Lebong Investments Pvt. Ltd., Kolkata V. D.C.I.T., Circle-11, Kolkata, Kolkata

ITA 2652/KOL/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 9528 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-01-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 08-11-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 25-11-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: P N RAJENDRAN
• Keywords: Business income; Business expenditure; Earning of tax free income
• Section: 143(3); 14A; 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH C KOLKATA BEFORE SHRI N.V.VASUDEVAN, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER ITA NO. 2652 / KOL / 2013 ASSESSMENT YEAR :2009-10 LEBONG INVESTMENTS PVT. LTD., CAMELLIA HOUSE, 14, GURUSADAY ROAD, KOLKATA- 700 019 [ PAN NO.AAACL 5002 E ] V/S . DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11, AAYAKAR BHAWAN, P/7 CHOWRINGHEE ROAD, KOLKATA-700 069 /APPELLANT .. / RESPONDENT /BY APPELLANT SHRI P.N. RAJENDRAN, FCA /BY RESPONDENT NONE /DATE OF HEARING 15-11-2016 /DATE OF PRONOUNCEMENT 18-01-2017 / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:- THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER O F COMMISSIONER OF INCOME TAX (APPEALS)-XII, KOLKATA DATED 27.09.2013. ASSESSMENT WAS FRAMED BY ACIT, RANGE-11, KOLKATA U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) VIDE HIS ORD ER DATED 26.09.2011 FOR ASSESSMENT YEAR 2009-10. 2. AT THE TIME OF HEARING WE FIND THAT ANYBODY NEIT HER APPEARED ON BEHALF OF REVENUE NOR FILED ANY ADJOURNMENT APPLICATION. H OWEVER WE DECIDED TO HEAR THIS APPEAL IN PRESENCE OF SHRI P.N. RAJENDRA, LD. AUTHORIZED REPRESENTATIVE ON BEHALF OF ASSESSEE. WE ALSO FIND THAT THIS IS AN OLD APPEAL ITA NO.2652/KOL/2013 A.Y. 20 09-10 LEBONG INVESTMENTS PVT. LTD. VS. DCIT, CIR- 11, KOL. PAGE 2 AND HAS BEEN FIXED FOR HEARING SEVERAL TIMES (INCLU DING TODAYS HEARING) HENCE, WE DECIDED TO PROCEED FOR HEARING THIS APPEA L IN PRESENCE OF LD. AR. 3. SOLITARY ISSUE RAISED BY ASSESSEE IN THIS APPEAL IS THAT LD. CIT(A) ERRED IN GIVING RELIEF IN PART TO ASSESSEE U/S 14A R.W.S. RULE 8D(2)(III) OF THE INCOME TAX RULES, 1962 (THE RULE FOR SHORT). THE ASSESSE E HAS RAISED THE FOLLOWING GROUNDS OF APPEAL. 1. THAT ON THE FACTS & CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE HELD THAT NO DISALLOWANCE COULD BE MADE U/S 14A OF THE INCOME TA X ACT, 1961 (THE ACT) AND HENCE ERRED IN DIRECTING THE ASSESSING OFF ICER TO APPLY RULE 8D(2)(III) OF THE INCOME TAX RULES, 1962 (THE RULES ) AND TO RE-COMPUTE THE ESTIMATE OF DISALLOWANCE OF EXPENSES U/S. 14A O F THE ACT IN SPITE OF HIS FINDINGS THAT THE ASSESSING OFFICER HAS NOT REC ORDED HIS SATISFACTION BEFORE INVOKING RULE 8D OF THE RULES. 4. BRIEFLY, THE FACTS ARE THAT ASSESSEE THE ASSESSE E IN THE PRESENT CASE IS A PRIVATE LIMITED COMPANY AND IS REGISTERED AS NON- BANKING FINANCE COMPANY WITH RESERVE BANK OF INDIA. THE ASSESSEE FO R THE YEAR UNDER CONSIDERATION HAS EARNED EXEMPTED DIVIDEND INCOME F OR RS. 55,17,162/- BUT NO DISALLOWANCE OF THE EXPENSE INCURRED IN CONNECTI ON WITH THE DIVIDEND INCOME IN TERMS OF PROVISION OF SEC. 14A R.W.S RULE 8D OF IT RULES WAS MADE. ON QUESTION BY AO FOR NON-DISALLOWANCE OF EXPENSE, THE ASSESSEE SUBMITTED THAT ONLY ADMINISTRATIVE AND OTHER EXPENSES AMOUNTI NG TO RS.1,98,732/- WAS INCURRED WHICH HAS NO CONNECTION WITH THE EARNING O F DIVIDEND INCOME. HOWEVER, AO DISREGARDED THE CLAIM OF ASSESSEE AND I NVOKED THE PROVISION OF SEC. 14A R.W.S. 8D(2)(III) OF THE IT RULES AND MADE A DISALLOWANCE OF RS.7,92,538/- WHICH WAS ADDED TO THE TOTAL INCOME O F ASSESSEE. 5. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE L D. CIT(A) WHO HAS PARTLY UPHELD THE ORDER OF ASSESSING OFFICER BY OBS ERVING AS UNDER:- AFTER CONSIDERING THE APPEALS SUBMISSION AND THE FACTS OF THE CASE, I AM INCLINED TO AGREE WITH THE CONTENTION OF THE APP ELLANT THAT THE AO HAS NOT RECORDED HIS SATISFACTION BEFORE INVOKING R ULE 8D IN ITS CASE. HOWEVER, I DO NOT FIND ANY MERIT IN THE ARGUMENT OF THE APPELLANT THAT THE PROVISIONS OF THE SECTION 14A OF THE ACT ARE NO T APPLICABLE IN THE INSTANT CASE AND NO EXPENDITURE TO BE DISALLOWED IN RELATION TO EARNING OF DIVIDEND INCOME. I AM OF THE VIEW THAT SINCE THE APPELLANT HAS EARNED ITA NO.2652/KOL/2013 A.Y. 20 09-10 LEBONG INVESTMENTS PVT. LTD. VS. DCIT, CIR- 11, KOL. PAGE 3 EXEMPTED DIVIDEND INCOME, PROPORTIONATE DISALLOWANC E OF EXPENDITURE RELATING TO THE EARNING OF SUCH EXEMPT INCOME IS RE QUIRED TO BE MADE BUT NOT IN EXCESS OF TOTAL EXPENSES INCURRED AND CL AIMED BY THE APPELLANT. I FIND FORCE IN THE ALTERNATIVE ARGUMENT ADVANCED BY THE APPELLANT THAT THE ASSESSING OFFICER IN ARRIVING AT THE AVERAGE COST OF INVESTMENT OUGHT TO HAVE CONSIDERED THE AVERAGE OF DIVIDED YIELDING INVESTMENTS IN 14 COMPANIES ONLY AS ON 31.03.2008 A ND 31.03.2009 AS PER RULE 8D(III) AND NOT THE AVERAGE OF TOTAL INVE STMENTS. MOREOVER, THE AO HAS ALSO TAKEN INCORRECTLY THE COST OF NON-DIVID END BEARING INVESTMENTS. IN THIS REGARD, RELIANCE MAY BE MADE T O THE DECISION OF HON'BLE JURISDICTIONAL ITAT, KOLKATA IN THE CASE OF REI AGRO LTD. VS- DCIT [ ITA NO.1131/KOL/2011 ] WHEREIN IT HAS BEEN HELD THAT FOR MAKING DISALLOWANCE US/S 14 READ WITH RULE 8D IN RESPECT O F THE INCOME WHICH IS EXEMPTED & DOS NOT FORM PART OF THE TOTAL INCOME, T HE ONLY INVESTMENT WHICH HAS GIVEN RISE TO THE EXEMPTED INCOME SHOULD BE TAKEN INTO CONSIDERATION AND NOT THE ENTIRE INVESTMENT MADE BY THE ASSESSEE. IN THE LIGHT OF THE ABOVE DISCUSSION AND FINDINGS, CONSIDERING THE ENTIRE FACTS OF THE CASE INCLUDING THE APPELLANTS SUBMISS ION AND RESPECTFULLY FOLLOWING THE ABOVE ORDER OF THE HON'BLE ITAT, KOLK ATA, THE AO IS DIRECTED TO RECOMPUTED THE AVERAGE VALUE OF INVESTM ENT CONSIDERING THE INVESTMENT WHICH HAS GIVEN RISE TO THE EXEMPTED INC OME ONLY IN VIEW OF WORKING OUT THE ESTIMATED DISALLOWANCE OF EXPENSES US/S 14A @ 0.5% AS PER RULE 8D(2)(III) AND RESTRICT THE DISALLOWANC E U/S.14A OF THE ACT ACCORDINGLY. THUS, THIS GROUND OF APPEAL IS PARTLY ALLOWED. BEING AGGRIEVED BY THIS, ASSESSEE HAS COME UP AN AP PEAL BEFORE US. 6. BEFORE US LD. AR FOR THE ASSESSEE FILED PAPER BO OK WHICH IS RUNNING PAGES FROM 1 TO 16 AND SUBMITTED THAT ASSESSEE HAS CLAIMED ADMINISTRATIVE AND OTHER EXPENSES TO THE TUNE OF RS.1,98,732/- ONL Y IN THE YEAR UNDER CONSIDERATION. NONE OF THE EXPENSE WAS INCURRED IN CONNECTION WITH THE EARNING OF DIVIDEND INCOME. THE LD. AR IN SUPPORT O F ASSESSEES CLAIM DREW OUR ATTENTION ON PAGE 14 OF THE PAPER BOOK WHERE TH E DETAIL OF ADMINISTRATIVE AND OTHER EXPENSE WAS PLACED. ON THE OTHER HAND, LD . DR VEHEMENTLY RELIED ON THE ORDER OF AUTHORITIES BELOW. 7. WE HAVE GONE THROUGH THE SUBMISSIONS MADE BY BOT H THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IN THE P RESENT CASE THE AO HAS INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT RE AD WITH RULE 8D(2)(III) OF INCOME TAX RULES 1962. ACCORDINGLY THE AO DISALLOWE D A SUM OF RS. ITA NO.2652/KOL/2013 A.Y. 20 09-10 LEBONG INVESTMENTS PVT. LTD. VS. DCIT, CIR- 11, KOL. PAGE 4 7,92,538/- WHICH WAS REDUCED BY THE LEARNED CIT(A) BY DIRECTING THE AO TO WORK OUT THE DISALLOWANCE AFTER CONSIDERING ONLY TH OSE INVESTMENTS WHICH HAVE YIELDED THE DIVIDEND INCOME TO THE ASSESSEE DU RING THE YEAR. HOWEVER THE ASSESSEE HAS CHALLENGED THE APPLICABILITY OF TH E PROVISIONS OF SECTION 14A OF THE ACT ON THE GROUND THAT NO SATISFACTION WAS R ECORDED BY THE AO. ON THE PERUSAL OF FINANCIAL STATEMENTS OF THE ASSESSEE WE FIND THAT TOTAL ADMINISTRATIVE AND OTHER EXPENSES FOR RS.1,98,732.0 0 WAS CLAIMED IN THE PROFIT AND LOSS ACCOUNT WHICH WAS NOT CONSIDERED BY THE LOWER AUTHORITIES FOR MAKING ANY DISALLOWANCE FROM THE PROVISIONS OF SECT ION 14 A OF THE ACT. IT IS AMPLY CLEAR THAT INCOME TAX AUTHORITIES CAN MAKE DI SALLOWANCE UNDER SECTION 14A OF THE ACT AFTER HAVING REGARD TO THE ACCOUNT O F THE ASSESSEE AND THE INCOME TAX AUTHORITIES ARE NOT SATISFIED WITH THE C ORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO EXEMPTED INCOME. IN THE INSTANT CASE IT IS IMPORTANT TO REPRODUCE THE P ROVISIONS OF SECTION 14A OF THE ACT WHICH READS AS UNDER:- [ EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCL UDIBLE IN TOTAL INCOME . 14A .[(1)] FOR THE PURPOSES OF COMPUTING THE TOTAL INCO ME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT O F EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT.] [(2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHO D AS MAY BE PRESCRIBED, IF 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 RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE H AS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PA RT OF THE TOTAL INCOME UNDER THIS ACT:] [ PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOW ER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREA DY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1 ST DAY OF APRIL, 2001.] ITA NO.2652/KOL/2013 A.Y. 20 09-10 LEBONG INVESTMENTS PVT. LTD. VS. DCIT, CIR- 11, KOL. PAGE 5 7.1 FROM THE PLAIN READING, IT IS CLEAR THAT THE AS SESSING OFFICER NEEDS TO INVOKE THE PROVISIONS OF SECTION 14A ONLY AFTER CON SIDERING THE BOOKS OF ACCOUNTS OF THE ASSESSEE. WHAT APPEARS FROM THE FAC TS OF THE CASE BEFORE US THAT THE AO HAS NOT CONSIDERED THE BOOKS OF ACCOUNT S OF THE ASSESSEE AND HAD MECHANICALLY APPLIED THE PROVISIONS OF SECTION 14A READ WITH RULE 8D WHICH IS NOT PERMISSIBLE UNDER THE PROVISIONS OF LA W. IT IS BECAUSE THE TOTAL EXPENSES CLAIMED BY THE ASSESSEE ARE MUCH LESSER TH AN THE EXPENSES DISALLOWED BY THE LOWER AUTHORITIES. THIS ACT CLEAR LY SHOWS THAT NO REGARD WAS GIVEN TO THE BOOKS OF ACCOUNTS OF THE ASSESSEE. WE FIND THAT THE AO HAS NOT BROUGHT ON RECORD ANYTHING WHICH PROVES THAT THERE IS ANY EXPENDITURE INCURRED TOWARDS EARNING OF THIS DIVIDEND INCOME. T HIS ISSUE IS COVERED BY THE DECISION OF MUMBAI TRIBUNAL IN THE CASE OF J. K. IN VESTORS (BOMBAY) LTD. VS. ACIT IN ITA NO.7858/MUM/2011 , AY 2008-09 DATED 13.03.2013, WHEREIN IT HAS BEEN HELD AS UNDER: 11. WE HAVE HEARD THE ARGUMENTS OF THE PARTIES AND HAVE PERUSED THE MATERIAL PLACED BEFORE US. THE ISSUE AS CARVED OUT BY THE AR IS WITH RESPECT TO RS.10,000 ONLY, BUT ON THE CONTRARY, THE ISSUE BEFORE US IS ON THE APPLICABILITY OF RULE 14A AND COMPUTATION OF DI SALLOWANCE AS PER RULE 8D. THE RELEVANT PORTION READ OUT BY THE AR FR OM THE DECISION IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD VS. DCIT (S UPRA) IN PARA 70 OF THE ORDER PERTAINS TO THE CORRECTNESS OF COMPUTATIO N OF DISALLOWANCE AND GIVING VALID REASONS FOR SUCH COMPUTATION. THE CRUX OF ARGUMENT OF AR IS WITH REFERENCE TO SECTION 14(2) WHICH IS AS U NDER: THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT O F EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, IF AO HAVING REGARD TO THE AC COUNTS OF ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. THE WORDS THAT NEED REFERENCE IN THE SECTION ARE I F AO HAVING REGARD TO THE ACCOUNTS OF ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MEANS THAT BEFORE GOING TO THE COMPUTATION, AO HAS TO CROSS THE BARRIER OF THE SATISFACTION WITH THE CORRECTNES S OF THE CLAIM, THEN AO CAN BE PERMITTED TO STRAIGHTAWAY APPLY THE COMPUTAT ION UNDER RULE 8D. 12. THUS THE ISSUE IN THIS APPEAL IS WITH REFERENC E TO INVOKING OF PROVISIONS OF SECTION 14A(2) AND RULE 8D. THE HON'B LE BOMBAY HIGH COURT WHILE UPHOLDING THE CONSTITUTIONAL VALIDITY O F THE SECTION 14A AND ITA NO.2652/KOL/2013 A.Y. 20 09-10 LEBONG INVESTMENTS PVT. LTD. VS. DCIT, CIR- 11, KOL. PAGE 6 RULE 8D HAS THIS TO OBSERVE WITH REFERENCE TO SUB S ECTION 2 & 3 OF SECTION 14A: SUB-SECTIONS (2) AND (3) OF SECTION 14A WERE INSER TED BY AN AMENDMENT BROUGHT ABOUT BY THE FINANCE ACT OF 2006 WITH EFFECT FROM APRIL 1, 2007. UNDER SUB-SECTION (2), THE ASSE SSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE INC URRED BY AN ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WITH S UCH METHOD AS MAY BE PRESCRIBED. SUB-SECTION (2) WAS INSERTED SO AS TO PROVIDE A UNIFORM METHOD APPLICABLE WHERE THE ASSESSING OFF ICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. PARLIAMENT HAS PROVIDED AN ADEQUATE SAFEGUARD TO TH E INVOCATION OF THE POWER TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO THE EARNING OF NONTAXABLE INCOME BY ADOPTION OF THE PRESCRIBED METHOD. THE INVOCATION OF THE POWER IS MADE CONDITI ONAL ON THE OBJECTIVE SATISFACTION OF THE ASSESSING OFFICER IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HAVING RE GARD TO THE ACCOUNTS OF THE ASSESSEE. THESE SAFEGUARDS WHICH AR E IMPLICIT IN THE REQUIREMENTS OF FAIRNESS AND FAIR PROCEDURE UND ER ARTICLE 14 MUST BE OBSERVED BY THE ASSESSING OFFICER WHEN HE A RRIVES AT HIS SATISFACTION UNDER SUB-SECTION (2) OF SECTION 14A. SUB-RULE (1) OF RULE 8D OF THE INCOME-TAX RULES, 1962, HAS ALSO INC ORPORATED THE ESSENTIAL REQUIREMENTS OF SUB SECTION (2) OF SECTIO N 14A BEFORE THE ASSESSING OFFICER PROCEEDS TO APPLY THE METHOD PRESCRIBED UNDER SUB-RULE (2) .. (EMPHASIS SUPPLIED). 13. THE SAME OPINION WAS EXPRESSED BY THE HON'BLE D ELHI HIGH 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 SUPREME 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 H IGH COURT IN THE CASE OF GODREJ AND BOYCE COMPANY LTD VS. DCIT (328 ITR 81). THE RELEVANT PORTIONS OF THE JUDGMENT OF HON'BLE DELHI HIGH COURT ARE AS UNDER: 29. SUB-SECTION (2) OF SECTION 14 A OF THE SAID ACT PROVIDES THE MANNER IN WHICH THE ASSESSING OFFICER IS TO DETERMI NE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME. HOWEVER, IF WE EXAMINE THE PROVIS ION CAREFULLY, WE WOULD FIND THAT THE ASSESSING OFFICER IS REQUIRED T O DETERMINE THE AMOUNT OF SUCH EXPENDITURE ONLY IF THE ASSESSING OF FICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED W ITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPEND ITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, THE REQUIREMENT OF THE ASSESSING OF FICER EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE I NCURRED IN RELATION TO EXEMPT INCOME WOULD BE TRIGGERED ONLY IF THE ASS ESSING OFFICER RETURNS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM ITA NO.2652/KOL/2013 A.Y. 20 09-10 LEBONG INVESTMENTS PVT. LTD. VS. DCIT, CIR- 11, KOL. PAGE 7 OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THE REFORE, 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 OFFICER MUST RECORD THAT HE IS N OT 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-S ECTION (2) OF SECTION 14A. SUBSECTION (3) APPLIES TO CASES WHERE THE ASSE SSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. I N OTHER WORDS, SUB- SECTION (2) DEALS WITH CASES WHERE THE ASSESSEE SPE CIFIES A POSITIVE AMOUNT OF EXPENDITURE IN RELATION TO INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT AND SUB-SECTION (3) APPLIES TO CASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDITURE HAD BEEN INCURRED IN RELATION TO EXEMPT INCOME. IN BOTH CASES, THE ASSES SING 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 MENTIONED IN SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT. IT IS ONLY IF T HE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, IN BOTH CASES, THAT THE ASSESSING OFFICER GETS JURISDICTION TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID AC T IN ACCORDANCE WITH THE PRESCRIBED METHOD. THE PRESCRIBED METHOD BEING THE METHOD STIPULATED IN RULE 8D OF THE SAID RULES. WHILE REJE CTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPEN DITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER WOULD HAVE TO INDICATE COGENT REASONS FOR THE SAME. RULE 8D. 30. AS WE HAVE ALREADY NOTICED, SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT REFERS TO THE METHOD OF DETERMINATION OF T HE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE EXPRESSION USED IS 'SUCH METHOD AS MAY BE PRESCRIBED'. WE HAVE AL READY MENTIONED ABOVE THAT BY VIRTUE OF NOTIFICATION NO.45/2008 DAT ED 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 SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; 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 TOTAL INCOME UNDER THE SAID ACT FO R SUCH PREVIOUS YEAR, THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF THE EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROV ISIONS OF SUB-RULE (2) OF RULE 8D. WE MAY OBSERVE THAT RULE 8D(1) PLACES T HE PROVISIONS OF ITA NO.2652/KOL/2013 A.Y. 20 09-10 LEBONG INVESTMENTS PVT. LTD. VS. DCIT, CIR- 11, KOL. PAGE 8 SECTION 14A(2) AND (3) IN THE CORRECT PERSPECTIVE. AS WE HAVE ALREADY SEEN, WHILE DISCUSSING THE PROVISIONS OF SUB-SECTIO NS (2) AND (3) OF SECTION 14A, THE CONDITION PRECEDENT FOR THE ASSESS ING OFFICER TO HIMSELF DETERMINE THE AMOUNT OF EXPENDITURE IS THAT HE MUST RECORD HIS DISSATISFACTION WITH THE CORRECTNESS OF THE CLAIM O F EXPENDITURE MADE BY THE ASSESSEE OR WITH THE CORRECTNESS OF THE CLAIM M ADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED. IT IS ONLY W HEN 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 INDICATED IN SUB-RULE (2) OF R ULE 8D OF THE SAID RULES. 31. IT IS, THEREFORE, CLEAR THAT DETERMINATION OF T HE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME UNDER RULE 8D WOULD ON LY 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 METHOD FOR DETERMINING THE EXPENDITURE IN RELATION TO EXEM PT INCOME HAS THREE COMPONENTS. THE FIRST COMPONENT BEING THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PAR T OF THE TOTAL INCOME. THE SECOND COMPONENT BEING COMPUTED ON THE BASIS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSESSEE INCURS E XPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO A NY PARTICULAR INCOME OR RECEIPT. THE FORMULA ESSENTIALLY APPORTIONS THE AMO UNT OF EXPENDITURE BY WAY OF INTEREST [OTHER THAN THE AMOUNT OF INTERE ST INCLUDED 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 AVERAGE OF THE TOTAL ASSETS OF THE ASSESSEE. 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 TOTAL INCOME, AS APPEARING IN THE BALAN CE SHEETS OF ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR, 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 UNDER SECTION 14A OF THE SAID ACT. IT IS, THEREFORE, CLEAR THAT IN TERMS OF THE S AID RULE, THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME HAS TWO AS PECTS (A) DIRECT AND (B) INDIRECT. THE DIRECT EXPENDITURE IS STRAIGH TAWAY 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 COM PUTED THROUGH THE PRINCIPLE OF APPORTIONMENT, AS INDICATED ABOVE, AND , IN CASES WHERE THE INDIRECT EXPENDITURE IS NOT BY WAY OF INTEREST, A R ULE OF THUMB FIGURE OF ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVEST MENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, IS TAKEN. 41. SUB-SECTION (2) OF SECTION 14A, AS WE HAVE SEEN , STIPULATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXP ENDITURE INCURRED IN ITA NO.2652/KOL/2013 A.Y. 20 09-10 LEBONG INVESTMENTS PVT. LTD. VS. DCIT, CIR- 11, KOL. PAGE 9 RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME 'IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED'. OF COURSE, THIS DETERMINATION CAN ONLY BE UNDERTAKEN IF THE ASSESSI NG OFFICER 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 IM PLICIT 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 DETERMINI NG SUCH EXPENDITURE WHICH IS NEW AND WHICH WILL OPERATE PROSPECTIVELY. IN OTHER WORDS, SECTION 14A, EVEN PRIOR TO THE INTRODUCTION OF SUB- SECTIONS (2) AND (3) WOULD REQUIRE THE ASSESSING OFFICER TO FIRST REJECT THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXTENT OF SUCH EXPENDIT URE AND SUCH REJECTION MUST BE FOR DISCLOSED COGENT REASONS. IT IS THEN THAT THE QUESTION OF DETERMINATION OF SUCH EXPENDITURE BY TH E ASSESSING OFFICER WOULD ARISE. THE REQUIREMENT OF ADOPTING A SPECIFIC METHOD OF DETERMINING SUCH EXPENDITURE HAS BEEN INTRODUCED BY VIRTUE OF SUB- SECTION (2) OF SECTION 14A. PRIOR TO THAT, THE ASSE SSING WAS FREE TO ADOPT ANY REASONABLE AND ACCEPTABLE METHOD. 14. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES LTD 323 ITR 518 (P&H) HAS ALSO HELD THA T DISALLOWANCE UNDER SECTION 14A COULD NOT STAND WHERE IT WAS FOUN D THAT FOR 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 TH E INVESTMENT IN THE SHARES AND FUNDS WERE OUT OF THE DIVIDEND PROCE EDS. IN VIEW OF THIS FINDING OF FACT, DISALLOWANCE UNDER SECTION 14A WAS NOT SUSTAINABLE. WHETHER, IN A GIVEN SITUATION, ANY EXP ENDITURE WAS INCURRED WHICH WAS TO BE DISALLOWED, WAS A QUESTION OF FACT. THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECT LY SOME EXPENDITURE WAS ALWAYS INCURRED WHICH MUST BE DISAL LOWED UNDER SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURR ED COULD NOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOM E WHICH MAY NULLIFY THE MANDATE OF SECTION 14A, COULD NOT BE AC CEPTED. DISALLOWANCE UNDER SECTION 14A REQUIRED FINDING OF INCURRING OF EXPENDITURE AND WHERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAD BEEN INCURRED, DISALLOWAN CE UNDER SECTION 14A COULD NOT STAND. CONSEQUENTLY, THE DISA LLOWANCE WAS NOT PERMISSIBLE. 15. 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 ANALYZED SIMILAR ISSUE AND CAME TO THE FOLLOWING CONCLUSION: 5 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. SECTION 14A HAS WITHIN IT IMPLI CIT NOTION OF APPORTIONMENT IN THE CASES WHERE THE EXPENDITURE IS INCURRED FOR ITA NO.2652/KOL/2013 A.Y. 20 09-10 LEBONG INVESTMENTS PVT. LTD. VS. DCIT, CIR- 11, KOL. PAGE 10 THE COMPOSITE/INDIVISIBLE ACTIVITIES IN WHICH TAXAB LE AND NON- TAXABLE INCOME IS RECEIVED. BUT WHEN IT IS POSSIBLE TO DETERMINE THE ACTUAL EXPENDITURE IN RELATION TO THE EXEMPT IN COME OR WHEN NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO THE EXEMPT INCOME, THEN PRINCIPLE OF APPORTIONMENT EMBEDDED IN SECTION 14 A HAS NO APPLICATION. THE OBJECTIVE OF SECTION 14 A IS NOT ALLOWING TO REDUCE TAX PAYABLE ON THE NORMAL EXEMPT INCOME B Y DEBITING THE EXPENDITURE INCURRED TO EARN THE EXEMPT INCOME. THUS, THE EXPENSES INCURRED TO EARN EXEMPT INCOME CANNOT BE A LLOWED AND THE EXPENSES SHALL BE ALLOWED ONLY TO THE EXTENT TH EY ARE RELATED TO THE EARNING OF TAXABLE INCOME. IF THERE IS EXPEN DITURE DIRECTLY OR INDIRECTLY INCURRED IN RELATION TO EXEMPT INCOME, T HE SAME CANNOT BE CLAIMED AGAINST THE INCOME, WHICH IS TAXABLE AS IT IS HELD BY THE HON'BLE SUPREME COURT IN CASE OF COMMISSIONER O F INCOME- TAX V. WALFORT SHARE AND STOCK BROKERS P. LTD. REPO RTED 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 EXEMPT INCOME. 5.1 THE EXPENDITURE INCURRED IN RELATION TO THE INC OME WHICH DOES NOT FORM PART OF TOTAL INCOME HAS TO BE DISALLOWED. HOWEVER, IT SHOULD BE PROXIMATE RELATIONSHIP BETWEEN THE EXPEND ITURE AND THE INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOM E. ONCE SUCH PROXIMITY RELATIONSHIPS EXIST, THE DISALLOWANCE IS TO BE EFFECTED. IN CASE THE ASSESSEE HAD CLAIMED THAT NO EXPENDITURE H AS BEEN INCURRED FOR EARNING THE EXEMPT INCOME, IT WAS FOR THE ASSESSING OFFICER TO DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED ANY EXPENDITURE IN RELATION TO INCOME WHICH DID NOT FOR M PART OF TOTAL INCOME AND IF SO TO QUANTIFY THE EXTENT OF DISALLOW ANCE. THUS, IN ORDER TO DISALLOW THE EXPENDITURE UNDER SECTION 14A , THERE MUST BE A LIVE NEXUS BETWEEN THE EXPENDITURE INCURRED AN D THE INCOME NOT FORMING PART OF TOTAL INCOME. NO NOTIONAL EXPEN DITURE CAN BE APPORTIONED FOR THE PURPOSE OF EARNING EXEMPT INCOM E UNLESS THERE IS AN ACTUAL EXPENDITURE IN RELATION TO EARNI NG THE INCOME NOT FORMING PART OF TOTAL INCOME. IF THE EXPENDITUR E IS INCURRED WITH A VIEW TO EARN TAXABLE INCOME AND THERE IS APPARENT DOMINANT AND IMMEDIATE CONNECTION BETWEEN THE EXPENDITURE IN CURRED AND TAXABLE INCOME, THEN NO DISALLOWANCE CAN BE MADE UN DER SECTION 14A MERELY BECAUSE SOME TAX EXEMPT INCOME IS RECEIV ED BY THE ASSESSEE. 5.2 AVERTING TO THE FACTS OF THE CASE IN HAND, THE ASSESSEE 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 CLEAR THAT THE EXPENDITURE INCUR RED AND CLAIMED BY THE ASSESSEE HAS DIRECT NEXUS WITH THE PROFESSIO NAL INCOME OF THE ASSESSEE. IT IS NOT THE CASE OF THE REVENUE THA T THE ASSESSEE HAS USED HIS OFFICIAL MACHINERY AND ESTABLISHMENT F OR EARNING THE ITA NO.2652/KOL/2013 A.Y. 20 09-10 LEBONG INVESTMENTS PVT. LTD. VS. DCIT, CIR- 11, KOL. PAGE 11 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 O THER WORDS WHEN THE ASSESSING OFFICER HAS NOT POINTED OUT THAT CERTAIN EXPENDITURE IS NOT INCURRED FOR EARNING THE PROFESS IONAL INCOME; BUT ARE INCURRED IN RELATION TO DIVIDEND INCOME OR SUCH EXPENDITURE IS INCURRED FOR INSEPARABLE AND INDIVIS IBLE ACTIVITIES COMPRISING PROFESSIONAL AS WELL AS THE ACTIVITIES O N WHICH IS EXEMPT INCOME HAS BEEN EARNED BY THE ASSESSEE, THEN IN THE ABSENCE OF ANY SUCH INSTANCE OF EXPENDITURE, FINDIN G OF ASSESSING OFFICER OR ANY MATERIAL TO SHOW THAT THE EXPENDITURE INCURRED AND CLAIMED BY THE ASSESSEE AGAINST THE TA XABLE 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 VS. ACIT (SUPRA) THIS TRIBUNAL HAS CONSIDERED AND DECIDED AN IDENTICAL ISSUE IN PARA 4 AS UNDER: 4. AFTER HEARING THE ASSESSEE IN PERSON AND ARGUME NTS OF THE LEARNED D.R. WE ARE OF THE OPINION THAT NO DISA LLOWANCE IS CALLED FOR UNDER SECTION 14A. OBVIOUSLY THE ASSE SSEE IS MAINTAINING SEPARATE BOOKS OF ACCOUNT FOR PURPOSE O F BUSINESS AND THESE INVESTMENTS ARE IN HIS PERSONAL CAPACITY. THE A.O. ALSO HAS NOT DISALLOWED ANY EXPE NDITURE OF PERSONAL NATURE OUT OF THE INCOME FROM BUSINESS OR PROFESSION IN THE COMPUTATION OF INCOME IN THE ASSE SSMENT ORDER. IN VIEW OF THIS, WE ARE OF THE OPINION THAT THE EXPENDITURE CLAIMED IN THE BUSINESS OF SHARE DEALIN GS CANNOT BE CORRELATED TO THE INCOMES EARNED IN PERSO NAL CAPACITY THAT TOO ON DIVIDEND, PPF INTEREST AND TAX FREE INTEREST ON RBI BONDS. IN VIEW OF THIS, WE ARE OF T HE OPINION THAT ESTIMATION OF EXPENDITURE OF `.20,000/- OUT OF BUSINESS EXPENDITURE CLAIMED IN BUSINESS ACTIVITY CANNOT BE CONSIDERED FOR BEING INCURRED FOR THIS EARNING OF T AX FREE INCOME OF ABOVE NATURE. IN VIEW OF THIS DISALLOWANC E SO MADE UNDER SECTION 14A OF `.2O,OOO/- IS DELETED. NO T ONLY THAT THE CIT(A) DIRECTED THE A.O. TO CONSIDER THE A LLOWANCE INVOKING RULE 8D. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT 328 I TR 81 HAS CONSIDERED RULE 8D TO BE APPLICABLE PROSPECTIVE AND SINCE THE ASSESSMENT YEAR INVOLVED IS BEFORE THE INTRODUCTION OF SUB SECTION (2) & (3) OF SECTION 14 A, THERE IS NO QUESTION OF DISALLOWING THE AMOUNTS INVOKING RUL E8D. THEREFORE, THE CIT(A)S DIRECTION ON THIS IS SET AS IDE AND THE ADDITIONS SO MADE BY THE A.O. IN THE COMPUTATION OF BUSINESS INCOME IS DELETED. GROUND IS CONSIDERED AL LOWED. ITA NO.2652/KOL/2013 A.Y. 20 09-10 LEBONG INVESTMENTS PVT. LTD. VS. DCIT, CIR- 11, KOL. PAGE 12 5.4 SIMILARLY IN CASE OF AUCHTEL PRODUCTS LTD (SUPR A), IT WAS HELD BY THIS TRIBUNAL IN PARA 15 HAS UNDER: 15. A BARE PERUSAL OF THE ABOVE PROVISIONS DISALLO WABLE AS PER RULE 8D, IF HE, IS NOT SATISFIED WITH THE CORR ECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPEN DITURE IN RELATION TO EXEMPT INCOME. EVEN IF THE ASSESSEE CLA IMS THAT NO EXPENDITURE WAS INCURRED IN RESPECT OF EXEMPT IN COME, THE AO IS SUPPOSED TO FOLLOW THE MANDATE OF RULE 8D IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASSESS EES CLAIM. TO PUT IT SIMPLY, THE FURTHER DISALLOWANCE U/S.14A IS CALLED FOR WHEN THE AO IS NOT SATISFIED WITH THE ASSESSEE S CLAIM OF HAVING INCURRED NO EXPENDITURE OR SOME AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME. SATISFACT ION OF THE AO AS TO THE INCORRECT CLAIM MADE BY THE ASSESS EE IN THIS REGARD IS SINE QUA NON FOR INVOKING THE APPLIC ABILITY OF RULE 8D. SUCH SATISFACTION CAN BE REACHED AND RECOR DED ONLY WHEN THE CLAIM OF THE ASSESSEE IS VERIFIED. IF THE ASSESSEE PROVES BEFORE THE AO THAT IT INCURRED A PA RTICULAR EXPENDITURE IN RESPECT OF EARNING THE EXEMPT INCOME AND THE AO GETS SATISFIED, THEN THERE IS NO REQUIREMENT TO STILL PROCEED WITH THE COMPUTATION OF AMOUNT DISALLOWABLE AS PER RULE 8D. FROM THE ASSESSMENT ORDER, IT IS OBSER VED THAT THE AO SIMPLY KEPT THE ASSESSEES SUBMISSIONS ON RECORD WITHOUT APPRECIATING AS TO WHETHER THESE WER E CORRECT OR NOT. HE PROCEEDED ON THE PREMISE AS IF T HE DISALLOWANCE AS PER RULE 8D IS AUTOMATIC IRRESPECTI VE OF THE GENUINENESS OF THE ASSESSEES CLAIM IN RESPECT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. IT IS AN INCORRECT COURSE ADOPTED BY THE AO. THE CORRECT SEQ UENCE, IN OUR CONSIDERED OPINION, FOR MAKING ANY DISALLOWA NCE U/S. 14A IS TO, FIRSTLY, EXAMINE THE ASSESSEES CLAIM OF HAVING INCURRED SOME EXPENDITURE OR NO EXPENDITURE IN RELA TION TO EXEMPT INCOME, IF THE AO GETS SATISFIED WITH THE SA ME, THEN THERE IS NO NEED TO COMPUTE DISALLOWANCE AS PER RUL E 8D. IT IS ONLY WHEN THE AO IS NOT SATISFIED WITH THE CO RRECTNESS OF THE CLAIM OF ASSESSEE IN RESPECT OF SUCH EXPENDI TURE OR NO EXPENDITURE HAVING BEEN INCURRED IN RELATION TO EXEMPT INCOME, THAT THE MANDATE OF RULE 8D WILL OPERATE. I N THE INSTANT CASE, THE AUTHORITIES BELOW HAVE DIRECTLY G ONE TO THE SECOND STAGE OF COMPUTING DISALLOWANCE U/S. 14A AS PER RULE 8D WITHOUT RENDERING ANY OPINION ON THE CORREC TNESS OR OTHERWISE OF THE ASSESSEES CLAIM IN THIS REGARD . WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER ON THIS ISS UE AND RESTORE THE MATTER TO THE FILE OF AO TO RE-COMPUTE DISALLOWANCE, IF ANY, IN ACCORDANCE WITH OUR ABOVE ITA NO.2652/KOL/2013 A.Y. 20 09-10 LEBONG INVESTMENTS PVT. LTD. VS. DCIT, CIR- 11, KOL. PAGE 13 OBSERVATIONS AFTER DULY EXAMINING THE ASSESSEES CL AIM IN THIS REGARD. 6. IN VIEW OF THE ABOVE DISCUSSION AND FACTS AND CI RCUMSTANCES OF THE CASE, WE ARE OF THE CONSIDERED OPINION THAT NO DISALLOWANCE UNDER SECTION 14A IS CALLED FOR WHEN THE ASSESSEE H AS NOT INCURRED AND CLAIMED ANY EXPENDITURE FOR EARNING TH E EXEMPT INCOME. 16. SIMILAR VIEWS WERE ALSO EXPRESSED BY THE COORDI NATE BENCHES IN THE CASE OF RELAXO FOOTWEARS LTD, VS. AD DL. 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 C LAIM 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 CONSONANCE 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 T HE ASSESSEE AT ALL AND HE HAS STRAIGHTWAY EMBARKED UPO N COMPUTING DISALLOWANCE UNDER RULE 8D. THE COMMISSIO NER (APPEALS) MADE AN ASSUMPTION THAT WHENEVER EXEMPT INCOME IS EARNED THERE WILL BE SOME EXPENDITURE INC URRED IN RELATION THERETO. SUCH PRESUMPTION CANNOT FORM THE BASIS FOR MAKING DISALLOWANCE UNDER RULE 8D. 17. IN THE CASE OF PRIYA EXHIBITORS (P) LTD VS. ACI T (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. (SUPRA), IT IS APPARENT THAT FIRST THE ASSESSI NG OFFICER HAS TO DETERMINE THE CLAIM OF THE ASSESSEE REGARDIN G EXPENSES WHICH NEITHER THE ASSESSING OFFICER NOR TH E COMMISSIONER (APPEALS) HAS DONE IN THE INSTANT CASE . IN FACT, THE SAID DECISION GOES AGAINST THE DEPARTMENT ITSELF IN SO FAR AS THEIR LORDSHIPS HAS HELD THAT THE ASSESSI NG OFFICER MUST IN THE FIRST INSTANCE DETERMINE WHETHER THE CL AIM OF THE ASSESSEE IS CORRECT AND DETERMINATION MUST BE MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE LEGISLATURE DIRECTS HIM TO FOLLOW RULE 8D ONLY WHER E THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM O F ASSESSEE. 18. AFTER CONSIDERING THE PRINCIPLES LAID DOWN BY V ARIOUS JUDGMENTS, IT IS IMPERATIVE THAT THE ASSESSING OFFICER CAN INVOKE RU LE 8D ONLY WHEN HE RECORDS SATISFACTION IN REGARD TO THE CORRECTNESS O F THE CLAIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSE SSEE. THE CONDITION ITA NO.2652/KOL/2013 A.Y. 20 09-10 LEBONG INVESTMENTS PVT. LTD. VS. DCIT, CIR- 11, KOL. PAGE 14 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 OFFICER MUST RECORD THAT HE IS N OT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGA RD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER WOULD HAVE TO INDICATE COGENT REASONS FOR THE SAME. THEREFORE, IT IS ALL THE MORE NECESSARY THAT AO HAS TO EXAMINE THE ACCOUNTS OF ASSESSEE FIRST AND THEN IF HE IS NO T SATISFIED WITH THE CORRECTNESS OF THE CLAIM, ONLY HE CAN INVOKE RULE 8 D. NO SUCH EXAMINATION WAS MADE OR SATISFACTION WAS RECORDED B Y AO IN THIS CASE. IT WAS NOTICED THAT THE ASSESSING OFFICER HAS NOT C ONSIDERED THE CLAIM OF THE ASSESSEE AT ALL AND HE HAS STRAIGHTWAY EMBARKED UPON COMPUTING DISALLOWANCE UNDER RULE 8D ON THE PRESUMPTION THAT PORT FOLIO MANAGEMENT INVOLVES AT LEAST 2% OF CHARGES. DISALLO WANCE UNDER SECTION 14A REQUIRED FINDING OF INCURRING OF EXPEND ITURE AND WHERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPEN DITURE HAD BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A COULD NOT STAND. WE NOTICE THAT ASSESSEE ITSELF DISALLOWED THE INTEREST WHICH IS DIRECTLY APPLICABLE, DMAT CHARGES AND ADMINISTRATIVE EXP ON ESTIMATION T OTALING TO RS.1,55,44,610. ASSESSEE IS A HUNDRED CRORE TURNOVE R COMPANY. AO HAS NOT EXAMINED ANY EXPENDITURE CLAIMED IN P& L AC COUNT SO AS TO RELATE TO EXEMPT INCOME, NOR GAVE A FINDING THAT AS SESSEE CLAIM IS NOT CORRECT FOR ANY REASON. RULE 8D CANNOT BE INVOKED D IRECTLY WITHOUT SATISFYING ABOUT THE CLAIMS OR OTHERWISE. CONSEQUEN TLY, THE DISALLOWANCE WAS NOT PERMISSIBLE. WE THEREFORE, ALL OW THE GROUND OF APPEAL. WE FIND FROM THE FACTS OF THE ABOVE CASE THAT THE A O HAS NOT EXAMINED THE ACCOUNTS OF THE ASSESSEE AND THERE IS NO SATISFACTI ON RECORDED BY THE AO ABOUT THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE AND WITHOUT THE SAME HE INVOKED RULE 8D OF INCOME TAX RULES. WHILE REJECTIN G THE CLAIM OF THE ASSESSEE WITH REGARD TO EXPENDITURE OR NO EXPENDITU RE, AS THE CASE MAY BE, IN RELATION TO EXEMPTED INCOME, THE AO HAS TO INDICATE COGENT REASONS FOR THE SAME. FROM THE FACTS OF THE PRESENT CASE IT IS NOTI CED THAT THE AO HAS NOT CONSIDERED THE CLAIM OF THE ASSESSEE AND STRAIGHT A WAY EMBARKED UPON COMPUTING DISALLOWANCE UNDER RULE 8D OF THE RULES O N PRESUMING THE AVERAGE VALUE OF INVESTMENT AT % OF THE TOTAL VALU E. IN VIEW OF THE ABOVE AND RESPECTFULLY FOLLOWING THE COORDINATE BENCH DECISIO N IN THE CASE OF J. K. ITA NO.2652/KOL/2013 A.Y. 20 09-10 LEBONG INVESTMENTS PVT. LTD. VS. DCIT, CIR- 11, KOL. PAGE 15 INVESTORS (BOMBAY) LTD., (SUPRA), WE REVERSE THE OR DER OF LOWER AUTHORITIES. THUS, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 8. IN THE RESULT, ASSESSEES APPEAL STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT 18/ 01/2017 SD/- SD/- ( !') ( !') (N.V.VASUDEVAN) (WASEEM AHMED) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) KOLKATA, *DKP, SR.P.S $!% &- 18 / 01 /201 7 / COPY OF ORDER FORWARDED TO:- 1. /APPELLANT-LEBONG INVESTMENTS PVT. LTD. CAMELLIA HO USE, 14, GURUSADAY ROAD, KOLKATA -700 019 2. /RESPONDENT-DCIT, CIRCLE-11, AAYAKAR BHAWAN, P7 CHO WRINGHEE ROAD, KOL-69 3. %.%/0 1 1 2 / CONCERNED CIT KOLKATA 4. 1 1 2- / CIT (A) KOLKATA 5. 567 /0, 1 /0 , / DR, ITAT, KOLKATA 6. 7:; <= / GUARD FILE. BY ORDER/ 1! , /TRUE COPY/ / % 1 /0 ,