TMI Blog2017 (1) TMI 1143X X X X Extracts X X X X X X X X Extracts X X X X ..... med, Accountant Member By Appellant : Shri P. N. Rajendran, FCA By Respondent : None ORDER Per Waseem Ahmed, Accountant Member This appeal by the assessee is against the order of Commissioner of Income Tax (Appeals)-XII, Kolkata dated 27.09.2013. Assessment was framed by ACIT, Range-11, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) vide his order dated 26.09.2011 for assessment year 2009-10. 2. At the time of hearing we find that anybody neither appeared on behalf of Revenue nor filed any adjournment application. However we decided to hear this appeal in presence of Shri P.N. Rajendra, Ld. Authorized Representative on behalf of assessee. We also find that this is an old appeal and has been fixed for hearing several times (including today s hearing) hence, we decided to proceed for hearing this appeal in presence of Ld. AR. 3. Solitary issue raised by assessee in this 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age of divided yielding investments in 14 companies only as on 31.03.2008 and 31.03.2009 as per Rule 8D(iii) and not the average of total investments. Moreover, the AO has also taken incorrectly the cost of non-dividend bearing investments. In this regard, reliance may be made to the decision of Hon'ble jurisdictional ITAT, Kolkata in the case of REI Agro Ltd. Vs- DCIT [ITA No.1131/Kol/2011] wherein it has been held that for making disallowance us/s 14 read with rule 8D in respect of the income which is exempted dos not form part of the total income, the only investment which has given rise to the exempted income should be taken into consideration and not the entire investment made by the assessee. In the light of the above discussion and findings, considering the entire facts of the case including the appellant s submission and respectfully following the above order of the Hon'ble ITAT, Kolkata, the AO is directed to recomputed the average 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/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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.] 7.1 From the plain reading, it is clear that the Assessing Officer needs to invoke the provisions of section 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. Sub-section (2) was inserted so as to provide a uniform method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of nontaxable income by 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. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income 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 Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 essentially apportions the amount of expenditure by way of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure - one half percent of the average value of the investment, income from 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the dividend proceeds. In view of this finding of fact, disallowance under section 14A was not sustainable. Whether, in a given situation, 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 for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. Consequently, the disallowance was not permissible. 15. The Coordinate Bench in the case of Justice Sam P Bharucha vs. Addl. CIT in ITA No.3889/Mum/2011 dated 25.07.2012 has analyzed similar issue and came to the following conclusion: 5 We have considered the rival submissions 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/i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 5.2 Averting to the facts of the case in hand, the assessee had made a claim that no expenditure has been incurred or claimed for earning the exempt income. From the details of the expenditure, it is clear that the expenditure incurred and claimed by the assessee has direct nexus with the professional income of the assessee. It is not the case of the revenue that the assessee has used his official machinery and Establishment for earning the exempt income. The Assessing Officer has not given any finding that any of the expenditure incurred and claimed 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, finding of Assessing Officer or any material to show that the expenditure incurred and claimed by the assessee against the taxable income has an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imply, 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 it incurred a particular expenditure in respect of earning the exempt income and the AO gets satisfied, then there is no requirement to still proceed with the computation of amount disallowable as per Rule 8D. From the assessment order, it is observed that the AO simply kept the assessee s submissions on record without appreciating as to whether these were correct or not. He proceeded on the premise as if the disallowance as per Rule 8D is automatic irrespective of the genuineness of the assessee 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, firstl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer has to determine the claim of the assessee regarding expenses which neither the Assessing Officer nor the Commissioner (Appeals) has done in the instant case. In fact, the said decision goes against the department itself in so far as their Lordships has held that the Assessing Officer must in the first instance determine whether the claim of the assessee is correct and determination must 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 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. While rejecting the claim of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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