AI Drafter 
TaxTMI 
TaxTMI 
2020 (7) TMI 211
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....-15 the Assessee filed its return of income. During the relevant previous year the Assessee earned dividend income from mutual funds amounting to Rs. 4,04,38,466/- which was exempt income from tax u/s 10(38) of the Act. As per the provisions of Sec.14A of the Act, any expenditure incurred in earning income which does not form part of the total income under Chapter III of the Act, has to be disallowed and added to the total income. The Assessee computed administrative expenses amounting to Rs. 3,55,660/- against the exempt dividend income and disallowed the same u/s14A of the Act. 3. The Assessee's case for the year under consideration was selected for scrutiny assessment and notice under sec.143(2) of the Act dated 29th August 2015 was issued by the AO. The AO passed order dated 25th November 2016 under section 143(3) of the Act accepting the income declared by the Assessee. Thus, the AO also accepted the disallowance made y the company u/s 14A of the Act amounting to Rs. 355,6660/-. 4. Subsequently, the AO initiated rectification proceedings under sec.154 of the Act vide notice dated 4th December 2017 proposing to rectify the following alleged mistake. According to the AO, i....
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....he basis of disallowance made by it in the return of income by pointing that the Assessee has suo-moto disallowed expenses u/s 14A of the Act amounting to Rs. 355,660/- against the exempt dividend income of Rs. 40,438,466/-. The Assessee has already considered all related administrative expenses incurred by it for managing the investment from which exempt income was earned and hence additional disallowance as per Rule 8D is not called for. The Assessee submitted that the treasury team of the Assessee manages all the investment made by the India group company namely, Mphasis Ltd., MSource India Pvt.Ltd. and MPhasis software and Solution India Ltd., in addition to the other work of forex management, hedging, payment settlement, etc. of the entire India group company. The Assessee follows the policy of disallowing entire salary cost incurred on the treasury tam and also allocable overhead cost on treasury team u/s 14A in proportion to the average opening and closing investment held by the Indian group companies. The Assessee submitted that the treasury team is engaged in managing other affairs of the group companies in addition to Assessee work responsibility of managing the investmen....
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....the rival submissions. 10. By the Finance Act of 2001, Parliament enacted section 14A with retrospective effect from April 1, 1962. Section 14-A of the Act so enacted provided that in computing the total income of an assessee, 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." The Memorandum Explaining the Provisions in the Finance Bill of 2001 provided the following rationale for the insertion of section 14A ([2001] 248 ITR (St.) 192, 195, 196) : "Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed. On the same analog....
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....n provided. As a result there was a considerable dispute between taxpayers and the Revenue on the method of determining such expenditure. In this background, sub-section (2) was inserted so as to make it mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to income which does not form part of the total income in accordance with the method that may be prescribed. The circular, however, reiterates that the Assessing Officer has to follow the prescribed method if he is not satisfied with the correctness of the claim of the Assessee having regard to the accounts of the Assessee. 13. Rule 8D was inserted by the Income-tax Act (Fifth Amendment) Rules, 2008, which were published in the Gazette on March 24, 2008. The rules specifically provide that they shall come into force from the date of their publication in the Official Gazette. The provisions of section 14A as originally introduced and as amended from time to time as well as the insertion of Rule 8D was subject-matter of several decisions rendered by various Benches of the ITAT as well as the Hon'ble High Courts. The Hon'ble Delhi High Court in the case of Maxopp Investments Ltd. v. CIT ....
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....re was incurred to earn exempt income was only Rs. 3,55,660. The AO has to follow the mandate laid down in Sec.14A(2) of the Act, i.e., he has to examine the claim of the Assessee in the light of the books of accounts of the Assessee. If the AO does not agree with the claim of the Assessee having regard to the books of accounts of the Assessee, then is it mandatory for him to resort to Rule 8D of the Income Tax Rules, 1962 to quantify the disallowance u/s.14A of the Act? We are of the view that even in a case where the AO rejects the claim of the Assessee regarding expenses incurred to earn the exempt income, it is not mandatory for him to invoke the method of calculation prescribed by Rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. The second part of Sec.14A(2) of the Act provides as follows, "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". In other words, it is only when no reasonable and proper parameters for making disallowance can be ar....