EI-O-Matic [ I ]P. Ltd., Pune V. ACIT, Pune

ITA 2459/PUN/2012

• Counselvise Citation: 245924514 RSA 2012
• Duration Of Justice: 1 year(s) 8 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 14-07-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 13-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MRS S PRAVEENA
• Assessee Lawyers: SUNIL PATHAK
• Keywords: Earning of tax free income
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NOS.2459 & 2460/PN/2012 (A. YS. : 2008-09 & 2009-10) EI-O-MATIC (INDIA) PVT. LTD., 16/B-1, SAROSH BHAVAN, DR. AMBEDKAR ROAD, PUNE 411 001. PAN : AAACE3847J . APPELLANT VS. ASSTT. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(1), PUNE. . RESPONDENT ASSESSEE BY : MR. SUNIL PATHAK DEPARTMENT BY : MRS. S. PRAVEENA DATE OF HEARING : 14-07-2014 DATE OF PRONOUNCEMENT : 25-08-2014 ORDER PER G. S. PANNU, AM THE TWO CAPTIONED APPEALS RELATE TO DIFFERENT ASSES SMENT YEARS INVOLVING SAME ASSESSEE AND SINCE THE ISSUE RAISED IS COMMON, THEY HAVE BEEN CLUBBED AND HEARD TOGETHER AND ARE BEING DISPO SED-OFF BY WAY OF A CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. 2. BOTH THE APPEALS ARE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-I, PUNE DATED 10.10.2012 WHICH , IN TURN, HAS ARISEN FROM AN ORDER DATED 15.12.2011 PASSED BY THE ASSESS ING OFFICER U/S 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) PERTA INING TO THE ASSESSMENT YEARS 2008-09 AND 2009-10 RESPECTIVELY. 3. IN BOTH THE APPEALS COMMON ISSUE RAISED BY THE A SSESSEE IS RELATING TO THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S 14A OF THE ACT. IN THE ASSESSMENT YEAR 2008-09 THE DISALLOWANCE MADE U/S 1 4A OF THE ACT AMOUNTS TO RS.2,18,229/- AND FOR ASSESSMENT YEAR 2009-10 AT RS.1,75,458/-. IN THE ITA NOS.2459 & 2460/PN/2012 A. YS. : 2008-09 & 2009-10 ASSESSMENT YEAR 2008-09 AS WELL AS IN THE ASSESSMEN T YEAR 2009-10 THE DISALLOWANCE U/S 14A HAS BEEN COMPUTED BY THE ASSES SING OFFICER BY INVOKING RULE 8D OF THE INCOME TAX RULES, 1962 (IN SHORT TH E RULES). IN ASSESSMENT YEAR 2008-09, THE ASSESSING OFFICER APPLIED CLAUSE (II) OF SUB-RULE (2) OF RULE 8D OF THE RULES TO COMPUTE THE DISALLOWANCE OF RS.1 ,57,864/- ON ACCOUNT OF INTEREST EXPENDITURE AND CLAUSE (III) THEREOF, TO C OMPUTE DISALLOWANCE OF RS.60,365/- ON ACCOUNT OF OVERHEADS THEREBY TOTALIN G TO RS.2,18,229/-. IN ASSESSMENT YEAR 2009-10, ASSESSEE HAD SUO-MOTU MADE A DISALLOWANCE U/S 14A OF THE ACT OF RS.5,000/- AND THE ASSESSING OFFI CER HAS MADE A FURTHER DISALLOWANCE OF RS.1,75,458/- COMPRISING OF RS.1,21 ,676/- ON ACCOUNT OF INTEREST IN TERMS OF CLAUSE (II) OF SUB-RULE (2) OF RULE 8D OF THE RULES AND RS.25,782/- ON ACCOUNT OF OVERHEADS IN TERMS OF CLA USE (III) OF SUB-RULE (2) OF RULE 8D OF THE RULES. FOR BOTH THE ASSESSMENT YEAR S THE ONLY DISALLOWANCE IN CHALLENGE BEFORE US IS ON ACCOUNT OF INTEREST EXPEN DITURE DISALLOWED BY INVOKING CLAUSE (II) OF SUB-RULE (2) OF RULE 8D OF THE RULES. THE OTHER LIMB OF THE DISALLOWANCE PERTAINING TO THE OVERHEAD EXPENSE S IS NOT DISPUTED BEFORE US IN THE COURSE OF HEARING. 4. IN THE ABOVE CONTEXT, WE MAY REFER TO THE FACTS OF THE ASSESSMENT YEAR 2008-09 IN ORDER TO APPRECIATE THE CONTROVERSY BEFO RE US. FOR ASSESSMENT YEAR 2008-09 ASSESSEE WAS FOUND TO HAVE EARNED DIVI DEND INCOME OF RS.3,49,350/- WHICH WAS EXEMPT FROM TAX. ON ACCOUN T OF EARNING OF SUCH EXEMPT INCOME THE ASSESSING OFFICER SHOW-CAUSED THE ASSESSEE AS TO WHY THE EXPENDITURE INCURRED IN RELATION TO THE SAID IN COME BE NOT DISALLOWED, AS PRESCRIBED BY SECTION 14A OF THE ACT. THE ASSESSEE HAD NOT CONSIDERED ANY DISALLOWANCE IN TERMS OF SECTION 14A OF THE ACT. T HE PLEA OF THE ASSESSEE WAS THAT THE SECURITIES WHICH HAVE YIELDED THE IMPUGNED EXEMPT DIVIDEND INCOME WERE PRIMARILY HELD AS INVESTMENTS AND THE BASIC IN TENTION FOR HOLDING THE INVESTMENTS WAS TO MAKE PROFITS ON ITS SALE AND NOT TO EARN INCOME BY WAY OF DIVIDENDS. IT WAS CONTENDED THAT THE PROFIT ON SAL E OF INVESTMENT IS A TAXABLE ITA NOS.2459 & 2460/PN/2012 A. YS. : 2008-09 & 2009-10 EVENT AND THEREFORE THERE WAS NO JUSTIFICATION FOR INVOKING OF SECTION 14A OF THE ACT WHICH DEALS WITH EXPENDITURE RELATABLE TO THE E XEMPT INCOMES ONLY. THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE SUBMIS SIONS AND HAVE INSTEAD INVOKED RULE 8D OF THE RULES FOR COMPUTING DISALLOW ANCE U/S 14A OF THE ACT. THE CIT(A) HAS ALSO AFFIRMED THE ORDER OF THE ASSES SING OFFICER, AGAINST WHICH ASSESSEE IS IN APPEAL BEFORE US. 5. BEFORE US, THE LIMITED PLEA OF THE ASSESSEE IS T HAT THERE WAS NO ELEMENT OF INTEREST EXPENDITURE RELATABLE TO THE INVESTMENT S MADE IN THE SECURITIES WHICH HAVE YIELDED THE IMPUGNED EXEMPT DIVIDEND INC OME. IT WAS, THEREFORE, CONTENDED THAT THE ASSESSING OFFICER ERRED IN INVOK ING RULE 8D OF THE RULES IN ORDER TO COMPUTE THE DISALLOWANCE U/S 14A OF THE AC T. IN THIS CONTEXT, THE LEARNED COUNSEL HAS REFERRED TO ASSESSEES SUBMISSI ONS BEFORE THE CIT(A) WHICH HAVE BEEN REPRODUCED IN PARA 6.1 OF THE IMPUG NED ORDER WHEREBY ASSESSEE HAD DEMONSTRATED THAT EVEN THE INVESTMENTS IN EARLIER PERIODS WERE ALSO NOT MADE OUT OF BORROWED FUNDS. IT WAS, THEREF ORE, CONTENDED THAT THERE WAS NO INTEREST EXPENDITURE INCURRED IN RELATION TO EARNING OF THE IMPUGNED EXEMPT INCOME. IT IS FURTHER POINTED OUT THAT ASSE SSEES OWN FUNDS ARE MUCH HIGHER IN COMPARISON TO THE FUNDS INVESTED IN THE I MPUGNED INVESTMENTS AND THEREFORE FOLLOWING THE RATIO OF THE JUDGEMENT OF T HE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD., 313 ITR 340 (BOM), IT HAS TO BE PRESUMED THAT THE INVESTMENTS H AVE BEEN MADE OUT OF NON-INTEREST BEARING FUNDS. SIMILAR FACT SITUATION HAS BEEN ASSERTED FOR THE ASSESSMENT YEAR 2009-10 ALSO. THE LEARNED COUNSEL ALSO REFERRED TO THE SUBMISSIONS PUT-FORTH BEFORE THE CIT(A) WHEREBY ASS ESSEE HAD CO-RELATED THE PURCHASE AND SALE OF INVESTMENT WITH ASSESSEES BAN K STATEMENT TO SHOW THAT THE INVESTMENTS WERE NOT MADE OUT OF INTEREST BEARI NG FUNDS. FOR ALL THE AFORESAID REASONS, IT IS SOUGHT TO BE MADE OUT THAT NO DISALLOWANCE WITH RESPECT TO THE INTEREST EXPENDITURE WAS JUSTIFIED I N THE PRESENT CASE EVEN IN TERMS OF SECTION 14A OF THE ACT. THE LEARNED COUNS EL FOR THE ASSESSEE ITA NOS.2459 & 2460/PN/2012 A. YS. : 2008-09 & 2009-10 VEHEMENTLY POINTED OUT THAT HAVING REGARD TO THE FA CTS FURNISHED BEFORE THE LOWER AUTHORITIES, THERE WAS NO SATISFACTION RECORD ED AS REQUIRED BY SECTION 14A(2) OF THE ACT BEFORE DISALLOWING INTEREST EXPEN DITURE IN TERMS OF CLAUSE (II) OF SUB-RULE (2) OF RULE 8D OF THE RULES. IN THE CO URSE OF HEARING, RELIANCE HAS BEEN PLACED ON THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MFG. CO. LTD. VS. CIT, 328 ITR 81 ( BOM) AS WELL AS THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE C ASES OF KALYANI STEELS LTD. VS. ADDL. CIT VIDE ITA NO.1733/PN/2012 DATED 30.01. 2014 AND ACIT VS. M/S MAGARPATTA TOWNSHIP DEVELOPMENT & CONSTRUCTION COMP ANY LTD. VIDE ITA NO.2114/PN/2012 DATED 27.05.2014 WHEREIN THE JUDGEM ENT OF THE HONBLE BOMBAY HIGH COURT HAS BEEN FOLLOWED. 6. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE APPEARING FOR THE REVENUE HAS DEFENDED THE ORDERS OF THE AUTH ORITIES BELOW BY PLACING RELIANCE ON THE SAME. 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. IN SO FAR AS SECTION 14A OF THE ACT IS CONCERNED, IT CONTEMPLATE S THAT FOR THE PURPOSES OF COMPUTING TOTAL INCOME NO DEDUCTION IS TO BE ALLOWE D IN RESPECT OF ANY EXPENDITURE INCURRED IN RELATION TO AN INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN THE PRESENT CASE, A SSESSEE WAS FOUND TO HAVE EARNED EXEMPT INCOME BY WAY OF DIVIDEND ON INVESTME NTS MADE IN THE MUTUAL FUNDS. THE EXISTENCE OF SUCH EXEMPT INCOME PROMPTE D THE ASSESSING OFFICER TO INVOKE SECTION 14A OF THE ACT WHILE COMPUTING TH E TOTAL INCOME OF THE ASSESSEE. FURTHER, THE ASSESSING OFFICER INVOKED R ULE 8D OF THE RULES TO COMPUTE THE DISALLOWANCE. OSTENSIBLY, SUB-SECTION (2) OF SECTION 14A OF THE ACT ENABLES THE ASSESSING OFFICER TO INVOKE RULE 8D OF THE RULES SO AS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN REL ATION TO AN INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HOWEVER, T HE PHRASEOLOGY OF SUB- SECTION (2) OF SECTION 14A OF THE ACT ITSELF BRINGS OUT THAT THE POWER OF THE ITA NOS.2459 & 2460/PN/2012 A. YS. : 2008-09 & 2009-10 ASSESSING OFFICER TO INVOKE RULE 8D OF THE RULES IS SUBJECT TO THE CONDITION THAT THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNT S OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO THE INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME I.E. EXEMPT INCOME. IT IS NO LONGER RES INTEGRA THAT INVOKING OF RULE 8D OF THE RULES IN ORDER TO COMPUTE THE DISALL OWANCE U/S 14A OF THE ACT IS NEITHER AUTOMATIC AND NOR IS DEPENDENT MERELY ON TH E EXISTENCE OF AN EXEMPT INCOME IN THE HANDS OF THE ASSESSEE. IN SUPPORT OF THE AFORESAID PROPOSITION, A GAINFUL REFERENCE CAN BE MADE TO THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MFG. CO. LTD. (SU PRA) AS WELL AS THE JUDGEMENT OF THE HONBLE DELHI HIGH COURT IN THE CA SE OF MAXOPP INVESTMENT LTD. & ORS. VS. CIT, (2012) 247 CTR 162 (DEL). THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF KALYANI STEELS LTD. (SUPRA) HAS ALSO CONSIDERED THE AFORESAID JUDGEMENTS AND CONCLUDED THAT SECTION 14A (2) OF THE ACT ENVISAGES A CONDITION PRECEDENT FOR INVOKING RULE 8D OF THE R ULES AND COMPUTING DISALLOWANCE; AND, SUCH CONDITION BEING THAT THE AS SESSING OFFICER RECORDS THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF TH E CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCO ME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. NOTABLY, THE AFORESAID PRECEDENTS ALSO B RING OUT THAT THE SATISFACTION WHICH IS MANDATED IN TERMS OF SECTION 14A(2) OF THE ACT MUST BE BASED ON REASONS AND ON RELEVANT CONSIDERATIONS. I N OTHER WORDS, THE INVOKING OF RULE 8D OF THE RULES IN ORDER TO COMPUT E THE DISALLOWANCE U/S 14A OF THE ACT IS TO BE UNDERSTOOD AS BEING CONDITIONAL UPON RECORDING OF AN OBJECTIVE SATISFACTION BY THE ASSESSING OFFICER WIT H REGARD TO THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDIT URE IN RELATION TO THE EXEMPT INCOME, HAVING REGARD TO THE ACCOUNTS OF THE ASSESS EE. THE RELEVANT DISCUSSION IN THE ORDER OF THE TRIBUNAL IS AS UNDER :- 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. SECTION 14A OF THE ACT CONTEMPLATES THAT FOR THE PURPOSES O F COMPUTING THE TOTAL ITA NOS.2459 & 2460/PN/2012 A. YS. : 2008-09 & 2009-10 INCOME, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT F ORM PART OF THE TOTAL INCOME UNDER THE ACT. SUB-SECTION (2) OF SECTION 1 4A OF THE ACT PRESCRIBES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, S UCH PRESCRIBED METHOD BEING CONTAINED IN RULE 8D OF THE RULES. HOWEVER, THE AFORESAID EMPOWERMENT OF THE ASSESSING OFFICER TO INVOKE APPL ICATION OF RULE 8D OF THE RULES IS SUPERSCRIBED BY A CONDITION CONTAINED IN S UB-SECTION (2) OF SECTION 14A OF THE ACT WHICH IS TO THE EFFECT THAT THE ASSE SSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED W ITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INC URRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . THEREFORE, THE INVOKING OF RULE 8D OF THE RULES IN ORDER TO COMPUTE THE DIS ALLOWANCE U/S 14A OF THE ACT IS NEITHER AUTOMATIC AND NOR IS TRIGGERED MERELY BE CAUSE ASSESSEE HAS EARNED AN EXEMPT INCOME. THE INVOKING OF RULE 8D OF THE R ULES IS PERMISSIBLE ONLY WHEN THE ASSESSING OFFICER RECORDS THE SATISFACTION IN REGARD TO THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. IN OTHER WORDS, SECTION 14A(2) OF TH E ACT ENVISAGED A CONDITION PRECEDENT FOR INVOKING RULE 8D OF THE RULES AND COM PUTING DISALLOWANCE THEREOF ONLY IF THE ASSESSING OFFICER RECORDS THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE, HAVING REGARD TO THE ACCOUNT OF THE ASSESSEE. IN T HIS CONTEXT, IT WOULD BE APPROPRIATE TO REFER TO THE FOLLOWING OBSERVATIONS OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING C O. LTD. (SUPRA) :- 70. NOW, IN DEALING WITH THE CHALLENGE IT IS NECESSARY TO ADVERT TO THE POSITION THAT SUB-SECTION (2) OF SECTION 14A PRESCR IBES A UNIFORM METHOD FOR DETERMINING THE AMOUNT OF EXPENDITURE IN CURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME ONLY IN A SITUATION WHERE THE ASSESSING OFFICER, HAVING REGAR D TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. IT, THEREF ORE, MERITS EMPHASIS THAT SUB-SECTION (2) OF SECTION 14A DOES NOT AUTHO RIZE OR EMPOWER THE ASSESSING OFFICER TO APPLY THE PRESCRIBED METHOD I RRESPECTIVE OF THE NATURE OF THE CLAIM MADE BY THE ASSESSEE. THE ASSE SSING OFFICER HAS TO FIRST CONSIDER THE CORRECTNESS OF THE CLAIM OF T HE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE SATISFA CTION OF THE ASSESSING OFFICER HAS TO BE OBJECTIVELY ARRIVED AT ON THE BASIS OF THOSE ACCOUNTS AND AFTER CONSIDERING ALL THE RELEVANT FAC TS AND CIRCUMSTANCES. THE APPLICATION OF THE PRESCRIBED ME THOD ARISES IN A SITUATION WHERE THE CLAIM MADE BY THE ASSESSEE IN R ESPECT OF EXPENDITURE WHICH IS RELATABLE TO THE EARNING OF IN COME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IS FOUN D TO BE INCORRECT. IN SUCH A SITUATION A METHOD HAD TO BE DEVISED FOR APP ORTIONING THE EXPENDITURE INCURRED BY THE ASSESSEE BETWEEN WHAT I S INCURRED IN RELATION TO THE EARNING OF TAXABLE INCOME AND THAT WHICH IS INCURRED IN RELATION TO THE EARNING OF NON-TAXABLE INCOME. AS A MATTER OF FACT, THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL, 2006, AND THE CENTRAL BOARD OF DIRECT TAXES CIRCULAR DATED DE CEMBER 28, 2006, STATE THAT SINCE THE EXISTING PROVISIONS OF SECTION 14A DID NOT PROVIDE A METHOD OF COMPUTING THE EXPENDITURE INCURRED IN REL ATION TO INCOME WHICH DID NOT FORM PART OF THE TOTAL INCOME, THERE WAS A CONSIDERABLE DISPUTE BETWEEN TAXPAYERS AND THE DEPARTMENT ON THE METHOD OF DETERMINING SUCH EXPENDITURE. IT WAS IN THIS BACKGR OUND THAT SUB- SECTION (2) WAS INSERTED SO AS TO PROVIDE A UNIFORM METHOD APPLICABLE WHERE THE ASSESSING OFFICER IS NOT SATISFIED WITH T HE CORRECTNESS OF THE ITA NOS.2459 & 2460/PN/2012 A. YS. : 2008-09 & 2009-10 CLAIM OF THE ASSESSEE. SUB-SECTION (3) CLARIFIES TH AT THE APPLICATION OF THE METHOD WOULD BE ATTRACTED EVEN TO A SITUATION W HERE THE ASSESSEE HAS CLAIMED THAT NO EXPENDITURE AT ALL WAS INCURRED IN RELATION TO THE EARNING OF NON-TAXABLE INCOME. 71. PARLIAMENT HAS PROVIDED AN ADEQUATE SAFEGUARD T O THE INVOCATION OF THE POWER TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO THE EARNING OF NON-TAXABLE INCOME BY ADOPTION OF THE PR ESCRIBED METHOD. THE INVOCATION OF THE POWER IS MADE CONDITIONAL ON THE OBJECTIVE SATISFACTION OF THE ASSESSING OFFICER IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNT S OF THE ASSESSEE. WHEN A STATUTE POSTULATES THE SATISFACTION OF THE A SSESSING OFFICER 'COURTS WILL NOT READILY DEFER TO THE CONCLUSIVENES S OF AN EXECUTIVE AUTHORITY'S OPINION AS TO THE EXISTENCE OF A MATTER OF LAW OR FACT UPON WHICH THE VALIDITY OF THE EXERCISE OF THE POWER IS PREDICATED'. (M. A. RASHEED V. STATE OF KERALA [1974] AIR 1974 SC 2249* ). A DECISION BY THE ASSESSING OFFICER HAS TO BE ARRIVED AT IN GOOD FAITH ON RELEVANT CONSIDERATIONS. THE ASSESSING OFFICER MUST FURNISH TO THE ASSESSEE A REASONABLE OPPORTUNITY TO SHOW CAUSE ON THE CORRECT NESS OF THE CLAIM MADE BY HIM. IN THE EVENT THAT THE ASSESSING OFFICE R IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSES SEE, HE MUST RECORD REASONS FOR HIS CONCLUSION. THESE SAFEGUARDS WHICH ARE IMPLICIT IN THE REQUIREMENTS OF FAIRNESS AND FAIR PROCEDURE UNDER ARTICLE 14 MUST BE OBSERVED BY THE ASSESSING OFFICER WHEN HE A RRIVES AT HIS SATISFACTION UNDER SUB-SECTION (2) OF SECTION 14A. AS WE SHALL NOTE SHORTLY HEREAFTER, SUB-RULE (1) OF RULE 8D HAS ALS O INCORPORATED THE ESSENTIAL REQUIREMENTS OF SUB-SECTION (2) OF SECTI ON 14A BEFORE THE ASSESSING OFFICER PROCEEDS TO APPLY THE METHOD PRE SCRIBED UNDER SUB-RULE (2). [UNDERLINED FOR EMPHASIS BY US] 9. THE AFORESAID OBSERVATIONS OF THE HONBLE HIGH C OURT CLEARLY SHOW THAT THE SATISFACTION OF THE ASSESSING OFFICER WITH REGARD TO THE CORRECTNESS OR OTHERWISE OF THE CLAIM MADE BY THE A SSESSEE MUST BE BASED ON REASONS AND ON RELEVANT CONSIDERATIONS. OSTENSI BLY, THE INVOKING OF RULE 8D OF THE RULES IN ORDER TO COMPUTE THE DISALLOWANC E U/S 14A OF THE ACT IS TO BE UNDERSTOOD AS BEING CONDITIONAL ON THE OBJECTIVE SATISFACTION OF THE ASSESSING OFFICER WITH REGARD TO THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSE SSEE. AT THIS STAGE, WE MAY ALSO TOUCH-UPON A SIMILAR VIEW EXPRESSED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. & ORS. VS. CIT, (2012) 247 CTR 162 (DEL), WHEREIN REFERENCE HAS BEEN MADE TO THE J UDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MAN UFACTURING CO. LTD. (SUPRA). AS PER THE HONBLE DELHI HIGH COURT, THE REQUIREMENT OF THE ASSESSING OFFICER EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME I N TERM OF RULE 8D OF THE RULES WOULD BE TRIGGERED ONLY IF THE ASSESSING OFFI CER RECORDS A FINDING THAT HE WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. ACCORDING TO THE HONBLE DELH I HIGH COURT, SUB-SECTION (2) OF SECTION 14A OF THE ACT DEALS WITH CASES WHER E THE 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-SECTION ( 3) APPLIES TO CASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDITURE HAS BEEN I NCURRED IN RELATION TO SUCH EXEMPT INCOME. EXPLAINING FURTHER, AS PER THE HON BLE HIGH COURT IN BOTH THE CASES THE RECOURSE TO RULE 8D OF THE RULES IS POSSI BLE ONLY IF THE ASSESSING OFFICER RECORDS A FINDING THAT HE WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E. ITA NOS.2459 & 2460/PN/2012 A. YS. : 2008-09 & 2009-10 8. IN OUR CONSIDERED OPINION, THE AFORESAID PARITY OF REASONING IN RELATION TO INVOKING OF RULE 8D OF THE RULES READ WITH SECTION 14A OF THE ACT APPLIES TO THE FACTS OF THE PRESENT CASE. THEREFORE, NOW WE MAY E XAMINE THE FACTS OF THE PRESENT CASE. IN ASSESSMENT YEAR 2008-09 ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.3,39,350/- WHICH IS EXEMPT FROM TAX. THE ASSERTIONS OF THE ASSESSEE HAVE BEEN THAT NO INTEREST EXPENDITURE WAS INCURRED IN RELATION TO EARNING OF SUCH INCOME BECAUSE THE INVESTMENTS HAVE NOT BEEN MADE OUT OF INTEREST BEARING FUNDS. IN THIS CONTEXT, THE SUBMI SSIONS PUT-FORTH BEFORE THE CIT(A) AND WHICH HAVE BEEN REPRODUCED BY HER IN THE IMPUGNED ORDER ARE RELEVANT. THE ASSESSEE FURNISHED THE NECESSARY MAT ERIAL TO SUPPORT THE PROPOSITION THAT THE INVESTMENTS ARE MADE OUT OF FU NDS FREE OF INTEREST COST. THE TABULATION REPRODUCED BY THE CIT(A) IN PARA 6.1 OF HER ORDER CLEARLY SHOWS THAT THE INVESTMENTS MADE BY THE ASSESSEE ARE OUT OF INTEREST FREE FUNDS. THE AFORESAID FACTUAL ASPECT HAS NOT BEEN N EGATED BY THE CIT(A) BUT THE SAME HAS BEEN MERELY BRUSHED ASIDE. ONE OF THE REASONS WEIGHING WITH THE CIT(A) WAS THAT ASSESSEE MADE A SUO-MOTU AD-HOC DISALLOWANCE OF RS.5,000/- IN ASSESSMENT YEAR 2009-10 ON ACCOUNT OF SECTION 14A OF THE ACT; ACCORDING TO THE CIT(A), IN VIEW OF THE AFORESAID, ASSESSING OFFICER WAS JUSTIFIED IN DERIVING SATISFACTION IN TERMS OF SECT ION 14A(2) OF THE ACT THAT THE CLAIM OF THE ASSESSEE OF NOT HAVING INCURRED ANY IN TEREST EXPENDITURE RELATING TO THE EXEMPT INCOME FOR ASSESSMENT YEAR 2008-09 WA S INCORRECT. THE AFORESAID STAND OF THE CIT(A) IS UNSUSTAINABLE BECA USE THE SATISFACTION CONTEMPLATED IN SECTION 14A(2) OF THE ACT IS TO BE MADE FOR EACH YEAR INDEPENDENTLY AND THAT TOO, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE . 9. IN CONCLUSION, WE MAY NOTE THAT IN THE PRESENT C ASE, THE ASSERTION OF THE ASSESSEE HAS BEEN THAT NO INTEREST EXPENDITURE HAS BEEN INCURRED IN RELATION TO THE INVESTMENTS, WHICH HAVE YIELDED EXEMPT DIVID END INCOME. FACTUALLY SPEAKING, THE AFORESAID ASSERTION OF THE ASSESSEE H AS NOT BEEN NEGATED BY THE LOWER AUTHORITIES ON THE BASIS OF ANY OBJECTIVE ANALYSIS OF THE ACCOUNTS OF ITA NOS.2459 & 2460/PN/2012 A. YS. : 2008-09 & 2009-10 THE ASSESSEE. THEREFORE, IN OUR CONSIDERED OPINION , THE SATISFACTION MANDATED U/S 14A(2) OF THE ACT QUA THE ELEMENT OF INTEREST E XPENDITURE HAS NOT BEEN APPROPRIATELY RECORDED BY THE LOWER AUTHORITIES. I N THE ABSENCE OF ADHERENCE TO THE REQUIREMENTS OF SECTION 14A(2) OF THE ACT, T HE ASSESSING OFFICER COULD NOT HAVE PROCEEDED TO INVOKE RULE 8D OF THE RULES A ND SUBJECT THE IMPUGNED INTEREST EXPENDITURE FOR DISALLOWANCE AS PER CLAUSE (II) OF SUB-RULE (2) OF RULE 8D OF THE RULES. THEREFORE, WE SET-ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS. 1,57,864/- MADE ON ACCOUNT OF CLAUSE (II) OF SUB-RULE (2) OF RULE 8D OF THE RU LES RELATING TO INTEREST EXPENDITURE FOR ASSESSMENT YEAR 2008-09. THUS, ON THIS ASPECT ASSESSEE SUCCEEDS. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR A SSESSMENT YEAR 2008-09 IS PARTLY ALLOWED. 11. SINCE THE FACTS AND CIRCUMSTANCES ARE SIMILAR I N ASSESSMENT YEAR 2009- 10, OUR DECISION IN ASSESSMENT YEAR 2008-09 SHALL A PPLY MUTATIS-MUTANDIS IN ASSESSMENT YEAR 2009-10 ALSO, RESULTING IN DELETION OF THE DISALLOWANCE OF RS.1,21,676/- OUT OF INTEREST EXPENDITURE. 12. RESULTANTLY, BOTH THE APPEALS OF THE ASSESSEE A RE PARTLY ALLOWED, AS ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH AUGUST, 2014. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 25 TH AUGUST, 2014. SUJEET ITA NOS.2459 & 2460/PN/2012 A. YS. : 2008-09 & 2009-10 COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-I, PUNE; 4) THE CIT-I, PUNE; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// SR. PRIVATE SECRETARY I.T.A.T., PUNE