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2015 (7) TMI 278 - ITAT CHENNAI

2015 (7) TMI 278 - ITAT CHENNAI - TMI - Disallowance under Section 14A - investments made in the capital account of the partnership firm - CIT(Appeals) accepting the ad hoc expenditure on estimation of 10% of the incomec- Held that:- The assessee itself claimed before the Assessing Officer that it had made a disallowance of ₹ 5,67,277/- being 10% of the income earned from the partnership firm, under Rule 8D. Therefore, it is an admitted position of the assessee that a disallowance has to b .....

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and Rule making authority employed the language “shall determine”, it is obligatory on the part of the Assessing Officer to determine the expenditure as provided in sub-Rule (2) of Rule 8D. Therefore, estimation of expenditure at 10% may not be in accordance with provisions of sub-Rule (2) of Rule 8D.

Also carefully gone through the order of this Tribunal in the assessee's own case this Tribunal found that the assessee has interest-free own funds to the extent of ₹ 42.95 Crores .....

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ssessing Officer to adopt the method prescribed in Rule 8D(2) of the Act. Therefore, the CIT(Appeals) is not justified in accepting the ad hoc expenditure on estimation of 10% of the income. Thus the entire issue of Rule 14A r.w. Rule 8D is remitted back to the Assessing Officer to determine the expenditure incurred by the assessee as per the method prescribed in the second limb of Rule 8D(2) of the Income-tax Rules, 1962 - Decided in favour of revenue for statistical purposes. - ITA No.405/Mds/ .....

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h regard to disallowance of ₹ 37,87,806/- under Section 14A of the Incometax Act, 1961 read with Rule 8D of Income-tax Rules, 1962. The Ld. D.R. further submitted that the assessee-company engaged itself in the business of manufacturing and exporting leather gloves. During the year under consideration, the assessee claimed investments of ₹ 3.43 Crores in the balance sheet in the year ended 31.03.2011 in the partnership firm M/s M.A. Khizar Hussain & Sons. The assessee-company cla .....

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by the assessee to the extent of ₹ 3.43 Crores. The assessee has claimed the above income of ₹ 56,72,766/- as exempted. The Ld. D.R. further submitted that the reserve of the company as per the books of account was to the extent of ₹ 48.26 Crores. However, the assessee showed ₹ 6.65 Crores as secured loans as on 31.3.2011. Interest outgo for the year under consideration is ₹ 1.44 Crores. 3. The Ld. D.R. further submitted that even though the assessee showed that a p .....

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14A of the Act mandates the Assessing Officer to determine the amount of expenditure incurred in relation to earning of exempted income in accordance with the method prescribed under Rule 8D. According to the Ld. D.R., the Legislature has used the word shall determine , therefore, the Assessing Officer has no other way except to determine the expenditure incurred for earning the exempt income. 4. Referring to Rule 8D of the Income-tax Rules, 1962, the Ld. D.R. submitted that where the Assessing .....

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2) may not be applicable. Referring to second limb of Rule 8D(2), the Ld. D.R. submitted that the assessee incurred interest expenditure during the year under consideration which is not directly attributable to the particular income earned by the assessee. Therefore, as per the second limb of Rule 8D(2), the Assessing Officer has to compute the interest expenditure which was not directly attributable to the particular income. Therefore, according to the Ld. D.R., wherever the interest is not dir .....

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ethod prescribed in Rule 8D(2). Therefore, disallowance of 10% would not be justified. 5. On the contrary, Smt. S. Vidhya, the Ld. representative for the assessee, submitted that admittedly the assessee has earned ₹ 56,72,766/- from the partnership firm which is exempted from taxation. The assessee itself disallowed a sum of ₹ 5,67,277/- being 10% of the above income. Therefore, the CIT(Appeals) rightly found that there is no need for any further disallowance under Section 14A of the .....

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on record. We have also carefully gone through the provisions of Section 14A of the Act. For the purpose of convenience, we are reproducing Section 14A hereunder:- [Expenditure incurred in relation to income not includible in total income. 14A. 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) The Assessing Offi .....

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ply 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 .....

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72,766/- does not form part of total income of the assessee. Therefore, the Assessing Officer has no option except to determine the expenditure in view of the mandate of the Parliament by using the word shall determine . 7. We have also carefully gone through the provisions of Rule 8D of Income-tax Rules, 1962 which reads as follows:- METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME (1) Where the Assessing Officer having regard to the accounts of .....

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of the total income shall be the aggregate of following amounts, namely:- (i) the amount of expenditure directly relating to income which does not form part of total income ; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :- A X B C Where A = amount of expenditure by way of interest other than the amount of i .....

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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. Under Rule 8D(1), when the Assessing Officer having regard to th .....

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is more relevant. In other words, the Assessing Officer has to record his finding that the accounts of the assessee does not satisfactorily explain the expenditure incurred for earning the income, which does not form part of the total income. We have also carefully gone through the order of the assessment. The assessee itself claimed before the Assessing Officer that it had made a disallowance of ₹ 5,67,277/- being 10% of the income earned from the partnership firm, under Rule 8D. Therefor .....

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llowance has to be made with regard to earning of the income which is exempted from taxation under the Income-tax Act in view of the language employed by the Parliament in Section 14A(2) that an Assessing Officer shall determine and the Rule 8D(1), this Tribunal is of the considered opinion that the method prescribed in sub-Rule (2) of Rule 8D has to be adopted. Since the Parliament and Rule making authority employed the language shall determine , it is obligatory on the part of the Assessing Of .....

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