RAPTAKOS, BRETT & CO. LTD, MUMBAI V. DCIT CEN CIR 46, MUMBAI

ITA 3317/MUM/2009

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92844 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 10-03-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 19-05-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SOLI DASTUR
• Keywords: Capital asset; Business income; Earning of tax free income; Cost of acquisition
• Section: 143(3); 2(14); 14A; 10; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES D, MUMBAI BEFORE SHRI B R BASKARAN, AM & SHRI AMIT SHUKLA, JM ITA NOS.3317/MUM/2009 & 1692/MUM/2010 ASSESSMENT YEAR : 2007-08 RAPTAKOS BRETT & CO. LTD., 21 A, MITTAL TOWER, 210 NARIMAN POINT, MUMBAI- 400 021 PAN : AAACR1772R VS. THE DCIT CEN. CIR 46, MUMBAI (APPELLANT) RESPONDENT) APPELLANT BY : S/SHRI SOLI DASTUR & MADHUR AGAR WAL RESPONDENT BY : SHRI RAVI SAWANA DATE OF HEARING : 25.03.2015 DATE OF PRONOUNCEMENT : 10. 06.2015 O R D E R PER AMIT SHUKLA, JUDICIAL MEMBER THE AFORESAID APPEALS HAVE BEEN FILED BY THE ASSESS EE AGAINST ORDER DATED 08.03.2009 PASSED BY THE CIT(A) CENTRAL II, MUMBA I, FOR THE QUANTUM OF ASSESSMENT U/S. 143(3) FOR A.Y. 2007-08 AND AGAINST ORDER DATED 12.01.2010 IN RELATION TO THE PENALTY PROCEEDINGS U/S. 271(1)(C) FOR THE ASSESSMENT YEAR 2007-08. 2. WE WILL FIRST TAKE UP THE QUANTUM APPEAL IN ITA NO. 3317/MUM/2009, VIDE WHICH, FOLLOWING GROUNDS HAVE BEEN RAISED. 1.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) CENTRAL II, MUMBAI [THE CIT(A)] ERRED IN CONFIRMING THE ACTION OF DEPUTY COMMISSION ER OF INCOME TAX (THE A.O) BY NOT ALLOWING THE CLAIM OF SET OFF OF LONG T ERM CAPITAL LOSS ON SALE OF SHARES WHERE SECURITY TRANSACTION TAX (STT) WAS D EDUCTED AGAINST THE LONG TERM CAPITAL GAIN ARISING ON SALE OF LAND AT CHENNA I; 2 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 1.2 THE APPELLANT PRAYS THAT SUCH SET OFF OF THE SA ID LONG TERM CAPITAL LOSS BE ALLOWED 2.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE A.O. IN DISALLOWING TH E EXPENSES OF RS.39,80,215/- U/S 14A OF THE ACT BY APPLYING RULE 8D OF THE INCOM E TAX RULES 1962 (THE RULES); 2.2 THE CIT(A) ALSO ERRED IN CONFIRMING THE ACTION OF THE A.O. IN APPLYING RULE 8D IN AS MUCH AS THE SAID RULE WAS ULTRAVIRES AND V OID; 2.3 THE CIT(A) FURTHER ERRED CONFIRMING THE ACTION OF THE A.O. IN APPLYING RULE 8D RETROSPECTIVELY IN AS MUCH AS THE SAID RULES WOU LD BE APPLICABLE WITH EFFECT FROM A.Y. 2008-09; 2.4 THE CIT(A) FURTHER ERRED IN CONFIRMING THE ACTI ON OF THE A.O. IN DISALLOWING THE EXPENSES PROPORTIONATELY AGAINST THE DIVIDEND I NCOME EARNED SO EXEMPT U/S. 10(38) OF THE ACT. 2.5 THE APPELLANT PRAYS THAT THE SAID DISALLOWANCE OF EXPENSES BE DELETED. 2.6 WITHOUT PREJUDICE TO ABOVE, THE APPELLANT PRAYS THAT THE SAID DISALLOWANCE OF EXPENSES BE APPROPRIATELY REDUCED. 3. THE BRIEF FACTS OF THE CASE, QUA THE ISSUE RAISE D IN GROUND NO.1 ARE THAT THE ASSESSEE IS A PHARMACEUTICAL COMPANY, ENGAGED IN MA NUFACTURING AND SALE OF PHARMACEUTICALS, FORMULATIONS, DIETETIC SPECIALITIE S AND ANIMAL HUSBANDRY. THE ASSESSEE IN THE COMPUTATION OF INCOME HAD SHOWN LON G TERM CAPITAL LOSS ON SALE OF SHARES AMOUNTING TO RS.57,32,835/- AND LOSS ON SALE OF MUTUAL FUNDS UNITS AMOUNTING TO RS.2,61,655/-. THE SAID LONG TERM CAP ITAL LOSS HAS BEEN SET OFF AGAINST THE LONG TERM CAPITAL GAINS OF RS.94,12,00, 000/- ARISING FROM SALE OF LAND AT CHENNAI. THE ASSESSING OFFICER HELD THAT THE LOSSE S CLAIMED CANNOT BE ALLOWED SINCE THE INCOME FROM LONG TERM CAPITAL GAIN ON SALE OF S HARES AND MUTUAL FUNDS ARE EXEMPT U/S. 10(38). THAT APART, OF THE LONG TERM C APITAL LOSS IN RESPECT OF SHARES WHERE SECURITIES TRANSACTION TAX HAS BEEN DEDUCTED, WOULD HAVE BEEN EXEMPT FROM LONG TERM CAPITAL GAIN HAD THERE BEEN PROFITS, THE REFORE, LONG TERM CAPITAL LOSS 3 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 FROM SALE OF SHARES CANNOT BE SET OFF AGAINST THE L ONG TERM CAPITAL GAIN ARISING OUT OF THE SALE OF LAND. 4. THE LEARNED CIT(A) TOO HAS CONFIRMED THE ACTION OF THE ASSESSING OFFICER ON THE GROUND THAT EXEMPT PROFIT OR LOSS CONSTRUES SEP ARATE SPECIES OF INCOME OR LOSS AND SUCH EXEMPT SPECIES OF INCOME OR LOSS CANNOT BE SET OFF AGAINST THE TAXABLE SPECIES OF INCOME OR LOSS. TAX EXEMPT LOSSES CANNOT BE DEDUCTED FROM TAXABLE INCOME AND, THEREFORE, THE ASSESSING OFFICER HAS RI GHTLY DISALLOWED THE CLAIM OF LOSSES FROM SHARES TO BE SET OFF AGAINST THE LONG T ERM CAPITAL GAIN FROM SALE OF LAND. 5. BEFORE US THE LEARNED SENIOR COUNSEL, SHRI SOLI DASTUR, SUBMITTED THAT WHAT IS CONTEMPLATED IN SECTION 10(38) IS EXEMPTION OF POSI TIVE INCOME AND LOSSES WILL NOT COME WITHIN THE PURVIEW OF THE SAID SECTION. THE S ET OFF OF LONG TERM CAPITAL LOSS HAS BEEN CLEARLY PROVIDED IN SECTIONS 70 AND 71. T HE LEGISLATION HAS NOT PUT ANY EMBARGO TO EXCLUDE LONG TERM CAPITAL LOSS FROM SALE OF SHARES TO BE SET OFF AGAINST LONG TERM CAPITAL GAIN ARISING ON ACCOUNT OF SALE O F OTHER CAPITAL ASSET. EVEN IN THE DEFINITION OF CAPITAL ASSET U/S. 2(14), NO EXCEPTIO N OR EXCLUSION HAS BEEN PROVIDED TO EQUITY SHARES THE PROFIT/GAIN OF WHICH ARE TREATED AS EXEMPT U/S. 10(38). CAPITAL GAIN IS CHARGEABLE ON TRANSFER OF A CAPITAL ASSET U /S. 45 AND MODE OF COMPUTATION HAS BEEN ELABORATED IN SECTION 48. CERTAIN EXCEPTI ONS HAVE BEEN PROVIDED IN SECTION 47 TO THOSE TRANSACTIONS WHICH ARE NOT REGARDED AS TRANSFER. NOTHING HAS BEEN MENTIONED IN SECTIONS 45 TO 48 THAT CAPITAL GAIN OR LOSS ON SALE OF SHARES ARE TO BE EXCLUDED AS SECTION 10(38) EXEMPTS THE INCOME ARISI NG FROM THE TRANSFER OF LONG TERM CAPITAL ASSET BEING AN EQUITY SHARE OR UNIT. LEGISLATURE HAS GIVEN EXEMPTION TO INCOME ARISING FROM TRANSFER OF LONG TERM CAPITAL A SSET BEING AN EQUITY SHARE IN 4 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 COMPANY OR UNIT OF EQUITY ORIENTED FUND, WHICH IS C HARGEABLE TO STT. SECTION 10(38) CANNOT BE READ INTO SECTION 70 OR71 OR SECTIONS 45 TO 48. IN SUPPORT OF HIS CONTENTION, HE STRONGLY RELIED UPON THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF ROYAL CALCUTTA TURF CLUB V. CIT (1983) 144 ITR 709 (CAL). IN THIS DECISION HE SUBMITTED THAT SIMILAR ISSUE WITH REGARD TO THE LOS SES ON ACCOUNT OF BREEDING HORSES AND PIGS WHICH ARE EXEMPT U/S. 10(27) WHETHER CAN B E SET OFF AGAINST ITS INCOME OF OTHER SOURCE UNDER THE HEAD BUSINESS. THE HONBL E HIGH COURT AFTER CONSIDERING THE RELEVANT PROVISIONS OF SECTION 10(27) AND SECTI ON 70, HELD THAT SECTION 10(27) EXCLUDES IN EXPRESSED TERMS ONLY ANY INCOME DERIVED FROM BUSINESS OF LIVESTOCK BREEDING, POULTRY OR DAIRY FARMING. IT DOES NOT EX CLUDE THE BUSINESS OF LIVESTOCK BREEDING, POULTRY OR DAIRY FARMING FROM THE OPERATI ON OF THE ACT. THE LOSSES SUFFERED BY THE ASSESSEE IN RESPECT OF LIVESTOCK, BREEDING W ERE HELD TO BE ADMISSIBLE FOR DEDUCTION AND WERE ALLOWED TO BE SET OFF AGAINST OT HER BUSINESS INCOME. HE DREW OUR ATTENTION TO THE VARIOUS OBSERVATIONS AND FINDI NGS OF THE HONBLE HIGH COURT AND ALSO THE RELIANCE PLACED BY THEIR LORDSHIPS TO VARI OUS DECISIONS OF HONBLE SUPREME COURT, ESPECIALLY IN THE CASE OF CIT VS. KARAMCHAND PREMCHAND LTD. (1960) 40 ITR 106. HE ALSO REFERRED TO VARIOUS OBSERVATIONS OF H ONBLE SUPREME COURT FROM THE SAID DECISION. THUS, HE SUBMITTED THAT THE LOSSES ON ACCOUNT OF SALE OF SHARES SHOULD BE ALLOWED TO BE SET OFF AGAINST LONG TERM C APITAL GAIN ON SALE OF LAND. IN HIS FAIRNESS, HE ALSO POINTED OUT BEFORE US THAT THERE IS A DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF KISHOREBHAI BHIKHABHAI VI RANI VS. ASST. CIT (2014) 367 ITR 261 (GUJ), WHICH HAS DECIDED THIS ISSUE AGAINST THE ASSESSEE. HOWEVER, HE SUBMITTED THAT IN THE SAID DECISION, THE DECISION O F HONBLE CALCUTTA HIGH COURT HAS NOT BEEN REFERRED AT ALL. THEREFORE, THIS DECISION DOES NOT HAVE PRECEDENCE VALUE AS 5 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 COMPARED TO THE CALCUTTA HIGH COURT DECISION, WHICH IS BASED ON SUPREME COURT DECISION ON THIS POINT. HE ALSO POINTED OUT THAT IT AT MUMBAI BENCH ALSO IN THE CASE OF SCHRADER DUNCAN LTD. VS. ADDL. CIT (2012) 50 SOT 68 HAS DECIDED SOMEWHAT SIMILAR ISSUE AGAINST THE ASSESSEE. HOWEVER, HE DI STINGUISHED THE SAID DECISION AND HIGHLIGHTED THE POINTS AS TO WHY SAID DECISION CANN OT BE FOLLOWED. 6. ON THE OTHER HAND, THE LEARNED DR STRONGLY RELIE D UPON THE ORDER OF THE AO AND CIT(A) AND SUBMITTED THAT, FIRSTLY, IF THE INCO ME FROM THE LONG TERM CAPITAL GAIN ON SALE OF SHARES IS EXEMPT, THEN THE LOSS FROM SUC H SALE OF SHARES WILL ALSO NOT FORM PART OF THE TOTAL INCOME AND THEREFORE, THERE IS NO QUESTION OF SET OFF AGAINST OTHER INCOME OR LONG TERM CAPITAL GAIN ON DIFFERENT CAPIT AL ASSET. SECONDLY, THE DECISIONS OF HONBLE GUJARAT HIGH COURT AND ITAT MUMBAI TRIBU NAL SHOULD BE FOLLOWED. HE FURTHER SUBMITTED THAT IT IS QUITE A SETTLED LAW TH AT INCOME INCLUDES LOSS ALSO AND, THEREFORE, IF THE INCOME FROM SALE OF SHARES DOES N OT FORM PART OF THE TOTAL INCOME, THEN THE LOSSES FROM SUCH SHARES ALSO WILL NOT FORM PART OF THE TOTAL INCOME. THUS, THE ORDER OF THE CIT(A) SHOULD BE CONFIRMED. 7. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS. THE MAIN ISSUE BEFORE US IS, WHETHER LONG TERM CAPITAL LOSS ON SALE OF EQUITY SHARES CAN BE SET OFF AGAINST LON G TERM CAPITAL GAIN ARISING ON SALE OF LAND OR NOT, AS THE INCOME FROM LONG TERM CAPITA L GAIN ON SALE OF SUCH SHARES ARE EXEMPT U/S. 10(38). THE NATURE OF INCOME HERE IN T HIS CASE IS FROM SALE OF LONG TERM CAPITAL ASSET, WHICH ARE EQUITY SHARES IN A CO MPANY AND UNIT OF AN EQUITY ORIENTED FUND WHICH IS CHARGEABLE TO STT. FIRST OF ALL, LONG TERM CAPITAL GAIN HAS BEEN DEFINED UNDER SECTION 2(39A), AS CAPITAL GAINS ARISING FROM TRANSFER OF A LONG 6 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 TERM CAPITAL ASSET. SECTION 2(14) DEFINES CAPITAL ASSET AND VARIOUS EXCEPTIONS AND EXCLUSIONS HAVE BEEN PROVIDED WHICH ARE NOT TREATED AS CAPITAL ASSET. SECTION 45 IS THE CHARGING SECTION FOR ANY PROFITS OR GAIN ARISIN G FROM A TRANSFER OF A CAPITAL ASSET IN THE PREVIOUS YEAR I.E. TAXABILITY OF CAPITAL GAI NS. SECTION 47 ENLISTS VARIOUS EXCEPTIONS AND TRANSACTIONS WHICH ARE NOT TREATED A S TRANSFER FOR THE PURPOSE OF CAPITAL GAIN U/S. 45. THE MODE OF COMPUTATION TO A RRIVE AT CAPITAL GAIN OR LOSS HAS BEEN ENUMERATED FROM SECTIONS 48 TO 55. FURTHER SU B SECTION (3) OF SECTION 70 AND SECTION 71 PROVIDES FOR SET OFF OF LOSS IN RESPECT OF CAPITAL GAIN. 8. FROM THE CONJOINT READING AND PLAIN UNDERSTANDIN G OF ALL THESE SECTIONS IT CAN BE SEEN THAT, FIRSTLY, SHARES IN THE COMPANY ARE TR EATED AS CAPITAL ASSET AND NO EXCEPTION HAS BEEN CARVED OUT IN SECTION 2(14), FOR EXCLUDING THE EQUITY SHARES AND UNIT OF EQUITY ORIENTED FUNDS THAT THEY ARE NOT TRE ATED AS CAPITAL ASSET. SECONDLY, ANY GAINS ARISING FROM TRANSFER OF LONG TERM CAPITAL AS SET IS TREATED AS CAPITAL GAIN WHICH IS CHARGEABLE U/S. 45; THIRDLY, SECTION 47 DOES NOT ENLIST ANY SUCH EXCEPTION THAT TRANSFER OF LONG TERM EQUITY SHARES/FUNDS ARE NOT T REATED AS TRANSFER FOR THE PURPOSE OF SECTION 45 AND SECTION 48 PROVIDES FOR COMPUTATI ON OF CAPITAL GAIN, WHICH IS ARRIVED AT AFTER DEDUCTING COST OF ACQUISITION I.E. COST OF ANY IMPROVEMENT AND EXPENDITURE INCURRED IN CONNECTION WITH TRANSFER OF CAPITAL ASSET, EVEN FOR ARRIVING OF GAIN IN TRANSFER OF EQUITY SHARES; LASTLY, SECTION 70 & 71 ELABORATES THE MECHANISM FOR SET OFF OF CAPITAL GAIN. NOWHERE, ANY EXCEPTIO N HAS BEEN MADE/ CARVED OUT WITH REGARD TO LONG TERM CAPITAL GAIN ARISING ON SALE OF EQUITY SHARES. THE WHOLE GENRE OF INCOME UNDER THE HEAD CAPITAL GAIN ON TRANSFER O F SHARES IS A SOURCE, WHICH IS TAXABLE UNDER THE ACT. IF THE ENTIRE SOURCE IS EXE MPT OR IS CONSIDERED AS NOT TO BE 7 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 INCLUDED WHILE COMPUTING THE TOTAL INCOME THEN IN S UCH A CASE, THE PROFIT OR LOSS RESULTING FROM SUCH A SOURCE DO NOT ENTER INTO THE COMPUTATION AT ALL. HOWEVER, IF A PART OF THE SOURCE IS EXEMPT BY VIRTUE OF PARTICULA R PROVISION OF THE ACT FOR PROVIDING BENEFIT TO THE ASSESSEE, THEN IN OUR CONS IDERED VIEW IT CANNOT BE HELD THAT THE ENTIRE SOURCE WILL NOT ENTER INTO COMPUTATION O F TOTAL INCOME. IN OUR VIEW, THE CONCEPT OF INCOME INCLUDING LOSS WILL APPLY ONLY WH EN THE ENTIRE SOURCE IS EXEMPT AND NOT IN THE CASES WHERE ONLY ONE PARTICULAR STRE AM OF INCOME FALLING WITHIN A SOURCE IS FALLING WITHIN EXEMPT PROVISIONS. SECTIO N 10(38) PROVIDES EXEMPTION OF INCOME ONLY FROM TRANSFER OF LONG TERM EQUITY SHARE S AND EQUITY ORIENTED FUND AND NOT ONLY THAT, THERE ARE CERTAIN CONDITIONS STIPULA TED FOR EXEMPTING SUCH INCOME I.E. PAYMENT OF SECURITY TRANSACTION TAX AND WHETHER THE TRANSACTION ON SALE OF SUCH EQUITY SHARE OR UNIT IS ENTERED INTO ON OR AFTER TH E DATE ON WHICH CHAPTER VII OF FINANCE (NO.2) ACT 2004 COMES INTO FORCE. IF SUCH CONDITIONS ARE NOT FULFILLED THEN EXEMPTION IS NOT GIVEN. THUS, THE INCOME CONTEMPLA TED IN SECTION 10(38) IS ONLY A PART OF THE SOURCE OF CAPITAL GAIN ON SHARES AND ON LY A LIMITED PORTION OF SOURCE IS TREATED AS EXEMPT AND NOT THE ENTIRE CAPITAL GAIN ( ON SALE OF SHARES). IF AN EQUITY SHARE IS SOLD WITHIN THE PERIOD OF TWELVE MONTHS TH EN IT IS CHARGEABLE TO TAX AND ONLY IF IT FALLS WITHIN THE DEFINITION OF LONG TERM CAPI TAL ASSET AND, FURTHER FULFILS THE CONDITIONS MENTIONED IN SUBSECTION (38) OF SECTION 10 THEN ONLY SUCH PORTION OF INCOME IS TREATED AS EXEMPT. THERE ARE FURTHER INS TANCES LIKE DEBT ORIENTED SECURITIES AND EQUITY SHARES WHERE STT IS NOT PAID, THEN GAIN OR PROFIT FROM SUCH SHARES ARE TAXABLE. SECTION 10 PROVIDES THAT CERTAI N INCOME ARE NOT TO BE INCLUDED WHILE COMPUTING THE TOTAL INCOME OF THE ASSESSEE AN D IN SUCH A CASE THE PROFIT OR LOSS RESULTING FROM SUCH A SOURCE OF INCOME DO NOT ENTER INTO COMPUTATION AT ALL. 8 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 HOWEVER, A DISTINCTION HAS BEEN DRAWN WHERE THE ENT IRE SOURCE OF INCOME IS EXEMPT OR ONLY A PART OF SOURCE IS EXEMPT. HERE IT NEEDS TO BE SEEN WHETHER SECTION 10(38) IS SOURCE OF INCOME WHICH DOES NOT ENTER INTO COMPU TATION AT ALL OR IS A PART OF THE SOURCE, THE INCOME IN RESPECT OF WHICH IS EXCLUDED IN THE COMPUTATION OF TOTAL INCOME. FOR INSTANCE, IF THE ASSESSEE HAS INCOME F ROM SHORT TERM CAPITAL GAIN ON SALE OF SHARES; LONG TERM CAPITAL GAIN ON DEBT FUND S; AND LONG TERM CAPITAL GAIN FROM SALE OF EQUITY SHARES, THEN WHILE COMPUTING TH E TAXABLE INCOME, THE WHOLE OF INCOME WOULD BE COMPUTED IN THE TOTAL INCOME AND ON LY THE PORTION OF LONG TERM CAPITAL GAIN ON SALE OF EQUITY SHARES WOULD BE REMO VED FROM THE TAXABLE INCOME AS THE SAME IS EXEMPT U/S 10(38). THIS PRECISE ISSUE HAD COME UP FOR CONSIDERATION BEFORE THE HONBLE CALCUTTA HIGH COURT IN ROYAL TUR F CLUB, WHEREIN THE HONBLE HIGH COURT OBSERVED THAT UNDER THE INCOME TAX ACT 1961 THERE ARE CERTAIN INC OMES WHICH DO NOT ENTER INTO THE COMPUTATION OF THE TOTA L INCOME AT ALL. IN COMPUTING THE TOTAL INCOME OF A RESIDENT ASSESSEE, CERTAIN INCOME S ARE NOT INCLUDED UNDER S.10 OF THE ACT. IT DEPENDS ON THE PARTICULAR CASE; WHERE THE ACT IS MADE INAPPLICABLE TO INCOME FROM A CERTAIN SOURCE UNDER THE SCHEME OF TH E ACT, THE PROFIT AND LOSS RESULTING FROM SUCH A SOURCE WILL NOT ENTER INTO TH E COMPUTATION AT ALL. BUT THERE ARE OTHER SOURCES WHICH, FOR CERTAIN ECONOMIC REASONS, ARE NOT INCLUDED OR EXCLUDED BY THE WILL OF THE LEGISLATURE. IN SUCH A CASE, ONE M UST LOOK TO THE SPECIFIC EXCLUSION THAT HAS BEEN MADE. THE HONBLE HIGH COURT WAS BESIEGED WITH THE FOLLOW ING QUESTION WHETHER UNDER S.10(27) READ WITH S.70 OF THE I.T.A CT, 1961, WAS THE ASSESSEE ENTITLED TO SET OFF THE LOSS ON THE TWO HEADS, NAME LY, BROODMARES ACCOUNT AND 9 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 THE PIG ACCOUNT, AGAINST ITS INCOME OF OTHER SOURCE S UNDER THE HEAD BUSINESS THEIR LORDSHIPS AFTER ANALYSING THE PROVISIONS OF S ECTION 70 AND SECTION 10(27) OBSERVED IN THE FOLLOWING MANNER: IN THIS CASE IT IS IMPORTANT TO BEAR IN MIND THAT SET-OFF IS BEING CLAIMED UNDER SECTION 70 OF THE 1961 ACT WHICH PERMITS SET OFF OF ANY INCOME FALLING UNDER ANY HEAD OF INCOME OTHER THAN THE CAPITAL GAIN WHIC H IS A LOSS, THE ASSESSEE SHALL BE ENTITLED TO HAVE THE AMOUNT OF SUCH LOSS S ET OFF AGAINST HIS INCOME FROM ANY OTHER SOURCE UNDER THE SAME HEAD. WE HAVE NOTICED THAT IN THE INSTANT CASE THE EXCLUSION HAS BEEN CONCEDED IN COM PUTING THE BUSINESS INCOME OR THE SOURCE OF INCOME FROM THE HEAD OF BUS INESS AND IN COMPUTING THAT BUSINESS INCOME, THE LOSS FROM ONE PARTICULAR SOURCE, THAT IS, BROODMARES ACCOUNT AND THE PIG ACCOUNT, HAD BEEN EXCLUDED CONT RARY TO THE SUBMISSION OF THE ASSESSEE. THE ASSESSEE WANTED THESE LOSSES TO B E SET OFF. THE REVENUE CONTENDS THAT AS THE SOURCES OF THE INCOME ARE NOT TO BE INCLUDED IN VIEW OF THE PROVISIONS OF CLAUSE (27) OF S. 10 OF THE 1961 ACT, THE LOSS SUFFERED FROM THIS SOURCE COULD ALSO NOT MERIT THE EXCLUSION. UND ER THE I.T. ACT, THERE ARE CERTAIN INCOMES WHICH DO NOT ENTER INTO THE COMPUTA TION OF THE TOTAL INCOME AT ALL. IN THIS CONNECTION WE HAVE TO BEAR IN MIND THE SCHEME OF THE CHARGING SECTION WHICH PROVIDES THAT THE INCOMES SHALL BE CH ARGED AND S. 4 OF THE ACT PROVIDES THAT THE CENTRAL ACT ENACTS THAT THE INCOM ES SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AND IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THE 1961 ACT IN RESPECT OF THE TOTAL INCOME OF THE PREV IOUS YEAR OR YEARS OR WHATEVER THE CASE MAY BE. THE SCHEME OF ' TOTAL INC OME ' HAS BEEN EXPLAINED BY S. 5 OF THE ACT WHICH PROVIDES THAT SUBJECT TO T HE PROVISIONS OF THE ACT, THE TOTAL INCOME OF THE PREVIOUS YEAR OF A PERSON WHO I S A RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE IT IS DERIVED. IN COMPU TING THE TOTAL INCOME, CERTAIN INCOMES ARE NOT INCLUDED UNDER S. 10 OF THE ACT. IT DEPENDS ON THE PARTICULAR CASE WHERE CERTAIN INCOME, IN RESPECT OF WHICH THE ACT IS MADE INAPPLICABLE TO THE SCHEME OF THE ACT, AND IN SUCH A CASE, THE PROFIT AND LOSS RESULTING FROM SUCH A SOURCE DO NOT ENTER INTO THE COMPUTATION AT ALL. BUT THERE ARE OTHER SOURCES WHICH FOR CERTAIN ECONOMIC REASON S ARE NOT INCLUDED OR EXCLUDED BY THE WILL OF THE LEGISLATURE. IN SUCH A CASE WE MUST LOOK TO THE SPECIFIC EXCLUSION THAT HAS BEEN MADE. THE QUESTION IS IN THIS CASE WHETHER S. 10(27) IS A SOURCE WHICH DOES NOT ENTER INTO THE CO MPUTATION AT ALL OR IS A SOURCE THE INCOME IN RESPECT OF WHICH IS EXCLUDED I N THE COMPUTATION OF TOTAL INCOME. HOW THIS QUESTION WILL HAVE TO BE VIEWED, H AS BEEN LOOKED INTO BY THE SUPREME COURT IN SEVERAL DECISIONS TO SOME OF WHICH OUR ATTENTION WAS DRAWN. 10 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 AFTER DISCUSSING THE VARIOUS DECISIONS OF THE HONB LE SUPREME COURT SPECIFICALLY THE DECISION OF IN THE CASE OF KARAMCHAND PREMCHAND (SU PRA), THE HONBLE HIGH COURT CAME TO THE FOLLOWING CONCLUSION: CL.(27) OF S.10 EXCLUDES IN EXPRESS TERMS ONLY AN Y INCOME DERIVED FROM A BUSINESS OF LIVE-STOCK BREEDING OR POULTRY OR DAIRY FARMING. IT DOES NOT EXCLUDE THE BUSINESS OF LIVESTOCK BREEDING OR POULTRY OR DA IRY FARMING FROM THE OPERATION OF THE ACT. THEREFORE, THE LOSSES SUFFER ED BY THE ASSESSEE IN THE BROODMARES ACCOUNT AND IN THE PIG ACCOUNT WERE ADMI SSIBLE DEDUCTIONS IN COMPUTING ITS TOTAL INCOME THUS, THE RATIO LAID DOWN BY THE HONBLE CALCUTTA H IGH COURT IS CLEARLY APPLICABLE AND ACCORDINGLY WE FOLLOW THE SAME IN THE PRESENT CASE. 9. NOW COMING TO THE ARGUMENT OF THE LEARNED DR AND LEARNED CIT(A) THAT INCOME INCLUDES LOSS AND IF INCOME IS EXEMPT THEN L OSS WILL ALSO NOT BE TAKEN INTO COMPUTATION OF THE INCOME, AND SUCH AN ARGUMENT IS WITH REFERENCE TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. HAR IPRASAD & COMPANY PVT. LTD. (1975) 99 ITR 118 . THE HONBLE SUPREME COURT, OPI NED THAT, IF LOSS WAS FROM THE SOURCE OR HEAD OF INCOME NOT LIABLE TO TAX OR CONGE NITALLY EXEMPT FROM INCOME TAX, NEITHER THE ASSESSEE WAS REQUIRED TO SHOW THE SAME IN THE RETURN NOR WAS THE ASSESSING OFFICER UNDER ANY OBLIGATION TO COMPUTE O R ASSESS IT MUCH LESS FOR THE PURPOSE OF CARRY FORWARD. FURTHER, THE HONBLE SUP REME COURT OBSERVED THAT 'FROM THE CHARGING PROVISIONS OF THE ACT, IT IS DISCERNIB LE THAT THE WORDS ' INCOME ' OR ' PROFITS AND GAINS' SHOULD BE UNDERSTOOD AS INCLUDIN G LOSSES ALSO, SO THAT, IN ONE SENSE 'PROFITS AND GAINS' REPRESENT ' PLUS INCOME ' WHEREAS LOSSES REPRESENT 'MINUS INCOME'. IN OTHER WORDS, LOSS IS NEGATIVE PROFIT. B OTH POSITIVE AND NEGATIVE PROFITS ARE OF A REVENUE CHARACTER. BOTH MUST ENTER INTO CO MPUTATION, WHEREVER IT BECOMES MATERIAL, IN THE SAME MODE OF THE TAXABLE INCOME OF THE ASSESSEE. ALTHOUGH SECTION 11 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 6 CLASSIFIES INCOME UNDER SIX HEADS, THE MAIN CHARG ING PROVISION IS SECTION 3 WHICH LEVIES INCOME-TAX, AS ONLY ONE TAX, ON THE 'TOTAL I NCOME ' OF THE ASSESSEE AS DEFINED IN SECTION 2(15). AN INCOME IN ORDER TO COME WITHIN THE PURVIEW OF THAT DEFINITION MUST SATISFY TWO CONDITIONS. FIRSTLY, IT MUST COMPR ISE THE ' TOTAL AMOUNT OF INCOME, PROFITS AND GAINS REFERRED TO IN SECTION 4(1)'. SEC ONDLY, IT MUST BE 'COMPUTED IN THE MANNER LAID DOWN IN THE ACT'. IF EITHER OF THESE CO NDITIONS FAILS, THE INCOME WILL NOT BE A PART OF THE TOTAL INCOME THAT CAN BE BROUGHT T O CHARGE.' WHILE CONCLUDING THE ISSUE THEIR LORDSHIPS OBSERVED THAT IT MAY BE REMEMBERED THAT THE CONCEPT OF CARRY FORWARD OF LOSS DOES NOT STAND IN VACUO. IT INVOLVES THE NOTION OF SET- OFF. ITS SOLE PURPOSE IS TO SET OFF THE LOSS AGAINST THE PROFITS OF A SUBSEQUENT YEAR. IT PRE-SUPPOSES THE PERMISSIBILIT Y AND POSSIBILITY OF THE CARRIED- FORWARD LOSS BEING ABSORBED OR SET OFF AGAINST THE PROFITS AND GAINS, IF ANY, OF THE SUBSEQUENT YEAR. SET OFF IMPLIES THAT THE TAX IS E XIGIBLE AND THE ASSESSEE WANTS TO ADJUST THE LOSS AGAINST PROFIT TO REDUCE THE TAX DE MAND. IT FOLLOWS THAT IF SUCH SET- OFF IS NOT PERMISSIBLE OR POSSIBLE OWING TO THE INC OME OR PROFITS OF THE SUBSEQUENT YEAR BEING FROM A NON-TAXABLE SOURCE, THERE WOULD B E NO POINT IN ALLOWING THE LOSS TO BE CARRIED FORWARD. CONVERSELY, IF THE LOSS A RISING IN THE PREVIOUS YEAR WAS UNDER A HEAD NOT CHARGEABLE TO TAX, IT COULD NOT BE ALLOWED TO BE CARRIED FORWARD AND ABSORBED AGAINST INCOME IN A SUBSEQUENT YEAR FR OM A TAXABLE SOURCE. THE RATIO AND THE PRINCIPLE LAID DOWN BY THE HONBLE AP EX COURT WOULD NOT APPLY HERE IN THIS CASE, BECAUSE THE CONCEPT OF INCOME INCLUDES L OSS WILL APPLY ONLY WHEN ENTIRE SOURCE IS EXEMPT OR IS NOT LIABLE TO TAX AND NOT IN THE CASE WHERE ONLY ONE OF THE INCOME FALLING WITHIN SUCH SOURCE IS TREATED AS EXE MPT. THE HONBLE APEX COURT ON 12 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 THE OTHER HAND, ITSELF HAS STATED THAT IF LOSS FROM THE SOURCE OR HEAD OF INCOME IS NOT LIABLE FOR TAX OR CONGENITALLY EXEMPT FROM INCOME T AX, THEN IT NEED NOT BE COMPUTED OR SHOWN IN THE RETURN AND ASSESSING OFFICER ALSO N EED NOT ASSESS IT. THIS DISTINCTION HAS TO BE KEPT IN MIND. HONBLE CALCUTTA HIGH COUR T IN ROYAL TURF CLUB HAVE DISCUSSED THE AFORESAID DECISION OF THE HONBLE SUP REME COURT AND HELD THAT THE SAME WILL NOT APPLY IN SUCH CASES. THUS, IN OUR CO NCLUSION, WE HOLD THAT SECTION 10(38) EXCLUDES IN EXPRESSED TERMS ONLY THE INCOME ARISING FROM TRANSFER OF LONG TERM CAPITAL ASSET BEING EQUITY SHARE OR EQUITY FUN D WHICH IS CHARGEABLE TO STT AND NOT ENTIRE SOURCE OF INCOME FROM CAPITAL GAINS ARIS ING FROM TRANSFER OF SHARES. IT DOES NOT LEAD TO EXCLUSION OF COMPUTATION OF CAPITA L GAIN OF LONG TERM CAPITAL ASSET OR SHORT TERM CAPITAL ASSET BEING SHARES. ACCORDIN GLY, LONG TERM CAPITAL LOSS ON SALE OF SHARES WOULD BE ALLOWED TO BE SET OFF AGAINST LO NG TERM CAPITAL GAIN ON SALE OF LAND IN ACCORDANCE WITH SECTION 70(3) 10. COMING TO THE DECISION OF THE ITAT MUMBAI BENCH IN THE CASE OF SCHRADER DUNCAN LTD.(SUPRA), THE ISSUE INVOLVED THERE WAS, W HETHER THE LOSS ON TRANSFER OF CAPITAL ASSET BEING UNITS US 64 SCHEME OF UNIT TRUS T OF INDIA CAN BE ALLOWED AND ENTITLED TO CARRY FORWARD THE SAME FOR SET OFF OF I N SUBSEQUENT ASSESSMENT YEARS, WHEN THE INCOME ARISING FROM SUCH TRANSFER OF UNIT IS EXEMPT U/S. 10(33). THE TRIBUNAL HELD THAT THE SOURCE BOTH CAPITAL GAIN AND CAPITAL LOSS ON SALE OF UNITS OF US64 IS ITSELF EXCLUDED AND NOT ONLY THE INCOME ARI SING OUT OF CAPITAL GAIN. THE HONBLE TRIBUNAL HAVE NOTED THE HISTORY OF US64 SCH EME AND THE PURPOSE FOR WHICH SUCH SCHEME WAS LAUNCHED. IN THIS CONTEXT OF TRANS FER OF US64 SCHEME THE TRIBUNAL HELD THAT THE PROVISIONS WERE NOT MEANT TO ENABLE T HE ASSESSEE TO CLAIM LOSS BY 13 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 INDEXATION FOR SET OFF AGAINST OTHER CAPITAL GAIN C HARGEABLE TO TAX. THIS DECISION IS SLIGHTLY DISTINGUISHABLE AND SECONDLY, WE HAVE ALRE ADY DISCUSSED THE ISSUE AT LENGTH AND HAVE HELD THAT THE RATIO OF HONBLE CALCUTTA IS APPLICABLE IN THE PRESENT CASE. LASTLY, COMING TO THE DECISION OF HONBLE GUJARAT H IGH COURT IN THE CASE OF KISHOREBHAI BHIKHABHAI VIRANI (SUPRA), WE FIND THAT THE ISSUE INVOLVED IN THE PRESENT CASE WAS ALMOST THE SAME, WHEREIN THE HONBLE HIGH COURT AFTER FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF HA RPRASAD & COMPANY PVT. LTD. (SUPRA), HAD DECIDED THE ISSUE AGAINST THE ASSESSEE . SINCE WE HAVE ALREADY NOTED DOWN THE RATIO OF HONBLE CALCUTTA HIGH COURT, WHER EIN THE HONBLE HIGH COURT HAS DISCUSSED THIS ISSUE IN DETAIL AFTER RELYING UPON S ERIES OF DECISIONS OF HONBLE SUPREME COURT AND HAVE REACHED TO A CONCLUSION AS D ISCUSSED ABOVE, AND, THEREFORE, WE ARE RESPECTFULLY FOLLOWING THE RATIO OF THE DECISION OF THE CALCUTTA HIGH COURT. FURTHER THE SAID DECISION HAVE NOT BEEN REF ERRED OR DISTINGUISHED BY THE HONBLE GUJARAT HIGH COURT. ACCORDINGLY, WE ALLOW THE ASSESSEES GROUND NO.1 AND DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF SET OFF OF LONG TERM CAPITAL LOSS ON SALE OF SHARES AGAINST THE LONG TERM CAPITAL GAIN A RISING ON SALE OF LAND. 11. THE NEXT GROUND RELATES TO DISALLOWANCE OF EXPE NSES OF RS.39,80,215/- U/S. 14A WHICH HAS BEEN MADE AFTER APPLYING RULE 8D. DU RING THE YEAR THE ASSESSEE HAD SHOWN DIVIDEND INCOME OF RS.5,15,28,242/- WHICH WAS CLAIMED AS EXEMPT U/S. 10(34). IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE SUBMITTED THAT INVESTMENTS HAVE BEEN MADE OUT OF ITS OWN CAPITAL A ND INTERNAL ACCRUALS AND, THEREFORE, NO DISALLOWANCE U/S. 14A IS CALLED FOR. HOWEVER, THE LEARNED ASSESSING OFFICER WITHOUT EXAMINING THE ASSESSEES CLAIM AND THE ACCOUNTS OF THE ASSESSEE, 14 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 PROCEEDED TO APPLY RULE 8D THEREBY MAKING THE DISAL LOWANCE OF RS.39,80,215/- EVEN THOUGH SUCH RULE HAS BEEN MADE APPLICABLE W.E.F. 01 .04.2008. THE CIT(A) TOO HAS CONFIRMED THE SAID ADDITION AFTER FOLLOWING THE DEC ISION OF THE MUMBAI SPECIAL BENCH IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT (P.) LTD. (2008) 119 TTJ 289. 12. BEFORE US, THE LEARNED SENIOR COUNSEL, SHRI SOL I DASTUR, SUBMITTED THAT THE DISALLOWANCE HAVE BEEN MADE AFTER APPLYING RULE 8D, WHICH ADMITTEDLY IS NOT APPLICABLE IN THE IMPUGNED ASSESSMENT YEAR I.E. A.Y . 2007-08. HE SUBMITTED THAT SECTION 14(2) WAS BROUGHT IN THE STATUTE BY FINANCE ACT 2006, W.E.F. 01.04.2007. THE SAID SUBSECTION PROVIDED MECHANISM FOR DETERMIN ATION /QUANTIFICATION OF AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOM E. SUCH QUANTIFICATION/DETERMINATION WAS TO BE DONE AS PER THE METHOD 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 RES PECT OF SUCH EXPENDITURE. HE SUBMITTED THAT THOUGH SUBSECTION (2) WAS BROUGHT IN THE ASSESSMENT YEAR 2007-08, HOWEVER, THE METHOD SPECIFIED FOR QUANTIFICATION OF EXPENDITURE WAS PRESCRIBED U/S. 8D, WHICH WAS BROUGHT IN THE RULES W.E.F. 24.03.200 8. THUS, EVEN IF THE CONDITIONS OF SUB SECTION (2) STANDS FULFILLED, THEN ALSO THER E CANNOT BE ANY DETERMINATION OF EXPENDITURE AS THE FORMULA GIVEN IN RULE 8D AS THE SAME WAS NOT EXISTING IN THE STATUTE. HE SUBMITTED THAT UPTO THE ASSESSMENT YEA R 2006-07, THERE COULD BE SOME REASONABLE BASIS FOR DISALLOWANCE. HOWEVER, IN THE ASSESSMENT YEAR 2007-08 THE STATUTE PROVIDED FOR QUANTIFICATION/DETERMINATION O F THE DISALLOWANCE AS PER THE METHOD PRESCRIBED BUT THE SAID METHOD WAS NOT THERE IN THE STATUTE OR RULES. THEREFORE, NO DISALLOWANCE CAN BE MADE BECAUSE THER E CAN BE NO DETERMINATION OF 15 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 EXPENDITURE. HE REFERRED TO THE DECISION OF HONBL E SUPREME COURT IN THE CASE OF CHANDRA KISHORE JHA VS. MAHAVIR PRASAD AND OTHERS ( 1999) 8 SCC 266, WHEREIN HAS BEEN LAID DOWN THAT IF A STATUTE PROVIDES FOR A THI NG TO BE DONE IN A PARTICULAR MANNER, THEN IT HAS TO BE DONE IN THAT MANNER AND I N OTHER MANNER. THIS PROPOSITION HAS BEEN EARLIER LAID DOWN BY HONBLE A PEX COURT IN THE CASE OF STATE OF UTTAR PRADESH VS. SINGHARA SINGH AIR 1964 SC 358. ACCORDINGLY, HE SUBMITTED THAT NO DISALLOWANCE SHOULD BE MADE. 13. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THA T THERE IS NO ALLOCATION OF EXPENDITURE BY THE ASSESSEE AND, THEREFORE, SOME DI SALLOWANCE IS CALLED FOR EVEN THOUGH RULE 8D IS NOT APPLICABLE IN THIS YEAR. OTH ERWISE ALSO HE SUBMITTED THAT ONCE THE STATUTE IS PROVIDED THE DETERMINATION OF AMOUNT OF EXPENDITURE IN TERMS OF SUBSECTION (2), THEN EVEN IF RULE 8D HAS BEEN BROUG HT W.E.F. 24.03.2008, THEN IT HAS TO BE IMPLIED THAT SAME RULE IS APPLICABLE IN THIS YEAR ALSO AND, ACCORDINGLY, DISALLOWANCE CAN BE DETERMINED IN ACCORDANCE WITH R ULE 8D. 14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PE RUSED THE MATERIAL PLACED ON RECORD. ON PERUSAL OF THE IMPUGNED ORDERS, WE FIND THAT THE ASSESSEE HAD MADE THE CLAIM BEFORE THE ASSESSING OFFICER THAT NO EXPENDIT URE CAN BE SAID TO BE ATTRIBUTABLE IN RELATION TO THE EARNING OF DIVIDEND INCOME. ONC E SUCH A CLAIM HAS BEEN MADE, THE ASSESSING OFFICER WAS REQUIRED UNDER THE STATUT E TO SATISFY HIMSELF HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE ABOUT THE CORRECTNE SS OF THE CLAIM OF THE ASSESSEE. THIS HAS BEEN SPECIFICALLY PROVIDED UNDER SUB SECTI ON (2) WHICH PROVIDES FOR DETERMINATION AND QUANTIFICATION OF THE AMOUNT OF D ISALLOWANCE OF EXPENDITURE UNDER 14A. IF SUCH A CONDITION MENTIONED IN SUBSECTION ( 2) OF SECTION 14A IS NOT FULFILLED 16 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 THEN, NEEDLESS TO SAY, THAT THE ASSESSING OFFICER C ANNOT PROCEED TO DISALLOW THE EXPENDITURE. THERE HAS TO BE SOME FINDING OF THE A SSESSING OFFICER THAT THE ASSESSEES CLAIM IS PRIMA FACIE NOT TENABLE. THE A SSESSEE HAS POINTED OUT THAT ENTIRE INVESTMENTS HAVE BEEN MADE OUT OF ITS OWN CAPITAL A ND INTERNAL ACCRUALS, THEREFORE, NO EXPENSES CAN BE SAID TO BE ATTRIBUTABLE. THIS C LAIM OF THE ASSESSEE REQUIRED EXAMINATION BY THE AO HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE AND THE NATURE OF EXPENDITURE WHICH CAN BE SAID TO BE ATTRIBUTABLE FOR EARNING OF THE EXEMPT INCOME. IF SUCH AN EXAMINATION HAS NOT BEEN DONE AND NO SATISFACTION HAS BEEN ARRIVED, THEN THE LEARNED ASSESSING OFFICER CANNOT REJECT THE ASSESSEES CLAIM AND PROCEED TO DISALLOW U/S. 14A(2). IN THE INSTANT CA SE, ADMITTEDLY, THE ASSESSING OFFICER HAS NOT CONDUCTED SUCH AN EXAMINATION AND T HE ASSESSMENT ORDER IS ALSO SILENT ABOUT HIS SATISFACTION ON THE CLAIM OF THE A SSESSEE. THEREFORE, WE ARE OF THE OPINION THAT THE MATTER SHOULD BE RESTORED BACK TO THE FILE OF THE AO TO EXAMINE THE CONDITIONS AS LAID DOWN IN SECTION 14A(2) AND, THER EAFTER, DECIDE THE ISSUE IN ACCORDANCE WITH THE PROVISIONS OF LAW WITHOUT RESO RTING TO RULE 8D, WHICH ADMITTEDLY IS NOT APPLICABLE IN THE IMPUGNED ASSESS MENT YEAR. THE AO WHILE DECIDING THIS ISSUE MAY CONSIDER THE DECISION OF HO NBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (328 ITR 81). NEEDLESS TO SAY THAT THE AO WILL GIVE REASONABLE OPPORTUNITY OF HEARING TO THE ASSES SEE AND THE ASSESSEE IS FREE TO RAISE ALL THE CONTENTIONS BEFORE THE AO, WHICH HAS BEEN RAISED BEFORE US. ACCORDINGLY, GROUND NO.2 IS TREATED AS PARTLY ALLOW ED FOR STATISTICAL PURPOSES. 15. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. 17 ITA NOS. 3317/MUM/2009 & 1692/MUM/2010 16. NOW WE COME TO APPEAL IN ITA NO. 1692/MUM/2010. THIS APPEAL IS IN RELATION TO THE PENALTY PROCEEDINGS U/S. 271(1)(C) WHEREIN PENALTY HAS BEEN LEVIED ON ACCOUNT OF DISALLOWANCE FOR ASSESSEES CLAIM FOR SET OFF OF LOSS AS DISCUSSED IN GROUND NO.1 AND DISALLOWANCE MADE U/S. 14A IN THE Q UANTUM APPEAL. SINCE, WE HAVE ALREADY ALLOWED THE ASSESSEES APPEAL ON FIRST ISSUE AND ON SECOND ISSUE ALSO MATTER HAS BEEN SET ASIDE, THEREFORE, THE PENALTY O N SUCH DISALLOWANCES HAVE NO LEGS TO STAND. ACCORDINGLY, THE PENALTY LEVIED IS DELETED AND THE APPEAL IS ALLOWED. 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN IT A NO. 3317/MUM/2009 IS PARTLY ALLOWED AND THAT IN ITA NO. 1692/MUM/2010 IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF JUNE 2015. SD/- SD/- (B R BASKARAN) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI; DATED : 10 TH JUNE, 2015. SA COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE C I T(A), MUMBAI. 4. THE C I T 5. THE DR, D BENCH, ITAT, MUMBAI BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) INCOME TAX APPELLATE TRIBUNAL, MUMBAI