TMI Blog2014 (1) TMI 987X X X X Extracts X X X X X X X X Extracts X X X X ..... e incurred in relation to exempt income as per the prescribed method i.e. Rule 8D. Before the insertion of Rule 8D, the Assessing Officer had the discretion to determine such expenditure on a reasonable and acceptable method of apportionment of expenditure between the taxable income and exempt income. Following Bharat Hari Singhania Vs. CWT [1994 (2) TMI 55 - SUPREME Court] - once the Assessing Officer records the satisfaction that he is not satisfied with the claim of the assessee of incurring of no expenditure or the amount of expenditure specified by the assessee, he is required to determine the expenditure incurred by the assessee in relation to the exempt income as per Rule 8D - Rule 8D is applicable from A.Y. 2008-09 which is mandatorily be adopted for computing disallowance u/s 14A - The CIT(A) was not justified in reducing the disallowance at a figure which was different than the disallowance determined as per Rule 8D of the Income-tax Rules - Decided in favour of Revenue. Disallowance for A.Y. 2007-08 - Held that:- Following Maxopp Investment Ltd. [2011 (11) TMI 267 - Delhi High Court] - In AY 2007-08, Rule 8D was not applicable, the Assessing Officer is required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 012] 52 SOT 39 (Mumbai)(URO). (iii) CIT Vs. Hero Cycles Ltd. - [ 2010] 323 ITR 518 (P H). (iv) DCIT Vs. Allied Investments Housing P.Ltd. - Order dated 7th November, 2013 in ITA No.305/Mds/2013 of Chennai Bench of ITAT. (v) JK Investors (Bombay) Ltd. Vs. ACIT(OSD) - Order dated 13th March, 2013 in ITA No.7858 7851/Mum/2011 of Mumbai Bench of ITAT. 4. With regard to the amount of disallowance, he stated that the Assessing Officer himself for AY 2010-11 has computed the disallowance at 0.05% of average investment which is the rate which is applied by the CIT(A) in the year under consideration. Therefore, even if it is held that some disallowance is required to be made under Section 14A, the disallowance sustained by the learned CIT(A) is computed on the identical basis as computed by the Assessing Officer for AY 2010-11 in the order passed under Section 143(3). He, therefore, submitted that since the assessee is not in appeal or cross- objection, the assessee's only request is that the order of learned CIT(A) should be sustained. 5. Learned DR, on the other hand, submitted that the contention of the learned counsel that the Assessing Officer has not recorded the satisfact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial placed before us. After considering the arguments of both the sides, we find that in this case, four questions arise for our adjudication :- (i) Whether the incurring of some expenditure by the assessee for earning of income which does not form part of total income is essential for invoking the provisions of Section 14A? (ii) Whether the Assessing Officer is required to record the satisfaction that he is not satisfied with the working of the assessee with regard to incurring of the expenditure for earning of exempt income? (iii) If the reply to question Nos.(i) (ii) is in the affirmative, whether, in the present case, the Assessing Officer has recorded the satisfaction as required by Section 14A? (iv) Whether from AY 2008-09, it is mandatory to compute the disallowance under Rule 8D or the Assessing Officer/appellate authority can work out the disallowance at a figure different than prescribed under Rule 8D? 7. Regarding question No.(i) - Section 14A as applicable during assessment year 2008-09 reads as under:- "14A. [(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Punjab Haryana High Court has also considered the similar issue in the case of CIT Vs. Hero Cycles Ltd. - [2010] 323 ITR 518 (P H) wherein their Lordships held as under:- "Held, dismissing the appeal, that the expenditure on interest was set off against the income from interest and the investment in the shares and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, was a question of fact. The contention of the Revenue that directly or indirectly some expenditure was always incurred which must be disallowed under section 14A and the impact of expenditure so incurred could not be allowed to be set off against the business income which may nullify the mandate of section 14A, could not be accepted. Disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. Consequently, the disallowance was not permissible." 10. Similar view is taken by the ITAT in the various decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, 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." 12. In view of the above language of Section 14A(2) and (3) and also relying upon the decision of Hon'ble Jurisdictional High Court in the case of Maxopp Investment Ltd., we hold that the Assessing Officer is required to record the satisfaction that he is not satisfied with the claim of the assessee with regard to incurring of no expenditure or the amount of the expenditure as specified by the assessee for earning of exempt income before embarking upon the determination of the amount of expenditure incurred in relation to exempt income under Section 14A(2). Accordingly, answer t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nouncements in paragraphs 4.2, 4.3 4.4 of the assessment order and thereafter, in paragraph 4.5, concluded as under:- "4.5 Having regard to the accounts of the assessee of the previous year, I am not satisfied with the claim made by the assessee that assessee has not incurred any expenditure in relation to income which does not form part of the total income under the Act of the previous year relevant to the assessment year under consideration and, therefore, the amount of expenditure in relation to such income is determined in accordance with the provisions of sub-rule (2) of Rule 8D of the IT Rules, 1962." 14. Thereafter, in paragraph 4.6, the Assessing Officer has worked out the disallowance under Section 14A in accordance with Rule 8D of the Income-tax Rules. Therefore, from a perusal of the assessment order, it is evident that the Assessing Officer has examined this issue after allowing opportunity of being heard to the assessee and thereafter has recorded the satisfaction that he is not satisfied with the claim made by the assessee that the assessee has not incurred any expenditure in relation to exempt income. Accordingly, answer to question No.(iii) is also in affirmat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xempt income. But, when the legislature has provided in Rules the method for apportionment of the expenditure between the exempt income and taxable income, in our opinion, the Assessing Officer as well as the other statutory authorities under the Income-tax Act are also required to determine the amount of expenditure in relation to exempt income as per the method prescribed in the Rules. While taking this view, we derive support from the decision of Hon'ble Apex Court in the case of Bharat Hari Singhania Vs. CWT - [1994] 207 ITR 1 (SC). In that case, there was a dispute with regard to the determination of the value of shares as per Rule 1D of the Wealth Tax Rules, 1957. Hon'ble Apex Court held as under:- "Rule 1D has to be followed in valuing each and every case of unquoted equity shares of a company (other than an investment company or a managing agency company). It is not a matter of choice or option. The rule-making authority has prescribed only one method for valuing the unquoted equity shares. If this method were not to be followed, there is no other method prescribed by the rules. Where there is a rule prescribing the manner in which a particular property has to be valued, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereafter, in paragraph 3.7, he worked out the disallowance as per Rule 8D of the Income-tax Rules which was amounting to Rs. 19,45,505/-. On appeal, learned CIT(A) reduced the disallowance to Rs. 1,59,479/- being 0.05% of average investment. The Revenue, aggrieved with the order of learned CIT(A), is in appeal before us. The assessee is neither in appeal nor in cross-objection, therefore, the only dispute that remains in this appeal before us is with regard to computation of disallowance under Section 14A. 20. We have heard both the sides and perused the material placed before us. The arguments of both the sides were identical as were advanced in AY 2008-09 with the only modification, as rightly pointed out by the learned counsel, that in AY 2007-08, Rule 8D was not applicable. Therefore, the disallowance cannot be worked out as per Rule 8D as was done by the Assessing Officer. We find that Hon'ble Jurisdictional High Court has considered the aspect of disallowance under Section 14A in the years prior to coming into force of Rule 8D in the case of Maxopp Investment Ltd. (supra) and held as under:- "Having done so, the Assessing Officer will have to determine the amount of expen ..... 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