DY. COMMISSIONER OF INCOME TAX-6, KANPUR vs. COMMERCIAL ENGINEERS & BODY BUILDERS CO. LTD., KANPUR

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH “B”, LUCKNOW BEFORE SHRI. A. D. JAIN, VICE PRESIDENT AND SHRI T. S. KAPOOR, ACCOUNTANT MEMBER ITA No.657 & 658/LKW/2018 Assessment Year: 2013-14 & 2014-15 Dy. CIT-6 v. M/s Commercial Engineers & Body Kanpur Builders Company Ltd. 84/105-A, Afim Kothi, G.T. Road Kanpur TAN/PAN:AAACC5823E (Appellant) (Respondent) Appellant by: Shri S. K. Maduk, CIT (DR) Respondent by: Shri B. L. Gupta, FCA Date of hearing: 15 07 2019 Date of pronouncement: 19 07 2019 O R D E R PER A. D. JAIN, V.P.: These are Revenue’s appeals against the orders of the ld. CIT(A)-II, Kanpur dated 14/8/201 and 16/8/2018 for assessment years 2013-14 and 2014-15 respectively. The Revenue has raised common grounds of appeal, except the difference in amount. However, for the sake of reference, we reproduce the grounds of appeal taken by the Revenue for assessment year 2013-14, as below:- 1. That the Commissioner of Income Tax (Appeals)-2, Kanpur has erred in law as well as on facts and circumstances of the case in deleting the addition of Rs.9,57,30,050/- made on account of wrong claim of additional depreciation, without appreciating the facts that the provisions as contained under section 32(1)(iia) of the Income Tax Act, 1961 are squarely applicable in this case. 2. That the Commissioner of Income Tax (Appeals)-2, Kanpur has erred in law as well as on facts and circumstances of the case

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in deleting the addition of Rs.9,57,30,050/- made on account of wrong claim of additional depreciation without appreciating the facts that plant and machinery was already used in the preceding financial year though for a period of less than 180 days, therefore, not eligible for additional depreciation. 3. That the Commissioner of Income Tax (Appeals)-2, Kanpur has erred in law as well as on facts and circumstances of the case in deleting the addition of Rs.2,22,870/- made u/s 14A read with Rule 8D(ii)/8D(iii) without considering the judgment by the Hon'ble High Court of Bombay in the case of Godrej & Boyce reported at 328 ITR 81. 4. That the order of Commissioner of Income Tax (Appeals)- II, Kanpur being erroneous in law and on facts be vacated and the order dated 16.08.2016 by the Assessing Officer u/s 143(3) of the Income tax Act 1961, be restored.

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appellant. I find that the AO did not allow additional depreciation should as the CIT(Appeals) had dismissed the appeal of the assessee on the same issue for assessment year 2012-2013. The Ld. A.R. submitted that the Hon'ble ITAT vide his order dated 21.09.2016 (ITA No.419/LKW/2016) allowed the appeal of the assessee of A.Y. 2012-13 in favour of the assessee on this issue vide para No.4 & 5 of its order. Copy of the Tribunal order is placed on record. AO is directed to follow the directions given in the appellate order for this year as well. In view of the aforesaid, the disallowance of additional depreciation of Rs. 9,57,30,050/- is hereby deleted.”

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“5. We have heard the rival submissions, carefully considered the same along with the orders of the tax authorities below. We noted that this is a case where the assessee has purchased and installed the new plant & machinery during the preceding assessment year i.e. assessment year 2011-12. The said new plant & machinery was purchased and installed in the preceding assessment year after 30th September 2010 and therefore, in the preceding assessment year the assessee was allowed 50% of the additional depreciation allowable @20% in respect of the new plant & machinery which has been put to use during the previous assessment year for less than 180 days i.e. in the preceding assessment year the assessee was allowed additional depreciation @10% in respect of the new plant & machinery. During the impugned assessment year the assessee claimed balance 50% of 20% i.e. @10% additional depreciation on these plant & machinery which were installed during the preceding assessment year after 30th September. There is no dispute about the working of the additional depreciation. There is no dispute that the assessee was entitled for additional depreciation in the plant & machinery acquired and installed in the preceding assessment year. In our opinion, now this issue is duly covered by the decision of Hon'ble Karnataka High Court in the case of CIT vs. Rittal India Pvt. Ltd. [2016] 380 ITR 423 (Kar) in which Hon'ble High Court vide its order dated 24/11/2015 by interpreting the provisions of section 32(1)(ii)(a) held as under: “9. The language used in clause (iia) of the said section clearly provides that "a further sum equal to 20 per cent. of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii)". The word "shall" used in the said clause is very significant. The benefit which is to be granted is 20 per cent. additional depreciation. By virtue of the proviso referred to above, only 10 per cent. can be claimed in one year, if plant and machinery is put to use for less than 180 days in the said financial year. This would necessarily mean that the balance 10 per cent. additional deduction can be availed of in the subsequent assessment year, otherwise the very purpose of insertion of clause (iia)

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would be defeated because it provides for 20 per cent. deduction which shall be allowed.” 5.1 No contrary decision was brought to our knowledge by Learned D. R. In view of the aforesaid decision of Hon'ble Karnataka High Court, we set aside the order of CIT(A) and direct the Assessing Officer to allow additional depreciation to the assessee being 50% of 20% of the cost of new plant & machinery installed by the assessee during the preceding assessment year after 30th September 2010 as has been allowed to the assessee in the preceding assessment year i.e. assessment year 2011-12, the copy of which is filed before us. Thus, ground No. 1 & 2 taken by the assessee stand allowed.” 7. Since the ld. CIT(A) has deleted the addition of Rs.9,57,30,050/- made on account of additional depreciation claimed by the assessee for assessment year 2012-13, relying on the order of the Tribunal, wherein the Tribunal had directed the A.O to allow additional depreciation to the assessee being 50% of 20% of the cost of new Plant & Machinery installed by the assessee, wherein the facts, mutatis mutandis, were the same, and which order of the Tribunal has not been to shown to have been upset, or even stayed, on further appeal, we find no merit in the grounds raised by the Revenue. Accordingly, ground Nos.1 & 2 of the appeal of the Revenue are rejected. 8. As regards ground No.3, relating to deletion of addition of Rs.2,22,870/- made under section 14A of the Act read with Rule 8D(ii)/8D(iii) of the Rules, the AO noticed from the balance sheet filed by the assessee that the assessee had made an investment of Rs.60.03 lakhs as on 31.3.2013 as against Rs.68.89 lakhs in the immediately preceding year. The A.O also noticed that the assessee had incurred expenditure by way of interest against borrowed fund. The A.O observed that there was a mixed fund flow interest expenditure including expenses directly attributable to earn exempt income, but no

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disallowance under section 14A of the Act has been made. He, therefore, issued a show cause letter dated 22/7/2016 requiring the assessee to explain as to why disallowance under section 14A of the Act read with rule 8D of the Rules should not be made. In response, the assessee vide reply dated 20/10/2015 submitted that the assessee company had not incurred any expenditure to earn exempt income, so no disallowance under section 14A of the Act had been made and investment is very less and old. The A.O, as per provisions of section 14A read with Rule 8D(2)(iii) of the I.T. Rules, disallowed, disallowed 0.5% of the average of value of investment as appearing in the balance sheet of the assessee on the first day and the last day of the previous year, i.e. Rs.64.46 lakhs (Rs.68.89 + 60.03/2)/2, which comes to Rs.32,230/-. The A.O, accordingly disallowed a total sum of Rs.2,22,870/- and added it to the total income of the assessee. 9. Before the ld. CIT(A), the assessee submitted that the AO did not record any specific satisfaction to the effect that the claim of the assessee is not correct or that the assessee has actually incurred some expenditure to earn any exempt income; that he has mechanically proceeded to apply the provisions of Section 14A read with Rule 8D, without rejecting the claim of the assessee; that on similar facts, in the assessee’s own case, the ITAT, Lucknow Bench, in ITA No.419/2016, for Assessment Year 2012-2013, directed for deletion of addition made under section 14A of the Act; that in the present case, the total investment as on 31.03.2012 & 31.03.2013 was Rs.60.03 Lakhs only, as against the paid up capital & reserves owned by the company, of more than Rs.274.03 Crores; and that on similar facts, the ld. CIT(A), in assessment year 2012-2013, deleted the addition made on account of disallowance under section 14A. He, accordingly, prayed that the addition of Rs.2,22,870/- is liable to be deleted.

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rightly deleted the addition relying upon the order of the Tribunal. Therefore, no interference is called for in the order of the ld. CIT(A). 13. Heard. We find that the Tribunal has dealt with an identical issue in the assessee’s own case for assessment year 2012-13 and placing reliance on various case laws, deleted the disallowance sustained by the ld. CIT(A) under section 14A read with Rule 8D(2)(iii). The relevant portion of the order of the Tribunal is reproduced, as below: 8. We have heard the rival submissions, carefully considered the same along with the orders of the tax authorities below as well as the material available on record and as has been referred during the course of hearing. We noted that this is a case where the Assessing Officer made the disallowance u/s 14A read with Rule 8D while the assessee claims that it has not incurred any expenditure by way of interest or otherwise for earning of exempt income. The assessee claims that it is a case where the Assessing Officer has not recorded any satisfaction as is required as per the provisions of section 14A of the Act. The assessee also claims that no satisfaction has been recorded by the Assessing Officer about the claim of the assessee that it has not incurred any expenditure for the earning of the income with reference to the books of account maintained by the assessee. Learned A. R. of the assessee in this regard vehemently relied before us on the decision of this Tribunal in I.T.A. No.509/Lkw/2015 in the case of DCIT vs. M/s Shri Laksyhmi Cotsyn Ltd. Learned D. R., on the other hand, relied on Rule 8D as well as the orders of the tax authorities below. We noted that in the case of the assessee, the Assessing Officer has not recorded any dissatisfaction about the correctness of the claim of the assessee in respect of the expenditure in relation to the income which does not form part of the total income having regard to the accounts of the assessee. The provisions of section 14A(2) are explicitly clear. This provision does not empower the Assessing Officer to disallow any expenditure by just applying directly rule 8D. The relevant provision of section 40A(2) lays down as under:

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“(2) (a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. Provided that no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm’s length price as defined in clause (ii) of section 92F.”

8.1 This Tribunal in the case of DCIT vs. M/s Shri Laksyhmi Cotsyn Ltd. in I.T.A. No.509/Lkw/2015 vide its order dated 29/07/2016, on the interpretation of section 14A(2) vis-à-vis Rule 8D, under para 6 onwards held as under: “6. We have heard both the parties and perused the record. We take note that from a bare reading of section 14A, we note that unless the A.O. records a clear finding that the expenditure shown or even not shown in the assessee’s account has been incurred, he cannot proceed to compute the disallowance as prescribed by the Rule 8D. The condition precedent for the A.O. to embark upon the formula stipulated in Rule 8D in order to compute the amount of expenditure incurred in relation to exempt income, is that the A.O. must record a clear finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure to earn income not includible in total income of the assessee. 7. The assessee’s case is that it has not incurred any expenditure to earn income not includible in the total income and so no disallowance u/s 14A of the Act is warranted. As per

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provision of section 14A of the Act, even if the assessee’s claim is that no expenditure has been incurred by him relating to income which does not part of total income, then as per sub-section 3 of section 14A recourse can be taken by the A.O. of sub-section 2 of section 14A and in this case when the assessee assert that no expenditure had been incurred in relation to the earning of exempt income then the A.O. has to record his dissatisfaction in respect to the correctness of the claim of the assessee that no expenditure has been incurred by the assessee for earning exempt income and then only invoke the prescribed method as laid down under Rule 8D . The A.O. has relied on the Co-ordinate Bench decision in the case of ACIT Vs. Ratan Housing Development Ltd., wherein the bench observed that even if the assessee does not earn any exempt income still disallowance u/s 14A of the Act need to be carried out. The Co-ordinate Bench observed that it is immaterial whether any dividend in fact is earned or not, whether the said observation of the Co-ordinate Bench is correct proposition of law in the light of the decision of the Hon’ble jurisdictional High Court (Allahabad) wherein the Hon'ble High Court held in the case of Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax (II) Kanpur, Vs. M/s. Shivam Motors (P) Ltd., decided on 05.05.2014. In the said decision it has been held:- “As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the 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 the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A) & Tribunal does not give rise to any substantial question of

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law. Hence, the deletion of the disallowance of Rs.2,03,752/- made by the Assessing Officer was in order.”

In the light of the aforesaid decision of the Hon’ble Jurisdictional High Court reliance placed by the revenue on the aforesaid Coordinate Bench decision is of no assistance to them because the order of the co-ordinate bench is no longer good law and so the contention of Revenue based on the said order of Tribunal is repelled. 8. Coming to the next reasoning given by the A.O. relying on a case of Champion Commercial Co. Ltd. Kolkata I.T.A.T. Bench, we must respectfully say that the A.O. has not cited the ITA Number or any citation of the order without which we are unable to take any reliance on the same. However, we have to disagree with the proportion of law as noted by the AO and wherein it is stated that when the tax payer does not offer any disallowance on his own, the provision of section 14A (2) read with Rule 8D can be invoked without there being any need of any express satisfaction about incorrectness of such claim. We must say that the bare reading of section 14A does not support such an interpretation and we are not in agreement with such proposition of law and the order of AO is vitiated on this count. 9. From a bare reading of section 14A of the act, it is clear that before making the disallowance the following conditions need to exist. (i) There must be income taxable under the Act; (ii) The said income must not form part of the total income under the Act; (iii) There must be an expenditure incurred by the assessee; and (iv) The said expenditure must have a relation to the income which does not form part of the total income under the Act. 10. In the present case, we note that the assessee had earned dividend income to the extent of Rs. 2,22,343/- and

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has claimed it as exempt income and informed the A.O. that it has not incurred any expenditure in earning the income which is claimed as exempt income and the Hon'ble Delhi High Court in the case of CIT Vs Taikisha Engineering India Ltd. (Delhi, High Court) dated 25.11.2014, 275 CTR 316 (Del) 2015 wherein it was held that “The A.O. at the first instance must examine the disallowance made by the assessee or the claim of the assessee that no expenditure was incurred to earn the exempted income. If and only if the AO is not satisfied on this count after making reference to the accounts, that he is entitled to adopt the method as prescribed i.e. under rule 8D.” This pre-condition is also mandated in sub-rule (1) of Rule 8D.” 8.2 Similar view has been taken by I.T.A.T. Panaji Bench in the case of Sesa Goa Limited vs. JCIT in I.T.A. No.72/PNJ/2012 & 85/PNJ/2012 for the assessment year 2009-10 under para 14 to 18 held as under: “14. We have carefully considered the rival submissions along with the order of the authorities below. We have also gone through various case laws and the provisions of the IT Act in this regard. The issue involved before us relate to the disallowance made by the AO by applying the provisions of sec.14A of the IT Act read with Rule 8D of the IT Rules. Sec.14A was inserted by the Finance Act, 2001 w.e.f. 1.4.1962. Originally this sec. provides that in computing the total income of the assessee no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act. Subsequently, by Finance Act, 2002 with retrospective effect from 11/5/2001 proviso was added which states that this sec. shall not empower the AO either to re- assess or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee for any assessment year beginning on or before 1/4/2001. With effect from 1/4/2007 by Finance Act, 2006 sub-sec. (2) empowers the AO to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with the

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method as may be prescribed. Such power is to be exercised if the AO having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of the expenditure mentioned in sub-sec.(1). Before applying Rule 8D, it is apparent that the AO must be satisfied with the correctness of the claim of the assessee having regard to the accounts of the assessee. Such satisfaction is an objective satisfaction that it has to be judicious and based on the material on record. It cannot be an impression that it is much more than the gossip or hearsay, it means judgment or belief that it is a belief or a connection resulting from what one thinks on a particular question. It must be based on the reasons and ground as seems good to him and while making such satisfaction, the AO must give regard to the accounts of the assessee. He must record deficiency in the accounts with regards to the claim of the assessee. Sub-sec.(3) provides that provisions of sub-sec.(2) shall also apply where assessee claims that no expenditure had been incurred in relation to income not forming part of the total income. This is not the case of the assessee as in the case of the assessee, assessee himself estimated the expenses relating to the exempt income and disallowed the same. Rule 8D was inserted by gazette notification dated 24/3/2008 in view of the power conferred under sub-sec (2). This Rule prescribes the method for computing the expenditure incurred in relation to the income not forming part of the total income. This is an undisputed fact that in this case, the assessee has invested in debts mutual funds. The assessee computed disallowance u/s 14A(2) at Rs.25,78,156/- and disallowed the same, while computing its total income. The working of the said disallowance claimed by the assessee is given herein above in the submissions made by the assessee. The AO was not satisfied with the correctness of the claim of the assessee especially the explanation of the assessee that no administrative expenditure incurred on earning the dividend income. Considering the magnitude of the investments and the dividend income received, the AO was of the view that the disallowance made by the assessee u/s 14A of the IT Act

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towards the administrative expenditure is low on comparing the magnitude of purchase and sales made by the assessee and the investments of large magnitude cannot be made without proper analysis of the market condition/stock movement etc. The revenue was of the opinion, that the assessee has worked out the administrative expenditure and had not considered all the administrative expenditure. Both the parties before us vehemently relied on the decision of Godrej Boyce Mfg Co. Ltd. Vs DCIT 328 ITR 81 (Mum). 15. We have gone through this decision and we noted that in this case, the assessee claimed exemption in respect of dividend income of 34.34 crores u/s 10(33). The AO issued notices for disallowance of interest u/s 14A of the IT Act. The explanation of the assessee was that (i) 95% of the shares were bonus shares for which no cost was incurred; (ii) No investment in shares was made in the current year and no disallowance was made in earlier years and (iii) There were sufficient interest free funds available in the form of share capital, reserves etc. which were more than investment in shares. The AO was not satisfied with the explanation of the assessee and he made disallowance u/s 14A on prorata basis. The CIT(A) following his orders for earlier years, accepted the appeal of the assessee. The Tribunal following the decision of the Special Bench in the case of ITO Vs Daga Capital Management (P) Ltd 117 ITD 169 (SB) restored the matter to the file of the AO for the consideration in the light of the provisions of sub-sec.(2) & (3) of Sec.14A of the IT Act. The assessee, being aggrieved, filed appeal as well as Writ Petition challenging the constitutional validity of sub-sec. (2) & (3) and Rule D. The Hon’ble High Court gave the following findings;

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the assessee furnish an objective basis for the AO to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the AO not being so satisfied that recourse to the prescribed method is mandated by law (pages 31-32). 6. In the event that the AO is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion (page-79). 7. The effect of sec.14A is to widen the theory of the apportionment of expenditure (page 49). 8. The expression ‘expenditure incurred; in Sec.14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for (page-50). 9. Sub-sections (2) & (3) of Sec.14A are intended to enforce and implement the provisions of sub-sec (1) (pages 50). 10. Even in the absence of sub-section (2) of sec.14A the AO 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 AO 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 relevant facts and circumstances”. The said decision of the jurisdictional High Court is binding on us. While deciding this case, the decision of the Hon’ble Supreme Court in the case of CIT Vs Wallfort Shares & Stock Brokers Ltd., 233 CTR (SC) 42 was referred to. In this decision, we noted that the Hon’ble Supreme Court in that case upheld the view of the Hon’ble Mumbai High Court in the case of Wallfort Shares & Stock Brokers Ltd. Vs ITO 310 ITR 421. The Hon’ble Supreme Court in this decision, at page-31 of the order held as under;

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“To attract Sec.14A there has to be proximate cause for disallowance which has its relationship with the tax exempt. Pay back or return of investment is not such proximate cause. Hence, Sec.14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, Sec.14A cannot be invoked”. 16. The Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs DCIT (supra) therefore at page-28 has clearly laid down that there must be proximate cause based on the relationship of the expenditure that tax exempt income is established, only then a disallowance would have to be effected u/s 14A of the IT Act. Therefore, in view of the decision of the jurisdictional High Court and the decision of the Hon’ble Supreme Court, we are of the view that sec.14A cannot be applied unless there is a proximate cause for disallowance. The onus to establish that there is proximate cause based on the relationship of the expenditure with the exempt income in our opinion is on the Revenue. Thus, the application of the provisions of sec. (2) & (3) of Sec.14A and Rule 8D is not automatic in each and every case, where there is income not forming part of the total income. Sub-sec. (2) & (3) are intended to enforce and implement the provisions of sub-sec. (1). Therefore, it is necessary for the AO first to ascertain whether there is proximate connection between the expenditure incurred and the income not forming part of the total income. If such proximate connection is established with the exempt income, the AO would be justified in applying the provisions of sub-sec (2) & (3) of sec.14A and Rule 8D of the IT Act, 1961. The expenditure incurred u/s 14A would include direct and indirect expenditure, but relationship with exempted income must be proximate. If there is material to establish that there is direct nexus between the expenditure incurred and the income not forming part of total income then disallowance would be justified even where there is no receipt of exempted income u/s 10 in the year under consideration in view of the decision of Special Bench in the case of Cheminvest Ltd. 124 TTJ 577 (Del)(SB).

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jurisdictional High Court decision is bound to record satisfaction as to how the expenses claimed by the assessee have been incurred on earning dividend income were not sufficient and correct. We have already held that the onus to prove in this regard lies on the assessing officer. Although the Ld. DR had vehemently contended and tried to build up his case by substituting the reasons given by the CIT(Appeal) in place of the AO, but failed to bring any cogent material or evidence in this regard which may prove that the other expenses claimed by the Revenue for apportionment had proximate connection with the earning of the dividend income. In our opinion until and unless this is proved or established by the revenue, the assessing officer does not have any power to reject the accounts of the assessee and take the shelter of Rule 8D for computing the disallowance out of the exempt income. We are not at all convinced with the submission of the Ld. DR relying on the decision of CIT(Appeal) in respect of Explanation bb to sec. 80HHC that 10% of the receipts under the sources mentioned therein are deemed to be the expenditure. This in our opinion will strengthen the case of the assessee as Explanation bb to sec. 80HHC does not recognize amount of the investment made in other receipt to be the basis of computing the expenditure being incurred for the earning of that income. Similar views have been taken by Hon’ble Tribunal in the following decisions also. In the case of DCIT Vs. Jindal Photo Ltd. held in I.T.A.T. Delhi bench dated 7.1.2011 it was held as follows: “Now as per section 14A(2) of the Act, if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the assessee’s total income under the Act, the AO shall determine the amount incurred in relation to such income, in accordance with such method as may be prescribed, i.e., under Rule 8D of the I.T. Rules. However, in the present case, the assessment order does not evince any such satisfaction of the AO regarding the correctness of the claim of the assessee. As such, Rule 8D of the Rules was not appropriately applied by the AO as correctly held by the CIT(A). It has not been done by the AO that any expenditure

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had been incurred by the assessee for earning its dividend income. Merely, an adhoc disallowance was made. The onus was on the AO to establish any such expenditure. This onus has not been discharged. In “CIT Vs. Hero Cycles” (P&H) 323 ITR 518, under similar circumstances, it was held that the disallowance u/s 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions. In “ACIT Vs. Eicher Ltd.”, 101 TTJ (Del.) 369, that it was held that the burden is on the AO to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance u/s 14A of the Act. In “Maruti Udyog Vs. DCIT, 92 ITD 119 (Del.), it has been held that before making any disallowance u/s 14A of the Act, the onus to establish the nexus of the same with the exempt income, is on the revenue. In “Wimco Seedlings Limited Vs. DCIT”, 107 ITD 267 (Del.) (TM), it has been held that there can be no presumption that the assessee must have incurred expenditure to earn tax free income. Similar are the decisions in: 1. Punjab National Bank Vs. DCIT, 103 TTJ 908 (Del.); 2. Vidyut Investment Ltd., 10 SOT 284 (Del.); and 3. D.J. Mehta Vs. Income Tax Officer, 290 ITR 238 (Mum.) (AT) In view of the above, finding no error with the order of the CIT(A) on the point at issue, the same is hereby confirmed. Ground no.3 is thus rejected.” In the case of Jindal Photo Ltd. Vs. DCIT held in I.T.A.T. Delhi bench dated 23.9.2011 it was held as follows: “In the year under consideration, it is seen that it is not incorrect when the assessee contends that no satisfaction has been recorded by the AO regarding the assessee’s calculation being incorrect. Even so, Rule 8D of the Rules has been applied. This, in our opinion, is not correct. Such satisfaction of the Assessing Officer is a pre-requisite to invoke the provisions of Rule 8D of the Rules. The Learned CIT(A),

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therefore, erred in partially approving the action of the Assessing Officer.” In the case of Avshesh Mercantile P. Ltd. Vs. DCIT in I.T.A.T. Mumbai Bench (I.T. Act No.5779/Mum/2006 & 208/Mum/2009) it was held as follows: “At the time of hearing, the contention raised by the learned DR in this regard is that the appeal of the Revenue on the issue having been dismissed by the Hon'ble Bombay High Court merely observing that no question arises, it cannot be treated as a decision rendered by the Hon'ble High Court on the merit of the issue which is binding on this Tribunal. We are unable to accept this contention of the learned DR. It is well settled proposition of judicial precedents that is appeal the Hon'ble High Court considers facts pertaining to the issue and gives approval to the decision of the lower forum, the decision of lower forum gets merged with the judgment and order of the High Court and it becomes binding precedent even though approval to decision of lower forum/court is summarily recorded. Similar situation had arisen for consideration before the Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. 283 ITR 402 wherein the effects of summary disposal of appeal by the High Court were analysed and explained by their Lordships. It was clarified that while hearing an appeal even for deciding whether substantial question of law arises or not from the order of the Tribunal, the High Court does not exercise either the original jurisdiction or the jurisdiction to issue writs and the only jurisdiction exercised by the High Court in the first instance decides whether or not substantial question of law arises from the order of the Tribunal, it cannot be said that the High Court does not exercise the appellate powers or that there is no decision on merit when the high court dismisses an appeal holding that no substantial question of law arises from the order of the Tribunal. It was held that whenever an order of the subordinate forum is carried in appeal before the higher appellate forum/court, operative part thereof merges into the judgment, decision or order of the higher court after the confirmation, modification or reversal, as the case may be,

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and the decision of the lower court or forum has no independent existence thereafter in relation to the issue which was carried before the appellate court or forum. It was held that where the High Court comes to the conclusion that no substantial question of law arises on a particular issue, it cannot be stated that the subject matter of controversy between the parties has not been dealt with by the High Court. It was held that when the decision of the Tribunal is affirmed on the issue brought before the High Court, it is the decision of the High Court which becomes operative and which is capable of being given effect to for all intents and purposes. Keeping in view the decision of Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. (supra), we have no hesitation to hold that the decision of the Hon'ble Bombay High Court in the case of Delite Enterprise Ltd. (supra) is a decision on merit which is binding precedent on us. As the issue involved in the present cases as well as all the material facts relevant thereto are similar to that of the case of Delite Enterprise (supra), we respectfully follow the said decision of the jurisdictional High Court and delete the disallowance made by the AO and confirmed by the learned CIT(A) on account of premium paid by the assessees on redemption of premium notes (OCPN) by invoking the provisions of section 14A of the Act. As regards the case laws cited by the Learned DR, it is observed that in none of these cases, the facts involved were similar to the case of the present assessees in as much as the investment made therein was not found to be capable of earning taxable as well as exempt income which was actually not earned by the assessee in the relevant period as are the facts of the present case or that of the case of Delite Enterprise (supra) decided by the Hon'ble Bombay High Court. Accordingly, we decide the common issue involved in all these appeals in favour of the assessees following the decision of jurisdictional High Court in the case of Delite Enterprises (supra) and allow the appeals of all the assessees.” 18. We have also gone through the decision relied upon by the learned DR also. The decision of ACIT Vs CITICORP Finance (Ind.) Ltd., 108 ITD 457 (Bom.) is no more relevant,

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in view of the decision of the Hon’ble Mumbai High Court in the case of Godrej Boyce Mfg Co. Ltd. (Supra). The decision of SPIC Vs DCIT 93 TTJ (Chennai) 161 is not applicable to the facts of the case. As in that case, the assessee was regularly investing in the shares. The assessee has not disallowed any expenditure with regard to the earning of the dividend income. Under these facts, the Hon’ble Tribunal held that whether to invest or not to invest is a very strategic decision and top management involve in taking the decisions. This decision relate to assessment year 2000-01 much prior to the insertion of provision of sec.14A(2) of the IT Act,1961. The decision of ACIT Vs Premium Consolidated Capital Trust 83 TTJ (Bom.) relates to assessment year 1991-92 prior to insertion of 14A(2) hence will not assist the revenue. The other decision relied on are also not applicable to the facts of the case, except the decision of jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs DC IT & Another 328 ITR 81(Bom.). In view of our aforesaid discussion and respectively following the decision of the jurisdictional High Court in the case of Godrej & Boyce Mfg. co. Ltd. Vs. DCIT & another 328 ITR 81 (Bom), we delete the disallowance made u/s 14A r.w. Rule 8D and accordingly, the ground taken by the assessee in this regard is allowed.” 8.3 No contrary decision was brought to our knowledge by Learned D. R. which may take a view that the Assessing Officer can compute the disallowance under Rule 8D without recording the non satisfaction about the creditworthiness of the claim of the assessee in respect of the expenditure in relation to the income which does not form part of the total income on the basis of the account of the assessee. Respectfully following the aforesaid decision, we set aside the order of CIT(A) so far it relates to the sustenance of disallowance of Rs.9,76,395/- and confirm the order of CIT(A) so far it relates to deletion of disallowance of Rs.45,80,445/-. Thus, ground 3 to 5 of assessee’s appeal are allowed and ground 1 & 2 of Revenue’s appeal are dismissed.

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Sd/- Sd/- [T. S. KAPOOR] [A. D. JAIN] ACCOUNTANT MEMBER VICE PRESIDENT DATED:19/07/2019 JJ:1507 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR By order

Assistant Registrar