M/s Chadha Super Cars Pvt. Ltd., Ludhiana V. ACIT, Ludhiana

ITA 304/CHANDI/2015

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9817 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-07-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 25-03-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: DR AMA RVEER SINGH
• Assessee Lawyers: KULDIP SINGH
• Keywords: Business income; Earning of tax free income; Retrospective amendment; Question of law
• Section: 143(3); 14A; 37; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES,CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI T.R. SOOD, ACCOUNTANT MEMBER ITA NO.304/CHD/2015 ASSESSMENT YEAR: 2010-11 CHADHA SUPER CARS PVT. LTD., VS. ACIT G.T. ROAD RANGE V VPO JUGIANA LUDHIANA LUDHIANA PAN NO. AABCC6944R (APPELLANT) (RESPONDENT) APPELLANT BY : SH. KULDIP SINGH RESPONDENT BY : DR. AMARVEER SINGH DATE OF HEARING : 30/06/2015 DATE OF PRONOUNCEMENT : 03/07/2015 ORDER PER T.R.SOOD, A.M. THE APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 03/02/2015 PASSED BY THE CIT(A)-2, LUDHIANA 2. IN THIS APPEAL ASSESSEE HAS RAISED THE FOLLOWING GROUNDS WHICH ARE AS UNDER : 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS)-II, LUDHIANA HAS ERRED CONFIRMING THE ORDER BY THE LD. ASSESSING OFFICER R EGARDING THE DISALLOWANCE OF RS. 1912761/- U/S 14A OF THE INCOME TAX ACT, 1961 SINCE THE ASSESSEE HAS UTILISED ITS OWN FUNDS FOR CAPITAL INVESTMENT IN PARTNERSHIP FIRM AN D SO THE DISALLOWANCE U/S 14A IS NOT APPLICABLE. THEREFORE, ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-II, LUDHIANA IS ILLEGAL, UNWARRANTED, UNC ALLED FOR AND NEEDS TO BE DELETED. 2. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS )-II, LUDHIANA, WITHOUT ANY PREJUDICE TO GROUND NO. 1, HAS ERRED IN CALCULATION OF DISALLOWANCE U/S 14A BY NOT EXCLUDING THE INTEREST EXPENDITURE ON SPECIFIC PURP OSE BORROWINGS WHICH DO NOT FORM PART OF COMMON KITTY FOR CAPITAL INVESTMENT IN PART NERSHIP FIRM. THEREFORE, ORDER PASSED 2 BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -II, LUDHIANA IS ILLEGAL, UNWARRANTED, UNCALLED FOR AND NEEDS TO BE DELETED. 3. AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG THE ASSESSMENT PROCEEDINGS AO NOTICED THAT ASSESSEE HAS SHOWN INVE STMENTS INCOME FROM WHICH WAS EXEMPT THEREFORE SECTION 14A WAS INVOKED AND DISALLOWANCE OF RS. 19,12,761/- WAS MADE. 4. ON APPEAL IT WAS MAINLY CONTENDED THAT SOME OF T HE LOANS WERE TAKEN FOR SPECIFIC PURPOSES AND THE SAME WERE UTILIZED FOR SP ECIFIC PURPOSES THEREFORE INTEREST FROM SUCH LOANS COULD NOT BE CONSIDERED FO R DISALLOWANCE. HOWEVER, THE LD. CIT(A) FOLLOWING THE ORDER OF TRIBUNAL FOR AY 2 008-09 IN ITA NO. 1241/CHD/2011 AND CONFIRM THE SAME. 5. BEFORE US LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT NO DOUBT THE ISSUE HAS BEEN DECIDED IN THE EARLIER YEAR AGAINST THE AS SESSEE BY THE TRIBUNAL BUT IN THE EARLIER YEAR THE FACT OF DIFFERENT LOANS TAKEN FOR SPECIFIC PURPOSES WAS NOT HIGHLIGHTED IN THE RECORDS. HE REFERRED TO PAGE 213 OF THE PAPER BOOK AND POINTED OUT THAT ATLEAST INTEREST ON LOANS TAKEN FR OM KOTAK MAHINDRA PRIME LIMITED WHICH WAS SPECIFICALLY TAKEN FOR INVENTORY FUNDING SHOULD NOT BE CONSIDERED FOR DISALLOWANCE UNDER SECTION 14A. HE P OINTED OUT THIS LOAN WAS SPECIFICALLY TAKEN ONLY FOR INVENTORY FUNDING AND A SSESSEE COULD NOT HAVE WITHDRAWN EVEN A SINGLE PENNY FROM THIS ACCOUNT COP Y OF WHICH IS AVAILABLE AT PAGE 463. 6. ON THE OTHER HAND LD. DR SUBMITTED THAT ISSUE IS SQUARELY COVERED AGAINST THE ASSESSEE BY THE ORDER OF TRIBUNAL FOR EARLIER Y EARS. 7. AFTER CONSIDERING THE RIVAL SUBMISSIONS CAREFULL Y WE FIND THAT THIS ISSUE HAS BEEN DECIDED IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008-09 IN ITA NO. 1241/CHD/2011 BY THE TRIBUNAL IN PARA 17 TO 28 WHIC H READS AS UNDER: 17 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY AND FIND THAT DURING THE YEAR THE ASSESSEE HAS MADE I NVESTMENT IN PARTNERSHIP AND MUTUAL FUND. THE PROFIT FROM MU TUAL FUND IN THE FORM OF DIVIDEND IS EXEMPT. AS FAR AS SHARE PRO FIT FROM PARTNERSHIP FIRM IS CONCERNED, THE SAME IS ALSO COV ERED U/S 10(2A), THEREFORE, THERE IS NO FORCE IN THE SUBMIS SIONS THAT THE ASSESSEE HAS MADE INVESTMENT IN FIRM WHICH ITSELF I S PAYING TAX, THEREFORE, IT CANNOT BE CALLED THAT THE INVES TMENT HAS 3 BEEN MADE TO EARN EXEMPT INCOME. SECTION 10(2A) RE ADS 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 BEAR S TO THE TOTAL INCOME OF THE FIRM THE SAME PROPORTION AS THE AMOUNT OF HIS SHARE IN THE PROFITS 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 (MU M) 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 JUDIC IAL 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 I N CLEAR TERMS THAT PARTNERS AND THE FIRM ARE TWO INDEPENDENT ENTITIES NOT ONLY FOR THE PURPOSES 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. 1993-94 PARTNERSHIP FIRMS HAVE BEEN GIVEN A CORPORATE PERSO NALITY IN A LIMITED SENSE BY MAKING NECESSARY AMENDMENTS IN THE PROVISIONS OF SS . 10(2A), 28(V), 40(B) AND RELEVANT PROCEDURAL SECTIONS WHICH CONCLUSIVELY PRO VE THAT PARTNERSHIP FIRM AS SUCH IS INDEPENDENT FROM ITS PARTNERS AS FAR AS PRO VISIONS OF IT ACT, 1961 ARE CONCERNED. SPECIFIC PROVISIONS MENTIONED HEREINABOV E READ WITH CIRCULAR NO. 636, DT. 31ST AUG., 1992 GO TO SHOW THAT A FIRM IS TO BE TAXED AS SEPARATE ENTITY AND THE GROSS TOTAL INCOME OF THE FIRM IS TO BE DET ERMINED IN THE NORMAL WAY UNDER DIFFERENT HEADS AS IN THE CASE OF ANY TAXABLE ENTITY, HENCE, ANY EXPENDITURE WHICH HAS BEEN INCURRED BY FIRM FOR THE PURPOSES OF ITS BUSINESS IS TO BE ALLOWED AS A DEDUCTION IN COMPUTING THE TOTAL IN COME OF THE FIRM SUBJECT TO ANY SPECIFIC LIMITATION/PROHIBITION PROVIDED FOR TH E ALLOWANCE OF SUCH EXPENDITURE. HAVING REGARD TO JUDICIAL OPINION AND ALSO THE LEGI SLATIVE CHANGES IN THE ACT, A PARTNERSHIP FIRM IS A SEPARATE ENTITY THAN THAT OF ITS PARTNERS UNDER THE IT ACT AND IF THERE EXISTS ANY SPECIFIC PROVISION IN THE I NCOME-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 SUFFICIE NTLY TAKE CARE OF THE ISSUE INVOLVED HEREIN, HENCE, THE ISSUE IS TO BE DECIDED ACCORDINGLY. THERE EXIST SPECIFIC PROVISIONS FOR COMPUTING THE INCOME OF THE PARTNERSHIP FIRM AS WELL AS THAT OF ITS PARTNERS, HENCE, TOTAL INCOME OF BOTH I S LIABLE TO BE COMPUTED IN ACCORDANCE WITH SUCH PROVISIONS. SINCE PARTNERSHIP FIRM, FOR THE PURPOSE OF IT ACT IS A SEPARATE ASSESSABLE 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, PROVI SIONS OF SECTION 14A WOULD BE APPLICABLE IN COMPUTING THE TOTAL INCOME OF SUCH PA RTNER IN RESPECT 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 TRADING 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. 4 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 DISALLOWANCE TO BE MADE U/S 14A, WE SHALL FIRST REF ER TO THE DECISION RELIED ON BY THE LD. COUNSEL OF THE ASSESS EE IN CASE OF CIT V. WINSOM TEXTILE, 319 ITR 204. IN THAT CASE F OLLOWING QUESTION OF LAW WAS CONSIDERED: 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 C OURT IN THE CASE 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 ASSESSING OFFICER DISALLOWED INTEREST ON INVESTMENT IN SHARES U/S 14A BECAUSE DIVIDEND INCOME WAS EXEMPT. THE LD. CIT(A) DELETED THE DISALLOWANCE BY OBSERVING THAT THE ASSESSEE HAD MADE INVESTMENT USING ITS OWN FUNDS AND NO INTEREST WAS INCURRED. THE TRIBUNAL CONFIRMED THE FINDINGS OF THE LD. CIT( A). BEFORE THE HON'BLE HIGH COURT THE CONTENTION WAS RAISED TH AT EVEN IF THE ASSESSEE MADE INVESTMENT OUT OF ITS OWN FUNDS T HE ASSESSEE HAD TAKEN LOANS ON WHICH INTEREST WAS PAID AND THEREFORE, THE MONEY AVAILABLE WITH THE ASSESSEE WA S IN COMMON KITTY IN VIEW OF THE DECISION OF THE COURT I N CASE OF CIT V.ABHISHEK INDUSTRIES (SUPRA). HON'BLE HIGH CO URT 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 THA T DEDUCTION FOR INTEREST WAS PERMISSIBLE WHEN LOAN WAS TAKEN FO R BUSINESS PURPOSE AND NOT FOR DIVERTING THE SAME TO SISTER CO NCERN WITHOUT HAVING NEXUS WITH THE BUSINESS. THE OBSERV ATIONS MADE THEREIN HAVE TO BE READ IN THAT CONTEXT. IN T HE PRESENT CASED, ADMITTEDLY, THE ASSESSEE DID NOT MAKE ANY CL AIM FOR EXEMPTION. IN SUCH A SITUATION, SECTION 14A COULD H AVE NO APPLICATION. 19 SECOND DECISION RELIED ON IS THAT OF CIT V. HERO CYCLES (SUPRA). IN THAT CASE FOLLOWING QUESTION WAS RAISE D BEFORE THE 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 HA S NOT BEEN ESTABLISHED THAT THE INTEREST BEARING FUNDS HAVE BE EN VESTED FOR 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 FURTHER APPEAL, THE TRIBUNAL HELD THAT THERE WAS NO NEXUS B ETWEEN THE EXPENDITURE INCURRED AND THE INCOME GENERATED, THEREFORE, DISALLOWANCE CANNOT BE MADE. IT WAS ALS O 5 OBSERVED THAT MAIN UNIT, LUDHIANA HAD MORE INTEREST INCOME THAN THE EXPENDITURE AND THE FUNDS FLOW POSITION SH OWS THAT ONLY NON INTEREST BEARING FUNDS HAVE BEEN UTILIZED FOR MAKING THE INVESTMENT. 21 BEFORE THE COURT, THE DEPARTMENT ALSO CONTENDED THAT RULE 8D PROVIDE THAT EVEN WHERE THE ASSESSEE CLAIME D THAT NO EXPENSES HAVE BEEN INCURRED, CORRECTNESS OF SUCH CL AIM CAN BE GONE INTO BY THE ASSESSING OFFICER. HON'BLE HIG H COURT HELD VIDE PARA 5 AS UNDER: IN VIEW OF THE FINDING REPRODUCED ABOVE, IT IS CLE AR THAT THE EXPENDITURE ON INTEREST WAS SET OFF AGAINST THE INCOME FROM INTERE ST AND THE INVESTMENT IN THE SHARE AND FUNDS WERE OUT OF THE DIVIDEND PROCEEDS. IN VIEW OF 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 INDIRECT LY SOME EXPENDITURE IS ALWAYS INCURRED WHICH MUST BE DISALLOWED UNDER SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY NULLIFY THE MANDATE OF SECTION 14A , CANNOT BE ACCEPTED. DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A CANNOT STA ND. IN THE PRESENT CASE, FINDING ON THIS ASPECT, AGAINST THE REVENUE, IS NOT SHOWN TO BE PERVERSE. CONSE- QUENTLY, DISALLOWANCE IS NOT PERMISSIBLE. WE HAVE T AKEN THIS VIEW EARLIER SO IN I. T. A. NO. 504 OF 2008 IN CIT V. WINSOME TEXTILE IND USTRIES LTD. 1)09] 319 ITR 204 (P&H), (DECIDED ON AUGUST 25, 2009), WHEREIN IT WAS OBSERV ED AS UNDER (PAGE 207) : '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 AVAILA BLE WITH THE ASSESSEE WAS IN COMMON KITTY, AS HELD BY THIS COURT IN CIT V. AB HISHEK INDUSTRIES LTD. [2006] 286 ITR 1 AND, THEREFORE, DISALLOWANCE UNDER SECTION 14 A 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, WITHOUT INT EREST. IT WAS HELD THAT DEDUCTION FOR INTEREST WAS PERMISSIBLE WHEN LOAN WA S TAKEN FOR BUSINESS PURPOSE AND NOT FOR DIVERTING THE SAME TO SISTER CONCERN WI THOUT HAVING NEXUS WITH THE BUSINESS. OBSERVATIONS MADE THEREIN HAVE TO BE READ IN THAT CONTEXT. IN THE PRESENT CASE, ADMITTEDLY, THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATION, SECTION 14A COULD H AVE 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 I N STATUTE BOOK. RULE 8D HAS BEEN INTRODUCED BY I.T. RULES (5 TH AMENDMENT) W.E.F. 24.3.2008. THEREFORE, IN BOTH TH E ABOVE CASES, RULE 8D COULD NOT HAVE BEEN POSSIBLY APPLIED . IN ANY CASE IN A LEADING JUDGMENT THE HON'BLE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOYCEE MANUFACTURING V DCIT, 328 ITR 81 (BOM) HELD THAT RULE 8D CAN NOT HAVE RETROSPECTIVE APPLICATION AND THE SAME CAN BE APPLIED ONLY FROM ASSESSMENT YEAR 2008-09. FURTHER IN CASE OF CIT V. WINSOM TEXTILE, 319 ITR 204, THE ISSUE WAS WHETHER THE PRI NCIPLES LAID DOWN IN CASE OF ABHISHEK INDUSTRIES (SUPRA) WERE AP PLICABLE FOR THE DISALLOWANCE U/S 14A AND THE HON'BLE COURT HELD THAT THE DECISION OF ABHISHEK INDUSTRIES (SUPRA) OPERATE S IN A DIFFERENT FIELD. SIMILARLY IN CASE OF HERO CYCLES ( SUPRA) THE TRIBUNAL HAS GIVEN A CATEGORICAL FINDING THAT THE I NVESTMENT 6 HAS BEEN MADE OUT OF NON INTEREST BEARING FUNDS. F ROM THESE TWO DECISIONS ONLY IT CAN BE CONCLUDED THAT IF INVE STMENT HAS BEEN MADE CLEARLY OUT OF NON INTEREST BEARING FUNDS THEN SECTION 14A IS NOT BE APPLICABLE. IN CASE BEFORE U S, THE SITUATION IS DIFFERENT WHICH WE SHALL SEE LITTLE LA TER. WE WOULD ALSO LIKE TO OBSERVE THAT EVEN HON'BLE PUNJAB & HAR YANA HIGH COURT IN A LATTER DECISION IN CASE OF CIT V. PUNJAB STATE INDUSTRIAL DEVELOPMENT COOPERATIVE LTD. HAS MADE OBSERVATIONS WHICH WE WILL ALSO LIKE TO DISCUSS LIT TLE LATER. 23 HON'BLE BOMBAY HIGH COURT CONSIDERED THE ISSUES ARISING OUT OF SECTION 14A AS WELL AS IMPLICATIONS OF RULE 8D. HON'BLE HIGH COURT REACHED THE FOLLOWING CONCLUSION AT PARA 88 WHICH READS 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 DO ES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIRTUE OF THE PROVISIONS O F SECTION 14A(1) ; (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 CHARG EABLE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAYS TAX IN DISCHA RGE 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 DIVIDEN D DOES 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 E FFECT 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 DUT Y BOUND 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 ASSESSI NG OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY 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 DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) I N RELATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFIC ER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PROVIDE A REASONABLE OPPORT UNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATE RIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 7 FROM ABOVE, IT IS CLEAR THAT EVEN THE TAXES PAID U/ S 115-O WHICH IS ALSO KNOWN AS DIVIDEND DISTRIBUTION TAXES, WOULD NOT MAKE DIVIDEND INCOME IN THE HANDS OF SHAREHOLDER AS NON- EXEMPT. SIMILARLY 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 HELD THAT RULE 8D WOULD BE APPLICABLE ONLY FROM ASSESSMENT YEAR 2008-09. IN THIS DECISIO N THE THEORY OF APPORTIONMENT OF EXPENDITURE WHICH WAS CONFIRMED BY THE HON'BLE SUPREME COURT IN CASE OF CIT V. WALFORT SHA RE AND STOCK BROKERS P LTD (2010) 326 ITR 1 (S.C), WAS FOL LOWED. IN FACT BEFORE INTRODUCTION OF SECTION 14A, THE ASSESS EE HAD A RIGHT TO CLAIM ALL THE EXPENSES IF SUCH EXPENSES CO ULD NOT BE BI-FURCATED AGAINST NORMAL TAXABLE INCOME AS WELL A S EXEMPTED INCOME IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN CASE OF RAJASTHAN WAREHOUSING COOPERATION V CIT, 242 ITR 450. THIS POSITION GOT CHANGED AFTER THE I NTRODUCTION OF SECTION 14A BY FINANCE ACT, 2001. THE MEMORANDU M 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. TH ERE 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 EXEMP T INCOME AGAINST TAXABLE INCOME. THIS IS AGAIN THE BASIC PRINCIPLES OF TAXA TION WHEREBY 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 CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO TH E 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 INCURR ED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME 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 ASSESSME NT YEAR 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 PLACITUM 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 , HOWEVER, IT NEEDS TO BE EMPHASIZED THAT THE PROVISIONS OF SECTION 14A WERE CONSTRUED IN WALFORT TO EVINCE PARLIAMENTARY INTENT NOT TO ALLOW DEDUCTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST TAXABLE INCOME. SECTION 14A IS CLARIFICATORY OF THE POSITION THAT EXPENSE CAN BE ALLOWED ONLY TO TH E EXTENT THAT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. ONLY T HOSE EXPENSES WHICH ARE IN RESPECT OF THE EARNING OF TAXABLE INCOME CAN BE AL LOWED. THE SECTION 14A BROADENS THE THEORY OF APPORTIONMENT OF EXPENDITUR E BETWEEN TAXABLE AND NON-TAXABLE INCOME IS EVIDENT FROM THE FOLLOWIN G 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. READI NG SECTION 14 IN JUXTAPOSITION WITH SECTIONS 15 TO 59, IT IS CLEAR THAT THE WORDS EXPENDITURE INCURRED IN SECTION 8 14A REFERS TO EXPENDITURE ON RENT, 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 T AXABLE INCOME AND EXEMPTED INCOME. 25 AS OBSERVED EARLIER, ALMOST SIMILAR OBSERVATIONS HAVE BEEN MADE BY THE HON'BLE PUNJAB & HARYANA HIGH COUR T IN A RECENT JUDGMENT IN CASE OF CIT V. PUNJAB STATE INDU STRIAL 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 DED UCTION ADMISSIBLE TO THE ASSESSEE UNDER SECTION 80M OF THE ACT, THE EXPENDIT URE INCURRED RELATING TO THE EARNING OF DIVIDEND INCOME HAS TO BE EXCLUDED THERE -FROM. ACCORDING TO THE LEARNED COUNSEL, THE EXPENDITURE WHICH WAS TO BE DE DUCTED WAS REQUIRED TO BE DEDUCTED ON PROPORTIONAL BASIS FOR INCURRING OF SUC H EXPENDITURE. RELIANCE WAS PLACED ON SECTION 14A OF THE ACT WHICH WAS INCORPOR ATED BY FINANCE ACT 2001 RETROSPECTIVELY .W.E.F. 1.4,1962. SUPPORT WAS GATHE RED FROM THE DECISION OF THE RAJASTHAN HIGH 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 FO R 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 HA D 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 DEDUCTIO N IN RESPECT OF ANY EXPENDIIURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST THE TAXABLE INCOME (SE E 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 EARNIN G OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSES INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCOME AND PARTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SECTION 14A, THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOM E WAS BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDATE OF SECTION 14A IS CLEAR . IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF E XPENSES INCURRED IN 9 RELATION TO EXEMPT INCOME. THE BASIC REASON FOR INS ERTION OF SECTION 14A IS THAT CERTAIN INCOMES ARE NOT INCLUDIBIE WHILE COMPUTING TOTAL IN COME AS THESE ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE ACT. IN THE PAST, THERE H AVE BEAN IN WHICH DEDUCTION HAS BEEN SOUGHT IN RESPECT OF SUCH INCOMES WHICH I N EFFECT 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, AGAIN ST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE. OH THE SAME ANALOGY T HE EXEMPTION IS ALSO IN RESPECT OF NET INCOME. EXPENSES ALLOWED CAN ONLY BE IN RESP ECT OF EARNING OF TAXABLE INCOME. THIS IS THE PURPORT OF SECTION 14A. IN SECT ION 14A, THE FIRST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS C HAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS OF INCOME AS PRESCRIBED UNDER CH APTER IV WOULD FALL WITHIN SECTION 14A. THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHI CH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT'. IT MEANS THAT IF AN INCOME D OES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 14A. FURTHER, SECTION 14 SPECIFIES FIVE HEA DS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE CHARGEABLE, AN IN COME HAS TO BE BROUGHT UNDER ONE OF THE FIVE HEADS. SECTIONS 15 TO 59 LAY DOWN T HE RULES FOR COMPUTING INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX UNDER THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL INCOME CHARGEABLE TO TAX. THE PERMISSIBLE DEDUCTIONS ENUMERATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOWED ONLY WITH R EFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF THE ABOVE HEADS AND IS CHARGEA BLE 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 F OR THE PURPOSE OF CHARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT OF EXPENDITURES BETWEEN TAXABLE AND NON- TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER S ECTION 14A. READING SECTION 14 IN JUXTAPOSITION WITH SECTIONS 15 TO 59, IT IS C LEAR THAT 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 S ECTIONS 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 SE CTION 14A. IT WAS FURTHER NOTICED THAT THE EXPRESSION 'EXPENSES INCURRED' OCC URRING 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. 16. IN VIEW OF THE ABOVE, THE SUBSTANTIAL QU ESTION NO.(II) IS ANSWERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. INC OME 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 SHA RE AND STOCK BROKERS P LTD (2010) 326 ITR 1 (S.C) FOLLOWED BY HON'BLE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOYCEE (SU PRA) HAS ALSO BEEN APPROVED BY HON'BLE PUNJAB & HARYANA HIGH COURT IN CASE OF CIT V. PUNJAB STATE INDUSTRIAL DEVELOPME NT 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 PARTIC ULAR ITEM OF INCOME TO MEET THESE DIFFICULTIES RULE 8D WAS INTRO DUCED WHICH HAS BEEN HELD TO BE CONSTITUTIONALLY VALID BY HON'BLE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOYCEE (SUP RA). RULE 8D READS AS UNDER: 10 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 RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SU B-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 AM OUNTS, 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 ATTR IBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, 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 Y EAR; 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 Y EAR; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE A VERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE AS SESSEE, 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 INCREA SE ON ACCOUNT 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 SPECI FICALLY FOR A PARTICULAR ITEM OF INCOME THEN IT HAS TO BE APPOR TIONED. IN CASE BEFORE US, THE ASSESSEE HAS PROVIDED SOURCES OF FUNDS BUT THEY CANNOT BE SAID TO HAVE BEEN MAINTAINED SEP ARATELY. FIRST OF ALL IT WAS CONCEDED THAT THE ASSESSEE IS H AVING MIXED FUNDS. THE DETAILS OF FUNDS WAS STATED TO BE AS UN DER 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 11 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 B ORROWED FUNDS, WOULD NOT SHOW THAT SPECIFIC FUNDS HAVE BEEN BORROWED FOR SPECIFIC PURPOSE. FOR EXAMPLE IT CAN BE VERY E ASILY SAID THAT THE ASSESSEE SUPPORTED ITS BUSINESS WITH OWN F UNDS AND BORROWED LOANS HAVE BEEN USED FOR MAKING INVESTMENT IN ASSETS AS WELL AS IN INVESTMENTS WHICH GENERATE EXE MPTED INCOME. ONCE THE FUNDS ARE MIXED, THERE IS NO WAY TO FIND OUT ACTUAL USAGE OF THE FUNDS. TO MEET THIS SITUATION ONLY RULE 8D WAS INSERTED TO REMOVE THE DIFFICULTIES. IN FACT T HIS ASPECT WAS ALSO EXAMINED BY HON'BLE BOMBAY HIGH COURT IN CASE OF GODREJ & BOYCEE (SUPRA). MANY OBSERVATIONS WERE MA DE UNDER THE HEAD PARAMETERS OF JUDICIAL REVIEW AT PA RA 62 TO 72 OF THE ORDER. WITHOUT UNNECESSARILY BURDENING THIS ORDER WITH THESE OBSERVATIONS WE WILL 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 H AS BEEN STATED, WITH REFERENCE TO RULE 8D(2)(II) THAT SINCE FUNDS ARE FUNGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACT UAL QUANTUM OF BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TA X FREE INVESTMENT. IT IS ONLY THE INTEREST ON BORROWED FU NDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS A IN THE FORMU LA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY 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 MECHANISM OR FORMULA HAD TO BE ADOPTED FOR ATTRIBUTING PART OF THE ADMINISTRATIVE/ MANAGERIAL EXPENSES TO TAX EXEMPT INVESTMENT INCOME. THE ADMINISTRATIVE EXPENSES ATTRIBUTABLE TO TAX FREE IN VESTMENT INCOME HAVE A FIXED COMPONENT AND A VARIABLE COMPON ENT. A VIEW WAS TAKEN THAT THE DISALLOWANCE SHOULD ALSO BE LINKED TO THE VALUE OF THE INVESTMENT RATHER THAN THE AMOU NT OF EXEMPT INCOME. UNDER PORTFOLIO MANAGEMENT SCHEME ( 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 ADMINIS TRATIVE EXPENSE WERE EXCLUDED, ON THE GROUND THAT IN THE CA ASE OFA LARGE CORPORATE TAXPAYER THEY WOULD BE SPREAD OVER A LARGE NUMBER OF VOLUMINOUS ACTIVITIES, THE VARIABLE EXPEN SES WERE COMPUTED AT ONE-HALF PER CENT OF THE VALUE OF THE I NVESTMENT. THE JUSTIFICATION THAT HAS BEEN OFFERED IN SUPPORT OF THE RATIONALE FOR RULE 8D CANNOT BE REGARDED AS BEING C APRICIOUS, PERVERSE OR ARBITRARY. APPLYING THE TESTS FORMULAT ED BY THE HON'BLE SUPREME COURT IT IS NOT POSSIBLE FOR THIS C OURT TO HOLD THAT THERE IS WRIT ON THE STATUTE OR ON THE SUBORDI NATE LEGISLATION PERVERSITY, CAPRICE OR IRRATIONALITY. THERE IS CERTAINLY NO MADNESS IN THE METHOD. 12 THUS ABOVE RULE WAS FOUND TO BE VALID AND RATIONAL. COMING BACK TO THE CASE IN HAND, THE PERUSAL OF THE ASSESS MENT ORDER SHOWS AS OBSERVED EARLIER, NO WHERE BEFORE THE ASS ESSING OFFICER OR THE LD. CIT(A), THE ASSESSEE HAS MADE A SPECIFIC MENTION TO SHOW WHICH PARTICULAR FUNDS WERE BORROWE D 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 14 A HAS BEEN WORKED OUT ON THE BASIS OF RULE 8D WHICH IS A S OBSERVED EARLIER APPLICABLE IN CASE OF THE ASSESSEE. THEREF ORE, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THAT OF THE ASSESSING OFFICER. 8. WE FURTHER FIND THAT BEFORE THE LD. CIT(A) IT WA S SUBMITTED AS UNDER : MOREOVER, WHILE CALCULATING THE DISALLOWANCE, THE LD. ASSESSING OFFICER CONSIDERED THE WHOLE AMOUNT OF INTEREST EXPENDITURE OF RS. 27183608/- WITHOUT SUBTRACTING THE INTEREST EXPENDITURE ON SPECIFIC PURPOSE TERM LOANS LIKE CAR LOAN, MTL, ETC. THUS, I T AGAIN EVINCES THE OVERLOOKING OF THE FACTS AND DECIDING THE ASSESSMENT IN FINANCIAL MANNER. IF INTEREST EXPENDITURE ON SPECIFIC PURPOSE TERM LOANS IS DEDUCTED THEN DISALLOWANCE WOULD HAVE BEEN AS UNDER:- DETAILS OF INTEREST EXPENDITURE OF RS. 2718360 TYPE OF LOAN NAME OF BANK NATURE OF LOAN AMOUNT OF INTEREST (INR) INTEREST TOTAL (INR) WORKING CAPITAL LOAN KOTAK MAHINDRA PRIME LTD. CASH CREDIT 1543266.84 KOTAK MAHINDRA PRIME LTD. INVENTORY FUNDING 12998806.74 SPECIFIC PURPOSE LOANS HDFC BANK LTD. CAR LOAN 1155057.82 KOTAK MAHINDRA PRIME LTD. CAR LOAN 881594.00 KOTAK MAHINDRA PRIME LTD. CAR LOAN 13939.00 INDIAN BANK TERM LOAN 868709.00 KOTAK MAHINDRA PRIME LTD. TERM LOAN 842850.00 KOTAK MAHINDRA PRIME LTD. TERM LOAN 3395062.00 HDFC BANK LTD. TRADE ADVANCE 5484322.97 14542073.58 12641534.79 TOTAL 27183608.37 APPOINTMENT OF DISALLOWANCE TO BE MADE U/S 14 A DISALLOWANCE MADE AS PER ORDER U/S 143(3) RS. 19 12761 TOTAL INTEREST EXPENDITURE RS. 27183608 INTEREST EXPENDITURE W.R.T. WORKING CAPITAL / UNSPECIFIED PURPOSE LOANS RS. 14542074 13 CORRECT DISALLOWANCE TO BE MADE IF SEC. 14 A APPLIC ABLE. RS. 1023246 9. WE HAVE EXAMINED THE COPY OF LOAN ACCOUNT WITH K OTAK MAHINDRA PRIME LTD. WHICH IS FILED AT PARA 463 TO 485 FROM WHICH N O WITHDRAWALS HAVE BEEN MADE AND VARIOUS AMOUNTS HAVE BEEN DEPOSITED, IT SE EMS THE ACCOUNT WAS BEING USED FOR INVENTORY FUNDING BUT HOWEVER THERE ARE CERTAIN ENTRIES MENTIONED AS TRANSFER FROM KOTAK MAHINDRA BANK LTD. WHICH HAS NOT BEEN EXPLAINED BEFORE US. MOREOVER INTEREST ON THIS ACCO UNT HAS BEEN WORKED OUT AT RS. 18481863/- ON PAGE 213 OF THE PAPER BOOK WHICH READS AS UNDER : PARTICULARS NATURE AMOUNT HDFC BANK LIMITED TRADE ADVANCE CAR LOAN 1168996.82 KOTAK MAHINDRA PRIME LIMITED TERM LOAN TERM LOAN 5120772.23 KOTAK MAHINDRA BANK LIMITED CASH CREDIT LIMIT 15432 66.84 INDIAN BANK TERM LOAN 868709.00 KOTAK MAHINDRA PRIME LIMITED INVENTORY FUNDING INVENTORY FUNDING 18481863.00 TOTAL 27183607 WHEREAS INTEREST ON THIS ACCOUNT HAS BEEN SHOWN AT RS. 12998806/- IN THE SUBMISSIONS MADE BEFORE LD. CIT(A) AS EXTRACTED ABO VE (SEE HIGHLIGHTED FIGURE IN THE SCHEDULE). NO EXPLANATION HAS BEEN GIVEN FOR THIS DISCREPANCY. THEREFORE, WE ARE UNABLE TO TAKE COGNIZANCE OF THIS CONTENTION AND FOLLOWING EARLIER YEAR ORDER WE DECIDE THE ISSUE AGAINST THE ASSESSEE. 10. IN THE RESULT APPEAL OF THE ASSESSEE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON 03/07/2015 SD/- SD/- (BHAVNESH SAINI) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 03/07/2015 AG COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT, TH E CIT(A), THE DR