DCIT, New Delhi V. M/s. National Seeds Corporation Ltd., New Delhi

ITA 6970/DEL/2014

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5477 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-04-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2011-2012
• Appeal Filed On: 24-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S R SENAPATI
• Assessee Lawyers: VIDUR PURI
• Keywords: Business income; Business expenditure; Earning of tax free income; Retrospective amendment; Commercial expediency
• Section: 143(3); 14A; 37(1); 80G; 37

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E: NEW DELHI BEFORE SHRI G.D. AGRAWAL, HONBLE PRESIDEN AND SHRI KUL BHARAT, JUDICIAL MEMBER ITA NO.:-6794/DEL/2014 ASSESSMENT YEAR: 2011-12 ITA NO. 6970/DEL/2014 ASSESSMENT YEAR : 2011-12 O R D E R PER BENCH NATIONAL SEEDS CORPORATION LTD. BEEJ BHAWAN, CTO BUILDING, PUSA COMPLEX, NEW DELHI 110 012 PAN AABCN8973F VS. ADDL. CIT, RANGE-13, NEW DELHI. (APPELLANT) (RESPONDENT) DCIT CIRCLE-17(2) NEW DELHI. VS. NATIONAL SEEDS CORPORATION LTD. BEEJ BHAWAN, CTO BUILDING, PUSA COMPLEX, NEW DELHI 110 012. PAN AABCN8973F ASSESSEE BY: SHRI VIDUR PURI, CA DEPARTMENT BY : SHRI S.R. SENAPATI, SR. DR DATE OF HEARING 02/04/2018 DATE OF PRONOUNCEMENT 2 THESE TWO CROSS APPEALS BY THE ASSESSEE A ND REVENUE ARE DIRECTED AGAINST THE ORDER OF LD. CIT(A) XVI NEW DEL HI DATED 22 ND SEPTEMBER, 2014 PERTAINING TO THE ASSESSMENT YEAR 2011 -12. BOTH THESE APPEALS ARE BEING DISPOSED OF TOGETHER BY THIS CO MMON ORDER FOR THE SAKE OF CONVENIENCE. FIRST WE TAKE UP ASSESSEES A PPEAL IN ITA NO. 6794/DEL/2014 ASSESSEE HAS RAISED FOLLOWING GROUNDS :- 1.(A) THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS I N UPHOLDING THE DISALLOWANCE OF BUSINESS EXPENSES OF R S. 59,21,197 AS CORPORATE SOCIAL RESPONSIBILITY (CSR) EXPENSES. (B)THE LEARNED CIT(A) ERRED IN LAW IN HIS FINDING T HAT EXPLANATION 2 INSERTED IN SECTION 37 BY THE FINANCE AC T 2014(2) IS CLARIFICATORY IN NATURE. 2. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS IN N OT DISPOSING OFF GROUND NO. 1,2 ON LEARNED ASSESSING O FFICERS ERRONEOUS OBSERVATIONS THAT A) THE OBJECTIVE BEHIND THESE GUIDELINES ISSUED BY DEPARTMENT OF PUBLIC ENTERPRISES CAN BE MET BY THE COMPANY BY SPENDING CERTAIN AMOUNT OUT OF ITS SURPLUS PROFIT AFTER TAX AND IT NEED NOT TO CLAIM THESE EXPENSES IN THE BOOKS OF ACCOUNT AS EXPENDITURE BEFORE DETERMINING TAXABLE PROFIT. 3 B) THE CSR EXPENDITURE WAS MEANT TO BE A BELOW THE LINE EXPENDITURE. THE APPELLANT CRAVES TO LEAVE, ADD, AMEND, MODIFY, DE LETE AND / OR CHANGE ALL OR ANY OF THE GROUNDS ON/OR BEF ORE THE DATE OF HEARING. 2. THE ONLY EFFECTIVE GROUND IN ASSESSEES APPE AL IS AGAINST CONFIRMING THE DISALLOWANCE OF EXPENSES OF RS. 59,21 ,197/- AS CORPORATE SOCIAL RESPONSIBILITY EXPENSES. BRIEFLY STA TED THE FACTS ARE THAT CASE OF THE ASSESSEE WAS PICKED UP FOR ASSESSMENT U/S 143(3) OF THE INCOME TAX ACT 1961 ( HEREINAFTER REFER TO AS THE A CT) WHICH WAS FRAMED VIDE ORDER DATED 31 ST JANUARY, 2014. WHILE FRAMING THE ASSESSMENT THE AO DISALLOWED THE CLAIM OF EXPENSES OF RS. 59,21,197/- INCURRED IN RESPECT OF EXPENSES TOWARD CO RPORATE SOCIAL RESPONSIBILITY. FURTHER THE AO WHILE INVOKING THE PROV ISION OF SECTION 14A MADE DISALLOWANCE OF RS. 45,41,046/- AND ALSO M ADE DISALLOWANCES OF OTHER EXPENDITURE RELATED TO DISALLOW ANCE ON ACCOUNT OF DEFAULT, ON ACCOUNT OF SHORT DEDUCTION OF TAX, DEP RECIATION ON UPS AND OTHER COMPUTER PERIPHERALS. 3. AGGRIEVED AGAINST THIS ORDER THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE LD. CIT(A) WHO AFTER CONSIDERING THE SUBMI SSIONS AFFIRMED THE DISALLOWANCE OF EXPENDITURE CLAIMED UNDER CSR. HO WEVER IN RESPECT OF THE EXPENDITURE DISALLOWED BY INVOKING THE PROVISION OF 4 SECTION 14A LD. CIT(A) AFFIRMED THE ENTIRE ADDITION IN RESPECT OF THE ADMINISTRATIVE EXPENSES. HOWEVER, LD. CIT(A) DELETED THE ADDITION IN RESPECT OF THE DISALLOWANCE OF INTEREST EXPENDITURE AND HOWEVER SUSTAINED THE ADDITION IN RESPECT OF DISALLOWANCE ON AC COUNT OF ADMINISTRATIVE EXPENSES. AGAINST THIS BOTH THE ASSESSEE AND REVENUE ARE IN APPEAL. 4. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT UN DER THE IDENTICAL FACTS THE TRIBUNAL HAD DELETED THE ADDITION BY HOLDING THAT THE EXPENSES TO SECTION 37 (1) WAS INSERTED W.E.F. 1 ST APRIL, 2015 AND CANNOT BE CONSTRUED AS TO DISADVANTAGE TO THE ASSESSEE I N THE PERIOD PRIOR TO THIS AMENDMENT. 5. LD. DR OPPOSED THESE SUBMISSIONS. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. THERE IS NO DISPUTE WITH REGARD TO THE FACT THA T BOTH THE PARTIES HAVE DISALLOWED THE EXPENDITURE TREATING THE SAME AS IN CURRED UNDER THE CSR SCHEME AND APPLIED THE EXPLANATION 2 TO SECTIO N 37(1). LD. CIT(A) HAD DECIDED THIS ISSUE BY HOLDING AS UNDER :- 4.1 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS O F THE A/R OF THE APPELLANT COMPANY, THE FACTS OF THE CASE AS WELL AS THE FINDINGS OF THE AO. IN GROUND NOS. 1.1 & 1.2 OF APPEAL THE PLEA OF THE APPELLANT IS THAT AO HAS ERRED DISA LLOWING THE CORPORATE SOCIAL RESPONSIBILITY (CSR FOR SHORT) EXPENSES 5 OF RS. 59,21,197/-. THE ASSESSEE COMPANY IS A GOVER NMENT OF INDIA UNDERTAKING IN COOPERATIVE SECTOR AND IS E NGAGED IN THE BUSINESS OF PRODUCTION, CERTIFICATION, QUALITY CONTROL, PROCESSING, HANDLING, PACKAGING, SALES TRAINING AND CONSULTANCY OF SEEDS AND IS ASSIGNED TO PLAN AND P ROMOTE PROGRAMMES OF COOPERATIVE DEVELOPMENT IN AGRICULTUR AL AND ALLIED ACTIVITIES THROUGH COOPERATIVE SOCIETIES. TH E APPELLANT HAS CLAIMED EXPENDITURES OF RS. 59,21,197/- ON CORP ORATE SOCIAL RESPONSIBILITY (CSR) EXPENSES. THE APPELLANT SUBMITTED THAT THE ASSESSEE COMPANY'S 100% SHAREHOL DING IS HELD BY CENTRAL GOVERNMENT OF INDIA. THE DEPARTM ENT OF PUBLIC ENTERPRISES HAD ISSUED THE GUIDELINES ON CO RPORATE SOCIAL RESPONSIBILITY FOR CENTRAL PUBLIC SECTOR EN TERPRISES AND THE ASSESSEE HAS INCURRED EXPENSES WHICH FALL U NDER AMBIT OF CORPORATE SOCIAL RESPONSIBILITY GUIDELINES . IT WAS SUBMITTED THAT THE EXPENSES WERE INCURRED TO CARRY OUT THE FOLLOWING CSR ACTIVITY- A. FACILITATING SOIL TESTING FOR NSC'S GROWERS B. ORGANIZATION OF FREE VETERINARY HEALTH CHECKUPS PARTICULARLY IN THE SEED VILLAGES C. DISTRIBUTION OF METALLIC BINS FOR SAFE STORAGE O F SEEDS SAVED BY FARMERS 6 D. UNDERTAKING WATER MANAGEMENT /CONSERVATION / HARVESTING MEASURES IN THE SEED VILLAGES E. ORGANIZING DE-ADDITION PROGRAMMES, ORGANIZING BL OOD DONATION CAPS, HEALTH/AIDS/HIV AWARENESS CAMPAIGN ETC. F. PARTICIPATION IN PRISON REFORM PROGRAMMES THROUG H SUPPLY OF FREE SEEDS AND PLANTING MATERIAL INCLUDIN G TECHNICAL ADVICE AND GUIDANCE TO JAIL AUTHORITIES G. ORGANIZING TREE PLANTATION SO AS TO CONTRIBUTE T O 'CLEANER ENVIRONMENT'. H. ORGANIZING TRAINING PROGRAMMES FOR FARMERS/SEED GROWERS ON CROP PRODUCTION/SEED PRODUCTION IN PARTICULAR I. DISTRIBUTION OF SOLAR LAMPS/HAND/FOOT SPRAYER AN D J. DISTRIBUTION OF TARPAULINS/SILPAULINES TO FAR MERS/SEED GROWERS IN RURAL AREAS IT IS SEEN THAT THE ABOVE EXPENDITURES ARE INCURRED AS PER GUIDELINES ISSUED BY DEPARTMENT OF PUBLIC ENTERPRIS ES. THEREFORE, THE EXPENDITURES ARE NOT MANDATORY IN NA TURE. FURTHER, NO COMMERCIAL EXPEDIENCY HAS BEEN ESTABLIS HED BY 7 THE ASSESSEE IN CONNECTION WITH THE EXPENDITURES IN CURRED ON ACCOUNT OF THE CORPORATE SOCIAL RESPONSIBILITY. UNDER THE PROVISIONS OF SEC 37(1) ONLY THE EXPENDITURES WHICH ARE LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPO SE OF THE BUSINESS OF THE ASSESSEE ARE ALLOWABLE. THE ABOVE REQUIREMENT U/S 37(1) IS NOT FULFILLED IN RESPECT O F THE ABOVE EXPENDITURES INCURRED ON THE BASIS OF GUIDELINES IS SUED BY DEPARTMENT OF PUBLIC ENTERPRISES (DPE). ALL THE DEC ISIONS RELIED UPON BY THE AR OF THE APPELLANT DEALS WITH I NSTANCES WHERE EXPENDITURE HAVE BEEN INCURRED SPECIFICALLY B ASED ON THE' PRINCIPLE OF COMMERCIAL EXPEDIENCY. IN RESPECT OF EXPENDITURES OF THE NATURE OF CORPORATE SOCIAL RESP ONSIBILITY THERE ARE EXISTING PROVISIONS UNDER THE IT ACT SUCH AS SECTION 35AC AND SECTION 80G WHICH PROVIDES FOR ALLOWBILITY OF SUCH EXPENDITURES SUBJECT TO FULFILLMENT OF CONDITIONS T HEREIN. THEREFORE, IF THE ASSESSEE INCURS CERTAIN EXPENDITU RES UNDER THE HEAD CORPORATE SOCIAL RESPONSIBILITY THE SAME C AN BE CLAIMED AS PER THE PROVISIONS ENSHRINED IN SEC 35AC OR SECTION 80G. FURTHER EXPLANATION 2 INSERTED BY THE AMENDMENT IN THE FINANCE ACT 2014 (2) IN SECTION 37 OF THE INCOME TAX ACT SAYS: 8 'EXPLANATION 2.-FOR THE REMOVAL OF DOUBTS, IT IS HE REBY DECLARED THAT FOR THE PURPOSES OF SUB-SECTION (1), ANY EXPENDITURE INCURRED BY AN ASSESSEE ON THE ACTIVITI ES RELATING TO CORPORATE SOCIAL RESPONSIBILITY REFERRE D TO IN SECTION 135 OF THE COMPANIES ACT, 2013 (18 OF 2013) SHALL NOT BE DEEMED TO BE AN EXPENDITURE INCURRED B Y THE ASSESSEE FOR THE PURPOSES OF THE BUSINESS OR PROFESSION. '. ALTHOUGH THE ABOVE EXPLANATION WAS INSERTED BY THE FINANCE ACT, 2014 THE ABOVE EXPLANATION BEING CLARIFICATOR Y IN NATURE, THEREFORE, IT IS CLEAR THAT INTENTION OF LE GISLATURE WAS NEVER TO TREAT THESE CSR EXPENDITURE AS EXPENDITURE INCURRED BY THE ASSESSEE FOR THE PURPOSES OF THE BU SINESS OR PROFESSION. IN VIEW OF THE ABOVE, THE DISALLOWANCE MADE BY THE AO IS FULLY JUSTIFIED. AS SUCH THE SAME IS SUST AINED. THE APPEAL FAILS IN THIS GROUND. 7. FURTHER THE COORDINATE BENCH OF THIS TRIBUNAL I N THE CASE OF ACIT VS. JINDAL POWER LTD. (2016) 70 TAXMANN.COM 389 (RAI PUR TRIBUNAL) HAS HELD AS UNDER :- 18. WE HAVE ALSO TAKE NOTE OF THE FACT THAT IN VIE W OF INSERTION OF EXPLANATION 2 TO SECTION 37(1), WITH EFFECT FROM 1 ST APRIL 2015, WHICH PROVIDES THAT 'FOR THE REMOVAL OF DOUBTS, IT IS HEREBY 9 DECLARED THAT FOR . THE PURPOSES OF SUB-SECTION (1) , ANY EXPENDITURE INCURRED BY AN ASSESSEE ON THE ACTIVITIES RELATING TO CORPORATE SOCIAL RESPONSIBILITY REFERRED TO IN SECTION 135 OF THE COMPANIES ACT, 2013 (18 OF2013) SHALL NOT BE DEEMED TO BE AN EXPENDITURE INCURRED BY THE ASSESSEE FOR THE PURPOSES OF THE BU SINESS OR PROFESSION', THE EXPENSES INCURRED IN DISCHARGING C ORPORATE SOCIAL RESPONSIBILITY ARE NOT DEDUCTIBLE IN COMPUTATION OF BUSINESS INCOME. LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITS THAT THIS AMENDMENT SHOULD BE TREATED AS CLARIFICATORY IN NAT URE, AS IT IS STATED TO BE IN SO MANY WORDS, AND WE SHOULD, THERE FORE, HOLD THAT THE EXPENSES IN DISCHARGING CORPORATE SOCIAL R ESPONSIBILITY WERE OUTSIDE THE AMBIT OF EXPENSES DEDUCTIBLE UNDER SECTION 37(1). 19. WE ARE UNABLE TO SEE LEGALLY SUSTAINABLE MERITS IN THIS PLEA EITHER. THE AMENDMENT IN THE SCHEME OF SECTION 37(1 ), WHICH HAS BEEN INTRODUCED WITH EFFECT FROM 1ST APRIL 2015, CA NNOT BE CONSTRUED AS TO DISADVANTAGE TO THE ASSESSEE IN THE PERIOD PRIOR TO THIS AMENDMENT. THIS DISABLING PROVISION, AS SET OU T IN EXPLANATION 2 TO SECTION 37(1), REFERS ONLY TO SUCH CORPORATE SOCIAL RESPONSIBILITY EXPENSES AS UNDER SECTION 135 OF THE COMPANIES ACT, 2013, AND, AS SUCH, IT CANNOT HAVE ANY APPLICA TION FOR THE PERIOD NOT COVERED BY THIS STATUTORY PROVISION WHIC H ITSELF CAME 10 INTO EXISTENCE IN 2013. EXPLANATION 2 TO SECTION 37 (1) IS, THEREFORE, INHERENTLY INCAPABLE OF RETROSPECTIVE APPLICATION A NY FURTHER. IN ANY EVENT, AS HELD BY HON'BLE SUPREME COURT'S FIVE JUDGE CONSTITUTIONAL BENCH'S LANDMARK JUDGMENT, IN THE CA SE OF CIT V. VATIKA TOWNSHIPS PVT. LTD (2014) 367 ITR 466/227 TA XMAN 121/49 TAXMANN.COM 249 (SC), THE LEGAL POSITION IN THIS REGARD HAS BEEN VERY SUCCINCTLY SUMMED UP BY OBSERVING THA T 'OF THE VARIOUS RULES GUIDING HOW LEGISLATION HAS TO BE INT ERPRETED, ONE ESTABLISHED RULE IS THAT UNLESS A CONTRARY INTENTIO N APPEARS, LEGISLATION IS PRESUMED NOT TO BE INTENDED TO HAVE A RETROSPECTIVE OPERATION. THE IDEA BEHIND THE RULE IS THAT A CURRE NT LAW SHOULD GOVERN CURRENT ACTIVITIES. LAW PASSED TODAY CANNOT APPLY TO THE EVENTS OF THE PAST. IF WE DO SOMETHING TODAY, WE DO IT KEEPING IN VIEW THE LAW OF TODAY AND IN FORCE AND NOT TOMORROW 'S BACKWARD ADJUSTMENT OF IT. OUR BELIEF IN THE NATURE OF THE L AW IS FOUNDED ON THE BEDROCK THAT EVERY HUMAN BEING IS ENTITLED TO ARRANGE HIS AFFAIRS BY RELYING ON THE EXISTING LAW AND SHOULD N OT FIND THAT HIS PLANS HAVE BEEN RETROSPECTIVELY UPSET. THIS PRINCIP LE OF LAW IS KNOWN AS LEX PROSPICIT NON RESPICIT: LAW LOOKS FORW ARD NOT BACKWARD. AS WAS OBSERVED IN PHILLIPS V. EYRE [, A RETROSPECTIVE LEGISLATION IS CONTRARY TO THE GENERAL PRINCIPLE TH AT LEGISLATION BY WHICH THE CONDUCT OF MANKIND IS TO BE REGULATED WHE N INTRODUCED FOR THE FIRST TIME TO DEAL WITH FUTURE ACTS OUGHT N OT TO CHANGE THE 11 CHARACTER OF PAST TRANSACTIONS CARRIED ON UPON THE FAITH OF THE THEN EXISTING 'TAW.' IT MAY APPEAR TO BE SOME KIND OF A DICHOTOMY IN THE TAX LEGISLATION BUT THE WELL SETTLED LEGAL POSITION IS THAT WHEN A LEGISLATION CONFERS A BENEFIT ON THE TAXPAYER BY RE LAXING THE RIGOUR OF PRE-AMENDMENT LAW, AND WHEN SUCH A BENEFIT APPEA RS TO HAVE BEEN THE OBJECTIVE PURSUED BY THE LEGISLATURE, IT W OULD BE A PURPOSI V E INTERPRETATION GI V IN G IT A RETROSPECTIVE EFFECT BUT WHEN A TAX LEGISLATION IMPOSES A LIABILITY OR A BURDEN , THE EFFECT OF SUCH A LEGISLATIVE PROVISION CAN ONLY BE PROSPECTIVE . WE HAVE ALSO NOTED THAT THE A MENDMENT IN THE SCHEM E OF S ECTION 37(1) IS NOT SPECIFICALLY STATED TO BE RETROSPECTIVE AND THE SAI D E XPLANATION IS INS E RTED ONL Y WITH EFFECT FROM 1 ST APRIL 2015. IN THIS VIEW OF THE MATTER ALSO , THERE IS NO REASON TO HOLD THIS P R O V I S ION TO BE RETROSPECTIVE IN APPLICATION . AS A MATTER OF FACT , THE AMENDMENT IN LAW , WHICH WAS ACCOMPANIED B Y THE STATUTORY REQUIREMENT WITH REGARD TO DISCHARGING THE CORPORATE SOCIAL RESPONSI BILITY , IS A DISABLING PROVISION WHICH PUTS AN ADDITIONAL TAX BU RDEN ON THE ASSESSEE IN THE SENSE THAT THE EXPENSES TH A T THE ASSESSEE IS REQUIRED TO INCUR UNDER A STATUTORY OBLIGATION IN T HE COURSE OF HIS BUSINESS ARE NOT ALLOWED DEDUCTION IN THE COMPUTATI ON OF INCOME. THIS DISALLOWANCE IS RESTRICTED TO THE EXPENSES INC URRED B Y THE ASSESSE E UND E R A STATUTORY OBLIGATION UNDER SECTION 135 OF COMPANIES ACT 2013 , AND THERE IS THUS NOW A LINE OF D E MARCATION 12 BETWEEN THE EXPENSES INCURRED BY THE ASSESSEE ON DI SCHARGING CORPORATE S OCIAL RESP O N S IB I LIT Y UNDER SUCH A STATUTORY OBLIGATION AND UNDER A VOLUNTARY ASSUMPTION OF RESPONSIBILIT Y. AS FOR THE F ORMER , THE DISALLOWANCE UNDER EXPLANATION 2 TO SECTION 37( 1) COMES INTO PLAY, BUT , AS FOR LATTER, THERE IS N O SUCH DISABLING PROVISION AS LONG AS THE EXPENSES , EVEN IN DISCHARGE OF CORPORATE SOCIAL RE S P ONSI BI L IT Y ON VOLUNTARY BASIS , CAN BE SAID TO BE 'WHOLL Y AND EX C LUSI V EL Y FOR TH E PURPOS ES O F BU SI N ESS ' . T HERE IS NO DISPUTE THAT THE EXPENSES IN QUESTION ARE NOT INCURRED UNDE R THE AFORESAID STATUTOR Y O B LIGATION. FO R T HIS REASON ALSO , AS ALSO FOR THE BASIC REASON THAT THE E XPLANA T ION 2 TO S E CTION 37 ( 1) C O M ES INTO PLA Y WITH EFFECT FROM 1 ST APRIL 2015, WE HOLD THAT THE DISABLING PROVISION OF E XPLANATION 2 TO SE CT I ON 3 7 ( 1 ) DOES NOT APPLY ON THE FACTS OF THIS CASE. 8. THE REVENUE HAS NOT BROUGHT TO OUR NOTICE ANY O THER BINDING PRECEDENTS BY JURISDICTIONAL HIGH COURT OR ANY OTHER HO NBLE HIGH COURTS. THEREFORE TAKING A CONSISTENT VIEW WE HEREBY D IRECT THE AO TO DELETE THE DISALLOWANCE. GROUND RAISED IN THIS APPEAL IS ALLOWED. 9. NOW WE TAKE UP THE REVENUES APPEAL. REVENUE HAS RAISED FOLLOWING GROUNDS OF APPEAL :- 13 (I) WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE & IN LAW, THE LD. CIT(A) IS JUSTIFIED IN RESTRICTING THE DISALLOWANCE OF EXPENSES U/S 14A OF RS. 45,41,046/- TO RS. 4,43,533 /-. (II) THAT THE ORDER OF THE CIT(APPEALS) IS ERRON EOUS AND IS NOT TENABLE IN LAW AND ON FACTS. (III) THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR FOREGO ANY GROUND(S) OF THE APPEAL RAISED ABOVE AT THE TIM E OF THE HEARING. 10. ONLY EFFECTIVE GROUND IN REVENUES APPEAL IS IN RESTRICTING THE DISALLOWANCE OF EXPENSES U/S 14A FROM RS. 45,41,046 /- TO RS. 4,43,533/-. LD. DR VEHEMENTLY ARGUED THAT THE LD. CIT(A ) WAS NOT JUSTIFIED IN DELEING THE DISALLOWANCE. HE SUBMITTED THAT THE ISSUE WITH REGARD TO THE DISALLOWANCE U/S 14A HAS BEEN DECIDED B Y THE HONBLE APEX COURT IN FAVOUR OF THE REVENUE IN THE CASES WHER E THE AMOUNT OF EXPENDITURE CANNOT BE DIVIDED. THE DISALLOWANCE U/S 1 4A IS JUSTIFIED. ON THE CONTRARY LD. AR SUBMITTED THAT THE JUDGMENT OF THE HONBLE APEX COURT IS NOT APPLICABLE ON THE FACTS OF THE PRESEN T CASE AND HE SUBMITTED THAT THE FACTS ARE DISTINGUISHABLE. 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD. LD. CIT(A) HAS DECIDED THESE ISSUES BY GI VING FINDING ON FACTS AS UNDER :- 14 4.2.1 GROUND NOS. 2.1 TO 2.3 OF APPEAL ARE DIRECTE D AGAINST DISALLOWANCE OF RS. 45,41,046/- MADE BY THE AO U/S 14A. THE ASSESSEE HAS INVESTED IN SHARES OF STATE SEEDS CORP ORATION (SSC) OF RS. 8,87,06,500/- DURING THE YEAR 1970 TO 2003 A ND EARNED DIVIDEND INCOME OF RS. 58,44,900/- DURING THE PREVI OUS YEAR RELEVANT TO A.Y. 2011-12. THE ABOVE DIVIDEND INCOME WAS CLAIMED EXEMPT. APPELLANT SUBMITTED THAT THE YEAR WISE DETA IL OF SHARE CAPITAL RECEIVED FROM GOVERNMENT OF INDIA AND INVE STMENT MADE IN THE SHARES OF SSC ARE AS UNDER:- YEAR SHARES ISSUED TO GOI IN RS. INVESTMENT IN SSC IN RS. 1970 32,00,000 10,00,000 1971 0 500 1976 1,20,00,000 200 1977 40,00,000 20,00,200 1978 84,18,000 48,10,60 0 1979 1,19,78,000 96,95,5 00 1980 37,53,600 42,25, 500 1981 34,00,000 81,24, 000 1982 1,45,00,000 18,75,00 0 1983 2,25,00,000 1,70,14,000 1984 2,94,99,400 70,80,000 1985 36,00,000 66,99,000 1986 1,05,50,000 11,54,000 15 1987 1,21,14,000 1,57,82,000 1992 4,46,87,000 15,94,00 0 1993 0 52,80,000 1997 61,93,000 (12,50,0 00)* 2003 0 3 6,22,000 TOTAL 19,03,93,000 8,87,06,500 REDEMPTION OF PREFERENCE SHARES BY UPSTDC FURTHER, NO DEDUCTION WAS MADE BY THE APPELLANT U/S 14A IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE APPELLANT SUBMITTED THAT DURING THE YEAR NO INV ESTMENT WAS MADE IN THE SHARES BY THE ASSESSEE. THE INVESTMENTS IN SHARES OF SSC WERE MADE IN THE EARLIER YEARS AND THE FUNDS WE RE PROVIDED BY THE GOVERNMENT OF INDIA BY WAY OF FURTHER INVEST MENT IN SHARE CAPITAL IN ASSESSEE COMPANY. THE ASSESSEE HAS NOT I NCURRED ANY INTEREST FOR INVESTMENT IN SHARES. THE LAST INVESTM ENT IN SHARES WAS MADE IN THE YEAR 2003 AND THERE CANNOT BE NEXUS BETWEEN THE INVESTMENT MADE IN SHARES IN THE YEARS 1970 TO 2003 AND THE INTEREST PAID ON LOANS OUTSTANDING DURING THE YEAR ENDED 31 ST MARCH, 2011. THE A. O. WAS NOT SATISFIED WITH THE C ORRECTNESS OF THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAS B EEN INCURRED IN RELATION TO THE EXEMPT INCOME. THEREFORE, FOLLOWING RULE 8D, THE A.D. HAS DISALLOWED RS.45,41,046/- U/S 14A OF THE A CT. 16 4.2.2 SECTION 14A PROVIDES THAT ALL THE EXPENDITURE INCURRED IN RELATION TO THE EXEMPT INCOME SHALL BE DISALLOWED. RULE 8D CLEARLY PROVIDES FOR DISALLOWANCE OF DIRECT EXPENDITURE INC URRED IN RELATION TO THE EXEMPT INCOME UNDER CLAUSE (I) OF SUB-RULE ( 2) AND INDIRECT EXPENDITURE BY WAY OF INTEREST OF RELEVANT PREVIOUS YEAR, UNDER CLAUSE (II) OF SUB RULE (2). FURTHER OTHER INDIRECT EXPENDITURE OF THE RELEVANT PREVIOUS YEAR ARE TO BE DISALLOWED AS PER CLAUSE (III) OF SUB-RULE (2), WHICH IS TO BE DETERMINED ON THE BASI S OF AVERAGE VALUE OF INVESTMENT FROM WHICH THE EXEMPT INCOME IS EARNED. 4.2.3 HON 'BLE HIGH COURT OF BOMBAY IN GODREJ & BOY CE MFG. CO. LTD. V. DCIT [20 I 0] 194TAXRNAN 203 (BORN) HELD TH AT AS A RESULT OF THE ENACTMENT OF SECTION 14A, NO EXPENDITURE CAN BE ALLOWED AS A DEDUCTION IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. ONLY THAT PART OF THE E XPENDITURE, WHICH IS INCURRED IN RELATION TO INCOME WHICH FORMS PART OF THE TOTAL INCOME, CAN BE ALLOWED. THE EXPENDITURE INCUR RED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME HAS TO BE DISALLOWED. THE EXPRESSION 'EXPENDITURE INCURRED' I N SECTION 14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INT EREST, ETC. IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR. HON'B LE HIGH COURT FURTHER HELD THAT SUB-SECTIONS (2) AND (3) OF SECTI ON 14A ARE INTENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS OF SUB-SECTION 17 (1). THE OBJECT OF SUB-SECTION (2) IS TO PROVIDE UN IFORMITY OF METHOD WHERE THE ASSESSING OFFICER IS, ON THE BASIS OF THE ACCOUNTS OF THE ASSESSEE, 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 THE ACT. SUB- SECTION (2) OF SECTION 14A DOES NOT ENABLE THE ASSE SSING OFFICER TO APPLY THE METHOD PRESCRIBED BY RULE 8D WITHOUT DETE RMINING IN THE FIRST INSTANCE THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. 4.2.4 HON'BLE HIGH COURT OF DELHI IN MAXOPP INVESTM ENT LTD. V. CIT [2011] 15 TAXMANN.COM 390 (DELHI) HELD THAT WHILE R EJECTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITUR E OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXE MPT INCOME, THE ASSESSING OFFICER WOULD HAVE TO INDICATE COGENT REA SONS FOR THE SAME. 4.2.5 THE AO HELD THAT THE AMOUNT OF DIRECT EXPENDI TURE IN RELATION TO EXEMPT INCOME IS NIL UNDER RULE 8D(2)(I). THE AO COMPUTED THE INDIRECT INTEREST EXPENDITURE UNDER RULE 8D(2)(II) AT RS. 40,97,513/- . HOWEVER WHILE COMPUTING INDIRECT INTEREST EXPENDI TURE FOR DISALLOWANCE U/S 14A, THE AO HAS NOT INDICATED ANY COGENT REASON AS TO HOW THE INTEREST EXPENDITURE ARE INDIR ECTLY INCURRED IN CONNECTION WITH INVESTMENT FROM WHICH THE EXEMPT INCOME IS 18 EARNED. FROM THE PARTICULARS FURNISHED IT IS SEEN T HAT THE ABOVE INVESTMENTS WERE MADE IN THE PERIOD 1970 TO 2003 AN D NO INVESTMENTS WERE MADE DURING THE RELEVANT PERIOD UN DER CONSIDERATION. THE INVESTMENTS WERE MADE IN EARLIER YEARS AND THE FUNDS WERE PROVIDED BY THE GOVERNMENT OF INDIA BY WAY OF FURTHER INVESTMENT IN SHARE CAPITAL IN ASSESSEE COM PANY. IN VIEW OF THE ABOVE AND THE APPELLANT'S SUBMISSION THAT NO INTEREST EXPENDITURES ARE INCURRED FOR INVESTMENT IN SHARES, THEREFORE, AO IS REQUIRED TO INDICATE COGENT REASON ON THE BASIS OF THE ACCOUNTS THAT THE CLAIM OF THE APPELLANT IS NOT CORRECT. IN THE ABSENCE OF ANY FINDING ON THE BASIS OF ACCOUNTS THAT INTEREST EXPE NDITURES ARE INCURRED IN RELATION TO EXEMPT INCOME NO DISALLOWAN CE OF INDIRECT INTEREST EXPENDITURE CAN BE MADE UNDER RULE 8D(2)(I I). IN VIEW OF THE ABOVE THE INDIRECT INTEREST EXPENDITURE OF RS. 40.97 LACS COMPUTED BY THE AO UNDER RULE 8D(2)(II) FOR DISALLO WANCE U/S 14A IS NOT JUSTIFIED. 4.2.6 HOWEVER, CONSIDERING THE INVESTMENT IN SHARES OF RS. 8.87 CRORES AND TAX EXEMPT INCOME OF RS. 58.44 LACS EARN ED DURING THE YEAR, IT IS INEVITABLE THAT SOME MANAGERIAL AND ADM INISTRATIVE EXPENDITURES ARE INCURRED IN RELATION TO THE EXEMPT INCOME BECAUSE NO INCOME CAN BE EARNED WITHOUT INCURRING S OME EXPENDITURES. WHEN ADMINISTRATIVE AND MANAGERIAL EX PENDITURES 19 ARE INCURRED DURING THE YEAR IT IS INEVITABLE THAT SUCH ADMINISTRATIVE AND MANAGERIAL EXPENSES ARE ALSO INC URRED TO EARN EXEMPT INCOME, ALTHOUGH SUCH EXPENDITURES ARE NOT S EGREGATED IN THE ACCOUNTS AND REMAIN CLUBBED WITH THE OVERALL EX PENDITURES. CONSIDERING THE EXEMPT INCOME, QUANTUM OF INVESTMEN T, ALL SUCH ADMINISTRATIVE AND MANAGEMENT EXPENSES ATTRIBUTABLE TO THE EXEMPT INCOME ARE REQUIRED TO BE CONSIDERED FOR DIS ALLOWANCE ON THE BASIS OF THE FORMULA GIVEN IN CL (III) OF RULE 8D (2) TO BE APPLIED ON THE AVERAGE VALUE OF INVESTMENT FROM WHICH THE E XEMPT INCOME IS EARNED. IT IS SEEN THAT AO HAS DISALLOWED RS. 4, 43,533/- AS PER FORMULA GIVEN IN RULE 8D(2)(III) BEING 112% OF AVER AGE VALUE OF TAX EXEMPT INVESTMENT. THEREFORE, NO INTERFERENCE IS CA LLED FOR IN THIS ACCOUNT. AS SUCH, THE DISALLOWANCE MADE BY THE AO U /S 14A IS REDUCED FROM RS. 45.411ACS TO RS. 4,43,533/-. ACCOR DINGLY, THE GROUND OF APPEAL IS PARTLY ALLOWED. 12. WE DO NOT SEE ANY REASON TO DISTURB THE ABOVE FINDINGS ON FACT AS LD. CIT(A) HAS EXAMINED THE ISSUE IN RIGHT PERSPEC TIVE. THE JUDGMENT RENDERED IN THE CASE OF MAXOPP INVESTMENTS VS. CIT (2011) 15 TAXMANN.COM 390 (DELHI) IS ON DIFFERENT SET OF FA CTS. HERE THE LD. CIT(A) HAS GIVEN A CLEAR FINDING THAT INVESTMENTS WERE MADE IN EARLIER YEARS OUT OF THE FUNDS PROVIDED BY THE GOVT. OF INDIA. THE REVENUE 20 HAS NOT FURNISHED ANY MATERIAL SUGGESTING THAT THE INVE STMENT WAS OUT OF BORROWED FUNDS. THIS GROUND OF REVENUES APPE AL IS DISMISSED. 13. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS ALLOWED WHEREAS APPEAL FILED BY THE REVENUE IS DISMISSED. THIS DECISION WAS PRONOUNCED IN THE OPEN C OURT ON 4 TH APRIL, 2018. SD/- SD/- (G.D. AGRAWAL) (KUL BHARAT) HONBLE PRESIDENT JUDICI AL MEMBER DATED: 4 TH APRIL, 2018 VEENA COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI