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2013 (12) TMI 995

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....nor has any debit for the interest paid during the year, the assessee furnished the working as directed by the Assessing Officer at Rs. 4,40,138. The Assessing Officer while noting that the assessee does not have any secured or unsecured loans during the year and only Rs.17,621 was claimed towards interest/finance charges however, disallowed A« per cent. of Rs. 8.80 crores of average investment and disallowed the above amount under section 14A. 3. Before the Commissioner of Income-tax (Appeals), it was submitted that the assessee is engaged in the business of hiring and operation of vessel and is deriving income from shipping operations and has opted for tonnage tax scheme as per the provisions of section 115VA of the Income-tax Act, 1961. It also derives non-tonnage income for which direct expenditure was relatable. Since the assessee has not spent any amount in earning exempt income, it was submitted that the disallowance under section 14A is not required. 4. The learned Commissioner of Income-tax (Appeals) in his very brief order upheld the action of the Assessing Officer stating that it is based on the decision of the hon'ble Bombay High Court in the case of Godrej and ....

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....e of Godrej and Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom). The relevant portions of the judgment of hon'ble Delhi High Court are as under (page 290 of 347 ITR) :              "29. Sub-section (2) of section 14A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expen....

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....d to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee ; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of rule 8D. We may observe that rule 8D(1) places the provisions of section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of sub-sections (2) and (3) of section 14A, the condition precedent for the Assessing 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 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 ru....

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.... 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 fulfilment 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) and (3) would require the Assessing Officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the Assessing Officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method." 7. The hon'ble Punjab and ....

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.... or indirectly incurred in relation to exempt income, the same cannot be claimed against the income, which is taxable as it is held by the hon'ble Supreme Court in case of CIT v. Walfort Share and Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC) that for attracting the provisions of section 14A, there should be proximate cause for disallowance which has relationship with the tax exempt income. 5.1 The expenditure incurred in relation to the income which does not form part of total income has to be disallowed. However, there should be proximate relationship between the expenditure and the income, which does not form part of total income. Once such proximity relationships exist, the disallowance is to be effected. In case the assessee had claimed that no expenditure has been incurred for earning the exempt income, it was for the Assessing Officer to determine as to whether the assessee had incurred any expenditure in relation to income which did not form part of total income and if so to quantify the extent of disallowance. Thus, in order to disallow the expenditure under section 14A, there must be a live nexus between the expenditure incurred and the income not forming part of total inc....

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.... income from business or profession in the computation of income in the assessment order. In view of this we are of the opinion that the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity that too on dividend, public provident fund interest and tax free interest on Reserve Bank of India bonds. In view of this, we are of the opinion that estimation of expenditure of Rs. 20,000 out of business expenditure claimed in business activity cannot be considered for being incurred for this earning of tax free income of the above nature. In view of this disallowance so made under section 14A of Rs. 20,000 is deleted. Not only that the Commissioner of Income-tax (Appeals) directed the Assessing Officer to consider the allowance invoking rule 8D. The hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom) has considered rule 8D to be applicable prospective and since the assessment year involved is before the introduction of sub-sections (2) and (3) of section 14A, there is no question of disallowing the amounts invoking rule 8D. Therefore, the Commissioner of Income-tax (Appeals....

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....e as per rule 8D. It is only when the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure having been incurred in relation to exempt income, that the mandate of rule 8D will operate. In the instant case, the authorities below have directly gone to the second stage of computing disallowance under section 14A as per rule 8D without rendering any opinion on the correctness or otherwise of the assessee's claim in this regard. We, therefore, set aside the impugned order on this issue and restore the matter to the file of the Assessing Officer to recompute disallowance, if any, in accordance with our above observations after duly examining the assessee's claim in this regard.' 6. In view of the above discussion and facts and circumstances of the case, we are of the considered opinion that no disallowance under section 14A is called for when the assessee has not incurred and claimed any expenditure for earning the exempt income." 9. Similar views were also expressed by the co-ordinate Benches in the cases of Relaxo Footwears Ltd. v. Addl. CIT [2012] 50 SOT 102 (Mumbai) and Priya Exhibitors P. Ltd. v. Asst.....

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....ting 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. Therefore, it is all the more necessary that the Assessing Officer has to examine the accounts of the assessee first and then if he is not satisfied with the correctness of the claim, only he can invoke rule 8D. No such examination was made or satisfaction was recorded by the Assessing Officer in this case. It was noticed that the Assessing Officer has not considered the claim of the assessee at all and he has straightway embarked upon computing disallowance under rule 8D. The disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. Consequently, the disallowance was not permissible. 12. Alternate contention was that the disallowance need not be made on entire expenditure made as the assessee's income from shipping related activity was assessed under section 115VA on presumptive basis. Since the assessee has offered income un....