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TMI Blog2015 (1) TMI 1239X X X X Extracts X X X X X X X X Extracts X X X X ..... towards its income, the learned CIT(Appeals) erred in upholding the action of the learned Assessing Officer of treating such interest of Rs. 13,75,418/- as income of the assessee company. 1.3. Because, in any case, the deposit account having been seized/ attached by the Provident Fund Commissioner and the assessee company having no control over these funds, the interest on such funds of Rs. 13,75,418/- ought not to have been treated as income of the assessee company. 2.1. Because the learned 1st appellate authority erred in confirming the addition made by the Assessing Officer u/s 14A of the Income Tax Act, 1961 read with rule 8D of the Income Tax Rules, 1962. 2.2. Because the learned 1st appellate authority failed to appreciate that the Assessing Officer applied Rule 8D in a mechanical manner without application of mind and without regard to facts and reply of the assessee; so much so that the learned assessing officer recorded an erroneous finding by stating that the 'assessee submitted that no expenditure has been incurred on this account' though the assessee on its own had determined expenditure of Rs. 47,564 for earning the exempt income and made disallowance on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s followed his earlier order for assessment year 2005-06 and rejected the ground of the assessee. During assessment year 2005-06, the Tribunal has examined this issue and has restored the matter to the file of the Assessing Officer with a direction to re-adjudicate the issue in the light of the order of the State Government dated 3.4.1980. The relevant observations of the Tribunal are extracted hereunder for the sake of reference:- "6. Having heard the rival submissions and from a careful perusal of the record, we find that before the lower authorities the assessee has taken a stand that the accounts were attached by the Regional Provident Fund Commissioner and assessee was not able to operate that account, therefore, the interest could not be offered to tax but before us the assessee has filed an order of the Statement Government containing the rider on the funds given to the assessee to meet the expenditure to be incurred for VRS. From a careful perusal of this order it appears that whatever fund was given by the Government to the assessee, it was given subject to certain conditions and one of the important contention is that whatever interest is earned on its deposits with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made, it was made in the 100% owned subsidiary concerns of the assessee. In support of the contention, the ld. counsel for the assessee has invited our attention to Schedule 'E' containing details of investment appearing at page 31 of the compilation of the assessee, according to which investments were made in Uptron India Limited; Uptron Powertronics Ltd. and Uplease Financial Services Ltd. The total investments made in these companies in the impugned assessment year was Rs. 60,90,10,559/-. Since the investment was in 100% owned subsidiaries, no disallowance can be made after invoking the provisions of rule 8D and 14A of the Act. In support of his contention, the ld. counsel for the assessee has placed reliance upon the order of the Mumbai "J" Bench of the Tribunal in the case of M/s JM Financial Limited vs. Addl. CIT, I.T.A. No. 4521/Mum/2012. Copy of the order of the Tribunal is also placed on record. Besides, reliance was also placed on the order of the Pune Bench of the Tribunal in the case of Kalyani Steels Ltd. vs. Addl. CIT, I.T.A. No. 1733/PN/2012, in which it has been held that the Assessing Officer was required to record objective satisfaction with regard to the correc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r for the sake of reference:- "7. Having considered the rival submissions as well as relevant material on record, we note that so far as applicability of Rule 8D is concerned, there is no quarrel on this point that for the A.Y. under consideration Rule 8D is applicable. Further for the A.Y. 2008-09, the Tribunal held in para 15 as under:- "We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. In the instant case, the only dispute is regarding determination of disallowance of expenditure for earning tax free dividend income of Rs. 18,17,68,458/- the assessee disallowed on its own Rs. 16.50 lakhs u/s 14A. Despite being asked by the AO to furnish the disallowance under rule 8D, the assessee did not furnish the details. The provisions of rule 8D inserted by the IT (Fifth Amendment) Rules 2008 with effect from 24.3.2008 are applicable for A.Y. 2008-09 and onwards. Therefore, the revenue authorities are bound to follow the mandatory provisions for calculation of disallowance u/s 14A. Therefore, we do not find any infirmity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 8D has recorded the principles as laid down by the Hon'ble Supreme Court in the case of WalfortShare and Stock Brokers P. Ltd. [2010] (326 ITR 1,) in para 31 as under:- (a) "The mandate of section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income. (b) Section 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; (c) The principle of apportionment of expenses is widened by section 14A to include even the apportionment of expenditure between taxable and nontaxable income of an indivisible business; (d) The basic principle of taxation is to tax net income. This principle applies even for the purpose of section 14A and expenses towards non-taxable income must be excluded; (e) Once a proximate cause for disallowance is established - which is the relationship of the expenditure with income which does not form part of the total income - a disallowance has to be effected. All expenditure under the provisions of the Act has to be disallowed under section 14A Income which does not form part of the total income is broadly adverted to as exempt income as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the expenditure incurred in relation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment. Further the investment were made long back and not in the year under consideration. Therefore, in view of the fact that the investment are in the group concern we do not find any reason to believe that the assessee would have incurred any administrative expenses in holding these investments. The Assessing Officer has not brought on record any material to show that the assessee has incurred any expenditure in relation to the income which does not form part of the total income. Section 14A has within it implicit the notion of apportionment in the cases where the expenditure is incurred for composite/indivisible activities in which taxable and non taxable income is received but when no expenditure has been incurred in relation to the exempt income then principle of apportionment embedded in section 14A has no application. The object of section 14A is not allowing to reduce tax payable on the non exempt income by deducting the expenditure incurred to earn the exempt income. In the case in hand it is not the case of the revenue that the assessee has incurred any direct expenditure or any interest expenditure for earning the exempt income or keeping the investment in question. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the assessee company as contract to execute the works awarded to them (i.e. SPVs) by the NHAI. In its profit and loss account for the year, the assessee has shown the turnover from execution of these contracts and therefore no expense and interest attributable to the investments made by the appellant in the PSVs can be disallowed u/s 14A LW. Rule 8D because it cannot be termed as expense/interest incurred for earning exempted income. Under the circumstances, Ld. Commissioner of Income Tax (Appeals) is correct in holding that disallowance of a further sum Rs. 40,556/- calculated@2%ofthedividend earned is sufficient. Under the circumstances, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals), hence we uphold the same." 13. In view of the above discussion and facts and circumstances of the case we agree with the view taken by this Tribunal in the above stated cases and accordingly hold that the assessee has brought out a case to show that no expenditure has been incurred for maintaining the 98% of the investment made in the subsidiary companies, therefore, in the absence of any finding that any expenditure has been incurred for earning the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other words, section 14A(2) of the Act envisaged a condition precedent for invoking rule 8D of the Rules and computing disallowance thereof only if the Assessing Officer records that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure, having regard to the account of the assessee. In this context, it would be appropriate to refer to the following observations of the Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra) :- "70. Now, in dealing with the challenge it is necessary to advert to the position that sub-section (2) of section 14A prescribes a uniform method for determining the amount of expenditure incurred in relation to income which does not form part of the total income only in a situation where 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. It, therefore, merits emphasis that sub-section (2) of section 14A does not authorize or empower the Assessing Officer to apply the prescribed method irrespective of the nature of the claim made by the assessee. The Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 subsection (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). [underlined for emphasis by us] 9. The aforesaid observations of the Hon'ble High Court clearly show that the satisfaction of the Assessing Officer with regard to the correctness or otherwise of the claim made by the assessee must be based on reasons and on relevant considerations. Ostensibly, the invoking of rule 8D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , recording of an objective satisfaction with regard to the claim of the assessee that an expenditure of Rs. 5,00,000/- has been incurred in relation to the exempt income, is incorrect. In order to examine the aforesaid compliance with the pre-condition, we have perused the para 4 to 4.2 of the assessment order and find that no reasons have been advanced as to why the disallowance determined by the assessee was found to be incorrect, having regard to the accounts of the assessee. The only point made by the Assessing Officer is to the effect that "the said disallowance was not acceptable". In-fact, we find that the assessee made detailed submissions to the Assessing Officer, which have been reproduced by the CIT(A) in para 3.2.1 of his order. As per the assessee, the determination of disallowance u/s 14A of the Act of Rs. 5,00,000/- was based on the employee costs and other costs involved in carrying out this activity. Further, assessee also explained that the shares which have yielded exempt income were acquired long back out of own funds and no borrowings were utilized. The mutual fund investments were claimed to be also made out of surplus funds. It was specifically claimed that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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