TaxTMI 
TaxTMI 
2023 (10) TMI 32
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....the provisions of section 14A of the Act. 4. Brief facts pertaining to the issue are that the; * assessee had earned exempt income by way of dividend amounting to Rs. 2,28,32,577/- * had disallowed expenses u/s 14A of the Act suo moto of Rs. 6,56,966/- * its total non current investments as reflected in its audited accounts were Rs. 96,88,65,627/- and current investments in Mutual Funds , PMS and Equity was Rs. 1,57,77,486/- * Expenses held disallowable by the AO by invoking Rule 8D of the Rules, and confirmed by Ld.CIT(A) Rs. 46,80,510/- resulting net disallowance of Rs. 40,23,544/- after taking into account suo moto disallowance made by the assessee. 5. Argument of the ld.counsel for the assessee before us was that the AO had invoked Rule 8D of the Income Tax Rules, 1962 ("Rules" in short)for the purpose of computing disallowance of expenses under section 14A of the Act without first complying with conditions set out in section 14A(2) of the Act for invoking Rule 8D of the Rules. To put in other words, his contention was to the effect that the provisions of section 14A require that Rule 8D can be invoked only in a situation when the AO is....
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....t of total income has been accepted in a way also in earlier years. Further, it is to be noted that for making investments, there need not be involvement of other man-power, telephone and stationery etc. Such expenditure are fixed in nature and do not have any linkage with investment activities. On the contrary attributable expenditure towards investments activities incurred by Portfolio managers and cost from our end is disallowed by us. It is further stated in the instant case it is necessary to examine whether Section 14 A is correctly applied or not. Section 14A speaks about the non availability of expenses incurred in relation to income which does not form part of the total income. In the case no expenditure is incurred in relation to income which is exempt except as disallowed voluntarily while furnishing return of income. In the instant case no expenditure incurred in relation to income which is exempt except as disallowed voluntarily while furnishing return of income. The intention of the legislature was that no deduction for expenditure incurred in respect of exempt income against taxable income. If we reiterate, the intention of the leg....
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....income and expenditure, Section 14A will not apply. It is very much clear from the forgoing discussion that unless there is a direct and proximate connection between expenditure and the exempt income, there cannot be any disallowance of the expenditure under this section. This view point is based on the expression 'in relation to' used in section as having only direct and proximate connection between the expenditure and exempt income. Be that as it may, we would also deal with the contention that there should be a dominant and immediate connection between the expenditure incurred and the exempt income so as to make disallowance U/s 14A. A great deal of emphasis has been laid on establishing of dominant and immediate connection between the expenditure incurred and the exempt income. Dominant and immediate connection refers to first degree of relation between the two things. However, it would cease to be dominant if the degree of relationship slips from first to second. With the foregoing discussion, it is very much clear that no further disallowance should be made u/s 14A of the Act as specially considering fact that all the investments ha....
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....separate identification. Sources has no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest.' CIT Vs Abhishekh Industries Ltd (2006) 280 ITR 1 ( P& H) (v) The Hon'ble Jurisdictional High Court in the case of Godrej & Boyce Mfg. Co.Ltd, reported in (2010) 328 ITR 81 (Bom) has categorically held that Rule 8D r.w.s. 14A is not arbitrary or unreasonable but can be applied only if assessee's method is not satisfactory. The Hon'ble Court also held that from Assessment Year 2008-09 provisions of Rule 8D will apply. The court further held that Section 14A is founded on the valid rationale t....
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....stment into shares is made by assessee may not be relevant. As section 14A applies irrespective of whether shares are held to gain control or as stock-in-trade. However where shares are held as stock-in-trade, main purpose is to trade in those shares and earn profits there from and, in process, certain dividend is also earned which is tax exempt under section 10(34); expenditure attributable to exempt dividend income will have to be appointed to be disallowed under section 14A. (xi) In circular No. 5/2014 dated 11.02.2014 issued by CBDT which clarifies that even in case of absence of exempt income; section 14A disallowance shall be made in case the assessee has made investment which is capable of yielding exempt income even though there might not be an actual receipt of exempt income. This circular has clarified the legislative intent as to allow only debt expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowances, irrespective of fact that whether any such income has been earned during the financial year or not. (xii) Interest bearing fund h....
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....others. Having so pointed out that, the ld.counsel for the assessee submitted that the AO recorded his dissatisfaction with the assessee's claim in very general terms, merely stating at para 4.1 that the investment decisions were very complex in nature, they required substantial market research, day-to-day analysis of market trends and decisions etc. and he also required huge investment in shares and consequential blocking of funds. He further pointed out that the rest of the dissatisfaction against the claim of the assessee, noted by the AO, related to interest expenditure incurred onloans allegedly utilized for making investment. 9. The ld.counsel for the assessee contended that having huge surplus funds, presumption was that surplus funds have been used for making investment, and there was no occasion for any interest to be disallowed, which he pointed out was settled position of law by the Hon'ble Apex Court in the case of CIT Vs. Reliance Industries Ltd., 410 ITR 466 (SC). Therefore the AO's dissatisfaction with the interest expenses not being disallowed was, he stated not in accordance with law. He, thereafter, stated that the AO has not stated as to how on going throug....
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.... ITAT as not being sufficient for invoking Rule 8D of the Rules. 12. The ld.DR on the other hand, pointed out that the onus was on the assessee to prove that the entire expenses pertaining to earning of exempt income had been disallowed by it. Her contention was that the assessee had merely furnished details of expenditure disallowed without pointing out as to how only these expenses pertained to earning of exempt income and not any other administrative expenses. She, therefore, stated that the satisfaction recorded by the AO was sufficient for invoking Rule 8D of the IT Rules. 13. Having heard both the parties and after carefully going through the orders of the authorities below, we are in complete agreement with the ld.counsel for the assessee that the AO had failed to comply with the conditions set out in law prior to invoking Rule 8D of IT Rules for computing disallowance of expenses u/s 14A of the Act. The AO, we hold, has not recorded the requisite satisfaction about the incorrectness of the claim of the assessee. There is no dispute with regard to the interpretation of provision of section 14A(2) of the Act; that the AO can invoking rule 8D of the Rules for computin....