Asstt. Comm. Of Income Tax Circle 1, Margao V. M/S. Fomento (Karnataka) Mining Co. Pvt. Ltd., Goa

ITA 23/PAN/2013

• Counselvise Citation: 2324114 RSA 2013
• Duration Of Justice: 6 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2008-2009
• Appeal Filed On: 11-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHA DESAI
• Assessee Lawyers: R S PURANI K
• Keywords: Earning of tax free income; Retrospective amendment; Question of law; Onus to prove
• Section: 80HHC; 14A; 194C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI P.K. BANSAL, HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HONBLE JUDICIAL MEMBER ITA NO. 23/PNJ/2013 : (ASST. YEAR : 2008 - 09) ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 1, MARGAO, GOA (APPELLANT) VS. M/S. FOMENTO (KARNATAKA) MINING CO. PVT. LTD., CIDADE DE GOA, VAINGUINIM BEACH, DONA PAULA, GOA (RESPONDENT) PAN : AAACF7487K ITA NO. 29/PNJ/2013 : (ASST. YEAR : 2008 - 09) M/S. FOMENTO (KARNATAKA) MINING CO. PVT. LTD., CIDADE DE GOA, VAINGUINIM BEACH, DONA PAULA, GOA (APPELLANT) PAN : AAACF7487K VS. ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 1, MARGAO, GOA (RESPONDENT) REVENUE BY : SMT. ASHA DESAI , DR ASSESSEE BY : NISHANT THAKKAR, ADV. & R.S. PURANI K , CA DATE OF HEARING : 06/08/2013 DATE OF PRONOUNCEMENT : 28 /08/2013 O R D E R PER P.K. BANSAL : 1. THESE CROSS APPEALS HAVE BEEN FILED AGAINST THE ORDER OF CIT(A) DT. 20.12.2012. THE REVENUE HAS TAKEN THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL : THE LD. CIT(A) HAS ERRED IN ALLOWING ASSESSEES CLAIM OF TDS AMOUNTING TO RS.24,32,285/ - U/S 194J AND RS.31,461/ - U/S 194C ON THE AMOUNTS OF RS.2,14,50,000/ - AND RS.13,75,356/ - RESPECTIVELY, WHICH ASSESSEE COMPANY HAS NOT OFFERED AS INCOME FOR TAXATION. WHILE THE ASSESSEE HAS TAKEN THE FOLLOWING EFFE CTIVE GROUNDS OF APPEAL : THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.11,49,919/ - MADE BY THE AO UNDER SECTION 14A OF INCOME TAX ACT, 1961 R.W.R. 8D O F THE RULES. 2 ITA NOS. 23&29/PNJ/2013 (ASST. YEAR : 2008 - 09) 2. THE ONLY EFFECTIVE GROUND IN THE REVENUES APPEAL RELATES TO DIRECTION GIVEN BY THE CIT(A) TO AO TO ALLOW THE CREDIT TO THE ASSESSEE IN RESPECT OF ASSESSEES CLAIM FOR TDS AMOUNTING TO RS.24,32,285/ - U/S 194J AND RS.31,461/ - U/S 194C. 2.1 THE BRIEF FACTS RELATING TO THIS ISSUE ARE THAT THE ASSESSEE CLAIMED TDS AMOUNTING TO RS.24,6 1,747/ - WHILE FILING THE RETURN BUT THE AO DID NOT ALLOW THE SAME. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE ASSESSEE CONTENDED THAT THE ASSESSEE INCURRED EXPENSES WHICH WERE REIMBURSED TO THE ASSESSEE BY THE OTHER PARTY AND O N THE REIMBURSEMENT OF SUCH EXPENSES, TAX WAS DEDUCTED AT SOURCE U/S 194J AND U/S 194C OF THE INCOME TAX ACT. THE ASSESSEE PAID LEGAL FEES AMOUNTING TO RS.2,14,50,000/ - AND SECURITY CHARGES AMOUNTING TO RS.13,57,357/ - ON BEHALF OF MR. B. KUMAR GOWDA, MINE OWNERS, SANDUR . THE ASSESSEE STATED THAT HE WAS NEW IN THE BUSINESS AND MR. B. KUMAR GOWDA HAD AGREED TO SUPPLY THE ENTIRE ORE TO THE ASSESSEE. HOWEVER, ONE M/S. SATVAHANA ISPAT LTD. CHALLENGED BEFORE THE HON'BLE HIGH COURT OF KARNATAKA AND MINES TRIBUNA L THE GRANT OF MINING LEASE TO MR. B. KUMAR GOWDA AND LATER ON M/S. JSW STEEL LTD. AND OTHER PARTIES ALSO CHALLENGED THE ALLOTMENT OF LEASE TO MR. B. KUMAR GOWDA. THE COMPANY WAS DEPENDENT ON THE SUPPLY OF ORE FROM MR. B. KUMAR GOWDA MINES, THEREFORE, HAS TO ARRANGE LEGAL COUNSEL AND DEFEND THE CASE. THE LEGAL AND PROFESSIONAL FEES WAS PAID ON BEHALF OF MR. B. KUMAR GOWDA, THE DETAILS OF WHICH ARE AVAILABLE AT PG. 19 - 20 OF THE CIT(A)S ORDER. WHILE MAKING THE PAYMENT OF THE FEES, THE ASSESSEE DEDUCTED TD S AND ISSUED TDS CERTIFICATE TO THE ADVOCATES AND SOLICITORS. SUBSEQUENTLY, THE AMOUNT WAS RECOVERED FROM MR. B. KUMAR GOWDA BY RAISING DEBIT NOTE. MR. B. KUMAR GOWDA ALSO DEDUCTED TDS FOR WHICH THE ASSESSEE HAS ASKED FOR CREDIT. SIMILARLY, IN RESPECT O F THE SECURITY CHARGES ALSO, THE ASSESSEE HAS PAID THE SECURITY CHARGES TO G4 SECURITY SERVICES PVT. LTD. ON BEHALF OF MR. B. 3 ITA NOS. 23&29/PNJ/2013 (ASST. YEAR : 2008 - 09) KUMAR GOWDA AND DEDUCTED TDS. WHEN MR. B. KUMAR GOWDA REIMBURSED THE SECURITY CHARGES TO THE ASSESSEE, HE ALSO DEDUCTED TDS AND T HE ASSESSEE HAS ASKED FOR CREDIT OF THIS TDS. AFTER GOING THROUGH THE SUBMISSIONS OF THE ASSESSEE AND GOING THROUGH THE BOOKS OF ACCOUNTS AND THE DETAILS, CIT(A) DIRECTED THE AO TO GIVE CREDIT TO THE ASSESSEE IN RESPECT OF THE TDS CLAIMED BY OBSERVING AS UNDER : I HAVE GONE THROUGH THE FACTS OF THE CASE, CONTENTS OF THE ASSESSMENT ORDER, WRITTEN SUBMISSIONS OF THE ASSESSEE. IN VIEW OF THE BOARD CIRCULAR NO. 715 DATED 08 - 08 - 1995 AND THE ASSESSEE HAS DRAWN INFERENCE FROM THE BOARD CIRCULAR NO 8/2009 DATED 11/2009 THE THIRD PARTY PAYMENT ALSO CAUSE TDS PAYMENT AS PER SECTION 194J. AS THE TDS ALREADY PAID ANY FURTHER DEDUCTION AMOUNTS TO BE DOUBLE DEDUCTION. HENCE THE AO IS DIRECTED THE CREDIT MAY BE GIVEN FOR THE TDS CLAIMED BY THE ASSESSEE WHICH WAS PAID BY THE B. KUMAR GOWDA. THE ASSESSEES GROUND OF APPEAL IS ALLOWED. 2. 2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. WE HAVE ALSO GONE THROUGH THE ORDER OF THE TAX AU THORITIES BELOW. IT IS A FACT THAT THE ASSESSEE HAS PAID LEGAL AND PROFESSIONAL CHARGES AS WELL AS SECURITY CHARGES ON BEHALF OF MR. B. KUMAR GOWDA. THIS FACT HAS NOT BEEN DENIED BY THE LD. DR. THE ASSESSEE HAS ALSO DEDUCTED TDS U/S 194J AS WELL AS 194C WHEN THE PAYMENTS WERE MADE ON BEHALF OF MR. B. KUMAR GOWDA . IT IS ALSO AN UNCONTROVERTED FACT THAT THE SAID AMOUNT HAS BEEN REIMBURSED BY MR. B. KUMAR GOWDA TO THE ASSESSEE AND MR. B. KUMAR GOWDA ALSO DEDUCTED TDS AND ISSUED TDS CERTIFICATE IN FAVOUR OF THE ASSESSEE WHILE REIMBURSING THE PAYMENTS IN RESPECT OF LEGAL AND PROFESSIONAL FEES AS WELL AS SECURITY EXPENSES. THE PROVISION S OF SEC. 1 99 DEAL WITH THE CREDIT OF TDS. AS PER SEC. 199(3) R/W RULE 37BA (4), CREDIT FOR TAX DEDUCTED AT SOURCE AND PAID TO THE ACCOUNT OF THE CENTRAL GOVERNMENT SHALL BE GRANTED TO THE PERSON TO WHOM THE PAYMENT HAS BEEN MADE OR CREDIT HAS BEEN GIVEN ON THE BASIS OF 4 ITA NOS. 23&29/PNJ/2013 (ASST. YEAR : 2008 - 09) ( I ) THE INFORMATION RELATING TO DEDUCTION OF TAX FURNISHED BY THE DEDUCTOR TO THE INCOME - TAX AUTHORITY OR THE PERSON AUTHORISED BY SUCH AUTHORITY; AND (II) THE INFORMATION IN THE RETURN OF INCOME IN RESPE CT OF THE CLAIM FOR THE CREDIT. IT IS NOT DENIED THAT AS PER INFORMATION SUBMITTED BY MR. B. KUMAR GOWDA, TAX HAS BEEN DEDUC TED ON THE PAYMENT MADE TO THE ASSESSEE. THE TDS IS AKIN TO ADVANCE TAX AND THEREFORE, IN OUR OPINION, NO INTERFERENCE IS CALLED FOR IN THE ORDER OF CIT(A) ON THIS ISSUE AND CIT(A) HAS RIGHTLY DIRECTED THE AO TO GIVE CREDIT TO THE ASSESSEE IN RESPECT OF T DS DEDUCTED BY MR. B. KUMAR GOWDA U/S 194J AND 19 4C. WE, ACCORDINGLY, CONFIRM THE ORDER OF CIT(A). IN VIEW OF THIS FACT, THE GROUND TAKEN BY THE REVENUE STANDS DISMISSED. 3. NOW, COMING TO THE APPEAL OF THE ASSESSEE, THE ONLY ISSUE RELATES TO THE DISALL OWANCE OF RS.11,49,919/ - MADE BY THE AO UNDER SECTION 14A R/W RULE 8D CONFIRMED BY THE CIT(A). 3.1 THE BRIEF FACTS RELATING TO THIS GROUND ARE THAT THE ASSESSEE RECEIVED DIVIDEND INCOME AMOUNTING TO RS. 63,41,266/ - BEING EXEMPT UNDER INCOME TAX ACT. TH E ASSESSEE CLAIMED THAT HE DID NOT INCUR ANY EXPENDITURE IN RESPECT OF THE DIVIDEND INCOME. IT IS ONLY THE SURPLUS FUNDS WHICH HAS BEEN INVESTED THROUGH THE BANKERS TO HAVE GOOD RELATION WITH THE BANKS AND FINANCIAL INSTITUTIONS. THE MUTUAL FUND OFFICIAL S USED TO COME TO THE DOOR STEP OF THE ASSESSEE AND FILL UP FORMS. THE ASSESSEE ONLY ISSUED THE CHEQUE. THE ASSESSEE POINTED OUT THAT THE ASSESSEE INVESTED ONLY IN 7 MUTUAL FUNDS DURING THE YEAR. THE AO DID NOT AGREE AND TOOK THE VIEW THAT WITHOUT ANALY SING THE NATURE OF THE INVESTMENT AND DEVOTING TIME, THE ASSESSEE COULD NOT HAVE MADE THE INVESTMENT IN MUTUAL FUNDS. THE AO TOOK THE VIEW THAT THE PROVISIONS OF SEC. 14A WERE CLEARLY APPLICABLE IN THE CASE OF THE ASSESSEE. HE ALSO OBSERVED THAT THE HON' BLE 5 ITA NOS. 23&29/PNJ/2013 (ASST. YEAR : 2008 - 09) BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT , 234 CTR (BOM) 1 HELD THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME U NDER THE ACT B Y VIRTUE OF PROVISIONS OF SEC. 14A(1) AND PROVISIONS OF RULE 8D OF THE INCOME TAX RULES APPLICABLE DURING THE IMPUGNED ASSESSMENT YEAR. THE AO ACCORDINGLY APPLIED RULE 8D AND COMPUTED THE DISALLOWANCE OF THE EXTENT BEING 0.5% OF THE AVERAGE INVESTMENT OF RS. 22,99,83,801/ - AMOUNTING TO RS.11,49,919/ - AND DISALLOWED THE SAME. THE ASSESSEE WENT IN APPEAL BEFORE CIT(A). CIT(A) CONFIRMED THE ORDER OF THE AO. 3.2 BEFORE US, THE LD. AR VEHEMENTLY CONTENDED THAT THE SATISFACTION OF THE AO IS NECES SARY ABOUT THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE SATISFACTION MUST BE WITH REGARD TO THE ACCOUNTS OF THE ASSESSEE. ATTENTION WAS DRAWN T OWARDS SEC. 14A(2). IT WAS POINTED OUT THAT WITHOUT RECORDING THE SATISFACTION ABOUT THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE, THE AO CANNOT STRAIGHTAWAY APPLY RULE 8D OF THE INCOME TAX ACT. OUR ATTENTION WAS DRAWN TOWARDS PARA 6.3, 6.4 AND 6.5 OF THE ASSESSMENT ORDER AND IT WAS POINTED OUT THAT THE AO HAS NOWHERE RECORDED ANY SATISFACTION ABOUT THE DISCREPANCY IN THE ACCOUNTS OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE INCURRED IN RELATION TO THE DIVIDEND INCOME. THE AO MERELY OBSERVED THAT FRO M A.Y 2008 - 09 ONWARDS THE POSITION IS THAT IN ALL CASES WHERE THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED ON EARNINGS THAT DO NOT FORM PART OF THE TOTAL INCOME, THE EXPENDITURE ON THIS ACCOUN T WILL NEED TO BE COMPUTED AS PER RULE 8D OF THE INCOME TAX ACT. OUR ATTENTION WAS ALSO DRAWN TOWARDS THE DECISION OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT, 328 ITR 81 (MUM). RELIANCE WAS ALSO PLACED ON THE SUBMISSIONS MADE BEFORE THE CIT(A). R ELIANCE WAS ALSO 6 ITA NOS. 23&29/PNJ/2013 (ASST. YEAR : 2008 - 09) PLACED ON THE DECISION OF THIS TRIBUNAL IN THE CASE OF ACIT VS. SESA GOA LTD. IN WHICH THIS TRIBUNAL VIDE ORDER DT. 8.3.2013 HELD THAT THE APPLICATION OF PROVISIONS OF SUB - SECTION 2 & 3 OF SEC. 14A AND RULE 8D IS NOT AUTOMATIC IN EACH AND EVERY CASE WHERE THERE IS INCOME NOT FORMING PART OF THE TOTAL INCOME. BEFORE MAKING ANY DISALLOWANCE THE AO IS REQUIRED TO RECORD SATISFACTION HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE THAT THE CLAIM OF THE ASSESSEE THAT THE EXPENDITURE INCURRED IS N OT RELATED TO THE INCOME FORMING PART OF THE TOTAL INCOME IS INCORRECT. SUCH SATISFACTION MUST BE ARRIVED AT ON OBJECTIVE BASIS. ONCE THE SATISFACTION IS MADE, ONLY THEN, THE APPLICABILITY OF RULE 8D WILL ARISE. IT WAS ALSO SUBMITTED THAT THE EXPENDITUR E WHICH HAVE TO BE DISALLOWED UNDER RULE 8D MUST HAVE A PROXIMATE RELATIONSHIP WITH THE EARNING OF THE DIVIDEND INCOME. FOR THIS ALSO, RELIANCE WAS PLACED ON THE DECISION OF THIS TRIBUNAL IN THE CASE OF ACIT VS. SESA GOA LTD. ( SUPRA ) DT. 8.3.2013 FOR WHIC H THE UNDERSIGNED IS THE AUTHOR. IT WAS ALSO POINTED OUT THAT THE DECISION OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT, 328 ITR 81 (MUM) ( SUPRA ) HAS DULY BEEN DISCUSSED BY THIS BENCH IN THAT CASE. IT WAS SUBMITTED THAT THERE IS NO SATISFACTION WHAT SOEVER BEING RECORDED BY THE AO IN ACCORDANCE WITH SEC. 14A(2) AND THEREFORE IT IS A CASE WHERE RULE 8D COULD HAVE NOT BEEN APPLIED AND THERE COULD NOT BE ANY DISALLOWANCE AS PER SEC. 14A(2). 3.3 THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE A O. 3.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. WE NOTED FROM THE PROVISIONS OF SEC. 14A(2) THAT BEFORE MAKING ANY DISALLOWANCE U/S 14A, THE AO MUST RECORD SATISFACTION HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE THAT THE CLAIM OF THE ASSESSEE THAT THE EXPENDITURE INCURRED IS NOT RELATED TO THE INCOME FORMING PART OF THE TOTAL INCOME IS INCORRECT. WE HAVE GONE THROUGH PARA 6.3, 6.4, 6.5, 6.6, 6.7, 6.8 AND 6.9 OF THE ASSESSMENT ORDER. WE NOTED THAT THE AO ONLY DI SCUSSED THE PROVISIONS OF SEC. 7 ITA NOS. 23&29/PNJ/2013 (ASST. YEAR : 2008 - 09) 14A(1) AND HAS NOT MADE OUT ANY SATISFACTION WHATSOEVER HOW THE EXPENDITURE INCURRED BY THE ASSESSEE DURING THE YEAR RELATE TO THE INCOME NOT FORMING PART OF THE TOTAL INCOME OF THE ASSESSEE. NO WHISPER WHAT TO TALK OF THE R ELATIONSHIP OF THE EXPENDITURE WITH THE EXEMPT INCOME IS MENTIONED. THE AO STRAIGHTAWAY JUMPED TO APPLYING RULE 8D RELYING ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT, 328 ITR 81 (MUM) ( SU PRA ) HOLDING THAT RULE 8D PERTAINS TO BOTH DIRECT AND INDIRECT EXPENDITURE INCURRED ON EARNING TAX EXEMPT INCOME AND IN THE JUDGEMENT IT WAS HELD THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCO ME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT BY VIRTUE OF PROVISIONS OF SEC. 14A(1) AND RULE 8D OF THE INCOME TAX RULES. CIT(A), WE NOTED, HAS ALSO NOT DEALT WITH THE SUBMISSIONS OF THE ASSESSEE WITH REGARD TO THE SATISFACTION BEING RECOR DED BY THE AO BEFORE APPLYING RULE 8D. THE MAIN CONTENTION OF THE ASSESSEE WHILE IS THAT THERE CANNOT BE ANY DISALLOWANCE UNDER THIS PROVISION. WE HAVE GONE THROUGH THE DECISION OF THIS BENCH IN THE CASE OF SESA GOA LTD. VS. JCIT ( SUPRA ) DT . 8.3.2013 FOR WHICH THE UNDERSIGNED IN THE AUTHOR. WE NOTED THAT THE CASE OF THE ASSESSEE IS DULY COVERED BY THE SAID DECISION. IN THAT DECISION, THIS TRIBUNAL HAS ELABORATELY DISCUSSED THE PROVISIONS OF SEC. 14A AS WELL AS RULE 8D AND ULTIMATELY HELD AS UNDER : 14. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS ALONG WITH THE ORDER OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH VARIOUS CASE LAWS AND THE PROVISIONS OF THE IT ACT IN THIS REGARD. THE ISSUE INVOLVED BEFORE US RELATE TO THE DISALLOWANCE MADE BY THE AO BY APPLYING THE PROVISIONS OF SEC.14A OF THE IT ACT READ WITH RULE 8D OF THE IT RULES. SEC.14A WAS INSERTED BY THE FINANCE ACT, 2001 W.E.F. 1.4.1962. ORIGINALLY THIS SEC. PROVIDES THAT IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE NO DEDUCTION SH ALL BE ALLOWED IN RESPECT OF THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. SUBSEQUENTLY, BY FINANCE ACT, 2002 WITH RETROSPECTIVE EFFECT FROM 11/5/2001 PROVISO WAS ADDED WHICH STATES THAT THIS SEC. SHALL NOT EMPOWER THE AO EITHER TO RE - ASSESS OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING THE REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE FOR ANY ASSESSMENT YEAR BEGINNING 8 ITA NOS. 23&29/PNJ/2013 (ASST. YEAR : 2008 - 09) ON OR BEFORE 1/4/2001. WITH EFFECT FROM 1/4/2007 BY FINANCE ACT, 2006 SUB - SEC. (2) EMPOWERS THE AO TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH THE METHOD AS MAY BE PRESCRIBED. SUCH POW ER IS TO BE EXERCISED IF THE AO HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE MENTIONED IN SUB - SEC.(1). BEFORE APPLYING RULE 8D, IT IS APPARENT THAT THE AO MU ST BE SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. SUCH SATISFACTION IS AN OBJECTIVE SATISFACTION THAT IT HAS TO BE JUDICIOUS AND BASED ON THE MATERIAL ON RECORD. IT CANNOT BE AN IMPRESSION THAT IT IS MUCH MORE THAN THE GOSSIP OR HEARSAY, IT MEANS JUDGMENT OR BELIEF THAT IT IS A BELIEF OR A CONNECTION RESULTING FROM WHAT ONE THINKS ON A PARTICULAR QUESTION. IT MUST BE BASED ON THE REASONS AND GROUND AS SEEMS GOOD TO HIM AND WHILE MAKING SUCH SATI SFACTION, THE AO MUST GIVE REGARD TO THE ACCOUNTS OF THE ASSESSEE. HE MUST RECORD DEFICIENCY IN THE ACCOUNTS WITH REGARDS TO THE CLAIM OF THE ASSESSEE. SUB - SEC.(3) PROVIDES THAT PROVISIONS OF SUB - SEC.(2) SHALL ALSO APPLY WHERE ASSESSEE CLAIMS THAT NO EXPEN DITURE HAD BEEN INCURRED IN RELATION TO INCOME NOT FORMING PART OF THE TOTAL INCOME. THIS IS NOT THE CASE OF THE ASSESSEE AS IN THE CASE OF THE ASSESSEE, ASSESSEE HIMSELF ESTIMATED THE EXPENSES RELATING TO THE EXEMPT INCOME AND DISALLOWED THE SAME. RULE 8D WAS INSERTED BY GAZETTE NOTIFICATION DATED 24/3/2008 IN VIEW OF THE POWER CONFERRED UNDER SUB - SEC (2). THIS RULE PRESCRIBES THE METHOD FOR COMPUTING THE EXPENDITURE INCURRED IN RELATION TO THE INCOME NOT FORMING PART OF THE TOTAL INCOME. THIS IS AN UNDISP UTED FACT THAT IN THIS CASE, THE ASSESSEE HAS INVESTED IN DEBTS MUTUAL FUNDS. THE ASSESSEE COMPUTED DISALLOWANCE U/S 14A(2) AT RS.25,78,156/ - AND DISALLOWED THE SAME, WHILE COMPUTING ITS TOTAL INCOME. THE WORKING OF THE SAID DISALLOWANCE CLAIMED BY THE ASS ESSEE IS GIVEN HEREIN ABOVE IN THE SUBMISSIONS MADE BY THE ASSESSEE. THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE ESPECIALLY THE EXPLANATION OF THE ASSESSEE THAT NO ADMINISTRATIVE EXPENDITURE INCURRED ON EARNING THE DIVIDEND I NCOME. CONSIDERING THE MAGNITUDE OF THE INVESTMENTS AND THE DIVIDEND INCOME RECEIVED, THE AO WAS OF THE VIEW THAT THE DISALLOWANCE MADE BY THE ASSESSEE U/S 14A OF THE IT ACT TOWARDS THE ADMINISTRATIVE EXPENDITURE IS LOW ON COMPARING THE MAGNITUDE OF PURCHA SE AND SALES MADE BY THE ASSESSEE AND THE INVESTMENTS OF LARGE MAGNITUDE CANNOT BE MADE WITHOUT PROPER ANALYSIS OF THE MARKET CONDITION/STOCK MOVEMENT ETC. THE REVENUE WAS OF THE OPINION, THAT THE ASSESSEE HAS WORKED OUT THE ADMINISTRATIVE EXPENDITURE AND HAD NOT CONSIDERED ALL THE ADMINISTRATIVE EXPENDITURE. BOTH THE PARTIES BEFORE US VEHEMENTLY RELIED ON THE DECISION OF GODREJ BOYCE MFG CO. LTD. VS DCIT 328 ITR 81 (MUM). 15. WE HAVE GONE THROUGH THIS DECISION AND WE NOTED THAT IN THIS CASE, THE ASSESSEE CLAIMED EXEMPTION IN RESPECT OF DIVIDEND INCOME OF 34.34 CRORES U/S 10(33). THE AO ISSUED NOTICES FOR DISALLOWANCE OF INTEREST U/S 14A OF THE IT ACT. THE EXPLANATION OF THE ASSESSEE WAS THAT (I) 95% OF THE SHARES WERE BONUS SHARES FOR WHICH NO COST WAS IN CURRED; (II) NO INVESTMENT IN SHARES WAS MADE IN THE CURRENT 9 ITA NOS. 23&29/PNJ/2013 (ASST. YEAR : 2008 - 09) YEAR AND NO DISALLOWANCE WAS MADE IN EARLIER YEARS AND (III) THERE WERE SUFFICIENT INTEREST FREE FUNDS AVAILABLE IN THE FORM OF SHARE CAPITAL, RESERVES ETC. WHICH WERE MORE THAN INVESTMENT IN SHA RES. THE AO WAS NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE AND HE MADE DISALLOWANCE U/S 14A ON PRORATA BASIS. THE CIT(A) FOLLOWING HIS ORDERS FOR EARLIER YEARS, ACCEPTED THE APPEAL OF THE ASSESSEE. THE TRIBUNAL FOLLOWING THE DECISION OF THE SPECIAL BENCH IN THE CASE OF ITO VS DAGA CAPITAL MANAGEMENT (P) LTD 117 ITD 169 (SB) RESTORED THE MATTER TO THE FILE OF THE AO FOR THE CONSIDERATION IN THE LIGHT OF THE PROVISIONS OF SUB - SEC.(2) & (3) OF SEC.14A OF THE IT ACT. THE ASSESSEE, BEING AGGRIEVED, FILED APPEAL AS WELL AS WRIT PETITION CHALLENGING THE CONSTITUTIONAL VALIDITY OF SUB - SEC. (2) & (3) AND RULE D. THE HON'BLE HIGH COURT GAVE THE FOLLOWING FINDINGS; 1. THE PROVISIONS OF SEC. 14A AND RULE 8D ARE CONSTITUTIONALLY VALID. 2. THE PROVISIONS OF SUB - SEC. (2) & (3) OF SEC.14A AND RULE 8D ARE PROSPECTIVE AND NOT RETROSPECTIVE, IN NATURE AND THEREFORE, WOULD APPLY FROM ASSESSMENT YEAR 2007 - 08. 3. THE BASIC OBJECT OF SEC.14A IS TO DISALLOW THE DIRECT AND INDIRECT EXPENDITURE INCURRED IN RELATION TO INCO ME WHICH DOES NOT FORM PART OF THE TOTAL INCOME (PAGE 21). 4. THE INSERTION OF SEC.14A WAS CURATIVE AND DECLARATORY OF THE INTENT OF THE PARLIAMENT. THE BASIC PRINCIPLE OF TAXATION IS THAT ONLY NET INCOME, NAMELY, GROSS INCOME MINUS EXPENDITURE THAT IS TA XABLE. EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THAT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME (PAGES 22 - 23). THE TEST WHICH HAS BEEN ENUNCIATED IN WALLFORT FOR ATTRACTING THE PROVISIONS OF SEC.14A IS THAT THERE HAS TO BE A PROXIMATE C AUSE FOR DISALLOWANCE WHICH HAS ITS RELATIONSHIP WITH THE TAX EXEMPT INCOME. ONCE THE TEST OF PROXIMATE CAUSE, BASED ON THE RELATIONSHIP OF THE EXPENDITURE WITH TAX EXEMPT INCOME IS ESTABLISHED, A DISALLOWANCE WOULD HAVE TO BE EFFECTED UNDER SECTION 14A (P AGE 28) 5. WHAT MERITS EMPHASIS IS THAT THE JURISDICTION OF THE AO TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, IN ACCORDANCE WITH THE PRESCRIBED METHOD, ARISES IF THE AO IS NOT SATISFIED W ITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE WHICH THE ASSESSEE CLAIMS TO HAVE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. MOREOVER, THE SATISFACTION OF THE AO HAS TO BE ARRIVED AT, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. HENCE, SUB - SEC (2) DOES NOT IPSO FACTO ENABLE THE AO TO APPLY THE METHOD PRESCRIBED BY THE RULES STRAIGHTAWAY WITHOUT CONSIDERING WHETHER THE CLAIM MADE BY THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELAT ION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS CORRECT. THE AO MUST, IN THE FIRST INSTANCE, DETERMINE WHETHER THE CLAIM OF THE ASSESSEE IN THAT REGARD IS CORRECT AND THE DETERMINATION MUST BE MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSE E. THE SATISFACTION OF THE AO MUST BE ARRIVED AT ON AN OBJECTIVE BASIS. IT IS ONLY WHEN 10 ITA NOS. 23&29/PNJ/2013 (ASST. YEAR : 2008 - 09) THE AO IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, THAT THE LEGISLATURE DIRECTS HIM TO FOLLOW THE METHOD THAT MAY BE PRESCRIBED. IN A SITUATION WHERE THE ACCOUNTS OF THE ASSESSEE FURNISH AN OBJECTIVE BASIS FOR THE AO TO ARRIVE AT A SATISFACTION IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE OF THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THERE WOULD BE NO WARRANT FOR TAKING RECOURSE TO THE METHOD PRESCRIBED BY THE RULES. FOR, IT IS ONLY IN THE EVENT OF THE AO NOT BEING SO SATISFIED THAT RECOURSE TO THE PRESCRIBED METHOD IS MANDATED BY LAW (PAGES 31 - 32). 6. IN THE EVENT THAT THE AO IS NOT SATIS FIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE, HE MUST RECORD REASONS FOR HIS CONCLUSION (PAGE - 79). 7. THE EFFECT OF SEC.14A IS TO WIDEN THE THEORY OF THE APPORTIONMENT OF EXPENDITURE (PAGE 49). 8. THE EXPRESSION EXPENDITURE INCURRED; IN S EC.14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC., IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (PAGE - 50). 9. SUB - SECTIONS (2) & (3) OF SEC.14A ARE INTENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS OF SUB - SEC (1) (PAGES 50). 10. EVE N IN THE ABSENCE OF SUB - SECTION (2) OF SEC.14A THE AO WOULD HAVE TO APPORTION THE EXPENDITURE AND TO DISALLOW THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE AO WOULD HAVE TO FO LLOW A REASONABLE METHOD OF APPORTIONING THE EXPENDITURE CONSISTENT WITH WHAT THE CIRCUMSTANCES OF THE CASE WOULD WARRANT AND HAVING REGARD TO ALL RELEVANT FACTS AND CIRCUMSTANCES. THE SAID DECISION OF THE JURISDICTIONAL HIGH COURT IS BINDING ON US. WHI LE DECIDING THIS CASE, THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS WALLFORT SHARES & STOCK BROKERS LTD., 233 CTR (SC) 42 WAS REFERRED TO. IN THIS DECISION, WE NOTED THAT THE HON'BLE SUPREME COURT IN THAT CASE UPHELD THE VIEW OF THE HON' BLE MUMBAI HIGH COURT IN THE CASE OF WALLFORT SHARES & STOCK BROKERS LTD. VS ITO 310 ITR 421. THE HON'BLE SUPREME COURT IN THIS DECISION, AT PAGE - 31 OF THE ORDER HELD AS UNDER; TO ATTRACT SEC.14A THERE HAS TO BE PROXIMATE CAUSE FOR DISALLOWANCE WHICH HAS ITS RELATIONSHIP WITH THE TAX EXEMPT. PAY BACK OR RETURN OF INVESTMENT IS NOT SUCH PROXIMATE CAUSE. HENCE, SEC.14A IS NOT APPLICABLE IN THE PRESENT CASE. THUS, IN THE ABSENCE OF SUCH PROXIMATE CAUSE FOR DISALLOWANCE, SEC.14A CANNOT BE INVOKED. 16. TH E HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS DCIT (SUPRA) THEREFORE AT PAGE - 28 HAS CLEARLY LAID DOWN THAT THERE MUST BE PROXIMATE CAUSE BASED ON THE RELATIONSHIP OF THE EXPENDITURE THAT TAX EXEMPT INCOME IS ESTABLISHED, ONLY T HEN A DISALLOWANCE WOULD HAVE TO BE EFFECTED U/S 14A OF THE IT 11 ITA NOS. 23&29/PNJ/2013 (ASST. YEAR : 2008 - 09) ACT. THEREFORE, IN VIEW OF THE DECISION OF THE JURISDICTIONAL HIGH COURT AND THE DECISION OF THE HON'BLE SUPREME COURT, WE ARE OF THE VIEW THAT SEC.14A CANNOT BE APPLIED UNLESS THERE IS A PROXI MATE CAUSE FOR DISALLOWANCE. THE ONUS TO ESTABLISH THAT THERE IS PROXIMATE CAUSE BASED ON THE RELATIONSHIP OF THE EXPENDITURE WITH THE EXEMPT INCOME IN OUR OPINION IS ON THE REVENUE. THUS, THE APPLICATION OF THE PROVISIONS OF SEC. (2) & (3) OF SEC.14A AND RULE 8D IS NOT AUTOMATIC IN EACH AND EVERY CASE, WHERE THERE IS INCOME NOT FORMING PART OF THE TOTAL INCOME. SUB - SEC. (2) & (3) ARE INTENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS OF SUB - SEC. (1). THEREFORE, IT IS NECESSARY FOR THE AO FIRST TO ASCERTAIN W HETHER THERE IS PROXIMATE CONNECTION BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF THE TOTAL INCOME. IF SUCH PROXIMATE CONNECTION IS ESTABLISHED WITH THE EXEMPT INCOME, THE AO WOULD BE JUSTIFIED IN APPLYING THE PROVISIONS OF SUB - SEC ( 2) & (3) OF SEC.14A AND RULE 8D OF THE IT ACT, 1961. THE EXPENDITURE INCURRED U/S 14A WOULD INCLUDE DIRECT AND INDIRECT EXPENDITURE, BUT RELATIONSHIP WITH EXEMPTED INCOME MUST BE PROXIMATE. IF THERE IS MATERIAL TO ESTABLISH THAT THERE IS DIRECT NEXUS BETWE EN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF TOTAL INCOME THEN DISALLOWANCE WOULD BE JUSTIFIED EVEN WHERE THERE IS NO RECEIPT OF EXEMPTED INCOME U/S 10 IN THE YEAR UNDER CONSIDERATION IN VIEW OF THE DECISION OF SPECIAL BENCH IN THE CASE O F CHEMINVEST LTD. 124 TTJ 577 (DEL)(SB). 17. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOME. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO TO BE ALLOWED ON NET BASIS I.E. GROSS RECEIPTS MINUS RELATED EXPENSES. THEREFORE, IF ANY EXPENDITURE IS DIRE CTLY RELATED TO EXEMPTED INCOME, IT CANNOT BE ALLOWED TO BE SET OFF AGAINST TAXABLE PROFIT. ON THE SAME ANALOGY, IN OUR OPINION, IF ANY EXPENDITURE IS DIRECTLY RELATED TO TAXABLE INCOME, IT CANNOT BE ALLOWED TO BE SET OFF AGAINST THE EXEMPTED INCOME MERELY BECAUSE SOME INCIDENTAL BENEFIT HAS ARISEN TOWARDS EXEMPTED INCOME. BEFORE MAKING ANY DISALLOWANCE U/S 14A, THE AO IS REQUIRED TO RECORD A SATISFACTION, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, THAT CLAIM OF ASSESSEE THAT EXPENDITURE INCURRED IS NOT RELATED TO THE INCOME FORMING PART OF THE TOTAL INCOME IS INCORRECT. SUCH SATISFACTION MUST BE ARRIVED AT ON THE OBJECTIVE BASIS. HE IS ALSO REQUIRED TO RECORD THE REASONS FOR ARRIVING AT SUCH SATISFACTION. THE ASSESSING OFFICER IN THIS CASE, WE NOTED IS NOT SATISFIED WITH THE CORRECTNESS OF THE DISALLOWANCE MADE BY THE ASSESSEE EVEN THOUGH HE HAS ACCEPTED THE EXPLANATION OF THE ASSESSEE THAT NO INTEREST IS INCURRED WITH REGARD TO EXEMPT INCOME. HE REJECTED THE EXPLANATION OF THE ASSESSEE THAT NO ADMINISTR ATIVE EXPENDITURE INCURRED ON EARNING DIVIDEND INCOME CONSIDERING THE MAGNITUDE OF THE INVESTMENTS AND DIVIDEND INCOME RECEIVED AND THE DISALLOWANCE ACCORDING TO HIM MADE BY THE ASSESSEE U/S 14A TOWARDS ADMINISTRATIVE EXPENDITURE IS VERY LESS. THE ASSESSIN G OFFICER NOWHERE POINTED OUT THE PROXIMATE CONNECTION OF OTHER EXPENSES NOT APPORTIONED BY THE ASSESSEE FOR THE EARNING OF THE DIVIDEND INCOME. HE MERELY OBSERVED THAT THE ADMINISTRATIVE EXPENSES DISALLOWED BY THE ASSESSEE IS VERY LESS BUT HOW THEY ARE LE SS AND HOW THE OTHER EXPENSES INCURRED BY THE ASSESSEE RELATED TO THE DIVIDEND INCOME HAS NOT BEEN BROUGHT ON RECORD. EVEN 12 ITA NOS. 23&29/PNJ/2013 (ASST. YEAR : 2008 - 09) THE AO HAS NOT POINTED OUT THE EXPENSES EXCLUDED BY THE ASSESSEE FOR DISALLOWANCE HAS PROXIMATE CONNECTION WITH DIVIDEND INCOME. IN O UR OPINION, THE ASSESSING OFFICER BEFORE REJECTING THE DISALLOWANCE COMPUTED BY THE ASSESSEE MUST GIVE A CLEAR CUT FINDING HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE HOW THE OTHER EXPENDITURE CLAIMED BY THE ASSESSEE OUT OF NON EXEMPT INCOME IS RELATED W ITH THE EXEMPT INCOME. NO DISCREPANCY IN THE CLAIM OF THE ASSESSEE WAS POINTED OUT. THE ASSESSING OFFICER IN OUR OPINION IN VIEW OF THE JURISDICTIONAL HIGH COURT DECISION IS BOUND TO RECORD SATISFACTION AS TO HOW THE EXPENSES CLAIMED BY THE ASSESSEE HAVE B EEN INCURRED ON EARNING DIVIDEND INCOME WERE NOT SUFFICIENT AND CORRECT. WE HAVE ALREADY HELD THAT THE ONUS TO PROVE IN THIS REGARD LIES ON THE ASSESSING OFFICER. ALTHOUGH THE LD. DR HAD VEHEMENTLY CONTENDED AND TRIED TO BUILD UP HIS CASE BY SUBSTITUTING T HE REASONS GIVEN BY THE CIT(APPEAL) IN PLACE OF THE AO, BUT FAILED TO BRING ANY COGENT MATERIAL OR EVIDENCE IN THIS REGARD WHICH MAY PROVE THAT THE OTHER EXPENSES CLAIMED BY THE REVENUE FOR APPORTIONMENT HAD PROXIMATE CONNECTION WITH THE EARNING OF THE DIV IDEND INCOME. IN OUR OPINION UNTIL AND UNLESS THIS IS PROVED OR ESTABLISHED BY THE REVENUE, THE ASSESSING OFFICER DOES NOT HAVE ANY POWER TO REJECT THE ACCOUNTS OF THE ASSESSEE AND TAKE THE SHELTER OF RULE 8D FOR COMPUTING THE DISALLOWANCE OUT OF THE EXEMP T INCOME. WE ARE NOT AT ALL CONVINCED WITH THE SUBMISSION OF THE LD. DR RELYING ON THE DECISION OF CIT(APPEAL) IN RESPECT OF EXPLANATION BB TO SEC. 80HHC THAT 10% OF THE RECEIPTS UNDER THE SOURCES MENTIONED THEREIN ARE DEEMED TO BE THE EXPENDITURE. THIS IN OUR OPINION WILL STRENGTHEN THE CASE OF THE ASSESSEE AS EXPLANATION BB TO SEC. 80HHC DOES NOT RECOGNIZE AMOUNT OF THE INVESTMENT MADE IN OTHER RECEIPT TO BE THE BASIS OF COMPUTING THE EXPENDITURE BEING INCURRED FOR THE EARNING OF THAT INCOME. SIMILAR VIEW S HAVE BEEN TAKEN BY HON'BLE TRIBUNAL IN THE FOLLOWING DECISIONS ALSO. IN THE CASE OF DCIT VS. JINDAL PHOTO LTD. HELD IN I.T.A.T. DELHI BENCH DATED 7.1.2011 IT WAS HELD AS FOLLOWS: NOW AS PER SECTION 14A(2) OF THE ACT, IF THE AO, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE ASSESSEES TOTAL INCOME UNDER THE ACT, THE AO SHALL DETERMINE THE AMOUNT I NCURRED IN RELATION TO SUCH INCOME, IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, I.E., UNDER RULE 8D OF THE I.T. RULES. HOWEVER, IN THE PRESENT CASE, THE ASSESSMENT ORDER DOES NOT EVINCE ANY SUCH SATISFACTION OF THE AO REGARDING THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. AS SUCH, RULE 8D OF THE RULES WAS NOT APPROPRIATELY APPLIED BY THE AO AS CORRECTLY HELD BY THE CIT(A). IT HAS NOT BEEN DONE BY THE AO THAT ANY EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE FOR EARNING ITS DIVIDEND INCOME. MERELY, AN ADHOC DISALLOWANCE WAS MADE. THE ONUS WAS ON THE AO TO ESTABLISH ANY SUCH EXPENDITURE. THIS ONUS HAS NOT BEEN DISCHARGED. IN .CIT VS. HERO CYCLES. (P&H) 323 ITR 518, UNDER SIMILAR CIRCUMSTANCES, IT WAS HELD 13 ITA NOS. 23&29/PNJ/2013 (ASST. YEAR : 2008 - 09) THAT THE DISALLOWANCE U/S 14A OF THE ACT REQU IRES A CLEAR FINDING OF INCURRING OF EXPENDITURE AND THAT NO DISALLOWANCE CAN BE MADE ON THE BASIS OF PRESUMPTIONS. IN .ACIT VS. EICHER LTD.., 101 TTJ (DEL.) 369, THAT IT WAS HELD THAT THE BURDEN IS ON THE AO TO ESTABLISH NEXUS OF EXPENSES INCURRED WITH TH E EARNING OF EXEMPT INCOME, BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT. IN MARUTI UDYOG VS. DCIT, 92 ITD 119 (DEL.), IT HAS BEEN HELD THAT BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT, THE ONUS TO ESTABLISH THE NEXUS OF THE SAME WITH THE EXEM PT INCOME, IS ON THE REVENUE. IN WIMCO SEEDLINGS LIMITED VS. DCIT., 107 ITD 267 (DEL.) (TM), IT HAS BEEN HELD THAT THERE CAN BE NO PRESUMPTION THAT THE ASSESSEE MUST HAVE INCURRED EXPENDITURE TO EARN TAX FREE INCOME. SIMILAR ARE THE DECISIONS IN: 1. PUN JAB NATIONAL BANK VS. DCIT, 103 TTJ 908 (DEL.); 2. VIDYUT INVESTMENT LTD., 10 SOT 284 (DEL.); AND 3. D.J. MEHTA VS. INCOME TAX OFFICER, 290 ITR 238 (MUM.) (AT) IN VIEW OF THE ABOVE, FINDING NO ERROR WITH THE ORDER OF THE CIT(A) ON THE POINT AT ISSUE, T HE SAME IS HEREBY CONFIRMED. GROUND NO.3 IS THUS REJECTED. IN THE CASE OF JINDAL PHOTO LTD. VS. DCIT HELD IN I.T.A.T. DELHI BENCH DATED 23.9.2011 IT WAS HELD AS FOLLOWS: IN THE YEAR UNDER CONSIDERATION, IT IS SEEN THAT IT IS NOT INCORRECT WHEN THE ASSESSEE CONTENDS THAT NO SATISFACTION HAS BEEN RECORDED BY THE AO REGARDING THE ASSESSEES CALCULATION BEING INCORRECT. EVEN SO, RULE 8D OF THE RULES HAS BEEN APPLIED. THIS, IN OUR OPINION, IS NOT CORRECT. SUCH SATISFACTION OF THE ASSESSING OFFICER IS A P RE - REQUISITE TO INVOKE THE PROVISIONS OF RULE 8D OF THE RULES. THE LEARNED CIT(A), THEREFORE, ERRED IN PARTIALLY APPROVING THE ACTION OF THE ASSESSING OFFICER. IN THE CASE OF AVSHESH MERCANTILE P. LTD. VS. DCIT IN I.T.A.T. MUMBAI BENCH (I.T. ACT NO.5779 /MUM/2006 & 208/MUM/2009) IT WAS HELD AS FOLLOWS: AT THE TIME OF HEARING, THE CONTENTION RAISED BY THE LEARNED DR IN THIS REGARD IS THAT THE APPEAL OF THE REVENUE ON THE ISSUE HAVING BEEN DISMISSED BY THE HON'BLE BOMBAY HIGH COURT MERELY OBSERVING THAT NO QUESTION ARISES, IT CANNOT BE TREATED AS A DECISION RENDERED BY THE HON'BLE HIGH COURT ON THE MERIT OF THE ISSUE WHICH IS BINDING ON THIS TRIBUNAL. WE ARE UNABLE TO ACCEPT THIS CONTENTION OF THE LEARNED DR. IT IS WELL SETTLED PROPOSITION OF JUDICIAL PRE CEDENTS THAT IS APPEAL THE HON'BLE HIGH COURT CONSIDERS FACTS PERTAINING TO THE ISSUE AND GIVES APPROVAL TO THE DECISION OF THE LOWER FORUM, THE DECISION OF LOWER FORUM GETS MERGED WITH THE JUDGMENT AND ORDER OF THE HIGH COURT AND IT BECOMES BINDING PRECED ENT EVEN THOUGH APPROVAL TO DECISION OF LOWER 14 ITA NOS. 23&29/PNJ/2013 (ASST. YEAR : 2008 - 09) FORUM/COURT IS SUMMARILY RECORDED. SIMILAR SITUATION HAD ARISEN FOR CONSIDERATION BEFORE THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF NIRMA INDUSTRIES LTD. 283 ITR 402 WHEREIN THE EFFECTS OF SUMMARY DISPOSAL O F APPEAL BY THE HIGH COURT WERE ANALYSED AND EXPLAINED BY THEIR LORDSHIPS. IT WAS CLARIFIED THAT WHILE HEARING AN APPEAL EVEN FOR DECIDING WHETHER SUBSTANTIAL QUESTION OF LAW ARISES OR NOT FROM THE ORDER OF THE TRIBUNAL, THE HIGH COURT DOES NOT EXERCISE EI THER THE ORIGINAL JURISDICTION OR THE JURISDICTION TO ISSUE WRITS AND THE ONLY JURISDICTION EXERCISED BY THE HIGH COURT IN THE FIRST INSTANCE DECIDES WHETHER OR NOT SUBSTANTIAL QUESTION OF LAW ARISES FROM THE ORDER OF THE TRIBUNAL, IT CANNOT BE SAID THAT T HE HIGH COURT DOES NOT EXERCISE THE APPELLATE POWERS OR THAT THERE IS NO DECISION ON MERIT WHEN THE HIGH COURT DISMISSES AN APPEAL HOLDING THAT NO SUBSTANTIAL QUESTION OF LAW ARISES FROM THE ORDER OF THE TRIBUNAL. IT WAS HELD THAT WHENEVER AN ORDER OF THE SUBORDINATE FORUM IS CARRIED IN APPEAL BEFORE THE HIGHER APPELLATE FORUM/COURT, OPERATIVE PART THEREOF MERGES INTO THE JUDGMENT, DECISION OR ORDER OF THE HIGHER COURT AFTER THE CONFIRMATION, MODIFICATION OR REVERSAL, AS THE CASE MAY BE, AND THE DECISION OF THE LOWER COURT OR FORUM HAS NO INDEPENDENT EXISTENCE THEREAFTER IN RELATION TO THE ISSUE WHICH WAS CARRIED BEFORE THE APPELLATE COURT OR FORUM. IT WAS HELD THAT WHERE THE HIGH COURT COMES TO THE CONCLUSION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES ON A PARTICULAR ISSUE, IT CANNOT BE STATED THAT THE SUBJECT MATTER OF CONTROVERSY BETWEEN THE PARTIES HAS NOT BEEN DEALT WITH BY THE HIGH COURT. IT WAS HELD THAT WHEN THE DECISION OF THE TRIBUNAL IS AFFIRMED ON THE ISSUE BROUGHT BEFORE THE HIGH COURT, IT IS THE DECISION OF THE HIGH COURT WHICH BECOMES OPERATIVE AND WHICH IS CAPABLE OF BEING GIVEN EFFECT TO FOR ALL INTENTS AND PURPOSES. KEEPING IN VIEW THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF NIRMA INDUSTRIES LTD. (SUPRA), WE HAVE NO HESITATION T O HOLD THAT THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF DELITE ENTERPRISE LTD. (SUPRA) IS A DECISION ON MERIT WHICH IS BINDING PRECEDENT ON US. AS THE ISSUE INVOLVED IN THE PRESENT CASES AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERETO A RE SIMILAR TO THAT OF THE CASE OF DELITE ENTERPRISE (SUPRA), WE RESPECTFULLY FOLLOW THE SAID DECISION OF THE JURISDICTIONAL HIGH COURT AND DELETE THE DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(A) ON ACCOUNT OF PREMIUM PAID BY THE ASSESSEE S ON REDEMPTION OF PREMIUM NOTES (OCPN) BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. AS REGARDS THE CASE LAWS CITED BY THE LEARNED DR, IT IS OBSERVED THAT IN NONE OF THESE CASES, THE FACTS INVOLVED WERE SIMILAR TO THE CASE OF THE PRESENT ASSESSEES IN AS MUCH AS THE INVESTMENT MADE THEREIN WAS NOT FOUND TO BE CAPABLE OF EARNING TAXABLE AS WELL AS EXEMPT INCOME WHICH WAS ACTUALLY NOT EARNED BY THE ASSESSEE IN THE RELEVANT PERIOD AS ARE THE FACTS OF THE PRESENT CASE OR THAT OF THE CASE OF DELITE ENTER PRISE (SUPRA) DECIDED BY THE HON'BLE BOMBAY HIGH COURT. ACCORDINGLY, WE DECIDE THE COMMON ISSUE INVOLVED IN ALL THESE APPEALS IN FAVOUR OF THE ASSESSEES FOLLOWING THE DECISION 15 ITA NOS. 23&29/PNJ/2013 (ASST. YEAR : 2008 - 09) OF JURISDICTIONAL HIGH COURT IN THE CASE OF DELITE ENTERPRISES (SUPRA) AND ALLOW THE APPEALS OF ALL THE ASSESSEES. 18. WE HAVE ALSO GONE THROUGH THE DECISION RELIED UPON BY THE LEARNED DR ALSO. THE DECISION OF ACIT VS CITICORP FINANCE (IND.) LTD., 108 ITD 457 (BOM.) IS NO MORE RELEVANT, IN VIEW OF THE DECISION OF THE HON'BLE MUMBAI HIGH COURT IN THE CASE OF GODREJ BOYCE MFG CO. LTD. (SUPRA). THE DECISION OF SPIC VS DCIT 93 TTJ (CHENNAI) 161 IS NOT APPLICABLE TO THE FACTS OF THE CASE. AS IN THAT CASE, THE ASSESSEE WAS REGULARLY INVESTING IN THE SHARES. THE ASSESSEE HAS NOT DIS ALLOWED ANY EXPENDITURE WITH REGARD TO THE EARNING OF THE DIVIDEND INCOME. UNDER THESE FACTS, THE HON'BLE TRIBUNAL HELD THAT WHETHER TO INVEST OR NOT TO INVEST IS A VERY STRATEGIC DECISION AND TOP MANAGEMENT INVOLVE IN TAKING THE DECISIONS. THIS DECISION R ELATE TO ASSESSMENT YEAR 2000 - 01 MUCH PRIOR TO THE INSERTION OF PROVISION OF SEC.14A(2) OF THE IT ACT,1961. THE DECISION OF ACIT VS PREMIUM CONSOLIDATED CAPITAL TRUST 83 TTJ (BOM.) RELATES TO ASSESSMENT YEAR 1991 - 92 PRIOR TO INSERTION OF 14A(2) HENCE WILL NOT ASSIST THE REVENUE. THE OTHER DECISION RELIED ON ARE ALSO NOT APPLICABLE TO THE FACTS OF THE CASE, EXCEPT THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS DC IT & ANOTHER 328 ITR 81(BOM.). IN VIEW OF OUR AFORES AID DISCUSSION AND RESPECTIVELY FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT & ANOTHER 328 ITR 81 (BOM), WE DELETE THE DISALLOWANCE MADE U/S 14A R.W. RULE 8D AND ACCORDINGLY, THE GROUND TAKEN BY THE ASSESSEE IN THIS REGARD IS ALLOWED. THE FINDING GIVEN BY THIS TRIBUNAL IN THE AFORESAID DECISION UNDER PARA 17 ARE EQUALLY APPLICABLE IN THE CASE OF THE ASSESSEE AS IN THE ASSESSMENT ORDER WE DO NOT FIND ANY WHISPER WHATSOEVER WHICH PROVES THAT TH E AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE WHICH THE ASSESSEE CLAIMS TO HAVE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE AO STRAIGHTAWAY WENT ON APPLYING RULE 8D WHILE, IN THE FIRST INSTANCE, THE AO SHOULD HAVE DETERMINED WHETHER THE CLAIM OF THE ASSESSEE THAT IT HAS NOT INCURRED ANY EXPENDITURE WITH REGARD TO THE DIVIDEND INCOME IS CORRECT OR NOT AND SUCH DETERMINATION MUS T HAVE BEEN MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE ON OBJECTIVE BASIS. IT IS ONLY WHEN THE AO IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, THE LEGISLATURE HAS EMPOWERED THE AO TO FOLLOW THE METHOD FOR CALCULATING THE DISALLOWANCE AS MAY BE PRESCRIBED I.E. RULE 8D. THE 16 ITA NOS. 23&29/PNJ/2013 (ASST. YEAR : 2008 - 09) AO INSTEAD OF DISCHARGING HIS OBLIGATION, STRAIGHTAWAY APPLIED RULE 8D AND MADE DISALLOWANCE. HE HAS PUT THE CART BEFORE THE HORSE WHICH IS NOT PERMISSIBLE UNDER LAW. THE CASE OF THE ASSESSEE, IN OUR OPINION, IS COVERED BY OUR AFORESAID DECISION IN THE CASE OF SESA GOA LTD. VS. JCIT ( SUPRA ). RESPECTFULLY FOLLOWING THE DECISION IN THE CASE OF SESA GOA LTD. VS. JCIT ( SUPRA ), WE DELETE THE DISALLOWANCE MADE U/S 14A. SIMILAR VIEW HAS BEEN TAKEN BY THIS BENCH IN ITA NO. 34/PNJ/ 2013 & ITA NO. 50/PNJ/2013 IN THE CASE OF M/S. INFRASTRUCTURE LOGISTICS PVT. LTD. VS. ACIT. THUS, THIS GROUND IS ALLOWED. 4. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED WHILE THE APPEAL FILED BY THE REVENUE STANDS DISMISSED. 5. ORDER PRON OUNCED IN THE OPEN COURT ON 28 /08/2013. SD/ (D.T.GARASIA) JUDICIAL MEMBER SD/ - (P.K. BANSAL) ACCOUNTANT MEMBER PLACE : PANAJI / GOA DATED : 28 /08/ 2013 *SSL* COPY TO : (1) APPELLANT (2) RESPONDENT (3) CIT, PANAJI (4) CIT(A), PANAJI (5) D.R (6) GUARD FILE TRUE COPY, BY ORDER SR. P RIVATE S ECRETARY ITAT, PANAJI, GOA