INDUCTO STEEL LTD, MUMBAI V. ACIT CEN CIR 38, MUMBAI

ITA 2555/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0536 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-05-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 17-05-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 05-05-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: REEPAL G TRASHAWAL
• Keywords: Related party transaction; Business expenditure; Earning of tax free income; Proportionate interest; Retrospective amendment; Question of law; Revised return
• Section: 14A; 147; 37; 15

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, I MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER ITA NO.2555/MUM/2015 ASSESSMENT YEAR: 2006-07 INDUCTO STEEL LTD. 156, MAKER CHAMBER VI, 220, JAMNALAL BAJAJ MARG, NARIMAN POINT, MUMBAI-400021 / VS. ACIT, CC-38, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400020 ( #$% & /ASSESSEE) ( / REVENUE) PAN. NO . AAACI1045E ' & ( / DATE OF HEARING : 17/05/2017 ' & ( / DATE OF ORDER: 26/05/2017 #$% & ! / ASSESSEE BY SHRI REEPAL G. TRASHAWAL ! / REVENUE BY SHRI AIRIJU JAI KARAN-DR ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 2 / O R D E R PER JOGINDER SINGH(JUDICIAL MEMBER) THE ASSESSEE IS AGGRIEVED BY THE IMPUGNED ORDER DAT ED 30/12/2014 OF THE LD. FIRST APPELLATE AUTHORITY, MU MBAI, REWORKING THE DISALLOWANCE U/S 14A OF THE INCOME TA X ACT, 1961 (HEREINAFTER THE ACT), TOWARDS INTEREST EXPEND ITURE BASED UPON THE RATIO BETWEEN THE INVESTMENT, MADE D URING THE YEAR, AND THE TOTAL INVESTMENT AND AFFECTING AD DITION OF RS.2,71,715/-, WITHOUT APPRECIATING THE BOOKS OF AC COUNTS. 2. DURING HEARING, THE LD. COUNSEL FOR THE ASSESSE E, SHRI REEPAL G. TRASHAWAL, CONTENDED THAT THE ASSESS EE WAS HAVING OWN SUFFICIENT FUNDS, WHICH WERE UTILIZED FO R THE PURPOSES OF INVESTMENT, THEREFORE, NO DISALLOWANCE WAS REQUIRED TO BE MADE U/S 14A OF THE ACT. IT WAS ALSO CONTENDED THAT THE LD. COMMISSIONER OF INCOME TAX ( APPEAL) OVERLOOKED THE JUDICIAL PRONOUNCEMENTS MENTIONED BE FORE HIM. IT WAS ALSO PLEADED THAT REWORKING THE DISALLO WANCE TOWARDS ADMINISTRATIVE EXPENSES OF RS.50,000/- ON A D-HOC BASIS WAS MERELY ON PRESUMPTIVE BASIS. IT WAS CONTE NDED THAT THE LD. COMMISSIONER OF INCOME TAX (APPEAL) AS WELL AS THE LD. ASSESSING OFFICER HAS MENTIONED WITH RESPEC T TO LONG TERM CAPITAL GAIN, WHEREAS, NO SUCH LTCG WAS EARNED BY THE ASSESSEE. OUR ATTENTION WAS INVITED TO PARA 4.3.5 O F THE IMPUGNED ORDER. RELIANCE WAS PLACED UPON THE DECISI ON IN THE CASE OF M/S TRADE APARTMENT LTD. (ITA NO.1277/KOL/2011) ORDER DATED 30/03/2012, THE DECIS ION FROM HON'BLE BOMBAY HIGH COURT IN THE CASE OF HDFC (283 ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 3 ITR 529 (BOM.). IT WAS EXPLAINED THAT THE INVESTMEN T INCREASED DUE TO AMALGAMATION FOR WHICH OUR ATTENTI ON WAS INVITED AT PAGE-7 (SCHEDULE OF INVESTMENT). RELIANC E WAS PLACED UPON THE DECISION IN M/S HYBRID PROPERTIES L TD. VS ACIT (ITA NO.4740/MUM/2011) ORDER DATED 04/03/2015. IT WAS PLEADED THAT THE EXEMPT INCOME IS RS.58,517/-, WHEREAS, DISALLOWANCE WAS MADE OF RS.2,49,320/-, TH EREFORE, AT BEST, THE DISALLOWANCE CAN BE MADE AT RS.28,815/ -. ON THE OTHER HAND, THE LD. DR, SHRI AIRIJU JAI KARAN, DEFE NDED THE DISALLOWANCE MADE U/S 14A OF THE ACT BY CONTENDING THAT HUGE INVESTMENT WAS MADE BY THE ASSESSEE, THUS, THE DISALLOWANCE WAS RIGHTLY MADE. 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACTS , IN BRIEF, ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SHIP BREAKING, MANUFACTURING OF INDUSTRIAL GASES, FINANC E AND INVESTMENT IN SHARES, DECLARES INCOME OF RS.83,83,7 37/-. SUBSEQUENTLY, REVISED RETURN WAS FILED BY THE ASSES SEE TO GIVE EFFECT OF AMALGAMATION OF HARYANA INDUSTRIAL GASES PVT. LTD. AND M/S INDUCTO TECHNO CASTING PVT. LTD. WITH THE A SSESSEE COMPANY, REFLECTING TOTAL INCOME OF RS.2,88,23,630/ -. WHILE DOING SO THE LD. ASSESSING OFFICER MADE DISALLOWANC E OF RS.1,81,880/- U/S 14A OF THE ACT. AS PER THE ASSESS EE, EVIDENCE OF OWNING THE SUFFICIENT FUNDS WAS PRODUCE D BEFORE THE ASSESSING OFFICER, THUS, THERE WAS NO PRESUMPTI ON THAT INVESTMENT WERE MADE OUT OF BORROWED FUNDS. THE LD. COMMISSIONER OF INCOME TAX (APPEAL) UPHELD THE ADDI TION. ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 4 2.2. THE ASSESSEE PREFERRED APPEAL BEFORE THE TRIB UNAL, WHEREIN, VIDE ORDER DATED 09/09/2010, THE MATTER WA S SENT BACK TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE QUANTUM DISALLOWANCE U/S 14A OF THE ACT, IN THE LIG HT OF THE DECISION IN GODREJ & BOYCE MFG. LTD. VS DCIT 328 IT R 81 (BOM.). HOWEVER, THE LD. ASSESSING OFFICER CONSIDE RED VARIOUS JUDICIAL DECISIONS AND WAS NOT SATISFIED WI TH THE EXPLANATION OF THE ASSESSEE ON THE PREMISE THAT CER TAIN OTHER EXPENSES, LIKE INTEREST EXPENSES, SALARY EXPENSES, PRINTING AND STATIONARY EXPENSES, BANK CHARGES AND GENERAL E XPENSES, ETC WAS ALSO ATTRIBUTABLE FOR EARNING EXEMPT INCOME FOR INVESTMENT IN SHARES, THUS, OVER AND ABOVE THE DISA LLOWANCE OF RS.29,702/- DISALLOWANCE OF INDIRECT EXPENSES AM OUNTING TO RS.18,73,981/- AND RS.1 LAKH (TOTAL RS.19,73,981 /-) WERE MADE BY THE ASSESSING OFFICER. 2.3. ON APPEAL BEFORE THE LD. COMMISSIONER OF INCO ME TAX (APPEAL), RELIEF OF RS.16,52,266/- (RS.19,73,98 1- RS.3,21,715/-) WAS GRANTED. 2.4. DURING HEARING BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE EXPLAINED THAT THE INVESTMENT WAS MADE OUT OF OWN SURPLUS FUNDS. BEFORE WE GO INTO THE QUESTIONS AT H AND IT WOULD BE APPROPRIATE TO NOT ONLY EXAMINE THE PROVIS IONS OF SECTION 14A OF THE ACT BUT ALSO TO NOTICE ITS LEGIS LATIVE HISTORY. SECTION 14A WAS INSERTED INTO THE ACT BY THE FINANC E ACT, 2001 WITH RETROSPECTIVE EFFECT FROM 01/04/1962. FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS C HAPTER, ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 5 NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDI TURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT . BY VIRTUE OF THE FINANCE ACT, 2002, THE FOLLOWING PROVISO WAS INSERT ED IN SECTION 14A AND WAS DEEMED TO HAVE BEEN INSERTED WI TH EFFECT FROM 11/05/2001 :- PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SH ALL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UN DER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSME NT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREAS ING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FO R ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. AS A RESULT OF THE INSERTION OF THE SAID PROVISO, S ECTION 14A WAS AS FOLLOWS:- EXPENDITURE INCURRED IN RELATION TO INCOME NOT INC LUDIBLE IN TOTAL INCOME. 14A. FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHA LL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UN DER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSME NT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREAS ING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FO R ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. THEN, BY THE FINANCE ACT, 2006, SECTION 14A WAS NUM BERED AS SUB-SECTION (1) THEREOF AND AFTER SUB-SECTION (1 ) AS SO NUMBERED, THE FOLLOWING SUB-SECTIONS WERE INSERTED, WITH EFFECT FROM 01/04/2007:- (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 6 DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, I F THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN R ELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. 2.5. CONSEQUENT UPON THE FINANCE ACT, 2006, SECTIO N 14A AS IT NOW STANDS IS AS UNDER:- EXPENDITURE INCURRED IN RELATION TO INCOME NOT INC LUDIBLE IN TOTAL INCOME . 14A. (1) FOR THE PURPOSES OF COMPUTING THE TOTAL IN COME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED I N RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUN T OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, I F THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN R ELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 7 PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHA LL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UN DER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSME NT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREAS ING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FO R ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. 2.6. BY NOTIFICATION NO.45/2008 DATED 24/03/2008, THE CENTRAL BOARD OF DIRECT TAXES (CBDT), IN EXERCISE O F ITS POWERS UNDER SECTION 295 OF THE SAID ACT READ WITH SUB- SECTION (2) OF SECTION 14A OF THE SAID ACT, MADE TH E INCOME- TAX (FIFTH AMENDMENT) RULES, 2008 TO FURTHER AMEND THE SAID RULES (I.E., THE INCOME-TAX RULES, 1962) BY IN TRODUCING RULE 8D THEREIN. CLAUSE 1(2) OF THE INCOME-TAX (FIF TH AMENDMENT) RULES, 2008 CLEARLY STIPULATED THAT THE RULES WOULD COME INTO FORCE FROM THE DATE OF PUBLICATION IN THE OFFICIAL GAZETTE. THE SAID RULE 8D IS AS UNDER:- METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RE LATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. 8D.(1) WHERE THE ASSESSING OFFICER, HAVING REGARD T O THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED W ITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MAD E BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETE RMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORD ANCE WITH THE PROVISIONS OF SUB-RULE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLO WING AMOUNTS, NAMELY : ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 8 (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 EXP ENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTE D IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY: WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCUR RED DURING THE PREVIOUS YEAR ; B = THE AVERAGE OF 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 ; C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN TH E BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAS T DAY OF THE PREVIOUS YEAR ; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE A VERAGE 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. (3) FOR THE PURPOSES OF THIS RULE, THE TOTAL ASSET S SHALL MEAN, TOTAL ASSETS AS APPEARING IN THE BALANCE SHEE T EXCLUDING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATIO N OF ASSETS. THE LAW PRIOR TO INSERTION OF SECTION 14A 2.6. PRIOR TO THE INTRODUCTION OF SECTION 14A IN THE SAID ACT, THE POSITION OF LAW WAS AS LAID DOWN BY THE SU PREME COURT IN CIT V. MAHARASHTRA SUGAR MILLS LTD: 82 ITR 452 (SC) AND RAJASTHAN STATE WAREHOUSING CORPORATION V. CIT: 242 ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 9 ITR 450 (SC) WAS DIFFERENT. IN MAHARASHTRA SUGAR MI LLS LTD (SUPRA) THE ASSESSEES BUSINESS COMPRISED OF TWO PA RTS, NAMELY, (1) CULTIVATION OF SUGAR CANE AND (2) THE M ANUFACTURE OF SUGAR. THE REVENUE HAD CONTENDED THAT AS THE INC OME FROM THE CULTIVATION OF SUGAR CANE, BEING THE RESUL T OF AN AGRICULTURAL OPERATION, WAS NOT EXIGIBLE TO TAX, TH EREFORE, ANY EXPENDITURE INCURRED IN RESPECT OF THAT ACTIVITY WA S NOT DEDUCTIBLE. THE SUPREME COURT REPELLED THIS CONTENT ION IN THE FOLLOWING MANNER:- 'THIS CONTENTION PROCEEDS ON THE BASIS THAT ONLY E XPENDITURE INCURRED IN RESPECT OF A BUSINESS ACTIVITY GIVING R ISE TO INCOME, PROFIT OR GAINS TAXABLE UNDER THE ACT CAN BE GIVEN DEDUCTI ON TO AND NOT OTHERWISE. WE SEE NO BASIS FOR THIS CONTENTION. TO FIND OUT WHETHER THE DEDUCTION CLAIMED IS PERMISSIBLE UNDER THE ACT OR NOT, ALL THAT WE HAVE TO DO IS TO EXAMINE THE RELEVANT PROVISIONS OF THE ACT. EQUITABLE CONSIDERATIONS ARE WHOLLY OUT OF PLACE IN CONSTRUIN G THE PROVISIONS OF A TAXING STATUTE. WE HAVE TO TAKE THE PROVISIONS OF THE STATUTE AS THEY STAND. IF THE AMOUNT CLAIMED IS PERMISSIBLE UNDER T HE ACT THEN THE SAME HAS TO BE DEDUCTED FROM THE GROSS PROFIT. IF I T IS NOT PERMISSIBLE UNDER THE ACT, IT HAS TO BE REJECTED. AS MENTIONED EARLIER, IT IS NOT DISPUTED THAT THE CULTIVATION OF SUGAR-CANE AND THE MANUFACTURE OF SUGAR CONSTITUTED ONE SINGLE AND INDIVISIBLE BUSINE SS. SECTION 10(2) SAYS THAT PROFITS UNDER SECTION 10(1) IN RESPECT OF A BUSINESS SHOULD BE COMPUTED AFTER DEDUCTING THE ALLOWANCES MENTIONE D THEREIN. ONE OF THE ALLOWANCES ALLOWED IS THAT MENTIONED IN SECT ION 10(2)(XV) WHICH SAYS THAT ANY EXPENDITURE LAID OUT OR EXPENDE D WHOLLY AN EXCLUSIVELY FOR THE PURPOSE OF SUCH BUSINESS SHALL BE DEDUCTED AS AN ALLOWANCE. THE MANDATE OF SECTION 10(2) (XV) IS PLA IN AND UNAMBIGUOUS. UNDOUBTEDLY, THE ALLOWANCE CLAIMED IN THIS CASE WAS LAID OUT OR EXPENDED FOR THE PURPOSE OF THE BUSINES S CARRIED ON BY THE ASSESSEE. THE FACT THAT THE INCOME ARISING FROM A PART OF THAT BUSINESS IS NOT EXIGIBLE TO TAX UNDER THE ACT IS NO T A RELEVANT CIRCUMSTANCE.' 2.8. IN RAJASTHAN STATE WAREHOUSING CORPORATION (SUPRA), THE SUPREME COURT AFTER, INTER ALIA, CONSI DERING ITS EARLIER DECISIONS IN CIT V. INDIAN BANK LTD: 56 ITR 77 (SC) ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 10 AND MAHARASHTRA SUGAR MILLS LTD (SUPRA) LAID DOWN T HE FOLLOWING PRINCIPLES:- '(I) IF INCOME OF AN ASSESSEE IS DERIVED FROM VARIO US HEADS OF INCOME, HE IS ENTITLED TO CLAIM DEDUCTION ADMISS IBLE UNDER THE RESPECTIVE HEAD WHETHER OR NOT COMPUTATIO N UNDER EACH HEAD RESULTS IN TAXABLE INCOME; (II) IF INCOME OF AN ASSESSEE ARISES UNDER ANY OF T HE HEADS OF INCOME BUT FROM DIFFERENT ITEMS, E.G., DIFFERENT HOUSE PROPERTIES OR DIFFERENT SECURITIES, ETC., AND INCOM E FROM ONE OR MORE ITEMS ALONE IS TAXABLE WHEREAS INCOME F ROM THE OTHER ITEM IS EXEMPT UNDER THE ACT, THE ENTIRE PERMISSIBLE EXPENDITURE IN EARNING THE INCOME FROM THAT HEAD IS DEDUCTIBLE; AND (III) IN COMPUTING 'PROFITS AND GAINS OF BUSINESS O R PROFESSION' WHEN AN ASSESSEE IS CARRYING ON BUSINES S IN VARIOUS VENTURES AND SOME AMONG THEM YIELD TAXABLE INCOME AND THE OTHERS DO NOT, THE QUESTION OF ALLOW ABILITY OF THE EXPENDITURE UNDER SECTION 37 OF THE ACT WILL DEPEND ON: (A) FULFILLMENT OF REQUIREMENTS OF THAT PROVISION N OTED ABOVE; AND (B) ON THE FACTS WHETHER ALL THE VENTURES CARRIED O N BY HIM CONSTITUTED ONE INDIVISIBLE BUSINESS OR NOT; IF THE Y DO, THE ENTIRE EXPENDITURE WILL BE A PERMISSIBLE DEDUCTION BUT IF THEY DO NOT, THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDITURE WILL APPLY BECAUSE THERE WILL BE NO NEX US BETWEEN THE EXPENDITURE ATTRIBUTABLE TO THE VENTURE NOT FORMING AN INTEGRAL PART OF THE BUSINESS AND THE EXPENDITURE SOUGHT TO BE DEDUCTED AS THE BUSINESS EXPENDITURE OF THE ASSESSEE.' 2.9. THUS, PRIOR TO THE INTRODUCTION OF SECTION 1 4A IN THE SAID ACT, THE LAW WAS THAT WHEN AN ASSESSEE HAD A COMPOSITE AND INDIVISIBLE BUSINESS WHICH HAD ELEMEN TS OF BOTH TAXABLE AND NON-TAXABLE INCOME, THE ENTIRE EXP ENDITURE IN RESPECT OF THE SAID BUSINESS WAS DEDUCTIBLE AND, IN SUCH A ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 11 CASE, THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDI TURE RELATING TO THE NON-TAXABLE INCOME DID NOT APPLY. H OWEVER, WHERE THE BUSINESS WAS DIVISIBLE, THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDITURE WAS APPLICABLE AND THE EXPENDITURE APPORTIONED TO THE EXEMPT INCOME OR I NCOME NOT EXIGIBLE TO TAX, WAS NOT ALLOWABLE AS A DEDUCTION. 2.10. THE OBJECT BEHIND THE INSERTION OF SECTIO N 14A IN THE SAID ACT IS APPARENT FROM THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL 2001 WHICH IS TO THE FOLLOWING EFFECT:- 'CERTAIN INCOMES ARE NOT INCLUDABLE WHILE COMPUTING THE TOTAL INCOME AS THESE ARE EXEMPT UNDER VARIOUS PROVISIONS OF THE ACT. THERE HAVE BEEN CASES WHERE DEDUCTIONS HAVE BEEN CL AIMED IN RESPECT OF SUCH EXEMPT INCOME. THIS IN EFFECT MEANS THAT THE TAX INCENTIVE GIVEN BY WAY OF EXEMPTIONS TO CERTAIN CAT EGORIES OF INCOME IS BEING USED TO REDUCE ALSO THE TAX PAYABLE ON THE NONEXEMPT INCOME BY DEBITING THE EXPENSES INCURRED TO EARN THE EXEMP T INCOME AGAINST TAXABLE INCOME. THIS IS AGAINST THE BASIC PRINCIPLE S OF TAXATION WHEREBY ONLY THE NET INCOME, I.E., GROSS INCOME MIN US THE EXPENDITURE IS TAXED. ON THE SAME ANALOGY, THE EXEM PTION IS ALSO IN RESPECT OF THE NET INCOME. EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAX ABLE INCOME. IT IS PROPOSED TO INSERT A NEW SECTION 14A SO AS TO CLARIFY THE INTENTION OF THE LEGISLATURE SINCE THE INCEPTION OF THE INCOME - TAX ACT, 1961, THAT NO DEDUCTION SHALL BE MADE IN RESPE CT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE IN COME-TAX ACT. THE PROPOSED AMENDMENT WILL TAKE EFFECT RETROSPECTI VELY FROM APRIL 1, 1962 AND WILL ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YEAR 1962-63 AND SUBSEQUENT ASSESSMENT YEARS.' 2.11. AS OBSERVED BY THE SUPREME COURT IN THE CAS E OF CIT V. WALFORT SHARE AND STOCK BROKERS P LTD: 326 I TR 1 (SC), THE INSERTION OF SECTION 14 A WITH RETROSPECTIVE EF FECT REFLECTS THE SERIOUS ATTEMPT ON THE PART OF PARLIAMENT NOT T O ALLOW ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 12 DEDUCTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT AGAINST THE TAX ABLE INCOME. THE SUPREME COURT FURTHER OBSERVED AS UNDER :- '.. IN OTHER WORDS, SECTION 14 A CLARIFIES THAT EXP ENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THAT THEY ARE RELATAB LE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSE S INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCO ME AND PARTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SECTION 14A, THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WAS BEING CLAI MED AGAINST TAXABLE INCOME. THE MANDATE OF SECTION 14A IS CLEAR . IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES IN CURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL OF THE TAX INCENTIVE BY WAY OF AN EXEMPTION OF EXEM PT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURR ED IN RELATION TO EXEMPT INCOME ..EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNI NG TAXABLE INCOME. THIS IS THE PURPORT OF SECTION 14A. IN SECTION 14A, THE FIRST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UND ER THIS CHAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS OF INCOME A S PRESCRIBED IN THE CHAPTER IV WOULD FALL WITHIN SECTION 14A. THE N EXT PHRASE IS, 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTA L INCOME UNDER THE ACT'. IT MEANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 14A.. (EMPHASIS SUPPLIED) 2.12. THE SUPREME COURT ALSO CLEARLY HELD THAT IN THE CASE OF AN INCOME LIKE DIVIDEND INCOME WHICH DOES N OT FORM PART OF THE TOTAL INCOME, ANY EXPENDITURE/DEDUCTION RELATABLE TO SUCH (EXEMPT OR NON-TAXABLE) INCOME, EVEN IF IT IS OF THE NATURE SPECIFIED IN SECTIONS 15 TO 59 OF THE SAID A CT, CANNOT BE ALLOWED AGAINST ANY OTHER INCOME WHICH IS INCLU DABLE IN THE TOTAL INCOME. THE EXACT WORDS USED BY THE SUPRE ME COURT ARE AS UNDER:- ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 13 'FURTHER, SECTION 14 SPECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE CHARGEABLE, A N INCOME HAS TO BE BROUGHT UNDER ONE OF THE FIVE HEADS. SECT IONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR T HE PURPOSE OF CHARGEABILITY TO TAX UNDER THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL INCOME CHARGEABLE TO TA X. THE PERMISSIBLE DEDUCTIONS ENUMERATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOWED ONLY WITH REFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF THE ABOVE HEADS AND IS CHAR GEABLE TO TAX. IF AN INCOME LIKE DIVIDEND INCOME IS NOT A PART OF THE TOTAL INCOME, THE EXPENDITURE/DEDUCTION THOUGH OF T HE NATURE SPECIFIED IN SECTIONS 15 TO 59 BUT RELATED T O THE INCOME NOT FORMING PART OF THE TOTAL INCOME COULD N OT BE ALLOWED AGAINST OTHER INCOME INCLUDABLE IN THE TOTA L INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NONTAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDE R SECTION 14 A.' (EMPHASIS SUPPLIED) 2.13. SUB-SECTION (1) OF SECTION 14A CLEARLY STIP ULATES THAT FOR THE PURPOSES OF COMPUTING TOTAL INCOME UND ER CHAPTER IV (COMPUTATION OF TOTAL INCOME), NO DEDUCT ION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FOR M PART OF THE TOTAL INCOME UNDER THE SAID ACT. A LOT OF EMPHA SIS WAS LAID ON THE EXPRESSIONS INCURRED AND IN RELATION TO. IT WAS CONTENDED BY LD. COUNSEL, WHO APPEARED ON BEHALF OF THE ASSESSES, THAT THE WORD INCURRED MUST BE TAKEN LI TERALLY IN THE SENSE THAT THE EXPENDITURE MUST HAVE ACTUALLY T AKEN PLACE. MOREOVER, THE EXPENDITURE MUST ALSO HAVE TAK EN PLACE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T OTAL INCOME. THE LD. COUNSEL CONTENDED THAT THE EXPRESSI ON IN RELATION TO IMPLIES THAT THERE MUST BE A DIRECT AN D PROXIMATE ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 14 CONNECTION WITH THE SUBJECT MATTER. IN OTHER WORDS, ACCORDING TO THE LD. COUNSEL, ONLY THAT ACTUAL EXPENDITURE WH ICH IS MADE DIRECTLY AND FOR THE OBJECT OF EARNING EXEMPT INCOME COULD BE DISALLOWED UNDER SECTION 14A. HE SUBMITTED THAT IF THE DOMINANT AND MAIN OBJECTIVE OF SPENDING WAS NOT THE EARNING OF EXEMPT INCOME THEN, THE EXPENDITURE CO ULD NOT BE DISALLOWED UNDER SECTION 14A PROVIDED IT WAS OTHERW ISE ALLOWABLE UNDER SECTIONS 15 TO 59 OF THE SAID ACT. IT WAS EMPHASIZED THAT THE EXPENDITURE MUST BE ACTUAL AND CANNOT BE COMPUTED ON THE BASIS OF SOME FORMULA AS STIPULA TED UNDER RULE 8D READ WITH SUB-SECTIONS (2) & (3) OF S ECTION 14A. 2.14. LET US EXAMINE THE EXPRESSION IN RELATION TO. WE MAY REFER TO THE SUPREME COURT DECISION IN MADHAV R AO SCINDIA V. UNION OF INDIA: AIR 1971 SC 530 WHERE, I N PARAGRAPH 134, IT IS OBSERVED AS UNDER:- '.. THE EXPRESSION 'PROVISIONS OF THIS CONSTITUTION RELATING TO' IN ARTICLE 363 MEANS PROVISIONS HAVING A DOMINANT AND IMMEDIATE CONNECTION WITH: IT DOES NOT MEAN MERELY HAVING A R EFERENCE TO.' 2.15. IN DOYPACK SYSTEMS PVT LTD V. UNION OF INDI A: AIR 1988 SC 782, THE SUPREME COURT OBSERVED THAT THE EXPRESSIONS 'PERTAINING TO', 'IN RELATION TO' AND ' ARISING OUT OF', USED IN THE DEEMING PROVISION, ARE USED IN THE EXPANSIVE SENSE. THE SUPREME COURT FURTHER OBSERVED AS UNDER: - '49. THE EXPRESSION 'IN RELATION TO' (SO ALSO 'PERT AINING TO'), IS A VERY BROAD EXPRESSION WHICH PRESUPPOSES ANOTHER SUB JECT MATTER. THESE ARE WORDS OF COMPREHENSIVENESS WHICH MIGHT BO TH HAVE A DIRECT SIGNIFICANCE AS WELL AS AN INDIRECT SIGNIFIC ANCE DEPENDING ON THE CONTEXT' ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 15 ' IN THIS CONNECTION REFERENCE MAY BE MADE TO 76 CORPUS JURIS SECUNDUM AT PAGES 620 AND 621 WHERE IT IS STATED TH AT THE TERM 'RELATE' IS ALSO DEFINED AS MEANING TO BRING INTO A SSOCIATION OR CONNECTION WITH. IT HAS BEEN CLEARLY MENTIONED THAT ' RELATING TO' HAS BEEN HELD TO BE EQUIVALENT TO OR SYNONYMOUS WITH AS TO 'CONCERNING WITH' AND 'PERTAINING TO'. THE EXPRESSION 'PERTAINI NG TO' IS AN EXPRESSION OF EXPANSION AND NOT OF CONTRACTION.' (EMPHASIS SUPPLIED) 2.16. HONBLE PUNJAB & HARYANA HIGH COURT IN THE C ASE OF CIT-II V. HERO CYCLES LTD., DECIDED ON 4/11/2009 , OBSERVED THAT:- DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING EXPENDITURE WHERE IT IS FOUND THAT FOR EARNING EXEM PTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER S ECTION 14A CANNOT STAND. 2.17. WE ARE OF THE VIEW THAT UNLESS AND UNTIL TH ERE WAS ACTUAL EXPENDITURE FOR EARNING THE EXEMPTED INC OME, THERE COULD NOT BE ANY DISALLOWANCE UNDER SECTION 1 4A. WHILE WE AGREE THAT THE EXPRESSION EXPENDITURE INCURRED REFERS TO ACTUAL EXPENDITURE AND NOT TO SOME IMAGINED EXPENDI TURE WE WOULD LIKE TO MAKE IT CLEAR THAT THE ACTUAL EXPEN DITURE THAT IS IN CONTEMPLATION UNDER SECTION 14A(1) OF THE ACT IS THE ACTUAL EXPENDITURE IN RELATION TO OR IN CONNECTIO N WITH OR PERTAINING TO EXEMPT INCOME. THE COROLLARY TO THIS IS THAT IF NO EXPENDITURE IS INCURRED IN RELATION TO THE EXEMPT I NCOME, NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE A CT. 2.18. SO FAR AS, SCOPE OF SUB-SECTION (2) OF SECT ION 14A OF THE ACT, IS CONCERNED, IT PROVIDES THE MANNER IN WHICH THE ASSESSING OFFICER IS TO DETERMINE THE AMOUNT OF EXP ENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HOWEVER, IF WE EXAMINE THE PROVISION CAREFULLY, ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 16 WE WOULD FIND THAT THE ASSESSING OFFICER IS REQUIRE D TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ONLY IF TH E ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELA TION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, THE REQUIREMENT OF TH E ASSESSING OFFICER EMBARKING UPON A DETERMINATION OF THE AMOUN T OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME W OULD BE TRIGGERED ONLY IF THE ASSESSING OFFICER RETURNS A F INDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLA IM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THEREFORE, THE CONDITION PRECEDENT FOR THE ASSESSING OFFICER ENTER ING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCU RRED IN RELATION TO EXEMPT INCOME IS THAT THE ASSESSING OFF ICER MUST RECORD THAT HE IS NOT SATISFIED WITH THE CORRECTNES S OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E. SUB- SECTION (3) IS NOTHING BUT AN OFFSHOOT OF SUB-SECTI ON (2) OF SECTION 14A. SUB-SECTION (3) APPLIES TO CASES WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURR ED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, SUB-SECT ION (2) DEALS WITH CASES WHERE THE ASSESSEE SPECIFIES A POS ITIVE AMOUNT OF EXPENDITURE IN RELATION TO INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT AN D SUB- SECTION (3) APPLIES TO CASES WHERE THE ASSESSEE ASS ERTS THAT NO EXPENDITURE HAD BEEN INCURRED IN RELATION TO EXEMPT INCOME. ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 17 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 EXPEND ITURE IN ACCORDANCE WITH ANY PRESCRIBED METHOD, AS MENTIO NED IN SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT. IT IS ONLY IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECT NESS OF THE CLAIM OF THE ASSESSEE, IN BOTH CASES, THAT THE ASSE SSING OFFICER GETS JURISDICTION TO DETERMINE THE AMOUNT O F EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID AC T IN ACCORDANCE WITH THE PRESCRIBED METHOD. THE PRESCRIB ED METHOD BEING THE METHOD STIPULATED IN RULE 8D OF TH E SAID RULES. WHILE REJECTING THE CLAIM OF THE ASSESSEE WI TH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER WO ULD HAVE TO INDICATE COGENT REASONS FOR THE SAME. 2.19. AS WE HAVE ALREADY NOTICED, SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT REFERS TO THE METHOD OF DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE EXPRESSION USED IS SUCH METHOD AS MAY BE PRESCRIBED. BY VIRTUE OF NOTIFICA TION NO.45/2008 DATED 24/03/2008, THE CENTRAL BOARD OF D IRECT TAXES INTRODUCED RULE 8D IN THE SAID RULES. THE SAI D RULE 8D ALSO MAKES IT CLEAR THAT WHERE THE ASSESSING OFFICE R, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOU S YEAR, IS NOT SATISFIED WITH ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 18 (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MAD E BY THE ASSESSEE; OR (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 SAID ACT FOR SUCH PRE VIOUS YEAR, THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF THE EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANC E WITH THE PROVISIONS OF SUB-RULE (2) OF RULE 8D. WE MAY O BSERVE THAT RULE 8D(1) PLACES THE PROVISIONS OF SECTION 14 A(2) AND (3) IN THE CORRECT PERSPECTIVE. AS WE HAVE ALREADY SEEN , WHILE DISCUSSING THE PROVISIONS OF SUB-SECTIONS (2) AND ( 3) OF SECTION 14A, THE CONDITION PRECEDENT FOR THE ASSESS ING OFFICER TO HIMSELF DETERMINE THE AMOUNT OF EXPENDITURE IS T HAT HE MUST RECORD HIS DISSATISFACTION WITH THE CORRECTNES S OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE OR WITH T HE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED. IT IS ONLY WHEN THIS CONDITION PRECEDENT IS SATISFIED THAT THE ASSESSING OFFICER I S REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDABLE IN TOTAL INCOME IN THE MANNER INDICA TED IN SUB-RULE (2) OF RULE 8D OF THE SAID RULES. 2.20. IT IS THEREFORE, CLEAR THAT DETERMINATION O F 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 R EGARD. IF ONE EXAMINES SUB-RULE (2) OF RULE 8D, WE FIND THAT THE METHOD FOR ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 19 DETERMINING THE EXPENDITURE IN RELATION TO EXEMPT I NCOME HAS THREE COMPONENTS. (I) THE FIRST COMPONENT BEING THE AMOUNT OF EXPENDI TURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PAR T OF THE TOTAL INCOME. (II) THE SECOND COMPONENT BEING COMPUTED ON THE BAS IS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSES SEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTL Y ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. T HE FORMULA ESSENTIALLY APPORTIONS THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST [OTHER THAN THE AMOUNT OF INTEREST INCLUDE D 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 AVE RAGE OF THE TOTAL ASSETS OF THE ASSESSEE. (III) THE THIRD COMPONENT IS AN ARTIFICIAL FIGURE ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENT , INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE T OTAL INCOME, AS APPEARING IN THE BALANCE SHEETS OF THE A SSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS Y EAR. IT IS THE AGGREGATE OF THESE THREE COMPONENTS WHICH WOULD CON STITUTE THE EXPENDITURE IN RELATION TO EXEMPT INCOME AND IT IS THIS AMOUNT OF EXPENDITURE WHICH WOULD BE DISALLOWED UND ER SECTION 14A OF THE SAID ACT. IT IS, THEREFORE, CLEA R THAT IN TERMS OF THE SAID RULE, THE AMOUNT OF EXPENDITURE IN RELA TION TO EXEMPT INCOME HAS TWO ASPECTS (A) DIRECT AND (B) INDIRECT. ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 20 THE DIRECT EXPENDITURE IS STRAIGHTAWAY TAKEN INTO A CCOUNT BY VIRTUE OF CLAUSE (I) OF SUB-RULE (2) OF RULE 8D. TH E INDIRECT EXPENDITURE, WHERE IT IS BY WAY OF INTEREST, IS COM PUTED THROUGH THE PRINCIPLE OF APPORTIONMENT, AS INDICATE D ABOVE. AND, IN CASES WHERE THE INDIRECT EXPENDITURE IS NOT BY WAY OF INTEREST, A RULE OF THUMB FIGURE OF ONE HALF PERCEN T OF THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, IS TAKE N. 2.21. INSOFAR AS SUB-SECTIONS (2) AND (3) OF SECT ION 14A ARE CONCERNED, THEY HAVE ALSO BEEN INTRODUCED BY VI RTUE OF THE FINANCE ACT, 2006 WITH EFFECT FROM 01.04.2007. THIS IS APPARENT, FIRST OF ALL, FROM THE NOTES ON CLAUSES O F THE FINANCE BILL, 2006 [REPORTED IN 281 ITR (ST) AT PAG ES 139- 140]. THE SAID NOTES ON CLAUSES REFERS TO CLAUSE 7 OF THE BILL WHICH HAD SOUGHT TO AMEND SECTION 14A OF THE SAID A CT. IT IS SPECIFICALLY MENTIONED IN THE SAID NOTES ON CLAUSES THAT:- THIS AMENDMENT WILL TAKE EFFECT FROM 1ST APRIL, 20 07 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YE AR 2007-08 AND SUBSEQUENT YEARS. THIS IS APPARENT, FIRST OF ALL, FROM THE NOTES ON C LAUSES OF THE FINANCE BILL, 2006 [REPORTED IN 281 ITR (ST) AT PAGES 139-140]. THE SAID NOTES ON CLAUSES REFERS TO CLAUS E 7 OF THE BILL WHICH HAD SOUGHT TO AMEND SECTION 14A OF THE S AID ACT. IT IS SPECIFICALLY MENTIONED IN THE SAID NOTES ON C LAUSES THAT:- THIS AMENDMENT WILL TAKE EFFECT FROM 1ST APRIL, 20 07 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSM ENT YEAR 2007-08 AND SUBSEQUENT YEARS. ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 21 2.22. FURTHERMORE, IN THE MEMORANDUM EXPLAINING THE PROVISIONS IN THE FINANCE BILL, 2006 [281 ITR (ST) AT PAGES 281-281], IT IS ONCE AGAIN STATED WITH REFERENCE TO CLAUSE 7 WHICH PERTAINS TO THE AMENDMENT TO SECTION 14A OF T HE SAID ACT THAT:- THIS AMENDMENT WILL TAKE EFFECT FROM 1ST APRIL, 20 07 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSM ENT YEAR 2007-08 AND SUBSEQUENT YEARS. 2.23. WE MAY ALSO REFER TO THE CBDT CIRCULAR NO.14/2006 DATED 28.12.2006 AND TO PARAGRAPHS 11 TO 11.3 THEREOF. PARAGRAPH 11 DEALT WITH THE METHOD FOR ALL OCATING EXPENDITURE IN RELATION TO EXEMPT INCOME AND PARAGR APHS 11.1 AND 11.2 EXPLAINED THE BASIS AND LOGIC BEHIND THE INTRODUCTION OF SUB-SECTION (2) OF SECTION 14A OF T HE SAID ACT. PARAGRAPH 11.3 SPECIFICALLY PROVIDED FOR APPLICABIL ITY OF THE PROVISIONS OF SUBSECTION (2) AND IT CLEARLY INDICAT ED THAT IT WOULD BE APPLICABLE FROM THE ASSESSMENT YEAR 2007- 08 ONWARDS. IT IS, THEREFORE, CLEAR THAT SUB-SECTIONS (2) AND (3) OF SECTION 14A WERE INTRODUCED WITH PROSPECTIVE EFFECT FROM THE ASSESSMENT YEAR 2007-08 ONWARDS. HOWEVER, SUB-SECTI ON (2) OF SECTION 14A REMAINED AN EMPTY SHELL UNTIL THE IN TRODUCTION OF RULE 8D ON 24/03/2008 WHICH GAVE CONTENT TO THE EXPRESSION SUCH METHOD AS MAY BE PRESCRIBED APPEA RING IN SECTION 14A(2) OF THE SAID ACT. THUS, IT IS CLEAR THAT, IN EFFECT, THE PROVISIONS OF SUBSECTIONS (2) AND (3) OF SECTIO N 14A WOULD BE WORKABLE ONLY WITH EFFECT FROM THE DATE OF INTRO DUCTION OF ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 22 RULE 8D. THIS IS SO BECAUSE PRIOR TO THAT DATE, THE RE WAS NO PRESCRIBED METHOD AND SUB-SECTIONS (2) AND (3) OF S ECTION 14A REMAINED UNWORKABLE. 2.24. SO FAR AS, AS TO HOW SECTION 14A TO BE WORKE D FOR THE PERIOD PRIOR TO THE INTRODUCTION OF RULE 8D, IS CONCERNED. SUB-SECTION (2) OF SECTION 14A, AS WE HAVE SEEN, ST IPULATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH S UCH METHOD AS MAY BE PRESCRIBED. OF COURSE, THIS DETER MINATION CAN ONLY BE UNDERTAKEN IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THIS PART OF SECTION 1 4A(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 PRESC RIPTION WITH REGARD TO THE METHOD OF DETERMINING SUCH EXPENDITUR E WHICH IS NEW AND WHICH WILL OPERATE PROSPECTIVELY. IN OTH ER WORDS, SECTION 14A, EVEN PRIOR TO THE INTRODUCTION OF SUB- SECTIONS (2) & (3) WOULD REQUIRE THE ASSESSING OFFICER TO FIRST REJECT THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXTENT OF SUCH EXPENDITURE AND SUCH REJECTION MUST BE FOR DISCLOSE D COGENT REASONS. IT IS THEN THAT THE QUESTION OF DETERMINAT ION OF SUCH EXPENDITURE BY THE ASSESSING OFFICER WOULD ARISE. T HE REQUIREMENT OF ADOPTING A SPECIFIC METHOD OF DETERM INING SUCH EXPENDITURE HAS BEEN INTRODUCED BY VIRTUE OF S UB- SECTION (2) OF SECTION 14A. PRIOR TO THAT, THE ASSE SSING WAS FREE ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 23 TO ADOPT ANY REASONABLE AND ACCEPTABLE METHOD. SO, EVEN FOR THE PRE-RULE8D PERIOD, WHENEVER THE ISSUE OF SECTIO N 14A ARISES BEFORE AN ASSESSING OFFICER, HE HAS, FIRST O F ALL, TO ASCERTAIN THE CORRECTNESS OF THE CLAIM OF THE ASSES SEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDI TURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, THE ASSESSING OFFICER WILL HAVE TO VERIFY THE CORRECTNESS OF SUCH CLAIM. IN CASE, THE ASSESSING O FFICER IS SATISFIED WITH THE CLAIM OF THE ASSESSEE WITH REGAR D TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, THE ASSESSING OFFICER IS TO ACCEPT THE CLAIM OF THE ASS ESSEE INSOFAR AS THE QUANTUM OF DISALLOWANCE UNDER SECTION 14A IS CONCERNED. IN SUCH EVENTUALITY, THE ASSESSING OFFIC ER CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPEND ITURE FOR THE PURPOSES OF SECTION14A(1). IN CASE, THE ASS ESSING OFFICER IS NOT, ON THE BASIS OF OBJECTIVE CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY, SATISFIED WI TH 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, THE ASSESSING OFFICER WILL HAVE TO DETERMI NE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SA ID ACT. HE IS REQUIRED TO DO SO ON THE BASIS OF A REASONABLE A ND ACCEPTABLE METHOD OF APPORTIONMENT. ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 24 2.25. IF THE OBSERVATION MADE IN THE ASSESSMENT OR DER, LEADING TO ADDITION MADE TO THE TOTAL INCOME, CONCL USION DRAWN IN THE IMPUGNED ORDER, MATERIAL AVAILABLE ON RECORD, ASSERTIONS MADE BY THE LD. RESPECTIVE COUNSEL, IF K EPT IN JUXTAPOSITION AND ANALYZED, FIRST OF ALL IT IS TO B E MENTIONED THAT THE ASSESSMENT YEAR INVOLVED BEFORE US IS 2006 -07, THEREFORE, IN VIEW OF THE DECISION FROM HON'BLE JUR ISDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. LTD. (SUPRA), RUL E-8D OF THE RULES IS NOT APPLICABLE TO THE CASE OF THE ASSE SSEE. THE ISSUE HAS BEEN EXAMINED BY HON'BLE HIGH COURT/COURT S AND ALSO BY HON'BLE APEX COURT. THE HON'BLE BOMBAY HIGH COURT IN RELIANCE UTILITIES & POWER LTD. 313 ITR 340(BOM. ), HERO CYCLES LTD. 323 ITR 518 (P & H) HAS THROWN LIGHT ON THE ISSUE. THE LD. COMMISSIONER OF INCOME TAX (APPEAL) HAS OBSERVED THAT THE ASSESSEE HAS SHOWED CAPITAL AND R ESERVED OF RS.4.95 CRORES AND IT APPEARS THAT THE FUNDS DEP LOYED FOR ACQUISITION OF FIXED ASSETS (RS. 29 LAKH), GRANTING LOAN AND ADVANCED TO SISTER CONCERN (RS.4.22 CRORES) AND THE ASSESSEE FULLY PAID ITS SECURED AND UNSECURED LOANS DURING T HE PERIOD AND INCURRED INTEREST EXPENSES OF RS.24,41,879/-. I T HAS BEEN FURTHER OBSERVED THAT THE ASSESSEE HAS NOT SHO WN ANY INTEREST INCOME. THE LD. COMMISSIONER OF INCOME TAX (APPEAL) HAS FURTHER OBSERVED THAT THE TRANSACTION WITH RELATED PARTIES, CONTAINED IN SCHEDULE-15 OF THE AU DITED ACCOUNTS, THE ASSESSEE PAID INTEREST TO HSDPL ON LO AN TRANSACTION OF RS.13.75 CRORES DURING THE RELEVANT PERIOD AND MADE FRESH INVESTMENT OF RS.1.53 CRORES. THE CRUX O F ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 25 ARGUEMTN OF LD. DR AND OBSERVATION OF THE LD. COMMI SSIONER OF INCOME TAX (APPEAL) CLAIMS THAT THERE IS DIVERSI ON OF BORROWED FUNDS, BY THE ASSESSEE, FOR NON-BUSINESS P URPOSES, INCLUDING INVESTMENT IN SHARES CANNOT BE RULED OUT, THEREFORE PROPORTIONATE INTEREST OUT OF TOTAL INTEREST EXPEND ITURE OF RS.24,41,879/-, ATTRIBUTABLE TO SUCH INVESTMENT WER E DISALLOWED, WHICH WORKS OUT OF RS.2,71,715/-. THUS, THE DISALLOWANCE OF INTEREST EXPENDITURE U/S 14A WAS RE STRICTED TO RS.2,71,715/- AS AGAINST RS.18,73,981/-, DETERMI NED BY THE ASSESSING OFFICER. WE HAVE PERUSED THE REVISED BALANCE SHEET AS ON 31/03/2006, WHEREIN, IN THE CURRENT YEA R, THE SHARE CAPITAL OF THE ASSESSEE IS RS.4,25,93,760/-, WHICH WAS RS.4,25,93,760/- IN THE PREVIOUS YEAR. THE RESERVE AND SURPLUS IN THE CURRENT YEAR IS RS.11,82,16,463/- AS AGAINST RS.48,49,220/- IN THE PREVIOUS YEAR. IN THE CURRENT YEAR, THE ASSESSEE MADE INVESTMENT OF RS.2,10,49,006/-, MEANI NG THEREBY THE ASSESSEE WAS HAVING MORE RESERVE AND SU RPLUS. THE ASSESSEE MADE SUO-MOTO DISALLOWANCE OF RS.29,70 2/- AS AGAINST THE FURTHER DISALLOWANCE OF RS.19,73,981/- WAS MADE BY THE ASSESSING OFFICER. AS MENTIONED EARLIER AND ARGUED BY THE LD. COUNSEL FOR THE ASSESSEE, THE ASSESSEE WAS HAVING OWN FUNDS, WHICH WAS IN FAR EXCESS OF BORROWED FUNDS, T HEREFORE, NO DISALLOWANCE CAN BE MADE MECHANICALLY. THE HON'B LE BOMBAY HIGH COURT IN RELIANCE UTILITIES AND POWER L TD. (SUPRA) HELD AS UNDER:- THE VERY BASIS ON WHICH THE REVENUE HAD SOUGHT TO CONTEND OR ARGUE THEIR CASE THAT THE SHAREHOLDERS FUNDS TO THE TUNE OF OVER RS. 172 CRORES WAS UTILISED FOR THE PURPOSE OF FIXED ASSETS IN TERMS OF THE ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 26 BALANCE SHEET AS ON 31ST MARCH, 1999, IS FALLACIOUS . FIRSTLY, THE BALANCE SHEET AS OF 31ST MARCH, 1999 IS NOR RELEVANT. WHAT WOULD BE RELEVANT WOULD BE BALANCE SHEET AS ON 31ST MARCH, 2000. APAR T FROM THAT, THE COUNSEL HAS BEEN UNABLE TO POINT OUT FROM THE BALAN CE SHEET THAT THE BALANCE SHEET AS ON 31ST MARCH, 1999 SHOWED THAT TH E SHAREHOLDERS FUNDS WERE UTILISED FOR THE PURPOSE OF FIXED ASSETS . THE P&L A/C AND THE BALANCE SHEET WOULD NOT SHOW WHETHER SHAREHOLDERS F UNDS HAVE BEEN UTILISED FOR INVESTMENTS. THE ARGUMENT HAS TO BE RE JECTED ON THIS COUNT ALSO. APART FROM THAT BOTH IN THE ORDER OF THE CIT( A) AS ALSO THE TRIBUNAL, A CLEAR FINDING IS RECORDED THAT THE ASSE SSEE HAD INTEREST-FREE FUNDS OF ITS OWN WHICH HAD BEEN GENERATED IN THE CO URSE OF THE YEAR COMMENCING FROM 1ST APRIL, 1999. APART FROM THAT IN TERMS OF THE BALANCE SHEET THERE WAS A FURTHER AVAILABILITY OF R S. 398.19 CRORES INCLUDING RS. 180 CRORES OF SHARE CAPITAL. IN THIS CONTEXT, THE FINDING OF FACT RECORDED BY CIT(A) AND TRIBUNAL AS TO AVAILABI LITY OF INTEREST-FREE FUNDS REALLY CANNOT BE FAULTED. IF THERE BE INTERES T-FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS A ND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED T HAT THE INVESTMENTS WERE FROM THE INTEREST-FREE FUNDS AVAIL ABLE. IN THIS CASE THIS PRESUMPTION IS ESTABLISHED CONSIDERING THE FIN DING OF FACT BOTH BY THE CIT(A) AND TRIBUNALWOOLCOMBERS OF INDIA LTD. V S. CIT (1981) 23 CTR (CAL) 204 : (1982) 134 ITR 219 (CAL) AND EAST I NDIA PHARMACEUTICAL WORKS LTD. VS. CIT (1997) 139 CTR (SC) 372 : (1997) 224 ITR 627 (SC) RELIED ON. 2.26. LIKEWISE, HON'BLE JURISDICTIONAL HIGH COURT IN HDFC BANK LTD. (SUPRA) ALSO HELD AS UNDER:- SECTION 14A OF THE ACT WOULD BE INAPPLICABLE. HOWE VER THIS WAS ALSO DISREGARDED BY THE IMPUGNED ORDER ON THE GROUND THA T THIS COURT DID NOT ENTERTAIN AN APPEAL OF THE REVENUE FROM THE ORD ER OF THE TRIBUNAL HOLDING THAT SECTION 14A OF THE ACT IS INAPPLICABLE WHERE THE INVESTMENT HAS BEEN MADE IN STOCK IN TRADE. THIS NO N ENTERTAINMENT OF AN APPEAL BEING ON THE GROUND THAT THIS COURT FOUND NO SUBSTANTIAL QUESTION OF LAW. (PARA18) THAT IF APPEAL IS NOT ADMITTED FROM AN ORDER OF THE TRIBUNAL, THEN IT IS OPEN TO THE TRIBUNAL IN ANOTHER CASE TO DECIDE DIRE CTLY CONTRARY TO THE VIEW TAKEN BY THE EARLIER ORDER OF THE TRIBUNAL, WH ICH IS NOT ENTERTAINED BY THIS COURT IN APPEAL. THIS WITHOUT EVEN AS MUCH AS A WHISPER OF ANY EXPLANATION WITH REGARD TO HOW AND WHY THE FACTS OF THE TWO CASES ARE DIFFERENT WARRANTING A VIEW DIFFERENT FROM THAT TAK EN BY THE TRIBUNAL EARLIER. IN FACT WHEN AN APPEAL IS NOT ENTERTAINED THEN THE ORDER OF THE TRIBUNAL HOLDS THE FIELD AND THE COORDINATE BENCHES OF THE TRIBUNAL ARE OBLIGED TO FOLLOW THE SAME UNLESS THERE IS SOME DIF FERENCE IN THE FACTS OR LAW APPLICABLE AND THE DIFFERENCE IN FACT AND / OR LAW SHOULD BE REFLECTED IN ITS ORDER TAKING A DIFFERENT VIEW. TRI BUNAL HAS ACTED BEYOND THE LIMITS OF ITS AUTHORITY. (PARA19) ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 27 IMPUGNED ORDER OF THE TRIBUNAL HAS AN OBSERVATION T HEREIN THAT THERE IS NO SUCH THING AS ESTOPPEL IN LAW AND BY VIRTUE O F THAT GIVES ITSELF A LICENCE TO DECIDE THE ISSUE BEFORE IT IGNORING THE BINDING PRECEDENT IN THE PETITIONERS OWN CASE IN HDFC BANK LTD(SUPRA). ONCE THERE IS A BINDING DECISION OF HIGH COURT, THE SAME CONTINUES TO BE BINDING ON ALL AUTHORITIES WITHIN THE STATE TILL SUCH TIME AS IT S TAYED AND / OR SET ASIDE BY THE APEX COURT OR THIS VERY COURT TAKES A DIFFER ENT VIEW ON AN IDENTICAL FACTUAL MATRIX OR LARGER BENCH OF THIS CO URT TAKES A VIEW DIFFERENT FROM THE ONE ALREADY TAKEN. (PARA22) FOR THE PURPOSES OF CERTAINTY, FAIRNESS AND UNIFORM ITY OF LAW, ALL AUTHORITIES WITHIN THE STATE ARE BOUND TO FOLLOW TH E ORDERS PASSED BY US IN ALL LIKE MATTERS, WHICH BY ITSELF IMPLIES THA T IF THERE ARE SOME DISTINGUISHING FEATURES IN THE MATTER BEFORE THE TR IBUNAL AND, THEREFORE, UNLIKE, THEN THE TRIBUNAL IS FREE TO DEC IDE ON THE BASIS OF THE FACTS PUT BEFORE IT. HOWEVER TILL SUCH TIME AS THE DECISION OF THIS COURT STANDS IT IS NOT OPEN TO THE TRIBUNAL OR ANY OTHER AUTHORITY IN THE STATE OF MAHARASHTRA TO DISREGARD IT WHILE CONSIDERING A LIKE ISSUE. IN CASE HIGH COURT ARE WRONG, THE AGGRIEVED PARTY CAN CERTA INLY TAKE IT UP TO THE SUPREME COURT AND HAVE IT SET ASIDE AND / OR CO RRECTED OR WHERE THE SAME ISSUE ARISES IN A SUBSEQUENT CASE THE ISSU E MAY BE RE URGED BEFORE HIGH COURT TO IMPRESS UPON IT THAT THE DECIS ION RENDERED EARLIER, REQUIRES RECONSIDERATION. IT IS NOT OPEN T O THE TRIBUNAL TO SIT IN APPEAL FROM THE ORDERS OF HIGH COURT AND NOT FOLLOW IT. IN CASE THE DOCTRINE OF PRECEDENT IS NOT STRICTLY FOLLOWED THER E WOULD COMPLETE CONFUSION AND UNCERTAINTY. THE VICTIM OF SUCH ARBIT RARY ACTION WOULD BE THE RULE OF LAW OF WHICH WE AS THE INDIAN STATE ARE SO JUSTIFIABLY PROUD. (PARA23) IT IS IN THE ABOVE CIRCUMSTANCES THAT HIGH COURT AR E OF THE VIEW THAT HIGH COURT HAVE TO EXERCISE OUR POWERS UNDER ARTICL E 227 OF THE CONSTITUTION OF INDIA. THIS IS IN VIEW OF THE MANNE R IN WHICH THE IMPUGNED ORDER OF THE TRIBUNAL HAS CHOSEN TO DISREG ARD AND/OR CIRCUMVENT THE BINDING DECISION OF THIS COURT IN RE SPECT OF THE SAME ASSESSEE FOR AN EARLIER ASSESSMENT YEAR. THIS IS A CLEAR CASE OF JUDICIAL INDISCIPLINE AND CREATING CONFUSION IN RESPECT OF I SSUES WHICH STAND SETTLED BY THE DECISION OF HIGH COURT. (PARA24) IT IS IN THE ABOVE VIEW, THAT HIGH COURT SET ASIDE THE IMPUGNED ORDER OF THE TRIBUNAL DATED 23RD SEPTEMBER, 2015 IN ITS ENTI RETY AND RESTORE THE ISSUE TO THE TRIBUNAL TO DECIDE IT AFRESH ON IT S OWN MERITS AND IN ACCORDANCE WITH LAW. HOWEVER THE TRIBUNAL WOULD SCR UPULOUSLY FOLLOW THE DECISIONS RENDERED BY THIS COURT WHEREIN A VIEW A HAS BEEN TAKEN ON IDENTICAL ISSUES ARISING BEFORE IT. IT IS NOT OP EN TO THE TRIBUNAL TO DISREGARD THE BINDING DECISIONS OF HIGH COURT, THE GROUNDS INDICATED IN THE IMPUGNED ORDER WHICH ARE NOT AT ALL SUSTAINABLE . (PARA25) ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 28 2.27. IN THE LIGHT OF THE ABOVE DECISIONS FROM HON 'BLE JURISDICTIONAL HIGH COURT, IT CAN BE CONCLUDED THAT SINCE THE INVESTMENT WAS MADE OUT OF SURPLUS FUNDS, NO FURTHE R DISALLOWANCE IS REQUIRED TO BE MADE U/S 14A OF THE ACT AS SECTION 14A PROVIDES FOR DISALLOWANCE OF EXPENDITUR E INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM THE PAR T OF THE TOTAL INCOME, MEANING THEREBY, THERE SHOULD BE DIRE CT NEXUS BETWEEN THE ACTUAL EXPENDITURE INCURRED FOR THE PUR POSE OF EARNING TAX FREE INCOME. NO DOUBT, THE WORD IN REL ATION TO APPEARS TO BE BROAD AT FIRM IMPRESSION BUT ON DEEPE R EXAMINATION AND READ IN CONJUNCTION WITH THE WORD INCURRED IT SEEMS THAT THESE ARE RESTRICTIVE WORD S, RESTRICTING THE POWER OF ASSESSING OFFICER TO ESTIM ATE A PART OF EXPENDITURE, INCURRED BY THE ASSESSEE, TO PRODUCE N ON- TAXABLE INCOME. TO ELABORATE FURTHER, THE WORD INC URRED REFERS TO FACTUAL SPENDING OF EXPENDITURE IN RELATI ON TO EXEMPT INCOME AND DOES NOT REFER TO DEEMED SPENDING OR ASS UMED SPENDING FOR THE PURPOSE. WHILE APPLYING THE SECTIO N, THERE IS NO AUTHORITY CONFERRED BY THE SECTION UPON ASSESSIN G OFFICER TO DEEM OR ASSUME CERTAIN EXPENDITURE TO HAVE BEEN INCURRED IN RELATION TO TAX FREE INCOME. THE PROXIMITY CAUSE OF DISALLOWANCE U/S 14A IS ITS RELATIONSHIP WITH THE T AX EXEMPT INCOME. WHEREVER THE EXPENSES INCURRED HAS NO RELA TIONSHIP WITH THE INCOME NOT INCLUDIBLE IN THE TOTAL INCOME, THERE CANNOT BE ANY OCCASION TO INVOKE THE PROVISION FOR MAKING THE DISALLOWANCE U/S 14A OF THE ACT. IN THE LIGHT OF THE FOREGOING DISCUSSION, IT CAN BE CONCLUDED THAT AT B EST FURTHER ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 29 DISALLOWANCE OF RS.28,815/-, AS AGREED BY THE LD. C OUNSEL FOR THE ASSESSEE, CAN BE MADE. THUS, THIS GROUND OF TH E ASSESSEE IS PARTLY ALLOWED. 3. SO FAR AS, REWORKING OF DISALLOWANCE TOWARDS ADMINISTRATIVE EXPENSES OF RS.50,000/-, AD-HOC BASI S IS CONCERNED, DURING HEARING THE LD. COUNSEL FOR THE A SSESSEE, CLAIMED THAT NO LONG TERM CAPITAL GAIN WAS EARNED B Y THE ASSESSEE. THE LD. ASSESSING OFFICER MADE DISALLOWA NCE OF RS.1 LAKH ON ACCOUNT OF SALARY, PRINTING AND STATIO NARY, BANK CHARGES AND GENERAL EXPENSES, WHICH WERE REDUCED TO RS.50,000/- BY THE LD. COMMISSIONER OF INCOME TAX ( APPEAL). CONSIDERING THE TOTALITY OF FACTS AND THE CIRCUMSTA NCES NARRATED BEFORE US, THE DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE EXPENSES IS REDUCED TO RS.25,000/- A S AGAINST RS.50,000/-, SUSTAINED BY THE LD. COMMISSIONER OF I NCOME TAX (APPEAL), THUS, THIS GROUND OF THE ASSESSEE IS PARTLY ALLOWED. FINALLY, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOW ED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT ON 26/05/2017. SD/- SD/- ( MANOJ KUMAR AGGARWAL ) (JOGINDER SINGH) '!# / ACCOUNTANT MEMBER $!# /JUDICIAL MEMBER MUMBAI; * DATED : 26 /05/2017 F{X~{T? P.S/. .. ITA NO.2555/MUM/2015 INDUCTO STEEL LTD. 30 %$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. ,-. / THE APPELLANT (RESPECTIVE ASSESSEE) 2. /0-. / THE RESPONDENT. 3. 1& ( , ) / THE CIT, MUMBAI. 4. 1& / CIT(A)- , MUMBAI, 5. 34/&# , ,(# 5 , / DR, ITAT, MUMBAI 6. 6$7 / GUARD FILE. ! / BY ORDER, 03,&/& //TRUE COPY// /! (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI