CNI RESEARCH LTD, MUMBAI V. DCIT 5(1), MUMBAI

ITA 4395/MUM/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3614 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 17-05-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 23-06-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V K AGARWALDR
• Keywords: Business expenditure; Earning of tax free income; Retrospective amendment
• Section: 14A; 147; 37; 15

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES C, MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI RAJENDRA, ACCOUNTANT MEMBER ITA NO.4395/MUM/2014 ASSESSMENT YEAR: 2010-11 M/S CNI RESEARCH LTD. A/12 GOKUL ARCADE, SAHAR ROAD, VILE PARLE (E), MUMBAI-400057 / VS. DCIT-5(1), MUMBAI ( ! /ASSESSEE) ( ' / REVENUE) PAN. NO . AACCC2842H ! / ASSESSEE BY SHRI BHUPENDRA SHAH ' / REVENUE BY SHRI V.K. AGARWAL-DR # '$ % ! & / DATE OF HEARING : 17/05/2016 % ! & / DATE OF ORDER: 18/05/2016 ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 2 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THE ASSESSEE IS AGGRIEVED BY THE IMPUGNED ORDER DAT ED 22/04/2014 OF THE LD. FIRST APPELLATE AUTHORITY, MU MBAI. THE ONLY GROUND RAISED IN THE PRESENT APPEAL PERTAI NS TO MAKING DISALLOWANCE OF RS.4,61,358/- U/S 14A OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT). 2. DURING HEARING, THE LD. COUNSEL FOR THE ASSESSE E, SHRI BHUPENDRA SHAH, CONTENDED THAT NO EXPENSES WER E INCURRED BY THE ASSESSEE FOR EARNING EXEMPT INCOME, THEREFORE, NO DISALLOWANCE IS TO BE MADE. OUR ATTE NTION WAS INVITED TO PAGES 27 AND 30 OF THE PAPER BOOK BY PLA CING RELIANCE UPON THE DECISION IN THE CASE OF IQBAL M. CHAGLA (67 SOT 123)(MUM), GODREJ & BOYCE 328 ITR 81(BOM.), WAL FORT SHARE & STOCK BROKER 326 ITR 1 (SC), MAXOOP INVEST MENT LTD. 347 ITR 272 (DEL.) AND HERO CYCLES LTD. 323 IT R 518 (P & H). ON THE OTHER HAND, SHRI V. K. AGARWAL, LD. D R, DEFENDED THE DISALLOWANCE/ADDITION MADE BY THE LD. ASSESSING OFFICER AND CONFIRMED BY THE LD. COMMISSI ONER OF INCOME TAX (APPEAL). ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 3 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACTS , IN BRIEF, ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF RESEARCH OF EQUITY SHARES OF LISTED COMPANIES DECLARED INCOM E OF RS.1,01,81,799/- IN ITS RETURN FILED ON 24/09/2010. THE LD. ASSESSING OFFICER, DURING ASSESSMENT PROCEEDINGS, N OTICED THAT THE ASSESSEE HAS EARNED RS.1,74,668/- AS DIVID END INCOME, THEREFORE, THE ASSESSEE WAS ASKED TO EXPLAI N AS TO WHY DISALLOWANCE SHOULD NOT BE MADE U/S 14A OF THE ACT READ WITH RULE 8D OF THE RULES. THE ASSESSEE EXPLAI NED THAT RULE 8D IS NOT APPLICABLE AS THERE IS INTEREST COST ON THE INVESTMENT AS THE ASSESSEE IS NOT IN THE BUSINESS O F PURCHASING AND SELLING OF SHARES. HOWEVER, THE LD. ASSESSING OFFICER WORKED OUT THE DISALLOWANCE AT RS.4,61,358/ - U/S 14A OF THE ACT AND ADDED TO THE TOTAL INCOME. THE ASSESSEE PREFERRED APPEAL BEFORE THE LD. COMMISSIONER OF INC OME TAX (APPEAL), WHEREIN, THE STAND TAKEN IN THE ASSESSMEN T ORDER WAS AFFIRMED. THE ASSESSEE FELT AGGRIEVED AND IS IN APPEAL BEFORE THIS TRIBUNAL. ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 4 2.2. IF THE OBSERVATION MADE IN THE ASSESSMENT ORD ER, LEADING TO ADDITION MADE TO THE TOTAL INCOME, CONCL USION DRAWN IN THE IMPUGNED ORDER, MATERIAL AVAILABLE ON RECORD, ASSERTIONS MADE BY THE LD. RESPECTIVE COUNSEL, IF K EPT IN JUXTAPOSITION AND ANALYZED. THE STAND OF THE ASSESS EE IS THAT NO EXPENSES WERE INCURRED BY THE ASSESSEE FOR EARNI NG THE EXEMPT INCOME. WE FIND THAT BEFORE THE LD. COMMISS IONER OF INCOME TAX (APPEAL) VIDE EXPLANATION DATED 21/11 /2013 (PAGE-27 OF THE PAPER BOOK), THE ASSESSEE HAS SPECI FICALLY FURNISHED THE PROFIT & LOSS ACCOUNT, DETAILS OF EXP ENSES DEBITED TO THE ACCOUNT, CLAIMING THAT NO EXPENSES W ERE CLAIMED FOR EARNING SUCH PROFIT AND FURTHER THE EXP ENSES WERE NOT WITH RESPECT TO INVESTMENT OF THE ASSESSEE . THIS FACTUAL MATRIX WAS NOT CONTRADICTED BY THE REVENUE. THE ASSESSMENT YEAR INVOLVED IS 2010-11, THEREFORE, RUL E-8D IS APPLICABLE, HOWEVER, THE SAME CANNOT BE INVOKED MECHANICALLY. SINCE THE ASSESSEE HAS NOT CLAIMED A NY EXPENDITURE IN EARNING THE EXEMPT INCOME, THEREFORE , ONUS IS UPON THE ASSESSEE TO PROVE THAT PARTICULAR EXPEN DITURE WAS INCURRED FOR EARNING SUCH INCOME. OUR VIEW FIND ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 5 SUPPORT FROM THE DECISION OF THE MUMBAI BENCH OF TH E TRIBUNAL IN ACIT VS IQBAL M. CHAGLA (2014) 52 TAXMA N.COM 94 (MUM. TRIB.), MAXOOP INVESTMENT LTD. 347 ITR 272 (DEL.) AND WALFORT SHARE & STOCK BROKER 326 ITR 1 (SC) AND ALSO THE DECISION IN HERO CYCLES 323 ITR 518 (P & H). 2.3. BEFORE WE GO INTO THE QUESTIONS AT HAND IT W OULD BE APPROPRIATE TO NOT ONLY EXAMINE THE PROVISIONS O F SECTION 14A OF THE SAID ACT BUT ALSO TO NOTICE ITS LEGISLAT IVE HISTORY. SECTION 14A WAS INSERTED INTO THE SAID ACT BY THE F INANCE ACT, 2001 WITH RETROSPECTIVE EFFECT FROM 01/04/1962 . FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS C HAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDI TURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT . BY VIRTUE OF THE FINANCE ACT, 2002, THE FOLLOWING PROVISO WAS IN SERTED IN SECTION 14A AND WAS DEEMED TO HAVE BEEN INSERTED WI TH EFFECT FROM 11/05/2001 :- PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SH ALL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UN DER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSME NT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREAS ING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FO R ANY ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 6 ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. AS A RESULT OF THE INSERTION OF THE SAID PROVISO, S ECTION 14A WAS AS FOLLOWS:- EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. 14A. FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED I N RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHA LL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UN DER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSME NT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREAS ING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FO R ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. THEN, BY THE FINANCE ACT, 2006, SECTION 14A WAS NUMBERED AS SUB-SECTION (1) THEREOF AND AFTER SUB-S ECTION (1) AS SO NUMBERED, THE FOLLOWING SUB-SECTIONS WERE INSERTED, WITH EFFECT FROM 01/04/2007:- (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, I F THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN R ELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 7 INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. 2.4. CONSEQUENT UPON THE FINANCE ACT, 2006, SECTIO N 14A AS IT NOW STANDS IS AS UNDER:- EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME . 14A. (1) FOR THE PURPOSES OF COMPUTING THE TOTAL IN COME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED I N RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUN T OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, I F THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN R ELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 8 PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHA LL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UN DER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSME NT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREAS ING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FO R ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. 2.5. BY NOTIFICATION NO.45/2008 DATED 24/03/2008, THE CENTRAL BOARD OF DIRECT TAXES (CBDT), IN EXERCI SE OF ITS POWERS UNDER SECTION 295 OF THE SAID ACT READ WITH SUB- SECTION (2) OF SECTION 14A OF THE SAID ACT, MADE TH E INCOME- TAX (FIFTH AMENDMENT) RULES, 2008 TO FURTHER AMEND THE SAID RULES (I.E., THE INCOME-TAX RULES, 1962) BY IN TRODUCING RULE 8D THEREIN. CLAUSE 1(2) OF THE INCOME-TAX (FIF TH AMENDMENT) RULES, 2008 CLEARLY STIPULATED THAT THE RULES WOULD COME INTO FORCE FROM THE DATE OF PUBLICATION IN THE OFFICIAL GAZETTE. THE SAID RULE 8D IS AS UNDER:- METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. 8D.(1) WHERE THE ASSESSING OFFICER, HAVING REGARD T O THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIE D WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MAD E BY THE ASSESSEE; OR ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 9 (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETE RMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLO WING AMOUNTS, NAMELY : (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXP ENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMP UTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY: WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR ; B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME , AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR ; C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN TH E BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAS T DAY OF THE PREVIOUS YEAR ; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE A VERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE , ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. (3) FOR THE PURPOSES OF THIS RULE, THE TOTAL ASSET S SHALL MEAN, TOTAL ASSETS AS APPEARING IN THE BALANCE SHEE T ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 10 EXCLUDING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATIO N OF ASSETS. THE LAW PRIOR TO INSERTION OF SECTION 14A 2.6. PRIOR TO THE INTRODUCTION OF SECTION 14A IN THE SAID ACT, THE POSITION IN LAW WAS AS LAID DOWN BY T HE SUPREME COURT IN CIT V. MAHARASHTRA SUGAR MILLS LTD : 82 ITR 452 (SC) AND RAJASTHAN STATE WAREHOUSING CORPOR ATION V. CIT: 242 ITR 450 (SC). IN MAHARASHTRA SUGAR MILL S LTD (SUPRA) THE ASSESSEES BUSINESS COMPRISED OF TWO PA RTS, NAMELY, (1) CULTIVATION OF SUGAR CANE AND (2) THE MANUFACTURE OF SUGAR. THE REVENUE HAD CONTENDED THA T AS THE INCOME FROM THE CULTIVATION OF SUGAR CANE, BEIN G THE RESULT OF AN AGRICULTURAL OPERATION, WAS NOT EXIGIB LE TO TAX, THEREFORE, ANY EXPENDITURE INCURRED IN RESPECT OF T HAT ACTIVITY WAS NOT DEDUCTIBLE. THE SUPREME COURT REPE LLED THIS CONTENTION IN THE FOLLOWING MANNER:- 'THIS CONTENTION PROCEEDS ON THE BASIS THAT ONLY E XPENDITURE INCURRED IN RESPECT OF A BUSINESS ACTIVITY GIVING R ISE TO INCOME, PROFIT OR GAINS TAXABLE UNDER THE ACT CAN BE GIVEN DEDUCTION TO AND NOT OTHERWISE. WE SEE NO BASIS FOR THIS CONTENTION. TO FIND OUT WHETHER THE DEDUCTION CLAIMED IS PERMISSIBLE UNDER THE ACT OR NOT, ALL THAT WE HAVE TO DO IS TO EXAMINE THE RELEVANT P ROVISIONS OF THE ACT. EQUITABLE CONSIDERATIONS ARE WHOLLY OUT OF PLA CE IN CONSTRUING THE PROVISIONS OF A TAXING STATUTE. WE HAVE TO TAKE THE PROVISIONS OF ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 11 THE STATUTE AS THEY STAND. IF THE AMOUNT CLAIMED IS PERMISSIBLE UNDER THE ACT THEN THE SAME HAS TO BE DEDUCTED FROM THE GROSS PROFIT. IF IT IS NOT PERMISSIBLE UNDER THE ACT, IT HAS TO BE REJECTED. AS MENTIONED EARLIER, IT IS NOT DISPUTED THAT THE CULT IVATION OF SUGAR- CANE AND THE MANUFACTURE OF SUGAR CONSTITUTED ONE S INGLE AND INDIVISIBLE BUSINESS. SECTION 10(2) SAYS THAT PROFI TS UNDER SECTION 10(1) IN RESPECT OF A BUSINESS SHOULD BE COMPUTED A FTER DEDUCTING THE ALLOWANCES MENTIONED THEREIN. ONE OF THE ALLOWA NCES ALLOWED IS THAT MENTIONED IN SECTION 10(2)(XV) WHICH SAYS THAT ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY AN EXCLUSIVELY FOR THE PURPOSE OF SUCH BUSINESS SHALL BE DEDUCTED AS AN ALLOWANCE. THE MAN DATE OF SECTION 10(2) (XV) IS PLAIN AND UNAMBIGUOUS. UNDOUBTEDLY, T HE ALLOWANCE CLAIMED IN THIS CASE WAS LAID OUT OR EXPENDED FOR T HE PURPOSE OF THE BUSINESS CARRIED ON BY THE ASSESSEE. THE FACT THAT THE INCOME ARISING FROM A PART OF THAT BUSINESS IS NOT EXIGIBLE TO TAX UNDER THE ACT IS NOT A RELEVANT CIRCUMSTANCE.' 2.7. IN RAJASTHAN STATE WAREHOUSING CORPORATION (SU PRA), THE SUPREME COURT AFTER, INTER ALIA, CONSIDERING IT S EARLIER DECISIONS IN CIT V. INDIAN BANK LTD: 56 ITR 77 (SC) AND MAHARASHTRA SUGAR MILLS LTD (SUPRA) LAID DOWN THE F OLLOWING PRINCIPLES:- '(I) IF INCOME OF AN ASSESSEE IS DERIVED FROM VARIO US HEADS OF INCOME, HE IS ENTITLED TO CLAIM DEDUCTION ADMISS IBLE UNDER THE RESPECTIVE HEAD WHETHER OR NOT COMPUTATIO N UNDER EACH HEAD RESULTS IN TAXABLE INCOME; (II) IF INCOME OF AN ASSESSEE ARISES UNDER ANY OF T HE HEADS OF INCOME BUT FROM DIFFERENT ITEMS, E.G., DIFFERENT HOUSE PROPERTIES OR DIFFERENT SECURITIES, ETC., AND INCOM E FROM ONE OR MORE ITEMS ALONE IS TAXABLE WHEREAS INCOME F ROM THE OTHER ITEM IS EXEMPT UNDER THE ACT, THE ENTIRE PERMISSIBLE EXPENDITURE IN EARNING THE INCOME FROM THAT HEAD IS DEDUCTIBLE; AND (III) IN COMPUTING 'PROFITS AND GAINS OF BUSINESS O R PROFESSION' WHEN AN ASSESSEE IS CARRYING ON BUSINES S IN VARIOUS VENTURES AND SOME AMONG THEM YIELD TAXABLE INCOME AND THE OTHERS DO NOT, THE QUESTION OF ALLOW ABILITY ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 12 OF THE EXPENDITURE UNDER SECTION 37 OF THE ACT WILL DEPEND ON: (A) FULFILLMENT OF REQUIREMENTS OF THAT PROVISION N OTED ABOVE; AND (B) ON THE FACTS WHETHER ALL THE VENTURES CARRIED O N BY HIM CONSTITUTED ONE INDIVISIBLE BUSINESS OR NOT; IF THE Y DO, THE ENTIRE EXPENDITURE WILL BE A PERMISSIBLE DEDUCTION BUT IF THEY DO NOT, THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDITURE WILL APPLY BECAUSE THERE WILL BE NO NEX US BETWEEN THE EXPENDITURE ATTRIBUTABLE TO THE VENTURE NOT FORMING AN INTEGRAL PART OF THE BUSINESS AND THE EXPENDITURE SOUGHT TO BE DEDUCTED AS THE BUSINESS EXPENDITURE OF THE ASSESSEE.' 2.8. THUS, PRIOR TO THE INTRODUCTION OF SECTION 1 4A IN THE SAID ACT, THE LAW WAS THAT WHEN AN ASSESSEE HAD A COMPOSITE AND INDIVISIBLE BUSINESS WHICH HAD ELEMEN TS OF BOTH TAXABLE AND NON-TAXABLE INCOME, THE ENTIRE EXP ENDITURE IN RESPECT OF THE SAID BUSINESS WAS DEDUCTIBLE AND, IN SUCH A CASE, THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDI TURE RELATING TO THE NON-TAXABLE INCOME DID NOT APPLY. H OWEVER, WHERE THE BUSINESS WAS DIVISIBLE, THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDITURE WAS APPLICABLE AND THE EXPENDITURE APPORTIONED TO THE EXEMPT INCOME OR I NCOME NOT EXIGIBLE TO TAX, WAS NOT ALLOWABLE AS A DEDUCTI ON. 2.9. THE OBJECT BEHIND THE INSERTION OF SECTION 14A IN THE SAID ACT IS APPARENT FROM THE MEMORANDUM EXPLAI NING ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 13 THE PROVISIONS OF THE FINANCE BILL 2001 WHICH IS TO THE FOLLOWING EFFECT:- 'CERTAIN INCOMES ARE NOT INCLUDABLE WHILE COMPUTING THE TOTAL INCOME AS THESE ARE EXEMPT UNDER VARIOUS PROVISIONS OF THE ACT. THERE HAVE BEEN CASES WHERE DEDUCTIONS HAVE BEEN CL AIMED IN RESPECT OF SUCH EXEMPT INCOME. THIS IN EFFECT MEANS THAT THE TAX INCENTIVE GIVEN BY WAY OF EXEMPTIONS TO CERTAIN CAT EGORIES OF INCOME IS BEING USED TO REDUCE ALSO THE TAX PAYABLE ON THE NONEXEMPT INCOME BY DEBITING THE EXPENSES INCURRED TO EARN THE EXEMPT INCOME AGAINST TAXABLE INCOME. THIS IS AGAIN ST THE BASIC PRINCIPLES OF TAXATION WHEREBY ONLY THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE IS TAXED. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO IN RESPECT OF THE NET INCOME. EXP ENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABL E TO THE EARNING OF TAXABLE INCOME. IT IS PROPOSED TO INSERT A NEW SECTION 14A SO AS TO CLARIFY THE INTENTION OF THE LEGISLATURE SINCE THE INCEPTION OF THE INCOME - TAX ACT, 1961, THAT NO DEDUCTION SHALL BE MADE IN RESPE CT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE IN COME-TAX ACT. THE PROPOSED AMENDMENT WILL TAKE EFFECT RETROSPECTI VELY FROM APRIL 1, 1962 AND WILL ACCORDINGLY, APPLY IN RELATI ON TO THE ASSESSMENT YEAR 1962-63 AND SUBSEQUENT ASSESSMENT Y EARS.' 2.10. AS OBSERVED BY THE SUPREME COURT IN THE CAS E OF CIT V. WALFORT SHARE AND STOCK BROKERS P LTD: 326 I TR 1 (SC), THE INSERTION OF SECTION 14 A WITH RETROSPECT IVE EFFECT REFLECTS THE SERIOUS ATTEMPT ON THE PART OF PARLIAM ENT NOT TO ALLOW DEDUCTION IN RESPECT OF ANY EXPENDITURE INCUR RED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT AGAINST THE TAXABLE INCOME. THE SUPREME COURT FURTHER OBSERVED AS UNDER :- ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 14 '.. IN OTHER WORDS, SECTION 14 A CLARIFIES THAT EXP ENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THAT THEY ARE RELATAB LE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPE NSES INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEM PT INCOME AND PARTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SEC TION 14A, THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WA S BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDATE OF SECT ION 14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DED UCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXAB LE INCOME AND AT THE SAME TIME AVAIL OF THE TAX INCENTIVE BY WAY OF AN EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT O F EXPENSES INCURRED IN RELATION TO EXEMPT INCOME ..EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNI NG TAXABLE INCOME. THIS IS THE PURPORT OF SECTION 14A. IN SECT ION 14A, THE FIRST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEA DS OF INCOME AS PRESCRIBED IN THE CHAPTER IV WOULD FALL WITHIN SECT ION 14A. THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH DOES N OT FORM PART OF TOTAL INCOME UNDER THE ACT'. IT MEANS THAT IF AN IN COME DOES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDI TURE IS OUTSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 14A.. (EMPHASIS SUPPLIED) 2.11. THE SUPREME COURT ALSO CLEARLY HELD THAT IN THE CASE OF AN INCOME LIKE DIVIDEND INCOME WHICH DOES N OT FORM PART OF THE TOTAL INCOME, ANY EXPENDITURE/DEDUCTION RELATABLE TO SUCH (EXEMPT OR NON-TAXABLE) INCOME, E VEN IF IT IS OF THE NATURE SPECIFIED IN SECTIONS 15 TO 59 OF THE SAID ACT, CANNOT BE ALLOWED AGAINST ANY OTHER INCOME WHICH I S INCLUDABLE IN THE TOTAL INCOME. THE EXACT WORDS USE D BY THE SUPREME COURT ARE AS UNDER:- 'FURTHER, SECTION 14 SPECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE CHARGEABLE, A N ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 15 INCOME HAS TO BE BROUGHT UNDER ONE OF THE FIVE HEAD S. SECTIONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX UNDE R THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL INCOME CHARGEABLE TO TAX. THE PERMISSIBLE DEDUCTIONS ENUMERATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOW ED ONLY WITH REFERENCE TO INCOME WHICH IS BROUGHT UNDE R ONE OF THE ABOVE HEADS AND IS CHARGEABLE TO TAX. IF AN INCOME LIKE DIVIDEND INCOME IS NOT A PART OF THE TOTAL INC OME, THE EXPENDITURE/DEDUCTION THOUGH OF THE NATURE SPECIFIE D IN SECTIONS 15 TO 59 BUT RELATED TO THE INCOME NOT FOR MING PART OF THE TOTAL INCOME COULD NOT BE ALLOWED AGAIN ST OTHER INCOME INCLUDABLE IN THE TOTAL INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NONTAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDE R SECTION 14 A.' (EMPHASIS SUPPLIED) 2.12. SUB-SECTION (1) OF SECTION 14A CLEARLY STIP ULATES THAT FOR THE PURPOSES OF COMPUTING TOTAL INCOME UND ER CHAPTER IV (COMPUTATION OF TOTAL INCOME), NO DEDUCT ION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRE D BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FOR M PART OF THE TOTAL INCOME UNDER THE SAID ACT. A LOT OF EMPHA SIS WAS LAID ON THE EXPRESSIONS INCURRED AND IN RELATION TO. IT WAS CONTENDED BY MR AJAY VOHRA, WHO APPEARED ON BEHALF OF MOST OF THE ASSESSES, THAT THE WORD INCURRED MUST BE TAKEN LITERALLY IN THE SENSE THAT THE EXPENDITURE M UST HAVE ACTUALLY TAKEN PLACE. MOREOVER, THE EXPENDITURE MUS T ALSO ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 16 HAVE TAKEN PLACE IN RELATION TO INCOME WHICH DOES N OT FORM PART OF TOTAL INCOME. MR VOHRA CONTENDED THAT THE EXPRESSION IN RELATION TO IMPLIES THAT THERE MUST BE A DIRECT AND PROXIMATE CONNECTION WITH THE SUBJECT MA TTER. IN OTHER WORDS, ACCORDING TO MR VOHRA, ONLY THAT ACTUA L EXPENDITURE WHICH IS MADE DIRECTLY AND FOR THE OBJE CT OF EARNING EXEMPT INCOME (IN THE PRESENT APPEALS DIV IDEND INCOME) COULD BE DISALLOWED UNDER SECTION 14A. HE SUBMITTED THAT IF THE DOMINANT AND MAIN OBJECTIVE O F SPENDING WAS NOT THE EARNING OF EXEMPT INCOME THE N, THE EXPENDITURE COULD NOT BE DISALLOWED UNDER SECTION 1 4A PROVIDED IT WAS OTHERWISE ALLOWABLE UNDER SECTIONS 15 TO 59 OF THE SAID ACT. MR SATYEN SETHI AND DR RAKESH GUPT A, WHO APPEARED FOR SOME OF THE ASSESSES, ALSO ADOPTED THE ARGUMENTS OF MR VOHRA AND EMPHASIZED THAT THE EXPENDITURE MUST BE ACTUAL AND CANNOT BE COMPUTED O N THE BASIS OF SOME FORMULA AS STIPULATED UNDER RULE 8D R EAD WITH SUB-SECTIONS (2) & (3) OF SECTION 14A. 2.13. LET US EXAMINE THE EXPRESSION IN RELATION TO. MR VOHRA HAD REFERRED TO THE SUPREME COURT DECISION IN ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 17 MADHAV RAO SCINDIA V. UNION OF INDIA: AIR 1971 SC 5 30 WHERE, IN PARAGRAPH 134, IT IS OBSERVED AS UNDER:- '.. THE EXPRESSION 'PROVISIONS OF THIS CONSTITUTION RELATING TO' IN ARTICLE 363 MEANS PROVISIONS HAVING A DOMINANT AND IMMEDIATE CONNECTION WITH: IT DOES NOT MEAN MERELY HAVING A R EFERENCE TO.' 2.14. IN DOYPACK SYSTEMS PVT LTD V. UNION OF INDI A: AIR 1988 SC 782, THE SUPREME COURT OBSERVED THAT TH E EXPRESSIONS 'PERTAINING TO', 'IN RELATION TO' AND ' ARISING OUT OF', USED IN THE DEEMING PROVISION, ARE USED IN THE EXPANSIVE SENSE. THE SUPREME COURT FURTHER OBSERVED AS UNDER: - '49. THE EXPRESSION 'IN RELATION TO' (SO ALSO 'PERT AINING TO'), IS A VERY BROAD EXPRESSION WHICH PRESUPPOSES ANOTHER SUB JECT MATTER. THESE ARE WORDS OF COMPREHENSIVENESS WHICH MIGHT BO TH HAVE A DIRECT SIGNIFICANCE AS WELL AS AN INDIRECT SIGNIFIC ANCE DEPENDING ON THE CONTEXT' ' IN THIS CONNECTION REFERENCE MAY BE MADE TO 76 CORPUS JURIS SECUNDUM AT PAGES 620 AND 621 WHERE IT IS STATED TH AT THE TERM 'RELATE' IS ALSO DEFINED AS MEANING TO BRING INTO A SSOCIATION OR CONNECTION WITH. IT HAS BEEN CLEARLY MENTIONED THAT ' RELATING TO' HAS BEEN HELD TO BE EQUIVALENT TO OR SYNONYMOUS WIT H AS TO 'CONCERNING WITH' AND 'PERTAINING TO'. THE EXPRESSI ON 'PERTAINING TO' IS AN EXPRESSION OF EXPANSION AND NOT OF CONTRA CTION.' (EMPHASIS SUPPLIED) 2.15. HONBLE PUNJAB & HARYANA HIGH COURT IN THE C ASE OF CIT-II V. HERO CYCLES LTD., DECIDED ON 4/11/2009 , OBSERVED THAT:- DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING EXPENDITURE WHERE IT IS FOUND THAT FOR EARNING EXEM PTED INCOME NO ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 18 EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER S ECTION 14A CANNOT STAND. 2.16. WE ARE OF THE VIEW THAT UNLESS AND UNTIL THERE WAS ACTUAL EXPENDITURE FOR EARNING THE EXEMPT ED INCOME, THERE COULD NOT BE ANY DISALLOWANCE UNDER S ECTION 14A. WHILE WE AGREE THAT THE EXPRESSION EXPENDITUR E INCURRED REFERS TO ACTUAL EXPENDITURE AND NOT TO S OME IMAGINED EXPENDITURE WE WOULD LIKE TO MAKE IT CLEAR THAT THE ACTUAL EXPENDITURE THAT IS IN CONTEMPLATION UNDER SECTION 14A(1) OF THE SAID ACT IS THE ACTUAL EXPENDITURE IN RELATION TO OR IN CONNECTION WITH OR PERTAINING TO EXEMPT IN COME. THE COROLLARY TO THIS IS THAT IF NO EXPENDITURE IS INCU RRED IN RELATION TO THE EXEMPT INCOME, NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE SAID ACT. 2.17. SO FAR AS, SCOPE OF SUB-SECTION (2) OF SECTI ON 14A OF THE ACT, IS CONCERNED, IT PROVIDES THE MANNER IN WH ICH THE ASSESSING OFFICER IS TO DETERMINE THE AMOUNT OF EXP ENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HOWEVER, IF WE EXAMINE THE PROVIS ION CAREFULLY, WE WOULD FIND THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITUR E ONLY ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 19 IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCO UNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELA TION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, THE REQUIREMENT OF TH E ASSESSING OFFICER EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMP T INCOME WOULD BE TRIGGERED ONLY IF THE ASSESSING OFF ICER RETURNS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXP ENDITURE. THEREFORE, THE CONDITION PRECEDENT FOR THE ASSESSIN G OFFICER ENTERING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME I S THAT THE ASSESSING OFFICER MUST RECORD THAT HE IS NOT SA TISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF SUCH EXPENDITURE. SUB-SECTION (3) IS NOTHING BUT AN OFFSHOOT OF SUB-SECTION (2) OF SECTION 14A. SUB-SEC TION (3) APPLIES TO CASES WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SA ID ACT. IN ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 20 OTHER WORDS, SUB-SECTION (2) DEALS WITH CASES WHERE THE ASSESSEE SPECIFIES A POSITIVE AMOUNT OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT AND SUB-SECTION (3) APPLI ES TO CASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDITUR E HAD BEEN INCURRED IN RELATION TO EXEMPT INCOME. IN BOTH CASES, THE ASSESSING OFFICER, IF SATISFIED WITH THE CORREC TNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E OR NO EXPENDITURE, AS THE CASE MAY BE, CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE IN ACCOR DANCE WITH ANY PRESCRIBED METHOD, AS MENTIONED IN SUB-SEC TION (2) OF SECTION 14A OF THE SAID ACT. IT IS ONLY IF THE A SSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF TH E CLAIM OF THE ASSESSEE, IN BOTH CASES, THAT THE ASSESSING OFF ICER GETS JURISDICTION TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT IN ACCO RDANCE WITH THE PRESCRIBED METHOD. THE PRESCRIBED METHOD B EING THE METHOD STIPULATED IN RULE 8D OF THE SAID RULES. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 21 EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER WO ULD HAVE TO INDICATE COGENT REASONS FOR THE SAME. 2.18. AS WE HAVE ALREADY NOTICED, SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT REFERS TO THE METHOD OF DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE EXPRESSION USED IS SUCH METHOD AS MAY BE PRESCRIBED. BY VIRTUE OF NOTIFICA TION NO.45/2008 DATED 24/03/2008, THE CENTRAL BOARD OF D IRECT TAXES INTRODUCED RULE 8D IN THE SAID RULES. THE SAI D RULE 8D ALSO MAKES IT CLEAR THAT WHERE THE ASSESSING OFF ICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MAD E BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT FOR SUCH PRE VIOUS YEAR, THE ASSESSING OFFICER SHALL DETERMINE THE AMO UNT OF ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 22 THE EXPENDITURE IN RELATION TO SUCH INCOME IN ACCOR DANCE WITH THE PROVISIONS OF SUB-RULE (2) OF RULE 8D. WE MAY OBSERVE THAT RULE 8D(1) PLACES THE PROVISIONS OF SE CTION 14A(2) AND (3) IN THE CORRECT PERSPECTIVE. AS WE HA VE ALREADY SEEN, WHILE DISCUSSING THE PROVISIONS OF SUB-SECTIO NS (2) AND (3) OF SECTION 14A, THE CONDITION PRECEDENT FOR THE ASSESSING OFFICER TO HIMSELF DETERMINE THE AMOUNT OF EXPENDIT URE IS THAT HE MUST RECORD HIS DISSATISFACTION WITH THE CO RRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE OR WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED. IT IS ONLY WHEN THIS CONDITION PRECEDENT IS SATISFIED THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDABLE IN TOTAL INCOME IN THE MAN NER INDICATED IN SUB-RULE (2) OF RULE 8D OF THE SAID RU LES. 2.19. IT IS, THEREFORE, CLEAR THAT DETERMINATION OF THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME UNDER RULE 8D WOULD ONLY COME INTO PLAY WHEN THE ASSESSING OFFICER REJECTS THE CLAIM OF THE ASSESSEE IN THIS R EGARD. IF ONE EXAMINES SUB-RULE (2) OF RULE 8D, WE FIND THAT THE METHOD ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 23 FOR DETERMINING THE EXPENDITURE IN RELATION TO EXEM PT INCOME HAS THREE COMPONENTS. (I) THE FIRST COMPONENT BEING THE AMOUNT OF EXPENDI TURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PAR T OF THE TOTAL INCOME. (II) THE SECOND COMPONENT BEING COMPUTED ON THE BAS IS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSES SEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. T HE FORMULA ESSENTIALLY APPORTIONS THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST [OTHER THAN THE AMOUNT OF INTEREST INCLUDE D IN CLAUSE (I)] INCURRED DURING THE PREVIOUS YEAR IN TH E RATIO OF THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, TO THE AVERAGE OF THE TOTAL ASSETS OF THE ASSESSEE. (III) THE THIRD COMPONENT IS AN ARTIFICIAL FIGURE ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENT , INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE T OTAL INCOME, AS APPEARING IN THE BALANCE SHEETS OF THE A SSESSEE, ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 24 ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS Y EAR. IT IS THE AGGREGATE OF THESE THREE COMPONENTS WHICH WOULD CONSTITUTE THE EXPENDITURE IN RELATION TO EXEMPT IN COME AND IT IS THIS AMOUNT OF EXPENDITURE WHICH WOULD BE DIS ALLOWED UNDER SECTION 14A OF THE SAID ACT. IT IS, THEREFORE , CLEAR THAT IN TERMS OF THE SAID RULE, THE AMOUNT OF EXPENDITUR E IN RELATION TO EXEMPT INCOME HAS TWO ASPECTS (A) DIR ECT AND (B) INDIRECT. THE DIRECT EXPENDITURE IS STRAIGHTAWA Y TAKEN INTO ACCOUNT BY VIRTUE OF CLAUSE (I) OF SUB-RULE (2 ) OF RULE 8D. THE INDIRECT EXPENDITURE, WHERE IT IS BY WAY OF INT EREST, 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 TH UMB FIGURE OF ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INV ESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART O F THE TOTAL INCOME, IS TAKEN. 2.20. SO FAR AS, APPLICABILITY OF SUB-SECTION (2) AND (3) OF SECTION 14A AND RULE-8D IS CONCERNED, WHILE EXAM INING THE LEGISLATIVE HISTORY OF SECTION 14A AND RULE 8D, WE HAVE ALREADY NOTED THAT SECTION 14A, AS INTRODUCED BY VI RTUE OF ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 25 THE FINANCE ACT, 2001, WAS WITH RETROSPECTIVE EFFEC T FROM 01.04.1962. THE PROVISO WAS INSERTED BY VIRTUE OF T HE FINANCE ACT, 2002 AND IT WAS MADE CLEAR THAT NOTHIN G IN SECTION 14A EMPOWERED THE ASSESSING OFFICER TO EITH ER RE- ASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING THE REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR ANY ASSESSMENT YEAR BEGINNING ON O R BEFORE THE FIRST DAY OF APRIL, 2001. THUS, IN RESPECT OF A LL THE ASSESSMENT YEARS PRIOR TO THE ASSESSMENT YEAR BEGIN NING ON OR BEFORE THE 1ST DAY OF APRIL, 2001, CONCLUDED ASS ESSMENTS COULD NOT BE DISTURBED DESPITE THE FACT THAT SECTIO N 14A HAD BEEN EXPRESSLY MADE RETROSPECTIVE WITH EFFECT FROM 01.04.1962. THE PROVISIONS OF SECTION 14A, WHICH WE RE RETROSPECTIVE WITH EFFECT FROM 01.04.1962 ARE NOW ENCAPSULATED IN SUB-SECTION (1) OF SECTION 14A. IT IS ALSO CLEAR THAT SUB-SECTIONS (2) AND (3) OF SECTION 14A WERE INTRODUCED SUBSEQUENTLY BY VIRTUE OF THE FINANCE AC T, 2006 AND WERE INTRODUCED WITH EFFECT FROM 01.04.2007. HO WEVER, ALTHOUGH SUB-SECTIONS (2) AND (3) HAD BEEN INTRODUC ED WITH ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 26 EFFECT FROM 01.04.2007, THEY REMAINED EMPTY SHELLS INASMUCH AS THE EXPRESSION SUCH METHOD AS MAY BE PRESCRIBED GOT MEANING ONLY BY THE INTRODUCTION OF RULE 8D BY VIRTUE OF THE INCOME-TAX (FIFTH AMENDMENT) RULES , 2008 WHICH WAS NOTIFIED BY THE CENTRAL BOARD OF DIRECT T AXES BY ITS NOTIFICATION NO.45/2008 DATED 24/03/2008. 2.21. WE ARE OF THE VIEW THAT RULE 8D WOULD OPERA TE PROSPECTIVELY, BECAUSE, IF THE SAID RULE WERE TO HA VE RETROSPECTIVE EFFECT, NOTHING PREVENTED THE CENTRAL BOARD OF DIRECT TAXES FROM SAYING SO, PARTICULARLY, IN VIEW OF THE FACT THAT IT HAD THE POWER TO MAKE A RULE RETROSPECTIVE BY VIRTUE OF SECTION 295(4) OF THE SAID ACT. INSTEAD OF MAKIN G RULE 8D RETROSPECTIVE, CLAUSE 1(2) OF THE INCOME-TAX (FIFTH AMENDMENT) RULES, 2008 MADE IT CLEAR THAT THE RULES WOULD COME INTO FORCE FROM THE DATE OF THEIR PUBLICATION IN THE OFFICIAL GAZETTE. IT IS, THEREFORE, CLEAR THAT RULE 8D, WHICH WAS INTRODUCED BY VIRTUE OF THE NOTIFICATION NO.45/ 2008 DATED 24.03.2008, WAS PROSPECTIVE IN OPERATION AND CANNOT BE REGARDED AS BEING RETROSPECTIVE. WE MAY ALSO POI NT OUT THAT WE HAVE HAD THE BENEFIT OF THE DECISION FROM H ONBLE ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 27 JURISDICTIONAL HIGH COURT IN GODREJ AND BOYCE MFG. CO. LTD V DCIT: (2010) 328 ITR 81 (BOM), WHEREIN IT HAS, INTE R ALIA, BEEN HELD THAT THE PROVISIONS OF RULE 8D OF THE SAI D RULES HAS PROSPECTIVE EFFECT AND SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09 ONWARDS. 2.22. INSOFAR AS SUB-SECTIONS (2) AND (3) OF SECT ION 14A ARE CONCERNED, THEY HAVE ALSO BEEN INTRODUCED BY VI RTUE OF THE FINANCE ACT, 2006 WITH EFFECT FROM 01.04.2007. THIS IS APPARENT, FIRST OF ALL, FROM THE NOTES ON CLAUSES O F THE FINANCE BILL, 2006 [REPORTED IN 281 ITR (ST) AT PAG ES 139- 140]. THE SAID NOTES ON CLAUSES REFERS TO CLAUSE 7 OF THE BILL WHICH HAD SOUGHT TO AMEND SECTION 14A OF THE SAID A CT. IT IS SPECIFICALLY MENTIONED IN THE SAID NOTES ON CLAUSES THAT:- THIS AMENDMENT WILL TAKE EFFECT FROM 1ST APRIL, 20 07 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YE AR 2007-08 AND SUBSEQUENT YEARS. THIS IS APPARENT, FIRST OF ALL, FROM THE NOTES ON C LAUSES OF THE FINANCE BILL, 2006 [REPORTED IN 281 ITR (ST) AT PAGES 139-140]. THE SAID NOTES ON CLAUSES REFERS TO CLAUS E 7 OF THE BILL WHICH HAD SOUGHT TO AMEND SECTION 14A OF THE S AID ACT. IT IS SPECIFICALLY MENTIONED IN THE SAID NOTES ON C LAUSES ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 28 THAT:- THIS AMENDMENT WILL TAKE EFFECT FROM 1ST AP RIL, 2007 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSE SSMENT YEAR 2007-08 AND SUBSEQUENT YEARS. 2.23. FURTHERMORE, IN THE MEMORANDUM EXPLAINING THE PROVISIONS IN THE FINANCE BILL, 2006 [281 ITR (ST) AT PAGES 281-281], IT IS ONCE AGAIN STATED WITH REFERENCE TO CLAUSE 7 WHICH PERTAINS TO THE AMENDMENT TO SECTION 14A OF T HE SAID ACT THAT:- THIS AMENDMENT WILL TAKE EFFECT FROM 1ST APRIL, 20 07 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSM ENT YEAR 2007-08 AND SUBSEQUENT YEARS. 2.24. WE MAY ALSO REFER TO THE CBDT CIRCULAR NO.14/2006 DATED 28.12.2006 AND TO PARAGRAPHS 11 TO 11.3 THEREOF. PARAGRAPH 11 DEALT WITH THE METHOD FOR ALL OCATING EXPENDITURE IN RELATION TO EXEMPT INCOME AND PARAGR APHS 11.1 AND 11.2 EXPLAINED THE BASIS AND LOGIC BEHIND THE INTRODUCTION OF SUB-SECTION (2) OF SECTION 14A OF T HE SAID ACT. PARAGRAPH 11.3 SPECIFICALLY PROVIDED FOR APPLICABIL ITY OF THE PROVISIONS OF SUBSECTION (2) AND IT CLEARLY INDICAT ED THAT IT WOULD BE APPLICABLE FROM THE ASSESSMENT YEAR 2007- 08 ONWARDS. ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 29 IT IS, THEREFORE, CLEAR THAT SUB-SECTIONS (2) AND (3) OF SECTION 14A WERE INTRODUCED WITH PROSPECTIVE EFFECT FROM THE ASSESSMENT YEAR 2007-08 ONWARDS. HOWEVER, SUB-SECTI ON (2) OF SECTION 14A REMAINED AN EMPTY SHELL UNTIL THE INTRODUCTION OF RULE 8D ON 24.03.2008 WHICH GAVE CO NTENT TO THE EXPRESSION SUCH METHOD AS MAY BE PRESCRIBED APPEARING IN SECTION 14A(2) OF THE SAID ACT. THUS, IT IS CLEAR THAT, IN EFFECT, THE PROVISIONS OF SUBSECTIONS (2) AND (3) OF SECTION 14A WOULD BE WORKABLE ONLY WITH EFFECT FROM THE DATE OF INTRODUCTION OF RULE 8D. THIS IS SO BECAUSE PRIOR TO THAT DATE, THERE WAS NO PRESCRIBED METHOD AND SUB-S ECTIONS (2) AND (3) OF SECTION 14A REMAINED UNWORKABLE. 2.25. SO FAR AS, AS TO HOW SECTION 14A TO BE WORKE D FOR THE PERIOD PRIOR TO THE INTRODUCTION OF RULE 8D, IS CONCERNED. SUB-SECTION (2) OF SECTION 14A, AS WE HAVE SEEN, ST IPULATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH S UCH METHOD AS MAY BE PRESCRIBED. OF COURSE, THIS DETER MINATION CAN ONLY BE UNDERTAKEN IF THE ASSESSING OFFICER IS NOT ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 30 SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THIS PART OF SECTION 1 4A(2) WHICH EXPLICITLY REQUIRES THE FULFILLMENT OF A COND ITION PRECEDENT IS ALSO IMPLICIT IN SECTION 14A(1) [AS IT NOW STANDS] AS ALSO IN ITS INITIAL AVATAR AS SECTION 14A. IT IS ONLY THE PRESCRIPTION WITH REGARD TO THE METHOD OF DETERMINI NG SUCH EXPENDITURE WHICH IS NEW AND WHICH WILL OPERATE PROSPECTIVELY. IN OTHER WORDS, SECTION 14A, EVEN PR IOR TO THE INTRODUCTION OF SUB-SECTIONS (2) & (3) WOULD REQUIR E THE ASSESSING OFFICER TO FIRST REJECT THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXTENT OF SUCH EXPENDITURE AND SUCH R EJECTION MUST BE FOR DISCLOSED COGENT REASONS. IT IS THEN TH AT THE QUESTION OF DETERMINATION OF SUCH EXPENDITURE BY TH E ASSESSING OFFICER WOULD ARISE. THE REQUIREMENT OF A DOPTING A SPECIFIC METHOD OF DETERMINING SUCH EXPENDITURE HAS BEEN INTRODUCED BY VIRTUE OF SUB-SECTION (2) OF SECTION 14A. PRIOR TO THAT, THE ASSESSING WAS FREE TO ADOPT ANY REASON ABLE AND ACCEPTABLE METHOD. SO, EVEN FOR THE PRE-RULE8D PER IOD, WHENEVER THE ISSUE OF SECTION 14A ARISES BEFORE AN ASSESSING OFFICER, HE HAS, FIRST OF ALL, TO ASCERTAIN THE COR RECTNESS OF THE ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 31 CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE SAID ACT. EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION T O INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, THE ASSES SING OFFICER WILL HAVE TO VERIFY THE CORRECTNESS OF SUCH CLAIM. IN CASE, THE ASSESSING OFFICER IS SATISFIED WITH THE C LAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPEN DITURE, AS THE CASE MAY BE, THE ASSESSING OFFICER IS TO ACC EPT THE CLAIM OF THE ASSESSEE INSOFAR AS THE QUANTUM OF DIS ALLOWANCE UNDER SECTION 14A IS CONCERNED. IN SUCH EVENTUALITY , THE ASSESSING OFFICER CANNOT EMBARK UPON A DETERMINATIO N OF THE AMOUNT OF EXPENDITURE FOR THE PURPOSES OF SECTION14 A(1). IN CASE, THE ASSESSING OFFICER IS NOT, ON THE BASIS OF OBJECTIVE CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY, SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HE SHALL HAVE TO REJECT THE CLAIM AND STA TE THE REASONS FOR DOING SO. HAVING DONE SO, THE ASSESSING OFFICER WILL HAVE TO DETERMINE THE AMOUNT OF EXPENDITURE IN CURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 32 INCOME UNDER THE SAID ACT. HE IS REQUIRED TO DO SO ON THE BASIS OF A REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. 2.26. IN VIEW OF THE FOREGOING DISCUSSION, SINCE, NO EXPENSES WERE INCURRED BY THE ASSESSEE FOR EARNING THE EXEMPT INCOME, THEREFORE, THERE IS NO QUESTION OF M AKING ANY DISALLOWANCE. EVEN OTHERWISE, NO DISALLOWANCE C AN BE MADE BY THE ASSESSING OFFICER MORE THAN THE EXEMPT INCOME, THUS, APPEAL OF THE ASSESSEE IS ALLOWED. TH E ASSESSING OFFICER IS DIRECTED TO DELETE THE DISALLO WANCE. FINALLY, THE APPEAL OF THE ASSESSEE IS ALLOWED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF LD. REPRESENTATIVES FROM BOTH SIDES AT THE CONCLUSION OF THE HEARING ON 17/05/2016. SD/- SD/- ( RAJENDRA ) (JOGINDER SINGH) ' # / ACCOUNTANT MEMBER $ # / JUDICIAL MEMBER MUMBAI; ( DATED :18/05/2016 F{X~{T? P.S/. .. ITA NO.4395/MUM/2014 M/S CNI RESEARCH LTD. 33 !%$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. *+,- / THE APPELLANT 2. ./,- / THE RESPONDENT. 3. 0 0 1! ( *+ ) / THE CIT, MUMBAI. 4. 0 0 1! / CIT(A)- , MUMBAI 5. 3'4.! , 0 *+&* 5 , / DR, ITAT, MUMBAI 6. 67 / GUARD FILE. ! / BY ORDER, /3+!.! //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI