Kothari Products Ltd., Kanpur V. Asstt. Commissioner of Income Tax, Kanpur

ITA 928/LKW/2014

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 3202 (ITAT-LUCKNOW)
• Duration Of Justice: 6 year(s) 9 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-10-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 29-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RESP; TRIB UNAL VIDE DATED
• Keywords: Business income; Business expenditure; Earning of tax free income; Avoidance of tax; Rule 8D; Set aside
• Section: 14A; 201; 48; 22

Judgement Text

I.T.A. NO.928/LKW/2014 I.T.A. NO.255/LKW/2015 1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A, LUCKNOW BEFORE SHRI A. D. JAIN, VICE PRESIDENT AND SHRI T. S. KAPOOR, ACCOUNTANT MEMBER ITA NO.255/LKW/2015 ASSESSMENT YEAR:2009-10 & I.T.A. NO.928/LKW/2014 ASSESSMENT YEAR:2010-11 M/S KOTHARI PRODUCTS LTD., 24/19, THE MALL, KANPUR. PAN:AAACK5571F VS. A.C.I.T., CENTRAL CIRCLE-1, KANPUR. (APPELLANT) (RESPONDENT) O R D E R PER T. S. KAPOOR, A.M. THESE TWO APPEALS HAVE BEEN FILED BY THE ASSESSEE AGAINST THE SEPARATE ORDERS OF LEARNED CIT(A) DATED 20/09/2014 AND 16/01/2015 RESPECTIVELY. 2. THESE APPEALS WERE EARLIER DISMISSED BY THE TRIB UNAL VIDE ORDER DATED 24/07/2015 AND 12/01/2016 RESPECTIVELY. SINCE THES E TRIBUNAL ORDERS WERE PASSED EX-PARTE QUA ASSESSEE, THEREFORE, THESE WERE RECALLED FOR HEARING AFRESH VIDE TRIBUNAL ORDER DATED 27/05/2016 AND 09/ 06/2017 RESPECTIVELY AND NOW THESE APPEALS HAVE BEEN LISTED FOR HEARING ON MERITS. APPELLANT BY SHRI ABHINAV MEHROTRA, ADVOCATE RESPONDENT BY SHRI AJAY KUMAR, D.R. DATE OF HEARING 14 / 0 9 /20 21 DATE OF PRONOUNCEMENT 20/10/2021 I.T.A. NO.928/LKW/2014 I.T.A. NO.255/LKW/2015 2 3. THE ASSESSEE HAS TAKEN SIMILAR GROUNDS IN BOTH T HE APPEALS. FOR THE SAKE OF COMPLETENESS, THE GROUNDS OF APPEAL IN I.T. A. NO.255/LKW/2015 ARE REPRODUCED BELOW: 1. THAT THE LD.CIT(A)-I, KANPUR ERRED IN LAW AS WE LL AS ON FACTS IN UPHOLDING DISALLOWANCE OF RS.26,27,592.00 OUT OF TRAVELLING EXPENSES, WITHOUT APPRECIATING THAT THE ENTIRE EXPENSE INCURRED UNDER THE HEAD WAS WHOLLY AND EXCL USIVELY AND IN THE REGULAR COURSE OF THE APPELLANT'S BUSINE SS. 2. THAT THE LD.CIT(A)-I, KANPUR ERRED IN LAW AS WEL L AS ON FACTS IN UPHOLDING THE DISALLOWANCE OUT OF TRAVELIN G EXPENSES WITHOUT APPRECIATING THE FACT THAT THE LD. A.O. HAD DULY EXAMINED THE BUSINESS EXPEDIENCY AND ALLOWED TRAVEL ING EXPENSES OF THE MANAGING AND EXECUTIVE DIRECTOR OF THE COMPANY FOR THE VERY SAME TRIPS. THEREFORE THE FACT THAT THE OVERSEAS TRIPS WERE IN FACT BUSINESS TRIPS WAS NOT IN DISPUTE. 3. THAT THE LD.CIT(A)-I, KANPUR ERRED IN LAW AS WEL L AS ON FACTS IN NOT APPRECIATING THAT THE APPELLANT WAS A LISTED COMPANY, AN ARTIFICIAL JUDICIAL PERSON, AND INCAPAB LE OF ANY PERSONAL OR NON BUSINESS EXPENDITURE. 4. THAT THE LD.CIT(A)-I, KANPUR ERRED IN LAW AS WEL L AS ON FACTS IN NOT CONSIDERING THE FACT THAT THE SAID EXP ENSES WERE ALSO COVERED UNDER THE PROVISIONS OF CHAPTER XII-H FRINGE BENEFITS TAX AND HENCE TAX HAD DULY BEEN PAID IN RE SPECT OF THE SAME AND THEREFORE 'DISALLOWANCE OF THE EXPENSE RESULTED IN DOUBLE TAXATION OF THE SAME EXPENSE. 5. THAT THE LD.CIT(A)-I, KANPUR ERRED IN LAW AS WEL L AS ON FACTS IN UPHOLDING THE DISALLOWANCE OF RS.62,08,794 .00 MADE BY THE LD. AO U/S 4A R.W. RULE 8D, WHEN IN FACT THE APPELLANT HAD SUO MOTO WORKED OUT THE DISALLOWANCE U/S 14A AN D ADDED THE SAME TO ITS INCOME. 6. THAT THE LD.CIT(A)-!, KANPUR ERRED IN LAW AS WEL L AS ON FACTS IN NOT APPRECIATING THE FACT THAT IN TERMS OF SECTION 14A(2), THE AO OUGHT TO RECORD HIS SATISFACTION FOR REJECTING AN ASSESSEE'S CLAIM, PRIOR TO WORKING OUT DISALLOWA NCE IN ACCORDANCE WITH RULE 8D. I.T.A. NO.928/LKW/2014 I.T.A. NO.255/LKW/2015 3 7. THAT THE LD. CIT(A)-I, KANPUR ERRED IN LAW AS WE LL AS ON FACTS IN UPHOLDING THE DISALLOWANCE U/S 14A WITHOUT CONSIDERING THE FACT THE LD. A.O. DID NOT BRING ON RECORD ANY REASON FOR REJECTING THE APPELLANT'S CALCULATION OF DISALLOWANCE U/S 14A. 8. THAT THE LD.CIT(A)-I, KANPUR ERRED IN LAW AS WEL L AS ON FACTS IN UPHOLDING THE DISALLOWANCE MADE BY THE LD. AO U/S 14A OF THE ACT WITHOUT APPRECIATING THE FACT THAT M OST OF THE INVESTMENTS WERE OLD INVESTMENTS, AND HAD BEEN MADE OUT OF SURPLUS FUNDS AVAILABLE WITH THE APPELLANT AND NO P ART OF THE INTEREST BEARING FUNDS HAD BEEN DIVERTED TOWARDS TH E SAME. 9. THAT THE LD.CIT(A)-I, KANPUR ERRED IN LAW AS WEL L AS ON FACTS IN UPHOLDING THE DISALLOWANCE MADE BY THE LD. AO U/S 14A OF THE ACT WITHOUT EXAMINING THE VERACITY OF TH E AMOUNT ADDED BACK BY THE APPELLANT U/S 14A OF THE ACT. 10. THAT THE LD.CIT(A)-I, KANPUR ERRED IN LAW AS WE LL AS ON FACTS IN UPHOLDING THE DISALLOWANCES MADE BY THE LD . A.O. WITHOUT CONSIDERING THE FACTS AND SUBMISSIONS PLACE D ON RECORD BY THE APPELLANT. 4. FROM THE GROUNDS OF APPEAL, IT EMERGES THAT THER E ARE TWO ISSUES INVOLVED IN THESE APPEALS, WHICH RELATE TO DISALLOW ANCE OF TRAVELLING EXPENSES AND DISALLOWANCE U/S 14A READ WITH RULE 8D OF THE I.T. RULES. 4.1 AS REGARDS THE FIRST ISSUE REGARDING DISALLOWAN CE OF TRAVELLING EXPENSES, LEARNED COUNSEL FOR THE ASSESSEE SUBMITTE D THAT THE DIRECTORS OF THE ASSESSEE HAD TRAVELLED BEYOND THE COUNTRY ALONG WITH THEIR SPOUSES FOR THE PURPOSE OF BUSINESS AND THE ASSESSING OFFICER A ND LEARNED CIT(A) HAVE MADE THE DISALLOWANCES ON ACCOUNT OF EXPENSES INCUR RED ON THE SPOUSES OF THE DIRECTORS OF THE ASSESSEE COMPANY. IT WAS SUBM ITTED THAT THE SAID EXPENSES WERE INCURRED BY THE ASSESSEE COMPANY AS P ART OF THE REMUNERATION PACKAGE OF DIRECTORS WHICH INCLUDED BE SIDES OTHER THINGS, THE TRAVELLING EXPENSES ALSO AND IN THIS RESPECT OUR AT TENTION WAS INVITED TO THE COPY OF RESOLUTION PASSED IN THE MEETING OF BOARD O F DIRECTORS WHEREIN THE I.T.A. NO.928/LKW/2014 I.T.A. NO.255/LKW/2015 4 LEAVE TRAVEL CONCESSION WAS STATED TO BE PART OF TH E OVERALL REMUNERATION OF THE DIRECTORS AND THEREFORE, IT WAS SUBMITTED TH AT SUCH EXPENDITURE WAS PART OF REMUNERATION OF DIRECTORS AND WAS ALLOWABLE AS BUSINESS EXPENDITURE. WITHOUT PREJUDICE, IT WAS SUBMITTED T HAT THE ASSESSEE HAD ALSO PAID FRINGE BENEFIT TAX ON SUCH BENEFITS EXTENDED T O THE DIRECTORS AND THEREFORE, THE FURTHER DISALLOWANCE BY THE ASSESSIN G OFFICER, AMOUNTS TO DOUBLE TAXATION OF THE SAME INCOME WHICH IS NOT PER MISSIBLE UNDER THE PROVISIONS OF LAW. 4.2 AS REGARDS THE OTHER DISALLOWANCE RELATING TO T HE PROVISIONS OF SECTION 14A, READ WITH RULE 8D, LEARNED COUNSEL FOR THE ASS ESSEE SUBMITTED THAT THE ASSESSEE ITSELF HAD WORKED OUT THE DISALLOWANCE U/S 14A, READ WITH RULE 8D, AND THE ASSESSING OFFICER, WITHOUT REJECTING TH E CLAIM OF THE ASSESSEE AND WITHOUT RECORDING HIS SATISFACTION FOR REJECTIN G THE ASSESSEES CLAIM, PROCEEDED TO MAKE DISALLOWANCE AS PER RULE 8D OF TH E I.T. RULES. IT WAS SUBMITTED THAT IN VARIOUS JUDGMENTS OF HON'BLE HIGH COURTS AND TRIBUNALS, IT HAS BEEN HELD THAT BEFORE REJECTING THE CLAIM OF TH E ASSESSEE WITH RESPECT TO DISALLOWANCE U/S 14A, THE ASSESSING OFFICER IS REQU IRED TO RECORD HIS SATISFACTION AS TO WHY THE CLAIM MADE BY THE ASSESS EE IS NOT TENABLE. LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT ASSESSEE ITSELF HAD MADE DISALLOWANCE WITH RESPECT TO THE EXPENSES AND AS REGARDS THE DISALLOWANCE OUT OF INTEREST EXPENSES, LEARNED COUN SEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD SURPLUS INTEREST FR EE FUNDS AT ITS DISPOSAL AND THEREFORE, THERE WAS MIXED USE OF FUNDS FOR MAK ING INVESTMENT OUT OF WHICH TAX FREE INCOME WAS EARNED AND THEREFORE, IN VIEW OF THE RECENT JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF SO UTH INDIAN BANK LTD. VS. CIT, CIVIL APPEAL NO. 9606 OF 2011, NO DISALLOW ANCE WAS WARRANTED OUT OF INTEREST EXPENSES. IN VIEW OF THE ABOVE FACTS A ND CIRCUMSTANCES AND I.T.A. NO.928/LKW/2014 I.T.A. NO.255/LKW/2015 5 JUDICIAL PRECEDENTS, IT WAS ARGUED THAT THE APPEALS FILED BY THE ASSESSEE MAY BE ALLOWED. 5. LEARNED D. R., ON THE OTHER HAND, SUBMITTED THA T THE EXPENSES INCURRED ON THE TRAVELLING OF SPOUSE CANNOT FORM PA RT OF THE BUSINESS EXPENDITURE AND THE ASSESSEE HAS ALSO NOT BEEN ABLE TO DEMONSTRATE AS TO HOW THE EXPENSES ON SPOUSE CAN BE ATTRIBUTED TO THE BUSINESS OF THE ASSESSEE. FURTHER IT WAS SUBMITTED THAT THE COPY O F RESOLUTION, FILED BY THE ASSESSEE, WAS NOT PART OF THE RECORD BEFORE THE AUT HORITIES BELOW THEREFORE, IT WAS PRAYED THAT THE MATTER MAY BE SET ASIDE TO T HE ASSESSING OFFICER FOR READJUDICATION IN VIEW OF FRESH EVIDENCE. 5.1 AS REGARDS THE DISALLOWANCE U/S 14A, READ WITH RULE 8D OF THE I.T. RULES, LEARNED D.R. SUBMITTED THAT IN VIEW OF THE J UDGMENT OF HON'BLE SUPREME COURT, RELIED ON BY LEARNED COUNSEL FOR THE ASSESSEE, THIS ISSUE MAY ALSO BE SET ASIDE TO THE ASSESSING OFFICER, WHO , IN ACCORDANCE WITH THE GUIDELINES OF HON'BLE SUPREME COURT, SHOULD WORK OU T THE DISALLOWANCE U/S 14A, IF ANY. 6. LEARNED COUNSEL FOR THE ASSESSEE, SUBMITTED THAT THOUGH EVERY DOCUMENT IS AVAILABLE ON RECORD TO DECIDE THE ISSUE BUT HE IS READY TO GO BACK TO THE ASSESSING OFFICER FOR HIS READJUDICATIO N ON ABOVE ISSUES. 7. WE HAVE HEARD THE RIVAL PARTIES AND HAVE GONE TH ROUGH THE MATERIAL PLACED ON RECORD. WE FIND THAT ON THE ISSUE OF DIS ALLOWANCE, OUT OF TRAVELLING EXPENSES, LEARNED COUNSEL FOR THE ASSESS EE HAS FILED COPY OF RESOLUTION WHEREIN THE REIMBURSEMENT OF TRAVELLING EXPENSES IN THE FORM OF LEAVE TRAVEL CONCESSION IS PART OF OVERALL REMUNERA TION OF THE DIRECTORS AND SUCH REIMBURSEMENT INCLUDES EXPENDITURE INCURRED ON SPOUSE ALSO. SINCE THE REIMBURSEMENT TO DIRECTORS ON ACCOUNT OF LEAVE TRAVEL CONCESSION IS I.T.A. NO.928/LKW/2014 I.T.A. NO.255/LKW/2015 6 NOT AVAILABLE ON THE RECORDS THEREFORE, IT CANNOT B E CONCLUDED THAT THE ASSESSEE HAD PAID, AS A PART OF REMUNERATION PACKAG E TO DIRECTOR, ANY LEAVE TRAVEL CONCESSION ON ACCOUNT OF HIS TRAVEL OR TRAVEL OF HIS SPOUSE. THE ASSESSING OFFICER HAS MADE THE DISALLOWANCE OUT OF TRAVELLING EXPENSES WHICH GENERALLY DO NOT INCLUDE THE LEAVE TRAVEL EXP ENSES GRANTED TO A DIRECTOR OR EMPLOYEE AS SUCH EXPENSES BEING PART OF SALARIES IS CLASSIFIED UNDER THE HEAD REMUNERATION TO DIRECTORS. MOREOV ER, THE ASSESSEE HAS ARGUED THAT ASSESSEE HAD PAID FRINGE BENEFIT TAX ON THESE PERQUISITES ALSO AND ABOVE ALL THE ASSESSEE HAD FILED COPY OF RESOLU TION MENTIONING THE PERQUISITES OF DIRECTORS BEFORE US. THEREFORE, IN VIEW OF ALL THESE FACTS AND CIRCUMSTANCES, IT IS APPROPRIATE THAT THE MATTER MA Y BE SET ASIDE TO THE ASSESSING OFFICER, WHO IN THE LIGHT OF ABOVE FACTS AND CIRCUMSTANCES, SHOULD READJUDICATE THE ISSUE. THE ASSESSEE IS AT LIBERTY TO FILE ANY FRESH DOCUMENT IN SUPPORT OF ITS CLAIM. 7.1 AS REGARDS THE ISSUE OF DISALLOWANCE U/S 14A, W E FIND THAT ASSESSEE HAD ITS OWN FUNDS AVAILABLE AS WELL AS HAD LOAN FUN DS. THE DIRECT LINKAGE OF THESE FUNDS TO THE INVESTMENT IN INVESTMENTS YIELDI NG TAX FREE INCOME NEEDS TO BE WORKED OUT BY ASSESSING OFFICER. THE HON'BLE SUPREME COURT IN SOUTH INDIAN BANK LTD. (SUPRA) HAS LAID DOWN THAT IF THER E IS MIXED USE OF FUNDS IN INVESTMENT IN SCRIPS YIELDING TAX FREE INCOME THEN DISALLOWANCE U/S 14A IS NOT RELEVANT. PARAS 23 TO 30 OF THE JUDGMENT OF HO N'BLE SUPREME COURT ARE REPRODUCED BELOW: 23. IT WOULD NOW BE APPROPRIATE TO ADVERT IN SOME D ETAIL TO MAXOPP INVESTMENT LTD. V. CIT10. THIS CASE INTEREST INGLY IS RELIED BY BOTH SIDES COUNSEL. WRITING FOR THE BENC H, JUSTICE DR. A.K. SIKRI NOTED THE OBJECTIVE FOR INCORPORATIO N OF SECTION 14A IN THE ACT IN THE FOLLOWING WORDS: - 3. THE PURPOSE BEHIND SECTION 14-A OF THE ACT, BY NOT PERMITTING DEDUCTION OF THE EXPENDITURE INCU RRED I.T.A. NO.928/LKW/2014 I.T.A. NO.255/LKW/2015 7 IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOME, IS TO ENSURE THAT THE ASSESSEE DOES NOT GET DOUBLE BENEFIT. ONCE A PARTICULAR INCOME ITSELF IS NOT TO BE INCLUDED IN THE TOTAL INCOME AND IS EXEMPTED FRO M TAX, THERE IS NO REASONABLE BASIS FOR GIVING BENEFI T OF DEDUCTION OF THE EXPENDITURE INCURRED IN EARNING SU CH AN INCOME.. THE FOLLOWING WAS WRITTEN EXPLAINING THE SCOPE OF S ECTION 14- A(1): 41. IN THE FIRST INSTANCE, IT NEEDS TO BE RECOGNIS ED THAT AS PER SECTION 14-A(1) OF THE ACT, DEDUCTION OF THA T EXPENDITURE IS NOT TO BE ALLOWED WHICH HAS BEEN INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT. AXIOMATICALLY, IT IS THAT EXPENDITURE ALONE WHICH H AS BEEN INCURRED IN RELATION TO THE INCOME WHICH IS INCLUDIBLE IN TOTAL INCOME THAT HAS TO BE DISALLOWE D. IF AN EXPENDITURE INCURRED HAS NO CAUSAL CONNECTION WI TH THE EXEMPTED INCOME, THEN SUCH AN EXPENDITURE WOULD OBVIOUSLY BE TREATED AS NOT RELATED TO THE INCOME T HAT IS EXEMPTED FROM TAX, AND SUCH EXPENDITURE WOULD BE ALLOWED AS BUSINESS EXPENDITURE. TO PUT IT DIFFEREN TLY, SUCH 10 (2018) 15 SCC 523 PAGE 15 OF 22 EXPENDITURE WOULD THEN BE CONSIDERED AS INCURRED IN RESPECT OF OTHER INCOME WHICH IS TO BE TREATED AS PART OF THE TOTAL INCOME. ADVERTING TO THE LAW AS IT STOOD EARLIER, THIS COUR T REJECTED THE THEORY OF DOMINANT PURPOSE SUGGESTED BY THE PUNJAB & HARYANA HIGH COURT AND ACCEPTED THE PRINCIPLE OF APPORTIONMENT OF EXPENDITURE ONLY WHEN THE BUSINESS WAS DIVISIBLE, AS WAS PROPOUNDED BY THE DELHI HIGH COUR T. FINALLY ADJUDICATING THE ISSUE OF EXPENDITURE ON SHARES HEL D AS STOCK- IN-TRADE, THE FOLLOWING KEY OBSERVATIONS WERE MADE BY JUSTICE SIKRI: 50. IT IS TO BE KEPT IN MIND THAT IN THOSE CASES WH ERE SHARES ARE HELD AS STOCK-IN-TRADE, IT BECOMES A BUSINESS ACTIVITY OF THE ASSESSEE TO DEAL IN THOSE SHARES AS A BUSINESS PROPOSITION. WHETHER DIVIDEND IS EARN ED OR NOT BECOMES IMMATERIAL. IN FACT, IT WOULD BE A Q UIRK I.T.A. NO.928/LKW/2014 I.T.A. NO.255/LKW/2015 8 OF FATE THAT WHEN THE INVESTEE COMPANY DECLARED DIVIDEND, THOSE SHARES ARE HELD BY THE ASSESSEE, TH OUGH THE ASSESSEE HAS TO ULTIMATELY TRADE THOSE SHARES B Y SELLING THEM TO EARN PROFITS. THE SITUATION HERE IS , THEREFORE, DIFFERENT FROM THE CASE LIKE MAXOPP INVESTMENT LTD. [MAXOPP INVESTMENT LTD. V. CIT, 201 1 SCC ONLINE DEL 4855 : (2012) 347 ITR 272] WHERE THE ASSESSEE WOULD CONTINUE TO HOLD THOSE SHARES AS IT WANTS TO RETAIN CONTROL OVER THE INVESTEE COMPANY. IN THAT CASE, WHENEVER DIVIDEND IS DECLARED BY THE INVESTEE COMPANY THAT WOULD NECESSARILY BE EARNED B Y THE ASSESSEE AND THE ASSESSEE ALONE. THEREFORE, EVE N AT THE TIME OF INVESTING INTO THOSE SHARES, THE ASS ESSEE KNOWS THAT IT MAY GENERATE DIVIDEND INCOME AS WELL AND AS AND WHEN SUCH DIVIDEND INCOME IS PAGE 16 OF 22 GENERATED THAT WOULD BE EARNED BY THE ASSESSEE. IN CONTRAST, WHERE THE SHARES ARE HELD AS STOCKIN-TRAD E, THIS MAY NOT BE NECESSARILY A SITUATION. THE MAIN PURPOSE IS TO LIQUIDATE THOSE SHARES WHENEVER THE S HARE PRICE GOES UP IN ORDER TO EARN PROFITS. THE LEARNED JUDGE THEN CONSIDERED THE IMPLICATION O F RULE 8D OF THE RULES IN THE CONTEXT OF SECTION 14-A(2) OF T HE ACT AND CLARIFIED THAT BEFORE APPLYING THE THEORY OF APPORT IONMENT, THE ASSESSING OFFICER MUST RECORD SATISFACTION ON SUO M OTO DISALLOWANCE ONLY IN THOSE CASES WHERE, THE APPORTI ONMENT WAS DONE BY THE ASSESSEE. THE FOLLOWING IS RELEVANT FOR THE PURPOSE OF THIS JUDGMENT: 51. .IT WILL BE IN THOSE CASES WHERE THE ASSESSEE IN HIS RETURN HAS HIMSELF APPORTIONED BUT THE AO WAS NOT ACCEPTING THE SAID APPORTIONMENT. IN THA T EVENTUALITY, IT WILL HAVE TO RECORD ITS SATISFACTIO N TO THIS EFFECT.. 24. ANOTHER IMPORTANT JUDGMENT DEALING WITH SECTIO N 14A DISALLOWANCE WHICH MERITS CONSIDERATION IS GODREJ A ND BOYCE MANUFACTURING COMPANY LTD. V. DCIT11. HERE THE ASSE SSEE HAD ACCESS TO ADEQUATE INTEREST FREE FUNDS TO MAKE INVESTMENTS AND THE ISSUE PERTAINED TO DISALLOWANCE OF EXPENDITURE INCURRED TO EARN DIVIDEND INCOME, WHICH WAS NOT FORMING PART 11 [(2017) 7 SCC 421. PAGE 17 OF 22 OF TOTAL INCOME OF THE ASSESSEE. JUSTICE RANJAN GOGOI WRITIN G THE I.T.A. NO.928/LKW/2014 I.T.A. NO.255/LKW/2015 9 OPINION ON BEHALF OF THE DIVISION BENCH OBSERVED TH AT FOR DISALLOWANCE OF EXPENDITURE INCURRED IN EARNING AN INCOME, IT IS A CONDITION PRECEDENT THAT SUCH INCOME SHOULD NO T BE INCLUDIBLE IN TOTAL INCOME OF ASSESSEE. THIS COURT ACCORDINGLY CONCLUDED THAT FOR ATTRACTING PROVISIONS OF SECTION 14A, THE PROOF OF FACT REGARDING SUCH EXPENDITURE BEING INCU RRED FOR EARNING EXEMPT INCOME IS NECESSARY. THE RELEVANT PO RTION OF JUSTICE GOGOIS JUDGMENT READS AS FOLLOW: 36. WHAT CANNOT BE DENIED IS THAT THE REQUIREMENT FOR ATTRACTING THE PROVISIONS OF SECTIO N 14- A (1) OF THE ACT IS PROOF OF THE FACT THAT THE EXPE NDITURE SOUGHT TO BE DISALLOWED/DEDUCTED HAD ACTUALLY BEEN INCURRED IN EARNING THE DIVIDEND INCOME. 25. PROCEEDING NOW TO ANOTHER ASPECT, IT IS SEEN T HAT THE CENTRAL BOARD OF DIRECT TAXES (CBDT) HAD ISSUED THE CIRCULAR NO. 18 OF 2015 DATED 02.11.2015, WHICH HAD ANALYZED AND THEN EXPLAINED THAT ALL SHARES AND SECURITIES HELD BY A BANK WHICH ARE NOT BOUGHT TO MAINTAIN STATUTORY LIQUIDIT Y RATIO (SLR) ARE ITS STOCK-IN-TRADE AND NOT INVESTMENTS AN D INCOME ARISING OUT OF THOSE IS ATTRIBUTABLE, TO BUSINESS O F BANKING. THIS CIRCULAR CAME TO BE ISSUED IN THE AFTERMATH OF PAGE 18 OF 22 CIT VS. NAWANSHAHAR CENTRAL COOPERATIVE BANK LTD .12 WHEREIN THIS COURT HAD HELD THAT INVESTMENTS MADE B Y A BANKING CONCERN IS PART OF THEIR BANKING BUSINESS. HENCE THE INCOME EARNED THROUGH SUCH INVESTMENTS WOULD FALL U NDER THE HEAD PROFITS & GAINS OF BUSINESS. THE PUNJAB AND HA RYANA HIGH COURT, IN THE CASE OF PR. CIT, VS. STATE BANK OF PATIALA13 WHILE ADVERTING TO THE CBDT CIRCULAR, CONCLUDED COR RECTLY THAT SHARES AND SECURITIES HELD BY A BANK ARE STOCK IN T RADE, AND ALL INCOME RECEIVED ON SUCH SHARES AND SECURITIES MUST BE CONSIDERED TO BE BUSINESS INCOME. THAT IS WHY SECTI ON 14A WOULD NOT BE ATTRACTED TO SUCH INCOME. 26. REVERTING BACK TO THE SITUATION HERE, THE REVEN UE DOES NOT CONTEND THAT THE ASSESSEE BANKS HAD HELD THE SE CURITIES FOR MAINTAINING THE STATUTORY LIQUIDITY RATIO (SLR) , AS MENTIONED IN THE CIRCULAR. IN VIEW OF THIS POSITION , WHEN THERE IS NO FINDING THAT THE INVESTMENTS OF THE ASSESSEE ARE OF THE RELATED CATEGORY, TAX IMPLICATION WOULD NOT ARISE A GAINST THE APPELLANTS, FROM THE SAID CIRCULAR. I.T.A. NO.928/LKW/2014 I.T.A. NO.255/LKW/2015 10 27. THE AFORESAID DISCUSSION AND THE CITED JUDGMENT S ADVISE THIS COURT TO CONCLUDE THAT THE PROPORTIONATE DISAL LOWANCE OF INTEREST IS NOT WARRANTED, UNDER SECTION 14A OF INC OME 12 [(2007) 15 SCC 611] / [(2007) 160 TAXMAN 48 (SC)] 1 3 2017 (393) ITR 476 (P&H) PAGE 19 OF 22 TAX ACT FOR INVES TMENTS MADE IN TAX FREE BONDS/ SECURITIES WHICH YIELD TAX FREE DIVIDEND AND INTEREST TO ASSESSEE BANKS IN THOSE SI TUATIONS WHERE, INTEREST FREE OWN FUNDS AVAILABLE WITH THE A SSESSEE, EXCEEDED THEIR INVESTMENTS. WITH THIS CONCLUSION, W E UNHESITATINGLY AGREE WITH THE VIEW TAKEN BY THE LEA RNED ITAT FAVOURING THE ASSESSEES. 28. THE ABOVE CONCLUSION IS REACHED BECAUSE NEXUS H AS NOT BEEN ESTABLISHED BETWEEN EXPENDITURE DISALLOWED AND EARNING OF EXEMPT INCOME. THE RESPONDENTS AS EARLIER NOTED, HAVE FAILED TO SUBSTANTIATE THEIR ARGUMENT THAT ASSESSEE WAS REQUIRED TO MAINTAIN SEPARATE ACCOUNTS. THEIR RELIA NCE ON HONDA SIEL (SUPRA) TO PROJECT SUCH AN OBLIGATION ON THE ASSESSEE, IS ALREADY NEGATED. THE LEARNED COUNSEL F OR THE REVENUE HAS FAILED TO REFER TO ANY STATUTORY PROVIS ION WHICH OBLIGATE THE ASSESSEE TO MAINTAIN SEPARATE ACCOUNTS WHICH MIGHT JUSTIFY PROPORTIONATE DISALLOWANCE. 29. IN THE ABOVE CONTEXT, THE FOLLOWING SAYING OF A DAM SMITH IN HIS SEMINAL WORK THE WEALTH OF NATIONS MAY APT LY BE QUOTED: THE TAX WHICH EACH INDIVIDUAL IS BOUND TO PAY OUGH T TO BE CERTAIN AND NOT ARBITRARY. THE TIME OF PAYMENT, THE MANNER OF PAYMENT, THE QUANTITY TO BE PAID OUGHT AL L TO BE CLEAR AND PLAIN TO THE CONTRIBUTOR AND TO EVERY OTHER PERSON. ECHOING WHAT WAS SAID BY THE 18TH CENTURY ECONOMIST , IT NEEDS TO BE OBSERVED HERE THAT IN TAXATION REGIM E, THERE IS NO ROOM FOR PRESUMPTION AND NOTHING CAN BE TAKEN TO BE IMPLIED. THE TAX AN INDIVIDUAL OR A CORPORATE IS RE QUIRED TO PAY, IS A MATTER OF PLANNING FOR A TAX PAYER AND TH E GOVERNMENT SHOULD ENDEAVOUR TO KEEP IT CONVENIENT A ND SIMPLE TO ACHIEVE MAXIMIZATION OF COMPLIANCE. JUST AS THE GOVERNMENT DOES NOT WISH FOR AVOIDANCE OF TAX EQUAL LY IT IS THE RESPONSIBILITY OF THE REGIME TO DESIGN A TAX SY STEM FOR WHICH A SUBJECT CAN BUDGET AND PLAN. IF PROPER BALA NCE IS I.T.A. NO.928/LKW/2014 I.T.A. NO.255/LKW/2015 11 ACHIEVED BETWEEN THESE, UNNECESSARY LITIGATION CAN BE AVOIDED WITHOUT COMPROMISING ON GENERATION OF REVEN UE. 30. IN VIEW OF THE FORGOING DISCUSSION, THE ISSUE F RAMED IN THESE APPEALS IS ANSWERED AGAINST THE REVENUE AND I N FAVOUR OF THE ASSESSEE. THE APPEALS BY THE ASSESSEES ARE A CCORDINGLY ALLOWED WITH NO ORDER ON COSTS. 8. SINCE THE MATTER REQUIRES VERIFICATION AS TO WHE THER THE ASSESSEE HAD USED MIXED FUNDS OR HAD DIRECTLY UTILIZED INTEREST BEARING FUNDS TO TAX FREE INCOME YIELDING ASSETS, WE DEEM IT APPROPRIATE TO R EMIT THIS ISSUE ALSO BACK TO THE ASSESSING OFFICER WHO IS DIRECTED TO WORK OU T THE DISALLOWANCE, IF ANY, U/S 14A IN ACCORDANCE WITH LAW LAID DOWN BY HON'BLE SUPREME COURT IN THE CASE OF SOUTH INDIAN BANK (SUPRA). NEEDLESS TO SAY , THE ASSESSEE WILL BE AFFORDED FAIR AND REASONABLE OPPORTUNITY OF BEING H EARD. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES AND JUDICIAL PRECEDEN TS, THE APPEALS FILED BY THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 9. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE STAND ALLOWED FOR STATISTICAL PURPOSES. (ORDER PRONOUNCED IN THE OPEN COURT ON 20/10/2021) SD/. SD/. ( A. D. JAIN ) ( T. S. KAPOOR ) VICE PRESIDENT ACCOUNTANT MEMBER DATED:20/10/2021 *SINGH COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. CONCERNED CIT 4. THE CIT(A) 5. D.R., I.T.A.T., LUCKNOW