TaxTMI 
TaxTMI 
TaxTMI 
2018 (6) TMI 1283
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....Rule 8D of the Income Tax Rules for both the aforesaid Assessment Years 2011-12 & 2012-13, in excess of the expenditure incurred by the assessee? (ii) Whether the authorities below were justified in disallowing the excess claim of deduction under Section 36(1)(viii) of the Act in the hands of the assessee who carries on the eligible business of banking over and above "profits and gains of business or profession" (before making any deduction under this Clause) carried to such Reserve Account by adding back the Depreciation and Amortization of the SLR investment made by the assessee bank during the period in question as per statutory requirements? We take up the issue first relating to 14A of the Act. Disallowance under Section 14A Expenditure incurred to earn exempted income: 3. The relevant findings of the assessing authority for the Assessment Year 2011-12 at Assessment order Annexure-B dated 30.01.2014 are narrated below for reference; "8. It is seen that the assessee has income by way of dividends of Rs. 1,80,30,965/- which has been claimed exempt. It is stated that no separate accounts have been maintained for earning exempted income. It is seen that the assessee has....
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....he year 2012-13. The said additions under Section 14A of the Act for both the assessment years were upheld by the first and second appellate authorities as well. 5. The learned counsel for the assessee Mr. H.R. Kambiyavar has submitted before us that Section 14A of the Act stipulates that no deductions shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act and it is for the Assessing Authority to determine the amount of expenditure so incurred in relation to earning of such exempted income. 6. Drawing the attention of the Court towards Rule 8D of the Income Tax Rules, 1962, the learned counsel for assessee has urged that the amount of disallowance under Section 14A of the Act read with Rule 8D of the Rules, cannot exceed the total expenditure claimed by the assessee for earning such exempted income. He submitted that in the present case the assessee earned "dividend income" from the SLR investments made by it, which is exempted from income tax to the extent of Rs. 1,80,30,965/- for the assessment year 2011-12 but the learned Assessing Authority vide the aforesaid order has disallowed th....
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....e assessing authority in this regard. Apparently, the expenditure, so calculated to the extent of Rs. 2,48,85,000/- which was disallowed by Assessing Authority is far in excess of the dividend income of Rs. 1,80,30,965/-. The same prima facie appears to be incorrect. While the assessee claimed that no expenses was incurred in this regard, the assessing authority has disallowed the said expenditure even in excess of the dividend income itself. The said calculations do not appear to be computed in accordance with Rule 8D of the Rules. We do not find any rational basis for the same. 11. The obligation is cast upon the assessing officer under Section 14A of the Act to determine the said amount of expenditure incurred for earning the exempted income of dividends. 12. The provision of Section 14A of the Act and Rule 8D of the Rules are quoted below for reference; "Expenditure incurred in relation to income not includible in total income. 14A. (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 does not form part of the total income under this Act. (2)....
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....t. The said Rule 8D as applicable for Assessment Years 2011-12 & 2013-14 will be relevant. 13. The manner in which the aforesaid disallowance has been made by the assessing authority and has been upheld by the appellate authorities leaves much to the desired and the same cannot be sustained and therefore the matter deserves to be remanded back to the Assessing Authority. 14. We make it clear that the expenditure for earning exempted income has to have a reasonable proportion to the income, so earned, going by the common financial prudence. Therefore, even if the Assessing Authority has to make an estimate of such an expenditure incurred to earn exempted income, it has to have a rational nexus with the amount of income earned itself. Disallowance under Section 14A of Rs. 2,48,85,000/- as expenses to earn exempted Dividend income of Rs. 1,80,30,965/- is per se absurd and hypothetical. The disallowance under Section 8D cannot exceed the expenses claimed by assessee under the Proviso to Rule 8D. Therefore, where the assessee claimed that assessee did not incur any such expenditure during the year in question to earn Dividends of Rs. 1,80,30,965/-, the burden was upon the assessing au....
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.... reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess. Explanation. - In this clause - (a) "specified entity" means,- (i) a financial corporation specified in section 4A of the Companies Act, 1956 (1 of 1956); (ii) a financial corporation which is a public sector company; (iii) a banking company; (iv) a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank; (v) a housing finance company; and (vi) any other financial corporation including a public company; 17. The authorities below have held against the assessee on the said issue that in the net profit from banking business declared by the assessee, transferred to General Reserve, the assessee before claiming 20% deduction of the profits, added back the amount of amortization and depreciation in SLR investments, to arrive at a higher figure of profit for claiming the aforesaid 20% deduction under Section 36(1)(viii) of the Act, which is not permissi....