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2015 (6) TMI 640 - ITAT MUMBAI

2015 (6) TMI 640 - ITAT MUMBAI - TMI - Disallowance u/s 14A r.w.r. 8D(2)(iii) - Held that:- In view of the detailed working given by the assessee and following the ratio laid down in Godrej & Boyce Mfg. Co. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT) and Taikisha Engineering India Ltd. [2014 (12) TMI 482 - DELHI HIGH COURT] and Maxopp Investment Ltd. [2011 (11) TMI 267 - Delhi High Court] before applying the provisions of Rule 8D of the I.T. Rules, the AO was duty bound to record his dissatisfact .....

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e expenditure which is to be disallowed under section 14A of the Act was incorrect. - Decided in favour of assessee. - I.T.A. No.5348/Mum/2012 - Dated:- 10-6-2015 - SHRI R.C. SHARMA and Ms. SUSHMA CHOWALA, JJ. For the Petitioner : Shri M.M. Golvala & Shri Bhaumik Sanghvi For the Respondent : Shri Neil Philip ORDER Per Sushma Chowla, J.M. This appeal by the assessee is directed against the order dated 24.04.20121 passed by CIT(A)-7, Mumbai and it pertains to A.Y. 2009-10. 2. Following gro .....

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ule 8D(2)(iii) without appreciating the fact that the Assessing Officer has not recorded any satisfaction to the effect that the disallowance under section 14A as computed by the Appellant was incorrect. 3. Brief facts necessary for disposal of the appeal are that the assessee-company provides custodial & depository services to institutional investors, mutual funds and retail investors. The assessee filed return of income for A.Y. 2009-10 on 30.09.2009 declaring total income at ₹ 85,72 .....

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10(34) of the Act and claimed deduction of ₹ 19,72,280/- under section 14A of the Act. The AO was of the opinion that the claim of deduction under section 14A was not as per Rule 8D of the Income Tax Rules. Therefore, the assessee was asked to furnish details of expenses incurred for earning exempt income and was also show caused as to why the expenses incurred for earning exempt income should not be disallowed as per the provisions of section 14A read with Rule 8D. 4. In response assesse .....

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Boyce Mfg. Co. Ltd. vs. DCIT reported in (2010) 328 ITR 81 (Bom.) provisions of Rule 8D are applicable from assessment year 2008-09 onwards. Therefore, the attributable expenditure for earning exempt income had to be computed as per the procedure mentioned in the said rules. The AO thereafter computed the expenses attributable to exempt income as per Rule 8D and worked out the disallowance at ₹ 47,25,088/- . Since the assessee suo moto made a disallowance of ₹ 19,72,280/- the disallo .....

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order of the CIT(A). 6. The learned A.R. for the assessee, at the outset, pointed out that before making the disallowance under section 14A read with Rule 8D of the I.T. Rules, the AO has not recorded any satisfaction as to why the disallowance made by the assessee under the said provisions should not be accepted. Our attention was drawn to the working of disallowance worked out by the assessee which is placed on page 35 of the paper book, under which assessee had declared 19,72,280/- and also .....

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e 8D of the I.T. Rules. The learned A.R. for the assessee further pointed out that the observations of the AO at page 2 are factually incorrect and it was further contended by the learned A.R. for the assessee that the disallowance made under Rule 8D(i) and 8D(ii) has been deleted by the CIT(A), against which Revenue is not in appeal. The assessee is in appeal against the disallowance made under Rule 8D(iii), i.e. 0.5% of the total investment. The contention of the learned A.R. for the assessee .....

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rt in the case Maxopp Investment Ltd. vs. CIT reported in (2012) 347 ITR 272 (Delhi) and CIT vs. Taikisha Engineering India Ltd. reported in (2015) 370 ITR 338 (Delhi). Further reliance was placed on the ratio laid down by the Mumbai Bench of the Tribunal in the case of Raj Shipping Agencies Ltd. vs. ACIT in ITA No. 4868/Mum/2011 relating to assessment year 2008-09, order dated 15.03.2013. Another contention of the learned A.R. for the assessee was that the Tribunal in assessee s own case relati .....

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se pointed out that either the matter should go back to the file of the AO or the disallowance worked under section 14A merits to be upheld in the hands of the assessee. 8. We have heard the rival contentions and perused the record. The issue arising before us is in relation to application of the provisions of section 14A of the I.T. Act and Rule 8D of the I.T. Rules. Section 14A lays down that while computing the total income in the hands of the assessee, no deduction shall be allowed in respec .....

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escribed. It is further provided that if the AO having regard to the facts 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 do not form part of the total income, then such disallowance has to be worked out. In other words, before relying to the provisions of Rule 8D provided under the Income Tax Rules, which prescribes the method of calculating the expenditure relatable to the exempt income, which is .....

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n in turn is held to vitiate the order of the AO in disallowing expenditure under the provisions of section 14A of the Act. 9. The Hon'ble Supreme Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) had laid down the following proposition vis-a-vis subsection 2 to section 14A of the Act: - Hence, sub-s. (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 expenditu .....

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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. (underline provided by us). 10. The Hon'ble Bombay High Court in the case Godrej & Boyce Mfg. Co. Ltd., while concluding the .....

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diture incurred in relation to income which does not form part of the total income under the Act, that he can proceed to make a determination under the rules; (ix) The satisfaction envisaged by sub-s. (2) of s. 14A is an objective satisfaction that has to be arrived at by the AO having regard to the accounts of the assessee. The safeguard introduced by sub-s. (2) of s. 14A for a fair and reasonable exercise of power by the AO, conditioned as it is by the requirement of an objective satisfaction, .....

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ulates 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 the correctness of the claim of the assessee in respect of expenditure in relation to exempt income, the Assessing Officer can determine the amount of ex .....

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. Rule 8D of the Rules. Thus, Rule 8D is not attracted and applicable to all assessee who have exempt income and it is not compulsory and necessary that an assessee must voluntarily compute disallowance as per Rule 8D of the Rules. Where the disallowance or nil disallowance made by the assessee is found to be unsatisfactory on examination of accounts, the assessing officer is entitled and authorised to compute the deduction under Rule 8D of the Rules. This pre-condition and stipulation as notice .....

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m of the assessee in respect of such expenditure, in relation to such income which does not form part of the taxable income. 13. Now coming to the facts of the present case assessee, during the year under consideration, had received dividend income of ₹ 81,80,792/- which was 28% of its total income of ₹ 27,48,09,826/-. Assessee was maintaining separate treasury and STT department for looking after its investments and assessee computed the disallowance which was relatable to earning o .....

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applying the provisions of Rule 8D of the I.T. Rules, the AO was duty bound to record his dissatisfaction that the working of the disallowance made by the assessee under section 14A of the Act was incorrect. A perusal of the assessment order reflects that no such dissatisfaction was recorded by the AO and in view thereof the provisions of section 14A(2) of the Act had not been applied and accordingly we find no merit in the disallowance made by the AO under section 14A(2) of the Act read with Ru .....

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