ADITYA BIRLA FINANCE LTD,MUMBAI vs. ADDL CIT RG 2(1), MUMBAI

आदेश / O R D E R Per Joginder Singh (Judicial Member) The assessee as well as Revenue is in cross appeal against the impugned order dated 14/07/2011 of the Ld. First Appellate Authority, Mumbai.

2.1. We have considered the rival submissions and perused the material available on record. In view of the above, it is noted that the tax effect in the present appeal is below prescribed limit of Rs.10 lakh, therefore, CBDT instruction No.21 of 2015, dated 10/12/2015 (F No.279/Misc./142/ 2007-IT(PT) is applicable, wherein, the Department was advised/directed by the Board not to file

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appeal in the cases where the tax effect does not exceed the following monetary limit.:-

Sl. Appeals in Income –tax matters Monetary Limit (in Rs.) No. 1. Before ITAT 10,00,000/- 2. U/s 260 A before Hon’ble High 20,00,000/- Court 3. Before Hon’ble Supreme Court 25,00,000/-

In view of the above instruction, since, the tax effect is less than Rs.10,00,000/-, consequently, the appeal of the Revenue is not maintainable, therefore, dismissed.

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Reliance Utilities and Power Ltd. 313 ITR 340 (Bom.). It was further explained that the assessee is in the business of finance and the interest income is more than interest expenditure. Our attention was invited to page-14 of the paper book and the latest decision from Hon'ble jurisdictional High Court in the case of CIT vs Jubilant Enterprises Pvt. Ltd. (ITA No.1512 of 2014 order dated 28/02/2017 and another decision in the case of Shri Paresh K. Shah (ITA No.8214/Mum/2011), order dated 05/06/2013. It was further explained that the conclusion of the assessee is on the basis of the decision of the accountant which is more scientific and rational, by further pleading that no defect was pointed out by the Assessing Officer/CIT(A). On the other hand, the Ld. DR, defended the conclusion of the Ld. Commissioner of Income Tax (Appeal) by placing reliance upon the decision in the case of Godrej and Boyce Mfg. Ltd. 328 ITR 81 (Bom.). However, the ld. counsel for the assessee further explained that interest income is higher than the interest expenses, therefore, no disallowance u/s 14A of the Act could have been made.

3.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee company is engaged in retails assets financing, investment and trade finances declared income of Rs.34,09,05,941/-. Subsequently, the assessee filed revised return on March, 30, 2010 declaring income of Rs.34,37,59,455/-. While framing the assessment u/s

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143(3) of the Act on 28/12/2010, the total income was determined at Rs.36,28,25,820/-, while doing so, the ld. Assessing Officer made certain additions/disallowances. During the year, the assessee received dividend of Rs.1,13,97,702/- out of which, the amount of Rs.1,13,95,882/- pertains to dividends received from mutual fund unit. It is noted that the assessee suo-moto disallowed Rs.10,66,834/- u/s 14A of the Act as the interest/expenses amount attributable to earning such exempt income. The Ld. Assessing Officer enhanced the disallowance by Rs.1,78,69,431/- applying Rule-8D of the rules. Right from beginning, the assessee had claimed that the assessee is pre-dominantly, in the business of financial services/facilities to its customers like loan against securities, IPO finance, bill discounting, working capital loan etc. It is further noted that the assessee made the investment in mutual funds out of excess funds, temporarily available, for a short span of period. The assessee explained that the appellant is a cash profit making company and generated cash flows from internal accruals and its promoters also contributed share capital. The assessee’s cash net-worth as on 31/03/2008 was as under:-

(Amount in Rs. In Lakh) Share Capital 10596.48 Preference Share 7500.00 Reserves & Surplus 1932.36 Deferred Tax Liabilities 1.56 Accumulated depreciation 136.16 Gross Cash Net Worth 20166.65

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3.2. During hearing before us, the ld.counsel for the assessee explained that the investment was made out of own surplus funds. Before we go into the questions at hand it would be appropriate to not only examine the provisions of section 14A of the Act but also to notice its legislative history. Section 14A was inserted into the Act by the Finance Act, 2001 with retrospective effect from 01/04/1962. 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. By virtue of the Finance Act, 2002, the following proviso was inserted in section 14A and was deemed to have been inserted with effect from 11/05/2001:-

“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.” As a result of the insertion of the said proviso, Section 14A was as follows:-

“Expenditure incurred in relation to income not includible in total income. 14A. 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.

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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.” Then, by the Finance Act, 2006, Section 14A was numbered as sub-section (1) thereof and after sub-section (1) as so numbered, the following sub-sections were inserted, with effect from 01/04/2007:- “(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.” 3.3 Consequent upon the Finance Act, 2006, section 14A as it now stands is as under:-

“Expenditure incurred in relation to income not includible in total income .

14A. (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

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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.” 3.4. By Notification No.45/2008 dated 24/03/2008, the Central Board of Direct Taxes (CBDT), in exercise of its powers under section 295 of the said Act read with sub- section (2) of section 14A of the said Act, made the “Income- tax (Fifth Amendment) Rules, 2008” to further amend the said Rules (i.e., the Income-tax Rules, 1962) by introducing Rule 8D therein. Clause 1(2) of the Income-tax (Fifth Amendment) Rules, 2008 clearly stipulated that the rules would come into force from the date of publication in the Official Gazette. The said Rule 8D is as under:-

“Method for determining amount of expenditure in relation to income not includible in total income. 8D.(1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with—

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(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) 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:—

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 assets 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.

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(3) For the purposes of this rule, the “total assets” shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.” The law prior to insertion of Section 14A

3.5. Prior to the introduction of section 14A in the said Act, the position of law was as laid down by the Supreme Court in CIT v. Maharashtra Sugar Mills Ltd: 82 ITR 452 (SC) and Rajasthan State Warehousing Corporation v. CIT: 242 ITR 450 (SC) was different. In Maharashtra sugar Mills Ltd (supra) the assessee’s business comprised of two parts, namely, (1) cultivation of sugar cane and (2) the manufacture of sugar. The Revenue had contended that as the income from the cultivation of sugar cane, being the result of an agricultural operation, was not exigible to tax, therefore, any expenditure incurred in respect of that activity was not deductible. The Supreme Court repelled this contention in the following manner:-

"This contention proceeds on the basis that only expenditure incurred in respect of a business activity giving rise to income, profit or gains taxable under the Act can be given deduction to and not otherwise. We see no basis for this contention. To find out whether the deduction claimed is permissible under the Act or not, all that we have to do is to examine the relevant provisions of the Act. Equitable considerations are wholly out of place in construing the provisions of a taxing statute. We have to take the provisions of the statute as they stand. If the amount claimed is permissible under the Act then the same has to be deducted from the gross profit. If it is not permissible under the Act, it has to be rejected. As mentioned earlier, it is not disputed that the cultivation of sugar- cane and the manufacture of sugar constituted one single and indivisible business. Section 10(2) says that profits under section 10(1) in respect of a business should be computed after deducting

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the allowances mentioned therein. One of the allowances allowed is that mentioned in section 10(2)(xv) which says that any expenditure laid out or expended wholly an exclusively for the purpose of such business shall be deducted as an allowance. The mandate of section 10(2) (xv) is plain and unambiguous. Undoubtedly, the allowance claimed in this case was laid out or expended for the purpose of the business carried on by the assessee. The fact that the income arising from a part of that business is not exigible to tax under the act is not a relevant circumstance." 3.6. In Rajasthan State warehousing Corporation (supra), the Supreme Court after, inter alia, considering its earlier decisions in CIT v. Indian bank Ltd: 56 ITR 77 (SC) and Maharashtra Sugar Mills Ltd (supra) laid down the following principles:-

"(i) if income of an assessee is derived from various heads of income, he is entitled to claim deduction admissible under the respective head whether or not computation under each head results in taxable income; (ii) if income of an assessee arises under any of the heads of income but from different items, e.g., different house properties or different securities, etc., and income from one or more items alone is taxable whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible; and (iii) in computing "profits and gains of business or profession" when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under section 37 of the Act will depend on: (a) fulfillment of requirements of that provision noted above; and (b) on the facts whether all the ventures carried on by him constituted one indivisible business or not; if they do, the entire expenditure will be a permissible deduction but if they do not, the principle of apportionment of the

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expenditure will apply because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee." 3.7. Thus, prior to the introduction of section 14A in the said Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of the said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. However, where the business was divisible, the principle of apportionment of the expenditure was applicable and the expenditure apportioned to the ‘exempt’ income or income not exigible to tax, was not allowable as a deduction.

3.8. The object behind the insertion of section 14A in the said Act is apparent from the Memorandum explaining the provisions of the Finance Bill 2001 which is to the following effect:-

"Certain incomes are not includable while computing 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 nonexempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against 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.

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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 years." 3.9. As observed by the Supreme Court in the case of CIT v. Walfort Share and Stock Brokers P Ltd: 326 ITR 1 (SC), the insertion of section 14 A with retrospective effect reflects the serious attempt on the part of Parliament 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 said act against the taxable income. The Supreme Court further observed as under:-

".. In other words, section 14 A clarifies that expenses incurred can be allowed only to the extent that 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 of the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income…” “..Expenses allowed can only be in respect of earning 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 in the 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..” (Emphasis supplied)

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3.10. The Supreme Court also clearly held that in the case of an income like dividend income which does not form part of the total income, any expenditure/deduction relatable to such (exempt or non-taxable) income, even if it is of the nature specified in sections 15 to 59 of the said Act, cannot be allowed against any other income which is includable in the total income. The exact words used by the Supreme Court are as under:-

"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 sections 15 to 59 but related to the income not forming part of the total income could not be allowed against other income includable in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditure between taxable and nontaxable has, in principle, been now widened under section 14 A." (emphasis supplied)

3.11. Sub-section (1) of section 14A clearly stipulates that for the purposes of computing total income under Chapter IV (Computation of Total Income), no deduction shall be allowed in respect of expenditure “incurred” by the assessee “in relation to” income which does not form part of

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the total income under the said Act. A lot of emphasis was laid on the expressions “incurred” and “in relation to”. It was contended by ld. counsel, who appeared on behalf of the assesses, that the word “incurred” must be taken literally in the sense that the expenditure must have actually taken place. Moreover, the expenditure must also have taken place in relation to income which does not form part of total income. The Ld. Counsel contended that the expression “in relation to” implies that there must be a direct and proximate connection with the subject matter. In other words, according to the Ld. Counsel, only that actual expenditure which is made directly and for the object of earning exempt income could be disallowed under section 14A. He submitted that if the dominant and main objective of spending was not the earning of ‘exempt’ income then, the expenditure could not be disallowed under section 14A provided it was otherwise allowable under sections 15 to 59 of the said Act. It was emphasized that the expenditure must be actual and cannot be computed on the basis of some formula as stipulated under Rule 8D read with sub-sections (2) & (3) of section 14A.

3.12. Let us examine the expression “in relation to”. we may refer to the Supreme Court decision in Madhav Rao Scindia v. Union of India: AIR 1971 SC 530 where, in paragraph 134, it is observed as under:-

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".. The expression "provisions of this Constitution relating to" in article 363 means provisions having a dominant and immediate connection with: it does not mean merely having a reference to." 3.13. In Doypack Systems Pvt Ltd v. Union of India: AIR 1988 SC 782, the Supreme Court observed that the expressions "pertaining to", "in relation to" and "arising out of", used in the deeming provision, are used in the expansive sense. The Supreme Court further observed as under:-

"49. The expression "in relation to" (so also "pertaining to"), is a very broad expression which presupposes another subject matter. These are words of comprehensiveness which might both have a direct significance as well as an indirect significance depending on the context…" "… In this connection reference may be made to 76 Corpus Juris Secundum at pages 620 and 621 where it is stated that the term "relate" is also defined as meaning to bring into association or connection with. It has been clearly mentioned that " relating to" has been held to be equivalent to or synonymous with as to "concerning with" and "pertaining to". The expression "pertaining to" is an expression of expansion and not of contraction." (emphasis supplied) 3.14. Hon’ble Punjab & Haryana High Court in the case of CIT-II v. Hero Cycles Ltd., decided on 4/11/2009, observed that:-

“Disallowance under Section 14A requires finding of incurring expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand.” 3.15. We are of the view that unless and until there was actual expenditure for earning the exempted income, there could not be any disallowance under section 14A. While we agree that the expression “expenditure incurred” refers to actual expenditure and not to some

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imagined expenditure we would like to make it clear that the ‘actual’ expenditure that is in contemplation under section 14A(1) of the Act is the ‘actual’ expenditure in relation to or in connection with or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made under section 14A of the Act.

3.16. So far as, scope of Sub-section (2) of Section 14A of the Act, is concerned, it provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only 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 the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that

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the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the

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expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same.

3.17. As we have already noticed, sub-section (2) of Section 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is – “such method as may be prescribed”. By virtue of Notification No.45/2008 dated 24/03/2008, the Central Board of Direct Taxes introduced Rule 8D in the said Rules. The said Rule 8D also makes it clear that where the Assessing Officer, having regard to the accounts 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 said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D(1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14A, the condition precedent for the Assessing

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Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules.

3.18. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components.

(i) The first component being the amount of expenditure directly relating to income which does not form part of the total income.

(ii) The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of

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the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee.

(iii) The third component is an artificial figure – one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under Section 14A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects – (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half percent of the average value of the investment, income from which does not or shall not form part of the total income, is taken.

3.19. Insofar as sub-sections (2) and (3) of Section 14A are concerned, they have also been introduced by virtue of the Finance Act, 2006 with effect from 01.04.2007. This is

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apparent, first of all, from the Notes on Clauses of the Finance Bill, 2006 [Reported in 281 ITR (ST) at pages 139- 140]. The said Notes on Clauses refers to clause 7 of the Bill which had sought to amend Section 14A of the said Act. It is specifically mentioned in the said Notes on Clauses that:-

“This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years.” This is apparent, first of all, from the Notes on Clauses of the Finance Bill, 2006 [Reported in 281 ITR (ST) at pages 139-140]. The said Notes on Clauses refers to clause 7 of the Bill which had sought to amend Section 14A of the said Act. It is specifically mentioned in the said Notes on Clauses that:- “This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years.

3.20. Furthermore, in the Memorandum explaining the provisions in the Finance Bill, 2006 [281 ITR (ST) at pages 281-281], it is once again stated with reference to clause 7 which pertains to the amendment to Section 14A of the said Act that:-

“This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years.” 3.21. We may also refer to the CBDT Circular No.14/2006 dated 28.12.2006 and to paragraphs 11 to 11.3 thereof. Paragraph 11 dealt with the method for allocating

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expenditure in relation to exempt income and paragraphs 11.1 and 11.2 explained the basis and logic behind the introduction of sub-section (2) of Section 14A of the said Act. Paragraph 11.3 specifically provided for applicability of the provisions of subsection (2) and it clearly indicated that it would be applicable “from the assessment year 2007-08 onwards”.

It is, therefore, clear that sub-sections (2) and (3) of Section 14A were introduced with prospective effect from the assessment year 2007-08 onwards. However, sub-section (2) of Section 14A remained an empty shell until the introduction of Rule 8D on 24/03/2008 which gave content to the expression “such method as may be prescribed” appearing in Section 14A(2) of the said Act. Thus, it is clear that, in effect, the provisions of subsections (2) and (3) of Section 14A would be workable only with effect from the date of introduction of Rule 8D. This is so because prior to that date, there was no prescribed method and sub-sections (2) and (3) of Section 14A remained unworkable.

3.22. So far as, as to how Section 14A to be worked for the period prior to the introduction of Rule 8D, is concerned. Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income “in accordance with such method as may be prescribed”. Of course, this determination

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can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) & (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method. So, even for the pre-Rule8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the assessing officer will have to verify the correctness of such claim. In

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case, the Assessing Officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality, the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section14A(1). In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment.

3.23. In view of the foregoing discussion, we find that the assessee suo-moto disallowed Rs.6.36 lakhs on account of interest and Rs.8.74 lakhs as indirect expenses, therefore, we find merit in the claim of the assessee. As mentioned earlier and argued by the ld. counsel for the assessee, the assessee was having own funds, which was in far excess of borrowed funds, therefore, mechanically no disallowance can be made. The Hon'ble Bombay High Court in Reliance Utilities and Power Ltd. (supra) held as under:-

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“The very basis on which the Revenue had sought to contend or argue their case that the shareholders funds to the tune of over Rs. 172 crores was utilised for the purpose of fixed assets in terms of the balance sheet as on 31st March, 1999, is fallacious. Firstly, the balance sheet as of 31st March, 1999 is nor relevant. What would be relevant would be balance sheet as on 31st March, 2000. Apart from that, the counsel has been unable to point out from the balance sheet that the balance sheet as on 31st March, 1999 showed that the shareholders funds were utilised for the purpose of fixed assets. The P&L a/c and the balance sheet would not show whether shareholders funds have been utilised for investments. The argument has to be rejected on this count also. Apart from that both in the order of the CIT(A) as also the Tribunal, a clear finding is recorded that the assessee had interest-free funds of its own which had been generated in the course of the year commencing from 1st April, 1999. Apart from that in terms of the balance sheet there was a further availability of Rs. 398.19 crores including Rs. 180 crores of share capital. In this context, the finding of fact recorded by CIT(A) and Tribunal as to availability of interest-free funds really cannot be faulted. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal—Woolcombers of India Ltd. vs. CIT (1981) 23 CTR (Cal) 204 : (1982) 134 ITR 219 (Cal) and East India Pharmaceutical Works Ltd. vs. CIT (1997) 139 CTR (SC) 372 : (1997) 224 ITR 627 (SC) relied on.”

3.24 Likewise, Hon'ble jurisdictional High Court in HDFC Bank Ltd. (supra) also held as under:-

“Section 14A of the Act would be inapplicable. However this was also disregarded by the impugned order on the ground that this Court did not entertain an appeal of the Revenue from the order of the Tribunal holding that Section 14A of the Act is inapplicable where the investment has been made in stock in trade. This non entertainment of an appeal being on the ground that this Court found no substantial question of law.

(Para18)

That if appeal is not admitted from an order of the Tribunal, then it is open to the Tribunal in another case to decide directly contrary to the view taken by the earlier order of the Tribunal, which is not entertained by this court in appeal. This without even as much as a whisper of any explanation with regard to how and why the facts of the two cases are different warranting a view different from that taken by the Tribunal earlier. In fact when an appeal is not entertained then the order of the Tribunal holds the field and the coordinate benches of the Tribunal are obliged to follow the same unless there is some difference in the facts or law applicable and the

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difference in fact and / or law should be reflected in its order taking a different view. Tribunal has acted beyond the limits of its authority.

(Para19)

Impugned order of the Tribunal has an observation therein that there is no such thing as estoppel in law and by virtue of that gives itself a licence to decide the issue before it ignoring the binding precedent in the petitioner’s own case in HDFC Bank Ltd(supra). Once there is a binding decision of HIGH Court, the same continues to be binding on all authorities within the State till such time as it stayed and / or set aside by the Apex Court or this very Court takes a different view on an identical factual matrix or larger bench of this Court takes a view different from the one already taken.

(Para22)

For the purposes of certainty, fairness and uniformity of law, all authorities within the State are bound to follow the orders passed by us in all like matters, which by itself implies that if there are some distinguishing features in the matter before the Tribunal and, therefore, unlike, then the Tribunal is free to decide on the basis of the facts put before it. However till such time as the decision of this court stands it is not open to the Tribunal or any other Authority in the State of Maharashtra to disregard it while considering a like issue. In case HIGH Court are wrong, the aggrieved party can certainly take it up to the Supreme Court and have it set aside and / or corrected or where the same issue arises in a subsequent case the issue may be re urged before HIGH Court to impress upon it that the decision rendered earlier, requires reconsideration. It is not open to the Tribunal to sit in appeal from the orders of High Court and not follow it. In case the doctrine of precedent is not strictly followed there would complete confusion and uncertainty. The victim of such arbitrary action would be the Rule of law of which we as the Indian State are so justifiably proud.

(Para23)

It is in the above circumstances that High Court are of the view that High Court have to exercise our powers under Article 227 of the Constitution of India. This is in view of the manner in which the impugned order of the Tribunal has chosen to disregard and/or circumvent the binding decision of this Court in respect of the same assessee for an earlier assessment year. This is a clear case of judicial indiscipline and creating confusion in respect of issues which stand settled by the decision of High Court.

(Para24) It is in the above view, that High Court set aside the impugned order of the Tribunal dated 23rd September, 2015 in its entirety and restore the issue to the Tribunal to decide it afresh on its own merits and in accordance with law. However the Tribunal would scrupulously follow the decisions rendered by this Court wherein a view a has been taken on identical issues arising before it. It is not open to the

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Tribunal to disregard the binding decisions of High Court, the grounds indicated in the impugned order which are not at all sustainable.” (Para25) 3.25 In the light of the above decisions from Hon'ble jurisdictional High Court, it can be concluded that since the investment was made out of surplus funds, no further disallowance is required to be made u/s 14A of the Act as section 14A provides for disallowance of expenditure incurred “in relation to” income which does not form the part of the total income, meaning thereby, there should be direct nexus between the actual expenditure incurred for the purpose of earning tax free income. No doubt, the word “in relation to” appears to be broad at firm impression but on deeper examination and read in conjunction with the word “incurred” it seems that these are restrictive words, restricting the power of Assessing Officer to estimate a part of expenditure, incurred by the assessee, to produce non- taxable income. To elaborate further, the word “incurred” refers to factual spending of expenditure in relation to exempt income and does not refer to deemed spending or assumed spending for the purpose. While applying the section, there is no authority conferred by the section upon Assessing Officer to deem or assume certain expenditure to have been incurred in relation to tax free income. The proximity cause of disallowance u/s 14A is its relationship with the tax exempt income. Wherever the expenses incurred has no relationship with the income not includible in the total income, there cannot be any occasion to invoke

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the provision for making the disallowance u/s 14A of the Act. In the light of the foregoing discussion, it can be concluded that the expenditure, which can be disallowed u/s 14A should be actually incurred.

3.26 So far as, the expression “satisfaction” is concerned, it postulates a bona-fide belief about the incorrectness of the claim of the assessee and existence of objective reason for such belief. Further, this expression also does not mean a purely subjective satisfaction of the Assessing Officer or pretence based on suspicion and conjuncture but must be a belief held in good faith and founded on material that is not irrelevant or arbitrary. In the light of the discussion, we are of the view, the Ld. Assessing Officer cannot reject the claim of the assessee merely because it is not as per Rule-8D. To invoke Rule-8D, the Assessing Officer should provide a justifiable reason for not accepting the claim of the assessee that no expenditure had been incurred for earning the tax free dividend income. In fact, it is apparent from the record/annual accounts of the assessee that no borrowed funds were utilized and the investment made by the assessee is out of its own funds, therefore, the provision cannot be invoked arbitrarily. It is also noted that the assessee suo-moto made the disallowance, wherever, it was suppose to do so. Thus, on this count, we allow this ground of the assessee, more specifically when own funds are much more in excess of the borrowed funds.

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3.27. So far as, the additional ground (ground no.5), is concerned, tt is also noted that the assessee is in the Finance business and the interest income is more than the interest expenditure as is evident frompage-14 of the paper book. In such a situation, the decision from jurisdictional High Court in CIT vs Jubilant Enterprises Pvt. Ltd. (ITA No.1512 of 2014) order dated 28/02/2017 supports the case of the assessee. Likewise, the decision in Paresh K Shah of coordinate Bench (ITA No.8214/Mum/2011) and Kolkata Bench in Trade Apartments Ltd. (ITA No.1277/Kol/2011) further supports the case of the assessee. In Paresh K. Shah vs DCIT order dated 05/06/2013, the coordinate Bench held as under:

“This appeal by the assessee is directed against the order dated 30.8.2011 of the Commissioner of Income Tax(Appeals) for the Assessment Year 2008-09. 2. The assessee has raised the following grounds in this appeal: “On the facts and in the circumstances of the case and in law, the Commissioner of Income Tax(Appeals) erred in upholding the disallowance u/s 14A of Rs. 17,65,069/- u/r 8D of I T Rules without appreciating that the appellant had sufficient interest free funds to make the investments. 2. On the facts and in the circumstances of the case and in laws the Commissioner of Income Tax(Appeals) erred in not considering the fact that the borrowed funds were not utilized for the purpose of making investment in the shares.” 3 The only issue arising from the appeal of the assessee is whether in the facts and circumstances of the case, the Commissioner of Income Tax(Appeals) is justified in confirming the disallowance made by the Assessing Officer u/s 14A of Rs. 17,65,069/- by applying Rule 8D of the I T Rules. 3.1 During the course of assessment proceedings, the Assessing Officer proposed to make the disallowance u/s 14A on account of interest expenditure as well as administrative expenditure by applying Rule 8D of the I T Rules. The assessee contended before the Assessing Officer that the

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assesssee’s own fund is sufficient for making the investments in the shares. It was further contended that the investments in the shares made in the sister concern of the assessee with a view to have control over the affairs of the sister concern and not for earning the dividend income. It was further contended that the interest income is more than the interest expenditure; therefore, no disallowance is called for u/s 14A. 3.2 The Assessing Officer did not accept the contention of the assessee and made the disallowance on account of interest u/s 14A to the tune of Rs. 15,40,831/- and further Rs. 2,24,238/- on account of administrative expenditure total amounting to Rs. 17,65,069/-.3.3 On appeal, the Commissioner of Income Tax(Appeals) has confirmed the disallowance made by the Assessing Officer. 4 Before us, the ld AR of the assessee has submitted that the interest income of the assessee is more than the interest expenditure; therefore, no disallowance is called for u/s 14A. He has referred the order of the coordinate Bench of the Tribunal in the case of DCIT vs M/s Trade Apartment Ltd., in ITA No. 1277/Kol.2011. The ld AR of the assessee has pointed out that the assessee has offered net income to tax and therefore, no question of disallowance u/s 14A arises. He has further submitted that the assessee’s own fund is sufficient for making the investments in the shares of the sister concern. Further, there is no new investments during the year and all investments in the earlier year and the revenue has not made any disallowance u/s 14A in the earlier year. 4.1 On the other hand, the ld DR has relied upon the orders of the authorities below and submitted that Rule 8D is applicable for the year under consideration; therefore, the Assessing Officer has disallowed the same by computing the disallowance on account of interest as well as administrative expenditure as per the formula provided u/r 8D of the I T Rules. The assessee has used the mixed funds comprising own funds and borrowed funds; therefore, disallowance is required to be made u/r 8D. In support of his contention, he has relied upon the order of the Ahmedabad Benches of the Tribunal in the case of Advance Finstock P Ltd in ITA No.3221/Ahd/2011 and submitted that the Tribunal has upheld the disallowance made u/s 14A when the assessee has used mixed funds for the purpose of investments in shares. 5 Having considered the rival submissions as well as the relevant material on record, we find that the assessee’s own funds comprising share capitals reserves and surplus is Rs.4,48,47,798/-, which is equalant to the cost of investment in the shares. Further, there is no fresh investments during the year under consideration and all these investments were made in the earlier year; therefore, there is no question of utilization of the borrowed funds during the year under consideration. 5.1 It is pertinent to note that when the Assessing Officer had not made any disallowance u/s 14A on account of interest expenditure in the earlier year; therefore, in the absence of fresh investment during the year, no disallowance can be made on account of interest by applying the provisions of sec. 14A. Further, the assessee earned the interest income of Rs.42,17,981/- against the interest & brokerage expenditure of Rs..

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30,79,450/- . This net interest expenditure offered to tax by the assessee is Rs. 11,38,531/- which show that interest income is more than the interest expenditure and therefore, it cannot be presumed that borrowed fund was utilised for the purpose of making the investments in the shares. 5.2 In view of the above facts and circumstances of the case as well as the decision of the Hon’ble Jurisdictional High Court in the case of Commissioner of Income-tax v. Reliance Utilities and Power Ltd. reported in 313 ITR 340, we are of the opinion that no disallowance is called for u/s 14A on account of interest expenditure.” In the light of the foregoing discussion, we find that neither the Ld. Assessing Officer nor the Ld. Commissioner of Income Tax (Appeal) pointed out any defect in the accounts of the assessee, therefore, the ratio laid down in the case of Britania Industries Ltd. vs DCIT (ITA No.390/Kol/2013) order dated 02/03/2016, M/s Raptakos Brett & Co. Ltd. vs Addl. CIT(A) (ITA No.7490/Mum/2013) order dated 10/11/2016 supports the case of the assessee. The ratio laid down in M/s Fedex Finance Pvt. Ltd. vs DCIT (ITA No.1073 and 1067/Mum/2013) and M/s White Water Mass Media vs ACIT (ITA No.2963/Mum/2013) supports the case of the assessee. It is also noted that during assessment proceedings, the report of the accountant, specifying the basis for calculating the amount disallowable u/s 14A of the Act was submitted by the assessee and the Ld. Assessing Officer without rejecting the report mechanically applied Rule-8D and computed the amount of disallowance, which cannot be said to be justified. At best, the disallowance may be restricted as suo-moto made by the assessee. Thus, no further disallowance was required to be made.

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Finally, the appeal of the Revenue is dismissed as not maintainable being less tax effect monetary limit and the

34 ITA No.5732 & 6648/Mum/2011 M/s Aditya Birla Finance Ltd.

appeal of the assessee is partly allowed for statistical purposes.

This order was pronounced in the open in the presence of ld. representatives from both sides at the conclusion of the hearing on 10/04/2017.

Sd/- Sd/- (Rajendra) (Joginder Singh) लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य / JUDICIAL MEMBER मुंबई Mumbai; �दनांक Dated : 12/04/2017

f{x~{tÜ? P.S/.�न.स.

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to :

आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy//

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai