Deputy Commissioner of Income tax, V. M/s. Alfa Laval India Ltd., Pune

ITA 2638/PUN/2016

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 7752 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 1 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 18-11-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NANDITA KANCHAN
• Keywords: Depreciation; Transfer pricing; International transaction; Earning of tax free income; Capital receipt; Revenue expenditure
• Section: 14A; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUN E BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI PARTHA SARATHI CHAUDHURY, JM / ITA NO. 2638/PUN/2016 / ASSESSMENT YEAR : 2011-12 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-8, PUNE. ....... / APPELLANT / V/S. M/S. ALFA LAVAL INDIA LTD. MUMBAI PUNE ROAD, PUNE-411 012 PAN : AAACA5899A / RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK REVENUE BY : SMT. NANDITA KANCHAN / DATE OF HEARING : 07.01.2019 / DATE OF PRONOUNCEMENT : 09.01.2019 / ORDER PER PARTHA SARATHI CHAUDHURY, JM : THIS APPEAL PREFERRED BY THE REVENUE EMANATES FROM THE ORDER OF LD. CIT(APPEALS)-13, PUNE DATED 04.07.2016 FOR THE ASSESSMENT YEAR 2011-12 AS PER FOLLOWING GROUNDS OF APPEAL ON RECORD. 1.WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CAS E THE LD. CIT(A) ERRED IN HOLDING THAT THE DOMESTIC MARKET SEGMENT A ND THE EXPORT MARKET 2 ITA NO. 2638/PUN/2016 A.Y.2011-12 SEGMENT WERE DISTINCT AND NOT COMPARABLE AND THEREB Y, THE APPLICATION OF THE COST PLUS METHOD ADOPTED BY THE TPO WAS INCORRE CT? 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) WAS JUSTIFIED IN HOLDING THAT DISCOUNT OF RS.72,74,168/- RECEIVED ON PRE-PAYMENT OF LIABILITY UNDER THE 'SAL ES TAX DEFERRAL SCHEME', AS NOT A REMISSION OR CESSATION OF LIABILITY U/S 41 (1)? 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF IT SERVICE CHARGES OF RS.6,22,64,471/- BY HOLDING THAT THE ABOVE EXPENDITURE WAS IN THE NATUR E OF REVENUE EXPENDITURE? 4. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION ON ACCOUNT OF IT SERVICE CHARGES OF RS. 6,22,64,471/-, IGNORING THAT ON SIMILAR ISSUE FOR A .Y.2008-09 THE HON'BLE ITAT HAS RESTORED THE MATTER TO THE FILE OF AO FOR FRESH VERIFICATION? 5. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.21,32,932/- U/S. 14(A) IGNORING THAT AO HAS CLEARLY RECORDED IN HIS ORDER THAT HE IS NOT SA TISFIED WITH THE QUANTUM OF EXPENSES ALLOCATED BY THE ASSESSEE AGAINST EXEMP T INCOME? 6. THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR ALTE R ANY OF THE ABOVE GROUNDS OF APPEAL. 2. THE BRIEF FACTS IN THIS CASE ARE THAT THE ASSESSEE COM PANY IS A SUBSIDIARY OF ALFA LAVAL AB, SWEDEN AND IS ENGAGED IN MANUF ACTURING AND SALE OF PLATE AND SPIRAL HEAD EXCHANGES, DECANTERS AND SEPAR ATORS AND ALSO EXECUTES COMPLETE PROJECTS AND SYSTEMS FOR ITS CUSTOME RS. THE ASSESSEE COMPANY HAS THREE DIVISIONS VIZ. EQUIPMENT DIVISION, THE PROJECTS DIV ISION AND THE PARTS AND SERVICES DIVISION. THE EQUIPMENT DIVISION OF T HE COMPANY IS ENGAGED IN MANUFACTURE AND SALE OF PLATE AND SPIRAL EXCHAN GERS, DECANTERS AND SEPARATORS ETC. WHEREAS THE PROJECTS DIVISION IS EN GAGED IN INSTALLATION AND COMMISSIONING OF PROJECTS, PLANTS AND SYSTEMS. THE PAR TS AND SERVICES DIVISION IS ENGAGED IN TRADING OF SPARES AND COMPONENTS A ND SERVICING RELATED ACTIVITIES. 3. THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE A SSESSEE DURING THE ASSESSMENT YEAR 2011-12 ARE AS FOLLOWS: 3 ITA NO. 2638/PUN/2016 A.Y.2011-12 SR. NO. NATURE OF TRANSACTIONS AMOUNTS METHOD ADOPTED 1 PURCHASE OF RAW MATERIALS, PARTS ETC. 145,89,05,869/- TNMM 2 PURCHASE OF FINISHED GOODS 1,75,18,138/- TNMM 3 SALE OF EQUIPMENT 245,58,20,589/- TNMM 4 PURCHASE OF CAPITAL EQUIPMENT TOOLS 1,26,51,609/- TNMM 5 PAYMENT OF ROYALTY 6,24,71,000/- CUP 6 PURCHASE FEES 1,25,58,520/- TNMM 7 PAYMENT OF CONSULTING AND INSPECTION 51,52,438/- TNMM 8 PAYMENT OF PROJECT RELATED SERVICES 49,52,438/- TNMM 9 IT INFRASTRUCTURE COST/ SOFTWARE MAINTENANCE FEES 2,31,96,716/- TNMM 10 PAYMENT OF ERP UP GRADATION/ENCASHMENT SERVICES 1,05,40,994/- TNMM 11 PAYMENT OF IT LICENCE AND SOFTWARE MAINTENANCE CHARGES 34,18,582/- TNMM 12 PAYMENT OF REPAIRS AND MAINTENANCE CHARGES 9,14,595/- TNMM 13 RECEIPT OF COMMISSION 33,62,088/- TNMM 14 RECEIPT OF AFTER SALES SERVICE CHARGES 25,25,845/- TNMM 15 REIMBURSEMENT OF EXPENSES 5,53,13,945/- TNMM 16 RECOVERY OF EXPENSES 1,97,58,267/- TNMM 414,90,51,277/- 4. THE ASSESSEE AGGREGATED ALL ITS INTERNATIONAL TRAN SACTION OF THE EQUIPMENT DIVISION IN ITS TRANSFER PRICING STUDY REPORT. ACCO RDING TO THE ASSESSEE, ITS INTERNATIONAL TRANSACTIONS ARE REQUIRED TO B E AGGREGATED BECAUSE THE SAME ARE CLOSELY INTERLINKED, THEREFORE, IT USED THE T RANSACTIONAL NET MARGIN METHOD (TNMM) TO BENCHMARK ITS INTERNATIONAL TRANS ACTIONS. THE ASSESSEE STATED THAT THE NET OPERATING MARGIN OVER SA LES OF ITS EQUIPMENT DIVISION WAS OF 13.77% WHICH WAS HIGHER THAN THE AVERAGE NET OPERATING MARGIN OF THE COMPARABLE COMPANIES. THEREFORE, ITS INTERNATIO NAL TRANSACTIONS 4 ITA NO. 2638/PUN/2016 A.Y.2011-12 OF THE EQUIPMENT DIVISION WERE AT THE ARMS LENGTH PRICE (ALP). THE TRANSFER PRICING OFFICER (TPO) IN THE ORDER PASSED U/S.92CA(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) REJECTED TH E TNMM USED BY THE ASSESSEE. THE TPO APPLIED THE COST PLUS METHOD (CPM) WITH THE PROFIT LEVEL INDICATOR (PLI) WITH RESPECT TO ITS DOMESTIC SEGMENT OF TH E TRADED SPARES @ 136.15% WHEREIN THE PLI IN THE CASE OF THE EXPORT OF THE TRADED SPAR ES TO AE IS @46.02%. WITH THE RESULT, THE TPO MADE THE ADJUSTMENT OF RS.1,56,00,000/- TO THE ASSESSEES INTERNATIONAL TRANSACTION OF EXPORT OF SPARES. 5. WITH RESPECT TO THE EXPORT OF MANUFACTURED EQUIPMEN T, THE TPO WORKED OUT THE GROSS MARGIN WITH RESPECT TO THE ASSES SEES NON-AE DOMESTIC SALES @34.28% AS AGAINST THE GROSS MARGIN @ 27.09% ON TR ANSACTIONS OF EXPORTS TO AE. THIS RESULTED IN TO THE ADJUSTMENT OF RS .14,02,00,000/- WITH RESPECT TO THE INTERNATIONAL TRANSACTIONS OF EXPORTS OF M ANUFACTURED EQUIPMENT. THUS, THE TPO MADE THE TOTAL ADJUSTMENT OF RS .15,58,00,000/- TO THE ASSESSEES INTERNATIONAL TRANSACTIONS. 6. IN ADDITION, FOLLOWING DISALLOWANCES WERE MADE AND ADDED B Y THE TPO TO THE ASSESSEES TOTAL INCOME: PARTICULARS AMOUNT (RS.) DIFFERENCE BETWEEN SALES-TAX DEFERRAL AND NPV 72,74,168/- DISALLOWANCE U/S.40A(9) 2,87,145/- DISALLOWANCE OUT OF IT SERVICE CHARGES 6,22,64,471/- DISALLOWANCE OUT OF BROKERAGE 1,86,000/- OUT OF DEPRECIATION 46,245/- ADDITIONAL DISALLOWANCE U/S.14A RW RULE 8D 21,32,932/- 5 ITA NO. 2638/PUN/2016 A.Y.2011-12 WITH THE RESULT, THE ASSESSING OFFICER ASSESSED THE ASSES SEES TOTAL INCOME AT RS.218,40,15,944/- AS AGAINST ITS TOTAL RETURNED INCOME OF RS.195,60,24,983/-. 7. WITH REGARD TO THE FIRST GROUND, AT THE TIME OF HEARING , THE LD. AR OF THE ASSESSEE INVITED OUR ATTENTION TO THE PARA 2.1.1 TO 2.1.4 AT PAGES 10 TO 18 OF THE LD. CIT(A)S ORDER WHEREIN ON THE ISSUE AS PER THE R EASONS APPEARING THEREIN, LD. CIT(A) HAS PROVIDED RELIEF TO THE ASSESSEE WHIC H IS ON RECORD. THE LD. AR SUBMITTED THAT TPO HAS MADE AN ADDITION WHILE DETE RMINING ALP OF THE INTERNATIONAL TRANSACTIONS RELATING TO THE EQUIPMENT DIVISION . THE ASSESSEE HAS ADOPTED TNMM AS THE MOST APPROPRIATE METHOD FOR D ETERMINING ALP. THE TPO HELD THAT THE COST PLUS METHOD IS THE MORE SUITABLE THAN TNMM. HOWEVER, THE LD. CIT(A) HAS HELD THAT TNMM IS TO BE APPLIED FOLLOWING THE ORDER OF THE CO-ORDINATE BENCH, ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008-09 TO 2010-11. THE ITAT HAS HELD THAT TNMM IS THE MOST APPROPRIATE METHOD AND ACCORDINGLY, THE ADDITION MADE HAS BEEN DE LETED. 8. THE LD. DR THOUGH PRINCIPALLY AGREED TO THE SUBMISSION S OF THE LD. AR , HOWEVER, HE HAS PLACED STRONG RELIANCE ON THE FINDINGS OF T PO AS WELL AS THE ASSESSING OFFICER. 9. WE HAVE PERUSED THE CASE RECORD AND HEARD THE RIV AL CONTENTIONS IN THE PAPER BOOK FILED BEFORE US. THE COPIES OF ORDER OF ITAT RE LATES TO ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2010-11 HAVE BEEN FILED IN PAGES 71 TO 81 OF THE PAPER BOOK. THE RELEVANT PORTION OF THE ORDER ON THIS ISSUE IS AS UNDE R: 13. NOW, COMING TO THE FACTS OF THE PRESENT CASE, THE TRANSFER PRICING OFFICER (TPO) IN PARA 12 OF ITS ORDER HAD REFERRED THE SAME LIST WHICH IS SIMILAR TO AS REPRODUCED IN PARA 10 AT PAGE 8 OF T HE TRIBUNALS ORDER DATED 30.06.2017 (SUPRA.). THE TPO IS DIRECTED TO A PPLY THE TNMM METHOD AS IN EARLIER YEARS TO EXCLUDE FIVE CONCERNS I.E. AXTEL INDUSTRIES 6 ITA NO. 2638/PUN/2016 A.Y.2011-12 LTD., ANUP ENGINEERING LTD, THERMAX LTD., WALCHANDN AGAR INDUSTRIES LTD. AND GMM PFAUDLER LTD. IT MAY BE POINTED OUT HEREIN ITSELF THAT THE TPO IN PARA 9 HAS ALSO REFERRED TO THE ORDER OF THE TRIBUN AL IN ASSESSMENT YEAR 2008-09. THE CIT(A) HAS ALSO GRANTED THE RELIEF TO THE ASSESSEE IN PARA 2.1.15 AT PAGE 24 IN TURN, RELYING ON THE ORDER OF TRIBUNAL IN ASSESSMENT YEAR 2008-09. WE FIND THAT THE TRIBUNAL FURTHER IN ASSESSMENT YEAR 2009- 10 HAS APPLIED SIMILAR PRINCIPLE AND HELD AS UNDER: ' 12 . SIMILAR ISSUE OF SELECTION OF MOST APPROPRIATE METH OD AROSE BEFORE THE TRIBUNAL IN ASSESSEE'S OWN CASE IN ASSES SMENT YEAR 2008-09 AND THE TRIBUNAL HELD THAT CPM METHOD SHOUL D NOT BE APPLIED AND TNMM METHOD IS TO BE APPLIED AS MOST AP PROPRIATE METHOD. APPLYING THE SAID RATIO TO THE FACTS OF THE PRESENT CASE, WHERE THE TPO HIMSELF HAD APPLIED TNMM METHOD IN AL L THE EARLIER YEARS STARLING FROM ASSESSMENT YEARS 2002-03 TO 200 7-08 AND THE TRIBUNAL HAD DIRECTED THE APPLICATION OF TNMM METHO D IN ASSESSMENT YEAR 2008-09, WE HOLD THAT FOR BENCHMARK ING THE INTERACTIONAL TRANSACTIONS IN THE EQUIPMENT DIVISIO N, TNMM METHOD IS TO BE APPLIED . THE TPO HAS ALREADY CONSIDERED THE LIST OF COMPARABLES SELECTED BY THE ASSESSEE. IN RESPECT OF COMPARABLES AT SERIAL NOS . 1 AND 7 BEING REJECTED FOR NON-MATCHING ON TURNOVER , WE UPHOLD THE ORDER OF TPO . SIMILARLY, WALCHANDNAGAR INDUSTRIES LTD. CANNOT BE SELECTED AS COMPARABLE FOR DIFFERENT ACCOUNTING PERIOD. IN RESPECT OF THERMAX LTD . AND GMM PFAUDLER LTD ., ' THE TWO CONCERNS ARE NOT FUNCTIONALLY COMPARABLE . NOW, LOOKING AT THE MARGINS OF BALANCE FOUR CONCERNS WHICH WERE SELECTE D BY THE ASSESSEE AND AS POINTED OUT BY THE LEARNED AUTHORIZ ED REPRESENTATIVE FOR THE ASSESSEE THAT THE MARGINS OF SAID CONCERNS ARE MUCH BELOW THE MARGINS SHOWN BY THE ASSESSEE AT 19.48% AND CONSEQUENTLY, NO ADJUSTMENT IS TO BE MADE IN TH E HANDS OF ASSESSEE ON THIS ACCOUNT. WE ALSO ACCEPT THE AGGREG ATION APPROACH APPLIED BY THE ASSESSEE UNDER THE SAID EQUIPMENT DI VISION AS SIMILAR AGGREGATION APPROACH HAS BEEN APPLIED BY TH E TPO IN ALL THE EARLIER YEARS AND EVEN BY THE TRIBUNAL IN ASSES SMENT YEAR 2008-09 CONSEQUENTLY, WE DELETE THE ADDITION OF RS.8,87,590 /- MADE IN THE DIVISION OF EXPORT OF EQUIPMENTS.' 14. IN VIEW OF SIMILARITY OF THE ISSUE, WE APPLY TH E PARITY OF REASONING AS IN ASSESSMENT YEAR 2009-10 TO DECIDE THE ISSUE IN F AVOUR OF THE ASSESSEE . THE TPO IS THUS, DIRECTED TO EXCLUDE FIVE CONCERNS I.E. AXTEL INDUSTRIES LTD ., ANUP ENGINEERING LTD . , THERMAX LTD . , WALCHANDNAGAR INDUSTRIES LTD. AND GMM PFAUDLER LTD . AND AFTER EXCLUDING THE SAID COMPARABLES, THE AVERAGE MARGIN OF BALANCE COMPARABLES WORK TO 14 . 01% AGAINST WHICH , THE ASSESSEE HAS SHOWN THE MARGINS OF 25 . 27% . HENCE, NO ADJUSTMENT IS TO BE MADE ON ACCOUNT OF ARM'S LENGTH PRICE OF INTE RNATIONAL TRANSACTIONS . THE GROUND OF APPEAL NO.1 RAISED BY THE REVENUE IS, THUS, DISMISSED. RESPECTFULLY, FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH , WE UPHELD THE RELIEF PROVIDED BY THE LD. CIT(A) ON THIS ISSUE. HENCE, GROUND OF APPEAL NO.1 RAISED BY THE REVENUE IS DISMISSED. 7 ITA NO. 2638/PUN/2016 A.Y.2011-12 10. WITH REGARD TO THE SECOND GROUND OF APPEAL, DURING A SSESSMENT PROCEEDINGS, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS REDUCED THE AMOUNT OF RS.72,74,170/- FROM ITS STATEMENT OF THE COMPUT ATION OF TOTAL INCOME CONTENDING THAT THIS AMOUNT IS NOT TAXABLE . THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD TOTAL UNPAID SALES TAX LIABILITY OF RS.4,60,55 ,889/- . OUT OF WHICH, THE ASSESSEE PAID RS.1,07,17,765/- ON THE DU E DATE. WITH THE RESULT, REMAINING OUTSTANDING SALES TAX LIABILITY BECAME RS.3,53 ,38,124/-. DURING THE YEAR, THE ASSESSEE PAID RS.2,80,63,956/- BEING THE NET PRESENT VALUE OF RS.3,53,38,124/- CLEARING ITS ENTIRE SALES TAX LIABILITY. T HUS, THE ASSESSEE RECEIVED THE BENEFIT OF RS.72,74,168/- WHICH THE A SSESSEE CLAIMED AS EXEMPT FROM TAX. THE ASSESSEE PLACED RELIANCE ON THE DEC ISION OF SPECIAL BENCH OF ITAT IN THE CASE OF SULZER INDIA LTD. 134 TTJ (MU MBAI) (SB) 385 AND THE DECISION OF THE ITAT, PUNE IN THE CASE OF ACIT VS. SPICER INDIA LTD. 11. BEFORE THE LD. CIT(APPEAL), ASSESSEE HAS MADE FOLLOWING DETAILED WRITTEN SUBMISSIONS : 2.1 IT IS SUBMITTED THAT OUR COMPANY IS ENGAGED IN MANUFACTURE AND SALE OF PLATE & SPIRAL HEAT EXCHANGERS, DECANTERS AND SE PARATORS AND ALSO EXECUTES COMPLETE PROJECTS AND SYSTEMS FOR ITS CUST OMERS. THE APPELLANT HAS SET UP MANUFACTURING UNITS AT SATARA. THE APPEL LANT BECAME ELIGIBLE TO SALES TAX DEFERRAL BENEFIT UNDER THE PACKAGE SCH EME OF INCENTIVES IN RESPECT OF ITS UNIT AT SATARA WHICH WAS IMPLEMENTED BY SICOM LTD ACTING AS NODAL AGENCY ON BEHALF OF THE STATE GOVERNMENT. AS PER THE SCHEME, THE SALES TAX COLLECTED FROM CUSTOMERS WAS ALLOWED TO BE ACCUMULATED AND THE APPELLANT WAS LIABLE TO REPAY THE AMOUNT AF TER 10 YEARS IN 5 EQUAL INSTALLMENTS. OUR COMPANY HAS DISCLOSED THE A BOVE AMOUNT AS UNSECURED LOAN IN ITS BOOKS. SECTION 38 OF THE BOMB AY SALES TAX ACT WAS AMENDED TO PROVIDE FOR PRE-PAYMENT OF DEFERRED SALE S TAX LIABILITY AT NET PRESENT VALUE (NPV). ACCORDINGLY DURING THE RELEVAN T PREVIOUS YEAR, OUR COMPANY DECIDED TO PRE-PAY THE ABOVE LOAN AT THE NP V. OUR COMPANY MADE PRE-PAYMENT OF RS.2,80,63,956/- DURING THE REL EVANT PREVIOUS YEAR BEING THE NET PRESENT VALUE OF RS.3,53,38,124/- RES ULTING IN SURPLUS OF RS.72,74,170/-. OUR COMPANY HAS TREATED THE SAID SU RPLUS AS CAPITAL RECEIPT. HOWEVER THE LEARNED ASSESSING OFFICER HAS NOT ACCEPTED THE ABOVE SUBMISSION AND OFFERED THE SAME TO TAX AS REVENUE R ECEIPT U/S. 41(1) /28(IV). 2.2. SECTION 41(1) OF THE INCOME TAX ACT, 1961 READS AS UNDER: 8 ITA NO. 2638/PUN/2016 A.Y.2011-12 41 ( 1 ) WHERE AN ALLOWANCE OR DEDUCTION HAS BEEN MADE IN TH E ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS, EXPENDI TURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE (HEREINAFTER REFERRED TO A S THE FIRST-MENTIONED PERSON) AND SUBSEQUENTLY DURING ANY PREVIOUS YEAR,- (A) THE FIRST-MENTIONED PERSON HAS OBTAINED, WHETHER IN CASH OR IN ANY OTHER MANNER WHATSOEVER, ANY AMOUNT IN RESPECT O(SU CH LOSS OR EXPENDITURE OR SOME BENEFIT IN RESPECT O(SUCH TRADI NG LIABILITY BY WAY O(REMISSION OR CESSATION THEREOF THE AMOUNT OBTAINED BY SUCH PERSON OR THE VALUE OF BENEFIT ACCRUING TO HIM SHALL BE DE EMED TO BE PROFITS AND GAINS OF BUSINESS OR PROFESSION AND ACCORDINGLY CHARGEABLE TO INCOME-TAX AS THE INCOME OF THAT PREVIOUS YEAR, WHE THER THE BUSINESS OR PROFESSION IN RESPECT OF WHICH THE ALLOWANCE OR DEDUCTION HAS BEEN MADE IS IN EXISTENCE IN THAT YEAR OR NOT; (B) THE SUCCESSOR IN BUSINESS HAS OBTAINED, WHETHER IN CASH OR IN ANY OTHER MANNER WHATSOEVER, ANY AMOUNT IN RESPECT OF W HICH LOSS OR EXPENDITURE WAS INCURRED BY THE FIRST-MENTIONED PER SON OR SOME BENEFIT IN RESPECT OF THE TRADING LIABILITY REFERRE D TO IN CLAUSE. (C) BY WAY OF REMISSION OR CESSATION THEREOF THE AMOUNT OBTAINED BY THE SUCCESSOR IN BUSINESS OR THE VALUE OF BENEFIT ACCRU ING TO THE SUCCESSOR IN BUSINESS SHALL BE DEEMED TO BE PROFITS AND GAINS OF THE BUSINESS OR PROFESSION, AND ACCORDINGLY CHARGEABLE TO INCOME-TA X AS THE INCOME OF THAT PREVIOUS YEAR. THERE ARE VARIOUS JUDICIAL DECISIONS ON THE APPLICA BILITY OF SECTION 41(1). IT APPEARS FROM THE SAME THAT TO INVOKE THE PROVISIONS OF SECTION 41(1), THE FOLLOWING CONDITIONS MUST BE FULFILLED: (I) IN THE ASSESSMENT OF THE ASSESSEE, AN ALLOWANC E OR DEDUCTION HAS BEEN MADE IN RESPECT OF LOSS, EXPENDITURE THE TRADI NG LIABILITY INCURRED BY THE ASSESSEE. (II) THE ASSESSEE MUST HAVE SUBSEQUENTLY (A) OBTAIN ED ANY AMOUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE OR (B) OBTAINED ANY BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CE SSATION THEREOF. IN CASE EITHER THESE EVENTS HAPPEN, THE DEEMING PROVISION E NACTED IN CLOSING PART OF SUB-SO (I) COMES INTO PLAY. (III) THE AMOUNT OBTAINED BY THE ASSESSEE OR THE VA LUE OF BENEFIT ACCRUING TO HIM IS DEEMED TO BE PROFITS AND GAINS THE BUSINE SS OR PROFESSION AND IT BECOMES CHARGEABLE TO INCOME-TAX AS AN INCOME OF TH AT PREVIOUS YEAR. 2.3 THUS TO INVOKE THE PROVISIONS OF SECTION 41(1), THE FIRST REQUIREMENT IS AS TO WHETHER IN THE ASSESSMENT OF THE ASSESSEE, AN ALLOWANCE OR DEDUCTION HAS BEEN MADE IN RESPECT OF LOSS, EXPENDI TURE OR THE TRADING LIABILITY INCURRED BY THE ASSESSEE AND SUBSEQUENTLY OBTAINED ANY BENEFIT IN RESPECT OF SUCH A TRADING LIABILITIES BY WAY OF REMISSION OR CESSATION THEREOF. IN THE PRESENT CASE, OUR COMPANY HAS ONLY MADE A PRE-PAYMENT OF ITS LIABILITY AS PER THE OPTION PROVIDED BY THE STATE GOVERNMENT AND THERE IS NO WAIVER OF SUCH LIABILITY. IN THIS CASE IT IS SUBMITTED THAT THE ABOVE PREPAYMENT COULD NOT BE CONSTRUED AS REMISSIO N OF LIABILITY BECAUSE THE STATE GOVERNMENT HAD NOT WAIVED OF ANY OF THE LIABILITY BUT ONLY ACCEPTED THE AMOUNT AT ITS PRESENT VALUE WHICH WAS DUE LATER. 2.4 IT IS SUBMITTED THAT THE CBDT HAS ISSUED CIRCUL AR CLARIFYING THAT DEFERRED SALES TAX UNDER THE DEFERRED SCHEME HAS TO BE TREATED AS ACTUALLY PAID SO THAT THE STATUTORY LIABILITY WILL BE TAKEN TO BE ACTUALLY 9 ITA NO. 2638/PUN/2016 A.Y.2011-12 PAID FOR THE PURPOSES OF SECTION 43B. AFTER SUCH DE EMED PAYMENT, THE UNPAID SALES TAX IS BY WAY OF DEFERRAL LOAN AND NOT A TRADING LIABILITY AND HENCE REMISSION OF SUCH LOAN CANNOT BE TREATED AS I NCOME OF THE APPELLANT. IT IS FURTHER SUBMITTED THAT IN THE PRES ENT CASE, THERE IS NO QUESTION OF ANY BENEFIT ARISING TO THE APPELLANT. S ECTION 41(1) IS APPLICABLE WHEN A LIABILITY FOR PAYMENT OF RS X IS SETTLED FOR LESSER AMOUNT AT X - Y . IN THIS CASE, THE LIABILITY FOR PAYMENT IS SETTLED AT ITS PRESENT VALUE AND THERE IS NEITHER ANY REMISSION NOR ANY WAIVER OF SU CH AMOUNT. ON PAYMENT OF SUCH NPV, SUCH DEFERRED SALES TAX IS ASS UMED TO BE PAID FULLY AND NOT WAIVED. BENEFIT HAS TO BE UNDERSTOOD COMMER CIALLY AND NOT MATHEMATICALLY. IN VIEW OF THIS, IT IS SUBMITTED TH AT THE APPELLANT COMPANY HAS NOT DERIVED ANY BENEFIT DUE TO SUCH PRE - PAYMENT AND THEREFORE THE RESULTANT SURPLUS CANNOT BE CONSIDERE D AS TAXABLE U/S. 41. 2.5 IT IS FURTHER SUBMITTED THAT IN THE PRESENT CAS E, S. 41(1) HAS BEEN INVOKED ON THE ALLEGED GROUND THAT OUR COMPANY HAS OBTAINED SOME BENEFIT IN RESPECT OF A TRADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF. IN THIS RESPECT, IT IS SUBMITTED THAT S.41 (1) DOES NOT APPLY IN THE PRESENT CASE BECAUSE (1) THE APPELLANT HAS NOT OBTAINED ANY BENEFIT (2) THERE HAS NOT BEEN ANY REMISSION OF A LIABILITY (3) THE BENEFIT IF ANY OBTAINED BY THE APPELLANT IS NOT IN RESPECT OF A TR ADING LIABILITY (4) THE BENEFIT IF ANY OBTAINED BY THE APPELLANT IS ON CAPI TAL ACCOUNT. IN VIEW OF THIS, IT IS RESPECTFULLY SUBMITTED THAT THE PROVISI ONS OF SECTION 41(1) CANNOT BE INVOKED IN THE PRESENT CASE. OUR COMPANY RELIES UPON THE FOLLOWING DECISIONS IN SUPPORT OF THE ABOVE SUBMISSIONS. (A) CIT VS. SULZER INDIA LTD. (2014) 369 ITR 717 (BOM.) (B) JURISDICTIONAL PUNE TRIBUNAL DECISION IN THE CASE O F ACIT VS. SPICER INDIA LTD. IN ITA NO. 1279/PN/2012 FOR ASSESSMENT Y EAR 2004-05. (C) COPIES OF ABOVE DECISIONS ARE ENCLOSED HEREWITH AS ANNEXURE-5 2.6 THE LEARNED ASSESSING OFFICER HAS FURTHER HELD THAT THIS SURPLUS IS TAXABLE U/S.28(IV) OF THE INCOME TAX ACT, 1961. SEC TION 28(IV) PROVIDES AS UNDER: THE FOLLOWING INCOME SHALL BE CHARGEABLE TO INCOME TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION.- XXXX (IV) THE VALUE OF ANY BENEFIT OR PERQUISITE, WHETHE R CONVERTIBLE INTO MONEY OR NOT, ARISING FROM BUSINESS OR THE EXERCISE OF A PROFESSION IT IS SUBMITTED THAT IN THE PRESENT CASE, THE APPEL LANT HAS NOT EARNED ANY BENEFIT AS SUBMITTED IN PARA 2.3 & 2.4 ABOVE. THE A PPELLANT HAS ONLY MADE A PRE-PAYMENT OF ITS DEFERRED SALES TAX LIABIL ITY AT THE NET PRESENT VALUE. THE NET PRESENT VALUE IS THE CURRENT VALUE O F THE FUTURE LIABILITY. SINCE THE PAYMENT IS MADE AT NPV, THERE IS NO REMIS SION OR WAIVER OF ANY LIABILITY AND THEREFORE THE ALLEGATIO N THAT SUCH BENEFIT IS TAXABLE U/S. 28 IS BASELESS AND WITHOUT ANY MERIT. SECTION 28 OF THE INCOME TAX ACT 1961 DOES NOT BRING CAPITAL RECEIPTS INTO THE INCOME TAX NET. IT IS RESPECTFULLY SUBMITTED THAT THE BENEFIT, IF ANY, WAS RECEIVED BY OUR COMPANY AT THE TIME OF SETTING UP' OF THE UNIT AND THE DEFERRAL SINCE THESE BENEFITS ARE RELATED TO THE SETTING UP OF THE UNITS. IN VIEW OF THIS, IT IS SUBMITTED THAT EVEN IF IT IS HELD THAT THERE IS ANY BENEFIT, IT HAS TO BE CONSIDERED TO BE ON CAPITAL ACCOUNT AND NOT ON R EVENUE ACCOUNT. [T IS SUBMITTED THAT THE LEARNED ASSESSING OFFICER HAS NO T DISCHARGED THE ONUS CAST UPON HIM BY THE PROVISIONS OF THE ACT TO PROVE AS TO HOW A CAPITAL 10 ITA NO. 2638/PUN/2016 A.Y.2011-12 RECEIPT IS TAXABLE U/S. 28(IV) AND THEREFORE THE TAXING THE SAME U/S. 28 IS WITHOUT ANY MERIT AND NOT IN ACCORDANCE WITH THE PROVISIONS OF THE INCOME TAX ACT 1961. 2.7 IN VIEW OF THIS, WE REQUEST YOUR HONOUR TO KI NDLY DIRECT THE LEARNED ASSESSING OFFICER TO DELETE THE ABOVE ADDITION AND OBLIGE. 2.8 WITHOUT PREJUDICE TO THE ABOVE, IT IS SUBMITTED THAT THE BENEFIT, IF ANY, WAS RECEIVED BY OUR COMPANY AT THE TIME OF SETTING UP OF THE UNIT AND THE DEFERRAL SINCE THESE BENEFITS ARE RELATED TO THE SE TTING UP OF THE UNITS. IN VIEW OF THIS, THE SAME SHOULD HAVE BEEN REDUCED FRO M THE RESPECTIVE BLOCKS BY THE LEARNED ASSESSING OFFICER AS PER THE PROVISIONS OF SECTION 43. IN VIEW OF THIS, WE REQUEST YOUR HONOUR TO DIRECT THE [EARNED ASSESSING OFFICER TO DELETE THE ADDITION AND OBLIGE US. 12. THE LD. CIT(APPEAL) AFTER CONSIDERING THE ASSESSMENT O RDER, SUBMISSIONS OF THE ASSESSEE AND THE FACTS OF THE CASE HE LD THAT THE ISSUE IS COVERED IN ASSESSEES FAVOUR BY THE DECISION OF HON'BLE J URISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. SULZER INDIA LTD. (2014) 369 I TR 717 ( BOM.) WHEREIN THE HON'BLE HIGH COURT HAS HELD THAT THE DIFFEREN CE BETWEEN THE NPV AGAINST THE FUTURE LIABILITY CREDITED BY THE ASSESSEE UNDE R THE CAPITAL RESERVE ACCOUNT IN ITS BOOKS OF ACCOUNT, IS A CAPITAL RECEIPT. IT CA NNOT BE TERMED AS A REMISSION OR CESSION OF A TRADING LIABILITY AND CONSEQUENTL Y, NO BENEFIT HAS ARISEN TO THE ASSESSEE IN TERMS OF THE SECTION 41(1). THE REFORE, BY FOLLOWING THE DECISION OF THE HON'BLE BOMBAY HIGH COURT, THE ADDITION OF R S.72,74,140/- MADE ON ACCOUNT OF THE GAIN ON SETTLEMENT OF THE SALES T AX DEFERRED LIABILITY WAS DELETED. 13. WE HAVE PERUSED THE CASE RECORD AND HEARD RIVAL C ONTENTIONS IN THE PAPER BOOK FILED, COPIES OF THE DECISION OF HON'BLE BOMBAY HIG H COURT IN THE CASE OF CIT VS. SULZER INDIA LTD. (SUPRA.) HAS BEEN PLACED IN PAGES 82 TO 102 OF THE PAPER BOOK. WE FIND THAT THIS ISSUE IS DIRECTLY COVERE D IN FAVOUR OF THE ASSESSEE THAT WHEN THERE IS NO CESSION OF A TRADING LIABILIT Y ON ACCOUNT OF PRE PAYMENT OF SALES TAX DEFERRAL LIABILITY, THE ADDITION IS NOT JUS TIFIED. ACCORDINGLY, 11 ITA NO. 2638/PUN/2016 A.Y.2011-12 RELIEF PROVIDED TO THE ASSESSEE BY THE LD. CIT(APPEAL) IS SU STAINED. HENCE, GROUND NO. 2 RAISED IN APPEAL BY REVENUE IS DISMISS ED. 14. THE GROUND NO. 3 AND 4 RELATE TO THE DELETION OF DISA LLOWANCE OF IT SERVICES. 15. ON THIS ISSUE, LD. DR APPRISED THE BENCH THAT IN ASS ESSEES OWN CASE FOR ASSESSMENT YEAR 2008-09, THE MATTER HAS BEEN SET ASIDE TO THE FILE OF ASSESSING OFFICER FOR FRESH CONSIDERATION AND THEREFORE, IN THE PRESENT ASSESSMENT YEAR I.E. 2011-12, THE ISSUE SHOULD BE SET ASI DE TO THE FILE OF ASSESSING OFFICER FOR FRESH CONSIDERATION. 16. THE LD. AR OF THE ASSESSEE CONCEDED TO THE ARGUMENTS OF THE L D. D.R. 17. WE HAVE PERUSED THE CASE RECORD AND HEARD THE R IVAL CONTENTIONS. WE FIND THAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 20 08-09 AND 2010-11, THIS ISSUE HAS BEEN REMITTED BACK TO THE FILE OF ASSESSING OFFICER FOR VERIFICATION. RELEVANT PART OF THE ORDER IN ITA NO.1351/PUN /2015 FOR ASSESSMENT YEAR 2010-2011 WHEREIN THE ORDER OF TRIBUNA L FOR ASSESSMENT YEAR 2008-09 HAS CONSIDERED IS AS UNDER: 16. IN THE FACTS RELATING TO THE ISSUE, THE ASSESSE E DURING THE YEAR UNDER CONSIDERATION HAD CLAIMED EXPENDITURE INCURRED TOWA RDS ACQUISITION AND USE OF SOFTWARE AT RS.5.38 CRORES. THE ASSESSING OF FICER ON EXAMINATION OF THE DETAILS OF EXPENDITURE HAD FOUND THE SAID EX PENDITURE TO BE CAPITAL IN NATURE AND ALLOWED DEPRECIATION AT RS.1.61 CRORE S ON IT. THE ASSESSING OFFICER DISALLOWED NET EXPENDITURE OF RS.3.76 CRORE S. 17. THE CIT(A) HAD DELETED THE ENTIRE DISALLOWANCE WITH DIRECTION TO REVERSE THE DEPRECIATION ALLOWED ON THE SAID DISALL OWANCE. 18. THE REVENUE IS AGGRIEVED BY THE ORDER OF CIT(A) AS SIMILAR ISSUE OF SOFTWARE EXPENSES HAD BEEN RESTORED BACK TO THE FIL E OF ASSESSING OFFICER FOR FRESH VERIFICATION BY THE TRIBUNAL. 19. WE FIND THAT THE TRIBUNAL IN ASSESSMENT YEAR 20 08-09 HAD SET ASIDE THE SAID ISSUE FOR VERIFICATION AS PER PARA 10 AT P AGE 53 OF THE SAID ORDER. 12 ITA NO. 2638/PUN/2016 A.Y.2011-12 WE ARE RELYING ON THE FINDING OF TRIBUNAL IN THIS R EGARD. HOWEVER, FOR THE SAKE OF BREVITY, THE SAME IS NOT BEING REPRODUCED. IN LINE WITH THE SAID DIRECTIONS, WE REMIT THIS ISSUE BACK TO THE FILE OF ASSESSING OFFICER FOR VERIFICATION, AS PER DIRECTIONS OF TRIBUNAL IN ASSE SSMENT YEAR 2008-09. THE GROUNDS OF APPEAL NO.2 AND 3 RAISED BY THE REVE NUE ARE ALLOWED FOR STATISTICAL PURPOSES. THAT, RESPECTFULLY FOLLOWING THE DECISION OF OUR CO-ORDINATE B ENCH, ITAT IN ASSESSEES OWN CASE, THESE TWO GROUNDS ARE REMITTED B ACK TO THE FILE OF ASSESSING OFFICER FOR VERIFICATION. ACCORDINGLY, GROUNDS NO. 3 AND 4 RAISED IN APPEAL BY THE REVENUE ARE ALLOWED FOR STATISTICAL P URPOSE. 18. GROUND NO. 5 IS WITH REGARD TO THE DELETION OF DISALLOW ANCE OF RS.21,32,932/- U/S.14A OF THE ACT. IT IS SEEN THAT THE ASS ESSING OFFICER DISALLOWED THE AMOUNT OF RS.21,32,932/- U/S.14A OF THE ACT B Y OBSERVING AS UNDER : 10.1 ON PERUSAL OF STATEMENT OF TOTAL INCOME FILED B Y THE ASSESSEE, IT IS SEEN THAT THE ASSESSEE HAS CLAIMED INCOME FROM DIVI DEND OF RS 4,28,70,778 AS EXEMPT FROM TAX IN VIEW OF PROVISION S OF SECTION 10(34) / 10(35) OF THE INCOME TAX ACT, 1961. THE ASSESSEE CO MPANY HAS DISALLOWED AN AD-HOC SUM OF RS 4,00,000/-, U/S. 14A OF THE INCOME TAX ACT, 1961 BEING EXPENSES RELATED TO EXEMPT INCOME. IT WAS BROUGHT TO THE NOTICE OF THE ASSESSEE'S AUTHORIZED REPRESENTATIVE THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE I AM NOT SATISFIED WIT H THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UND ER THE INCOME TAX ACT. IT IS FURTHER SEEN THAT THE ASSESSEE'S TAX AUD ITOR IN HIS REPORT HAS ALSO GIVEN THE WORKING OF DISALLOWANCE U/S.14A R.W. RULE 8D OF RS.25,32,932/-. IN MY VIEW THE ABOVE AMOUNT IS REQU IRED TO BE DISALLOWED U/S 14A R.W. RULE 8D. 10.2 AS THE ASSESSEE HAS ALREADY DISALLOWED RS.4,00 ,000/- U/S.14A OF THE INCOME TAX ACT, 1961 IN ITS STATEMENT OF TOTAL INCOME, I HEREBY, DISALLOW NET RS.21,32,932/-/- (I.E. RS.25,32,932/- LESS RS.4,00,000/-) U/S.14A R.W.RULE 8D OF THE INCOME TAX ACT, 1961. 19. AT THE TIME OF APPEAL BEFORE THE FIRST APPELLATE AUTHO RITY, THE ASSESSEE ADVANCED SIMILAR ARGUMENTS VIDE LETTER DATED 19.05.2016 ON THIS DIS ALLOWANCE, WHICH WERE ADVANCED BY IT AGAINST THE SAME DISALLOWANCE M ADE BY THE ASSESSING OFFICER IN THE ASSESSMENT YEAR 2010-11 IN ASSES SEES OWN CASE. THE 13 ITA NO. 2638/PUN/2016 A.Y.2011-12 LD. CIT(APPEAL) AFTER CONSIDERING THE FACTS OF THE CASE, ASS ESSMENT ORDER AND THE SUBMISSIONS OF THE ASSESSEE HELD AS FOLLOWS : 2.6.3 I FIND THAT I HAVE DELETED THE DISALLOWANCE M ADE BY THE LEARNED AO U/S 14A IN THE APPELLANT'S APPEAL FOR AY 2010-11 BE CAUSE THE LEARNED AO FAILED TO RECORD HIS SATISFACTION BEFORE INVOKING R ULE 8D, WHICH IS HELD AS A MANDATORY PRE- CONDITION PROVIDED U/S 14(2). THE SA ME FACTS PREVAIL DURING THE YEAR UNDER CONSIDERATION AS WELL. I DO NOT FIND ANY SATISFACTION OF THE LEARNED AO RECORDED IN THE ASSESSMENT ORDER BEFORE INVOKING THE RULE 8D. ACCORDINGLY, I DELETE THE DISALLOWANCE U/S 14A MADE BY THE LEARNED AO OF RS 21,32,932 BY FOLLOWING MY ORDER OF THE A.Y.2010-11 IN THE APPELLANT'S CASE. 20. WE HAVE PERUSED THE CASE RECORD. WE FIND THAT THE LD. CIT(APPEAL) DELETED THIS DISALLOWANCE IN ASSESSEES CASE FOR ASSESSMEN T YEAR 2010-11 BECAUSE THE ASSESSING OFFICER FAILED TO RECORD HIS SATISFACTIO N BEFORE INVOKING RULE 8D, WHICH IS HELD AS A MANDATORY PRECONDITION PROVIDED U/S.14(2) OF THE ACT AND THE SAME FACTS PREVAIL DURING THE YEAR UNDER CO NSIDERATION. THEREFORE, LD. CIT(APPEAL) HAD DELETED THE DISALLOWANCE AS HE HAS DONE FOR ASSESSMENT YEAR 2010-11, MAINTAINING STATUS QUO . 21. AT THE TIME OF HEARING, THE LD. AR OF THE ASSESSEE AP PRAISED THE BENCH THAT THE PUNE BENCH OF THE TRIBUNAL IN ITA NO.1351/PUN/2 015 ON THE SAME ISSUE, FACTS AND CIRCUMSTANCES HAS ALSO DELETED THE DISALLO WANCE MADE AND HAS GIVEN FINDINGS IN FAVOUR OF THE ASSESSEE. THE RELEVANT PARTS OF THE FINDINGS ARE AS UNDER: 25. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE WHICH ARISES IN THE PRESENT APPEAL IS THE PRE LIMINARY ISSUE OF RECORDING OF SATISFACTION BY THE ASSESSING OFFICER BEFORE APPLYING PROVISIONS OF RULE 8D OF THE RULES IN LINE WITH SEC TION 14A OF THE ACT. WE FIND THAT SIMILAR ISSUE OF EXERCISE OF JURISDICTION BY THE ASSESSING OFFICER IN RECORDING THE SATISFACTION WHILE APPLYING THE PR OVISIONS OF SECTION 14A OF THE ACT AROSE BEFORE THE TRIBUNAL IN KALYANI STE ELS LTD. VS. ADDL.CIT (SUPRA), WHEREIN IT WAS HELD AS UNDER:- 10. IN THE AFORESAID BACKGROUND, NOW, WE MAY EXAMI NE THE FACTS OF THE PRESENT CASE. IN THIS CASE, ASSESSEE HAS EAR NED BY WAY OF DIVIDENDS A SUM OF RS.5,45,58,685/-, WHICH IS EXEMP T U/S 10(38) OF THE ACT AND THUS THE SAME DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN THE COMPUTATION OF INCOME, ASSESS EE HAVING 14 ITA NO. 2638/PUN/2016 A.Y.2011-12 REGARD TO SECTION 14A OF THE ACT, DETERMINED THE AM OUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME AT RS.5,00,000/-. THE ASSESSING OFFICER HAS NOT FOUND IT ACCEPTABLE A ND HAS INSTEAD DETERMINED THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME BY APPLYING RULE 8D OF THE RULES. OSTENSIBLY, THE ACTI ON OF THE ASSESSING OFFICER CANNOT BE UPHELD UNLESS HE HAS CO MPLIED WITH THE PRE-REQUISITE OF INVOKING RULE 8D OF THE RULES, NAMELY, RECORDING OF AN OBJECTIVE SATISFACTION WITH REGARD TO THE CLA IM OF THE ASSESSEE THAT AN EXPENDITURE OF RS.5,00,000/- HAS BEEN INCUR RED IN RELATION TO THE EXEMPT INCOME, IS INCORRECT. IN ORDER TO EXA MINE THE AFORESAID COMPLIANCE WITH THE PRE-CONDITION, WE HAV E PERUSED THE PARA 4 TO 4.2 OF THE ASSESSMENT ORDER AND FIND THAT NO REASONS HAVE BEEN ADVANCED AS TO WHY THE DISALLOWANCE DETER MINED BY THE ASSESSEE WAS FOUND TO BE INCORRECT, HAVING REGA RD TO THE ACCOUNTS OF THE ASSESSEE. THE ONLY POINT MADE BY THE ASSESSING OFFICER IS TO THE EFFECT THAT THE SAID DISALLOWANC E WAS NOT ACCEPTABLE. IN-FACT, WE FIND THAT THE ASSESSEE MAD E DETAILED SUBMISSIONS TO THE ASSESSING OFFICER, WHICH HAVE BE EN REPRODUCED BY THE CIT(A) IN PARA 3.2.1 OF HIS ORDER. AS PER TH E ASSESSEE, THE DETERMINATION OF DISALLOWANCE U/S 14A OF THE ACT OF RS.5,00,000/- WAS BASED ON THE EMPLOYEE COSTS AND OTHER COSTS INV OLVED IN CARRYING OUT THIS ACTIVITY. FURTHER, ASSESSEE ALSO EXPLAINED THAT THE SHARES WHICH HAVE YIELDED EXEMPT INCOME WERE ACQUIR ED LONG BACK OUT OF OWN FUNDS AND NO BORROWINGS WERE UTILIZED. T HE MUTUAL FUND INVESTMENTS WERE CLAIMED TO BE ALSO MADE OUT O F SURPLUS FUNDS. IT WAS SPECIFICALLY CLAIMED THAT NO FRESH IN VESTMENTS HAVE BEEN MADE DURING THE YEAR UNDER CONSIDERATION IN SH ARES YIELDING EXEMPT INCOME. ALL THE AFORESAID POINTS RAISED BY T HE ASSESSEE HAVE NOT BEEN ADDRESSED BY THE ASSESSING OFFICER AN D THE SAME HAVE BEEN BRUSHED ASIDE BY MAKING A BLAND STATEMENT THAT THE DISALLOWANCE IS NOT ACCEPTABLE. THEREFORE, IN OUR VIEW, IN THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT RECORDE D ANY OBJECTIVE SATISFACTION IN REGARD TO THE CORRECTNESS OF THE CL AIM OF THE ASSESSEE, WHICH IS MANDATORILY REQUIRED IN TERMS OF SECTION 14A(2) OF THE ACT AND THEREFORE HIS ACTION OF INVOKING RUL E 8D OF THE RULES TO COMPUTE THE IMPUGNED DISALLOWANCE IS UNTENABLE. ACCORDINGLY, THE ORDERS OF THE AUTHORITIES BELOW ARE SET-ASIDE O N THIS ASPECT AND THE ASSESSING OFFICER IS DIRECTED TO RETAIN THE DIS ALLOWANCE U/S 14A OF THE ACT TO THE EXTENT OF RS.5,00,000/-, AS R ETURNED BY THE ASSESSEE. 26. IN THE FACTS OF THE PRESENT CASE, THE ASSESSING OFF ICER HAS FAILED TO RECORD ANY SATISFACTION BEFORE MAKING THE AFORESAID DISALLOWANCE AND IN THE ABSENCE OF RECORDING OF SATISFACTION, THE PROVI SIONS OF SECTION 14A OF THE ACT CANNOT BE INVOKED AS THE ASSESSING OFFICER HAS FAILED TO COME TO A FINDING AS TO WHY THE DISALLOWANCE MADE BY THE ASSE SSEE UNDER SECTION 14A OF THE ACT AT RS.3 LAKHS IS INCORRECT. ACCORDIN GLY, WE UPHOLD THE ORDER OF CIT(A). THE GROUND OF APPEAL NO.4 RAISED BY THE REVENUE IS THUS, DISMISSED. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE CO-OR DINATE BENCH, WE UPHOLD THE ORDER OF LD. CIT(APPEAL) ON THIS ISSUE AND SU STAIN THE RELIEF PROVIDE TO THE ASSESSEE. THUS, GROUND NO. 5 RAISED IN APPEAL BY REVENUE IS DISMISSED . 15 ITA NO. 2638/PUN/2016 A.Y.2011-12 22. THE GROUND NO. 6 IS GENERAL IN NATURE AND HENCE, REQ UIRES NO ADJUDICATION. 23. IN COMBINED RESULT, APPEAL OF THE REVENUE IS PARTLY A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 9 TH DAY OF JANUARY, 2019. SD/- SD/- D. KARUNAKARA RAO PARTHA SARAT HI CHAUDHURY ACCOUNTANT MEMBER JUDICIAL MEMBER / PUNE; / DATED : 9 TH JANUARY, 2019. SB !'#$%&%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT(APPEALS)-13, PUNE. 4. THE PR. CIT-5, PUNE. 5. '#$ %%&' , ( &' , )*+ , / DR, ITAT, B BENCH, PUNE. 6. $,- ./ / GUARD FILE. // TRUE COPY // (0 / BY ORDER, %1 &+ / PRIVATE SECRETARY ( &' , / ITAT, PUNE. 16 ITA NO. 2638/PUN/2016 A.Y.2011-12 DATE 1 DRAFT DICTATED ON 07 .01.2019 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 08.01.2019 SR.PS/PS 3 DRAFT PROPOSED AND PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/JM 5 APPROVED DRAFT COMES TO THE SR. PS/PS SR.PS/PS 6 KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7 DATE OF UPLOADING OF ORDER SR.PS/PS 8 FILE SENT TO BENCH CLERK SR.PS/PS 9 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 10 DATE ON WHICH FILE GOES TO THE A.R 11 DATE OF DISPATCH OF ORDER