Income Tax Appellate Tribunal - MumbaiInducto Steel Ltd , Mumbai vs Acit Cen Cir 38, Mumbai on 26 May, 2017ु ई  यायपीठ,'आई',मंब
   आयकर अपील
य अ धकरण, मंब                  ु ई।IN THE INCOME TAX APPELLATE TRIBUNAL
               MUMBAI BENCHES, 'I' MUMBAI

             ी जो	ग दर  संह,  या यक सद य एवं
        ी मनोज कुमार अ वाल, लेखा सद य, के सम

      Before Shri Joginder Singh, Judicial Member, and
      Shri Manoj Kumar Aggarwal, Accountant MemberITA No.2555/Mum/2015Assessment Year: 2006-07
INDUCTO STEEL LTD.                        ACIT,
156, Maker Chamber VI,           बनाम/    CC-38,
220, Jamnalal Bajaj Marg,                 Aayakar Bhavan,
Nariman Point,                   Vs.      M.K. Road,
Mumbai-400021                             Mumbai-400020
   ( नधा$%रती /Assessee)                       (राज व /Revenue)
PAN. No. AAACI1045E


   नधा$%रती क  ओर से / Assessee by   Shri Reepal G. Trashawal
   राज व क  ओर से / Revenue by       Shri Airiju Jai Karan-DR


   ु वाई क' तार(ख / Date of Hearing:सन                                            17/05/2017

  आदे श क' तार(ख /Date of Order:                26/05/20172                 ITA No.2555/Mum/2015Inducto Steel Ltd.



                     आदे श / O R D E R
Per Joginder Singh(Judicial Member)The assessee is aggrieved by the impugned order dated
30/12/2014 of the Ld. First Appellate Authority, Mumbai,
reworking the disallowanceu/s 14Aof the Income Tax Act,
1961 (hereinafter the Act), towards interest expenditure
based upon the ratio between the investment, made during
the year, and the total investment and affecting addition of
Rs.2,71,715/-, without appreciating the books of accounts.2.        During hearing, the ld. counsel for the assessee,
Shri Reepal G. Trashawal, contended that the assessee was
having own sufficient funds, which were utilized for the
purposes of investment, therefore, no disallowance was
required to be madeu/s 14Aof the Act. It was also
contended that the Ld. Commissioner of Income Tax (Appeal)
overlooked the judicial pronouncements mentioned before
him. It was also pleaded that reworking the disallowance
towards administrative expenses of Rs.50,000/- on ad-hoc
basis was merely on presumptive basis. It was contended
that the Ld. Commissioner of Income Tax (Appeal) as well as
the ld. Assessing Officer has mentioned with respect to long
term capital gain, whereas, no such LTCG was earned by the
assessee. Our attention was invited to para 4.3.5 of the
impugned order. Reliance was placed upon the decision in
the    case   of   M/s    Trade    Apartment      Ltd.        (ITA
No.1277/Kol/2011) order dated 30/03/2012, the decision
from Hon'ble Bombay High Court in the case of HDFC (2833                 ITA No.2555/Mum/2015Inducto Steel Ltd.ITR 529 (Bom.). It was explained that the investment
increased due to amalgamation for which our attention was
invited at page-7 (schedule of investment). Reliance was
placed upon the decision in M/s Hybrid Properties Ltd. vs
ACIT (ITA No.4740/Mum/2011) order dated 04/03/2015. It
was pleaded that the exempt income is Rs.58,517/-,
whereas, disallowance was made of Rs.2,49,320/-, therefore,
at best, the disallowance can be made at Rs.28,815/-. On the
other hand, the Ld. DR, Shri Airiju Jai Karan, defended the
disallowance madeu/s 14Aof the Act by contending that
huge investment was made by the assessee, thus, the
disallowance was rightly made.2.1.      We have considered the rival submissions and
perused the material available on record. The facts, in brief,
are that the assessee is engaged in the business of ship
breaking, manufacturing of industrial gases, finance and
investment in shares, declares income of Rs.83,83,737/-.
Subsequently, revised return was filed by the assessee to give
effect of amalgamation of Haryana Industrial Gases Pvt. Ltd.
and M/s Inducto Techno Casting Pvt. Ltd. with the assessee
company, reflecting total income of Rs.2,88,23,630/-. While
doing so the Ld. Assessing Officer made disallowance of
Rs.1,81,880/- u/s 14A of the Act. As per the assessee,
evidence of owning the sufficient funds was produced before
the Assessing Officer, thus, there was no presumption that
investment were made out of borrowed funds. The Ld.
Commissioner of Income Tax (Appeal) upheld the addition.4                ITA No.2555/Mum/2015Inducto Steel Ltd.2.2.       The assessee preferred appeal before the Tribunal,
wherein, vide order dated 09/09/2010, the matter was sent
back to the file of the Assessing Officer to decide the
quantum disallowanceu/s 14Aof the Act, in the light of the
decision inGodrej & Boyce Mfg. Ltd. vs DCIT328 ITR 81
(Bom.).    However, the Ld. Assessing Officer considered
various judicial decisions and was not satisfied with the
explanation of the assessee on the premise that certain other
expenses, like interest expenses, salary expenses, printing
and stationary expenses, bank charges and general expenses,
etc was also attributable for earning exempt income for
investment in shares, thus, over and above the disallowance
of Rs.29,702/- disallowance of indirect expenses amounting
to Rs.18,73,981/- and Rs.1 lakh (total Rs.19,73,981/-) were
made by the Assessing Officer.2.3.       On appeal before the Ld. Commissioner of Income
Tax    (Appeal),   relief   of   Rs.16,52,266/-   (Rs.19,73,981-
Rs.3,21,715/-) was granted.2.4.       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 ofsection 14Aof the Act but also to notice its legislative history.Section 14Awas inserted into the Act by theFinance Act,
2001with retrospective effect from 01/04/1962. For the
purposes of computing the total income under this Chapter,5                   ITA No.2555/Mum/2015Inducto Steel Ltd.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 theFinance Act, 2002, the following proviso was inserted insection 14Aand 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 undersection 147or pass an order enhancing the assessment or
     reducing a refund already made or otherwise increasing
     the liability of the assessee undersection 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
14Awas 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.Provided that nothing contained in this section shall
     empower the Assessing Officer either to reassess undersection 147or pass an order enhancing the assessment or
     reducing a refund already made or otherwise increasing
     the liability of the assessee undersection 154, for any
     assessment year beginning on or before the 1st day of
     April, 2001."Then, by theFinance Act, 2006,Section 14Awas 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 which6                    ITA No.2555/Mum/2015Inducto Steel Ltd.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."2.5.         Consequent upon theFinance 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
       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.7                       ITA No.2555/Mum/2015Inducto Steel Ltd.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."2.6.          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--(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 :--8                       ITA No.2555/Mum/2015Inducto Steel Ltd.(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.(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 14A2.6.           Prior to the introduction of section 14A in the said
Act, the position of law was aslaid down bythe Supreme
Court inCIT v. Maharashtra Sugar Mills Ltd: 82ITR 452 (SC)
and Rajasthan State Warehousing Corporation v. CIT: 2429                       ITA No.2555/Mum/2015Inducto Steel Ltd.ITR 450 (SC) was different.In Maharashtra sugarMills 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 undersection 10(1)in respect of a business should
       be computed after deducting the allowances mentioned therein. One
       of the allowances allowed is that mentioned insection 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 ofsection 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."2.8.In    Rajasthan         State     warehousingCorporation(supra), the Supreme Court after, inter alia, considering its
earlier decisions inCIT v. Indianbank Ltd: 56 ITR 77 (SC)10                   ITA No.2555/Mum/2015Inducto Steel Ltd.andMaharashtra 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
       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."2.9.         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 a11                       ITA No.2555/Mum/2015Inducto Steel Ltd.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.2.10.                  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.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 theIncome-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."2.11.           As observed by the Supreme Court in the case ofCIT v. Walfort Share and Stock Brokers P Ltd: 326 ITR 1 (SC),
the insertion ofsection 14 Awith retrospective effect reflects
the serious attempt on the part of Parliament not to allow12                      ITA No.2555/Mum/2015Inducto Steel Ltd.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 Aclarifies 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 ofsection 14A, the expenditure
        incurred in respect of exempt income was being claimed against
        taxable income. The mandate ofsection 14Ais 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 ofsection 14A. Insection 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 withinsection 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 ofsection 14A.."(Emphasis supplied)


2.12.           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 insections 15to59of 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:-13                    ITA No.2555/Mum/2015Inducto Steel Ltd."Further,section 14specifies 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 15to59lay down the rules for computing income for the
        purpose of chargeability to tax under those heads.Sections
        15to59quantify the total income chargeable to tax. The
        permissible deductions enumerated insections 15to59are 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 insections 15to59but 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 undersection 14A."(emphasis supplied)

2.13.          Sub-section (1) ofsection 14Aclearly 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
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 proximate14                      ITA No.2555/Mum/2015Inducto Steel Ltd.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 undersection 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 undersection 14Aprovided it was otherwise
allowable undersections 15to59of 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) ofsection 14A.2.14.          Let us examine the expression "in relation to". we
may refer to the Supreme Court decision inMadhav Rao
Scindia v. Union of India: AIR 1971 SC 530 where, in
paragraph 134, it is observed as under:-".. The expression "provisions of this Constitution relating to" inarticle 363means provisions having a dominant and immediate
        connection with: it does not mean merely having a reference to."2.15.InDoypack 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..."15                       ITA No.2555/Mum/2015Inducto Steel Ltd."... 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)
2.16.          Hon'ble Punjab & Haryana High Court in the case
ofCIT-II v. Hero Cycles Ltd., decided on 4/11/2009, observed
that:-"Disallowance underSection 14Arequires finding of incurring
        expenditure where it is found that for earning exempted income no
        expenditure has been incurred, disallowance underSection 14Acannot stand."2.17.                 We are of the view that unless and until there
was actual expenditure for earning the exempted income,
there could not be any disallowance undersection 14A. While
we agree that the expression "expenditure incurred" refers to
actual expenditure and not to some imagined expenditure we
would like to make it clear that the 'actual' expenditure that
is in contemplation undersection 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 undersection 14Aof the Act.2.18. So far as, scope of Sub-section (2) ofSection 14Aof 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,16                ITA No.2555/Mum/2015Inducto Steel Ltd.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 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) ofSection 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.17                 ITA No.2555/Mum/2015Inducto Steel Ltd.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) ofSection 14Aof 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 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.2.19.      As we have already noticed, sub-section (2) ofSection 14Aof 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 with18                ITA No.2555/Mum/2015Inducto Steel Ltd.(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 ofSection 14A(2)and (3)
in the correct perspective. As we have already seen, while
discussing the provisions of Sub-sections (2) and (3) ofSection 14A, the condition precedent for the Assessing 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.2.20.      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 for19                 ITA No.2555/Mum/2015Inducto Steel Ltd.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 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 underSection 14Aof 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.20                    ITA No.2555/Mum/2015Inducto Steel Ltd.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.2.21.          Insofar as sub-sections (2) and (3) ofSection 14Aare concerned, they have also been introduced by virtue of
theFinance Act, 2006with effect from 01.04.2007. 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."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.21                  ITA No.2555/Mum/2015Inducto Steel Ltd.2.22. 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."2.23.         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
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 of22                 ITA No.2555/Mum/2015Inducto Steel Ltd.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.2.24.      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
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 free23                 ITA No.2555/Mum/2015Inducto Steel Ltd.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 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.24                ITA No.2555/Mum/2015Inducto Steel Ltd.2.25.     If the observation made in the assessment order,
leading to addition made to the total income, conclusion
drawn in the impugned order, material available on record,
assertions made by the ld. respective counsel, if kept in
juxtaposition and analyzed, first of all it is to be mentioned
that the assessment year involved before us is 2006-07,
therefore, in view of the decision from Hon'ble jurisdictional
High Court inGodrej & Boyce Mfg. Ltd.(Supra), Rule-8D of
the rules is not applicable to the case of the assessee. The
issue has been examined by Hon'ble High Court/Courts and
also by Hon'ble Apex Court. The Hon'ble Bombay High Court
in Reliance Utilities & Power Ltd. 313 ITR 340(Bom.), Hero
Cycles Ltd. 323 ITR 518 (P & H) has thrown light on the
issue. The Ld. Commissioner of Income Tax (Appeal) has
observed that the assessee has showed capital and reserved
of Rs.4.95 crores and it appears that the funds deployed for
acquisition of fixed assets (Rs. 29 lakh), granting loan and
advanced to sister concern (Rs.4.22 crores) and the assessee
fully paid its secured and unsecured loans during the period
and incurred interest expenses of Rs.24,41,879/-. It has
been further observed that the assessee has not shown any
interest income. The Ld. Commissioner of Income Tax
(Appeal) has further observed that the transaction with
related parties, contained in schedule-15 of the audited
accounts, the assessee paid interest to HSDPL on loan
transaction of Rs.13.75 crores during the relevant period and
made fresh investment of Rs.1.53 crores. The crux of25                     ITA No.2555/Mum/2015Inducto Steel Ltd.arguemtn of Ld. DR and observation of the Ld. Commissioner
of Income Tax (Appeal) claims that there is diversion of
borrowed funds, by the assessee, for non-business purposes,
including investment in shares cannot be ruled out, therefore
proportionate interest out of total interest expenditure of
Rs.24,41,879/-,      attributable        to   such    investment         were
disallowed, which works out of Rs.2,71,715/-. Thus, the
disallowance of interest expenditure u/s 14A was restricted
to Rs.2,71,715/- as against Rs.18,73,981/-, determined by
the Assessing Officer. We have perused the revised balance
sheet as on 31/03/2006, wherein, in the current year, the
share capital of the assessee is Rs.4,25,93,760/-, which was
Rs.4,25,93,760/- in the previous year. The reserve and
surplus in the current year is Rs.11,82,16,463/- as against
Rs.48,49,220/- in the previous year. In the current year, the
assessee made investment of Rs.2,10,49,006/-, meaning
thereby the assessee was having more reserve and surplus.
The assessee made suo-moto disallowance of Rs.29,702/- as
against the further disallowance of Rs.19,73,981/- was made
by the Assessing Officer. 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,
no disallowance can be made mechanically. The Hon'ble
Bombay High Court in Reliance Utilities and Power Ltd.
(supra) held as under:-"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 the26                       ITA No.2555/Mum/2015Inducto Steel Ltd.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."2.26.          Likewise, Hon'ble jurisdictional High Court in
HDFC Bank Ltd. (supra) also held as under:-"Section 14Aof 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 thatSection 14Aof 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 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)27                       ITA No.2555/Mum/2015Inducto Steel Ltd.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 underArticle 227of 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 Tribunal to
disregard the binding decisions of High Court, the grounds indicated in
the impugned order which are not at all sustainable."(Para25)28                  ITA No.2555/Mum/2015Inducto Steel Ltd.2.27.        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 madeu/s 14Aof 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 the provision for making
the disallowanceu/s 14Aof the Act.               In the light of the
foregoing discussion, it can be concluded that at best further29                  ITA No.2555/Mum/2015Inducto Steel Ltd.disallowance of Rs.28,815/-, as agreed by the ld. counsel for
   the assessee, can be made. Thus, this ground of the assessee
   is partly allowed.3.            So far as, reworking of disallowance towards
   administrative expenses of Rs.50,000/-, ad-hoc basis is
   concerned, during hearing the Ld. counsel for the assessee,
   claimed that no long term capital gain was earned by the
   assessee.      The Ld. Assessing Officer made disallowance of
   Rs.1 lakh on account of salary, printing and stationary, bank
   charges and general expenses, which were reduced to
   Rs.50,000/- by the Ld. Commissioner of Income Tax (Appeal).
   Considering the totality of facts and the circumstances
   narrated      before   us,   the   disallowance   on     account          of
   administrative expenses is reduced to Rs.25,000/- as against
   Rs.50,000/-, sustained by the Ld. Commissioner of Income
   Tax (Appeal), thus, this ground of the assessee is partly
   allowed.Finally, the appeal of the assessee is partly allowed.This Order was pronounced in the open court on
   26/05/2017.Sd/-                                   Sd/-
    (Manoj Kumar Aggarwal)                      (Joginder Singh)
लेखा सद#य / ACCOUNTANT MEMBER           या$यक सद#य /JUDICIAL MEMBER
   मब
    ुं ई Mumbai; *दनांक Dated : 26/05/2017
   f{x~{tÜ? P.S/. न.स.30                     ITA No.2555/Mum/2015Inducto Steel Ltd.आदे श क  %$त'ल(प अ)े(षत/Copy of the Order forwarded to :1.   अपीलाथ. / The Appellant (Respective assessee)2.   /0यथ. / The Respondent.3.   आयकर आय1
            ु त(अपील) / The CIT, Mumbai.4.   आयकर आय1
            ु त / CIT(A)-      , Mumbai,5.   3वभागीय / त न	ध, आयकर अपील(य अ	धकरण, मब
                                           ुं ई / DR,
     ITAT, Mumbai6.   गाड$ फाईल / Guard file.आदे शानस
                                                             ु ार/ BY ORDER,
             स0या3पत / त //True Copy//

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