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TMI Blog2012 (11) TMI 308X X X X Extracts X X X X X X X X Extracts X X X X ..... s per relevant orders are that return declaring income of Rs.Rs. 7,96,610/- filed on 30th October, 2004 by the assessee, engaged in the business of sale/purchase of shares, after being processed on 10.2.2005 u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act), was selected for scrutiny with the service of a notice u/s 143(2) of the Act, issued on 4.10.2005. During the course of assessment proceedings, the Assessing Officer[AO in short] noticed that though the assessee reflected tax free dividend income of Rs.18,49,757/- and incurred financial charges of Rs.20,40,412/-, it did not offer any disallowance u/s 14A of the Act .To a query by the AO, the assessee did not offer any explanation. Accordingly, the AO disallowed proportionate financial expenses amounting to Rs.10,22,674/-, having recourse to provisions of section 14A of the Act. 3. On appeal, the learned CIT(A) reduced the disallowance by Rs.48,208/- in the following terms:- "3. I have carefully considered the facts of the case and the submissions made by the learned AR. It is noted that the special Bench of Mumbai ITAT in the case of M/s Daga Capital Management (P) Ltd. (2008) 119 TTJ (Mum.)(SB) 289 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .), holding that Rule 8D was not applicable in the year under consideration. 5. We have heard both the parties and gone through the facts of the case as also the aforesaid decision. We find that 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 it enacts an artificial method of estimating expenditure relatable to tax-free income. It 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 Court concluded. 5.1 We find that Hon'ble Supreme Court in their decision dated 6.7.2010 in CIT v. Walfort Share & Stock Brokers (P.) Ltd.,326 ITR 1, inter alia, observed that for attracting section 14A of the Act there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Hon'ble Apex Court observed in the conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deduct ions enumerated in sections 15 to 59 are now to be allowed only with, reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduct ion though of the nature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest , etc. in respect of which allowances are provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections (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 Share & Stock Brokers (P.) Ltd. (supra) to the following effect:- "The theory of apportionment of expenditure between taxable and nontaxable has, in principle, been now widened under section 14 A." So, even for the pre-Rule8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does ..... X X X X Extracts X X X X X X X X Extracts X X X X
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