ACIT, New Delhi V. M/s. Nucleus Software Exports Ltd., New Delhi

ITA 5755/DEL/2011

• Counselvise Citation: 575520114 RSA 2011
• Duration Of Justice: 10 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-11-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 31-10-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 26-12-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ANOOP KR SINGH
• Keywords: Earning of tax free income; Retrospective amendment
• Section: 14A; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI E BENC H BEFORE SHRI RAJPAL YADAV, JM & SHRI A.N. PAHUJA, AM ITA NO.5755/DEL/2011 ASSESSMENT YEAR:2007-08 A.C.I.T.,CIRCLE 13(1), ROOM NO.406,C.R. BUILDING, I.P. ESTATE,NEW DELHI V/S . NUCLEUS SOFTWARE EXPORTS LTD., 33-35, THYAGRAJ NAGAR MARKET, LODHI ROAD, NEW DELHI [PAN : AAACN 5382 P] (APPELLANT) (RESPONDENT) ASSESSEE BY APPLICATION FOR ADJOURNMENT REJECTED. REVENUE BY SHRI ANOOP KR. SINGH, DR DATE OF HEARING 31-10-2012 DATE OF PRONOUNCEMENT 02-11-2012 O R D E R A.N.PAHUJA:- THIS APPEAL FILED ON 26 TH DECEMBER, 2011 BY THE REVENUE AGAINST AN ORDER DATED 31-08-2011 OF THE LEARNED CIT(A)-XVI , NEW DELHI, RAISES THE FOLLOWING GROUNDS:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN REDUCING DISALLOWANCE U/S 14A TO ` ` 9,91,465/- @10% OF DIVIDEND INCOME ON THE BASIS OF THE DECISION OF HONBLE ITAT, MUMBAI (SB) IN THE CASE OF INCOME-TAX OFFICER VS. D AGA CAPITAL MANAGEMENT PVT. LTD. (2009) 117 ITD 169. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED BY IGNORING THE FACTS MENTIONED IN JUDGMENT O F HONBLE HIGH COURT OF BOMBAY IN THE CASE OF M/S GODREJ & BOYCE M FG. CO. LTD. VS. DCIT 228 ITR 81 (MUM) WHEREIN, THE DISALLOWANCE MADE U/S 14A READ WITH RULE 8D HAS BEEN UPHELD AND THE DECIS ION OF THE BOMBAY ITAT IN THE ABOVE CITED CASE HAS BEEN OVERRU LED. ITA N O.5755 /DEL./2011 2 3. THE APPELLANT CRAVES TO BE ALLOWED TO ADD ANY FR ESH GROUNDS OF APPEAL AND/OR DELETE OR AMEND ANY OF THE GROUNDS OF APPEAL. 2. AT THE OUTSET, CONSIDERING THE NATURE OF ISSUE AND FINDINGS OF THE ITAT IN THE PRECEDING YEAR ,THE BENCH REJECTED THE REQUEST FOR ADJOURNMENT AND PROCEEDED TO DISPOSE OF THE APPEAL AFTER HEARING BOTH THE PAR TIES.. 3.. FACTS IN BRIEF, AS PER RELEVANT ORDERS ARE THA T THE E-RETURN DECLARING INCOME OF ` ` 1,53,57,790/- FILED ON 30.10.2007 BY THE ASSESSEE, WAS SELECTED FOR SCRUTINY WITH THE SERVICE OF A NOTICE U/S 143(2) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE AS THE ACT), ISSU ED ON 06.07.2009. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFF ICER[AO IN SHORT] NOTICED THAT THE ASSESSEE CLAIMED EXEMPTION IN RESPECT OF D IVIDEND INCOME OF ` `99,14,653/- AND OFFERED AN AMOUNT OF ` ` 2,17,800/- BY WAY OF DISALLOWANCE IN TERMS OF PROVISIONS OF SECTION 14A OF THE ACT. SIN CE THE AMOUNT OFFERED FOR DISALLOWANCE WAS NOT ADEQUATE, THE AO SHOWCAUSED AS TO WHY THE DISALLOWANCE BE NOT MADE U/S 14A OF THE ACT READ WITH RULE 8D O F I.T. RULES, 1962. IN RESPONSE, THE ASSESSEE REPLIED THAT RULE 8D WAS NOT APPLICABLE IN THE YEAR UNDER CONSIDERATION AND RELIED UPON DECISION IN K.J. AROR A VS. DCIT (2009) 180 TAXMAN 131 (DEL.); IMPULSE (INDIA) PVT. LTD. VS. AC IT (2008) 22 SOT 368 (DEL.); INDO GERMEN INTERNATIONAL PVT. LTD. VS. DCIT (2009) 185 TAXMAN 103 (DEL.) AND CIT VS. HERO CYCLES (P & H). HOWEVER, THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE AND WHILE RELYING UPON DECISIONS IN THE CASE OF CIT VS. UNITED GENERAL TRUST, 200 ITR 488 (SC);INCOME-TAX OFFICER VS. DAGA CAPITAL MANAGEMENT PVT. LTD. (2009) 117 ITD 169 (MUMBAI,SB) ; GODREJ & BOYCE VS. DCIT IN I.T.A. NO.626 OF 2010 AND WP NO.758 OF 2010 ; SHRAVAN KUMAR SWARUP 210 ITR 886 (SC); KASTURBHAI MAYABHAI (164 ITR), CO MPUTED DISALLOWANCE OF ` ` 36,45,212/- IN PARA 5.8 OF THE ASSESSMENT ORDER I N TERMS OF PROVISIONS OF SEC. 14A OF THE ACT. INTER ALIA, THE AO POINTED OUT THAT SAME METHOD WAS FOLLOWED IN THE AY 2006-07WHILE WORKING OUT DISALLOWANCE U/S 14 A OF THE ACT AND LD. CIT(A) IN HIS ORDER DATED 1.6.2010 UPHELD THE DISALLOWANCE . ITA N O.5755 /DEL./2011 3 4. ON APPEAL, THE LEARNED CIT(A) RESTRICTED THE DI SALLOWANCE TO ` ` 9,91,465/- I.E., @10% OF DIVIDEND INCOME OF `99,14, 653/- HOLDING AS UNDER:- 2.2 I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE AUTHORIZED REPRESENTATIVE OF THE APPELLANT COMPANY AS WELL AS THE DISCUSSION IN THE ASSESSMENT ORDER AND AM OF THE VI EW THAT NO INCOME, WHETHER TAXABLE OR EXEMPT, CAN BE EARNED WI THOUT INCURRING SOME EXPENSES TOWARDS THE EARNING OF THE SAME. PERUSAL OF THE FINAL ACCOUNTS OF THE APPELLANT FILED BEFORE ME REVEALS THAT AS ON 31.03.2007 THE APPELLANT WAS HAVING TOTAL INVEST MENTS TO THE TUNE OF ` `69,00,92,446/- AS COMPARED TO ` `61,36,67,536/- IN THE IMMEDIATELY PRECEDING YEAR. WHILE CERTAIN INVESTME NTS IN EQUITY SHARES, BONDS AND MUTUAL FUNDS RUNNING INTO CRORES OF RUPEES WERE DISPOSED OF DURING THE YEAR, FRESH INVESTMENTS TO T HE TUNE OF CRORES WERE MADE. ALL THIS MUST HAVE ENTAILED THE EXPERTI SE AND TIME OF THE MANAGEMENT IN ORDER TO TAKE DECISIONS REGARDING WHERE TO INVEST AND HOW LONG TO CONTINUE WITH THE INVESTMENT S. OVERHEAD AND ADMINISTRATIVE EXPENSES ON TELEPHONE, POSTAGE, PRINTING AND STATIONARY, ETC. MUST HAVE ALSO BEEN INCURRED FOR T HESE ACTIVITIES AND FOR FOLLOWING UP IN REGARD TO THE COLLECTION OF DIVIDEND INCOME. ALTHOUGH THE HONBLE HIGH COURT OF BOMBAY IN THE CA SE OF GODREJ AND BOYCE HAVE HELD THAT RULE 8D IS NOT APPLICABLE WITH RETROSPECTIVE EFFECT I.E. PRIOR TO ASSESSMENT YEAR 2008-09, THEY HAVE OBSERVED THAT THE ASSESSING OFFICER HAS TO ENF ORCE THE PROVISIONS OF SECTION 14A(1). FOR THAT PURPOSE THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THEREFORE, RULE 8D IS NOT APPLICABLE TO TH E ASSESSMENT YEAR IN QUESTION. HOWEVER, SINCE THE APPELLANT HAS NOT SHOWN EXPENSES INCURRED FOR THE EARNING OF DIVIDEND INCOM E IN PROPORTION TO THE INCOME EARNED AND IN VIEW OF THE FOREGOING D ISCUSSION, THE EXPENSES U/S 14A ARE HEREBY ESTIMATED AT 10% OF THE DIVIDEND RECEIVED OF ` ` 9,91,653/-. THE DISALLOWANCE U/S 14A IS, THEREFORE , RESTRICTED TO ` `9,91,465/- WHICH INCLUDES ` `2,17,800/- DISALLOWED BY THE APPELLANT IN ITS COMPUTATION OF INCOME. THE AP PELLANT GETS RELIEF OF ` ` 26,53,747/- (`36,45,212 - `9,91,465). THIS GROUND OF APPEAL IS PARTLY ALLOWED. 5. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT (A).AT THE OUTSET, THE LD. DR INVITED OUR ATTENTION TO DECISION DATED 31.03.2011 OF THE ITAT IN THE ASSESS EES OWN CASE IN THE AY 2006-07 IN I.T.A. NO.3870/DEL./2010 AND CONTENDED T HAT MATTER IS REQUIRED TO BE RESTORED TO THE FILE OF THE AO WITH SIMILAR DIRECTI ONS, RULE 8D OF THE IT RULES,1962 ITA N O.5755 /DEL./2011 4 BEING NOT APPLICABLE IN THE YEAR UNDER CONSIDERATIO N. THE LD. AR ON BEHALF OF THE ASSESSEE DID NOT OPPOSE THESE SUBMISSIONS OF THE LD . DR. 6. WE HAVE HEARD THE LD. DR AND GONE THROUGH THE F ACTS OF THE CASE. AS REGARDS GROUNDS RELATING TO DISALLOWANCE U/S 14 A OF THE ACT, THE AO COMPUTED DISALLOWANCE OF ` 36,45,212/- INCLUDING ` 2,17,800 OFFERED SUO MOTU BY THE ASSESSEE IN PARA 5.8 OF THE ASSESSMENT ORDER WH ILE THE LD. CIT(A) REDUCED THE DISALLOWANCE TO 10% OF THE DIVIDEND INCOME WHIL E OBSERVING THAT THE ASSESSEE WAS HAVING TOTAL INVESTMENTS TO THE TUNE O F ` `69,00,92,446/- AS COMPARED TO ` `61,36,67,536/- IN THE IMMEDIATELY PRECEDING YEAR A ND CERTAIN INVESTMENTS IN EQUITY SHARES, BONDS AND MUTUAL FUND S RUNNING INTO CRORES OF RUPEES WERE DISPOSED OF DURING THE YEAR; MOREOVER, FRESH INVESTMENTS TO THE TUNE OF CRORES WERE MADE AND THIS ENTAILED THE EXPE RTISE AND TIME OF THE MANAGEMENT IN ORDER TO TAKE DECISIONS REGARDING WHE RE TO INVEST AND HOW LONG TO CONTINUE WITH THE INVESTMENTS . THERE IS NOTHING TO SUGGEST AS TO WHAT IS THE BASIS FOR DISALLOWANCE OF ` 2,17,800/- COMPUTED BY THE ASSESSEE NOR THE LATTER SEEMS TO HAVE FURNISHED ANY SPECIFIC DETAILS OF E XPENDITURE INCURRED FOR MANAGEMENT AND SUPERVISION OF AFORESAID HUGE INVES TMENTS EITHER BEFORE THE AO OR THE LD. CIT(A) IN ORDER TO ENABLE THEM TO REC ORD THEIR SATISFACTION ON THE CLAIM OF THE ASSESSEE . OF COURSE, AS PER SECTION 1 4A(2) OF THE ACT, EVEN WHERE THE ASSESSEE CLAIMS THAT THERE IS NO EXPENDITURE WH ICH HAD BEEN INCURRED, RELATING TO INCOME WHICH DOES NOT FORM PART OF HIS TOTAL INCOME, THE AO, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, HAS TO RECO RD HIS SATISFACTION IN RESPECT OF CORRECTNESS OF THE CLAIM OF THE ASSESSEE. THE PR OVISIONS CLEARLY STATE THAT WHEN THE AO EMBARKS UPON SUCH EXERCISE, HE MUST HAV E REGARD TO THE ACCOUNTS OF THE ASSESSEE; HE CANNOT SHOW A BLIND EYE TO THE PICTURE REVEALED BY THE ACCOUNTS. HONBLE APEX COURT IN KANTAMANI VENKATA N ARAYANA AND SONS V. FIRST ADDL. ITO [1967] 63 ITR 638 AND AGAIN IN MALEGAON ELECTRICITY CO. P. LTD. V. CIT [1970] 78 ITR 466 (SC) OBSERVED THAT IT IS THE DUTY OF THE ASSESSEE TO BRING TO THE NOTICE OF THE INCOME TAX OFFICER PARTICULAR ITEMS I N THE BOOKS OF ACCOUNT OR PORTIONS OF DOCUMENTS WHICH ARE RELEVANT. THE LAW CASTS A DUTY ON THE ITA N O.5755 /DEL./2011 5 ASSESSEE TO DISCLOSE FULLY AND TRULY ALL MATERIAL F ACTS NECESSARY FOR HIS ASSESSMENT FOR THAT YEAR. 6.1. HONBLE BOMBAY HIGH COURT IN THE CASE OF GOD REJ & BOYCE MANUFACTURING COMPANY LTD. (SUPRA) WHILE ADJUDICATING A SIMILAR ISSUE IN THE CONTEXT OF PROVISIONS OF SEC. 14A OF THE ACT AND RULE 8D OF THE IT RULES,1962 CONCLUDED THAT RULE 8D, INSERTED W.E.F 24.3.2008 CANNOT BE REGARDED AS RETROSPECTIVE BECAUSE IT ENAC TS AN ARTIFICIAL METHOD OF ESTIMATING EXPENDITURE RELATABLE TO TAX-F REE INCOME. IT APPLIES ONLY W.E.F AY 2008-09. FOR THE ASSESSMENT Y EARS WHERE RULE 8D DOES NOT APPLY, THE AO WILL HAVE TO DETERMI NE THE QUANTUM OF DISALLOWABLE EXPENDITURE BY A REASONABLE METHOD HAVING REGARD TO ALL THE FACTS AND CIRCUMSTANCES, THE HONBLE HIG H COURT CONCLUDED. 6.2 HONBLE SUPREME COURT IN THEIR DECISION DATED 6.7.2010 IN CIT V. WALFORT SHARE & STOCK BROKERS (P.) LTD.,326 ITR 1, INTER ALIA, OBSERVED THAT FOR ATTRACTING SECTION 14A OF THE ACT THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE, WHICH IS ITS RE LATIONSHIP WITH THE TAX EXEMPT INCOME. THE THEORY OF APPORTIONMENT OF E XPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A, HONBLE APEX COURT CONCLUDED. IN THE WORDS OF HONB LE APEX COURT: 17. THE INSERTION OF SECTION 14A WITH RETROSPECTIV E EFFECT IS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT TO ALLOW DEDUCTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSES SEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOM E UNDER THE ACT AGAINST THE TAXABLE INCOME (SEE CIRCULAR NO. 14 OF 2001, DATED 22- 11-2001). IN OTHER WORDS, SECTION 14A CLARIFIES THA T EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSES INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCOME AND PARTLY TO THE TAXABLE INCOME. IN THE ABS ENCE OF SECTION 14A, THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WAS BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDATE O F SECTION 14A ITA N O.5755 /DEL./2011 6 IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAI NST TAXABLE INCOME AND AT THE SAME TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY APPOR TIONMENT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN INCOME S ARE NOT INCLUDIBLE WHILE COMPUTING TOTAL INCOME AS THESE ARE EXEMPT UN DER CERTAIN PROVISIONS OF THE ACT. IN THE PAST, THERE HAVE BEEN CASES IN WHICH DEDUCTION HAS BEEN SOUGHT IN RESPECT OF SUCH INCOME S WHICH IN EFFECT WOULD MEAN THAT TAX INCENTIVES TO CERTAIN IN COMES WAS BEING USED TO REDUCE THE TAX PAYABLE ON THE NON-EXEMPT IN COME BY DEBITING THE EXPENSES, INCURRED TO EARN THE EXEMPT INCOME, AGAINST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE. O N THE SAME ANALOGY THE EXEMPTION IS ALSO IN RESPECT OF NET INC OME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABL E INCOME. THIS IS THE PURPORT OF SECTION 14A. IN SECTION 14A, THE FIR ST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS C HAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS OF INCOME AS PRES CRIBED UNDER CHAPTER IV WOULD FALL WITHIN SECTION 14A. THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTA L INCOME UNDER THE ACT'. IT MEANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 14A. FURTHER, SECTION 14 S PECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE CHARGEABLE, AN INCOME HAS TO BE BROUGHT UNDER ONE OF THE FIVE HEAD S. SECTIONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR T HE PURPOSE OF CHARGEABILITY TO TAX UNDER 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 UNDER ONE OF T HE ABOVE HEADS AND IS CHARGEABLE TO TAX. IF AN INCOME LIKE DIVIDEN D INCOME IS NOT A PART OF THE TOTAL INCOME, THE EXPENDITURE/DEDUCTION THOUGH OF THE NATURE SPECIFIED IN SECTIONS 15 TO 59 BUT RELATED T O THE INCOME NOT FORMING PART OF TOTAL INCOME COULD NOT BE ALLOWED A GAINST OTHER INCOME INCLUDIBLE IN THE TOTAL INCOME FOR THE PURPO SE OF CHARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT OF EXPENDITURES BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A. READING SECTION 14 IN JUXTAPOSITION WITH SECT IONS 15 TO 59, IT IS CLEAR THAT THE WORDS 'EXPENDITURE INCURRED' IN SECT ION 14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC . IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37) ITA N O.5755 /DEL./2011 7 6.3 HONBLE PUNJAB & HARYANA HIGH COURT IN THE IR DECISION IN CIT VS. HERO CYCLES LTD.,323 ITR 518 HAVE OBSERVED THAT DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE AND WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A C ANNOT STAND. 6.4 IN CHEMINVEST LTD. V. INCOME-TAX OFFICER,317I TR(AT)86,SPECIAL BENCH HELD THAT WHEN THE EXPENDITURE IS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, IT HAS TO SUFFER THE DISALLOW ANCE IRRESPECTIVE OF THE FACT WHETHER ANY INCOME IS EARNED BY THE ASSESSEE OR NOT AND THE PROVISIONS OF SEC. 14A OF THE ACT DO NOT ENVISAGE ANY SUCH EXCEPTION. 6.5 HONBLE JURISDICTIONAL HIGH COURT IN A RECEN T DECISION DATED 18.11.2011 IN MAXOPP INVESTMENT LTD.(SUPRA) HELD AS UNDER: '41. SUB-SECTION (2) OF SECTION 14A, AS WE HAVE SEE N, STIPULATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXP ENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME 'IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED'. OF COURSE, THIS DETERMINATION CAN ONLY BE UNDERTAKEN IF THE ASSESSI NG OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF SUCH EXPENDITURE. THIS PART OF SECTION 14A(2) WHICH EXPL ICITLY REQUIRES THE FULFILLMENT OF A CONDITION PRECEDENT IS ALSO IMPLIC IT IN SECTION 14A(1) [AS IT NOW STANDS] AS ALSO IN ITS INITIAL AVATAR AS SECTION 14 A. IT IS ONLY THE PRESCRIPTION WITH REGARD TO THE METHOD OF DETERMINING SUCH EXPEN DITURE WHICH IS NEW AND WHICH WILL OPERATE PROSPECTIVELY. IN OTHER WORDS, S ECTION 14A, EVEN PRIOR TO THE INTRODUCTION OF SUB-SECTIONS (2) & (3) WOULD RE QUIRE THE ASSESSING OFFICER TO FIRST REJECT THE CLAIM OF THE ASSESSEE WITH REGA RD TO THE EXTENT OF SUCH EXPENDITURE AND SUCH REJECTION MUST BE FOR DISCLOSE D COGENT REASONS. IT IS THEN THAT THE QUESTION OF DETERMINATION OF SUCH EXP ENDITURE BY THE ASSESSING OFFICER WOULD ARISE. THE REQUIREMENT OF ADOPTING A SPECIFIC METHOD OF DETERMINING SUCH EXPENDITURE HAS BEEN INTRODUCED BY VIRTUE OF SUB-SECTION (2) OF SECTION 14A. PRIOR TO THAT, THE ASSESSING OF FICER WAS FREE TO ADOPT ANY REASONABLE AND ACCEPTABLE METHOD. 42. THUS, THE FACT THAT WE HAVE HELD THAT SUB-SECTI ONS (2) & (3) OF SECTION 14A AND RULE 8D WOULD OPERATE PROSPECTIVELY (AND, N OT RETROSPECTIVELY) DOES NOT MEAN THAT THE ASSESSING OFFICER IS NOT TO SATIS FY HIMSELF WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE WITH REGAR D TO SUCH EXPENDITURE. IF HE IS SATISFIED THAT THE ASSESSEE HAS CORRECTLY REF LECTED THE AMOUNT OF SUCH EXPENDITURE, HE HAS TO DO NOTHING FURTHER. ON THE O THER HAND, IF HE IS SATISFIED ON AN OBJECTIVE ANALYSIS AND FOR COGENT REASONS THA T THE AMOUNT OF SUCH ITA N O.5755 /DEL./2011 8 EXPENDITURE AS CLAIMED BY THE ASSESSEE IS NOT CORRE CT, HE IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ON THE BAS IS OF A REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. IT WOULD BE APP ROPRIATE TO RECALL THE WORDS OF THE SUPREME COURT IN WALFORT (SUPRA) TO TH E FOLLOWING EFFECT:- ' THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A .' SO, EVEN FOR THE PRE-RULE 8D PERIOD, WHENEVER THE I SSUE OF SECTION 14A ARISES BEFORE AN ASSESSING OFFICER, HE HAS, FIRST O F ALL, TO ASCERTAIN THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, THE ASSESSING OFFICER WILL HAVE TO VERIFY THE CORRE CTNESS OF SUCH CLAIM. IN CASE, THE ASSESSING OFFICER IS SATISFIED WITH THE C LAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, THE ASSESSING OFFICER IS TO ACCEPT THE CLAIM OF THE ASS ESSEE INSOFAR AS THE QUANTUM OF DISALLOWANCE UNDER SECTION 14A IS CONCER NED. IN SUCH EVENTUALITY, THE ASSESSING OFFICER CANNOT EMBARK UP ON A DETERMINATION OF THE AMOUNT OF EXPENDITURE FOR THE PURPOSES OF SECTION 1 4A(1). IN CASE, THE ASSESSING OFFICER IS NOT, ON THE BASIS OF OBJECTIVE CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY, SATISFIED WITH T HE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HE SHALL HAVE TO REJECT THE CLAIM AND STATE THE REASONS FOR DOING SO. HAVING DONE SO, THE ASSESSING OFFICER WILL HAVE TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. HE IS REQUIRED TO DO SO ON THE BASIS OF A REASONABLE AND ACCEPTABLE METHOD OF APPO RTIONMENT.' . 6.6. HONBLE CALCUTTA HIGH COURT IN DHANUKA & SONS VS. CIT,12 TAXMANN.COM 227(CAL.) HELD THAT AFTER HEARING THE LEARNED COUNSEL APPEARIN G FOR THE PARTIES AND AFTER GOING THROUGH THE MATERIALS ON RECORD AND THE DECISIONS C ITED BY MR. KHAITAN, WE FIND THAT THE SUPREME COURT IN THE CASES OF CIT V. MAHAR ASTRA SUGAR MILLS LTD. [1971] 82 ITR 452 AND RAJASTHAN STATE WAREHOUSING CORPN. V. CIT [200 0] 242 ITR 450 / 109 TAXMAN 145 HAVING HELD THAT WHERE THERE IS ONE INDIVISIBLE BU SINESS GIVING RISE TO TAXABLE INCOME AS WELL AS EXEMPT INC OME, THE ENTIRE EXPENDITURE INCURRED IN RELATION TO THAT BUSINESS WOULD HAVE TO BE ALLOWED EVEN IF A PART OF THE INCOME EARNED FROM THE BUSINESS IS EXEMPT FROM TAX, SECTION 14A OF THE ACT WAS ENACTED TO OVERCOME THOSE JUDICIAL PRONOUNCEMENTS. THE OBJECT OF SECTION14A OF THE ACT IS TO DISALLOW THE DIRECT AND INDIRECT EXPE NDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . 8. IN THE CASE BEFORE US, THERE IS NO DISPUTE THAT PA RT OF THE INCOME OF THE ASSESSEE FROM ITS BUSINESS IS FROM DIVIDEND WHICH I S EXEMPT FROM TAX WHEREAS THE ASSESSEE WAS UNABLE TO PRODUCE ANY MATERIAL BEF ORE THE AUTHORITIES BELOW SHOWING THE SOURCE FROM WHICH SUCH SHARES WERE ACQU IRED. MR. KHAITAN ITA N O.5755 /DEL./2011 9 STRENUOUSLY CONTENDED BEFORE US THAT FOR THE LAST F EW YEARS BEFORE THE RELEVANT PREVIOUS YEAR, NO NEW SHARE HAS BEEN ACQUIRED AND T HUS, THE LOAN THAT WAS TAKEN AND FOR WHICH THE INTEREST IS PAYABLE BY THE ASSESSEE WAS NOT FOR ACQUISITION OF THOSE OLD SHARES AND, THEREFORE, THE AUTHORITIES BELOW ERRED IN LAW IN GIVING BENEFIT OF PROPORTIONATE DEDUCTION. 9. IN OUR OPINION, THE MERE FACT THAT THOSE SHARES WE RE OLD ONES AND NOT ACQUIRED RECENTLY IS IMMATERIAL. IT IS FOR THE ASSESSEE TO S HOW THE SOURCE OF ACQUISITION OF THOSE SHARES BY PRODUCTION OF MATERIALS THAT THOSE WERE ACQUIRED FROM THE FUNDS AVAILABLE IN THE HANDS OF THE ASSESSEE AT THE RELEV ANT POINT OF TIME WITHOUT TAKING BENEFIT OF ANY LOAN. IF THOSE SHARES WERE PURCHASED FROM THE AMOUNT TAKEN IN LOAN, EVEN FOR INSTANCE, FIVE OR TEN YEARS AGO, IT IS FOR THE ASSESSEE TO SHOW BY THE PRODUCTION OF DOCUMENTARY EVIDENCE THAT SUCH LO ANED AMOUNT HAD ALREADY BEEN PAID BACK AND FOR THE RELEVANT ASSESSMENT YEAR , NO INTEREST IS PAYABLE BY THE ASSESSEE FOR ACQUIRING THOSE OLD SHARES. IN THE ABSENCE OF ANY SUCH MATERIALS PLACED BY THE ASSESSEE, IN OUR OPINION, T HE AUTHORITIES BELOW RIGHTLY HELD THAT PROPORTIONATE AMOUNT SHOULD BE DISALLOWED HAVING REGARD TO THE TOTAL INCOME AND THE INCOME FROM THE EXEMPT SOURCE. IN TH E ABSENCE OF ANY MATERIAL DISCLOSING THE SOURCE OF ACQUISITION OF SHARES WHIC H IS WITHIN THE SPECIAL KNOWLEDGE OF THE ASSESSEE, THE ASSESSING AUTHORITY TOOK A MOST REASONABLE APPROACH IN ASSESSMENT. 6.7 IN THE INSTANT CASE, IN THE PRECEDING ASSES SMENT YEAR, A CO-ORDINATE BENCH VIDE ORDER DATED 31.03.2011 RESTORED THE MATTER BAC K TO THE FILE OF THE AO WITH THE DIRECTIONS TO RECOMPUTE REASONABLE AMOUNT OF DI SALLOWANCE AFTER MAKING INQUIRIES REGARDING EXPENDITURE INCURRED FOR EARNIN G THE INCOME, WHICH IS NOT REQUIRED TO BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. THE RELEVANT FINDINGS OF THE ITAT READ AS UNDER:- 2. IT IS THE COMMON CASE OF BOTH THE PARTIES THAT THE DECISION OF SPECIAL BENCH OF MUMBAI TRIBUNAL IN THE CASE OF DAG A CAPITAL MANAGEMENT (P) LTD. (2009) 117 ITD (AT) 169 IS NO LONGER A GOOD LA W IN VIEW OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MANUFACTURING COMPANY LIMITED VS. DCIT, (2010) 194 TAXMAN 203. I N THIS CASE, IT HAS BEEN HELD BY THE HONBLE HIGH COURT THAT THE PROVISION C ONTAINED IN RULE 8D IS APPLICABLE TO THE PROCEEDINGS OF ASSESSMENT YEAR 20 08-09 AND ONWARD. IT IS ALSO HELD THAT PRIOR TO THIS YEAR, THE ASSESSING OFFICER CAN MAKE INQUIRY REGARDING THE EXPENDITURE INCURRED FOR EARNING THE INCOME WHICH I S NOT TO BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. ON THE BASIS OF SUCH INQUIRY, HE MAY MAKE DISALLOWANCE OF A REASONABLE AMOUNT, DEPENDING THE FACTS OF THE CASE. THE EXERCISE AS PER THE RATIO OF THIS CASE HAS NOT BEEN CARRIED OUT BY THE LOWER AUTHORITIES. THEREFORE, THE MATTER IS RESTORED TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE MATTER OF THE DISALLOWANCE OR OTHERWI SE AS PER AFORESAID DECISION. ITA N O.5755 /DEL./2011 10 IN CASE THE DECISION OF ANY OTHER HIGH COURT INCLUD ING THE TERRITORIAL HIGH COURT IS RECEIVED TILL FINALIZATION OF THE ASSESSMENT PURSUA NT TO THIS ORDER, THE SAME SHALL ALSO BE CONSIDERED BY THE ASSESSING OFFICER. 7. AS ALREADY OBSERVED, IN TERMS OF THE AFORESAID D ECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN MAXOPP INVESTMENT LTD. (SUPRA), EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURR ED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, THE AO IS REQUIRED TO VERIFY THE CORRECTNESS OF SUCH CLAIM. IN CASE , THE AO IS NOT, ON THE BASIS OF OBJECTIVE CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUN ITY, SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HE SHALL HAVE TO REJECT THE CLAIM AND STATE THE REASONS FOR DOING SO. HAVING DONE SO, THE AO HAS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT, HONBLE HIGH C OURT CONCLUDED . FOLLOWING THE VIEW TAKEN IN THIS DECISION, HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. MACHINO PLASTIC LTD IN THEIR DECISION DATED 28.2.2012 IN I TA NO. 92 OF 2011, RESTORED THE MATTER TO THE FILE OF THE AO, BEING HANDICAPPED BEC AUSE OF FAILURE OF THE ASSESSEE TO FURNISH RELEVANT DETAILS AND PARTICULAR S .IN THE INSTANT CASE ALSO, THERE IS NOTHING TO SUGGEST AS TO WHETHER OR NOT TH E ASSESSEE FURNISHED THE RELEVANT DETAILS OR ACCOUNTS BEFORE THE AO WHILE M AKING THE DISALLOWANCE IN TERMS OF PROVISIONS OF SEC. 14A OF THE ACT. THERE I S NOTHING IN THE ASSESSMENT ORDER OR IMPUGNED ORDER AS TO WHETHER THE ASSESSEE PLACED THE RELEVANT DETAILS & ACCOUNTS BEFORE THE AO NOR THE LD. CIT(A) SEEMS TO HAVE UNDERTAKEN ANY EXERCISE TO ASCERTAIN THE DETAILS OF EXPENDITURE OB JECTIVELY IN MANAGING AND SUPERVISING THE AFORESAID HUGE INVESTMENTS .IN VIEW OF THE FOREGOING, ESPECIALLY IN THE LIGHT OF FINDINGS OF THE CO-ORDIN ATE BENCH IN THE PRECEDING YEAR,WE CONSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO T HE FILE OF THE AO FOR DECIDING THE ISSUE, AFRESH IN ACCORDANCE WITH LAW IN THE LIGHT OF OUR AFORESAID OBSERVATIONS AND VARIOUS JUDICIAL PRO NOUNCEMENTS, INCLUDING THOSE REFERRED TO ABOVE, AFTER ALLOWING S UFFICIENT OPPORTUNITY TO THE ASSESSEE NEEDLESS TO SAY THAT W HILE REDECIDING ITA N O.5755 /DEL./2011 11 THE ISSUE, THE AO SHALL PASS A SPEAKING ORDER, GIV ING REASONS FOR HIS SATISFACTION OR OTHERWISE, AS POINTED OUT BY T HE HONBLE JURISDICTIONAL HIGH COURT IN THEIR DECISION IN MAXO PP INVESTMENT LTD (SUPRA),BRINGING OUT CLEARLY EXPENDITURE INCURRED I N MANAGING AND SUPERVISING THE AFORESAID HUGE INVESTMENTS. THE ASS ESSEE IS ALSO DIRECTED TO FURNISH ALL THE RELEVANT DETAILS OF EXPENDITURE ACTUALLY INCURRED IN MANAGING AND SUPERVISING THE AFORESAID HUGE INVESTM ENTS ALONG WITH RELEVANT ACCOUNTS. WITH THESE OBSERVATIONS, GR OUND NOS 1 &2 IN THE APPEAL ARE DISPOSED OF . 8. NO ADDITIONAL GROUND HAVING BEEN RAISED BEFORE U S IN TERMS OF RESIDUARY GROUND NO. 3 IN THE APPEAL, ACCORDINGLY, THIS GRO UND IS DISMISSED. 9.. NO OTHER PLEA OR ARGUMENT WAS MADE BEFORE U S. 10. IN THE RESULT, APPEAL IS ALLOWED BUT FOR STATISTICAL PURPOSES SD/- SD/- (RAJPAL YADAV) (A.N. PAHUJA) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) NS COPY OF THE ORDER FORWARDED TO :- 1. ASSESSEE 2. A.C.I.T.,CIRCLE 13(1), ROOM NO.406,C.R. BUIL DING, I.P. ESTATE,NEW DELHI 3. CIT CONCERNED 4. CIT(A)-XVI, NEW DELHI 5. DR, ITAT,E BENCH, NEW DELHI 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, DELHI ORDER PRONOUNCED IN OPEN COURT