TaxTMI 
TaxTMI 
TaxTMI 
2011 (8) TMI 1193
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.... Such deposits are also allowed to be treated as margin money for transaction carried out by them. The amounts received are invested in to fixed deposits of banks and units of mutual funds. While no interest is paid to the constituents on such deposits, the assessee earns interest on such deposits or earns dividend from mutual fund. The assessee had made various investments into various scheme of mutual funds and had earned dividend income as also short term and long term capital gains on such investments on sale. The dividend earned during the year was Rs. 20,80,89,624/-. According to the Assessee, the entire investments was made out of own funds and out of various interest free deposits received from members. While the capital gains were taxed at appropriate rates, the dividend income was claimed as exempt dividend income under section 10(35) (a) of the Income Tax Act, 1961. Since the dividend income was exempt the AO examined the question of disallowance of expenses in earning exempt income in view of sec. 14A of the Income Tax Act, 1961 (the Act). 3. The assessee claimed that it had not paid any interest except interest on car loans and interest on loans for business purposes ....
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....by the assessee for record keeping of such transaction and had arrived at expenses set out above, on scientific basis and has offered the same to be disallowed. In arriving at the salary of the persons, the Assessee pointed out that it had worked out the salary of all persons involved in the treasury operation covering the investment into mutual funds from which exempt income in the form of dividend was earned by the assessee. Similarly all expenses such as rent, telephone, conveyance, electricity expenses and security expenses were worked out on the basis of number of employees who had contributed to the total number of employees employed by the company. 6. The AO however was of the view that the disallowance under section 14A of the Act has to be made in accordance with Rule 8D of the IT Rules and he, therefore, worked out disallowance at a sum of Rs. 2,14,41,162/- by applying the provisions of Rule 8D of IT Rules 1962. 7. On appeal by the assessee the CIT(A) was of the view that once it is admitted that the assessee has incurred some expenditure for earning income which is exempt, provisions of section 14A(2) and 14a(3) r.w.r. 8D of the Rules would automatically apply. The CIT....
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.... not form part of the total income under the Act. In other respects ld. counsel for the assessee reiterated the submissions made before the revenue authorities. 10. The ld. D.R submitted that the very fact that the AO invoked the provisions of Rule 8D of the Rules only implies that he was not satisfied with the claim of the assessee with regard to the expenses incurred in earning the exempt income. In other words, it was submitted by the ld. D,R that the satisfaction of the AO is implied. On merits it was submitted that the AO has rightly applied Rule 8D of the rules and the assessee cannot have any grievance. 11. We have considered the rival submission. The Hon'ble Bombay High Court in INCOME TAX APPEAL NO.626 OF 2010 in the case of Godrej & Boyce Mfg.Co.Ltd. Mumbai. Vs. Dy. Commissioner of Income Tax,Range 10(2), Mumbai & Anr. 328 ITR 81 (Bom) has held as follows: "Insertion of Subsections (2) and (3) to Section 14A : 25. Subsections (2) and (3) of Section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from 1 April 2007. Subsections (2) and (3) provide as follows : "14A(2) The Assessing Officer shall determine the amount of expend....
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....r must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. In 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 ....