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2015 (9) TMI 1112

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..... ed order. The grounds of appeal raised in ITA No. 2788/Del/2013 are as under: 1. That the order of the Commissioner of Income-tax (Appeals)-IV, New Delhi, the Commissioner (Appeal), dated 23.03.2012, the impugned order, is wrong on facts and bad in law; 2. That on the facts and in the circumstances of the case and in law the 2. Commissioner (Appeals) erred in confirming the disallowance of expenditure of ₹ 67,45,880/- under Section 14A of the Act by applying Rule 8D of the Rules; 2.1 That the Commissioner (Appeals) failed to appreciated that Rule 8D of the Rules was applicable after recorded with reasons as to why the claim of the Appellant that no expenditure was incurred or the expenditure incurred was not more than the expenditure added by the Appellant for the dividend income was incorrect. He failed to appreciate that Rule 8D of the Rules was not applicable in the instant case as there was no such finding; 2.2 That the Commissioner (Appeals) failed to appreciate that the entire expenditure was incurred by the Appellant for the purposes of its business and no expenditure was incurred for the dividend income earned and as such no expenditure was to be deducted .....

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..... ent owing to search and seizure operations conducted in the group of companies of the appellant. After perusal of the application for condonation of delay, we are of the considered opinion that in the interest of justice, the delay of 344 days should be condoned as we appreciate the difficulties faced by the appellant company on account of 598 notices received from the Income Tax Department following the search and seizure operation. Accordingly, the delay of 344 days in filling the present appeals is condoned. 4. This brings us to the grounds relating to the applicability of Section 14A read with Rule 8D of the Income Tax Rules, 1962 in these appeals. 5. Learned counsel for the appellant submitted that the investments are made only for the purpose of controlled management of the group of the companies. The intention had never been to earn the dividend income. Therefore, the provisions of Section 14A cannot be applied. 6. Another limb of the arguments of the learned counsel for the assesee is that there are investments which never yielded any dividend income and therefore while calculating the value of investments as per Rule 8D as only those investments which yielded div .....

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..... amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing 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 in .....

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..... ome 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 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 assetsǁ 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 re .....

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..... g 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 subsection (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 Assessin .....

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..... 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 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 .....

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..... to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of 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 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 incurr .....

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..... e, he must record reasons for his conclusion. These safeguards which are implicit in the requirements of fairness and fair procedure under article 14 must be observed by the Assessing 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. (su .....

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..... 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. 9. The ratio laid down in the above case is that unless the satisfaction is recorded by the Assessing Officer to the effect that the disallowances offered by the assessee is unsatisfactory, no disallowance can be made under the provisions of Section 14A of the Act. This ratio was followed by several coordinate benches of ITAT, which are as follows: i. CIT Vs. Hero Management Services Ltd. [2014] 360 ITR 68 (Del.) (HC) [AY 2007-08] ii. Kodak India Pvt. Ltd. Vs. ACIT [2013] 155 TTJ 697 (Mum.) (Trib.) [AY 2008-09. iii. JK Investors (Bombay) Limited (Mum.) (Trib.) [AY 2008-09] iv. Auchtel Products Limited Vs. ACIT [2012] 52 SOT 39 (Mum.) (Trib.) [2003-04, 2007-08, 2008-09] v. Priya Exhibitors Pvt. Ltd. Vs. ACIT [2012] 54 SOT 356 (Del.) (Trib.) [AY 2008-09] vi. DCIT Vs. REI Agro Ltd. (Kol.) (Trib.) [AY 2009-10]. This decision has been upheld by the Calcutta High Court in GA 3022 of 2013, dated 23/12/2013 ; vii. ACIT Vs. Iqb .....

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