Shri Ashok Kumar Pankaj Kumar (HUF), Kanpur V. The Dy. CIT, Kanpur

ITA 305/LKW/2010

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6095 (ITAT-LUCKNOW)
• Duration Of Justice: 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-09-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 15-09-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 12-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS SHEFALI SWARUP
• Keywords: Retrospective amendment
• Section: 14A; 147; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, B - BENCH, LUCKNOW. BEFORE SHRI H.L.KARWA, HON'BLE VICE PRESIDENT AND SHRI N.K.SAINI, ACCOUNTANT MEMBER I.T.A.NO.305(LUC.)/2010 A.Y. : 2006-07 SHRI ASHOK KUMAR PANKAJ KUMAR VS. THE DY.CIT-I, (HUF), 26/55,BIRHANA ROAD, KANPUR. KANPUR. PAN AAAHA9256Q (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RAKESH GARG,ADVOCATE RESPONDENT BY : MRS.SHEFALI SWARUP, D.R. O R D E R PER N.K.SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE O RDER DATED 26.3.2010 OF THE LD.CIT(A)-II, KANPUR. 2. THE FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEAL. 01. BECAUSE THE ORDER PASSED BY THE CIT(APPEALS) CONFIRMING THE DISALLOWANCE OF RS.4,85,604/- BY APP LYING THE PROVISIONS OF SECTION 14A OF THE I.T. ACT IS CONTRA RY TO FACTS, BAD IN LAW AND BE DELETED. 02. BECAUSE ON A PROPER APPRAISAL OF FACTS AND CIRC UMSTANCES OF THE CASE, IT WOULD BE FOUND THAT THE ASSESSEE HUF HAS S UFFICIENT INTEREST FREE FUNDS AND HAS NOT INVESTED INTEREST B EARING FUNDS IN TAX FREE INSTRUMENTS. AS SUCH, THE AUTHORITIES BEL OW HAVE ERRED ON FACTS AND IN LAW IN APPLYING THE PROVISIONS OF S ECTION 14A OF THE ACT, AND MAKING AN ADDITION OF RS.4,85,604/-. 2 2 03. BECAUSE THE ORDERS OF THE AUTHORITIES BELOW ARE CONTRARY TO FACTS, ERRONEOUS, MISCONCEIVED, THE ADDITION OF RS. 4,85,604/- BE DELETED. 04. BECAUSE THE CASE LAWS APPLIED BY THE CIT (APPEA LS), I.E., DAGA CAPITAL AND CHEMINVEST ARE NOT APPLICABLE TO THE FA CTS OF THE CASE, AND AS SUICH, THE CIT (APPEALS) HAS ERRED IN LAW IN ARBITRARILY UPHOLDING THE ADDITION OF RS.4,85,604/- . 05. BECAUSE IN ANY CASE AND IN ALL CIRCUMSTANCES OF THE CASE, THE ADDITION MADE IS BAD IN LAW, ARBITRARY AND BE DELET ED. 2.1 FROM THE AFORESAID GROUNDS, IT WOULD BE CLEAR T HAT THE ONLY GRIEVANCE OF THE ASSESSEE RELATES TO THE CONFIRMATION OF THE DISALLOWANCE OF RS.4,85,604 MADE BY THE AO BY APPLYING THE PROVISIO NS OF SECTION 14A OF THE INCOME-TAX ACT,1961. 3. THE FACTS OF THE CASE, IN BRIEF, ARE THAT THE AS SESSEE CARRIED ON THE BUSINESS OF ADVANCING INTEREST BEARING LOANS AS AL SO INVESTMENT IN SHARES AND SECURITIES. FOR THE YEAR UNDER CONSIDERATION, T HE RETURN OF INCOME WAS FILED ON 30.10.2006 DECLARING AN INCOME OF RS.6,89, 470, WHICH WAS PROCESSED UNDER SECTION 143(1) ON 21.8.2007. LATER ON, THE CASE WAS SELECTED FOR SCRUTINY. DURING THE COURSE OF ASSESS MENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAD MADE CONSIDERABLE BOR ROWINGS ON WHICH INTEREST IS BEING PAID. HE MADE A SUMMARY OF THE AF FAIRS OF THE ASSESSEE, WHICH WAS AS UNDER : CAPITAL 1,17,49,744/- UNSECURED LOANS 1,34,44,526/- TOTAL 2,51,94,270/- 3 3 THE ABOVE FUNDS WERE MAINLY USED AS UNDER:- S.S. ENTERPRISES 1,44,77,108/- (IN THE NAME AND STYLE S.S.INTERPRISE) SHARES AND DEBENTURES,GOI 8% RELIEF BOND, MF, ETC. 1,18,02,388 TOTAL 2,62,79,496/- 4. ACCORDING TO THE AO, THE ASSESSEE HAD MADE INVE STMENT IN SHARES, DEBENTURES, GOI 8% RELIEF BONDS, MUTUAL FUND ETC. DURING THE YEAR AND ALSO IN THE EARLIER YEAR. HE ALSO OBSERVED THAT THE INTE REST BEARING UNSECURED LOANS OF RS.1.33 CRORES WERE RAISED PARTLY DURING THE YEAR AND PARTLY DURING THE EARLIER YEAR. IT WAS FURTHER OBSERVED THAT THERE WA S COMPLETE INTERMINGLING OF FUNDS (OWN AND BORROWED) FOR LENDING AND ALSO FOR INVESTMENT MADE. THE AO INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT AND MADE A DISALLOWANCE OF RS.4,87,604 BY OBSERVING AS UNDER : 2.3 THE ASSESSEE WAS REQUESTED TO FURNISH DETAILS OF SOURCE OF INVESTMENT IN PURCHASE OF SHARES AND BONDS OF RS.1, 18,02,388/-. THE ASSESSEE HAS MADE SUCH INVESTMENT DURING THE YEAR A S WELL AS IN THE IMMEDIATELY PRECEDING YEAR. THE INTEREST BEARING UN SECURED LOANS OF RS.1,34,44,526/- WERE ALSO RAISED PARTLY DURING THE YEAR AND PARTLY DURING THE EARLIER YEARS. THE INFORMATION WHATSOEVE R HAS BEEN SUBMITTED BY THE ASSESSEE REVEALS THAT THE INTEREST BEARING LOANS WERE USED FOR PURCHASE OF SHARES, ETC. ALSO. MOREOVER, S INCE THE LOANS WERE CREDITED IN THE BANK ACCOUNT AND TRANSACTIONS WERE REGULARLY MADE FROM S.S. ENTERPRISES OR INVESTMENT MADE IN SHARE A ND DEBENTURES. THEREFORE, THE EXACT NEXUS AS TO WHICH LOAN WAS USE D FOR THE PURPOSE OF BUSINESS AND WHICH FUNDS WAS USED FOR INVESTMENT IN THE SHARES CAN NOT BE FURNISHED BY THE ASSESSEE. IN VIEW OF THIS, IT IS HELD THAT THE AMOUNT OF FUNDS AVAILABLE BY WAY OF CAPITAL OR LOAN WERE USED ON PRO- RATA BASIS FOR INVESTMENT IN S.S. ENTERPRISES AND A LSO IN PURCHASE OF SHARES ETC. THE INVESTMENT MADE IN S.S. ENTERPRISE IS RS.1,44,77,108/- AND INVESTMENT IN SHARES IS RS.1,18,02,388/-. THUS, THE PERCENTAGE IN SHARE COMES TO 44.91% AND ACCORDINGLY 44.91% OF INT EREST BEARING 4 4 LOANS WERE HELD TO BE UTILIZED FOR INVESTMENT IN PU RCHASE OF SHARES. THEREFORE, 44.91% OF TOTAL INTEREST OF RS.1081283/- AMOUNTING TO RS.4,85,604/- WERE HELD TO BE NOT FOR THE PURPOSE O F EARNING TAXABLE INCOME BUT IT WAS RELATABLE TO THE EARNING OF TAX F REE INCOME BY WAY OF DIVIDEND AND LONG TERM CAPITAL GAINS. THE EXPLAN ATION GIVEN BY THE ASSESSEE THAT THE FUNDS WERE USED WHOLLY AND EXCLUS IVELY FOR EARNING TAXABLE INCOME IS REJECTED IN VIEW OF FACTS MENTION ED ABOVE AND ALSO LOOKING TO THE FACT THAT AT MANY INSTANCES THE LOAN S RAISED WERE INVESTED IN PURCHASE OF SHARES, DEBENTURES AND MUTU AL FUNDS. IN VIEW OF PROVISIONS OF SECTION 14A OF I.T. ACT, THE DEDUC TION ON A/C OF PAYMENT OF INTEREST OF RS.4,85,604/- IS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. (DISALLOWANCE OF INTEREST: RS.4,85,604/- ON A/C OF INVESTMENT MADE IN NON EARNING ACTIVITIES OUT OF INTEREST BEARING FUND S) 2.4 IN SUPPORT OF ABOVE DISALLOWANCES, RELIANCE IS PLACED ON THE VARIOUS DECISIONS OF HONBLE COURTS WHICH ARE DISCU SSED AS UNDER:- I) SHREE SYNTHETICS LTD. VS. CIT (2006)-205 CTR (MP) 7 86, WHEREIN IT HAS BEEN HELD BY HONBLE HIGH COURT THAT WHERE THE ASSESSEE TOOK LOAN AND MADE INVESTMENT IN UNITS OF THE UTI AND TAX FREE SEGMENTS, PROVISIONS OF SECTION 14A WOULD APPLY AGAINST THE ASSESSEE IN SO FAR AS CLAIM OF INTEREST PAID ON THIS LOAN TRANSACTION IS CONCERNED. II) MOHAN T. ADVANI FINANCE (P) LTD. VS. ITO (2006) 9 S OT 675 (MAH.), WHEREIN IT HAS BEEN HELD BY HONBLE HIGH CO URT THAT WHERE THE EXPENDITURE INCURRED IS EARNED IN EARNING THE NON TAXABLE INCOME WOULD NOT BE ALLOWED TO BE DEDUCTIBL E AGAINST TAXABLE INCOME. III) EVERPLUS MINERALS & FINANCE LTD. VS. DY. CIT (2006) 101 ITD 157/102- TTJ-120(DEL) WHEREIN IT HAS BEEN HELD THAT WHERE INTEREST BEARING LOANS HAD BEEN INVESTED IN SHARES, WHICH YIELDED DIVIDEND INCOME WHICH WAS EXEMPT FROM TAX B Y VIRTUE OF SECTION 10(33), THE AO WAS JUSTIFIED IN DISALLOW ING INTEREST PAID ON SAID LOAN BY INVOKING SECTION 14A OF THE AC T. 5. THE ASSESSEE CARRIED THE MATTER TO THE LD.CIT(A ),WHO CONFIRMED THE ACTION OF THE AO BY OBSERVING AS UNDER : 5 5 4. THE APPELLANT HAS REITERATED ITS SUBMISSIONS AN D HAS FURTHER INVITED MY ATTENTION TO THE DECISION OF THE HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF HERO CYCLES. ON PERUSAL OF THIS DECISION, I FIND THAT THE FACTS OF THAT CASE ARE EN TIRELY DIFFERENT THAN THE PRESENT CASE. IN THAT CASE THERE IS A SPECIFIC FIN DING THAT THERE WAS NO MIXING OF FUNDS AND IT WAS HELD IN THAT CASE THAT I NVESTMENTS HAD BEEN MADE THROUGH A SEPARATE ACCOUNT WHICH DID NOT HAVE ANY BORROWED FUNDS. HOWEVER, THE FACTS ARE NOT THE SAME IN THE I NSTANT CASE WHERE THERE IS A COMPLETE INTERMINGLING OF OWN AND BORROW ED FUNDS. THUS, THE DECISION IN THE CASE OF HERO CYCLE DOES NOT COM E TO THE AID OF THE APPELLANT. 4.1 THE APPELLANTS CASE IS FULLY COVERED BY THE DE CISIONS OF THE HONBLE ITAT(SB) IN THE CASES OF DAGA CAPITAL AND C HEMINVEST. RESPECTFULLY FOLLOWING THESE DECISIONS, I CONFIRM THE ADDITION MADE BY THE AO WITH THE DIRECTION THAT HE SHOULD COMPUTE SUCH DISALLOWANCE IN ACCORDANCE WITH RULE 8D OF THE I.T. RULES. 6. NOW, THE ASSESSEE IS IN APPEAL. 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ADDITION UNDER SECTION 14A OF THE INCOME-TAX ACT,1961 COULD HAVE B EEN MADE ONLY IN RESPECT OF THE EXPENDITURE WHICH HAD A RELATION TO THE INCOME, WHICH DID NOT FORM PART OF THE TOTAL INCOME DURING THE YEAR. HOW EVER, IN THE PRESENT CASE, THE AO FAILED TO ESTABLISH NEXUS OF THE EXPENDITUR E INCURRED BY THE ASSESSEE WITH THE EXEMPTED INCOME (DIVIDEND) AND HAD MADE A N ARBITRARY ADDITION OF RS.4,85,604 TO THE TOTAL INCOME. IT WAS STATED THA T THE PROVISIONS OF RULE 8D APPLIED BY THE AO ARE NOT APPLICABLE IN THE ASSESSE ES CASE SINCE THE SAID PROVISIONS ARE APPLICABLE ONLY FOR THE ASSESSMENT Y EAR 2008-09, WHILE THE ASSESSEES CASE RELATES TO ASSESSMENT YEAR 2006-07. HE, THEREFORE, REQUESTED TO DELETE THE ADDITION MADE BY THE AO AND CONFIRME D BY THE LD.CIT(A). RELIANCE WAS PLACED ON THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT 6 6 IN THE CASE OF GODREJ &BOYCE MFG. CO. LTD. VS. DY. CIT (2010) 234 CTR (BOM.)1. 8. IN HIS RIVAL SUBMISSIONS, THE LD.D.R. STRONGLY S UPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND FURTHER SUBMITTED THAT TH E AO HAD TAKEN A REASONABLE VIEW AND RIGHTLY MADE THE ADDITION. THER EFORE, THE LD.CIT(A) WAS JUSTIFIED IN CONFIRMING THE ADDITION MADE BY THE AO . 9. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, THE AO INVOKED THE PROVISIONS OF SECTION 14A OF THE IN COME-TAX ACT, 1961. THE SAID PROVISION READS AS UNDER : 14A. (1) FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT O F EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE 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 INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE H AS BEEN 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 EMPOWE R 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 7 7 INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154 , FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. 9.1 FROM THE ABOVE PROVISIONS IT WOULD BE CLEAR THA T THE MANDATE OF SECTION 14A IS TO PREVENT CLAIMS FOR DEDUCTION OF E XPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. THIS SECTION IS ENACTED TO ENSURE THAT ONLY EXPENSES I NCURRED IN RESPECT OF EARNING TAXABLE INCOME ARE ALLOWED. ALL EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE PROVISIONS OF THE I.T.ACT HAS TO BE DISALLOWED UNDER SECTION 14A. UNDER SUB-SECTION (2) OF SECTION 14, THE AO IS REQUIRED TO DETERMINE TH E AMOUNT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WI TH SUCH METHOD AS MAY BE PRESCRIBED. IN THE PRESENT CASE, ALTHOUGH THE A O HAS NOT ESTABLISHED THE NEXUS BETWEEN THE EXPENDITURE AND THE EXEMPTED INC OME (DIVIDEND) TO WORK OUT THE EXPENDITURE BUT FOR MAKING DISALLOWAN CE INVOKED THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RULES, 1962 WHICH ARE INSERTED BY THE INCOME-TAX (FIFTH AMENDMENT) RULES,2008, W.E.F. 24.3.2008. HOWEVER, AS PER THE RATIO LAID DOWN BY THE HON'BLE BOMBAY HI GH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA), THE PROVISION S OF RULE 8D ARE APPLICABLE PROSPECTIVELY AND NOT RETROSPECTIVELY. I N THE SAID CASE, THEIR LORDSHIPS OF THE HON'BLE BOMBAY HIGH COURT, WHILE INTERPRETING THE PROVISIONS OF SECTION 14A OF THE ACT AND RULE 8D O F THE INCOME-TAX RULES, 1962, OBSERVED AT PARAS 66 & 67 OF THE AFORESAID R EFERRED TO ORDER (HEAD NOTE) AS UNDER : THE FIRST POINT TO BE NOTED ABOUT THE PROVISIONS O F S. 14A AND R. 8D IS THAT DIFFERENT DATES HAVE BEEN PROVIDED IN THESE PR OVISIONS FOR THEIR ENFORCEMENT: (I) SUB-SEC. (1) OF S. 14A WAS INSERTE D BY THE FINANCE 8 8 ACT OF 2001 WITH RETROSPECTIVE EFFECT FROM 1ST APRI L, 1962; (II) SUB-SS. (2) AND (3) WERE INSERTED IN S. 14A BY THE FINANCE ACT OF 2006 W.E.F. 1ST APRIL, 2007; (III) THE PROVISO WAS INSERTED BY THE FINANCE ACT OF 2002 WITH RETROSPECTIVE EFFECT FROM 11TH MAY, 2001; (IV) RULE 8D WAS INSERTED BY THE IT (FIFTH AMENDMENT) RULES, 2008 BY PUBLICATION IN THE GAZETTE DT. 24TH MARCH, 2008. SUB-R. (2) OF R.1 STIPULATES THAT THE RULES SHALL COME INTO FORCE FROM THE DATE OF THEIR PUBLICATION IN THE OFFICIAL GAZETTE. THIS BY ITSELF IS NOT CONCLUSIVE. SECONDLY, PRIOR TO THE INSERTION OF S. 14A BY THE FINANCE ACT OF 2001 THE SUPREME COURT HAD HELD IN ITS DECISIONS IN CIT VS. INDIAN BANK LT D. AIR 1965 SC 1473, CIT VS. MAHARASHTRA SUGAR MILLS LTD. 1973 CTR (SC) 489: (1971) 82 ITR 452 (SC):(1971) 3 SCC 543 AND RAJASTH AN STATE WAREHOUSING CORPORATION VS. CIT (2000) 159 CTR (SC) 132 : (2000) 242 ITR 450 (SC) THAT IN THE CASE OF A COMPOSITE AN D INDIVISIBLE BUSINESS WHICH RESULTED IN TAXABLE AND NON-TAXABLE INCOME, IT WAS IMPERMISSIBLE FOR THE AO TO APPORTION THE EXPENDITU RE INCURRED IN RELATION TO SUCH BUSINESS AS BETWEEN THE EARNING OF TAXABLE AND NON- TAXABLE INCOME. SUB-SEC. (1) OF S. 14A WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 1ST APRIL, 1962 TO OVERCOME THE DECISIO NS OF THE SUPREME COURT. AT THE SAME TIME, AS HAS BEEN NOTICED BY THE SUPREME COURT IN ITS DECISION IN CIT VS. WALFORT SHARE & STOCK BROKE RS (P) LTD. (2010) 233 CTR (SC) 42 : (2010) 41 DTR (SC) 233, THE THEOR Y OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NO N-TAXABLE INCOME HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER S. 14A. READING S. 14 IN JUXTAPOSITION WITH SS. 15 TO 59, IT HAS BEEN OBSERVED THAT THE WORDS 'EXPENDITURE INCURRED' IN S. 14A REFER TO EXP ENDITURE ON RENT, TAX, SALARY, INTEREST ETC. IN RESPECT OF WHICH ALLO WANCES ARE PROVIDED FOR. THIRDLY, SUB-SS. (2) AND (3) WERE INTRODUCED B Y A LEGISLATIVE AMENDMENT BROUGHT ABOUT BY THE FINANCE ACT OF 2006. THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL OF 2006 RECOGNIZES THAT THE EXISTING PROVISIONS OF S. 14A D ID NOT PROVIDE A METHOD OF COMPUTING THE EXPENDITURE INCURRED IN REL ATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. CONSE QUENTLY, THERE WAS A CONSIDERABLE AMOUNT OF DISPUTE BETWEEN THE TAXPAY ERS AND THE DEPARTMENT ON THE METHOD OF DETERMINING SUCH EXPEND ITURE. IT WAS IN VIEW OF THESE DISPUTES THAT PARLIAMENT INSERTED A N EW SUB-SEC. (2) TO PERMIT THE FRAMING OF SUBORDINATE LEGISLATION TO PR OVIDE A MANDATORY METHOD FOR THE AO TO FOLLOW IN DETERMINING THE EXPE NDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME, IF THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF TH E CLAIM OF THE 9 9 ASSESSEE. THE MEMORANDUM PROVIDED THAT 'THIS AMENDM ENT WILL TAKE EFFECT FROM 1ST APRIL, 2007 AND WILL, ACCORDINGLY A PPLY IN RELATION TO THE ASST. YR. 2007-08 AND SUBSEQUENT YEARS'. A CIRC ULAR WAS ISSUED BY THE CBDT ON 28TH DEC., 2006 ONCE AGAIN CLARIFYING T HE POSITION THAT THE AMENDMENT WOULD BE APPLICABLE 'FROM THE ASST. Y R. 2007-08 ONWARDS'. AT ANY RATE THIS CONSTRUCTION WHICH HAS B EEN PLACED ON THE AMENDMENT BOTH IN THE MEMORANDUM EXPLAINING THE PRO VISIONS OF THE FINANCE BILL OF 2006 AND IN THE CIRCULAR OF THE CBD T DT. 28TH DEC., 2006 CAN BE REGARDED AS A REASONABLE INTERPRETATION OF THE PROVISION. THE FOURTH ASPECT OF THE MATTER WHICH WOULD MERIT E MPHASIS, IS THE PRINCIPLE OF LAW THAT IN DETERMINING AS TO WHETHER A RULE IN A PIECE OF SUBORDINATE LEGISLATION IS TO BE REGARDED AS PROSPE CTIVE OR RETROSPECTIVE, AN IMPORTANT ASPECT IS AS TO WHETHER THE RULE EMBODIES WHAT IS ESSENTIALLY A WELL KNOWN, A WELL SETTLED OR WELL ACCEPTED METHOD. AS A MATTER OF FACT IN THE PRESENT CASE THE RE CAN BE NO DOUBT ABOUT THE POSITION THAT R. 8D HAS ESSENTIALLY PUT I NTO PLACE AN ARTIFICIAL METHOD OF ESTIMATING THE EXPENDITURE THAT CAN BE RE GARDED AS BEING RELATABLE TO INCOME THAT DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. BEFORE THE INSERTION OF S. 14A, THERE WAS NO SPECIFIC METHOD OF DETERMINING THE EXPENDITURE INCURRED IN RELATION TO NONTAXABLE INCOME. LOOKING AT THE TOTALITY OF THE CIRCUMSTANCE S, THE MEASURE OF 0.5 PER CENT PROVIDED IN R. 8D(2)(III) IS REASONABL E. HENCE, WHILE THE METHOD OF COMPUTATION PROVIDED IN R. 8D IS FAIR AN D REASONABLE TO PASS MUSTER UNDER ART. 14, THE METHOD MUST TAKE EFF ECT PROSPECTIVELY. FINALLY, SUB-SEC. (4) OF S. 295 EMPOWERS THE RULE-M AKING AUTHORITY TO GIVE RETROSPECTIVE EFFECT TO SUBORDINATE LEGISLATIO N. HOWEVER, UNLESS EXPRESSLY OR BY NECESSARY IMPLICATION, A CONTRARY P ROVISION IS MADE, NO RETROSPECTIVE EFFECT IS TO BE GIVEN TO ANY RULE SO AS TO PREJUDICIALLY AFFECT THE INTERESTS OF THE ASSESSEE. EVEN IN THE A BSENCE OF SUB-SS. (2) AND (3) OF S. 14A AND OF R. 8D, THE AO WAS NOT PREC LUDED FROM MAKING APPORTIONMENT. SUCH AN APPORTIONMENT WOULD H AVE TO BE MADE IN ORDER TO GIVE EFFECT TO THE SUBSTANTIVE PRO VISIONS OF SUB-S. (1) OF S. 14A WHICH PROVIDE THAT NO DEDUCTION WOULD BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCO ME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE CH ANGE WHICH IS BROUGHT ABOUT BY THE INSERTION OF SUB-SS (2) AND (3 ) INTO S. 14A BY THE FINANCE ACT OF 2006 W.E.F. 1ST APRIL, 2007 IS THAT IN A SITUATION WHERE THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN REGARD TO THE EXPENDITURE INCURRED BY I T IN RELATION TO THE NON-TAXABLE INCOME, THE AO WOULD HAVE TO FOLLOW THE METHOD WHICH 10 10 IS PRESCRIBED BY THE RULES. THE AMENDMENT RULES WER E NOTIFIED TO COME INTO FORCE ON 24TH MARCH, 2008. IT IS A TRITE PRINC IPLE OF LAW THAT THE LAW WHICH WOULD APPLY TO AN ASSESSMENT YEAR IS THE LAW PREVAILING ON THE FIRST DAY OF APRIL. CONSEQUENTLY, R. 8D WHICH H AS BEEN NOTIFIED ON 24TH MARCH, 2008 WOULD APPLY WITH EFFECT FROM ASST. YR. 2008-09. THE RULE CONSEQUENTLY CANNOT HAVE APPLICATION IN RESPEC T OF ASST. YR. 2002- 03 WHICH IS THE YEAR UNDER CONSIDERATION IN THIS CA SE. 9.2 IN THE PRESENT CASE, SINCE THE AO APPLIED THE P ROVISIONS CONTAINED IN RULE 8D,WHICH ARE APPLICABLE WITH EFFECT FROM A.Y. 2008-09, WHILE THE ASSESSMENT YEAR INVOLVED IN THIS CASE IS 2006-07,T HEREFORE, WE ARE OF THE VIEW THAT THE LD.CIT(A) WAS NOT JUSTIFIED IN CONFIR MING THE ACTION OF THE AO BY CONSIDERING THE RATIO LAID DOWN BY THE I.T.A. T., SPECIAL BENCH IN THE CASE OF M/S. DAGA CAPITAL MANAGEMENT PRIVATE LTD., 312 ITR 1 (S.B.) MUMBAI, WHICH IS NOT A GOOD LAW IN VIEW OF THE JU DGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE AFORESAID REFERRED TO CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA), WE, THEREFORE, SET ASIDE T HE ORDER OF THE LD.CIT(A) AND REMAND THE ISSUE BACK TO THE FILE OF THE AO FOR FRESH ADJUDICATION AS TO WHETHER SECTION 14A OF THE ACT IS APPLICABLE TO THE FACTS OF THE PRESENT CASE OR NOT. IF IT IS APPLICABLE, THE AO WILL DECID E THE ISSUE BY KEEPING IN VIEW THE GUIDELINES LAID DOWN BY THE HON'BLE BOMBA Y HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA). 10. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 15.9.201 0. SD. SD. (H.L.KARWA) (N.K.SAINI) VICE PRESIDENT ACCOUNTANT MEMBER SEPTEMBER 15 ,2010. 11 11 COPY TO THE : 1. APPELLANT 2. RESPONDENT 3. CIT(A) (4) CIT 5.DR. A.R.,ITAT, LUCKNOW. SRIVASTAVA.