TMI Blog2014 (8) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... t is a very strategic decision and top management involve in taking the decisions – Relying upon Godrej & Boyce Mfg. co. Ltd. Vs. DCIT & another [2010 (8) TMI 77 - BOMBAY HIGH COURT] - the disallowance made u/s 14A r.w. Rule 8D is set aside – Decided in favour of Assessee. - ITA No. 1850/Kol/2012 - - - Dated:- 24-7-2014 - Sri P. K. Bansal, AM And Sri Mahavir Singh, JM,JJ. For the Appellant: Shri Girish Sharma, FCA For the Respondent: Shri Saboorul Hasan Usmani, JCIT, Sr. DR ORDER Per Shri P.K.Bansal, AM This is an appeal filed by the assessee against the order of ld. CIT(A)-VI, Kolkata dated 15.10.2012 by taking the following effective grounds : 1. That on the facts and circumstances of the case the ld. CIT(A) erred in disallowing ₹ 26,26,985/- as per Rule 8D read with Section 14A of the Income Tax Act, 1961. 2. That on the facts and circumstances of the case ld.Commissioner (Appeals)erred in setting aside the case to A.O. for calculating disallowance under Section 94(7) of the Income Tax Act, 1961 on earning of dividend income on stock in trade in addition to disallowance made above in point no.1. 3. That on the facts and circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO, in our opinion, cannot directly apply Rule 8D. Our aforesaid view is duly supported by the decision of ITAT Panaji Bench in ITA NO.72 85/PNJ/2012 in the case of Sesa Goa Ltd, Panaji,Goa Ltd., Panaji,Goa vs JCIT in which Panaji Bench of this Tribunal vide its order dated 08.03.2013 wherein the undersigned was the author has held as under :- 14. We have carefully considered the rival submissions along with the order of the authorities below. We have also gone through various case laws and the provisions of the IT Act in this regard. The issue involved before us relate to the disallowance made by the AO by applying the provisions of sec.14A of the IT Act read with Rule 8D of the IT Rules. Sec.14A was inserted by the Finance Act, 2001 w.e.f. 1.4.1962. Originally this sec. provides that in computing the total income of the assessee no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act. Subsequently, by Finance Act, 2002 with retrospective effect from 11/5/2001 proviso was added which states that this sec. shall not empower the AO either to re-assess or pass an o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee that no administrative expenditure incurred on earning the dividend income. Considering the magnitude of the investments and the dividend income received, the AO was of the view that the disallowance made by the assessee u/s 14A of the IT Act towards the administrative expenditure is low on comparing the magnitude of purchase and sales made by the assessee and the investments of large magnitude cannot be made without proper analysis of the market condition/stock movement etc. The revenue was of the opinion, that the assessee has worked out the administrative expenditure and had not considered all the administrative expenditure. Both the parties before us vehemently relied on the decision of Godrej Boyce Mfg Co. Ltd. Vs DCIT 328 ITR 81 (Mum). 15. We have gone through this decision and we noted that in this case, the assessee claimed exemption in respect of dividend income of 34.34 crores u/s 10(33). The AO issued notices for disallowance of interest u/s 14A of the IT Act. The explanation of the assessee was that (i) 95% of the shares were bonus shares for which no cost was incurred; (ii) No investment in shares was made in the current year and no disallowance was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income. Moreover, the satisfaction of the AO has to be arrived at, having regard to the accounts of the assessee. Hence, sub- sec (2) does not ipso facto enable the AO to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The AO must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the AO must be arrived at on an objective basis. It is only when the AO is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the AO to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Hon'ble Supreme Court, we are of the view that sec.14A cannot be applied unless there is a proximate cause for disallowance. The onus to establish that there is proximate cause based on the relationship of the expenditure with the exempt income in our opinion is on the Revenue. Thus, the application of the provisions of sec. (2) (3) of Sec.14A and Rule 8D is not automatic in each and every case, where there is income not forming part of the total income. Sub-sec. (2) (3) are intended to enforce and implement the provisions of sub-sec. (1). Therefore, it is necessary for the AO first to ascertain whether there is proximate connection between the expenditure incurred and the income not forming part of the total income. If such proximate connection is established with the exempt income, the AO would be justified in applying the provisions of sub- sec (2) (3) of sec.14A and Rule 8D of the IT Act, 1961. The expenditure incurred u/s 14A would include direct and indirect expenditure, but relationship with exempted income must be proximate. If there is material to establish that there is direct nexus between the expenditure incurred and the income not forming part of tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee how the other expenditure claimed by the assessee out of non exempt income is related with the exempt income. No discrepancy in the claim of the assessee was pointed out. The assessing officer in our opinion in view of the jurisdictional High Court decision is bound to record satisfaction as to how the expenses claimed by the assessee have been incurred on earning dividend income were not sufficient and correct. We have already held that the onus to prove in this regard lies on the assessing officer. Although the Ld. DR had vehemently contended and tried to build up his case by substituting the reasons given by the CIT(Appeal) in place of the AO, but failed to bring any cogent material or evidence in this regard which may prove that the other expenses claimed by the Revenue for apportionment had proximate connection with the earning of the dividend income. In our opinion until and unless this is proved or established by the revenue, the assessing officer does not have any power to reject the accounts of the assessee and take the shelter of Rule 8D for computing the disallowance out of the exempt income. We are not at all convinced with the submission of the Ld. DR relying o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave incurred expenditure to earn tax free income. Similar are the decisions in: 1. Punjab National Bank Vs. DCIT, 103 TTJ 908 (Del.); 2. Vidyut Investment Ltd., 10 SOT 284 (Del.); and 3. D.J. Mehta Vs. Income Tax Officer, 290 ITR 238 (Mum.) (AT) In view of the above, finding no error with the order of the CIT(A) on the point at issue, the same is hereby confirmed. Ground no.3 is thus rejected. In the case of Jindal Photo Ltd. Vs. DCIT held in I.T.A.T. Delhi bench dated 23.9.2011 it was held as follows: In the year under consideration, it is seen that it is not incorrect when the assessee contends that no satisfaction has been recorded by the AO regarding the assessee's calculation being incorrect. Even so, Rule 8D of the Rules has been applied. This, in our opinion, is not correct. Such satisfaction of the Assessing Officer is a pre-requisite to invoke the provisions of Rule 8D of the Rules. The Learned CIT(A), therefore, erred in partially approving the action of the Assessing Officer. In the case of Avshesh Mercantile P. Ltd. Vs. DCIT in I.T.A.T. Mumbai Bench (I.T. Act No.5779/Mum/2006 208/Mum/2009) it was held as follows: At the time of hearing, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the decision of the Tribunal is affirmed on the issue brought before the High Court, it is the decision of the High Court which becomes operative and which is capable of being given effect to for all intents and purposes. Keeping in view the decision of Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. (supra), we have no hesitation to hold that the decision of the Hon'ble Bombay High Court in the case of Delite Enterprise Ltd. (supra) is a decision on merit which is binding precedent on us. As the issue involved in the present cases as well as all the material facts relevant thereto are similar to that of the case of Delite Enterprise (supra), we respectfully follow the said decision of the jurisdictional High Court and delete the disallowance made by the AO and confirmed by the learned CIT(A) on account of premium paid by the assessees on redemption of premium notes (OCPN) by invoking the provisions of section 14A of the Act. As regards the case laws cited by the Learned DR, it is observed that in none of these cases, the facts involved were similar to the case of the present assessees in as much as the investment made therein was not found to be capab ..... 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