ADITYA BIRLA FINANCE LTD, MUMBAI V. ADDL CIT RG 2(1), MUMBAI

ITA 5732/MUM/2011

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 1273 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 7 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 16-04-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 11-08-2011
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR YADAV
• Keywords: Depreciation; Business expenditure; Earning of tax free income; Retrospective amendment; Question of law; Tax effect; Revised return
• Section: 143(3); 14A; 147; 37; 15

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A, MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI RAJENDRA, ACCOUNTANT MEMBER ITA NO.5732/MUM /2011 ASSESSMENT YEAR-2008-09 M/S ADITYA BIRLA FINANCE LIMITED (ONE INDIABULLS CENTER, TOWER-1, 18 TH FLOOR, JUPITER MILL COMPOUND, 841, SENAPATI BAPAT MARG, ELPHINSTONE ROAD, MUMBAI-400012 / VS. ACIT-2(1), R. NO.575, 5 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400020 PAN NO. AABCB5769M ( / ASSESSEE) ( / REVENUE) ITA NO.6648/MUM /2011 ASSESSMENT YEAR-2008-09 ACIT-2(1), R. NO.575, 5 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400020 / VS. M/S ADITYA BIRLA FINANCE LIMITED (ONE INDIABULLS CENTER, TOWER-1, 18 TH FLOOR, JUPITER MILL COMPOUND, 841, SENAPATI BAPAT MARG, ELPHINSTONE ROAD, MUMBAI-400012 PAN NO. AABCB5769M ( / REVENUE) ( / ASSESSEE) ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 2 / REVENUE BY SHRI RAJESH KUMAR YADAV- DR / ASSESSEE BY SHRI RONAK DOSHI / DATE OF HEARING : 10/04/2017 / DATE OF ORDER: 12/04/2017 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THE ASSESSEE AS WELL AS REVENUE IS IN CROSS APPEAL AGAINST THE IMPUGNED ORDER DATED 14/07/2011 OF THE LD. FIRST APPELLATE AUTHORITY, MUMBAI. 2. FIRST, WE SHALL TAKE UP THE APPEAL OF THE REVENU E (ITA NO.6648/MUM/2011). AT THE OUTSET, DURING HEARING OF THIS APPEAL, SHRI RONAK DOSHI, LD. COUNSEL FOR THE ASSES SEE, CONTENDED THAT IN THE PRESENT APPEAL, THE TOTAL TAX EFFECT IS BELOW PRESCRIBED MONETARY LIMIT OF RS.10 LAKH. THE LD. DR, SHRI REJESH KUMAR YADAV, DID NOT CONTROVERT THIS FA CTUAL MATRIX. 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD . IN VIEW OF THE ABOVE, IT IS NOTED THAT THE TAX EFFECT IN THE PRESE NT APPEAL IS BELOW PRESCRIBED LIMIT OF RS.10 LAKH, THEREFORE, CB DT INSTRUCTION NO.21 OF 2015, DATED 10/12/2015 (F NO.279/MISC./142/ 2007-IT(PT) IS APPLICABLE, WHEREI N, THE DEPARTMENT WAS ADVISED/DIRECTED BY THE BOARD NOT T O FILE ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 3 APPEAL IN THE CASES WHERE THE TAX EFFECT DOES NOT E XCEED THE FOLLOWING MONETARY LIMIT.:- SL. NO. APPEALS IN INCOME TAX MATTERS MONETARY LIMIT (IN RS.) 1. BEFORE ITAT 10,00,000/ - 2. U/S 260 A BEFORE HONBLE HIGH COURT 20,00,000/ - 3. BEFORE HONBLE SUPREME COURT 25,00,000/ - IN VIEW OF THE ABOVE INSTRUCTION, SINCE, THE TAX EF FECT IS LESS THAN RS.10,00,000/-, CONSEQUENTLY, THE APPEAL OF THE REVENUE IS NOT MAINTAINABLE, THEREFORE, DISMISSED. 3. NOW, WE SHALL TAKE UP THE APPEAL OF THE ASSESSE E IN ITA NO.5732/MUM/2011, WHEREIN, FIRST GROUND PERT AINS TO DISALLOWING AN ADDITIONAL SUM OF RS.1,78,69,431/ - U/S 14A OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE AC T) READ WITH RULE-8D OF THE RULES. THE LD. COUNSEL FOR THE ASSESSEE EXPLAINED THAT THE TOTAL EXEMPT INCOME EARNED BY TH E ASSESSEE IS RS.1.13 CRORES, WHEREAS, THE ASSESSEE S UO-MOTO DISALLOWED THE INTEREST PORTION OF RS.6.36 LAKHS AN D INDIRECT EXPENSES TO THE TUNE OF RS.8.74 LAKHS. THE LD. COUN SEL FURTHER CONTENDED THAT IGNORING THE EXPLANATION OF THE ASSESSEE, THE LD. ASSESSING OFFICER UPHELD THE NET DISALLOWANCE OF RS.1.78 CRORES AFTER MAKING ADJUSTM ENT OF SUO-MOTO DISALLOWANCE MADE BY THE ASSESSEE. IT WAS FURTHER EXPLAINED THAT OWN FUNDS ARE MUCH IN EXCESS OF THE BORROWED FUNDS FOR WHICH OUR ATTENTION WAS INVITED TO PAGE- 8 OF THE PAPER BOOK. RELIANCE WAS PLACED UPON THE D ECISION IN HDFC BANK LTD. VS DCIT 383 ITR 529 (BOM.) AND C IT VS ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 4 RELIANCE UTILITIES AND POWER LTD. 313 ITR 340 (BOM. ). IT WAS FURTHER EXPLAINED THAT THE ASSESSEE IS IN THE BUSIN ESS OF FINANCE AND THE INTEREST INCOME IS MORE THAN INTERE ST EXPENDITURE. OUR ATTENTION WAS INVITED TO PAGE-14 O F THE PAPER BOOK AND THE LATEST DECISION FROM HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS JUB ILANT ENTERPRISES PVT. LTD. (ITA NO.1512 OF 2014 ORDER DA TED 28/02/2017 AND ANOTHER DECISION IN THE CASE OF SHRI PARESH K. SHAH (ITA NO.8214/MUM/2011), ORDER DATED 05/06/2013. IT WAS FURTHER EXPLAINED THAT THE CONCL USION OF THE ASSESSEE IS ON THE BASIS OF THE DECISION OF THE ACCOUNTANT WHICH IS MORE SCIENTIFIC AND RATIONAL, BY FURTHER P LEADING THAT NO DEFECT WAS POINTED OUT BY THE ASSESSING OFFICER/CIT(A). ON THE OTHER HAND, THE LD. DR, DEFE NDED THE CONCLUSION OF THE LD. COMMISSIONER OF INCOME TAX (A PPEAL) BY PLACING RELIANCE UPON THE DECISION IN THE CASE O F GODREJ AND BOYCE MFG. LTD. 328 ITR 81 (BOM.). HOWEVER, THE LD. COUNSEL FOR THE ASSESSEE FURTHER EXPLAINED THAT INT EREST INCOME IS HIGHER THAN THE INTEREST EXPENSES, THEREF ORE, NO DISALLOWANCE U/S 14A OF THE ACT COULD HAVE BEEN MAD E. 3.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACTS , IN BRIEF, ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN RETAILS ASSETS FINANCING, INVESTMENT AND TRADE FINANCES DECLARED I NCOME OF RS.34,09,05,941/-. SUBSEQUENTLY, THE ASSESSEE FILED REVISED RETURN ON MARCH, 30, 2010 DECLARING INCOME OF RS.34,37,59,455/-. WHILE FRAMING THE ASSESSMENT U/S ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 5 143(3) OF THE ACT ON 28/12/2010, THE TOTAL INCOME W AS DETERMINED AT RS.36,28,25,820/-, WHILE DOING SO, TH E LD. ASSESSING OFFICER MADE CERTAIN ADDITIONS/DISALLOWAN CES. DURING THE YEAR, THE ASSESSEE RECEIVED DIVIDEND OF RS.1,13,97,702/- OUT OF WHICH, THE AMOUNT OF RS.1,13,95,882/- PERTAINS TO DIVIDENDS RECEIVED FRO M MUTUAL FUND UNIT. IT IS NOTED THAT THE ASSESSEE SUO-MOTO D ISALLOWED RS.10,66,834/- U/S 14A OF THE ACT AS THE INTEREST/E XPENSES AMOUNT ATTRIBUTABLE TO EARNING SUCH EXEMPT INCOME. THE LD. ASSESSING OFFICER ENHANCED THE DISALLOWANCE BY RS.1,78,69,431/- APPLYING RULE-8D OF THE RULES. RIG HT FROM BEGINNING, THE ASSESSEE HAD CLAIMED THAT THE ASSESS EE IS PRE-DOMINANTLY, IN THE BUSINESS OF FINANCIAL SERVICES/FACILITIES TO ITS CUSTOMERS LIKE LOAN AGAI NST SECURITIES, IPO FINANCE, BILL DISCOUNTING, WORKING CAPITAL LOAN ETC. IT IS FURTHER NOTED THAT THE ASSESSEE MADE TH E INVESTMENT IN MUTUAL FUNDS OUT OF EXCESS FUNDS, TEM PORARILY AVAILABLE, FOR A SHORT SPAN OF PERIOD. THE ASSESSEE EXPLAINED THAT THE APPELLANT IS A CASH PROFIT MAKING COMPANY AND GENERATED CASH FLOWS FROM INTERNAL ACCRUALS AND ITS PROMOTERS ALSO CONTRIBUTED SHARE CAPITAL. THE ASSE SSEES CASH NET-WORTH AS ON 31/03/2008 WAS AS UNDER:- (AMOUNT IN RS. IN LAKH) SHARE CAPITAL 10596.48 PREFERENCE SHARE 7500.00 RESERVES & SURPLUS 1932.36 DEFERRED TAX LIABILITIES 1.56 ACCUMULATED DEPRECIATION 136.16 GROSS CASH NET WORTH 20166.65 ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 6 3.2. DURING HEARING BEFORE US, THE LD.COUNSEL FOR THE ASSESSEE EXPLAINED THAT THE INVESTMENT WAS MADE OUT OF OWN SURPLUS FUNDS. BEFORE WE GO INTO THE QUESTIONS AT H AND IT WOULD BE APPROPRIATE TO NOT ONLY EXAMINE THE PROVIS IONS OF SECTION 14A OF THE ACT BUT ALSO TO NOTICE ITS LEGIS LATIVE HISTORY. SECTION 14A WAS INSERTED INTO THE ACT BY T HE FINANCE ACT, 2001 WITH RETROSPECTIVE EFFECT FROM 01/04/1962. FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE AL LOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT . BY VIRTUE OF THE FINANCE ACT, 2002, THE FOLLOWING PROVISO WAS INSERTED IN SECTION 14A AND WAS DEEMED TO HAVE BEEN INSERTED WITH EFFECT FROM 11/05/2001 :- PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SH ALL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UN DER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSME NT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREAS ING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FO R ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. AS A RESULT OF THE INSERTION OF THE SAID PROVISO, S ECTION 14A WAS AS FOLLOWS:- EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. 14A. FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED I N RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 7 PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHA LL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UN DER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSME NT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREAS ING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FO R ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. THEN, BY THE FINANCE ACT, 2006, SECTION 14A WAS NUMBERED AS SUB-SECTION (1) THEREOF AND AFTER SUB-S ECTION (1) AS SO NUMBERED, THE FOLLOWING SUB-SECTIONS WERE INSERTED, WITH EFFECT FROM 01/04/2007:- (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, I F THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN R ELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. 3.3 CONSEQUENT UPON THE FINANCE ACT, 2006, SECTION 14A AS IT NOW STANDS IS AS UNDER:- EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME . 14A. (1) FOR THE PURPOSES OF COMPUTING THE TOTAL IN COME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED I N RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUN T OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 8 DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, I F THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN R ELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHA LL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UN DER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSME NT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREAS ING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FO R ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. 3.4. BY NOTIFICATION NO.45/2008 DATED 24/03/2008, THE CENTRAL BOARD OF DIRECT TAXES (CBDT), IN EXERCI SE OF ITS POWERS UNDER SECTION 295 OF THE SAID ACT READ WITH SUB- SECTION (2) OF SECTION 14A OF THE SAID ACT, MADE TH E INCOME- TAX (FIFTH AMENDMENT) RULES, 2008 TO FURTHER AMEND THE SAID RULES (I.E., THE INCOME-TAX RULES, 1962) BY IN TRODUCING RULE 8D THEREIN. CLAUSE 1(2) OF THE INCOME-TAX (FIF TH AMENDMENT) RULES, 2008 CLEARLY STIPULATED THAT THE RULES WOULD COME INTO FORCE FROM THE DATE OF PUBLICATION IN THE OFFICIAL GAZETTE. THE SAID RULE 8D IS AS UNDER:- METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. 8D.(1) WHERE THE ASSESSING OFFICER, HAVING REGARD T O THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIE D WITH ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 9 (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MAD E BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETE RMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLO WING AMOUNTS, NAMELY : (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXP ENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMP UTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY: WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR ; B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME , AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR ; C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN TH E BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAS T DAY OF THE PREVIOUS YEAR ; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE A VERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE , ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 10 (3) FOR THE PURPOSES OF THIS RULE, THE TOTAL ASSET S SHALL MEAN, TOTAL ASSETS AS APPEARING IN THE BALANCE SHEE T EXCLUDING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATIO N OF ASSETS. THE LAW PRIOR TO INSERTION OF SECTION 14A 3.5. PRIOR TO THE INTRODUCTION OF SECTION 14A IN THE SAID ACT, THE POSITION OF LAW WAS AS LAID DOWN BY T HE SUPREME COURT IN CIT V. MAHARASHTRA SUGAR MILLS LTD : 82 ITR 452 (SC) AND RAJASTHAN STATE WAREHOUSING CORPOR ATION V. CIT: 242 ITR 450 (SC) WAS DIFFERENT. IN MAHARASH TRA SUGAR MILLS LTD (SUPRA) THE ASSESSEES BUSINESS COMPRISED OF TWO PARTS, NAMELY, (1) CULTIVATION OF SUGAR CANE AND (2 ) THE MANUFACTURE OF SUGAR. THE REVENUE HAD CONTENDED THA T AS THE INCOME FROM THE CULTIVATION OF SUGAR CANE, BEIN G THE RESULT OF AN AGRICULTURAL OPERATION, WAS NOT EXIGIB LE TO TAX, THEREFORE, ANY EXPENDITURE INCURRED IN RESPECT OF T HAT ACTIVITY WAS NOT DEDUCTIBLE. THE SUPREME COURT REPE LLED THIS CONTENTION IN THE FOLLOWING MANNER:- 'THIS CONTENTION PROCEEDS ON THE BASIS THAT ONLY E XPENDITURE INCURRED IN RESPECT OF A BUSINESS ACTIVITY GIVING R ISE TO INCOME, PROFIT OR GAINS TAXABLE UNDER THE ACT CAN BE GIVEN DEDUCTION TO AND NOT OTHERWISE. WE SEE NO BASIS FOR THIS CONTENTION. TO FIND OUT WHETHER THE DEDUCTION CLAIMED IS PERMISSIBLE UNDER THE ACT OR NOT, ALL THAT WE HAVE TO DO IS TO EXAMINE THE RELEVANT P ROVISIONS OF THE ACT. EQUITABLE CONSIDERATIONS ARE WHOLLY OUT OF PLA CE IN CONSTRUING THE PROVISIONS OF A TAXING STATUTE. WE HAVE TO TAKE THE PROVISIONS OF THE STATUTE AS THEY STAND. IF THE AMOUNT CLAIMED IS PERMISSIBLE UNDER THE ACT THEN THE SAME HAS TO BE DEDUCTED FROM THE GROSS PROFIT. IF IT IS NOT PERMISSIBLE UNDER THE ACT, IT HAS TO BE REJECTED. AS MENTIONED EARLIER, IT IS NOT DISPUTED THAT THE CULT IVATION OF SUGAR- CANE AND THE MANUFACTURE OF SUGAR CONSTITUTED ONE S INGLE AND INDIVISIBLE BUSINESS. SECTION 10(2) SAYS THAT PROFI TS UNDER SECTION 10(1) IN RESPECT OF A BUSINESS SHOULD BE COMPUTED A FTER DEDUCTING ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 11 THE ALLOWANCES MENTIONED THEREIN. ONE OF THE ALLOWA NCES ALLOWED IS THAT MENTIONED IN SECTION 10(2)(XV) WHICH SAYS THAT ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY AN EXCLUSIVELY FOR THE PURPOSE OF SUCH BUSINESS SHALL BE DEDUCTED AS AN ALLOWANCE. THE MAN DATE OF SECTION 10(2) (XV) IS PLAIN AND UNAMBIGUOUS. UNDOUBTEDLY, T HE ALLOWANCE CLAIMED IN THIS CASE WAS LAID OUT OR EXPENDED FOR T HE PURPOSE OF THE BUSINESS CARRIED ON BY THE ASSESSEE. THE FACT THAT THE INCOME ARISING FROM A PART OF THAT BUSINESS IS NOT EXIGIBLE TO TAX UNDER THE ACT IS NOT A RELEVANT CIRCUMSTANCE.' 3.6. IN RAJASTHAN STATE WAREHOUSING CORPORATION (SUPRA), THE SUPREME COURT AFTER, INTER ALIA, CONSI DERING ITS EARLIER DECISIONS IN CIT V. INDIAN BANK LTD: 56 ITR 77 (SC) AND MAHARASHTRA SUGAR MILLS LTD (SUPRA) LAID DOWN T HE FOLLOWING PRINCIPLES:- '(I) IF INCOME OF AN ASSESSEE IS DERIVED FROM VARIO US HEADS OF INCOME, HE IS ENTITLED TO CLAIM DEDUCTION ADMISS IBLE UNDER THE RESPECTIVE HEAD WHETHER OR NOT COMPUTATIO N UNDER EACH HEAD RESULTS IN TAXABLE INCOME; (II) IF INCOME OF AN ASSESSEE ARISES UNDER ANY OF T HE HEADS OF INCOME BUT FROM DIFFERENT ITEMS, E.G., DIFFERENT HOUSE PROPERTIES OR DIFFERENT SECURITIES, ETC., AND INCOM E FROM ONE OR MORE ITEMS ALONE IS TAXABLE WHEREAS INCOME F ROM THE OTHER ITEM IS EXEMPT UNDER THE ACT, THE ENTIRE PERMISSIBLE EXPENDITURE IN EARNING THE INCOME FROM THAT HEAD IS DEDUCTIBLE; AND (III) IN COMPUTING 'PROFITS AND GAINS OF BUSINESS O R PROFESSION' WHEN AN ASSESSEE IS CARRYING ON BUSINES S IN VARIOUS VENTURES AND SOME AMONG THEM YIELD TAXABLE INCOME AND THE OTHERS DO NOT, THE QUESTION OF ALLOW ABILITY OF THE EXPENDITURE UNDER SECTION 37 OF THE ACT WILL DEPEND ON: (A) FULFILLMENT OF REQUIREMENTS OF THAT PROVISION N OTED ABOVE; AND (B) ON THE FACTS WHETHER ALL THE VENTURES CARRIED O N BY HIM CONSTITUTED ONE INDIVISIBLE BUSINESS OR NOT; IF THEY DO, THE ENTIRE EXPENDITURE WILL BE A PERMISSIBLE DEDUCT ION BUT IF THEY DO NOT, THE PRINCIPLE OF APPORTIONMENT OF THE ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 12 EXPENDITURE WILL APPLY BECAUSE THERE WILL BE NO NEX US BETWEEN THE EXPENDITURE ATTRIBUTABLE TO THE VENTURE NOT FORMING AN INTEGRAL PART OF THE BUSINESS AND THE EXPENDITURE SOUGHT TO BE DEDUCTED AS THE BUSINESS EXPENDITURE OF THE ASSESSEE.' 3.7. THUS, PRIOR TO THE INTRODUCTION OF SECTION 1 4A IN THE SAID ACT, THE LAW WAS THAT WHEN AN ASSESSEE HAD A COMPOSITE AND INDIVISIBLE BUSINESS WHICH HAD ELEMEN TS OF BOTH TAXABLE AND NON-TAXABLE INCOME, THE ENTIRE EXP ENDITURE IN RESPECT OF THE SAID BUSINESS WAS DEDUCTIBLE AND, IN SUCH A CASE, THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDI TURE RELATING TO THE NON-TAXABLE INCOME DID NOT APPLY. H OWEVER, WHERE THE BUSINESS WAS DIVISIBLE, THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDITURE WAS APPLICABLE AND THE EXPENDITURE APPORTIONED TO THE EXEMPT INCOME OR I NCOME NOT EXIGIBLE TO TAX, WAS NOT ALLOWABLE AS A DEDUCTI ON. 3.8. THE OBJECT BEHIND THE INSERTION OF SECTION 14A IN THE SAID ACT IS APPARENT FROM THE MEMORANDUM EXPLAI NING THE PROVISIONS OF THE FINANCE BILL 2001 WHICH IS TO THE FOLLOWING EFFECT:- 'CERTAIN INCOMES ARE NOT INCLUDABLE WHILE COMPUTING THE TOTAL INCOME AS THESE ARE EXEMPT UNDER VARIOUS PROVISIONS OF THE ACT. THERE HAVE BEEN CASES WHERE DEDUCTIONS HAVE BEEN CL AIMED IN RESPECT OF SUCH EXEMPT INCOME. THIS IN EFFECT MEANS THAT THE TAX INCENTIVE GIVEN BY WAY OF EXEMPTIONS TO CERTAIN CAT EGORIES OF INCOME IS BEING USED TO REDUCE ALSO THE TAX PAYABLE ON THE NONEXEMPT INCOME BY DEBITING THE EXPENSES INCURRED TO EARN THE EXEMPT INCOME AGAINST TAXABLE INCOME. THIS IS AGAIN ST THE BASIC PRINCIPLES OF TAXATION WHEREBY ONLY THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE IS TAXED. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO IN RESPECT OF THE NET INCOME. EXP ENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABL E TO THE EARNING OF TAXABLE INCOME. ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 13 IT IS PROPOSED TO INSERT A NEW SECTION 14A SO AS TO CLARIFY THE INTENTION OF THE LEGISLATURE SINCE THE INCEPTION OF THE INCOME - TAX ACT, 1961, THAT NO DEDUCTION SHALL BE MADE IN RESPE CT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE IN COME-TAX ACT. THE PROPOSED AMENDMENT WILL TAKE EFFECT RETROSPECTI VELY FROM APRIL 1, 1962 AND WILL ACCORDINGLY, APPLY IN RELATI ON TO THE ASSESSMENT YEAR 1962-63 AND SUBSEQUENT ASSESSMENT Y EARS.' 3.9. AS OBSERVED BY THE SUPREME COURT IN THE CASE OF CIT V. WALFORT SHARE AND STOCK BROKERS P LTD: 326 I TR 1 (SC), THE INSERTION OF SECTION 14 A WITH RETROSPECT IVE EFFECT REFLECTS THE SERIOUS ATTEMPT ON THE PART OF PARLIAM ENT NOT TO ALLOW DEDUCTION IN RESPECT OF ANY EXPENDITURE INCUR RED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT AGAINST THE TAXABLE INCOME. THE SUPREME COURT FURTHER OBSERVED AS UNDER :- '.. IN OTHER WORDS, SECTION 14 A CLARIFIES THAT EXP ENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THAT THEY ARE RELATAB LE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPE NSES INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEM PT INCOME AND PARTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SEC TION 14A, THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WA S BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDATE OF SECT ION 14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DED UCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXAB LE INCOME AND AT THE SAME TIME AVAIL OF THE TAX INCENTIVE BY WAY OF AN EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT O F EXPENSES INCURRED IN RELATION TO EXEMPT INCOME ..EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNI NG TAXABLE INCOME. THIS IS THE PURPORT OF SECTION 14A. IN SECT ION 14A, THE FIRST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEA DS OF INCOME AS PRESCRIBED IN THE CHAPTER IV WOULD FALL WITHIN SECT ION 14A. THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH DOES N OT FORM PART OF TOTAL INCOME UNDER THE ACT'. IT MEANS THAT IF AN IN COME DOES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDI TURE IS OUTSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 14A.. (EMPHASIS SUPPLIED) ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 14 3.10. THE SUPREME COURT ALSO CLEARLY HELD THAT IN THE CASE OF AN INCOME LIKE DIVIDEND INCOME WHICH DOES N OT FORM PART OF THE TOTAL INCOME, ANY EXPENDITURE/DEDUCTION RELATABLE TO SUCH (EXEMPT OR NON-TAXABLE) INCOME, E VEN IF IT IS OF THE NATURE SPECIFIED IN SECTIONS 15 TO 59 OF THE SAID ACT, CANNOT BE ALLOWED AGAINST ANY OTHER INCOME WHICH I S INCLUDABLE IN THE TOTAL INCOME. THE EXACT WORDS USE D BY THE SUPREME COURT ARE AS UNDER:- 'FURTHER, SECTION 14 SPECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE CHARGEABLE, A N INCOME HAS TO BE BROUGHT UNDER ONE OF THE FIVE HEAD S. SECTIONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX UNDE R THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL INCOME CHARGEABLE TO TAX. THE PERMISSIBLE DEDUCTIONS ENUMERATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOW ED ONLY WITH REFERENCE TO INCOME WHICH IS BROUGHT UNDE R ONE OF THE ABOVE HEADS AND IS CHARGEABLE TO TAX. IF AN INCOME LIKE DIVIDEND INCOME IS NOT A PART OF THE TOTAL INC OME, THE EXPENDITURE/DEDUCTION THOUGH OF THE NATURE SPECIFIE D IN SECTIONS 15 TO 59 BUT RELATED TO THE INCOME NOT FOR MING PART OF THE TOTAL INCOME COULD NOT BE ALLOWED AGAIN ST OTHER INCOME INCLUDABLE IN THE TOTAL INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NONTAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDE R SECTION 14 A.' (EMPHASIS SUPPLIED) 3.11. SUB-SECTION (1) OF SECTION 14A CLEARLY STIP ULATES THAT FOR THE PURPOSES OF COMPUTING TOTAL INCOME UND ER CHAPTER IV (COMPUTATION OF TOTAL INCOME), NO DEDUCT ION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRE D BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FOR M PART OF ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 15 THE TOTAL INCOME UNDER THE SAID ACT. A LOT OF EMPHA SIS WAS LAID ON THE EXPRESSIONS INCURRED AND IN RELATION TO. IT WAS CONTENDED BY LD. COUNSEL, WHO APPEARED ON BEHALF OF THE ASSESSES, THAT THE WORD INCURRED MUST BE TAKEN LI TERALLY IN THE SENSE THAT THE EXPENDITURE MUST HAVE ACTUALLY T AKEN PLACE. MOREOVER, THE EXPENDITURE MUST ALSO HAVE TAK EN PLACE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T OTAL INCOME. THE LD. COUNSEL CONTENDED THAT THE EXPRESSI ON IN RELATION TO IMPLIES THAT THERE MUST BE A DIRECT AN D PROXIMATE CONNECTION WITH THE SUBJECT MATTER. IN OT HER WORDS, ACCORDING TO THE LD. COUNSEL, ONLY THAT ACTU AL EXPENDITURE WHICH IS MADE DIRECTLY AND FOR THE OBJE CT OF EARNING EXEMPT INCOME COULD BE DISALLOWED UNDER SE CTION 14A. HE SUBMITTED THAT IF THE DOMINANT AND MAIN OBJ ECTIVE OF SPENDING WAS NOT THE EARNING OF EXEMPT INCOME THEN, THE EXPENDITURE COULD NOT BE DISALLOWED UNDER SECTION 1 4A PROVIDED IT WAS OTHERWISE ALLOWABLE UNDER SECTIONS 15 TO 59 OF THE SAID ACT. IT WAS EMPHASIZED THAT THE EXPENDI TURE MUST BE ACTUAL AND CANNOT BE COMPUTED ON THE BASIS OF SO ME FORMULA AS STIPULATED UNDER RULE 8D READ WITH SUB-S ECTIONS (2) & (3) OF SECTION 14A. 3.12. LET US EXAMINE THE EXPRESSION IN RELATION TO. WE MAY REFER TO THE SUPREME COURT DECISION IN MADHAV R AO SCINDIA V. UNION OF INDIA: AIR 1971 SC 530 WHERE, I N PARAGRAPH 134, IT IS OBSERVED AS UNDER:- ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 16 '.. THE EXPRESSION 'PROVISIONS OF THIS CONSTITUTION RELATING TO' IN ARTICLE 363 MEANS PROVISIONS HAVING A DOMINANT AND IMMEDIATE CONNECTION WITH: IT DOES NOT MEAN MERELY HAVING A R EFERENCE TO.' 3.13. IN DOYPACK SYSTEMS PVT LTD V. UNION OF INDI A: AIR 1988 SC 782, THE SUPREME COURT OBSERVED THAT TH E EXPRESSIONS 'PERTAINING TO', 'IN RELATION TO' AND ' ARISING OUT OF', USED IN THE DEEMING PROVISION, ARE USED IN THE EXPANSIVE SENSE. THE SUPREME COURT FURTHER OBSERVED AS UNDER: - '49. THE EXPRESSION 'IN RELATION TO' (SO ALSO 'PERT AINING TO'), IS A VERY BROAD EXPRESSION WHICH PRESUPPOSES ANOTHER SUB JECT MATTER. THESE ARE WORDS OF COMPREHENSIVENESS WHICH MIGHT BO TH HAVE A DIRECT SIGNIFICANCE AS WELL AS AN INDIRECT SIGNIFIC ANCE DEPENDING ON THE CONTEXT' ' IN THIS CONNECTION REFERENCE MAY BE MADE TO 76 CORPUS JURIS SECUNDUM AT PAGES 620 AND 621 WHERE IT IS STATED TH AT THE TERM 'RELATE' IS ALSO DEFINED AS MEANING TO BRING INTO A SSOCIATION OR CONNECTION WITH. IT HAS BEEN CLEARLY MENTIONED THAT ' RELATING TO' HAS BEEN HELD TO BE EQUIVALENT TO OR SYNONYMOUS WIT H AS TO 'CONCERNING WITH' AND 'PERTAINING TO'. THE EXPRESSI ON 'PERTAINING TO' IS AN EXPRESSION OF EXPANSION AND NOT OF CONTRA CTION.' (EMPHASIS SUPPLIED) 3.14. HONBLE PUNJAB & HARYANA HIGH COURT IN THE C ASE OF CIT-II V. HERO CYCLES LTD., DECIDED ON 4/11/2009 , OBSERVED THAT:- DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING EXPENDITURE WHERE IT IS FOUND THAT FOR EARNING EXEM PTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER S ECTION 14A CANNOT STAND. 3.15. WE ARE OF THE VIEW THAT UNLESS AND UNTIL THERE WAS ACTUAL EXPENDITURE FOR EARNING THE EXEMPT ED INCOME, THERE COULD NOT BE ANY DISALLOWANCE UNDER S ECTION 14A. WHILE WE AGREE THAT THE EXPRESSION EXPENDITUR E INCURRED REFERS TO ACTUAL EXPENDITURE AND NOT TO S OME ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 17 IMAGINED EXPENDITURE WE WOULD LIKE TO MAKE IT CLEAR THAT THE ACTUAL EXPENDITURE THAT IS IN CONTEMPLATION UNDER SECTION 14A(1) OF THE ACT IS THE ACTUAL EXPENDITURE IN RE LATION TO OR IN CONNECTION WITH OR PERTAINING TO EXEMPT INCOME. THE COROLLARY TO THIS IS THAT IF NO EXPENDITURE IS INCU RRED IN RELATION TO THE EXEMPT INCOME, NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE ACT. 3.16. SO FAR AS, SCOPE OF SUB-SECTION (2) OF SECTI ON 14A OF THE ACT, IS CONCERNED, IT PROVIDES THE MANNER IN WH ICH THE ASSESSING OFFICER IS TO DETERMINE THE AMOUNT OF EXP ENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HOWEVER, IF WE EXAMINE THE PROVIS ION CAREFULLY, WE WOULD FIND THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITUR E ONLY IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCO UNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELA TION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, THE REQUIREMENT OF TH E ASSESSING OFFICER EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMP T INCOME WOULD BE TRIGGERED ONLY IF THE ASSESSING OFF ICER RETURNS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXP ENDITURE. THEREFORE, THE CONDITION PRECEDENT FOR THE ASSESSIN G OFFICER ENTERING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME I S THAT ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 18 THE ASSESSING OFFICER MUST RECORD THAT HE IS NOT SA TISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF SUCH EXPENDITURE. SUB-SECTION (3) IS NOTHING BUT AN OFFSHOOT OF SUB-SECTION (2) OF SECTION 14A. SUB-SEC TION (3) APPLIES TO CASES WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SA ID ACT. IN OTHER WORDS, SUB-SECTION (2) DEALS WITH CASES WHERE THE ASSESSEE SPECIFIES A POSITIVE AMOUNT OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT AND SUB-SECTION (3) APPLI ES TO CASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDITUR E HAD BEEN INCURRED IN RELATION TO EXEMPT INCOME. IN BOTH CASES, THE ASSESSING OFFICER, IF SATISFIED WITH THE CORREC TNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E OR NO EXPENDITURE, AS THE CASE MAY BE, CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE IN ACCOR DANCE WITH ANY PRESCRIBED METHOD, AS MENTIONED IN SUB-SEC TION (2) OF SECTION 14A OF THE SAID ACT. IT IS ONLY IF THE A SSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF TH E CLAIM OF THE ASSESSEE, IN BOTH CASES, THAT THE ASSESSING OFF ICER GETS JURISDICTION TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT IN ACCO RDANCE WITH THE PRESCRIBED METHOD. THE PRESCRIBED METHOD B EING THE METHOD STIPULATED IN RULE 8D OF THE SAID RULES. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 19 EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER WO ULD HAVE TO INDICATE COGENT REASONS FOR THE SAME. 3.17. AS WE HAVE ALREADY NOTICED, SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT REFERS TO THE METHOD OF DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE EXPRESSION USED IS SUCH METHOD AS MAY BE PRESCRIBED. BY VIRTUE OF NOTIFICA TION NO.45/2008 DATED 24/03/2008, THE CENTRAL BOARD OF D IRECT TAXES INTRODUCED RULE 8D IN THE SAID RULES. THE SAI D RULE 8D ALSO MAKES IT CLEAR THAT WHERE THE ASSESSING OFF ICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MAD E BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT FOR SUCH PRE VIOUS YEAR, THE ASSESSING OFFICER SHALL DETERMINE THE AMO UNT OF THE EXPENDITURE IN RELATION TO SUCH INCOME IN ACCOR DANCE WITH THE PROVISIONS OF SUB-RULE (2) OF RULE 8D. WE MAY OBSERVE THAT RULE 8D(1) PLACES THE PROVISIONS OF SE CTION 14A(2) AND (3) IN THE CORRECT PERSPECTIVE. AS WE HA VE ALREADY SEEN, WHILE DISCUSSING THE PROVISIONS OF SUB-SECTIO NS (2) AND (3) OF SECTION 14A, THE CONDITION PRECEDENT FOR THE ASSESSING ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 20 OFFICER TO HIMSELF DETERMINE THE AMOUNT OF EXPENDIT URE IS THAT HE MUST RECORD HIS DISSATISFACTION WITH THE CO RRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE OR WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED. IT IS ONLY WHEN THIS CONDITION PRECEDENT IS SATISFIED THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDABLE IN TOTAL INCOME IN THE MAN NER INDICATED IN SUB-RULE (2) OF RULE 8D OF THE SAID RU LES. 3.18. IT IS, THEREFORE, CLEAR THAT DETERMINATION OF THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME UNDER RULE 8D WOULD ONLY COME INTO PLAY WHEN THE ASSESSING OFFICER REJECTS THE CLAIM OF THE ASSESSEE IN THIS R EGARD. IF ONE EXAMINES SUB-RULE (2) OF RULE 8D, WE FIND THAT THE METHOD FOR DETERMINING THE EXPENDITURE IN RELATION TO EXEM PT INCOME HAS THREE COMPONENTS. (I) THE FIRST COMPONENT BEING THE AMOUNT OF EXPENDI TURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PAR T OF THE TOTAL INCOME. (II) THE SECOND COMPONENT BEING COMPUTED ON THE BAS IS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSES SEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. T HE FORMULA ESSENTIALLY APPORTIONS THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST [OTHER THAN THE AMOUNT OF INTEREST INCLUDE D IN CLAUSE (I)] INCURRED DURING THE PREVIOUS YEAR IN TH E RATIO OF ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 21 THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, TO THE AVERAGE OF THE TOTAL ASSETS OF THE ASSESSEE. (III) THE THIRD COMPONENT IS AN ARTIFICIAL FIGURE ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENT , INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE T OTAL INCOME, AS APPEARING IN THE BALANCE SHEETS OF THE A SSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS Y EAR. IT IS THE AGGREGATE OF THESE THREE COMPONENTS WHICH WOULD CONSTITUTE THE EXPENDITURE IN RELATION TO EXEMPT IN COME AND IT IS THIS AMOUNT OF EXPENDITURE WHICH WOULD BE DIS ALLOWED UNDER SECTION 14A OF THE SAID ACT. IT IS, THEREFORE , CLEAR THAT IN TERMS OF THE SAID RULE, THE AMOUNT OF EXPENDITUR E IN RELATION TO EXEMPT INCOME HAS TWO ASPECTS (A) DIR ECT AND (B) INDIRECT. THE DIRECT EXPENDITURE IS STRAIGHTAWA Y TAKEN INTO ACCOUNT BY VIRTUE OF CLAUSE (I) OF SUB-RULE (2 ) OF RULE 8D. THE INDIRECT EXPENDITURE, WHERE IT IS BY WAY OF INT EREST, IS COMPUTED THROUGH THE PRINCIPLE OF APPORTIONMENT, AS INDICATED ABOVE. AND, IN CASES WHERE THE INDIRECT EXPENDITURE IS NOT BY WAY OF INTEREST, A RULE OF TH UMB FIGURE OF ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INV ESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART O F THE TOTAL INCOME, IS TAKEN. 3.19. INSOFAR AS SUB-SECTIONS (2) AND (3) OF SECT ION 14A ARE CONCERNED, THEY HAVE ALSO BEEN INTRODUCED BY VI RTUE OF THE FINANCE ACT, 2006 WITH EFFECT FROM 01.04.2007. THIS IS ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 22 APPARENT, FIRST OF ALL, FROM THE NOTES ON CLAUSES O F THE FINANCE BILL, 2006 [REPORTED IN 281 ITR (ST) AT PAG ES 139- 140]. THE SAID NOTES ON CLAUSES REFERS TO CLAUSE 7 OF THE BILL WHICH HAD SOUGHT TO AMEND SECTION 14A OF THE SAID A CT. IT IS SPECIFICALLY MENTIONED IN THE SAID NOTES ON CLAUSES THAT:- THIS AMENDMENT WILL TAKE EFFECT FROM 1ST APRIL, 20 07 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YE AR 2007-08 AND SUBSEQUENT YEARS. THIS IS APPARENT, FIRST OF ALL, FROM THE NOTES ON C LAUSES OF THE FINANCE BILL, 2006 [REPORTED IN 281 ITR (ST) AT PAGES 139-140]. THE SAID NOTES ON CLAUSES REFERS TO CLAUS E 7 OF THE BILL WHICH HAD SOUGHT TO AMEND SECTION 14A OF THE S AID ACT. IT IS SPECIFICALLY MENTIONED IN THE SAID NOTES ON C LAUSES THAT:- THIS AMENDMENT WILL TAKE EFFECT FROM 1ST AP RIL, 2007 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSE SSMENT YEAR 2007-08 AND SUBSEQUENT YEARS. 3.20. FURTHERMORE, IN THE MEMORANDUM EXPLAINING THE PROVISIONS IN THE FINANCE BILL, 2006 [281 ITR (ST) AT PAGES 281-281], IT IS ONCE AGAIN STATED WITH REFERENCE TO CLAUSE 7 WHICH PERTAINS TO THE AMENDMENT TO SECTION 14A OF T HE SAID ACT THAT:- THIS AMENDMENT WILL TAKE EFFECT FROM 1ST APRIL, 20 07 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSM ENT YEAR 2007-08 AND SUBSEQUENT YEARS. 3.21. WE MAY ALSO REFER TO THE CBDT CIRCULAR NO.14/2006 DATED 28.12.2006 AND TO PARAGRAPHS 11 TO 11.3 THEREOF. PARAGRAPH 11 DEALT WITH THE METHOD FOR ALL OCATING ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 23 EXPENDITURE IN RELATION TO EXEMPT INCOME AND PARAGR APHS 11.1 AND 11.2 EXPLAINED THE BASIS AND LOGIC BEHIND THE INTRODUCTION OF SUB-SECTION (2) OF SECTION 14A OF T HE SAID ACT. PARAGRAPH 11.3 SPECIFICALLY PROVIDED FOR APPLICABIL ITY OF THE PROVISIONS OF SUBSECTION (2) AND IT CLEARLY INDICAT ED THAT IT WOULD BE APPLICABLE FROM THE ASSESSMENT YEAR 2007- 08 ONWARDS. IT IS, THEREFORE, CLEAR THAT SUB-SECTIONS (2) AND (3) OF SECTION 14A WERE INTRODUCED WITH PROSPECTIVE EFFECT FROM THE ASSESSMENT YEAR 2007-08 ONWARDS. HOWEVER, SUB-SECTI ON (2) OF SECTION 14A REMAINED AN EMPTY SHELL UNTIL THE INTRODUCTION OF RULE 8D ON 24/03/2008 WHICH GAVE CO NTENT TO THE EXPRESSION SUCH METHOD AS MAY BE PRESCRIBED APPEARING IN SECTION 14A(2) OF THE SAID ACT. THUS, IT IS CLEAR THAT, IN EFFECT, THE PROVISIONS OF SUBSECTIONS (2) AND (3) OF SECTION 14A WOULD BE WORKABLE ONLY WITH EFFECT FROM THE DATE OF INTRODUCTION OF RULE 8D. THIS IS SO BECAUSE PRIOR TO THAT DATE, THERE WAS NO PRESCRIBED METHOD AND SUB-S ECTIONS (2) AND (3) OF SECTION 14A REMAINED UNWORKABLE. 3.22. SO FAR AS, AS TO HOW SECTION 14A TO BE WORKE D FOR THE PERIOD PRIOR TO THE INTRODUCTION OF RULE 8D, IS CONCERNED. SUB-SECTION (2) OF SECTION 14A, AS WE HAVE SEEN, ST IPULATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH S UCH METHOD AS MAY BE PRESCRIBED. OF COURSE, THIS DETER MINATION ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 24 CAN ONLY BE UNDERTAKEN IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THIS PART OF SECTION 1 4A(2) WHICH EXPLICITLY REQUIRES THE FULFILLMENT OF A COND ITION PRECEDENT IS ALSO IMPLICIT IN SECTION 14A(1) [AS IT NOW STANDS] AS ALSO IN ITS INITIAL AVATAR AS SECTION 14A. IT IS ONLY THE PRESCRIPTION WITH REGARD TO THE METHOD OF DETERMINI NG SUCH EXPENDITURE WHICH IS NEW AND WHICH WILL OPERATE PROSPECTIVELY. IN OTHER WORDS, SECTION 14A, EVEN PR IOR TO THE INTRODUCTION OF SUB-SECTIONS (2) & (3) WOULD REQUIR E THE ASSESSING OFFICER TO FIRST REJECT THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXTENT OF SUCH EXPENDITURE AND SUCH R EJECTION MUST BE FOR DISCLOSED COGENT REASONS. IT IS THEN TH AT THE QUESTION OF DETERMINATION OF SUCH EXPENDITURE BY TH E ASSESSING OFFICER WOULD ARISE. THE REQUIREMENT OF A DOPTING A SPECIFIC METHOD OF DETERMINING SUCH EXPENDITURE HAS BEEN INTRODUCED BY VIRTUE OF SUB-SECTION (2) OF SECTION 14A. PRIOR TO THAT, THE ASSESSING WAS FREE TO ADOPT ANY REASON ABLE AND ACCEPTABLE METHOD. SO, EVEN FOR THE PRE-RULE8D PER IOD, WHENEVER THE ISSUE OF SECTION 14A ARISES BEFORE AN ASSESSING OFFICER, HE HAS, FIRST OF ALL, TO ASCERTAIN THE COR RECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE SAID ACT. EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION T O INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, THE ASSES SING OFFICER WILL HAVE TO VERIFY THE CORRECTNESS OF SUCH CLAIM. IN ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 25 CASE, THE ASSESSING OFFICER IS SATISFIED WITH THE C LAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPEN DITURE, AS THE CASE MAY BE, THE ASSESSING OFFICER IS TO ACC EPT THE CLAIM OF THE ASSESSEE INSOFAR AS THE QUANTUM OF DIS ALLOWANCE UNDER SECTION 14A IS CONCERNED. IN SUCH EVENTUALITY , THE ASSESSING OFFICER CANNOT EMBARK UPON A DETERMINATIO N OF THE AMOUNT OF EXPENDITURE FOR THE PURPOSES OF SECTION14 A(1). IN CASE, THE ASSESSING OFFICER IS NOT, ON THE BASIS OF OBJECTIVE CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY, SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HE SHALL HAVE TO REJECT THE CLAIM AND STA TE THE REASONS FOR DOING SO. HAVING DONE SO, THE ASSESSING OFFICER WILL HAVE TO DETERMINE THE AMOUNT OF EXPENDITURE IN CURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE SAID ACT. HE IS REQUIRED TO DO SO ON THE BASIS OF A REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. 3.23. IN VIEW OF THE FOREGOING DISCUSSION, WE FIND THAT THE ASSESSEE SUO-MOTO DISALLOWED RS.6.36 LAKHS ON A CCOUNT OF INTEREST AND RS.8.74 LAKHS AS INDIRECT EXPENSES, THEREFORE, WE FIND MERIT IN THE CLAIM OF THE ASSESSEE. AS MENT IONED EARLIER AND ARGUED BY THE LD. COUNSEL FOR THE ASSES SEE, THE ASSESSEE WAS HAVING OWN FUNDS, WHICH WAS IN FAR EXC ESS OF BORROWED FUNDS, THEREFORE, MECHANICALLY NO DISALLOW ANCE CAN BE MADE. THE HON'BLE BOMBAY HIGH COURT IN RELIA NCE UTILITIES AND POWER LTD. (SUPRA) HELD AS UNDER:- ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 26 THE VERY BASIS ON WHICH THE REVENUE HAD SOUGHT TO CONTEND OR ARGUE THEIR CASE THAT THE SHAREHOLDERS FUNDS TO THE TUNE OF OVER RS. 172 CRORES WAS UTILISED FOR THE PURPOSE OF FIXED AS SETS IN TERMS OF THE BALANCE SHEET AS ON 31ST MARCH, 1999, IS FALLACIOUS . FIRSTLY, THE BALANCE SHEET AS OF 31ST MARCH, 1999 IS NOR RELEVAN T. WHAT WOULD BE RELEVANT WOULD BE BALANCE SHEET AS ON 31ST MARCH, 2 000. APART FROM THAT, THE COUNSEL HAS BEEN UNABLE TO POINT OUT FROM THE BALANCE SHEET THAT THE BALANCE SHEET AS ON 31ST MARCH, 1999 SHOWE D THAT THE SHAREHOLDERS FUNDS WERE UTILISED FOR THE PURPOSE OF FIXED ASSETS. THE P&L A/C AND THE BALANCE SHEET WOULD NOT SHOW WHETHE R SHAREHOLDERS FUNDS HAVE BEEN UTILISED FOR INVESTMENTS. THE ARGUM ENT HAS TO BE REJECTED ON THIS COUNT ALSO. APART FROM THAT BOTH I N THE ORDER OF THE CIT(A) AS ALSO THE TRIBUNAL, A CLEAR FINDING IS REC ORDED THAT THE ASSESSEE HAD INTEREST-FREE FUNDS OF ITS OWN WHICH H AD BEEN GENERATED IN THE COURSE OF THE YEAR COMMENCING FROM 1ST APRIL , 1999. APART FROM THAT IN TERMS OF THE BALANCE SHEET THERE WAS A FURTHER AVAILABILITY OF RS. 398.19 CRORES INCLUDING RS. 180 CRORES OF SHARE CAPITAL. IN THIS CONTEXT, THE FINDING OF FACT RECOR DED BY CIT(A) AND TRIBUNAL AS TO AVAILABILITY OF INTEREST-FREE FUNDS REALLY CANNOT BE FAULTED. IF THERE BE INTEREST-FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVES TMENTS WERE FROM THE INTEREST-FREE FUNDS AVAILABLE. IN THIS CASE THI S PRESUMPTION IS ESTABLISHED CONSIDERING THE FINDING OF FACT BOTH BY THE CIT(A) AND TRIBUNALWOOLCOMBERS OF INDIA LTD. VS. CIT (1981) 2 3 CTR (CAL) 204 : (1982) 134 ITR 219 (CAL) AND EAST INDIA PHARMACEU TICAL WORKS LTD. VS. CIT (1997) 139 CTR (SC) 372 : (1997) 224 ITR 62 7 (SC) RELIED ON. 3.24 LIKEWISE, HON'BLE JURISDICTIONAL HIGH COURT I N HDFC BANK LTD. (SUPRA) ALSO HELD AS UNDER:- SECTION 14A OF THE ACT WOULD BE INAPPLICABLE. HOWE VER THIS WAS ALSO DISREGARDED BY THE IMPUGNED ORDER ON THE GROUND THA T THIS COURT DID NOT ENTERTAIN AN APPEAL OF THE REVENUE FROM THE ORD ER OF THE TRIBUNAL HOLDING THAT SECTION 14A OF THE ACT IS INAPPLICABLE WHERE THE INVESTMENT HAS BEEN MADE IN STOCK IN TRADE. THIS NO N ENTERTAINMENT OF AN APPEAL BEING ON THE GROUND THAT THIS COURT FO UND NO SUBSTANTIAL QUESTION OF LAW. (PARA18) THAT IF APPEAL IS NOT ADMITTED FROM AN ORDER OF THE TRIBUNAL, THEN IT IS OPEN TO THE TRIBUNAL IN ANOTHER CASE TO DECIDE DIRE CTLY CONTRARY TO THE VIEW TAKEN BY THE EARLIER ORDER OF THE TRIBUNAL, WH ICH IS NOT ENTERTAINED BY THIS COURT IN APPEAL. THIS WITHOUT E VEN AS MUCH AS A WHISPER OF ANY EXPLANATION WITH REGARD TO HOW AND W HY THE FACTS OF THE TWO CASES ARE DIFFERENT WARRANTING A VIEW DIFFE RENT FROM THAT TAKEN BY THE TRIBUNAL EARLIER. IN FACT WHEN AN APPE AL IS NOT ENTERTAINED THEN THE ORDER OF THE TRIBUNAL HOLDS TH E FIELD AND THE COORDINATE BENCHES OF THE TRIBUNAL ARE OBLIGED TO F OLLOW THE SAME UNLESS THERE IS SOME DIFFERENCE IN THE FACTS OR LAW APPLICABLE AND THE ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 27 DIFFERENCE IN FACT AND / OR LAW SHOULD BE REFLECTED IN ITS ORDER TAKING A DIFFERENT VIEW. TRIBUNAL HAS ACTED BEYOND THE LIMIT S OF ITS AUTHORITY. (PARA19) IMPUGNED ORDER OF THE TRIBUNAL HAS AN OBSERVATION T HEREIN THAT THERE IS NO SUCH THING AS ESTOPPEL IN LAW AND BY VIRTUE O F THAT GIVES ITSELF A LICENCE TO DECIDE THE ISSUE BEFORE IT IGNORING THE BINDING PRECEDENT IN THE PETITIONERS OWN CASE IN HDFC BANK LTD(SUPRA). ONCE THERE IS A BINDING DECISION OF HIGH COURT, THE SAME CONTINUES TO BE BINDING ON ALL AUTHORITIES WITHIN THE STATE TILL SUCH TIME AS IT STAYED AND / OR SET ASIDE BY THE APEX COURT OR THIS VERY COURT TAKES A DIFFERENT VIEW ON AN IDENTICAL FACTUAL MATRIX OR LARGER BENCH OF THIS COURT TAKES A VIEW DIFFERENT FROM THE ONE ALREADY TAKEN. (PARA22) FOR THE PURPOSES OF CERTAINTY, FAIRNESS AND UNIFORM ITY OF LAW, ALL AUTHORITIES WITHIN THE STATE ARE BOUND TO FOLLOW TH E ORDERS PASSED BY US IN ALL LIKE MATTERS, WHICH BY ITSELF IMPLIES THA T IF THERE ARE SOME DISTINGUISHING FEATURES IN THE MATTER BEFORE THE TR IBUNAL AND, THEREFORE, UNLIKE, THEN THE TRIBUNAL IS FREE TO DEC IDE ON THE BASIS OF THE FACTS PUT BEFORE IT. HOWEVER TILL SUCH TIME AS THE DECISION OF THIS COURT STANDS IT IS NOT OPEN TO THE TRIBUNAL OR ANY OTHER AUTHORITY IN THE STATE OF MAHARASHTRA TO DISREGARD IT WHILE CONS IDERING A LIKE ISSUE. IN CASE HIGH COURT ARE WRONG, THE AGGRIEVED PARTY C AN CERTAINLY TAKE IT UP TO THE SUPREME COURT AND HAVE IT SET ASIDE AN D / OR CORRECTED OR WHERE THE SAME ISSUE ARISES IN A SUBSEQUENT CASE TH E ISSUE MAY BE RE URGED BEFORE HIGH COURT TO IMPRESS UPON IT THAT THE DECISION RENDERED EARLIER, REQUIRES RECONSIDERATION. IT IS N OT OPEN TO THE TRIBUNAL TO SIT IN APPEAL FROM THE ORDERS OF HIGH C OURT AND NOT FOLLOW IT. IN CASE THE DOCTRINE OF PRECEDENT IS NOT STRICT LY FOLLOWED THERE WOULD COMPLETE CONFUSION AND UNCERTAINTY. THE VICTI M OF SUCH ARBITRARY ACTION WOULD BE THE RULE OF LAW OF WHICH WE AS THE INDIAN STATE ARE SO JUSTIFIABLY PROUD. (PARA23) IT IS IN THE ABOVE CIRCUMSTANCES THAT HIGH COURT AR E OF THE VIEW THAT HIGH COURT HAVE TO EXERCISE OUR POWERS UNDER ARTICL E 227 OF THE CONSTITUTION OF INDIA. THIS IS IN VIEW OF THE MANNE R IN WHICH THE IMPUGNED ORDER OF THE TRIBUNAL HAS CHOSEN TO DISREG ARD AND/OR CIRCUMVENT THE BINDING DECISION OF THIS COURT IN RE SPECT OF THE SAME ASSESSEE FOR AN EARLIER ASSESSMENT YEAR. THIS IS A CLEAR CASE OF JUDICIAL INDISCIPLINE AND CREATING CONFUSION IN RES PECT OF ISSUES WHICH STAND SETTLED BY THE DECISION OF HIGH COURT. (PARA24) IT IS IN THE ABOVE VIEW, THAT HIGH COURT SET ASIDE THE IMPUGNED ORDER OF THE TRIBUNAL DATED 23RD SEPTEMBER, 2015 IN ITS E NTIRETY AND RESTORE THE ISSUE TO THE TRIBUNAL TO DECIDE IT AFRE SH ON ITS OWN MERITS AND IN ACCORDANCE WITH LAW. HOWEVER THE TRIBUNAL WO ULD SCRUPULOUSLY FOLLOW THE DECISIONS RENDERED BY THIS COURT WHEREIN A VIEW A HAS BEEN TAKEN ON IDENTICAL ISSUES ARISING BEFORE IT. IT IS NOT OPEN TO THE ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 28 TRIBUNAL TO DISREGARD THE BINDING DECISIONS OF HIGH COURT, THE GROUNDS INDICATED IN THE IMPUGNED ORDER WHICH ARE NOT AT AL L SUSTAINABLE. (PARA25) 3.25 IN THE LIGHT OF THE ABOVE DECISIONS FROM HON' BLE JURISDICTIONAL HIGH COURT, IT CAN BE CONCLUDED THAT SINCE THE INVESTMENT WAS MADE OUT OF SURPLUS FUNDS, NO FURTHE R DISALLOWANCE IS REQUIRED TO BE MADE U/S 14A OF THE ACT AS SECTION 14A PROVIDES FOR DISALLOWANCE OF EXPENDITUR E INCURRED IN RELATION TO INCOME WHICH DOES NOT FOR M THE PART OF THE TOTAL INCOME, MEANING THEREBY, THERE SH OULD BE DIRECT NEXUS BETWEEN THE ACTUAL EXPENDITURE INCURRE D FOR THE PURPOSE OF EARNING TAX FREE INCOME. NO DOUBT, THE W ORD IN RELATION TO APPEARS TO BE BROAD AT FIRM IMPRESSION BUT ON DEEPER EXAMINATION AND READ IN CONJUNCTION WITH THE WORD INCURRED IT SEEMS THAT THESE ARE RESTRICTIVE WORD S, RESTRICTING THE POWER OF ASSESSING OFFICER TO ESTIM ATE A PART OF EXPENDITURE, INCURRED BY THE ASSESSEE, TO PRODUC E NON- TAXABLE INCOME. TO ELABORATE FURTHER, THE WORD INC URRED REFERS TO FACTUAL SPENDING OF EXPENDITURE IN RELATI ON TO EXEMPT INCOME AND DOES NOT REFER TO DEEMED SPENDING OR ASSUMED SPENDING FOR THE PURPOSE. WHILE APPLYING TH E SECTION, THERE IS NO AUTHORITY CONFERRED BY THE SEC TION UPON ASSESSING OFFICER TO DEEM OR ASSUME CERTAIN EXPENDI TURE TO HAVE BEEN INCURRED IN RELATION TO TAX FREE INCOME. THE PROXIMITY CAUSE OF DISALLOWANCE U/S 14A IS ITS RELA TIONSHIP WITH THE TAX EXEMPT INCOME. WHEREVER THE EXPENSES INCURRED HAS NO RELATIONSHIP WITH THE INCOME NOT IN CLUDIBLE IN THE TOTAL INCOME, THERE CANNOT BE ANY OCCASION T O INVOKE ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 29 THE PROVISION FOR MAKING THE DISALLOWANCE U/S 14A O F THE ACT. IN THE LIGHT OF THE FOREGOING DISCUSSION, IT CAN BE CONCLUDED THAT THE EXPENDITURE, WHICH CAN BE DISALL OWED U/S 14A SHOULD BE ACTUALLY INCURRED. 3.26 SO FAR AS, THE EXPRESSION SATISFACTION IS CONCERNED, IT POSTULATES A BONA-FIDE BELIEF ABOUT T HE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE AND EXIS TENCE OF OBJECTIVE REASON FOR SUCH BELIEF. FURTHER, THIS EXP RESSION ALSO DOES NOT MEAN A PURELY SUBJECTIVE SATISFACTION OF T HE ASSESSING OFFICER OR PRETENCE BASED ON SUSPICION AN D CONJUNCTURE BUT MUST BE A BELIEF HELD IN GOOD FAITH AND FOUNDED ON MATERIAL THAT IS NOT IRRELEVANT OR ARBIT RARY. IN THE LIGHT OF THE DISCUSSION, WE ARE OF THE VIEW, THE LD . ASSESSING OFFICER CANNOT REJECT THE CLAIM OF THE ASSESSEE MER ELY BECAUSE IT IS NOT AS PER RULE-8D. TO INVOKE RULE-8D , THE ASSESSING OFFICER SHOULD PROVIDE A JUSTIFIABLE REAS ON FOR NOT ACCEPTING THE CLAIM OF THE ASSESSEE THAT NO EXPENDI TURE HAD BEEN INCURRED FOR EARNING THE TAX FREE DIVIDEND INC OME. IN FACT, IT IS APPARENT FROM THE RECORD/ANNUAL ACCOUNT S OF THE ASSESSEE THAT NO BORROWED FUNDS WERE UTILIZED AND T HE INVESTMENT MADE BY THE ASSESSEE IS OUT OF ITS OWN F UNDS, THEREFORE, THE PROVISION CANNOT BE INVOKED ARBITRAR ILY. IT IS ALSO NOTED THAT THE ASSESSEE SUO-MOTO MADE THE DISALLOWANCE, WHEREVER, IT WAS SUPPOSE TO DO SO. TH US, ON THIS COUNT, WE ALLOW THIS GROUND OF THE ASSESSEE, M ORE SPECIFICALLY WHEN OWN FUNDS ARE MUCH MORE IN EXCESS OF THE BORROWED FUNDS. ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 30 3.27. SO FAR AS, THE ADDITIONAL GROUND (GROUND NO. 5), IS CONCERNED, TT IS ALSO NOTED THAT THE ASSESSEE IS IN THE FINANCE BUSINESS AND THE INTEREST INCOME IS MORE TH AN THE INTEREST EXPENDITURE AS IS EVIDENT FROMPAGE-14 OF T HE PAPER BOOK. IN SUCH A SITUATION, THE DECISION FROM JURIS DICTIONAL HIGH COURT IN CIT VS JUBILANT ENTERPRISES PVT. LTD. (ITA NO.1512 OF 2014) ORDER DATED 28/02/2017 SUPPORTS TH E CASE OF THE ASSESSEE. LIKEWISE, THE DECISION IN PARESH K SHAH OF COORDINATE BENCH (ITA NO.8214/MUM/2011) AND KOLKATA BENCH IN TRADE APARTMENTS LTD. (ITA NO.1277/KOL/201 1) FURTHER SUPPORTS THE CASE OF THE ASSESSEE. IN PARES H K. SHAH VS DCIT ORDER DATED 05/06/2013, THE COORDINATE BENC H HELD AS UNDER: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 30.8.2011 OF THE COMMISSIONER OF INCOME TAX(APPEALS) FOR THE ASS ESSMENT YEAR 2008-09. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS I N THIS APPEAL: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE COMMISSIONER OF INCOME TAX(APPEALS) ERRED IN UPHOLD ING THE DISALLOWANCE U/S 14A OF RS. 17,65,069/- U/R 8D OF I T RULES WITHOUT APPRECIATING THAT THE APPELLANT HAD SUFFICIENT INTE REST FREE FUNDS TO MAKE THE INVESTMENTS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAWS THE COMMISSIONER OF INCOME TAX(APPEALS) ERRED IN NOT CO NSIDERING THE FACT THAT THE BORROWED FUNDS WERE NOT UTILIZED FOR THE PURPOSE OF MAKING INVESTMENT IN THE SHARES. 3 THE ONLY ISSUE ARISING FROM THE APPEAL OF THE ASS ESSEE IS WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE COMMISSION ER OF INCOME TAX(APPEALS) IS JUSTIFIED IN CONFIRMING THE DISALLO WANCE MADE BY THE ASSESSING OFFICER U/S 14A OF RS. 17,65,069/- BY APP LYING RULE 8D OF THE I T RULES. 3.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E ASSESSING OFFICER PROPOSED TO MAKE THE DISALLOWANCE U/S 14A ON ACCOUN T OF INTEREST EXPENDITURE AS WELL AS ADMINISTRATIVE EXPENDITURE B Y APPLYING RULE 8D OF THE I T RULES. THE ASSESSEE CONTENDED BEFORE THE ASSESS ING OFFICER THAT THE ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 31 ASSESSSEES OWN FUND IS SUFFICIENT FOR MAKING THE I NVESTMENTS IN THE SHARES. IT WAS FURTHER CONTENDED THAT THE INVESTMENTS IN TH E SHARES MADE IN THE SISTER CONCERN OF THE ASSESSEE WITH A VIEW TO HAVE CONTROL OVER THE AFFAIRS OF THE SISTER CONCERN AND NOT FOR EARNING THE DIVIDEND INC OME. IT WAS FURTHER CONTENDED THAT THE INTEREST INCOME IS MORE THAN THE INTEREST EXPENDITURE; THEREFORE, NO DISALLOWANCE IS CALLED FOR U/S 14A. 3.2 THE ASSESSING OFFICER DID NOT ACCEPT THE CONTEN TION OF THE ASSESSEE AND MADE THE DISALLOWANCE ON ACCOUNT OF INTEREST U/S 14 A TO THE TUNE OF RS. 15,40,831/- AND FURTHER RS. 2,24,238/- ON ACCOUNT O F ADMINISTRATIVE EXPENDITURE TOTAL AMOUNTING TO RS. 17,65,069/-.3.3 ON APPEAL, THE COMMISSIONER OF INCOME TAX(APPEALS) HAS CONFIRMED T HE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 4 BEFORE US, THE LD AR OF THE ASSESSEE HAS SUBMITTE D THAT THE INTEREST INCOME OF THE ASSESSEE IS MORE THAN THE INTEREST EX PENDITURE; THEREFORE, NO DISALLOWANCE IS CALLED FOR U/S 14A. HE HAS REFERRED THE ORDER OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF DCI T VS M/S TRADE APARTMENT LTD., IN ITA NO. 1277/KOL.2011. THE LD AR OF THE ASSESSEE HAS POINTED OUT THAT THE ASSESSEE HAS OFFERED NET INCOM E TO TAX AND THEREFORE, NO QUESTION OF DISALLOWANCE U/S 14A ARISES. HE HAS FUR THER SUBMITTED THAT THE ASSESSEES OWN FUND IS SUFFICIENT FOR MAKING THE IN VESTMENTS IN THE SHARES OF THE SISTER CONCERN. FURTHER, THERE IS NO NEW INVEST MENTS DURING THE YEAR AND ALL INVESTMENTS IN THE EARLIER YEAR AND THE REVENUE HAS NOT MADE ANY DISALLOWANCE U/S 14A IN THE EARLIER YEAR. 4.1 ON THE OTHER HAND, THE LD DR HAS RELIED UPON TH E ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT RULE 8D IS APPLICABLE FOR THE YEAR UNDER CONSIDERATION; THEREFORE, THE ASSESSING OFFICER HAS DISALLOWED THE SAME BY COMPUTING THE DISALLOWANCE ON ACCOUNT OF INTEREST A S WELL AS ADMINISTRATIVE EXPENDITURE AS PER THE FORMULA PROVIDED U/R 8D OF T HE I T RULES. THE ASSESSEE HAS USED THE MIXED FUNDS COMPRISING OWN FU NDS AND BORROWED FUNDS; THEREFORE, DISALLOWANCE IS REQUIRED TO BE MA DE U/R 8D. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE ORDER OF THE AHMEDABAD BENCHES OF THE TRIBUNAL IN THE CASE OF ADVANCE FINSTOCK P LTD IN ITA NO.3221/AHD/2011 AND SUBMITTED THAT THE TRIBUNAL HAS UPHELD THE DISA LLOWANCE MADE U/S 14A WHEN THE ASSESSEE HAS USED MIXED FUNDS FOR THE PURP OSE OF INVESTMENTS IN SHARES. 5 HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL A S THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ASSESSEES OWN FUNDS COMPR ISING SHARE CAPITALS RESERVES AND SURPLUS IS RS.4,48,47,798/-, WHICH IS EQUALANT TO THE COST OF INVESTMENT IN THE SHARES. FURTHER, THERE IS NO FRES H INVESTMENTS DURING THE YEAR UNDER CONSIDERATION AND ALL THESE INVESTMENTS WERE MADE IN THE EARLIER YEAR; THEREFORE, THERE IS NO QUESTION OF UTILIZATIO N OF THE BORROWED FUNDS DURING THE YEAR UNDER CONSIDERATION. 5.1 IT IS PERTINENT TO NOTE THAT WHEN THE ASSESSING OFFICER HAD NOT MADE ANY DISALLOWANCE U/S 14A ON ACCOUNT OF INTEREST EXPENDI TURE IN THE EARLIER YEAR; THEREFORE, IN THE ABSENCE OF FRESH INVESTMENT DURIN G THE YEAR, NO DISALLOWANCE CAN BE MADE ON ACCOUNT OF INTEREST BY APPLYING THE PROVISIONS OF SEC. 14A. FURTHER, THE ASSESSEE EARNED THE INTER EST INCOME OF RS.42,17,981/- AGAINST THE INTEREST & BROKERAGE EXP ENDITURE OF RS.. ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 32 30,79,450/- . THIS NET INTEREST EXPENDITURE OFFERED TO TAX BY THE ASSESSEE IS RS. 11,38,531/- WHICH SHOW THAT INTEREST INCOME IS MORE THAN THE INTEREST EXPENDITURE AND THEREFORE, IT CANNOT BE PRESUMED TH AT BORROWED FUND WAS UTILISED FOR THE PURPOSE OF MAKING THE INVESTMENTS IN THE SHARES. 5.2 IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF COMMISSIONER OF INCOME-TAX V. RELIANCE UTILITIES AND POWER LTD. REPORTED IN 313 ITR 340, WE ARE OF THE OPINION THAT NO DISALLOWANCE IS CALLE D FOR U/S 14A ON ACCOUNT OF INTEREST EXPENDITURE. IN THE LIGHT OF THE FOREGOING DISCUSSION, WE FIND T HAT NEITHER THE LD. ASSESSING OFFICER NOR THE LD. COMMI SSIONER OF INCOME TAX (APPEAL) POINTED OUT ANY DEFECT IN TH E ACCOUNTS OF THE ASSESSEE, THEREFORE, THE RATIO LAID DOWN IN THE CASE OF BRITANIA INDUSTRIES LTD. VS DCIT (ITA NO.390/KOL/2013) ORDER DATED 02/03/2016, M/S RAPTAK OS BRETT & CO. LTD. VS ADDL. CIT(A) (ITA NO.7490/MUM/2 013) ORDER DATED 10/11/2016 SUPPORTS THE CASE OF THE ASS ESSEE. THE RATIO LAID DOWN IN M/S FEDEX FINANCE PVT. LTD. VS DCIT (ITA NO.1073 AND 1067/MUM/2013) AND M/S WHITE WATER MASS MEDIA VS ACIT (ITA NO.2963/MUM/2013) SUPPORTS THE CASE OF THE ASSESSEE. IT IS ALSO NOTED THAT DURING ASSESSMENT PROCEEDINGS, THE REPORT OF THE ACCOUNTANT, SPECIFYI NG THE BASIS FOR CALCULATING THE AMOUNT DISALLOWABLE U/S 1 4A OF THE ACT WAS SUBMITTED BY THE ASSESSEE AND THE LD. ASSES SING OFFICER WITHOUT REJECTING THE REPORT MECHANICALLY A PPLIED RULE-8D AND COMPUTED THE AMOUNT OF DISALLOWANCE, WH ICH CANNOT BE SAID TO BE JUSTIFIED. AT BEST, THE DISALL OWANCE MAY BE RESTRICTED AS SUO-MOTO MADE BY THE ASSESSEE. TH US, NO FURTHER DISALLOWANCE WAS REQUIRED TO BE MADE. ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 33 4. THE ASSESSEE HAS ALSO RAISED ADDITIONAL GROUNDS WITH RESPECT TO TDS CREDIT OF RS.22,26,540/- FROM D EAR INVESTMENT PVT. LTD. AND LOVELY INVESTMENT PVT. LTD . IS CONCERNED, WE FIND THAT THIS GROUND WAS ALSO RAISED BEFORE THE LD. COMMISSIONER OF INCOME TAX (APPEAL) AS IS MENTIONED IN PARA-13 (PAGE-4) OF THE IMPUGNED ORDER . THUS, WE ADMIT THE ADDITIONAL GROUND. THE LD. COUNSEL FOR THE ASSESSEE EXPLAINED THAT TWO PARTIES DEDUCTED TDS (RS.12,49,987/- BY DEAR INVESTMENT PVT. LTD. AND RS.9,76,553/- BY LOVELY INVESTMENT PVT. LTD.) BUT D ID NOT HAND OVER THE TDS CERTIFICATE TO THE ASSESSEE. IT W AS ALSO EXPLAINED THAT THE ASSESSEE WROTE TO THE ASSESSING OFFICER OF THOSE PARTIES WITH RESPECT TO THIS CLAIM BUT THERE WAS NO RESPONSE FROM THE ASSESSING OFFICER ALSO. THE LD. C OUNSEL RELIED UPON SECTION 205 OF THE ACT. IN SUCH A SITUA TION, WE REMAND THIS GROUND TO THE FILE OF THE LD. ASSESSING OFFICER TO EXAMINE THE CLAIM OF THE ASSESSEE AND IF FELT NECES SARY, THE LD. ASSESSING OFFICER MAY CALL REPORT FROM THE ASSE SSING OFFICER OF THOSE PARTIES, AS PRAYED BY THE ASSESSEE . THE LD. ASSESSING OFFICER MAY ALSO SEND NOTICES TO THE CONC ERNED PARTIES AND EXAMINE THEM WITH RESPECT TO DEDUCTION OF TAX AT SOURCE, IF SO REQUIRED. THE ASSESSEE BE GIVEN OPPOR TUNITY OF BEING HEARD WITH FURTHER LIBERTY TO FURNISH EVIDENC E, IF ANY, IN SUPPORT OF ITS CLAIM. THUS, THIS GROUND OF THE A SSESSEE ALLOWED FOR STATISTICAL PURPOSES. FINALLY, THE APPEAL OF THE REVENUE IS DISMISSED AS NOT MAINTAINABLE BEING LESS TAX EFFECT MONETARY LIMIT A ND THE ITA NO.5732 & 6648/MUM/2011 M/S ADITYA BIRLA FINANCE LTD. 34 APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATIS TICAL PURPOSES. THIS ORDER WAS PRONOUNCED IN THE OPEN IN THE PRESEN CE OF LD. REPRESENTATIVES FROM BOTH SIDES AT THE CONCL USION OF THE HEARING ON 10/04/2017. SD/- S D/- (RAJENDRA) (JOGINDER SINGH) ' # / ACCOUNTANT MEMBER $ # / JUDICIAL MEMBER MUMBAI; # DATED : 12/04/2017 F{X~{T? P.S/. .. !%$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. %& '( / THE APPELLANT (RESPECTIVE ASSESSEE) 2. )*'( / THE RESPONDENT. 3. ++ , ( %& ) / THE CIT, MUMBAI. 4. ++ , / CIT(A)- , MUMBAI, 5. /01)2 , +%& %23 , / DR, ITAT, MUMBAI 6. 145 / GUARD FILE. ! / BY ORDER, */&) //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI