Subscription   Feedback   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Articles Highlights TMI Notes SMS News Newsletters Calendar Imp. Links Database Experts Contact us More....
Extracts
Home List
← Previous Next →

D.C.I.T, Cir-10, Kolkata Versus M/s Phillips Carbon Black Ltd and Vica-Versa

2016 (10) TMI 323 - ITAT KOLKATA

Disallowance u/s 14A - fair and reasonable amount for the purpose of making disallowance u/s.14A - Held that:- As during the course of assessment proceedings AO noticed that assessee has earned dividend income of ₹ 1,65,924/- and claimed the same as exempt u/s. 10(34) of the Act. The AO required the assessee to furnish the details of expenditure incurred for earning this dividend income. The assessee in reply stated that no expenditure has been incurred to earn the said dividend income. Th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

High Court in the case of Maxopp Investment Ltd and Others v. CIT [2011 (11) TMI 267 - Delhi High Court]. The facts in the aforementioned case are clearly applicable to the facts of the case, In view of the same, we hold that the AO did not verify the accounts and claim of the assesse while applying Rule 8D and computing expenditure thereon, and, therefore, the order of the CIT-A is quashed and the grounds raised by the assesse are allowed. - I.T.A No. 2123/Kol/2013, I.T.A No. 2124/Kol/2013, CO .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

dt:15-03-2013/13-03-2013. 2. Since the issues involved in these appeals and cross objections are common, therefore, heard together with the consent of the both the parties and disposed of the same by a consolidated order for the sake of convenience. 3. First we take up ITA No.2123/Kol/2013 A.Y 2006-07 filed by the revenue 4. Ground no.1 raised by is as under:- 1. Whether Ld CIT(A)-XII, Kolkata, was justified in holding that ₹ 1,22,89,710/- was not allowable disallowance u/s 14A on the basi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ing a loss of ₹ 16,20,03,209/-. The said return was processed determining at loss. Thereafter, on scrutiny the notices u/s. 143(2)/142(1) were issued. In response to which, the ld.A/Rs of the assessee appeared and submitted all the details including the books of accounts and information as called for before the AO. During the assessment proceedings u/s. 143(3) the AO found that the assessee has earned dividend income of ₹ 11,400/- and interest on tax free 6.75% US 64 Bonds of ₹ .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

on Rule 8D worked out the disallowance of expenditure including interest as under:- (A) Interest Debited to P & L Account Rs.3064.97 lcas (B) Opening Investments as on 01.04.2005 Rs.2035.95 lacs Closing Investments as on 31.03.2006 Rs.2906.53 lacs Therefore, Average Investments Rs.2471.24 lacs (C) Total Assets (Rs. Lacs) As on 31/3/06 As on 1/4/05 Fixed Assets 28219.99 29805.34 Investments 2906.53 2035.95 Current Assets, Loans & Advances 39177.06 34593.78 Miscellaneous Expenditure 129.3 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

d that Rule 8D notified by the Board on 24-03-2008 did not have retrospective application but the Rule was applicable only prospectively and therefore applicable from A.Y 2008-09. The CIT-A following his earlier order dated 28.03.2012 and the orders of the ITAT Kolkata in the cases of Civil Engineers Enterprises P.Ltd Vs. DCIT (ITA No. 859/Kol/2010 and ITO Vs. B.P.S Securities P.Ltd (ITA No.123/Kol/2010) on similar issue directed the AO to restrict the same u/s. 14A to 1% holding that disallowan .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ts order dated 10-06-2011 in ITA No.566/Kol/2009 & CO 39/K/09 for the AY 2004-05 in assessee s own case has held as under page 2 & 10 of the paper book. 10. Heard and perused the record. The Hon ble Third Member in assessee s own case for AY 2004-05 supra held that the disallowance of 1% as directed by the CIT-A of the exempt income is fair and reasonable. The order of the Hon ble Third Member was also followed by the CIT-A-XXIV in assessee s own case for the AY 2007-08. Further, the ITA .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e facts and circumstances of the case, the disallowance of ₹ 2 lakhs on ad hoc basis proposed by ld. JM or disallowance of expenses to 1% of the total exempted income proposed by ld.AM is justified under section 14A of the I.T Act, 1961. 2. Hon ble President, ITAT nominated Shri G.D Agarwa, Hon ble Vice President (AZ)KZ) as Third Member. The Hon ble Third Member vide his order dated 27.05.2011 has concurred with the findings of ld. Accountant Member by observing as under:- 7. I have consid .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ed to the order of the Id C.I. T (A) only on the issue -of application of Rule 8D for the purposes of making disallowance u/s 14A of the Act. Perusal of the grounds of cross objection showed that the assessee did not challenge the disallowance made by the A.O. at ₹ 42,130/-, but objected only to the application of Rule 8D which in its opinion was not applicable for assessment year under consideration, i.e. A. Y 2004-05. I find merit in the submissions of the learned counsel for the assesse .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he Ld. Members relied on the decision of Hon 'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd (supra). Therefore, once both the Ld. Members agreed with the . Submissions of the learned for the assessee-that Rule 8D of the Rules was not applicable and disallowance u/s. 14A of the Act could not be made with reference to said Rule 8D in assessment year 2005-06, then the question remains whether it was open for the Tribunal to estimate amount disallowable on any bas .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

D was required to be vacated. Since the assessee did not challenge the order of the A.O making the disallowance u/s. 14A calculating' the amount disallowable @ 1% of the total exempt income, then it was not open for the Tribunal to go into the question of quantification of amount disallowable, because neither the assessee nor the revenue had challenged the estimation of amount disallowable, as made by the A.O. in the assessment order. In these circumstances. the Tribunal cannot go into the q .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ng the order as per the majority view". 11. In view of the above, in accordance with the majority view, we hold that the expenses at 1% of the total exempt income is reasonable as disallowable u/s. I4A of the Act as held by the Third Member in ITA No. 566/Kol/09 & CO 39/Kol/09 for the A.Y 2004-05 in assessee s own case supra. Therefore,, accordingly, the ground no-1 raised by the Revenue is dismissed. 12. Ground no.2 raised by the revenue is as under:- 2. Whether Ld CIT(A)-XII, Kolkata, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

was claimed as an expenditure in the return. The assessee has made the following submission in support of its claim. "During the previous year, the assessee incurred flying rights charges of ₹ 3,40, 00, 000/- for the aircraft flying rights taken by the assessee from Spencer Travel Services Ltd. The assessee entered into an agreement dated 17.11.03 with M/s Spencer Travel Services Ltd whereby the assessee agreed to take exclusive flying rights of an aircraft being a Beechjet 400 Aircr .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

cattered in different parts of the country and outside. To cater to the business needs of the company the company had decided to take on hire the exclusive flying rights of an aircraft and thus entered into the agreement dated 17.11.03 with M/s Spencer Travel Services Ltd (copy attached). By virtue of the said agreement the assessee was always made available of the aircraft for the flying needs of its senior officials. If a reference is made to the aforesaid agreement, Spencer Travel Services Lt .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

sions of the assessee and following the similar payments made in AY 2005-06 disallowed 25% of the expenditure of ₹ 340 lacs, amounting to ₹ 85,00,00/- being non-business purpose and added the same to the total income of the assessee. 15. On first appeal, the CIT-A relying on his earlier order dated 30-11-2011 for AY 2005-06 deleted the disallowance 25% of the expenditure incurred on aircraft flying rights charges. 16. Aggrieved by such order of the CIT-A, now the Revenue before the T .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the Hon ble Calcutta High Court, wherein the revenue s appeal was dismissed by upholding the order dated 13th November, 2013 of the Tribunal in ITA No. 235/Kol/2012 for the AY 2005-06 on similar issue and in ITA No.741/Kol/2012 & 939/K/2012 for AY 2007-08. The Ld. DR conceded that the Hon ble High Court of Calcutta dismissed their appeal. In view of the same and respectfully following , ground no-2 of revenue s appeal is dismissed. 18. Ground no.3 raised by the revenue is as under:- 3. Wheth .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

as paid to M/s Sreebala Pvt Ltd. The aforesaid party catered to the customers in the non-tyre segment, which are widely scattered, and are in large numbers, and for which purposes the assessee company appointed Sreebala (P) Ltd as their consultant for market development in the non-tyre segment for sale of carbon black in Eastern India since 1994. The role of the party envisages identification of the customers, procurement of the orders from these customers, coordinating supplies and arranges col .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e of the assessee. 21. On first appeal, the CIT-A found that the issue of allowability of payment of retainership/consultancy charges paid to M/s. Sreebala P.Ltd came up before the ITAT, Kolkata in assessee s case in a.y 1996-97 and 1997-98. The Tribunal vide its order dated 26-7-04 in ITA Nos. 720 & 747/Kol/03 held that the payments made to M/s. Sreebala P.Ltd were allowable as business expenses. He further found that the Tribunal in assessee s own case for AY 1998-99 in ITA No. 232/K/04 da .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

orders deleted the disallowance being treating as business expenditure 22. Aggrieved by such order of the CIT(A) now the revenue is in appeal before us by raising the above mentioned ground. 23. At the time of hearing before us, the assessee submits that the issue involved in this ground is squarely covered in favour of assessee and against the revenue by the order of the Hon ble Calcutta High Court dated 30th October, 2014 in GA No.1382 of 2014/ITAT 31 of 2014, wherein the revenue s appeal was .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

f the Hon'ble ITAT, Kolkata in assessee's own case for Asst year 2000-01 and 2001-02, whereas the Hon'ble Mumbai ITAT in the case of New India Extrusion Ltd -vs- CIT [46 SOT Mum (10 Taxman 165) held the issue in favour of revenue? 25. During the assessment proceedings the AO found that the assessee filed the details of miscellaneous expenses along with Tax Audit Report, wherein it was observed that the assessee has incurred expenditure on guest house of ₹ 77,34,306/-. The AO, t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

squarely covered in favour of assessee and against the revenue by the order of the Hon ble Jurisdictional Calcutta High Court vide order dated 23-02-2012 & 30-10-2014 in GA Nos. 276 of 2012 & ITAT 12 of 2012 & 1382 of 2014/ITAT 31 of 2014 (in ITA No.235/Kol/2012 for the AY 2005-06), wherein the revenue s appeal was dismissed by upholding the order dated 13th November, 2013 of the Tribunal in ITA No. 235/Kol/2012 for the AY 2005-06 on similar issue. The Ld. DR conceded that the Hon bl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

on the basis of decision of the CIT(A)-XXXIV, Kolkato in assessee's own case for Asst year 2005-06, when the said decision is challenged before the Hon'ble ITAT, Kolkata? 2. Whether Ld CIT(A)-XII, Kolkata, was justified in holding that expenditure of ₹ 12,26,700/- as retainer-ship fee was allowable business expenditure when the A.O made the addition on the ground that the track record of the party to render such service was not known ? 3. Whether Ld CIT(A)-XII, Kolkata, was justif .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

as Licence Fee paid to RPG Enterprise was allowable business expenditure on the basis of decision of the Hon'ble ITA T, Kolkata in assessee's own case for Asst year 2004-05, whereas the Revenue has filed appeal before the Hon'ble ITAT, kolkata against the CIT(A)'s decision on same issue for Asst year 2004-05 ? 31. Ground nos.1 to 3 raised in ITA No.2124/Kol/2013 for the A.Y 2008-09 by the revenue are identical to that of grounds raised in ITA No.2123/Kol/2013 for the A.Y 2006-07, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Enterprise was allowable business expenditure on the basis of decision of the Hon'ble ITA T, Kolkata in assessee's own case for Asst year 2004-05, whereas the Revenue has filed appeal before the Hon'ble ITAT, kolkata against the CIT(A)'s decision on same issue for Asst year 2004-05 ? 33. During the assessment proceedings the AO found that the assessee has paid license fees of ₹ 2,91,00,000/- to RPG Enterprises. The assessee submitted as under:- "Phillips Carbon Black .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

oy experts in all fields of business on its own. As licencee of RPG Enterprises Ltd we enjoy the services of their experts readily, as and when required, though at cost. Major areas where services are provided by RPG Enterprises Ltd include, amongst others, (a) Human resources, (b) Strategic planning (c) Corporate finance, (d) Management information, (e) Forex management, (f) Taxation and legal, (g) Total quality management, (h) Project development, (i) Information technology, (j) Corporate gove .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ion facilities in place the company caters easily to markets in East, West and South India. Needless to mention, that there is a considerable saving that has arisen to the company. It all became possible since it enjoyed the services of experts of RPG Enterprises Ltd readily and timely, though at cost. The entire business strategy of our company in areas of exports, capacity enhancement, acquisition of capacities in other parts of India for geographical spread to have outposts in the consuming c .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

AT allowed the claim of assessee as deduction. 36. Aggrieved by such order of the CIT-A now the revenue is in appeal before us by raising the above mentioned ground. 37. At the time of hearing before us, the assessee submits that the issue involved in this appeal is squarely covered in favour of assessee and against the revenue by the order of ITAT in ITA No.566/Kol/09 & CO No.39/Kol/09 for the AY 2004-05 and the order of the Hon ble Calcutta High Court vide order dated 23-02-2012 for the AY .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ction 1. That on the facts and in the circumstances of the case the Commissioner of Income Tax (Appeals) erred in upholding the action of the Assessing Officer in disallowing a part of the interest and other expenses u/s 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962. 2. That on the facts and in the circumstances of the case the Commissioner of Income Tax (Appeals) should have seen that the Assessing Officer without pointing out the mistake in the disallowance of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e action of the AO by the CIT-A in making disallowances of interest and other expenses u/s. 14A of the Act. 41. During the previous year the assessee earned dividend income of ₹ 1,55,10,976/- and interest of ₹ 1,17,565/- on tax-free US 64 Bonds and claimed these as exempt u/s. 10. In response to the query, made to the assessee why management expenses should not be disallowed on pro-rata basis interms of section 14A of the Act. the AR submitted that the assessee did not incur any expe .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rther stated that against the investments of ₹ 28.06 crs held by the assessee as at 31.03.2008, the own fund stood at ₹ 242.80 crs which were far in excess of the investments in shares and securities. As such no expenses can be attributed to earning of the exempt income and disallowable u/s 14A of the Act. The submissions of the assessee are considered. However, the same is not acceptable since the assessee is bound to incur some expenditure for earning the exempt income. In view of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

on 31/3/07 31.03.08 Fixed Assets 28138.09 37541.49 Investments 2805.52 2805.52 Current Assets, Loans &Advances 42934.71 44971.50 Miscellaneous Expenditure 103.23 88.01 Total 73981.55 85406.52 Therefore, average of opening & closing total assets ₹ 79694.04 Proportionate Interest as per Rule 8D(2)(ii)(axb/c) Rs.68.46 Proportionate expenses as per Rule 8D(iii) 0.5% of (b) Rs.14.03 Total as per Rule 8D Rs.82.50 The assessee itself disallowed a sum of ₹ 2,22,500/-, therefore a fu .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nder clause (f) to the Explanation to section115JB are "the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply". Under the provisions of section 14A no 'deduction is to be allowed in respect of' expenditure incurred by the assessee in relation to income which does not form part of total income under this Act. Since the issue of expenditure related to dividend .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

al income. Therefore, insofar as computation of adjusted book profit is concerned, provisions of sub- section (2) and sub-section (3) of section 14A cannot be imported into clause (f) of Explanation to section 11SJB. The disallowance of interest of ₹ 1,29,10,000/- was made in terms of section 14A(2) read with Rule 8D(2)(ii) and the disallowance of expenses of' ₹ 14.28,000/- was made in terms of section 14A(2) read with Rule 8D(2) (iii) and the same therefore cannot be added under .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Essar Teleholdings Ltd vs. DClT [ITA No. 38S0/Mum/20101 dated 29.07.2011. In the circumstances it is,submitted that no addition of the expenses including interest amounting to ₹ 80,27,500/- disallowed u/s 14A by invoking the provisions of Rule 80 in the computation of total income under the normal provisions of the Act in the assessment order made u/s 143(3) can be made under clause (f) to the Explanation to section 115JB. The appellant therefore submits that the addition of ₹ 80,27, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

1961 for earning the exempt income. The assessee has earned exempted income of ₹ 15510976/- and interest income of ₹ 117565/- during the relevant assessment year. The AO has calculated expenditure under rule 8D in order to earn the exempted income. The A.R has submitted that the assessee did not incur any expenditure for earning this exempted income. I have considered the finding of the AO and the written submission filed by the A.R. I think after the amendment brought in the Financ .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

now the assessee before the Tribunal by filing respective ground as mentioned hereinabove. 45. At the time of hearing before us the Ld.AR submits that the Asseesee suo moto disallowed an amount of ₹ 2,22,500/- and argued assessee s own funds are larger than the investments and no part of loan was utilized for investments. Further submitted that the assesse is a promoter of CEAT company and earned exempt income and relied on by the order dated 14-05-2013 of Ä bench of Kolkata Tribunal .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

to examine is as to whether the AO rightly invoked Rule 8D without verifying the correctness of claim of assesse in the facts and circumstances of the case. 49. We find from the order of AO that the assesse was holding investment to the tune of Rs..28.06 crores and its own fund standing at ₹ 242.80 crores on 31-08-2008 and it is clear from the same that the funds were in surplus than that of investments and the AO did not accept contentions of the assessee. The observation of the AO was th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

o the order dt:14-05-13 of ITAT, Kolkata, A Bench, Kolkata in ITA No.1811/Kol/2012 for the AY 2009-10 in the case of supra has disposed of the issue by observing as under:- 5. This issue in this appeal of revenue is against the order of CIT(A) deleting the addition made by AO by invoking the provisions of section 14A read with Rule 8D(2)(iii) of the I. T. Rules, 1962. For this, revenue has raised following two grounds: 3. That on the facts and in the circumstances of the case the CIT(A) has erre .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ave heard rival submissions and gone through facts and circumstances of the case. Brief facts leading to the above issue are that during the course of assessment proceedings AO noticed that assessee has earned dividend income of ₹ 1,65,924/- and claimed the same as exempt u/s. 10(34) of the Act. The AO required the assessee to furnish the details of expenditure incurred for earning this dividend income. The assessee in reply stated that no expenditure has been incurred to earn this dividen .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e is identified which can be directly attributable to earning of such income or making of the long term investments listed above. Therefore, this figure is adopted at NIL. ii) Disallowance of Interest not invoked. Amount to be disallowed A*B/C = NIL iii) Disallowance of ½% of average value of investment ₹ 107,29,27,282/- * 0.5% = ₹ 53,64,636/- Total disallowance u/s. 14A ₹ 53,64,636/- 7. Aggrieved, assessee challenged the disallowance made by invoking the provisions of s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

vestment of ₹ 110,79,27,282/-. The assessee before us stated that it has accumulated funds i.e. share capital and reserves surplus at ₹ 602,22,55,755/-. The assessee before us also contended that no loans or borrowed funds were taken for making investment in shares. This issue is covered by the decision of Mumbai Tribunal in the case of J. K. Investors (Bombay) Ltd. Vs. ACIT in ITA No.7858/Mum/2011, AY 2008-09 dated 13.03.2013, wherein it has been held as under: 11. We have heard the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ns for such computation. The crux of argument of AR is with reference to Section 14(2) which is as under: 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 AO having regard to the accounts of assessee, is not satisfied with the correctness of the claim of assessee in respect of such expenditure in relation to income which does not f .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

(2) and Rule 8D. The Hon'ble Bombay High Court while upholding the constitutional validity of the section 14A and Rule 8D has this to observe with reference to sub section 2 & 3 of section 14A: Sub-sections (2) and (3) of section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from April 1, 2007. Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which do .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

er is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. These safeguards which are implicit in the requirements of fairness and fair procedure under article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under sub-section (2) of section 14A. Sub-rule (1) of rule 8D of the Income-tax Rules, 1962, has also incorporated the essential requi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rt in the case of Godrej and Boyce Company Ltd vs. DCIT (328 ITR 81). The relevant portions of the judgment of Hon'ble Delhi High Court are as under: 29. Sub-section (2) of Section 14 A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nding 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

xempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

8D. 30. As we have already noticed, sub-section (2) of Section 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is - "such method as may be prescribed". We have already mentioned above that by virtue of Notification No.45/2008 dated 24/03/2008, the Central Board of Direct Taxes introduced Rule 8D in the said Rules. The said Rule 8D also makes it clear that where the Assessing Officer, havi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

may observe that Rule 8D(1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Subsections (2) and (3) of Section 14A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nes sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. 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 essential .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

appearing in the balance sheets of assessee, on the first day and the last day of the previous year, It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under section 14A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expenditure is st .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tion (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 prescribed". of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fu .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

on must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of subsection (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method. 14. The Hon'ble Punjab & Haryana High Court in the case of CIT vs. Hero Cycles Ltd 323 ITR 518 (P&H) has also held t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

a question of fact. The contention of the Revenue that directly or indirectly some expenditure was always incurred which must be disallowed under section 14A and the impact of expenditure so incurred could not be allowed to be set off against the business income which may nullify the mandate of section 14A, could not be accepted. 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, di .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

activities in which taxable and non-taxable income is received. But when it is possible to determine the actual expenditure in relation to the exempt income or when no expenditure has been incurred in relation to the exempt income, then principle of apportionment embedded in section 14 A has no application. The objective of section 14 A is not allowing to reduce tax payable on the normal exempt income by debiting the expenditure incurred to earn the exempt income. Thus, the expenses incurred to .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

hould be proximate cause for disallowance which as relationship with the tax exempt income. 5.1 The expenditure incurred in relation to the income which does not form part of total income has to be disallowed. However, it should be proximate relationship between the expenditure and the income, which does not form part of total income. Once such proximity relationships exist, the disallowance is to be effected. In case the assessee had claimed that no expenditure has been incurred for earning the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

an actual expenditure in relation to earning the income not forming part of total income. If the expenditure is incurred with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance can be made under section 14A merely because some tax exempt income is received by the assessee. 5.2 Averting to the facts of the case in hand, the assessee had made a claim that no expenditure has been incurred o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

me. In other words when the assessing officer has not pointed out that certain expenditure is not incurred for earning the professional income; but are incurred in relation to dividend income or such expenditure is incurred for inseparable and indivisible activities comprising professional as well as the activities on which is exempt income has been earned by the assessee, then in the absence of any such instance of expenditure, finding of Assessing Officer or any material to show that the expen .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ning separate books of account for purpose of business and these investments are in his personal capacity. The A.O. also has not disallowed any expenditure of personal nature out of the income from business or profession in the computation of income in the assessment order. In view of this, we are of the opinion that the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity that too on dividend, PPF interest and tax free interest on .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

. DCIT 328 ITR 81 has considered Rule 8D to be applicable prospective and since the assessment year involved is before the introduction of sub section (2) & (3) of section 14A, there is no question of disallowing the amounts invoking Rule8D. Therefore, the CIT(A) s direction on this is set aside and the additions so made by the A.O. in the computation of business income is deleted. Ground is considered allowed. 5.4 Similarly in case of Auchtel Products Ltd (supra), it was held by this Tribun .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

led for when the AO is not satisfied with the assessee s claim of having incurred no expenditure or some amount of expenditure in relation to exempt income. Satisfaction of the AO as to the incorrect claim made by the assessee in this regard is sine qua non for invoking the applicability of Rule 8D. Such satisfaction can be reached and recorded only when the claim of the assessee is verified. If the assessee proves before the AO that it incurred a particular expenditure in respect of earning the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t income. It is an incorrect course adopted by the AO. The correct sequence, in our considered opinion, for making any disallowance u/s. 14A is to, firstly, examine the assessee s claim of having incurred some expenditure or no expenditure in relation to exempt income, If the AO gets satisfied with the same, then there is no need to compute disallowance as per Rule 8D. It is only when the AO is not satisfied with the correctness of the claim of assessee in respect of such expenditure or no expen .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

servations after duly examining the assessee s claim in this regard. 6. In view of the above discussion and facts and circumstances of the case, we are of the considered opinion that no disallowance under section 14A is called for when the assessee has not incurred and claimed any expenditure for earning the exempt income. 16. Similar views were also expressed by the Coordinate Benches in the case of Relaxo Footwears Ltd, vs. Addl. CIT (2012) 50 SOT 102 and Priya Exhibitors (P) Ltd vs. ACIT (201 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ay embarked upon computing disallowance under rule 8D. The Commissioner (Appeals) made an assumption that whenever exempt income is earned there will be some expenditure incurred in relation thereto. Such presumption cannot form the basis for making disallowance under rule 8D. 17. In the case of Priya Exhibitors (P) Ltd vs. ACIT (2012) 54 SOT 356 it was held as under: From the careful study of the observations made by the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

egislature directs him to follow rule 8D only where the Assessing Officer is not satisfied with the claim of assessee. 18. After considering the principles laid down by various judgments, it is imperative that the 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 expendit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

and then if he is not satisfied with the correctness of the claim, only he can invoke Rule 8D. No such examination was made or satisfaction was recorded by AO in this case. It was 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 port folio management involves at least 2% of charges. Disallowance under section 14A required finding of incurring of expenditure and .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

for any reason. Rule 8D cannot be invoked directly without satisfying about the claims or otherwise. Consequently, the disallowance was not permissible. We therefore, allow the ground of appeal. 9. We find from the facts of the above case that the AO has not examined the accounts of the assessee and there is no satisfaction recorded by the AO about the correctness of the claim of the assessee and without the same he invoked Rule 8D of the Rules. While rejecting the claim of the assessee with re .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 

what is new what is new
  ↓     bird's eye view     ↓  


|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version