TMI Blog2014 (12) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... g disallowance under rule 8D - The disallowance u/s 14A required finding of incurring of expenditure. Assessee has offered most of the income under the tonnage tax scheme - the disallowance need not be made on entire expenditure made as the assessee's income from shipping related activity was assessed under section 115VA on presumptive basis – When the income of the assessee from the business of operating ships is computed as per the special provisions contained in Chapter XII-G, only the expenses incurred by the assessee for earning income of the said business are deemed to be allowed and nothing else - The income of the assessee from the business of operating ships having been computed in accordance with the provisions of Chapter XII-G, only the expenses incurred for the said business are deemed to have been allowed and no addition to such income can be made by way of disallowance u/s 14A on account of any expenditure incurred in relation to earning of exempt dividend income – thus, the order of the CIT(A) is set aside and the AO is directed to delete the addition – Decided in favour of assessee. - ITA. No. 2497/PN/2012 - - - Dated:- 11-2-2014 - Shri R.S. Padvekar And Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was submitted that the entire investment was out of own funds and no borrowed funds had been utilised towards investment in the mutual funds. Further, there are only 19 entries of dividends credited to the assessee s bank account by ECS. The assessee has not separately incurred any expenses on earning dividend income during the year. Further, the investments in mutual funds have been made on the basis of information and advice received from mutual funds which did not entail any expenditure on the part of the assessee. Relying on various decisions it was submitted that no disallowance under the facts and circumstances of the case is called for. 3.1 However, the Ld.CIT(A) did not accept the contention of the assessee. Distinguishing the various decisions cited before her she upheld the disallowance of expenses ₹ 3,03,823/- made by the Assessing Officer u/s.14A r.w. Rule 8D of the I.T. Act. 4. Aggrieved with such order of the CIT(A) the assessee is in appeal before us. 5. The Ld. Counsel for the assessee strongly challenged the order of the CIT(A). He submitted that there is no direct or indirect expenses incurred for earning the dividend income. The entire investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance is called for. We find merit in the above argument of the Ld. Counsel for the assessee. 7.1 We find the facts of the instant case are identical to the facts in the case of Raj Shipping Agencies Ltd. (Supra) where the assessee has declared dividend income from mutual funds amounting to ₹ 1,12,84,713/- which was claimed as exempt. The entire investment in the mutual fund was out of own source on which no interest liability was incurred by the assessee. Since the assessee has not offered any disallowance u/s.14A the Assessing Officer disallowed an amount of ₹ 4,40,138/- u/s.14A r.w. Rule 8D which was upheld by the CIT(A). On further appeal by the assessee the Tribunal deleted the addition by holding as under : 6. The issue in this appeal is with reference to invoking of provisions of section 14A and Rule 8D. The Hon'ble Bombay High Court while upholding the constitutional validity of the section 14A and Rule 8D has this to observe with reference to sub section 2 3 of section 14A: Sub-sections (2) and (3) of section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from April 1, 2007. Under sub-section (2), the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Act. In other words, the requirement 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. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Sub- section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules. 31. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest [other than the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method. 7. The Hon'ble Punjab Haryana High Court in the case of CIT vs. Hero Cycles Ltd 323 ITR 518 (P H) has also held that disallowance under section 14A could not stand where it was found that for earning exempted income no expenditure has been incurred: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred any expenditure in relation to income which did not form part of total income and if so to quantify the extent of disallowance. Thus, in order to disallow the expenditure under section 14A, there must be a live nexus between the expenditure incurred and the income not forming part of total income. No notional expenditure can be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the income not forming part of total income. If the expenditure is incurred with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance can be made under section 14A merely because some tax exempt income is received by the assessee. 5.2 Averting to the facts of the case in hand, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Similarly in case of Auchtel Products Ltd (supra), it was held by this Tribunal in Para 15 has under: 15. A bare perusal of the above provisions indicates that the AO shall determine the amount disallowable as per Rule 8D, if he, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to exempt income. Even if the assessee claims that no expenditure was incurred in respect of exempt income, the AO is supposed to follow the mandate of Rule 8D if he is not satisfied with the correctness of the assessee's claim. To put it simply, the further disallowance u/s.14A is called for when the AO is not satisfied with the assessee's claim of having incurred no expenditure or some amount of expenditure in relation to exempt income. Satisfaction of the AO as to the incorrect claim made by the assessee in this regard is sine qua non for invoking the applicability of Rule 8D. Such satisfac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to earning the exempt income. If the claim was not found to be in consonance with the facts on record, it could have been rejected and disallowance could have been made as per rule 8D. However, it is found that the Assessing Officer has not considered the claim of the assessee at all and he has straightway embarked upon computing disallowance under rule 8D. The Commissioner (Appeals) made an assumption that whenever exempt income is earned there will be some expenditure incurred in relation thereto. Such presumption cannot form the basis for making disallowance under rule 8D. 10. In the case of Priya Exhibitors (P) Ltd vs. ACIT (2012) 54 SOT 356 it was held as under: From the careful study of the observations made by the Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. (supra), it is apparent that first the Assessing Officer has to determine the claim of the assessee regarding expenses which neither the Assessing Officer nor the Commissioner (Appeals) has done in the instant case. In fact, the said decision goes against the department itself in so far as their Lordships has held that the Assessing Officer must in the first instance determine whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said business was declared and assessed as per the special provisions contained in Chapter XIIG which lay down tonnage tax scheme. As per the provisions of section 115VA contained in Chapter XIIG, the income from the business of operating qualifying ships can be computed at the option of the assessee in accordance with the provisions of Chapter XIIG and once this option is exercised by the assessee, the income so computed shall be deemed to be the profits and gains of such business chargeable to tax under the head Profits and Gains of business or profession notwithstanding any thing to the contrary contained in section 28 to 43C. It, therefore, follows that when the income of the assessee from the business of operating ships is computed as per the special provisions contained in Chapter XIIG, only the expenses incurred by the assessee for earning income of the said business are deemed to be allowed and nothing else. It, therefore, cannot be said that when the income of the assessee from the business of operating ships is computed as per the special provisions of Chapter XIIG, any expenditure other than the expenditure incurred for the purpose of the said business has been allow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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