NRC LTD, MUMBAI V. DY.CIT. CIR. 2 (2), MAHARASHTRA

ITA 3811/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8638 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 05-09-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 12-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRAVIN VARMA
• Keywords: Business income; Bad and doubtful debts
• Section: 14A; 37; 28

Judgement Text

1 NRC LIMITED IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI B BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT (MZ) AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER ITA NO.3811/M/2010 ASSESSMENT YEAR: 2005-2006 NRC LIMITED, EWART HOUSE, 2 ND FLOOR,H.M. STREET, FORT, MUMBAI 400 020. PAN:AAACN1616J VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE-2(2), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI MIHIR NANI WADEKAR RESPONDENT BY : SHRI PRAVIN VARMA DATE OF HEARING: 5.9.2012 DATE OF ORDER: 10.10 .2012 O R D E R PER D. KARUNAKARA RAO, AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT (A)-5, MUMBAI FOR THE ASSESSMENT YEAR 2005-2006. 2. GROUNDS RAISED BY THE ASSESSEE READ AS UNDER: (A) 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED BOTH ON FACTS AND IN LAW IN UPHOLDING THE DISALLOWANCE OF BAD DEBTS TO THE EXTENT OF RS. 11,32,53,915/- U/S 36(1)(VII) / 36(2) OF THE INCOME TAX ACT, 1961 FOR THE REASONS STATED IN THE APPELLATE ORDER. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THE FACT THAT BAD DEBTS WRITTEN OFF ARE LOANS GIVEN IN THE NORMAL COURSE OF BUSINESS AND INTEREST CHARGED THEREON WERE OFFERED TO TAX A S BUSINESS INCOME AND NOT AS INCOME FROM OTHER SOURCE S ON ACCRUAL BASIS. (B) 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN UPHOLDING THE DISALLOWANCE OF EXPENSES U/S 14A R.W. RULE 8-D. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS IGNORED THE FACT THAT NO EXPENDITURE IS INCURRED IN CONNECTION WITH THE EXEMPTED DIVIDEND INCOME. 2 NRC LIMITED 3. WITHOUT PREJUDICE TO AND IN THE ALTERNATE TO GRO UND NO. B, 1 AND B, 2 AMENDMENTS TO SECTION 14-A ALSO REFER TO RULE 8-D IS EFFECTIVE FROM ASSESSMENT YEAR 2007-2008 AND HENCE NOT APPLICABLE IN THE CASE OF APPELLANT FOR ASSESSMENT YEAR 2005-2006. 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN INTERLINKING THE INTEREST U/S 36(1)(III) WITH THE D ISALLOWANCE U/S 14-A AND ENHANCING DISALLOWANCE U/S 14-A TO RS. 75,66,519/-. 5. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS IGNORED THE FACT WHILE UPHOLDING THE DISALLOWANCE OF INTEREST U /S 36(1)(III) THAT THE INVESTMENTS ARE MADE OUT OF SURPLUS FUNDS AND FOR THE PURPOSE OF BUSINESS ONLY. 3. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTURING OF MANMADE FIBRES/YARN, C HEMICALS AND POWER GENERATION. ASSESSEE CLAIMED THAT IT HAS ALSO ENGAG ED IN THE BUSINESS OF MONEY LENDING TOO. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE MADE A CLAIM OF BAD DEBTS TO THE TUNE OF RS. 15.57 CRORES OUT OF WHICH THE AO DISALLOWED RS. 11,32,53,915/-. THIS AMOUNT CONSISTS OF THE PRINCIP LE AMOUNTING TO RS. 5.05 CORES AND THE BALANCE OF RS. 6,27,53,915/- RELATES TO THE INTEREST PORTION. THE DETAILS ARE TABULATED AS UNDER: S.NO. NAME OF THE PARTY PRINCIPLE (RS.) INTEREST (RS.) I) CONSOLIDATED FIBRES & CHEMICALS 3,00,00,000/ - 3,21,17,260/ - II) GUJARAT CARBON & INDUSTRIES LTD. 1,80,00,000/ - 1,54,68,782/ - III) BAKELITE HYLAM LTD. 25,00,000/ - 13,18,356/ - IV) EZRA TRADING & FINANCE CO. LTD. - 5,49,088/ - V) KANGRA VALLY INVESTMENT LTD (DEBENTURE INTEREST) - 1,33,00,429/ - TOAL: 5,05,00,000/ - 6,27,53,915/ - 4. ON EXAMINING THE DETAILS, AO CAME TO THE CONCLUS ION THAT THE MONEY LENDING WAS NOT PART OF HIS BUSINESS, THEREFORE, THE LOANS AND ADVANCES WRITTEN OFF AS BAD DEBTS AMOUNTING TO RS. 5.05 CRORES WAS NOT ALLOWED EITHER U/S 36(1)(VII) OR U/S 28 OR U/S 37 OF THE ACT AS THE SAID AMOUNT BEING LOANS GI VEN CONSTITUTES THE CAPITAL LOSSES . FURTHER, THE AO ALSO DISALLOWED THE INTEREST-REL ATED-BAD DEBTS OF RS. 6,27,53,917/- AS THERE IS NO PROVISION U/S 57 OF TH E ACT FOR ALLOWING THE BAD DEBTS OF THIS KIND. AS PER THE AO, THE INTEREST RECEIPTS ARE TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES . 3 NRC LIMITED 5. AGGRIEVED WITH THE ABOVE DISALLOWANCES ON ACCOUN T OF BAD DEBTS, THE ASSESSEE FILED AN APPEAL BEFORE THE CIT (A). BEFOR E HIM, THE ASSESSEE FILED WRITTEN SUBMISSIONS AND MENTIONED THAT THE ASSESSEE IS AUTH ORIZED TO DO THE MONEY LENDING BUSINESS AND RELIED ON CLAUSE-52 OF THE MEMORANDUM OF ASSOCIATION. ASSESSEE SUBMITTED THAT THE CLAIM OF BAD DEBTS IS PROPER AS THE SAME WERE GIVEN IN THE ORDINARY COURSE OF BUSINESS OF THE ASSESSEE AND THE Y BECAME RECOVERABLE AND, HENCE, THESE BAD DEBTS WRITTEN OFF IN THE BOOKS CON STITUTES AS BUSINESS LOSSES OR ALLOWABLE BAD DEBTS. REGARDING INTEREST RELATED BA D DEBTS OF RS 6,27,53,915/- , THE ASSESSEE SUBMITTED THAT CONSIDERING THE MONEY LENDI NG NATURE OF THE ASSESSEES BUSINESS, THE SAME CONSTITUTES BUSINESS LOSS / BAD DEBTS. IN THIS REGARD, THE ASSESSEE SUBMITTED THAT THE INTEREST INCOME OF THE SIMILAR KIND WAS EARLIER FURNISHED IN THE RETURNS OF THE YEARS AS THE BUSINESS INCOME AND THE SAID CLAIM WAS NOT OBJECTED BY THE AO. THAT IS HOW THE ASSESSEE JUST IFIED THE CLAIM OF BAD DEBTS, BOTH THE LOANS AND THE INTEREST SEGMENTS, BY INVOKING T HE PROVISIONS OF SECTION 35(1)(VII) AND SECTION 36(2) OF THE ACT. TO SUPPORT THE SAME, THE ASSESSEE FILED THE RELEVANT ASSESSMENT ORDER FOR THE ASSESSMENT YEARS 2003-2004 AND 2004-2005 TO SUBSTANTIATE THE ASSERTION THAT INTEREST INCOME WAS OFFERED AS BUSINESS INCOME WHICH WAS ACCEPTED BY THE CONCERNED ASSESSING OFFI CER IN THE SAID AYS. ON EXAMINING THE SUBMISSION OF THE ASSESSEE, THE CIT ( A) OPINED THAT THE SUBMISSIONS OF THE ASSESSEE SHOULD BE DISMISSED FOR THE REASONS GIVEN IN PARA 5 AND ITS SUB- PARAS OF THE IMPUGNED ORDER. THE CIT (A)S REASONI NG ARE THAT MERE EXISTENCE OF CLAUSE-52 IN THE MEMORANDUM OF ASSOCIATION, WHICH I S MERELY AN ENABLING CLAUSE OF THE MOA SHOULD BE VIEWED VIS A VIS THE ACTUAL BUSIN ESS ACTIVITIES OR TRANSACTION OF THE ASSESSEE. CIT (A) CAME TO THE CONCLUSION THAT THERE IS NO CLEAR MONEY LENDING BUSINESS ACTIVITIES AS EVIDENT FROM THE RECORDS AVA ILABLE BEFORE HIM. HE HELD THAT THE IMPUGNED LOAN TRANSACTIONS ARE FEW ISOLATED ONE S. THE CIT (A) CAME TO THE CONCLUSION THAT LENDING OF MONEY IS NOT ITS MAIN AC TIVITY AND NOT EVEN AN ANCILLARY ACTIVITY. FURTHER, THE CIT (A) DELIBERATED ON CERT AIN JUDICIAL PRONOUNCEMENTS AS GIVEN IN PARA 5.1, 5.2 AND 5.3 OF HIS ORDER. THERE WAS DISCUSSION ON THE PRINCIPLE OF RES JUDICATA TOO . FINALLY, THE CIT (A) FOUND FAULT WITH THE ASSESSEE IN MATTERS OF DISCHARGE OF ONUS. THE CIT (A) CONCLUDED THAT NEITH ER THE LOANS RELATED DEBT, PRINCIPLE AMOUNT, WHICH IS NOTHING BUT A CAPITAL L OSS NOR THE INTEREST RELATED DEBT, 4 NRC LIMITED BOTH OF WHICH ARE STATED IRRECOVERABLE, WERE ALLOWA BLE CLAIMS. AGGRIEVED WITH THE ABOVE, ASSESSEE FILED THE PRESENT APPEAL BEFORE US ON THIS ISSUE. 6. BEFORE US, MR. MIHIR NANI WADEKAR APPEARED FOR THE ASSESSEE AND MR. PRAVIN VARMA, CIT-DR APPEARED FOR THE REVENUE. LEARNED CO UNSEL FOR THE ASSESSEE HAS TAKEN US THROUGH THE PROVISIONS OF SECTION 36(2) OF THE ACT AND MENTIONED THAT THE PRINCIPLE AS WELL AS INTEREST AMOUNT HAVE TO BE TRE ATED ALIKE FOR THE PURPOSE OF THE EXPRESSION PART THEREOF , THE EXPRESSIONS USED IN SECTION 36(2)(I) OF THE ACT. SO LONG AS PART OF THE AMOUNT WAS CREDITED IN ANY OF T HE EARLIER PREVIOUS YEARS, THE ASSESSEE IS ELIGIBLE FOR BENEFITS OF SECTION 36(2). AS A RESULT, THE PRINCIPLE AMOUNT BECOMES A BAD DEBT, WHICH IS AN ALLOWABLE DEDUCTION . FURTHER, THE LEARNED COUNSEL MENTIONED THAT SO LONG AS ASSESSEE HAS EXCESS FUNDS WHICH ARE GIVEN AS LOANS / DEPOSITS WITH OTHER CONCERNS, THE SAME MUST BE CONS IDERED AS INVESTMENT IN THE NORMAL COURSE OF THE BUSINESS ACTIVITIES OF THE ASS ESSEE AND THE LOSSES, IF ANY, OCCURRED IN THE PROCESS SHOULD BE ALLOWED AS A BUSI NESS LOSS. FURTHER, LEARNED COUNSEL IS ALSO OF THE OPINION THAT CLAUSE-52 OF TH E MEMORANDUM OF ASSOCIATION ENABLES THE ASSESSEE TO DO MONEY LENDING ACTIVITY, WHICH IS ALSO EVIDENT FROM THE FACT THAT THE INTEREST INCOME WAS OFFERED AS BUSINE SS INCOME IN THE EARLIER PREVIOUS YEARS AND RELIED ON THE ASSESSMENTS MADE BY THE DEP ARTMENT FOR THE ASSESSMENT YEAR 2003-2004 AND 2004-2005. FURTHER, THE COUNSEL RELIED ON VARIOUS JUDGMENTS TO SUPPORT THE ABOVE CONTENTIONS NAMELY ITW SIGNODE VS. DCIT (2007) 110 TTJ170; HINDUSTAN MI SWACO VS. DCIT (ITA NO.3774/AHD/2008); DCIT VS. INSILCO (ITA NO.311/2011 (DELHI HC); CIT VS. SHREYAS MORAKHIA (2 0120 342 ITR 285 (BOM); CIT VS. RELIANCE UTILITIES (2009) 313 ITR 340 (BOM) AND NRC LIMITED VS. DCIT (ITA NO.5554/M/2010). 7. ON THE OTHER HAND, LEARNED CIT-DR FOR THE REVENU E RELIED ON ORDER OF THE AO AND MENTIONED THAT THE SAID CALUSE-52 OF THE MEMORA NDUM OF ASSOCIATION DOES NOT CLEARLY PROVIDES FOR MONEY LENDING ACTIVITIES OF TH E ASSESSEE. HE HAS ALSO RELIED ON A COUPLE OF DECISIONS NAMELY MANGALYA TRADING & INVES TMENTS LTD. VS. ITO (ITA NO.8683/M/2004) AND HASIMARA INDUSTRIES LTD. VS. CI T (1998) 231 ITR 842 (SC). 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE R ELEVANT MATERIAL ON RECORD. THE CASE OF THE ASSESSEE IS THAT CLAUSE 52 OF THE M OA OF THE ASSESSEE ENABLES HIM 5 NRC LIMITED TO CONDUCT MONEY LENDING BUSINESS. IN REALITY, THE ASSESSEE ADVANCED LOANS AND RECEIVED INTEREST IN EARLIER PREVIOUS YEARS AND THE SAME WAS OFFERED TO TAX AS BUSINESS INCOME AS EVIDENT FROM THE ASSESSMENTS MAD E BY THE DEPARTMENT FOR THE ASSESSMENT YEAR 2003-2004 AND 2004-2005. THE EXPRES SIONS PART THEREOF USED IN SECTION 36(2) OF THE ACT EXPLAINED, OF COURSE IN TH E CONTEXT OF SHARE BROKER, TO ACCOMMODATE THE PRINCIPLE PORTION OF THE LOANS TOO. THEREFORE, THE BAD DEBTS CLAIM OF THE ASSESSEE IS AN ALLOWABLE. PER CONTRA , THE CASE OF THE REVENUE IS THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURIN G OF MANMADE FIBRES / YARN, CHEMICALS, POWER GENERATION AND THE ISOLATED TRANSA CTIONS DETAILED IN THE TABLE ABOVE DO NOT ENTITLE THE ASSESSEE TO THE DEDUCTIONS UNDER THE HEAD PROFITS AND GAINS FROM BUSINESS OR PROFESSION AS THESE TRANSAC TIONS DO NOT CONSTITUTE BUSINESS ONES. FURTHER, AS PER THE DR, THE CLAUSE 52 OF THE MOA IS NOT SPECIFICALLY WORDED FOR ENABLING THE ASSESSEE TO DO THE MONEY LENDING BUSIN ESS. 9. WE HAVE CONSIDERED THE DIVERGENT STANDS OF THE PARTIES AND GONE THROUGH THE FACTS OF THE ISSUE UNDER CONSIDERATION AND THE RELE VANT LEGAL PROPOSITIONS. WE HAVE ALSO PERUSED THE CITATIONS RELIED UPON BY LD COUNSE L FOR THE ASSESSEE. THE CORE ISSUE TO BE DECIDED BY US RELATES TO IF THE ASSESSEE IS E NGAGED IN THE BUSINESS OF MONEY LENDING OR NOT. IN THIS REGARD, WE HAVE EXAMINED THE CLAUSE 52 (PAGE 33 OF THE PAPER BOOK) AND THE SAME READ AS FOLLOWS. 52. TO RECEIVE ON DEPOSIT AT INTEREST OR OTHERWISE AND TO LEND MONEY .... TO SUCH PERSONS AND ON SUCH TERMS AS MAY SEEM EXPEDIEN T AND IN PARTICULAR TO CUSTOMERS OF AND PERSONS HAVING DEALINGS WITH THE C OMPANY FROM THE ABOVE, IT IS EVIDENT THAT THE CLAUSE 52 PR OVIDES FOR THE ASSESSEE TO LEND MONEY AND IN OUR OPINION, IT AMOUNTS TO LENDING M ONEY. THEREFORE, THE ASSESSEE IS ENTITLED TO CONDUCT THE BUSINESS OF MONEY LENDING A S WELL. THUS, WE FIND NOTHING WRONG IN THE LANGUAGE USED IN CLAUSE 52 OF THE MOA AND THE ASSESSEE IS AUTHORISED TO MONEY LENDING BUSINESS. THEREFORE, THE OBJECTION S RAISED BY LD DR IN THIS REGARD HAVE TO BE DISMISSED. THEN THE CONSEQUENTIAL QUESTI ON THAT ARISES RELATES TO WHY THE ASSESSEE GAVE THE LOANS TO THE SAID PARTIES IF NOT FOR BUSINESS PURPOSES. IT IS NOT THE CASE OF THE REVENUE THAT THE SAID LOANS WERE NOT GI VEN FOR ANY PERSONAL USE. IN SUCH CIRCUMSTANCES, THE SAME HAVE TO BE CONSIDERED AS CO MMERCIAL TRANSACTIONS IN 6 NRC LIMITED NORMAL COURSE OF THE BUSINESS. IN FACT, WE HAVE PER USED THE CONTENTS OF PARA 12 OF THE ORDER OF THE TRIBUNAL IN THE CASE OF ITW SIGNOD E 110 TTJ 170 (HYD) WHICH IS RELIED UPON BY THE ASSESSEE AND FIND THAT THEREFORE, PLACING OF ICDS IS IN THE USUAL COURSE OF BUSINESS AND A COMPANY DOING SO NEED NOT BE IN MONEY LENDING BUSINESS. IT WAS SO HELD BY THE TRIBUNAL HYDERABAD BENCH IN TH E CONTEXT OF THE COMPANY PLACING ICDS OUT OF THE EXCESS FUNDS. THIS LINE OF REASONING IS APPROVED IN OTHER DECISIONS NAMELY HINDUSTHAN MI SWACO ITA 3774/AHD/2 008, INSILCO ITA 311/DEL/2011 AND SHREYAS MORAKHIA 342 ITR 285 BOM. 10. FURTHER, WE HAVE EXAMINED THE COPIES OF THE ASS ESSMENTS MADE BY THE DEPARTMENT FOR THE ASSESSMENT YEAR 2003-2004 AND 20 04-2005 AND IT IS FACT THAT THE ASSESSEE OFFERED THE INTEREST RECEIPTS EARNED O N THE LOANS AS BUSINESS INCOME AND IT IS NOT CASE THE DEPARTMENT HAS TAKEN ANY INI TIATIVES TO REASSESS UNDER THE HEAD INCOME FROM OTHER SOURCES AS DONE IN THE AY 2005-06. IN FACT LD COUNSEL HAS ARGUED THAT ONCE THE DEPARTMENT HAS ASSESSED THE IN TEREST INCOME AS BUSINESS INCOME OF THE ASSESSEE IN THE FIRST YEAR OF THE MON EY LENT, THE SAME CANNOT BE ALTERED IN THE SUBSEQUENT YEARS IN VIEW OF THE PRIN CIPLE OF CONSISTENCY. PARA 11 OF THE AHMEDABAD BENCH DECISION IN THE CASE OF HINDUST HAN MI SWACO (SUPRA) IN THIS REGARD FOR THE PROPOSITION THAT THE CONDITIONS STIPULATED IN SECTION 36(2)(I) IS SATISFIED, IF INTEREST FOR MONEY LENT WAS ASSESSED AS BUSINESS INCOME IN THE EARLIER YEAR OR EVEN IN THE YEAR IN WHICH THE BAD DEBT IS W RITTEN OFF (PAGE 23 OF THE PAPER BOOK). 11. THEREFORE, FROM THE ABOVE DISCUSSION, WE CAN IN FER THAT BY VIRTUE OF THE MOA I.E. CLAUSE-52, THE ASSESSEE IS AUTHORISED TO ENGAG E IN MONEY LENDING BUSINESS. FURTHER, BY VIRTUE OF THE TAXATION BY THE REVENUE O F THE INTEREST RECEIPTS IN THE IMMEDIATELY PRECEDING AYS UNDER THE HEAD PROFITS A ND GAINS FROM BUSINESS OR PROFESSION, THE CONDITIONS SPECIFIED IN SECTION 36 (2) ARE SATISFIED FOR CLAIM OF BAD DEBTS AS AN ALLOWABLE EXPENDITURE WHEN THE MONEY LE NT AND RELATABLE INTEREST ARE WRITTEN OFF IN THE BOOKS OF THE ASSESSEE AS IRRECOV ERABLE. AS SUCH, IT IS NOT THE REQUIREMENT OF THE LAW THAT THE ASSESSEE NEEDS TO P ROVE THAT THEY REALLY BECOME IRRECOVERABLE. THEREFORE, IN OUR OPINION, THE CLAIM OF THE ASSESSEE IN RESPECT OF THE 7 NRC LIMITED BAD DEBTS IS ALLOWABLE. ACCORDINGLY, THE GROUNDS 1 AND 2 RAISED BY THE ASSESSEE IN PART A ARE ALLOWED. 12. PART B OF THE GROUNDS CONTAIN 5 GROUNDS AND THE Y RELATES TO THE ADDITION MADE U/S 14A OF THE ACT R.W. RULE-8D OF I. T. RULES , 1962 INVOKING THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT. 13. BRIEFLY STATED RELEVANT FACTS OF THIS ISSUE ARE THAT THE AO NOTED THAT THE ASSESSEE EARNED EXEMPT DIVIDEND INCOME OF RS 10.50 LAKHS AND IT HAD FORMED PART OF THE TOTAL INCOME AND THEREFORE, HE DISALLOWED TH E CLAIM OF INTEREST TO THE EXTENT OF RS 66.08 LAKHS RELATABLE TO THE INVESTMENT IN SHARE S WHICH YIELDED THE SAID DIVIDEND. FURTHER, HE DISALLOWED A SUM OF RS 52,500/- I.E. 5% OF THE SAID DIVIDEND TOWARDS THE ESTABLISHMENT AND ADMINISTRATIVE EXPENDITURE. DURIN G THE FIRST APPELLATE PROCEEDINGS, AFTER RECALCULATING THE DISALLOWABLE INTEREST, THE CIT(A) ENHANCED THE DISALLOWANCE TO RS 75,66,519/-. IN THIS REGARD, LEARNED COUNSEL FOR THE ASSESSEE MENTIONED THAT THE SAID ISSUE RELATING TO THE DISALLOWANCE U/S 14A OF THE ACT IS COVERED IN FAVOUR OF THE ASSESSEE AND THE SAME HAS TO BE SET ASIDE TO THE FI LES OF AO VIDE PARA 4 OF ITA NO. 5554/M/2010 IN ASSESSEES OWN CASE, FOR CONSIDERING THE ISSUE AFRESH. 14. WE HAVE PERUSED THE SAID PARA AND THE SAME IS R EPRODUCED HERE AS UNDER FOR READY REFERENCE. WE FIND THAT SO FAR AS DISALLOWANCE UNDER SECTION 1 4A IN RESPECT OF INTEREST ON BORROWED FUNDS IS CONCERNED, THE ASSESS EE HAS GIVEN A REASONABLE EXPLANATION IN SUPPORT OF THE SUBMISSION THAT NO INTEREST BEARING FUNDS HAVE BEEN USED IN ACQUISITION OF SHAR ES ON WHICH DIVIDEND IS EARNED. THE ASSESSING OFFICER HAS NOT FOUND ANY FAULT IN THESE SUBMISSIONS, NOR HAS HE CONTROVERTED THE CLAI M OF THE ASSESSEE THAT INTEREST BEARING FUNDS HAVE NOT BEEN EMPLOYED IN ACQUIRING THESE SHARES. THE ASSESSEE HAS SPECIFIC SUBMISSION WITH RESPECT OF EACH OF THE YEAR IN WHICH THERE IS AN ACCRETION TO INVESTME NTS IN SHARES, AND IT IS POINTED OUT THAT INTEREST FREE FUNDS IN EACH OF THESE YEARS WAS HIGHER THAN ACCRETION IN INVESTMENT IN SHARES. TO THE EXTENT OF INTEREST DISALLOWANCE, THEREFORE, WE DEEM IT FIT AN D PROPER TO REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR THE LIMITED PURPOSES OF VERIFICATION OF THE CLAIM OF THE ASSESSEE. WHIL E DOING SO, THE ASSESSING OFFICER SHALL DECIDE THE MATTER BY WAY OF A SPEAKING ORDER, IN ACCORDANCE WITH THE LAW AND AFTER GIVING A FAIR AND REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. IN CASE THE ASSESSING OFFICER DOES NOT FIND ANY INCONSISTENCIES OR FLAWS IN THE E XPLANATIONS SO GIVEN 8 NRC LIMITED BY THE ASSESSEE, NO INTEREST DISALLOWANCE CAN BE MA DE. HOWEVER, THAT IS NOT THE END OF THE MATTER BECAUSE THE QUEST ION OF APPLICABILITY OF RULE 8-D AND DISALLOWANCE FOR GENERAL EXPENSES S TILL REMAINS OPEN. LEARNED REPRESENTATIVES AGREE THAT SO FAR AS THE QU ESTION OF RULE 8-D IS CONCERNED, THE ISSUE IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY THE HONBLE JURISDICTIONAL HIGH COURTS JUDGMENT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT (328 ITR 81), WHEREI N, IT HAS BEEN HELD THAT RULE-8D OF THE INCOME TAX RULES, 1962 IS APPLICABLE ONLY PROSPECTIVELY I.E. FROM AY 2008-2009. THE ASSESSME NT YEAR INVOLVED IN THE PRESENT CASE IS 2006-2007 AND, THEREFORE, RU LE 8D IS NO APPLICABLE IN THE PRESENT CASE. THE HONBLE HIGH C OURT HAS HELD THAT A REASONABLE DISALLOWANCE FOR EXPENSES INCURRED IN EARNING DIVIDEND INCOME IS NEVERTHELESS TO BE COMPUTED BY THE AO. I N VIEW OF THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF GODREJ AND BOYCE MFG. CO. LTD (SUPRA) AND AS AGREED TO BY THE PARTIES, WE REMIT THE ISSUE TO THE FILE OF THE AO TO RE-COMPUTE THE DISALLOWANCE U/S 14A IN THE LIGHT OF THE LAW LAID DOWN BY THE HO NBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. (SUPRA) AND IN TERMS OF OUR DIRECTIONS ABOVE. 15. THEREFORE, THERE ARE VARIOUS ASPECTS TO BE CONS IDERED BEFORE THE PROVISIONS OF SECTION 14A OF THE ACT ARE INVOKED IN THIS CASE. AO IS REQUIRED TO SEE IF THE PROVISION OF RULE-8D APPLIES TO ALL THE PENDING PROCEEDINGS O R ONLY TO THE RETURNS FILED AFTER THE INSERTION OF THE SAID RULES. FURTHER, AO HAS TO EXAMINE THE EXISTENCE OF THE NON INTEREST BEARING SURPLUS FUNDS AND THEIR INVESTMENT IN THE IMPUGNED SHARES THAT YIELDED DIVIDEND OF RS 10.50 LAKHS. FINALLY, THE AO IS REQUIRED TO FOLLOW ALL THE DIRECTIONS MENTIONED IN THE PARAGRAPH EXTRACTED ABO VE. ACCORDINGLY, THE GROUNDS RAISED IN PART B ARE SET ASIDE. 16. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF OCTOBER, 2012. SD/- SD/- (D. MANMOHAN) (D. KARU NAKARA RAO) VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI. DATED THE 10.10.2012 OKK 9 NRC LIMITED COPY OF THE ORDER IS FORWARDED TO : 1. NRC LIMITED, MUMBAI. 2. DCIT-CIRCLE 2(2), MUMBAI. 3. CIT-CONCERNED 4. D.R. ITAT B BENCH, MUMBAI 5. GUARD FILE BY ORDER ASSISTANT REGISTRAR I.T.A.T, MUMBAI.