TMI Blog2016 (2) TMI 381X X X X Extracts X X X X X X X X Extracts X X X X ..... red the claim of the assessee at all and he has straightway embarked upon computing disallowance under Rule 8D on the presumption that the assessee might have incurred some expenses. Disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. We notice that assessee itself disallowed for earning the interest income. The Assessing Officer has not examined any expenditure claimed in P & L account so as to relate to exempt income, nor gave a finding that assessee claim is not correct for any reason. Rule 8D cannot be invoked directly without satisfying about the claims or otherwise. - Decided in favour of assessee - ITA No.2049/Mum/2015 - - - Dated:- 15-1-2016 - Shri Joginder Singh, Judicial Member For The Assessee : Shri M.C. Naniwadekar For The Revenue : Shri V.S. Jadhav-DR ORDER The assessee is aggrieved by the impugned order dated 13/01/2015 of the Ld. First Appellate Authority, Mumbai. The only ground argued by the ld. counsel for the assessee, Shri M.C. Naniwadekar, is that disallowance of ₹ 5,40,531 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the investment. It is noted that the ld. Assessing Officer neither recorded any satisfaction for making the disallowance nor indicated in his order with respect to any other expenses, if any, claimed by the assessee. So far as, application of Rule-8D is concerned, there is a force in the submission of the ld. DR, since, the assessment year involved is 2009-10, therefore, in view of the decision from Hon ble jurisdictional High Court in Godrej Boyce Mfg. Ltd., 328 ITR 81 (Bom.), it is applicable. But question arises whether Rule 8D of the rules can be blindly applicable to the facts of the present appeal, therefore, I am expected to analyze the totality of facts. 2.1. So far as, invoking provisions of section 14A(2) is concerned, the Hon ble jurisdictional High Court, while upholding the constitution validity of section 14A and Rule 8D has observed, with reference to sub-section 2 3 of section 14A as under:- Sub-sections (2) and (3) of section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from April 1, 2007. Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of subsection (2) of Section 14A. Subsection (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 sub-section (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 sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules. 31.It is, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method. 2.4. The Hon'ble Punjab Haryana High Court in the case of CIT vs. Hero Cycles Ltd 323 ITR 518 (P H) has also held that disallowance under section 14A could not stand where it was found that for earning exempted income no expenditure has been incurred: Held - dismissing the appeal, that the expenditure on interest was set off against the income from interest and the investment in the shares and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, was a question of fact. The contention of the Revenue that directly or indirectly some expenditure was always incurred which must be disallowed under section 14A and the impact of expenditure so incurred could not be allowed to be set off against the business income which may nullify ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of total income and if so to quantify the extent of disallowance. Thus, in order to disallow the expenditure under section 14A, there must be a live nexus between the expenditure incurred and the income not forming part of total income. No notional expenditure can be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the income not forming part of total income. If the expenditure is incurred with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance can be made under section 14A merely because some tax exempt income is received by the assessee. 5.2 Averting to the facts of the case in hand, the assessee had made a claim that no expenditure has been incurred or claimed for earning the exempt income. From the details of the expenditure, it is clear that the expenditure incurred and claimed by the assessee has direct nexus with the professional income of the assessee. It is not the case of the revenue that the assessee has used his official machinery and Establishment for earning the exempt income. TheAssessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, the CIT(A) s direction on this is set aside and the additions so made by the A.O. in the computation of business income is deleted. Ground is considered allowed. 5.4 Similarly in case of Auchtel Products Ltd (supra), it was held by this Tribunal in Para 15 has under: 15. A bare perusal of the above provisions disallowable as per Rule 8D, if he, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to exempt income. Even if the assessee claims that no expenditure was incurred in respect of exempt income, the AO is supposed to follow the mandate of Rule 8D if he is not satisfied with the correctness of the assessee s claim. To put it simply, the further disallowance u/s.14A is called for when the AO is not satisfied with the assessee s claim of having incurred no expenditure or some amount of expenditure in relation to exempt income. Satisfaction of the AO as to the incorrect claim made by the assessee in this regard is sine qua non for invoking the applicability of Rule 8D. Such satisfaction can be reached and recorded only when the claim of the assessee is verified. If the assessee proves before the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en rejected and disallowance could have been made as per rule 8D. However, it is found that the Assessing Officer has not considered the claim of the assessee at all and he has straightway embarked upon computing disallowance under rule 8D. The Commissioner (Appeals) made an assumption that whenever exempt income is earned there will be some expenditure incurred in relation thereto. Such presumption cannot form the basis for making disallowance under rule 8D. 2.7. In the case of Priya Exhibitors (P) Ltd vs. ACIT (2012) 54 SOT 356 it was held as under: From the careful study of the observations made by the Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. (supra), it is apparent that first the Assessing Officer has to determine the claim of the assessee regarding expenses which neither the Assessing Officer nor the Commissioner (Appeals) has done in the instant case. In fact, the said decision goes against the department itself in so far as their Lordships has held that the Assessing Officer must in the first instance determine whether the claim of the assessee is correct and determination must be made having regard to the accounts of the assessee. The Legisla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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