TaxTMI 
TaxTMI 
TaxTMI 
2016 (12) TMI 1412
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....e proferred disallowance of Rs. 7.5 lakhs made by the assessee. The relevant discussion by the AO is reproduced as follows: "1. Deemed Dividend:- During Assessment proceedings, an intimation from ACIT Circle 3(1) and Addl. CIT, Range-3, have been received regarding applicability of section 2(22)(e) in the hands of the assessee. The facts of the intimation received from ACIT, Circle 3(1) and also Addl. CIT, R-3 are that assessee company is having substantial interest holding 61% of shares in MIS Citiland Commercial Credits Ltd. and also having accumulated profits as on 31.03.2006 of Rs. 8.47 Crores. As per the intimation the assessee company has received a loan of Rs. 12,25,055/- from MIS Citiland Commercial Credits Ltd. during the F.Y. 2005-06 relevant to the A.Y. 2006-07. On receipt of intimation from the ACIT Circle3(I), assessee was asked to show a cause as to why loan taken of Rs. 12.25,055/- from MIS Citiland commercial Credits Ltd. should not be treated as deemed dividend. In response, assessee company has filed an explanation vide letter dated 12.12.2008. the relevant contents are reproduced as under:- "1. Details of loans and advances received during the year as interest....
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....so increased to the tune of Rs. 2,55,02,142/-, when compared with immediate preceding year i.e. A.Y. 2005-06. The above discussion reveals that there is a direct nexus between the increase in exempt income and increase in the expenses. Therefore, I hold that an amount of Rs. 2.55,02,142/- under the head expenses are attributable to the increased exempted income. Therefore, this amount is disallowed uls 14A. Since exempted income is not taxable and expenses attributable to this income has to be disallowed. Thus lump sum disallowance is made on the basis of above discussion to the tune of Rs. 2,55,02,1421- and added back to the assessee's income. (Addition: Rs. 2,55,02,142/-)" 4. The order of the AO was rectified under Section 154 of the Act but without yielding any relief; the AO merely clarified that the amount of Rs. 7.5 lakhs offered was not "taken into consideration" at the time of passing the order under Section 143(3). The AO, therefore, reduced that amount from the figure of the determined disallowance. The appellate Commissioner [hereafter "CIT"], on being approached, was of the opinion that the rejection of Rs. 7.5 lakhs was valid and restored the matter for fresh co....
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....ining the amount of expenditure in relation to income not includable in total income, as envisaged in 14A. The AO ought to have adopted the method of calculation as prescribed in Rule 8D, rather than making his own estimates, since he passed the order on 30.12.2008. when Rule 8D was very much in existence. It may not be out of place to mention here that insertion of Rule 8D bring procedural in nature, takes the retrospective effect and the assessment which are pending at any stage before the AO, CIT(A) or Tribunal of High Courts would be governed by the mandate of Rule 8D as sub-section (2) & (3) of section 14A of the IT Act r.w.r. 8D procedural in nature and hence retrospective. In this regard reference is made to ITO Vs. Daga Capital Management P. Ltd. (2008) TTJ (Mumbai) (SB) 289; IT0 Vs. Sagar Capital management (P) Ltd. (2008) 119 TTJ (Mumbai) SB; Aquarius Travel (P) Ltd. Vs. IT0 (2008) 114 TTJ (Del) SB 584). Therefore, the AO is directed to compute the disallowance of expenditure relatable to the exempt income in accordance with Rule 8D." 5. In the impugned order, the ITAT relied upon the decision of this Court in CIT-VI v. Taikisha Engineering India Ltd. 2015 (370) ITR 338 ....
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.... to this extent or in entirety as the case may be, has to be excluded for making computation as per the formula prescribed. Pertinently, the amount to be disallowed as expenditure relatable to exempt income, under sub Rule (2) is the aggregate of the amount under clause (i), clause (ii) and clause (iii). Clause (i) relates to direct expenditure relating to income forming part of the total income and under clause (iii) an amount equal to 0.5% of the average amount of value of investment, appearing in the balance sheet on the first day and the last day of the assessee has to be disallowed. 20. However, in the present case we need not refer to sub Rule (2) to Rule 8D of the Rules as conditions mentioned in sub Section (2) to Section 14A of the Act read with sub Rule (1) to Rule 8D of the Rules were not satisfied and the Assessing Officer erred in invoking sub Rule (2), without elucidating and explaining why the voluntary disallowance made by the assessee was unreasonable and unsatisfactory. We do not find any such satisfaction recorded in the present case by the Assessing Officer, before he invoked sub Rule (2) to Rule 8D of the Rules and made the re-computation. Therefore, the respo....
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....erwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001." 9. The above provision is in a sense a taxing exception to the stream of income which is otherwise exempt, i.e. tax exempt income. The principle of disallowance is stated in Section 14A(1). Section 14A(2) prescribes the mode or methodology for the disallowance and the steps for its calculation. Unlike the other part of the statute which decree or enjoin the actual methodology and are substantive, Parliament deemed it appropriate to leave it to the rule making authority to prescribe the methodology, i.e. computation. For instance, what are taxable and in what proportion and the principles applicable are embedded in the statute in certain provisions, such as Sections 28 to 43 and Sections 80A to 80HHC when it comes to deductions. Instead of adopting that mode, the Parliament thought it appropriate to leave the mode to the rule making authority. In that sense, the rules are not merely procedural but are substantive and can be said to be engrafted in the statute, as is evident from the mandate of the first part of Section 14A(2). That apart, si....