TMI Blog2016 (9) TMI 1150X X X X Extracts X X X X X X X X Extracts X X X X ..... ed method. Since, no expenses were incurred by the assessee for earning the exempt income, therefore, there is no question of making any disallowance. Even otherwise, no disallowance can be made by the Assessing Officer more than the exempt income, thus, appeal of the assessee is allowed. The Assessing Officer is directed to delete the disallowance. - Decided in favour of assessee - ITA No. 4395/Mum/2014 - - - Dated:- 18-5-2016 - Shri Joginder Singh, Judicial Member And Shri Rajendra, Accountant Member Assessee by Shri Bhupendra shah Revenue by Shri V.K. Agarwal-DR ORDER Per Joginder Singh ( Judicial Member ) The assessee is aggrieved by the impugned order dated 22/04/2014 of the Ld. First Appellate Authority, Mumbai. The only ground raised in the present appeal pertains to making disallowance of ₹ 4,61,358/- u/s 14A of the Income Tax Act, 1961 (hereinafter the Act). 2. During hearing, the ld. counsel for the assessee, Shri Bhupendra Shah, contended that no expenses were incurred by the assessee for earning exempt income, therefore, no disallowance is to be made. Our attention was invited to pages 27 and 30 of the paper book by placing reliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oked mechanically. Since the assessee has not claimed any expenditure in earning the exempt income, therefore, onus is upon the assessee to prove that particular expenditure was incurred for earning such income. Our view find support from the decision of the Mumbai Bench of the Tribunal in ACIT vs Iqbal M. Chagla (2014) 52 taxman.com 94 (Mum. Trib.), Maxoop Investment Ltd. 347 ITR 272 (Del.) and Walfort Share Stock Broker 326 ITR 1 (SC) and also the decision in Hero Cycles 323 ITR 518 (P H). 2.3. Before we go into the questions at hand it would be appropriate to not only examine the provisions of section 14A of the said act but also to notice its legislative history. Section 14A was inserted into the said Act by the Finance Act, 2001 with retrospective effect from 01/04/1962. For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. By virtue of the Finance Act, 2002, the following proviso was inserted in section 14A and was deemed to have been inserted with effect from 11/05/2001:- Provided that not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method 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 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. 2.5. By Notification No.45/2008 dated 24/03/2008, the Central Board of Direct Taxes (CBDT), in exercise o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) For the purposes of this rule, the total assets shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets. The law prior to insertion of Section 14A 2.6. Prior to the introduction of section 14A in the said Act, the position in law was as laid down by the Supreme Court in CIT v. Maharashtra Sugar Mills Ltd: 82 ITR 452 (SC) and Rajasthan State Warehousing Corporation v. CIT: 242 ITR 450 (SC). In Maharashtra sugar Mills Ltd (supra) the assessee s business comprised of two parts, namely, (1) cultivation of sugar cane and (2) the manufacture of sugar. The revenue had contended that as the income from the cultivation of sugar cane, being the result of an agricultural operation, was not exigible to tax, therefore, any expenditure incurred in respect of that activity was not deductible. The Supreme Court repelled this contention in the following manner:- This contention proceeds on the basis that only expenditure incurred in respect of a business activity giving rise to income, profit or gains taxable under the Act can be given deduction to and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the question of allowability of the expenditure under section 37 of the Act will depend on: (a) fulfillment of requirements of that provision noted above; and (b) on the facts whether all the ventures carried on by him constituted one indivisible business or not; if they do, the entire expenditure will be a permissible deduction but if they do not, the principle of apportionment of the expenditure will apply because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee. 2.8. Thus, prior to the introduction of section 14A in the said Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of the said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. However, where the business was divisible, the principle of apportionment of the expenditure was applicable and the expenditure apportioned to the exempt inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income ..Expenses allowed can only be in respect of earning taxable income. This is the purport of section 14A. In section 14A, the first phrase is for the purposes of computing the total income under this Chapter which makes it clear that various heads of income as prescribed in the Chapter IV would fall within section 14A. The next phrase is, in relation to income which does not form part of total income under the Act . It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.. (Emphasis supplied) 2.11. The Supreme Court also clearly held that in the case of an income like dividend income which does not form part of the total income, any expenditure/deduction relatable to such (exempt or non-taxab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earning of exempt income then, the expenditure could not be disallowed under section 14A provided it was otherwise allowable under sections 15 to 59 of the said Act. Mr Satyen Sethi and Dr Rakesh Gupta, who appeared for some of the assesses, also adopted the arguments of Mr Vohra and emphasized that the expenditure must be actual and cannot be computed on the basis of some formula as stipulated under Rule 8D read with sub-sections (2) (3) of section 14A. 2.13. Let us examine the expression in relation to . Mr Vohra had referred to the Supreme Court decision in Madhav Rao Scindia v. Union of India: AIR 1971 SC 530 where, in paragraph 134, it is observed as under:- .. The expression provisions of this Constitution relating to in article 363 means provisions having a dominant and immediate connection with: it does not mean merely having a reference to. 2.14. In Doypack Systems Pvt Ltd v. Union of India: AIR 1988 SC 782, the Supreme Court observed that the expressions pertaining to , in relation to and arising out of , used in the deeming provision, are used in the expansive sense. The Supreme Court further observed as under:- 49. The expression in relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther 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 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 sub-section (2) of Section 14A. Sub-section (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctness of the claim 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. 2.19. 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. (i) The first component being the amount of expenditure directly relating to income which does not form part of the total income. (ii) 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 claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct from 01.04.1962 are now encapsulated in sub-section (1) of Section 14A. It is also clear that sub-sections (2) and (3) of Section 14A were introduced subsequently by virtue of the Finance Act, 2006 and were introduced with effect from 01.04.2007. However, although sub-sections (2) and (3) had been introduced with effect from 01.04.2007, they remained empty shells inasmuch as the expression such method as may be prescribed got meaning only by the introduction of Rule 8D by virtue of the Income-tax (Fifth Amendment) Rules, 2008 which was notified by the Central Board of Direct Taxes by its notification No.45/2008 dated 24/03/2008. 2.21. We are of the view that Rule 8D would operate prospectively, because, if the said Rule were to have retrospective effect, nothing prevented the Central Board of Direct Taxes from saying so, particularly, in view of the fact that it had the power to make a rule retrospective by virtue of Section 295(4) of the said Act. Instead of making Rule 8D retrospective, clause 1(2) of the Income-tax (Fifth Amendment) Rules, 2008 made it clear that the rules would come into force from the date of their publication in the Official Gazette. It is, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cability of the provisions of subsection (2) and it clearly indicated that it would be applicable from the assessment year 2007-08 onwards . It is, therefore, clear that sub-sections (2) and (3) of Section 14A were introduced with prospective effect from the assessment year 2007-08 onwards. However, sub-section (2) of Section 14A remained an empty shell until the introduction of Rule 8D on 24.03.2008 which gave content to the expression such method as may be prescribed appearing in Section 14A(2) of the said Act. Thus, it is clear that, in effect, the provisions of subsections (2) and (3) of Section 14A would be workable only with effect from the date of introduction of Rule 8D. This is so because prior to that date, there was no prescribed method and sub-sections (2) and (3) of Section 14A remained unworkable. 2.25. So far as, as to how Section 14A to be worked for the period prior to the introduction of Rule 8D, is concerned. Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income in accordance with such method as may be pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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