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M/s. Multi Commodity Exchange of (India) Limited. Versus DCIT

2011 (8) TMI 1193 - ITAT MUMBAI

Disallowance u/s 14A - Held 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 regardi .....

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rders of the CIT(A) has to be set aside and the issue should be remanded to the AO for fresh consideration. - 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 .....

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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 received are invested in to fixed deposits of banks and units of mutual funds. While no interest is paid to the constituents on such deposits, the assessee earns interest on such deposits or earns dividend from mutual fund. The assessee had made var .....

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(a) of the Income Tax Act, 1961. Since the dividend income was exempt the AO examined the question of disallowance of expenses in earning exempt income in view of sec. 14A of the Income Tax Act, 1961 (the Act). 3. The assessee claimed that it had not paid any interest except interest on car loans and interest on loans for business purposes to the extent of ₹ 1,93,070/-(Including interest on delayed tax payment of ₹ 57,739/-). No interest was paid for any loan to earn exempt income. .....

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nvesting as also disinvesting involved banking activities as also requesting mutual funds for accepting fresh funds towards additional investments as also redemption of existing investment. These activities were fully supported by the employees of distributors of mutual funds. d. As such no direct cost either in terms of interest cost or employees cost was involved. Since there were no other direct expenses incurred no amount was disallowed by the Assessee on its own u/s.14A of the Act. 5. As fa .....

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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 supporte .....

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n the treasury operation covering the investment into mutual funds from which exempt income in the form of dividend was earned by the assessee. Similarly all expenses such as rent, telephone, conveyance, electricity expenses and security expenses were worked out on the basis of number of employees who had contributed to the total number of employees employed by the company. 6. The AO however was of the view that the disallowance under section 14A of the Act has to be made in accordance with Rule .....

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had also contended before the CIT(A) that the computation of disallowance made by the AO even as per the provisions of Rule 8D were not correct. This arguments was also rejected by the CIT(A). 8. Aggrieved by the order of the CIT(A) the assessee has preferred the present appeal before the CIT(A) and raised the followings grounds of appeal. 1. The learned Commissioner of Income Tax (Appeals) erred in confirming disallowance made by the Assessing Officer u/s. 14A. 2. The Learned Commissioner of I .....

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ellant. 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 .....

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he Hon ble Bombay High Court in the case of Godrej boyce Manufacturing Co. Ltd., 328 ITR 81(Bom), wherein the Bombay High Court has laid down that Rule 8D can be invoked only if the AO rejects the correctness of the claim made by the assessee regarding expenses incurred in relation to income which does not form part of the total income under the Act. In other respects ld. counsel for the assessee reiterated the submissions made before the revenue authorities. 10. The ld. D.R submitted that the v .....

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NCOME TAX APPEAL NO.626 OF 2010 in the case of Godrej & Boyce Mfg.Co.Ltd. Mumbai. Vs. Dy. Commissioner of Income Tax,Range 10(2), Mumbai & Anr. 328 ITR 81 (Bom) has held as follows: Insertion of Subsections (2) and (3) to Section 14A : 25. Subsections (2) and (3) of Section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from 1 April 2007. Subsections (2) and (3) provide as follows : 14A(2) The Assessing Officer shall determine the amount of expendi .....

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e claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing 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. (The proviso was in .....

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s 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 a .....

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nation 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 asse .....

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by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an Assessment Year beginning on or before 1 April 2001 either 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. 26. The circumstances in which the provisions of sub secti .....

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n (2) was inserted so as to make it mandatory for the Assessing Officer to determine 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 .....

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