ACIT, CHENNAI V. Shri Ravikant Choudhary, CHENNAI

ITA 768/CHNY/2012

• Counselvise Citation: 76821714 RSA 2012
• Duration Of Justice: 8 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-12-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 10-12-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 11-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Retrospective amendment; Deemed dividend
• Section: 143(3); 14A; 147

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL A BENCH, CHENNAI. BEFORE ABRAHAM P. GEORGE, ACCOUNTANT MEMBER & SHRI S.S. GODARA, JUDICIAL MEMBER I.T.A. NO.768/MDS/2012 ASSESSMENT YEAR: 2008-09 & C.O. NO. 93/MDS/2012 [IN I.T.A. NO.768/MDS/2012] THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE I(1), CHENNAI 600 034. VS. SHRI RAVIKANT CHOUDHARY, NO. 51, ELEPHANT GATE STREET, SOWCARPET, CHENNAI 600 079. [PAN:AAEPR7102C] (APPELLANT) (RESPONDENT/CROSS OBJECTOR) APPELLANT BY : SHRI SHAJI P. JACOB, CIT RESPONDENT BY : SHRI PHILIP GEORGE, ADVOCATE DATE OF HEARING : 10.12.2012 DATE OF PRONOUNCEMENT : 17.12.2012 ORDER PER BENCH THIS APPEAL FILED BY THE REVENUE AND THE CROSS OBJ ECTIONS AT THE BEHEST OF THE ASSESSEE; EMANATE FROM THE ORDER OF THE COMM ISSIONER OF INCOME TAX (APPEALS) III, CHENNAI DATED 12.01.2012 IN ITA NO. 424/2010-11/A.III FOR THE ASSESSMENT YEAR 2008-09 IN PROCEEDINGS UNDER SECTIO N 143(3) OF THE INCOME TAX ACT 1961 [IN SHORT THE ACT]. I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 2 2. IN THE GROUNDS RAISED, THE SUBSTANTIVE PLEA, IN TER ALIA, OF THE REVENUE READS AS UNDER: 1. XXXXXXXXXXXX 2.1 THE LEARNED CIT(A) ERRED IN DELETING THE ADDITI ON MADE U/S. 2(22)(E) OF THE ACT AND OUGHT TO HAVE UPHELD AN ADDITION OF ` . 2.99 CRORES WHICH IS THE MAXIMUM LOAN OUTSTANDING DURING THE YEAR. 2.2 TO 3. XXXXXXXXXXXXX THE ASSESSEES EFFECTIVE PLEA IN THE CROSS OBJECTIO NS IS ALSO HEREBY REPRODUCED AS UNDER: 1. XXXXXXXXXXXX 1.1 THE COMMISSIONER OF INCOME TAX (APPEALS) GROSSL Y ERRED IN UPHOLDING THE DISALLOWANCE OF INTEREST EXPENDITURE U/S. 14A READ WITH RULE 8D TO THE TUNE OF ` .19,67,681/-. 1.2 TO 2. XXXXXXXXXXXXX 3. FACTS APROPOS THE GROUNDS ABOVE SAID ARE THAT T HE ASSESSEE [INDIVIDUAL] IS THE MANAGING DIRECTOR OF A COMPANY NAMELY M/S. ASL CAPITAL HOLDINGS PVT. LTD. ON 30.09.2008, HE HAD FILED HIS RETURN ADMITTING TOTAL INCOME OF ` .2,48,99,350/- WHICH WAS PROCESSED AND ACCEPTED UNDER SECTION 143( 1) OF THE ACT ON 05.02.2010. 4. IN THE ENCLOSURES FILED WITH THE RETURN, THE ASSESSEE HAD CLAIMED AN AMOUNT OF ` .38,26,191/- IN THE SHAPE OF DIVIDEND AS EXEMPT I NCOME UNDER SECTION 10(34) OF THE ACT WITHOUT ATTRIBUTING ANY EXPENDITURE IN EARNING THE SAME IN HIS P&L ACCOUNT. IN SCRUTINY PROCEEDINGS, HE REITERATED THE SAID FACTUAL I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 3 POSITION THAT NO EXPENDITURE HAD BEEN INCURRED IN R ELATION TO EARNING EXEMPT INCOME. THE ASSESSING OFFICER VIDE ASSESSMENT ORDER DATED 31.12.2010; BY INVOKING SECTION 14A OF THE ACT PRESCRIBING DISAL LOWANCE OF EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME AND AFTER PLACIN G RELIANCE ON SPECIAL BENCH DECISION OF MUMBAI ITAT IN CIT VS. DAGA CAPITAL MAN AGEMENT PRIVATE LIMITED, MAXOPP INVESTMENTS LIMITED VS. ACIT AND M/S. CHEMIN REST LIMITED VS. DCIT (DELHI, ITAT), HELD THAT SINCE SECTION 14A [SUB-SEC TION (2) AND (3)] OF THE ACT AS WELL AS RULE 8D OF THE INCOME TAX RULES WERE ONLY P ROCEDURAL IN NATURE, SO, THEY WOULD APPLY IN THE INSTANT CASE WITH RETROSPECTIVE EFFECT. ACCORDINGLY, HE COMPUTED DISALLOWANCE OF ` .19,67,681/- BY FOLLOWING RULE 8D AND ADDED THE SAI D AMOUNT IN ASSESSEES TOTAL INCOME. 5. SIMILARLY, IN THE PREVIOUS YEAR RELEVANT TO THE IMPUGNED ASSESSMENT YEAR, THE ASSESSEE HAD SHOWN TO HAVE RECEIVED AN AMOUNT O F ` .4.99 CRORES FROM THE COMPANY M/S. ASL CAPITAL HOLDINGS PVT. LTD. (SUPRA) . PER ASSESSING OFFICER, SINCE THE SAID ENTITY IS A CLOSELY HELD COMPANY WIT HOUT SUBSTANTIAL INTEREST OF THE PUBLIC AND IN VIEW OF THE FACT THAT AS ON 31.03.200 8, ITS PROFIT WERE OF ` .5,42,92,504/-, THE PROVISIONS OF DEEMED DIVIDEND E NSHRINED IN THE ACT I.E. UNDER SECTION 2(22)(E) WOULD APPLY, THE AMOUNT RECE IVED BY THE ASSESSEE IS TO BE TREATED AS HIS INCOME. CONTESTING THIS, THE ASSE SSEE STATED THAT HE HAD GIVEN A PERSONAL GUARANTEE ON BEHALF OF THE SAID COMPANY AND RECEIVED THE AMOUNT IN QUESTION AS QUID PRO QUO ARRANGEMENT AS THE TRANSAC TION WAS ONLY AN INSTANCE OF I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 4 BUSINESS EXPEDIENCY. THE ASSESSING OFFICER DID NOT CONCUR WITH THE SAID SUBMISSION OF THE ASSESSEE AND ADDED AN AMOUNT OF ` .4.99 CRORES IN ASSESSEES INCOME AS DEEMED DIVIDEND BY HOLDING THAT THE ASSES SEE HAD SHOWN THE SAME AS SUNDRY CREDIT IN HIS ACCOUNT, WHICH COULD NOT BE TREATED AS CREDITS IN THE ORDINARY BUSINESS. HE ALSO OBSERVED THAT SECTION 2( 22)(E) WAS APPLICABLE AS A LOAN TO A SHARE HOLDER IS DEEMED DIVIDEND REGARDLES S OF ITS PURPOSE. IN THIS MANNER, AFTER MAKING ADDITIONS OF DISALLOW ANCE UNDER SECTION 14A OF THE ACT: AND DEEMED DIVIDEND (SUPRA), THE ASSE SSING OFFICER WORKED OUT THE ASSESSEES TOTAL INCOME AS ` .76,767,031/-. 6. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL. WE FI ND THAT ON THE ISSUE OF DISALLOWANCE UNDER SECTION, THE CIT(A) HAS AFFIRMED THE ADDITION MADE BY THE ASSESSING OFFICER BY HOLDING THAT SINCE THE INSTANT CASE PERTAINS TO EXEMPT INCOME IN THE SHAPE OF DIVIDEND INCOME, THEREFORE, SECTION 14A READ WITH RULE 8D WOULD BE APPLICABLE AND MORE SO, IN VIEW OF THE FACT THAT THE AMENDMENTS TO SECTION 14A AS WELL AS RULE 8D OF THE INCOME TAX RU LES HAD COME INTO OPERATION DURING THE PENDENCY OF THE ASSESSMENT PROCEEDINGS. THE PRINCIPLE CONTENTION ADVANCED BY THE ASSESSEE BEFORE THE CIT(A) THAT RUL E 8D APPLIES ONLY WITH EFFECT FROM 24.03.2008 [FROM THE DATE OF ITS NOTIFI CATION] STANDS REJECTED. HOWEVER, QUA DISALLOWANCE MADE BY THE ASSESSING OF FICER UNDER SECTION 2(22)(E) ON THE QUESTION OF DEEMED DIVIDEND, THE CI T(A) HAS AGREED TO ASSESSEES CONTENTION THAT THE UNDERSTANDING BETWEE N HIM AND THE COMPANY IN I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 5 MAKING HIM TO FURNISH BANK GUARANTEE AND IN RECEIVI NG THE AMOUNT LATER ON WAS A CASE OF BUSINESS EXPEDIENCE WHICH COULD NOT BE TR EATED AS DEEMED DIVIDEND UNDER THE PROVISIONS OF THE ACT. ACCORDINGLY, THE ASSESSEES APPEAL STANDS PARTLY ACCEPTED BY THE CIT(A). IN THIS MANNER; ON THE ONE HAND, THE REVENUE IS AGG RIEVED BY THE ORDER OF THE CIT(A) ON THE ISSUE OF DEEMED DIVIDEND, WHEREAS , THE ASSESSEE IS CHALLENGING THE DISALLOWANCE UNDER SECTION 14A WHIC H HAS BEEN CONFIRMED. 7. ON BEHALF OF THE APPELLANT/REVENUE, THE DR HAS VEHEMENTLY ARGUED THAT THE CIT(A) HAS WRONGLY DELETED THE DISALLOWANCE OF DEEMED DIVIDEND WHICH WAS DESERVINGLY MADE BY THE ASSESSING OFFICER QUA THE F ACTS OF THE CASE. THEREFORE, HE HAS REITERATED THE PLEADINGS RAISED IN THE GROUN DS AND PRAYED FOR ACCEPTANCE OF THE APPEAL. 8. OPPOSING THE REVENUE, IT HAS BEEN SUBMITTED AT THE BEHEST OF THE ASSESSEE THAT THE CIT(A) HAS RIGHTLY INTERFERED ON THE ISSUE OF DEEMED DIVIDEND SINCE ESSENTIAL CONDITIONS AS PRESCRIBED IN THE CON CERNED STATUTORY PROVISION OF THE ACT WERE NOT SATISFIED BEFORE MAKING THE ADDI TION BY THE ASSESSING OFFICER. IN ADDITION TO THIS, HE HAS ALSO PLACED RELIANCE ON THE DECISION OF THE ITAT CHENNAI IN I.T.A. NO. 1270/MDS/2011 TITLED ACIT VS. SMT. G. SREEVIDYA DECIDED DATED 28.06.2012 AND PRAYED FOR UPHOLDING THE CIT(A )S ORDER TO THIS EFFECT. FURTHER, THE AR HAS CHALLENGED THE CIT(A)S ORDER O N THE GROUND THAT THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D HA S WRONGLY BEEN MADE BY I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 6 THE ASSESSING OFFICER AND CONFIRMED BY THE CIT(A). BY REFERRING TO THE FOLLOWING CASE LAW: I) [2012] 347 ITR 272 (DELHI) MAXOPP INVESTMENT L TD. V. CIT II) [2010] 328 ITR 81 (BOM) GODREJ & BOYCE MFG. CO. LTD. V. DCIT III) [2012] 250 CTR (KAR) 291 CCI LTD. V. JCIT IV) I.T.A. NO. 267/DEL/2012 M/S. GILLETTE GROUP I NDIA PVT. LTD. V. ACIT DATED 23.03.2012, THE AR HAS PRAYED FOR THE ACCEPTA NCE OF THE CROSS OBJECTIONS. 9. THE DR REPRESENTING REVENUE HAS STRONGLY SUPPOR TED THE ORDER OF THE CIT(A) ON THE GROUND OF DISALLOWANCE UNDER SECTION 14A WHICH WAS MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE CIT(A). IN T HE LIGHT OF FINDINGS CONTAINED THEREIN, HE PRAYED FOR UPHOLDING THE SAME. 10. WE HAVE HEARD BOTH PARTIES AT CONSIDERABLE LEN GTH AND ALSO GONE THROUGH THE FINDINGS OF THE ASSESSING OFFICER AS WELL AS CI T(A) AND PERUSED THE CASE LAW CITED. UNDISPUTEDLY THE ASSESSEE IS THE MANAGING DI RECTOR OF M/S. ASL CAPITAL HOLDINGS PVT. LTD., WHEREIN THE PUBLIC ARE NOT SUBS TANTIALLY INTERESTED HOLDING MORE THAN 10% OF SHARES. IT TRANSPIRES THAT THE ASS ESSEE HAD FURNISHED A BANK GUARANTEE FOR THE COMPANY FOR AN AMOUNT OF ` .3.75 CRORES. IN THE PREVIOUS YEAR RELEVANT TO THE IMPUGNED ASSESSMENT YEAR, HE HAD RE CEIVED THE AMOUNT IN QUESTION OF ` .4.99 CRORES. THIS FACT HAS NOT BEEN CONTROVERTED E VEN BY THE ASSESSING OFFICER IN HIS ORDER NOR THERE IS ANY REC ORD PRODUCED BY THE REVENUE BEFORE US TO DISPEL THE SAID FACTUAL POSITION. NOT ONLY THIS, THE ASSESSEE IS ALSO STATED TO HAVE ISSUED A LETTER TO THE BANK CONCERNE D FOR CONTINUING THE AFORESAID I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 7 GUARANTEE. LATER ON, WHEN THE COMPANY IN QUESTION W AS HAVING SUFFICIENT FUNDS, HE CHOSE TO RECEIVE THE SAID AMOUNT AS QUID PRO QUO . IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE ARRANGEMENT BETWEEN THE AS SESSEE AND THE COMPANY IN QUESTION IS COMMERCIAL EXPEDIENCE, WHEREIN, THE ASS ESSEE BEING MANAGING DIRECTOR FURNISHED BANK GUARANTEE; CONTINUED IT, LA TER ON RECEIVED THE AMOUNT FROM THE COMPANY. IN OUR CONSIDERED OPINION, THE SA ME CANNOT BE CALLED AS AN INSTANCE OF DEEMED DIVIDEND AS IT IS NEITHER A CASE OF ADVANCEMENT OF LOAN NOR THAT OF A DEPOSIT. WE NOTICE THAT THE COORDINATE BE NCH OF ITAT CHENNAI IN THE CASE OF SMT. G. SREEVIDYA (SUPRA), WHILE DEALING WI TH SIMILAR FACTS HAS HELD AS UNDER: 6. WE HAVE HEARD THE SUBMISSIONS MADE BY THE RESPE CTIVE PARTIES AND HAVE GONE THROUGH THE DOCUMENTS ON RECORD, ORDERS O F THE LOWER AUTHORITIES AS WELL AS THE JUDGEMENTS REFERRED TO BY THE RESPEC TIVE PARTIES. THE PROVISIONS OF SECTION 2(22)(E) ARE REPRODUCED HEREIN BELOW:- 2(22)(E) ANY PAYMENT BY A COMPANY, NOT BEING A CO MPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) [MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFICIAL O WNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND W HETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER, OR TO ANY CONCERN IN WHICH SUCH SHARE HOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTI AL INTEREST (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE SAID C ONCERN)] OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE I NDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS. BUT 'DIVIDEND' DOES NOT INCLUDE (I) A DISTRIBUTION MADE IN ACCORDANCE WITH SUB-CLAU SE (C) OR SUB-CLAUSE (D) IN RESPECT OF ANY SHARE ISSUED FOR FULL CASH CO NSIDERATION, WHERE THE I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 8 HOLDER OF THE SHARE IS NOT ENTITLED IN THE EVENT OF LIQUIDATION TO PARTICIPATE IN THE SURPLUS ASSETS ; [(IA) A DISTRIBUTION MADE IN ACCORDANCE WITH SUB-CL AUSE (C) OR SUB- CLAUSE (D) IN SO FAR AS SUCH DISTRIBUTION IS ATTRIB UTABLE TO THE CAPITALISED PROFITS OF THE COMPANY REPRESENTING BONUS SHARES AL LOTTED TO ITS EQUITY SHAREHOLDERS AFTER THE 31ST DAY OF MARCH, 1964, [AN D BEFORE THE 1ST DAY OF APRIL, 1965] ;] (II) ANY ADVANCE OR LOAN MADE TO A SHAREHOLDER [OR THE SAID CONCERN] BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS , WHERE THE LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF T HE COMPANY ; (III) ANY DIVIDEND PAID BY A COMPANY WHICH IS SET O FF BY THE COMPANY AGAINST THE WHOLE OR ANY PART OF ANY SUM PREVIOUSLY PAID BY IT AND TREATED AS A DIVIDEND WITHIN THE MEANING OF SUB-CLA USE (E), TO THE EXTENT TO WHICH IT IS SO SET OFF; [(IV) ANY PAYMENT MADE BY A COMPANY ON PURCHASE OF ITS OWN SHARES FROM A SHAREHOLDER IN ACCORDANCE WITH THE PROVISION S OF SECTION 77A OF THE COMPANIES ACT, 1956 (1 OF 1956); (V) ANY DISTRIBUTION OF SHARES PURSUANT TO A DEMERG ER BY THE RESULTING COMPANY TO THE SHAREHOLDERS OF THE DEMERGED COMPANY (WHETHER OR NOT THERE IS A REDUCTION OF CAPITAL IN THE DEMERGED COM PANY). THE DEFINITION LAID DOWN BY SECTION 2(22) IS INCLUS IVE AND NOT EXHAUSTIVE. THE FOLLOWING PAYMENTS OF DISTRIBUTIONS BY A COMPANY T O ITS SHAREHOLDER ARE DEEMED AS DIVIDENDS TO THE EXTENT OF ACCUMULATED PR OFITS OF THE COMPANY ALTHOUGH THESE PAYMENTS MAY NOT BE DIVIDENDS UNDER THE PROVISIONS OF COMPANIES ACT:- (A) ANY DISTRIBUTION OR RELEASE OF COMPANYS ASSETS; (B) ANY DISTRIBUTION OF DEBENTURES, DEBENTURE STOCK, DE POSIT CERTIFICATES AND BONUS TO PREFERENCE SHARE- HOLDERS; (C) DISTRIBUTION ON LIQUIDATION OF COMPANY; (D) DISTRIBUTION ON REDUCTION OF CAPITAL (E) ANY PAYMENT BY WAY OF LOAN OR ADVANCES BY A CLOSELY HELD COMPANY TO A SHAREHOLDER HOLDING SUBSTANTIAL INTEREST PROVIDED THE LOAN SHOULD NOT HAVE BEEN MADE IN THE ORDINARY COURSE OF BUSINESS A ND MONEY LENDING SHOULD NOT BE A SUBSTANTIAL PART OF THE COMPANYS B USINESS. I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 9 7. IN ORDER TO ATTRACT THE PROVISIONS OF SECTION 2( 22)(E), THE IMPORTANT CONSIDERATION IS THAT THERE SHOULD BE LOAN/ADVANCE BY A COMPANY TO ITS SHAREHOLDER. EVERY AMOUNT PAID MUST MAKE THE COMPA NY A CREDITOR OF THE SHAREHOLDER OF THAT AMOUNT. AT THE SAME TIME, IT IS TO BE BORNE IN MIND THAT EVERY PAYMENT BY A COMPANY TO ITS SHAREHOLDERS MAY NOT BE LOAN/ADVANCE. IN THE PRESENT CASE, THE AMOUNT WAS WITHDRAWN BY THE A SSESSEE FROM THE COMPANY ONLY TO MEET HER SHORT TERM CASH REQUIREMEN TS. BY VIRTUE OF OFFERING PERSONAL GUARANTEE AND COLLATERAL SECURITY FOR THE BENEFIT OF THE COMPANY, THE LIQUIDITY POSITION OF THE ASSESSEE HAD GONE DOWN. IN THE STRICT SENSE IF IT IS TO BE CONSTRUED THE AMOUNT FORWARDED BY THE COMPANY TO THE ASSESSEE WAS NOT IN THE SHAPE OF ADVANCES OR LOANS. THE ARRANGEMENT BET WEEN THE ASSESSEE AND THE COMPANY WAS MERELY FOR THE SAKE OF CONVENIENCE ARISING OUT OF BUSINESS EXPEDIENCY. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, IT IS NOT APPROPRIATE TO HOLD THAT THE AMOUNT WITHDRAWN BY THE ASSESSEE PART AKES THE CHARACTER OF DEEMED DIVIDEND UNDER THE PROVISIONS OF SECTION 2(2 2)(E) OF THE ACT. 8. THE CASE OF THE ASSESSEE IS SQUARELY COVERED BY THE DIVISION BENCH JUDGEMENT OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF PRADIP KUMAR MALHOTRA (SUPRA), WHEREIN THE FACTS WERE SIMILAR TO THE FACTS OF THE INSTANT CASE. IN PRADIP KUMARS CASE ASSESSEE HAD SUBSTANT IAL HOLDING IN IN A PRIVATE COMPANY. THE ASSESSEE PERMITTED HIS IMMOVABLE PROPE RTY TO BE MORTGAGED TO THE BANK FOR ENABLING THE COMPANY TO TAKE THE BENEF IT OF LOAN. THE BOARD OF DIRECTORS OF THE COMPANY PASSED A RESOLUTION TO OBT AIN INTEREST FREE DEPOSIT UPTO ` .50 LAKHS AS AND WHEN REQUIRED. THE ASSESSEE OBTAI NED FROM THE COMPANY A SUM OF ` . 20,75,000/- BY WAY OF SECURITY DEPOSIT. OUT OF TH IS AMOUNT, A SUM OF ` .20 LAKHS WAS RETURNED BY THE ASSESSEE TO THE COMPA NY. THE ASSESSING OFFICER ADDED THE SUM OF ` .20,75,000/- AS DEEMED DIVIDEND. THE HONBLE HIGH COURT WHILE ALLOWING THE APPEAL OF THE ASSESSEE HELD THAT FOR RETAINING THE BENEFIT OF LOAN AVAILED OF FROM THE B ANK, IF DECISION WAS TAKEN TO GIVE ADVANCE TO THE ASSESSEE SUCH DECISION WAS NOT TO GIVE GRATUITOUS ADVANCE TO ITS SHAREHOLDER BUT TO PROTECT THE BUSINESS INTE REST OF THE COMPANY. THE SUM OF ` .20,75,000/- COULD NOT BE TREATED AS DEEMED DIVIDE ND. THE DIVISION BENCH OF THE HONBLE CALCUTTA HIGH COURT FOLLOWED T HE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. CRE ATIVE DYEING & PRINTING P.LTD. REPORTED AS 318 ITR 476(DEL). IN THE INSTANT CASE ALSO THE ASSESSEE WAS ALLOWED TO WITHDRAW FUNDS FROM THE COMPANY AS PER R EQUIREMENT FOR PERSONAL PURPOSES AGAINST THE PERSONAL GUARANTEE AND THE COL LATERAL SECURITY GIVEN BY HER TO FACILITATE HER AVAILING OF CREDIT FACILITY O F THE COMPANY. 9. IT IS A WELL SETTLED LAW THAT LOAN OR ADVANCE GI VEN TO A SHAREHOLDER BY A COMPANY IN WHICH PUBLIC IS NOT SUBSTANTIALLY INTERE STED AND WHICH HAD ACCUMULATED PROFITS, THE AMOUNT ADVANCED AS LOAN TO SUCH SHAREHOLDER IS DEEMED TO BE DIVIDEND AS PER THE PROVISIONS OF SECT ION 2(22)(E) OF THE ACT. I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 10 HOWEVER, THE FACTS AND CIRCUMSTANCES OF EACH CASE H AVE TO BE SCRUTINIZED BEFORE APPLYING THE RATIO OF THE CASES HOLDING ABOV E WELL SETTLED LAW. IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, JUDGEM ENTS RELIED UPON BY THE DR IN THE CASES OF SARADA P.(SUPRA), P.K.ABUBUCKER (S UPRA) AND TARULATA SHYAM (SUPRA) ARE NOT APPLICABLE. 10. THE COMMISSIONER OF INCOME TAX (APPEALS) VIDE O RDER DATED 6.4.2011 HAS RIGHTLY DELETED THE ADDITION MADE ON ACCOUNT OF DEEMED DIVIDEND BY THE ASSESSING OFFICER. WE DO NOT FIND ANY INFIRMITY IN THE ORDER PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS). IN VIEW OF OUR AFORESAID FINDINGS, THE APPEAL OF THE REVENUE FAILS AND THE SAME IS DIS MISSED BEING DEVOID OF ANY MERIT. EXPRESSING OUR AGREEMENT WITH THE AFORESAID FINDING S OF THE COORDINATE BENCH, WE ALSO HOLD THAT THE RECOURSE TAKEN BY THE ASSESSE E IN FIRST FURNISHING A BANK GUARANTEE FOR THE COMPANY AND LATER ON RECEIVING TH E AMOUNT IN QUESTION IS NOT COVERED BY THE CONCEPT OF THE DEEMED DIVIDEND AS DE FINED UNDER SECTION 2(22) OF THE ACT. CONSEQUENTLY, WE FIND NO INFIRMITY IN TH E ORDER OF THE CIT(A) TO THIS EXTENT, WHICH IS HEREBY UPHELD. 11. COMING TO THE CROSS OBJECTIONS OF THE ASSESSEE , WE NOTICE THAT QUA THIS ISSUE OF DISALLOWANCE IN QUESTION UNDER SECTION 14A , THE UNDISPUTED FACTS THAT THE ASSESSEE HAD CLAIMED AN AMOUNT OF ` .38,26,191/- AS EXEMPT INCOME IN THE SHAPE OF DIVIDEND UNDER SECTION 10(34) OF THE ACT WITHOUT ATTRIBUTING ANY EXPENDITURE. AFTER INVOKING SECTION 14A, THE ASSESS ING OFFICER DISALLOWED THE AMOUNT OF ` .19,67,681/-. WE HAVE PERUSED THE ASSESSMENT ORDER AS WELL AS THE ORDER OF THE CIT(A). AT THIS STAGE, WE ALSO DEEM IT APPROPRIATE TO REPRODUCE THE RELEVANT PROVISIONS OF THE ACT I.E. SECTION 14A, WHICH READS AS UNDER: 14A. (1)] FOR THE PURPOSES OF COMPUTING THE TOTAL I NCOME UNDER THIS CHAPTER, I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 11 NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDI TURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT.] [(2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHO D AS MAY BE PRESCRIBED, IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCO UNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO A PPLY 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 PAS S AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTH ERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR AN Y ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. A PERUSAL OF THE STATUTORY PROVISION MAKES IT CLEAR THAT THE SAME HAS BEEN INCORPORATED IN THE ACT BY THE LEGISLATURE WITH A STIPULATION THAT NO DEDUCTION IN RESPECT OF EXPENDITURE INCURRED BY THE CONCERNED AS SESSEE IN RELATION TO INCOME IN FORMING PART OF THE TOTAL INCOME UNDER THE ACT WOULD BE ALLOWED. THEREAFTER, VIDE FINANCE ACT, 2006 WITH EFFECT FROM 01.04.2007 SUB-SECTION (2) AND (3) HAVE BEEN INSERTED BY THE LEGISLATURE. THE TENOR OF THE SAID LEGISLATION IS THAT UNDER SUB-SECTION (2), THE ASSESSING OFFICER IS EMPOWERED TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO AN EXEMPT INCOM E. HOWEVER, BEFORE PROCEEDING TO DETERMINE THE DISALLOWANCE, PRE-CONDI TION IS THAT THE ASSESSING OFFICER HAS TO RECORD HIS SATISFACTION THAT THE CLA IM OF THE ASSESSEE, PER HIS I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 12 ACCOUNT IN RESPECT OF EXPENDITURE IN RELATION TO SU CH INCOME IS NOT CORRECT. FROM PERUSING THE ORDER OF THE ASSESSING OFFICER, WE NOT ICE THAT THERE IS NO SUCH SATISFACTION RECORDED BY THE ASSESSING OFFICER BEFO RE COMPUTING THE DISALLOWANCE. IN APPEAL, THE CIT(A) HAS ALSO NOT CO NSIDERED VITAL ASPECT ABOVE SAID. THIS INACTION OF THE ASSESSING OFFICER AS WEL L AS CIT(A), IN OUR CONSIDERED OPINION DOES NOT SATISFY THE TEST TO BE APPLIED BEF ORE INVOKING 14A. FURTHER, THE PREVIOUS YEAR RELEVANT TO THE IMPUGNED ASSESSMENT YEAR IS FROM 01.04.2007 TO 31.03.2008. IN THE INTERVENING P ERIOD I.E. ON 24.03.2008, THE CBDT INCORPORATED RULE 8D IN THE INCOME TAX RULES P RESCRIBING THE METHODOLOGY TO COMPUTE EXPENDITURE INCURRED IN RELA TION TO EARNING INCOME NOT INCLUDEABLE IN TOTAL INCOME I.E. EXEMPT INCOME. THE STRIFE BETWEEN THE PARTIES BEFORE US IS THAT PER ASSESSEE, THE AUTHORITIES BEL OW HAVE WRONGLY COMPUTED THE DISALLOWANCE UNDER SECTION 14A BY APPLYING RULE 8D RETROSPECTIVELY, WHICH HAS BEEN OPPOSED BY THE REVENUE BY SUBMITTING THAT SINC E SECTION 14A AS WELL AS RULE 8D ARE ONLY PROCEDURAL IN NATURE, THEREFORE, T HEY ARE APPLICABLE WITH RETROSPECTIVE EFFECT. IN THESE CIRCUMSTANCES, WE NO TICE THAT THIS ISSUE WAS FIRST EXAMINED BY THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA), WHEREIN IT HAS BEEN HELD THAT RUL E 8D IS APPLICABLE WITH EFFECT FROM THE ASSESSMENT YEAR 2008-09. AT THE SAME TIME, WE ALSO NOTICE THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVE STMENT LTD. (SUPRA) HAS ALSO EXAMINED THE ISSUE IN DETAIL AS TO WHETHER RULE 8D IS ALSO APPLICABLE RETROSPECTIVELY I.E. FOR THE TIME PERIOD BEFORE 24. 03.2008. AFTER CONSIDERING THE I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 13 LEGISLATIVE HISTORY OF SECTION 14A AS WELL AS RULE 8D ALONG WITH THE EXPLANATION IN SUPPORT, THEIR LORDSHIPS HAVE COME TO THE CONCLUSIO N THAT THE PROVISIONS OF SUB- SECTION (2) AND (3) WOULD APPLY WITH EFFECT FROM TH E DATE OF INTRODUCTION OF RULE 8D AND NOT QUA THE TIME PERIOD PRIOR TO THAT. WE AL SO DEEM IT APPROPRIATE TO TAKE OUT THE RELEVANT PORTION OF THE JUDGMENT AS FOLLOWS : 33. WHILE EXAMINING THE LEGISLATIVE HISTORY OF SE CTION 14A AND RULE 8D, WE HAVE ALREADY NOTED THAT SECTION 14A, AS INTRODUC ED BY VIRTUE OF THE FINANCE ACT, 2001, WAS WITH RETROSPECTIVE EFFECT FR OM APRIL 1, 1962. THE PROVISO WAS INSERTED BY VIRTUE OF THE FINANCE ACT, 2002 AND IT WAS MADE CLEAR THAT NOTHING IN SECTION 14A EMPOWERED THE ASSESSING OFFICER TO EITHER RE- ASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING THE REFUND ALREADY MADE OR OTHERWISE INCRE ASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE FIRST DAY OF APRIL, 2001. THUS, IN RESPECT OF A LL THE ASSESSMENT YEARS PRIOR TO THE ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1 ST DAY OF APRIL, 2001, CONCLUDED ASSESSMENTS COULD NOT BE DISTURBED DESPIT E THE FACT THAT SECTION 14A HAD BEEN EXPRESSLY MADE RETROSPECTIVE WITH EFFE CT FROM 01.04.1962. THE PROVISIONS OF SECTION 14A, WHICH WERE RETROSPECTIVE WITH EFFECT FROM APRIL 1, 1962 ARE NOW ENCAPSULATED IN SUB-SECTION (1) OF SEC TION 14A. IT IS ALSO CLEAR THAT SUB-SECTIONS (2) AND (3) OF SECTION 14A WERE I NTRODUCED SUBSEQUENTLY BY VIRTUE OF THE FINANCE ACT, 2006 AND WERE INTRODUCED WITH EFFECT FROM 01.04.2007. HOWEVER, ALTHOUGH SUB-SECTIONS (2) AND (3) HAD BEEN INTRODUCED WITH EFFECT FROM APRIL 1, 2007, THEY REMAINED EMPTY SHELLS INASMUCH AS THE EXPRESSION 'SUCH METHOD AS MAY BE PRESCRIBED' GOT M EANING ONLY BY THE INTRODUCTION OF RULE 8D BY VIRTUE OF THE INCOME-TAX (FIFTH AMENDMENT) RULES, 2008 WHICH WAS NOTIFIED BY THE CENTRAL BOARD OF DIR ECT TAXES BY ITS NOTIFICATION NO.45/2008 DATED 24/03/2008. 34. DR RAKESH GUPTA, THE LEARNED COUNSEL, WHO HAD APPEARED FOR SOME OF THE ASSESSEES, SUBMITTED THAT SECTION 295 OF THE SA ID ACT EMPOWERED THE CENTRAL BOARD OF DIRECT TAXES TO MAKE RULES FOR THE WHOLE OR ANY PART OF INDIA FOR CARRYING OUT THE PURPOSE OF THE SAID ACT. HE REFERRED TO SUB-SECTION (4) OF SECTION 295 AND SUBMITTED THAT THE POWER TO MAKE RULES CONFERRED ON THE CENTRAL BOARD OF DIRECT TAXES INCLUDED THE POWE R TO GIVE RETROSPECTIVE EFFECT, FROM A DATE NOT EARLIER THAN THE DATE OF TH E COMMENCEMENT OF THE SAID ACT, TO THE RULES OR ANY OF THEM AND, UNLESS THE CO NTRARY WAS PERMITTED (WHETHER EXPRESSLY OR BY NECESSARY IMPLICATION), NO RETROSPECTIVE EFFECT WAS I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 14 TO BE GIVEN TO ANY RULE SO AS TO PREJUDICIALLY AFFE CT THE INTERESTS OF THE ASSESSEES. HE FURTHER SUBMITTED THAT RULE 8D WAS IN SERTED IN THE SAID RULES, BUT THE CENTRAL BOARD OF DIRECT TAXES DID NOT MAKE IT RETROSPECTIVE. HE SUBMITTED THAT WHENEVER THE CBDT FELT IT NECESSARY TO INTRODUCE A RULE WITH RETROSPECTIVE EFFECT, IT DID SO BY MAKING THE RULE EXPRESSLY RETROSPECTIVE. AS AN EXAMPLE, HE REFERRED TO RULE 11EA WHICH WAS INSERTE D BY THE INCOME-TAX (NINTH AMENDMENT) RULES, 1997 WITH RETROSPECTIVE EF FECT, FROM OCTOBER 1,1994. 35. ON THE OTHER HAND, IT WAS CONTENDED ON BEHALF O F THE REVENUE AND, PARTICULARLY, BY MR SANJEEV SABHARWAL THAT SINCE SE CTION 14A WAS INTRODUCED WITH RETROSPECTIVE EFFECT FROM APRIL 1, 1962, THE P RINCIPLES OF SECTION 14A WOULD HAVE TO BE CONSIDERED AS HAVING ALWAYS BEEN A PART OF THE SAID ACT AND, THEREFORE, SUB-SECTIONS (2) AND (3) OF SECTION 14 A AND RULE 8D OF THE SAID RULES WERE ONLY MACHINERY PROVISIONS AND OUGHT TO B E READ RETROSPECTIVELY SO AS TO GIVE MEANING TO SECTION 14A(1). 36. WE ARE OF THE VIEW THAT RULE 8D WOULD OPERATE PROSPECTIVELY. WE AGREE WITH THE SUBMISSIONS MADE BY DR RAKESH GUPTA THAT IF THE SAID RULE WERE TO HAVE RETROSPECTIVE EFFECT, NOTHING PREVENTE D THE CENTRAL BOARD OF DIRECT TAXES FROM SAYING SO, PARTICULARLY, IN VIEW OF THE FACT THAT IT HAD THE POWER TO MAKE A RULE RETROSPECTIVE BY VIRTUE OF SEC TION 295(4) OF THE SAID ACT. INSTEAD OF MAKING RULE 8D RETROSPECTIVE, CLAUSE 1(2 ) OF THE INCOME-TAX (FIFTH AMENDMENT) RULES, 2008 MADE IT CLEAR THAT THE RULES WOULD COME INTO FORCE FROM THE DATE OF THEIR PUBLICATION IN THE OFFICIAL GAZETTE. IT IS, THEREFORE, CLEAR THAT RULE 8D, WHICH WAS INTRODUCED BY VIRTUE OF THE NOTIFICATION NO.45/2008 DATED MARCH 24, 2008, WAS PROSPECTIVE IN OPERATION AND CANNOT BE REGARDED AS BEING RETROSPECTIVE. WE MAY ALSO POINT OUT THAT WE HAVE HAD THE BENEFIT OF THE DECISION OF THE BOMBAY HIGH COURT IN GODREJ AND BOYCE MFG. CO. LTD V DCIT: (2010) 328 ITR 81 (BOM), WHEREIN IT HAS, INTE R ALIA, BEEN HELD THAT THE PROVISIONS OF RULE 8D OF THE SAID RULES HAS PROSPEC TIVE EFFECT AND SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09 ONWARDS. 37. INSOFAR AS SUB-SECTIONS (2) AND (3) OF SECTION 14A ARE CONCERNED, THEY HAVE ALSO BEEN INTRODUCED BY VIRTUE OF THE FINANCE ACT, 2006 WITH EFFECT FROM APRIL 1, 2007. THIS IS APPARENT, FIRST OF ALL, FROM THE NOTES ON CLAUSES OF THE FINANCE BILL, 2006 [REPORTED IN 281 ITR (ST) AT PAG ES 139-140]. THE SAID NOTES ON CLAUSES REFERS TO CLAUSE 7 OF THE BILL WHI CH HAD SOUGHT TO AMEND SECTION 14A OF THE SAID ACT. IT IS SPECIFICALLY MEN TIONED IN THE SAID NOTES ON CLAUSES THAT:- I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 15 'THIS AMENDMENT WILL TAKE EFFECT FROM 1ST APRIL, 20 07 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YE AR 2007-08 AND SUBSEQUENT YEARS.' 38. FURTHERMORE, IN THE MEMORANDUM EXPLAINING THE P ROVISIONS IN THE FINANCE BILL, 2006 [281 ITR (ST) AT PAGES 281-281], IT IS ONCE AGAIN STATED WITH REFERENCE TO CLAUSE 7 WHICH PERTAINS TO THE A MENDMENT TO SECTION 14A OF THE SAID ACT THAT:- 'THIS AMENDMENT WILL TAKE EFFECT FROM 1ST APRIL, 20 07 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YE AR 2007-08 AND SUBSEQUENT YEARS.' 39. WE MAY ALSO REFER TO THE CBDT CIRCULAR NO.14/20 06 DATED DECEMBER 28, 2006 AND TO PARAGRAPHS 11 TO 11.3 THEREOF. PARA GRAPH 11 DEALT WITH THE METHOD FOR ALLOCATING EXPENDITURE IN RELATION TO EX EMPT INCOME AND PARAGRAPHS 11.1 AND 11.2 EXPLAINED THE BASIS AND LO GIC BEHIND THE INTRODUCTION OF SUB-SECTION (2) OF SECTION 14A OF T HE SAID ACT. PARAGRAPH 11.3 SPECIFICALLY PROVIDED FOR APPLICABILITY OF THE PROV ISIONS OF SUB- SECTION (2) AND IT CLEARLY INDICATED THAT IT WOULD BE APPLICABLE 'F ROM THE ASSESSMENT YEAR 2007-08 ONWARDS'. 40. IT IS, THEREFORE, CLEAR THAT SUB-SECTIONS (2) AND (3) OF SECTION 14A WERE INTRODUCED WITH PROSPECTIVE EFFECT FROM THE ASSESSM ENT YEAR 2007-08 ONWARDS. HOWEVER, SUB-SECTION (2) OF SECTION 14A RE MAINED AN EMPTY SHELL UNTIL THE INTRODUCTION OF RULE 8D ON MARCH 24, 2008 WHICH GAVE CONTENT TO THE EXPRESSION 'SUCH METHOD AS MAY BE PRESCRIBED' A PPEARING IN SECTION 14A(2) OF THE SAID ACT. 41. FROM THE ABOVE DISCUSSION, IT IS CLEAR THAT, I N EFFECT, THE PROVISIONS OF SUB- SECTIONS (2) AND (3) OF SECTION 14A WOULD BE W ORKABLE ONLY WITH EFFECT FROM THE DATE OF INTRODUCTION OF RULE 8D. THIS IS S O BECAUSE PRIOR TO THAT DATE, THERE WAS NO PRESCRIBED METHOD AND SUB-SECTIONS (2) AND (3) OF SECTION 14A REMAINED UNWORKABLE. HOW IS SECTION 14A TO BE WORKED FOR THE PERIOD PRIO R TO THE INTRODUCTION OF RULE 8D? 42. SUB-SECTION (2) OF SECTION 14A, AS WE HAVE SEEN , 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 I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 16 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 SECTIO N 14A. IT IS ONLY THE PRESCRIPTION WITH REGARD TO THE METHOD OF DETERMINI NG SUCH EXPENDITURE WHICH IS NEW AND WHICH WILL OPERATE PROSPECTIVELY. IN OTH ER WORDS, SECTION 14A, EVEN PRIOR TO THE INTRODUCTION OF SUB-SECTIONS (2) & (3) WOULD REQUIRE THE ASSESSING OFFICER TO FIRST REJECT THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXTENT OF SUCH EXPENDITURE AND SUCH REJECTION MUST BE FOR DISCLOSED COGENT REASONS. IT IS THEN THAT THE QUESTION OF DETERMINAT ION OF SUCH EXPENDITURE BY THE ASSESSING OFFICER WOULD ARISE. THE REQUIREMENT OF ADOPTING A SPECIFIC METHOD OF DETERMINING SUCH EXPENDITURE HAS BEEN INT RODUCED BY VIRTUE OF SUB- SECTION (2) OF SECTION 14A. PRIOR TO THAT, THE ASSE SSING WAS FREE TO ADOPT ANY REASONABLE AND ACCEPTABLE METHOD. 43. THUS, THE FACT THAT WE HAVE HELD THAT SUB-SECT IONS (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 REFLEC TED 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 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 S ECTION 14A.' SO, EVEN FOR THE PRE-RULE 8D PERIOD, WHENEVER THE I SSUE OF SECTION 14A ARISES BEFORE AN ASSESSING OFFICER, HE HAS, FIRST OF ALL, TO ASCERTAIN THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDI TURE 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 B EEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, TH E ASSESSING OFFICER WILL HAVE TO VERIFY THE CORRECTNESS OF SUCH CLAIM. IN CA SE, THE ASSESSING OFFICER IS SATISFIED WITH THE CLAIM OF THE ASSESSEE WITH REGAR D TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, THE ASSESSING OFFI CER IS TO ACCEPT THE CLAIM OF THE ASSESSEE INSOFAR AS THE QUANTUM OF DISALLOWANCE UNDER SECTION 14A IS CONCERNED. IN SUCH EVENTUALITY, THE ASSESSING OFFIC ER CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE FOR THE PURPOSES OF SECTION 14A(1). IN CASE, THE ASSESSING OFFICER IS NOT, ON T HE BASIS OF OBJECTIVE CRITERIA I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 17 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 ASSESSING OFFICER WILL HAVE TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SA ID ACT. HE IS REQUIRED TO DO SO ON THE BASIS OF A REASONABLE AND ACCEPTABLE METH OD OF APPORTIONMENT. TAKING CUE FROM THE SAME, WE ARE OF THE OPINION THA T IN THE INSTANT CASE ALSO, THE ASSESSING OFFICER AS WELL AS CIT(A) HAVE NOT PROCEE DED ON CORRECT INTERPRETATION OF THE LAW WHILE COMPUTING THE DISALLOWANCE UNDER S ECTION 14A AS PER THE CORRECT APPLICATION OF RULE 8D. IN VIEW OF OUR ABOVE DISCUS SION, WE HOLD THAT WHILE INVOKING SECTION 14A AS WELL AS IN COMPUTING DISALL OWANCE UNDER RULE 8D, THE ASSESSING OFFICER HAS NOT PROCEEDED AS PER TRUE MAN DATE OF THE LEGISLATURE. THEREFORE, WE REMIT THE GROUND IN HAND RAISED BY TH E ASSESSEE BACK TO THE FILE OF THE ASSESSING OFFICER, WHO SHALL DECIDE IT AFRESH I N ACCORDANCE WITH LAW AFTER AFFORDING ADEQUATE OPPORTUNITY TO THE ASSESSEE. WE ALSO MAKE IT CLEAR THAT THIS DIRECTION WILL NOT BIND THE ASSESSING OFFICER FROM CONSIDERING ANY OTHER CASE LAW APPLICABLE TO THE FACTS OF THE CASE. THOUGH THE ASS ESSEE HAS ALSO SUBMITTED THAT THE DISALLOWANCE IN QUESTION UNDER SECTION 14A COUL D NOT EXCEED THE ACTUAL EXPENDITURE INVOLVED IN VIEW OF THE CASE LAW BY DEL HI ITAT IN THE CASE OF M/S. GILLETTE GROUP INDIA PVT. LTD (SUPRA), BUT IN VIEW OF THE FACT THAT WE ARE ONLY REMITTING THE ISSUE BACK TO THE FILE OF THE ASSESSI NG OFFICER, WE CLARIFY THAT THE ASSESSEE WOULD BE AT LIBERTY TO REFER THE SAID CASE LAW BEFORE THE ASSESSING OFFICER WHICH WOULD BE CONSIDERED IN ACCORDANCE WIT H LAW. I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.768 768768 768/M/ /M/ /M/ /M/12 1212 12 & & & & C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 C.O. NO. 93/M/12 18 12. TO SUM UP, THE APPEAL FILED BY THE REVENUE IS DISMISSED AND THE CO OF THE ASSESSEE IS ACCEPTED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON MONDAY, THE 17 TH OF DECEMBER, 2012 AT CHENNAI. SD/- SD/- (ABRAHAM P. GEORGE) ACCOUNTANT MEMBER (S.S. GODARA) JUDICIAL MEMBER CHENNAI, DATED, THE 17.12.2012 VM/- TO: THE ASSESSEE//A.O./CIT(A)/CIT/D.R.