TaxTMI 
TaxTMI 
2014 (6) TMI 597
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....e was no occasion for disallowance of expenses. 4. That the appellant seeks to alter, modify and add any of the ground as the case may be." 3. Apropos disallowances made u/s 14A of the Income Tax Act, 1961 (hereinafter 'the Act'). 4. Brief facts of the case is as follows. The assessee company is engaged in the business of design, engineering, supply of machinery and spares and supervision of erection and commissioning of grinding plants using MPS Vertical Roller Mills or Cement and similar industries. The assessee filed its return of income declaring total income at Rs. 33,36,01,100/- on 24.09.2008. The same was processed u/s 143(1). The case was selected for scrutiny assessment. During the course of scrutiny assessment the AR has produced the books of account which have been examined on test check basis. Since the assessee in its return of income has declared a dividend income of Rs. 2,71,83,864/- which has been claimed as exempt, the assessee was asked to explain as to why expenses incurred for earning dividend income not be disallowed as per the provision of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (hereinafter 'the Rules'). Pursuant to the said ....
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....essee has earned dividend income amounting to Rs. 2,71,83,864/- from Mutual Funds, which were exempt u/s 10(35) of the Act. Ld counsel submitted that as per section 14A(1) of the Act, for the purpose of computing total income under Chapter IV of the Act, 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. Further, sub-section 2 and 3 of the said Section provides that Assessing Officer can disallow the expenses in relation to income which is exempt from income tax on the basis of prescribed method where he is not satisfied with the correctness of the assessee's claim regarding such expenditure having regard to the books of accounts of the assessee. Rule 8D of the Rules is the method of computation prescribed for the purpose of said section. It was submitted by the counsel that the assessee during the year has not incurred any expenditure directly or indirectly towards earning exempt dividend income. The ld counsel, Shri Salil Agarwal, strenuously argued that even after insertion of rule 8D the disallowance u/s 14A of the Act cannot be made unless the Assessing Officer is satisfied having....
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....at in this case, the assessee has claimed that no disallowance is to be made u/s 14A of the Act. The Assessing Officer has discussed the same and thereafter came to the conclusion that disallowance under section 14A is required to be made. Therefore, according to the ld DR, the contention of the ld counsel of the assessee that no satisfaction was recorded by the Assessing Officer is factually incorrect. According to the ld DR, the mere fact that the Assessing Officer invoked Rule 8D after serving notice to the assessee in this behalf, itself implies that the Assessing Officer was not satisfied with the correctness of the claim of the assessee and in any case, during appellate proceedings the ld CIT(A) hearing the said grievousness of the assessee, has exercised his co-terminus power as held by the Hon'ble Supreme Court in Kanpur Coal Syndicate and after giving opportunity to the assessee to explain again as to why disallowance u/s 14A read with Rule 8D be not made, since application of the prescribed method is mandatory for the relevant Assessment Year and thereafter the ld CIT(A) after considering the reply of the assessee, recorded the satisfaction as envisaged in the statute and....
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....vestments (supra) and Jindal Photo (supra). So far as the legal proposition put forth by the ld counsel is concerned, there cannot by any dispute in this respect. From a plain reading of section 14A(1) and also the decision of the Hon'ble Jurisdictional High court in Maxopp Investments (supra) and ITAT's Delhi Bench decision in Jindal Photo ITA NO. 814/Del/2011, it is clear that incurring of some expenditure is essential for invoking the provisions of section 14A. In other words, if no expenditure is found to have been incurred for earning exempt income, disallowance u/s 14A could not be made by the Assessing Officer. As per sub-section (2) of Section 14A, the Assessing Officer can embark upon determination of amount of expenditure incurred in relation to exempt income only if he records a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) of Section 14A further extends the scope of sub-section (2) and the Assessing Officer is required to record the similar finding even where the assessee claims that no expenditure has been incurred by him in relation to the exempt income. Therefore, the contention of t....
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....minus with that of the ITO(here it is AO). And it was also held that he (appellate authority, CIT(A))can do what the ITO(AO) can do and can also direct the concerned persons to do what he (ITO, AO in this case) has failed to do. So we find that in the instant case, the grievance of the assessee before the ld CIT(A) that no satisfaction was recorded by the Assessing Officer, before disallowing expense as contemplated under section 14A read with Rule 8D, the ld CIT(A) after observing that the Assessing Officer by not accepting the reply/ explanation of the assessee to his notice for disallowance u/s 14A, has infact conveyed the implied dissatisfaction of Assessing Officer as contemplated u/s 14A, however the ld CIT(A) has exercised his co-terminus, plenary power enjoined to him as an appellate authority as held by the Apex Court in Kanpur Coal Syndicate (supra) and after giving fresh opportunity to the assessee to explain before him why disallowance u/s 14A read with Rule 8D be not made in its case and after receipt of the reply/ explanation from assessee, then only the ld CIT(A) has recorded his satisfaction as envisaged by Section 14A and thereafter computed the disallowance as per....
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....36.19 crores. It is an established facts that in commercial world, there is no concept of free lunch and it is impossible to believe that the making of investment (which earns the exempt income) is not in nature of any passive activity involving no input. Infact, in the present situation. b) maintain or continuing with any investment in a particular share/ mutual funds etc and c) even the time when to exit from one investment to another, All these activities are well coordinate and well informed management decisions, involving not only inputs from various sources but also it involves acumen of senior management decisions. No doubt the services of Deutch Bank must be availed but definitely the senior functionaries of the appellant company and some other officials must be there to have a liaison with banking authorities. No prudent businessman (who is going to invest a substantial sum of money on investment) will leave decision entirely on a third party with no stakes. Accordingly, the plea of the appellant that they have not incurred any expenditure in deploying a huge funds of Rs. 36.19 croes during the year is not acceptable at all. Hence in the absence of any information, fro....
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....de simply on the basis of the formulae given therein, unless there is evidence to demonstrate that any expenditure has actually been incurred for earning the exempt income. However, the ld DR, contended that Rule 8D is mandatory for the relevant Assessment Year. And no person is going to invest such a huge amount and leave it to a third party (Deutch Bank), to do whatever it like to do with its fund and definitely there will be expenses incurred by the Deutch Bank and other expenses incurred for earning the exempt income. And since the assessee is not forthcoming with the expenditure incurred by it to earn to exempt income, a procedure has been prescribed by the statute which has been followed in this case and the disallowance has been calculated as per the prescribed method envisaged in Rule 8D and the assessee has failed to show any mistake in the calculation made under the Rule so the order need not be disturbed. 13. Since we have found that the requirement of sub-section (2) of Section 14A has been satisfied by the authorities below, now the question is about the validity of the amount determined by the revenue as expenditure in relation to exempt income under Rule 8D. It may ....