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Amtek Crank Shafts India Ltd Versus Addl. CIT, Range-1 and DCIT, Circle-1, New Delhi

2015 (9) TMI 1112 - ITAT DELHI

Disallowance of expenditure under Section 14A applying Rule 8D of the Rules - Held 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. See CIT Vs. Hero Management Services Ltd. [2013 (10) TMI 80 - DELHI HIGH COURT ] - we hereby direct the Assessing Officer to delete the additions made under Section 14A of the Act. - Decided in .....

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d to decide the appeals by a consolidated 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 a .....

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eals) 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 under the said provisions; 2.3 That the Commissioner (Appeals) erred in determining the disallowance at ₹ 9,08,951/- under Rule 8D (2)(ii) of the Rules; 2.4 That the Commissioenr (Appeals) erred in confirming the disallowance under Rule 8D(2)(iii) of the Rules at  .....

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time of hearing of the above appeal. 2. For the sake of convenience and brevity, the facts in ITA No. 2788/Del/2013, are stated as below: 2.1 Briefly stated facts of the case are that the assessee company was holding some investments in the form of unquoted equity shares of group companies which held only for the purpose of control management and one of the associates of the group companies. The appellant itself made a suo motu disallowance of some expenditure as relating to exempt income where .....

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le 8D, had granted the part relief while working out the disallowance. Being aggrieved, the present appeals have been filed by the appellant company before us. 3. Before we proceed with the disposal of the grounds of appeal, it is necessary to deal with the application filed by the appellant for condonation of delay. There is delay of 344 days in filing of these appeals. The appellant had filed the application dated 28.10.2013 praying for condonation of delay in the circumstances that the delay .....

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g 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 .....

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04.2014 (Ahd.)(Trib.) as well on the decision of coordinate bench of Kolkata ITAT in the case of DCIT Vs. Salvel Advertising Pvt. Ltd. [2015] 58 Taxmann.com 196 (Kolkata) (Trib.), in support of the proposition that when the investments are made for strategic purposes, no disallowances under Section 14A should be made and finally submitted that no satisfaction was recorded by the Assessing Officer as to how the disallowance made by the appellant itself was unreasonable and unsatisfactory and in s .....

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sessment order that the Assessing Officer proceded with the calculation as per Rule 8D for the purposes of working out the disallowance under Section 14A of the Act. Without rendering any finding as to how the disallowances offered by the appellant is unreasonable and unsatisfactory. Now it is settled principle of law that without recording the satisfaction in this behalf the disallowances worked out by the Assessing Officer cannot be upheld. The Hon ble Jurisdictional High Court in the case of .....

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t 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 Officer shall determine the 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 .....

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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 ass .....

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urred to earn the exempt income. If and only if the Assessing Officer is not satisfied on this count after making reference to the accounts, that he is entitled to adopt the method as prescribed i.e. 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 fou .....

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of the claim of expenditure made by the assessee; 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 Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- (i) .....

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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 th .....

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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 the Act, can go on to determine the disallowance under sub Rule (2) to Rule 8D of the Rules. Sub Rule (2) will not come into operation until and unless the specific precondition in sub Rule (1) is satisfied. Thus, Section 14A(2) of the Act and Rule 8D(1) in unison and affirmatively record that .....

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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. Commissioner of Income Tax [2012] 347 ITR 272, has observed:- ―Scope of sub-sections (2) and (3) of Section 14A Sub-section (2) of Section 14 A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income w .....

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g 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 the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering 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 .....

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ot 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 Secti .....

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rd 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-section (2) of Section 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is - ―such method as may be prescribedǁ. We have already mentioned above that by virtue of Notification No.45 of 20 .....

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revious 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) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Subsections (2) and (3) of Section 14A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record hi .....

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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 give .....

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ird 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 components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under Section 14A of the said Act. It is, there .....

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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. versus Deputy Commissioner of Income Tax (2010) 328 ITR 81 (Bom.) had referred to Section 14(2) of the Act and observed:- ―Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of t .....

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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, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, sub-section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of .....

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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 .....

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her 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. 16. Equally illuminating are the following observations in Godrej and Boyce Mfg. Co. Ltd. (supra) ―… However, if the assessee does not maintain separate accounts, it would be necessary for the Assessing Officer to deter-mine the proportion of expenditure incurred in relation to the dividend business ( .....

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(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 the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. When a statute postulates the satisfaction of .....

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e 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 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 require .....

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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 decis .....

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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 interest in the previous year and the interest paid is not directly attributable to any particular income or receipt then the formula prescribed would apply. Under clause (ii) to Rule 8D(2) of the Rules, the Assessing Officer is required to examine whether the assessee has incurred expenditure by way of interest in the previous year and secondly whether .....

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i). 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. 20. However, in the present case we need not refer to sub Rule (2) to Rule 8D of the Rules as conditions mentioned in sub Section (2) to Section 14A of the Act read with sub Rule (1) to Rule 8D of the Rules .....

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