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2020 (6) TMI 26

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...."Act") read with Rule 8D of the Income-tax Rules, 1962 (hereinafter referred to as the "Rules"). 3. Briefly stated facts as observed by the AO are that the assessee had received exempted income by way of dividend. According to AO, the assessee has invested money in shares i.e. non current investment to the tune of Rs. 42,98,45,733/- during the FY 2011-12. And the assessee has debited only demat charges of Rs. 33,145/- and claimed that no other expenditure was incurred by it for earning this dividend income. However, the AO after asking for explanation remarked that he did not accept the claim of assessee and applied Rule 8D and computed the disallowance to the extent of Rs. 20,72,749/-. Aggrieved, assessee preferred an appeal before the Ld....

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....x audit report auditor has disallowed the demat charges." 5. Drawing our attention to this reason recorded by AO the ld. AR submitted that the AO had rejected the contention of the assessee without providing any reason for such rejection. According to him, the only reason for disallowance u/s. 14A was that the auditor of the assessee in the tax audit report had disallowed demat charges of Rs. 33,145/- u/s. 14A which was never incurred for earning dividend income. The ld. AR submitted that the AO has neither recorded any nexus between the exempt income and the expenditure so disallowed by him nor recorded his dissatisfaction with reference to the claim of the assessee that no expenditure other than already disallowed in the return was incur....

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....e which does not form part of the total income under this Act in accordance with such method as may be prescribed, 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 this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : [Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhanci....

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....sallowance as per Rule 8D is not automatic and it can be resorted to only if the AO having regard to the accounts of the assessee records his dissatisfaction as to the claim of expenses incurred by the assessee for earning the exempt income. In the instant case the AO while making the addition u/s. 14A had made no effort to examine the veracity of the claim made by the assessee company that it did not incurr any expenditure other than the demat charges suo-moto disallowed by it, which also assessee contests that the demat charges not incurred while earning the exempt income. The ld. CIT(A) also did not make any effort to examine the claim of the assessee rather has simply taken into consideration the alternate claim of the assessee without ....