DCIT, Ludhiana V. M/s Sunder Forging, Ludhiana

ITA 803/CHANDI/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 60849 (ITAT-CHANDIGARH)
• Duration Of Justice: 9 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 09-05-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 12-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JYOTI KUMARI
• Keywords: Capital asset; Earning of tax free income; Fair market value; Capital expenditure
• Section: 14A; 80IB; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A CHANDIGARH BEFORE SHRI H.L. KARWA, V.P. AND SHRI T.R. SOOD, AM ITA NO. 803/CHD/2011 ASSESSMENT YEAR: 2007-08 D.C.I.T. CIRCLE 1 V. SUNDER FORGING LUDHIANA INDUSTRIAL AREA C, SUA ROAD DHANDARI KALAN LUDHIANA PAN: AANFS 7430 H ITA NO. 1059/CHD/2011 ASSESSMENT YEAR: 2008-09 J.C.I.T. (OSD) CIRCLE 1 V. SUNDER FORGING LUDHIANA INDUSTRIAL AREA C, SUA ROAD DHANDARI KALAN LUDHIANA PAN: AANFS 7430 H DEPARTMENT BY: SMT. JYOTI KUMARI ASSESSEE BY: SHRI ASHWANI KUMAR DATE OF HEARING: 09.05.2012 DATE OF PRONOUNCEMENT: 17.5 .2012 ORDER PER T.R. SOOD, A.M I.T.A NO. 803/CHD/2011: REVENUES APPEAL - IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLOWING GROUNDS AS UNDER: 1 THAT THE LD. CIT(A) ERRED IN LAW AND ON THE FACT S IN ALLOWING DEDUCTION U/S 80IB AT RS. 1,05,06,021/- BY HOLDING THE ASSESS EE UNIT TO BE SMALL SCALE INDUSTRIAL UNIT BY SIMPLY RELYING ON THE SUBMISSION S OF THE ASSESSEE AND NOT BY GIVING ANY INDEPENDENT FINDINGS. 2. THAT THE LD. CIT(A) ERRED IN LAW AND ON THE FACT S IN ALLOWING DEDUCTION U/S 80IB BY HOLDING THE ASSESSEE UNIT TO SMALL SCAL E INDUSTRIAL UNIT AND BY NOT GIVING ANY FINDINGS THAT WHETHER THE VALUE OF THE M ACHINERY IS TO BE CONSIDERED AS ON THE LAST DATE OF THE PREVIOUS YEAR OR IN THE YEAR IN WHICH THE ASSESSEE WAS REGISTERED AS A SMALL SCALE INDUSTRY ALTHOUGH I T IS CLEARLY PROVIDED IN CLAUSE (G) OF SUB-SECTION 14 OF THE SECTION 80IB TH AT THE VALUE OF PLANT AND MACHINERY HAS TO BE CONSIDERED ON THE LAST DAY OF T HE PREVIOUS YEAR. 3. THAT THE LD. CIT(A) ERRED IN LAW AND FACTS IN DE LETING THE ADDITION OF RS. 3,44,772/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF EXPENDITURE INCURRED BY THE ASSESSEE ON MACHINES TREATING IT AS CAPITAL EXPENDITURE. 4. THAT THE LD. CIT(A) ERRED IN LAW AND FACTS IN DE LETING THE ADDITION OF RS. 8,58,822/- ON ACCOUNT OF INTEREST PAID TO THE PERS ONS SPECIFIED IN SECTION 40A(2)(B) OF THE ACT @ 15% WHEREAS THE AVERAGE RATE OF INTEREST PAID TO THE FINANCIAL INSTITUTIONS IS NOT MORE THAN 12% INCLUDI NG THE BANKS. 2 2. GROUND NOS. 1 AND 2 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICE D THAT THE ASSESSEE HAD CLAIMED DEDUCTION U/S 80IB OF THE ACT. 3. THE ASSESSING OFFICER FURTHER NOTED THAT SINCE T HE INVESTMENT MADE BY THE ASSESSEE HAS EXCEEDED THE LIMIT OF RS. 1.00 CRORE P RESCRIBED FOR SMALL SCALE INDUSTRIES (IN SHORT SSI), THEREFORE, THE ASSESS EE WAS NOT ELIGIBLE FOR DEDUCTION U/S 80IB. HE FURTHER NOTED THAT THOUGH THE LIMIT FOR S SI UNITS WAS INCREASED TO RS. 5.00 CRORE BUT THE ASSESSEE WOULD STILL NOT BE ENTITLED FOR DEDUCTION. NEW MACHINERY WAS INSTALLED FOR RS. 99,93,665/- DURING THE YEAR. THE LIMIT OF RS. 5.00 CRORE WAS INCREASED VIDE SO NO. 1642(E) DARTED 29.9.2006 W.E.F. 2.10.20 06. HOWEVER, ACCORDING TO THE ASSESSING OFFICER SINCE THE ASSESSEE HAD ALREADY LO ST THE STATUS OF SSI DURING ASSESSMENT YEAR 2006-07 AND THEREFORE, THE ASSESSE E WAS NOT ENTITLED TO DEDUCTION U/S 80IB BECAUSE ACCORDING TO HIM THE NEW INCREASED LIMIT OF RS. 5.00 CRORE WAS APPLICABLE TO THE NEW UNITS. SINCE THE ASSESSEE UNI T WAS OLD AND ONCE HAVE LOST THE STATUS OF SSI, COULD NOT REGAIN THE SAME STATUS IN VIEW OF THE LATEST NOTIFICATION. ACCORDINGLY A SHOW CAUSE NOTICE WAS ISSUED WHY THE DEDUCTION U/S 80IB SHOULD NOT BE ALLOWED. 4. IN RESPONSE TO THE SHOW CAUSE NOTICE IT WAS MAI NLY SUBMITTED THAT DEDUCTION U/S 80IB WAS ALLOWABLE IF THE UNIT WAS ELIGIBLE AND NOT FORMED AFTER SPLITTING THE SAME. IT WAS FURTHER SUBMITTED THAT DEFINITION OF SSI WAS SPECIFIED IN SUB-SECTION 14 OF SECTION 80IB CLAUSE (G) AND ONCE THE ASSESSEE IS CO VERED BY THAT DEFINITION THE ASSESSEE WAS ENTITLED TO DEDUCTION. HOWEVER, THE A SSESSING OFFICER DID NOT ACCEPT THIS CONTENTION AND OBSERVED VIDE PARA 4.8 AND DECL INED THE DEDUCTION AS UNDER: 4.8 IT HAS FURTHER ALREADY INVESTED MORE THAN RS. ONE CRORE IN PLANT AND MACHINERY DURING ASSESSMENT YEAR 2006-07 BY CONSIDI ERING PLANT AND MACHINERY UNDER INSTALLATION EXPENSES AMOUNTED TO R S. 99,36,655/-. AS PER THE BOOKS OF THE ASSESSEE, OUT OF RS. 99,36,655/- U NDER INSTALLATION THE PLANT AND MACHINERY AMOUNTING TO RS. 91,67,365/- WAS TRAN SFERRED AS INSTALLELD PLANT AND MACHINERY AND STILL PLANT AND MACHINERY UNDER I NSTALLTIO AMOUNTING TO RS. 7,69,290/-. THE DETAILS OF INVESTMENT/COST OF PLAN T AND MACHINERY UNDER DIFFERENT HEADS AS GIVEN BY ASSESSEE ARE MENTIONED BELOW UP TO ASSESSMENT YEAR 2007-08. PARTICULARS AMOUNT (RS) MACHINERY 2,62,54,874 MACHINERY UNDER INSTALLATION 32,44,227 DIES 83,48,490 MISC. FIXED ASSETS 10,30,928 TOTAL 3,88,78,519 3 MISC. FIXED ASSETS INSTALLATION (EXTRA TRANSFORMER AND LINE CHARGE) 21,86,863 TOTAL 4,10,65,382 4.9 THE INCREASE IN CAPITAL WAS ALLOWED VIDE THE MI CRO SMALL AND MEDIUM ENTERPRISES DEVELOPMENT ACT, 2006 DATED 6 TH JUNE, 2006. IT CAME IN TO FORCE FROM 2 ND OCTOBER 2006 AS PER SO 1154(E) DATED 18.7.2006. A S PER PAGE NO. 30 OF LEDGER, MACHINERY UNDER INSTALLATION AFTER TH E AMOUNT OF RS. 90,36,655/- WAS TRANSFERRED ON 1.4.2006 TO MACHINERY ACCOUNT WA S RS. 40,13,517. 4.10 THEREFORE, AS ON 1.4.2006 EVEN THE INVESTMENT IN PLANT AND MACHINERY WAS MORE THAN RS. ONE CRORE AND IT HAS LOST ITS STA TUS AS SSI ON 1.4.2006. IT CANNOT BE REVISED AGAIN BY COMING OF A NEW LAW INTO FORCE ON SUBSEQUENT DATE AS IT HAS ALREADY LOST ITS STATUS AS SSI. 4.11 THE MAIN ISSUE IS WHETHER FOR THE PURPOSE OF C OMPUTATION OF DEDUCTION U/S 80IB THE ABOVE MENTIONED INCOMES ARE TO BE INCL UDED IN PROFITS AND GAINS DERIVED FROM INDUSTRIAL UNDERTAKING OR NOT. SECTION 80IB OF THE I.T. ACT READS: (1) WHERE THE GROSS TOTAL INCOME OF AN ASSESSEE INC LUDE ANY PROFITS AND GAINS DERIVED FROM ANY BUSINESS REFERRED TO IN SUB-SECTIONS (3) TO (11) AND (11A) (SUCH BUSINESS BEING HEREINAFTER REFERRED TO AS THE ELIGIBLE BUSINESS) THERE SHALL IN ACCORDANCE WITH AND SUBJECT TO THE P ROVISIONS OF THIS SECTION, BE ALLOWED IN COMPUTING THE TOTAL INCOME OF THE ASSESS EE, A DEDUCTION FROM SUCH PROFITS AND GAINS OF AN AMOUNT EQUAL TO SUCH PERCEN TAGE AND FOR SUCH NUMBER OF ASSESSMENT YEARS AS SPECIFIED IN THIS SECTION. 4.12 THE DEDUCTION U/S 80IB CAN BE GRANTED ONLY TO A NEW UNIT WITH NEW PLANT AND MACHINERY AND NOT TO A OLD UNIT ALREADY HAVING PLANT AND MACHINERY WHICH MAY HAVE BEEN INSTALLED 6-7 YEARS BACK. THE DISCONT INUED STATUS OF SSI CANNOT BE REVIVED AND AGAINST START GIVING DEDUCTIONS U/S 80IB. IT IS NEITHER MENTIONED IN LETTERS AND NOR IT IS THE SPIRIT OF THE PROVISIO NS. THE LEGISLATIVE INTENT IS CLEAR THAT IT HAS TO BE GIVEN TO A NEW PLANT UNIT AS AN I NCENTIVE ONLY. THE PROVISIONS OF SECTION 80IB ARE OVERRIDING ON THE INDUSTRIES (D EVELOPMENT AND REGULATION) ACT, 1951 AND MICRO SMALL AND MEDIUM ENTERPRISES DE VELOPMENT ACT, 2006. THE HARMONIOUS INTERPRETATION OF SECTION 80IB AND T HE LEGISLATION ON THE STATUS OF GRANTING SSI TO A UNIT IS THAT THE SAME AS DISCU SSED ABOVE. 5. BEFORE THE LD. CIT(A), IT WAS MAINLY SUBMITTED T HAT ONCE THE UNDERTAKING WAS NOT FORMED BY SPLITTING OR RECONSTRUCTION OF THE BU SINESS THEN DEDUCTION WAS ALLOWABLE. 6. THE LD. CIT(A) FOUND FORCE IN THE SUBMISSIONS AN D DECIDED THE ISSUE VIDE PARA 4 IN FAVOUR OF THE ASSESSEE: 4 I HAVE CONSIDERED THE RIVAL VIEW POINTS ON THE I SSUE. THE ASSESSING OFFICERS BASIS OF DISALLOWING THE CLAM IS ON THE G ROUND THAT ONCE THE STATUS OF SSI IS LOST, THE SAME CAN NOT BE RE4VIVED FOR THE P URPOSES OF CLAIM OF DEDUCTION U/S 80IB. THE AO HAS OPINED THAT THE REVIVAL OF SS I UNIT UNDER THE RELEVANT INDUSTRIES ACT IS NOT MEANT TO SATISFY THE CONDITIO NS AS SPECIFIED U/S 80IB. ACCORDING TO ASSESSING OFFICER THE DEDUCTION CAN BE GRANTED ONLY TO A NEW UNIT WITH A NEW PLANT AND MACHINERY AND NOT TO AN OLD UN IT WITH OLD PLANT AND MACHINERY. I DO NOT AGREE WITH THE VIEW TAKEN BY T HE ASSESSING OFFICER ON THE ISSUE AS THE APPELLANT HAD SET UP THE UNIT AS SMALL SC ALE UNDERTAKING AND FOR ONE FINANCIAL YEAR I.E. 2005-06 THE UNIT CEASED TO BE SSI BECAUSE OF REDUCTION OF INVESTMENT LIMIT TO RS. 1 CRORE. HOWEVER, THI S LIMIT GOT ENHANCED TO RS. 5 CRORE IN THE FINANCIAL YEAR 2006-07 WHEREBY THE APP ELLANT UNIT AGAIN BECAME SMALL SCALE UNIT AND ALL IN ALL IT HAD FULFILLED AL L THE CONDITIONS SPECIFIED IN SECTION 4 80IB. THE PROVISIONS OF SECTION 80IB (14)(G) CLEAR LY SPECIFY SMALL SCALE INDUSTRIAL UNDERTAKING MEANS AN INDUSTRIAL UNDERTA KING WHICH IS, AS ON THE LAST DAY OF THE PREVIOUS YEAR, REGARDED AS A SMALL SCAL E INDUSTRIAL UNDERTAKING UNDER SECTION 11B OF THE INDUSTRIES (DEVELOPMENT AND REGULATION) ACT, 1951 (65 OF 1951) . SINCE THE APPELLANT HAD THE STATUS OF SSI ON THE LAST DAY OF THE PREVIOUS YEAR AND IT HAD COMPLIED WITH EVERY OTHER PROVISIONS OF SECTION 80IB, THE DEDUCTION CLAM CAN NOT BE DISALLOWED. THE ADDI TION MADE BY THE ASSESSING OFFICER IS THEREFORE, DELETED. 7. BEFORE US, THE LD. DR FOR THE REVENUE STRONGLY S UPPORTED THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT ONCE THE ASSES SEE ITSELF WAS NOT CLAIMING DEDUCTION FOR ASSESSMENT YEAR 2006-07 THAT MEANS TH E ASSESSEE CEASED TO BE SSI UNIT AND THEREFORE, THE ASSESSEE COULD NOT HAVE THE CLAIM TO DEDUCTION WHEN THE LIMIT OF INVESTMENT WAS INCREASED TO RS. 5.00 CRORES LATE R ON. 8. ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSESS EE REITERATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES AND CONTENDED THA T ORIGINALLY THE LIMIT OF INVESTMENT WAS RS. 3.00 CRORES FIXED VIDE NOTIFICATION NO. SO 857(E) DATED 10.12.1997. SINCE THE INVESTMENT OF THE ASSESSEE WAS LESS THAN THIS LIMIT , THEREFORE, THE ASSESSEE WAS ELIGIBLE FOR DEDUCTION U/S 80IB. SINCE ALL OTHER C ONDITIONS WERE COMPLIED THE ASSESSEE CLAIMED DEDUCTION DURING ASSESSMENT YEAR 2002-03,20 05-06. THE SAID LIMIT WAS SUBSEQUENTLY REDUCED TO RS. 1.00 CRORE VIDE NOTIFIC ATION NO. SO 1288(E) DATED 24.12.1999. SINCE THE INVESTMENT OF THE ASSESSEE W AS MORE THAN RS. 1.00 CRORE AND ACCORDINGLY NO DEDUCTION WAS CLAIMED IN ASSESSMENT YEAR 2006-07. THE LIMIT WAS AGAIN INCREASED TO RS. 5.00 CRORES VIDE SO NO. 1642 (E) DATED 29.9.2006 AND SINCE THE INVESTMENT OF THE ASSESSEE WAS LESS THAN RS. 5.00 C RORES THE ASSESSEE AGAIN CLAIMED THE DEDUCTION BECAUSE THE ASSESSEES STATUS BECAME OF SSI. THERE IS NO ALLEGATION THAT THE ASSESSEE HAS FORMED THE UNIT BY SPLITTING THE UNIT WHICH WAS ALREADY IN EXISTENCE. IN FACT THE SAME UNIT CONTINUES TO BE T HERE BECAUSE OF THE CHANGE IN THE LIMIT OF INVESTMENT OF SSI WHICH WAS AGAIN INCREASE D BY THE GOVERNMENT. HE POINTED OUT THAT DEFINITION OF SSI HAS BEEN GIVEN IN CLAUSE (G) OF SUB-SECTION 14 OF SECTION 80IB WHICH CLEARLY MENTIONS THAT INVESTMENT HAS TO BE SEEN ON THE LAST DATE OF PREVIOUS YEAR AND THE NOTIFICATION INCREASING THE L IMIT TO RS. 5.00 CRORE WAS EFFECTIVE FROM OCTOBER, 2006. HE ALSO FILED COPIES OF RELEVAN T NOTIFICATION. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS CAREFULLY AN D FIND FORCE IN THE SUBMISSIONS OF THE LD. COUNSEL OF THE ASSESSEE. WE HAVE PERUSE D THE NOTIFICATION NO. 1642(E) 5 DATED 29.9.29006 AND FIND THAT THERE IS NO CONDITIO N THAT NEW DEFINITION IS APPLICABLE TO THE NEW UNITS ONLY. IN FACT, SECTION 80IB(14)(G) R EADS AS UNDER: SMALL-SCALE INDUSTRIAL UNDERTAKING MEANS AN INDUS TRIAL UNDERTAKING WHICH IS, AS ON THE LAST DAY OF THE PREVIOUS YEAR, REGARDED A S A SMALL SCALE INDUSTRIAL UNDERTAKING UNDER SECTION 11B OF THE INDUSTRIES (DE VELOPMENT AND REGULATION) ACT, 1951 (65 OF1951). THE ABOVE CLEARLY SHOWS THAT THE AMOUNT OF INVESTME NT HAS TO BE SEEN AS ON THE LAST DATE OF PREVIOUS YEAR. IN THE CASE BEFORE US, THE LAST DATE OF THE PRECEDING YEAR IS 31.3.2007 AND THE NEW LIMIT OF RS. 5.00 CRORE WAS A PPLICABLE FROM 2.10.2006. THEREFORE, AS ON 31.3.2007 THE ASSESSEE WAS CLEARL Y COVERED BY THE NEW DEFINITION. ACCORDINGLY WE FIND THAT THE LD. CIT(A) HAS CORRECT LY ADJUDICATED THE ISSUE AND HIS ORDER DOES NOT REQUIRE ANY INTERFERENCE. 10. GROUND NO. 3 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED SUM OF RS. 3,44,772/- ON ACCOUNT OF REPAIRS AND MAINTENANCE. IN RESPONSE TO THE QUERY THE DETAILS WERE FILED AND IT WAS SUBMITTED THAT THE EX PENSES HAS BEEN INCURRED TO MAINTAIN ALREADY EXISTING MACHINERY AND NOT TO BRING NEW ASS ET INTO EXISTENANCE. THE EXPENDITURE WAS IN THE FORM OF SPARE PARTS AND DOES NOT HAVE A SEPARATE IDENTITY. THE ASSESSING OFFICER AFTER EXAMINING THE SUBMISSIONS O BSERVED THAT THE ASSESSEE HAD PURCHASED NEW TUP WHICH HAS BEEN SHOWN AS REPAIR AND MAINTENANCE. THEREAFTER, HE DISCUSSED THE DEFINITION OF REPAIR IN VARIOUS CA SE LAWS AND OBSERVED THAT THESE ARE TWO NEW MACHINES AND THE EXPENDITURE WAS DISALLOWE D. 11. BEFORE THE LD. CIT(A) THE SUBMISSIONS MADE BEFO RE THE ASSESSING OFFICER WERE REITERATED. THE LD. CIT(A) FOUND FORCE IN THE SUBMI SSIONS AND DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE VIDE PARA 6 AS UNDER: 6 I HAVE CONSIDERED THIS ISSUE AND IT IS APPARENT THAT THE ASSESSING OFFICERS CONCLUSION IS NOT BASED UPON ANY SPECIALI ZED KNOWLEDGE OF THE PRODUCTION PROCESS OR ANY THING TO SUGGEST THAT HE SPARE PARTS WERE ACTUALLY A MACHINE BY ITSELF. AS AGAINST THIS THE A.R HAD FIE LD EVIDENCE IN THE FORM OF LETTER FROM THE MACHINERY MANUFACTURER CERTIFYING T HAT THE ITEMS IN QUESTION WERE PART OF THE MACHINERY. THEREFORE, THE CASE LA WS RELIED UPON BY THE A.O ARE NOT OF ANY HELP AS THE FACTS OF THE CASE A RE E NTIRELY DIFFERENT. THEREFORE, THE CLAIM OF THE APPELLANT DESERVES TO BE ALLOWED. 12. BEFORE US, THE LD. DR FOR THE REVENUE STRONGLY SUPPORTED THE ORDER OF THE ASSESSING OFFICER. 6 13. ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSE SSEE SUPPORTING THE APPELLATE ORDER ALSO POINTED OUT THAT A CERTIFICATE WAS FURNI SHED BEFORE THE ASSESSING OFFICER FROM RATTAN HAMMERS (COPY OF WHICH IS PLACED AT PAG E 25) SHOWING THAT IT IS ONLY A PART. 14. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT RATTAN HAMMERS HAD ALREADY CERTIFIED AS UNDER: THIS IS TO CERTIFY THAT TUP IS A WEARABLE AND BREA KABLE PART AND IT REQUIRE REPLACEMENT IS CASE OF EXCESS WEAR AND BREAKAGE. I T HAS GOT NO LINK IN THE INCREASE OF CAPACITY OF DROP HAMMER. NO OTHER MATERIAL HAS BEEN BROUGHT BEFORE US TO SHO W BY THE REVENUE THAT THE TUP IS NOT A SPARE PART. THEREFORE, IN THE ABSENCE OF AN Y OTHER MATERIAL, WE ARE OF THE VIEW THAT CERTIFICATE ISSUED BY THE SUPPLIER OF SPARE PA RT HAS TO BE ACCEPTED. ACCORDINGLY WE FIND MERIT IN THE ORDER OF THE LD. CIT(A) AND CONFI RM THE SAME. 15. GROUND NO. 4 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS OBTAINED CERTAIN UNSECURED LOANS FROM VARIOUS PERSONS WHO WERE RELAT IVES OF THE ASSESSEE AND COVERED U/S 40A(2)(B) OF THE ACT. THE ASSESSEE HAD PAID INTEREST @ 15% TO SUCH PERSONS. THE ASSESSING OFFICER NOTED THAT THE ASSE SSEE HAD PAID INTEREST OF 12% TO FINANCIAL INSTITUTIONS AND BANKS, THEREFORE, HIGHE R INTEREST WAS GIVEN TO THE RELATIVES JUST TO HELP THEM AND ACCORDINGLY THE INTEREST PAYM ENT WAS RESTRICTED TO 12% AND BALANCE OF 3% WAS DISALLOWED. 16. BEFORE THE LD. CIT(A) IT WAS MAINLY SUBMITTED T HAT FOR INVOKING PROVISIONS OF SECTION 40A(2)(B), THE ASSESSING OFFICER IS REQUIRE D TO SHOW FAIR MARKET VALUE OF THE PRODUCT OR THE SERVICES AND HOW THE ASSESSEE HAS PA ID EXCESSIVE VALUE FOR SUCH SERVICES. IT WAS FURTHER SUBMITTED THAT THE ASSESS ING OFFICER HAS NOT SHOWN HOW INTEREST PAID WAS EXCESSIVE. IT WAS POINTED OUT TH AT THE ASSESSEE HAS TAKEN UNSECURED LOAN @ 15% PA AND THE SAME INTEREST WAS B EING PAID FOR THE LAST MANY YEARS AND WAS ACCEPTED BY THE REVENUE EVEN THROUGH ASSESSMENTS FRAMED U/S 143(3). THE LOAN FROM THE BANKS AND FINANCIAL INSTITUTIONS ARE GRANTED ON CERTAIN PARAMETERS AND SUCH LOANS ARE TOTALLY SECURED AND THEREFORE, INTEREST CHARGED BY FINANCIAL INSTITUTIONS AND THE BANKS IS NOT COMPARABLE. 7 17. THE LD. CIT(A) FOUND FORCE IN THE SUBMISSIONS A ND DELETED THE ADDITION. 18. BEFORE US, THE LD. DR FOR THE REVENUE RELIED ON THE ORDER OF THE ASSESSING OFFICER. 19. ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSE SSEE SUPPORTED THE IMPUGNED APPELLATE ORDER. 20. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT THE LD. CIT(A) HAS ADJUDICATED THE ISSUE VIDE PARA 9 WHICH IS AS UNDER : 9 I HAVE CONSIDERED THE BASIS OF DISALLOWANCE MAD E BY THE ASSESSING OFFICER WHICH IS PRIMARILY FOCUSED ON THE OBSERVATI ON THAT INTEREST @ 9% HAD BEEN PAID TO ONE MS. KAUSHALYA WANTI WHEREAS @ 15% TO OTHER FAMILY MEMBERS. THE ASSESSING OFFICER OBSERVED THAT THE F UNDS WERE AVAILABLE FROM BANKS @ 12% AND THEREFORE, ANY INTEREST PAID IN EX CESS OF THIS RATE WAS UNREASONABLE AND EXCESSIVE ESPECIALLY WHEN THE BORR OWING HAS BEEN DONE FROM THE SPECIFIED PERSONS AS PROVIDED IN SECTION 4 0A(2). HOWEVER, IT IS MATTER OF RECORD THAT THE ASSESSEE HAS BEEN PAYING INTERES T @ 15% FOR SEVERAL YEARS AND THE SAME HAS BEEN ACCEPTED AS FAIR AND REASONAB LE AS PER ORDER PASSED U/S 143(3). THE A.R HAS CLAIMED THAT FUNDS BORROWE D FROM THE BANK ARE SUBJECT TO A NUMBER OF RESTRICTIONS AND REQUIRE THE APPELLANT TO COMPLY WITH A LOT OF PROCEDURES IS CORRECT. THE FUNDS AVAILABLE FROM THE FAMILY MEMBERS ARE HOWEVER, AVAILABLE FOR LONGER PERIOD OF TIME AND WI THOUT ANY FORMALITIES EVEN THOUGH THE SAME REMAIN UNSECURED. THERE IS OBVIOUS LY RISK ELEMENT IN ADVANCING FUNDS TO ANY ONE WITHOUT TAKING ANY SECUR ITY AND THEREFORE, SUCH A RISK IS ALWAYS GOING TO FETCH CERTAIN HIGHER RATE O F INTEREST AND THEREFORE, RATE OF 15% AS AGAINST 12% CHARGED BY THE BANK CAN NOT BE S EEN AS EXCESSIVE/UNREASONABLE. THEREFORE, I DONT SEE TH AT THE PAYMENT OF INTEREST @ 15% BY THE APPELLANT FIRM TO SPECIFIED PERSONS IS A NY WAY MEANT TO REDUCE THE TAX LIABILITY OF THE APPELLANT FIRM. AS SUCH DISAL LOWANCE MADE BY THE ASSESSING OFFICER IS DELETED. THE LD. CIT(A) HAS CORRECTLY ADJUDICATED THE ISSUE BECAUSE THE FUNDS BORROWED FROM BANK AND FINANCIAL INSTITUTIONS ARE SUBJECT TO NUMB ER OF RESTRICTIONS AND ARE MORE THAN SECURE WHEREAS MONEY BORROWED FROM THE RELATIVES WA S UNSECURED AND GENERALLY INTEREST RATE IS MORE IN CASE OF UNSECURED LOANS. THEREFORE, WE FIND NOTHING WRONG WITH THE ORDER OF LD. CIT(A) AND CONFIRM THE SAME. 21 IN THE RESULT, APPEAL FILED BY THE REVENUE IS DI SMISSED. I.T.A. NO. 1059/CHD/2011: REVENUES APPEAL IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1 THAT THE LD. CIT(A) ERRED IN LAW AND ON THE FACT S IN ALLOWING DEDUCTION U/S 80IB AT RS. 68,58,645/- BY RELYING UPON ITS OWN DECISION FOR THE ASSESSMENT YEAR 2007-08 WHEREAS THE REVENUE HAS FILED APPEAL A GAINST THE SAME BEFORE THE HON'BLE ITAT. 2. THAT THE LD. CIT(A) ERRED IN LAW AND FACTS IN DE LETING THE ADDITION OF 9,79,845/- MADE ON ACCOUNT OF INTEREST PAID TO THE PERSONS SPECIFIED IN SECTION 8 40A(2)(B) OF THE ACT @ 15% WHEREAS THE AVERAGE RATE OF INTEREST PAID TO THE FINANCIAL INSTITUTIONS IS NOT MORE THAN 12% INCLUDI NG THE BANKS. 3. THAT THE LD. CIT(A) ERRED IN LAW AND FACTS IN DE LETING THE ADDITION OF RS. 5,38,360/- MADE U/S 14A READ WITH RULE 8D ON ACCOUN T OF EXPENSES INCURRED FOR MAKING INVESTMENTS IN MUTUAL FUNDS AND EQUITY FUNDS . 4. THAT THE LD. CIT(A) ERRED IN LAW AND FACTS IN DE LETING THE ADDITION OF RS. 4,97,044/- MADE BY THE ASSESSING OFFICER BY APPLYIN G PROVISIONS OF SECTION 36(1)(III) OF ACT TREATING EXPENDITURE OF CAPITAL N ATURE TO BE INCURRED BY THE ASSESSEE FOR THE PURCHASE OF PLOT, BUILDING AND MAC HINERY ETC. 22. GROUND NO. 1 THE ISSUES HAVE BEEN DECIDED BY US BY PARA NO. 9 AND SINCE THE FACTS ARE IDENTICAL THIS YEAR ALSO, THEREFORE, THIS ISSUE IS BEING DECIDED IN FAVOUR OF THE ASSESSEE. 23. GROUND NO. 2 IDENTICAL ISSUE HAS BEEN DECIDED AGAINST THE REV ENUE WHILE ADJUDICATING THE REVENUES APPEAL FOR ASSESSMENT YE AR 2007-08 VIDE PARA 20. FOLLOWING THAT ORDER, WE DECIDE THIS ISSUE AGAINST THE REVENUE. 24. GROUND NO. 3 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS INVESTED A SUM OF RS. 45.00 LAKHS IN RELIANCE DIVERSIFIED FUNDS AND RS. 5.00 LAKHS IN STANDARD CHARTERED PREMIER EQUITY FUND AND EARNED DIVIDEND I NCOME OF RS. 3,10,337/- WHICH IS EXEMPT FROM TAX. THEREFORE, THE PROVISIONS OF SEC TION 14A READ WITH RULE 8D WERE INVOKED FOLLOWING THE DECISION OF HON'BLE BOMBAY HI GH COURT IN THE CASE OF GODREJ AND BOYCE MANUFACTURING CO. LTD V. DCIT, 328 ITR 81 (BO M). THE ASSESSING OFFICER WORKED OUT THE DISALLOWANCE AS PER RULE 8D AND DISA LLOWED A SUM OF RS. 5,38,360/-. 25. BEFORE THE LD. CIT(A), IT WAS MAINLY STATED THA T THERE WAS NO DIRECT LINK BETWEEN THE EXPENDITURE AND THE INVESTMENT, THEREFORE, SEC TION 14A COULD NOT BE APPLIED. IN THIS REGARD RELIANCE WAS PLACED ON THE DECISION OF CIT V. HERO CYCLES LTD, 323 ITR 518 (PH). 26. THE LD. CIT(A) AGREED WITH THE SUBMISSIONS AND DELETED THE ADDITION VIDE PARA 6 WHICH IS AS UNDER: 6 I HAVE CONSIDERED THE BASIS OF DISALLOWANCE WORK ED OUT BY THE ASSESSING OFFICER AND THE ARGUMENTS OF THE A.R ON T HE ISSUE. IT IS APPARENT THAT THE ASSESSING OFFICER HAS NOT ESTABLISHED ANY DIRECT CONNECTION BETWEEN THE INTEREST PAID AND EXEMPT EARNED TO PROCEED TO T HE MACHINERY FOR WORKING OF DISALLOWANCE UNDER RULE 8D. THE ASSESSING OFFICER HAS ONLY OBSERVED THAT THE ASSESSEE HAS NOT PROVIDED ANY EVIDENCE IN SUPPORT O F HIS CLAIM THAT FUNDS HAD BEEN INVESTED FROM THE SURPLUS AVAILABLE. I DO NOT AGREE WITH THIS OBSERVATION OF THE ASSESSING OFFICER AS THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS 9 HAS CLEARLY SUBMITTED THAT THE INVESTMENT WAS OUT O F THE CURRENT A/C OF THE COMPANY FROM WHICH NO INTEREST HAS BEEN PAID. THIS SUBMISSION OF THE ASSESSEE HAS NOT BEEN CONTROVERTED BY THE ASSESSING OFFICER AND THEREFORE, HIS CONCLUSION ON THE ISSUE IS APPARENTLY ERRONEOUS . THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT V. HERO CYCLE S LTD., 323 ITR 518 HAS CLEARLY HELD THAT: IN VIEW OF THIS FINDING OF FACT, DISALLOWANCE U/S 14A WAS NOT SUSTAINABLE. WHETHER, IN A GIVEN SITUATION, ANY EXPENDITURE WAS INCURRED WHICH WAS TO BE DISALLOWED, IS A QUESTION OF FACT. THE CONTE NTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE IS ALW AYS INCURRED WHICH MUST BE DISALLOWANCE U/S 14A AND THE IMPACT OF EXPE NDITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINES S INCOME WHICH MAY NULLIFY THE MANDATE OF S. 14A, CANNOT BE ACCEPTED. DISALLOWANCE U/S 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE WH ERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INC URRED, DISALLOWANCE U/S 14A CANNOT STAND. IN THE PRESENT CASE FINDING ON THIS ASPECT, AGAINST THE REVENUE, IS NOT SHOWN TO BE PER VERSE. CONSEQUENTLY, DISALLOWANCE IS NOT PERMISSIBLE. 27. BEFORE US, THE LD. DR FOR THE REVENUE SUBMITTED THAT RULE 8D IS CLEARLY APPLICABLE IN THIS CASE BECAUSE SAME WAS HELD TO BE APPLICABLE BY HON'BLE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOYCE MANUFACTURIN G CO. LTD V. DCIT, 328 ITR 81 (BOM) W.E.F. ASSESSMENT YEAR 2008-09. SINCE THE YE AR BEFORE US IS AT 2008-09, THEREFORE, RULE 8D IS CLEARLY APPLICABLE. MOREOVE R THE ASSESSEE HAS NOT SHOWN ANY SURPLUS FUND BEFORE THE ASSESSING OFFICER OR EVEN B EFORE THE TRIBUNAL AND THE LD. CIT(A) HAS WRONGLY HELD THAT ONCE THE FUNDS WERE IN TEREST FREE WHICH WERE INVESTED TO EARN EXEMPTED INCOME THEN NO DISALLOWANCE U/S 14A C AN BE MADE. 28. ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSES SEE REITERATED THE SUBMISSIONS MADE BEFORE THE FIRST APPELLATE AUTHORITY AND SUBMI TTED THAT NO DISALLOWANCE CAN BE MADE POSSIBLY IN VIEW OF THE DECISION OF HON'BLE JU RISDICTIONAL HIGH COURT IN THE CASE OF CIT V. HERO CYCLES LTD, 323 ITR 518. 29. 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 10 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. 30. 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. 31. 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 11 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. 32. 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 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). 12 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. 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 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. 13 33. 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. 32. GROUND NO. 4 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS GIVEN ADVANCES ON ACCOUNT OF CAPITAL EXPENSES AS UNDER: 1 ADVANCE FOR PURCHASE OF PLOT RS. 24,000/- 2 ADVANCE TO SURINDER SINGH AGAINST BUILDING RS. 5, 88,613/- 3 ADVANCE AGAINST MACHINERY RS. 10,00,000/- 4 ADVANCE TO SUKHWINDER SINGH RS. 2,00,000/- 5 ADVANCE TO YOGESH KHOSLA RS. 20,00,000/- 6 ADVANCE AGAINST MACHINERY RS. 3,29,419/- TOTAL RS. 41,42,032/- THE ASSESSEE WAS ASKED TO SHOW WHY INTEREST SHOULD NOT BE DISALLOWED IN VIEW OF THE PROVISO TO SECTION 36(1)(III). IN RESPONSE IT WAS EXPLAINED THAT ALL THE ADVANCES HAVE BEEN GIVEN FOR BUSINESS PURPOSES AND THEREFORE, IN TEREST SHOULD BE ALLOWED. HOWEVER, THE ASSESSING OFFICER NOTED THAT AFTER THE AMENDMEN T BY FINANCE ACT, 2003 BY WHICH EXPENDITURE FOR EXPANSION OF THE EXISTING BUSINESS COULD NOT BE ALLOWED AND ACCORDINGLY HE DISALLOWED THE INTEREST EXPENSES. 34. ON APPEAL BEFORE THE LD. CIT(A) IT WAS MAINLY S TATED THAT ALL THE ADVANCES WERE GIVEN FOR THE PURPOSE OF BUSINESS AND NON OF THE AD VANCE HAS BEEN MADE TO THE RELATIVES. THEREFORE, THE INTEREST WAS ALLOWABLE EXPENSES IN VIEW OF THE DECISION OF HON'BLE PUNJAB & HARYANA HIGH COURT IN CASE OF CIT V. ABHISHEK INDUSTRIES, 286 ITR 1. 35. THE LD. CIT(A) AGREED WITH THE SUBMISSIONS AND DELETED THE ADDITION. 36. BEFORE US THE LD. DR FOR THE REVENUE STRONGLY S UPPORTED THE ORDER OF ASSESSING OFFICER. 37. ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSE SSEE SUPPORTED THE APPELLATE ORDER. 14 38. WE HAVE HEARD THE RIVAL SUBMISSIONS CAREFULLY A ND WE FIND THAT THE ASSESSING OFFICER HAS CORRECTLY MADE AN ADDITION. BEFORE INSE RTION PROVISO TO OF CLAUSE (III) OF SECTION 36(1), THE INTEREST INCURRED FOR THE PURPOS E OF BUSINESS EVEN IF IT WAS INCURRED FOR CREATING CAPITAL ASSETS WAS HELD TO BE ALLOWABL E. HOWEVER, LATER ON SECTION 36(1)(III) WAS AMENDED AND AFTER THE AMENDMENT W.E. F. 1.4.2004 SECTION READS AS UNDER: 36(1)(III) THE AMOUNT OF THE INTEREST PAID IN RE SPECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION; (PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSINESS OR PROFESSION (WHETHER CAPITALISED IN THE BOOKS OF ACC OUNT OR NOT); FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHICH SUCH ASST WAS FIRST PUT TO USE; SHALL NOT BE ALLOWED AS DEDUCTION ). FROM THE ABOVE, IT IS CLEAR THAT LAW HAS BEEN AMEND ED W.E.F. 1.4.2004 AND EXPENDITURE INCURRED ON INTEREST FOR THE PURPOSE OF ACQUISITION OF CAPITAL ASSET IS NO MORE ALLOWABLE. IN FACT THIS ISSUE CAME UP FOR CONSIDERA TION OF HON'BLE SUPREME COURT FOR ASSESSMENT YEAR 1996-97. IN CASE OF DCIT COREHEALT H LTD. 298 ITR 194 IN THIS CASE THE INTEREST EXPENDITURE WAS HELD TO BE ALLOWA BLE EVEN ON CAPITAL EXPENDITURE BUT THE SAME WAS HELD TO BE ALLOWABLE BECAUSE THERE WAS NO DEFINITION IN SECTION 36(1)(III) WHETHER THE BORROWINGS WERE MADE FOR CAPITAL PURPOS E OR REVENUE PURPOSES. THE HON'BLE SUPREME COURT ITSELF NOTED IN PLACITUM 11 A S UNDER: 11 BEFORE CONCLUDING ON THIS POINT WE MAY STATE TH AT IN THIS BATCH OF CIVIL APPEALS WE ARE CONCERNED WITH THE ASSESSMENT YEARS 1992-93, 1993-94, 1995-96 AND 1997-98. A PROVISO HAS SINCE BEEN INSE RTED IN SECTION 36(1)(III) OF THE 1961 ACT. THAT PROVISO HAS BEEN INSERTED BY TH E FINANCE ACT, 2003, WITH EFFECT FROM APRIL 1, 2004. HENCE THE SAID PROVISO WILL NOT APPLY TO THE FACTS OF THE PRESENT CASE. FURTHER IN OUR VIEW THE SAID PRO VISO WOULD OPERATE PROSPECTIVELY. IN THIS CONNECTION, IT MAY BE NOTED THAT BY THE SAME FINANCE ACT, 2003, INSERTIONS HAVE BEEN MADE BY WAY OF PROV ISO IN SECTION 36(1)(VIIA) BY THE SAME FINANCE ACT WHICH IS ALSO MADE WITH EFF ECT FROM APRIL 1, 2004. THE SAME IS THE POSITION WITH REGARD TO INSERTION OF A SUB-SECTION AFTER SECTION 90(2) AND BEFORE THE EXPLANATION. THIS INSERTION ALSO OP ERATES WITH EFFECT FROM APRIL 1, 2004. IN SHORT THE ABOVE AMENDMENTS HAVE BEEN M ADE BY THE FINANCE ACT, 2003, AND ALL THE SAID AMENDMENTS HAVE BEEN MADE OP ERATIONAL WITH EFFECT FROM APRIL 1, 2004. THEREFORE, THE PROVISO INSERTE D IN SECTION 36(1)(III) HAS TO BE READ AS PROSPECTIVELY AND WITH EFFECT FROM APRIL 1, 2004. IN THIS CASE, WE ARE CONCERNED WITH THE LAW AS IT EXISTED PRIOR TO APRIL 1, 2004. AS STATED ABOVE, WE ARE NOT CONCERNED WITH THE INTERPRETATION OR APPLIC ABILITY OF THE SAID PROVISO TO SECTION 36(1)(III) WITH EFFECT FROM APRIL 1, 2004 I N THE PRESENT CASE. 39. THUS IT IS CLEAR THAT AFTER 1.4.2004 IF THE INT EREST EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF ACQUISITION OF CAPITAL ASSET THE N THE SAME IS NOT ALLOWABLE. SINCE BEFORE US, THE ADVANCES HAVE BEEN MADE ADMITTEDLY F OR THE PURPOSE OF ACQUISITION OF 15 CAPITAL ASSET I.E. LAND, BUILDING ETC. INTEREST INC URRED FOR ACQUISITION OF SUCH ASSET IS NOT ALLOWABLE. ACCORDINGLY WE SET ASIDE THE ORDER OF T HE LD. CIT(A) AND RESTORED THAT OF THE ASSESSING OFFICER. 40. IN THE RESULT, THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED. ORDER PRONOUNCED ON 17.05.2012 SD/- SD/- (H.L. KARWA) (T.R. SOOD) VICE PRESIDENT ACCOUNTANT MEMBER DATED: 17 .05.2012 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/ THE DR