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TMI Blog2014 (1) TMI 844X X X X Extracts X X X X X X X X Extracts X X X X ..... tributed to income earned on investments made in equity shares and mutual funds under section 14A of the Act by invoking provisions of Rule 8D. 2. Without prejudice to Ground no. 1, the learned CIT(A) erred in confirming the proportionate interest expenditure for the purpose of disallowance under section 14A disregarding the fact that the said interest expenditure has direct nexus to the interest income earned and offered to tax by the appellant in return of income. 3. Without prejudice to Ground Nos. 1&2, the learned CIT(A) erred in not restricting the disallowance under section 14A to the total expenditure claimed in the return of income. 2. The only issue, as per various grounds raised pertained to disallowance of expenses u/s 14A rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of the assessee, having regard to the accounts of the assessee. The condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. 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. Therefore, it is all the more necessary that AO has to examine the accounts of assessee first and then if he is not satisfied with the correctness of the claim, only he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO cannot invoke the provisions of Rule 8D until and unless, he gives a specific and cogent reasons which would accord his satisfaction, that the accounts cannot be relied upon. This aspect has been dealt with comprehensively in the case of J K Investors (supra), (where one of us was a party), to hold, "Rule 8D cannot be invoked directly, without satisfying about the claims or otherwise. Consequently, the disallowance was not permissible". In this judgment, the words, "if AO having regard to the accounts of the assessee, is not satisfied with the correctness of the claim...", has been examined. The coordinate Bench explained, "that before going to the computation, the AO has to cross the barrier of the satisfaction with the correctness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... procedure under article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under sub-section (2) of section 14A. Sub-rule (1) of rule 8D of the Income-tax Rules, 1962, has also incorporated the essential requirements of sub-section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2)" .. (emphasis supplied")" 10. In the instant case, we do not find any basis or satisfaction having been recorded by the AO, as per the relevant provisions of the Act, and even as per the observations made by the Hon'ble Bombay High Court in the case of Godrej & Boyce (supra). The AO has nowhere made any reference with regard to the claim of the assessee, concerning expenses, h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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