TMI Blog2012 (8) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that:- It is a condition precedent for the AO while determining amount of expenditure incurred in relation to exempt income to record his dissatisfaction with the correctness of the claim of the assessee in respect of the expenditure incurred in relation to exempt income. See Maxopp Investment Ltd (2011 (11) TMI 267 - DELHI HIGH COURT ). In present case, AO has not given any finding as to how the calculation was made by the assessee and disallowing the same in its computation of income towards expenditure incurred in relation to income, which does not form part of total income is incorrect. Therefore, we delete the dis-allowance made u/s 14A while computing income both under normal provisions as well as under the provisions of section 115JB - Decided in favor of assessee - I.T.A. Nos.701 & 702/M/12 - - - Dated:- 28-6-2012 - Shri Abraham P. George, Shri Challa Nagendra Prasad, JJ. Appellant by : Shri R. Sivaraman, Advocate Respondent by : Shri Sanjay Punglia, JCIT ORDER PER Challa Nagendra Prasad, Judicial Member These two appeals filed by different assessees are against different orders of the Commissioner of Income Tax (Appeals) V, Chennai both dated 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copy of the order is placed before us. 5. We have gone through the order of this Tribunal in the case of the assessee dated 10.10.2011 and find that this Tribunal followed Coordinate Bench decision in assessee s own case for the assessment year 2005-06 in I.T.A. No. 235/Mds/2009 dated 16.07.2009, wherein this Tribunal decided the issues against the assessee. In that appeal, the assessee has raised the following grounds: I. The order of the CIT A , to the extent that it has confirmed i) Disallowance of amount transferred to Statutory Reserve Rs.7,55,53,760/- in compliance with mandatory provisions of Reserve Bank of India in computing income under the Regular provisions of the Income Tax Act, 1961; and ii) addition of Rs.10,00,00,000/- transferred to Reserve Fund in computing income and u/s. 115JB of the Income Tax Act, is against law and facts of the case. The Tribunal has held as under: 2. The only issue brought before us for adjudication is whether the CIT(Appeals) has erred in confirming the addition of amount transferred to Statutory Reserve as per Reserve Bank of India guidelines. 3. At the time of hearing, the learned counsel for the assessees relied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ratio from this decision is very much applicable in this case, because as per the Reserve Bank of India Act, the assessee has to create a Reserve Fund and to transfer therein certain percentage of its profits before any dividend is declared. This transfer to Reserve Fund was to be utilized for such purposes as specified by the Reserve Bank of India from time to time. No such specification of utilization. of that Fund had been issued by the Reserve Bank of India. Hence, it cannot be said that there was any diversion of income by overriding title nor can the amount set apart be claimed as expenditure and it also cannot be stated that it was a loss. .. . .. . .. .. ... .. .. . . .. . . . . 2.17 Moreover, as discussed earlier, this is only an appropriation of profits for purposes which have not yet been specified. Moreover, amount involved is very much under the control of the assessee and is lying in its business. Hence, in the background of aforesaid discussion and precedents, we uphold the well reasoned order of the learned Commissioner of Income Tax (Appeals) in this regard and decide the issue against the assessees." 6. Since the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that he has not satisfied with the correctness of the claim of the assessee and that the assessee had incurred expenditure much more than Rs.66,55,225/- in earning dividend income, which is exempt from tax. The counsel for the assessee submitted that in the absence of any finding by the Assessing Officer that he is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred by the assessee in relation to exempted income, which is not forming part of total income as contemplated in the provisions of section 14A(2), there is no justification for invoking the provisions of section 14A read with Rule 8D and disallowing further amount of Rs.53,64,488/-. The counsel for the assessee placed reliance on the decision of Delhi G Bench of this Tribunal in the case of ACIT v. SIL Investment Ltd. in I.T.A. No. 2431(Del)2010 dated 04.05.2012 and the decision of the Hon ble Delhi High Court in the case of MAXOPP Investment Ltd. vs. CIT in I.T.A. No. 687 of 2009 dated 18.11.2011 in support of the above contention, copies of judgments were placed on record. 11. The counsel for the Revenue relied on the orders of lower authorities. He also relied on the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s regarding 0.5% of exempt investments, he approved the action of the AO; and that once Rule 8D cannot be applied, the assessee s working is to be accepted. 11. The ld. DR, on the other hand, has strongly supported the impugned order in this regard also, contending that the ld. CIT(A) has excluded security taken from customers . 12. The ld. CIT(A), it is seen, restricted the disallowance u/s 14A to Rs.19,43,022/-, calculating the disallowance of expenditure in terms of section 14A read with Rule 8D of the Rules as follows:- a) Direct expenses attributable to earning of exempt income: NIL b) Average exempt investments 37,82,57,180/- c) Average assets 157,64,90,333/- d) Interest payments made by the assessee 2,15,625/- e) Interest disallowed: (d) x (b)/(c) = 51,736/- f) 0.5% of exempt investments = 18,91,286/- Total disallowance u/s 14A [ (e) + (f) ] = 19,43,022/-. 13. The Tribunal (supra), for assessment year 2007-08, had held as follows:- 17. We have heard the parties on this issue and have perused the material on record. During the year, the assessee had earned exempt dividend income of Rs. 17,97,010/- in respect of investment made in mutual funds. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e can be made on the basis of presumptions in ACIT v. Eicher Ltd. 101 TTJ (Del)369, that it was held that the burden is on the AO to establish nexus of expenses incurred with the earning of exempt income before making any disallowance u/s 14A of the Act. In Maruti Udyog v. DCIT 92 ITD 119(Del), it has been held that before making any disallowance u/s 14A of the Act, the onus to establish the nexus of the same with the exempt income, is on the revenue. In Wimco Seedlings Limited v. DCIT 107 ITD 267 (Del) (TM), it has been held that there can be no presumption that the assessee must have incurred expenditure to earn tax free income. Similar are the decisions in: 1. Punjab National Bank v. DCIT, 103 TTJ 908(Del); 2. Vidyut Investment Ltd., 10 SOT 284(Del); and 3. D.J. Mehta v. ITO, 290 ITR 238(Mum.)(AT). 19. In view of the above, finding no error with the order of the CIT(A) on the point at issue, the same is hereby confirmed. Ground No.3 is thus rejected. 14. In the year under consideration, it is seen that it is not incorrect when the assessee contends that no satisfaction has been recorded by the AO regarding the assessee s calculation being incorrect. Even so, Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. Rule 8D 30. As we have already noticed, sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 percent 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 first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under Section 14A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... empty shell until the introduction of Rule 8D on 24.03.2008 which gave content to the expression "such method as may be prescribed" appearing in Section 14A(2) of the said Act. 40. From the above discussion, it is clear that, in effect, the provisions of subsections (2) and (3) of Section 14A would be workable only with effect from the date of introduction of Rule 8D. This is so because prior to that date, there was no prescribed method and sub-sections (2) and (3) of Section 14A remained unworkable. 15. The Hon ble High Court held that it is a condition precedent for the Assessing Officer while determine the amount of expenditure incurred in relation to exempt income that he must record that his dissatisfaction with the correctness of the claim of the assessee in respect of the expenditure incurred in relation to exempt income. The Hon ble High Court held that sub-section (3) of section 14A is an offshoot of sub-section (2) of section 14A and therefore, subsection (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income, which does not form part of total income. The Hon ble High Court held that sub-section (2) deals with case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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