CHANAKYA INTERNAITNAL P. LTD, MUMBAI V. DCIT CIR 1(1), MUMBAI

ITA 6285/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9432 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 06-11-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 12-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Retrospective amendment
• Section: 14A; 147; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C, MUMBAI BEFORE SHRI D. KARUNAKARA RAO , ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. 6285/MUM/2011 (ASSESSMENT YEAR: 2008-09) CHANAKYA INTERNATIONAL PVT. LTD., 218/219, JASWANT INDUSTRIAL ESTATE, 63 TARDEO ROAD, MUMBAI -400 034 PAN AAACC 4592 Q VS DCIT- 1(1), AAYAKAR BHAVAN, MUMBAI -400 020 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI PARESH SHAPARIA RESPONDENT BY : SHRI RAJARSHI DWIVEDY DATE OF HEARING: 08.11.2012 DATE OF PRONOUNCEMENT: 21.11.2012 O R D E R PER VIVEK VARMA, JM: THE APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF C IT(A) 9, MUMBAI, DATED 05.07.2011, WHEREIN THE FOLLOWING GROUNDS HAVE BEEN RAISED: 1. THE LEARNED CIT(A) IN CONFIRMING DISALLOWANCE OF RS. 28,31,068/- U/S 14A R.W. RULE 8D OVER AND ABOVE DISALLOWANCE ALREADY MADE THE APPELLANT OF RS. 35,63,498/-. 2. THE LEARNED CIT(A) OUGHT NOT TO HAVE CONFIRMED DISALLOWANCE OF RS. 28,31,068/- U/S 14A R W RULE 8D . 3. THE DISALLOWANCE OF RS. 28,31,068/- U/S 14A R.W RULE 8D REQUIRES TO BE DELETED. 2. THE FACTS ARE THAT THE ASSESSEE IS ENGAGED IN THE B USINESS OF MANUFACTURE & EXPORT AND EMBROIDERY MADE UPS AND PANE LS. IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD SHOWN EXEMP T DIVIDEND INCOME OF RS. 65,93,178, AGAINST WHICH, THE ASSESSEE HAD SH OWN A DISALLOWANCE OF RS. 35,63,498 AS UNDER : CHANAKYA INTERNATIONAL PVT. LTD. ITA 6285/MUM/2011 2 DEMAT CHARGES 5,44,431 STT 25,01,067 PMS CHARGES 3,20,898 OTHER 1,97,102 35,63,498 3. THE AO, IN THE ASSESSMENT ORDER TOOK INTO ACCOUNT D MAT CHARGES AND STT PAID AND ADDED THE SAME TO RS. 33,49,0 68 (COMPUTED 8D DISALLOWANCE AS PER PRESCRIBED FORMULA), AND CAME TO TH E CONCLUSIVE FIGURE OF RS. 28,31,068. HE, IN FACT, DISREGARDED THE DISALLOWANCE MADE BY THE ASSESSEE SUO MOTO . 4. NOT SATISFIED BY THE DECISION OF THE AO, THE ASSESSEE A PPROACHED THE CIT(A), WHO, SUSTAINED THE COMPUTATION, AS MADE BY THE AO. 5. AGGRIEVED, THE ASSESSEE IS NOW BEFORE THE ITAT. 6. BEFORE US, THE AR POINTED OUT THE DISALLOWANCE MADE BY THE REVENUE AUTHORITIES AND REITERATED HIS ARGUMENTS BEFORE THE REVENUE AUTHORITIES. THE AO POINTED OUT THAT THE REVENUE AUTHOR ITIES, THOUGH APPLIED THE PRESCRIBED FORMULA UNDER RULE 8D, AND ALSO REFE RRED TO THE APPLICATION OF RATIO DECIDED BY THE HONBLE BOMBAY HIGH COU RT IN GODREJ & BOYCE MFG. CO. LTD., REPORTED IN 328 ITR 81, BUT IN FACT, THE REVENUE AUTHORITIES HAVE NOT ADOPTED THE SPIRIT OF THE DE CISION, BUT HAS APPLIED THE DECISION IN A MECHANICAL MANNER. 7. THE AR ALSO SUBMITTED THAT THE REVENUE AUTHORITIES DID NOT SPECIFY AS TO HOW AND WHY, THE DISALLOWANCE MADE SUO MOTO BY THE ASSESSEE AT RS. 35,63,498 WAS INCORRECT AND HOW THE DIS ALLOWANCE COMPUTED BY THE AO AT RS. 63,94,566 WAS CORRECT. THE AR , THEREFORE, SUBMITTED THAT, THE REVENUE AUTHORITIES ERRED IN NOT SPE CIFYING THE DISREGARD, OF THE ASSESSEES FIGURE FOR DISALLOWANCE. 8. THE DR RELIED ON THE ORDERS OF THE REVENUE AUTHORITIES. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND HAVE PERUSE D THE MATERIAL PLACED BEFORE US. FROM THE PLAIN READING OF THE OR DER BY THE REVENUE AUTHORITIES WE FIND THAT THEY DO NOT SPECIFY HOW THE COMPUTATION ADOPTED BY THE ASSESSEE WAS INCORRECT, BEC AUSE, BEFORE APPLYING THE FORMULA, THE AO HAS TO SHOW HIS DISSATISFACTIO N AGAINST THE COMPUTATION MADE BY THE ASSESSEE. WE HAVE, IN OUR O WN ORDER IN THE CASE OF CIBA RESEARCH (INDIA) LTD., ITA NO. 6392 & 6112/MUM/2011, HAVE OBSERVED, WE HAVE CONSIDERED THE ABOVE ARGUMENTS OF BOTH THE PARTIES AND PERUSED THE PAPERS FILED BEFORE US. IT IS AN UN DISPUTED FACT THAT THE GROUNDS/OBJECTIONS RAISED BY BOTH THE PART IES OF THE LITIGATION REVOLVES AROUND THE APPLICABILITY OF THE PROVISIONS OF RULE 8D OF THE IT RULES, 1962 AND THE SECTION 14A O F THE ACT. WE CHANAKYA INTERNATIONAL PVT. LTD. ITA 6285/MUM/2011 3 HAVE PERUSED THE ABOVE EXTRACTED PORTION FROM THE I MPUGNED ORDER AND FIND THE AO IS DIRECTED TO WORK OUT THE D ISALLOWANCES AS PER THE DECISION OF THE JURISDICTIONAL HIGH COUR T AFTER AFFORDING AN OPPORTUNITY TO THE APPELLANT OF BEING HEARD. WE DO NOT FIND ANY MISTAKE IN THE SAID DIRECTION OF THE C IT (A). NEVERTHELESS, IT IS A FACT THAT THE CIT(A) HAS NOT ADDRESSED TO THE ARGUMENTS RAISED BY ASSESSEE. THUS, THE ORDER OF TH E CIT(A) IS DEFICIENT TO THE EXTENT THAT HE HAS NOT ADDRESSED T O THE ISSUES I.E. IF THE DISALLOWANCE ARE CALLED FOR AT ALL WHEN THE ASSESSEE HAS NOT SPENT ANY EXPENDITURE WHAT SO EVER FOR EARN ING OF THE IMPUGNED DIVIDEND INCOME AND IF THE EXPENDITURE AT ALL BE DISALLOWED IN VIEW OF THE AMENDMENTS TO THE SECTION 14A BY THE FINANCE ACT 2006. THE ORDER OF THE CIT(A) DOES NOT CONTAIN THE REASONS FOR REJECTIONS OF THE ASSESSEES CLAIMS ABO UT THE NON INCURRING OF ANY EXPENDITURE BEFORE INVOKING THE JU RISDICTIONAL HIGH COURTS JUDGMENT IN THE CASE OF GODREJ & BOYCE MFG. CO LTD (SUPRA). THE SAID JUDGMENT SPECIFIES THAT THE AO IS UNDER OBLIGATION FIRST TO DISSATISFY HIMSELF ABOUT THE CL AIMS OF THE ASSESSEE ON THE TOPIC BEFORE ANY REASONABLE METHOD FOR ANY DETERMINATION OF DISALLOWABLE SUM IS DETERMINED. WE HAVE THE BENEFIT OF THE DECISION OF GODREJ & BOYCE MFG. CO. LTD., THE HONBLE BOMBAY HIGH COURT HELD, REPORTED IN 328 ITR 81, WHEREIN THE HONBLE BOMBAY HIGH COURT EXPLAINED THE INTENT FOR B RINGING IN THE PROVISION OF SECTION 14A AND ITS APPLICATION. THE HONBL E BOMBAY HIGH COURT OBSERVES, THE INSERTION OF SECTION 14A WAS CURATIVE AND DECL ARATORY OF THE INTENT OF PARLIAMENT. THE BASIC PRINCIPLE OF TAXATION IS T HAT ONLY NET INCOME, NAMELY, GROSS INCOME MINUS EXPENDITURE THAT IS TAXABLE. EXP ENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THAT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. HOWEVER, ASSESSEES HAD CLAIMED DEDUCTIONS I N RESPECT OF INCOME WHICH WAS EXEMPT UNDER VARIOUS PROVISIONS OF THE AC T AS A RESULT OF WHICH THE TAX INCENTIVE GIVEN IN RESPECT OF CERTAIN CATEGORIE S OF INCOME WHICH WERE EXEMPT WAS BEING UTILIZED TO REDUCE THE TAX PAYABLE ON NON -EXEMPT INCOME. THIS BEING CONTRARY TO LEGISLATIVE INTENT, SECTION 14A WAS INS ERTED IN ORDER TO RESTORE THE LEGAL POSITION CONSISTENT WITH PARLIAMENTARY INTENT . DECLARATORY OR CURATIVE AMENDMENTS ARE CONSTRUED TO BE RETROSPECTIVE BECAUS E THEY AUTHORITATIVELY SET FORTH THE ORIGINAL LEGISLATIVE INTENT. PARLIAMENT P LACED THE MATTER BEYOND DOUBT BY LEGISLATING UPON SECTION 14A WITH RETROSPECTIVE EFFECT FROM APRIL 1, 1962. THIS WAS ALSO AMPLIFIED IN THE CENTRAL BOARD OF DIR ECT TAXES CIRCULAR NO. 14 OF 2001 ([2001] 252 ITR (ST.) 65). CONSEQUENT UPON THE ENACTMENT OF SECTION 14A, THE P OSITION AS IT HAS EMERGED IN LAW IS THAT NO DEDUCTION CAN BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. SECTION 14A, HAS THE EF FECT OF BROADENING OR WIDENING THE EARLIER POSITION. THE CONSEQUENCE OF T HE INSERTION OF SECTION 14A HAS BEEN DEALT WITH IN A JUDGMENT OF THE SUPREME CO URT IN CIT V. WALFORT SHARE AND STOCK BROKERS P. LTD. [2010] 326 ITR 1, D ELIVERED ON JULY 6, 2010 (CIVIL APPEAL NO. 4927 OF 2010). IN WALFORT, THE AS SESSEE WHO WAS A MEMBER OF THE STOCK EXCHANGE, PURCHASED UNITS OF A MUTUAL FUN D ON MARCH 24, 2000, UPON WHICH IT BECAME ENTITLED TO A DIVIDEND OF RS. 1.82 CRORES. AS A RESULT OF A PAYOUT OF THE DIVIDEND, THE NAV OF THE MUTUAL FUND WHICH WAS RS. 17.23 PER UNIT ON MARCH 24, 2000, STOOD REDUCED TO RS. 13.23 PER UNIT ON MARCH 27, CHANAKYA INTERNATIONAL PVT. LTD. ITA 6285/MUM/2011 4 2000. THE ASSESSEE IN THE RETURN CLAIMED A DEDUCTIO N OF RS.1.82 CRORES AS EXEMPT FROM TAX UNDER SECTION 10(33) BUT ALSO CLAIM ED A SET OFF OF THE LOSS INCURRED ON THE SALE OF THE UNITS. THIS WAS DISALLO WED BY THE ASSESSING OFFICER ON THE GROUND THAT THE TRANSACTION WAS IN THE NATUR E OF DIVIDEND STRIPPING. THE DISALLOWANCE WAS DELETED BY THE TRIBUNAL WHOSE DECI SION WAS CONFIRMED BY THE HIGH COURT. THE MAIN ISSUE BEFORE THE SUPREME COURT WAS WHETHER THE LOSS ON THE SALE OF THE UNITS COULD BE CONSIDERED AS EXP ENDITURE IN RELATION TO EARNING DIVIDEND INCOME EXEMPT UNDER SECTION 10(33 ) AND HENCE DISALLOWABLE UNDER SECTION 14A. THE REVENUE CLAIMED THAT THE DIF FERENTIAL BETWEEN THE PURCHASE AND THE SALE PRICE OF THE UNITS CONSTITUTE D EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING TAX FREE INCOME AND WAS LIABLE TO BE DISALLOWED UNDER SECTION 14A. THE SUPREME COURT EXPLAINED THE REASON FOR THE INSERTION OF SECTION 14A THUS (PAGES 15 AND 16) : 'THE INSERTION OF SECTION 14A WITH RETROSPECTIVE EF FECT IS THE SERIOUS ATTEMPT ON THE PART OF PARLIAMENT NOT TO ALLOW DEDU CTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST THE TAXABLE INCOME (SEE CIRCULAR NO. 14 OF 2001, DATED NOVEMBER 22, 2001). IN OTHER WORDS, SECTION 14A CLARIFIES THAT 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 WA S BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDATE OF SECTION 14A IS CLEAR . IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL O F THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY AP PORTIONMENT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. THE BASIC RE ASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN INCOMES ARE NOT INCLUDIBLE WHIL E COMPUTING TOTAL INCOME AS THESE ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE AC T. IN THE PAST, THERE HAVE BEEN CASES IN WHICH DEDUCTION HAS BEEN SOUGHT IN R ESPECT OF SUCH INCOMES WHICH IN EFFECT WOULD MEAN THAT TAX INCENTIVES TO CERTAIN INCOMES WAS BEING USED TO REDUCE THE TAX PAYABLE ON THE NON-EXEMPT I NCOME BY DEBITING THE EXPENSES, INCURRED TO EARN THE EXEMPT INCOME, AGAIN ST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOM E, I.E., GROSS INCOME MINUS THE EXPENDITURE. ON THE SAME ANALOGY THE EXEMPTION IS A LSO IN RESPECT OF NET INCOME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE INCOME. THIS IS THE PURPORT OF SECTION 14A.' DURING THE COURSE OF THIS JUDGMENT, IT WOULD BE NEC ESSARY TO REVISIT THE DECISION OF THE SUPREME COURT IN WALFORT. AT THIS S TAGE, HOWEVER, IT NEEDS TO BE EMPHASIZED THAT THE PROVISIONS OF SECTION 14A WERE CONSTRUED IN WALFORT TO EVINCE PARLIAMENTARY INTENT NOT TO ALLOW DEDUCTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST TAXABLE INCOME. SECTION 14A IS CLARIFICATORY OF THE POSITION THAT EXPENSES CAN BE ALLOWED ONLY T O THE EXTENT THAT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. ONLY T HOSE EXPENSES WHICH ARE IN RESPECT OF THE EARNING OF TAXABLE INCOME CAN BE ALL OWED. THAT SECTION 14A BROADENS THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON- TAXABLE INCOME IS EVIDENT FROM THE FOLLOWING OBSERV ATIONS OF THE SUPREME COURT (PAGE 17) : 'THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON- TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER S ECTION 14A. READING SECTION 14 IN JUXTAPOSITION WITH SECTIONS 15 TO 59, IT IS CLEAR THAT THE WORDS `EXPENDITURE INCURRED' IN SECTION 14A REFERS TO EX PENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC., IN RESPECT OF WHICH ALLO WANCES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37).' CHANAKYA INTERNATIONAL PVT. LTD. ITA 6285/MUM/2011 5 ON THE FACTS, THE SUPREME COURT HELD THAT AN EXPEND ITURE IS A PAYOUT WHICH RELATES TO DISBURSEMENT. A PAY BACK TO THE AS SESSEE WAS NOT AN EXPENDITURE INCURRED WITHIN THE MEANING OF SECTION 14A. THE JUDGMENT OF THE SUPREME COURT IN WALFORT IS ALS O SIGNIFICANT ON ANOTHER ASPECT OF THE CONTROVERSY IN THE PRESENT CA SE. SECTION 14 OF THE ACT SPECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. INCOME TO BE TAXABLE MUST FALL FOR CLASSIFICATION UNDER ONE OF THOSE FIV E HEADS, NAMELY, (I) SALARIES ; (II) INCOME FROM HOUSE PROPERTY ; (III) PROFITS AND GAINS OF BUSINESS OR PROFESSION; (IV) CAPITAL GAINS ; AND (V) INCOME FROM OTHER SOUR CES. SECTIONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX UNDER THOSE HEADS. AS A RESULT OF SECTION 14A, THE PERMISSIBLE DEDUCTIONS CAN BE ALLOWED ONLY WITH REFERENCE TO INCOME WHICH IS B ROUGHT UNDER ONE OF THOSE HEADS AND IS CHARGEABLE TO TAX. IF AN INCOME DOES N OT FORM PART OF THE TOTAL INCOME, THEN THE RELATED EXPENDITURE IS LIABLE TO B E DISALLOWED. THE TEST WHICH HAS BEEN ENUNCIATED IN WALFORT FOR ATTRACTING THE P ROVISIONS OF SECTION 14A IS THAT 'THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLO WANCE WHICH IS ITS RELATIONSHIP WITH THE TAX EXEMPT INCOME'. ONCE THE TEST OF PROXIMATE CAUSE, BASED ON THE RELATIONSHIP OF THE EXPENDITURE WITH T AX EXEMPT INCOME IS ESTABLISHED, A DISALLOWANCE WOULD HAVE TO BE EFFECT ED UNDER SECTION 14A. THE FOLLOWING PRINCIPLES WOULD EMERGE FROM SECTION 14A AND THE DECISION IN WALFORT : (A) THE MANDATE OF SECTION 14A IS TO PREVENT CLAIMS FOR DEDUCTION OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME OF THE ASSESSEE; (B) SECTION 14A(1) IS ENACTED TO ENSURE THAT ONLY E XPENSES INCURRED IN RESPECT OF EARNING TAXABLE INCOME ARE ALLOWED ; (C) THE PRINCIPLE OF APPORTIONMENT OF EXPENSES IS W IDENED BY SECTION 14A TO INCLUDE EVEN THE APPORTIONMENT OF EXPENDITUR E BETWEEN TAXABLE AND NON-TAXABLE INCOME OF AN INDIVISIBLE BUSINESS ; (D) THE BASIC PRINCIPLE OF TAXATION IS TO TAX NET I NCOME. THIS PRINCIPLE APPLIES EVEN FOR THE PURPOSES OF SECTION 14A AND EX PENSES TOWARDS NONTAXABLE INCOME MUST BE EXCLUDED; (E) ONCE A PROXIMATE CAUSE FOR DISALLOWANCE IS ESTA BLISHED-WHICH IS THE RELATIONSHIP OF THE EXPENDITURE WITH INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME-A DISALLOWANCE HAS TO BE EFFECTED. ALL EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE PROVISIONS OF THE ACT HAS TO BE DISALLOWED UNDER SE CTION 14A. INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS BROADLY A DVERTED TO AS EXEMPT INCOME AS AN ABBREVIATED APPELLATION. INSERTION OF SUB-SECTIONS (2) AND (3) TO SECTION 14 A SUB-SECTIONS (2) AND (3) OF SECTION 14A WERE INSERT ED BY AN AMENDMENT BROUGHT ABOUT BY THE FINANCE ACT OF 2006 WITH EFFEC T FROM APRIL 1, 2007. SUB- SECTIONS (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, IF 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 RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BE EN 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 SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREA DY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECT ION 154 FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001.' CHANAKYA INTERNATIONAL PVT. LTD. ITA 6285/MUM/2011 6 (THE PROVISO WAS INSERTED EARLIER BY THE FINANCE AC T OF 2002 WITH RETROSPECTIVE EFFECT FROM MAY 11, 2001) UNDER SUB-SECTION (2), THE ASSESSING OFFICER IS REQ UIRED TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RE LATION 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, HAVIN G REGARD TO THE MEANING OF THE EXPRESSION 'PRESCRIBED' IN SECTION 2(33), MU ST BE PRESCRIBED BY RULES MADE UNDER THE ACT. WHAT MERITS EMPHASIS IS THAT TH E JURISDICTION OF THE ASSESSING OFFICER TO DETERMINE THE EXPENDITURE INCU RRED 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 IN COME WHICH DOES NOT PART OF THE TOTAL INCOME. MOREOVER, THE SATISFACTION OF THE ASSESSING OFFICER HAS TO BE ARRIVED AT, HAVING REGARD TO THE ACCOUNTS OF THE AS SESSEE. HENCE, SUB-SECTION (2) DOES NOT IPSO FACTO ENABLE THE ASSESSING OFFICE R TO APPLY THE METHOD PRESCRIBED BY THE RULES STRAIGHTAWAY WITHOUT CONSID ERING WHETHER 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 INSTANCE, DETERMINE WHE THER THE CLAIM OF THE ASSESSEE IN THAT REGARD IS CORRECT AND THE DETERMINATION MU ST BE MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE SATISFACTION OF THE ASSESSING OFFICER MUST BE ARRIVED AT ON AN OBJECTIVE BASIS. IT IS ONLY WHEN T HE ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, THAT THE LEGISLATURE DIRECTS HIM TO FOLLOW THE METHOD THAT MAY BE PRESCRIBED. IN A SITU ATION WHERE THE ACCOUNTS OF THE ASSESSEE FURNISH AN OBJECTIVE BASIS FOR THE ASS ESSING OFFICER 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 PRESCRIBED BY THE RULES. FOR, IT IS ONLY IN THE EVENT OF THE ASSESSING OFFICER NOT BEING SO SATISFIED THAT RECOURSE TO THE PRESCRIBED METHOD IS MANDATED BY LAW. SUB-SECTION (3) OF SECTION 14A PRO VIDES FOR THE 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 ASSESS ING OFFICER, FOR AN ASSESSMENT YEAR BEGINNING ON OR BEFORE APRIL 1, 200 1, EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSME NT OR REDUCING THE REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154. THE CIRCUMSTANCES IN WHICH THE PROVISIONS OF SUB-SE CTIONS (2) AND (3) WERE INTRODUCED BY AN AMENDMENT HAVE BEEN ADVERTED TO IN A CIRCULAR OF THE CENTRAL BOARD OF DIRECT TAXES DATED DECEMBER 28, 20 06 (CIRCULAR NO. 14 OF 2006-[2006] 288 ITR (ST.)9). THE CIRCULAR NOTES THA T IN THE EXISTING PROVISIONS OF SECTION 14A NO METHOD FOR COMPUTING THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME HAD BEEN PROVIDED. AS A RESULT THERE WAS A CONSIDERABLE DISPUTE BETWEEN TAX PAYERS AND THE REVENUE ON THE METHOD OF DETERMINING SUCH EXPENDITURE. IN T HIS BACKGROUND, SUB-SECTION (2) WAS INSERTED SO AS TO MAKE IT MANDATORY FOR THE ASSESSING OFFICER TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN REL ATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WIT H THE METHOD THAT MAY BE PRESCRIBED. THE CIRCULAR, HOWEVER, REITERATES THAT THE ASSESSING OFFICER HAS TO FOLLOW THE PRESCRIBED METHOD IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE . CHANAKYA INTERNATIONAL PVT. LTD. ITA 6285/MUM/2011 7 ON PERUSING THE ARGUMENTS OF THE AR AND READING THE S AME ALONGSIDE THE DECISION OF GODREJ & BOYCE (SUPRA) , WE ARE OF THE CONSIDERED OPINION, THAT THE REVENUE AUTHORITIES HAVE ERRED IN NOT R ECORDING A SPECIFIC DISSATISFACTION, ON THE WORKING OF THE ASSESSEE AND FOR THIS REASON, WE FEEL NECESSARY THAT THE ORDER OF THE CIT(A) BE SET ASIDE ON THIS ISSUE AND THE AO MUST COMPUTE THE DISALLOWANCE, NOT ONLY BY APPLYING THE PRESCRIBED RULE 8D BUT ALSO FOLLOWING THE SP IRIT OF THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GO DREJ & BOYCE (SUPRA). 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TR EATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 29/11/2012. SD/- (D. KARUNAKARA RAO) ACCOUTANT MEMBER SD/- (VIVEK VARMA) JUDICIAL MEMBER MUMBAI, DATE: 29/11/2012 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)- 11 , MUMBAI. 4) THE CIT CITY-4, MUMBAI, 5) THE D.R. C BENCH, MUMBAI. 6) COPY TO GUARD FILE. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T., MUMBAI *CHAVAN