TaxTMI 
TaxTMI 
2015 (8) TMI 1037
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.... segregated any expenditure attributable to such investments whose income (dividends income) is exempt from tax. Hence the Assessing Officer invoked the provisions of sec.14A of the Act read with rule 8D and determined the expenditure attributable for earning such exempt income at Rs. 37,28,239/- and disallowed the same,both under the regular provisions of the Act as well as u/s.115JB of the Act. The relevant portion of the assessment order held as under:- 6. Disallowance of expenditure attributable to earning of Exempted Income: During the period under reference the Assessee Company has received a dividend of Rs. 4,92,32,251/- which has been claimed as exempt u/s 10(34). However, the assessee has not considered any expenditure attributable towards the earning of such exempted Income. A reasonable expenditure is necessary to earn the exempt income considering the human resources cost, interest cost of the investment and other relevant cost which should go into earning of the exempt income. The Assessee was accordingly asked to give details of the expenditure incurred on earning the above income in the course of hearing. The Assessee vide written submission filed o....
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....ense incurred for earning the dividend income exempt u/s.10(34). Accordingly, Assessing Officer added back an amount of Rs. 37,28,239/- with the total income being the expense incurred for earning the dividend income exempt u/s.10(34). Aggrieved, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). 4. On appeal, the Commissioner of Income Tax (Appeals) observed that the assessee's total investments in shares/funds were Rs. 92.35 crores as on 31.03.2008 (and Rs. 55.77 crores as on 31.03.2007), as could be seen from the investments of the balance during the financial year 2007-08, and also earned dividends of Rs. 4,92,32,251/- and claimed the same as exempt u/s.10(34) of the Act. 4.1 The Commissioner of Income Tax (Appeals) observed that the assessee was not maintaining any separate books of accounts for the investments in shares/funds. Nor there was a separate establishment to look after the investments in shares/funds. The assessee may be having substantial interest free own funds (in the form of capital/reserves and surpluses etc). But this does not mean that the investments are made only from these own interest free funds, especially if t....
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....nce dividend income is exempted from tax by virtue of section 10(34), interest paid on borrowed capital utilized in purchase of shares, being expenditure incurred in relation to dividend income not forming part of assessee's total income, cannot be allowed as a deduction - Held, yes- Whether such disallowance under section 14A can be made even in a year in which no exempt income has been earned or received by assessee - Held, yes 4.3 Thus, from the above decision it was clear that the amount of exempt income earned during the year was not relevant for the purpose of disallowance of expenses u/s.14A read with rule 8D. What was to be seen the amount of investments made and the efforts taken by the assessee in the said process. Therefore the amount of disallowance was to be worked out proportionate to the investments made and the expenses (either direct or indirect) involved in the process, even if there are no such exempt income earned during the year. 4.4 As could be seen from the P&L account, the assessee has several activities including investments in shares. For the purpose of making these investments etc, the same management, manpower, machinery and infrastruc....
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....fied the said expenses at Rs. 37,28,239/-, by using the rule 8D, and disallowed u/s.14A of the Act. 4.7 According to the Commissioner of Income Tax (Appeals) observed that the Assessing Officer was satisfied that there was an element of expenses involved in making investments whose income was exempt from tax. The Assessing Officer was duty bound to invoke the provisions of Rule-8D. Once the provisions of Rule-8D are invoked, the Assessing Officer has no option but to arrive at the expenses @ 0.5% as per step-3 of the formula which was mandatory. In fact, the Assessing Officer in his order has clearly stated these facts before invoking the provisions of section 14A r.w.r.8D. Hence the Assessing Officer rightly invoked the Rule-8D and arrived at the disallowance of expenses u/s.14A r.w.Rule-8D. 4.8 In view of the above he confirmed the Assessing Officer's action of determining the expenses attributable for earning exempt income at Rs. 37,28,239/- u/s.14A, r.w.Rule 8D, both under the regular provisions of the Act as well as u/s.115JB of the Act. Against this, the assessee is in appeal before us. 5. We have heard both the parties and perused the material on record. In this....
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....d the rival submissions. Admittedly, in this case the assessee is having enough interest free funds in the form of share capital and reserve and surplus. The amount of investment made by the assessee is less than the interest free funds. Further, Rule 8D was introduced with effect from 24.03.2008, which was prospective in operation and cannot be regarded as being retrospective as held by Delhi High Court in the case of Maxopp Investment Ltd vs. CIT 347 ITR 272. However, incurring certain administrative expenses cannot be ruled out. Accordingly, placing reliance on the judgment of the jurisdictional High Court in the case of Simpson & Co Ltd in T.C. No.2621/2006, dated 15.10.2012, we direct the Assessing Officer to disallow 2% of exempt income as income expenditure towards earning that income. This ground of the assessee is partly allowed. 8. The next ground for our consideration is that the Commissioner of Income Tax (Appeals) erred in not adjudicating the following ground. Admittedly, the assessee raised the following ground before the Commissioner of Income Tax (Appeals), which was not adjudicated by the Commissioner of Income Tax (Appeals) "That the Commissioner of I....