GEBR Pfeiffer (I) Pvt. Ltd., Noida V. Addl. CIT, New Delhi

ITA 3616/DEL/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77736 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 03-03-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 10-07-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SATPAL SINGH
• Assessee Lawyers: SAILESH GUPTA
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C : NEW DELHI BEFORE SHRI B.C.MEENA , ACCOUNTANT MEMBER AND SHRI A. T. VARKEY, JUDICIAL MEMBER ITA NO. 3616 /DEL/ 2012 (ASSESSMENT YEAR: 2008 - 09 ) GEBR PFEIFFER (I) PVT. LTD., PLOT NO. A - 27A, SECTOR - 16, NOIDA PAN AABCG3002E VS. ADDL. CIT RANGE - 12, NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY : SALIL AGARWAL, ADV. & SAILESH GUPTA, CA RESPONDENT BY : SATPAL SINGH, SR. DR O R D E R PER A. T. VARKEY , JUDICIAL MEMBER THIS IS AN APPEAL PREFERRED BY THE ASSESSEE AGAINST THE ORDER OF THE LD CIT(A) - X V , NEW DELHI DATED 03.05.2012 FOR THE ASSESSMENT YEAR 2008 - 09 . 2. THE GROUNDS OF APPEAL ARE AS FOLLOWS: - 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS GROSSLY ERRED BOTH ON FACTS AND LAW BEFORE PASSING THE IMPUGNED ORDER. 2. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS GROSSLY ERRED IN NOT APPRECIATING THAT BEFORE ANY DISALLOWANCE C AN BE MADE UNDER SECTION 14A THERE SHOULD BE A NEXUS BETWEEN THE EXPENSES DEBITED AND THE EXEMPT INCOME. 3. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS GROSSLY ERRED IN NOT APPRECIATING THAT THE ASSESSEE HAD NOT INCURRED ANY EXPENSES FOR EARNING THE EXEMPT INCOME WHICH WAS PURELY FROM DIVIDEND INCOME AND NO EXPENSES HAS BEEN INCURRED HENCE THERE WAS NO OCCASION FOR DISALLOWANCE OF EXPENSES. 4. THAT THE APPELLANT SEEKS TO ALTER, MODIFY AND ADD ANY OF THE GROUND AS THE CASE MAY BE. 3. APROPOS DISALLOWANCES MADE U/S 14A OF THE INCOME TAX ACT , 1961 (HEREINAFTER THE ACT) . 4. BRIEF FACTS OF THE CASE IS AS FOLLOWS. THE ASSESSEE CO MPANY IS ENGAGED IN THE BUSINESS OF DESIGN, ENGINEERING, SUPPLY OF MACHINERY AND SPARES AND SUPERVISION OF ERECTION AND COMMISSIONING OF GRINDING PLANTS USING MPS VERTICAL ROLLER MILLS OR CEMENT AND SIMILAR INDUSTRIES. THE ASSESSEE FILED ITS RETURN OF INCO ME DECLARING TOTAL PAGE NO. 2 INCOME AT RS. 33,36,01,100/ - ON 24.09.2008. THE SAME WAS PROCESSED U/S 143(1 ) . THE CASE WAS SELECTED FO R SCRUTINY ASSESSMENT. DURING THE COURSE OF SCRUTINY ASSESSMENT THE AR HAS PRODUCED THE BOOKS OF ACCOUNT WHICH HAVE BEEN EXAMINE D ON TEST CHECK BASIS . SINCE THE ASSESSEE IN ITS RETURN OF INCOME HAS DECLARED A DIVIDEND INCOME OF RS. 2,71,83,864/ - WHICH HAS BEEN CLAIMED AS EXEMPT , T HE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY EXPENSES INCURRED FOR EARNING DIVIDEND INCOME NOT BE DISALLOWED A S PER THE PROVISION OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 (HEREINAFTER THE RULE S ) . PURSUANT TO THE SAID QUERY OF THE ASSESSING OFFICER THE ASSESSEE REPLIED THAT RULE 8D IS NOT APPLICABLE SINCE THERE IS NO NEXUS OF EXPE NSES DEBITED TO PROFIT AND LOSS ACCOUNT AND THE EXEMPT INCOME AND THEREFORE THE PROVISION OF SECTION 14A READ WITH RULE 8D ARE NOT APPLICABLE. IT WAS ALSO SUBMITTED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER THAT THE COMPANY HAD NOT INCURRED ANY EXPENSES FOR EARNING EXEMPT INCOME ; AND T HE EXEMPT INCOME IS ONLY IN THE FORM OF DIVIDEND FROM MUTUAL FUNDS AND THE MUTUAL FUNDS ARE NOT PURCHASED FROM ANY BORROWED FUND ON WHICH ANY INTEREST IS PAID AND THE EXPENSES/ EXPENDITURE DEBITED IN THE PROFIT AND LOSS ARE IN NO MANNER WAS CONNECTED/ INCURRED WITH THE EXEMPT INCOME AND HENCE, THE PROVISION OF 14A READ WITH RULE 8D ARE NOT AT ALL ATTRACTED. IT WAS ALSO SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE COMPANY HAS MADE INVESTMENT IN MUTUAL FUNDS ON THE BASIS OF ADVISORY SERVICES GIVEN BY THE DEUTCH BANK INVESTMENT ADVISORS ; AND IT WAS ALSO CONTENDED THAT THESE SERVICES ARE OFFERED BY THE DEUTCH BANK INVESTMENT ADVISORS FREE OF COST TO ALL INSTITUTIONAL BUYERS ; AND SINCE THEY (DEUTCH BANK) WILL GET COMMISSION IN THE EVENT OF SALE OF THE SAID MUTUAL FUND FROM THE MUTUAL FUND COMPANY WHEN IT IS SOLD MEANING THAT THE DEUTCH BANK S INCENTIVE TO GIVE FREE ADVICE TO THE ASSESSEE IS THAT IT WILL ULTIMATELY RECEIVE COMMISSION WHEN THE MUTUAL FINDS ARE SOLD. IT WAS ALSO SU BMITTED THAT THE DEUTCH BANK DID NOT CHARGE ANY FEES FOR ITS ADVISE. THE ASSESSING OFFICER DID NOT ACCEPT THIS REPLY OF THE ASSESSEE AND HELD THAT THERE ARE ALWAYS SOME EXPENSES RELATED TO EARNING OF AN INCOME , ACCORDINGLY HE HELD THAT AS PER CLAUSE (III) OF SUB - RULE ( 2 ) OF RULE 8D , AN AMOUNT I.E. ONE - HALF PERCENT OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH D O ES 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, IS TO BE DISALLOWED. AND THE ASSESSING OFFICER COMPUTED THE DISALLOWANCE RS. 13,82,741/ - WHICH WAS ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. PAGE NO. 3 5. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD CIT(A), WHO WAS PLEASED TO DISMISS THE SAME. BEING AGGRIEVED BY THE SAID ORDER OF THE LD CIT(A) THE ASSESSEE IS BEFORE US. 6 . THE LD COUNSEL, SHRI SAL I L AGARWA L, SUBMITTED THAT DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE HAS EARNED DIVIDEND INCOME AMOUNTING TO RS. 2,71 , 83,864/ - FROM MUTUAL FUNDS, WHICH WERE EXEMPT U/S 10(35) OF THE ACT. LD COUNSEL SUBMITTED THAT AS PER SECTION 14A(1) OF THE ACT, FOR THE PU RPOSE OF COMPUTING TOTAL INCOME UNDER CHAPTER IV OF THE ACT, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. FURTHER, SUB - SECTION 2 AND 3 OF THE SAID SECTI ON PROVIDES THAT ASSESSING OFFICER CAN DISALLOW THE EXPENSES IN RELATION TO INCOME WHICH IS EXEMPT FROM INCOME TAX ON THE BASIS OF PRESCRIBED METHOD WHERE HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASSESSEES CLAIM REGARDING SUCH EXPENDITURE HAVING RE GARD TO THE BOOKS OF ACCOUNTS OF THE ASSESSEE. RULE 8D OF THE RULES IS THE METHOD OF COMPUTATION PRESCRIBED FOR THE PURPOSE OF SAID SECTION. IT WAS SUBMITTED BY THE COUNSEL THAT THE ASSESSEE DURING THE YEAR HAS NOT INCURRED ANY EXPENDITURE DIRECTLY OR INDI RECTLY TOWARDS EARNING EXEMPT DIVIDEND INCOME. THE LD COUNSEL, SHRI SALIL AGARWAL, STRENUOUSLY ARGUED THAT EVEN AFTER INSERTION OF RULE 8D THE DISALLOWANCE U/S 14A OF THE ACT CANNOT BE MADE UNLESS THE ASSESSING OFFICER IS SATISFIED HAVING REGARD TO THE ACC OUNTS OF THE ASSESSEE THAT EXPENSES WAS INCURRED IN RELATION TO EXEMPT DIVIDEND INCOME. THEREFORE, IT WAS SUBMITTED BY HIM THAT HAVING REGARD TO THE BOOKS OF ACCOUNT OF THE ASSESSEE AND ON THE FACTS OF THE CASE, NO SATISFACTION TOWARDS INCURRING OF EXPEND ITURE IN EARNING EXEMPT DIVIDEND INCOME COULD HAVE BEEN REACHED BY THE ASSESSING OFFICER, AND SO RESULTANTLY NO DISALLOWANCE ON ACCOUNT OF EXPENDITURE WHICH HAS NOT BEEN INCURRED CANNOT BE COMPUTED AGAINST THE ASSESSEE. THE LD COUNSEL STATED THAT THE AO HAS NOT RECORDED HIS SATISFACTION ABOUT THE CORRECTNESS OF THE CLAIM IN THIS RESPECT BY THE ASSESSEE BEFORE PROCEEDING TO APPLY RULE 8D AND NON - RECORDING OF THE SATISFACTION VITIATES THE ENTIRE ADDITION MADE BY AO. IT WAS ALSO POINTED OUT BY THE LD COUNSEL THAT AS PER RULE 8D, THE DISALLOWANCE CANNOT BE MADE SIMPLY ON THE BASIS OF THE FORMULAE GIVEN THEREIN, UNLESS THERE IS EVIDENCE TO DEMONSTRATE THAT ANY EXPENDITURE HAS ACTUALLY BEEN INCURRED FOR EARNING THE EXEMPT INCOME . THE LD COUNSEL SUBMITTED THAT THERE IS NO NEXUS BETWEEN THE EXEMPT INCOME AND THE EXPENSES DEBITED IN THE P&L ACCOUNT . FURTHER, IT WAS SUBMITTED THAT INVESTMENT IN PAGE NO. 4 MUTUAL FUND ON WHICH THE EXEMPT DIVIDEND HAS BEEN EARNED WERE NOT INVESTED FROM BORROWED F UND ON WHICH NO INTEREST HAD BEEN PAID AND SO ON THAT ACCOUNT ALSO NO DISALLOWANCE CAN BE MADE. IT WAS SUBMITTED BY THE LD COUNSEL THAT NO PORTION OF THE EXPENSES DEBITED TO THE PROFIT AND LOSS ACCOUNT FOR THE YEAR TOWARDS ADMINISTRATIVE AND MANAGERIAL CO STS IS RELATABLE TO EARNING OF DIVIDEND INCOME FROM INVESTMENTS IN VARIOUS MUTUAL FUNDS. THEREFORE IT WAS SUBMITTED BY THE LD COUNSEL THAT EVEN AFTER INSERTION OF RULE 8D, DISALLOWANCE U/S 14A CANNOT BE MADE ON AD - HOC BASIS WITHOUT BRINGING ON RECORD EVIDE NCE OF INCURRENCE OF EXPENDITURE TOWARDS EARNING EXEMPT DIVIDEND INCOME. IN SUPPORT OF HIS CONTENTION LD AR RELIED ON THE DECISION OF CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF JINDAL PHOTO ITA NO. 814/DE/2011AND MAXOPP INVESTMENT LTD. VS. CIT (2012 ) 347 ITR 272 (DEL.). 7 . LD DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE ASSESSING OFFICER AND HAS STATED THAT SECTION 14A WAS INSERTED BY THE FINANCE ACT, 2001 SO AS TO AVOID THE LITIGATION WHICH WAS PREVAILING IN RESPECT OF ALLOCATION OF EXPENDITUR E BETWEEN THE TAXABLE INCOME AND EXEMPT INCOME. THAT IN FURTHERANCE TO SUCH OBJECTIVE, RULE 8D HAS BEEN PROVIDED. THAT IN THIS CASE, THE ASSESSEE HAS CLAIMED THAT NO DISALLOWANCE IS TO BE MADE U/S 14A OF THE ACT . THE ASSESSING OFFICER HAS DISCUSSED THE SAM E AND THEREAFTER CAME TO THE CONCLUSION THAT DISALLOWANCE UNDER SECTION 14A IS REQUIRED TO BE MADE. THEREFORE, ACCORDING TO THE LD DR, THE CONTENTION OF THE LD COUNSEL OF THE ASSESSEE THAT NO SATISFACTION WAS RECORDED BY THE ASSESSING OFFICER IS FACTUALLY INCORRECT. ACCORDING TO THE LD DR, THE MERE FACT THAT THE ASSESSING OFFICER INVOK ED RULE 8D AFTER SERVING NOTICE TO THE ASSESSEE IN THIS BEHALF, ITSELF IMPLIES THAT THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE A ND IN ANY CASE, DURING APPELLATE PROCEEDINGS THE LD CIT(A) HEARING THE SAID GRIEVOUSNESS OF THE ASSESSEE, HAS EXERCISED HIS CO - TERMINUS POWER AS HELD BY THE HONBLE SUPREME COURT IN KANPUR CO A L SYNDICATE AND AFTER GIVING OPPORTUNITY TO THE ASSESSEE TO EXPLAIN AGAIN AS TO WHY DISALLOWANCE U/S 14A READ WITH RULE 8D BE NOT MADE , SINCE APPLICATION OF THE PRESCRIBED METHOD IS MANDATORY FOR THE RELEVANT ASSESSMENT YEAR AND THEREAFTER THE LD CIT(A) AFTER CONSIDERING THE REPLY OF THE ASSESSEE, RECORDED THE SATISFACTION AS ENVISAGE D IN THE STATUTE AND THEREAFTER COMPUTED THE DISALLOWANCE AT RS. 13,82,741/ - BEING 0.5% OF AVERAGE INVESTMENT AS IS PRESCRIBED U/RULE 8D (2)(II) . THE LD DR FURTHER STATED THAT THE LEGISLATIVE INTENTION WAS TO AVOID DISPUTE S WITH REGARD TO ALLOCATION OF THE EXPENDI TURE RELATING TO EXEMPT INCOME AND RULE 8D HAS BEEN PRESCRIBED FOR THIS, PAGE NO. 5 WHICH IS APPLICABLE IN THE YEAR UNDER CONSIDERATION. ACCORDING TO THE LD DR, ONCE RULE 8D IS APPLICABLE, THE ASSESSEE CAN PO INT OUT A MISTAKE, IF ANY, IN THE WORKING MADE BY THE ASSESSING OFFICER IN RESPECT OF RULE 8D. HOWEVER, WITHOUT POINTING OUT ANY SUCH MISTAKE, THE ASSESSEE CANNOT CLAIM THAT NO DISALLOWANCE U/S 14A IS REQUIRED TO BE MADE. THE LD DR POINTED OUT THAT THE DIVISION BENCH OF HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS. COMMISSIONER OF INCOME - TAX (2012) 347 ITR 272 (DELHI) AFTER TAKING INTO CONSIDERATION A NUMBER OF CASES ULTIMATELY HAS REMITTED THE CASES BACK TO THE FILE OF ASSESSING OFF ICER TO COMPUTE THE ACTUAL EXPENDITURE INCURRED EVEN IN CASES WHERE TH IS TRIBUNAL HAS HELD THAT ASSESSEE INCURRED NO EXPENDITURE IN RELATION TO THE EXEMPT DIVIDEND INCOME, AND THE HONBLE HIGH COURT HAD SET - ASIDE THOSE ORDERS OF THE TRIBUNAL AND REMANDED I T BACK TO THE ASSESSING OFFICER. THE LD DR TOOK OUR ATTENTION TO THE DECISION IN CIT VS. WALFORT SHARE AND STOCK BROKERS P. LTD. (2010) 326 ITR1 (SC) AND MAXOPP INVESTMENT LTD. (SUPRA) AND CONTENDED THAT THE ORDER OF THE AUTHORITIES BELOW ARE VALID AS PER LAW AND THEREFORE NEED NO INTERFERENCE. 8 . WE HAVE CAREFULLY CONSIDERED THE SUBMISSION OF BOTH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. THE DISPUTE IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S 14A AMOUNTING T O RS. 13,82,741/ - WHICH IS SUSTAINED BY THE LD CIT(A). THE ASSESSEE HAS DISPUTED THE DISALLOWANCE MAINLY ON TWO GROUNDS - (I) THAT NO SATISFACTION IS RECORDED BY THE ASSESSING OFFICER AS ENVISAGED BY THE SUB - SECTION (2) &(3) OF SECTION 14A, AND (II) THAT NO EXPENDITURE WAS INCURRED BY THE ASSESSEE FOR EARNING OF EXEMPT INCOME. HERE WE WOULD LIKE TO POINT OUT THAT IN THE GROUNDS OF APPEAL PREFERRED BY THE ASSESSEE, NO SPECIFIC PLEA TO GROUND NO. 1 HAS BEEN TAKEN BY THE ASSESSEE, THOUGH HE ARGUED THE SAME BEFOR E US AND TOOK PAINS TO CONVINCE US TO ADJUDICATE ON IT . 9 . IN SUPPORT OF THE FIRST CONTENTION, THE LD COUNSEL FOR THE ASSESSEE HAS RELIED UPON THE DECISIONS OF MAXOPP INVESTMENTS (SUPRA) AND JI NDAL PHOTO (SUPRA) . SO FAR AS THE LEGAL PROPOSITION PUT FORTH B Y THE LD COUNSEL IS CONCERNED, THERE CANNOT BY ANY DISPUTE IN THIS RESPECT . FROM A PLAIN READING OF SECTION 14A(1) AND ALSO THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN MAXOPP INVESTMENTS (SUPRA) AND ITATS DELHI BENCH DECISION IN JINDAL PHOTO ITA NO. 814/DEL/2011, IT IS CLEAR THAT INCURRING OF SOME EXPENDITURE IS ESSENTIAL FOR INVOKING THE PROVISIONS OF SECTION 14A. IN OTHER WORDS, IF NO EXPENDITURE IS FOUND TO HAVE BEEN INCURRED FOR EARNING EXEMPT INCOME, DISALLOWANCE U/S 14A COULD NOT BE MADE BY THE ASSESSING OFFICER. AS PER PAGE NO. 6 SUB - SECTION (2) OF SECTION 14A, THE ASSESSING OFFICER CAN EMBARK UPON DETERMINATION OF AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME ONLY IF HE RECORDS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. SUB - SECTION (3) OF SECTION 14A FURTHER EXTENDS THE SCOPE OF SUB - SECTION (2) AND THE ASSESSING OFFICER IS REQUIRED TO RECORD THE SIMILAR FINDING EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO THE EXEMPT INCOME. THEREFORE, THE CONTENTION OF THE LD COUNSEL, THAT BEFORE PROCEEDING TO MAKE THE DISALLOWANCE U/S 14A , THE ASSESSING OFFICER HAS TO RECORD HIS SATISFACTION AS REQUIRED BY SUB - SECTION (2) & (3) OF SECTION 14A, IS ACCEPTED. 10 . NOW THE QUESTION IS WHETHER THE ASSESSING OFFICERS NON - RECORDING OF SATISFACTION IN EXPLICIT TERMS IN RESPECT TO THE CLAIM OF THE ASSESSEE, VITIATE THE ADDITION MADE U/S 14A READ WITH RULE 8D. HERE WE FIND THAT ASSES SING OFFICER IN HIS ASSESSMENT ORDER HAD ASKED THE ASSESSEE TO EXPLAIN AS TO WHY EXPENSES FOR EARNING DIVIDEND INCOME NOT BE DISALLOWED AS PER THE PROVISION OF SECTION 14A. AFTER TAKING NOTE OF THE ASSESSEES REPLY DATED 03.12.2010 & 15.12.2010 ( WHICH HAS BEEN REP RODUCED IN THE ASSESSMENT ORDER), THE ASSESSING OFFICER, HAS REJECTED THE EXPLANATION OF THE ASSESSEE BY SAYING THAT THE REPLY OF THE ASSESSEE HAS BEEN DULY CONSIDERED AND FOUND TO BE UNACCEPTABLE. THERE ARE ALWAYS SOME EXPENSES RELATED TO EARNING OF AN INCOME. THEREAFTER THE ASSESSING OFFICER APPLIE D CLAUSE (III) OF SUB - RULE (2) OF RULE 8D OF THE INCOME TAX RULE, 1962, AND THUS DISALLOWED RS. 13,82,741/ - . SO WE FIND THAT THE ASSESSING OFFICER HAS NOT SPECIFICALLY RECORDED HIS SATISFACTION ABOUT T HE CORRECTNESS OF THE SAID CLAIM. HOWEVER, IN THIS RESPECT WE FIND THAT DURING THE APPELLATE PROCEEDINGS THE LD CIT(A) HAS OBSERVED THAT THE AO HAD SERVED NOTICE TO THE ASSESSEE AS TO WHY DISALLOWANCE OF EXPENDITURE ON THE EXEMPT INCOME BE NOT MADE AND AFT ER RECEIPT OF THE REPLY/ EXPLANATION HAS CLEARLY STATED THAT THE SAID REPLY/ EXPLANATION OF THE ASSESSEE CANNOT BE ACCEPTED. AND THEREAFTER INVOKED RULE8D, WHICH ACCORDING TO THE LD CIT(A) WAS NOTHING OTHER THAN AN IMPLIED RECORD ING OF SATISFACTION AS ENVI SAGED UNDER SUB - SECTION (2) OF SECTION 14 ( A ) . FURTHER WE FIND THAT OUT OF ABUNDANT CAUTION, AND TO AVOID ANY PREJUDICE WHATSOEVER TO THE ASSESSEE IN THIS RESPECT , THE LD CIT(A) HAD EXERCISED HIS CO - TERMINUS POWER AS THAT OF AO AND HAS GIVEN AGAIN NOTICE TO THE APPELLANT - ASSESSEE TO EXPLAIN AS TO WHY DISALLOWANCE U/S 14A READ WITH RULE 8D BE NOT MADE SINCE IT WAS MANDATORY TO DO SO FOR THE RELEVANT ASSESSMENT YEAR UNDER CONSIDERATION . PAGE NO. 7 HERE WE WOULD LIKE TO REFER TO CIT VS. KANPUR COAL SYNDICATE, 53ITR 225( SC) WHEREIN, THE HONBLE SUPREME COURT HAS HELD THAT THE APPELLATE COMMISSIONER (IN THIS CASE LD CIT(A) HAS PLENARY P OWERS IN DISPOSING OF AN APPEAL , AND ALSO THAT THE SCOPE OF THIS POWER IS CO - TERMINUS WITH THAT OF THE ITO (HERE IT IS AO) . AND IT WAS ALSO HELD THAT HE (APPEL LATE AUTHORITY, CIT(A)) CAN DO WHAT THE ITO ( AO ) CAN DO AND CAN ALSO DIRECT THE CONCERN ED PERSONS TO DO WHAT HE (ITO , AO IN THIS CASE) HAS FAILED TO DO. SO WE FIND THAT IN THE INSTANT CASE, THE GRIEVANCE OF THE ASSESSEE BEFORE THE LD CIT( A) THAT NO SATISFACTION WAS RECORDED BY THE ASSESSING OFFICER, BEFORE DISALLOWING EXPENSE AS CONTEMPLATED UNDER SECTION 14A READ WITH RULE 8D, THE LD CIT(A) AFTER OBSERVING THAT THE ASSESSING OFFICER BY NOT ACCEPTING THE REPLY/ EXPLANATION OF THE ASSESSEE TO HIS NOTICE FOR DISALLOWANCE U/S 14A, HAS INFACT CONVEYED THE IMPLIED DIS SATISFACTION OF ASSESSING OFFICER AS CONTEMPLATED U/S 14A, HOWEVER THE LD CIT(A) HAS EXERCISED HIS CO - TERMINUS, PLENARY POWER ENJOINED TO HIM AS AN APPELLATE AUTHORITY AS HELD BY THE APEX COURT IN KANPUR COAL SYNDICATE (SUPRA) AND AFTER GIVING FRESH OPPORTUNITY TO THE ASSESSEE TO EXPLAIN BEFORE HIM WHY DISALLOWANCE U/S 14A READ WITH RULE 8D BE NOT M ADE IN ITS CASE AND AFTER RECEIPT OF THE REPLY / EXPLANATION FROM ASSESSEE , THEN ONLY THE LD CIT(A) HAS RECORD ED HIS SATISFACTION AS ENVISAGED BY SECTION 14A AND THEREAFTER COMPUTED THE DISALLOWANCE AS PER RULE 8D. IT WOULD APPOSITE TO REPRODUCE THE RELEVAN T PARAGRAPH OF THE ORDER OF THE LD CIT(A), AND THE SAME IS REPRODUCED BELOW. 5.3 IN THE INSTANT CASE, SINCE ASSESSING OFFICER HAS INVOKED RULE 8D, IT IS THUS IMPLIED THAT, HE WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE APPELLANT. IN ANY CA SE, SINCE IT IS WELL SETTLED THAT, POWERS OF THE CIT(A) ARE CO - TERMINUS WITH THAT OF THE ASSESSING OFFICER, AS HAS BEEN HELD BY HONBLE SUPREME COURT IN THE CASE OF KANPUR COAL SYNDICATES VS. CIT REPORTED IN 53 ITR 225, THE APPELLANT WAS GIVEN ANOTHER OPPO RTUNITY TO EXPLAIN AS TO WHY DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D BE NOT MADE, AS FROM ASSESSMENT YEAR 2008 - 09, THIS RULE IS MANDATORY IN NATURE. WITH REGARD TO ABOVE, THE APPELLANT SIMPLY STATED NO DISALLOWANCE IS WARRANTED IN THEIR CASE, AS NO ORGANIZED INVESTMENT ACTIVITY IS BEING CARRIED BY THEM RATHER THEY GET FREE ADVICE FROM DEUTCH BANK. HENCE NO AMOUNT OF DISALLOWANCE IS WARRANTED UNDER RULE 8D, AS SUCH DETERMINATION IS NOT PRACTICALLY FEASIBLE. 5.4 FROM THE ABOVE SUBMISSION, IT IS EVIDENT THAT, THE APPELLANT HAS NOT BEEN ABLE TO SUPPORT ITS CLAIM FROM THE BOOKS OF ACCOUNTS THAT, (NO EXPENDITURE IS INCURRED IN RELATION TO EXEMPT INCOME). THERE IS NO DISPUTE THAT APPELLANT HAS EARNED EXEMPT INCOME OF RS. 2,71,83,864/ - DURING THE YEAR UNDER CONSIDERATION AND APPELLANT HAS ITSELF STATED THAT NO EXPENDITURE IS INCURRED BY THEM IN EARNING A HUGE PAGE NO. 8 DIVIDEND OF RS. 2.7 CRORE. THIS MERE CLAIM UNSUPPORTED BY ANY EXPENDITURE THAT NO ORGANIZED INVESTMENT ACTIVITY IS BEING CARRIED ON BY THE COMPANY AND IS GIVEN FREE ADVICE BY DEUTCH BANK DOES NOT LEAD TO ANY INFERENCE THAT EXPENDITURE HAS NOT BEEN INCURRED FOR EARNING EXEMPT INCOME. ACCORDINGLY, IT IS HELD THAT, I AM NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM O F THE APPELLANT THAT NO EXPENDITURE WAS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. ONCE SUCH IS A POSITION, THE LOGICAL CONSEQUENCE IS APPLICATION OF RULE 8D. IN OTHER WORDS, WHEN APPELLANT CLAIMS THAT THE Y HAVE NOT INCURRED ANY EXPENDITURE ON INVESTMENTS WHICH YIELDED THE EXEMPT INCOME, THE LD CIT(A)/ASSESSING OFFICER ARE BOUND TO DETERMINE ANY DISALLOWANCE U/S 14A/ RULE 8D FROM ASSESSMENT YEAR 2008 - 09 ONWARDS. NOW IN THE APPELLANTS CASE IT IS SEEN THAT, DURING THE YEAR, THE APPELLANT HAS MADE VARIOUS INVESTMENTS TO THE TUNE OF RS. 36.19 CRORES. IT IS AN ESTABLISHED FACTS THAT IN COMMERCIAL WORLD, THERE IS NO CONCEPT OF FREE LUNCH AND IT IS IMPOSSIBLE TO BELIEVE THAT THE MAKING OF INVESTMENT (WHICH EARNS THE EXEMPT INCOME) IS NOT IN NATURE OF ANY PASSIVE ACTIVITY INVOLVING NO INPUT. INFACT, IN THE PRESENT SITUATION. B) MAINTAIN OR CONTINUING WITH ANY INVESTMENT IN A PARTICULAR SHARE/ MUTUAL FUNDS ETC AND C) E VEN THE TIME WHEN TO EXIT FROM ONE INVESTMENT TO ANOTHER, ALL THESE ACTIVITIES ARE WELL COORDINATE AND WELL INFORMED MANAGEMENT DECISIONS, INVOLVING NOT ONLY INPUTS FROM VARIOUS SOURCES BUT ALSO IT INVOLVES ACUMEN OF SENIOR MANAGEMENT DECISIONS. NO DOUBT THE SERVICES OF DEUTCH BANK MUST BE AVAILED BUT DEFINITELY THE SENIOR FUNCTIONARIES OF THE APPELLANT COMPANY AND SOME OTHER OFFICIALS MUST BE THERE TO HAVE A LIAISON WITH BANKING AUTHORITIES. NO PRUDENT BUSINESSMAN (WHO IS GOING TO INVEST A SUBSTANTIAL SUM OF MONEY ON INVESTMENT) WILL LEAVE DECISION ENTIRELY ON A THIRD PARTY WITH NO STAKES. ACCORDINGLY, THE PLEA OF THE APPELLANT THAT THEY HAVE NOT INCURRED ANY EXPENDITURE IN DEPLOYING A HUGE FUNDS OF RS. 36.19 CROES DURING THE YEAR IS NOT ACCEPTABLE AT ALL . HENCE IN THE ABSENCE OF ANY INFORMATION, FROM ASSESSMENT YEAR 2008 - 09, THE ASSESSING OFFICER (AND CIT(A) IN VIEW OF HIS CO - TERMINUS POWER WITH THAT OF ASSESSING OFFICER) IS BOUND TO COMPUTE DISALLOWANCE U/S 14A READ WITH RULE 8D. ACCORDINGLY, BY APPLYING THE SAME, I COMPUTE THE DISALLOWANCE U/S 14A/RULE 8D AT RS. 13,82,741/ - BEING (0.5% OF AVERAGE INVESTMENTS) AS IS WARRANTED UNDER RULE 8D(2)(II). 11 . FROM A PERUSAL OF THE ABOVE, WE FIND THAT LD CIT(A) WHILE EXERCISING HIS APPELLATE JURISDICTION HAS EXERCISED HIS CO - TERMINUS POWER WITH THAT OF ASSESSING OFFICER AND HAS RECORDED HIS DIS SATISFACTION WITH THE CORRECTION OF THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE WAS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER T HE ACT . SO NO WE FIND NO VIOLATION OF ANY LAW WHATSOEVER HAS BEEN CAUSED TO THE ASSESSEE IN THIS REGARD. MOREOVER, THOUGH THIS PAGE NO. 9 GROUND HAS NOT BEEN SPECIFICALLY RAISED BY THE ASSESSEE AS A GROUND IN APPEAL IT IS CONSID E RED BY US , SINCE IT BEING A MIXED QUES TION OF LAW AND FACT AND IT GOES TO THE ROOT OF THE MATTER , WE HAVE LOOKED INTO THIS ISSUE RAISED DURING ARGUMENT AND HAS BEEN FOUND TO BE DEVOID OF MERIT AND THEREFORE DISMISSED. 12 . COMING TO THE ASSESSEES NEXT CONTENTION THAT NO EXPENDITURE WAS INCURR ED FOR EARNING EXEMPT INCOME, THE LD COUNSEL HAS SUBMITTED THAT THERE IS NO NEXUS BETWEEN THE EXEMPT INCOME AND THE EXPENSES DEBITED IN THE P&L ACCOUNT. FURTHER, IT WAS SUBMITTED THAT INVESTMENT IN MUTUAL FUND ON WHICH THE EXEMPT DIVIDEND HAS BEEN EARNED W ERE NOT INVESTED FROM BORROWED FUND ON WHICH NO INTEREST HAD BEEN PAID AND SO ON THAT ACCOUNT ALSO NO DISALLOWANCE CAN BE MADE. IT WAS SUBMITTED BY THE LD COUNSEL THAT NO PORTION OF THE EXPENSES DEBITED TO THE PROFIT AND LOSS ACCOUNT FOR THE YEAR TOWARDS A DMINISTRATIVE AND MANAGERIAL COSTS IS RELATABLE TO EARNING OF DIVIDEND INCOME FROM INVESTMENTS IN VARIOUS MUTUAL FUNDS. THEREFORE IT WAS SUBMITTED BY THE LD COUNSEL THAT EVEN AFTER INSERTION OF RULE 8D, DISALLOWANCE U/S 14A CANNOT BE MADE ON AD - HOC BASIS W ITHOUT BRINGING ON RECORD EVIDENCE OF INCURRENCE OF EXPENDITURE TOWARDS EARNING EXEMPT DIVIDEND INCOME. IN SUPPORT OF HIS CONTENTION LD AR RELIED ON THE DECISION OF CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF JINDAL PHOTO ITA NO. 814/DE/2011AND MAXOP P INVESTMENT LTD. VS. CIT (20 12) 347 ITR 272 (DEL.). IT WAS ALSO POINTED OUT BY THE LD COUNSEL THAT AS PER RULE 8D, THE DISALLOWANCE CANNOT BE MADE SIMPLY ON THE BASIS OF THE FORMULAE GIVEN THEREIN, UNLESS THERE IS EVIDENCE TO DEMONSTRATE THAT ANY EXPENDITURE HAS ACTUALLY BEEN INCURRED FOR EARNING THE EXEMPT INCOME. HOWEVER, THE LD DR, CONTENDED THAT RULE 8D IS MANDATORY FOR THE RELEVANT ASSESSMENT YEAR. AND NO PERSON IS GOING TO INVEST SUCH A HUGE AMOUNT AND LEAVE IT TO A THIRD PARTY (DEUTCH BANK), TO DO WHATEVER IT LIKE TO DO WITH ITS FUND AND DEFINITELY THERE WILL BE EXPENSES INCURRED BY THE DEUTCH BANK AND OTHER EXPENSES INCURRED FOR EARNING THE EXEMPT INCOME. AND SINCE THE ASSESSEE IS NOT FORTHCOMING WITH THE EXPENDITURE INCURRED BY IT TO EARN T O EXEMPT INCOME, A PROCEDURE HAS BEEN PRESCRIBED BY THE STATUTE WHICH HAS BEEN FOLLOWED IN THIS CASE AND THE DISALLOWANCE HAS BEEN CALCULATED AS PER THE PRESCRIBED METHOD ENVISAGED IN RULE 8D AND THE ASSESSEE HAS FAILED TO SHOW ANY MISTAKE IN THE CALCULATI ON MADE UNDER THE RULE SO THE ORDER NEED NOT BE DISTURBED. 13 . SINCE WE HAVE FOUND THAT THE REQUIREMENT OF SUB - SECTION (2) OF SECTION 14A HAS BEEN SATISFIED BY THE AUTHORITIES BELOW, NOW THE QUESTION IS ABOUT THE VALIDITY OF PAGE NO. 10 THE AMOUNT DETERMINED BY THE REVENUE AS EXPENDITURE IN RELATION TO EXEMPT INCOME UNDER RULE 8D. IT MAY BE TAKEN NOTE THAT RULE 8D HAS BEEN INTRODUCED TO AVOID THE DISPUTE WITH REGARD TO ALLOCATION OF THE EXPENDITURE BETWEEN THE EXEMPT INCOME AND TAXABLE INCOME. WHEN ON E EXAMINES SUB - R ULE (2) OF RULE 8D, WE FIND THAT THE METHOD FOR DETERMINING THE EXPENDITURE IN RELATION TO EXEMPT INCOME HAS THREE COMPONENTS THE FIRST COMPONENT BEING THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE SECOND COMPONENT COMPUTED ON THE BASIS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSESSEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE FORMULA ESSENTIALLY APPORTIONS THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST (OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (1) INCURRED DURING THE PREVIOUS YEAR IN THE RATIO OF THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, TO THE AVERAG E OF THE TOTAL ASSETS OF THE ASSESSEE. THE THIRD COMPONENT IS AN ARTIFICIAL FIGURE - ONE HALF PERCENT OF THE AVERAGE INCOME, AS APPEARING IN THE BALANCE SHEETS OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. IT IS AGGREGATE OF THESE THREE COMPONENTS WHICH WOULD CONSTITUTE THE EXPENDITURE IN RELATION TO EXEMPT INCOME AND IT IS THIS AMOUNT OF EXPENDITURE WHICH WOULD BE DISALLOWED UNDER SECTION 14A OF THE SAID ACT. IT I S , THEREFORE, CLEAR THAT IN TERMS OF THE SAID RULE, THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME HAS TWO ASPECTS (A) DIRECT AND (B) INDIRECT. TH E DIRECT EXPENDITURE IS STRAIGHTAWAY TAKEN INTO ACCOUNT BY VIRTUE OF CLAUSE (1) SUB - RULE (2) OF RULE 8D. THE INDIRE CT EXPENDITURE, WHERE IT IS BY WAY OF INTEREST, IS COMPUTED THROUGH THE PRINCIPLE OF APPORTIONMENT, AS INDICATED ABOVE. AND, IN CASES WHERE THE INDIRECT EXPENDITURE IS NOT BY WAY OF INTEREST, A RULE OF THUMP FIGURE OF ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, IS TAKEN. IT MAY BE NOTED THAT EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOM E UNDER THE ACT, THE OFFICER EXERCIS I NG JURISDICTION, WHILE ASSESSING THE ASSESSEE WILL HAVE TO VERIFY THE CORRECTNESS OF THE CLAIM. IF THE ASSESSEES REPLY/ EXPLANATION ARE NOT ACCEPTABLE FOR THE AUTHORITIES THEN IT SHALL STATE REASONS AND AFTER RECORDING HIS DISSATISFACTION, SHALL REJECT THE CLAIM. HAVING DONE SO, THE AUTHORITIES HAVE TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THEREFORE AS PAGE NO. 11 PER SUB - SECTION (2) OF SECTION 14A, AS WE HAVE SEEN STIPULATES THAT THE ASSESSING OFFICER SHALL DETERMINE, THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESC RIBED, HERE WE FIND THAT THE LD CIT(A) EXERCISED HIS CO - TERMINUS POWER AND AFTER RECORDING HIS DISSATISFACTION AS TO THE CLAIM OF THE ASSESSEE IN RESPECT TO EXPENDITURE IN RELATION TO EXEMPT INCOME HAS COMPUTED THE EXPENDI TURE AS PROVIDED UNDER RULE 8D AS ONE - HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENT, INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, IS TAKEN. THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2008 - 09 AND ADMITTEDLY, RULE 8D WAS APPLICABLE. THAT THE ASSESSING OFFICER AND LD CIT(A) HAS COMPUTED THE DISALLOWANCE UNDER RULE 8D AND AS PER FORMULA PROVIDED UNDER RULE 8D, THE DISALLOWANCE WORKED OUT TO RS. 13,82,741/ - . SINCE, THE LD CIT (A) IN EXERCISE OF HIS CO - TERMINUS POWERS HAS RECORDED SATISFACTION AS ENVISAGED UNDER SECTION 14A ; AND THE ASSESSEE IS NOT ABLE TO POINT OUT ANY MISTAKE IN THE DISALLOWANCE MADE UNDER RULE 8D AND SINCE THE DISALLOWANCE UNDER RULE 8D ; HAD BEEN WORKED OUT AS PER THE FORMULA GIVEN IN THE RULES, WE ARE NOT INCLINED TO INTERFERE IN THE IMPUGNED ORDER OF THE LD CIT( A) AND WE DO NOT FIND ANY LEGAL INFIRMITY THEREIN. THE SAME IS THEREFORE SUSTAINED AND THE APPEAL OF THE ASSESSEE IS DISMISSED. 14. IN THE RESULT THE APPEAL OF THE ASSESSEE IS DISMISSED. ORDER P RONOUNCED IN THE OPEN COURT ON 30 . 05 .2014. - SD/ - - SD/ - ( B.C.MEENA ) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 30 / 05 / 2014 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI