The Punjab State Coop. Supply & Marketing Fed. Ltd., Chandigarh V. DCIT, Chandigarh

ITA 290/CHANDI/2012

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 1565 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 year(s) 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 13-07-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 01-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR AMA RVEER SINGH
• Keywords: Earning of tax free income; Retrospective amendment; Question of law
• Section: 14A; 37

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI T.R. SOOD, ACCOUNTANT MEMBER ITA NO. 290/CHD/2012 ASSESSMENT YEAR: 2008-09 THE PUNJAB STATE COOP. SUPPLY VS. THE DCIT, CIRCLE 4(1), & MARKETING FED. LTD., CHANDIGARH CHANDIGARH PAN NO. AAAAT3454G ITA NO. 885/CHD/2013 ASSESSMENT YEAR: 2010-11 THE PUNJAB STATE COOP. SUPPLY VS. THE ACIT, CIRCLE 4(1), & MARKETING FEDERATION LTD., CHANDIGARH CHANDIGARH PAN NO. AAAAT3454G & ITA NO. 1003/CHD/2012 ASSESSMENT YEAR: 2009-10 THE PUNJAB STATE COOP. SUPPLY VS. THE ACIT, CIRCLE 4(1), & MARKETING FEDERATION LTD., CHANDIGARH CHANDIGARH PAN NO. AAAAT3454G (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ATUL GOYAL RESPONDENT BY : DR. AMARVEER SINGH DATE OF HEARING : 14/07/2015 DATE OF PRONOUNCEMENT : 03/08/2015 ORDER PER T.R.SOOD, A.M. THE APPEALS BY THE ASSESSEE FOR DIFFERENT ASSESSMEN T YEARS ARE DIRECTED AGAINST THE ORDER DATED 2.12.2011, 3.6.2013 AND 13. 7.2012 RESPECTIVELY OF CIT(A), CHANDIGARH. 2 2. IN ALL THESE APPEALS COMMON ISSUE HAS BEEN RAISE D I.E. CONFIRMATION OF DISALLOWANCE U/S 14A READ WITH RULE 8D. 3. AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT ASSESSEE HAD MAD E CERTAIN INVESTMENTS, INCOME FROM WHICH WAS EXEMPT. THE ASSESSING OFFICER ASKED THE ASSESSEE WHY DISALLOWANCE U/S 14A SHOULD NOT BE MADE. IN RESPONS E, IT WAS MAINLY STATED THAT NO SPECIFIC EXPENDITURE WAS INCURRED. THE BORROWED FUN DS HAVE BEEN SPECIFICALLY USED FOR BUSINESS ACTIVATES, THEREFORE, DISALLOWANCE WAS NOT CALLED FOR. THE ASSESSING OFFICER DID NOT ACCEPT THESE SUBMISSIONS AND MADE D ISALLOWANCE U/S 14A WHICH HAS BEEN CONFIRMED BY LD. CIT(A). 4. BEFORE US, LD. COUNSEL FOR THE ASSESSEE REFERRED TO PAGE 15 OF THE PAPER BOOK AND POINTED OUT THAT ALL THE INVESTMENTS ARE O LD AND THEY HAVE BEEN MADE RIGHT FROM 1962 ONWARDS. THE LAST INVESTMENT MADE W AS 1994. THE INVESTMENTS WERE MADE OUT OF SURPLUS FUNDS AND, THEREFORE, DISA LLOWANCE U/S 14A IS NOT CALLED FOR. IN ANY CASE THE ASSESSING OFFICER HAS NOT POIN TED OUT HOW ASSESSEE HAS INCURRED ANY EXPENDITURE AS REQUIRED U/S 14A AND IN THIS REGARD HE RELIED ON THE DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT V DEEPAK MITTAL & AMRIT SAGAR MITTAL 361 ITR 131(P&H). 5. ON THE OTHER HAND LD. DR SUBMITTED THAT THIS ISS UE HAS BEEN DEALT IN DETAIL BY TRIBUNAL IN THE CASE OF M/S MUNJAL SALES CORPORA TION, LUDHIANA V ACIT IN ITA NO. 274/CHD/2015. FURTHER, EVEN THE DECISION OF HO NBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT V DEEPAK MITTAL & AMRIT SA GAR MITTAL (SUPRA) HAS BEEN DEALT IN DETAIL IN THAT ORDER AND, THEREFORE, THAT ORDER IS APPLICABLE TO THE CASE OF THE ASSESSEE. 3 6. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT ISSUE REGARDING DISALLOWANCE U/S 14A HAS BEEN DEALT IN DETAIL IN TH E CASE OF M/S MUNJAL SALES CORPORATION, LUDHIANA V ACIT IN ITA NO. 274/CHD/20 15 VIDE PARAS 8 TO 17, WHICH ARE REPRODUCED BELOW:- 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY. IT IS IMPORTANT TO NOTE HERE THAT PRESENT ASSESSMENT YEAR IS 2009-10 WHERE RULE 8D WOULD BE APPLICABLE. IN THIS REGARD, WE WOULD LIKE TO REPROD UCE THE DETAIL ANALYSIS GIVEN BY TRIBUNAL REGARDING INTERPRETATION OF SECTI ON 14A AS WELL AS IMPLICATION OF RULE 8D IN THE CASE OF M/S CHANDHA S UPER CARS P. LTD LUDHIANA V ACIT IN ITA NO. 1241/CHD/2011. THIS IS SUE WAS DISCUSSED IN PARAS 17 TO 28 WHICH ARE AS UNDER:- 17 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY AND FIND THAT DURING THE YEAR THE ASSESSEE HAS MADE INVESTM ENT IN PARTNERSHIP AND MUTUAL FUND. THE PROFIT FROM MUTUAL FUND IN TH E FORM OF DIVIDEND IS EXEMPT. AS FAR AS SHARE PROFIT FROM PARTNERSHIP FIRM IS CONCERNED, THE SAME IS ALSO COVERED U/S 10(2A), THEREFORE, TH ERE IS NO FORCE IN THE SUBMISSIONS THAT THE ASSESSEE HAS MADE INVESTME NT IN FIRM WHICH ITSELF IS PAYING TAX, THEREFORE, IT CANNOT BE CALL ED THAT THE INVESTMENT HAS BEEN MADE TO EARN EXEMPT INCOME. SECTION 10(2A ) READS AS UNDER: [(2A) IN THE CASE OF A PERSON BEING A PARTNER OF A FIRM WHICH IS SEPARATELY ASSESSED AS SUCH, HIS SHARE IN THE TOTAL INCOME OF THE FIRM. EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE, THE S HARE OF A PARTNER IN THE TOTAL INCOME OF A FIRM SEPARATELY ASSESSED AS SUCH SHALL, NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER LAW, BE AN AMOUNT WHICH BEARS TO THE T OTAL INCOME OF THE FIRM THE SAME PROPORTION AS THE AMOUNT OF HIS SHARE IN THE PROFIT S OF THE FIRM IN ACCORDANCE WITH THE PARTNERSHIP DEED BEARS TO SUCH PROFITS ;] IN ANY CASE BOMBAY BENCH OF THE TRIBUNAL HAD AN OCC ASION TO CONSIDER THIS ISSUE IN CASE OF DHARMASINGH M. POPAT V ACIT, 127 TTJ (MUM) 61. IN THAT CASE IT WAS HELD AS UNDER:- THOUGH THE PARTNERSHIP FIRM IS NOT A SEPARATE ENTI TY AS PER GENERAL LAW, FOR A SPECIFIC PURPOSE IT MAY BE TREATED AS INDEPENDENT O F ITS PARTNERS UNDER THE PROVISIONS OF IT ACT, 1961. TO PUT IT DIFFERENTLY, THE CONCEPT OF PARTNERSHIP FIRM, BEING A COMPENDIUM OF ITS PARTNERS IS SUBJECT TO TH E MODIFYING SUCH CONCEPT OF PARTNERSHIP LAW WHICH MEANS THAT IF THERE EXIST NO PROVISION IN THE TAX LAWS FOR A PARTICULAR SITUATION, THEN, THE PROVISIONS OF PARTN ERSHIP LAW WOULD BE THE GUIDING FACTOR FOR ADJUDICATION OF THAT ISSUE. THE CURRENT JUDICIAL THOUGHT IS LEANING TOWARDS THE CONCEPT OF SEPARATE LEGAL ENTITY OF PARTNERSHIP FIRM THAN THAT OF ITS PARTNERS FOR THE PURPOSES OF IT ACT, 1961. 'HERE WAS A JUDICIAL OPINION THAT ON DISTRIBUTION OR DIVISION OR ALLOTMENT OF ASSETS TO PARTNERS BY THE ON DISSOLUTION OR OTHERWISE THERE RESULTED NO GAIN EXIGIBLE TO TAX, HOWEVER, BY INCOR PORATING S. -45(2), 45(3) AND 45(4), THE LEGISLATURE HAS DECLARED ITS INTENTION IN CLEAR TERMS THAT PARTNERS AND THE FIRM ARE TWO INDEPENDENT ENTITIES NOT ONLY FOR THE PURPO SES OF ASSESSMENT BUT ALSO FOR THE PURPOSE OF DETERMINING THE CHARGE OF INCOME-TAX ON THE TRANSACTIONS ENTERED INTO BETWEEN THEM. SIMILARLY, FROM ASST. YR. 1993-9 4 PARTNERSHIP FIRMS HAVE BEEN GIVEN A CORPORATE PERSONALITY IN A LIMITED SENSE BY MAKING NECESSARY AMENDMENTS IN 4 THE PROVISIONS OF SS. 10(2A), 28(V), 40(B) AND RELE VANT PROCEDURAL SECTIONS WHICH CONCLUSIVELY PROVE THAT PARTNERSHIP FIRM AS SUCH IS INDEPENDENT FROM ITS PARTNERS AS FAR AS PROVISIONS OF IT ACT, 1961 ARE CONCERNED. SP ECIFIC PROVISIONS MENTIONED HEREINABOVE READ WITH CIRCULAR NO. 636, DT. 31ST AU G., 1992 GO TO SHOW THAT A FIRM IS TO BE TAXED AS SEPARATE ENTITY AND THE GROSS TOT AL INCOME OF THE FIRM IS TO BE DETERMINED IN THE NORMAL WAY UNDER DIFFERENT HEADS AS IN THE CASE OF ANY TAXABLE ENTITY, HENCE, ANY EXPENDITURE WHICH HAS BEEN INCUR RED BY FIRM FOR THE PURPOSES OF ITS BUSINESS IS TO BE ALLOWED AS A DEDUCTION IN COM PUTING THE TOTAL INCOME OF THE FIRM SUBJECT TO ANY SPECIFIC LIMITATION/PROHIBITION PROV IDED FOR THE ALLOWANCE OF SUCH EXPENDITURE. HAVING REGARD TO JUDICIAL OPINION AND ALSO THE LEGISLATIVE CHANGES IN THE ACT, A PARTNERSHIP FIRM IS A SEPARATE ENTITY THAN T HAT OF ITS PARTNERS UNDER THE IT ACT AND IF THERE EXISTS ANY SPECIFIC PROVISION IN T HE INCOME-TAX LAW MODIFYING THE PARTNERSHIP LAW THEN, SUCH SPECIFIC PROVISION SHALL BE APPLIED AND IF THE TAX LAW IS SILENT ON A SPECIFIC ISSUE, THEN A REFERENCE WILL H AVE TO BE MADE TO THE PROVISIONS OF PARTNERSHIP LAW FOR THE ADJUDICATION OF THE SAME AND IN THE PRESENT CASE, PROVISIONS OF LAW SUFFICIENTLY TAKE CARE OF THE ISSUE INVOLVED HEREIN, HENCE, THE ISSUE IS TO BE DECIDED ACCORDING LY. THERE EXIST SPECIFIC PROVISIONS FOR COMPUTING THE INCOME OF THE PARTNERSHIP FIRM AS WELL AS THAT OF ITS PARTNERS, HENCE, TOTAL INCOME OF BOTH IS LIABLE TO BE COMPUTE D IN ACCORDANCE WITH SUCH PROVISIONS. SINCE PARTNERSHIP FIRM, FOR THE PURPOSE OF IT ACT IS A SEPARATEASSESSABLE ENTITY AND THEREFORE PARTNERS VIS-A-VIS PARTNERSHIP FIRM WOULD STAND ON THE SAME FOOTING OF SHAREHOLDERS VIS-A-VIS COMPANY. ACCORDINGLY INCOME CHARGED IN THE HANDS OF A PARTNERSHIP FIRM THEREFORE, PROVISIONS OF SECT ION 14A WOULD BE APPLICABLE IN COMPUTING THE TOTAL INCOME OF SUCH PARTNER IN RESPE CT OF HIS SHARE IN THE PROFITS OF SUCH FIRM - CIT V. A.W. FIGGIES & CO. & ORS (1953) 24 ITR 4 05 (S.C), DY CST (LAW) V K. KELUKUTTY (1985) 155 ITR 158 (S.C), BIST & SONS, VS. CIT (1979) 8 CTR (SC) 152 : (1979) 116 ITR 131 (SC), QT VS. KALURAM PURANMAL (1979) 12 CTR (BOM) 225 : (1979) 119 ITR 564 (BOM) AND CIT VS. CHASE TR ADING CO. (1998) 147 CTR (BOM) 228 . (1999) 236 ITR 665 (BOM) APPLIED; CIT VS. R,M, CHIDAMBARARN.PILLAI 1977 CTR (SC) 71 : (1977) 106 ITR 292 (SC) DISTINGUISHED. THEREFORE, IT IS CLEAR THAT INVESTMENT MADE IN A FI RM IS TO BE TREATED AS INVESTMENT FOR EARNING EXEMPT INCOME. 18 COMING TO THE SECOND ASPECT OF THE ISSUE THAT WH ETHER IN ANY NEXUS IS REQUIRED BETWEEN THE INVESTMENT AND THE DI SALLOWANCE TO BE MADE U/S 14A, WE SHALL FIRST REFER TO THE DECISION RELIED ON BY THE LD. COUNSEL OF THE ASSESSEE IN CASE OF CIT V. WINSOM TE XTILE, 319 ITR 204. IN THAT CASE FOLLOWING QUESTION OF LAW WAS CONSIDER ED: WHETHER, IN THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HON'BLE INCOME-TAX APPELLATE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE ORDER OF THE JURISDICTIONAL HIGH COURT IN THE C ASE OF CIT V. ABHISHEK INDUSTRIES LTD. REPORTED IN (2006) 286 ITR 1 (PH); 156 TAXMAN 257 (PH) ARE NOT APPLICABLE IN THIS CASE AND THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S 14A OF THE INCOME -TAX ACT IS NOT AS PER LAW. THE ASSESSEE WAS ENGAGED IN THE MANUFACTURING AND S ALE OF COTTON YARN AND HAD MADE CERTAIN INVESTMENTS. THE ASSESSI NG OFFICER DISALLOWED INTEREST ON INVESTMENT IN SHARES U/S 14A BECAUSE DIVIDEND INCOME WAS EXEMPT. THE LD. CIT(A) DELETED THE DISAL LOWANCE BY OBSERVING THAT THE ASSESSEE HAD MADE INVESTMENT USI NG ITS OWN FUNDS AND NO INTEREST WAS INCURRED. THE TRIBUNAL CONFIRM ED THE FINDINGS OF THE LD. CIT(A). BEFORE THE HON'BLE HIGH COURT THE CONTENTION WAS RAISED THAT EVEN IF THE ASSESSEE MADE INVESTMENT OU T OF ITS OWN FUNDS THE ASSESSEE HAD TAKEN LOANS ON WHICH INTEREST WAS PAID AND THEREFORE, THE MONEY AVAILABLE WITH THE ASSESSEE WAS IN COMMON KITTY IN VIEW OF 5 THE DECISION OF THE COURT IN CASE OF CIT V.ABHISHEK INDUSTRIES (SUPRA). HON'BLE HIGH COURT HELD VIDE PARA 7 AS UNDER:- WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. THE JUDGMENT OF THIS COURT IN ABHISHEK INDUSTRIES LTD. (2006) 286 I TR 1 WAS ON THE ISSUE OF ALLOWABILITY OF INTEREST PAID ON LOANS GIVEN TO SISTER CONCERNS, WITHOUT INTEREST. IT WAS HELD THAT DEDUC TION FOR INTEREST WAS PERMISSIBLE WHEN LOAN WAS TAKEN FOR BU SINESS PURPOSE AND NOT FOR DIVERTING THE SAME TO SISTER CO NCERN WITHOUT HAVING NEXUS WITH THE BUSINESS. THE OBSERVATIONS M ADE THEREIN HAVE TO BE READ IN THAT CONTEXT. IN THE PRESENT CA SED, ADMITTEDLY, THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATION, SECTION 14A COULD HAVE NO APPL ICATION. 19 SECOND DECISION RELIED ON IS THAT OF CIT V. HERO CYCLES (SUPRA). IN THAT CASE FOLLOWING QUESTION WAS RAISED BEFORE T HE COURT: WHETHER ON THE FACTS AND IN LAW, THE HON'BLE INCOM E-TAX APPELLATE TRIBUNAL WAS LEGALLY JUSTIFIED IN DELETIN G THE DISALLOWANCE OF IGNORING THE EVIDENCE RELIED ON BY THE ASSESSING OFFICER AND HOLDING THAT A CLEAR NEXUS HAS NOT BEEN ESTABLISHED THAT THE INTEREST BEARING FUNDS HAVE BEEN VESTED FO R INVESTMENTS GENERATING TAX FREE DIVIDEND INCOME. 20 IN THIS CASE THE ASSESSING OFFICER MADE DISALLO WANCE U/S 14A(3) WHICH WAS PARTLY UPHELD BY THE LD. CIT(A). ON FURT HER APPEAL, THE TRIBUNAL HELD THAT THERE WAS NO NEXUS BETWEEN THE E XPENDITURE INCURRED AND THE INCOME GENERATED, THEREFORE, DISAL LOWANCE CANNOT BE MADE. IT WAS ALSO OBSERVED THAT MAIN UNIT, LUDHIAN A HAD MORE INTEREST INCOME THAN THE EXPENDITURE AND THE FUNDS FLOW POSITION SHOWS THAT ONLY NON INTEREST BEARING FUNDS HAVE BEEN UTIL IZED FOR MAKING THE INVESTMENT. 21 BEFORE THE COURT, THE DEPARTMENT ALSO CONTENDED THAT RULE 8D PROVIDE THAT EVEN WHERE THE ASSESSEE CLAIMED THAT N O EXPENSES HAVE BEEN INCURRED, CORRECTNESS OF SUCH CLAIM CAN BE GONE INT O BY THE ASSESSING OFFICER. HON'BLE HIGH COURT HELD VIDE PARA 5 AS UN DER: IN VIEW OF THE FINDING REPRODUCED ABOVE, IT IS CLE AR THAT THE EXPENDITURE ON INTEREST WAS SET OFF AGAINST THE INCOME FROM INTEREST AND TH E INVESTMENT IN THE SHARE AND FUNDS WERE OUT OF THE DIVIDEND PROCEEDS. IN VIEW O F THIS FINDING OF FACT, DISALLOWANCE U/S 14A WAS NO SUSTAINABLE. WHETHER, IN A GIVEN SITUATION, ANY EXPENDITURE WAS INCURRED WHICH WAS TO BE DISALLOWED, IS A QUESTION OF FACT. THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITUR E IS ALWAYS INCURRED WHICH MUST BE DISALLOWED UNDER SECTION 14A AND THE IMPACT OF E XPENDITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOM E WHICH MAY NULLIFY THE MANDATE OF SECTION 14A, CANNOT BE ACCEPTED. DISALLOWANCE UN DER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE WHERE IT IS FOU ND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWAN CE UNDER SECTION 14A CANNOT STAND. IN THE PRESENT CASE, FINDING ON THIS ASPECT, AGAINST THE REVENUE, IS NOT SHOWN TO BE PERVERSE. CONSEQUENTLY, DISALLOWANCE IS NOT P ERMISSIBLE. WE HAVE TAKEN THIS VIEW EARLIER SO IN I. T. A. NO. 504 OF 2008 IN CIT V. WINSOME TEXTILE INDUSTRIES LTD. 1)09] 319 ITR 204 (P&H), (DECIDED ON AUGUST 25, 200 9), WHEREIN IT WAS OBSERVED AS UNDER (PAGE 207) : 6 'THE CONTENTION RAISED ON BEHALF OF THE REVENUE IS THAT EVEN IF THE ASSESSEE HAD MADE INVESTMENT IN SHARES OUT OF ITS OWN FUNDS, THE ASSESSEE HAD TAKEN LOANS ON WHICH INTEREST WAS PAID AND ALL THE MONEY AVAILABLE WITH THE ASSESSEE WAS IN COMMON KITTY, AS HELD BY THIS COURT IN CIT V. ABHISHEK INDUSTRIES LTD. [2006] 286 ITR 1 AND, THEREFORE, DI SALLOWANCE UNDER SECTION 14A WAS JUSTIFIED. WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. THE JU DGMENT OF THIS COURT IN ABHISHEK INDUSTRIES LTD. [2006] 286 ITR 1 WAS ON TH E ISSUE OF ALLOWABILITY OF INTEREST PAID ON LOANS GIVEN TO SISTER CONCERNS, WI THOUT INTEREST. IT WAS HELD THAT DEDUCTION FOR INTEREST WAS PERMISSIBLE WHEN LO AN WAS TAKEN FOR BUSINESS PURPOSE AND NOT FOR DIVERTING THE SAME TO SISTER CONCERN WITHOUT HAVING NEXUS WITH THE BUSINESS. OBSERVATIONS MADE T HEREIN HAVE TO BE READ IN THAT CONTEXT. IN THE PRESENT CASE, ADMITTED LY, THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATION, SECTION 14A COULD HAVE NO APPLICATION.' IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THAT N O SUBSTANTIAL QUESTION OF LAW ARISE. 22 IT IS CLEAR THAT BOTH THE ABOVE DECISIONS PERTAI N TO ASSESSMENT YEAR 2004-05 WHEN RULE 8D WAS NOT EVEN IN STATUTE BOOK. RULE 8D HAS BEEN INTRODUCED BY I.T. RULES (5 TH AMENDMENT) W.E.F. 24.3.2008. THEREFORE, IN BOTH THE ABOVE CASES, RULE 8D COULD N OT HAVE BEEN POSSIBLY APPLIED. IN ANY CASE IN A LEADING JUDGMEN T THE HON'BLE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOYCEE MANU FACTURING V DCIT, 328 ITR 81 (BOM) HELD THAT RULE 8D CAN NOT HA VE RETROSPECTIVE APPLICATION AND THE SAME CAN BE APPLIED ONLY FROM A SSESSMENT YEAR 2008-09. FURTHER IN CASE OF CIT V. WINSOM TEXTILE, 319 ITR 204, THE ISSUE WAS WHETHER THE PRINCIPLES LAID DOWN IN CASE OF ABHISHEK INDUSTRIES (SUPRA) WERE APPLICABLE FOR THE DISALLOW ANCE U/S 14A AND THE HON'BLE COURT HELD THAT THE DECISION OF ABHISHE K INDUSTRIES (SUPRA) OPERATES IN A DIFFERENT FIELD. SIMILARLY IN CASE OF HERO CYCLES (SUPRA) THE TRIBUNAL HAS GIVEN A CATEGORICAL FINDIN G THAT THE INVESTMENT HAS BEEN MADE OUT OF NON INTEREST BEARIN G FUNDS. FROM THESE TWO DECISIONS ONLY IT CAN BE CONCLUDED THAT I F INVESTMENT HAS BEEN MADE CLEARLY OUT OF NON INTEREST BEARING FUNDS THEN SECTION 14A IS NOT BE APPLICABLE. IN CASE BEFORE US, THE SITUA TION IS DIFFERENT WHICH WE SHALL SEE LITTLE LATER. WE WOULD ALSO LIK E TO OBSERVE THAT EVEN HON'BLE PUNJAB & HARYANA HIGH COURT IN A LATTE R DECISION IN CASE OF CIT V. PUNJAB STATE INDUSTRIAL DEVELOPMENT COOPERATIVE LTD. HAS MADE OBSERVATIONS WHICH WE WILL ALSO LIKE TO DI SCUSS LITTLE LATER. 23 HON'BLE BOMBAY HIGH COURT CONSIDERED THE ISSUES ARISING OUT OF SECTION 14A AS WELL AS IMPLICATIONS OF RULE 8D. HO N'BLE HIGH COURT REACHED THE FOLLOWING CONCLUSION AT PARA 88 WHICH R EADS AS UNDER: 88 OUR CONCLUSION IN T HIS JUDGMENT ARE AS FOLLOWS : (I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FA LLING WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME-TAX ACT, 1961, AS WAS APPLICABLE FOR THE ASSESSMENT YEAR 2002-03 IS NOT INCLUDIBLE IN COMPUTING THE TOT AL INCOME OF THE ASSESSEE. CONSEQUENTLY, NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIRTUE OF THE PROVISIONS OF SECTI ON 14A(1) ; 7 (II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTIO N 115-O(1) OF ADDITIONAL INCOME-TAX ON PROFITS DECLARED, DISTRIBUTED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS OF THE COMPANY. THE COMPANY IS CHARGEAB LE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAYS TAX IN DISCHARG E OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT FOR ITS SHAREHOLDERS. IN T HE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DIVIDEND, INCOME BY WAY OF DIVIDEND DO ES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROVISIONS OF SECTION 10(33 ). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS ; (III) THE PROVISIONS OF SUB-SECTIONS (2) AND '(3) O F SECTION 14A OF THE INCOME-TAX ACT 1961 ARE CONSTITUTIONALLY VALID ; (IV) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RU LES AS INSERTED BY THE INCOME-TAX (FIFTH AMENDMENT) RULES, 2008, ARE NOT ULTRA VIRES THE PROVISIONS OF SECTION 14A, MORE PARTICULARLY SUB-SECTION (2) AND DO NOT OFFEND ARTICLE 14 OF THE CONSTITUTION ; (V) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RUL ES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24, 2008, SHALL APPLY WITH EFFECT FROM THE ASSESSMENT YEAR 2008- 09 ; (VI) EVEN PRIOR TO THE ASSESSMENT YEAR 2008-09, WHE N RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORCE THE PROVISIONS OF SUBSECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFFICER IS DUTY BOU ND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST AD OPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND C IRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD ; (YII) THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2002- 03 SHALL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL DETE RMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RE LATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE T OTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REAS ONABLE BASIS FOR EFFECTING THE APPOR- TIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSE SSING OFFICER SHALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. FROM ABOVE, IT IS CLEAR THAT EVEN THE TAXES PAID U/ S 115-O WHICH IS ALSO KNOWN AS DIVIDEND DISTRIBUTION TAXES, WOULD NO T MAKE DIVIDEND INCOME IN THE HANDS OF SHAREHOLDER AS NON-EXEMPT. S IMILARLY THE TAXES PAID BY A FIRM WOULD BE TAXES ON THE PROFIT OF THE FIRM AND NOT IN THE HANDS OF THE ASSESSEE. THE ABOVE DECISION ALSO HEL D THAT RULE 8D WOULD BE APPLICABLE ONLY FROM ASSESSMENT YEAR 2008- 09. IN THIS DECISION THE THEORY OF APPORTIONMENT OF EXPENDITURE WHICH WAS CONFIRMED BY THE HON'BLE SUPREME COURT IN CASE OF C IT V. WALFORT SHARE AND STOCK BROKERS P LTD (2010) 326 ITR 1 (S.C ), WAS FOLLOWED. IN FACT BEFORE INTRODUCTION OF SECTION 14A, THE ASS ESSEE HAD A RIGHT TO CLAIM ALL THE EXPENSES IF SUCH EXPENSES COULD NOT B E BI-FURCATED AGAINST NORMAL TAXABLE INCOME AS WELL AS EXEMPTED I NCOME IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN CASE OF RA JASTHAN 8 WAREHOUSING COOPERATION V CIT, 242 ITR 450. THIS P OSITION GOT CHANGED AFTER THE INTRODUCTION OF SECTION 14A BY FI NANCE ACT, 2001. THE MEMORANDUM EXPLAINING THE PROVISIONS OF FINANCE BILL READS AS UNDER: CERTAIN INCOME ARE NOT INCLUDIBLE WHILE COMPUTATIN G THE TOTAL INCOME AS THESE ARE EXEMPT UNDER VARIOUS PROVISIONS OF THE ACT. THERE HAVE BEEN CASES WHERE DEDUCTIONS HAVE BEEN CLAIMED IN RESPECT OF SUCH EXE MPT INCOME. THIS IN EFFECT MEANS THAT THE TAX INCENTIVE GIVEN BY WAY OF EXEMPT IONS TO CERTAIN CATEGORIES OF INCOME IS BEING USED TO REDUCE ALSO THE TAX PAYABLE ON THE NON-EXEMPT INCOME BY DEBITING THE EXPENSES INCURRED TO EARN THE EXEMPT I NCOME AGAINST TAXABLE INCOME. THIS IS AGAIN THE BASIC PRINCIPLES OF TAXATION WHER EBY ONLY THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE IS TAXED. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO IN RESPECT OF THE NET INCOME. EXPENSES INCURRED CA N BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE 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 A CT, 1961, THAT NO DEDUCTION SHALL BE MADE IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE INCOME-TAX ACT. THE PROPOSED AMENDMENT WILL TAKE EFFECT RETROSPECTI VELY FROM APRIL 1, 1962 AND WILL ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YE AR 1962-63 AND SUBSEQUENT ASSESSMENT YEAR. 24 HON'BLE BOMBAY HIGH COURT NOTED THIS DECISION AN D THEN CONFIRMED THE THEORY OF APPORTIONMENT OF EXPENSES A ND HELD THAT SAME IS VERY MUCH APPLICABLE IN SECTION 14A. AT PLACITU M 28 IT HAS BEEN OBSERVED AS UNDER: DURING THE COURSE OF THIS JUDGMENT, IT WOULD BE NE CESSARY TO REVISIT THE DECISION OF HON'BLE SUPREME COURT IN WALFORT. AT THIS STAGE, H OWEVER, IT NEEDS TO BE EMPHASIZED THAT THE PROVISIONS OF SECTION 14A WERE CONSTRUED I N WALFORT TO EVINCE PARLIAMENTARY INTENT NOT TO ALLOW DEDUCTION IN RESPECT OF ANY EXP ENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT AGAINST TAXABLE INCOME. SECTION 14A IS CLARIFICATOR Y OF THE POSITION THAT EXPENSE CAN BE ALLOWED ONLY TO THE EXTENT THAT THEY ARE RELATAB LE TO THE EARNING OF TAXABLE INCOME. ONLY THOSE EXPENSES WHICH ARE IN RESPECT OF THE E ARNING OF TAXABLE INCOME CAN BE ALLOWED. THE SECTION 14A BROADENS THE THEORY OF AP PORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE INCOME IS EVIDENT F ROM THE FOLLOWING OBSERVATIONS OF THE HON'BLE SUPREME COURT PAGE 17) THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON- TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED U/S 14A . READING SECTION 14 IN JUXTAPOSITION WITH SECTIONS 15 TO 59, IT IS CLEAR T HAT THE WORDS EXPENDITURE INCURRED IN SECTION 14A REFERS TO EXPENDITURE ON R ENT, TAXES, SALARIES, INTEREST, ETC., IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37). THUS ON THE BASIS OF ABOVE, IT WAS HELD THAT AFTER INTRODUCTION OF SECTION 14A, IT WAS POSSIBLE TO APPORTION THE EXPENDITURE BETWEEN TAXABLE INCOME AND EXEMPTED INCOME. 9 25 AS OBSERVED EARLIER, ALMOST SIMILAR OBSERVATIONS HAVE BEEN MADE BY THE HON'BLE PUNJAB & HARYANA HIGH COURT IN A REC ENT JUDGMENT IN CASE OF CIT V. PUNJAB STATE INDUSTRIAL DEVELOPMENT COOPERATION LTD. IN ITA NO. 565 OF 2006 VIDE ORDER DATED 18.7.2011. 11. ADVERTING TO QUESTION NO.(II), LEARNED COUNSEL FOR THE REVENUE SUBMITTED THAT WHILE DETERMINING THE QUANTUM OF DEDUCTION ADM ISSIBLE TO THE ASSESSEE UNDER SECTION 80M OF THE ACT, THE EXPENDITURE INCURRED RE LATING TO THE EARNING OF DIVIDEND INCOME HAS TO BE EXCLUDED THERE-FROM. ACCORDING TO THE LEARNED COUNSEL, THE EXPENDITURE WHICH WAS TO BE DEDUCTED WAS REQUIRED T O BE DEDUCTED ON PROPORTIONAL BASIS FOR INCURRING OF SUCH EXPENDITURE. RELIANCE W AS PLACED ON SECTION 14A OF THE ACT WHICH WAS INCORPORATED BY FINANCE ACT 2001 RETROSPE CTIVELY .W.E.F. 1.4,1962. SUPPORT WAS GATHERED FROM THE DECISION OF THE RAJASTHAN HIG H COURT IN SHEKHAVATI GENERAL TRADERS LTD. VS. COMMISSIONER OF INCOME TAX (1987) 167 ITR116 AND THE JUDGMENT OF THIS COURT IN INCOME TAX APPEAL NO. 530 OF 2006 (THE PUNJAB STATE COOPERATIVE MILK PRODUCER'S FEDERATION LTD, VS. COMMISSIONER OF INCOME TAX-IF AND ANOTHER) DECIDED ON 28,3,2011 AND OF THE APEX COURT IN COMMISSIONER OF INCOME TAX VS. WALFORT SHARE & STOCK BROKERS (P) LTD. (2010) 41 DTR JUDGMENTS 233. 12. CONTROVERTING THE AFORESAID SUBMISSION, LEARNED COU NSEL FOR THE ASSESSEE RELIED UPON THE DECISION OF THE CA LCUTTA HIGH COURT IN COMMISSIONER OF INCOME TAX VS. UNITED COLLIERIES LT D. (1993) 203 ITR 857 (CALCUTTA). LEARNED COUNSE L ALSO RELIED UPON COMMISSIONER OF INCOME TAX VS. CENTRAL BANK OF INDI A (2003) 264 ITR 522 (BOMBAY) AND STATE BANK OF INDORE VS. COMMISSIONER OF INCOME TAX (2005) 275 ITR 23 (MP). IT WAS CONTENDED THAT IT WAS ONLY THE ACTUAL EXPENSE INCUR RED FOR EARNING DIVIDEND WHICH WAS TO BE DEDUCTED FROM THE DIVIDEND INCOME FOR CALCULATING THE ADMISSIBLE DEDUCTIONS UNDER SECTION 80M OF THE ACT. IT WAS URGED THAT THE PLEA OF THE REVENUE THAT PROP ORTIONAL EXPENSES SHOULD ALSO BE REDUCED, WAS AGAINST THE STATUTE. 13. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO THE RESPECTIVE SUBMISSIONS OF THE LEARNED COUNSEL FOR T HE PARTIES AND FIND *FORCE IN THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE REVENUE. FINANCE ACT 2001 HAD INSERTED SECTION 14A WITH EFFECT FROM 1.4.1962. ACCORDING TO THE SAID SECTION, ANY EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING IN COME WHICH DID NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT WAS NOT TO BE ALL OWED AS EXPENSES. THIS COURT IN THE CASE OF PUNJAB STATE COOPERATIVE MILK PRODUCER'S FEDERATION LTD.'S CASE (SUPRA) RELYING UPON THE DECISION OF THE APEX COURT IN WALFORT SHARE AND STOCK BROKERS'S CASE (SUPRA), WHEREIN, WHILE DEFINING THE SCOPE OF SECTION 14A OF THE ACT, INCORPORATED RETROSPECTIVELY W.E.F. 1.4.1962, IT HAD LAID DOWN AS UNDER: THE INSERTION OF SECTION 14A WITH RETROSPECTIVE EFFECT IS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT TO ALLOW DEDUCTION IN RESPECT OF ANY EXPENDIIURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST THE TAXABLE INCOME (SEE CIRCULAR NO. 14 OF 2001 DATED 22.11.2001 K IN OTHER WORDS, SECTION 14A CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE 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 INCOME AND PA RTLY TO THE TAXABLE 10 INCOME. IN THE ABSENCE OF SECTION 14A, THE EXPENDIT URE INCURRED IN RESPECT OF EXEMPT INCOME WAS BEING CLAIMED AGAINST TAXABLE INC OME. THE MANDATE OF SECTION 14A IS CLEAR. IT DESIRES TO CURB THE PRACTI CE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXAB LE INCOME AND AT THE SAME TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RE LATION TO EXEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 1 4A IS THAT CERTAIN INCOMES ARE NOT INCLUDIBIE WHILE COMPUTING TOTAL INCOME AS THES E ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE ACT. IN THE PAST, THERE HAVE BEAN IN WHICH DEDUCTION HAS BEEN SOUGHT IN RESPECT OF SUCH INCOMES WHICH IN E FFECT WOULD MEAN THAT TAX INCENTIVES TO CERTAIN INCOMES WAS BEING USED TO RED UCE THE TAX PAYABLE ON THE NON- EXEMPT INCOME BY DEBITING THE EXPENSES, INCURRED TO EARN THE EXEMPT INCOME, AGAINST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXA TION IS TO TAX THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE. OH THE SA ME ANALOGY THE EXEMPTION IS ALSO IN RESPECT OF NET INCOME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE INCOME. THIS IS THE PURPORT OF SECTION 1 4A. IN SECTION 14A, THE FIRST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS OF INCOME A S PRESCRIBED UNDER CHAPTER IV WOULD FALL WITHIN SECTION 14A. THE NEXT PHRASE I S, 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL 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 1 4A. FURTHER, SECTION 14 SPECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE CHARGEABLE, AN INCOME HAS TO BE BROUGHT UNDER ONE O F THE FIVE HEADS. SECTIONS 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 QUANTIF Y THE TOTAL INCOME CHARGEABLE TO TAX. THE PERMISSIBLE DEDUCTIONS ENUMERATED IN SE CTIONS 15 TO 59 ARE NOW TO BE ALLOWED ONLY WITH REFERENCE TO INCOME WHICH IS B ROUGHT UNDER ONE OF THE ABOVE HEADS AND IS CHARGEABLE TO TAX. IF AN INCOME LIKE DIVIDEND INCOME IS NOT A PART OF THE TOTAL INCOME, THE EXPENDITURE/DEDUCTION THOUGH OF THE NATURE SPECIFIED IN PART OF TOTAL INCOME COULD NOT BE ALLOWED AGAINST ORE INCOME INCLUDIBLE IN THE TOTAL INCOME FOR THE PURPOSE OF C HARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT OF EXPENDITURES BETWEEN TAX ABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 1 4A. READING SECTION 14 IN JUXTAPOSITION WITH SECTIONS 15 TO 59, IT IS CLEAR T HAT THE WORDS 'EXPENDITURE INCURRED' IN SECTION 14A REFERS TO EXP ENDITURE ON RENT, TAXES, SALARIES, INTEREST,ETC. IN RESPECT OF WHICH ALLOWAN CES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37).' ' 14. THE APEX COURT HAD SPECIFICALLY RECORDED THAT THE THEORY OF APPORTIONMENT OF AMOUNT OF EXPENSE* BETWEEN TAXABLE AND NON-TAXABLE INCOME STOOD WIDENED BY INCORPORATION OF SECTION 14A. IT WAS FURTHER NOTICED THAT THE EXPRES SION 'EXPENSES INCURRED' OCCURRING IN SECTION 14A REFERRED TO TAX, SALARY, INTEREST ETC. IN RESPECT' OF WHICH ALLOWANCES ARE PROVIDED FOR UNDER SECTIONS 30 TO 37 OF THE ACT. 15. IN ALL FAIRNESS TO THE ASSESSEE, IN THE JU DGMENTS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE, SECTI ON 14A AS INCORPORATED BY FINANCE ACT 2001, WITH EFFECT FROM 1.4.1962, WAS NOT UNDER CONSIDERATION AND, THEREFORE, THE SAME DO NOT COME TO THE RESCUE OF THE ASSESSEE. 11 16. IN VIEW OF THE ABOVE, THE SUBSTANTIAL QU ESTION NO.(II) IS ANSWERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. INCOME TAX APPEAL NOS. 565, 567 AND 569 STAND DISPOSED OF ACCORDINGLY. 26 THUS THEORY OF APPORTIONMENT AS APPROVED BY THE HON'BLE SUPREME COURT IN CASE OF CIT V. WALFORT SHARE AND STOCK BRO KERS P LTD (2010) 326 ITR 1 (S.C) FOLLOWED BY HON'BLE BOMBAY HIGH COU RT IN CASE OF GODREJ AND BOYCEE (SUPRA) HAS ALSO BEEN APPROVED BY HON'BLE PUNJAB & HARYANA HIGH COURT IN CASE OF CIT V. PUNJAB STATE I NDUSTRIAL DEVELOPMENT COOP LTD. (SUPRA). 27 NOW THE QUESTION IS HOW SUCH EXPENDITURE CAN BE APPORTIONED. THERE MAY BE A SITUATION WHETHER THE EXPENSES OR INTEREST CANNOT BE IDENTIFIED AGAINST THE PARTICULAR ITEM OF INCOME TO MEET THESE DIFFICULTIES RULE 8D WAS INTRODUCED WHICH HAS BEEN HELD TO BE CONSTITUTI ONALLY VALID BY HON'BLE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOY CEE (SUPRA). RULE 8D READS AS UNDER: RULE 8D READS AS UNDER: (1) WHERE THE ASSESSING OFFICER HAVING REGARD TO T HE ACCOUNT 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 EXPENDIT URE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE HALL DETERMINE THE AMOUNT OF EXPENDITURE IN RELA TION TO SUCH INCOME IN ACCORDANCE 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 FOLLOWING AMOUNTS, NAMELY :- (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 EXPE NDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FO RMULA, NAMELY:- A X B C WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED 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; 12 C = THE AVERAGE OF TOTAL ASSET AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST 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 O F 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 ASSET AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INCREASE ON ACCO UNT OF REVALUATION OF ASSET BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS.) . 28 CLAUSE (II) OF SUB-RULE (2) CLEARLY SHOWS THAT I F THE ASSESSEE SHOW THAT INTEREST HAS BEEN INCURRED SPECIFICALLY F OR A PARTICULAR ITEM OF INCOME THEN IT HAS TO BE APPORTIONED. IN CASE B EFORE US, THE ASSESSEE HAS PROVIDED SOURCES OF FUNDS BUT THEY CA NNOT BE SAID TO HAVE BEEN MAINTAINED SEPARATELY. FIRST OF ALL IT W AS CONCEDED THAT THE ASSESSEE IS HAVING MIXED FUNDS. THE DETAILS OF FUN DS WAS STATED TO BE AS UNDER BEFORE THE LD. CIT(A): 31.3.2008 RS. IN LAKHS SHARE CAPITAL 78.36 RESERVES AND SURPLUSES 130.82 OWN FUNDS 209.18 WORKING CAPITAL BORROWINGS 1779.62 CURRENT ASSETS 2243.45 AMOUNT INVESTED IN EXCESS OF LOAN 463.83 TERM LOAN BORROWINGS 253.31 FIXED ASSETS 451.82 AMOUNT INVESTED IN EXCESS OF LOAN 198.51 AMOUNT INVESTED IN CHADHA MOTORS 255.96 CONSEQUENTLY BY SIMPLY SAYING THAT THE FUNDS INVEST ED IN FIXED ASSETS AND CURRENT ASSETS ARE MORE THAN THE BORROWED FUNDS , WOULD NOT SHOW THAT SPECIFIC FUNDS HAVE BEEN BORROWED FOR SPECIFIC PURPOSE. FOR EXAMPLE IT CAN BE VERY EASILY SAID THAT THE ASSESSE E SUPPORTED ITS BUSINESS WITH OWN FUNDS AND BORROWED LOANS HAVE BEE N USED FOR MAKING INVESTMENT IN ASSETS AS WELL AS IN INVESTMEN TS WHICH GENERATE EXEMPTED INCOME. ONCE THE FUNDS ARE MIXED, THERE I S NO WAY TO FIND OUT ACTUAL USAGE OF THE FUNDS. TO MEET THIS SITUAT ION ONLY RULE 8D WAS INSERTED TO REMOVE THE DIFFICULTIES. IN FACT THIS ASPECT WAS ALSO EXAMINED BY HON'BLE BOMBAY HIGH COURT IN CASE OF GO DREJ & BOYCEE (SUPRA). MANY OBSERVATIONS WERE MADE UNDER THE HEA D PARAMETERS OF JUDICIAL REVIEW AT PARA 62 TO 72 OF THE ORDER. WI THOUT UNNECESSARILY BURDENING THIS ORDER WITH THESE OBSERVATIONS WE WIL L QUOTE PARA 73 WHICH DEALS WITH JUSTIFICATION OF RULE 8D: IN THE AFFIDAVIT IN REPLY THAT HAS BEEN FILED ON BE HALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RAT IONALE UNDERLYING RULE 8D. IN THE WRITTEN SUBMISSIONS WHI CH HAVE BEEN FILED BY THE ADDITIONAL SOLICITOR GENERAL IT HAS BE EN STATED, WITH REFERENCE TO RULE 8D(2)(II) THAT SINCE FUNDS ARE FU NGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACTUAL QUANTUM O F BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX FREE INVES TMENT. IT IS 13 ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE A PPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST TH AT WILL BE TAKEN (AS A IN THE FORMULA) WILL EXCLUDE ANY EXPE NDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO A NY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLE ANY ASPECT OF THE ASSESSEES BUSINESS SUCH AS PLANT/MACHINERY ETC.). AS REGARDS RULE 8D(2)(III) IT HAS BEEN SUBMITTED THAT SOME MECHANIS M OR FORMULA HAD TO BE ADOPTED FOR ATTRIBUTING PART OF THE ADMINISTRATIVE/MANAGERIAL EXPENSES TO TAX EXEMPT IN VESTMENT INCOME. THE ADMINISTRATIVE EXPENSES ATTRIBUTABLE T O TAX FREE INVESTMENT INCOME HAVE A FIXED COMPONENT AND A VARI ABLE COMPONENT. A VIEW WAS TAKEN THAT THE DISALLOWANCE SHOULD ALSO BE LINKED TO THE VALUE OF THE INVESTMENT RATHER THA N THE AMOUNT OF EXEMPT INCOME. UNDER PORTFOLIO MANAGEMENT SCHEM E (PMS) THE FEE CHARGED RANGES BETWEEN 2 AND 2.5 PER CENT O F THE PORTFOLIO VALUE WHICH WOULD BE INCLUSIVE OF A PROFI T ELEMENT FOR THE PORTFOLIO MANAGER. WHILE THE FIXED ADMINISTRAT IVE EXPENSE WERE EXCLUDED, ON THE GROUND THAT IN THE CASE OF A LARGE CORPORATE TAXPAYER THEY WOULD BE SPREAD OVER A LARG E NUMBER OF VOLUMINOUS ACTIVITIES, THE VARIABLE EXPENSES WERE C OMPUTED AT ONE-HALF PER CENT OF THE VALUE OF THE INVESTMENT. THE JUSTIFICATION THAT HAS BEEN OFFERED IN SUPPORT OF T HE RATIONALE FOR RULE 8D CANNOT BE REGARDED AS BEING CAPRICIOUS, PER VERSE OR ARBITRARY. APPLYING THE TESTS FORMULATED BY THE HO N'BLE SUPREME COURT IT IS NOT POSSIBLE FOR THIS COURT TO HOLD THA T THERE IS WRIT ON THE STATUTE OR ON THE SUBORDINATE LEGISLATION PE RVERSITY, CAPRICE OR IRRATIONALITY. THERE IS CERTAINLY NO M ADNESS IN THE METHOD. THUS ABOVE RULE WAS FOUND TO BE VALID AND RATIONAL. COMING BACK TO THE CASE IN HAND, THE PERUSAL OF THE ASSESSMENT ORD ER SHOWS AS OBSERVED EARLIER, NO WHERE BEFORE THE ASSESSING OF FICER OR THE LD. CIT(A), THE ASSESSEE HAS MADE A SPECIFIC MENTION TO SHOW WHICH PARTICULAR FUNDS WERE BORROWED FOR WHICH PARTICULAR REQUIREMENT AND IN THE ABSENCE OF SUCH SPECIFIC UTILIZATION RULE 8D , WOULD BE APPLICABLE. PERUSAL OF THE ASSESSMENT ORDER SHOWS THAT DISALLOWANCE U/S 14A HAS BEEN WORKED OUT ON THE BASIS OF RULE 8 D WHICH IS AS OBSERVED EARLIER APPLICABLE IN CASE OF THE ASSESSEE . THEREFORE, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THAT OF THE ASSESSING OFFICER. 9. FROM THE ABOVE IT EMERGES THAT DECISIONS OF HON' BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS HERO CYCLE S LTD., 323 ITR 518(P&H) AND CIT VS. WINSOME TEXTILE INDUSTRIES LTD . IN 319 ITR 203 (P&H) WERE FOUND TO BE DISTINGUISHABLE BECAUSE THESE DECI SIONS WERE RENDERED FOR ASSESSMENT YEAR 2004-05 AND FURTHER TH ERE WERE CERTAIN FINDINGS OF FACTS WHICH MAY NOT BE APPLICABLE IN EV ERY SITUATION. SECONDLY, TO SOLVE PROBLEM OF QUANTUM OF INTEREST TO BE DISAL LOWED AND EXPENDITURE FROM COMMON POOL OF INTEREST AND EXPENDITURE, RULE 8D HAS BEEN INTRODUCED SO THAT REASONABLE DISALLOWANCE IS MADE. IN THE ABO VE FINDINGS, THE THEORY OF 14 PROPORTIONATE DISALLOWANCE AS CONFIRMED BY HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT-1 VS PUNJAB STATE IND USTRIAL DEVELOPMENT CORPORATION LTD IN INCOME TAX APPEAL NO.565 OF 2006 VIDE ORDER DATED 18.7.2011 HAS BEEN DISCUSSED IN ABOVE NOTED PASRAS. JUSTIFICATION OF RULE 8D AS GIVEN BY HON'BLE BOMBAY HIGH COURT IN THE CAS E OF GODREJ & BOYCE MANUFACTURING CO. LTD VS. DCIT 328 ITR 81 (BOM.) HA S ALSO BEEN DISCUSSED. IN CONCLUSION IT CAN BE SAID THAT RULE 8D IS APPLIC ABLE FROM ASSESSMENT YEAR 2008-09 AND, THEREFORE, ISSUE ARISING IN THIS APPEA L HAVE TO BE DISCUSSED ON THE PREMISE THAT RULE 8D WAS APPLICABLE. 10. THE LD. COUNSEL FOR THE ASSESSEE HAS EMPHASIZED THAT ASSESSEE HAS ITSELF DISALLOWED A SUM OF RS. 50,000/- WHICH WAS C ONFIRMED BY TRIBUNAL IN THE EARLIER YEARS. THE DECISION OF EARLIER YEAR PER TAINS TO ASSESSMENT YEAR 2007-08 AND THEREFORE, AS EMPHASIZED EARLIER RULE 8D WAS NOT APPLICABLE AND THAT DECISION CANNOT BE RELIED IN THE PRESENT Y EAR. IN ANY CASE THE HON'BLE PUNJAB & HARYANA HIGH COURT ITSELF HAS HELD IN CIT V A.B. SUGAR MILLS LTD IN INCOME TAX APPEAL NO. 199 OF 2014(O&M) VIDE ORDER DATED 16.2.2015 THAT TRIBUNAL HAS NO POWER TO ESTIMATE TH E DISALLOWANCE U/S 14A READ WITH RULE 8D. IN THAT CASE ALSO THE ASSESSING OFFICER HAS DISALLOWED A SUM OF RS. 7,19,513/- AND RS. 60,97,429/- WHICH WAS ESTIMATED AT RS. 1 LAKH AND RS. 5 LAKH BECAUSE RULE 8D WAS NOT APPLICABLE IN THOSE YEARS. THE HON'BLE HIGH COURT OBSERVED AS UNDER:- WE HAVE HEARD COUNSEL FOR THE PARTIES. THE QUESTION OF LAW THAT ARISES FOR ADJUDICATION IS WHETHER THE TRIBUNA L COULD HAVE REDUCED THE QUANTUM OF DISALLOWANCE WITHOUT RECORDI NG SATISFACTION IN TERMS OF SECTION 14A OF THE ACT? THE DISPUTE BEFORE THE ASSESSING OFFICER, THE CIT(A ) AND THE ITAT, WAS WHETHER RULE 8D WAS PROSPECTIVE OR RETROS PECTIVE. THE TRIBUNAL RIGHTLY HELD THAT RULE 8D IS PROSPECTI VE. A PERUSAL OF THIS RULE REVEALS THAT IT DOES NOT, WHET HER BY WORDS OR INTENT, LEND CREDENCE TO THE REVENUE'S STAND THA T RULE 8D IS RETROSPECTIVE. THE TRIBUNAL, THEREFORE, RIGHTLY PLA CED RELIANCE UPON THE JUDGMENT IN GODREJ & BOYCE MANUFACTURING V . DCIT (SUPRA), WHILE HOLDING THAT RULE 8D SHALL OPERATE PROSPECTIVELY. THE MATTER, HOWEVER, DOES NOT REST HERE. THE TRIBUN AL HAVING HELD THAT RULE 8D OPERATES PROSPECTIVELY, PROCEEDED TO REDUCE THE QUANTUM OF DISALLOWANCE WITHOUT RECORDING SATIS FACTION OR ASSIGNING ANY COGENT REASONS OR REFERRING TO ANY RE LEVANT FACTS/ FACTORS. THE POWER TO DETERMINE THE QUANTUM OF DISA LLOWANCE, INHERS THE RECORDING OF SATISFACTION BASED UPON REL EVANT FACTS/FACTORS. A PERUSAL OF THE IMPUGNED ORDER REVE ALS THAT AFTER HOLDING THAT RULE INCOME TAX APPEAL NO.199 OF 2014(O&M) -4- 8D OF THE RULES IS PROSPECTIVE IN OPE RATION, THE TRIBUNAL ABRUPTLY OR SHOULD WE SAY ARBITRARILY PROC EEDED TO REDUCE THE QUANTUM OF DISALLOWANCE RECORDED BY THE ASSESSING OFFICER FROM RS.7,19,513/- TO RS.1,00,000/- AND RS. 60,97,429/- TO RS. 5,00,000/- IN ITA NO.199 OF 2014, AND RS.7,5 5,849 TO RS.1,23,754/-IN ITA NO.237 OF 2014, WITHOUT REFEREN CE TO ANY RELEVANT FACTS OR FACTORS. 15 CONSEQUENTLY, WE ANSWER THE QUESTION OF LAW IN FAVO UR OF THE REVENUE, ALLOW THE APPEAL TO THE LIMITED EXTENT OF ERROR IN DETERMINING THE QUANTUM OF DISALLOWANCE AND REMIT T HE MATTER TO THE ASSESSING OFFICER FOR DETERMINING THE QUANTU M OF DISALLOWANCE, AFTER GRANTING AN ADEQUATE OPPORTUNIT Y TO THE ASSESSEE TO PUT FORTH HIS PLEAS REGARDING THE QUANT UM OF DISALLOWANCE. THEREFORE, IT IS CLEAR THAT ESTIMATION OF EXPENDITU RE, IF ANY, ON THE REASONABLE BASIS HAS TO BE MADE BY ASSESSING OFFICE R AND APPELLATE AUTHORITIES HAVE NO SUCH POWER. CONSEQUENTLY, IT BE COME ABSOLUTELY CLEAR THAT ORDER OF THE TRIBUNAL FOR EARLIER ASSESSMENT Y EAR CONFIRMING THE ESTIMATED DISALLOWANCE OF RS. 50,000/- CANNOT BE RE LIED IN VIEW OF THIS JUDGEMENT OF THE HON'BLE PUNJAB & HARYANA HIGH COUR T. 11. WE MAY ALSO NOTE THAT IN ANOTHER DECISION BY H ON'BLE PUNJAB & HARYANA HIGH COURT OF M/S AVON CYCLES LTD LUDHIANA V CIT & ANOTHER IN ITA NO. 277 OF 2013 VIDE ORDER DATED 20.08.2014, TH E FOLLOWING QUESTIONS OF LAW AROSE BEFORE THE HIGH COURT. (I) WHETHER IN FACTS AND CIRCUMSTANCES OF THE PRESENT C ASE, THE LEARNED AUTHORITIES HAVE ERRED IN INVOKING THE PROVISIONS OF SECTION 14A READ WITH RULE 8D WITHOUT ANY FINDING THAT ANY EXPENDITURE HAS BEEN INCURRED FOR EARNING EXEMPT INCOME IS LEGALLY UNSUSTAINABLE THE EYES OF LAW? (II) WHETHER IN FACTS AND CIRCUMSTANCES OF THE CASE, TH E LEARNED AUTHORITIES BELOW ERRED IN LAW IN MAKING TH E PROVISIONS OF SECTION 14A READ WITH RULE 8D APPLICA BLE TO THE ASSESSEE IN A MECHANICAL MANNER WITHOUT CONTROVERTING THE FACT FINDING IN FAVOUR OF THE ASS ESSEE? III) WHETHER THE LEARNED AUTHORITIES BELOW ERRED I N IGNORING THE DISALLOWANCE MADE BY THE ASSESSEE HIMSELF IN RE SPECT OF EARNING THE EXEMPT INCOME AND INVOKING SECTION 1 4A AND RULE 8D? (IV) WHETHER IN FACT AND CIRCUMSTANCES OF THE CAS E, THE ACTION OF THE AUTHORITIES BELOW, THE IMPUGNED ORDERS ARE L EGALLY SUSTAINABLE IN THE EYES OF LAW? 12. IN THIS CASE THE ISSUE MAINLY PERTAINS TO DISAL LOWANCE OF INTEREST UNDER SECTION 14A. IN THIS CASE ALSO RULE 8D WAS HELD TO BE APPLICABLE AND DISALLOWANCE OF INTEREST WAS CONFIRMED BY THE TRIBU NAL. BEFORE THE HON'BLE HIGH COURT, RELIANCE WAS PLACED ON THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF CIT V RELIANCE UTILITIES AND POWER LTD. 313 ITR 340 AS WELL AS DECISION OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. 16 HERO CYCLES 323 ITR 518 FOR THE PROPOSITION THAT I F INTEREST FREE FUNDS ARE AVAILABLE WITH THE ASSESSEE THEN IT WILL BE PRESUME D THAT SUCH FUNDS HAVE BEEN INVESTED IN VARIOUS INVESTMENTS. THE HONBLE H IGH COURT DEALT WITH THIS ISSUE AS UNDER:- IN RELIANCE UTILITIES AND POWER LTD. CASE (SUPRA), THE REVENUE WAS IN APPEAL BEFORE THE BOMBAY HIGH COURT AGAINST AN ORDER PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, WHERE NEGATING THE ARGUMENT OF THE REVENU E THAT SHAREHOLDERS FUNDS TO THE TUNE OF OVER RS.172 CRORES WAS UTILIZED FOR THE PURPOSE OF FIXED ASSETS IN TER MS OF THE BALANCE-SHEET. IT WAS FOUND THAT A CLEAR FINDING OF FACT WAS RECORDED THAT ASSESSEE HAD INTEREST FREE FUNDS OF ITS OWN WHICH HAD BEEN GENERATED IN THE YEAR IN QUESTIO N, WHICH HAS BEEN INVESTED FOR EARNING EXEMPT INCOME. SIMILARLY, IN HERO CYCLES LTD. CASE (SUPRA), AGAIN THE REVENUE WAS IN APPEAL. THE COURT HAS NOTICED THAT T HE TRIBUNAL HAS HELD THAT THE EXPENDITURE ON INTEREST WAS SET OFF AGAINST THE INCOME FROM INTEREST AND THE INVEST MENT IN THE SHARE AND FUNDS WERE OUT OF THE DIVIDEND PROCEE DS. IN VIEW OF THE FINDING OF FACT, DISALLOWANCE UNDER SEC TION 14A OF THE ACT WAS NOT FOUND TO BE SUSTAINABLE. THE COURT OBSERVED THAT AS TO WHETHER ANY EXPENDITURE INCURRE D WAS TO BE DISALLOWED IS A QUESTION OF FACT. IT WAS HELD TO THE FOLLOWING EFFECT: IN VIEW OF THE FINDING REPRODUCED ABOVE, IT IS CLEAR THAT THE EXPENDITURE ON INTEREST WAS SET OFF AGAINST THE INCOME FROM INTEREST AND THE INVESTMENT IN THE SHARE AND FUNDS WERE OUT OF THE DIVIDEND PROCEEDS. IN VIEW OF THIS FINDING OF FACT, DISALLOWANCE UNDER SECTION 14A WAS NOT SUSTAINABLE. WHETHER, IN A GIVEN SITUATION, ANY EXPENDITURE WAS INCURRED WHICH WAS TO BE DISALLOWED, IT IS A QUESTION OF FACT IN THE PRESENT CASE, AFTER EXAMINING THE BALANCE-SH EET OF THE ASSESSEE, A FINDING OF FACT HAS BEEN RECORDED T HAT THE FUNDS UTILIZED BY THE ASSESSEE BEING MIXED FUNDS, THEREFORE, THE INTEREST PAID BY THE ASSESSEE IS ALS O AN ITA NO.277 OF 2013 5 INTEREST ON THE INVESTMENTS MADE. SUCH BEING A FINDING OF FACT, WE DO NOT FIND THAT ANY SU BSTANTIAL QUESTION OF LAW ARISES FOR CONSIDERATION OF THIS CO URT. 13. FROM THE ABOVE IT BECOMES CLEAR THAT HON'BLE CO URT HAS CONFIRMED THAT ONCE THERE ARE MIXED FUNDS, RULE 8D HAS TO BE RESORTED. THE SAME PRINCIPLE WOULD APPLY IN THE CASE OF EXPENDITURE IN CURRED IN EARNING EXEMPT INCOME. 17 14. THE LAST IMPORTANT CONTENTION MADE BY THE LD. C OUNSEL FOR THE ASSESSEE IS THAT SECTION 14A READ WITH RULE 8D CAN BE APPLIED ONLY IF THE ASSESSING OFFICER HAS RECORDED A SATISFACTION THAT DISALLOWANCE MADE BY THE ASSESSEE IS NOT CORRECT. WE FIND THAT SECTION 14A R EADS AS UNDER:- EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME (1 ) FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITUR E INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUN T 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 W HICH 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 BE EN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART 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 1ST DAY OF APRIL, 2001. FURTHER, RULE 8D OF THE ACT READS AS UNDER:- (1) WHERE THE ASSESSING OFFICER HAVING REGARD TO TH E ACCOUNTS OF THE ASSESSEE OF THE PREVIOUS YEAR, IS NOT SATISF IED WITH - (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 SHA LL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RUL E (2). (2). 18 15. THE CAREFUL READING OF THE ABOVE SECTION AS WELL AS RULE 8D WOULD SHOW THAT WHAT IS REQUIRED UNDER THE PROVISION IS T HAT RULE 8D CAN BE RESORTED ONLY WHEN ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF T HE CLAIM OF DISALLOWANCE MADE BY THE ASSESSEE. SO, THEREFORE, THERE IS NO RE QUIREMENT FOR RECORDING A SATISFACTION. HOWEVER, BEFORE RESORTING TO RULE 8D, ASSESSING OFFICER IS REQUIRED TO SOMEHOW OR OTHER SHOW THAT DISALLOWANCE ALREADY MADE BY THE ASSESSEE IS NOT CORRECT WITH REFERENCE TO THE ACCOU NTS OF THE ASSESSEE. THEREFORE, SUCH SATISFACTION HAS TO BE INFERRED FRO M THE ORDER. HERE WE MAY LIKE TO POINT OUT THAT DECISIONS OF INVESTMENTS ARE NOT EASY TO MAKE AND IN FACT LARGE CORPORATIONS INVEST THEIR SURPLUS FUNDS CONTINUOUSLY IN VARIOUS INVESTMENTS OF BANK FDRS, GOVT. SECURITIES, MUTUAL FUNDS, SHARES OF OTHER COMPANIES. THESE OPERATIONS IN THE COMMERCIAL PARLA NCE ARE KNOWN AS TREASURY OPERATIONS. THE NECESSITY FOR THESE OPERA TIONS ARISE BECAUSE OF TWO SITUATIONS NAMELY, EITHER A COMPANY HAS SURPLUS FUN DS WHICH MAY NOT BE REQUIRED IMMEDIATELY FOR INVESTMENTS BUT MAY BE REQ UIRED FOR INVESTMENTS LATER ON. IN SUCH A SITUATION THE FUNDS ARE TEMPOR ARILY DEPLOYED TO EARN REASONABLE RETURNS. IN THE SECOND SITUATION, THERE ARE CERTAIN COMPANIES WHERE CASH CREDITS AND OTHER LIMITS ARE TAKEN FROM THE BANK AND SUCH FUNDS MAY NOT BE REQUIRED FOR SOME INTERVALS OF TIME BECA USE OF SLACKNESS IN THE BUSINESS CYCLE OR BECAUSE OF THE BUSINESS BEING OF SEASONAL CHARACTER. SUCH COMPANIES CAN ALSO NOT RETURN THE FUNDS TO THE BANK S BECAUSE IT MAY NOT BE EASY TO OBTAIN THE SAME LIMITS LATER ON. SUCH COMP ANIES ALSO INVEST THE FUNDS TO EARN SHORT TERM RETURNS. IN THESE TWO SITU ATIONS, GENERALLY THE COMPANIES DEPLOY THE FUNDS FOR CONSIDERING THE IMPL ICATION OF TAXATION ALSO. 16. IN THESE TREASURY OPERATIONS, SPECIALIZED PEOPL E EITHER BRING CHARTERED ACCOUNTANTS OR MBA FINANCE OR SOME OTHER PERSONS WITH HIGHER QUALIFICATIONS LIKE CFA ARE EMPLOY TO CONDUCT THESE OPERATIONS. THE TREASURY OPERATIONS ARE VERY SOPHISTICATED AND COMP LICATED. IT REQUIRES DECISIONS FOR SELECTION OF INVESTMENT, WHETHER INVE STMENTS SHOULD BE MADE IN BANK DEPOSITS, GOVERNMENT SECURITIES, SHARE OF VARI OUS COMPANIES, MUTUAL FUNDS, DEBENTURES, DERIVATIVES ETC. FURTHER, THE T AX IMPLICATIONS ON SUCH INVESTMENTS ARE REQUIRED TO BE ANALYZED. FOR TAKIN G THESE DECISIONS IT IS FURTHER REQUIRED TO BE SEEN WHETHER INVESTMENTS ARE SECURED OR NOT. FOR EXAMPLE GOVERNMENT SECURITIES ARE KNOWN AS GILT SE CURITIES BECAUSE THEY ARE FULLY SECURED AS THEY ARE BACKED BY THE GOVERNM ENT. SIMILARLY, THE BANK FDRS ARE REASONABLY WELL SECURED. INVESTMENT IN SH ARES IS HIGHLY RISKY BECAUSE PRICES WOULD MOVE DEPENDING UPON ECONOMIC C ONDITION OF THE COUNTRY AS WELL AS PARTICULAR SECTOR IN WHICH SUCH COMPANY OPERATES. IT IS REQUIRED TO BE INVESTIGATED AND ANALYZED HOW AN EXI T CAN BE MADE FROM THE PARTICULAR INVESTMENT. FOR EXAMPLE FDR IS MADE FOR A PERIOD FOR WHICH FUNDS ARE NOT REQUIRED AND CAN BE ENCASHED GENERALL Y AT THE END OF THE TERM OF FDR BECAUSE IF THE SAME IS ENCHASED EARLIER THEN SOME INTEREST LOSS HAPPENS. IN CASE OF GOVERNMENT SECURITIES, THE SAME CAN BE SOLD OR PURCHASED IN THE SECONDARY MARKET. THE RATE OF RETU RN WOULD ALSO DEPEND ON THE PERIOD FOR WHICH INVESTMENTS ARE MADE. FURTHER, IT TO BE SEEN WHAT IS THE LIQUIDITY ATTACHED TO PARTICULAR INVESTMENT. IN FA CT ALL THESE FUNCTIONS ARE HIGHLY SPECIALIZED FUNCTIONS AND REQUIRES SKILL OF HIGHLY SPECIALIZED PERSONS. IT IS ALMOST IMPOSSIBLE TO PIN-POINT HOW MUCH TIME IS SPENT BY SUCH A TEAM 19 ON THE INVESTMENT DECISIONS BECAUSE THESE TREASURY OPERATIONS ARE VERY SOPHISTICATED. IN A VERY LARGE COMPANY, THERE MAY BE DESIGNATED TREASURY OPERATION TEAM, BUT IN A MEDIUM SIZED COMPANY, THER E MAY BE ONLY 02 -03 CHARTERED ACCOUNTANTS WHO ARE DOING THE NORMAL DUTI ES OF ACCOUNT WRITING AND AUDITING, TAXATION, FUNDS RAISING ETC. AND AT T HE SAME TEAM MAY ALSO BE DOING TREASURY OPERATIONS ALSO. TO MEET THIS CONTI NGENCY, RULE 8D WAS INCORPORATED IN THE STATUTE. NOW IT IS SIGNIFICANT TO NOTE THAT THE ASSESSING OFFICER IS REQUIRED TO HAVE SATISFACTION HAVING REG ARD TO THE ACCOUNTS OF THE ASSESSEE WHICH MEANS VARIOUS OPERATIONS OF THE ASSE SSEE. 17. HAVING UNDERSTOOD THE BASIC LOGIC BEHIND THE INCORPORATION OF RULE 8D, LET US CONSIDER THE JUDGEMENT CITED BY LD. COUN SEL FOR THE ASSESSEE. THE FIRST DECISION REFERRED TO IS IN THE CASE OF CIT VS . DEEPAK MITTAL & AMRIT SAGAR (SUPRA). THIS DECISION HAS BEEN RENDERED BY T HE HON'BLE PUNJAB & HARYANA HIGH COURT FOR AY 2007-08. FURTHER, THE HO N'BLE COURT HAS REFERRED TO THE DECISION OF CIT VS. HERO CYCLES WHI CH HAS ALREADY BEEN DISTINGUISHED BY US AND THAT DECISION HAS BEEN CONF IRMED BY HONBLE PUNJAB & HARYANA HIGH COURT ITSELF IN THE CASE OF AVON CYC LES LTD VS. CIT IN ITA NO. 277 OF 2013 AND THE RELEVANT PARAS HAVE ALREADY BEEN REPRODUCED ABOVE. IN THIS DECISION IT IS TO BE NOTED THAT NO E XPENDITURE WAS ALLOCATED BY THE ASSESSEE WHEREAS IN THE CASE BEFORE US THE ASS ESSEE HAS ITSELF ALLOCATED A SUM OF RS. 50,000/- TOWARDS EXPENDITURE INCURRED FOR EARNING THE EXEMPT INCOME. THERE IS ANOTHER ASPECT IN THIS CASE FOR WHICH MATTER HAS BEEN SET ASIDE BY LD. CIT(A) TO THE FILE OF ASSESSING OFFICE R, THEREFORE, THIS ASPECT CAN ALSO BE EXAMINED BY POINTING OUT HOW ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSES SEE. THE OTHER DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V TAI KISHA ENGINEERING INDIA LTD. (SUPRA) ARE ALSO TO THE SAME EFFECT. 7. THEREFORE, THE PRINCIPLES LAID DOWN ABOVE ARE A PPLICABLE IN THIS CASE ALSO. HOWEVER, FROM THE LIST OF INVESTMENTS IT IS SEEN TH AT INVESTMENT SEEMS TO BE VERY OLD EVEN BEFORE THE INTRODUCTION OF PROVISION TO SE CTION 14A. IT IS NOT POSSIBLE FOR US TO VERIFY WHETHER SUCH INVESTMENT HAVE BEEN REAL LY MADE IN THE YEARS STATED IN THE LIST AS WELL AS WHETHER SUCH INVESTMENTS HAVE B EEN MADE OUT OF SURPLUS FUNDS. THEREFORE, WE SET ASIDE THE ORDER OF LD. CIT(A) AND REMIT THE MATTER BACK TO THE FILE OF ASSESSING OFFICER TO REEXAMINE THE ISSUE IN THE LIGHT OF THE OBSERVATIONS MADE BY US IN THE CASE OF M/S MUNJAL SALES CORPORAT ION, LUDHIANA V ACIT (SUPRA) WHICH ARE REPRODUCED ABOVE. HE SHOULD ALSO VERIFY W HETHER THE INVESTMENTS HAVE BEEN MADE OUT OF SURPLUS FUNDS IN THE EARLIER YEAR, AND IF SO, THEN NO DISALLOWANCE U/S 14A IS CALLED FOR, OTHERWISE THE ISSUE MAY BE D ECIDED IN ACCORDANCE WITH LAW. 20 8. IN THE RESULT, ALL THE APPEALS OF THE ASSESSEE A RE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 03/08/2015 SD/- SD/- (BHAVNESH SAINI) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 03/08/2015 RKK COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR