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TMI Blog2012 (9) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... s contended that section 14A of the Income-tax Act, 1961 contemplates expenditure "incurred" for earning exempt income which can only be disallowed. On the facts of the assessee's case no expenditure other than PMS fees has been incurred for the purpose of earning tax free income. The disallowance of Rs. 28,35,695/- should be deleted. 4. The CIT(A) has erred in misleading himself that there are transactions other than through PMS also but there is no such transaction in the case of the assessee. All the transactions were through PMS. 5. The appellant contends that he may be allowed to add, amend, alter forgo any of the grounds at the time of hearing. 6. The above grounds are independent and without prejudice to one another." 2. Facts, in brief, as per relevant orders are that return declaring income of Rs. 3,09,77,622/- filed on 29.09.2008 by the assessee, providing services for intellectual property rights and leasing of office premises, was selected for scrutiny with the service of a notice u/s 143(2) of the Income-tax Act, 1961 (hereinafter referred to as the Act) issued on 06.08.2009. During the course of assessment, to a query by the Assessing Officer (A.O. in short), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. " 7.2. The scope of the above section was recently examined by the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. vs. CIT reported in 64 DTR 122 wherein it was held that, if an expenditure has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise, qualifies under the other provisions of the said Act. It was further held that, it is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of expenditure claimed to have been incurred that 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 is the method stipulated in Rule 8D of the Rules which is applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om their portfolio manager made sales and purchase of investments of Rs..9.38 crores and Rs. 8.00 crores respectively i.e. net purchase is Nil, Whereas it is seen from the Balance Sheet that during the year the investment have increased by Rs..12 crores, thus it is clear that apart from dealing with Portfolio manager (from where net purchase is Nil) appellant on its own also dealing in investment. Further it is pertinent to mention here that the making of investment (which earns the exempt income) is not in the nature of any passive activity involving no input. In fact, in the present situation a) making of investment, b) maintaining or continuing with any investment in a particular share/mutual funds etc. and c) even the time when to exit from one investment to another all these activities are well coordinate and well informed management decisions, involving not only inputs from various sources but also it involves acumen of senior management decisions. There are incidental administration expenses on collecting information, research etc. which helps in arriving at a particular investment decisions, and these expenses, relating to earning of income are embed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions in the period relevant to the AY 2006-07 & 2007-08 and not for the year under consideration. 5. On the other hand, the ld. DR supported the findings of the ld. CIT(A) while contending that to manage and supervise the huge investments, the assessee incurred management expenses including salary and thus, the plea of the ld. AR that no expenditure was incurred on the activity of managing and supervising these investments, was incorrect. 6. We have heard both the parties and gone through the facts of the case. Indisputably, the AO disallowed the aforesaid amount invoking provisions of section 14A(2) of the Act read with Rule 8D of I.T. Rules, 1962,without even analyzing the nature of the expenditure nor it appears that relevant details of expenditure and accounts were placed before the AO or the ld. CIT(A). The assessee submitted before the AO in its letters dated 7.9.2010 & 4.11.2010 that no expenditure has been incurred by it which had any proximate connection to earning of tax free income while all the investments were handled by its Director Ms. Rosemary Sagar through Deutche Bank. A perusal of details of investments in the balancesheet reveals that the assessee had inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not relevant accounts were placed before the AO or the ld. CIT(A) in order to enable them to examine the claim of the assessee. The ld. CIT(A) merely referred to certain decisions in relation to the disallowance without even examining the relevant accounts .The object or purpose of the investment affects operation of section 14A of the Act inasmuch as any expenditure incurred for earning tax free income is not an allowable deduction by virtue of operation of the said section, as held in CIT vs. State benk of Travancore,16 Taxmann.com 289(Ker). 6.1. Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Ltd. (supra) while adjudicating a similar issue in the context of provisions of sec. 14A of the Act and Rule 8D of the IT Rules,1962 concluded that Rule 8D, inserted w.e. f 24.3.2008 cannot be regarded as retrospective because i t enacts an artificial method of estimating expenditure relatable to tax-free income. I t applies only w.e. f AY 2008-09. For the assessment years where Rule 8D does not apply, the AO will have to determine the quantum of disallowable expenditure by a reasonable method having regard to all the facts and circumstances, the Hon'ble High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing officer was free to adopt any reasonable and acceptable method. 42. Thus, the fact that we have held that sub-sections (2) & (3) of section 14A and Rule 8D would operate prospectively (and, not retrospectively) does not mean that the assessing officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort (supra) to the following effect:- "The theory of apportionment of expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct and indirect expenditure incurred in relation to income which does not form part of the total income. 8. In the case before us, there is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired. Mr. Khaitan strenuously contended before us that for the last few years before the relevant previous year, no new share has been acquired and thus, the loan that was taken and for which the interest is payable by the assessee was not for acquisition of those old shares and, therefore, the authorities below erred in law in giving benefit of proportionate deduction. 9. In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities seems to have undertook any exercise to ascertain the details of expenditure incurred in managing and supervising the aforesaid huge investments in various funds & securities, objectively. Even when ,a query was raised by us regarding time devoted by management in investment or disinvestment decision, no satisfactory reply has been furnished .In these circumstances, it is but natural that management would have spent some time in taking investment or disinvestment decisions in various mutual funds. However, this issue has not been examined at length by any of the lower authorities. In view of the foregoing, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to the file of the AO for deciding the issue, afresh in accordance with law in the light of our aforesaid observations and various judicial pronouncements, including those referred to above, after al lowing sufficient opportunity to the assessee Needless to say that while redeciding the issue, the AO. shall pass a speaking order, giving reasons for his satisfaction or otherwise, as pointed out by the Hon'ble jurisdict ional High Court in their decision in Maxopp Investment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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