TaxTMI 
TaxTMI 
TaxTMI 
2014 (12) TMI 482
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....er, 2010. The Assessing Officer considered the reply and noted that the voluntary disallowance did not fulfil the requirements of Section 14A of the Act read with Rule 8D of the Rules. No other reason was indicated. Decision of the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. vs. CIT [2010] 328 ITR 81 (Bom.) and the principles enunciated and enumerated in the said decision were quoted. The Assessing Officer recomputed the disallowance by applying Rule 8D of the Rules and quantified the disallowance at Rs. 42,59,540. As the assessee had himself disallowed an amount of Rs. 1,15,000/-, the balance amount of Rs. 41,44,540/- was added and the returned income enhanced. 4. For the assessment year 2009-10, the assessee had filed return declaring income of Rs. 8,98,19,429/- and had voluntarily disallowed Rs. 2,76,194/- under Section 14A of the Act. The Assessing Officer noticed that the assessee had earned exempt dividend income to the tune of Rs. 17,43,782/- and had declared long term capital gain, which was not taxable. The Assessing Officer recorded that he had considered the reply to justify the disallowance of Rs. 2,76,194/-, but without any further elucidation held that the disa....
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.... the following explanation of the assessee:- "Interest Clause (ii) "Investment in Mutual Fund is made from current account in HDFC bank in which no interest is incurred. Investments were made out of surplus/own funds deposit earlier. Assessee deposited funds in HDFC current account amounting to Rs. 10,6715,425.00 generated on sale of mutual fund during the period October 07, March 2008 and Apr. 2008. Dividend amounting to Rs. 57,90,120.00 received during the F.Y. 2007-08 also invested. Total surplus/own funds available are Rs. 112505545.00 utilised by assessee for making investment in the A.Y. 2009-10. Details are enclosed "Exhibit-3". Photocopy of the bank statement for the Exhibit no. 3 for the period 01.10.2007 to 08.04.2008 is enclosed showing funds deposited marked vide "Exhibit-4". Photocopy of the bank statement for the Exhibit no. 2 for the F.Y. 2008-09 is enclosed showing investment made marked vide "Exhibit-5". As explained above no interest bearing funds were used by the assessee for investment. Interest bearing funds were used by the assessee for doing normal business of the company. Assessee used surplus/own funds for the investment in mutual funds. As the as....
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....Rs.] 53.79 crore at the end of the year. Thus, it is evident that the amount invested in such shares or securities is far in excess of share holders' funds." 9. Reference was made to the decision of the Delhi High Court in CIT vs. Tin Box Co. [2003] 260 ITR 637 (Del) to hold that when the assessee had sufficient funds and non interest funds were advanced to a sister concern, no disallowance was justified. Further, the Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom.) had similarly held that when sufficient non interest funds were available for investment then no disallowance of interest should be made. The Bombay High Court had placed reliance on the decision of East India Pharmaceutical Works Ltd. vs. CIT [1997] 224 ITR 627 (SC) to the effect that if the assessee had sufficient non interest funds, then investment made in shares and securities resulting in exempt income should not lead to disallowance of interest expenditure, as there was no question of attributing any interest to such investments. Lastly, reference was made to the decision of the Gujarat High Court in CIT vs. Suzlon Energy Ltd. [2013] 354 ITR 630, to the same effect. 10....
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....income. If and only if the Assessing Officer is not satisfied on this count after making reference to the accounts, that he is entitled to adopt the method as prescribed i.e. Rule 8D of the Rules. Thus, Rule 8D is not attracted and applicable to all assessee who have exempt income and it is not compulsory and necessary that an assessee must voluntarily compute disallowance as per Rule 8D of the Rules. Where the disallowance or "nil" disallowance made by the assessee is found to be unsatisfactory on examination of accounts, the assessing officer is entitled and authorised to compute the deduction under Rule 8D of the Rules. This pre-condition and stipulation as noticed below is also mandated in sub Rule (1) to Rule 8D of the Rules. 12. Rule 8D of the Rules, again for the sake of convenience, is reproduced below:- "8D. (1) 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 Act for such previ....
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....must be examined with reference to the accounts, and only and when the explanation/claim of the assessee is not satisfactory, computation under sub Rule (2) to Rule 8D of the Rules is to be made. 13. We need not, therefore, go on to sub Rule (2) to Rule 8D of the Rules until and unless the Assessing Officer has first recorded the satisfaction, which is mandated by sub Section (2) to Section 14A of the Act and sub Rule (1) to Rule 8D of the Rules. 14. The view and legal ratio expressed above is not being elucidated for the first time. The Delhi High Court in Maxopp Investment Ltd. vs. Commissioner of Income Tax [2012] 347 ITR 272, has observed:- "Scope of sub-sections (2) and (3) of Section 14A 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 claim....
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....(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 of 2008, dated March 24, 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 asses see; 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 Off....
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....uted through 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." 15. Even earlier the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. versus Deputy Commissioner of Income Tax (2010) 328 ITR 81 (Bom.) had referred to Section 14(2) of the Act and observed:- "Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. The method, having regard to the meaning of the expression "prescribed" in section 2(33), must be prescribed by rules made under the Act. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the c....
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....roportion of expenditure incurred in relation to the dividend business (i.e., earning exempt income). It is for exactly such situations that a machinery/method for computing the proportion of expenditure incurred in relation to the dividend business has been provided by way of section 14A(2)/(3) and rule 8D." 17. More important and relevant for us are the observations in Godrej and Boyce Mfg. Co. Ltd. (supra) on requirement and stipulation of satisfaction being recorded by the Assessing Officer with reference to the accounts under Section 14(2) of the Act and Rule 8D(1) of the Rules. It was observed:- "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 the assessee. When a statute postulates the satisfaction of the Assessing Officer "Courts will not readily defer to the conclusiveness of an executive authority's opinion as to the exist....