TMI Blog2012 (12) TMI 728X X X X Extracts X X X X X X X X Extracts X X X X ..... he disallowance u/s 14A rule 8D of IT Rules is applicable in the year before us and disallowance has been worked out as per Rule 8D. Issue remand back to AO in favour of assessee - ITA No. 769/Chd/2011 - - - Dated:- 10-7-2012 - SHRI H.L. KARWA AND SHRI T.R. SOOD, JJ. Appellant by: Shri N.K. Saini Respondent by: Shri Sudhir Sehgal ORDER PER T.R. SOOD, A.M In this appeal the Revenue has raised the following grounds: 1 That the ld. CIT(A)-II, Ludhiana on facts as well as in law, has erred in deleting the disallowance of Rs. 6,19,626/- made u/s 36(I)(iii) of the Act. 2 (a) That the ld. CIT(A)-II, Ludhiana on facts as well as in law has erred in deleting disallowance of Rs. 4,75,974/- made u/s 14A of the Act read with rule 8D of IT Rules. (b) That the ld. CIT(A)-II, Ludhiana has failed to appreciate that the assessee had made investments which would generate exempted income and thus this section 14A read with Rule 8D of the IT Act comes into play. 2. Ground No. 1 - After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that the assessee has advanced certain amounts to M/s Jai Durga Paper Mills ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiates his contention that there are regular dealings between the appellant and the above said company. The Ld. LD. A.R has also stated that against the monies advanced by the appellant to the above company, there have been purchase of raw material and this fact has also not been denied by the Assessing Officer. It has also been argued that the Assessing Officer has erred in mentioning in his assessment order that there has been a debit balance of the above company in the books of the appellant whereas the fact of the matter is that on various dates during the year, there has also been a credit balance of the above party in the books of the appellant. Under the above facts and circumstances of the case, I find force in the contention of the ld. AR that the AO cannot step into the shoes of the businessman and decides the advance that should be given to the supplier in the ordinary course of business. It has also not been denied by the A.O that advances to M/s Jai Durga Paper Mills Pvt Ltd. have been adjusted against the supplies made by the said company to the appellant and neither there has been any doubt the huge purchase and sale transactions between the appellant and the above c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions made before the lower authorities and supported the impugned appellate order. 12. We have heard the rival submissions carefully. We find that the decision of Hon'ble Jurisdictional High Court in the case of CIT V. Hero Cycles Ltd, 323 ITR 518 was rendered for Assessment Year 2004-05. Later on Hon'ble Bombay High Court in case of Godrej and Boyce Manufacturing Co. Ltd V. DCIT, 328 ITR 81 has considered the implications of Section 14A even the constitutional validity and applicability of Rule 8D in great detail ultimately Hon'ble High Court has given the following conclusion: 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-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble Supreme Court in case of CIT v. Walfort Share and Stock Brokers P Ltd (2010) 326 ITR 1 (S.C), therefore, in our opinion, the ratio of this decision is applicable to the case of the assessee and rule 8D would be applicable in the present case which relates to Assessment Year 2008-09. 14. Though the ld. CIT(A) deleted the addition by observing that investment in mutual fund is out of current account but it was not denied before us that all the receipts are being credited to the current account which means current account is dealing with the combined fund of the assessee-company. The assessee has nowhere shown that the interest free funds were available for investment in mutual fund. In fact before the provision of Section 14A the assessee had the right to claim all the expenses if such expenses could not be bifurcated in terms of normal taxable income and exempted income in view of the decision of Hon'ble Supreme Court in case of Rajasthan State Warehousing Corporation V. CIT, 242 ITR 450 but this position changed after the introduction of Section 14A by Finance Act, 2001. The Memorandum explaining the provisions of finance bill reads as under: Certain income are not includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and nontaxable 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 apportioned the expenditure between taxable income and exempted income. 16. We also find that in a recent judgment of Hon'ble Punjab Haryana High Court dated 18.7.2011 in ITA No. 565 of 2006 on a similar issue, the following observations were made: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.2001 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 exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. 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) was approved by the Hon'ble Jurisdictional High Court and disallowance u/s 14A held to be justified. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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