TaxTMI 
TaxTMI 
2021 (3) TMI 813
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....eld the provisions of section 14A of the Act, for the purposes of disallowing expenses relating to exempt income, applicable in the facts of the present cases on noting that the assessee had earned exempt income in the form of dividend. That after holding so, the ITAT had restored the issue of calculating the disallowance of expenses to the AO with the direction to decide the same in accordance with the provisions of section 14A of the Act and as per law. That subsequently the AO, after giving due opportunity of hearing to the assessee, had worked out the disallowance by applying the mathematical formula provided in Rule 8D of the Income Tax Rule, 1962 for the said purpose, making disallowance of expenses for the impugned assessment years as under: Asstt. Year Disallowance of Interest Expenses Disallowance of Administration Expenses Total 2006-07 Rs. 40,54,400/- Rs. 12,49,257/- Rs. 53,03,657/- 2007-08 Rs. 21,30,672/- Rs. 10,75,091/- Rs. 32,05,763/- 2008-09 Rs. 11,96,147/- Rs. 8,83,523/- Rs. 20,79,670/- 2009-10 Rs. 6,66,301/- Rs. 7,94,186/- Rs. 14,60,487/- 2010-11 Rs. 3,06,973/- Rs. 7,89,686/- Rs. 10,96,659/- 4. That the assessee filed appeal....
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....e exempt income. He placed reliance on various cases. He furthermore submits that AO has not brought on record any expenditure which has been incurred by the assessee to earn the exempt income but has applied Rule 8-D of the Rules in a mechanical manner. And lastly he argued that the assessee had not made investments in the shares of the borrowed funds. The investments have been made out of the interest free funds of the assessee. 12.2.1 On careful perusal of facts of the case, I find merit in the arguments of the appellant ARs. First and foremost, AO has failed to bring on record that borrowed funds have been used to make investment in the shares. Moreover, it has been decided by various judicial authorities that disallowance cannot exceed the exempt income. The Delhi High Court in Joint Investments Pvt. Ltd. v. CIT (ITA No. 117/2015) has held that Section 14A or Rule 8D cannot be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A of the Act, and is only to the extent of disallowance of expenditure 'incurred by the assessee in relation to tax exempt income'- Accordingly, the tax exempt ....
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....me findings on identical facts, AO is directed to delete the addition exceeding the exempt income. The Grounds of Appeal Nos. 1 to 3 are partly allowed." 6. Aggrieved by the same, the assessee has filed the present appeals relating to the impugned years before us. The grounds raised for assessment years 2006-07 and 2007-08, it was pointed out, were identically worded challenging the application by the AO of Rule 8D of the Income Tax Rules, 1962, for working out disallowance u/s. 14A of the Act as also challenging on merits the upholding of disallowance by the Ld. CIT(A) to the extent of exempt income earned. For the sake of convenience the grounds raised in assessment year 2006-07 are reproduced hereunder: "1. That the CIT(A) has erred in law & facts of the case in upholding disallowance under section 14A r.w. Rule 8D of the Income Tax Act/Rules ignoring that the provisions of Rule 8D are not applicable to the relevant assessment year which is highly unjustified and uncalled for. 2. That the CIT(A) has erred in law & facts of the case in upholding disallowance to the extent of Rs. 2,97,432/- which is highly unjustified and uncalled for." 7. It was pointed out that for assessm....
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....le 8D would operate prospectively. For this reliance is being placed on the following judicial pronouncements:- Commissioner of Income-tax v. Essar Teleholdings Ltd. (2018) 401 ITR 445 (SC) GODREJ & BOYCE MFG. CO. LTD. Vs. COMMISSIONER OF INCOME TAX & ANR. 328 itr 0081 (Bom.) MAXOPP INVESTMENT LTD. & ORS. Vs. COMMISSIONER OF INCOME TAX (2012) 247 CTR 0162 In view of above, we submit that the provisions of Section 14(2), Section 14(3) and Rule 8D are not applicable to the year under consideration. Thus the disallowance made by the AO applying Rule 8D be deleted." 9. The Ld. DR, on the other hand, contended that mere applicability of Rule 8D, which was not enforceable or attracted in those years, would not negate the entire disallowance since even the ITAT in the first round had held that the disallowance with respect to the exempt income earned had to be calculated. That merely because the AO had applied a formula which was not applicable in the impugned years would not mean that the entire disallowance calculated by him needed to be deleted. 10. Thereafter on the merits of the case, the Ld. Counsel for the assessee contended that in the facts of the case no disallowance o....
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....ts were made way back approximately 25 to 35 years ago. The whole exercise does not require any expense to be incurred. The investments were made years ago and the dividend is automatically credited through ECS mode. Thus once the investments were made, there are hardly any expenses which are required to be incurred. It is like making an FDR out of surplus funds, keep invested, earn interest until funds are required. Once the FDR is made, interest is automatically accruing which does not require any amount of expense to be incurred. Thus the assessee has not incurred any expense during the year to earn exempt income. However the AO has made the disallowance ignoring the aforesaid fact. It is well settled that the disallowance can be made only it is proved that the assessee has incurred expenditure for earning the exempt income. For this reliance is being placed on the following judicial pronouncements:- In the decision in the case of Godrej & Boyce Manufacturing Co. Ltd. v. Dy. CIT & Anr. (2017) 394 ITR 449 (SC) (para 36)..... Again in the judgment of Maxopp Investment Ltd. v. Commissioner of Income Tax (2018) 402 ITR 640 (SC) vide para 32 In view of the above, the first condit....
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.... of the assessee. The assessee had not made by investments in the shares out of the borrowed funds. The investments have been made by the assessee in the shares more than 25-35 years ago out of the funds received from the State Government for the purpose of investing the same. It is pertinent to mention here that no investment has been made by the assessee in the aforesaid shares during the year(PB Page 19-22). Also, the matter regarding the source of funds from which the investment has been made is already settled by the ITAT in the assessee's case itself in A.Y. 2003-04 & A.Y. 2004-05. For this, we would like to bring on record the facts of the case which are as under.............. The AO after due verification had deleted the addition made on account of disallowance of interest in the aforesaid years. The copy of order of ITAT and the AO giving appeal effect is enclosed herewith at Page 23-60. It is settled fact that the no interest bearing funds have been invested by the assessee in shares. The entire income from which dividend was earned during the year was from the investments which were existing as on 01.04.2005. In the case, where the assessee had enough own surplus....
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.... for disallowance is indicated in Section 14A of the Act, and is only to the extent of disallowance of expenditure incurred by the assessee in relation to tax exempt income'. Accordingly, the tax exempt income cannot be disallowed entirely. Supreme Court has dismissed SLP of the Department against the judgment of Delhi High Court. Similar view has been taken by the jurisdictional High Court in the case of Principal Commissioner of Income-tax-1, Chandigarh vs. Empire Package (P) Ltd. (2017) 81 taxmann.com 108 (Punjab & Haryana) Dated 12.01.2016. The facts of the case are that income from dividend had been shown at Rs. 1,11,564 whereas disallowance under section 14A read with rule 8D of the Rules worked out by the Assessing Officer came to Rs. 4,09,675. The Hon'ble High Court has held that when the assessee claimed that it had not made any expenditure on earning exempt income, the Assessing Officer in terms of sub-section (2) of sec. 14A was required to collect such material evidence to determine expenditure if any incurred by the assessee in relation to earning of exempt income. The Assessing Officer disallowed the entire tax exempt income which is not permissible as per set....
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....specific and the Ld. CIT(A) having given no finding regarding the nature of disallowed expenses upheld by him, we restore the issue raised by the assessee on merits against the said disallowance back to the Ld. CIT(A) for adjudication afresh. The Ld. CIT(A) is directed to consider the submissions made by the assessee and thereafter adjudicate the issue giving clear finding regarding the nature of disallowed expenses upheld if any. Needless to add the assessee be granted due opportunity of hearing. 15. Vis-a-vis. the ground No. 1 raised by the assessee in its appeal filed relating to assessment years 2006-07 and 2007-08 urging that the entire disallowance made u/s. 14A of the Act needed to be deleted since Rule 8D was not applicable in the impugned years, we are not convinced with the same. Merely because the AO had adopted an incorrect method for working out the disallowance does not mean that the entire disallowance was not tenable in law, more particularly when the ITAT had in the first round held that in the light of the fact that the assessee had earned exempt income, section 14A of the Act was attracted and the AO was only required to work out the disallowance as per the prov....