Income Tax Appellate Tribunal - Chandigarh
Ramesh Kumar Dudani, Mohali vs Assessee on 10 July, 2015
1
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCHES, CHANDIGARH
BEFORE SHR I BHAVNESH SAINI, JUDIC IAL MEMBER AND
SHRI T.R. SOOD, ACCOUNTANT MEMBER
ITA No. 309/Chd/2013
Assessment Year: 2009-10
Shri Ramesh Kumar Dudani, Vs. The Addl. C IT, Range VI,
Mohali Mohali
PAN No. ABBPD0633J
(Appellant) (Respondent)
Appellant By : Shri B.K.Nohria
Respondent By : Shri Manjit Singh
Date of hearing : 08/07/2015
Date of Pronouncement : 10/07/2015
ORDER
PER T.R.SOOD, A.M.
The appeal by the assessee is directed against the order dated 6.11.2012 of CIT(A), Chandigarh.
2. In this appeal the assessee has raised the following grounds:-
1. That the Learned CIT(A) Chandigarh has erred in law and facts in upholding the Provisions of Section 80IA(10) and Section 80IC(7) of the Income Tax Act, 1961 and has wrongly denied deduction u/s 80IC to the tune of Rs. 58,91,946/-. In the alternative disallowance is excessive.
2. That the Learned CIT(A) Chandigarh has erred in law and facts in upholding the Provisions of Section 80IA(10) and wrongly led to the conclusion that since the Unit at Theog, Shimla and Unit at Mohali are of the same person, therefore the Provisions of Section 80IA(10) are attracted and has erred in reducing deduction u/s 80IC of the Income Tax Act, 1961 and has wrongly denied deduction u/s 80IC of the Income Tax Act, 1961 and has wrongly denied deduction u/s 80IC of the Act by Rs. 58,91,946/-.
3. That the Learned CIT(A) Chandigarh has erred in law and facts in upholding the wrong application of the sales ratio in apportioning the total expenses incurred for both units without appreciating the fact that the expenses incurred for both units are exclusively 2 incurred for them and there was no cause to apportion the expenses as the assessee is maintaining regular books of accounts for both units.
4. That the Learned CIT(A) Chandigarh has erred in law and facts in upholding the wrong application of sales ratio to apportion the total expenses which includes manufacturing, administration, depreciation on fixed assets, selling & distribution and financial expenses of both units in different ratios without appreciating the nature of expenditure incurred and has erred in apportioning the expenses to the tune of Rs. 58,91,946/- to the unit at Theog, Shimla which was alleged to have been booked at Unit at Mohali.
5. That the Learned CIT(A) Chandigarh has erred in law and facts in upholding the adding back an amount of Rs. 15,36,321/- as disallowance u/s 14A as the investment in shares and mutual funds has been made by the assessee out of his personal capital and no expenses has been incurred by the assessee against exempt income.
6. That the Learned CIT(A) Chandigarh has erred in law and facts in upholding the error in calculations in making disallowance u/s 14A read with rule 8D of the Income Tax Rules.
3. Ground Nos.1 to 4: After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that assessee was claiming deduction u/s 80IC in respect of TCP unit II. It was further noticed that there was huge difference in net profit rate of TCP-1 i.e. non-exempt unit where it was 3.02% and in TCP-II which was exempt unit the net profit rate was 33.29%. After detailed examination and considering the replies it was noticed that basic plant and machinery, technology, nature of products was identical and difference was because of over booking to expenditure in non-exempt unit. Therefore, in view of section 80IA(10), expenses were allocated in the ratio of turnover and an addition was made amounting to Rs.
58,91,946/- in the non exempt unit.
4. On appeal, the action of the Assessing Officer was confirmed by Ld. CIT(A).
5. Before us Ld. Counsel for the assessee fairl y admitted that issue is covered by the order of the Tribunal in assessee's own case for assessment year 2008-09.
6. On the other hand Ld. DR supported the order of Ld. C IT(A).
37. After considering the rival submissions we find that identical issue came up for consideration of the Tribunal in assessee's own case in ITA No. 1147/Chd/2011 and the same was decided vide para 4, which is as under:-
"4. The learned A.R. for the assessee fairly pointed out that the issues in ground Nos.2 to 5 are identical decided against the assessee by the order of the Tribunal. We find that the issues raised vide present ground Nos.2 to 5 were decided by Tribunal against the assessee in assessee's appeal bearing No.113/Chd/2010 vide order dated 30.3.2011. The said ratio was followed by the Tribunal in assessee's own appeal in ITA No.597/Chd/2011 relating to assessment year 2007-08 vide order dated 29.7.2011. Following the above said precedent and in view of the submission made by the learned A.R. for the assessee, ground of appeal Nos.2 to 5 raised by the assessee are thus dismissed."
Following the same, we decide the same against the assessee.
8. Ground Nos. 5 & 6 :- After hearing both he parties we find that during assessment proceedings the Assessing Officer noticed that assessee has earned exempt income of Rs. 8,79,700/- on account of dividend from mutual funds and exempt capital gains The assessee had not apportioned any expenses towards income. In response the query regarding application of section 14A read with Rule 8D, it was submitted as under;-
"...as far as provisions of section 14A are concerned, the same are not applicable keeping in mind the fact that there is no expenses which has been incurred by the assessee against exempt income. Though the assessee is dealing in purchase / share of mutual funds, the fact is that this activity is being undertaken by the assessee himself and no part of the business module is engaged by him and neither any expenses is incurred against such tax free income. The investment in such mutual fund has also been made out of personal capital of the assessee."
9. The Assessing Officer after examination of the above repl y did not find an y force in the same. He observed that perusal of the balance sheet shows that incom e from mutual funds was shown as 'business income' but no evidence was furnished.
4Therefore, he invoked the provisions of section 14A read with Rule 8D and computed the disallowance under Rule 8D(i),(ii),(iii) amounting to Rs. 15,36,321/-.
10. On appeal, action of the Assessing Officer was confirmed by Ld. C IT(A).
11. Before us Ld. Counsel for the assessee submitted that there was no evidence that assessee has incurred any direct expenditure, therefore, disallowance under Rule 8D(i) is not justified. Further, assessee has not incurred any expenditure. Assessee also had interest free funds and therefore, no expenditure could be allocated on account of interest.
12. On the other hand Ld. DR strongl y relied on the order of CIT(A). He also submitted that this issue has been adjudicated by the Tribunal in the case of M/s Munjal Sales Corporation, Ludhiana v ACIT in ITA No. 274/Chd/2015 and relied on that order.
13. After considering the rival submissions we find force in the submissions of Ld. Counsel for the assessee that Assessing Officer has not pointed out how any direct expenditure was incurred, therefore, disallowance under Rule 8D(i) is not justified.
However, as far as disallowance on account of proportionate expenditure and proportionate interest is concerned, the same is justified. This issue was adjudicated by us in case of m/s Munjal Sales Corporation, Ludhiana v ACIT in ITA No. 274/Chd/2015 vide paras 8 to 17, which are reproduced below:-
"8. We have considered the rival submissions carefully. It is important to note here that present assessment year is 2009-10 where Rule 8D would be applicable. In this regard, we would like to reproduce the detail analysis given by Tribunal regarding interpretation of section 14A as well as implication of Rule 8D in the case of M/s Chandha Super Cars P. Ltd Ludhiana v ACIT in ITA No. 1241/Chd/2011. This issue was discussed in paras 17 to 28 which are as under:-
"17 We have considered the rival submissions carefully and find that during the year the assessee has made investment in partnership and mutual fund. The profit from mutual fund in the form of dividend is exempt. As far as share profit from partnership firm is concerned, the same is also covered u/s 10(2A), therefore, there is no force in the 5 submissions that the assessee has made investment in firm which itself is paying tax, therefore, it cannot be called that the investment has been made to earn exempt income. Section 10(2A) reads as under:
" [(2A) in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm.
Explanation.--For the purposes of this clause, the share of a partner in the total income of a firm separately assessed as such shall, notwithstanding anything contained in any other law, be an amount which bears to the total income of the firm the same proportion as the amount of his share in the profits of the firm in accordance with the partnership deed bears to such profits ;] "
In any case Bombay Bench of the Tribunal had an occasion to consider this issue in case of Dharmasingh M. Popat V ACIT, 127 TTJ (Mum) 61. In that case it was held as under:-
"Though the partnership firm is not a separate entity as per general law, for a specific purpose it may be treated as independent of its partners under the provisions of IT Act, 1961. To put it differently, the concept of partnership firm, being a compendium of its partners is subject to the modifying such concept of partnership law which means that if there exist no provision in the tax laws for a particular situation, then, the provisions of partnership law would be the guiding factor for adjudication of that issue. The current judicial thought is leaning towards the concept of separate legal entity of partnership firm than that of its partners for the purposes of IT Act, 1961. "here was a judicial opinion that on distribution or division or allotment of assets to partners by the on dissolution or otherwise there resulted no gain exigible to tax, however, by incorporating s. -45(2), 45(3) and 45(4), the legislature has declared its intention in clear terms that partners and the firm are two independent entities not only for the purposes of assessment but also for the purpose of determining the charge of income- tax on the transactions entered into between them. Similarly, from asst. yr. 1993-94 partnership firms have been given a corporate personality in a limited sense by making necessary amendments in the provisions of ss. 10(2A), 28(v), 40(b) and relevant procedural sections which conclusively prove that partnership firm as such is independent from its partners as far as provisions of IT Act, 1961 are concerned. Specific provisions mentioned hereinabove read with Circular No. 636, dt. 31st Aug., 1992 go to show that a firm is to be taxed as separate entity and the gross total income of the firm is to be determined in the normal way under different heads as in the case of any taxable entity, hence, any expenditure which has been incurred by firm for the purposes of its business is to be allowed as a deduction in computing the total income of the firm subject to any specific limitation/prohibition provided for the allowance of such expenditure. Having regard to judicial opinion and also the legislative changes in the Act, a partnership firm is a separate entity than that of its partners under the IT Act and if there exists any specific provision in the income-tax law modifying the partnership law then, such specific provision shall be applied and if the tax law is silent on a specific issue, then a reference will have to be made to the provisions of partnership law for the adjudication of the same and in the present case, provisions of law sufficiently take care of the issue involved herein, hence, the issue is to be decided accordingly. There exist specific provisions for computing the income of the partnership firm as well as that of its partners, hence, total income of both is liable to be computed in accordance with such provisions. Since partnership firm, for the purpose of IT Act is a separateassessable entity and therefore partners vis-a-vis partnership firm would stand on the same footing of shareholders vis-a-vis company. Accordingly income charged in the hands of a partnership firm therefore, provisions of section 14A would be applicable in computing the total income of such partner in respect of his share in the profits of such firm - CIT V. A.W. Figgies & Co. & Ors (1953) 24 ITR 405 (S.C), Dy CST (Law) V K. Kelukutty (1985) 155 ITR 158 (S.C), Bist & Sons, vs. CIT (1979) 8 CTR (SC) 152 : (1979) 116 ITR 131 (SC), QT vs. Kaluram Puranmal (1979) 12 CTR (Bom) 225 : (1979) 119 ITR 564 (Bom) and CIT vs. Chase Trading Co. (1998) 147 CTR (Bom) 228 •. (1999) 236 ITR 665 6 (Bom) applied; CIT vs. R,M, Chidambararn.Pillai 1977 CTR (SC) 71 : (1977) 106 ITR 292 (SC) distinguished."
Therefore, it is clear that investment made in a firm is to be treated as investment for earning exempt income.
18 Coming to the second aspect of the issue that whether in any nexus is required between the investment and the disallowance to be made u/s 14A, we shall first refer to the decision relied on by the ld. counsel of the assessee in case of CIT V. Winsom Textile, 319 ITR 204. In that case following question of law was considered:
"Whether, in the facts and circumstances of the case and in law, the Hon'ble Income-tax Appellate Tribunal was justified in holding that the order of the jurisdictional High Court in the case of CIT V. Abhishek Industries Ltd. reported in (2006) 286 ITR 1 (PH); 156 Taxman 257 (PH) are not applicable in this case and the disallowance made by the Assessing Officer u/s 14A of the Income-tax Act is not as per law."
The assessee was engaged in the manufacturing and sale of cotton yarn and had made certain investments. The Assessing Officer disallowed interest on investment in shares u/s 14A because dividend income was exempt. The ld. CIT(A) deleted the disallowance by observing that the assessee had made investment using its own funds and no interest was incurred. The Tribunal confirmed the findings of the ld. CIT(A). Before the Hon'ble High Court the contention was raised that even if the assessee made investment out of its own funds the assessee had taken loans on which interest was paid and therefore, the money available with the assessee was in common kitty in view of the decision of the Court in case of CIT V.Abhishek Industries (supra). Hon'ble High Court held vide para 7 as under:-
"We do not find any merit in this submission. The judgment of this court in Abhishek Industries Ltd. (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present cased, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application."
19 Second decision relied on is that of CIT V. Hero Cycles (supra). In that case following question was raised before the Court:
"Whether on the facts and in law, the Hon'ble Income-tax Appellate Tribunal was legally justified in deleting the disallowance of ignoring the evidence relied on by the Assessing Officer and holding that a clear nexus has not been established that the interest bearing 7 funds have been vested for investments generating tax free dividend income."
20 In this case the Assessing Officer made disallowance u/s 14A(3) which was partly upheld by the ld. CIT(A). On further appeal, the Tribunal held that there was no nexus between the expenditure incurred and the income generated, therefore, disallowance cannot be made. It was also observed that main unit, Ludhiana had more interest income than the expenditure and the funds flow position shows that only non interest bearing funds have been utilized for making the investment.
21 Before the Court, the Department also contended that Rule 8D provide that even where the assessee claimed that no expenses have been incurred, correctness of such claim can be gone into by the Assessing Officer. Hon'ble High Court held vide para 5 as under:
"In view of the finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance u/s 14A was no sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disallowed under section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, cannot be accepted. Disallowance under section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand. In the present case, finding on this aspect, against the Revenue, is not shown to be perverse. Consequently, disallowance is not permissible. We have taken this view earlier ^so in I. T. A. No. 504 of 2008 in CIT v. Winsome Textile Industries Ltd. 1)09] 319 ITR 204 (P&H), (decided on August 25, 2009), wherein it was observed as under (page 207) :
"The contention raised on behalf of the Revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this court in CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1 and, therefore, disallowance under section 14A was justified.
We do not find any merit in this submission. The judgment of this court in Abhishek Industries Ltd. [2006] 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. Observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application."
In view of the above, we are of the opinion that no substantial question of law arise."
22 It is clear that both the above decisions pertain to Assessment year 2004-05 when Rule 8D was not even in statute book. Rule 8D has been introduced by I.T. Rules (5th Amendment) w.e.f. 24.3.2008. Therefore, in both the above cases, Rule 8D could not have been possibly applied. In any case in a leading judgment the Hon'ble Bombay High Court in case of Godrej and Boycee Manufacturing V DCIT, 328 ITR 81 (Bom) held that 8 rule 8D can not have retrospective application and the same can be applied only from Assessment year 2008-09. Further in case of CIT V. Winsom Textile, 319 ITR 204, the issue was whether the principles laid down in case of Abhishek Industries (supra) were applicable for the disallowance u/s 14A and the Hon'ble Court held that the decision of Abhishek Industries (supra) operates in a different field. Similarly In case of Hero Cycles (supra) the Tribunal has given a categorical finding that the investment has been made out of non interest bearing funds. From these two decisions only it can be concluded that if investment has been made clearly out of non interest bearing funds then section 14A is not be applicable. In case before us, the situation is different which we shall see little later. We would also like to observe that even Hon'ble Punjab & Haryana High Court in a latter decision in case of CIT V. Punjab State Industrial Development Cooperative Ltd. has made observations which we will also like to discuss little later.
23 Hon'ble Bombay High Court considered the issues arising out of Section 14A as well as implications of Rule 8D. Hon'ble High Court reached the following conclusion at para 88 which reads as under:
"88 Our conclusion in t his judgment are as follows :
(i) Dividend income and income from mutual funds falling 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 computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of section 14A(1) ;
(ii) The payment by a domestic company under section 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 chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend 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) of section 14A of the Income-tax Act 1961 are constitutionally valid ;
(iv) The provisions of rule 8D of the Income-tax Rules as inserted by the Income-tax (Fifth Amendment) Rules, 2008, are not ultra 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 Rules which have been notified with effect from March 24, 2008, shall apply with effect from the assessment year 2008-09 ;
(vi) Even prior to the assessment year 2008-09, when 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 duty 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 Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity 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 Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income/income from 9 mutual funds which does not form part of the total income as contemplated under section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment.
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."
From above, it is clear that even the taxes paid u/s 115-O which is also known as dividend distribution taxes, would not make dividend income in the hands of shareholder as non-exempt. Similarly the taxes paid by a firm would be taxes on the profit of the firm and not in the hands of the assessee. The above decision also held that rule 8D would be applicable only from Assessment year 2008-09. In this decision the theory of apportionment of expenditure which was confirmed by the Hon'ble Supreme Court in case of CIT V. Walfort Share and Stock Brokers P Ltd (2010) 326 ITR 1 (S.C), was followed. In fact before introduction of Section 14A, the assessee had a right to claim all the expenses if such expenses could not be bi-furcated against normal taxable income as well as exempted income in view of the decision of Hon'ble Supreme Court in case of Rajasthan Warehousing Cooperation V CIT, 242 ITR 450. This position got changed after the introduction of Section 14A by Finance Act, 2001. The Memorandum explaining the provisions of Finance Bill reads as under:
"Certain income are not includible while computating the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is again the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable 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 Act, 1961, that no deduction shall be made in respect of any expenditure incurred by the 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 retrospectively from April 1, 1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent Assessment Year."
24 Hon'ble Bombay High Court noted this decision and then confirmed the theory of apportionment of expenses and held that same is very much applicable in Section 14A. At placitum 28 it has been observed as under:
"During the course of this judgment, it would be necessary to revisit the decision of Hon'ble Supreme Court in Walfort. At this stage, however, it needs to be emphasized that the provisions of section 14A were construed in Walfort to evince Parliamentary intent not to allow deduction 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 taxable income. Section 14A is clarificatory of the position that expense can be allowed only to 10 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 can be allowed. The section 14A broadens the theory of apportionment of expenditure between taxable and non- taxable income is evident from the following observations of the Hon'ble Supreme Court page 17) "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 clear that the words 'expenditure incurred' in section 14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for (see sections 30 to 37)."
Thus on the basis of above, it was held that after introduction of Section 14A, it was possible to apportion the expenditure between taxable income and exempted income.
25 As observed earlier, almost similar observations have been made by the Hon'ble Punjab & Haryana High Court in a recent judgment in case of CIT V. Punjab State Industrial Development Cooperation Ltd. in ITA No. 565 of 2006 vide order dated 18.7.2011.
" 11. Adverting to question No.(ii), learned counsel for the revenue submitted that while determining the quantum of deduction admissible to the assessee under Section 80M of the Act, the expenditure incurred relating to the earning of dividend income has to be excluded there-from. According to the learned counsel, the expenditure which was to be deducted was required to be deducted on proportional basis for incurring of such expenditure. Reliance was placed on Section 14A of the Act which was incorporated by Finance Act 2001 retrospectively .w.e.f. 1.4,1962. Support was gathered from the decision of the Rajasthan High Court in Shekhavati General Traders Ltd. vs. Commissioner of Income Tax (1987) 167 ITR116 and the judgment of this Court in Income Tax Appeal No. 530 of 2006 (The Punjab State Cooperative Milk Producer's Federation Ltd, vs. Commissioner of Income Tax-if and another) decided on 28,3,2011 and of the Apex Court in Commissioner of income Tax vs. Walfort Share & Stock Brokers (P) Ltd. (2010) 41 DTR Judgments 233.
12. Controverting the aforesaid submission, learned counsel for the assessee relied upon the decision of the Calcutta High Court in Commissioner of Income Tax vs. United Collieries Ltd. (1993) 203 ITR 857 (Calcutta). Learned counsel also relied upon Commissioner of Income Tax vs. Central Bank of India (2003) 264 ITR 522 (Bombay) and State Bank of Indore vs. Commissioner of Income Tax (2005) 275 ITR 23 (MP). It was contended that it was only the actual expense incurred for earning dividend which was to be deducted from the dividend income for calculating the admissible deductions under Section 80M of the Act. It was urged that the plea of the Revenue that proportional expenses should also be reduced, was against the statute.
13. We have given our thoughtful consideration to the respective submissions of the learned counsel for the parties and find *force in the submissions of the learned counsel for the revenue. Finance Act 2001 had inserted Section 14A with effect from 1.4.1962. According to the said Section, any expenditure incurred by the assessee for earning income which did not form part of the total income under the Act was not to be allowed as expenses. This Court in the case of Punjab State Cooperative Milk Producer's Federation Ltd.'s case (supra) relying upon the 11 decision of the Apex Court in Walfort Share and Stock Brokers's case (supra), wherein, while defining the scope of Section 14A of the Act, incorporated retrospectively w.e.f. 1.4.1962, it had laid down as under:
The insertion of Section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expendiiure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dated 22.11.2001 K In other words, Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of Section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of Section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of Section 14A is that certain Incomes are not includibie while computing total income as these are exempt under certain provisions of the Act. In the past, there have bean in which deduction has been sought In respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-
exempt Income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. Oh the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of Section 14A. In Section 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within Section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of Section 14A. Further, Section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in Sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in part of total income could not be allowed against ore income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under Section 14A. Reading Section 14 in juxtaposition with Sections 15 to 59, it is clear that the words "expenditure incurred" in Section 14A refers to expenditure on rent, taxes, salaries, interest,etc. in respect of which allowances are provided for (see Sections 30 to 37)." '
14. The apex Court had specifically recorded that the theory of apportionment of amount of expense* between taxable and non-taxable income stood widened by incorporation of Section 12 14A. It was further noticed that the expression 'expenses incurred' occurring in Section 14A referred to tax, salary, interest etc. in respect" of which allowances are provided for under Sections 30 to 37 of the Act.
15. In all fairness to the assessee, in the judgments relied upon by the learned counsel for the assessee, Section 14A as incorporated by Finance Act 2001, with effect from 1.4.1962, was not under consideration and, therefore, the same do not come to the rescue of the assessee.
16. In view of the above, the substantial question No.(ii) is answered in favour of the revenue and against the assessee. Income Tax Appeal Nos. 565, 567 and 569 stand disposed of accordingly."
26 Thus theory of apportionment as approved by the Hon'ble Supreme Court in case of CIT V. Walfort Share and Stock Brokers P Ltd (2010) 326 ITR 1 (S.C) followed by Hon'ble Bombay High Court in case of Godrej and Boycee (supra) has also been approved by Hon'ble Punjab & Haryana High Court in case of CIT V. Punjab State Industrial Development Coop Ltd. (supra).
27 Now the question is how such expenditure can be apportioned. There may be a situation whether the expenses or interest cannot be identified against the particular item of income to meet these difficulties rule 8D was introduced which has been held to be constitutionally valid by Hon'ble Bombay High Court in case of Godrej and Boycee (supra). Rule 8D reads as under:
" Rule 8D reads as under:
"(1) Where the Assessing Officer having regard to the account of the assessee of a 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 hall 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 which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:-
AXB C 13 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 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 asset as appearing in the balance sheet excluding the increase on account of revaluation of asset but including the decrease on account of revaluation of assets.)."
28 Clause (ii) of Sub-Rule (2) clearly shows that if the assessee show that interest has been incurred specifically for a particular item of income then it has to be apportioned. In case before us, the assessee has provided sources of funds but they cannot be said to have been maintained separately. First of all it was conceded that the assessee is having mixed funds. The details of funds was stated to be as under before the ld. CIT(A):
31.3.2008 Rs. In Lakhs Share capital 78.36 Reserves and Surpluses 130.82 Own funds 209.18 Working capital borrowings 1779.62 Current assets 2243.45 Amount invested in excess of loan 463.83 Term loan borrowings 253.31 Fixed Assets 451.82 Amount invested in excess of loan 198.51 Amount invested in Chadha Motors 255.96 Consequently by simply saying that the funds invested in fixed assets and current assets are more than the borrowed funds, would not show that specific funds have been borrowed for specific purpose. For example it can be very easily said that the assessee supported its business with own funds and borrowed loans have been used for making investment in assets as well as in investments which generate exempted income. Once the funds are mixed, there is no way to find out actual usage of the funds. To meet this situation only Rule 8D was inserted to remove the difficulties.
In fact this aspect was also examined by Hon'ble Bombay High Court in case of Godrej & Boycee (supra). Many observations were made under the head "parameters of judicial review at para 62 to 72 of the order".
14Without unnecessarily burdening this order with these observations we will quote para 73 which deals with justification of Rule 8D:
In the affidavit in reply that has been filed on behalf of the Revenue an explanation has been provided of the rationale underlying rule 8D. In the written submissions which have been filed by the Additional Solicitor General it has been stated, with reference to rule 8D(2)(ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax free investment. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as "A" in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example - any aspect of the assessee's business such as plant/machinery etc.). As regards rule 8D(2)(iii) it has been submitted that some mechanism or formula had to be adopted for attributing part of the administrative/managerial expenses to tax exempt investment income. The administrative expenses attributable to tax free investment income have a fixed component and a variable component. A view was taken that the disallowance should also be linked to the value of the investment rather than the amount of exempt income. Under Portfolio Management Scheme (PMS) the fee charged ranges between 2 and 2.5 per cent of the portfolio value which would be inclusive of a profit element for the portfolio manager. While the fixed administrative expense were excluded, on the ground that in the case of a large corporate taxpayer they would be spread over a large number of voluminous activities, the variable expenses were computed at one-half per cent of the value of the investment. The justification that has been offered in support of the rationale for rule 8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Hon'ble Supreme Court it is not possible for this court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no "madness in the method."
Thus above rule was found to be valid and rational. Coming back to the case in hand, the perusal of the assessment order shows as observed earlier, no where before the Assessing Officer or the ld. CIT(A), the assessee has made a specific mention to show which particular funds were borrowed for which particular requirement and in the absence of such specific utilization Rule 8D, would be applicable. Perusal of the assessment order shows that disallowance u/s 14A has been worked out on the basis of Rule 8D which is as observed earlier applicable in case of the assessee. Therefore, we set aside the order of the ld. CIT(A) and restore that of the Assessing Officer."
9. From the above it emerges that decisions of Hon'ble Punjab & Haryana High Court in the case of CIT vs Hero Cycles Ltd., 323 ITR 518(P&H) and CIT 15 Vs. Winsome Textile Industries Ltd. in 319 ITR 203 (P&H) were found to be distinguishable because these decisions were rendered for assessment year 2004-05 and further there were certain findings of facts which may not be applicable in every situation. Secondly, to solve problem of quantum of interest to be disallowed and expenditure from common pool of interest and expenditure, Rule 8D has been introduced so that reasonable disallowance is made. In the above findings, the theory of proportionate disallowance as confirmed by Hon'ble Punjab & Haryana High Court in the case of CIT-1 vs Punjab State Industrial Development Corporation Ltd in Income Tax Appeal No.565 of 2006 vide order dated 18.7.2011 has been discussed in above noted pasras.
Justification of Rule 8D as given by Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd Vs. DCIT 328 ITR 81 (Bom.) has also been discussed. In conclusion it can be said that Rule 8D is applicable from assessment year 2008-09 and, therefore, issue arising in this appeal have to be discussed on the premise that Rule 8D was applicable.
10. The Ld. Counsel for the assessee has emphasized that assessee has itself disallowed a sum of Rs. 50,000/- which was confirmed by Tribunal in the earlier years. The decision of earlier year pertains to assessment year 2007-08 and therefore, as emphasized earlier Rule 8D was not applicable and that decision cannot be relied in the present year. In any case the Hon'ble Punjab & Haryana High Court itself has held in CIT v A.B. Sugar Mills Ltd in Income Tax Appeal No. 199 of 2014(O&M) vide order dated 16.2.2015 that Tribunal has no power to estimate the disallowance u/s 14A read with Rule 8D. In that case also the Assessing Officer has disallowed a sum of Rs. 7,19,513/- and Rs. 60,97,429/- which was estimated at Rs. 1 lakh and Rs. 5 lakh because Rule 8D was not applicable in those years. The Hon'ble High Court observed as under:-
"We have heard counsel for the parties. The question of law that arises for adjudication is whether the Tribunal could have reduced the quantum of disallowance without recording satisfaction in terms of Section 14A of the Act?
The dispute before the Assessing Officer, the CIT(A) and the ITAT, was whether Rule 8D was prospective or retrospective. The Tribunal rightly held that Rule 8D is prospective. A perusal of this Rule reveals that it does not, whether by words or intent, lend credence to the revenue's stand that Rule 8D is retrospective. The Tribunal, therefore, rightly placed reliance upon the judgment in Godrej & Boyce Manufacturing v. DCIT (supra), while holding that Rule 8D shall operate prospectively.
The matter, however, does not rest here. The Tribunal having held that Rule 8D operates prospectively, proceeded to reduce the quantum of disallowance without recording satisfaction or assigning any cogent reasons or referring to any relevant facts/ factors. The power to determine the quantum of disallowance, inhers the recording of satisfaction based upon relevant facts/factors. A perusal of the impugned order reveals that after holding that Rule Income Tax Appeal No.199 of 2014(O&M) -4- 8D of the Rules is prospective in operation, the Tribunal abruptly or should we say arbitrarily proceeded to reduce the quantum of disallowance recorded by the Assessing Officer from Rs.7,19,513/ -16
to Rs.1,00,000/- and Rs.60,97,429/- to Rs. 5,00,000/- in ITA No.199 of 2014, and Rs.7,55,849 to Rs.1,23,754/-in ITA No.237 of 2014, without reference to any relevant facts or factors.
Consequently, we answer the question of law in favour of the revenue, allow the appeal to the limited extent of error in determining the quantum of disallowance and remit the matter to the Assessing Officer for determining the quantum of disallowance, after granting an adequate opportunity to the Assessee to put forth his pleas regarding the quantum of disallowance."
Therefore, it is clear that estimation of expenditure, if any, on the reasonable basis has to be made by Assessing Officer and Appellate authorities have no such power. Consequently, it become absolutely clear that order of the Tribunal for earlier assessment year confirming the estimated disallowance of Rs. 50,000/- cannot be relied in view of this judgement of the Hon'ble Punjab & Haryana High Court.
11. We may also note that in another decision by Hon'ble Punjab & Haryana High Court of M/s Avon Cycles Ltd Ludhiana v CIT & Another in ITA No. 277 of 2013 vide order dated 20.08.2014, the following questions of law arose before the High Court.
(i) Whether in facts and circumstances of the present case, the learned authorities have erred in invoking the provisions of Section 14A read with Rule 8D without any finding that any expenditure has been incurred for earning exempt income is legally unsustainable the eyes of law?
(ii) Whether in facts and circumstances of the case, the learned authorities below erred in law in making the provisions of Section 14A read with Rule 8D applicable to the assessee in a mechanical manner without controverting the fact finding in favour of the assessee?
iii) Whether the learned authorities below erred in ignoring the disallowance made by the assessee himself in respect of earning the exempt income and invoking Section 14A and Rule 8D?
(iv) Whether in fact and circumstances of the case, the action of the authorities below, the impugned orders are legally sustainable in the eyes of law?"
12. In this case the issue mainly pertains to disallowance of interest under Section 14A. In this case also Rule 8D was held to be applicable and disallowance of interest was confirmed by the Tribunal. Before the Hon'ble High Court, reliance was placed on the decision of Bombay High Court in the case of CIT v Reliance Utilities and Power Ltd. 313 ITR 340 as well as decision of Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Hero Cycles 323 ITR 518 for the proposition that if interest free funds are available with the 17 assessee then it will be presumed that such funds have been invested in various investments. The Hon'ble High Court dealt with this issue as under:-
"In Reliance Utilities and Power Ltd. case (supra), the Revenue was in appeal before the Bombay High Court against an order passed by the Income Tax Appellate Tribunal, where negating the argument of the Revenue that shareholders funds to the tune of over Rs.172 crores was utilized for the purpose of fixed assets in terms of the balance-sheet. It was found that a clear finding of fact was recorded that assessee had interest free funds of its own which had been generated in the year in question, which has been invested for earning exempt income.
Similarly, in Hero cycles Ltd. case (supra), again the Revenue was in appeal. The Court has noticed that the Tribunal has held that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of the finding of fact, disallowance under Section 14A of the Act was not found to be sustainable. The Court observed that as to whether any expenditure incurred was to be disallowed is a question of fact. It was held to the following effect:
"In view of the finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under Section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, it is a question of fact......"
In the present case, after examining the balance-sheet of the assessee, a finding of fact has been recorded that the funds utilized by the assessee being mixed funds, therefore, the interest paid by the assessee is also an ITA No.277 of 2013 5 interest on the investments made. Such being a finding of fact, we do not find that any substantial question of law arises for consideration of this Court."
13. From the above it becomes clear that Hon'ble Court has confirmed that once there are mixed funds, Rule 8D has to be resorted. The same principle would apply in the case of expenditure incurred in earning exempt income.
14. The last important contention made by the Ld. Counsel for the assessee is that section 14A read with Rule 8D can be applied only if the Assessing Officer has recorded a satisfaction that disallowance made by the assessee is not correct. We find that section 14A reads as under:-
18"EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME (1 ) 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.
(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) 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, for any assessment year beginning on or before the 1st day of April, 2001."
Further, Rule 8D of the Act reads as under:-
(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)................ "
15. The careful reading of the above section as well as Rule 8D would show that what is required under the provision is that Rule 8D can be resorted only when Assessing Officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of disallowance made by the assessee. So, therefore, there is no requirement for recording a satisfaction. However, before resorting to Rule 8D, Assessing Officer is required to somehow or other show that disallowance already made by the assessee is not correct with reference to the accounts of the assessee. Therefore, such satisfaction has to be inferred from the order. Here we may like to point out that decisions of investments are not easy to make and in fact large corporations invest their surplus funds continuously in various investments of Bank FDRs, govt.
19securities, mutual funds, shares of other companies. These operations in the commercial parlance are known as treasury operations. The necessity for these operations arise because of two situations namely, either a company has surplus funds which may not be required immediately for investments but may be required for investments later on. In such a situation the funds are temporarily deployed to earn reasonable returns. In the second situation, there are certain companies where cash credits and other limits are taken from the bank and such funds may not be required for some intervals of time because of slackness in the business cycle or because of the business being of seasonal character. Such companies can also not return the funds to the banks because it may not be easy to obtain the same limits later on. Such companies also invest the funds to earn short term returns. In these two situations, generally the companies deploy the funds for considering the implication of taxation also.
16. In these treasury operations, specialized people either bring Chartered Accountants or MBA Finance or some other persons with higher qualifications like CFA are employ to conduct these operations. The treasury operations ar e very sophisticated and complicated. It requires decisions for selection of investment, whether investments should be made in bank deposits, government securities, share of various companies, mutual funds, debentures, derivatives etc. Further, the tax implications on such investments are required to be analyzed. For taking these decisions it is further required to be seen whether investments are secured or not. For example government securities are known as 'gilt securities' because they are fully secured as they are backed by the government. Similarly, the bank FDRs are reasonably well secured. Investment in shares is highly risky because prices would move depending upon economic condition of the country as well as particular sector in which such company operates. It is required to be investigated and analyzed how an exit can be made from the particular investment. For example FDR is made for a period for which funds are not required and can be encashed generally at the end of the term of FDR because if the same is enchased earlier then some interest loss happens. In case of government securities, the same can be sold or purchased in the secondary market. The rate of return would also depend on the period for which investments are made. Further, it to be seen what is the liquidity attached to particular investment. In fact all these functions are highly specialized functions and requires skill of highly specialized persons. It is almost impossible to pin-point how much time is spent by such a team on the investment decisions because these treasury operations are very sophisticated. In a very large company, there may be designated treasury operation team, but in a medium sized company, there may be only 02 -03 Chartered Accountants who are doing the normal duties of account writing and auditing, taxation, funds raising etc. and at the same team may also be doing treasury operations also. To meet this contingency, Rule 8D was incorporated in the Statute. Now it is significant to note that the Assessing Officer is required to have satisfaction having regard to the accounts of the assessee which means various operations of the assessee.
17. Having understood the basic logic behind the incorporation of Rule 8D, let us consider the judgement cited by Ld. Counsel for the assessee. The first 20 decision referred to is in the case of CIT Vs. Deepak Mittal & Amrit Sagar (supra). This decision has been rendered by the Hon'ble Punjab & Haryana High Court for AY 2007-08. Further, the Hon'ble Court has referred to the decision of CIT Vs. Hero Cycles which has already been distinguished by us and that decision has been confirmed by Hon'ble Punjab & Haryana High Court itself in the case of Avon Cycles Ltd Vs. CIT in ITA No. 277 of 2013 and the relevant paras have already been reproduced above. In this decision it is to be noted that no expenditure was allocated by the assessee whereas in the case before us the assessee has itself allocated a sum of Rs. 50,000/- towards expenditure incurred for earning the exempt income. There is another aspect in this case for which matter has been set aside by Ld. CIT(A) to the file of Assessing Officer, therefore, this aspect can also be examined by pointing out how Assessing Officer is not satisfied with the correctness of the claim made by the assessee. The other decision of Hon'ble Delhi High Court in the case of CIT v Taikisha Engineering India Ltd. (supra) are also to the same effect."
14. From the reading of the above order and particularl y para No.11 of the above order, it becomes clear that once assessee has mixed funds then proportionate disallowance has to be made. We had asked Ld. Counsel for the assessee that if assessee had surplus funds the same were being maintained in separate account. In response, he simpl y filed a copy of the bank account of packing credit account but that does not prove that assessee do not have mixed funds. Once funds are mixed then it is not possible to show that assessee has used surplus funds for investments. This ratio has been confirmed by Hon'ble Punjab & Haryana High Court in the case of M/s Avon Cycles Ltd., Ludhiana Vs. C IT (supra) which has been reproduced above in para 11 of the order of M/s Munjal Sales Corporation (supra). Therefore, we set aside he order of Ld. C IT(A) and direct the Assessing Officer to make disallowance onl y in respect of proportionate expenditure and proportionate interest under Rule 8D(ii) and 8D (iii). In other words, disallowance under Rule 8D (i) is deleted and disallowance under Rule 8D(ii) and 8D (iii) is confirmed.
15. In the result appeal is partl y allowed.
Order pronounced in the open Court on 10/07/2015.
Sd/- Sd/- (BHAVNESH SAINI) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 10 t h July, 2015 21 Rkk Copy to: 1. The Appellant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR 22