Aditya Medisales Limited, Baroda V. The DY.CIT., Cent.Circle-1, Baroda

ITA 2143/AHD/2005

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 9361 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 1 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-11-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 01-11-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 30-09-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S N SOPARAKAR
• Keywords: Business income; Earning of tax free income; Proportionate interest; Retrospective amendment
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D BEFORE SHRI G.D.AGRAWAL, VICE-PRESIDENT (AZ) AND SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER DATE OF HEARING : 01/11/2010 DRAFTED ON:09/11/ 2010 1. ITA NO.2143/AHD/2005 A.Y. 2002-03 2. ITA NO.1117/AHD/2005 A.Y. 2001-02 ADITYA MEDISALES LIMITED 3 RD FLOOR, SYNERGY HOUSE SUBHANPURA, BARODA VS. DY.CIT CENTRAL CIRCLE-1 BARODA PAN/GIR NO. : AABCA 9317 J (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI S.N. SOPARAKAR, SR. ADV. RESPONDENT BY: S/SHRI SHYAM KUMAR/ABHIJEET KUMAR N., DRS O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THESE TWO APPEALS HAVE BEEN FILED BY THE ASSESSEE PERTAINING TO ASSESSMENT YEARS 2001-02 & 2002-03 AGAINST TWO SEPA RATE ORDERS OF LEARNED CIT(APPEALS)-IV, AHMEDABAD RESPECTIVELY DA TED 28/02/2004 & 14/07/2005. FOR BOTH THE YEARS, THE GROUNDS RAISE D BY THE ASSESSEE ARE ALMOST IDENTICALLY WORDED, THEREFORE, FOR THE SAKE OF CONVENIENCE, GROUNDS ARE REPRODUCED FROM ASSESSMENT YEAR 2001-02 , BEING A LEAD YEAR AS FOLLOWS:- 1. RE: DISALLOWANCE U/S.14A 1.1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) ITA NOS.2143 & 1117/AHD /2005 ADITYA MEDISALES LTD. DY.CIT ASST.YEARS - 2002-03 & 2001-02 RESPECTIVELY - 2 - [HEREINAFTER REFERRED TO AS THE CIT(A) ERRED IN CO NFIRMING THE DISALLOWANCE OF INTEREST U/S.14A. 1.2. THE CIT(A) OUGHT TO HAVE CONSIDERED THAT THE SHARES ARE HELD AS STOCK-IN-TRADE AND NOT AS INVESTMENT. HEN CE THE STOCK-IN-TRADE IS MAINLY HELD FOR THE PURPOSE OF EA RNING PROFITS ON SALES OF SHARES AND DIVIDEND INCOME IS M ERELY INCIDENTAL TO THE HOLDING OF THE STOCK-IN-TRADE. 1.3. THE CIT(A) OUGHT TO HAVE CONSIDERED THAT THE ENTIRE BORROWINGS MADE BY THE APPELLANT WAS FOR THE PURPOS E OF BUSINESS WHICH INCLUDES THE INVESTMENT MADE IN STOC K-IN- TRADE AND ACCORDINGLY THE INTEREST ON THE BORROWING S WOULD DEDUCTIBLE EXPENDITURE U/S.36(1)(III). 1.4. THE CIT(A) ERRED IN NOT APPRECIATING THE FACT THERE IS NO PROVISION FOR PROPORTIONATE DISTRIBUTION OF EXPENSE S BETWEEN TAXABLE INCOME AND TAX FREE INCOME AND HENCE THE EX PENSES SHOULD BE ALLOWED IN FULL. 2. BARE MINIMUM FACTS WHICH WE CONSIDER NECESSARY T O MENTION, AS EXTRACTED FROM THE CORRESPONDING ASSESSMENT ORDER P ASSED U/S.143(3) OF THE ACT, DATED 29/03/2004 FOR AY 2001-02, WERE TH AT THE ASSESSEE- COMPANY IS IN THE BUSINESS OF TRADING OF PHARMACEU TICAL PRODUCTS. IN RESPECT OF THE ISSUE, AS RAISED IN THE GROUNDS OF A PPEAL, THE OBSERVATION OF THE ASSESSING OFFICER WAS THAT ON PERUSAL OF PROFIT & LOSS ACCOUNT, IT WAS FOUND THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.13,39,322/-. UNDISPUTEDLY, THE SAID DIVIDEND INCOME WAS AN EXEMPTED INCOME. DUE TO THAT REASON, THE EXPENSES ATTRIBUTABLE TO THE SAID EXEMPTED INCOME WERE HELD TO BE DISALLOWED BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. FURTHER, IT WAS ALSO OBSERVED BY THE ASSESSING OFFICER BY EXAMINING THE BALANCE-SHEE T OF THE ASSESSEE THAT THE SHARES HAVE BEEN RECORDED AS INVESTMENTS AND NO T AS STOCK-IN-TRADE. ITA NOS.2143 & 1117/AHD /2005 ADITYA MEDISALES LTD. DY.CIT ASST.YEARS - 2002-03 & 2001-02 RESPECTIVELY - 3 - AS PER ASSESSING OFFICER, THE SHARES IN QUESTION HA VE BEEN HELD FOR A LONG PERIOD, THEREFORE, THOSE WERE ACQUIRED AS AN I NVESTMENT AND NOT AS STOCK-IN-TRADE. THEREAFTER, THE IMPUGNED DISALLO WANCE WAS CALCULATED BY THE ASSESSING OFFICER AS PER THE FOLLOWING CALCU LATION:- DIVIDEND INCOME X (INTEREST EXPENSES / TOTAL SALE S) THIS WORKING IS NOT CORRECT BECAUSE WHILE CALCULATI NG THE PROPORTIONATE INTEREST ATTRIBUTABLE TO DIVIDEND INC OME, THE RATIO OF DIVIDEND INCOME AND TOTAL SALES SHOULD NOT HAVE BEE N TAKEN, BECAUSE THERE IS NO DIRECT RELATION BETWEEN THE TWO . THE CORRECT FORMULA FOR WORKING OUT THE PROPORTIONATE INTEREST ATTRIBUTABLE TO THE EXEMPT DIVIDEND INCOME SHOULD BE INTEREST EXPENSES ON BORROWED CAPITAL X (TOTAL INV ESTMENT IN SHARES / CURRENT ASSETS, LOANS AND ADVANCES INCLUDI NG INVESTMENT IN SHARES) THE FIGURES AS PER THE AUDITED ACCOUNTS ARE AS BELO W : INTEREST EXPENSES RS. 74,73,968/- TOTAL INVESTMENT IN SHARES (AS PER SCHEDULE7) RS. 10,58,49,159/- CURRENT ASSETS, LOANS AND ADVANCES INCLUDING RS.74 ,74,35,670/- INVESTMENT IN SHARES PROPORTIONATE INTEREST DISALLOWABLE : 74,73,96 8 X 10,58,49,159 / 74,74,35,670 = RS.10,58,436/- THUS, TOTAL DISALLOWANCE U/S.14A BECOMES RS.10,58, 436/- AND ADDED TO THE INCOME OF THE ASSESSEE. AS A RESULT, CORRESPONDINGLY AN ADDITION OF RS.10, 58,436/- WAS MADE BY INVOKING THE PROVISIONS OF SEC.14A OF THE A CT. THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. 3. THOUGH THE LEARNED CIT(APPEALS) HAS DISCUSSED TH E ISSUE AT LENGTH BY REPRODUCING THE ARGUMENTS OF THE ASSESSEE , HOWEVER, IN A CRYPTIC MANNER HELD THAT THE ISSUE WAS COVERED BY T HE ORDERS OF HIS ITA NOS.2143 & 1117/AHD /2005 ADITYA MEDISALES LTD. DY.CIT ASST.YEARS - 2002-03 & 2001-02 RESPECTIVELY - 4 - PREDECESSORS IN ASSESSEES OWN CASE AND SINCE THERE WAS NO CHANGE IN RESPECT OF THE FACTS AS ALSO IN RESPECT OF LAW FOR THE YEAR UNDER CONSIDERATION, THEREFORE, APPLYING THE SAME RATIO T HE ADDITION WAS CONFIRMED IN BOTH THE YEARS. BEING AGGRIEVED, NOW T HE ASSESSEE IS FURTHER IN APPEALS. 4. WE HAVE HEARD BOTH THE SIDES AND ALSO PERUSED TH E ORDERS OF THE AUTHORITIES BELOW. AT THE OUTSET, IT IS WORTH TO M ENTION THAT FOR BOTH THE YEARS THE ASSESSING OFFICER HAD SPECIFICALLY COMMEN TED THAT THE ADDITION WAS ON THE BASIS OF THE DISCUSSION AND ADDITION MAD E IN EARLIER ASSESSMENT YEARS, HOWEVER, THE CALCULATION MADE IN THE PAST WAS WRONG. LIKEWISE, THE FIRST APPELLATE AUTHORITY HAS ALSO NO TED WHILE DECIDING THIS GROUND THAT THE SAME HAS ALREADY BEEN DECIDED BY HI S PREDECESSOR IN THE PAST, THEREFORE, FOR THESE YEARS AS WELL, FOLLOWING THE SAID ORDERS, THE ADDITION WAS CONFIRMED. IN THIS CONTEXT, THEREFOR E, IT IS WORTH TO MENTION THAT FOR ASSESSMENT YEARS 1999-2000, 2000-01, 2001- 02, 2002-03 & 2003-04, THE REVENUE WAS IN APPEAL IN THE PAST AS I S EVIDENT FROM THE ORDER OF THE ITAT AHMEDABAD D BENCH DATED 30/09/2 010. IN THAT ORDER, THERE WAS NO GROUND IN RESPECT OF THE ISSUE OF SECTION 14A OF THE ACT. ON EXAMINING THESE FACTS, A SPECIFIC QUERY HA S BEEN RAISED THAT WHETHER THE ASSESSEE HAD CHALLENGED THE ORDER OF TH E LEARNED CIT(APPEALS) IN THE PAST BEFORE THE TRIBUNAL, HOWEV ER, LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE MR. S.N.S OPARKAR HAS CATEGORICALLY STATED THAT NO APPEAL WAS FILED BY THE ASSESSEE IN THE PAST AND THE APPELLATE ORDER OF THE TRIBUNAL IN HAND WAS IN RESPECT OF OTHER ISSUES BUT THE ISSUE OF APPLICABILITY OF SECTION 14 A OF THE ACT, HENCE, THIS ISSUE HAS TO BE DECIDED NOW FOR THE FIRST TIME IN A PPELLANTS CASE. ITA NOS.2143 & 1117/AHD /2005 ADITYA MEDISALES LTD. DY.CIT ASST.YEARS - 2002-03 & 2001-02 RESPECTIVELY - 5 - 5. WITH THIS BRIEF BACKGROUND, WE HAVE EXAMINED THE FACTS OF THE CASE AS ALSO THE LAW PRONOUNCED IN THIS REGARD. 6. AS FAR AS THE ASSESSING OFFICERS ACTION IS CON CERNED, THE DISALLOWANCE HAS BEEN MADE ON THE BASIS OF A CALCUL ATION OF THE PROPORTIONATE INTEREST ALLEGED TO BE ATTRIBUTABLE T O THE INVESTMENT EARNING EXEMPTED DIVIDEND INCOME. IT IS ALSO TO BE NOTED THAT WHILE DOING SO FOR THE YEARS UNDER CONSIDERATION THE A.O. HAS NOT FOLLOWED THE PAST METHOD OF CALCULATION OF THE DISALLOWANCE. AS PER AO IT WAS SEEN THAT THE WORKING OF DISALLOWANCE WAS WRONG BECAUSE WHILE CALCULATING THE PROPORTIONATE INTEREST ATTRIBUTABLE TO DIVIDEND INCOME THE RATIO OF DIVIDEND INCOME AND TOTAL SALES HAVE BEEN TAKEN THO UGH THERE WAS NO DIRECT RELATION BETWEEN THE TWO. THE ASSESSING OFF ICER HAD THUS MADE THE CALCULATION AFTER TAKING INTO ACCOUNT THE PROPO RTION OF THE INTEREST ON THE RATIO BETWEEN THE INVESTMENT IN SHARES AND TOT AL ASSETS INCLUDING INVESTMENT IN SHARES. APART FROM THIS, THERE IS NOTHING IN THE ASSESSMENT ORDER WHICH CAN ESTABLISH THE NEXUS OF UTILIZATION OF BORROWED INTEREST- BEARING FUNDS DIVERTED TOWARDS INVESTMENT IN DEBENT URES. BUT THERE ARE OTHER DISCUSSIONS IN THIS VERY ASSESSMENT ORDER WHE REIN THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT HAVE ALSO BEEN TOUCHE D UPON. THE ASSESSING OFFICER WAS EXPECTED TO CORRELATE THE SAID DISCUSSI ON WITH THE EXEMPTED DIVIDEND INCOME U/S.10(33) OF THE ACT. AS FAR AS THE LAW PRONOUNCED IN THIS REGARD IS CONCERNED, FIRST OF ALL, WE HAVE TO FOLLOW A LATEST DECISION OF HON'BLE BOMBAY HIGH COURT PRONOUNCED IN THE CASE OF GODREJ & BOYCE MFG. CO.LTD. MUIMBAI VS. DY.CIT IN INCOME TAX APPEAL NO.626 OF 2010 AND WRIT PETITION NO.758 OF 2010 ORD ER DATED ITA NOS.2143 & 1117/AHD /2005 ADITYA MEDISALES LTD. DY.CIT ASST.YEARS - 2002-03 & 2001-02 RESPECTIVELY - 6 - 12/08/2010, { NOW REPORTED AS 328 ITR 81(BOM) } WHEREIN THE HON'BLE HIGH COURT HAS UPHELD THE CONSTITUTIONAL VALIDITY O F SECTION 14A OF THE I.T. ACT, 1961 AND HELD THAT THE ASSESSING OFFICER SHOULD DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO DIVIDEND INCOME AND/OR INCOME FROM MUTUAL FUND WHICH DO NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATE D U/S.14A OF THE I.T. ACT, 1961. IT HAS ALSO BEEN DIRECTED THAT THE ASSESSING OFFIC ER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. IT HAS ALSO BEEN OBSERVED BY THE HON'BLE COURT THAT WHILE MAKING THA T DETERMINATION, THE ASSESSING OFFICER SHOULD PROVIDE A REASONABLE OPPOR TUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND MATERIAL H AVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 6.1. IN THIS JUDGEMENT AT THE END, THE HON'BLE COUR T HAS ALSO RECAPITULATED THE CONCLUSION AND PRONOUNCED THAT A FINDING IS REQUIRED WHETHER THE INVESTMENT IN SHARES IS MADE OUT OF OWN FUNDS OR OUT OF BORROWED FUNDS. A NEXUS IS REQUIRED TO BE ESTABLIS HED BETWEEN THE INVESTMENTS AND THE BORROWINGS. IN SECTION 14A OF THE ACT EXPENDITURE INCURRED IN RELATION TO EXEMPTED INCOME IS TO BE DI SALLOWED ONLY IF THE ASSESSING OFFICER IS SATISFIED WITH THE EXPENDITURE CLAIMED BY THE ASSESSEE PERTAINING TO THE SAID EXEMPT INCOME. RA THER, THE COURT WAS VERY SPECIFIC THAT IN CASE, NO SUCH EXERCISE WAS CA RRIED OUT BY THE ASSESSING OFFICER THEN THE MATTER IS TO BE REMANDED BACK FOR AFRESH INVESTIGATION. IT HAS ALSO BEEN MADE CLEAR THAT TH E PROVISO TO SECTION 14A OF THE ACT WAS EFFECTIVE FROM 2001-02. THE HON'BL E COURT HAS ALSO POINTED OUT THE IMPORTANCE OF RULE 8D OF THE I.T.RU LES, 1962. IT WAS MADE CLEAR THAT SUB-SECTION (1) TO SECTION 14A WAS INSERTED WITH ITA NOS.2143 & 1117/AHD /2005 ADITYA MEDISALES LTD. DY.CIT ASST.YEARS - 2002-03 & 2001-02 RESPECTIVELY - 7 - RETROSPECTIVE EFFECT FROM 01/04/1962, HOWEVER, SUB- SECTIONS (2) & (3) WERE MADE APPLICABLE WITH EFFECT FROM 01/04/2007. THE PROVISO WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 11/05/2001 , HOWEVER RULE 8D WAS INSERTED BY THE INCOME TAX (FIFTH AMENDMENT), RULES, 2008 BY PUBLICATION IN THE GAZETTE DATED 24/03/2008; REPROD UCED BELOW:- A) THE ITAT HAD RECORDED A FINDING IN THE EARLIE R ASSESSMENTS THAT THE INVESTMENTS IN SHARES AND MUTUAL FUNDS HAVE BEE N MADE OUT OF OWN FUNDS AND NOT OUT OF BORROWED FUNDS AND THAT TH ERE IS NO NEXUS BETWEEN THE INVESTMENTS AND THE BORROWINGS. HOWEVER, IN NONE OF THOSE DECISIONS WAS THE DISALLOWABILITY OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME EARNED OUT OF INVESTMENTS MADE OUT OF OWN FUNDS CONSIDERED. MOREOVER, UNDER SECTION 14A, EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME C AN BE DISALLOWED ONLY IF THE ASSESSING OFFICER IS NOT SAT ISFIED WITH THE CORRECTNESS OF THE EXPENDITURE CLAIMED BY THE ASSES SEE. IN THE PRESENT CASE, NO SUCH EXERCISE HAS BEEN CARRIED OUT AND, THEREFORE, THE TRIBUNAL WAS JUSTIFIED IN REMANDING THE MATTER. B) SECTION 14A WAS INTRODUCED BY THE FINANCE ACT 20 01 WITH RETROSPECTIVE EFFECT FROM 1 APRIL 1962. HOWEVER, I N VIEW OF THE PROVISO TO THAT SECTION, THE DISALLOWANCE THEREUNDE R COULD BE EFFECTIVELY MADE FROM ASSESSMENT YEAR 2001-2002 ONW ARDS. THE FACT THAT THE TRIBUNAL FAILED TO CONSIDER THE APPLI CABILITY OF SECTION 14A IN ITS PROPER PERSPECTIVE, FOR ASSESSMENT YEAR 2001-2002 WOULD NOT BAR THE TRIBUNAL FROM CONSIDERING DISALLO WANCE UNDER SECTION 14A IN ASSESSMENT YEAR 2002-2003. C) THE DECISIONS REPORTED IN SRIDEV ENTERPRISES (SUPRA), MUNJAL SALES CORPORATION (SUPRA) AND RADHASOAMI SATSANG (SUPRA) HOLDING THAT THERE MUST BE CONSISTENCY AND DEFINITE NESS IN THE APPROACH OF THE REVENUE WOULD NOT APPLY TO THE FACT S OF THE PRESENT CASE, BECAUSE OF THE MATERIAL CHANGE INTRODUCED BY SECTION 14A BY WAY OF STATUTORY DISALLOWANCE IN CERTAIN CASES. TH ERE, THE DECISIONS OF THE TRIBUNAL IN THE EARLIER YEARS WOUL D HAVE NO RELEVANCE IN CONSIDERING DISALLOWANCE IN ASSESSMENT YEAR 2002- 2003 IN THE LIGHT OF SECTION 14A OF THE ACT. ITA NOS.2143 & 1117/AHD /2005 ADITYA MEDISALES LTD. DY.CIT ASST.YEARS - 2002-03 & 2001-02 RESPECTIVELY - 8 - 73. FOR THE REASONS WHICH WE HAVE INDICATED, WE HA VE COME TO THE CONCLUSION THAT UNDER SECTION 14A(1) IT IS FOR THE ASSESSING OFFICER TO DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED A NY EXPENDITURE IN RELATION TO THE EARNING OF INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THE ACT AND IF SO TO QUANTIFY THE EXTE NT OF THE DISALLOWANCE. THE ASSESSING OFFICER WOULD HAVE TO ARRIVE AT HIS DETERMINATION AFTER FURNISHING AN OPPORTUNITY TO TH E ASSESSEE TO PRODUCE ITS ACCOUNTS AND TO PLACE ON THE RECORD ALL RELEVANT MATERIAL IN SUPPORT OF THE CIRCUMSTANCES WHICH ARE CONSIDERE D TO BE RELEVANT AND GERMANE. FOR THIS PURPOSE AND IN LIGHT OF OUR OBSERVATIONS MADE EARLIER IN THIS SECTION OF THE JUDGMENT, WE DEEM IT APPROPRIATE AND PROPER TO REMAND THE PROCEEDINGS BACK TO THE ASSESS ING OFFICER FOR A FRESH DETERMINATION. CONCLUSION : 74. OUR CONCLUSIONS IN THIS JUDGMENT ARE AS FOLLOWS ; I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FALLIN G WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME TA X ACT 1961, AS WAS APPLICABLE FOR ASSESSMENT YEAR 2002-03 IS NOT INCLUDIBLE IN COMPUTING THE TOTAL INCOME OF THE ASS ESSEE. CONSEQUENTLY, NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIRTUE OF THE PROVISIONS OF SECTION 14A (1); II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTION 115 O(1) OF ADDITIONAL INCOME TAX ON PROFITS DECLARED, DISTR IBUTED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS OF T HE COMPANY. THE COMPANY IS CHARGEABLE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAYS TAX IN DIS CHARGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT F OR ITS SHAREHOLDERS. IN THE HANDS OF THE SHAREHOLDER AS T HE RECIPIENT OF DIVIDEND, INCOME BY WAY OF DIVIDEND DO ES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROV ISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS; ITA NOS.2143 & 1117/AHD /2005 ADITYA MEDISALES LTD. DY.CIT ASST.YEARS - 2002-03 & 2001-02 RESPECTIVELY - 9 - III) THE PROVISIONS OF SUB SECTIONS (2) AND (3) OF SECTI ON 14A OF THE INCOME TAX ACT 1961 ARE CONSTITUTIONALLY VALID; IV) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES A S INSERTED BY THE INCOME TAX (FIFTH AMENDMENT) RULES 2008 ARE NOT ULTRA VIRES THE PROVISIONS OF SECTION 14A, MORE PARTICULARLY SUB SECTION (2) AND DO NOT OFFEND ARTI CLE 14 OF THE CONSTITUTION; V) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES W HICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24 MARCH 2008 S HALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09; VI) EVEN PRIOR TO ASSESSMENT YEAR 2008-09, WHEN RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORC E THE PROVISIONS OF SUB SECTION (1) OF SECTION 14A. FOR THT PURPOSE, THE ASSESSING OFFICER IS DUTY BOUND TO DET ERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASON ABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FA CTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE R ECORD; VII) THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 SHALL S TAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESS ING OFFICER SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RE LATION TO DIVIDEND INCOME / INCOME FROM MUTUAL FUNDS WHICH DO ES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NOS.2143 & 1117/AHD /2005 ADITYA MEDISALES LTD. DY.CIT ASST.YEARS - 2002-03 & 2001-02 RESPECTIVELY - 10 - 6.2. IN ADDITION TO THE ABOVE PRECEDENT, WE ARE AL SO GOVERNED BY A DECISION OF RESPECTED ITAT MUMBAI BENCH PRONOUNCED IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT.LTD. REPORTED AS 117 IT D 169 (MUM.), WHEREIN ALSO IT WAS PRONOUNCED THAT IN ORDER TO ESC APE THE APPLICABILITY OF SECTION 14A, ONUS IS ON THE ASSESSEE TO PROVE TH AT THE EXPENDITURE WAS INCURRED FOR EARNING ONLY TAXABLE INCOME. HOWEVER, IT HAS ALSO BEEN PRESCRIBED THAT AFTER INTRODUCTION OF RULE 8D, IT B ECOMES CLEAR THAT NOT ONLY THE EXPENDITURE DIRECTLY RELATING TO EXEMPTED INCOME BUT ALSO THE INDIRECT EXPENDITURE LIKE INTEREST WHICH IS NOT DIR ECTLY ATTRIBUTABLE TO ANY PARTICULAR: INCOME OR RECEIPT ARE TO BE TAKEN IN TO FOR THE PURPOSE OF INVOCATION OF THE PROVISIONS OF SECTION 14A OF THE I.T. ACT, 1961. 6.3. APART FROM THE ABOVE DISCUSSION, AN ANOTHER CASE LAW SHOULD ALSO NOT ESCAPE OUR ATTENTION AS PRONOUNCED IN THE CASE OF WAL FORT SHARES AND STOCK BROKERS LTD. [2009](310 ITR 421) [BOM]. THE OBSERVATION WAS THAT WHAT SECTION 14A OF THE ACT CONTEMPLATES I S THE EXPENDITURE ACTUALLY INCURRED FOR EARNING TAX-FREE INCOME AND N OT ASSUMED EXPENDITURE OR DEEMED EXPENDITURE. THEREFORE CONFIR MING THE DECISION OF THE RESPECTED SPECIAL BENCH { 96 TTJ 673(SB)(MUM.)} AN OBSERVATION WAS MADE THAT THERE WAS NO MERIT IN THE CONTENTION THAT THE LOSS ARISING FROM THE TRANSACTION WAS LIABLE TO BE TREATED AS A N EXPENDITURE INCURRED FOR EARNING THE TAX FREE INCOME AND HENCE DISALLOWA BLE UNDER SECTION 14A. ADMITTEDLY, NO EXPENDITURE WAS INCURRED IN PUR CHASING THE DIVIDEND BEARING UNITS. THE TRIBUNAL WAS JUSTIFIED IN HOLDIN G THAT THE LOSS ARISING FROM THE TRANSACTION WAS LIABLE TO BE SET OFF AGAIN ST THE OTHER TAXABLE INCOME OF THE ASSESSEE. WHILE UPHOLDING THE DECISI ON OF HON'BLE HIGH ITA NOS.2143 & 1117/AHD /2005 ADITYA MEDISALES LTD. DY.CIT ASST.YEARS - 2002-03 & 2001-02 RESPECTIVELY - 11 - COURT, THE HON'BLE SUPREME COURT { CIT VS WALFORT SHARE & STOCK BROKERS 326 ITR PG.1(SC) } HAS ALSO SAID THAT FOR ATTRACTING SECTION 14A OF THE ACT THERE HAS TO BE A PROXIMATE CAUSE FOR DI SALLOWANCE, WHICH IS ITS RELATIONSHIP WITH THE TAX EXEMPT INCOME, RELEVANT P ARA FROM THE HELD PORTION IS AS FOLLOWS :- SECTION 14A OF THE INCOME-TAX ACT, 1961, CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATU RE OF EXPENSES INCURRED BY THE A MAY BE RELATABLE PARTLY TO EXEMPT INCOME AND PARTLY TO TAXABLE INCOME. IN THE ABSENCE OF SECT ION 14A, THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WA S BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDATE OF SEC TION 14A IS CLEAR: IT DESIRES TO CURB THE PRACTICE OF CLAIMING DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAI NST TAXABLE INCOME AND AT THE SAME TIME AVAIL OF THE TAX INCENT IVE BY WAY OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF E XPENSES INCURRED IN RELATION TO EXEMPT INCOME. THE BASIC R EASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN INCOMES AR E NOT INCLUDIBLE WHILE COMPUTING THE TOTAL INCOME BECAUSE THESE ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE ACT. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET I NCOME, I.E., GROSS INCOME MINUS EXPENDITURE. ON THE SAME ANALO GY, EXEMPTION IS ALSO IN RESPECT OF NET INCOME. THE TH EORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NO N-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 1 4A. A PAY BACK IS NOT AN EXPENDITURE IN THE SCHEME OF S ECTION 14A; FOR ATTRACTING SECTION 14A THERE HAS TO BE A P ROXIMATE CAUSE FOR DISALLOWANCE, WHICH IS IN RELATIONSHIP WITH THE TAX EXEMPT INCOME. PAY BACK OR RETURN OF INVESTMENT IS NOT SU CH PROXIMATE CAUSE. 6.4. IT IS WORTH TO MENTION, AS HELD IN THE CASE OF HERO CYCLES (323 ITA NOS.2143 & 1117/AHD /2005 ADITYA MEDISALES LTD. DY.CIT ASST.YEARS - 2002-03 & 2001-02 RESPECTIVELY - 12 - ITR 518)[P&H] THAT IF THERE IS SUFFICIENT MATERIAL ON RECORD TO E STABLISH THAT INVESTMENT IN SHARES/UNITS WAS MADE OUT OF NON -INTEREST BEARING FUNDS, THEN NO DISALLOWANCE HAS TO BE MADE OUT OF I NTEREST DEBITED TO PROFIT & LOSS ACCOUNT, EVEN IF THERE IS DIVIDEND IN COME FROM SUCH INVESTMENT. WHERE THE EXPENDITURE INCURRED COULD NOT BE RELATED TO EXEMPTED INCOME, THE PROVISIONS OF SECTION 14A WOUL D ALSO NOT BE ATTRACTED. IT IS ALSO A SETTLED LAW THAT THE THE ORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE INCOME, HAS BEEN ACCEPTED. HOWEVER, ASSESSING OFFICER HAS TO SATISFY HIMSELF A ND SUCH SATISFACTION MUST BE ARRIVED AT ON THE OBJECTIVE BASIS. IF BEN EFIT ARISING FROM INVESTMENT IN SHARES OUT OF INTEREST-BEARING FUND I S THE DIVIDEND INCOME EXEMPT U/S.10(34) OF THE ACT, THE RELATED EXPENDITU RE HAS TO BE DISALLOWED . 6.5. HOWEVER, IT DEPENDS ON THE FACTS OF EACH C ASE. BUT THE FACT OF THE PRESENT CASE WAS THAT THE ASSESSING OFFICER HAD NOT ENQUIRED THE ISSUE IN THE LIGHT OF THE ABOVE LEGAL PRONOUNCEMENTS. SPECIA LLY THE PRONOUNCEMENT OF THE HON'BLE BOMBAY HIGH COURT WAS NOT AVAILABLE AT THAT TIME, HENCE, THE ASSESSING OFFICERS ASSESSMEN T ORDER WAS DEVOID OF MERITS AS ALSO APPLICABLE LAW. NOW WE HAVE GOT CER TAIN GUIDELINES, THOUGH CAN NOT BE SAID TO BE EXHAUSTIVE OR COMPLETE , BUT ON THESE LINES, THE ASSESSING OFFICER IS EXPECTED HENCEFORTH TO COM PUTE THE CORRECT DISALLOWANCE, NEEDLESS TO SAY AFTER PROVIDING AN A DEQUATE OPPORTUNITY OF HEARING TO THE ASSESSEE. ITA NOS.2143 & 1117/AHD /2005 ADITYA MEDISALES LTD. DY.CIT ASST.YEARS - 2002-03 & 2001-02 RESPECTIVELY - 13 - 7. IN THE RESULT BOTH THE APPEALS OF THE ASSESSEE F OR ASSESSMENT YEAR 2001-02 AND 2002-03 BEING RESTORED FOR RE-ADJUDICAT IONS HENCE TO BE TREATED AS ALLOWED BUT FOR STATISTICAL PURPOSES. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 26/ 11 /2010. SD/- SD/- ( G.D.AGRAWAL ) ( MUKUL KR. SHRAWAT ) VICE PRESIDENT (AZ) JUDICIAL ME MBER AHMEDABAD; DATED 26 / 11 /2010 T.C. NAIR, SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE ASSESSEE. 2. THE DEPARTMENT. 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-IV, AHMEDABAD 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD 1. DATE OF DICTATION..09/11/2010 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 09/11/2010 OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S 26.11.10. 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 26.11.10. 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 9. DATE OF DESPATCH OF THE ORDER