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TMI Blog2017 (1) TMI 1143X X X X Extracts X X X X X X X X Extracts X X X X ..... his appeal is that Ld. CIT(A) erred in giving relief in part to assessee u/s 14A r.w.s. Rule 8D(2)(iii) of the Income Tax Rules, 1962 ('the Rule' for short). The assessee has raised the following grounds of appeal. 1. That on the facts & circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) ought to have held that no disallowance could be made u/s 14A of the Income Tax Act, 1961 (the Act) and hence erred in directing the Assessing Officer to apply rule 8D(2)(iii) of the Income Tax Rules, 1962 (the Rules) and to re-compute the estimate of disallowance of expenses u/s. 14A of the Act in spite of his findings that the Assessing Officer has not recorded his satisfaction before invoking rule 8D of the Rules." 4. Briefly, the facts are that assessee the assessee in the present case is a Private Limited Company and is registered as Non-Banking Finance Company with Reserve Bank of India. The assessee for the year under consideration has earned exempted dividend income for Rs. 55,17,162/- but no disallowance of the expense incurred in connection with the dividend income in terms of provision of Sec. 14A r.w.s Rule 8D of IT Rules was made. On question by AO fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge value of investment considering the investment which has given rise to the exempted income only in view of working out the estimated disallowance of expenses us/s 14A @ 0.5% as per Rule 8D(2)(iii) and restrict the disallowance u/s.14A of the Act accordingly. Thus, this ground of appeal is partly allowed." Being aggrieved by this, assessee has come up an appeal before us. 6. Before us Ld. AR for the assessee filed paper book which is running pages from 1 to 16 and submitted that assessee has claimed administrative and other expenses to the tune of Rs. 1,98,732/- only in the year under consideration. None of the expense was incurred in connection with the earning of dividend income. The ld. AR in support of assessee's claim drew our attention on page 14 of the paper book where the detail of administrative and other expense was placed. On the other hand, Ld. DR vehemently relied on the order of Authorities Below. 7. We have gone through the submissions made by both the parties and perused the materials available on record. In the present case the AO has invoked the provisions of section 14A of the Act read with rule 8D(2)(iii) of Income Tax Rules 1962. Accordingly the AO disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 154, for any assessment year beginning on or before the 1st day of April, 2001.]" 7.1 From the plain reading, it is clear that the Assessing Officer needs to invoke the provisions of section 14A only after considering the books of accounts of the assessee. What appears from the facts of the case before us that the AO has not considered the books of accounts of the assessee and had mechanically applied the provisions of section 14A read with rule 8D which is not permissible under the provisions of law. It is because the total expenses claimed by the assessee are much lesser than the expenses disallowed by the lower authorities. This act clearly shows that no regard was given to the books of accounts of the assessee. We find that the AO has not brought on record anything which proves that there is any expenditure incurred towards earning of this dividend income. 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 arguments of the parties and have perused the material placed before us. The issue as carve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Income-tax Rules, 1962, has also incorporated the essential requirements of sub section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2)" .. (emphasis supplied). 13. The same opinion was expressed by the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd and Others v. CIT 247 CTR 162 wherein reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT vs. Walfort Share & Stock Brokers Pvt. Ltd 326 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer 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 8D also makes it clear that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elation 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 straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above, and, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half percent of the average value of the investment, income from which does not or shall not form part of the total income, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions as well as relevant material on record. Section 14A has within it implicit notion of apportionment in the cases where 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 incurred to earn the exempt income. Thus, the expenses incurred to earn exempt income cannot be allowed and the expenses shall be allowed only to the extent they are related to the earning of taxable income. If there is expenditure directly or indirectly incurred in relation to exempt income, the same cannot be claimed against the income, which is taxable as it is held by the Hon'ble Supreme Court in case of Commissioner of Income- tax v. Walfort Share and Stock Brokers P. Ltd. reported in 326 ITR 1 that for attracting the provisions of section 14 A, there should be proxima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of expenditure, finding of Assessing Officer or any material to show that the expenditure incurred and claimed by the assessee against the taxable income has any relation for earning the exempt income, the provisions of section 14A cannot be applied. 5.3 In the case of Shri Pawan Kumar Parameshwar Lal vs. ACIT (supra) this tribunal has considered and decided an identical issue in Para 4 as under: "4. After hearing the assessee in person and arguments of the learned D.R. we are of the opinion that no disallowance is called 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 capacity that too on dividend, PPF interest and tax free interest on RBI bonds. In view of this, we are of the opinion that estimation of expenditure of Rs. 20,000/- out of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expenditure having been incurred in relation to exempt income, that the mandate of Rule 8D will operate. In the instant case, the authorities below have directly gone to the second stage of computing disallowance u/s. 14A as per Rule 8D without rendering any opinion on the correctness or otherwise of the assessee's claim in this regard. We, therefore, set aside the impugned order on this issue and restore the matter to the file of AO to re-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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not satisfied with the correctness of the claim of the assessee in respect of such expenditure. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. Therefore, it is all the more necessary 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 under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. We notice that assessee itself disallowed the interest which is directly applicable, Dmat charges and administrative exp on estimation totaling to Rs. 1,55,44,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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