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2017 (2) TMI 647 - PUNJAB AND HARYANA HIGH COURT

2017 (2) TMI 647 - PUNJAB AND HARYANA HIGH COURT - TMI - Disallowance u/s 14A - application of Rule 8-D - Held that:- There would be several instances where an Assessing Officer can come to the conclusion that the claim is incorrect but would be unable to assess the extent of the inaccuracy. That is precisely the purpose of Rule 8D. For instance in the present case, the Assessing Officer was entitled to presume that a part of the expenses from the common fund are attributable to the expenditure .....

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rred expenditure towards administrative activities necessary to earn the exempt income. If the presumption or inference is correct, as we have held it is, the Assessing Officer is entitled to resort to Rule 8D. - AO on not being satisfied with the correctness of the claim by the assessee in respect of the expenditure incurred to earn exempt income ought to have applied Rule 8D which he did not. Instead he made an estimate on the basis that he considered to be reasonable. This he was not enti .....

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ether it arises in this case open. The Assessing Officer must determine the same after taking all the provisions of law and the precedents into consideration. - If the Assessing Officer justifiably is not satisfied with the correctness of the assessee’s claim regarding the expenditure, he must resort to Rule 8D entirely for the determination of the expenditure incurred with respect to the exempt income for the purpose of section 14A. For instance, if the assessee claims that he has not incur .....

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. Rule 8D(ii) refers only to interest. We cannot read into it words that are clearly not there. - Income Tax Appeal No.458 of 2015 (O&M) - Dated:- 3-2-2017 - MR. S.J. VAZIFDAR AND MR. DEEPAK SIBAL, JJ. For The Appellant : Mrs.Radhika Suri, Senior Advocate with Ms. Rinku Dahiya, Advocate, and Mr. Manpreet Singh, Advocate For The Respondent : Mr. Zora Singh Klar, Advocate S.J. VAZIFDAR, CHIEF JUSTICE: This is an appeal against the order of the Income Tax Appellate Tribunal confirming the order of .....

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he interest paid as opposed to the net interest earned by the appellant? The appellant also raised the following question of law which it did not press:- iv) Whether in facts and circumstances of the case, the Income Tax Appellate Tribunal had fallen in error in not excluding the value of investment in subsidiaries from the computation under Rule 8D? 3. The appellant filed its return of income declaring a business income of Rs. 1,05,52,20,790/-. The case was taken under scrutiny. The assessee de .....

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e returned income. The Assessing Officer rejected the assessee s contention that no expenditure was incurred for earning the dividend income as it received the dividend by ECS credit. He held that the assessee had invested Rs. 6 crores in different securities which being volatile in nature required the assessee to keep constant vigil on the movements of prices as well as the financial group viability of the company. This he observed would require the company to incur expenses, including the sala .....

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In other words, the Assessing Officer held that the administrative expenses to manage such a large portfolio would obviously have been incurred. The Assessing Officer also rejected the assessee s contention that it had made the investments way back observing that if the funds were not blocked in these securities they would have been available to the assessee which would have obviated its need to borrow funds carrying interest from banks. Lastly, the Assessing Officer observed that the assessee .....

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have, therefore, to treat income earned as criteria to estimate expenses incurred to earn exempted income, accordingly, the expenses are apportioned as under:- Exempted income : 225.72 lacs Trading income : 96958.58-69089.21-1692.29 = 26177.08 lacs Operating expenses + Finance charges = 18162.04 - 1457.74 = 16704.30 lacs. Expenditure attributable to exempted income 16704.30 x 225.72 26177.08 = 144.03 lacs. Accordingly, addition of Rs. 144.03 lacs is made to the returned income of the assessee. P .....

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he assessment year in this appeal were not the same as in the assessment year 2004-05 the addition made under section 14A was deleted mainly on the ground that the investments in the shares of the Indian Companies had been made in the past years and the dividend income from those investments was claimed as exempt in the year 2004-05 and that no part of the interest expenditure was attributable to those investments. On the other hand in the assessment year 2008-09 which falls for consideration, f .....

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investments were made by it out of its profits and not out of borrowed funds. This submission was sought to be supported on the basis of the assessee s audit accounts. A fund flow statement for the corresponding financial year 2007-08 was relied upon and is annexed as Annexure A-9 to this appeal. The net funds generated during the year was Rs. 2,91,55,000/- whereas the fresh investments in securities yielding exempt income were only about Rs. 150 crores. In other words the interest free funds av .....

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xpenditure had been incurred or allocates the expenditure in relation to the exempt income, the Assessing Officer would be entitled to determine the amount of expenditure incurred in relation to the tax free income if the circumstances specified in Section 14A are satisfied. The CIT(Appeals), therefore, accepts that if bifurcation is possible, there would be no question of invoking Rule 8D for apportioning the expenses relating to taxable income and tax free income. The CIT (Appeals) then held a .....

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e A.O. has duly recorded his satisfaction also that expenditure is incurred for earning the tax free income. Moreover, the appellant has also not substantiated with proof that investments are not made out of borrowed fund. Under the facts and circumstances of the case, disallowance of expenditure is called for under the provisions of section 14A on the tax free income earned from the investments etc. The appellant himself has also given a suo moto calculation for disallowance to be made under Ru .....

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sment proceeding has made the additions u/s 14A of the I.T. Act 61 in line with previous year and initiated penal proceedings. As discussed above, because of the changed circumstances in this year, in my opinion, the addition made by the A.O. is not covered by the order of the Hb ITAT (supra) and therefore it is held that section 14A is applicable subject to application of rule 8D. Penal proceedings may be considered by A.O. as per law. 7. We will deal with these observations after referring to .....

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hellip;… It is a common knowledge that the investments in shares and mutual fund by the Corporate sector requires big financial efforts and are handled by a department known as Treasury operations. In fact this is one of the important functions of the Finance Department to handle surplus funds with respect to liquidity, safety and at the same time to generate maximum returns. Therefore, it cannot be said that no expenditure is required to be incurred for making investments and receiving d .....

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incurred any expenditure or the Assessing Officer has not pointed out any reason, is totally incorrect. In view of this matter, Rule 8D has been rightly invoked by the Assessing Officer…………….. sic- CIT(Appeals). The last two words Assessing Officer are admittedly an error. What was meant is the Commissioner of Income Tax (Appeals). 19. We also agree that if no interest expenditure has been incurred in assessment year 2009-10, then no proportionate disallowance .....

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half of the appellant-assessee requested us not to deliver the judgment stating that she had come across certain judgments in view of which our judgment dated 19.09.2016 in Commissioner of Income Tax (Central) Ludhiana v. M/s Hero Cycles Limited, Ludhiana, ITA No. 44 of 2003 which was relied upon by Mr.Klar for the respondent is per-incurium. By our order dated 01.12.2016, we recorded that this appeal alongwith certain other appeals had been placed on board for further arguments in the circumsta .....

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ve judgments of this Court which were specifically under Section 14A of the Act. We were also to hear Income Tax Appeal No. 244 of 2016 Pr. Commissioner of Income Tax, Patiala v. State Bank of Patiala. Some of the issues that arise in these appeals also arose in those appeals. She, therefore, requested us not to deliver the judgment till after the hearing in those appeals. We accordingly heard further submissions and now proceed to deliver our judgment. By our order and judgment dated 30.01.2017 .....

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ule 8-D of the Income Tax Rules, 1962 read as under:- Section 14-A Expenditure incurred in relation to income not includible in total income. 14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not .....

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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. RULE 8-D [Method for determining amount of expenditure in relation to in .....

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ith the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- i) the amount of expenditure directly relating to income which does not form part of total income; and ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the foll .....

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ast day of the previous year; iii) an amount equal to one-half percent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. (3) For the purposes of this rule, the total assets shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account .....

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on 14-A must exist in order to entitle the Assessing Officer to invoke Rule 8D. This is clear from the language of these sub-sections. Sub-section (2) provides that the Assessing Officer shall determine the amount of expenditure incurred in respect of exempt income in accordance with the method prescribed i.e. Rule 8D if having regard to the accounts of the assessee, he is not satisfied with the correctness of the assesses claim in respect of such expenditure in relation to exempt income. The wo .....

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hus where an assessee claims that no expenditure has been incurred by him in relation to exempt income, the Assessing Officer can resort to Rule 8D only if having regard to the accounts of the assessee he is not satisfied with the correctness of the claim of the assessee that no expenditure has been incurred by him in relation to the income which does not form part of the total income under this Act. 13. Thus under sub sections (2) and (3) of Section 14A, an Assessing Officer can resort to Rule .....

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Rule 8D. Sub-section (3) states that sub-section (2) shall also apply in relation to a case specified therein. The word also establishes this. For the purpose of invoking Rule 8D, it is not necessary, therefore, that the conditions in both the sub-sections exist. It is sufficient if the condition in either of the sub sections exist. 15. Our view is supported by the judgment of the Division Bench of the Bombay High Court in Godrej and Boyce MFG. Co. Ltd. v. Deputy Commissioner of Income Tax and .....

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jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, .....

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t be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of th .....

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relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an Assessment Year beginning on or before 1 April 2001 either to reassess under Section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under Section 154. 16. A Division Bench of the Delhi High Court has taken a similar vie .....

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of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) & (3) would require the .....

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e are in respectful agreement with the judgments of the Bombay High Court and the Delhi High Court in this regard. 18. The next question is as to whether it is necessary for the Assessing Officer to record his reasons for not being satisfied with the correctness of the assessee s claim. 19. It is mandatory for the Assessing Officer to record that having regard to the accounts of the assessee he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in r .....

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equires the Assessing Officer to record satisfaction that interest bearing funds have been used to earn tax free income. The satisfaction to be recorded must be based upon credible and relevant evidence……………………………….. 21. The judgment in Maxopp Investment Ltd. (supra) also supports this view namely that the Assessing Officer must record reasons for not being satisfied with the correctness of the assessee s content .....

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isfied in writing. 22. The next question, therefore, is whether the Assessing Officer has disclosed cogent reasons for invoking the method prescribed in section 14A(1), namely Rule 8D. Mrs. Suri s submission that the Assessing Officer had not recorded his satisfaction for invoking Rule 8D is not well founded. In our view, however, he has. 23. We have already quoted the relevant part of the assessment order. The Assessing Officer concluded this aspect by observing that the assessee had deployed s .....

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re would require the deployment of the assesses s intellectual, physical and financial resources. 24. In Commissioner of Income Tax (Central) Ludhiana v. Hero Cycles Ltd. [2016] 74 Taxmann.com 254 (P&H) we considered a case under section 80M of the Act. We had raised the following substantial question of law:- (v) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in deleting the proportionate management expenses allocated against di .....

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another domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of such domestic company, a deduction of an amount equal to:- i) …… ….. ….. …… …… …… ……. ii) In the case of any other domestic company, so much of the amount of income by way of dividends from another domestic company as does not exceed the amount of dividend distribut .....

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he deduction under that section shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of this Act (before making any deduction under this chapter) and not with reference to the gross amount of such dividends. 16. Admittedly, Section 80M applies only to income from other sources. Both the counsel agreed that in view of the judgment of the Supreme Court in Distributors (Baroda) P. Ltd. vs. Union of India and others, [1985] 155 ITR 120 .....

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ve expenses ……………………………………………… 22. The Tribunal then observed that the assessee had not incurred any expenditure to earn the dividend income and that it had not even incurred any expenditure for the purpose of realizing the dividend. It was further observed that the assessee had not claimed any deduction under section 57 of the Act and that the Assessing Officer had not a .....

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e income by way of dividend for the purpose of deduction allowable under section 80(M) of the Act. 24. Where the assessee does not provide any bifurcation of the expenditure incurred in respect of its income, the Assessing Officer has no option but to estimate the expenditure and to recompute the income by way of dividend to arrive at the deduction that may be allowed under section 80M of the Act. Assuming that some portion of the expenditure is attributable to the dividend earned, the Assessing .....

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vidend income, the onus of proof lies on the Assessing Officer to prove otherwise namely that the assessee has incurred the expenditure is correct. The Tribunal s further observation that the Assessing Officer had not brought out any material or evidence on record which may establish that the assessee had incurred any expenditure for the purpose of earning the dividend, is, however, incorrect. In cases such as this, the Assessing Officer is justified in presuming that some expenditure had been i .....

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ely to yield the dividend the management of the investing company is bound to apply its mind as to whether it would be a prudent investment or not. Even if an investment is only for the larger benefit of the group itself or for the benefit of the particular company in the group, the management of the investing company would have to apply its mind on a variety of issues including as to whether the investment would serve this purpose; whether the investment would be detrimental to the investing co .....

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uch as this, therefore, there would arise a justifiable presumption that some expenditure would be required for the purpose of earning dividend on such investments. The onus would then shift to the assessee to establish that no expenditure whatsoever was incurred for earning the dividend. The Assessing Officer was, therefore, justified in coming to the conclusion that the assessee had incurred expenditure towards earning the said dividend. The assessee has not furnished any material in this rega .....

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asis on which we arrived at those conclusions would apply equally to a case under section 14A of the Act. 27. Mrs. Suri then submitted that the observations in paragraph-25 of the judgment are per-incurium being contrary to the earlier judgments of this Court in Commissioner of Income Tax v. Winsome Textile Industries [2009] 319 ITR 204 (P&H); Commissioner of Income Tax v. Hero Cycles Ltd. [2010] 323 ITR 518 (P&H); Commissioner of Income Tax, Jalandhar-1, Jalandhar v. Deepak Mittal [2014 .....

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expenditure for making investments in the purchase of shares referred to therein and that, therefore, no disallowance was warranted under section 40A. The entire discussion by the Tribunal was related to whether the assessee had made the investment for purchase of shares out of the borrowed funds or invested its own funds. The question of administrative expenses and the effect thereof on Section 14A was neither raised before nor decided by this Court. Our judgment in Commissioner of Income Tax .....

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servations of the Tribunal in considerable detail and we will presume, affirmed them. These observations make it clear that the discussion related to the utilization of funds. The assessee contended that the entire investment had been made out of the dividend proceeds, sale proceeds, debenture redemption etc. The Tribunal found that the funds flow position showed that only the noninterest bearing funds had been utilized for making the investments. The Tribunal, therefore, held that on facts it d .....

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e Division Bench also held that in view of the findings of the Tribunal it was clear that the investment in the shares and funds were out of the dividend proceeds i.e. the assessee s own funds. It is in this back ground that paragraph-5 of the judgment relied upon strongly by Mrs. Suri must be read. The Division Bench held:- 5. Learned counsel for the appellant relies upon section 14A(2) and rule 8D(1)(b) to submit that even where the assessee claimed that no expenditure had been incurred, the c .....

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

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25, 2009), wherein it was observed as under (page 207): The contention raised on behalf of the Revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this court in CIT v. Abhishek Industries Ltd., [2006] 286 ITR 1 and, therefore, disallowance under section 14A was justified. These observations are in the context of the nature of .....

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deal with the issue of administrative expenses. 30. In Commissioner of Income Tax-1, Ludhiana v. M/s Abhishek Industries Ltd. Ludhiana, ITA No. 320 of 2013, a Division Bench of this Court by its judgment dated 27.01.2015 quoted the observations of the Tribunal which were quoted by the Division Bench in Commissioner of Income Tax v. Winsome Textile Industries [2009] 319 ITR 204 (P&H). The Division Bench went on to hold:- Section 14A of the Act requires the Assessing Officer to record satisfac .....

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egitimately disallow such a claim. The Assessing Officer, however, cannot, by recording general observations, particularly where the assessee has denied using interest bearing funds, proceed to infer that interest bearing income must has been used to earn exempted income. Section 14A of the Act, being in the nature of an exception, has to be construed strictly and only where the Assessing Officer records satisfaction, on the basis of clear and cogent material, shall an order be passed under Sect .....

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corded by the Division Bench, the Assessing Officer disallowed the dividend earned by the assessee that the interest bearing funds had been used to earn tax free income. The CIT (Appeals) set-aside this finding by holding that the Assessing Officer had failed to prove that the interest bearing fund was used by the assessee and the Tribunal affirmed the same. The question of administrative expenses and the presumption to be drawn in respect thereof were neither raised before nor decided by the Di .....

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ne the amount of expenditure incurred in relation to exempt income or he must determine that no expenditure was incurred in relation to exempt income for it is only then that he would be in a position to come to the conclusion that he is not satisfied with the correctness of the assessee s claim in either case. 32. The first part of Mrs. Suri s submission is well founded but not the second. Both parts require a consideration of the nature of the lack of satisfaction required to entitle the Asses .....

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laim of the assessee is incorrect. The language of Section 14(2) is is not satisfied with the correctness of the claim and not reasonably doubts it or has reasons to doubt the correctness of the claim . 34. Mrs. Suri s reliance upon the word determine in sub section (2) of Section 14A as regards the second part of her submission is misplaced. The term determination in Section 14A(2) applies to the computation of the expenditure incurred in relation to exempt income by resorting to the method as .....

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undertaken for the purpose of computing the expenditure in relation to exempt income in accordance with the method as may be prescribed. The Assessing Officer is not required to quantify the amount prior to the invocation of Rule 8D. 35. For an Assessing Officer not to be satisfied with the correctness of the claim of the assessee, it is not necessary for him to determine the expenditure incurred for earning the exempt income. Indeed, if that were so, Rule 8D would be redundant. It is sufficient .....

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ntitled to presume that a part of the expenses from the common fund are attributable to the expenditure incurred for earning the exempt income. He was entitled to resort to Rule 8D without determining the amount expended by the assessee towards earning the exempt income. Indeed if he could have done so, it would not have been necessary for him to resort to Rule 8D at all. 37. It follows, therefore, that Mrs. Suri s submission that a determination means an actual quantification of the expenditure .....

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e had incurred expenditure towards administrative activities necessary to earn the exempt income. If the presumption or inference is correct, as we have held it is, the Assessing Officer is entitled to resort to Rule 8D. 39. We are, however, unable to agree with Mr.Klar that the assessee is estopped from challenging the Assessing Officer s application of Rule 8D, as the assessee had itself furnished its working under Rule 8D. The assessee furnished a calculation only to show that the Assessing O .....

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nable. This he was not entitled to do. Where an Assessing Officer is not satisfied with the correctness of the claim of the assessee, in this regard, he is bound by the provisions of sub section (2) of Section 14A to follow the prescribed method which at the relevant time was Rule 8D. 41. Questions (i) and (ii) are, therefore, answered in favour of the Revenue. Re: Question (iii) 42. Mrs.Suri clarified that what is sought to be contended is that the assessee earned exempt income by investing its .....

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ntentions of the assessee in regard thereto would be open. For instance, clause (ii) relates to the expenditure by way of interest which is not directly attributable to any particular income or receipt. It is open to the assessee in this regard to establish that it has not incurred any expenditure by way of interest during the previous year to earn the exempt income. The amount in clause (ii) of sub rule (2) of Rule 8D, would be nil where the assessee establishes that it has not incurred any exp .....

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s of sub-rule (2). 44. Further to establish this, the assessee is entitled to invite the Assessing Officer to raise a presumption or draw inferences permissible in law. For instance, if an assessee establishes that its interest free funds were equal to or more than the interest bearing funds, it would be open to it to contend that presumption arises that the expenditure for earning exempt income was incurred from out of its interest free funds. By our order and judgment dated 06.09.2016 in Commi .....

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ndia Pharmaceutical Works Ltd. v. Commissioner of Income Tax 1997 Income Tax Reports 224 (SC), Commissioner of Income Tax v. Reliance Utilities and Power Ltd. 2009 (313) ITR, 340 (Bombay), HDFC Bank Ltd. v. Deputy Commissioner of Income Tax and others, 2016 (383) ITR 529 (Bombay), Commissioner of Income Tax v. HDFC Bank Ltd. 2014 (366) ITR 505 and Bright Enterprises Pvt. Ltd. v. Commissioner of Income Tax 2016 (381) ITR 107. If the presumption as held by us in Commissioner of Income Tax (Jalandh .....

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n ought to be raised or not. If he finds that the presumption ought to be raised then he must raise it before being satisfied or not satisfied regarding the correctness of the assessee s claim. 45. Mr.Klar on the other hand submitted that our judgment is not good law in view of the judgment of this Court in the case of CIT v. M/s Abhishek Industries Ltd. [2006] 286 ITR 1. Mrs. Suri, however, submitted that this judgment is in no longer good law in view of the judgment of the Supreme Court in Her .....

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