Appeal Details
Counselvise Citation
[2013] 140 COUNSELVISE.COM (IT) 72041 (ITAT-PANAJI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
6 month(s) 22 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
13-09-2013
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
DB
Assessment Year
2009-2010
Appeal Filed On
21-02-2013
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI P.K. BANSAL, HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HONBLE JUDICIAL MEMBER ITA NO. 32/PNJ/2013 : (ASST. YEAR : 2009 - 10) SOCIEDADE DE FOMENTO INDUSTRIAL PVT. LTD., MARGAO, GOA PAN : AABCS8860Q (APPELLANT) VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 1, MARGAO, GOA. (RESPONDENT) ITA NO. 37/PNJ/2013 : (ASST. YEAR : 2009 - 10) ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 1, MARGAO, GOA. (APPELLANT) VS. SOCIEDADE DE FOMENTO INDUSTRIAL PVT. LTD., MARGAO, GOA PAN : AABCS8860Q (RESPONDENT) REVENUE BY : SMT. ASHA DESAI , DR ASSESSEE BY : NISHANT THAKKAR , ADV. DATE OF HEARING : 05 /08/2013 DATE OF PRONOUNCEMENT : 13 /0 9 /2013 O R D E R PER P.K. BANSAL : 1. THESE CROSS APPEALS HAVE BEEN FILED AGAINST THE ORDER OF CIT(A) DT. 20.12.2012. THE ASSESSEE HAS TAKEN THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL 1. THAT THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), PANAJI, GOA (HEREINAFTER REFERRED TO AS CIT(A)) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. (A) THAT THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE AO UNDER SECTION 14A OF RS.2,41,86,023/ - . (B) WITHOUT PREJUDICE, THE DISALLOWANCE BY APPLICATION OF RULE 8D MAY DIRECTED TO BE RESTRICTED (A) BY CALCULATING THE AVERAGE INVESTMENT VALUE TAKING INTO CONSIDERATION ONLY THOSE INVESTMENTS ON WHICH THE ASSESSEE EARNED EXEMPTION 2 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) DIVIDEND AND (B) BY EXCLUDIN G THE BANK CHARGES AND COMMISSION WHILE CONSIDERING THE PROPORTIONATE DISALLOWANCE OF INTEREST UNDER RULE 8D(2)(II). 3. THE CIT(A) ERRED IN CONFIRMING THE ADDITION OF RS. 6,98,926/ - MADE BY THE AO ON ACCOUNT OF DIFFERENCE IN CREDITOR ACCOUNT IN SPITE OF PROV IDING THE RECONCILIATION BEFORE THE AO. 4. (I) THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE AMOUNTING TO RS.2,52,064/ - BY HOLDING THAT THE ASSESSEE FAILED TO PROVIDE THE CONFIRMATION LETTER BEFORE THE AO. (II) THE CIT(A) OUGHT TO HAVE DELETED THE ADDITIO N AS THERE BEING NO CHANGE IN THE OPENING AND CLOSING BALANCES OF THESE CREDITORS DURING THE YEAR UNDER APPEAL SUGGESTING ANY INCOME ACCRUED TO THE ASSESSEE. 5. (I) THE CIT(A) ERRED IN CONFIRMING THE ADDITION AMOUNTING TO RS.15,10,000/ - WRITTEN OFF AS BAD DE BT BY THE ASSESSEE PERTAINING TO ONE OF ITS EX - STAFF. (II) THE CIT(A) HAVING IN KNOWLEDGE THAT THE ADVANCE GIVEN TO A STAFF WHICH REMAINED UNRECOVERED BY REASON OF HIS LEAVING THE JOB, OUGHT TO HAVE ALLOWED THE SAME AS BUSINESS LOSS UNDER SECTION 29 OF T HE ACT. 6. (I) THE CIT(A) ERRED IN CONFIRMING THE ADDITION IN THE SUM OF RS.3,08,039/ - . (II) HAVING NOTICED THAT THE ADDITION WAS ON ACCOUNT OF HANDLING LOSS INVOLVING 541 METRIC TONS OF ORE DURING TRANSPORTATION FROM COLOMBA MINE TO PLANT AT CUDDEGAL, THE CIT(A) OUGHT TO HAVE ALLOWED THE CLAIM TAKING INTO CONSIDERATION THE QUANTITY OF ORE HANDLED BY THE ASSESSEE DURING THE YEAR. 7. (I) THE CIT(A) ERRED IN CONFIRMING THE ADDITION IN THE SUM OF RS.42,93,066/ - AS SUPPRESSION OF CLOSING STOCK ON ACCOUNT OF ALLEGE D GROUND LOSS. (II) THE CIT(A) HAVING IN KNOWLEDGE THAT THE ASSESSEE CLAIMED ACTUAL GROUND LOSS BELONGING TO EOU DIVISION AND NON - EOU DIVISION, OUGHT TO HAVE ACCEPTED THE ACTUAL GROUND LOSS PERTAINING TO THE NON - EOU DIVISION AS NO STOCK REMAINED OF THIS D IVISION ON THE LAST DAY OF THE ACCOUNTING YEAR THOUGH THE PERCENTAGE OF GROUND LOSS WAS SLIGHTLY HIGHER WHEN COMPARED WITH THAT OF EOU DIVISION. (III) WITHOUT PREJUDICE, THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE AT RS.42,93,066/ - CALCULATED BY THE A O BY APPLYING THE COST PER TON RELATABLE TO THE ORE BELONGING TO EOU DIVISION WHILE IN FACT THE ALLEGED SUPPRESSED STOCK CALCULATED WAS OF THAT OF NON - EOU DIVISION. (IV) THE CIT(A) OUGHT TO HAVE DELETED THE ENTIRE ADDITION OF RS. 42,93,066/ - AS ENHANCED V ALUE OF CLOSING STOCK WHEN SUCH ENHANCED VALUE WILL AUTOMATICALLY BE ADDED TO THE OPENING STOCK OF THE NEXT FINANCIAL YEAR AND THAT THERE WILL NOTBE ANY LOSS TO THE REVENUE IN THE END RESULT. WHILE THE REVENUE HAS TAKEN THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL 3 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) 1. THE ORDER OF LD. CIT(A) IS OPPOSED TO THE LAW AND FACT OF THE CASE. 2. THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE AO AMOUNTING TO RS.2,74,002/ - ON ACCOUNT OF LOSS DUE TO FORWARD BOOKING OF U.S.$. 3. THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE AO AMOUNTING TO RS.35,15,625/ - RELATING TO DISALLOWANCE OF EXPENDITURE INCURRED BY WAY OF CONTRIBUTION FOR CONSTRUCTION OF USGAO BRIDGE. 4. THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE AO AMOUNTING TO RS.26,24,381/ - IN RELATION TO DISALLOWANCE OF EXPENSES OUT OF COMMUNITY DEVELOPMENT. 5. THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE AO RELATING TO INCOME ON ACCOUNT OF ALLEGED SALE OF MINE HELD BY FIRM A MOUNTING TO RS.12,60,00,000/ - , TREATING THIS INCOME AS CAPITAL GAIN, BUT NOT THE INCOME FROM BUSINESS. 6. THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE AO ON ACCOUNT OF UNPAID SUNDRY CREDITORS AMOUNTING TO RS.30,00,000/ - . 7. THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE AO ON ACCOUNT OF BAD DEBTS WRITTEN OFF AMOUNTING TO RS.4,53,996/ - . 2. GROUND NO. 1 IN ASSESSEES APPEAL AS WELL AS REVENUES APPEAL ARE GENERAL IN NATURE AND THEREFORE DO NOT REQUIRE ANY ADJUDICATION. 3. GROUND NO. 2 IN ASSESSEES APPEAL RELATES TO THE SUSTENANCE OF THE DISALLOWANCE U/S 14A R/W RULE 8D OF THE INCOME TAX ACT. THE BRIEF FACTS RELATING TO THIS GROUND ARE THAT THE ASSESSEE RECEIVED DIVIDEND INCOME AMOUNTING TO RS. 13,85,03,376 / - BEING EXEMPT U NDER INCOME TAX ACT. THE ASSESSEE CLAIMED THAT HE DID NOT INCUR ANY EXPENDITURE IN RESPECT OF THE DIVIDEND INCOME. IT IS ONLY THE SURPLUS FUNDS WHICH HA VE BEEN INVESTED THROUGH THE BANKERS TO HAVE GOOD RELATION WITH THE BANKS AND FINANCIAL INSTITUTIONS. THE MUTUAL FUND OFFICIALS USED TO COME TO THE DOOR STEP OF THE ASSESSEE AND FILL UP FORMS. THE ASSESSEE ONLY ISSUED THE CHEQUE. THE AO DID NOT AGREE AND TOOK THE VIEW THAT WITHOUT ANALYSING THE NATURE OF THE INVESTMENT AND DEVOTING TIME, THE ASSESSEE CO ULD NOT HAVE MADE THE INVESTMENT IN MUTUAL FUNDS. THE AO TOOK THE VIEW THAT THE PROVISIONS OF SEC. 14A WERE CLEARLY APPLICABLE IN THE CASE 4 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) OF THE ASSESSEE. HE ALSO OBSERVED THAT THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS . DCIT, 234 CTR (BOM) 1 HELD THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT 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 PROVISIONS OF SEC. 14A(1) AND PROVISIONS O F RULE 8D OF THE INCOME TAX RULES APPLICABLE DURING THE IMPUGNED ASSESSMENT YEAR. THE AO ACCORDINGLY APPLIED RULE 8D AND COMPUTED THE DISALLOWANCE OF THE EXTENT BEING 0.5% OF THE AVERAGE INVESTMENT OF RS. 381,67,09,731/ - AMOUNTING TO RS. 1,90,83,548 / - AND DISALLOWED THE SAME. THE ASSESSEE WENT IN APPEAL BEFORE CIT(A). CIT(A) CONFIRMED THE ORDER OF THE AO. 3.2 BEFORE US, THE LD. AR VEHEMENTLY CONTENDED THAT THE SATISFACTION OF THE AO IS NECESSARY ABOUT THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPE CT OF EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE SATISFACTION MUST BE WITH REGARD TO THE ACCOUNTS OF THE ASSESSEE. ATTENTION WAS DRAWN TOWARDS SEC. 14A(2). IT WAS POINTED OUT THAT WITHOUT RECORDING T HE SATISFACTION ABOUT THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE, THE AO CANNOT STRAIGHTAWAY APPLY RULE 8D OF THE INCOME TAX ACT. OUR ATTENTION WAS DRAWN TOWARDS PARA 3.5, 3.6, 3.7, 3.8, 3.9, 3.10 AND 3.11 OF THE ASSESSMENT ORDER AND IT WAS POINTED OU T THAT THE AO HAS NOWHERE RECORDED ANY SATISFACTION ABOUT THE DISCREPANCY IN THE ACCOUNTS OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE INCURRED IN RELATION TO THE DIVIDEND INCOME. THE AO MERELY OBSERVED THAT FROM A.Y 2008 - 09 ONWARDS THE POSITION IS THAT IN ALL CASES WHERE THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED ON EARNINGS THAT DO NOT FORM PART OF THE TOTAL INCOME, THE EXPENDITURE ON THIS ACCOUNT WILL NEED TO BE COMPUTED AS PER RULE 8D OF THE INCOME TAX ACT. OUR ATTENTION WAS ALSO DRAWN TOWARDS THE DECISION OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT, 328 ITR 81 (MUM). RELIANCE WAS ALSO PLACED ON THE SUBMISSIONS MADE BEFORE THE CIT(A). RELIANCE 5 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) WAS ALSO PLACED ON THE DECISION OF THIS TRIBUNAL IN THE CASE OF ACIT VS. SESA GOA LTD. IN WHICH THIS TRIBUNAL VIDE ORDER DT. 8.3.2013 HELD THAT THE APPLICATION OF PROVISIONS OF SUB - SECTION 2 & 3 OF SEC. 14A AND RULE 8D IS NOT AUTOMATIC IN EACH AND EVERY CASE WHERE THERE IS INCOME NOT FORMI NG PART OF THE TOTAL INCOME. BEFORE MAKING ANY DISALLOWANCE THE AO IS REQUIRED TO RECORD SATISFACTION HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE THAT THE CLAIM OF THE ASSESSEE THAT THE EXPENDITURE INCURRED IS NOT RELATED TO THE INCOME FORMING PART OF T HE TOTAL INCOME IS INCORRECT. SUCH SATISFACTION MUST BE ARRIVED AT ON OBJECTIVE BASIS. ONCE THE SATISFACTION IS MADE, ONLY THEN, THE APPLICABILITY OF RULE 8D WILL ARISE. IT WAS ALSO SUBMITTED THAT THE EXPENDITURE WHICH HAVE TO BE DISALLOWED UNDER RULE 8 D MUST HAVE A PROXIMATE RELATIONSHIP WITH THE EARNING OF THE DIVIDEND INCOME. FOR THIS ALSO, RELIANCE WAS PLACED ON THE DECISION OF THIS TRIBUNAL IN THE CASE OF ACIT VS. SESA GOA LTD. ( SUPRA ) DT. 8.3.2013 FOR WHICH THE UNDERSIGNED IS THE AUTHOR. IT WAS A LSO POINTED OUT THAT THE DECISION OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT, 328 ITR 81 (MUM) ( SUPRA ) HAS DULY BEEN DISCUSSED BY THIS BENCH IN THAT CASE. IT WAS SUBMITTED THAT THERE IS NO SATISFACTION WHATSOEVER BEING RECORDED BY THE AO IN ACCORDA NCE WITH SEC. 14A(2) AND THEREFORE IT IS A CASE WHERE RULE 8D COULD HAVE NOT BEEN APPLIED AND THERE COULD NOT BE ANY DISALLOWANCE AS PER SEC. 14A(2). 3.3 THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE AO. 3.4 WE HAVE HEARD THE RIVAL SUBMISSI ONS AND CAREFULLY CONSIDERED THE SAME. WE NOTED FROM THE PROVISIONS OF SEC. 14A(2) THAT BEFORE MAKING ANY DISALLOWANCE U/S 14A, THE AO MUST RECORD SATISFACTION HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE THAT THE CLAIM OF THE ASSESSEE THAT THE EXPENDITU RE INCURRED IS NOT RELATED TO THE INCOME FORMING PART OF THE TOTAL INCOME IS INCORRECT. WE HAVE GONE THROUGH PARA 3.5, 3.6, 3.7, 3.8, 3.9, 3.10 AND 3.11 OF THE ASSESSMENT ORDER. WE NOTED THAT THE AO ONLY DISCUSSED THE PROVISIONS OF 6 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) SEC. 14A(1) AND HAS NO T MADE OUT ANY SATISFACTION WHATSOEVER HOW THE EXPENDITURE INCURRED BY THE ASSESSEE DURING THE YEAR RELATE TO THE INCOME NOT FORMING PART OF THE TOTAL INCOME OF THE ASSESSEE. NO WHISPER WHAT TO TALK OF THE RELATIONSHIP OF THE EXPENDITURE WITH THE EXEMPT I NCOME IS MENTIONED. THE AO STRAIGHTAWAY JUMPED TO APPLYING RULE 8D RELYING ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT, 328 ITR 81 (MUM) ( SUPRA ) HOLDING THAT RULE 8D PERTAINS TO BOTH DIREC T AND INDIRECT EXPENDITURE INCURRED ON EARNING TAX EXEMPT INCOME AND IN THE JUDGEMENT IT WAS HELD THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT 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 PROVISIONS OF SEC. 14A(1) AND RULE 8D OF THE INCOME TAX RULES. CIT(A), WE NOTED, HAS ALSO NOT DEALT WITH THE SUBMISSIONS OF THE ASSESSEE WITH REGARD TO THE SATISFACTION BEING RECORDED BY THE AO BEFORE APPLYING RULE 8D. THE MAIN CONTENTION OF THE ASSESSEE WHILE IS THAT THERE CANNOT BE ANY DISALLOWANCE UNDER THIS PROVISION. WE HAVE GONE THROUGH THE DECISION OF THIS BENCH IN THE CASE OF SESA GOA LTD. VS. JCIT ( SUPRA ) DT . 8.3.2013 FOR WHICH THE UNDERSIGNED IN THE AUTHOR. WE NOTED THAT THE CASE OF THE ASSESSEE IS DULY COVERED BY THE SAID DECISION. IN THAT DECISION, THIS TRIBUNAL HAS ELABORATELY DISCUSSED THE PROVISIONS OF SEC. 14A AS WELL AS RULE 8D AND ULTIMATELY HELD AS UNDER : 14. WE HAVE CAREFULLY CONSIDERED THE RI VAL SUBMISSIONS ALONG WITH THE ORDER OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH VARIOUS CASE LAWS AND THE PROVISIONS OF THE IT ACT IN THIS REGARD. THE ISSUE INVOLVED BEFORE US RELATE TO THE DISALLOWANCE MADE BY THE AO BY APPLYING THE PROVISIONS OF SEC.14A OF THE IT ACT READ WITH RULE 8D OF THE IT RULES. SEC.14A WAS INSERTED BY THE FINANCE ACT, 2001 W.E.F. 1.4.1962. ORIGINALLY THIS SEC. PROVIDES THAT IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE EXPEND ITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. SUBSEQUENTLY, BY FINANCE ACT, 2002 WITH RETROSPECTIVE EFFECT FROM 11/5/2001 PROVISO WAS ADDED WHICH STATES THAT THIS SEC. SHALL NOT EMPOWER THE AO EITHER TO RE - ASSESS OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING THE REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE FOR ANY ASSESSMENT YEAR BEGINNING 7 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) ON OR BEFORE 1/4/2001. WITH EFFECT FROM 1/4/2007 BY FINANCE AC T, 2006 SUB - SEC. (2) EMPOWERS THE AO TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH THE METHOD AS MAY BE PRESCRIBED. SUCH POWER IS TO BE EXERCISED IF THE AO HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE MENTIONED IN SUB - SEC.(1). BEFORE APPLYING RULE 8D, IT IS APPARENT THAT THE AO MUST BE SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. SUCH SATISFACTION IS AN OBJECTIVE SATISFACTION THAT IT HAS TO BE JUDICIOUS AND BASED ON THE MATERIAL ON RECORD. IT CANNOT BE AN IMPRESSION THAT IT IS MUCH MORE THAN THE GOSSIP OR HEA RSAY, IT MEANS JUDGMENT OR BELIEF THAT IT IS A BELIEF OR A CONNECTION RESULTING FROM WHAT ONE THINKS ON A PARTICULAR QUESTION. IT MUST BE BASED ON THE REASONS AND GROUND AS SEEMS GOOD TO HIM AND WHILE MAKING SUCH SATISFACTION, THE AO MUST GIVE REGARD TO TH E ACCOUNTS OF THE ASSESSEE. HE MUST RECORD DEFICIENCY IN THE ACCOUNTS WITH REGARDS TO THE CLAIM OF THE ASSESSEE. SUB - SEC.(3) PROVIDES THAT PROVISIONS OF SUB - SEC.(2) SHALL ALSO APPLY WHERE ASSESSEE CLAIMS THAT NO EXPENDITURE HAD BEEN INCURRED IN RELATION TO INCOME NOT FORMING PART OF THE TOTAL INCOME. THIS IS NOT THE CASE OF THE ASSESSEE AS IN THE CASE OF THE ASSESSEE, ASSESSEE HIMSELF ESTIMATED THE EXPENSES RELATING TO THE EXEMPT INCOME AND DISALLOWED THE SAME. RULE 8D WAS INSERTED BY GAZETTE NOTIFICATION D ATED 24/3/2008 IN VIEW OF THE POWER CONFERRED UNDER SUB - SEC (2). THIS RULE PRESCRIBES THE METHOD FOR COMPUTING THE EXPENDITURE INCURRED IN RELATION TO THE INCOME NOT FORMING PART OF THE TOTAL INCOME. THIS IS AN UNDISPUTED FACT THAT IN THIS CASE, THE ASSESS EE HAS INVESTED IN DEBTS MUTUAL FUNDS. THE ASSESSEE COMPUTED DISALLOWANCE U/S 14A(2) AT RS.25,78,156/ - AND DISALLOWED THE SAME, WHILE COMPUTING ITS TOTAL INCOME. THE WORKING OF THE SAID DISALLOWANCE CLAIMED BY THE ASSESSEE IS GIVEN HEREIN ABOVE IN THE SUBM ISSIONS MADE BY THE ASSESSEE. THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE ESPECIALLY THE EXPLANATION OF THE ASSESSEE THAT NO ADMINISTRATIVE EXPENDITURE INCURRED ON EARNING THE DIVIDEND INCOME. CONSIDERING THE MAGNITUDE OF THE INVESTMENTS AND THE DIVIDEND INCOME RECEIVED, THE AO WAS OF THE VIEW THAT THE DISALLOWANCE MADE BY THE ASSESSEE U/S 14A OF THE IT ACT TOWARDS THE ADMINISTRATIVE EXPENDITURE IS LOW ON COMPARING THE MAGNITUDE OF PURCHASE AND SALES MADE BY THE ASSESSEE AND T HE INVESTMENTS OF LARGE MAGNITUDE CANNOT BE MADE WITHOUT PROPER ANALYSIS OF THE MARKET CONDITION/STOCK MOVEMENT ETC. THE REVENUE WAS OF THE OPINION, THAT THE ASSESSEE HAS WORKED OUT THE ADMINISTRATIVE EXPENDITURE AND HAD NOT CONSIDERED ALL THE ADMINISTRATI VE EXPENDITURE. BOTH THE PARTIES BEFORE US VEHEMENTLY RELIED ON THE DECISION OF GODREJ BOYCE MFG CO. LTD. VS DCIT 328 ITR 81 (MUM). 15. WE HAVE GONE THROUGH THIS DECISION AND WE NOTED THAT IN THIS CASE, THE ASSESSEE CLAIMED EXEMPTION IN RESPECT OF DIVIDE ND INCOME OF 34.34 CRORES U/S 10(33). THE AO ISSUED NOTICES FOR DISALLOWANCE OF INTEREST U/S 14A OF THE IT ACT. THE EXPLANATION OF THE ASSESSEE WAS THAT (I) 95% OF THE SHARES WERE BONUS SHARES FOR WHICH NO COST WAS INCURRED; (II) NO INVESTMENT IN SHARES WA S MADE IN THE CURRENT 8 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) YEAR AND NO DISALLOWANCE WAS MADE IN EARLIER YEARS AND (III) THERE WERE SUFFICIENT INTEREST FREE FUNDS AVAILABLE IN THE FORM OF SHARE CAPITAL, RESERVES ETC. WHICH WERE MORE THAN INVESTMENT IN SHARES. THE AO WAS NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE AND HE MADE DISALLOWANCE U/S 14A ON PRORATA BASIS. THE CIT(A) FOLLOWING HIS ORDERS FOR EARLIER YEARS, ACCEPTED THE APPEAL OF THE ASSESSEE. THE TRIBUNAL FOLLOWING THE DECISION OF THE SPECIAL BENCH IN THE CASE OF ITO VS DAGA CAPIT AL MANAGEMENT (P) LTD 117 ITD 169 (SB) RESTORED THE MATTER TO THE FILE OF THE AO FOR THE CONSIDERATION IN THE LIGHT OF THE PROVISIONS OF SUB - SEC.(2) & (3) OF SEC.14A OF THE IT ACT. THE ASSESSEE, BEING AGGRIEVED, FILED APPEAL AS WELL AS WRIT PETITION CHALLE NGING THE CONSTITUTIONAL VALIDITY OF SUB - SEC. (2) & (3) AND RULE D. THE HON'BLE HIGH COURT GAVE THE FOLLOWING FINDINGS; 1. THE PROVISIONS OF SEC. 14A AND RULE 8D ARE CONSTITUTIONALLY VALID. 2. THE PROVISIONS OF SUB - SEC. (2) & (3) OF SEC.14A AND RULE 8D ARE PROSPECTIVE AND NOT RETROSPECTIVE, IN NATURE AND THEREFORE, WOULD APPLY FROM ASSESSMENT YEAR 2007 - 08. 3. THE BASIC OBJECT OF SEC.14A IS TO DISALLOW THE DIRECT AND INDIRECT EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTA L INCOME (PAGE 21). 4. THE INSERTION OF SEC.14A WAS CURATIVE AND DECLARATORY OF THE INTENT OF THE PARLIAMENT. THE BASIC PRINCIPLE OF TAXATION IS THAT ONLY NET INCOME, NAMELY, GROSS INCOME MINUS EXPENDITURE THAT IS TAXABLE. EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THAT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME (PAGES 22 - 23). THE TEST WHICH HAS BEEN ENUNCIATED IN WALLFORT FOR ATTRACTING THE PROVISIONS OF SEC.14A IS THAT THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE WHICH HAS ITS REL ATIONSHIP WITH THE TAX EXEMPT INCOME. ONCE THE TEST OF PROXIMATE CAUSE, BASED ON THE RELATIONSHIP OF THE EXPENDITURE WITH TAX EXEMPT INCOME IS ESTABLISHED, A DISALLOWANCE WOULD HAVE TO BE EFFECTED UNDER SECTION 14A (PAGE 28) 5. WHAT MERITS EMPHASIS IS THA T THE JURISDICTION OF THE AO TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, IN ACCORDANCE WITH THE PRESCRIBED METHOD, ARISES IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE WHICH THE ASSESSEE CLAIMS TO HAVE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. MOREOVER, THE SATISFACTION OF THE AO HAS TO BE ARRIVED AT, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. HENCE, SUB - SEC (2) DOES NOT IPSO FACTO ENABLE THE AO TO APPLY THE METHOD PRESCRIBED BY THE RULES STRAIGHTAWAY WITHOUT CONSIDERING WHETHER THE CLAIM MADE BY THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS CORRECT. THE AO MUST, IN THE FIRST INSTANCE, DETERMINE WHETHER THE CLAIM OF THE ASSESSEE IN THAT REGARD IS CORRECT AND THE DETERMINATION MUST BE MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE SATISFACTION OF THE AO MUST BE A RRIVED AT ON AN OBJECTIVE BASIS. IT IS ONLY WHEN 9 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) THE AO IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, THAT THE LEGISLATURE DIRECTS HIM TO FOLLOW THE METHOD THAT MAY BE PRESCRIBED. IN A SITUATION WHERE THE ACCOUNTS OF THE ASSESSEE FURNISH AN OBJECTIVE BA SIS FOR THE AO TO ARRIVE AT A SATISFACTION IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE OF THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THERE WOULD BE NO WARRANT FOR TAKING RECOURS E TO THE METHOD PRESCRIBED BY THE RULES. FOR, IT IS ONLY IN THE EVENT OF THE AO NOT BEING SO SATISFIED THAT RECOURSE TO THE PRESCRIBED METHOD IS MANDATED BY LAW (PAGES 31 - 32). 6. IN THE EVENT THAT THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE, HE MUST RECORD REASONS FOR HIS CONCLUSION (PAGE - 79). 7. THE EFFECT OF SEC.14A IS TO WIDEN THE THEORY OF THE APPORTIONMENT OF EXPENDITURE (PAGE 49). 8. THE EXPRESSION EXPENDITURE INCURRED; IN SEC.14A REFERS TO EXPENDITURE ON RENT, T AXES, SALARIES, INTEREST, ETC., IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (PAGE - 50). 9. SUB - SECTIONS (2) & (3) OF SEC.14A ARE INTENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS OF SUB - SEC (1) (PAGES 50). 10. EVEN IN THE ABSENCE OF SUB - SECTION (2) OF SEC.14A THE AO WOULD HAVE TO APPORTION THE EXPENDITURE AND TO DISALLOW THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE AO WOULD HAVE TO FOLLOW A REASONABLE METHOD OF APPORTIONIN G THE EXPENDITURE CONSISTENT WITH WHAT THE CIRCUMSTANCES OF THE CASE WOULD WARRANT AND HAVING REGARD TO ALL RELEVANT FACTS AND CIRCUMSTANCES. THE SAID DECISION OF THE JURISDICTIONAL HIGH COURT IS BINDING ON US. WHILE DECIDING THIS CASE, THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS WALLFORT SHARES & STOCK BROKERS LTD., 233 CTR (SC) 42 WAS REFERRED TO. IN THIS DECISION, WE NOTED THAT THE HON'BLE SUPREME COURT IN THAT CASE UPHELD THE VIEW OF THE HON'BLE MUMBAI HIGH COURT IN THE CASE OF WALLFORT SHARES & STOCK BROKERS LTD. VS ITO 310 ITR 421. THE HON'BLE SUPREME COURT IN THIS DECISION, AT PAGE - 31 OF THE ORDER HELD AS UNDER; TO ATTRACT SEC.14A THERE HAS TO BE PROXIMATE CAUSE FOR DISALLOWANCE WHICH HAS ITS RELATIONSHIP WITH THE TAX EXEMPT. PAY BACK OR RETURN OF INVESTMENT IS NOT SUCH PROXIMATE CAUSE. HENCE, SEC.14A IS NOT APPLICABLE IN THE PRESENT CASE. THUS, IN THE ABSENCE OF SUC H PROXIMATE CAUSE FOR DISALLOWANCE, SEC.14A CANNOT BE INVOKED. 16. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS DCIT (SUPRA) THEREFORE AT PAGE - 28 HAS CLEARLY LAID DOWN THAT THERE MUST BE PROXIMATE CAUSE BASED ON THE RELATI ONSHIP OF THE EXPENDITURE THAT TAX EXEMPT INCOME IS ESTABLISHED, ONLY THEN A DISALLOWANCE WOULD HAVE TO BE EFFECTED U/S 14A OF THE IT 10 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) ACT. THEREFORE, IN VIEW OF THE DECISION OF THE JURISDICTIONAL HIGH COURT AND THE DECISION OF THE HON'BLE SUPREME COURT, WE ARE OF THE VIEW THAT SEC.14A CANNOT BE APPLIED UNLESS THERE IS A PROXIMATE CAUSE FOR DISALLOWANCE. THE ONUS TO ESTABLISH THAT THERE IS PROXIMATE CAUSE BASED ON THE RELATIONSHIP OF THE EXPENDITURE WITH THE EXEMPT INCOME IN OUR OPINION IS ON THE REVENUE. TH US, THE APPLICATION OF THE PROVISIONS OF SEC. (2) & (3) OF SEC.14A AND RULE 8D IS NOT AUTOMATIC IN EACH AND EVERY CASE, WHERE THERE IS INCOME NOT FORMING PART OF THE TOTAL INCOME. SUB - SEC. (2) & (3) ARE INTENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS OF S UB - SEC. (1). THEREFORE, IT IS NECESSARY FOR THE AO FIRST TO ASCERTAIN WHETHER THERE IS PROXIMATE CONNECTION BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF THE TOTAL INCOME. IF SUCH PROXIMATE CONNECTION IS ESTABLISHED WITH THE EXEMPT IN COME, THE AO WOULD BE JUSTIFIED IN APPLYING THE PROVISIONS OF SUB - SEC (2) & (3) OF SEC.14A AND RULE 8D OF THE IT ACT, 1961. THE EXPENDITURE INCURRED U/S 14A WOULD INCLUDE DIRECT AND INDIRECT EXPENDITURE, BUT RELATIONSHIP WITH EXEMPTED INCOME MUST BE PROXIM ATE. IF THERE IS MATERIAL TO ESTABLISH THAT THERE IS DIRECT NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF TOTAL INCOME THEN DISALLOWANCE WOULD BE JUSTIFIED EVEN WHERE THERE IS NO RECEIPT OF EXEMPTED INCOME U/S 10 IN THE YEAR UND ER CONSIDERATION IN VIEW OF THE DECISION OF SPECIAL BENCH IN THE CASE OF CHEMINVEST LTD. 124 TTJ 577 (DEL)(SB). 17. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOME. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO TO BE ALLOWED ON NET BASIS I.E. GROSS RECEIPTS MINUS RELATED EXPENSES. THEREFORE, IF ANY EXPENDITURE IS DIRECTLY RELATED TO EXEMPTED INCOME, IT CANNOT BE ALLOWED TO BE SET OFF AGAINST TAXABLE PROFIT. ON THE SAME ANALOGY, IN OUR OPINION, IF ANY EXPENDITURE IS DIRECTLY RELATED TO TAXABLE INCOME , IT CANNOT BE ALLOWED TO BE SET OFF AGAINST THE EXEMPTED INCOME MERELY BECAUSE SOME INCIDENTAL BENEFIT HAS ARISEN TOWARDS EXEMPTED INCOME. BEFORE MAKING ANY DISALLOWANCE U/S 14A, THE AO IS REQUIRED TO RECORD A SATISFACTION, HAVING REGARD TO THE ACCOUNTS O F THE ASSESSEE, THAT CLAIM OF ASSESSEE THAT EXPENDITURE INCURRED IS NOT RELATED TO THE INCOME FORMING PART OF THE TOTAL INCOME IS INCORRECT. SUCH SATISFACTION MUST BE ARRIVED AT ON THE OBJECTIVE BASIS. HE IS ALSO REQUIRED TO RECORD THE REASONS FOR ARRIVING AT SUCH SATISFACTION. THE ASSESSING OFFICER IN THIS CASE, WE NOTED IS NOT SATISFIED WITH THE CORRECTNESS OF THE DISALLOWANCE MADE BY THE ASSESSEE EVEN THOUGH HE HAS ACCEPTED THE EXPLANATION OF THE ASSESSEE THAT NO INTEREST IS INCURRED WITH REGARD TO EXEMP T INCOME. HE REJECTED THE EXPLANATION OF THE ASSESSEE THAT NO ADMINISTRATIVE EXPENDITURE INCURRED ON EARNING DIVIDEND INCOME CONSIDERING THE MAGNITUDE OF THE INVESTMENTS AND DIVIDEND INCOME RECEIVED AND THE DISALLOWANCE ACCORDING TO HIM MADE BY THE ASSESSE E U/S 14A TOWARDS ADMINISTRATIVE EXPENDITURE IS VERY LESS. THE ASSESSING OFFICER NOWHERE POINTED OUT THE PROXIMATE CONNECTION OF OTHER EXPENSES NOT APPORTIONED BY THE ASSESSEE FOR THE EARNING OF THE DIVIDEND INCOME. HE MERELY OBSERVED THAT THE ADMINISTRATI VE EXPENSES DISALLOWED BY THE ASSESSEE IS VERY LESS BUT HOW THEY ARE LESS AND HOW THE OTHER EXPENSES INCURRED BY THE ASSESSEE RELATED TO THE DIVIDEND INCOME HAS NOT BEEN BROUGHT ON RECORD. EVEN 11 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) THE AO HAS NOT POINTED OUT THE EXPENSES EXCLUDED BY THE ASSESS EE FOR DISALLOWANCE HAS PROXIMATE CONNECTION WITH DIVIDEND INCOME. IN OUR OPINION, THE ASSESSING OFFICER BEFORE REJECTING THE DISALLOWANCE COMPUTED BY THE ASSESSEE MUST GIVE A CLEAR CUT FINDING HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE HOW THE OTHER EX PENDITURE CLAIMED BY THE ASSESSEE OUT OF NON EXEMPT INCOME IS RELATED WITH THE EXEMPT INCOME. NO DISCREPANCY IN THE CLAIM OF THE ASSESSEE WAS POINTED OUT. THE ASSESSING OFFICER IN OUR OPINION IN VIEW OF THE JURISDICTIONAL HIGH COURT DECISION IS BOUND TO RE CORD SATISFACTION AS TO HOW THE EXPENSES CLAIMED BY THE ASSESSEE HAVE BEEN INCURRED ON EARNING DIVIDEND INCOME WERE NOT SUFFICIENT AND CORRECT. WE HAVE ALREADY HELD THAT THE ONUS TO PROVE IN THIS REGARD LIES ON THE ASSESSING OFFICER. ALTHOUGH THE LD. DR HA D VEHEMENTLY CONTENDED AND TRIED TO BUILD UP HIS CASE BY SUBSTITUTING THE REASONS GIVEN BY THE CIT(APPEAL) IN PLACE OF THE AO, BUT FAILED TO BRING ANY COGENT MATERIAL OR EVIDENCE IN THIS REGARD WHICH MAY PROVE THAT THE OTHER EXPENSES CLAIMED BY THE REVENUE FOR APPORTIONMENT HAD PROXIMATE CONNECTION WITH THE EARNING OF THE DIVIDEND INCOME. IN OUR OPINION UNTIL AND UNLESS THIS IS PROVED OR ESTABLISHED BY THE REVENUE, THE ASSESSING OFFICER DOES NOT HAVE ANY POWER TO REJECT THE ACCOUNTS OF THE ASSESSEE AND TAKE THE SHELTER OF RULE 8D FOR COMPUTING THE DISALLOWANCE OUT OF THE EXEMPT INCOME. WE ARE NOT AT ALL CONVINCED WITH THE SUBMISSION OF THE LD. DR RELYING ON THE DECISION OF CIT(APPEAL) IN RESPECT OF EXPLANATION BB TO SEC. 80HHC THAT 10% OF THE RECEIPTS UNDER THE SOURCES MENTIONED THEREIN ARE DEEMED TO BE THE EXPENDITURE. THIS IN OUR OPINION WILL STRENGTHEN THE CASE OF THE ASSESSEE AS EXPLANATION BB TO SEC. 80HHC DOES NOT RECOGNIZE AMOUNT OF THE INVESTMENT MADE IN OTHER RECEIPT TO BE THE BASIS OF COMPUTING THE EXPENDITURE BEING INCURRED FOR THE EARNING OF THAT INCOME. SIMILAR VIEWS HAVE BEEN TAKEN BY HON'BLE TRIBUNAL IN THE FOLLOWING DECISIONS ALSO. IN THE CASE OF DCIT VS. JINDAL PHOTO LTD. HELD IN I.T.A.T. DELHI BENCH DATED 7.1.2011 IT WAS HELD AS FOLLOWS: NOW AS PER SECTION 14A(2) OF THE ACT, IF THE AO, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE ASS ESSEES TOTAL INCOME UNDER THE ACT, THE AO SHALL DETERMINE THE AMOUNT INCURRED IN RELATION TO SUCH INCOME, IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, I.E., UNDER RULE 8D OF THE I.T. RULES. HOWEVER, IN THE PRESENT CASE, THE ASSESSMENT ORDER DOES N OT EVINCE ANY SUCH SATISFACTION OF THE AO REGARDING THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. AS SUCH, RULE 8D OF THE RULES WAS NOT APPROPRIATELY APPLIED BY THE AO AS CORRECTLY HELD BY THE CIT(A). IT HAS NOT BEEN DONE BY THE AO THAT ANY EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE FOR EARNING ITS DIVIDEND INCOME. MERELY, AN ADHOC DISALLOWANCE WAS MADE. THE ONUS WAS ON THE AO TO ESTABLISH ANY SUCH EXPENDITURE. THIS ONUS HAS NOT BEEN DISCHARGED. IN .CIT VS. HERO CYCLES. (P&H) 323 ITR 518, UNDER SIMILAR C IRCUMSTANCES, IT WAS HELD 12 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) THAT THE DISALLOWANCE U/S 14A OF THE ACT REQUIRES A CLEAR FINDING OF INCURRING OF EXPENDITURE AND THAT NO DISALLOWANCE CAN BE MADE ON THE BASIS OF PRESUMPTIONS. IN .ACIT VS. EICHER LTD.., 101 TTJ (DEL.) 369, THAT IT WAS HELD THAT THE BURDEN IS ON THE AO TO ESTABLISH NEXUS OF EXPENSES INCURRED WITH THE EARNING OF EXEMPT INCOME, BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT. IN MARUTI UDYOG VS. DCIT, 92 ITD 119 (DEL.), IT HAS BEEN HELD THAT BEFORE MAKING ANY DISALLOWANCE U/S 14 A OF THE ACT, THE ONUS TO ESTABLISH THE NEXUS OF THE SAME WITH THE EXEMPT INCOME, IS ON THE REVENUE. IN WIMCO SEEDLINGS LIMITED VS. DCIT., 107 ITD 267 (DEL.) (TM), IT HAS BEEN HELD THAT THERE CAN BE NO PRESUMPTION THAT THE ASSESSEE MUST HAVE INCURRED EXPE NDITURE TO EARN TAX FREE INCOME. SIMILAR ARE THE DECISIONS IN: 1. PUNJAB NATIONAL BANK VS. DCIT, 103 TTJ 908 (DEL.); 2. VIDYUT INVESTMENT LTD., 10 SOT 284 (DEL.); AND 3. D.J. MEHTA VS. INCOME TAX OFFICER, 290 ITR 238 (MUM.) (AT) IN VIEW OF THE ABOVE, FINDING NO ERROR WITH THE ORDER OF THE CIT(A) ON THE POINT AT ISSUE, THE SAME IS HEREBY CONFIRMED. GROUND NO.3 IS THUS REJECTED. IN THE CASE OF JINDAL PHOTO LTD. VS. DCIT HELD IN I.T.A.T. DELHI BENCH DATED 23.9.2011 IT WAS HELD AS FOLLOWS: IN THE YE AR UNDER CONSIDERATION, IT IS SEEN THAT IT IS NOT INCORRECT WHEN THE ASSESSEE CONTENDS THAT NO SATISFACTION HAS BEEN RECORDED BY THE AO REGARDING THE ASSESSEES CALCULATION BEING INCORRECT. EVEN SO, RULE 8D OF THE RULES HAS BEEN APPLIED. THIS, IN OUR OPINI ON, IS NOT CORRECT. SUCH SATISFACTION OF THE ASSESSING OFFICER IS A PRE - REQUISITE TO INVOKE THE PROVISIONS OF RULE 8D OF THE RULES. THE LEARNED CIT(A), THEREFORE, ERRED IN PARTIALLY APPROVING THE ACTION OF THE ASSESSING OFFICER. IN THE CASE OF AVSHESH MERCANTILE P. LTD. VS. DCIT IN I.T.A.T. MUMBAI BENCH (I.T. ACT NO.5779/MUM/2006 & 208/MUM/2009) IT WAS HELD AS FOLLOWS: AT THE TIME OF HEARING, THE CONTENTION RAISED BY THE LEARNED DR IN THIS REGARD IS THAT THE APPEAL OF THE REVENUE ON THE ISSUE HAVING BEEN DISMISSED BY THE HON'BLE BOMBAY HIGH COURT MERELY OBSERVING THAT NO QUESTION ARISES, IT CANNOT BE TREATED AS A DECISION RENDERED BY THE HON'BLE HIGH COURT ON THE MERIT OF THE ISSUE WHICH IS BINDING ON THIS TRIBUNAL. WE ARE UNABLE TO ACCEPT THIS CONTE NTION OF THE LEARNED DR. IT IS WELL SETTLED PROPOSITION OF JUDICIAL PRECEDENTS THAT IS APPEAL THE HON'BLE HIGH COURT CONSIDERS FACTS PERTAINING TO THE ISSUE AND GIVES APPROVAL TO THE DECISION OF THE LOWER FORUM, THE DECISION OF LOWER FORUM GETS MERGED WITH THE JUDGMENT AND ORDER OF THE HIGH COURT AND IT BECOMES BINDING PRECEDENT EVEN THOUGH APPROVAL TO DECISION OF LOWER 13 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) FORUM/COURT IS SUMMARILY RECORDED. SIMILAR SITUATION HAD ARISEN FOR CONSIDERATION BEFORE THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF NIRM A INDUSTRIES LTD. 283 ITR 402 WHEREIN THE EFFECTS OF SUMMARY DISPOSAL OF APPEAL BY THE HIGH COURT WERE ANALYSED AND EXPLAINED BY THEIR LORDSHIPS. IT WAS CLARIFIED THAT WHILE HEARING AN APPEAL EVEN FOR DECIDING WHETHER SUBSTANTIAL QUESTION OF LAW ARISES OR NOT FROM THE ORDER OF THE TRIBUNAL, THE HIGH COURT DOES NOT EXERCISE EITHER THE ORIGINAL JURISDICTION OR THE JURISDICTION TO ISSUE WRITS AND THE ONLY JURISDICTION EXERCISED BY THE HIGH COURT IN THE FIRST INSTANCE DECIDES WHETHER OR NOT SUBSTANTIAL QUESTION OF LAW ARISES FROM THE ORDER OF THE TRIBUNAL, IT CANNOT BE SAID THAT THE HIGH COURT DOES NOT EXERCISE THE APPELLATE POWERS OR THAT THERE IS NO DECISION ON MERIT WHEN THE HIGH COURT DISMISSES AN APPEAL HOLDING THAT NO SUBSTANTIAL QUESTION OF LAW ARISES FRO M THE ORDER OF THE TRIBUNAL. IT WAS HELD THAT WHENEVER AN ORDER OF THE SUBORDINATE FORUM IS CARRIED IN APPEAL BEFORE THE HIGHER APPELLATE FORUM/COURT, OPERATIVE PART THEREOF MERGES INTO THE JUDGMENT, DECISION OR ORDER OF THE HIGHER COURT AFTER THE CONFIRMA TION, MODIFICATION OR REVERSAL, AS THE CASE MAY BE, AND THE DECISION OF THE LOWER COURT OR FORUM HAS NO INDEPENDENT EXISTENCE THEREAFTER IN RELATION TO THE ISSUE WHICH WAS CARRIED BEFORE THE APPELLATE COURT OR FORUM. IT WAS HELD THAT WHERE THE HIGH COURT C OMES TO THE CONCLUSION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES ON A PARTICULAR ISSUE, IT CANNOT BE STATED THAT THE SUBJECT MATTER OF CONTROVERSY BETWEEN THE PARTIES HAS NOT BEEN DEALT WITH BY THE HIGH COURT. IT WAS HELD THAT WHEN THE DECISION OF THE TRI BUNAL IS AFFIRMED ON THE ISSUE BROUGHT BEFORE THE HIGH COURT, IT IS THE DECISION OF THE HIGH COURT WHICH BECOMES OPERATIVE AND WHICH IS CAPABLE OF BEING GIVEN EFFECT TO FOR ALL INTENTS AND PURPOSES. KEEPING IN VIEW THE DECISION OF HON'BLE GUJARAT HIGH COUR T IN THE CASE OF NIRMA INDUSTRIES LTD. (SUPRA), WE HAVE NO HESITATION TO HOLD THAT THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF DELITE ENTERPRISE LTD. (SUPRA) IS A DECISION ON MERIT WHICH IS BINDING PRECEDENT ON US. AS THE ISSUE INVOLVED IN THE PRESENT CASES AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERETO ARE SIMILAR TO THAT OF THE CASE OF DELITE ENTERPRISE (SUPRA), WE RESPECTFULLY FOLLOW THE SAID DECISION OF THE JURISDICTIONAL HIGH COURT AND DELETE THE DISALLOWANCE MADE BY THE AO AND CON FIRMED BY THE LEARNED CIT(A) ON ACCOUNT OF PREMIUM PAID BY THE ASSESSEES ON REDEMPTION OF PREMIUM NOTES (OCPN) BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. AS REGARDS THE CASE LAWS CITED BY THE LEARNED DR, IT IS OBSERVED THAT IN NONE OF THESE CASE S, THE FACTS INVOLVED WERE SIMILAR TO THE CASE OF THE PRESENT ASSESSEES IN AS MUCH AS THE INVESTMENT MADE THEREIN WAS NOT FOUND TO BE CAPABLE OF EARNING TAXABLE AS WELL AS EXEMPT INCOME WHICH WAS ACTUALLY NOT EARNED BY THE ASSESSEE IN THE RELEVANT PERIOD A S ARE THE FACTS OF THE PRESENT CASE OR THAT OF THE CASE OF DELITE ENTERPRISE (SUPRA) DECIDED BY THE HON'BLE BOMBAY HIGH COURT. ACCORDINGLY, WE DECIDE THE COMMON ISSUE INVOLVED IN ALL THESE APPEALS IN FAVOUR OF THE ASSESSEES FOLLOWING THE DECISION 14 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) OF JURISD ICTIONAL HIGH COURT IN THE CASE OF DELITE ENTERPRISES (SUPRA) AND ALLOW THE APPEALS OF ALL THE ASSESSEES. 18. WE HAVE ALSO GONE THROUGH THE DECISION RELIED UPON BY THE LEARNED DR ALSO. THE DECISION OF ACIT VS CITICORP FINANCE (IND.) LTD., 108 ITD 457 (B OM.) IS NO MORE RELEVANT, IN VIEW OF THE DECISION OF THE HON'BLE MUMBAI HIGH COURT IN THE CASE OF GODREJ BOYCE MFG CO. LTD. (SUPRA). THE DECISION OF SPIC VS DCIT 93 TTJ (CHENNAI) 161 IS NOT APPLICABLE TO THE FACTS OF THE CASE. AS IN THAT CASE, THE ASSESSEE WAS REGULARLY INVESTING IN THE SHARES. THE ASSESSEE HAS NOT DISALLOWED ANY EXPENDITURE WITH REGARD TO THE EARNING OF THE DIVIDEND INCOME. UNDER THESE FACTS, THE HON'BLE TRIBUNAL HELD THAT WHETHER TO INVEST OR NOT TO INVEST IS A VERY STRATEGIC DECISION AND TOP MANAGEMENT INVOLVE IN TAKING THE DECISIONS. THIS DECISION RELATE TO ASSESSMENT YEAR 2000 - 01 MUCH PRIOR TO THE INSERTION OF PROVISION OF SEC.14A(2) OF THE IT ACT,1961. THE DECISION OF ACIT VS PREMIUM CONSOLIDATED CAPITAL TRUST 83 TTJ (BOM.) RELATES TO ASSESSMENT YEAR 1991 - 92 PRIOR TO INSERTION OF 14A(2) HENCE WILL NOT ASSIST THE REVENUE. THE OTHER DECISION RELIED ON ARE ALSO NOT APPLICABLE TO THE FACTS OF THE CASE, EXCEPT THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. L TD. VS DC IT & ANOTHER 328 ITR 81(BOM.). IN VIEW OF OUR AFORESAID DISCUSSION AND RESPECTIVELY FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT & ANOTHER 328 ITR 81 (BOM), WE DELETE THE DISALLOWA NCE MADE U/S 14A R.W. RULE 8D AND ACCORDINGLY, THE GROUND TAKEN BY THE ASSESSEE IN THIS REGARD IS ALLOWED. THE FINDING GIVEN BY THIS TRIBUNAL IN THE AFORESAID DECISION UNDER PARA 17 ARE EQUALLY APPLICABLE IN THE CASE OF THE ASSESSEE AS IN THE ASSESSMENT ORDER WE DO NOT FIND ANY WHISPER WHATSOEVER WHICH PROVES THAT THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE WHICH THE ASSESSEE CLAIMS TO HAVE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE AO STRAIGHTAWAY WENT ON APPLYING RULE 8D WHILE, IN THE FIRST INSTANCE, THE AO SHOULD HAVE DETERMINED WHETHER THE CLAIM OF THE ASSESSEE THAT IT HAS NOT INCURRED ANY EXPENDITURE WITH REGARD TO THE DIVIDEND INCOME IS CORRECT OR NOT AND SUCH DETERMINATION MUST HAVE BEEN MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE ON OBJECTIVE BASIS. IT IS ONLY WHEN THE AO IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, THE LEGISLATURE HAS EMPOWERED THE AO TO FOLLOW THE METHOD FOR CALCULATING THE DISALLOWANCE AS MAY BE PRESCRIBED I.E. RULE 8D. THE 15 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) AO INSTEAD OF DISCHARGING HIS OBLIGATION, STRAIGHTAWAY APPLIED RULE 8D AND MADE DISALLOWANCE. HE HAS PUT THE CART BEFORE THE HORSE WHICH IS NOT PERMISSIBLE UNDE R LAW. THE CASE OF THE ASSESSEE, IN OUR OPINION, IS COVERED BY OUR AFORESAID DECISION IN THE CASE OF SESA GOA LTD. VS. JCIT ( SUPRA ). RESPECTFULLY FOLLOWING THE DECISION IN THE CASE OF SESA GOA LTD. VS. JCIT ( SUPRA ), WE DELETE THE DISALLOWANCE MADE U/S 14 A. SIMILAR VIEW HAS BEEN TAKEN BY THIS BENCH IN ITA NO. 34/PNJ/2013 & ITA NO. 50/PNJ/2013 IN THE CASE OF M/S. INFRASTRUCTURE LOGISTICS PVT. LTD. VS. ACIT. THUS, THIS GROUND IS ALLOWED. 4. GROUND NO. 3 IN ASSESSEES APPEAL RELATES TO SUSTENANCE OF THE ADDITION OF RS. 6,98,926/ - . THE AO DURING THE COURSE OF THE ASSESSMENT NOTED THAT THERE WAS A CREDIT BALANCE IN THE NAME OF M/S. HIRALAL KHODIDAS OF RS.59,40,707/ - . THE ABOVE PARTY IN REPLY TO NOTICE U/S 133(6) INFORM ED THAT THEY HAVE DEBITED BALANCE OF RS.47,43,037/ - . WHEN THE ASSESSEE WAS QUESTIONED ABOUT THE DIFFERENCE OF RS.11,97,670/ - , THE ASSESSEE SUBMITTED THAT TCS OF RS.2,330/ - HAS NOT BEEN SHOWN BY M/S. HIRALAL KHODIDAS IN ITS BOOKS OF ACCOUNTS AND AN AMOUNT OF RS.1,09,089/ - DEBITED BY THE CREDITOR HAS BEEN ACCOUNTED BY THE ASSESSEE IN THE SUBSEQUENT YEAR AND THE FOLLOWING PAYMENTS HAVE NOT BEEN TAKEN CREDIT BY M/S. HIRALAL KHODIDAS : DATE OF PAYMENT PARTICULARS AMOUNT 23.03.1999 DEBITED TO MINIMUM FRANCHISE RS.6,00,000 31.03.2001 DEBITED TO MINIMUM FRANCHISE RS.1,00,000 31.03.2008 WRITTEN OFF AS PRIOR PERIOD EXPENSES RS.4,98,744 THE AO DID NOT AGREE WITH THE ASSESSEE AND SINCE A SUM OF RS.4,98,744/ - WRITTEN OFF AS PRIOR PERIOD EXPENSES HAS ALREADY BEEN TAKEN AS INCOME BY THE ASSESSEE, NET ADDITION OF RS.6,98,926/ - WAS MADE. THE ASSESSEE WENT IN APPEAL BEFORE CIT(A). CIT(A) ALSO CONFIRMED THE ORDER OF THE AO. 16 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) 4.1 BEFORE US, THE LD. AR VEHEMENTLY CONTENDED THAT THERE WAS A DIFFERENCE OF RS.11,97,670/ - . T HE SUM OF RS.6 LACS AND RS. 1 LAC HAS BEEN DEBITED IN THE EARLIER YEARS ON 23.3.1999 AND 31.3.2001. THE SUM OF RS.2,330/ - DEBITED BY THE ASSESSEE HAS NOT BEEN CREDITED BY M/S. HIRALAL KHODIDAS AND IF THESE ENTRIES ARE TAKEN INTO ACCOUNT, THERE WILL NOT BE ANY DIFFERENCE. 4.2 THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF CIT(A). 4.3 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD. WE HAVE GONE THROUGH THE DETAILS OF THE DEPOSIT ACCOUNT KEPT BY THE ASSESSEE OVER THE PERIOD OF TIME FROM 1999 TO 2008 FOR BY PASSING MINIMUM FRANCHISE PAYABLE TO M/S. HIR ALAL KHODIDAS. IT IS A FACT THAT THE ASSESSEE HAS DEBITED SUM OF RS. 6 LACS AND RS. 1 LAC ON 23.3.1999 AND 31.3.2001. IF CREDIT OF THESE AMOUNTS IS GIVEN BY M/S. HIRALAL KHODIDAS, WE FEEL THAT THERE WILL BE JUST NEGLIGIBLE DIFFERENCE. IN VIEW OF THE ABO VE FACT WE DELETE THE ADDITION. THUS, THIS GROUND STANDS ALLOWED. 5. GROUND NO. 4 IN ASSESSEES APPEAL AND GROUND NO. 6 IN REVENUES APPEAL RELATE TO THE COMMON ISSUE RELATING TO ADDITION MADE ON ACCOUNT OF UNPAID SUNDRY CREDITORS. THE AO NOTED VARIATION OF SUNDRY CREDITORS AS ON 31.3.2009 TOTALLING TO RS.32,52,064/ - , DETAILS OF WHICH ARE GIVEN IN PARA 8.1 OF CIT(A)S ORDER. THE AO MADE ADDITION OF RS.32,52,064/ - . ASSESSEE WENT IN APPEAL BEFORE CIT(A). CIT(A) NOTED THAT THE ASSESSEE HAS FILED DETAILS O F PAYMENT OF RS. 30 LACS THROUGH CHEQUE NO. 238933 DT. 10.4.2012 TO M/S. MAYUR MINERALS AND THEREFORE HE DELETED THE ADDITION OF RS. 30 LACS SUSTAINING THE ADDITION TO THE EXTENT OF RS.2,52,064/ - IN THE ABSENCE OF ANY EVIDENCE BEING PRODUCED. 5.1 WE HAV E HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. BEFORE US ALSO, THE ASSESSEE DID NOT PRODUCE ANY EVIDENCE EXCEPT RELYING ON THE 17 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) PROVISIONS OF SEC. 41(1) THAT THE LIABILITY HAS NOT CEASED AND THAT UNTIL LIABILITY IS NOT CEASED, THE SUM OF RS.2,52,064/ - CANNOT BE TREATED TO BE THE INCOME OF THE ASSESSEE. IN RESPECT OF THE GROUND TAKEN BY THE REVENUE FOR RS. 30 LACS, THE SUBMISSION MADE BEFORE CIT(A) WERE REITERATED. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE AO. WE HAVE CAR EFULLY CONSIDERED THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD. WE HAVE GONE THROUGH THE ORDER OF CIT(A). IT IS A FACT THAT A SUM OF RS. 30 LACS INCLUDED IN THE SUNDRY CREDITORS AS ON 31.3.2009 HAS BEEN PAID BY THE ASSESSEE TO M/S. MAYUR MINERAL S THROUGH CHEQUE NO. 238933 DT. 10.4.2012. IN VIEW OF THIS UNDISPUTED FACT, WE CONFIRM THE DELETION OF THE ADDITION BY THE CIT(A) TO THE EXTENT OF RS. 30 LACS. SO FAR THE BALANCE SUM OF RS. 2,52,064/ - IS CONCERNED, NO EVIDENCE WHATSOEVER HAS BEEN FILED B Y THE ASSESSEE WHETHER THESE CREDITORS STILL EXIST. IT IS ALSO A FACT THAT THE ASSESSEE HAS ALSO NOT WRITTEN OFF THESE CREDITORS SO THAT IT MAY BE TREATED AS CESSATION OF LIABILITY AND MADE CHARGEABLE TO TAX U/S 41(1) BUT WHILE GOING THROUGH THE SUBMISSIO NS OF THE ASSESSEE AS WELL AS THE DOCUMENTS FILED BEFORE US, WE NOTED THAT THE ASSESSEE HAS NOT EVEN GIVEN THE DATES AS WELL AS THE ADDRESSES OF THESE PARTIES SO THAT IT CAN BE ASCERTAINED WHETHER THE SUNDRY CREDITOR S ARE GENUINE OR NOT. UNDER THESE FACTS , WE DO NOT FIND NEED TO INTERFERE WITH THE ORDER OF CIT(A) CONFIRMING THE ADDITION OF RS.2,52,064/ - . WE, ACCORDINGLY, CONFIRM THE ADDITION OF RS. 2,52,064/ - AS WELL AS THE DELETION OF THE ADDITION OF RS. 30 LACS. IN THE RESULT, GROUND NO. 4 OF THE ASSES SEES APPEAL STANDS DISMISSED WHILE GROUND NO. 6 TAKEN BY THE REVENUE ALSO STANDS DISMISSED. 6. GROUND NO. 5 IN ASSESSEE S APPEAL AND GROUND NO. 7 IN REVENUES APPEAL RELATES TO BAD DEBTS WRITTEN OFF PERTAINING TO EX - STAFF AND OTHERS . THE BRIEF FACTS RELATING TO THIS GROUND ARE THAT THE AO DURING THE COURSE OF ASSESSMENT NOTED THAT THE ASSESSEE HAS WRITTEN OFF BAD DEBTS RELATING TO OLD BALANCE AND STAFF ADVANCES AMOUNTING TO RS.19,63,996/ - . THIS CONSISTS OF A SUM OF 18 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) RS.15,10,000/ - B EING STAFF ADVANCE GIVEN TO RAJENDRA S. KAKODKAR AND OTHER PETTY STAFF ADVANCES AS WELL AS ADVANCES GIVEN TO THE CONTRACTOR , CAR BOOKING AND DEMAT CHARGES . WHEN ASKED FOR, THE ASSESSEE SUBMITTED THAT THE ADVANCES WERE GIVEN DURING THE COURSE OF ITS BUSINE SS. SINCE THE ADVANCES WERE NOT RECOVERABLE, THEREFORE, THEY WERE WRITTEN OFF. THE AO MADE ADDITION AS THE ADVANCE IN THE CASE OF RAJENDRA S. KAKODKAR WAS VERY HUGE AND THE ASSESSEE DID NOT FURNISH THE NATURE OF THE ADVANCE GIVEN TO HIM AND WHY THE SAME WAS NOT RECOVERABLE. ACCORDING TO THE AO, THE ASSESSEE SHOULD HAVE TAKEN STEPS TO COLLECT THE MONEY INCLUDING LODGING OF FIR. ADDITION FOR OTHER ADVANCES AMOUNTING TO RS.4,53,996/ - WAS ALSO MADE ON THE SAME BASIS. IN RESPECT OF ADDITION OF RS. 50,000/ - FOR CAR BOOKING TO M/S. PAL PEUGEOT LTD. IT WAS OBSERVED THAT THIS ADVANCE CANNOT BE A BUSINESS ADVANCE. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). CIT(A) SUSTAINED THE ADDITION OF RS.15,10,000/ - BUT DELETED THE ADDITION OF RS. 4,53,996/ - OBSERVING T HAT THE ASSESSEE HAS NOT FILED ANY DETAILS EXCEPT THAT HE HAS WRITTEN OFF THE DEBT DURING THE YEAR. 6.1 THE LD. AR BEFORE US VEHEMENTLY CONTENDED THAT THIS IS LOSS INCIDENTAL TO THE BUSINESS. THE ADVANCES HAVE BEEN GIVEN TO THE EMPLOYEES AND OTHERS FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE COMPANY DURING THE COURSE OF THE BUSINESS. AS THE EMPLOYEE LEFT THE COMPANY, THE AMOUNT COULD NOT BE RECOVERABLE. THE ADVANCES WERE ALSO NOT RECOVERABLE FROM THE OTHER PARTIES. THE ASSESSEE DID NOT PREFER TO TAKE DELIVERY OF THE CAR AS REPORTS OF THE CAR ON INDIAN ROADS WERE NOT GOOD. FOR THIS, ATTENTION WAS DRAWN TOWARDS THE LETTER OF THE ASSESSEE DT. 16.12.2011 SUBMITTED TO THE AO. 6.2 THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE AUTHORITIES BELOW. 19 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) 6.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. WE HAVE GONE THROUGH THE ORDER OF THE AUTHORITIES BELOW. WE NOTED THAT IT HAS NOT BEEN DENIED BY THE REVENUE THAT RAJENDRA S. KAKODKAR WAS AN EMPLOYEE OF THE ASSESSEE. THE ADVANCES WERE GIVEN BY THE ASSESSEE DURING THE COURSE OF THE BUSINESS. THESE ADVANCES HAVE NOT BEEN RECOVERED BY THE ASSESSEE. RAJENDRA S. KAKODKAR HAS LEFT THE SERVICES OF THE ASSESSEE AND IS NO MORE AN EMPLOYEE OF THE ASSESSEE. UNDER THESE FACTS, THE ASSESSEE HAS WRITTEN OFF THE ADVANCE. SO FAR AS THE OTHER ADVANCES ARE CONCERNED, WE NOTED PARA 9.1 OF CIT(A)S ORDER WHICH CONTAINS DETAILS OF THE ADVANCES. A SUM OF RS. 600/ - IS STAFF ADVANCE, RS. 15,000/ - IS GIVEN TO H. HUCHAIAH AND RS. 290/ - AND RS. 50/ - WERE GIVEN TO MAHESH S BORKER AND SUBHASH R KANE AND WERE WRITTEN OFF AS THEY WERE NO MORE EMPLOYEE OF THE ASSESSEE AND REST OF THE AMOUNT HAS BEEN GIVEN TO CONTRACTOR AND ORE SUPPLIER AS ADVANCE. THE SUM OF RS. 50,000/ - WAS DEPOSITED TOWARDS CA R BOOKING WITH M/S. PAL PEUGEOT LTD. IT IS NOT DENIED THAT ALL THESE ADVANCES WERE GIVEN BY THE ASSESSEE COMPANY DURING THE COURSE OF THE BUSINESS FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. SINCE THE ADVANCES COULD NOT BE RECOVERED, THE ASSESSEE HA S WRITTEN OFF THESE ADVANCES. THE ADVANCES, IN OUR OPINION, ARE UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, INCIDENTAL TO THE BUSINESS OF THE ASSESSEE AND ARE ALLOWABLE U/S 29 AS LOSS INCIDENTAL TO THE BUSINESS. WE, ACCORDINGLY, DELETE THE DISALLOWANCE. ACCORDINGLY, GROUND NO. 5 IN ASSESSEES APPEAL IS ALLOWED WHILE GROUND NO. 7 IN REVENUES APPEAL STANDS DISMISSED. 7. GROUND NO. 6 IN ASSESSEES APPE AL RELATES TO SUSTENANCE OF THE ADDITION OF RS. 3,08,039/ - ON ACCOUNT OF HANDLING LOSS. THE FACTS RELATING TO THIS ADDITION ARE THAT THE AO NOTED FROM THE DETAILS OF THE CLOSING STOCK THAT SFI HAS TRANSFERRED 13,489 MT OF IRON ORE TO CUDDEGAL MINES WHILE CUDDEGAL MINES RECEIVED ONLY 12,948 MT OF IRON ORE. THUS, THERE WAS SHORTAGE OF 541 MT. THE ASSESSEE EXPLAINED THAT THIS LOSS WAS DUE TO HANDLING AND DURING THE COURSE OF 20 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) HANDLING OF THE IRON ORE , LOSS IS BOUND TO BE INCURRED. THE AO DID NOT ACCEPT THE HANDLING LOSS AND VALUING THE ORE @ RS.569.39/MT ADDED A SUM OF RS.3,08,039/ - IN THE INCOME OF THE ASSESSEE. THE ASSESSEE WENT IN APPEAL BEFORE CIT(A). CIT(A) CONFIRMED THE ADDITION. 7.1 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND FORCE IN THE SUBMISSION OF THE LD. AR THAT THE ORE WHICH IS TO BE TRANSPORTED FROM COLOMBA MINE TO CUDDEGAL PLANT HAD TO TRAVEL ABOUT 36 KMS. AND IT IS QUITE NATURAL THAT SOME LOSS IS INCURRED DURING TRANSIT AND DURING THE HAN DLING OF THE ORE. IN OUR OPINION, IT CANNOT BE SAID THAT THERE CANNOT BE ANY LOSS. THE ASSESSEE IS MAINTAINING REGULAR BOOKS OF ACCOUNTS. THE STOCK RECORD HAS DULY BEEN MAINTAINED. THERE IS NO ALLEGATION THAT THE ASSESSEE HAS SOLD THE IRON ORE OUTSIDE THE BOOKS OF ACCOUNTS. UNDER THESE FACTS AND CIRCUMSTANCES OF THE CASE, THE LOSS HAS TO BE ACCEPTED AS BEING INCIDENTAL TO THE BUSINESS. IN VIEW OF THIS, WE DELETE THE ADDITION. THUS, GROUND NO. 6 IS ALLOWED. 8. GROUND NO. 7 IN ASSESSEES APPEAL RELATE S TO SUSTENANCE OF THE ADDITION OF RS.42,93,066/ - BY THE CIT(A). THE BRIEF FACTS RELATING TO THIS ADDITION ARE THAT THE ASSESSEE HAS SHOWN GROUND LOSS OF 48,330 MT OF IRON ORE IN GREATER FERROMET AND 23,025 MT OF IRON ORE IN SFI AT BERTH NO. 9 (VESSEL LOA DING POINT). THE IRON ORE IS BEING TRANSPORTED FROM CAPXEM/MAINA JETTY TO BERTH NO. 9 FOR EXPORT. THE LOSS SO INCURRED WORKS OUT TO 2.54% IN GREATER FERROMET AND 3.54% IN SFI. THE AO WAS OF THE OPINION THAT THERE CANNOT BE DIFFERENT HANDLING LOSS IN GRE ATER FERROMET AND SFI. IT MUST BE AT THE SAME RATE. THEREFORE, HE CALLED FOR EXPLANATION OF THE ASSESSEE. THE ASSESSEE GAVE EXPLANATION VIDE HIS LETTER DT. 16.12.2011. THE AO DID NOT ACCEPT THE EXPLANATION OF THE ASSESSEE . T HE ASSESSEE CALCULATED THE GROUND LOSS ON 18,97,335 MT OF IRON ORE HANDLED IN GREATER FERROMET AT 2.54% AND IN RESPECT 21 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) OF SFI IN WHICH 6,49,975 MT OF IRON ORE WAS HANDLED AT 3.54%. THE AO WAS OF THE OPINION THAT THE GROUND LOSS IN RESPECT OF IRON ORE HANDLED IN GREAT ER FERROMET AND SFI UNIT MUST BE SAME AND ACCORDINGLY, HE DISALLOWED THE GROUND LOSS SHOWN IN THE CASE OF SFI UNIT @ 1%. THE QUANTITY THEREOF WAS WORKED OUT AT 6,516 MT AND VALUE OF THE SAME WAS WORKED OUT AT RS.42,93,066/ - AND ADDED TO THE INCOME OF THE ASSESSEE. THE ASSESSEE WENT IN APPEAL BEFORE CIT(A). BEFORE CIT(A) THE ASSESSEE CONTENDED THAT THE CLOSING STOCK HAS BEEN PHYSICALLY VERIFIED AND ON THAT BASIS IT WAS ACCOUNTED FOR. THE ASSESSEE WAS NOT HAVING ANY OTHER CLOSING STOCK AND THEREFORE, THER E CANNOT BE ANY ADDITION TO ARRIVE AT THE HYPOTHETICAL CLOSING STOCK. IT WAS CONTENDED THAT THE ORE AT BERTH NO. 9 WAS RECEIVED FROM TWO DIFFERENT JETTIES. THE DISTANCE BETWEEN THE CUDDEGAL TO CAPXEM, CUDDEGAL TO MAINA, CAPXEM TO BERTH NO. 9 AND MAINA TO BERTH NO. 9 ARE DIFFERENT AND DUE TO THE DIFFERENCE IN THE DISTANCE, THE GROUND LOSS IS BOUND TO BE DIFFERENT. CIT(A) UPHELD THE ADDITION. 8.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. IT IS NOT DENIED BY THE REVENUE AUTHOR ITIES THAT THERE HAS TO BE GROUND LOSS WHEN THE IRON ORE HAS TO BE HANDLED. IT IS ALSO NOT DENIED THAT THE DISTANCE BETWEEN CUDDEGAL TO CAPXEM AND CUDDEGAL TO MAINA AND CAPXEM TO BERTH NO. 9 AND MAINA TO BERTH NO. 9 ARE DIFFERENT. HANDLING LOSS AND LOSS IN TRANSIT ARE BOUND TO VARY DUE TO THE DISTANCE. NO THUMB RULE CAN BE LAID DOWN THAT THE GROUND LOSS HAS TO BE INCURRED AT A PARTICULAR PERCENTAGE. THE AO HIMSELF HAS ACCEPTED THE GROUND LOSS @ 2.54% IN RESPECT OF SFI UNIT AS WELL AS GREATER FERROMET. IT IS ALSO ACCEPTED THAT THE EXPORT OF THE IRON ORE HAS TO TAKE PLACE FROM BERTH NO.9. IN OUR OPINION, BOTH THE AO AS WELL AS THE CIT(A) WERE NOT CORRECT IN APPRECIATING THE FACTS OF THE CASE AND JUST ALLOWING THE GROUND LOSS IN RESPECT OF SFI UNIT AT THE SAME PERCENTAGE AT WHICH IT HAS BEEN INCURRED IN RESPECT OF GREATER FERROMET UNIT. THE GROUND LOSS HAS TO VARY WITH THE DISTANCE. THERE IS NO ALLEGATION THAT THE ASSESSEE HAS SOLD THE INVENTORY OF IRON ORE OUTSIDE THE 22 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) BOOKS OF ACCOUNTS. IN VIEW OF THIS FACT, WE SET ASIDE THE ORDER OF CIT(A) AND DELETE THE ADDITION MADE BY THE AO. THUS, GROUND NO. 7 TAKEN BY THE ASSESSEE IS ALLOWED. 9. GROUND NO. 2 OF REVENUES APPEAL RELATES TO THE DELETION OF THE ADDITION OF RS.2.74,002/ - ON ACCOUNT OF LOSS DUE TO FORWARD BOOKING OF US$. THE AO NOTICED THAT THE ASSESSEE HAS DEBITED A SUM OF RS.2,74,002/ - ON ACCOUNT OF CANCELLATION OF FORWARD BOOKING. THE AO WAS OF THE VIEW THAT IT IS A SPECULATION LOSS AND DISALLOWED THE SAME. THE ASSESS EE WENT IN APPEAL BEFORE CIT(A). CIT(A), ON THE BASIS OF THE DECISION OF THE JURISDICTION HIGH COURT IN THE CASE OF CIT VS. BADRI DAS GAURIDU PVT. LTD., 261 ITR 256 TOOK THE VIEW THAT THE LOSS INCURRED BY THE ASSESSEE ON FORWARD CONTRACT HAD A DIRECT NEXU S AND DELETED THE DISALLOWANCE. 9.1 THE LD. D R BEFORE US EVEN THOUGH RELIED ON THE ORDER OF THE AO BUT COULD NOT BRING TO OUR KNOWLEDGE ANY OTHER DECISION OF THE JURISDICTION HIGH COURT OR THAT OF THE HON'BLE SUPREME COURT WHICH WOULD HAVE TAKEN A CONTR ARY VIEW THAN THAT TAKEN BY THE HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF CIT VS. BADRI DAS GAURIDU PVT. LTD., 261 ITR 256 ( SUPRA ) . EVEN IT WAS NOT THE CASE OF THE REVENUE THAT THE SAID DECISION WAS NOT APPLICABLE IN THIS CASE. UNDER THESE FACTS OF THE CASE, WE ARE OF THE VIEW THAT NO ILLEGALITY OR INFIRMITY IS CAUSED IN THE ORDER OF CIT(A) WHILE DELETING THE DISALLOWANCE ON ACCOUNT OF FOREIGN EXCHANGE LOSS ON FORWARD CONTRACT. WE, ACCORDINGLY, DISMISS GROUND NO. 2 TAKEN BY THE REVENUE. 10. GROUND NO. 3 IN REVENUES APPEAL RELATES TO DISALLOWANCE OF RS.35,15,625/ - INCURRED BY THE ASSESSEE BY WAY OF CONTRIBUTION FOR THE CONSTRUCTION OF THE USGAO BRIDGE. THE BRIEF FACTS OF THIS GROUND ARE THAT THE ASSESSEE CONTRIBUTED A SUM OF RS.35,15,625/ - TO GOA MINE RAL ORE EXPORTERS 23 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) ASSOCIATION FOR CONSTRUCTION OF BRIDGE IN USGAO FOR THE USAGE OF PUBLIC. WHEN QUESTIONED BY THE AO, THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS AN EXPORTER OF IRON O RE. THE ORE IS PROCURED FROM VARIOUS MINES LOCATED AT DIFFERENT LOCATI ONS INCLUDING THE MINES AT KARNATAKA. THE ASSESSEE IS UNDER AN OBLIGATION TO COLLECT, LOAD THE ORE FROM THE PIT HEAD/MIN E HEAD. F OR TRANSPORTING THE ORE FROM THE MINE SITUATED AT KARNATAKA, THE ASSESSEE USES THE NATIONAL HIGHWAY 4A THROUGH DARBANDORA - PIL IEM TO REACH USGAO. TO REACH MAINA (THE OFF LOADING POINT CLOSEST TO THE JETTY) FROM USGAO, IT IS INCUMBENT UPON THE ASSESSEE TO CROSS A TRIBUTARY OF RIVER MANDOVI. THERE IS NO OTHER WAY IN WHICH ORE CAN BE TRANSPORTED FROM THE MINES IN KARNATAKA TO MAIN A. THE ASSESSEE SUBMITTED THE GEOGRAPHICAL MAP BEFORE THE AO. IT WAS FURTHER SUBMITTED THAT PORTION OF THE ORE PROCURED FROM N.S. NARVEKAR MINE AND SANCORDEM MINE WERE ALSO TRANSPORTED THROUGH THIS BRIDGE TO REACH THE SAME AT MAINA LOADING POINT. THIS B RIDGE HAS LOST ITS STRENGTH AND WAS OF PRECARIOUS CONDITION. THE GOA GOVERNMENT WROTE TO THE GOA MINERAL ORE EXPORTERS ASSOCIATION. THE MEMBERS OF THE ASSOCIATION USING THIS BRIDGE AGREED TO CONTRIBUTE TOWARDS THE CONSTRUCTION OF THE NEW BRIDGE ACROSS T HE TRIBUTARY OF RIVER MANDOVI. ACCORDINGLY, THE ASSESSEE HAD TO CONTRIBUTE RS.35,15,625 / - DURING THE YEAR UNDER CONSIDERATION. THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF THE BUSINESS AS THE BUSINESS EXIGENCY DEMANDS SUCH EXPENDITURE TO BE INCURRED. THE ASSESSEE DID NOT ACQUIRE ANY TANGIBLE ASSET IN CONSIDERATION OF THE CONTRIBUTION MA DE BY THE ASSESSEE. RELIANCE WAS PLACED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF L.H. SUGAR FACTORY AND OIL MILLS (P) LTD. VS. CIT, 125 ITR 293 AS WELL AS OF HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. COATS VIYELLA INDIA LTD., 253 ITR 667. THE AO DID NOT AGREE WITH THE SUBMISSION OF THE ASSESSEE AND DISALLOWED THE EXPENDITURE. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). CIT(A) DELETED THE DISALLOWANCE TREATING IT TO BE A REVENUE EXPENDITURE RELYING ON THE DECISION OF CHOWGULE AND CO. LTD. V S . ACIT, MARGAO IN ITA NO.162/PNJ/2006 FOR A.Y.2002 - 03 . 24 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) 10.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. WE NOTED THAT CIT(A) WHILE DELETING THE SAID DISALLOWANCE RELIED ON THE DECISION OF ITAT PANAJI BENCH IN IT A NO.162/PNJ/2006 IN THE CASE OF CHOWGULE AND CO. LTD. V S . ACIT, MARGAO IN WHICH THE TRIBUNAL HAS HELD THAT THE CONTRIBUTION TO GOA INFRASTRUCTURAL DEVELOPMENT CO. PVT . LTD. FOR REPAIRS AND MAINTENANCE OF ROADS FREQUENTLY USED BY THE COMPANY TO TRANSPORT I TS GOODS IS NOT A CAPITAL EXPENDITURE BUT EXPENDITURE INCURRED FOR THE PURPOSE OF THE BUSINESS. IT IS A SOCIAL OBLIGATION DEMANDED BY THE LOCAL COMMUNITY WHICH CANNOT BE OVERLOOKED BY THE ASSESSEE. EVEN THOUGH THE LD. DR VEHEMENTLY RELIED ON THE ORDER OF THE AO, NO CONTRARY DECISION WAS BROUGHT TO OUR KNOWLEDGE AND NO MATERIAL OR EVIDENCE WAS BROUGHT TO OUR KNOWLEDGE WHICH MAY PROVE THAT THE PROJECT BELONGED TO THE ASSESSEE AND IT REPRESENTS CAPITAL EXPENDITURE INCURRED BY THE ASSESSEE. WE HAVE ALSO GONE THROUGH THE DECISION AS RELIED BY THE LD. AR IN THE CASE OF L.H. SUGAR FACTORY AND OIL MILLS (P) LTD. VS. CIT, 125 ITR 293 ( SUPRA) AND THAT OF HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. COATS VIYELLA INDIA LTD., 253 ITR 667 ( SUPRA) . WE NOTED THAT T HESE DECISIONS ARE ALSO EQUALLY APPLICABLE TO THE FACTS OF THE CASE OF THE ASSESSEE. UNDER THESE CIRCUMSTANCES, WE DO NOT HAVE ANY OTHER ALTERNATIVE EXCEPT TO FOLLOW THE DECISION OF THIS TRIBUNAL IN THE CASE OF CHOWGULE AND CO. LTD. V S . ACIT IN ITA NO.162/PNJ/2006 ( SUPRA ) AND ACCORDINGLY WE CONFIRM THE ORDER OF CIT(A). THUS, THIS GROUND STANDS DISMISSED. 11. GROUND NO. 4 IN REVENUES APPEAL RELATES TO DELETION OF THE DISALLOWANCE OF EXPENSES OUT OF COMMUNITY DEVELOPMENT AMOUNTING TO RS. 26,24,381/ - . THE BRIEF FACTS OF THIS GROUND ARE THAT THE AO NOTED THAT THE ASSESSEE HAS DEBITED A SUM OF RS.52,48,763/ - UNDER THE HEAD COMMUNITY DEVELOPMENT EXPENSES. THE AO WAS OF THE OPINION THAT THESE EXPENSES ARE OF CHARITY IN NATURE AND INVOLVED EXPENSES TOW ARDS SCHOOL BUS TRANSPORT, STUDENTS TRAINING 25 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) FEES, MEDICAL SERVICES TO VILLAGERS, CONSTRUCTION OF WELL ALONGWITH OTHER EXPENSES OF SIMILAR NATURE. THE AO CONSIDER ING THE NATURE OF THE BUSINESS ACTIVITY CARRIED OUT BY THE ASSESSEE BEING EXTRACTION OF IRON ORE AND ALSO THE ASPECT OF AIR POLLUTION AND THE OBSTACLE FROM THE PUBLIC, ALLOWED 50% OF THESE EXPENDITURE CONSIDERING INVOLVEMENT OF INFLATION OF THE EXPENSES. THE ASSESSEE WENT IN APPEAL BEFORE CIT(A). CIT(A) DELETED THE DISALLOWANCE. 11.1 WE HAVE HE ARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. WE NOTED THAT THE AO HIMSELF HAS ACCEPTED, CONSIDERING THE NATURE OF THE BUSINESS ACTIVITY CARRIED OUT BY THE ASSESSEE AND THE OBSTACLE FROM THE PUBLIC, THAT INCURRENCE OF THIS EXPENDITURE CANNO T BE RULED OUT BUT RESTRICTED THE ALLOWANCE OF THIS EXPENDITURE TO 50% CONSIDERING INVOLVEMENT OF INFLATION OF THE EXPENDITURE. THE LD. DR EVEN THOUGH VEHEMENTLY RELIED ON THE ORDER OF AO, BUT COULD NOT BRING TO OUR KNOWLEDGE ANY EVIDENCE WHICH MAY PROVE THAT THE EXPENDITURE CLAIMED BY THE ASSESSEE WAS INFLATED. IN OUR OPINION, THE APPARENT IS REAL . THE ONUS IS ON THE PERSON WHO ALLEGES THAT THE APPARENT IS NOT REAL. IT IS NOT DENIED THAT THE ASSESSEE IS MAINTAINING REGULAR BOOKS OF ACCOUNTS AND ACCOUNT S ARE BEING AUDITED. EVEN ON THIS BASIS ITSELF, INCURRENCE OF THE EXPENDITURE IS THE BUSINESS NEED AND THE NATURE OF THE BUSINESS OF THE ASSESSEE DEMANDS SUCH EXPENDITURE TO BE INCURRED BY THE ASSESSEE SO THAT THERE MAY NOT BE ANY DISTURBANCE FROM THE SUR ROUNDING VILLAGE AS WELL AS ENVIRONMENT. EVEN THOUGH THE NATURE OF THE EXPENSES WERE CLEARLY BROUGHT TO THE NOTICE OF THE AO, REVENUE DID NOT BRING ANY INSTANCE WHICH MAY PROVE THAT THE EXPENSES ARE PERSON EXPENSES, CAPITAL EXPENDITURE OR HAVE NOT BEEN IN CURRED FOR THE PURPOSE OF THE BUSINESS. IN VIEW OF THIS, IN OUR OPINION, NO INTERFERENCE IS CALLED FOR IN THE ORDER OF CIT(A). CIT(A) HAS RIGHTLY DELETED THE DISALLOWANCE. 12. GROUND NO. 5 IN REVENUES APPEAL RELATE TO DELETION OF THE ADDITION OF RS.12,60,00,000/ - . THE BRIEF FACTS RELATING TO THIS GROUND ARE THAT THE ASSESSEE 26 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) DURING THE ASSESSMENT YEAR UNDER CONSIDERATION DECLARED LONG TERM CAPITAL GAINS AMOUNTING TO RS. 12,59,41,410/ - ON ACCOUNT OF RELINQUISHMENT OF RIGHTS IN THE SHARE IN PARTNER SHIP FIRM, M/S. BANASHANKARI MINING CORPORATION BANGALORE. HOWEVER, AFTER SET OFF OF BROUGHT FORWARD LOSS, LONG TERM CAPITAL GAINS DECLARED BY THE ASSESSEE COMES TO NIL. THERE WAS ONE PARTNERSHIP FIRM, M/S. BANASHANKARI MINING CORPORATION BANGALORE CONSI STING OF PARTNERS, SHRI THAKUR DIL I P SINGH AND MS. BIJALI MAHALAKSHMI SINGH . ON 8.10.2002 THE ASSESSEE ENTERED INTO THIS PARTNERSHIP FIRM WITH A NOMINAL SHARE CAPITAL OF RS. 45,000/ - AND MS. BIJALI MAHALAKSHMI SINGH RETIRED FROM THE SAID FIRM. AS PER THE DEED OF RECONSTITUTION OF THE FIRM, THE BUSINESS OF THE FIRM IS MINING, PROCESSING AND TRADING (EXPORT) OF ALL TYPES OF MINERAL ORE. AS PER THE DEED OF RECONSTITUTION, THE OBJECT OF INTRODUCING ASSESSEE INTO THE PARTNERSHIP FIRM WAS SEEKING TECHNICAL AND MARKETING ASSISTANCE TO WORK/OPERATE THE PROPOSED MINING LICENCE AND TO SELL/EXPORT THE IRON ORE MINED FROM THE PROPOSED MINING LICENCE. THE ASSESSEE ALSO AGREED TO BRING THE FUNDS REQUIRED TO OBTAIN GRANT OF PROPOSED MINING LICENCE AS ALSO FOR THE WORKI NG OF THE PROPOSED MINING LICENCE AFTER GRANT. THE ASSESSEE WAS HAVING 70% SHARE IN THE PARTNERSHIP FIRM. THE SAID FIRM HAS APPLIED TO THE STATE GOVERNMENT OF KARNATAKA FOR GRANT OF MINING LEASE FOR AN IRON ORE AND MANGANESE ORE MINE OVER AN AREA OF 515. 98 HECTARES. THE STATE GOVERNMENT VIDE LETTER DT. 5.10.2007 COMMUNICATED TO THE MINISTRY OF MINES, GOVERNMENT OF INDIA, THE STATE GOVERNMENTS RECOMMENDATION FOR GRANT OF IRON ORE MINING LEASE FOR 178.30 ACRES TO THE SAID FIRM IN RESPECT OF PROPOSED LEASE AREA. THE FIRM WAS IN ANTICIPATION OF GETTING APPROVAL FOR GRANT OF MINING LEASE IN FAVOUR OF THE FIRM FOR THE PROPOSED LEASE AREA. D URING THE IMPUGNED ASSESSMENT YEAR, THE ASSESSEE SOLD MINING LEASE/THE RIGHTS IN THE SAID FIRM FOR A SUM OF RS. 18 CRORES BY RETIRING FROM THE PARTNERSHIP THROUGH AN INDENTURE OF AGREEMENT DT. 15.7.2008 ENTERED INTO BETWEEN THE ASSESSEE, OTHER PARTNER AND M/S. BRN - BLACK DIAMOND OVERSEA & MINING PROJECTS PVT. LTD. BANGALORE. THE ASSESSEES SHARE COMES TO RS. 12.60 CROR ES. UPON RECEIPT OF THE FULL 27 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) CONSIDERATION, THE ASSESSEE RETIRED FROM THE PARTNERSHIP VIDE RETIREMENT DEED DT. 3.10.2009 AND THE FIRM WAS RE - CONSTITUTED ACCORDINGLY. AS PER THE AGREEMENT DT. 15.7.2008 BETWEEN THE ASSESSEE AND M/S. BRN - BLACK DIAMOND OVERS EA & MINING PROJECTS PVT. LTD. AND THE OTHER PARTNER FOR SALE OF MINING LEASE, THE ASSESSEE WAS REQUIRED TO SIGN AND EXECUTE AN APPROPRIATE DEED FOR RECONSTITUTION OF THE SAID FIRM RELINQUISHING ALL THE RIGHTS. THE ASSESSEE ACCORDINGLY RETIRED FROM THE PA RTNERSHIP FIRM VIDE RETIREMENT DEED DT. 3.10.2009 AND THE FIRM WAS RECON STITUTED WITH THE NEW PARTNER, M/S. BRN - BLACK DIAMOND OVERSEA & MINING PROJECTS PVT. LTD. AND ONE MRS. K.S. NADANA. THE AO WAS OF THE VIEW THAT THE CONSIDERATION RECEIVED ON SALE OF T HE MINING LEASE THROUGH AGREEMENT DT. 15.7.2008 BY WAY OF RETIREMENT FROM THE PARTNERSHIP FIRM BY THE ASSESSEE TANTAMOUNT TO ADVENTURE IN THE NATURE OF TRADE AS MINING LEASE WAS OBTAINED BY THE ASSESSEE WITH AN INTENTION OF EXTRACTING THE ORE AND SELLING I T. THE ASSESSEE HAS ALREADY BEEN IN THE BUSINESS OF MINING AND EXPORTING OF IRON ORE. THE INVESTMENT IN THE FIRM M/S. BANASHANKARI MINING CORPORATION BANGALORE OR OBTAINING MINING LICENCE AT GOLLARHALLI, TUMKUR WAS WITH AN INTENTION OF EXPANDING THE BUSI NESS OF MINING ACTIVITY OR TO GET HIGH GRADE ORE FROM KARNATAKA TO AUGMENT THE ASSESSEES IRON ORE BUSINESS IN GOA. EVEN THE OBJECTS OF THE ASSESSEES INVESTMENT IN THE MINING LEASE WERE TO EARN BUSINESS PROFIT. THEREFORE, SHOW CAUSE NOTICE WAS ISSUED B Y THE AO TO THE ASSESSEE. IN RESPONSE THERETO, THE ASSESSEE VIDE LETTER DT. 30.11.2011 SUBMITTED AS UNDER : A. THAT THE AMOUNT RECEIVED ON RETIREMENT FROM M/S BANASHANKARI MINING CORPORATION (THE PARTNERSHIP FIRM) WAS SHOWN AS RECEIPT FROM THE SALE OF MININ G LEASE. WE MAY CLARIFY THAT WE HAVE RECEIVED THE MONIES TOWARDS OUR SHARE IN THE PARTNERSHIP; AND B. THAT THE MINING LEASE WAS OBTAINED BY US WITH AN INTENTION OF EXTRACTING ORE AND SELLING THE ORE SO EXTRACTED FIRSTLY, WE HAVE NOT OBTAINED ANY MINING LEASE, AN APPLICATION FOR OBTAINING CONCESSION / MINING LEASE WAS FILED BY THE PARTNERSHIP FIRM AND NOT B Y US (AND THAT TOO MUCH PRIOR TO WE BEING ADMITTED AS A PARTNER IN PARTNERSHIP FIRM); SECONDLY, IF AND WHEN A CONCESSION WAS TO BE GRANTED OR A MINING LEASE WAS TO BE ALLOTTED, THE CONCESSIONAIRE / LESSEE / 28 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) ALLOTTEE WOULD BE THE PARTNERSHIP FIRM AND NOT US ; SECONDLY, AS PER OUR INFORMATION, UNTIL DATE NO LEASE / CONCESSION HAS BEEN EXECUTED BY THE STATE GOVERNMENT IN FAVOUR OF THE PARTNERSHIP FIRM. 2. WE THEREFORE SUMMARISE THE CORRECT FACTS AS UNDER., A. THE PARTNERSHIP FIRM HAD APPLIED TO THE STATE GOVERNMENT FOR OBTAINING A CONCESSION IN THE KARNATAKA MINING FIELDS; B. WE HAVE NOT ENTERED INTO ANY SUCH PARTNERSHIP FOR OBTAINING A CONCESSION / A MINING LEASE AND OPERATING IT. C. WE WERE ADMITTED TO THE PARTNERSHIP DUE TO OUR EXPERTISE IN MINING OPERATIONS; D. AS PER CLAUSE 5 OF THE PARTNERSHIP DEED, THE PARTNERSHIP IS ENGAGED IN THE BUSINESS OF 'MINING PROCESSING AND TRADING (INCLUDING EXPORTS) OF ALL TYPES OF MINERAL ORE '; AND E. ON BRN BLACK DI AMOND OVERSEAS AND MINING PROJECTS PVT. LTD. (BLACK DIAMOND) APPROACHING THE PARTNERS IN 2008 WITH A COMMERCIALLY VIABLE OFFER TO ACQUIRE THE PARTNERSHIP INTEREST OF THE EXISTING PARTNERS, WE JOINTLY WITH THE OTHER PARTNER VIZ. TAHKUR DILEEP SINGH, EXECU TED AN AGREEMENT DATED JULY 15, 2008 TO TRANSFER OUR INTEREST IN THE FIRM AND RETIRE THERE FROM SIMULTANEOUS WITH THE ADMISSION OF BLACK DIAMOND AND ITS NOMINEE. 3. WHAT FOLLOWS FROM THE ABOVE IS THAT OUR ENTERING TO THE PARTNERSHIP WAS WITH THE INTEN T TO OPERATE THE MINE AND NOT WITH THE INTENT TO PROCURE THE CONCESSION AND SELL THE SAME, IN OTHER WORDS THE CONCESSION / MINING LEASE WOULD BE, IF AND WHEN GRANTED, A PROFIT EARNING APPARATUS AND NOT A STOCK IN TRADE. 4. THE APEX COURT IN THE CASE OF AD DANKI NARAYANAPPA VS. BHASKARA KRISHTAPPA & ORS. AIR 1966 SC 1300, AFTER REFERRING TO THE VARIOUS PROVISIONS OF THE INDIAN PARTNERSHIP ACT, 1932 OBSERVES AS UNDER: 'FROM A PERUSAL OF THESE PROVISIONS IT WOULD BE ABUNDANTLY CLEAR THAT WHATEVER MAY BE THE C HARACTER OF THE PROPERTY WHICH IS BROUGHT IN BY THE PARTNERS WHEN THE PARTNERSHIP IS FORMED OR WHICH MAY BE ACQUIRED IN THE COURSE OF THE BUSINESS OF THE PARTNERSHIP IT BECOMES THE PROPERTY OF THE FIRM AND WHAT A PARTNER IS ENTITLED TO IS HIS SHARE OF PROF ITS, IF ANY, ACCRUING, TO THE PARTNERSHIP FROM THE RELISATION O F THIS PROPERTY, AND UPON DISSOLUTION OF THE PARTNERSHIP TO A SHARE IN THE MONEY REPRESENTING THE VALUE OF THE PROPERTY. NO DOUBT, SINCE A FIRM HAS NO LEGAL EXISTENCE, THE PARTNERSHIP PROPERTY WILL VEST IN ALL THE PARTNERS AND IN THAT SENSE EVERY PARTNER HAS AN INTEREST IN THE PROPERTY OF PARTNERSHIP. DURING THE SUBSISTENCE OF THE OF THE PARTNERSHIP HOWEVER, NO PARTNER CAN DEAL WITH ANY PORTION PROPERTY AS HIS OWN. NOR CAN BE ASSIGN HIS INTEREST IN A SPECIFIC ITEM OF THE PARTNERSHIP PROPERTY TO ANYONE. HIS RIGHT IS TO OBTAIN SUCH PROFITS, IF ANY, AS FALL TO HIS SHARE FROM TIME TO TIME AND UPON THE DISSOLUTION OF THE FIRM TO A SHARE 29 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) IN THE ASSETS OF THE FIRM WHICH REMAIN AFTER SATISFYING THE LIABI LITIES SET OUT IN CLAUSE (A) AND SUB - C/S. (I), (II) AND ( II I) OF CLAUSE (B) OF 5. 48.' 5. WE THEREFORE SUBMIT THAT IT IS INCORRECT TO SUGGEST THAT WHAT HAS BEEN TRANSFERRED BY US UNDER THE AGREEMENT DATED JULY 15, 2008 IS THE MINING LEASE. WE SUBMIT THAT HE CONSIDERATION RECEIVED BY US ON RETIREMENT IS A CAPITAL RECEIPT. RELIANCE IS PLACED ON T HE FOLLOWING. WE ARE FORTIFIED IN OUR VIEW BY THE FOLLOWING DECISIONS, COPIES WHEREOF ARE ENCLOSED: A. PRASHANT S. JOSHI VS. ITO (324 ITR 154) (BOM) B. A. K. SHARAFUDDIN VS. CIT (39 ITR 333) (MAD) C. CIT VS. GANESHA CHETTIAR (133'LTR 103) (MAD) D , SHEVANTHIBHAI C. MEHTA VS, ITO [(2004) 4 SOT 94 (PUNE)J IN THE LIGHT OF OUR AFORESAID SUBMISSIONS, WE REQUEST YOU TO ACCEPT OUR RETURNED INCOME UNDER THE HEAD CAPITAL GAINS AND CONCLUDE THE PROCEEDINGS ACCORDINGLY. ' THE AO DID NOT AGREE WITH THE EXPLANA TION OF THE ASSESSEE AND TREATED THE RECEIPT AS REVENUE RECEIPT AND ADDED THE SUM UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE ASSESSEE CONTENDED THAT THE ASSESSEE, AS A PART O F ITS OVERALL BUSINESS EXPANSION, ACQUIRED PARTNERSHIP INTEREST IN THE FIRM M/S. BANASHANKARI MINING CORPORATION BANGALORE ON 8.10.2002 WITH THE INTENTION TO PARTICIPATE IN THE OPERATION OF ANY MINE THAT MAY BE ALLOTTED TO THE FIRM AND NOT WITH THE INTENTI ON TO PROCURE CONCESSION AND SELL THE SAME. THE CONCESSION/MINING LEASE WOULD BE , IF AND WHEN GRANTED , TREATED AS A PROFIT EARNING APPARATUS AND NOT AS STOCK - IN - TRADE. THE FIRM HAD MADE AN APPLICATION TO THE KARNATAKA GOVERNMENT ON AUGUST 9, 1999 FOR OBT AINING THE CONCES S ION N KARNATAKA MINING FIELDS I.E. MUCH BEFORE THE ADMISSION OF THE ASSESSEE AS PARTNER IN THE FIRM. IF AND WHEN THE CONCESSION WOULD HAVE BEEN GRANTED OR MINING LEASE ALLOTTED, THE CONCESSIONAIRE/LESSEE/ALLOTTEE WOULD HAVE BEEN THE PARTNERSHIP FIRM AND NOT THE ASSESSEE. M/S. BANASHANKARI MINING CORPORATION BANGALORE WAS PURSUING WITH THE GOVERNMENT OF KARNATAKA FOR GRANT OF MINING LEASE OVER AN AREA OF 515.98 HECTARES. HOWEVER, ON THE SAME MINING LEASE OTHER 5 P ARTIES HAD ALSO CLAIMED THEIR RIGHT IN THE COURT OF LAW AS SIMILAR APPLICATIONS 30 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) WERE MADE BY OTHER PARTIES. AS A RESULT OF THE DISPUTE, THE HON'BLE HIGH COURT OF KARNATAKA ORDERED TO DIVIDE THE TOTAL AREA INTO 6 PARTS AND EACH APPLICANT WAS ENTITLED FOR A BOUT 86 HECTARES OF MINING AREA AND THE FIRMS AREA GOT REDUCED TO 178.30 ACRES. THE MINING AREA WHICH WAS PROPOSED TO BE ALLOTTED TO THE FIRM WAS NOT HAVING THAT MUCH GOOD QUALITY OF RESERVES OF IRON ORE/MANGANESE ORE AND THUS WAS NOT ECONOMICALLY VIABLE TO DEVELOP THE SAID PROPOSED AREA OF MINING LEASE. THE GOVERNMENT OF KARNATAKA AS WELL AS THE CENTRAL GOVERNMENT WERE HEAVILY COMING ON THE MINE OWNERS BY PUTTING LOT OF RESTRICTIONS ON MINING ACTIVITY DUE TO AGGRESSIVE AGITATION FROM THE PUBLIC/NGOS AGA INST MINING ACTIVITY. THE ASSESSEE BY THE YEAR 2009 REALISED THAT THE VENTURE WOULD BE UNVIABLE, THEREFORE, AFTER REMAINING PARTNER FOR ALMOST 7 YEARS, THE ASSESSEE ALONGWITH OTHER PARTNER, SHRI THAKUR DILIP SINGH DECIDED TO TRANSFER THEIR INTEREST IN THE PARTNERSHIP FIRM WHEN APPROACHED BY M/S. BRN - BLACK DIAMOND OVERSEA & MINING PROJECTS PVT. LTD. BANGALORE IN THEIR FAVOUR BY RELINQUISHING PARTNERSHIP RIGHTS IN THE SAID FIRM VIDE AGREEMENT DT .15.7.2008. THE ASSESSEE ENTERED INTO PARTNERSHIP WITH THE INT ENTION TO OPERATE THE MINE AND NOT WITH THE INTENTION TO PROCURE THE CONCESSION AND SELL THE SAME AS ALLEGED. AS PER THE ASSESSEES INFORMATION, TILL DATE NO LEASE/CONCESSION HAS BEEN EXECUTED BY THE CENTRAL GOVERNMENT IN FAVOUR OF THE PARTNERSHIP FIRM. IN THE HANDS OF SHRI THAKUR DILIP SINGH, THE AO ASSESSED THE SAID RECEIPT UNDER THE HEAD CAPITAL GAINS. THE SAME TREATMENT SHOULD BE GIVEN IN THE CASE OF THE ASSESSEE. CIT(A) AFTER GOING THROUGH THE SUBMISSION OF THE ASSESSEE TREATED THE CONSIDERATION SO RECEIVED AS CAPITAL GAINS BY OBSERVING AS UNDER : I HAVE GONE THROUGH THE FACTS OF THE CASE CONTENTS OF THE ASSESSMENT ORDER AND WRITTEN SUBMISSION OF THE ASSESSEE. THE AO HAS RELIED ON THE FOLLOWING CASE LAWS: 1. ECLAT CONSTRUCTION COMPANY PVT. LTD. VS. CIT 172 ITR 84 (PAT) IN THIS CASE ASSESSEE IS A PRIVATE LIMITED COMPANY INCORPORATED JUNE' 1967 WITH OBJECT TO CARRY ON BUSINESS OF ENGINEERING AND BUILDING CONTRACT. THE OBJECT ALSO INCLUDE BUYING, SELLING, MANUFACTURING, REPAIRING AND LETTING OUT O N HIGHER AND 31 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) DEALING IN ALL PLANTS AND MACHINERI ES. THE BULLDOZER IS ACQUIRED AFTER TAKING LOAN ON VARIOUS FINANCE INSTITUTIONS AND IT WAS LET OUT TO HYDERABAD INVESTMENT TRUST LTD., ON A MONTHLY HIGH CHARGES OF RS.12,000/ - . THE ASSESSEE HAS SHOWN INCOME AS A INCOME FROM BUSINESS BUT APPELLATE ASST.COMM ISSIONER HELD IT HAS INCOME FROM OTHER SOURCES AND THE HON'BLE TRIBUNAL ENDORSED THE DECISION OF THE AACT AND HELD THAT HIRING OF BULLDOZER WAS NOT AN ADVENTURE IN NATURE OF TRADE AND COMMERCE. THE HIGH COURT OF PATNA HAS REVERSE THE DECISION OF THE ITAT A ND HELD THAT THE RENTAL RECEIPTS ARE AMOUNT IN TO BUSINESS INCOME. 2. JCIT VS KHANNA AND ANNDHANAM 115 TT3 663 (DELHI) IN THIS CASE THE ASSESSEE WAS A PRACTICING CHARTERED ACCOUNTANT FIRM AND IN THE COURSE OF CARRYING ON SUCH PROFESSION ENTERED IN TO AN AGR EEMENT FOR CONCURRENT MEMBERSHIP OF DELOITTEE TOUCHE TOHMATSU INTERNATIONAL (DTTI) IN 1992. THE EFFECT OF NEW ARRANGEMENT IS THAT DTTI WILL NOT REFER THE CLIENT AND TO FACILITATE THE TRANSFER OF ALL REFERRED CLIENTS, THE ASSESSEE WAS COMPENSATED FOR PROBAB LE LOSS IN THE FORM OF NON RECEIPT OF PROFESSIONAL RECEIPT. IT CAN BE SAID THAT, THOUGH VOLUNTARILY, THE PAYMENT CAME TO THE ASSESSEE IN THE COURSE OF CARRYING ON THE PROFESSION OF ACCOUNTANCY. THE PAYMENT HAS ORIGIN IN THE PROFESSION CARRIED ON WHICH ITSE LF IS A DEFINITE SOURCE OF INCOME AND CHARGEABLE TO TAX. SERVING THE CLIENTS REFERRED TO BY THE DTTI CANNOT BE CONSIDERED AS SEPARATE, DISTINCT AND DEFINITE SOURCE OF INCOME DE - HORSE THE EXISTING PROFESSION CARRIED ON. ON THE ABOVE FACTS IT WAS HELD THAT T HE AMOUNT RECEIVED BY THE ASSESSEE IS ARISING IN THE COURSE OF CARRYING ON PROFESSION AND CHARGEABLE AS REVENUE RECEIPT. THE ABOVE CASE LAWS ARE DISTINGUISHABLE ON FACTS. THE ASSESS EE HAS RELIED ON THE FOLLOWING A.K.SHRAFUDDIN VS. CIT (39 ITR 333) (MAD ) WHERE IT WAS HELD THAT THE COMPENSATION RECEIVED BY THE ONE PARTNER OF THE PARTNERSHIP FROM ANOTHER PARTNER FOR RELINQUISHING ALL IS RIGHTS IN THE PARTNERSHIP IS COMPENSATION FOR LOSS OF CAPITAL ASSET AND NOT A TRADING RECEIPT. IN VIEW OF THE ABOVE DISC USSION THE ASSESSEE BECAME THE PARTNER WITH CAPITAL AND BEFORE COMMENCEMENT OF THE BUSINESS ACTIVITY THE ASSESSEE RELINQUISHED ITS SHARE AND COMPENSATION RECEIVED BY THE ASSESSEE IS TREATED AS A CAPITAL GAIN BUT NOT THE INCOME FROM BUSINESS. HENCE THE ADDI TION MADE BY THE AO DISMISSED AND THIS GROUND OF THE APPEAL IS ALLOWED. 12. 1 BEFORE US, THE LD. AR REITERATED THE SUBMISSION MADE BEFORE THE CIT(A). THE LD. AR AFTER TAKING US THROUGH THE VARIOUS AGREEMENTS ENTERED INTO BETWEEN THE ASSESSEE WHEN THE ASSESSEE BECAME THE PARTNER, THE AGREEMENT ENTERED INTO 32 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) BETWEEN THE ASSESSEE AND M/S. BANASHANKARI MINING CORPORATION BANGALORE AS WELL AS THE AGREEMENT DT. 23.4.2009 VEHEMENTLY CONTENDED THAT WHAT THE ASSESSEE HAS SOLD TO M/S. BRN - BLACK DIAMOND OVERSEA & MINING PROJECTS PVT. LTD. BANGALORE IS ITS RIGHT IN PARTNERSHIP FIRM AND THE CONSIDERATION RECEIVED WAS A CAPITAL RECEIPT CHARGEABLE TO TAX UNDER THE HEAD INCOME FROM CAPITAL GAINS. THE ASSESSEE BY BECOMING PARTNER IN THE FIRM GOT RIGHT AS A PARTNER AND WHATEVER CONCESSION/MINING LEASE, IF TO BE ALLOTTED TO THE FIRM, WOULD BE TREATED AS PROFIT EARNING APPARATUS FOR THE FIRM. THE ASSESSEE HAS SIMPLY RELINQUISHED HIS RIGHT IN THE PARTNERSHIP FIRM AND RELINQUISHMENT OF A RIGHT IN A PARTNERSHIP FIRM IS A TR ANSFER. THE CASE OF THE ASSESSEE IS DULY COVERED BY THE DECISION OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF A.K. SHRAFUDDIN VS. CIT, 39 ITR 333 (MAD). IT WAS ALSO SUBMITTED THAT THE AO HAS WRONGLY RELIED ON THE DECISION OF JCIT VS. KHANNA AND ANNDHA NAM, 115 TTJ 663 (DELHI). THIS DECISION WAS SUBSEQUENTLY REVERSED BY HON'BLE HIGH COURT AND IN THIS CASE ALSO ULTIMATELY THE CASE WAS DECIDED IN FAVOUR OF THE ASSESSEE BY HOLDING THAT THE AMOUNT RECEIVED BY THE ASSESSEE UNDER TERMS OF RELEASE AGREEMENT RE PRESENTED A CAPITAL RECEIPT. 12.2 THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE AO. 12.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. WE NOTED THAT THE ASSESSEE BECAME PARTNER IN THE FIRM, M/S. BANASHANKARI MINING CORPORATION BANGALORE VIDE AGREEMENT DATED OCTOBER 8, 2002. THE SAID FIRM HAD MADE AN APPLICATION TO THE KARNATAKA GOVERNMENT FOR OBTAINING A CONCESSION IN KARNATAKA MINING FIELDS MUCH BEFORE ADMISSION OF THE ASSESSEE AS A PARTNER INTO THE FIRM. THE ASS ESSEE GOT A RIGHT AS PARTNER IN THE PARTNERSHIP FIRM AS SOON AS HE ENTERED INTO THE PARTNERSHIP. SUBSEQUENTLY, THE ASSESSEE RELINQUISHED HIS RIGHT IN THE PARTNERSHIP FIRM VIDE AGREEMENT DT. 15.7.2008 IN FAVOUR OF M/S. BRN - BLACK DIAMOND OVERSEA & MINING PR OJECTS PVT. LTD. 33 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) BANGALORE FOR A CONSIDERATION AMOUNTING TO RS. 12.60 CRORES. THE OTHER PARTNER, SHRI THAKUR DILIP SINGH HAS ALSO SIMILARLY ENTERED INTO AN AGREEMENT WITH M/S. BRN - BLACK DIAMOND OVERSEA & MINING PROJECTS PVT. LTD. BANGALORE. THIS AGREEMEN T WAS TRANSFER OF THE INTEREST OF THE ASSESSEE, WHATEVER THE ASSESSEE HAD, IN THE PARTNERSHIP FIRM. IT IS A FACT THAT THIS PARTNERSHIP FIRM HAS NOT STARTED ITS BUSINESS. IT WAS EXPECTING PROCURING CONCESSION/MINING LEASE FROM THE STATE GOVERNMENT. THE A SSESSEE CLAIMED THE SAID RECEIPT UNDER THE HEAD LONG TERM CAPITAL GAINS FOR RELINQUISHING HIS RIGHT IN THE PARTNERSHIP FIRM WHICH HE ACQUIRED VIDE AGREEMENT DT. 8.10.2002. IN OUR OPINION, THE MOMENT THE ASSESSEE BECAME PARTNER IN THE PARTNERSHIP FIRM, H E GOT A VALUABLE RIGHT BEING A PARTNER OF THE FIRM AND THIS RIGHT TANTAMOUNT TO BE A CAPITAL ASSET IN THE HANDS OF THE ASSESSEE. RELINQUISHING THE PARTNERSHIP RIGHT TANTAMOUNT TO TRANSFER OF A CAPITAL ASSET. THE REVENUE ITSELF HAS ACCEPTED THE CONSIDERAT ION SO RECEIVED BY THE OTHER PARTNER, SHRI THAKUR DILIP SINGH TO BE A CAPITAL RECEIPT IN HIS HAND. THE CONSIDERATION IS NOT FOR CARRYING ON ANY BUSINESS ACTIVITY. THE CONSIDERATION IS FOR THE TRANSFER OF THE RIGHTS, WHATEVER THE ASSESSEE WAS HAVING IN TH E PARTNERSHIP FIRM. WE HAVE ALSO GONE THROUGH THE DECISION AS RELIED BY THE LD. AR. THE ISSUE IS DULY COVERED BY THE DECISION OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF A.K. SHRAFUDDIN VS. CIT, 39 ITR 333 (MAD) ( SUPRA ) WHEREIN IT WAS HELD THAT THE C OMPENSATION RECEIVED BY ONE PARTNER OF THE PARTNERSHIP FIRM FROM ANOTHER PARTNER FOR RELINQUISHING HIS RIGHT IN THE PARTNERSHIP IS THE COMPENSATION FOR LOSS OF CAPITAL ASSET AND IS NOT A TRADING RECEIPT. THE AO RELIED ON THE DECISION OF JCIT VS. KHANNA AN D ANNDHANAM, 115 TTJ 663 (DELHI), BUT THIS DECISION, WE NOTED, HAS SUBSEQUENTLY BEEN REVERSED BY THE HON'BLE DELHI HIGH COURT VIDE ORDER DT. 29.1.2013 IN ITA NO. 1286/08. EVEN WE NOTED THAT THE FACTS OF THIS CASE ARE ENTIRELY DIFFERENT. IN THIS CASE, THE PARTNER HAS NOT RELINQUISHED HIS RIGHTS IN THE PARTNERSHIP FIRM IN FAVOUR OF ANOTHER PARTY. WE HAVE ALSO GONE THROUGH THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF N.A. MODY VS. CIT, 162 ITR 420. WE NOTED 34 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) THAT IN THIS CASE SOME SORT OF SIMILAR QUESTION HAS ARISEN AND THE HON'BLE HIGH COURT UNDER PARA 21 OF ITS ORDER HAS HELD AS UNDER : 21. WE HAVE, IN THE INSTANT CASE, HELD THAT THE OVERALL EFFECT OF THE CONSENT TERMS IS THAT THEY PROVIDE FOR THE RETIREMENT O F THE ASSESSEE FROM THE PARTNERSHIP. THERE IS IN THE CONSENT TERMS A CLAUSE PROVIDING FOR THE ASSIGNMENT OF THE ASSESSEE'S SHARE IN THE PARTNERSHIP AND ITS ASSETS TO THE CONTINUING PARTNERS. THE FACTS ARE, THEREFORE, SIMILAR TO THE FACTS IN TRIBHUVANDAS PA TEL'S CASE (SUPRA) AND, FOR THAT MATTER, IN ASLOT'S CASE ALSO (SUPRA). FOLLOWING THOSE DECISIONS, AS WE MUST, WE HOLD THAT THERE WAS A TRANSFER BY THE ASSESSEE WITHIN THE MEANING OF S. 2(47) OF THE IT ACT, 1961, AND THAT LIABILITY TO CAPITAL GAINS TAX EXIS TS. T H E FIRST QUESTION MUST, THEREFORE, BE ANSWERED IN THE NEGATIVE AND IN FAVOUR OF THE REVENUE. IN VIEW OF THE AFORESAID DISCUSSION AND THE DECISION OF THE JURISDICTION HIGH COURT, WE ARE OF THE VIEW THAT NO INTERFERENCE IS CALLED FOR IN THE ORDER OF C IT(A) AND CIT(A) HAS RIGHTLY TREATED THE CONSIDERATION RECEIVED UNDER THE HEAD CAPITAL GAINS. WE, ACCORDINGLY, CONFIRM THE ORDER OF CIT(A). THUS, THIS GROUND STANDS DISMISSED. 13. IN THE RESULT, THE APPEAL FILED BY THE REVENUE STANDS DISMISSED WHILE T HE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. 14. ORDER PRONOUNCED IN THE OPEN COURT ON 13 /09/2013. SD/ - (D.T.GARASIA) JUDICIAL MEMBER SD/ - (P.K. BANSAL) ACCOUNTANT MEMBER PLACE : PANAJI / GOA DATED : 13 /09/ 2013 *SSL* 35 ITA NOS. 32 & 37/PNJ/2013 (ASST. YEAR : 2009 - 10) COPY TO : (1) APPELLANT (2) RESPONDENT (3) CIT, PANAJI (4) CIT(A), PANAJI (5) D.R (6) GUARD FILE TRUE COPY, BY ORDER SR. P RIVATE S ECRETARY ITAT, PANAJI, GOA
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