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

ITA 36/CHANDI/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64120 (ITAT-CHANDIGARH)
• Duration Of Justice: 11 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-12-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 20-12-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 12-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SUNIL KUMAR MUKHI
• Keywords: Business income; Earning of tax free income; Proportionate interest; Retrospective amendment; Additional evidence; Question of law
• Section: 14A; 37; 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH B, CHANDIGARH BEFORE SHRI T.R. SOOD, A.M AND MS. SUSHMA CHOWLA, J M ITA NO. 1241/CHD/2011 ASSESSMENT YEAR : 2008-09 M/S CHADHA SUPER CARS V A.C.I.T. C-V, LUDHIANA P. LTD G.T. ROAD JUGIANA LUDHIANA AABCC 6944 R ITA NO. 36/CHD/2012 ASSESSMENT YEAR : 2008-09 A.C.I.T. C-V V M/S CHADHA SUPER CARS LUDHIANA P. LTD G.T. ROAD JUGIANA LUDHIANA (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI SUNIL KUMAR MUKHI DEPARTMENT BY: SHRI AKHILESH GUPTA. DATE OF HEARING 20.12.2012 DATE OF PRONOUNCEMENT 28.12.2012 O R D E R PER T.R.SOOD, A.M THESE APPEALS ARE DIRECTED AGAINST THE ORDERS PASSE D BY THE LD. CIT(A)-II, LUDHIANA DATED 1.11.2011. THES E ARE CROSS- APPEALS RAISING COMMON ISSUES, THEREFORE, BOTH THE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY T HIS COMMON ORDER. 2. ITA NO. 1241/CHD/2011 IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS:- 1 THAT THE LD. CIT(A)-II, LUDHIANA HAS ERRED IN UPHOLDING THE ADDITION OF RS. 2,40,000/- U/S 36(1)( III) OF INCOME-TAX ACT, 1961 ON ACCOUNT OF ADVANCE OF RS. 20 2 LAKHS TO M/S DEVBHUMI SPINNING AND WEAVING MILLS WA S NOT FOR BUSINESS PURPOSES WITHOUT GIVING ANY COGENT REASONS IN HIS ORDER. THEREFORE, THE ADDITION OF R S. 2,40,000/- IS UNCALLED FOR UNWARRANTED AND MAY BE DELETED. 2. THAT THE LD. CIT(A)-II, LUDHIANA IN UPHOLDING TH E ADDITION OF RS. 4,51,931/- U/S 14A OF INCOME-TAX AC T, 1961 WITHOUT CONSIDERING THE REPLY FILED BY THE APPELLAN T. THEREFORE, ADDITION OF RS. 4,51,931/- IS UNCALLED F OR UNWARRANTED AND MAY BE DELETED. 3. ITA NO. 36/CHD/2012 - IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLOWING GROUNDS:- 1(A) THAT THE LD. CIT(A)-II, LUDHIANA ON FACTS AS WELL AS IN LAW, HAS ERRED IN PARTLY DELETING THE INTEREST D ISALLOWED U/S 36(I)(III) OF INCOME-TAX ACT, 1961 ON ACCOUNT O F INTEREST FREE ADVANCE GIVEN TO M/S BALWINDRA TOOLS PVT LTD. (B) THAT THE LD. CIT(A)-II, LUDHIANA HAS ERRED IN L AW BY ACCEPTING ADDITIONAL EVIDENCE, WHICH WAS NOT FILED BEFORE THE ASSESSING OFFICER WITHOUT CONFRONTING THE SAME TO HIM, THUS VIOLATING THE PROVISIONS OF RULE 46A OF THE I.T. RULES. 2(A) THAT THE LD. CIT(A)-II, LUDHIANA ON FACTS AS W ELL AS IN LAW, HAS ERRED IN DELETING DISALLOWANCE OF RS. 20,19,490/- OUT OF TOTAL DISALLOWANCE OF RS. 24,71, 119/- MAD;E U/S 14A OF THE INCOME-TAX ACT, 1961 R.W.R. 8D OF I.T. RULES. (B) THAT THE LD. CIT(A)-II, LUDHIANA HAS FAILED TO APPRECIATE THAT ONCE IT IS HELD THAT, DISALLOWANCE U/S 14A IS CALLED FOR, IT HAS TO BE COMPUTED AS PER RULE 8D OF THE INCOME-TAX RULES AND NOT IN ANY OTHER MANNER. 4. FIRST COMMON ISSUE REGARDING DISALLOWANCE OF INT EREST U/S 36(I)(III) DURING ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS MADE ADVANCE TO TEN PARTIES. THE EXPLANATION WAS GIVEN IN RESPECT OF SIX PARTIES BUT DESPITE NUMBER OF OPPORTUNITY NO EXPLANATION WA S GIVEN IN RESPECT OF FOLLOWING FOUR PARTIES 1 SHRI SURESH KUMAR RS. 3,00,000/- 2 M/S PANTHUR FARMS PVT LTD RS. 2,50,000/- 3 M/S BALWINDRA TOOLS PVT LTD RS. 15,00,000/- 4 M/S DEVBHUMI SPINNING & WEAVING MILLS RS. 20,00,000/- 3 IT WAS FURTHER NOTICED THAT THE ASSESSEE HAD BORROW ED FUNDS AND CLAIMED INTEREST THEREFORE, THE ASSESSING OFFIC ER AFTER RELYING ON THE DECISION OF HON'BLE PUNJAB & HARYANA HIGH COURT IN CASE OF CIT V. ABHISHEK INDUSTRIES, 286 ITR 1 (P H), DISALLOWED 12% INTEREST WHICH WAS WORKED OUT AS UND ER: NAME AMOUNT OF LOAN NO. OF DAYS DISALLOWAN CE OF INTEREST @ 12% SHRI SURESH KUMAR 3,00,000/- 30 2,959/- M/S PANTHUR FARMS PVT LTD 2,50,000/- 365 30,000/- M/S BALWINDRA TOOLS PVT LTD 15,00,000/- 365 1,80,000/- M/S DEVBHUMI SPINNING & WEAVING MILLS 20,00,000/- 365 2,40,000/- TOTAL DISALLOWANCE 4,52,959/- 5. ON APPEAL BEFORE THE LD. CIT(A), IT WAS CONTENDE D THAT THE ASSESSEE HAD GIVEN ALL THE ADVANCES FOR BUSINESS PU RPOSES. IT WAS SPECIFICALLY STATED THAT ADVANCES TO SHRI SURES H KUMAR, M/S PANTHUR FARMS PVT LTD AND M/S BALWINDRA TOOLS P VT LTD. WERE GIVEN AS ADVANCES FOR NEGOTIATING SUITABLE PIE CE OF LAND ON BEHALF OF THE ASSESSEE. CONFIRMATION IN RESPECT OF SHRI SURESH KUMAR AND M/S PANTHUR FARMS PVT LTD WERE ALS O FILED. IN CASE OF M/S BALWINDRA TOOLS PVT LTD, COPY OF IQR ARNAMA WAS FILED. 6. AFTER CONSIDERING THE SUBMISSIONS, THE LD CIT(A) WAS OF THE OPINION THAT THE ASSESSEE HAS SATISFIED THE NEE D FOR GIVING ADVANCES TO THREE PARTIES AND ACCORDINGLY THE ADVAN CES WERE DELETED IN CASE OF SHRI SURESH KUMAR, M/S PANTHUR F ARMS PVT LTD AND M/S BALWINDRA TOOLS PVT LTD. AS FAR AS THE DECISION IN RESPECT OF DISALLOWANCE OF INTEREST ON ACCOUNT OF ADVANCE TO M/S DEVBHUMI SPINNING & WEAVING MILLS WAS CONFIRMED . THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE IN RESPECT OF 4 INTEREST ON ACCOUNT OF ADVANCE TO M/S DEVBHUMI SPIN NING & WEAVING MILLS WHEREAS THE REVENUE HAS CHALLENGED TH E DELETION OF ADDITION ON ACCOUNT OF M/S BALWINDRA TO OLS PVT LTD BECAUSE THE LD. CIT(A) HAS ADMITTED ADDITIONAL EVID ENCE WITHOUT GIVING ANY OPPORTUNITY TO THE AO. 7. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUBM ITTED THAT A SUM OF 20 LAKHS WAS GIVEN TO M/S DEVBHUMI SPINNIN G & WEAVING MILLS ON ACCOUNT OF ADVANCES FOR ARRANGING SUITABLE PROPERTY TO BE PURCHASED BY THEM. THEREFORE, THE S AME WAS FOR A BUSINESS PURPOSE. HOWEVER, THE PROPERTY COUL D NOT BE PURCHASED AND ADVANCE WAS RETURNED IN FY 2010-11 BY THE SAID PARTY. IN THIS REGARD HE REFERRED TO THE COPIES OF ACCOUNT OF THE PARTY FILED AT PAGE 19 TO 22 OF PAPER BOOK. HE ALS O SUBMITTED THAT THIS PARTY WAS NOT RELATED TO THE ASSESSEE AND THEREFORE, INTEREST COULD NOT HAVE BEEN DISALLOWED AT ALL. AS FAR AS DISALLOWANCE ON ACCOUNT OF M/S BALWINDRA TOOLS PVT LTD IS CONCERNED, HE AGREED THAT SINCE THE FIRST APPELLATE AUTHORITY HAS NOT GIVEN AN OPPORTUNITY TO THE ASSESSING OFFIC ER, THE MATTER MAY BE SET ASIDE. 8. ON THE OTHER HAND, THE LD. D.R. FOR THE REVENUE SUBMITTED THAT NO EVIDENCE WAS FILED FOR JUSTIFICATION OF ADV ANCE TO M/S DEVBHUMI SPINNING & WEAVING MILLS BEFORE THE ASSESS ING OFFICER OR THE LD. CIT(A) AND THEREFORE, THE LD. CO UNSEL FOR THE ASSESSEE NOW CANNOT ARGUE THAT THE SAME WAS FOR THE PURPOSE OF BUSINESS AND ACCORDINGLY DISALLOWANCE WAS JUSTIF IED. IN RESPECT OF ADVANCE TO M/S BALWINDRA TOOLS PVT LTD, HE SUBMITTED THAT IQRARNAMA FOR PURCHASE OF GODOWN WAS FILED BEFORE THE LD. CIT(A) FOR THE FIRST TIME DURING AP PELLATE PROCEEDINGS AND THE LD. CIT(A) SHOULD NOT HAVE ADMI TTED THE 5 SAME WITHOUT GIVING OPPORTUNITY TO THE ASSESSING OF FICER TO EXAMINE THE SAME. 9 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULL Y AND FIND THAT AS FAR AS THE ADVANCE TO M/S DEVBHUMI SPI NNING & WEAVING MILLS IS CONCERNED, NO PURPOSE FOR THE SAME WAS GIVEN BEFORE THE ASSESSING OFFICER OR THE LD. CIT(A). TH OUGH BEFORE US, IT WAS STATED THAT THE SAME WAS FOR THE PURPOSE OF PURCHASE OF PROPERTY BUT NO EVIDENCE WAS FILED BEFORE US, TH EREFORE, IN THE ABSENCE OF ANY EVIDENCE IT HAS TO BE CONCLUDED THAT MONEY HAS BEEN DIVERTED FOR NON BUSINESS PURPOSE. SINCE THE ASSESSEE HAS ADMITTEDLY BORROWED HUGE AMOUNTS ON IN TEREST, THE PROPORTIONATE INTEREST HAS TO BE DISALLOWED IN RESPECT OF THE ADVANCES MADE TO M/S DEVBHUMI SPINNING & WEAVING MI LLS IN VIEW OF THE DECISION OF HON'BLE PUNJAB & HARYANA HI GH COURT IN CASE OF CIT V. ABHISHEK INDUSTRIES (SUPRA). ACCORDI NGLY WE CONFIRM THE DISALLOWANCE IN RESPECT OF INTEREST REL ATING TO ADVANCES MADE TO M/S DEVBHUMI SPINNING & WEAVING MI LLS. 10 AS FAR AS ADVANCE TO M/S BALWINDRA TOOLS PVT LTD IS CONCERNED, IT WAS ADMITTED BEFORE US THAT IQRARNAMA WAS FILED BEFORE THE LD. CIT(A) FOR THE FIRST TIME, THEREFORE , EVEN IF THE SAME IS ADMITTED BY THE LD. CIT(A) HE SHOULD HAVE A LLOWED AN OPPORTUNITY TO THE ASSESSEE TO EXAMINE THIS EVIDENC E. THEREFORE, IN THE INTEREST OF JUSTICE, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND REMIT THE ISSUE RELATING TO THE DISALLOWANCE OF INTEREST ON ACCOUNT OF ADVANCE TO M/S BALWINDRA TOOLS PVT LTD TO THE FILE OF ASSESSING OFFICER TO EXAMINE THE IQRARNAMA FILED BEFORE THE FIRST APPELLATE AUTHORITY AND DECI DE THE ISSUE IN ACCORDANCE WITH LAW. 6 11. THE SECOND COMMON ISSUE IS REGARDING DISALLOWAN CE OF EXPENSES OF INTEREST U/S 14A OF THE ACT DURING AS SESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED INTEREST EXPENSES TO THE TUNE OF RS. 2, 13,46,266/-. IT WAS FURTHER NOTICED THAT THE ASSESSEE HAS SHOWN INVESTMENT IN THE BALANCE SHEET AMOUNTING TO RS. 1,73,02,285/- AND RS. 2,64,46,428/- AS ON 31.3.2007 AND ON 31.3.2008 RESP ECTIVELY. THE INVESTMENT WAS MADE IN PARTNERSHIP FIRM, M/S CH ADHA MOTORS AND ALSO IN MUTUAL FUNDS AND INCOME FROM BOT H WAS EXEMPT IN THE HANDS OF THE ASSESSEE. THEREFORE, TH E EXPENDITURE IN RELATION TO THESEINVESTMENT WAS REQU IRED TO BE ADDED BACK TO THE INCOME OF THE ASSESSEE AS PER SEC 14A OF THE ACT. IN RESPONSE TO THE SHOW CAUSE NOTICE, IT WAS SUBMITTED VIDE LETTER DATED 10.12.2010 AS UNDER: THAT THE ASSESSEE-COMPANY IS A PARTNER IN M/S CHAD HA MOTORS, TRANSPORT NAGAR, LUDHIANA AND INTRODUCED CA PITAL IN M/S CHADHA MOTORS AT THE TIME OF START OF THE B USINESS OF M/S CHADHA MOTORS AND ALSO INTRODUCED SUM CAPIT AL DURING THE YEAR UNDER CONSIDERATION AS THIS CAPITAL WAS REQUIRED BY THE CHADHA MOTORS FOR DOING THE BUSINES S. THE ASSESSEE-COMPANY RECEIVING THE PROFIT FROM THE ABOVE SAID FIRM WHICH IS EXEMPT UNDER THE INCOME-TA X ACT, 1961. THIS PROFIT IS EXEMPT BECAUSE OF THE FA CT THE M/S CHADHA MOTORS PAID THE TAX ON THIS PROFIT. SO IN ORDER TO AVOID THE DOUBLE TAXATION THE PROFIT RECEIVED BY THE COMPANY IS EXEMPT FROM TAX UNDER THE PROVISION OF INCOME-TAX ACT, 1961. THE SECTION 14A CAN ONLY CONTEMPLATES THE EXPENDITURE ACTUALLY INCURRED FOR EARNING TAX FREE INCOME AND NOT ASSUMED EXPENDITURE OR DEEM ED EXPENDITURE AS HELD BY HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT V. WALLFORT SHARE AND STOCK BROKERS PVT LTD. CITED IN (2009) 310 ITR 421 (BOM). THE ASSESSING OFFICER AFTER EXAMINING THE SUBMISSIO NS CONSIDERED THE PROVISIONS OF SECTION 14A. HE ALSO CONSIDERED THE MEMORANDUM EXPLAINING THE PROVISIONS IN THE FIN ANCE ACT, 2001 AS WELL AS CIRCULAR NO. 14. ACCORDING TO THE ASSESSING OFFICER IN VIEW OF THESE PROVISIONS THE EXPENDITURE RELATED TO EXEMPT INCOME, COULD NOT BE ALLOWED. ACCORDINGLY H E INVOKED 7 THE RULE 8D AND WORKED OUT THE DISALLOWANCE VIDE PA RA 6.13 WHICH IS AS UNDER: ACCORDINGLY DISALLOWANCE U/R 8D IS COMPUTED AS UN DER: (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. (II) INTEREST DURING THE PREVIOUS YEAR WHICH IS NO T DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR R ECEIPT: A= AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CL. (I) INCURRED DURING THE PREVIOUS YEAR = 21346266 B= THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE O N THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR) = 21874356 INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NO T FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHEET AVERAGE OF VALUE OF THE ASSESSEE ON THE FIRST DAY OF THE ON THE LAST DAY PREVIOUS YEAR OF THE PREVIOUS YEAR 17302285 26446428 21874356 C (THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAS T DAY AND THE LAST DAY OF THE PREVIOUS YEAR)= 197707785 TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE APPEARING IN THE BALANCE SHEET AVERAGE OF VALUE OF THE ASSESSEE ON THE FIRST DAY OF ON THE LAST DAY OF THE PREVIOUS YEAR THE PREVIOUS YEAR 171204857 224210720 197707785 INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. B A X ---------- = 2361747 C 8 (III) AN AMOUNT EQUAL TO ONE HALF PER CENT OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARIN G IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. = 0.5 X B = 109372 = 24,71,119 AGGREGATE AMOUNT = 24,71,119 BALANCE DISALLOWABLE = 24,71,119 12 BEFORE THE LD. CIT(A) IT WAS MAINLY CONTENDED TH AT THE ASSESSING OFFICER HAS WRONGLY OBSERVED THAT INVESTM ENT OF RS. 2,09,74,356/- IS MADE TO EARN EXEMPT INCOME AND THE SAME WAS DONE FOR THE BUSINESS PURPOSE WITH AN EMPHASIS TO EXPAND THE BUSINESS BY FLOATING THE SISTER CONCERN, M/S CH ADHA MOTORS HAS SHOWN INCOME FROM YEAR TO YEAR AND PAYING TAX A T THE HIGHER RATE APPLICABLE, THEREFORE, IT CANNOT BE SAI D THAT INVESTMENT MADE IN THE FIRM AS WORKING CAPITAL WAS TO EARN EXEMPT INCOME. THE SHARE OF PROFIT, RESULTANT OFF-S HOOT OF THE PARTNER, REMAINING IN THE FIRM AFTER PAYING THE INC OME-TAX WHICH ULTIMATELY BECOME THE PART OF CAPITAL OF A PARTNER IN THE PARTNERSHIP FIRM. IT WAS STRESSED THAT SEC 14A IS A PPLICABLE ONLY WHEN THE INVESTMENT IS MADE TO EARN EXEMPT INC OME AND THE ASSESSEE HAD NOT EARNED ANY EXEMPT INCOME IN TH E YEAR. THEREFORE, PROVISIONS OF SECTION 14A WERE NOT APPLI CABLE. IT WAS ALSO CONTENDED THAT SIGNIFICANT PART OF THE INV ESTMENT WAS MADE OUT OF THE PAID UP CAPITAL AVAILABLE WITH THE APPELLANT COMPANY AND THEREFORE, THAT PART OF THE CAPITAL CAN NOT BE CONSIDERED FOR CALCULATING DISALLOWANCE U/S 14A. I N THIS REGARD RELIANCE WAS PLACED ON THE DECISION OF HON'BLE PUNJ AB & HARYANA HIGH COURT IN CASE OF CIT V. WINSOM TEXTIL E, 319 ITR 204. THE CALCULATION WAS FURNISHED TO SHOW THAT IN VESTMENT WAS MADE OUT OF SHARE CAPITAL AND FREE RESERVES AS UNDER: 9 31.3.2008 RS. IN LAKHS SHARE CAPITAL 78.36 RESERVES AND SURPLUSES 130.82 OWN FUNDS 209.18 WORKING CAPITAL BORROWINGS 1779.62 CURRENT ASSETS 2243.45 AMOUNT INVESTED IN EXCESS OF LOAN 463.83 TERM LOAN BORROWINGS 253.31 FIXED ASSETS 451.82 AMOUNT INVESTED IN EXCESS OF LOAN 198.51 AMOUNT INVESTED IN CHADHA MOTORS 255.96 FINALLY RELIANCE WAS PLACED ON THE DECISION OF HON' BLE PUNJAB & HARYANA HIGH COURT IN CASE OF CIT V. HERO CYCLES, 323 ITR 518. 13 THE LD. CIT(A) AFTER CONSIDERING THESE SUBMISSIO NS QUOTED THE PROVISIONS OF SEC 14A(1) AND ULTIMATELY DECIDED THE ISSUE AS UNDER: AFTER PERUSING THE ABOVESAID FACTUAL POSITION, I A M NOT INCLINED TO AGREE WITH THE APPELLANTS CONTENTION T HAT THE PROVISIONS OF SECTION 14A ARE NOT APPLICABLE IN THI S CASE AS THE LANGUAGE OF THIS SECTION IS VERY CLEAR IN TH IS REGARD. HOWEVER, ANOTHER CONTENTION OF THE APPELLA NT IS CONCERNED THAT INVESTMENTS WERE MADE FROM AVAILABLE INTEREST FREE ADVANCES AND COMPANYS OWN FUNDS, A C HART REGARDING AVAILABILITY OF FUNDS WITH THE APPELLANT AND INVESTMENT MADE FROM THE SAME HAS BEEN FURNISHED. IN THAT CHART, THE COMPANY HAS OWN FUNDS INCLUDING RES ERVES AND SURPLUSES AMOUNTING TO RS. 209.18 LAKHS BUT THE AMOUNT OF INVESTMENT IS RS. 255.96 LAKHS. THEREFOR E, I AM OF THE VIEW THAT IT WILL BE FAIR AND JUSTIFIABLE TO ALLOW THE RELIEF TO THE EXTENT OF AMOUNT AVAILABLE WITH T HE APPELLANT IN THE SHAPE OF OWN FUNDS FOR THIS INVEST MENT. THUS THE DISALLOWANCE OF RS. 4,51,629/- (24,71,119 X 209.18/255.96) IS HEREBY CONFIRMED AND REMAINING 20,19,490/- (24,71,119 4,51,629/-) IS DIRECTED TO BE DELETED. THEREFORE, THIS GROUND OF THE APPELLANT I S ALSO HEREBY PARTLY ALLOWED. 14 BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REIT ERATED THE SUBMISSIONS MADE BEFORE THE FIRST APPELLATE AUT HORITY. HE EMPHASIZED THAT SEC 14A CAN BE INVOKED ONLY TO DISA LLOW THE EXPENDITURE WHICH CAN BE RELATED TO THE EXEMPT INCO ME. 10 ACCORDING TO HIM BY MAKING INVESTMENT IN A PARTNERS HIP FIRM AS 99% SHARE HOLDER, IT CANNOT BE SAID THAT THE ASSESS EE WOULD EARN EXEMPT INCOME BECAUSE SUCH PARTNERSHIP FIRM WO ULD PAY TAXES AT THE MAXIMUM RATE AND THUS THE TAXES STAND PAID. IN THIS REGARD HE ALSO REFERRED TO PAGE 7 OF THE ASSES SMENT ORDER WHEREIN THE ASSESSING OFFICER HAS EXTRACTED THE MEM ORANDUM EXPLAINING THE PROVISIONS AND CIRCULAR NO. 14 ISSUE D BY THE CBDT WHEREIN IT HAS BEEN OBSERVED THAT EXPENSES REL ATING TO THE EXEMPT INCOME CANNOT BE ALLOWED BECAUSE THE SAM E IS AGAINST THE BASIC PRINCIPLE OF TAXATION BECAUSE ONL Y NET INCOME THAT IS GROSS INCOME MINUS EXPENDITURE ONLY CAN BE TAXED. IT WAS FURTHER STATED IN THIS MEMORANDUM THAT SAME AN ALOGY EXEMPTION IS ALSO IN RESPECT OF NET INCOME. THE E XPENDITURE AGAINST INCOME CAN BE ALLOWED ONLY TO THE EXTENT TH EY ARE RELATABLE TO THE TAXABLE INCOME. SINCE INVESTMENT I N PARTNERSHIP FIRM IS CLEARLY TAXABLE, EXPENDITURE SO INCURRED AGAINST THE SAME CANNOT BE DISALLOWED. 15 HE ALSO SUBMITTED THAT IN ANY CASE THE ASSESSEE HAS MADE INVESTMENT OUT OF SHARE CAPITAL AND RESERVES A VAILABLE WITH THE ASSESSEE AND NOT OUT OF BORROWED FUNDS AND THEREFORE, THE PROVISIONS OF SECTION 14A WERE NOT APPLICABLE. FOR THIS HE RELIED ON THE DECISION OF HON'BLE PUNJAB & HARYANA HIGH COURT IN CASE OF HERO CYCLES (SUPRA) AND CIT V. WINSOME T EXTILE INDS LTD, (SUPRA). HE ALSO REFERRED TO THE CALCULA TION OF SURPLUS FUNDS WHICH WAS GIVEN BEFORE THE LD. CIT(A). HOWEV ER, ON A SPECIFIC QUERY BY THE BENCH IT WAS ADMITTED THAT DU RING THE YEAR NO SEPARATE ACCOUNT FOR SURPLUS FUNDS WAS BEIN G MAINTAINED AND IT WAS A CASE OF MIX FUNDS. 11 16 ON THE OTHER HAND, THE LD. D.R. FOR THE REVENU E STRONGLY SUPPORTED THE ORDER OF THE ASSESSING OFFICER. HE AL SO SUBMITTED THAT THE INCOME CHARGED IN THE HANDS OF T HE PARTNERSHIP FIRM HAS TO BE TREATED AS EXEMPT INCOME IN THE HANDS OF THE PARTNERS AND IN THIS REGARD HE RELIED ON THE DECISION OF HON'BLE BOMBAY BENCH OF THE TRIBUNAL IN CASE OF DHARMASINGH M. POPAT V ACIT, 127 TTJ (MUM) 61: 2 IT R 586. HE ALSO CONTENDED THAT THE ASSESSEE IS NOT MAINTAIN ING SEPARATE ACCOUNTS TO SHOW THAT THE INVESTMENT HAS B EEN MADE OUT OF SURPLUS FUNDS. ONCE THE FUNDS ARE MIX FUNDS THEN RULE 8D IS APPLICABLE. IN FACT RULE 8D WAS BROUGHT TO D EAL WITH THE SITUATION WHERE THE MIX FUNDS ARE THERE. RULE 8D I S APPLICABLE FROM ASSESSMENT YEAR 2008-09 AND IN THIS REGARD H E RELIED ON THE CASE OF GODREJ AND BOYCE MFG V DCIT, 328 ITR 81 (BOM). 17 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY AND FIND THAT DURING THE YEAR THE ASSESSEE HAS MADE I NVESTMENT IN PARTNERSHIP AND MUTUAL FUND. THE PROFIT FROM MUTUA L FUND IN THE FORM OF DIVIDEND IS EXEMPT. AS FAR AS SHARE PRO FIT FROM PARTNERSHIP FIRM IS CONCERNED, THE SAME IS ALSO COV ERED U/S 10(2A), THEREFORE, THERE IS NO FORCE IN THE SUBMIS SIONS THAT THE ASSESSEE HAS MADE INVESTMENT IN FIRM WHICH ITSELF I S PAYING TAX, THEREFORE, IT CANNOT BE CALLED THAT THE INVES TMENT HAS BEEN MADE TO EARN EXEMPT INCOME. SECTION 10(2A) RE ADS AS UNDER: [(2A) IN THE CASE OF A PERSON BEING A PARTNER OF A FIRM WHICH IS SEPARATELY ASSESSED AS SUCH, HIS SHARE IN THE TOTAL INCOME OF THE FIRM. EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE, THE S HARE OF A PARTNER IN THE TOTAL INCOME OF A FIRM SEPARATELY ASSESSED A S SUCH SHALL, NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER LAW , BE AN AMOUNT WHICH BEARS TO THE TOTAL INCOME OF THE FIRM THE SAM E PROPORTION AS THE 12 AMOUNT OF HIS SHARE IN THE PROFITS OF THE FIRM IN A CCORDANCE WITH THE PARTNERSHIP DEED BEARS TO SUCH PROFITS ;] IN ANY CASE BOMBAY BENCH OF THE TRIBUNAL HAD AN OCC ASION TO CONSIDER THIS ISSUE IN CASE OF DHARMASINGH M. POPAT V ACIT, 127 T TJ (MUM) 61. IN THAT CASE IT WAS HELD AS UNDER:- THOUGH THE PARTNERSHIP FIRM IS NOT A SEPARATE ENTI TY AS PER GENERAL LAW, FOR A SPECIFIC PURPOSE IT MAY BE TREATED AS IN DEPENDENT OF ITS PARTNERS UNDER THE PROVISIONS OF IT ACT, 1961. TO PUT IT DIFFERENTLY, THE CONCEPT OF PARTNERSHIP FIRM, BEING A COMPENDIUM OF ITS PARTNERS IS SUBJECT TO THE MODIFYING SUCH CONCEPT OF PARTNERSHI P LAW WHICH MEANS THAT IF THERE EXIST NO PROVISION IN THE TAX LAWS FOR A P ARTICULAR SITUATION, THEN, THE PROVISIONS OF PARTNERSHIP LAW WOULD BE TH E GUIDING FACTOR FOR ADJUDICATION OF THAT ISSUE. THE CURRENT JUDICIAL THOUGHT IS LEANING TOWARDS THE CONCEPT OF SEPARATE LEGAL ENTITY OF PAR TNERSHIP FIRM THAN THAT OF ITS PARTNERS FOR THE PURPOSES OF IT ACT, 1961. ' HERE WAS A JUDICIAL OPINION THAT ON DISTRIBUTION OR DIVISION OR ALLOTME NT OF ASSETS TO PARTNERS BY THE ON DISSOLUTION OR OTHERWISE THER E RESULTED NO GAIN EXIGIBLE TO TAX, HOWEVER, BY INCORPORATING S. -45(2 ), 45(3) AND 45(4), THE LEGISLATURE HAS DECLARED ITS INTENTION IN CLEAR TER MS THAT PARTNERS AND THE FIRM ARE TWO INDEPENDENT ENTITIES NOT ONLY FOR THE PURPOSES OF ASSESSMENT BUT ALSO FOR THE PURPOSE OF DETERMINING THE CHARGE OF INCOME-TAX ON THE TRANSACTIONS ENTERED INTO BETWEEN THEM. SIMILARLY, FROM ASST. YR. 1993-94 PARTNERSHIP FIRMS HAVE BEEN GIVEN A CORPORATE PERSONALITY IN A LIMITED SENSE BY MAKING NECESSARY AMENDMENTS IN THE PROVISIONS OF SS. 10(2A), 28(V), 40(B) AND RELEVANT PROCEDURAL SECTIONS WHICH CONCLUSIVELY PROVE THAT PARTNERSHIP FIRM AS SUCH IS INDEPENDENT FROM ITS PARTNERS AS FAR AS PRO VISIONS OF IT ACT, 1961 ARE CONCERNED. SPECIFIC PROVISIONS MENTIONED H EREINABOVE READ WITH CIRCULAR NO. 636, DT. 31ST AUG., 1992 GO TO SH OW THAT A FIRM IS TO BE TAXED AS SEPARATE ENTITY AND THE GROSS TOTAL INCOME OF THE FIRM IS TO BE DETERMINED IN THE NORMAL WAY UNDER DIFFERENT HEADS AS IN THE CASE OF ANY TAXABLE ENTITY, HENCE, ANY EXPENDITURE WHICH HA S BEEN INCURRED BY FIRM FOR THE PURPOSES OF ITS BUSINESS IS TO BE ALLO WED AS A DEDUCTION IN COMPUTING THE TOTAL INCOME OF THE FIRM SUBJECT TO A NY SPECIFIC LIMITATION/PROHIBITION PROVIDED FOR THE ALLOWANCE O F SUCH EXPENDITURE. HAVING REGARD TO JUDICIAL OPINION AND ALSO THE LEGI SLATIVE CHANGES IN THE ACT, A PARTNERSHIP FIRM IS A SEPARATE ENTITY THAN T HAT OF ITS PARTNERS UNDER THE IT ACT AND IF THERE EXISTS ANY SPECIFIC P ROVISION IN THE INCOME-TAX LAW MODIFYING THE PARTNERSHIP LAW THEN, SUCH SPECIFIC PROVISION SHALL BE APPLIED AND IF THE TAX LAW IS SI LENT ON A SPECIFIC ISSUE, THEN A REFERENCE WILL HAVE TO BE MADE TO THE PROVISIONS OF PARTNERSHIP LAW FOR THE ADJUDICATION OF THE SAME AND IN THE PRESENT CASE, P ROVISIONS OF LAW SUFFICIENTLY TAKE CARE OF THE ISSUE INVOLVED HE REIN, HENCE, THE ISSUE IS TO BE DECIDED ACCORDINGLY. THERE EXIST SPECIFIC PRO VISIONS FOR COMPUTING THE INCOME OF THE PARTNERSHIP FIRM AS WELL AS THAT OF ITS PARTNERS, HENCE, TOTAL INCOME OF BOTH IS LIABLE TO BE COMPUTE D IN ACCORDANCE WITH SUCH PROVISIONS. SINCE PARTNERSHIP FIRM, FOR T HE PURPOSE OF IT ACT IS A SEPARATE ASSESSABLE ENTITY AND THEREFORE PARTNERS VIS-A-VIS PARTNERSHIP FIRM WOULD STAND ON THE SAME FOOTING OF SHAREHOLDERS VIS-A-VIS COMPANY. ACCORDINGLY INCOME CHARGED IN THE HANDS OF A PARTNERSHIP FIRM THEREFORE, PROVISIONS OF SECTION 1 4A WOULD BE APPLICABLE IN COMPUTING THE TOTAL INCOME O F SUCH PARTNER IN RESPECT OF HIS SHARE IN THE PROFITS OF SUCH FIRM - CIT V. A.W. FIGGIES & CO. & ORS (1953) 24 ITR 4 05 (S.C), DY CST (LAW) V K. KELUKUTTY (1985) 155 ITR 1 58 (S.C), BIST & SONS, VS. CIT (1979) 8 CTR (SC) 152 : (1979) 116 ITR 131 (SC), QT VS. KALURAM PURANMAL (1979) 12 CTR (BOM) 225 : (1979) 119 ITR 564 (BOM) AND CIT VS. CHASE TRADING CO. (1998) 147 CTR (BOM) 228 . (1999) 236 ITR 665 (BOM) APPLIED; CIT VS. R,M, CHIDAMBARARN.PILLAI 1977 CTR (SC) 71 : (1977) 106 I TR 292 (SC) DISTINGUISHED. 13 THEREFORE, IT IS CLEAR THAT INVESTMENT MADE IN A FI RM IS TO BE TREATED AS INVESTMENT FOR EARNING EXEMPT INCOME. 18 COMING TO THE SECOND ASPECT OF THE ISSUE THAT WH ETHER IN ANY NEXUS IS REQUIRED BETWEEN THE INVESTMENT AND TH E DISALLOWANCE TO BE MADE U/S 14A, WE SHALL FIRST REF ER TO THE DECISION RELIED ON BY THE LD. COUNSEL OF THE ASSESS EE IN CASE OF CIT V. WINSOM TEXTILE, 319 ITR 204. IN THAT CASE F OLLOWING QUESTION OF LAW WAS CONSIDERED: WHETHER, IN THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HON'BLE INCOME-TAX APPELLATE TRIBUNAL W AS JUSTIFIED IN HOLDING THAT THE ORDER OF THE JURISDIC TIONAL HIGH COURT IN THE CASE OF CIT V. ABHISHEK INDUSTRIES LTD . REPORTED IN (2006) 286 ITR 1 (PH); 156 TAXMAN 257 ( PH) ARE NOT APPLICABLE IN THIS CASE AND THE DISALLOWANC E MADE BY THE ASSESSING OFFICER U/S 14A OF THE INCOME-TAX ACT IS NOT AS PER LAW. THE ASSESSEE WAS ENGAGED IN THE MANUFACTURING AND S ALE OF COTTON YARN AND HAD MADE CERTAIN INVESTMENTS. THE ASSESSING OFFICER DISALLOWED INTEREST ON INVESTMENT IN SHARES U/S 14A BECAUSE DIVIDEND INCOME WAS EXEMPT. THE LD. CIT(A) DELETED THE DISALLOWANCE BY OBSERVING THAT THE ASSESSEE HAD MADE INVESTMENT USING ITS OWN FUNDS AND NO INTEREST WAS INCURRED. THE TRIBUNAL CONFIRMED THE FINDINGS OF THE LD. CIT( A). BEFORE THE HON'BLE HIGH COURT THE CONTENTION WAS RAISED TH AT EVEN IF THE ASSESSEE MADE INVESTMENT OUT OF ITS OWN FUNDS T HE ASSESSEE HAD TAKEN LOANS ON WHICH INTEREST WAS PAID AND THEREFORE, THE MONEY AVAILABLE WITH THE ASSESSEE WA S IN COMMON KITTY IN VIEW OF THE DECISION OF THE COURT I N CASE OF CIT V.ABHISHEK INDUSTRIES (SUPRA). HON'BLE HIGH COURT HELD VIDE PARA 7 AS UNDER:- 14 WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. THE JUDGMENT OF THIS COURT IN ABHISHEK INDUSTRIES LTD. (2006) 286 ITR 1 WAS ON THE ISSUE OF ALLOWABILITY OF INTER EST PAID ON LOANS GIVEN TO SISTER CONCERNS, WITHOUT INTEREST . IT WAS HELD THAT DEDUCTION FOR INTEREST WAS PERMISSIBLE WH EN LOAN WAS TAKEN FOR BUSINESS PURPOSE AND NOT FOR DIVERTIN G THE SAME TO SISTER CONCERN WITHOUT HAVING NEXUS WITH TH E BUSINESS. THE OBSERVATIONS MADE THEREIN HAVE TO BE READ IN THAT CONTEXT. IN THE PRESENT CASED, ADMITTEDLY, THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN S UCH A SITUATION, SECTION 14A COULD HAVE NO APPLICATION. 19 SECOND DECISION RELIED ON IS THAT OF CIT V. HERO CYCLES (SUPRA). IN THAT CASE FOLLOWING QUESTION WAS RAISE D BEFORE THE COURT: WHETHER ON THE FACTS AND IN LAW, THE HON'BLE INCOM E-TAX APPELLATE TRIBUNAL WAS LEGALLY JUSTIFIED IN DELETIN G THE DISALLOWANCE OF IGNORING THE EVIDENCE RELIED ON BY THE ASSESSING OFFICER AND HOLDING THAT A CLEAR NEXUS HA S NOT BEEN ESTABLISHED THAT THE INTEREST BEARING FUNDS HA VE BEEN VESTED FOR INVESTMENTS GENERATING TAX FREE DIV IDEND INCOME. 20 IN THIS CASE THE ASSESSING OFFICER MADE DISALLO WANCE U/S 14A(3) WHICH WAS PARTLY UPHELD BY THE LD. CIT(A). ON FURTHER APPEAL, THE TRIBUNAL HELD THAT THERE WAS NO NEXUS B ETWEEN THE EXPENDITURE INCURRED AND THE INCOME GENERATED, THER EFORE, DISALLOWANCE CANNOT BE MADE. IT WAS ALSO OBSERVED THAT MAIN UNIT, LUDHIANA HAD MORE INTEREST INCOME THAN THE EX PENDITURE AND THE FUNDS FLOW POSITION SHOWS THAT ONLY NON INT EREST BEARING FUNDS HAVE BEEN UTILIZED FOR MAKING THE INV ESTMENT. 21 BEFORE THE COURT, THE DEPARTMENT ALSO CONTENDED THAT RULE 8D PROVIDE THAT EVEN WHERE THE ASSESSEE CLAIME D THAT NO EXPENSES HAVE BEEN INCURRED, CORRECTNESS OF SUCH CL AIM CAN BE GONE INTO BY THE ASSESSING OFFICER. HON'BLE HIGH C OURT HELD VIDE PARA 5 AS UNDER: IN VIEW OF THE FINDING REPRODUCED ABOVE, IT IS CLE AR THAT THE EXPENDITURE ON INTEREST WAS SET OFF AGAINST THE INC OME FROM INTEREST AND THE INVESTMENT IN THE SHARE AND FUNDS WERE OUT OF 15 THE DIVIDEND PROCEEDS. IN VIEW OF THIS FINDING OF FACT, DISALLOWANCE U/S 14A WAS NO SUSTAINABLE. WHETHER, IN A GIVEN SITUATION, ANY EXPENDITURE WAS INCURRED WHICH WAS T O BE DISALLOWED, IS A QUESTION OF FACT. THE CONTENTION OF THE REVENUE THA T DIRECTLY OR INDIRECTLY SOME EXPENDITURE IS ALWAYS INCURRED WHICH MUST BE D ISALLOWED UNDER SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME W HICH MAY NULLIFY THE MANDATE OF SECTION 14A, CANNOT BE ACCEPTED. DISALLO WANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE WH ERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INC URRED, DISALLOWANCE UNDER SECTION 14A CANNOT STAND. IN THE PRESENT CASE, FINDING ON THIS ASPECT, AGAINST THE REVENUE, IS NOT SHOWN T O BE PERVERSE. CONSE- QUENTLY, DISALLOWANCE IS NOT PERMISSIBLE. WE HAVE T AKEN THIS VIEW EARLIER SO IN I. T. A. NO. 504 OF 2008 IN CIT V. WINSOME T EXTILE INDUSTRIES LTD. 1)09] 319 ITR 204 (P&H), (DECIDED O N AUGUST 25, 2009), WHEREIN IT WAS OBSERVED AS UNDER (PAGE 207) : 'THE CONTENTION RAISED ON BEHALF OF THE REVENUE IS THAT EVEN IF THE ASSESSEE HAD MADE INVESTMENT IN SHARES OUT OF I TS OWN FUNDS, THE ASSESSEE HAD TAKEN LOANS ON WHICH INTEREST WAS PAID AND ALL THE MONEY AVAILABLE WITH THE ASSESSEE WAS IN COMMON KIT TY, AS HELD BY THIS COURT IN CIT V. ABHISHEK INDUSTRIES LTD. [2006] 286 ITR 1 AND, THEREFORE, DISALLOWANCE UNDER SECTION 14A WAS JUSTI FIED. WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. THE JU DGMENT OF THIS COURT IN ABHISHEK INDUSTRIES LTD. [2006] 286 ITR 1 WAS ON THE ISSUE OF ALLOWABILITY OF INTEREST PAID ON LOANS GIVEN TO SISTER CONCERNS, WITHOUT INTEREST. IT WAS HELD THAT DEDUCTION FOR INTEREST W AS PERMISSIBLE WHEN LOAN WAS TAKEN FOR BUSINESS PURPOSE AND NOT FOR DIV ERTING THE SAME TO SISTER CONCERN WITHOUT HAVING NEXUS WITH THE BUSINE SS. OBSERVATIONS MADE THEREIN HAVE TO BE READ IN THAT CONTEXT. IN TH E PRESENT CASE, ADMITTEDLY, THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATION, SECTION 14A COULD HAVE NO APPLICA TION.' IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THAT N O SUBSTANTIAL QUESTION OF LAW ARISE. 22 IT IS CLEAR THAT BOTH THE ABOVE DECISIONS PERTAI N TO ASSESSMENT YEAR 2004-05 WHEN RULE 8D WAS NOT EVEN I N STATUTE BOOK. RULE 8D HAS BEEN INTRODUCED BY I.T. RULES (5 TH AMENDMENT) W.E.F. 24.3.2008. THEREFORE, IN BOTH TH E ABOVE CASES, RULE 8D COULD NOT HAVE BEEN POSSIBLY APPLIED . IN ANY CASE IN A LEADING JUDGMENT THE HON'BLE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOYCEE MANUFACTURING V DCIT, 328 ITR 81 (BOM) HELD THAT RULE 8D CAN NOT HAVE RETROSPECTIVE APPLICATION AND THE SAME CAN BE APPLIED ONLY FROM ASSESSMENT YE AR 2008- 09. FURTHER IN CASE OF CIT V. WINSOM TEXTILE, 319 ITR 204, THE ISSUE WAS WHETHER THE PRINCIPLES LAID DOWN IN CASE OF ABHISHEK 16 INDUSTRIES (SUPRA) WERE APPLICABLE FOR THE DISALLOW ANCE U/S 14A AND THE HON'BLE COURT HELD THAT THE DECISION OF ABH ISHEK INDUSTRIES (SUPRA) OPERATES IN A DIFFERENT FIELD. S IMILARLY IN CASE OF HERO CYCLES (SUPRA) THE TRIBUNAL HAS GIVEN A CATEGORICAL FINDING THAT THE INVESTMENT HAS BEEN MA DE OUT OF NON INTEREST BEARING FUNDS. FROM THESE TWO DECISIO NS ONLY IT CAN BE CONCLUDED THAT IF INVESTMENT HAS BEEN MADE C LEARLY OUT OF NON INTEREST BEARING FUNDS THEN SECTION 14A IS N OT BE APPLICABLE. IN CASE BEFORE US, THE SITUATION IS DI FFERENT WHICH WE SHALL SEE LITTLE LATER. WE WOULD ALSO LIKE TO O BSERVE THAT EVEN HON'BLE PUNJAB & HARYANA HIGH COURT IN A LATTE R DECISION IN CASE OF CIT V. PUNJAB STATE INDUSTRIAL DEVELOPME NT COOPERATIVE LTD. HAS MADE OBSERVATIONS WHICH WE WIL L ALSO LIKE TO DISCUSS LITTLE LATER. 23 HON'BLE BOMBAY HIGH COURT CONSIDERED THE ISSUES ARISING OUT OF SECTION 14A AS WELL AS IMPLICATIONS OF RULE 8D. HON'BLE HIGH COURT REACHED THE FOLLOWING CONCLUSION AT PARA 88 WHICH READS AS UNDER: 88 OUR CONCLUSION IN T HIS JUDGMENT ARE AS FOLLOWS : (I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FA LLING WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME-TA X ACT, 1961, AS WAS APPLICABLE FOR THE ASSESSMENT YEAR 2002-03 I S NOT INCLUDIBLE IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE. CONS EQUENTLY, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITUR E INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIRTUE OF THE PROVIS IONS OF SECTION 14A(1) ; (II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTIO N 115- O(1) OF ADDITIONAL INCOME-TAX ON PROFITS DECLARED, DISTRIBUTED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS O F THE COMPANY. THE COMPANY IS CHARGEABLE TO TAX ON ITS PROFITS AS A DI STINCT TAXABLE ENTITY AND IT PAYS TAX IN DISCHARGE OF ITS OWN LIAB ILITY AND NOT ON BEHALF OF OR AS AN AGENT FOR ITS SHAREHOLDERS. IN T HE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DIVIDEND, INCOME BY WAY OF DIVIDEND DOES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROVISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS ; (III) THE PROVISIONS OF SUB-SECTIONS (2) AND '(3) O F SECTION 14A OF THE INCOME-TAX ACT 1961 ARE CONSTITUTIONALLY VALID ; 17 (IV) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RU LES AS INSERTED BY THE INCOME-TAX (FIFTH AMENDMENT) RULES, 2008, ARE NOT ULTRA VIRES THE PROVISIONS OF SECTION 14A, MORE PARTICULARLY SUB-SECTION (2) AND DO NOT OFFEND ARTI CLE 14 OF THE CONSTITUTION ; (V) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RUL ES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24, 2008, SHALL APPLY WITH EFFECT FROM THE ASSESSMENT YEAR 2008-09 ; (VI) EVEN PRIOR TO THE ASSESSMENT YEAR 2008-09, WHE N RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORCE TH E PROVISIONS OF SUB- SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE A SSESSING OFFICER IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A R EASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FA CTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECOR D ; (YII) THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2002- 03 SHALL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICE R SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE ( DIRECT OR INDIRECT) IN RELATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUND S WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECT ION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SH ALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUN TS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. FROM ABOVE, IT IS CLEAR THAT EVEN THE TAXES PAID U/ S 115-O WHICH IS ALSO KNOWN AS DIVIDEND DISTRIBUTION TAXES, WOULD NOT MAKE DIVIDEND INCOME IN THE HANDS OF SHAREHOLDER AS NON- EXEMPT. SIMILARLY THE TAXES PAID BY A FIRM WOULD BE TAXES ON THE PROFIT OF THE FIRM AND NOT IN THE HANDS OF THE ASSESSEE. THE ABOVE DECISION ALSO HELD THAT RULE 8D WOULD BE APPL ICABLE ONLY FROM ASSESSMENT YEAR 2008-09. IN THIS DECISION THE THEORY OF APPORTIONMENT OF EXPENDITURE WHICH WAS CONFIRMED BY THE HON'BLE SUPREME COURT IN CASE OF CIT V. WALFORT SHA RE AND STOCK BROKERS P LTD (2010) 326 ITR 1 (S.C), WAS FOL LOWED. IN FACT BEFORE INTRODUCTION OF SECTION 14A, THE ASSESS EE HAD A RIGHT TO CLAIM ALL THE EXPENSES IF SUCH EXPENSES CO ULD NOT BE BI-FURCATED AGAINST NORMAL TAXABLE INCOME AS WELL A S EXEMPTED INCOME IN VIEW OF THE DECISION OF HON'BLE SUPREME C OURT IN CASE OF RAJASTHAN WAREHOUSING COOPERATION V CIT, 24 2 ITR 18 450. THIS POSITION GOT CHANGED AFTER THE INTRODUCT ION OF SECTION 14A BY FINANCE ACT, 2001. THE MEMORANDUM EXPLAINING THE PROVISIONS OF FINANCE BILL READS AS UNDER: CERTAIN INCOME ARE NOT INCLUDIBLE WHILE COMPUTATIN G THE TOTAL INCOME AS THESE ARE EXEMPT UNDER VARIOUS PROVISIONS OF THE ACT. THERE HAVE BEEN CASES WHERE DEDUCTIONS HAVE B EEN CLAIMED IN RESPECT OF SUCH EXEMPT INCOME. THIS IN EFFECT MEANS THAT THE TAX INCENTIVE GIVEN BY WAY OF EXEMPT IONS TO CERTAIN CATEGORIES OF INCOME IS BEING USED TO REDUC E ALSO THE TAX PAYABLE ON THE NON-EXEMPT INCOME BY DEBITING TH E EXPENSES INCURRED TO EARN THE EXEMPT INCOME AGAINST TAXABLE INCOME. THIS IS AGAIN THE BASIC PRINCIPLES OF TAXA TION WHEREBY ONLY THE NET INCOME, I.E., GROSS INCOME MINUS THE E XPENDITURE IS TAXED. ON THE SAME ANALOGY, THE EXEMPTION IS AL SO IN RESPECT OF THE NET INCOME. EXPENSES INCURRED CAN B E ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNIN G OF TAXABLE INCOME. IT IS PROPOSED TO INSERT A NEW SECTION 14A SO AS TO CLARIFY THE INTENTION OF THE LEGISLATURE SINCE THE INCEPTION OF THE INCOME- TAX ACT, 1961, THAT NO DEDUCTION SHALL BE MADE IN R ESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATIO N TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE INCOME- TAX ACT. THE PROPOSED AMENDMENT WILL TAKE EFFECT RETROSPECTI VELY FROM APRIL 1, 1962 AND WILL ACCORDINGLY, APPLY IN RELATI ON TO THE ASSESSMENT YEAR 1962-63 AND SUBSEQUENT ASSESSMENT Y EAR. 24 HON'BLE BOMBAY HIGH COURT NOTED THIS DECISION AN D THEN CONFIRMED THE THEORY OF APPORTIONMENT OF EXPENSES A ND HELD THAT SAME IS VERY MUCH APPLICABLE IN SECTION 14A. AT PLACITUM 28 IT HAS BEEN OBSERVED AS UNDER: DURING THE COURSE OF THIS JUDGMENT, IT WOULD BE NE CESSARY TO REVISIT THE DECISION OF HON'BLE SUPREME COURT IN WA LFORT. AT THIS STAGE, HOWEVER, IT NEEDS TO BE EMPHASIZED THAT THE PROVISIONS OF SECTION 14A WERE CONSTRUED IN WALFORT TO EVINCE PARLIAMENTARY INTENT NOT TO ALLOW DEDUCTION IN RESP ECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST TAXABLE INCOME. SECTION 14A IS CLARIFICATOR Y OF THE POSITION THAT EXPENSE CAN BE ALLOWED ONLY TO THE EX TENT THAT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME . ONLY THOSE EXPENSES WHICH ARE IN RESPECT OF THE EARNING OF TAXABLE INCOME CAN BE ALLOWED. THE SECTION 14A BROADENS TH E THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AN D NON-TAXABLE INCOME IS EVIDENT FROM THE FOLLOWING OB SERVATIONS OF THE HON'BLE SUPREME COURT PAGE 17) 19 THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED U/S 14A. READING SECTION 14 IN JUXTAPOSITI ON WITH SECTIONS 15 TO 59, IT IS CLEAR THAT THE WORDS EXPENDITURE INCURRED IN SECTION 14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC ., IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37). THUS ON THE BASIS OF ABOVE, IT WAS HELD THAT AFTER INTRODUCTION OF SECTION 14A, IT WAS POSSIBLE TO APPORTION THE EXPEN DITURE BETWEEN TAXABLE INCOME AND EXEMPTED INCOME. 25 AS OBSERVED EARLIER, ALMOST SIMILAR OBSERVATIONS HAVE BEEN MADE BY THE HON'BLE PUNJAB & HARYANA HIGH COUR T IN A RECENT JUDGMENT IN CASE OF CIT V. PUNJAB STATE INDU STRIAL DEVELOPMENT COOPERATION LTD. IN ITA NO. 565 OF 2006 VIDE ORDER DATED 18.7.2011. 11. ADVERTING TO QUESTION NO.(II), LEARNED COUNSEL FOR THE REVENUE SUBMITTED THAT WHILE DETERMINING THE QUANTUM OF DED UCTION ADMISSIBLE TO THE ASSESSEE UNDER SECTION 80M OF THE ACT, THE EXPENDIT URE INCURRED RELATING TO THE EARNING OF DIVIDEND INCOME HAS TO BE EXCLUDED T HERE-FROM. ACCORDING TO THE LEARNED COUNSEL, THE EXPENDITURE WHICH WAS TO B E DEDUCTED WAS REQUIRED TO BE DEDUCTED ON PROPORTIONAL BASIS FOR I NCURRING OF SUCH EXPENDITURE. RELIANCE WAS PLACED ON SECTION 14A OF THE ACT WHICH WAS INCORPORATED BY FINANCE ACT 2001 RETROSPECTIVELY .W .E.F. 1.4,1962. SUPPORT WAS GATHERED FROM THE DECISION OF THE RAJASTHAN HIG H COURT IN SHEKHAVATI GENERAL TRADERS LTD. VS. COMMISSIONER OF INCOME TAX (1987) 167 ITR116 AND THE JUDGMENT OF THIS COURT IN INCOME TAX APPEAL NO. 530 OF 2006 (THE PUNJAB STATE COOPERATIVE MILK PRODUCER'S FEDERATION LTD, VS. COMMISSIONER OF INCOME TAX-IF AND ANOTHER) DECIDED ON 28,3,2011 AND OF THE APEX COURT IN COMMISSIONER OF INCOME TAX VS. WALFORT SHARE & STOCK BROKERS (P) LTD. (2010) 41 DTR JUDGMENTS 233. 12. CONTROVERTING THE AFORESAID SUBMISSION, LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE DECISION OF THE CA LCUTTA HIGH COURT IN COMMISSIONER OF INCOME TAX VS. UNITED COLLIERIES LT D. (1993) 203 ITR 857 (CALCUTTA). LEARNED COUNSE L ALSO RELIED UPON COMMISSIONER OF INCOME TAX VS. CENTRAL BANK OF INDI A (2003) 264 ITR 522 (BOMBAY) AND STATE BANK OF INDORE VS. COMMISSIONER OF INCOME TAX (2005) 275 ITR 23 (MP). IT WAS CONTENDED THAT IT WAS ONLY THE ACTUAL EXPENSE INCUR RED FOR EARNING DIVIDEND WHICH WAS TO BE DEDUCTED FROM THE DIVIDEND INCOME FOR CALCULATING THE ADMISSIBLE DEDUCTIONS UNDER SECTION 80M OF THE ACT. IT WAS URGED THAT THE PLEA OF THE REVENUE THAT PROP ORTIONAL EXPENSES SHOULD ALSO BE REDUCED, WAS AGAINST THE STATUTE. 13. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO THE RESPECTIVE SUBMISSIONS OF THE LEARNED COUNSEL FOR T HE PARTIES AND FIND 20 *FORCE IN THE SUBMISSIONS OF THE LEARNED COUNSEL FO R THE REVENUE. FINANCE ACT 2001 HAD INSERTED SECTION 14A WITH EFFECT FROM 1.4. 1962. ACCORDING TO THE SAID SECTION, ANY EXPENDITURE INCURRED BY THE ASSES SEE FOR EARNING INCOME WHICH DID NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT WAS NOT TO BE ALLOWED AS EXPENSES. THIS COURT IN THE CASE OF PUNJAB STATE COOPERATIVE MILK PRODUCER'S FEDERATION LTD.'S CASE (SUPRA) RELYING UPON THE DECISION OF THE APEX COURT IN WALFORT SHARE AND STOCK BROKERS'S CASE (SUPRA), WHEREIN, WHILE DEFINING THE SCOPE OF SECTION 14A OF THE ACT, INCORPORATED RETROSPECTIVELY W.E.F. 1.4.1962, IT HAD LAID DOWN AS UNDER: THE INSERTION OF SECTION 14A WITH RETROSPECTIVE EFFECT IS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT TO ALLOW DEDUCTION IN RESPECT OF ANY EXPENDIIURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST THE TAXABLE INCOME (SEE CIRCULAR NO. 14 OF 2001 DATED 22.11.2001 K IN OTHER WORDS, SECTION 14A CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSE S INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCO ME AND PARTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SECTION 14A, THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WAS BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDATE OF SECTION 14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME A GAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURR ED IN RELATION TO EXEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 1 4A IS THAT CERTAIN INCOMES ARE NOT INCLUDIBIE WHILE COMPUTING TOTAL INCOME AS THES E ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE ACT. IN THE PAST, THERE HAVE BEAN IN WHICH DEDUCTION HAS BEEN SOUGHT IN RESPECT OF SUCH INCOMES WHICH IN E FFECT WOULD MEAN THAT TAX INCENTIVES TO CERTAIN INCOMES WAS BEING USED TO RED UCE THE TAX PAYABLE ON THE NON-EXEMPT INCOME BY DEBITING THE EXPENSES, INCURRED TO EARN THE EXEMPT INCOME, AGAINST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXA TION IS TO TAX THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE. OH THE SA ME ANALOGY THE EXEMPTION IS ALSO IN RESPECT OF NET INCOME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE INCOME. THIS IS THE PURPORT OF S ECTION 14A. IN SECTION 14A, THE FIRST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS OF INCOME AS PRESCRIBED UNDER CHAPTER IV WOULD FALL WITHIN SECTION 14A. THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UND ER THE ACT'. IT MEANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 1 4A. FURTHER, SECTION 14 SPECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE CHARGEABLE, AN INCOME HAS TO BE BROUGHT UNDER ONE OF THE FIVE HEADS. SECTIONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX UNDER THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL INCOME CHARGEABLE TO TAX. THE PERMISSIBLE DEDUCTIONS ENUMERATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOWED ONLY WITH R EFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF THE ABOVE HEADS AND IS CHARGEA BLE TO TAX. IF AN INCOME LIKE DIVIDEND INCOME IS NOT A PART OF THE TOTAL INCOME, THE EXPENDITURE/DEDUCTION THOUGH OF THE NATURE SPECIFIED IN PART OF TOTAL INCOME COULD NOT BE ALLOWED AGAINST ORE INCOME INCLUDIBLE IN THE TOTAL INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT O F EXPENDITURES BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A. READING SECTION 14 IN JUXTAPOSIT ION WITH SECTIONS 15 TO 59, IT IS CLEAR THAT THE WORDS 'EXPENDITURE INCURRE D' IN SECTION 14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST,ETC. IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37) .' ' 14. THE APEX COURT HAD SPECIFICALLY RECORDED THAT THE THEORY OF APPORTIONMENT OF AMOUNT OF EXPENSE* BETWEEN TAXABLE AND NON- 21 TAXABLE INCOME STOOD WIDENED BY INCORPORATION OF SE CTION 14A. IT WAS FURTHER NOTICED THAT THE EXPRESSION 'EXPENSES INCURRED' OCC URRING IN SECTION 14A REFERRED TO TAX, SALARY, INTEREST ETC. IN RESPECT' OF WHICH ALLOWANCES ARE PROVIDED FOR UNDER SECTIONS 30 TO 37 OF THE ACT. 15. IN ALL FAIRNESS TO THE ASSESSEE, IN THE JU DGMENTS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE, SECTI ON 14A AS INCORPORATED BY FINANCE ACT 2001, WITH EFFECT FROM 1.4.1962, WAS NOT UNDER CONSIDERATION AND, THEREFORE, THE SAME DO NOT COME TO THE RESCUE OF THE ASSESSEE. 16. IN VIEW OF THE ABOVE, THE SUBSTANTIAL QU ESTION NO.(II) IS ANSWERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. INCOME TAX APPEAL NOS. 565, 567 AND 569 STAND DISPOSED OF ACCORDINGLY. 26 THUS THEORY OF APPORTIONMENT AS APPROVED BY THE HON'BLE SUPREME COURT IN CASE OF CIT V. WALFORT SHARE AND S TOCK BROKERS P LTD (2010) 326 ITR 1 (S.C) FOLLOWED BY HO N'BLE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOYCEE (SU PRA) HAS ALSO BEEN APPROVED BY HON'BLE PUNJAB & HARYANA HIGH COURT IN CASE OF CIT V. PUNJAB STATE INDUSTRIAL DEVELOPMENT COOP LTD. (SUPRA). 27 NOW THE QUESTION IS HOW SUCH EXPENDITURE CAN BE APPORTIONED. THERE MAY BE A SITUATION WHETHER THE EXPENSES OR INTEREST CANNOT BE IDENTIFIED AGAINST THE PARTIC ULAR ITEM OF INCOME TO MEET THESE DIFFICULTIES RULE 8D WAS INTRO DUCED WHICH HAS BEEN HELD TO BE CONSTITUTIONALLY VALID BY HON'B LE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOYCEE (SUPRA). R ULE 8D READS AS UNDER: RULE 8D READS AS UNDER: (1) WHERE THE ASSESSING OFFICER HAVING REGARD TO T HE ACCOUNT OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MAD E BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YE AR, HE HALL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RUL E (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGAT E OF FOLLOWING AMOUNTS, NAMELY:- 22 (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPE NDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH I S NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR R ECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FO RMULA, NAMELY:- A X B C WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCUR RED DURING THE PREVIOUS YEAR; B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME , AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; C = THE AVERAGE OF TOTAL ASSET AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAS T DAY OF THE PREVIOUS YEAR; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE A VERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAS T DAY OF THE PREVIOUS YEAR. (3) FOR THE PURPOSES OF THIS RULE, THE TOTAL ASSET S SHALL MEAN, TOTAL ASSET AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSET BU T INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS.) . 28 CLAUSE (II) OF SUB-RULE (2) CLEARLY SHOWS THAT I F THE ASSESSEE SHOW THAT INTEREST HAS BEEN INCURRED SPECI FICALLY FOR A PARTICULAR ITEM OF INCOME THEN IT HAS TO BE APPOR TIONED. IN CASE BEFORE US, THE ASSESSEE HAS PROVIDED SOURCES OF FUNDS BUT THEY CANNOT BE SAID TO HAVE BEEN MAINTAINED SEP ARATELY. FIRST OF ALL IT WAS CONCEDED THAT THE ASSESSEE IS H AVING MIXED FUNDS. THE DETAILS OF FUNDS WAS STATED TO BE AS UN DER BEFORE THE LD. CIT(A): 31.3.2008 RS. IN LAKHS SHARE CAPITAL 78.36 RESERVES AND SURPLUSES 130.82 OWN FUNDS 209.18 WORKING CAPITAL BORROWINGS 1779.62 CURRENT ASSETS 2243.45 AMOUNT INVESTED IN EXCESS OF LOAN 463.83 23 TERM LOAN BORROWINGS 253.31 FIXED ASSETS 451.82 AMOUNT INVESTED IN EXCESS OF LOAN 198.51 AMOUNT INVESTED IN CHADHA MOTORS 255.96 CONSEQUENTLY BY SIMPLY SAYING THAT THE FUNDS INVEST ED IN FIXED ASSETS AND CURRENT ASSETS ARE MORE THAN THE BORROWE D FUNDS, WOULD NOT SHOW THAT SPECIFIC FUNDS HAVE BEEN BORROW ED FOR SPECIFIC PURPOSE. FOR EXAMPLE IT CAN BE VERY EASIL Y SAID THAT THE ASSESSEE SUPPORTED ITS BUSINESS WITH OWN FUNDS AND BORROWED LOANS HAVE BEEN USED FOR MAKING INVESTMENT IN ASSETS AS WELL AS IN INVESTMENTS WHICH GENERATE EXE MPTED INCOME. ONCE THE FUNDS ARE MIXED, THERE IS NO WAY TO FIND OUT ACTUAL USAGE OF THE FUNDS. TO MEET THIS SITUATION ONLY RULE 8D WAS INSERTED TO REMOVE THE DIFFICULTIES. IN FACT T HIS ASPECT WAS ALSO EXAMINED BY HON'BLE BOMBAY HIGH COURT IN CASE OF GODREJ & BOYCEE (SUPRA). MANY OBSERVATIONS WERE MADE UNDE R THE HEAD PARAMETERS OF JUDICIAL REVIEW AT PARA 62 TO 7 2 OF THE ORDER. WITHOUT UNNECESSARILY BURDENING THIS ORDER WITH THESE OBSERVATIONS WE WILL QUOTE PARA 73 WHICH DEALS WITH JUSTIFICATION OF RULE 8D: IN THE AFFIDAVIT IN REPLY THAT HAS BEEN FILED ON BE HALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RATIONALE UNDERLYING RULE 8D. IN THE WRITTEN SUBMI SSIONS WHICH HAVE BEEN FILED BY THE ADDITIONAL SOLICITOR G ENERAL IT HAS BEEN STATED, WITH REFERENCE TO RULE 8D(2)(II ) THAT SINCE FUNDS ARE FUNGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACTUAL QUANTUM OF BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX FREE INVESTMENT. IT IS ONLY TH E INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONE D AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT W ILL BE TAKEN (AS A IN THE FORMULA) WILL EXCLUDE ANY EXPE NDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE T O ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLE ANY AS PECT OF THE ASSESSEES BUSINESS SUCH AS PLANT/MACHINERY ETC .). AS REGARDS RULE 8D(2)(III) IT HAS BEEN SUBMITTED TH AT SOME MECHANISM OR FORMULA HAD TO BE ADOPTED FOR ATTRIBUT ING PART OF THE ADMINISTRATIVE/MANAGERIAL EXPENSES TO T AX EXEMPT INVESTMENT INCOME. THE ADMINISTRATIVE EXPEN SES ATTRIBUTABLE TO TAX FREE INVESTMENT INCOME HAVE A F IXED COMPONENT AND A VARIABLE COMPONENT. A VIEW WAS TA KEN THAT THE DISALLOWANCE SHOULD ALSO BE LINKED TO THE VALUE OF THE INVESTMENT RATHER THAN THE AMOUNT OF EXEMPT INC OME. UNDER PORTFOLIO MANAGEMENT SCHEME (PMS) THE FEE CHARGED RANGES BETWEEN 2 AND 2.5 PER CENT OF THE PORTFOLIO VALUE WHICH WOULD BE INCLUSIVE OF A PROFI T ELEMENT FOR THE PORTFOLIO MANAGER. WHILE THE FIXED ADMINISTRATIVE EXPENSE WERE EXCLUDED, ON THE GROUND THAT 24 IN THE CAASE OFA LARGE CORPORATE TAXPAYER THEY WOUL D BE SPREAD OVER A LARGE NUMBER OF VOLUMINOUS ACTIVITIES , THE VARIABLE EXPENSES WERE COMPUTED AT ONE-HALF PER CEN T OF THE VALUE OF THE INVESTMENT. THE JUSTIFICATION THA T HAS BEEN OFFERED IN SUPPORT OF THE RATIONALE FOR RULE 8 D CANNOT BE REGARDED AS BEING CAPRICIOUS, PERVERSE OR ARBITR ARY. APPLYING THE TESTS FORMULATED BY THE HON'BLE SUPREM E COURT IT IS NOT POSSIBLE FOR THIS COURT TO HOLD THA T THERE IS WRIT ON THE STATUTE OR ON THE SUBORDINATE LEGISLATI ON PERVERSITY, CAPRICE OR IRRATIONALITY. THERE IS CER TAINLY NO MADNESS IN THE METHOD. THUS ABOVE RULE WAS FOUND TO BE VALID AND RATIONAL. COMING BACK TO THE CASE IN HAND, THE PERUSAL OF THE ASSESS MENT ORDER SHOWS AS OBSERVED EARLIER, NO WHERE BEFORE THE ASS ESSING OFFICER OR THE LD. CIT(A), THE ASSESSEE HAS MADE A SPECIFIC MENTION TO SHOW WHICH PARTICULAR FUNDS WERE BORROWE D FOR WHICH PARTICULAR REQUIREMENT AND IN THE ABSENCE OF SUCH SPECIFIC UTILIZATION RULE 8D, WOULD BE APPLICABLE. PERUSAL OF THE ASSESSMENT ORDER SHOWS THAT DISALLOWANCE U/S 14 A HAS BEEN WORKED OUT ON THE BASIS OF RULE 8D WHICH IS A S OBSERVED EARLIER APPLICABLE IN CASE OF THE ASSESSEE. THEREF ORE, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THAT OF THE ASSESSING OFFICER. 29. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMIS SED AND REVENUES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED ON 28.12.2012. SD/- SD/- (SUSHMA CHOWLA) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEM BER DATED : 28.12. 2012 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/THE DR 25