TaxTMI 
TaxTMI 
2021 (11) TMI 921
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....the case of the appellant as the expenditure incurred by him are wholly and exclusively incurred for the business and are nowhere related to the exempt income earned in any manner. 1.2 The learned Commissioner of Income Tax (Appeals) further erred in law and fact by not considering that the Assessing Officer has neither recorded any dissatisfaction with regard to correctness of appellant's claim of expenditure for earning exempt income nor shown any nexus between the expenditure and the exempt income. On the contrary, by merely observing that some expenditure is attributable to exempt income has straight away proceeded to compute disallowance under Section 14A by applying Rule 8D. We rely upon. M/S Fereshte Sethna V/s CIT (2017) 77 taxmann.com 156(Mumbai ITAT). , Pukhraj Chunilal Bafna VS DCIT (2014) 47 taxmann.com 288(Mumbai ITAT) & ACIT v/s Sachin R Tendulkar (2017) 77 taxmann.com 305 (Mumbai ITAT). 1.3 The learned Commissioner of Income Tax (Appeals) further erred in law and Fact by overlooking the Honorable Income tax Appellate Tribunal decision in respect of the Appellant' case for assessment year 2011-12 vide no. 478/MUM/2015 on 28/07/2017. In identi....
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....Observing, that investments decisions are very complex in nature and require substantial research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time etc., the A.O was of the view that the claim of the assessee that the dividend income was earned by incurring no or nominal expenditure could not be accepted. The A.O was of the view that as the assessee during the year had earned substantial exempt dividend income of Rs. 3,24,96,099/-, therefore, its claim that it had earned the same without incurring any expenditure, whatsoever, including management or administration expenses was beyond comprehension. Backed by his aforesaid observations, the A.O worked out the disallowance u/s 14A as per the mechanism provided in Rule 8D of the Income Tax Rules, 1963. Accordingly a disallowance u/s 14A r.w Rule 8D(2)(iii) of Rs. 1,07,16,643/- was computed by the A.O. After, inter alia, making the aforesaid disallowance the A.O vide his order passed u/s 143(3), dated 21.12.2018 assessed the income of the assessee company at Rs. 171,38,95,201/-. 4. Aggrieved, the assessee carried the matter in appeal before the C....
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.... that as the A.O had duly recorded his satisfaction as to why the assessee's claim that no expenditure could be attributed towards earning of the exempt dividend income was not to be accepted, therefore, had validly assumed jurisdiction and worked out the disallowance as per mechanism provided in Rule 8D. The ld. D.R relied on the judgment of the Hon'ble Supreme Court in the case of Maxopp Investments ltd. Vs. CIT (2018) 402 ITR 640 (SC). 7. We have heard the ld. Authorized Representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. As observed by us hereinabove, the controversy involved in the present appeal hinges around the solitary issue i.e as to whether or not the A.O had validly assumed jurisdiction and worked out the disallowance u/s 14A r.w Rule 8D. It is the claim of the assessee before us that the A.O without recording his dissatisfaction as regards the claim of the assessee that no expenditure was incurred for earning of the exempt dividend income had in a mechanical manne....
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....xempt income is actually earned or received during the year, from the investment. Therefore, the disallowance is to be worked out, even if there is no exempt income earned. Prior to Rule 8D, the apportionment of expenditure was at the discretion of Assessing Officer. But, now Rule 8D has prescribed a formula for calculation of disallowance u/s 14A and the same is binding in nature. 3.5 Further, reliance is also placed in the circular No. 5/2014 where in the Central Board of Direct Taxes clarifies that even if there is no exempt income earned by the assessee in the year under consideration disallowance u/s 14A can be made." 8. Before adverting to the issue in question i.e as to whether or not the A.O had rightly assumed jurisdiction and dislodged the assessee's claim that no expenditure could be attributed for earning of the exempt dividend income, we think it apt to first cull out the position of law as regards the same. The Hon'ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC) had, inter alia, held, that the A.O is obligated to mention the reasons while concluding that the claim of the assessee that no ex....
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....while dealing with the Assessment Year 2002-2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and Rs. 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While It is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case." Also, the aforesaid view was once again reiterated by the Hon'ble Apex Court in the case of Maxopp Investment Ltd. Vs.....
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....the basis of surmises or conjectures. The observations of the Hon'ble High Court qua the aforesaid issue for the sake of clarity are being reproduced as under: "11. As the record reveals, the Assessee received dividend income of Rs. 13,85,03,376/-. It was exempted under the IT Act. The Assessee claimed that he did not incur any expenditure to earn that dividend. It is said to have invested surplus funds through the bankers and other financial institutions. The mutual fund officials used to come to the Assessee's doorstep to fill up the forms and to do all other things necessary in that regard. The Assessee only issued the cheques. The AO disagreed. He reckoned that without devoting time and without analysing the nature of the investment, the Assessee could not have invested in the mutual funds. The AO took the view that section 14A clearly applied to the Assessee's case. The AO accordingly invoked Rule 8D and computed the disallowance at 0.5% of Rs. 381,67,09,7317-, the average investment. Then, he disallowed Rs. 1,90,83,548/-. The Assessee appealed to the CIT(A). Indeed, the appellate authority confirmed the AO's disallowance. Of course, the Tribunal reversed ....
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....14A of the IT Act. We need not elaborate on that Rule. 14. In Kanga & Palkhiwala: Law & Practice of Income Tax, (Lexis Nexis, New Delhi, 11 ed. Online edition), the learned revising author Arvind P. Datar has an interesting word about this 'inequitable and unfair1 provision. According to Kanga & Palkhiwala, on a cursory reading, section 14A seeks to prevent a deduction that may result when income does not form part of the taxable income. But the expenditure incurred to earn that income is allowable as a deduction. However, this section and Rule 8D have been amended several times. Those amendments have resulted in highly unfair consequences for Assessees who earn dividend income. The object of exempting dividend income under section 10(34) and income from mutual funds under section 10(33) was to encourage investments in shares and promote savings. 15. Dividends are not taxed in the hands of the shareholder, but it would be incorrect and anomalous, according to the revising author, to state that dividends are a category of income which does not suffer any tax. The object of section 14A is to disallow expenditure on income which has not suffered tax. That said, u....
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....ons and counter assertions, and the same result: the Tribunal reversed CIT(A)'s findings. Can our response be different here? 19. Here, on facts, the Tribunal noted that the AO only discussed the provisions of section 14A(I) but has not justified how the expenditure the Assessee incurred during the relevant year related to the income not forming part of its total income. The AO, according to the Tribunal, straightaway applied Rule 8D. Indeed, there must be a proximate relationship between the expenditure and the tax-exempt income. Only then would a disallowance have to be effected. This Court, we may note, on more than one occasion, has held that the onus is on the Revenue to establish that there is a proximate relationship between the expenditure and the exempt income. That is, the application of section I4A and rule 8D is not automatic in each and every case, where there is income not forming part of the total income. No doubt, the expenditure under section 14A includes both direct and indirect expenditure, but that expenditure must have a proximate relationship with the exempted income. Surmise or conjecture is no answer. 20. We may further reiterate that b....