Coated Fabrics Pvt. Ltd., Pune V. Deputy Commissioner of Income-tax,

ITA 2225/PUN/2014

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 7217 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 11-09-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 15-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR VIVEK AGGARWAL
• Keywords: Earning of tax free income; Source of fund; Retrospective amendment
• Section: 143(3); 14A

Judgement Text

] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO.2225/PUN/2014 [ [ / ASSESSMENT YEAR : 2008-09 COATED FABRICS PVT. LIMITED, (NOW AMALGAMATED WITH ORBIT ELECTRICALS PVT. LIMITED), ORBIT ELECTRICALS PVT. LTD. PLOT NO.5, HARMONY COMPLEX, ICS COLONY, GANESHKHIND ROAD, PUNE 411 007. PAN : AAACC7011N / AAACF2636C. . / APPELLANT V/S DY.COMMISSIONER OF INCOME TAX, CIRCLE 1(1), PUNE. . / RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK. REVENUE BY : SHRI DR. VIVEK AGGARWAL. / ORDER PER ANIL CHATURVEDI, AM : 1. THIS APPEAL FILED BY THE ASSESSEE IS EMANATING OUT OF THE ORDER OF COMMISSIONER OF INCOME TAX (A) I, PUNE DT.30.06.2014 FOR THE ASSESSMENT YEAR 2008-09. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER :- / DATE OF HEARING : 11.09.2017 / DATE OF PRONOUNCEMENT: 31.10.2017 2 2.1 ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE BUSINESS OF INVESTMENT AND TRADING IN SHARES, MUTUAL FUNDS AND FINANCE BUSINESS. ASSESSEE ELECTRONICALLY FILED ITS RETURN OF INCOME FOR A.Y. 2008-09 ON 29.09.2008 DECLARING TOTAL INCOME OF RS.1,43,77,420/-. THE CASE WAS SELECTED FOR SCRUTINY AND THEREAFTER ASSESSMENT WAS FRAMED U/S 143(3) OF THE ACT VIDE ORDER DT.06.12.2010 AND THE TOTAL INCOME WAS DETERMINED AT RS.1,49,73,050/-. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD.CIT(A), WHO VIDE ORDER DT.30.06.2014 (IN APPEAL NO.PN/CIT(A)-I/DCIT CIR 1(1)/PN/84/2010-11) GRANTED PARTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE ORDER OF LD.CIT(A) ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS : 1. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE U/S 14A R.W.R. 8D(2)(III) OF RS.5,90,627/- WITHOUT APPRECIATING THAT NO SUCH DISALLOWANCE WAS WARRANTED ON FACTS OF THE CASE. 2. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ASSESSEE HAD INCURRED INDIRECT EXPENDITURE IN RELATION TO EARNING THE EXEMPT DIVIDEND INCOME OF RS.2,54,40,017/- AND THEREFORE, THE DISALLOWANCE U/S 14A R.W.R. 8D(2)(III) MADE BY THE LEARNED A.O. WAS JUSTIFIED. 3. THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE LEARNED A.O. HAD NOT RECORDED ANY OBJECTIVE SATISFACTION AS TO HOW THE DISALLOWANCE U/S 14A OF RS.5,000/- MADE BY THE ASSESSEE ON ITS OWN IN THE RETURN OF INCOME WAS NOT SUFFICIENT AND HENCE, THERE WAS NO REASON TO APPLY RULE 8D IN THE CASE OF THE ASSESSEE. 4. WITHOUT PREJUDICE TO THE ABOVE GROUND, IT IS SUBMITTED THAT THE ASSESSEE HAD NOT INCURRED ANY INDIRECT EXPENDITURE FOR EARNING THE EXEMPT DIVIDEND INCOME OF RS.2,54,40,0 17/- FROM THREE GROUP COMPANIES AND THEREFORE, THERE WAS NO REASON TO MAKE ANY DISALLOWANCE OVER AND ABOVE THE DISALLOWANCE OF RS.5,000/- ALREADY MADE BY THE ASSESSEE COMPANY. 5. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSESSEE SUBMITS THAT THE DISALLOWANCE U/S 14A CONFIRMED BY THE LEARNED CIT(A) IS VERY HIGH AND THE SAME BE REDUCED SUBSTANTIALLY. 3 3. BEFORE US, LD.A.R. SUBMITTED THAT THOUGH ASSESSEE HAS RAISED VARIOUS GROUNDS BUT THE SOLE CONTROVERSY IS WITH RESPECT TO DISALLOWANCE OF EXPENSES U/S 14A R.W. RULE 8D OF THE ACT. 4. DURING THE COURSE OF ASSESSMENT, ON PERUSAL OF THE COMPUTATION OF INCOME AO NOTICED THAT ASSESSEE HAS CLAIMED EXEMPT INCOME OF RS.2,54,40,017/- U/S 10(38) OF THE ACT BUT HAD NOT ATTRIBUTED ANY EXPENDITURE TOWARDS EARNING EXEMPT INCOME. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY EXPENDITURE CORRESPONDING TO INCOME NOT BE DISALLOWED U/S 14A OF THE ACT. IN RESPONSE TO THE QUERY OF AO ASSESSEE SUBMITTED THAT IT HAS NOT INCURRED ANY EXPENDITURE ON ACCOUNT OF INTEREST DURING THE YEAR AND FURTHER NO EXPENDITURE WAS INCURRED FOR EARNING EXEMPT INCOME BUT HOWEVER ASSESSEE HAS SUO-MOTO DISALLOWED RS.5,000/- TOWARDS DISALLOWANCE OF EXPENSES. IT WAS FURTHER SUBMITTED THAT THE DIVIDEND WAS RECEIVED BY THE ASSESSEE FROM THREE GROUP COMPANIES AND THE AMOUNT WAS DIRECTLY CREDITED IN THE BANK ACCOUNT OF ASSESSEE. THE SUBMISSION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE TO THE AO. HE PROCEEDED TO WORK OUT THE DISALLOWANCE DIRECTLY BY FOLLOWING SEC.14A R.W. RULE 8D OF THE ACT AND WORKED OUT DISALLOWANCE AT RS.5,95,627/-. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD.CIT(A), WHO UPHELD THE ORDER OF AO BY HOLDING AS UNDER : 4.2 THE SUBMISSIONS MADE BY THE APPELLANT WERE FOUND TO BE NOT CONVINCING TO THE ASSESSING OFFICER. THE AO OBSERVED THAT IT IS DIFFICULT TO ASSUME THAT ALL THE TAX FREE INCOME EARNED BY APPELLANT HAS BEEN EARNED WITHOUT ANY EXPENDITURE AND THERE WAS ELEMENT OF AN INDIRECT EXPENDITURE IN RELATION TO EXEMPT INCOME ALTHOUGH DIRECT EXPENDITURE IS NOT SEEN TO BE INCURRED FOR EARNING THE DIVIDEND INCOME IN THE CASE OF THE APPELLANT. ACCORDINGLY, A SUM OF RS. 5,95,627/- WAS DISALLOWED UNDER 4 SEC. 14A READ WITH RULE 8D(III) AND ADDED TO THE TOTAL INCOME OF THE APPELLANT. 4.3 THE APPELLANT BEFORE THE UNDERSIGNED SUBMITTED THAT THE COMPANY IS A PART OF THE FINOLEX GROUP OF COMPANIES AND HAS BEEN ENGAGED IN THE ACTIVITY OF TRADING IN SHARES. AT THE OUTSET, THE APPELLANT SUBMITS THAT AS PER THE PROVISIONS OF SECTION 14A(2), BEFORE MAKING ANY DISALLOWANCE U/S 14A R.W.R. 80, THE A.O. MUST BE SATISFIED THAT THE CLAIM MADE BY THE APPELLANT IN RELATION TO EARNING THE EXEMPT INCOME IS NOT CORRECT AND ONLY THEN, HE CAN PROCEED TO MAKE THE DISALLOWANCE BY APPLYING THE PROVISIONS OF RULE 8D. IT IS EXHORTED THAT THE A.O. MUST RECORD OBJECTIVE SATISFACTION AS TO HOW THE CLAIM OF THE APPELLANT IS NOT CORRECT AND HE MUST RECORD COGENT REASONS FOR REJECTING THE CLAIM OF THE ASSESSEE. IT IS SUBMITTED THAT IN THE INSTANT CASE, THE APPELLANT HAD EXPLAINED VARIOUS REASONS AS TO WHY THE APPELLANT HAD NOT INCURRED ANY EXPENDITURE IN RELATION TO EARNING THE EXEMPT DIVIDEND INCOME AND HENCE, IT WAS CLAIMED THAT THE' DISALLOWANCE OF RS. 5,000/- MADE IN THE RETURN OF INCOME FILED FOR THIS YEAR WAS SUFFICIENT TO COVER EXPENSES INCURRED, IF ANY, FOR EARNING THE TAX FREE INCOME. HOWEVER, ACCORDING TO THE APPELLANT, IN THE ASST. ORDER, THE LEARNED A.O. HAS MERELY STATED THAT IT IS DIFFICULT TO ASSUME THAT THE APPELLANT HAS NOT INCURRED ANY EXPENSES FOR EARNING THE DIVIDEND INCOME AND THAT THERE IS ALWAYS AN ELEMENT OF INDIRECT EXPENDITURE IN EARNING THE EXEMPT INCOME. THUS, THE APPELLANT CONTENDS THAT THE LEARNED A.O. HAS NOT GIVEN ANY COGENT REASONS AS TO WHY HE IS NOT SATISFIED WITH THE CLAIM MADE BY THE APPELLANT AND WITHOUT RECORDING ANY OBJECTIVE SATISFACTION AS TO WHY THE CLAIM MADE BY THE APPELLANT IS NOT CORRECT, THE LEARNED A.O.IS NOT JUSTIFIED IN COMPUTING THE DISALLOWANCE U/S 14A BY APPLYING THE PROVISIONS OF RULE 8D. ACCORDINGLY, IT IS URGED THAT THE DISALLOWANCE MADE BY THE LEARNED A.O. IS NOT JUSTIFIED AND THE SAME MAY BE DELETED. 4.3.1 WITHOUT PREJUDICE TO THE ABOVE CONTENTION, ASSUMING WITHOUT ADMITTING THAT THE A.O. IS NOT REQUIRED TO RECORD OBJECTIVE SATISFACTION FOR REJECTING THE CLAIM OF THE APPELLANT, IT IS SUBMITTED THAT THE APPELLANT HAS EARNED TOTAL DIVIDEND OF RS. 2,54,40,017/- FROM INVESTMENT MADE IN EQUITY SHARES OF THREE GROUP COMPANIES OF FINOLEX GROUP, NAMELY, FINOLEX CABLES LTD., FINOLEX INDUSTRIES LTD. AND PLASTRO PLASSON INDUSTRIES LTD. IT IS REITERATED THAT IT IS ALSO A PART OF THE FINOLEX GROUP OF COMPANIES AND THE INVESTMENTS MADE IN THE ABOVE THREE COMPANIES WERE HELD AS PROMOTER'S HOLDING BY THE ASSESSEE AND THE MAIN INTENTION BEHIND MAKING INVESTMENTS IN THESE COMPANIES WAS TO MAINTAIN THE PROMOTER'S STAKE AND NOT TO EARN DIVIDEND THEREON. THE APPELLANT FURTHER SUBMITS THAT OUT OF THE TOTAL INVESTMENT OF RS. 10.11 CRS. HELD IN THESE THREE COMPANIES, ONLY AN AMOUNT OF 44.85 LACS WAS INVESTED IN THIS YEAR WHEREAS THE BALANCE INVESTMENTS OF RS. 9.66 CRS. WERE MADE IN THE EARLIER YEARS. IT IS EXPLAINED THAT THESE INVESTMENTS WERE MADE OUT OF OWNED FUNDS OF THE ASSESSEE COMPANY AND IT HAS NOT UTILIZED ANY BORROWED FUNDS FOR MAKING INVESTMENTS IN THESE COMPANIES. FURTHER, IT IS POINTED OUT THAT THE DIVIDEND RECEIVED FROM EACH OF THESE COMPANIES 5 HAS BEEN CREDITED DIRECTLY TO THE BANK ACCOUNT OF THE ASSESSEE BY WAY OF A SINGLE ENTRY IN THE YEAR AND THEREFORE IT HAS NOT INCURRED ANY DIRECT EXPENDITURE FOR EARNING THE SAID DIVIDEND INCOME AND TH IS FACT IS ALSO ACCEPTED BY THE A.O. IN THIS ASST. ORDER. 4.3.2 ADVANCING ITS ARGUMENTS FURTHER, THE APPELLANT SUBMITS THAT IT HAS NOT INCURRED ANY INDIRECT EXPENDITURE IN RELATION TO EARNING THE ABOVE DIVIDEND INCOME. IT IS SUBMITTED THAT THE INVESTMENT IN THE ABOVE GROUP COMPANIES WAS MADE WITH THE INTENTION TO MAINTAIN THE PROMOTER'S STAKE IN SUCH COMPANIES AND NOT TO EARN DIVIDENDS ON THE SAME. NEVERTHELESS, IN THE RETURN OF INCOME FILED FOR THIS YEAR, THE ASSESSEE HAS MADE A SUO MOTO DISALLOWANCE OF RS.5,000/- U/S 14A OF THE ACT. THE APPELLANT SUBMITS THAT THE LEARNED A.O. HAS NOT BROUGHT ANYTHING ON RECORD TO SHOW THAT THE APPELLANT HAS INCURRED ANY INDIRECT EXPENDITURE IN RELATION TO THE ABOVE DIVIDEND INCOME AND IT IS NOWHERE STATED IN THE ASSESSMENT ORDER THAT THE INDIRECT EXPENSES INCURRED, IF ANY, IN RELATION TO EARNING THE DIVIDEND INCOME WERE MORE THAN THE DISALLOWANCE OF RS. 5,000/- MADE BY THE APPELLANT. ACCORDINGLY, IT IS ARGUED THAT IN SUCH CIRCUMSTANCES, THE DISALLOWANCE OF RS. 5,95,627/- MADE BY THE LEARNED A.O, IN RESPECT OF INDIRECT EXPENSES BY APPLYING THE PROVISIONS OF RULE 8D(2)(III) IS NOT JUSTIFIED. LD. COUNSEL SUBMITTED THAT THE DISALLOWANCE MADE BY IT IS MORE THAN REASONABLE AND HENCE, THE DISALLOWANCE MADE BY THE LEARNED A.O. SHOULD BE DELETED. 4.3.3 WITHOUT PREJUDICE TO THE ABOVE GROUNDS AND ASSUMING BUT NOT ADMITTING THAT THE APPELLANT HAS INCURRED SOME INDIRECT EXPENSES TOWARDS EARNING EXEMPT DIVIDEND INCOME, THE APPELLANT SUBMITS THAT THE LEARNED A.O. IS NOT JUSTIFIED IN DETERMINING SUCH EXPENSES AT RS. 5.95 LACS. IN THIS RESPECT, IT IS SUBMITTED THAT THE TOTAL DIVIDEND EARNED ON INVESTMENTS MADE BY THE ASSESSEE IN THIS YEAR WAS RS. 2.54 CRS. AND HENCE, THE DISALLOWANCE OF RS. 5.95 LACS, WHICH WORKS OUT TO 2.34% OF THE DIVIDEND INCOME IS VERY HIGH AND THE SAME MAY BE REDUCED SUBSTANTIALLY. 4.3.4 WITHOUT PREJUDICE TO THE ABOVE SUBMISSIONS, IT IS FURTHER SUBMITTED THAT THE LEARNED A,O. HAS COMPUTED THE DISALLOWANCE U/S 14A R.W.R. 8D AT RS. 5,95,627/- AND HE HAS ADDED THE ENTIRE AMOUNT TO THE TOTAL INCOME OF THE APPELLANT WITHOUT TAKING INTO CONSIDERATION THE DISALLOWANCE OF RS. 5,000/- U/S 14A AND HENCE, IF AT ALL, ANY DISALLOWANCE WAS TO BE MADE IN THE CASE OF THE APPELLANT, THE TOTAL DISALLOWANCE OUGHT TO HAVE BEEN REDUCED BY THE AMOUNT OF RS. 5,000/- ALREADY DISALLOWED BY THE APPELLANT AND ONLY THE BALANCE ADDITION SHOULD HAVE BEEN MADE TO THE TOTAL INCOME OF THE APPELLANT. 4.4 THE SUBMISSIONS MADE BY THE APPELLANT ARE CAREFULLY EXAMINED IN THE LIGHT OF THE FACTS OF THE CASE AND THE PROVISIONS OF SEE. 14A ARE APPLICABLE TO THE YEAR UNDER CONSIDERATION. 'THE FIRST ARGUMENT OF THE APPELLANT IS THAT THE ASSESSING OFFICER WHILE MAKING THE IMPUGNED DISALLOWANCE HAS NOT RECORDED OBJECTIVE SATISFACTION AS TO WHY THE ASSESSING OFFICER WAS OF THE VIEW THAT THE DISALLOWANCE OF 6 EXPENDITURE OF RS. 5000/- MADE BY THE APPELLANT ITSELF IS NOT CORRECT. THIS CONTENTION OF THE APPELLANT IS NOT WELL FOUNDED. IN PARA 4.2 OF THE ASSESSMENT ORDER, IT IS CLEARLY RECORDED BY THE ASSESSING OFFICER THAT THE APPELLANT HAS DEBITED VARIOUS EXPENSES TO THE P & L ACCOUNT AND IT IS DIFFICULT TO ASSUME THAT THE TAX FREE DIVIDEND INCOME WAS EARNED BY THE APPELLANT WITHOUT INCURRING ANY INDIRECT EXPENDITURE AT ALL OR INCURRING ONLY RS. 5000/- AS CLAIMED BY THE APPELLANT. THUS, THE ASSESSING OFFICER HAVING REGARD TO THE COMPOSITE ACCOUNTS OF THE APPELLANT IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE APPELLANT THAT ONLY EXPENDITURE OF RS. 5000/- WAS INCURRED IN RELATION TO SAID EXEMPT INCOME AND INVOKED SECTION 14A READ WITH RULE 8D OF THE I.T. ACT.' SECTION 14A INTRODUCED BY THE FINANCE ACT, 2001 WITH RETROSPECTIVE EFFECT FROM 01/04/1962, PROVIDES FOR EXCLUSION OR DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THIS ACT. IN THIS REGARD, REFERENCE CAN BE MADE TO THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (328 ITR 81) WHEREIN THE HON'BLE HIGH COURT HELD AS UNDER (PARA 43): 4.4.1 THE FACTS OF THE PRESENT CASE ARE NOW TESTED VIS-A-VIS THE ABOVE PRINCIPLES LAID DOWN BY THE BOMBAY HC AND THE PROVISIONS OF SEC. 14A. IN THE CASE OF THE APPELLANT, THE BUSINESS IS COMPOSITE AND INDIVISIBLE AND THE TOTAL INCOME OF THE APPELLANT INCLUDES TAXABLE INCOME AND EXEMPTED INCOME FROM DIFFERENT SOURCES. ONCE THE BUSINESS IS COMPOSITE AND THE EXPENDITURE INCURRED BY THE APPELLANT INCLUDES COMMON INDIRECT EXPENSES AS IS EVIDENT FROM THE CONSOLIDATED FINANCIALS, THE EXPENDITURE IN RELATION TO THE EXEMPTED INCOME HAS TO BE WORKED OUT AS PER RULE 8D ON PRO-RATA BASIS AS PER THE FORMULA PROVIDED IN THE SAID RULE. IN FACT, CONSIDERING THE DISPUTES BETWEEN TAX PAYERS AND INCOME TAX DEPARTMENT ON THE METHOD OF DETERMINING SUCH EXPENDITURE, RULE 8D WAS SPECIFICALLY BROUGHT INTO THE STATUTE AND AS MAY BE OBSERVED FROM THE CBDT CIRCULAR 14/2006 DATED 28.12.2006, IT IS NOW MANDATORY ON THE PART OF THE ASSESSING OFFICER TO DETERMINE AND ALLOCATE EXPENDITURE INCURRED IN RELATION TO SUCH INCOME. ONCE THE INCOME FROM DIVIDEND IS EXEMPT IN THE HANDS OF THE RECIPIENT, SECTION 14A READ WITH RULE 8D COMES INTO PLAY AND THE ASSESSING OFFICER HAS TO COMPUTE THE EXPENDITURE IN RELATION TO SUCH EXEMPT DIVIDEND INCOME. FURTHER AS SUBMITTED BY THE APPELLANT ITSELF THERE WAS FRESH INVESTMENT OF RS. 44.85 LACS IN SHARES OF THE GROUP COMPANIES DURING THE YEAR AND THIS EXERCISE OF MAKING FRESH INVESTMENTS AND MAINTAINING THE EXISTING PORTFOLIO DEFINITELY INVOLVES CERTAIN INDIRECT EXPENDITURE. IT IS ALSO IMPORTANT TO NOTE THAT IN THE PRESENT CASE, THE DISALLOWANCE WAS COMPUTED BY THE AO ONLY UNDER CLAUSE (III) OF RULE 8D. THE CONTENTION OF THE APPELLANT THAT THE COMPANY ITSELF HAS DISALLOWED AND ADDED BACK THE' SUBSTANTIAL EXPENDITURE IN THE COMPUTATION OF TOTAL INCOME IS OF NO CONSEQUENCE FOR THE REASON THAT FROM THE A.Y. 2008-09 THE EXPENDITURE IN RELATION TO EXEMPT INCOME HAS TO BE WORKED OUT AS PER THE METHOD 7 PRESCRIBED IN RULE 8D AND NOT ON ESTIMATE BASIS OR BY ANY OTHER MODE. FURTHER, MERELY BECAUSE THE TOTAL DISALLOWANCE WORKS OUT TO 2.34% OF THE DIVIDEND INCOME, IT CANNOT BE SAID THE EXPENDITURE COMPUTED BY THE AO AS PER THE FORMULA PRESCRIBED IN RULE 8D IS UNJUSTIFIED PARTICULARLY WHEN THE APPELLANT HAS NOT POINTED OUT ANY MISTAKE OR ERROR IN THE COMPUTATION OF THE AO. IN FACT, AS PER SCHEDULE-8 TO THE P & L ACCOUNT, SUBSTANTIAL INDIRECT EXPENSES IN THE FORM OF SALARIES & WAGES, OFFICE & ADMINISTRATION EXPENSES, WERE INCURRED BY THE APPELLANT DURING THE YEAR AND OUT OF WHICH THE ASSESSING OFFICER HAS DISALLOWED EXPENDITURE OF RS. 5,65,627/- INVOKING RULE 8D(III) WHICH CANNOT BE SAID TO BE UNJUSTIFIED OR ON HIGHER SIDE. DEPENDING ON THE FACTS OF THE CASE, THE DISALLOWANCE UNDER RULE 8D MAY BE EVEN 100% OF THE EXEMPT INCOME CLAIMED BY THE APPELLANT IN SOME CASES AND THAT BY ITSELF DOES NOT RENDER THE DISALLOWANCE PROPERLY WORKED OUT AS PER RULE 8D UNJUSTIFIED OR INCORRECT. THEREFORE, ON THE FACTS OF THE PRESENT CASE, WHERE SUBSTANTIAL INCOME IS CLAIMED AS EXEMPT, THE ACTION OF THE ASSESSING OFFICER IN WORKING OUT THE DISALLOWANCE UNDER RULE 8D (III) BY TAKING INTO CONSIDERATION AVERAGE INVESTMENTS CANNOT BE FAULTED WITH. 4.4.2 THUS) IN THE PRESENT CASE, HAVING REGARD TO THE CONSOLIDATED FINANCIALS OF THE APPELLANT, COMPOSITE BUSINESS ACTIVITY AND DIFFERENT SOURCES OF INCOME, THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE APPELLANT THAT EXPENDITURE OF RS. 5000/- ONLY WAS INCURRED IN RELATION TO EXEMPT INCOME. ON THE FACTS OF THE CASE, I AM OF THE CONSIDERED VIEW THAT THE EXPENDITURE OF RS. 5,95,627/- WAS RIGHTLY CONSIDERED FOR DISALLOWANCE BY THE AO AS PER THE MODE OF COMPUTATION OF EXPENDITURE IN RELATION TO EXEMPT INCOME PRESCRIBED UNDER RULE 8D READ WITH SEC. 14A. HOWEVER, WHILE DOING SO THE ASSESSING OFFICER HAS NOT CONSIDERED THE DISALLOWANCE OF RS. 5000/- ALREADY MADE BY THE ASSESSING OFFICER IN THE RETURN OF INCOME. ACCORDINGLY, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THIS GROUND IS RESTRICTED TO RS. 5,90,627/- (5,95,627-5,000). THE APPELLANT GETS CONSEQUENTIAL RELIEF OF RS. 5,000/-. GROUNDS OF APPEAL NO.1 TO 6 STAND DISPOSED OF ACCORDINGLY. AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US. 5. BEFORE US, LD.A.R. REITERATED THE SUBMISSIONS MADE BEFORE AO AND LD.CIT(A) AND FURTHER POINTED TO THE BALANCE-SHEET PLACED AT PAGE 21 OF THE PAPER BOOK AND POINTED OUT THAT THE SHAREHOLDERS FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES AND SURPLUS WAS RS.246.59 CRORES AS AGAINST THE INVESTMENTS OF 8 RS.121.36 CRORES MEANING THEREBY THAT THE SHAREHOLDERS FUNDS WERE FAR IN EXCESS OF THE INVESTMENTS AND THEREFORE NO DISALLOWANCE ON ACCOUNT OF INTEREST IS CALLED FOR AND FOR THIS PROPOSITION, HE RELIED ON THE DECISION IN THE CASE OF CIT VS. HDFC BANK LTD. REPORTED IN (2014) 366 ITR 505(BOM). HE THEREAFTER POINTED TO PAGE 25 WHICH CONTAINED THE DETAILS OF INVESTMENTS AND POINTED OUT THAT DURING THE YEAR NO NEW INVESTMENTS HAD BEEN PURCHASED BY THE ASSESSEE. HE FURTHER SUBMITTED THAT ASSESSEE HAS EARNED EXEMPT INCOME IN THE FORM OF DIVIDEND FROM THE SHARES OF THREE GROUP COMPANIES AND THAT SINCE NO DIVIDEND HAS BEEN RECEIVED FROM OTHER INVESTMENTS, NO DISALLOWANCE U/S 14A IS CALLED FOR. HIS OTHER ARGUMENT WAS THAT BEFORE INVOKING THE PROVISIONS U/S 14A OF THE ACT, AO IS REQUIRED TO RECORD SATISFACTION. IN THE PRESENT CASE, NO SATISFACTION HAS BEEN RECORDED BY THE AO AND THEREFORE ALSO NO DISALLOWANCE U/S 14A IS CALLED FOR AND FOR THIS PROPOSITION HE RELIED ON THE DECISION RENDERED BY PUNJAB & HARYANA HIGH COURT IN THE CASE OF PUNJAB TRACTORS LIMITED VS. COMMISSIONER OF INCOME TAX, PATIALA REPORTED IN [2017] 399 ITR 223 (P & H). HE ALSO PLACED RELIANCE ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING COMPANY LIMITED VS. DY.COMMISSIONER OF INCOME TAX REPORTED IN [2017] 394 ITR 449 (SC). 6. LD.D.R. ON THE OTHER HAND SUPPORTED THE ORDER OF AO AND TOOK US THROUGH THE FINDINGS OF LD. CIT(A) AND SUPPORTED THE ORDER OF LOWER AUTHORITIES. HE FURTHER SUBMITTED THAT IN THE PRESENT CASE THE AO IN THE ORDER HAS RECORDED SATISFACTION ABOUT 9 THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE WHICH IS GOOD ENOUGH FOR INVOKING THE PROVISIONS OF SEC.14A OF THE ACT. HE FURTHER SUBMITTED THAT ASSESSEE HAS NOT MAINTAINED SEPARATE BANK ACCOUNT SO AS TO JUSTIFY THE USE OF SHAREHOLDERS FUNDS FOR MAKING INVESTMENTS. HE THUS SUPPORTED THE ORDER OF LOWER AUTHORITIES. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH RESPECT TO DISALLOWANCE OF RS.5,90,627/- U/S 14A OF THE ACT. THE PERUSAL OF THE BALANCE-SHEET WHICH IS PLACED AT PAGE 21 OF THE PAPER BOOK REVEALS THAT THE SHAREHOLDERS FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES AND SURPLUS AGGREGATED TO RS.246.59 CRORES AS AGAINST THE INVESTMENTS OF RS.121.36 CRORES MEANING THEREBY THAT THE AVAILABILITY OF SHAREHOLDERS FUNDS ARE FAR IN EXCESS OF THE INVESTMENTS. WHEN THE SHAREHOLDERS FUNDS ARE IN EXCESS OF INVESTMENTS, THERE IS PRESUMPTION THAT THE INVESTMENTS ARE OUT OF SHAREHOLDERS FUNDS AND THEREFORE NO DISALLOWANCE ON AMOUNT OF INTEREST IS CALLED FOR. 8. ON THE ISSUE OF PRESUMPTION THAT WHEN SHAREHOLDERS FUNDS AVAILABLE WITH THE ASSESSEE ARE IN EXCESS OF INVESTMENTS IT IS OUT OF SHAREHOLDERS FUNDS, WE FIND THAT HONBLE BOMBAY HIGH COURT IN THE CASE OF HDFC VS. DCIT REPORTED IN (2016) 383 ITR 529 (BOM) HAS OBSERVED AS UNDER : 15. IT IS CLEAR THAT FOR THE FIRST TIME IN THE CASE OF HDFC BANK LTD. (SUPRA) THAT THIS COURT TOOK A VIEW THAT THE PRESUMPTION WHICH HAS BEEN LAID DOWN IN RELIANCE UTILITIES AND POWER LTD. (SUPRA) WITH REGARD TO INVESTMENT IN TAX FREE SECURITIES COMING OUT OF ASSESSEES OWN FUNDS IN CASE THE SAME ARE IN EXCESS OF THE INVESTMENTS MADE IN THE SECURITIES (NOTWITHSTANDING THE FACT THAT 10 THE ASSESSEE CONCERNED MAY ALSO HAVE TAKEN SOME FUNDS ON INTEREST) APPLIES, WHEN APPLYING SECTION 14A OF THE ACT. THUS, THE DECISION OF THIS COURT IN HDFC BANK LTD.(SUPRA) FOR THE FIRST TIME ON 23RD JULY, 2014 HAS SETTLED THE ISSUE BY HOLDING THAT THE TEST OF PRESUMPTION AS HELD BY THIS COURT IN RELIANCE UTILITIES AND POWER LTD. (SUPRA) WHILE CONSIDERING SECTION 36(1)(III) OF THE ACT WOULD APPLY WHILE CONSIDERING THE APPLICATION OF SECTION 14A OF THE ACT. THE AFORESAID DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA) ON THE ABOVE ISSUE HAS ALSO BEEN ACCEPTED BY THE REVENUE INASMUCH AS EVEN THOUGH THEY HAVE FILED AN APPEAL TO THE SUPREME COURT AGAINST THAT ORDER ON THE OTHER ISSUE THEREIN, VIZ., BROKEN PERIOD INTEREST, NO APPEAL HAS BEEN PREFERRED BY THE REVENUE ON THE ISSUE OF INVOKING THE PRINCIPLES LAID DOWN IN RELIANCE UTILITIES AND POWER LTD. (SUPRA) IN ITS APPLICATION TO SECTION 14A OF THE ACT. THEREFORE, THE ISSUE WHICH AROSE FOR CONSIDERATION BEFORE THE TRIBUNAL HAD NOT BEEN DECIDED BY THIS COURT IN GODREJ AND BOYCE MANUFACTURING CO. LTD. (SUPRA). IT AROSE AND WAS SO DECIDED FOR THE FIRST TIME BY THIS COURT IN HDFC BANK LTD. (SUPRA). THUS, THERE IS NO CONFLICT AS SOUGHT TO BE MADE OUT BY THE IMPUGNED ORDER. THUS, IMPUGNED ORDER HAS PROCEEDED ON A FUNDAMENTALLY ERRONEOUS BASIS AS THE RATIO DECIDENDI OF THE ORDER IN GODREJ AND BOYCE MANUFACTURING CO. LTD. (SUPRA) HAD NOTHING TO DO WITH THE REST OF PRESUMPTION CANVASSED BY THE PETITIONER BEFORE THE TRIBUNAL ON THE BASIS OF THE RATIO OF THE DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA). 16. AT THE HEARING MR. SURESH KUMAR, LEARNED COUNSEL FOR THE REVENUE URGED THAT ON THE FACTS OF THIS CASE NO FAULT CAN BE FOUND WITH THE ORDER OF THE TRIBUNAL. IT IS SUBMITTED THAT, THE PETITIONER WAS NOT ABLE TO ESTABLISH BEFORE THE ASSESSING OFFICER AND THE CIT(A) THAT THE AMOUNTS INVESTED IN THE INTEREST FREE SECURITIES CAME OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE PETITIONER. IN THAT VIEW OF THE MATTER, IT IS SUBMITTED BY HIM THAT THE ORDER OF THIS COURT IN HDFC BANK LTD.(SUPRA) WOULD NOT APPLY TO THE FACTS OF THE PRESENT CASE. WE ARE UNABLE TO UNDERSTAND THE ABOVE SUBMISSION. THE ASSESSING OFFICER PASSED THE ASSESSMENT ORDER ON 22ND DECEMBER, 2010 UNDER SECTION 143(3) OF THE ACT. THE CIT(A) PASSED AN ORDER ON 21ST NOVEMBER, 2011 DISMISSING THE PETITIONERS APPEAL. ON BOTH THE DATES, WHEN THE ORDERS WERE PASSED BY THE ASSESSING OFFICER AND CIT(A), THE AUTHORITIES DID NOT HAVE THE BENEFIT OF THE ORDER OF THIS COURT IN HDFC BANK LTD. (SUPRA) RENDERED ON 23RD JULY, 2014. ONCE THE ISSUE IS SETTLED BY THE DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA), THERE IS NOW NO NEED FOR THE ASSESSEE TO ESTABLISH WITH EVIDENCE THAT THE AMOUNTS WHICH HAS BEEN INVESTED IN THE TAX FREE SECURITIES HAVE COME OUT OF INTEREST FREE FUNDS AVAILABLE WITH IT. THIS IS BECAUSE ONCE THE ASSESSEE IS POSSESSED OF INTEREST FREE FUNDS SUFFICIENT TO MAKE THE INVESTMENT IN TAX FREE SECURITIES, IT IS PRESUMED THAT IT HAS BEEN PAID FOR OUT OF THE INTEREST FREE FUNDS. CONSEQUENTLY, WE DO NOT FIND ANY MERIT IN THE ABOVE SUBMISSION MADE AT THE HEARING ON BEHALF OF THE REVENUE. 9. BEFORE US, REVENUE HAS NOT PLACED ANY CONTRARY BINDING DECISION IN ITS SUPPORT. IN VIEW OF ALL THESE FACTS, WE ARE OF THE 11 VIEW THAT NO DISALLOWANCE OF INTEREST UNDER RULE 8D(2)(II) IS CALLED FOR. 10. AS FAR AS THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES UNDER RULE 8D(2)(III) IS CONCERNED, IT IS SEEN THAT THE DISALLOWANCE OF RS.5,95,627/- HAS BEEN WORKED OUT U/S 14A R.W.R. 8D(2)(III) BY AO. WE FIND THAT AO WHILE PROCEEDING WITH DISALLOWING THE EXPENSES HAS NOT RECORDED ANY SATISFACTION AS REQUIRED U/S 14A(2) OF THE ACT. AS PER SEC.14A(2), FOR INVOCATION OF RULE 8D, THE AO HAS TO RECORD SATISFACTION ABOUT THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. IN THE PRESENT CASE, WE FIND THAT NO SATISFACTION HAS BEEN RECORDED BY THE AO WHILE DISALLOWING THE EXPENSE U/S 14A OF THE ACT. ON THE ISSUE OF NECESSITY OF RECORDING OF SATISFACTION WHILE DISALLOWING EXPENSES U/S 14A WE FIND THAT HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF PUNJAB TRACTORS LTD., VS. CIT REPORTED IN (2017) 393 ITR 223 (P&H) HAS HELD THAT AO MUST RECORD SATISFACTION THAT CLAIM REGARDING EXPENDITURE IS NOT SATISFACTORY. THE RELEVANT OBSERVATIONS BY HONBLE HIGH COURT ARE REPRODUCED HEREUNDER : 11.SECTION 14A SPECIFIES THE CIRCUMSTANCES IN WHICH THE ASSESSING OFFICER IS ENTITLED TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. THE METHOD PRESCRIBED IS IN RULE 8D OF THE INCOME-TAX RULES, 1962 WHICH WAS INTRODUCED WITH EFFECT FROM THE ASSESSMENT YEAR 2008-09. THE CONDITIONS SPECIFIED IN SUB-SECTIONS (2) AND (3) OF SECTION 14A MUST EXIST IN ORDER TO ENTITLE THE ASSESSING OFFICER TO INVOKE RULE 8D. THIS IS CLEAR FROM THE LANGUAGE OF THESE SUB-SECTIONS. SUB-SECTION (2) PROVIDES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF 12 EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME IN ACCORDANCE WITH THE METHOD PRESCRIBED, I.E., RULE 8D 'IF' HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASSESSEE'S CLAIM IN RESPECT OF SUCH EXPENDITURE IN RELATION TO EXEMPT INCOME. THE WORD 'IF' INDICATES THAT TO INVOKE THE METHOD PRESCRIBED NAMELY RULE 8D, THE ASSESSING OFFICER MUST NOT BE SATISFIED WITH THE CORRECTNESS OF THE ASSESSEE'S SAID CLAIM. 12. SUB-SECTION (3) PROVIDES THAT THE PROVISIONS OF SUB-SECTION (2) SHALL APPLY IN RELATION TO A CASE WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO EXEMPT INCOME. THE OPENING WORDS OF SUB-SECTION (3) MAKE THE PROVISIONS OF SUB-SECTION (2) APPLICABLE IN RELATION .TO CASES UNDER SUB-SECTION (3). THUS WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER CAN RESORT TO RULE 8D ONLY IF HAVING REGARD TO THE ACCOUNTS OF THE ASSESSE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. THUS UNDER SUB-SECTION (2) AND (3) OF SECTION 14A, AN ASSESSING OFFICER CAN RESORT TO RULE 8D ONLY IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASSESSEES CLAIM IN RESPECT OF THE EXPENDITURE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT OR IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASSESSEES CLAIM THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO SUCH INCOME. THE HONBLE HIGH COURT FURTHER OBSERVED AS UNDER 18. THE NEXT QUESTION IS AS TO WHETHER IT IS NECESSARY FOR THE ASSESSING OFFICER TO RECORD HIS REASONS FOR NOT BEING SATISFIED WITH THE CORRECTNESS OF THE ASSESSEE'S CLAIM. 19. IT IS MANDATORY FOR THE ASSESSING OFFICER TO RECORD THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE HE 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 ACT OR THAT HE IS NOT SATISFIED WITH THE ASSESSEE'S CLAIM THAT NO EXPENDITURE HAD BEEN INCURRED BY HIM IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. 20. THE MATTER STANDS CONCLUDED BY A JUDGMENT OF THIS COURT DATED JANUARY 27, 2015 IN CIT VS. ABHISHEK INDUSTRIES LTD. I T A. NO. 320 OF 2013- REPORTED IN [2016] 380 I1R 652 (P&H), WHERE THE DIVISION BENCH HELD (PAGE 657) :- 'SECTION 14A OF THE ACT REQUIRES THE ASSESSING OFFICER TO RECORD SATISFACTION THAT INTEREST BEARING FUNDS HAVE BEEN USED TO EARN TAX- FREE INCOME. THE SATISFACTION TO BE RECORDED MUST BE BASED UPON CREDIBLE AND RELEVANT EVIDENCE ... ' 13 21. THE JUDGMENT IN MAXOPP INVESTMENT LTD. (SUPRA) ALSO SUPPORTS THIS VIEW NAMELY THAT THE ASSESSING OFFICER MUST RECORD REASONS FOR NOT BEING SATISFIED WITH THE CORRECTNESS OF THE ASSESSEE' CONTENTIONS WITH REGARD TO THE ASPECTS MENTIONED IN SUB-SECTIONS (2) AND (3) OF SECTION 14A. IT IS TRUE THAT THE DELHI HIGH COURT MERELY STATES THAT SUCH REJECTION MUST BE FOR DIS-CLOSED COGENT REASONS. THE DISCLOSURE, HOWEVER, CAN ONLY BE IN WRITING. IT CAN HARDLY BE SUGGESTED THAT THE DISCLOSURE REMAINS IN THE ASSESSING OFFICER'S MIND. THE ASSESSEE IS ENTITLED TO TEST THE BASIS OF THE REJECTION OF HIS CONTENTIONS. THIS CAN BE DONE ONLY IF THE ASSESSING OFFICER RECORDS HIS REASONS FOR HIS NOT BEING SATISFIED IN WRITING. WE FURTHER FIND THAT IN THE CASES OF EICHER MOTORS LTD VS. CIT (2017) 398 ITR 51 (DEL) AND CIT VS. U.P. ELECTRONICS CORP. LTD (2017) 397 ITR 113 (ALL) ALSO IT IS HELD THAT RECORDING OF SATISFACTION IS MANDATORY BEFORE PROCEEDING FOR DISALLOWING EXPENSES U/S 14A R.W. RULE 8D OF THE ACT. CONSIDERING THE TOTALITY OF THE AFORESAID FACTS AND RELYING ON THE AFORESAID DECISIONS OF HONBLE HIGH COURTS, WE ARE OF THE VIEW THAT IN THE PRESENT CASE IN THE ABSENCE OF RECORDING OF SATISFACTION BY AO FOR DISALLOWING THE EXPENSES, NO DISALLOWANCE U/S 14A OVER AND ABOVE THAT HAS BEEN SUO-MOTO DISALLOWED BY ASSESSEE IS CALLED FOR. WE THEREFORE SET ASIDE THE ADDITIONAL DISALLOWANCE U/S 14A OF THE ACT MADE BY AO. THUS, THE GROUNDS OF THE ASSESSEE IS ALLOWED. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON 31 ST DAY OF OCTOBER, 2017. SD/- SD/- ( SUSHMA CHOWLA ) ( ANIL CHATURVEDI ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER PUNE; DATED : 31 ST OCTOBER, 2017. YAMINI 14 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. 4. 5. 6. CIT(A)-I, PUNE. CIT-I, PUNE. , , / DR, ITAT, B PUNE; [ / GUARD FILE. / BY ORDER // // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE.