9911796707
TMI Blog2014 (2) TMI 301X X X X Extracts X X X X X X X X Extracts X X X X ..... cts necessary for disposal of the appeal are stated in brief. In the year under consideration the assessment was originally completed under section 143(3) of the Act on 08.12.2009. During the course of scrutiny assessment proceedings the AO appears to have noticed that the assessee received dividend income of Rs.1.11 crores which was claimed as exempt under section 10(34) of the Act but the assessee has not voluntarily disallowed any portion of the expenditure claimed against other income, under section 14A of the Act. It appears that the AO raised a query regarding applicability of section 14A in his letter dated 10.09.2009. In response thereto the assessee stated that it has incurred expenditure in the form of lease rent, interest receivable, establishment expenses and auditor's remuneration but none of them are either directly or indirectly connected to exempt income. In other words, the above expenditure was not incurred to earn exempt income. Therefore the question of any expenditure being attributable to exempt income, in view of the provisions of section 14A, does not arise. Having taken into consideration the reply filed by the assessee, the AO has not made any disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 008-09 and hence the AO could not have made the disallowance. Without prejudice it was submitted that it had interest free funds in the form of share capital, reserves and surplus, which were sufficient for making investments and thus there is nothing on record to suggest that the assessee had incurred any expenditure for the purpose of earning exempt income. 7. The learned CIT(A) observed that in the light of the decision of the Hon'ble Bombay High Court (supra) Rule 8D is not applicable in this year but the fact remains that even under section 14A of the Act disallowance can be made on a reasonable basis. He also observed that the assessee earned exempt dividend income of Rs.1,11,28,950/- whereas it had incurred expenditure in the form of interest payment to the tune of Rs.2,09,401/- and the assessee has not brought on record any evidence to show that the entire expenditure was for earning income other than exempt income. He also observed that no nexus was proved by the assessee company that the loan taken was not utilised for acquisition of shares from where exempt income is derived. Accounts of the assessee are mixed, i.e. separate accounts were not maintained with regard to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other income instead of apportioning it against exempt income, whereas in the instant case the AO has not recorded any such reason except stating that section 14A mandates disallowance of expenditure, ignoring the fact that it has to be shown that some expenditure is at least remotely relatable to earning of exempt income, which exercise was not done either during the course of issuance of notice or thereafter. The learned counsel submitted that though this ground was not raised before the CIT(A), since it is a pure legal ground which arises out of the facts already on record, it deserves to be admitted and the notice issued under section 148 to be quashed. 8.1 Even otherwise, on merits, no disallowance is called for since the AO has not recorded satisfaction with regard to any connection between the expenditure incurred by the assessee and the income claimed as exempt under section 10(34); he merely proceeded to disallow certain expenditure by invoking Rule 8D, which is not applicable to the year under consideration. He also submitted that the learned CIT(A) has proceeded on assumptions, to make adhoc disallowance of Rs.1,00,000/- even after holding that Rule 8D is not applicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 14A has to be read with Rule 8D in which event the disallowance would be mandatory. At this stage it may be pointed out that it has to be inferred that the AO is under the impression that even if there is no expenditure directly or indirectly attributable to earning of exempt income Rule 8D mandates disallowance of a percentage of expenditure as per the computation prescribed under the said rule and probably he might have been under the impression that Explanation 2(c) to section 147 comes into play whereby any excessive relief granted to the assessee can be corrected by issuance of notice under section 148 of the Act. It is also not in dispute that Rule 8D is not applicable to the assessment year under consideration in view of the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) under section 14A of the Income Tax Act it is for the AO to record his findings that the expenditure recorded in the books of account gives rise to a doubt that the correct expenditure in relation to the income, which does not form part of the total income, was not recorded properly whereas in the instant case no such finding was given by the AO. Under th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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