TMI Blog2011 (8) TMI 1193X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration. - ITA NO.1050/MUM/2010 - - - Dated:- 5-8-2011 - SHRI R.S.SYAL(A.M) AND SHRI N.V.VASUDEVAN(J.M) For the Appellant: Shri Chetan A. Karia For the Respondent: Shri Satbir Singh ORDER PER N.V.VASUDEVAN, J.M, This is an appeal by the assessee against the order dated 4/12/2009 of CIT(A)-38, Mumbai relating to assessment year 2008-09. 2. The assessee is a company. It is a regulator and carries on the activity of a commodity exchange. The activities of the exchange are carried on by members of the exchange on an electronic platform and infrastructure provided by the assessee. The activities of the members are supervised and monitored by the assessee. The major source of income of the assessee is receipt of membership fee on grant of membership to new members, annual recurring fees and transaction processing charges for transaction carried out on the platform provided by the assessee. In order to carry out various transactions smoothly and on a regular and consistent basis, the assessee also invites deposits from the constituents. Such deposits are also allowed to be treated as margin money for transaction carried out by them. The amounts recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch income they were in the form of cost of employees who shall take decision of making investments/ disinvestments as also cost of employees carrying out account entries of such transactions. The assessee had worked out the details of such indirect expenses and filed such details before the assessing officer. Based on such details, the amount disallowed were as under: Nature of expenses Amount Rent 167562 Salary 408807 Staff welfare expenses 9452 Telephone expenses 18000 Total 603821 The assessee had also explained to the assessing officer as to how no amount was disallowable on account of direct expenses to earn such exempt income and that ₹ 6,03,821/- was incurred by way of indirect expenses. The Assessee submitted that in order to make investments the company had a dedicated person looking after investment decision and accounting thereof. He was also supported by a peon. He was also provided with a computer. He was using office p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of rule 8D could not be applied to the case of the appellant. 9. We have heard the submissions of the ld. counsel for the assessee, who submitted that the AO was not justified in applying Rule 8D of the Income Tax Rules. In this regard the ld. counsel for the assessee drew our attention to the provisions of section 14A(2) of the Act and submitted that assessee had claimed before the AO that only a sum of ₹ 6,03,821/- can be considered as expenses incurred by the assessee in relation to income which does not form part of the total income under the Act. When such claim is made by the assessee the AO was required to apply his mind to the plea of the assessee. He was also expected to give a finding that he is not satisfied with the correctness of the claim made by the assessee. The AO also expected to spell out the reasons as to why the claim made by the assessee cannot be accepted. It is only after doing so that the AO can resort to the provisions of Rule 8D of the Rules. In this regard out attention was also drawn to the decision of the Hon ble Bombay High Court in the case of Godrej boyce Manufacturing Co. Ltd., 328 ITR 81(Bom), wherein the Bombay High Court has la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inserted earlier by the Finance Act of 2002 with retrospective effect from 11.5.2001) Under subsection (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 the total income under the Act in accordance with such method as may be prescribed. The method, having regard to the meaning of the expression prescribed in Section 2(33), must be prescribed by rules made under the Act. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the 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 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the amount of expenditure incurred in relation to income which does not form part of the total income in accordance with the method that may be prescribed. The circular, however, reiterates that the Assessing Officer has to follow the prescribed method if he is not satisfied with the correctness of the claim of the assessee having regard to the accounts of the assessee. (underlining by us for emphasis) 12. It is clear from the observations of the Hon ble Bombay High Court referred to above that the application of Rule 8D of the Rules is not automatic. When the assessee makes the claim regarding the quantum of expenses to be disallowed in terms of section 14A of the Act, it was incumbent on the part of the AO to consider the claim of the assessee. It is only when the AO is not satisfied with the claim of the assessee he can have recourse with the provisions of Rule 8D of the Income Tax Rules. The satisfaction that the claim made by the assessee regarding expenses incurred in relation to the income which does not form part of the total income under the Act, is not correct, has to be arrived at by the AO, on an objective basis. In the present case, we find that the AO has proc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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