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Alidhara Textool Engineers P. Ltd. Versus DCIT, Circle-1, Surat

2016 (5) TMI 471 - ITAT AHMEDABAD

Disallowance u/s 14A r.w.r. 8D - Held that:- Rule 8D comes into operation where the Assessing Officer is not satisfied in relation to income which does not form part of the total income under this Act and thereafter if the Assessing Officer is unable to determine the amount of such expenditure incurred in relation to the income which does not form part of the total income then he may resort to the method with prescribed in Rule 8D of the IT Rules, 1962.

Assessing Officer completely ig .....

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f the dealings of the assessee in regard to investment for various mutual funds including switching but not switching out from one fund to another in order to optimum benefit to the assessee. In the given situation where the assessee has himself added a sum of ₹ 11,71,455/- to its total income in relation to expenditure incurred for earning exempt income then there remains no reason to sustain the addition of ₹ 8,84,542/- as made by ld. Assessing Officer under the provisions of secti .....

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008- 09 on 31.3.2010 u/s 143(3) of the IT Act, 1961 (in short the Act). Assessee has raised following grounds of appeal :- 1. On the facts and in circumstances of the case as well as law on the subject, the learned Commissioner of Income-tax (Appeals) has erred in confirming the action of the assessing officer by sustaining disallowance of ₹ 8,84,5421- u/s 14A of the IT. Act, 1961 as alleged expenditure incurred in relation to the exempt income. 2. It is therefore prayed that above disallo .....

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assessment and notice u/s 143(2) of the Act was issued on 27.8.2009 and duly served on the assessee. Assessment was completed after making following two additions : i) Excess claim of deduction u/s 80IB Rs.28,548 ii) disallowance u/s 14A of the IT Act Rs.8,84,542/- Rs.9,13,090/- And income was assessed at ₹ 35,46,41,200/-. 3. On appeal before ld. CIT(A) assessee could not succeed and addition of ₹ 9,13,090/- was confirmed. 4. Assessee is now in appeal before the Tribunal against the .....

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t no expenditure was shown in relation to such income. Therefore, Assessing Officer asked assessee to furnish the details of expenditure incurred in relation to such exempt income. In response to the same assessee explained that entire Investment is made in the year under consideration out of its own funds and hence no cost can be associated in making the said investment. It is to be noted that assesee has already disallowed Management fees of ₹ 11,01,973/- which comprises of Portfolio man .....

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ed the same to the total income of assessee. Ld. AR also submitted that assessing officer has erred in making disallowance u/s 14A of the Act. The assessing officer has failed to properly appreciate the explanation given during the course of assessment proceedings. The dividend amounting to ₹ 4,30,64,998/- is credited by assessee which is mostly received through ECS or automatically reinvested under dividend reinvestment option and both of which possibly do not require any human efforts. I .....

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t & Loss A/c that assessee has not claimed any interest or financial charges and thus, the contention of assessee that no cost has been incurred for making above investment stands proved beyond any shadow of doubt. The above facts were clearly explained by assessee in his aforesaid letter. Now when assessee in fact did not incur any further expenditure for earning dividend income, it is imperative on the part of assessing officer to record his satisfaction as to why the contention of assesse .....

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Sales and Administrative expenses at Pg. No. 15 of the Paper Book. However, assessing officer did not record any such satisfaction nor did he consider the disallowances already made by assessee in the computation but has mechanically proceeded to make disallowance on the basis of formula given u/s 14A of the Act. The assessing officer has not even cited any expenditure which could possibly be linked with the earning of exempt income. 6. On the other hand, ld. DR supported the orders of lower au .....

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irm at ₹ 1,52,92,255/-. However, he could not trace out from the records that any expenditure in relation to such income has been added back by assessee to its total income and accordingly he went ahead to determine the amount of expenditure in relation to dividend income which does not form part of any method under rule 8D of IT Rules, 1962 and calculated ₹ 8,84,542/- as disallowance u/s 14A of the Act. Section 14A of the Act & rule 8D of IT Rules read as under :- Sec. 14A. Expe .....

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as may be prescribed, if 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 in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this .....

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This notification amends the Income-tax Rules by insertion of a new Rule 8D providing for a "Method for determining amount of expenditure in relation to income not includible in total income". Reading this Rule it is evident that the Rule provides for disallowance of not only direct expenditure incurred for earning the exempt income but also for disallowance of proportionate indirect expenditure. This is clearly contrary to the main objective with which S. 14A was enacted. 2.2 Broadly .....

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gate of the following amounts : (a) The amount of expenditure directly relating to income which does not form part of total income. (b) In the case of interest on borrowed funds which is not directly attributable to any particular income or receipt, the amount computed in accordance with this following formula : A x B C A = Amount of interest, other than the amount of interest which is directly attributable to the exempt income stated in (a) above. B = The average of value of investment, income .....

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unt of revaluation of assets. (c) An amount equal to ½ % of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year. In our view, Rule 8D comes into operation where the Assessing Officer is not satisfied in relation to income which does not form part of the total income under this Act and thereafter if the Assessing Off .....

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