DCIT CENT. CIR. 7(1), MUMBAI V. RARE ENTERPRISES, MUMBAI

ITA 5207/MUM/2016

• Counselvise Citation: [2018] 123 COUNSELVISE.COM (IT) 8314 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-10-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 17-08-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S PADMAJA
• Assessee Lawyers: S C TIWARI
• Keywords: Capital asset; Earning of tax free income; Retrospective amendment
• Section: 14A; 147; 37; 154; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'I' BENCH, MUMBAI BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NOS. 5207 & 5208/MUM/2016 (ASSESSMENT YEARS: 2012-13 & 2013-04) DCIT, CENTRAL CIRCLE - 7(1) ROOM NO. 653, 6TH FLOOR AAYAKAR BHAVAN, M.K. ROAD MUMBAI 400020 VS. M/S. RARE ENTERPRISES 151, NARIMAN BHAVAN NARIMAN POINT MUMBAI 400020 PAN AAEFR8176J APPELLANT RESPONDENT APPELLANT BY: MS. S. PADMAJA RESPONDENT BY: SHRI S.C. TIWARI & MS. RUTUJA N. PAWAR DATE OF HEARING: 03.07.2018 DATE OF PRONOUNCEMENT: 01.10.2018 O R D E R PER B.R. BASKARAN, JM BOTH APPEALS FILED BY THE REVENUE ARE DIRECTED AGAI NST COMMON ORDER DATED 18.5.2016 PASSED BY THE LEARNED CIT(A)- 49, MUMBAI AND THEY RELATE TO A.Y. 2012-13 & 2013-14. IN BOTH THE APPEA LS, THE REVENUE IS AGGRIEVED BY THE DECISION OF THE LEARNED CIT(A) IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER U/S. 14A OF THE ACT. SINCE IDENTICAL ISSUE IS URGED IN THESE APPEALS, THEY WERE HEARD TOGETHER AN D ARE BEING DISPOSED OF BY THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. 2. BOTH THE APPEALS ARE BARRED BY LIMITATION BY 10 DAYS. THE REVENUE HAS MOVED PETITIONS REQUESTING THE BENCH TO CONDONE THE DELAY. HAVING REGARD TO THE SUBMISSIONS MADE IN THE PETITION, WE CONDONE THE DELAY AND ADMIT BOTH THE APPEALS FOR HEARING. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF TRADI NG IN SHARES AND SECURITIES. BESIDES THAT IT IS ALSO ENGAGED IN THE ACTIVITIES OF ACQUIRING INTEREST IN BUSINESS ORGANIZATION OF ALL TYPES, I.E , EITHER SINGLY OR BY ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 2 ENTERING INTO JOINT VENTURES IN EXISTING AND/OR NEW GREEN FIELD VENTURES IN TECHNOLOGY AND OTHER FIELD. 4. IN A.Y. 2012-13, THE ASSESSEE EARNED DIVIDEND INCOME OF ` 394.67 LAKHS AND CLAIMED THE SAME AS EXEMPT. THE ASSESSEE DISALLOWED A SUM OF ` 6,01,184/- U/S. 14A OF THE ACT AS EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. IN AY 2013-14, THE ASSESSEE EARNED DIVIDEND INCOME OF RS.778.13 LAKHS AND DISALLOWED A SUM OF RS.10.46 LAKHS U/S 14 A OF THE ACT. IT IS PERTINENT TO NOTE THAT THE ASSESSEE HAS HELD ALL TH E SHARES AS ITS STOCK IN TRADE, I.E., IT DID NOT HOLD ANY SHARES AS ITS INVE STMENT. THE AO NOTICED THAT THE ASSESSEE HAS NOT COMPUTED DISALLOWANCE U/S . 14A OF THE ACT IN ACCORDANCE WITH RULE 8D OF THE I.T. RULES. HE TOOK THE VIEW THAT THE ASSESSEE SHOULD HAVE COMPUTED DISALLOWANCE AS PER R ULE 8D IN TERMS OF SECTION 14A OF THE ACT. THE DISCUSSION MADE BY THE ASSESSING OFFICER IN THIS REGARD IN AY 2012-13 ARE EXTRACTED BELOW :- 4. DISALLOWANCE OF EXPENSES U/S 14A OF THE ACT R.W .R 8D OF I.T RULES 1962 : 4.1 ON PERUSAL OF THE COMPUTATION OF INCOME, IT IS NOTICED THAT DURING THE YEAR THE ASSESSEE HAS EARNED DIVIDEND IN COME OF RS.3,94,67,098/-, WHICH IS CLAIMED TO BE EXEMPT, TH E ASSESSEE IS SHOWING INVENTORIES IN THE FORM OF CLOSING STOCK OF SHARES, SECURITIES AND CLAIMS WORTH RS,243,14,97,164/-(P.Y. RS.229,86, 85,468/-) AS AT THE END OF THE YEAR UNDER SCRUTINY. THE ASSESSEE OU GHT TO HAVE MADE DISALLOWANCE OF EXPENDITURE IN RELATION TO THE INCO ME WHICH DOES NOT OR SHALL NOT FORM PART OF TOTAL INCOME AS REQUIRED U/S. 14A IN ACCORDANCE WITH THE PROVISION OF RULE 8D. 4.2 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AS SESSEE WAS ASKED TO EXPLAIN AS TO WHY DISALLOWANCE U/S 14A REA D WITH RULE 8D SHOULD NOT MADE IN ITS CASE. IN RESPONSE TO THE SAM E, ASSESSEE VIDE LETTER DATED 17.12.2014 SUBMITTED THE DISALLOWANCE MADE ON ACCOUNT OF EXPENSES RELATED TO EXEMPT INCOME IS OF RS.6,01, 184/- AS PER COMPUTATION OF TOTAL INCOME. THE ASSESSEE VIDE LETT ER DATED 29.12.2014 FURNISHED WORKING OF DISALLOWANCE U/S L4 A (WITHOUT PREJUDICE TO EARLIER LETTER DATED 17.12.2014) WHERE IN DISALLOWANCE IS BEING WORKED OUT AS PER PROVISIONS OF SECTION 14A R EAD WITH RULE 8D OF IT RULES, 1962. 4.3 THE ASSESSEE COMPANY'S ABOVE CONTENTIONS HAVE B EEN CONSIDERED AND FOUND TO BE NOT ACCEPTABLE FOR THE F OLLOWING REASONS: ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 3 A) THE RULE 8D HAS BEEN FRAMED ACCORDING TO PROVIS IONS OF SUB- SEC. 2 & 3 OF SECTION 14A OF THE INCOME TAX ACT. B) THE SUB-SEC. 2 & 3 OF SECTION 14A IS THE PROCEDU RAL PROVISIONS FOR DISALLOWANCE OF THE EXPENDITURE IN RELATION TO INCOME NOT FORMING PART OF THE TOTAL INCOME. THE SUB-SECTION PROVIDES THE PROCEDURE FOR MAKING DISALLOWANCE U/S.14A. C) THE SCHEME OF THE ACT SHOWS THAT TOTAL INCOME O F THE ASSESSEE IS TO BE COMPUTED UNDER VARIOUS HEADS OF INCOME SPE CIFIED IN SECTION 14. THE PROVISIONS FOR COMPUTATION OF INCOME UNDER VARIOUS HEADS ARE PROVIDED IN SECTIONS 15 TO 57. THE LEGISLATURE IN I TS WISDOM THOUGHT THAT EXPENDITURE IN RELATION TO INCOME EXEMPTED FRO M TAXATION SHOULD NOT BE ALLOWED AS DEDUCTION WHILE COMPUTING THE INC OME CHARGEABLE TO TAX. ACCORDINGLY, THE LEGISLATURE, INSTEAD OF MA KING VARIOUS PROVISIONS FOR DISALLOWANCE UNDER VARIOUS HEADS, HA S INSERTED SECTION 14A AT THE INCEPTION, I.E., PRIOR TO THE COMPUTATIO NAL PROVISIONS UNDER VARIOUS HEADS. THUS, INTENTION OF THE LEGISLATURE I S CLEAR TO DISALLOW ALL THE EXPENDITURES INCURRED IN RELATION TO INCOME NOT FORMING PART OF TOTAL INCOME. CONTEXTUAL INTERPRETATION OF SECTION 14A CLEARLY SUGGESTS THAT EXPENDITURE IN RELATION TO EXEMPTED INCOME HAS TO BE DISALLOWED, EVEN THOUGH SUCH EXPENDITURE WOULD HAVE BEEN ALLOWA BLE UNDER THE COMPUTATIONAL PROVISIONS RELATING TO VARIOUS HEADS OF INCOME. HENCE, SECTION 14A HAS AN OVERRIDING EFFECT OVER THE COMPU TATIONAL PROVISIONS UNDER VARIOUS HEADS. TO HOLD OTHERWISE WOULD AMOUNT TO RENDERING THE PROVISIONS OF SECTION 14A AS OTIOSE/REDUNDANT W HICH IS NOT PERMISSIBLE IN LAW. HENCE, THERE WAS NO FORCE IN TH E CONTENTION OF THE ASSESSEE THAT NO DISALLOWANCE COULD BE MADE UNDER S ECTION 14A IF THE DEDUCTION WAS PERMISSIBLE UNDER OTHER PROVISION S OF THE ACT. CONSEQUENTLY, IN THE CASE OF AN ASSESSEE CARRYING O N A BUSINESS ACTIVITY, ANY EXPENDITURE INCURRED BY HIM, EVEN THO UGH ALLOWABLE UNDER SECTION 36(1)(III) OR SECTIONS 37 OR 57, YET CAN BE DISALLOWED UNDER SECTION 14A IF SUCH AN EXPENDITURE HAS BEEN I NCURRED IN RELATION TO THE INCOME NOT FORMING PART OF TOTAL IN COME. HENCE ASSESSES EXPLANATION THAT NO INTEREST IS DISALLOWAB LE U/S. 14A OF THE ACT, IF THE SAME ARE ALLOWABLE UNDER ANY OTHER PROV ISIONS OF THE ACT IS WITHOUT ANY MERIT AND THE SAME IS REJECTED. D) ALSO EVEN IF IT IS PRESUMED THAT THE ASSESSEE HAS P ROVED THAT THE INVESTMENT WAS MADE PARTLY OUT OF OWN FUND S AND PARTLY FROM BORROWED FUNDS, STILL ITS CLAIM OF INTE REST PAID FOR BUSINESS PURPOSE AND NOT FOR INVESTMENT ARE UNACCEP TABLE. BECAUSE THE ASSESSEE HAS NOT PROVED THAT INTEREST P AID IS DIRECTLY ATTRIBUTABLE FOR ADVANCES MADE. SO, NEXUS CAN BE PR OVED ONLY WHEN SUCH COMPARISONS ARE MADE WITH INFLOW AND OUT FLOW OF FUNDS ON ONE TO ONE BASIS. IN ABSENCE OF ANY EVIDENCE TO PROVE ONE TO ONE NEXUS OF FUNDS RECEIVED AND UTILIZED, IT GIVES ONLY A DISTORTED PICTURE AND LEAD TO INCORRECT CONCLUSIONS. IN ABSEN CE OF ANY EVIDENCE TO PROVE ONE TO ONE NEXUS OF FUNDS RECEIVE D AND UTILIZED, IT CAN ONLY BE INFERRED THAT, INTEREST BE ARING LOANS WERE ALSO UTILIZED FOR MAKING INVESTMENT IN SHARES, THE INCOME ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 4 RECEIVED ON IT BY WAY OF DIVIDEND HAS BEEN CLAIMED AS EXEMPT. IT IS ALSO TO BE STATED HERE THAT EVEN IF THE INVESTMENT WERE MADE OUT OF OWN FUNDS, STILL, TO HOLD AND MAINTAIN/MANAGE THE INVESTMENTS, THE ASSESSEE HAS INCURRED EXPENDITURE TOWARDS PAYMENT OF VARIOUS EXPENSES INCURRED FOR MAINTENANCE OF SUC H INVESTMENT. SINCE THE EXPENDITURE INCURRED BY WAY OF INTEREST D URING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PART ICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FORMULA GIVEN IN RULE 8D OF THE I.T. RULES IS CLEARLY INADMISSIBLE I N THIS CASE. E) PRIOR TO THE INSERTION OF SUB SECTION (2) & (3 ) OF SECTION 14A, THE REVENUE HAD SOUGHT TO DISALLOW THE EXPENDITURE INCU RRED IN RELATION TO EXEMPT INCOME. HOWEVER, THE SUPREME COURT IN MAH ARASHTRA SUGAR AND IN RAJASTHAN STATE WAREHOUSING CORPORATION HELD THAT WHERE THERE IS ONE INDIVISIBLE BUSINESS GIVING RISE TO TA XABLE INCOME AS WELL AS EXEMPT INCOME, THE ENTIRE EXPENDITURE INCURRED I N RELATION TO THAT BUSINESS WOULD HAVE TO BE ALLOWED EVEN IF A PART OF THE INCOME EARNED FROM THE BUSINESS IS EXEMPT FROM TAX. SECTIO N 14A HAS-BEEN ENACTED TO OVERCOME THESE JUDICIAL PRONOUNCEMENTS. - SECTION 14A WAS INTRODUCED BY AN AMENDMENT TO THE F INANCE ACT OF 2001 WITH RETROSPECTIVE EFFECT FROM 1 APRIL 1962 . - SUB-SECTIONS (2) AND (3) WERE INSERTED BY THE FINANCE ACT OF 2006 WITH EFFECT FROM 1 APRIL 2007. - RULE 8D OF THE INCOME TAX RULES PRESCRIBES THE METHOD FOR DETERMINING THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, WHERE THE A SSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE. RU LE 8D WAS NOTIFIED IN THE OFFICIAL GAZETTE OF 24 MARCH 2008. G. THE INSERTION OF SECTION 14A WAS CURATIVE AND DECLARATORY OF THE INTENT OF THE PARLIAMENT. THE BASIC PRINCIPLE O F TAXATION IS THAT ONLY NET INCOME, NAMELY, GROSS INCOME MINUS EXPENDITURE THAT IS TAXABLE. EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THAT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. HOWEVER , ASSESSES HAD CLAIMED DEDUCTIONS IN RESPECT OF INCOME WHICH WAS E XEMPT UNDER VARIOUS PROVISIONS OF THE ACT AS A RESULT OF WHICH THE TAX INCENTIVE GIVEN IN RESPECT OF CERTAIN CATEGORIES OF INCOME WH ICH WERE EXEMPT WAS BEING UTILIZED TO REDUCE THE TAX PAYABLE ON NON -EXEMPT INCOME. THIS BEING CONTRARY TO LEGISLATIVE INTENT, SECTION 14A WAS INSERTED IN ORDER TO RESTORE THE LEGAL POSITION CONSISTENT WITH PARLIAMENTARY INTENT. DECLARATORY OR CURATIVE AMENDMENTS ARE CONS TRUED TO BE RETROSPECTIVE BECAUSE THEY AUTHORITATIVELY SET FORT H THE ORIGINAL LEGISLATIVE INTENT. PARLIAMENT PLACED THE MATTER BE YOND DOUBT BY LEGISLATING UPON SECTION 14A WITH RETROSPECTIVE EFF ECT FROM 1 APRIL 1962. THIS WAS ALSO AMPLIFIED IN CBDT CIRCULAR 14 O F 2001. VARIOUS COURTS HAVE, TIME AND AGAIN, HELD THAT MAKING OF IN VESTMENTS AND EARNING OF EXEMPT INCOME REQUIRES EFFORTS. THE ADMINISTRATIVE AND OTHER EXPENSES INCURRED BY THE A SSESSEE COMPANY FACILITATE EARNING OF ALL INCOMES INCLUDING THE EXE MPT INCOME. THE ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 5 FUNDS OF THE BUSINESS ARE A MIX OF OWN AS WELL AS I NTEREST BEARING BORROWED FUNDS. THE ASSESSEE HAS NOT DEMONSTRATED T HE UTILIZATION OF INTEREST BEARING UNSECURED LOANS FOR THE PURPOSE OF BUSINESS OTHER THAN MAKING OF INVESTMENTS. THEREFORE, THE APPLICAT ION OF SUCH INTEREST BEARING FUNDS TOWARDS MAKING INVESTMENTS F OR EARNING OF EXEMPT INCOME CANNOT BE RULED OUT. THESE ARE VALID INFERENCES BASED ON THE FACTS OF THE CASE. IN THIS CONNECTION, RELIA NCE IS PLACED ON THE FOLLOWING JUDGEMENTS/DECISIONS : (I) DISTRIBUTORS (BARODA) PVT. LTD. [155 ITR 120 (SC) (II) GODREJ BOYCE & MFG. CO. LTD. VS. DCIT (234 CTR 1 (B OM) (III) MAGGANLAL CHAGGANLAL PVT. LTD. [236 ITR 456 (BOM) (IV) M/S. GHERZI EASTERN LIMITED (ITA NO. 6562/BOM/94) D ATED 23 RD SEPTEMBER, 2002) (ITAT, MUMBAI) IN THE CASE OF GODREJ BOYCE & MFG. CO. LTD. VS. ACI T, THE HON'BLE BOMBAY HIGH COURT HAS UPHELD THE CONSTITUTIONAL VAL IDITY OF RULE 8D. IT IS OBSERVED BY THE HON'BLE COURT THAT ONCE THE S ATISFACTION IS RECORDED BY THE ASSESSING OFFICER FOR MAKING DISALL OWANCE U/S 14A, THEN THE PROCEDURE FOR COMPUTING THE SAID DISA LLOWANCE IS TO BE FOLLOWED AS PER RULE 8D. RULE 8D LAYS DOWN A MATHEMATICAL FORMULA FOR THE COMPUTATION OF DISALLO WANCE U/S 14A. THE SAID JUDGEMENT HAS CONSIDERED ALL THE ANGLES, A RGUMENTS AND JUDICIAL POSITIONS AND HENCE, IN VIEW OF THE SAID J URISDICTIONAL HIGH COURT'S JUDGEMENT, THE APPLICABILITY OF VARIOUS OTH ER DECISIONS MENTIONED IN PARA 4.1 SUPRA RELIED UPON BY THE ASSE SSEE IS DISTINGUISHED. H) IN THE CASE OF CHEMINVEST LTD 317 ITR 86, THE DELHI HIGH COURT DECIDED THAT DISALLOWANCE UNDER SECTION 14A, CAN BE MADE IN A YEAR IN WHICH NO EXEMPT INCOME HAS BEEN E ARNED OR RECEIVED BY THE ASSESSEE. PROVISIONS OF SECTION 14A ARE APPLICABLE WITH RESPECT OF DIVIDEND INCOME EARNED BY THE ASSES SEE ENGAGED IN THE BUSINESS OF DEALING IN SHARES AND SECURITIES, O N THE SHARES HELD AS STOCK IN TRADE. IN THE CASE UNDER CONSIDERATION THE ASSESSEE FAILED TO BROUGHT ON RECORD THE DETAILS OF SCRIPTS SHARES ON WHICH DIVIDEND EARNED THEREFORE ALL THE SCRIPTS/SHARES HAVE BEEN T AKEN BEING SCRIPTS /SHARES FETCH DIVIDEND INCOME. PROVISIONS OF SUB-SECTION (2) AND (3) OF SECTION 14A ARE PROCEDURAL IN NATURE HENCE APPLI CABLE RETROSPECTIVELY. THIS IS TO BE NOTED HERE THAT IN THE ABOVE CITED C ASE THE DELHI TRIBUNAL'S SPECIAL BENCH HELD THAT WHEN T HE EXPENDITURE IS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME IT HAS TO SUFFER THE DISALLOWANCE IRRESPECTIVE OF T HE FACT WHETHER ANY INCOME IS EARNED BY THE ASSESSEE OR NOT AND THE PRO VISIONS OF SECTION 14A OF THE ACT DO NOT ENVISAGE ANY SUCH EXCEPTION. THE FACTS AND JUDGMENT OF THE CASE CITED ABOVE I.E. CHEMINVEST LT D VS CIT 317 ITR 86, ARE SQUARELY APPLICABLE TO THE CASE UNDER CONSI DERATION. I) RECENTLY, THE CBDT VIDE CIRCULAR NO.5 OF 2014 DATED 11.02.2014 HELD THAT THE INTENT OF THE LEGISLATURE IS TO ALLOW ONLY THAT ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 6 EXPENDITURE WHICH IS RELATABLE TO EARNING OF INCOME AND IT THEREFORE FOLLOWS THAT THE EXPENSES WHICH ARE RELATABLE TO EA RNING OF EXEMPT OF EXEMPT INCOME HAVE TO BE CONSIDERED FOR DISALLOWANC E, IRRESPECTIVE OF THE FACT WHETHER ANY SUCH INCOME HAS BEEN EARNED DU RING THE FINANCIAL YEAR OR NOT. THE POSITION IS FURTHER CLAR IFIED BY THE USAGE OF TERM 'INCLUDIBLE' IN THE HEADING TO SECTION 14A OF THE ACT AND ALSO THE HEADING TO RULE 8D OF IT RULES, 1962 WHICH INDICATE S THAT IT IS NOT NECESSARY THAT EXEMPT INCOME SHOULD NECESSARILY BE INCLUDED IN A PARTICULAR YEAR'S INCOME FOR DISALLOWANCE TO BE TRI GGERED. ALSO, SECTION 14A OF THE ACT DOES NOT USE THE WORD 'INCOME OF THE YEAR' BUT 'INCOME UNDER THE ACT'. THIS ALSO INDICATES THAT FOR INVOKI NG DISALLOWANCE U/S 14A, IT IS NOT MATERIAL THAT ASSESSEE SHOULD HAVE E ARNED SUCH EXEMPT INCOME DURING THE FINANCIAL YEAR UNDER CONSIDERATIO N. 5. ACCORDINGLY THE AO COMPUTED DISALLOWANCE U/S 1 4A OF THE ACT FOR ASSESSMENT YEAR 2012-13 BY APPLYING THE PROVISIONS OF RULE 8D OF THE I.T RULES. THE DISALLOWANCE SO MADE BY THE AO WORKED O UT TO RS.2015.08 LAKHS. ON IDENTICAL REASONS, THE AO COMPUTED DISAL LOWANCE IN AY 2013-14 ALSO AS PER RULE 8D OF THE I.T RULES, WHICH WORKED OUT TO RS.3131.83 LAKHS. 6. AGGRIEVED BY THE ORDERS PASSED BY THE AO, THE ASSESSEE PREFERRED APPEALS BEFORE LD CIT(A). THE ASSESSEE, INTER ALIA, CONTENDED THAT THE AO HAS APPLIED THE PROVISIONS RULE 8D WITHOUT RECORDIN G SATISFACTION AGAINST THE CORRECTNESS OF THE DISALLOWANCE MADE BY THE AO. THE LD CIT(A) NOTICED THAT THE ASSESSING OFFICER DID NOT EXPRESS HIS DISS ATISFACTION OVER THE WORKING MADE BY THE AO, WHICH WAS A MANDATORY CONDI TION PRESCRIBED U/S 14A(2) OF THE ACT. ACCORDINGLY THE LD CIT(A) HELD THAT THE ASSESSING OFFICER WAS NOT CORRECT IN LAW IN INVOKING THE PROVISIONS O F RULE 8D OF THE I.T RULES. THE RELEVANT DISCUSSIONS MADE BY THE LD CIT (A) IN AY 2012-13 ARE EXTRACTED BELOW:- 6.0 I HAVE CAREFULLY EXAMINED THE FACTS OF THE CASE, THE STAND TAKEN BY THE A.O IN THE ASSESSMENT ORDER, THE GROUNDS OF APPEAL AND THE WRITTEN SUBMISSIONS FILED BY THE APPELLANT DURING T HE HEARING PROCEEDINGS 6.1 THE A.O HAS OBSERVED THAT THE APPELLANT IS ENGA GED IN THE BUSINESS OF TRADING IN SHARES AND SECURITIES AND AL SO INTO ACQUIRING THE INTEREST IN BUSINESS ORGANISATION OF ALL TYPES. FROM THE ASSESSMENT ORDER IT IS NOTED THAT THE A.O HAS MADE AN ELABORATE DISCUSSION ON THE PROVISIONS OF SECTION 14A, VARIOU S DECISIONS RELATING ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 7 TO SECTION 14A AND AFTER CONSIDERING THE FACT THAT THE APPELLANT HAS CLAIMED DISALLOWANCE U/S 14A OF RS.601,184/- AGAINS T EXEMPT DIVIDEND INCOME OF RS.394,67,098/-, HAS PROCEEDED T O COMPUTE DISALLOWANCE AS PER RULE 8D OF RS.20,15,08,828/~, I T IS NOTED THAT THE AMOUNT OF EXPENDITURE OF RS.601,184/- STATED BY THE APPELLANT TO BE RELATED TO EXEMPT INCOME HAS ALSO BEEN CONSIDERE D AS PART OF DISALLOWANCE UNDER RULE 8D(2)(I) BEING DIRECT EXPEN DITURE TO EARN EXEMPT INCOME. HOWEVER, THE A.O HAS DETERMINED THE DISALLOWANCE UNDER RULE 8D WITHOUT STATING THAT HE WAS NOT SATIS FIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE I.E RS.601,184/-IN RELATION TO EXEMPT INCOME, HAVIN G REGARD TO THE ACCOUNT OF THE APPELLANT IN TERMS OF SUB-SECTION 2 OF SECTION 14A OF THE ACT. THE A.O HAS NOT SPECIFIED WHAT OTHER EXPENSES HAVE BEEN INCURRED IN RELATION TO THE EXEMPT INCOME AND HOW T HE CLAIM OF THE APPELLANT WAS NOT CORRECT IN VIEW OF THE ABOVE, I A M INCLINED TO HOLD THAT THE A.O WAS NOT CORRECT IN INVOKING RULE 8D AN D COMPUTING DISALLOWANCE U/S 14A AT RS.20,15,08,828/-. 7. THE ASSESSEE ALSO CONTENDED THAT THE SHARES A RE HELD BY IT AS STOCK IN TRADE AND HENCE THE PROVISIONS OF RULE 8D CANNOT BE APPLIED TO IT. IN THIS REGARD, THE ASSESSEE RELIED UPON THE DECISION RENDE RED BY MUMBAI BENCH OF TRIBUNAL IN THE CASE OF INDIA ADVANTAGE SECURITI ES LTD (ITA NO.1131 OF 2013) AND THE DECISION RENDERED BY HONBLE KARNATAK A HIGH COURT IN THE CASE OF CCI LTD VS. JCI (250 CTR 291). THE ASSESSE E ALSO CONTENDED THAT THE PROVISIONS OF RULE 8D WOULD FAIL IN ITS CASE, S INCE IT DID NOT HOLD ANY SHARES AS ITS INVESTMENTS. THE LD CIT(A) WAS ALSO CONVINCED WITH THIS CONTENTION OF THE ASSESSEE AND ACCEPTED THE SAME. THE RELEVANT OBSERVATIONS MADE BY LD CIT(A) IN AY 2012-13 ARE EX TRACTED BELOW:- 6.2 FURTHER, I AM INCLINED TO AGREE WITH THE APPE LLANT'S SUBMISSION THAT COMPUTING DISALLOWANCE UNDER RULE 8D(2)(II) AN D 8D(2)(III) WAS NOT CORRECT IN THIS CASE, SINCE THE APPELLANT IS A TRADER IN SHARES AND SECURITIES AND THE SAME ARE NOT HELD AS INVESTMENTS . SO THE VALUE OF INVESTMENT IN TERMS OF RULE 8D(2) WOULD BE NIL AND THERE WOULD BE NO SUCH DISALLOWANCE. IN THIS REGARD, I FIND THAT THE HON'BLE BOMBAY HIGH COURT, VIDE ORDER DATED 13.04.2015, IN THE CAS E OF CIT VS. INDIA ADVANTAGE SECURITIES LTD. [I.T NO.1131 OF 2013], HA S OBSERVED THAT - BOTH THE AUTHORITIES IN THIS CASE HAVE FOLLOWED THI S JUDGMENT (I.E. DECISION IN THE CASE OF GODREJ AND BOYCE MFG. CO. L TD.) AND APPLIED SECTION 14A OF THE INCOME TAX ACT, 1961 AND RULE 8D OF INCOME TAX RULES, 1962. THEY HAVE BEEN APPLIED CORRECTLY. IN T HE CASE OF INDIA ADVANTAGE SECURITIES LTD., THE ITAT, MUMBAI, RELYIN G ON THE DECISION OF HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CCL LTD. VS JCIT [250 CTR 291], HELD THAT DISALLOWANCE OF INTEREST IN REL ATION TO THE DIVIDEND RECEIVED FROM TRADING SHARES COULD NOT BE MADE AND ACCORDINGLY ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 8 UPHELD THE ORDER OF THE CIT(A) IN DELETING THE DISA LLOWANCE U/S 14A COMPUTED BY THE A.O IN RELATION TO THE STOCK-IN-TRA DE. 6.3 REFERENCE HAS BEEN MADE TO THE DECISION OF ITA T 'D' BENCH, MUMBAI IN THE CASE OF HDFC BANK LTD. DATED 23,9.201 5, WHEREIN THE ABOVE SAID DECISION IN THE CASE OF INDIA ADVANTAGE SECURITIES LTD. WAS DISTINGUISHED AND DISALLOWANCE UNDER RULE 8D WA S UPHELD. THE SAID DECISION HAS BEEN SET ASIDE IN ITS ENTIRETY, B Y THE ORDER OF THE HON'BLE HIGH COURT OF BOMBAY DATED 25.02.2016 IN WR IT PETITION NO. 1753 OF 2016, IN THE CASE OF HDFC BANK LTD. VS DCIT MUMBAI & OTHERS. 6.4 FROM ABOVE DISCUSSION, IT IS APPARENT THAT THE HIGH COURT OF BOMBAY HAS APPROVED THE FINDING OF THE ITAT, MUMBAI IN THE CASE OF INDIA ADVANTAGE SECURITIES LTD., AND HAS DISAPPROVE D THE ORDER OF THE TRIBUNAL IN THE CASE OF HDFC BANK LTD., FOR TAKING A VIEW CONTRARY TO THE EARLIER ORDER OF THE TRIBUNAL (I.E. IN THE CASE OF INDIA ADVANTAGE SECURITIES LTD.). IT HAS ALSO BEEN OBSERVED THAT NO DECISION WAS RENDERED BY THE SAID COURT IN THE CASE OF GODREJ & BOYCE MFG. COMPANY LTD, ON THE ISSUE WHETHER DISALLOWANCE UNDE R RULE 8D COULD BE MADE WHERE THE INVESTMENT HAS BEEN MADE IN ITS STOCK-IN- TRADE. 6.5 I FIND THAT THE APPELLANT IS IN THE BUSINES S OF TRADING IN SHARES AND SECURITIES WHICH ARE HELD AS STOCK-IN-TRADE. TH E INVESTMENTS REFLECTED IN SCHEDULE V TO THE BALANCE SHEET AS ON 31.03.2012 ARE AS UNDER: - SCHEDULE -V INVESTMENTS PAINTING RS. 34.87.500 RS. 34,87,500 THIS DOES NOT INCLUDE INVESTMENT IN SHARES. THE ENT IRE HOLDING OF SHARES AND SECURITIES ARE REFLECTED IN SCHEDULE VI - CURRENT ASSETS, LOANS AND ADVANCES- INVENTORIES, CLOSING STOCK OF S HARES, SECURITIES AND CLAIMS OF RS.22,98,685,4687-. IN VIEW OF THE AB OVE SAID DECISIONS OF THE HIGH COURT OF BOMBAY, IN THE CASE OF INDIA A DVANTAGE SECURITIES LTD. AND HDFC BANK LTD., IT IS HELD THAT THE DISALLOWANCE WORKED OUT UNDER RULE 8D AMOUNTING TO RS.20,15,08,8 287-, BY CONSIDERING THE CLOSING STOCK OF SHARES AS INVESTME NTS IN SHARES, WAS NOT CORRECT. IN THIS CASE, THE APPELLANT HAS ALREAD Y WORKED OUT THE DISALLOWANCE CONSIDERING THE ACTUAL EXPENDITURE OF EARNING DIVIDEND INCOME OF RS.601,1847- IN THE RETURN OF INCOME. IN VIEW OF THE ABOVE DISCUSSION, THE ADDITION OF RS . 20,15,08,8287- IS FOUND TO BE WITHOUT MERITS AND IS DELETED. THE GROUNDS NO. 1 & 2 TAKEN BY THE APPELLANT FOR A.Y 20 12-13 ARE ALLOWED. SINCE GROUND NO. 3 IS WITHOUT PREJUDICE TO THE GROUNDS NO. 1 & 2, THE SAME IS DISMISSED IN VIEW OF THE RELIEF AL LOWED WITH RESPECT TO THESE GROUNDS. ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 9 8. THE LD CIT(A) DELETED THE ADDITIONS MADE BY TH E AO IN AY 2013-14 ALSO ON IDENTICAL REASONS. AGGRIEVED BY THE ORDERS PASS ED BY LD CIT(A), THE REVENUE HAS FILED THESE APPEALS IN BOTH THE YEARS. 9. THE LD D.R SUBMITTED THAT THE PROVISIONS OF SEC 14A(2) DO NOT PRESCRIBE ANY SPECIFIC FORMAT FOR RECORDING DISSATI SFACTION OVER THE WORKINGS MADE BY THE ASSESSEE. THE LD CIT-DR FURTHE R SUBMITTED THAT THE DISSATISFACTION OF THE AO CAN BE INFERRED FROM THE OBSERVATIONS MADE BY THE ASSESSING OFFICER. SHE FURTHER SUBMITTED THAT THE ASSESSING OFFICER HAS INVOKED THE PROVISIONS OF RULE 8D AS PER THE PROVIS IONS OF SEC. 14A(2) OF THE ACT AFTER PROPERLY RECORDING HIS DISSATISFACTIO N. 10. THE LD D.R FURTHER SUBMITTED THAT THE HONB LE SUPREME COURT HAS SINCE HELD IN THE CASE OF MAXOPP INVESTMENT LTD (CI VIL APPEAL NOS.104-109 OF 2015 DATED 12-02-2018) HAS HELD THAT THE EXEMPT DIVIDEND INCOME EARNED FROM SECURITIES HELD AS STOCK-IN-TRADE ALSO TRIGGERS THE PROVISIONS OF SEC.14A OF THE ACT. SHE FURTHER SUBMITTED THAT THE HONBLE PUNJAB & HARYANA HIGH COURT HAS, INTER ALIA, HELD IN THE CAS E OF PR. CIT VS. STATE BANK OF PATIALA (391 ITR 218) THAT THE DIVIDEND INC OME EARNED FROM SECURITIES HELD AS STOCK-IN-TRADE WOULD NOT ATTRACT THE PROVISIONS OF SEC.14A OF THE ACT. SHE SUBMITTED THAT THE ASSESS ING OFFICER, IN THE ABOVE SAID CASE, HAD RESTRICTED THE DISALLOWANCE U/S 14A OF THE ACT TO THE AMOUNT OF EXEMPT INCOME. THE LD CIT(A), HOWEVER, EN HANCED THE DISALLOWANCE BY APPLYING PROVISIONS OF RULE 8D AND THE SAME WAS SET ASIDE BY THE TRIBUNAL. THE ABOVE SAID DECISION OF TRIBUN AL WAS UPHELD BY THE HONBLE HIGH COURT AND ALSO SUPREME COURT IN THE CA SE OF MAXOPP INVESTMENT LTD (SUPRA). IN THE HANDS OF BANKS, ALL THE INVESTMENTS ARE TREATED AS STOCK IN TRADE AS PER CIRCULAR NO.18/201 5 (F.NO.279/MISC./ 140/2015/ITJ) DATED 2-11-2015. STILL THE AO MADE D ISALLOWANCE IN THE ABOVE SAID CASE. THE LD D.R ALSO PLACED RELIANCE O N THE DECISION RENDERED BY KOLKATTA BENCH OF TRIBUNAL IN THE CASE OF DCIT V S. TEENLOK ADVISORY SERVICES (P) LTD (2016)(159 ITD 991), WHEREIN IT WA S HELD THAT THE EXEMPT INCOME EARNED FROM SHARES HELD AS STOCK IN TRADE WO ULD ATTRACT DISALLOWANCE. ACCORDINGLY THE LD D.R SUBMITTED THAT THE EXEMPT DIVIDEND ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 10 INCOME EARNED FROM SECURITIES HELD AS STOCK IN TRAD E WOULD ATTRACT THE PROVISIONS OF SEC.14A OF THE ACT. ACCORDINGLY THE LD D.R CONTENDED THAT THE ASSESSING OFFICER HAS RIGHTLY COMPUTED DISALLOW ANCE BY APPLYING PROVISIONS OF RULE 8D OF THE I.T RULES. 11. THE LD A.R, ON THE CONTRARY, SUBMITTED THAT THE ASSESSEES MAIN OBJECTIVE IN PURCHASE AND SALE OF SHARES IS TO EARN PROFIT ON SALE OF SHARES AND HENCE THE DIVIDEND INCOME EARNED BY IT IS ONLY INCIDENTAL INCOME ARISING ON ACCOUNT OF HOLDING OF SHARES ON THE RECO RD DATE PRESCRIBED FOR DECLARATION OF DIVIDEND. HE SUBMITTED THAT ALL THE EXPENSES INCURRED BY THE ASSESSEE ARE IN CONNECTION WITH TRADING IN SHAR ES ONLY. THE ASSESSEE SHALL BE INCURRING ALL THE EXPENSES DEBITED TO THE PROFIT AND LOSS ACCOUNT, EVEN IT DOES NOT EARN ANY DIVIDEND INCOME AT ALL. ACCORDINGLY, THE LD A.R SUBMITTED THAT ALL THE EXPENSES ARE RELATED TO TRAD ING ACTIVITY ONLY AND NONE OF IT IS RELATED TO DIVIDEND INCOME, WHICH IS EXEMPT FROM TAXATION. THE LD A.R SUBMITTED THAT, DESPITE THESE FACTS, THE ASSESSEE HAS VOLUNTARILY DISALLOWED A SUM OF RS.6.01 LAKHS AND R S.10.46 LAKHS IN AY 2012-13 AND 2013-14 RESPECTIVELY TO MEET THE REQUIR EMENTS OF SEC.14A OF THE ACT. 12. THE LD A.R SUBMITTED THAT THE PROVISIONS OF SEC.14A(2) PRESCRIBES A MANDATORY CONDITION THAT THE AO SHOULD EXAMINE THE DISALLOWANCE MADE BY THE AO AND HE HAS TO RECORD HIS DISSATISFACTION , HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, OVER THE WORKING OF DISAL LOWANCE GIVEN BY THE ASSESSEE. ONLY IF THE AO RECORDS HIS DISSATISFACTIO N, THEN THE AO IS ENTITLED TO APPLY THE PROVISIONS OF RULE 8D OF I.T RULES. TH E LD A.R SUBMITTED THAT THE AO HAS COMPUTED THE DISALLOWANCE BY APPLYING PR OVISIONS OF RULE 8D WITHOUT FOLLOWING MANDATORY CONDITION OF RECORDING DISSATISFACTION OVER THE WORKINGS MADE BY THE AO. HENCE THE LD CIT(A) WAS JU STIFIED INHOLDING THAT THE DISALLOWANCE SO MADE BY THE AO IS NOT JUSTIFIED . THE LD A.R TOOK SUPPORT OF DECISION RENDERED BY HONBLE SUPREME COU RT IN THE CASE OF GODREJ & BOYCE MANUFACTURING COMPANY LTD (CIVIL APP EAL NO.7020 OF 2011 DATED 08-05-2017); THE DECISION RENDERED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF PR. CIT VS. RELIANCE CAPITAL ASSET M ANAGEMENT LTD (2017) ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 11 (86 TAXMANN.COM 200)(BOM); THE DECISION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD (SUPRA). ACCORDINGLY THE LD A.R SUBMITTED THAT THE LD CIT(A) WAS JUSTIFIED IN H OLDING THAT THE AO WAS NOT LEGALLY CORRECT IN INVOKING THE PROVISIONS OF R ULE 8D IN THE FACTS AND CIRCUMSTANCES OF THE CASE. HE FURTHER SUBMITTED THA T THE VOLUNTARY DISALLOWANCE MADE BY THE ASSESSEE IN BOTH THE YEARS WOULD ALSO MEET THE REQUIREMENTS OF LAW AND HENCE NO FURTHER DISALLOWAN CE IS CALLED FOR. 13. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE RECORD. THE UNDISPUTED FACTS REMAIN THAT THE ASSESSEE IS A TRAD ER IN SHARES AND SECURITIES AND THE ASSESSEE HAS HELD ITS ENTIRE SEC URITIES AS STOCK IN TRADE ONLY. THE ASSESSEE DID NOT HOLD ANY SECURITY AS IT S INVESTMENT. THE PROVISIONS OF SEC.14A READ AS UNDER:- 14A. (1) FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT O F EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H 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 WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, IF THE ASSESSING OFFICER, HAVING REG ARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTN ESS 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 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 H AS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NO T FORM PART OF THE TOTAL INCOME UNDER THIS ACT : PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOWE R THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESS EE UNDER SECTION 154 , FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE TH E 1ST DAY OF APRIL, 2001. SUB.SEC.(2) OF SEC.14A IS RELEVANT FOR OUR CONSIDER ATION. THE POWER TO DISREGARD THE COMPUTATION MADE BY THE ASSESSEE IS G IVEN TO THE AO UNDER SUB.SEC(2) OF SEC. 14A OF THE ACT. IT PRESCRIBES TH AT THE AO CAN DETERMINE THE QUANTUM OF EXPENDITURE TO BE DISALLOWED ONLY IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS N OT SATISFIED WITH THE ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 12 CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. IF HE IS NOT SO SATISFIED, THEN THE AO HAS TO COMPUTE THE DISALLOWANCE IN ACCORDANCE WITH THE METHOD PRESCRIBED, I.E., AS PER RULE 8D OF I.T RULES. HENCE THE MANDATORY CONDITION PRESCRIBED IN SEC.14( 2) IS THAT THE AO, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, HAS TO SHOW THAT HE WAS NOT SATISFIED WITH THE CORRECTNESS OF WORKING OF DISALL OWANCE MADE BY THE ASSESSEE. IF HE FAILS TO RECORD HIS DISSATISFACTION ABOUT THE CORRECTNESS OF WORKING OF DISALLOWANCE MADE BY THE ASSESSEE, HAVIN G REGARD TO THE ACCOUNTS OF THE ASSESSEE, THE AO IS NOT ENTITLED TO DETERMINE THE DISALLOWANCE IN ACCORDANCE WITH RULE 8D OF I.T RULE S. 14. THE ASSESSEE HAS PLACED ITS RELIANCE ON VARI OUS CASE LAWS TO SUPPORT THE ABOVE SAID PROPOSITION. FOR THE SAKE OF CONVEN IENCE, WE EXTRACT BELOW THE RELEVANT OBSERVATIONS MADE BY HONBLE SUPREME C OURT, HONBLE JURISDICTIONAL BOMBAY HIGH COURT AND OTHER HIGH COU RTS, ON WHICH THE ASSESSEE HAD PLACED RELIANCE: (A) EXTRACT FROM THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING COMPANY LIMITED 394 ITR 449 (SC) 'NEVERTHELESS, IRRESPECTIVE OF THE AFORESAID QUESTI ON, WHAT CANNOT BE DENIED IS THAT THE REQUIREMENT FOR ATTRACTING THE P ROVISIONS OF SECTION 14A(1) OF THE ACT IS PROOF OF THE FACT THAT THE EXP ENDITURE SOUGHT TO BE DISALLOWED/DEDUCTED HAD ACTUALLY BEEN INCURRED IN E ARNING THE DIVIDEND INCOME.' X X X X 'SUB-SECTIONS (2) AND (3) OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES MERELY PRESCRIBE A FORMULA FOR DETERMINAT ION OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN A SITUATION WHERE THE ASSESSING OF FICER IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE. WHETHER SUCH DETERM INATION IS TO BE MADE ON APPLICATION OF THE FORMULA PRESCRIBED UNDER RULE 8D OR IN THE BEST JUDGMENT OF THE ASSESSING OFFICER, WHAT THE LAW POS TULATES IS THE REQUIREMENT OF A SATISFACTION IN THE ASSESSING OFFI CER THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, AS PLACED BEFORE H IM, IT IS NOT POSSIBLE TO GENERATE THE REQUISITE SATISFACTION WITH REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. IT IS ONLY THEREAFTER THAT T HE PROVISIONS OF SECTION 14A(2) AND (3) READ WITH RULE 8D OF THE RULES OR A BEST JUDGMENT DETERMINATION, AS EARLIER PREVAILING, WOULD BECOME APPLICABLE'. ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 13 (B) EXTRACT FROM THE JUDGMENT OF HON'BLE BOMBAY HIGH CO URT IN THE CASE OF RELIANCE CAPITAL ASSET MANAGEMENT LTD. 86 TAXMANN.COM 200 (BOM.) 'THE ASSESSING OFFICER DID NOT SPECIFICALLY RECORD THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF THE EXPENDITURE IN RELATION TO THE INCOME WHICH DOES NO T FORM PART OF THE TOTAL INCOME UNDER THE ACT. HOWEVER, HE FELT OBLIGED AND GOING BY THE PRESENCE OF RULE 8D THAT ONCE SECTION 14A IS ATTRACTED, THE DISALLOWANCE IS TO BE MADE AS PER RULE 8D ONLY WHICH HAS BEEN PRESCRIBED BY THE LEGISLATURE. THE ASSESSING OFFICER HAS NOT ADVERTED TO THE PLAIN LANGUAGE OF SUB- SECTION (2) OF SECTION 14A. IT IS THAT MISTAKE COMMITTED BY THE ASSESSING OFFIC ER WHICH WAS PARTIALLY CORRECTED BY THE FIRST APPELLATE AUTHORITY. THE FIR ST APPELLATE AUTHORITY AGREED WITH THE ASSESSEE THAT THE ASSESSING OFFICER HAS NOT COMMENTED UPON THE CORRECTNESS OR OTHERWISE OF THE APPELLANT' S WORKING OF THE CLAIM. HE HAS NOT SPECIFICALLY REJECTED THAT WORKING AND H AS NOT PROVIDED ANY REASON FOR DOING SO. THE COMMISSIONER WAS OF THE VI EW THAT BEFORE PROCEEDING TO COMPUTE THE DISALLOWANCE UNDER SECTIO N 14A AS PER RULE 8D, THE ASSESSING OFFICER SHOULD CONSIDER THE WORKI NG OF EXPENSES MADE BY THE ASSESSEE AND WHEN HE IS NOT SATISFIED WITH T HE SAID WORKING AND TERMS IT AS INCORRECT, BASED ON OBJECTIVE CRITERIA AND FOR COGENT REASONS, HE CAN THEN PROCEED TO WORK OUT THE DISALLOWANCE UN DER SECTION 14A AS PER RULE 8D OF THE RULES. WE CANNOT FIND ANY FAULT WITH THIS CONCLUSION OF THE F IRST APPELLATE AUTHORITY BASED AS IT IS ON THE LANGUAGE OF SUB-SEC TION (2) OF SECTION 14A OF THE ACT, REPRODUCED ABOVE'. (C) EXTRACT FROM THE JUDGMENT OF HON'BLE DELHI HIGH COU RT IN THE CASE OF HERO MANAGEMENT SERVICES LIMITED 360ITR 68 (DEL.) 'FURTHER TO INVOKE RULE 8D, THE ASSESSING OFFICER H AS TO FIRST RECORD A FINDING THAT HE WAS NOT SATISFIED WITH THE CORRECTN ESS OF THE CLAIM FOR EXPENDITURE MADE BY THE ASSESSEE IN RELATION TO INC OME, WHICH DID NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. NO SUC H SATISFACTION HAS BEEN RECORDED BY THE ASSESSING OFFICER. . . IN VIEW OF THE AFORESAID DISCUSSION, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE IMPUGNED ORDER. THE APPEAL HAS NO MERIT AND IS DISMISSED IN LIMINE'. (D) EXTRACT FROM THE JUDGMENT OF HON'BLE PUNJAB & HARYA NA HIGH COURT IN THE CASE OF HERO CYCLES LTD. 323 ITR 518 ( P & H.) 'IN VIEW OF FINDING REPRODUCED ABOVE, IT IS CLEAR T HAT THE EXPENDITURE ON INTEREST WAS SET OFF AGAINST THE INCOME FROM INTERE ST AND THE INVESTMENT IN THE SHARE AND FUNDS WERE OUT OF THE DIVIDEND PRO CEEDS. IN VIEW OF THIS FINDING OF FACT, DISALLOWANCE UNDER SECTION 14A WAS NOT SUSTAINABLE. WHETHER, IN A GIVEN SITUATION, ANY EXPENDITURE WAS INCURRED WHICH WAS TO BE DISALLOWED, IS A QUESTION OF FACT. THE CONTEN TION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE IS ALWAYS I NCURRED WHICH MUST BE DISALLOWED UNDER SECTION 14A AND THE IMPACT OF EXPE NDITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINES S INCOME WHICH MAY ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 14 NULLIFY THE MANDATE OF SECTION 14A, CANNOT BE ACCEP TED. DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITU RE HAS BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A CANNOT STA ND. IN THE PRESENT CASE FINDING ON THIS ASPECT, AGAINST THE REVENUE, I S NOT SHOWN TO BE PERVERSE. CONSEQUENTLY, DISALLOWANCE IS NOT PERMISS IBLE'. (E) EXTRACT FROM THE JUDGMENT OF HON'BLE CALCUTTA HIGH COURT IN THE CASE OF REI AGRO LTD. GA NO. 3022 OF 2013 'THE ASSESSING OFFICER ALSO DISALLOWED THE EXPENDIT URE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 WITHOUT FIRST RECORDING THAT HE WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM AS REGA RDS THE CLAIM THAT 'NO EXPENDITURE' WAS MADE BY THE ASSESSEE... THE DISALL OWANCE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 IS PLAINLY CONTRARY TO THE PROVISIONS OF THE STATUE. THE CIT, IN THE CIRCUMSTA NCES, ALLOWED THE APPEAL OF THE ASSESSEE AND THE TRIBUNAL DID NOT INT ERFERE'. (F) EXTRACT FROM THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD. 4021TR 640 (SC) 'HAVING REGARD TO THE LANGUAGE OF SECTION 14A(2) OF THE ACT, READ WITH RULE 8D OF THE RULES, WE ALSO MAKE IT CLEAR THAT BE FORE APPLYING THE THEORY OF APPORTIONMENT, THE AO NEEDS TO RECORD SAT ISFACTION THAT HAVING REGARD TO THE KIND OF THE ASSESSEE, SUO MOTO DISALL OWANCE UNDER SECTION 14A WAS NOT CORRECT. IT WILL BE IN THOSE CASES WHER E THE ASSESSEE IN HIS RETURN HAS HIMSELF APPORTIONED BUT THE AO WAS NOT A CCEPTING THE SAID APPORTIONMENT. IN THAT EVENTUALITY, IT WILL HAVE TO RECORD ITS SATISFACTION TO THIS EFFECT. FURTHER, WHILE RECORDING SUCH A SATISF ACTION, NATURE OF LOAN TAKEN BY THE ASSESSEE FOR PURCHASING THE SHARES/MAK ING THE INVESTMENT IN SHARES IS TO BE EXAMINED BY THE AO. 15. IN THE INSTANT CASE, WE NOTICE THAT THE ASSES SING OFFICER DID NOT RECORD ANY DISSATISFACTION OVER THE AMOUNT OF DISALLOWANCE DETERMINED BY THE ASSESSEE U/S 14A OF THE ACT, HAVING REGARD TO THE A CCOUNTS OF THE ASSESSEE. FURTHER, WE NOTICE THAT THE AO HAS PROCEEDED ON THE ERRONEOUS PRESUMPTION THAT THE APPLICATION OF RULE 8D IS MAND ATORY IN NATURE. FURTHER THE AO HAS ALSO MADE CERTAIN OBSERVATIONS, WHICH ARE INCONSISTENT WITH THE OBSERVATIONS MADE BY HIGH COURTS. (A) FIRST OF ALL, THE ASSESSEE DOES NOT HOLD ANY SE CURITY AS ITS INVESTMENT, WHERE AS THE AO HAS PROCEEDED TO MAKE O BSERVATIONS ON SOURCES OF FUNDS FOR MAKING INVESTMENTS. THIS FACT SHOWS THAT THE AO HAS NOT UNDERSTOOD THE FACTS CORRECTLY. (B) SECONDLY, THE AO HAS TAKEN THE VIEW THAT THE BO RROWED FUNDS SHOULD BE CONSIDERED AS USED FOR MAKING INVESTMENTS , WHICH IS ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 15 AGAINST THE PRINCIPLES LAID DOWN BY HONBLE BOMBAY HIGH COURT IN THE CASE OF HDFC BANK LTD (366 ITR 505). (C) THIRDLY, THE AO HAS EXPRESSED THE VIEW THAT MA KING OF INVESTMENTS AND EARNING OF EXEMPT INCOME REQUIRES E FFORTS. THIS IS CONTRARY TO THE FOLLOWING OBSERVATIONS MADE BY HON BLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD (SUPRA): - 40.. IT IS TO BE KEPT IN MIND THAT IN THOSE CASES WHERE SHARES ARE HELD AS STOCK IN TRADE AS BUSINESS PROPO SITION. WHETHER DIVIDEND IS EARNED OR NOT BECOMES IMMATERIA L. IN FACT, IT WOULD BE A QUIRK OF FATE THAT WHEN THE INV ESTEE COMPANY DECLARED DIVIDEND, THOSE SHARES ARE HELD BY THE ASSESSEE, THOUGH THE ASSESSEE HAS TO ULTIMTELY TRADE THOSE SHARES BY SELLING THEM TO EARN PROFITS. (D) FOURTHLY, THE AO HAS OBSERVED THAT THE HONBL E DELHI HIGH COURT HAS HELD IN THE CASE OF CHEMINVEST LTD (317 I TR 86) THAT DISALLOWANCE U/S 14A CAN BE IN A YEAR IN WHICH NO E XEMPT INCOME HAS BEEN EARNED OR RECEIVED BY THE ASSESSEE. THIS INTERPRETATION OF THE AO IS NOT CORRECT AS THE HONBLE DELHI HIGH COU RT HAS HELD OTHERWISE, I.E., NO DISALLOWANCE IS REQUIRED WHEN T HERE IS NO EXEMPT INCOME. THUS, WE NOTICE THAT THE AO HAS PROCEEDED TO INVOKE THE PROVISIONS OF RULE 8D OF THE I.T RULES, WITHOUT SHOWING THAT HE WAS NO T SATISFIED WITH THE WORKINGS GIVEN BY THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. FURTHER, THE UNDERSTANDING OF AO WITH RE GARD TO THE DISALLOWANCE U/S 14A OF THE ACT IS INCONSISTENT WIT H THE PRINCIPLES LAID DOWN BY THE HONBLE HIGH COURTS AND SUPREME COURT. 16. IN VIEW OF THE FOREGOING DISCUSSIONS, WE ARE OF THE VIEW THAT THE LD CIT(A) WAS JUSTIFIED IN HOLDING THAT THE AO WAS NOT JUSTIFIED IN INVOKING RULE 8D TO COMPUTE DISALLOWANCE U/S 14A, WITHOUT SH OWING THAT HE WAS NOT SATISFIED WITH THE AMOUNT OF DISALLOWANCE WORKE D OUT BY THE ASSESSEE. ACCORDINGLY WE UPHOLD THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE. ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 16 17. FURTHER, THE LD CIT(A) HAS NOTICED THAT THE ASSESSEE HAS HELD THE SHARES AS ITS STOCK-IN TRADE AND HENCE THERE IS NO INVESTMENT IN SHARES HELD BY THE ASSESSEE. ACCORDINGLY, THE LD CIT(A) H AS HELD THAT THE VALUE OF INVESTMENT FOR THE PURPOSE OF RULE 8D(2)(II) AND (I II) WILL BE NIL. IN THAT CASE, THERE WILL BE NO DISALLOWANCE UNDER RULE 8D O F THE I.T RULES. THESE OBSERVATIONS OF LD CIT(A) WOULD SHOW THAT EVEN IF T HE PROVISIONS OF RULE 8D IS HELD TO BE APPLICABLE FOR A MOMENT, EVEN THEN TH ERE WILL BE NO DISALLOWANCE UNDER THE SAID RULE IN THE INSTANT CAS E, SINCE THE ASSESSEE DID NOT HOLD ANY SHARES AS ITS INVESTMENTS. IN THE ABSENCE OF ANY INVESTMENT, THE COMPUTATION PROVISIONS OF RULE 8D W OULD FAIL. IN OUR VIEW, THERE IS MERIT IN THE ABOVE SAID OBSERVATIONS MADE BY LD CIT(A). 18. THE LD CIT(A) HAS ALSO TAKEN SUPPORT OF THE DECISION RENDERED BY HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD (SUPRA) AND THE DECISION RENDERED BY CO-ORDINATE BENCH IN THE CASE OF INDIA ADVANTAGE SECURITIES LTD (SUPRA) TO HOLD THAT THE DISALLOWANC E OF INTEREST IN RELATION TO THE DIVIDEND RECEIVED FROM TRADING SHARES COULD NOT BE MADE. HOWEVER, WE ARE UNABLE TO AGREE WITH THE ABOVE SAID OBSERVATION S OF LD CIT(A), IN VIEW OF THE FOLLOWING OBSERVATIONS MADE BY HONBLE SUPRE ME COURT IN THE CASE OF MAXOPP INVESTMENT LTD (SUPRA):- 39. IN THOSE CASES, WHERE SHARES ARE HELD AS STOC K-IN-TRADE, THE MAIN PURPOSE IS TO TRADE IN THOSE SHARES AND EARN P ROFITS THEREFROM. HOWEVER, WE ARE NOT CONCERNED WITH THOSE PROFITS WH ICH WOULD NATURALLY BE TREATED AS INCOME UNDER THE HEAD PR OFITS AND GAINS FROM BUSINESS AND PROFESSION. WHAT HAPPENS IS THAT, IN THE PROCESS, WHEN THE SHARES ARE HELD AS STOCK-IN-TRAD E, CERTAIN DIVIDEND IS ALSO EARNED, THOUGH INCIDENTALLY, WHICH IS ALSO AN INCOME. HOWEVER, BY VIRTUE OF SECTION 10(34) OF THE ACT, THIS DIVIDEND INCOME IS NOT TO BE INCLUDED IN THE TOTAL INCOME AN D IS EXEMPT FROM TAX. THIS TRIGGERS THE APPLICABILITY OF SECTION 14 A OF THE ACT, WHICH IS BASED ON THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE INCOME AS HELD IN WALFORT SHARE AND STOCK BROKERS P LTD CASE. THEREFORE, TO THAT EXTENT, DEPENDING UPO N THE FACTS OF EACH CASE, THE EXPENDITURE INCURRED IN ACQUIRING THOSE S HARES WILL HAVE TO BE APPORTIONED. HENCE, EVEN IF THE SHARES ARE HELD AS STOCK IN TRAD E, THE DISALLOWANCE U/S 14A SHALL BE TRIGGERED ONCE EXEMPT INCOME IS EARNED BY THE ASSESSEE. ITA NOS. 5207 & 5208/MUM/2016 M/S. RARE ENTERPRISES 17 19. WE HAVE NOTICED THAT THE ASSESSEE HAS DISALL OWED A SUM OF RS.6.01 LAKHS AND RS.10.46 LAKHS IN AY 2012-13 AND 2013-14 RESPECTIVELY U/S 14A OF THE ACT. WE HAVE UPHELD THE VIEW TAKEN BY L D CIT(A) THAT THE ASSESSING OFFICER WAS NOT CORRECT IN LAW IN APPLYIN G THE PROVISIONS OF RULE 8D IN BOTH THE YEARS, SINCE THE AO HAS FAILED TO SH OW/RECORD, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, THAT HE WAS NOT SATISFIED WITH THE DISALLOWANCE COMPUTED BY THE ASSESSEE. UNDER THESE SET OF FACTS, WE HAVE UPHELD THE ORDER PASSED BY LD CIT(A) IN SETTING ASI DE THE DISALLOWANCE WORKED OUT BY THE AO. WE HAVE ALSO NOTICED THAT TH E HONBLE SUPREME COURT HAS HELD IN THE MAXOPP INVESTMENT LTD (SUPRA) THAT THE DISALLOWANCE U/S 14A SHALL BE TRIGGERED IF EXEMPT INCOME IE. EAR NED, EVEN IF THE SHARES ARE HELD AS STOCK IN TRADE. UNDER THESE SET OF FAC TS, THE DISALLOWANCE WORKED OUT BY THE ASSESSEE SHOULD BE CONSIDERED AS MEETING THE REQUIREMENTS OF SEC.14A OF THE ACT. ACCORDINGLY WE UPHOLD THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE IN BOTH THE YEARS UNDER CONSIDERATION. 20. IN THE RESULT, BOTH THE APPEALS OF THE REVEN UE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST OCTOBER, 2018. SD/ - SD/ - (PAWAN SINGH) (B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 1 ST OCTOBER, 2018 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) -49, MUMBAI 4. THE PR. CIT, CENTRAL-4, MUMBAI 5. THE DR, I BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.