TMI Blog2012 (12) TMI 409X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure having been incurred in relation to exempt income, that the mandate of Rule 8D will operate. Appeal decides in favour of assessee - IT APPEAL NO. 3889 (MUM.) OF 2011 - - - Dated:- 25-7-2012 - G. E. Veerabhadrappa And Vijay Pal Rao , JJ. K. K. Ved for the Appellant. A. K. Nayak for the Respondent. JUDGMENT Vijay Pal Rao, Judicial Member This appeal by the assessee is directed against the order dated 24/03/2001 of CIT(A) for the assessment year 2006-07. 2. The assessee has raised the following grounds in this appeal: 1. The learned CIT(A) has erred in confirming the disallowance of expenditure of ₹ 2,26,58 1 under section 14A of the Income Tax Act, 1961 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mutual funds. Thus, it was submitted that the provisions of section 14 A under r.w.r 8D of I T Rules is applicable in the case of the assessee. 4.1 Even otherwise, Rule 8D is applicable only with effect from 1.4.2008 and therefore, in view of the decision of honourable jurisdictional High Court in case of Godrej Boyce Mfg Co Ltd. v. Dy. CIT Rule 8D is not applicable for the assessment year under consideration. 4.2 The ld AR of the assessee has referred the computation of total income and details of expenditure incurred during the year. He has pointed out that none of the expenditure incurred and claimed by the assessee is related to the dividend income, which is exempted under section 10 (35) of the Income Tax Act. He has furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when no expenditure has been incurred in relation to the exempt income, then principle of apportionment embedded in section 14A has no application. The objective of section 14A is not allowing to reduce tax payable on the normal exempt income by debiting the expenditure incurred to earn the exempt income. Thus, the expenses incurred to earn exempt income cannot be allowed and the expenses shall be allowed only to the extent they are related to the earning of taxable income. If there is expenditure directly or indirectly incurred in relation to exempt income, the same cannot be claimed against the income, which is taxable as it is held by the honourable Supreme Court in case of CIT v. Walfort Share Stock Brokers (P.) Ltd. [2010] 326 ITR 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had made a claim that no expenditure has been incurred or claimed for earning the exempt income. From the details of the expenditure, it is clear that the expenditure incurred and claimed by the assessee has direct nexus with the professional income of the assessee. It is not the case of the revenue that the assessee has used his official machinery and Establishment for earning the exempt income. The Assessing Officer has not given any finding that any of the expenditure incurred and claimed by the assessee is attributable for earning the exempt income. In other words when the assessing officer has not pointed out that certain expenditure is not incurred for earning the professional income; but are incurred in relation to divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng incurred for this earning of tax free income of above nature. In view of this disallowance so made under section 14A of ₹ 20,00/- is deleted. Not only that the CIT(A) directed the A.O. to consider the allowance invoking Rule 8D. The Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. v. DCIT 328 ITR 81 has considered Rule 8D to be applicable prospective and since the assessment year involved is before the introduction of sub-section (2) (3) of section 14A, there is no question of disallowing the amounts invoking Rule8D. Therefore, the CIT(A)'s direction on this is set aside and the additions so made by the A.O. in the computation of business income is deleted. Ground is considered allowed. 5.4 Sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance as per Rule 8D is automatic irrespective of the genuineness of the assessee's claim in respect of expenses incurred in relation to exempt income. It is an incorrect course adopted by the AO. The correct sequence, in our considered opinion, for making any disallowance u/s. 14A is to, firstly, examine the assessee's claim of having incurred some expenditure or no expenditure in relation to exempt income, If the AO gets satisfied with the same, then there is no need to compute disallowance as per Rule 8D. It is only when the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure having been incurred in relation to exempt income, that the mandate of Rule 8D will ope ..... X X X X Extracts X X X X X X X X Extracts X X X X
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