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TMI Blog2012 (8) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... nfirmed i) Disallowance of amount transferred to Statutory Reserve Rs.1,45,21,25,865/- in compliance with mandatory provisions of Reserve Bank of India; and ii) The application of Rule 8D of Income tax Rules in computing disallowance u/s. 14A of the Act. In arriving at the income under the Regular provisions of the Income Tax Act, 1961; and iii) Not allowing the appellant's claim for deduction of Rs.78,00,00,000/- transferred to Reserve Fund; and iv) Confirming the applicability of Rule 8D of Income Tax Rules in computing the disallowance u/s. 14A of the Act. In arriving at the income u/s 115JB of the Income Tax Act is against law and facts of the case." "I. The order of the CIT'A', to the extent that it has confirmed i) Disallowance of amount transferred to Statutory Reserve Rs.32,55,30,819/- in compliance with mandatory provisions of Reserve Bank of India; and ii) The application of Rule 8D of Income tax Rules in computing disallowance u/s. 14A of the Act. In arriving at the income under the Regular provisions of the Income Tax Act, 1961; and iii) Not allowing the appellant's claim for deduction of Rs.17,61,11,000/- transferred to Reserve Fund; and iv) Confirmi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the facts and material on record including the orders of this Tribunal cited supra. We find that an identical issue had been considered by this Tribunal in the said orders and the appeals of the assessees were dismissed. In I.T.A. Nos. 570, 571, 806 & 807/Mds/2008, while dismissing the appeals of the assessee, the Tribunal has observed as follows: "2.11 Now, we examine the present case on the anvil of above. By no stretch of imagination, it can be said that the amount sought to be deducted has in fact not reached the assessee. The amount involved is only an appropriation out of company's own profits before declaration of dividend. The amount has very much reached and is in the business of the assessee. RBI has not attached any obligation that the fund be kept in any earmarked security nor the purpose of utilization of the fund has been specified. Even if some obligation is subsequently attached for specific appropriation of the fund, it will only be an application of income, which will need to be dealt with as per relevant tax law. The transfer of Reserve Fund in this case can certainly not be called a diversion of income by overriding charge. 2.12. .............the ratio fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mained in both the assessees' appeal is against disallowance made under section 14A read with Rule 8D of the Income Tax Rules under the normal provisions as well as while computing book profit under section 115JB of the Act. 8. The Assessing Officer, while completing the assessment, disallowed Rs.53,64,488/- as expenditure incurred for earning income exempt under the Act by applying the provisions of Rule 8D read with section 14A of the Act. 9. On appeal, the Commissioner of Income Tax (Appeals) confirmed the disallowance made by the Assessing Officer to the extent of Rs.52,24,710/- and directed the Assessing Officer to delete Rs.1,39,778/- as there is a mistake in computing the disallowance made under section 14A. 10. The counsel for the assessee submitted that the assessee itself had disallowed Rs. 66,55,225/- in its adjusted statement of income towards expenditure attributable to earning of income exempt from tax and submitted that there is no justification in applying Rule 8D read with section 14A and disallowing further amount of Rs.53,64,488/- by the Assessing Officer. The counsel for the assessee submitted that the Assessing Officer ought to have accepted the disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decisions relied on by both counsels. In the case of ACIT vs. SIL Investment Ltd. (supra), the Delhi Bench of the Tribunal in its order in para 27 held as under: "27. In the present case, the AO did not bring any evidence on record to establish that any expenditure had been incurred by the assessee company for earning the exempt income. In the absence of such evidence, it was wrong on the part of the AO to proceed to compute disallowance of the expenses u/s 14A of the Act by merely applying Rule 8D(2)(iii) of the Rules." The above view was taken by the Tribunal taking into consideration various decisions of the Tribunal including the decision of the Delhi Bench in the case of DCIT vs. Jindal Photo Ltd. and the High Courts. 13. The Delhi Bench of the Tribunal in the case of DCIT vs. Jindal Photo Limited in I.T.A. No. 814(Del)2011 by order dated 23.09.2011 for the assessment year 2008-09 also considered this issue and held that satisfaction of the Assessing Officer is a pre-requisite to invoke the provision of Rule 8D of the Income Tax Rules. While holding so, the Tribunal observed as under: "10. Now. Coming to ground No.3, the Department alleges that the CIT(A) has erred in restr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veral places. Its head office was at Delhi. The assessee had maintained separate books of account for each unit. Common expenses incurred at the head office and the branches were attributed to all the units including the head office. Investment in mutual funds, which gave rise to exempt dividend income, was done through the head office. It was the case of the assessee that to earn such dividend income, no direct expenditure was required and no expenses were incurred to make investment of surplus amounts in mutual funds. The suo moto disallowance had, however, been made by the assessee keeping in consideration, the provisions of section 14A of the Act. 18. Now, as per section 14A(2) of the Act, if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the assessee's total income under the Act, the AO shall determine the amount incurred in relation to such income, in accordance with such method as may be prescribed, i.e., under Rule 8D of the I.T. Rules. However, in the present case, the assessment order does not evince any such sati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessment years subsequent to assessment years 2008-09. The Hon'ble High Court in paras 29 to 31 and 36 to 40 held as under: 29. Sub-section (2) of Section 14 A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only 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 the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D(1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules. 31. It is, therefore, clear that determination of the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 35. ........ ............... ................. ................ 36. Insofar as sub-sections (2) and (3) of Section 14A are concerned, they have also been introduced by virtue of the Finance Act, 2006 with effect from 01.04.2007. This is apparent, first of all, from the Notes on Clauses of the Finance Bill, 2006 [Reported in 281 ITR (ST) at pages 139-140]. The said Notes on Clauses refers to clause 7 of the Bill which had sought to amend Section 14A of the said Act. It is specifically mentioned in the said Notes on Clauses that:- "This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years." 37. Furthermore, in the Memorandum explaining the provisions in the Finance Bill, 2006 [281 ITR (ST) at pages 281-281], it is once again stated with reference to clause 7 which pertains to the amendment to Section 14A of the said Act that:- "This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years." 38. We may also refer to the CBDT Circular No.14/2006 dated 28.12.2006 and to paragraphs 11 to 11.3 thereof. Paragraph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le only with effect from the date of introduction of Rule 8D i.e. 24.03.2008 because prior to that date, there was no prescribed method and sub-sections (2) and (3) of section 14A remain unworkable. 16. Therefore, finding of the Assessing Officer that the claim of the assessee that it had not incurred any expenditure or it had incurred only so much expenditure is incorrect is a must for invoking the provision of sub-section (2) of section 14A of the Act. 17. Respectfully following the decision of the Hon'ble Delhi High Court in the case of MAXOPP Investment Ltd. v. CIT (supra), we hold that the Assessing Officer has to give a finding as to the correctness of the claim of the assessee before invoking the provisions of section 14A(2) read with Rule 8D for disallowing the expenditure attributable to the income exempt under the Act. No doubt, the decision of the Hon'ble High Court was rendered for the assessment years prior to the assessment year 2008-09, but the Hon'ble High Court has considered the effect of the provisions of sub-section (2) and (3) of section 14A and its applicability for the assessment year 2008-09 onwards. Therefore, in our considered view, the ratio of this dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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