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2016 (10) TMI 323 - ITAT KOLKATA

2016 (10) TMI 323 - ITAT KOLKATA - [2016] 50 ITR (Trib) 482 - 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 expe .....

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he Tribunal taken support from the ratio of the Hon'ble Delhi 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 al .....

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against the separate orders of the CIT(Appeals)-XII, Kolkata 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, .....

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ale of power. The assessee filed its return on 30-11-06 declaring 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 ₹ .....

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ion and contention of the assessee was rejected. The AO, based 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 &a .....

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ce Mfg. Co. Ltd Vs. CIT reported in 328 ITR 81, wherein it held 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 .....

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Third Member, ITAT, Kolkata, wherein the ITAT, Kolkata vide its 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-XX .....

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on 255(4) of the I.T Act, 1961 for his opinion:- Whether in the 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 .....

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, 770/-. In the grounds of cross objection the assessee objected 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 m .....

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ectively from A. Y. 2008-09. In support of this finding both the 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 op .....

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the Id. C.I.T·(A) for making disallowance as per Rule 8D 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 or .....

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come. 8. The matter will now go to the regular Bench for passing 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 b .....

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aircraft rent amounting to ₹ 3,40,00,000/- and the same 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 exc .....

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t different locations in the country. The customers are also scattered 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 .....

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thereof " . 14. The AO after considering the above submissions 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. Aggr .....

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paper book. In this case the revenue preferred appeal before 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 .....

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vious year, retainership fees amounting to ₹ 12267001- was 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 order .....

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under consideration and added back the same to the total income 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 Tribuna .....

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e CIT-A relying on order of Tribunal and following his earlier 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. .....

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was allowable business expenditure on the basis of decision of 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 incurre .....

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ing before us, the assessee submits that the issue in hand is 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 .....

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0/- as flying rights charge was allowable business expenditure 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 .....

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ustified in holding that expenditure of ₹ 2,91,00,000/- 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 .....

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xpenditure of ₹ 2,91,00,000/- 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 ? 33. During the assessment proceedings the AO found that the assessee has paid license fees of ₹ 2,91,00,000/- to RPG Enterprises. .....

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ely essential but it is very difficult for the company to employ 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) Proje .....

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ntially expanded the production capacities. With these production 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 Ind .....

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he various submissions and relying on earlier orders of the ITAT 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 .....

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by the assessee. 39. The assessee raised Grounds of Cross-Objection 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 O .....

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demic in nature. 40. Ground no s 1 to 3 relate to upholding the 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 .....

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me can be attributed to earn the aforesaid income. The A/Rs further 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 inc .....

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ge Investments Rs.2471.24 lacs (c) Total Assets in Rs. Lacs as 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 .....

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der: It is submitted that the only addition that can be made under 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 unde .....

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xpenses incurred in relation to income not forming part of total 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 .....

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] dated 18.02.2011 and by the: Mumbai Tribunal in the case of 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 a .....

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f calculation under Rule 8D read with sec. 14A of the I.T Act, 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 .....

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no. 1 is dismissed. 44. Aggrieved by such order of the CIT-A 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 t .....

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the material available on record. 48. The question before us 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 .....

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ne the expenses as per Rule 8D. In this regard, we may refer to 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 .....

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, which are evident from the recordings of note-sheet. 6. We have 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 sta .....

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i) Direct expenses : In the P&L A/c no item of expenditure 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 ch .....

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e us clarified that it has own funds to cover up the entire investment 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. .....

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rectness of computation of disallowance and giving valid reasons 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 resp .....

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eal is with reference to invoking of provisions of section 14A(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 expenditu .....

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y adoption of the prescribed method. The invocation of the power 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 Inc .....

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ITR 1 (SC) and the decision of the Hon'ble Bombay High Court 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 .....

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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 .....

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asserts that no expenditure had been incurred in relation to exempt 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 cl .....

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ficer would have to indicate cogent reasons for the same. Rule 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 .....

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accordance with the provisions of sub-rule (2) of Rule 8D. We 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 .....

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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. 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 attributa .....

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which does not or shall not form part of the total income, as 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 aspec .....

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is taken. …………… 41. 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 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 .....

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with regard to the extent of such expenditure and such rejection 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 .....

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any expenditure was incurred which was to be disallowed, was 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 fo .....

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ere the expenditure is incurred for the composite/indivisible 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 incur .....

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1 that for attracting the provisions of section 14 A, there should 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 .....

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ioned for the purpose of earning exempt income unless there is 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 ass .....

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ed by the assessee is attributable for earning the exempt income. 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, findi .....

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alled for under section 14A. Obviously the assessee is maintaining 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 capaci .....

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High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. 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 ca .....

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aim. To put it simply, the further disallowance u/s.14A is called 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 .....

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e s claim in respect of expenses incurred in relation to exempt 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 th .....

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-compute disallowance, if any, in accordance with our above observations 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. CI .....

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nsidered the claim of the assessee at all and he has straightway 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 .....

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t be made having regard to the accounts of the assessee. The Legislature 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 Offic .....

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ecessary that AO has to examine the accounts of assessee first 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 unde .....

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income, nor gave a finding that assessee claim is not correct 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 o .....

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