Safal Reality Pvt.Ltd., Ahmedabad V. The ACIT.,(OSD)Circle-8, Ahmedabad

ITA 2334/AHD/2012

• Counselvise Citation: 233420514 RSA 2012
• Duration Of Justice: 1 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-11-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 21-11-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 17-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P L KUREEL
• Assessee Lawyers: VIJAY RANJAN
• Keywords: Earning of tax free income; Proportionate interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER AND SHRI T.R. MEENA, ACCOUNTANT MEMBER ITA NO.2334/AHD/2012 & 1842/AHD/2013 A.YS. 2009-10 & 2010-11 SAFAL REALITY P. LTD., AHMEDABAD, TOP FLOOR, SARTHAK ANNEXE, NEAR FUN REPUBLIC CINEMA, SATELLITE AHMEDABAD. PAN: AACCT 0294J VS ACIT (OSD), CIRCLE-8, AHMEDABAD. (APPELLANT) (RESPONDENT) REVENUE BY : SHRI P.L. KUREEL, SR.D.R. ASSESSEE(S) BY : SHRI VIJAY RANJAN, A.R. / DATE OF HEARING : 21/11/2013 / DATE OF PRONOUNCEMENT: 29/11/2013 / O R D E R PER SHRI MUKUL KUMAR SHRAWAT, JUDICIAL MEMBER THESE TWO APPEALS OF THE ASSESSEE HAVE EMERGED FRO M THE ORDERS OF LEARNED CIT(A)-XIV, AHMEDABAD, RESPECTIVELY, DATED 08.08.2012 AND 09.05.2013. FOR THESE TWO YEARS IDENTICALLY WORDED GROUNDS HAVE BEEN RAISED, CHALLENGING THE DISALLOWANCE OF INTEREST BY INVOKING THE PROVISIONS OF SECTION 14A OF IT ACT. FOR A.Y. 2009- 10, THE DISALLOWANCE WAS RS.41,13,106/- AND FOR A.Y. 2010-11, THE DISALL OWANCE WAS RS.9,26,942/- ITA NOS.2334/ AHD/2012 AND 1842/AHD/2013 SAFAL REALITY P. LTD. AHMEDABAD VS. ACIT (OSD) CIR- 8, AHMEDABAD . FOR A.YS. 2009-10 & 2010-11 - 2 - 2. THE ASSESSEE COMPANY IS A BUILDER AND DEVELOPER OF RESIDENTIAL AND COMMERCIAL PROJECTS. IT WAS NOTED BY THE AO THAT TH E ASSESSEE COMPANY IS A PARTNER IN SEVERAL PARTNERSHIP FIRMS. THE AO HAD MADE A LIST OF ALL THOSE FIRMS ALONG WITH PROFIT SHARING RATIO OF THE ASSESSEE IN THOSE FIRMS. IT WAS NOTED BY THE AO THAT FOR A.Y.2009-10, THE AS SESSEE HAD EARNED PROFIT FROM THOSE PARTNERSHIP FIRMS RS.20,54,20,4 02/-. THE SAID PROFIT WAS CLAIMED AS EXEMPT U/S.10(2A) OF IT ACT. THE ASS ESSES INVESTMENT IN THOSE FIRMS AS ON 31 ST OF MARCH, 2009 WAS RS.66,63,26,727/-. FURTHER, IT WAS NOTED BY THE AO THAT THE ASSESSEE HAD PAID INTE REST OF RS.3,61,28,214/-. THE OBSERVATION OF THE AO WAS THA T THE ASSESSEE COMPANY HAD INVESTED SUBSTANTIAL FUND IN THE PARTNE RSHIP FIRM AND EARNED EXEMPTED INCOME. ACCORDING TO AO, ON ONE HAND, THE ASSESSEE HAD PAID INTEREST ON THE UNSECURED LOANS. HOWEVER, ON THE OT HER HAND, THE BORROWED FUNDS WERE INVESTED IN THE PARTNERSHIP FIR MS FROM WHERE EARNED EXEMPTED INCOME U/S. 10(2A) OF IT ACT. THE AO HAS I NVOKED THE PROVISIONS OF SECTION 14A READ WITH RULE 8D OF THE ACT. THE DISALLOWANCE WAS COMPUTED BY THE AO IN THE FOLLOWIN G MANNER:- IN VIEW OF THE ABOVE FACTS, DISALLOWANCE U/S.14A R EAD WITH RULE 8D IS MADE AS UNDER: (A) DIRECT EXPENSES NIL (B) DISALLOWANCE OUT OF INTEREST INTEREST PAID X AVERAGE VALUE OF INVESTMENT AVERAGE OF THE TOTAL ASSETS 12201010 X 319854608 = 2685054 145343439 (C) HALF PERCENT OF AVERAGE INVESTMENT = 0.5% OF 319854608 = 1599273 DISALLOWANCE U/S. 14A = A+B+C = NIL + 2685054 + 1599273 = 4284327 ITA NOS.2334/ AHD/2012 AND 1842/AHD/2013 SAFAL REALITY P. LTD. AHMEDABAD VS. ACIT (OSD) CIR- 8, AHMEDABAD . FOR A.YS. 2009-10 & 2010-11 - 3 - NOTE-1 CALCULATION OF INTEREST EXPENSES TOTAL INTEREST DEBITED TO P & L A/C. 35,966,900 LESS: INTEREST RELATED TO PROJECT (AS PER SEPARATE BOOKS OF A/C.) 23,765,890/- 12,201,010 NOTE-2 CALCULATION OF TOTAL ASSETS AS ON MARCH 31,2008 FIXED ASSETS (NET BLOCK) 11,863,542 INVESTMENTS 584,515,064 CURRENT ASSETS, LOANS AND ADVANCES 667,158,777 1,263,537,383 NOTE 3 CALCULATION OF TOTAL ASSETS AS ON MARCH 31,2009 FIXED ASSETS (NET BLOCK) 26,787,720 INVESTMENTS 666,326,727 CURRENT ASSETS, LOANS AND ADVANCES 950,216,867 1,643,331,314 NOTE 4 TOTAL INVESTMENT IN PARTNERSHIP FIRMS AS AT MARCH 31, 2008 570,202,724 LESS: LESS: INVESTMENT FORM WHICH INTEREST IS RECEIVED (A) GOKULDHAM DEVELOPERS 186,215,014 (B) SNEHAL DEVELOPERS 3,239,024 189,454,038 LESS: PROFIT ELEMENTS NOT WITHDRAWN FROM FIRM (A) SAFAL ASSOCIATES 43,608,321 NET INVESTMENT 337,140,366 NOTE- 5 TOTAL INVESTMENT IN PARTNERSHIP FIRMS AS AT ITA NOS.2334/ AHD/2012 AND 1842/AHD/2013 SAFAL REALITY P. LTD. AHMEDABAD VS. ACIT (OSD) CIR- 8, AHMEDABAD . FOR A.YS. 2009-10 & 2010-11 - 4 - MARCH 31, 2009 6,65,626,727 LESS: LESS: INVESTMENT FORM WHICH INTEREST IS RECEIVED (A) GOKULDHAM DEVELOPERS 185,107,968 (B) SNEHAL DEVELOPERS 958,779 (C) SAFAL GALA REALITIES 29,676,399 (D) GALA SAFAL DEVELOPERS 108,943,355 324,686,501 LESS: PROFIT ELEMENTS NOT WITHDRAWN FROM FIRM (A) SAFAL ASSOCIATES 11,673,373 (B) ORCHID DEVELOPERS 26,698,002 38,371,375 NET INVESTMENT 302,568,851 THUS, THE DISALLOWANCE U/S. 14A READ WITH RULE 8D W HICH COMES TO RS.42,84,327 IS ADDED TO THE TOTAL INCOME OF THE AS SESSEE. 3. WHEN THE MATTER WAS CARRIED BEFORE THE FIRST APP ELLATE AUTHORITY, IT WAS CONTESTED THAT THE ASSESSEE HAD SUFFICIENT I NTEREST FREE FUND AND THAT THE AO HAD NOT ESTABLISHED ANY NEXUS BETWEEN THE FU NDS INVESTED FOR EARNING THE INTEREST FREE INCOME. ACCORDING TO LEAR NED CIT(A), THE ASSESSEE HAD BORROWED INTEREST BEARING FUNDS ON WHI CH INTEREST OF RS.1,22,01,101/- WAS PAID. ACCORDING TO HIM, THE AO HAD GIVEN A FINDING THAT THERE WAS AN INTERMINGLING OF OWN FUNDS AND BO RROWED FUNDS. ACCORDING TO LEARNED CIT(A) IF THERE WAS NEXUS BETW EEN THE INCURRING OF EXPENSES AND EARNING OF EXEMPTED INCOME IS ESTABLIS HED THEN DISALLOWANCE CAN BE MADE. FURTHER, IT WAS NOTED BY THE LEARNED CIT(A) THAT SOME OF THE JUDGMENTS WHICH WERE CITED BEFORE HIM WERE PRIOR TO A.Y. 2008-09, HOWEVER, RULE 8D HAD BEEN EFFECTIVE F ROM A.Y. 2008-09. AFTER THE INTRODUCTION OF RULE 8D A FORMULA HAS BEE N PRESCRIBED FOR WORKING OUT THE DISALLOWANCE U/S. 14A OF IT ACT. ITA NOS.2334/ AHD/2012 AND 1842/AHD/2013 SAFAL REALITY P. LTD. AHMEDABAD VS. ACIT (OSD) CIR- 8, AHMEDABAD . FOR A.YS. 2009-10 & 2010-11 - 5 - 3.1 AN ANOTHER PLEA WAS RAISED BEFORE LEARNED CIT(A ) THAT THE INTEREST EARNED BY THE ASSESSEE WAS MORE THAN THE INTEREST P AID, HENCE, THERE WAS NET INCOME FROM INTEREST, ACCORDINGLY, NO DISALLOWA NCE U/S. 14A SHOULD HAVE BEEN MADE BY THE AO. ACCORDING TO LEARNED CIT( A), THE TOTAL INTEREST EXPENDITURE WAS TO BE CONSIDERED IN THE FO RMULA PRESCRIBED IN RULE 8D. THE BASIC IDEA BEHIND TAKING THE TOTAL INT EREST EXPENDITURE IS TO WORK OUT THE PROPORTIONATE INTEREST WHICH IS CORRES PONDING TO THE FUNDS INVESTED IN TAX EXEMPTED ASSETS. THE ASSESSEE HAD P LACED RELIANCE ON A DECISION OF TRADE INVESTMENT LIMITED (ITA NO.1277/K OL/2011, DATED 30 TH OF MARCH, 2012), THE SAID DECISION WAS PRONOUNCED ON THE PRINCIPAL OF NETTING AND HELD THAT ONCE THE ENTIRE EXPENSES H AVE BEEN OFFERED FOR DISALLOWANCE THEN THERE WAS NOTHING REMAIN FOR DISA LLOWANCE U/S. 14A OF THE IT ACT. AN ANOTHER PLEA WAS RAISED THAT THE INT EREST PAID ON VEHICLE LOAN, ETC., SHOULD BE EXCLUDED FROM THE FIGURE OF T HE INTEREST PAID DURING THE YEAR. THIS PLEA OF THE ASSESSEE WAS ACCEPTED BY LEARNED CIT(A) AND ACCORDINGLY AN ADJUSTMENT WAS GRANTED; HENCE, INSTE AD OF THE TOTAL INTEREST EXPENDITURE OF RS.1,22,01,010/-, LEARNED C IT(A) HAS DIRECTED THAT THE INTEREST EXPENDITURE FOR THE PURPOSE OF RULE 8D WAS TO BE CONSIDERED AT RS.1,15,56,267/-. AGAINST THIS PART RELIEF NOW T HE ASSESSEE IS FURTHER IN APPEAL. 4. FROM THE SIDE OF THE APPELLANT, LEARNED AR MR. V IJAY RANJAN APPEARED AND PLEADED THAT THE ASSESSEE HAD ITS OWN SUFFICIENT FUNDS OF RS.106,16,43,052/-. HOWEVER, THE INVESTMENT IN CAPI TAL OF PARTNERSHIP FIRMS WAS ONLY RS.66,56,26,727/-. ONCE THE ASSESSEE HAD SUFFICIENT OWN FUNDS, THEREFORE, THE PROVISIONS OF SECTION 14A WER E WRONGLY INVOKED. HE HAS ALSO ARGUED THAT THE ASSESSEE HAS EARNED INT EREST FREE PARTNERSHIP ITA NOS.2334/ AHD/2012 AND 1842/AHD/2013 SAFAL REALITY P. LTD. AHMEDABAD VS. ACIT (OSD) CIR- 8, AHMEDABAD . FOR A.YS. 2009-10 & 2010-11 - 6 - FIRM ON CAPITAL OF RS.1,18,50,970/- AND EARNED INTE REST FROM BANK RS.78,38,101/- TOTALING RS.1,96,89,071/-. AS AGAINS T THAT THE INTEREST EXPENDITURE WHICH WAS TAKEN BY THE AO FOR THE SAID DISALLOWANCE WAS ONLY RS.1,22,01,010/-. ONCE THE INTEREST INCOME WAS MORE THAN THE INTEREST EXPENDITURE THEN IT WAS WRONG ON THE PART OF THE AO TO INVOKE THE PROVISIONS OF RULE 8D OF THE ACT. HE HAS PLACED RELIANCE UPON THE DECISION OF HONBLE ITAT D BENCH AHMEDABAD IN THE CASE ITO AHMEDABAD VS. KARNAVATI PETROCHEM PVT. LTD., IN ITA NO.2228/AHD/2012, FOR A.Y.2008-09, DATED 05.07.2013 . 5. FROM THE SIDE OF THE REVENUE, LEARNED SR.D.R., M R. P.L. KUREEL HAS PLEADED THAT THE AO AS WELL AS LEARNED CIT(A), BOTH HAVE GIVEN SUFFICIENT REASONING FOR THE INVOCATION OF THE PROV ISIONS U/S.14A BY PLACING RELIANCE ON THOSE JUDGMENTS. HE HAS PLEADED THAT THE DISALLOWANCE SHOULD BE CONFIRMED. 5. WE HAVE HEARD BOTH THE SIDES AT SOME LENGTH. WE HAVE ALSO CAREFULLY PERUSED THE ORDERS OF THE AUTHORITIES BEL OW IN THE LIGHT OF THE ABOVE COMPILATION FILED. ONCE, THE FACTUAL POSITION IS THAT THE ASSESSEE WAS HAVING SUFFICIENT OWN FUNDS, AS DEMONSTRATED BE FORE US WHICH WERE STATED TO BE UTILIZED FOR THE INVESTMENT IN CAPITAL OF THE PARTNERSHIP FIRM THEN IT IS UNFAIR ON THE PART OF THE REVENUE DEPART MENT TO PRESUME THAT THE BORROWED CAPITAL WAS UTILIZED FOR THE PURPOSE O F INVESTMENT IN THE FIRM TO EARN THE EXEMPTED INCOME FOR A.Y. 2008-09. THE MAIN PROVISIONS OF SECTION 14A ARE TO BE APPLIED. FURTHER RULE 8D ( 1) READS AS FOLLOWS: WHERE THE ASSESSING OFFICER, HAVING REGARD TO THE A CCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH- (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MAD E BY THE ASSESSEE; OR ITA NOS.2334/ AHD/2012 AND 1842/AHD/2013 SAFAL REALITY P. LTD. AHMEDABAD VS. ACIT (OSD) CIR- 8, AHMEDABAD . FOR A.YS. 2009-10 & 2010-11 - 7 - (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETERMINE THE AMOU NT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROV ISIONS OF SUB-RULE (2). 5.1 AS PER THIS RULE, AS REPRODUCED ABOVE, THE AO HAS TO DETERMINE THE DISALLOWANCE HAVING REGARD TO THE ACCOUNTS OF THE A SSESSEE TO SATISFY HIMSELF IN RESPECT OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE AS WELL AS IN RESPECT OF THE CLAIM WHETHER ANY EXPENDI TURE WAS INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME; HENCE, EXEMPT UNDER THE ACT. THE AO IS FIRST REQUIR ED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH EXEMPTED INCOME. WE HAVE ALSO NOTED THAT EVEN FOR A.Y. 2008-09 THE RESPECTED CO-ORDINATE BENCH D ITAT AHMEDABAD IN THE CASE OF KARNAVATI PETROCHEM PVT. LTD. (SUPRA) HAS HELD AS UNDER: WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. WE FIND THAT CIT(A) WHILE GRANTING RELIEF TO THE AS SESSEE HAS GIVEN A FINDING THAT NO NEXUS HAS BEEN ESTABLISHED BY THE AO WHICH THE AMOUNT INCURRED BY THE ASSESSEE FOR EARNING THE TAX FREE INCOME. HE HA S FURTHER NOTED THAT IN THE ASSESSEES CASE THE INTEREST INCOME WAS MORE THAN I NTEREST EXPENSE AND THUS THE ASSESSEE WAS HAVING NET POSITIVE INTEREST INCOM E AND THEREFORE THE SAME CANNOT BE CONSIDERED FOR DISALLOWANCE AND FOR WHICH HE PLACE RELIANCE ON THE DECISION OF KOLKATA TRIBUNAL IN THE CASE OF TRADING APARTMENT LIMITED AND THE DECISION OF TRIBUNAL IN THE CASE MORGAN STANLEY INDIA SECURITIES PRIVATE LIMITED. HE HOWEVER CONSIDERED THE ADMINISTRATIVE E XPENSES TO BE 0.5% OF THE AVERAGE INVESTMENTS AND DISALLOWED THE SAME. 5.2 TO COMPLETE THIS ORDER, WE DEEM IT PROPER TO RE PRODUCE A PORTION OF THE ORDER OF HONBLE DELHI HIGH COURT PRONOUNCED IN THE CASE OF MAXOPP INVESTMENT LTD. AND OTHERS VS. CIT AS FOLLOW S: SUB-S. (2) OF S. 14A PROVIDES THE MANNER IN WHICH THE AO IS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HOWEVER, IF ONE EXAMINES THE PROVISION CAREFULLY, ONE WOULD FIND THAT THE AO IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ONLY IF THE AO, HAVING REGARD TO THE AC COUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES N OT FORM PART OF THE TOTAL ITA NOS.2334/ AHD/2012 AND 1842/AHD/2013 SAFAL REALITY P. LTD. AHMEDABAD VS. ACIT (OSD) CIR- 8, AHMEDABAD . FOR A.YS. 2009-10 & 2010-11 - 8 - INCOME UNDER THE ACT. IN OTHER WORDS, THE REQUIREME NT OF THE AO EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE I NCURRED IN RELATION TO EXEMPT INCOME WOULD BE TRIGGERED ONLY IF AO RETURNS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. SUB-S. (3) IS NOTHING BUT AN OFFSHOOT OF SUB-S. (2) OF S. 14A. SUB-S. (3) APPLIES TO CASES WHERE THE ASSESSEE CLAIMS THAT NO EXPENDIT URE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN OTHER WORDS, SUB-S. (2) DEALS WITH CASES WHERE T HE ASSESSEE SPECIFIES A POSITIVE AMOUNT OF EXPENDITURE IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AND SUB-S. (3) AP PLIES TO CASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDITURE HAD BEEN INCUR RED IN RELATION TO EXEMPT INCOME. IN BOTH CASES, THE AO, IF SATISFIED WITH TH E CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR NO E XPENDITURE, AS THE CASE MAY BE, CANNOT EMBARK UPON A DETERMINATION OF THE AMOUN T OF EXPENDITURE IN ACCORDANCE WITH ANY PRESCRIBED METHOD, AS MENTIONED IN SUB-S. (2) OF S. 14A. IT IS ONLY IF THE AO IS NOT SATISFIED WITH THE CORR ECTNESS OF THE CLAIM OF THE ASSESSEE, IN BOTH CASES, THAT THE AO GETS JURISDICT ION TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WIT H THE PRESCRIBED METHOD, THE PRESCRIBED METHOD BEING THE METHOD STIPULATED I N R. 8D. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPEND ITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE AO WOULD HAVE TO INDICATE COGENT REASONS FOR THE SAME. IT IS, THEREFORE, CLE AR THAT DETERMINATION OF THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME UNDER RULE 8D WOULD ONLY COME INTO PLAY WHEN THE ASSESSING OFFICER REJECTS T HE CLAIM OF THE ASSESSEE IN THIS REGARD. IF ONE EXAMINES SUB-RULE (2) OF RULE 8D, THE METHOD FOR DETERMINING THE EXPENDITURE IN RELATION TO EXEMPT INCOME HAS THREE COMPONENTS. THE FIRST COMPONENT IS THE AMOUNT OF EXPENDITURE DIRECTLY REL ATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE SECOND IS BEING COMPUTED ON THE BASIS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSESSEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTL Y ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE FORMULA ESSENTIA LLY APPORTIONS THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST (OTHER THAN THE A MOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR IN THE RATIO OF THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, TO THE AVERAGE OF THE TOTAL ASSETS OF THE ASSESSEE. THE THIRD COMPONENT IS AN ARTIFICIAL FIGURE-ONE HALF PERCENT OF THE AVERAGE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, APPEARING IN THE BALANCE-SHEETS OF THE ASSE SSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. IT IS THE AGGRE GATE OF THESE THREE COMPONENTS WHICH WOULD CONSTITUTE THE EXPENDITURE I N RELATION TO EXEMPT INCOME AND IT IS THIS AMOUNT OF EXPENDITURE WHICH W OULD BE DISALLOWED UNDER SECTION 14A OF THE ACT. IT IS, THEREFORE, CLEAR TH AT IN TERMS OF THE RULE, THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME HAS TWO ASPECTS- (A) ITA NOS.2334/ AHD/2012 AND 1842/AHD/2013 SAFAL REALITY P. LTD. AHMEDABAD VS. ACIT (OSD) CIR- 8, AHMEDABAD . FOR A.YS. 2009-10 & 2010-11 - 9 - DIRECT, AND (B) INDIRECT. THE DIRECT EXPENDITURE I S STRAIGHTAWAY TAKEN INTO ACCOUNT BY VIRTUE OF CLAUSE (I) OF SUB-RULE(2) OF R ULE 8D. THE INDIRECT EXPENDITURE, WHERE IT IS BY WAY OF INTEREST, IS COM PUTED THROUGH THE PRINCIPLE OF APPORTIONMENT. SECTION 14A EVEN PRIOR TO THE INTRODUCTION OF SUB-S ECTIONS (2) AND (3) WOULD REQUIRE THE ASSESSING OFFICE TO FIRST REJECT THE CL AIM OF THE ASSESSEE WITH REGARD TO THE EXTENT OF SUCH EXPENDITURE AND SUCH R EJECTION MUST BE FOR DISCLOSED COGENT REASONS. IT IS THEN THAT THE QUES TION OF DETERMINATION OF SUCH EXPENDITURE BY THE ASSESSING OFFICER WOULD ARISE. THE REQUIREMENT OF ADOPTING A SPECIFIC METHOD OF DETERMINING SUCH EXPE NDITURE HAS BEEN INTRODUCED BY VIRTUE OF SUB-SECTION (2) OF SECTION 14A. PRIOR TO THAT, THE ASSESSEE WAS FREE TO ADOPT ANY REASONABLE AND ACCEP TABLE METHOD. SO, EVEN FOR THE PRE-RULE 8D PERIOD, WHENEVER THE ISSUE OF S ECTION 14A ARISES BEFORE AN ASSESSING OFFICER, HE HAS, FIRST OF ALL, TO ASCERTA IN THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCUR RED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURR ED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THE A SSESSING OFFICER WILL HAVE TO VERIFY THE CORRECTNESS OF SUCH CLAIM. IN CASE, THE ASSESSING OFFICER IS SATISFIED WITH THE CLAIM OF THE ASSESSEE WITH REGAR D TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, THE ASSESSING OFFI CER IS TO ACCEPT THE CLAIM OF THE ASSESSEE IN SO FAR AS THE QUANTUM OF DISALLOWAN CE UNDER SECTION 14A IS CONCERNED. IN SUCH EVENTUALITY, THE ASSESSING OFFI CER CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE FOR THE PURPOSES OF SECTION 14A (1). IN CASE, THE ASSESSING OFFICER IS NOT, ON THE BASIS OF THE OBJECTIVE CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUN ITY, SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HE SHALL HAVE TO REJECT THE CLAIM AND STATE THE REASONS FOR DOING SO. HAVING DONE SO, TH E ASSESSING OFFICER WILL HAVE TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRE D IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HE IS REQUIRED TO DO SO ON THE BASIS OF A REASONABLE AND ACCEPTABLE M ETHOD OF APPORTIONMENT. 5.3 UNDER THE TOTALITY OF THE FACTS AND CIRCUMSTANC ES OF THE CASE, WE ARE OF THE CONSIDERED OPINION THAT WHEN THE INTERES T INCOME WAS MORE THAN THE INTEREST EXPENDITURE THEN THE AO WAS NOT J USTIFIED TO INVOKE THE PROVISIONS OF SECTION 14A READ WITH RULE 8D OF IT A CT. WE HEREBY REVERSE THE FINDINGS OF THE AUTHORITIES BELOW AND D IRECT TO DELETE THE DISALLOWANCE. ITA NOS.2334/ AHD/2012 AND 1842/AHD/2013 SAFAL REALITY P. LTD. AHMEDABAD VS. ACIT (OSD) CIR- 8, AHMEDABAD . FOR A.YS. 2009-10 & 2010-11 - 10 - 6. FACTS BEING IDENTICAL FOR A.Y. 2010-11 IN SOLIDO APPLIES. AS FAR AS THE QUESTION OF DISALLOWANCE OF ADMINISTRATIVE EXPE NSE IS CONCERNED, ALTHOUGH LEARNED AR HAS RAISED THIS QUESTION, BUT N O SUCH GROUND HAS BEEN RAISED BEFORE US AS PER THE GROUNDS OF APPEAL. THERE WAS SOME MENTION IN THE STATEMENT OF FACTS BUT IN A SITUATIO N WHEN NO SPECIFIC GROUND AS PER GROUNDS OF APPEAL HAS BEEN RAISED BEF ORE US, THEREFORE, WE ARE NOT EMPOWERED TO ADJUDICATE AN ISSUE WHICH HAS NOT BEEN PROPERLY RAISED BEFORE US AS PER LAW. THIS PART OF THE PLEA IS, THEREFORE, REJECTED. 7. IN THE RESULT FOR BOTH THE YEARS, THE GROUND RAI SED BEFORE US IS HEREBY ALLOWED. SD/- SD/- (T.R. MEENA) (MUKUL KR. SHRAWAT) ACCOUNTANT MEMBER JUD ICIAL MEMBER AHMEDABAD; DATED /11/2013 PRABHAT KR. KESARWANI, SR. P.S. / 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. / GUARD FILE. / BY ORDER, / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD