TaxTMI 
TaxTMI 
2014 (2) TMI 661
X X X X Extracts X X X X
X X X X Extracts X X X X
....f hot metal, pig iron, steel billets, and generation of power, etc.. For the assessment year under consideration, it filed its return of income on 27.09.2008 declaring total income of Rs.58,17,36,890/-. For the assessment year under consideration, the total income declared included a sum of Rs.5,45,58,685/- representing dividend income which was exempt u/s 10(38) of the Act. In the computation of income, the assessee had offered a sum of Rs.5,00,000/- for disallowance u/s 14A of the Act on the ground that such expenditure was incurred in relation to the exempt income. The Assessing Officer did not find the disallowance acceptable and instead calculated a disallowance of Rs.1,05,46,918/-. In doing so, the Assessing Officer applied the provisions of rule 8D of the Income Tax Rules, 1962 (in short "the Rules"). The disallowance of Rs.1,05,46,918/- has been worked out as per sub-clause (iii) of sub-rule(2) of rule 8D of the Rules. Since assessee had already disallowed a sum of Rs.5,00,000/- in computation of income, the balance of Rs.1,00,46,918/- was disallowed and added to the total income. Such enhancement of disallowance by the Assessing Officer u/s 14A of the Act was carried in ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....income. 5. The CIT(A) has dismissed the appeal of the assessee and has instead upheld the disallowance made by the Assessing Officer. Firstly, as per the CIT(A), the Assessing Officer in para 4.1 of the assessment order has derived her satisfaction in respect of the incorrectness of the disallowance computed by the assessee u/s 14A of the Act. Secondly, as per the CIT(A), the Assessing Officer was justified in applying rule 8D of the Rules as the same was mandatory from assessment year 2008-09. For the said reasons, the disallowance made by the Assessing Officer has been retained. Not being satisfied with the order of the CIT(A), assessee is in further appeal before us. 6. Before us, the learned counsel for the assessee has vehemently argued that the CIT(A) erred in confirming the disallowance made by the Assessing Officer when it was apparent that the Assessing Officer has not recorded any satisfaction in the assessment order about the incorrectness of the computation of disallowance made by the assessee. It was, further, canvassed that recording of such satisfaction in terms of section 14A(2) of the Act was mandatory as per law laid down by the Hon'ble Bombay High Court in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 8. We have carefully considered the rival submissions. Section 14A of the Act contemplates that for the purposes of computing the 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 Act. Sub-section (2) of section 14A of the Act prescribes that the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with such method as may be prescribed, such prescribed method being contained in rule 8D of the Rules. However, the aforesaid empowerment of the Assessing Officer to invoke application of rule 8D of the Rules is superscribed by a condition contained in sub-section (2) of section 14A of the Act which is to the effect that 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 expenditure incurred in relation to the income which does not form part of the total income. Therefore, the invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Central Board of Direct Taxes circular dated December 28, 2006, state that since the existing provisions of section 14A did not provide a method of computing the expenditure incurred in relation to income which did not form part of the total income, there was a considerable dispute between taxpayers and the Department on the method of determining such expenditure. It was in this background that sub- section (2) was inserted so as to provide a uniform method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Sub-section (3) clarifies that the application of the method would be attracted even to a situation where the assessee has claimed that no expenditure at all was incurred in relation to the earning of non-taxable income. 71. Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isfied with the correctness of the claim of the assessee in respect of such expenditure. According to the Hon'ble Delhi High Court, sub-section (2) of section 14A of the Act 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 Act and sub-section (3) applies to cases where the assessee asserts that no expenditure has been incurred in relation to such exempt income. Explaining further, as per the Hon'ble High Court in both the cases the recourse to rule 8D of the Rules is possible only if the Assessing Officer records a finding that he was not satisfied with the correctness of the claim of the assessee in respect of such expenditure. 10. In the aforesaid background, now, we may examine the facts of the present case. In this case, assessee has earned by way of dividends a sum of Rs.5,45,58,685/-, which is exempt u/s 10(38) of the Act and thus the same does not form part of the total income under the Act. In the computation of income, assessee having regard to section 14A of the Act, determined the amount of expenditure incurred in relation to such income at Rs.5,00,000/-. The Ass....