2014 (1) TMI 844

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....and administrative expenditure allegedly attributed to income earned on investments made in equity shares and mutual funds under section 14A of the Act by invoking provisions of Rule 8D. 2. Without prejudice to Ground no. 1, the learned CIT(A) erred in confirming the proportionate interest expenditure for the purpose of disallowance under section 14A disregarding the fact that the said interest expenditure has direct nexus to the interest income earned and offered to tax by the appellant in return of income. 3. Without prejudice to Ground Nos. 1&2, the learned CIT(A) erred in not restricting the disallowance under section 14A to the total expenditure claimed in the return of income. 2. The only issue, as per various grounds raised ....

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....cords satisfaction in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. 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. 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. Therefore, it is all the more necessary that AO has to examine the accounts of assessee first and then if he ....

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....ion 14A(2) and the case cited by the AR, we are of the view that the AO cannot invoke the provisions of Rule 8D until and unless, he gives a specific and cogent reasons which would accord his satisfaction, that the accounts cannot be relied upon. This aspect has been dealt with comprehensively in the case of J K Investors (supra), (where one of us was a party), to hold, "Rule 8D cannot be invoked directly, without satisfying about the claims or otherwise. Consequently, the disallowance was not permissible". In this judgment, the words, "if AO having regard to the accounts of the assessee, is not satisfied with the correctness of the claim...", has been examined. The coordinate Bench explained, "that before going to the computation, the AO h....