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2016 (2) TMI 381 - ITAT MUMBAI

2016 (2) TMI 381 - ITAT MUMBAI - TMI - Disallowance under section 14A - Held that:- Assessing Officer can invoke Rule 8D only when he records satisfaction in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. 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 .....

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as made nor any satisfaction was recorded by Assessing Officer in this case. It is noticed 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 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 .....

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ssee : 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/- u/s 14A of the Income Tax Act, 1961 (hereinafter the Act) read with Rule 8D of the Rules by calculating at 0.5% of the average investment. 2. During hearing, the crux of argument advanced by .....

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ee. Reliance was placed upon the decision in the case of ACIT vs Bandekar Brothers Pvt. Ltd. (2015) 155 ITD 1171 (Panji Tribunal), JK Investors (Bom.) Ltd. vs ACIT (ITA No.7858 and 7851/Mum/2011) order dated 13/03/2013 and the a decision from Hon ble jurisdictional High Court in CIT vs I.P. Support Services India (P.) Ltd. (ITA No.283/2014) order dated 24/09/2015. On the other hand, the ld. DR, Shri V.S. Jadhav, defended the addition made by the Assessing Officer and sustained by the ld. Commiss .....

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e assessee attended the proceedings from time to time and furnished the details as called for as is evident from para 3 (page-2) of the assessment order. The assessee was asked to justify the claim with respect to disallowance u/s 14A, read with rule 8D. The assessee claimed that suo-moto disallowance of ₹ 1,59,356/- has been made by the assessee, which was incurred for earning exempt income. The assessee claimed that no other expenses were incurred for earning the tax free dividend income .....

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ssion 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 upho .....

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e with such method as may be prescribed. Sub-section (2) was inserted so as to provide a uniform method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the assessee. 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 As .....

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Officer proceeds to apply the method prescribed under sub-rule (2) .. (emphasis supplied) 2.3. The same opinion was expressed by the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd and Others v. CIT 247 CTR 162 wherein reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT vs. Walfort Share & Stock Brokers Pvt. Ltd 326 ITR 1 (SC) and the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Company Ltd vs. DCIT (328 .....

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gard 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 the said Act. In other words, the requirement of the Assessing 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 cl .....

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at 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 satisfi .....

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rred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard 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. 30. As we have already noticed, sub-section (2) of Sectio .....

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is not satisfied with (a) the correctness 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 said Act for such previous 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 1 .....

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ied 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 deter .....

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her 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 of the total income, as appearing in the balance sheets of assessee, on the first day .....

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le (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above, and, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half percent of the average value of the investment, income from which does not or shall not form part of the total income, is taken. …………… 41. Sub-section (2) of section 14A, as we have seen, stipulates that the A .....

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14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) and (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the qu .....

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as 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 direct .....

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he disallowance was not permissible. 2.5. The Coordinate Bench in the case of Justice Sam P Bharucha vs. Addl. CIT in ITA No.3889/Mum/2011 dated 25.07.2012 has analyzed similar issue and came to the following conclusion: 5 We have considered the rival submissions as well as relevant material on record. Section 14A has within it implicit notion of apportionment in the cases where the expenditure is incurred for the composite/indivisible activities in which taxable and non-taxable income is receiv .....

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be allowed only to the extent they are related to the earning of taxable income. If there is expenditure directly or indirectly incurred in relation to exempt income, the same cannot be claimed against the income, which is taxable as it is held by the Hon'ble Supreme Court in case of Commissioner of Income-tax v. Walfort Share and Stock Brokers P. Ltd. reported in 326 ITR 1 that for attracting the provisions of section 14 A, there should be proximate cause for disallowance which as relations .....

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e as to whether the assessee had incurred any expenditure in relation to income which did not form part 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 .....

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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 Officer has not given any finding that any of the expenditure incurred and claimed by the assessee is attributable for earning the exempt income. In other words when the assessing officer has not pointed .....

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le income has any relation for earning the exempt income, the provisions of section 14A cannot be applied. 5.3 In the case of Shri Pawan Kumar Parameshwar Lal vs. ACIT (supra) this tribunal has considered and decided an identical issue in Para 4 as under: 4. After hearing the assessee in person and arguments of the learned D.R. we are of the opinion that no disallowance is called for under section 14A. Obviously the assessee is maintaining separate books of account for purpose of business and th .....

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ation of expenditure of ₹ 20,000/- out of business expenditure claimed in business activity cannot be considered for being incurred for this earning of tax free income of above nature. In view of this disallowance so made under section 14A of ₹ 2O,OOO/- is deleted. Not only that the CIT(A) directed the A.O. to consider the allowance invoking Rule 8D. The Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 328 ITR 81 has considered Rule 8D to be applicab .....

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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 .....

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no requirement to still proceed with the computation of amount disallowable as per Rule 8D. From the assessment order, it is observed that the AO simply kept the assessee s submissions on record without appreciating as to whether these were correct or not. He proceeded on the premise as if the disallowance as per Rule 8D is automatic irrespective of the genuineness of the assessee s claim in respect of expenses incurred in relation to exempt income. It is an incorrect course adopted by the AO. T .....

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, that the mandate of Rule 8D will operate. In the instant case, the authorities below have directly gone to the second stage of computing disallowance u/s. 14A as per Rule 8D without rendering any opinion on the correctness or otherwise of the assessee s claim in this regard. We, therefore, set aside the impugned order on this issue and restore the matter to the file of AO to recompute disallowance, if any, in accordance with our above observations after duly examining the assessee s claim in t .....

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s held as under: The Assessing Officer should have considered the claim of the assessee that no expenditure has been incurred in relation to earning the exempt income. If the claim was not found to be in consonance with the facts on record, it could have been 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. Th .....

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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 Legislature directs him to follow rule 8D only where the .....

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