TaxTMI 
TaxTMI 
2017 (10) TMI 1652
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....le 8D of the Income Tax Rules, 1962 on account of expenses incurred for earning exempt income." Grounds raised by the Revenue: "1. The order of Ld. CIT(A) is not correct in law and facts. 2. On the facts and circumstances of the case the Ld. CIT(A) has erred in law in restricting the disallowance u/s. 14 read with Rule 8D of Rs.1,50,62,219/- and allowing a relief to assessee of Rs.11,15,08,645/- out of total disallowance of Rs.12,65,71,862/- made by the AO. 3. On the facts and circumstances of the case the Ld. CIT(A) has erred in law in deleting the addition of Rs.12,65,71,862/- u/s. 14A r.w.r. 8D on account of expenses incurred for earning exempt income and also increase the book profits for the purposes of calculating of MAT u/s. 115JB." 2. As culled out from the above grounds of appeals and the attending facts of the case, we find that the primary issue involved for adjudication in both the appeals is with respect to partial sustenance and partial deletion of addition made u/s. 14A r.w.r. 8D. Therefore, both the appeals are being disposed of simultaneously. 3. The brief facts of the case are that the assessee filed its return of income o....
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....tion on the incorrectness of the disallowance made by assessee and then to proceed further. Therefore, the application of Rule 8D and computation of disallowance u/s. 14A made by the AO is not legally tenable. It was submitted that in the identical situation, the similar disallowance was made by the AO in A.Yrs. 2008-09 to 2010-11, which stood by the Delhi Bench of ITAT in ITA Nos. 621 to 623/Del./2013 vide order dated 09.06.2017. Therefore, the issue is covered by the aforesaid decision of coordinate Bench. It was also submitted that the ld. CIT(A) after considering the provisions of section 115JB has rightly deleted the addition. 7. The ld. DR on the other hand, submitted that the ld. CIT(A) was not justified in deleting the additions made by AO u/s. 14A r.w.r. 8D and the AO had made disallowance after relying on the decision in the case of Cheminvest Ltd. vs. ITO 317 ITR 86. He further relied on the decisions in Indiabulls Financial Services Ltd. vs. DCIT, 76 Taxmann.com 28 and Nahar Spinning Mills Ltd. vs. CIT, 82 Taxmann.com 154 (P&H). 8. We have heard the rival submissions and have gone through the entire material available on record and we find that the issue involved ....
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.... of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the asses see in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of section 14A of the said Act. It is only if the Assessing Officer is not satisfied with th....
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....xempt income under rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines subrule (2) of rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest (other than the amount of interest included in clause (i)) incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure-one half per cent. of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the fi....
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....cer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the Legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law. Sub- section (3) of section 14A provides for the application of sub-section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under t....
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....d reasons for his conclusion. These safeguards which are implicit in the requirements of fairness and fair procedure under article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under sub-section (2) of section 14A. As we shall note shortly hereafter, sub-rule (1) of rule 8D has also incorporated the essential requirements of sub-section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2)." 18. It is in this context we feel that the findings recorded by the Commissioner of Income-tax (Appeals) and the Tribunal are appropriate and relevant. The clear findings are that the assessee had sufficient funds for making investments in shares and mutual funds. The said findings coupled with the failure of the Assessing Officer to hold and record his satisfaction clinches the issue in favour of the respondent-assessee and against the Revenue. The self or voluntary deductions made by the assessee were not rejected and held to be unsatisfactory, on examination of accounts. The judgments in Tin Box Co. (supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy Ltd. (supra) and East India Phar....
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....ce made by the assessee was unreasonable and unsatisfactory. We do not find any such satisfaction recorded in the present case by the Assessing Officer, before he invoked subrule (2) of rule 8D of the Rules and made the re-computation. Therefore, the respondent-assessee would succeed and the appeals should be dismissed. 1. Therefore, in view of the above decision we are of the opinion that in absence of any satisfaction recorded by the ld AO as provided u/s 14A(2) of the Act the disallowance u/s 14A applying provisions of Rule 8D cannot be sustained. In view of this we reverse the order of the ld CIT(A) we direct the ld Assessing Officer to delete the disallowance of Rs. 28997064/-. In the result, the appeal filed by the assessee is allowed. 2. Now we come to the appeal of the assessee for the AY 20010-11 in ITA No. 623/Del/2013 for which the assessee has filed return of income on 29.09.2010 declaring Nil income. During the year the assessee has earned exempt income of Rs. 4988797/- on account of dividend and disallowed Rs. 26635/- u/s 14A of the Act. The ld AO issued questionnaire on 09.08.2011 about the applicability of provisions of Rule 8D for disallowance u/s....