Income Tax Appellate Tribunal - Mumbai
Yogesh J. Shah , Pune vs Assessee on 16 April, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES, 'G', MUMBAI
BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER AND
SHRI VIJAY PAL RAO, JUDICIAL MEMBER
ITA No. 3665/Mum/2009
(Assessment Year: 2005-06)
Yogesh J Shah
55/4 Ganeshkhind road, Aundh
Pune-
PAN: AAFPS1165F ......Appellant
Vs
ACIT circle 4(2)
Aayakar Bhavan
M K Road-
Mumbai-400020 ... Respondent
Assessee by : Shri Vipul Joshi & Sameer Dalal
Revenue by : Shri A K Nayak
O R D E R
PER VIJAY P AL RAO,JM This appeal by the assessee is directed against the order dated 16.04.2009 of the learned CIT(A)-IV, Mumbai for the assessm ent year 2005-06.
2. The assessee has raised the following grounds in this appeal:
"1. The ld. CIT(A) erred in directing the AO to recompute disallowance u/s 14A of the Act being alleged expenditure incurred for earning dividend income by applying Rule 8D of the Rules 1962.
2. It is submitted that in the fact and the circumstances of the case, and in law such direction was beyond and/or in excess of the jurisdiction of the 2 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6) ld. CIT(A)In the result the appeal by the assessee is partly allowed for statistical purposes.
3. The ld. CIT(A) erred in directing the AO to apply rul e 8D of the Rules to the case of the appellant "
.
3. From the grounds of appeal followi ng two issue arises
i) whether in the facts and circumstances of the case, the provisions of section 14A are applicable when the dividend was received by the assessee on the shares which were acquired i n the course of assessee's business and incom e from which is taxable;
ii) whether the provisions of Rule 8D are applicable in the case of the aseseee..
4. Issue no..1 regarding applicability of the provisions of section 14A of the Act. During the year the assessee has earned incom e from the dividend of Rs`.60,30,372/- which is exem pt as claimed under secti on 10 of the Act. The AO noticed that the assessee has not allocated any expendit ure as regard for earning of this tax free income. The assessee contended before the AO that no expenses have been incurred to earn the exempt i ncome. The AO did not accept the contenti on of the assessee. Accordingly the AO by following the decision of this Tribunal in the case of ACIT V/s Citicorp Finance (India) Ltd (108 ITD 457) (Mum) as well as the other orders i) DCIT V/s SG 3 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6) Investments and industries ltd (89 ITD 44) Kolkata ii) CIT V/s United General Trust 200 ITR 148 (SC), iii)Manmohan Lal M Shah V/s DCIT 105 IED 669 and the decision of the Hon. Supreme Court in the case of CIT V/s Union of India, disallowed 10% of the expenditure being treated as directl y related to earning of the exempt income which com es to Rs.2,38,105/- for this year
5. On appeal, the CIT(A) has directed the AO to determine the amount of expenditure in relation to exem pt incom e as per the provisions of Rule 8D of the IT Rules and accordingl y, recomputed the disallowance u/s 14A by f ollowing the decision of the Speci al Bench of this Tri bunal in the case of ITO V/s Daga Capital Management Pvt ltd (2008) 119 TTJ (Mum) (SB)
289) vide impugned order.
6. Before us, the learned AR of the assessee has submitted that the assessee is a dealer in shares and the income from purchase and sale of the shares is taxabl e, theref ore the expenditure incurred b y the assessee was for earning of the taxabl e income and no part of the expenditure can be disallowed on dividend received as it is tax free. He has further contended that the purchase and sale of the shares was not for earning the dividend but the incom e of dividend is only incidental and therefore the provisions of section 14A did not apply in the case of the assessee who is a dealer in shares.
4 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6)
7. The ld. AR has pointed out that there is a distinctio n between the investor i n the share and dealer i n share. Particularly the intention of investor is to earn dividend while dealer's i ntent ion is to earn business profit If the expenditure is incurred in relation to earning the taxable income which is allowable as a deduction then it cannot be an expenditure which is incurred i n relation to tax free incom e withi n the m eaning of section 14A. W hen the assessee has held shares as stock-in-trade then the dividend income is onl y an incidental because the purpose of holdi ng the shares was not for earning the dividend income and therefore the allocation of such expenditure between the business incom e and the divident income is not possible and permissible.
8. The ld. AR has relied upon the decision hon. Suprem e Court in the case of CIT V/s Indian Bank Limited reported in (1965) 56 ITR 77(SC), CIT V/s New India Investment Corporation Ltd (113 ITR 778(Cal), CIT V/s Devenport and co Pvt ltd 158 ITR 348 (Cal), CIT V/s Anniversary Investments Agenci es ltd 175 ITR 199(Cal). He has further submitted that no part of the business expenditure can be attri buted to earning the dividend income The borrowing of the assessee by way of overdraft form the bank was not for the purposes of acquiri ng shares wit h the object of earning dividends on those shares, but the object of the 5 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6) borrowings was to purchase shares for the purpose of the assessee's busi ness namel y buying and selling of shares and securities with a view to earning profits. The object of the borrowing thus was not for making or earning dividend incom e. The learned AR then referred the m emorandum explaining the provisions of Finance Bill 2001 whereby the amendment was brought and section 14A was introduced in the statute and submitted that the legislature intent i n bringing the section 14A was to curb the practice of claiming the expenditure i ncurred for earning the exem pt income. Therefore as per the object behind the provisions, the expenditures incurred can be allowed only to the extent the y are eligible to earning the taxabl e income. The ld AR has also referred the decision of the Hon. Supreme Court in the case of CIT V/s W allfort Share and Stock Brokers pvt ltd (2010) 326 ITR 1 (SC) and the decision of the jurisdictional High Court in the case of Godrej and Boyce Mfg co. ltd V/s Dy CIT (2010) 43 DTR 177 (Bom). The ld. AR while concluding his argument has submitted that the expenditure incurred in relation to the income in respect of dividend income which is forming the part of the total income as apparent in the section 14A and expenditure in relation to income whi ch forms part of the tot al income are mutually exclusive. Once the expenditure held as having been incurred in relation to earning the tax free income within the meaning of section 14A it woul d 6 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6) corresponding ceased to be regarded as having i ncurred for earning taxable income and consequently would loose the deduction. W hen there is no expenditure incurred for earning the dividend income then the provisions of section 14A cannot be invoked. In fact, the existence of expenditure is very the foundation/subject matter of the section 14A. The inquiry regarding the such expenditure incurred in relation to the income is only next stage. Section 14A applied to cases where, admittedly and as a m atter of fact, some expendit ure have been incurred with respect to a specific activity carried on to earn tax free incom e but, due to indivisibility of the said business along with other businesses of the assessee, no part of the common business expenditure can be specificall y computed/attributed to the sai d tax free i ncome generating activity. Section 14A has no application, nor was it the legisl ative intent, to case where there is only one business activity of the aseseee, , which is carried on to earn taxable business incom e;
9. It has been further contended that section 14 A has no application in a case of dealer i n shares. In case of a dealer, the business expenses are incurred in relati on to earning taxabl e incom e, that is, profit or loss arising from regular dealing in shares. As such, they cannot be regarded as in relation for earning dividend incom e.
7 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6) The proximate cause is between the expenses and the taxabl e business income and not between the expenses and the tax free dividend incom e. The assessee had not made an y investment in shares for the purpose of earni ng dividend. No doubt, the assessee had received dividends but it was incidental receipts, as the aseseee purchased shares for the purposes of selling the sam e and during that process the aseseee received som e dividend. Therefore, it could not be said that the assessee was dealing in the transactions whic h were exempt from tax. Therefore on the fact of the instant case, the provisions of section 14A were not applicabl e.
10. On the other hand, the learned DR has submitted that the provisions of section 14A are attracted when the assessee has earned the incom e which is not included in the total income i rrespective of the fact whether such exem pt incom e desired b y the aseseee or inci dental, when the aseseee has claimed such income as exem pt u/s 10. Dividend is not in the hand of the assessee, therefore, the intent of the aseseee is not material for applying the provisions of section 14A. He has further contended that the jurisdictional High Court in th e case Godrej and Boyce Mfg co. ltd V/s Dy CIT (supra) has observed, in the paragraph 24, the principle emerges from section 14A in view of the decision of the Hon. Supreme Court in the case of CIT V/s W allfort Share and Stock Brokers pvt 8 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6) ltd (supra). He has relied upon the orders of the authorities below.
11. W e have considered the rival contentions and rel evant record. It is not disputed by the assessee that the expenditure which was not incurred for the earning of the exem pt incom e by the AO are not incurred for the purchase and sal e of the shares. The main contention of the assessee is that the said expenditure incurred for the purposes of business activity and therefore no part of the same can be attributed to the earning of the dividend income. As far as the intent of the aseseee for purchasing and holding of the shares on which the dividend income was earned is concerned, we do not agree with the contention of ld. AR that when the exempt income earned b y the aseseee without any intention for the sam e no expendit ure can be attributed for earning the said incom e. Once the aseseee has claimed exem ption that the incom e is not forming part of the total income the questi on arises whether any expenditure is incurred for earning the said income. There is no condition for invoking the provisions of Section 14A is that the exem pt incom e earned by the assessee must be as a result of intended activities. The requirement for invoking the provisions of section 14A is that an expenditure is actually incurred for the activity which resulted or may result the income not forming part of total income of the assessee.
9 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6) Merely invoking the provisions of section 14A does not ipso facto disallow the expenditure when no expenditure has bee n incurred for earning the exempt income rather the provisions of section 14A provides procedure for inquiry and verification to find out whether any expenditure is i ncurred by the aseseee in relation to the income which is exempt, and does not form the part of the total income. In case of composite and indivisible business, the AO has to determine the quantum of disallowance of expenditure which has a proximate relationship with the income which does not form part of the total income. The Hon Supreme Court in the case of CIT V/s W allfort Share and Stock Brokers pvt ltd (supra) in paragraph 17 has held as under :
"......... "Theref ore, one n eeds t o read the words "expenditure incurre d" in Section 14A in the conte xt of the scheme of the Act and, if so read, i t is clear t hat it di sallows certain ex pendi tures i ncurred to earn e xempt income f rom being deduct ed from other i ncome whi ch is includi ble in th e " total income" for the pur pose of chargeabil ity t o tax. As stated ab ove, the scheme of Sections 30 to 37 is that profits and gains must be computed su bject to certain allowances for deducti ons/ expenditure. The charge is not on gross receipts, i t is on profits and gains. Profits have to be computed af ter deducti ng losses a nd expenses incurre d for business. A deducti on for exp en diture or loss which is not within the prohibition must be allowed i f it is on the facts of the case a proper Debit Item to be charged agai nst t he Incomi ngs of the business in as certai ning the true profits. A return of investment or a pay-back i s not such a Debit It em as expl ained above, he nce, it is not "expenditure incurred" i n terms of Secti on 14A. Expenditure is a pay-out. It rel ates to disburs ement. A pay-bac k is not an expenditure in the scheme of S ection 14A . F or att racting Section 14A, there has t o be a proximat e cause for disallowance, which i s its rel ationship with the t ax exem pt income. Pay-
10 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6) back or return of investment is not such proximate cause, hence, Secti on 1 4A i s not appli cable i n the prese nt case. Thus, in the absence of such proximate cause for is al lowance, Section 14A cannot be invoked. In our view, ret urn of investment cannot be con strued to mean "expenditure" and if it is construed to mean "exp enditure"
in the se nse of physi cal spe nding sti ll the expenditure was not such as could be claimed as an "al l owance " against the profits of the rel evant acc ounti ng year under Secti ons 30 to 37 of the A ct and, t herefore, Secti on 14A cannot b e invoked. Hen ce, the t wo asset theory i s not appli cable i n this case as there i s no ex pendi ture i ncurred in terms of Section 14A.
(emph asis suppli ed) .
13. As observed b y the Hon. Apex Court the basic principle of taxati on is to tax the net incom e and on the sam e analog y the exemption is also allowed in respect of the net exempted income. Therefore, if there is an expenditure directly or indirectly incurred in relation to the exem pt income the sam e cannot be claimed against the income which is taxable. The Hon. Suprem e Court has laid down the principle f or attracting the provisions of section 14A there should be proximate cause for disallowance which has relationship with the tax exem pt income. The Hon.Jurisdicti onal High Court in the case of Godrej and Boyce Mfg co. ltd V/s Dy CIT (supra) has als o taken note of the decision of the honourable Suprem e Court in the case of CIT V/s W allfort Share and Stock Brokers pvt ltd (supra) at page 24 as under :
11 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6) "24. The following principles would emerge from Section 14A and the decision in Walfort:
(a) The mandate of Section 14A is to prevent cl aims for deduction of expenditure in relation to income which does not form part of the total income of the assessee;
(b) Section 14A(1) is enact ed to ensure that only expenses incurred in respect of earning taxable income are allowed;
(c) The principle of apportionment of expenses is widened by Section 14A to include even the apportionment of expenditure between taxabl e and nontaxable income of an indivisibl e business;
(d) The basic principle of taxation is to tax net income. This principle applies even for the purposes of Section 14A and expenses towards nontaxable income must be excluded;
(e) Once a proximate cause for disallowance is established -
which is the relationship of the expenditure with income which does not form part of the total income - a disallowance has to be effected. All expenditure incurred in relation to income which does not form part of the total income under the provisions of the Act has to be disallowed under Section 14A. Income which does not form part of the total income is broadly adverted to as exempt income as an abbreviated appellation.
Insertion of Subsections (2) and (3) to Section 14A : "
The Hon. High Court has further observed and summarized the conclusion in paragraph 43 as under :
"A Summation of our conclusions on the i nterpretation of the provisions:
43. In order to conclude the discussion on this aspect of the case, we would proceed to recapitulate our conclusi ons.
12 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6)
(i) Section 14A was enacted by Parliament in order to overcome the judgments of the Supreme Court in the case of Indian bank, Maharashtra Sugar and Rajasthan W arehousi ng Corporation in which it was held that in the case of a composite and indivisible business, which results in earni ng of taxable and nontaxable income, it is impermi ssi ble to apportion the expenditure between that which was laid out for the earning of taxable as opposed to nontaxable income;
(ii) The effect of Section 14A is to widen the theory of the apportionment of expenditure. Prior to the enactment of Section 14A where the business of an assessee was not a composite and indivisible business and the assessee earned both taxable and nontaxable income, the expenditure incurred on earning nontaxable income could not be allowed as a deduction as against the taxabl e income. As a result of the enactment of Section 14A, no expenditure can be allowed as a deduction in relation to income which does not form part of the total income under the Act. Hence, even in the case of a composite and i ndivisible business, which results in the earning of taxable and nontaxable income, it would be necessary to apportion the expenditure incurred by the assessee. Only that part of t he expenditure which is incurred in relation to income which forms part of the total income can be allowed. The expenditure incurred in relation to income which does not form part of the total income has to be disallowed;
(iii) From this it would follow that Section 14A has implicit within it a noti on of apportionment. The principle of apportionment which prior t o the amendment of Section14A would not have applied to expenditure incurred in a composite and indivisible business which results in taxabl e and nontaxable income, must after the enactment of the provisions apply even to such a situation;
(iv) The expression "expenditure incurred" i n Section 14A refers to expenditure on rent, taxes, salaries, interest etc. in respect of which allowances are provided for;
13 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6)
(v) Subsections (2) and (3) of Section 14A are intended to enforce and implement the provisions of Subsection (1). The object of subsecti on (2) is to provide a uniformi ty of method where the Assessing Officer is, on the basi s of the accounts of the assessee, not satisfi ed with the correctness of the clai m of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the Act;
-(vi) Even in the absence of sub-section (2) of Section 14A, the Assessing Officer would have to apportion the expenditure and to disallow the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The Assessing Officer would have to follow a reasonable method of apportioning the expenditure consistent with what the circumstances of the case would warrant and having regard to all the relevant facts and circumstances;
(v).....
(vi).....
(vii).....
(viii)......
(ix).........
(x).........
(xi)........
(xii).......
(xiii) Income f rom dividend and si milarly, income from mutual funds do not form part of the total income under Section 10(33).
The expenditure incurred in relation to earning such income cannot be allowed under Section 14A;
(xiv) In order to determine the quantum of the disallowance, there must be a proximate relationship between the expenditure and the income which does not form part of the total income. Once such a proximate rel ationship exists, the disallowance has to be effected. All expenditure incurred in the earning of i ncome which does not form part of the total income has to be disallowed subject to compliance with the test adopted by the Supreme Court in Walfort and it would not be permissible to restrict the provisions of Section 14A by an artificial method of interpretation.
14 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6) C.2 A plain and grammatical construction does not lead to absurdity:
14. It is clear f rom the above decision of the honourabl e jurisdictional High Court that the e xp enditure incurred on th e earning of the no n taxable incom e shoul d not be al lowed as deducti on again st the ta xable income. Even in t he c ase of com posite/indivisibl e business which results the earni ng of both taxable and non taxable inc om e, it would be necessa ry to apportion the ex pen dit ure i ncurred by t he assessee. Onl y th at part of the expenditure which i s incurre d in relation to the incom e whi ch f orm the part of the total incom e should be allo wed. The expenditure incurre d in relation to the income which does no t f orm the part of the tot al incom e has to be disallo wed. The H on'bl e High Court f urther observe d that section 14A has im pli cit wi thin it a notion of app ortionm ent. Even prior t o the am endm ent whereby the su b-section 2 of section 14A was brought into, the AO woul d have to apportion the expenditure an d disal low the exp enditure incurred b y the asse ssee in relation to the i ncom e whi ch d oes not f orm part of the t otal i ncom e. The Hon.j urisdi ctional Hi gh Court held t hat t he AO has t o f ol low a reasonable m ethod of apportioning the expe nditure c onsistent wi th what the circumf erence of the case woul d warra nt and havi ng re gard to all rel evant f act s and c ircumstances. T hus, in vie w of the deci sion of the jurisdictional Hi gh Court in the case of Godrej and Boyce Mf g co. lt d V/s Dy CIT (supra) even i f the assessee has cl aim ed 15 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6) that he has not incurred any expenditure for earning the exem pt income "dividend" the applicability of provisions of section 14A cannot be ruled out.. It is for the AO to determine as to whether the assessee had incurred an y expenditure in relation to the income which does not form the part of the total income and if so to quantif y the extent of th e disallowance as held in para 73 of the decision(supra) as under:
"73. For the reasons which we have indicated, we have come to the conclusion that under Section 14A(1) it is for the Assessi ng Officer to determine as to whether the assessee had incurred any expenditure in relation to the earning of income which does not form part of the total income under the Act and if so to quantify the extent of the disallowance. The Assessing Officer would have to arrive at his determi nation after furnishing an opportunity to the assessee to produce its accounts and to place on the record all relevant material in support of the circumstances which are considered to be relevant and germane. For this purpose and in light of our observations made earlier in this section of the judgment, we deem it appropriate and proper to remand the proceedings back to the Assessing Officer for a fresh determination. "
15. Accordi ngly, this issue is decided against the assessee.
16. The next issue is applicability of Rule 8D. The am endment whereby Rule 8D has been introduced in statute has been held prospective by the Hon.jurisdictional High Court in the decision in the case of Godrej and Boyce Mfg co. ltd V/s Dy CIT (supra) in paragraph 69,70,71 as under :
"69. For the reasons which we have noted earlier, we have come to the conclusion that the provisions of Rule 8D shall have no application to Assessment Year 200203 which is the year under consideration in this case. At the same time, as we have noted, Section 16 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6) 14A(1) would have to be given effect to. The principle underlying Section 14A(1) is that no deduction can be claimed in respect of the expenditure incurred in relation to i ncome which does not form part of the total income under the Act. The dividend income earned by the assessee for Assessment Year 200203 does not form part of the total income in view of the provisions of Section 10(33) as they then stood. Hence, the expenditure which has been incurred in relation to the earning of that income would have to be apportioned and disallowed. Even if Rule 8D has no application to Assessment Year 200203 the Assessing Officer woul d be duty bound to compute the extent of the disallowance by the application of a reasonable method having regard to all the facts and circumstances of the case. In order to facilitate this exercise, an order of remand to the Assessing Officer would be necessary.
70. However, it has been urged on behalf of the assessee that there is no factual basis for making a disallowance in view of the findings recorded by the Tribunal for Assessment Years 1998-99, 1999-00 and 2001-02. Hence, it was urged that the Tribunal had wrongly restored the proceedings to the Assessing Officer. Now a perusal of the findings of the Tribunal for assessment Year 1998-99 would show that the Tribunal held that no nexus between the investments made by the assessee in dividend earning shares and borrowings by the assessee has been established. This order was followed for Assessment Years 1999- 00 and 2001-02. Counsel appearing on behalf of the assessee submitted that as against its investments in income yielding shares / units of mutual funds of Rs.125.54 Crores on 31 March 2002, the assessee had a share capital of Rs.6.55 Crores and reserves and surplus of Rs.274.09 Crores aggregating to Rs.280.64 Crores. The inference which is sought to be drawn on behalf of the assessee by counsel is that the investments were made by the assessee out of its own funds. Moreover, it has been submitted that the investment which stood at Rs.127.20 Crores was reduced as on 31 March 2002 to Rs.125.54 Crores and there was a decrease in the investment during the previous year under consideration. Counsel placed reliance on the judgment of the Supreme Court in Radhasoami Satsang v. Commissioner of Income Tax
17 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6) to urge that though strictly speaki ng res judicata does not apply to income tax proceedings each assessment year being a unit itself, where a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained, it would not be appropriate to allow the position to be changed in a subsequent year. Reliance was also sought to be placed upon the decisions of the Karnataka (1992) 193 ITR 321 (SC). High Court in Commissioner of Income Tax v. Sridev Enterprises; of a Division Bench of this Court in Commi ssioner of Income Tax v. Reliance Utilities and Power Ltd.44 and on the decision of the Supreme Court in Munjal Sales Corporation v. Commi ssioner of Income Tax.
71. Now before we deal with the judgments on which reliance has been placed, it is necessary to appreciate the basis of the decisions of the Tribunal for Assessment Years 1998-99,1999-00and 2001-02. In all these decisions, the Tribunal held that no nexus had been established between borrowed funds and investments by the assessee in dividend yielding shares / income yielding mutual funds. Now assuming that this is so, the only conclusion which emerges is that the assessee had utilized its own funds for the purpose of making the investments. The fact that the assessee has utilized its own funds in making the investments would not be dispositive of the question as to whether the assessee had incurred expenditure in rel ation to the earning of such income. Even if the assessee has utilized its own funds for making 43(1991) 192 ITR 165. 44(2009) 313 ITR 340 (Bom). 45 (2008) 298 ITR 298 (SC). investments which have resulted in income which does not form part of the total income under the Act, the expenditure which is incurred in the earning of that income would have to be disallowed. That is exactly a matter which the Assessing Officer has to determine. Whether or not any expenditure was incurred by the assessee in relation t o the earning of nontaxable income falls withi n the domain of the Assessing Officer. The basis on which the Tribunal had come to its decision for Assessment Years 1998-99, 1999-00 and 2001-02 would not conclude that question.
72. ..........
a) The ITAT had recorded a finding in the earlier assessments that the investments in shares and 18 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6) mutual funds have been 47(1997) 224 ITR 627.VBC 117 ITXA626.10 made out of own funds and not out of borrowed funds and that there is no nexus between the investments and the borrowings. However, in none of those decisions was the disallowability of expenses incurred in relation to exempt income earned out of investments made out of own funds considered. Moreover, under Section 14A, expenditure incurred in relation to exempt income can be disallowed only if the assessing officer is not sati sfied with the correctness of the expenditure claimed by the assessee. In the present case, no such exercise has been carried out and, therefore, the Tribunal was justified in remanding the matter.
b) .....Section 14A was introduced by the Finance Act 2001 with retrospective effect from 1 April 1962. However, in view of the proviso to that Section, the disallowance there under could be effectively made from assessment year 2001-2002 onwards. The fact that the Tribunal failed to consider the applicability of Section 14A in its proper perspective, for assessment year 2001-2002 would not bar the Tribunal from considering disallowance under Secti on 14A in assessment VBC 118 ITXA626.10 year 2002-2003.
c) The decisions reported in Sridev Enterprises (supra), Munjal Sales Corporation (supra) and Radhasoami Satsang (supra) holding that there must be consistency and definiteness in the approach of the revenue would not apply to the facts of the present case, because of the materi al change introduced by Section 14A by way of statutory disallowance in certai n cases. Therefore, the decisions of the Tribunal in the earl ier years would have no relevance in considering disallowance in assessment year 2002-2003 in the light of Section 14A of the Act. "
17. Accordi ngly, Rule 8D is not applicabl e for the assessm ent year under consideration. However, whether or not any expenditure was incurred by the assessee in relation to the earning of the income not forming the part of total income falls within the domain of AO as held by the Hon. 19 IT A No . 366 5 /Mum /2 009 ( Assessm ent Year : 2 005-0 6) Jurisdictional High Court in the case (supra) . Therefore, we set aside the order of the CIT(A) and remand the matter to th e file of the AO to decide the issue in view of the decision in the case of Godrej and Boyce Mfg co. ltd V/s Dy CIT (supra) . The appeal is partly allowed.
Pronounced in the Open Court on 08.10.2010 Sd sd (P.M.JAGTAP) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated 8 th Oct 2010 SRL:24910 copy to:
1. Appellant
2. Respondent
3. CIT Concerned
4. CIT(A) concerned
5. DR concerned Bench BY ORDER True cop y ASSTT. REGISTRAR, ITAT, MUMBAI