TaxTMI 
TaxTMI 
2014 (9) TMI 351
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....rowed funds and investment in mutual funds before applying section 14A of the Act read with Rule 8D of the Income Tax Rules. 3. The learned Commissioner of Income-tax (Appeals) erred in not appreciating that the assessee failed to quantify the direct/indirect expenditure incurred by not maintaining separate accounts for funds utilized in such investments, inviting application of Rule 8D of the Rules. 4. The learned Commissioner of Income-tax (Appeals) erred in holding that the income derived by the assessee from the letting out of premises of the 'Cyber City' has to be assessed as business income and not as income under the head "House Property" as had been taken in the assessment. 5. The learned Commissioner of Income-tax (Appeals) erred in failing to appreciate that the primary object of the assessee was to let out the properties in order to derive income there from and not to exploit them commercially and merely because certain infrastructure has been provided to facilitate such letting out, such provision can by no means amount to carrying on complex commercial activities.  ....
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....owed the same in terms of section 14A of the Act. In computing such disallowance the Assessing Officer applied the provisions of rule 8D of the Income Tax Rules, 1962 (in short "the Rules"), particularly clauses (ii) and (iii) of sub-rule (2) of rule 8D of the Rules. Against such a disallowance, assessee carried the matter in appeal before the CIT(A). Apart from reiterating the submissions made to the Assessing Officer, assessee also submitted before the CIT(A) that the application of rule 8D of the Rules to compute the disallowance u/s 14A of the Act was not automatic because the Assessing Officer was required to be satisfied with the correctness or otherwise of the claim of the assessee in respect of expenditure incurred in relation to the exempt income, which was a requirement of section 14A(2) of the Act. It was pointed out that the Assessing Officer did not record any satisfaction as required by section 14A(2) of the Act, as factually it was evident that the assessee had made a small investment which could yield exempt income, which was made out of own funds and that too towards the end of the assessment year under consideration. In support of such proposition reliance was pla....
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....of the Pune Bench of the Tribunal in the case of Kalyani Steels Ltd. v. Addl.CIT vide IT Appel No.1733/PN/2012, order dated 30.01.2014 wherein following the judgement of the Hon'ble Bombay High Court it has been held that invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is conditional upon recording of an objective satisfaction by the Assessing Officer with regard to the incorrectness of the claim of the assessee having regard to the accounts of the assessee. On the aforesaid basis, the stand of the CIT(A) in deleting the addition is sought to be defended. 7. We have carefully considered the rival submissions. In so far as the provisions of section 14A of the Act is concerned, it contemplates that for the purposes of computing total income no deduction is to be allowed in respect of any expenditure incurred in relation to an income which does not form part of the total income under the Act. In the present case, assessee was found to have earned exempt income by way of dividend on investments made in the mutual funds. The existence of such exempt income prompted the Assessing Officer to invoke section 14A of the Act while computing the ....
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....ct of expenditure in relation to the exempt income, having regard to the accounts of the assessee. In our considered opinion, the aforesaid parity of reasoning in relation to invoking of rule 8D of the Rules read with section 14A of the Act applies to the fact of the present case. 8. In the background of the aforesaid discussion, we may now examine the facts of the present case. As noted earlier, assessee has earned dividend income of Rs. 2,75,483/- on investment in mutual funds. In the course of proceedings before the lower authorities, apart from other assertions, assessee claimed that no expenditure was incurred in relation to earning of such income. Firstly, it was pointed out that the dividend on mutual funds was earned on investment made for about two months only i.e. January and February, 2009 (as found from extract of assessee's submissions to the CIT(A) reproduced in para 3.1 of his impugned order). On the said basis, the case setup by the assessee is that the funds were parked in mutual fund by the bank for a temporary period; and, that it had more than enough non-interest bearing funds by way of share capital and accumulated profits to cover the impugned investmen....
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.... Act. Therefore, in the absence of adherence to the requirements of section 14A(2) of the Act, the Assessing Officer could not have proceeded to invoke rule 8D of the Rules and subject the impugned interest expenditure for disallowance as per clause (ii) of rule 8D of the Rules. Similarly, the CIT(A) records another finding which is to the effect that the dividend receipt has been directly credited into the bank account of the assessee, thus "leaving no scope for incurring any other expenses for earning exempt income" by the assessee. For the said reason, the indirect expenditure sought to be disallowed by invoking clause (iii) to sub-rule (2) of rule 8D of the Rules has also been faulted by the CIT(A). On this aspect, we are in agreement with the CIT(A) that under the given facts and circumstances of the case, the Assessing Officer was not justified in invoking rule 8D of the Rules in order to compute the disallowance u/s 14A(1) of the Act. In view of the aforesaid discussion, we hereby affirm the action of the CIT(A) in deleting the disallowance of Rs. 20,66,011/- made by the Assessing Officer invoking section 14A of the Act. Thus, on this aspect, Revenue fails and accordingly th....