TaxTMI 
TaxTMI 
TaxTMI 
2015 (6) TMI 640
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....at the disallowance under section 14A as computed by the Appellant was incorrect." 3. Brief facts necessary for disposal of the appeal are that the assessee-company provides custodial & depository services to institutional investors, mutual funds and retail investors. The assessee filed return of income for A.Y. 2009-10 on 30.09.2009 declaring total income at Rs. 85,72,598/-. The assessee showed book profit of Rs. 82,71,41,992/- under section 115JB of the Act. The return was processed under section 143(1) of the Act. Later on it was selected for scrutiny by issue of notice under section 143(2) of the Act on 20.08.2010. Notice under section 142(1) alongwith detailed questionnaire was also been issued to the assessee. During the year under consideration assessee earned dividend income of Rs. 7,81,80,792/-, which it claimed as exempt income under section 10(34) of the Act and claimed deduction of Rs. 19,72,280/- under section 14A of the Act. The AO was of the opinion that the claim of deduction under section 14A was not as per Rule 8D of the Income Tax Rules. Therefore, the assessee was asked to furnish details of expenses incurred for earning exempt income and was also show caused ....
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....rcentage of tax free income was 28% as against the percentage of taxable income which was 72% and hence the percentage of 28% was applied to the total expenses incurred by the assessee, in order to compute the disallowance under Rule 8D of the I.T. Rules. The learned A.R. for the assessee further pointed out that the observations of the AO at page 2 are factually incorrect and it was further contended by the learned A.R. for the assessee that the disallowance made under Rule 8D(i) and 8D(ii) has been deleted by the CIT(A), against which Revenue is not in appeal. The assessee is in appeal against the disallowance made under Rule 8D(iii), i.e. 0.5% of the total investment. The contention of the learned A.R. for the assessee before us was that the main section, i.e. section 14A lays down additional jurisdiction upon the AO and where he does not record satisfaction then the disallowance worked out by the AO under section 14A of the Act needs to be cancelled. In this regard the learned A.R. for the assessee drew our attention to the observation of the Hon'ble High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) and further reliance was placed upon the ratio laid down by th....
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....d under the Income Tax Rules, which prescribes the method of calculating the expenditure relatable to the exempt income, which is to be disallowed in the hands of the assessee, there is another condition laid upon the AO. The AO has to first record his satisfaction that the claim of the assessee in respect of the expenditure relatable to exempt income is not correct and after recording such satisfaction the AO is to determine the amount of expenditure which is to be excluded while assessing the income in the hands of the assessee, which is exempt from the provisions of the Act. Such non-fulfillment of recording satisfaction in turn is held to vitiate the order of the AO in disallowing expenditure under the provisions of section 14A of the Act. 9. The Hon'ble Supreme Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) had laid down the following proposition vis-a-vis subsection 2 to section 14A of the Act: - "Hence, sub-s. (2) does not ipso facto enable the AO to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total....
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.... as under: - "Section 14A of the Act postulates and states that no deduction shall be allowed in respect of expenditure incurred by an assessee in relation to income which does not form part of the total income under the Act. Under sub Section (2) to Section 14A of the Act, the Assessing Officer is required to examine the accounts of the assessee and only when he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to exempt income, the Assessing Officer can determine the amount of expenditure which should be disallowed in accordance with such method as prescribed, i.e. Rule 8D of the Rules (quoted and elucidated below). Therefore, the Assessing Officer at the first instance must examine the disallowance made by the assessee or the claim of the assessee that no expenditure was incurred to earn the exempt 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 as....