DCIT, CIR-4, KOLKATA, Kolkata V. M/s Star Paper Mills Ltd., Kolkata

ITA 480/KOL/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 9202 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2017
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 08-03-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 20-03-2014
• Court: TRIBUNAL
• Department Lawyers: SAURABH KUMAR CIT LD
• Assessee Lawyers: G A SESHAN LD
• Section: 43B; 14A

Judgement Text

1 ITA NO. 480/KOL/2014 S TAR PAPER MILLS LTD. IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA A B ENCH, KOLKATA BEFORE SHRI M.BALAGANESH, ACCOUNTANT MEMBER AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER I.T.A. NO. 480/KOL/2014 ASSESSMENT YEAR: 2008-09 DEPUTY COMMISSIONER OF INCOME TAX ,............................. APPELLANT CIRCLE-4, KOLKATA, AAYAKARBHAWAN, P-7, CHOWRINGHEE SQUARE, KOLKATA-700 069. -VS- M/S. STAR PAPER MILLS LTD ,............................................ RES PONDENT PAN: AAECS 0759B 27, BIPLABI TROILAKYA MAHARAJ SARANI, KOLKATA-700 001. APPEARANCES BY: SHRI SAURABH KUMAR, ADDL. CIT, L D.DR FOR THE REVENUE SHRI G.A. SESHAN, LD.AR FOR THE ASSESSEE DATE OF HEARING: 08-03-2017 DATE OF PRONOUNCEMENT: 22-03-2017 SHRI S.S. VISWANETHRA RAVI , JM: THIS APPEAL BY THE REVENUE AGAINST ORDER DT: 06-11- 2013 PASSED BY THE COMMISSIONER OF INCOME TAX-(APPEALS), IV, KOLKATA F OR THE ASSESSMENT YEAR 2008-2009 2. GROUND NOS 1 IS RELATING TO ALLOWANCE OF RELIEF MADE ON ACCOUNT OF PROVISIONS FOR LEAVE ENCASHMENT. 2 ITA NO. 480/KOL/2014 S TAR PAPER MILLS LTD. 3. THE BRIEF FACTS OF THE ISSUE ARE THAT THE AO FOU ND THAT THE ASSESSEE CONSIDERED THE SUM OF RS.2,11,23,952/- AND DISALLOW ED THE SAME U/S. 43B OF THE ACT. THE AO WAS OF THE OPINION THAT THE DIFFERE NCE BETWEEN COMPUTATION OF ASSESSEE AND AUDITOR WAS OF RS. 26,83,073 (RS.2,38, 07,025 RS.2,11,23,952) AS ON 31-03-2008. THE AO DISALLOWED THE SUM OF RS.2 6,83,073/-U/S 43B OF THE ACT IN VIEW OF AN SLP MOVED BY THE DEPARTMENT BEFOR E THE HONBLE SUPREME COURT. 4. THE CIT-A DIRECTED THE AO TO PASS AN APPROPRIATE ORDER IN THE LIGHT OF THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF E XIDE INDUSTRIES LTD. RELEVANT FINDINGS OF THE CIT-A IN THIS REGARD IS REPRODUCED HEREIN BELOW:- 4.2 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS O F THE A.R AND NOTED THE A.OS FINDING IN THE IMPUGNED ORDER. IT IS INDEED CORRECT THAT THE C ALCUTTA HIGH COURT IN THE CASE OF EXIDE INDUSTRIES LTD (SUPRA) HAD HELD THAT CLAUSE (F) OF SEC. 43B WAS INCONSISTENT WITH THE OBJECT WITH WHICH THE SEC. 43B WAS ENACTED AND THEREFORE THE SA ME WAS STRUCK DOWN AS ULTRA VIRUS. DECISION OF THE JURISDICTIONAL CALCUTTA HIGH COURT HAS SINCE BEEN FOLLOWED WITH APPROVAL BY THE KERALA HIGH COURT IN THE CASE OF CIT VS. HINDUSTHAN LATEX LTD. FOLLOWING THE JUDGMENTS OF THE CALCUTTA & KERALA HIGH COURTS THE ITAT BENCHES AT B ANGALORE & JODHPUR HAVE ALSO ALLOWED RELIEF TO THE APPELLANT BY DELETING THE DISALLOWANCES MADE IN RESPECT OF PROVISION FOR LEAVE ENCASHMENT. I, HOWEVER, FIND THAT ONLY THE SLP FILE D BY THE I.T DEPARTMENT AGAINST THE JUDGMENT OF THE CALCUTTA HIGH COURT IN THE CASE OF EXIDE INDUSTRIES LTD (SUPRA) WAS ADMITTED BY THE HONBLE SUPREME COURT, BUT ADDITIONALLY THE SU PREME COURT ALSO STAYED THE OPERATION OF THE SAID CALCUTTA HIGH COURT JUDGMENT AND FURTHER D IRECTED THE SAID ASSESSEE TO PAY THE TAX DEMAND RAISED WITH REFERENCE TO THE ADDITION ON ACC OUNT OF PROVISION FOR LEAVE ENCASHMENT. IN THE CIRCUMSTANCES, I FIND THAT AT THIS POINT IN TIM E JUDGMENT OF THE CALCUTTA HIGH COURT DOES NOT OPERATE AS A BINDING JUDICIAL PRECEDENT FOR THE JUD ICIAL AUTHORITIES FUNCTIONING UNDER THE JURISDICTION OF THE HONBLE CALCUTTA HIGH COURT. IN THE CIRCUMSTANCES, BEING JUDICIAL FUNCTIONARY OPERATING WITHIN THE JURISDICTION OF THE CALCUTTA H IGH COURT I AM NOT ONLY EXPECTED TO ABIDE BY THE JUDGMENT OF THE CALCUTTA HIGH COURT, BUT I ALSO NEED TO FOLLOW THE ORDERS PASSED BY THE APEX COURT IN RELATION TO THE JUDGMENT OF THE CALCU TTA HIGH COURT. I FIND THAT ONLY THE JUDGMENT OF THE CALCUTTA HIGH COURT, RELIED UPON BY THE APPE LLANT IS STAYED BY THE APEX COURT BUT THE APPELLANT CONCERNED WAS ALSO DIRECTED TO PAY THE T AX DEMAND RELATING TO SAID ISSUE. ON THESE FACTS, THEREFORE, I FIND THAT THE RATIO DECIDED OF THE CALCUTTA HIGH COURT JUDGMENT CANNOT BE USED AS A BINDING PRECEDENT TILL THE I.T DEPARTMENT S APPEAL IS DECIDED BY THE SUPREME COURT. AT THE SAME TIME, I ALSO FIND THAT THE ISSUE WITH R EGARD TO ALLOWABILITY OF THE PROVISION FOR LEAVE ENCASHMENT HAS NOT BEEN DECIDED BY THE HONBLE APEX COURT ONE WAY OR THE OTHER & THE ISSUE OF ALLOWABILITY IS PENDING BEFORE THE SUPREME COURT FOR ITS DECISION. IN THE CIRCUMSTANCES, TO MEET THE ENDS OF JUSTICE I DIRECT THAT WHILE GIVING EFFECT TO THE APPELLATE ORDER THE AO WILL TAKE INTO CONSIDERATION THE JUDGMENT THAT WILL ULTIMATEL Y BE RENDERED BY THE SUPREME COURT IN THE DEPARTMENTAL APPEAL IN THE CASE OF CIT VS. EXIDE IN DUSTRIES LTD. SINCE THE TIME LIMIT DOES NOT OPERATE IN THE MATTER OF GIVING EFFECT TO THE DIREC TIONS OF THE APPELLATE AUTHORITY, I DIRECT THAT THE AO SHALL PASS AN APPROPRIATE ORDER EITHER CONFI RMING THE DISALLOWANCE U/S. 43B(F) OR ALLOWING THE RELIEF IN THE LIGHT OF THE DECISION OF THE APEX COURT IN THE CASE OF EXIDE INDUSTRIES LTD. 3 ITA NO. 480/KOL/2014 S TAR PAPER MILLS LTD. 5. AT THE TIME OF HEARING BEFORE US THE LD.DR APPEA RING ON BEHALF OF REVENUE HAS RELIED ON THE ORDER OF THE AO IN MAKING DISALLOWANCE U/S. 43B OF THE ACT ON ACCOUNT OF LEAVE ENCASHMENT AMOUNTING T O RS.26,83,073/- IN THE ASSESSMENT PROCEEDINGS. 6. ON THE OTHER HAND, THE LD.AR OF THE ASSESSEE SUB MITS BEFORE US THAT THE ISSUE IN HAND MAY BE RESTORED TO THE FILE OF THE AO IN VIEW OF SLP PENDING BEFORE THE HONBLE CALCUTTA HIGH COURT. 7. HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THIS TRIBUNAL DECIDED THE ISSUE THEREIN IS BEING SI MILAR TO THE ISSUE ON HAND COVERING THE GROUNDS AS RAISED IN NO-1 AND THE RELE VANT PORTION OF WHICH IS REPRODUCED HEREIN BELOW: 25. THE ISSUE RAISED IN GROUND NO. 8 RELATES TO THE DISALLOWANCE OF 1.51 CRORES MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(APPE ALS) ON ACCOUNT OF PROVISION MADE BY THE ASSESSEE FOR LEAVE ENCASHMENT. 26. THE ASSESSEE-COMPANY DURING THE YEAR UNDER CONS IDERATION HAD MADE A PROVISION OF RS.1.51 CRORES FOR LEAVE ENCASHMENT ON THE BASIS OF AN ACTURIAL VALUATION AND THE SAME WAS CLAIMED AS DEDUCTION BY RELYING ON THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN ASSESESES OWN CASE REPORTED IN 292 ITR 470 AND THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS REPORTED IN 245 ITR 428. THE ASSESSING OFFICER, HOWEVER, DISALLOWED THE CLAIM OF THE ASSESSEE FOR PROVISION OF LEAVE ENCASHMENT RELYING ON THE CLAUSE (F) INSERTED IN SECTION 43B BY THE FINANCE ACT, 200 1 W.E.F. 1S T APRIL, 2002. THE LD. CIT(APPEALS) CONFIRMED THE SAID DISALLOWANCE. THE A SSESESE CHALLENGED THE CONSTITUTIONAL VALIDITY OF CLAUSE (F) INSERTED IN SECTION 43B BEFO RE THE HONBLE CALCUTTA HIGH COURT BY WAY OF A WRIT PETITION AND ALTHOUGH THE SAME WAS INITIA LLY DISMISSED BY THE SINGLE BENCH, IT WAS ADMITTED AND RULED IN FAVOUR OF THE ASSESSEE BY THE DIVISION BENCH OF THE HONBLE CALCUTTA HIGH COURT BY HOLDING THAT THE INTRODUCTION OF CLAU SE (F) TO SECTION 43B IS ULTRA VIRUS OF THE ACT IN THE ABSENCE OF DISCLOSURE OF THE OBJECTS AND BEING INCONSISTENT WITH THE BASIC INTENT OF SECTION 43B. THEREAFTER THE DEPARTMENT FILED THE SL P AGAINST THE DECISION OF THE HONBLE CALCUTTA HIGH COURT AND WHILE ADMITTING THE SAME, T HE HONBLE SUPREME COURT VIDE ITS JUDGMENT DATED 08.09.2008 STAYED THE JUDGMENT OF TH E HONBLE CALCUTTA HIGH COURT UNTIL FURTHER ORDERS. 27. AT THE TIME OF HEARING BEFORE US, THE LD. COUNS EL FOR THE ASSESSEE HAS CONTENDED THAT EVEN THOUGH THE DECISION OF THE HONBLE CALCUTTA HI GH COURT HOLDING CLAUSE (F) OF SECTION 43D AS ULTRA VIRUS IS STAYED BY THE HONBLE SUPREME COURT WHILE ADMITTING THE SLP FILED BY THE REVENUE, THE SAME HAS NOT BEEN REVERSED AND THI S TRIBUNAL, THEREFORE, IS BOUND TO FOLLOW THE SAME BEING A BINDING PRECEDENT. HE HAS ALSO CON TENDED THAT THE DECISION OF THE HONBLE CALCUTTA HIGH COURT WAS STAYED BY THE HONBLE APEX COURT VIDE ITS JUDGMENT DATED 08.09.2008 UNTIL FURTHER ORDERS AND THERE BEING ANO THER INTERIM ORDER PASSED BY THE HONBLE SUPREME COURT ON 08.05.2009, THE STAY GRANTED EARLI ER STANDS AUTOMATICALLY VACATED. A COPY OF THE SAID INTERIM ORDER DATED 08.05.2009 IS PLACE D ON RECORD BEFORE US, THE CONTENTS OF WHICH ARE EXTRACTED BELOW:- PENDING HEARING AND FI NAL DISPOSAL OF THE CIVIL APPEAL, 4 ITA NO. 480/KOL/2014 S TAR PAPER MILLS LTD. DEPARTMENT IS RESTRAINED FROM RECOVERING PENALTY AN D INTEREST WHICH HAS ACCRUED TILL DATE. IT IS MADE CLEAR THAT AS FAR AS THE OUTSTANDING INTERE ST DEMAND AS OF DATE IS CONCERNED, IT WOULD BE OPEN TO THE DEPARTMENT TO RECOVER THE AMOU NT IN CASE CIVIL APPEAL OF THE DEPARTMENT IS ALLOWED. WE FURTHER MAKE IT CLEAR THA T THE ASSESSEE WOULD DURING THE PENDENCY OF THIS CIVIL APPEAL, PAY TAX AS IF SECTIO N 43B(F) IS ON THE STATUTE BOOK BUT AT THE SAME TIME IT WOULD BE ENTITLED TO MAKE A CLAIM IN I TS RETURNS. 28. WE HAVE CAREFULLY PERUSED THE INTERIM ORDER DAT ED 8T H MAY, 2009 PASSED BY THE HONBLE SUPREME COURT IN THE MATTER. IT IS OBSERVED THAT THE HONBLE APEX COURT IN THE SAID ORDER HAS MADE IT CLEAR THAT THE ASSESSEE, DURING T HE PENDENCY OF THE CIVIL APPEAL, WOULD PAY TAX AS IF SECTION 43B(F) IS ON THE STATUTE BOOK , BUT AT THE SAME TIME, IT WOULD BE ENTITLED TO MAKE CLAIM IN ITS RETURN. KEEPING IN VIEW ALL TH ESE DEVELOPMENTS, THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DY. CIT VS.- BLA INDU STRIES PVT. LTD. (ITA NO. 1434/KOL/2012 DATED 16.01.2015) HAS RESTORED THE SIMILAR ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO AWAIT TILL THE FINAL DECISION OF THE H ONBLE SUPREME COURT ON THE ISSUE AND THEN TO DECIDE THE ISSUE ACCORDINGLY. FOLLOWING THE SAID DE CISION OF THE COORDINATE BENCH, WE RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER WIT H THE SIMILAR DIRECTION. GROUND NO. 8 IS ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURP OSES. 8. TAKING INTO CONSIDERATION THE ORDER SUPRA , WE REMAND THE ISSUE TO THE FILE OF AO TO DECIDE THE SAME IN ACCORDANCE WITH TH E JUDGMENT OF THE HONBLE SUPREME COURT THAT MAY BE PASSED IN CIVIL APPEAL FI LED BY THE REVENUE. GROUND NO-1 IS ALLOWED FOR STATISTICAL PURPOSES. 9. GROUND NO. 2 IS RELATING TO RESTRICTION OF DISAL LOWANCE MADE U/S. 14A OF THE ACT TO RS.1,51,764/- BY THE CIT-A. 10. THE BRIEF FACTS OF THIS ISSUE ARE THAT DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE EARNED DIVIDEND INCO ME OF RS.1,20,000/- DURING THE A.Y UNDER CONSIDERATION. THE AO FOUND TH AT THE ASSESSEE DISALLOWED ON ITS OWN AN AMOUNT OF RS.1,45,765/- AT 5% OF DIVI DEND INCOME I. E RS. 6000/- AS OTHER EXPENSES RELATABLE TO EARNING SUCH DIVIDEND INCOME. IN EXPLANATION TO THE APPLICABILITY FOR S.14A R.W.R 8D FOR MAKING OF SUCH DISALLOWANCE, THE ASSESSEE SUBMITTED THAT THE MAIN BUSINESS OF ASSESSEE IS MANUFACTURING OF PAPER AND INVESTMENTS AND IN RES PECT OF WHICH DIVIDEND WAS EARNED WERE PURCHASED YEARS BACK WITH ITS OWN FUNDS . HOWEVER, BEING NOT SATISFIED WITH SUCH CONTENTION OF ASSESSEE, THE AO APPLYING RULE 8D(III) OF THE 5 ITA NO. 480/KOL/2014 S TAR PAPER MILLS LTD. IT RULES COMPUTED THE DISALLOWABLE EXPENDITURE AT R S. 13,76,000/- [ RS.15,27,764 ( - ) RS.1,51,764/- ] AS MADE/COMPUTED BY THE ASSESSEE. 11. THE CIT-A DELETED SUCH DISALLOWANCE BY OBSERVIN G THAT THE AO COULD NOT ESTABLISH THE REAL AND APPROXIMATE NEXUS BETWEEN TH E EXPENSES AND THE DIVIDEND EARNED. RELEVANT FINDINGS OF THE CIT-A ARE REPRODUCED HEREIN BELOW:- 5.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELL ANT AND PERUSED THE DETAILS ON RECORD. I NOTE THAT THE APPELLANT HELD INVESTMENTS IN SHARES OF OTHER BODIES CORPORATE WHICH WERE SUBSTANTIAL IN VALUE. I ALSO NOTE THAT IN THE IMPUG NED ORDER THE A.O. IN PRINCIPLE ACCEPTED THE APPELLANT'S CONTENTION THAT INVESTMENTS WERE MADE O UT OF APPELLANT'S OWN FUNDS AND NO PART OF THE BORROWED FUNDS WERE UTILIZED. ACCORDINGLY, THE AO DID NOT MAKE DISALLOWANCE OUT OF INTEREST PAID. FROM THE DETAILS FURNISHED, I FURTHER NOTE TH AT DURING THE F.Y. 2007-08 THE APPELLANT EARNED DIVIDEND OF RS.1,20,000/- FROM THE SHARES WH ICH THE APPELLANT HELD IN BANK OF BARODA. THE SAID INVESTMENT WAS ACQUIRED IN THE EARLIER YEA R. DIVIDEND WAS RECEIVED ONLY ON 2 OCCASIONS WHICH WAS DIRECTLY CREDITED TO THE APPELLANT'S ACCO UNT THROUGH ECS MODE. I THEREFORE FIND FORCE IN THE APPELLANT'S EXPLANATIONS THAT FOR EARNING OR MAKING DIVIDEND INCOME OF RS.1,20,000/- THE APPELLANT WAS NOT REQUIRED TO INCUR EXPENSES ON COL LECTING OR REALIZING THE DIVIDEND. SAVE AND EXCEPT 2 OCCASIONS ON WHICH DIVIDEND WAS RECEIVED T HE APPELLANT DID NOT EARN TAX-FREE INCOME ON ANY OTHER OCCASION DURING THE ENTIRE F.Y. 2007-0 8. IN THE CIRCUMSTANCES ALL THAT THE APPELLANT WAS EXPECTED TO INCUR EXPENDITURE ON, REL ATED TO ACCOUNTING OF DIVIDEND RECEIVED ON 2 OCCASIONS. THE APPELLANT FAIRLY ESTIMATED SUCH EXPE NDITURE AT RS.6,000/-. THE APPELLANT'S ESTIMATE OF THE AMOUNT DISALLOWABLE U/S 14A APPEARE D TO BE FAIR AND REASONABLE HAVING REGARD TO THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF T HE CASE. IT HAS BEEN HELD BY JUDICIAL AUTHORITIES THAT EXPENDITURE WHICH CAN BE DISALLOWED U/S 14A MU ST HAVE SOME REAL, RATIONAL AND PROXIMATE NEXUS WITH EARNING OF TAX-FREE INCOME. RULE 8D IS A RULE OF EVIDENCE WHICH PRESCRIBES A MATHEMATICAL FORMULA FOR MAKING DISALLOWANCE. THE P RESUMPTIVE RULE OF EVIDENCE CONTAINED IN RULE 8D IS HOWEVER REBUTTABLE IN NATURE & THE ASSES SEE CAN REBUT THE PRESUMPTION BY BRINGING ON RECORD RELEVANT FACTS TO ESTABLISH THAT EXPENDIT URE WAS IN FACT NOT INCURRED TO THE EXTENT ENVISAGE BY RULE 8D. BEFORE RULE 8D(2) IS INVOKED I N IT IS NECESSARY FOR THE A.O TO FIRST COME TO A RATIONAL CONCLUSION THAT THE EXPENDITURE WHICH TH E APPELLANT INCURRED DURING THE RELEVANT YEAR HAD SOME REAL & ACTUAL NEXUS WITH EARNING OF TAX-FR EE INCOME. MERELY BECAUSE AN APPELLANT IN ITS PROFIT & LOSS A/C DEBITS EXPENSES IN RESPECT OF HIS BUSINESS ACTIVITIES AND IN THE SAME P & L ACCOUNT THE APPELLANT ALSO CREDITS DIVIDEND INCOME; THEN SUCH FACT BY ITSELF IS NOT SUFFICIENT FOR THE AO TO DISALLOW PART OF THE EXPENSES WHICH THE A PPELLANT HAS OTHERWISE INCURRED IN RELATION OR IN CONNECTION WITH HIS BUSINESS ACTIVITIES HAVING N O CONNECTION WITH EARNING OF TAX-FREE INCOME. IN THE GARB OF MAKING DISALLOWANCE IN CONFORMITY WI TH THE MATHEMATICAL FORMULA INCORPORATE IN RULE 8D(2) THE AO IS NOT PERMITTED TO DISALLOW EXPE NSES WHICH THE ASSESSEE HAS LEGITIMATELY INCURRED IN CONNECTION WITH HIS BUSINESS ACTIVITIES WHICH YIELD HIM TAXABLE INCOME. IT IS FOR THESE REASONS LANGUAGE EMPLOYED IN SEC. 14A AS ALSO IN RU LE 8D(1) REQUIRE THAT BEFORE INVOKING THE MATHEMATICAL FORMULA INCORPORATED IN RULE 8D(2) THE AO MUST HAVE REGARD TO THE APPELLANTS EXPLANATION AND ALSO TO THE ENTRIES IN THE APPELLAN TS BOOKS. THE AO MUST TAKE INTO CONSIDERATION THE FACTUAL ASPECTS OF THE APPELLANT S CASE WHILE OBJECTIVELY DEALING WITH THE EXPLANATIONS FURNISHED BY THE APPELLANT. 5.3 IN THE PRESENT CASE OF THE APPELLANT IT HAD EAR NED DIVIDEND OF RS.1,20,000/- ONLY FROM INVESTMENT IN SHARES OF ONE COMPANY I.E. BANK OF BA RODA. THE DIVIDEND WAS RECEIVED ONLY ON 2 OCCASIONS. DIVIDEND WAS DIRECTLY CREDITED TO APPELL ANT'S ACCOUNT THROUGH ECS. THE INVESTMENT WAS BROUGHT FORWARD FROM THE EARLIER YEAR. MOREOVER , BY A.O'S OWN ADMISSION THE INVESTMENTS WERE MADE IN THE EARLIER YEARS WITHOUT UTILIZING BO RROWED FUNDS. ON THESE FACTS, THEREFORE, IT IS BEYOND COMPREHENSION AS TO ON WHAT BASIS THE A.O. C AME TO CONCLUSION THAT THE ASSESSEE HAD INCURRED EXPENSES OF RS.15,27,764/- FOR EARNING DIV IDEND OF ONLY RS.L,20,000/-. THE A.O'S FINDING SHOULD HAVE ESTABLISHED SAME RATIONAL AND R EAL NEXUS BETWEEN ANY PARTICULAR ITEM OF EXPENDITURE TO THE ORDER OF RS.15,27,764/- WITH EAR NING OF DIVIDEND OF MERE RS.1,20,000/-. I HOWEVER, FIND THAT SAVE AND EXCEPT MECHANICALLY APP LYING MATHEMATICAL FORMULA INCORPORATED IN RULE 8D(2)(III) THE A.O. DID NOT BRING ON RECORD AN Y MATERIAL WHICH IN ANY MANNER PROVED ANY RATIONAL AND REAL NEXUS BETWEEN ANY SPECIFIC ITEMS OF EXPENDITURE WITH EARNING OF DIVIDEND OF RS.1,20,000/-. THE ITAT KOLKATA BENCH IN THE CASE O F HINDUSTHAN PAPER CORPORATION LTD VS 6 ITA NO. 480/KOL/2014 S TAR PAPER MILLS LTD. DCIT IN I.T.A. NO. 47/KOL/2012 FOR THE ASST YEAR 20 08-09 HAD CONSIDERED A SIMILAR ISSUE. THE APPEAL DECIDED BY THE TRIBUNAL ALSO RELATED TO A.Y. 2008-09 BEING THE YEAR IN WHICH RULE 8D CAME IN FORCE. IN THAT CASE THE APPELLANT, A GOVERN MENT UNDERTAKING, HAD RECEIVED DIVIDEND ONLY ON ONE OCCASION FROM ITS SUBSIDIARY THROUGH EC S MODE. BY INVOKING PROVISIONS OF RULE 8D(2)(III) THE A.O. DISALLOWED RS.1,02,59,650/-. TA KING INTO CONSIDERATION THE EXPLANATIONS PUT FORWARD BY THE ASSESSEE AND HAVING REGARD TO THE FA CT THAT THE DIVIDEND WAS RECEIVED FROM THE SUBSIDIARY ONLY ON ONE OCCASION THROUGH ECS THE ITA T DID NOT FIND ANY MERIT IN THE DISALLOWANCE MADE BY THE A.O. BY MECHANICAL APPLICATION OF RULE 8D(2)(III). THE TRIBUNAL ACCEPTED THE SUBMISSIONS OF THE ASSESSEE THAT EVEN AFTER INTRODU CTION OF RULE 8D, IT WAS NECESSARY FOR THE A.O. TO ESTABLISH SOME REAL AND PROXIMATE NEXUS BET WEEN INCURRING OF EXPENSES AND EARNING OF DIVIDEND AND IN ABSENCE OF SUCH NEXUS; DISALLOWANCE ONLY BASED ON ARITHMETICAL FORMULA; INCORPORATED IN RULE 8D(2)(III) WAS HELD TO BE UNSU STAINABLE. THE FACTS OF THE CASE DECIDED BY THE ITAT KOLKATA BENCH ARE ALMOST IDENTICAL TO THE FACTS OF THE APPELLANT'S CASE. I FIND THAT SAVE AND EXCEPT APPLYING THE FORMULA INCORPORATED IN RUL E 8D(2)(III) THE A.O. DID' NOT BRING ON RECORD ANY MATERIAL TO CORRELATE ANY SPECIFIC ITEM OF EXPE NDITURE WITH EARNING OF DIVIDEND. THE DIVIDEND WAS RECEIVED ONLY FROM ONE COMPANY AND THROUGH ECS MODE WITHOUT INCURRING ANY COLLECTION CHARGES. ON THESE FACTS THEREFORE I HAVE NO HESITAT ION IN HOLDING THAT THE FACTS OF THE APPELLANT'S CASE DID NOT JUSTIFY DISALLOWANCE TO TH E EXTENT OF RS.15,27,764/- AS MADE BY APPLYING RULE 8D(2)(III). FOR THE REASONS SET OUT H EREIN BEFORE, THEREFORE I DO NOT FIND MERIT IN A.O'S ACTION OF DISALLOWING ADDITIONAL SUM OF RS.13 ,76,000/- U/S 14A. THE DISALLOWANCE OF RS.13,76,000/- IS ACCORDINGLY DELETED. GROUND NO. 2 IS ALLOWED. 12. THE LD. DR RELIED ON THE ORDER OF AO. ON THE C ONTRARY, THE LD. AR OF THE ASSESSEE SUBMITS THAT IT IS COVERED BY THE ORDER OF THIS TRIBUNAL IN THE CASE OF REI AGRO LTD SUPRA IN ITA NO. 1331/KOL/2011 REPORTED IN 144 ITD 141 ( KOL). 13. HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERI AL AVAILABLE ON RECORD. WE FIND THAT EXCEPT OBSERVING THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME AND NOTHING WAS SHOWN BY THE AO IN HIS ORDER THAT T HE ASSESSEE EARNED INCOME AS DIVIDEND INCOME AND RESORTED TO APPLY THE METHOD AS PROVIDED UNDER RULE 8D(2)(III) AND COMPUTED THE EXPENSES BAS ING ON TOTAL AVERAGE INVESTMENT AS OPENING AND CLOSING BALANCE RESPECTIV ELY AND DISALLOWED THE IMPUGNED AMOUNT. THE CONTENTION OF THE ASSESSEE BEF ORE THE CIT-A AS WELL AS BEFORE US, WAS THAT THE ASSESSEE DID NOT DERIVE DIVIDEND INCOME FROM ALL INVESTMENTS AND SUCH INVESTMENTS WERE MADE OUT OF I TS OWN FUNDS. IN THIS REGARD WE MAY REFER TO THE SAID DECISION AS RELIED BY THE LD.AR IN THE CASE OF SUPRA, WHEREIN THE TRIBUNAL HELD THAT THE DIVIDEND EARNED OUT OF INVESTMENTS WOULD BECOME THE SUBJECT MATTER TO BE C ONSIDERED FOR COMPUTING THE EXPENSES BY THE METHOD AS PROVIDED UN DER RULE 8D WHEN SUCH INVESTMENT YIELDS DIVIDEND INCOME. IT MEANS TO SHOW THAT WHEN THERE IS NO DIVIDEND INCOME APPLICATION OF RULE 8D DOES N OT ARISE AT ALL. FOR BETTER UNDERSTANDING RELEVANT PORTION OF WHICH IS REPRODUC ED HEREIN BELOW:- 7 ITA NO. 480/KOL/2014 S TAR PAPER MILLS LTD. 8.1 THUS, NOT ALL INVESTMENTS BECOME THE SUBJECT-MA TTER OF CONSIDERATION WHEN COMPUTING DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D. T HE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D IS TO BE IN RELATION TO THE INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME AND THIS CAN BE DONE ONLY BY TAKING INTO CONSIDERATION THE INVESTMENT WHICH HAS GIVEN RISE TO THIS INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . UNDER THE CIRCUMSTANCES, THE COMPUTATION OF THE DISALLOWANCE UNDER SECTION 14A READ WITH RUL E 8D(2)(II), WHICH IS ISSUE IN THE ASSESSEES APPEAL, IS RESTORED TO THE FILE OF THE AO FOR RECOM PUTATION IN LINE WITH THE DIRECTION GIVEN ABOVE. NO DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D (2)(I) AND (II) CAN BE MADE IN THIS CASE. 14. RESPECTFULLY FOLLOWING THE CO-ORDINATE BENCH DE CISION OF THIS TRIBUNAL SUPRA, WE DIRECT THE LD. AO TO CONSIDER DISALLOWANC E IN TERMS OF RULE 8D(2)(III) OF THE I.T RULES BY CONSIDERING ONLY THO SE INVESTMENTS, WHICH HAD YIELDED DIVIDEND INCOME. HENCE, THE GROUND NO.2 RAI SED BY THE REVENUE IS PARTLY ALLOWED. 15. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 22-03 -2017 SD/- SD/- M.BALAGANESH S.S. VISWANETHRA RAVI ACCOUNTANT MEMBER JUDICIAL MEMBER DATE: 22-03-2017 COPIES OF THE ORDER FORWARDED TO : (1) THE DEPARTMENT: DEPUTY COMMISSIONER OF INCOME T AX, CIR-4, KOLKATA, P-7 CHOWRINGHEE SQUARE, KOLKATA-69. (2) THE ASSESSEE: M/S. STAR PAPER MILLS LTD 27 BIPL ABI TROILAKYA MAHARAJ SARANI, KOLKATA-700 001. (3) COMMISSIONER OF INCOME-TAX (APPEALS)-I, KOLKATA (4) COMMISSIONER OF INCOME TAX, KOLKATA (5) THE DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE **PP/SPS BY ORDER ASSISTANT REGISTRAR, INCOME TAX APPELLATE TRIBUNAL KOLKATA