The order of the Bench was delivered by
P. K. Bansal (Accountant Member)- These are the cross-appeals filed by the assessee and the Revenue against the order of the Commissioner of Income-tax (Appeals)-II, Kanpur dated March 21, 2016.
2. In its appeal the assessee has taken the following grounds :
"1. Because the learned Commissioner of Income-tax (Appeals) has erred in law and on facts in confirming the disallowance of Rs. 1,62,66,215 on account of additional depreciation claimed under section 32(1)(iia) of the Income-tax Act inasmuch as provision of allowing additional depreciation on a new plant and machinery installed is one time compact 20 per cent. allowance which on account of methodology of calculation is allowed 50 per cent. of 20 per cent if the new plant and machinery is installed after 30th September of the year and rest in ensuing year. So, the disallowance is bad in law and deserves to be deleted.
2. Because the learned Commissioner of Income-tax (Appeals) has erred in law and on facts in interpreting the spirit contained in the provisions of section 32(1)(iia) and so the appellant-company places reliance in the judgment delivered by the honourable High Court of Karnataka in the case of CIT v. Rittal India (P.) Ltd. (No. 1) (I. T. A. No. 268/2014 dated November 24, 2015 reported in [2016] 380 ITR 423 (Karn).
3. Because the learned Commissioner of Income-tax (Appeals) has erred in law and on facts in confirming the addition of Rs. 9,76,395 being disallowance under section 14A of the Income-tax Act read with rule 8D(2)(iii) of the Income-tax Rules, particularly when the appellant is not in receipt of exempt income during the year.
4. Because the learned Commissioner of Income-tax (Appeals) has erred in law and on facts that orders of the honourable High Court and the Supreme Court have overriding effect over the circulars/instructions issued by the Central Board of Direct Taxes irrespective of the fact whether the particular circular/instruction is adjudicated upon or not and the appellant's case is squarely covered by the decision of the jurisdictional High Court in the case of CIT v. Shivam Motors P. Ltd. (I. T. A. No. 88/2014 dated May 5, 2014).
5. Because the learned Commissioner of Income-tax (Appeals) has failed to appreciate that the entire investments made in tax exempt instruments, are all old ones and out of the interest-free funds available, the provisions of section 14A read with rule 8D of the Income- tax Rules is not applicable, and has thereby erred in confirming the disallowance of Rs. 9,76,395 under section 14A of the Income-tax Act, 1961."
3. In its appeal the Revenue has taken the following grounds :
"1. That the learned Commissioner of Income-tax (Appeals) erred in law and on facts in allowing the appeal of the assessee regarding the disallowance of interest of Rs. 45,80,445 which is not directly attributable to any particular income or receipt under section 14A read with rule 8D(2)(ii) without properly appreciating the facts and circumstances of the case as well as merits brought on record by the Assessing Officer in the order under reference.
2. That the learned Commissioner of Income-tax (Appeals) erred in law and on facts in allowing the appeal of the assessee regarding the disallowance of interest of Rs. 45,80,445 which is not directly attributable to any particular income or receipt under section 14A read with rule 8D(2)(ii) without properly appreciating that the assessee failed to offer any justified explanation to substantiate the same.
3. That the learned Commissioner of Income-tax (Appeals) erred in law and on facts in allowing the appeal of the assessee regarding disallowance made under section 36(1)(va) of the Act of Rs. 4,55,488 without appreciating that the action of the Assessing Officer was justified in invoking the provisions of section 36(1)(va) of the Income- tax Act, 1961.
4. That the order of the Commissioner of Income-tax (Appeals) being erroneous, unjust and bad in law be vacated and the order of the Assessing Officer be restored."
4. Ground Nos. 1 and 2 in the assessee's appeal relate to the sustenance of disallowance of Rs. 1,62,66,215 on account of additional depreciation claimed under section 32(1)(ii)(a) on new plant and machinery on the methodology that 50 per cent. of 20 per cent. of the new plant and machinery installed after 30th September and the rest in the ensuing year. The facts relating to these grounds are that the Assessing Officer found that the assessee has claimed additional depreciation amounting to Rs. 1,62,66,215 on the plant and machinery which has been acquired and installed in the assessment year 2011-12. The Assessing Officer did not allow the additional depreciation during the impugned assessment year as the new plant and machinery were acquired and installed during the assessment year 2011-12. The assessee went in appeal before the Commissioner of Income- tax (Appeals) who interpreted the provisions of section 32(1)(ii)(a) and took the view that as per this said provision if the plant and machinery purchased during the previous year has been used for less than 180 days, the deduction under this sub-section in respect of such plant and machinery shall be restricted to 50 per cent. of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (ii)(a) as the case may be. Therefore, he took the view that there is nothing in the statute to provide for the balance 50 per cent. of allowable additional depreciation to be allowed in the subsequent year. Thus, the Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer by dismissing the ground taken by the assessee and directed the Assessing Officer to recalculate the closing written down value and the opening written down value for the subsequent years.
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 and machinery during the preceding assessment year, i.e., the assessment year 2011-12. The said new plant and machinery was purchased and installed in the preceding assessment year after September 30, 2010 and therefore, in the preceding assessment year the assessee was allowed 50 percent. of the additional depreciation allowable at 20 per cent. in respect of the new plant and 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 at 10 per cent. in respect of the new plant and machinery. During the impugned assessment year the assessee claimed the balance 50 per cent. of 20 per cent. i.e. 10 per cent. additional depreciation on these plant and 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 and machinery acquired and installed in the preceding assessment year. In our opinion, now this issue is duly covered by the decision of the hon'ble Karnataka High Court in the case of CIT v. Rittal India P. Ltd. (No. 1) [2016] 380 ITR 423 (Karn) in which hon'ble High Court vide its order dated November 24, 2015 by interpreting the provisions of section 32(1)(ii)(a) held as under (page 427) :
"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) 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 the learned Departmental representative. In view of the aforesaid decision of the hon'ble Karnataka High Court, we set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to allow additional depreciation to the assessee being 50 per cent. of 20 per cent. of the cost of new plant and machinery installed by the assessee during the preceding assessment year after September 30, 2010 as has been allowed to the assessee in the preceding assessment year i.e. the assessment year 2011-12, the copy of which is filed before us. Thus, ground Nos. 1 and 2 taken by the assessee stand allowed.
6. Ground Nos. 3, 4 and 5 in the assessee's appeal relate to the sustenance of disallowance amounting to Rs. 9,76,395 under section 14A read with rule 8D(2)(iii) of the Income-tax Rules. The Revenue has also taken in its appeal ground Nos. 1 and 2 which relate to the decision of disallowance of interest of Rs. 45,80,445 made by the Assessing Officer under section 14A read with rule 8D(2)(ii) of the Act.
7. The brief facts relating to ground Nos. 3 and 4 taken by the assessee and ground Nos. 1 and 2 taken by the Revenue are that the Assessing Officer noted from the perusal of the balance-sheet that the assessee has investment of Rs. 68,89,000 as on March 31, 2012 as against Rs. 38,36,69,000 in the immediately preceding year. The assessee has incurred expenditure by way of interest but did not make any disallowance under section 14A of the Act. The Assessing Officer asked the assessee to justify why disallowance under section 14A read with rule 8D was not made. The assessee submitted its explanation but the Assessing Officer was not satisfied with the explanation of the assessee that the assessee did not incur any interest to earn exempt income. The Assessing Officer was of the view that the provisions of section 14A read with rule 8D were applicable and accordingly he applied rule 8D(2)(ii) and computed the total amount of expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt as per rule 8D(2)(ii) at Rs. 45,80,445. Further on the basis of the average investment by applying rule 8D(2)(iii), he calculated 0.5 per cent. of the average value of the investment at Rs. 9,76,395 and therefore, made a disallowance of Rs. 55,56,840. The assessee went in appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) deleted the addition so far it relates to the disallowance calculated under rule 8D(2)(ii) at Rs. 45,80,445 and confirmed the disallowance so far it relates to rule 8D(2)(ii) at Rs. 9,75,395. The Commissioner of Income-tax (Appeals) also noted that in the assessee's own case in the assessment year 2011-12, the Assessing Officer held investment in mutual fund etc. were made out of public issue proceeds and interest pertaining to such investments was allowed while calculating the disallowance under section 14A. Since the facts involved during the impugned assessment year were the same therefore, he deleted the disallowance of Rs. 45,80,445. Against the deletion of the said addition, the Revenue is in appeal whereas against the sustenance of disallowance the assessee is in appeal.
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 under section 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. The learned authorised representative 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 Deputy CIT v. Shri Laksyhmi Cotsyn Ltd. [2016] 51 ITR (Trib) 594 (Lucknow). The learned Departmental representative, 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 :
"(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 Deputy CIT v. Shri Laksyhmi Cotsyn Ltd. [2016] 51 ITR (Trib) 594 (Lucknow) in I. T. A. No. 509/Lkw/2015 vide its order dated July 29, 2016 on the interpretation of section 14A(2) vis-a- vis rule 8D, under paragraph 6 onwards held as under (page 598):
"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 Assessing Officer 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 rule 8D. The condition precedent for the Assessing Officer 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 Assessing Officer 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.
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 under section 14A of the Act is warranted. As per the 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 form part of total income, then as per sub-section (3) of section 14A recourse can be taken by the Assessing Officer 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 Assessing Officer 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 Assessing Officer has relied on the co-ordinate Bench decision in the case of Asst. CIT v. Ratan Housing Development Ltd., wherein the Bench observed that even if the assessee does not earn any exempt income still disallowance under section 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, CIT v. Shivam Motors P. Ltd., decided on May 5, 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 Commissioner of Income-tax (Appeals) and the Tribunal does not give rise to any substantial question of 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 co-ordinate 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 the Tribunal is repelled.
Coming to the next reasoning given by the Assessing Officer relying on a case of Champion Commercial Co. Ltd. the Kolkata Income- tax Appellate Tribunal Bench, we must respectfully say that the Assessing Officer has not cited the Income-tax appeal 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 or law as noted by the Assessing Officer and wherein it is stated that when the taxpayer 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 the Assessing Officer is vitiated on this count.
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.
In the present case, we note that the assessee had earned dividend income to the extent of Rs. 2,22,343 and has claimed it as exempt income and informed the Assessing Officer 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 v. Taikisha Engineering India Ltd. dated November 25, 2014, [2015] 370 ITR 338 (Delhi) ; [2015] 275 CTR (Delhi) 316 wherein it was held that 'The Assessing Officer 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 Assessing Officer 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 the Income-tax Appellate Tribunal, Panaji Bench in the case of Sesa Goa Limited v. Joint CIT (I. T. A. Nos. 72/PNJ/2012 and 85/PNJ/2012 dated March 8, 2013) for the assessment year 2009-10 under paragraphs 14 to 18 held as under :
"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 Income-tax Act in this regard. The issue involved before us relate to the disallowance made by the Assessing Officer by applying the provisions of section 14A of the Income-tax Act read with rule 8D of the Income-tax Rules. Section 14A was inserted by the Finance Act, 2001 with effect from April 1, 1962. Originally this section 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 the Finance Act, 2002 with retrospective effect from May 11, 2001 a proviso was added which states that this section shall not empower the Assessing Officer either to reassess 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 April 1, 2001. With effect from April 1, 2007 by the Finance Act, 2006 sub-section (2) empowers the Assessing Officer 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 method as may be prescribed. Such power is to be exercised 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 the expenditure mentioned in sub-section (1). Before applying rule 8D, it is apparent that the Assessing Officer 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 Assessing Officer 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-section (3) provides that provisions of sub-section (2) shall also apply where the 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 the Gazette notification dated March 24, 2008 in view of the power conferred under sub-section (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 under section 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 hereinabove in the submissions made by the asses see. The Assessing Officer 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 Assessing Officer was of the view that the disallowance made by the assessee under section 14A of the Income-tax Act 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 and Boyce Mfg. Co. Ltd. v. Deputy CIT [2010] 328 ITR 81 (Bom).
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 under section 10(33). The Assessing Officer issued notices for disallowance of interest under section 14A of the Income- tax Act. The explanation of the assessee was that (i) 95 per cent. 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 shares capital, reserves etc. which were more than investment in shares. The Assessing Officer was not satisfied with the explanation of the assessee and he made disallowance under section 14A on pro rata basis. The Commissioner of Income-tax (Appeals) following his orders for the earlier years, accepted the appeal of the assessee. The Tribunal following the decision of the Special Bench in the case of ITO v. Daga Capital Management P. Ltd. [2009] 312 ITR (AT) 1 (Mum) [SB] ; [2009] 117 ITD 169 [SB] restored the matter to the file of the Assessing Officer for the consideration in the light of the provisions of sub-sections (2) and (3) of section 14A of the Income-tax Act. The assessee, being aggrieved, filed appeal as well as writ petition challenging the constitutional validity of sub-sections (2) and (3) and rule 8D. The hon'ble High Court gave the following findings :
1. The provisions of section 14A and rule 8D are constitutionally valid.
2. The provisions of sub-sections (2) and (3) of section 14A and rule 8D are prospective and not retrospective, in nature and therefore, would apply from the assessment year 2007-08.
3. The basic object of section 14A is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income (page 21).
4. The insertion of section 14A was curative and declaratory of the intent of Parliament. The basic principle of taxation is that only net income, namely, gross income minus expenditure that is taxable. Expenses incurred can be allowed only to the extent that they are relatable to the earning of taxable income (pages 22-23). The test which has been enunciated in Wallfort for attracting the provisions of section 14A is that there has to be a proximate cause for disallowance which has its relationship with the tax exempt income. Once the test of proximate cause, based on the relationship of the expenditure with tax exempt income is established, a disallowance would have to be effected under section 14A (page 28)
5. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not form part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, sub-section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the Legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer 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 Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law (pages 31-32).
6. In the event that the Assessing Officer 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 section 14A is to widen the theory of the apportionment of expenditure (page 49).
8. The expression expenditure incurred in section 14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for (page 50).
9. Sub-sections (2) and (3) of section 14A are intended to enforce and implement the provisions of sub-section (1) (pages 50).
10. Even in the absence of sub-section (2) of section 14A the Assessing Officer would have to apportion the expenditure and to disallow the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The Assessing Officer would have to follow a reasonable method of apportioning the expenditure consistent with what the circumstances of the case would warrant and having regard to all 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 v. Walfort Share and Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC) ; [2010] 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 CIT v. Walfort Share and Stock Brokers P. Ltd. [2009] 310 ITR 421 (Bom). The hon'ble Supreme Court in this decision, at page 31 of the order held as under :
'To attract section 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, section 14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, section 14A cannot be invoked'.
The hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. v. Deputy CIT [2010] 328 ITR 81 (Bom) 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 under section 14A of the Income-tax 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 section 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 sub- sections (2) and (3) of section 14A and rule 8D is not automatic in each and every case, where there is income not forming part of the total income. Sub-sections (2) and (3) are intended to enforce and implement the provisions of sub-section (1). Therefore, it is necessary for the Assessing Officer 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 Assessing Officer would be justified in applying the provisions of sub-sections (2) and (3) of section 14A and rule 8D of the Income-tax Act, 1961. The expenditure incurred under section 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 under section 10 in the year under consideration in view of the decision of the Special Bench in the case of Cheminvest Ltd. v. ITO [2009] 317 ITR (AT) 86 (Delhi) [SB] ; [2009] 124 TTJ 577 (Del) (SB).
The basic principle of taxation is to tax the net income. On the same analogy, the exemption is also to be allowed on net basis i.e. gross receipts minus related expenses. Therefore, if any expenditure is directly related to exempted income, it cannot be allowed to be set off against taxable profit. On the same analogy, in our opinion, if any expenditure is directly related to taxable income, it cannot be allowed to be set off against the exempted income merely because some incidental benefit has arisen towards exempted income. Before making any disallowance under section 14A, the Assessing Officer is required to record a satisfaction, having regard to the accounts of the assessee, that the claim of the assessee that expenditure incurred is not related to the income forming part of the total income is incorrect. Such satisfaction must be arrived at on the objective basis. He is also required to record the reasons for arriving at such satisfaction. The Assessing Officer in this case, we noted, is not satisfied with the correctness of the disallowance made by the assessee even though he has accepted the explanation of the assessee that no interest is incurred with regard to exempt income. He rejected the explanation of the assessee that no administrative expenditure incurred on earning dividend income considering the magnitude of the investments and dividend income received and the disallowance according to him made by the assessee under section 14A towards administrative expenditure is very less. The Assessing Officer nowhere pointed out the proximate connection of other expenses not apportioned by the assessee for the earning of the dividend income. He merely observed that the administrative expenses disallowed by the assessee is very less but how they are less and how the other expenses incurred by the assessee related to the dividend income has not been brought on record. Even the Assessing Officer has not pointed out the expenses excluded by the assessee for disallowance has proximate connection with dividend income. In our opinion, the Assessing Officer before rejecting the disallowance computed by the assessee must give a clear cut finding having regard to the accounts of the assessee how the other expenditure claimed by the assessee out of non-exempt income is related with the exempt income. No discrepancy in the claim of the assessee was pointed out. The assessing officer in our opinion in view of the 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 learned Departmental representative had vehemently contended and tried to build up his case by substituting the reasons given by the Commissioner of Income-tax (Appeals) in place of the Assessing Officer, 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 learned Departmental representative relying on the decision of the Commissioner of Income-tax (Appeals) in respect of Explanation (bb) to section 80HHC that 10 per cent. of the receipts under the sources mentioned therein are deemed to be the expenditure. This in our opinion will strengthen the case of the asses see as Explanation (bb) to section 80HHC does not recognise 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 Deputy CIT v. Jindal Photo Ltd. held in the Income- tax Appellate Tribunal Delhi Bench dated January 7, 2011 it was held as follows :
'Now as per section 14A(2) of the Act, 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 expenditure incurred in relation to income which does not form part of the asses see's total income under the Act, the Assessing Officer shall deter mine the amount incurred in relation to such income, in accordance with such method as may be prescribed, i.e., under rule 8D of the Income-tax Rules. However, in the present case, the assessment order does not evince any such satisfaction of the Assessing Officer regarding the correctness of the claim of the assessee. As such, rule 8D of the Rules was not appropriately applied by the Assessing Officer as correctly held by the Commissioner of Income-tax (Appeals). It has not been done by the Assessing Officer that any expenditure had been incurred by the assessee for earning its dividend income. Merely, an ad hoc disallowance was made. The onus was on the Assessing Officer to establish any such expenditure. This onus has not been discharged. In CIT v. Hero Cycles Ltd. [2010] 323 ITR 518 (P&H), under similar circumstances, it was held that the disallowance under section 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 Asst. CIT v. Eicher Ltd. [2006] 101 TTJ (Delhi) 369, that it was held that the burden is on the Assessing Officer to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance under section 14A of the Act. In Maruti Udyog Ltd. v. Deputy CIT [2005] 92 ITD 119 (Delhi), it has been held that before making any disallowance under section 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 v. Deputy CIT (Assessment) [2007] 293 ITR (AT) 216 (Delhi) ; 107 ITD 267 (Delhi) (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 v. Deputy CIT [2006] 103 TTJ (Delhi) 908;
2. Vidyut Investment Ltd. v. ITO [2006] 10 SOT 284 (Delhi) ; and
3. D. J. Mehta v. ITO [2007] 290 ITR (AT) 238 (Mumbai)
In view of the above, finding no error with the order of the Commissioner of Income-tax (Appeals) on the point at issue, the same is hereby confirmed. Ground No. 3 is thus rejected.'
In the case of Jindal Photo Ltd. v. Deputy CIT held in the Income- tax Appellate Tribunal Delhi Bench dated September 23, 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 Assessing Officer 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 Commissioner of Income-tax (Appeals), therefore, erred in partially approving the action of the Assessing Officer.'
In the case of Avshesh Mercantile P. Ltd. v. Deputy CIT in the Income-tax Appellate Tribunal Mumbai Bench (I. T. A. Nos. 5779/Mum/2006 and 208/Mum/2009 dated March 15, 2012) it was held as follows :
'At the time of hearing, the contention raised by the learned Departmental representative 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 Departmental representative. 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. v. Deputy CIT [2006] 283 ITR 402 (Guj) 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 juris diction to issue writs and the only jurisdiction exercised by the High Court is the appellate jurisdiction. It was held that merely because 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, 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 the hon'ble Gujarat High Court in the caseof Nirma Industries Ltd. [2006] 283 ITR 402 (Guj), 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 the merits 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 Ltd. (supra), we respectfully follow the said decision of the jurisdictional High Court and delete the disallowance made by the Assessing Officer and confirmed by the learned Commissioner of Income-tax (Appeals) 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 Departmental representative, 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 Ltd. (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 the jurisdictional High Court in the case of Delite Enterprise Ltd. (supra) and allow the appeals of all the assessees.'
We have also gone through the decision relied upon by the learned Departmental representative also. The decision of Asst. CIT v. Citi Corp Finance (India) Ltd. [2007] 108 ITD 457 (Bom), is no more relevant, in view of the decision of the hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. [2010] 328 ITR 81 (Bom). The decision of Southern Petro Chemical Industries v. Deputy CIT [2005] 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 the assessment year 2000-01 much prior to the insertion of provision of section 14A(2) of the Income-tax Act, 1961. The decision of Asst. CIT v. Premium Consolidated Capital Trust (I.) Ltd. [2004] 83 TTJ (Bom) 843 relates to the assessment year 1991-92 prior to the insertion of section 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 the jurisdictional High Court in the case of Godrej and Boyce Mfg. Co. Ltd. v. Deputy CIT [2010] 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 and Boyce Mfg. Co. Ltd. v. Deputy CIT [2010] 328 ITR 81 (Bom), we delete the disallowance made under section 14A read with 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 the learned Departmental representative 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 the Commissioner of Income-tax (Appeals) so far it relates to the sustenance of disallowance of Rs. 9,76,395 and confirm the order of Commissioner of Income-tax (Appeals) so far it relates to deletion of disallowance of Rs. 45,80,445. Thus, grounds 3 to 5 of the assessee's appeal are allowed and grounds 1 and 2 of the Revenue's appeal are dismissed.
9. Ground Nos. 3 and 4 in the Revenue's appeal relate to the deletion of disallowance made by the Assessing Officer under section 36(1)(va) of the Act amounting to Rs. 4,55,488. The Assessing Officer made the disallowance of the sum of Rs. 4,55,488 as he found from the audit report that the assessee has not deposited the employees' contribution towards PF and ESI within the prescribed due date although the payment was made before the due date of filing of the return. When the matter went before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) deleted the said disallowance.
10. We have heard the rival submissions, carefully considered the same along with the orders of the tax authorities below. We noted that the said issue is duly covered by the decision of the honourable Supreme Court in the case of CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306 (SC). Respectfully following the said decision of the honourable Supreme Court, we confirm the order of the Commissioner of Income-tax (Appeals) deleting the disallowance. Thus, ground Nos. 3 and 4 of the Revenue's appeal stand dismissed.
11. In the result, the appeal of the assessee stands allowed while the appeal of the Revenue stands dismissed.