TaxTMI 
TaxTMI 
2017 (9) TMI 1573
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....e-tax (Appeals) (hereinafter referred to as "CIT(A)") in relation to additions made by disallowing exemption under section 14A(2) of the Act, 1961 read with rule 8D of the Income-tax Rules, 1962 (hereinafter referred to as "Rules, 1962"). 3. The expenditure computed as income by the Assessing Officer disputed in this appeal are to the extent of Rs. 40,31,477. This appeal was admitted on July 3, 2015 on the following substantial questions of law : "(i) Whether the Income-tax Appellate Tribunal is justified under the facts and circumstances of the case in setting aside the order of the Commissioner of Income-tax (Appeals) and deleting the addition made by the Assessing Officer under section 14A of the Income-tax Act, 1961 of Rs. 40,31,477 ; when the assessee made investments in subsidiary companies and not submitted any detail of expenditure before the authorities ? (ii) Whether the Income-tax Appellate Tribunal is justified under the facts and circumstances of the case in setting aside the order of the Commissioner of Income-tax (Appeals) without considering that when no explanation submitted by the assessee regarding the expenditure, the Assessing Officer right....
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....012, the Commissioner of Income-tax (Appeals) confirmed applicability of section 14A of the Act, 1961 for disallowing expenditure but giving a relief of Rs. 47,564, it reduced additions to Rs. 39,83,913. 8. The assessee preferred further appeal before the Tribunal. It has allowed appeal of the assessee with regard to addition applying section 14A of the Act, 1961 by observing that the Assessing Officer has failed to record its objective satisfaction with regard to correctness of claim of the assessee and addition is mechanical without satisfying the conditions precedent for applying section 14A(2) of the Act, 1961. It has set aside the said addition made by the Commissioner of Income-tax (Appeals) and deleted the same. 9. Now the Revenue, being aggrieved by this order, has preferred this appeal. 10. Section 14A of the Act, 1961 as it stood during the relevant period of the assessment year, reads as under : "14A. Expenditure incurred in relation to income not includible in total income.-(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which d....
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....axable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income." 14. Section 14A(1) of the Act, 1961 is substantive in nature and provides that for the purpose of computation of total income under Chapter IV, no deduction can be allowed in respect of expenditure in relation to income which does not form part of total income under the Act, 1961. In other words, a deduction of an expenditure incurred by the assessee which relates to income forming part of the total income is only allowable for computing total income under Chapter IV and not otherwise. 15. Sub-section (2) of section 14A of the Act, 1961 is procedural in nature. It provides as to what the Assessing Officer has to do for determining the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act, 1961. For this purpose, he has to follow the procedure prescribed, i.e., under the Rule....
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.... details of expenditure, etc., which it failed. He placed before us rule 8D which came to be inserted in Rules, 1962 by Income-tax (Fifth Amendment) Rules, 2008, with effect from March 24, 2008 and as it stood during the relevant assessment year, reads as under ([2008] 299 ITR (St.) 88) : "8D. Method for determining amount of expenditure in relation to income not includible in total income.-(1) 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 asses see ; 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 pro visions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :- (i) the amount of expenditure directly relating to income which does not form part of total income ; ....
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....ms alone is taxable whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible ; and (iii) in computing 'profits and gains of business or profession' when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under section 37 of the Act will depend on : (a) fulfilment of requirements of that provision noted above ; and (b) on the fact whether all the ventures carried on by him constituted one indivisible business or not ; if they do, the entire expenditure will be a permissible deduction but if they do not, the principle of apportionment of the expenditure will apply because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee." 24. This exposition of law prior to introduction of section 14A of the Act, 1961 was when an assessee had a composite and indivisible business which had elements ....
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....t of an objective satisfaction, must, therefore, be scrupulously observed. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and recording of reasons by the Assessing Officer in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee ;" (emphasis added) 27. A Division Bench of the Delhi High Court considered section 14A(2) and (3) of the Act, 1961 and rule 8D of the Rules, 1962 in Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 (Delhi) and in para 30 of judgment, the court said (page 290) : "However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in ....
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....n all these judgments, the court disapproved the order of the Assessing Officer invoking section 14A of the Act, 1961 and rule 8D(2) of the Rules, 1962 where the Assessing Officer has disallowed exemption without recording his satisfaction. The court said that recording of satisfaction in the shape of reasons as to why voluntary disallowance made by the assessee was unreasonable and unsatisfactory and it is a mandatory requirement of law. 29. The view of this court is also similar. In Dhampur Sugar Mills Ltd. v. CIT [2015] 370 ITR 187 (All), a Division Bench of this court, presided by the hon'ble Dr. Justice D. Y. Chandrachud (Chief Justice) (as His Lordship then was), after referring to section 14A(2) of the Act, 1961 and rule 8D of the Rules, 1962 observed that to determine the amount of expenditure incurred in relation to such income which does not form part of total income under the Act, 1961 by applying the method which is prescribed in rule 8D of the Rules, 1962, the Assessing Officer must not be satisfied with the correctness of claim of the assessee having regard to accounts of assessee. Having said so, the court observed that for the purpose of looking into the fact....