSESSING OFFIC ER OR ANY MATERIAL TO SHOW THAT THE EXPENDITURE INCURRED AND CLAIMED BY THE ASSESSEE AGAINST THE TAXABLE INCOME HAS ANY REL ATION FOR EARNING THE EXEMPT INCOME, THE PROVISIONS OF SECTIO N 14A CANNOT BE APPLIED. 5.3 IN THE CASE OF SHRI PAWAN KUMAR PARAMESHWAR LAL VS. ACIT (SUPRA) THIS TRIBUNAL HAS CONSIDERED AND DECID ED AN IDENTICAL ISSUE IN PARA 4 AS UNDER: 4. AFTER HEARING THE ASSESSEE IN PERSON AND ARGUME NTS OF THE LEARNED D.R. WE ARE OF THE OPINION THAT NO DISALLOW ANCE IS ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 14 CALLED FOR UNDER SECTION 14A. OBVIOUSLY THE ASSESSE E IS MAINTAINING SEPARATE BOOKS OF ACCOUNT FOR PURPOSE O F BUSINESS AND THESE INVESTMENTS ARE IN HIS PERSONAL CAPACITY. THE A.O. ALSO HAS NOT DISALLOWED ANY EXPENDITURE OF PERSONAL NATURE OUT OF THE INCOME FROM BUSINESS OR PROFESSION IN THE CO MPUTATION OF INCOME IN THE ASSESSMENT ORDER. IN VIEW OF THIS, WE ARE OF THE OPINION THAT THE EXPENDITURE CLAIMED IN THE BUS INESS OF SHARE DEALINGS CANNOT BE CORRELATED TO THE INCOMES EARNED IN PERSONAL CAPACITY THAT TOO ON DIVIDEND, PPF INTERES T AND TAX FREE INTEREST ON RBI BONDS. IN VIEW OF THIS, WE ARE OF THE OPINION THAT ESTIMATION OF EXPENDITURE OF RS.20,000 /- OUT OF BUSINESS EXPENDITURE CLAIMED IN BUSINESS ACTIVITY C ANNOT BE CONSIDERED FOR BEING INCURRED FOR THIS EARNING OF T AX FREE INCOME OF ABOVE NATURE. IN VIEW OF THIS DISALLOWANC E SO MADE UNDER SECTION 14A OF RS.2O,OOO/- IS DELETED. NOT ON LY THAT THE CIT(A) DIRECTED THE A.O. TO CONSIDER THE ALLOWANCE INVOKING RULE 8D. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT 328 ITR 81 HA S CONSIDERED RULE 8D TO BE APPLICABLE PROSPECTIVE AND SINCE THE ASSESSMENT YEAR INVOLVED IS BEFORE THE INTRODUCTION OF SUB- SECTION (2) & (3) OF SECTION 14A, THERE IS NO QUEST ION OF DISALLOWING THE AMOUNTS INVOKING RULE8D. THEREFORE, THE CIT(A)S DIRECTION ON THIS IS SET ASIDE AND THE ADD ITIONS SO MADE BY THE A.O. IN THE COMPUTATION OF BUSINESS INC OME IS DELETED. GROUND IS CONSIDERED ALLOWED. 5.4 SIMILARLY IN CASE OF AUCHTEL PRODUCTS LTD (SUPR A), IT WAS HELD BY THIS TRIBUNAL IN PARA 15 HAS UNDER: ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 15 15. A BARE PERUSAL OF THE ABOVE PROVISIONS DISALLO WABLE AS PER RULE 8D, IF HE, IS NOT SATISFIED WITH THE CORR ECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITU RE IN RELATION TO EXEMPT INCOME. EVEN IF THE ASSESSEE CLA IMS THAT NO EXPENDITURE WAS INCURRED IN RESPECT OF EXEMPT INCOM E, THE AO IS SUPPOSED TO FOLLOW THE MANDATE OF RULE 8D IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASSESSEES CL AIM. TO PUT IT SIMPLY, THE FURTHER DISALLOWANCE U/S.14A IS CALLED FOR WHEN THE AO IS NOT SATISFIED WITH THE ASSESSEES CLAIM OF HA VING INCURRED NO EXPENDITURE OR SOME AMOUNT OF EXPENDITU RE IN RELATION TO EXEMPT INCOME. SATISFACTION OF THE AO A S TO THE INCORRECT CLAIM MADE BY THE ASSESSEE IN THIS REGARD IS SINE QUA NON FOR INVOKING THE APPLICABILITY OF RULE 8D. SUCH SATISFACTION CAN BE REACHED AND RECORDED ONLY WHEN THE CLAIM OF THE ASSESSEE IS VERIFIED. IF THE ASSESSEE PROVES BEFORE THE AO THAT IT INCURRED A PARTICULAR EXPENDITURE IN RESPECT OF EAR NING THE EXEMPT INCOME AND THE AO GETS SATISFIED, THEN THERE IS NO REQUIREMENT TO STILL PROCEED WITH THE COMPUTATION O F AMOUNT DISALLOWABLE AS PER RULE 8D. FROM THE ASSESSMENT OR DER, IT IS OBSERVED THAT THE AO SIMPLY KEPT THE ASSESSEES SUB MISSIONS ON RECORD WITHOUT APPRECIATING AS TO WHETHER THESE WERE CORRECT OR NOT. HE PROCEEDED ON THE PREMISE AS IF T HE DISALLOWANCE AS PER RULE 8D IS AUTOMATIC IRRESPECTI VE OF THE GENUINENESS OF THE ASSESSEES CLAIM IN RESPECT OF E XPENSES INCURRED IN RELATION TO EXEMPT INCOME. IT IS AN INC ORRECT COURSE ADOPTED BY THE AO. THE CORRECT SEQUENCE, IN OUR CON SIDERED OPINION, FOR MAKING ANY DISALLOWANCE U/S. 14A IS TO , FIRSTLY, EXAMINE THE ASSESSEES CLAIM OF HAVING INCURRED SOM E ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 16 EXPENDITURE OR NO EXPENDITURE IN RELATION TO EXEMPT INCOME, IF THE AO GETS SATISFIED WITH THE SAME, THEN THERE IS NO NEED TO COMPUTE DISALLOWANCE AS PER RULE 8D. IT IS ONLY WHE N THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR NO EXPENDITURE HAVIN G BEEN INCURRED IN RELATION TO EXEMPT INCOME, THAT THE MAN DATE OF RULE 8D WILL OPERATE. IN THE INSTANT CASE, THE AUTH ORITIES BELOW HAVE DIRECTLY GONE TO THE SECOND STAGE OF COMPUTING DISALLOWANCE U/S. 14A AS PER RULE 8D WITHOUT RENDER ING ANY OPINION ON THE CORRECTNESS OR OTHERWISE OF THE ASSE SSEES CLAIM IN THIS REGARD. WE, THEREFORE, SET ASIDE THE IMPUGN ED ORDER ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF AO TO RE- COMPUTE DISALLOWANCE, IF ANY, IN ACCORDANCE WITH OU R ABOVE OBSERVATIONS AFTER DULY EXAMINING THE ASSESSEES CL AIM IN THIS REGARD. 6 IN VIEW OF THE ABOVE DISCUSSION AND FACTS AND CIR CUMSTANCES OF THE CASE, WE ARE OF THE CONSIDERED OPINION THAT NO DISALLOWANCE UNDER SECTION 14A IS CALLED FOR WHEN T HE ASSESSEE HAS NOT INCURRED AND CLAIMED ANY EXPENDITURE FOR EA RNING THE EXEMPT INCOME. 2.6. SIMILAR VIEWS WERE ALSO EXPRESSED BY THE COORD INATE BENCHES IN THE CASE OF RELAXO FOOTWEARS LTD, VS. AD DL. CIT (2012) 50 SOT 102 AND PRIYA EXHIBITORS (P) LTD VS. ACIT (2012) 54 SOT 356. IN THE CASE OF RELAXO FOOTWEARS LTD, IT WAS HELD AS UNDER: ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 17 THE ASSESSING OFFICER SHOULD HAVE CONSIDERED THE C LAIM OF THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO EARNING THE EXEMPT INCOME. IF THE CLAIM WAS NOT FOUND TO BE IN CONSONANCE WITH THE FACTS ON RECORD, IT COULD HA VE BEEN REJECTED AND DISALLOWANCE COULD HAVE BEEN MADE AS P ER RULE 8D. HOWEVER, IT IS FOUND THAT THE ASSESSING OFFICER HAS NOT CONSIDERED THE CLAIM OF THE ASSESSEE AT ALL AND HE HAS STRAIGHTWAY EMBARKED UPON COMPUTING DISALLOWANCE UN DER RULE 8D. THE COMMISSIONER (APPEALS) MADE AN ASSUMPT ION THAT WHENEVER EXEMPT INCOME IS EARNED THERE WILL BE SOME EXPENDITURE INCURRED IN RELATION THERETO. SUCH PRES UMPTION CANNOT FORM THE BASIS FOR MAKING DISALLOWANCE UNDER RULE 8D. 2.7. IN THE CASE OF PRIYA EXHIBITORS (P) LTD VS. AC IT (2012) 54 SOT 356 IT WAS HELD AS UNDER: FROM THE CAREFUL STUDY OF THE OBSERVATIONS MADE BY THE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG . CO. LTD. (SUPRA), IT IS APPARENT THAT FIRST THE ASSESSI NG OFFICER HAS TO DETERMINE THE CLAIM OF THE ASSESSEE REGARDING EX PENSES WHICH NEITHER THE ASSESSING OFFICER NOR THE COMMISS IONER (APPEALS) HAS DONE IN THE INSTANT CASE. IN FACT, TH E SAID DECISION GOES AGAINST THE DEPARTMENT ITSELF IN SO F AR AS THEIR LORDSHIPS HAS HELD THAT THE ASSESSING OFFICER MUST IN THE FIRST INSTANCE DETERMINE WHETHER THE CLAIM OF THE ASSESSE E IS CORRECT AND DETERMINATION MUST BE MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE LEGISLATURE DIRECTS H IM TO FOLLOW ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 18 RULE 8D ONLY WHERE THE ASSESSING OFFICER IS NOT SAT ISFIED WITH THE CLAIM OF ASSESSEE. 2.8. ON CONSIDERATION OF THE PRINCIPLES LAID DOWN B Y VARIOUS JUDGMENTS, IT IS IMPERATIVE THAT THE ASSESSING OFFI CER CAN INVOKE RULE 8D ONLY WHEN HE RECORDS SATISFACTION IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HA VING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE CONDITI ON PRECEDENT FOR THE ASSESSING OFFICER ENTERING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCU RRED IN RELATION TO EXEMPT INCOME IS THAT THE ASSESSING OFF ICER MUST RECORD THAT HE IS NOT SATISFIED WITH THE CORRE CTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPEND ITURE. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGA RD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER HA S TO INDICATE COGENT REASONS FOR THE SAME. THEREFORE, IT IS ALL THE MORE NECESSARY THAT ASSESSING OFFICER HAS TO EXAMI NE THE ACCOUNTS OF ASSESSEE FIRST AND THEN IF HE IS NOT SA TISFIED WITH THE CORRECTNESS OF THE CLAIM, ONLY HE CAN INVO KE RULE 8D. NEITHER SUCH EXAMINATION WAS MADE NOR ANY SATISFACTION WAS RECORDED BY ASSESSING OFFICER IN T HIS CASE. IT IS NOTICED THAT THE ASSESSING OFFICER HAS NOT CO NSIDERED THE CLAIM OF THE ASSESSEE AT ALL AND HE HAS STRAIGH TWAY EMBARKED UPON COMPUTING DISALLOWANCE UNDER RULE 8D ON THE PRESUMPTION THAT THE ASSESSEE MIGHT HAVE INCURR ED SOME EXPENSES. DISALLOWANCE UNDER SECTION 14A REQUI RED FINDING OF INCURRING OF EXPENDITURE AND WHERE IT WA S FOUND ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 19 THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAD BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A COULD NOT STAND. WE NOTICE THAT ASSESSEE ITSELF DISALLOWED RS.1,59,3 56/- FOR EARNING THE INTEREST INCOME. THE ASSESSING OFFICER HAS NOT EXAMINED ANY EXPENDITURE CLAIMED IN P & L ACCOUNT S O AS TO RELATE TO EXEMPT INCOME, NOR GAVE A FINDING THAT ASSESSEE CLAIM IS NOT CORRECT FOR ANY REASON. RULE 8D CANNOT BE INVOKED DIRECTLY WITHOUT SATISFYING ABOUT THE CLAIM S OR OTHERWISE. CONSEQUENTLY, THE DISALLOWANCE WAS NOT PERMISSIBLE, THEREFORE, THE GROUND RAISED BY THE A SSESSEE IS ALLOWED. FINALLY, THE APPEAL OF THE ASSESSEE IS ALLOWED. THIS ORDER WAS PRONOUNCED IN THE OPEN IN THE PRESENCE OF LD. REPRESENTATIVE FROM BOTH SIDES AT T HE CONCLUSION OF THE HEARING ON 14/01/2016. SD/- (JOGINDER SINGH) ! ' / JUDICIAL MEMBER MUMBAI; DATED : 15/01/2016 F{X~{T? P.S / ! & $ )!*+ ,&+-* / COPY OF THE ORDER FORWARDED TO : 1. '#$%& / THE APPELLANT 2. '(%& / THE RESPONDENT. 3. ) ) * ( '#$ ) / THE CIT, MUMBAI. 4. ) ) * / CIT(A)- , MUMBAI ITA NO.2049/MUM/2015 RAJSHRI PRODUCTIONS PVT. LTD. 20 5. -./ ' , ) '#$ ' 1 , / DR, ITAT, MUMBAI 6. /2 3$ / GUARD FILE. & / BY ORDER, (-# ' //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI