M/s Highway Industries Ltd., Ludhiana V. ACIT, Ludhiana

ITA 693/CHANDI/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80947 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 year(s) 3 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-10-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 23-09-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 22-06-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JYOTI KUMARI
• Assessee Lawyers: SUBHASH AGGARWAL
• Keywords: Business income; Earning of tax free income; Retrospective amendment; Question of law
• Section: 14A; 37; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI T.R. SOOD, ACCOUNTANT MEMBER ITA NO. 693/CHD/2012 ASSESSMENT YEARS : 2008-09 HIGHWAY INDUSTRIES LTD V A.C.I.T. NANDPUR CICLE V, LUDHIANA G.T. ROAD LUDHIANA AABCH 4072 M (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SUBHASH AGGARWAL RESPONDENT BY: SMT. JYOTI KUM ARI DATE OF HEARING 23.9.2014 DATE OF PRONOUNCEMENT 0 8.10.2014 O R D E R PER T.R. SOOD, A.M THIS APPEAL IS DIRECTED AGAINST THE ORDER OF THE LD CIT(A)- II, LUDHIANA DATED 4.5.2012. 2. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLO WING GROUNDS: 1 THAT THE LEARNED CIT(A)-II HAS ERRED IN CONFIRMING AN ADDITION OF RS. 5,17,740/- MADE BY THE AO BY APPLYING THE PROVI SION OF SECTION 14 A OF THE INCOME TAX ACT, R.W RULE 8 D OF THE INCOME T AX RULES. 2. THAT THE LEARNED CIT(A)-II WHILE CONFIRMING THE ADDITION HAS IGNORED THE PAST HISTORY OF THE CASE WHEN THE ADDIT IONS MADE STOOD DELETED BY THE APPELLATE AUTHORITIES. 3. THAT IT HAS BEEN IGNORED THAT THERE WAS NO FRESH INVESTMENT DURING THE YEAR AND ALL THE INVESTMENTS WERE MADE I N THE PAST. 4. THAT IN ANY CASE THE DISALLOWANCE IS AGAINST THE LAW AND THE FACTS OF THE CASE. 3 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURIN G ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICE D THAT THE ASSESSEE HAD PAID INTEREST OF RS. 1.78 CRORES ON TH E BORROWINGS. FURTHER THE ASSESSEE HAS MADE CERTAIN INVESTMENTS FOR EARNING TAX EXEMPT INCOME AND DURIN G THE YEAR EARNED DIVIDEND OF RS. 36,77,099. THE ASSESSEE HAD ITSELF SUO MOTTO DISALLOWED INTEREST BY APPLYING RULE 8D TO TH E TUNE OFRS. 101,318/-. THE ASSESSING OFFICER RAISED CERTAIN QU ERIES AND 2 DETAILED REPLIES WERE FILED. THE ASSESSING OFFICER MADE OBSERVATIONS VIDE PARAS 4.6 TO 4.9 WHICH ARE AS UND ER: 4.6 ON GOING THROUGH THE CONTENTS OF RULE 8D, IT BE COMES AMPLY CLEAR THAT NOT ONLY THE EXPENDITURE DIRECTLY RELATING TO EXEMPT INCOME [SUB- R.2(I) OF R.8D] BUT ALSO THE INDIRECT EXPENDITURE L IKE INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR R ECEIPT [ SUB-R.2(II)] AND THEN FURTHER ONE-HALF PER CENT OF THE VALUE OF INVE STMENT TO COVER UP INCIDENTAL INDIRECT EXPENSES [SUB-R.2(III) HAS BEEN CATEGORIZED AS EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. 4.7 THE QUESTION WHICH ARISES ABOUT THE ONUS ON THE AO OR THE ASSESSEE FOR BRINGING A PARTICULAR AMOUNT OF EXPEND ITURE IN THE PURVIEW OF S. 14 A AND THE MANNER OF COMPUTATION OF DISALLO WANCE HAS CEASED TO BE OF ANY RELEVANCE SINCE THE ASSESSING OFFICER IS BOUND TO ADOPT RULE 8D FOR MAKING DISALLOWANCE UNDER S. 14 A, WHERE HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RES PECT OF SUCH EXPENDITURE. 4.8 THE PLEA OF THE ASSESSEE THAT THE ASSESSEE HAS NOT USED BORROWED FUND FOR INVESTMENT INCOME FROM WHICH INCO ME DOES NOT FORM OR SHALL NOT FORM PART OF THE TOTAL INCOME UNDER TH E IT ACT LOOSES SIGNIFICANCE IN THE WAKE OF THE WORDING OF CLAUSE 2 (II) OF HT THE RULE 8 D WHERE THE DISALLOWANCE IN RESPECT OF NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT IS REFERRED. 4.9 WHAT IS REQUIRED TO BE DETERMINED AS PER RULE 8 D IS EXPENDITURE INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM OR SHALL NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTA L INCOME IS REQUIRED TO BE ASCERTAINED AS PER SUB-CLAUSE (I) OF CLAUSE ( 2) OF RULE 8D. THEREAFTER HE APPLIED RULE 8D AND CALCULATED THE DI SALLOWANCE OF RS. 517,740/-. 4 ON APPEAL BEFORE THE LD. CIT(A) IT WAS MAINLY PLE ADED THAT DISALLOWANCE OF RS. 305514/- OUT OF INTEREST U /S 14A WAS DELETED IN ASSESSMENT YEAR 2004-05 AND SIMILARLY DISALLOWANCES WERE DELETED IN ASSESSMENT YEAR 2005 -06 AND NO DISALLOWANCES WERE MADE IN ASSESSMENT YEAR 2006 -07 AND ASSESSMENT YEAR 2007-08. THE ASSESSEE HAD SHARE C APITAL AS WELL AS INCOME DURING THE YEAR WHICH WAS AVAILABLE FOR INVESTMENT. 5 THE LD. CIT(A) EXAMINED THE SUBMISSIONS AND DID N OT FIND FORCE IN THE SAME AND AFTER REFERRING TO THE DECISI ON OF HON'BLE SUPREME COURT IN CASE OF CIT V. WALFORT SHARE AND STOCK BROKERS P. LTD, 326 ITR 1 (S.C) AND DECISION OF HO N'BLE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOYCE MANUF ACTURING V DCIT, 328 ITR 81 (BOM) AND HELD THAT RULE 8D WAS APPLICABLE AND CONFIRMED THE DISALLOWANCE. 6 BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUBMI TTED THAT THE INVESTMENTS MADE BY THE ASSESSEE ARE OLD A ND NO DISALLOWANCE WAS MADE IN THE EARLIER YEAR. INVESTM ENTS HAVE 3 BEEN MADE OUT OF INTEREST FREE FUNDS, THEREFORE NO DISALLOWANCE SHOULD HAVE BEEN MADE IN THIS YEAR ALSO. IN ANY CAS E THE INTEREST PAID ON TERM LOANS CANNOT BE INCLUDED IN T HE TOTAL INTEREST. FOR THESE PROPOSITIONS HE MAINLY RELIED ON FEW DECISIONS OF THE TRIBUNAL. HE FURTHER SUBMITTED TH AT ASSESSEE HAD RECEIVED INTEREST AMOUNTING TO RS. 16,22,685/- AND THE ASSESSING OFFICER AND THE LD. CIT(A) HAS CONSIDERED WHOLE OF THE INTEREST FOR THE PURPOSE OF COMPUTING DISALLOWA NCE UNDER RULE 8D OF IT RULES. THE INTEREST RECEIVED IS REQU IRED TO BE REDUCED FROM THE TOTAL INTEREST FOR THE PURPOSE OF DISALLOWANCE. IN THIS REGARD HE RELIED ON THE DECISION OF HON'BLE SUPREME COURT IN CASE OF ACG ASSOCIATED CAPSULES PVT LTD V CIT, 343 ITR 89 (S.C), DECISION OF HON'BLE DELHI HIGH COURT IN CASE OF CIT V. SASAN POWER LTD, 205 TAXMAN 56. 7 ON THE OTHER HAND, THE LD. D.R FOR THE REVENUE S UBMITTED THAT ALL THESE PROPOSITIONS HAVE BEEN DISCUSSED IN DETAIL BY THE TRIBUNAL IN CASE OF CHADHA SUPER CARS V A.C.I.T. IN ITA NO. 1241/CHD/2011 AND 36/CHD/2012 AND THIS BENCH OF THE TRIBUNAL IS BOUND TO FOLLOWING ITS OWN DECISION. 8 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULL Y. BEFORE US, IT HAS NOT BEEN ESTABLISHED HOW MANY INV ESTMENTS ARE OLD AND HOW MANY NEW INVESTMENTS HAVE BEEN MADE AND GIVING GENERAL REPLY, IS NOT SUFFICIENT. THE ASSESS EE HAS NOT MAINTAINED SEPARATE ACCOUNT FOR INTEREST FREE FUNDS AND ONCE IT IS A CASE OF MIXED FUNDS THEN RULE 8D IS OBVIOUSLY ATTRACTED. ALL THESE ISSUES WERE DISCUSSED BY US IN DETAIL IN CASE OF CHADHA SUPER CARS V A.C.I.T (SUPRA). RELEVANT PARA S ARE 18 TO 28 WHICH ARE AS UNDER|: 18 COMING TO THE SECOND ASPECT OF THE ISSUE THAT W HETHER IN ANY NEXUS IS REQUIRED BETWEEN THE INVESTMENT AND TH E DISALLOWANCE TO BE MADE U/S 14A, WE SHALL FIRST REF ER TO THE DECISION RELIED ON BY THE LD. COUNSEL OF THE ASSESS EE IN CASE OF CIT V. WINSOM TEXTILE, 319 ITR 204. IN THAT CASE F OLLOWING QUESTION OF LAW WAS CONSIDERED: WHETHER, IN THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HON'BLE INCOME-TAX APPELLATE TRIBUNAL WAS JUSTI FIED IN HOLDING THAT THE ORDER OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. ABHISHEK INDUSTRIES LTD. REPORTED IN (2006) 286 ITR 1 (PH); 156 TAXMAN 257 (PH) ARE NOT APPLICABLE IN THIS CASE AND THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S 14A OF THE INCOME-TAX ACT IS NOT AS PER LAW. THE ASSESSEE WAS ENGAGED IN THE MANUFACTURING AND S ALE OF COTTON YARN AND HAD MADE CERTAIN INVESTMENTS. THE ASSESSI NG OFFICER DISALLOWED INTEREST ON INVESTMENT IN SHARES U/S 14A BECAUSE 4 DIVIDEND INCOME WAS EXEMPT. THE LD. CIT(A) DELETED THE DISALLOWANCE BY OBSERVING THAT THE ASSESSEE HAD MAD E INVESTMENT USING ITS OWN FUNDS AND NO INTEREST WAS INCURRED. THE TRIBUNAL CONFIRMED THE FINDINGS OF THE LD. CIT(A). BEFORE T HE HON'BLE HIGH COURT THE CONTENTION WAS RAISED THAT EVEN IF THE AS SESSEE MADE INVESTMENT OUT OF ITS OWN FUNDS THE ASSESSEE HAD TA KEN LOANS ON WHICH INTEREST WAS PAID AND THEREFORE, THE MONEY AV AILABLE WITH THE ASSESSEE WAS IN COMMON KITTY IN VIEW OF THE DEC ISION OF THE COURT IN CASE OF CIT V.ABHISHEK INDUSTRIES (SUPRA). HON'BLE HIGH COURT HELD VIDE PARA 7 AS UNDER:- WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. THE JUDGMENT OF THIS COURT IN ABHISHEK INDUSTRIES LTD. (2006) 286 ITR 1 WAS ON THE ISSUE OF ALLOWABILITY OF INTEREST PAID ON LOANS GIV EN TO SISTER CONCERNS, WITHOUT INTEREST. IT WAS HELD THAT DEDUC TION FOR INTEREST WAS PERMISSIBLE WHEN LOAN WAS TAKEN FOR BUSINESS PU RPOSE AND NOT FOR DIVERTING THE SAME TO SISTER CONCERN WITHOUT HA VING NEXUS WITH THE BUSINESS. THE OBSERVATIONS MADE THEREIN HAVE T O BE READ IN THAT CONTEXT. IN THE PRESENT CASED, ADMITTEDLY, TH E ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATI ON, SECTION 14A COULD HAVE NO APPLICATION. 19 SECOND DECISION RELIED ON IS THAT OF CIT V. HERO CYCLES (SUPRA). IN THAT CASE FOLLOWING QUESTION WAS RAISE D BEFORE THE COURT: WHETHER ON THE FACTS AND IN LAW, THE HON'BLE INCOM E-TAX APPELLATE TRIBUNAL WAS LEGALLY JUSTIFIED IN DELETING THE DISA LLOWANCE OF IGNORING THE EVIDENCE RELIED ON BY THE ASSESSING OF FICER AND HOLDING THAT A CLEAR NEXUS HAS NOT BEEN ESTABLISHED THAT THE INTEREST BEARING FUNDS HAVE BEEN VESTED FOR INVESTM ENTS GENERATING TAX FREE DIVIDEND INCOME. 20 IN THIS CASE THE ASSESSING OFFICER MADE DISALLO WANCE U/S 14A(3) WHICH WAS PARTLY UPHELD BY THE LD. CIT(A). ON FURTHER APPEAL, THE TRIBUNAL HELD THAT THERE WAS NO NEXUS BETWEEN T HE EXPENDITURE INCURRED AND THE INCOME GENERATED, THEREFORE, DISAL LOWANCE CANNOT BE MADE. IT WAS ALSO OBSERVED THAT MAIN UNIT, LUDH IANA HAD MORE INTEREST INCOME THAN THE EXPENDITURE AND THE FUNDS FLOW POSITION SHOWS THAT ONLY NON INTEREST BEARING FUNDS HAVE BEE N UTILIZED FOR MAKING THE INVESTMENT. 21 BEFORE THE COURT, THE DEPARTMENT ALSO CONTENDED THAT RULE 8D PROVIDE THAT EVEN WHERE THE ASSESSEE CLAIMED THA T NO EXPENSES HAVE BEEN INCURRED, CORRECTNESS OF SUCH CLAIM CAN B E GONE INTO BY THE ASSESSING OFFICER. HON'BLE HIGH COURT HELD VID E PARA 5 AS UNDER: IN VIEW OF THE FINDING REPRODUCED ABOVE, IT IS CLE AR THAT THE EXPENDITURE ON INTEREST WAS SET OFF AGAINST THE INCOME FROM INTERE ST AND THE INVESTMENT IN THE SHARE AND FUNDS WERE OUT OF THE DIVIDEND PROCEE DS. IN VIEW OF THIS FINDING OF FACT, DISALLOWANCE U/S 14A WAS NO SUSTAI NABLE. WHETHER, IN A GIVEN SITUATION, ANY EXPENDITURE WAS INCURRED WHICH WAS T O BE DISALLOWED, IS A QUESTION OF FACT. THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDI RECTLY SOME EXPENDITURE IS ALWAYS INCURRED WHICH MUST BE DISALLOWED UNDER SECT ION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY NULLIFY THE MANDATE OF SECTION 14A, CANNOT BE A CCEPTED. DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE WH ERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, D ISALLOWANCE UNDER SECTION 14A CANNOT STAND. IN THE PRESENT CASE, FINDING ON T HIS ASPECT, AGAINST THE REVENUE, IS NOT SHOWN TO BE PERVERSE. CONSEQUENTLY, DISALLOWANCE IS NOT PERMISSIBLE. WE HAVE TAKEN THIS VIEW EARLIER SO IN I. T. A. NO. 504 OF 2008 IN CIT V. WINSOME TEXTILE INDUSTRIES LTD. 1)09] 319 ITR 204 (P&H), (DECIDED O N AUGUST 25, 2009), WHEREIN IT WAS OBSERVED AS UNDER (PAGE 207) : 5 'THE CONTENTION RAISED ON BEHALF OF THE REVENUE IS THAT EVEN IF THE ASSESSEE HAD MADE INVESTMENT IN SHARES OUT OF ITS O WN FUNDS, THE ASSESSEE HAD TAKEN LOANS ON WHICH INTEREST WAS PAID AND ALL THE MONEY AVAILABLE WITH THE ASSESSEE WAS IN COMMON KITTY, AS HELD BY THIS COURT IN CIT V. ABHISHEK INDUSTRIES LTD. [2006] 286 ITR 1 AND, THEREFORE, DI SALLOWANCE UNDER SECTION 14A WAS JUSTIFIED. WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. THE JU DGMENT OF THIS COURT IN ABHISHEK INDUSTRIES LTD. [2006] 286 ITR 1 WAS ON THE ISSUE O F ALLOWABILITY OF INTEREST PAID ON LOANS GIVEN TO SISTER CONCERNS, WITHOUT INT EREST. IT WAS HELD THAT DEDUCTION FOR INTEREST WAS PERMISSIBLE WHEN LOAN WAS TAKEN FOR BU SINESS PURPOSE AND NOT FOR DIVERTING THE SAME TO SISTER CONCERN WITHOUT HAVING NEXUS WITH THE BUSINESS. OBSERVATIONS MADE THEREIN HAVE TO BE READ IN THAT C ONTEXT. IN THE PRESENT CASE, ADMITTEDLY, THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATION, SECTION 14A COULD HAVE NO APPLICATION.' IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THAT N O SUBSTANTIAL QUESTION OF LAW ARISE. 22 IT IS CLEAR THAT BOTH THE ABOVE DECISIONS PERTAI N TO ASSESSMENT YEAR 2004-05 WHEN RULE 8D WAS NOT EVEN I N STATUTE BOOK. RULE 8D HAS BEEN INTRODUCED BY I.T. RULES (5 TH AMENDMENT) W.E.F. 24.3.2008. THEREFORE, IN BOTH THE ABOVE CAS ES, RULE 8D COULD NOT HAVE BEEN POSSIBLY APPLIED. IN ANY CASE IN A LEADING JUDGMENT THE HON'BLE BOMBAY HIGH COURT IN CASE OF G ODREJ AND BOYCEE MANUFACTURING V DCIT, 328 ITR 81 (BOM) HELD THAT RULE 8D CAN NOT HAVE RETROSPECTIVE APPLICATION AND THE SAME CAN BE APPLIED ONLY FROM ASSESSMENT YEAR 2008-09. FURTHER IN CASE OF CIT V. WINSOM TEXTILE, 319 ITR 204, THE ISSUE WAS W HETHER THE PRINCIPLES LAID DOWN IN CASE OF ABHISHEK INDUSTRIES (SUPRA) WERE APPLICABLE FOR THE DISALLOWANCE U/S 14A AND THE HON 'BLE COURT HELD THAT THE DECISION OF ABHISHEK INDUSTRIES (SUPRA) OP ERATES IN A DIFFERENT FIELD. SIMILARLY IN CASE OF HERO CYCLES ( SUPRA) THE TRIBUNAL HAS GIVEN A CATEGORICAL FINDING THAT THE I NVESTMENT HAS BEEN MADE OUT OF NON INTEREST BEARING FUNDS. FROM THESE TWO DECISIONS ONLY IT CAN BE CONCLUDED THAT IF INVESTME NT HAS BEEN MADE CLEARLY OUT OF NON INTEREST BEARING FUNDS THEN SECTION 14A IS NOT BE APPLICABLE. IN CASE BEFORE US, THE SITUATIO N IS DIFFERENT WHICH WE SHALL SEE LITTLE LATER. WE WOULD ALSO LIK E TO OBSERVE THAT EVEN HON'BLE PUNJAB & HARYANA HIGH COURT IN A LATTE R DECISION IN CASE OF CIT V. PUNJAB STATE INDUSTRIAL DEVELOPMENT COOPERATIVE LTD. HAS MADE OBSERVATIONS WHICH WE WILL ALSO LIKE TO DISCUSS LITTLE LATER. 23 HON'BLE BOMBAY HIGH COURT CONSIDERED THE ISSUES ARISING OUT OF SECTION 14A AS WELL AS IMPLICATIONS OF RULE 8D. HON'BLE HIGH COURT REACHED THE FOLLOWING CONCLUSION AT PARA 88 WHICH READS AS UNDER: 88 OUR CONCLUSION IN T HIS JUDGMENT ARE AS FOLLOWS : (I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FA LLING WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME-TAX ACT, 1961 , AS WAS APPLICABLE FOR THE ASSESSMENT YEAR 2002-03 IS NOT INCLUDIBLE I N COMPUTING THE TOTAL INCOME OF THE ASSESSEE. CONSEQUENTLY, NO DEDUCTION SHALL BE A LLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIRTUE OF THE PR OVISIONS OF SECTION 14A(1) ; (II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTIO N 115-O(1) OF ADDITIONAL INCOME-TAX ON PROFITS DECLARED, DISTRIBU TED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS OF THE COMPANY. THE C OMPANY IS CHARGEABLE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAY S TAX IN DISCHARGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT F OR ITS SHAREHOLDERS. IN THE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DIVIDEND, INCOM E BY WAY OF DIVIDEND 6 DOES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROVISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS ; (III) THE PROVISIONS OF SUB-SECTIONS (2) AND '(3) O F SECTION 14A OF THE INCOME-TAX ACT 1961 ARE CONSTITUTIONALLY VALID ; (IV) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RU LES AS INSERTED BY THE INCOME-TAX (FIFTH AMENDMENT) RULES, 2008, ARE NOT U LTRA VIRES THE PRO- VISIONS OF SECTION 14A, MORE PARTICULARLY SUB-SECTI ON (2) AND DO NOT OFFEND ARTICLE 14 OF THE CONSTITUTION ; (V) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RUL ES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24, 2008, SHALL APP LY WITH EFFECT FROM THE ASSESSMENT YEAR 2008-09 ; (VI) EVEN PRIOR TO THE ASSESSMENT YEAR 2008-09, WHE N RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORCE THE PROVISIONS OF SUBSECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFFICER IS DUTY BOU ND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFIC ER MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FA CTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE AS SESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD ; (YII) THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2002- 03 SHALL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL DETE RMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RE LATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE B ASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFI CER SHALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUN TS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. FROM ABOVE, IT IS CLEAR THAT EVEN THE TAXES PAID U/ S 115-O WHICH IS ALSO KNOWN AS DIVIDEND DISTRIBUTION TAXES, WOULD NO T MAKE DIVIDEND INCOME IN THE HANDS OF SHAREHOLDER AS NON-EXEMPT. S IMILARLY THE TAXES PAID BY A FIRM WOULD BE TAXES ON THE PROFIT O F THE FIRM AND NOT IN THE HANDS OF THE ASSESSEE. THE ABOVE DECISI ON ALSO HELD THAT RULE 8D WOULD BE APPLICABLE ONLY FROM ASSESSME NT YEAR 2008- 09. IN THIS DECISION THE THEORY OF APPORTIONMENT O F EXPENDITURE WHICH WAS CONFIRMED BY THE HON'BLE SUPREME COURT IN CASE OF CIT V. WALFORT SHARE AND STOCK BROKERS P LTD (2010) 326 ITR 1 (S.C), WAS FOLLOWED. IN FACT BEFORE INTRODUCTION OF SECTI ON 14A, THE ASSESSEE HAD A RIGHT TO CLAIM ALL THE EXPENSES IF S UCH EXPENSES COULD NOT BE BI-FURCATED AGAINST NORMAL TAXABLE INC OME AS WELL AS EXEMPTED INCOME IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN CASE OF RAJASTHAN WAREHOUSING COOPERATION V CIT, 242 ITR 450. THIS POSITION GOT CHANGED AFTER THE INTRODUCT ION OF SECTION 14A BY FINANCE ACT, 2001. THE MEMORANDUM EXPLAININ G THE PROVISIONS OF FINANCE BILL READS AS UNDER: CERTAIN INCOME ARE NOT INCLUDIBLE WHILE COMPUTATIN G THE TOTAL INCOME AS THESE ARE EXEMPT UNDER VARIOUS PROVISIONS OF THE AC T. THERE HAVE BEEN CASES WHERE DEDUCTIONS HAVE BEEN CLAIMED IN RESPECT OF SUCH EXEMPT INCOME. THIS IN EFFECT MEANS THAT THE TAX INCENTIV E GIVEN BY WAY OF EXEMPTIONS TO CERTAIN CATEGORIES OF INCOME IS BEING USED TO REDUCE ALSO THE TAX PAYABLE ON THE NON-EXEMPT INCOME BY DEBITIN G THE EXPENSES INCURRED TO EARN THE EXEMPT INCOME AGAINST TAXABLE INCOME. THIS IS AGAIN THE BASIC PRINCIPLES OF TAXATION WHEREBY ONLY THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE IS TAXED. ON TH E SAME ANALOGY, THE EXEMPTION IS ALSO IN RESPECT OF THE NET INCOME. EX PENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IT IS PROPOSED TO INSERT A NEW SECTION 14A SO AS TO CLARIFY THE INTENTION OF THE LEGISLATURE SINCE THE INCEPTION OF THE INCOME-T AX ACT, 1961, THAT NO DEDUCTION SHALL BE MADE IN RESPECT OF ANY EXPENDIT URE INCURRED BY THE 7 ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE INCOME-TAX ACT. THE PROPOSED AMENDMENT WILL TAKE EFFECT RETROSPECTI VELY FROM APRIL 1, 1962 AND WILL ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YEAR 1962- 63 AND SUBSEQUENT ASSESSMENT YEAR. 24 HON'BLE BOMBAY HIGH COURT NOTED THIS DECISION AN D THEN CONFIRMED THE THEORY OF APPORTIONMENT OF EXPENSES A ND HELD THAT SAME IS VERY MUCH APPLICABLE IN SECTION 14A. AT PL ACITUM 28 IT HAS BEEN OBSERVED AS UNDER: DURING THE COURSE OF THIS JUDGMENT, IT WOULD BE NE CESSARY TO REVISIT THE DECISION OF HON'BLE SUPREME COURT IN WALFORT. AT T HIS STAGE, HOWEVER, IT NEEDS TO BE EMPHASIZED THAT THE PROVISIONS OF SECTI ON 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 WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST TAXABLE INCOME. SECTION 14A IS CLARIFIC ATORY OF THE POSITION THAT EXPENSE CAN BE ALLOWED ONLY TO THE EXTENT THAT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. ONLY THOSE EXPENSES WHICH ARE IN RESPECT OF THE EARNING OF TAXABLE INCOME CAN BE AL LOWED. THE SECTION 14A BROADENS THE THEORY OF APPORTIONMENT OF EXPEND ITURE BETWEEN TAXABLE AND NON-TAXABLE INCOME IS EVIDENT FROM THE FOLLOWING OBSERVATIONS OF THE HON'BLE SUPREME COURT PAGE 17) THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED U/S 14A. READING SECTION 14 IN JUXTAPOSITION WITH SECTIONS 1 5 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). THUS ON THE BASIS OF ABOVE, IT WAS HELD THAT AFTER INTRODUCTION OF SECTION 14A, IT WAS POSSIBLE TO APPORTION THE EXPENDITURE B ETWEEN TAXABLE INCOME AND EXEMPTED INCOME. 25 AS OBSERVED EARLIER, ALMOST SIMILAR OBSERVATIONS HAVE BEEN MADE BY THE HON'BLE PUNJAB & HARYANA HIGH COURT IN A REC ENT JUDGMENT IN CASE OF CIT V. PUNJAB STATE INDUSTRIAL DEVELOPMENT COOPERATION LTD. IN ITA NO. 565 OF 2006 VIDE ORDER DATED 18.7.2011. 11. ADVERTING TO QUESTION NO.(II), LEARNED COUNSEL FOR THE REVENUE SUBMITTED THAT WHILE DETERMINING THE QUANTUM OF DEDUCTION ADMISSIB LE TO THE ASSESSEE UNDER SECTION 80M OF THE ACT, THE EXPENDITURE INCURRED RELATING TO TH E EARNING OF DIVIDEND INCOME HAS TO BE EXCLUDED THERE-FROM. ACCORDING TO THE LEARNED COUNS EL, THE EXPENDITURE WHICH WAS TO BE DEDUCTED WAS REQUIRED TO BE DEDUCTED ON PROPORTI ONAL BASIS FOR INCURRING OF SUCH EXPENDITURE. RELIANCE WAS PLACED ON SECTION 14A OF THE ACT WHICH WAS INCORPORATED BY FINANCE ACT 2001 RETROSPECTIVELY .W.E.F. 1.4,1962. SUPPORT WAS GATHERED FROM THE DECISION OF THE RAJASTHAN HIGH COURT IN SHEKHAVATI GENERAL TRADERS LTD. VS. COMMISSIONER OF INCOME TAX (1987) 167 ITR116 AND THE JUDGMENT OF THIS COURT IN INCOME TAX APPEAL NO. 530 OF 2006 (THE PUNJAB STATE COOPERATIVE MILK PRODUCER'S FEDERATION LTD, VS. COMMISSIONER OF INCOME TAX-IF AND ANOTHER) DECIDED ON 28,3,2011 AND OF THE APEX COURT IN COMMISSIONER OF INCOME TAX VS. WALFORT SHARE & STOCK BROKERS (P) LTD. (2010) 41 DTR JUDGMENTS 233. 12. CONTROVERTING THE AFORESAID SUBMISSION, LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE DECISION OF THE CA LCUTTA HIGH COURT IN COMMISSIONER OF INCOME TAX VS. UNITED COLLIERIES LT D. (1993) 203 ITR 857 (CALCUTTA). LEARNED COUNSE L ALSO RELIED UPON COMMISSIONER OF INCOME TAX VS. CENTRAL BANK OF INDI A (2003) 264 ITR 522 (BOMBAY) AND STATE BANK OF INDORE VS. COMMISSIONER OF INCOME TAX (2005) 275 ITR 23 (MP). IT WAS CONTENDED THAT IT WAS ONLY THE ACTUAL EXPENSE INCUR RED FOR EARNING DIVIDEND WHICH WAS TO BE DEDUCTED FROM THE DIVIDEND INCOME FOR CALCULATING THE ADMISSIBLE DEDUCTIONS UNDER SECTION 80M OF THE ACT. IT WAS URGED THAT THE PLEA OF THE REVENUE THAT PROP ORTIONAL EXPENSES SHOULD ALSO BE REDUCED, WAS AGAINST THE STATUTE. 8 13 WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO THE RESPECTIVE SUBMISSIONS OF THE LEARNED COUNSEL FOR T HE PARTIES AND FIND FORCE IN THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE REVENUE. FINANCE ACT 20 01 HAD INSERTED SECTION 14A WITH EFFECT FROM 1.4.1962. ACCORDING TO THE SAID SECTION, ANY EXPEND ITURE INCURRED BY THE ASSESSEE FOR EARNING INCOME WHICH DID NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT WAS NOT TO BE ALLOWED AS EXPENSES. THIS COURT IN THE CASE O F PUNJAB STATE COOPERATIVE MILK PRODUCER'S FEDERATION LTD.'S CASE (SUPRA) RELYING UPON THE DECISION OF THE APEX COURT IN WALFORT SHARE AND STOCK BROKERS'S CASE (SUPRA), WHEREIN, WHILE DEFINING THE SCOPE OF SECTION 14A OF THE ACT, INCORPORATED R ETROSPECTIVELY W.E.F. 1.4.1962, IT HAD LAID DOWN AS UNDER: THE INSERTION OF SECTION 14A WITH RETROSPECTIVE EFFECT IS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT TO ALLOW DEDUCTION IN RE SPECT OF ANY EXPENDIIURE 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 DAT ED 22.11.2001 K IN OTHER WORDS, SECTION 14A CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONL Y TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPE NSES INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCOME AND PARTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SECTION 14A, THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WAS 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 EXEMP T INCOME AGAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTI ON OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO E XEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN INCOMES AR E NOT INCLUDIBIE WHILE COMPUTING TOTAL INCOME AS THESE ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE AC T. IN THE PAST, THERE HAVE BEAN IN WHICH DEDUCTION HAS BEEN SOUGHT IN RESPECT OF SUCH INCO MES WHICH IN EFFECT WOULD MEAN THAT TAX INCENTIVES TO CERTAIN INCOMES WAS BEING USED TO RED UCE THE TAX PAYABLE ON THE NON-EXEMPT INCOME BY DEBITING THE EXPENSES, INCURRED TO EARN THE EXEMPT INCOME, AGAIN ST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET I NCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE. OH THE SAME ANALOGY THE EXEMPTION IS ALSO IN RESPEC T OF NET INCOME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE INCOME. THIS IS THE PURPORT OF SECTION 14A. IN SECTION 14A, THE FIRST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS OF INCOME AS PRESCRIBED UN DER CHAPTER IV WOULD FALL WITHIN SECTION 14A. THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF TOTAL INCOME UNDER THE ACT'. IT MEANS THAT IF AN INCOME DOES NOT FORM PART OF TO TAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 1 4A. FURTHER, SECTION 14 SPECIFIES 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 HEADS. SECTIONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR THE PURPOSE OF CHARGEABILITY T O TAX UNDER THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL INCOME CHARGEABLE TO TAX. THE PE RMISSIBLE DEDUCTIONS ENUMERATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOWED ONLY WITH REFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF THE ABOVE HEADS AND IS CHARGEABLE TO TAX. IF AN INCOME LIKE DIVIDEND INCOME IS NOT A PART OF THE TOTAL INCOME, THE EXPENDITURE/DEDUCTION THOUGH OF THE NAT URE SPECIFIED IN PART OF TOTAL INCOME COULD NOT BE ALLOWED AGAINST ORE INCOME INCL UDIBLE IN THE TOTAL INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX. THE THEORY OF APPO RTIONMENT OF EXPENDITURES BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A. READING SECTION 14 IN JUXTAPOSITION WITH SECTIONS 1 5 TO 59, IT IS CLEAR THAT THE WORDS 'EXPENDITURE INCURRED' IN SECTION 14A REFERS TO EXP ENDITURE ON RENT, TAXES, SALARIES, INTEREST,ETC. IN RESPECT OF WHICH ALLOWANCES ARE PR OVIDED FOR (SEE SECTIONS 30 TO 37).' ' 14. THE APEX COURT HAD SPECIFICALLY RECORDED THAT THE THEORY OF APPORTIONMENT OF AMOUNT OF EXPENSE* BETWEEN TAXABLE AND NON- TAXABLE INCOME STOOD WIDENED BY INCORPORATION OF SE CTION 14A. IT WAS FURTHER NOTICED THAT THE EXPRESSION 'EXPENSES INCURRED' OCCURRING IN SECTION 14A REFERRED TO TAX, SALARY, INTEREST ETC. IN RESPECT' OF WHICH ALLOWANCES ARE P ROVIDED FOR UNDER SECTIONS 30 TO 37 OF THE ACT. 15. IN ALL FAIRNESS TO THE ASSESSEE, IN THE JU DGMENTS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE, SECTI ON 14A AS INCORPORATED BY FINANCE ACT 2001, WITH EFFECT FROM 1.4.1962, WAS NOT UNDER CONSIDERATION AND, THEREFORE, THE SAME DO NOT COME TO THE RESCUE OF THE ASSESSEE. 16. IN VIEW OF THE ABOVE, THE SUBSTANTIAL QU ESTION NO.(II) IS ANSWERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. INCOME TAX APPEAL NOS. 565, 567 AND 569 STAND DISPOSED OF ACCORDINGLY. 9 26 THUS THEORY OF APPORTIONMENT AS APPROVED BY THE HON'BLE SUPREME COURT IN CASE OF CIT V. WALFORT SHARE AND S TOCK BROKERS P LTD (2010) 326 ITR 1 (S.C) FOLLOWED BY HON'BLE BO MBAY HIGH COURT IN CASE OF GODREJ AND BOYCEE (SUPRA) HAS ALS O BEEN APPROVED BY HON'BLE PUNJAB & HARYANA HIGH COURT IN CASE OF CIT V. PUNJAB STATE INDUSTRIAL DEVELOPMENT COOP LTD. (S UPRA). 27 NOW THE QUESTION IS HOW SUCH EXPENDITURE CAN BE APPORTIONED. THERE MAY BE A SITUATION WHETHER THE EXPENSES OR INTEREST CANNOT BE IDENTIFIED AGAINST THE PARTICULA R ITEM OF INCOME TO MEET THESE DIFFICULTIES RULE 8D WAS INTRODUCED W HICH HAS BEEN HELD TO BE CONSTITUTIONALLY VALID BY HON'BLE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOYCEE (SUPRA). RULE 8D READS A S UNDER: RULE 8D READS AS UNDER: (1) WHERE THE ASSESSING OFFICER HAVING REGARD TO T HE ACCOUNT 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 ACT FOR SUCH PREVIOUS YEAR, HE HAL L DETERMINE 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 FOLLOWIN G 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 EXPE NDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY:- A X B C 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 APPEARI NG IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; C = THE AVERAGE OF TOTAL ASSET AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST 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. (3) FOR THE PURPOSES OF THIS RULE, THE TOTAL ASSET S SHALL MEAN, TOTAL ASSET AS APPEARING IN THE BALANCE SHEET EXCLUDING T HE INCREASE ON ACCOUNT OF REVALUATION OF ASSET BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS.). 28 CLAUSE (II) OF SUB-RULE (2) CLEARLY SHOWS THAT I F THE ASSESSEE SHOW THAT INTEREST HAS BEEN INCURRED SPECI FICALLY FOR A PARTICULAR ITEM OF INCOME THEN IT HAS TO BE APPORTI ONED. IN CASE BEFORE US, THE ASSESSEE HAS PROVIDED SOURCES OF FU NDS BUT THEY CANNOT BE SAID TO HAVE BEEN MAINTAINED SEPARATELY. FIRST OF ALL IT 10 WAS CONCEDED THAT THE ASSESSEE IS HAVING MIXED FUND S. THE DETAILS OF FUNDS WAS STATED TO BE AS UNDER BEFORE T HE LD. CIT(A): 31.3.2008 RS. IN LAKHS SHARE CAPITAL 78.36 RESERVES AND SURPLUSES 130.82 OWN FUNDS 209.18 WORKING CAPITAL BORROWINGS 1779.62 CURRENT ASSETS 2243.45 AMOUNT INVESTED IN EXCESS OF LOAN 463.83 TERM LOAN BORROWINGS 253.31 FIXED ASSETS 451.82 AMOUNT INVESTED IN EXCESS OF LOAN 198.51 AMOUNT INVESTED IN CHADHA MOTORS 255.96 CONSEQUENTLY BY SIMPLY SAYING THAT THE FUNDS INVEST ED IN FIXED ASSETS AND CURRENT ASSETS ARE MORE THAN THE BORROWE D FUNDS, WOULD NOT SHOW THAT SPECIFIC FUNDS HAVE BEEN BORROW ED FOR SPECIFIC PURPOSE. FOR EXAMPLE IT CAN BE VERY EASILY SAID TH AT THE ASSESSEE SUPPORTED ITS BUSINESS WITH OWN FUNDS AND BORROWED LOANS HAVE BEEN USED FOR MAKING INVESTMENT IN ASSETS AS WELL A S IN INVESTMENTS WHICH GENERATE EXEMPTED INCOME. ONCE T HE FUNDS ARE MIXED, THERE IS NO WAY TO FIND OUT ACTUAL USAGE OF THE FUNDS. TO MEET THIS SITUATION ONLY RULE 8D WAS INSERTED TO RE MOVE THE DIFFICULTIES. IN FACT THIS ASPECT WAS ALSO EXAMINE D BY HON'BLE BOMBAY HIGH COURT IN CASE OF GODREJ & BOYCEE (SUPRA ). MANY OBSERVATIONS WERE MADE UNDER THE HEAD PARAMETERS O F JUDICIAL REVIEW AT PARA 62 TO 72 OF THE ORDER. WITHOUT UNN ECESSARILY BURDENING THIS ORDER WITH THESE OBSERVATIONS WE WIL L QUOTE PARA 73 WHICH DEALS WITH JUSTIFICATION OF RULE 8D: IN THE AFFIDAVIT IN REPLY THAT HAS BEEN FILED ON BE HALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RAT IONALE UNDERLYING RULE 8D. IN THE WRITTEN SUBMISSIONS WHI CH HAVE BEEN FILED BY THE ADDITIONAL SOLICITOR GENERAL IT HAS BE EN STATED, WITH REFERENCE TO RULE 8D(2)(II) THAT SINCE FUNDS ARE FU NGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACTUAL QUANTUM OF BORR OWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX FREE INVESTMENT. IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONE D AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS A IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR IN COME OR RECEIPT (FOR EXAMPLE ANY ASPECT OF THE ASSESSEES BUSINES S SUCH AS PLANT/MACHINERY ETC.). AS REGARDS RULE 8D(2)(III) IT HAS BEEN SUBMITTED THAT SOME MECHANISM OR FORMULA HAD TO BE ADOPTED FOR ATTRIBUTING PART OF THE ADMINISTRATIVE/MANAGERIAL E XPENSES TO TAX EXEMPT INVESTMENT INCOME. THE ADMINISTRATIVE EXPEN SES ATTRIBUTABLE TO TAX FREE INVESTMENT INCOME HAVE A F IXED COMPONENT AND A VARIABLE COMPONENT. A VIEW WAS TAKEN THAT T HE DISALLOWANCE SHOULD ALSO BE LINKED TO THE VALUE OF THE INVESTMENT RATHER THAN THE AMOUNT OF EXEMPT INCOME. UNDER POR TFOLIO MANAGEMENT SCHEME (PMS) THE FEE CHARGED RANGES BETW EEN 2 AND 2.5 PER CENT OF THE PORTFOLIO VALUE WHICH WOULD BE INCLUSIVE OF A PROFIT ELEMENT FOR THE PORTFOLIO MANAGER. WHILE TH E FIXED ADMINISTRATIVE EXPENSE WERE EXCLUDED, ON THE GROUND THAT IN THE CAASE OFA LARGE CORPORATE TAXPAYER THEY WOULD BE SP READ OVER A LARGE NUMBER OF VOLUMINOUS ACTIVITIES, THE VARIABLE EXPENSES WERE COMPUTED AT ONE-HALF PER CENT OF THE VALUE OF THE I NVESTMENT. THE JUSTIFICATION THAT HAS BEEN OFFERED IN SUPPORT OF T HE RATIONALE FOR RULE 8D CANNOT BE REGARDED AS BEING CAPRICIOUS, PER VERSE OR ARBITRARY. APPLYING THE TESTS FORMULATED BY THE HO N'BLE SUPREME COURT IT IS NOT POSSIBLE FOR THIS COURT TO HOLD THA T THERE IS WRIT ON THE STATUTE OR ON THE SUBORDINATE LEGISLATION PERVE RSITY, CAPRICE OR IRRATIONALITY. THERE IS CERTAINLY NO MADNESS IN T HE METHOD. 11 THUS ABOVE RULE WAS FOUND TO BE VALID AND RATIONAL. COMING BACK TO THE CASE IN HAND, THE PERUSAL OF THE ASSESSMENT ORDER SHOWS AS OBSERVED EARLIER, NO WHERE BEFORE THE ASSESSING OF FICER OR THE LD. CIT(A), THE ASSESSEE HAS MADE A SPECIFIC MENTION TO SHOW WHICH PARTICULAR FUNDS WERE BORROWED FOR WHICH PARTICULAR REQUIREMENT AND IN THE ABSENCE OF SUCH SPECIFIC UTILIZATION RUL E 8D, WOULD BE APPLICABLE. PERUSAL OF THE ASSESSMENT ORDER SHOWS THAT DISALLOWANCE U/S 14A HAS BEEN WORKED OUT ON THE BAS IS OF RULE 8D WHICH IS AS OBSERVED EARLIER APPLICABLE IN CASE OF THE ASSESSEE. THEREFORE, WE SET ASIDE THE ORDER OF TH E LD. CIT(A) AND RESTORE THAT OF THE ASSESSING OFFICER. FROM ABOVE IT BECOMES CLEAR THAT IN THE ABSENCE OF SEPARATE ACCOUNTS OF INTEREST FREE FUNDS RULE 8D HAS TO BE A PPLIED FROM ASSESSMENT YEAR 2008-09. THE CASE BEFORE US RELAT ES TO ASSESSMENT YEAR 2008-09, THEREFORE RULE 8D HAS BEE N CORRECTLY INVOKED. THE LD. COUNSEL FOR THE ASSESSE E HAS NOT BEEN ABLE TO SHOW ANY ERROR IN THE CALCULATION MADE BY THE ASSESSING OFFICER. 9 HOWEVER, WE AGREE PARTIALLY WITH THE CONTENTION T HAT THE INTEREST RECEIVED BY THE ASSESSEE IS REQUIRED TO BE REDUCED FROM THE TOTAL INTEREST FOR CALCULATING THE DISALLO WANCE UNDER RULE 8D, THEREFORE TO THIS EXTENT WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND REMIT THE MATTER BACK TO THE FILE OF ASSESSING OFFICER WITH A DIRECTION TO VERIFY WHETHER THE ASSE SSEE HAS RECEIVED ANY INTEREST AND THEN TO REDUCE THE SAME F ROM TOTAL INTEREST AND THEN MAKE DISALLOWANCE AS PER RULE 8D OF IT RULES. 10 IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 8.10.2014 SD/- SD/- (BHAVNESH SAINI) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 8.10.2014 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/THE DR 12