M/s Ferrocare Machines P. Ltd., Pune V. Jt. CIT, Pune

ITA 2497/PUN/2012

• Counselvise Citation: 249724514 RSA 2012
• Duration Of Justice: 1 year(s) 1 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-02-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 28-01-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 17-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S P WALIMBE
• Assessee Lawyers: P D KUDWA
• Keywords: Business income; Business expenditure; Earning of tax free income; Corroborative evidences
• Section: 14A; 6; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI R.S. PADVEKAR, JUDICIAL MEMBER, AND SHRI R.K. PANDA, ACCOUNTANT MEMBER. ITA.NO.2497/PN/2012 (ASSESSMENT YEAR 2009-10) M/S. FERROCARE MACHINES PVT. LTD., 23-25, GULMOHAR KUBERA INDUSTRIAL COMPLEX, SALUNKE VIHAR ROAD, PUNE 411040 PAN NO.AAACF3571A .. APPELLANT VS. JCIT (OSD), CIRCLE-1(2), PUNE .. RESPONDENT ASSESSEE BY : SHRI P.D. KUDWA REVENUE BY : SHRI S.P. WALIMBE DATE OF HEARING : 06-02-2014 DATE OF PRONOUNCEMENT : 11-02-2014 ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER DATED 23-11-2012 OF THE CIT(A)-I, PUNE RELATING TO ASSESS MENT YEAR 2009-10. 2. THE ONLY EFFECTIVE GROUND RAISED BY THE ASSESSEE READS AS UNDER: THE HONBLE CIT(A) ERRED IN SUSTAINING THE DISALLOWAN CE OF EXPENSES OF RS.3,03,823/- AS RELATED TO EXEMPT DIVIDEND INCOME OF RS.21,90,651/- U/S.14A R.W. RULE 8D OF THE I.T RULES. THE APPELLANT PLEADS THAT THE DISALLOWANCE MADE BY THE A.O. IS NOT JUSTIFIED AND NOT VALID. 2.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING, TRADING A ND SERVICING OF MACHINES. DURING THE COURSE OF ASSESSMENT PROCEEDI NGS THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS RECEIVED DIVIDE ND INCOME OF RS.21,90,651/- WHICH HAS BEEN CLAIMED AS EXEMPT. H OWEVER, THE ASSESSEE HAS NOT MADE ANY DISALLOWANCE U/S.14A OF THE I.T. A CT. ON BEING 2 QUESTIONED BY THE ASSESSING OFFICER, IT WAS EXPLAIN ED THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE FOR EARNING THE DIVIDE ND. THE ASSESSING OFFICER, HOWEVER, DID NOT ACCEPT THE ABOVE CONTENTI ON OF THE ASSESSEE. ACCORDING TO HIM, AS PER SECTION 14A(3) OF THE I.T. ACT, EVEN THOUGH THE ASSESSEE HAS CLAIMED THAT NO EXPENDITURE HAS BEEN I NCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THE ASSESSING OFFICER SHALL DETERMINE THE EXPENDITURE U /S.14A OF THE I.T. ACT. IN ABSENCE OF ANY SUPPORTING EVIDENCE THE ASSESSING OFFICER DISALLOWED AN AMOUNT OF RS.3,03,823/- U/S.14A R.W.RULE 8D AND ADD ED BACK THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 3. BEFORE THE CIT(A) THE ASSESSEE FURNISHED FULL DE TAILS AND EXPLANATIONS WITH REGARD TO ITS INCOME IN THE ASSES SMENT PROCEEDINGS. IT WAS SUBMITTED THAT THE TOTAL INVESTMENT IN SHARES W AS RS.500 AND IN THE MUTUAL FUNDS AT RS.4,46,47,615/- AS ON 31-03-2008. THE INVESTMENT IN MUTUAL FUNDS STOOD AT RS.7,68,81,182/- AS ON 31-03- 2009. THE DIVIDEND INCOME OF RS.21,90,651/- EARNED DURING THE FINANCIA L YEAR 2008-09 COMPRISED EXCLUSIVELY OF DIVIDENDS EARNED ON INVEST MENT OF THE ASSESSEES SURPLUS FUND IN MUTUAL FUNDS. REFERRING TO THE SHA RE CAPITAL OF RS.47,04,000/- AND RESERVES AND SURPLUS AT RS.10,94 ,32,588/- AS ON 31-03- 2009 IT WAS SUBMITTED THAT THE ENTIRE INVESTMENT WA S OUT OF OWN FUNDS AND NO BORROWED FUNDS HAD BEEN UTILISED TOWARDS INVESTM ENT IN THE MUTUAL FUNDS. FURTHER, THERE ARE ONLY 19 ENTRIES OF DIVID ENDS CREDITED TO THE ASSESSEES BANK ACCOUNT BY ECS. THE ASSESSEE HAS N OT SEPARATELY INCURRED ANY EXPENSES ON EARNING DIVIDEND INCOME DURING THE YEAR. FURTHER, THE INVESTMENTS IN MUTUAL FUNDS HAVE BEEN MADE ON THE B ASIS OF INFORMATION AND ADVICE RECEIVED FROM MUTUAL FUNDS WHICH DID NOT ENTAIL ANY 3 EXPENDITURE ON THE PART OF THE ASSESSEE. RELYING O N VARIOUS DECISIONS IT WAS SUBMITTED THAT NO DISALLOWANCE UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE IS CALLED FOR. 3.1 HOWEVER, THE LD.CIT(A) DID NOT ACCEPT THE CONTE NTION OF THE ASSESSEE. DISTINGUISHING THE VARIOUS DECISIONS CIT ED BEFORE HER SHE UPHELD THE DISALLOWANCE OF EXPENSES RS.3,03,823/- MADE BY THE ASSESSING OFFICER U/S.14A R.W. RULE 8D OF THE I.T. ACT. 4. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSE SSEE IS IN APPEAL BEFORE US. 5. THE LD. COUNSEL FOR THE ASSESSEE STRONGLY CHALLE NGED THE ORDER OF THE CIT(A). HE SUBMITTED THAT THERE IS NO DIRECT O R INDIRECT EXPENSES INCURRED FOR EARNING THE DIVIDEND INCOME. THE ENTI RE INVESTMENT IN MUTUAL FUNDS IS OUT OF OWN CAPITAL AND FREE RESERVES AND N O BORROWED FUND HAS BEEN UTILISED TOWARDS INVESTMENT. THERE ARE ONLY 1 9 DIVIDEND ENTRIES WHICH ARE DIRECTLY CREDITED TO THE BANK THROUGH ECS . REFERRING TO THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF RAJ SHIPPING AGENCIES LTD. VS. ADDL.CIT REPORTED IN (2013) 38 TA XMANN.COM 345 (MUMBAI-TRIBUNAL) FOR THE A.Y. 2008-09 HE SUBMITTED THAT UNDER IDENTICAL FACTS AND CIRCUMSTANCES THE TRIBUNAL HAS DELETED TH E DISALLOWANCE U/S.14A R.W. RULE8D ON THE GROUND THAT THE ASSESSING OFFICE R HAD NOT RECORDED ANY SATISFACTION WITH REFERENCE TO ACCOUNTS OF ASSESSEE OR CLAIM THAT NO EXPENDITURE WAS INCURRED. SINCE IN THE INSTANT CAS E THE ASSESSING OFFICER HAS NOT RECORDED ANY SATISFACTION WITH REFERENCE TO ACCOUNTS OF ASSESSEE AND HAS NOT CONTROVERTED THE CLAIM THAT NO EXPENDIT URE WAS INCURRED, 4 THEREFORE, IN VIEW OF THE AFOREMENTIONED DECISION T HE ORDER OF THE CIT(A) HAS TO BE SET-ASIDE AND THE ADDITION SHOULD BE DELE TED. 6. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND STRONGLY RELIED ON THE ORDER OF THE CIT(A). 7. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALS O CONSIDERED THE DECISION CITED BEFORE US IN THE CASE OF RAJ SHIPPIN G AGENCIES LTD. (SUPRA). WE FIND IN THE INSTANT CASE THE ASSESSEE HAD DECLAR ED DIVIDEND INCOME FROM MUTUAL FUNDS AT RS.21,90,651/- WHICH IT CLAIME D AS EXEMPT. FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE, WE F IND NO BORROWED FUND HAS BEEN UTILISED TOWARDS INVESTMENT IN THE MUTUAL FUNDS, THE INCOME OF WHICH HAS BEEN CLAIMED AS EXEMPT. WE FIND THE ASSE SSING OFFICER DISALLOWED AN AMOUNT OF RS.3,03,823/- BEING EXPENDI TURE INCURRED FOR EARNING THE DIVIDEND INCOME U/S.14A R.W. RULE 8D WH ICH HAS BEEN UPHELD BY THE CIT(A). WHILE DOING SO, WE FIND THE ASSESSI NG OFFICER HAS NOT RECORDED ANY SATISFACTION WITH REFERENCE TO ACCOUNT S OF ASSESSEE NOR REJECTED THE CLAIM THAT NO EXPENDITURE WAS INCURRED . IT IS THE CASE OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ASSESSING OFF ICER HAS NOT RECORDED ANY SATISFACTION WITH REFERENCE TO ACCOUNTS OF THE ASSESSEE NOR REJECTED THE CLAIM THAT NO EXPENDITURE WAS INCURRED AND THEREFOR E IN VIEW OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF RAJ SHI PPING AGENCIES LTD. (SUPRA) NO DISALLOWANCE IS CALLED FOR. WE FIND MER IT IN THE ABOVE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE. 5 7.1 WE FIND THE FACTS OF THE INSTANT CASE ARE IDENT ICAL TO THE FACTS IN THE CASE OF RAJ SHIPPING AGENCIES LTD. (SUPRA) WHERE TH E ASSESSEE HAS DECLARED DIVIDEND INCOME FROM MUTUAL FUNDS AMOUNTIN G TO RS.1,12,84,713/- WHICH WAS CLAIMED AS EXEMPT. THE ENTIRE INVESTMENT IN THE MUTUAL FUND WAS OUT OF OWN SOURCE ON WHICH NO I NTEREST LIABILITY WAS INCURRED BY THE ASSESSEE. SINCE THE ASSESSEE HAS N OT OFFERED ANY DISALLOWANCE U/S.14A THE ASSESSING OFFICER DISALLOW ED AN AMOUNT OF RS.4,40,138/- U/S.14A R.W. RULE 8D WHICH WAS UPHELD BY THE CIT(A). ON FURTHER APPEAL BY THE ASSESSEE THE TRIBUNAL DELETED THE ADDITION BY HOLDING AS UNDER : 6. THE ISSUE IN THIS APPEAL IS WITH REFERENCE TO INVOK ING OF PROVISIONS OF SECTION 14A AND RULE 8D. THE HON'BLE BOMBAY HIGH COU RT WHILE UPHOLDING THE CONSTITUTIONAL VALIDITY OF THE SECTION 14A AND RU LE 8D HAS THIS TO OBSERVE WITH REFERENCE TO SUB SECTION 2 & 3 OF SECTION 14A: 'SUB-SECTIONS (2) AND (3) OF SECTION 14A WERE INSERTED BY AN AMENDMENT BROUGHT ABOUT BY THE FINANCE ACT OF 2006 WITH EFFEC T FROM APRIL 1, 2007. UNDER SUB-SECTION (2), THE ASSESSING OFFICER IS REQUIRED T O DETERMINE THE AMOUNT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RELATI ON TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER T HE ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. SUB-SECTION (2) WAS INSERTED SO AS TO PROVIDE A UNIFORM METHOD APPLICABLE WHERE THE ASSE SSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE . PARLIAMENT HAS PROVIDED AN ADEQUATE SAFEGUARD TO THE INVOCATION OF THE POWER TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO T HE EARNING OF NON- TAXABLE INCOME BY ADOPTION OF THE PRESCRIBED METHOD. THE INVOCATION OF THE POWER IS MADE CONDITIONAL ON THE OBJECTIVE SATISFA CTION OF THE ASSESSING OFFICER IN REGARD TO THE CORRECTNESS OF THE CLA IM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THESE SAFE GUARDS WHICH ARE IMPLICIT IN THE REQUIREMENTS OF FAIRNESS AND FAIR PRO CEDURE UNDER ARTICLE 14 MUST BE OBSERVED BY THE ASSESSING OFFICER WHEN HE ARRIVES AT HIS SATISFACTION UNDER SUB-SECTION (2) OF SECTION 14A. SUB-R ULE (1) OF RULE 8D OF THE INCOME-TAX RULES, 1962, HAS ALSO INCORPORATED THE ESSENTIAL REQUIREMENTS OF SUB-SECTION (2) OF SECTION 14A BEFORE T HE ASSESSING OFFICER PROCEEDS TO APPLY THE METHOD PRESCRIBED UNDER SUB-RULE (2)' (EMPHASIS SUPPLIED) THE SAME OPINION WAS EXPRESSED BY THE HON'BLE DELHI HIG H COURT IN THE CASE OF MAXOPP INVESTMENT LTD AND OTHERS V. CIT 247 CTR 162 WHEREIN RELIANCE WAS PLACED ON THE DECISION OF THE HON'BLE SU PREME COURT IN THE CASE OF CIT VS. WALFORT SHARE & STOCK BROKERS PVT. LTD 326 ITR 1 (SC) AND THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE COMPANY LTD VS. DCIT (328 ITR 81). THE RELEVA NT PORTIONS OF THE JUDGMENT OF HON'BLE DELHI HIGH COURT ARE AS UNDER: 6 29. SUB-SECTION (2) OF SECTION 14 A OF THE SAID ACT P ROVIDES THE MANNER IN WHICH THE ASSESSING OFFICER IS TO DETERMINE THE AMOUNT O F EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM P ART OF THE TOTAL INCOME. HOWEVER, IF WE EXAMINE THE PROVISION CAREFUL LY, WE WOULD FIND THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ONLY IF 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 IN RELATION TO I NCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID AC T. IN OTHER WORDS, THE REQUIREMENT OF THE ASSESSING OFFICER EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO E XEMPT INCOME WOULD BE TRIGGERED ONLY IF THE ASSESSING OFFICER RETURNS A FINDIN G THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THEREFORE, THE CONDITION PRECEDENT FOR THE ASSESSING OFFICER ENTERING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME IS THAT THE ASSESSING OFFI CER MUST RECORD THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. SUB-SECTION (3) IS NOTHING BUT AN OFFSHOOT OF SUB-SECTION (2) OF SECTION 14A. SUB- SECTION (3) APPLI ES TO CASES WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, SUB-SECTION (2) DEALS WITH CASES WHERE THE A SSESSEE SPECIFIES A POSITIVE AMOUNT OF EXPENDITURE IN RELATION TO INCO ME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT AND SUB-SECTION (3) APPLIES TO CASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDI TURE HAD BEEN INCURRED IN RELATION TO EXEMPT INCOME. IN BOTH CASES, THE ASSESSING OFFICER, IF SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE , CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE I N ACCORDANCE WITH ANY PRESCRIBED METHOD, AS MENTIONED IN SUB-SECTION (2) OF S ECTION 14A OF THE SAID ACT. IT IS ONLY IF THE ASSESSING OFFICER IS NOT SATISFI ED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, IN BOTH CASES, TH AT THE ASSESSING OFFICER GETS JURISDICTION TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART O F THE TOTAL INCOME UNDER THE SAID ACT IN ACCORDANCE WITH THE PRESCRIBED METHOD. THE PRESCRIBED METHOD BEING THE METHOD STIPULATED IN RULE 8D OF THE SAID RULES. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH R EGARD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER WOULD HAVE TO INDICATE CO GENT REASONS FOR THE SAME. RULE 8D 30. AS WE HAVE ALREADY NOTICED, SUB-SECTION (2) OF SEC TION 14A OF THE SAID ACT REFERS TO THE METHOD OF DETERMINATION OF THE AMO UNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE EXPRESSION USED IS - 'SUCH METHOD AS MAY BE PRESCRIBED'. WE HAVE ALREADY MENTIO NED ABOVE THAT BY VIRTUE OF NOTIFICATION NO.45/2008 DATED 24/03/2008, THE CENTRAL BOARD OF DIRECT TAXES INTRODUCED RULE 8D IN THE SAID RULES. THE SAID RULE 8D ALSO MAKES IT CLEAR THAT WHERE THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFI ED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE A SSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE T OTAL INCOME UNDER THE SAID ACT FOR SUCH PREVIOUS YEAR, THE ASSESSING OFFICER SHA LL DETERMINE THE AMOUNT OF THE EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE (2) OF RULE 8D. WE MAY OBSER VE THAT RULE 8D(1) PLACES THE PROVISIONS OF SECTION 14A(2) AND (3) IN THE CORRECT PERSPECTIVE. AS WE HAVE ALREADY SEEN, WHILE DISCUSSING THE PROVISIONS O F SUB-SECTIONS (2) AND (3) OF SECTION 14A, THE CONDITION PRECEDENT FOR THE ASSESSING 7 OFFICER TO HIMSELF DETERMINE THE AMOUNT OF EXPENDITU RE IS THAT HE MUST RECORD HIS DISSATISFACTION WITH THE CORRECTNESS OF THE CL AIM OF EXPENDITURE MADE BY THE ASSESSEE OR WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED. IT IS ONL Y WHEN THIS CONDITION PRECEDENT IS SATISFIED THAT THE ASSESSING OFFIC ER IS REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDABLE IN TOTAL INCOME IN THE MANNER INDICATED IN SUB-RULE (2) OF RULE 8D OF THE SAID RULES. 31.IT IS, THEREFORE, CLEAR 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 THE CLAIM OF THE ASSESSEE IN THIS REGARD. IF ONE EXAMINES SUB-RULE (2) OF RULE 8D, WE FIND THAT THE ME THOD FOR DETERMINING THE EXPENDITURE IN RELATION TO EXEMPT INCOME HAS THR EE COMPONENTS. THE FIRST COMPONENT BEING THE AMOUNT OF EXPENDITURE DIRE CTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE SECOND COMPONENT BEING COMPUTED ON THE BASIS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSESSEE INCURS EXPENDITURE BY WAY OF INTE REST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR R ECEIPT. THE FORMULA ESSENTIALLY APPORTIONS THE AMOUNT OF EXPENDITURE BY WA Y OF INTEREST [OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I)] I NCURRED DURING THE PREVIOUS YEAR IN THE RATIO OF THE AVERAGE VALUE OF I NVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL IN COME, TO THE AVERAGE OF THE TOTAL ASSETS OF THE ASSESSEE. THE THIRD COMPONENT IS AN ARTIFICIAL FIGURE - ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTM ENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEETS OF ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR, IT IS THE AGGREGATE OF THESE THREE COMPONENTS WH ICH WOULD CONSTITUTE THE EXPENDITURE IN RELATION TO EXEMPT INCOME AND IT IS THIS AMOUNT OF EXPENDITURE WHICH WOULD BE DISALLOWED UNDER SECTION 1 4A OF THE SAID ACT. IT IS, THEREFORE, CLEAR THAT IN TERMS OF THE SAID RULE , THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME HAS TWO ASPE CTS - (A) DIRECT AND (B) INDIRECT. THE DIRECT EXPENDITURE IS STRAIGHTAWAY TAKEN INTO ACCOUNT BY VIRTUE OF CLAUSE (I) OF SUB-RULE (2) OF RULE 8D. THE INDIRECT EXPENDITURE, WHERE IT IS BY WAY OF INTEREST, IS COMPUTED THROUGH TH E PRINCIPLE OF APPORTIONMENT, AS INDICATED ABOVE, AND, IN CASES WHERE THE INDIRECT EXPENDITURE IS NOT BY WAY OF INTEREST, A RULE OF THUM B FIGURE OF ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENT, INCO ME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, IS T AKEN. ............... 41. SUB-SECTION (2) OF SECTION 14A, AS WE HAVE SEEN, STI PULATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDIT URE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE T OTAL INCOME 'IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED'. OF COURSE, THIS DETERMINATION CAN ONLY BE UNDERTAKEN IF THE ASSESSING O FFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THIS PART OF SECTION 14A(2) WHICH EXPLICITLY REQUIRES THE FULFILLMENT OF A CONDITION PRECEDENT IS ALSO IMPLICIT IN SECTION 14A(1) [AS IT NOW STANDS] AS ALSO IN ITS INITIAL AVATAR AS SECTION 14A. IT IS ONLY THE PRESCRIPTION WITH REGARD TO THE METHOD OF DETERMINING SUCH EXPENDITURE WHICH IS NEW AND WHICH W ILL OPERATE PROSPECTIVELY. IN OTHER WORDS, SECTION 14A, EVEN PRIOR TO THE INTRODUCTION OF SUB-SECTIONS (2) AND (3) WOULD REQUIRE THE ASSESSING OF FICER TO FIRST REJECT THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXT ENT OF SUCH EXPENDITURE AND SUCH REJECTION MUST BE FOR DISCLOSED CO GENT REASONS. IT IS THEN THAT THE QUESTION OF DETERMINATION OF SUCH EXPEN DITURE BY THE ASSESSING OFFICER WOULD ARISE. THE REQUIREMENT OF ADOPTI NG A SPECIFIC 8 METHOD OF DETERMINING SUCH EXPENDITURE HAS BEEN INTR ODUCED BY VIRTUE OF SUB-SECTION (2) OF SECTION 14A. PRIOR TO THAT, THE ASSESSI NG WAS FREE TO ADOPT ANY REASONABLE AND ACCEPTABLE METHOD. 7. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE C ASE OF CIT VS. HERO CYCLES LTD 323 ITR 518 (P&H) HAS ALSO HELD THAT DISALL OWANCE UNDER SECTION 14A COULD NOT STAND WHERE IT WAS FOUND THAT F OR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED: 'HELD - DISMISSING THE APPEAL, THAT THE EXPENDITURE ON INTEREST WAS SET OFF AGAINST THE INCOME FROM INTEREST AND THE INVESTMENT IN THE SHARES AND FUNDS WERE OUT OF THE DIVIDEND PROCEEDS. IN VIEW OF T HIS FINDING OF FACT, DISALLOWANCE UNDER SECTION 14A WAS NOT SUSTAINABLE. WHET HER, IN A GIVEN SITUATION, ANY EXPENDITURE WAS INCURRED WHICH WAS TO BE DISALLOWED, WAS A QUESTION OF FACT. THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE WAS ALWAYS INCURRED WHICH MUST BE DISAL LOWED UNDER SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED COULD NOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY NULLIFY THE MANDATE OF SECTION 14A, COULD NOT BE ACCEPTED. DISALL OWANCE UNDER SECTION 14A REQUIRED FINDING OF INCURRING OF EXPENDITURE AN D WHERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAD BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A COULD NOT STAND. CONSEQ UENTLY, THE DISALLOWANCE WAS NOT PERMISSIBLE. 8. THE COORDINATE BENCH IN THE CASE OF JUSTICE SAM P BHARUCHA VS. ADDL. CIT IN ITA NO.3889/MUM/2011 DATED 25.07.2012 HAS ANALYZ ED SIMILAR ISSUE AND CAME TO THE FOLLOWING CONCLUSION: '5 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS REL EVANT MATERIAL ON RECORD. SECTION 14A HAS WITHIN IT IMPLICIT NOTION OF APPORTIONMENT IN THE CASES WHERE THE EXPENDITURE IS INCURRED FOR THE CO MPOSITE/INDIVISIBLE ACTIVITIES IN WHICH TAXABLE AND NON-TAXABLE INCOME I S RECEIVED. BUT WHEN IT IS POSSIBLE TO DETERMINE THE ACTUAL EXPENDITURE IN REL ATION TO THE EXEMPT INCOME OR WHEN NO EXPENDITURE HAS BEEN INCURRED IN R ELATION TO THE EXEMPT INCOME, THEN PRINCIPLE OF APPORTIONMENT EMBE DDED IN SECTION 14 A HAS NO APPLICATION. THE OBJECTIVE OF SECTION 14 A IS N OT ALLOWING TO REDUCE TAX PAYABLE ON THE NORMAL EXEMPT INCOME BY DEBITING THE EXPENDITURE INCURRED TO EARN THE EXEMPT INCOME. THUS, THE EXPENSE S INCURRED TO EARN EXEMPT INCOME CANNOT BE ALLOWED AND THE EXPENSES SHALL BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATED TO THE EARNING OF TA XABLE INCOME. IF THERE IS EXPENDITURE DIRECTLY OR INDIRECTLY INCURRED IN RELA TION TO EXEMPT INCOME, THE SAME CANNOT BE CLAIMED AGAINST THE INCOME, WHICH IS TAXABLE AS IT IS HELD BY THE HON'BLE SUPREME COURT IN CASE OF COMMISSIO NER OF INCOME-TAX V. WALFORT SHARE AND STOCK BROKERS P. LTD. REPORTED IN 326 ITR 1 THAT FOR ATTRACTING THE PROVISIONS OF SECTION 14 A, THERE SHOULD BE PROXIMATE CAUSE FOR DISALLOWANCE WHICH AS RELATIONSHIP WITH THE TAX EX EMPT INCOME. 5.1 THE EXPENDITURE INCURRED IN RELATION TO THE INC OME WHICH DOES NOT FORM PART OF TOTAL INCOME HAS TO BE DISALLOWED. HOWEV ER, IT SHOULD BE PROXIMATE RELATIONSHIP BETWEEN THE EXPENDITURE AND T HE INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOME. ONCE SUCH PROXIMI TY RELATIONSHIPS EXIST, THE DISALLOWANCE IS TO BE EFFECTED. IN CASE THE ASSESSEE H AD CLAIMED THAT NO EXPENDITURE HAS BEEN INCURRED FOR EARNING THE EXEMPT INCOME, IT WAS FOR THE ASSESSING OFFICER TO DETERMINE AS TO WHETHER THE ASSESSE E HAD INCURRED ANY EXPENDITURE IN RELATION TO INCOME WHICH DID NOT FORM PART OF TOTAL INCOME AND IF SO TO QUANTIFY THE EXTENT OF DISALLOWA NCE. THUS, IN ORDER TO DISALLOW THE EXPENDITURE UNDER SECTION 14A, THERE MUST BE A LIVE NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF TOTAL INCOME. NO NOTIONAL EXPENDITURE CAN BE APPORTIONED FOR THE PURPOSE OF EARNING EXEMPT INCOME UNLESS THERE IS AN ACTUAL EXPEND ITURE IN RELATION TO 9 EARNING THE INCOME NOT FORMING PART OF TOTAL INCOME . IF THE EXPENDITURE IS INCURRED WITH A VIEW TO EARN TAXABLE INCOME AND THE RE IS APPARENT DOMINANT AND IMMEDIATE CONNECTION BETWEEN THE EXPEN DITURE INCURRED AND TAXABLE INCOME, THEN NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A MERELY BECAUSE SOME TAX EXEMPT INCOME IS RECEIVED BY T HE ASSESSEE. 5.2 AVERTING TO THE FACTS OF THE CASE IN HAND, THE ASSE SSEE HAD MADE A CLAIM THAT NO EXPENDITURE HAS BEEN INCURRED OR CLAIMED FOR EARNING THE EXEMPT INCOME. FROM THE DETAILS OF THE EXPENDITURE, IT IS CL EAR THAT THE EXPENDITURE INCURRED AND CLAIMED BY THE ASSESSEE HAS DIRECT NEXUS WIT H THE PROFESSIONAL INCOME OF THE ASSESSEE. IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE HAS USED HIS OFFICIAL MACHINERY AND ESTABLISHME NT FOR EARNING THE EXEMPT INCOME. THE ASSESSING OFFICER HAS NOT GIVEN ANY FINDING THAT ANY OF THE EXPENDITURE INCURRED AND CLAIMED BY THE ASSESSEE IS ATTRIBUTABLE FOR EARNING THE EXEMPT INCOME. IN OTHER WORDS WHEN T HE ASSESSING OFFICER HAS NOT POINTED OUT THAT CERTAIN EXPENDITURE IS NOT I NCURRED FOR EARNING THE PROFESSIONAL INCOME; BUT ARE INCURRED IN RELATION TO DIVIDEND INCOME OR SUCH EXPENDITURE IS INCURRED FOR INSEPARABLE AND INDIV ISIBLE ACTIVITIES COMPRISING PROFESSIONAL AS WELL AS THE ACTIVITIES ON WHIC H IS EXEMPT INCOME HAS BEEN EARNED BY THE ASSESSEE, THEN IN THE ABSEN CE OF ANY SUCH INSTANCE OF EXPENDITURE, FINDING OF ASSESSING OFFICER OR ANY MATERIAL TO SHOW THAT THE EXPENDITURE INCURRED AND CLAIMED BY TH E ASSESSEE AGAINST THE TAXABLE INCOME HAS ANY RELATION FOR EARNING THE EXEMPT INCOME, THE PROVISIONS OF SECTION 14A CANNOT BE APPLIED. 5.3 IN THE CASE OF SHRI PAWAN KUMAR PARAMESHWAR LAL V S. ACIT (SUPRA) THIS TRIBUNAL HAS CONSIDERED AND DECIDED AN IDENTICAL ISSUE IN PARA 4 AS UNDER: '4. AFTER HEARING THE ASSESSEE IN PERSON AND ARGUMENTS OF THE LEARNED D.R. WE ARE OF THE OPINION THAT NO DISALLOWANCE IS CALLED FOR UNDER SECTION 14A. OBVIOUSLY THE ASSESSEE IS MAINTAINING SEPARATE BOOKS OF AC COUNT FOR PURPOSE OF BUSINESS AND THESE INVESTMENTS ARE IN HIS PERSON AL CAPACITY. THE A.O. ALSO HAS NOT DISALLOWED ANY EXPENDITURE OF PE RSONAL NATURE OUT OF THE INCOME FROM BUSINESS OR PROFESSION IN THE COMPUTATIO N OF INCOME IN THE ASSESSMENT ORDER. IN VIEW OF THIS WE ARE OF THE OPI NION THAT THE EXPENDITURE CLAIMED IN THE BUSINESS OF SHARE DEALINGS CA NNOT BE CORRELATED TO THE INCOMES EARNED IN PERSONAL CAPACITY THAT TOO O N DIVIDEND, PPF INTEREST AND TAX FREE INTEREST ON RBI BONDS. IN VIEW O F THIS, WE ARE OF THE OPINION THAT ESTIMATION OF EXPENDITURE OF RS.20,000 /- OUT OF BUSINESS EXPENDITURE CLAIMED IN BUSINESS ACTIVITY CANNOT BE CON SIDERED FOR BEING INCURRED FOR THIS EARNING OF TAX FREE INCOME OF ABOV E NATURE. IN VIEW OF THIS DISALLOWANCE SO MADE UNDER SECTION 14A OF RS.20,000/- I S DELETED. NOT ONLY THAT THE CIT(A) DIRECTED THE A.O. TO CONSIDER T HE ALLOWANCE INVOKING RULE 8D. THE HON'BLE BOMBAY HIGH COURT IN THE CASE O F GODREJ & BOYCE MFG. CO. LTD. VS. DCIT 328 ITR 81 HAS CONSIDERED RULE 8D TO BE APPLICABLE PROSPECTIVE AND SINCE THE ASSESSMENT YEAR INVOLVED IS BEFO RE THE INTRODUCTION OF SUB- SECTION (2) & (3) OF SECTION 14A, THERE IS NO QUESTION OF DISALLOWING THE AMOUNTS INVOKING RULE8D. THEREFORE, T HE CIT(A)'S DIRECTION ON THIS IS SET ASIDE AND THE ADDITIONS SO MADE BY THE A.O. IN THE COMPUTATION OF BUSINESS INCOME IS DELETED. GROUND IS CO NSIDERED ALLOWED.' 5.4 SIMILARLY IN CASE OF AUCHTEL PRODUCTS LTD (SUPRA), IT WAS HELD BY THIS TRIBUNAL IN PARA 15 HAS UNDER: '15. A BARE PERUSAL OF THE ABOVE PROVISIONS INDICATES T HAT THE AO SHALL DETERMINE THE AMOUNT DISALLOWABLE AS PER RULE 8D, IF HE, 'IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE' IN RE SPECT OF SUCH EXPENDITURE IN RELATION TO EXEMPT INCOME. EVEN IF T HE ASSESSEE CLAIMS THAT NO EXPENDITURE WAS INCURRED IN RESPECT OF EXEMPT INCO ME, THE AO IS SUPPOSED TO FOLLOW THE MANDATE OF RULE 8D IF HE IS NOT SATISFIED WITH THE 10 CORRECTNESS OF THE ASSESSEE'S CLAIM. TO PUT IT SIMPLY, THE FURTHER DISALLOWANCE U/S.14A IS CALLED FOR WHEN THE AO IS NOT SA TISFIED WITH THE ASSESSEE'S CLAIM OF HAVING INCURRED NO EXPENDITURE OR SO ME AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME. SATISFACTI ON OF THE AO AS TO THE INCORRECT CLAIM MADE BY THE ASSESSEE IN THIS REGARD IS SINE QUA NON FOR INVOKING THE APPLICABILITY OF RULE 8D. SUCH SATISFACT ION CAN BE REACHED AND RECORDED ONLY WHEN THE CLAIM OF THE ASSESSEE IS VERIFIED . IF THE ASSESSEE PROVES BEFORE THE AO THAT IT INCURRED A PARTICULAR E XPENDITURE IN RESPECT OF EARNING THE EXEMPT INCOME AND THE AO GETS SATISFIED, T HEN THERE IS NO REQUIREMENT TO STILL PROCEED WITH THE COMPUTATION OF AMOUNT DISALLOWABLE AS PER RULE 8D. FROM THE ASSESSMENT ORDER, IT IS OBSERVED THAT THE AO SIMPLY KEPT THE ASSESSEE'S SUBMISSIONS ON RECORD WITHOUT APP RECIATING AS TO WHETHER THESE WERE CORRECT OR NOT. HE PROCEEDED O N THE PREMISE AS IF THE DISALLOWANCE AS PER RULE 8D IS AUTOMATIC IRRESPECTI VE OF THE GENUINENESS OF THE ASSESSEE'S CLAIM IN RESPECT OF EXPENSES I NCURRED IN RELATION TO EXEMPT INCOME. IT IS AN INCORRECT COURSE ADOPTED BY THE AO. THE CORRECT SEQUENCE, IN OUR CONSIDERED OPINION, FOR MAKI NG ANY DISALLOWANCE U/S. 14A IS TO, FIRSTLY, EXAMINE THE ASSESSEE'S CLAIM OF HA VING INCURRED SOME EXPENDITURE OR NO EXPENDITURE IN RELATION TO EXEMPT INCOME, IF THE AO GETS SATISFIED WITH THE SAME, THEN THERE IS NO NEED TO COMPU TE DISALLOWANCE AS PER RULE 8D. IT IS ONLY WHEN THE AO IS NOT SATISFIED WI TH THE CORRECTNESS OF THE CLAIM OF ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR N O EXPENDITURE HAVING BEEN INCURRED IN RELATION TO EXEMPT INCOME, THAT THE MANDATE OF RULE 8D WILL OPERATE. IN THE INSTANT CASE, THE AUTHOR ITIES BELOW HAVE DIRECTLY GONE TO THE SECOND STAGE OF COMPUTING DISALLO WANCE U/S. 14A AS PER RULE 8D WITHOUT RENDERING ANY OPINION ON THE CO RRECTNESS OR OTHERWISE OF THE ASSESSEE'S CLAIM IN THIS REGARD. WE, THER EFORE, SET ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF AO TO RE- COMPUTE DISALLOWANCE, IF ANY, IN ACCORDANCE WITH OUR ABOVE OBSERVATIONS AFTER DULY EXAMINING THE ASSESSEE'S CLAIM IN THIS REGARD. ' 6. IN VIEW OF THE ABOVE DISCUSSION AND FACTS AND CIRCUM STANCES OF THE CASE, WE ARE OF THE CONSIDERED OPINION THAT NO DISALLOWANC E UNDER SECTION 14A IS CALLED FOR WHEN THE ASSESSEE HAS NOT INCURRED AND CLAIME D ANY EXPENDITURE FOR EARNING THE EXEMPT INCOME. 9. SIMILAR VIEWS WERE ALSO EXPRESSED BY THE COORDINATE BENCHES IN THE CASE OF RELAXO FOOTWEARS LTD, VS. ADDL. CIT (2012) 50 SOT 102 AND PRIYA EXHIBITORS (P) LTD VS. ACIT (2012) 54 SOT 356. IN THE CASE OF RELAXO FOOTWEARS LTD, IT WAS HELD AS UNDER: ' THE ASSESSING OFFICER SHOULD HAVE CONSIDERED THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO EARNING THE EXEMPT INCOME. IF THE CLAIM WAS NOT FOUND TO BE IN CONSONANC E WITH THE FACTS ON RECORD, IT COULD HAVE BEEN REJECTED AND DISALLOWANCE COULD HAVE BEEN MADE AS PER RULE 8D. HOWEVER, IT IS FOUND THAT THE ASSESSING OFFICER HAS NOT CONSIDERED THE CLAIM OF THE ASSESSEE AT ALL AND HE HAS ST RAIGHTWAY EMBARKED UPON COMPUTING DISALLOWANCE UNDER RULE 8D. THE COMMISSIONER (APPEALS) MADE AN ASSUMPTION THAT WHENEVER EXEMPT INC OME IS EARNED THERE WILL BE SOME EXPENDITURE INCURRED IN RELATION THERETO. SUCH PRESUMPTION CANNOT FORM THE BASIS FOR MAKING DISALLOWAN CE UNDER RULE 8D.' 10. IN THE CASE OF PRIYA EXHIBITORS (P) LTD VS. ACIT ( 2012) 54 SOT 356 IT WAS HELD AS UNDER: ' FROM THE CAREFUL STUDY OF THE OBSERVATIONS MADE BY THE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SU PRA), IT IS APPARENT THAT FIRST THE ASSESSING OFFICER HAS TO DETERMINE THE CLAIM OF THE ASSESSEE REGARDING EXPENSES WHICH NEITHER THE ASSESSING OFFICER NO R THE 11 COMMISSIONER (APPEALS) HAS DONE IN THE INSTANT CASE. IN F ACT, THE SAID DECISION GOES AGAINST THE DEPARTMENT ITSELF IN SO FAR AS THEIR LORDSHIPS HAS HELD THAT THE ASSESSING OFFICER MUST IN THE FIRST INSTANCE DETERMINE WHETHER THE CLAIM OF THE ASSESSEE IS CORRECT AND DETERM INATION MUST BE MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE LEGISLATURE DIRECTS HIM TO FOLLOW RULE 8D ONLY WHERE THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM OF ASSESSEE. ' 11. AFTER CONSIDERING THE PRINCIPLES LAID DOWN BY VA RIOUS JUDGMENTS, IT IS IMPERATIVE THAT THE ASSESSING OFFICER CAN INVOKE RULE 8 D ONLY WHEN HE RECORDS SATISFACTION IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE CONDITION PRECEDENT FOR THE ASSESSING OFFICER ENTERING UPON A DET ERMINATION OF THE AMOUNT OF THE EXPENDITURE INCURRED IN RELATION TO E XEMPT INCOME IS THAT THE ASSESSING OFFICER MUST RECORD THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGARD T O THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EX EMPT INCOME, THE ASSESSING OFFICER WOULD HAVE TO INDICATE COGENT REASONS F OR THE SAME. THEREFORE, IT IS ALL THE MORE NECESSARY THAT AO HAS TO EXAMINE THE ACCOUNTS OF ASSESSEE FIRST AND THEN IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM, ONLY HE CAN INVOKE RULE 8D. NO SUCH EXAMINATI ON WAS MADE OR SATISFACTION WAS RECORDED BY AO IN THIS CASE. IT WAS NOTI CED THAT THE ASSESSING OFFICER HAS NOT CONSIDERED THE CLAIM OF THE ASSESSE E AT ALL AND HE HAS STRAIGHTWAY EMBARKED UPON COMPUTING DISALLOWANCE U NDER RULE 8D. DISALLOWANCE UNDER SECTION 14A REQUIRED FINDING OF IN CURRING OF EXPENDITURE AND WHERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAD BEEN INCURRED, DISALLOWANCE UNDER SEC TION 14A COULD NOT STAND. CONSEQUENTLY, THE DISALLOWANCE WAS NOT PERMISSIBLE . 12. ALTERNATE CONTENTION WAS THAT THE DISALLOWANCE NE ED NOT BE MADE ON ENTIRE EXPENDITURE MADE AS ASSESSEE'S INCOME FROM SHIPPING RELATED ACTIVITY WAS ASSESSED U/S 115VA ON PRESUMPTIVE BASIS. SINCE ASSESSEE HAS OFFERED INCOME UNDER THE TONNAGE TAX SCHEME, APPLIC ABILITY OF SECTION 14A WAS ALSO DISCUSSED BY THE COORDINATE BENCH IN THE CA SE OF VARUN SHIPPING COMPANY LTD VS. ADDL. CIT IN ITA NO.5576/MU M/2011 WHEREIN THE COORDINATE BENCH HAS HELD AS UNDER: '7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALSO PER USED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE ASSESSEE IS MAINLY ENGAGED IN THE BUSINESS OF OPERATION OF SHIPS AND ITS IN COME FROM THE SAID BUSINESS WAS DECLARED AND ASSESSED AS PER THE SPECIAL PROVISI ONS CONTAINED IN CHAPTER XIIG WHICH LAY DOWN TONNAGE TA X SCHEME. AS PER THE PROVISIONS OF SECTION 115VA CONTAINED IN CHAPTER XIIG, THE INCOME FROM THE BUSINESS OF OPERATING QUALIFYING SHIPS CAN BE COMP UTED AT THE OPTION OF THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER XIIG AND ONCE THIS OPTION IS EXERCISED BY THE ASSESSEE, THE INCOME SO COM PUTED SHALL BE DEEMED TO BE THE PROFITS AND GAINS OF SUCH BUSINESS CHAR GEABLE TO TAX UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESS ION' NOTWITHSTANDING ANY THING TO THE CONTRARY CONTAINED IN SECTION 28 TO 43C. IT, THEREFORE, FOLLOWS THAT WHEN THE INCOME OF THE A SSESSEE FROM THE BUSINESS OF OPERATING SHIPS IS COMPUTED AS PER THE SPECIAL PROVISIONS CONTAINED IN CHAPTER XIIG, ONLY THE EXPENSES INCURRED BY THE ASSESSEE FOR EARNING INCOME OF THE SAID BUSINESS ARE DEEMED TO BE A LLOWED AND NOTHING ELSE. IT, THEREFORE, CANNOT BE SAID THAT WHEN THE INC OME OF THE ASSESSEE FROM THE BUSINESS OF OPERATING SHIPS IS COMPUTED AS PER TH E SPECIAL PROVISIONS OF CHAPTER XIIG, ANY EXPENDITURE OTHER THA N THE EXPENDITURE INCURRED FOR THE PURPOSE OF THE SAID BUSINESS HAS BEEN AL LOWED AND CONSEQUENTLY NO ADDITION TO INCOME SO COMPUTED CAN BE MADE BY WAY OF DISALLOWANCE U/S 14A ON ACCOUNT OF EXPENDITURE INCURR ED BY THE ASSESSEE 12 IN RELATION TO EARNING OF EXEMPT DIVIDEND INCOME. W E, THEREFORE, FIND MERIT IN THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSE E THAT THE INCOME OF THE ASSESSEE FROM THE BUSINESS OF OPERATING SHIPS HAVING BE EN COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER XIIG, ONLY THE EXPENSES INCURRED FOR THE SAID BUSINESS ARE DEEMED TO HAVE BEEN ALLOWED A ND NO ADDITION TO SUCH INCOME CAN BE MADE BY WAY OF DISALLOWANCE U/S 14A ON ACCOUNT OF ANY EXPENDITURE INCURRED IN RELATION TO EARNING OF EXEMPT DIVIDEND INCOME. IN OUR OPINION, IF AT ALL THE ASSESSEE HAS CLAIM ED ANY SUCH EXPENDITURE IN COMPUTATION OF PROFIT OF BUSINESS OF SHI PPING, THE SAME ARE TO BE TAKEN AS DISALLOWED WHEN THE INCOME OF THE SAID BUSINESS IS FINALLY COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER XIIG AND NO SEPARATE DISALLOWANCE ON ACCOUNT OF SUCH EXPENDITURE U /S 14A CAN BE MADE. WE, THEREFORE, DELETE THE DISALLOWANCE MADE BY THE AO U/S 14A AND CONFIRMED BY THE LEARNED CIT(APPEALS) AND ALLOW GROU ND NO. 1 OF THE ASSESSEE'S APPEAL'. 13. IN VIEW OF THE ABOVE, SINCE ASSESSEE HAS NOT DIRECTLY SPENT ANY EXPENDITURE FOR EARNING THE EXEMPT INCOME AND ALSO SI NCE AO HAS NOT RECORDED ANY SATISFACTION WITH REFERENCE TO THE ACCOU NTS OF ASSESSEE OR CLAIM THAT NO EXPENDITURE WAS INCURRED AND ALSO KEEPI NG IN MIND THE FACT THAT ASSESSEE HAS OFFERED MOST OF THE INCOME UNDER THE TO NNAGE TAX SCHEME AND BALANCE OF THE EXPENDITURE WAS FOR EARNIN G TAXABLE NON- TONNAGE TAX INCOME, WE ARE OF THE OPINION THAT INVO CATION OF RULE 8D FOR DISALLOWING THE EXPENDITURE UNDER SECTION 14A ON ESTIM ATION/ PRESUMPTIVE BASIS DOES NOT ARISE. ACCORDINGLY, THE GROU NDS RAISED BY ASSESSEE ARE ALLOWED. 7.2 SINCE THE FACTS OF THE CASE DECIDED BY THE TRIB UNAL CITED ABOVE ARE IDENTICAL TO THE FACTS OF THE IMPUGNED APPEAL, THER EFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE MUMBAI BENCH OF THE T RIBUNAL IN THE CASE OF RAJ SHIPPING AGENCIES LTD. (SUPRA) AND IN ABSENCE O F ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE BY THE LD. DEPARTMEN TAL REPRESENTATIVE WE SET-ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE AS SESSING OFFICER TO DELETE THE ADDITION. THE GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 11-02-2014. SD/- SD/- (R.S.PADVEKAR ) ( R. K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER SATISH PUNE, DATED 11 TH FEBRUARY 2014 13 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, PUNE. 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, PUNE