ACIT, Ludhiana V. M/s Sigma Cartons (P) Ltd., Ludhiana

ITA 769/CHANDI/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 60934 (ITAT-CHANDIGARH)
• Duration Of Justice: 11 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-07-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 04-07-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 27-07-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N K SAINI
• Keywords: Business income; Earning of tax free income; Retrospective amendment; Commercial expediency
• Section: 14A; 37; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A CHANDIGARH BEFORE SHRI H.L. KARWA, VP AND SHRI T.R. SOOD, AM ITA NO. 769/CHD/2011 ASSESSMENT YEAR: 2008-09 A.C.I.T. CIRCLE - V V SIGMA CARTONS (P) LTD. LUDHIANA GT ROAD, JUGIANA LUDHIANA AACCS 2698 M (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI N.K. SAINI RESPONDENT BY: SHRI SUDHIR SEHGAL DATE OF HEARING: 6.07.2012 DATE OF PRONOUNCEMENT: 10 .07.2012 ORDER PER T.R. SOOD, A.M IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLOWIN G GROUNDS: 1 THAT THE LD. CIT(A)-II, LUDHIANA ON FACTS AS WE LL AS IN LAW, HAS ERRED IN DELETING THE DISALLOWANCE OF RS. 6,19,626/ - MADE U/S 36(I)(III) OF THE ACT. 2 (A) THAT THE LD. CIT(A)-II, LUDHIANA ON FACTS AS WELL AS IN LAW HAS ERRED IN DELETING DISALLOWANCE OF RS. 4,75,974/ - MADE U/S 14A OF THE ACT READ WITH RULE 8D OF IT RULES. (B) THAT THE LD. CIT(A)-II, LUDHIANA HAS FAILED T O APPRECIATE THAT THE ASSESSEE HAD MADE INVESTMENTS WHICH WOULD GENER ATE EXEMPTED INCOME AND THUS THIS SECTION 14A READ WITH RULE 8D OF THE IT ACT COMES INTO PLAY. 2. GROUND NO. 1 - AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICE D THAT THE ASSESSEE HAS ADVANCED CERTAIN AMOUNTS TO M/S JAI DURGA PAPER MIL LS PVT LTD. IT WAS NOTED THAT THERE WAS A DEBIT BALANCE THROUGHOUT THE YEAR AND THERE WAS OPENING DEBIT BALANCE AND EVEN ON CLOSING OF THE YEAR THERE WAS A DEBIT BALANCE. ON A QUERY IT WAS MAINLY SUBMITTED THAT WITH M/S JAI DURGA PAP ER MILLS PVT LTD. ASSESSEE HAS BUSINESS DEALINGS AND THE ASSESSEE HAS IN FACT MADE PURCHASES OF RS. 5.40 CRORES AND EVEN SALES HAVE BEEN MADE AT RS. 3. 10 CRORES. THEREFORE, THESE WERE BUSINESS TRANSACTIONS AND INTEREST COULD NOT BE DISALLOWED. HOWEVER, THE ASSESSING OFFICER DID NOT AGREE WITH T HE SUBMISSIONS AND HE 2 WORKED OUT THE DEBIT BALANCE ON VARIOUS DATES AND D ISALLOWED THE INTEREST BY FOLLOWING THE DECISION IN CASE OF CIT V. ABHISHEK I NDUSTRIES, 286 ITR 1 (PH). THE DISALLOWANCE WAS WORKED OUT AT RS. 6,19,626/-. 3. BEFORE THE LD. CIT(A) THE SUBMISSIONS MADE BEFOR E THE ASSESSING OFFICER WERE REITERATED. THE LD. CIT(A) AGREED WITH THE SU BMISSIONS AND DELETED THE ADDITION. 4. BEFORE US, THE LD. DR FOR THE REVENUE STRONGLY S UPPORTED THE ORDER OF ASSESSING OFFICER. HE ALSO REFERRED TO PAGE 7 OF THE ORDER W HERE THE ASSESSING OFFICER HAS FOUND THAT THE ASSESSEE HAD ADVANCED THE MONEY ON 9.4.200 7 AND DEBIT BALANCE KEPT ON INCREASING TILL THE MIDDLE OF JULY 2007. THIS CLEARLY SHOWS THAT THE ASSESSEE HAS DIVERTED T HE INTEREST BEARING FUNDS FOR GIVING INTEREST FREE LOANS TO SISTER CONCERN. 5. ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSESS EE REITERATED THE SUBMISSIONS MADE BEFORE THE APPELLATE AUTHORITY AND STRONGLY SU PPORTED THE IMPUGNED APPELLATE ORDER. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS CAREFULLY AN D FIND FORCE IN THE SUBMISSIONS OF THE LD. COUNSEL OF THE ASSESSEE. THE LD. CIT(A) HAS DECIDED THIS ISSUE VIDE PARA 3 WHICH IS AS UNDER: I HAVE CAREFULLY CONSIDERED THE CONTENTIONS OF THE COUNSEL FOR THE APPELLANT AND PERUSED THE RELEVANT RECORD. THE ASS ESSING OFFICER HAS MADE THE DISALLOWANCE OF INTEREST BY HOLDING THAT T HE ADVANCING OF MONEY BY THE APPELLANT TO M/S M/S JAI DURGA PAPER M ILLS PVT LTD. IS AMOUNTING TO GIVING OF INTEREST FREE LOAN WHEREAS O N THE OTHER HAND, THE COUNSEL IN HIS WRITTEN SUBMISSIONS HAS STATED THAT THE SAID ADVANCES ARE IN THE ORDINARY COURSE OF THE BUSINESS OF THE APPEL LANT. THE COUNSEL HAVE BROUGHT MY ATTENTION TO THE FACT THAT DURING T HE YEAR UNDER CONSIDERATION, THE APPELLANT HAS MADE TOTAL PURCHAS E OF RS. 5.40 CRORES AND TOTAL SALES OF RS. 3.10 CRORES WITH THE ABOVE C OMPANY WHICH SUBSTANTIATES HIS CONTENTION THAT THERE ARE REGULAR DEALINGS BETWEEN THE APPELLANT AND THE ABOVE SAID COMPANY. THE LD. LD. A.R HAS ALSO STATED THAT AGAINST THE MONIES ADVANCED BY THE APPELLANT T O THE ABOVE COMPANY, THERE HAVE BEEN PURCHASE OF RAW MATERIAL A ND THIS FACT HAS ALSO NOT BEEN DENIED BY THE ASSESSING OFFICER. IT HAS ALSO BEEN ARGUED THAT THE ASSESSING OFFICER HAS ERRED IN MENTIONING IN HIS ASSESSMENT ORDER THAT THERE HAS BEEN A DEBIT BALANCE OF THE AB OVE COMPANY IN THE BOOKS OF THE APPELLANT WHEREAS THE FACT OF THE MATT ER IS THAT ON VARIOUS DATES DURING THE YEAR, THERE HAS ALSO BEEN A CREDIT BALANCE OF THE ABOVE PARTY IN THE BOOKS OF THE APPELLANT. UNDER THE ABO VE FACTS AND CIRCUMSTANCES OF THE CASE, I FIND FORCE IN THE CONT ENTION OF THE LD. AR THAT THE AO CANNOT STEP INTO THE SHOES OF THE BUSINESSMA N AND DECIDES THE ADVANCE THAT SHOULD BE GIVEN TO THE SUPPLIER IN THE ORDINARY COURSE OF BUSINESS. IT HAS ALSO NOT BEEN DENIED BY THE A.O T HAT ADVANCES TO M/S JAI DURGA PAPER MILLS PVT LTD. HAVE BEEN ADJUSTED A GAINST THE SUPPLIES MADE BY THE SAID COMPANY TO THE APPELLANT AND NEITH ER THERE HAS BEEN ANY DOUBT THE HUGE PURCHASE AND SALE TRANSACTIONS B ETWEEN THE APPELLANT AND THE ABOVE COMPANY. THE HON'BLE SUPRE ME COURT IN THE CASE OF M/S S.A. BUILDERS HAS HELD THAT IN CASE THE RE IS COMMERCIAL EXPEDIENCY IN ADVANCING THE MONEY THEN NO DISALLOWA NCE OF INTEREST CAN BE MADE U/S 36(1)(III) OF THE ACT. THE UNDER-MENTI ONED JUDGMENTS RELIED UPON BY THE A.R ALSO SUPPORT THE CASE OF THE APPELL ANT: 3 I. ACCELERATED FREEZE DRYING CO. LTD. V. DCIT (2008 ) 5 DTR 285 II. MUNJAL SALESA CORPORATION V. CIT & ANR (2008) 3 DTR (S.C) 217 III. M/S KASHMIRI LAL BHARAT BHUSHAN (2005) 26 IT R EP 152 (ASR-TRIB) IV. CIT V. ROCKMAN CYCLE INDUSTRIES LTD. (2009) 176 TAXMAN 21 V. CIT V. PREMIER POLY SACKS PVT LTD (2010) 321 ITR 450 THE ABOVE CLEARLY SHOWS THAT WITH M/S JAI DURGA PAP ER MILLS PVT LTD. THE ASSESSEE HAD MADE REGULAR BUSINESS DEALINGS AND THE AMOUNTS GOING INTO DEBIT ARE ON ACCOUNT OF SALES WHEN THE ASSESSEE WAS DOIN G BUSINESS WITH THE SISTER CONCERN THEN IT IS NATURAL THAT SOME TIME ACCOUNT M AY BE IN DEBIT. IN THESE CIRCUMSTANCES WE ARE OF THE OPINION THAT THE RATIO OF THE DECISION IN CASE OF CIT V. ABHISHEK INDUSTRIES (SUPRA) IS NOT APPLICABLE. ACCORDINGLY WE FIND NOTHING WRONG WITH THE ORDER OF THE LD. CIT(A) AND CONFIRM THE SAME. 7. GROUND NO. 2 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTIC ED THAT THE ASSESSEE HAS MADE INVESTMENT OF RS. 51,02,000/- AND RS. 1,53,52, 000/- AS ON 31.3.2007 AND 31.3.2008. THE INCOME FROM INVESTMENTS WAS FOUND T O BE EXEMPT. SINCE THE ASSESSEE HAS INCURRED INTEREST EXPENSES THE ASSESS ING OFFICER INVOKED SECTION 14A OF THE ACT ALONG WITH RULE 8D OF IT RUL ES AND CALCULATED THE DISALLOWANCE U/S 14A AT RS. 4,75,974/-. 8. ON APPEAL BEFORE THE LD. CIT(A) IT WAS MAINLY ST ATED THAT THERE WAS NO NEXUS BETWEEN THE INVESTMENTS MADE AND THE LOAN TAK EN BY THE ASSESSEE, THEREFORE, NO ADDITION CAN BE MADE U/S 14A. 9. THE LD. CIT(A) FOUND FORCE IN THE SUBMISSIONS OF THE ASSESSEE AND DELETED THE ADDITION PARTICULARLY IN VIEW OF THE DE CISION OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT V. HERO CYCLE S LTD, 323 ITR 518 (PH). 10. BEFORE US, THE LD. DR FOR THE REVENUE SUBMITTED THAT SINCE THE YEAR INVOLVED BEFORE US IS 2008-09 AND THEREFORE, RULE 8D WOULD BE APPLICABLE IN THIS REGARD HE RELIED ON THE DECISION OF HON'BLE BO MBAY HIGH COURT IN CASE OF GODREJ AND BOYEE MANUFACTURING V DCIT, 328 ITR 81 ( BOM). 11. ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSES SEE REITERATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES AND S UPPORTED THE IMPUGNED APPELLATE ORDER. 4 12. WE HAVE HEARD THE RIVAL SUBMISSIONS CAREFULLY. WE FIND THAT THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T V. HERO CYCLES LTD, 323 ITR 518 WAS RENDERED FOR ASSESSMENT YEAR 2004-05. LATER ON HON'BLE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOYCE MANUFACTURING CO. LTD V. D CIT, 328 ITR 81 HAS CONSIDERED THE IMPLICATIONS OF SECTION 14A EVEN THE CONSTITUTI ONAL VALIDITY AND APPLICABILITY OF RULE 8D IN GREAT DETAIL ULTIMATELY HON'BLE HIGH COURT HA S GIVEN THE FOLLOWING CONCLUSION: 88 OUR CONCLUSION IN T HIS JUDGMENT ARE AS FOLLOW S : (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 IN COMPUT ING 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 VIR TUE OF THE PROVISIONS OF SECTION 14A(1) ; (II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTIO N 115-O(1) OF ADDITIONAL INCOME-TAX ON PROFITS DECLARED, DISTRIBUTED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS OF THE COMPANY. THE COMPANY IS CHARG EABLE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAYS TAX IN DISCHA RGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT FOR ITS SHAREHOLDERS. IN T HE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DIVIDEND, INCOME BY WAY OF DIVIDEN D 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 PROVISIONS OF SECTION 14A, MORE PARTICULARLY SUB-SECTION (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 APPLY WITH E FFECT 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 DUT Y BOUND 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 ASSESSI NG OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE 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 OFFICE R SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE ( DIRECT OR INDIRECT) IN RELATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUND S WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 1 4A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPO RTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 5 13. THE ABOVE DECISION HAS BEEN RENDERED AFTER CONS IDERING THE DECISION OF HON'BLE SUPREME COURT IN CASE OF CIT V. WALFORT SHA RE AND STOCK BROKERS P LTD (2010) 326 ITR 1 (S.C), THEREFORE, IN OUR OPINION, THE RATIO OF THIS DECISION IS APPLICABLE TO THE CASE OF THE ASSESSEE AND RULE 8D WOULD BE AP PLICABLE IN THE PRESENT CASE WHICH RELATES TO ASSESSMENT YEAR 2008-09. 14. THOUGH THE LD. CIT(A) DELETED THE ADDITION BY O BSERVING THAT INVESTMENT IN MUTUAL FUND IS OUT OF CURRENT ACCOUNT BUT IT WAS NO T DENIED BEFORE US THAT ALL THE RECEIPTS ARE BEING CREDITED TO THE CURRENT ACCOUNT WHICH MEANS CURRENT ACCOUNT IS DEALING WITH THE COMBINED FUND OF THE ASSESSEE-COMP ANY. THE ASSESSEE HAS NOWHERE SHOWN THAT THE INTEREST FREE FUNDS WERE AVAILABLE F OR INVESTMENT IN MUTUAL FUND. IN FACT BEFORE THE PROVISION OF SECTION 14A THE ASSESSEE HA D THE RIGHT TO CLAIM ALL THE EXPENSES IF SUCH EXPENSES COULD NOT BE BIFURCATED I N TERMS OF NORMAL TAXABLE INCOME AND EXEMPTED INCOME IN VIEW OF THE DECISION OF HON' BLE SUPREME COURT IN CASE OF RAJASTHAN STATE WAREHOUSING CORPORATION V. CIT, 242 ITR 450 BUT THIS POSITION CHANGED AFTER THE INTRODUCTION OF SECTION 14A BY FI NANCE ACT, 2001. THE MEMORANDUM EXPLAINING THE PROVISIONS OF FINANCE BIL L READS AS UNDER: CERTAIN INCOME ARE NOT INCLUDIBLE WHILE COMPUTATIN G THE TOTAL INCOME AS THESE ARE EXEMPT UNDER VARIOUS PROVISIONS OF THE ACT. TH ERE HAVE BEEN CASES WHERE DEDUCTIONS HAVE BEEN CLAIMED IN RESPECT OF SUCH EXE MPT INCOME. THIS IN EFFECT MEANS THAT THE TAX INCENTIVE GIVEN BY WAY OF EXEMPT IONS TO CERTAIN CATEGORIES OF INCOME IS BEING USED TO REDUCE ALSO THE TAX PAYA BLE ON THE NON-EXEMPT INCOME BY DEBITING THE EXPENSES INCURRED TO EARN TH E EXEMPT INCOME AGAINST TAXABLE INCOME. THIS IS AGAIN THE BASIC PRINCIPLES OF TAXATION WHEREBY ONLY THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITUR E IS TAXED. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO IN RESPECT OF THE NE T INCOME. EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABL E 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-TAX A CT, 1961, THAT NO DEDUCTION SHALL BE MADE IN RESPECT OF ANY EXPENDITURE INCURR ED BYTHE 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 ASSESSME NT YEAR 1962-63 AND SUBSEQUENT ASSESSMENT YEAR. 15. IN FACT THE HON'BLE BOMBAY HIGH COURT HAS NOTED THIS POSITION AND THEN CONFIRMED THAT THEORY OF APPORTIONMENT OF EXPENSES IS VERY MUCH APPLICABLE IN SECTION 14A. IN FACT AT PLACITUM 28 IT HAS OBSERVED AS UND ER: 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 6 TO BE EMPHASIZED THAT THE PROVISIONS OF SECTION 14A WERE CONSTRUED IN WALFORT TO EVINCE PARLIAMENTARY INTENT NOT TO ALLOW DEDUCTI ON 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 TAXA BLE INCOME. SECTION 14A IS CLARIFICATORY OF THE POSITION THAT EXPENSE CAN BE A LLOWED 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 CA N BE ALLOWED. THE SECTION 14A BROADENS THE THEORY OF APPORTIONMENT OF EXPEND ITURE BETWEEN TAXABLE AND NON-TAXABLE INCOME IS EVIDENT FROM THE FOLLOWING OB SERVATIONS OF THE HON'BLE SUPREME COURT: 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 15 TO 59, IT IS C LEAR THAT THE WORDS EXPENDITURE INCURRED IN SECTION 14A REFERS TO EXP ENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC., IN RESPECT OF WHI CH 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 APPORTIONED THE EXPENDITURE BETWEEN TAX ABLE INCOME AND EXEMPTED INCOME. 16. WE ALSO FIND THAT IN A RECENT JUDGMENT OF HON'B LE PUNJAB & HARYANA HIGH COURT DATED 18.7.2011 IN ITA NO. 565 OF 2006 ON A SIMILAR ISSUE, THE FOLLOWING OBSERVATIONS WERE MADE: 11. ADVERTING TO QUESTION NO.(II), LEARNED COUNSEL FOR THE REVENUE SUBMITTED THAT WHILE DETERMINING THE QUANTUM OF DED UCTION ADMISSIBLE TO THE ASSESSEE UNDER SECTION 80M OF THE ACT, THE EXPENDIT URE INCURRED RELATING TO THE EARNING OF DIVIDEND INCOME HAS TO BE EXCLUDED T HERE-FROM. ACCORDING TO THE LEARNED COUNSEL, THE EXPENDITURE WHICH WAS TO B E DEDUCTED WAS REQUIRED TO BE DEDUCTED ON PROPORTIONAL BASIS FOR I NCURRING 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 HIG H 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. 13. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO THE RESPECTIVE SUBMISSIONS OF THE LEARNED COUNSEL FOR T HE PARTIES AND FIND 7 *FORCE IN THE SUBMISSIONS OF THE LEARNED COUNSEL FO R THE REVENUE. FINANCE ACT 2001 HAD INSERTED SECTION 14A WITH EFFECT FROM 1.4. 1962. ACCORDING TO THE SAID SECTION, ANY EXPENDITURE INCURRED BY THE ASSESSEE F OR 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 OF 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 RETROSPECTIVELY W.E.F. 1.4.1962, IT HAD LAID DOWN A S UNDER: INCOME TAX APPEAL NO. 565 OF 2006 THE INSERTION OF SECTION 14A WITH RETROSPECTIVE EFFECT IS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT TO ALLOW DEDUCTION IN RESPECT 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 DATED 22.11.2001 K IN OTHER WORDS, SECTION 14A CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSE S INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCO ME 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 EXEMPT INCOME A GAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURR ED IN RELATION TO EXEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 1 4A IS THAT CERTAIN INCOMES ARE NOT INCLUDIBIE WHILE COMPUTING TOTAL INCOME AS THES E ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE ACT. IN THE PAST, THERE HAVE BEAN IN WHICH DEDUCTION HAS BEEN SOUGHT IN RESPECT OF SUCH INCOMES WHICH IN E FFECT 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, AGAINST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXA TION IS TO TAX THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE. OH THE SA ME ANALOGY THE EXEMPTION IS ALSO IN RESPECT OF NET INCOME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE INCOME. THIS IS THE PURPORT OF S ECTION 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 UNDER CHAPTER IV WOULD FALL WITHIN SECTION 14A. THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UND ER THE ACT'. IT MEANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 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 O F THE FIVE HEADS. SECTIONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FO R THE PURPOSE OF CHARGEABILITY TO TAX UNDER THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL INCOME CHARGEABLE TO TAX. THE PERMISSIBLE DEDUCTION S 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 T AX. IF AN INCOME LIKE DIVIDEND INCOME IS NOT A PART OF THE TOTAL INCOME, THE EXPEN DITURE/DEDUCTION THOUGH OF THE NATURE SPECIFIED IN PART OF TOTAL INCOME COULD NOT BE ALLOWED AGAINST ORE INCOME INCLUDIBLE IN THE TOTAL INCOME FOR THE PURPO SE OF CHARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT OF EXPENDITURES BETWEEN TAXABLE AND NON- TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER S ECTION 14A. READING SECTION 14 IN JUXTAPOSITION WITH SECTIONS 15 TO 59, IT IS CLEAR THAT THE WORDS 'EXPENDITURE INCURRED' IN SECTION 14A REFERS TO EXP ENDITURE ON RENT, TAXES, SALARIES, INTEREST,ETC. IN RESPECT OF WHICH ALLOWAN CES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37).' ' 8 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' OCC URRING IN SECTION 14A REFERRED TO TAX, SALARY, INTEREST ETC. IN RESPECT' OF WHICH ALLOWANCES ARE PROVIDED 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. INC OME TAX APPEAL NOS. 565, 567 AND 569 STAND DISPOSED OF ACCORDINGLY. THUS THEORY OF APPORTIONMENT AS APPROVED 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 APPROVED BY THE HON'BLE JURISDICTIONAL HIGH COURT AND DISALL OWANCE U/S 14A HELD TO BE JUSTIFIED. 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 T HE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE HALL DETERMINE THE AMOUN T 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 FOLLOWING AM OUNTS, 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 APPEARING 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 9 INCOME, AS APPEARING IN THE BALANCE SHEET OF THE AS SESSEE, 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 THE INCREA SE ON ACCOUNT OF REVALUATION OF ASSET BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS.). CLAUSE (B) OF SUB-SECTION (2) CLEARLY SHOWS THAT IF ASSESSEE DOES NOT SHOW THAT THE INTEREST HAS BEEN INCURRED SPECIFICALLY FOR A PARTI CULAR ITEM OF INCOME THEN IT HAS TO BE APPORTIONED. IN CASE BEFORE US SINCE THE ASSESSEE HAD INCURRED EXPENSES ON INTEREST WHICH CAN NOT BE DIRECTLY RELATED TO PARTICULAR TYP E OF INCOME, THEREFORE, INTEREST IS REQUIRED TO BE APPORTIONED. 17. PERUSAL OF ASSESSMENT ORDER SHOWS THAT THE DISA LLOWANCE U/S 14A IS BASED ON RULE 8D WHICH HAS BEEN NOTED ABOVE WAS APPLICABLE D URING THE YEAR UNDER CONSIDERATION AND WHICH IS IN CONSONANCE WITH THE DECISION OF HON'BLE BOMBAY HIGH COURT. THEREFORE, WE SET ASIDE THE ORDER OF LD. C IT(A) AND RESTORE THAT OF THE ASSESSING OFFICER BY CONFIRMING THE DISALLOWANCE U/ S 14A. 18. THEREFORE, WE SET ASIDE THE ORDER OF THE LD. C IT(A) AND RESTORE THE ORDER OF THE ASSESSING OFFICER BECAUSE RULE 8D OF IT RULE S IS APPLICABLE IN THE YEAR BEFORE US AND DISALLOWANCE HAS BEEN WORKED OUT AS PER RULE 8D OF IT RULES. ACCORDINGLY THIS GROUND IS ALLOWED. 19 IN THE RESULT, APPEAL FILED BY THE REVENUE IS PA RTLY ALLOWED. ORDER PRONOUNCED ON 10 .07.2012 SD/- SD/- (H.L. KARWA) (T.R. SOOD) VICE PRESIDENT ACCOUNTANT MEMBER DATED: 10 .07.2012 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/ THE DR 10