Shreno Limited, Baroda V. The Addl.CIT.,Range-4, Baroda

ITA 2298/AHD/2010

• Counselvise Citation: 229820514 RSA 2010
• Duration Of Justice: 3 year(s) 1 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 31-07-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 08-07-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: J P JANGID
• Assessee Lawyers: S N SOPARKAR
• Keywords: Business income; Earning of tax free income; Proportionate interest; Retrospective amendment
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, AHMEDABAD BEFORE SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER AND SHRI T.R. MEENA, ACCOUNTANT MEMBER ITA NO. 2298/AHD/2010 A.Y: 2007-2008 SHRENO LIMITED, 5 TH FLOOR, ALEMBIC ADM BUILDING, ALEMBIC ROAD, BARODA. PAN: AABCA 7953Q VS ACIT, RANGE-4, BARODA. (ASSESSEE) (REVENUE) REVENUE BY : SHRI J.P. JANGID SR. D.R. ASSESSEE(S) BY : SHRI S.N SOPARKAR, A.R. / // / DATE OF HEARING : 31/07/2013 / DATE OF PRONOUNCEMENT: 23/08/2013 / O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE ARISING FR OM THE ORDER OF LEARNED CIT(A)-III, BARODA, DATED 14.04.2010. TH E GROUNDS RAISED ARE HEREBY DECIDED AS FOLLOWS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) (HEREI NAFTER REFERRED TO AS THE LEARNED CIT(A)) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER BY DISALLOWING RS.65.12 LACS U/S 14A READ WITH RULE 8D WITHOUT APPRECIATING THAT THE APPELLANT HAD SUF FICIENT OWN FUND FOR MAKING THE INVESTMENTS AND MOST OF THE BORROWIN GS WERE TAKEN FOR THE PURPOSE OF BUSINESS AND NOT FOR MAKING INVESTME NTS. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF TH E ASSESSING OFFICER BY NOT EXCLUDING SPECIFIC BORROWINGS OBTAIN ED FOR BUSINESS PURPOSES FROM THE DISALLOWANCE OF INTEREST EXPENDIT URE U/S READ WITH RULE 8D. ITA NO.2298/AHD/2010 SHRENO LTD. BARODA VS. ACIT BARODA A.Y. 2007-2008 - 2 - 2. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDING ASSESSMENT ORDER PASSED UNDER SECTION 143(3), DATED 16.12.2009 WERE THAT THE ASSESSEE COMPANY IS IN THE BUSINESS O F MANUFACTURING OF GLASSWARE ITEMS. IT WAS NOTED BY T HE AO THAT W.E.F. 1.4.2006 A MERGER TOOK PLACE WITH ALEMBIC GL ASS INDUSTRIES. IN RESPECT OF THE PROVISIONS OF SECTION 14-A, IT WAS NOTED THAT THE ASSESSEE HAD RECEIVED DIVIDEND INCOM E OF RS.1.84 CRORES, WHICH WAS CLAIMED AS EXEMPT UNDER SECTION 1 0(34) OF THE IT ACT. THE ASSESSEE HAD FURNISHED A COMPUTATION AN D MADE A DISALLOWANCE U/S. 14A OF RS.6.29 LACS. THE AO HAS T HEREUPON PROPOSED THE INVOCATION OF THE PROVISIONS OF SECTIO N 14A OF THE IT ACT AND FINALLY WORKED OUT AT DISALLOWANCE IN THE F OLLOWING MANNER: AVERAGE VALUE OF INVESTMENT AS PER WORKING OF THE ASSESSEE COMES TO RS.29.50 CRORE AND AVERAGE VALUE OF ASSETS AT RS. 1 07.75 CRORE. THEREFORE, ALLOWING THE INTEREST EXPENSE OF RS.220. 63 LACS ON BORROWED FUNDS FOR REPAYMENT OF ONGC LIABILITY FROM THE GROSS INTEREST PAYMENT OF RS.427.61 LACS, THE NET INTERES T PAYMENTS COMES TO RS.206.98 LACS. APPORTIONMENT OF THE INTEREST OF RS .206.98 LACS IN THE RATION OF AVERAGE VALUE OF INVESTMENT TO AVERAGE VA LUE OF ASSETS COMES TO RS. 56.66 LACS. HALF PERCENT OF THE AVERAG E VALUE OF INVESTMENT WILL BE RS.14.75 LACS. THEREFORE, THE TO TAL DISALLOWANCE U/S. 14 A READ WITH RULE 8D IS COMPUTED AT RS.71.41 LACS. OUT OF THE SAME THE ASSESSEE HAS ALREADY CONSIDERED A DISALLOW ANCE OF RS.6.29 LACS IN ITS COMPUTATION. THEREFORE, A FURTHER DISAL LOWANCE OF RS.65.12 LACS IS WORKED ON THIS ISSUE. AS THE ASSESSEE HAS F URNISHED INACCURATE PARTICULARS OF ITS INCOME BY NOT WORKING THE DISALL OWANCE U/S. 14A CORRECTLY, PENALTY U/S. 271(1)(C) IS INITIATED. (DISALLOWANCE RS.65,12,000/-) 3. WHEN THE MATTER WAS CARRIED BEFORE THE FIRST APP ELLATE AUTHORITY, THE ACTION OF THE AO WAS AFFIRMED BY STA TING THAT THE AO HAD RIGHTLY APPORTIONED THE INTEREST OF RS.206.8 9 LACS IN THE RATIO OF THE AVERAGE VALUE OF INVESTMENT TO AVERAGE VALUE OF ASSETS. ITA NO.2298/AHD/2010 SHRENO LTD. BARODA VS. ACIT BARODA A.Y. 2007-2008 - 3 - SINCE, THE ACTION OF THE AO WAS AFFIRMED, THEREFORE , BEING AGGRIEVED THE ASSESSEE IS NOW FURTHER IN APPEAL. 4. ON THIS ISSUE, WE HAVE HEARD BOTH THE SIDES. WE HAVE NOTED THAT THE PROVISIONS OF SECTION 14A READ WITH RULE 8 D HAVE NOT BEEN CORRECTLY APPRECIATED IN THE LIGHT OF THE FEW JUDGMENTS ALREADY PRONOUNCED ON THIS ISSUE. FOR READY REFEREN CE, WE ARE HEREBY REPRODUCE A RELEVANT PORTION FROM AN ORDER O F THE RESPECTED CO-ORDINATE BENCH PRONOUNCED IN THE CASE OF PAUSHAK LTD. (ITA NO.1228/AHD/2006, DATED 31.12.2010) IS REPRODUCED BELOW: THIS ISSUE HAS COME UP IN SEVERAL CASES BEFORE THE AHMEDABAD BENCHES AND WE ARE CONSISTENTLY FOLLOWING THE A LAT EST 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 12/08/2010, [ NOW REPORTED AS 328 ITR 81(BOM)] AND THEREUPON RESTORING THE MATTER BACK TO THE FILE OF ASSESSING OFFICER TO DECIDE AFRESH AS PER THE GUIDELINES OF THE HON'BLE HIGH CO URT. FOR READY REFERENCE, WE HEREBY CITE ONE OF OUR DECISION PRONO UNCED IN THE CASE OF ADITYA MEDISALES LTD. VS. DY.CIT BEARING ITA NO. 2143/AHD/2005 FOR ASSESSMENT YEAR 2002-03 AND ITA NO.1117/AHD/20 05 FOR ASSESSMENT YEAR 2001-02, DATED 26/11/2010 AS FOLLOW S:- 5. WITH THIS BRIEF BACKGROUND, WE HAVE EXAMINED TH E 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 BEC AUSE WHILE CALCULATING THE PROPORTIONATE INTEREST ATTRIBUTABLE TO DIVIDEND INCOME THE RATIO OF DIVIDEND INCOME AND TOTAL SALES HAVE B EEN TAKEN THOUGH THERE WAS NO DIRECT RELATION BETWEEN THE TWO. THE ASSESSING OFFICER HAD THUS MADE THE CALCULATION AFTER TAKING INTO ACC OUNT THE ITA NO.2298/AHD/2010 SHRENO LTD. BARODA VS. ACIT BARODA A.Y. 2007-2008 - 4 - PROPORTION OF THE INTEREST ON THE RATIO BETWEEN THE INVESTMENT IN SHARES AND TOTAL ASSETS INCLUDING INVESTMENT IN SH ARES. APART FROM THIS, THERE IS NOTHING IN THE ASSESSMENT ORDER WHIC H CAN ESTABLISH THE NEXUS OF UTILIZATION OF BORROWED INTEREST-BEARING F UNDS DIVERTED TOWARDS INVESTMENT IN DEBENTURES. BUT THERE ARE OT HER DISCUSSIONS IN THIS VERY ASSESSMENT ORDER WHEREIN THE PROVISIONS O F SECTION 36(1)(III) OF THE ACT HAVE ALSO BEEN TOUCHED UPON. THE ASSESS ING OFFICER WAS EXPECTED TO CORRELATE THE SAID DISCUSSION 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 FOLLO W 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 12/08/2010, { NOW REPORTED AS 328 ITR 81(BOM) } WHEREIN THE HON'BLE HIGH COURT HAS UPHELD THE CONSTITUTIONAL VA LIDITY OF SECTION 14A OF THE I.T. ACT, 1961 AND HELD THAT THE ASSESSI NG 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 TOTA L INCOME AS CONTEMPLATED U/S.14A OF THE I.T. ACT, 1961. IT HAS ALSO BEEN DIRECTED THAT THE ASSESSING OFFICER CAN ADOPT A REASONABLE B ASIS FOR EFFECTING THE APPORTIONMENT. IT HAS ALSO BEEN OBSERVED BY T HE HON'BLE COURT THAT WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHOULD PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND MATERIAL HAVING A BEARING ON THE FAC TS 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 O UT OF OWN FUNDS OR OUT OF BORROWED FUNDS. A NEXUS IS REQUIRED TO B E ESTABLISHED BETWEEN THE INVESTMENTS AND THE BORROWINGS. IN SE CTION 14A OF THE ACT EXPENDITURE INCURRED IN RELATION TO EXEMPTED IN COME IS TO BE DISALLOWED ONLY IF THE ASSESSING OFFICER IS SATISFI ED WITH THE EXPENDITURE CLAIMED BY THE ASSESSEE PERTAINING TO T HE SAID EXEMPT INCOME. RATHER, THE COURT WAS VERY SPECIFIC THAT IN CASE, NO SUCH EXERCISE WAS CARRIED OUT BY THE ASSESSING OFFICER T HEN THE MATTER IS TO BE REMANDED BACK FOR AFRESH INVESTIGATION. IT HAS ALSO BEEN MADE CLEAR THAT THE PROVISO TO SECTION 14A OF THE ACT WA S EFFECTIVE FROM 2001-02. THE HON'BLE COURT HAS ALSO POINTED OUT T HE IMPORTANCE OF RULE 8D OF THE I.T.RULES, 1962. IT WAS MADE CLEAR THAT SUB-SECTION (1) TO SECTION 14A WAS INSERTED WITH RETROSPECTIVE EFFE CT FROM 01/04/1962, HOWEVER, SUB-SECTIONS (2) & (3) WERE MADE APPLICABL E WITH EFFECT FROM 01/04/2007. THE PROVISO WAS INSERTED WITH RE TROSPECTIVE EFFECT FROM 11/05/2001 , HOWEVER RULE 8D WAS INSERTED BY T HE INCOME TAX (FIFTH AMENDMENT), RULES, 2008 BY PUBLICATION IN TH E GAZETTE DATED 24/03/2008; REPRODUCED BELOW:- ITA NO.2298/AHD/2010 SHRENO LTD. BARODA VS. ACIT BARODA A.Y. 2007-2008 - 5 - A) THE ITAT HAD RECORDED A FINDING IN THE EARLIE R ASSESSMENTS THAT THE INVESTMENTS IN SHARES AND MUTU AL FUNDS HAVE BEEN MADE OUT OF OWN FUNDS AND NOT OUT OF BORR OWED FUNDS AND THAT THERE IS NO NEXUS BETWEEN THE INVEST MENTS AND THE BORROWINGS. HOWEVER, IN NONE OF THOSE DECISION S WAS THE DISALLOWABILITY OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME EARNED OUT OF INVESTMENTS MADE OUT OF OWN FU NDS CONSIDERED. MOREOVER, UNDER SECTION 14A, EXPENDITU RE INCURRED IN RELATION TO EXEMPT INCOME CAN BE DISALL OWED ONLY IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE EXPENDITURE CLAIMED BY THE ASSESSEE. IN THE PR ESENT CASE, NO SUCH EXERCISE HAS BEEN CARRIED OUT AND, THEREFOR E, 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. HOWEV ER, IN VIEW OF THE PROVISO TO THAT SECTION, THE DISALLOWANCE TH EREUNDER COULD BE EFFECTIVELY MADE FROM ASSESSMENT YEAR 2001 -2002 ONWARDS. THE FACT THAT THE TRIBUNAL FAILED TO CO NSIDER THE APPLICABILITY OF SECTION 14A IN ITS PROPER PERSPECT IVE, FOR ASSESSMENT YEAR 2001-2002 WOULD NOT BAR THE TRIBUNA L FROM CONSIDERING DISALLOWANCE UNDER SECTION 14A IN ASSES SMENT 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 DEFINITENESS IN THE APPROACH OF THE REVENUE WOULD N OT APPLY TO THE FACTS OF THE PRESENT CASE, BECAUSE OF THE MATER IAL CHANGE INTRODUCED BY SECTION 14A BY WAY OF STATUTORY DISAL LOWANCE IN CERTAIN CASES. THERE, THE DECISIONS OF THE TRIBUNA L IN THE EARLIER YEARS WOULD HAVE NO RELEVANCE IN CONSIDERIN G DISALLOWANCE IN ASSESSMENT YEAR 2002-2003 IN THE LI GHT OF SECTION 14A OF THE ACT. 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 ITA NO.2298/AHD/2010 SHRENO LTD. BARODA VS. ACIT BARODA A.Y. 2007-2008 - 6 - PROPER TO REMAND THE PROCEEDINGS BACK TO THE ASSESS ING OFFICER FOR A FRESH DETERMINATION. CONCLUSION : 74. OUR CONCLUSIONS IN THIS JUDGMENT ARE AS FOLL OWS ; I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FALLIN G WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME TAX ACT 1 961, AS WAS APPLICABLE FOR ASSESSMENT YEAR 2002-03 IS NOT I NCLUDIBLE IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE. CON SEQUENTLY, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDI TURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T, 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 DISCHARGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT FOR ITS SHAREHO LDERS. IN THE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DI VIDEND, INCOME BY WAY OF DIVIDEND DOES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROVISIONS OF SECTION 10(33 ). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS; 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 PAR TICULARLY SUB SECTION (2) AND DO NOT OFFEND ARTICLE 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 DETERMINE TH E 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 REASONABLE BASIS OR ITA NO.2298/AHD/2010 SHRENO LTD. BARODA VS. ACIT BARODA A.Y. 2007-2008 - 7 - METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECOR D; 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. 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 ITD 169 (MUM.), WHEREIN ALSO IT WAS PRONOUNCED THAT IN ORDER TO ES CAPE THE APPLICABILITY OF SECTION 14A, ONUS IS ON THE ASSESS EE TO PROVE THAT THE EXPENDITURE WAS INCURRED FOR EARNING ONLY TAXABLE I NCOME. HOWEVER, IT HAS ALSO BEEN PRESCRIBED THAT AFTER INTRODUCTION OF RULE 8D, IT BECOMES CLEAR THAT NOT ONLY THE EXPENDITURE DIRECTL Y RELATING TO EXEMPTED INCOME BUT ALSO THE INDIRECT EXPENDITURE L IKE INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR: IN COME OR RECEIPT ARE TO BE TAKEN INTO 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 CO NTEMPLATES IS THE EXPENDITURE ACTUALLY INCURRED FOR EARNING TAX-FREE INCOME AND NOT ASSUMED EXPENDITURE OR DEEMED EXPENDITURE. THEREFOR E CONFIRMING 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 TRANS ACTION WAS LIABLE TO BE TREATED AS AN EXPENDITURE INCURRED FOR EARNING T HE TAX FREE INCOME AND HENCE DISALLOWABLE UNDER SECTION 14A. ADMITTEDL Y, NO EXPENDITURE WAS INCURRED IN PURCHASING THE DIVIDEND BEARING UNITS. THE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE LOSS ARISING FROM THE TRANSACTION WAS LIABLE TO BE SET OFF AGAINST THE OT HER TAXABLE INCOME OF THE ASSESSEE. WHILE UPHOLDING THE DECISION OF H ON'BLE HIGH COURT, ITA NO.2298/AHD/2010 SHRENO LTD. BARODA VS. ACIT BARODA A.Y. 2007-2008 - 8 - 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 DISAL LOWANCE, WHICH IS ITS RELATIONSHIP WITH THE TAX EXEMPT INCOME, RELEVA NT PARA 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 SECTION 14A , THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WAS BEING CLAI MED AGAINST TAXABLE INCOME. THE MANDATE OF SECTION 14A IS CLEA R: IT DESIRES TO CURB THE PRACTICE OF CLAIMING DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AN D AT THE SAME TIME AVAIL OF THE TAX INCENTIVE BY WAY OF EXEMPT IN COME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RE LATION TO EXEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN INCOMES ARE NOT INCLUDIBLE WHILE COMPUTING THE TOTA L INCOME BECAUSE THESE ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE AC T. 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 THEORY OF APPOR TIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A. A PAY BACK IS NOT AN EXPENDITURE IN THE SCHEME OF S ECTION 14A; FOR ATTRACTING SECTION 14A THERE HAS TO BE A PROXIM ATE CAUSE FOR DISALLOWANCE, WHICH IS IN RELATIONSHIP WITH THE TAX EXEMPT INCOME. PAY BACK OR RETURN OF INVESTMENT IS NOT SUCH PROXIM ATE CAUSE. 6.4. IT IS WORTH TO MENTION, AS HELD IN THE CASE OF CYCLES (HERO 323 ITR 518)[P&H] THAT IF THERE IS SUFFICIENT MATERIAL ON RECORD TO ESTABLISH THAT INVESTMENT IN SHARES/UNITS WAS MADE OUT OF NON-INTEREST BEARING FUNDS, THEN NO DISALLOWANCE HAS TO BE MADE OUT OF INTEREST DEBITED TO PROFIT & LOSS ACCOUNT, EVEN IF THERE IS DIVIDEND INCOME FROM SUCH INVESTMENT. WHERE THE EXPENDITURE INCU RRED COULD NOT BE RELATED TO EXEMPTED INCOME, THE PROVISIONS OF SECTI ON 14A WOULD ALSO NOT BE ATTRACTED. IT IS ALSO A SETTLED LAW THAT THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NO N-TAXABLE INCOME, HAS BEEN ACCEPTED. HOWEVER, ASSESSING OFFICER HAS TO SATISFY HIMSELF AND SUCH SATISFACTION MUST BE ARRIV ED AT ON THE OBJECTIVE BASIS. IF BENEFIT ARISING FROM INVESTME NT IN SHARES OUT OF INTEREST-BEARING FUND IS THE DIVIDEND INCOME EXEMPT U/S.10(34) OF THE ACT, THE RELATED EXPENDITURE HAS TO BE DISALLOWED. ITA NO.2298/AHD/2010 SHRENO LTD. BARODA VS. ACIT BARODA A.Y. 2007-2008 - 9 - 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 PRONOUNCEMENT S. SPECIALLY THE PRONOUNCEMENT OF THE HON'BLE BOMBAY HIGH COURT WAS NOT AVAILABLE AT THAT TIME, HENCE, THE ASSESSING OFFICERS ASSESS MENT ORDER WAS DEVOID OF MERITS AS ALSO APPLICABLE LAW. NOW WE HA VE GOT CERTAIN GUIDELINES, THOUGH CAN NOT BE SAID TO BE EXHAUSTIVE OR COMPLETE, BUT ON THESE LINES, THE ASSESSING OFFICER IS EXPECTED H ENCEFORTH TO COMPUTE THE CORRECT DISALLOWANCE, NEEDLESS TO SAY AFTER PROVIDING AN ADEQUATE OPPORTUNITY OF HEARING TO THE ASSESSEE. 7. IN THE RESULT BOTH THE APPEALS OF THE ASSESSEE F OR ASSESSMENT YEAR 2001-02 AND 2002-03 BEING RESTORED FOR RE-ADJU DICATIONS HENCE TO BE TREATED AS ALLOWED BUT FOR STATISTICAL PURPO SES. 7. THEREFORE AFTER A LONG DISCUSSION, IT WAS DECIDE D BY THE RESPECTED CO-ORDINATE BENCH TO REFER THE ISSUE BACK TO ASSESSMENT STAGE TO DECIDE AS PER THE GUIDELINES OF THE HONBL E COURTS THEREFORE ON THE SAME LINES WE HEREBY RESTORE THE MATTER BAC K TO THE FILE OF ASSESSING OFFICER. RESULTANTLY,THIS GROUND OF THE A SSESSEE IS ALLOWED ONLY FOR STATISTICAL PURPOSES. 5. IN THE LIGHT OF THE ABOVE ORDER, IT IS APPARENT THAT CERTAIN GUIDELINES HAVE BEEN ISSUED TO CORRECTLY APPLY THES E PROVISIONS. WE, THEREFORE, HEREBY DIRECT THE AO TO EXAMINE THE FACTS OF THIS CASE IN THE LIGHT OF THE PRECEDENTS CITED HEREINABO VE AND THEREUPON COMPUTE THE DISALLOWANCE, IF ANY, TO BE MADE. WITH THESE DIRECTIONS, WE HEREBY ALLOW THIS GROUND OF THE ASSE SSEE FOR STATISTICAL PURPOSE ONLY. 6. GROUND NO.2 IS REPRODUCED BELOW: DISALLOWANCE OF FOREIGN TRAVEL EXPENDITURE RS.7,81, 757/: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER OF EXPENDITURE ON FOREIGN TRAVEL INCURRED BY THE APPELLANT PRESUMING IT TO BE FOR NON BUSINESS PURPO SES. ITA NO.2298/AHD/2010 SHRENO LTD. BARODA VS. ACIT BARODA A.Y. 2007-2008 - 10 - THE APPELLANT CRAVES LEAVE TO ADD TO, ALTER, AMEND OR DELETE ANY GROUND OF APEAL. 6.1. IT WAS NOTED BY THE AO THAT UNDER THE HEAD TR AVELING AND CONVEYANCE EXPENSES THE ASSESSEE HAS CLAIMED AN EX PENDITURE OF RS.97.40 LACS. ON SCRUTINY, IT WAS FOUND THAT RS.29 .53 LACS WERE UNDER THE HEAD FOREIGN TOUR. ON EXAMINATION OF DE TAILS, IT WAS FOUND THAT AN EXPENDITURE OF RS.7,81,757/- WAS CLAI MED ON FOREIGN TRAVELS OF MS. YERA R. AMIN (DIRECTOR OF THE COMPAN Y) FOR HER VISIT TO LONDON & BANGKOK. THE ASSESSEES CLAIM WAS THAT THE PURPOSE OF VISIT WAS FOR DEVELOPMENT OF THE PRODUCT AND FOR THE DEVELOPMENT OF THE BUSINESS. HOWEVER, ACCORDING TO THE AO, NO RELIABLE EVIDENCE WAS FILED. IN HIS OPINION, THE EX PENDITURE WAS NOT FOR THE PURPOSE OF THE BUSINESS. HENCE, THE SAM E WAS DISALLOWED. 6.2 WHEN THE MATTER WAS CARRIED BEFORE THE LEARNED CIT(A), IT WAS HELD THAT THE CLAIM WAS NOT MAINTAINABLE. 7. FROM THE SIDE OF THE ASSESSEE, LEARNED AR., MR. S.N. SOPARKAR, APPEARED AND INFORMED THAT IN ASSESSEES OWN CASE FOR A.Y. 2003-04 IN ITA NO.120/AHD/2007, VIDE AN ORDER DATED 17 TH OF SEPTEMBER, 2008 WHILE DECIDING REVENUES APPEAL BY ITAT, AHMEDABAD BENCH (CAMP AT BARODA), IT WAS HELD THAT THE FOREIGN TOUR EXPENDITURE OF MR. P.C. AMIN (DIRECTOR) FOR HI S TOUR TO BANGKOK, LONDON, CHINA AND TOKYO WERE FOR THE PURPO SE OF THE BUSINESS AND THE LEARNED CIT(A) HAS RIGHTLY ALLOWED THE ITA NO.2298/AHD/2010 SHRENO LTD. BARODA VS. ACIT BARODA A.Y. 2007-2008 - 11 - EXPENDITURE. HOWEVER, FROM THE SIDE OF THE REVENUE, LEARNED D.R. HAS PLACED RELIANCE ON THE FINDINGS OF THE AUTHORIT IES BELOW. 8. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES, WE ARE OF THE VIEW THAT THIS GROUND HAS TO BE RE-EXAMINED AFR ESH BY THE AO BECAUSE THE REQUISITE DETAILS WERE DEMANDED DURING THE COURSE OF ASSESSMENT PROCEEDINGS BUT WERE NOT COMPLETELY FURN ISHED. AS FAR AS THE DECISION RELIED UPON BY LEARNED AR FOR A.Y. 2003-04 IS CONCERNED THE FUNDAMENTAL DISTINCTION IS THAT MR. P .C. AMIN IS ONE OF THE DIRECTOR OF THE COMPANY AND HE VISITED T HOSE COMPANIES ALONG WITH OTHER SENIOR EXECUTIVES OF THE COMPANIES. IT HAS ALSO BEEN NOTED THAT CERTAIN COLLABORATIONS WERE MADE WHICH RESULTED INTO A SUBSTANTIAL GROWTH IN THE SALES. CO NSIDERING THOSE ASPECTS, THE RESPECTED TRIBUNAL HAS AFFIRMED THE RE LIEF GRANTED BY LEARNED CIT(A). ON THE OTHER HAND, WE HAVE NOTED TH AT ALTHOUGH WRITTEN NOTICES WERE FURNISHED BEFORE THE AO BUT TH E DETAILS OF THE EXPENDITURE, PURPOSE OF THE EXPENDITURE AND THE BUS INESS CONNECTION OF THOSE EXPENDITURES COULD NOT BE ESTAB LISHED. CERTAIN EXPENDITURES WHICH WERE STATED TO BE INCURRED FOR T HE VISIT OF MS. YEAR R. AMIN, WERE RESTAURANT EXPENDITURE, FLORIST EXPENDITURE, ETC., WHICH IS BEARING AT PAGE 37 OF THE PAPER BOOK . LIKEWISE ON PAGE 91, THERE IS A SHORT NOTE ABOUT THE PURPOSE OF THE VISIT BUT THE ASSESSEE IS REQUIRED TO PRODUCE THE DIRECT EVIDENCE TO ESTABLISH THE GENUINENESS OF THE CLAIM. WE, THEREFORE, RESTORE TH IS GROUND ALSO BACK TO THE STAGE OF THE AO, SO THAT THE ASSESSEE C AN AVAIL THIS OPPORTUNITY TO PRODUCE CERTAIN EVIDENCES THROUGH WH ICH IT COULD BE ESTABLISHED THAT THE FOREIGN TRAVEL WAS IN FACT UNDERTAKEN FOR THE ITA NO.2298/AHD/2010 SHRENO LTD. BARODA VS. ACIT BARODA A.Y. 2007-2008 - 12 - PURPOSE OF THE BUSINESS OF THE ASSESSEE. RESULTANTL Y, THIS GROUND OF THE ASSESSEE MAY BE TREATED AS ALLOWED FOR STATISTI CAL PURPOSE ONLY. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSE ONLY. SD/- SD/- (T.R. MEENA ) (MUKUL KR. S HRAWAT ) ACCOUNTANT MEMBER JUDICIAL MEMB ER AHMEDABAD; DATED 23/08/2013 PRABHAT KR. KESARWANI, SR. P.S. TRUE COPY / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. !' / THE RESPONDENT. 3. #$#% ' '& / CONCERNED CIT 4. ' '&() / THE CIT(A)-III, AHMEDABAD 5. )*' %, ' ' % , ,-$ / DR, ITAT, AHMEDABAD 6. *./ 0 / GUARD FILE. / BY ORDER, 1 11 1/ // /,' #2 ,' #2 ,' #2 ,' #2 ( DY./ASSTT.REGISTRAR) ' ' % ' ' % ' ' % ' ' % , , , , ,-$ ,-$ ,-$ ,-$ / ITAT, AHMEDABAD