department has filed present appeal on following grounds: "1. On facts and in circumstances of case and in law, ld. CIT(A) has erred in directing to allow deduction of Rs. 1,94,96,945 on account of provisions for accrued expenses which was correctly disallowed by Assessing Officer. 2. On facts and in circumstances of case and in law, ld. CIT(A) has erred in directing to allow exemption under section 10(33) in respect of whole dividend income of Rs. 4,85,24,362 instead of net income rightly determined by Assessing Officer at Rs. 1,17,21,951." 2. Briefly stated, facts of case are that assessee company was engaged in business of providing financial services like commercial vehicle financing, equipment finance, advances against financial assets and inter corporate loans and deposits. During course of assessment proceedings, Assessing Officer noticed that assessee had earned dividend of Rs. 4,85,24,362 which was exempt from tax. Taking note of section 14A of Income-tax Act, he called upon assessee to furnish details of expenditure incurred in earning aforesaid dividend and also to explain as to why expenditure on pro rata basis should not be apportioned to earning of aforesaid dividend. In reply, assessee submitted before Assessing Officer that it had not incurred any expenditure in earning aforesaid dividend and hence pro rata basis could not be applied to allocate expenditure for earning said dividend. In absence of details, Assessing Officer applied pro rata basis for allocating total expenditure of Rs. 90,64,63,336 between exempt income (i.e., dividend) and non-exempt income in ratio of their receipts (total receipts being Rs. 1,19,48,19,592 including dividend receipts of Rs. 4,85,24,362). In this manner, he quantified expenditure at Rs. 3,68,02,411 being 4.06 per cent of total expenditure as having been incurred in relation to earning dividend and therefore disallowed same while computing non-exempt income. On appeal, learned CIT(A), by his order dated 16-6-2003, directed Assessing Officer to allow deduction on gross amount of dividend without allocating any expenditure. Department is aggrieved by aforesaid order and is now in appeal before this Tribunal. 3. In support of appeal, learned Departmental Representative relied upon grounds of appeal, assessment order and provisions of section 14A and submitted that impugned disallowance was in conformity with aforesaid provisions. 4. In reply, learned counsel for assessee submitted that gross dividend amounting to Rs. 4,85,24,362 was received from nine companies which was exempt from tax. According to him, dividend income was reflected in accounts under head "Permanent investments". It was also submitted that all deployment of funds in permanent investments were made out of capital infusion into assessee company from Citicorp Overseas Investment Corporation and that all outside borrowings were made for meeting requirements of working capital of assessee company and not for making permanent investments. It was vehemently contended that since all investments on which dividend was earned were entirely made out of own funds and, in this view of matter, no interest expenditure incurred by assessee was allocable to earning of dividend income. 5. He invited our attention to provisions of section 14A and submitted that rule of proportionality of expenditure was not applicable for making disallowance under section 14A. 6. He further submitted that issue under consideration had since been decided by this Tribunal in favour of assessee by order dated 7th October, 2005 in Department's appeal in assessee's own case for assessment year 1998-99. In this connection, he invited our attention to para 11 of said order, which reads as under: "We have heard both parties. Delhi Tribunal, in case of Maruti Udyog Ltd., cited supra, has held that no disallowance could be made under section 14A where assessee has interest free funds far and excess of amounts invested in shares of other companies. assessee company was having capital far and excess of investment made on which dividend income was received. Moreover, it has been held by various courts that proportionate disallowance of expenses is not permissible. findings of ld. CIT(A) are upheld and third ground is dismissed." 7. He also invited our attention to another order dated 19-1-2006 passed b y this Tribunal in Department's appeal in assessee's case for assessment year 1999-2000 in which earlier order of Tribunal for assessment year 1998-99 has been followed. 8. We have heard both parties and considered their submissions including judicial authorities cited by them. Short issue in matter before us is whether provisions of section 14A empower Assessing Officer to make proportionate allocation in respect of expenditure incurred in relation to exempt income and consequentially take same into account for computing exempt income and, if so, whether mechanism for computing allocation of such expenditure as provided in sub-section (2)/(3) of section 14A (inserted by Finance Act, 2006) would apply to all pending matters or would apply to matters arising with effect from assessment year 2006-07. 9. Section 14A has been inserted in Income-tax Act, by section 11 of Finance Act, 2001, with retrospective effect from 1-4-1962, i.e., for and from assessment year 1962-63. Section 14A has been amended by section 10 of Finance Act, 2002 and again by section 7 of Finance Act, 2006. Section 14A as so amended reads now as under: "14A. Expenditure incurred in relation to income not includible in total income.-(1) For purposes of computing total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of total income under this Act. (2) Assessing Officer shall determine amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with such method as may be prescribed, if Assessing Officer, having regard to accounts of assessee, is not satisfied with correctness of claim of assessee in respect of such expenditure in relation to income which does not form part of total income under this Act. (3) provisions of sub-section (2) shall also apply in relation to case where assessee claims that no expenditure has been incurred by him in relation to income which does not form part of total income under this Act: Provided that nothing contained in this section shall empower Assessing Officer either to reassess under section 147 or pass order enhancing assessment or reducing refund already made or otherwise increasing liability of assessee under section 154, for any assessment year beginning on or before 1st day of April, 2001. " [Inserted as section 14A (without numbering) in IT Act by Finance Act, 2001 with retrospective effect from 1-4-1962. Inserted by Finance Act, 2006 and consequently all clauses of section 14A were numbered. Inserted by Finance Act, 2002.] 10. In matter before us, we are not concerned with proviso to section 14A. We are concerned with sub-section (1) [as originally inserted (without numbering of sub-section) by Finance Act, 2001 with retrospective effect from 1-4-1962] and sub-section (2)/(3) (inserted by Finance Act, 2006 with consequential numbering of clauses of section 14A) of section 14A. scope and effect of insertion of section 14A, with retrospective effect from 1-4-1962, in Income-tax Act by Finance Act, 2001 have been explained in para 25 of Circular No. 14 of 2001 issued by Central Board of Direct Taxes, which reads as under: "25. No deduction for expenditure incurred in respect of exempt income against taxable income. 25.1 Certain incomes are not includible while computing total income, as these are exempt under various provisions of Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that tax incentive given by way of exemptions to certain categories of income, is being used to reduce also tax payable on non- exempt income by debiting expenses incurred to earn exempt income against taxable income. This is against basic principles of taxation whereby against taxable income. This is against basic principles of taxation whereby only net income, i.e., gross income minus expenditure, is taxed. On same analogy, exemption is also in respect of net income. Expenses incurred can be allowed only to extent they are relatable to earning of taxable income. 25.2 Through Finance Act, 2001, new section 14A has been inserted so as to clarify intention of Legislature since inception of Income-tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred by assessee in relation to income which does not form part of total income under Income-tax Act. 25.3 Vide Circular No. 11/2001, dated 23rd July, 2001, direction was issued by Central Board of Direct Taxes that assessments where proceedings have become final before first day of April, 2001 should not be reopened under section 147 of Act to disallow expenditure relatable to exempt income by applying provisions of section 14A of Act. This circular h s been issued by Board by exercising its powers to issue beneficial circular under section 119(2)(a) of Income-tax Act. 25.4 This amendment takes effect retrospectively from 1st April, 1962 and accordingly, applies in relation to assessment year 1962-63 and subsequent assessment years." 11. Section 14A clearly makes distinction between exempt income and taxable income. It treats both of them as separate classes for computation of income after allocation of expenditure relating thereto and mandates that no deduction in respect of any expenditure shall be allowed against taxable income which is incurred in relation to exempt income. underlying object is to compute both exempt income and taxable income correctly, which is possible only after expenditure incurred in relation thereto is allocated to them. In other words, section 14A bars deduction of expenditure incurred in relation to exempt income out of taxable income, as this would have effect of artificially inflating exempt income and thereby deflating taxable income. 12. prohibition for allowing deduction under section 14A for and from assessment year 1962-63 is "in respect of expenditure incurred by assessee in relation to income" which does not form part of total income. term "expenditure" has been defined at page 598 of Black's Law Dictionary (Seventh Edition) thus: "1. act or process of paying out disbursement. 2. sum paid out." term "expense" has been defined at same page of aforesaid dictionary as follows: "n. expenditure of money, time, labour, or resources to accomplish result; esp., business expenditure chargeable against revenue for specific period. - expense, vb. Cf. COST (1)." "expense" has many forms, namely, accrued expense, administrative expense, business expense, capital expense, capitalized expense, current expense, deferred expense, educational expense, entertainment expense, extraordinary expense, fixed expense, funeral expense, general administrative expense, medical expense, moving expense, operating expense, ordinary and necessary expense, organizational expense, put-of-pocket expense, prepaid expense, travel expense. term "expenditure" occurring in section 14A would thus take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial. term "incur" has been defined at page 771 of aforesaid dictionary as follows: "incur, vb. To suffer or bring on oneself (a liability o r expense)." One of meanings given to word "relate" under head "Law" at page 2534 in "The New Shorter Oxford English Dictionary" (1993 Edition) is "Have some connection with, be connected to." phraseology used in section 14A prohibiting deduction in respect of expenditure incurred by assessee in relation to exempt income is thus wide enough to cover all forms of expenses provided they have some connection with exempt income. This is based on principle that expenses must be allocated to that income to which they are connected to avoid distortions in computation of both taxable as well s exempt income. This is also achieved by matching principle of accountancy. In Taparia Tools Ltd. v. Jt. CIT [2003] 260 ITR 102 (Bom.), Hon'ble jurisdictional High Court has explained matching principle as under: "The mercantile system of accounting is based on accrual. Basically, it is double entry system of accounting. Under mercantile system of accounting, profits arising or accruing at date of transaction are liable to be taxed notwithstanding fact that they are not actually received or deemed to be received under Act. Under mercantile system of accounting, therefore, book profits are liable to be taxed. profits earned and credited in books of account constitute basis of computation of income. system postulates existence of tax in so far as monies due and payable by parties to whom they are debited. Therefore, under mercantile system of accounting, in order to determine net income of accounting year, revenue and other incomes are matched with cost of resources consumed (expenses). Under mercantile system of accounting, this matching is required to be done on accrual basis. Under this matching concept, revenue and income earned during accounting period, irrespective of actual cash inflow, is required to be compared with expenses incurred during same period, irrespective of actual outflow of cash. In this case, assessee is following mercantile system of accounting. This matching concept is very relevant to compute taxable income. . . ." 13. It is difficult to accept hypothesis that one can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses. By same logic, it is equally difficult to accept that only expenses involved in earning dividend income are those incurred on collection of dividend or on encashing few dividend warrants. company cannot earn dividend without its existence and management. Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at most appropriate time. They require huge investment in shares and consequential blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in meetings of Board o f Directors for which administrative expenses are incurred. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. This aspect of matter has also received careful attention of Chennai Bench of this Tribunal in Southern Petro Chemical Industries v. Dy. CIT [2005] 3 SOT 157. After comprehensive consideration of all relevant aspects of case including provisions of law, Chennai Bench has held that investment decisions are very strategic decisions in which top management is involved and therefore proportionate management expenses are required to be deducted while computing exempt income from dividend. In Harish Krishnakant Bhatt v. ITO [2004] 91 ITD 311 (Ahd.), Ahmedabad Bench of this Tribunal has held that, dividend income being exempt under section 10(33), interest on capital borrowed for acquisition of relevant shares yielding such dividend cannot be allowed deduction by operation of section 14A. In Dy. CIT v. SG Investments & Industries Ltd. [2004] 89 ITD 44 (Cal.), Calcutta Bench of this Tribunal has laid down two propositions: one, in view of section 14A inserted in Income-tax Act with retrospective effect from 1-4-1962, pro rata expenses on account of interest relatable to investment in shares for earning exempt income from dividend are to be disallowed against taxable income and only net dividend income is to be allowed exemption after deducting expenses; and two, expression "expenditure incurred by assessee in relation to income which does not form part of total income" in section 14A has to be given wider meaning and would include both direct and indirect relationship between expenditure and exempt income. Following decision of Hon'ble Supreme Court in CIT v. United General Trust Ltd. [1993] 200 ITR 488, Calcutta Bench of Tribunal has also held that interest paid by assessee being attributable to money borrowed for purpose of making investment which yielded dividend and other expenses incurred in connection with or for making or earning dividend income can be regarded as expenditure incurred in relation to dividend income. In Everplus Securities & Finance Ltd. v. Dy. CIT [2006] 101 ITD 151, Delhi Bench of this Tribunal has held that merely because assessee did not earn dividend out of investment in certain shares does not imply that provisions of section 14A would not apply to that extent. In Asstt. CIT v. Premier Consolidated Capital Trust (I) Ltd. [2004] 83 TTJ (Mum.) 843, Mumbai Bench of this Tribunal has held that Assessing Officer is justified in attributing part of financial and administrative expenses as expenditure incurred in relation to exempt income and disallowing same in view of provisions of section 14A. 14. Keeping in view provisions of section 14A as also aforesaid decisions of co-ordinate Benches of this Tribunal, we hold that all expenses connected with exempt income have to be disallowed under section 14A regardless of whether they are direct or indirect, fixed or variable and managerial or financial in accordance with law. In this connection, provisions of sub- section (2)/(3) of section 14A inserted by Finance Act, 2006 deserve to be noted. 15. procedure for computation of disallowance has now been provided in sub-sections (2) and (3) of section 14A of Income-tax Act. It is no longer open to Assessing Officer to apply his discretion in computing disallowance or make ad hoc disallowance under section 14A. Substantive provisions are contained in sub-section (1) of section 14A prohibiting deduction in respect of expenditure incurred in relation to exempt income while procedural provisions regarding computation of aforesaid disallowance are contained in sub-sections (2) and (3) thereof. Sub-sections (2) and (3) seek to achieve underlying object of section 14A(1) that any expenditure incurred in relation to exempt income should not be allowed deduction. It is fairly well settled by catena of decisions that procedural provisions apply to all pending matters and that rule against retrospectivity does not hit them. 16. In W.H. Cockerline and Co. v. IRC [1930] 16 TC 1 (CA) at 19, Lord Hanworth quoted with approval following passage from judgment of Sargant L. J.: "The liability is imposed by charging section, namely, section 38, words of which are clear. subsequent provisions as to assessment and so on are machinery only. They enable liability to be quantified, and when quantified to be enforced against subject, but liability is definitely and finally created by charging section and all materials for ascertaining it are available immediately." In Halsbury's Law of England (Fourth edition, Vol. 23, paragraph 29), referring to machinery provisions, it is stated: "It is important to distinguish between charging provisions, which impose charge to tax, and machinery provisions, which provide machinery for quantification of charge and levying and collection of tax in respect of charge so imposed. Machinery provisions do not impose charge or extend or restrict charge elsewhere clearly imposed." In Kesoram Industries & Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 (SC) Hon'ble Mr. Justice Shah observed: "Section 7(2) merely provides machinery in certain special cases for valuation of assets, and it is from aggregate valuation of assets that net wealth chargeable to tax is from aggregate valuation of assets that net wealth chargeable to tax may be ascertained. . . . This is artificial rule adopted with view to avoid investigation of mass of evidence which it would be difficult to secure or, if secured, may require prolonged investigation." Though aforesaid observation was part of minority opinion, there is, however, nothing said to contra in majority view. In Associated Cement Co. Ltd. v. CTO [1981] 48 STC 466 (SC), Hon'ble Supreme Court has held: "It is settled law that distinction has to be made by courts while interpreting provisions of taxing statute between charging provisions which impose charge to tax and machinery provisions which provide machinery for quantification of tax and levying and collection of tax so imposed. While charging provisions are construed strictly, machinery sections are not generally subject to rigorous construction. courts are expected to construe machinery sections in such manner that charge to tax is not defeated." Bennion's Statutory Interpretation (First edition, page 446, paragraph 191) lays down as follows: "Because change made by Legislator in procedural provisions is expected to be for general benefit of litigants and others, it is presumed that it applies to pending as well as future proceedings." At page 447, it is stated: "Procedure and practice is mere machinery of law enforcement. As Ormrod L.J. said: 'The object of all procedural rules is to enable justice to be done between parties consistently with public interest'." In Jose Da Costa v. Bascora Sadashiva Sinai Narcornim AIR 1975 SC 1843, Hon'ble Supreme Court has held at page 1849 of AIR 1975 SC. "Before ascertaining effect of enactments aforesaid passed by Central Legislature on pending suits or appeals, it would be appropriate to bear in mind two well established principles. first is that 'while provisions of statute dealing merely with matters of procedure may properly, unless that construction be textually inadmissible, have retrospective effect attributed to them, provisions which touch right in existence at passing of statute are not to be applied retrospectively in absence o f express enactment or necessary intendment' (See Delhi Cloth and General Mills Co. Ltd. v. ITC AIR 1927 PC 242). second is that right of appeal being substantive right institution of suit carries with it implication that all successive appeals available under law then in force would be preserved to parties to suit throughout rest of career of suit. There are two exceptions to application of this rule, viz., (i) when by competent enactment such right of appeal is taken away expressly or impliedly with retrospective effect; and (ii) when court to which appeal lay at commencement of suit stands abolished [See Garikapatti Veeraya v. N. Subbiah Choudhury AIR 1957 SC 540, and Colonial Sugar Refining Co. Ltd. v. Irving [1905] AC 369 (PC)]" Halsbury's Laws of England (Fourth edition, Vol. 44, paragraph 925) states: "The presumption against retrospection does not apply to Legislation concerned merely with matters of procedure or of evidence; on contrary, provisions of that nature are to be construed as retrospective unless there is clear indication that such was not intention of Parliament." All aforesaid observations have been cited, with approval, by Hon'ble Supreme Court in CWT v. Sharvan Kumar Swarup & Sons [1994] 210 ITR 886. 17. In view of aforesaid, we hold that provisions for quantification of disallowance as contained in sub-sections (2) and (3) of section 14A are procedural and therefore apply to all pending matters. It is no longer open to Assessing Officer to make disallowance according to his own discretion or on ad hoc basis. He is statutorily required to compute disallowance in manner provided by sub-sections (2) and (3) of section 14A. We therefore set aside orders passed by CIT(A) and Assessing Officer in this behalf and restore matter to Assessing Officer for fresh examination and decision in light of provisions of section 14A including sub-sections (2) and (3) thereof, in accordance with law. 18. We are aware that Rule of Consistency requires us to follow orders of co-ordinate Benches of this Tribunal till there is change in either factual situation or legal position. In case before us, sub-sections (2) and (3) of section 14A were not available on statute book when orders were passed by this Tribunal in assessee's own case for earlier two years. We have already held above that aforesaid provisions have retroactive operation and therefore would apply to all pending matters. They cannot therefore be ignored. Besides, other relevant decisions rendered by this Tribunal in cases cited supra were also not brought to notice of this Tribunal at time when Department's appeal for earlier two years in assessee's own case were decided. 19. In view of foregoing, appeal filed by Department is treated as allowed for statistical purposes. *** ASSISTANT COMMISSIONER OF INCOME TAX v. CITICORP FINANCE (INDIA) LTD.