TaxTMI 
TaxTMI 
2014 (1) TMI 987
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....n restricting the addition u/s 14A to Rs.1,93,054/- as against Rs.19,96,242/- made by the A.O." 3. At the time of hearing before us, it is submitted by the learned counsel that no expenses were incurred by the assessee company for earning of dividend income. That incurring of some expenditure by the assessee for earning of exempt income is the pre-requisite for applicability of Section 14A as well as Rule 8D. He submitted that the assessee had only invested in the shares of subsidiary companies. That the assessee had enough own funds for making the investment and, therefore, no money was borrowed by the assessee company. He further submitted that no satisfaction was recorded by the Assessing Officer as required by sub-section (2) & (3) of Section 14A before invoking Rule 8D for computing the disallowance. In support of this contention, he relied upon the following decisions:- (i) Justice Sam P. Bharucha Vs. Additional Commissioner of Income-tax-11(3), Mumbai - [2012] 53 SOT 192 (Mumbai)(URO). (ii) Auchtel Products Ltd. Vs. ACIT, Circle-6(1), Mumbai - [2012] 52 SOT 39 (Mumbai)(URO). (iii) CIT Vs. Hero Cycles Ltd. - [ 2010] 323 ITR 518 (P&H). (iv) DCIT Vs. Allied Inves....
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....omputation of disallowance in respect of the expenditure incurred by the assessee for earning of exempt income. To avoid the uncertainty and litigation with regard to quantum of disallowance incurred by the assessee in respect of earning of exempt income, the legislature has provided Rule 8D which is binding upon the Assessing Officer as well as appellate authorities. Learned CIT(A) reduced the disallowance below the amount of disallowance worked out under Rule 8D, which is contrary to law. He further submitted that even if the Assessing Officer has committed any mistake in AY 2010-11 and passed an order which is legally incorrect, the same cannot be binding on the ITAT. She stated that the assessment order for AY 2010-11 is dated 27th March, 2012 and there is sufficient time with the Revenue for taking remedial action under Section 154, 147 & 263 of the Act. She, therefore, submitted that the order of learned CIT(A) should be reversed and that of the Assessing Officer be restored. 6. We have carefully considered the submissions of both the sides and perused the material placed before us. After considering the arguments of both the sides, we find that in this case, four question....
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....incurred by the assessee in relation to income which does not form part of total income. Therefore, incurring of some expenditure by the assessee in relation to exempt income is essential so as to invoke the provisions of Section 14A(1) by the Assessing Officer. That the Hon'ble Jurisdictional High Court has considered this issue in the case of Maxopp Investment Ltd. Vs. CIT - [2012] 347 ITR 272 (Delhi) and their Lordships held as under:- "The expression "in relation to" does not have any embedded object. It simply means "in connection with" or "pertains to". If the expenditure in question has a relation or connection with or pertains to exempt income it cannot be allowed as a deduction even if it qualifies under other provisions of the Act. The actual expenditure that is in contemplation under section 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 under section 14A of the Act." 9. Hon'ble Punjab & Haryana High Court has also considered the similar issue in the case of CIT Vs. Hero Cycles ....
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....income. Thereafter, the Assessing Officer is required to examine the assessee's claim with regard to incurring of no expenditure or with regard to the amount of expenditure claimed to have been incurred by the assessee for earning of exempt income. If the Assessing Officer is satisfied with the claim of the assessee, then, no further action under Section 14A is required except to disallow the amount of expenditure, if any, which assessee claimed to have incurred for earning of exempt income. However, when the Assessing Officer is not satisfied with the claim of the assessee with regard to incurring of no expenditure or the amount of expenditure specified by the assessee for earning of exempt income, then, he is required to determine the amount of expenditure incurred by the assessee in relation to earning of exempt income. Such expenditure is to be determined by him in accordance with such method as may be prescribed. That the Hon'ble Jurisdictional High Court has considered this aspect in the case of Maxopp Investment Ltd. (supra) and their Lordships held as under:- "The requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in....
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....d warrant have to be taken into consideration but also the indirect expenses including major managerial/clerical expenses are involved in making and implementing the decision for investment. Learned DR, at the time of hearing before us, has referred to the assessee's balance sheet specially Schedule-9 which is at page 55 of the assessee's paper book. She has pointed out that the total investment as on 31st March, 2007 at Rs. 33.63 crores has increased to Rs. 43.64 crores as on 31st March, 2008. She stated that during the accounting year relevant to the assessment year under consideration, the assessee made further investment in the equity shares of five different companies. Therefore, apart from involvement of the managerial level people in taking the decision of investment, the clerical staff is also involved for implementing the decision of investment in the equity shares of various companies. Therefore, the Assessing Officer has recorded the finding of incurring of expenditure by the assessee for earning of exempt income. He further discussed the legal issue and various judicial pronouncements in paragraphs 4.2, 4.3 & 4.4 of the assessment order and thereafter, in paragraph 4.5,....
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....nt made by the assessee. With this factual background, now we come to question No.(iv) whether it is permissible for the Assessing Officer or the CIT(A), after coming into effect of Rule 8D, to work out the disallowance in any other manner than the manner prescribed under Rule 8D. In sub-section (2) of Section 14A, it is provided the Assessing Officer shall determine the amount of expenditure incurred in relation to exempt income in accordance with such method as may be prescribed. The legislature has provided Rule 8D with effect from 24th March, 2008 as the method for determination of amount of expenditure incurred in relation to exempt income. By using the word "shall" in sub-section (2) of Section 14A, the legislature has made it mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to exempt income as per the prescribed method i.e. Rule 8D. Before the insertion of Rule 8D, the Assessing Officer had the discretion to determine such expenditure on a reasonable and acceptable method of apportionment of expenditure between the taxable income and exempt income. But, when the legislature has provided in Rules the method for apportionment of t....
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.... of sub-section (3) of section 14A which specifies that even if the assessee makes a claim that no expenditure has been incurred in earning the exempted income, sub-section (2) of section 14A shall apply, meaning thereby, disallowance u/s 14A(1) is called for." 18. The facts of the case are that the assessment year under appeal is 2007-08. For this year also, the assessee claimed that it has not incurred any expenditure for earning of exempt income. The Assessing Officer, after detailed discussion at pages 3 & 4 of the assessment order, recorded the following satisfaction:- "3.6 Furthermore, having regard to the accounts of the assessee of the previous year, I am not satisfied with 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 of the previous year relevant to the assessment year under consideration and, therefore, the amount of expenditure in relation to such income is determined in accordance with methodology of the provisions of sub-rule (2) of Rule 8D of the IT Rules, 1962." 19. Thereafter, in paragraph 3.7, he worked out the disallowance as per Rule 8D of the Income-....