Asstt. Commissioner of Income Tax, Bareilly V. M/s Goel Investments Ltd., Bareilly

ITA 817/LKW/2014

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 0569 (ITAT-LUCKNOW)
• Duration Of Justice: 6 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-06-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 10-06-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 13-11-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: PUNIT KUMAR
• Assessee Lawyers: A K GUPTA
• Keywords: Capital asset; Salary income; Rule of consistency; Cost of acquisition; Commercial expediency
• Section: 14A; 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A, LUCKNOW BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI. A. K. GARODIA, ACCOUNTANT MEMBER ITA NO.817/LKW/2014 ASSESSMENT YEAR:2010-11 ACIT CENTRAL CIRCLE BAREILLY V. M/S GOEL INVESTMENTS LTD. 13, CIVIL LINES BAREILLY TAN/PAN:AAACG5286F (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI. PUNIT KUMAR, D.R. RESPONDENT BY: SHRI. A. K. GUPTA, C.A. DATE OF HEARING: 10 06 2015 DATE OF PRONOUNCEMENT: 12 06 2015 O R D E R PER SUNIL KUMAR YADAV: THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST THE ORDER OF THE LD. CIT(A) ON A SOLITARY GROUND THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN DELETING THE ADDITION OF RS.28,98,891/- MADE U/S 14A OF THE INCOME TAX ACT, 1961 (HEREINAFTER CALLED IN SHORT THE ACT') ON ACCOUNT OF DISALLOWANCE OF EXPENDITURE INCURRED IN EARNING DIVIDEND INCOME WITHOUT VERIFYING THE FACTS ON RECORDS AND ASSIGNING ANY LOGICAL REASON. 2. THE FACTS IN BRIEF BORNE OUT FROM THE RECORD ARE THAT THE ASSESSEE IS A PUBLIC LIMITED COMPANY AND IT EARNED DIVIDEND OF RS.1,74,04,733/- DURING THE YEAR. THE ASSESSING OFFICER HAS DISALLOWED AN AMOUNT OF RS.28,98,891/- BEING 0.5% OF THE AVERAGE VALUE OF INVESTMENTS DURING THE RELEVANT PREVIOUS YEAR. 3. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) WITH THE SUBMISSION THAT THE ASSESSEE HAS NOT PAID ANY INTEREST DURING THE YEAR. THE LD. CIT(A) RE-EXAMINED THE ISSUE IN THE LIGHT OF VARIOUS JUDICIAL :- 2 -: PRONOUNCEMENTS AND FOLLOWING HIS EARLIER ORDER FOR ASSESSMENT YEAR 2009- 10 IN THE ASSESSEES OWN CASE, THE LD. CIT(A) HAS DELETED THE ADDITION. 4. NOW THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL AND DURING THE COURSE OF HEARING OF THE APPEAL, THE LD. D.R. HAS INVITED OUR ATTENTION TO THE ORDER OF THE TRIBUNAL FOR ASSESSMENT YEAR 2009-10 IN THE ASSESSEES OWN CASE WITH THE SUBMISSION THAT THE TRIBUNAL HAS ADJUDICATED THE ISSUE OF APPLICABILITY OF RULE 8D OF THE RULES WHILE COMPUTING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT. COPY OF THE ORDER OF THE TRIBUNAL IS PLACED ON RECORD. THE LD. D.R. HAS FURTHER CONTENDED THAT HAVING ADJUDICATED THE ISSUE IN DETAIL IN THE LIGHT OF THE RELEVANT PROVISIONS OF THE ACT, THE TRIBUNAL HAS HELD THAT ONCE PROVISIONS OF SECTION 14A OF THE ACT ARE TO BE INVOKED, DISALLOWANCE IS TO BE COMPUTED AS PER RULE 8D OF THE RULES. SINCE THE LD. CIT(A) HAS ADJUDICATED THE ISSUE IN THE INSTANT ASSESSMENT YEAR FOLLOWING HIS VIEW TAKEN IN ASSESSMENT YEAR 2009-10 AND THE VIEW TAKEN BY THE LD. CIT(A) IN THAT YEAR HAS BEEN REVERSED BY THE TRIBUNAL, THE ORDER OF THE TRIBUNAL FOR ASSESSMENT YEAR 2009-10 BE FOLLOWED IN THE IMPUGNED ASSESSMENT YEAR IN VIEW OF RULE OF CONSISTENCY. 5. THE LD. COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT IN THE IMPUGNED ASSESSMENT YEAR THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE IN EARNING THE DIVIDEND INCOME. THEREFORE, NO DISALLOWANCE CAN BE MADE. 6. HAVING CAREFULLY EXAMINED THE ORDERS OF THE LOWER AUTHORITIES IN THE LIGHT OF THE RIVAL SUBMISSIONS, WE FIND THAT THE LD. CIT(A) HAS ADJUDICATED THE ISSUE IN THE INSTANT ASSESSMENT YEAR BY FOLLOWING HIS VIEW TAKEN IN ASSESSMENT YEAR 2009-10 AND IN ASSESSMENT YEAR 2009-10 THE TRIBUNAL HAS REVERSED THE ORDER OF THE LD. CIT(A) AND RESTORED THE ORDER OF THE ASSESSING OFFICER. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE EXTRACTED HEREUNDER FOR THE SAKE OF REFERENCE:- 7. HAVING CAREFULLY EXAMINED THE ORDERS OF THE LOWER AUTHORITIES IN THE LIGHT OF THE RIVAL SUBMISSIONS, WE ARE OF THE VIEW THAT WHATEVER ARGUMENT WERE ADVANCED BY THE LD. COUNSEL FOR THE ASSESSEE, THE SAME WERE EXAMINED BY THE TRIBUNAL IN THE CASE OF INCOME TAX :- 3 -: OFFICER 2(1) VS. M/S COMMERCIAL AUTO CENTRE (SUPRA), IN WHICH WE HAVE TAKEN A VIEW THAT IN THE LIGHT OF THE JUDGMENT OF THE HON'BLE APEX COURT IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA), THE DISALLOWANCE UNDER SECTION 14A OF THE ACT CAN BE MADE EVEN IF THERE IS NO RECEIPT OF ANY DIVIDEND INCOME. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE EXTRACTED HEREUNDER:- 37. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT IN THIS YEAR, THE ISSUE WAS DECIDED BY THE LD. CIT(A) AS PER PARAS 13 TO 17 OF HIS ORDER AND FOR THE SAKE OF READY REFERENCE, THE SAME ARE REPRODUCED HEREIN BELOW:- 13. I HAVE CONSIDERED THE FACTS AND CIRCUMSTANCES OF THE CASE, THE REASONS NOTED BY AO FOR DISALLOWANCE AND THE ARGUMENTS OF THE APPELLANT. IT IS SEEN FROM THE FACTS THAT THE APPELLANT HAS INVESTED IN THE SHARES OF THE SISTER CONCERNS COMPANIES TO THE EXTENT OF RS.7,97,64,380/- IN TOTAL OVER PAST YEARS AND RS.3,38,88,530/- IN THE CURRENT YEAR. THE AO HAS NOTED THAT THIS INVESTMENT CANNOT BE SAID TO HAVE BEEN MADE FOR THE BUSINESS PURPOSE. THE AO HAS ALSO NOTED THAT THE INVESTMENT IN SHARES IS NOT THE BUSINESS ACTIVITY OF THE APPELLANT AS PER ITS OBJECTIVES. DURING THE YEAR THE APPELLANT HAS PAID INTEREST ON THE PUBLIC DEPOSITS AND BORROWINGS WHICH SHOWS THAT SUBSTANTIAL AMOUNTS OF FUNDS HAVE BEEN BORROWED FOR BUSINESS PURPOSE. FINALLY, THE AO HAS HELD THAT SINCE; INVESTMENT IS NOT THE BUSINESS ACTIVITIES OF THE APPELLANT, THEREFORE, THESE INVESTMENTS IN SHARES ARE TREATED AS ADVANCE IN THE NATURE OF DIVERSION OF FUNDS TO SISTER CONCERNS WITHOUT CHARGING ANY INTEREST. NO DIVIDEND HAS BEEN RECEIVED DURING THE YEAR ON THESE SHARES, IS ALSO A FACT WHICH HAS BEEN RELIED UPON BY AO. IT IS NOTICED THAT THE AO HAS NOT APPRECIATED THE 'BUSINESS CONNECTION' WITH THE SISTER CONCERNS AND 'COMMERCIAL EXPEDIENCY', AS ARGUED BY THE APPELLANT IN RESPECT OF THESE TRANSACTIONS OF INVESTMENT. THIS ASPECT IS IMPORTANT IN THE CONTEXT OF SECTION 36 OF THE I.T. ACT UNDER WHICH THE CLAIM OF DEDUCTION OF INTEREST IS MADE BY THE APPELLANT. THE RATIO AND DECISION IN THE CASE OF CIT VS. DALIUIA 254 ITR CLARIFIES THE POSITION ON THIS ISSUE WHERE IT WAS HELD THAT. ''IF THERE IS AN ANOTHER CONNECTION BETWEEN THE ASSESSEE'S BUSINESS AND THAT OF THE PERSON TO WHOM SUCH ADVANCE IS MADE, THEN SUCH ADVANCE IS TO BE :- 4 -: REGARDED AS BEING FOR BUSINESS PURPOSES AND THE INTEREST ON BORROWINGS IS DEDUCTIBLE': SIMILARLY, THE BUSINESS INTEREST AND BUSINESS EXPEDIENCY HAS BEEN DEFINED IN MORE WIDER TERMS IN THE CONTEXT OF SECTION 36 IN THE DECISION IN THE CASES OF CIT VS. RAJEEV 208 ITR, CIT VS. JARDINE 210 ITR AND KEJARIWAL VS. CIT 260 1TR WHERE IT WAS HELD THAT 'IF BORROWED MONEY IS USED FOR ACQUIRING CONTROLLING INTEREST IN OTHER COMPANIES, AND THE SAME IS IN THE ASSESSEE'S BUSINESS INTERESTS, INTEREST ON SUCH BORROWAL IS DEDUCTIBLE'''. THUS, IT CAN BE SEEN THAT THE BUSINESS PURPOSE AND INTEREST IS DEFINED IN MUCH WIDER WAY THAN THE AO HAS PERCEIVED IN THIS CASE. IT IS SEEN FROM THE FACTS OF THE CASE THAT ALL THE CONCERNS WHERE THE INVESTMENT HAS BEEN MADE ARE IN THE BUSINESS OF DEALER/HIRE-PURCHASE, BODY BUILDING AND FABRICATION OF MOTOR VEHICLE AND ITS SPARE PARTS. THE APPELLANT ITSELF IS IN THE SAME BUSINESS SINCE LAST MANY YEARS. 14. UNDER THE CIRCUMSTANCES AND IN THE LIGHT OF DECISIONS NOTED ABOVE, IT CANNOT BE SAID THAT THE AMOUNTS INVESTED BY APPELLANT ARE FOR NON BUSINESS PURPOSE, THOUGH SAME MAY BE INDIRECT BUSINESS CONNECTION. THE FACTS SHOW THAT THE INVESTMENT MADE IN THE SHARES OF THE SISTER CONCERNS WHICH ARE IN THE SAME LINE OF BUSINESS; IN THE EARLIER YEARS WHEN THE APPELLANT HAD SUFFICIENT PROFITS. THE COPIES OF THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT FILED FOR THE RELEVANT YEARS SHOWS THAT THE APPELLANT HAD A NET PROFIT OF RS.34,14,292.31 IN THE YEAR ENDED 31ST MARCH, 1995, RS.45,23,870.87 IN THE YEAR ENDED 31ST MARCH, 1996, RS.11,73,112.84 IN THE YEAR ENDED 31ST MARCH, 1997, RS.79,47,875.0IN THE YEAR ENDED 31ST MARCH, 2000 AND RS.43,05,224.11 IN THE YEAR ENDED 31ST MARCH, 2003. THEREBY, THE APPELLANT HAS STATED THAT THERE IS NO NEXUS BETWEEN THE BORROWINGS AND INVESTED FUNDS. CONTRARILY, IT HAS BEEN REITERATED THAT THE INVESTMENT HAD BEEN MADE OUT OF PROFIT OF EARLIER YEARS. THE AO HAS ALSO NOTED ONLY RS.3,38,88,530/- INVESTED DURING THE CURRENT YEAR WHERE AS THE BALANCE AMOUNT OF RS.4,58,75,850/- RELATES TO EARLIER YEARS. CONSIDERING THE FACTS THAT THE APPELLANT HAD BUSINESS PROFIT IN THE EARLIER YEARS AND A PART OF THE INVESTMENT IS MADE IN THE EARLIER YEARS, I AM UNABLE :- 5 -: TO FIND A NEXUS BETWEEN THE BORROWED CAPITAL AND AMOUNT INVESTED IN THE EARLIER YEARS. ACCORDINGLY, THE FINDING OF THE AO THAT THE INTEREST BEARING FUND WAS DIRECTED FOR INVESTMENT IS NOT PROVED. THE DECISION IN THE CASE OF CIT VS. GOPI KRISHNA 47 ITR HAD LAID THE CORRECT RATIO WHERE IT WAS HELD THAT 'DEPARTMENT IS NOT ENTITLED TO DISALLOW INTEREST PAID UNLESS THERE IS A EVIDENCE TO SHOW THAT A PARTICULAR AMOUNT BORROWED WAS UTILIZED FOR PRIVATE PURPOSES'. 15. FINALLY, IT IS ALSO SEEN THAT THE AO HAS CONSIDERED THE INVESTMENT IN SHARES OF THE SISTER CONCERNS AS ADVANCE BY LOOKING INTO THE SUBSTANCE OF THE TRANSACTIONS. THE ONLY BASIS FOR REACHING THIS CONCLUSION IS THAT THE APPELLANT IS NOT AN INVESTMENT CONCERN AND NO DIVIDENDS HAVE BEEN RECEIVED DURING THE YEAR. I WOULD OBSERVE THAT IT WAS A HASTY AND GENERAL CONCLUSION REACHED BY AO BECAUSE THE DISTINCTION BETWEEN 'INVESTMENT' AND 'ADVANCE' IS VERY WIDE AND BOTH ARE TWO DIFFERENT TRANSACTIONS. THE TRANSACTING PARTIES HAVE ENTERED THE TRANSACTION AS INVESTMENT WHICH IS PROPERLY, EVIDENCED AND DOCUMENTED WITHOUT ANY DEFECT AND HENCE REASON FOR SUSPICION. UNDER THE CIRCUMSTANCES, THE NATURE OF TRANSACTION CANNOT BE DOUBTED AND ANY CHANGE EFFECTING TO THE ACTUAL NATURE OF TRANSACTION IS NOT JUSTIFIED AS PER FACTS AND LAW. ACCORDINGLY, THE SUBSEQUENT TAXATION ON THE BASIS OF TELESCOPING IS ALSO NOT JUSTIFIED. THE APPELLANT HAS POINTED OUT THAT THE INVESTMENT AND ITS ACCRUALS ARE TAXABLE AS AND WHEN THE DIVIDENDS/PROFITS ARISE. THEREFORE, ASSESSING OFFICER HAS IRRELEVANT GROUNDS FOR DISALLOWANCE OF INTEREST ON THE SAID INVESTMENT. 16. I WOULD CONCLUDE THAT THE! INVESTMENT MADE BY APPELLANT IN THE SISTER CONCERNS PRIMA-FACIE SEEM TO BE IN THE COURSE OF BUSINESS AS PER BUSINESS EXPEDIENCY AND ALSO THAT THE INVESTMENT HAVE BEEN MADE IN THE EARLIER YEARS, AT THE TIME OF AVAILABLE FUNDS/PROFITS IN THE HANDS OF THE APPELLANT. THAT IS TO SAY THE NEXUS BETWEEN INTEREST BEARING BORROWED FUNDS AND INVESTMENT MADE IN THE SHARES OF THE SISTER CONCERNS IS NOT ESTABLISHED AS PER THE FACTS OF THE CASE. I WOULD ALSO REFER TO THE DECISION IN THE CASE OF MINAKSHI SYNTHETICS PVT. LTD. VS CIT (2003) 84 ITD 563 (LUCKNOW) OF THE JURISDICTIONAL HON'BLE TRIBUNAL :- 6 -: BENCH, LUCKNOW HOLDING THAT NON CHARGING OF INTEREST ON LOANS GIVEN BY AN ASSESSEE CANNOT ITSELF BE A SUFFICIENT GROUND FOR DISALLOWING INTEREST PAID BY AN ASSESSEE ON LOANS TAKEN BY IT IN THE ABSENCE OF ANY NEXUS BETWEEN BORROWED CAPITAL AND INTEREST FEE ADVANCES OR IN THE ABSENCE OF ANY FINDING 'THAT BORROWED FUNDS OR PART THEREOF WAS DIVERTED TOWARDS INTEREST FREE ADVANCES'. THERE IS NO MATERIAL BROUGHT ON RECORD BY AO TO ESTABLISH NEXUS BETWEEN THE INVESTMENT MADE BY APPELLANT IN THE SHARES OF A SISTER CONCERNS AND THE INTEREST BEARING FUNDS BORROWED BY THE APPELLANT. THEREFORE, THE DISALLOWANCE MADE BY AO TO THE EXTENT OF RS.56,64,137/- IS NOT JUSTIFIED. ACCORDINGLY, GROUND NO. 1(X) OF APPEAL IS ALLOWED. 17. GROUNDS NO. 2 AND 3 OF APPEAL ARE GENERAL AND VAGUE. NO SPECIFIC SUBMISSIONS AND ARGUMENTS HAVE BEEN MADE ON THESE GROUNDS. HENCE SAME ARE TREATED AS DISMISSED. 38. FROM THE ABOVE PARAS FROM THE ORDER OF CIT(A), WE FIND THAT THE ADDITION WAS DELETED BY HIM ON THE BASIS THAT THE ASSESSING OFFICER HAS NOT APPRECIATED THE BUSINESS CONNECTION WITH THE SISTER CONCERN AND COMMERCIAL EXPEDIENCY AS ARGUED BY THE ASSESSEE IN RESPECT OF THESE TRANSACTIONS OF INVESTMENT. HE HAS NOTED IN PARA 13 OF HIS ORDER THAT DEDUCTION WAS CLAIMED BY THE ASSESSEE U/S 36 (1) (III) OF THE I. T. ACT. THEREAFTER IT IS NOTED BY CIT(A) IN PARA 14 OF HIS ORDER THAT IT CANNOT BE SAID THAT THE AMOUNTS INVESTED BY ASSESSEE ARE FOR NON BUSINESS PURPOSE, THOUGH SAME MAY BE INDIRECT BUSINESS CONNECTION. WE ARE OF THE CONSIDERED OPINION THAT HAVING BUSINESS CONNECTION IS DIFFERENT THING AND MAKING INVESTMENT FOR BUSINESS EXPEDIENCY IS DIFFERENT THING ALTOGETHER. IN THE PRESENT CASE, THIS IS THE ONLY CLAIM OF THE ASSESSEE BEFORE THE ASSESSING OFFICER AND BEFORE US ALSO THAT THE INVESTMENTS MADE BY THE ASSESSEE IN SISTER CONCERNS WHO ARE ENGAGED IN A CONNECTED OR SIMILAR BUSINESS. EVEN IF THIS IS CORRECT THEN ALSO, IT CANNOT BE SAID THAT THIS INVESTMENT IN SISTER CONCERN IS FOR BUSINESS PURPOSE OR FOR BUSINESS EXPEDIENCY. HENCE, THE JUDGMENT OF HONBLE APEX COURT RENDERED IN THE CASE OF S. A. BUILDERS (SUPRA) IS NOT RENDERING ANY HELP TO THE ASSESSEE. INVESTMENT IN SHARES IS MADE ONLY TO EARN DIVIDEND INCOME AND AS IN CASE OF ANY OTHER INVESTMENT, THERE MAY BE CAPITAL GAIN OR LOSS ALSO AT THE TIME OF SALE OF :- 7 -: CAPITAL ASSET. TILL THE ASSESSMENT YEAR 2003-04, DIVIDEND INCOME WAS TAXABLE AND THEREFORE, DEDUCTION ON ACCOUNT OF INTEREST ON BORROWED FUND FOR MAKING INVESTMENT IN SHARE HAD TO BE ALLOWED U/S 57(III) OF THE ACT AS HAS BEEN HELD BY US WHILE DECIDING THE APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2003-04 BY FOLLOWING THE JUDGMENT OF HONBLE APEX COURT RENDERED IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA). IN THIS CASE, IT WAS HELD BY HON'BLE APEX COURT THAT IF BORROWED FUNDS HAVE BEEN USED FOR MAKING INVESTMENT IN SHARES, THEN INTEREST EXPENDITURE INCURRED ON SUCH BORROWED FUND HAS TO BE ALLOWED AS DEDUCTION U/S 57(III) OF THE ACT EVEN IF THERE WAS NO DIVIDEND INCOME EARNED DURING THE YEAR UNDER CONSIDERATION. THE RELEVANT PARA OF THIS JUDGMENT OF HON'BLE APEX COURT IN THE CASE OF RAJENDRA PRASAD MOODY VS. CIT AS REPORTED IN [1978] 115 ITR 519 IS REPRODUCED BELOW: WHAT S. 57(III) REQUIRES IS THAT THE EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INCOME. IT IS THE PURPOSE OF THE EXPENDITURE THAT IS RELEVANT IN DETERMINING THE APPLICABILITY OF S. 57(III) AND THAT PURPOSE MUST BE MAKING OR EARNING OF INCOME. S. 57(III) DOES NOT REQUIRE THAT THIS PURPOSE MUST BE FULFILLED IN ORDER TO QUALIFY THE EXPENDITURE FOR DEDUCTION. IT DOES NOT SAY THAT THE EXPENDITURE SHALL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED. THERE IS IN FACT NOTHING IN THE LANGUAGE OF S. 57(III) TO SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY INTO ANY BENEFIT BY WAY OF RETURN IN THE SHAPE OF INCOME. THE PLAIN NATURAL CONSTRUCTION OF THE LANGUAGE OF S. 57(III) IRRESISTIBLY LEADS TO THE CONCLUSION THAT TO BRING A CASE WITHIN THE SECTION, IT IS NOT NECESSARY THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE. IT MAY BE POINTED OUT THAT AN IDENTICAL VIEW WAS TAKEN BY THIS COURT IN EASTERN INVESTMENTS LTD. V. CIT [1951] 20 ITR 1, 4 (SC), WHERE INTERPRETING THE CORRESPONDING PROVISION IN S. 12(2) OF THE INDIAN I.T. ACT, 1922, WHICH WAS IPSISSIMA VERBA IN THE SAME TERMS AS S. 57(III). BOSE J., SPEAKING ON BEHALF OF THE COURT, OBSERVED : :- 8 -: 'IT IS NOT NECESSARY TO SHOW THAT THE EXPENDITURE WAS A PROFITABLE ONE OR THAT IN FACT ANY PROFIT WAS EARNED.' IT IS INDEED DIFFICULT TO SEE HOW, AFTER THIS OBSERVATION OF THE COURT, THERE CAN BE ANY SCOPE FOR CONTROVERSY IN REGARD TO THE INTERPRETATION OF S. 57(III). IT IS ALSO INTERESTING TO NOTE THAT, ACCORDING TO THE REVENUE, THE EXPENDITURE WOULD DISQUALIFY FOR DEDUCTION ONLY IF NO INCOME RESULTS FROM SUCH EXPENDITURE IN A PARTICULAR ASSESSMENT YEAR, BUT IF THERE IS SOME INCOME, HOWSOEVER SMALL OR MEAGRE, THE EXPENDITURE WOULD BE ELIGIBLE FOR DEDUCTION. THIS MEANS THAT IN A CASE WHERE THE EXPENDITURE IS RS. 1,000, IF THERE IS INCOME OF EVEN RE. 1, THE EXPENDITURE WOULD BE DEDUCTIBLE AND THERE WOULD BE RESULTING LOSS OF RS. 999 UNDER THE HEAD ' INCOME FROM OTHER SOURCES '. BUT IF THERE IS NO INCOME, THEN, ON THE ARGUMENT OF THE REVENUE, THE EXPENDITURE WOULD HAVE TO BE IGNORED AS IT WOULD NOT BE LIABLE TO BE DEDUCTED. THIS WOULD INDEED BE A STRANGE AND HIGHLY ANOMALOUS RESULT AND IT IS DIFFICULT TO BELIEVE THAT THE LEGISLATURE COULD HAVE EVER INTENDED TO PRODUCE SUCH ILLOGICALITY. MOREOVER, IT MUST BE REMEMBERED THAT WHEN A PROFIT AND LOSS ACCOUNT IS CAST IN RESPECT OF ANY SOURCE OF INCOME, WHAT IS ALLOWED BY THE STATUTE AS PROPER EXPENDITURE WOULD BE DEBITED AS AN OUTGOING AND INCOME WOULD BE CREDITED AS A RECEIPT AND THE RESULTING INCOME OR LOSS WOULD BE DETERMINED. IT WOULD MAKE NO DIFFERENCE TO THIS PROCESS WHETHER THE EXPENDITURE IS X OR Y OR NIL; WHATEVER IS THE PROPER EXPENDITURE ALLOWED BY THE STATUTE WOULD BE DEBITED. EQUALLY, IT WOULD MAKE NO DIFFERENCE WHETHER THERE IS ANY INCOME AND IF SO, WHAT, SINCE WHATEVER IT BE, X OR Y OR NIL, WOULD BE CREDITED. AND THE ULTIMATE INCOME OR LOSS WOULD BE FOUND. WE FAIL TO APPRECIATE HOW EXPENDITURE WHICH IS OTHERWISE A PROPER EXPENDITURE CAN CEASE TO BE SUCH MERELY BECAUSE THERE IS NO RECEIPT OF INCOME. WHATEVER IS A PROPER OUTGOING BY WAY OF EXPENDITURE MUST BE DEBITED IRRESPECTIVE OF WHETHER THERE IS RECEIPT OF INCOME :- 9 -: OR NOT. THAT IS THE PLAIN REQUIREMENT OF PROPER ACCOUNTING AND THE INTERPRETATION OF S. 57(III) CANNOT BE DIFFERENT. THE DEDUCTION OF THE EXPENDITURE CANNOT, IN THE CIRCUMSTANCES, BE HELD TO BE CONDITIONAL UPON THE MAKING OR EARNING OF THE INCOME. 40. THERE WAS AN ARGUMENT THAT SINCE NO DIVIDEND INCOME WAS EARNED DURING A.Y. 2004 05, NO DISALLOWANCE CAN BE MADE U/S 14A. RELIANCE WAS PLACED ON A TRIBUNAL DECISION RENDERED IN THE CASE OF SHIVAM AUTO, WHICH IS UPHELD BY HONBLE ALLAHABAD HIGH COURT IN ITA NO.88 OF 2014 DATED 5.5.2014. RELIANCE WAS ALSO PLACED ON A JUDGMENT OF HONBLE GUJARAT HIGH COURT RENDERED IN THE CASE OF CIT VS. CORRTECH ENERGY (P) LTD. 145 TAXMAN 116. BUT THIS IS TO BE NOTED THAT IN THE PRESENT CASE, DISALLOWANCE IS NOT MADE BY THE A.O. U/S 14A OF THE I. T. ACT ALONE. THE DISALLOWANCE IS MADE ON THIS BASIS THAT IT IS NOT ALLOWABLE U/S 36 (1) (III) BECAUSE INVESTMENT IN SHARES IS NOT A BUSINESS OF THE ASSESSEE. THEREAFTER IT IS STATED BY THE A.O. THAT SUCH DISALLOWANCE IS ALSO TO BE MADE KEEPING IN VIEW THE PROVISIONS OF SECTION 14A. HERE, WE WOULD LIKE TO OBSERVE THAT WHETHER ANY DISALLOWANCE U/S 14A IS CALLED FOR OR NOT IS REQUIRED TO BE SEEN ONLY IF EXPENDITURE IS OTHERWISE ALLOWABLE UNDER A PROVISION OF THE ACT MINUS SECTION 14A. IN FACT, SECTION 14A IS A DISALLOWING SECTION, AS PER WHICH, EVEN IF DEDUCTION IS ALLOWABLE IN RESPECT OF ANY EXPENDITURE AS PER SOME PROVISION OF THE ACT THEN IN VIEW OF THE PROVISION OF SECTION 14A OF THE ACT, DEDUCTION CANNOT BE ALLOWED OF SUCH EXPENDITURE IF IT IS FOUND THAT SUCH EXPENDITURE IS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. HENCE, IT HAS TO BE FIRST ESTABLISHED BY THE ASSESSEE THAT DEDUCTION ON ACCOUNT OF INTEREST IS ALLOWABLE UNDER SOME PROVISIONS OF THE ACT. IN OUR CONSIDERED OPINION, IN THE FACTS OF THE PRESENT CASE, INTEREST IS NOT AN ALLOWABLE EXPENDITURE UNDER ANY PROVISION OF THE ACT. IT IS DEFINITELY NOT ALLOWABLE FOR COMPUTING SALARY INCOME OR INCOME FROM HOUSE PROPERTY. IT CANNOT BE SAID THAT DEDUCTION ON ACCOUNT OF INTEREST EXPENDITURE IS TO BE ALLOWED FOR COMPUTING INCOME FROM CAPITAL GAIN SINCE INCOME ON ACCOUNT OF CAPITAL GAIN IS TAXABLE BECAUSE DEDUCTION ON ACCOUNT OF INTEREST EXPENDITURE IS NOT ALLOWABLE FOR COMPUTING CAPITAL GAIN. FOR COMPUTING CAPITAL GAIN, DEDUCTION IS ALLOWABLE IN RESPECT OF COST OF ACQUISITION, COST OF IMPROVEMENT AND COST OF TRANSFER ONLY AND INTEREST DOES NOT FALL IN ANY OF THESE THREE CATEGORIES. FROM A.Y. 2004 05, IT IS NOT AN ALLOWABLE DEDUCTION U/S 57 (III) I.E. FOR COMPUTING INCOME FROM OTHER SOURCES ALSO BECAUSE, :- 10 -: DEDUCTION IS ALLOWABLE UNDER THIS SECTION FOR THOSE EXPENSES WHICH ARE INCURRED FOR EARNING AN INCOME TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. SINCE NOW DIVIDEND INCOME IS NOT TAXABLE UNDER THIS HEAD, DEDUCTION IS NOT ALLOWABLE U/S 57 (III). NOW, THE ONLY REMAINING SECTION IS SECTION 36 (1) (III) FOR ALLOWABILITY OF INTEREST EXPENDITURE. THIS IS ADMITTED POSITION THAT THE ASSESSEE IS NOT DEALING IN SHARES AS THE ASSESSEE ITSELF HAS SHOWN IT AS INVESTMENT IN THE BALANCE SHEET. OTHERWISE ALSO, THE ASSESSEE HAS NOT BROUGHT ANYTHING ON RECORD TO ESTABLISH THAT THIS INVESTMENT IN SHARES IS A BUSINESS OF THE ASSESSEE. ONLY CONTENTION OF THE ASSESSEE BEFORE LOWER AUTHORITIES AND BEFORE US IS THAT SINCE THE INVESTMENT IS IN SHARES OF SISTER CONCERNS ENGAGED IN CONNECTED BUSINESS, IT IS FOR BUSINESS EXPEDIENCY BUT WE FIND NO MERIT IN THIS CONTENTION. THE DECISION OF LEARNED CIT (A) IS ON THIS BASIS THAT IT CANNOT BE SAID THAT THE AMOUNTS INVESTED BY APPELLANT ARE FOR NON BUSINESS PURPOSE, THOUGH SAME MAY BE INDIRECT BUSINESS CONNECTION. IN OUR CONSIDERED OPINION, THE ORDER OF LEARNED CIT (A) IS NOT SUSTAINABLE BECAUSE DEDUCTION U/S 36 (1) (III) IS NOT ALLOWABLE ON THE BASIS OF A BUSINESS CONNECTION. DEDUCTION FOR INTEREST U/S 36 (1) (III) IS ALLOWABLE IN RESPECT OF MONEY BORROWED FOR THE PURPOSES OF THE BUSINESS. IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE HAS FAILED TO ESTABLISH THAT INTEREST IS INCURRED FOR BORROWINGS FOR BUSINESS PURPOSES. HENCE, WE HAVE NO HESITATION IN HOLDING THAT IN THE FACTS OF THE PRESENT CASE, DEDUCTION ON ACCOUNT OF INTEREST IS NOT ALLOWABLE UNDER ANY PROVISION OF INCOME TAX ACT AND THERE IS NO NEED TO TAKE HELP OF SECTION 14A TO DISALLOW THE INTEREST EXPENDITURE. 41. STILL, WE DEAL WITH THIS CONTENTION THAT NO SUCH DISALLOWANCE U/S 14A IS JUSTIFIED BECAUSE THERE IS NO ACTUAL EARNING OF THE DIVIDEND IN THE PRESENT YEAR. WE FIND THAT IN THIS REGARD, THE JUDGMENT OF HON'BLE APEX COURT IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA) SUPPORTS THE CASE OF THE REVENUE BECAUSE WHILE DECIDING THE ISSUE IN RESPECT OF ALLOWABILITY OF INTEREST EXPENDITURE U/S 57(III), IT WAS HELD BY HON'BLE APEX COURT THAT SECTION 57(III) DOES NOT SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY INTO ANY BENEFIT BY WAY OF RETURN IN THE SHAPE OF INCOME. AS PER THE SAME LOGIC, WHEN THE INTEREST EXPENDITURE IS INCURRED FOR EARNING DIVIDEND INCOME, IT HAS TO BE ACCEPTED THAT THIS INTEREST EXPENDITURE WAS INCURRED IN RELATION TO EARNING EXEMPT DIVIDEND INCOME AND HENCE, IT IS NOT RELEVANT AS TO WHETHER THERE WAS ACTUAL DIVIDEND INCOME IN THE PRESENT YEAR OR NOT. :- 11 -: IN THIS REGARD, WE ARE AWARE THAT THERE ARE TRIBUNAL DECISIONS AS WELL AS THE JUDGMENT OF HON'BLE ALLAHABAD HIGH COURT ALSO THAT IF THERE IS NO DIVIDEND INCOME ACTUALLY EARNED THEN NO DISALLOWANCE CAN BE MADE U/S 14A BUT IN THESE JUDGMENTS, THE JUDGMENT OF HON'BLE APEX COURT RENDERED IN THE CASE OF RAJENDRA PRASAD MOODY (SUPRA) WAS NOT BROUGHT TO THE NOTICE OF THE TRIBUNAL AND HONBLE HIGH COURT AND HENCE, IT WAS NOT TAKEN NOTE OF. IT WAS ALSO NOT TAKEN NOTE OF THAT EVEN IF IT IS HELD THAT NO DISALLOWANCE IS TO BE MADE U/S 14A OF THE ACT, THEN ALSO, THERE HAS TO BE A POSITIVE FINDING THAT UNDER WHICH SECTION, THIS INTEREST EXPENDITURE IS ALLOWABLE. SINCE DIVIDEND INCOME IS NOT SUBJECT TO TAX AS INCOME FROM OTHER SOURCES FROM ASSESSMENT YEAR 2004-05, IT CANNOT BE SAID THAT INTEREST EXPENDITURE HAS TO BE ALLOWED U/S 57(III) OF THE ACT. THIS IS ALSO NOT A CASE OF THE ASSESSEE THAT INVESTMENT IN SHARES WAS MADE OUT OF BORROWED FUNDS IN COURSE OF DEALING IN SHARES AND THEREFORE, INTEREST EXPENDITURE IS ALLOWABLE U/S 36 (1) (III) OF THE ACT. WE HAVE ALREADY SEEN THAT INTEREST INCOME IS NOT ALLOWABLE WHILE COMPUTING CAPITAL GAIN. HENCE, EVEN IF IT IS HELD THAT SECTION 14A IS NOT TO BE INVOKED FOR MAKING DISALLOWANCE IN A YEAR IN WHICH THERE IS NO ACTUAL DIVIDEND INCOME AS WAS HELD BY HONBLE JURISDICTIONAL HIGH COURT AND HONBLE GUJARAT HIGH COURT, THEN ALSO, IT HAS TO BE SEEN AS TO WHETHER DEDUCTION ON ACCOUNT OF INTEREST EXPENDITURE IS ALLOWABLE UNDER ANY PROVISION OF THE ACT. SINCE IN THE PRESENT CASE, SUCH DEDUCTION ON ACCOUNT OF INTEREST EXPENDITURE IS NOT ALLOWABLE U/S 36 (1) (III) OR 57(III) OF THE ACT, THERE IS NO NEED TO INVOKE THE PROVISIONS OF SECTION 14A OF THE ACT FOR MAKING DISALLOWANCE BECAUSE INVOKING THE PROVISION OF THIS SECTION IS REQUIRED WHERE THE DEDUCTION IS OTHERWISE ALLOWABLE. 42. AS PER ABOVE DISCUSSION, WE FIND THAT THE ORDER OF CIT (A) ON THIS ISSUE IS NOT SUSTAINABLE BECAUSE IT IS NOT AS PER LAW AND FACTS OF THE PRESENT CASE BECAUSE THE DECISION OF CIT (A) IS ON THE BASIS THAT IN HIS OPINION, THE INVESTMENT MADE BY THE ASSESSEE IN SISTER CONCERN IS IN COURSE OF BUSINESS AS PER BUSINESS EXPEDIENCY BUT WE HAVE ALREADY SEEN THAT MAKING INVESTMENT IN SHARES AS A CAPITAL ASSET CANNOT BE SAID TO BE IN COURSE OF BUSINESS OR FOR BUSINESS EXPEDIENCY. THE SECOND REASONING OF CIT (A) IS THAT THE INVESTMENT HAS BEEN MADE IN THE EARLIER YEAR AT THE TIME WHEN INTEREST FREE FUNDS WERE AVAILABLE IN THE HANDS OF THE ASSESSEE. THIS FINDING OF CIT (A) IS WITHOUT ANY BASIS BECAUSE AS PER THE COPY OF FUND FLOW STATEMENT AVAILABLE ON PAGE NO. 11 OF THE PAPER BOOK AND AS PER COPY OF BALANCE SHEET AVAILABLE ON PAGE NO. 12, WE FIND :- 12 -: THAT EVEN AT THE END OF THE YEAR ON 31/03/2003 ALSO, THERE WAS DEBIT BALANCE IN THE CAPITAL ACCOUNTS OF THE PARTNERS. HENCE, EVEN IF THERE WAS PROFIT AT ANY POINT OF TIME, THE SAME WAS WITHDRAWN BY THE PARTNERS AND IN FACT THE WITHDRAWAL WAS MORE THAN THE CONTRIBUTION OF CAPITAL AND PROFIT OF THE FIRM RESULTING INTO DEBIT BALANCE IN PARTNERS CAPITAL ACCOUNTS AND THEREFORE, IT CANNOT BE SAID THAT AT ANY POINT OF TIME, OWN FUND WAS AVAILABLE WITH THE ASSESSEE FIRM FOR MAKING INVESTMENT IN SHARES. THE FUND IS AVAILABLE WITH THE ASSESSEE OUT OF UNSECURED LOANS AND SUNDRY CREDITORS. THE ASSESSEE IS PAYING INTEREST ON UNSECURED LOAN AND FOR SUNDRY CREDITORS, THE ASSESSEE IS GETTING SUPPLY OF MATERIALS WITHOUT PAYMENT AND THE ASSESSEE DOES NOT GET CASH FROM SUNDRY CREDITORS FOR MAKING INVESTMENT IN SHARES AND THEREFORE, IT CANNOT BE ACCEPTED THAT THE INVESTMENT WAS MADE OUT OF FUND AVAILABLE IN THE FORM OF SUNDRY CREDITORS. 43. AS PER ABOVE DISCUSSION, WE HAVE SEEN THAT INTEREST EXPENDITURE INCURRED BY THE ASSESSEE BY BORROWING FUNDS FOR MAKING INVESTMENT IN SHARES IS NOT ALLOWABLE FROM ASSESSMENT YEAR 2004-05 BECAUSE THE DIVIDEND INCOME IS NOT TAXABLE INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES AND THEREFORE, DEDUCTION IS NOT ALLOWABLE U/S 57(III) OF THE ACT. WE HAVE ALSO SEEN THAT NO DEDUCTION IS ALLOWABLE U/S 36 (1) (III) ALSO. HENCE WE REVERSE THE ORDER OF LEARNED CIT (A) AND RESTORE THAT OF THE A.O. REGARDING VARIOUS JUDGMENTS CITED BY THE LEARNED AR OF THE ASSESSEE INCLUDING THE JUDGMENT OF HONBLE APEX COURT RENDERED IN THE CASE OF S. A. BUILDERS (SUPRA), WE WOULD LIKE TO OBSERVE THAT NO JUDGMENT IS RENDERING ANY HELP TO THE ASSESSEE BECAUSE WE HAVE SEEN THAT DEDUCTION IS NOT ALLOWABLE UNDER ANY PROVISIONS OF ANY SECTION OF INCOME TAX ACT. HENCE, THERE IS NO NEED TO DISALLOW ANY EXPENSES WHICH IS NOT ALLOWABLE. IN FACT, THE ASSESSEE HAS FAILED TO MAKE OUT A CASE THAT DEDUCTION OF INTEREST EXPENDITURE IS ALLOWABLE UNDER THE PROVISIONS OF ANY SECTION OF INCOME TAX ACT, 1961. 44. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS ALLOWED. 8. THE MODE OF COMPUTATION AS PER RULE 8D OF THE RULES WAS ALSO EXAMINED BY THE TRIBUNAL IN THE CASE OF INCOME TAX OFFICER VS. M/S SHRUTI FINSEC PT. LTD. IN I.T.A. NO. 592/LKW/2012, IN WHICH IT HAS BEEN HELD THAT WHILE ADOPTING THE PROCEDURE FOR COMPUTATION OF DISALLOWANCE AS PER RULE 8D OF THE RULES, ALL ASPECTS OF DIRECT AND INDIRECT EXPENSES ARE TO BE CONSIDERED. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN THAT CASE ARE ALSO EXTRACTED HEREUNDER:- :- 13 -: 7. BEFORE COMING TO THE CONTROVERSY INVOLVED IN THIS CASE, WE WOULD LIKE TO PREFER TO EXAMINE THE PROVISIONS OF SECTION 14A OF THE ACT, ACCORDING TO WHICH FOR COMPUTING THE TOTAL INCOME UNDER CHAPTER-IV, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. IN ORDER TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE, THE ASSESSING OFFICER HAS TO FOLLOW THE METHOD PRESCRIBED, IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THE METHOD FOR DETERMINING THE AMOUNT OF EXPENDITURE HAS BEEN PRESCRIBED UNDER RULE 8D OF THE RULES WHICH WAS INTRODUCED W.E.F. 24.3.2008 BY THE INCOME-TAX (5TH AMENDMENT) RULES, 2008 RELEVANT TO THE ASSESSMENT YEAR 2008-09. FOR THE SAKE OF REFERENCE, WE EXTRACT THE PROVISIONS OF SECTION 14A OF THE ACT AND 8D OF THE RULES AS UNDER:- SECTION 14A OF THE ACT: 14A. EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. 3(2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS 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 FORM PART OF THE TOTAL INCOME UNDER THIS ACT. 3(3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO APPLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN 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 SHALL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, :- 14 -: FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. RULE 8D OF THE RULES: 8D. METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. (1) WHERE THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF THE PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE ; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB- RULE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWING AMOUNTS, NAMELY: (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME ; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY : B A X--- 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 ASSETS AS APPEARING IN THE BALANCE-SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; :- 15 -: (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT. OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE-SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. 3. FOR THE PURPOSES OF THIS RULE, THE TOTAL ASSETS SHALL MEAN, TOTAL ASSETS AS APPEARING IN THE BALANCE-SHEET EXCLUDING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. 8. FROM A BARE READING OF THE AFORESAID PROVISIONS, IT HAS BECOME ABUNDANTLY CLEAR THAT ONCE THE ASSESSING OFFICER HAS ANY REASON TO DOUBT THE EXPENDITURES AND IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURES IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE INCOME-TAX ACT, THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURES SO INCURRED IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED UNDER RULE 8D OF THE RULES. NO OPTION WAS GIVEN TO THE ASSESSING OFFICER TO ADOPT DIFFERENT FORMULA TO COMPUTE THE AMOUNT OF EXPENDITURES INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. ONLY TWO OPTIONS ARE LEFT WITH THE ASSESSING OFFICER ONE IS TO ACCEPT THE EXPENDITURES CLAIMED BY THE ASSESSEE AND IF HE DISPUTES THE SAME, HE HAS TO COMPUTE THE EXPENDITURES BY ADOPTING THE FORMULA LAID DOWN IN RULE 8D OF THE RULES. 9. TURNING TO THE FACTS OF THE CASE, THE ASSESSEE HAS EARNED THE DIVIDEND INCOME AT RS.68,635/- FOR WHICH IT HAS CLAIMED EXPENDITURES OF ONLY RS.16,544/- OF WHICH DETAILS WERE FURNISHED BEFORE THE ASSESSING OFFICER. APPARENTLY, THE QUANTUM OF EXPENDITURES DOES NOT COMMENSURATE WITH THE EXEMPTED INCOME CLAIMED BY THE ASSESSEE. THEREFORE, THE ASSESSING OFFICER HAS EVERY REASON TO DOUBT THE CORRECTNESS OF THE EXPENDITURES CLAIMED BY THE ASSESSEE FOR EARNING THE EXEMPTED INCOME OF RS.17,68,735/-. THEREFORE, WE ARE OF THE VIEW THAT THE ASSESSING OFFICER HAS TO RE-COMPUTE THE EXPENDITURES RELATING TO THE DIVIDEND INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THIS ACT AND FOR COMPUTING THE EXPENDITURES, THE ASSESSING OFFICER HAS NO OTHER OPTION BUT TO ADOPT THE FORMULA LAID DOWN UNDER RULE 8D OF THE RULES AND HE DID THE SAME. BUT FROM THE CALCULATION, WE FIND THAT THE ASSESSING OFFICER HAS NOT DETERMINED THE AMOUNT OF EXPENDITURES DIRECTLY RELATED TO THE INCOME WHICH DOES NOT :- 16 -: FORM PART OF THE TOTAL INCOME OF THE ASSESSEE AS PER SUB-RULE (2) (I) OF RULE 8D. IT IS ALSO NOT CLEAR WHETHER THE ASSESSING OFFICER HAS MADE ANY VERIFICATION WITH REGARD TO THE AMOUNT OF EXPENDITURES DIRECTLY RELATING TO THE INVESTMENT MADE IN EARNING DIVIDEND INCOME. THE OTHER DEFECT WE FIND IN THE CALCULATION IS THAT AS PER DEFINITION (C) OF RULE 8D, THE AVERAGE OF THE TOTAL AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR IS TO BE TAKEN, BUT THE ASSESSING OFFICER HAS TAKEN THE AVERAGE OF INVESTMENT OF THE ASSESSEE-COMPANY AS PER BALANCE SHEET AS ON 31.3.2008 AND 31.3.2009. THE MINOR MISTAKES ARE NOTED IN THE CALCULATION OF THE ASSESSING OFFICER FOLLOWING THE METHOD OF RULE 8D. WE, HOWEVER, DID NOT AGREE WITH THE ORDER OF THE LD. CIT(A) RESTRICTING THE DISALLOWANCE TO THE EXTENT OF RS.16,544/- EVEN WITHOUT ASSIGNING ANY REASON AND IN FEW LINES HE ACCEPTED THE CLAIM OF THE ASSESSEE. THEREFORE, WE SET ASIDE THE ORDER OF THE LD. CIT(A), BUT SO FAR AS CALCULATION OF DISALLOWANCE OF EXPENDITURES ARE CONCERNED, WE RESTORE THE MATTER TO THE ASSESSING OFFICER WITH A DIRECTION TO RE-VERIFY THE CALCULATION OF DISALLOWANCE OF EXPENDITURES AS PER RULE 8D. ACCORDINGLY, THE APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. 9. IN THE LIGHT OF THESE FACTS, WE ARE OF THE VIEW THAT ONCE PROVISIONS OF SECTION 14A OF THE ACT ARE TO BE INVOKED, THE DISALLOWANCE IS TO BE COMPUTED AS PER RULE 8D OF THE RULES. IN THE INSTANT CASE, NOTHING HAS BEEN BROUGHT ON RECORD TO DEMONSTRATE THAT THERE WAS ANY INCORRECTNESS IN THE COMPUTATION OF DISALLOWANCE AS PER RULE 8D. IT WAS SIMPLY CONTENDED THAT DISALLOWANCE UNDER SECTION 14A OF THE ACT CANNOT EXCEED THE RECEIPT OF DIVIDEND INCOME. THIS ASPECT HAS ALREADY BEEN EXAMINED BY US IN THE FOREGOING PARAGRAPHS. SINCE NO DISPUTE HAS BEEN RAISED WITH REGARD TO THE COMPUTATION OF DISALLOWANCE AS PER RULE 8D, WE FIND NO INFIRMITY THEREIN AND ACCORDINGLY WE CONFIRM THE ORDER OF THE ASSESSING OFFICER AFTER SETTING ASIDE THE ORDER OF THE LD. CIT(A), AS THE LD. CIT(A) HAS GRANTED RELIEF TO THE ASSESSEE WITHOUT LOOKING TO THE MODE OF COMPUTATION AS PER RULE 8D OF THE RULES. 7. SINCE THE TRIBUNAL HAS TAKEN A VIEW IN THE ASSESSEES OWN CASE THAT ONCE THE PROVISIONS OF SECTION 14A OF THE ACT ARE TO BE INVOKED, DISALLOWANCE IS TO BE COMPUTED AS PER RULE 8D OF THE RULES, WE FIND NO JUSTIFICATION TO TAKE A CONTRARY VIEW IN THIS APPEAL. ACCORDINGLY FOLLOWING :- 17 -: THE VIEW TAKEN BY THE TRIBUNAL IN ASSESSMENT YEAR 2009-10, WE DECIDE THIS ISSUE IN FAVOUR OF THE REVENUE. ACCORDINGLY, THE ORDER OF THE LD. CIT(A) IS SET ASIDE AND THAT OF THE ASSESSING OFFICER IS RESTORED. 8. IN THE RESULT, APPEAL OF THE REVENUE IS ALLOWED. ORDER WAS PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTIONED PAGE. SD/- SD/- [A. K. GARODIA] [SUNIL KUMAR YADAV] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 12 TH JUNE, 2015 JJ:1006 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR ASSISTANT REGISTRAR