AI Drafter 
TaxTMI 
TaxTMI 
2013 (11) TMI 1588
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....firms. It was noted by the AO that for A.Y.2009-10, the assessee had earned profit from those "partnership firms" Rs. 20,54,20,402/-. The said profit was claimed as exempt u/s.10(2A) of IT Act. The assesse's investment in those firms as on 31st of March, 2009 was Rs. 66,63,26,727/-. Further, it was noted by the AO that the assessee had paid interest of Rs. 3,61,28,214/-. The observation of the AO was that the assessee company had invested substantial fund in the partnership firm and earned exempted income. According to AO, on one hand, the assessee had paid interest on the unsecured loans. However, on the other hand, the borrowed funds were invested in the partnership firms from where earned exempted income u/s. 10(2A) of IT Act. The AO has invoked the provisions of Section 14A read with Rule 8D of the Act. The disallowance was computed by the AO in the following manner:- "In view of the above facts, disallowance u/s.14A read with Rule 8D is made as under: (A) Direct expenses - NIL (B) Disallowance out of interest Interest paid x Average value of investment/Average of the total assets 12201010 X 319854608/145343439 =....
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....o him, the AO had given a finding that there was an intermingling of own funds and borrowed funds. According to learned CIT(A) if there was nexus between the incurring of expenses and earning of exempted income is established then disallowance can be made. Further, it was noted by the learned CIT(A) that some of the judgments which were cited before him were prior to A.Y. 2008-09, however, Rule 8D had been effective from A.Y. 2008-09. After the introduction of Rule 8D a formula has been prescribed for working out the disallowance u/s. 14A of IT Act. 3.1 An another plea was raised before learned CIT(A) that the interest earned by the assessee was more than the interest paid, hence, there was net income from interest, accordingly, no disallowance u/s. 14A should have been made by the AO. According to learned CIT(A), the total interest expenditure was to be considered in the formula prescribed in Rule 8D. The basic idea behind taking the total interest expenditure is to work out the proportionate interest which is corresponding to the funds invested in tax exempted assets. The assessee had placed reliance on a decision of Trade Investment Limited (ITA No.1277/Kol/2011, dated 30th o....
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....t is unfair on the part of the Revenue Department to presume that the borrowed capital was utilized for the purpose of investment in the firm to earn the exempted income for A.Y. 2008-09. The main provisions of Section 14A are to be applied. Further Rule 8D (1) reads as follows: "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 shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). " 5.1 As per this Rule, as reproduced above, the AO has to determine the disallowance having regard to the accounts of the assessee to satisfy himself in respect of the claim of expenditure made by the assessee as well as in respect of the claim whether any expenditure was incurred in relation to the income which does not form part of the total income; hence, exempt under the Act. The AO is fi....
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....ls 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 Act and sub-s. (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the AO, 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-s. (2) of s. 14A. It is only if the AO is not satisfied with the correctness of the claim of the assessee, in both cases, that the AO 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 Act in accordance with the prescribed method, the prescribed method being the method stipulated in r. 8D. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the AO would have to indicate cogent reasons for the same. It is, therefore, clear that determi....
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....adopt any reasonable and acceptable method. So, even for the pre-rule 8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income, the Assessing Officer will have to verify the correctness of such claim. In case, the Assessing Officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the Assessing Officer is to accept the claim of the assessee in so far as the quantum of disallowance under section 14A is concerned. In such eventuality, the Assessing Officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A (1). In case, the Assessing Officer is not, on the basis of the objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall ha....