NETMAGIC SOLUTIONS P.LTD, MUMBAI V. DCIT 9(2), MUMBAI

ITA 2205/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8350 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: J
• Assessment Year: 2011-2012
• Appeal Filed On: 15-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T A KHAN
• Assessee Lawyers: ANUJ KISNADWALLA
• Keywords: Earning of tax free income; Wholly owned subsidiary
• Section: 143(3); 14A; 12

Judgement Text

J IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI BEFORE SHRI C.N. PRASAD, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO.2205/ MUM/2015 ( / ASSESSMENT YEAR : 2011-12) NETMAGIC SOLUTIONS PRIVATE LIMITED, BLDG. NO. 22, NIRLON COMPLEX, WESTERN EXPRESS HIGHWAY, GOREGAON, MUMBAI 400 063. / V. DEPUTY COMMISSIONER OF INCOME TAX, 9(2), MUMBAI. ./ PAN : AABCN1254B ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY : MR. VIJAY MEHTA & MR. ANUJ KISNADWALLA REVENUE BY : MR. T.A. KHAN, DR / DATE OF HEARING : 30-01-2017 / DATE OF PRONOUNCEMENT : 27-02-2017 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER THIS APPEAL, FILED BY THE ASSESSEE, BEING ITA NO. 2205/MUM/2015, IS DIRECTED AGAINST THE APPELLATE ORDER DATED 06-01-20 15 PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)- 21, MUMBAI (H EREINAFTER CALLED THE CIT(A)), FOR THE ASSESSMENT YEAR 2011-12, THE APPE LLATE PROCEEDINGS BEFORE THE LEARNED CIT(A) ARISING FROM THE ASSESSMENT ORDE R DATED 6 TH FEBRUARY, 2014 PASSED BY LEARNED ASSESSING OFFICER(HEREINAFTE R CALLED THE AO) U/S 143(3) OF THE INCOME-TAX ACT,1961 (HEREINAFTER CALL ED THE ACT). ITA 2205/MUM/2015 2 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE IN THE MEMO OF APPEAL FILED WITH THE INCOME-TAX APPELLATE TRIBUNAL, MUMBA I (HEREINAFTER CALLED THE TRIBUNAL) READ AS UNDER:- 1. DISALLOWANCE U/ S 14A OF RS. 19,81,195/-: 1.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) ERRED IN UPHOLDING THE DISALLOWANCE U/S 14A READ WITH RULE 8D(2) OF RS. 19,81,195/-. 1.2 THE LEARNED CIT (A) OUGHT TO HAVE APPRECIATED THA T THE ASSESSING OFFICER HAD NOT REACHED APPROPRIATE SATISFACTION REGA RDING THE AMOUNT DISALLOWED BY THE APPELLANT OF RS 2,50,000/- WAS NOT ADEQUATE. 1.3 THE LEARNED CIT (A) OUGHT TO HAVE APPRECIATED THA T THE PROVISIONS OF S.14A COULD NOT BE APPLIED IN THE INSTANT CASE, SIN CE THE INVESTMENTS WERE MADE OUT OF OWN FUNDS AND APPELLANT HAD SUBMITTED NEXUS OF FUNDS USED FOR THE PURPOSE OF INVESTMENT DURING THE CO URSE OF APPELLATE PROCEEDINGS. 1.4 WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT(A) GROSSLY ERRED IN UPHOLDING THE ACTIONS OF ASSESSING OFFICER TO INCLUDE THE VALUE OF INVESTMENTS THAT DO NOT PRODUCE EXEMPT INCOME WHILE COMPUTING DISALLOWANCE U/S 14A READ WITH RULE 8D, WITHOUT GIVI NG ANY REASONING. 1.5 WITHOUT PREJUDICE TO THE ABOVE , THE LEARNED CIT(A) GROSSLY ERRED IN UPHOLDING THE ACTIONS OF ASSESSING OFFICER , BY NOT EXCLUDING INTEREST-CHARGES PAID ON TERM LOAN ACQUIRED SPECIFICA LLY FOR ACQUISITION OF FIXED ASSETS WHILE COMPUTING DISALLOWANCE U/S 14A READ WITH RULE 8D, WITHOUT GIVING ANY REASONING. 1.6 WITHOUT PREJUDICE TO ABOVE , RS 2,50,000/- DISALLOWED BY THE APPELLANT IN COMPUTATION OF INCOME WHILE FILING THE RE TURN OF INCOME SHOULD BE REDUCED FROM OVERALL DISALLOWANCE CARRIED BY THE ASSESSING OFFICER. 1.7 WITHOUT PREJUDICE TO THE ABOVE, DISALLOWANCE U/ S 14A SHOULD BE SUBSTANTIALLY REDUCED. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY IS ENGAGED IN THE BUSINESS OF PROVIDING INTERNET SERVICE AND INTERNET DATA CENTRE. DURING THE ITA 2205/MUM/2015 3 COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) R.W.S. 143(2) OF THE ACT, THE ASSESSEE WAS ASKED TO EXPLAIN ABOUT THE APPLICABILI TY OF SECTION 14A READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 WHEREIN THE A SSESSEE FURNISHED THE FOLLOWING SUBMISSION:- A. INVESTMENTS HAVE BEEN MADE IN MUTUAL FUNDS AND I N THE SUBSIDIARY COMPANY AND RECEIVED DIVIDEND WHICH IS C LAIMED EXEMPT U/S 10(34) OF THE INCOME TAX ACT, 1961. B. THE INVESTMENTS WERE MADE OUT OF OWN FUNDS AND NO BORROWED FUNDS WERE UTILIZED. THE SAME WERE DONE THROUGH RAI SING OF CAPITAL BY ISSUE OF PREFERENCE SHARES AND USED TO CREATE FIXED D EPOSITS WHICH WERE REDEEMED TO PURCHASE MUTUAL FUNDS. C. FRESH INVESTMENTS WERE MADE OUT OF PREFERENCE SHA RES ISSUED. D. A TERM LOAN WAS OBTAINED FROM AXIS BANK AMOUNTIN G TO RS. 5,83,46,000/- FOR CAPITAL INVESTMENT AND TOWARDS ADDI TIONS TO FIXED ASSETS AND NOT UTILIZED FOR INVESTMENTS. E. A TABLE SHOWING THE PROFITS EARNED WAS ALSO SUBMITTE D WHICH SHOWS SHARE CAPITAL AT RS. 205883000/- AND RESERVES AND SURPLUS AT RS. 897824000/-. F. NO ADMINISTRATIVE EXPENDITURE WAS INCURRED TOWARDS PURCHASE OF MUTUAL FUND AND WERE CARRIED OUT THROUGH AN AGENT WHO USED TO FILL UP THE FORMS AND DIVIDEND AND WAS CREDITED TO THE ACCOUNT THROUGH ECS AND CHEQUES WERE COLLECTED BY THE AGENT IN RESPECT OF MUTUAL FUNDS AND HENCE NO ADMINISTRATIVE EXPENDITURE WAS INCURRED. G. NO EXPENDITURE WAS BORNE TOWARDS REDEEMING OF MUTU AL FUNDS AS THE REMITTANCES WERE DONE THROUGH ECS. H. IN CASE OF ANY DISALLOWANCE TO BE MADE, THE ASSES SEE HAS MADE A SUO MOTO DISALLOWANCE OF RS. 2,50,000/- BEING AMOUNT DISALLOWED IN SECURITY TRANSACTION TAX. THE A.O. REJECTED THE CONTENTION OF THE ASSESSEE BY HOLDING AS UNDER:- IT IS ALSO IMPORTANT TO NOTE THAT A COMPANY CANNOT EARN DIVIDEND WITHOUT ITS EXISTENCE AND MANAGEMENT. INVESTMENT DE CISIONS ARE ITA 2205/MUM/2015 4 VERY COMPLEX M NATURE. THEY REQUIRE SUBSTANTIAL MAR KET RESEARCH, DAY-TO-DAY ANALYSIS OF MARKET TRENDS AND DECISIONS WITH REGARD TO ACQUISITION, RETENTION AND SALE OF SHARES AT THE MOST APPROPRIATE TIME. IT IS, THEREFORE, NOT CORRECT TO SAY THAT DIVIDEND INCOME/EXEMPT INCOME CAN BE EARNED BY INCURRING NO OR NOMINAL EXPENDITURE. IT IS DIFFICULT TO ACCEPT THAT A COMPA NY CAN EARN DIVIDEND INCOME/EXEMPT INCOME WITHOUT INCURRING ANY EXPENSES WHATSOEVER INCLUDING MANAGEMENT OR ADMINISTRATIVE E XPENSES AS INVESTMENT DECISIONS ARE GENERALLY TAKEN IN THE MEE TINGS OF THE BOARD OF DIRECTORS FOR WHICH ADMINISTRATIVE EXPENSE S ARE INCURRED. THE TERM EXPENDITURE' OCCURRING IN SECTI ON 14A WOULD TAKE IN ITS SWEEP NOT ONLY DIRECT EXPENDITURE BUT A LSO ALL FORMS OF EXPENDITURE REGARDLESS OF WHETHER ARE FIXED, VARIAB LE, DIRECT, INDIRECT, ADMINISTRATIVE, MANAGERIAL OR FINANCIAL. SUB-SECTION (1) OF SECTION 14A PROVIDES IN UNEQUIVOCAL TERMS FOR NO T ALLOWING DEDUCTION IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO EXEMPT INCOME AND SUB-SECTION (2) LAYS DOWN THE MECHANISM FOR DETERMINING SUCH AMOUNT OF EXPENDITUR E INCURRED IN RELATION TO EXEMPT INCOME IN ACCORDANCE WITH MET HOD AS PRESCRIBED UNDER RULE 8D. RELIANCE IN THIS REGARD I S PLACED ON THE RECENT DECISION OF HON'BLE HIGH COURT IN THE CASE O F GODREJ & BOYCE MFG., CO. LTD. - 234 CTR (BOM)1(2010). PRIOR TO RULE 8D, THE APPORTIONMENT OF EXPENDITURE WAS AT THE DISCRET ION OF ASSESSING OFFICER. BUT, NOW RULE 8D HAS PRESCRIBED A FORMULA FOR CALCULATION OF DISALLOWANCE U/S S14A AND THE SAME I S BINDING IN NATURE. IN VIEW OF THE ABOVE AND THE EXPLICIT PROVISIONS OF SEC.14A READ WITH RULE 8D AND JUDICIAL PRONOUNCEMENTS, THE AMOUN T OF DISALLOWANCE U/ S.14A OF THE I.T. ACT IS WORKED OUT AS UNDER; OPENING BALANCE CLOSING BALANCE (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME 0 (II) IN CASE WHERE THE ASSESSEE HAS INCURRED EXPENDI TURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO A NY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FO LLOWING FORMULA A AMOUNT OF ITA 2205/MUM/2015 5 EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE(I) INCURRED DURING THE PREVIOUS YEAR 1,11,53,000 14,40,397 B THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. 158234000 98393,000 108159,500 C THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR 1514373,000 1167494000 1340933,500 A X B/C 0 (III) 0.5% OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL ITA 2205/MUM/2015 6 INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR 5,40,798 DISALLOWANCE U/S.14A (I) +(II)+(III) 19,81,195 THUS THE A.O. MADE A DISALLOWANCE OF EXPENDITURE OF RS. 19,81,195/- INCURRED FOR EARNING EXEMPT INCOME U/S 14A READ WIT H RULE 8D OF THE INCOME-TAX RULES, 1962, VIDE ASSESSMENT ORDER DATED 06.02.2014 U/S 143(3) OF THE ACT. 4. AGGRIEVED BY THE ASSESSMENT ORDER DATED 06.02.20 14 PASSED BY THE A.O. U/S 143(3) OF THE ACT, THE ASSESSEE FILED FIRST APP EAL BEFORE THE LD. CIT(A). 5. THE ASSESSEE CONTENDED BEFORE THE LD. CIT(A) THA T THE ASSESSEE HAS VOLUNTARILY MADE DISALLOWANCE OF RS. 2,50,000/- OF EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME WHICH WAS NOT CONSIDERED BY T HE A.O. . IT WAS SUBMITTED THAT IT HAD MADE INVESTMENT IN VARIOUS MU TUAL FUNDS AND ITS SUBSIDIARY COMPANIES AND HAS RECEIVED DIVIDEND INCO ME OF RS. 48,69,223/- WHICH WAS CLAIMED AS EXEMPT INCOME FROM TAX U/S 10( 34) OF THE ACT BUT THERE WAS NO SUCH HUGE EXPENDITURE OF RS. 19,81,195/- INC URRED BY THE ASSESSEE AS DISALLOWED BY THE AO U/S 14A OF THE ACT R.W.S. 8D O F INCOME-TAX RULES, 1962 FOR EARNING EXEMPT INCOME. IT WAS SUBMITTED THAT D URING THE YEAR NO FRESH INVESTMENT HAD BEEN MADE AND INVESTMENTS MADE DURIN G THE PREVIOUS YEARS WERE WHOLLY OUT OF OWN FUND BY ISSUE OF PREFERENCE SHARES. NO BORROWED FUNDS WERE UTILIZED FOR INVESTMENT IN MUTUAL FUND. IT WAS SUBMITTED THAT THE ASSESSEE HAD NOT INCURRED ANY EXPENSES FOR INVESTME NT IN MUTUAL FUND OR FOR ITA 2205/MUM/2015 7 EARNING DIVIDEND. IT WAS SUBMITTED THAT THE AUTHORI ZED AGENT ACTED AS FINANCIAL ADVISER FOR INVESTMENT AS WELL AS REDEMPT ION OF MUTUAL FUND, AND HENCE ASSESSEE DID NOT HAVE TO INCUR ANY EXPENDITUR E. IT WAS SUBMITTED THAT THE INVESTMENT IN SHARE OF ITS 100% SUBSIDIARY CAPI TAL SKY N-LAND VIDEO NETWORKS PVT. LTD. WAS A STRATEGIC INVESTMENT AND WAS MADE WITH AN INTENTION TO ACQUIRE CONTROLLING INTEREST IN THIS S UBSIDIARY. IT WAS FURTHER SUBMITTED THAT NO INTEREST BEARING FUND HAS BEEN UT ILIZED. THE INTEREST EXPENDITURE APPEARING IN PROFIT AND LOSS ACCOUNT WA S IN RESPECT OF TERM LOAN UTILIZED FOR ACQUIRING FIXED ASSETS. IT WAS SUBMIT TED THAT DISALLOWANCE OF EXPENSES MADE FOR EARNING EXEMPT INCOME SHOULD BE D ELETED. THE ASSESSEE RELIED UPON SEVERAL JUDGMENT AS ENUMERATED IN LEARN ED CIT(A) ORDERS. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE REJECTED THE SAME VIDE APPELLATE ORDER DATED 06-01-2015 , BY HOL DING AS UNDER:- 4.3 I HAVE CONSIDERED THE RIVAL SUBMISSION OF THE APPELLANT, FINDING OF THE ASSESSING OFFICER AND FAC TS OF THE CASE, CAREFULLY. I FIND THAT THERE IS ELEMENT OF EXPENDIT URE FOR EARNING DIVIDEND OF RS. 48,69,223/- WHEN THERE IS CAUTIOUS DECISION FOR INVESTMENT IN MUTUAL FUNDS OR INVESTMENT IN PREFERE NCE SHARE OF SUBSIDIARY, THERE IS INVOLVEMENT OF MANAGEMENT, INF RASTRUCTURE, USE OF OFFICE AND RENDERING OF SERVICES OF VARIOUS EMPLOYEES. BECAUSE OF SUCH ELEMENT OF EXPENDITURE, APPELLANT H AS ADMITTED THE EXPENDITURE TO THE EXTENT OF RS. 2,50,000/- OTH ERWISE ON THE BASIS OF ARGUMENT IT WOULD HAVE NOT OFFERED SUCH DI SALLOWANCE. IT IS IMPORTANT TO POINT OUT THAT THERE IS NO CONVINCI NG BASIS FOR ASCERTAINING SUCH DISALLOWABLE EXPENDITURE OF RS. 2 ,50,000/-. THE INVESTMENT IN SUBSIDIARY IS ALSO CAPABLE OF EXE MPT INCOME, THOUGH IT MIGHT BE INVESTED FROM STRATEGIC POINT OF VIEW. BECAUSE OF DIFFICULTY IN ASCERTAINMENT OF SUCH EXPENDITURE, RULE 8D WAS PRESCRIBED, HENCE NO FAULT CAN BE SEEN IN WORKING O F DISALLOWABLE EXPENDITURE MADE BY THE ASSESSING OFFICER IN PARA 4 .4 OF THE ASSESSMENT ORDER. IN THE APPELLANT'S OWN CASE HON'B LE ITAT IN I.T.A. NO.901 AND 902 /MUMBAI/2010 DATED 03.06.2011 , HAS NOT GIVEN ANY RELIEF TO THE APPELLANT AND HAS HELD THAT RULE 8D IS APPLICABLE IN SUBSEQUENT YEAR, SUCH EXPENDITURE CAN BE DISALLOWED IN THIS YEAR AS VALIDITY OF RULE 8D HAS BEEN APPROVED ITA 2205/MUM/2015 8 BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GOD REJ AND BOYCE MANUFACTURING LTD. VS. DCIT (2010) 328 ITR 81 (BORN). THUS, I FIND NO MERIT IN THE ARGUMENTS OF THE APPEL LANT THAT NO DISALLOWANCE COULD BE MADE U/S.14A R.W.R. 8D. BECAU SE OF THE FACTS AND CIRCUMSTANCES OF THE CASE RATIO OF NONE O F THE DECISION RELIED UPON BY THE LD. A.R. IS APPLICABLE, HENCE TH E FINDING OF THE ASSESSING OFFICER IS APPROVED AND THEREFORE DISALLO WANCE OF TOTAL EXPENDITURE RELATED TO SUCH EXEMPT INCOME, OF RS. 1 9,81,195/- IS SUSTAINED. 6. AGGRIEVED BY THE ABOVE APPELLATE ORDER DATED 06- 01-2015 PASSED BY THE LD. CIT(A), THE ASSESEE FILED SECOND APPEAL BEFORE THE TRIBUNAL. 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DISALLOWANCE OF EXPENDITURE FOR EARNING EXEMPT INCOME HAS BEEN MADE U/S 14A OF THE ACT BY THE AO AMOUNTING TO RS. 19,81,195/-. IT WAS SUBMIT TED THAT FOR THE ASSESSMENT YEAR 2009-10, IN ASSESSEES OWN CASE, TH E TRIBUNAL HAD DECIDED THE ISSUE WHEREBY THE DISALLOWANCE HAS BEEN DELETED ON ACCOUNT OF NON- RECORDING OF THE SATISFACTION. OUR ATTENTION WAS DR AWN TO THE DECISION OF THE TRIBUNAL IN ITA NO. 5160/MUM/2013 VIDE ORDERS DATED 25-08-2016 FOR ASSESSMENT YEAR 2009-10 IN ASSESSEES OWN CASE, WHE REIN THE TRIBUNAL DELETED THE DISALLOWANCE MADE BY THE AO U/S 14A OF THE ACT WHICH DISALLOWANCE MADE BY THE AO WAS LATER AFFIRMED BY L EARNED CIT(A). IT WAS SUBMITTED THAT DESPITE GIVING DETAILED EXPLANATIONS AS TO THE DISALLOWANCE MADE U/S 14A OF THE ACT , THE AO DID NOT RECORDED S ATISFACTION BEFORE REJECTING THE CONTENTIONS OF THE ASSESSE. IT WAS S UBMITTED THAT THE ASSESSEE HAS VOLUNTARILY DISALLOWED AN AMOUNT OF RS. 2,50,00 0/- TOWARDS EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME. IT WAS SUBMITT ED THAT THE ASSESSEE HAS OWN SURPLUS FUNDS AVAILABLE WHICH ARE MORE THAN SUF FICIENT TO COVER INVESTMENTS MADE IN THE SHARES AND MUTUAL FUNDS. T HE INVESTMENT AS REFLECTED IN THE BALANCE SHEET AS AT 31-03-2011 IS ONLY 15.82 CRORES, WHILE THE TOTAL SHAREHOLDER FUNDS ARE TO THE TUNE OF RS. 110.66 CRORES WHICH ARE FAR IN EXCESS OF INVESTMENTS OF RS.15.82 CRORES HELD AS AT 31-03-2011, HENCE, NO ITA 2205/MUM/2015 9 DISALLOWANCE IS CALLED FOR. THE LD. COUNSEL DREW O UR ATTENTION TO PAPER BOOK PAGE 3 WHEREBY THE BALANCE SHEET OF THE ASSESSEE AS AT 31 ST MARCH, 2011 IS PLACED. THE LD. COUNSEL ALSO DREW OUR ATTENTION TO PAPER BOOK PAGE 8 WHEREBY THE SCHEDULES FORMING PART OF THE BALANCE S HEET IS PLACED ON RECORD WHEREBY THE INVESTMENTS ARE REFLECTED OF RS. 15.83 CRORES OUT OF WHICH INVESTMENT IN SUBSIDIARY COMPANY ARE TO THE TUNE OF RS. 6.40 CRORES . IT WAS SUBMITTED THAT NO DISALLOWANCE IS CALLED FOR W.R.T. STRATEGIC INVESTMENTS MADE IN SUBSIDIARY COMPANIES AS THE INVESTMENTS WERE MAD E NOT WITH AN OBJECTIVE TO EARN DIVIDEND INCOME BUT WITH A VIEW TO HAVE CON TROLLING STAKE IN THESE SUBSIDIARY COMPANIES. IT WAS SUBMITTED THAT THE A.O . HAS WRONGLY APPLIED RULE 8D OF INCOME-TAX RULES, 1962. IT WAS SUBMITTED THAT THE DISALLOWANCE OF RS. 5,40,798/- WAS WRONGLY MADE BY THE AO BY INVOKI NG RULE 8D(2)(III) OF INCOME-TAX RULES, 1962 AS THE ASSESSEE HAS VOLUNTAR ILY DISALLOWED RS.2,50,000/- U/S 14A OF THE ACT. 8. THE LD. D.R. SUBMITTED THAT NO BASIS WAS GIVEN B Y THE ASSESSEE WITH REGARD TO THE DISALLOWANCE OF RS. 2.5 LACS MADE BY THE ASSESSEE U/S 14A OF THE ACT. THE A.O. HAD RECORDED THE SATISFACTION BE FORE INVOKING RULE 8D OF INCOME-TAX RULES,1962. OUR ATTENTION WAS INVITED T O PARA NO. 4.3 OF THE ASSESSMENT ORDER OF THE A.O. WHEREIN IT WAS SUBMIT TED THAT SATISFACTION WAS DULY RECORDED BY THE AO BEFORE INVOKING RULE 8D OF INCOME-TAX RULES, 1962. THE LD. D.R. RELIED ON THE DECISION OF HONBLE BOMB AY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. CIT, (2010) 328 ITR 81(BOM.) AND SUBMITTED RULE 8D OF INCOME-TAX RULES, 1962 IS APPL ICABLE W.E.F. ASSESSMENT YEAR 2008-09. IT WAS SUBMITTED THAT THE TRIBUNAL IN ITA NO. 902/MUM/2010 VIDE ORDERS DATED 03-06-2011 HAD UPHELD THE DISALLO WANCE OF EXPENDITURE FOR EARNING EXEMPT INCOME IN ASSESSEES OWN CASE FOR AS SESSMENT YEAR 2006-07. THE SHOW CAUSE NOTICE WAS ISSUED BY THE AO TO THE A SSESSEE AS TO HOW IT ARRIVED AT THE FIGURE OF RS.2.50 LACS FOR MAKING D ISALLOWANCE OF EXPENDITURE FOR EARNING EXEMPT INCOME U/S 14A OF THE ACT BUT NO DETAILS WERE SUBMITTED ITA 2205/MUM/2015 10 BY THE ASSESSEE AND HENCE THE AO APPLIED RULE 8D OF INCOME-TAX ACT,1961 WHICH IS MANDATORY. 9. THE LD. COUNSEL FOR THE ASSESSEE, IN THE REJOIND ER, SUBMITTED THAT THE ASSESSEE HAD NOT INCURRED ANY EXPENSES FOR EARNING DIVIDEND ON INVESTMENTS IN SHARES/MUTUAL FUNDS. 10. WE HAVE CONSIDERED RIVAL CONTENTIONS AND ALSO P ERUSED MATERIAL AVAILABLE ON RECORD. THE ASSESSEE COMPANY IS ENGAGE D IN THE BUSINESS OF PROVIDING INTERNET SERVICE AND INTERNET DATA CENTRE . THE ASSESSEE HAS MADE INVESTMENTS IN SUBSIDIARY COMPANY AS WELL AS IN THE MUTUAL FUNDS TO THE TUNE OF RS. 15,82,38,000/-. THE ASSESSEE HAS EARNED DIV IDEND INCOME OF RS. 48,69,223/- WHICH HAS BEEN CLAIMED TO BE EXEMPT U/S 10(34) OF THE ACT. THE ASSESSEE HAS SUO MOTU DISALLOWED EXPENDITURE OF RS. 2,50,000/- U/S 14A OF THE ACT HAVING INCURRED IN RELATION TO EARNING OF E XEMPT INCOME TOWARDS STT.THE ASSESSEE HAS CLAIMED THAT IT HAS ITS OWN FU NDS WHICH WERE INVESTED IN SHARES AND MUTUAL FUNDS AND NO BORROWED FUNDS WE RE UTILIZED.SIMILARLY EXPLANATIONS WERE GIVEN THAT NO ADMINISTRATIVE EXPE NSES WERE INCURRED , WHICH ARE DETAILED HEREUNDER. THE ASSESSEE CAME FOR WARD WITH DETAILED REPLY BEFORE THE AO WHEREIN EXPLANATIONS WERE GIVEN BY TH E ASSESSEE AS TO THE EXPENDITURE INCURRED IN RELATION TO EARNING OF THE EXEMPT INCOME, WHICH WAS OFFERED FOR DISALLOWANCE TO THE TUNE OF RS 2.50 LAC S BY THE ASSESSEE U/S 14A OF THE ACT. THE SAID REPLY OF THE ASSESSEE BEFORE LEA RNED AO IS REPRODUCED HEREUNDER : A. INVESTMENTS HAVE BEEN MADE IN MUTUAL FUNDS AND I N THE SUBSIDIARY COMPANY AND RECEIVED DIVIDEND WHICH IS C LAIMED EXEMPT U/S 10(34) OF THE INCOME TAX ACT, 1961. B. THE INVESTMENTS WERE MADE OUT OF OWN FUNDS AND NO BORROWED FUNDS WERE UTILIZED. THE SAME WERE DONE THROUGH RAI SING OF CAPITAL BY ISSUE OF PREFERENCE SHARES AND USED TO CREATE FIXED D EPOSITS WHICH WERE REDEEMED TO PURCHASE MUTUAL FUNDS. ITA 2205/MUM/2015 11 C. FRESH INVESTMENTS WERE MADE OUT OF PREFERENCE SHA RES ISSUED. D. A TERM LOAN WAS OBTAINED FROM AXIS BANK AMOUNTIN G TO RS. 5,83,46,000/- FOR CAPITAL INVESTMENT AND TOWARDS ADDI TIONS TO FIXED ASSETS AND NOT UTILIZED FOR INVESTMENTS. E. A TABLE SHOWING THE PROFITS EARNED WAS ALSO SUBMITTE D WHICH SHOWS SHARE CAPITAL AT RS. 205883000/- AND RESERVES AND SURPLUS AT RS. 897824000/-. F. NO ADMINISTRATIVE EXPENDITURE WAS INCURRED TOWARDS PURCHASE OF MUTUAL FUND AND WERE CARRIED OUT THROUGH AN AGENT WHO USED TO FILL UP THE FORMS AND DIVIDEND AND WAS CREDITED TO THE ACCOUNT THROUGH ECS AND CHEQUES WERE COLLECTED BY THE AGENT IN RESPECT OF MUTUAL FUNDS AND HENCE NO ADMINISTRATIVE EXPENDITURE WAS INCURRED. G. NO EXPENDITURE WAS BORNE TOWARDS REDEEMING OF MUTU AL FUNDS AS THE REMITTANCES WERE DONE THROUGH ECS. H. IN CASE OF ANY DISALLOWANCE TO BE MADE, THE ASSES SEE HAS MADE A SUO MOTO DISALLOWANCE OF RS. 2,50,000/- BEING AMOUNT DISALLOWED IN SECURITY TRANSACTION TAX. THE AO DID NOT RECORDED SATISFACTION AS TO THE INCO RRECTNESS OF CLAIM/EXPLANATION OF THE ASSESSEE OF HAVING INCURRE D EXPENDITURE TO THE TUNE OF RS. 2,50,000/- IN RELATION TO THE EARNING OF EXE MPT INCOME HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE BEFORE INVOKING RUL E 8D OF INCOME-TAX RULES, 1962 FOR COMPUTING DISALLOWANCE U/S 14A OF THE ACT WHICH METHOD AS PRESCRIBED U/R 8D OF RULES OF 1962 WAS INVOKED BY T HE AO IN AN MECHANICAL MANNER WITHOUT UNDERTAKING EXERCISE BY THE AO TO CO MPUTE DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EARNING OF EXEM PT INCOME HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE AND RECORDING SATIS FACTION THAT THE SUO MOTU DISALLOWANCE OFFERED BY THE ASSESSEE IS INCORRECT , DESPITE ASSESSEE COMING FORWARD WITH DETAILED REPLY AS ENUMERATED ABOVE. TH E SO CALLED SATISFACTION SO RECORDED BY THE AO VIDE PARA 4.3 OF THE ASSESSMENT ORDER FOR THE IMPUGNED ASSESSMENT YEAR AS CLAIMED BY THE LEARNED DR TO BE SATISFACTION AS MANDATED ITA 2205/MUM/2015 12 U/S 14A OF THE ACT IS NOT SUFFICIENT AS REQUIRED TO BE RECORDED BY THE AO AS MANDATED U/S 14A(2) OF THE ACT TO BE RECORDED AFTER BEING NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, WHICH EXERCISE THE AO DID NOT DO TO I DENTIFY EXPENDITURE HAVING BEING INCURRED FOR EARNING EXEMPT INCOME HAVING REG ARDS TO THE ACCOUNTS OF THE ASSESSEE BEFORE PROCEEDING TO COMPUTE DISALLOWA NCE BY INVOKING RULE 8D OF INCOME-TAX RULES, 1962 R.W.S 14A OF THE ACT . THE FACTS OF THE DETAILS AND NATURE OF THE ACCOUNTS OF THE ASSESSEE ARE ESPECIALLY WITHIN THE KNOWLEDGE OF THE ASSESSEE AND HENCE, THE BURDEN OF PROVING THAT FACT IS UPON THE ASSESSEE . IF A FACT WHICH ESPECIALLY ARE WITHIN THE KNOWLEDGE OF THE PERSON, A DUTY AND ONUS IS CAS T ON THE PERSON WITHIN WHOSE KNOWLEDGE ESPECIALLY SUCH FACTS ARE , TO PROV E SUCH FACTS. THIS IS THE MANDATE OF SECTION 106 OF THE INDIAN EVIDENCE ACT,1 872 WHICH IS REPRODUCED HEREIN BELOW :- 106. BURDEN OF PROVING FACT ESPECIALLY WITHIN KNO WLEDGE.- WHEN ANY FACT IS ESPECIALLY WITHIN THE KNOWLEDGE OF ANY PERS ON, THE BURDEN OF PROVING THAT FACT IS UPON HIM. ILLUSTRATIONS (A)*** (B) A IS CHARGED WITH TRAVELLING ON A RAILWAY WITHO UT A TICKET. THE BURDEN OF PROVING THAT HE HAD A TICKET IS ON HIM. THE ASSESSEE HAD IN ITS KNOWLEDGE ESPECIALLY FACT OF HAVING INCURRED EXPENDITURE IN RELATION TO EARNING OF EXEMPT INCOME AS THE ASSESSEE IS PRIVY TO ITS ACCOUNTS. THE ASSESSEE DID COME FORWARD AND GAV E COMPREHENSIVE REPLY BEFORE THE AO W.R.T. DISALLOWANCE U/S 14A OF THE AC T OF 1961 AND THE PRIMARY ONUS/ BURDEN CAST ON THE ASSESSEE U/S 14A OF THE AC T R.W.S 106 OF THE ACT OF 1872 STOOD DISCHARGED . NOW, THE ONUS SHIFTED TO TH E AO TO DEMONSTRATE HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE AS T O HOW THE SUO MOTU DISALLOWANCE OF RS. 2.50 LACS AS OFFERED BY THE AS SESSEE IS IN-CORRECT HAVING ITA 2205/MUM/2015 13 REGARDS TO THE ACCOUNTS OF THE ASSESSEE WHICH EXERC ISE WAS NOT DONE BY THE AO AS NO SATISFACTION WAS RECORDED SHOWING INCORREC TNESS OF THE DISALLOWANCE OFFERED BY THE ASSESSE HAVING REGARDS TO THE ACCOUN TS OF THE ASSESSEE BY THE AO BEFORE PROCEEDING TO ADOPT METHOD AS PRESCRIBED U/R 8D OF RULES OF 1962 . THE RELIANCE OF THE LEARNED DR ON THE ORDER OF THE TRIBUNAL IN ITA NO 902/MUM/2010 FOR ASSESSMENT YEAR 2006-07 VIDE ORDER DATED 03-06-2011 IN ASSESSEES OWN CASE IS MISCONCEIVED AS THE SAID ASS ESSMENT YEAR IS 2006-07 WHICH IS PRIOR TO ASSESSMENT YEAR 2008-09 WHEREIN R ULE 8D OF INCOME-TAX RULES, 1962 HAS HELD TO COME INTO EFFECT W.E.F. ASS ESSMENT YEAR 2008-09 AS PER DECISION OF HONBLE BOMBAY HIGH COURT IN THE CA SE OF GODREJ AND BOYCE MANUFACTURING COMPANY LIMITED V. DCIT IN (2010) 328 ITR 81(BOM.)) , WHEREIN TRIBUNAL IN SAID ORDER DATED 03-06-2011 FOR ASSESSMENT YEAR 2006-07 HAD SET ASIDE THE MATTER TO THE FILE OF THE AO TO C OMPUTE REASONABLE DISALLOWANCE U/S 14A OF THE ACT IN ACCORDANCE WITH RATIO OF LAW LAID DOWN BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MANUFACTURING COMPANY LIMITED V. DCIT IN (2010) 328 ITR 81(BOM.)) WE HAVE OBSERVED THAT THE TRIBUNAL IN ASSESSEES OW N CASE FOR ASSESSMENT YEAR 2009-10 HAS DELETED THE ADDITIONS MADE BY THE AO U/S 14A OF THE ACT IN ITA NO. 5160/MUM/2013 VIDE ORDERS DATED 25.08.2016 ON GROUNDS OF NON- RECORDING OF SATISFACTION BY THE AO WHICH WAS HELD TO BE NECESSARY REQUIREMENTS IN TERMS OF SECTION 14A(2) OF THE ACT BEFORE INVOKING METHOD AS PRESCRIBED UNDER RULE 8D OF INCOME-TAX RULES, 1962 FOR COMPUTING DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EARNING OF EXEMPT INCOME U/S 14A OF THE ACT, WHEREIN TRIBUNAL OBSERVED AS UN DER: 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND PERUSED THE MATERIAL PLACED BEFORE US INCLUDING THE ORDERS OF A UTHORITIES BELOW. ON PERUSAL OF THE ORDERS, WE FIND THAT BY INVOKING THE PROVISIONS OF SECTION 14A R.W.R 8D, THE AO HAS NOT AT ALL COMMENTED ON TH E DISALLOWANCE OF ITA 2205/MUM/2015 14 RS.2,50,000/- WHICH WAS MADE BY THE ASSESSEE SUO MO TTU FOR EARNING EXEMPT INCOME. WE ARE OF THE CONSIDERED OPINION THA T INVOKING THE PROVISIONS OF SECTION 14A R.W.R 8D WITHOUT RECORDIN G THE SATISFACTION BY THE AO IS WRONG AND ACCORDINGLY THE ORDER OF THE LD .CIT(A) BY UPHOLDING THE ACTION OF AO CANNOT BE SUSTAINED. THE CASE OF T HE ASSESSEE FINDS SUPPORTS FROM THE VARIOUS DECISIONS OF HIGH COURT A S WELL TRIBUNAL REFERRED DURING THE COURSE OF HEARING. WE FIND THAT IN THE CASE OF KALYANI STEELS LTD (SUPRA), THE CO-ORDINATE BENCH OF THE TR IBUNAL HAS HELD THAT NON RECORDING SATISFACTION WITH REGARD TO THE CORRE CTNESS OF THE CLAIM OF THE ASSESSEE WHICH IS A MANDATORY REQUIREMENT IN TE RMS OF SECTION 14A OF THE ACT R.W.R 8D TO COMPUTE THE IMPUGNED DISALLO WANCE IS UNTENABLE IN LAW. THE RELEVANT OPERATIVE PART OF THE ORDER IS RE PRODUCED BELOW : 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. SECTION 14A OF THE ACT CONTEMPLATES THAT FOR THE PURPOSES O F COMPUTING THE TOTAL INCOME, NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T. SUB-SECTION (2) OF SECTION 14A OF THE ACT PRESCRIBES THAT THE ASSES SING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN REL ATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, SUCH PRESCRI BED METHOD BEING CONTAINED IN RULE 8D OF THE RULES. HOWEVER, T HE AFORESAID EMPOWERMENT OF THE ASSESSING OFFICER TO INVOKE APPL ICATION OF RULE 8D OF THE RULES IS SUPERSCRIBED BY A CONDITION CONT AINED IN SUBSECTION (2) OF SECTION 14A OF THE ACT WHICH IS T O THE EFFECT THAT 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 EXPENDITURE INCURRED IN RELA TION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . THEREFORE, THE INVOKING OF RULE 8D OF THE RULES IN ORDER TO COMPUT E THE DISALLOWANCE U/S 14A OF THE ACT IS NEITHER AUTOMATI C AND NOR IS TRIGGERED MERELY BECAUSE ASSESSEE HAS EARNED AN EXE MPT INCOME. THE INVOKING OF RULE 8D OF THE RULES IS PERMISSIBLE ONLY WHEN THE ASSESSING OFFICER RECORDS THE SATISFACTION IN REGAR D TO THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. IN OTHER WORDS, SECTION 1 4A(2) OF THE ACT ENVISAGED A CONDITION PRECEDENT FOR INVOKING RULE 8 D OF THE RULES AND COMPUTING DISALLOWANCE THEREOF ONLY IF THE ASSE SSING OFFICER RECORDS THAT HE IS NOT SATISFIED WITH THE CORRECTNE SS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE, HAVING REGARD 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 THE CASE OF GODREJ & BOYCE MANUFACTURING C O. LTD. (SUPRA) ITA 2205/MUM/2015 15 :- 70. NOW, IN DEALING WITH THE CHALLENGE IT IS NE CESSARY TO ADVERT TO THE POSITION THAT SUB-SECTION (2) OF SECTION 14A PRESCRIBES A UNIFORM METHOD FOR DETERMINING THE AMOUNT OF EXPEND ITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME ONLY IN A SITUATION WHERE THE ASSESSING OFFICER, HA VING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPEND ITURE. IT, THEREFORE, MERITS EMPHASIS THAT SUB-SECTION (2) OF SECTION 14A DOES NOT AUTHORIZE OR EMPOWER THE ASSESSING OFFICER TO A PPLY THE PRESCRIBED METHOD IRRESPECTIVE OF THE NATURE OF THE CLAIM MADE BY THE ASSESSEE. THE ASSESSING OFFICER HAS TO FIRST CO NSIDER THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REG ARD TO THE ACCOUNTS OF THE ASSESSEE. THE SATISFACTION OF THE A SSESSING OFFICER HAS TO BE OBJECTIVELY ARRIVED AT ON THE BASIS OF TH OSE ACCOUNTS AND AFTER CONSIDERING ALL THE RELEVANT FACTS AND CIRCUM STANCES. THE APPLICATION OF THE PRESCRIBED METHOD ARISES IN A SI TUATION WHERE THE CLAIM MADE BY THE ASSESSEE IN RESPECT OF EXPEND ITURE WHICH IS RELATABLE TO THE EARNING OF INCOME WHICH DOES NOT F ORM PART OF THE TOTAL INCOME UNDER THE ACT IS FOUND TO BE INCORRECT . IN SUCH A SITUATION A METHOD HAD TO BE DEVISED FOR APPORTIONI NG 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. A S A MATTER OF FACT, THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FIN ANCE BILL, 2006, AND THE CENTRAL BOARD OF DIRECT TAXES CIRCULA R DATED DECEMBER 28, 2006, STATE THAT SINCE THE EXISTING PR OVISIONS OF SECTION 14A DID NOT PROVIDE A METHOD OF COMPUTING T HE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DID NOT FORM P ART OF THE TOTAL INCOME, THERE WAS A CONSIDERABLE DISPUTE BETWEEN TA XPAYERS AND THE DEPARTMENT ON THE METHOD OF DETERMINING SUCH EX PENDITURE. IT WAS IN THIS BACKGROUND THAT SUBSECTION (2) WAS INSE RTED SO AS TO PROVIDE A UNIFORM METHOD APPLICABLE WHERE THE ASSES SING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. SUB- SECTION (3) CLARIFIES THAT THE APPLICATION OF THE M ETHOD WOULD BE ATTRACTED EVEN TO A SITUATION WHERE THE ASSESSEE HA S CLAIMED THAT NO EXPENDITURE AT ALL WAS INCURRED IN RELATION TO T HE EARNING OF NON- TAXABLE INCOME. 71. PARLIAMENT HAS PROVIDED AN ADEQ UATE 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 SATISFAC TION OF THE ASSESSING OFFICER IN REGARD TO THE CORRECTNESS OF T HE CLAIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSE SSEE. WHEN A STATUTE POSTULATES THE SATISFACTION OF THE ASSESSIN G OFFICER 'COURTS ITA 2205/MUM/2015 16 WILL NOT READILY DEFER TO THE CONCLUSIVENESS 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 POWE R IS PREDICATED'. (M. A. RASHEED V. STATE OF KERALA [1974] AIR 1974 S C 2249*). A DECISION BY THE ASSESSING OFFICER HAS TO BE ARRIVED AT IN GOOD FAITH ON RELEVANT CONSIDERATIONS. THE ASSESSING OFFICER M UST FURNISH TO THE ASSESSEE A REASONABLE OPPORTUNITY TO SHOW CAUSE ON THE CORRECTNESS OF THE CLAIM MADE BY HIM. IN THE EVENT THAT THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECT NESS OF THE CLAIM MADE BY THE ASSESSEE, HE MUST RECORD REASONS FOR HI S CONCLUSION. THESE SAFEGUARDS WHICH ARE IMPLICIT IN THE REQUIREM ENTS OF FAIRNESS AND FAIR PROCEDURE UNDER ARTICLE 14 MUST BE OBSERVE D BY THE ASSESSING OFFICER WHEN HE ARRIVES AT HIS SATISFACTI ON UNDER SUB- SECTION (2) OF SECTION 14A. AS WE SHALL NOTE SHORTL Y HEREAFTER, SUBRULE (1) OF RULE 8D HAS ALSO INCORPORATED THE ES SENTIAL REQUIREMENTS OF SUB-SECTION (2) OF SECTION 14A BEFO RE THE ASSESSING OFFICER PROCEEDS TO APPLY THE METHOD PRESCRIBED UND ER SUB-RULE (2). [UNDERLINED FOR EMPHASIS BY US] 7. IN THE ASSESSEES CASE ALSO, WE FIND THAT NO SAT ISFACTION HAS BEEN RECORDED AS REGARD THE INVOKING OF THE PROVISIONS O F SECTION 14A R.W.R 8D, AND THEREFORE APPLICATION OF SECTION 14A R.W.R.8D I S NOT CORRECT AS THE NECESSARY SATISFACTION IN TERMS OF SECTION 14A(2) O F THE ACT HAS NOT BEEN RECORDED. FOLLOWING THE RATIO LAID DOWN IN THE DECI SION OF THE TRIBUNAL (SUPRA), WE SET ASIDE THE ORDER OF THE LD.CIT(A) AN D DIRECT THE AO TO DELETE THE ADDITION. THIS GROUND IS ALLOWED WE HAVE OBSERVED THAT FACTS IN THE INSTANT YEAR ARE IDENTICAL TO THE FACTS IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 20 09-10 AND RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEE S OWN CASE IN ITA NO. 5160/MUM/2013 FOR ASSESSMENT YEAR 2009-10, WE ORDER DELETION OF THE ADDITIONS MADE BY THE AO AS CONFIRMED BY THE LEARNE D CIT(A) ON THE SAME GROUNDS THAT NO SATISFACTION WAS RECORDED BY THE AO U/S 14A(2) OF THE ACT AS TO THE INCORRECTNESS OF THE CLAIM/EXPLANATION OF TH E ASSESSEE AS TO THE DISALLOWANCE MADE BY THE ASSESSEE OF EXPENDITURE OF RS. 2,50,000/- HAVING INCURRED IN RELATION TO THE EARNING OF THE EXEMPT I NCOME, BEFORE INVOKING SECTION14A OF THE ACT R.W.R. 8D OF INCOME-TAX RULES , 1962 , EXCLUDING THE SUO MOTU DISALLOWANCE OF RS. 2,50,000/- AS VOLUNTARILY OFFERED BY THE ASSESSEE ITA 2205/MUM/2015 17 U/S 14A OF THE ACT WHICH DISALLOWANCE U/S 14A OF TH E ACT TO THE TUNE OF RS. 2,50,000/- STOOD CONFIRMED/SUSTAINED. WE ORDER ACC ORDINGLY. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IN ITA NO . 2205/MUM/2015 FOR THE ASSESSMENT YEAR 2011-12 IS ALLOWED AS INDICATED AB OVE. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH FEBRUARY, 2017. # $% &' 27-02-2017 ( ) SD/- SD/- (C.N. PRASAD) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER $ MUMBAI ; & DATED 27-02-2017 .9../ R.K. R.K. R.K. R.K. , EX. SR. PS !'#$%&%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. : ( ) / THE CIT(A)- CONCERNED, MUMBAI 4. : / CIT- CONCERNED, MUMBAI 5. =>( 99?@ , ?@ , $ / DR, ITAT, MUMBAI J BENCH 6. (BC D / GUARD FILE. / BY ORDER, = 9 //TRUE COPY// / ( DY./ASSTT. REGISTRAR) , $ / ITAT, MUMBAI