TaxTMI 
TaxTMI 
2016 (10) TMI 1021
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....,000/- being alleged expenses incurred in earning exempt income under section 14A of the Income-tax Act, 1961 as against the disallowance of Rs. 38,00,216/- made by the appellant in computing the normal income. iii. That the learned Commissioner of Income Tax (Appeals) is not justified in confirming the addition of Rs. 8,72,79,000/- being alleged expenses incurred in earning exempt income under Section 14A of the Income-tax Act, 1961 as against the disallowance of Rs. 38,00,216/- made by the Appellant in computing the Book Profit under Section 115JB of the Income-tax Act, 1961. iv. That further grounds shall be submitted at the time of hearing. 3. Grounds of appeal raised in ITA No. 2398/Del/2014 for assessment year 2010-11 are as under: i. That the order of the learned Commissioner of Income Tax (Appeals) is against the facts and law. ii. That the learned Commissioner of Income Tax (Appeals) is not justified in confirming the addition of Rs. 15,63,49,582/-(including Rs. 8,80,64,287/- being out of interest paid) as alleged expenses incurred in earning exempt income under Section 14A of the Income-tax Act, 1961 as against the disallowance of Rs....
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....es Nil (b) Interest expenses not attributable to any Specific income or receipt Nil (c) 0.5% of average investment income from which Does not or shall not form part of total income. Rs.1663.56 + 1827.59 = 3491.15 Rs.(1745.58*0.5%) Rs.8,72,79,000/- 4.2 Thus, disallowance u/s 14A of the Act is worked out at Rs. 8,72,79,000/-. However, since assessee itself has disallowed an amount of Rs. 38,00,216/- in its computation, the net disallowance of Rs. 8,34,78,784/- i.e. (Rs.8,72,79,000 - 38,00,216) is being made and added to the assessee's total income as well as book profit computed u/s 115JB of the Income Tax Act, 1961." 4.1 Being aggrieved from the assessment order, the assessee filed an appeal before the learned Commissioner of Income Tax (Appeals), who confirmed the additions made by the Assessing Officer. Hence, the present appeals before the ITAT. 5. Ground nos. 1 & 2 are general in nature and do not require to adjudicate upon. 6. Ground no. 2 is regarding the addition of Rs. 8,72,79,000/- for earning exempt income under Section 14A of the Act read with Rule 8D(2)(iii) of the Income Tax Rules, 1962 (in short "the ....
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.... Name EMP No. Salary PF Total Other Benefit s Grand Total R K Gupta 15075 1080085 70226 1150311 230062 1380373 Anil Dudeja 00052 575227 33616 608843 121769 730612 Total 1656312 103842 1759154 351831 2110985 Crs Total CC Expenses 186.15 Employee co....
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.... by the AO on this account is directed to be deleted. Ground No. 2 is allowed. 11. Ground No. 3 & 4 are regarding addition of Rs. made by the AO while computing book profit under section 115JB of the Income-tax Act. In view of our decision regarding no. 2 whereby we have upheld the disallowance under section 14A of Rs. 20,81,729/- made by the assessee as against Rs. 9,74,22,250/- computed by the AO by invoking Rule 8D these grounds become consequential in nature. The AO is directed to restrict the disallowance while computing book profit under section 115JB to Rs. 20,81,729/- as computed by the assessee. These grounds of appeal are accordingly disposed of. Copy of the order is enclosed herewith. ii) Against the above order of ITAT Revenue filed an appeal in the High Court of Delhi as ITA 218/2016 which was dismissed vide order dated 30.03.2016 and Para (5) is reproduced hereunder: - 5. Considering that it is not case where regular activities were undertaken by the Assessee in respect of the investments to earn income there form, there was no basis for the AO to hold that the expenditure as disclosed by the Assessee towards earning exempt income w....
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....d by the tax auditor in its tax audit report which reads as under:- "In our opinion and in accordance to the information and explanation given to us direct and indirect expenses of Rs. 20,81,729/- has been incurred in relation to income being exempted u/s and 10(34) of the Income Tax Act, 1961 (i.e. interest on tax free Securitized Bond/Loan and Dividend)." 10.2 The AO has rejected the same on the ground that there would have been certain expenditure towards administrative establishment for proper accounting of these investments and income there on. There cannot be any quarrel with this proposition but the moot question is whether the amount computed by the assessee is not sufficient enough and if so the reasons for insufficiency. On going through the assessment order we note that the AO has simply made a general remark that the assessee is required to incur certain expenses to supervise and account these income and it is not acceptable that investment has been made and no expenditure- could be attributable. It is not a case of no expenditure. From the facts it is clear that the assessee has itself added back a sum of Rs. 20,81,729/. In case the AO was not satisfi....
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.... year was Rs. 12 Crores which continued at Rs. 12 Crores during the year under consideration. The dividend received from these two companies has been credited to the bank account. Thus the exempt income received by the assessee company during the year is by way of tax free interest on the bonds and dividend from these two companies. As regards the investments we note from the Annua accounts that there is a small addition by way of further contribution to existing trade investments. It is not a case where there are regular activities in respect of investments or income which is tax free. Assessee Company is not engaged in investment activity by way of frequent purchase and sale of such investments. Can on the basis of these activities it be said, that the expenditure of Rs. 20,81,729/- added back by the assessee company is insufficient. The AO and the CIT(A) has not brought any material to even demonstrate that this expenditure is insufficient. The learned DR also during the course of his argument could not point out or give any reason why this expenditure of Rs. 20,81,729/- is insufficient considering the above facts of the assessee's case. It may also be relevant to refer....
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....e 8D the AO has to give cogent reasons. It is not by simply stating that he is not satisfied by the explanation given by the assessee that the AO can invoke Rule 8D. 10.4 The Hon'ble jurisdictional Delhi High Court had occasion to consider this issue in the case of CIT vs. Taikisha Engineering India Ltd. (2015) 370 ITR 338 (Del) and has held that under section 14A(2), the AO 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, the AO can determine the amount of expenditure which should be disallowed in accordance with Rule 8D. The AO itself at the first instance must examine the disallowance made by the assessee or the claim of the assessee that no expenditure was incurred to earn the exempt income. If the AO is not satisfied on this count after making reference to the accounts the AO is entitled to adopt and apply Rule 8D. Thus the requirement of the law is that the AO is required to examine the accounts of the assessee and if he not satisfied after making reference to the account only then he could make disallowance applying Rule 8D. The relevant observation of the Court is as under:- ....
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....ng rule 8D of the Rules, namely, recording of an objective satisfaction with regard to the claim of the assessee that an expenditure of Rs. 5,00,000/- has been incurred in relation to the exempt income, is incorrect. In order to examine the aforesaid compliance with the pre-condition, we have perused the para 4 to 4.2 of the assessment order and find that no reasons have been advanced as to why the disallowance determined by the assessee was found to be incorrect, having regard to the accounts of the assessee. The only point made by the Assessing Officer is to the effect that "the said disallowance was not acceptable". In-fact, we find that the assessee made detailed submissions to the Assessing Officer, which have been reproduced by the CIT(A) in para 3.2.1 of his order. As per the assessee, the determination of disallowance u/s 14A of the Act of Rs. 5,00,000/- was based on the employee costs and other costs involved in carrying out this activity. Further assessee also explained that the shares which have yielded exempt income were acquired long back out of own funds and no borrowings were utilized. The mutual fund investments were claimed to be also made out of surplus funds. It ....
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....MI 267 - Delhi High Court] has held that by virtue of the provisions of sub-section (2) and (3) of Section 14A of the Act, if the Assessing Officer is not satisfied by the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon the determination of the amount of expenditure in accordance with Rule 8D. While rejecting the claim of the assessee, the Assessing Officer has to render cogent reasons for the same. In a case where the assessee states that no expenditure has been incurred by it to earn exempt income, the Assessing Officer has verify the correctness of the assessee's claim having regard to the accounts of the assessee. In the case on hand, we find that the Assessing Officer has not given any cogent reason in the order of assessment for disbelieving the contention of the assessee that it has incurred no expenditure to earn the exempt income of Rs. 18,400 but has proceeded to apply the provisions of Rule 8D to arrive at the disallowance of Rs. 1,93,730 as the expenditure deemed to be incurred for earning exempt income. Further as contented by the learned Authorized Representative, the judicial pronou....