TaxTMI 
TaxTMI 
2015 (9) TMI 1112
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....; 2.1 That the Commissioner (Appeals) failed to appreciated that Rule 8D of the Rules was applicable after recorded with reasons as to why the claim of the Appellant that no expenditure was incurred or the expenditure incurred was not more than the expenditure added by the Appellant for the dividend income was incorrect. He failed to appreciate that Rule 8D of the Rules was not applicable in the instant case as there was no such finding; 2.2 That the Commissioner (Appeals) failed to appreciate that the entire expenditure was incurred by the Appellant for the purposes of its business and no expenditure was incurred for the dividend income earned and as such no expenditure was to be deducted under the said provisions; 2.3 That the Commissioner (Appeals) erred in determining the disallowance at Rs. 9,08,951/- under Rule 8D (2)(ii) of the Rules; 2.4 That the Commissioenr (Appeals) erred in confirming the disallowance under Rule 8D(2)(iii) of the Rules at Rs. 59,76,929/-; 2.5 That the disallowance of Rs. 67,45,880/- under Section 14A of the Act s excessive and unreasonable; 3. That the reliefs prayed for may kindly be allowed and the orders(s) of the Assessing Officer and/or Commi....
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.... brings us to the grounds relating to the applicability of Section 14A read with Rule 8D of the Income Tax Rules, 1962 in these appeals. 5. Learned counsel for the appellant submitted that the investments are made only for the purpose of controlled management of the group of the companies. The intention had never been to earn the dividend income. Therefore, the provisions of Section 14A cannot be applied. 6. Another limb of the arguments of the learned counsel for the assesee is that there are investments which never yielded any dividend income and therefore while calculating the value of investments as per Rule 8D as only those investments which yielded dividend income alone to be considered. In this regard, he placed reliance on the decisions of coordinate bench of Ahmedabad ITAT in the case of Sarabhai Holdings Pvt. Ltd. Vs. ACIT, ITA No. 2328/Ahd/2012, dated 11.04.2014 (Ahd.)(Trib.) as well on the decision of coordinate bench of Kolkata ITAT in the case of DCIT Vs. Salvel Advertising Pvt. Ltd. [2015] 58 Taxmann.com 196 (Kolkata) (Trib.), in support of the proposition that when the investments are made for strategic purposes, no disallowances under Section 14A shou....
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....ms that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. 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 firs....
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....of the assessee, on the first day and the last day of the previous year ; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. (3) For the purposes of this rule, the ―total assetsǁ shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets. Sub Rule (1) categorically and significantly states that the Assessing Officer having regard to the account of the assessee and on not being satisfied with the correctness of the claim of expenditure made by the assessee or claim that no expenditure was incurred in relation to income which does not form part of the total income under the Act, can go on to determine the disallowance under sub Rule (2) to Rule 8D of the Rules. Sub Rule (2) will not come into operation until and unless the specific precondition in sub Rule (1) is satisfied. Thus, Section 14A(2) of the Act and Rule 8D(1) in unison and affirmati....
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.... sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and subsection (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relati....
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....uted on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest (other than the amount of interest included in clause (i)) incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure - one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under Section 14A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expend....
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.... a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law. Sub-section (3) of section 14A provides for the application of sub-section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an assessment year beginning on or before April 1, 2001, either to reassess under section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under section 154. 16. Equally illuminating are the following observations in Godrej and Boy....
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.... is in this context we feel that the findings recorded by the CIT(A) and the Tribunal are appropriate and relevant. The clear findings are that the assessee had sufficient funds for making investments in shares and mutual funds. The said findings coupled with the failure of the Assessing Officer to hold and record his satisfaction clinches the issue in favour of the respondent assessee and against the Revenue. The self or voluntary deductions made by the assessee were not rejected and held to be unsatisfactory, on examination of accounts. Judgments in Tin Box Co. (supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy Ltd. (supra) and East India Pharmaceutical Works Ltd. (supra) would be relevant if the satisfaction of the Assessing Officer is in issue, and such question of satisfaction is with reference to the accounts. 19. However, the decisions relied upon by the Tribunal in the case of Tin Box Co. (supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy Ltd. (supra) and East India Pharmaceutical Works Ltd. (supra) could not be now applicable, if we apply and compute the disallowance under Rule 8D of the Rules. The said Rule in sub Rule (2) specifically....