Asst. Commissioner of Income tax, Panaji V. M/s Sesa Goa Ltd, Panaji

ITA 386/PAN/2013

• Counselvise Citation: 38624114 RSA 2013
• Duration Of Justice: 7 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-07-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 12-06-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 06-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHA DESAI
• Assessee Lawyers: VIJAY GUPTA VP TAXATION
• Keywords: Recovery proceedings; Depreciation; Double taxation relief; Earning of tax free income; Deemed to accrue or arise in india; Retrospective amendment; Question of law; Onus to prove
• Section: 80HHC; 14A; 194C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI P.K. BANSAL, HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HONBLE JUDICIAL MEMBER ITA NO. 364/PNJ/2013 : (ASST. YEAR : 2007 - 08) SESA GOA LIMITED SESA GHOR, 20, EDC COMPLEX, PATTO, PANAJI GOA 403 001. PAN : AACCS7101B (APPELLANT) VS. ADDL. COMMISSIONER OF INCOME TAX, RANGE 1, PANAJI, GOA (RESPONDENT) ITA NO. 386/PNJ/2013 : (ASST. YEAR : 2007 - 08) ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 1(1), PANAJI, GOA (APPELLANT) VS. SESA GOA LIMITED SESA GHOR, 20, EDC COMPLEX, PATTO, PANAJI GOA 403 001. PAN : AACCS7101B (RESPONDENT) ASSESSEE BY : VINOD KUMAR BINDAL, CA SANJEEV BINDAL, CA & VIJAY GUPTA, VP (TAXATION) REVENUE BY : SMT. ASHA DESAI, DR DATE OF HEARING : 12/06/2014 DATE OF PRONOUNCEMENT : 18 /0 7 /2014 O R D E R PER P.K. BANSAL : 1. THESE CROSS - APPEALS HAVE BEEN FILED AGAINST THE ORDER OF CIT(A) DT. 25.9.2013 FOR A.Y 2007 - 08. THE ASSESSEE IN HIS APPEAL HAS TAKEN THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL : 1. THE LEARNED CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE OF RS.34,08,943/ - BY THE A.O. U/S 14 - A OF THE ACT, AS EXPENDITURE INCURRED BY THE APPELLANT IN RELATION TO THE INCOME WHICH DID NOT FORM OF PART OF TOTAL INCOME (HEREIN - AFTER REFERRED TO AS THE EXEMPT INCOME) 2 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THE APPELLANT DID NOT INCUR ANY EXPENDITURE SPECIFICALLY IN RELATION TO THE SAID EX EMPT INCOME, AND HENCE THAT NO EXPENDITURE COULD BE ATTRIBUTED AS INCURRED IN RELATION TO THE SAID EXEMPT INCOME. 2. THE LEARNED CIT(A), ERRED IN UPHOLDING THE A.OS REASONING THAT THE JUDICIOUS WAY OF ESTIMATING THE EXPENDITURE INCURRED BY THE APPELLANT IN EARNING THE EXEMPT INCOME WOULD BE BY APPLYING TO THE EXEMPT INCOME THE SAME PERCENTAGE OF THE TOTAL ADMINISTRATIVE EXPENDITURE BEARS TO THE TOTAL INCOME WHEN NO SUCH METHOD WAS BEEN PRESCRIBED U/S 14A(2); THE CIT(A) OUGHT TO HAVE APPRECIATED THAT IN THE ABSENCE OF ANY METHOD PRESCRIBED THE AO BY ADOPTING A FOREIGN METHOD HAS MERELY ESTIMATED SUCH EXPENDITURE AND CALCULATING THE EXPENDITURE BY ANY OTHER METHOD WHICH IS NOT PRESCRIBED THE AO HAS TRANSGRESSED THE PROVISION OF SECTION 14A. 3. THE LEARNED CIT(A), ERRED IN CONFIRMING THE DISALLOWANCE OF RS.34,08,943/ - AS ADMINISTRATIVE EXPENSES U/S 14A IN RELATION TO EXEMPT INCOME. ON FACTS, HARDLY AN Y EXPENDITURE WAS INCURRED FOR EARNING THE DIVIDEND ON INVESTMENTS. WHEN THERE WAS NO SPECIFIC IDENTIFICAT ION OF ANY SUCH EXPENDITURE FOR EARNING OF SUCH NON - TAXABLE INCOME IDENTIFIED BY THE ASSESSING OFFICER. AS SUCH AND OTHERWISE TOO THE EXPENDITURE ASSUMED TO BE INCURRED ON NON - TAXABLE INCOME CANNOT BE DISALLOWED. THAT THE SAID DISALLOWANCE OF EXPENSE HAS BEEN MADE ON ERRONEOUS VIEWS AND/OR NON - APPRECIATION OF FACTS, LAW, EVIDENCES, SUBMISSIONS AND CASE LAW RELIED UPON BY THE ASSESSEE IN ITS FAVOUR; THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THE ASSESSING OFFICER HAS NOT SPECIFICALLY POINTED OUT ANY DIREC T EXPENSE AND HAS NOT GIVEN ANY FINDING REGARDING THE CORRECTNESS OF CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED FOR EARNING EXEMPT INCOME WHEN THE DISALLOWANCE UNDER SECTION 14A OF THE ACT REQUIRES A CLEAR FINDING OF INCURRING OF EXPENDITU RE AND THAT NO DISALLOWANCE CAN BE MADE ON THE BASIS OF PRESUMPTIONS. THE REVENUE IN ITS APPEAL HAS TAKEN THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL : 1. THE ORDER OF THE LD. CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITIONS OF RS.22,66,41,759/ - MADE U/S 40A(IA) R.W.S SEC. 195(1) TOWARDS PAYMENT OF COMMISSION TO FOREIGN AGENTS OUTSIDE INDIA THOUGH THE BANK IN INDIA, WHERE TDS WAS NOT DEDUCTED AS HELD IN THE CASE OF RAJIV MALHOTRA INRE(AAR)284ITR 564 A ND SKF BOILERS AND DRIERS PVT. LTD. 3 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) 3. THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITIONS OF RS.1,88,784/ - ON ACCOUNT OF EXCESS DEPRECIATION CLAIMED ON UPS RELYING ON DECISION HON'BLE ITAT, PANAJI INSTEAD OF RELYING ON THE DECISION OF HON'BLE DELHI BENCH OF ITAT IN NESTLE INDIA LIMITED VS. DCIT (2007) 111 TTJ (DEL) 0498. 4. THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITIONS OF RS.2,47,50,646/ - MADE U/S. 40A(IA) R.W.S. SEC. 195(1) TOWARDS PAYMENT OF DEMURRAGES PAID TO BUYERS OF IRON ORE IN PAKISTAN THROUGH THE BANK IN INDIA, ON WHICH TDS WAS NOT DEDUCTED AS HELD IN THE CASE OF CIT V. ELI LILLY & CO. (INDIA) PVT. LTD. 312 ITR 225(SC). 5. THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITIONS OF RS.95,46,558/ - MADE U/S 40A(IA) R.W.S. SEC.194C TOWARDS PAYMENT OF DEMURRAGES TO PARTIES IN INDIA, WHERE IN FACT PAYMENTS WERE MADE FOR CONTRACT WORK ON WHICH TDS WAS NOT DEDUCTED. ITA NO. 364/PNJ/2013 : 2. GROUND NOS. 1 TO 3 IN ASSESSEES APPEAL RELATE TO THE DISALLOWANCE OF EXPENDITURE MADE BY THE AO AMOUNTING TO RS. 34,08,943/ - INVOKING THE PROVISIONS OF SEC. 14A OF THE INCOME TAX ACT. BOTH THE PARTIES AGREED THAT THIS ISSUE IS DULY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THIS TRIBUNAL DT. 8.3.2013 IN ASSESSEE S OWN CASE IN ITA NOS. 72 & 85/PNJ/2012 FOR A.Y 2009 - 10 TO WHICH OUR ATTENTION WAS DRAWN BY THE LD. AR. 2.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. WE HAVE ALSO GONE THROUGH THE DECISION OF THE TRIBUNAL IN ITA NOS. 72 & 85/PNJ/2012 FOR A.Y 2009 - 10 IN THE CASE OF THE ASS ESSEE DT. 8.3.2013 IN WHICH THIS TRIBUNAL UNDER PARA 14 - 18 OF ITS ORDER HAS HELD AS UNDER : 14. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS ALONG WITH THE ORDER OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH VARIOUS CASE LAWS AND THE PROVISIONS OF THE IT ACT IN THIS REGARD. THE ISSUE INVOLVED BEFORE US RELATE TO THE DISALLOWANCE MADE BY THE AO BY APPLYING THE PROVISIONS OF SEC.14A OF THE IT ACT READ WITH RULE 8D OF THE IT RULES. SEC.14A WAS INSERTED BY THE FINANCE ACT, 2001 W.E.F. 1.4.1962. ORIGINALLY THIS SEC. PROVIDES THAT IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE NO DEDUCTION SHAL L BE ALLOWED IN RESPECT OF THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. SUBSEQUENTLY, BY FINANCE ACT, 2002 WITH RETROSPECTIVE EFFECT FROM 11/5/2001 PROVISO 4 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) WAS ADDED WHICH STATES THAT THIS SEC. SHALL NOT EMPOWER THE AO EITHER TO RE - ASSESS OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING THE REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE 1/4/2001. WITH EFFECT FROM 1/4/2007 BY FINANCE ACT, 2006 SUB - SEC. (2) EMPOWERS THE AO TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH THE METHOD AS MAY BE PRESCRIBED. SUCH POWER IS TO BE EXERCISED IF THE AO HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE MENTIONED IN SUB - SEC.(1). BEFORE APPLYING RULE 8D, IT IS APPARENT THAT THE A O MUST BE SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. SUCH SATISFACTION IS AN OBJECTIVE SATISFACTION THAT IT HAS TO BE JUDICIOUS AND BASED ON THE MATERIAL ON RECORD. IT CANNOT BE AN IMPRESSION THAT IT IS MUCH MORE THAN THE GOSSIP OR HEARSAY, IT MEANS JUDGMENT OR BELIEF THAT IT IS A BELIEF OR A CONNECTION RESULTING FROM WHAT ONE THINKS ON A PARTICULAR QUESTION. IT MUST BE BASED ON THE REASONS AND GROUND AS SEEMS GOOD TO HIM AND WHILE MAKING SUC H SATISFACTION, THE AO MUST GIVE REGARD TO THE ACCOUNTS OF THE ASSESSEE. HE MUST RECORD DEFICIENCY IN THE ACCOUNTS WITH REGARDS TO THE CLAIM OF THE ASSESSEE. SUB - SEC.(3) PROVIDES THAT PROVISIONS OF SUB - SEC.(2) SHALL ALSO APPLY WHERE ASSESSEE CLAIMS THAT N O EXPENDITURE HAD BEEN INCURRED IN RELATION TO INCOME NOT FORMING PART OF THE TOTAL INCOME. THIS IS NOT THE CASE OF THE ASSESSEE AS IN THE CASE OF THE ASSESSEE, ASSESSEE HIMSELF ESTIMATED THE EXPENSES RELATING TO THE EXEMPT INCOME AND DISALLOWED THE SAME. RULE 8D WAS INSERTED BY GAZETTE NOTIFICATION DATED 24/3/2008 IN VIEW OF THE POWER CONFERRED UNDER SUB - SEC (2). THIS RULE PRESCRIBES THE METHOD FOR COMPUTING THE EXPENDITURE INCURRED IN RELATION TO THE INCOME NOT FORMING PART OF THE TOTAL INCOME. THIS IS AN UNDISPUTED FACT THAT IN THIS CASE, THE ASSESSEE HAS INVESTED IN DEBTS MUTUAL FUNDS. THE ASSESSEE COMPUTED DISALLOWANCE U/S 14A(2) AT RS.25,78,156/ - AND DISALLOWED THE SAME, WHILE COMPUTING ITS TOTAL INCOME. THE WORKING OF THE SAID DISALLOWANCE CLAIMED BY THE ASSESSEE IS GIVEN HEREIN ABOVE IN THE SUBMISSIONS MADE BY THE ASSESSEE. THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE ESPECIALLY THE EXPLANATION OF THE ASSESSEE THAT NO ADMINISTRATIVE EXPENDITURE INCURRED ON EARNING T HE DIVIDEND INCOME. CONSIDERING THE MAGNITUDE OF THE INVESTMENTS AND THE DIVIDEND INCOME RECEIVED, THE AO WAS OF THE VIEW THAT THE DISALLOWANCE MADE BY THE ASSESSEE U/S 14A OF THE IT ACT TOWARDS THE ADMINISTRATIVE EXPENDITURE IS LOW ON COMPARING THE MAGN ITUDE OF PURCHASE AND SALES MADE BY THE ASSESSEE AND THE INVESTMENTS OF LARGE MAGNITUDE CANNOT BE MADE WITHOUT PROPER ANALYSIS OF THE MARKET CONDITION/STOCK MOVEMENT ETC. THE REVENUE WAS OF THE OPINION, THAT THE ASSESSEE HAS WORKED OUT THE ADMINISTRATIVE EXPENDITURE AND HAD NOT CONSIDERED ALL THE ADMINISTRATIVE EXPENDITURE. BOTH THE PARTIES BEFORE US VEHEMENTLY RELIED ON THE DECISION OF GODREJ BOYCE MFG CO. LTD. VS DCIT 328 ITR 81 (MUM). 5 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) 15. WE HAVE GONE THROUGH THIS DECISION AND WE NOTED THAT IN THIS CA SE, THE ASSESSEE CLAIMED EXEMPTION IN RESPECT OF DIVIDEND INCOME OF 34.34 CRORES U/S 10(33). THE AO ISSUED NOTICES FOR DISALLOWANCE OF INTEREST U/S 14A OF THE IT ACT. THE EXPLANATION OF THE ASSESSEE WAS THAT (I) 95% OF THE SHARES WERE BONUS SHARES FOR WHICH NO COST WAS INCURRED; (II) NO INVESTMENT IN SHARES WAS MADE IN THE CURRENT YEAR AND NO DISALLOWANCE WAS MADE IN EARLIER YEARS AND (III) THERE WERE SUFFICIENT INTEREST FREE FUNDS AVAILABLE IN THE FORM OF SHARE CAPITAL, RESERVES ETC. WHICH WERE MORE TH AN INVESTMENT IN SHARES. THE AO WAS NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE AND HE MADE DISALLOWANCE U/S 14A ON PRORATA BASIS. THE CIT(A) FOLLOWING HIS ORDERS FOR EARLIER YEARS, ACCEPTED THE APPEAL OF THE ASSESSEE. THE TRIBUNAL FOLLOWING TH E DECISION OF THE SPECIAL BENCH IN THE CASE OF ITO VS DAGA CAPITAL MANAGEMENT (P) LTD 117 ITD 169 (SB) RESTORED THE MATTER TO THE FILE OF THE AO FOR THE CONSIDERATION IN THE LIGHT OF THE PROVISIONS OF SUB - SEC.(2) & (3) OF SEC.14A OF THE IT ACT. THE ASS ESSEE, BEING AGGRIEVED, FILED APPEAL AS WELL AS WRIT PETITION CHALLENGING THE CONSTITUTIONAL VALIDITY OF SUB - SEC. (2) & (3) AND RULE D. THE HONBLE HIGH COURT GAVE THE FOLLOWING FINDINGS; 1. THE PROVISIONS OF SEC. 14A AND RULE 8D ARE CONSTITUTIONALLY VALID. 2. THE PROVISIONS OF SUB - SEC. (2) & (3) OF SEC.14A AND RULE 8D ARE PROSPECTIVE AND NOT RETROSPECTIVE, IN NATURE AND THEREFORE, WOULD APPLY FROM ASSESSMENT YEAR 2007 - 08. 3. THE BASIC OBJECT OF SEC.14A IS TO DISALLOW THE DIRECT AND INDIRECT EXPENDITU RE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME (PAGE 21). 4. THE INSERTION OF SEC.14A WAS CURATIVE AND DECLARATORY OF THE INTENT OF THE PARLIAMENT. THE BASIC PRINCIPLE OF TAXATION IS THAT ONLY NET INCOME, NAMELY, GROSS INCOM E MINUS EXPENDITURE THAT IS TAXABLE. EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THAT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME (PAGES 22 - 23). THE TEST WHICH HAS BEEN ENUNCIATED IN WALLFORT FOR ATTRACTING THE PROVISIONS OF SEC.14A IS THAT THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE WHICH HAS ITS RELATIONSHIP WITH THE TAX EXEMPT INCOME. ONCE THE TEST OF PROXIMATE CAUSE, BASED ON THE RELATIONSHIP OF THE EXPENDITURE WITH TAX EXEMPT INCOME IS ESTABLISHED, A DISALLOWANCE WOULD HAVE TO B E EFFECTED UNDER SECTION 14A (PAGE 28) 5. WHAT MERITS EMPHASIS IS THAT THE JURISDICTION OF THE AO TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, IN ACCORDANCE WITH THE PRESCRIBED METHOD, ARISE S IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE WHICH THE ASSESSEE CLAIMS TO HAVE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. MOREOVER, THE SATISFACTION OF THE AO HAS TO BE ARRIVED AT, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. HENCE, SUB - SEC (2) DOES NOT IPSO FACTO ENABLE THE AO TO APPLY THE METHOD PRESCRIBED BY THE RULES STRAIGHTAWAY 6 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) WITHOUT CONSIDERING WHETHER THE CLAIM MADE BY THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS CORRECT. THE AO MUST, IN THE FIRST INSTANCE, DETERMINE WHETHER THE CLAIM OF THE ASSESSEE IN THAT REGARD IS CORRECT AND THE DETERMINATION MUST BE MADE HAVING REG ARD TO THE ACCOUNTS OF THE ASSESSEE. THE SATISFACTION OF THE AO MUST BE ARRIVED AT ON AN OBJECTIVE BASIS. IT IS ONLY WHEN THE AO IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, THAT THE LEGISLATURE DIRECTS HIM TO FOLLOW THE METHOD THAT MAY BE PRESCRIBED. IN A SITUATION WHERE THE ACCOUNTS OF THE ASSESSEE FURNISH AN OBJECTIVE BASIS FOR THE AO TO ARRIVE AT A SATISFACTION IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE OF THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THERE WOULD BE NO WARRANT FOR TAKING RECOURSE TO THE METHOD PRESCRIBED BY THE RULES. FOR, IT IS ONLY IN THE EVENT OF THE AO NOT BEING SO SATISFIED THAT RECOURSE TO THE PRESCRIBED METHOD IS MANDATED BY LAW (PAGES 31 - 32). 6. IN THE EVENT THAT THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE, HE MUST RECORD REASONS FOR HIS CONCLUSION (PAGE - 79). 7. THE EFFECT OF SEC.14A IS TO WIDEN THE THEORY OF THE APPORTIONMENT OF EXPENDITURE (PAGE 49). 8. THE EXP RESSION EXPENDITURE INCURRED; IN SEC.14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC., IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (PAGE - 50). 9. SUB - SECTIONS (2) & (3) OF SEC.14A ARE INTENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS O F SUB - SEC (1) (PAGES 50). 10. EVEN IN THE ABSENCE OF SUB - SECTION (2) OF SEC.14A THE AO WOULD HAVE TO APPORTION THE EXPENDITURE AND TO DISALLOW THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE AO WOULD HAVE TO FOLLOW A REASONABLE METHOD OF APPORTIONING THE EXPENDITURE CONSISTENT WITH WHAT THE CIRCUMSTANCES OF THE CASE WOULD WARRANT AND HAVING REGARD TO ALL RELEVANT FACTS AND CIRCUMSTANCES. THE SAID DECISION OF THE JURISDICTI ONAL HIGH COURT IS BINDING ON US. WHILE DECIDING THIS CASE, THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS WALLFORT SHARES & STOCK BROKERS LTD., 233 CTR (SC) 42 WAS REFERRED TO. IN THIS DECISION, WE NOTED THAT THE HONBLE SUPREME COURT IN THAT CASE UPHELD THE VIEW OF THE HONBLE MUMBAI HIGH COURT IN THE CASE OF WALLFORT SHARES & STOCK BROKERS LTD. VS ITO 310 ITR 421. THE HONBLE SUPREME COURT IN THIS DECISION, AT PAGE - 31 OF THE ORDER HELD AS UNDER; 7 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) TO ATTRACT SEC.14A THERE HAS TO BE PROXIMATE CAUSE FOR DISALLOWANCE WHICH HAS ITS RELATIONSHIP WITH THE TAX EXEMPT. PAY BACK OR RETURN OF INVESTMENT IS NOT SUCH PROXIMATE CAUSE. HENCE, SEC.14A IS NOT APPLICABLE IN THE PRESENT CASE. THUS, IN THE ABSENCE OF SUCH PROXIMATE CAUSE FOR DISALLOWAN CE, SEC.14A CANNOT BE INVOKED. 16. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS DCIT (SUPRA) THEREFORE AT PAGE - 28 HAS CLEARLY LAID DOWN THAT THERE MUST BE PROXIMATE CAUSE BASED ON THE RELATIONSHIP OF THE EXPENDITURE TH AT TAX EXEMPT INCOME IS ESTABLISHED, ONLY THEN A DISALLOWANCE WOULD HAVE TO BE EFFECTED U/S 14A OF THE IT ACT. THEREFORE, IN VIEW OF THE DECISION OF THE JURISDICTIONAL HIGH COURT AND THE DECISION OF THE HONBLE SUPREME COURT, WE ARE OF THE VIEW THAT SEC.1 4A CANNOT BE APPLIED UNLESS THERE IS A PROXIMATE CAUSE FOR DISALLOWANCE. THE ONUS TO ESTABLISH THAT THERE IS PROXIMATE CAUSE BASED ON THE RELATIONSHIP OF THE EXPENDITURE WITH THE EXEMPT INCOME IN OUR OPINION IS ON THE REVENUE. THUS, THE APPLICATION OF TH E PROVISIONS OF SEC. (2) & (3) OF SEC.14A AND RULE 8D IS NOT AUTOMATIC IN EACH AND EVERY CASE, WHERE THERE IS INCOME NOT FORMING PART OF THE TOTAL INCOME. SUB - SEC. (2) & (3) ARE INTENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS OF SUB - SEC. (1). THEREFOR E, IT IS NECESSARY FOR THE AO FIRST TO ASCERTAIN WHETHER THERE IS PROXIMATE CONNECTION BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF THE TOTAL INCOME. IF SUCH PROXIMATE CONNECTION IS ESTABLISHED WITH THE EXEMPT INCOME, THE AO WOULD BE JUSTIFIED IN APPLYING THE PROVISIONS OF SUB - SEC (2) & (3) OF SEC.14A AND RULE 8D OF THE IT ACT, 1961. THE EXPENDITURE INCURRED U/S 14A WOULD INCLUDE DIRECT AND INDIRECT EXPENDITURE, BUT RELATIONSHIP WITH EXEMPTED INCOME MUST BE PROXIMATE. IF THERE IS MA TERIAL TO ESTABLISH THAT THERE IS DIRECT NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF TOTAL INCOME THEN DISALLOWANCE WOULD BE JUSTIFIED EVEN WHERE THERE IS NO RECEIPT OF EXEMPTED INCOME U/S 10 IN THE YEAR UNDER CONSIDERATION IN VIEW OF THE DECISION OF SPECIAL BENCH IN THE CASE OF CHEMINVEST LTD. 124 TTJ 577 (DEL)(SB). 17. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOME. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO TO BE ALLOWED ON NET BASIS I.E. GROSS RECEIPTS MINUS RELATED EXPENSES. THEREFORE, IF ANY EXPENDITURE IS DIRECTLY RELATED TO EXEMPTED INCOME, IT CANNOT BE ALLOWED TO BE SET OFF AGAINST TAXABLE PROFIT. ON THE SAME ANALOGY, IN OUR OPINION, IF ANY EXPENDITURE IS DIRECTLY RELATED TO TAXABLE INCOME, IT CANNOT BE ALLOWED TO BE SET OFF AGAINST THE EXEMPTED INCOME MERELY BECAUSE SOME INCIDENTAL BENEFIT HAS ARISEN TOWARDS EXEMPTED INCOME. BEFORE MAKING ANY DISALLOWANCE U/S 14A, THE AO IS REQUIRED TO RECORD A SATISFACTION, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, THAT CLAIM OF ASSESSEE THAT EXPENDITURE INCURRED IS NOT RELATED TO THE INCOME FORMING PART OF THE T OTAL INCOME IS INCORRECT. SUCH SATISFACTION MUST BE ARRIVED AT ON THE OBJECTIVE BASIS. HE IS ALSO REQUIRED TO RECORD THE REASONS FOR ARRIVING AT SUCH SATISFACTION. THE ASSESSING OFFICER IN THIS CASE, WE NOTED IS NOT SATISFIED WITH THE CORRECTNESS OF TH E DISALLOWANCE MADE BY THE ASSESSEE EVEN THOUGH 8 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) HE HAS ACCEPTED THE EXPLANATION OF THE ASSESSEE THAT NO INTEREST IS INCURRED WITH REGARD TO EXEMPT INCOME. HE REJECTED THE EXPLANATION OF THE ASSESSEE THAT NO ADMINISTRATIVE EXPENDITURE INCURRED ON EARNING DI VIDEND INCOME CONSIDERING THE MAGNITUDE OF THE INVESTMENTS AND DIVIDEND INCOME RECEIVED AND THE DISALLOWANCE ACCORDING TO HIM MADE BY THE ASSESSEE U/S 14A TOWARDS ADMINISTRATIVE EXPENDITURE IS VERY LESS. THE ASSESSING OFFICER NOWHERE POINTED OUT THE PROXI MATE CONNECTION OF OTHER EXPENSES NOT APPORTIONED BY THE ASSESSEE FOR THE EARNING OF THE DIVIDEND INCOME. HE MERELY OBSERVED THAT THE ADMINISTRATIVE EXPENSES DISALLOWED BY THE ASSESSEE IS VERY LESS BUT HOW THEY ARE LESS AND HOW THE OTHER EXPENSES INCURRED BY THE ASSESSEE RELATED TO THE DIVIDEND INCOME HAS NOT BEEN BROUGHT ON RECORD. EVEN THE AO HAS NOT POINTED OUT THE EXPENSES EXCLUDED BY THE ASSESSEE FOR DISALLOWANCE HAS PROXIMATE CONNECTION WITH DIVIDEND INCOME. IN OUR OPINION, THE ASSESSING OFFICER BEF ORE REJECTING THE DISALLOWANCE COMPUTED BY THE ASSESSEE MUST GIVE A CLEAR CUT FINDING HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE HOW THE OTHER EXPENDITURE CLAIMED BY THE ASSESSEE OUT OF NON EXEMPT INCOME IS RELATED WITH THE EXEMPT INCOME. NO DISCREPANCY IN THE CLAIM OF THE ASSESSEE WAS POINTED OUT. THE ASSESSING OFFICER IN OUR OPINION IN VIEW OF THE JURISDICTIONAL HIGH COURT DECISION IS BOUND TO RECORD SATISFACTION AS TO HOW THE EXPENSES CLAIMED BY THE ASSESSEE HAVE BEEN INCURRED ON EARNING DIVIDEND INC OME WERE NOT SUFFICIENT AND CORRECT. WE HAVE ALREADY HELD THAT THE ONUS TO PROVE IN THIS REGARD LIES ON THE ASSESSING OFFICER. ALTHOUGH THE LD. DR HAD VEHEMENTLY CONTENDED AND TRIED TO BUILD UP HIS CASE BY SUBSTITUTING THE REASONS GIVEN BY THE CIT(APPEAL ) IN PLACE OF THE AO, BUT FAILED TO BRING ANY COGENT MATERIAL OR EVIDENCE IN THIS REGARD WHICH MAY PROVE THAT THE OTHER EXPENSES CLAIMED BY THE REVENUE FOR APPORTIONMENT HAD PROXIMATE CONNECTION WITH THE EARNING OF THE DIVIDEND INCOME. IN OUR OPINION UNTIL AND UNLESS THIS IS PROVED OR ESTABLISHED BY THE REVENUE, THE ASSESSING OFFICER DOES NOT HAVE ANY POWER TO REJECT THE ACCOUNTS OF THE ASSESSEE AND TAKE THE SHELTER OF RULE 8D FOR COMPUTING THE DISALLOWANCE OUT OF THE EXEMPT INCOME. WE ARE NOT AT ALL CONVI NCED WITH THE SUBMISSION OF THE LD. DR RELYING ON THE DECISION OF CIT(APPEAL) IN RESPECT OF EXPLANATION BB TO SEC. 80HHC THAT 10% OF THE RECEIPTS UNDER THE SOURCES MENTIONED THEREIN ARE DEEMED TO BE THE EXPENDITURE. THIS IN OUR OPINION WILL STRENGTHEN THE CASE OF THE ASSESSEE AS EXPLANATION BB TO SEC. 80HHC DOES NOT RECOGNIZE AMOUNT OF THE INVESTMENT MADE IN OTHER RECEIPT TO BE THE BASIS OF COMPUTING THE EXPENDITURE BEING INCURRED FOR THE EARNING OF THAT INCOME. SIMILAR VIEWS HAVE BEEN TAKEN BY HONBLE TR IBUNAL IN THE FOLLOWING DECISIONS ALSO. IN THE CASE OF DCIT VS. JINDAL PHOTO LTD. HELD IN I.T.A.T. DELHI BENCH DATED 7.1.2011 IT WAS HELD AS FOLLOWS: NOW AS PER SECTION 14A(2) OF THE ACT, IF THE AO, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE , IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE ASSESSEES TOTAL INCOME UNDER THE ACT, THE AO SHALL DETERMINE THE AMOUNT INCURRED IN RELATION TO S UCH INCOME, IN ACCORDANCE WITH 9 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) SUCH METHOD AS MAY BE PRESCRIBED, I.E., UNDER RULE 8D OF THE I.T. RULES. HOWEVER, IN THE PRESENT CASE, THE ASSESSMENT ORDER DOES NOT EVINCE ANY SUCH SATISFACTION OF THE AO REGARDING THE CORRECTNESS OF THE CLAIM OF THE ASSESS EE. AS SUCH, RULE 8D OF THE RULES WAS NOT APPROPRIATELY APPLIED BY THE AO AS CORRECTLY HELD BY THE CIT(A). IT HAS NOT BEEN DONE BY THE AO THAT ANY EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE FOR EARNING ITS DIVIDEND INCOME. MERELY, AN ADHOC DISALLOWAN CE WAS MADE. THE ONUS WAS ON THE AO TO ESTABLISH ANY SUCH EXPENDITURE. THIS ONUS HAS NOT BEEN DISCHARGED. IN CIT VS. HERO CYCLES (P&H) 323 ITR 518, UNDER SIMILAR CIRCUMSTANCES, IT WAS HELD THAT THE DISALLOWANCE U/S 14A OF THE ACT REQUIRES A CLEAR FIND ING OF INCURRING OF EXPENDITURE AND THAT NO DISALLOWANCE CAN BE MADE ON THE BASIS OF PRESUMPTIONS. IN ACIT VS. EICHER LTD., 101 TTJ (DEL.) 369, THAT IT WAS HELD THAT THE BURDEN IS ON THE AO TO ESTABLISH NEXUS OF EXPENSES INCURRED WITH THE EARNING OF EXE MPT INCOME, BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT. IN MARUTI UDYOG VS. DCIT, 92 ITD 119 (DEL.), IT HAS BEEN HELD THAT BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT, THE ONUS TO ESTABLISH THE NEXUS OF THE SAME WITH THE EXEMPT INCOME, IS ON THE REVENUE. IN WIMCO SEEDLINGS LIMITED VS. DCIT, 107 ITD 267 (DEL.) (TM), IT HAS BEEN HELD THAT THERE CAN BE NO PRESUMPTION THAT THE ASSESSEE MUST HAVE INCURRED EXPENDITURE TO EARN TAX FREE INCOME. SIMILAR ARE THE DECISIONS IN: 1. PUNJAB NATIONAL B ANK VS. DCIT, 103 TTJ 908 (DEL.); 2. VIDYUT INVESTMENT LTD., 10 SOT 284 (DEL.); AND 3. D.J. MEHTA VS. INCOME TAX OFFICER, 290 ITR 238 (MUM.) (AT) IN VIEW OF THE ABOVE, FINDING NO ERROR WITH THE ORDER OF THE CIT(A) ON THE POINT AT ISSUE, THE SAME IS HERE BY CONFIRMED. GROUND NO.3 IS THUS REJECTED. IN THE CASE OF JINDAL PHOTO LTD. VS. DCIT HELD IN I.T.A.T. DELHI BENCH DATED 23.9.2011 IT WAS HELD AS FOLLOWS: IN THE YEAR UNDER CONSIDERATION, IT IS SEEN THAT IT IS NOT INCORRECT WHEN THE ASSESSEE CONTENDS THAT NO SATISFACTION HAS BEEN RECORDED BY THE AO REGARDING THE ASSESSEES CALCULATION BEING INCORRECT. EVEN SO, RULE 8D OF THE RULES HAS BEEN APPLIED. THIS, IN OUR OPINION, IS NOT CORRECT. SUCH SATISFACTION OF THE ASSESSING OFFICER IS A PRE - REQUISITE T O INVOKE THE PROVISIONS OF RULE 8D OF THE RULES. THE LEARNED CIT(A), THEREFORE, ERRED IN PARTIALLY APPROVING THE ACTION OF THE ASSESSING OFFICER. IN THE CASE OF AVSHESH MERCANTILE P. LTD. VS. DCIT IN I.T.A.T. MUMBAI BENCH (I.T. ACT NO.5779/MUM/2006 & 20 8/MUM/2009) IT WAS HELD AS FOLLOWS: AT THE TIME OF HEARING, THE CONTENTION RAISED BY THE LEARNED DR IN THIS REGARD IS THAT THE APPEAL OF THE REVENUE ON THE ISSUE HAVING BEEN DISMISSED BY THE 10 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) HON'BLE BOMBAY HIGH COURT MERELY OBSERVING THAT NO QUESTION ARI SES, IT CANNOT BE TREATED AS A DECISION RENDERED BY THE HON'BLE HIGH COURT ON THE MERIT OF THE ISSUE WHICH IS BINDING ON THIS TRIBUNAL. WE ARE UNABLE TO ACCEPT THIS CONTENTION OF THE LEARNED DR. IT IS WELL SETTLED PROPOSITION OF JUDICIAL PRECEDENTS THAT IS APPEAL THE HON'BLE HIGH COURT CONSIDERS FACTS PERTAINING TO THE ISSUE AND GIVES APPROVAL TO THE DECISION OF THE LOWER FORUM, THE DECISION OF LOWER FORUM GETS MERGED WITH THE JUDGMENT AND ORDER OF THE HIGH COURT AND IT BECOMES BINDING PRECEDENT EVEN THOU GH APPROVAL TO DECISION OF LOWER FORUM/COURT IS SUMMARILY RECORDED. SIMILAR SITUATION HAD ARISEN FOR CONSIDERATION BEFORE THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF NIRMA INDUSTRIES LTD. 283 ITR 402 WHEREIN THE EFFECTS OF SUMMARY DISPOSAL OF APPEAL BY THE HIGH COURT WERE ANALYSED AND EXPLAINED BY THEIR LORDSHIPS. IT WAS CLARIFIED THAT WHILE HEARING AN APPEAL EVEN FOR DECIDING WHETHER SUBSTANTIAL QUESTION OF LAW ARISES OR NOT FROM THE ORDER OF THE TRIBUNAL, THE HIGH COURT DOES NOT EXERCISE EITHER THE OR IGINAL JURISDICTION OR THE JURISDICTION TO ISSUE WRITS AND THE ONLY JURISDICTION EXERCISED BY THE HIGH COURT IN THE FIRST INSTANCE DECIDES WHETHER OR NOT SUBSTANTIAL QUESTION OF LAW ARISES FROM THE ORDER OF THE TRIBUNAL, IT CANNOT BE SAID THAT THE HIGH COU RT DOES NOT EXERCISE THE APPELLATE POWERS OR THAT THERE IS NO DECISION ON MERIT WHEN THE HIGH COURT DISMISSES AN APPEAL HOLDING THAT NO SUBSTANTIAL QUESTION OF LAW ARISES FROM THE ORDER OF THE TRIBUNAL. IT WAS HELD THAT WHENEVER AN ORDER OF THE SUBORDINAT E FORUM IS CARRIED IN APPEAL BEFORE THE HIGHER APPELLATE FORUM/COURT, OPERATIVE PART THEREOF MERGES INTO THE JUDGMENT, DECISION OR ORDER OF THE HIGHER COURT AFTER THE CONFIRMATION, MODIFICATION OR REVERSAL, AS THE CASE MAY BE, AND THE DECISION OF THE LOWER COURT OR FORUM HAS NO INDEPENDENT EXISTENCE THEREAFTER IN RELATION TO THE ISSUE WHICH WAS CARRIED BEFORE THE APPELLATE COURT OR FORUM. IT WAS HELD THAT WHERE THE HIGH COURT COMES TO THE CONCLUSION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES ON A PARTICULA R ISSUE, IT CANNOT BE STATED THAT THE SUBJECT MATTER OF CONTROVERSY BETWEEN THE PARTIES HAS NOT BEEN DEALT WITH BY THE HIGH COURT. IT WAS HELD THAT WHEN THE DECISION OF THE TRIBUNAL IS AFFIRMED ON THE ISSUE BROUGHT BEFORE THE HIGH COURT, IT IS THE DECISIO N OF THE HIGH COURT WHICH BECOMES OPERATIVE AND WHICH IS CAPABLE OF BEING GIVEN EFFECT TO FOR ALL INTENTS AND PURPOSES. KEEPING IN VIEW THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF NIRMA INDUSTRIES LTD. (SUPRA), WE HAVE NO HESITATION TO HOLD THAT THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF DELITE ENTERPRISE LTD. (SUPRA) IS A DECISION ON MERIT WHICH IS BINDING PRECEDENT ON US. AS THE ISSUE INVOLVED IN THE PRESENT CASES AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERETO ARE SIM ILAR TO THAT OF THE CASE OF DELITE ENTERPRISE (SUPRA), WE RESPECTFULLY FOLLOW THE SAID DECISION OF THE JURISDICTIONAL HIGH COURT AND DELETE THE DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(A) ON ACCOUNT OF PREMIUM PAID BY THE ASSESSEES ON R EDEMPTION OF PREMIUM NOTES (OCPN) BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. AS REGARDS THE CASE LAWS CITED BY THE LEARNED DR, IT IS 11 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) OBSERVED THAT IN NONE OF THESE CASES, THE FACTS INVOLVED WERE SIMILAR TO THE CASE OF THE PRESENT ASSESSEES IN A S MUCH AS THE INVESTMENT MADE THEREIN WAS NOT FOUND TO BE CAPABLE OF EARNING TAXABLE AS WELL AS EXEMPT INCOME WHICH WAS ACTUALLY NOT EARNED BY THE ASSESSEE IN THE RELEVANT PERIOD AS ARE THE FACTS OF THE PRESENT CASE OR THAT OF THE CASE OF DELITE ENTERPRISE (SUPRA) DECIDED BY THE HON'BLE BOMBAY HIGH COURT. ACCORDINGLY, WE DECIDE THE COMMON ISSUE INVOLVED IN ALL THESE APPEALS IN FAVOUR OF THE ASSESSEES FOLLOWING THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF DELITE ENTERPRISES (SUPRA) AND ALLOW THE APPEALS OF ALL THE ASSESSEES. 18. WE HAVE ALSO GONE THROUGH THE DECISION RELIED UPON BY THE LEARNED DR ALSO. THE DECISION OF ACIT VS CITICORP FINANCE (IND.) LTD., 108 ITD 457 (BOM.) IS NO MORE RELEVANT, IN VIEW OF THE DECISION OF THE HONBLE MUMBAI HIGH COURT IN THE CASE OF GODREJ BOYCE MFG CO. LTD. (SUPRA). THE DECISION OF SPIC VS DCIT 93 TTJ (CHENNAI) 161 IS NOT APPLICABLE TO THE FACTS OF THE CASE. AS IN THAT CASE, THE ASSESSEE WAS REGULARLY INVESTING IN THE SHARES. THE ASSESSEE HAS NOT DI SALLOWED ANY EXPENDITURE WITH REGARD TO THE EARNING OF THE DIVIDEND INCOME. UNDER THESE FACTS, THE HONBLE TRIBUNAL HELD THAT WHETHER TO INVEST OR NOT TO INVEST IS A VERY STRATEGIC DECISION AND TOP MANAGEMENT INVOLVE IN TAKING THE DECISIONS. THIS DECISION RELATE TO ASSESSMENT YEAR 2000 - 01 MUCH PRIOR TO THE INSERTION OF PROVISION OF SEC.14A(2) OF THE IT ACT,1961. THE DECISION OF ACIT VS PREMIUM CONSOLIDATED CAPITAL TRUST 83 TTJ (BOM.) RELATES TO ASSESSMENT YEAR 1991 - 92 PRIOR TO INSERTION OF 14A(2) HENCE WI LL NOT ASSIST THE REVENUE. THE OTHER DECISION RELIED ON ARE ALSO NOT APPLICABLE TO THE FACTS OF THE CASE, EXCEPT THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS DC IT & ANOTHER 328 ITR 81(BOM.). IN VIEW OF OUR AF ORESAID DISCUSSION AND RESPECTIVELY FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT & ANOTHER 328 ITR 81 (BOM), WE DELETE THE DISALLOWANCE MADE U/S 14A R.W. RULE 8D AND ACCORDINGLY, THE GROUND TA KEN BY THE ASSESSEE IN THIS REGARD IS ALLOWED. RESPECTFULLY FOLLOWING THE DECISION OF THIS TRIBUNAL IN THE CASE OF THE ASSESSEE, WE ALLOW THE GROUND AND DELETE THE DISALLOWANCE MADE BY THE AO U/S 14A. THUS, THE GROUND NO S . 1 TO 3 TAKEN BY THE ASSESSEE IS ALLOWED. ITA NO. 386/PNJ/2013 : 3. GROUND NO. 1 IN REVENUES APPEAL IS GENERAL IN NATURE AND DOES NOT REQUIRE ADJUDICATION. 12 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) 4. GROUND NO. 2 IN REVENUES APPEAL RELATES TO DISALLOWANCE MADE U/S 40 ( A ) (IA) R.W.S. 195 TOWARDS PAYMENT OF COMMISSION TO F OREIGN AGENCY OUTSIDE INDIA. 4.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. WE NOTED THAT THIS ISSUE IS DULY COVERED IN FAVOUR OF THE ASSESSEE SO FAR AS IT RELATES TO THE DISALLOWANCE MADE U/S 40(A)(IA ) BY THE DECISION OF THIS TRIBUNAL DT. 10.3.2011 IN ITA NO. 113/PNJ/2010 IN WHICH THIS TRIBUNAL RELYING ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE P. LTD. V. COMMISSIONER OF INCOME - TAX , 327 ITR 456 DELETED THE DI SALLOWANCE AND ALLOWED THE APPEAL OF THE ASSESSEE ON THIS ISSUE BY HOLDING AS UNDER : 9. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES. LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE ISSUE IN CONTROVERSY WHETHER THE ASSESS EE REQUIRES TO DEDUCT TAX AT SOURCE FOR THE COMMISSION PAID TO NON - RESIDENTS HAS BEEN DEALT BY HON'BLE SUPREME COURT IN GE INDIA TECHNOLOGY CENTRE P. LTD. WHEREIN IT HAS BEEN HELD AS UNDER : THE MOST IMPORTANT EXPRESSION IN SECTION 195(1) OF THE INCOME T AX ACT, 1961 DEALING WITH DEDUCTION OF TAX AT SOURCE CONSISTS OF THE WORDS 'CHARGEABLE UNDER THE PROVISIONS OF THE ACT.' A PERSON PAYING INTEREST OR ANY OTHER SUM TO A NON - RESIDENT IS NOT LIABLE TO DEDUCT TAX IF SUCH SUM IS NOT CHARGEABLE TO TAX UNDER THE ACT. SECTION 195 CONTEMPLATES NOT MERELY AMOUNTS, THE WHOLE OF WHICH ARE PURE INCOME PAYMENTS; IT ALSO COVERS COMPOSITE PAYMENTS WHICH HAVE AN ELEMENT OF INCOME IMBEDDED OR INCORPORATED IN THEM. THE OBLIGATION TO DEDUCT TAX AT SOURCE IS, HOWEVER, LIMITED T O APPROPRIATE PROPORTION OF INCOME CHARGEABLE UNDER THE ACT FORMING PART OF THE GROSS SUM OF MONEY PAYABLE TO THE NON - RESIDENT. IT IS FOR THIS REASON THAT THE CBDT HAS CLARIFIED IN CIRCULAR NO.728 DATED OCTOBER 31, 1995, THAT THE TAX DEDUCTOR CAN TAKE INTO CONSIDERATION THE EFFECT OF THE DTAA IN RESPECT OF PAYMENTS OF ROYALTIES AND TECHNICAL FEES WHILE DEDUCTING TAX AT SOURCE. THE EXPRESSION 'CHARGEABLE UNDER THE PROVISIONS OF THE ACT' IN SECTION 195(1) SHOWS THAT THE REMITTANCE HAS GOT TO BE OF A TRADING RECEIPT, THE WHOLE OR PART OF WHICH IS LIABLE TO TAX IN INDIA. IF TAX IS NOT SO ASSESSABLE, THERE IS NO QUESTION OF TAX AT SOURCE BEING DEDUCTED.' 13 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) RESPECTFULLY FOLLOWING THE SAME, WE ALLOW THE CLAIM OF THE ASSESSEE AND HELD THAT THE ASSESSEE IS NOT LIABLE TO DEDUCT TAX AT SOURCE UNDER SECT/ON 195(1) BECAUSE INCOME IS NOT TAXABLE IN INDIA. THE TRIBUNAL IN CASE OF ITA NOS.6133(MUM.)/2002 AND NO.7589(MUM.)/2003, WHEREIN THE TRIBUNAL HAS CLARIFIED CIRCULAR NO.786 DATED 07 - 02 - 2000. ACCORDING TO PARA - 3 OF THIS C IRCULAR NO.7 OF 2009, THE EARLIER CIRCULAR NO.23 DATED 23 - 07 - 1969 IS WITHDRAWN WITH IMMEDIATE EFFECT. SIMILAR IS THE FATE FOR CIRCULAR NO.786. IT IS THEREFORE, BECOMES CLEAR THAT THE CIRCULARS ON WHICH THE TRIBUNAL HAS PLACED RELIANCE WHILE DECIDING THE CA SE FOR ASSESSMENT YEAR 1997 - 98 IN ASSESSEE'S OWN CASE HOLD GOOD FOR THE INSTANT YEAR AS WELL. IT IS AXIOMATIC THAT A CIRCULAR IN OPERATION THROUGH THE ASSESSMENT YEAR 1998 - 99 CANNOT BE HELD TO BE IN OPERATIONAL SIMPLY BY REASON OF THE FACT THAT IT HAS BEEN WITHDRAWN IN THE YEAR 2009. THE WITHDRAWAL OF SUCH CIRCULARS WILL BE EFFECTIVE ONLY AFTER THE SAID DATE OF 22 - 10 - 2009 BY WHICH THESE CIRCULARS WILL BE EFFECTIVE ONLY AFTER THE SAID DATE OF 22 - 10 - 2009 BY WHICH THESE CIRCULARS HAVE BEEN WITHDRAWN WITH IMMED IATE EFFECT. ACCORDINGLY, CIRCULAR NO.7 OF 2009 WITHDRAWING THE CIRCULAR NO.23 OF 1969,163 OF 1975 AND 786 OF 2000 WILL BE OPERATIVE ONLY FROM 22 - 10 - 2009 AND NOT PRIOR TO THAT DATE. THUS, WE ARE OF THE VIEW THAT THIS ASSESSMENT YEAR IS 2005 - 06 AND IT IS NO T APPLICABLE FOR THE YEAR UNDER CONSIDERATION. THEREFORE, WE ALLOW THE APPEAL OF THE ASSESSEE ON THIS GROUND. RESPECTFULLY FOLLOWING THE AFORESAID DECISION, WE CONFIRM THE ORDER OF CIT(A) DELETING THE DISALLOWANCE MADE U/S 40(A)(IA). WE MAY MENTION THAT THIS TRIBUNAL HAS DELETED THE SAID DISALLOWANCE IN THE CASE OF THE ASSESSEE IN ITA NO. 190/PNJ/2011 FOR A.Y 2006 - 07 AND ALSO IN ITA NOS. 72 & 85/PNJ/2012 FOR A.Y 2009 - 10. NO CONTRARY DECISION WAS BROUGHT TO OUR KNOWLEDGE BY THE LD. DR. WE, T HEREFORE, R ESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y 2005 - 06, CONFIRM THE ORDER OF CIT(A) DELETING THE DISALLOWANCE. 5. GROUND NO. 3 IN REVENUES APPEAL RELATES TO DISALLOWANCE OF DEPRECIATION ON UPS AM OUNTING TO RS. 1,88,784/ - DELETED BY THE CIT(A). 5.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. WE NOTED THAT THIS ISSUE IS ALSO DULY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THIS TRIBUNAL DT. 26 . 4 .201 3 IN ITA NO. 1 90/PNJ/2011 FOR A.Y 2006 - 07 IN WHICH THIS TRIBUNAL UNDER PARA 5 HAS HELD AS UNDER : 14 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) 5. GROUND NO. 4 RELATE TO THE DISALLOWANCE OF RS. 1,49,782/ - ON ACCOUNT OF DEPRECIATION OF UPS. THE BRIEF FACTS RELATING TO THIS GROUND ARE THAT THE ASSESSEE HAS INSTALLE D UPS AS PART OF THE COMPUTER AND CLAIMED DEPRECIATION @ 60%. THE ASSESSING OFFICER ALLOWED DEPRECIATION @ 15% AND DISALLOWED THE BALANCE AMOUNT. WHEN THE MATTER WENT BEFORE CIT(A), THE CIT(A) ALSO CONFIRMED THE DISALLOWANCE. THE LEARNED AR IN THIS REGA RD RELIED ON THE DECISION OF THE TRIBUNAL IN THE FOLLOWING CASES : SL NO TITLE FORUM CITATION NO. 1 ITO VS. SAMIRAN MAJUMDAR, ITAT CALCUTTA 280 ITR 74 2 CIT VS. BSES YAMUNA POWERS LTD., HC, DELHI ITA NO. 1267/2010 3 CIT VS. ORIENT CERAMICS AND INDS LTD. HC DELHI ITA NO. 65 AND 66 OF 2011 4 ITO VS. OMNI GLOBE INFORMATION TECHNOLOGIES INDIA (P) LTD ITAT DELHI 131 ITD 280 THE LEARNED DR ON THE OTHER HAND RELIED ON THE ORDER OF THE AUTHORITIES BELOW. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. WE HAVE NOTED THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. BSES YAMUNA POWERS LTD., ITA NO. 1267/2010 AND ALSO IN THE CASE OF CIT VS. ORIENT CERAMICS AND IND. LTD. IN ITA NO. 65 AND 66 OF 2011 CONFIRMED THE ORDER OF THE TRIBUNAL ALLOWING DEPRECIATION @ 60% UNDER PARA 4 AND 13 OF THE RESPECTIVE ORDERS. NO CONTRARY DECISION WAS BROUGHT TO OUR KNOWLEDGE. RESPECTFULL Y FOLLOWING THE DECISIONS OF THE TRIBUNAL AS WELL AS THAT OF THE HONBLE HIGH COURT, WE SET ASIDE THE ORDER OF CIT(A) AND DIRECT THE ASSESSING OFFICER TO ALLOW DEPRECIATION FOR UPS @ 60%. NO CONTRARY DECISION WAS BROUGHT TO OUR KNOWLEDGE BY THE LD. DR. WE, THEREFORE, R ESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, CONFIRM THE ORDER OF CIT(A) DELETING THE DISALLOWANCE IN RESPECT OF DEPRECIATION ON UPS. 6. GROUND NOS. 4 AND 5 OF REVENUES APPEAL RELATE TO DELETION OF DISALLOWANCE OF RS.2,47 ,50,646/ - MADE U/S 40(A)(IA) R.W.S 195 TOWARDS PAYMENT OF DEMURRAGE PAID TO BUYERS OF IRON ORE IN PAKISTAN THROUGH BANK OF INDIA AND DELETION OF DISALLOWANCE OF DEMURRAGE MADE U/S 40(A)(IA) R.W.S 194C AMOUNTING TO RS.95,46, 558/ - PAID TO TWO RESIDENT EXPORT ERS OF IRON ORE. 15 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) 6.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME WE NOTED THAT SIMILAR ISSUES HAVE ARISEN IN THE CASE OF THE ASSESSEE FOR A.Y 2009 - 10 AND THIS TRIBUNAL WHILE DISPOSING OFF THE APPEAL OF THE ASSESSEE IN ITA NO. 72/ PNJ/2012 VIDE ORDER DT. 8.3.2013 HELD AS UNDER : 31. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THIS IS A FACT THAT THE ASSESSEE HAS PAID THE DEMURRAGE CHARGES TO THE NON - RESIDENT IN RESPECT OF DELAY IN LOADING THE SHIP. WE FIND THAT THE SUM OF RS. 36,05,767/ - WAS REIMBURSED BY THE ASSESSEE TO THE FOREIGN BUYER TO COMPENSATE THE FOREIGN BUYER FOR PAYING DEMURRAGE TO THE SHIP OWNER WHEN SHIP CAME TO INDIAN PORT AND THE ASSESSEE COULD NOT LOAD THE GOODS ON TO THE SHIP WITHIN THE LIMITED TIME PERIOD. THE EXPORT SALES WERE MADE TO THE FOREIGN PAKISTANI BUYER ON FOB BASIS. IN VIEW OF THE CONTRACT WITH THE PAKISTANI BUYER SPECIFICALLY CLA USE 11(D), IN OUR OPINION, THE ASSESSEE IS BOUND TO COMPENSATE THE PAKISTANI BUYER IN RESPECT OF DEMURRAGE PAID BY THE PAKISTANI BUYER TO THE SHIP OWNER. THIS PAYMENT IN OUR OPINION CAN BE REGARDED TO BE THE EXPENDITURE INCURRED BY THE ASSESSEE FOR THE SAL ES OF THE GOODS. WE DO NOT AGREE WITH THE LD. AR THAT THIS PAYMENT WAS AKIN TO PRICE DEDUCTION DUE TO FAULT IN PRODUCT/SERVICE AND IS EQUIVALENT TO DISCOUNT/REBATE WHICH CAN BE ADJUSTED AGAINST THE SALE PRICE. 32. WE HAVE GONE THROUGH EXPLANATION 1(B) TO SECTION 9(1)(I) OF THE INCOME - TAX ACT, 1961. WE NOTED THAT THIS SECTION PROVIDES THAT IN THE CASE OF A NON - RESIDENT, NO INCOME SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA TO HIM THROUGH OR FROM OPERATIONS WHICH ARE CONFINED TO THE PURCHASE OF THE GOODS IN INDIA FOR THE PURPOSE OF EXPORT. THE NON - RESIDENT BUYER GOT THE COMPENSATION TOWARDS THE DEMURRAGE INCURRED THROUGH THE OPERATION WHICH ARE CONFINED TO THE PURCHASE OF THE GOODS, I.E. IN RELATION TO THE SHIP WHICH IT HAD ARRANGE FOR TAKING THE DELIVERY OF THE GOODS FROM THE ASSESSEE/SELLER FROM INDIA. IN OUR OPINION THIS INCOME CANNOT BE DEEMED TO ACCRUE OR ARISE IN INDIA IN THE HANDS OF THE FOREIGN BUYER AND THEREFORE IT CANNOT BE TAXABLE IN INDIA AND IS NOT LIABLE TO TAX DEDUCTION AT SOURCE. ON THIS BA SIS, NO DISALLOWANCE CAN BE MADE U/S 40(A)(IA) AND ACCORDINGLY WE DELETE THE DISALLOWANCE OF RS. 36,05,767/ - . 32.1 NOW COMING TO THE SUBMISSION OF THE LD. DR THAT THESE CHARGES ARE THE DEMURRAGE LIABLE TO TAX IN INDIA U/S 172(8) OF THE I.T. ACT AND HAVE BEEN INCURRED BY THE ASSESSEE FOR MAKING PAYMENT TO THE SHIPPING COMPANY THROUGH FOREIGN BUYER. WE HAVE GONE THROUGH THE CIRCULAR NO.723 DATED 19/9/1995 WHICH DEALS WITH THE PROVISIONS OF SECTION 172, 194C & 195 OF THE INCOME - TAX ACT. IT READS AS UNDER: SECTION 172 DEALS WITH SHIPPING BUSINESS OF NON - RESIDENTS. SECTION 172(1) PROVIDES THE MODE OF THE LEVY AND RECOVERY OF TAX IN THE CASE OF ANY SHIP, 16 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) BELONGING TO OR CHARTERED BY A NON - RESIDENT, WHICH CARRIES PASSENGERS, LIVE - STOCK, MAIL OR GOODS SHIPPED AT A PORT IN INDIA. AN ANALYSIS OF THE PROVISIONS OF SECTION 172 WOULD SHOW THAT THESE PROVISIONS HAVE TO BE APPLIED TO EVERY JOURNEY A SHIP, BELONGING TO OR CHARTERED BY A NON - RESIDENT, UNDERTAKES FROM ANY PORT IN INDIA. SECTION 172 IS A SELF - CONTAINED CODE FOR THE LEVY AND RECOVERY OF THE TAX, SHIP WISE AND JOURNEY WISE, AND REQUIRES THE FILING OF THE RETURN WITHIN A MAXIMUM TIME OF THIRTY DAYS FROM THE DATE OF DEPARTURE OF THE SHIP. THE PROVISIONS OF SECTION 172 ARE TO APPLY, NOTWITHSTANDING ANYTHING CONTAINED IN OTHER PROVISIONS OF THE ACT. THEREFORE, IN SUCH CASES, THE PROVISIONS OF SECTION 194C AND 195 RELATING TO TAX DEDUCTION AT SOURCE ARE NOT APPLICABLE. THE RECOVERY OF TAX IS TO BE REGULATED, FOR A VOYAGE UNDERTAKEN FROM ANY PORT IN INDIA BY A SHIP UNDER THE PROVISIONS OF SECTION 172. SECTION 194C DEALS WITH WORK CONTRACT INCLUDING CARRIAGE OF GOODS AND PASSENGERS BY ANY MODE OF TRANSPORT OTHER THAN RAILWAYS. THIS SECTION APPLIES TO PAYMENTS MADE BY A PERSON REFERRED TO IN CLAUSES (A) TO (J) OF SUB - SECTION (1) TO ANY RESIDENT (TERMED AS CONTRACTOR). IT IS CLEAR FROM THE SECTION THAT THE AREA OF OPERATION OF TDS IS CONFINED TO PAYMENTS MADE TO ANY RESIDENT. ON THE OTHER HAND, SECTION 172 OPERATES IN THE AREA OF COMPUTATION OF PROFITS FROM SHIPPING BUSINESS OF NON - RESIDENTS. THUS, THERE IS NO OVERLAPPING IN THE AREAS OF OPERATION OF THESE SECTIONS. THERE WOULD, HOWEVER, BE CASES WHERE PAYMENTS ARE MADE TO SHIPPING AGENTS OF NON - RESIDENT SHIP OWNERS OR CHARTERERS FOR CARRIAGE OF PASSENGERS , ETC., SHIPPED AT A PORT IN INDIA. SINCE, THE AGENT ACTS ON BEHALF OF THE NON - RESIDENT SHIP - OWNER OR CHARTERER, HE STEPS INTO THE SHOES OF THE PRINCIPAL. ACCORDINGLY, PROVISIONS OF SECTION 172 SHALL APPLY AND THOSE OF SECTIONS 194C AND 195 WILL NOT APPL Y. 33. FROM THE PERUSAL OF THIS CIRCULAR, IT IS APPARENTLY CLEAR THAT THE PROVISIONS OF SECTION 194C AND 195 RELATING TO TAX DEDUCTION AT SOURCE ARE NOT APPLICABLE WHERE THE PROVISIONS OF SECTION 172 ARE APPLICABLE. THE CIRCULAR ISSUED BY THE CBDT IS BI NDING ON THE DEPARTMENT. IN VIEW OF THE CIRCULAR IN OUR OPINION THE ASSESSEE IS NOT OBLIGED TO DEDUCT TDS ON THE PAYMENT MADE AS DEMURRAGE CHARGES AND THE DEMURRAGE CHARGES ARE ALSO LIABLE TO BE TAXED U/S 172 OF THE INCOME - TAX ACT. THE ASSESSEE, SINCE IS NOT LIABLE TO DEDUCT TAX AT SOURCE, NO QUESTION ARISE FOR MAKING ANY DISALLOWANCE U/S 40(A)(I). NO CONTRARY DECISION WAS BROUGHT TO OUR KNOWLEDGE BY THE LD. DR. WE, THEREFORE, RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL CONFIRM 17 ITA NOS. 364 & 386/PNJ/2013 (ASST. YEAR : 2007 - 08) THE ORDER OF CIT(A) DELETING THE DISALLOWANCE OF RS.2,47,50,646/ - MADE U/S 40(A)(IA) R.W.S 195 AND RS.95,46,558/ - MADE U/S 40(A)(IA) R.W.S 194C. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED WHILE THE APPEAL FILED BY THE REVENUE STANDS DISMISS ED. 8. ORDER PRONOUNCED IN THE OPEN COURT ON 1 8 / 07 / 2014. S D / - S D / - (D.T.GARASIA) JUDICIAL MEMBER (P.K. BANSAL) ACCOUNTANT MEMBER PLACE : PANAJI / GOA DATED : 1 8 / 07 / 2014 *SSL* COPY TO : (1) APPELLANT (2) RESPONDENT (3) CIT CONCERNED (4) CIT(A) CONCERNED (5) D.R (6) GUARD FILE TRUE COPY, BY ORDER