TaxTMI 
TaxTMI 
2015 (3) TMI 1021
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.... attention to para 4 of the order of Hon'ble High Court with a view to apprise the Bench that facts in the case of assessee and in the case decided by Hon'ble High Court are identical. Ld. A.R. took us to para 10 onwards where Hon'ble High Court had dealt with the issue and decided the issue in favour of assessee. 3. Ld. D.R. on the other hand heavily relied upon the orders of authorities below. 4. We have heard rival parties and have gone through the material placed on record. We find that the A.O. during assessment proceedings observed that the assessee had earned exempt income and therefore, vide questionnaire dated 22.10.2010, the assessee was asked to explain as to why disallowance in accordance with the provisions of Rule 8D should not be made. Not satisfied with the reply of assessee, the A.O. calculated the disallowance as per the provisions of Rule 8D without recording any satisfaction regarding explanation submitted by assessee. We find that Hon'ble Delhi High Court in the case of Taikisha Engineering India Ltd. vide para 10 onwards has decided similar issue in favour of assessee by holding as under: "10. Having heard the Counsel for the parties, ....
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....f 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 previous year, he shal....
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....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 of the assessee in respect of such expenditure in relation to income which does not form part of the t....
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....ed 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 Subsections (2) and (3) of Section 14A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction wi....
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....t 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 claim of the assessee in respect of the expenditure which the assessee claims to h....
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....s (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 existence of a matter of law or fact upon which the validit....
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....ause expressly states that where the assessee has incurred expenditure by way of interest in the previous year and the interest paid is not directly attributable to any particular income or receipt then the formula prescribed would apply. Under clause (ii) to Rule 8D(2) of the Rules, the Assessing Officer is required to examine whether the assessee has incurred expenditure by way of interest in the previous year and secondly whether the interest paid was directly attributable to particular income or receipt. In case the interest paid was directly attributable to any particular income or receipt, then the interest on loan amount to this extent or in entirety as the case may be, has to be excluded for making computation as per the formula prescribed. Pertinently, the amount to be disallowed as expenditure relatable to exempt income, under sub Rule (2) is the aggregate of the amount under clause (i), clause (ii) and clause (iii). Clause (i) relates to direct expenditure relating to income forming part of the total income and under clause (iii) an amount equal to 0.5% of the average amount of value of investment, appearing in the balance sheet on the first day and the last day of the a....