TaxTMI 
TaxTMI 
2014 (12) TMI 27
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.... any disallowance u/s.14A of the I.T. Act. On being questioned by the Assessing Officer, it was explained that the assessee has not incurred any expenditure for earning the dividend. The Assessing Officer, however, did not accept the above contention of the assessee. According to him, as per section 14A(3) of the I.T. Act, even though the assessee has claimed that no expenditure has been incurred by him in relation to income which does not form part of the total income, the Assessing Officer shall determine the expenditure u/s.14A of the I.T. Act. In absence of any supporting evidence the Assessing Officer disallowed an amount of Rs. 3,03,823/- u/s.14A r.w.Rule 8D and added back the same to the total income of the assessee. 3. Before the CIT(A) the assessee furnished full details and explanations with regard to its income in the assessment proceedings. It was submitted that the total investment in shares was Rs. 500 and in the mutual funds at Rs. 4,46,47,615/- as on 31-03-2008. The investment in mutual funds stood at Rs. 7,68,81,182/- as on 31-03-2009. The dividend income of Rs. 21,90,651/- earned during the financial year 2008-09 comprised exclusively of dividends earned on inves....
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....e other hand strongly relied on the order of the CIT(A). 7. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the decision cited before us in the case of Raj Shipping Agencies Ltd. (Supra). We find in the instant case the assessee had declared dividend income from mutual funds at Rs. 21,90,651/- which it claimed as exempt. From the various details furnished by the assessee, we find no borrowed fund has been utilised towards investment in the mutual funds, the income of which has been claimed as exempt. We find the Assessing Officer disallowed an amount of Rs. 3,03,823/- being expenditure incurred for earning the dividend income u/s.14A r.w. Rule 8D which has been upheld by the CIT(A). While doing so, we find the Assessing Officer has not recorded any satisfaction with reference to accounts of assessee nor rejected the claim that no expenditure was incurred. It is the case of the Ld. Counsel for the assessee that the Assessing Officer has not recorded any satisfaction with reference to accounts of the assessee nor rejected the claim tha....
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....-tax Rules, 1962, has also incorporated the essential requirements of sub-section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2)" (emphasis supplied) The same opinion was expressed by the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd and Others v. CIT 247 CTR 162 wherein reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT vs. Walfort Share & Stock Brokers Pvt. Ltd 326 ITR 1 (SC) and the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Company Ltd vs. DCIT (328 ITR 81). The relevant portions of the judgment of Hon'ble Delhi High Court are as under: 29. Sub-section (2) of Section 14 A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the clai....
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....ion (2) of Section 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is - "such method as may be prescribed". We have already mentioned above that by virtue of Notification No.45/2008 dated 24/03/2008, the Central Board of Direct Taxes introduced Rule 8D in the said Rules. The said Rule 8D also makes it clear that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or (b) 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 said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D(1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14A, the condition precedent for the Assessing Officer ....
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....hrough the principle of apportionment, as indicated above, and, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half percent of the average value of the investment, income from which does not or shall not form part of the total income, is taken. ............... 41. Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income "in accordance with such method as may be prescribed". of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) and (3) would require the assessin....
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....has no application. The objective of section 14 A is not allowing to reduce tax payable on the normal exempt income by debiting the expenditure incurred to earn the exempt income. Thus, the expenses incurred to earn exempt income cannot be allowed and the expenses shall be allowed only to the extent they are related to the earning of taxable income. If there is expenditure directly or indirectly incurred in relation to exempt income, the same cannot be claimed against the income, which is taxable as it is held by the Hon'ble Supreme Court in case of Commissioner of Income-tax v. Walfort Share and Stock Brokers P. Ltd. reported in 326 ITR 1 that for attracting the provisions of section 14 A, there should be proximate cause for disallowance which as relationship with the tax exempt income. 5.1 The expenditure incurred in relation to the income which does not form part of total income has to be disallowed. However, it should be proximate relationship between the expenditure and the income, which does not form part of total income. Once such proximity relationships exist, the disallowance is to be effected. In case the assessee had claimed that no expenditure has been incurred for....
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....d D.R. we are of the opinion that no disallowance is called for under section 14A. Obviously the assessee is maintaining separate books of account for purpose of business and these investments are in his personal capacity. The A.O. also has not disallowed any expenditure of personal nature out of the income from business or profession in the computation of income in the assessment order. In view of this we are of the opinion that the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity that too on dividend, PPF interest and tax free interest on RBI bonds. In view of this, we are of the opinion that estimation of expenditure of Rs. 20,000/- out of business expenditure claimed in business activity cannot be considered for being incurred for this earning of tax free income of above nature. In view of this disallowance so made under section 14A of Rs. 20,000/- is deleted. Not only that the CIT(A) directed the A.O. to consider the allowance invoking Rule 8D. The Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 328 ITR 81 has considered Rule 8D to be applicable prospective and since the ass....
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.... with the correctness of the claim of assessee in respect of such expenditure or no expenditure having been incurred in relation to exempt income, that the mandate of Rule 8D will operate. In the instant case, the authorities below have directly gone to the second stage of computing disallowance u/s. 14A as per Rule 8D without rendering any opinion on the correctness or otherwise of the assessee's claim in this regard. We, therefore, set aside the impugned order on this issue and restore the matter to the file of AO to recompute disallowance, if any, in accordance with our above observations after duly examining the assessee's claim in this regard." 6. In view of the above discussion and facts and circumstances of the case, we are of the considered opinion that no disallowance under section 14A is called for when the assessee has not incurred and claimed any expenditure for earning the exempt income. 9. Similar views were also expressed by the Coordinate Benches in the case of Relaxo Footwears Ltd, vs. Addl. CIT (2012) 50 SOT 102 and Priya Exhibitors (P) Ltd vs. ACIT (2012) 54 SOT 356. In the case of Relaxo Footwears Ltd, it was held as under: "The Assessing Officer shou....
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....irst and then if he is not satisfied with the correctness of the claim, only he can invoke Rule 8D. No such examination was made or satisfaction was recorded by AO in this case. It was noticed that the Assessing Officer has not considered the claim of the assessee at all and he has straightway embarked upon computing disallowance under Rule 8D. Disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. Consequently, the disallowance was not permissible. 12. Alternate contention was that the disallowance need not be made on entire expenditure made as assessee's income from shipping related activity was assessed u/s 115VA on presumptive basis. Since assessee has offered income under the Tonnage Tax Scheme, applicability of section 14A was also discussed by the Coordinate Bench in the case of Varun Shipping Company Ltd vs. Addl. CIT in ITA No.5576/Mum/2011 wherein the Coordinate Bench has held as under: "7. We have considered the rival submissions and also perused the relevant material on record. It is observed that the assessee....