M/s. Desai & Gaikwad, Pune V. CIT-II, Pune

ITA 241/PUN/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79706 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 2 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-04-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 23-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K MODI
• Assessee Lawyers: NILESH KHANDELWAL
• Keywords: Revision of order; Earning of tax free income; Assessment record
• Section: 143(3); 14A; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHE B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.241/PN/2013 (ASSESSMENT YEAR : 2008-09) M/S DESAI & GAIKWAD, K.G. MANSION, 1233/C, APTE ROAD, PUNE 411 004. PAN : AABFD8715A . APPELLANT VS. CIT-II, PUNE. . RESPONDENT ASSESSEE BY : MR. NILESH KHANDELWAL DEPARTMENT BY : MR. A. K. MODI DATE OF HEARING : 20-02-2014 DATE OF PRONOUNCEMENT : 11-04-2014 ORDER PER G. S. PANNU, AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX-II, PUNE (IN SHORT THE COMMISSIONER) DATED 05.11.2012 PASSED U/S 263 OF THE INCOME TAX ACT, 19 61 (IN SHORT THE ACT) WHEREBY THE ASSESSMENT ORDER PASSED BY THE ASSESSIN G OFFICER U/S 143(3) OF THE ACT DATED 10.11.2010 HAS BEEN HELD TO BE ERRONE OUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE WITHIN THE MEANING OF SECTION 263 OF THE ACT QUA THE DISALLOWANCE OF RS.12,73,000/- MADE IN THE ASSESSMENT ORDER IN TERMS OF SECTION 14A OF THE ACT R.W. RULE 8D OF THE INCOME TAX RULES, 1962 (IN SHORT THE RULES). 2. IN BRIEF, THE FACTS RELEVANT TO APPRECIATE THE C ONTROVERSY IN THIS APPEAL CAN BE SUMMARIZED AS FOLLOWS. THE APPELLANT, A PAR TNERSHIP FIRM ENGAGED IN THE BUSINESS OF PROPERTY DEVELOPERS AND PROMOTERS, FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2008-09 DECLARING TOTAL INCOME OF RS.92,77,21,550/-. THE RETURN OF INCOME FILED BY THE ASSESSEE WAS SUBJ ECT TO A SCRUTINY ASSESSMENT BY THE ASSESSING OFFICER U/S 143(3) OF T HE ACT AND VIDE ORDER ITA NO.241/PN/2013 A.Y. : 2008-09 DATED 10.11.2010 THE TOTAL INCOME WAS DETERMINED AT RS.92,91,68,022/-, WHICH INTER-ALIA, INCLUDED A DISALLOWANCE IN TERMS OF SECTION 14A OF THE ACT AMOUNTING TO RS.12,73,000/-, WHICH AS PER BY THE AS SESSING OFFICER, WAS WORKED OUT IN TERMS OF RULE 8D OF THE RULES. 3. SUBSEQUENTLY, THE COMMISSIONER WHILE INVOKING HI S REVISIONARY POWER CONTAINED IN SECTION 263 OF THE ACT SHOW-CAUSED THE ASSESSEE AS TO WHY THE ASSESSMENT ORDER BE NOT CONSIDERED ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE ON ACCOUNT OF FACT THA T THE DISALLOWANCE COMPUTED BY THE ASSESSING OFFICER U/S 14A OF THE AC T AMOUNTING TO RS.12,73,000/- WAS NOT AS PER RULE 8D OF THE RULES. IN ORDER TO APPRECIATE THE ISSUE RAISED BY THE COMMISSIONER, THE FOLLOWING DIS CUSSION IS RELEVANT. THE ASSESSEE HAD DECLARED TOTAL INCOME OF RS.92,77,21,5 50/- IN THE RETURN OF INCOME, WHICH INTER-ALIA, INCLUDED INCOME BY WAY OF DIVIDENDS OF RS.1,79,47,737/- WHICH WAS EXEMPT IN TERMS OF SECTI ON 10(34) OF THE ACT. SECTION 14A PRESCRIBES THAT FOR THE PURPOSES OF COM PUTING TOTAL INCOME NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF AN EXPENDI TURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER INVOKED SECTION 14A OF THE ACT AND CONFRONTED THE A SSESSEE AS TO WHY EXPENDITURE INCURRED IN RELATION TO THE INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME (I.E. THE DIVIDEND INCOME OF RS.1,79,4 7,737/-), SHOULD NOT BE DISALLOWED. OSTENSIBLY, ASSESSEE HAD NOT DISALLOWE D ANY EXPENDITURE U/S 14A OF THE ACT IN THE RETURN OF INCOME FILED. AFTER EX AMINING THE VARIOUS PLEAS OF THE ASSESSEE, THE ASSESSING OFFICER FINALLY REQUIRE D THE ASSESSEE TO SUBMIT A WORKING OF THE AMOUNT DISALLOWABLE U/S 14A OF THE A CT AS PER THE FORMULA CONTAINED IN RULE 8D OF THE RULES, AND ACCORDINGLY THE DISALLOWANCE WAS DETERMINED AT RS.12,73,000/-. THE COMMISSIONER HAS FOUND THE ORDER OF THE ASSESSING OFFICER ERRONEOUS IN SO FAR AS IT IS PREJ UDICIAL TO THE INTERESTS OF THE REVENUE ON THE POINT OF THE DISALLOWANCE COMPUTED A T RS.12,73,000/-. AS PER ITA NO.241/PN/2013 A.Y. : 2008-09 THE COMMISSIONER, THE WORKING OF THE DISALLOWANCE S UBMITTED BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS HAS BEEN ACCEPTED BY THE ASSESSING OFFICER WITHOUT ANY VERIFICATION AND WITHOUT ANY APPLICATI ON OF MIND. SECONDLY, THE COMMISSIONER HAS ALSO OBSERVED THAT T HE DISALLOWANCE OF RS.12,73,000/- DETERMINED BY THE ASSESSING OFFICER U/S 14A OF THE ACT WAS ALSO NOT IN ACCORDANCE WITH RULE 8D OF THE RULES, A ND IT WAS THUS ERRONEOUS IN LAW. ON THE BASIS OF THE AFORESAID TWIN REASONS, T HE COMMISSIONER HAS HELD THE ASSESSMENT ORDER AS ERRONEOUS IN SO FAR AS IT I S PREJUDICIAL TO THE INTERESTS OF THE REVENUE WITHIN THE MEANING OF SECTION 263 OF THE ACT. AS PER THE COMMISSIONER, THE CORRECT AMOUNT DISALLOWABLE AS PE R RULE 8D OF THE RULES IS RS.1,07,73,516/- AS PER A WORKING CONTAINED IN PARA 10 OF HIS ORDER AS AGAINST RS.12,73,000/- COMPUTED BY THE ASSESSING OFFICER; A ND, ACCORDINGLY HE DIRECTED THE ASSESSING OFFICER TO MODIFY THE ASSESS MENT ORDER DATED 10.11.2010 BY MAKING A DISALLOWANCE OF RS.1,07,73,5 16/- U/S 14A OF THE ACT INSTEAD OF RS.12,73,000/- ALREADY MADE BY THE ASSES SING OFFICER. THE ASSESSEE HAS CHALLENGED THE AFORESAID DIRECTION OF THE COMMISSIONER BEFORE US. 4. THE SUM AND SUBSTANCE OF THE PLEA RAISED BY THE APPELLANT IS THAT THE COMMISSIONER HAS ERRED IN LAW AND ON FACTS IN INVOK ING SECTION 263 OF THE ACT INASMUCH AS THE ASSESSMENT ORDER WAS NEITHER ERRONE OUS AND NOR PREJUDICIAL TO THE INTERESTS OF THE REVENUE WITHIN THE MEANING OF SECTION 263 OF THE ACT. THE LEARNED COUNSEL FOR THE ASSESSEE HAS ARGUED THA T THE COMMISSIONER WAS WRONG IN ASSERTING THAT THE ASSESSMENT ORDER WAS PA SSED WITHOUT APPLICATION OF MIND ON THE ISSUE OF WORKING OF DISALLOWANCE U/S 14A OF THE ACT R.W. RULE 8D OF THE RULES; AND, IT IS FURTHER CONTENDED THAT THE COMMISSIONER HAS ERRED IN LAW BY COMPUTING THE DISALLOWANCE IN TERMS OF RULE 8D OF THE RULES AT RS.1,07,73,516/- AS AGAINST RS.12,73,000/- CORRECTL Y DETERMINED BY THE ASSESSING OFFICER. IN THE COURSE OF HEARING, LEARN ED COUNSEL HAS REFERRED TO THE RELEVANT MATERIAL PLACED IN THE PAPER BOOK TO S HOW THAT IN THE COURSE OF ITA NO.241/PN/2013 A.Y. : 2008-09 ASSESSMENT PROCEEDINGS ASSESSEE WAS REQUIRED BY THE ASSESSING OFFICER TO FURNISH ITS SAY WITH REGARD TO THE APPLICABILITY OF SECTION 14A OF THE ACT AS ALSO THE WORKING OF DISALLOWANCE U/S 14A OF THE ACT, ALT HOUGH ASSESSEE WAS OF THE OPINION THAT NO DISALLOWANCE U/S 14A OF THE ACT WAS MERITED. THE AFORESAID MATERIAL HAS BEEN REFERRED TO JUSTIFY THAT THERE WA S DUE APPLICATION OF MIND BY THE ASSESSING OFFICER WHILE DETERMINING THE DISALLO WANCE U/S 14A OF THE ACT R.W. RULE 8D OF THE RULES, AND THE ASSESSMENT ORDER COULD NOT BE HELD AS ERRONEOUS. THE SECOND LIMB OF ASSESSEES ARGUMENT IS THAT THE COMMISSIONER IS WRONG IN LAW ALSO TO SAY THAT THE WORKING OF THE DISALLOWANCE UNDER RULE 8D OF THE RULES ACCEPTED BY THE ASSESSING OFFICER WAS WRONG. IT IS CONTENDED THAT THE COMMISSIONER IS WRONG IN INCLUDING THE INT EREST EXPENDITURE FOR COMPUTING THE DISALLOWANCE AS PER CLAUSE (II) OF SU B-RULE (2) OF RULE 8D OF THE RULES. FOR THIS PURPOSE, ATTENTION WAS INVITED TO THE SUBMISSIONS MADE BEFORE THE ASSESSING OFFICER WHEREBY IT WAS POINTED OUT TH AT ENTIRE INTEREST EXPENDITURE DEBITED IN THE PROFIT & LOSS ACCOUNT WA S ON ACCOUNT OF FUNDS UTILIZED TO EARN TAXABLE INCOME AND WERE NOT UTILIZ ED TO INVEST IN MUTUAL FUNDS, WHICH HAVE YIELDED THE IMPUGNED EXEMPT DIVIDEND INC OME. IT WAS, THEREFORE, CONTENDED THAT IN LAW AND ON FACTS, THE COMMISSIONE R HAS ERRED IN INVOKING HIS REVISIONARY POWER U/S 263 OF THE ACT IN THE PRE SENT CASE. 5. ON THE OTHER HAND, THE LEARNED CIT-DR APPEARING FOR THE REVENUE HAS DEFENDED THE ORDER OF THE COMMISSIONER BY POINTING OUT THAT THE ASSESSING OFFICER WHILE COMPUTING THE DISALLOWANCE IN TERMS O F RULE 8D OF THE RULES HAD OMITTED TO CONSIDER CLAUSE (II) OF SUB-RULE (2) OF RULE 8D OF THE RULES AND THEREFORE THE DISALLOWANCE COMPUTED IN TERMS OF RUL E 8D OF THE RULES IN THE ASSESSMENT ORDER WAS INCORRECT IN LAW. IT WAS ALSO REITERATED THAT SINCE THE ASSESSING OFFICER ACCEPTED THE ASSESSEES WORKING O F DISALLOWANCE AS PER RULE 8D OF THE RULES WITHOUT ANY FURTHER VERIFICATI ON, IT AMOUNTED TO AN ASSESSMENT MADE WITHOUT DUE APPLICATION OF MIND AND THAT THE SAME WAS A JUSTIFIABLE GROUND FOR INVOKING SECTION 263 OF THE ACT. IN THIS CONTEXT, RELIANCE ITA NO.241/PN/2013 A.Y. : 2008-09 HAS BEEN PLACED ON THE JUDGEMENT OF THE HONBLE SUP REME COURT IN THE CASE OF MALABAR INDUSTRIAL CO. LTD. VS. CIT, 243 ITR 83 (SC) WHICH HAS ALSO BEEN RELIED UPON BY THE COMMISSIONER IN THE IMPUGNED ORD ER. 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS, PERUSED THE RESPECTIVE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE OTHER RELEVANT MATERIAL ON RECORD. THE CRUX OF THE CONTROVERSY BEFORE US I S WITH REGARD TO INVOKING OF SECTION 263 OF THE ACT BY THE COMMISSIONER TO HOLD THE ASSESSMENT ORDER DATED 10.11.2010 AS ERRONEOUS IN SO FAR AS IT IS PR EJUDICIAL TO THE INTERESTS OF THE REVENUE WITHIN THE MEANING OF SECTION 263 OF TH E ACT. SECTION 263 OF THE ACT EMPOWERS THE COMMISSIONER TO CALL FOR AND EXAMI NE THE RECORD OF ANY PROCEEDING UNDER THE ACT, AND IF HE CONSIDERS ANY O RDER PASSED THEREIN BY THE ASSESSING OFFICER AS ERRONEOUS IN SO FAR AS IT IS P REJUDICIAL TO THE INTERESTS OF THE REVENUE, HE MAY, AFTER GIVING THE ASSESSEE AN O PPORTUNITY OF BEING HEARD AND AFTER MAKING OR CAUSING TO BE MADE SUCH ENQUIRI ES AS HE MAY DEEM NECESSARY, PASS SUCH ORDER THEREON INCLUDING AN ORD ER ENHANCING OR MODIFYING THE ASSESSMENT OR CANCELLING THE ASSESSMENT AND DIR ECTING A FRESH ASSESSMENT. IN THE PRESENT CASE, THE COMMISSIONER HAS INVOKED HIS REVISIONARY POWER AND HAS FOUND THE ASSESSMENT ORDE R TO BE ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTERESTS OF THE RE VENUE AND HAS DIRECTED THE ASSESSING OFFICER TO ENHANCE THE ASSESSMENT ON ACCO UNT OF THE DISALLOWANCE U/S 14A OF THE ACT R.W. RULE 8D OF THE RULES. THE PHRASEOLOGY OF SECTION 263 OF THE ACT MAKES IT CLEAR THAT THE COMMISSIONER IS COM PETENT TO INVOKE HIS REVISIONARY POWER ONLY ON SATISFACTION OF TWO CONDI TIONS, NAMELY, THAT (I) THE ORDER OF THE ASSESSING OFFICER SOUGHT TO BE REVISED IS ERRONEOUS; AND, (II) SUCH ORDER IT IS PREJUDICIAL TO THE INTERESTS OF THE REV ENUE. IN THE CASE OF MALABAR INDUSTRIAL CO. LTD. (SUPRA) THE HONBLE SUPREME COU RT HELD THAT AN INCORRECT ASSUMPTION OF FACTS OR AN INCORRECT APPLICATION OF LAW OR AN ASSESSMENT ORDER MADE WITHOUT APPLICATION OF MIND BY THE ASSESSING O FFICER IS LIABLE TO BE CONSIDERED AS ERRONEOUS WITHIN THE MEANING OF SECTI ON 263 OF THE ACT. IN THE ITA NO.241/PN/2013 A.Y. : 2008-09 PRESENT CASE, THE FIRST ISSUE RAISED BY THE COMMISS IONER IS THAT THE ASSESSMENT ORDER HAS BEEN PASSED WITHOUT APPLICATIO N OF MIND QUA THE DISALLOWANCE U/S 14A OF THE ACT COMPUTED AS PER RUL E 8D OF THE RULES. WHILE THERE CANNOT BE ANY DISPUTE WITH THE AFORESAID PROP OSITION IN-PRINCIPLE, SO HOWEVER, ONE HAS TO EXAMINE AS TO WHETHER THE CHARG E MADE BY THE COMMISSIONER IN THE PRESENT CASE TO THE EFFECT THAT THE DETERMINATION OF DISALLOWANCE UNDER RULE 8D OF THE RULES BY THE ASSE SSING OFFICER IS WITHOUT APPLICATION OF MIND, IS JUSTIFIED ON FACTS OR NOT. IT IS A TRITE LAW THAT WHETHER OR NOT AN ASSESSMENT ORDER IS PASSED WITHOUT APPLICATI ON OF MIND IS AN ASPECT WHICH IS REQUIRED TO BE EXAMINED HAVING REGARD TO T HE FACTS OF EACH CASE. IN THIS CONTEXT, IT WOULD BE RELEVANT TO OBSERVE THAT IT IS NOT ONLY THE ASSESSMENT ORDER BUT THE ENTIRE ASSESSMENT RECORD WHICH HAS TO BE EXAMINED BEFORE ARRIVING AT A CONCLUSION AS TO WHETHER OR NOT THE A SSESSING OFFICER HAS APPLIED HIS MIND ON AN ISSUE OR NOT. AS PER THE HONBLE BO MBAY HIGH COURT IN THE CASE OF CIT VS. GABRIEL INDIA LTD., 203 ITR 108 (BO M) AN ASSESSMENT ORDER COULD NOT BE HELD TO BE ERRONEOUS SIMPLY BECAUSE TH ERE IS ABSENCE OF AN ELABORATE DISCUSSION IN RESPECT OF A PARTICULAR POI NT IF THE RECORD OTHERWISE SHOWED THAT THE ASSESSING OFFICER HAD MADE ENQUIRIE S WITH REGARD TO THE POINT RAISED BY THE COMMISSIONER AND THAT ASSESSEE HAD MA DE DETAILED EXPLANATIONS IN WRITING IN THE COURSE OF ASSESSMENT PROCEEDINGS. THE ENQUIRIES BY THE ASSESSING OFFICER AS WELL AS THE R EPLIES OF THE ASSESSEE WERE HELD TO BE A PART OF THE RECORD OF THE PROCEEDING S UNDER REVISION, THOUGH AN ELABORATE DISCUSSION IN THE ASSESSMENT ORDER WAS NO T PRESENT. AS PER THE HONBLE HIGH COURT, UNDER THE AFORESAID CIRCUMSTANC ES, THE ASSESSMENT ORDER COULD NOT BE HELD TO BE ERRONEOUS SIMPLY BECAUSE IT DID NOT CONTAIN AN ELABORATE DISCUSSION ON THIS ISSUE. 7. TO THE SAME EFFECT IS THE JUDGEMENT OF THE HONB LE PUNJAB & HARYANA HIGH COURT IN THE CASE OF HARI IRON TRADING CO. VS. CIT (2003) 263 ITR 437 (P&H). AS PER THE HONBLE HIGH COURT, SECTION 263( 1) OF THE ACT REQUIRES THE ITA NO.241/PN/2013 A.Y. : 2008-09 COMMISSIONER TO EXERCISE HIS POWER ONLY AFTER EXAMI NING THE RECORD OF ANY PROCEEDING UNDER THE ACT. FURTHER, THE EXPRESSION RECORD IN SECTION 263(1) OF THE ACT HAS ALSO BEEN DEFINED IN CLAUSE (B) OF T HE EXPLANATION THEREOF TO INCLUDE ALL RECORDS RELATING TO ANY PROCEEDING UNDE R THIS ACT AVAILABLE AT THE TIME OF EXAMINATION BY THE COMMISSIONER. THEREFORE , AS PER THE HONBLE HIGH COURT, IT IS NOT ONLY THE ASSESSMENT ORDER BUT THE ENTIRE MATERIAL AVAILABLE ON RECORD WHICH HAS TO BE EXAMINED BEFORE ARRIVING AT A CONCLUSION AS TO WHETHER OR NOT THE ASSESSING OFFICER HAS EXAMINED ANY ISSUE OR NOT. EXPLAINING FURTHER, THE HONBLE HIGH COURT NOTED THAT THE AFOR ESAID EXERCISE WAS NECESSARY BECAUSE ASSESSEE HAS NO CONTROL OVER THE WAY AN ASSESSMENT ORDER IS DRAFTED AND THEREFORE MERE NON-MENTIONING IN THE ASSESSMENT ORDER CANNOT BE SINGULARLY DETERMINATIVE OF THE ISSUE OF NON-APPLICATION OF MIND BY THE ASSESSING OFFICER. THEREFORE, IN ORDER TO DETE RMINE WHETHER OR NOT THE ASSESSING OFFICER HAS APPLIED HIS MIND ON AN ISSUE, A MERE PERUSAL OF ASSESSMENT ORDER WOULD NOT SUFFICE, RATHER THE ENTI RE RECORD IS LIABLE TO BE EXAMINED BEFORE ARRIVING AT A CONCLUSION AS TO WHET HER OR NOT THE ASSESSING OFFICER HAS APPLIED HIS MIND. IN THIS BACKGROUND, NOW WE MAY EXAMINE THE FACTS OF THE PRESENT CASE IN ORDER TO TEST THE CHAR GE MADE BY THE COMMISSIONER THAT THE ASSESSING OFFICER ACCEPTED TH E WORKING OF DISALLOWANCE UNDER RULE 8D OF THE RULES WITHOUT ANY APPLICATION OF MIND. 8. THE ASSESSING OFFICER HAS DISCUSSED THE ISSUE IN PARAS 5.1 TO 5.1.7 OF HIS ORDER. OSTENSIBLY, IN THE RETURN OF INCOME, AS SESSEE HAD DECLARED DIVIDEND INCOME OF RS.1,79,47,737/-, WHICH WAS EXEMPT U/S 10 (34) OF THE ACT BUT NO DISALLOWANCE U/S 14A OF THE ACT WAS MADE. ASSESSEE WAS SHOW-CAUSED ON THE ISSUE OF DISALLOWANCE U/S 14A OF THE ACT AND WA S ALSO ASKED TO GIVE COMPUTATION OF EXPENSES INCURRED IN RELATION TO EAR NING OF DIVIDEND INCOME WHICH WAS LIABLE FOR DISALLOWANCE U/S 14A OF THE AC T. ASSESSEE RESPONDED BY FURNISHING WRITTEN SUBMISSIONS DATED 19.10.2010, WH ICH HAVE BEEN REPRODUCED BY THE ASSESSING OFFICER IN PARA 5.1.1 OF THE ASSES SMENT ORDER. IN THE WRITTEN ITA NO.241/PN/2013 A.Y. : 2008-09 SUBMISSIONS, ASSESSEE ASSERTED THAT NO DISALLOWANCE WAS MADE IN THE RETURN OF INCOME AS THERE WAS NO DIRECT EXPENDITURE RELATA BLE TO THE EARNING OF SUCH INCOME DEBITED IN THE PROFIT & LOSS ACCOUNT. NEVER THELESS, ASSESSEE ALSO FURNISHED A COMPUTATION OF SUCH EXPENSES, WHICH COU LD BE CONSIDERED FOR DISALLOWANCE. THE ASSESSING OFFICER EXAMINED THE A FORESAID PLEA, AS IS EVIDENT FROM HIS DISCUSSION IN PARAS 5.1.2 TO 5.1.6 . OF THE ORDER. THE DISCUSSION IN THE ASSESSMENT ORDER REVEALS THAT INI TIALLY ASSESSEE QUANTIFIED THE DISALLOWANCE U/S 14A OF THE ACT AT RS.52,000/- BY ALLOCATING A PORTION OF GENERAL EXPENSES AGAINST THE EXEMPT DIVIDEND INCOME IN PROPORTION OF THE DIVIDEND INCOME EARNED VIS--VIS THE TOTAL INCOME E ARNED BY THE ASSESSEE. THE ASSESSING OFFICER REJECTED SUCH WORKING, AS ACC ORDING TO HIM, IT WAS NOT IN THE MANNER PRESCRIBED UNDER THE RULE 8D OF THE RULE S. THEREAFTER, THE ASSESSING OFFICER RECORDS THAT ASSESSEE WAS ASKED T O SPECIFICALLY SUBMIT WORKING OF THE EXPENDITURE DISALLOWABLE IN TERMS OF RULE 8D OF THE RULES, WHICH WAS FURNISHED BY THE ASSESSEE VIDE ITS COMMUNICATIO N DATED 25.10.2010. THE ASSESSING OFFICER HAS REFERRED TO SUCH COMMUNICATIO N, IN TERMS OF WHICH THE DISALLOWANCE U/S 14A OF THE ACT IN TERMS OF RULE 8D OF THE RULES WAS COMPUTED AT RS.12,73,000/-. ACCORDINGLY, THE ASSESSING OFFI CER MADE A DISALLOWANCE OF RS.12,73,000/- U/S 14A OF THE ACT R.W. RULE 8D OF T HE RULES. 9. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE REFERRED TO PAGE 25 OF THE PAPER BOOK, WHICH IS A COPY OF THE COMMUNICATIO N DATED 25.10.2010 ADDRESSED TO THE ASSESSING OFFICER, WHEREIN THE DIS ALLOWANCE AS PER RULE 8D OF THE RULES WAS WORKED OUT AT RS.12,73,000/-. THE SAID WORKING IS REPRODUCED HEREINAFTER AS UNDER :- WORKING OF SUB-RULE (2) OF RULE 8D AS PER INCOME T AX RULES, 1962. (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FROM PART OF TOTAL INCOME. IN OUR CASE, THERE IS NO EXPENDITURE INCURRED RELAT ING TO DIVIDEND INCOME, HENCE NO AMOUNT QUALITIES UNDER CL AUSE 2(I), HENCE NIL DISALLOWANCE. ITA NO.241/PN/2013 A.Y. : 2008-09 (II) IN CASE WHEN ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR, WHICH IS NOT DIR ECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME. IN OUR CASE, THE INTEREST EXPENDITURE IS INCURRED T OWARDS FUNDS UTILIZED TO EARN TAXABLE INCOME WHEREAS THERE HAS B EEN NO BORROWING UTILIZED TO INVEST IN MUTUAL FUNDS. IN F ACT THE INTEREST AND LOANS BORROWED HAS BEEN PAID OUT OF SALE PROCEE DS OF BHAVDAN LAND AND THEN AFTER THE BALANCE FUND WAS IN VESTED IN MUTUAL FUND, HENCE NIL DISALLOWANCE. (III) AN AMOUNT EQUAL TO OF THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART O F TOTAL INCOME AS APPEARING IN THE BALANCE SHEET OF THE ASS ESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR . WE HAVE COMPUTED THE DISALLOWANCE UNDER THIS CLAUSE AND SUBMITTED AT THE TIME OF HEARING AND ACCORDINGLY A. O. DISALLOWED RS.12,73,000/-. THE WORKING OF RS.12,73 ,000/- IS REPRODUCED HEREUNDER :- PARTICULARS AMT. RS. OPENING INVESTMENT 0.00 CLOSING INVESTMENT 50,91,80,550.00 TOTAL 50,91,80,550.00 AVERAGE OF ABOVE 25,45,90,275.00 0.5% OF ABOVE 12,72,951.00 SAY 12,73,000/- DISALLOWANCE MADE BY A.O. AS PER RULE 8D AS PER SUM OF ABOVE (I) NIL (II) NIL (III) 12,73,000.00 TOTAL 12,73,000.00 10. IN THE COURSE OF HEARING, REFERENCE WAS MADE TO ANOTHER WRITTEN SUBMISSION DATED 18.10.2010, WHICH WAS ALSO BEFORE THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDINGS, A COPY OF WHICH HAS BEEN PLACED IN THE PAPER BOOK AT PAGES 7 TO 11. IN THE SAID WRITTEN S UBMISSIONS ALSO, ASSESSEE HAS FURNISHED ITS SAY ON THE DISALLOWANCE U/S 14A O F THE ACT. 11. ON THE BASIS OF THE AFORESAID FACTUAL ASPECTS, IN OUR CONSIDERED OPINION, WE HAVE NOT BEEN ABLE TO APPRECIATE AS TO HOW THE C OMMISSIONER HAS RECORDED A FINDING THAT THE ASSESSMENT ON THE ASPEC T OF DISALLOWANCE U/S 14A OF THE ACT HAS BEEN MADE BY THE ASSESSING OFFICER W ITHOUT APPLICATION OF MIND. OSTENSIBLY, THE ASSESSING OFFICER HAD SHOW-CAUSED T HE ASSESSEE ON THE ISSUE OF DISALLOWANCE U/S 14A OF THE ACT AND ASSESSEE MAD E DETAILED SUBMISSIONS ON MORE THAN ONE OCCASION TO THE ASSESSING OFFICER. THE MATERIAL AVAILABLE ITA NO.241/PN/2013 A.Y. : 2008-09 ON RECORD SUGGESTS THAT THE PRELIMINARY ASSERTION O F THE ASSESSEE TO THE EFFECT THAT NO DISALLOWANCE U/S 14A OF THE ACT WAS MERITED , HAS BEEN REJECTED BY THE ASSESSING OFFICER SINCE HE HAS MADE A DISALLOWANCE OF RS.12,73,000/-. SECONDLY, THE INITIAL QUANTIFICATION OF DISALLOWANC E PROPOSED BY THE ASSESSEE AT RS.52,000/- WAS ALSO REJECTED BY THE ASSESSING O FFICER, AS NOT BEING PER THE FORMULA PRESCRIBED UNDER RULE 8D OF THE RULES. SUB SEQUENTLY, THE ASSESSEE FURNISHED A WORKING OF DISALLOWANCE IN TERMS OF RUL E 8D OF THE RULES, WHICH WE HAVE EXTRACTED ABOVE. THE SAID WORKING IS QUITE EX HAUSTIVE AND BRINGS OUT THE ASSERTION OF THE ASSESSEE ON EACH OF THE CLAUSES OF SUB-RULE (2) OF RULE 8D OF THE RULES; AND, THE SAME HAS BEEN ACCEPTED BY THE A SSESSING OFFICER AND DISALLOWANCE OF RS.12,73,000/- MADE. FOR THE PRESE NT, WE MAY NOT GO INTO THE MERITS OF THE WORKING, WHICH WE DO A LITTLE LATER I N THE ORDER; BUT, ALL THE AFORESAID MATERIAL WHICH WAS BEFORE THE ASSESSING O FFICER ONLY GOES TO SHOW THAT THE COMMISSIONER WAS WRONG IN COMING TO CONCLU DE THAT THE ASSESSMENT ON THE ASPECT OF DISALLOWANCE U/S 14A OF THE ACT HA S BEEN MADE WITHOUT APPLICATION OF MIND. THEREFORE, ON THIS ASPECT OF THE MATTER, WE ARE UNABLE TO UPHOLD THE STAND OF THE COMMISSIONER. 12. NOW, WE MAY EXAMINE THE OTHER POINT MADE OUT BY THE COMMISSIONER THAT THE WORKING OF THE DISALLOWANCE UNDER RULE 8D OF THE RULES CONTAINED IN THE ASSESSMENT ORDER IS LEGALLY UNSUSTAINABLE AND W RONG. THE WORKING OF RS.12,73,000/- MADE IN THE ASSESSMENT ORDER HAS ALR EADY BEEN EXTRACTED BY US IN THE EARLIER PART OF THIS ORDER. AS PER THE C OMMISSIONER, THE DISALLOWANCE IN TERMS OF RULE 8D OF THE RULES WORKS OUT TO RS.1, 07,73,516/-, WHICH IS CONTAINED IN PARA 10 OF HIS ORDER AS UNDER :- 10. IN THE CASE OF THE ASSESSEE IT IS FOUND THAT T HE COMPUTATION SHOULD HAVE BEEN MADE AS PER RULE 8D AS UNDER :- A = 1,91,79,303/- B = 50,91,80,549/- + 0 = 25,45,90,274/- 2 C = 73,15,13,812/- + 29,31,80,689/- = 51,23,47,250/- 2 ITA NO.241/PN/2013 A.Y. : 2008-09 DISALLOWANCE AS PER RULE 8D : I) NIL II) 1,91,19,303/- X 25,45,90,274/- = 95,00,565/- 51,23,47,250/- III) 0.5% OF 25,45,90,274/- = 12,72,951/- TOTAL DISALLOWANCE = 1,07,73,516/- 13. BEFORE PROCEEDING FURTHER, WE MAY REFER TO RULE 8D(2) OF THE RULES WHICH PRESCRIBES A FORMULA FOR DETERMINATION OF THE AMOUNT OF EXPENDITURE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME :- (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLO WING AMOUNTS, NAMELY :- (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME ; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPE NDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT D IRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, A N AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY :- A X B C WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTERES T OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR ; B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FR OM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR ; C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN TH E BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR ; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. 14. IF WE PERUSE SUB-RULE (2) OF RULE 8D OF THE RUL ES, IT IS NOTICEABLE THAT THE FORMULA TO DETERMINE EXPENDITURE IN RELATION TO INC OME WHICH DOES NOT FORM PART OF THE TOTAL INCOME COMPRISES OF THREE LIMBS. THE FIRST LIMB [I.E. CLAUSE (I)], BEING THE AMOUNT OF EXPENDITURE DIRECTLY RELATING T O THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE SECOND LIMB [I. E. CLAUSE (II)] BEING COMPUTED ITA NO.241/PN/2013 A.Y. : 2008-09 ON THE BASIS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE ASSESSEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTL Y ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE SAID FORMULA SEE KS TO APPORTION 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 TH E RATIO OF AVERAGE VALUE OF INVESTMENTS, ETC. PRESCRIBED THEREIN. THE THIRD LI MB [I.E. CLAUSE (III)] IS AN AD- HOC BASIS OF DISALLOWANCE, NAMELY, ONE-HALF OF THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT PART OF TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY OF AND THE LAST DAY OF THE PREVIOUS YEAR. OSTENSIBLY, IT IS T HE AGGREGATE OF THE THREE LIMBS OF THE FORMULA, WHICH WOULD CONSTITUTE THE EXPENDIT URE IN RELATION TO THE EXEMPT INCOME AND THAT WOULD BE AMOUNT WHICH WOULD BE DISA LLOWED U/S 14A OF THE ACT. IT IS ALSO CLEAR FROM SUB-RULE (2) OF RULE 8D OF THE RULES THAT THE DISALLOWANCE HAS BROADLY TWO COMPONENTS OF EXPENDIT URE, NAMELY, DIRECT AND INDIRECT. THE DIRECT EXPENDITURE IS TAKEN CARE BY CLAUSE (I) OF SUB-RULE (2) OF RULE 8D OF THE RULES. THE INDIRECT EXPENDITURE BY WAY OF INTEREST IS TAKEN CARE BY WAY OF CLAUSE (II) OF SUB-RULE (2) OF RULE 8D OF THE RULES ON THE PRINCIPLE OF APPORTIONMENT. THIRDLY, IN CASES WHERE THE INDIREC T EXPENDITURE IS NOT BY WAY OF INTEREST, A FIGURE IS COMPUTED BY WAY OF A THUMB RULE PRESCRIBED IN CLAUSE (III) OF SUB-RULE (2) OF RULE 8D OF THE RULES. 15. IN THE PRESENT CASE, AS PER THE WORKING OF THE ASSESSEE, WHICH IS ACCEPTED BY THE ASSESSING OFFICER, AND EVEN AS PER THE WORKING OF THE COMMISSIONER, THERE IS NO DIRECT EXPENDITURE RELATI NG TO THE EXEMPT INCOME IN QUESTION; THUS, NO AMOUNT QUALIFIES FOR DISALLOWANC E IN TERMS OF CLAUSE (I) OF SUB-RULE (2) OF RULE 8D OF THE RULES. THUS, ON THI S ASPECT, THERE IS NO DISPUTE. 16. THE DISPUTE ARISES WITH REGARD TO THE CLAUSE (I I) OF SUB-RULE (2) OF RULE 8D OF THE RULES, WHICH RELATES TO INDIRECT EXPENDIT URE BY WAY OF INTEREST. AS PER THE ASSESSEE THERE IS NO AMOUNT OF INTEREST EXP ENDITURE WHICH IS NOT ITA NO.241/PN/2013 A.Y. : 2008-09 ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT OR IN OTHER WORDS, AS PER THE ASSESSEE THERE IS NO ELEMENT OF INTEREST EXPENDITUR E FALLING FOR CONSIDERATION IN CLAUSE (II) OF SUB-RULE (2) OF RULE 8D OF THE RULES . THE ASSERTION OF THE ASSESSEE BEFORE THE ASSESSING OFFICER, WHICH CAN BE SEEN FROM THE WORKING REPRODUCED BY US EARLIER IN PARA 9, WAS THAT THE EN TIRE EXPENDITURE ON ACCOUNT OF INTEREST IS INCURRED TOWARDS FUNDS UTILIZED TO E ARN TAXABLE INCOME AND NO BORROWING HAS BEEN UTILIZED FOR INVESTMENT IN MUTUA L FUNDS WHICH HAVE YIELDED THE EXEMPTED DIVIDEND INCOME. THE ASSESSEE SUPPORT ED THIS ASSERTION BY POINTING OUT THAT THE INTEREST AND LOANS BORROWED W ERE INDEED PAID OUT OF SALE PROCEEDS OF CERTAIN LANDS AND THE BALANCE SALE PROC EEDS WERE INVESTED IN MUTUAL FUNDS, WHICH HAVE YIELDED EXEMPT INCOME. TH US, THE CASE OF THE ASSESSEE WAS THAT IT HAS NO EXPENDITURE BY WAY OF I NTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME. THE COMMISS IONER, ON THE OTHER HAND, HAS OBSERVED THAT ASSESSEE HAS AN INTEREST EXPENDIT URE OF RS.1,91,79,303/- AND SUBJECTED THE SAME BE DISALLOWANCE IN TERMS OF CLAUSE (II) OF SUB-RULE (2) OF RULE 8D OF THE RULES. THIS IS THE AREA OF DIFFE RENCE BETWEEN THE WORKING OF DISALLOWANCE CONTAINED IN THE ASSESSMENT ORDER AND THAT DONE BY THE COMMISSIONER. 17. WE HAVE CAREFULLY EXAMINED THE SAID ASPECT AND FIND NO JUSTIFICATION FOR THE ACTION OF THE COMMISSIONER. IN-FACT AS THE PHR ASEOLOGY OF CLAUSE (II) OF SUB-RULE (2) OF RULE 8D OF THE RULES SUGGEST, THE A PPORTIONMENT CONTAINED THEREIN IS IN RESPECT OF AMOUNT OF EXPENDITURE BY W AY OF INTEREST, WHICH IS OTHER THAN THE AMOUNT OF INTEREST WHICH IS ATTRIBUTABLE T O ANY PARTICULAR INCOME. IN THE PRESENT CASE, ASSESSEE ASSERTED BEFORE THE ASSE SSING OFFICER THAT THERE WAS NO INTEREST EXPENDITURE WHICH WAS AVAILABLE FOR APPORTIONMENT IN TERMS OF CLAUSE (II) OF SUB-RULE (2) OF RULES 8D OF THE RULE S AS THE ENTIRE INTEREST EXPENDITURE WAS DIRECTLY RELATED TO EARNING OF TAXA BLE INCOME. THIS ASSERTION OF THE ASSESSEE WAS ALSO SUPPORTED BY HIS EXPLANATI ON THAT NO BORROWINGS WERE UTILIZED FOR INVESTMENT IN MUTUAL FUNDS WHICH HAVE YIELDED EXEMPT ITA NO.241/PN/2013 A.Y. : 2008-09 INCOME AND FURTHER THAT INTERESTS AND LOANS BORROWE D WERE RATHER PAID OUT OF SALE PROCEEDS OF LAND AND THE BALANCE OF THE PROCEE DS WERE INVESTED IN MUTUAL FUNDS WHICH YIELDED EXEMPT INCOME. THE AFOR ESAID EXPLANATION HAS BEEN IMPLIEDLY ACCEPTED BY THE ASSESSING OFFICER IN ASMUCH AS HE HAS NOT MADE ANY DISALLOWANCE ON THIS SCORE. THE COMMISSIO NER, ON THE OTHER HAND, HAS NOT POINTED OUT AS TO HOW THE SAID EXPLANATION OF THE ASSESSEE WAS WRONG OR CONTRARY TO RECORD. THEREFORE, WE ARE UNABLE TO APPRECIATE AS TO HOW THE ASSESSING OFFICER ERRED IN ACCEPTING THE STAND OF T HE ASSESSEE ON THIS COUNT. IN THE IMPUGNED ORDER, THE COMMISSIONER HAS NOT POI NTED OUT EITHER FACTUALLY OR OTHERWISE AS TO THE INFIRMITY IN THE STAND OF TH E ASSESSING OFFICER ON THIS SCORE. NO SPECIFIC REFERENCE HAS BEEN MADE TO ANY MATERIAL TO SHOW THAT THE WORKING ACCEPTED BY THE ASSESSING OFFICER AS PER TH E SECOND LIMB CONTAINED IN CLAUSE (II) OF SUB-RULE (2) OF RULE 8D OF THE RU LES WAS WRONG OR CONTRARY TO THE RECORD. THEREFORE, WE ARE UNABLE TO UPHOLD THE ACTION OF THE COMMISSIONER ON THIS SCORE. 18. IN SO FAR AS THE THIRD LIMB OF THE DISALLOWANCE IN TERMS OF CLAUSE (III) OF SUB-RULE (2) OF RULE 8D OF THE RULES, THERE IS NO D IFFERENCE BETWEEN THE WORKING ACCEPTED BY THE ASSESSING OFFICER AND THAT DONE BY THE COMMISSIONER. 19. THEREFORE, IN FINAL ANALYSIS WE ARE UNABLE TO U PHOLD THE STAND OF THE COMMISSIONER THAT THE WORKING OF DISALLOWANCE U/S 1 4A OF THE ACT R.W. RULE 8D OF THE RULES CONTAINED IN THE ASSESSMENT ORDER IS W RONG IN LAW OR ON FACTS. 20. IN VIEW OF OUR AFORESAID DISCUSSION, WE THEREFO RE HOLD THAT THE COMMISSIONER ERRED IN INVOKING HIS REVISIONARY POWE R CONTAINED IN SECTION 263 OF THE ACT; AND, ACCORDINGLY, THE ORDER OF THE COMM ISSIONER IN ENHANCING THE DISALLOWANCE U/S 14A OF THE ACT R.W. RULE 8D OF THE RULES IS SET-ASIDE AND DISALLOWANCE MADE BY THE ASSESSING OFFICER IN THE A SSESSMENT ORDER IS RESTORED. ITA NO.241/PN/2013 A.Y. : 2008-09 21. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH APRIL, 2014. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 11 TH APRIL, 2014. SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT-II, PUNE; 4) THE DR B BENCH, I.T.A.T., PUNE; 5) GUARD FILE. BY ORDER //TRUE COPY// SR. PRIVATE SECRETARY I.T.A.T., PUNE