Oswal Woollen Mills Ltd., Ludhiana V. Addl. CIT, Ludhiana

ITA 53/CHANDI/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57707 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-03-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 17-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Gift; Opportunity of being heard; Earning of tax free income; Retrospective amendment; Capital expenditure
• Section: 43B; 14A; 37(1); 147; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES B CHANDIGARH BEFORE SHRI H.L.KARWA, HON'BLE, VICE PRESIDENT AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA NO. 16/CHD/2012 ASSESSMENT YEAR: 2008-09 THE DCIT, VS M/S OSWAL WOOLLEN MILLS LTD., CIRCLE VII, SHERPUR, LUDHIANA LUDHIANA PAN NO. AAACO1973F (APPELLANT) (RESPONDENT) & ITA NO. 53/CHD/2012 ASSESSMENT YEAR: 2008-09 M/S OSWAL WOOLLEN MILLS LTD., VS THE ADDL.CIT, SHERPUR, LUDHIANA RANGE VII, LUDHIANA LUDHIANA PAN NO. AAACO1973F APPELLANT BY : SHRI AKHILESH GUPTA, RESPONDENT BY : SHRI NAVDEEP SHARMA DATE OF HEARING : 02.03.2012 DATE OF PRONOUNCEMENT : 06.03.2102 ORDER PER H.L.KARWA, VP THESE TWO APPEALS FILED BY THE REVENUE AND ASSESSEE ARE DIRECTED AGAINST THE ORDER OF CIT(A)-II, LUDHIANA DATED 9.11 .2011 RELATING TO ASSESSMENT YEAR 2008-09. 2 2. FIRSTLY, WE WILL TAKE UP REVENUES APPEAL I.E. I TA NO.16/CHD/2012. GROUND NO.1 OF THE APPEAL READS AS UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A)-II LUDHIANA HAS ERRED IN ALLOWING THE EXPENS ES AMOUNTING TO RS. 33,895/- THOUGH RELATING TO PREVIO US YEAR BUT CRYSTALLIZED AND PAID DURING THE YEAR. 3. THE FACTS RELATING TO THIS ISSUE ARE THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY HAD PAID EXPENSE S OF RS. 33,01,275/- IN ITS VARIOUS UNITS WHICH WERE RELATED TO EARLIER YEARS. OUT OF THE SAID AMOUNT CLAIMED, THE ASSESSING OFFICER DISALLOWED AND ADDED RS. 33,895/- BY REJECTING THE CONTENTION OF THE ASSESSEE COMPANY. THE ASSESSI NG OFFICER DISCUSSED THIS ISSUE AT PAGES 2 OF 4 IN PARA 1 OF THE ASSESSMENT O RDER. 4. ON APPEAL, THE CIT(A) DELETED THE ADDITION FOR T HE REASONS STATED IN PARA 3 OF THE IMPUGNED ORDER, WHICH READS AS UNDER:- 3. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AND ARGUMENTS ADVANCED BY THE LD. A.R OF THE APPELLANT COMPANY AND PERUSED THE RELEVANT DOCUMENTS PRODUCED BEFORE ME. IT WAS SEEN THAT RS. 16,275/- ON ACCO UNT OF TRADE DISCOUNT WAS DECIDED TO BE PAID DURING THE YE AR UNDER APPEAL, THOUGH THIS TRADE DISCOUNT WAS ALLOWE D AT THE SALE MADE BY THE PARTY M/S VINDH TRADERS, LUCKN OW, DURING THE IMMEDIATE PRECEDING YEAR. SINCE THE LI ABILITY WAS CRYSTALLIZED, DETERMINED AND PAID DURING THE Y EAR UNDER APPEAL, THEREFORE, IT IS ALLOWABLE DURING THI S YEAR. SIMILARLY, THE TRADE DISCOUNT WAS DETERMINED AND ALLOWED TO THE PARTY M/S ROHIT ENTERPRISES, BRAILLY , ON THE SALES MADE BY THE SAID PARTY IN THE PRECEDING Y EAR. SINCE THERE WAS DISPUTE WHICH WAS SETTLED DURING TH E YEAR, THEREFORE, IT IS AN ALLOWABLE DURING THE YEAR UNDER CONSIDERATION. REGARDING CASH DISCOUNT ALLOWED BY THE APPELLANT TO M/S J. K. SONS, THE DISPUTE BETWEEN THE PARTY AN D THE 3 APPELLANT COMPANY AROSE. THE PARTY WAS CLAIMING CAS H DISCOUNT ON THE PAYMENTS MADE BY M/S J. K. SONS TO THE APPELLANT COMPANY ON 30/6/2006. THE SAID DISPUTE WA S SETTLED DURING THE YEAR AND THE APPELLANT COMPANY ALLOWED 7.5% CASH DISCOUNT ON PAYMENT OF RS. 1,50 L AC, WHICH COMES TO RS.11,250/- AND RIGHTLY CLAIMED DURI NG THE YEAR UNDER CONSIDERATION. THEREFORE, IT IS ALLO WABLE DURING THE YEAR ONLY. FROM THE FACTS, DOCUMENTS AND THE ARGUMENTS, THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE EXPENDIT URE OF RS.33,895/-, BEING THE LIABILITY CRYSTALLIZED AND P AID DURING THE YEAR UNDER APPEAL. THIS GROUND OF APPEAL IS THEREFORE ALLOWED. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE ALS O PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT A SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE A BENCH OF THE TRIBUNAL IN ASSESSEES CAS E IN ITA NO.1349/CHD/2011 RELATING TO ASSESSMENT YEAR 2007-08. IN THAT YEAR, THERE WAS A DISPUTE OF RS. 58,878/-. THE TRIBUNAL VIDE ITS ORDER DATED 27.12. 2011 CONFIRMED THE ORDER OF CIT(A) STATING THAT THE EXPENDITURE OF RS. 58,878/- BEING THE LIABILITY CRYSTALLIZED OF EARLIER YEAR AND PAID DURING THE YE AR UNDER APPEAL IS ALLOWABLE EXPENDITURE. THE ORDER OF THE TRIBUNAL REFERRED TO ABOVE IS SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT YEAR. FOLLO WING THE ORDER OF THE TRIBUNAL, WE HOLD THAT CIT(A) WAS JUSTIFIED IN DIRE CTING THE ASSESSING OFFICER TO ALLOW EXPENSES WHICH WAS CRYSTALLIZED AND PAID D URING THE YEAR, THOUGH RELATED TO EARLIER YEAR. IN VIEW OF THE ORDER OF T HE TRIBUNAL, WE UPHOLD THE ORDER OF CIT(A) REPRODUCED HEREINABOVE. THE GROUND NO.1 IS DISMISSED. 6. GROUND NO.2 OF THE APPEAL READS AS UNDER:- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A)-II, LUDHIANA HAS ERRED IN DELETING THE ADDIT ION OF RS. 4,75,471/- ON ACCOUNT OF ARTICLES DISTRIBUTED A MONG 4 BUSINESS ASSOCIATES ON VARIOUS OCCASIONS FOR WANT O F DETAIL OF PERSONS TO WHOM THE GIFTS WERE DISTRIBUTE D. 7. WHILE FRAMING THE ASSESSMENT, THE ASSESSING OFFI CER DISALLOWED RS. 4,75,471/- ON ACCOUNT OF ARTICLES DISTRIBUTED AMONG ST BUSINESS ASSOCIATES ON VARIOUS OCCASIONS INCLUDING DIWALI FOR WANT OF THE DETAIL OF PERSONS WHOM GIFTS WERE DISTRIBUTED. 8. ON APPEAL, THE CIT(A) ALLOWED THE CLAIM OF THE A SSESSEE FOLLOWING HIS OWN ORDER PASSED IN ASSESSEES CASE FOR ASSESSMENT YEAR 2007-08. 9. AFTER HEARING THE LD. REPRESENTATIVES OF BOTH THE PARTIES, WE FIN D THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE ORDER OF THE TRIBUNAL DATED 27.12.2011 IN ITA N O.1349/CHD/2011 IN ASSESSEES CASE RELATING TO ASSESSMENT YEAR 2007-08 . WHILE DECIDING A SIMILAR ISSUE, THE TRIBUNAL IN ASSESSMENT YEAR 2007-08 FOLL OWED THE ORDER OF ITAT CHANDIGARH BENCH B PASSED IN ASSESSEES CASE IN I TA NO. 594/CHD/2005 DATED 26.5.2006 RELATING TO ASSESSMENT YEAR 2001-02 . THE RELEVANT FINDINGS GIVEN BY THE TRIBUNAL IN ASSESSEES CASE IN ASSESSM ENT YEAR 2001-02 READS AS UNDER:- 8 WE HAVE HEARD BOTH THE PARTIES AT LENGTH AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RE CORD. IN THE PRESENT CASE IT IS NOT IN DISPUTE THAT THE ASSESSEE DISTRIBUTED THE GIFTS ON THE OCCASION OF DIWALI. T HE ASSESSING OFFICER WHILE MAKING THE DISALLOWANCE HAD CONSIDERED THAT THOSE EXPENSES WERE NOT RELATED TO THE BUSINESS OF THE ASSESSEE. SIMILAR ISSUE HAD BEEN D ECIDED BY THE TRIBUNAL IN ITA NO. 895/CHANDI/2000 IN THE C ASE OF DCIT C.C. V, LUDHIANA V NAHAR INTERNATIONAL LTD, LUDHIANA (SUPRA). IN THE DETAILED ORDER DATED 24.2 .2005 IN THE AFORESAID REFERRED TO CASE, ITAT CHANDIGARH BENCH A HAS HELD AS UNDER: 5 16 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND THE MATERIAL AVAILABLE ON RECORD. IN THE INSTANT CASE, IT IS NOT IN DISPUTE THAT THE EXPENSES HAD BE EN INCURRED BY THE ASSESSEE ON THE OCCASION OF DIWALI. THE ASSESSING OFFICER DISALLOWED 50% OF EXPENSES CONSIDERING THE SAME IN THE NATURE OF ENTERTAINMENT ON THE BASIS THAT THE ASSESSEE HAD NOT FILED THE DETAILS OF PERSONS TO WHOM THOSE GIFTS WERE DELIVERED. NO OTHER BASIS HAD BEEN GIVEN. IN OUR OPINION, THE REASONS GIVEN BY THE ASSESSING OFFICER IN MAKING THE DISALLOWANCE WERE NOT SUFFICIENT PARTICULARLY WHEN IT IS CUSTOMARY TO INCUR SUCH TYP E OF EXPENSES ON THE OCCASION OF DIWALI. IT IS ALSO NOTICED FROM THE ASSESSMENT ORDER THAT THE ASSESSING OFFICER HAD MENTIONED THE NAMES OF THE PERSONS FROM WHOM THE PURCHASES WERE MADE. HE ALSO POINTED OUT THAT FEW OF THE ITEMS WERE SHAWL WHICH SHOWS THAT VOUCHERS/BILLS WERE AVAILABLE AND THOSE HAD BEEN CONSIDERED BY THE ASSESSING OFFICER. THEREFORE, IT CANNOT BE SAID THAT THE EXPENSES WERE NOT INCURRED BY THE ASSESSEE AND THE DETAILS OF EXPENSES WERE NOT AVAILABLE TO THE ASSESSING OFFICER. WE ARE OF THE VIEW THAT THE FACTS OF ASSESSEES CAS E ARE SIMILAR TO THE FACTS INVOLVED IN THE CASE OF NAHAR INTERNATIONAL LTD (SUPRA) SO, RESPECTFULLY FOLLOWIN G THE EARLIER ORDER OF THE TRIBUNAL DATED 24.2.2005 IN TH E CASE OF NAHAR INTERNATIONAL LTD (SUPRA), WE DO NOT SEE A NY MERIT IN THIS GROUND OF DEPARTMENTAL APPEAL. 10. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNA L PASSED IN ASSESSEES CASE REFERRED TO ABOVE, WE DISMISS THE GROUND RAISE D BY THE REVENUE. 11. GROUND NO 3 OF THE APPEAL READS AS UNDER:- 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A)-II LUDHIANA HAS ERRED IN DELETING ADDITION O F RS. 35,000/- MADE OUT OF TOTAL EXPENDITURE OF RS. 91,03 2/- INCURRED ON GUEST HOUSE. 12. AFTER HEARING THE LD. REPRESENTATIVES OF BOTH T HE PARTIES, WE FIND THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY 6 THE DECISION OF THIS BENCH OF THE TRIBUNAL DATED 27 .12.2011 IN ASSESSEES CASE IN ITA NO.1349/CHD/2011 RELATING TO ASSESSMENT YEAR 2007-08. THE RELEVANT FINDINGS OF THE TRIBUNAL READS AS UNDER:- 9. IN GROUND NO.4, THE REVENUE CHALLENGED THE DELETION OF ADDITION OF RS.35,000/- MADE OUT OF TOT AL EXPENDITURE OF RS.1,21,404/- INCURRED ON GUEST HOUS E. LD. 'AR' PLACED RELIANCE ON CO NO. 61/CHD/2004 FOR THE ASSESSMENT YEAR 1999-2000 IN THE CASE OF NAHAR INDUSTRIAL ENTERPRISES. BEFORE CIT(A), IT WAS CONT ENDED BY THE ASSESSEE THAT THE IMPUGNED ADDITION WAS MADE ON SURMISES AND CONJECTURES AND WITHOUT BRINGING RELEV ANT MATERIAL ON RECORD. GUEST HOUSE EXPENSES ARE ALLOW ABLE. ANY ADHOC DISALLOWANCE, WITHOUT ANY EVIDENCE, IS NO T SUSTAINABLE IN THE EYES OF LAW. THIS IS ESTABLISHE D PROPOSITION OF LAW THAT ADDITION CANNOT BE MADE ON SURMISES AND CONJECTURES. IT SHOULD BE FOUNDED ON COGENT AND CREDIBLE EVIDENCE. IN THE PRESENT CASE, WE DO NOT FIND ANY EVIDENCE BROUGHT ON RECORD BY THE AO TO SUPPORT HIS ADDITION. THEREFORE, FINDINGS OF THE CIT(A) ARE UP HELD AND THIS GROUND OF APPEAL IS DISMISSED. 13. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNA L (SUPRA), WE DO NOT SEE ANY MERIT IN THIS GROUND OF APPEAL AND DISMISS THE SAME. 14. GROUND NO.4 OF THE APPEAL READS AS UNDER:- 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A)-II , LUDHIANA HAS ERRED IN DELETING ADDITION OF RS. 11,462/- ON ACCOUNT OF SUBSCRIPTION EXPENSES OF CLU B, OR DIRECTOR AND EMPLOYEES OF THE COMPANY . 15. AFTER HEARING LD. REPRESENTATIVES OF BOTH THE P ARTIES, WE FIND THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF THIS BENCH OF THE TRIBUNAL PASSED I N ASSESSEES CASE IN ITA NO.1349/CHD/2011 RELATING TO ASSESSMENT YEAR 2007-0 8. THE TRIBUNAL VIDE ITS ORDER DATED 27.12.2011 HELD AS UNDER:- 7 10. IN GROUND NO.5, REVENUE CONTENDED, THAT CIT(A) ERRED IN DELETING ADDITION OF RS.15,458/- ON ACCOUN T OF SUBSCRIPTION EXPENSES OF CLUB, OF DIRECTOR AND EMPL OYEES OF THE COMPANY. LD. 'DR' PLACED RELIANCE ON THE ASSESSMENT ORDER AND LD. 'AR' PLACED RELIANCE ON TH E ORDER OR THE CIT(A) AND CONTENDED THAT THE ISSUE ST ANDS COVERED IN ITS FAVOUR VIDE ITA NO. 594/CHD/2005 (ASSESSMENT YEAR 2001-02) IN ASSESSEE'S OWN CASE. 11. WE HAVE CAREFULLY PERUSED THE FACTUAL SITUATION OF THE PRESENT CASE, THE ASSESSMENT ORDER AND THE ORDE R PASSED BY THE TRIBUNAL IN ASSESSEE'S OWN CASE AND F OUND THAT SUCH EXPENSES ARE ADMISSIBLE, HENCE, SAME ARE ALLOWED. THERE IS NO INFIRMITY IN THE ORDER OF THE CIT(A), THEREFORE, THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 16. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNA L REFERRED TO ABOVE, WE UPHOLD THE ORDER AND DISMISS GROUND NO.4 OF THE APP EAL. 17. GROUND NO.5 OF THE APPEAL READS AS UNDER:- 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A)-II, LUDHIANA ERRED IN DIRECTING THE ASSESSIN G OFFICER TO ALLOW EXPENDITURE OF RS. 4,04,791/- PAID TO ESI DEPARTMENT BEING ADDITIONAL AMOUNT CHARGED BY ESI DEPARTMENT FOR DELAY IN DEPOSITING ESI PAYMENT. 18. DURING THE YEAR UNDER CONSIDERATION, THE ASSESS EE CLAIMED RS. 4,04,791/- PAID TO EMPLOYEES STATE INSURANCE DEPARTMENT, CHAND IGARH BEING THE ADDITIONAL AMOUNT CHARGED BY ESI DEPARTMENT FOR DEL AY IN DEPOSING ESI PAYMENT. THE ASSESSING OFFICER DID NOT ALLOW THE C LAIM OF THE ASSESSEE ON THE GROUND THAT THE SAID AMOUNT WAS NOTHING BUT THE PEN ALTY LEVIED BY ESI DEPARTMENT. 19. ON APPEAL, THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE FOR THE REASONS STATED IN PARA 12 OF THE IMPUGNED ORDER. 8 20. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE AL SO PERUSED THE MATERIALS AVAILABLE ON RECORD. IT IS APPARENT FROM THE RECOR D THAT THE ASSESSEE COMPANY PAID AN AMOUNT OF RS. 4,04,791/- TO ESI DEPARTMENT ON ACCOUNT OF ADDITIONAL AMOUNT LEVIED BY ESI DEPARTMENT, CHANDIGARH FOR DEL AY IN DEPOSITING ESI PAYMENT. THE ASSESSEE CLAIMED THE SAID EXPENDITURE AS REVENUE IN NATURE. RELIANCE WAS PLACED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF PRAKASH COTTON MILLS P. LTD V CIT (1993) 201 ITR 684. SHRI NEERAJ SHARMA, LD. COUNSEL FOR THE ASSESSEE ALSO RELIED UP ON ANOTHER JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF STANDARD BATTE RIES LTD V CIT (1995) 211 ITR 444 (SC). IN THESE DECISIONS, IT HAS BEEN HELD THAT ANY AMOUNT WHICH IS COMPENSATORY IN NATURE IS AN ALLOWABLE EXPENDITURE IN RESPECT OF ITS NOMENCLATURE A PENALTY. SHRI NEERAJ SHARMA, LD. CO UNSEL FOR THE ASSESSEE FURTHER FURNISHED A COPY OF ORDER DATED 1.1.2008 PA SSED BY REGIONAL OFFICER, ESIC, CHANDIGARH UNDER SECTION 85(B) OF THE ESI ACT , 1948. AS PER THIS ORDER, THE IMPUGNED AMOUNT PAID BY THE ASSESSEE TO ESI DEP ARTMENT IS AN ADDITIONAL AMOUNT FOR DELAY OF PAYMENT ON ESI CHARGES. SINCE THE PARTICULAR AMOUNT OF ESI WAS AN ALLOWABLE EXPENDITURE AND WAS ALLOWED BY THE ASSESSING OFFICER U/S 43B OF THE ACT ON ACTUAL BASIS, THEREFORE, ANY AMOUNT OVER AND ABOVE PAID BY THE COMPANY FOR DELAY IN THE PAYMENT OF THE AMOU NT IS NOTHING BUT COMPENSATION AND IS COMPENSATORY IN NATURE. THE LD . CIT(A) HAS ALSO CATEGORICALLY HELD THAT THE IMPUGNED PAYMENT PAID B Y THE COMPANY TO ESI DEPARTMENT FOR DELAY IN PAYMENTS IS NOTHING BUT COM PENSATION AND IS COMPENSATORY IN NATURE. THERE IS NO MATERIAL ON REC ORD TO CONTROVERT THE CATEGORICAL FINDINGS GIVEN BY THE CIT(A). IN OUR V IEW, THE SAID AMOUNT IS NOT A PENALTY BUT DAMAGES PAID TO ESI DEPARTMENT AND HE NCE COMPENSATORY IN 9 CHARACTER. THUS, IN VIEW OF THE DECISIONS OF THE H ON'BLE SUPREME COURT REFERRED TO ABOVE, THE IMPUGNED AMOUNT IS TO BE ALL OWED U/S 37(1) OF THE INCOME TAX ACT. ACCORDINGLY, WE UPHOLD THE ORDER O F CIT(A) AND DISMISS THE GROUND RAISED BY THE REVENUE. 21. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. 22. NOW WE WILL TAKE UP ASSESSEES APPEAL I.E. ITA NO. 53/CHD/2012 RELATING TO ASSESSMENT YEAR 2008-09. 23. GROUND NO.1 OF THE APPEAL READS AS UNDER:- 1. THAT THE LD. CIT (A)-II ERRED IN LAW AND ON FACTS I N NOT DELETING THE ADDITION OF RS. 1,00,6483/- MADE B Y THE LD. ASSESSING OFFICER U/S 14A OF THE ACT BY APPLYING RU LE 8D FOR EXPENSES ALLEGED TO HAVE BEEN INCURRED TO EARN DIVI DEND INCOME. DIRECTIONS MAY BE GIVEN NOT TO DISALLOW ANY EXPENDITURE U/S 14A OF THE ACT MERELY ON SURMISES & CONJECTURES IN VIEW OF HON'BLE JURISDICTIONAL HIGH COURT'S DECISION IN THE CASE OF CIT VS HERO CYCLES LTD DATE D 4/11/2009 IN ITA NO. 331 OF 2009. HOWEVER WITHOUT PREJUDICE TO THE ABOVE SUBMISSIONS THE LD. CIT(A -II, LUDHIANA HAS FURTHER ERRED IN LAW AND FA CTS IN NOT DIRECTING THE LD. ASSESSING OFFICER TO MAKE DISALLO WANCE U/S 14A BY DISALLOWING SOME ADMINISTRATIVE EXPENSES ON PROPORTIONATE BASIS WHICH WORKS OUT AT RS. 23,560/- AS SUBMITTED BY THE HUMBLE APPELLANT DURING THE ASSESS MENT PROCEEDINGS ON THE BASIS OF ITAT DECISION IN EARLIE R YEARS. 24. THE ASSESSING OFFICER HAS DISCUSSED THIS ISSUE IN PARA 5 OF THE ASSESSMENT ORDER WHICH READS AS UNDER:- 5. DISALLOWANCE U/S 14A THE COMPANY HAS MADE INVESTMENT IN SHARES FROM YEAR TO YEAR. THE TOTAL INVESTMENT AS ON 31/3/2008 AS SHOWN IN THE 10 BALANCE SHEET IS AT RS. 13.39 CRORE. THE ASSESSEE H AS EARNED DIVIDEND INCOME OF RS. 1893345/- ON THE SAID INVESTMENT. THE ASSESSEE WAS ASKED TO COMPUTE THE EXPENSES INCURRED TO EARN THE DIVIDEND INCOME WHICH HAS BEEN CLAIMED TO BE EXEMPT U/S 10(34) OF THE INCOME TAX A CT. THE ASSESSEE WAS ALSO ASKED TO EXPLAIN AS TO WHY THE DISALLOWANCE U/S 14A SHOULD NOT BE MADE AS PER RULE 8D OF THE INCOME TAX RULES. IN REPLY TO THE QUERY THE ASS ESSEE FILED ITS WRITTEN REPLY DATED 17/8/2010 WHICH IS REPRODUC ED AS UNDER 'DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE C OMPANY HAS EARNED EXEMPT INCOME U/S 10(34) & 10(38) COMPRI SING OF DIVIDEND INCOME OF RS. 1893345/- AND LONG TERM C APITAL GAIN OF RS.1499596/-. NO EXPENSES WERE INCURRED TO EARN THE SAID DIVIDEND INCOME. ALSO NO COLLECTION CHARGES WE RE PAID FOR THE CREDIT OF DIVIDEND WARRANTS AS THE WARRANTS WERE SENT FOR LOCAL CLEARING. THE INVESTMENT MADE DURING THE YEAR AS WELL AS IN EARLIER YEAR WAS MADE FROM CURRENT ACCRU ALS, RESERVES AND SURPLUS AVAILABLE WITH THE COMPANY. YO UR KIND SELF WOULD APPRECIATE THAT SUFFICIENT FUNDS IN THE FORM OF RESERVES WERE AVAILABLE WITH THE COMPANY TO MAKE TH E INVESTMENTS. SINCE NO AMOUNT WAS BORROWED FOR THE P URPOSE OF MAKING INVESTMENTS, THEREFORE NEITHER INTEREST N OR ANY OTHER EXPENDITURE OUT OF ADMINISTRATIVE EXPENSES CA N BE DISALLOWED U/S 14A OF THE ACT. HOWEVER, WITHOUT PREJUDICE TO THE ABOVE SUBMISSIONS IF AT ALL SOME EXPENSES ARE ATTRIBUTABLE FOR EARNING THE SAID DIVIDEND INCOME OF RS. 1893345/- THE SAME PRINCIPLE FOR COMPUTING SUCH AMOUNT AS LAID DOWN BY THE HON'BLE I TAT IN CONO 17/2001 FOR ASSTT. YEAR 1997-98 IN CASE OF NAH AR INDUSTRIAL ENTERPRISES LTD ONE OF THE GROUP COMPAN Y AND ALSO FOLLOWED BY YOUR PREDECESSOR IN ASSESSMENT PROCEEDINGS FOR ASSTT. YEAR 2006-07 ARE WORKED OUT AS UNDER. DISALLWOANCE U/S 14-A (AMOUNT IN RS.) IN CASE U/S 115HB IN CASE OF REGULAR COMPUTATION 1.LONG TERM CAPITAL GAIN 0 14,99,596 2.AMOUNT OF DIVIDEND INCOEM 18,93,345 18,93,345 18,93,345 32,92.941 11 3.OPERATING INCOME 442,46,11,707 442,46,11,707 4. %OF DIVIDEND INCOME 0.04 0.08 5. AMOUNT OF EXPENSES OUT ADMINISTRATIVE EXPRESES 2,90,74,500 2,90,74,550 6.PROPORIONATE AMOUNT OF DISALLOWANCE OF ADMINISTRATIVE EXPNSES TO EARN DIVIDEND INCOME 11,630 23,560 ADMINISTRATIVE EXPENSES 1.MANAGERIAL REMUNERATION 1,86,25,000 2.COST AUDIT 66,410 3.AUDITORS REMUNERATION 5,37,369 4. DIRECTORS MEETING FEE 1,00,000 5. POSTAGE, TELEGRAM & TELEPHONE 60,77,101 6.PRINTING & STATIONERY 33,68,670 2,90,74,550 AFTER GOING THROUGH THE SUBMISSIONS IT IS FOUND THA T THE ASSESSEE HAS COMPUTED THE DISALLOWANCE ON THE BASIS OF EARLIER Y EAR DISALLOWANCE MADE IN ACCORDANCE WITH THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL IN THE CASE OF GROUP COMPANY M/S NAHAR IND USTRIAL ENTERPRISES LTD. HOWEVER, SINCE THE RULE 8D HAS COM E INTO EXISTENCE AND IS APPLICABLE IN THE YEAR UNDER CONSIDERATION, THEREFORE THE DISALLOWANCE UNDER RULE 8D IS COMPUTED AT RS. 10300 43/- WHICH IS AS UNDER: DISALLOWANCE U/S 14A AS PER RULE 8-D 1. EXPENSES DIRECTLY RELATABLE TO INCOME WHICH DOES NO T FORM PART NIL 12 OF TOTAL INCOME 2. INCOME WHERE ASSESSEE HAS INCURRED EXPEND ITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. INTEREST 14871450 X 125099353 AVQ VALUE OF INVESTME NT 404546 4598751517 AVG. VALUE OF TOTAL ASSETS 3. THE AMOUNT OF HALF PERCENT OF AVERAGE VALUE OF INVE STMENT 0.5% 625497 OF RS. 125099353 FROM WHICH EXEMPT INCOME AROSE. __________ 1030043 LESS: ALREADY ADDED BACK 23560 1006483 ACCORDINGLY, THE ADDITION OF RS. 1006483/- IS MADE TO THE TOTAL INCOME OF THE ASSESSEE COMPANY. THOUGH THE ASSESSEE HAS COMPUTED THE DISALLOWANCE U/S 14A AT RS. 235607- IN ITS RETURN ON THE BASIS OF HON'BLE ITAT IN GROUP COMPANY CASE M/S NAHAR INDUSTRIAL ENTERPRISES LTD, BUT DURING THE YEAR UND ER CONSIDERATION DISALLOWABLE U/S 14A HAS TO BE COMPUTED AS PER RULE 8-D OF THE INCOME TAX RULES AS DISCUSSED ABOVE . 25. ON APPEAL, THE CIT(A) UPHELD THE ORDER OF ASSES SING OFFICER FOR THE REASONS STATED IN PARA 9 TO 10 OF THE IMPUGNED ORDE R. 26. SH NAVDEEP SHARMA, LD. COUNSEL FOR THE ASSESSEE VEHEMENTLY ARGUED THAT ASSESSING OFFICER WAS NOT JUSTIFIED IN APPLYIN G RULE 8-D OF THE INCOME TAX RULES, 1962 AND THEREBY MAKING A DISALLOWANCE O F RS. 10,06,483/- U/S 14A OF THE INCOME TAX ACT, 1961(IN SHORT 'THE ACT'),WIT HOUT ASSUMING THE PROPER JURISDICTION AND IN VIEW OF THE FACT THAT THE ASSES SEE ITSELF DISALLOWED RS. 23,560/- IN ITS RETURN ON PROPORTIONATE BASIS ONCE SUCH CLAIM WAS MADE BY THE ASSESSEE. THE ASSESSING OFFICER WAS REQUIRED TO APP LY HIS MIND TO THE PLEA OF THE ASSESSEE.HE FURTHER SUBMITTED THAT THE ASSESSIN G OFFICER WAS ALSO EXPECTED TO GIVE FINDINGS THAT HE IS NOT SATISFIED WITH THE CORRECTIONS OF THE CLAIM MADE BY THE ASSESSEE. SH NAVDEEP SHARMA LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSING OFFICER IS ALSO EXPECT ED TO SPELL OUT THE REASONS 13 AS TO WHY THE CLAIM MADE BY THE ASSESSEE CAN NOT BE ACCEPTED. IT IS AFTER DOING SO THAT ASSESSING OFFICER CAN RESORT TO THE PROVISI ONS OF RULE 8-D OF THE INCOME TAX RULES. RELIANCE WAS PLACED ON THE FOLLO WING DECISIONS:- I) MULTI COMMODITY EXCHANGE OF INDIA LTD V DCIT (ITA N O. 1050/MUMBAI/2010 AY 2008-09) ORDER DATED 5.8.2011 II) BALARAMPUR CHINI MILLS LTD V DCIT (140 TTJ 73) (ITA NO. 504/KOL/2011 AY 2008-09) ORDER DATED 29.7.2011 III) DCIT V JINDAL PHOTO LTD (ITA NO. 814/DEL/2011, AY : 2008-09) -ORDER DATED 23.9.2011 27. IN VIEW OF THE ABOVE DECISIONS, SHRI NAVEEP SHA RMA, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ORDER OF CIT(A) ON THIS ISSUE MAY BE SET ASIDE AND THE ISSUE MAY BE REMANDED TO THE ASSESSING OFFICER FOR FRESH CONSIDERATION. 28. SHRI AKHILESH GUPTA, LD. DR STRONGLY SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE DECISIONS RELIED UPON BY SHRI NAVDEEP SHARMA, LD. COUNSEL FOR THE ASSESSEE ARE NOT APPLIC ABLE TO THE FACTS OF THE PRESENT CASE. 29. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE AL SO PERUSED THE MATERIALS AVAILABLE ON RECORD. THE DECISION RELIED UPON BY T HE LD. COUNSEL FOR THE ASSESSEE WERE DULY CONSIDERED. 30. IN THE CASE OF MULTI COMMODITY EXCHANGE OF INDI A LTD V DCIT (SUPRA), THE ITAT MUMBAI BENCH HELD AS UNDER:- 9. WE HAVE HEARD THE SUBMISSIONS OF THE ID. COUN SEL FOR THE ASSESSEE, WHO SUBMITTED THAT THE AO WAS NOT JUSTIFI ED IN APPLYING RULE 8D OF THE INCOME TAX RULES. IN THIS REGARD THE ID. COUNSEL 14 FOR THE ASSESSEE DREW OUR ATTENTION TO THE PROVISIO NS OF SECTION 14A(2) OF THE ACT AND SUBMITTED THAT ASSESSEE HAD C LAIMED BEFORE THE AO THAT ONLY A SUM OF RS. 6,03,821/- CAN BE CON SIDERED AS EXPENSES INCURRED BY THE ASSESSEE IN RELATION TO IN COME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T. WHEN SUCH CLAIM IS MADE BY THE ASSESSEE THE AO WAS REQUIRED T O APPLY HIS MIND TO THE PLEA OF THE ASSESSEE. HE WAS ALSO EXPEC TED TO GIVE A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNE SS OF THE CLAIM MADE BY THE ASSESSEE. THE AO ALSO EXPECTED TO SPELL OUT THE REASONS AS TO WHY THE CLAIM MADE BY THE ASSESSEE CA NNOT BE ACCEPTED. IT IS ONLY AFTER DOING SO THAT THE AO CAN RESORT TO THE PROVISIONS OF RULE 8D OF THE RULES. IN THIS REGARD OUT ATTENTION WAS ALSO DRAWN TO THE DECISION OF THE HON'BLE BOMBA Y HIGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURING CO. LTD., 328 ITR 81 (BOM), WHEREIN THE BOMBAY HIGH COURT HAS LAI D DOWN THAT RULE 8D CAN BE INVOKED ONLY IF THE AO REJECTS THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE REGAR DING EXPENSES INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN OTHER RESPECT S LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BE FORE THE REVENUE AUTHORITIES. 10. THE ID. D.R SUBMITTED THAT THE VERY FACT THAT THE AO INVOKED THE PROVISIONS OF RULE 8D OF THE RULES ONLY IMPLIES THAT HE WAS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENSES INCURRED IN EARNING THE EXEMPT INCOME. IN OTHER WORDS, IT WAS SUBMITTED BY THE ID. D,R THAT THE SAT ISFACTION OF THE AO IS IMPLIED. ON MERITS IT WAS SUBMITTED THAT THE AO HAS RIGHTLY APPLIED RULE 8D OF THE RULES AND THE ASSESS EE CANNOT HAVE ANY GRIEVANCE. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSION. THE HON'BLE BOMBAY HIGH COURT IN INCOME TAX APPEAL NO.626 OF 20 10 IN THE CASE OF GODREJ AND BOYCE MFG. CO.LTD. MUMBAI . VS. DY. COMMISSIONER OF INCOME TAX, RANGE 10(2),MUMBAI AND ANR. 328 ITR 81 (BOM) HAS HELD AS FOLLOWS: 'INSERTION OF SUBSECTIONS (2) AND (3) TO SECTION 14 A: 25. SUBSECTIONS (2) AND (3) OF SECTION 14A WERE INS ERTED BY AN AMENDMENT BROUGHT ABOUT BY THE FINANCE ACT OF 20 06 WITH EFFECT FROM 1 APRIL 2007. SUBSECTIONS (2) AND (3) PROVIDE AS FOLLOWS: '14A(2) THE ASSESSING OFFICER SHALL DETERMINE THE A MOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT 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 RELA TION TO 15 INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUBSECTION (2) SHALL ALSO APP LY 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: PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHA LL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECT ION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154 FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001.' (THE PROVISO WAS INSERTED EARLIER BY THE FINANCE AC T OF 2002 WITH RETROSPECTIVE EFFECT FROM 11.5.2001) UNDER SUBSECTION (2), THE ASSESSING OFFICER IS REQU IRED TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. THE METHOD, HAVING REGARD TO THE MEANIN G OF THE EXPRESSION 'PRESCRIBED 1 IN SECTION 2(33), MUST BE PRESCRIBED BY RULES MADE UNDER THE ACT. WHAT MERITS EMPHASIS IS T HAT THE JURISDICTION OF THE ASSESSING OFFICER TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, IN ACCORDANCE WITH THE PRESCRIBED METHOD, ARISES IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE WHICH THE ASSESSEE CLAIMS TO HAVE INCURRED IN RELATION TO INC OME WHICH DOES NOT PART OF THE TOTAL INCOME. MOREOVER, THE SATISFA CTION OF THE ASSESSING OFFICER HAS TO BE ARRIVED AT, HAVING REGA RD TO THE ACCOUNTS OF THE ASSESSEE. HENCE, SUB SECTION (2) DO ES NOT IPSO FACTO ENABLE THE ASSESSING OFFICER TO APPLY THE MET HOD PRESCRIBED BY THE RULES STRAIGHTAWAY WITHOUT CONSIDERING WHETH ER THE CLAIM MADE BY THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS CORRECT. THE ASSESSING OFFICER MUST, IN THE FIRST I NSTANCE, DETERMINE WHETHER THE CLAIM OF THE ASSESSEE IN THAT REGARD IS CORRECT AND THE DETERMINATION MUST BE MADE HAVING R EGARD TO THE ACCOUNTS OF THE ASSESSEE. THE SATISFACTION OF THE A SSESSING OFFICER MUST BE ARRIVED AT ON AN OBJECTIVE BASIS. IT IS ONL Y WHEN THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM O F THE ASSESSEE, THAT THE LEGISLATURE DIRECTS HIM TO FOLLOW THE METH OD THAT MAY BE PRESCRIBED. IN A SITUATION WHERE THE ACCOUNTS OF TH E ASSESSEE FURNISH AN OBJECTIVE BASIS FOR THE ASSESSING OFFICE R TO ARRIVE AT A SATISFACTION IN REGARD TO THE CORRECTNESS OF THE CL AIM OF THE ASSESSEE OF THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME , THERE WOULD BE NO WARRANT FOR TAKING RECOURSE TO THE METHOD PRE SCRIBED BY THE RULES. FOR, IT IS ONLY IN THE EVENT OF THE ASSESSIN G OFFICER NOT BEING SO SATISFIED THAT RECOURSE TO THE PRESCRIBED METHOD IS MANDATED BY 16 LAW. SUB SECTION (3) OF SECTION 14A PROVIDES FOR TH E APPLICATION OF SUB SECTION (2) ALSO TO A SITUATION WHERE THE ASSES SEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. UNDER THE PROVISO, IT HAS BEEN STIPULATED THAT NOTHING IN THE SECTION WILL EMPOWER THE ASSESSING OFFICER, FOR AN ASSESSMENT YE AR BEGINNING ON OR BEFORE 1 APRIL 2001 EITHER TO REASSESS 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 26. THE CIRCUMSTANCES IN WHICH THE P ROVISIONS OF SUB SECTIONS (2) AND (3) WERE INTRODUCED BY AN AMEN DMENT HAVE BEEN ADVERTED TO IN A CIRCULAR OF THE CBDT DATED 28 DECEMBER 2006. (CIRCULAR 14 OF 2006) THE CIRCULAR NOTES THAT IN THE EXISTING PROVISIONS OF SECTION 14A NO METHOD FOR COMPUTING T HE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME HAD BEEN PROVIDED. AS A RESULT THERE W AS A CONSIDERABLE DISPUTE BETWEEN TAX PAYERS AND THE REV ENUE ON THE METHOD OF DETERMINING SUCH EXPENDITURE. IN THIS BAC KGROUND, SUB SECTION (2) WAS INSERTED SO AS TO MAKE IT MANDATORY FOR THE ASSESSING OFFICER TO DETERMINE THE AMOUNT OF EXPEND ITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME IN ACCORDANCE WITH THE METHOD THAT MAY BE PRESCRIBE D. THE CIRCULAR, HOWEVER, REITERATES THAT THE ASSESSING OF FICER HAS TO FOLLOW THE PRESCRIBED METHOD IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REG ARD TO THE ACCOUNTS OF THE ASSESSEE.' (UNDERLINING BY US FOR E MPHASIS) 12. IT IS CLEAR FROM THE OBSERVATIONS OF THE HON'BLE BOMBAY HIGH COURT REFERRED TO ABOVE THAT THE APPLICATION O F RULE 8D OF THE RULES IS NOT AUTOMATIC. WHEN THE ASSESSEE MAKES THE CLAIM REGARDING THE QUANTUM OF EXPENSES TO BE DISALLOWED IN TERMS OF SECTION 14A OF THE ACT, IT WAS INCUMBENT ON THE PAR T OF THE AO TO CONSIDER THE CLAIM OF THE ASSESSEE. IT IS ONLY WHEN THE AO IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE HE CAN HAV E RECOURSE WITH THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES. THE SATISFACTION THAT THE CLAIM MADE BY THE ASSESSEE RE GARDING EXPENSES INCURRED IN RELATION TO THE INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, IS NOT CORR ECT, HAS TO BE ARRIVED AT BY THE AO, ON AN OBJECTIVE BASIS. IN THE PRESENT CASE, WE FIND THAT THE AO HAS PROCEEDED TO APPLY RULE 8D WIT HOUT GIVING ANY FINDING WITH REGARD TO THE CORRECTNESS OF THE C LAIM MADE BY THE ASSESSEE REGARDING THE DISALLOWANCE TO BE MADE UNDE R SECTION 14A OF THE ACT. THE CIT(A) HAS ALSO PROCEEDED ON THE SA ME BASIS. WE ARE, THEREFORE, OF THE VIEW THAT THE ORDERS OF THE CIT(A) HAS TO BE SET ASIDE AND THE ISSUE SHOULD BE REMANDED TO THE A O FOR FRESH CONSIDERATION. THE AO WILL CONSIDER THE CLAIM OF TH E ASSESSEE WITH REGARD TO THE DISALLOWANCE TO BE MADE UNDER SECTION 14A OF THE ACT IN THE LIGHT OF THE DECISION OF THE HON'BLE BOMBAY HIGH COURT REFERRED TO ABOVE. THE AO WILL DECIDE THE ISSUE AFT ER AFFORDING THE ASSESSEE OPPORTUNITY OF BEING HEARD. FOR STATISTICA L PURPOSES THE 17 APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED. 31. FROM THE ABOVE DECISIONS, IT IS CLEAR THAT THE APPLICATION OF RULE 8-D OF I.T. RULES, 1962 IS NOT AUTOMATIC. FURTHER, IT IS ALSO CLEAR THAT WHEN THE ASSESSEE MAKES THE CLAIM REGARDING THE QUANTUM OF E XPENSES TO BE DISALLOWED IN TERMS OF SECTION 14A OF THE ACT, IT IS DUTY OF T HE ASSESSING OFFICER TO CONSIDER THE CLAIM OF THE ASSESSEE. IT IS ONLY WHE N THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, HE CA N HAVE RECOURSE WITH THE PROVISIONS OF RULE 8-D OF THE INCOME TAX RULES, 196 2. FURTHER, IT IS ALSO CLEAR THAT THE SATISFACTION THAT THE CLAIM MADE BY THE AS SESSEE REGARDING EXPENSES INCURRED IN RELATION TO THE INCOME WHICH DOES NOT F ORM PART OF TOTAL INCOME UNDER THE ACT IS NOT CORRECT, HAS TO BE A ARRIVED A T BY ASSESSING OFFICER ON OBJECTIVE BASIS. IN THE INSTANT CASE, IT IS APPARE NT FROM THE RECORDS THAT THE ASSESSING OFFICER PROCEEDED TO APPLY RULE 8-D WITHO UT GIVING ANY FINDINGS WITH REGARD TO THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE REGARDING DISALLOWANCE MADE U/S 14A OF THE ACT. THE CIT(A) H AS ALSO PROCEEDED ON THE SAME BASIS. 32. IN THE CASE OF BALARAMPUR CHINI MILLS LTD V DCI T (SUPRA), ITAT KOLKATA BENCH OF THE TRIBUNAL HELD AS UNDER:- .FROM R. 8D OF THE RULES, IT IS CLEAR THAT THE A O CAN INVOKE THIS RULE IN CASE HE IS NOT SATISFIED WITH R EGARD TO THE ACCOUNT OF ASSESSEE THAT THE CLAIM OF EXPENDITU RE MADE BY ASSESSEE IS NOT CORRECT AND. THE CLAIM MADE BY A SSESSEE THAT NO EXPENDITURE HAS BEEN MADE IN RELATION TO IN COME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT, HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATI ON TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF R. 8D(2) OF THE RULES. EVEN THE PROVISIONS OF S. 14A(2) CLEA RLY STATE THAT THE AO SHALL DETERMINE THE AMOUNT OF EXPENDITU RE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THIS ACT IN ACCORDANCE W ITH SUCH METHOD AS PRESCRIBED (UNDER R. 8D OF THE RULES), IF THE AO 18 HAVING REGARD TO THE ACCOUNT OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF TOTAL INCOME UNDER THE PROVISIONS OF T HIS ACT. 33. NEITHER THE ASSESSING OFFICER NOR CIT(A) HAS RE CORDED ANY FINDINGS THAT HAVING REGARD TO THE ACCOUNT OF THE ASSESSEE, THEY ARE NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE OR THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN I NCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR THE RELEVANT ASSESSMENT YEAR. IN THE INSTANT CASE ALS O, NEITHER THE ASSESSING OFFICER NOR CIT(A) HAS RECORDED ANY FINDINGS THAT H AVING REGARD TO THE ACCOUNT OF THE ASSESSEE THAT THEY ARE NOT SATISFIED WITH TH E CORRECTNESS OF THE CLAIM OF EXPENSES MADE BY THE ASSESSEE. 34. IN THE CASE OF DCIT V JINDAL PHOTO LTD (SUPRA) , THE ITAT DELHI BENCH OF THE TRIBUNAL HELD AS UNDER:- 14. IN THE YEAR UNDER CONSIDERATION, IT IS SE EN THAT IT IS NOT INCORRECT WHEN THE ASSESSEE CONTENDS THAT NO SATISFACTION HAS BEEN RECORDED BY THE AO REGARDING THE ASSESSEE'S CALCULATION BEING INCORREC T. EVEN SO, RULE 8D OF THE RULES HAS BEEN APPLIED. THI S, IN OUR OPINION, IS NOT CORRECT. SUCH SATISFACTION O F THE AO IS A PRE-REQUISITE TO INVOKE THE PROVISIONS OF RULE 8D OF THE RULES. THE ID. CIT (A), THEREFORE, ERRED IN PARTIALLY APPROVING THE ACTION OF THE AO. 35. FROM THE ABOVE DECISIONS, IT IS CLEAR THAT THE SATISFACTION OF THE CLAIM MADE BY THE ASSESSING OFFICER REGARDING THE EXPENSE S INCURRED IN RELATION TO THE INCOME DOES NOT FORM TOTAL INCOME UNDER THE ACT , IS NOT CORRECT, IS TO BE ARRIVED AT BY THE ASSESSING OFFICER ON OBJECTIVE BA SIS. BOTH THE AUTHORITIES BELOW HAVE NOT RECORDED ANY FINDINGS THAT HAVING RE GARD TO THE ACCOUNT OF THE ASSESSEE THEY ARE NOT SATISFIED WITH THE CORRECTNES S OF THE CLAIM OF THE 19 EXPENDITURE MADE BY THE ASSESSEE THAT NO EXPENDITU RE HAD BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. IN THE ABSENCE OF ANY FINDINGS, WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) DE SERVES TO BE SET ASIDE. WE ORDER ACCORDINGLY AND REMAND THE ISSUE TO THE ASSES SING OFFICER FOR FRESH DECISION IN ACCORDANCE WITH LAW AFTER AFFORDING A R EASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROUND NO.1 OF THE AS SESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 36. GROUND NO. 2 OF THE APPEAL READS AS UNDER:- 2. THAT THE LD. CIT(A)-II ERRED IN LAW AND ON FACTS IN UPHOLDING THE DECISION OF LD. ASSESSING OFFICER FOR CAPITALIZING INTEREST OF RS. 178549/- PAID ON TERM LOAN FOR ITS EXISTING BUSINESS AND NOT FOR EXTENSION OF BUSINESS. DIRECTIONS MAY BE GIVEN NOT TO TREAT THE SAID INTEREST AS CAPITAL EXPENDITURE AND FURTHER TO ALLO W THE SAID AMOUNT OF INTEREST OF RS. 178549/- AS REVE NUE EXPENDITURE . 37. AT THE TIME OF HEARING OF THE APPEAL, SHRI NAVD EEP SHARMA, LD. COUNSEL FOR THE ASSESSEE DID NOT PRESS FOR THIS GROUND OF A PPEAL AND ACCORDINGLY WE DISMISS THE SAME AS NOT PRESSED. 38. IN THE RESULT, REVENUES APPEAL I.E. ITA NO. 16 /CHD/2012 IS DISMISSED WHILE ASSESSEES APPEAL I.E ITA NO. 53/CHD/2012 IS ALLOWED PARTLY FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 6 TH DAY OF MARCH, 2012 SD/- SD/- (MEHAR SINGH) (H.L.KARWA) ACCOUNTANT MEMBER VICE PRESIDENT DATED : 6 TH MARCH, 2012 RKK 20 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR TRUE COPY BY ORDER ASSISTANT REGISTRAR 21 JINDAL TRIBUNAL ORDER 13. THE TRIBUNAL (SUPRA), FOR ASSESSMENT YEAR 2007 -08, HAD HELD AS FOLLOWS:- '17. WE HAVE HEARD THE PARTIES ON THIS ISSUE AND HA VE PERUSED THE MATERIAL ON RECORD. DURING THE YEAR, TH E ASSESSEE HAD EARNED EXEMPT DIVIDEND INCOME OF RS.17,97,010/- IN RESPECT OF INVESTMENT MADE IN MUTUAL FUNDS. IN THE RETURN OF INCOME FILED, A SUO MOTO DISALLOWANCE OF EXPENSES TO THE TUNE OF RS.1,73,038/- HAD BEEN MADE BY THE ASSESSEE U/S 14A OF THE ACT. IN THE ASSESSMENT ORDER, THE AO MADE A DISALLOWANCE OF RS.32,18,475/- BY APPLYING THE METHOD PROVIDED IN RULE 8D OF THE I.T. RULES, 1962. THIS WAS DONE WITHOUT POINTING OUT ANY INACCURACY I N THE METHOD OF APPORTIONMENT OR ALLOCATION OF EXPENSES, AS ADOPTED BY THE ASSESSEE. ALL THROUGH, THE ASSESSEE WAS MAINTAINED THAT THE ASSESSEE WAS DURIN G THE YEAR, CARRYING ON MANUFACTURING ACTIVITIES AT I TS MANUFACTURING UNITS AT SEVERAL PLACES. ITS HEAD OFF ICE WAS AT DELHI. THE ASSESSEE HAD MAINTAINED SEPARATE BOOKS OF ACCOUNT FOR EACH UNIT. COMMON EXPENSES INCURRED AT THE HEAD OFFICE AND THE BRANCHES WERE ATTRIBUTED TO ALL THE UNITS INCLUDING THE HEAD OFFI CE. INVESTMENT IN MUTUAL FUNDS, WHICH GAVE RISE TO EXEMPT DIVIDEND INCOME, WAS DONE THROUGH THE HEAD OFFICE. IT WAS THE CASE OF THE ASSESSEE THAT TO EAR N SUCH DIVIDEND INCOME, NO DIRECT EXPENDITURE WAS REQUIRED AND NO EXPENSES WERE INCURRED TO MAKE INVESTMENT OF SURPLUS AMOUNTS IN MUTUAL FUNDS. THE SUO MOTO DISALLOWANCE HAD, HOWEVER, BEEN MADE BY THE ASSESSEE KEEPING IN CONSIDERATION, THE PROVISIO NS OF SECTION 14A OF THE ACT. 18. NOW, AS PER SECTION 14A(2) OF THE ACT, IF THE A O, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS N OT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE ASSESSEE'S TOTAL INCOME UNDER THE ACT, THE AO SHALL DETERMINE THE AMOUNT INCURRED IN RELATION TO SUCH INCOME, IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, I.E., UNDER RULE 8D OF THE I.T. RULES. HOWEVER, IN THE PRESENT CASE, THE ASSESSMENT ORDER DOES NOT EVINCE ANY SUCH SATISFACTION OF THE AO REGARDING THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. AS SUCH, RULE 8D OF THE RULES WAS NOT APPROPRIATELY APPLIED BY THE AO AS CORRECTLY HELD B Y THE CIT(A). IT HAS NOT BEEN SHOWN BY THE AO THAT AN Y EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE FOR EARNING ITS DIVIDEND INCOME. MERELY, AN AD HOC DISALLOWANCE WAS MADE. THE ONUS WAS ON THE AO TO ESTABLISH ANY SUCH EXPENDITURE . THIS ONUS HAS NOT BEEN DISCHARGED. IN 'CIT V. HERO CYCLES' (PANDH) 323 FTR 518, UNDER SIMILAR CIRCUMSTANCES, IT WAS HELD THAT THE DISALLOWANCE U/S 14A OF THE ACT REQUIRES A CLEAR FINDING OF INCURRING OF EXPENDITUR E 2. 22 AND THAT NO DISALLOWANCE CAN BE MADE ON THE BASIS O F PRESUMPTIONS IN 'ACIT V. EICHER LTD.' 101 TTJ (DEL)369, THAT IT WAS HELD THAT THE BURDEN IS ON TH E AO TO ESTABLISH NEXUS OF EXPENSES INCURRED WITH THE EARNING OF EXEMPT INCOME BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT. IN 'MARUTI UDYOG V . DCIT' 92 ITD 119(DEL), IT HAS BEEN HELD THAT BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT, THE ONUS TO ESTABLISH THE NEXUS OF THE SAME WITH THE EXEMPT INCOME, IS ON THE REVENUE. IN 'WIMCO SEEDLINGS LIMITED V. DCIT' 107 ITD 267 (DEL) (TM), IT HAS BEEN HELD THAT THERE CAN BE NO PRESUMPTION T HAT THE ASSESSEE MUST HAVE INCURRED EXPENDITURE TO EARN TAX FREE INCOME. SIMILAR ARE THE DECISIONS IN: 1. PUNJAB NATIONAL BANK V. DCIT, 103 TTJ 908(DEL); 2. VIDYUT INVESTMENT LTD., 10 SOT 284(DEL); AND 3. D.J. MEHTA V. ITO, 290 ITR 238(MUM.)(AT). 19. IN VIEW OF THE ABOVE, FINDING NO ERROR WITH THE ORDER OF THE CFT(A) ON THE POINT AT ISSUE, THE SAME IS HEREBY CONFIRMED. GROUND NO.3 IS THUS REJECTED.'