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2015 (4) TMI 5 - ITAT DELHI

2015 (4) TMI 5 - ITAT DELHI - TMI - Disallowance u/s 14A r.w. rule-8D - dividend income claimed exempt u/s 10(34) - Held that:- No effort has been made by A.O. to record his findings as to why the claim of assessee that no expenditure was incurred was not correct. He has made disallowance just by holding that some expenditure must have been incurred. Therefore, case of CIT Vs Taikisha Engineering India Ltd. [2014 (12) TMI 482 - DELHI HIGH COURT] is applicable to the assessee and no disallowance .....

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ndent : Shri P. Dam Kanunjha, Sr. DR ORDER Per T.S. Kapoor, AM: This is an appeal filed by assessee against the order of Ld. CIT(A) dated 19.12.2012. The grounds of appeal taken by assessee are reproduced below: 1. The order of Ld. CIT(A), New Delhi dated 19.12.2012 is bad in law and on facts. 2. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in confirming the disallowance a sum of ₹ 60,09,848/- under provisions of section 14A r.w. rule-8D of the Income-ta .....

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T Vs Taikisha Engineering India Ltd. 54 Taxman.com 109 and filed a copy of the same. Ld. A.R. invited our attention to para 4 of the said order to highlight the facts of that case. Ld. A.R. also took us to para 10 of the said order and submitted that in the present case also, the A.O. has not recorded his objective satisfaction and without recording any satisfaction, he has proceeded to make disallowance as per Rule 8D. Ld. A.R. submitted that above order of Hon'ble Deli High Court was follo .....

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he investment in shares has been declared as stock in trade and in this respect, our attention was invited to paper book page 13 where the said investment was clarified as stock in trade in the balance sheet of the assessee. Ld. A.R. submitted that in a case where the shares are held in stock in trade, no disallowance can be made u/s 14A and in this respect, our attention was invited to the decision of ITAT Kolkata Bench in the case of DCIT Vs Baljit Securities Pvt. Ltd. placed at paper book pag .....

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n of income declaring an income of ₹ 5,48,588/-. During assessment proceedings, the A.O. observed that the assessee had earned exempt income. Therefore, assessee was required to explain as to why the deduction u/s 14A read with Rule 8D be not made. In reply, the assessee submitted that the assessee was engaged in the business of trading and broking of shares and the dividend received by it is incidental to its main business and no expenses have been incurred for earning the dividend income .....

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0. Having heard the Counsel for the parties, we feel that the respondent assessee is entitled to succeed on somewhat different grounds and reasons, than those elucidated by the Tribunal. 11. Section 14A of the Act is relevant and reproduced below:- ―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 assessee in relation to income which does not form part of the total income under this Act. (2) .....

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(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 .....

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ation to exempt income, the Assessing Officer can determine the amount of expenditure which should be disallowed in accordance with such method as prescribed, i.e. Rule 8D of the Rules (quoted and elucidated below). Therefore, the Assessing Officer at the first instance must examine the disallowance made by the assessee or the claim of the assessee that no expenditure was incurred to earn the exempt income. If and only if the Assessing Officer is not satisfied on this count after making referenc .....

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ion under Rule 8D of the Rules. This pre-condition and stipulation as noticed below is also mandated in sub Rule (1) to Rule 8D of the Rules. 12. Rule 8D of the Rules, again for the sake of convenience, is reproduced below:- ―8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incur .....

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ssessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :- A × B/C Where A = amount of expenditure by way of interest other than the amount of 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 appearin .....

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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 incurred in relation to income which does not form part of the total income under th .....

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of the assessee is not satisfactory, computation under sub Rule (2) to Rule 8D of the Rules is to be made. 13. We need not, therefore, go on to sub Rule (2) to Rule 8D of the Rules until and unless the Assessing Officer has first recorded the satisfaction, which is mandated by sub Section (2) to Section 14A of the Act and sub Rule (1) to Rule 8D of the Rules. 14. The view and legal ratio expressed above is not being elucidated for the first time. The Delhi High Court in Maxopp Investment Ltd. vs .....

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sing 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 the said 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 th .....

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re 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 subsection (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Asses .....

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ount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. Rule 8D As we have already noticed, sub-se .....

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assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the asses see; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D(1) plac .....

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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. 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 .....

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ure 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 .....

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virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half percent of the average value of the investment, income from which does not or shall not form part of the total income, is taken.‖ 15. Even earlier the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. vers .....

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ed by rules made under the Act. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, .....

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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 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 .....

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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 the Assessing Officer, for an assessment year beginning on or before April 1, 2001, either to reassess under section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under section 154. .....

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s been provided by way of section 14A(2)/(3) and rule 8D.‖ 17. More important and relevant for us are the observations in Godrej and Boyce Mfg. Co. Ltd. (supra) on requirement and stipulation of satisfaction being recorded by the Assessing Officer with reference to the accounts under Section 14(2) of the Act and Rule 8D(1) of the Rules. It was observed:- ―Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to .....

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hich the validity of the exercise of the power is predicated". (M. A. Rasheed v. State of Kerala [1974] AIR 1974 SC 2249*). A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the assessee a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, he must record reasons f .....

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ext 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, .....

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ia Pharmaceutical Works Ltd. (supra) could not be now applicable, if we apply and compute the disallowance under Rule 8D of the Rules. The said Rule in sub Rule (2) specifically prescribes the mode and method for computing the disallowance under Section 14A of the Act. Thus, the interpretation of clause (ii) to sub Rule (2) to Rule 8D of the Rules by the CIT(A) and the Tribunal is not sustainable. The said clause expressly states that where the assessee has incurred expenditure by way of interes .....

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me or receipt, then the interest on loan amount to this extent or in entirety as the case may be, has to be excluded for making computation as per the formula prescribed. Pertinently, 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 .....

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the assessee was unreasonable and unsatisfactory. We do not find any such satisfaction recorded in the present case by the Assessing Officer, before he invoked sub Rule (2) to Rule 8D of the Rules and made the re-computation. Therefore, the respondent assessee would succeed and the appeal should be dismissed. 5. We find that Hon ble Delhi High Court has held that sub-rule 2 of Rule 8D cannot be invoked without recording explanation by A.O. as to why voluntary disallowance made by assessee was no .....

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the Specific query raises by this office, assessee company has submitted vide letter dated'- 16.09.2011 that the assessee company is doing the busine.ss of trading and broking and company earns dividend Income In normal course of business. As per list of dividend income and quantum of dividend itself clear that company has not done any dividend swapping. Expenditure of the company was remaining the same, even if the other company has not declared or paid the dividend. There is no relation b .....

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