TMI Blog2014 (12) TMI 482X X X X Extracts X X X X X X X X Extracts X X X X ..... come or receipt - the amount to be disallowed as expenditure relatable to exempt income, under sub Rule (2) is the aggregate of the amount under clause (i), clause (ii) and clause (iii) - Clause (i) relates to direct expenditure relating to income forming part of the total income and under clause (iii) an amount equal to 0.5% of the average amount of value of investment, appearing in the balance sheet on the first day and the last day of the assessee has to be disallowed – thus, the order of the Tribunal is upheld – Decided against revenue. - ITA 115/2014 & 119/2014 - - - Dated:- 25-11-2014 - Sanjiv Khanna And V. Kameswar Rao,JJ. For the Appellant : Ms. Suruchi Aggarwal, Sr. Standing Counsel For the Respondent : Mr. K. R. Manjani, Advocate ORDER Sanjiv Khanna, J. (Oral) These two appeals by the Revenue under Section 260A of the Income Tax Act, 1961 ( Act for short) relate to assessment years 2008-09 and 2009-10. 2. The issue raised by the Revenue in these appeals pertains to Section 14A of the Act and Rule 8D of the Income Tax Rules, 1962 ( Rules for short) and disallowance of expenditure relating to exempt income. 3. For the assessment year 2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to ₹ 28,7130,569.00 generated on sale of mutual fund during the F.Y. 2007-08 and funds amounting to ₹ 15,59,58,985.00 were used for acquiring the investment Which results into net surplus of ₹ 13,11,71,584.00. In support of this we have already filed the details of funds realised on sale of mutual funds and deposited along with the details funds utilized for investment in current of HDFC bank. Also copy of the bank statement showing these transactions is already filed. Assessee having interest free funds far in excess of amount invested in mutual funds, no disallowance could be made under section 14A because the interest expenditure was incurred in respect of the borrowing in cash credit limits utilized for normal business purposes of the assessee and no part of the borrowed funds has been utilized by the assessee for making investment in the mutual funds. Rather on account of capital gain on sale of mutual funds, company generated surplus funds. 6. He observed that the assessee had share capital of ₹ 60,00,000/- and Reserve Surplus funds of ₹ 53.19 crores as on 31st March, 2008 and share capital of ₹ 60,00,000/- and Reserve and Surpl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). The AR has explained that no borrowed funds were utilized for making the investment. The issue has been examined in the earlier years and found that no disallowance is called for under Rule 8D(2)(ii). It is further seen that the disallowance under rule 8D(2)(iii) worked out to ₹ 2,76,194/- which was forgotten to be added by mistake. The AR has no objection for disallowing of ₹ 2,76,914/- which he has accepted in the assessment proceedings. Relief: 5,36,393/- Confirmed: 2,76,914/- Accordingly Ground No.1 is partly allowed. 8. The Income Tax Appellate Tribunal ( Tribunal , for short) by a common order dated 27th September, 2013 has dismissed the appeals filed by the Revenue. Rule 8D of the Rules it was held was applicable and the issue related to computation under sub Rule (2) and the three sub-clauses. Reference was made to clause (ii) of sub Rule (2) to Rule 8D of the Rules and it has been held:- 2.4. ... Only clause (ii) is involved in the present appeal. The AO considered the total interest paid by the assessee for allocating a sum of [Rs.] 36.76 lakh to the investments yielding exempt income. At the threshold it needs to be determined as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. Section 14A of the Act postulates and states that no deduction shall be allowed in respect of expenditure incurred by an assessee in relation to income which does not form part of the total income under the Act. Under sub Section (2) to Section 14A of the Act, the Assessing Officer is required to examine the accounts of the assessee and only when he is not satisfied with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f interest included in clause (i) incurred during the previous year ; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. (3) For the purposes of this rule, the total assets shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets. Sub Rule (1) categorically and significantly states that the Assessing Officer having regard to the account of the assessee and on not being satisfied with the correctness of the claim of expenditure made by the assessee or claim that no expenditure was i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 amount of interest included in clause (i)) incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three compone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer 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 Assessing Officer 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 only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law. Sub-section (3) of section 14A provides for the application of sub-section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer when he arrives at his satisfaction under sub-section (2) of section 14A. As we shall note shortly hereafter, sub-rule (1) of rule 8D 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). 18. It is in this context we feel that the findings recorded by the CIT(A) and the Tribunal are appropriate and relevant. The clear findings are that the assessee had sufficient funds for making investments in shares and mutual funds. The said findings coupled with the failure of the Assessing Officer to hold and record his satisfaction clinches the issue in favour of the respondent assessee and against the Revenue. The self or voluntary deductions made by the assessee were not rejected and held to be unsatisfactory, on examination of accounts. Judgments in Tin Box Co. (supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy Ltd. (supra) and East India Pharmaceutical Works Ltd. (supra) would be relevant if the satisfaction of the Assessing Officer is in issue, and such question of satisfaction is with reference to the accounts. 19. However, the decisions rel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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