TaxTMI 
TaxTMI 
2014 (7) TMI 596
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....nd claimed the same as exempt. The Assessing Officer noticed that the assessee did not disallow part of any expense as per the provisions of sec. 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (the Rules), apparently under the plea that it did not incur any expense in earning the dividend income. Hence, the AO sought clarification in this regard and the assessee submitted that interest bearing funds were not utilized for making investments, but were utilised for some other business purposes. It was further submitted that the loan taken by it at "Zero" per cent interest was used for making investments, which earned the dividend income. Accordingly, it was submitted that there was no requirement of making disallowance of any part of interest expenditure. With regard to the administrative expenses, the assessee submitted that, during the instant year, investment was made in purchasing shares of two companies and further dividend income of Rs. 5.15 crores was received from a single company named M/s Adlabs Films Ltd. Accordingly, it was submitted that the assessee did not incur any apparent expenditure in making investments and also in realizing dividend income. However....
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....ns including the decision rendered in the case of Godrej and Boyce Mfg. Co. Ltd (supra) has held that the AO is required to examine the accounts of the assessee first and then if he is not satisfied with the correctness of the claim, then only he can invoke rule 8D. The Ld A.R also submitted that the similar view taken by the Kolkatta bench of Tribunal in the case of REI Agro Ltd in ITA No.1811/Kol/2012 dated 14.5.2013 has since been upheld by the Hon'ble Calcutta High Court, vide its order dated 23.12.2013 in CIT Vs. R.E.I Agro Ltd in GA 3022 of 2013 /ITAT 161 of 2013. 6. We have heard the rival contentions and carefully perused the record. The facts prevailing in the instant case show that the assessee has invested funds mainly in its subsidiary /group companies. The investments made by the assessee have been tabulated as under by the tax authorities:- A careful perusal of the above said table would show that the assessee has made fresh investments in this year in two companies viz., M/s Adhar Project Management and Consultancy Pvt. Ltd. (Rs. One lakh) and in M/s Phi Management Solutions P.Ltd (Rs.160 lakhs). Further, it has been stated that the assessee has received the divide....
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....xpenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. 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....
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....ay of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure - one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of assessee, on the first day and the last day of the previous year, It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under section 14A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indire....
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....oper perspective, which is clear from the following observations made by him:- "The above reply of the assessee has been perused carefully but is not acceptable. The provisions of sec. 14A r.w.r. 8D are very clear in this matter. The provisions say that if the assessee is having exempt income and the expenses incurred for earning cannot be correctly arrived at, then resort to Rule 8D. In the instant case, there is no method by which the amount of expense incurred by the assessee for earning of exempt income could be correctly arrived at, therefore section 14A r.w. rule 8D of the I.T Act is invoked and the disallowance is worked out as under" It can be noticed that the assessing officer did not examine the claim of the assessee with reference to the accounts maintained by the assessee. Hence, in our view, the assessing officer has not followed the mandate of the provisions of sec. 14A, which have been explained in various decisions referred supra. 10. On the contrary, we notice that the Ld CIT(A) has examined the claim made by the assessee in proper perspective. The operative portion of the order passed by Ld CIT(A) reads as under:- "In view of the above facts and circumstances,....